Odd Lots - Zach Carter on the Real Story of Weimar Hyperinflation

Episode Date: April 15, 2021

Whenever the government is engaging in fiscal or monetary expansion, people like to invoke the history of Weimar Germany and how soon we might all go around transporting dollars in wheelbarrows. But what really happened with Weimar and how did it come about? On this episode, we speak with Zach Carter, the author of the best-selling book “The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes.” He explains how the story of collapse of the German currency was less about money printing and more about domestic political collapse and the destruction of the country's productive base.See omnystudio.com/listener for privacy information.

Thanks for listening to OddLots. Follow the show on Amazon Music for more future episodes or just ask Alexa play the podcast, OddLots on Amazon Music. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a very big. It's a very much. It's a lot. It's a firm. It's a lot. It's a commitment to your clients. We're talking top grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com slash audio.

That's vanguard.com slash audio. All investing is subject to risk vanguard marketing corporation Distributor. Hello and welcome to another episode of the Oddlots podcast. I'm Joe Wisenthal. And I'm Tracy Allaway. Tracy, you know, it's interesting having watched the aftermath of two separate crises now because you start to see similarities in the sort of stories that people tell after each one of them. Yeah, that's true. I also think it's really interesting to see how much opinions kind of change in retrospect. So I remember, for instance, after the 2008 financial crisis, people would get upset if you suggested that quantitative easing could have an impact on stocks. Like, if you actually said there was an asset substitution effect, people would think that you were crazy. I remember writing an Alphaville post on this at the time and getting a bunch of comments saying it was completely wrong.

And now, of course, the idea that QE pushes up stocks, you know, most people sort of accept that even if it may or may not be. True. But yeah, you're right. You were really ahead of the curve back then, I think. Oh, thank you. I'm just humble bragging. Like talking about asset substitution effects. But I also think, like, the dominant narrative, like, out there just in the sphere and the broad things is all this idea of, like, QE would inevitably lead to inflation. Yeah. Maybe even hyperinflation.

All this government spending. And obviously, we saw a lot of talk around that in 2010, and we see a lot of talk about it now. just this idea that government policies, particularly U.S. government policy is reckless and we're going to destroy the value of the dollar. Yeah. And to offset what I just said about that Alphaville post, I'm pretty sure I also wrote things on Alphaville about the coming hyperinflation, or at least I summarized a bunch of notes about that, you know, back in 2008, 2009. But you're right. That was sort of, well, it was the big concern after 2008. And we saw it kind of come back in, 2020 with the announcement of all this additional government spending, there are always concerns

that it's going to lead to inflation, even though we've now had, you know, over a decade of central banks missing their inflation targets. Right. So if you ever point out, it's like actually inflation isn't mild or whatever, you know, QE is probably, you know, doesn't have much of an inflationary impact or misunderstanding the deficit, what happens is if you say that, that gold bugs like yourself or silver bugs, you know, like your dad, respond with like memes of people pushing wheelbarrows of the Deutschmark during the Weimar hyperinflation and tell you why you're wrong. Let me tell you, Joe, if the inflation ever comes, I'm going to be stacking my silver and gold

in your face and you're going to be very, very jealous. Yeah. Look, I'm joking. You will definitely have the last laugh. But if we're going to like talk about, okay, the prospect of what happened with the YMarrar hyperinflation, seems like, okay. it's probably not going to happen. I don't think our existing policies are on that route. But maybe we should actually learn about what really happened beyond just the memes of people pushing wheelbarrows,

of cash. No, I totally agree. And I also think, you know, the Weimar Republic is sort of this scary story that everyone brings up when they're talking about inflation and people sort of throw the term or the name around. But actually not that many people know exactly what happens. happened, what drove it, and how bad inflation actually got during that period. So I think it's a great idea to dig into the details. Great. Well, I am very excited about today's episode. We are going to have a repeat guest. We talked to him back in the spring or summer. We're going to be speaking with Zach Carter. He is the author of the New York Times bestselling book, The Price of Peace, Money, Democracy, and the Life of John Maynard Cairns. Paperback coming out April 20th.

And there is a section in his book where he talks about the Weimar hyperinflation. So we thought we would dive into that and find out what really happened. So, Zach, thank you so much for coming back on Adlaught. Thanks so much for having me. Before we start, have you heard of this? I saw this on Wikipedia last night when I was doing my research. Zero stroke. Had you heard of that?

No. This is a thing. This is a thing. It's on Wikipedia, so it must be real. There was a mental disorder diagnosed by physicians. in Germany during the hyperinflation. I'm just reading the page. And the disorder was primarily characterized

by the desire of patience to write endless rows of zeros, which are referred to as ciphers. And this is actually, even John Kenneth Galbraith and his book about money talks about this. And there seems to be a few references. I guess it's real. It's kind of hard to believe.

