4 Finance Essay Questions

INFLATIONARY CULTURE:

STEFAN ZWEIG'S WORLD OF YESTERDAY

The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists. Ernest Hemingway

Notes on the Next War

Introduction

Inflation in the twentieth century has become the object of social and literary, as well as economic analysis,

as suggested by the quotation above. Like other economic crises, inflation produces severe hardship and

political instability, creating in turn vast human tragedies. Thus severe economic conditions disrupt social

and political, as well as financial and commercial life. It is the human element of these crises that has

attracted writers such as Hemingway and Stefan Zweig. Yet unlike the garden variety recessions and

unemployment, or even "moderate" inflation, hyperinflation--the accelerating and uncontrolled explosion in

the money supply and prices-- creates a particularly devastating and lasting effect on a nation's psyche.

The German experience with hyperinflation in 1923 eroded the German people's confidence in the Weimar

Republic and paved the way for Hitler's rise to power. Yet even after the second world war, the memories

of the 1923 hyperinflation created a strong and typically German aversion to inflationary policies, even

those "moderately" excessive monetary policies that became a common tool of stabilization measures

among governments in the wake of the "Keynesian Revolution." In terms of its historical impact, the

German hyperinflation can be compared only with the Great Depression for leaving its mark on current

economic policy. The main channel of its influence is the Exchange Rate Mechanism (ERM) of the

European Community, which is dominated by German monetary policy.

In 1922, the exchange rate of the German mark was 70 marks per U.S. dollar. By November 1923, the

mark was trading at 4.2 trillion marks to the dollar. In a six-month period from May to November 1923,

the annual inflation rate in Germany was 1.3 trillion percent. The causes of this incredible situation have

been the subject of much economic study, but in general it was the punitive burden of war reparations

imposed upon Germany after world war I that lay at the root of the crisis. The German economy had been

severely weakened by the war and its aftermath; as a result the economy could not generate output

sufficient to meet the requirements of the reparations demanded by the victorious allies. Unable under

these conditions to borrow or to collect more taxes, the government turned to the printing presses to meet

its obligations. A vicious circle of political instability, rapidly declining confidence in the mark, and

greater expansion of the money supply followed, exacerbated by events such as the assassination of

German foreign minister Walther Rathenau in June of that year, described by Zweig below. The crisis

finally ended in November 1923 with the currency reform implemented by Gustav Stresemann, but the

damage to the credibility of the Weimar Republic was irreparable and the trust in its democratic institutions

was broken. The coming of the next economic crisis, the Great Depression, left the way open for Hitler to

seize power.

Stefan Zweig was born in Vienna in 1881. His literary career focused on biographies and literary and

psychological portraits of historical figures such as Erasmus and Dostoyevsky, but also generated poetry,

essays, drama and novels. In his writings one senses above all else a cosmopolitan dedication to European

culture; Zweig was steeped in the literary traditions of Austria, Germany and France (he also translated

literary works from French into German). Like many German and Austrian Jewish intellectuals of his time,

however, he was forced to leave his homeland by Hitler's racial policies. This separation from his cultural

and literary roots proved to be devastating to Zweig. He finally settled during the war years in Rio de

Janiero and managed to continue his writing, but under the increasing burden of psychotic depression. His

last work, a memoire entitled The World of Yesterday, recalls the Europe of the early twentieth century and

the events that destroyed it. In a sense they also destroyed Zweig. Just after mailing the final manuscript to

his publisher in New York in 1942, Zweig and his wife carried out a suicide pact that had evidently been

planned for months. The following passages represent both his observations on the role of inflation in the

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crumbling of political and moral institutions, and his final tribute to the civilization that he longed for

during his exile.

In the first passage, Zweig describes the famine and inflation immediately following the first world war in

Austria. The second passage begins with a description of the news of Rathenau's assassination in June,

1923, which helped to trigger the political instability that fueled the hyperinflation of that year.

