Polanyi’s book is a classic of economic history. What had not been clear to me were the catastrophic consequences of the so-called gold standard—and not just in the Weimar Republic. One final point: in the wake of World War I, a number of new states emerged that possessed no gold at all. To import goods, they took out new loans—initially from French and British banks. Ultimately, however, these loans were all held by American banks. When the US stock market crashed, the loans fell due, with disastrous consequences.
Although I would like to say that issuing one’s own currency cannot be considered debt. It might go onto accounting tables under those labels, but it doesn’t make any sense.
Issuing money, especially chartist money, is a statutory operation. Money is the means of payment. The obligation to make a payment is a debt relationship between a creditor, and somebody who is obligated to pay.
Creating the means of exchange of a payment system is not debt, but a statutory creation by which debt is discharged.
At the beginning of the 20th century, major currencies were pegged to gold holdings (the gold standard). Nations lacking gold could not import goods because no other country would accept their local currency. Consequently, states that emerged after World War I were forced to take out loans denominated in currencies pegged to gold.
I suspect your information is not entirely accurate. You seem to be referring to Bretton Woods, signed in 1944, at least with the initial countries. The dollar was pegged to gold at an exchange rate of $35 to ounce and every other country agreed to a fixed exchange rate with respect to the dollar. I think later in 1958 currencies became directly convertible with each other other. One of the side effects of BW was that international bank gold reserves were drawn down over the years, but that process collapsed in reversed as BW began to unravel in the 60s at the end of course finally fall over in the 70s.
The price support for gold these days which is somewhere around 4000 give or take is a product of Biden, seizing Russian central bank assets and freezing Russia out of the international bank settlement system. Central banks all over the world realize that this was a risk they weren’t going to accept and since then they’ve been on a steady program since around 2023 or so of expanding their gold reserves. When you couple that with the normal sort of momentum, buying and cyclical over subscription into one commodity or another, this largely explains the stupid prices gold has achieved.. somewhere around February. I think margin lenders increased. The reserve that margin borrowers had to maintain on their purchases of gold on margin and that in certain Middle Eastern countries having to spend a little bit of their goal to cover expenses, while their refineries were being bombed.
“ In 1944 at Bretton Woods, as a result of the collective conventional wisdom of the time,[24] representatives from all the leading allied states collectively favored a regulated system of fixed exchange rates, indirectly disciplined by a US dollar tied to gold”
Hi Andrew, I probably should have right enough, particularly on the idea that the treaty was unworkable in the first place.
I was trying to keep it as tight/short as I could: say what I needed to say - and stick with the MMT perspective.
But you are right, he was an important voice I should have mentioned. Once I scratched the surface I found too much to write about. Most of it I had to leave aside. :-(
It would help to have a graph of Germany's monetary base during the Weimar era. And then get to tackling who was generating demand for the monetary base to increase it so. It shouldn't have been the national gov of Germany generating that demand as the national gov of Germany could fund deficit spending with the existing monetary base. That's how it works in general for deficit spending by national govs - deficit spending should in theory not be increasing the monetary base.
So if not the national gov of Germany, was it their central bank? For instance was their central bank printing currency to buy assets? Along the lines of QE? Keep in mind even QE by central banks as we know it today should in theory only increase M0 amounts in the monetary base, not the M1, M2, M3-like amounts (which exclude M0 and which are the amounts that lead to debasement of the currency). So was the German central bank doing something unconventional? E.g. printing currency to buy assets from the private sector?
Zarlanga has opined that the inflation was speculative excess. The private sector betting against the currency of Germany due to the issues you mentioned: the Versailles treaty putting Germany in a weak position and Germany not being able to run a trade surplus (to pay for the war reparations) due to its industry being curtailed. And the private sector bet against the currency by naked shorting it into existence (i.e. borrowing it via fractional reserve lending) and using it to buy assets. No different than how speculation works today. Except in the case of Germany there was nothing to stop the speculative excess as there was no threat to the speculators of the German Mark becoming stronger. On one hand this makes sense as a vehicle for driving debasement for currency, but it would only explain inflation in assets, not goods and services. There had to be a transmission mechanism to goods and services. Perhaps through labor having their wages pegged to inflation? If the amount of currency isn't increasing in the wallets of consumers then inflation in goods and services has to be limited, regardless of whether there are cuts in supply chain capacity.
