illusionary wealth – A House Rises

by Jens O. Parsson, published 1974, 2011

The collapse of a monetary regime

The following note outline was rescued from my personal document archive. The outline consists of a summary of Jen O. Parsson’s classic tale of monetary woe, Dying Of Money. Parrson catalogued two mass inflation events in modern Western history– the German post-war hyperinflation and the US monetary boom of the 1960s and 70s which culminated in the abrogation of the gold-exchange mechanism by Nixon in 1971; both are instructive for different reasons.

Dying Of Money

Prologue: The German Inflation of 1914-1923
1. The Ascent
  1. “Disastrous prosperity”
    1. old mark had been worth 23 US cents; written off at 1T old marks to one new mark at end of inflation
    2. all the marks in the world in summer of 1922 (190 billion) were not enough to buy a newspaper or tram ticket in November 1923
    3. first 90% of Reichsmark’s real value had been lost before the middle of 1922
    4. inflation cycle: gestation of 8 years, collapse of 1 year
  2. The beginning
    1. summer of 1914, Germany leaves gold standard, runs up debt, prints money in anticipation of WWI
    2. war financed through issuance of new debt (war loans) paid for with newly printed currency
    3. domestic prices slightly more than doubled by the end of the war in 1918, even though money supply increased more than 9x
    4. 1919, Germany sees violent price increases of 17x prewar level
    5. other nations, including WWI victors, stop spending and suffer recession 1920-1921; Germany continues printing and experiences a boom while prices stabilize for fifteen months between 1920 and 1921, money supply doubles again
  3. Benefits of the inflationary boom
    1. Exports thriving
    2. Hordes of foreign tourists
    3. New fortunes minted overnight
    4. Berlin becomes one of the brightest capitals in the world
    5. Great mansions of the new rich in abundance
    6. City life took on a wanton, careless manner
    7. Frugality absent as no one took time to search for real value
  4. Losers of the inflationary boom
    1. Crime rate soared
    2. Unionized workers kept up with inflation while non-unionized fell behind
    3. Salaried and white-color workers lose purchasing power even as unemployment virtually disappears
    4. Total production rose
  5. Paradoxical wealth and poverty
    1. much employment in “spurious and unproductive” pursuits
    2. paperwork and paperworkers abounded
    3. government employment grew, heavy restraints against layoffs and discharges kept redundant employees on payroll
    4. incessant labor disputes and collective bargaining consumed time and effort
    5. business failures and bankruptcies were few
    6. almost any kind of business could make money
  6. Speculative fever
    1. speculation became one of the largest activities
    2. fever to buy and sell paper titles to wealth was enormous
    3. volumes on Berlin Bourse were so high that, even with bloated back-office staff, Bourse was closed several days a week to work off the backlog
    4. capital goods and industrial construction industry experience a boom, many new factories built all while neighboring countries continued using old equipment
    5. M&A, takeovers and proxy fights in vogue
    6. massive conglomerations of non-integrated businesses took place; these businesses and the “kings of inflation” disappeared after the collapse
2. The Descent
  1. Price increases catch-up with money printing
    1. From July 1921, prices double in next four months and increase 10x through summer of 1922
    2. consumers put on “buyer’s strikes” that are fruitless
    3. interest rates soar as lenders attempt to anticipate inflation
    4. businessmen transact in gold or constant-value clauses or foreign currency
    5. government’s budget deficits close to balance; nonetheless, government is only able to refinance existing debt through money printing
  2. Final moments
    1. July 1922, prices rise 10x in four months, 200x in 11 months
    2. near end in 1923, prices nearly quadrupling each week
    3. prices raced so far ahead of printing that the total real value of all Reichsmarks in the world was smaller than ever
  3. The end of the inflation
    1. August 1923, government of Wilhelm Cuno falls; October 1923, Gustav Streseman made chancellor, given dictatorial powers, hires Dr. Hjalmar Schacht as commissioner of new Rentenmark (“investment mark”)
    2. Rentenmark placed in circulation beside mark with the avowal that Rentenmark’s would not be inflated
    3. Germans believed it, and Rentenmarks supply was held constant
