Thursday, May 22, 2014

The Weimar Hyperinflation, a bibliographic review.

Because, piece of paper
    The Weimar Hyperinflation of 1923 remains the paradigmatic example of the destruction of a paper currency in the modern world. While other inflations in modern history have certainly been worse and lasted longer, few true hyperinflations have taken place in modern industrial nations where banking, credit, and a middle class were firmly established. Festooning economic articles even today there appear black-and-white photographs of Germans shoveling piles of paper marks into furnaces to heat their homes and of people standing in theater lines with loaves of bread or small hams to exchange for tickets. The hyperinflation changed German society and fiscal policy in ways that last to this day.

What happens when the currency breaks down is that the economy breaks down, becomes less efficient and smaller. It moves goods out of the reach of the poor and the helpless. But that’s not all that happens. Society itself, based as it is on an intricate web of relationships demanding trust, also comes apart.  As British historian John Maynard Keynes noted about the German hyperinflation, “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” And economic law cares nothing for starving masses.

    Our own American experience points this out as well. James Madison noted in The Federalist that “the pestilent effects of paper money on the necessary confidence between man and man, on the necessary confidence in the public councils, on the industry and morals of the people, and on the character of republican government” provided an unassailable argument against unlimited money issuance. Following hyperinflation the Americans successfully established a republican government on the industry of the people and the confidence in public councils. The Germans, on the other hand, lost one.

    This paper will present a brief narrative of the 1914-23 hyperinflation in Germany's Weimar Republic...

(Wander not beyond this point unless ye possess a death wish)

    This paper will present a brief narrative of the 1914-23 hyperinflation in Germany's Weimar Republic. It will examine the root causes from both historical and economic perspectives. It will also discuss financial, cultural, and moral effects of the hyperinflation. Gerald D. Feldman’s The Great Disorder, a comprehensive account of the political and economic decisions that drove the inflation, will provide the outline of the narrative. Six other books, most of which deal with specific areas or classes, will then be compared to Feldman and each other where applicable.

    Distinguished historian of the Nazis Gerald D. Feldman argues that the German hyperinflation had its roots in World War I, and that many factors, both internal and external, drove the German currency down its path to self-immolation. Feldman is no economic determinist, but he makes it clear that, given the choices Germany faced and the choices it made or which were imposed on it, it could reach no other result.

    Total victory demands total war. According to Feldman that’s the attitude imperial Germany adopted in 1914, and it quickly brought about changes to its own government that would allow it access to the finance it needed to win what it hoped and expected would be a short war. Immediately at the opening of hostilities, for example, a handful of hastily-passed finance laws all but separated the Reichsbank from the Reichstag and gave it vast new powers to discount government debts – in short, it could use government debts as backing for its paper currency in the same way gold had been used previously. Discounting provided one advantage to those who preferred easy money: it’s a lot easier to increase the supply of government debt than to increase the supply of gold.

    The Reichsbank itself began an immediate crusade against metallic coinage, especially the gold marks that had undergirded German commerce for half a century. The bank was fully aware that hard economic times would cause the populace to hoard valuable coins in exactly the same way the bank had decided to hoard its own gold. It was also fearful that an immediate reduction in circulating specie would hurt the German economy just when it needed liquidity to ramp up wartime production.

So beginning in 1914 the Reichsbank made a number of educational and even propagandistic efforts to increase the use of paper money for all but the smallest transactions. All the while, it steadily withdrew specie from circulation, doing in effect precisely what it was urging the populace not to do: accumulate gold.  But Germany knew the war should not be paid for just by hoarding gold and printing money. It raised taxes and pushed bond issue after bond issue, soaking up the free wealth of much of the newly-established middle classes.

Massive as these efforts were, they could only meet the demands of total war through 1916. To make up the difference after that, the government used special “extraordinary” budget items of the kind that had been used in the past only for self-amortizing assets like railways. It had borrowed in the past only to build. Now it would borrow and borrow and borrow some more to destroy. In the end, the government abdicated this borrowing, leaving an inflationary wreckage it had created to the yet-to-be-established Weimar government.

    The results of this wreckage were obvious: at the end of WWI, Germany had an economy shocked by war and running on unbacked paper. Much of the wealth of its middle class was tied up in war bonds. Its capacity to create consumer goods had been gutted by the war effort. Its markets and colonies had been lopped off by the victorous Allied powers. Much of its best agricultural land had been taken, and a tithe of its population removed. Its central bank sat on a mountain of questionable assets. Germany had millions of men, some maimed for life, returning from the front and looking for jobs. And it had victorious opponents talking about billions of gold marks’ worth of reparations that would be extracted, by force if necessary, from a nation that was already starving. Such was the framework from within which the brand new Weimar government had to make its choices.

    Its choices seemed just as hopeless.  Even with price controls in place, prices had been rising, as much due to scarcity of goods as to an abundance of money chasing them (though the well-developed black market and smuggling ensured that goods were available for those with cash).  In order to get prices under control, the Government would have to oversee an increase in national production – which demanded immediate credit – at the same time it deflated the currency. In order to deflate the currency, it would have to balance its budget at the same time it provided for millions of newly-needy citizens, from unemployed workers to starving infants to wounded soldiers. The cost of dealing with inflation in the short term was ignoring the acute social crisis caused by the war, a crisis that would likely bring down the new government from the left or the right before it could even get established. That was a cost the Republic could not pay: for the short term, anyway, there would be paper money and inflation, and plenty of both.

