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The Nightmare of 1923 and Its Cause

Mises Daily: Monday, January 24, 2011 by

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[When Money Dies: Lessons from the Great German Hyperinflation of 1923 • By Adam Fergusson • London: William Kimber & Company, 1975 • 256 pages]

When Money Dies

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, republished 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 German 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 of the pathetic, heartrending 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 essentially changed in our monetary system. That is, 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 two pieces of 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. (Hmm, I wonder — is there is a cause-and-effect link here?) Rather than backing circulating currency by gold at least to some marginal extent, central banks engaged in a strategy to remove all the restrictions imposed on their inflation of the money supply 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 2 percent inflation rate in order 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 then stronger and stronger doses until chaos reigned. Today's pronouncements are no different. The Fed and its easy-money, Keynesian-trained apologists are calling for even more monetary inflation. So we now have QE2 and maybe QE3 and QE4. Further interventions have not been ruled out, and what would prevent them? Nothing. The failure of each monetary binge becomes the justification for the next. 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 then 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 is 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 both the scum of society and the cream of society. The scum were the common crooks and the cream were the politically connected industrial and financial elites. The middle class bore the lion's share of the cost and was destroyed. Is this starting to sound familiar?

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Today, in order to benefit from money expansion one must either live upon welfare or get a too-big-to-fail bailout. 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.

Gone are the days of a noninterventionist 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 — to 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.