But apparently there really was a mental affliction where people just wrote zeros on pages during the hyperinflation. I've read the Galbraith book on money. It's very good. I don't remember that particular episode. though. You know, this was a totally formative event for a lot of, a lot of economic thinkers who would go on to have an extraordinary degree of influence. Friedrich Hayek witnessed this from

Vienna and was just totally horrified and I think embarrassed by what happened after the war in Germany. And I think it shaped a lot of, you know, sort of what we now call neoliberal views about how the world works and what the great threats to the economy and democracy are. And obviously, we still talk about it today even when I think it's, you know, as you mentioned, I think it's totally inappropriate to be invoking, you know, the ViBire experience is something that we might have in the near future here. But it obviously animates our understanding of the economy even today. Well, shall we dive into it then and maybe start at the beginning?

Can you lay the scene for us of what exactly Germany and I guess the developed world order looked like going into this episode of hyperinflation? Yeah, I think, you know, when we talk about this today, there's obviously a kind of political lens that we see this through. You have gold bugs and, you know, inflation hawks who tend to be more conservative invoking this episode. and you have, you know, soft-hearted liberals in their soft money ways saying, don't worry about it. That wasn't really the way the politics of the time were playing out. There was a consensus after World War I that the reparations duties that had been assigned to Germany, which lost World War I, were too stringent, too severe, that they were unpayable, and they would result in economic turmoil for Europe and the world.

And the person who issued this critique most famously was John Maynard Keynes, which is why I wrote about my book. Keynes in the early 1920s is not this sort of, you know, hero of people like Paul Krugman and the kind of center-left and further political sphere. He's a very conventional establishment figure in the British government, and his critique is heralded by none other than Friedrich Hayek. So this idea is not something that is being harbored only by, you know, like left-wing socialists trying to, you know, bring about some sort of egalitarian millennium.

This is a very standard conventional view within Germany and across Europe. And the size of these duties is so large. By 1920, the Reparations Commission that's established after World War I says Germany's going to need to pay about $33 billion. German pre-war GDP is about $12.5 billion. So this is like triple the German annual output of the economy. It'd be like somebody saying today, you know, by the way, the United States, you've got to run your economy, you know, solve whatever problems you want, but you owe $70 trillion somewhere else. And it's got to be paid over the next, you know, several years. So these are huge, huge reparations figures that are looming over every decision that the German government is trying to make. And the German government from the end of the war really through into the 1930s is in a kind of perpetual state of revolution. The revolution. The revolution. just tend to fail. Communists like Rosa Luxembourg are murdered in the streets in 1919. Walter Rathenow,

who is the foreign minister, sort of the most important diplomat in the German government. He is murdered by far right terrorists in 1922. There is a communist uprising in Hamburg, I think, is the pronunciation in October 1923, which is just a few weeks ahead of Hitler's famous Beer Hall-Putch in November of 1923. So there's just an enormous amount of political turmoil happening right now. You have hundreds of political assassinations happening every year. They do not have conditions of political stability in Germany. And so the political coalition that is trying to govern is making choices with its budget to try and basically fend off some sort of violent takeover of the government. And it's spending a lot of money in order to do that. And this is creating

a very large budget deficit. So, Zach, before we go further into the German budget, I just want to sort of get the background a little bit more about how the size of the German war debt or the German reparations were established. And you mentioned $33 billion, multiple times the size of German GDP. What, where did this come from? What were the sort of like, talk a little bit about how this number was established, what was the dead sort of denominated in at that time? Because I think, obviously, that's an important thing. And so, like, you know, where did this, you know, the end of the war happens, and then they have this number that they owe, who do they owe it to and so forth? Right. So the answer is it's extremely complicated. Cain's issues his critique in a book called

The Economic Consequences of the Peace that comes out in 1919. And an interesting aspect of this critique is that it's enormously persuasive, but there actually hasn't been a formal reparations figure fixed by the conference. They've decided that there are going to be enormous economic duties on Germany, but the peace conference at the end of the war doesn't arrive at a final figure. It arrives at a set of principles that are going to guarantee a very, very high figure. But the actual formal number is kicked to a reparations commission, which is going to be sort of overseen by the League of nations, and they're going to spend the next year or two figuring out what this number will be. And that number comes down from what some of the calls are. I mean, there are calls for, you know,

$120 billion reparations duties at the Paris Peace Conference. And these numbers are just, they're just totally ludicrous. They're not arrived at by making any kind of serious attempt to calculate what Germany can afford to pay. You just have the victors of the war sitting down and deciding, okay, how can we come up with the largest number possible? Germany is responsible for this terrible war that has killed all these people. Now we have to make them pay. We'll come up with the biggest figure we can and then negotiate down as it becomes clear that this is not economically feasible. The result of this is that you have a series of efforts to renegotiate the actual German reparations duty over the course of the 1920s.

Every year or two, all of the major diplomats in Europe meet to try and move this figure down a little bit from wherever it was set the year before. And in fact, this happens right before the hyperinflation. The British intervene and say, look, this $33 billion figure is crazy. Let's say it's something about equal to the pre-war GDP level of $12.5 billion. But even this is a very large number for a country that is in the throes of revolution to be trying to meet. In terms of how it's paid, this is the sort of, you know, loose era of the gold standard. comes apart during World War I, but there is an understanding that the world is going to get back on gold.