    But government deficits were not the only cause of rising prices. A second, already alluded to, was “cost pull” inflation driven by scarcity – there were simply not enough goods to go around, so prices for them shot up. In the decades immediately prior to the war, Germany had developed one of the more efficient industrial societies in the world. But four years of war production and wear had reduced efficiency markedly. Railways had to make up for neglected repairs. Coal deliveries were uneven. Business flailed about to replace supplies and market shares that had been previously acquired through colonies and trade. Output suffered across the board and for many interlocking reasons. The result was that, try as it might, Germany could not in the short run produce what it had just a few years prior no matter how hard it worked.  Germany no longer had the tools, and it would take time and money to rebuild them.

    The third major cause of rising prices was the deteriorating position of the mark on world markets. While a falling mark made German exports more competitive and helped the German labor market by reducing real wages compared to the nations to whom it was exporting, it also had a pair of drawbacks. The first was that it increased the price of imports, and not just the expensive French wines Germany might choose to do without.  Because of the loss of territory and assets, Germany had to import iron ore (even as German businesses exported it to get hard currency) and other metals, and occasionally even coal. Most importantly it had to continue to import food, which the allies demanded be purchased in gold or their own currencies. So while the falling mark made Germans busy, it also served to undercut further the standard of living they were trying to attain by working.  And the worse the German economy looked, the more the mark dropped, and the more the mark dropped, the harder it became to import the things the economy needed and therefore the worse the economy looked. The worse the future looked, the more Germans themselves sold marks on the world market, making the future look worse. The more expensive imported food became, the more the German government had to sell marks on the market to get the hard currency to buy the food, and the more expensive food became. The vicious cycle had begun to accelerate. 

    Though in 1919 the Reichsbank warned that the only way to stop the inflation and the deterioration of the mark was for the government to balance its books, unemployment relief was a political necessity and food aid was a humanitarian necessity and the railroads had to be kept running even if they burned imported coal. Price controls, especially on food, did little good – farmers simply refused to sell their produce for controlled prices, feeding their own cows instead while the urban poor waited in queue for sour bread. Crime, especially theft, was up. Dogs and cats had long disappeared from Berlin. The 1920 elections showed a marked dissatisfaction with the center ruling coalition, as voters moved left and especially right. By 1920, people were openly wondering if the mark could be saved at all. When the Reichsbank opened the “discount” to private debt in addition to public, the question was answered in the negative.

    While the government had fought inflation, more or less unsuccessfully, inflation was considered a temporary problem, to be addressed after the other more pressing problems of security and stability were handled.  In reality, since those other problems would never be handled, inflation was going to continue. Two events, both external, intervened to bring the problem to a crisis: Reparations and the French invasion of the Ruhr.

    Historians have long argued to what extent Germany could have paid reparations and to what length they went to hide that ability. But the perception that Germany could not pay, fostered by Germany itself, led to an acceleration in the fall of the mark, while at the same time neighboring states were limiting the German goods that could be imported in an effort to protect their own employers from competitive German ones. The result, of course, was another blow to the German economy, which further reduced their actual ability to pay reparations. Such monetary reparations as they did pay only served to remove what few good assets the Reichsbank had – they ran out of foreign reserves completely in 1922. Payments in-kind reduced Germany’s capital stock, making recovery that much harder.

    Perhaps that was France’s intention, as Germany was in no position to physically oppose the French armies that rolled into the Ruhr Valley in early 1923 to forcibly collect what they claimed Germany owed. The German government, industrialists, and workers agreed on a response they called “passive resistance.” They were not going to fight the French, nor were they going to work for them: they would rather starve. To keep the latter from happening, the Weimar government underwrote huge business losses and put massive numbers of people on make-work or unemployment rolls. The number of people on government support immediately increased 10-fold, and the money presses rolled. The mark tanked, this time for good. As government wages were now inversely tied to the mark, government spending increased exponentially, hopelessly. Old ladies shoveled paper marks into fireplaces, and people paid traded bread for movie tickets. The Mark was now worth functionally zero, and the government began to prepare for a replacement currency.

    The end of the Mark arrived in November, 1923, at a price of more than 4.2 trillion to the dollar, or one trillionth of its value just nine years prior. The presses were simply turned off. The Mark ceased to be quoted (it had already ceased to be used), and a replacement currency, the Rentenmark, was quietly issued. Due to legal limitations on loans to government and a scarcity of credit and currency, the Rentenmark overcame initial expectations that it would follow the mark’s path. A new government decimated the bureaucracy and put the survivors on what they not unfairly complained were starvation wages. It balanced the budget. Finally it cut the railroad loose from the budget, forcing it to stand on its own. The Weimar had solved one huge problem, but Feldman argues that the problems that would arise from that solution were now on the way.

    The Great Disorder is an octavo-sized monster with a painfully small font, weighing in at more than 1000 pages, including 150 pages of notes.  Feldman, who died in 2007 after more than four decades of teaching European and especially German history, has included every cabinet, every program, and seemingly every speech relating to the finances of the early Weimar governments. His major conclusion, that inflation did not lead directly to Hitler, is well-supported. But the work itself is designed less to make arguments than to provide a comprehensive history, though it is a history that with a few notable exceptions is limited to prices and politics.

    The changes in German society driven by prolonged and violent inflation were in no way limited to prices and wages; they changed politics.  As Andreas Kunz argues in Civil Servants and the Politics of Inflation in Germany 1914-1924, it was the inflation that brought Germany’s civil servants into the realm of interest group politics, and it did so in a way that would prove very troublesome for the republic in the late 1920s.