    4. November 15, 1923: final exchange rate, 1T mark: 1 Rentenmark
    5. Government budget balanced by finance minister Dr. Hans Luther
  4. The fallout of the collapse
    1. Schacht orders end of credit from Reichsbank April 7, 1924; credit squeeze ensues; price increases halt
    2. Savings destroyed
    3. Inflationary boom businesses go bankrupt
    4. Credit nearly impossible to get
    5. Unemployment temporarily skyrockets
    6. Govt spending slashed, govt workers dismissed, taxes raised
    7. Working hours increase, wages cut
    8. Millions of voters join Communist and Nazi parties in the “inflation Reichstag” of May 1924
  5. Economic recovery
    1. New elections in December 1924 erase extremist party gains
    2. business recovery based upon foreign loans due to German credit tightening; world depression of 1929 knocks debtor Germany down
3. Gains and Losses
  1. Debtors: winners
    1. every contract or debt fixed in marks was paid off in worthless marks
    2. Germany’s total prewar mortgage indebtedness, equal to 40 billion marks or 1/6th of total German wealth, worth less than one American cent after the inflation
    3. Savers and owners of mark wealth (bank accounts, savings, insurance, bonds, notes) lose out big
    4. those who borrowed up until the last minute to buy assets turned out to be winners
  2. German Govt: winner
    1. Largest debtor
    2. Entirely relieved of crushing war debt, representing cost of war, reconstruction, reparations and deficit-financed boom
    3. beware being a creditor when the government is a huge debtor
  3. Farmers: winners
    1. always had food
    2. farms were constant values
    3. mortgages were forgiven outright
  4. Foreign owners of marks and other losers
    1. Germany made a profit of 15 billion gold marks, or 40% of annual national product, on sale of paper marks to foreigners, after deduction of reparation payments
    2. Trustees, forced by law to own fixed obligations, lost
    3. Wealthy Germans invested in marks lost
    4. Great charitable institutions wiped out
    5. Banks and insurance companies were weakened but not destroyed (they are both lenders and borrowers)
    6. Sound business survived, but in a weakened state, boom businesses wiped out
  5. Industrial stocks
    1. height of the boom, astronomical P/E ratios
    2. dividends cancelled
    3. stock prices increase 4x from February 1920-November 1921
    4. Stock market crash of December 1, 1921, in the middle of inflation
      1. prices fell by 25% and hovered for 6 mos while other prices were soaring
    5. real value of stocks decline because their prices lagged behind the price of tangible goods
      1. Entire stock of Mercedes-Benz valued at price of 327 cars
    6. near end of 1923, stocks skyrocket again as investors realize that stocks have value even when bonds do not and have a claim to underlying real value
4. Roots of the inflation
  1. Prices contained by faith
    1. Germans and foreign investors, until 1922 and the brink of collapse, absorbed the Reichsmark
    2. faith was in the idea that an economic giant like Germany could not fail
    3. willingness to save marks kept them from being dumped immediately back into the markets
    4. realization that Germany would not back the money was the moment the dam let loose
  2. Balance of payments
    1. More cheap Reichs flowed out than hard money came in
    2. This despite constantly rising exports and constantly falling imports
    3. payment deficit actually muted price increases by keeping Reichs outside of German markets
    4. Reversal of payments deficits marked the proximity of the end
    5. in collapsing stages, Germany ran a huge payments surplus
  3. Foreign exchange rate
    1. unlike era after WWII, free and uncontrolled “float” of forex
    2. German mark almost always falling and almost always had a lower forex value than its purchasing power within Germany
    3. Thus, forex rate proved a quicker and more sensitive measure of inflation than internal prices
    4. German exports were abnormally competitive on world markets due to forex vs. internal purchasing power discrepancies
    5. Germany lost 10 billion gold marks, or 25% of a year’s national product, on underpriced exports due to inflation
5. The Great Prosperity of 1920-1921
  1. March 1920-December 1921
    1. prices stable
    2. businesses and stock market booming
    3. exchange rate of mark against $ and other currencies rose for a time, was momentarily strongest in the world
    4. ROW enduring severe recession; Germany envy of the world
  2. Reign of finance minister Matthias Erzberger, June 1919
