[R-G] [BillTottenWeblog] Time to Get Out the Wheelbarrows?

Sat May 23 18:21:49 MDT 2009

Another Look at the Weimar Hyperinflation

by Ellen Brown

webofdebt.com (May 19 2009)

"It was horrible. Horrible! Like lightning it struck. No one was
prepared. The shelves in the grocery stores were empty. You could buy
nothing with your paper money."
-- Harvard University law professor Friedrich Kessler on on the Weimar
Republic hyperinflation (1993 interview)

Some worried commentators are predicting a massive hyperinflation of the
sort suffered by Weimar Germany in 1923, when a wheelbarrow full of
paper money could barely buy a loaf of bread. An April 29 editorial in
the San Francisco Examiner warned:

"With an unprecedented deficit that's approaching $2 trillion, [the
President's 2010] budget proposal is a surefire prescription for
hyperinflation. So every senator and representative who votes for this
monster $3.6 trillion budget will be endorsing a spending spree that
could very well turn America into the next Weimar Republic." {1}

In an investment newsletter called Money Morning on April 9, Martin
Hutchinson pointed to disturbing parallels between current government
monetary policy and Weimar Germany's, when fifty percent of government
spending was being funded by seigniorage - merely printing money. [2}
However, there is something puzzling in his data. He indicates that the
British government is already funding more of its budget by seigniorage
than Weimar Germany did at the height of its massive hyperinflation; yet
the pound is still holding its own, under circumstances said to have
caused the complete destruction of the German mark. Something else must
have been responsible for the mark's collapse besides mere
money-printing to meet the government's budget, but what? And are we
threatened by the same risk today? Let's take a closer look at the data.

History Repeats Itself - or Does It?

In his well-researched article, Hutchinson notes that Weimar Germany had
been suffering from inflation ever since World War One; but it was in
the two year period between 1921 and 1923 that the true "Weimar
hyperinflation" occurred. By the time it had ended in November 1923, the
mark was worth only one-trillionth of what it had been worth back in
1914. Hutchinson goes on:

"The current policy mix reflects those of Germany during the period
between 1919 and 1923. The Weimar government was unwilling to raise
taxes to fund post-war reconstruction and war-reparations payments, and
so it ran large budget deficits. It kept interest rates far below
inflation, expanding money supply rapidly and raising fifty percent of
government spending through seigniorage (printing money and living off
the profits from issuing it) ...

"The really chilling parallel is that the United States, Britain and
Japan have now taken to funding their budget deficits through
seigniorage. In the United States, the Fed is buying $300 billion worth
of US Treasury bonds (T-bonds) over a six-month period, a rate of $600
billion per annum, fifteen percent of federal spending of $4 trillion.
In Britain, the Bank of England (BOE) is buying 75 billion pounds of
gilts [the British equivalent of US Treasury bonds] over three months.
That's 300 billion pounds per annum, 65% of British government spending
of 454 billion pounds. Thus, while the United States is approaching
Weimar German policy (fifty percent of spending) quite rapidly, Britain
has already overtaken it!"

And that is where the data gets confusing. If Britain is already meeting
a larger percentage of its budget deficit by seigniorage than Germany
did at the height of its hyperinflation, why is the pound now worth
about as much on foreign exchange markets as it was nine years ago,
under circumstances said to have driven the mark to a trillionth of its
former value in the same period, and most of this in only two years?
Meanwhile, the US dollar has actually gotten stronger relative to other
currencies since the policy was begun last year of massive "quantitative
easing" (today's euphemism for seigniorage). {3} Central banks rather
than governments are now doing the printing, but the effect on the money
supply should be the same as in the government money-printing schemes of
old. The government debt bought by the central banks is never actually
paid off but is just rolled over from year to year; and once the new
money is in the money supply, it stays there, diluting the value of the
currency. So why haven't our currencies already collapsed to a
trillionth of their former value, as happened in Weimar Germany? Indeed,
if it were a simple question of supply and demand, a government would
have to print a trillion times its earlier money supply to drop its
currency by a factor of a trillion; and even the German government isn't
charged with having done that. Something else must have been going on in
the Weimar Republic, but what?

Schacht Lets the Cat Out of the Bag

Light is thrown on this mystery by the later writings of Hjalmar
Schacht, the currency commissioner for the Weimar Republic. The facts
are explored at length in The Lost Science of Money (2002) by Stephen
Zarlenga, who writes that in Schacht's 1967 book The Magic of Money, he
"let the cat out of the bag, writing in German, with some truly
remarkable admissions that shatter the 'accepted wisdom' the financial
community has promulgated on the German hyperinflation". What actually
drove the wartime inflation into hyperinflation, said Schacht, was
speculation by foreign investors, who would bet on the mark's decreasing
value by selling it short.

