Wednesday, December 17, 2008

Reichsmark, Fiscus & Exuberance

On Dec. 15, 2008, the Nobel Prize-laureate Paul Krugman posted an opinion piece with The New York Times, admonishing the German government's lackluster enthusiasm for the idea of boosting the slouching global economy with fiscal spending of its own. I had just been visiting Germany and contributed a comment that I reprint below:

To date, life seems good in Germany. Unemployment is under 5 percent (p.s: I could not retrace my source. This level may pertain to the Frankfurter region. FOXNews reported 7.1 percent for the nation on Nov. 27). Germans perceive the economic crisis American made, requiring American solutions.

In anticipation of the negative impact of the American crisis on German exports, Professor Merkel's government has committed no more than roughly 25 billion dollars to stimulate the GERMAN economy when trade slows down. The fiscal conservatives prevail in wishing to keep the national credit card paid off.

I cannot blame anyone for shying away from piling up dizzying national debt. How is this country ever going to service the 10 trillion dollars it is going to owe? Is printing money the solution? Hyperinflation and devaluation may loom in the wake.

I just found a billion Reichsmark among family documents and remembered my grandmother telling me that when this currency was in circulation, she used to take her teacher's salary to the store immediately on the morning of payday to buy butter and bread, because she got less for it on that very day's evening. I sincerely hope that we will be spared.

I added two pictures of banknotes to this post in support of the above comment:

In 1920, 10 Reichsmark bills were still in use.
Three years later the German government saw the need to introduce 100 million Reichsmark bills.

  • The former British Member of the European Parliament, Special Adviser on European Affairs to the Foreign and Commonwealth Office, writer and journalist Adam Fergusson analyzed in detail the causes of hyperinflation in 1920s Germany in this highly-recommended and highly-valued book entitled "When money dies: The nightmare of the Weimar collapse" (07/12/10).
  • In his New York Times Magazine essay entitled "Can Europe be Saved?" published online Jan. 12, 2011, Paul Krugman suggests 'internal devaluation' as one possible mechanism which the failing economies of the eurozone may have to consider as a remedy for their credit troubles, because the Germans hesitate to crank up the printing press; no Easing is expected. Today, Terry Gross spoke with Paul Krugman spoke on this issue in her interview on National Public Radio's Fresh Air entitled "Paul Krugman: The Economic Failure Of The Euro". The reasons for German reluctance are buried in the history of the Republic of Weimar. Perhaps, the U.S. may have to entertain 'internal devaluation' as well once the printing press reached its limits (01/25/2011).
  • In a history of the German Metal Workers Trade Union published by the union on the occasion of its 65th anniversary in 1966 [Seventy-Five Years Trade Union 1891 - 1966 (Metal Workers Trade Union of the Federal Republic of Germany, ed.), Europ√§ische Verlagsanstalt, Frankfurt a.M.: p. 222], I found the following insights into the causes of hyperinflation in 1920s Germany. Parallels to our day are easily recognizable.
    German emperor Wilhelm II refrained from instituting a war tax to finance the expenditures for World War I, but decided to rely mainly on government bond issues instead. After the Germans surrendered in 1918 and the emperor had abdicated, the amassed sovereign debt and the reparation payments stipulated by the victors constituted an enormous financial burden for the successor of the German Empire, that is the Republic of Weimar. The new government sought to reduce this burden with strong inflationary growth, because it feared that increasing taxes would stifle economic recovery. The central bank printed progressively more money. Whereas notes worth 2.4 billion marks were in circulation at the outbreak of the war in 1914, this amount had increased to 72 billion at the end of 1920, and the backing of the currency with gold reserves had diminished from 54 percent to only 1.5 percent. As a consequence, the exchange rate for one dollar climbed from 4.35 marks to 73 marks. Wealthy taxpayers welcomed this inflation, because it eased their loan and mortgage payments. Enterprises reaped an advantage with paying corporate taxes at last year's value with this year's money. The people who paid the price were earners of salaries and wages whose income lost value faster than it could be spent. People with low and middle income fell on extremely hard times in the process (07/20/2011).
  • In this interview with The Wall Street Journal published Aug. 11, 2011, Nouriel Roubini provides informative insights on economic depression, recession and the current economic situation (08/12/2011):

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