Much has been written about the economic and social distress that can occur during a deep recession in business activity. But very little has been said about an economic experience that may today be a more appropriate matter for concern—the distress that can occur in a time of spiraling inflation. The paucity is perhaps understandable. America's brushes with inflation have been less wrenching than its slumps. But major countries have suffered disastrous inflation in modern times, and detailed, intelligent analyses of these unhappy experiences can be found. Two of the best involve the horrendous German inflation of the early 1920's. They are "The Economics of Inflation" by Costantino Bresciani-Turroni, an Italian economist, published in 1931, and "Exchange, Prices and Production in Hyper-Inflation: Germany, 1920-1923" by Frank D. Graham, an American economist, published in 1930. The report that follows draws heavily from these two books, both long out of print. Some disquieting parallels with developments today may be noted, but there has been no deliberate attempt to select such material. Also, it should be stressed that Germany in that period was a defeated country, saddled with war "reparation" debts that unquestionably exacerbated the inflation problem. Inflation-torn countries today, including the U.S., are under no such burden. Even in today's economic environment, the raw statistics of Germany's inflation make awesome reading. In August 1922, the country's money supply totaled 252 billion marks. In January 1923, it was 2 trillion. In September 1923, it stood at 28 quadrillion. And in November 1923, it reached 497 quintillion— that is, 497 followed by 18 zeros. This runaway inflation of the money supply stopped, finally, when the currency became virtually worthless, its stated value worth literally less than the cost of the paper it was printed on. The old mark was replaced in 1924 by a new "reichsmark" whose value was set at 1 billion old marks. The old marks were withdrawn from circulation and ceased to be legal tender. HOURLY PRICE CHANGES In late 1923, near the final collapse of the currency, some companies took to reimbursing their employes with special scrip that could be used to acquire company products. Borrowing became well-nigh impossible. All sorts of goods were scarce. Food riots erupted in cities. Prices changed by the hour. Obviously, there could be no precise record kept of the price spiral in those desperate months. But Mr. Graham's book does trace the country's wholesale price index through December 1922. At the start of the year, the index stood at 4,626 times the 1913 average. By December 1922, it reached 374,563,426,600 times the 1913 average. Statistics bearing on other facets of the price spiral are available, however, through the entire period. Employment, perhaps surprisingly, held up quite well until just before the currency collapse. As late as July 1923, only 3.5% of the nation's trade union members were jobless. This actually was lower than the rate of 6% in July 1920, three years earlier, when prices were just beginning to spiral. As things got out of hand near the end of 1923, however, unemployment soared. The jobless rate went from 3.5% in July to 9.9% in September to a ghastly 28.2% in December. Mr. Graham discussed why employment as well as economic activity generally, remained at a high level until near the end: "The more rapid the rise in prices, the greater became the intensity of demand. Business boomed, unemployment vanished, sales were all too easy. There was of course an enormous amount of buying which, under other circumstances, would have been quite senseless. People purchased not what they wanted to use but whatever they could get. . . . One could produce anything material and be sure of a market." An index measuring the volume of the country's physical output of goods, contained in the Graham book, underscores this rising demand, before the collapse, for "anything material." The index stood at 61 % of the 1913 average in 1920, rose to 77% in 1921 and then climbed to 86% in 1922. A year later, however, it was down to 54%. As late as 1927, the index was still at the 1922 level. The inflation's impact on savings also has been recorded. Depositors who left their funds in savings banks throughout the period lost everything. In 1913, some 19 billion marks were on deposit in savings banks. In November 1924, that sum had the purchasing power of one-quarter of an American penny. The rush to withdraw savings as inflation worsened forced many thrift institutions to close. In 1913, there were 10,890 savings-banks offices in the country. By 1924, there were only 4,870. The story was much the same in the insurance business. In 1913, there were some 16 million life insurance policies outstanding. By 1924, the total was barely 3 million. At the worst of the price spiral, the postage stamp on an envelope containing an insurance payment to a beneficiary often cost more than the sum written on the enclosed check. The period wasn't a happy time for stock-market investors. A share-price index was recorded by Mr. Bresciani-Turroni and has been adjusted to express values in dollar terms. It stood at 49.68 at the start of 1919. By February 1920, it was down to 8.47. Then, as business activity became more frenetic, it began to climb, reaching 26.80 by the end of 1922. The climb continued in much of 1923, but share prices plunged again near the end of the year, when economic chaos set in. A study cited by Mr. Bresciani-Turroni found that an investor who had bought a typical group of stocks in 1914 would, by 1924, have retained only one-quarter of his original investment, expressed in terms of gold. By then, company bankruptcies, which had been rare during the boo my years, were widespread. Another victim of the price spiral was efficiency. As evidence of this the Bresciani-Turroni book said that in a typical large manufacturing firm there were 120 "unproductive" employees for every 100 actual production-line workers in 1922. This compared with 66 for every 100 in 1913. One reason was that more office personnel were required to handle rapidly changing price lists, more frequent cost-of-living pay supplements, incessant disputes with labor unions, increasingly complex tax and accounting problems and spreading supply and production bottlenecks. ECONOMIC PHENOMENA A wide range of other economic phenomena occurred. Exports rose briskly in the early inflation years, as the mark got cheaper on foreign exchange markets. But near the end, export volume sagged as shortages developed. Various export controls were imposed to try to prevent still worse shortages. At the same time, the quality of workmanship deteriorated. An "index of quality" for various products, published in the Frankfurter Zeitung, a newspaper, dropped from a level of 1.00 in April 1921 to 0.82 in October 1922 to 0.64 in October 1923. After the currency collapse, it began to move up again, reaching 1.24 in April 1924, a time of depressed business activity. Other trends included a tendency toward greater economic concentration. Large companies gobbled up smaller companies. Fearing shortages, companies that produced, for example, consumer goods sought mergers with companies that supplied them with raw materials. On an individual level, inflation led to a greater concentration of wealth among the rich. Investors with sufficient financial sophistication to foresee the worsening price spiral were able to hedge much more effectively against it than the middle-class, the poor or older persons on fixed incomes. Crime rose rapidly during the years of inflation. An index reflecting the total number of crimes committed stood at 136% of the 1882 average in 1921. By 1923, it was 170%. After the price spiral ended, however, it fell sharply, to 150% in 1924 and 122% in 1925. Crimes committed by young men, particularly, paralleled price developments. Such crimes soared to 212% of the 1882 average in 1923 and then fell to 153% in 1924 and 87% in 1925. Other sociological ramifications of the inflation years are less easily pinpointed. It's widely held, however, that the country's increasing prejudice against Jews and the subsequent rise of Hitler can be traced to that time. Perhaps the most puzzling aspect of the period was the willingness of German leaders to continue along the inflationary path for so long once the hazards had become clear. Mr. Bresciani-Turroni concluded that the authorities simply lacked "the courage to resist the pressure of those who demanded ever greater quantities of paper money, and to face boldly" the temporary business setback that would no doubt have followed a prompter return to more conservative monetary policies. In the economist's view, this lack of courage to curb a developing boom through stricter policies, rather than the burden of World War I debts, was "the fundamental cause of the depreciation of the mark." DISCUSSION 1. If you had lived in Germany in 1923, how could you have protected yourself against inflation? What could you have done to make its impact on you as small as possible? 2. If you had had any control over the economy in Germany in 1923, what would you have done to halt the inflation? (This question will be significantly easier to answer after reading the next few chapters; after you have done so, come back to this question and try again.) 3. Could an-inflation as bad as the one described above ever happen in the United States? Why or why not?