Lastly it would be interesting to know if Germany exercised capital controls to limit their oligarchs from swapping their currency hoards for foreign currency. The oligarchs would be inclined to do this to move their wealth offshore and in the process it would devalue the Germany currency. Which would have helped their exports but hurt their ability to pay for reparations. It's no different to what what the oligarchs of Argentina have a history of doing with their own currency. Except in their case, after they swap for dollars they loan those dollars back to the gov of Argentina and then have the IMF act as their enforcer when Argentina can't keep up on the dollar denominated debts. I would be surprised if the Germany oligarchs were doing the same thing, but who knows.
Bottom line, I can well imagine the Germany oligarchy betting against the Weimar republic, by speculating against their currency heavily, finding a transmission mechanism to get a chunk of that inflation into the wallets of the consumers and then swapping their currency hoards for foreign currency to devalue the Germany currency even further.
Thanks for you thoughtful and comprehensive comment djrichard. You make so many good points: so I'll not attempt to reply just off the top of my head. I'll need to get my head around what you are saying before getting back to you. I do know that capital controls were not introduced until 1931 (if I'm remembering correctly), so as far as I know there was no way to stop capital moving out of the mark: yes there was capital flight. Get back to you as soon as I can. Thanks again for your input.
'Capital flight' is another one of those completely misapplied terms that mainstream econ loves so much (for propaganda, not enlightenment purposes).
No such thing in reality - it's an asset exchange with a foreign currency.... **which requires willing counter-parties to hold the currency that is being sold**
On the face of it, I would think goods and services inflation would be a natural consequence of a background of removal of resources and disruption to production. Such factors would increase scarcity of essential goods and services to the point where the prices would begin to climb.
Workers in the period negotiated their hourly wages on a daily basis as a result and employers had to pay this as there was no cheaper labour option and the workers would not work if basic needs were not met by wages. Also note that people typically could not emigrate due to lack of foreign currency and obligations to non workers in their social group helped keep them in-situ.
I may be oversimplifying, but that situation seems a basis for hyperinflation in locally-produced, basic goods and services too.
Once it starts to take hold, high inflation has a self reinforcing feedback effect also. If your wage today is 10 marks but you know tomorrow the price of wheat will have increased 100% or more, then you better go out and spend it all immediately on whatever food you can find before your money is worthless. Thus excess demand for limited supply is further exacerbated - an effect similar to what we would call "FOMO" today. The classic photos of Weimar inflation show workers literally picking up their wage as wheelbarrow loads of notes, going straight to the bakery, and still finding they haven't enough to buy bread.
Fascinating piece Jim. Perhaps it would be interesting to look at the other popular example, Zimbabwe, next?
This is a must read piece debunking the silly notion of the hyperinflation rhetoric involving Germany & unfortunately it's been used too often as strawman to attack MMT. Also a reminder that having too much foreign currency debt can be disastrous just like the case with nations in the global south as we speak.
Bottom line, this piece is also a reminder that too many people simply don't understand inflation & get caught up sadly in the monetarism nonsense started by Milton Friedman.
Exactly Michael, I decided to write this after seeing lots of comments last week pushing the 'too much money causes inflation' myth. And they mentioned Milton Friedman and the Weimar Republic. I just thought, this is something that needs to be 'put to bed'.
Having looked into it a bit (because I wasn't familiar with Germany - or how its central bank worked - from this period in history before I started writing my article) here's my understanding.
On how this ‘fed through into everyday prices’ idea, what you are saying looks about right to me. Wages were increasingly linked to the cost of living: as the inflation accelerated, there were monthly then weekly adjustments by 1923.
In relation to deficit spending – from a standard MMT point of view - when a currency-issuing government spends, the central bank just credits reserve accounts. Nothing needs to be raised or borrowed first - to do that.
And bond sales are a separate, optional step, conventionally run afterwards to drain those reserves back out - as a way to control the overnight interest rate - so the interbank interest rate doesn't collapse to zero.
It's an interest rate management convention, not a financing requirement.
