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Thursday, May 12, 2011

Reading List: When Money Dies

Fergusson, Adam. When Money Dies. New York: PublicAffairs, [1975] 2010. ISBN 978-1-58648-994-6.

This classic work, originally published in 1975, is the definitive history of the great inflation in Weimar Germany, culminating in the archetypal paroxysm of hyperinflation in the Fall of 1923, when Reichsbank printing presses were cranking out 100 trillion (1012) mark banknotes as fast as paper could be fed to them, and government expenditures were 6 quintillion (1018) marks while, in perhaps the greatest achievement in deficit spending of all time, revenues in all forms accounted for only 6 quadrillion (1015) marks. The book has long been out of print and much in demand by students of monetary madness, driving the price of used copies into the hundreds of dollars (although, to date, not trillions and quadrillions—patience). Fortunately for readers interested in the content and not collectibility, the book has been re-issued in a new paperback and electronic edition, just as inflation has come back onto the radar in the over-leveraged economies of the developed world. The main text is unchanged, and continues to use mid-1970s British nomenclature for large numbers (“millard” for 109, “billion” for 1012 and so on) and pre-decimalisation pounds, shillings, and pence for Sterling values. A new note to this edition explains how to convert the 1975 values used in the text to their approximate present-day equivalents.

The Weimar hyperinflation is an oft-cited turning point in twentieth century, but like many events of that century, much of the popular perception and portrayal of it in the legacy media is incorrect. This work is an in-depth antidote to such nonsense, concentrating almost entirely upon the inflation itself, and discussing other historical events and personalities only when relevant to the main topic. To the extent people are aware of the German hyperinflation at all, they'll usually describe it as a deliberate and cynical ploy by the Weimar Republic to escape the reparations for World War I exacted under the Treaty of Versailles by inflating away the debt owed to the Allies by debasing the German mark. This led to a cataclysmic episode of hyperinflation where people had to take a wheelbarrow of banknotes to the bakery to buy a loaf of bread and burning money would heat a house better than the firewood or coal it would buy. The great inflation and the social disruption it engendered led directly to the rise of Hitler.

What's wrong with this picture? Well, just about everything…. Inflation of the German mark actually began with the outbreak of World War I in 1914 when the German Imperial government, expecting a short war, decided to finance the war effort by deficit spending and printing money rather than raising taxes. As the war dragged on, this policy continued and was reinforced, since it was decided that adding heavy taxes on top of the horrific human cost and economic privations of the war would be disastrous to morale. As a result, over the war years of 1914–1918 the value of the mark against other currencies fell by a factor of two and was halved again in the first year of peace, 1919. While Germany was committed to making heavy reparation payments, these payments were denominated in gold, not marks, so inflating the mark did nothing to reduce the reparation obligations to the Allies, and thus provided no means of escaping them. What inflation and the resulting cheap mark did, however, was to make German exports cheap on the world market. Since export earnings were the only way Germany could fund reparations, promoting exports through inflation was both a way to accomplish this and to promote social peace through full employment, which was in fact achieved through most of the early period of inflation. By early 1920 (well before the hyperinflationary phase is considered to have kicked in), the mark had fallen to one fortieth of its prewar value against the British pound and U.S. dollar, but the cost of living in Germany had risen only by a factor of nine. This meant that German industrialists and their workers were receiving a flood of marks for the products they exported which could be spent advantageously on the domestic market. Since most of Germany's exports at the time relied little on imported raw materials and products, this put Germany at a substantial advantage in the world market, which was much remarked upon by British and French industrialists at the time, who were prone to ask, “Who won the war, anyway?”.

While initially beneficial to large industry and its organised labour force which was in a position to negotiate wages that kept up with the cost of living, and a boon to those with mortgaged property, who saw their principal and payments shrink in real terms as the currency in which they were denominated declined in value, the inflation was disastrous to pensioners and others on fixed incomes denominated in marks, as their standard of living inexorably eroded.

The response of the nominally independent Reichsbank under its President since 1908, Dr. Rudolf Havenstein, and the German government to these events was almost surreally clueless. As the originally mild inflation accelerated into dire inflation and then headed vertically on the exponential curve into hyperinflation they universally diagnosed the problem as “depreciation of the mark on the foreign exchange market” occurring for some inexplicable reason, which resulted in a “shortage of currency in the domestic market”, which could only be ameliorated by the central bank's revving up its printing presses to an ever-faster pace and issuing notes of larger and larger denomination. The concept that this tsunami of paper money might be the cause of the “depreciation of the mark” both at home and abroad, never seemed to enter the minds of the masters of the printing presses.

It's not like this hadn't happened before. All of the sequelæ of monetary inflation have been well documented over forty centuries of human history, from coin clipping and debasement in antiquity through the demise of every single unbacked paper currency ever created. Lord D'Abernon, the British ambassador in Berlin and British consular staff in cities across Germany precisely diagnosed the cause of the inflation and reported upon it in detail in their dispatches to the Foreign Office, but their attempts to explain these fundamentals to German officials were in vain. The Germans did not even need to look back in history at episodes such as the assignat hyperinflation in revolutionary France: just across the border in Austria, a near-identical hyperinflation had erupted just a few years earlier, and had eventually been stabilised in a manner similar to that eventually employed in Germany.

