A giant breaks his chains and again walks the earth: inflation

Inflation can reshape a nation, searing a memory into its collective consciousness that can take generations to fade. Once embedded in an economy, the government’s efforts to root out inflation can cause a severe recession. Inflation swept across the world in the 1970’s, contained only with great effort. Now it again appears, with results impossible to foresee. This series looks at inflation, its causes, and geopolitical effects.

Rampant, accelerating inflation warps society in thousands of impossible to predict ways, things seldom discussed in economics texts. Here are excerpts from two of the essential histories of the 20th century, descriptions of the classic examples of extreme inflation in an industrial society: Germany and Austria after WWI (1919 – 1924). This is what governments fear, and take severe steps to prevent.

From Otto Freidrich’s Before the Deluge: Berlin in the Twenties tells about the effects of hyperinflation in the Wiemar Republic:

The fundamental quality of the disaster was a complete loss of faith in the functioning of society. Money is important not just a medium of economic exchange, after all, but as a standard by which society judges our work, and thus our selves.

… “The collapse of the currency meant not only the end of trade, bankrupt businesses, food shortages in the big cities and unemployment” according to one historian, Allan Bullock. “It had the effect, which is the unique quality of economic catastrophe, of reaching down and touching every single member of the community in a way which no political event can. The savings of the middle classes and the working classes were wiped out at a single blow with a ruthlessness which no revolution could ever equal. … The result of the inflation was to undermine the foundations of German society in a way which neither the war, nor the revolution of November 1918, nor the Treaty of Versailles had ever done. The real revolution in German was the inflation.

“Yes, the inflation was by far the most important event of the period” says a 75 year old journalist. … It wiped out the savings of the whole middle class, but those are just words. You have to understand what that meant. There was not a single girl in the entire middle class who could get married without her father paying a dowry. Even the maids — they never spent a penny of their wages. They saved and saved so that they could get married. When the money became worthless it destroyed the whole system for getting married, and so it destroyed the whole idea of remaining chaste until marriage.

“The rich had never lived up to their own standards of course, and the poor had different standards anyway. But the middle class, by and large, obeyed the rules. … But what happened from the inflation was that the girls learned that virginity didn’t matter anymore. The women were liberated.”

In the World of Yesterday Stefan Zweig describes some of the result of this inflation on society:

In the collapse of all values a kind of madness gained hold particularly in the bourgeois circles which until then had been unshakable in their probity.

… How wild, anarchic and unreal were those years, years in which, with the dwindling value of money all other values in values in Austria and Germany began to slip! It was an epoch of high ecstasy and ugly scheming, a singular mixture of unrest and fanaticism. Every extravagant idea that was not subject to regulation reaped a golden harvest: theosophy, occultism, yoga … Anything that gave hope of newer and greater thrills, anything in the way of narcotics, morphine, cocaine, heroin found a tremendous market; on the stage, incest and parricide; in politics communism and fascism constituted the most favored themes; unconditionally proscribed, however, was any representation of normality and moderation.

… Nothing ever embittered the German people so much — it is important to remember this — nothing made them so furious with hate and so ripe for Hitler as the inflation.

Austria’s experience with hyper-inflation is not so well-known as Germany’s. Here is a two-page history: “The Great Austrian Inflation“, Richard M. Ebeling, The Freeman, April 2006, (published by Foundation for Economic Education).

Please share your comments by posting below, brief and relevant, please. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For more information about this subject

  1. Is the US Government deliberately underestimating inflation? (8 November 2007)
  2. What you probably do not know about China’s food crisis (21 April 2008)
  3. Higher food prices, riots, shortages – what is going on? (29 April 2008)
  4. The geopolitics of inflation, an introduction  (17 June 2008)

6 thoughts on “A giant breaks his chains and again walks the earth: inflation

  1. I’m not going to argue with anybody about the devastating effects of hyper-inflation. Just follow the current news stories out of Zimbabwe and you get a feel for the insanity of the situation.

    I’m considerably more concerned about the effects of more moderate inflation, in the 8-10% range for example. While not as destructive in the short-run, suffering 8-10% annual inflation over just a couple of years is remarkably destructive to a society like ours that is used to more-or-less stable prices.

