The Joyless Street

The Joyless Street

By |2012-09-23T14:53:47+00:00September 23rd, 2012|Commodities, Currencies, Federal Reserve/Monetary Policy|

By Brian Cronin

In striking a blow for democracy, it looks like the preliminary decision of the German Constitutional Court has had an effect on other nations signing on for the permanent bailout fund, the European Stability Mechanism. You will recall the court said that any change to the upper limit of Germany’s commitment (€190 billion) had to be OK’d by the German member on the ESM board and that that decision had to be ratified by the Bundestag. Other nations grumbled that Germany was getting a special break where everyone else had to put up with what the ESM decided.

Germany foresaw difficulties if the ESM had been allowed to ride roughshod over parliamentary protocol. For one thing, what if other nations did not kick in the amounts required or did not live up to the guarantees they had made? Germans felt that they would be on the hook to make up the difference, and they weren’t having any of that. But in a move to smooth things over, it now appears that there will be changes to the ESM so that each member country’s parliament will be given the ability to weigh in on any overages. This week, member countries plan to sign on to what is being termed a “declarative interpretation” so that the ESM can go into effect sooner rather than later.

This is an important point for Germany and not merely an academic one either. Though most Germans born during the war or thereafter are fully aware of their country’s awful history between the world wars, they do not feel they should be in the penalty box ad infinitum. The oft-stated reason for the EU was to bind the formerly warring nations together so that nothing like the Third Reich could ever again emerge. The dire warnings of the founders were that if their vision was not followed there would be a recurrence of Nazism. Well, that didn’t happen obviously and Germans as a whole wanted to forget about a period that brought shame to their nation.

While they wanted to forget Adolf Hitler, they did not want to forget what had given rise to the rise of the Führer. Many speak of their parents and grandparents having to live and survive through the terrible inflation of the 1920s, the great Weimar inflation, where money became worthless and life savings disappeared. The exchange rate changed more than once a day so that groceries and the necessities of life would cost more by the end of the day than they did at the beginning. This turmoil gave rise to the term “wheelbarrow inflation”, where the wheelbarrow you carted your money around in to get to the shops would actually be worth more than the money inside it.

It is etched deep into the German psyche. The fear of inflation is never far beneath the surface. The guardian of the nation’s sound money is the Deutsche Bundesbank (Buba) whose head, Jens Weidmann, was the only board member of the European Central Bank to vote against the unlimited purchase of distressed country bonds proposed by Mario Draghi recently for what it might portend. As it was put to me once by a senior Buba official: “2% inflation is 2% too much”.

The third round of quantitative easing by the Federal Reserve, QE3, brings this clearly into focus. While pundits discuss the relative merits of such a policy as the only means, in the absence of any solution by Congress, to jumpstart the economy, we have started to see references, and I have seen at least three in this past week, to a 1975 book by Adam Fergusson that discusses in detail why Germany decided that printing money was its only way out of an ugly situation in the 1920s. Mr. Fergusson’s book, highly recommended, is called “When Money Dies” and those articles I just referred to, use his title for their own. The parallels are unmistakable. At some point, it will all catch up with us and we will be spending a lot more money for what Germans call ‘lebensmittel’, literally the means of living, the bare necessities – food.

Just to give you some idea of how the value of the mark deteriorated, on January 1, 1920 the dollar was worth 50 marks. By January 1, 1923, the exchange rate was 9,000 marks and by November 23, 1923, the dollar was worth 4.2 trillion marks.

In his book, Mr. Fergusson refers to a film made by G.W. Pabst, who directed, you will recall from my essay “The Best of Enemies” (8/26/12), “Kameradschaft” (1931) about the unlikely comradership between French and German coalminers. But the film he refers to is “Die freudlose Gasse” (“The Joyless Street”). It was made in Vienna in 1925 and dealt with the rampant hyperinflation in Austria after the Great War. It starred a young Greta Garbo just before she came to the United States and found fame and fortune.

If you want a good idea of how desperate things can become once money starts to lose its value and what you must do to feed your family, this is a pretty good place to start. In it, we find unscrupulous, lecherous shopkeepers who decide what to sell and who to serve depending on how willing their female customers are to grant favors, the wide disparity between those who have and those who do not and the inevitable clash between them. Garbo plays the good girl and Asta Nielsen plays the girl who is not and who plies her trade at a fleabag hotel run (I kid you not) by a Frau Merkel.

It’s not exactly an uplifting fun-filled evening’s entertainment, but it is a sobering film and a pretty good reflection of the way things were, and, heaven forbid, the way things could be here. The film was heavily censored in various countries and even banned in the UK for a long time, fearful of how the film would be received by the public. Curiously enough, according to film lore, Garbo was paid in US dollars and not German marks. Either very savvy or very lucky.

Hyperinflation is defined as price increases at a rate of 50% per month and changing daily, not monthly. We are not likely in this electronic age to see people with wheelbarrows full of money if hyperinflation ever takes hold in the US but we might see some form of a barter system if it all goes pear-shaped. Never say never. Sharply rising prices do change human behavior in many ways. You might end up doing things you would not ever think of yourself as doing but what you have to do to survive. Seniors on fixed income are getting little by way of interest on their money these days and are already starting to see their grocery bill going up week by week. They have to adjust accordingly and maybe it’s a tossup between food and medications.

Inflation doesn’t exist in isolation. It has to be seen in a political context too. Weimar proves that. But if you thought that this is a relic of bygone days, consider in modern times the unique democratic style of Zimbabwe’s Robert Mugabe. The administration of the affairs of state under his stewardship saw the money supply increase at a fantastic rate courtesy of the printing press.

Inflation reached an unbelievable estimated 90,000,000,000,000,000,000,000% in November 2008. I am not sure if there is even a word to quantify what those many zeroes represent. The Zimbabwean dollar itself went through four different incarnations before finally being abandoned in April 2009 in favor of the US dollar and the South African rand. At its peak, a $100 trillion bill would not buy you very much. As a constant reminder of just how bad things can get, a friend of mine has on his desk a Zimbabwean banknote of $100 trillion.

Could it happen here? It already did. How many times have you heard in westerns, “it ain’t worth a plugged nickel” which I had always thought meant the middle had been shot out of it by a sharpshooter but actually meant that the  middle of the coin had been robbed of it silver content and ‘plugged’ with a base metal. A hundred years earlier, you would have heard that “it ain’t worth a continental” when the easily counterfeited continental dollar became worthless.

During the American Civil War, the Confederate States experienced hyper-inflation. The loss of revenue from cotton as a result of the northern blockade, the drought of 1863 and the Richmond Food Riots drove the CSA and the individual states to issue their own currency. Inflation reached 9,000%. The currency would have collapsed anyway even if the South had not lost the war. “Sesesh” currency became worthless.

John Maynard Keynes said that to debauch the capitalist system you must first corrupt its currency. The constant flooding of the system with money has made our dollar week. What it does to people’s savings, investments and sense of self is a tale worth telling. Just like “The Joyless Street” was when it was first released, it is a morality tale.

Brian Cronin

September 22, 2012

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