The most devastating inflation the world has ever seen was in Weimar Germany. After the First World War, the value of the Reichsmark collapsed in a few short years from 4.2 to $1 to 4.2 trillion to $1.
Hyperinflation of that astonishing order is unlikely to strike an advanced economy again. But at the root of the German financial disaster was the willingness to print more and more money, a practice the Federal Reserve and the Bank of England call “quantitative easing.” In Britain and in the US, we are approaching a second round of quantitative easing, QE2. The markets have already anticipated it: The price of gold and equities have scaled new heights, with the dollar plunging and the threat of a trade war conducted with the weapon of competitive currency devaluation.
In the 1920s, Germany’s economic fabric had been torn to bits by the war, its tax base was destroyed, revolution threatened and punitive reparations were due in gold to the Allies. The Reichsbank thought it had no choice but to print money if wages were to be paid, workers were to be employed, unrest was to be averted. Disastrously, the bank’s president, Dr. Rudolf Havenstein, also believed that money supply had no connection with price levels or exchange rates, and that it was his duty (uncontested by the ministers) to meet insatiable demand with infinite supply.
In August 1923, Havenstein boasted that he would soon he able to print and issue an extra two-thirds of the total circulation of money in a single day. Promptly the mark’s nominal value fell through the floor — from 3 million to 5.2 million to the dollar. By the time those banknotes were printed — on one side of the paper only for efficiency, with 30 paper mills and 2,000 printing presses working 24 hours a day — they were too few, their denominations too small. So rapid was the depreciation that workers on strike for higher wages had no sensible idea of how much to demand.
The lesson is that the public’s inflationary expectations are self-fulfilling. The view that they can be manipulated safely without being inflamed is hugely risky.
There is also the matter of addiction. As Lord D’Abernon, the British ambassador to Berlin, put it then, “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.”
Wasn’t the first federal stimulus round supposed to be a one-off? Who can remember? Will the next be the last? Who knows? What evasive counter-action may the investor, the pensioner, the holder of government bonds, the self-employed, anyone on a fixed income with nowhere to run, decide to take? Ninety-odd years ago this sort of question, especially the last one, was being asked by Germans watching a government ready to do anything to avoid huge unemployment.
There is as yet no proof that QE “works,” whatever that means — in Britain, so far, most of the extra money conjured up has disappeared without boosting or stimulating anything apart from the books of banks. In the US, too, QE seems to be not just a dangerous exercise but — as interminable dispute between economists shows — a highly uncertain one.
The history of Weimar is not predictive, but should serve as a warning that printing money to postpone an evil hour usually makes it worse. The moral of Weimar is that a central bank’s primary duty is to maintain people’s trust in their currency.
Public investment and infrastructure spending undertaken in recession are (more or less) the neo-Keynesians’ prescription for recovery. But what if the medicine has already been used up; what if the roof was not fixed when the sun was shining; what if the day of reckoning is put off and insolvency still looms? Germany postponed that day until it arrived in all its pent-up fury.
Adam Fergusson is the author of “When Money Dies: Germany in the 1920s and the Nightmare of Deficit Spending, Devaluation, and Hyperinflation” (PublicAffair), out now.
Old, bankrupt world
Sixty percent of all the nations in the world will have their debt downgraded to “junk” status by 2060, according to a harrowing new report by Standard & Poor’s. The cause? Rapidly aging populations, with retirement and health costs their countries can’t afford. The world’s population over 65 will double to 16.2% from 7.6% today, according to the United Nations. Today, most nations have a debt at 40% of their GDP. By 2050, S&P says, it will average 245%. For the US, it’s even worse — from 69% today to 415% in 2050, dwarfing the levels seen during the world wars.
Percent of GDP the US will spend on age-related costs, according to S&P:
2010: 10.8%
2020: 12.5%
2030: 15.1%
2040: 17.1%
2050: 18.5%