A Flock of Black Swans

adam Fergusson: When Money Dies

The Wall Street Journal, December 30, 2010

It says something about present anxieties that a 35-year-old account of Weimar hyperinflation has come into vogue. In early 2010, Adam Fergusson's long-out-of-print volume was trading online for four-figure sums. There were (false) reports of kind words about it from Warren Buffett. Now back in print, this once obscure book from 1975 has been selling briskly. Just another manifestation of the financial millenarianism now sweeping the land? Perhaps, but "When Money Dies" remains a fascinating and disturbing book.

The death of the German mark (it took 20 of them to buy a British pound in 1914 but 310 billion in late 1923) plays a key part in the dark iconography of the 20th century: Images of kindling currency and economic chaos are an essential element in our understanding of the rise of Hitler. Mr. Fergusson adds valuable nuance to a familiar story. His tale begins not, as would be popularly assumed, in the aftermath of Germany's political and military collapse in 1918 (by which point the mark had halved against the pound) but in the original decision to fund the war effort largely through debt—a decision with uncomfortable contemporary parallels (one of many in this book) tailor-made for today's end-timers.

Yet the parallels go only so far. The almost inevitably inflationary consequences of paying for a world war on credit were exacerbated by: Germany's relatively shallow capital markets, the creation of "loan banks" funded solely by a printing press that was also at the disposal of the central bank; and the muffling of warning signals in a way unimaginable in our information age. The rise in prices was obvious to all. That it was due to more than wartime shortages was not. The country's stock markets were closed for the duration of the fighting. Foreign-exchange rates were not published.

And then there were the black swans. Early 20th-century Germany was savaged by a flock, including defeat in what was then the world's most destructive war, revolution, civil unrest, territorial loss, the imposition of punitive reparations, a fresh occupation of its industrial heartland and, as if these woes were not enough, a Reichsbank presided over by Rudolf Havenstein. Even in the era of Zimbabwe's Gideon Gono, Havenstein must be considered a strong contender for the title of worst central banker of all time. There seemed to be no limit to the amount of currency he was willing to print. Yes, America has its problems today, but by comparison . . .

"When Money Dies" was written in the early 1970s for a British audience. Inflation was accelerating fast, and London's political class was at a loss about what to do. Mr. Fergusson's book (which began as a series of newspaper articles) reflected the growing national alarm over inflation and hinted that price stability would not be won back without more focus on the quantity of money in circulation. With monetarist ideas just beginning to enter mainstream British political discourse, the Havenstein of "When Money Dies"—a printing-press banker supposedly unaware of the connection between soaring inflation and roaring money supply—made a useful villain.

Yet in all probability his behavior owed as much to desperation as ignorance. Mass unemployment seemed more of a threat to Weimar's dangerously fragile social order than rising prices. Devaluation was the other side of Germany's debased coin. It kept the country's exports competitive and its factories (given an extra boost by generous subsidy regimes) humming.

But in the end the music stopped. Without a reliable pricing mechanism, much of the German economy eventually ceased to function, even at the most basic level. Rent was payable in butter, a ticket to the movies with a lump of coal. Farmers stopped sending food to the cities. Under such circumstances the harsh medicine of monetary reform (the return to a fixed parity against gold and the dollar, the imposition of strict budgetary discipline) found the political support it needed despite the pain it was bound to bring to German industry and its work force.

And so, in November 1923, a new quasi-currency, the Rentenmark, was launched. Its asset backing was little more than a conjuring trick, but with the population desperate to believe (and with the Reichsbank no longer financing the government) the magic worked. Despite the rickety nature of the recovery that eventually ensued, Germany might have arrived at a lasting turning point had not black swans—the Great Crash and a global depression—returned to bedevil its future once again.

Readers of Mr. Fergusson's melancholy chronicle can comfort themselves with the thought: That was then, and this is now. "When Money Dies" cannot be used to prove that the combination of rising deficits and the modern money manufacture euphemized as "Quantitative Easing" can only end up in near-apocalyptic disaster. (In a note to this new edition, Mr. Fergusson, who subsequently became a Conservative member of the European Parliament in the early Thatcher years, stresses that no "advanced economy is threatened with inflation approaching such severity as in post-Imperial Germany.") Nevertheless, to borrow his adjective, the book is a "sobering" warning of what could go wrong.

His examination of both the seductions of inflation and its devastatingly corrosive effect is merciless and horrifying. Most haunting are the depictions of those broken on inflation's wheel, the workers without a union to protect them, the retired trying to live on pensions that had lost all meaning, the once-proud bourgeois after the annihilation of their savings. A nation can recover from hyperinflation, but for these people time had run out. Everybody ought to read this book. But baby boomers must.