    1. Raised taxes on capital; real tax yield of 1920 highest of any year from beginning of war to end of inflation
    2. tight money induced for an extended period in late 1919; only time money supply stopped rising for more than a month or so
    3. March 1920, price level was 17x prices of 1914, roughly equal to increases in money supply, new equilibrium reached
    4. Price increases halted for nearly a year, real burden of war debt had been cut by 5/6ths as a result of price increases of 1919
    5. March 12, 1920, Erzeberger exits govt, disgraced after a libel suit, and his pro-inflationary rivals take over
    6. March 1920 is the month prices stop rising, but with Erzeberger’s exit, the boom prosperity begins
      1. prices remain passive
      2. exchange value of Reichsmark rises
      3. stock market rises 3x before crashing in December 1921
      4. Reichsbank doubles over next year into summer of 1921 when price increases catch up
6. The Lessons
  1. Unrealized depreciation
    1. built upon faith in the German economy to recover
    2. built upon faith in German government to make good on debts
  2. Booms
    1. built upon increasing rates of inflation
  3. Hitler and extremists thrive in wild, inflationary conditions
    1. Hitler’s putsch was in the last and worst month of the inflation
    2. totally eclipsed when economic conditions improved
    3. took power through elections during another economic period of trouble
    4. middle class voters wiped out in the inflation moved to the extremes in polling, bolstering Hitler and others
ACT ONE: The Rise of the great American Inflation
1. The War
  1. Dollar lost 70% of its value from 1939-1973, prices rose 3.5x
  2. Seven years of WWII, Federal debt increased to $269B
    1. 1/4th greater than the annual gross product of the country at that time
    2. money supply grew by 3.5x between 1939 and 1947
    3. June of 1946, prices had increased by less than half from 1939
      1. price controls
      2. new money was absorbed by the issuance of war debt rather than bidding for consumer goods
      3. many saved money during the war for “safety” rather than spent it
      4. low money velocity resulted
    4. real value of dollar at the end of the war was 2/3rd what it had been at start of war
    5. government stopped inflating, allowed price increases to reach new equilibrium
  3. Prices controls end 1946
    1. prices double from levels in 1939 in two years
  4. Money supply held stable 1947-1950; prices remain stable as well
    1. economic recession 1949
  5. Comparisons: German war inflation vs. US war inflation
    1. American war debt of $269B, about 1.25x annual national product; Germany 153B marks, about 1.5x annual national product
    2. American monetary inflation, 3.5x; German 25x
    3. American price inflation 2x; German 17x
    4. Ratio of monetary to price increases about the same, 60%
2. Grappling with Stability
  1. Korean War, 1950
    1. Federal budget did not run a deficit fighting the war
    2. money supply increases by 16%; prices increased 13%
  2. Eisenhower administration
    1. money supply increased 1% per year on average from 1953-1962; wholesale prices never varied +/-1% from 1958-1964
    2. “monetary oscillations”
      1. 1953-1954, money growth <1%, recession
      2. 1954-1956, money growth 3.9%pa, boom and price inflation
      3. 1957, money supply contracts, followed by recession
      4. 1958-1959, inflation
      5. 1959-1960, contraction
      6. 1961, inflation
      7. 1962, contraction
3. The Great Prosperity of 1962-1968
  1. intense monetary inflation beginning 1962
    1. 4.6% per annum for 43 months (through April 1966)
    2. 7.2% per annum for 27 months (January 1967-April 1969)
    3. total inflation over seven years was 38%, interrupted only by the 9month period of no expansion in 1966, accompanied by stock market collapse and economic recession by no effect on prices
    4. combined with an investment tax credit of 7% for businesses to spend on new capital assets, leading to exaggerated investment boom
    5. prices did not keep up, leading to “unrealized price inflation”, despite rising at nearly 5% per annum for the seven year period
4. The Inflationary Syndrome
  1. economic effects from 1962-1968
    1. gross national product increased $360B, or 7% per annum, compared to 4.8% per annum during Eisenhower years of 1955-1960
    2. unemployment continually decreased
    3. stock market was almost constantly rising for more than 6 years
  2. speculative effects
    1. high stock market volumes, huge capital gains appreciation, large paper profit generation
