By Philip Pilkington, a journalist and writer living in Dublin, Ireland. Simuposted in German on Wiesaussieht
If the intensity of a phantasy increases to the point at which it would be bound to force its way into consciousness, it is repressed and a symptom is generated through a backward impetus from the phantasy to its constituent memories. All phobias are derived in this way from phantasies which, in turn, are built upon memories.
There are certain words in our culture upon which so many taut emotions converge that they become nothing less than a breaking point for certain opinions and moral platitudes. ‘Sex’ is obviously one. ‘Inflation’ is another.
To even begin to unravel the complex of associations that the word ‘inflation’ brings to mind in the average citizen would be an enterprise worthy of a full book. But one of the key associations is that of robbery. People instinctively feel that if there is inflation occurring they are being robbed by someone or other – most likely some ominous governmental bureaucracy, like a central bank.
They are not wholly wrong, of course. Inflation certainly punishes creditors and savers and favours debtors. As the value of the currency falls while savings and loans remain nominally the same, the real value of these savings and loans falls – needless to say, the amount that debtors have to pay back in real terms also falls. Most people will then get an image of a grandmother in their mind and bring up the ‘pension’ trope. “Anyone who favours inflationary policies is advocating robbing poor old pensioners,” they will say.
You’ve probably heard all of these ‘arguments’ before. Of course you have. But they’re not actually arguments, they’re emotionally charged soundbites. But such is the nature of the game, unfortunately.
In reality inflation tends to favour the poor over the rich. Oftentimes it can be seen as an explicit rebalancing act as income or trade disparities close. Poorer people – or countries – are usually indebted to richer people – or countries – and inflation is one way that this debt might be evaporated and greater balance brought about.
This is one way of looking at what is happening in Europe right now. It is a little crude, a little rough and ready – but it is a good starting point. It is natural then, that the creditor countries should hate inflation or anything that smells of it with a passion and do everything in their power to suppress it.
But in the real world things are more complex again. In fact, Germany – THE key creditor nation in Europe – has a long-held phobia about inflation. Their’s is not simply the standard reaction of the rich creditor country ensuring that her economic serfs don’t break out of the debt contract; no, this has much deeper roots than that, this is a phobia proper that the Germans have lived with for decades.
This phobia has vastly exacerbated both the circumstances leading to the present crisis and the crisis itself. Like most phobias it is irrational, unrealistic and unfounded. In fact, as we shall see the great German industrial economy was largely built using policy measures many German policymakers would now consider inflationary and unacceptable for any European economy.
It is almost as if, having repressed this historical memory – this memory of an economy built on government spending – a phobia has been generated incorporating a different set of phantasies derived from a different set of memories. It would seem that the same process described above by Freud over a century ago in relation to the individual is also to be found at the collective level of national consciousness.
So, let us go right back to the root of this phobia; right back to the Weimar era in pre-Nazi Germany.
Wheelbarrows of Misery
It is January 1923. Germany and her allies lost the war and have been forced by the winning countries to make massive, bloody-minded and destructive reparations. (The phrase: “History does not repeat itself, but it does rhyme”, comes to mind…). Inflation in Germany is already high. Very high.
There are many contributing factors to the inflation. From the wartime wiping out of resources, to the new bargaining position of the trade-unions, to the large government deficits. This situation may have been manageable but for the political situation in Europe at the time. The inflation may have subsided without reaching epic proportions, as it did after many wars in history. But the politics in France at the time would not allow it.
The French were angry – very angry. Much had been lost for them in the war and they were determined to make Germany compensate them for this. As John Maynard Keynes noted at the time in his seminal pamphlet ‘The Economic Consequences of the Peace’, this strategy made no economic sense; but then politics and crass nationalism rarely make economic sense.
As an aside, it should be noted that the historical parallels with what is happening today are striking. Except today, it is Germany and France who are pushing together for the destruction of Europe by imposing debt peonage on the periphery.
