Do you know about - The Weimar Hyperinflation - Could it Happen Again?
Fed Interest Rates! Again, for I know. Ready to share new things that are useful. You and your friends."It was horrible. Horrible! Like lightning it struck. No one was prepared. The shelves in the grocery shop were empty. You could buy nothing with your paper money."
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- Harvard University law professor Friedrich Kessler on the Weimar Republic hyperinflation (1993 interview)
Some worried commentators are predicting a immense hyperinflation of the sort suffered by Weimar Germany in 1923, when a wheelbarrow full of paper money could barely buy a loaf of bread. An April 29 editorial in the San Francisco examiner warned:
"With an unprecedented deficit that's approaching trillion, [the President's 2010] budget proposal is a surefire prescription for hyperinflation. So every senator and representative who votes for this monster .6 trillion budget will be endorsing a spending spree that could very well turn America into the next Weimar Republic."
In an investment newsletter called Money Morning on April 9, Martin Hutchinson pointed to disturbing parallels between current government monetary course and Weimar Germany's, when 50% of government spending was being funded by seigniorage - merely printing money. However, there is something puzzling in his data. He indicates that the British government is already funding more of its budget by seigniorage than Weimar Germany did at the height of its immense hyperinflation; yet the pound is still keeping its own, under circumstances said to have caused the perfect destruction of the German mark. Something else must have been responsible for the mark's collapse also mere money-printing to meet the government's budget, but what? And are we threatened by the same risk today? Let's take a closer look at the data.
History Repeats Itself - Or Does It?
In his well-researched article, Hutchinson notes that Weimar Germany had been suffering from inflation ever since World War I; but it was in the two year duration between 1921 and 1923 that the true "Weimar hyperinflation" occurred. By the time it had ended in November 1923, the mark was worth only one-trillionth of what it had been worth back in 1914. Hutchinson goes on:
"The current course mix reflects those of Germany during the duration between 1919 and 1923. The Weimar government was unwilling to raise taxes to fund post-war reconstruction and war-reparations payments, and so it ran large budget deficits. It kept interest rates far below inflation, addition money provide rapidly and raising 50% of government spending straight through seigniorage (printing money and living off the profits from issuing it). . . .
"The indeed chilling parallel is that the United States, Britain and Japan have now taken to funding their budget deficits straight through seigniorage. In the United States, the Fed is buying 0 billion worth of U.S. Treasury bonds (T-bonds) over a six-month period, a rate of 0 billion per annum, 15% of federal spending of trillion. In Britain, the Bank of England (Boe) is buying 75 billion pounds of gilts [the British equivalent of U.S. Treasury bonds] over three months. That's 300 billion pounds per annum, 65% of British government spending of 454 billion pounds. Thus, while the United States is approaching Weimar German course (50% of spending) quite rapidly, Britain has already overtaken it!"
And that is where the data gets confusing. If Britain is already meeting a larger division of its budget deficit by seigniorage than Germany did at the height of its hyperinflation, why is the pound now worth about as much on foreign replacement markets as it was nine years ago, under circumstances said to have driven the mark to a trillionth of its previous value in the same period, and most of this in only two years? Meanwhile, the U.S. Dollar has indeed gotten stronger relative to other currencies since the course was begun last year of immense "quantitative easing" (today's euphemism for seigniorage). Central banks rather than governments are now doing the printing, but the consequent on the money provide should be the same as in the government money-printing schemes of old. The government debt bought by the central banks is never indeed paid off but is just rolled over from year to year; and once the new money is in the money supply, it stays there, diluting the value of the currency. So why haven't our currencies already collapsed to a trillionth of their previous value, as happened in Weimar Germany? Indeed, if it were a straightforward quiz, of provide and demand, a government would have to print a trillion times its earlier money provide to drop its currency by a factor of a trillion; and even the German government isn't expensed with having done that. Something else must have been going on in the Weimar Republic, but what?