THE WORLD OF YESTERDAY

by Stefan Zweig

(New York: Viking Press, 1943)

The Austrian Inflation

Every descent into the town at that period was a moving experience; it was my first sight of the yellow and

dangerous eyes of famine. The bread crumbled into black particles and tasted like pitch and glue, coffee

was a brew of roasted barley, beer like yellow water, chocolate like colored sand and the potatoes were

frozen. Most people raised rabbits, in order not wholly to forget the taste of meat; a young lad shot squirrels

in our garden for his Sunday dinner and well nourished dogs or cats returned only seldom from lengthy

prowls. Such textiles as were for sale were no more than specially treated paper, ersatz for an ersatz; men

crept about almost always dressed in old uniforms--even Russian uniforms--which they had obtained from

some depot or hospital and in which more than one had already died; trousers tailored from old sacks were

not uncommon. Every step through the street, where show-windows had a plundered look, where decaying

houses shed crumbling mortar like scurf, where visibly undernourished people painfully dragged

themselves to their work, served to trouble one's soul. Out in the country the food situation was better; no

peasant-farmer allowed himself to be influenced by the general breakdown of morale to sell his butter,

eggs, or milk at the legally prescribed "maximum prices." He concealed his goods wherever he could and

waited at home for the highest bidder. This procedure gave rise to the "black market." A man would set off

with an empty bag or two and go from farm to farm, sometimes even taking the train to particularly

productive illicit sources of provisions which he would then peddle in town at four and five times the cost

price. ln the beginning the peasants gloated over the shower of paper money for which they had sold their

butter and eggs, and which made them profiteers. However, when they brought their bursting wallets to

town to make purchases, they discovered to their exasperation that while they had merely quintupled

normal prices, the scythe, the hammer, the kettle which they had come to buy had meanwhile risen twenty

or fifty times in price. Thereafter they sought to exchange only for manufactured goods and demanded

substance for substance, merchandise for merchandise; mankind with its trenches having been content to

retrogress to cave-dweller times, it now dissolved the thousand-year-old convention of money and reverted

to primitive barter. The whole country was seized with a grotesque traffic. The city dwellers hauled out to

the farms whatever they could get along without-- Chinese porcelain vases and rugs, sabers and rifles,

cameras and books, lamps and ornaments--thus, entering a Salzburg peasant's home, one might be surprised

by a staring Indian Buddha or a rococo book case with French leatherbound books of which the new

owners were particularly proud. "Genuine Leather! France!" they bragged impressively. Substance,

anything but money, became the watchword. There were those who had to take their wedding ring from

their finger or the leather belt from around their body merely to keep that body alive.

Finally the authorities interfered to stop the subversive trade in the execution of which none but the well-to-

do derived benefit; in every province cordons were thrown around key points and illicit goods arriving by

train or bicycle were confiscated for the benefit of the municipal food offices. The hoarders responded by

organizing nightly deliveries by lorry with Western desperado accompaniment or by bribing inspectors,

themselves the fathers of hungry children; sometimes there were real battles with revolvers and knives

which these youths, after four years of practice at the front, knew how to use just as well as they knew the

approved military way of finding cover when in flight. The chaos grew from week to week, the population

became more excited. The progressive devaluation of money became increasingly manifest. The

neighboring states had substituted their new currency for the old Austro-Hungarian notes, thus saddling

tiny Austria with the main burden, more or less, of redeeming the old krone. The first sign of distrust was

the disappearance of hard money, for people tended to value a bit of copper or nickel more highly than

mere printed paper. The government did its best to get maximum note production from the printing presses,

