Monday, September 12, 2011

Unintended Economic Consequences.

From the book Before the Deluge: A portrait of Berlin in the 1920's.

The survivors smile now at the madness of 1923[Ed: Wiemar Hyperinflation], but the destruction of an economy brings considerable suffering to the poor and the helpless, and even though the inflation made everyone poor, it made some people poorer than others. Louis Lochner, who arrived in Berlin during this period and eventually became bureau chief for the Associated Press, got the usual first impression of "cafe's crowded with stylishly garbed ladies" but soon found a different story on the side streets off the fashionable boulevards. "I visited a typical Youth Welfare Station," he said later. "Children who looked as though they were eight or nine years old proved to be thirteen. I learned that there were then 15,000 tubercular children in Berlin; that 23 percent of the children examined by the city health authorities were badly undernourished." The old were equally helpless. One elderly writer named Maximilian Bern withdrew all his savings, more than 100,000 marks, and spent them on one subway ticket. He took a ride around Berlin and then locked himself in his apartment and starved to death. "Barbarism prevailed," said George Grosz. "The streets became dangerous. . . . We kept ducking in and out of doorways because restless people, unable to remain in their houses, would go up on the rooftops and shoot indiscriminately at anything they saw Once, when one of these snipers was caught and faced with the man he bad shot in the arm, his only explanation was, 'But I thought it was a big pigeon.'"

The fundamental quality of the disaster was a complete loss of faith in the functioning of society. Money is important not just as a medium of economic exchange, after all, but as a standard by which society judges our work, and thus our selves. If all money becomes worthless, then so does all government, and all society, and all standards. In the madness of 1923, a workman's work was worthless, a widow's savings were worthless, everything was worthless. "The collapse of the currency not only meant the end of trade, bankrupt businesses, food shortages in the big cities and unemployment according to one historian, Alan Bullock. "It had the effect,which is the unique quality of economic catastrophe, of reaching down to and touching every single member of the community in a way which no political event can. The savings of the middle classes and the working classes were wiped out at a single blow with a ruthlessness which no revolution could ever equal.... The result of the inflation was to undermine the foundations of German society in a way which neither the war, nor the revolution of November, 1918 nor the Treaty of Versailles bad ever done. The real revolution in Germany was the inflation." [Ed]

"Yes, the inflation was by far the most important event of this period," says a seventy-five-year-old journalist, a woman who still lives in Berlin. She is white-haired and rather large, and she nibbles cookies as she talks, forgetting that it is already two in the morning. "The inflation wiped out the savings of the entire middle class, but those are just words. You have to realize what that meant. [Ed]There was not a single girl in the entire German middle class who could get married without her father paying a dowry. Even the maids-they never spent a penny of their wages. They saved and saved so that they could get married. When the money became worthless, it destroyed the whole system for getting married, and so it destroyed the whole idea of remaining chaste until marriage.

"The rich had never lived up to their own standards, of course, and the poor had different standards anyway, but the middle class, by and large, obeyed the rules. Not every girl was a virgin when she was married, but it was generally accepted that one should be. But what happened from the inflation was that the girls learned that virginity didn't matter any more. The women were liberated."
(Before the Deluge, Otto Friedrich)

I don't imagine that there has been an economics textbook which has linked the supply of money with the promotion of chastity, and yet in 1920's Germany it did have an effect. The economic theory of the time did not predict it, neither would it predict it today. But that's what happens when a specialty takes too reductionist a view of it's operation. It's not just about prices and efficient capital allocation, it's also about people.