Fears of Hyper-Inflation are Unfounded
Posted by Michael A. Kamperman on May 27, 2009
Hyper-inflation would be very destructive and
would cause its own depression, one of a different sort. Hyper-inflation
infected Germany after World War I in the early 1920’s, and it
infects Zimbabwe today. Zimbabwe is a small, civil war-torn country
with an extremely corrupt government. Its situation is not applicable
to that of any major industrialized country, especially to that of the
United States. However, Germany in the post-World War I era was
a major industrialized nation, and as such, the hyper-inflation that
occurred in Germany should serve as a caution to the leaders of
all industrialized nations. The fear of needing wheelbarrows full of
money to buy a loaf of bread is still deeply ingrained in the modern
German psyche. It serves as a major obstacle to Europe’s finding a
satisfactory solution to its own asset-bubble, debt-induced, deflationary
depression.
Hyper-inflation is a condition that exists when inflation runs out
of control with almost no end in sight. Many economists will
concede hyper-inflation exists in an economy once annual inflation
reaches 50 percent or more. Hyper-inflation is almost always
accompanied by a collapsing currency. In the Weimar Republic of
Germany, hyper-inflation took hold after World War I. Prior to
World War I, Germany had a stable currency and had been on the
gold standard. At the end of the war Germany signed the Treaty
of Versailles. By signing, Germany was forced to make war reparation
payments to the victorious allies. Initially Germany was able
to use gold-backed marks to pay its war reparations. Germany
had experienced a normal cycle of higher inflation between 1914
and 1921 due to the costs of fighting and losing World War I. In
1914, 4.2 marks were convertible into 1 U.S. dollar. By the middle
of 1921, it took 60 marks to buy 1 U.S. dollar. The war reparations
paid by Germany exhausted the country of most of its gold reserves
before the end of 1922. Germany insisted it could not make the
war reparations demanded. However, the U.S. pressured France to
make its debt payments for the money it borrowed to fight World
War I. France and Belgium in turn insisted that Germany make
the war reparation payments it had agreed to in the Treaty of Versailles.
Since Germany had run out of gold as its primary source of a
hard currency, the German government resorted to printing money
to run its economy and make its war reparation payments. By the
end of 1923 it took 4,200,000,000,000 marks to buy 1 U.S. dollar.
This event has scarred the memory of Germans, many other Europeans,
and many Americans ever since.
The cause of hyper-inflation in Germany had its roots in a psychology
of high inflation that was already built into the psyche of
German expectations after World War I. Additionally, there was
social upheaval in Germany after World War I. The loss in World
War I led to instability in the government, and there were many
short-term changes in leadership. Revolutions and riots had to
be put down. There were fears that worker rebellions would turn
into a full-blown communist revolution similar to the one in the
Soviet Union. So in addition to allocating a portion of the budget
towards making war reparation payments, the German government
also focused on employment. There was a belief in Germany that if
unemployment rates were allowed to rise too high, the communists
would be able to take over the government. Germany made its initial
payments for war reparations backed by gold. However, the government
eventually ran out of gold and other hard currencies to meet
its obligations. Germany resorted to printing money with abandon
and offered to pay its war reparations with printed money. Because
of the collapse of the mark on world currency markets, the allies no
longer wanted to receive the free-falling mark as an acceptable form
of payment. France and Belgium sent their troops into the Ruhr
region of Germany to take control of German coal mines to gain
repayment in a hard asset; coal. When France and Belgium confiscated
the coal mines in the Ruhr region, they deprived Germany of
one of the few exports it had that could earn other currencies. This
led to the situation’s growing even worse. Germans were cashing
in their life savings to buy bread. Germany printed a one hundred
trillion mark note. Finally, at the end of 1923 Germany established
a new currency. One trillion paipermarks were convertible into
1 rentenmark. The German government backed the rentenmark with
the German real estate it owned, and the monetary and currency
panics ended. The world once again accepted the German mark as
an adequate store of value, and the German currency stabilized on
the world markets.
The specter of another German Weimar Republic-style hyperinflation
has been held over the heads of all who seek to print
money as a solution to their economic problems. But is our situation
actually comparable to early 1920’s Germany? It hardly seems so,
even through a casual analysis. First and foremost, Germany owed
other countries pounds and francs, not marks. When Germany
ran out of gold, the value of the mark was no longer backed by the
value of gold. This led to a crash in the value of the mark relative
to the value of other currencies. As Germany started printing more
money for repayment, currency speculators drove the mark lower
and lower. This forced Germany to print more and more marks in
order to convert the mark into either pounds or francs. The cycle
seemed endless. The U.S. does not owe people gold, pounds, euros,
yen, rubles, pesos, yuan, or any other currency. We owe people dollars.
Therefore, we will not have to print a never-ending amount
of dollars to meet our obligations to others. For example, the
U.S. government will have to print exactly one trillion dollars plus
interest to repay China the one trillion dollars we owe. Secondly,
Germany had a cycle of high inflation during and after World War
I that built inflationary expectations of German citizens into the
economy prior to the hyper-inflation of the early 1920’s. Wealthy
Germans were already seeking ways to convert their money into
hard assets such as real estate or works of art. We have deflation in
the U.S. Our wealthy citizens are looking to hide their cash under
the mattress in Treasury bonds. Wealthy Americans are not currently
looking to put their money into more real estate. We would welcome
people driving up the prices of real estate. Thirdly, Germany had
significant political instability after the war. There were riots, coup
attempts, and rebellions. The U.S. just experienced another peaceful
transition of power from the Republican Bush administration and
the Democratic Obama administration. Finally, the major difference
between the U.S. and the defeated Weimar Republic is that France
was able to send troops into Germany in 1923 and confiscate its
coal mines. Obviously this humiliation would lead to a collapse of
confidence in a country. It is presently unimaginable that any army
could confiscate one inch of U.S. soil in North America. The key
differences between the U.S. and the Weimar Republic of Germany
are that the U.S. does not owe others in a currency it cannot print,
the U.S. is not in an extended period of inflationary expectations like
we were in the 1970’s, the U.S. is not in a post-war period of political
instability, and the U.S. is not under the threat of its hard assets being
confiscated by a foreign army. Once we perform a simple analysis we
can easily see that we are not facing the circumstances that Germany
faced in the early 1920’s that led to hyper-inflation. Misconceptions
concerning the root causes of hyper-inflation in Germany have prevented
us from realizing that our situation is markedly different. We
can and need to print more money to solve our problems. Because
we are in a deflationary depression, the outcomes of printing more
money will be very different for us than the outcomes were for
Germany when it printed money in the early 1920’s.
Excerpted from How America Can Escape the New Great Depression