    Corporations feel squeezed so they cut back on hiring and automate more processes. Those who stay employed feel vulnerable and cut back on expenses because pay raises never match the inflation rate. Unemployed workers feel completely at risk and are much more willing to act on ideas that seemed silly when they had a job, frequently resulting in disaster for their already stressed finances. Politicians feel the need to be seen “doing something,” usually with negative consequences. All of the above turns into a vicious circle that continually feeds on itself.

    I lived through the 70’s and am prepared for it but very few others are, and I’m really not looking forward to reliving those days.
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    Fabius Maximus replies: This is dicussed in part III. But here is a summary, a summary of a sketch.

    Inflation is just like the first few drinks at a bar. If folks got a hangover immediately after the second drink there would be no drunks. In a high-debt society like ours, inflation feels great for most of the population. The rich speculate and get richer. The middle class does well by their highly-leveraged real estate. The poor suffer, as their cost of living skyrockets — food and energy being 1/4 to 1/3 of their budget — but they have too little political power to matter.

    Unfortunately inflation easily and inevitably accellerates. The governing elites, unless brain-dead, eventually see the consequences — that’s why I started with the terminal hyper-inflation scenarios — and take corrective action. Hence the pain from inflation usually comes from (belated) efforts to stop it — not from the inflation itself.

    This cycle, coming at the end of the post-WWII Debt Supercyle, will be more complex than the 1970’s events. But more on this later.

  2. I found a website “Shadow Govenrment Statistics” to have an interesting take on economic indicators such as the CPI and the unemployment rates.
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    Fabius Maximus replies: It is a fun site to read, but mostly IMO pseudo-knowledge. It implicitly assumes that there are “real” answers to the calcuation conceptual numbers like GDP and CPI, as if they were calculated like counting apples. This is nonsense. No calculation of such things will work for every economic state, and will over time increasingly become obsolete. Adapting them as the econmoy changes destroys the long baseline of data, which is one of their great uses.
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    Also it ignores the fact that these departments are just underfunded, lacking any constituency. Has anyone reading this ever wrote his CongressCritter, demanding more funds for the Bureau of Labor Statistics?

  3. I look forward to the series. Be careful not to confuse increases in price level (which can reflect increased real prices, as with food, energy, and their derivative products) with inflation.

  4. Dan #3 is correct AND important — higher oil prices are part inflation (usd deflation) and part increased demand (from China and India).

    Inflation in the US is being used to reduce the house price bubble pop problems. So far, with less pain to the economy than so many bad decisions deserve.

    Fabius Maximus replies: I do not want to start a debate on this here, as it is not relevant to this post (it is the subject of the next chapter), but Tdxap refers to the definition of inflation as a general increase in the price level. As Milton Friedman said, inflation is always and everywhere a monetary phenomenon. Changes in some prices — those of inports or commodity prices — are not inflation.

    This is one of the most-misunderstood aspects of economics. The reaction to these factors could be
    (1) loose money, to mitigate the effects, which could create inflation.
    (2) tight money, to prevent inflation, which could spark deflation (people cannot spend what they do not have).
    It all depends.

    Please hold your comments on this until the next chapter.

  5. Fabius,

    Not sure what you mean by this:

    “Tdxap refers to the definition of inflation as a general increase in the price level.”

    Obviously inflation is not a general increase in the price level. I’m very happy you are aware of this. The majority of media and blog discussions of inflation confuse these two different things.

    “Changes in some prices — those of inports or commodity prices — are not inflation.”

    Exactly.

  6. Is this your prediction for our future?
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    Fabius Maximus replies: Where possible I prefer to avoid the Mr. Wizard gig, making forecasts. Rather let us consider choices. We have incurred debts, promises — both to fellow Americans and foreigners. As I discuss in “A happy ending to the current economic recession“, there are four paths from here.

    * Growth,
    * Inflation,
    * Default, or
    * Socialization.

    The choice we make will play a large role in determining what America will become in the 21st century.

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