When Money Dies, Adam Fergusson.
Public Affairs ISBN 978-0718302146
In December 1918, Anna Eisenmenger took her War Bonds to a bank in Vienna, intending to cash them in. Making her way through a frenzied crowd, she found her banker, who delivered a rude surprise: had she bought Swiss francs instead, "you would not now have lost three-fourths of your fortune," he told her. "Lost!" Anna exclaimed, "but mine are government securities: Surely there can't be anything safer than that?" "My dear lady," the banker replied, "where is the State which guaranteed these securities to you? It is dead."
The idea that money can "die" may seem odd to a modern eye. It's a rare achievement of central bankers and their political masters that they haven't debauched many currencies to total collapse. But that doesn't mean that the monetary mismanagement and runaway inflation that ate away at Frau Eisenmenger's wealth can't erupt again, although (one hopes) not on such a radical scale. If there's one lesson of this book, it's that "if you wish to destroy a nation you must first corrupt its currency".
It is happening today, to a degree. The Federal Reserve is pumping out so many dollars that the currency buys only about 1400th of an ounce of gold and has plummeted in value against other money—the Australian dollar last year hit parity for the first time since 1982. Inflation is on the rise from Beijing to Rio. The prices of oil, food and other commodities are moving sharply upwards. And the only person who doesn't seem to notice is the one man who could do something about it—Fed Chairman Ben Bernanke.
In February, he told emerging market bankers that inflation is their problem, not his—never mind that the vast majority of the world's trade is transacted in greenbacks. His view recalls that of President Nixon's Treasury Secretary, John Connally, who told the Europeans in the 1970s that the dollar "is our currency, but your problem".
Little wonder then that an old book about another central banker is getting a new look from businesspeople the world over. Fergusson's 1975 classic, When Money Dies, chronicles Weimar Germany's struggle to manage its currency, the mark, in the aftermath of World War I. The former British journalist's account is an engrossing and disturbing read, not just because his case study is chronicled with such care, but because he puts the episode into a broader frame that's still applicable today: "The question to be asked—the danger to be recognized—is how inflation, however caused, affects a nation: its government, its people, its officials, and its society," he writes. "The more materialist that society, possibly, the more cruelly it hurts."
The story starts long before the war. As far back as August 1914, the government suspended Reichsbank notes' redemption into gold. Loan banks were set up to finance World War I and the Reichsbank was allowed to cover its shortfalls by issuing short-term bills. Thus the government "willfully" financed the fighting "not by taxation, but by borrowing". The question, said Mr Fergusson, a conservative who was writing for a 1970s British audience also faced with rising prices, was only "when the bill would be presented, and who would pay it".
Average citizens weren't sure whether the rising prices came from the printing presses or war shortages. Some believed other currencies were just "unfairly rising" (an echo of today's American debate about the appreciating Chinese yuan). Economic information was scarce; stock exchanges were closed for the war's duration and foreign-exchange rates weren't published. Then the Armistice came and France, looking for its pound of flesh, pushed for harsh reparations. The Reichsbank kept printing money. The mark went from 20 to the pound sterling, to 43 in December 1918, to 60 in June 1919, and 185 that December—a 20 per cent annual depreciation on average over the war years.
And yet Germany's hapless central banker, Rudolf Havenstein ploughed on, pumping out marks from 1921 to 1923. The press cheered him "without dissent". Industrialists and investors, too, loved the policy, which artificially depressed the price of German exports. Currency and stock speculation soared. The politicians worried more about unemployment than the rising prices, and a cheap mark seemed to keep industry afloat—by inflating away their debt at the expense of shareholders. Hugo Stinnes, the richest industrialist of the day went so far as to justify the policy as "the only course open to a benevolent government".
But although it seemed to prop up the economy at the beginning, it ultimately wasn't a virtuous cycle. The government, unable to pay its debts, raised taxes. Business found ways to evade them and stockpile foreign exchange through creative accounting. Foreigners poured into the country, buying up property on the cheap and stoking a protectionist backlash. German exports slipped down the value chain. The government launched raids to mop up foreign currency. Politicians like the prime minister of Bavaria resorted to populist jibes, floating a bill to make "gluttony" a capital offence. Riots erupted in the Ruhr and elsewhere, as wage rises failed to keep pace with the rising costs.
Most importantly, the average person's standard of living was devastated. Farmers hoarded their crops, unwilling to take depreciating currency as payment. Barter became the medium of exchange. Mothers trawled rubbish bins in richer neighbourhoods to find food for their children. Professional men swept streets. Those who relied on their savings or on pensions were devastated. By 1922, most of Germany had returned to wartime conditions, complete with fuel shortages and food vouchers. In Berlin, 30 per cent of children who left school "were unfit to work for reasons of health". And most ominously, it was in this chaotic period that anti-Semitism started to rear its head.
It was only near the end of 1923 that Germany installed a new central bank head, Hjalmar Schacht, and managed to right itself, mostly by convincing the public that a new currency, the Rentenmark, was backed by mortgages—a tangible asset. The value of that guarantee was "exceedingly doubtful" and the scheme a "confidence trick", according to Fergusson, but the public accepted the idea and the mark stabilised. Part of the magic was due to the fact that Schacht simply waited until the mark hit an even number—a million million marks—to peg the new currency to a gold mark. Farmers started selling food again and social unrest subsided.
That wasn't the end of the story however, as Germany soon found itself struggling with persistent unemployment, the stock market crash later that decade and the rise of nazism. Fergusson is careful not to draw a direct line between the 1923 currency debacle and the economic conditions that nurtured Hitler, although there is correlation—anti-Semitism undoubtedly festered as the economy deteriorated. Or as Fergusson puts it: "Inflation did not conjure up Hitler, any more than he, as it happened, conjured it. But it made Hitler possible."
Out-of-control inflation doesn't just unravel democratic regimes. The 1989 Tiananmen Square protests in China were sparked not only because of a frustration with the one-party state and the corruption it engendered, but also because of sharply rising inflation. The recent riots in Tunisia—which sparked sympathetic riots in Egypt, Bahrain and Libya—came against a backdrop of sharply rising food prices and a fall in the standard of living for the average worker.
But inflation's damage to a democracy is more insidious, because it is done under the auspices of elected politicians who are meant to protect their constituents' interests. In Weimar Germany, no financial authorities ever hinted that "their policies derived from cynicism ... rather than incompetence and incapacity". Most citizens believed their leaders when they said they were trying to control prices, even as they kept the money flowing.
Who, then, might benefit most from Fergusson's moral tale? It may be for those who think central bankers are modern-day oracles who can muster the political will to control inflation before it runs out of control; or those elites who think inflation isn't such a bad remedy to sluggish growth and heavy debts after all. As Lord D'Abernon, the British ambassador to Berlin during the Weimar Republic observed: "It requires handcuffs to stay the hand which turns the crank of the printing press." But who today in the halls of the Fed or in the political classes will secure them?