Weimar Germany and Deflation

 

  1. During WWI, all major players not beholden to a commodity standard (such as gold or silver) inflated their money supplies.
    1. What I mean by “inflating the money supply” may be a little bit different than what one would learn in a basic economics class. What I mean is that the total quantity of money put in circulation increased relative to the available wealth within that nation’s economy.
      1. This is usually only possible if the money in question is not physically made of a commodity that is limited in availability (such as fiat currency not tied to gold or silver reserves) or if there is an unexpected windfall of the limited commodity (such as the sudden importation of gold and silver from the Americas into Europe).
    2. Typically, this inflation is felt by consumers in short order, as the supply of money increases relative to its demand (as the available goods remain constant). This is represented by decreased purchasing power a.k.a. a general rise in prices.
      1. In the case of the Weimar republic, this rise in consumer prices was delayed by various forces.
        1. In the mainstream narrative, this was due to people hoarding their money in mattresses and hidey-holes due to the economic uncertainty of war. By not allowing the money to enter circulation, the citizens of the Republic delayed the Cantillon effect.  After the war ended, people had more confidence in the economy and began spending the money they had hoarded, causing the Cantillon effect that should have been felt gradually over the course of the war to be felt all at once.
          1. The Cantillon effect is a result whereby an individual coming into possession of counterfeit or inflated (same thing) currency can more easily raise the market clearing price of a particular good, thereby securing that good more easily than others in the market. This windfall on the part of the seller of said good then contributes to his ability to raise the market clearing price of a good he desires.
            For example: if the Reichsbank just printed me a hundred thousand marks, I could either more easily outbid my competition for purchasing a vehicle I desire or I could buy the next nicest model without having contributed any actual wealth to the market.  This is free money for me and it is also effectively free money for the car dealer.  He, in turn, can purchase a house he wants for a higher price than his competition or buy a nicer house than he could have originally afforded, and this process continues throughout the economy.
          2. This process can be drowned out by noise in the market if it is just one counterfeiter, but when an entire nation takes advantage of that free money, there’s no way the market can absorb that general rise in prices.
        2. After the initial market correction to the elevated prices, uncertainty concerning the value of the Mark over time diminished and the economy was allowed to recover and adjust to the new normal. This new normal featured relatively stable purchasing power for the Mark, despite the Reichsbank continuing to print money.
          1. A situation not unlike the current situation in the United States emerged, though. Through government payments to foreign nations (in Weimar, it was due to the absurd demands set in the treaty of Versailles, in our situation it has a lot more to do with foreign aid and proxy wars) as well as a severe imbalance between importation and exportation, the Cantillon effect was, again, delayed by moving Marks out of the country at a rate comparable to the rate they were being printed.  This made the Mark weak as compared to other currencies in circulation, but one would not notice if their financial concerns were purely domestic.
            1. This loss of purchasing power (like that of the USD is) was masked by the coincidental inflation of foreign currencies as well.
          2. As more countries dropped the Mark as a preferred currency, more and more marks moved back into the Weimar Republic, causing that delayed Cantillon effect to be felt all at once, again.
            1. The mainstream account tends to overlook the reality that the mechanism by which this flood of returning currency occurred was by using the Marks, which were created out of thin air without commensurate increases in tangible wealth within the Republic, to purchase the goods which remained in the Republic. This drastically decreased the available capital assets of the Republic while also drastically increasing the available money supply relative to those assets.
            2. One thing that the mainstream account does acknowledge is that the rising prices over time provided consumers with incentives to spend quickly, which, in economic terms, means that the demand for said money was drastically reduced, further compounding the effects of inflation.
              1. To take it one step further: at this point, according to Mises’ regression theorem, the Mark was totally unsuitable for use as a currency, which should be no surprise given the nature of fiat currency in general, but the Western World has a hard time learning from its history.
            3. Ultimately, once the Mark was inflated to the point that it was more expensive to hold and transport the Marks one owned than the Marks were worth, the economy was dead on arrival. This is where a populist movement centered around a fiscally literate charismatic demagogue will come to power, declare the Mark to be of no consequence, default on international debt, install a more secure monetary policy, and unleash military force on anyone who would try to stop them from doing so.
            4. But I digress… As far as deflation is concerned, it had very little impact on the general trajectory of interbellum Germany.  While the mainstream accuses deflation for the sudden burst of post-war inflation, the cause of post-war inflation was the presses running amok during WWI.  The deflationary forces of scared consumers, at most, simply delayed the effect of wartime inflation.  A more likely cause of the delayed effect than scared consumers, though, is the mechanisms by which the inflated money supply was confined to military budgets and paychecks that wouldn’t be spent until the war wound down and the soldiers went home and the manner in which the inflated marks were exported to foreign producers of arms and consumer goods, much like the temporary stability experienced in the Weimar Republic.
              1. This delayed economic impact is actually more common than a lot of people may think. Because economic signals are the results of human actions and human actions are the result of people responding to market signals, there is always a degree of delay between when an event takes place and when one reacts to the event… rinse and repeat.
              2. Also, if one is able to keep certain market signals secret, as in the housing collapse of 2008, the delay of a couple days or even months can cause people to behave in ways that they would not, if they had all the information they needed to make a sound investment. In the case of the housing bubble, the banks were able to feign loan viability and even solvency for the entire bank long enough to get political processes started for pending bailouts.  In the case of apparently stable prices during WWI and prior to the hyperinflation as the Mark collapsed, the sheer quantity of money being printed and exported was being largely ignored in the media at the time.  For comparison, look at the reported national debt of the United States today as compared to the “unfunded liabilities” of the same.
            5. A lot of these events and theories parallel the next podcast episode that has been commissioned concerning the Great Depression in America.
              1. If you like this episode, please send Bitcoin (BTC) to the address in the show notes: [insert address]
              2. If you’d like an episode to be produced on commission or would like consulting or tutoring services, feel free to contact me on social media or at madphilosopher@gmx.com
            6. Carpe Veritas
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