A Cautionary Tale

Today the housing market is down, the government is bailing out banks and considering extending this courtesy to a host of other industries. Wealthy AIG executives take a taxpayer bailout and then flaunt it with bonuses and extravagant trips. The consumer is the fall guy and prices are rising at retail outlets everywhere. The financial pundits are calling for a bleak Christmas shopping season and Black Friday may actually be awash in red ink this year. The pundits are calling for rough economic times ahead. There is talk of soon increasing credit card interest rates to 27-30%. Our government is printing money to keep up with our windfall spending and economic IOU's and promises to everyone.

Young people today do not remember the 4 year term of President Carter when home interest rates were 20%, there were gas lines everywhere and energy conservation included wearing a sweater and turning down the thermostat! The history taught in our public schools is a watered down revisionist version of what happened, so it is no wonder that young adults today have a disconnect between the past and the present. If you never learned history, then you cannot learn from the mistakes of the past.

In March 2003, Brian Trumbone wrote an article for StockandNews.com that I would offer as a cautionary tale for today's economic turmoil. In this article he described the conditions of the Weimar Republic in the decades between the end of World War I and World War II.

On January 11, 1923, French and Belgain troops (against the advice of the British) occupied the Ruhr, a region which furnished 4/5's of Germany's coal and steel production. The miners refused to work for the enemy and the Germans simply printed more money with which to pay them not to, allowing inflation to spiral completely out of control. The economy was strangled and the free fall in the mark was incredible. Following is the historic slide in the value of the German mark.

July 1914 4.2 marks to the dollar.
January 1919 8.9 marks to the dollar.
July 1919 14.0 marks to the dollar.
January 1920 64.8 marks to the dollar.
July 1920 39.5 marks to the dollar.
January 1921 64.9 marks to the dollar.
July 1921 76.7 marks to the dollar.
January 1922 1919.8 marks to the dollar.
July 1922 493.2 marks to the dollar.
January 1923 17,972 marks to the dollar.
July 1923 353,412 marks to the dollar.
August 1923 4, 620,455 marks to the dollar.
September 1923 98,860,000 marks to the dollar.
October 1923 25,260,208,000 marks to the dollar.
November 1923 4,200,000,000,000 marks to the dollar. YES TRILLION!

By late 1923, the German government required 1,783 printing presses running around the clock to print money.

Germans wheeled shopping carts filled with literally trillions of marks to pay for a single loaf of bread. Employees asked to be paid their wages each morning so that they could shop at noon before merchants posted the afternoon price rises.

Spiraling inflation also wiped out people on fixed income along with the small savings they had put aside for retirement.

"Annuities, pensions, proceeds of insurance policies, savings accounts in the banks, income from bonds and mortgages--every form of revenue which had been arranged for at some time in the past, and which often represented the economy, foresight and personal planning of many years--now turned to nothing. The middle class was pauperized and demoralized."

William Shirer in The Rise and Fall of the Third Reich, adds: "What good were the standards and practices of such a society, which encouraged savings and investment and solemnly promised a safe return from them and then defaulted? Was this not a fraud upon the people?" But not everyone suffered in Germany.

Again, Shirer:"Big industrialists and landlords goaded the government to deliberately let the mark tumble in order to free the State of its public debts, to escape from paying reparations and to sabotage the French in the Ruhr. The destruction of the currency enabled German heavy industry to wipe out its indebtedness by refunding its obligations in worthless marks. The fall of the mark wiped out war debts and thus, left Germany financially unencumbered for a new war. The masses of the people only knew that a large bank account could not buy a straggly bunch of carrots, a few ounces of sugar. In their misery the Republic was made the scapegoat for all that had happened.

At the height of the currency crisis, an interested spectator commented: "The government calmly goes on printing these scraps of paper because, if it stopped, that would be the end of the government. Because once the printing presses stopped--and that is the prerequisite for the stabilization of the mark--the swindle would at once be brought to light. Believe me, our misery will increase. The scoundrel will get by. The reason: because the State itself has become the biggest swindler and crook. A robbers State!? If the horrified people notice that they can starve on billions, they must arrive at this conclusion: We will no longer submit to a State which is built on the swindling idea of the majority. We want a dictatorship." Thus spoke Adolf Hitler.