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April 21st, 2009
A nation's currency, like its language, is an abstraction. There is a cultural agreement as to its meaning - in the case of money, an agreement that it represents a unit of wealth.
Inflation is an assault on that assumption. When the assumption no longer holds, the social contract is broken and a civilization begins to cleave at the seams. As Calvin Coolidge once said, "Inflation is repudiation."
In The Penniless Billionaires, Max Shapiro studies four periods of extreme inflation in the past and, from there, proceeds to a sobering examination of the present inflation-prone milieu.
Governments fell as a result of three of the bouts of hyperinflation that Mr. Shapiro surveys - in Imperial Rome, Revolutionary France and Weimar Germany. His fourth case was a tamer strain of inflation, during Civil War America, and it was eventually snuffed out by stopping the flood of greenbacks into the economy.
This is history through the monetary prism, laced with anecdote, for the layman - an engaging narrative. Mr. Shapiro has limned the history books, accounts of archaeological digs and Government reports, but presents his subject as a tale, not a text.
In a preliminary treatment of inflation in antiquity, for instance, we learn that Alexander the Great, the controversy about his drinking habits notwithstanding, pursued a monetary policy of considerable restraint. At least he did until near the end of his reign when, largely to pay for his military exploits, he threw a flood of coins into circulation. A wild inflation broke out, one that was still raging when Alexander died of fever and exhaustion in 323 B.C.
To illustrate the mind-numbing inflation of Weimar Germany, Mr. Shapiro presents the example of Lotte Hendlich, a German widow who returned to her homeland in the autumn of 1923 after a few years in Switzerland recovering from tuberculosis.
In the autumn of 1923, Lotte Hendlich, a German widow in her fifties, returned to her native Frankfurt after an absence of more than four years in Switzerland.
In 1919 she had gone to spend a few pleasant weeks in a Swiss village where her relatives lived. But almost immediately, Frau Hendlich broke her hip in a fall. During her long convalescence her chronic cough became worse, and the doctor attending her advised her that she was suffering from advanced tuberculosis. The months and years of her illness dragged on interminably even though her relatives were genuinely solicitous (they insisted on defraying all her expenses, including the fees of the doctor). At last, in September 1923, she was "cured" and considered well enough to return home.
Her much longed-for homecoming soon became a nightmare.
In the stack of accumulated mail she found three letters from her bank; they delineated her ruin.
The first -- written in mid 1920 by a minor bank officer who had befriended her -- advised her "to invest most of the funds in your rather substantial bank account" (amounting to over 600,000 marks, or the equivalent of more than $70,000 at the exchange rate prevailing in 1919 -- nearly $1,000,000 by today's standards). "It is my judgment," the writer continued, "that the purchasing power of the mark will decline, and I suggest you try to guard against this through some suitable investment which we can discuss when you come into the bank."
The next letter, dated in September 1922, and signed by another officer, said, "It is no longer profitable for us to service such a small account as yours. Will you kindly withdraw your funds at the earliest opportunity?"
The third letter, dated several weeks before her return from Switzerland, announced, "Not having heard from you since our last communication, we have closed out your account. Since we no longer have on hand any small-denomination bank notes, we herein enclose a note for one million marks."
With gathering panic, Frau Hendlich looked at the envelope that had contained the letter and the million-mark note. She noticed that affixed to it there was a cancelled postage stamp of one million marks. Her bank account -- which four years before seemed large enough to provide here with serene existence to the end of her days -- had been utterly consumed by inflation and could no longer pay for an ordinary postage stamp.
In history's eras of rampant inflation, Mr. Shapiro writes, the details differ with time and place, but the basic script is the same. In each episode, the government was well aware of the danger of inflation. Yet faced with some emergency, usually a war or social unrest, the government sped up the economy; its spending far exceeded its revenues (tax increases were shunned), while the money stock was swelled enormously.
Each time, the first decision to inflate the economy made sense: the prospect of inflation was preferable to the present danger of war or revolution. However, once the printing presses are set rolling, it becomes difficult to slow them. A principal reason, Mr. Shapiro contends, is that there is inevitably a ''net of vested interests'' that amass great wealth, thanks to inflation, and exercise their influence to keep it going.
The net of vested interests is made up of industrialists, entrepreneurs, professional investors and bankers. Simply put, they can obtain credit to buy assets -- real estate, factories, gold -- with currency and then pay off their loans later with vastly depreciated paper money. They have the ante to play the wealth-grabbing game, while the middle class is ''stretched daily on the rack of inflation,'' as the Austrian author Stefan Zweig wrote of Weimar.
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