HYPERINFLATION is among the worst catastrophes that can befall an economy. It can destroy output and destabilise societies. The hoarding of real assets, such as property and precious metals, wrecks business and financial investment in countries afflicted by it. Business costs soar, as wages and prices have to be increased on an hourly basis, reducing productivity. Foreign investment evaporates as the financial risks of doing business rise. The sudden redistribution of wealth from creditors to debtors can eat at civil society and discredit political institutions. John Maynard Keynes, as early as 1919, recognised the threat inflation posed to modern capitalist societies:

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency… [he] was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

The German public, it seems, is particularly fearful of letting inflation getting out of control. This is, in part, due to the legacy of the German hyperinflation of 1922-3. The mark-dollar exchange rate rose from 4.2 to one in 1914 to a peak of around 4.2 trillion marks to the dollar by November 1923. At its height, prices were rising so fast that waiters had to climb on tables to call out new menu prices in restaurants every half hour. Banknotes became sufficiently useless that workers had to bring wheelbarrows with them to work to collect their daily pay, and bundles were given to children to play with, being cheaper than actual toys (see picture).

Present discomfort within Germany with policies designed to reflate the euro-zone economy has been stoked by the assertion of a linkage between hyperinflation and the rise to power of the Nazis in the early-1930s. For example, in 2009, at the nadir of the global recession, Der Spiegel published a special issue focusing on the history of money, which explicitly linked the disaster of the early 1920s to Nazism.

It's no coincidence that Adolf Hitler's inexorable rise to power began in November 1923, the highpoint of Germany's inflation, when he organized the abortive Beer Hall Putsch in Munich. Catalan Germany correspondent Eugeni Xammar witnessed the spectacle at close quarters, having recently conducted an interview with "the future ex-dictator of Germany." In this interview Hitler claimed the high cost of living was Germany's biggest problem, promising "We intend to make life cheaper." To this end he demanded that shops—many of which were in Jewish hands—be brought under state control. And he stressed, "We expect all kinds of miracles of these national stores."

This narrative is often cited in explaining Germany's resistance to policies aimed at solving the euro-area crisis, such as quantitative easing or Eurobonds. Yet academics paint a very different picture of this period than the story occasionally related in the German press. The Nazi party did not become a popular political force until long after the hyperinflation period ended. The Nazis only won 32 Reichstag seats in the election of May 1924, and just 12 in 1928. As Paul Krugman has pointed out, “the 1923 hyperinflation didn’t bring Hitler to power; it was the Brüning deflation” of the early-1930s.

A study of hyperinflation published earlier this year by the British historian Frederick Taylor has confirmed that the Nazis benefitted much more from deflation than they did from rising prices. Although hyperinflation played a role in destabilising German politics and weakening its institutions in the 1920s, it was deflation and depression during the early-1930s that “brought the toxic plant into fruit” in the form of Nazism.

The hyperinflation of 1923 created winners and losers among the middle classes (those with mortgages or debts found some relief while those with savings lost them). Middle-class votes subsequently splintered between several different parties, such as the Economic Party of the German Middle Class.

Yet virtually all classes lost out when Brüning’s government reacted to a projected fiscal deficit and gold outflows in 1930 with deflationary policies. The resulting economic tailspin hurt most groups in German society. Unemployment surged among both the working and middle classes. Businessmen went bankrupt. Civil servants were either laid off or had their wages repeatedly slashed. Creditors lost their savings and debtors had their homes repossessed when the banking system collapsed in 1931. The experience of deflation made Hitler’s promises to conquer unemployment and stabilise prices by any means necessary attractive to a wide range of groups in German society, making it into a mass political movement across Germany for the first ever time in the early-1930s. The rest, as they say, is history.

Of course, other 20th-century events may have reinforced a German preference for even-keel macroeconomics. As Richard Evans of Cambridge University points out, much of the German public has attributed the rise of German prosperity over the last 65 years to economic and, importantly, price stability. This is in contrast to the instability of the years 1914-48, which included two world wars, two periods of high to rampant inflation, a Depression that left over a third of the workforce out of a job, and the virtual demolition of every German city by bombing by the end of the Second World War. Little wonder Konrad Adenauer won the 1957 German general election with a slogan of “no experiments”—a message with resounding similarity to what has been called Angela Merkel’s “trust in mother” campaign strategy earlier this year.

The question is the extent to which these lessons remain appropriate. Deflation is now a greater risk than inflation in Europe. The euro zone’s underlying or “core” inflation rate is now as low as just 0.8%: the lowest level in the short-life of the single currency. Britain and America, by contrast, have yet to suffer from destabilising levels of inflation because of reflationary policies like quantitative easing. Neither it is clear that the same set of policies that the German public credits for its economic and political stability will work in places like Greece or Italy, with very different structural contexts. A selective memory of the past may prove worse than no memory at all.

Suggested reading:

T. Balderston, (2002). Economics and Politics in the Weimar Republic. Cambridge: Cambridge University Press.

R. Evans, (2003). The Coming of the Third Reich. London: Allen Lane.

A. Fergusson, (1975). When Money Dies: The Nightmare of the Weimar Hyper-Inflation. London: William Kimber.

J. M. Keynes, (1919). The Economic Consequences of the Peace.London: Macmillan.

A. Tooze, (2006). The Wages of Destruction: The Making and Breaking of the Nazi Economy. London: Allen Lane.

F. Taylor, (2013). The Downfall of Money: Germany’s Hyperinflation and the Destruction of the Middle Class. London: Bloomsbury.