Schacht Lets The Cat Out Of The Bag
Light is thrown on this strangeness by the later writings of Hjalmar Schacht, the currency commissioner for the Weimar Republic. The facts are explored at length in The Lost Science of Money by Stephen Zarlenga, who writes that in Schacht's 1967 book The Magic of Money, he "let the cat out of the bag, writing in German, with some truly qualified admissions that shatter the 'accepted wisdom' the financial society has promulgated on the German hyperinflation." What indeed drove the wartime inflation into hyperinflation, said Schacht, was investment by foreign investors, who would bet on the mark's decreasing value by selling it short.
Short selling is a technique used by investors to try to profit from an asset's falling price. It involves borrowing the asset and selling it, with the understanding that the asset must later be bought back and returned to the original owner. The speculator is gambling that the price will have dropped in the meantime and he can pocket the difference. Short selling of the German mark was made possible because hidden banks made immense amounts of currency ready for borrowing, marks that were created on quiz, and lent to investors, returning a profitable interest to the banks.
At first, the investment was fed by the Reichsbank (the German central bank), which had recently been privatized. But when the Reichsbank could no longer keep up with the voracious quiz, for marks, other hidden banks were allowed to originate them out of nothing and lend them at interest as well.
A Story With An Ironic Twist
If Schacht is to be believed, not only did the government not cause the hyperinflation but it was the government that got the situation under control. The Reichsbank was put under precise
regulation, and prompt remedial measures were taken to eliminate foreign investment by eliminating easy passage to loans of bank-created money.
More intriguing is a little-known sequel to this tale. What allowed Germany to get back on its feet in the 1930s was the very thing today's commentators are blaming for bringing it down in the 1920s - money issued by seigniorage by the government. Economist Henry C. K. Liu calls this form of financing "sovereign credit." Writing in The Asia Times on May 24, 2005, he said of Germany's qualified transformation:
"The Nazis came to power in Germany in 1933, at a time when its cheaper was in total collapse, with ruinous war-reparation obligations and zero prospects for foreign investment or credit. Yet straight through an independent monetary course of sovereign credit and a full-employment public-works program, the Third Reich was able to turn a bankrupt Germany, stripped of overseas colonies it could exploit, into the strongest cheaper in Europe within four years, even before armament spending began."
While Hitler clearly deserves the opprobrium heaped on him for his later atrocities, he was enormously beloved with his own people, at least for a time. This was evidently because he rescued Germany from the throes of a worldwide depression - and he did it straight through a plan of communal works paid for with currency generated by the government itself. Projects were first earmarked for funding, including flood control, heal of communal buildings and hidden residences, and building of new buildings, roads, bridges, canals, and port facilities. The projected cost of the various programs was fixed at one billion units of the national currency. One billion non-inflationary bills of replacement called Labor Treasury Certificates were then issued against this cost. Millions of citizen were put to work on these projects, and the workers were paid with the Treasury Certificates. The workers then spent the certificates on goods and services, creating more jobs for more people. These certificates were not indeed debt-free but were issued as bonds, and the government paid interest on them to the bearers. But the certificates circulated as money and were renewable indefinitely, making them a de facto currency; and they avoided the need to borrow from international lenders or to pay off international debts. The Treasury Certificates did not trade on foreign currency markets, so they were beyond the reach of the currency speculators. They could not be sold short because there was no one to sell them to, so they retained their value.
Within two years, Germany's unemployment question had been solved and the country was back on its feet. It had a solid, carport currency, and no inflation, at a time when millions of citizen in the United States and other Western countries were still out of work and living on welfare. Germany even managed to restore foreign trade, although it was denied foreign credit and was faced with an economic boycott abroad. It did this by using a barter system: tool and commodities were exchanged directly with other countries, circumventing the international banks. This system of direct replacement occurred without debt and without trade deficits. Although Germany's economic experiment was short-lived, it left some persisting monuments to its success, including the supreme Autobahn, the world's first extensive superhighway.