    2. conglomeration and merger of big business
    3. most wage growth in the speculative class of paper-pushers
    4. overinvestment in capital goods
    5. IBM, Xerox (back-office service/goods companies) were the investment darlings of the era
    6. overproduction and stimulation of the growth of educational and legal industries
  3. foreign exchange and the balance of international payments
    1. current account deficits are a symptom of inflation
      1. when there is excess money in one country it flows out to other countries
      2. the currency in the inflationary country is overpriced relative to world markets, so it goes out and buys imports
    2. current account deficits reduce price inflation in the inflationary country because the currency bids up prices in foreign rather than domestic markets
    3. dollars held by foreigners returning to the US at the point that the current account turns to a surplus, would result in price inflation in the US
INTERLUDE: The General Theory of Inflation
1. Prices
  1. prices in aggregate are determined by total amount of money availble for spending in a given period of time, in relation to total supply of all values available for purchase with money in that period of time
  2. money supply defined as that which people use to buy things of value with, but which is not a thing of value itself (dollars, coins, checking account deposits)
  3. money available per unit of time, aka money velocity, also a factor, but it is hard to measure or determine
  4. price level = money quantity x money velocity / supply of all real values
  5. this is the quantity theory of money
2. Real Values
  1. in an inflation, there are many “spurious values” which disguise and conceal the inflation of prices of real values
  2. real wealth consists of land, resources, productive plant, durable goods and people
  3. paper wealth is not real wealth; money wealth is debt, including money contracts such as bonds, mortgages, debentures, notes, loans, deposits, life insurance and pension obligations
  4. debt does not represent the direct ownership of any real assets but rather subdivision of interests in real assets with the direct owners of the assets
    1. for ex, a man is not part of the total supply of real capital as he can not be bought and sold
    2. however, if this man borrows money, he subdivides ownership of his future productive power and adds himself to the supply of capital assets
    3. if he borrowed from a bank which borrowed from a depositor, further subdivision has occurred
    4. government debt represents a “lien” on the part of the productivity of all citizens
  5. this multiplication and stratification of paper wealth can be increased to many times the size of the real existing wealth
  6. paper wealth structure is all built on faith– issuance of new paper wealth does not result in an increase in real values by itself
3. Government Debt
  1. issuance of government debt increases supply of paper wealth, meaning it is price deflationary
  2. when Fed wants to tighten money, sells govt debt into market, reducing prices
  3. large issues of government debt could not be marketed without a large increase in the supply of money because they’d drive interest rates upward– precisely what govts don’t want; therefore, they’re almost always accompanied by money printing
  4. government surplus is price inflationary; if it is used to pay down debt, it reduces the supply of outstanding values and raises prices
  5. when faith in government debt fails, price inflationary effects will be amplified
4. Interest
  1. lenders accepted negative real rates only because they didn’t realize what they were doing
  2. “the announced intention of Keynesian economics was to effect [the holder of money’s] extinction”
  3. the rich tend to be net debtors in an inflation
  4. inflation is paid for by the lower classes and the creditors
  5. an attack on interest results in a flight from debt to equity, from money wealth to equity/real values
5. The Economics of Disaster
  1. occurs when the holders of money wealth revolt
  2. duller the holders of money are, the longer price inflation can be kept at bay by govt, though the greater will be the eventual breaking of the price dam
  3. desertion of money resembles a panic, sudden and unexpected
  4. people’s ability to discern real and spurious values suddenly becomes acute
  5. people flee paper assets and goods and services for known value like food and land
  6. no government causes collapse, “when at least it sees the choice, it has no choice”
THE LAST ACTS: The American Prognosis
1. Act Two, Scene One: President Nixon Begins

