In February, Axel Weber surprised much of Europe when he resigned as Bundesbank president. Weber said that he felt isolated for his “clear positions” in opposition to the European Central Bank’s policy of purchasing distressed euro-area sovereign debt on secondary markets.
In September, Jurgen Stark, the Bundesbank representative on the ECB's board, also resigned. He was concerned that further ECB bond purchases would destabilize the euro and undermine the central bank's independence.Monetary policy, he feared, was propping up profligate national fiscal policies.
In November, the new Bundesbank president, Jens Weidmann, said that the ECB could not act as a lender of last resort for countries; it would be a direct violation of the European Union treaty. Only adherence to treaty rules and to fiscal discipline could create long-term financial credibility and price stability.
The Germans' strict opposition to the monetary financing of governments isn't just petty legalism -- it's a bedrock principle, based in history, which was purposefully built into EU treaties and Bundesbank policies.
It's worth revisiting why the memory of hyperinflation has seared itself into the minds of many Germans, and how it's shaping their thinking and the future of the euro itself.
Imagine yourself among the wealthiest people in the world in 1914, holding 4.2 billion marks (then about $1 billion) in safe government bonds. Those bonds would have been nearly worthless 9 years later -- easily payable with, say, a 50 billion-mark banknote signed by Reichsbank President Rudolf Havenstein. Of course, you would need 45.8 billion marks in change, which illustrates one of the great ironies of hyperinflation: Everyone was always short of cash in the midst of a blizzard of paper.
Havenstein justified the continuous purchasing of government debt on the grounds that there was little choice given the national emergency. Havenstein thought the real sources of inflation were the legislature’s inability to balance its budget and the burden of reparations placed onGermany by the Allies at the end of World War I.
Despite millions starving, the demobilization of millions of soldiers, and a near civil war in the Ruhr, inflation creeped till 1919, then “galloped” until mid-1922. Then, in late 1922, it spiraled into hyperinflation as Germany refused to continue payments on the 132 billion gold marks levied on it at the London Ultimatum of May 1921.
Because Germany halted reparation payments, France decided to confiscate goods in kind and occupied the Ruhr, the center of German coal and steel might, in January 1923. In response, the Germans began a campaign of "passive resistance" that all but destroyed the mark. Havenstein felt that he had no choice but to continue printing money to support the Reich.
Hyperinflation wreaked havoc on Germans. People on fixed incomes suffered terribly. One poor elderly woman, whose life savings in Deutsche Bank were wiped out, later discovered that the bank didn't inform her because the stamp would have cost too much. The propertied middle class lost their savings after suffering deprivation throughout the war. Many sold possessions to raise cash for increasingly expensive "real goods" such as bread or meat. Housewives stood outside factories to collect their husband’s pay and spend it as quickly as possible. Businesses needed sacks of cash to pay workers. Famous photographs show money being carted in wheelbarrows; one possibly apocryphal story has a robber stealing the wheelbarrow rather than the money.
Eventually, industrialists gave up paying in marks, sometimes creating their own substitute scrip or paying workers in “three breads.” Cities and organizations also created their own monies. Retailers had to continually adjust prices, which gave considerable room for misunderstandings. The response was sometimes violent. In November 1923, mobs attacked Jewish shops around Alexanderplatz in Berlin. Similar attacks occurred across the country.
“Speculators,” bankers, and black-market dealers came in for particular criticism. One small savings bank organized a swap meet for buyers and sellers to eliminate the dishonest profiteers. As one eyewitness, quoted in Gerald D. Feldman's "The Great Disorder," put it:
A walk through the small salesroom with its tables and glass cases is heart-rending. There lie spread out so many lovely things so pleasing to the eye ... everything in short that once decorated a house is assembled here ... There is some old piece, a picture, a porcelain dish, a vase, which appears to the loving but unskilled eye of the owner as a true rarity and who, if she must part with it, wants to receive as much as possible. One now has to tell her that it has neither material nor artistic value, and the sick, embittered souls are always inclined to take this as a personal affront and bad will ... A look out the window -- there slides by the restless life of the metropolis, the fine silk stockings and expensive furs, there sit autos with the fat figures of profiteers, and here inside, in the quiet room, an impoverished Germany quietly and painfully weeps in its silent misery.
The hyperinflation also fomented a new and dangerous activism in German politics. The prime minister of Bavaria declared martial law. In October 1923, federal troops marched into Saxony and Thuringen to depose radical communists from government. Then, in November, Adolf Hitlerand General Erich Ludendorff attempted a Mussolini-like march on Berlin, in what's now known as the Beer Hall Putsch.
The putsch failed miserably, but Hitler continued to seize on the prevalent economic despair. He was briefly sent to prison where he wrote "Mein Kampf." Although he didn't gain power until January 1933, the link between reparations, financial crisis and the destruction of the mark proved ready rhetorical fodder.
Hyperinflation didn't lead to the rise of Hitler, but it undermined the legitimacy of the democraticWeimar Republic.
Millions of disaffected middle-class voters soon drifted to various splinter parties on the right. The center hollowed out, and subsequent coalition governments ruled on a tolerated-minority basis. German politics never really regained its balance in the mid-1920s, a time of relative economic stabilization -- and then came the Great Depression, government austerity packages and, ultimately, the rise of the Nazis.
Never again, the thinking goes today. And rightly so. But the fate of the euro zone depends on which historical lesson one draws from this episode. Are there circumstances in which monetizing government debt is appropriate -- or not?
(Jeffrey Fear is a professor of business administration at the University of Redlands. The opinions expressed are his own.)
To contact the writer of this blog post: Jeffrey Fear at jeff_fear@redlands.edu.
To contact the editor responsible for this blog post: Timothy Lavin at tlavin1@bloomberg.net.
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