The Weimar Hyperinflation? Could
it Happen Again?
by Ellen Brown
"It was horrible. Horrible! Like
lightning it struck. No one was prepared. The shelves in the grocery
stores were empty. You could buy nothing with your paper money."
- Harvard University law professor Friedrich Kessler on the Weimar
Republic hyperinflation (1993 interview)
Some worried commentators are predicting
a massive hyperinflation of the sort suffered by Weimar Germany
in 1923, when a wheelbarrow full of paper money could barely buy
a loaf of bread. An April 29 editorial in the San Francisco Examiner
"With an unprecedented deficit that's
approaching $2 trillion, [the President's 2010] budget proposal
is a surefire prescription for hyperinflation. So every senator
and representative who votes for this monster $3.6 trillion budget
will be endorsing a spending spree that could very well turn America
into the next Weimar Republic."1
In an investment newsletter called Money
Morning on April 9, Martin Hutchinson pointed to disturbing parallels
between current government monetary policy and Weimar Germany's,
when 50% of government spending was being funded by seigniorage
- merely printing money.2 However, there is something puzzling
in his data. He indicates that the British government is already
funding more of its budget by seigniorage than Weimar Germany
did at the height of its massive hyperinflation; yet the pound
is still holding its own, under circumstances said to have caused
the complete destruction of the German mark. Something else must
have been responsible for the mark's collapse besides mere money-printing
to meet the government's budget, but what? And are we threatened
by the same risk today? Let's take a closer look at the data.
History Repeats Itself - or Does It?
In his well-researched article, Hutchinson
notes that Weimar Germany had been suffering from inflation ever
since World War I; but it was in the two year period between 1921
and 1923 that the true "Weimar hyperinflation" occurred.
By the time it had ended in November 1923, the mark was worth
only one-trillionth of what it had been worth back in 1914. Hutchinson
"The current policy mix reflects
those of Germany during the period between 1919 and 1923. The
Weimar government was unwilling to raise taxes to fund post-war
reconstruction and war-reparations payments, and so it ran large
budget deficits. It kept interest rates far below inflation, expanding
money supply rapidly and raising 50% of government spending through
seigniorage (printing money and living off the profits from issuing
it). . . .
"The really chilling parallel is
that the United States, Britain and Japan have now taken to funding
their budget deficits through seigniorage. In the United States,
the Fed is buying $300 billion worth of U.S. Treasury bonds (T-bonds)
over a six-month period, a rate of $600 billion per annum, 15%
of federal spending of $4 trillion. In Britain, the Bank of England
(BOE) is buying 75 billion pounds of gilts [the British equivalent
of U.S. Treasury bonds] over three months. That's 300 billion
pounds per annum, 65% of British government spending of 454 billion
pounds. Thus, while the United States is approaching Weimar German
policy (50% of spending) quite rapidly, Britain has already overtaken
And that is where the data gets confusing.
If Britain is already meeting a larger percentage of its budget
deficit by seigniorage than Germany did at the height of its hyperinflation,
why is the pound now worth about as much on foreign exchange markets
as it was nine years ago, under circumstances said to have driven
the mark to a trillionth of its former value in the same period,
and most of this in only two years? Meanwhile, the U.S. dollar
has actually gotten stronger relative to other currencies since
the policy was begun last year of massive "quantitative easing"
(today's euphemism for seigniorage).3 Central banks rather than
governments are now doing the printing, but the effect on the
money supply should be the same as in the government money-printing
schemes of old. The government debt bought by the central banks
is never actually paid off but is just rolled over from year to
year; and once the new money is in the money supply, it stays
there, diluting the value of the currency. So why haven't our
currencies already collapsed to a trillionth of their former value,
as happened in Weimar Germany? Indeed, if it were a simple question
of supply and demand, a government would have to print a trillion
times its earlier money supply to drop its currency by a factor
of a trillion; and even the German government isn't charged with
having done that. Something else must have been going on in the
Weimar Republic, but what?
Schacht Lets the Cat Out of the Bag
Light is thrown on this mystery by the
later writings of Hjalmar Schacht, the currency commissioner for
the Weimar Republic. The facts are explored at length in The Lost
Science of Money by Stephen Zarlenga, who writes that in Schacht's
1967 book The Magic of Money, he "let the cat out of the
bag, writing in German, with some truly remarkable admissions
that shatter the 'accepted wisdom' the financial community has
promulgated on the German hyperinflation." What actually
drove the wartime inflation into hyperinflation, said Schacht,
was speculation by foreign investors, who would bet on the mark's
decreasing value by selling it short.
Short selling is a technique used by investors
to try to profit from an asset's falling price. It involves borrowing
the asset and selling it, with the understanding that the asset
must later be bought back and returned to the original owner.