So, you know, what is it denominated in? It's it's denominated in currencies that are expected to be fixed to gold at fixed exchange rates, but are not quite there yet. And so, you know, understanding the true value of these numbers becomes a little bit of, you know, a metaphysically uncertain endeavor. But there is a consensus and not just on the left here that the figure is too high. And that consensus has a sort of political significance that impacts the way currency traders, you have these sophisticated speculative currency markets that develop after the war because

the gold standard has been broken and these currencies are not fixed to a certain amount of gold. Traders and markets are relying on these kinds of political judgment. and opinions as they make their investments. Before the war, the market trade was fixed at about four to one to the dollar. By the end of the war, it's about 65 to one. So Germany has relied on a policy of deliberate inflation to finance its war machine. All of the governments did to some extent, but Germany was the most extreme. So, you know, the dollar has inflated quite a bit over the course of the war, too.

So 65 to 1 against the dollar is 65 to 1. against an inflated dollar. But by 1921, really, for whatever reason, the international community has come to a consensus that Germany is stabilized. And so the sort of wartime and post-war inflation that keeps going up and up and up plateaus. And you have for a few months and about six months in 1921, it looks like things are going to be, okay, there's about $2 billion in international investment that comes into Germany through what we would today call markets. And this is, it looks like things are going to be okay. But then over the course of 1921, you have a series of political developments which

cause all of that foreign investment to evaporate. And you start seeing the inflation take off again. The point I want to emphasize is that there are a lot of decisions that are made by the German government that you can criticize. is if you end up in a situation of hyperinflation, it's not because your finance ministers have done everything wonderfully. But they are in a very difficult predicament. And most of the problems that I think we associate with, most of the problems that are most

directly responsible for this hyperinflation are political problems that are reflected then in market confidence, not problems with, say, you know, the quantity of currency and circulation or the velocity of money or things like that. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real.

Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top-grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out,

go see the record for yourself at vanguard.com slash audio. That's vanguard.com slash audio, all investing in subject to risk vanguard marketing corporation distributor. So I'm really glad you brought up the political charm wall point, Because I think a lot of people tend to forget that Germany was absolutely terrified of communism in, you know, the late, well, in the 1920s. A lot of people think they just kind of went straight to Nazism or, you know, fascism. But actually, there was this huge, huge ideological debate that went on for years and a real tug of war in power. So how do you think that played out in terms of the government spending?

So they're running up a big deficit. A big chunk of that is going on reparations, which you just outlined very well. What else were they spending on? So it's what we would today call social welfare spending. In 1920 and 1921, Germany moves to an eight-hour workday. So people are working less than they had been. They start paying unemployment benefits to people who don't have jobs. and during the sort of heavy inflation era right after the war, 19, 1920, where all the countries

of the world are having heavy inflation, not hyperinflation, the unemployment rate is very high. So there's a lot of people who, you know, are having trouble paying their bills and making ends meet. And they're offering health care and food relief to the sick and the poor. And there are a lot of sick and poor people in Germany. The Allied blockade at the end of the war probably killed 400,000 people through starvation. and in the cities in particular in Germany and Austria, you have a lot of hunger and just very, very serious destitution in a way that I think people living in European cities today have trouble imagining.

So the material conditions are really quite severe and they are spending quite a bit of money on these things. But the government, which is sort of a center-left government, feels like it doesn't have a choice. It feels like its political coalition will fall apart if it doesn't find some way to materially support all of these citizens. The threat for most people is perceived as being from the left more so than from the right, I think, in the ruling elite at first. At Paris, people forget Keynes before he became this sort of hero for American liberalism. his chief ally at the Paris Peace Conference was the man named Herbert Hoover.

And Herbert Hoover, of course, would become sort of his betton noir in the Great Depression. But in 1919, they agreed that there was this terrible threat from both the left and the right of authoritarian violence if there wasn't some way to feed and clothe the people of Germany. That this sort of Soviet, Hoover was particularly worried about the Soviet. tide sweeping across Germany. Keynes was a little more worried about a right-wing tide, but there was a consensus that authoritarianism was coming if the sort of moderate liberal democracy couldn't prove that it worked with citizens in the streets. So they're paying a lot on these social welfare things, and they may be paying too much. I mean, the inflation that takes

over before things get really out of control by 1922, I think prices increased about 40 times. I mean, this is not, you know, a slight amount of inflation that we're talking about. But, you know, the coalition in Germany, you have very conservative members of the Reichstag, people like Hugo Stinstein. I get my German pronunciation mixed up. But this is like a coal baron who's saying, your lives are worth more than money. If we don't, if we, the only, the only choice we have for keeping this government together is to inflate the currency. We just, we can't, you know, we don't have the, the productive power right now after this war to, to make this happen with, you know, ordinary wealth. So, you know, we joked in the beginning about how every time there is a stimulus here, QE, whatever people invoke comparisons to why my hyperinflation.

