“Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.”
— John Maynard Keynes, The Economic Consequences of Peace, 1919
It was three in the morning and the walls were still oozing the previous day’s heat. I was tossing around on the bed. That probably woke her up and she asked me, “Do I look alright?”
I answered like Eric Clapton had before me, cooing “Yes, you look wonderful tonight.”
“But it’s already morning dear” she remarked.
“And what can I do, you always look beautiful to me,” I replied, switching the table lamp on, hoping to read something, now that sleep was eluding me and she seemed to be awake.
“You and your books! Don’t let me sleep.”
“Oh. So I’ll go and read in the other room.”
“Arre no. Read here. Even I am not feeling sleepy.”
“Thank you for that.”
“So what are you reading?”
“I am reading this interesting book called Lords of Finance - 1929, The Great Depression, And the Bankers Who Broke the World by Liaquat Ahamed. Currently I am reading this portion about the
hyperinflation in Germany in the early 1920s.”
“Why do you keep throwing these economic jargons at me? We are beyond the dating stage, you don’t need to impress me anymore. I know, up there, you are very good. Now, what is hyperinflation?”
“Simply put, hyperinflation is a situation in which inflation is totally out of control and prices rise at a very rapid rate.”
“And how rapid is rapid?”
“To answer that, I will have to get into some detail about Germany in the early 1920s.”
“Haan. Not a problem. It’s three in the morning and it’s hot and humid. You won’t install an air-conditioner and till that, I won’t be able to sleep well. So I guess there is nothing better to do,” she said trying to drink cold water from a bottle and at the same time spilling it all around. “So tell me,” she said, once she was finished drinking.
“Basically the Great War got over on November 11, 1918.”
“The Great War?” she interrupted, her face confused.
“World War I was known as the Great War back then. It only came to be known as the World War I after the World War II happened.”
“Oh! Please continue.”
“So Germany was on the losing side. And France and the United Kingdom were on the winning side. Given this, the French and the British wanted the Germans to compensate them for the war. Initially, the British wanted the Germans to pay $100 billion as compensation. That was humungous, given that the GDP of Germany was $12 billion. So even if Germany would have agreed to borrow and pay the amount, the interest on that borrowing would be huge. Even at the rate of 5%, the interest would work out to $5 billion or around 40% of the country’s GDP.”
“So did they pay $100 billion?”
“Of course not.”
“Why?”
“As Ahamed puts it in his book, Germany “discovered what every debtor at some point discovers: that when one owes a large amount of money, threatening to default can give one the upper hand.””
“Now that’s very interesting. So what happened after that?”
“After that the negotiations kept going on. The amount came down to $33 billion and finally the agreed amount was $12.5 billion, about a single year’s GDP for Germany. As Ahamed writes “To meet the annual interest and principal repayments on this new debt, Germany was required to pay between $600 million and $800 million, a little over 5% of its annual GDP.”
“Hmmm. So how did this hyperinflation set in?”
“Well. The economic situation in Germany wasn’t great. On top of that, they had to pay the victors, and that made the situation worse. The government was in a situation where it was spending more money than it was earning and this led to a situation where the Reichsbank (the German central bank) printed ever increasing amount of marks (the German currency) to finance the deficit. “The budget deficit almost doubled to around $1.5 billion. Financing this shortfall required the printing of ever-increasing amounts of ever-more worthless paper marks. In 1922, around 1 trillion marks of additional currency was issued; in the six months of 1923 it was 17 trillion marks,” writes Ahamed.”
“Now that’s a huge amount of money to print.”
“Yes it is. And the situation only got worse. In order to keep the country adequately supplied with the notes the logistical operation required “133 printing works with 1,783 machines… and more than 30 paper mills.” With so much money being printed, the mark started to lose value dramatically. To give you a sense of comparison, one dollar was worth 4.2 marks in 1914. By 1920, one dollar was worth 65 marks. In August 1923, it was worth 620,000 marks. By early November, it was worth 630 billion marks.
This was the impact all the money printing had. And given this loss of value in the currency, prices went through the roof. As Ahamed writes “Basic necessities were now priced in the billions — a kilo of butter cost 250 billion; a kilo of Bacon cost 180 billion; a simple ride on a Berlin street car, which had cost 1 mark before the War, was now set at 15 billion. Even though currency notes were available in denominations of up to 100 billion marks, it took whole sheaves to pay for anything. The country was awash with currency notes, carried around in bags, in wheelbarrows, in laundry baskets and hampers, even in baby carriages.””
“Oh my god!”
“Yeah. As Ahamed puts it “economic existence became a race.” And people who faced the brunt of it were the workers at the bottom of the pyramid. “Workers once paid weekly, were now paid daily with stacks of notes. Every morning big trucks loaded with laundry baskets full of notes rolled out of Reichsbank printing offices and drove from factory to factory, where someone would clamber aboard to pitch great bundles to the sullen crowds of workers, who would then be given half an hour off to rush out and buy something before the money became worthless.””
“And how is this relevant today?” she asked.
“Very. If you take a look at some of the biggest economies of the world, the fiscal deficits they are running are mind-boggling. At some point of time it will become tempting for them to start financing a major part of their deficit by simply printing more money. Now that temptation has to be avoided because you don’t want it to become a habit and end up where Germany was way back in 1923.”
“Yup. You are right,” she said, as the crows and the pigeons started to make all the noise they could. It was morning already. Another day had begun.
(The example is hypothetical)
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