    Even before the Great War, civil servants in Germany (the Beamtenschaft) were an important, if not particularly organized, social group. Estimates of the number of civil servants vary, mostly because a public budget with personnel counts was not published by the Reich government, and the last German employment census before the war was gathered in 1907, while the first afterwards took place in 1924, after a massive reduction of the bureaucracy. We are therefore dealing with estimates, but they are estimates of significant size: Kunz estimates the complete number of Reich and local civil servants at around a million in 1914, rising nearly 50% percent until 1923, when stabilization of the currency and civil service reform reduced the numbers by 10 to 15%. When families are included, it is obvious that a not-negligible proportion of the urban population is in play, and an even higher percentage of the professional population. Kunz argues that it was not the hyperinflation of 1923 that drove this group to create something of a united front against the German government. Rather, because of stagnant government salaries, the inflation of the Great War forced the process of organization. While government salaries reached a low point of 30% of pre-war buying power in 1923, that was actually an increase from the buying power of government salaries in 1920.

    Before the Great War, government workers tended to be apolitical, seeing their interests far more in line with the Kaiser and the government than with the petty party politics of the legislature. While individuals held party and policy preferences just like everyone else, because their jobs were less dependent on the legislature than on the Kaiser, they never developed a collective political voice. Nor did they surmount the bureaucracy’s upper/middle/lower split in class that mirrored that of society at large.  The upper classes of the bureaucracy saw its interests more in line with the upper class outside than with the middle or lower inside. However, with the 1919 revolution, the entire beamtenschaft discovered that they did have something in common: their jobs and salaries were at the mercy of the Weimar government. Even if they did not particularly like that government, they were going to have to work with it: prices were going up, and their salaries were not.

    When salaries hit their buying-power nadir in 1920, the beamtenschaft had already created a Federation of German Civil Servants (the Deutchter Beamtenbund, or DBB) and had begun as a group to exert pressure on two of the larger political parties in the Weimar, the center-left SPD and the center-right DVP, convincing both to include DBB members and leaders on committees that dealt with beamtenschaft issues. Sporadic strikes of the wildcat variety broke out on occasion, though neither the government nor the DBB really knew whether such strikes were legal. A series of cost-of-living adjustments in 1920, 1921, and accelerating into 1922 managed to keep civil servants at least within hailing distance of galloping prices. Even so, February of 1922 brought a massive general strike of government workers which was ended by one more lavish wage increase. The “soft” treatment of those whom many believed were illegally on strike tended to alienate the beamtenschaft from others in society, including the army and a general public whose salaries were not being adjusted as successfully, and make them even more dependent on the Weimar government. And while the civil servants had the upper hand for a while, their preferential treatment would prove only temporary.

    In 1923, when the hyperinflation was raging in earnest, civil servants managed to stay ahead of the conflagration in several ways. They demanded and received pre-payment of their salaries, originally a month in advance, but eventually a quarter in advance, based on a negotiated expectation of how high prices would be three months hence, giving them a significant buying power advantage over their neighbors. They demanded and received payment of half of their salaries in hard, i.e. in non-German, currency. Their salaries continually increased, sometimes bi-weekly by a negotiated multiplicand that worked to keep them ahead of price rises. And most notably throughout 1922 and 1923, each time one of the successive Weimar governments attempted to stabilize the currency, labor relations immediately went south. It looked to outsiders like government employees were doing pretty well for themselves on the backs of others, even to the point of sabotaging a solution to the inflation.

    Once stabilization arrived, the new Stressemann government took seriously the necessity of reducing the beamtenschaft both in size and salary. While civil servants argued their new wage levels were “starvation wages,” they received very little sympathy from a public which still accused the oversized public sector not only of prolonging the inflation, but of individually gaining from it through currency speculation and other crimes.  The beamtenschaft received very little support from other unions when reforms were imposed in 1924, and even less from a government that decimated the civil service to save its own budget.  As a result of this treatment, the civil servants felt they had been singled out, and sold out, by their employer and by the various centrist political parties they had previously supported. The 1924 election, Kunz argues, showed that civil servants en masse had abandoned the center parties, just as many others had in 1920, for more radical left and especially radical right parties. In the final analysis it was not the disease of hyperinflation that caused the beamtenschaft to give up on Weimar. It was the cure. 

    Kunz does a very good job of filling in some very sketchy numbers – as he complains, the number of workers that made up the beamtenschaft was so hidden as to be a virtual state secret. This was complicated by the fact that much government work was done by contractors who were not necessarily counted as payrolled employees or who were counted differently in different places. He also explains very well why the government payroll grew when and how it did. A lot of returning soldiers were given their old jobs back, a lot of wounded soldiers were given make-work, and a lot of middle-level bureaucrats were needed to enforce price controls. To top it off, reforms like the 8-hour work day meant that both business and government needed more employees to do the same amount of work. Kunz makes it clear that the beamtenschaft was not itself responsible for its expansion. He also illustrates very well that much anger against the bureaucracy was misplaced.

    Unfortunately, I think he falls into a number of the same errors of which he accuses prior historians, though given the nature of the data, such errors may be unavoidable. For example, Kunz takes Keynes to task for setting up three hypothetical classes (investing, earning, and business) whose fortunes advanced or degraded differently in the hyperinflation. Keynes asserted that the business class, for example, advanced via windfall profits from delayed payments – they borrowed $100 today and paid it back in 6 months at a penny. The investing class, roughly equivalent to the Marxists’ rentier class, suffered a complete collapse, having their incomes and assets denominated in a currency that was destroyed.  Kunz argues, more correctly than not, that such classes are too imprecise.

