Life during hyperinflation

[I am back from summer hiatus and will be posting regularly again.]

When I first began learning about hyperinflation, my main concern was to understand what it looked like on the street, for the common people. It is hard to imagine a situation where on Monday bread costs $20/loaf and on Wednesday that's risen to $22 and by Friday it's $25 (to make up an example). How does society keep functioning under those bizarre circumstances?

There was an excellent article published in the German paper Spiegel which gives us some details.

At the Junkers plant in Dessau the company gave its workers the equivalent of the day's price of three-and-a-half loaves of bread at 9am every morning. Their wives, who were waiting at the factory gates, took the money and dashed off to the shops before the new dollar exchange rate was published at around midday.

Many doctors insisted on being paid not in cash but sausages, eggs, coal, and the like. Because of the constant increase in prices, shops stopped displaying them in their windows. And when the Prussian authorities forced them to do so nonetheless, it drove prices even higher because traders simply took prospective increases into account....

People lived in a strange kind of tension. On the one hand there was the daily fight for survival, for food, and for heating fuel. "If we more-or-less manage to prevent the city of Cologne from collapsing completely, I shall get down on my knees and thank my Maker," the city's mayor, Konrad Adenauer, said....

Something that occurs to me, when pondering such a situation in the United States, is that if retailers want to take delivery more often, and consumers want to make purchases more often, the price of gas is going to go up faster than anything else, and the traffic will be terrible. Also, I'm not sure the big chain stores will be able to keep up with frequent pricing changes, which will either mean they go out of business, or that they gouge customers. Large organizations that make automated payments to workers will have trouble when workers need to be paid more often. If you pay your workers only on the 1st of the month, they may not have the cash to buy gas to come to work by the end of the month. The logistics of a high-velocity economy -- accelerated not due to real activity or production, but merely because people are frantic -- is hard to imagine in the current United States. A lot of retailers and companies may simply shut down, unable to cope.

On the other hand it was also a time of phenomenal wastefulness. The people were gripped by the urge to panic-buy. They squandered their money, and lived from one day to the next. "We're drinking away Grandma's house" proclaimed one popular tune of the day....

In fact petty crime in general increased in leaps and bounds. Potato fields were plundered, bakeries raided, shop windows smashed. Prices weren't the only thing that went out of control. All values seemed to have been corrupted. Dance halls and strip bars opened up in the cities, and cocaine sales skyrocketed. People lived as if there were no tomorrow. Economist Joseph Schumpeter noted the "disorganizing effects of the collapsing currency on the national character, on morals, and all branches of cultural life."

I once came across a blog written by a man who had lived through Argentina's second currency collapse several years ago, in which banks closed for 5 months and the currency lost three quarters of its value. Crime levels went through the roof, even among the middle class. He said that if someone stepped out in front of your car in an attempt to wave you down, you had to make yourself step on the accelerator, because the odds were very high that this person (or their accomplices) would rob you. After a while, he said, it got easier to do this-- they always jumped out of the way in time. In some neighborhoods people began carrying guns openly, in holsters, like it was the Wild West. Many people made sure they were home before dark and kept their children inside at all times. Such crime levels are what I fear most about hyperinflation. When people can't plan for the future they obviously grow more impulsive, which, combined with poverty, has to lead to crime.

The only objects of real value were tangible assets: diamonds and coins, antiques, pianos and art. The works of contemporary artists like Lyonel Feininger, Paul Klee, Max Pechstein and Karl Schmidt-Rottluff were in especially high demand. And if you had foreign currency, you lived like a king.

One senior mail inspector gained notoriety when it was revealed he had intercepted letters containing foreign banknotes: 1,717 dollars, 1,102 Swiss francs, and 114 French francs - enough to buy two houses for himself and a piano for a friend, with enough left over for an indulgence-like donation to the church....

Notice how few foreign bills it took to buy two houses and more. This is because, in real terms (as measured in a gold-backed foreign currency or in ounces of gold) prices in Germany were actually plummeting drastically. In real terms (gold equivalents) Germany was suffering from an astounding deflation, as I talked about in this post. Fat lot of good it did you if all you had were Marks, though; in that case, prices were rising faster than your paycheck was.

The stupid ones were those who had nest eggs: the thrifty, holders of government bonds, but primarily the country's pensioners. In other words, those who received money without having to work for it, who lived on their pensions or the interest on their savings. Large sections of the middle classes saw themselves stripped of their assets, losing almost everything they had set aside for years....

Today, all major currencies are fiat currencies (that is, just paper backed by collective confidence in its utility). It's hard to say which brands of paper (dollars, Euros, yen, yuan) will suffer the worst inflation, or when. Having small denomination silver will be much more reliable for making purchases, while gold can be used to preserve larger amounts of wealth.

By perverse contrast, the winners of the hyperinflation were those with massive debts; first and foremost the state, but also private individuals who had borrowed money to buy houses, construction land or farmland, and whose loans were slashed by the switch to the rentenmark....

This benefit to debtors is the whole reason why hyperinflation is an attractive option, in the eyes of the government, in a country with enormous debts, both public and private. You start by printing money to pay debts and deficits, and you end by defaulting on debts because the dollars you pay your creditors with are now worthless. Yes, some of the poor starve and die of nutritional deficiencies and resultant disease, but the mega-rich have safely ensconced their wealth in gold and silver, art and antiques, jewelry, and landed estates. The middle class mostly survives but is left with nothing afterward and must start from scratch.

As bad as that sounds, what's worse is that the United States doesn't have the tools to re-start production from scratch. Because of globalization, we offshored all the means of production. Yet production is the only real wealth, and real goods grown or manufactured represent the only real purchasing power for the common people. We are going to be poor in this country in a way that is hard to even imagine. We don't make anything anymore, or if we do, we buy the parts from China and merely assemble it here. We don't even have foundries, nor do we have shoe factories or textile mills, nor enough rail lines or ports. Even our means of food production have been centralized and industrialized into a business model that will, to put it plainly, abruptly cease to exist.

Modern people think they are somehow unlike the people who have gone before, because technology has made our world appear so different than the world of even Weimar Germany, less than a century ago. People photographed in black and white, stuffing banknotes into stoves or hauling it in wheelbarrows, might as well have been living on Mars, for all we care. And yet it's technology -- or more accurately, the centralization and globalization technology has enabled -- that have so terribly impoverished our country in real terms. The American way of life is non-negotiable, say our leaders. All I can say to that is, pride goeth before a fall.

Few could laugh at "the macabre joke of inflation," as writer Klaus Mann termed it. "What breathtaking fun it is to watch the world coming off the rails," he wrote in undisguised fascination. Germany was now witnessing "the complete depreciation of the only truly credible value in this godforsaken era: that of money...."

It is true to say that nothing seemed safe anymore -- all semblance of order went out of the window, and with it faith in the Weimar Republic, in democracy, indeed in the future itself.