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QE2: History Lessons From Germany

By Adam Fergusson, author of When Money Dies

NEW YORK ( TheStreet) -- Through the printing press, the Weimar Republic conducted the most extreme policy of quantitative easing in history. The German mark, 4 to the $1 before World War I, stood at 20 when it ended. Gathering momentum, it eventually plunged in November 1923 to 4 trillion to the $1.

At that point the nominal value of the ocean of circulating paper reached 93 quintillion (a figure with 18 noughts). The mark was dead. Such headlong debauchery of a currency in an advanced economy teaches us something today.

Then as now, the objective was to reduce unemployment and thus avoid unrest and political unpopularity. Revolution was in the air. A defeated army was disbanding. Dr. Rudolf Havenstein, president of the independent Reichsbank, made it his task to supply industry with all the credits and the government with all the wages and salaries needed for national recovery and survival.

Havenstein pursued it relentlessly, convinced that his titanic money-printing triumphs had no connection with the depreciation which accompanied, and later anticipated, them. Unchallenged, he blamed that on the economic crisis, international speculators, the fear of Bolshevism, the social disorganisation of a truncated country (the Treaty of Versailles had cost a defeated Germany all her colonies, Alsace-Lorraine and the industries of Upper Silesia), the Allied blockade, the massive war reparations payable in gold and in kind, and finally, in the spring of 1923, on the Franco-Belgian invasion of the Ruhr to retrieve those payments. The Kaiser's regime, which had hoped in 1914 to pay for a short war not with taxes but the spoils of victory, had certainly left its Socialist successor a baleful legacy.

As a way of ensuring full employment, printing money was successful from the start. And what a success! Private industry, much of it converting from a war footing, expanded rapidly and happily to mop up the limitless credit the Reichsbank and the currency-issuing regional banks made available. Exports boomed, for with such low manufacturing costs they undercut all competition (and in 1920 contributed to a slump in France and Britain, and afterwards to the beggaring of France and other neighbors).

Shipbuilders in Hamburg, automobile makers, steelworks in the Ruhr -- all flourished. Profits were outrageous. New enterprises sprouted: as inflation speeded up, the loans which had launched them could be repaid with trivial amounts of foreign earnings or the price of a tram ticket. Often these foreign earnings, if not hoarded abroad, were invested in new factory buildings which produced nothing but boosted the construction industry enormously.
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