Hyperinflation Lessons from Weimar Germany

In a rampant monetary inflation, the rich can become super-rich, and wealthy industrialists can become out-of-this-world rich, like Greek gods living atop a financial Mount Olympus.

If you sit atop an industrial empire when runaway inflation comes, and if you deploy the right strategies, you can find ways to grow your horde of treasure by 10X to 100X, or maybe even 1,000X.

The opportunities in a runaway monetary inflation episode are so great, in fact, that some participants will actually cheer the inflation, and actively back policies that ultimately destroy the currency. Once locked in, those same individuals may advocate for destroying the currency even faster, and even more forcefully, while claiming it is all for the people’s own good.

Are we talking about 2020?

One might assume so, given that, toward the end of August, Jeff Bezos saw his net worth cross $200 billion, Elon Musk topped $100 billion, and the junk bond industry partied like it was 1999 (with a handful of corporate yields falling below zero).

At the same time, in August 2020, private equity titans appeared to be having more fun than they did in the drug-driven 1980s — thanks to a free credit backstop from the Federal Reserve — and the upper echelons of the stock market (though not all stocks, to be sure) roared to wild heights, even as food banks were overrun and the real economy fell off a fiscal cliff.

It really does sound like 2020. After all, recent market events fit our Mutant Goldilocks theory like hand-in-glove.

Mutant Goldilocks, if you recall, is the scenario in which policies specifically designed to benefit wealthy individuals and corporations — and the stock market specifically — manage to transform run-of-the-mill inequality into hyper-inequality, while normal citizens are told to eat cake.

But no — in describing the above, we are not drawing lessons from the present day.

Instead, we draw these lessons from the Weimar Germany period after World War I — one of the few examples in history of a Western industrial country experiencing full-on hyperinflation.

It sounds bizarre, but in the post-World War I Weimar Germany period, the country’s elite — and particularly its top industrialists — came to be openly in favor of radically inflationary monetary policy, that is to say, printing like there was no tomorrow.

To put it another way, the industrial elites egged on the out-of-control money printing, even after food prices had gone insane, even after grocery store shelves had been emptied out, and even when cost-of-living expenses for the average German citizen were rising by more than 12% a week.

(Imagine life’s necessities becoming 50% more expensive every four weeks, month in and month out, with no relief and no end in sight.)

In the Weimar era, Germany’s top tier learned to love the destruction of Germany’s currency, the mark — prior to the wheelbarrow point, anyway, when it literally took a wheelbarrow’s worth of paper to buy a loaf of bread — because Germany’s upper echelons had figured out how to grow even wealthier as a result of runaway inflation, through skillful moves on the asset management gameboard.

By way of tax dodges, cross-border capital movements, strategic real asset purchases, aggressive stock market speculation, export-import ledger shenanigans, and other such tricks, those with the means to play the game figured out how to dodge the worst effects of runaway inflation, while growing their pool of assets at an exponentially fast clip.

It can all be a game, you see, even when the consequences are catastrophic. If, say, the value of your currency is falling by 50% per month, but you are consistently registering gains of 100% per month, while dodging taxes and currency controls besides, you can come out ahead.

As it turns out, for the wealthy, connected, and fleet of foot, the Weimar Germany period was a giant policy arbitrage, more or less, with incredible gains for those who could work the spread.

And all of this happened even as millions of average Germans — the non-connected, non-wealthy, and non-union citizenry — saw the value of their savings and wages wiped out so fast, with so little relief, that in some cases desperate German mothers were reduced to scavenging from garbage cans in wealthy neighborhoods, trying to find scraps of food for their malnourished children.

In Weimar Germany, hyperinflation was not just an event of unprecedented economic destruction.

It was also a runaway train of wealth creation for the top tier of society, with the worst effects of the hyperinflation shielded by cross-border transactions, strategic asset purchases, stock market capital gains, and inflation-indexed wage hikes via unionized labor agreements.

Meanwhile, the rest of German society in that era essentially starved and went through hell.

