WEBVTT NOTE Hyperinflation, Money Demand and the Crack-up Boom: Revisiting the Weimer Republic Experience 1 00:00:00.000 --> 00:00:11.000 Ladies 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. 2 00:00:11.000 --> 00:00:20.000 The other day I came across a remark made by Henry Ford, the American auto tycoon. 3 00:00:20.000 --> 00:00:30.200 He once said, the people of the nation do not understand our money and banking system. 4 00:00:30.200 --> 00:00:37.160 For if they did, I believe, there would be a revolution before tomorrow morning. 5 00:00:37.160 --> 00:00:43.400 I just wondered what Henry Ford might have in mind as far as the role of democracy is 6 00:00:43.400 --> 00:00:49.780 concerned when he made these statements. 7 00:00:49.780 --> 00:00:58.380 The paper I am going to talk about has the title Weimar Republic Hyperinflation, an a priori 8 00:00:58.380 --> 00:01:06.540 theory viewpoint. In the next 20 minutes I would like to go through the paper and would 9 00:01:06.540 --> 00:01:16.740 like to outline the basic thoughts of illustrating the causes of the German hyperinflation from 10 00:01:16.740 --> 00:01:21.060 The Austrian Historical Method 11 00:01:21.060 --> 00:01:32.540 The German hyperinflation of 1923 can be for a number of reasons termed as a perfect hyperinflation. 12 00:01:32.540 --> 00:01:40.620 It not only led to a drastic debasement of the currency, it led to the total destruction 13 00:01:40.620 --> 00:01:43.580 of the currency. 14 00:01:43.580 --> 00:01:51.940 The German hyperinflation occurred in times of peace, around about five years after World 15 00:01:51.940 --> 00:01:54.460 War I ended. 16 00:01:54.460 --> 00:02:01.900 It led to unprecedented economic and political disaster in Germany and it certainly paved 17 00:02:01.900 --> 00:02:09.980 the way towards totalitarianism under the National Socialist rule and led to World War 18 00:02:09.980 --> 00:02:10.980 II. 19 00:02:10.980 --> 00:02:19.980 Recently, German hyperinflation occurred in an economically advanced society. 20 00:02:19.980 --> 00:02:25.980 It was not a banana republic. 21 00:02:25.980 --> 00:02:33.980 And that hyperinflation needs to be addressed these days is obvious. 22 00:02:33.980 --> 00:02:45.980 This note carries $100 trillion with it. Yes, Mr. Chairman, $100 trillion, but don't worry, 23 00:02:45.980 --> 00:02:58.780 it's Zimbabwe dollar, it's not US dollar. The German hyperinflation is not a tragic 24 00:02:58.780 --> 00:03:07.780 historical episode from an a priori social theory as represented by the Austrian historical 25 00:03:07.780 --> 00:03:15.600 method it can be shown that the German hyperinflation illustrates the inevitable or I should say 26 00:03:15.600 --> 00:03:23.660 logical consequence of public ownership of government of which democracy republicanism 27 00:03:23.660 --> 00:03:27.740 is the most prominent model. 28 00:03:27.740 --> 00:03:36.000 What I'm going to show is that a priori theory shows that it is impossible to limit the expansion 29 00:03:36.000 --> 00:03:38.180 of government. 30 00:03:38.180 --> 00:03:45.820 It leads to a relentless increase into an aggression against private property and the 31 00:03:45.820 --> 00:03:50.820 final drama is the complete destruction of the currency. 32 00:03:50.820 --> 00:03:58.020 That's basically the result of the paper and if you turn to page two you could in the paragraph 33 00:03:58.020 --> 00:04:01.920 below see how the paper has been structured. 34 00:04:01.920 --> 00:04:08.280 What I'm going to do is I'm just talking briefly about the Austrian historical method. 35 00:04:08.280 --> 00:04:14.140 Against this backdrop we are going to look at the theoretical relation between the social 36 00:04:14.140 --> 00:04:19.100 Financial Order, Property Rights, and Time Preference. 37 00:04:19.100 --> 00:04:23.700 And then I move on and we will briefly look at the major developments in the course of 38 00:04:23.700 --> 00:04:26.940 the German hyperinflation period. 39 00:04:26.940 --> 00:04:32.580 And finally the paper concludes basically with outlining the relation between public 40 00:04:32.580 --> 00:04:35.020 ownership of government and money production. 