The final stages of inflation induce a state resembling delirium, where people seek to exchange paper money for anything at all which might keep its value even momentarily, farmers with abundant harvests withhold them from the market rather than exchange them for worthless paper, foreigners bearing sound currency descend upon the country and buy up everything for sale at absurdly low prices, employers and towns, unable to obtain currency to pay their workers, print their own scrip, further accelerating the inflation, and the professional and middle classes are reduced to penury or liquidated entirely, while the wealthy, industrialists, and unionised workers do reasonably well by comparison.

One of the principal problems in coping with inflation, whether as a policy maker or a citizen or business owner attempting to survive it, is inherent in its exponential growth. At any moment along the path, the situation is perceived as a “crisis” and the current circumstances “unsustainable”. But an exponential curve is self-similar: when you're living through one, however absurd the present situation may appear to be based on recent experience, it can continue to get exponentially more bizarre in the future by the inexorable continuation of the dynamic driving the curve. Since human beings have evolved to cope with mostly linear processes, we are ill-adapted to deal with exponential growth in anything. For example, we run out of adjectives: after you've used up “crisis”, “disaster”, “calamity”, “catastrophe”, “collapse”, “crash”, “debacle”, “ruin”, “cataclysm”, “fiasco”, and a few more, what do you call it the next time they tack on three more digits to all the money?

This very phenomenon makes it difficult to bring inflation to an end before it completely undoes the social fabric. The longer inflation persists, the more painful wringing it out of an economy will be, and consequently the greater the temptation to simply continue to endure the ruinous exponential. Throughout the period of hyperinflation in Germany, the fragile government was painfully aware that any attempt to stabilise the currency would result in severe unemployment, which radical parties of both the Left and Right were poised to exploit. In fact, the hyperinflation was ended only by the elected government essentially ceding its powers to an authoritarian dictatorship empowered to put down social unrest as the costs of its policies were felt. At the time the stabilisation policies were put into effect in November 1923, the mark was quoted at six trillion to the British pound, and the paper marks printed and awaiting distribution to banks filled 300 ten-ton railway boxcars.

What lessons does this remote historical episode have for us today? A great many, it seems to me. First and foremost, when you hear pundits holding forth about the Weimar inflation, it's valuable to know that much of what they're talking about is folklore and conventional wisdom which has little to do with events as they actually happened. Second, this chronicle serves to remind the reader of the one simple fact about inflation that politicians, bankers, collectivist media, organised labour, and rent-seeking crony capitalists deploy an entire demagogic vocabulary to conceal: that inflation is caused by an increase in the money supply, not by “greed”, “shortages”, “speculation”, or any of the other scapegoats trotted out to divert attention from where blame really lies: governments and their subservient central banks printing money (or, in current euphemism, “quantitative easing”) to stealthily default upon their obligations to creditors. Third, wherever and whenever inflation occurs, its ultimate effect is the destruction of the middle class, which has neither the political power of organised labour nor the connections and financial resources of the wealthy. Since liberal democracy is, in essence, rule by the middle class, its destruction is the precursor to establishment of authoritarian rule, which will be welcomed after the once-prosperous and self-reliant bourgeoisie has been expropriated by inflation and reduced to dependence upon the state.

The Weimar inflation did not bring Hitler to power—for one thing the dates just don't work. The inflation came to an end in 1923, the year Hitler's beer hall putsch in Munich failed ignominiously and resulted in his imprisonment. The stabilisation of the economy in the following years was widely considered the death knell for radical parties on both the Left and Right, including Hitler's. It was not until the onset of the Great Depression following the 1929 crash that rising unemployment, falling wages, and a collapsing industrial economy as world trade contracted provided an opening for Hitler, and he did not become chancellor until 1933, almost a decade after the inflation ended. And yet, while there was no direct causal connection between the inflation and Hitler's coming to power, the erosion of civil society and the rule of law, the destruction of the middle class, and the lingering effects of the blame for these events being placed on “speculators” all set the stage for the eventual Nazi takeover.

The technology and complexity of financial markets have come a long way from “Railway Rudy” Havenstein and his 300 boxcars of banknotes to “Helicopter Ben” Bernanke. While it used to take years of incompetence and mismanagement, leveling of vast forests, and acres of steam powered printing presses to destroy an industrial and commercial republic and impoverish those who sustain its polity, today a mere fat-finger on a keyboard will suffice. And yet the dynamic of inflation, once unleashed, proceeds on its own timetable, often taking longer than expected to corrode the institutions of an economy, and with ups and downs which tempt investors back into the market right before the next sickening slide. The endpoint is always the same: destruction of the middle class and pensioners who have provided for themselves and the creation of a dependent class of serfs at the mercy of an authoritarian regime. In past inflations, including the one documented in this book, this was an unintended consequence of ill-advised monetary policy. I suspect the crowd presently running things views this as a feature, not a bug.

A Kindle edition is available, in which the table of contents and notes are properly linked to the text, but the index is simply a list of terms, not linked to their occurrences in the text.

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