Hyperinflation, Money Demand and the Crack-up Boom: Revisiting the Weimer Republic Experience

0:00Ladies and gentlemen, dear Mr. Chairman, thank you very much for the invitation. It's a great pleasure to be here. It's always a great experience to be at the Mises Institute. The other day I came across a remark made by Henry Ford, the American auto tycoon. He once said, the people of the nation do not understand our money and banking system. For if they did, I believe, there would be a revolution before tomorrow morning. I just wondered what Henry Ford might have in mind as far as the role of democracy is concerned when he made these statements.

0:49The paper I am going to talk about has the title Weimar Republic Hyperinflation, an a priori theory viewpoint. In the next 20 minutes I would like to go through the paper and would like to outline the basic thoughts of illustrating the causes of the German hyperinflation from The Austrian Historical Method The German hyperinflation of 1923 can be for a number of reasons termed as a perfect hyperinflation. It not only led to a drastic debasement of the currency, it led to the total destruction of the currency.

1:43The German hyperinflation occurred in times of peace, around about five years after World War I ended. It led to unprecedented economic and political disaster in Germany and it certainly paved the way towards totalitarianism under the National Socialist rule and led to World War II. Recently, German hyperinflation occurred in an economically advanced society. It was not a banana republic. And that hyperinflation needs to be addressed these days is obvious.

2:33This note carries $100 trillion with it. Yes, Mr. Chairman, $100 trillion, but don't worry, it's Zimbabwe dollar, it's not US dollar. The German hyperinflation is not a tragic historical episode from an a priori social theory as represented by the Austrian historical method it can be shown that the German hyperinflation illustrates the inevitable or I should say logical consequence of public ownership of government of which democracy republicanism is the most prominent model.

3:27What I'm going to show is that a priori theory shows that it is impossible to limit the expansion of government. It leads to a relentless increase into an aggression against private property and the final drama is the complete destruction of the currency. That's basically the result of the paper and if you turn to page two you could in the paragraph below see how the paper has been structured. What I'm going to do is I'm just talking briefly about the Austrian historical method. Against this backdrop we are going to look at the theoretical relation between the social Financial Order, Property Rights, and Time Preference.

4:19And then I move on and we will briefly look at the major developments in the course of the German hyperinflation period. And finally the paper concludes basically with outlining the relation between public ownership of government and money production. I should say that the paper draws heavily, very heavily on the work which has been done by Ludwig von Mises, Murray Rothbard and Professor Hoppe. If we turn to page number three, you would see a paragraph titled History and Apriori Theory. It's fair to say that Ludwig von Mises, right from his start as an academic, dealt in depth with the relationship between economics and history. Human action carries a lot of for Insightful Explanation, and the culmination of all this work is certainly his book, History and Theory, which he published in 1953.

5:24History, Mises notices the record of human action, and Mises' historical method basically rests on the indisputable insight that ideas ultimately cause human action, and I quote, History establishes the fact that men, inspired by definite ideas, made definite judgments of value, chose definite ends and resorted to definite means in order to attain the ends chosen and it deals furthermore with the outcome of the action, the state of affairs the actions brought about. And a fantastic introduction to the historical method of the Austrian School of Economics of the Misesian Approach can be found in a wonderful introduction by Professor Salerno to Rothbard's history of money and banking in the United States of America.

6:23The point I would like to make here is that for making sense of historical data, a priori theory is required and that means a theory which establishes truth without taking recourse to Experience. Economics as a branch of praxeology offers such irrefutably true propositions anterior to experience. And these irrefutable true propositions can be illustrated then by historical events. Historical events, I should stress this important finding, cannot confirm or refute the truth of a priori theoretical interpretations.

7:11And to set the ball rolling, I would like to quote Hans Zenholz, who in his book Age of Inflation in 1979 wrote, I quote, in view of the German hyperinflation, who would inflict on a great nation such evil which had ominous economic, social and political ramifications not only for Germany but for the whole world and his sobering answer was quote every mark was printed by Germans and issued by a central bank that was governed by Germans under a government that was purely German. It was German political parties such as the Socialist, the Catholic Central Party and the Democrat forming various coalition governments that were solely are solely responsible for the policies they conducted. Of course, admission of responsibility for any calamity cannot be expected from any political party.

8:15And in the same vein, Mises had written back in 1923 in a paper which he basically finalized in January 1923. If a government is not in a position to negotiate loans and does not dare levy additional taxation for fear that the financial and general economic effects will be revealed too clearly too soon so that it will lose support for its program, it always considers it necessary to undertake Inflationary Measures. Thus, inflation becomes one of the most important psychological aids to an economic policy which tries to camouflage its effects. It permits a system of government to continue which would have no hope of receiving any approval of the people if conditions were frankly explained to them. So we can see in both the writings of Zenholz and Ludwig von At that time, there was a clear insight of the underlying causes of hyperinflation.

