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Hyperinflation: Who Is Going To Do It?

Written by Gorg Huff

 

The 16th century was a period of massive inflation. European silver production increased as gold and silver came from the Americas. The growing importance of credit transactions plus population growth and the expansion of European economies and trade were all factors. In the Danube region the price of grain increased 170%; meat prices soared by 110%. Wages did not keep up with the precipitous rise in agricultural prices: A Viennese bricklayer’s apprentice had received daily wages equivalent to eight pounds of beef in 1500; in 1600 his daily earnings netted him only five pounds of beef.

At the beginning of the 17th century, inflation accelerated, finally leading to a bout of hyperinflation known as “Kipper und Wipperzeit” in 1621–22. It should be noted that coin scales to check the Wippen were illegal. You weren’t supposed to check the weight of the coins.

Timeline of events in a bit more detail:

1559—The Augsburg Imperial mint ordinance of the Holy Roman Empire was implemented. Per this ordinance, only a selected group of princes had the right to mint. Mints could not be sold. Export of coins and silver was prohibited and import of foreign coins limited. The metal content of coins was set and debasement punishable by death. Standardized denominations such as 9.5 gulden to the mark were defined. Bimetallic standard largest coins were gold; all others silver. Except it didn't work. People started breaking the rules before the ink was dry, starting with the lowest denomination coins where the cost of minting was greatest for a given amount of silver.

1576—Spain declares bankruptcy

1582—1 reichstaller = 68 kreuzer

1587—Venetian Banko della Piazza di Realto founded in response to the bankruptcy of the private deposit banks.

1596—Spain declares bankruptcy

1607—Spain declares bankruptcy

1609—1 reichstaller = 84 kreuzer

1609—Amsterdam Deposit Bank founded. Coins could be deposited and the respective amount would be credited in bank money. The quality of the coins would be assayed at the time of deposit. Bank money could be transferred to someone else's account by assignment, avoiding the cost and pain of transferring the coins directly.

1614—Lending bank established in Amsterdam, to make loans to the government and against collateral, mostly coins and bullion. This led to the creation of money through writing of bills of exchange. Any account holder could write bills in terms of bank money. In effect, the two banks together become a fractional reserve bank without being thought of as one.

1617—Duke of Braunschweig-Wolfenbuttel ordered the coining of 210 groschen from one mark of silver compared to 110 required by the ordinance.

1616—Middelburg Deposit bank founded.

1619—Hamburg deposit bank founded.

1621—330 groschen to the mark. 46 gulden to the mark

1621—Nuernburg Banko Publico founded. Note: the Nuernburg Banko Publico never did all that well because its bank money wasn't a consistent amount of silver and because it started loaning money to the government of Nuernburg from the get go.

1622—Hans de Witte, Albrecht von Wallenstein and Karl von Liechtenstein lease all mints in Bohemia, Moravia and Lower Austria from Ferdinand II and are granted a monopoly for silver purchases and coin production in those areas. Silver was to be minted at 79 gulden per mark. But they diluted it even more. Ferdinand II got six million gulden from the lease. The value of the thaler rose from an original equivalent of 1 gulden, 8 kreuzer to 11 gulden, 15 kreuzer. Yet that change could not have been because of an overwhelming increase in the money supply simply because they could not melt and remint all the coins in the Holy Roman Empire in the space of a couple of years. There would be coins of varying silver content from older mintings. How many coins could they manage to mint in just under two years when they had to buy the silver? Assume that they mint 90 gulden to the mark and assume that they managed to mint coins equal to twenty percent of those already in circulation. The total increase in the money supply is somewhere between ten and fifteen percent. That's not hyperinflation territory if you're dealing with credit money.

1623—Near the end of the year Ferdinand II decreed the withdrawal and exchange of the kipper money. 100 thaler of kipper coins were exchanged for only 13.3 thaler imperial coins—an 87% loss of value tantamount to national bankruptcy. Note that the people who had been stuck with the kipper coins took the loss, not Ferdinand II.

1624—Most of the exchange of Kipper and Wipper money for new imperial coins. Legal copper coins were first minted in Sweden.

1627—The Castilian economy collapsed. The Spanish had been debasing their currency to pay for the war in the Netherlands and prices exploded in Spain.

At the same time, the average German peasant saw cash money only occasionally for most of the sixteenth and seventeenth centuries. Per Govind P. Sreenivasan's The Peasants of Ottobeuren, 1487-1726, they used "money" but not cash. As in: Hans has a debt of 4 Gilders on which he pays two and one half Gilders by taking five horses to market. There are lots of examples that indicate that though actual coins were occasionally used, more often than not it was small-scale money of account, because neither side of the deal actually had any coins. It was debt money, full faith and credit money, but not issued by the government. It was issued by the borrower when he promised to pay later for something that he needed and accepted by the lender he was getting the goods from.

