Copyright 2012 by John T. Reed
A Swiss reader of mine, Peter Frech, recommended this book. It is about the infamous hyperinflation that took place in Weimar Republic Germany during the period 1920-1923. I had previously read When Money Dies, about the same period, and Anna Eisenmenger’s diary, about the same event and time, but in Austria where conditions were about the same. I also read the Hyperinflation Survival Guide by Gerald Swanson. about Latin American hyperinflation in recent decades. And I watched the silent Greta Garbo movie, The Joyless Street, which you can see on the Internet. (You probably need to read a book about German or Austrian hyperinflation to fully understand the movie. The movie audiences of the day in Germany and Austria needed no such instruction, but hyperinflation and its effects are so foreign to current people that they will probably wonder what the heck is going on without doing some homework first.) It was made in 1925 in Germany about the hyperinflation in Austria that had occurred a couple of years earlier.
I needed to read/see all five because each has a different perspective. Turroni was an Italian economist who was stationed in Berlin during the hyperinflation as a representative of the victorious Allied powers who won World War I. He was there to supervise and monitor Germany’s paying the reparations ordered by the Treaty of Versailles.
Because Americans are so locked in on gold and so oblivious to the importance of foreign currency during hyperinflation, I have put the phrases foreign currency or foreign bank in red to make sure you see the pattern. Gold essentially makes no appearance in Turroni’s book other than as a sort of price index to compare with German marks.
This book gives the top-down, big-picture perspective from a trained economist who can see things that laymen would not see or understand.
Much of it is counterintuitive, but once he explains it, you think, “Okay, I can see how that is logical and makes sense.”
He often comments that the people who were smart and knowledgeable figured out what to do and thereby either preserved their life savings or actually got rich on the hyperinflation. But the vast majority, including small business, pensioners, government, and workers, did not figure it out until the final months of the hyperinflation, which was actually a bad thing because once the hyperinflation ended—overnight as it always does—the behavior that was right during the hyperinflation became exactly the wrong thing to do when it was over, and many lost whatever they had left by switching to hyperinflation-wise behavior—like borrowing a lot of fixed-rate money—just as hyperinflation ended.
…numerous other individuals who lived totally or partly on a fixed money income; those receiving [private annuities], old people or those disabled by accidents, the war-disabled, or parents of [war dead], and pensioners of the State and private institutions. The [hyperinfl]ation destroyed what was often the sole income of those individuals. They were reduced to the most abject poverty.
Making sure you are one of the ones who understood and saved yourself and your family is my purpose: to help you become one of those who understood the danger and prepared in advance.
I am a how-to book writer. I have written 35 different how-to titles; 95 books if you count editions.
When you write a how-to book, you must identify the best practices of the field in question. If you are good at it, your readers buy your books, are persuaded by them, employ the best practices you recommend, and have much better success than before and much better success than almost all others in the field. Do my books do that? Yes, You can especially see it in the testimonials at my football and baseball coaching book web pages because sports has weekly games that give a no-BS answer to the question, “Are you good at this field?”
In my research to write my book How to Protect Your Life Savings from Hyperinflation & Depression,
I identified many best practices for doing what the title promises. My most recent research on that subject—especially the book by Turroni—has turned up a bunch more.
Also, I do not write a book unless the existing books on the subject are incorrect or incomplete and the people in the field have got it wrong. For example, my first full-length book was Aggressive Tax Avoidance for Real Estate Investors and said to those investors and their tax advisors, essentially, “What the hell is wrong with you people? You are ignoring half the great provisions in the Internal Revenue Code that could save you money and you are wimping out on how to make a number judgmental choices, like improvement ratio, thereby overpaying your taxes.” That book, which is now in its 19th edition, has sold more than 100,000 copies—a best seller if I had sold them faster.
Two different Simon & Schuster editors independently called me and tried to get me to write a book about Aggressive Tax Avoidance for Everyone. One said he thought I would become the “Norman Dacey of tax avoidance.” Dacey wrote How to Avoid Probate, a famous, best-selling book about the use of the living trust.
I considered the request then turned it down saying, “The existing books on tax avoidance for everyone are adequate. There are no great tax-avoidance techniques that the average accountant is overlooking for Joe Wage-earner.”
So not only do I identify best practices, I always find things that people erroneously believe are best practices but are not. That essentially is the definition of only writing books when the existing books are incorrect or incomplete or both. So I have to include chapters in the books where I identify the mistaken best practices, prove why they are mistaken, and motivate my readers to stop doing those things and start doing the correct best practices. A good example in the hyperinflation protection field is gold. The average person and many “experts” figure all you need to know about inflation protection is gold. Bull!
Gold actually sucks at protecting you from inflation. See my article about the disadvantages of gold. Almost all of them are objective and inarguable, like capital gains on precious metals are taxed at 28% as opposed to almost all other capital gains which are taxed at 15%. Conversely, the best protection against hyperinflation is foreign currency. Hardly anyone who has not lived through hyperinflation seems to have figured that out. Turroni’s book and all the others I have read say again and again that the goal of everyone during the hyperinflation was to get foreign currency.
