Fiat Money of the Past, Part 6

This entry is part 22 of 31 in the series 2011B

German Money

Of all the incidents of failed money in history the poster child of bad money is that of the Weimar Republic of Germany in 1923. Unfortunately, this is often used as an example of why fiat money must be avoided like the plague.

Those who put the blame on fiat money make the mistake of lumping all fiat money into one category but as was pointed out earlier there are two categories of fiat money.  Here they are again:

(1) Money created by private banks or institutions and loaned out at interest. Most of our national debt is created this way. The Federal Reserve creates the money by fiat and loans it to the government at interest. There are many variations of this  category, some fairly workable and others doomed to failure.

(2) Interest and debt free money created or approved by the government.

The Greenbacks that we just covered was in the second category.  This has been proven historically to be much more stable than the private fiats that create debt and interest.

The fiat attackers make the mistake of lumping all forms of fiat money together as being equally bad and dangerous. Nowhere is this more apparent than their portraying the Weimar republic’s money as being no different than the Greenback.

Most writers talk about the German inflation problem as beginning in 1919 or 1921 but the problem really began at the beginning of World War I in 1914. By the time 1921 rolled around those who were on fixed incomes and depended on savings or government bonds for retirement or security were largely wiped out by the high inflation leading up to that date. From the beginning of the war in 1914 to its end in 1918 prices of consumer goods increased over 200%. By February 1920 shortly after the Treaty of Versailles internal prices jumped over 500% and prices of imported products skyrocketed to 1898% over the 1914 level.

Unfortunately, Germany could not pay off their draconian war reparations with inflated Marks but had to pay them with foreign currency values. This meant that when the Mark lost half of its value it took 200 of them to pay for what only took 100 earlier.

This situation accompanied by unlimited printing from private banks created an inflation slide of historical proportions.

By July 1922 it took 300 Marks to equal one U.S. dollar. By November it took 9000 and by January of 1923 it was a whopping 49,000.  That was just the beginning of the sinkhole.  By July 1923 the figure was 1,100,000 and by Mid November it reached the legendary 2.5 trillion marks to equal one U.S. dollar. Billion mark notes were traded as almost worthless paper.

It is a blatantly false and disingenuous comparison to compare the Weimar money as being equivalent to the Greenbacks.  Let us examine the differences so the reader can judge correctly.

(1) The Greenback was issued by the government
The Weimar money was issued by private banks – led by the Reichsbank.  This was similar to the Federal Reserve, which, contrary to the sound of its name, was privately owned and publicly controlled.  May 26 1922 private business was given complete control over the Reichsbank and the issuing of currency.

Most hyperinflation commentators blame the government as having sole responsibility for issuing so much money but it was done through the privately owned Reichsbank and other private issuers of the Mark. The Greenback was not issued by a private or semi private bank but by the U.S. government.

(2) The Weimar Mark was created by loans at interest whereas the Greenback was created without interest involved.

(3) The Weimar Mark had no limitations on its issue.  The Greenback’s issue was limited to $450 million.

A heroic German, named Hjalmar Schacht, who became the Commissioner of Currency, finally brought the inflation under control. He prohibited the private banks from creating Marks and established a new Mark – the Rentenmark. The new Mark had a value equal to an astounding $4.2 trillion of the old Marks. He then established guidelines for limited issue and created regulations that dramatically slowed the currency speculation that had been adding to inflation.

Within a year the currency reached an amazing degree of stabilization despite the fact they still had reparations to deal with.

After 1929 a great depression was forced upon most of the world. By 1932 Germany had suffered economic effects similar to that of the United States including a 30% unemployment rate and a 41% dip in industrial production. One could say they were lucky it was not worse considering they had war reparations to pay off.

This was the situation when Adolf Hitler came to power.

Now before I write more about Hitler let me make something crystal clear because many others who have written about Hitler’s economic recovery have been maliciously accused of being a Hitler lover or sympathizer.  This is not the case with me nor is it the vast majority of writers on this subject.

BUT… there is one thing that is agreed on by those who despise Hitler’s philosophy and that is – he was an evil genius.

It’s fine with people if you talk about the evil part but as soon as you talk about the genius part there is danger of being lumped with Neo Nazis or worse.

This is unfortunate as we need examine Hitler without blinders on if we wish to neutralize such tyrants in the future.

When Hitler took over Germany on January 30, 1933 Germany was in the middle of a great depression and the little gold they had was storming out of the country. By 1934 they only had 83 million Marks worth of gold, a loss of about 97% of their supplies since 1929.

Basing an economic recovery on gold would have been pure fantasy.

