Saturday, February 27, 2010

Revolt 426 on the German Hyperinflation before WWII

From http://forum.prisonplanet.com/index.php?topic=105934.160

Right, so if you owe 200,000$ on a mortgage, installment loan, commercial loan (or one of numerous other loans) , if there is deflation - you cannot REPAY the loan and you will go bankrupt.

Now, think about how many of these loans are oustanding, and we have a serious problem.

No, there is no easy way out - but instituting a Gold Standard is CERTAINLY not the answer ( and i did not attack the entire Austrian school, just about 3 key issues)..


You may be interested to look at how Germany ended up with hyperinflation (Through the privatized issuence of currency):


The great German hyper-inflation of 1922-1923 is one of the most widely cited examples by those who insist that private bankers, not governments, should control the money system. What is practically unknown about that sordid affair is that it occurred under the auspices of a privately owned and controlled central bank.

Up to then the Reichsbank had a form of private ownership but with substantial public control; the President and Directors were officials of the German government, appointed by the Emperor for life. There was a sharing of the revenue of the central bank between the private shareholders and the government. But shareholders had no power to determine policy.

The Allies' plan for the reconstruction of Germany after WWI came to be known as the Dawes Plan, named after General Charles Gates Dawes, a Chicago banker. The foreign experts delegated by the League of Nations to guide the economic recovery of Germany wanted a more free market orientation for the German central bank.

[Hjalmar] Schacht relates how the Allies had insisted that the Reichsbank be made more independent from the government:

"On May 26, 1922, the law establishing the independence of the Reichsbank and withdrawing from the Chancellor of the Reich any influence on the conduct of the Bank's business was promulgated."

This granting of total private control over the German currency became a key factor in the worst inflation of modern times.

The stage had already been set by the immense reparations payments. That they were payable in foreign currency would place a great continuing pressure on the Reichsmark far into the future.

HOW IS A CURRENCY DESTROYED?

In a sentence, a currency is destroyed by issuing or creating tremendously excessive amounts of it. Not just too much of it but far too much. This excessive issue can happen in several ways, for example by British counterfeiting as occurred with the U.S. Continental Currency, and with the French Assignats. The central bank itself might print too much currency, or the central bank might allow speculators to destroy a currency through excessive short selling of it, similar to short selling a company's shares, in effect allowing speculators to "issue" the currency.

The destruction of an already pressured national currency through speculation is what concerns us in this case. A related process was recently allowed to destroy several Asian currencies, which dropped over 50% against the Dollar in a few months time, in 1997-98, threatening the livelihood of millions.

It works like this: First there is some obvious weakness involved in the currency. In Germany's case it was World War One, and the need for foreign currency for reparations payments. In the case of the Asian countries, they had a need for U.S. dollars in order to repay foreign debts coming due.

Such problems can be solved over time and usually require national contribution toward their solution, in the form of taxes or temporary lowering of living standards. However, because currency speculation on a scale large enough to affect the currency's value is still erroneously viewed as a legitimate activity, private currency speculators can make a weak situation immeasurably worse and take billions of dollars in "profits" out of the situation by selling short the currency in question. This doesn't just involve selling currency that they own but making contracts to sell currency that they don't own -- to sell it short.

If done in large amounts, in a weak situation, such short selling soon has self-fulfilling results, driving down the value of the currency faster and further than it otherwise would have fallen. Then at some point, panic strikes, which causes widespread flight from the currency by those who actually hold it. It drops precipitously. The short selling speculators are then able to buy back the currency that they sold short, and obtain tremendous profits, at the expense of the producers and working people whose lives and enterprises were dependent on that currency.

The free market gang claim that it's all the fault of the government that the currency was weak in the first place. But by what logic does it follow that speculators take this money from those already in trouble? Currency speculation in such large amounts should be viewed as a form of aggression, no less harmful than dropping bombs on the country in question.