41 00:04:35.020 --> 00:04:43.140 I should say that the paper draws heavily, very heavily on the work which has been done 42 00:04:43.140 --> 00:04:49.960 by Ludwig von Mises, Murray Rothbard and Professor Hoppe. 43 00:04:49.960 --> 00:04:54.900 If we turn to page number three, you would see a paragraph titled History and Apriori 44 00:04:54.900 --> 00:05:03.900 Theory. It's fair to say that Ludwig von Mises, right from his start as an academic, dealt 45 00:05:03.900 --> 00:05:12.500 in depth with the relationship between economics and history. Human action carries a lot of 46 00:05:12.500 --> 00:05:22.040 for Insightful Explanation, and the culmination of all this work is certainly his book, History 47 00:05:22.040 --> 00:05:24.980 and Theory, which he published in 1953. 48 00:05:24.980 --> 00:05:31.620 History, Mises notices the record of human action, and Mises' historical method basically 49 00:05:31.620 --> 00:05:40.860 rests on the indisputable insight that ideas ultimately cause human action, and I quote, 50 00:05:40.860 --> 00:05:46.660 History establishes the fact that men, inspired by definite ideas, made definite judgments 51 00:05:46.660 --> 00:05:53.060 of value, chose definite ends and resorted to definite means in order to attain the ends 52 00:05:53.060 --> 00:05:59.660 chosen and it deals furthermore with the outcome of the action, the state of affairs the actions 53 00:05:59.660 --> 00:06:01.660 brought about. 54 00:06:01.660 --> 00:06:08.660 And a fantastic introduction to the historical method of the Austrian School of Economics 55 00:06:08.660 --> 00:06:16.980 of the Misesian Approach can be found in a wonderful introduction by Professor Salerno 56 00:06:16.980 --> 00:06:23.020 to Rothbard's history of money and banking in the United States of America. 57 00:06:23.020 --> 00:06:30.100 The point I would like to make here is that for making sense of historical data, a priori 58 00:06:30.100 --> 00:06:37.520 theory is required and that means a theory which establishes truth without taking recourse 59 00:06:37.520 --> 00:06:40.160 to Experience. 60 00:06:40.160 --> 00:06:46.640 Economics as a branch of praxeology offers such irrefutably true propositions anterior 61 00:06:46.640 --> 00:06:49.520 to experience. 62 00:06:49.520 --> 00:06:56.880 And these irrefutable true propositions can be illustrated then by historical events. 63 00:06:56.880 --> 00:07:05.880 Historical events, I should stress this important finding, cannot confirm or refute the truth 64 00:07:05.880 --> 00:07:11.680 of a priori theoretical interpretations. 65 00:07:11.680 --> 00:07:19.280 And to set the ball rolling, I would like to quote Hans Zenholz, who in his book Age 66 00:07:19.280 --> 00:07:28.520 of Inflation in 1979 wrote, I quote, in view of the German hyperinflation, who would inflict 67 00:07:28.520 --> 00:07:35.840 on a great nation such evil which had ominous economic, social and political ramifications 68 00:07:35.840 --> 00:07:42.080 not only for Germany but for the whole world and his sobering answer was quote 69 00:07:42.080 --> 00:07:47.600 every mark was printed by Germans and issued by a central bank that was 70 00:07:47.600 --> 00:07:54.480 governed by Germans under a government that was purely German. It was German 71 00:07:54.480 --> 00:07:59.680 political parties such as the Socialist, the Catholic Central Party and the 72 00:07:59.680 --> 00:08:03.120 Democrat forming various coalition governments that were solely 73 00:08:03.120 --> 00:08:15.120 are solely responsible for the policies they conducted. Of course, admission of responsibility for any calamity cannot be expected from any political party. 74 00:08:15.120 --> 00:08:27.120 And in the same vein, Mises had written back in 1923 in a paper which he basically finalized in January 1923. 