Book Review: Adam Fergusson's When Money Dies
There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. - John Maynard Keynes, The Economic Consequences of the Peace, pp. 235-248.
When Money Dies, the horrifyingly true story of post-World War I Germany's experience with hyperinflation, was first published in 1975. Largely because the world has been forcibly reacquainted with central banks, and specifically, the U.S. Federal Reserve's "quantitative easing," this essential book was republished and re-released in 2010.
The German devaluation of the mark, which began during the war, continued at great speed in its aftermath such that, by 1923, the dollar bought 4,200,000,000,000 units of the almost worthless currency. The story of the mark's descent into nothingness is scarily relevant to what we're witnessing today on the currency front, and the stories within touch on myriad modern themes about runaway government debt, investor flight to hard assets, and societal unrest related to monetary mischief.
It's hard to tell the ideology of author Adam Fergusson, but as a read of When Money Dies ably reveals, when it comes to monetary debasement ideology is really beside the point. More important is what Fergusson writes about the consequences. His account of Germany's currency tragedy will ring true to indviduals of all stripes who've witnessed a mercifully pale imitation of the mark's devaluation since 2001 in terms of the dollar, euro and pound.
Review. The book's prologue ends with the simple suggestion (echoing Keynes) that "if you wish to destroy a nation you must first corrupt its currency. Thus must sound money be the first bastion of a society's defence."
With currency destruction used as the dropoff point, Fergusson describes for the reader what happens when money is devalued, and it's surely a descent into Hell. There are important lessons to be learned in what befell Germany, Austria and other belligerants after the war. Sadly, the stories are all too relevant today.
To begin, it's most helpful to look into what so many currency watchers miss in noting changing currency values vis-à-vis one another. Fergusson quotes Pearl Buck, who observed the Germans at the time commenting that (p. 5) "‘The dollar is going up again,' while in reality the dollar remained stable but our mark was falling."
This observation applies equally to the present. Many, including Fed officials and Paul Krugman, argue as evidence for an absence of inflation that the dollar has not fallen drastically against the yen, euro and pound relative to where it was ten years ago. But those are paper currencies. What is perhaps unseen, and which the price of gold reveals, is a greater truth about the dollar's debasement.
The dollar's weakness versus other major currencies hides the weakness of every single global currency in terms of gold. Just as the wrongly perceived strength of the dollar in the 1920s gave German citizens false comfort about the mark's health, at least for a time, the relative stability of exchange rates in modern times obscures a broad run on all national paper currencies.
While Germany's Bank Law of 1875 required that at least 1/3rd of the mark's issue be backed by gold, in 1914 the mark's link to gold was suspended, and thus began its devaluation (p. 9). And to finance the war effort, rather than raise revenues to fund it, a great deal of borrowing ensued. The eventual cost of 164,000 million marks was the equivalent of 110,000 million marks in prewar terms.
The above dovetails nicely with the historically credible view that deficits often work against currency strength, given that governments sometimes use devaluation as a tool for reducing the real cost of debt service. Sure enough, after its defeat Germany faced not only war debt but also war reparations. With the mark's devaluation up to full speed by 1920, the national debt of 287,000 million marks, though originally £14,400 million in sterling terms, had declined to the equivalent of £1,200 million by October of 1920 (p. 34).
Sadly for the German citizenry, and arguably for the country's politicians, the German stock exchange was closed during the war (p. 11). This deprived citizen and politician alike of the markets' warnings of the great economic pain to come. Consumer price spikes were predictably blamed on "war shortages" (p. 11), much as politicians and central bankers today finger demand from China and India as the cause of commodity spikes. The real culprits then and now were able to some degree to escape blame.
When war shortages could no longer suffice as an explanation, "speculators" predictably filled the breech for angry citizens, as they often do today. As Fergusson so clearly puts it, in blaming "the sharpness of the Jews, or the speculators making fortunes in the money markets, they were in large measure still blaming not the disease but the symptoms" (p. 69-70).
Though money supply itself can often provide conflicting signals when it comes to the health of a currency, Dr. Rudolf Havenstein, president of the Reichsbank, took to bragging as the mark collapsed that his Reichsbank "today issues 20,000 million marks of new money daily," and that "In a few days, we shall therefore be able to issue in one day two-thirds of the total circulation" (p. 171). And much as Fed Chairman Ben Bernanke is presently of the view that U.S. inflation is well contained, that broad commodity spikes are merely "transitory" and wholly disassociated from Treasury and Fed policy, throughout the German hyperinflation Havenstein "held firmly to his view that money supply was unconnected with either price levels or exchange rates" (p. 170).
New York Fed President Bill Dudley recently suggested that inflation could "never happen today" thanks to the Fed's ability to increase interest rates. But the Reichsbank raised interest rates to 30 percent in August of 1923 (p. 167), with no positive effect on the mark.
It's hard for central bankers to control or arrest that which they don't understand. The Fed today, like the Reichsbank of 1923, often ignores the tie between currency weakness and inflation.
To show how worthless the mark had become by the time of Havenstein's inflation denials, Fergusson recounts the experience of German citizen Hans-George von der Osten. In possession of an American dollar inside Germany in early 1923, he "got hold of six friends and went to Berlin one evening determined to blow the lot; but early the next morning, long after dinner, and many nightclubs later, they still had change in their pockets" (p. 140). Considering how inflation wipes out creditors, this same von der Osten borrowed 4 million marks in February of 1922 to buy an estate next to his existing property, and was able by the autumn to pay the debt with the proceeds from "less than half the crop of one of his potato fields" (p. 109).