So under normal institutional practice (as you say), deficit spending and monetary base growth get decoupled, but only because someone is actively running that draining operation.
But it doesn't look like that was happening in Weimar Germany. The central bank wasn't managing the money supply in either direction.
The central bank was supplying the government with freshly printed money by buying its debt directly itself, rather than that debt being sold to private lenders in the usual way.
By May 1922, something like four fifths of government income was coming through that route rather than from taxation.
The real anomaly isn't that the government was having its central bank print money to cover its bills. It's that nobody was managing the currency at all. Notes just kept being issued, with nothing ever pulling money back out the other side.
"Note: even quantitative easing - often called ‘money printing’ - is really just an asset swap, bonds for reserves."
My opinion is:
Most treasuries are held by nonbanks. The basic payment, for a purchase from a nonbank, is an asset swap, of bonds for deposits. The reserve creation is the transmission mechanism. As payment issuer, final settlement *within the system of accounts called the Federal Reserve* back into the Fed's own account is achieved with Federal Reserve Note issuance, whose purchase forms the counter payment that drains the reserves created by the Treasury bond purchases.
As the Federal Reserve only issues this physical currency purely passively, any massive issuance of payments by the System Open Market Account will overwhelm that mechanism despite making it go vertical, and we call that effect, "QE."
____________
Note, it is not clear that simply the Treasury not issuing bonds at all (ZIRP) for a normal sized annual deficit will cause a rise in reserves beyond some low upper bound--an open question, I think, due to the acceleration of the aforementioned passive drain observed in WWII, the QEs, and Trump's plandemic once reserves rise beyond a certain point, although low interest rates, not quantity, may be real trigger of the System Open Market Account-matching passive drain.
I'd like to add Karl Polany: The Great Transformation.
I hadn’t heard of him but I’ve just looked him up and he seems like an interesting character - with ideas worth exploring. Thanks for the heads up.
Polanyi’s book is a classic of economic history. What had not been clear to me were the catastrophic consequences of the so-called gold standard—and not just in the Weimar Republic. One final point: in the wake of World War I, a number of new states emerged that possessed no gold at all. To import goods, they took out new loans—initially from French and British banks. Ultimately, however, these loans were all held by American banks. When the US stock market crashed, the loans fell due, with disastrous consequences.
As all MMTers know: the worst thing a country can do is build up debts in a foreign currency. Disaster awaits.
Although I would like to say that issuing one’s own currency cannot be considered debt. It might go onto accounting tables under those labels, but it doesn’t make any sense.
Issuing money, especially chartist money, is a statutory operation. Money is the means of payment. The obligation to make a payment is a debt relationship between a creditor, and somebody who is obligated to pay.
Creating the means of exchange of a payment system is not debt, but a statutory creation by which debt is discharged.
At the beginning of the 20th century, major currencies were pegged to gold holdings (the gold standard). Nations lacking gold could not import goods because no other country would accept their local currency. Consequently, states that emerged after World War I were forced to take out loans denominated in currencies pegged to gold.
I suspect your information is not entirely accurate. You seem to be referring to Bretton Woods, signed in 1944, at least with the initial countries. The dollar was pegged to gold at an exchange rate of $35 to ounce and every other country agreed to a fixed exchange rate with respect to the dollar. I think later in 1958 currencies became directly convertible with each other other. One of the side effects of BW was that international bank gold reserves were drawn down over the years, but that process collapsed in reversed as BW began to unravel in the 60s at the end of course finally fall over in the 70s.
The price support for gold these days which is somewhere around 4000 give or take is a product of Biden, seizing Russian central bank assets and freezing Russia out of the international bank settlement system. Central banks all over the world realize that this was a risk they weren’t going to accept and since then they’ve been on a steady program since around 2023 or so of expanding their gold reserves. When you couple that with the normal sort of momentum, buying and cyclical over subscription into one commodity or another, this largely explains the stupid prices gold has achieved.. somewhere around February. I think margin lenders increased. The reserve that margin borrowers had to maintain on their purchases of gold on margin and that in certain Middle Eastern countries having to spend a little bit of their goal to cover expenses, while their refineries were being bombed.