In today's world there are tight-money economies, and cash-strapped economies, but the situation in early-seventeenth century went beyond that . . . to the border of a barter economy. At least for the poor and up to the lower middle class.

This way of doing things compensated some for the lack of money. However, it had its drawbacks. It meant that people were tied into a market where they were known. Their credit wasn't, for the most part, portable. They couldn't go after a better job because they didn't have a reputation in the next town and they had no money to get them by till they got established.

So, how can you have hyperinflation when there isn't enough money to support the economy? Simple: base your money on a commodity, in this case silver, then don't put the full amount of silver in the coins. Credit money and commodity can coexist and trade one against the other, but they don't mix well. You can't have a solid currency that is part one and part the other. If you try, the lack of the commodity in your coins causes the value of the coins to drop. Or, if the commodity price goes up, people start buying your coins for the commodity and taking them out of circulation.

That was the general state of affairs in Europe when the Ring of Fire happened in 1631. The Ring of Fire brought with it some—but by no means all—of the knowledge of economic theory that had been accumulating over the ensuing centuries. Spain's economy was in collapse; Germany's was worse; France's was held together by the power of the central government. The economic bright spots were the United Netherlands and Venice.

People were making do, making their own money, simply by deciding it was there. By accepting each other's promise to pay them later and then accepting goods and services for the debt owed.

After the Ring of Fire

The Ring of Fire happens and things start to diverge. What follows is deduction combined with canon from the books and stories in the 1632 series.

There is going to be pressure on the Finance Subcommittee from the beginning to introduce silver coinage. The Finance Subcommittee will fight the pressure as long as it can, but may be forced to a compromise. The compromise is the issuing of silver coins that are not American dollars or any multiple of dollars. It won't be a silver dollar or a silver ten-dollar coin or twenty-dollar coin. If anyone tries to call it a dollar, Coleman Walker will have a conniption fit and so will the rest of the Finance Subcommittee. An Amsterdam bank money gulden represents a bit over three-quarters of a troy ounce of silver in a vault in Amsterdam. 24.616 grams or 0.791 troy ounces. So, sterling silver is going to start trading in the Grantville exchange at about $250.00 a troy ounce. By the time that the Dutch gulden is down to $42 to the dollar, sterling silver is trading at around $53 dollars an ounce. The Pfennig, which is generally the smallest denomination available before the Ring of Fire, starts at about $7.50 and ends up around $1.50. Even a brass farthing in England starts out at $3.12 and is still worth $0.66 when the American dollar reaches $42 to the guilder.

There is a transaction cost in having a currency that is hard to subdivide below the dollar level. It's not just that little Penny can't save her pennies and little Hans isn't going to get his hands on any hard money no matter how many chores he does. Little Hans' mom is affected when she goes to the bakery for the family's daily bread as well. The baker can charge one pfennig for a loaf of bread or he can charge two. He can adjust the size of the loaf a bit if the price of flour changes, but he can't drop his price nor raise it in small increments. So the family ends up with extra three-day-old bread but can't put aside a little at a time to buy a new cheese grater. Not having currency in smaller than dollar amounts limits competition because the baker down the way can't lower his prices.

One of the hidden benefits of the introduction of the American dollar will be the ability to make incremental price adjustments. The baker can offer the widow Schmidt a three-quarter size loaf for less than the full-size loaf, since she has only little Hans to feed and a full-size loaf would get moldy before it got eaten. And if the first baker won't do that, well, the one down the lane will and get more customers for his trouble. This hidden benefit will show up gradually as increased production and sales of low cost items and in minor price adjustments on larger purchases. This will be followed by a gradual decrease in the "in kind" arrangements that were so prevalent.

The acceptance of paper money that isn't based on silver isn't that much of a stretch, not for a farmer who has been trading his labor for goods and services based on the local merchants' account books. It takes a bit of explaining and a bit of salesmanship. Some of the farmers need some silver, enough to pay off debts, or at least pay them down. So, just at first, there is quite a silver crunch. The Roth's stock of precious metals is vitally important in the first couple of months. So is the silver that Captain Mackay deposits in the first national Bank of Grantville. And while a couple of trunks full of silver may not seem like that much to run an economy on, the local economy has been running on not much more. What it hasn't been doing—couldn't do—was be flexible enough to expand.

With the small denomination coins being the ones that have been most adulterated during Kipper and Wipper and time leading up to it, there are a lot of small denomination silver coins that are mostly copper. Some up-timers will end up selling stuff for silver that turns out to be copper. This makes the up-timers, at least most of them, hesitant to take down-time silver coins. The First National Bank of Grantville accepts silver coins but only after assaying them.