My Swiss reader also urged me to read the “Homecoming to Austria” chapter of Stefan Zweig’s autobiography The World of Yesterday. I did and here is a pertinent quote from that chapter:
The only thing that remained stable within the land during the three years in which the inflation progressed at accelerating tempo was foreign currency. Because Austrian money melted like snow in one’s hand everyone wanted Swiss francs or American dollars and foreigners in substantial numbers availed themselves of the chance to fatten on the quivering cadaver of the Austrian krone [currency].
Note: The American dollar will probably be the Austrian krone of 2016. On June 26, 2012, I flew to Vancouver, Canada to buy Swiss francs. I had already bought a bunch of Canadian, Australian, and New Zealand dollars. Note that Zweig does not mention gold. The book has an index. Gold is not in it. I own no gold at all.
The people who got rich during the hyperinflation generally did so by borrowing marks at fixed interest rates and using the loan proceeds to buy foreign currency. Or they were exporters who had the foreign buyers pay them foreign currency on the side and deposit it in foreign banks. Gold was never spoken about as a currency or barter commodity. No one said they were glad they bought gold or wished they had bought gold or that so-and-so was doing great because he bought gold or talked about buying or selling anything for gold. Gold was only mentioned in some books about hyperinflation as a sort of index to measure how far the German mark or Austrian krone had fallen in purchasing power.
So here are my biggest best practices for protecting yourself from hyperinflation:
• Acquire foreign currency in countries that are fiscally well managed. I believe the best today are Australia, Canada, New Zealand and Switzerland. If you want six, add Denmark and Sweden.
• Price and sell your products in foreign currency. If and when we get hyperinflation, I will probably change the prices on my books to Canadian currency and have my Internet shopping cart convert your U.S. dollar debit card payments to Canadian dollars and deposit them in one of my Canadian bank accounts in Canada. That will enable me to show you that I have not raised real prices during the hyperinflation. And it will save me from having to scramble to convert USD to CAD every time I sell a book.
• Borrow at fixed rates in the hyperinflated currency. Anyone who makes such a loan is nuts, but the fact is they did in Germany and Austria and, I recall personally, in the U.S. during the late 1970s and early 1980s inflation. Either get nonrecourse loans or be sure you can refinance them without penalty if and when rates come down. Hyperinflation always ends overnight. When it does, you need to be able to unwind the contracts that made sense during hyperinflation fast.
Hyperinflation, like deflation , causes people who experience it to comment that everything they were always told—save for a rainy day, avoid borrowing, etc.—turned out to be the exact wrong things to do. Yes, until the day the hyperinflation ends, at which point all those things go back to being the right things to do and the stuff that made sense during hyperinflation is now all wrong. A lot of the nouveau rich who made a killing during hyperinflation were themselves killed by the overnight replacement of the previously hyperinflated currency. The old currency is replaced by a new one that is managed properly and does not inflate. But when that happens, you must instantly undo all the stuff you set up to protect yourself from hyperinflation. For example, foreign currency, like gold, ain’t worth a damn during stable-currency times. Neither pays any interest. And no one wants either except a few tourists and importers. Gold prices in U.S. dollars collapse the day after the hyperinflation ends. Owning gold and owing high-fixed-interest rate, recourse debt are two of the main things you do not want to be doing the day the hyperinfation ends.
• Think in terms of foreign currency.
• Look at interest you are receiving and paying only in terms of real (the nominal rate minus the inflation rate in the foreign currency), after-tax, rates in the foreign currency. Do not try to do anything or analyze anything in the hyperinflated currency. It is madness. They often used the word “fog” in the books written by people who were there. No one knew what anything was worth. One guy would be selling eggs for a $100 apiece and another guy for $200 apiece. The first guy would quickly sell out because he priced them too cheap. Then the other guy would also sell out for the same reason. Each feared he was gouging. In fact, each was a chump who sold too cheaply because the inflation was moving so fast they could not get a fix on where true values were. By thinking in terms of foreign currency, you avoid the “fog.”
I have seen this is real estate in the U.S. When prices move fast, sellers tend to be behind the market because they have not been in the market for a home. When prices are rising fast, houses tend to draw multiple offers and sell in an hour. Morons call this a sellers’ market. It is the opposite. It is a buyers’ market. The houses are selling so fast because the seller’s are charging what seem to them to be high prices, but they are STILL behind and under the current market value.
Conversely, when values fall, as in the late 2000s, sellers tend to lower prices too slowly, for the same reason. Their ideas of value are out of date because it has been years since they went out and looked for a home. The morons erroneously call this a buyer’s market. But the truth is nothing sellers during such markets because the prices are above market and the buyers will not pay more than market. It is actually nobody’s market.