THE AWFUL YEAR INFLATION R AN WILD

Much has been written about the economic and social distress that can occur during a deep recession in business activity. But very little has been said about an economic experience that may today be a more appropriate matter for concern—the distress that can occur in a time of spiraling inflation. The paucity is perhaps understandable. America's brushes with inflation have been less wrenching than its slumps. But major countries have suffered disastrous inflation in modern times, and detailed, intelligent analyses of these unhappy experiences can be found. Two of the best involve the horrendous German inflation of the early 1920's. They are "The Economics of Inflation" by Costantino Bresciani-Turroni, an Italian economist, published in 1931, and "Exchange, Prices and Production in Hyper-Inflation: Germany, 1920-1923" by Frank D. Graham, an American economist, published in 1930. The report that follows draws heavily from these two books, both long out of print. Some disquieting parallels with developments today may be noted, but there has been no deliberate attempt to select such material. Also, it should be stressed that Germany in that period was a defeated country, saddled with war "reparation" debts that unquestionably exacerbated the inflation problem. Inflation-torn countries today, including the U.S., are under no such burden. Even in today's economic environment, the raw statistics of Germany's inflation make awesome reading. In August 1922, the country's money supply totaled 252 billion marks. In January 1923, it was 2 trillion. In September 1923, it stood at 28 quadrillion. And in November 1923, it reached 497 quintillion— that is, 497 followed by 18 zeros. This runaway inflation of the money supply stopped, finally, when the currency became virtually worthless, its stated value worth literally less than the cost of the paper it was printed on. The old mark was replaced in 1924 by a new "reichsmark" whose value was set at 1 billion old marks. The old marks were withdrawn from circulation and ceased to be legal tender.

