When Money Dies
Many of us have been searching for an historical reference point in which to interpret current events, a prism that might give us some insight on what comes next in the growing chaos that is modern America. At the end of 2016, the narrative was the tumultuous presidency of Andrew Jackson. Since then, some have (nostalgically, I presume) preferred a digital update to the 1960’s analog of social protest and reform (not sure if they are predicting yuppies too). While the last days of the Roman Republic have held some allure to me, it’s the Weimar Republic that has been my analogous meltdown of choice for some time now.
Germany’s post World War I republic has everything you’d want in an epic tragedy. The ambiguous but utterly draining end to a costly war, the senseless squandering of hard won prestige and moral standing, broad disappointment over what could have been had fools not taken things off the rails, massive wealth disparities sorted along outdated social hierarchies, extreme polarization of two major political factions with juxtaposed heroes and villains in their narratives, and a feeble set of institutions run by managers just competent enough to keep things going but not dynamic enough to head off disaster. Any of that sound familiar?
I have been planning to go back and update a piece I wrote back in 2011 after reading Adam Fergusson's When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany. After re-reading that nine-year-old piece, I’m chilled by how apropos it is. With only light editing, here is a column Strong Towns published on July 18, 2011.
Ben Bernanke, in a photo from 2013. Bernanke served two terms as chair of the Federal Reserve, from 2006 to 2014. Image source.
Coming off of World War I, Germany was forced to sign a treaty that, among other things, forced it to make large reparation payments to the Allied forces. It is a misconception that these payments caused their hyper-inflation episode, that Germans simply printed money to pay their debt. The payments to the Allies were to be made in gold, not marks. Despite the remarks of our Federal Reserve chairman last week that holding gold is simply "tradition" and that gold is not currency, the metal has value across time. As we will see in a minute, gold is what ultimately provided a Germany in extreme turmoil and chaos with the backstop for a stable currency.
While the reparations were a tremendous burden, the inducement for inflation was domestic. Having spent and borrowed heavily to finance the war, Germany, as the loser, had no spoils. (Neither did France or England, in this case, since victory was an armistice and not a plunder.) The German government owed their own population a tremendous amount of money since it was their own citizens buying government bonds (lending the government money) that largely financed the war. To pay this back, the German government literally just printed money. They started up the printing press and they printed, and printed, and printed money until everyone was paid back.
None of this is a far cry from where we are today. We've financed multiple wars (engagements, presidential actions, etc.) while bailing out banks and insurance companies, doing record stimulus spending, creating a new trillion dollar entitlement, paying out record unemployment and other household assistance and preparing for the pending retirement of America's largest generation. Since 2008, the Federal Reserve has created and injected $5.3 trillion into the economy, much of this given to the U.S. Treasury to finance the national debt. The exact mechanism is that the Fed buys treasury bonds so, in theory, they will get that money back in the future. [Note from 2020: These were mind boggling numbers back in 2011. The fact that there are so quaint now is a key part of this narrative and why I’ve chosen not to update it.]
Of course, getting that money back, repayment of those debts, will happen when the time is right, when the economy is back booming again. We all remember (not) how, during the dot.com boom or the housing boom, our treasury was so flush and our population so fat and happy that we were willing to tax ourselves more and cut back on our spending to pay off our debts. We couldn’t bring ourselves to have such fiscal discipline during the best of times, but Germany was forced to confront its debts during the worst of times. They were desperate. And so they printed more money. Lots more.
I don't remember the entire Weimar Republic hyperinflation episode as more than one or two lines in my history book, crammed in between the two great wars, but the fascinating thing about Fergussen’s book was how long it took the hyperinflation to happen and what the transition was like. At first, inflation solved a lot of problems. Yes, prices went up but, relatively speaking, debt—the bigger burden at the time—went down. To quote the book:
With inflation alone....can a government extinguish debt without repayment, or wage war and engage in other non-productive activities on a large scale: it is still not recognized as a tax by the tax-payer.
