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Wall Street History

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09/21/2012

QE Infinity...a look back

[Reprinted from March 2009…in light of the Federal Reserve’s latest round of quantitative easing, or “QE Infinity,” as some are calling it, which, coupled with similar moves in Europe threaten, in the eyes of some, to ignite inflation that could then get out of control.]

More on Weimar Germany

If you Google “Weimar Germany,” in the first three pages or so of entries you’ll find a piece I’ve posted on the topic, under my agreement with BuyandHold.com. Frankly, it’s one of my better ones and I decided to glance at it again as some of today’s market participants are concerned about prospects for inflation with governments around the world printing money at a fever pitch, particularly here in the United States and soon to be Europe. While I will leave my own inflation projections for my “Week in Review” column, in going through the original piece I realize I can add some material via a book I didn’t have at the time: “The Dark Valley…a panorama of the 1930s,” by Piers Brendon. If the global economy continues to weaken, are there parallels to today when looking at that awful decade? 

Brendon writes of the Germany of 1923: “The lost war and the cruel peace had reduced the new Weimar Republic to a condition bordering on anarchy….there was a rash of political assassinations. Riots and strikes proliferated. Poverty and hunger stalked the land. France’s intransigent President Poincare demanded prompt payment of reparations, fixed at the enormous sum of 132 billion gold marks…More insidious still, inflation was destroying the value of money like some financial cancer.” 

It was a time ripe for Adolf Hitler, who “intuitively grasped the fact that the social chaos caused by the mark’s precipitous fall was the humus of Nazism.” Hitler liked to tell the story of “the old woman who had rejoiced when her small postcard shop did well during the Munich gymnastic festival.” 

‘But now the old woman is sitting in front of an empty shop, crying her eyes out. For with the miserable paper money she took in for her cards, she can’t buy a hundredth of her old stock. Her business is ruined, her livelihood absolutely destroyed. She can go begging. And the same despair is seizing a whole people. We are facing a revolution…’ 

Hitler would rile the crowds by saying revolution would come “when the farmer stopped selling food for currency good only for papering ‘his outhouse on the manure heap.’” As Piers Brendon writes, “Hitler pinned his faith in the ‘revolt of the starving billionaires.’” 

Brendon notes entrepreneur Hugo Stinnes, who said at the time that Bolshevism would have won the day in Germany, but that the government, in aiming to avoid paying reparations, engineered currency depreciation for the purposes of promoting cheap exports, thus exerting “economic pressure on the Allies.” But the reparations contributed to inflation in impacting the balance of trade while undermining confidence in the government’s ability to survive. 

“The massive toll in cash and kind led to a severe budget deficit which governments found themselves unwilling and unable to make up through taxation. So they printed money, in ever increasing quantities. In January 1919 there were 9 marks to the dollar; three years later there were 192. Stimulated by the assassination of the Jewish foreign minister Walter Rathenau in 1922, the ‘currency debauch’ worsened.”  

As I wrote in my first piece on Weimar Germany, the Reichsbank tried to hold the mark at a rate of about 2,000 to the dollar, but to no avail. 

July 1923…353,412 marks to the dollar

August 1923…4,620,455
September 1923…98,860,000
October 1923…25,260,208,000
November 1923…4,200,000,000,000…yes, trillion 

“The most colossal inflation in history,” though these days I’d have to go back to the inflation rates seen in Zimbabwe a few years ago (that have since been arrested). 

Piers Brendon writes: “To produce this currency 300 paper mills and 2,000 printing plants worked around the clock; eventually it cost more to print the notes than they were worth. Banks had to take on more clerks to count the noughts. They used the blank side of the notes as scrap paper because it was cheaper than buying pads. Eventually stacks of cash were not counted at all but weighed or measured with a ruler. 

“Life was transformed into a bizarre paperchase. Patrons of restaurants found their meals becoming more expensive as they ate. Factory workers saw their wages shrinking in value as they queued to collect them. However fast they ran to the shops, prices outstripped them. Shopkeepers, indeed, looked on their customers almost as thieves for taking goods which could only be replaced at prohibitive expense. Peasants refused to sell their produce for paper money, saying: ‘We don’t want any Jew-confetti from Berlin.’ Beggars rejected anything less than a million marks….Some people paid in kind: theatre seats were sold for a couple of eggs; prostitutes offered their services for cigarettes….Bureaucrats in the Finance Ministry took part of their salaries in potatoes.” 

The flipside was, if you possessed any foreign currency you were “impossibly rich, for no one had enough marks to change anything but the smallest denominations. Ten dollars would purchase a large modern house….while American tourists lit their cigarettes with million-mark notes and pasted larger denominations on their suitcases, further exacerbating German chauvinism. In the words of one contemporary, ‘Germany was a rapidly decomposing corpse, on which the birds of prey were swooping down from all directions.’” 

Life in Germany became “madness, nightmare, desperation, chaos.” D.H. Lawrence said: “Money becomes insane, and people with it.” And then there was the sexual decadence in places like Berlin…but I’ll pass on the details. 

One historian wrote of the time that inflation infected everything, a “revolutionary influence much more powerful than the war itself.” An influence that Hitler would exploit. 

Wall Street History will return in two weeks. Perhaps another look at the inflation of Weimar Germany.

