Warren Mosler & Phil Armstrong, Weimar Republic Hyperinflation Through An MMT Lens (2)
Sarrera:
Phil Armstrong and Warren Mosler
2020
Weimar Republic Hyperinflation through a Modern Monetary Theory Lens
Phil Armstrong and Warren Mosler 2020
Abstract
The hyperinflation in Weimar Germany in 1922-23 has become the poster child of mainstream economists -and especially the monetarists-when presenting the benefits of constraining governments by the rules of ‘sound finance’. Their narrative presumes that governments are naturally inclined to spend beyond their means and that, if left to their profligate ways, inflation ‘gets out of hand’ and leads to hyperinflation in a continuous, accelerating, unstoppable catastrophic collapse of the value of the money.
In contrast to this ubiquitous mainstream analysis,we recognize a fundamentally different origin of inflation, and argue that inflation requires sustained, proactive policy support. And, in the absence of such policies, inflation will rapidly subside. Wereplace the erroneous mainstream theory with the knowledge of Modern Monetary Theory (MMT) identifying both the source of the price level and what makes it change. We are not Weimar scholars, and our aim is not to present a comprehensive historical analysis. We examine the traditionally reported causal forces behind the Weimar hyperinflation, along with the factors that contributed to the hyperinflation and to its abrupt end.
The purpose of this paper is to present our view of the reported information from an MMT perspective.In that regard,we identify the cause of the inflation as the German government paying continuously higher prices for its purchases, particularly those of the foreign currencies the Allies demanded for the payment of reparations, andwe 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
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#89 Warren Mosler & Phil Armstrong: Weimar Republic Hyperinflation Through An MMT Lens (part 2)
Feb 24, 2021
Part 2: Patricia and Christian talk to MMT founder Warren Mosler and MMT scholar Dr Phil Armstrong about their recent paper: “Weimar Republic Hyperinflation through a Modern Monetary Theory Lens”.
Part 1 of this conversation: https://www.patreon.com/posts/episode-88-phil-47638591
Transcript for opening monologue: https://www.patreon.com/posts/47905062
Opening monologue for episode 89 – Warren Mosler & Phil Armstrong: Weimar Republic Hyperinflation Through An MMT Lens (part 2)
At the beginning there, you heard MMT founder Warren Mosler and author Dr Phil Armstrong and in moment we’re going to be talking to them about their recent paper on the Weimar Republic hyperinflation, and also we talk about how understanding modern money gives us some real solutions for today’s urgent crises.
This is part two of a two-part interview, so check out our last episode, that’s episode 88, to get the full context of this episode, and also, if you’re new to MMT, you might want to listen to our first three episodes for an explanation of the basics.
In this episode we’re talking about hyperinflation, but first let’s talk about inflation, and let’s start with the insight that currency-issuing governments, like those of say the UK, the US, Japan, Canada, or Australia create new money when they spend instead of re-cycling tax money collected previously – it has to be that way, since these governments, through their agents, are the sole issuers of their respective currencies, and the sole issuer of anything has to issue that thing before anybody else can have any quantity of it in their possession. So the government necessarily has to spend first before anybody in the non-government, that would include you and me, can have any currency to pay taxes with in the first place.
This can be quite jarring when you first hear it, but tax payments aren’t the source of revenue for government spending. Taxation instead serves to create a permanent demand for the government’s money. To paraphrase economist Hyman Minsky: anybody can create money, the trick is to get it accepted – and when you’re a national government, demanding taxes be paid in the currency that you alone are allowed to issue is the way you accomplish that trick. So without taxation the need to acquire the currency goes away and it loses its value.
So, given that governments can, and do, spend money into existence every day without *operational* limit – in other words, their spending is not revenue-constrained – the question then becomes – what is the limit to government spending? What would be the evidence of too much spending power in an economy? As Professor Stephanie Kelton explains in The Deficit Myth, “excessive spending manifests as inflation”.
So evidence of government overspending *could be* inflation – it’s not the only cause of inflation, but we’ll put that to one side – but the consequence of a government *underspending* is that there will be people in the economy looking to find a way to earn currency to pay their taxes with, who can’t yet find it, otherwise known as unemployment.