The reason for this is that the majority of people did not feel poorer. Rising prices were a burden, but wages were rising too. Imagine you make $50,000 this year but next year you get a raise and make $75,000. Even if gas and food prices double, you're going to feel a little better off.
A one-million mark note being used as a notepad. Image source.
As things went on, the dog kept chasing its tail, and the Reichsbank kept printing money. The government, unable to balance its budget, and unable/unwilling to really tax its people, simply printed its way to a balanced budget. They paid wages and benefits to people largely with printed money. They spent money on programs and infrastructure via the printing press. The objective of the government at the time was full employment, and stimulating the economy through government spending of printed marks was how they accomplished it. Of course, if it were only that easy. From the book:
In the inflationary period new factories were built, old establishments reorganized and extended, new plant laid down, participations in all fields of industrial activity bought up, and the great amorphous concerns founded. Too late, it was found that this process had undermined the capital structure of the country: capital was frozen in factories for which, because of the extermination of the rentier and the reduction of the real wages of so many of the great consumer classes, there was no economic demand. Once the demand for goods was shut off and the flow of cash dammed, the fate of productive apparatus was sealed.
This eerily sounds like America today where, instead of industry, our inflated capital was pumped into the suburban experiment. There it sits frozen. That is, it’s frozen only where it has yet to vanish altogether, for there are few buyers and many sellers now. And unlike Weimar, our sinking economy wears the concrete shoes of ongoing annual expenses for servicing and maintaining all this unproductive, yet critical, local infrastructure. We're trying to prop it all up—we've yet to hit the bottom—but it is getting harder and harder to do.
This is because, as with Weimar Germany, more and more people are being caught on the wrong side of the inflation game. You've had your wages increase from $50,000 to $75,000 (a 50% increase), but your cost of essential items like energy and food doubled (a 100% increase). That may work for a year if you make $50,000 to start, but not if you make $20,000. That lower wage earner soon finds their wages not keeping up with just the essentials of life. As time goes on and inflation continues, progressively higher and higher wage earners are put in the same situation.
In the U.S., wages have been stagnant for a decade. The stagnation was offset by rising housing prices and the get-rich-quick action in the suburbs. And, of course, the most leveraged and least resilient among us are the first to feel the effects.
Over time in Weimar, as prices kept rising faster than wages, some crazy things happened. Workers started to demand to be paid at the end of each day. There were stories of people ordering dinner at one price and then, because of the rapid inflation, having to pay a different price when dinner was over. Large purchases like new cars became impossible as a 20% down payment would be near worthless two months later when the purchaser was to take possession.
People were desperate to tread water, to simply hold onto what they had. They would leave work after getting their wages and go out and buy anything they could find, knowing that whatever tangible thing they could purchase could later be sold or traded for a higher value. "Growth" was created because people invested wherever they could, lest they hold onto their money and watch its value disappear. From the book:
As the old virtues of thrift, honesty and hard work lost their appeal, everybody was out to get rich quickly, especially as speculation in currency or shares could palpably yield far greater rewards than labour. While the anonymous, mindless Republic in the shape of the Reichsbank was prepared to be the dupe of borrowers, no industrialist, businessman or merchant would have wished to let the opportunities for enrichment slip by while others were making hay. For the less astute, it was incentive enough, and arguably morally defensible, to play the markets and take every advantage of the unworkable fiscal system merely to maintain one's financial and social position.
As that position slid away, patriotism, social obligations and morals slid away with it. The ethic cracked. Willingness to break the rules reflected the common attitude. Not to be able to hold on to what one had, or what one had saved, little as it worried those who had nothing, was a very real basis of the human despair from which jealousy, fear and outrage were not far removed.
[Note from 2020: We can see the mirror image of the Reichsbank “prepared to be the dupe of borrowers” in our Federal Reserve, which is buying near-junk corporate debt from companies that would disappear without Fed generosity, and will certainly go away once it ends. And in a stock market that has experienced its greatest rise in history during a global pandemic (amid other calamities), we have recreated the conditions whereby no investor “would have wished to let the opportunities for enrichment slip by while others were making hay.”]