During hyperinflation in Germany, Latin America, etc. sellers are almost always behind the market, yet thinking they made a killing, because they cannot see true value. Constantly converting to a stable foreign currency will enable you to see true value. When, during the coming hyperinflation, someone offers you $20 million USD for your house that was worth $350,000 in both Canadian and US dollars in 2012, convert the $20 million USD to then current CAD (Canadian dollars abbreviation). I predict you will find the amount you are being offered is something like $250,000 in the stable currency. If he offers an amount that translates to $350,000 Canadian, consider the offer. But do not try to figure out what the USD amount means with CPI indices or other traditional inside-the-country ways of adjusting for hyperinflation. They may work in inflation. But they do not work in hyperinflation. However, the values of the stable currencies in other countries are still valid and easy to use.
Simplest way to do this, when someone offers to buy something from you during the U.S. during hyperinflation, just tell them to pay you in Canadian dollars or some other stable foreign currency. They will then look at how much they will have to pay for that currency and the offer will get very real and very easy to reject real fast.
In Latin America, where inflation has been chronic, it has long been standard practice to buy homes there with U.S. dollars and pay in all cash. Wise idea—as long as the U.S. dollar is stable. Do the same in the other direction—stable non-U.S. dollars—if and when we get hyperinflation in this country. That is what they have ultimately figured out they need to do in those countries. Do not be one of those who still blunders along trying to do business in U.S. dollars after that is insane. In hyperinflated early 1920s Germany, the big businessmen figured out to do business in foreign currency only very early. The government, workers, and small businessmen only figured it out in the final few months of the multi-year hyperinflation. Remember, just any foreign currency will not do. It must be a foreign currency that is stable while the U.S. dollar is hyperinflating.
Gold is a hard asset. So is real estate. I said to buy hard assets in my hyperinflation book. But I cautioned that you must be able to make all the payments on them if there is a mortgage. And I warned that you cannot buy a gallon of milk with a gold coin or a house. Hard assets generally come in inconvenient denominations and, other than precious metals, require a coincidence of wants if you try to buy things by barter with them. I list a bunch of relatively liquid hard assets in the book: forever stamps, U.S. pennies and nickels which are worth their face value in metal, business inventory, etc. See page 179 of my book for the complete list. Precious metals require an assayer to persuade the seller to accept your gold as being real. Foreign currency, on the other hand, does not require an assayer. Generally, any bank will accept it.
Turroni reveals another problem with hard assets. When people realize that their currency is hyperinflating, they immediately try to get rid of it as soon as possible. Often, the way they did this was to buy hard assets—any hard assets. As you might expect, that meant people often ended up with assets that were not worth much or that were worthless or that were okay but they had more of them than they needed and they were unbarterable—like business buildings and factories. During the hyperinflation, some hard assets became obsolete before they were used or before the owners could get their money out of them.
Again, foreign currency does not have this problem. You can store value with it until you need it for a worthwhile purchase, as you have been used to doing with U.S. dollars your whole life.
I originally assume that hyperinflation was the same as normal except that prices rose rapidly and the inflation rate was high. It’s not that simple. Not even close.
Let’s say you have six bars of Irish Spring soap. Before hyperinflation, you bought them for $2.00 at your local supermarket.
What do they cost there now that you have had a year of hyperinflation? The government price controls say $240.00, but the stores are sold out. They are almost always sold out at the government-controlled prices which are too low.
Government price controls cause a black market—an illegal market. The black market price may be $550.00. The black market is a free market, but its prices are high because of the need to smuggle the items into the country or across the country, inability to sell them from a fixed store. Everything is harder and more expensive. Everything is a risk because of the illegality. Like buying drugs now—so I hear.
Then there is the foreign currency price. When foreigners come into the hyperinflated country, the government is eager to please them and get them to spend money. In Canada during this future hyperinflation, the Irish Spring soap still costs $2.00 in Canadian dollars, same as in the U.S. before the inflation. So how does the U.S. government get the Canadians to come across the border to spend their soap money here? By selling the soap cheaper than in Canada: maybe $1.25. Also, the U.S. store owners would be equally or more eager to get foreign currency.
In other words, people with foreign currency get a huge discount over not only hyperinflated U.S. prices but a discount compared to prices in their own country and prices here before the hyperinflation hit.
Would that be you if you bought foreign currency when you could? Probably not. The U.S. government would probably require all Americans to turn in any foreign currency they own to the nearest bank for a below market value conversion to hypenflated U.S. currency. That is a standard aspect of capital controls which are a standard accompaniment of hyperinflation. Absent capital controls, everyone in America would trade all their U.S. currency for foreign currency. The U.S. government cannot allow that to happen because they are only able to pay entitlements and their other bills by “printing” money. If no one will accept the printed dollars, they are worthless.
Eventually, that is exactly what will happen. But the U.S. government will try to delay it as long as possible with capital controls. And capital controls prohibit possession or use of foreign currency by Americans. Foreign visitors, however, can use foreign currency inside the hyperinflated country. They will be treated like kings in the U.S.
