Seven Crashes, page 14
In the longer run, inflation destroyed German savings and made the economy of the unstable democracy of Weimar vulnerable to yet more shocks. It also had a dramatic effect on popular and political psychology. Attempts to compensate losers in the German inflation, by revaluing some assets but not others, set one group against another, and prompted the belief that politics was about negotiating between organized interest groups.
The constant alteration of prices, the dramatic story of fortunes made and fortunes lost as a result of speculation, made ordinary Germans, and Central Europeans, vulnerable and neurotic. Gender relations were transformed by the madness of prices. Men saw women and women saw men as fundamentally calculating, materialistic, and disenchanted with any romantic illusions.56 Money was all that mattered. Because it played along with very old established clichés about Jewish dominance of finance, the inflationary uncertainty fueled anti-Semitism. Later on, some shrewd observers such as the scientist and writer Elias Canetti reached the conclusion that it was the Great Inflation that made the Holocaust possible, by creating a world in which large numbers seemed unreal and incomprehensible.57 Bureaucrats simply wrote down impossibly big sums without thinking of the human consequences.
It is worth thinking about the precise mechanism by which unstable prices translated into destructive and ultimately murderous social behavior. In stable times, we expect each partner in a commercial transaction to believe that the price was fair, and that both sides benefit from the exchange. I buy a meal that satisfies my hunger, and the innkeeper in return has money that can be used to satisfy their needs. When prices move, I am upset by having to pay more. The innkeeper is angry because the money I have given no longer buys so many goods. We both think that we have lost out in the transaction, and that we have been manipulated by some sinister force. We also feel guilty for taking advantage of others—getting rid of our banknotes as soon as possible. We start to think that we are behaving in a speculative and grasping way. Non-Jewish Germans after the First World War in the middle of the currency disorder thus took up activities that they associated with Jewish actions, hated themselves for their breach of traditional norms, and externalized that powerful emotion by blaming the groups associated with finance and money. There was also a backlash against mobility, especially across Germany’s new eastern border, and foreign Polish and Jewish traders were depicted as taking advantage of Germans; but foreign (western European and American) tourists also seemed to be living the high life in Berlin and other fleshpots on the cheap as the mark depreciated relative to the strong foreign currencies. They too provoked resentments.
The inflation destroyed ethical values, but it also corroded and undermined political structures. Germany was (and is) a federal country. Federalism depends on precise rules about the distribution of revenue and expenditure. The inflationary process, with a constant uncertainty about the real value of taxes and government payments, produces for the territorial units the same feeling of losing out that is experienced in personal life. Taxes seem to go to the center—to Berlin, or to Moscow (for the waning Soviet Union), or to Belgrade (for Yugoslavia under stress). On the other hand, spending looks as if it is associated with proximity to the seat of the federal government. Such interpretations fuel separatism. In the year of the hyperinflation, Saxony tried to break away under a radical left-wing regime (“the red hundreds”), while Bavaria moved to the radical right (and in November 1923 Adolf Hitler staged an unsuccessful putsch). The Rhineland separatists wanted to reach their own arrangement with France.
Calculations about access to credit and the government printing press reinforce the push to separatism. The German central bank was extending credit at highly negative real interest rates: that amounted to a subsidy. But only firms that could assert their national importance, and their closeness to the political process in Berlin, had a chance of getting that subsidy. Everyone else though they were losing out.
As the political disintegration proceeds, tax collection becomes more difficult—especially in the further or remote regions; and spending also collapses. In consequence, regional governments have substantial incentives to invent new fiscal mechanisms.
The dynamic that almost led to a breakup of Germany in the late summer and fall of 1923 would later lead to the disintegration of both the Soviet and the Yugoslav federations at the end of the Cold War. There was hoarding as the ability to make or trust cash or credit transactions broke down: thus, from 1990, Ukraine stopped supplying food to Russia. Central banks favored well-connected enterprises. The central federal government then blamed the outside world, or the international community, for all the chaos and disorder. For Serbia, the origins of inflation lay in international sanctions. The Soviet collapse also quickly produced a narrative of Russian victimization, as the result of the implementation of a Cold War strategy of Russia’s enemies that worked together with a supposedly treasonous Soviet leadership under Mikhail Gorbachev that “sold out” to the West. The Serbian and Russian explanations of inflation and economic vulnerability look like very close echoes of the constant refrain both of Weimar’s leaders and of the increasingly radical opposition to the “system,” namely that it was the foreign powers or the international order that had created the inflation through the impossibly large reparations bill. Inflation led to the targeting of minorities, but also to an explosion of rage at the iniquity of the international order.
Short of large-scale Czech-type confiscation, only a dramatic economic and political collapse, of the type that occurred in Austria and Hungary in 1922 and in Germany a year later, could lay a basis for an effective monetary and financial stabilization. There was discussion of nationalization in all these countries, but it was rejected—in large part because of the argument that such an operation would give an easy lever to the reparations creditors to seize resources. The argument was of course put forward with exceptional vigor by existing property-holders. The whole debate left a permanent mark on politics: the idea that seizing the assets of a specific group might end every fiscal conundrum played powerfully into the growing anti-Semitic movement. It laid the basis for Nazi policies of expropriation.
