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September 19, 2020
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How money has been wasted in the past. Part 8. Inflation after the Great War – Blocksats

We ended the previous part of our story like in a good series, in a rather dramatic moment: Gold Standard collapsed and the world entered a new era in finance. World War I changed our world beyond recognition. Globalization was stopped, almost the whole world was in debt, the US strengthened its position and was only a step away from becoming the ultimate global hegemon. The Soviet Union appeared on the map. Inflation has been hyperinflationary in some countries.

Inflation after the war

Let’s remind it again: World War I buried the Gold Standard. Why did this happen? Individual countries expected a quick fight, not war, but an adventure worthy of naive youths. It ended in one of the biggest, bloodiest tragedies in the history of the world. The black swan turned out to be a bloodthirsty beast and cruel monster.

The prolonged war turned out to be – as you can guess – extremely expensive. Hence, they started moving away from the Gold Standard, which somehow blocked the process of indebtedness of the countries. In Great Britain, in addition to the Bank of England banknotes, they were issued by government during this period currency notes – something like a second currency in circulation with low denominations (1 and 0.5 pounds). In Germany, they appeared in turn reichskassenscheiny, but also local currencies. Tsarist Russia bet on cash tickets (the lowest denominations were in fact converted into “banknotes” … postage stamps).

The return to normal turned out to be unreal. Ultimately, countries that tried to carry out stabilization reforms in the 1920s can be divided into three groups:

  1. those in which inflation has reached the stage of hyperinflation. The reform had to consist in creating a completely new monetary system. This group included Poland, but also Germany, Austria, Hungary and in a sense Russia, which turned into the Soviet Union.
  2. those where it was possible to stabilize exchange rates, but at lower levels – here the countries of the former Latin Monetary Union and Czechoslovakia should be qualified.
  3. and finally those that have restored former exchange rates by deflationary policy and have even resumed convertibility to gold. Great Britain and the Scandinavian Monetary Union countries succeeded. In other words, countries that have been least affected by the war have achieved it.

Germans know how to incur debts?

Central states, as we have already written, were indebted to their citizens during the war (and not like Britain in other countries). Inflation was the same way to get out of debt. This was additionally fueled by war reparations.

Poland was in this group for another reason – our country was extremely weak at the time, because in its incarnation it became a kind of incoherent cluster of three former partitions. In addition, the young Polish state was somehow destroyed by the war with the Bolsheviks in 1920.

Hyperinflation, welcome!

Perhaps central governments were counting on thanks inflation they will write off their debts, but things quickly got out of hand. Germany entered the hyperinflation phase as early as 1923. A direct price jump was the occupation of the Ruhr region by France and Belgium. There have been revolts inside the country. In October, the communist uprising broke out in Hamburg, and about two weeks later, there was a coup attempt in Munich, which organized the Nazi movement, headed by, among others Adolf Hitler (then not yet considered the undisputed leader of the German fascists, Fuhrer; it was only the farce trial after the failed putsch and prison sentence that somehow built his legend and paved the way for electoral successes).

Hjalmar Schacht

On November 12, Hjalmar Schacht, a former director of Danatbank, one of the largest private banks in the country, became Germany’s currency commissioner. The giggle of history is that years later he will be a close associate of Hitler and help the Third Reich build its economic power. At that time, he was still on the other side of the front and did everything to stop hyperinflation and thus suppress radical communist and Nazi movements in the bud.

In any case, after just three days in office of the new monetary commissioner, a rentenmark, a currency based on a State Treasury mortgage, was issued. Interestingly, it was not exchangeable for other currencies – it could only be used to enter into transactions within Germany. It could not be exchanged, for example, into dollars or, above all, gold. The “old” reichsbranders in circulation were exchanged for rentermarks in the ratio of 1 trillion reichsmarks for 1 rentenmark.

After this last operation, did the Germans live happily ever after? Not really, but I must admit that Schacht stopped hyperinflation with him. Already in autumn 1924, Reichsbank was founded and reichsmarks started to be issued again (in a new version), already convertible into gold and other currencies.

It is also worth emphasizing that the above would not have been successful had it not been for it Dawes’ plan, i.e. obtaining foreign loans by Germany. Ultimately, the boom returned to the market in 1926.

Hyperinflation also occurred in Austria and Hungary, but was mild. At least if you compare it with the German one.

Caring for your own currency

Great Britain decided to return to the Gold Standard. It wasn’t that easy though. The pound was worth $ 4.86 before the war. After it, it should cost $ 3.50. He walked in the free market so much. However, the government artificially restored the pre-war period course. It was a bit about the prestige of currency and power, which was still the United Kingdom.

The effect, however, was that Great Britain became a country “very dear to life”. The expensive pound negatively affected exports and flooded the market with imported goods. As a result, when in 1926 most countries were recovering from crises for good, the English were just entering it.

Ultimately, however, the world was divided into two camps. The US has remained with the classic gold standard. In exchange for dollars they paid gold. European countries seemingly too, but the reality was different. In exchange for pounds and other European currencies, only bars were paid, which were only suitable for international exchange and not for daily transactions. As a result, gold from circulation was eliminated as a means of payment. In addition, the United Kingdom in exchange for pounds tried to pay not only gold (bars), but also dollars. Other countries approached the topic differently and exchanged their currencies for pounds. Something like a strange pyramid was created. At the top was gold, for which dollars were exchanged. Dollars in turn to pounds, while other currencies to pounds. This can be shown using the diagram:

Gold -> dollars -> pounds -> other currencies.

“Other countries have not exchanged their pounds for gold now, just kept the pounds and increased on their basis inflation. That is why Great Britain and the whole of Europe could increase inflation without restrictions, and the deficit of Great Britain could grow unhindered by the market discipline, which used to be the gold standard. “

– he translated in “Gold, banks, people.” Murray N. Rothbard.


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