Covid Debt, Inflation, and the Weimar Republic
By Hugo Figueiredo, Third Year Economics
Inflation is back, and the economic consequences of lockdown are coming home to roost. In this piece, The Bristorian explores the cautionary tale of hyperinflation experienced by the Weimar Republic nearly 100 years ago and seeks to link it to the West’s current economic predicament.
In the first year of the pandemic, the UK government borrowed £300bn, the highest annual figure since records began in 1946. The government is expected to have borrowed a further £200bn by April this year. Significant drivers of this have been the furlough and Eat-Out-to-Help-Out schemes, lower VAT and income tax receipts, and an increase in welfare payments to those feeling the effects of unemployment.
Yet this figure is only the thin end of the wedge when it comes to the UK’s national debt, a figure which has accumulated to a staggering £2.2 trillion. Understandably, some may question why the government can’t just print money to ease the burden of debt.
To answer this, it’s important to understand that physical money itself has no intrinsic value, an inherent aspect of all fiat currencies. If you were stranded on a desert island, a ten-pound note would be unusable; it only has value because it represents wealth and allows us to trade with others. If a nation was to suddenly decide that its currency was worthless, it would be. So, when a government prints more, you may feel richer – but there are now more resources chasing the same amount of goods and services. As a shopkeeper, the logical thing to do is to raise your prices, your product is now facing a greater demand from new buyers who could not previously afford it.
This is called inflation and describes how banknotes can lose their value over time as more are created. We can take history’s most infamous hyperinflation horror story, the Weimar Republic, as a cautionary tale.
After Germany lost WW1, they were forced to sign the Treaty of Versailles. A war guilt clause blamed them for starting it and the allies demanded huge reparations to be paid in yearly instalments. These payments summed to 132bn gold marks, an equivalent of £250bn in today’s money. In November 1922, Germany failed to pay up.
In response, French & Belgian troops invaded the Ruhr, an industrial heartland on the Western border. They were ordered to confiscate German goods as they were being made. But the government fought back, paying workers to strike, and printed the money to finance it. Across the nation, this caused prices to spiral out of control.
A loaf of bread cost 250 marks in January 1923. This rose to 200bn marks in November, it cost more to print a note than the note itself was worth.[1]
The more money that the government printed, the more it became worthless. This meant that, when other countries exchanged their money for Reichsmarks, it had no value. As a result, imports to Germany fell and food shortages reached critical levels. Germany could not provide its people with the goods they needed for survival, and hyperinflation created a situation whereby prices rose almost hour by hour.[2]
Where this ties in with modern-day finance is through policies of quantitative easing (QE). Central banks, like the Bank of England, can now create new money electronically without resorting to firing up the printing press. Most of this goes towards buying up government bonds, a type of investment that injects cash into government budgets. Recipients promise to pay back the loan in the future, as well as yearly interest. When demand for anything increases, so does the value and so buying huge amounts of these bonds pushes their price up.
The interest rates on loans offered to businesses and individuals are impacted by the price of government bonds and if those bond prices go up, the rates on those loans should go down. This makes it easier for people to borrow and spend money, while stimulating the economy.[3]
It can be a useful tool for when economies are hit by recessions, with the UK first implementing QE in 2009 in response to the financial crisis. Now, in response to lockdowns and the pandemic, the policy has been taken to its extreme. From March to November 2020, the Bank of England published that it planned to buy £450bn of government bonds. To date, the total amount that the Bank owns is £875bn, around 40% of GDP.
But just like Weimar Germany, this could get out of hand. If QE is pursued too aggressively, inflation will spiral, a direct result of individuals buying goods and services that they could not have done before the injection into the money supply. The US increased its money supply by 35.7% between December 2019 & August 2021 – the largest increase in recorded history – conveying the looming threat to the purchasing power of working Americans.[4]
A graph charting the growth of the US’s money supply
(source linked in image)
The difference, currently, is that the UK and US are not experiencing the same level of socio-political dysfunction that existed across Europe post-WW1. Moreover, the specific set of circumstances in 1923 Germany are not the same as today’s, rendering similar scenes of extreme hyperinflation highly unlikely.
The UK’s inflationary spike from 0.7% to 5.4% between March & December 2021 is more likely to be a result of rising global energy prices, global supply chain fragilities and higher shipping costs than QE. It’s doubtful that QE has been a significant contributor to the inflationary spike. Rather, it has constituted a vital agent of monetary policy that has limited the recessional impact of repeated lockdowns. It’s long-term consequences, however, remain to be seen.
Whether electronically or physically, the increase of a nation’s money supply needs to be approached with extreme caution. In countries with stable financial institutions, one hopes that lessons have been learnt from the past; the inflationary calamity that befell the Weimar Republic must be avoided at all costs. With careful financial practice, QE can be an effective way of halting downward economic pressure. For good or ill, it is a policy that will have a large part to play in the post-pandemic economy.
The astronomical amounts of debt we have accumulated to mitigate lockdown’s catastrophic economic effects is being paid for through QE. Without it, it is hard to imagine how we would have been able to get through the curtailment of ‘non-essential’ business practise. It is however a policy that has radically increased the money-supply, lined the reserves of commercial banks like Goldman Sachs, and inflated a stock market that was already in need of a correction.[5]
Perhaps what is worth noting is that the world’s ten richest men have doubled their wealth from $700bn to $1.5 trillion since March 2020. Yet the general populace now sits in the middle of an unprecedented cost of living crisis that threatens to force millions into poverty; all within the timeframe of the largest increase in the money supply in recorded history. QE may have saved the economy from the consequences of lockdown, but it has simultaneously catalysed rising inequality into distinctly uncharted territory. Worth it?
Footnotes
[1] BBC, ‘The Weimar Republic 1918-1929’.
[2] Tutor2u, ‘The effects of hyperinflation in Germany 1923’.
[3] Ben King, ‘What is quantitative easing and how will it affect you?’ (2020).
[4] John Greenwood, ‘The Monetary Bathtub is Overflowing’, Wall Street Journal, (Oct 2021).
[5] Brent Schrotenboer, ‘’Printing’ money to help save the economy from the Covid-19 crisis’, USA Today (May 2020)