Central banks exist to create inflation. As much as the people will tolerate.
— Peter St Onge, Ph.D. (@profstonge) November 25, 2023
What happens when that process goes runaway?
This week, we revisit the Weimar hyperinflation.
The food shortages, the families selling off heirlooms, the gangs roving the countryside beating up… pic.twitter.com/m5e74LJoG5
In last week's newsletter I wrote about my fear that we are repeating the 1970s stagflation. This week inspired by Thorsten Polleit, I cover an even worse case, Germany's 1920s hyperinflation. The Weimar hyperinflation is one of the most talked about episodes today. Of course paper money hyperinflates all the time. Argentina is currently running at 143% inflation, a key reason for Javier Milei's win last week. Before WWI, the German mark had been backed by gold, but during the war the German government went off gold to run massive deficits. Total public debt went from $5 billion marks in 1914 to $105 billion in 1918. This led to 115% of inflation so about 20% per year, but that was just the beginning. The war had wiped out nearly half of German industries, saddled it with massive reparation payments and the new socialist government wanted to hike spending. They halted reparation payments to make room which led France and Belgium to seize Germany's main industrial region. The government encouraged workers to resist, promising to pay all of their wages. This turned out to be the bite from the apple. So starting in May of 1923, the Central Bank cranked up the money printers. Physical currency doubled in a single month, then it rose 40 fold in 3 months; then it rose a billion fold, not a joke, by Christmas. Prices, of course, soared. A loaf of bread cost $200 billion marks; that was roughly double the pre-inflation national debt for a loaf of bread. Germans would rush out on payday to spend the money before it inflated away by the end of the day. Housewives used bundles of marks as firewood. $1 bought 4.2 marks as American exchange students in Berlin used their food allowances to buy up houses. Unemployment rose to nearly 30%, and even middle-class Germans were selling off their family heirlooms. In the countryside roving gangs on bicycles beat up farmers, killed their livestock out of spite, and stole food. The hyperinflation only ended when the central bank was forced to stop issuing new money to fund government deficits. The Reichs Bank massively reduced new issues, revalued the mark, and it stuck. The hyperinflation was over.
Like the Federal Reserve, the Reichs Bank was independent on paper, but given that governments always control central banks they are never truly independent. That means when government spending takes off, so does inflation. During COVID lockdowns, the Federal Reserve printed nearly $5 trillion to finance federal deficits. At one point, one in three had fresh ink. It delivered what it always does, out-of-control inflation with deficits now once again threatening to restart the money printers. So what is the solution? Simple: separation of state and money. Individuals only strike money that holds its value; otherwise, people will not accept it, whether it's gold or bitcoin. Only the state can hyperinflate, and as long as the state controls the money, it is always a catastrophe waiting to happen. Once government controls the money we all know how the book ends. It's just a question of when.
Read the full article with charts and links to some great reads at profstonge.com.
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