The speculator is gambling that the price will have dropped in
the meantime and he can pocket the difference. Short selling of
the German mark was made possible because private banks made massive
amounts of currency available for borrowing, marks that were created
on demand and lent to investors, returning a profitable interest
to the banks.
At first, the speculation was fed by the
Reichsbank (the German central bank), which had recently been
privatized. But when the Reichsbank could no longer keep up with
the voracious demand for marks, other private banks were allowed
to create them out of nothing and lend them at interest as well.4
A Story with an Ironic Twist
If Schacht is to be believed, not only
did the government not cause the hyperinflation but it was the
government that got the situation under control. The Reichsbank
was put under strict regulation, and prompt corrective measures
were taken to eliminate foreign speculation by eliminating easy
access to loans of bank-created money.
More interesting is a little-known sequel
to this tale. What allowed Germany to get back on its feet in
the 1930s was the very thing today's commentators are blaming
for bringing it down in the 1920s - money issued by seigniorage
by the government. Economist Henry C. K. Liu calls this form of
financing "sovereign credit." He writes of Germany's
"The Nazis came to power in Germany
in 1933, at a time when its economy was in total collapse, with
ruinous war-reparation obligations and zero prospects for foreign
investment or credit. Yet through an independent monetary policy
of sovereign credit and a full-employment public-works program,
the Third Reich was able to turn a bankrupt Germany, stripped
of overseas colonies it could exploit, into the strongest economy
in Europe within four years, even before armament spending began."5
While Hitler clearly deserves the opprobrium
heaped on him for his later atrocities, he was enormously popular
with his own people, at least for a time. This was evidently because
he rescued Germany from the throes of a worldwide depression -
and he did it through a plan of public works paid for with currency
generated by the government itself. Projects were first earmarked
for funding, including flood control, repair of public buildings
and private residences, and construction of new buildings, roads,
bridges, canals, and port facilities. The projected cost of the
various programs was fixed at one billion units of the national
currency. One billion non-inflationary bills of exchange called
Labor Treasury Certificates were then issued against this cost.
Millions of people were put to work on these projects, and the
workers were paid with the Treasury Certificates. The workers
then spent the certificates on goods and services, creating more
jobs for more people. These certificates were not actually debt-free
but were issued as bonds, and the government paid interest on
them to the bearers. But the certificates circulated as money
and were renewable indefinitely, making them a de facto currency;
and they avoided the need to borrow from international lenders
or to pay off international debts.6 The Treasury Certificates
did not trade on foreign currency markets, so they were beyond
the reach of the currency speculators. They could not be sold
short because there was no one to sell them to, so they retained
Within two years, Germany's unemployment
problem had been solved and the country was back on its feet.
It had a solid, stable currency, and no inflation, at a time when
millions of people in the United States and other Western countries
were still out of work and living on welfare. Germany even managed
to restore foreign trade, although it was denied foreign credit
and was faced with an economic boycott abroad. It did this by
using a barter system: equipment and commodities were exchanged
directly with other countries, circumventing the international
banks. This system of direct exchange occurred without debt and
without trade deficits. Although Germany's economic experiment
was short-lived, it left some lasting monuments to its success,
including the famous Autobahn, the world's first extensive superhighway.7
The Lessons of History: Not Always What
Germany's scheme for escaping its crippling
debt and reinvigorating a moribund economy was clever, but it
was not actually original with the Germans. The notion that a
government could fund itself by printing and delivering paper
receipts for goods and services received was first devised by
the American colonists. Benjamin Franklin credited the remarkable
growth and abundance in the colonies, at a time when English workers
were suffering the impoverished conditions of the Industrial Revolution,
to the colonists' unique system of government-issued money. In
the nineteenth century, Senator Henry Clay called this the "American
system," distinguishing it from the "British system"
of privately-issued paper banknotes. After the American Revolution,
the American system was replaced in the U.S. with banker-created
money; but government-issued money was revived during the Civil
War, when Abraham Lincoln funded his government with U.S. Notes
or "Greenbacks" issued by the Treasury.
The dramatic difference in the results
of Germany's two money-printing experiments was a direct result
of the uses to which the money was put. Price inflation results
when "demand" (money) increases more than "supply"
(goods and services), driving prices up; and in the experiment
of the 1930s, new money was created for the purpose of funding
productivity, so supply and demand increased together and prices
remained stable. Hitler said, "For every mark issued, we
required the equivalent of a mark's worth of work done, or goods
produced." In the hyperinflationary disaster of 1923, on
the other hand, money was printed merely to pay off speculators,
causing demand to shoot up while supply remained fixed. The result
was not just inflation but hyperinflation, since the speculation
went wild, triggering rampant tulip-bubble-style mania and panic.