What began as an error in economic thinking thus ended up as a catastrophic unleashing of the politics of violence. No figure is more responsible for this trajectory than the mastermind of the ultimately failed strategy of German wartime financial mobilization, Treasury Secretary Karl Helfferich.
The Economist out of His Depth: Karl Helfferich
Germany had a unique obsession with money and with financial stability even before the catastrophes of the First World War and the hyperinflation. Thomas Mann’s fairy-tale second novel, Königliche Hoheit (Royal Highness, 1909), is an over-the-top depiction of this dominant German mentality. It followed his stunning debut novel, Buddenbrooks, which had dealt with the decay of a commercial family. The new work started with a narration of the decline of a traditional German small territorial state, a grand duchy, and its economy. The subsequent turn to optimism and a happy ending is a surprise. The state is rescued only when the prince starts to read books on political economy, thereby convincing an American heiress (the father is modeled on Andrew Carnegie) that he really has the good of his whole people at heart—as she does. She marries him, the bond yields of the country fall, and prosperity returns. Political economy was at the heart of German statecraft: but what would happen if the economy books were wrong? Karl Helfferich became the principal exponent of a German view of money.
Helfferich was born in 1872, the son of a merchant who, in the commercial as well as political enthusiasm accompanying the creation of the German Empire, had the year before started up a textile mill in his hometown, Neustadt an der Weinstrasse, on the edge of the picturesque Pfälzerwald in western Germany. The son was thus literally a product of the entrepreneurial enthusiasm of the Gründerzeit. As a child he was precocious and disputatious, and something of a bully to his younger brothers and sisters. He apparently always insisted on taking the German side when playing with tin soldiers.
The first of his family to study at university, he read law in Munich and then, through a family friend, met Georg Friedrich Knapp, professor of political economy at Strassburg (Strasbourg), who was interested in economic history and in 1891 produced a massively influential book titled The State Theory of Money. This work was filled with a strange new vocabulary to describe how it was the state that created money. Knapp termed himself a chartalist or nominalist, opposed to “metallists” who argued that precious metals had a worth of their own. The new language of economics was taken from Greek, and lent itself easily to ridicule and parody. Thus his stage theory of monetary development: “(1) We presupposed the hylogenesis of the means of payment, for only hylic means of payment allow of pensatory use. (2) Then morphism appears; only morphic means of payment can be proclamatory and therefore Chartal. (3) Finally, it is only in the case of Chartal means of payment that the hylic basis can disappear; they alone, therefore, can be autogenic.”58 Knapp’s reputation outside Germany, never great, became increasingly problematic as he was widely seen as one of what the economist T. E. Gregory termed “the main intellectual factors making for the catastrophe of the inflation.”59 Howard Ellis’s survey of German monetary theory concludes: “We should never be led to suspect from the State Theory that Gresham’s law sometimes directly thwarts the will of the states, or that trade rejects state money altogether if it becomes hopelessly depreciated.”60
But Knapp’s vision of the state as the center of the monetary process fitted a contemporary demand that wanted national sovereignty over money, and saw money as a tool in a struggle for power. It is a vision that despite all its problems comes back resonantly at regular intervals—usually at moments of doubt about the direction of globalization. Knapp’s argumentation about how the state creates money and his explanation of the wonderful consequences is structurally similar to today’s arguments in favor of so-called Modern Monetary Theory, or MMT. Knapp thought of money in two distinct ways. First, there was domestic currency, which he called autogenic money.
Instead of always highlighting only the shortcomings of autogenic money, one should occasionally also think about what it still does: it frees us from our debts; but whoever abolishes his debts, does not need to think long about whether he has also received a substance or not. Above all, it frees us from the debts against the state, because the state as an issuer emphatically recognizes that it as the recipient allows itself to accommodate this means of payment. The more taxes in the state mean, the more this circumstance is relevant. By creating autogenic means of payment, the state gives to these instruments the power of debt repayment.
Second, there was international (or, as Knapp characteristically phrased it, pantopolic) money, which could only be managed through “exchange control,” or “extradronic control.”61 He absolutely rejects any idea that there is any connection between the domestic monetary situation and exchange rates.
