Lessons from the Great German Hyperinflation of 1923

When Money Dies, by Adam Fergusson
Reviewed by Patrick Barron

Feel the need for a good, old-fashioned horror story, one that will make your hair stand on end? Maybe one that will cause bile to rise in your throat? Well, don’t bother to reread William Peter Blatty’s The Exorcist, Mary Shelley’s Frankenstein, or Bram Stoker’s Dracula. For a detailed account of the descent of an entire country into despair and barbarism read Adam Fergusson’s When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany.

First published in 1975 and re-published in 2010 and made available through The Mises Institute, When Money Dies should dispel the notion that the rule of men is superior to the rule of law. Why “the rule of law”? Because it was the violation of the rule of law by governments themselves that supplanted the peaceful, liberal order of a gold-based international monetary system with one in which central banks, at governments’ behest, could print fiduciary media without limit. The full implication of this change was seen in Weimar Germany, the German people’s first experiment with representative democracy, where civilized society fell victim to the evils of the monetary printing press. For all practical purposes, the Mark was not worth the paper upon which it was printed. Eventually the Reichsbank issued the largest denomination note ever printed in the history of the world, a one hundred trillion-mark note, which no one would accept for payment. Be very careful if you believe that it can’t happen today.

Throughout Fergusson’s detailed, almost day-to-day description of government’s attempt to chase its tail around the inflationary circle and the pathetic, heart-rendering response of the great mass of the German people who tried to survive when their money became worthless, my thoughts kept returning to modern day America. The hair really did rise on the back of my neck and the bile really did rise in my throat when I realized that nothing had changed in the essential realm of our current monetary system; that is, that men rather than law control our money and their understanding of the very nature of money is no different than it was almost a century ago.

For those who believe that Germany’s central bank destroyed its own currency in order to print its way out of its World War I reparations payments, Fergusson gives compelling evidence to the contrary. One, there no evidence in the written record that German bankers ever secretly pursued this goal, and there is much written record. Two, in any case Germany was forced by the Treaty of Versailles to pay its reparations in gold or real goods anyway. So we must look elsewhere for the cause of the great currency inflation. And we need look no further than that men in positions of power were ignorant of monetary theory and had every incentive not to become knowledgeable about such theory.

Money production had become politicized throughout the world prior to World War I (Hum…I wonder is there is a cause-and-effect link here?) Rather than backing circulating currency to gold at least to some marginal extent, central banks engaged in a strategy to remove all the restrictions to their inflation of the money supply necessarily imposed upon them by the fact that the quantity of gold could not be inflated.

Hard as it may be to believe, Fergusson presents a compelling argument that the central bankers of Europe did not believe that the quantity of money had anything to do with the price level. And I suppose you think that our modern Fed rulers understand at least this much. Well, if they did they would not inflate the money supply. They would not issue statements that they are pursuing a two-percent inflation rate to achieve full employment. (By the way, full employment was one of the main justifications for the Reichsbank’s inflationist monetary policies. So nothing has changed. Central bankers still believe that monetary policy can lower the unemployment rate.) We see what happened in Weimar Germany. When a little monetary inflation failed to cure all ills, a little stronger dose was prescribed, and stronger and stronger doses until chaos reigned. Today’s pronouncements are no different. The Fed and their easy money, Keynesian-trained apologists are calling for even more monetary inflation. So we now have QE2 and maybe QE3 and QE4. It has not been ruled out and who or what will prevent it? Nothing, for failure of the latest monetary binge becomes justification for more. Furthermore, the near term advantages are irresistible. Bailouts are heralded by all who get the money, and the same apologists issue their propagandistic approval, which is disseminated by an ignorant mainstream media to a populace untrained in economics.

But the most important conclusion that one can draw from the great German hyperinflation experience is that money expansion is a prelude to and an enabler of war. The demise of the gold standard is the common thread that underlies the belligerency of the European powers around the turn of the 19th to the 20th century. America lagged behind somewhat but only somewhat. The ability to print money in unlimited quantities explains why the 20th century was the most brutally destructive in history. Printed money allows governments to embark on military adventurism, because it allows them to confiscate resources and reward key constituents. Even during Weimar Germany’s direst hours, there were those who knew how to benefit from the chaos. They were the scum of society plus the cream of society. The scum were all crooks and the cream was the politically connected industrial and financial elite. The middle class bore the lion’s share of the cost and was destroyed. Is this starting to sound familiar?

Today one must be either dependent upon welfare or receive too-big-to-fail bailouts in order to benefit from money expansion. Again, nothing has changed. The middle class scrambles to make ends meet while politically connected pressure groups benefit. In the meantime men who only yesterday were little more than highly paid extortionists, scamming state governments for the benefit of special interest groups, now send American troops, like so many toy soldiers, to every corner of the world. Our military is stretched to the breaking point while our strategic defenses suffer. This is why America was so eager to sign a disreputable new arms treaty with Russia—supposedly we can cut our strategic missile deterrence force in order to pay for expansions of the fruitless war on terror and new bread and circuses for the masses in the form of healthcare reform. Gone are the days of a strong defense and a non-interventionist foreign policy. And gone forever are the days of personal responsibility and living within one’s own means. To this we may give credit where credit is due—fiat money produced in unlimited amounts and showered on those who support the government.

This cannot last. For a sickening glimpse into the abyss that awaits, read When Money Dies.