    Yet  Kunz’ upper, middle, and lower classes are surely as vague as Keynes’s tripartite division.  In an era where salaries of the top earners lose 80% of their value while lower salaries are rising, surely such class distinctions cannot be maintained. Kunz artificially holds them apart in order to show how they were later drawn together, and may overplay his data in doing so. There is no guarantee that any identifiable person belongs to only one class.  Can a person be an upper-level bureaucrat and own a rental house whose value is destroyed by price controls? Of course, and that person would gain and suffer differently from any other member of the beamtenschaft who owned different assets or made different decisions. His categories are too broad, too neatly separated, and might not apply fully to any member in them, which allows us to only speak in generalities. Even though it is still a useful exercise, it is, of course, exactly where he accuses Keynes of falling short.

    However, where he is incorrect is in claiming that Keynes’s short study during two particularly virulent periods cannot illustrate long-term effects. Surely it can, for while the effects start before the hyperinflationary period proper, those effects are cumulative and some are permanent. How many thousand percent must prices rise to wipe out pensioners? To make people give up hope? To convince them that theft is easier than working?  After a certain, large, unknown percentage increase the measured prices are not real because the currency is not real. The price of a movie ticket is irrelevant because no one is giving them out for money. What does it matter if a potato costs four million dollars or four trillion? The effects may last a long time and they will probably be set deeper the longer the longer inflation lasts, but it doesn’t take a long time for them to come into effect once we are measuring inflation in thousands of percent annually. When that happens, most of the financial damage occurs very quickly and is unrecoverable. The social damage, while it takes longer to occur, can surely be measured in small chunks as well as large.

    The German Inflation of 1923, edited by Frinz K. Ringer, is a volume from the famous “Problems in European History” series. As such is a not a book as much as a collection of essays, interviews, and other documents related to the hyperinflation and which illustrate small parts of it. They are introduced by a full chapter of background material, as well as chapter-level introduction to the smaller pieces. While it would be superfluous to review every essay, interview, or speech in the book, two of the more notable ones will be examined.

    The most interesting interview in the book is doubtless the excerpt from Pearl S. Buck’s How it Happens.  The interview, carried out after World War II with a Hamburg native named Erna von Pustau, concerns her remembrances of the inflation on her parents (she was a teenager in the early 1920s). Ringer gives a note of caution in introduction, and it is well taken: because this history is ‘remembered’ after later events, it is also interpreted through those events in the mind of the teller. It is quite possible that Miss von Pustau would have never remembered that her father’s business partner was a Jew had Hitler died in the Beer Hall Putsch. There are certainly undercurrents of anti-Semitism, and Jews are certainly getting some blame during the inflation, but we must be very careful estimating the relative size of something viewed under the microscope of later experience. 

    That said, what was a real insight was the moral and social changes brought about by the inflation where they were tied to personal experiences. Before the inflation, judgments of social fitness (i.e. for marriage) were often a function of social position. The daughters of good families received good dowries and married in or above their station. Erna’s mother, in the case of Erna’s elder sister, insisted that tradition be kept.  However, as the inflation destroyed her family’s assets, she came to realize that she was no longer able to provide a dowry, and so reluctantly agreed to a marriage for her daughter to a painter that would have been unthinkable a few years prior, lest her daughter end up pregnant by him anyway.  Thus quickly traditions succumb to necessity.

    The second insight was the quick change in attitudes towards work and savings. When Erna provided dance lessons for neighbors in exchange for cash, she quickly discovered that the wages she finally received bought less than her pittance of an allowance a few years prior.  “Money,” she says, ‘isn’t worth earning.” It was madness to save such money or to defer gratification. Plenty of others thought so as well, as they spent, spent, spent – a wholly rational act in the face of the currency heading to zero.

    A second essay of value was Hugo Stinnes’s explanation of the need for inflation.  Stinnes, of course, was one of Germany’s most successful industrialists and a man who was intimate with every German government of the Weimar period.  His explanation comes in the form of an interview by the American ambassador to Germany in 1922 on the very day Walter Rathenau was assassinated, with whom Stinnes had been meeting. Therefore it can be taken as the “public” argument of the German government, though one cannot assume that Stinnes is telling the Americans the actual position of that government.

    His argument boils down to the following: sustained, purposeful inflation is necessary to put 4 million soldiers back to work and to keep them working. Even if real wages suffer, the economic “boom” created by a burst of government purchases is preferable to having an army of disaffected young men stirring up trouble. The republic really has no choice. Secondly, inflation must continue to avoid Bolshevism. While the Weimar government had suppressed a putsch from the left already, it was not certain that given enough fuel, such an attempt would not be tried again. Stinnes argues that such a revolution would cause far more harm in Germany than in Russia, the former being an industrial power.  This argument was surely more than a little self-serving and convenient given America’s hostility to Bolshevism and the Red Scare taking place at home.  It also fit neatly with the “Hole in the West” theory whereby Germany was supposedly preserving Western culture from encroaching godless communism.  What Stinnes fails to mention is that “proletarianization” and radicalization were guaranteed effects of this inflation policy.

    Finally, Stinnes argued that inflation was necessary to get out from under pensions, and specifically war bonds. It is a direct if crass admission that the government had no intention of meeting its existing financial obligations in anything resembling meaningful payment. Of course, in that Germany is hardly alone.  As 2011 Greece prepares to return to the inflatable drachma to manage its debt, and as the American Federal Reserve tries desperately to purposely create dollar inflation to allow our government to manage its growing debt load, the story, if not an echo, is at least a rhyme.