During German hyperinflation, even poor people from neighboring countries were rich in the hyperinflated countries because their foreign currency was so rare and valuable. They pigged out in fancy German restaurants and stayed in the best five-star hotels.
There is no easy way to determine prices in a hyperinflated country. The black market cannot publish them for obvious reasons, plus they change rapidly and vary from smuggler to smuggler. Government-controlled prices are meaningless because no one will sell for such prices if the buyer pays in hyperinflated currency.
For inhabitants of Germany paying with their hyperinflated currency, real prices of goods and services were above pre-hyperinflation and prices in countries with stable currencies. But for those spending foreign currency from stable currency countries, real prices were lower in Germany than they had been there before hyperinflation or than what same goods and services cost within the country with the stable currency.
Farmers and manufacturers and miners almost stop producing for the domestic market, because of price controls that force them to sell too cheap. So they produce only for their own use and for export and for sale to foreign tourists. Licenses must be obtained from the government to export or accept foreign currency from visitors. The government wants all the foreign currency but must share with the producers or there will be no exports or sales to tourists.
Labor within the hyperinflated country seems to be highly paid. With hyperinflation their paychecks look like those of CEOs before the hyperinflation hit, but they are actually being paid less than before the hyperinflation. Because labor is now so cheap after adjustment for inflation, foreigners bring their cars to the hyperinflated country to get them repaired, as do ship owners. Shipments are sent the long way through the hyperinflated country because the train shipping rates are so much cheaper than in non-hyperinflated countries that taking a longer route through the hyperinflated country is cheaper than the shortest route. The hyperinflated country exports fewer raw materials than before and more finished products. Why? Because cheap labor makes the hyperinflated country the cheaper place to do the manufacture. This is a distortion in the marketplace that will go away the day the hyperinflation ends.
Here are some quotes from Turroni’s final paragraph:
It annihilated thrift;…it destroyed incalculable moral and intellectual values. It provoked a serious revolution in social classes, a few people accumulating wealth and forming a class of usurpers of national property, whilst millions were thrown into poverty. It was a distressing preoccupation and constant torment of innumerable families; it poisoned the German people by spreading among all classes the spirit of speculation and by diverting them from proper and regular work, it was the cause of incessant political and moral disturbance. It is indeed easy enough to understand why the record of the sad years of 1919-23 always weighs like a nightmare on the German people.
It looks like we will be saying the same about 2016-2020 or thereabouts.
• The Germans had to switch to logarithmic scales on graphs of hyperinflation to fit them on the pages of books and newspapers.
• Value of professionals’ (lawyers, doctors, professors) labor fell to the levels of the lowest unskilled workers during hyperinflation. Same is true in deflation as I said in my book on Hyperinflation & Depression. Politicians would not let the lowest paid workers wages fall much for political reasons. But they had no qualms about professionals’ salaries falling down to those levels.
• Many hoarded paper money thinking its value would go back to normal after the hyperinflation. Hyperinflation ends with the old currency being replaced by a new currency and the conversion rate for turning in the old is simply is value on its last day. For example, if a loaf of bread cost one trillion marks on the last day of the hyperinflation and one mark on the first day of the post-hyperinflation new rentenmark currency, you could turn in your old marks and get one new rentenmark for each trillion old marks.
• The new field of behavioral economics has identified a bias known as money illusion. That is the tendency of people to fail to adjust their thinking and financial calculations to reflect actual inflation. Because a million dollars used to be a lot of money, they figure it still is even when it only buys a used Ford Taurus. Money illusion is the source of many of the profits made by the sharpies during hyperinflation. The less sharp tend to become less efficient and more lackadaisical as a result of feeling like they now have a lot of money even though they actually have less purchasing power than before.
• Government “businesses” like the post office and railroads and taxing agencies were the worst and slowest to adjust. So their services and tax burden were startling bargains for most of the period.
• As with the stock, bond, and commodities markets, the market for a currency, including the one of your home country, the U.S. dollar, is affected by both fundamentals (value investing) and irrational exuberance and irrational despair. Irrational exuberance and despair are more commonly described as excessive optimism and excessive pessimism. Hyperinflation is caused by the fundamental of the Federal Reserve “printing” too much money compared to the growth rate of the economy. They “print” it by buying U.S. government bonds with money conjured out of thin air. Sometimes, the market gets behind or ahead of the fundamentals in the form of reluctance to believe any such thing could ever happen to the mighty U.S. dollar. Or, once trust is lost and the market panics, that no currency issued by the U.S. government is worth anything. In other words, sometimes the purchasing power of the dollar is primarily determined by how many of them the Federal Reserve “printed,” other times, by psychology, confidence, rumor, jumping to conclusions based on observations of events by laymen, etc.
• From before World War I (normal times) to after the hyperinflation ended in 1923, the real value of German stocks fell 75% but stock owners thought they were doing well because of the money illusion—inability to see the real value underlying the inflated stock price. When hyperinflation ended, it was like the pulling back of the curtain on the Wizard of Oz. Real values suddenly were evident. Or as Warren Buffett says, “When the tide goes out, you learn who was skinny dipping.”
