Hyperinflation Heralded the Fall of German Democracy (2023)
smithsonianmag.com
smithsonianmag.com
Hyperinflation is better thought of as the rejection of a currency by the people, and it has historically always been associated with extreme exogenous factors like foreign-currency denominated debt, with war, civil war or rampant corruption.
The Weimar Republic had foreign-currency denominated debt, which famously you cannot satisfy with printing more domestic currency.
[edit] Here's a good write-up that aligns with my take.
[1] https://www.pragcap.com/hyperinflation-its-more-than-just-a-...
My father is in his late 60s. He lived through the 70s. He saw double digit inflation. He saw price controls. All in his prime working years.
I don’t know where this leaves us. But it worries me when even those with memories to draw from don’t.
Would sure be nice to live in precedented times for a change.
Adam Fergusson is a controversial right wing economists. And the claim that its 'more a psychological event than a purely monetary event' can be made about many things. One could argue that an earthquake or anything else is 'more psychological'.
Factually speaking, its simply a monetary event. It doesn't matter what when and where, if you print money to the extend Wiemar did your gone get hyperinflation. Had France, Britain or the US done the same, it would have had the same effect.
Carl Melchior was a member of the German elite who had a completely wrong understanding of economics and his words should not be just accepted.
> made by huge German exports and these exports will ruin the trade in England and America
This is a fundamentally flawed statement. This is German elites still thinking in Zero-Sum terms. The idea that Britain and the US could never accept German as an exporting trading partner, is just false. And its also false that debt can only be paid back if you are a massive exporter.
Every modern economist who looks at this, concludes that Germany could have paid back the debt just fine. Its simply that the German elites didn't want to pay it. That the simple reality.
Hyperinflation happened because German elites preferred hyperinflation, economic chaos to paying back the debt.
Uses a mix of old economic stats paired with German citizens journals and public newspapers to tell the story of how hyperinflation in Germany started and then ended, but not before creating so much distrust in society that the seeds were sewn for the country to take a militaristic stance to fixing its problems. Highly recommend the book above.
Of course it's possible your theory is right, at the moment my uneducated guess about what the Trump admin is doing is like some art critic seeing paint on canvas and asking "I wonder what this artist' motivation is..." when it's in fact just a monkey having smeared its droppings on the canvas.
Whereas the lockdowns around the world are probably governments being scared that they'll have too many deaths. If there was a conspiracy, with so many governments, what do you think the chances are of somebody leaking the plans are?
But I agree with you: The Covid pandemic seems to genuinely have overwhelmed governments worldwide.
In Germany’s case much of their industrial capacity was destroyed or seized as reparations for WW1.
Trying to make parallels to the current situation in the US borders on the absurd.
Hyperinflation can also be caused by massive fiscal mismanagement. Venezuela and Argentina are currently undergoing this. It doesn't have to be violent, though violence is certainly a risk.
And unlike after WW2 Germany didn't unconditional surrender, Germany was not invaded and its factories were not transported away as the Soviets did after WW2.
So both your points are wrong, German industrial capacity was neither destroyed nor seized. No idea what you are basing these claims on.
German eventually was required to pay reparations. But the also received massive foreign investment at the same time. In fact, the received more foreign investment then they paid in reparations.
And the reparations payment were far from something that Germany couldn't actually handle at the time. They simply didn't want to.
"The treaty stripped Germany of 65,000 km2 (25,000 sq mi) of territory and 7 million people."[1]
They also specifically lost coal and iron rich areas to pay back France for destroying theirs.
The inflation fear-mongering serves specific interests. When central banks jack up rates to "fight inflation," workers lose jobs while asset-holders are protected. Meanwhile, recent inflation wasn't primarily caused by stimulus or "too much money" - it was supply chain disruptions, corporate price-setting, and energy shocks.
Blyth demonstrates how our inflation responses are political choices disguised as economic necessities. We could address price stability through buffer stocks, targeted subsidies, or energy transition investments instead of the blunt instrument of interest rates that disproportionately harm working people.
The kicker? Inflation actually helps debtors (most people) while hurting creditors (the wealthy). No wonder the financial class is so obsessed with stamping it out at any cost to workers.
No, it didn't. It was a crushing _deflation_. Germany actually did generally fine during the inflation period, with some economic growth.