“ In 1944 at Bretton Woods, as a result of the collective conventional wisdom of the time,[24] representatives from all the leading allied states collectively favored a regulated system of fixed exchange rates, indirectly disciplined by a US dollar tied to gold”
https://en.wikipedia.org/wiki/Bretton_Woods_system
Excellent lesson, Jim! Thank you for the education.
You're welcome. Thanks for your positive comment. :-)
Thanks for the great work on a very important and timely subject! Keynes: "The Economic Consequences of the Peace" is another very good source.
Thanks for the info Rick. :-)
Brilliant piece Jim, well done :)
Thanks Mike, Very generous of you to say :-)
A bit surprised you do not reference Keynes' book on the shabby consequences of the Versailles Treaty.
Hi Andrew, I probably should have right enough, particularly on the idea that the treaty was unworkable in the first place.
I was trying to keep it as tight/short as I could: say what I needed to say - and stick with the MMT perspective.
But you are right, he was an important voice I should have mentioned. Once I scratched the surface I found too much to write about. Most of it I had to leave aside. :-(
Hi Jim,
It would help to have a graph of Germany's monetary base during the Weimar era. And then get to tackling who was generating demand for the monetary base to increase it so. It shouldn't have been the national gov of Germany generating that demand as the national gov of Germany could fund deficit spending with the existing monetary base. That's how it works in general for deficit spending by national govs - deficit spending should in theory not be increasing the monetary base.
So if not the national gov of Germany, was it their central bank? For instance was their central bank printing currency to buy assets? Along the lines of QE? Keep in mind even QE by central banks as we know it today should in theory only increase M0 amounts in the monetary base, not the M1, M2, M3-like amounts (which exclude M0 and which are the amounts that lead to debasement of the currency). So was the German central bank doing something unconventional? E.g. printing currency to buy assets from the private sector?
Zarlanga has opined that the inflation was speculative excess. The private sector betting against the currency of Germany due to the issues you mentioned: the Versailles treaty putting Germany in a weak position and Germany not being able to run a trade surplus (to pay for the war reparations) due to its industry being curtailed. And the private sector bet against the currency by naked shorting it into existence (i.e. borrowing it via fractional reserve lending) and using it to buy assets. No different than how speculation works today. Except in the case of Germany there was nothing to stop the speculative excess as there was no threat to the speculators of the German Mark becoming stronger. On one hand this makes sense as a vehicle for driving debasement for currency, but it would only explain inflation in assets, not goods and services. There had to be a transmission mechanism to goods and services. Perhaps through labor having their wages pegged to inflation? If the amount of currency isn't increasing in the wallets of consumers then inflation in goods and services has to be limited, regardless of whether there are cuts in supply chain capacity.
Lastly it would be interesting to know if Germany exercised capital controls to limit their oligarchs from swapping their currency hoards for foreign currency. The oligarchs would be inclined to do this to move their wealth offshore and in the process it would devalue the Germany currency. Which would have helped their exports but hurt their ability to pay for reparations. It's no different to what what the oligarchs of Argentina have a history of doing with their own currency. Except in their case, after they swap for dollars they loan those dollars back to the gov of Argentina and then have the IMF act as their enforcer when Argentina can't keep up on the dollar denominated debts. I would be surprised if the Germany oligarchs were doing the same thing, but who knows.
Bottom line, I can well imagine the Germany oligarchy betting against the Weimar republic, by speculating against their currency heavily, finding a transmission mechanism to get a chunk of that inflation into the wallets of the consumers and then swapping their currency hoards for foreign currency to devalue the Germany currency even further.
Thanks for you thoughtful and comprehensive comment djrichard. You make so many good points: so I'll not attempt to reply just off the top of my head. I'll need to get my head around what you are saying before getting back to you. I do know that capital controls were not introduced until 1931 (if I'm remembering correctly), so as far as I know there was no way to stop capital moving out of the mark: yes there was capital flight. Get back to you as soon as I can. Thanks again for your input.
'Capital flight' is another one of those completely misapplied terms that mainstream econ loves so much (for propaganda, not enlightenment purposes).
No such thing in reality - it's an asset exchange with a foreign currency.... **which requires willing counter-parties to hold the currency that is being sold**
On the face of it, I would think goods and services inflation would be a natural consequence of a background of removal of resources and disruption to production. Such factors would increase scarcity of essential goods and services to the point where the prices would begin to climb.