Industrialists should realize that when they allow such activity to be included under the umbrella of "business activity," they are making a serious error. They should help isolate such speculation and educate the populace on how destructive it is, so that it can be stopped through law.

Limitations could easily be placed on speculative currency transactions without limiting those that are a normal part of business and trading, while stopping the kind of transactions that are thinly disguised attacks on the country involved. Placing a small tax on such transactions would be a healthy first move.

TOO MANY GERMAN MARKS ISSUED

By July 1922 the German Mark fell to 300 marks for $1; in November it was at 9,000 to $1; by January 1923 it was at 49,000 to $1; by July 1923 it was at 1,100,000 to $1. It reached 2.5 trillion marks to $1 in mid November, 1923, varying from city to city.

In the monetary chaos Hamburg, Bremen and Kiel established private banks to issue money backed by gold and foreign exchange. The private Reichsbank printing presses had been unable to keep up and other private parties were given the authority to issue money. Schacht estimated that about half the money in circulation was private money from other than Reichsbank sources.

CAUSE OF THE FIRST INFLATION: SCHACHT'S FIRST "EXPLANATION"

There is often a false assumption made that the government allowed the mark to fall, in order to more easily pay off the war indemnity. But since the Versailles Treaty required payment in U.S. Dollars and British Pounds, the inflationary disorder actually made it much harder to raise such foreign exchange.

Hjalmar Schacht's 1967 book, The Magic of Money, presents what appears to be a contradictory explanation of the private Reichsbank's role in the inflation disaster.

First, in the hackneyed tradition of economists, he is prepared to let the private Reichsbank off the hook very easily and blame the government's difficult reparations situation instead. He minimized the connection of the private control of the central bank with the inflation as mere co-incidence....

THEN SCHACHT GIVES THE REAL EXPLANATION

Schacht was a lifelong member of the banking fraternity, reaching its highest levels. He may have felt compelled to give his banker peers and their public relations corps something innocuous to quote. But Schacht also had a streak of German nationalism, and more than that, an almost sacred devotion to a stable mark. He had watched helplessly as the hyper-inflation destroyed "his mark."

For whatever reasons, after 44 years he proceeded to let the cat out of the bag, with some truly remarkable admissions, which shatter the "accepted wisdom" the Anglo-American financial community has promulgated on the German hyper-inflation....

SCHACHT'S REVELATION

It was in describing his 1924 battles in stabilizing the Rentenmarks that Schacht made his revelation, giving the private mechanism of the hyper-inflation. Schacht was obviously very upset when the speculators continued to attack the new Rentenmark currency. By the end of the November 1923:

"The dollar reached an exchange rate of 12 trillion Rentenmarks on the free market of the Cologne Bourse. This speculation was not only hostile to the country's economic interests, it was also stupid. In previous years such speculation had been carried on either with loans which the Reichsbank granted lavishly, or with emergency money which one printed oneself, and then exchanged for Reichsmarks.

"Now, however, three things had happened. The emergency money had lost its value. It was no longer possible to exchange it for Reichsmarks. The loans formerly easily obtained from the Reichsbank were no longer granted, and the Rentenmark could not be used abroad. For these reasons the speculators were unable to pay for the dollars they had bought when payment became due (and they) made considerable losses."

Schacht is telling us that the excessive speculation against the mark -- the short selling of the mark -- was financed by lavish loans from the private Reichsbank. The margin requirements that the anti-mark speculators needed and without which they could not have attacked the mark was provided by the private Reichsbank!

This contradicts Schacht's earlier explanation, for there is no way to interpret or justify "lavishly" loaning to anti-mark speculators as "helping to keep the government's head above water." Just the opposite. Schacht was a bright fellow, and he wanted this point to be understood. He waited until he wrote the Magic of Money in 1967. His earlier book, The Stabilization of the Mark (1927), discussed inflation profiteering but did not clearly identify the private Reichsbank itself as financing such speculation, making it so convenient to go short the mark.