But one difference, it sounds like, is, you know, we might get inflation here. I mean, there are many differences, but we might get inflation here as a potential cost of doing stimulus or whatever. It sounds like then it was not seen as a potential cost, but that was the deliberate strategy, that that was inflation was seen as the path out as opposed to perhaps an acceptable cost of something else we want to achieve, which is how people would probably characterize current U.S. macro policy. Yeah, I think in the current context, people who declare with absolute certainty what they think the consequences of running these multi-trillion dollar seamless programs are going to be. I think that certainty is difficult to take seriously. But the idea that there is a risk that's worth taking seems to be the assessment from people who are supportive of these packages. They're not saying, you know, we're certain to get double. digit inflation if we do this. So let's do it because double digit inflation is good and that's the

best outcome we can hope for. I think Rath and Al shortly before he was murdered, just a matter of hours, he's in this big meeting where they're talking about the budget. And he says, our economy is like a city that's surrounded by an army. And the only way out is to is to break through the line somehow. And it's going to be really costly. And we're going to lose a lot of soldiers if we break through this line. But it's the only chance we have. So that's how he feels. feels about the hyperinflation. This is not great, but it's what we've got. And if we don't do it, we're going to be destroyed. And, you know, maybe he was wrong, but the political judgment at the time, they don't have a whole lot of good options. And of course, Rathinau is literally

assassinated by right-wing death squads hours after making that comment. So the parallels, there just aren't a lot of parallels politically between what's happening in Yemar, Germany and any of the crises that we've seen, certainly in the United States and in the dead. decades since. But the devastation that results from the hyperinflation is so severe. I think people, thinkers from this time are scarred by it in ways that are hard to understand for people who didn't live through it. Can you talk a little bit about how class played into inflation? Because I'm sure people, you know, different segments of society and the political sphere had different opinions about this policy and inflation. You mentioned Hugo Stennis just then as someone who was

you know, sort of fighting for full employment. But, you know, it's also true he was a huge industrialist. And I think conglomerates did pretty well during an inflationary era. So some people have argued that he was basically just talking out of self-interest because if he got inflation, it would benefit him. So I'm just curious, like, how did the different segments of society feel about this policy? Like if you were going to look at the middle class, the upper class, and the lower class, can you segment it out? I don't know if class in Germany at this period of time translates as obviously to class in our own moment as I think we might intuitively want it to. I think your point there, though, that that someone like Dennis is

talking his own book is almost certainly true. It certainly is true. But I also think a lot of these people, you know, people have a tendency to believe things that benefit them, right? And it's the sentence is otherwise a conservative. So you do have these kind of conservative thinkers thinking this could be smart policy, even, you know, and good for me. If you look at the unemployment rate, though, during this kind of 40-fold increase in prices that happens in 1922. And here we are not talking about the hyperinflation with 40-fold increases in prices. I mean, this is an enormous, enormous inflationary period, but this is not anywhere near what's going to happen in 1923.

But over this 1922 period, wages are basically keeping pace with price increases. So people don't feel materially poor. The people who are really getting screwed are people who have large holdings of assets that are demarcated in the mark. And even then, if you can dump your marks for something else and, you know, if you can trade them for gold or other currencies, you can live pretty well. There's a remarkable phenomenon of foreigners living in Berlin at this period of time, where because the prices in Marx are just going totally crazy, if you have a lot of foreign currency, you can live like a total king if you're hanging out

in the Weimar world, which is just, you know, despite all the violence, a really culturally vibrant place. But the unemployment rate is for the first time in several years since the war has, basically come down to a reasonable level. You don't have the high joblessness in Germany during this period that you have, say, in Britain. Britain's basically having, suffering from double-digit unemployment from the end of the war to the outbreak of World War II. Same thing in France. So you have an inflationary problem that is hurting German investors. But for ordinary people trying to go to work, it's, it's kind of annoying to have to keep track of prices, but, but wages really are keeping a

pace and, and people are working. So it doesn't feel like a, uh, a material disaster in the moment. And I think that, that alleviates a lot of the political pressure to adopt a, you know, what we would consider a more sound or fiscally responsible budgetary position, because economically, it's, it, it, it seems to be working for most people. So this gets to, uh, and you talk about this in your book, like this early stages of, it. There is a lot of extreme inflation, but wages are roughly keeping track and also unemployment is low. So when does it become this sort of hyperinflation of legends, cash and wheelbarrows, words like numbers like quadrillion being thrown about? Like, when does that start to begin and why?