Treasury reduces expenditures and attempts to balance budget, July 1969- June 1970
Fed drops inflation rate in May of 1969 from 8%, 1yr later approx 3.8%
Stock market prices fall by 14% within two months of May 1969, another year later down 31 percent; interest rates rise into spring 1970 credit crunch
Approaching two year mark to next election, government begins pumping money again
1. August 1970, budget deficit plunges to new peacetime lows
2. money inflation of 6.5%
3. interest rates plunge, stock market soars

Act Two, Scene Two: Price Controls and Other Follies
1. worst inflation since the end of WW2 and before 1967
2. economic boom into Nixon’s re-election in 1972
3. boom quickly wears off
  1. stock market falls
  2. interest rates rise to surpass peaks of 1970
  3. price inflation worse than ever, around 4%
  4. cheap dollar floods world markets
4. Nixon announces Phase I of price controls, August 15, 1971
  1. detaches dollar from gold
  2. 10% import surcharge
  3. excise taxes on automobiles removed
  4. wage and price controls
Self-Defense
1. No sure safety, safety will change fluidly through an inflation
2. Best hope is to lose as little as possible
3. fixed money wealth/debt is the absolute worst investment in an inflation
4. foreign money can be safe refuge only if the foreign government inflates less wildly than the domestic government
5. the author shits on gold, but with no reason other than an arbitrary one because he is a Keynesian– gold may be overvalued during and even before and inflation but so long as people continue to think it is money, it can hold some value
6. real estate provides a shelter for REAL value (usability/livability/productivity of land) but could be harmed in terms of investment value in an inflation
  1. real estate held in high esteem by inflationary prosperity (luxury dwellings, overblown commercial developments) may lose more real value than other investments as they started out overpriced in the inflation
7. farmland is a special category of real estate
  1. produces what people must have, inflation or no
  2. farmers thrive and farmland excels in dying throes of every inflation
  3. less prosperous in early stages of an inflation
8. hoarding of useful goods is a possibility, but has large storage, distribution and opportunity costs prior to an inflation
Self-Defense Continued: The Stock Market
1. stock shares are pieces of paper, but they are claims on real assets and real wealth
2. stock market is incredibly liquid
3. common stocks provide returns in first madness of an inflation, then fall into disrepute in middle stages of an inflation
4. a booming stock market is not necessarily part of an economically healthy nation
  1. the opposite is truer: booming stock market is a signal of inflation
  2. falling stock market is a sign of returning to reality
5. the stock market as a whole rises due to inflation and nothing more
6. the stock market declines on a weakening of inflation
7. general business conditions and price inflation operate on a lag; when money is first printed it has nowhere to “work” and goes into investment markets
  1. markets rise while business is still bad
  2. later, as money moves out of the market and into businesses, the market falls
  3. when business is worst, stock markets rise; when business is best, stock markets fall
  4. rising stock market signals nothing but fresh money inflation– it is the earliest and most sensitive signal
8. stocks bought at any price above their real-value bottom are not a hedge against loss but a guaranteed loss
9. conversely, stocks bought at real-value bottoms have a good chance of holding their values through an inflation
10. American stock market’s deflated bottom in 1970 was 43% higher than deflated bottom in 1962, just as money supply in 1970 was about 43% higher than in 1962
11. as other prices outpace stock market rises (or even stock market decreases), fear can take over that the businesses will not be worth anything; but faith will pay off with real value nearly the same at the end of an inflation
12. stock markets can enjoy inflated gains if there are laws in place forbidding the inflationary money to bid up prices elsewhere or in foreign markets
13. the stock market represents real value, but not every stock does
14. inflationary times tend to reward the most valueless stocks; use a “post-inflationary eye” to have a look around at what might actually survive the inflation in terms of real value
15. “Attempting to make profits from the stock market, or even to make sense of it, without completely understanding the universal determinant of inflation was like being at sea among uncharted rocks and shoals without so much as a tide table.”
A World of Nations
1. Virtually all of the entire growth of Federal debt after 1967, $55B, was involuntarily financed and acquired by foreigners
2. by 1973, foreigners’ holdings of liquid dollar debt had risen to $90B from $31B in 1966
3. America exported inflation; other nations imported it– this is the balance of payments deficit
4. natural consequence of an inflation, surplus money must flow outward looking for “cheap” items to buy abroad
5. 100% beneficial to the deficit country
  1. import real value from abroad while exporting worthless paper
  2. price inflation domestically is partially contained
6. central bankers began a game of printing up new local currency to exchange with the inflowing dollars, sending the dollars back to the US where they would be recycled and re-exported
7. exchange rates operate on a time lag
  1. first, the internal price level is too low, so the new currency flows out to the rest of the world
  2. then, the internal price level rises, drawing in currency from the rest of the world
8. the best defense against another country’s inflation, is inflation

Tag: illusionary wealth

Notes – Dying Of Money