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following Mephistopheles' prescription, but it could not keep pace with the inflation; then every city and

town, eventually every village, began to print its own "emergency money" which neighboring villages

could reject and which, for the most part, was recognized to be worthless and was thrown away. An

economist who knew how to describe graphically all the phases of the inflation which spread from Austria

to Germany, would find it unsurpassed material for an exciting novel, for the chaos took on ever more

fantastic forms. Soon nobody knew what any article was worth. Prices jumped arbitrarily; a thrifty

merchant would raise the price of a box of matches to twenty times the amount charged by his upright

competitor who was innocently holding to yesterday's quotation; the reward for his honesty was the sale of

his stock within an hour, because the news got around quickly and everybody rushed to buy whatever was

for sale whether it was something they needed or not. Even a goldfish or an old telescope was "goods" and

what people wanted was goods instead of paper. The most grotesque discrepancy developed with respect

to rents, the government having forbidden any rise; thus tenants, the great majority, were protected but

property owners were the losers. Before long, a medium-size apartment in Austria cost its tenant less for

the whole year than a single dinner; during five or ten years (for the cancellation of leases was forbidden

even afterwards) the population of Austria enjoyed more or less free lodgings. In consequence of this mad

disorder the situation became more paradoxical and unmoral from week to week. A man who had been

saving for forty years and who, furthermore, had patriotically invested his all in war bonds, became a

beggar. A man who had debts became free of them. A man who respected the food rationing system

starved; only one who disregarded it brazenly could eat his fill. A man schooled in bribery got ahead, if he

speculated he profited. If a man sold at cost price, he was robbed, if he made careful calculation he yet

cheated. Standards and values disappeared during this melting and evaporation of money; there was but one

merit: to be clever, shrewd, unscrupulous, and to mount the racing horse instead of being trampled by it.

To top it all, during the financial whirlwind when Austrians were deprived of every economic yardstick,

certain foreigners recognized how our misery might be made to serve their purposes. The only thing that

remained stable within the land during the three years in which the inflation progressed at accelerating

tempo was foreign currency. Because Austrian money melted like snow in one's hand everyone wanted

Swiss francs or American dollars and foreigners in substantial numbers availed themselves of the chance to

fatten on the quivering cadaver of the Austrian krone. Austria was "discovered" and suffered a calamitous

"tourist season." Every hotel in Vienna was filled with these vultures; they bought everything from

toothbrushes to landed estates, they mopped up private collections and antique shop stocks before their

owners, in their distress, woke to how they had been plundered.

Humble hotel clerks from Switzerland, stenographers from Holland, would put up in the deluxe suites of

the Ringstrasse hotels. Incredible as it may seem, I can vouch for it as an eyewitness that Salzburg's first-

rate Hotel de l'Europe was occupied for a period by English unemployed, who, because of Britain's

generous dole were able to live more cheaply at that distinguished hostelry than in their slums at home.

Whatever was not nailed down, disappeared. The tidings of cheap living and cheap goods in Austria spread

far and wide; greedy visitors came from Sweden, from France; more Italian, French, Turkish and Rumanian

was spoken than German in Vienna's business district. Even Germany, where the inflation started at a much

slower pace even if eventually to become a hundred thousand times greater than Austria's, exploited our

shrinking krone to the advantage of her mark. Salzburg, a border town, afforded me an opportunity to

observe these daily raids. Bavarians from neighboring villages and cities poured into the little town by

hundreds and by thousands. They patronized the tailor, they had their cars repaired, they consulted

physicians and bought their drugs. Munich business men mailed their foreign letters and filed their cables

from Austria so as to pocket the saving in the rates. Then, at the instigation of the German Government, a

border control was established to stop Germans from buying their supplies in Salzburg where a mark

fetched seventy Austrian crowns. Merchandise coming from Austria was strictly confiscated at the custom

house. One article, however, that could not be confiscated remained free of duty: the beer in one's stomach.

And the beer-drinking Bavarians would watch the daily rate of exchange to determine whether the falling

krone would allow them five or six or ten liters of beer in Salzburg for the price of a single liter at home.

No more superb enticement could be imagined, and so they would come in hordes with their wives and

children from nearby Freilassing and Reichenhall to enjoy the luxury of gulping down as much beer as

belly and stomach would hold. Every night the railway station was a veritable pandemonium of drunken,

bawling, belching humanity; some of them, helpless from overindulgence, had to be carried to the train on

hand-trucks and then, with bacchanalian yelling and singing, they were transported back to their own

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country. The merry Bavarians did not, to be sure, suspect how terrible a revenge was in store for them. For,

when the krone was stabilized and the mark in turn plunged down in astronomic proportions, it was the

Austrians who traversed the same stretch of track to get drunk cheaply, and the spectacle was duplicated

but this time in the opposite direction. This beer war between two inflations remains one of my oddest

recollections because it was a precise reflection, in grotesque graphic miniature, of the whole insane

character of those years.

