Rudolf Havenstein was the architect of the horrifying German hyperinflation of 1919-1923. A lawyer, with no knowledge in economics, Havenstein was the president of the German Reischbank from 1912 to 1923. Even when inflation was running at 100% a day, he believed that Germany was suffering a money shortage.
He was boasting that, besides the printing presses of the Reischbank, he had contracted 133 additional printing firms with 1,783 machines to supply paper money, and more than 30 paper
manufacturers worked at full capacity solely to provide paper for the Reichsbank notes.
Havenstein urged the provinces, municipalities and large concerns to print and put into circulation their own emergency money notes. He gave the assurance that he would redeem these notes exactly as if they were Reichsbank banknotes. He kept interest rates at 5% a year when inflation was 100% a day. What madness!
Prodded by Havenstein's super-money helicoptering, the socialist-communist dominated government expanded its expenditure; unable to keep pace, taxes represented only 0.7% of expenditure in 1923.
Authors have searched for the most appropriate terms to describe the German tragedy - disaster, cataclysm, chaos, destruction may not fully convey the suffering of Germany. Nor may the use of figures on the scale of quintillions capture the imagination sufficiently.
The British Embassy in Berlin had its own approach, saying that the number of marks per pound, equal to 1 in 1913, became in 1923 equal to the number of yards to the Sun. Dr Hjalmar Schacht, who succeeded Havenstein as Reichsbank president in 1923, said the price of one egg that year would have bought 500 billion eggs in 1913.
Dr Frank Graham (1930) reported that nominal mortgages were one-sixth of Germany's wealth in 1913; they were less than one US cent in 1923, meaning that one US cent in 1923 was more than enough to pay off all 1913 nominal mortgages.
Countless sad stories abounded. A man went to the bakery with a wheelbarrow full of marks; he went inside the bakery to check how far the price of bread increased; a thief dumped the piles of money on the ground and stole the wheelbarrow. A teacher saved for 30 years; his savings could not buy a tramway ticket; he committed suicide. Municipal workers cleaned streets littered with tons of dumped marks; people burned marks in their fireplaces; teachers and workers were paid twice a day; shops remained closed or they closed as quickly as they opened. All financial calculations, accounting, and contracts became impossible.
Millions of Germans suffered food shortage and starvation; middle class people had their savings wiped out and became beggars on the streets; many people committed suicide.
Nevertheless, a class of profiteers were strong supporters of inflation; these were businessmen, speculators, and borrowers. They enjoyed abundant free wealth and indulged in the most sumptuous consumption and accumulation of jewelry. Academics were strong supporters of the hyperinflation as an easy way to prosperity and full-employment. Practically, borrowers inherited free wealth such as houses, farms, buildings and machinery.
A German paper wrote in 1923: Did Havenstein understand that the German workers could starve? Or was there something more sinister than stupidity at work? Was the aim to spread desperation in the masses, to destroy the republic's authority, and to prepare the way for dictatorship?
Havenstein was described as the mad banker whose only object was to swamp Germany with banknotes. The Weimar Republic showed that a corrupt government, supported by academics and profiteers of inflation, would never stop the hyperinflation. In the event, hyperinflation ended on its own; the mark died exactly like a patient who loses a battle with cancer. No farmer and no shop would accept marks anymore.
German inflation was a perfect legal looting orchestrated by the government. The looting had to stop when there was nothing of value left for the looters, not even garbage cans. Yet the inflationists solved no problem; they wrecked the German economy and brought contempt and revolt against the government.
Havenstein became a symbol of central bankers and politicians who seek to destroy the currency of a country and plunder its wealth in favor of their supporters and the free profiteers of inflation. Havenstein's model encompassed Keynesian fiscal-money policies, former Federal Reserve chairman Ben Bernanke's helicoptering model, Barack Obama's socialism, Fed chair Janet Yellin's inflationism, the structure of a Ponzi scheme, Bernie Madoff's swindling, and Lenin's currency destruction. It was also a model of 100% negative interest rates whereby every debt is wiped out through inflation.
The setting of the US since 2002 and that of the Weimar Republic are practically identical. Both are controlled by politicians and profiteers who believe that money printing is the way to prosperity; both have huge spending waste and very high deficits monetized by printing presses.
Total US domestic debt exceeded 500% of GDP in 2014; debtors and speculators will not accept losing huge free wealth. In both settings, central banks make victims, including workers, pay three taxes: a tax for the state budget, a tax for borrowers, and a tax for speculators. In both settings, debt is plundering paid by inflation.
The US and the financial systems of other leading countries have been destabilized by a Havenstein, called Bernanke. Despite the 2008 general bankruptcy, the disappearance of many financial giants and monumental bailouts, Bernanke showed the same folly as Havenstein. He forced interest rates to near zero from 2008, denied savers any income, and unleashed money plundering. He knocked Japan and the eurozone out of gear.
Everywhere people suffer from his inflationism. Huge wealth is being looted by the Federal Reserve in favor of inflation profiteers, making victims who include poor people in Bangladesh and Mali pay for crimes they did not commit.
