Book Review: Adam Fergusson's When Money Dies
by John Tamny
Real Clear Markets
by John Tamny: Book
Review: C.J. Maloney's Back to the Land
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
Economic Consequences of the Peace, pp. 235-248.
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.
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.
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."
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."
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.
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
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).
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
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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