Originally published in 1975, The Death of Money covers hyperinflation in Weimar Germany in the early 1920s. I chose to read this book as I became increasingly worried about ‘modern monetary theory’ in 2021. This period of low interest rates and bond, and even equity, buying by central banks to stimulate the economy began after the global recession and despicable bank bailouts of 2008. Many, including me, speculated that this would create inflation and this book, first published in the 1970s, was re-published around 2008-10. Inflation actually remained remarkably low, undershooting the US / UK central bank target of 2%, for most of this period. This book was also the beginning of a reading project about WWI, the intervening period and WW2.
Germany funded WW1 using debt in the form of war bonds, which caused its currency to weaken even before hyperinflation. After Germany lost the war, and was burdened with huge reparations to be paid in hard currency, money printing began in earnest. Not having been invaded, Germany still had large amounts of industrial infrastructure intact after the war ended and, with the help of a weakening currency, began to undergo an export boom. The stock market also boomed. This confused Germany’s leadership, who thought the economy needed to be stimulated in order to meet reparations payments. The central bankers refused to raise interest rates for this reason and even argued it would make inflation worse by raising the cost of capital. Instead, all monetary problems were solved by printing money. However, as the mark weakened and weakened against its foreign counterparts, officials thought that it was the strength of foreign currency that was causing the problem rather than inflation or devaluation of their own. As Fergusson writes,
“That the government and the Reichsbank were dominated by the notion that a huge ‘passive’ balance of payments made constant devaluation inevitable hardly seems sufficient explanation of their total, blind refusal to connect the mark’s depreciation with the money supply…the budgeting deficits of the Reich and states alike were considered by writers and politicians ‘not the cause, but the consequence of the external depreciation of the mark’. (p251)
The situation continued to deteriorate as French and Belgian troops occupied the Ruhr to guarantee payment of reparations in goods like coal. The German government provided financial support to domestic resistance in this region, again by printing money. Thus the Reichsbank ended up in a situation where it was printing money to buy foreign currency to pay reparations, printing money to fund projects and finance entrepreneurs to bolster the economy and printing money to pay for striking workers in the occupied territory. All this left the country awash with worthless paper money. However, the continued printing helped political and commercial interests, in the short term, and so it went on:
“It remains so that once an inflation is well under way (as Schmolders has it) ‘it develops a powerful lobby that has no interest in rational arguments’. This was as true for Austria and Hungary as for Germany.” (p253)
In a similar vein, Lord D’Abernon, British ambassador to Germany at the time, remarked, “Inflation is like a drug in more ways than one… It is fatal in the end but it gets its votaries over many difficult moments.”
Fergusson rejects any suggestion of scheming or Machiavellianism on the part of the government or the Reichsbank and sees these institutions as overwhelmed by their circumstances and the enormity of their difficulties:
“In practice, inflation proved no means of escaping foreign obligations except so far as it contributed to the economic collapse of 1932 which wrecked the reparations programme for good.
The Reichsbank’s display of naivete in its credit policies of 1922 and 1923 should finally dispel any suspicions of financial Machiavellianism on the part of Havenstein and his associates. They staunchly denied that higher discount rates would moderate the inflation and, on the contrary, opined that they would merely raise the cost of production and push up prices further. Loudly as they later asserted that these inexplicably cheap credits were given principally for ‘profitable’ projects, the favoured firms who benefited from this largesse turned the money to their best advantage - either by turning it into material assets or into foreign currency, or simply using it to speculate against the mark and drive it downwards. The only financial conditions which Havenstein understood were those which prevailed before 1914” (p252)
The government was trying to keep the country stable and keep up payments on an impossible schedule of reparations. Commercial interests were trying to maintain, or even increase, the value of their own interests using the government and the central bank as a source of cheap credit to buy assets or even speculate against the mark, the exact opposite of what politicians and central bankers wanted. As such, the country blundered along towards hyper-inflation and eventual stabilisation in 1923. Even though it seems perfectly obvious in hindsight, it’s noteworthy that neither one of the government, monetary institutions nor the general public had much interest in tackling inflation as it occurred.