Could Havenstein Bernanke set interest rates at near-zero under a gold standard? Richard Nixon gave the answer in 1971 and the United Kingdom in 1931. Could interest rates be zero? Never, except perhaps, in heavens where abundance is unlimited; but not on Earth, where hunger and misery are prevalent.
In 2014, in Ghana, the central bank rate is 16% a year, in India 8%, in Brazil, 7.5%. Why is the Fed's rate at almost zero? If a good cost $100 in a shop and someone is selling it at $2 he must be a thief. Ghana cannot use its money outside its territory and therefore can plunder no country; the US can print as much money as it wishes and import as much real capital as it wants as to keep interest rates at zero without exploding prices into hyperinflation. At zero interest, any luxury item is no longer a privilege of the very rich. Anyone can buy the highest luxury with unlimited loans that may soon become toxic, as in 2008, and paid for by printed paper money.
The hyperinflation panic, wherever it has happened, sets in quickly. Why Havenstein's money policy turned into hyperinflation within four years yet the even more extravagant policy of Bernanke-Yellen has not yet triggered hyperinflation despite negative interest rates and trillions of dollars printed since 2008?
The German mark was a local currency; likewise the continentals, John Law's notes, and the assignats - local monies all, which died as quickly as the mark did under inflation. The dollar has been the world currency since 1944, and so the inflation theft is not local; it is distributed all over the world, which spreads the impact of the Fed's printing.
In other words, the poor in Africa are forced to starve to pay for the Fed's plundering and the sumptuous consumption of inflation profiteers. Borrowers drive luxurious cars, welfare recipients enjoy abundance, the capital of which is paid by poor people in Africa where government ministers cannot afford to drive even popular cars.
Nonetheless, the more the Fed prints money and plunders real capital, the more agony lingers in the vulnerable countries, and the more people recognize the cause of their plight.
The dollar may not soon face a panic. All leading currencies are in a state of "all hang together, or all hang separately". The money printing and negative interest rates in the eurozone, Japan, and many other leading countries maintain key currencies in the depreciation race. This enables each reserve central bank to plunder and redistribute wealth from victims to inflation profiteers. Vulnerable countries will suffer and may risk upheaval.
In the period before World War II, leading countries became entangled in a deadly currency depreciation race that resulted in a disastrous war. Fast-forward to the present, and similarly no one country will leave the race and risk losing exports. Similar to the US, every country is dominated by labor unions, anti-market forces, and powerful interest groups; all make inflation, instead of structural changes, as the only political tool for solving social and economic issues.
Many poor countries such as Chad, Guinea-Bissau, Mali and Niger, to name just a few, never print any money despite their extreme budget difficulties and poverty. These countries are not "square circlers" or reasoners that "Earth is flat". For them, there is no money policy, money is money, and not a plundering tool. They have not yet heard about John Law, Havenstein, Bernanke, and Yellen's magic that a country can become too rich by printing paper money.
Leading US economic scholars write books saying that money is paper; it is a policy tool at the discretion of any Havenstein; unlimited printing of costless paper money brings full-employment and unlimited richness; the state has no money limit on spending and nor do borrowers; interest rates should be zero; gold is a barbaric relic and a fetter.
These professors hold the power of US policy making and turn their ideology into practice. They reject the US Constitution, which is the only constitution in the world that explicitly says that money is a metallic coin and not a policy tool.
Benjamin Franklin said: "Tim was so learned, that he could name a horse in nine languages; so ignorant, that he bought a cow to ride on." Havensteins never understand that money is not an arbitrary policy tool as much as a cow is not a vehicle; a horse is not a cow, and vice versa; confusing both leads to madness. If you see someone riding a cow, be sure he is mad. Only despotism and corruption make money a policy tool.
Together with the Great Depression, German hyperinflation was one of the 20th century's worst economic and social calamities. Both were inflicted by central banks. Both led to political forces and money and economic disorder that culminated in human tragedies and a disastrous war. In the US, the fear of inflation shaped the US Constitution; the latter stipulated only gold and silver are the monies of the United States.
Money was never meant to be a policy tool in the US. The fear of central banking was expressed by presidents Thomas Jefferson and Andrew Jackson; the latter repealed central banking, saying: "You are a den of vipers and thieves. I intend to rout you out, and by the eternal God, I will rout you out."
Inflationism in the US is deeply popular and many groups are enjoying free wealth. Practically all political leaders and academics in the US believe that inflation establishes full-employment and economic prosperity. The 2008 bankruptcy had no impact on such thinking; there is practically no doubt about the soundness of the Fed's escalating debt and money printing.
The Fed is powerfully controlled by inflationists that include the president, the US Congress, academics, and the media. The US is, however, going to be around for the long haul and many generations to come will feel the consequences of the Fed's money printing, financial anarchy, negative interest rates, stock market bulls, wealth redistribution, and economic impoverishment. When there is no law, there is no bread, said Benjamin Franklin.
Noureddine Krichene is an economist with a PhD from UCLA.