This was also true in Zimbabwe, a dramatic
contemporary example of runaway inflation. The crisis dated back
to 2001, when Zimbabwe defaulted on its loans and the IMF refused
to make the usual accommodations, including refinancing and loan
forgiveness. Apparently, the IMF's intention was to punish the
country for political policies of which it disapproved, including
land reform measures that involved reclaiming the lands of wealthy
landowners. Zimbabwe's credit was ruined and it could not get
loans elsewhere, so the government resorted to issuing its own
national currency and using the money to buy U.S. dollars on the
foreign-exchange market. These dollars were then used to pay the
IMF and regain the country's credit rating.8 According to a statement
by the Zimbabwe central bank, the hyperinflation was caused by
speculators who manipulated the foreign-exchange market, charging
exorbitant rates for U.S. dollars, causing a drastic devaluation
of the Zimbabwe currency.
The government's real mistake, however,
may have been in playing the IMF's game at all. Rather than using
its national currency to buy foreign fiat money to pay foreign
lenders, it could have followed the lead of Abraham Lincoln and
the American colonists and issued its own currency to pay for
the production of goods and services for its own people. Inflation
would then have been avoided, because supply would have kept up
with demand; and the currency would have served the local economy
rather than being siphoned off by speculators.
The Real Weimar Threat and How It Can
Is the United States, then, out of the
hyperinflationary woods with its "quantitative easing"
scheme? Maybe, maybe not. To the extent that the newly-created
money will be used for real economic development and growth, funding
by seigniorage is not likely to inflate prices, because supply
and demand will rise together. Using quantitative easing to fund
infrastructure and other productive projects, as in President
Obama's stimulus package, could invigorate the economy as promised,
producing the sort of abundance reported by Benjamin Franklin
in America's flourishing early years.
There is, however, something else going
on today that is disturbingly similar to what triggered the 1923
hyperinflation. As in Weimar Germany, money creation in the U.S.
is now being undertaken by a privately-owned central bank, the
Federal Reserve; and it is largely being done to settle speculative
bets on the books of private banks, without producing anything
of value to the economy. As gold investor James Sinclair warned
nearly two years ago:
"[T]he real problem is a trembling
$20 trillion mountain of over the counter credit and default derivatives.
Think deeply about the Weimar Republic case study because every
day it looks more and more like a repeat in cause and effect .
. . ."9
The $12.9 billion in bailout funds funneled
through AIG to pay Goldman Sachs for its highly speculative credit
default swaps is just one egregious example.10 To the extent that
the money generated by "quantitative easing" is being
sucked into the black hole of paying off these speculative derivative
bets, we could indeed be on the Weimar road and there is real
cause for alarm. We have been led to believe that we must prop
up a zombie Wall Street banking behemoth because without it we
would have no credit system, but that is not true. There is another
viable alternative, and it may prove to be our only viable alternative.
We can beat Wall Street at its own game, by forming publicly-owned
banks that issue the full faith and credit of the United States
not for private speculative profit but as a public service, for
the benefit of the United States and its people.11
Ellen Brown developed her research skills
as an attorney practicing civil litigation in Los Angeles. In
Web of Debt, her latest book, she turns those skills to an analysis
of the Federal Reserve and "the money trust." She shows
how this private cartel has usurped the power to create money
from the people themselves, and how we the people can get it back.
Her websites are www.webofdebt.com and www.ellenbrown.com.
1. "Examiner Editorial: Get Ready
for Obama's Coming Hyperinflation," San Francisco Examiner,
April 29, 2009.
2. Martin Hutchinson, "Is It 1932
- or 1923?", Money Morning (April 9, 2009).
3. See Monthly Average Graphs, x-rate.com.
4. Stephen Zarlenga, The Lost Science
of Money (Valatie, New York: American Monetary Institute, 2002),
pages 590-600; S. Zarlenga, "Germany's 1923 Hyperinflation:
A 'Private' Affair," Barnes Review (July-August 1999).
5. Henry C. K. Liu, "Nazism and the
German Economic Miracle," Asia Times (May 24, 2005).
6. S. Zarlenga, op. cit.
7. Matt Koehl, "The Good Society?",
Rense (January 13, 2005).
8. "Bags of Bricks: Zimbabweans Get
New Money - for What It's Worth," The Economist (August 24,
2006); Thomas Homes, "IMF Contributes to Zimbabwe's Hyperinflation,"
www.newzimbabwe.com (March 5, 2006).
9. Jim Sinclair, "Fed Actions a Bandaid
on a Gaping Economic Wound," reprinted in Go for Gold, September
10. Eliot Spitzer, "The Real AIG
Scandal, Continued! The Transfer of $12.9 Billion from AIG to
Goldman Looks Fishier and Fishier," Slate (March 22, 2009).
11. See Ellen Brown, "Cash Starved
States Need to Play the Banking Game," webofdebt.com/articles
(March 2, 2009).