Anyway back to our tale. Because the Germans could not afford the debt repayments the French marched into the Ruhr Valley which contained much of Germany’s productive capacity. (Greek asset-stripping, much?). This wiping out of Germany’s means of production together with the strikes it invoked finally sent the inflation into the stratosphere.
Day-to-day transactions were in chaos; people roamed the streets with wheelbarrows of money; and savings were wiped out within a matter of days or weeks. But perhaps the most important historical consequence was that the hyperinflation left an indelible imprint on the minds of certain influential German intellectuals of the day. This imprint would then be passed from generation to generation and that would rise time and again like a ghost whenever certain policies were considered in Germany.
Hitler’s Economic ‘Miracle’
So, what happened next? Well, this is part of the history that is often less talked about, as it tends to burst the inflationista’s fantasy understating of past events and break their assertions about the unremitting dangers of inflationary policies.
In November 1923, the German government issued a new currency, the Rentenmark. For the most part this was a psychological exercise. The government simply lopped twelve zeroes off the end of the notes and prices. There was some flustering that the currency remained stable because of elaborate land-backed schemes by the finance ministry, but the psychological mood was without doubt the most important factor. We see this clearly in the fact that the German people thought they had witnessed a ‘miracle’ – this was a leap of faith where the German government essentially tricked the population into believing in the Mark once more.
Germany then tied its fortunes to the rest of the global economy – most notably the US. Under the auspices of the Dawes plan, the Germans secured major loans from the US which floated the economy from 1924-29. These would become known as the Golden Year of the Weimar Republic.
But such was short-lived. The 1929 stock market crash in the US and the subsequent depression ensured that loans for the embattled German economy dried up. Germany fell back into an economic slump and unemployment soared once more. Much of this can be put down to the then German Chancellor Heinrich Brüning’s government who – with the memory of inflation still in their minds – ran balanced budgets despite the deflating economy.
The reasons for the rise of Hitler have been hotly debated by historians for years. But many, myself included, think that Brüning’s irrational anti-inflationary policies had a lot to do with Hitler’s election. Hitler gave a beleaguered people a new lease of life. And he did so by temporarily overcoming the inflation phobia so prevalent at that time and running large budget deficits. These policies were remarkably successful and have been ignored by many in the ensuing years.
Hitler’s government not only undertook the impressive feat of rearming the country to become a leading military power, but they also laid the foundations of the modern German economy – the most famous representative of which is the fantastic German road system, the Autobahnen, which was largely constructed under the Nazi regime.
One is loath to speak well of Hitler, for he was a monster the likes of which history has not seen before or since. His economic policies, however, were remarkably successful. And yet, in the ‘reasonable’ German mind of the day they would have been seen as dangerously inflationary. The great American economist John Kenneth Galbraith summarised the Hitlerite economic policies and their convenient historical forgetting in his book ‘The World Economy Since the Wars’:
Germany was the most distraught economic case in the early depression years; it was also the clearest case of action by the state to promote economic recovery. That this was accomplished under a government of repression, genocide and eventual military insanity has, in some measure, kept the economic achievement from being seen. Nothing constructive could be thought to come from Adolf Hitler. In reality, the German economy made a remarkable recovery in the depression years – the depression there was effectively over by 1936 – and this fact remains to this day largely outside the common reach of history.
This period of large-scale government spending was also, as we have said, the beginning of the new German economy. In these years the Nazi government laid the foundations that would be built upon after the war. This was the era when Germany began to leave behind the economic turmoil of the Weimar Era and begin once more to establish itself as a world power. This point cannot be stressed enough.
This recovery was achieved through the use of supposedly senseless and inflationary policies. And as we shall see, after the war the German economy would reconstruct itself in a very similar manner.
The Hitler economy has disappeared down the historical memory hole in Germany and in the wider world. No one wants to remember anything but horrors from the Hitler years and in that they their sentiments are correct. But in consigning this truth to the dustbin of history Germany continues to misunderstand just how they modernised as an economy and so they remain unable and unwilling to learn any lessons from their own economic development.