There's a very clear break that happens when the French government decides. to occupy the Rurr Valley. And this is territory, you know, the border between France and Germany. It is the industrial core of the German economy. It's where all of the mining and industrial wealth of Germany is. And under the Treaty of Versailles that ended World War I, if Germany fails to make its reparations payments on time, on schedule, then France will get the right to take over this territory. And Germany misses its reparations payments, even under the lower negotiated figures of the reparations commission and these further efforts from the British government to lower even the reparations commissions amount, the German government misses the payment and France essentially

invades. And when that happens, you have a total loss of international confidence in the mark. It happens very quickly. You start seeing the mark, instead of being 65 or 1, it starts being measured in millions against the dollar. And this continues in part because of the political situation, in part because of the German government's choice to finance a campaign of what they call passive resistance to the occupation, which basically means paying a lot of money to be. people who don't want to leave the rural valley because, you know, once the French troops arrive. So Germany had been running about a 750 million a year budget deficit that doubles to $1.5 billion a year. Again, a large deficit, but, you know, about 10% of pre-war GDP, a little more than 10%.

So not something completely ludicrous, but they are going deep. into the deficit territory than they already were. And, of course, they're having 40-fold price increases beforehand. So I don't think, when I say I don't think it's completely ludicrous. It's a very large deficit. But it's not like you can dollar for dollar see, oh, okay, this currency issue has led to this amount of inflation. There is a huge loss of confidence in the political project of Wymour, Germany.

and then there's no reason that the government is giving to have any confidence in their willingness to abate from inflationary policies as that collapse is happening. So the German government invades. The mark just immediately spirals out of control and it just goes into complete crazy, crazy land after this. I think they stop measuring when it gets to about a trillion to one sometime in 1924 marks to dollars. So it's a political collapse is what happens. And you have, of course, the Beer Hall Putsch from Hitler and Ludendorf, which is more famous than the uprising in Hamburg. But politically, the government is just wiped out and they have to essentially start over. I think one important factor here is that's not just one important factor, but an important factor here is the way that this

is viewed internationally. The hyperinflation is not in the moment viewed as just, merely an extreme act of recklessness by the German government. There is an immediate effort to renegotiate the Treaty of Versailles and lower the reparations, obligations to Germany when this happens. And the French invasion is viewed as politically illegitimate, not just within Germany, but by the Americans and by the British government. And that's really quite something because, of course, the Americans and the French and the British were allies during the war. They crafted the peace treaty. And France was really just abiding by the the terms of the treaty. Germany didn't make good on its reparations. And France said, okay, well,

we're going to go in. And all of France's allies abandon it and basically say Germany is in the right here. We've got to renegotiate this. And the renegotiations become known as the Young Plan. And it's officially performed by a couple of J.P. Morgan bankers, but they're really acting as sort of deputies for the U.S. foreign policy establishment. And this changes the way, that Germany is governed. And so the politics change and the currency can be stabilized. But first, you basically have to have a completely new international political regime and consensus that replaces the old one. And until that happens, Germany cannot be stabilized financially. So I have what might be a dumb question just before we get into, you know, what actually resolved

this inflationary episode. But during the worst of the price increases, how were people actually keeping track of prices? Because nowadays, if you think about inflation, we've got a bunch of indices, obviously, but also if the cost of your cup of coffee increased tenfold while you were drinking it, I think everyone would probably photograph their receipt and put it on social media and talk about it. And we'd have almost instantaneous knowledge that inflation was happening. But I can't really imagine what it was like back then. Like, how did people actually monitor, you know, how quickly prices for things were changing? They couldn't is the answer. I think over the course of 1922, you could. You could go into the grocery store one day and say,

okay, well, this is how much, you know, a bag of flour costs. So the next day you say, oh, it's even higher. It just, the money became, became worthless. And so you had, you had people, you had huge theft and looting problems where people just steal from stores and then go into, I would, sometimes referred to as flea markets, but you basically had barter in the streets where ordinary people trying to make ends meet were having to trade goods for goods instead of paying with wheelbarrows full of cash. I mean, workers were still being paid in these giant stacks of money, but you couldn't really do anything with them. I mean, you're talking about millions of marks to, you know, to pay for a sandwich or something at a diner. I mean, how do you get that stuff across the

counter? I mean, you just can't. So you do have this kind of funny wheelbarrow thing, but that's mostly workers taking their cash home from work that they then can't do anything with. The actual terms of commerce, commerce becomes a barter system and you have a total breakdown. Eating well shouldn't be complicated, but somehow it turns into recipes, prep, cleanup, and half your Sunday gone. Factors solves all that. These are fresh, ready-to-eat meals designed by dietitians, delivered to your door, and ready in just minutes. No prep, no cleanup, no excuses. And it's not just about convenience. You're getting real food, balanced nutrition, and zero artificial stuff.

Meals that help you stay on track for all of your goals without the grind of doing it all yourself. Grilled chicken, roasted veggies, steak plates, postables. They taste like something you get in a restaurant, but they come out of your microwave in two minutes flat. If time, cost, or effort have been holding you back from eating better, Factor just took those off the table. Right now, get 11 meals, free shipping, and free sides for life.