HOURLY PRICE CHANGES

In late 1923, near the final collapse of the currency, some companies took to reimbursing their employes with special scrip that could be used to acquire company products. Borrowing became well-nigh impossible. All sorts of goods were scarce. Food riots erupted in cities. Prices changed by the hour. Obviously, there could be no precise record kept of the price spiral in those desperate months. But Mr. Graham's book does trace the country's wholesale price index through December 1922. At the start of the year, the index stood at 4,626 times the 1913 average. By December 1922, it reached 374,563,426,600 times the 1913 average. Statistics bearing on other facets of the price spiral are available, however, through the entire period. Employment, perhaps surprisingly, held up quite well until just before the currency collapse. As late as July 1923, only 3.5% of the nation's trade union members were jobless. This actually was lower than the rate of 6% in July 1920, three years earlier, when prices were just beginning to spiral. As things got out of hand near the end of 1923, however, unemployment soared. The jobless rate went from 3.5% in July to 9.9% in September to a ghastly 28.2% in December. Mr. Graham discussed why employment as well as economic activity generally, remained at a high level until near the end: "The more rapid the rise in prices, the greater became the intensity of demand. Business boomed, unemployment vanished, sales were all too easy. There was of course an enormous amount of buying which, under other circumstances, would have been quite senseless. People purchased not what they wanted to use but whatever they could get. . . . One could produce anything material and be sure of a market." An index measuring the volume of the country's physical output of goods, contained in the Graham book, underscores this rising demand, before the collapse, for "anything material." The index stood at 61 % of the 1913 average in 1920, rose to 77% in 1921 and then climbed to 86% in 1922. A year later, however, it was down to 54%. As late as 1927, the index was still at the 1922 level. The inflation's impact on savings also has been recorded. Depositors who left their funds in savings banks throughout the period lost everything. In 1913, some 19 billion marks were on deposit in savings banks. In November 1924, that sum had the purchasing power of one-quarter of an American penny. The rush to withdraw savings as inflation worsened forced many thrift institutions to close. In 1913, there were 10,890 savings-banks offices in the country. By 1924, there were only 4,870. The story was much the same in the insurance business. In 1913, there were some 16 million life insurance policies outstanding. By 1924, the total was barely 3 million. At the worst of the price spiral, the postage stamp on an envelope containing an insurance payment to a beneficiary often cost more than the sum written on the enclosed check. The period wasn't a happy time for stock-market investors. A share-price index was recorded by Mr. Bresciani-Turroni and has been adjusted to express values in dollar terms. It stood at 49.68 at the start of 1919. By February 1920, it was down to 8.47. Then, as business activity became more frenetic, it began to climb, reaching 26.80 by the end of 1922. The climb continued in much of 1923, but share prices plunged again near the end of the year, when economic chaos set in. A study cited by Mr. Bresciani-Turroni found that an investor who had bought a typical group of stocks in 1914 would, by 1924, have retained only one-quarter of his original investment, expressed in terms of gold. By then, company bankruptcies, which had been rare during the boo my years, were widespread. Another victim of the price spiral was efficiency. As evidence of this the Bresciani-Turroni book said that in a typical large manufacturing firm there were 120 "unproductive" employees for every 100 actual production-line workers in 1922. This compared with 66 for every 100 in 1913. One reason was that more office personnel were required to handle rapidly changing price lists, more frequent cost-of-living pay supplements, incessant disputes with labor unions, increasingly complex tax and accounting problems and spreading supply and production bottlenecks.

ECONOMIC PHENOMENA A wide range of other economic phenomena occurred. Exports rose briskly in the early inflation years, as the mark got cheaper on foreign exchange markets. But near the end, export volume sagged as shortages developed. Various export controls were imposed to try to prevent still worse shortages. At the same time, the quality of workmanship deteriorated. An "index of quality" for various products, published in the Frankfurter Zeitung, a newspaper, dropped from a level of 1.00 in April 1921 to 0.82 in October 1922 to 0.64 in October 1923. After the currency collapse, it began to move up again, reaching 1.24 in April 1924, a time of depressed business activity. Other trends included a tendency toward greater economic concentration. Large companies gobbled up smaller companies. Fearing shortages, companies that produced, for example, consumer goods sought mergers with companies that supplied them with raw materials. On an individual level, inflation led to a greater concentration of wealth among the rich. Investors with sufficient financial sophistication to foresee the worsening price spiral were able to hedge much more effectively against it than the middle-class, the poor or older persons on fixed incomes. Crime rose rapidly during the years of inflation. An index reflecting the total number of crimes committed stood at 136% of the 1882 average in 1921. By 1923, it was 170%. After the price spiral ended, however, it fell sharply, to 150% in 1924 and 122% in 1925. Crimes committed by young men, particularly, paralleled price developments. Such crimes soared to 212% of the 1882 average in 1923 and then fell to 153% in 1924 and 87% in 1925. Other sociological ramifications of the inflation years are less easily pinpointed. It's widely held, however, that the country's increasing prejudice against Jews and the subsequent rise of Hitler can be traced to that time. Perhaps the most puzzling aspect of the period was the willingness of German leaders to continue along the inflationary path for so long once the hazards had become clear. Mr. Bresciani-Turroni concluded that the authorities simply lacked "the courage to resist the pressure of those who demanded ever greater quantities of paper money, and to face boldly" the temporary business setback that would no doubt have followed a prompter return to more conservative monetary policies. In the economist's view, this lack of courage to curb a developing boom through stricter policies, rather than the burden of World War I debts, was "the fundamental cause of the depreciation of the mark."

DISCUSSION

1. If you had lived in Germany in 1923, how could you have protected yourself against inflation? What could you have done to make its impact on you as small as possible?

2. If you had had any control over the economy in Germany in 1923, what would you have done to halt the inflation? (This question will be significantly easier to answer after reading the next few chapters; after you have done so, come back to this question and try again.)

3. Could an-inflation as bad as the one described above ever happen in the United States? Why or why not?