The biggest losers from this situation appear to be the middle classes and retirees. Many had fixed pensions or other types of annuities, or had invested in war bonds or other fixed income assets that paid a set number of marks. These rapidly lost all value during the early 1920s. Meanwhile other asset owners, and especially manufacturers, initially benefited from the weakening of the currency and the subsequent export boom as foreigners flocked to buy things cheaply. Likewise, initially unionised workers could demand pay rises by threatening to strike. The middle class and the unorganised labour force felt the pinch severely as the cost of living soared and their wages failed to rise enough to keep pace. As the situation deteriorated, a more general, and perhaps far greater loss took place - that of what could loosely be called ‘societal principles’. As the rules of preexisting order crumbled around them, citizens did whatever it took to survive:
“There were few in any class of society who were not infected by, or prey to, the pervasive soul-destroying influence of the constant erosion of capital or earnings and uncertainty about the future. From tax-evasion, food hoarding, currency speculation, or illegal exchange transactions - all crimes against the State, each of which to a greater or lesser degree became for individuals a matter of survival - it was a short step to breaching one of the other of the Ten Commandments. Whereas the lower classes with the further goad of unemployment might turn to theft and similar crimes (the figures up by almost 50% in 1923 over 1913 and 1925) or to prostitution, the middle and upper classes under a different kind of strain would resort to graft and fraud, both bribing and bribable.” (p236)
The rising tide of money had covered many financial indiscretions and when it was withdrawn, scandals abounded. Some of the more noteworthy figures involved in scandals were Barmat (p238), Kutisker, Jacob Michael and the Shlarek brothers. Many of these people were Jewish; hyperinflation was a period when antisemitism became more intense. After stabilisation, many high ranking government and bank officials were found to have been taking bribes in exchange for credit. More generally, the receding tide of credit uncovered those who’d been swimming naked:
“Stabilisation had ended the period when entrepreneurs could borrow as much as they wished at the expense of everyone else. A vast number of enterprises, established or expanded during monetary plenty, rapidly became unproductive when capital grew short.” (p228)
Attempts were made to reevaluate mortgage and government debt, the latter at 2.5% of face value and that only after reparations had been paid (chp 14). Even though the general losses are inestimable, some indication of the monetary devastation that had occurred emerged.
“The seal of permanence had been put on the people’s losses; as Bresciani-Turroni described it, ‘the vastest expropriation of some classes of society that has ever been effected in time of peace’. (p207)
The monetary fiction was over, and German society lay in a sickly state that it would not recover from for decades:
“With inflation alone, noted Gunter Schmolders, can a government extinguish debt without repayment, or wage war and engage in other non-profitable activities on a large scale: it is still not recognised as a tax by the taxpayer.” (p249)
Another important consequence of the inflation was political radicalisation. Some parts of German society still felt that the loss of WW1 had been a capitulation by politicians and that the army would’ve won the war if it had been given a fair chance. These same factions opposed reparations as a gross injustice. The appointment of President von Hindenburg (1925-34), a former general and war hero, could be seen as an example of this mindset. Another could be the banning of “All Quiet On The Western Front” as unpatriotic. After the inflation, when many people had lost everything, the rules of what had been known as ‘normal’ society had evaporated and antisemitism was on the rise. The country was highly unstable.
“The population is ripe,” Joseph Addison wrote home to Alexander Cadogan (both British diplomats) “to accept any system of firmness or for any man who appears to know what he wants and issues commands in a loud, bold voice.” Addison had another significant point to make:
“Economic distress is leading the people to be much more amenable to authority as representing the only hope of salvation from the present state of affairs. Unemployment is taking the gilt off the gingerbread of democracy, while the working classes realise that striking is useless since nothing would be more welcome to employers.” (p188-9)
Fergusson writes that:
“In German minds democracy and Republicanism had become so associated with the financial, social and political disorder as to render any alternatives preferable when disorder threatened again…” (p248)
And, assessing the condition of the German people, concludes elsewhere:
“They had little enthusiasm left for democracy, and were themselves moving towards authoritarianism through sheer weariness of spirit and an almost complete indifference to anything except their own lack of material comforts.” (p189)
Such was the downtrodden state of the vast majority of Germans, a narrative that squarely blamed foreign imposed reparations and the preceding government while promising some degree of material security and the restoration of national pride was a very appealing one. And those not polarized towards Hitler and the right went towards the Russia-backed revolutionary left, which was scarcely less destabilising in terms of the effect it would have had on foreign politics if it came to power.
“It is thus not astonishing that there are in this country great numbers of ordinary mankind - excellent fathers and husbands of families - who can think of foreign politics only in terms of war.” (p245) Lord D’Abernon
All this made me wonder if ‘modern monetary theory’ will eventually lead to disastrous consequences like hyperinflation and societal collapse. It certainly seems like a loss of faith in money can have extreme outcomes. In the modern world, there doesn’t seem to be a direct equivalent to reparations. On the other hand, the refusal to raise interest rates, even in the face of increasingly buoyant markets and economies, and the huge amount of cheap credit available today both seem similar. Perhaps central bankers are overconfident about their ability to finely control inflation and the economy. I wonder if they’re unwittingly enacting Lenin’s famous quote - "the best way to destroy the capitalist system is to debauch the currency." When inflation rises, it may become very hard to control. Currently, central bankers say they will target an average of 2%. So if it has been lower for a long period, it can afford to be higher for a few quarters or years. However, it seems dangerous to me to have negative real interest rates for so long. Such heavy manipulation of the bond market by central bankers and the seeming necessity for easy credit conditions to keep the party going are both highly worrisome as well.
This was a good and thoroughly researched book with lots of interesting vignettes. The book relies heavily on contemporary British political and diplomatic papers relating to Germany. It shows its age a bit in the academic language and tone. I found it a bit lacking in terms of a clearly sketched overview of the period it deals with along the lines of the ‘Epilogue’ chapter that does exactly that for the period directly after the inflation. It also wasn’t very detailed in its explanations of the technical aspects of monetary policy and central bank discounting. In fairness, it is a general account and not a technical one. The book is well indexed and footnoted and makes frequent reference to Bresciani-Turroni’s ‘The Economics of Inflation’, so perhaps that is the place to turn!
NOTES
P195 - point about inverse of Gresham's law
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