Hurry, this offer won't last long. Go to factormeels.com.ca and use code fit. That's 11 meals, free shipping and free size for life, but only with the code fit at facturemeals.ca. Factor, Canada's number one ready-to-eat meal delivery service. Life changes fast and one thing shouldn't, your storage price. At XYZ storage, lock in your rate for a full year with our industry-first locked-in pricing promotion. No surprises, no sudden increases, just secure, affordable storage you can count on. Whether you're storing a little or a lot, now's the time to make your move.

Visit XYZ Storage.ca. People who needs space. You know, I asked in the beginning if you had heard of a zero stroke and you said no, I don't even know. I'm like, I'm not totally convinced this is real. Like even though apparently it was written about it still seems kind of crazy. You can get why this was like such a, I mean, obviously such a scarring thing that it still dominates discourse till this day. And of course, we know the Germans to this day remain sort of like famous for their

commitment to more like a hard money approach. I mean, it was just, you know, complete societal devastation. Yes. And it was humiliating to people in Germany. I mean, the national pride was was complete. They just lost a war, which was, you know, people don't like to lose wars. And now they, they were sort of an international laughing stock. They couldn't even, they couldn't even run a monetary economy. And Germany had been prior to the war. you know, the, if not the industrial powerhouse of Europe, one of the two alongside Britain. It was, you know, a major rising superpower in world affairs. And suddenly it's just a complete, a complete mess. And, you know, you have people on the streets, you know, talking about exchange

rates and concerned with these things that have nothing to do with the course of ordinary life in a prosperous society. So, yeah, it's a, it's something that, you know, it's something that, I mean, Friedrich Huyck never forgets it. He carries this with him for the rest of his life. And it's not just, you know, the blow to national pride is not just on the right. It's not just people like Hitler. People like Hitler are able to rise to power because there is a widespread feeling of resentment and humiliation across German society.

It makes it very difficult for social democracy in its sort of more moderate. modes to sustain itself. So before we get to the legacy of Weimar hyperinflation, can we go through what exactly ended it or like how did it all come to a halt? Because it's not like the government just sat by waiting for this to pass. They did actively try to do things to mitigate it. And so did the international community, as you already mentioned, by, you know, looking at reparations and lowering them. So what worked and what didn't? It's an international fit. It's a international fix, and then there's essentially a wipe out of the currency and starting from scratch.

So the German government never stops its campaign of passive resistance. So it's $1.5 billion a year deficit is continuing. And the idea that the French occupation is illegitimate is held across the political spectrum in Germany. Nobody wants, no politician wants from any party wants to be. saying, you know, they don't support resistance to this unlawful thing that the French government has done, even though, of course, it's perfectly legal under international law. What happens is a new currency, but a new currency with a new political milieu, which is the Young Plan. And the Young Plan is

essentially a program of issuing large loans to France and Germany so that both France and Germany stop complaining about the terms of the treaty. The reason German reparations are so high during the war is partly just victor's sort of excess, but also because there's really serious damage that's been done, particularly in France. And so there's a very expensive project of rebuilding that needs to take place,

and the French economy has been damaged in such way that's hard to do with domestic capital. So getting money from Germany, helping France rebuild, having France then pay its war debts to Britain, United States. The United States ends up with all this money at the end. The obvious player to support Europe through this period is the United States. And so with the Young Plan, I think there's a $200 million loan to Germany and a $100 billion loan to France. And this matters not only financially because

Germany can then afford to start, you know, actually meeting obligations with money that isn't printed out of thin air. It matters symbolically because the United States has come in and said, okay, we get it, we need to support Europe here, and if we don't, everything will fall apart. And so this buys several years of relative economic stability in Europe. And you have this system where essentially the United States lends a lot of money to Germany through different channels. Germany pays some form of reparations duties to France and to Britain. And then Britain pays the war debts that it's accumulated over the course of 1913 to 193.

19 to the United States, which then has all this money, which it lends back to Germany. So this cycle of funds keeps going basically until you have financial crises that unwind it, and then you have the Great Depression. You have 20 years of economic dysfunction, but a relative period of stability here once the United States steps in and says, we're going to pay to keep Europe afloat. So in the folk history of Weimar, Germany, that gets told on the Internet through memes, it's like Germany printed a bunch of money and then that was really terrible and then the Nazis came to power because that was so terrible and doesn't sound like that is actually the correct sequence of things. When do in this sort of like the sequence of things, what are the conditions prior to, you know, sort of between the massive hyperinflation and then what you described and then the conditions that did in fact sort of precede the rise of the Nazis?

It's a long period of time. So it's hard to classify it as one particular thing. But, Hamar, Germany has its ups and downs like the rest of Europe over this period. But the second half of the 1920s is much more prosperous and much more stable than the first half. It is the financial turmoil of the early 1930s that really unwinds things. and brings the Nazis to power. In 1930, you have a huge run on a bank called Credit Onstalt in Vienna. And Credit Onstalt is a very large politically connected bank.