The strangest thing is that I cannot recall, however I may try, how we kept house during that era, or in what

manner the Austrians kept on raising the thousands and tens of thousands of kronen and the Germans, in

their turn, the millions which were daily needed to keep body and soul together. Mysteriously enough, they

did raise them. Habits are acquired and the chaos became normal to life. It stands to reason that one who

was not a witness would imagine that, at a time when an egg cost what a fine motor-car used to cost (in

Germany eggs went up to four billion marks, the approximate past value of all the real estate in Greater

Berlin), women must have been running wildly through the streets with tousled hair, that shops were

deserted for lack of purchasing power and that theaters and amusement places were surely empty.

Astonishingly enough, just the opposite was the case. The will to pursue life was great enough to overcome

the instability of the currency. Financial chaos prevailed yet the daily round seemed little affected. There

were widespread individual changes, such as those who had wealth in the form of cash in bank or

government bonds became impoverished, speculators became rich. But the balance-wheel maintained its

rhythm unconcerned with single fates, there was no standstill; bakers baked bread, cobblers made boots,

authors wrote books, peasants sowed and reaped, trains ran on schedule, the morning newspaper never

failed, and it was just the places of entertainment, bars, and theaters, that were filled to capacity. The very

fact that what once represented the greatest stability--money--was dwindling in value daily caused people

to assess the true values of life-work, love, friendships, art and Nature the more highly, and the whole

nation lived more intensively and more buoyantly than ever despite the catastrophe; young people went on

mountain tramps and returned healthily tanned, dance halls kept going until late at night, new factories and

business enterprises sprang up. I don't think that I ever lived and worked with greater zest than in those

years. Whatever had meant much to us in days gone by meant even more now; at no time had we ever been

so devoted to art in Austria as in those years of chaos, because the collapse of money made us feel that

nothing was enduring except the eternal within ourselves.

I shall never forget what an opera performance meant in those days of direst need. For lack of coal the

streets were only dimly lit and people had to grope their way through; gallery seats were paid for with a

bundle of notes in such dcnominations as would once have been sufficient for a season's subscription to the

best box. The theater was not heated, thus the audience kept their overcoats on and huddled together, and

how melancholy and gray this house was that used to glitter with uniforms and costly gowns! There never

was any certainty that the opera would last into the next week, what with the sinking value of money and

the doubts about coal deliveries; the desperation seemed doubly great in this abode of luxury and imperial

abundance. The Philharmonic players were like gray shadows in their shabby dress suits, undernourished

and exhausted by many privations, and the audience, too, seemed to be ghosts in a theater which had

become ghostly. Then, however, the conductor lifted his baton, the curtain parted and it was as glorious as

ever. Every singer, every musician did his best, his utmost, for each had in mind that perhaps it might be

his last time in this beloved house. And we strained and listened, receptive as never before, because

perhaps it was really the last time. That was the spirit in which we lived, thousands of us, multitudes, giving

forth to the limit of our capacity in those weeks and months and years, on the brink of destruction. Never

have I experienced in a people and in myself so powerful a surge of life as at that period when our very

existence and survival were at stake.

