Many economists have a misunderstanding of what caused hyperinflation in the Weimar Republic. More importantly, many economists have overlooked the times when QE for People was used to successfully grow the German economy.
History has many examples of governments successfully growing their economies through state-led money creation. While none of these policies were called, “QE for People”, “Sovereign Money Creation”, or “Helicopter Money”, they shared the common trait of using newly created state money to finance government spending, rather than relying on commercial banks to create new money through lending.
The times when this state-led money creation has resulted in high inflation or even hyperinflation (inflation of over 50% a year) have been well documented. However, the times when governments have created money in a careful and responsible manner to grow the economy are usually ignored or overlooked. At Positive Money, we want to set the record straight and bring to light the many case studies where state-led money creation has successfully boosted the economy without leading to economic disaster.
In our previous posts on this topic, we showed that theory and analysis have been dispensed with at the expense of this widespread misconception. We showed that misleading conclusions have been drawn from the case studies of state-led money creation in Zimbabwe and the Weimar Republic. We also showed that QE for People happened in the places you least expect, the ancient Roman and Chinese empires and the former British colony of Pennsylvania and the island of Guernsey. In our most recent post, we looked at why Japan was so successful at thwarting the global recession of the 1930s.
Today we discuss state-led money creation in Germany in the earlier part of the 1930s. We approach all case studies from a scientific line of enquiry, so as to draw the relevant policy lessons for state-led money creation. Clearly, we do not support the actions of Nazi Germany. In reviewing the case study of Germany in the 1930s, we merely aim to demonstrate how state-led money creation was used to successfully grow the economy (before it was used to finance military expenditure).
It is rare to read an economic textbook discussing government money creation without seeing a reference made to the Weimar Republic and how hyperinflation wrecked the German economy. Interestingly, the Post-Weimar monetary system and how a bankrupt Germany (without any colonies to exploit) became Europe’s strongest economy in less than four years (before extensive military spending began) is often neglected in economic textbooks.
According to acclaimed authors such as Ellen Brown (2010) and Henry Liu (2005), when Adolf Hitler and the National Socialist party gained power, the German economy was in dire straits and external debt levels due to WWI were skyrocketing. The German people were forced, through the Treaty of Versailles, to make reparation payments amounting to approximately three times the value of all German property. The German economy was also still suffering from the 1929 global recession and the collapse in the German Mark in 1923 (which had all but destroyed the national currency, private sector savings and the economy as a whole).
The state of the economy meant there was little scope for both foreign investment and foreign lending. To kick-start an economic recovery the German state began issuing its own fiat money. The government’s newly created money would be used to fund a large-scale public infrastructure plan, which encompassed projects such as repairing and maintaining public buildings and existing public infrastructure, as well as building new roads and highways, bridges, canals, and harbours. The budget for the infrastructure programme did not exceed one billion units of the domestic currency. To pay for the programme, the government issued Treasury Certificates. Brown (2010) explains:
“One billion non-inflationary bills of exchange, called Labor Treasury Certificates, were then issued against this cost. Millions of people were put to work on these projects, and the workers were paid with the Treasury Certificates. The workers then spent the certificates on goods and services, creating more jobs for more people…They were not actually debt-free; they were issued as bonds, and the government paid interest on them. But they circulated as money and were renewable indefinitely, and they avoided the need to borrow from international lenders or to pay off international debts” (p. 230)
This sovereign credit creation programme leads Brown (2010) to suggest that in less than two years the German economy was up and running again. Whilst millions of people in the U.S. and other Western countries were out of work, in Germany the ‘unemployment problem had been largely solved’. Indeed, between January 1933 and July 1935 the number of people in employment increased from 11.7 million to 16.9 million. Moreover, the national currency had stabilised; there was no inflation and no new external debt obligations.
In just a few years, Germany went from one of Europe’s weakest economies to one of the world’s strongest. While eventually the money creating powers of the state were used for warfare, there is good reason to believe that the German economy was thriving before extensive resources were diverted towards military expenditure. Renowned economist Henry Liu writes:
“Yet through an independent monetary policy of sovereign credit and a full-employment public-works program, the Third Reich was able to turn a bankrupt Germany, stripped of overseas colonies it could exploit, into the strongest economy in Europe within four years, even before armament spending began. In fact, German economic recovery preceded and later enabled German rearmament…”
This is an important case study – it shows that QE for people can have a huge positive impact even on an economy that is in dire straits. Democratising money and banking is key to our proposed Sovereign Money system.
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