Currently there's a lot of talk about Russia, the Ukraine, and World War III. Perhaps it's worth remembering the role inflation and international sanctions played in starting World War II
At 11:00 AM on Monday 11 NOV 1918, the conflict euphemistically called "The War to End All Wars" (but later regrettably known as World War I) ended with an armistice signed in France earlier that morning at 5:45 AM, with 2,738 men dying during the intervening 5+ hours. Over the period of belligerency, there had been approximately 40 million casualties: 20 million dead and 21 million wounded. Of these 20 million dead, 9.7 million were military personnel and about 10 million were civilians. It had been (to say the least) a ghastly spectacle of global carnage.
It is one of history's great mysteries how what should have been a relatively easy war to avoid became such an all-encompassing conflagration. No less of a mystery is the attitude of the victors whose harsh treatment of Germany from 1918 onward, would come back to haunt them with a terrific vengeance a mere generation later.
But the point of this essay is economics, and more to the point, the horrors of inflation and its relationship to causing wars and dictatorships. And although I will be looking primary at post World War I Germany, we should not forget that there have been many World Wars before World War I and yes, inflation played a major role in these as well.
Let's take for example Napoleon and the Napoleonic Wars. In an excellent piece by Kate Steir for The National Museum of American History entitled Let them eat dollars: Hyperinflation from revolutionary France to Zimbabwe Ms. Steir observes that in 1792 during it's war with Austria, the French National Assembly printed paper currency, hoping that this measure would provide the public with greater access to money and thereby grow the economy (sound familiar?) While this appeared to work at first, the large amount of currency entering the French market caused prices for goods to grow so quickly that soon the ink necessary to print the notes cost more than the notes were worth. What Ms. Steir does not explore however, is what happened next. As values dropped, the National Assembly turned to asset confiscation and the sale of those assets. This of course deflated the asset's value (and concurrently the currency) more, spurring inflation ever upward.
This hyperinflation first killed the National Assembly who gave way to the Directory and then to Napoleon Bonaparte as First Consul (later dictator and ultimately, emperor) who finally killed inflation by killing the fiat currency with a gold standard. As historian H.A. Scott Trask points out in the conclusion of his essay, Inflation and the French Revolution: The Story of a Monetary Catastrophe (Mises Institute 23 NOV 2020) "Napoleon would go on to conquer most of the Continent while on the gold standard. His success gives the lie to generations of scholarly and academic excuse making that for all its pitfalls the assignat 'saved' the Revolution. On the contrary, it helped bring on the Terror and set French progress back a generation."
It bears keeping in mind that the motivation for French fiat currency was social mobility, redistribution of wealth, and universal egalitarianism; concepts we find in our own borrow and spend rhetoric today. It also bears keeping in mind that the motivations of a "controlled" economy sent post World War I Germany into an inflationary period almost beyond imagination.
As the imperial period ended and the German Republic began, the government decided devaluation of the currency would help restore the economy by making exports more desirable. The German hyper-inflationary period is complicated, but for those who want to read more about it, there is an excellent piece from Daily History entitled What Were the Causes of Germany's Hyperinflation of 1921-1923 that lays out the particulars in detail. It suffices to say however, as values decreased, the government printed more money setting off a terrible spiral of inflation.
What's more important for our purposes at this point though is not the cause of the inflation but it's effect, especially as it pertains to foreign affairs and war in general and World War II in particular, as explored in a 17 JAN 2022 Investopedia piece by Matthew Johnston (reviewed by Robert C. Kelly and fact checked by Pete Rathburn) entitled: Economic Conditions That Helped Cause World War II. In Mr. Johnston's assessment, the aftermath of the war, its "Guilt Clause," and the attendant war reparations were unreasonably levied and impossible to meet. As early as 1923, the newly constituted Weimar Republic began delaying payments on war reparations, which initiated a retaliatory response by France and Belgium, who decided to seize the coal and metal assets of the Ruhr River Valley (see the French National Assembly tactic above) which, since coal and metals were imperative to German manufacturing (remember, they devalued their currency to make their manufactured products more desirable for export) had the exact opposite and counterproductive effect of further depressing the economy and making the reparation payments even more difficult to accomplish.
Needless to say this downturn encouraged "stimulus" to correct, resulting in more printing of more fiat currency, resulting in more inflation-- resulting in more misery-- and so on until-- (just like when personal finances get out of control)-- a bankruptcy intervened. In the case of Weimar Germany that bankruptcy was the American Dawes Plan of 1924 which successfully restructured the reparations debt. But for Germany's middle class, the damage was already done. The hyper-inflationary period had destroyed middle class savings, and as a result, many became distrustful of the liberal-democratic Weimar government. This distrust, along with resentment over the Treaty of Versailles, lent itself to the increasing popularity of more left and right-wing radical political parties, a trend that ultimately lead to Adolf Hitler and the deadly path to World War II.
What's so striking about these two scenarios (or frightening if you prefer) was the results of the inflation and how it was corrected. In revolutionary France, a dictator forced the nation back onto the gold standard and in Germany, a populist dictator militarized the entire economy and began an aggressive war of expansion. In both cases, totalitarianism not democracy were the way out.
This is very frightening because one can see how hard sound monetary policy is in a democracy that has become addicted to saying "yes" to any and all constituencies. It is also frightening when you realize that after many attempts at the same shady economics, western monetary policy still thinks printing fiat currency and seizing assets will have a positive effect on the economy. We may call it "retaliatory action," or "wealth taxes," or "social justice," but the effect is the same: jeopardizing private property and calling into question the safety of investment. Just like in Weimar Germany, no middle-aged middle-class likes to see its savings or assets wiped out.
I bring up these points because one has to wonder why political leaders would pursue retaliatory policies contrary to their own benefit, much like France and Belgium did with the Ruhr Valley in the 1920s. Only moments ago, I became aware of a story from Aljazeera entitled Yuan jumps after report Saudis consider its use in oil deals which illustrates this point. Petrodollars, which is to say, dollars used to buy petroleum, is a major cornerstone of the U.S. Dollar as a reserve currency. To further explain, much of the U.S.' ability to front 30 trillion dollars in debt (and attendant fiat currency) is founded on the Dollar as a reserve currency. As discussed in the Socratic Original from 01 MAR 2022 Seeing the World as it Is: and I quote (myself as it happens) "A concerted effort on the part of a foreign enemy to dump dollars (a reserve currency) or treasury bills, would have a near instantaneous and devastating effect on our credit and our ability to meet even the most mundane functions of government." If it proves true that a "Petroyuan" is in the near future, this could have a devastating effect on American citizens who are already suffering from rampant inflation especially in the area of fuel costs.
There is of course a visceral reason inflation has such epic effects upon history; inflation (like war) is one of humankind's a great equalizers in misery. As the daily struggle to provide basic necessities increases, so does the ingenuity of the populace to avoid it as much as they possibly can, which will only further exacerbate the situation. As we manipulate currencies and commodities without regard to their consequences (or in spite of them) we invite the type of social restructuring we originally sought to avoid. Many wars and revolutions have been caused by inflation; hopefully we will relearn this lesson before it's too late.
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