Weimar Republic Hyperinflation through a Modern Monetary Theory Lens
Phil Armstrong and Warren Mosler
"we identify the rise in the quantity of money and the printing of increasing quantities of banknotes as a consequence of the hyperinflation, rather than its cause."
"The presumption of a money supply fixed by the government, however, applies to a convertible, fixed exchange rate currency, such as existed under the gold standard. This relegates the applicability of the quantity theory of money to fixed exchange rate regimes and
makes it entirely inapplicable to today’s floating exchange rate regimes (as well as in the
Weimar Republic) where the government does not offer convertibility at a fixed rate."
"After a decades-long search for an ‘M’- a monetary aggregate that correlates to and leads to inflation- mainstream economics today has moved on to its current position of inflation expectations being the cause of inflation. ...Central banks have, in fact, developed intricate methodologies to
measure inflation expectations to guide policy, while their researchers have struggled to find evidence of the validity of the theory."
"The funds to pay taxes and net save come only from the government or its agents (Bell 1998); the currency itself is a public monopoly and therefore the price level, as a point of logic, is necessarily a function of prices paid by the government (Mosler 1993). Said another way, the value of the currency is a function of what economic agents must do in order to obtain it from the government and its designated agents, directly or indirectly. With the currency a public monopoly (imperfect competition) mainstream
quantity theory, inflation expectations theory and the neutrality of money are not applicable."
"The value of the currency is defined by what a given amount of it can buy. So, for example, if the government increases purchases at current prices, regardless of the quantity of money spent, that additional (price constrained) spending has not driven up prices, and the value of the currency has not been altered. However, if the government instead pays more for the same items purchased, the value of the currency, by definition, has become lower, as it takes more of it to buy the same quantity than was previously the case."
"Ormazabal (2008) recognizes that taxes would have to be raised to reduce German consumption so that
sufficient goods and services would be available to transfer to the Allies: ‘It is understood that
the Germans cease to consume because they part with money’ (Ormazabal 2008: 10). He
further reasons that if the need for German money to pay for the German exports equalled the
German currency the Agent General converted into foreign exchange, the transfer of German money for reparations to the Agent General would not destabilize the foreign exchange
markets. However, if taxes are not sufficient to reduce German consumption exports revenues
will not be sufficient, causing the exchange rate for the mark to fall. And a fall in the German
exchange rate would make it increasingly burdensome for Germany - via the Agent General - to obtain the required foreign currency to meet its reparation liabilities."
"We, in general, agree with this summation, enhanced further with MMT insights. Due to taxation being set at too low a level, payment of reparations resulted in higher levels of German
deficit spending. In addition, the higher interest rates implemented to fight the inflation further
increased the deficit (a point missed in orthodox narratives; see Appendix 2). We would also
point out that this deficit spending was not only for purchases of real goods and services and
payment of interest, but also for purchases of foreign exchange by the Agent General. Purchases of foreign exchange (and gold) are, functionally, deficit spending, even though they
are not accounted for as such but only as asset purchases by the central bank. Thus, we
argue that, as a practical matter, the stated accounts underestimate the size of deficits.
Importantly, with both insufficient tax liabilities and compliance, German purchases of foreign
exchange could only take place at continuously higher prices. MMT provides important insights here, namely that it was the higher prices paid that were the cause of the increase in
the price level, and only if real wages had been sufficiently lowered to the point of reducing domestic consumption and increasing exports could Germany have bought the required
foreign exchange without paying higher prices."