This article first appeared on the Strong Towns website on June 29, 2020. Visit StrongTowns.org.
Many of us have been searching for an historical reference point in which to interpret current events, a prism that might give us some insight on what comes next in the growing chaos that is modern America.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over what could have been, had fools not taken things off the rails; massive wealth disparities sorted along outdated social hierarchies; extreme polarization of two major political factions with juxtaposed heroes and villains in their narratives; and a feeble set of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.
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 they’re 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 Adam Fergusson’s 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.
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.
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, participation 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…