I was fortunate to have the opportunity to borrow an original copy of Jens O. Parsson’s book Dying of Money: Lessons of the Great German and American Inflations from a local university library a few years ago during my summer vacation (the book is out of print today and usually sells for several hundreds of dollars at used book stores that have a copy). Parsson’s book essentially used Weimar Germany’s devastating hyperinflation in the early 1920s as a case study to analyze how paper money loses its value. It’s a must read book if you can get your hands on a copy…
I took copious notes when I read Parsson’s book because the feeling I had at the time was that the United States and perhaps the globe could eventually face a Weimar-style hyperinflation. Fortunately, I have my notes transcribed on my computer so I can easily reference them anytime I want to. After reviewing my notes last night and thinking about Quantitative Easing 2.0 (QE2) a few things have crossed my mind. I’ll share my thoughts with you in this blog post…
After World War 1 many of the world’s major economies experienced major inflation. Most countries stemmed the inflation by stop printing money, stop spending money that they did not have, and by accepting the subsequent recession that resulted from fighting inflation. The exception to this was Weimar Germany because it continued to spend money that it did not have and its central bank insisted on constant money printing; not allowing for the country to experience a recession like the rest of the world experienced. If the German economy experienced any signs of weakness the German central bank would quickly increase its money printing efforts to restore the economic boom.
- Parsson wrote about how some countries envied Weimar Germany’s economic resilience-not realizing that Weimar Germany was going to soon pay a severe price for its continuing its economic boom.
Parsson wrote about how spending, profit, speculation, riches, and poverty were in all excess as the inflation in the German economy bubbled up from all the money printing. Meanwhile, German speculators and foreigners had complete faith in the German Mark because they naively believed that an economy like Germany could not fail. Unsurprisingly, Weimar Germany ran major trade deficits as foreigners gladly sent Germans their goods in exchange for inflated Marks.
Eventually German investors and foreign investors realized that the Mark was backed by essentially nothing. This was a major turning point because investors then sought to rid themselves of their Marks as quickly as possible. Foreigners sought to buy up anything that had any real value from Weimar Germany before the Mark became more debased. The money returning from overseas caused domestic prices to rise further as money returned to the domestic German economy to chase a limited supply of German goods and assets.
The German government tried all sorts of wage, price, and exchange controls to stop prices from rising further. The German government also labeled anyone who tried to protect their purchasing power by ridding themselves of their Marks as “traitors”. However, all these measures were ineffective because Germany continued to print money. Eventually, ordinary citizens lost faith in the German government’s ability to stop inflation.
- The Weimar constitution restrained the German government from making difficult decisions that would stop the problem because those in the German government were so concerned about losing votes...
Ordinary Germans eventually took similar actions as investors by ridding themselves of their Marks as quickly as possible when they lost faith in the German government and in the Mark. This phenomenon of people bidding up the value of assets and goods and the continuous flow of new money into the German economy caused prices to skyrocket out of control. The process literally fed upon itself as people tried to spend their money before prices increased even further and the German government tried to print more money to compensate for the rapidly decreasing purchasing power of its tax revenue.
The end result was a devastating hyperinflation that left virtually every German middle class saver impoverished. Parsson wrote about how many elderly people had to spend the rest of their lives going back to work and about how doctors and university professors were broke. The hyperinflation did not end until the German government stopped printing money.
U.S. policymakers remind me of the policymakers in Weimar Germany prior to its hyperinflation. Like Weimar German officials, U.S. policymakers believe that recessions are something that must be prevented at all cost. They believe that it is the government’s and/or the central bank’s responsibility to intervene with stimulus/money printing to boost economic growth back to “normal” as soon as they detect a sign of economic weakness (recessions are a plague… there must only be economic growth and economic booms in U.S. policymaker’s eyes). In addition, like the Weimar government, the U.S. government does not have the courage to make difficult decisions because decision makers are afraid to negatively impact the voters who they depend on to maintain their power. Rarely does a person hear a U.S. politician vow to reduce spending and to reduce entitlements during an election campaign.
I focus on QE2 a lot in my latest news headlines and commentary section of my blog because it represents another major attempt by the Federal Reserve to prevent an economic downturn at all costs. Many people question the wisdom of engaging in a new round of money printing because commodity prices have already risen significantly in recent months. Some fear that the new money created from QE2 could trigger an inflation that is difficult to control in the long-run (we may not see so much in the short-term because there is some expectation among some investors that the stock market may drop following the announcement of QE2). If inflation becomes difficult to control we have the potential of repeating the kind of hyperinflation seen in Weimar Germany.
I'm not sure if Parsson is still alive, but I’m sure he would admit that there are some differences between the U.S. today and Weimar Germany. One thing that is different is that the U.S. economy is far more complex today than Weimar Germany’s economy ever was. Another difference is the U.S. is probably less prone to seeing a run on its currency than Weimar Germany because the global economy is far more interconnected than it was in the 1920s.
- Instead of allowing the U.S. dollar to collapse on its own, foreign central banks and governments may try to keep the U.S. dollar going so they can keep their massive dollar holdings from becoming “worthless” and to stave off the negative effects that would come with the sudden collapse of the world’s reserve currency (the U.S. dollar).
Nevertheless, if the Federal Reserve continues its money printing ways the end result inevitably will be the dying of money because ordinary people will eventually figure out their money is really backed by nothing. Once ordinary people figure this out the Federal Reserve and the U.S. government may be powerless to halt the resulting frenzy...