75 00:08:27.120 --> 00:08:40.880 If a government is not in a position to negotiate loans and does not dare levy additional taxation 76 00:08:40.880 --> 00:08:47.600 for fear that the financial and general economic effects will be revealed too clearly too soon 77 00:08:47.600 --> 00:08:53.540 so that it will lose support for its program, it always considers it necessary to undertake 78 00:08:53.540 --> 00:08:59.740 Inflationary Measures. Thus, inflation becomes one of the most important psychological aids 79 00:08:59.740 --> 00:09:06.740 to an economic policy which tries to camouflage its effects. It permits a system of government 80 00:09:06.740 --> 00:09:11.900 to continue which would have no hope of receiving any approval of the people if conditions were 81 00:09:11.900 --> 00:09:20.900 frankly explained to them. So we can see in both the writings of Zenholz and Ludwig von 82 00:09:20.900 --> 00:09:28.620 At that time, there was a clear insight of the underlying causes of hyperinflation. 83 00:09:28.620 --> 00:09:34.500 In the third paragraph of my paper, I just wanted to take an analytical starting point 84 00:09:34.500 --> 00:09:40.500 and you see a figure which relates the social order, property rights and time preference 85 00:09:40.500 --> 00:09:43.060 or put them into a proper perspective. 86 00:09:43.060 --> 00:09:50.100 When you talk about the organization of society, we can, on the one hand, look at the libertarian 87 00:09:50.100 --> 00:09:56.820 Government-Societal Order, which is characterized by the absence of violation of individual 88 00:09:56.820 --> 00:09:58.500 property rights. 89 00:09:58.500 --> 00:10:05.500 The other extreme is Government-Societal Order, which is characterized by aggression against 90 00:10:05.500 --> 00:10:08.180 property rights, by definition. 91 00:10:08.180 --> 00:10:15.020 Now if we take a closer look at Government-Societal Order, we can make a distinction between a 92 00:10:15.020 --> 00:10:19.580 a government which is characterized by a low time preference 93 00:10:19.580 --> 00:10:23.460 and a government which is characterized by high 94 00:10:23.460 --> 00:10:25.580 time preference 95 00:10:25.580 --> 00:10:30.580 and those of you who have read Mansa Olsen, his Power and Prosperity book 96 00:10:30.580 --> 00:10:36.820 he used two terms, he talked about a roving bandit 97 00:10:36.820 --> 00:10:39.060 and a stationary bandit 98 00:10:39.060 --> 00:10:43.180 the roving bandit has a high time preference 99 00:10:43.180 --> 00:10:51.700 The roving bandit comes and his thievery reaches 100 percent because he has a narrow interest 100 00:10:51.700 --> 00:10:56.800 in the welfare of his victims. 101 00:10:56.800 --> 00:11:01.500 He takes and vanishes, moves on. 102 00:11:01.500 --> 00:11:08.240 The stationary bandit, he settles down and he has an encompassing interest in the productive 103 00:11:08.240 --> 00:11:09.920 forces of society. 104 00:11:09.920 --> 00:11:17.080 He feeds on his victims on an ongoing basis, so his expropriation and exploitation is less 105 00:11:17.080 --> 00:11:18.800 than 100%. 106 00:11:18.800 --> 00:11:24.100 So we could say the stationary bandit has a lower time preference compared to the roving 107 00:11:24.100 --> 00:11:25.100 bandit. 108 00:11:25.100 --> 00:11:34.120 Now if we look at the stationary bandit, we can refer to monarchy, for instance, or feudalism, 109 00:11:34.120 --> 00:11:40.720 which is characterized by private ownership of government. Private ownership of government, 110 00:11:40.720 --> 00:11:47.480 that's the representative model of the stationary bandit. So where is public ownership of government 111 00:11:47.480 --> 00:11:55.860 or what's the model? I already referred to that model, that's democracy and republicanism. 112 00:11:55.860 --> 00:12:02.320 Which has a higher, by definition, a higher time preference compared to the stationary 113 00:12:02.320 --> 00:12:08.200 Stationary Bandit or the Model of Monarchy. 114 00:12:08.200 --> 00:12:18.040 So we could say that the stationary bandit has a relatively lower time preference. 115 00:12:18.040 --> 00:12:25.400 So his theory is less than the theory caused by the roving bandit. 116 00:12:25.400 --> 00:12:35.480 And of course, the lower the time preference, the more conducive is government for supporting 117 00:12:35.480 --> 00:12:39.760 the process of civilization. 