---
title: A Timely History Lesson from the Weimar Republic
date: '2008-10-09T01:00:00Z'
categories:
- History
tags:
- books
- economics
- Germany
- history
- money
summary: Excerpts from Adam Smith's "Paper Money" on the hyperinflation in 1920s Germany, timely in the midst of the 2008 financial crisis.
original:
  url: http://bendiken.net/2008/10/08/a-timely-history-lesson
  archive: https://web.archive.org/web/20090219182642/http://feeds.feedburner.com/bendiken
---

> *I feel like we're inside a Civilization game and there's some f\*cking idiot
> playing.*\
> — Michael T. McNamara

I'm reading a
[timely](https://web.archive.org/web/20081008/http://www.shadowstats.com/article/292 "SGS Hyperinflation Special Report - April 8, 2008")
book, [*Paper
Money*](https://web.archive.org/web/20081008/http://www.amazon.co.uk/Paper-Money-Adam-Smith/dp/0708821634 "Paper Money by Adam Smith"),
by [George J. W.
Goodman](https://web.archive.org/web/20081008/http://www.adamsmith.net/connection.html).
Writing under the unlikely pseudonym of "Adam Smith", Goodman is also the author
of the classic investment bestsellers [*The Money
Game*](https://web.archive.org/web/20081008/http://www.amazon.com/Money-Game-Adam-Smith/dp/0394721039 "The Money Game by Adam Smith")
and
[*Supermoney*](https://web.archive.org/web/20081008/http://www.amazon.com/Supermoney-Wiley-Investment-Classics-Smith/dp/0471786314 "Supermoney by Adam Smith").

Published in 1981, *Paper Money* is currently out of print, though judging by
the [Amazon sales
rank](https://web.archive.org/web/20081008/http://www.amazon.co.uk/Paper-Money-Adam-Smith/dp/0708821634 "Paper Money by Adam Smith")
of its second-hand copies I suspect that situation will be remedied in the
not-too-far-off future. The following excerpts are from [pp.
57-62](https://web.archive.org/web/20081008/http://www.pbs.org/wgbh/commandingheights/shared/minitext/ess_germanhyperinflation.html "The German 1923 Hyperinflation on PBS")
and concern the systemic [financial
crisis](https://web.archive.org/web/20081008/http://en.wikipedia.org/wiki/Hyperinflation#Hyperinflation_and_the_currency "hyperinflation")
in [1920s
Germany](https://web.archive.org/web/20081008/http://en.wikipedia.org/wiki/Weimar_Republic "The Weimar Republic")
that laid the foundation for the fascist regime that followed:

