The Mystery of Banking

shortage
of money, for they now face a shortage of
cash balances relative to the much higher price levels. Total cash
balances are no longer sufficient to carry transactions at the
The Demand for Money
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higher price. The people will then clamor for the government to
issue more money to catch up to the higher price. If the govern-
ment tightens its own belt and stops printing (or otherwise creat-
ing) new money, then inflationary expectations will eventually be
reversed, and prices will fall once more—thus relieving the
money shortage by lowering prices. But if government follows its
own inherent inclination to counterfeit and appeases the clamor
by printing more money so as to allow the public’s cash balances
to “catch up” to prices, then the country is off to the races.
Money and prices will follow each other upward in an ever-accel-
erating spiral, until finally prices “run away,” doing something
like tripling every hour. Chaos ensues, for now the psychology of
the public is not merely inflationary, but 
hyper
inflationary, and
Phase III’s runaway psychology is as follows: “The value of
money is disappearing even as I sit here and contemplate it. I must
get rid of money right away, and buy 
anything
, it matters not
what, so long as it isn’t money.” A frantic rush ensues to get rid
of money at all costs and to buy 
anything
else. In Germany, this
was called a “flight into real values.” The demand for money falls
precipitously almost to zero, and prices skyrocket upward virtu-
ally to infinity. The money collapses in a wild “crack-up boom.”
In the German hyperinflation of 1923, workers were paid twice
a day, and the housewife would stand at the factory gate and rush
with wheelbarrows full of million mark notes to buy anything at
all for money. Production fell, as people became more interested
in speculating than in real production or in working for wages.
Germans began to use foreign currencies or to barter in com-
modities. The once-proud mark collapsed. 
The absurd and disastrous way in which the Reichsbank—the
German Central Bank—met the crucial clamor for more money
to spend immediately in the hyperinflation of the early 1920s is
revealed in a notorious speech delivered by Rudolf Havenstein,
the head of the Reichsbank, in August 1923. The Reichsbank was
the sole source of paper money, and Havenstein made clear that
the bank would meet its responsibilities by fulfilling the increased
demand for paper money. Denominations of the notes would be
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The Demand for Money
73
multiplied, and the Reichsbank would stand ready to keep its
printing presses open all night to fill the demand. As Havenstein
put it: 
The wholly extraordinary depreciation of the mark has nat-
urally created a rapidly increasing demand for additional
currency, which the Reichsbank has not always been able
fully to satisfy. A simplified production of notes of large
denominations enabled us to bring ever greater amounts
into circulation. But these enormous sums are barely ade-
quate to cover the vastly increased demand for the means of
payment, which has just recently attained an absolutely fan-
tastic level, especially as a result of the extraordinary
increases in wages and salaries. 
The running of the Reichsbank’s note-printing organiza-
tion, which has become absolutely enormous, is making the
most extreme demands on our personnel.
2 
During the later months of 1923, the German mark suffered
from an accelerating spiral of hyperinflation: the German govern-
ment (Reichsbank) poured out ever-greater quantifies of paper
money which the public got rid of as fast as possible. In July
1914, the German mark had been worth approximately 25 cents.
By November 1923, the mark had depreciated so terrifyingly that
it took 4.2 trillion marks to purchase one dollar (in contrast to
25.3 billion marks to the dollar only the month before). 
And yet, despite the chaos and devastation, which wiped out
the middle class, pensioners and fixed-income groups, and the
emergence of a form of barter (often employing foreign currency
as money), the mark continued to be used. How did Germany get
out of its runaway inflation? Only when the government resolved
to 
stop
monetary inflation, and to take steps dramatic enough to
convince the inflation-wracked German public that it was serious
about it. The German government brought an end to the crack-
up boom by the “miracle of the