    Professor Steven B. Webb, economics professor at the University of Michigan, approaches the issues of hyperinflation from a completely different perspective than most historians in his short, economically-focused Hyperinflation and Stabilization in Weimar Germany. Webb’s book is not geared toward the history student trying to understand economics; its intention is “to give the history that complements the econometric literature on the German inflation.”  As such, while it littered with quotes and observations from the above books, its focus is not on the political questions regarding the hyperinflation, but on the economic ones. These questions are most often contrasted between the monetarist school of thought and that of neo-Keynesians, however Webb does bring to the questions a number of historical theories that dealt only with specific questions.  It is an odd oversight, however, that while Webb mentions the Austrian hyperinflation twice, does not mention either the Austrian school of economics which developed during it, nor Ludwig von Mises, who had plenty to say about it from his chair at Vienna University.  

    Among the questions Professor Webb tries to answer in seven essays/chapters is one that has raged on and off from the beginning of the hyperinflation: why did prices rise faster than the quantity of money being created?  While this paper has presumed that the quantity of money being issued was the causal factor in the inflation, Webb explains that for many, especially German government officials and economists, another culprit was to blame. Under the Balance of Payments theory of inflation, the negative balance of payments (e.g. more money leaving for food and reparations than was coming in for finished goods) caused a fall in the mark. The fall in the mark then drove domestic prices up. Rising prices then drove the costs of government up, upsetting the budget. The printing of money by government, then, becomes a reaction to and a consequence of the price issue, which problem is ultimately caused by the Allies.  One can see how this theory might be comforting to certain Germans and their government – if the problem is reparations and not spending imbalances, then the only real solution is to seek relief in regards to reparations and the government can spend and tax as it wishes. Webb, however, explains its fatal assumption: the exchange rate was not exogenous, but was as dependent upon the world’s perceptions of the German government’s effectiveness and policies. In short, the perceived value of the mark rested as much upon its perceived future quality as its present quantity.  For example, demands for reparations upset the exchange rate, but it was the German insistence that reparations would cripple Germany that most hurt the mark; the more they complained, the more the mark dropped, even before a single mark was paid. And the mark tended to level and inflation tended to slow when it looked, as in 1920, when the Weimar government might get its house in order, even though it was still issuing money like mad. So the Balance of Payments theory draws an incomplete circle, which must be completed by tying the market’s perception of the mark to the market’s perception of the issuer of the mark, a knot many were quite opposed to tying. Webb makes a good case based on modeling that Quantity Theory, especially factoring in expectations and velocity, is a better explanation, i.e. that it is not simply that there was more money, but that the money was moving faster and faster, that caused prices to rise faster than the increase in the quantity of marks. For my part, I suspect that the truth lies somewhere in the middle. Given our own economic experience since the Great Recession, I have a lot less confidence in economic models than does Professor Webb.

    A second item of significant value was Webb’s explanation of the reforms necessary for a stable replacement for the dying mark. The first, a budget balanced or in surplus, is the most obvious if most difficult; it was the inability of the German government to meet its demands that unbalanced budgets in the first place, leading right back to the war’s beginning. To balance the budget meant to jettison a whole lot of government activities, to reduce personnel and salaries, to eliminate subsidies. In short, Germany had to implement a brutal austerity program that makes Greece’s current one pale by comparison. It was only the pain of the hyperinflation that made its cure bearable, but introducing a new currency is not sufficient in itself to cure the inflation. Secondly, the new currency demanded strict limits on Reichsbank discounting, especially to the government. The government was verboten from borrowing as they had in the past. Nor would businesses be welcome at that window. Companies would be stripped of their right to issue notgeld, paper scrip that had circulated alongside paper marks. The central bank would be forced to curtail credit to avoid monetary expansion. It had had to be willing (and able) to step into the foreign exchange markets to stabilize the value of the mark. Webb argues that only by doing what had been considered impossible could Germany overcome the inflationary expectations that had exacerbated the effects the inflationary actions of the past decade.

    Webb makes a number confident assertions in areas that historians and economists still argue about, most notably in his insistence that Germany could pay reparations because the amounts demanded “were not an economically impossible share of the national product.” But here he is thinking like a computer-modeling economist rather than an historian. The fact that something is economically possible does not make it politically possible. Webb comes closer to reality later in the book, for there he recognizes that reparations are only justified if Germany can actually pay them. After repeating his earlier assertion that Germany had the means to pay, he notes that the Germans elected governments that agreed to pay and tried to pay, yet failed. I would argue that they failed because there is more to the possible than economics; a purposeful, painful, long-term course of action must be politically possible in the short term and politically sustainable over the long term. In Germany, no one was thinking about the long term; the short term had too many problems already.

    It is difficult to imagine an account more unlike Webb’s econometric analysis of the inflation that Adam Fergusson’s hard-money morality tale, When Money Dies. Originally published during the high-inflation 1970s, When Money Dies hit the bookshelves again last year, sporting an expanded forward and a back cover containing dire warnings of the dangers of Quantitative Easing, the modern electronic version of the printing press.  Where Webb seeks to model and explain the mechanics of the hyperinflation, Fergusson, a former member of the European parliament from Scotland, illustrates through contemporary accounts how inflation destroys people, families, and societies. It is like the difference between a man who explains how cancer spreads and one who shows you pictures of tumors to get you to quit smoking.

    Written in a popular style, When Money Dies relies on contemporary records from the British foreign office and near-contemporary diaries and interviews, rounded out by a small number of secondary works. It uses more than a few of the same sources as Ringer, including Pearl S. Buck, though without the historian’s warnings about taking such memories at face value. Though Fergusson claims to not expound “any economic lessons,” he takes a purely monetarist interpretation to the episode, continuously chiding those politicians who fervently clung to the Balance of Payments theory that exonerated them from responsibility for the financial mess they were clearly making. 