• Land and stocks do well in hyperinflation although stocks also do badly in hyperinflation. Homes occupied by their owners generally hold their value and preserve real wealth, but rental and business properties typically lose value during hyperinflation because of price controls and capital controls. Because controls crushed net income, government refused to use the so-called income approach to assessing property values and said only pre-inflation values could be used for assessments.
• Because government indexing of prices was too slow to produce adequate tax revenue, the German government proposed simply confiscating the assets of the wealthy to fund government. The wealthy defeated such measures politically in most cases. Late penalties were raised but not enough to compensate for hyperinflation.
• The smartest businessmen hoarded foreign currency. Yep, like my buying Swiss francs in Canada and my bank accounts in Australia, Canada, and New Zealand. I will add that I was doing that starting in 2011 and had completed it before I read that part of Turroni’s book. Great minds run in the same channels, including great minds dealing with similar events 90 years apart.
• Smart businessmen started putting index clauses into long-term contracts very early. Later, the government did the same with regard to taxes and such. In 1933, FDR and his Congress outlawed gold clauses (Emergency Banking Act of 1933) which were the index clauses of the day. They were not allowed again in the U.S. until 1977. [Reed note: During hyperinflation, if the clauses are allowed by law, they must be connected to extremely high-speed indexes like foreign currency trading in financial markets are commodity indexes based on minute-by-minute trading of the commodities in question. Indices like the Consumer Price Index are a horse-drawn-buggy joke during the rocket race that is hyperinflation.
• Cash management is a standard best practice in business when dealing with large sums of money and/or high inflation like in the late 1970s and early 1980s. It means paying money out as slow as possible and collecting it in as fast as possible. In hyperinflation, cash management means that plus converting money you receive to stable foreign currency ASAP and paying as many bills as possible in the hyperinflated currency. This is related to Gresham’s Law.
• In July 1923, The Reichsbank owned 93% of German treasury bills. In 2011, the Federal Reserve Bank bought 61% of U.S. government bonds issued. The Reichsbank was the German equivalent of the U.S. Federal Reserve Bank.
• German politicians and press accused those moving their money out of marks into foreign currencies of being unpatriotic. Do not waste a second listening to that nonsense. The destroyer of the U.S. dollar is the U.S. government itself, the same entity that you are expected be be loyal to.
• In my article the Day the Dollar Dies, I said lenders would stop making loans. Forgive me. That would be the logical thing to do. As Economics of Inflation reminds me, elected officials do not do the logical thing or the right thing, they do the political thing, which is is to make government loans and to direct regulated banks to make loans to the most “deserving” people (Translation: to the people most likely to vote for our side).
• By artificially making foreign currency more scarce within Germany, and continually giving the impression that they would soon make it impossible to get, they made it far more valuable to those in Germany who had it or wanted it. On page 88, Turroni says,
…the purchase of foreign [currency] by the public assumed the proportions of a pathological phenomenon…feverish acquisition of foreign [currency]…panic created by political events…[financial] slaughter of the innocents
That is why I moved, and I recommend moving your rainy day savings into foreign currencies in foreign countries while you still can and while the can be purchased for normal prices. Today, 7/30/12, the four currencies I recommend cost this much in U.S. dollars:
Australian dollar: $.99772
Canadian dollar: $.9772
New Zealand dollar: $.77567
Swiss franc: $1.0490
In other words, an Australian dollar costs 99.772¢; a Swiss franc, $1.049, and so on. And you can easily buy them. After hyperinflation kicks in on the U.S. dollar, these prices will go up by orders of magnitude, reflecting the surplus of U.S. dollars being “printed.” The purchasing power of these currencies will be about the same, but the U.S. dollar will buy less and less of them by the hour.
Once hyperinflation got going in Germany, the German people were extremely eager to see the cost of a U.S. dollar or other stable currencies as stated in German marks. Turroni heard the owner of a cabaret in Berlin comment each night that either, “Many gentlemen are good-humored this evening, that is to say the dollar rises!” or “Many people this evening have melancholy faces, that is to say, the mark rises!”
Only the people smart enough to have put their money into U.S. dollars could afford to go to such clubs.
Dr. Dean Edell said his dentist had a sign in his waiting room saying “floss only the teeth you want to keep.” You should move to foreign currencies and foreign banks only the savings you want to keep.
• Normally, people only want foreign currency to engage in foreign trade or tourism. But during hyperinflation, they want foreign currency for the purpose of preserving savings. On November 15, 1923, the day the rentenmark was born, demand for foreign currency instantly fell back to 1913 (pre-World War I and pre-hyperinflation) levels. In other words, no one had any use for foreign currency except to pay for imports or to become a tourist in the country in question—just as things had been in the happy normal days before the war. Here is a statement from page 173:
At a certain stage of the [hyperinfl]ation of a paper currency this ceases to serve the function of a store of value, and is replaced by foreign [currency]. At further stage, when the [hyperinfl]ation is very rapid, the depreciated paper is also more and more replaced by foreign currency in its function as a “means of payment.” This happened to the German mark. First in foreign trade, then in internal wholesale trade, and later in retail trade, the practice of practice of making payments in foreign money spread rapidly.
