Wednesday, March 07, 2018

A wheelbarrow of cash for a loaf of bread: The Downfall of Money (F Taylor)

     Frederick Taylor. The Downfall of Money (2013) The story of the German hyper-inflation that followed World War I, 1919-1923. Taylor mixes political, economic, and personal stories, which gave me a vivid impression of what it was like to live through that time. For example, a memory of how the family would get the father’s salary at the beginning of the month, and strive to spend it all on food and other necessities by noon or early afternoon at the latest, before the prices went up. With luck, the haul lasted until the first of the next month, when the exercise was repeated.
     Taylor is also good on thumbnail sketches of the politicians and their motives. He emphasises the murderous mutual vilification of left and right, which came near to outright civil war. We can see the beginnings of the tangled path of cross-purposes, and more or less blatant betrayals, that led from the Weimar Republic’s inability to forge a national unity to the handing over of power to Adolf Hitler.
     The book is highly readable. Taylor has done his homework: the list of sources occupies six pages of small print. He has the knack of synthesising huge amounts of information, clarifying the narrative lines, and dropping telling details at the right places to create the personal, human scale that allows us to form an impression of reality.
     As a believable story of the times, the book is very good, As an analysis of why and how the awful events unfolded, it is weak. It’s clear enough that French intransigent refusal to renegotiate reparations payments played a key role, as did American insistence on repayment of debts. It’s also clear that the German inflation was in part deliberately induced to reduce the accounting value of the reparations. A side effect was that all that excess money created consumer demand, so for a while there was a boom. But since the money supply grew faster than production, that did not last.
     In addition, the government was unwilling to risk the effects of a limited money supply, which would have stabilised the currency, but which would also have required siphoning large amounts of cash out of the economy in order to pay reparations. The last phase, hyper-inflation, created grievous hardship.
     In short, Taylor is good at presenting the immediate causes of the inflation. He does not raise the question of underlying causes. Inflation is a puzzle: Why do people come to expect to hand over more and more cash for the same quantity of goods? And why do central banks supply that cash? Why do people believe that austerity (borne mostly by other people, of course) will generate a desired surplus of cash for payment of debts?
     The German hyperinflation is a good case study in the role of psychology in the economy. People make decisions (such as investing in war bonds) because of their beliefs about how the economy works. When those beliefs prove unreliable guides, they act on different beliefs (and spend a month’s salary in half a day to get enough food to last the month). To understand inflation we need to understand what people believe about money.
     It’s pretty clear that the dominant belief operating in the postwar period was that money is wealth. That’s why the French wanted money from the Germans. That’s why the Americans wanted the Allies to repay the money they borrowed. The French did insist that at least part of the reparations should be paid in kind (iron and coal, mostly). But what they wanted was gold marks, actual bullion, or paper money that was guaranteed to be exchangeable for gold. Neither the Americans nor the French were willing to forgive the debt owed them, nor to help Germany rebuild its economy so that they could supply the goods and services that France and Belgium needed for rebuilding. It was all about the cash. I think it not at all surprising that the German government decided to provide the cash, in the end by the wheelbarrow.
     Could inflation have been avoided? I don’t think so: devaluing currency is a handy way to reduce debt, and everybody did it to some extent (the British and Americans least of all, which is why the pound held its value against the dollar). But once people realised that cash is not wealth, and preferred things (food, clothing, furniture, jewellery, etc) over cash, hyperinflation was the predictable result. Then if inflation becomes bad enough, people are willing to swallow the bitter medicine of currency reform, and the sharp but relatively short-lived pain of adjustment to the new bookkeeping.
     Money works only as long as people trust it. Whether “backed” by gold or not, money is a measure of value, just as a meter stick is a measure of length. There’s a difference, though. The value of a dollar depends on what people believe it to be. A $10 bill is an IOU: as long as we trust it as a “medium of exchange”, it can be cashed in for real wealth: a meal, a book, a few gallons of gas, a pair of gloves, a theatre ticket, a sack of potatoes.
     Good book, worth reading as history, and as an object of meditation about the nature of money. ***

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