> Before World War I Germany was a prosperous country, with a gold-backed
> currency, expanding industry, and world leadership in optics, chemicals, and
> machinery. The German Mark, the British shilling, the French franc, and the
> Italian lira all had about equal value, and all were exchanged four or five to
> the dollar. That was in 1914. **In 1923, at the most fevered moment of the
> German hyperinflation, the exchange rate between the dollar and the Mark was
> one trillion Marks to one dollar, and a wheelbarrow full of money would not
> even buy a newspaper.** Most Germans were taken by surprise by the financial
> tornado.
>
> "My father was a lawyer," says Walter Levy, an internationally known
> German-born oil consultant in New York, "and he had taken out an insurance
> policy in 1903, and every month he had made the payments faithfully. It was a
> 20-year policy, and when it came due, he cashed it in and bought a single loaf
> of bread." The Berlin publisher Leopold Ullstein wrote that an American
> visitor tipped their cook one dollar. The family convened, and it was decided
> that a trust fund should be set up in a Berlin bank with the cook as
> beneficiary, the bank to administer and invest the dollar.
>
> In retrospect, you can trace the steps to hyperinflation, but some of the
> reasons remain cloudy. Germany abandoned the gold backing of its currency in
> 1914. **The war was expected to be short, so it was financed by government
> borrowing, not by savings and taxation.** In Germany prices doubled between
> 1914 and 1919.
>
> After four disastrous years Germany had lost the war. Under the Treaty of
> Versailles it was forced to make a reparations payment in gold-backed Marks,
> and it was due to lose part of the production of the Ruhr and of the province
> of Upper Silesia. The Weimar Republic was politically fragile.
>
> But the bourgeois habits were very strong. Ordinary citizens worked at their
> jobs, sent their children to school and worried about their grades, maneuvered
> for promotions and rejoiced when they got them, and generally expected things
> to get better. **But the prices that had doubled from 1914 to 1919 doubled
> again during just five months in 1922. Milk went from 7 Marks per liter to 16;
> beer from 5.6 to 18.** There were complaints about the high cost of living.
> Professors and civil servants complained of getting squeezed. Factory workers
> pressed for wage increases. An underground economy developed, aided by a
> desire to beat the tax collector.
>
> On June 24, 1922, right-wing fanatics assassinated Walter Rathenau, the
> moderate, able foreign minister. Rathenau was a charismatic figure, and the
> idea that a popular, wealthy, and glamorous government minister could be shot
> in a law-abiding society shattered the faith of the Germans, who wanted to
> believe that things were going to be all right. Rathenau's state funeral was a
> national trauma. **The nervous citizens of the Ruhr were already getting their
> money out of the currency and into real goods — diamonds, works of art, safe
> real estate. Now ordinary Germans began to get out of Marks and into real
> goods.**
>
> Pianos, wrote the British historian Adam Fergusson, were bought even by
> unmusical families. Sellers held back because the Mark was worth less every
> day. As prices went up, the amounts of currency demanded were greater, and the
> German Central Bank responded to the demands. Yet the ruling authorities did
> not see anything wrong. **A leading financial newspaper said that the amounts
> of money in circulation were not excessively high. Dr. Rudolf Havenstein, the
> president of the Reichsbank (equivalent to the Federal Reserve) told an
> economics professor that he needed a new suit but wasn't going to buy one
> until prices came down.**
>
> Why did the German government not act to halt the inflation? It was a shaky,
> fragile government, especially after the assassination. The vengeful French
> sent their army into the Ruhr to enforce their demands for reparations, and
> the Germans were powerless to resist. **More than inflation, the Germans
> feared unemployment.** In 1919 Communists had tried to take over, and severe
> unemployment might give the Communists another chance. The great German
> industrial combines — Krupp, Thyssen, Farben, Stinnes — condoned the inflation
> and survived it well. **A cheaper Mark, they reasoned, would make German goods
> cheap and easy to export, and they needed the export earnings to buy raw
> materials abroad. Inflation kept everyone working.**
>
> So the printing presses ran, and once they began to run, they were hard to
> stop. The price increases began to be dizzying. Menus in cafes could not be
> revised quickly enough. **A student at Freiburg University ordered a cup of
> coffee at a cafe. The price on the menu was 5,000 Marks. He had two cups. When
> the bill came, it was for 14,000 Marks.** "If you want to save money," he was
> told, "and you want two cups of coffee, you should order them both at the same
> time."
>
> The presses of the Reichsbank could not keep up though they ran through the
> night. Individual cities and states began to issue their own money. Dr.
> Havenstein, the president of the Reichsbank, did not get his new suit. **A
> factory worker described payday, which was every day at 11:00 a.m.:** "At
> 11:00 in the morning a siren sounded, and everybody gathered in the factory