118 00:12:39.760 --> 00:12:47.440 Now in this paper I also refer to an important insight, Olson is basically making the point 119 00:12:47.440 --> 00:13:05.400 that an autocratic government so has a higher time preference compared to the majority rule 120 00:13:05.400 --> 00:13:17.160 and it's fair to say that this can be dismissed but at this juncture I just wanted to make 121 00:13:17.160 --> 00:13:22.900 economic three points against the backdrop of the finding in paragraph three. 122 00:13:22.900 --> 00:13:28.760 Namely the first, the transition from private to public ownership of government leads to 123 00:13:28.760 --> 00:13:36.760 rise in a social time preference and is thereby causing negative effects on the process to 124 00:13:36.760 --> 00:13:37.760 civilization. 125 00:13:37.760 --> 00:13:42.980 Second, public ownership of government provides economic incentives for growing aggression 126 00:13:42.980 --> 00:13:46.420 against private property over time. 127 00:13:46.420 --> 00:13:51.940 And third, public ownership of government has little economic incentives to correct 128 00:13:51.940 --> 00:14:00.780 the consequences of bad policies if the benefits of this correction will materialize in the 129 00:14:00.780 --> 00:14:02.660 future rather than in the short term. 130 00:14:02.660 --> 00:14:10.980 And against this backdrop, I think it's fair now to take a view on the developments in 131 00:14:10.980 --> 00:14:15.180 in Germany between 1919 and 1923. 132 00:14:15.180 --> 00:14:17.860 And that starts on page number nine. 133 00:14:17.860 --> 00:14:25.020 And you can see that, for instance, the outlays related to World War I were predominantly 134 00:14:25.020 --> 00:14:35.260 financed by the German Reich, by the German Empire, by the issuing of a government debt. 135 00:14:35.260 --> 00:14:41.500 Because the idea was once the Allies were defeated, you know, the Kaiserreich would 136 00:14:41.500 --> 00:14:49.960 have taken the gold reserves and other property titles to make, to repay basically this debt. 137 00:14:49.960 --> 00:14:56.860 And for instance, the table shows you that in 1914, the total debt outstanding in Germany, 138 00:14:56.860 --> 00:15:10.420 Ludwig, debt was 5.2 billion gold marks and it reached 5.2 million gold marks and it reached 139 00:15:10.420 --> 00:15:21.460 105.3 million at the end of the First World War. That's around about 200% of GDP. GDP 140 00:15:21.460 --> 00:15:28.820 measured in terms of its level in 1914. 141 00:15:28.820 --> 00:15:32.200 There was also an increase in the money supply. 142 00:15:32.200 --> 00:15:36.900 Money supply rose by 440% in that period. 143 00:15:36.900 --> 00:15:44.180 So there was, of course, an inflationary effect because the gold, the Reichsmarkt was suspended 144 00:15:44.180 --> 00:15:51.300 from its convertibility into gold, but it was not yet a hyperinflationary development. 145 00:15:51.300 --> 00:15:59.300 Then in April 1917, during the World War I, the United States of America under President 146 00:15:59.300 --> 00:16:06.380 Woodrow Wilson entered war activities, taking sides with the Allies and, of course, making 147 00:16:06.380 --> 00:16:11.500 the Allies the militarily dominant powers. 148 00:16:11.500 --> 00:16:18.820 The Germans and the Austrian-Angarians were encouraged by Wilson's 14 Points Plan from 149 00:16:18.820 --> 00:16:28.180 from the early 1980s to sign an armistice, and basically the peace was settled in the 150 00:16:28.180 --> 00:16:38.540 Treaty of Versailles, which to the surprise of the Germans resulted in Germany was basically 151 00:16:38.540 --> 00:16:43.620 made solely responsible for the causes of the war. 152 00:16:43.620 --> 00:16:49.680 The treaty required the German Reich to disarm, make substantial territorial concessions and 153 00:16:49.680 --> 00:16:53.020 pay reparations to the Allies. 154 00:16:53.020 --> 00:16:59.460 And that was of course done because of the strong American backing of France and Britain 155 00:16:59.460 --> 00:17:02.940 who then could push through the political program. 