Hyper-Inflation in Germany in the 1920's and Similarities to the United States in the 2020's

As the U.S. Senate and House vote to raise the national debt ceiling to 18 trillion dollars and to continue with government deficit spending to the tune of nearly 1 trillion dollars a year, it would be wise for every American to pause and ask the question, "Has national fiscal irresponsibility of this size occurred before in this world?"  Answer: Yes, it has.

Germany's government irresponsibly printed fiat Germany currency (the mark) in the 1910's and 1920's to pay for government deficits and debt, subsidize the German people, and pay for the cost of war. Prior to runaway inflation in 1923, the people of Germany were unconcerned by their government's deficit spending, skyrocketing debt, and fiat currency policies.  Why the apathy among the German people? The prices for their commodities, services and consumer products were relatively stable. People only become anxious when their pocketbook is affected. The shift from relatively stable prices to runaway inflation in Germany was slow and gradual until all of the sudden, in 1923, inflation hit the German economy like a "bat out of hell." That's when the German people panicked.

There are many similarities between Germany in the 1920's and the United States today. The American economy has enjoyed relatively low inflation for the past twenty years. However, don't let that fool you. Inflation is coming. It's not a matter of if, but when. There is no scientific method to measure when the American public will begin to awaken to the cancer of inflationary pressures, but when Joe Q. Public begins to shift his expectation from price stability to price inflation, watch out. When mom goes and buys milk on Monday because she expects its price to rise by Tuesday, the hammer has fallen.

The shift from consumer confidence to panic over corrosive inflation can occur slowly or quickly depending on the public's trust in government, the speed of effective communication, and cultural awareness of inflation's dark history.  Let's learn from Germany's experience in the 1920's. In Germany, the transition from price stability to consumer panic over price inflation took six years (1917-1923). When public expectation tipped decisively from confidence to panic, Germany's economy entered a very dangerous zone.

A German in the midst of the inflationary panic of 1923 would think like this: “The value of my money is disappearing before my very eyes. I must go and buy anything, I don't care what it is, so long as I can get rid of my money and possess something other than money!"

The frantic rush to get rid of money at all costs and to buy anything else is called  “a flight into real values.” As the public's demand for money falls to almost nothing, prices skyrocket. The speed of this shift from price stability to hyper-inflation is staggering. Again, the shift usually starts slowly (six years in Germany's case), but the inflationary movement accelerates until it becomes an economic sonic boom.

In your great-grandfather's day, before Germany and the United States untied their currencies to silver and gold, a person could walk into any bank, hand over a $10 silver bank certificate, and be given $10 worth of silver (or its equivalency in gold). Germany changed that practice in 1914 and took the German mark off the gold standard and began printing massive amounts of paper currency in the late 1910's to pay for their World War I debts, cover the interest on bonds sold to other nations, and fund costs of subsidies for the German people like healthcare (sound familiar?). The United States created the Federal Reserve in 1913, but the United States moved much slower than Germany in taking the dollar off the gold standard, finally doing so in 1971. As always happens, when a central bank prints fiat money to fund debt, prices for consumer goods and commodities inflate.  America began to see inflation in the 1970's, but except for the late 1970's, America's inflation (like Germany in the late 1910's and early 1920's) was modest. However, when the inflationary hammer falls, it falls fast.

Germany's Reischbank was the central bank of Germany in the early 1900's and the bank equivalent to the Federal Reserve System in America today. The Reischbank was the sole source of Germany's paper money just as the Federal Reserve is the sole source of America's currency today. One hundred years ago Germany began printing massive amounts of money to pay their debts (wars, government subsidies, etc...), just as America today is printing massive amounts of fiat currency today to pay for government debts.

When the German public perception shifted to inflationary pricing in 1923, business and companies were forced to pay their workers twice a day. German mothers would stand at the factory gate to receive their husband's pay and then rush with wheelbarrows full of million mark notes to buy bread or any other commodity. The German people began to forsake the German mark for foreign currencies and to barter for precious commodities. The German mark collapsed in value.

What did the German government do in response? It continued to print more German marks. The printing presses were operating full force. The thinking of the Reischbank was "If our government and people need more money to pay for things because prices have gone up, we will PRINT MORE MONEY for them." Today in the United States, we don't use paper and ink to flush the economy with fiat dollars,  we use computers and mouses, but the principle remains the same. Deficit spending and fiat currency policies ultimately end in inflationary economic death.

What happened in Germany in 1923 is summarized by the outstanding book The Mystery of Banking.

"By the later months of 1923, the German mark suffered from an accelerating spiral of hyperinflation: the German government (Reichsbank) poured out ever-greater quantifies of paper money which the public got rid of as fast as possible. In July 1914, the German mark had been worth approximately 25 cents. By November 1923, the mark had depreciated so terrifyingly that it took 4.2 trillion marks to purchase one dollar (in contrast to 25.3 billion marks to the dollar only the month before). 

And yet,  despite the chaos and devastation, which wiped out the middle class, pensioners and fixed-income groups, and the emergence of a form of barter (often employing foreign currency as money), the mark continued to be used. How did Germany get out of its runaway inflation? only when the government resolved to stop monetary inflation, and to take steps dramatic enough to convince the inflation-wracked German public that it was serious about it."

In 1933 Adolph Hitler came to power in the newly formed Nazi Party. Faced with an insurmountable national debt, the country of Germany defaulted. Germany rebuilt its economy from national bankruptcy and its dictator soon took out his wrath on the rest of the civilized world during World War II.

A Lesson for the United States: When the people of a democracy figure out they can vote themselves money, and when those same democratic people get addicted to free money including government deficits, national debt, and government handouts,  then that democracy has only a few short decades left. Eventually a dictatorship will arise to take freedoms from the people "for the good of the state."

God forbid, but it seems the United States is destined to repeat the path of Germany a century ago. We Americans would do well to awake to the prospects before us and do something as a nation before its too late. Those unaware of the mistakes of the past are destined to repeat them in the future.

And, for those of us with faith in Christ Jesus, we are like Daniel during the Babylonian Empire and the beginning of the Persian Empire (609 BC to 539 BC). Our Savior is the "rock not cut with human hands" who knocks down every empire of man through the establishment of an eternal kingdom. When panic sets in for the rest of the world, we calmly respond, "Silver and gold have I none, but what I have I give to you, in the name of Jesus Christ, arise and live."