Instead of descending the country further into economic chaos, as many expected, Hitler surprised the world by creating a teeming economic system in a few short years.  Between 1933-1938 the Nazi economy grew by 9.5% per year. They built many public works projects such as dams and about 1900 miles of the current autobahn. Housing construction doubled. By 1936 unemployment was over 80% gone and by 1938 it was virtually non-existent for they had more jobs available than there were laborers to fill them.

By contrast FDR and his New Deal was not working so well. In 1938 the United States was in a depression within the depression with unemployment at 19% and many were committing suicide rather than endure a continued struggle.

Some say that Hitler achieved full employment because he borrowed money and put people to work on government projects.  That explanation does not cut it because FDR did the same thing yet his economy was in shambles.

What was the difference then?

There were several.  Even though Hitler only had a elementary understanding of economics he recognized talent when he saw it. Hjalmar Schacht, who once restored Germany’s economy but quit in frustration in 1930, was appointed by Hitler to be the Reichsbank President in 1933. He enthusiastically supported Hitler until the war and later supported Stauffenberg and the resistance to Hitler. He assisted Hitler in creating Bills of Exchange, similar to what the early American colonists did when they had no gold.

This was powerful fiat money, but still had a disadvantage over the Greenback in that they paid around 4% interest and added to the national debt whereas the greenback was interest free.

Even with this disadvantage they were able to put enough money into circulation to revive the economy whereas money was nowhere to be found or borrowed by the common people in the United States at that time.

By contrast it was said that the German “certificates (were) paid out to employers who undertook projects of replacement or maintenance projects. Anyone who equipped a factory with new machines or who had his house repainted could finance his operations with these work drafts…”
Konrad Heiden, The Fuerher, (Boston: Houghton Mifllin, 1944, page 662.

Hitler’s economy not only did a much better job in making consumers happy and employed but in addition to doing this he built up a military from virtually nothing that challenged everything the banking systems of the whole world could throw at him.  This is even more amazing when you consider that France, England and the United States put very little investment in defense until the War because they had just fought the war to end all wars – World War I.

Hitler often bragged about his economic accomplishments in his speeches.  Here’s just one example:

When I took over the government, I had only one hope on which to build, namely, the efficiency and ability of the German nation and the German workingman; the intelligence of our inventors, engineers, technicians, chemists, and so forth. I built on the strength which animates our economic system. One simple question faced me: Are we to perish because we have no gold; am I to believe in a phantom which spells our destruction? I championed the opposite opinion: Even though we have no gold, we have capacity for work.

The German capacity for work is our gold and our capital, and with this gold I can compete successfully with any power in the world.
DECEMBER 10, 1940 in Berlin

He not only bragged about besting his enemies when he had no gold but he also drew comparisons between Germany and the Allies. Germany only had 85 million people, and a land with limited resources occupying only 232,000 square miles. He compared that to the British Empire that controlled 16 million square miles of land. In addition, there was the Continental United States possessing over 3 million square miles containing vast resources.

We are extremely fortunate that two things were in our favor.

First, we can thank our lucky stars that Hitler did not wait an additional five years to start the war.  Five more years of economic growth and perfecting her military would have made Germany unbeatable.

Secondly, we are lucky that the bankers supported the Allies during the war and that we did have superior resources for we did not have a superior economic system or currency.

It is interesting to note that two of the most significant men in history – Abraham Lincoln (one of the best), and  Adolf Hitler (one of the worst) – both used creative forms of fiat money to advance their cause.  This merely illustrates that money, like electricity is a neutral power. Those bent on destruction can use it to do harm whereas those with good intent can use it constructively or for good.

Today, most of the common people use what power they have for good. They feed their families, heat their homes, travel to see friends and family etc.  The misuse of power usually comes from those who amass great quantities of it for the sake of control over others.  It thus behooves us to do all in our power to make all useful power or energy available to the masses who, on the whole, use it well. This principle certainly applies to money.  If there is abundance of it available to all then the chances are that it will be used constructively for the good of all.

Let it so be.

Sources:
Web of Debt by Ellen H. Brown, 2008

The Lost Science of Money By Stephen Zarlenga, 2002

Konrad Heiden, The Fuerher, (Boston: Houghton Mifllin, 1944

John Weitz, Hitler’s Banker (Great
Britain: Warner Books, 1999).

Henry C. K. Liu, “Nazism and the
German Economic Miracle,” Asia
Times (May 24, 2005).

HITLER’S MONEY
The Bills of Exchange of Schacht and Rearmament in the Third Reich
Guido Giacomo Preparata University of Washington, Tacoma

Hjalmar Schacht, Stabilization of the Mark, (London: George Allen & Unwin, 1927)

Hjalmar Schacht, The Magic of Money, (London: Oldboume, Trans. P. Erskine, 1967)

Norbert Muhlen, Schacht – Hitler’s Magician, (New York: Alliance, Longmans Green, trans. Dickes

C. C. Veith, Citadels of Chaos (Meador, 1949

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Copyright 2011 by J J Dewey

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7 thoughts on “Fiat Money of the Past, Part 6

  1. LWK
    You have to ask yourself what Hitler’s economy was “efficient” at. The obvious answer is quickly mobilizing a nation and building a war machine. It did do that well.

