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A US $100 bill burns

19 - The Loss of Trust

The economics of disaster commence when the holders of money wealth revolt, getting rid of their money and declining to hold it any longer than necessary to get rid of it. Taking example from the German hyperinflation...

The desertion of money holders has many of the aspects of a panic, like any desertion in the thick of a struggle. A filling of inflationary reservoirs in the capital markets which may have taken years may be emptied in a day.”15

[Money] velocity started to rise with moderate vigour in the summer of 1921, when Germans began to smell a governmental rat, and that signalled the gradual emergence of the latent price inflation. Velocity took an almost right-angle turn upward in the summer of 1922, and that signalled the beginning of the end. An explosive rise in velocity thus accurately marks the point of obliteration of an inflated currency, but it does not cause itself. People cause velocity, and they only cause hypervelocity after prolonged abuse of their trust. The German mark had been undergoing massive dilution for over two years, and the people only at last realized it when they turned on the velocity.”16

The final convulsion when it began was at first bizarre and at last became sheer nightmare. Beginning in July 1922, prices rose tenfold in four months, two hundredfold in eleven months. Near the end in 1923, prices were at least quadrupling each week.”17The worker had to compute his pay in the trillions, carry it in bales, and spent it instantly lest he lose it. The forlorn buyers' strikes of earlier days against the mildly higher prices were no more; in their place the buyers were vying with one another to buy up any kind of goods at any price before their little money could evaporate...Legally "fair" interest rates reached as much as 22 percent per day. The price of a schnitzel dinner might rise 20 percent between giving the order and paying the check.”18

At the end in 1923, the velocity of German money began to approach infinity, because paper bills could easily change hands hourly or faster and practically did.”19Finally, the government finds itself deprived of its inflationary tax while its regular taxes yield little, and it resorts to still more money inflation as a means of finance. In so doing, the pathetic government trails far in the dust of the fleeing citizenry.”20In October 1923 it was noted in the British Embassy in Berlin that the number of marks to the pound equalled the number of yards to the sun. Dr Schacht, Germany's National Currency Commissioner, explained that at the end of the Great War one could in theory have bought 500,000,000,000 eggs for the same price as that for which, five years later, only a single egg was procurable.21

The unwinding of the inflation will leave a tremendous destruction in its wake and the damage which is done will be permanent for the currencies involved. But those who have read and understood all of the above have power to protect themselves from such a disaster.

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