Opponents of European Central Bank intervention to bail out the eurozone consistently cite Germany’s experiences with hyperinflation in the early 1920s as a reason that the bank can not or should not go ahead with such a plan.
But let’s set the record straight—there are very few parallels between today’s events and those that caused hyperinflation.
Hyperinflation in Germany after World War I was the product of poor government policy during the war, collapse of the political system, and competition between the public and private sector for a limited quantity of goods. A basic rundown of these policies:
The German government financed its military operations in WWI completely through borrowing. Even by 1919 this caused the mark to depreciate to 20% of its prewar value, according to scholar Gerhard Rempel.
WWI severely diminished Germany’s productive capacity, and the overwhelming demand from both the public (because of reparations demanded by the Allies) and private sectors drove prices to dizzying heights. Rempel writes, “Germany lost 13 per cent of her territory, 10 per cent of her population, 15 per cent of arable land, 75 per cent of iron and 68 per cent of zinc ore, 26 per cent of her coal resources, the entire Alsatian potash and textile industries, and the communications system built around Alsace-Lorraine and Upper Silesia,” not to mention losses of human capital and transport vehicles.
With staggering foreign debts that had to be paid off in gold (in particular, the reparations that had to be paid under the Treaty of Versailles), the new government thought that it would not have the capacity to pay back their creditors without massive exports. Government leaders also thought they would never accomplish this without massive depreciation of the mark, and so pursued radically inflationary policies on purpose.
From German Financier Carl Melchior in 1921 (via Pragmatic Capitalism):
“We can get through the first two or three years with the aid of foreign loans. By the end of that time foreign nations will have realised that these large payments can only be made by huge German exports and these exports will ruin the trade in England and America so that creditors themselves will come to us to request modification.”
Inflation was already out of control by modern standards when the war ended and the government actively sought to pursue policy that would further diminish the value of its currency.
The fact of the matter is that ECB intervention that would increase the supply of euros in order to support struggling sovereigns is a very different problem with distinct stakes.
First of all, the scale of any “money printing” would be quite limited in comparison to the scale on which similar behaviour occurred in Weimar Germany. Up until now, the ECB has been adamant about liquidity draining operations that prevent inflation, and the size of any intervention would still be minor in comparison to the size of the euro area.
Perhaps most importantly, problems in the euro area right now relate to lack of demand not too much demand, as was the case in Germany in the 1920s. Risk of overheating in the eurozone economy at present seems almost laughable. Indeed, inflation is low and sinking in the euro area right now with economic growth falling off, enough so that deflation rather than inflation appears to be a more pressing problem.
In contrast to Weimar Germany, an ECB commitment to act as the lender of last resort is intended (and probably would) bolster confidence that sovereign debt and the euro currency is valuable, not to cause foreign governments to lose faith in the both the currency and EU leadership (as was the idea in Weimar Germany). It was, in the 1920s, in Germany’s best interest to prove that it was incapable of making its reparations payments. The absolute opposite goal is in place right now.
Further, a commitment by the ECB to buy unlimited amounts of sovereign debt or stand behind the European Financial Stability Facility in an unlimited capacity might end up proving cheaper than continuing purchases of sovereign bonds. What’s important in Europe is the commitment to backing up sovereigns and/or banks, not the actual behaviour that would realise these policies.
Thus, ECB action would be acting to strengthen and not diminish confidence in the euro currency, and any policy that does not succeed in this respect would immediately be called to a halt. Weimar politicians had no desire nor incentive to do the same until the situation was way out of control.
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