When Money Dies, Adam Fergusson's cautionary account of hyperinflation in Weimar-era Germany, is the book Americans desperately need to read today.
Ours is a nation willfully lacking in knowledge and understanding of money; a cynic might think this lack of apprehension is by design. Money is seldom discussed in schools, popular media, or politics. And almost a century after the stark lessons of 1923 Germany, the West is convinced it can't happen here. In our overwhelming material abundance, aided by the natural deflationary pressures of markets, we simply have lost our ability to imagine a hyperinflationary scenario. Sure, there have been currency meltdowns since the two world wars in places like Yugoslavia, Zimbabwe, Bulgaria, and Argentina. Yes, Venezuela and arguably Turkey face currency crises today. But we need not worry about this, because modern central banks—especially the US Federal Reserve and the European Central Bank—have tamed inflation through sheer technocratic expertise and a willingness to use extraordinary monetary policy tools. Asset purchases and balance sheet expansion, ultralow or negative interest rates, and a determination to provide as much "liquidity" as an economy needs are the new normal for central bankers. Thanks to this open embrace of centrally planned money, former Fed chair (and likely future Treasury secretary) Janet Yellen assured us we need not expect another financial crisis in our lifetime.
To believe this, one has to believe policy is more important than production, and that an express policy of inflation is the mechanism to forestall too much inflation. This is a curious position.
It's also a position sorely tested by the events of 2020. With governments across the world shutting down business, schools, and travel in response to covid, central banks have opened the floodgates of expansionary monetary policy like never before. Any slight tapering of the Fed's balance sheet, still swollen from the crash of '07, is now a pipe dream as it heads toward $10 trillion (Congress chipped in with its own $2.7 trillion fiscal stimulus bill, with another $1 trillion imminent). The fed funds rate is barely perceptible at 0.25 percent, and reserve requirements for banks are suspended since March. M1 money supply spiked precipitously, while Congress funded nearly half of 2020 federal spending with Treasury debt. Fed chair Jerome Powell now tells us the bank's sadistic 2 percent annual inflation target must average out over a period of years. In other words, we should expect (dubious official) inflation measures to run at 4 or 5 percent in coming years, to make up for the all the years when inflation supposedly was near zero.
Is it any wonder even mainstream hedge fund gurus like Ray Dalio now sound the alarm against hyperinflation? Cash is trash!
Fergusson's book should be assigned to central bankers stat (we wonder how many of them know of it). It's not a book about economic policy or banks per se, but rather a historical account of folly and hubris on the part of German politicians and bureaucrats. It's the story of a disaster created by humans who imagined they could overcome markets by monetary fiat. It's a reminder that war and inflation are inextricably linked, that war finance leads nations to economic disaster and sets the stage for authoritarian bellicosity. Versailles and reparations alone were perhaps not enough to create the conditions for Hitler's rise, but without the Reichbank's earlier suspension of its one-third gold reserve requirement in 1914 it seems unlikely Germany would have become a dominant European military power. Without inflation, Hitler might have been a footnote.
Most of all, When Money Dies is a tale of privation and degradation. Not only for Germans, but also Austrians and Hungarians grappling with their own political upheavals and currency crises in the 1920s. In a particularly poignant chapter, Fergusson describes the travails of a Viennese widow named Anna Eisenmenger. Her Austrian kronen, which in 1914 were worth one-quarter of a British pound sterling, spiral to 1/35,000 by 1922. As the twenties unfold, she is forced into black markets and pawning assets to procure food for her war-damaged children. Her late husband's gold watch exchanges for potatoes and coal. Luckier than most Viennese women, she owns small investments which produce modest income—fixed in kronen. Her banker urges her to immediately exchange any funds for Swiss francs, but this practice is banned by authorities. The downward spiral of her life, marked by hunger and hoarding anything with real value, happens so quickly she barely has time to adjust.
Conditions in Vienna find voice in the realistic silent film about the era called The Joyless Street, starring a young Greta Garbo. Her character sees everything deteriorate around her; even her father beats her with his cane for returning home without food. Once friendly neighbors become suspicious of each other's stores of bread and cheese, while prostitution becomes rampant. Angry people jostle in line waiting for the butcher to open; when he does only the most attractive women receive the scraps of meat available that day. Everything familiar and beautiful in society becomes degraded and cheapened seemingly overnight.
1920s Germany and Austria represent extreme hyperinflationary scenarios, but such grim historical lessons should counsel us to avoid repeating their mistakes. As Professor Jörg Guido Hülsmann so capably explains in The Ethics of Money Production, there are enormous moral and civilization components to monetary policy. Inflation not only harms our economy, it makes us worse people: profligate, shortsighted, lazy, and unconcerned with future generations. This is perhaps the greatest untold story in America today: the story of how the Fed not only fundamentally shifted our economy from one of production to consumption, but also the profound ethical and sociological implications of that shift.
Our make-believe economy, as Axios puts it, increasingly depends on enormous levels of ongoing fiscal and monetary intervention. Corporations borrow so cheaply we might call it "house money," then buy back their own stock rather than hire or expand. Newly created money and credit benefits those closest to the spigot, juicing equity markets but doing little for ordinary people. Congress spends with abandon, knowing the Fed will keep its debt service low and provide a ready backstop market for US Treasurys—but little of the stimulus reaches Main Street. Whole industries, including airlines, seek bailouts for covid shutdowns. Those shutdowns also strain tax revenue for state budgets; Mr. Biden promises a bailout there too. Meanwhile, small business and retail face an apocalypse which already leaves tens of millions unemployed. Once again, the presumed answer to all of this is the Fed.
Hyperinflation may not be around the corner or even years away; no one can predict such a thing. The US dollar may well hold or gain value relative to foreign currencies over the coming years. After all, foreign currency exchange values are relative and "King Dollar" may remain a perceived store of value. But at some point the US economy must create real organic growth if we hope to maintain living standards and avoid an ugly inflationary reality. No amount of monetary or fiscal engineering can take the place of capital accumulation and higher productivity. More money and credit is no substitute for more, better, and cheaper goods and services.
History shows us how money dies. Yes, it can happen here. Only a fool thinks otherwise.