More On Weimar: Let Us Be Clear What Really Caused Hyperinflation

by Martin Odoni

Originally written 22-8-2015. Publication delayed until 1st September

Earlier this year I wrote a rather lengthy historical analysis of the economic misery endured by the Weimar Republic of Germany between the World Wars. I am not in any way backtracking on anything in that article here, but this morning it occurred to me that there was a key point in it that I had not quite drummed home.

The reason it occurred to me was that I allowed myself to glance at an article in the Daily Telegraph by Jeremy Warner, a man described in his bio, without any noticeable trace of irony, as “one of Britain’s leading business and economics commentators”. The piece was meant as a critique of the economic plans of apparent Labour-leader-elect, Jeremy Corbyn, who wishes to introduce what he calls ‘People’s QE‘.

‘People’s QE’ is short for ‘Quantitative Easing invested in people’, and involves the issue from the Bank Of England of vast numbers of new pounds-sterling for investment in social projects and the lives of ordinary members of the public, run by a new National Investment Bank. This is in fact not as radical an idea as it might sound, partly because QE effectively happens all the time anyway, only through the private banking system; for example, when a bank sells a loan to a borrower, or credits interest to a customer’s account, it is effectively creating the money out of thin air. ‘People’s QE’ would therefore, in a manner of speaking, remove the ‘middle man’, investing new money directly into the parts of society that most need it, rather than only into those who can easily pay the money back.

Warner’s article to criticise the plan is, alas, so clichéd in its objections it reads like a knee-jerk, spluttering rejection, more than a real analysis. Certainly, his use of the terms “plainly bonkers ideas” and “crackpot policies” leans the article more in the direction of mocking abuse than academic rigour. Warner’s objections take on such a familiar, scaremongering form that it is difficult to believe that any real or fresh thought was put into them. The title refers to a supposed danger of the UK being reduced to a clone of Zimbabwe, whose Hyperinflation disaster since the late-2000’s has reduced its native dollar to one-quadrillionth the value of a US dollar, as of June this year.

Of course, there is a pretty sizeable issue in comparing the UK to Zimbabwe, which is that the two economies are almost nothing alike. In Zimbabwe, a poorly-thought-out and needlessly-violent land reform program has devastated its agricultural industry, a doubly-crippling blow when exports of crops, especially tobacco, are critical to the nation’s balance-of-trade. Knock-on effects of the wars in neighbouring Congo have added to the hardships. Further, Robert Mugabe’s oppressive regime, which at times borders on transposed Apartheid, has led to the country facing economic sanctions from the outside world. The infrastructure of Zimbabwe, a country that only came into fully-independent being less than forty years ago, is many decades behind that of Britain, and its industrial base and infrastructure are thus absolutely minuscule in comparison.

None of the conditions afflicting Zimbabwe are in any realistic way duplicated in the United Kingdom, which makes the possibility of the events being duplicated look so remote, they might just as well be mentioned alongside the threat of the British mainland being destroyed by a nationwide meteor shower.

The real ‘hot button’ Warner hit though was the all-time pet favourite of conservative-types, when he said that ‘People’s QE’ “would almost inevitably lead to a collapse in the currency and eventually the kind of hyper-inflation that engulfed Weimar Germany”.

The very old idea that Warner is expressing, so beloved of anti-state-spending idealists, is that Governments creating large amounts of fresh currency will automatically devalue it, and cause wild inflation. His implication is that, when the Weimar Government started printing hundreds of thousands of new Deutschmarks in 1923 in a desperate bid to keep making the ‘Reparations’ payments it owed after World War I, the much-widened availability of the mark caused its value to drop through the floorboards.

It would be an exaggeration to call this view of the 1920’s in Germany ‘false’, but it is misleading. It would certainly be true to say that the printing of all the extra marks had an inflationary effect, but what Warner is not telling us is that it was not the chief cause, nor the starting cause, of the Hyperinflation in Weimar Germany.

The main reason that the mark lost all its value in 1923-24 was that Germany had been invaded by French and Belgian troops looking to enforce the ‘Reparations’, and they occupied the Ruhr region for nearly a year. The Ruhr was Germany’s industrial heartland, and most German workers went on strike, refusing to manufacture goods while the occupation continued. The German Treasury was quickly emptied as the economy ground to a halt.

The upshot of this was that the German industrial base was producing almost no goods, resulting in widespread shortages. With demand outstripping supply by many scales, prices for what few goods there were went spiralling upwards. With there being so little that the Deutschmark could be used to purchase, its value plummeted.

It was only after this process had already been well under way, and the occupation was putting terrible pressure on the Weimar Government to co-operate with the ‘Reparations’, that the decision was made to print the money with which payments could be resumed.

There is no doubt that printing money upped the tempo of Hyperinflation, as all the extra notes in circulation made it much easier to possess and spend Deutschmarks quickly for goods, the demand for which was already climbing rapidly. But the policy only accelerated a process that was already in motion, it is not what precipitated it. Furthermore had the printing of money been done purely in isolation, without all the other prevailing circumstances of military occupation and an industrial base ‘in limbo’, inflation would almost certainly have been kept under some measure of control.

Furthermore, what happens with new money when it is issued is more important than the total amount that is being circulated. Had the new money that the Weimar Government had printed been invested in failing industries, instead of being sent in the main to foreign Governments, not only would there not have been Hyperinflation, the German economy might have been boosted by the extra manufacturing capital. For instance, more workers could have been hired, combating unemployment – provided the German people could be persuaded to work while occupied of course.

Whatever we might speculate about that, as a matter of historical reality, it was the occupation of the Ruhr and the shutdown of Germany’s industries that were the root cause of Hyperinflation, not the printing of fresh money. So long as there are plenty of goods available to purchase with it, a currency will retain a practical value, even if it is somewhat lower than it had been previously.

In truth, all Government spending works far more like this than is widely recognised; we tend to get the process the wrong way around, imagining that we work to earn money, from which the Government then takes a share to cover its budget requirements. In fact, Government is what issues money in the first place whenever it needs anything to be done, and then imposes taxes in the currency that it has issued, in order to get people to co-operate. So, if we know we have to pay a certain number of pounds to the Government every month, we are likelier to do our business in pounds, and to perform the tasks Government give us in order to earn the pounds we need in order to pay the taxes. The taxes, far from paying for services, are simply cancelled out of existence once they have been received back by the Central Bank.

When looked at this way, Warner’s outrage at Corbyn’s “crackpot ideas” sounds not only unfair, but even a little out-of-left-field; Warner, a staunchly conservative commentator, is arguing against the established practise.

That is ironic, but nothing unusual among the economic semi-literates to be found at newspapers like the Telegraph.