Given that inflation costs politicians their jobs and unemployment generally doesn’t, when they form a government, politicians tend to favour the underspending option and then they dodge their responsibility for the consequences by blaming the victims. But when you understand where money comes from, you understand it’s absolutely on them, the monopoly issuer of the currency, if the demand for the thing they issue is not met.
Over the last couple of decades, MMT economists have developed a policy approach that, if adopted, would ensure that governments automatically spend precisely where and when it’s needed, to create true full employment without inflation. The proposal has a number of names, I’m going to call it the Job Guarantee, Warren often calls it the Transition Job, but in the show notes I’ve linked to our episode 47 with Job Guarantee expert Professor Pavlina Tcherneva explaining it in more detail.
And I’ve also linked to a list of people and movements advocating for it, most excitingly this week, US congresswoman Ayanna Pressley has introduced a congressional resolution recognizing the duty of the Federal Government to create a Job Guarantee, so I’ve linked to where people can put their weight behind, and learn from, that initiative and others like it. Of course wherever you are in the world, a good place to start is by ignoring any economist who depicts a government that creates its own money like it’s in the position of an adult film star needing to come to some arrangement with a plutocrat to get funding.
Speaking of things that suck, what about hyperinflation? Perhaps a large source of misunderstanding about hyperinflation comes from the term itself. In the words of author Clint Ballinger: ‘Calling a currency collapse “hyperinflation” is like calling [a plane] crash a “hyperlanding.”’
In episodes of what gets called hyperinflation, it’s never the case that “too much” money gets created, and that causes it to become worthless – it’s the other way around. The sharp currency depreciation comes first, and the rapid acceleration in money creation comes second, to keep up with the demand for money in the domestic economy, and in these extreme instances, we need to go case by case to determine the cause of the original depreciation.
Opponents of certain categories of government spending have, as Michael Hudson wrote in 2013, “implanted a false memory and a false economic theory blaming hyperinflation on deficit spending. The reality is that every hyperinflation in history has come from paying foreign debts, not domestic debts. Germany’s Weimar inflation resulted from the Reichsbank having to pay reparations to the Allied Powers. It sold German currency on the foreign exchange markets for sterling, francs and dollars – far beyond Germany’s ability to obtain foreign exchange by exporting. Germany had been stripped of its coal and steel production capacity and its ability to export was limited. So the currency plunged. Declining exchange rates caused import prices to rise. The general price level followed suit behind the umbrella effect of higher import prices. More money had to be printed to pay for transactions purposes at the higher price level. Every serious study of the German hyperinflation […] shows the same sequence of causation from foreign debt payment to currency depreciation, rising domestic prices, and finally to new money creation.”
Our guests this week, Warren and Phil, with their paper, have applied to this the MMT recognition that fiat currency is a public monopoly and that monopolists are necessarily price-setters, rather than price takers, and therefore the price level is a function of prices paid by government when it spends.
Towards the end of the interview you’ll hear Warren advocate for Medicare For All, but you’ll also hear him say that implementing it would be a deflationary event. And I think that goes to the heart of MMT’s relevance for today. The conventional view might be that if the government’s going to increase its spending to ensure every American gets healthcare, free at the point of delivery, that taxes will need to go up to “pay for” that increase in spending.
But when you consider that tax revenues aren’t the source of funding for federal government spending, and that raising taxes reduces overall spending power in the economy – and that as people switch from private healthcare to medicare for all, a large part of the for-profit medical insurance industry will become redundant, an understanding of how modern money actually works should make it clear that the rational response to a deflationary event like this would be not to take more spending power out of the economy by raising taxes, but to go in the other direction – either lower taxes, or increase spending in other areas, or both – depending on your politics.
So rather than economic shocks having to be a bad thing, they can be opportunity for the government to take up that newly-created slack, at least by guaranteeing a minimum standard of living through a Job Guarantee while the private sector re-organises itself, or something more ambitious, like a green infrastructure project – but the point is: understanding how the system works gives you *all* the options.
So I hope you’ll get time to check out the show notes for this episode, where I’ve linked to some useful resources relating to all of the above, …
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So thanks as ever for the time you put into understanding MMT. Let’s dive in!
