by Gary North
by Gary North
A web page by Ellen Brown is making the rounds. It is here.
Ellen Brown is a lawyer. She is anti-Federal Reserve. So, she gets a hearing in conservative circles. This is unfortunate. There is nothing conservative about her. She is an apologist for statism and the United States Treasury (a wholly owned subsidiary of Goldman Sachs).
Her article is about the hyperinflation of Germany, 1921—23. She has no understanding of what happened or why, but she talks as if she does.
If you want the real story on the German hyperinflation, you can get it on the Mises.org site. All of these are available for free.
First, there is Hans Sennholz's article, "Hyperinflation in Germany."
Second, there is Adam Fergusson's book, When Money Dies.
For even more detail, read this: The Economics of Inflation (1931), by Constantino Bresciani-Turroni.
These books show that price inflation in Germany was exclusively the result of the central bank of Germany, which expanded the monetary base.
Ms. Brown offers a different explanation for the German inflation.
Schacht Lets the Cat Out of the Bag
Light is thrown on this mystery by the later writings of Hjalmar Schacht, the The Lost Science of Money by Stephen Zarlenga, who writes that in Schacht's 1967 book The Magic of Money, he "let the cat out of the bag, writing in German, with some truly remarkable admissions that shatter the 'accepted wisdom' the financial community has promulgated on the German hyperinflation." What actually drove the wartime inflation into hyperinflation, said Schacht, was speculation by foreign investors, who would bet on the mark's decreasing value by selling it short.
Short selling is a technique used by investors to try to profit from an asset's falling price. It involves borrowing the asset and selling it, with the understanding that the asset must later be bought back and returned to the original owner. The speculator is gambling that the price will have dropped in the meantime and he can pocket the difference. Short selling of the German mark was made possible because private banks made massive amounts of currency available for borrowing, marks that were created on demand and lent to investors, returning a profitable interest to the banks.
To say that this is economically erroneous does not do justice to how wrong it is.
First, short selling is as legitimate as going long (buying). Speculators forecast future prices; they do not cause those prices. For every long position, there is a short. Those speculators, long or short, who guess wrong lose money. For every gain made by shorting the German mark, there was a loss imposed on a speculator who was long.
Second, she describes short selling on the stock market. She does not mention commodity futures. The rules on the commodity futures market are different. These contracts do not involve borrowing the asset. This woman hasn't a clue about financial markets.
Third, the argument was refuted as long ago as 1931, in the still-definitive book, The Economics of Inflation. The author reports:
The accusation that the collapse of the German exchange was provoked by bold groups of professional speculators seems better founded. The objection to that is that speculation cannot be the original cause of the depreciation of the currency of a country. On the contrary, speculation appears when for certain reasons, such as the Budget deficit, the continual issues of paper money, the disequilibrium of the balance of trade, and the political situation, the exchanges are unstable. Speculation weakens and eventually disappears when the causes which provoked the original depreciation of the currency become less. Speculation in Austrian crowns flourished so long as that currency was unstable; but it disappeared as soon as the stabilization plan was adopted. Directly the monetary reform of November 1923 made the German exchange stable, speculation ceased, after some fruitless attempts to prevent the success of the operation (pp. 100—101).
Fourth, the banks were destroyed with the currency. Bankers suffered along with everyone.
Fifth, Schacht was a fascist economist. He was the Minister of Economics from 1934 to 1937. In short, he ran Hitler's economy.
Sixth, it was central bank policy that caused the inflation. Commercial banks merely lent the money created by the central bank. The head of the central bank, Helferich, refused to stop printing money. Professor Bresciani-Turroni's analysis has stood since 1931. He began with a quotation from the head of the central banks, Helfferich:
"To follow the good counsel of stopping the printing of notes would mean — as long as the causes which are upsetting the German exchange continue to operate — refusing to economic life the circulating medium necessary for transactions, payments of salaries and wages, etc., it would mean that in a very short time the entire public, and above all the Reich, could no longer pay merchants, employees, or workers. In a few weeks, besides the printing of notes, factories, mines, railways and post office, national and local government, in short, all national and economic life would be stopped."
The authorities therefore had not the courage to resist the pressure of those who demanded ever greater quantities of paper money, and to face boldly the crisis which (although painted in unduly dark colours by Helfferich) would be, undeniably, the result of a stoppage of the issue of notes. They preferred to continue the convenient method of continually increasing the issues of notes, thus making the continuation of business possible, but at the same time prolonging the pathological state of the German economy.
Seventh, Schacht served as the currency commissioner of the country, beginning in late 1923. He had tried to get the job as the head of the central bank. He later did take over as the head of the Reichsbank. He was a central banker. So, he wanted to blame foreigners, not the central bank. Those evil speculators! As Hans Sennholz pointed out in 1970, this was the argument of the central bank: the speculators did it. As he wrote:
When all other explanations are exhausted, modern governments usually fall back on the speculator, who is held responsible for all economic and social evils. What the witch was to medieval man, what the capitalist is to socialists and communists, the speculator is to most politicians and statesmen: the embodiment of evil. He is said to be imbued with ruthless and fickle selfishness that is capable of wrecking the national economy, government plans, and, in the case of German inflation, the national currency. No matter how blatantly contradictory this explanation may be, it is most popular with government authorities in search of a convenient explanation for the failure of their own policies.
The same German officials who denied the very existence of inflation lamented the depreciation caused by speculators, or they blamed the Allied reparation burdens and simultaneously denounced speculators for the depreciation. Dr. Havenstein, the President of the Reichsbank, embracing every conceivable theory that exculpated his policies, also pointed at the speculators. Before a parliamentary committee he testified: "On the 28th of March began the attack on the foreign exchange market. In very numerous classes of the German economy, from that day onwards, thought was all for personal interests and not for the needs of the country."
Ms. Brown believes the self-serving explanation by the central bankers who destroyed the German currency.
At first, the speculation was fed by the Reichsbank (the German central bank), which had recently been privatized. But when the Reichsbank could no longer keep up with the voracious demand for marks, other private banks were allowed to create them out of nothing and lend them at interest as well.
Ms. Brown has no understanding of central banking. She repeats the very argument of the head of the German central bank: the bank could not keep up with demand for money. The destroyers of Germany's currency thought they were doing the nation a favor. She believes them.
May 26, 2009
Copyright © 2009 Gary North