How to Correctly Understand Weimar Germany’s Hyperinflation
Executive Summary
- Private banking interests habitually oversimplify Germany’s hyperinflation as the German government printing too much money.
Introduction
Private banking funded media and economists have a simple explanation for German post WWI hyperinflation. However, they leave out the greatly reduced supply or productive capacity of the country. This is explained in the following quotation.
“The country could not produce anything until it was rebuilt. Even though the government was printing money, that money couldn’t buy anything because nothing was available. Therefore, the price of goods, like food, kept rising. Yes, the government printed too much money. But correlation doesn’t mean causation. The main problem was the country had no resources to make bread. In addition to the internal supply constraints that caused famine, the country had external draws on its supply of commodities. The terms of the Versailles Treaty called for Germany to pay World War I reparations with gold, timber, industrial metals, and other valuable resources. The country could not simply print Reichmarks to pay off France and England. In practice, this was similar to Germany owing debt, denominated in hard currency, to other nations. The government had to obtain gold or commodities before it could make payments. But, again, much of the country’s infrastructure was destroyed. The government had no real means to harvest commodities to pay the commodities it owed. It was an endless, futile circle. In an environment without a strong central government, the risk for inflation increases. Government infrastructure is important in maintaining a stable currency because taxation is the main way to create demand for said currency. Without the infrastructure to collect, enforce and levy taxes, a fiat currency has no underlying value. And without receiving core public services like water and protection of property, citizens are less likely to pay their taxes voluntarily. Again, a death spiral for an economy. So in reality, it wasn’t money printing that caused hyperinflation in the Weimar Republic. Instead, very specific circumstances caused hyperinflation. In one of the great tragedies of world history, a whole book was written explaining the future collapse of Europe, long before the start of the second world war. In 1919, John Mayard Keynes wrote The Economic Consequences of the Peace. Keynes was so outraged by the misguided negotiations at the Paris Peace Conference of 1919 he left in protest and immediately started writing the book. Keynes picked apart the Treaty of Versailles, destroyed the reputations of the politicians that crafted the document, and offered specific alternatives to avoid the coming disaster. It might be one of the most important economic documents ever written. While his writing style was flowery, Keynes’ message was clear: “The Treaty includes no provisions for the economic rehabilitation of Europe – nothing to make the defeated Central Powers into good neighbors, nothing to stabilize the new states of Europe, nothing to reclaim Russia; nor does it promote in any way a compact of solidarity amongst the Allies themselves; no arrangement was reached at Paris for restoring the disordered finances of France and Italy, or to adjust the systems of the Old World and the New.” Keynes had a keen understanding that hampering Germany’s commodity-based economy would result in disaster. The Treaty was meant to destroy Germany so the country could no longer gather the resources to rebuild its economic and military power. All of Germany’s industrial supply was damaged and foreign trade was hindered. The country was supply-constrained. Reading “The Economic Consequences of the Peace” is haunting, not just because the predictions were so accurate, but the inevitable outcome could not be prevented. Seeking justice through vengeance is a core human trait. But it never leads to peace.” – Contrahour
Source: Contrahour