    JJ
    This is true but until the war started they were also doing a lot better at supplying the material needs of the people than either England or the United States did. Imagine how much better he would have done if he was like us and did not concentrate on a war machine.

    LWK
    You also mentioned Lincoln’s use of a fiat currency to help win the Civil War. One might say that fiat currency, enforced with a gun and the force of the state, is “efficient” for wars.

    JJ
    There have always been wars during all types of currency whether it be private or public, whether it be fiat, partially backed or fully backed.

    The currency of the Allies, which competed with Hitler was also enforced by the point of a gun and still is today. Try to pay your taxes with some alternative currency and see what happens.

    LWK
    I don’t think however you can take either example and legitimately infer that this is the best way to run a peacetime economy. Some aspects might work, but you don’t know – and you cannot legitimately claim in my view – that Hitler’s economy would have kept expanding and being efficient, etc. if he had not gone to war. Most analysts that I have read seem to think that Hitler’s economy had to go to war, or go broke. I find their analysis more convincing.

    JJ
    I know a lot of analysts think that but a lot of their reasoning seems to be that Hitler was a bad guy and nothing good could come from him. When you look at his system and compare it to our Federal Reserve system I see no reason why it wouldn’t work better, though Hitler’s money was created with interest attached just as is the Feds. It appears to me more flexible with more usable money going to production. It would be interesting to see what would have happened if that production was all for the people rather than conquest.

    LWK
    It seems to me that what the world really needs is a means of exchange that is NOT under the control of any particular government or politician.

    JJ
    That’s what we had during the last part of the hyperinflation in Germany and that didn’t work out so well.

    LWK
    If there is one principle that should be obvious from human history it is that no man, or group of men can be trusted to control the monetary system for the good of all. They all either succumb to greed, lust for power, or the delusion that they can do good by taking from some and giving to others.

    JJ
    The trouble is that when it is private hands we have to trust those with power to create the money and when it is in public hands we still have to trust.

    I’ll be writing about what we can do about this shortly and will be interested in your comments.

  2. “Secondly, we are lucky that the bankers supported the Allies during the war and that we did have superior resources for we did not have a superior economic system or currency.”

    So you believe that National Socialism produced a “superior economic system”? It certainly did produce short term results that inevitably led to war. I am not sure exactly what was “superior” about that? Why do you believe that such a system was viable in the long term? For evidence to the contrary I would only point to the utlimate failure of the Soviet Union, largely due to economic factors when a totalitarian state could compete with a semi-free capitalistic state.

    lwk

    1. I was comparing Hitler’s economic approach to FDR and our Federal reserve. I think the results speak for themselves. I know you’re no fan of either FDR or the Federal Reserve. Our country was one of the last ones out of the depression. There were a number of countries handling their economy better than we were.

      I think most of us would rather put up with our ineffective Federal Reserve system than a more efficient economy like Hitlers that has a political system that allows for less freedom.

      1. You have to ask yourself at Hitler’s economy was “efficient” at. The obvious answer is quickly mobilizing a nation and building a war machine. It did do that well. You also mentioned Lincoln’s use of a fiat currency to help win the Civil War. One might say that fiat currency, enforced with a gun and the force of the state, is “efficient” for wars.

        I don’t think however you can take either example and legitimately infer that this is the best way to run a peacetime economy. Some aspects might work, but you don’t know – and you cannot legitimately claim in my view – that Hitler’s economy would have kept expanding and being efficient, etc. if he had not gone to war. Most analysts that I have read seem to think that Hitler’s economy had to go to war, or go broke. I find their analysis more convincing.

        It seems to me that what the world really needs is a means of exchange that is NOT under the control of any particular government or politician. Instead such a currency would need to be governed purely by market forces out of the hands of any politician, or any group of men. If there is one principle that should be obvious from human history it is that no man, or group of men can be trusted to control the monetary system for the good of all. They all either succumb to greed, lust for power, or the delusion that they can do good by taking from some and giving to others.

        lwk

  3. Another great installment. It seems the economic discussion equals as many pages as the whole first part of the book. Should the economic part form a whole nuther section and these installments all be separate chapters?

    There is a typo in this sentence:

    The Weimar money was issued by a private banks – led by *yhe* Reichsbank.

    1. The first part of the book was 123,000 words and this last section is 36,000 so far but parts of the first section do deal with the economy so I am thinking of dividing the book into two sections – political and economic. Glad you are enjoying the series and thanks for the typo heads up.

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