As all of this happened, the country’s bankers, right on up to the Reichsbank — Germany’s central bank of the time — sided with those who wanted the printing to keep on going, and refused to acknowledge the destructive effects of such a policy.

Nobody really knew how to get away from the madness of the printing, meanwhile, because mass volumes of currency creation were keeping the economy’s lights on.

Germany’s powerful unions were demanding stratospheric wage increases, and getting them, by way of printed currency. To deny the unions was to risk industrial shutdowns, and nobody felt the country could afford that.

Price controls, meanwhile, were introduced for various commodities and services vital to industrial production. This subsidized the outsized profits of the industrialists, as prices rose all around them, with much of the profit shielded from taxes and consistently moved abroad.

Amazingly, even as prices went vertical, it seemed to be the case that 90% of the banks, and the Reichsbank itself, refused to even see or admit that the insane currency printing policy and the hyperinflation result were connected.

They failed to see not because they were blind, but because the moneyed elites were getting rich from the situation, and the union workers were getting paid, too (via inflation-indexed collective bargaining agreements that enabled stratospheric wage hikes), and these powerful interest groups preferred the bankers cover their eyes and ears in a “see no evil, hear no evil” style as the printing presses rolled on.

Weimar Germany, in other words, is a warning for all of us today.

If something like this happens in the United States — and it could, and it is possible the whirring of the machine have already begun — a small portion of society could become very, very rich, even as the vast majority of the country experiences desperate, agonizing poverty, with prices going through the roof.

If this is the route we go down, the fabric of society could be ripped apart at the seams, as the gulf between haves and have-nots becomes a canyon or a chasm.

It isn’t even clear, at this point, whether such a track is avoidable. That is because the road to Weimar is more about monetary policy than political ideology, and most politicians grasp the intricacies of monetary policy about as well as a dog understands algebra.

If some variation of Weimar is where we are headed, the asset inflation seen thus far could merely be a warm-up.

The takeaways in this piece are largely drawn from the book, When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany, first published in 1975.

The book’s author, Adam Fergusson, points out that the causes of Weimar Germany’s hyperinflation — the “how” of how they got there, in the aftermath of World War I — are not so important as the consequences. As Fergusson writes:

“The question to be asked — the danger to be recognised — is how inflation, however caused, affects a nation: its government, its people, its officials, and its society. The more materialist that society, possibly, the more cruelly it hurts.

“If what happened to the defeated Central Powers in the early 1920s is anything to go by, then the process of collapse of the recognised, traditional, trusted medium of exchange, the currency by which all values are measured, by which social status is guaranteed, upon which security depends, and in which the fruits of labour are stored, unleashes such greed, violence, unhappiness, and hatred, largely bred from fear, as no society can survive uncrippled and unchanged.”

In an updated foreword to the book, composed in 2010, Fergusson captures the essence of hyperinflation in just two sentences. “People’s trust in their currency is here a central theme,” Fergusson writes. “As it evaporates, they spend faster, the velocity of circulation increases, a little money does the work of much, prices take off, and more money is needed.”

This is the doom loop in which expectations lead to forced speculation. When a nation fears the currency is becoming worthless — or if prices are rising at a sufficiently fast clip — the impulse to spend becomes rational, as holding onto paper feels increasingly irrational.  

In reading Fergusson’s exhaustively detailed treatment of the era — which goes deep into the historical record, bringing forth a torrent of names, dates, and events — the thing that stood out most was the diversity of response as the currency evaporated. 

Those who had the means to protect themselves against runaway inflation did so, by any means necessary. This led to huge disparities that had never existed before — like unionized workers seeing compensation raise 10 or 20-fold, for example, while doctors, lawyers, and other non-union professionals saw their income streams turn to dust. 

In a follow-up piece on the Weimar Germany era, we will take a closer look at the reasons why hyperinflation happened; the logistical drivers behind endless currency printing; the capital preservation strategies used by industrialists and wealthy elites; and the uncomfortable parallels that suggest America could be on its own “road to Weimar” 100-plus years on.