156 00:17:02.940 --> 00:17:17.100 But be that as it may, be that as it may until round about the end of 1922, the German public 157 00:17:17.100 --> 00:17:22.580 finances did not get out of control, did not get out of control and you can take a look 158 00:17:22.580 --> 00:17:32.500 on page number 11, you can see there the percentage ratio of taxes to total revenues were between 159 00:17:32.500 --> 00:17:42.820 around about 50 and 70 percent in that period and towards the end of 1922 this ratio started 160 00:17:42.820 --> 00:17:52.220 collapsing and the fatal event that basically led to the fatal hyperinflation came in late 161 00:17:52.220 --> 00:17:55.220 1922. 162 00:17:55.220 --> 00:18:00.780 The reparation commission declared Germany to be in default of reparations and French 163 00:18:00.780 --> 00:18:04.220 and Belgian troops started occupying 164 00:18:04.220 --> 00:18:06.620 the German industrial heartland, 165 00:18:07.860 --> 00:18:11.780 causing the collapse, basically, of the German economy. 166 00:18:13.060 --> 00:18:17.520 And the German government under Chancellor Wilhelm Kuno, 167 00:18:17.520 --> 00:18:22.020 now Germany had a democratically elected government 168 00:18:22.020 --> 00:18:27.020 with various coalition, was unable to resist militarily 169 00:18:27.020 --> 00:18:32.020 and called for passive resistance, passive resistance. 170 00:18:32.020 --> 00:18:37.020 And the passive resistance was basically an idea 171 00:18:37.020 --> 00:18:42.020 to pay people from, you know, 172 00:18:44.020 --> 00:18:49.020 paying reparations, basically paid strike action. 173 00:18:49.020 --> 00:18:53.020 And this passive resistance was made possible only because 174 00:18:53.020 --> 00:18:58.660 The Reichsregierung had promised to pay firms for output losses and provide financial assistance 175 00:18:58.660 --> 00:19:06.660 to the unemployed and expelled civil servants. And that was paid by printing money. And as 176 00:19:06.660 --> 00:19:14.660 you can see from figure four on page number 12, around about June 1923, things started 177 00:19:14.660 --> 00:19:20.640 to get out of control. There were ever greater amounts of government debt getting monetized 178 00:19:20.640 --> 00:19:25.840 by the Reichsbank, and that led to this disastrous hyperinflation period. 179 00:19:25.840 --> 00:19:35.720 And just to give you an idea, before World War I started, you had to pay 4.2 gold marks 180 00:19:35.720 --> 00:19:38.420 for one U.S. dollar. 181 00:19:38.420 --> 00:19:49.160 And in the middle of November 1918, you had to pay 4.5 trillion Reichsmark basically, 182 00:19:49.160 --> 00:19:59.440 The point I would like to make here is that it was a deliberate decision made on the part 183 00:19:59.440 --> 00:20:05.720 of government to increase the money supply. Printing ever greater amounts of money was 184 00:20:05.720 --> 00:20:12.840 seen as the policy of the least evil. It was deliberately done by the German government, 185 00:20:12.840 --> 00:20:15.960 a democratically elected government. 186 00:20:15.960 --> 00:20:20.080 And so the quotes I just gave you by Zenholz and Mises, 187 00:20:20.080 --> 00:20:23.520 I think from an a priori theory viewpoint 188 00:20:23.520 --> 00:20:25.200 can be fully supported. 189 00:20:25.200 --> 00:20:28.680 Can be fully supported namely that this hyperinflation 190 00:20:28.680 --> 00:20:32.040 was basically caused, deliberately caused 191 00:20:32.040 --> 00:20:35.520 by a public ownership of government. 192 00:20:35.520 --> 00:20:51.120 In view of my time frame, I would like to conclude here. What I tried to do was to illustrate 193 00:20:51.120 --> 00:20:57.240 the Weimar Republic hyperinflation from the viewpoint of a priori theory and to show that 194 00:20:57.240 --> 00:21:05.960 We can, by taking recourse to this theoretical framework, we can really make the conclusion 195 00:21:05.960 --> 00:21:13.360 that the German hyperinflation was not just a tragic or historical episode, but a direct 196 00:21:13.360 --> 00:21:17.400 or logical consequence of public ownership of government. 197 00:21:17.400 --> 00:21:18.080 Thank you very much.