By Nathan Tankus, a student and research assistant at the University of Ottawa. You can follow him on Twitter at @NathanTankus
Money is a social construct. It also facilitates many complex, interrelated social relations. As a result, it’s difficult to pin down for the average person what the effects of a particular policy will be, especially with regard to economic policy. While inflation may have negative effects in certain times or places, it’s difficult to figure that out just by looking around a city or country. As a result when politicians or other figures with agendas want to talk about inflation, they inevitably go for the most visceral descriptions available. For some number of decades now, the example they go to do decry inflation is people carrying around “wheelbarrows full of money” to go buy something such as bread. One of their favorite examples is Weimar Germany. So let’s talk about it.
What’s odd about this knee-jerk reaction is that it’s just begging for context. Weimar Germany? Wasn’t that a government formed right after Germany’s defeat in world war one? Perhaps that had something to do with the ensuing collapse? Indeed it did. Dealing with this issue was a major obstacle for monetarists. In the 1920’s there were certainly people touting the quantity theory of money as an explanation for Germany’s crisis, but there were also prominent people pushing different ideas. It’s sometimes forgotten that Keynes first became famous by writing The Economic Consequences of the Peace criticizing the allies for imposing reparations (in real goods and services and foreign currencies) beyond Germany’s ability to pay.
This point should be emphasized. Keynes finished writing his book a little over a month after the Treaty of Versailles was signed. His work was the definitive opinion on the treaty and spread the view that the terms were unfair, which was taken up by people across Europe and the United States. A few years later Harold Moulton, an American economist, wrote an entire book called Germany’s Capacity to Pay taking a similar view point. How then did the view that the allies created a balance of payments crisis by imposing on Germany those reparations, get transformed to the point that now even German political elites believe that Weimar Germany printed too much money and caused hyperinflation?
Well, first Keynes’s position had to slip away into the sands of history. Over a decade after Keynes’s polemic, Bresciani-Turroni wrote The Economics of Inflation: A Study of Currency Depreciation in Post-War Germany. Finally the definitive monetarist explanation of Germany’s experience had arrived (you can tell how successful it was because mises.org is the one hosting the pdf file). Bresciani-Turroni mentions Keynes, but he makes sure not to remind his readers that Keynes ever wrote specifically on the German situation. However, he doesn’t ignore the “balance of payment view” all together. Instead he does something more insidious: he forever brands it “the German view”.
What was the “German View”? Bresciani-Turroni used Karl Helfferich, a German Treasury secretary during World War I (then called the Great War) and a prominent critic of reparation payments. This choice was very deliberate since it was easy to make the case that any view he proposed was of the most self serving ideological type (notice that among monetarists and neoclassical economists it’s only those whose they criticize who have a “special” interest). Anyway, Helfferich argued (quite rightly in my opinion) that the causality ran from falls in the exchange rate to inflation which in turn increased the money supply (as Post-Keynesian authors have been arguing for decades ):
The depreciation of the German mark in terms of foreign currencies was caused by the excessive burdens thrust on to Germany and by the policy of violence adopted by France; the increase of the prices of all imported goods was caused by the depreciation of the exchanges; then followed the general increase of internal prices and of wages, the increased need for means of circulation on the part of the public and of the State, greater demands on the Reichsbank by private business and the State and the increase of the paper mark issues. Contrary to the widely held conception, not inflation but the depredation of the mark was the beginning of this chain of cause and effect; inflation is not the cause of the increase of prices and of the depreciation of the mark; but the depreciation of the mark is the cause of the increase of prices and of the paper mark issues. The decomposition of the German monetary system has been the primary and decisive cause of the financial collapse. (Helfferich 1923, cited in Bresciani-Turroni 1931 pg 45)
Bresciani-Turroni goes on to make the case that this view was shared by most of the German press and elite. Obviously this view was self serving, but just because you’re paranoid doesn’t mean they aren’t out to get you and just because your theory is self serving doesn’t mean it’s wrong. It goes without saying then that in such a short sighted and ahistorical field as economics, Bresciani-Turroni was wildly successful. Almost a century later, this view of hyperinflation is still being called the “German view” in the academic literature even though now even the German elite are parroting the opposite view (indeed, now that they are running the balance of payment surpluses and have the rest of Europe under their heel, they are again presenting the most self serving view). In this time of crisis, it’s obvious just by walking around how much worse things have gotten. You can see austerity in the streets and faces around you. If you want to know the seriousness of a balance of payments crisis, I suggest you visit a Greek hospital.