Some worried
commentators are predicting a massive hyperinflation of the sort
suffered by Weimar Germany in 1923, when a wheelbarrow full of paper
money could barely buy a loaf of bread. An April 29 editorial in the
San Francisco Examiner warned:

"With
an unprecedented deficit thats approaching $2 trillion, [the
Presidents 2010] budget proposal is a surefire prescription for
hyperinflation. So every senator and representative who votes for this
monster $3.6 trillion budget will be endorsing a spending spree that
could very well turn America into the next Weimar Republic."¹

In an investment newsletter called Money Morning
on April 9, Martin Hutchinson pointed to disturbing parallels between
current government monetary policy and Weimar Germanys, when 50% of
government spending was being funded by seigniorage – merely printing money.² However, there is something puzzling in his data. He indicates that the British government is already
funding more of its budget by seigniorage than Weimar Germany did at
the height of its massive hyperinflation; yet the pound is still
holding its own, under circumstances said to have caused the complete
destruction of the German mark. Something else must have been
responsible for the marks collapse besides mere money-printing to meet
the governments budget, but what? And are we threatened by the same
risk today? Lets take a closer look at the data. HISTORY REPEATS ITSELF — OR DOES IT?

In
his well-researched article, Hutchinson notes that Weimar Germany had
been suffering from inflation ever since World War I; but it was in the
two year period between 1921 and 1923 that the true "Weimar
hyperinflation" occurred. By the time it had ended in November 1923,
the mark was worth only one-trillionth of what it had been worth back in 1914. Hutchinson goes on:

"The
current policy mix reflects those of Germany during the period between
1919 and 1923. The Weimar government was unwilling to raise taxes to
fund post-war reconstruction and war-reparations payments, and so it
ran large budget deficits. It kept interest rates far below inflation,
expanding money supply rapidly and raising 50% of government spending
through seigniorage (printing money and living off the profits from
issuing it). . . .

"The
really chilling parallel is that the United States, Britain and Japan
have now taken to funding their budget deficits through seigniorage. In
the United States, the Fed is buying $300 billion worth of U.S.
Treasury bonds (T-bonds) over a six-month period, a rate of $600
billion per annum, 15% of federal spending of $4 trillion. In Britain,
the Bank of England (BOE) is buying 75 billion pounds of gilts [the
British equivalent of U.S. Treasury bonds] over three months. Thats
300 billion pounds per annum, 65% of British government spending of 454
billion pounds. Thus, while the United States is approaching Weimar
German policy (50% of spending) quite rapidly, Britain has already
overtaken it!"

And
that is where the data gets confusing. If Britain is already meeting a
larger percentage of its budget deficit by seigniorage than Germany did
at the height of its hyperinflation, why is the pound now
worth about as much on foreign exchange markets as it was nine years
ago, under circumstances said to have driven the mark to a trillionth
of its former value in the same period, and most of this in only two
years? Meanwhile, the U.S. dollar has actually gotten stronger
relative to other currencies since the policy was begun last year of
massive "quantitative easing" (todays euphemism for seigniorage).³
Central banks rather than governments are now doing the printing, but
the effect on the money supply should be the same as in the government
money-printing schemes of old. The government debt bought by the
central banks is never actually paid off but is just rolled over from
year to year; and once the new money is in the money supply, it stays
there, diluting the value of the currency. So why haven’t our
currencies already collapsed to a trillionth of their former value, as
happened in Weimar Germany? Indeed, if it were a simple question of
supply and demand, a government would have to print a trillion times
its earlier money supply to drop its currency by a factor of a
trillion; and even the German government isn’t charged with having done
that. Something else must have been going on in the Weimar Republic,
but what?

SCHACHT LETS THE CAT OUT OF THE BAG

Light
is thrown on this mystery by the later writings of Hjalmar Schacht, the
currency commissioner for the Weimar Republic. The facts are explored
at length in The Lost Science of Money by Stephen Zarlenga, who writes that in Schachts 1967 book The Magic of Money,
he "let the cat out of the bag, writing in German, with some truly
remarkable admissions that shatter the ‘accepted wisdomthe financial
community has promulgated on the German hyperinflation." What
actually drove the wartime inflation into hyperinflation, said Schacht,
was speculation by foreign investors, who would bet on the marks
decreasing value by selling it short.