The analysis developed at the end of the nineteenth century has a modern American parallel in Modern Monetary Theory. The central basis is an idea of monetary sovereignty. The leading MMT proponent, economist Stephanie Kelton, gives the contemporary American reader a linguistically pared-down version of the Knapp view on the emancipatory advantages of domestic money that follow directly from it being a liability of the state. Money and government debt should not be considered as a liability of the state, requiring citizens to pay higher taxes in the future, but rather as an asset that enables citizens to realize their dreams. The debt part is a fiction that doesn’t matter. “If we wanted to, we could pay off the debt immediately with a simple keystroke.” And again, “The entire national debt could be paid off tomorrow and none of us would have to chip in a dime.” The government’s spending capacity is infinite; all that is limited are the productive resources of the economy. “Financing isn’t a constraint; real resources are. Closing the health-care deficit will require more primary care doctors, nurses, dentists, surgeons, medical equipment, hospital beds, and so on.”62
But then there follows a crucial qualification: Kelton goes “extradronic” like Knapp. She proceeds to assert that only states that control their foreign exchange market can obtain these marvelous blessings. How very Knapp of her! The implication is that states that borrow in their own currency have a large, perhaps infinite, room for maneuver. Fifty years ago, only a relatively few rich industrial countries could borrow long-term in their own currency. The rest suffered from what Barry Eichengreen and Ricardo Hausmann termed “original sin”: there was no market confidence in the solidity of the currency and they were dependent on foreign-denominated debt.63 Now a large number of upper-middle-income states, such as Mexico, can borrow long-term in domestic currency. But the problem does not end with government borrowing: if there is substantial corporate borrowing, by an economically essential group of companies, the threat of an inability to pay may create an implicit liability of the government to step in with a bailout. Seen in this light, most, perhaps all, countries except the United States no longer have true monetary sovereignty, and MMT becomes a purely American belief. For instance, the UK looks as if it has monetary sovereignty in the MMT approach, but there is plenty of private borrowing in dollars, and thus exposure to a foreign currency whose value cannot be manipulated by the government. The U.S. position is quite different. The long-term trade deficit of the United States is not a problem in this view, and results simply from the desire of the rest of the world to hold dollars. If there is a private-sector deficit, it stems from the government allowing its deficit to fall below the trade deficit. There is thus considerable room for expansion of the budget deficit, or of fiscal outlays. Again, this is a peculiarly American issue.
There is an even more fundamental objection to this line of monetary analysis than the observation that it can apply only in a substantially closed economy. Critics in the early twentieth century quickly pointed out that Knapp was completely oblivious to the question of a limitation of money supply: Ellis rightly concluded that the work was “sterile.”64 But it was a sterility that had large—and disastrous—consequences.
Under Knapp’s supervision, Helfferich completed a doctoral dissertation, which he published as The Consequences of the German-Austrian Currency Union of 1857. Knapp was enthusiastic about his disciple and recommended him to his former student Karl von Lumm, who was head of the Reichsbank Statistical Department, and in effect the bank’s chief economist. Helfferich could not have been a more different personality than Knapp. Whereas the professorially bearded Knapp was a gentle and unworldly soul who liked to wallow in his absurd lexicon of newly coined economic terms, the bullet-headed Helfferich was a man who wanted to be at the center of any kind of action. He was a fundamentally political animal. Knapp was happy to live as a professor in Strassburg, remote from the political center; Helfferich was desperate to get to Berlin and to the seat of power. Helfferich soon became a gifted and energetic propagandist for the gold standard, then under attack from populists and agrarians who wanted a silver currency and rising prices that they saw as relieving their indebtedness. That led to a break with Knapp, who was less enthralled by gold. The young man wrote with enormous facility, dictating at “machine-gun speed” and developing a substantial talent for polemics that Knapp disliked greatly (and warned him against). Helfferich rightly saw that free silver coining would not solve the basic problem of German grain growers—their high costs—and proceeded with a quite forensic discussion of German prices, wages, and borrowing costs. He thought that ending the gold standard would lead to a “fateful economic and social catastrophe.”65 The vigor of the polemic against one of Germany’s leading bimetallists, the Conservative Reichstag deputy Otto Arendt, led to a libel action and almost cost Helfferich his second doctorate (Habilitation). At this point he tried to synthesize his academic work into a systematic work of exposition, a textbook on money.
Helfferich’s Das Geld (Money) was massively influential, going through numerous editions, with constant revisions to account for the dramatic shifts in monetary realities that occurred up to the early 1920s; the last revision appeared in 1923, when Germany was devastated by hyperinflation. The work is in many ways a continual engagement with the world view of Knapp, with Helfferich consistently arguing for the gold standard, whose origins had been the major subject of his historical work.
The peculiarity of Das Geld is that it largely treated money as a commodity, which facilitated national and international commerce and thus had a sort of analogy to transport. Helfferich had little time for marginal utility: instead, money “serves for the satisfaction of wants exactly in the same way as do all those other kinds of goods which are in the nature of intermediaries or agents.”66
Helfferich repeatedly tried to define in a Knappian way an ideal monetary order as one that would produce no socially and politically destabilizing disturbances.
Changes in the value of money, no matter in which direction they take place, thus produce conditions which create serious alterations in the distribution of income and of wealth, disturbances in the bases of all economic calculations, and accordingly in the economic life of the community. Both in the interests of the economic system as well as of justice, it therefore appears most desirable to maintain the value of money as stable as possible, i.e. to keep the factors which determine exchange relations on the side of money as fixed as possible. . . . The smaller the influence which money exercises and the less the course of economic life is affected by money, the more closely does money approach that ideal which is commonly described as the “stability in the value of money.”67
