Are you afraid of inflation, Economist?

A chatting journey with social science and fine art / #2

P: Good morning, Economist.

E: Good morning, Photographer.

P: Are you afraid of inflation, Economist?

E: I’m not.

P: But things are getting more and more expensive. I had this cappuccino the other day. It was delicious. But it cost 4 euro.

E: Quality comes with a price.

P: The thing is, quality stays the same, but prices rise. Why is it so?

E: It‘s all in the news.

P: Heard about it. They say, the reason is the increased energy prices due to the Russian invasion in Ukraine. Right?

E: That‘s a main reason.

P: But listen, economist. If that were the reason, the prices would only have risen once. But price hikes have been there for quite a while now.

E: True. Among others it’s due to the wage-price spiral.

P: Sounds fun.

E: It isn‘t. People want the increased cost of living to be offset. Trade unions, therefore, push through high wage increases in wage negotiations. This makes the company's products more expensive again. Inflation continues. In the worst case, it always goes on like this. Prices go up, wages go up, prices go up again.

P: A vicious circle.

E: So to say.

[silence]

P: Are we heading for hyperinflation, economist? I read that this happened before in Germany, precisely 100 years ago.

E: Different times.

P: Back then, by late 1923, in Berlin, a loaf of bread cost 200,000,000,000 Marks. That scares me.

E: It shouldn‘t.

P: Why not?

E: Today, we have an independent central bank.

P: Long explanations aren't your thing, are they?

E: Germany had funded the First World War entirely by borrowing. The plan was to pay off the debt by winning the war and imposing war reparations on the defeated countries. You may know that this did not happen. It was precisely the opposite. After the war, Germany had high debts and had to pay reparations to the victors. To be more precisely, the new Weimar Republic had to pay 132 billion Goldmark which was 33 billion US-Dollar by exchange rates. What is important to know: The Goldmark was different from the Mark of Weimar Republic, that was later called Papiermark, paper mark. The Goldmark was the currency of the German Empire – it lasted from 1871 to 1918 – and was linked to gold, the so-called gold standard. That is a monetary system in which the whole amount of a currency is based on a fixed quantity of gold that the central bank possesses. The advantage of the gold standard: The money supply cannot be increased so easily. The value remains stable. The Papiermarkt hadn‘t that connection, it wasn‘t – as many say – a hard currency. The thing is that the reparations were required to be repaid in such a hard currency. So what Germany did ­– to be exactly, it was the strategy of Rudolf Havenstein, the president of the Reichsbank back then in 1921 ­– it printed money of the Papiermark to buy foreign hard currency.

P: Havenstein paid war reparations with foreign currency that was bought by mass printing banknotes.

E: Exactly. I didn‘t know that you can listen carefully.

P: I didn‘t know that you are able to tell something longer than one sentence.

E: The Havenstein strategy failed. By the autumn of 1922, the mark was practically worthless. That made it impossible for Germany to buy foreign exchange or gold. Germany could not pay France an instalment of reparations, and as a consequence, French and Belgian troops occupied the Ruhr valley.

P: Why the Ruhr valley?

E: It was Germany‘s central industrial region. France and Belgium wanted to be paid in goods, such as coal.

P: Did it work?

E: It didn’t. Not for both sides. The German government ordered a policy of passive resistance. The workers were told not to help the invaders in any way. Since that was a general strike, it led to no worker payments. So the government paid these workers by printing more and more banknotes. The country was swamped with paper money. People went shopping with wheelbarrows full of paper money.

P: How did it end?

E: A new currency was introduced. The so-called Rentenmark.

P: What‘s the difference?

E: The currency was linked to the price of gold again, like it was with the Goldmark in the German Empire. That means the central bank couldn't just print more money. And no more money was given to the government. On 30 August 1924, a monetary law permitted the exchange of a 1-trillion paper mark note for one unit of the new currency that was then called Reichsmark, replacing the Rentenmark. By 1924 one dollar was equivalent to 4.2 Reichsmark. Inflation has ended.

P: And why can't that happen today?

E: Because the European Central Bank in Frankfurt that provides the Euro is independent. Politicians cannot force the so-called ECB to print money, for example, to pay the very high debts of European countries. The main task of the central bankers is to keep the currency stable.

P: But that's not the case at the moment. The euro is losing value.

E: The central bank is doing something about it.

P: What?

E: It increases interest rates, that means that the price it costs to borrow euros from the central bank rises.

P: That leads to what?

E: That there is less money in circulation. Money is getting scarcer. That leads to less investments. The economy is cooling off. Prices go down.

P: I better believe you.

E: You better do.

[silence]

P: Hey, economist.

E: What?

P: I didn‘t know that you can be a chatterbox.

E: You don't know a lot.

[silence]

E: Hey, photographer.

P: What?

E: I like your photo.

P: It‘s not art.

E: I know. Maybe that‘s why I like it.

P: And I thought you were going to compliment me.

E: Wrong thought. But, hey, will you take me to this cafe?

P: I have to think about it.