It's got people from all of the big European banking families on the board. It's not so much the size that matters by the sort of prestige of the institution. If this bank could fail, think about what this means for the Austrian economy. And on the gold standard, of course, if government spent too much they can run out of gold and their currency can be destroyed. And there's a fear that is sparked among investors when credit on Stalt fails in 1930 that the Austrian government is going to spend so much money supporting its banking system that they will no longer be able to support gold convertibility. And so people start dumping Austrian bonds and Austrian currency. You have a run on

the shilling. That quickly spreads to a run on the German mark because, of course, the economies of Germany and Austria are closely intertwined. So the idea that Austria won't be able to meet its obligations creates fears that Germany will support it and not be able to meet its obligations. And this eventually spreads to a run on the British pound for similar reasons. So the idea being that British foreign investment in Germany will make the British untowable. So you very quickly over the course of 1930 to 1931 have a total collapse of the entire international financial system in this sort of latter stage of the gold standard. By the 1930s, everybody's back on

gold. It's not working super well, but it hasn't been a disaster. But suddenly with this financial crisis, everybody's wrecked and the gold standard is gone. And you have a period of absolutely crushing deflation that takes over across all of Europe. There has been deflation for much of the 1920s, but it accelerates dramatically in 1930 and 1931 with the collapse of the European financials. system. This is also happening in the United States after the, the big precipitous event in the United States is the crash of the stock market in 1929, which most financial historians now, I think, accept is connected to the financial crisis of 1930, 1931 in Europe. But these events are basically doing away with the banking system's ability to meet the industrial demands of society.

And so you have terrible deflation that takes hold and massive, massive unemployment. And the period that we now know, we now think of as the Great Depression sets in. And that's where Hitler comes from economically. You know, there's all sorts of other cultural things happening in Germany. And anti-Semitism is obviously very well known. But the economic grounds, there is widespread misery in Germany at this period in time. But it's a different kind of, the misery is similar, but it's a different cause than in 1923. You've gone from hyperinflation in 1923 to very severe deflation in 1932.

So you've mentioned this a couple times already, but this idea that the whole episode had a really big impact on a lot of economists at the time. And these economists, of course, went on to have a really big impact on economics itself for, you know, decades to come. But can you walk us through the legacy of Weimar inflation? Like, how did it actually end up shaping and impacting economic thought and policy afterwards? I think it's a really complicated question because economics is always kind of moving by fits and starts in different directions at the same time. I think it causes a kind of crisis within the sort of liberal, broad, enlightenment liberal tradition that had not been anticipated ahead of the war. So people like Hayek and Keynes were very much sympathico in 1912, 1913. I think they had very similar views of the world. Hayek was enamored with the glories of the sort of pre-war Austrian Empire. Keynes is very taken with the glories of the British Empire, but they have very divergent reactions to what happens from 1923 onward.

They even agree with what is – they even agree with the problems with the Treaty of Versailles. But from the hyperinflation moment on, they take totally different interpretations of of what has gone wrong and what needs to be fixed. Keynes comes to believe that governments need to support their economies in order to prevent the kind of political chaos that has unfolded in Germany. And Hyatt comes to believe that it's this irresponsible spending of the German government on these social welfare programs, which invited the catastrophe to begin with. So they have totally opposite views of what the source of the hyperinflation was.

And, of course, data and things like this are nowhere near as precise as they are today. And even today, you know, the exact same set of data can spark to wildly divergent interpretations from people in economics. But both Hyac and Keynes have, I think, pretty compelling stories to tell about what went wrong. I mean, the German government did spend an enormous amount of money. It was on social welfare programs. And if you are inclined to believe that, you know, we live in a hard world and inequality is kind of a fact of nature, not a political choice, then it looks like the German government was reckless in doing things that were irresponsible. If you believe that the economic possibilities for our grandchildren, as Keynes once said, are quasi-utopian and that, in fact, the world is richer than it's ever been before and how. has the capacity to improve life for everyone in it, then I think it's easier to believe that

this was a, you know, a political disaster rather than an act of excessive kindheartedness. Within the sort of debates of the 1930s, Hayek has a lot of allies in the British sort of economic establishment. He's not really a famous guy in the 1930s. He becomes famous in the 1940s with a political book called The Road to Serfdom. But the real economic leader of this school of thought that we've come to associate with Hayek is a guy named Lionel Robbins, and he's at the London School of economics. And Robbins is someone who espouses views that I think we would today associate with with Milton Friedman or or or or or or or or or or or or or highick and he's constantly fighting with Keynes over over over

work spending and whether it's it's possible to create economic growth through public works or through budget deficits and within Britain by the end of the 1930s robins is basically recanted and said you know Keynes was right and this view that that we come we come to call neoliberalism is is is really consigned to a tiny, kind of quirky, oddball intellectual minority. And it's not until the 1970s that this school of thought becomes dominant again. And that's largely due to a lot of really impressive sort of social work that Hayek does, organizing people who see the world the way he does and helping them, you know,

write papers and write books and tell stories about how. the economy works that are similar to his own worldview. So one last thing, but I know we've talked a lot about whether or not this period of history has any relevance to the financial and economic system right now. But it and you've been quite clear that you don't really think it does. But is there anything that you think we have in common now with, this is a really dark question with the Weimar Republic? No, it's a good question, though.