Short selling is a technique used by investors to try to profit from an
asset's falling price. It involves borrowing the asset and selling it,
with the understanding that the asset must later be bought back and
returned to the original owner. The speculator is gambling that the
price will have dropped in the meantime and he can pocket the
difference. Short selling of the German mark was made possible because
private banks made massive amounts of currency available for borrowing,
marks that were created on demand and lent to investors, returning a
profitable interest to the banks.

At first, the speculation was fed by the Reichsbank (the German central
bank), which had recently been privatized. But when the Reichsbank could
no longer keep up with the voracious demand for marks, other private
banks were allowed to create them out of nothing and lend them at
interest as well. {4}

A Story with an Ironic Twist

If Schacht is to be believed, not only did the government not cause the
hyperinflation but it was the government that got the situation under
control. The Reichsbank was put under strict regulation, and prompt
corrective measures were taken to eliminate foreign speculation by
eliminating easy access to loans of bank-created money.

More interesting is a little-known sequel to this tale. What allowed
Germany to get back on its feet in the 1930s was the very thing today's
commentators are blaming for bringing it down in the 1920s - money
issued by seigniorage by the government. Economist Henry C K Liu calls
this form of financing "sovereign credit". He writes of Germany's
remarkable transformation:

"The Nazis came to power in Germany in 1933, at a time when its economy
was in total collapse, with ruinous war-reparation obligations and zero
prospects for foreign investment or credit. Yet through an independent
monetary policy of sovereign credit and a full-employment public-works
program, the Third Reich was able to turn a bankrupt Germany, stripped
of overseas colonies it could exploit, into the strongest economy in
Europe within four years, even before armament spending began." {5}

While Hitler clearly deserves the opprobrium heaped on him for his later
atrocities, he was enormously popular with his own people, at least for
a time. This was evidently because he rescued Germany from the throes of
a worldwide depression - and he did it through a plan of public works
paid for with currency generated by the government itself. Projects were
first earmarked for funding, including flood control, repair of public
buildings and private residences, and construction of new buildings,
roads, bridges, canals, and port facilities. The projected cost of the
various programs was fixed at one billion units of the national
currency. One billion non-inflationary bills of exchange called Labor
Treasury Certificates were then issued against this cost. Millions of
people were put to work on these projects, and the workers were paid
with the Treasury Certificates. The workers then spent the certificates
on goods and services, creating more jobs for more people. These
certificates were not actually debt-free but were issued as bonds, and
the government paid interest on them to the bearers. But the
certificates circulated as money and were renewable indefinitely, making
them a de facto currency; and they avoided the need to borrow from
international lenders or to pay off international debts. {6} The
Treasury Certificates did not trade on foreign currency markets, so they
were beyond the reach of the currency speculators. They could not be
sold short because there was no one to sell them to, so they retained
their value.

Within two years, Germany's unemployment problem had been solved and the
country was back on its feet. It had a solid, stable currency, and no
inflation, at a time when millions of people in the United States and
other Western countries were still out of work and living on welfare.
Germany even managed to restore foreign trade, although it was denied
foreign credit and was faced with an economic boycott abroad. It did
this by using a barter system: equipment and commodities were exchanged
directly with other countries, circumventing the international banks.
This system of direct exchange occurred without debt and without trade
deficits. Although Germany's economic experiment was short-lived, it
left some lasting monuments to its success, including the famous
Autobahn, the world's first extensive superhighway. {7}

The Lessons of History: Not Always What They Seem

Germany's scheme for escaping its crippling debt and reinvigorating a
moribund economy was clever, but it was not actually original with the
Germans. The notion that a government could fund itself by printing and
delivering paper receipts for goods and services received was first
devised by the American colonists. Benjamin Franklin credited the
remarkable growth and abundance in the colonies, at a time when English
workers were suffering the impoverished conditions of the Industrial
Revolution, to the colonists' unique system of government-issued money.
In the nineteenth century, Senator Henry Clay called this the "American
system", distinguishing it from the "British system" of privately-issued
paper banknotes. After the American Revolution, the American system was
replaced in the US with banker-created money; but government-issued
money was revived during the Civil War, when Abraham Lincoln funded his
government with US Notes or "Greenbacks" issued by the Treasury.

The dramatic difference in the results of Germany's two money-printing
experiments was a direct result of the uses to which the money was put.
Price inflation results when "demand" (money) increases more than
"supply" (goods and services), driving prices up; and in the experiment
of the 1930s, new money was created for the purpose of funding
productivity, so supply and demand increased together and prices
remained stable. Hitler said, "For every mark issued, we required the
equivalent of a mark's worth of work done, or goods produced". In the
hyperinflationary disaster of 1923, on the other hand, money was printed
merely to pay off speculators, causing demand to shoot up while supply
remained fixed. The result was not just inflation but hyperinflation,
since the speculation went wild, triggering rampant tulip-bubble-style
mania and panic.