The value of a large number of coins as judged by their metal content is difficult to determine with precision. Coins can be devalued by clipping, shrinking or adulteration. If you have a hundred coins and a few of them are clipped or shrunk and you put them all on a scale, you will get the same weight as if you have a hundred coins and half of them are adulterated with copper. So, if you go by weight, you're going to end up paying silver prices for a weight of copper.

That is, however, much less of a problem for the up-timers than it would be for the down-timers. Starting with a coin-operated vending machine—or perhaps two or three of them—you can readily develop a device that will sort coins individually by size and weight. Uriel Abrabanel, as a banker, has a stock of local silver coins from various mintings. Without costing Uriel much, if anything, those coins can be used as a base line to test the equipment. A few representative samples can be further tested to determine with precision their metallic content.

From very early on the Bank of Grantville and the Credit Union are in a position to judge down-time coins. Private individuals and merchants mostly aren’t.

There was a fairly consistent "company store" mentality in the towns and cities of Germany at the time, a concerted and consistent attempt to restrict where the villages could buy and sell. Various authorities in various places would write laws requiring that villagers within a certain distance buy and sell only from the town. From the first trade that is made, the up-timers in the Ring of Fire are net exporters, simply because they have so much and their machines make their labor so much more productive. The up-timers are unwilling to be restricted in who they can sell to or buy from. From the very beginning of Grantville's arrival, the towns of Germany are in no position to enforce such restrictions outside of their own walls.

Before the Battle of the Crapper there would have been some consideration given to the possibility of using force to get the up-timers to follow the rules—or at least to punish the villagers for buying from within the Ring of Fire. After the Battle of the Crapper, that is no longer a consideration.

In the summer of 1631, the only reason that the towns can still enforce their trade restrictions in town is that the up-timers decline to force them to stop. As a result, during the summer and fall of 1631 the towns around the Ring of Fire are walking a very fine line, trying to maintain their control of the surrounding countryside while not taking any action that the up-timers would consider justification for the use of force. Looked at in this light, the little incident with Gretchen and Jeff after the battle of Jena has some additional connotations in terms of what sort of restrictions the city governments can get away with placing on their citizens. So does Mike Stearns' discussion of printing cooperation.

This doesn't endear the up-timers to the towns and cities of Thuringia, but it sure makes them popular with the farming villages. Advanced sales of some or all of a village's food crops helps with the food shortage in the winter of 1631-2. However, most of the people living in farming villages are in a state of perpetual debt. Much of the crop is already contracted to local towns. It's hard-to-impossible for the farmers to sell where they want until debts are paid off.

These political factors have an effect on how towns and farming villages react to up-timer money. The towns would prefer not to take the up-timer money and the farming villages would prefer to have it accepted. However, the towns are in a bind. They are losing their market to the up-timers. Not just the villagers, but also the merchants—who the towns have less control over in the first place. The towns need to be able to sell their goods to the up-timers. If they can't, their situation is going to go from economically precarious to out-and-out disaster.

Badenburg, Rudolstadt and Saalfeld, being closest, are affected first and most strongly. Uriel Abrabanel takes some heat in the early days for his acceptance of the American dollar. The fact that his niece sits on the Emergency Committee of the up-timers prevents that resentment from taking the sort of concrete form it might have otherwise.

Faced with little in the way of other options, Badenburg, Rudolstadt and Saalfeld took an "If you can't beat them join them" approach. The American dollar became acceptable currency in those towns and the villages near them while production started moving from inside the Ring of Fire to all three towns, HSMC in Badenburg, USE Steel in or near Saalfeld, Krause Furniture in Rudolstadt, and many more. By the spring of 1632, the three towns around the Ring of Fire and the surrounding farming villages had effectively merged in terms of trade. You could buy products produced in any of them, in all of them, without special restrictions. You could buy little things, like buttons. Things that cost less than even an American dollar. A whole new market opened up for the manufacturers of the Greater Grantville Area. Retail was born. And since the market was there, it became suddenly worth the effort and cost to make labor-saving devices that let you make lots of little things more quickly and cheaply.

Buttons and latches and files! Oh, my!

All of which the spies and other visitors to the area talked about when they got home, generally taking examples with them.

Spring planting in the region took full advantage of tractors, hastily constructed greenhouses and other up-time innovations, so that yields were generally improved and the yield of vegetables drastically improved. The use of greenhouses to sprout vegetables before the last frost of winter for planting outdoors later was labor-intensive, but—thanks to the tractors—the labor was available. Not that everyone, or even most, in the area were interested in such innovations, but enough were so that the tractors were kept busy and the greenhouses full. This produced a noticeable increase in food and other agricultural products. Prices for agricultural products that had been high in the first winter went down.