Deflation completely killed that.
The hyper inflation was in the aftermath of WWI when Germany's economy was broken by 4 years of war. An it was austerity at the beginning of the 29 financial crisis that brought on deflation and collapse. Followed by the election of Hitler. In the US the same thing resulted in the election of FDR and the end of Republican dominance for two generations.
The reality is, no matter if the German government had increased or decreased spending, the Great Depression was bigger then Germany and would have impacted Germany either way.
The deflation happened because of the massive accumulation of gold by the central banks of France and the US. France and the US manipulated the gold standard.
And the Financial crisis of 1929 wasn't really the bad part, that was a stock collapse. But this doesn't make a great depression, stock went down more in 1987 then in 1929.
The situation in 1929 caused many problems in the US horrifyingly organized banking system (that's its own topic) and further restricted the money supply. The Smoot–Hawley Tariff Act lead to banks collapsing in Europe and continued the restriction of the money supply.
The countries that left the gold standard early were more successful then those that left later. Economist like R. G. Hawtrey (one of the most famous economists at the time) spend literally 10 years warning people that this would happen because the Post-WW1 gold standard was so flawed. Had they listened to him, there might have still been some amount of stock collapse in 1929 but the real issue was not the 1929 stock collapse, but rather the 1930/1931 deflation.
So 'austerity' has nothing to do with it really, its only a background character.
You could stay on the gold standard and do austerity or not. Or you could leave it and do austerity or not. All these four are options and different country picked differently for various reasons.
The US under Hoover and FDR first practiced limit stimulus under gold and then left, and continued stimulus even more so. Actually they always did both as tariffs can be seen as type of tax, but that's debatable. And FDR was of the 'throw spaghetti at the wall and hopefully something works' type.
Germany stayed and did austerity. They couldn't leave the gold standard as it would make it even hard to pay back debt. Adam Tooze pointed this out on his commentary on "Golden Fetters". If somebody would have lent them a lot more money if they had wanted to do a massive stimulus program is questionable, the terms would have been harsh. So its understandable they didn't want even more high interest debt.
Its also the case that those that left the gold standard instantly saw the situation get better and therefore saw less need for austerity. So that plays into it as well. The US had its fast historical growth in industrial out put ever the few month after it left gold (that then collapsed the NRA was adopted). So Britain who left gold early recovered better and didn't have to be as extreme.
That said, in the minds of many at the time the gold standard and prudent physical policy were linked. In Japan for example, balanced books and gold were seen 'womanly' a true warrior didn't give a shit, just go and steal that shit. So you tended to have liberal and centrist being pro austerity and pro gold standard. While right wingers hated gold standard (its internationalism) and wanted massive military spending. They didn't care about debt because they would simply take over and steal everything.
But this is just historical coincidence. Being pro fiscal spending and pro gold is a perfectly reasonable position that some at the time held. It just not how politics happened to break down in most of the world.
I actually am on the 4th side where I think (depending on country) leaving gold and doing some amount of austerity or at least re-appropriate spending and taxes is reasonable (remember raising taxes on the rich is austerity as well).
It literally did. Austerity (forced by the Gold Standard) was the only reason for the severity of the Great Depression. And it was ended by expansionist policies in the US and the Nazi Germany.
> The reality is, no matter if the German government had increased or decreased spending, the Great Depression was bigger then Germany and would have impacted Germany either way.
The UK did not do austerity, and the 1929 downturn did not affect them as strongly. They had a 5% GDP drop, compared to almost 30% in the US, and 16% in Germany.
> The countries that left the gold standard early were more successful then those that left later.
Indeed. And the gold standard basically required the countries to practice the austerity.
And your own statement makes the causality clear, something happen with gold (ie the money supply). So that clearly is the root cause, so why are you disagreeing?
Austerity is one potential thing that people can do in response, but they can do others. And if they do it or not, a global crisis is gone suck.
> And it was ended by expansionist policies in the US and the Nazi Germany.
Wrong. The major US recovery didn't happen when massive spending increase happened. You will see that the initial recovery well well on its way once the US left the gold standard. The NRA was adopted and growth essentially stopped until NRA was removed.