> forecourt, where a five-ton lorry was drawn up loaded brimful with paper
> money. The chief cashier and his assistants climbed up on top. They read out
> names and just threw out bundles of notes. As soon as you had caught one you
> made a dash for the nearest shop and bought just anything that was going."
> Teachers, paid at 10:00 a.m., brought their money to the playground, where
> relatives took the bundles and hurried off with them. Banks closed at 11:00
> a.m.; the harried clerks went on strike.
>
> The flight from currency that had begun with the buying of diamonds, gold,
> country houses, and antiques now extended to minor and almost useless items —
> bric-a-brac, soap, hairpins. The law-abiding country crumbled into petty
> thievery. Copper pipes and brass armatures weren't safe. Gasoline was siphoned
> from cars. People bought things they didn't need and used them to barter — a
> pair of shoes for a shirt, some crockery for coffee. Berlin had a "witches'
> Sabbath" atmosphere. Prostitutes of both sexes roamed the streets. Cocaine was
> the fashionable drug. In the cabarets the newly rich and their foreign friends
> could dance and spend money. Other reports noted that not all the young people
> had a bad time. Their parents had taught them to work and save, and that was
> clearly wrong, so they could spend money, enjoy themselves, and flout the old.
>
> The publisher Leopold Ullstein wrote: **"People just didn't understand what
> was happening. All the economic theory they had been taught didn't provide for
> the phenomenon.** There was a feeling of utter dependence on anonymous powers
> — almost as a primitive people believed in magic — that somebody must be in
> the know, and that this small group of 'somebodies' must be a conspiracy."
>
> When the 1,000-billion Mark note came out, few bothered to collect the change
> when they spent it. By November 1923, with one dollar equal to one trillion
> Marks, the breakdown was complete. The currency had lost meaning.
>
> What happened immediately afterward is as fascinating as the Great Inflation
> itself. The tornado of the Mark inflation was succeeded by the "miracle of the
> Rentenmark." A new president took over the Reichsbank, Horace Greeley Hjalmar
> Schacht, who came by his first two names because of his father's admiration
> for an editor of the *New York Tribune*. The Rentenmark was not Schacht's
> idea, but he executed it, and as the Reichsbank president, he got the credit
> for it. For decades afterward he was able to maintain a reputation for
> financial wizardry. He became the architect of the financial prosperity
> brought by the Nazi party.
>
> Obviously, though the currency was worthless, Germany was still a rich country
> — with mines, farms, factories, forests. The backing for the Rentenmark was
> mortgages on the land and bonds on the factories, but that backing was a
> fiction; the factories and land couldn't be turned into cash or used abroad.
> **Nine zeros were struck from the currency; that is, one Rentenmark was equal
> to one billion old Marks.** The Germans wanted desperately to believe in the
> Rentenmark, and so they did. "I remember," said one Frau Barten of East
> Prussia, "the feeling of having just one Rentenmark to spend. I bought a small
> tin bread bin. Just to buy something that had a price tag for one Mark was so
> exciting."
>
> **All money is a matter of belief. Credit derives from Latin, *credere*, "to
> believe."** Belief was there, the factories functioned, the farmers delivered
> their produce. The Central Bank kept the belief alive when it would not let
> even the government borrow further.
>
> **But although the country functioned again, the savings were never restored,
> nor were the values of hard work and decency that had accompanied the
> savings.** There was a different temper in the country, a temper that Hitler
> would later exploit with diabolical talent. Thomas Mann wrote: **"The market
> woman who without batting an eyelash demanded 100 million for an egg lost the
> capacity for surprise. And nothing that has happened since has been insane or
> cruel enough to surprise her."**
>
> With the currency went many of the lifetime plans of average citizens. It was
> the custom for the bride to bring some money to a marriage; many marriages
> were called off. Widows dependent on insurance found themselves destitute.
> **People who had worked a lifetime found that their pensions would not buy one
> cup of coffee.**
>
> Pearl Buck, the American writer who became famous for her novels of China, was
> in Germany in 1923. She wrote later: "The cities were still there, the houses
> not yet bombed and in ruins, but the victims were millions of people. **They
> had lost their fortunes, their savings; they were dazed and inflation-shocked
> and did not understand how it had happened to them and who the foe was who had
> defeated them.** Yet they had lost their self-assurance, their feeling that
> they themselves could be the masters of their own lives if only they worked
> hard enough; and lost, too, were the old values of morals, of ethics, of
> decency."
>
> The fledgling Nazi party, whose attempted coup had failed in 1923, won 32
> seats legally in the next election. The right-wing Nationalist party won 106
> seats, having promised 100 percent compensation to the victims of inflation
> and vengeance on the conspirators who had brought it.

