“Inflations may be of every conceivable variety of degree, from the mildly annoying to the volcanic. Inflations may be fast or slow, accelerating or decelerating, chronic or transitory. A merely annoying inflation usually causes no one very much real harm. A volcanic inflation, on the other hand, is the kind of catastrophe that confiscates wealth, withholds the means of life, breeds revolutions, and precipitates wars. Every volcanic inflation of history began as a mildly annoying inflation.” Quote from Dying of Money by Jens O. Parsson. Last week’s thought experiment was to imagine hyper-inflation and what you would do to protect you and your won from the currency calamity. What would you buy? Invest in? Would you move? 100% inflation isn’t even really considered hyper-inflation by economists as that designation usually is at least 50% a month, but these nerds can often get lost in the forest for the trees, because by that time it is a failure of government so what does it matter? You’d be forced to buy something with your money now lest your purchasing power erode next year, next month, or even tomorrow. In fact, you might even say that no country on earth is better prepared for hyperinflation than the American consumer. There are two generations of women that have been training for this their entire lives. Siri- press button buy now pay later. Boom! Forget wheelbarrows of marks to buy bread in Germany, the American woman is ready to buy Jimmy Choo’s in the event of an emergency. Amazon packages would flow like the Euphrates to the front door of suburban McMansions and these clever consumers would simply outfox the inflation. As we shall see, it isn’t quite that simple.
Today we are going to discuss 5 of the very worst hyper-inflations and the ramifications of a currency collapse and juxtapose these historical events against the US situation today. In most cases hyper-inflation affects a country that has been weakened and hit by an expensive external shock like a war, sanctions, or a natural disaster or even a great financial crisis or pandemic. ENDEVR has a tidy little Youtube video discussing 5 of the worst hypers ever, based on the research of one of our favorite follows economists Steve Hanke and Nicholas Krus. Tax revenues drop, the government prints money to cover the difference, inflation rises, this hurts consumers and operators and the tax revenue drops further, and the government has to print more money etc. This cycle devalues the currency in that as more currency hits the system that currency in the system isn’t as special, not as valuable. All the following fit this mold and I will try and proceed chronologically with perhaps not the worst statistically, but some that were the most instructive like the Weimar Germany 1922-23 and their monthly inflation record of 29,500%, China in the late 1940s at 5,070%, Hungary in the late 1940s at 4.19 quadrillion percent, Yugoslavia in the 1990s at 313 million %, and lastly Zimbabwe in 2008 79.6 billion %.
The Weimar Germany hyper began because of World War I when Germany was expected to pay an amount that it simply couldn’t in war reparations. The Treaty of Versailles was signed in 1919 and even Keynesian economic founder John Maynard Keynes found the reparations too harsh. The allied forces expected Germany to basically reimburse their economies (also fragile because of war expenditures) for the cost of the war. We will see how deadly the costs of war are on economies like Germany that sell bonds to fund a war but adding steep reparations on top of that was futile. In 1922, the cost of a loaf of bread was 163 marks and by November 1923 it was 200 billion marks. So much for that Jimmy Choo buy now pay later plan huh? Wrong, Germans ran to spend their money as fast as they could earn it exactly as the American housewives do. They had to because prices would change in as little as ordering a meal and getting the check.
Jens O. Parsson writes
“Barter became prevalent… Farmers, who were comfortable enough, would not sell their food to the townsmen for their worthless money. Starvation and abject poverty reigned. The German Weimar middle class virtually disappeared as professors, doctors, lawyers, scientists and artists pawned their earthly goods and turned to fields or factories to try to earn a little food.” Adolf Hitler appeared in November of 1923 at a famous beer hall Putsch during the height of inflation and the world would never be the same. Millions worldwide would die due to the power he began acquiring when a country was at its weakest and most vulnerable.
Few people in history can claim to have killed more people than Hitler, but let’s introduce you to the circumstances that brought along Chairman Mao in China. Up until 1935 China had private banks, but the Nationalist party won control of power in 1927 and set about monopolizing the currency creation by controlling the banks. Chiang Kalshek, the leader of the Nationalists, used force to suppress strikes in exchange for loans from the banks. They eventually went from the protectors of the banks to their biggest customers to simply taking them over when bankers that wouldn’t make more loans to his government were simply thrown in jail. The Chinese government did this because they used extensive debt financing. Why did they use debt-financing because taxation was politically unattractive (sound familiar). Then they guaranteed bonds—tax revenues of the country—banks owned 50-80% of the bonds. When Japan invaded China in 1932, Chinese bond prices fell by 40% and that caused a bank run because banks were holding bonds that were underwater and banks failed (sound familiar?). These bonds were guaranteed by government revenues aka risk free (sound familiar?). There was an external shock that affected Chinese banks as well. The US was legislated to buy silver in large quantities and the silver flowed out of China in a torrent. The Chinese Banks sold silver abroad, causing a liquidity problem at home.
Jay Habegger writes for FEE:
“The declining supply of bank notes caused each note left in circulation to appreciate in value, leading many businesses to experience accounting losses…The losses caused many businesses to lay off workers and cut production…many businesses carried some debt. The loans were made in non-deflated currency, but now had to be paid back in deflated money. “ That’s right, deflation preceded hyper in China.
Habegger continues with the most sound familiar of them all:
“If the bond market collapsed, the Nationalists would be unable to continue the policy of debt financing.”At the time Chinese banks were backed by silver so the Nationalists instituted the death penalty for all those trying to smuggle silver out of the country, and when they had nationalized the banks issued a fiat currency backed by the full faith and credit of the Nationalist party or some other clever line like our own fiat currency. This stopped the deflation and now because they controlled the banks they could monetize the debt, the equivalent of our Fed having $8 trillion on its balance sheet (sound familiar?).
Let the money printing begin – H.H. Kung Kalshek’s finance minister:
“The government is determined to avoid inflation.” The inflation began almost immediately and ultimately reached over 5000% and caused the end of the Nationalist party leading to Chairman Mao and the communist party to take over power with promises made to a populace that had seen its savings and money disappear. Over the next 25 years of Maoism, between 40-80 million people died from a combination of mass starvation, persecution, prison labor, and mass executions. The government control of the money supply during Kalshek’s reign and resulting mismanagement of the currency ushered in the greatest killer of the 20th century after the mosquito.
In part 2 of our hyperinflation series next week, we are going to talk about the hypers in Hungary, Yugoslavia, Zimbabwe, and we will draw a conclusion for today.
Sincerely yours,
C Thomas Printer
On this date in history
2,346 years ago to be exact, Alexander the Great of Macedon died. He was undefeated and never lost.
This week’s thought experiment
If you were to call your congressman and worried about hyper-inflation what topic would you start your conversation with?
Also born on this date
A stuntman, turned Hollywood walk of fame actor, turned world champion rodeo cowboy Ben Johnson. He was also a self-managed investor who turned his investments into $100 million by the time of his death in 1996.
Resources
The Yugoslav Hyperinflation of 1992-1994
The Worst Case Of Hyperinflation In History – Hungary
Top five worst cases of Hyperinflation in History