The old text book story of 'Hoover was an evil austerity guy, and then FDR came and 2 days later he spend 50% of GDP and magically the economy got better' is complete incompatible with the data.
FDR intervention other then leaving the gold standard and the bank holy-day (a Hover area policy implemented in FDR turn) were macro economically net neutral at best, and more likely negative. Go look at the Blue Eagle Club or killing 10000s of pigs, if Trump did these things now people would lose their shit.
The US economy improved when FDR finally kicked out all his dumb advisers and replaced them with actually people who knew what they were doing, and they got ready for WW2. And then after WW2 many of those people stayed, and the policies continued. And it didn't hurt the rest of the world was in need for exports.
And please don't buy into the Nazi propaganda about how Hitler came to power build the Autobahn and saved the country, literally just propaganda. The reality is, by 1933 the economy, globally and in Germany was already growing again. The deflation caused by the gold standard had mostly been adjusted to, because of the natural adjustment and hurt, and the changing polices of the major economy.
Even had Germany continue under the previous government, their economy would have done perfectly fine in the 1930s. In fact the primary guy who ran the economy was a guy from the previous government who spent years holding Hitler spending habits back as much as he could, until he got fired. But of course its also easier to spend more if you stop paying debt.
> The UK did not do austerity, and the 1929 downturn did not affect them as strongly. They had a 5% GDP drop, compared to almost 30% in the US, and 16% in Germany.
The UK had plenty of gold and did allow gold outflow, they did the right thing in terms of the global gold standard. The problem is that at some point they thought they were losing 'to much'. So decided to drop the standard, turns out, this was a good idea. Spending was pretty constant during that time period, they neither did austerity nor did they engage in massive stimulus spending.
The US had the worst crisis and their financials were fine. They had low spending and low debt. They didn't do much 'austerity' before 1929 because they didn't have any reason to and they couldn't really cut much with austerity anyway as they spend so little anyway.
So you can not correlate 'level of austerity' before 1929. And even after, the deciding factor for countries doing well or not was if they were on the gold standard or not. If you left the gold standard and you did austerity you did fine. If you stayed on the gold standard and did austerity, you didn't do so well but by 1933 you would be growing again too.
> Indeed. And the gold standard basically required the countries to practice the austerity.
... it didn't. It would just require countries to be OK with massive gold outflows (if they had it) and much worse debt deals and in the 1930s most countries didn't think it was viable to go to high debt levels at high interest.
In the US or example, there was a huge gold reserve and the gold standard restricted them literally not at all as papers had shown. Any policy in regards to fiscal spending was 100% in the power of the politicians, gold standard or not. It was simply the central bankers who decided on a specific policy, that lead to massive gold accumulation in the US. The same goes for other major economies their fiscal policies could be conducted whatever the gold standard did, they just didn't want to.
What you also don't talk about is that the massive WW1 debt were another reasons for government trying to save money. Germany couldn't really default(they thought) and leaving gold would have devalued their currency and increase their debt. Now this would have still been the right thing to do, but they understandable didn't really do that. Other countries had issues like that too.
Governments going bust was reasonable common, no IMF. International bond markets were not as developed. There was massive inter-governmental debt. If you go fully bust revolution was a real fear (or at least that what many believed). So its understandable why many mainstream politicians didn't want to do anything crazy.
So its not really accurate to say 'gold standard required austerity', it was more like, the complete international system depended on a network of standards, debt and obligations. And as gold got worse, all of those relationships got worse at the same time.
But to be clear, yes the gold standard (as it was designed) was bad and leaving it was good. Doing austerity in response wasn't a good idea but not doing austerity certainty wasn't a solution.
Just like if I attack you with a knife and you run into a wall, it isn't the wall's fault. Sure it would have been better not to run into a wall, but see people didn't really expect attacks with knifes. Because the pre-WW1 gold standard and pre-WW1 financial and debt markets just worked competently differently, WW1 changed everything.
The excessive treatment made them see themselves as freedom fighters. Of course, that's not what people are taught in school in Britain or France, it's an inconvenient narrative.
That was in public school so the same program as for the vast majority of French students.
Communism is usually also not discussed enough. In the Weimar Republic in the 30s it was inevitable that either Communists or Nazis would come to power. The mainstream parties had completely failed the country so the people were desperate and sought refuge in radical ideologies. It was either or, there was no alternative.