Thus it was a privately owned and privately controlled central bank, that made loans to private speculators, enabling them to speculate against the nation's currency. Whatever other pressures the currency faced (and they were substantial), such speculation helped create a one way market down for the Reichsmark. Soon a continuous panic set in, and not just speculators, but everyone else had to do what they could to get out of their marks, further fueling the disaster. This private factor has been largely unknown in America.


-- Stephen Zarlenga, The Lost Science of Money, pp. 579-87

3 comments:

Andrea Muhrrteyn said...

"Thus it was a privately owned and privately controlled central bank, that made loans to private speculators, enabling them to speculate against the nation's currency."

So, if I interpret accurately, then what he is saying is that the private central banks role in the massive inflation of the Deutschemark, was economic warfare against the German people, in the form of a financial false flag attack on their own currency.

Put differently, it was a form of a deliberate attack on the nations consumption; what peak oil theorists currently refer to as 'demand destruction' economic warfare.

The heightened price of oil would certainly encourage conservation--i.e., demand destruction--but that conservation might come in the form of terrible hardship for millions and perhaps billions of people and possibly death for many. That would give a rather gruesome connotation to the notion of demand destruction.

If one assumes that the oil peak is far off and that technology will allow us to make a smooth transition to the next energy economy (and solve other related problems that threaten to annihilate us such as global warming), then there is no need to worry about the effects of sudden demand destruction in the oil markets. But, if the peak arrives soon, say, within the next 10 to 15 years, then no bloodless abstraction such as "demand destruction" will be able to obscure the fact the it is people who are going to get destroyed, and lots of them.
-- Demand Destruction: Who gets destroyed? [See also: Predator-Prey Dynamics in Demand Destruction and Oil Prices.

Ecology: Predation and Parasitism:

Predation is used here to include all "+/-" interactions in which one organism consumes all or part of another. This includes predator-prey, herbivore-plant, and parasite-host interactions. These linkages are the prime movers of energy through food chains.

What Stabilizes Predator-Prey Systems in Nature? Competitive exclusion, which in 'political human parlance' would be 'apartheid'.

The principle of competitive exclusion is based on the idea that ecological separation of species in competition is an inevitable outcome.

All species occupy a niche, which describes the roles of the organism within an ecosystem.

No two species can occupy the same niche in a community, as there will be competition for the same resources.

Species either segregate within a habitat (resource partitioning (apartheid)), or one species numbers will increase and the other die off (competitive exclusion).

The principle of competitive exclusion can be summarised by Gause's Law – complete competitors cannot coexist.

Andrea Muhrrteyn said...

Complex Interactions in Ecological Communities.

Predation can have far-reaching effects on biological communities. A starfish is the top predator upon a community of invertebrates inhabiting tidally inundated rock faces in the Pacific Northwest. The rest of the community included mollusks, barnacles and other invertebrates, for a total of 12 species (not counting microscopic taxa). The investigator removed the starfish by hand, which of course reduced the number of species to 11. Soon, an acorn barnacle and a mussel began to occupy virtually all available space, out competing other species. Species diversity dropped from more than 12 species to essentially 2. The starfish was a keystone predator, keeping the strongest competitors in check. Although it was a predator, it helped to maintain a greater number of species in the community. Its beneficial impact on species that were weak competitors is an example of an indirect effect.
- Predation

The principle of CommonSism, restricting all human cultures, religions, races, etc to procreating and consuming below regional, national and international carrying capacity limits; if implemented would function as a form of 'legal /jurisprudence starfish' predation, whereby those individuals 'cheating' as procreation or consumption predators; are eliminated from the genepool, to both (a) keep the system stable with regard to human population vis a vis other species and resources; and (b) restrict any one religion, race, or culture from overpredation; by outcompeting all other species (due to greater access to capital (consumption war predatory benefits) or human cannon fodder (breeding war predatory benefits); and thereby enhance and stabilize both natural biodiversity and human cultural, religious and racial diversity.

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