This was also true in Zimbabwe, a dramatic contemporary example of
runaway inflation. The crisis dated back to 2001, when Zimbabwe
defaulted on its loans and the IMF refused to make the usual
accommodations, including refinancing and loan forgiveness. Apparently,
the IMF's intention was to punish the country for political policies of
which it disapproved, including land reform measures that involved
reclaiming the lands of wealthy landowners. Zimbabwe's credit was ruined
and it could not get loans elsewhere, so the government resorted to
issuing its own national currency and using the money to buy US dollars
on the foreign-exchange market. These dollars were then used to pay the
IMF and regain the country's credit rating. {8} According to a statement
by the Zimbabwe central bank, the hyperinflation was caused by
speculators who manipulated the foreign-exchange market, charging
exorbitant rates for US dollars, causing a drastic devaluation of the
Zimbabwe currency.

The government's real mistake, however, may have been in playing the
IMF's game at all. Rather than using its national currency to buy
foreign fiat money to pay foreign lenders, it could have followed the
lead of Abraham Lincoln and the American colonists and issued its own
currency to pay for the production of goods and services for its own
people. Inflation would then have been avoided, because supply would
have kept up with demand; and the currency would have served the local
economy rather than being siphoned off by speculators.

The Real Weimar Threat and How It Can Be Avoided

Is the United States, then, out of the hyperinflationary woods with its
"quantitative easing" scheme? Maybe, maybe not. To the extent that the
newly-created money will be used for real economic development and
growth, funding by seigniorage is not likely to inflate prices, because
supply and demand will rise together. Using quantitative easing to fund
infrastructure and other productive projects, as in President Obama's
stimulus package, could invigorate the economy as promised, producing
the sort of abundance reported by Benjamin Franklin in America's
flourishing early years.

There is, however, something else going on today that is disturbingly
similar to what triggered the 1923 hyperinflation. As in Weimar Germany,
money creation in the US is now being undertaken by a privately-owned
central bank, the Federal Reserve; and it is largely being done to
settle speculative bets on the books of private banks, without producing
anything of value to the economy. As gold investor James Sinclair warned
nearly two years ago:

"[T]he real problem is a trembling $20 trillion mountain of over the
counter credit and default derivatives. Think deeply about the Weimar
Republic case study because every day it looks more and more like a
repeat in cause and effect ..." {9}

The $12.9 billion in bailout funds funneled through AIG to pay Goldman
Sachs for its highly speculative credit default swaps is just one
egregious example. {10} To the extent that the money generated by
"quantitative easing" is being sucked into the black hole of paying off
these speculative derivative bets, we could indeed be on the Weimar road
and there is real cause for alarm. We have been led to believe that we
must prop up a zombie Wall Street banking behemoth because without it we
would have no credit system, but that is not true. There is another
viable alternative, and it may prove to be our only viable alternative.
Main Street can beat Wall Street at its own game by forming
publicly-owned banks that issue the full faith and credit of the United
States not for private speculative profit but as a public service, for
the benefit of the United States and its people. {11}

Notes:

1. "Examiner Editorial: Get Ready for Obama's Coming Hyperinflation",
San Francisco Examiner (April 29 2009).

2. Martin Hutchinson, "Is It 1932 - or 1923?", Money Morning (April 09
2009).

3. See Monthly Average Graphs, x-rate.com.

4. Stephen Zarlenga, The Lost Science of Money (Valatie, New York:
American Monetary Institute, 2002), pages 590-600; S Zarlenga,
"Germany's 1923 Hyperinflation: A 'Private' Affair", Barnes Review
(July-August 1999).

5. Henry C K Liu, "Nazism and the German Economic Miracle", Asia Times
(May 24 2005).

6. S Zarlenga, op cit.

7. Matt Koehl, "The Good Society?", Rense (January 13 2005).

8. "Bags of Bricks: Zimbabweans Get New Money - for What It's Worth",
The Economist (August 24, 2006); Thomas Homes, "IMF Contributes to
Zimbabwe's Hyperinflation", www.newzimbabwe.com (March 5, 2006).

9. Jim Sinclair, "Fed Actions a Bandaid on a Gaping Economic Wound",
reprinted in Go for Gold (September 18 2007).

10. Eliot Spitzer, "The Real AIG Scandal, Continued! The Transfer of
$12.9 Billion from AIG to Goldman Looks Fishier and Fishier", Slate
(March 22 2009).

11. See Ellen Brown, "Cash Starved States Need to Play the Banking
Game", webofdebt.com/articles (March 02 2009).

_____

Ellen Brown developed her research skills as an attorney practicing
civil litigation in Los Angeles. In Web of Debt (2007), her latest book,
she turns those skills to an analysis of the Federal Reserve and "the
money trust". She shows how this private cartel has usurped the power to
create money from the people themselves, and how we the people can get
it back. Her earlier books focused on the pharmaceutical cartel that
gets its power from "the money trust." Her eleven books include
Forbidden Medicine (1998), Nature's Pharmacy (1998), co-authored with Dr
Lynne Walker, and The Key to Ultimate Health (2000), co-authored with Dr
Richard Hansen. Her websites are www.webofdebt.com and www.ellenbrown.com.

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