    His major arguments are two. The first is that while the inflation did not cause Hitler, it certainly made him more likely.  What little republican credibility the dolschtoss failed to undermine was completely destroyed by the failure of the currency. The argument is not, however, that Germans necessarily wanted a Hitler in 1924, but that the suffering inflicted on them by the republic made other options preferable. That they wanted stability was a certainty; that they wanted everything Hitler gave them was not.

    Fergusson’s second argument will sound familiar to anyone who follows the hard-money, Austrian, or libertarian schools of economic interpretation: Germany continually chose to take “the soft road,” resulting in a harder road in the end.  At every economic decision point, the various Weimar governments avoided the feared depression by inflating. They could not avoid it in the end; they simply dragged it out for longer and made the suffering worse than it needed be. While they tried to avoid unemployment or default or social disorder, they simply added monetary destruction to those results. Everyone recognized that deflation was going to be necessary however painful. But as Augustine once prayed for chastity and added a quick “but not yet,” each government worked to push the day of reckoning further into the future. Everyone knew the long-term was naught but the accumulation of short terms, but concern for the short term pushed the long term out of the decision process. I suppose it is not unlike American government officials who repeatedly claim that in the long-term America needs to get its fiscal house in order, but that any short term moves in that direction will harm the present, fragile recovery. Fortunately, America is not contending with the dozens of other more acute problems that Weimar politicians had to juggle alongside inflation.

        To Webb's binary choice of the mechanical causes of the hyperinflation, Carl-Ludwig Holtfrerich adds a third possibility in his German Inflation 1914-1923: Causes and Effects in International Perspective. This alternative, which forms the third side of a triangle of interlocking causes he discusses and evaluates, is that the rise in Germany's domestic prices is most easily explained as "cost-push" inflation, meaning that higher wages chasing fewer goods drove the vicious cycle that ended in 1923.  This theory, first advanced by Karsten Laursen and Jorgan Pederson in 1964, places the Reichsbank in a passive role: its monetary emissions are simply meet existing monetary needs, and no blame accrues for that money's effects. These divergent ideas, argues Holtfrerich, do not arise solely from differences in theory, but are based on the "inadequate state of empirical research" about the period, mostly as a result of inadequate German bureaucratic documentation.  That said,  Holtfrerich will eventually reject the Larsten/Pederson thesis for the Quantity Theory, while retaining a number of the former thesis's conclusions.

    Like Webb,  Holtfrerich seeks to provide statistics where none exist.  He quotes Feldman who notes that the period is "a historical desert with few oases," and seeks to pour a little water on the sand, though his real insight comes not in providing a model but in explaining the problems of various existing models. For all their explanatory power, economic models tend to break down when they ignore or minimize political considerations as inputs. Too many models, he argues, are seduced by the beauty of mathematics in isolation from the sausage-making of real world government action. He's correct, of course: economists, like historians, often speak more confidently than their data truly allow.

    The focus of the book, however, does not rest on statistics, but rather on the effects of the hyperinflation on the rest of the world. The inflation in Germany, which for a few years resulted in full employment and growing exports, caused reactions in other markets and, of course, reacted in turn to the circumstances it changed. 

Different nations pursued opposite approaches to the necessary conversion to a peacetime economy – Britain and the United States deflated their currencies and accepted a short, sharp depression in 1920-1 that Germany's infant government might not have survived.  Germany for its part avoided that depression through policies of full employment and inflation, only to take its own deflationary medicine after the United States and Britain were fully recovered. 

Among Holtfrerich's more controvertial assertions is that, given that the 1920-1 depression in the United States was far steeper than that of 1929-31, it is likely that Germany's policy of stimulus and the imports that policy demanded significantly shortened its duration.  As evidence, he offers that Germany's prime imports from the United States (wheat, cotton, meat) were also the United State's primary exports.  I find him less than convincing in this argument; the difference in depth and length between the depressions of 1920-1 and that of the 1930s are far better explained by the divergent reactions – deflationary versus inflationary – of the respective American administrations tasked with fighting them.  

    While rejecting the Larsten/Pederson causistry of the inflation, Holtfrerich does agree with them that the inflation had several positive effects which must be weighed against the inarguable pain it caused ordinary Germans.  First, the fall in the value of the mark stimulated export markets.  Without these markets, it would have proven impossible for Germany to get the gold or the hard currency it needed to afford its imports. Perhaps. However, Holtfrerich ignores the effects on the costs of Germany's rising import deficit – every mark industry made in exports as a result of the falling currency turned into a mark the government had to print to buy food.  Secondly, he argues that the hyperinflation significantly moderated the Allies' reparations demands. It also provided a period of full employment and gave the various Weimar governments breathing room they might not have enjoyed had Germany taken deflationary medicine immediately after the war.  Finally he argues that by destroying many large incomes, the inflation created a wealth distribution that was far more egalitarian than that which existed either before or after the inflationary period.  While it is hard to argue against the numbers, the latter exercise seems a bit like arguing that Gilligan's fellow survivors were better off on their island than in California because Mr. Howell's suitcase of money was worthless at sea. While that fact surely erased social differences between Mrs. Howell and Mary Ann, it's hardly something a nation would be wise using as a justification for a macroeconomically harmful policy. This is especially true when, as  Holfrerich notes, the forced egalitarianism was temporary.