The Lessons Of History: Not always What They Seem
Germany's task for escaping its crippling debt and reinvigorating a moribund cheaper was clever, but it was not indeed original with the Germans. The belief that a government could fund itself by printing and delivering paper receipts for goods and services received was first devised by the American colonists. Benjamin Franklin credited the qualified increase and fullness in the colonies, at a time when English workers were suffering the impoverished conditions of the industrial Revolution, to the colonists' unique system of government-issued money. In the nineteenth century, Senator Henry Clay called this the "American system," distinguishing it from the "British system" of privately-issued paper banknotes. After the American Revolution, the American system was supplanted in the U.S. With banker-created money; but government-issued money was revived during the Civil War, when Abraham Lincoln funded his government with U.S. Notes or "Greenbacks" issued by the Treasury.
The dramatic unlikeness in the results of Germany's two money-printing experiments was a direct consequent of the uses to which the money was put. Price inflation results when "demand" (money) increases more than "supply" (goods and services), driving prices up; and in the experiment of the 1930s, new money was created for the purpose of funding productivity, so provide and quiz, increased together and prices remained stable. Hitler said, "For every mark issued, we required the equivalent of a mark's worth of work done, or goods produced." In the hyperinflationary disaster of 1923, on the other hand, money was printed merely to pay off speculators, causing quiz, to shoot up while provide remained fixed. The consequent was not just inflation but hyperinflation, since the investment went wild, triggering rampant tulip-bubble-style mania and panic.
This was also true in Zimbabwe, a dramatic contemporary example of runaway inflation. The accident dated back to 2001, when Zimbabwe defaulted on its loans and the Imf refused to make the usual accommodations, including refinancing and loan forgiveness. Apparently, the Imf's intention was to punish the country for political policies of which it disapproved, including land reform measures that complicated reclaiming the lands of wealthy landowners. Zimbabwe's credit was ruined and it could not get loans elsewhere, so the government resorted to issuing its own national currency and using the money to buy U.S. Dollars on the foreign-exchange market. These dollars were then used to pay the Imf and accumulate the country's credit rating. According to a statement by the Zimbabwe central bank, the hyperinflation was caused by speculators who manipulated the foreign-exchange market, charging exorbitant rates for U.S. Dollars, causing a drastic devaluation of the Zimbabwe currency.
The government's real mistake, however, may have been in playing the Imf's game at all. Rather than using its national currency to buy foreign fiat money to pay foreign lenders, it could have followed the lead of Abraham Lincoln and the American colonists and issued its own currency to pay for the output of goods and services for its own people. Inflation would then have been avoided, because provide would have kept up with demand; and the currency would have served the local cheaper rather than being siphoned off by speculators.
The Real Weimar Threat And How It Can Be Avoided
Is the United States, then, out of the hyperinflationary woods with its "quantitative easing" scheme? Maybe, maybe not. To the extent that the newly-created money will be used for real economic development and growth, funding by seigniorage is not likely to inflate prices, because provide and quiz, will rise together. Using quantitative easing to fund infrastructure and other productive projects, as in President Obama's stimulus package, could invigorate the cheaper as promised, producing the sort of fullness reported by Benjamin Franklin in America's flourishing early years.
There is, however, something else going on today that is disturbingly similar to what triggered the 1923 hyperinflation. As in Weimar Germany, money creation in the U.S. Is now being undertaken by a privately-owned central bank, the Federal Reserve; and it is largely being done to decree speculative bets on the books of hidden banks, without producing whatever of value to the economy. As gold investor James Sinclair warned in September 2007:
"[T]he real question is a trembling trillion mountain of over the counter credit and default derivatives. Think deeply about the Weimar Republic case study because every day it looks more and more like a repeat in cause and consequent . . . ."
The .9 billion in bailout funds funneled straight through Aig to pay Goldman Sachs for its highly speculative credit default swaps is just one egregious example. To the extent that the money generated by "quantitative easing" is being sucked into the black hole of paying off these speculative derivative bets, we could indeed be on the Weimar road and there is real cause for alarm. We have been led to believe that we must prop up a zombie Wall road banking behemoth because without it we would have no credit system, but that is not true. There is another viable alternative, and it may prove to be our only viable alternative. We can beat Wall road at its own game, by forming publicly-owned banks that issue the full faith and credit of the United States not for hidden speculative profit but as a communal service, for the benefit of the United States and its people.
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