On the downside, by the summer of 1632 what they could do with just what had come with them was mostly already being done. The rate of economic expansion slowed as they had to wait for new tools-to-build-tools to come on line. Expansion didn't stop; it just slowed to something closer to what one might consider a sane rate of expansion. Roads were still being built as fast as they had been before, but there were more to build. New businesses were still starting but they were having to wait for their production machines to come out of the machine shops, whereas most, but not all, of the new businesses in 1631 had been able to use modified up-time equipment.

Also, by 1632 the majority of people who have dealings involving American dollars have not seen the Ring of Fire. This is a change from 1631, when checking it out only took a couple of days walk. There is a noticeable difference in the response to American dollars between those who have seen the Ring of Fire and those who haven't. Those who haven't seen it but have just heard about it, even from a reliable source, may believe but still take with a grain of salt the miraculous event. So they look on the pieces of paper that the up-timers use as money with considerably more skepticism.

Somewhat countering this is the increasing availability of crystal sets and the increasing range of the Voice Of America. The money market that developed in Grantville in 1631 and the exchange reports that give weekly or daily reports on the relative value of American dollars, plus the extended Abrabanel family's acceptances of American dollars and stated willingness to buy them with silver provides more than just a floor. It also provides an endorsement. "If the Abrabanels, canny merchants that they are, are willing to buy American dollars, there must be something to American dollars."

By 1632 the economic advisors of various nations of Europe are getting information on how up-timer money works. Or, rather, how it worked up-time. Depending on the advisor and the government being advised, they may look at this as a way of scamming the hoi polloi, or as a valid economic system. Most fall somewhere in between. Monetary metals have a lot of inertia on their side, in terms of people's belief that silver and gold have innate value. There will be quite a bit of head-shaking about how even peasants can be so gullible.

However, as the advisors and governments look at it, the more observant of them will see the trend of silver and gold flowing into the New US and out of the surrounding areas. It will take observation, because at that point the New US is still small enough that it's barely a blip in the overall economy of Europe. It will be visible because the economy of Europe is a forest that can't be seen for the trees. A few items will have reached places like Vienna, Rome, London and Madrid, but they will be curiosity cases. Agents will have reported on the phenomenal productivity of the area right around the Ring of Fire and the increase in general trade in the area as the roads get better. But it will as yet be fairly difficult for most to see it affecting them in any major way. It's too small and far away. Like a campfire three valleys over, you might get a whiff of smoke, but that's about all. The whiff of smoke in this case is rumors in the merchant circles that "This New US might be an interesting place to invest a few bob. If it survives that is. If it doesn't get run over by one of the marauding armies."

By mid 1633 it's still a distant flame, but more of a bonfire than a campfire. It's starting to get really noticeable. Merchants have started putting their few bob into manufactories along the Saale River, most of which are using small one-to-five horsepower steam engines. Magdeburg is being rebuilt with Simpson's naval base and starting to look like a bonfire, too. But as fast as they are turning out goods in both places and innumerable places in between, they are not even close to keeping up with demand. Another fire is starting along the Werra River in and near Eisenach, where the improved roads connect it to the Ring of Fire and the Saale corridor. With good roads to Eisenach and the rail line rapidly approaching the navigable part of the Saale River, it's cheaper to ship goods produced in Bremen to Halle by way of the railroad and roads than by river. The up-timers and their down-time partners aren’t just making money by manufacturing but by transporting goods as well. In the process, the price of even down-time produced goods is going down while the variety goes up.

More important to the foreign powers looking on is the increasing souvenir market. People are going to go look at the Ring of Fire and while there are buying souvenirs. An important souvenir will be photographic prints of the Ring of Fire. Which means that even those down-timers who aren't able to go to the Ring of Fire themselves are able to see clear photorealistic images of it. Plus all sorts of knickknacks, some few of which were actually produced up-time. So, belief in the Ring of Fire increases and so does tourism and along with it comfort with up-timer credit money.

Also by 1633 Gustav Adolph, who introduced large copper coins in 1624 because he was short of silver, is very interested in American dollars and what he can do in a similar vein. One thing that he can do is introduce the Copper Dollar, a paper money that is based on a given weight of copper. Note that this is not canon that I am aware of but is likely. What he won't be able to do—or at least will be advised against—is the introduction of credit or fiat money. This mostly because he overvalued the copper coins when he introduced them in 1624, so his credit isn't any too good.

That changes with ...