*******

Germany: The Hyperinflation

On that day [in June, 1923], I was already in Westerland. Hundreds of vacationists were bathing gaily in

the surf. Again, as on the day when the assassination of Franz Ferdinand was announced, a band played to

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carefree people when, like white petrels, the newsboys stormed over the boardwalk. "Walter Rathenau1

assassinated." A panic broke out and the tremor spread through the whole Reich. Abruptly the mark

plunged down, never to stop until it had reached the fantastic figures of madness, the millions, the billions

and trillions. Now the real witches' sabbath of inflation started, against which our Austrian inflation with its

absurd enough ratio of l5,000 old to 1 of new currency had been shabby child's play. To describe it in

detail, with its incredibilities, would take a whole book and to readers of today it would seem like a fairy

tale. I have known days when I had to pay fifty thousand marks for a newspaper in the morning and a

hundred thousand in the evening; whoever had foreign currency to exchange did so from hour to hour,

because at four o'clock he would get a better rate than at three, and at five o'clock he would get much more

than he had got an hour earlier. For instance, I sent a manuscript to my publisher on which I had worked for

a year; to be on the safe side I asked for an advance payment of royalties on ten thousand copies. By the

time the check was deposited, it hardly paid the postage I had put on the parcel a week before; on street

cars one paid in millions, trucks carried the paper money from the Reichsbank to the other banks, and a

fortnight later one found hundred thousand mark notes in the gutter; a beggar had thrown them away

contemptuously. A pair of shoe laces cost more than a shoe had once cost, no, more than a fashionable

store with two thousand pairs of shoes had cost before; to repair a broken window more than the whole

house had formerly cost, a book more than the printer's shop with a hundred presses. For a hundred dollars

one could buy rows of six-story houses on Kurfurstendamm, and factories were to be had for the old

equivalent of a wheelbarrow. Some adolescent boys who had found a case of soap forgotten in the harbor

disported themselves for months in cars and lived like kings, selling a cake every day, while their parents,

formerly well-to-do, slunk about like beggars. Messenger boys established foreign exchange businesses and

speculated in currencies of all lands. Towering over all of them was the gigantic figure of the superprofiteer

Stinnes2. Expanding his credit and in thus exploiting the mark he bought whatever was for sale, coal mines

and ships, factories and stocks, castles and country estates, actually for nothing because every payment,

every promise became equal to naught. Soon a quarter of Germany was in his hands and, perversely, the

masses, who in Germany always become intoxicated at a success that they can see with their eyes, cheered

him as a genius. The unemployed stood around by the thousands and shook their fists at the profiteers and

foreigners in their luxurious cars who bought whole rows of streets like a box of matches; everyone who

could read and write traded, speculated and profited and had a secret sense that they were deceiving

themselves and were being deceived by a hidden force which brought about this chaos deliberately in order

to liberate the State from its debts and obligations. I have a pretty thorough knowledge of history, but

never, to my recollection, has it produced such madness in such gigantic proportions. All values were

changed, and not only material ones; the laws of the State were flouted, no tradition, no moral code was

respected, Berlin was transformed into the Babylon of the world. Bars, amusement parks, honky-tonks

sprang up like mushrooms. What we had seen in Austria proved to be just a mild and shy prologue to this

witches' sabbath; for the Germans introduced all their vehemence and methodical organization into the

perversion. Along the entire Kurfurstendamm powdered and rouged young men sauntered and they were

not all professionals; every high school boy wanted to earn some money and in the dimly lit bars one might

see government officials and men of the world of finance tenderly courting drunken sailors without any

shame. Even the Rome of Suetonius had never known such orgies as the pervert balls of Berlin, where

hundreds of men costumed as women and hundreds of women as men danced under the benevolent eyes of

the police. In the collapse of all values a kind of madness gained hold particularly in the bourgeois circles

which until then had been unshakeable in their probity. Young girls bragged proudly of their perversion, to

1 Walther Rathenau (1867-1922): German statesman, industrialist and philosopher, also founder of the

centrists German Democratic Party. As foreign minister, he negotiated the Treaty of Rapallo, which ended

hostilities between Germany and the Soviet Union in 1922. Reviled by right-wing groups as a "Jewish

conspirator" and for his dealings with the communist Soviet government, he was assassinated by fascist

extremists. As a result, the German government enacted new state security measures, which were

ironically used mainly to suppress left-wing groups, facilitating the rise of national socialism (Nazism). 2 Hugo Stinnes (1870-1924): German industrialist. He pursued strategies of vertical integration to create

huge industrial trusts controlling river and ocean barges and steamers, coal and iron mines, factories and

power plants. Later acquisitions focused on timberlands, insurance companies, paper manufacturing plants

and newspapers. Stinnes thus represented the trend in Germany at the time towards unrestricted industrial

concentration, and opposed any efforts at government regulation of industry. He was a member of the

Reichstag (Parliament) from 1920-1924.

