The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
The spectre of Weimar Republic-like inflation has haunted some fevered minds since central banks revved up their printing presses after the Lehman Brothers bust. No hyperinflation has yet emerged. Still, a milder manifestation of the social malaise which gripped Germany in the early 1920s is becoming evident in the West. Monetary policymakers are urging more extreme actions in their frantic pursuit of higher inflation. They should be careful what they wish for.
Historians agree that the origins of Germany’s post-war inflation lay in the failure of the country’s political classes to make hard choices. The Germans had funded their war effort largely with debt, accompanied by the printing of central-bank money. After the Weimar Republic was established in 1918, inflationary finance continued. Government deficits funded with newly printed marks had the advantage of maintaining employment at high levels and keeping the economy buzzing. As inflation soared, enterprises were able to borrow from the Reichsbank at rates so low that capital was, in effect, free.
This policy had the support of many seemingly reasonable people. Walther Rathenau, the cultured head of the electronics firm AEG and a future foreign minister, suggested in January 1921 that should the economy turn down “we ought to print money a bit faster and start construction works, using the employment these create as a dam against the depression. It is incorrect when people said that printing money was bringing us ruin.”
Rathenau, who was assassinated some 18 months later, lived long enough to change his mind. He later complained of the “delirium of milliards” (a thousand million) after the mark collapsed on the foreign exchanges and prices began escalating out of control. “We are living in a bubble,” observed the chastened politician. “Our companies pay dividends – but in fairy gold. We are eating our own accumulated resources, the result of generations of work of our ancestors.”
John Maynard Keynes agreed with these sentiments. “In the modern world,” wrote Keynes in the Manchester Guardian in the autumn of 1922, “organization is worth more in the long run than material resources.” The printing of paper marks, he continued, had brought temporary economic benefits “at the cost of a ruinous disorganization, both present and future and still to come. (Germany) has confiscated most of the means of livelihood of her educated middle class, the source of her intellectual strength; and the industrial chaos and unemployment, which the end of the inflationary boom seems likely to bring, may disorder the minds of her working class, the source of her political stability.”
The celebrated economist, whose later work gleefully extolled the “euthanasia of the rentier”, turned out to be correct on all points.
One of the curious features of the Weimar inflation was the refusal of the Reichsbank to accept that rising prices resulted from its own money-printing. Rather its president, Rudolf Havenstein, maintained resolutely that the decline of the currency was responsible. Inflation, he claimed, produced a shortage of currency which it was the Reichsbank’s duty to rectify. When it was suggested that the central bank set interest rates too low, Havenstein replied that it wasn’t his duty to make market rates but to follow them. In response to calls that Havenstein change course, he insisted on the central bank’s constitutional independence.
Inflation was difficult to bring under control not merely because the central bank was obtuse and politicians feared the inevitable cost in terms of unemployment and bankruptcies. Rather, once under way, inflation develops its own lobby which is not responsive to reason. The industrialists, who benefited from inflation, only changed their position after the economy and society started falling to pieces during the course of 1923. Another group of beneficiaries, the over-worked printers at the Reichsbank’s presses, even went on strike when a currency stabilization plan was eventually announced.
By the time its currency was stabilized, the real value of Germany’s enormous post-war national debt had shrunk to a fraction of a 1913 gold mark – 35 pfennigs to be exact. According to economist Costantino Bresciani-Turroni, this amounted to the greatest peacetime expropriation in the history of the world. The country’s wealth, writes Frederick Taylor in his gripping account of the Weimar inflation, “The Downfall of Money”, was “no longer spread evenly among millions but largely coagulated in blobs among the new plutocracy”.
Capital had passed from the slow-witted to opportunists. Speculators, who spent their rapidly amassed fortunes with great ostentation, were bitterly resented. So were foreigners, who bought up properties and shares with hard currency. In January 1923, a government minister called for tighter immigration controls.
Germany’s inflation undermined morals and manners, and fostered corruption. Respect for government and the rule of law declined as prices escalated and social order broke down. Adolf Hitler eagerly exploited the growing rancor in society, inveighing against the money-printing which he claimed had crushed the “decent solid businessman who doesn’t speculate” and turned the country into a “robbers’ state”. The horrors of inflation fed the Germans’ desire for a political strong man.
Modern central bankers like to point out that despite the recent explosion of their balance sheets the much-feared inflation has yet to materialize. Nevertheless, the recent period of ultra-low interest rates has produced conditions which, though less extreme, are eerily reminiscent of the Weimar years.
Once again, an era of negative real interest rates has produced low unemployment and “bubble” prosperity. Powerful interests support the easy-money policy, while central bankers ignore the damage their policies produce. Wealth has been redistributed on a grand scale. The newly rich flaunt it, while those less well-positioned feel squeezed. Rancor runs high in society. Popular sentiment has turned against foreigners.
In several countries the political middle ground is giving way. Firebrand politicians like Donald Trump campaign on promises of national resurrection. Hard choices and substantive economic reforms are invariably avoided. And once again, monetary policymakers, unwittingly invoking the tragic Rathenau, intone that “it is incorrect when people said that printing money was bringing us ruin.”