Ludwig von Mises Criticized Herr Havenstein, the Governor of the Reichsbank During the Hyperinflation of 1921-1923

In passing under review the German monetary and banking policy from the outbreak of the war to the catastrophe of 1923, the most startling thing is the absolute ignorance even of the most elementary principles of monetary science on the part of literally all German statesmen, politicians, bankers, journalists and would-be economists. It is impossible for any foreigner even to realise how boundless this ignorance was. For this reason, in the last three years of the German inflation, some foreigners came to believe that the Germans ruined their own currency of set purpose in order to involve other countries in their own ruin, and to evade the payment of reparations. Such imputation of secret satanism to German policy does it wrong. The only secret of German policy was Germany's total lack of any acquaintance with economic theory.

Thus Herr Havenstein, the governor of the Reichsbank, honestly believed that the continuous issue of new notes had nothing to do with the rise of commodity prices, wages, and foreign exchanges. This rise he attributed to the machinations of speculators and profiteers and to intrigues on the part of external and internal foes. Such indeed was the general belief. Nobody durst venture to oppose it without incurring the risk of being denounced both as a traitor to his country and as an abettor of profiteering. In the eyes both of the public and of the rulers the only reason why monetary conditions were not healthy was the lamentable indulgence of the Government in regard to profiteering. For the restoration of sound currency nothing else seemed to be necessary than a powerful suppression of the egotistic aims of unpatriotic people.

—Ludwig von Mises, “The Great German Inflation,” Economica, no. 36 (May 1932): 228-229.

Socialists Soon Recognized that a Result of Punitive Measures Against the Black Market Was an Increase in the Profits from It

Our politicians, blinded by their Étatist illusions, believe that the urban population is entirely dependent upon whatever is supplied to them by the state sector. That may be true for public employees without a second income and for many pensioners, to the extent that they are not supported by food supplements provided by relatives in the countryside. It is completely erroneous as far as the majority of the population is concerned. Rationed food items do not supply enough nutrition to sustain bodily functions in an adult at rest. Anyone who must restrict himself to what the government provides and what is offered in public food kitchens is doomed to a slow death from starvation. Expenses for rationed food items and prepared meals in war kitchens do not at this point use up the entire income of the workers. Any money left over finds its way into the black market. The masses live on what their black market purchases provide, and as soon as they can no longer obtain food supplies from the black market with crowns, they will be faced with a very difficult situation.¹¹

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¹¹ Following the collapse of the Austro-Hungarian Empire and the declaration of German-Austria as an independent republic in November 1918, the provincial authorities took increasing power over political and economic affairs in their jurisdictions, including restrictions on the sale and shipment of food supplies out of their areas to Vienna, leading to near-starvation conditions in the capital city through all of 1919 and into 1920. See Chapter 9, “Vienna’s Political Relationship with the Provinces in Light of Economics.” The black market became the only avenue for many in Vienna to acquire many of the essential items of life; see Charles A. Gulick, Austria: From Habsburg to Hitler, Vol. I (Berkeley: University of California Press, 1948), pp. 90–92:

Closely connected with the problem of state particularism [provincial political and economic nationalism] were the important Schleichhandel or black market difficulties; indeed, the restrictive policies of the [provinces] rendered that trade possible. And because of the desperate food shortage it became the most thriving “business enterprise” of Austria. The number of persons engaged in it, in defiance of law and decrees both of central and [provincial] governments, was naturally never statistically ascertained, but must have amounted to many thousands. . . . Despite their support for laws and ordinances on the matter, the Socialists soon recognized that a major result of punitive measures against the black market was an increase in the profits from it. The consumer needed commodities so badly that he had to buy them at almost any price; consequently, he was generally prepared to pay for the greater risks of the profiteer and his higher costs, that is, bribes, entailed by the prohibitive measures. . . . Specifically, the black market became a source of income for many official circles in the [provinces], for the bribes willingly paid by the profiteer were a welcomed addition to the lean wages of the civil servants. Thus the state bureaucracy had a special reason for supporting the system of trade restrictions which, as already noted, rendered the illicit trade possible.

—Ludwig von Mises, “On the Actions to Be Taken in the Face of Progressive Currency Depreciation,” in Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression, ed. Richard M. Ebeling, vol. 2 of Selected Writings of Ludwig von Mises (Indianapolis: Liberty Fund, 2002), 51, 51-52n11.