• Prolonged hyperinflation creates a substantial and growing constituency for the continuation of hyperinflation: those who learned how to profit from it. Many of those same people are, as they feared, crushed financially by the overnight end of inflation because they have arranged their balance sheet based on the assumption of its continuation.
• The end point in hyperinflation is when the currency in question is accepted by nobody for anything. Government employees will not get out of bed and go to work as soldiers, judges, FBI agents, customs officer, and so on because it will get them nothing but a worthless pile of paper that will buy them nothing. Farmers stop farming except for the needs of themselves and close friends and relatives. They would only sell to strangers who had foreign currency to pay with. By that time, the black market, using foreign currency and barter including gold, will be the only market and the government will be forced to legalize the black market by repealing legal tender, price controls, capital controls, rationing, and anti-hoarding laws. And on that day, hyperinflation and the old currency to which it happened, will disappear as if it never happened. It was called “The Miracle of the Rentenmark” [the new currency] Those over about 45 will remember that is exactly what happened to the green and red flags at gas stations in the U.S. when the price controls, rationing (odd-numbered license plates), and government allocation of gasoline to each gas station ended. It happened overnight and it was if it had been nothing but a bad dream.
A similar thing happened in Germany after World War II. It was called the “Wirtschaftswunder” [economic miracle] for much the same reason: replacement of the Nazi currency with a new mark and end of price controls.
The “pain” of ending all those rules was the price went up slightly initially, but the American people did not complain because they so hated the lines at the gas stations and the constant fear of running out and not being able to buy more. The day after the hyperinflation in the U.S. will be something similar. People will have lost their life savings, but at least they will be able to earn real money and buy real things with it. It may be, and seems likely that Americans are too ignorant of the danger of hyperinflation now to make their elected representatives stop “printing” money and start cutting federal spending. But after they get educated by having to endure hyperinflation, they will demand the cutting and anyone who would dare complain and pine for the good old days when a Coke cost $500,000 will be stoned.
• The German government put price controls on the resale prices of homes, unheard of in U.S. history. The essentially Communist citizens of Berkeley, CA almost lynched the city council there when it was proposed in that city in the 1980s.
• Rent controls virtually held rents at the same level for the entire 1914-1924 period. Before World War I, in 1913, German tenants paid about 25% of their income for rent—the world wide standard percentage. By 1924, they were only paying about .4% of their income for rent. Landlords were crushed financially by that, although they also benefitted from the real value of mortgages falling if they had a mortgage.
• Businesses could not figure out what prices to charge or what their expenses were. They were blinded by hyperinflation, unable to put a price on anything. It wasn’t just that prices had gone up a lot but that they did not know how much. There was no believable consumer price index. As I said above, the solution seems to be to simply pick a stable foreign currency and do all your thinking, bookkeeping, and price setting in that currency. Reality can only be seen in the markets of countries with stable currencies.
• Prices within Germany during hyperinflation were more than double what they were before hyperinflation when stated in terms of stable foreign currency or gold. Those were the closest one could come to what we call real (adjusted for inflation) prices in the U.S. During hyperinflation, it is not possible to adjust for inflation because inflation cannot be measured fast enough or accurately enough especially when there are price controls, black markets, and so on. If you want to know what something is worth in the U.S. when we have hyperinflation and Canada does not, ask a Canadian what that item costs there. Then figure out how many U.S. dollars you need to buy that many Canadian dollars. But that U.S. dollar conversion will only be good for the moment when you do it. An hour later, it will be out of date because the number of U.S. dollars you need to buy that many Canadian dollars will go up much higher.
• Labor productivity in Germany fell. As with any other price, no one knew what it was worth. Workers were demoralized and could no longer see the connection between hard work and financial reward. Most productivity increases come from better machines and tools and methods. But it was clear to sharp businessmen that labor was much cheaper so they switched from buying labor-saving machines and going backward in time as if they were Luddites. Cheap labor makes more efficient machines less attractive and, after a point, unattractive. Hand shovels make more sense than steam shovels when the labor is cheap enough. But on that inevitable day when hyperinflation ends, so do laborers with hand shovels and you need to get back into the use of steam shovels ASAP or you will be crushed by more efficient foreign and domestic competition, as many German companies were in 1924.
• Wholesale trade was done in foreign currencies in Germany; consumer transactions, in hyperinflated marks. Consumers who paid in foreign currencies or what were called gold marks got a big discount over those who insisted on using paper marks. Consumers were charged a premium in part based on the expectation of how long it would take the merchant to convert the sale proceeds into foreign currency and how many more marks he would have to have to buy the foreign currency amount he wanted by the time he was able to buy the foreign currency.