Germans didn't love authoritarianism. Well over half the population voted Communist, Social democrat or with the center party. And usually far more, only in the middle of massive economic depression did the Nazis gain ground. Arguable the communist are 'authoritarians' but they don't think of themselves that way. And many who did vote for the Nazis weren't authoritarians either. Germany had the largest social democratic movement in the world.
The whole 'bled the country dry with reparations' is just weimar/nazi propaganda. Germany reparations were not that extreme, and specially when you compare on what reparations Germany forced on its enemies. Germany could heave paid the reparations without much issue. All the claims that poor little Germany couldn't handle it is Waimar propaganda that the Nazis continued and intensified. Somehow they can spend 20+ of GDP on building a military, but the reparations are somehow impossible.
> Nazi figures like Goebbels who was constantly broke, struggling to pay bills and ranted about financial enslavement of his people.
What if I told you that there are poor people in all nations? And people struggle in lots of place. Germany in 1920 did better then most nations on the plant. And Goebbles was likely in the Top 1 of global population. And you are literally quoting the propaganda minister, of course that is the impression he wants to give.
> The excessive treatment made them see themselves as freedom fighters. Of course, that's not what people are taught in school in Britain or France, it's an inconvenient narrative.
Except that's exactly what people are thought in school. The whole 'extreme reparations' nonsense is the standard view. Its only in the last couple decades that this was seriously questioned by economists and historians.
The Nazis only became a major political force years later during the DEFLATIONARY period of 1930-1933. Heinrich Brüning's government implemented brutal austerity in response to the Depression - slashing wages by 25%, quadrupling pension contributions, and cutting social spending by two-thirds[12]. This deflationary policy was economic malpractice that caused massive suffering.
Recent research confirms that "localities that experienced larger declines in spending and higher rises in taxes had higher vote shares for the Nazi Party in each and every German federal election between 1930 and 1933"[11]. Each standard deviation increase in austerity severity correlated with a 2-5 percentage point increase in Nazi votes[11].
The political establishment's obsession with balancing budgets through austerity crushed the working and middle classes, creating mass unemployment (reaching 6 million by 1932)[9] and pushing desperate voters toward radical solutions. As Hjalmar Schacht warned in 1930: "if the German people are going to starve, there are going to be many more Hitlers"[11].
This history matters today. When elites respond to economic crisis with deflation and austerity that protects creditors while immiserating workers, they create the perfect conditions for fascism. The CEPR's conclusion is chilling: "too much harsh austerity can trigger social unrest and unintended political consequences"[11].
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The reality that still many people don't want to see is that the deal was actually not bad for German. Keynes as usually got it totally wrong. They could paid the reparations, other countries have done so in arguable worse situations. Germany was mostly untouched by WW1 (capital stock), they had significant industrial power and very good relations with the US. Massive amounts of investment went into the country, more then after WW2 and the Marshall Plan.
They always received far more money in foreign investment then they ever had to pay back, and then over multiple rounds, that debt was reduced and reduced and then eliminated. Mostly because US and British elites had no interest in actually enforcing anything. Essentially stabbing France in the back.
The route cause of all of this is really Wilson. Wilson refused to ally himself to Britain and France. He always was pro-German, or at very least saw them as one and the same. Then he fell right into the traps of the German, when the Germans came to him specifically, over heads of France and Britain, and ask for an armistice on lenient terms. And then the Germans could let Wilson do the work of forcing this deal onto Britain and France. Instead of insisting that armistice negotiations would only be held with all major nations together.
Henry Cabot Lodge and other in congress (and of course many others) believed pushing at least into the Ruhr was the minimum. Then you can negotiate from a real position of strength and you can continue to occupy the Ruhr with a multinational (US/Belgium/English/French) force until Germany was clearly in line. And at the minimum they should destroyed German army leadership and split up all the large land holdings in the East of German. This would have actually benefited the SPD. But the SPD couldn't really do it themselves. And this is not hing sight, many at the time understood this.
Then during the negotiations he continued to refused the US/Britain/French alliance that could have stabilized the world. He refused unilateral debt renegotiation with his allies. Both of these were done successfully after WW2.