Adolf Hitler Is the Foster-Child of the Great German Inflation and the Depreciation of the Mark from 1914 to 1923

The depreciation of the mark of 1914-23, which is the subject of this work, is one of the outstanding episodes in the history of the twentieth century. Not only by reason of its magnitude but also by reason of its effects, it looms large on our horizon. It was the most colossal thing of its kind in history: and, next probably to the Great War itself, it must bear responsibility for many of the political and economic difficulties of our generation. It destroyed the wealth of the more solid elements in German society: and it left behind a moral and economic disequilibrium, apt breeding ground for the disasters which followed. Hitler is the foster-child of the inflation. The financial convulsions of the Great Depression were, in part at least, the product of the distortions of the system of international borrowing and lending to which its ravages had given rise. If we are to understand correctly the present position of Europe, we must not neglect the study of the great German inflation. If we are to plan for greater stability in the future, we must learn to avoid the mistakes from which it sprang.

—Lionel Robbins, foreword to The Economics of Inflation: A Study of Currency Depreciation in Post-War Germany, by Costantino Bresciani-Turroni (London: George Allen and Unwin, 1937), 5.

During the Reign of Terror, Ceilings on Grain Prices Were Ridiculously Low and Enforced by the Guillotine

As with many hyperinflationary episodes, the French government attempted to implement price and exchange controls. In 1793, an exchange control known as “the Law of the Maximum” was enforced, decreeing that “any person selling gold or silver coin, or making any difference in any transaction between paper and specie, should be imprisoned in irons for six years; that anyone who refused to accept payment in assignats, or accepted assignats at a discount, should pay a fine of six thousand francs and suffer imprisonment for twenty years in irons” (Hamilton, 1977, p. 277). Hamilton (1977) also comments on the failure of the price controls during the French episode, and he observes that during the Reign of Terror (1793–1794), ceilings on grain prices were ridiculously low and effectively enforced by ruthless use of the guillotine. Although sales above the price ceilings seldom occurred, the authoritarian regime failed miserably in its efforts to force holders of grain to sell.

—Jayson Coomer and Thomas Gstraunthaler, “The Hyperinflation in Zimbabwe,” Quarterly Journal of Austrian Economics 14, no. 3 (Fall 2011): 336-337.

Fashioned after Communist Movements in Cuba and the USSR, Zimbabwe’s Government Retained Its Revolutionary Flavor

Ideological governments tend to fight what is beyond their control, in particular the free market. Once policies are implemented that interfere with these forces, the market will continue to react. More often than not, the forces of the free market do not simply cease their existence, but rather find different ways to manifest themselves.

Zimbabwe’s government had sprung from guerrilla roots and its ideology still retained its revolutionary flavor. Fashioned after the communist movements in Cuba and the Soviet Union, the military influence in politics was huge. Communist ideas were behind the attempt to restore a “balance” of power and economic wealth, away from the white colonial minority, and toward the indigenous majority. 

The forceful dispossession of the landowners followed a similar logic as so many dispossession waves before. The move toward indigenization is similar to the Communist nationalization in the Soviet Union. In mid-1918, the Communists nationalized all large factories, banned private trade and appropriated goods and resources from the rich and the middle-class (Fischer, 1994). The dispossession was depicted as a necessary act to achieve a greater good in society. Yet, it was also the beginning of the Soviet Union’s hyperinflation. . . . 

High inflation can also be used as a tool to speed up the achievement of a perceived equality of the “classes.” Lenin is said to have looked to the debauching of a country’s currency as the best way to the overthrow capitalism (Keynes, 1920). Through a prolonged period of inflation, a government can confiscate the wealth of its citizens. This potential to use money creation to enforce a communist ideology was seen in the Soviet Union hyperinflation. “The new regime had a clear desire for rapid inflation to wipe out the middle classes and speed the revolutionary cause” (Capie, 1986, p. 128). The drastic depreciation of the rouble was justified by the Soviets as a method of expropriating the bourgeoisie (Maier, 1978). A similar event happened in Hungary, when the Soviets overruled the Hungarian Central Bank’s objection to the vast numbers of Treasury Bills being issued (Capie, 1986).

—Jayson Coomer and Thomas Gstraunthaler, “The Hyperinflation in Zimbabwe,” Quarterly Journal of Austrian Economics 14, no. 3 (Fall 2011): 333-334.