Workers in the period negotiated their hourly wages on a daily basis as a result and employers had to pay this as there was no cheaper labour option and the workers would not work if basic needs were not met by wages. Also note that people typically could not emigrate due to lack of foreign currency and obligations to non workers in their social group helped keep them in-situ.
I may be oversimplifying, but that situation seems a basis for hyperinflation in locally-produced, basic goods and services too.
You make good points Liam. As you say, workers wages would need to keep up with spiralling costs.
Once it starts to take hold, high inflation has a self reinforcing feedback effect also. If your wage today is 10 marks but you know tomorrow the price of wheat will have increased 100% or more, then you better go out and spend it all immediately on whatever food you can find before your money is worthless. Thus excess demand for limited supply is further exacerbated - an effect similar to what we would call "FOMO" today. The classic photos of Weimar inflation show workers literally picking up their wage as wheelbarrow loads of notes, going straight to the bakery, and still finding they haven't enough to buy bread.
Fascinating piece Jim. Perhaps it would be interesting to look at the other popular example, Zimbabwe, next?
This is a must read piece debunking the silly notion of the hyperinflation rhetoric involving Germany & unfortunately it's been used too often as strawman to attack MMT. Also a reminder that having too much foreign currency debt can be disastrous just like the case with nations in the global south as we speak.
Bottom line, this piece is also a reminder that too many people simply don't understand inflation & get caught up sadly in the monetarism nonsense started by Milton Friedman.
Exactly Michael, I decided to write this after seeing lots of comments last week pushing the 'too much money causes inflation' myth. And they mentioned Milton Friedman and the Weimar Republic. I just thought, this is something that needs to be 'put to bed'.
Having looked into it a bit (because I wasn't familiar with Germany - or how its central bank worked - from this period in history before I started writing my article) here's my understanding.
On how this ‘fed through into everyday prices’ idea, what you are saying looks about right to me. Wages were increasingly linked to the cost of living: as the inflation accelerated, there were monthly then weekly adjustments by 1923.
In relation to deficit spending – from a standard MMT point of view - when a currency-issuing government spends, the central bank just credits reserve accounts. Nothing needs to be raised or borrowed first - to do that.
And bond sales are a separate, optional step, conventionally run afterwards to drain those reserves back out - as a way to control the overnight interest rate - so the interbank interest rate doesn't collapse to zero.
It's an interest rate management convention, not a financing requirement.
So under normal institutional practice (as you say), deficit spending and monetary base growth get decoupled, but only because someone is actively running that draining operation.
But it doesn't look like that was happening in Weimar Germany. The central bank wasn't managing the money supply in either direction.
The central bank was supplying the government with freshly printed money by buying its debt directly itself, rather than that debt being sold to private lenders in the usual way.
By May 1922, something like four fifths of government income was coming through that route rather than from taxation.
The real anomaly isn't that the government was having its central bank print money to cover its bills. It's that nobody was managing the currency at all. Notes just kept being issued, with nothing ever pulling money back out the other side.
"Note: even quantitative easing - often called ‘money printing’ - is really just an asset swap, bonds for reserves."
My opinion is:
Most treasuries are held by nonbanks. The basic payment, for a purchase from a nonbank, is an asset swap, of bonds for deposits. The reserve creation is the transmission mechanism. As payment issuer, final settlement *within the system of accounts called the Federal Reserve* back into the Fed's own account is achieved with Federal Reserve Note issuance, whose purchase forms the counter payment that drains the reserves created by the Treasury bond purchases.
As the Federal Reserve only issues this physical currency purely passively, any massive issuance of payments by the System Open Market Account will overwhelm that mechanism despite making it go vertical, and we call that effect, "QE."
____________
Note, it is not clear that simply the Treasury not issuing bonds at all (ZIRP) for a normal sized annual deficit will cause a rise in reserves beyond some low upper bound--an open question, I think, due to the acceleration of the aforementioned passive drain observed in WWII, the QEs, and Trump's plandemic once reserves rise beyond a certain point, although low interest rates, not quantity, may be real trigger of the System Open Market Account-matching passive drain.