He only cared about the flawed 'League of Nations'. And the reason he actually wanted the 'League of Nations' is because it would have overruled the constitution and would have given him power to go to war without congress. So if Serbia attacks Greece, the US could go to war with Serbia without congress approval. Wilson really hated congress (or anything else that prevented him from doing whatever he wanted).
But France simply refused to go along with the deal Wilson had in mind. Because France was not dumb enough to believe that 'Collective Security' from the League would actually help them. This could only be overcome by Wilson basically caving in, and offering France the alliance it wanted. So the whole Treaty was concluded under what turned out to be false promises in the first place.
He then refused any attempt by congress to even minimally adjust the treaty, making it clear that the US would only go to war with an act of congress. Its often claimed that congress was full of hardcore isolationist but this simply isn't the case. Many republicans were pro allies, and wanted the US to take a leadership position in global affairs. Very basic congressional politics could resulted into the US joining the League and having an alliance with France and Britain. Many republicans would have gone along with that.
The problem is, he was so hell bent on his (flawed) vision of Collective Security and Presidential power. He wasted time and nearly killed himself giving speeches and trying to convince the general population of his vision. And then he eventually opposed the treaty in congress anyway because it wasn't exactly his, telling the democrats to vote against. This collapsed the complete security architecture of Europe and diplomatic fallout followed. Leading to a more isolationist mood in the US.
Germany saw the opportunity to do the same thing again, claiming they can't pay, creating inflation, divided US/French/British and again using to US to force the others into line. The US pushed for debt restructuring for German debt on French and Britain. But its important to understand, there was no restructuring of the debt that Britain and France owned the US. So the US was very willing and aggressively pushed for Germany to pay less debt to other, but was unwilling to reduce the debt on its own allies. Wilson had completely refused any consideration that all of the this debt was connected. He wanted to use debt as a mechanism to keep France and Britain in line instead.
The Treaty of Versailles was full to the brim with inspirational stuff, like womans rights, labor rights, pretty much anybody that showed up with some concerns could get bunch of stuff into the Treaty. But it fundamentally lacked solutions for the things that actually mattered to the leadership of all the countries, European security and government debt.
The fundamental division between US/France/Britain essentially gave Germany the opportunity to completely reverse the Treaty of Versailles and facing no consequences.
So I think saying the hyperinflation is the cause of 1933 is fundamentally flawed, its more accurate to say that both the hyperinflation, the great depression and the return of German militarism were all because of a flawed peace making after WW1. And Wilson wanting the US to stand alone, "city upon a hill" and all the others are just equally unimportant sinners that could be dominated by him is a the root of the issue. He negotiated an armistice on bad terms, forced a bad treaty onto the other nations and then failed to actually stand behind his treaty. So at the end of his presidency, the complete Post-WW1 security architecture had already fundamentally collapsed and the Treaty of Versailles was mostly a dead letter.
This comment is long enough, but the Great Depression very much happened because of this same dynamic.
I recommend Adam Tooze on some of this (even if I don't fully agree with him on some things). These talks he gave at Standford about the Post-WW1 treaties.
Making Peace in Europe 1917-1919: Brest-Litovsk and Versailles (https://www.youtube.com/watch?v=EDlRKl3XGoM)
Hegemony: Europe, America and the problem of financial reconstruction, 1916-1933 (https://www.youtube.com/watch?v=9Alx_JDpQio)
And the book its based on: "The Deluge: The Great War, America and the Remaking of the Global Order, 1916-1931"
I was his quiet champion up until about a month ago. So much crap to get rid off in the west. Still true.
Then, the other day, tariffing Ukraine with 10% but not Russia.
I think people who're into economics can usually tell what he tries to say. But in terms of communicating it to the wider public its a total failure because he simply says what he thinks and tries to dumb it down for common people. Which is of course bound to fail, it sounds silly to them because they have never been told anything like it. The usual PR is to spin the strategy and essentially lie to the public. Trump talks about all the things he's actually doing without any filter which sounds insane and scary to people.
If you're worried about inflation now, probably better they didn't tell you what they did in 2020:
This isn't merely a joke. If you read about famous intelligence stories, you'll see how much emphasis the Russians place on maintaining a believable cover to protect their agents.
Can you imagine being his handler?