When did the United States have hyperinflation?

Hyperinflation: The exciting parallels to the once great France

It is often worth taking a look at history. The topic of public finances and inflation shows that.

When the then great France plunged into a bad crisis at the end of the 18th century, the money printing machine was started and operated with all its might.

The consequences of such a monetary policy are very instructive even today. Because there is currently a risk that politicians and central banks will make things much worse by making failed rescue attempts.

Okay, the reading tip doesn't sound overwhelmingly sexy at first sight: a business novel from 1912, from before the First World War. By an author named Andrew Dickson White, a history scholar from the United States whom almost no one knows today. And then the topic, a subject from what felt like the deepest past, France in the late, late 18th century, in the confused, terrorist 1790s ... oh my goodness. Does it have to be that way?

Itgot to Not. But itshould

Even the title of this monograph,Fiat Money inflation in France (loosely translated as "paper money inflation in France"), sounds brittle and dreary. But in the global chaos of the 2020 corona year - pandemic, global economic crisis, escalating national debt - it is one of the most helpful books in the library of economic history. On the other hand, it is encouraging: the part has only 60 pages and can be read in two hours, provided you have a command of English *.

A luminary from Cornell, a man of the world

Andrew Dickson White was already 80 when his France ribbon came out. Both academically and politically, the man had a highly respectable career. The historian co-founded Cornell University in the small town of Ithaca in the US state of New York in the 1860s and served as its first president. Cornell was (and is) anything but an academic wallflower, but rather one of the elite Ivy League universities in the American Northeast; better-known members of the Unibund are Harvard in Cambridge / Boston and Yale in New Haven. White later served as America's ambassador to imperial Berlin and Russia. In short: a luminary, a man of the world.

His paper money study is just as instructive today as it was when it first appeared. As early as 1912 it could have opened the eyes of attentive readers, even should. After all, the opus was published shortly before the outbreak of World War I, which in 1914 brought the end of the global gold standard, which had been tried and tested for decades, and before the hyperinflation of the Weimar era, the collapse of the financial, banking and economic system in Germany at the time. Other nations also experienced a collapse of their currencies in the early 1920s, such as the still young, unsettled states of Austria and Hungary as well as the Soviet Union.

Unfortunately, there are a number of uncomfortable parallels between the 1790s and today.

Superpowers areNot almighty

Starting with White's protagonist, the disordered state of France, where something was wrong. Why should we learn something today from this nation of all people, which at the time had only just left absolutism and the ancien régime behind by revolution and had still not found the way to stable democratic conditions for a long time? Because France was the great power of Europe in the late 18th century, just as the United States is today in a global perspective as a “superpower”. France had around 27 million inhabitants, hardly less than the British Isles and the German territorial patchwork put together on the demographic scale. The USA, which had gained its independence as early as 1776, was still a small state with around five million people - and was also thousands of kilometers away, across the ocean in another, from the point of view of Europeans, “New” world.

France advised and administered - like its British and Spanish rivals - a world empire and the corresponding fleet and exercised its influence in North America, South Asia and elsewhere. Crafts, arts and literature flourished. French stood for education, culture and diplomacy in much of the world. It was Voltaire's language, elegance, good style. And France was an economic power in Europe.

Cultural revolution, crisis decade, bankruptcy candidate

At least until the revolution, which sparked a political beacon among free spirits all over the world, but at the same time heralded an era of anarchy, dictatorship and economic collapse. The 1790s were the decade of crisis for Paris and the court at Versailles. They culminated in an epochal state crisis and a cultural revolution, catastrophic in many respects, which questioned, broke through and tried to rearrange everything that had been valid until then - including the greatest social injustice. Tens of thousands lost their lives, millions lost their belongings. (In turn, the king and queen, Louis XVI and Marie Antoinette, first lost their freedom and in 1793 their head.)

France was as good as broke. As a monarchy it had waged one costly war after another, criminally neglected its tax base and allowed a numerically tiny elite - court, nobility, clergy - for generations to live in luxury at the expense of the people, the plebeian. The country financed itself on credit. In today's language: It had a gigantic national debt combined with a massive budget deficit. France was restructuring case, a candidate for national bankruptcy.

Anyone who spontaneously thinks of the USA in 2020: d‘accord. An economic and political superpower that wages one military conflict after another, maintains a gigantic fleet, has a weak tax base, is over-indebted and lives on credit, in which the elites (the infamousone percent) Live in luxury and enjoy considerable tax benefits ... Plus, of course, a gigantic national debt in connection with a budget deficit, which is currently at 3.3 trillion US dollars a year, i.e. nine billionduring the day. Such a budget policy is not sustainable, not even with superpowerful nations.

France's money was the world's leading currency in the 18th century. Today, since the First World War, it is the US dollar.

Eureka! There will be ... money!

In France in the 1790s, the political and social reinvention resulted in a smoldering and soon no longer controllable economic crisis. In this emergency situation, shrewd statesmen came up with the seductive idea that an economy could create “money” not only by generating economic performance and value, but by conjuring it up from the air. So just print it out by proclaiming: “It will” (Latin, “fiat”).

In France during the Revolution, the state had unceremoniously confiscated the gigantic church property and the property of those nobles who (for good reason) had fled into exile abroad. The revolutionary government immediately gave "assignats" (assignats, literally: "Instructions"), the value of which was anchored in French property that was practically as good as money and was used that way. Similar structured "mandates" followed later (mandates territoriaux). That certainly sounded like a wonderfully simple, feasible, inconsequential idea that apparently also had to solve the annoying over-indebtedness of the state.

