Friday, February 27, 2009

A big pile of money

When I was in high school, I took a German language class. I was a less than stellar student, but I do remember our teacher, a German immigrant with a strong accent. I remember only a few things from the class, one is to conjugate German personal pronouns, the other was a story our teacher told to us about conditions in Germany before World War II. He said that one day his mother came home and told him to run as fast as he could to the bank, withdraw all of their money and run to the nearest store and buy a pair of shoes.

Our teacher, who was very young at the time, did just as his mother asked him to do, he ran to the bank, an withdrew all of their money, he needed a wheelbarrow to carry all the cash, but he then ran to the nearest shoe store and was just able to purchase a pair of shoes with the cash. When I was in high school I thought the story to be highly improbable, but later studies showed me that this actually happened about 1923. Here are some pictures of the way the money was used. By late 1923 it took 200 billion marks to buy a loaf of bread.

Few, if any, of the current U.S. Government administration have read any of this history or the commonly accepted fact that if the monetary authority chooses to monetize a country's national debt, its banks' bad loans, or the savings of depositors at failed banks, then that country will experience hyperinflation. Germany in 1924 has many parallels to the current conditions in the United States and other countries. For up to date information on the Money Stock Measures in the U.S. from the Federal Reserve Statistical Release, you can see that M2 has steadily increased for the past two years.

M2 consists of M1 plus (1) savings deposits (including money market deposit accounts); (2) small-denomination time deposits (time deposits in amounts of less than $100,000), less individual retirement account (IRA) and Keogh balances at depository institutions; and (3) balances in retail money market mutual funds, less IRA and Keogh balances at money market mutual funds. Seasonally adjusted M2 is constructed by summing savings deposits, small-denomination time deposits, and retail money funds, each seasonally adjusted separately, and adding this result to seasonally adjusted M1. M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler's checks of nonbank issuers; (3) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (4) other checkable deposits (OCDs), consisting of negotiable order of withdrawal (NOW) and automatic transfer service (ATS) accounts at depository institutions, credit union share draft accounts, and demand deposits at thrift institutions. Seasonally adjusted M1 is constructed by summing currency, traveler's checks, demand deposits, and OCDs, each seasonally adjusted separately.

The meaning of the increase in the money supply is controversial. But as George Santayana, stated in his Reason in Common Sense, The Life of Reason, Vol.1, wrote "Those who cannot remember the past are condemned to repeat it." Hopefully, we are not repeating the mistakes made by Germany in the 1920s, but it sure does look suspicious.

1 comment:

  1. At least we're not as bad as Zimbabwe: "At the beginning of November 2008, the inflation rate was calculated to be at 516 quintillion percent (516,000,000,000,000,000,000%). The monthly inflation was 13.2 billion percent. Zimbabwe hyperinflation is estimated to have surpassed post Second World War Hungary's hyperinflation (12.95 quadrillion percent per month, ie. prices doubling every 15.6 hours) by the end of 2008. On January 16, 2009, Zimbabwe issued a $100 trillion bill." (From Wikipedia about hyperinflation).