    In contrast to Holtfrerich's assertion that the hyperinflationary period was a desert for historical analysis, Bernd Widdig in his Culture and Inflation in Weimar Germany asserts that the period sports "an impressive, almost overwhelming array of economic and scholarly works." They are not talking about the same thing, obviously, as Holtfrerich's concern is for primary materials, while Widdig is almost bemoaning the plethora of secondary interpretations.  One area where Widdig does find a relative dearth of material is in the specific interaction of inflation and culture.

    Inflation, argues Widdig, is a trauma, an injury to society. Since behind only language, money is the medium through which society communicates, the loss of that money's expected value and use is bound to have deep and long-lasting effects. Historians' emphasis on the causes and financial effects of monetary inflation does not help our understanding of the real societal effects of inflation.  Instead, Widdig uses any number of non-historical and fictional works to illustrate the incredible changes to German society from that period. He is half right – the rise of women's rights, of prostitution, and of the treatment of consumption as feminine can be explained by historians in reference to inflation, but they seldom are.  On the other hand, culture is not only books and movies, but cultural attitudes – the German fear of inflation which lasts into today is as much a part of their culture as was Bauhaus architecture.

    Widdig compares three interrelated dynamics of monetary inflation, and especially hyperinflation, to their cultural equivalents. First and perhaps foremost is vermassung, "massification," the idea that like the transformation of small numbers on bills to large ones destroys the individuality of each one, so the massification of culture transforms individuals into groups, with the associated feeling of loss of individuality in each person.  Secondly, he argues that circulation, the passing of money quickly from one to another, has its parallel in the passing of ideas and mores across boundaries that had been previously respected.  Finally, depreciation, the loss in overall value, works on cultural attitudes as it does on marks.  As the mark was increasingly seen to be valueless, so was the cultural heritage that the mark represented. Inflation, like war, destroys the past and the future and leaves only the present. Culture which respects the past and looks forward to the future is bound to be different than that which cares for only the here and now.

    A large part of this alienation, Widdig argues, was tied up in the intellectual class.  Before the war, many intellectuals saw themselves as the guardians of culture, of learning, and of "Germanness." When inflation destroyed their incomes and their ability to think and write for a living, the lost sense of purpose they felt manifested itself in new forms of art, new architecture, and in a literary weltanschauung that was unlike the world they lost.

A second interpretation, perhaps less valuable, explains the changing place of women in society.  While the rise of prostitution certainly had its parallels with "circulation," there is possibly a better explanation than a loss of the future: the old adage that it's better to have a prostitute in the house than a dead infant.

But Widdig goes further when he parallels the rise of women in society with the transformation from a financial culture of production to one of consumption.  Men were generally the producers – they went to work. But this monopoly, never complete, was broken when 1.5 million women went to work in war industries. That genii could never be fit back into the bottle. Surely the fact that women were society's de facto consumers would lead to their relative increase in importance as the culture shifted from production to consumption? But while it's possible that inflation speeded the change, it's unlikely that inflation caused it – such a change took place in nations that did not suffer from it at all, but chose its opposite to wind down their war efforts. Furthermore the existence of the purposely single woman is just as easily blamed on the ravages of war, borne by a single generation of men dead and crippled, who could not be husbands and providers in the post-war era, as it is on the idea that inflation forces society's main shoppers into "quick and instantaneous acts of buying."

    Widdig's book underscores the difficulties of writing history while relying on primarily non-historical sources. He provides many heretofore unexamined "interpretive sources" like paintings, political cartoons, photographs, and buildings.  Unfortunately, this New Historicism, while it can be enlightening, also suffers from a fatal subjectivity.  Surely the short time preferences of the period are related to the inflation, for when money loses its value, savings and its related attitudes are punished and thereby disappear.  However, it is as difficult to draw a straight line between inflation and increasing female independence as it is to draw one between inflation and the rise of Hitler.  One may have helped the other, one may have fertilized fields that would be planted by the other, but to make one a necessary cause, much less a sufficient one, plows fields of stone that are likely to deliver a sickly harvest at best.

    The German hyperinflation of 1923 was not simply a monetary phenomenon. It was a political one. The new Weimar governments faced an unmanageable debt – the interest alone demanded 9 billion marks a year, more than four times the government's 1919 income.  In modern American terms, that means interest payments of $9 trillion on our tax collection of $2.4 trillion, rather than the ~$200 billion that upsets our present budget. It faced the immediate need to find work for millions of returning soldiers, some maimed to the point they could not do manual labor at all. It faced potential revolutions from the right and left, movements that would be exacerbated by hordes of unemployed men. It faced an agricultural and industrial infrastructure unable to feed, house, and clothe the nation.  It wrestled starvation in the streets; it is a sad commentary that an internal German report noted by Holtfrerich explains that one reason for reduced deaths among elderly and dependent populations in 1922 was that so many had died in 1918. It suffered a loss of productive land imposed by the victorious allies, as well as a corresponding loss in population. To top this all off, the allies demanded Germany pay, in goods and gold, all the costs of the greatest war mankind had fought to that point, with the threat of invasion if it defaulted.  The government's realistic options looked limited.

    So it chose inflation. Surely German officials gave convenient if theoretical explanations for why the results of the inflation were not their fault, but even the Reichsbank, while it publicly held to the Balance of Payments explanation, admitted in private to the government that their own printing presses drove the increased prices. The Germans inflated on purpose because that was the only way they saw to deal with the more acute issues they faced.  But inflation reduced options; a road not taken, once passed by, cannot easily be chosen again. As the inflation wore on, the forces of Wage Push and falling exchange rates made the problem worse. Currency speculation and tax evasion by industrialists like Hugo Stinnes made the problem worse. Conspicuous consumption by the newly rich made the problems seem worse to the poor and non-existent to the vengeful French. But they did not cause the inflation, they lived on it like a tick on a dog. The printing press caused the inflation.