It wasto nice and easy to be true.

"Extraordinary skill and honesty"

But where there is danger, what can save also grows, to say it with the poet Friedrich Hölderlin, and every crisis - whether political, economic or even pandemic - finds its heroes. The heroes of that era are suspiciously similar to ours today: “guardians” of money, currency, and the economy. In France in the 1790s, these “experts” seemed to be able to save the country and the people with their ingenious money printing coup. Then as now, the “monetary watchdogs” were considered to be the very brightest minds. "The men who managed French finances during the reign of terror [1793/94] and who carried out these experiments, which seem so monstrous to us [1912] [...], were generally recognized in Europe as extraordinarily skilled and honest financiers," White writes . As a cunning one. Unfortunately, many of the rulers of that time were close to madness without noticing or suspecting it.

Today, “monetary watchdogs” like Christine Lagarde from the European Central Bank (ECB) and Jerome Powell from the US Federal Reserve system, both by the way not economists, but lawyers, also have the nimbus of genius, expertise and world salvation. In the course of the corona crisis, in close coordination with elected politicians, they made it possible in the first place to build up massive debts in their respective currency areas - the two largest in the world - and to finance this unprecedented debt orgy with the digital equivalent of the printing press.

The boom on credit

White describes the image change of the concept of money printing in revolutionary France perfectly. From the beginning there were eminent critics and warners who were however overruled or ignored. There was a reason for their skepticism. France had already experienced catastrophic hyperinflation in 1720, at the time under the direction of the Scottish financial juggler John Law. This collapse of money was anchored in the collective memory in a similar way to the fiasco of the Weimar period in German society today.

The idea of ​​the money-out-of-the-air magic number was just too tempting despite this episode. "Never before has a theory been more seductive to financiers and statesmen," said White. You could seemingly get rid of the overwhelming debt, stimulate the economy without cutting back, without cutting spending, without raising taxes. Eureka! Lo and behold: the economy even recovered, flourished, without any unpleasant side effects.

But it was a sham bloom, a short-lived boom.

A first-rate addictive substance: fiat money

“The nation got drunk on paper money,” says White, describing the French feeling. “The good feeling was that of a drinker right after his first sip; and it must be noted as a simple historical fact, corresponding to the physiological, that the subsequent phases of wellbeing became shorter with each new 'sip' of paper money. ”Just as a drug addict may hesitate and hesitate before using it for the first time, the inhibition threshold lies significantly lower the second time - and the third run is a sure-fire success. In White's words, "It proceeded under a law of social physics that we might call the 'law of accelerated spending and devaluation'. It was comparatively easy to curb the first issue [of new paper money]. It was extremely difficult to do this on the second. Holding back on the third - and the following - was practically impossible. ”Printing paper money is seductively simple, and it quickly leads politicians and the central bank into addiction, addiction. At least that's how it was in France in the 1790s. And what will apply in 2020?

Let's not kid ourselves: the situation is not that different today. The world's central banks already knew how to help each other during the long-term Great Financial Crisis from summer 2007 onwards than with "temporary" money printing, the magic of fiat money - justified in retrospect with a virtuoso fabric of legal handicrafts. It was the boozer's first gulp from the bottle, so well described by White.

Then came Corona and the almost immediate multiplication of money printing all over the world - as well as a fundamentally new redistribution policy in the European Union, a community debt that the various European treaties had actually always excluded from the beginning. De facto, the EU now has a gigantic European financial equalization scheme, which in any case is diametrically opposed to the basic European treaties in spirit and text. Politicians presented this as a "Corona emergency measure" - and of course as a "one-off", as an "exception". Need does not know any command, is the thought in parliaments, in the media, in public.

But the next time the economy weakens - or even in the next crisis, because it can always get worse - government cabinets, parliaments and central banks are likely to waved through new debts and new money printing programs in no time at all. It would be the third sip from the drug bottle. The sure-fire success.

And the moral of the story'?

It happened as it had to: France printed more and more paper money at ever shorter intervals and quickly slipped into hyperinflation, the galloping, complete currency devaluation - formally usually defined as more than fifty percent consumer goods price inflation per month. In 1797 assignats and mandates were practically worthless and were eventually invalidated by the government.

For the sake of completeness it should be added that the path to the downfall of money was not only catastrophic in financial terms. State arbitrariness, reign of terror, looting, lynching, expropriations cost tens of thousands of lives and ruined countless others. The revolution ate their children, the stupid monetary policy their money and prosperity. According to White, the misery of assignats lasted “almost ten years”, and the economic recovery lasted “a full forty years”.

That is the reason why it is worthwhile for us to pick up his old economics volume and delve deep into the well of economic history. And why a sentence like “need knows no command” is deceptive.Just Need needs commandment, clear rules, prudence, weighing up advantages and disadvantages, risks and side effects - especially when it comes to public finances. Otherwise there is a risk that politicians and central banks will make things much worse by making failed rescue attempts.

* Andrew Dickson White (1832-1918):Fiat Money inflation in France, CreateSpace Independent Publishing (Amazon), 66 pages, € 3.58 (print), free as an e-book. The author is not aware of any German edition of the work.

Michael Braun Alexander is one of the most prominent financial journalists in Germany. He has been writing about the stock market and economics since 1995, including as a correspondent in Mumbai and New York and as a columnist for Bild am Sonntag, and has published twelve books (When money diesIndia superpower).