Taking into account the substantial human toll of inflation, Fergusson's stories are many. There is Frau Eisenmenger, confident that she'll weather a parallel Austrian inflation thanks to her "gilt edged" Austrian government securities. But then she is tragically told, "My dear lady, where is the State which guaranteed these securities to you? It is dead" (p. 21). As she later put it in her diary, "A housewife who has had no experience of the horrors of currency depreciation has no idea what a blessing stable money is, and how glorious it is to be able to buy with the note in one's purse the article one had intended to buy at the price one had intended to pay" (p. 24).
Within the professional class, Fergusson reports that a bank clerk could "aspire to a maximum yearly salary of 12,000 marks" (p. 84), but by 1922 the weekly minimum cost to feed a family of four was 2,300 to 2,800 marks (p. 84). By August of 1923, "most firms gave raises to their employees ranging from 5 million to 15 million marks a week (p. 164), but this was hardly a source of comfort given that Germany's cost-of-living index, measured at 1 in 1914, reached 218,000 million by November of 1923 (p. 203).
And with German citizens increasingly aware of inflation's realities, what von Mises famously called "flight to the real" took shape. As Fergusson put it, the citizenry sought to insure themselves against paper currency losses through the purchase of "assets which would maintain their value: houses, real estate, manufactured goods, raw materials and so forth" (p. 109). This may remind us today of a similar flight to hard assets such as housing and commodities that took hold not long after the dollar's decline began in 2001. Home prices have moderated since 2007, but not discussed enough is how much the soggy dollar props up home prices to this day at the expense of a necessary, and very cleansing correction.
Some of those whose money had been destroyed, and who lacked hard assets to exchange for food, turned to the kind of theft that characterizes societies suffering devaluation. Fergusson observes that "metal plaques on national monuments had to be removed for safe keeping," while "brass bell plates were stolen from the front doors of the British Embassy in Berlin" (p. 139).These stories of a dying Germany nearly 90 years ago have a modern feel to them, and specifically bring to mind a USA Today story from 2007 which told of "unprecedented copper thefts," and businesses boosting security to avoid theft of their commoditized assets.
Inflation at its core is a lie about the most important price in humankind: that of money. As Fergusson explained it, "those who lived with, or who observed, the inflationary process and the crisis of the recovery readily attributed what they saw first and foremost to the inflation: the fear, the greed, the immorality, the demoralization, the dishounour" (p. 233). Fergusson channels Keynes in describing what a lying, thieving country Germany became.
Of course not all Germans were impoverished amid the mark's decline. Rather, those long on land, gold and other real assets weathered the inflation with ease, and were seen enjoying Germany's finest restaurants while wearing the most expensive of clothes. Fergusson cites the diary of another German who noted that "Anti-Semitism had been negligible before inflation" (p. 234), but with the mark dead, an increasingly "communal hatred, especially against the Jews," found its footing.
To blame the speculator for rising prices is the modern equivalent of blaming the climatologist for forecasting rain. But with a people completely crushed by inflation, and understandably looking for answers, the Jews who were seen to have weathered the inflation largely unscathed became targets of hatred. Worse, the population grew ripe for "any system of firmness or for any man who appears to know what he wants and issues commands in a loud, bold voice" (p. 188). Would Obama be president if Bush 43 hadn't reversed the Reagan-Clinton policy of a strong dollar? This writer thinks not.
So while Fergusson doesn't directly tie the rise of Adolf Hitler and the subsequent Holocaust to the 1920s inflation, he argues that "it is indisputable that in those inflationary years Hitler felt his political strength as a national figure and first tried his fingers for size on the throat of German democracy" (p. 250). Further along he notes "Inflation did not conjure up Hitler, any more than he, as it happened, conjured it. But it made Hitler possible" (p. 250).
If there's a positive storyline to what is a horrifying bit of history, it's that inflation can certainly be cured, and quickly. Indeed, as Fergusson observed, Havenstein's successor as Reichsbank president, Dr. Hjalmar Schacht, managed with U.S. support to transform "the German financial system from chaos to stability in less than a week" (p. 211), and after waving the "magical wand of currency stability," food soon became abundant once again (p. 216). Similarly the dollar, however weak now, could be strengthened quickly if Treasury were to once again define it, and make it redeemable in terms of something real, such as gold.
But it should in no way be presumed that inflation's arrest in Germany made things better in one fell swoop. Fergusson quotes a German named Gunter Schmolders who sagely observed that once in place, inflation "develops a powerful lobby that has no interest in rational argument" (p. 253).
What this tells us today is that rescue from what is an exponentially less horrifying bout with inflation will hardly be painless. Sure enough, any presumed return to a strong dollar, though it could be achieved quickly, will involve the unwinding of trillions of dollars worth of what the Austrian School terms mal-investment. In short, our modern inflation led to the redistribution of wealth toward those assets that most benefit from devaluation (think gold, agriculture and other commodities), and stabilization of the dollar promises to be painful for those most exposed to the assets of the earth. Both sides are apt to get hurt before the end of the story.
Still, we cannot delay. As Fergusson puts it, "the longer the delay, the more savage the cure" (p. 254). Inflation is cruel and drives all manner of faulty investment, but the sooner it's arrested, the sooner what is always limited capital can be salvaged with as little long lasting economic damage as possible.
Whatever Fergusson's ideology, it would be hard to find a book to recommend more strongly than When Money Dies. Not only does it tell how to best protect one's assets during periods of inflation, it's perhaps most useful for reminding us of what can happen to financially stable countries that lose their way. He details the horrifying effects these monetary crack-ups can have on society more broadly, and most importantly of all, reminds that this could be us if we're not careful.
To read When Money Dies is to be warned about what can happen if we ignore the inflationary problem that is already gaining speed. Fergusson tells us that we must do everything possible to put the dollar on a sounder footing. New York Fed President Bill Dudley was wrong when he said that inflation in the U.S. could "never happen today." When Money Dies reminds us how wrong.