Brian Trumbore
 



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Wall Street History

09/21/2012

QE Infinity...a look back

[Reprinted from March 2009…in light of the Federal Reserve’s latest round of quantitative easing, or “QE Infinity,” as some are calling it, which, coupled with similar moves in Europe threaten, in the eyes of some, to ignite inflation that could then get out of control.]

More on Weimar Germany

If you Google “Weimar Germany,” in the first three pages or so of entries you’ll find a piece I’ve posted on the topic, under my agreement with BuyandHold.com. Frankly, it’s one of my better ones and I decided to glance at it again as some of today’s market participants are concerned about prospects for inflation with governments around the world printing money at a fever pitch, particularly here in the United States and soon to be Europe. While I will leave my own inflation projections for my “Week in Review” column, in going through the original piece I realize I can add some material via a book I didn’t have at the time: “The Dark Valley…a panorama of the 1930s,” by Piers Brendon. If the global economy continues to weaken, are there parallels to today when looking at that awful decade? 

Brendon writes of the Germany of 1923: “The lost war and the cruel peace had reduced the new Weimar Republic to a condition bordering on anarchy….there was a rash of political assassinations. Riots and strikes proliferated. Poverty and hunger stalked the land. France’s intransigent President Poincare demanded prompt payment of reparations, fixed at the enormous sum of 132 billion gold marks…More insidious still, inflation was destroying the value of money like some financial cancer.” 

It was a time ripe for Adolf Hitler, who “intuitively grasped the fact that the social chaos caused by the mark’s precipitous fall was the humus of Nazism.” Hitler liked to tell the story of “the old woman who had rejoiced when her small postcard shop did well during the Munich gymnastic festival.” 

‘But now the old woman is sitting in front of an empty shop, crying her eyes out. For with the miserable paper money she took in for her cards, she can’t buy a hundredth of her old stock. Her business is ruined, her livelihood absolutely destroyed. She can go begging. And the same despair is seizing a whole people. We are facing a revolution…’ 

Hitler would rile the crowds by saying revolution would come “when the farmer stopped selling food for currency good only for papering ‘his outhouse on the manure heap.’” As Piers Brendon writes, “Hitler pinned his faith in the ‘revolt of the starving billionaires.’” 

Brendon notes entrepreneur Hugo Stinnes, who said at the time that Bolshevism would have won the day in Germany, but that the government, in aiming to avoid paying reparations, engineered currency depreciation for the purposes of promoting cheap exports, thus exerting “economic pressure on the Allies.” But the reparations contributed to inflation in impacting the balance of trade while undermining confidence in the government’s ability to survive. 

“The massive toll in cash and kind led to a severe budget deficit which governments found themselves unwilling and unable to make up through taxation. So they printed money, in ever increasing quantities. In January 1919 there were 9 marks to the dollar; three years later there were 192. Stimulated by the assassination of the Jewish foreign minister Walter Rathenau in 1922, the ‘currency debauch’ worsened.”  

As I wrote in my first piece on Weimar Germany, the Reichsbank tried to hold the mark at a rate of about 2,000 to the dollar, but to no avail. 

July 1923…353,412 marks to the dollar

August 1923…4,620,455
September 1923…98,860,000
October 1923…25,260,208,000
November 1923…4,200,000,000,000…yes, trillion 

“The most colossal inflation in history,” though these days I’d have to go back to the inflation rates seen in Zimbabwe a few years ago (that have since been arrested). 

Piers Brendon writes: “To produce this currency 300 paper mills and 2,000 printing plants worked around the clock; eventually it cost more to print the notes than they were worth. Banks had to take on more clerks to count the noughts. They used the blank side of the notes as scrap paper because it was cheaper than buying pads. Eventually stacks of cash were not counted at all but weighed or measured with a ruler. 

“Life was transformed into a bizarre paperchase. Patrons of restaurants found their meals becoming more expensive as they ate. Factory workers saw their wages shrinking in value as they queued to collect them. However fast they ran to the shops, prices outstripped them. Shopkeepers, indeed, looked on their customers almost as thieves for taking goods which could only be replaced at prohibitive expense. Peasants refused to sell their produce for paper money, saying: ‘We don’t want any Jew-confetti from Berlin.’ Beggars rejected anything less than a million marks….Some people paid in kind: theatre seats were sold for a couple of eggs; prostitutes offered their services for cigarettes….Bureaucrats in the Finance Ministry took part of their salaries in potatoes.” 

The flipside was, if you possessed any foreign currency you were “impossibly rich, for no one had enough marks to change anything but the smallest denominations. Ten dollars would purchase a large modern house….while American tourists lit their cigarettes with million-mark notes and pasted larger denominations on their suitcases, further exacerbating German chauvinism. In the words of one contemporary, ‘Germany was a rapidly decomposing corpse, on which the birds of prey were swooping down from all directions.’” 

Life in Germany became “madness, nightmare, desperation, chaos.” D.H. Lawrence said: “Money becomes insane, and people with it.” And then there was the sexual decadence in places like Berlin…but I’ll pass on the details. 

One historian wrote of the time that inflation infected everything, a “revolutionary influence much more powerful than the war itself.” An influence that Hitler would exploit. 

Wall Street History will return in two weeks. Perhaps another look at the inflation of Weimar Germany.

Brian Trumbore