What can we learn from unprecedented price rises in US, and Germany in the last millennium?

High inflation has been the talk of the town. In June, the retail inflation in the United States was at 9.1 per cent, the highest it has been in more than four decades. In Turkey, the inflation in June was at a whopping 78.6 per cent — the highest in more than two decades. Inflation has become a reality in countries across the world and is proving stubborn to get rid of.

No macroeconomic indicator has as much impact on the society as inflation does. Most people don’t follow economic growth figures of their countries but start to feel the pinch as soon as prices start to go up. Inflation is the rate of price rise.

Hence, it becomes very important to understand the causes behind inflation, how they impact the society-at-large and what can possibly be done to control it.

The best way to look at the present is to look at the past. To do this, we will look at two historical episodes of inflation.

The German hyperinflation of 1923 and the high inflation in the US in the late 1970s and early 1980s.

These two different bouts of inflation will help us understand the reasons behind inflation as it prevails in the world at large today and what can be possibly done about it.

The classical gold standard

Before 1913 most countries around the world were on the classical gold standard. This money system was different from the money system as it prevails today.

At present, the currency that we use is basically fiat money. It is money because the government says so. This money is not backed by gold or any other commodity.

But before 1913, every currency unit was worth a certain amount of gold, and it could be exchanged for gold.

When World War-I started many countries suspended the gold standard to be able to print enough money to be able to finance the war. The gold standard did not allow them to print money simply because when the printed money was spent people could turn up at banks demanding it be converted into gold. Given this, banks and governments could soon run out of gold.

Once WW-I ended, governments tried to go back to the gold standard. But a country like Germany, which was on the losing side, was financially in a bad state, and at the end of the war had a budget deficit of 11,300 million Deutsche marks. Budget deficit is the difference between what a government earns and what it spends.

What happened next?

As the government did not earn enough revenue to meet its expenditure it started to print money to finance the expenditure. In 1922, a trillion Deutsche marks were printed as the deficit shot through the roof. In the first six months of 1923, nearly 17 trillion Deutsche marks were printed.

With such an astonishing amount of money being printed, German money started to lose value dramatically. By August 1923, one dollar was worth 620,000 Deutsche marks and by early November it was worth 620 billion Deutsche marks. The price of essential commodities skyrocketed.

The industry, which thrived during this period was the money-printing industry.

Altogether, 30 paper mills and 133 printing plants were working, but still could not print enough money required to keep up with the amount needed.

On October 23, 1923, a statement issued by the German central bank said it had been able to print only 120 quadrillion (120 followed by 15 zeros) paper marks, when the demand had been a quintillion (one followed by 18 zeros). Inflation in Germany, at its peak, touched 1,000 million per cent.

How did it impact German society?

Practically all money had become worthless. A wheelbarrow full of money was not good enough to buy a newspaper. Walter Levy, a well-respected German-born oil consultant working in New York, would later recall that his father had taken out an insurance policy in 1903. He had religiously paid the premiums on the 20-year policy. When the policy had matured in 1923, the money he received was just enough to buy a loaf of bread.

As money lost value, barter came into the scene. Farmers who were not in dire need of money chose not to sell their produce to the townsmen. All in all, it was one big mess. As the money was losing value at a rapid rate men and women ran to spend their wages as soon as they were paid. Businesses had to employ people to count money.

In the end, the paper money had depreciated so much that it was simply used as wallpaper or even used as fuel to generate heat.

Germany decided to move to a new currency and called it the Renten mark. One Renten mark was deemed to be worth one trillion Reichs mark. Soon prices stabilised and the hyperinflation came to an end.

The rise of Hitler and WW-II

The German citizens lost their faith in the politicians and the political system of the day as they saw their lifetime savings fall to zero. Unionised unemployment rose to 30 per cent in 1923, from under 1 per cent in the previous year. People began to feel a sense of hatred and a loss of faith in the politicians of the day and in the German democratic system.

This paved the way for the rise of Adolf Hitler. As Henry Hazlitt, an American journalist, wrote in What You Should Know About Inflation: “It was in the tremendous German inflation of 1923 that the seeds of Nazism were sown.”

Hitler led Germany into WW-II, which started in 1939 and lasted until 1945. By the time WW-II was about to end, the global financial system was again in tatters. The financial system that emerged after WW-II had the American dollar at the heart of it. And the greenback was the only currency that could be converted into gold, but only by central banks of other countries.

Vivek Kaul is the author of the Easy Money Trilogy