I'll skip the specific commentary as I can't here possibly do justice to the
relevant [economic
realities](https://web.archive.org/web/20081008/http://mises.org/story/3128 "The Mises.org Bailout Reader")
and, in any case, I think the piece speaks for itself. Those sufficiently
[concerned](https://web.archive.org/web/20081008/http://www.youtube.com/watch?v=-AtxSDMc87I "Jim Rogers: Clean out the system before it is too late - September 25, 2008"),
or just plain
[fascinated](https://web.archive.org/web/20081008/http://www.youtube.com/watch?v=_XgkeTanCGI "Naomi Wolf: Give Me Liberty - October 4, 2008"),
by the alluded-to [present-day
events](https://web.archive.org/web/20081008/http://www.shadowstats.com/article/292 "SGS Hyperinflation Special Report - April 8, 2008")
will no doubt have already done their own
[homework](https://web.archive.org/web/20081008/http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hyperinflation "examples of hyperinflation")
by now. Haven't you?

Some further pointers. If you've already got a grasp of
[the](https://web.archive.org/web/20081008/http://www.amazon.com/Economics-One-Lesson-50th-Anniversary/dp/0930073193 "Economics in One Lesson by Henry Hazlitt")
[fundamentals](https://web.archive.org/web/20081008/http://www.amazon.com/Economics-Real-People-Gene-Callahan/dp/0945466412 "Economics for Real People by Gene Callahan"),
you may, in addition to *Paper Money*, also be interested in checking out Ralph
T. Foster's new book [*Fiat Paper Money, The History and Evolution of Our
Currency*](https://web.archive.org/web/20081008/http://localbizblogs.com/fostercoinstamp/2007/04/16/the-future-of-our-money-revealed)
and [Murray N.
Rothbard's](https://web.archive.org/web/20081008/http://www.lewrockwell.com/rothbard/rothbard-lib.html "Murray N. Rothbard library and resources")
classic [*What Has Government Done to Our
Money?*](https://web.archive.org/web/20081008/http://www.amazon.com/What-Government-Money-Percent-Dollar/dp/0945466447)
(also available
[online](https://web.archive.org/web/20081008/http://mises.org/money.asp "What Has Government Done to Our Money? by Murray N. Rothbard")).
For instant gratification, there's always the [educational
videos](https://web.archive.org/web/20081008/http://www.youtube.com/user/misesmedia "YouTube Mises Media channel").

For the technically-inclined activist/hacker, [Tom
Greco's](https://web.archive.org/web/20081008/http://www.reinventingmoney.com/ "Reinventing Money by Thomas H. Greco, Jr.")
[*Money: Understanding and Creating Alternatives to Legal
Tender*](https://web.archive.org/web/20081008/http://www.amazon.com/Money-Understanding-Creating-Alternatives-Tender/dp/1890132373)
(see
[excerpt](https://web.archive.org/web/20081008/http://www.reinventingmoney.com/documents/MoneyEbook.pdf "Money: Understanding and Creating Alternatives to Legal Tender, PDF excerpt"))
is a treasure trove. The book explains (as does Rothbard in his work) the
fundamental functions of money in enabling civilization based on the [division
of
labor](https://web.archive.org/web/20081008/http://www.econlib.org/library/Essays/rdPncl1.html "I, Pencil by Leonard E. Read"),
describes existing private [community
currencies](https://web.archive.org/web/20081008/http://en.wikipedia.org/wiki/Local_currency)
and payment systems such as
[LETS](https://web.archive.org/web/20081008/http://en.wikipedia.org/wiki/Local_Exchange_Trading_Systems "Local Exchange Trading Systems")
and the [Toronto
Dollar](https://web.archive.org/web/20081008/http://www.torontodollar.com/), the
principles they are based on, and their successes in [revitalizing local
economies](https://web.archive.org/web/20081008/http://en.wikipedia.org/wiki/Local_currency#Benefits "benefits of local currencies").

Greco also [ruminates
on](https://web.archive.org/web/20081008/http://video.google.com/videoplay?docid=-1399011433067824706 "Tom Greco presentation in Malaysia")
ideas for the next step [beyond
money](https://web.archive.org/web/20081008/http://beyondmoney.wordpress.com/ "Beyond Money blog by Tom Greco").
What sort of non-monetary electronic markets could be [conceived
of](https://web.archive.org/web/20081008/http://beyondmoney.wordpress.com/new-chapters/credit-clearing-pure-and-simple/ "Beyond Money: Credit clearing explained")
to facilitate free exchange and transcend the limitations and increasingly
obvious
[dysfunctions](https://web.archive.org/web/20081008/http://www.financialsense.com/editorials/hultberg/2008/0129.html "Financial Sense: Keynesian chickens coming home")
inherent in having to rely on government-enforced monopolies of [banking and the
issuance of
currency](https://web.archive.org/web/20081008/http://www.youtube.com/watch?v=iYZM58dulPE "Money, Banking and the Federal Reserve")?
Much food for thought in there for any aspiring practitioner of
[counter-economics](https://web.archive.org/web/20081008/http://en.wikipedia.org/wiki/Counter-economics "Counter-economics and agorism").

Well, that's enough economics for one evening. Good night, and good luck.