A German 100 trillion mark. Image source.
While early on the dollar would trade for 5 marks, by the end it fell to one dollar for 4,200,000,000,000 marks, the entire economy reduced to barter and foreign currency. Unemployment spiked as the inflation-driven investments were revealed for what they were: worthless.
As I said earlier, while the pace picked up at the end, this decline all happened over many years. There were a number of opportunities that politicians and others had to put the brakes to this disaster. Nobody could. This also eerily has a tinge of our current political situation. From the book:
Much as it may have been recognized that stability would have to be arranged some day, and that the greater the delay the harder it would be, there never seemed to be a good time to invite trouble of that order. Day by day....the reckoning was postponed, the more (not the less) readily as the prospective consequences of inflation became more frightening. The conflicting objectives of avoiding unemployment and avoiding insolvency ceased at last to conflict when Germany had both.
We can see ourselves in many ways in that fear of the tough reckoning. While many politicians talk tough, they reflect our unease. Are we really prepared to deal with the suburban malinvestment of the past two generations? Are we prepared to undergo the difficult transformation in our living arrangement and the massive decline in our standard of living required to face up to our core insolvency and lack of productivity? Knowing that we aren't helps us see that the German policy of inflation—kicking the can down the road— was not so crazy at the time.
Even so, the result is no less predictable. From the book:
What really broke Germany was the constant taking of the soft political option in respect of money. The take-off point therefore was not a financial but a moral one; and the political excuse was despicable, for no imaginable political circumstances could have been more unsuited to the imposition of a new financial order than those pertaining in November 1923, when inflation was no longer an option....Stability only came when the abyss had been plumbed, when the credible mark could fall no more, when everything that four years of financial cowardice, wrong-headedness and mismanagement had been fashioned to avoid had in fact taken place, when the inconceivable had ineluctably arrived.
Federal Reserve Bank in Houston. Image Source: Unsplash
As a final thought here, it was also important to note in this book that, as the tough decisions got put off further and further, the solutions obviously became more difficult. As the needed medicine became more distasteful, the politics of the day became more extreme. In Germany of 1923, you had the communists on one side and the national socialists on the other. Their numbers grew as the situation became more desperate, as the pragmatic kick-the-can strategies simply put off and compounded the inevitable reckoning. The communists were for the worker, the Nazis for the industrialists. In the end, the workers lost their jobs and the industries all went bankrupt.
Inflation is the ally of political extremism, the antithesis of order. At other times—in post-revolutionary Russia, in Kadar's Hungary—it may have been deliberately engendered in order to destroy the social order, for chaos is the stuff of revolution. In Germany at this time, however, the inflationary policy was the consequence of financial ignorance, of industrial greed and, to some extent, of political cowardice. It therefore produced hothouse conditions for the greater and faster growth of reactionary or revolutionary crusades.
Of course, we know how that all tragically ended in Germany.
We have a lot to ponder in this country. A lot to discuss. And we have a lot of really difficult decisions to make. It will be politically easier in the near-term to continue to debase the currency, to pretend that we are making good on all of our obligations while continuing to expand our empire, with inflation providing the illusion of prosperity. It will be very tempting to restart the suburban experiment by resetting our private debt levels through inflation. Is this just postponing the inevitable?
Incidentally, after Germany had "plumbed the abyss" they restored their currency by a) stopping the printing press, and b) issuing new currency that was fully backed by and exchangeable for gold. For the United States, the fragility of our suburban experiment is compounded by our experiment with fiat currency (we went off the gold standard in 1971). Never has the world held one reserve currency that was not backed by anything but "good faith and credit."
We may need more of both soon enough.
Cover image Jp Valery on Unsplash.
Having to shut down major pieces of infrastructure because it can’t afford to repair or replace them is a bad position for a city to be in. But in some cases, it’s just the wake-up call officials need to start making better decisions.