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be sixteen and still under suspicion of virginity would have been considered a disgrace in any school of

Berlin at that time, every girl wanted to be able to tell of her adventures and the more exotic, the better. But

the most revolting thing about this pathetic eroticism was its spuriousness. At bottom the orgiastic period

which broke out in Germany simultaneously with the inflation was nothing more than feverish imitation;

one could see that these girls of the decent middle class families much rather would have worn their hair in

a simple arrangement than in a sleek man's haircut, that they would much rather have eaten apple pie with

whipped cream than drink strong liquor; everywhere it was unmistakable that this over-excitation was

unbearable for the people, this being stretched daily on the rack of inflation and that the whole nation, tired

of war, actually only longed for order, quiet, and a little security and bourgeois life. And, secretly it hated

the republic, not because it suppressed this wild freedom, but on the contrary, because it held the reins too

loosely

Whoever lived through these apocalyptic months, these years, disgusted and embittered, sensed the coming

of a counterblow, a horrible reaction. And behind the scenes, smiling, there waited, watch in hand, those

same people who had driven the German nation into the chaos: "The worse it is for the country, the better

for us." They knew that their hour was at hand. Around Ludendorff3, more than around the then still

powerless Hitler, the counterrevolution was already crystallizing openly; the officers whose epaulettes had

been torn off their shoulders organized in secret, the small tradesmen who had been cheated out of their

savings silently closed ranks and aligned themselves in readiness for any slogan that promised order.

Nothing was as fateful to the German Republic as the idealistic attempt to give liberty not only to the

people but even to its enemies. For the German people, a disciplined folk, did not know what to do with

their freedom and already looked impatiently toward those who were to take it from them.

The day the German inflation ended (1924) could have become a turning point in history when, as if at the

sound of a gong, each billion of artificially inflated marks was exchanged for a single new mark, a norm

had been created. And, truly, the muddy tide with all its filth and slime flowed back soon, the bars, the

honky-tonks disappeared, conditions became normal again, everybody could now figure clearly how much

he had won, how much he had lost. The great majority, the mighty masses, had lost. But the blame was laid

not on those who had caused the war but on those who with sacrifice and without thanks had undertaken

the burden of reconstruction. Nothing ever embittered the German people so much--it is important to

remember this-- nothing made them so furious with hate and so ripe for Hitler as the inflation. For the war,

murderous as it was, had yet yielded hours of jubilation, with ringing of bells and fanfares of victory. And,

being an incurably militaristic nation, Germany felt lifted in her pride by her temporary victories; while the

inflation served only to make it feel soiled, cheated, and humiliated; a whole generation never forgot or

forgave the German Republic for those years and preferred to reinstate its butchers. But all of that was still

far away. On thc surface, in 1924 the wild phantasmagoria seemed to have passed like a dance of will-o'-

the-wisps. It was day again, one saw one's way in and out. And already we greeted the ascendance of order

as the beginning of lasting peace. Again, once more, we thought we had risen above war, chronic fools as

we always had been. But at least this deceptive delusion bestowed on us a decade of work, of hope and

even of security.

3 Erich Friedrich Wilhelm Ludendorff (1865-1937): German general and right-wing politician. A popular

war hero, he initially aligned himself with Hitler after world war I and participated in Hitler's unsuccessful

uprising in Munich in 1923. From 1924 to 1928 he was a National Socialist (Nazi) member of the

Reichstag. His mystical beliefs in a German "divine faith" led him to blame hostile forces within Germany

for its military defeat, which helped to poison the political environment during the Weimar Republic. He

later broke with Hitler and warned of his tyrannical plans, to no avail.