• Economists often describe inflation as a hidden tax. Turroni disputes that. I think my web article on theft by commission better describes it. The government deliberately causes hyperinflation. Why? To come up with the money to pay their bills without having to cut spending or raise taxes. Who is hurt by hyperinflation? All world wide who own dollar-denominated assets including annuitants like Social Security recipients, all types of bond owners, U.S.-dollar checking and savings account owners, U.S. dollar cash, people who get paid in dollars, merchants who sell goods and services for dollars. Do all those people have to suffer just so the government can pay about $1.2 trillion of government payments a year? No. The government could just cut spending by that amount. Who would be hurt by that? Just persons who receive checks from the U.S. government—Social Security recipient, federal retirees, medical care recipients, some government employees, government bond owners. Why does government hurt hundreds of millions of people around the world, destroy the U.S. economy, and the reputation of the U.S. rather than just cut payments to tens of millions of people? Because they think they will get blamed for cutting a small number of people but that harming hundreds of millions of people and destroying the U.S. economy will allow them to blame capitalism, business, the rich, the Bush Administration, and so on. The Democrats more or less got away with that in the Great Depression. Why not do it again?
Is this a monstrous crime?
Could it be stopped? Yes, if the American people demand it.
Nope. They see no problem. They went to the mall or they’re wattching TV. They won’t understand this until hyperinflation happens—if then.
• Much vertical integration took place in Germany during hyperinflation. This means companies owning the whole chain of production: the mine, the smelter, the manufacturing plant, and the retail merchants that sell the final refrigerator or whatever. Some vertical integration makes sense, but hyperinflation induced too much of it which had to be undone when hyperinflation ended. At a consumer level, people also had to vertically integrate in a sense by hiking to farms to barter art or musical instruments or gold watches and such for food. In doing so, they were acting as their own pawn shop, retail merchant, food transportation company. This saved middlemen’s profit and overhead and took them to the original source of the products they wanted. Factories have similar incentives to vertically integrate. The vertical integration often also meant disintermediation, that is, cutting out the banks and going straight to investors by selling them stock or bonds. Loss of currency’s store-of-value and banks’ intermediary roles very much hurt banks.
• During hyperinflation, persons with foreign currency could and did buy many German farms, houses factories, companies, land, buildings, mines, and so on at huge bargain purchases.
• Massive government intervention and regulations like price controls, capital controls, etc. dramatically increased the administrative burden on business akin to what has happened in U.S. education where public schools used to be all teachers and a handful of administrators and now have huge numbers of administrators to do required paperwork.
• Bankruptcies, which are typically caused by falling behind in debt payments, disappeared during hyperinflation because the real cost of making debt payments fell to nothing.
• Although interest rates seem high during hyperinflation, they are often still too low (money illusion). The real interest rate is the apparent or nominal interest rate written on the loan documents minus the inflation rate. The fact that the inflation rate is very hard to discern during hyperinflation is irrelevant. The real interest rate is still the nominal rate minus the inflation rate. Low real interest rates raise the real values of capital assets. Stocks are capital assets that were affected this way in Germany. Most people are familiar with this in the home market where mortgage interest rates going down lets you buy a more expensive home and rates going up has the opposite effect. It happened in Germany and Austria back then, but it was hard to see. But the shrewd businessmen could see it. They had what I say all people with great expertise have: x-ray vision to see the things that less experienced trained people cannot. Again, relating everything to a foreign stable currency reveals the true picture.
• Hyperinflation appears to create many arbitrage opportunities. That is, an asset is selling for two prices. If you can buy at the lower price and sell at the higher one, you make a profit. This appears to be ubiquitous in hyperinflation but you need to straddle the domestic market inside the hyperinflated currency country and foreign currency. There is also a sort of interest-rate arbitrage known as positive leverage. That happens when your real, after-tax cost of borrowing to buy an asset is less than your real, after-tax return on that asset. Again “real” means after adjustment for inflation.
• When did German politicians finally do the right thing and stop printing money and start cutting spending? Probably about a week before the nation turned into a million-man mob of pitchfork-, torch-, and noose-carrying legislator killers. I cannot be precise about that, but Turroni makes it pretty clear that when they finally knocked off the BS, the German people had had it up to here with the German government. Ten years later in 1933 the German people elected Adolf Hitler chancellor in a fair and square election.
If that’s how bad it has to get here to fix the problem, we are in for a lot more trouble than just high prices.
• Insurance companies in Germany were required by law to invest only in mortgages and government bonds. In other words, they were required to own only the worst possible assets for hyperinflation. Ditto university, other charitable institutions, religious societies, and scientific and literary foundations’ endowments. They were obliterated financially because of that.
• page 287 quote:
…transfer of wealth…to the disadvantage of those classes of society who had not been able, or did not know how, to defend themselves against the influence of the [hyperinfl]ation of the mark.
Today, I would define that group as those who have not read my book How to Protect Your Life Savings from Hyperinflation & Depression.
