The same economists who failed to see the credit crunch are talking about increasing the money supply – “quantitative easing” in the new jargon. A look at the 1920s should indicate why this might not be such a brilliant wheeze…
Running out of ideas? Print money!
WORKERS, FEBRUARY 2009 ISSUE
When all else fails, print money. How economics is too important to be left to capitalists – and that workers will always pay the bill – is well illustrated by events from over 80 years ago, in the period just after the First World War.
The European belligerents had massive debts as a result of the war. The USA became a creditor country for the first time in its history. Inflation flourished everywhere with prices more than doubling in Britain, Germany and even in neutral Denmark. The German government owed 153 billion marks, mainly in the form of war loans from its own population.
The fledgling Weimar Republic attempted to recover the cost via taxation but capital fled abroad, despite export controls, or found other methods of avoidance. With the decline in industrial production more money was printed to pay for much needed imports. The real purchasing power of the mark fell to one third of its pre-war value by the middle of 1919 and to one eighth by the end of the year.
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| The results of “quantitative easing”: A 50 billion mark stamp from 1920s Germany. |
The victorious allies were determined to make Germany pay the full cost of the war. France, in particular, wanted to make sure that the German economy would be so saddled with debt that Germany would never be a threat again and ideally wanted to see the break-up of the Reich. Keynes, a member of the British delegation to Versailles, wrote a book in 1920 predicting the disastrous economic consequences of the Allies’ policy. In May 1921 reparations were fixed at 132 billion marks. Germany was to pay 2 billion marks a year plus 26 per cent of the value of its exports. French Premier Poincaré brushed aside German arguments that a postponement of payments was essential for the stabilisation of the mark.
Confidence in the mark fell and it began to tumble. It had already declined to 10 per cent of its pre-war value by the beginning of 1920. By the summer of 1922 it was worth 1 per cent of that, and 0.025 per cent by the beginning of 1923. The inflation was encouraged by industrialists, big landlords and speculators. It enabled the landowners to pay off their mortgages and German heavy industry to wipe out its debts.
The Stock Exchange boomed as did export industries whose goods were sold abroad at dumping prices. Unemployment was virtually wiped out. Germany was envied by a world languishing in severe post-war recession. Big companies bought up smaller ones and profiteers such as Hugo Stinnes were able to build up industrial empires almost overnight.
The Weimar Government also let the value of the mark fall in order to escape from its own debts and seek refuge from the French appetite for reparations behind the chaotic currency situation.
But those with savings, war loans or other securities, insurance policies, on a pension or fixed income were losing everything. So were groups such as domestics and farm workers who did not have strong unions to fight for wage increases. And there was a tremendous conversion of working to fixed capital way beyond market needs which had severe consequences later.
On the pretext of delays in the delivery of coal and timber payments, French and Belgian troops occupied the Ruhr on 11 January 1923 and Germans embarked on a campaign of civil resistance. But the Ruhr supplied Germany with 80 per cent of its coal and steel, and each day of passive resistance cost the government 40 million gold marks. Initially the Reichsbank held the mark relatively stable using its gold and currency reserves, but had to abandon its efforts in April.
In May the exchange rate reached 50,000 marks to the dollar, in June 100,000, in July 350,000 and in August 4.6 million. Confidence in money disappeared and the German currency became practically worthless. Trade union funds were destroyed. Money could not be printed fast enough. Three hundred paper mills and 2,000 presses were working day and night. Workers had to be paid three times a day because wages had to be spent as soon as they were received. Many companies issued their own private currency.
Food riots
Farmers were refusing to sell their produce. Food riots were breaking out and parties of workers were leaving the cities to take the food from the farms. There was international pressure because the contagion was spreading to other currencies.
The Rentenmark was introduced in November 1923 at the rate of one to one billion old marks and backed up by loans from the USA. When the government refused to print any more banknotes confidence was restored. A balanced budget was introduced and 330,000 government workers were sacked.
The bubble had burst, Companies went under and unemployment again soared. It receded for a short time afterwards but the credit system finally broke down, due mainly to the ravages of hyper inflation, and unemployment climbed to four times the level it was at the end of 1923. The Weimar Republic collapsed to be eventually replaced by the Third Reich.