I'm glad you asked them. Yeah. Financially, no, but politically, yeah, I do worry. It's one of the reasons why I wrote the biography of Keynes when I did. I felt like after the financial crisis, there's a difference between an economic crisis that's brought on by the quick collapse of a banking system and one that's brought on by, you know, a World War. So there are clearly differences. But I do think we live in a moment where we have authoritarian violence rising.

not only in the United States, but around the world, which makes it, and we're kind of reluctant to see the international dimension to that crisis. It plays out in the United States through the patterns of history that have been here. So the American version of it is different than the British version or the German version, but there's obviously a rising tide of authoritarian thought and authoritarian violence around the world right now. And the outbursts of violence in the United States are the sort of outbursts that, looking backwards, if something terrible happens, you would say, ah, that was clearly a precursor. I think the Capitol Hill riot on January 6th is an extremely, extremely dangerous event that most of us don't want to think about because the implications

of it as a sort of 21st century push event are really terrifying. But we, We do have a lot of right-wing resentment in the United States right now, and we are not unique to that. That was true in the 1920s and 30s, too. The rise of fascism in Germany was not an isolated event. It played out according to a set of historically contingent German proclivities in Germany, but you also saw it in Italy. You also saw it in France, in Spain.

and you saw less successful versions of it in France and the United States. I mean, when FDR came to power in 1932, there was an enormous amount of violence in American society. And it wasn't obvious that the political project was going to hold together. I hope that that's not where we're going, but I think it would be silly to pretend that there aren't some overtones of that era in our own time. I'm glad you asked that, Tracy, because I think that was a very important, very important answer. Zach Carter, thank you so much for coming back on Oddlock. Thanks so much for having me. And good luck with the release of the paperback.

Thank you so much. Thanks, Zach. That was great. Tracy, I actually thought your question at the end was the best there because I do think, like, setting aside the sort of Y-Mar question for a second. Like whenever I think about like, you know, what's worrisome or what could cause hyperinflation, I do think it's exactly sort of that and what he, what Zach pointed out, which is like, it's probably not going to come because, oh, we like, you know, spent some X amount of billions more than we should have. It seems much more likely to come because like something political just causes people to lose faith in the existing system. Yeah. I guess inflation is always and everywhere.

political problem, right? Yeah, I actually think that... No, I'm being serious. I know that sounds flippant, but I think there's a lot of truth to that. No, it's true. And I think also this idea that Zach was talking about that, you know, Germany didn't just go out and decide to run a massive deficit for the sake of it and to screw over all the people it owed money to in the form of reparations,

although that was, of course, part of it. But a big part of the government spending also came from these. social programs, which were targeted at, you know, achieving full employment, helping people live a better life, and also trying to make people happy to try to dampen down that political turmoil. Right. Yeah, like, it's really the entire combination. So the hard currency debt, the collapse, I mean, one of the things that people talk about is, like, to get true, like, inflation or hyperinflation, you need some sort of like supply side disruption. And so, of course, You had the war itself and then the French invasion after the debts weren't paid.

So that further diminished the German industrial capacity. You have the domestic political turmoil and Zach laid out all of the various assassinations and uprisings and things that were happening during this period. So it really was like a it was a unique stew of very bad things that happened that caused this episode. Yeah. But again, like the thing that comes through from that conversation is that it. inflation is a political choice sometimes, although it can spin out of control. Yeah, right.

Like the one thing it's not is just a function of, oh, we want to run expansionary fiscal policy. Like there could be like the political situation that forced Germany to have to choose between paying its external debts and domestic debts. Like there were aspects of that, but it's clearly not just a sort of like, you know, it's not a simple. It's not a policy. It's not a simple policy thing. On that note, shall we leave it there? Yeah, let's leave it there on that happy note. This has been another episode of the Odd Lots podcast.

I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway. And I'm Joe Wisenthall. You can follow me on Twitter at The Stallwork. Follow our guest, Zach Carter. He's at Zach D. Carter. And check out his book, The Price of Peace, Money, Democracy, and the Life of John Maynard Keynes, Paperback out April 20th.

Follow our producer, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levy, at Francesca Today. And check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening. Join Bloomberg in New York or via live stream on May 19th for building an AI future-ready business. This event will examine how organizations are moving beyond experimentation to scale agentic AI across the enterprise. By joining us, you'll hear from successful examples.

who are at the forefront of designing human plus agent operating models that are secure and outcome-driven. This event is proudly sponsored by Kindrel. Register at Bloomberg Live.com slash Future Ready. What separates good leaders from transformational ones? I'm Jessica Chen, and in season two of Leading By Example, we'll sit down with executives like Grace Chen of Bertie Gray to find out. It's important to understand where you spike, but also really acknowledge. where you don't and find people who can fill those gaps.

Listen to leading by example executives making an impact on the IHeart radio app, Apple podcast, or wherever you get your podcasts.