9:28In the third paragraph of my paper, I just wanted to take an analytical starting point and you see a figure which relates the social order, property rights and time preference or put them into a proper perspective. When you talk about the organization of society, we can, on the one hand, look at the libertarian Government-Societal Order, which is characterized by the absence of violation of individual property rights. The other extreme is Government-Societal Order, which is characterized by aggression against property rights, by definition. Now if we take a closer look at Government-Societal Order, we can make a distinction between a a government which is characterized by a low time preference and a government which is characterized by high time preference and those of you who have read Mansa Olsen, his Power and Prosperity book he used two terms, he talked about a roving bandit and a stationary bandit the roving bandit has a high time preference The roving bandit comes and his thievery reaches 100 percent because he has a narrow interest

10:51in the welfare of his victims. He takes and vanishes, moves on. The stationary bandit, he settles down and he has an encompassing interest in the productive forces of society. He feeds on his victims on an ongoing basis, so his expropriation and exploitation is less than 100%. So we could say the stationary bandit has a lower time preference compared to the roving bandit. Now if we look at the stationary bandit, we can refer to monarchy, for instance, or feudalism, which is characterized by private ownership of government. Private ownership of government, that's the representative model of the stationary bandit. So where is public ownership of government or what's the model? I already referred to that model, that's democracy and republicanism.

11:55Which has a higher, by definition, a higher time preference compared to the stationary Stationary Bandit or the Model of Monarchy. So we could say that the stationary bandit has a relatively lower time preference. So his theory is less than the theory caused by the roving bandit. And of course, the lower the time preference, the more conducive is government for supporting the process of civilization. Now in this paper I also refer to an important insight, Olson is basically making the point that an autocratic government so has a higher time preference compared to the majority rule and it's fair to say that this can be dismissed but at this juncture I just wanted to make economic three points against the backdrop of the finding in paragraph three.

13:22Namely the first, the transition from private to public ownership of government leads to rise in a social time preference and is thereby causing negative effects on the process to civilization. Second, public ownership of government provides economic incentives for growing aggression against private property over time. And third, public ownership of government has little economic incentives to correct the consequences of bad policies if the benefits of this correction will materialize in the future rather than in the short term. And against this backdrop, I think it's fair now to take a view on the developments in in Germany between 1919 and 1923.

14:15And that starts on page number nine. And you can see that, for instance, the outlays related to World War I were predominantly financed by the German Reich, by the German Empire, by the issuing of a government debt. Because the idea was once the Allies were defeated, you know, the Kaiserreich would have taken the gold reserves and other property titles to make, to repay basically this debt. And for instance, the table shows you that in 1914, the total debt outstanding in Germany, Ludwig, debt was 5.2 billion gold marks and it reached 5.2 million gold marks and it reached 105.3 million at the end of the First World War. That's around about 200% of GDP. GDP measured in terms of its level in 1914.

15:28There was also an increase in the money supply. Money supply rose by 440% in that period. So there was, of course, an inflationary effect because the gold, the Reichsmarkt was suspended from its convertibility into gold, but it was not yet a hyperinflationary development. Then in April 1917, during the World War I, the United States of America under President Woodrow Wilson entered war activities, taking sides with the Allies and, of course, making the Allies the militarily dominant powers. The Germans and the Austrian-Angarians were encouraged by Wilson's 14 Points Plan from from the early 1980s to sign an armistice, and basically the peace was settled in the Treaty of Versailles, which to the surprise of the Germans resulted in Germany was basically made solely responsible for the causes of the war.

16:43The treaty required the German Reich to disarm, make substantial territorial concessions and pay reparations to the Allies. And that was of course done because of the strong American backing of France and Britain who then could push through the political program. But be that as it may, be that as it may until round about the end of 1922, the German public finances did not get out of control, did not get out of control and you can take a look on page number 11, you can see there the percentage ratio of taxes to total revenues were between around about 50 and 70 percent in that period and towards the end of 1922 this ratio started collapsing and the fatal event that basically led to the fatal hyperinflation came in late 1922.

17:55The reparation commission declared Germany to be in default of reparations and French and Belgian troops started occupying the German industrial heartland, causing the collapse, basically, of the German economy. And the German government under Chancellor Wilhelm Kuno, now Germany had a democratically elected government with various coalition, was unable to resist militarily and called for passive resistance, passive resistance. And the passive resistance was basically an idea to pay people from, you know, paying reparations, basically paid strike action.

18:49And this passive resistance was made possible only because The Reichsregierung had promised to pay firms for output losses and provide financial assistance to the unemployed and expelled civil servants. And that was paid by printing money. And as you can see from figure four on page number 12, around about June 1923, things started to get out of control. There were ever greater amounts of government debt getting monetized by the Reichsbank, and that led to this disastrous hyperinflation period. And just to give you an idea, before World War I started, you had to pay 4.2 gold marks for one U.S. dollar.

19:38And in the middle of November 1918, you had to pay 4.5 trillion Reichsmark basically, The point I would like to make here is that it was a deliberate decision made on the part of government to increase the money supply. Printing ever greater amounts of money was seen as the policy of the least evil. It was deliberately done by the German government, a democratically elected government. And so the quotes I just gave you by Zenholz and Mises, I think from an a priori theory viewpoint can be fully supported.

20:25Can be fully supported namely that this hyperinflation was basically caused, deliberately caused by a public ownership of government. In view of my time frame, I would like to conclude here. What I tried to do was to illustrate the Weimar Republic hyperinflation from the viewpoint of a priori theory and to show that We can, by taking recourse to this theoretical framework, we can really make the conclusion that the German hyperinflation was not just a tragic or historical episode, but a direct or logical consequence of public ownership of government.

21:17Thank you very much.