Book Review: Adam Fergusson's When Money Dies

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There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

~ John Maynard Keynes, The Economic Consequences of the Peace, pp. 235-248.

When Money Dies, the horrifyingly true story of post-World War I Germany’s experience with hyperinflation, was first published in 1975. Largely because the world has been forcibly reacquainted with central banks, and specifically, the U.S. Federal Reserve’s "quantitative easing," this essential book was republished and re-released in 2010.

The German devaluation of the mark, which began during the war, continued at great speed in its aftermath such that, by 1923, the dollar bought 4,200,000,000,000 units of the almost worthless currency. The story of the mark’s descent into nothingness is scarily relevant to what we’re witnessing today on the currency front, and the stories within touch on myriad modern themes about runaway government debt, investor flight to hard assets, and societal unrest related to monetary mischief.

It’s hard to tell the ideology of author Adam Fergusson, but as a read of When Money Dies ably reveals, when it comes to monetary debasement ideology is really beside the point. More important is what Fergusson writes about the consequences. His account of Germany’s currency tragedy will ring true to indviduals of all stripes who’ve witnessed a mercifully pale imitation of the mark’s devaluation since 2001 in terms of the dollar, euro and pound.

The book’s prologue ends with the simple suggestion (echoing Keynes) that "if you wish to destroy a nation you must first corrupt its currency. Thus must sound money be the first bastion of a society’s defence."

With currency destruction used as the dropoff point, Fergusson describes for the reader what happens when money is devalued, and it’s surely a descent into Hell. There are important lessons to be learned in what befell Germany, Austria and other belligerants after the war. Sadly, the stories are all too relevant today.

To begin, it’s most helpful to look into what so many currency watchers miss in noting changing currency values vis-à-vis one another. Fergusson quotes Pearl Buck, who observed the Germans at the time commenting that (p. 5) "‘The dollar is going up again,’ while in reality the dollar remained stable but our mark was falling."

This observation applies equally to the present. Many, including Fed officials and Paul Krugman, argue as evidence for an absence of inflation that the dollar has not fallen drastically against the yen, euro and pound relative to where it was ten years ago. But those are paper currencies. What is perhaps unseen, and which the price of gold reveals, is a greater truth about the dollar’s debasement.

The dollar’s weakness versus other major currencies hides the weakness of every single global currency in terms of gold. Just as the wrongly perceived strength of the dollar in the 1920s gave German citizens false comfort about the mark’s health, at least for a time, the relative stability of exchange rates in modern times obscures a broad run on all national paper currencies.

While Germany’s Bank Law of 1875 required that at least 1/3rd of the mark’s issue be backed by gold, in 1914 the mark’s link to gold was suspended, and thus began its devaluation (p. 9). And to finance the war effort, rather than raise revenues to fund it, a great deal of borrowing ensued. The eventual cost of 164,000 million marks was the equivalent of 110,000 million marks in prewar terms.

The above dovetails nicely with the historically credible view that deficits often work against currency strength, given that governments sometimes use devaluation as a tool for reducing the real cost of debt service. Sure enough, after its defeat Germany faced not only war debt but also war reparations. With the mark’s devaluation up to full speed by 1920, the national debt of 287,000 million marks, though originally £14,400 million in sterling terms, had declined to the equivalent of £1,200 million by October of 1920 (p. 34).

Sadly for the German citizenry, and arguably for the country’s politicians, the German stock exchange was closed during the war (p. 11). This deprived citizen and politician alike of the markets’ warnings of the great economic pain to come. Consumer price spikes were predictably blamed on "war shortages" (p. 11), much as politicians and central bankers today finger demand from China and India as the cause of commodity spikes. The real culprits then and now were able to some degree to escape blame.

When war shortages could no longer suffice as an explanation, "speculators" predictably filled the breech for angry citizens, as they often do today. As Fergusson so clearly puts it, in blaming "the sharpness of the Jews, or the speculators making fortunes in the money markets, they were in large measure still blaming not the disease but the symptoms" (p. 69-70).

Though money supply itself can often provide conflicting signals when it comes to the health of a currency, Dr. Rudolf Havenstein, president of the Reichsbank, took to bragging as the mark collapsed that his Reichsbank "today issues 20,000 million marks of new money daily," and that "In a few days, we shall therefore be able to issue in one day two-thirds of the total circulation" (p. 171). And much as Fed Chairman Ben Bernanke is presently of the view that U.S. inflation is well contained, that broad commodity spikes are merely "transitory" and wholly disassociated from Treasury and Fed policy, throughout the German hyperinflation Havenstein "held firmly to his view that money supply was unconnected with either price levels or exchange rates" (p. 170).

New York Fed President Bill Dudley recently suggested that inflation could "never happen today" thanks to the Fed’s ability to increase interest rates. But the Reichsbank raised interest rates to 30 percent in August of 1923 (p. 167), with no positive effect on the mark.

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