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U.S. Economy Looks Like Weimar on the Brink


Inflation in the Weimar Republic made it cheaper for this woman to burn money than firewood. (AdsD der Friedrich-Ebert-Stiftun)

Twentieth-century economic history generated two great bogeymen: the Great Inflation and the Great Depression. The memory of both continues to haunt policy-makers.

Only a few years ago, the talk was about the dangers of a world trapped in deflation by the addition of ever more efficient producers in the poor economies of Latin America and Asia.


COPYRIGHT_WI: Published on https://washingtonindependent.com/w/2345/us-economy-looks-like-weimar-on-the-brink/ by - on 2020-07-31T00:00:00.000Z

Illustration by: Matt Mahurin

Today, the dramatic growth of those producers has pushed up energy and food prices, and economists now worry about world inflation. At the same time, America is anxious about dependence on inflows of foreign investments – whether as Chinese or Japanese central bank purchases of government securities, or controversial purchases of financial institutions by sovereign wealth funds.

These modern anxieties about inflation and dependence on foreign money have a frightening historical parallel in the early 20th century.

These modern anxieties about inflation and dependence on foreign money have a frightening historical parallel in the early 20th century.

The world’s most dramatic and most famous inflationary experience of the 20th century was Germany after World War I — though other central European countries had similar experiences. By November 1923, the German currency, the Mark, had fallen to one trillionth (1/10 12 ) of its pre-war value.

In the last stages of inflation, prices changed several times a day. Shopkeepers followed the foreign exchange rates, and immediately adjusted their charges. Vast amounts of paper money were needed to make even the smallest purchases. Instead of purses, people used first baskets and then wheelbarrows to carry their money.

Ultimately, inflation destroyed German savings, and made the economy of the unstable democratic Weimar Republic vulnerable to yet more shocks. It also had a dramatic effect on popular and political psychology.

The constant alteration of prices, the dramatic story of fortunes made and lost through speculation, made ordinary Germans vulnerable and neurotic. Because it played into old established clichés about Jewish dominance of finance, the inflationary uncertainty fueled anti-Semitism. Later on, some shrewd observers, like the scientist and writer Elias Canetti, concluded that the Great Inflation made the Holocaust possible — by creating a world in which large numbers seemed unreal and incomprehensible. Bureaucrats simply wrote down impossibly big sums without thinking of the human consequences.

The German postwar inflation and hyper-inflation of the 1920s had two fundamental causes: a low savings rate, and bad monetary and fiscal policy. One consequence of World War I was an erosion of incomes, and a dramatically reduced savings rate. But at the same time, at least for a while, Germans were able to sustain their living standard, and run large trade deficits.

They had this luxury because investors from around the globe bought German assets: currency, securities, real estate. British and American investors were gambling on a German recovery. After all, before 1914, Germany had been, with the United States, one of the world’s two strongest economies.

Only at a relatively late stage in the story of the German inflation, in the summer of 1922, did foreigners begin to realize that Germany was unlikely to be able to pay all its debts — including the financial reparations that the Allies demanded under the 1919 Versailles Treaty.

In the summer of 1922, the assassination of Foreign Minister Walther Rathenau underlined the political instability of the Weimar Republic. From that moment, foreigners no longer wanted to buy German assets. The big capital flow of the earlier period came to a stop. The Mark went into a free fall.

The second driving force of the inflation was the policy of the German government and the German central bank. Both were sensitive to political considerations. Both worried that rising unemployment might destabilize the precarious political order. So they were willing to do anything in fiscal and monetary policy to counteract economic slowdown. The government ran large budget deficits as it tried to keep up employment in the state-owned railroad and postal systems, and also to generate more purchasing power. It kept on looking for new ways to administer repeated fiscal stimuli.

Equally significant, the president of the central bank, an elderly Prussian bureaucrat called Rudolf Havenstein, boasted about his success in getting new printing plants (132 factories, as well as the bank’s own facilities), printing plate manufacturers (29) and paper factories (30) to meet the enormous demand for new money. He found more and more ingenious ways of stimulating bank lending to large businesses on ever more dubious securities. And he kept on saying that keeping the money presses rolling was a patriotic duty.

There was, in short, what would now be called a “Havenstein put” — in which the central bank would keep its interest rate at levels sufficiently low so that German business could continue to expand.

The United States today is clearly a different economy and society than Weimar Germany. But the same kinds of forces that blew up Weimar’s money are threatening.

First, there are persistently low savings rates, declining steadily since the 1970s. This is matched by higher rates of savings in fast-growing Asian economies and in Middle Eastern oil producing countries. The combination has produced a structural dependence on foreign capital inflows, and over recent years foreign investors have seen the U.S. as a good buying opportunity. There is a gigantic sucking sound of money flowing in. The United States accounts for about three-quarters of the world’s net capital inflows.

Second, the U.S. policy environment is extremely sensitive to downturns. American society was traumatized by the other 20th-century bogeyman — the sustained depression of the 1930s. We are deeply worried about recession and unemployment. We are even more obsessed with the fear that financial assets in housing or securities might be lost.

So far, as in Germany before the summer of 1922, there is not too much worry about rising inflation, because we think that foreigners will continue to keep us in the money. Like Germany then, the United States is a powerful industrial economy and there are plenty of reasons why it should attract inflows.

But we are, in consequence, vulnerable to a swing in expectations. If that took place, we might be closer to Weimar than we can ever imagine.

Harold James, a professor of history and international affairs at Princeton University, is the author of “The German Slump: Politics and Economics 1924-1936″ and “The Nazi Dictatorship and the Deutsche Bank”

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