    When France’s army rolled into Germany and the Germans decided to pay their passive resistors with newly printed marks, the currency finally broke. Then there was no choice left but to accept the deflation, the unemployment, and the political radicalism that a dozen governments had tried to avoid via inflation. The currency fell to nothingness, the decks had been cleared, the madness ended. Perhaps the cost was worth it in the short run, as Germany did manage to gather a few silver linings from the raging storm. But had they known the road they traveled led through hell before circling back to where it started, it is hard to argue that they would have taken it anyway.

Bibliography, in order of discussion:

Feldman, Gerald. The Great Disorder: Politics, Economics, and Society in the Great Inflation 1914-1924. London: Oxford University Press. 1989.

Kunz, Andreas. Civil Servants and the Politics of Inflation in Germany 1914-1924. Walter De Gruyter Inc. 1986.

Ringer, Fritz. The German Inflation of 1923. London: Oxford University Press. 1969.

Webb, Steven B. Hyperinflation and Stabilization in Weimar Germany. London: Oxford University Press. 1989.

Fergusson, Adam. When Money Dies: The Nightmare of the Weimar Collapse. London: William Kimber. 1975.

Holtfrerich, Carl-Ludwig. The German Inflation 1914-1923: Causes and Effects in International Perspective. Walter De Gruyter Inc. 1986.

Widdig, Bernd. Culture and Inflation in Weimar Germany. Sacramento: University of California Press. 2001


  1. Quite a tale. And while, probably, we won't face that, it is not the only way to hyperinflation, or deflation really, in the end. And, that is quite possible. If the government decides to bankroll failed public and private retirement and medical... we could easily get there. Throw in state debt, when it becomes untenable, in it's various forms, and... I would say that would get us there. Especially since once bailouts begin they never stop.

    Something you aren't adding in is that, as of several years ago, maybe last year, we were borrowing something like 43 cents of every dollar spent. As that became an unreasonable bet, some nations stopped buying, or at least slowed their purchasing. At some point, if I understand things correctly, we started "buying" our own debt. I don't even think that, really, is a part of QE. Basically, we are, on top of printing more, printing it to buy the debt. That has to be taking a downhill sled off the slope and getting a raise in elevation via helicopter. Then being released mid-air. That has to be nearly... what... exponentially faster, and without restrictions, considering how debt to dollar is considered? Something about something... fractional...

    As to cabals... Oh, sure, they exist. Many of them, though. Dozens, hundreds, thousands? I believe they are simply in cya mode. The ones who really understand are looking for anything, any way. They are far more panicked than the average Joe. While, for example, there are groups working to keep gold down, there are groups working just as hard to keep gold up. Actually, that is one set of cabals which I think is the same. They are trying to keep gold at a certain point. The last bubble? Too big and it busts, too small and it holds no use to those needing to squirrel away the millions or billions of trillions that are being printed by most nations. Maybe, or among the last of bubbles. Silver too. I won't even buy silver until it hits $10, unless it is still falling to it's real value... $4-$7. Bubble. If I see gold settle to $350-400, maybe $500, I might buy... if the drop seems to be settling.

    Yeah, well... I'm not sure how fast, slow, or exactly what form it will take. But I do agree with Vox, we are, and have been, in a depression since '08. It is only getting worse. And it is global. No economy is spared from it. They are sticking together, not for love, out of sheer desperation. To have watched as China choked and released a flood of even silver, absolutely having to break, bringing silver down to $20, only to see their arch-rival (one of them, local) India, pick up the slack? Yeah... they are holding on with fingers and toes. Maybe just nails now. If someone, anyone, drops, major private or a larger government, the gig is up. Not sure how long they can overcome differences of politics and petty hatreds for greed. But... it's... sort of fun to watch. Popcorn!

    Actually, I think the reset will be better than this last decade, after a short very hard time. Probably. Uhrm, assuming it stays in the economic and doesn't end up in a seven way nuclear war somehow. Oh, don't be surprised. The bigger the loser, the harder they'll take it. Anything is possible if, say, the Rothschild empire was foreclosed.

    Feel free to make correction, debate, or just explain something I don't seem to be getting. I'll... eventually... do some homework. Just... I won't read six books, no matter how well, or poorly, written. But I will investigate a few areas more thoroughly. I don't expect you to do my homework, if I expect not to be sent on wild goose chases. :p

  2. At some point, if I understand things correctly, we started "buying" our own debt.

    This is a big deal and most people really, really do not understand how big. It's how bad things happen. But it really isn't bad yet. Now, watch what happens when rates head back to normal levels as they must someday, after we tack on a few trillion more and SecSec becomes a net drag on the budget. Then it will be decision time.

    For a bit of perspective I mention in there that in proportion to our current budget, Germany's interest payments alone were something like $9t. So rather than borrowing 43 cents of every dollar spent, they were borrowing on the order of $5 for every dollar in actual budget for interest alone. It was obviously hopeless. Our situation is likewise hopeless, but it's not obvious yet.

    That's what I mean about Decision Time. Weimar made a conscious decision to get out from under its debts by destroying its currency. They judged that hyperinflation was a lesser price to pay than the massive default/deflation that loomed following the war. Whether the decision was correct or not, it was not something they stumbled into blindly, it was simply where the path they chose led.

    We are at about 1915 in Weimar time, as far as I can tell. We will face the same choice soon enough.