• Socialists took power in Germany after the war. They wanted to raise taxes on the rich, but they were unable to get such laws passed. So they printed money instead, literally in that era. That made many of the rich richer and impoverished the middle class, workers, and pensioners. Our 21st century U.S. government is essentially doing the exact same thing, for the same reasons.
• page 318:
[Savings & loans lost almost all their money in hyperinflation in Germany because they were generally not allowed to buy foreign currency] which was the most efficacious method of protecting against the [hyperinfl]ation of the national currency.
• The ripoff of mortgage lenders was so extreme and blatant that even the beneficiaries were discomforted. The Nationalist parties made a campaign promise to revalue assets like loans where the lender got next to nothing because of the loss of purchasing power of the mark. Initially, courts said a mark is a mark meaning that while the mark you loaned had more purchasing power the borrower need only pay you back in current marks and the fact that they have little or no purchasing power is irrelevant. In the beginning of 1923, though, Turroni said a court decision held,
…that according to the Civil Code a debt must be paid according to equity and good faith, and that to reimburse the creditor after the [hyperinfl]ation of the currency with the identical nominal sum was contrary to good faith, as the debtor still kept the property which guaranteed the loan.
Subsequent decisions and legislation attempted to restore about 15% to 29% of the real value of loans that had been paid off with lesser purchasing power marks. Different percentages applied depending upon the type of loan, date it was made, and so on.
• Debt versus equity was turned upside down with regard to corporate finance. Secured corporate bond holders got a lower return—just interest—because they had priority over the shareholders in the event of bankruptcy. But in Germany, those who owned debt of a corporation typically got next to nothing back in terms of purchasing power while the subordinate shareholders in the same corporation typically did preserve part of their money or even have a gain over the same time period.
• Rent control was ended gradually and the resulting landlord profits were taxed.
• Farmers who got to payoff mortgages with near worthless marks were also taxed on those hyperinflation profits.
• German government bonds were revalued to restore some of their purchasing power that was lost because of hyperinflation.
• Retroactive state and federal windfall profits taxes were also levied on many who used hyperinflation to get rich.
It has been said that, “The law is an ass.” (Charles Dickens in Oliver Twist.) And German law was, because it was not indexed during the hyperinflation. The above not-100% indexing solutions were a retroactive attempt to make the law of debt more fair. I expect that the U.S. government will do some similar things during here after our coming hyperinflation.
• Because of shortages due to hyperinflation, children were underweight, underheight, and often suffered from rickets. Tuberculosis, malnutrition, and scurvy were widespread because of poor diet and lack of clothing and coal to heat buildings in winter. Houses were decrepit from lack of ways to keep them in good repair. Women were forced to work outside the home as during war—largely unheard of at the time when women’s role was strictly children and home. Suicides rose as did the number of pauper funerals paid by the government. The law requiring wood caskets was changed to allow cardboard. Horse and dog meat consumption rose or began for the first time. Prostitution increased—a theme of the 1925 German movie The Joyless Street. The number of used and consignment shops greatly increased with many well-to-do living off the sales of their personal properties.
• Socialism. Communism, and nationalism rose as replacements for the government that had let the hyperinflation happen. Democracy was blamed for the problems.
• Emigration out of Germany rose in 1920 and peaked in 1923.
• Property crimes—theft—rose during the hyperinflation but violent assaults against people went down—perhaps because people could not afford to get drunk as often.
• To an extent, the end of hyperinflation came partly from a central bank that famously refused to increase the printing of marks in the face of demands from the elected officials that they do so, but also apparently the German people wanted so fervently to again believe in the stability of their currency that they simply willed it so without entirely having solid reasons to do so.
• Although the various laws intended to let the hyperinflation succeed at letting the government avoid the spending cuts in needed to make—legal tender, capital controls, price controls, rationing, anti-hoarding laws—citizens and foreigners circumvented the laws massively. Anna Eisenmenger, the Viennese housewife who kept a diary during that country’s hyperinflation said that to abide by the laws meant to starve or freeze to death. Neither she nor anyone else abided by them.
• Ending hyperinflation caused tax revenues to go up. Liberals think raising tax rates on the rich do that. No, it doesn’t. A strong economy, which ending of hyperinflation caused, is what maximizes tax revenue.
• Federal government became sole source of loans during hyperinflation. Who else would be dumb enough to make a loan during hyperinflation?
• Businessmen found arbitraging fixed-rate loans to invest in hard assets and/or foreign currency was more profitable than operating their businesses. This was also reported in The Hyperinflation Survival Guide written about Latin American hyperinflation in the second half of the 20th century.
• Ostensibly, government has not control over velocity—how fast residents spend their money to convert it to hard assets or foreign currency. But, in fact, cutting back on printing it lowers velocity.
• Remember that those who can see through the fog of hyperinflation to the real values, those who have “X-ray” vision, are the ones who profit, but they must remain liquid and manage risk such that they can survive the 180º reversal of economic fundamentals when the hyperinflation ends in order to come out ahead in the end.
John T. Reed