I’d like to clarify a point in 20th century history. Some policymakers have implied—and some newspapers that should know better have explicitly said—that lurking in the shadows of the current eurozone crises is the specter of the great German hyperinflation of the 1920s, the eventual collapse of the Weimar Republic, and the calamitous rise of the Third Reich. This read of history assumes that Germany’s legendary post-World War I hyperinflation so weakened the republic that a vicious dictatorship emerged which offered the only orderly solution. It’s a compelling story, but not what happened.
History shows that the 1923 introduction of the Rentenmark (an interim currency indexed to hard assets, which replaced the worthless Papiermark) halted German hyperinflation in its tracks. Germany returned to sound money and reasonably stable prices nearly a decade before Hitler took power. In fact, it was only after the onset of the global Great Depression in 1930 that the Nazi Party became anything more than a fringe movement. The resulting combination of brutal economic austerity measures, an unemployment rate that reached 30% and a polarized political environment ultimately resulted in a population so desperate for political change that the Nazi party enjoyed a 17-fold rise in votes between 1928 and 1932. Ironically, many monetarists argue that it was deflation (too tight a monetary policy), rather than inflation, that led to Nazi Germany.
I’m not trying to explain one of history’s most tragic chapters in a 300-word blog, but I do worry that misinterpreting the lessons of history may result in significant policy errors being made today. If European central bankers are keeping the purse strings tight to avoid a profligate fiscal policy, then I say, “bravi.” If, however, policymakers fear that using monetary policy to replace money destroyed by a contracting financial system will inevitably lead to inflation, then I say, “Go back to the history books.”