The Bailout of a Ruined Germany
It was soft money that drove the German recovery after WWII and allowed their ‘miracle’ economy to take off in the ensuing decades. Europeans should remember – and they should remember well – that it was deflationary policies or forced extraction that led to the second war; deflationary policies eerily similar to those that are being forced upon the periphery by Germany and France today. But it was inflationary policies and government intervention that ensured such a catastrophe would not take place again.
The money spent on rebuilding Germany was, in essence, given to them. Under the auspices of the now famous Marshall Plan the US gave Germany the money that she could then spend on the foundations of her new economy.
A few protested against this ‘irresponsible’ method. Some invidious individuals on the Allied side called for more policies like those enacted on Germany after the first war – and, more to the point, like those being enacted upon Greece and elsewhere today. But they were largely ignored as cranks. Then there were some who invoked the spectre of inflation once more. They, thankfully, were also ignored.
The Marshall Plan was an almost immediate success. In the three and a half years after its implementation the countries that received the aid saw their economies grow by a massive 25% of GNP. And another lesson was also learned from the experience that the Germans would do well to listen to today: much of the money circulated back to the US for the purchase of various goods. This reinforced the post-war boom in the US.
Today Germany essentially stands where the US stood over half a century ago. Now, as then, we can be sure that any expansionary fiscal policies implemented in the periphery would lead to higher German economic output rather than to inflation. But the inflation phobia continues nevertheless to loom large. Today, it threatens to destroy Europe.
Lessons Never Learned
The parallels between Germany’s rise to the status of an economic world power and the present situation in the periphery are so stark that one would almost allow them to speak for themselves. But perhaps it would be productive to briefly outline what is happening in Europe right now – and why the German attitudes toward these events are key to ensure the continued viability of the European project.
Germany is a rich country. As we have shown, her riches were built upon the twin foundations of deficit spending and international fiscal transfers – the very things that her leaders rail against today. The European periphery, on the other hand, is weak and poor. And it is these countries today that require the bailouts and the stimulus to grow powerful.
In accepting a single currency the peripheral countries have essentially pegged their exchange rate to the more powerful German economy. This puts them at a significant trade disadvantage. And so it was inevitable that they would have to run some sort of deficit – be it a trade deficit, a government deficit, a private sector deficit or some combination of the above – in order to absorb the goods that crossed their borders.
Today as this framework rots from the inside out, it is clear that a rebalancing is necessary, just as it was for Germany under Hitler and after the war. Wealth must be increased in the periphery by either budget deficits, fiscal transfers or a combination of both.
As it was for the US in the late 1940s, this is not to be seen as a zero-sum game. Germany will likely reap the benefits of the increased peripheral growth in the form of increased exports and, hence, increased output. This is fine in the short-term, but in the long-term Germany must further overcome her inflation phobia and increase the living-standards of her own citizens. In short, Germany must move away from the punitively mercantilist policies she has pursued until now and refocus her efforts of the prosperity of the German people.
Blocking all of these actions at their very root is Germany’s inflation phobia. She fears releasing funds to the depressed periphery because she fears stoking inflation. In like fashion she fears increasing the living standards of her own citizenry because she fears stoking inflation. But these fears are completely ungrounded and irrational.
Germany still fears the ghost of Weimar era hyperinflation. But this was a very different time in history. A time when Germany was under siege and her economy was cowed and weak. ‘Inflationary’ policies brought the German economy back to life and yet she still remembers only the hyperinflation.
Today there needs to be a sort of collective therapy in Germany; a complete revaluation of her economic history. Out of this she can then begin to see that what Germany faced through the 20th century, the European periphery now faces in the 21st. If Germany does not break through her childish fears about inflation and enter this century on good terms there is every chance that history will blame her once more for attempting the destruction of Europe. A silly phobia could then result in another generation burdened by a collective sense of guilt. No one wants to see this happen, not least the Germans themselves.