Short selling
is a technique used by investors to try to profit from an assets
falling price. It involves borrowing the asset and selling it, with the
understanding that the asset must later be bought back and returned to
the original owner. The speculator is gambling that the price will have
dropped in the meantime and he can pocket the difference. Short selling
of the German mark was made possible because private banks made massive
amounts of currency available for borrowing, marks that were created on
demand and lent to investors, returning a profitable interest to the
banks.

At
first, the speculation was fed by the Reichsbank (the German central
bank), which had recently been privatized. But when the Reichsbank
could no longer keep up with the voracious demand for marks, other
private banks were allowed to create them out of nothing and lend them
at interest as well.⁴

A STORY WITH AN IRONIC TWIST

If
Schacht is to be believed, not only did the government not cause the
hyperinflation but it was the government that got the situation under
control. The Reichsbank was put under strict regulation, and prompt
corrective measures were taken to eliminate foreign speculation by
eliminating easy access to loans of bank-created money.

More
interesting is a little-known sequel to this tale. What allowed Germany
to get back on its feet in the 1930s was the very thing todays
commentators are blaming for bringing it down in the 1920s – money issued by seigniorage by the government. Economist Henry C. K. Liu calls this form of financing "sovereign credit." He writes of Germanys remarkable transformation:

"The
Nazis came to power in Germany in 1933, at a time when its economy was
in total collapse, with ruinous war-reparation obligations and zero
prospects for foreign investment or credit. 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."⁵

While
Hitler clearly deserves the opprobrium heaped on him for his later
atrocities, he was enormously popular with his own people, at least for
a time. This was evidently because he rescued Germany from the throes
of a worldwide depression – and he did it through a plan of public
works paid for with currency generated by the government itself.
Projects were first earmarked for funding, including flood control,
repair of public buildings and private residences, and construction of
new buildings, roads, bridges, canals, and port facilities. The
projected cost of the various programs was fixed at one billion units
of the national currency. 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. These certificates were not actually debt-free but were
issued as bonds, and the government paid interest on them to the
bearers. But the certificates circulated as money and were renewable
indefinitely, making them a de facto currency; and they avoided the need to borrow from international lenders or to pay off international debts.⁶
The Treasury Certificates did not trade on foreign currency markets, so
they were beyond the reach of the currency speculators. They could not
be sold short because there was no one to sell them to, so they
retained their value.

Within
two years, Germanys unemployment problem had been solved and the
country was back on its feet. It had a solid, stable currency, and no inflation,
at a time when millions of people in the United States and other
Western countries were still out of work and living on welfare.
 Germany even managed to restore foreign trade, although it was denied
foreign credit and was faced with an economic boycott abroad. It did
this by using a barter system: equipment and commodities were exchanged
directly with other countries, circumventing the international banks.
This system of direct exchange occurred without debt and without trade
deficits. Although Germanys economic experiment was short-lived, it
left some lasting monuments to its success, including the famous
Autobahn, the worlds first extensive superhighway.⁷

THE LESSONS OF HISTORY: NOT ALWAYS WHAT THEY SEEM

Germanys
scheme for escaping its crippling debt and reinvigorating a moribund
economy was clever, but it was not actually original with the Germans.
The notion that a government could fund itself by printing and
delivering paper receipts for goods and services received was first
devised by the American colonists. Benjamin Franklin credited the
remarkable growth and abundance in the colonies, at a time when English
workers were suffering the impoverished conditions of the Industrial
Revolution, to the colonistsunique system of government-issued money.
In the nineteenth century, Senator Henry Clay called this the "American
system," distinguishing it from the "British system" of
privately-issued paper banknotes. After the American Revolution, the
American system was replaced in the U.S. with banker-created money; but
government-issued money was revived during the Civil War, when Abraham
Lincoln funded his government with U.S. Notes or "Greenbacks" issued by
the Treasury.

The
dramatic difference in the results of Germanys two money-printing
experiments was a direct result of the uses to which the money was put.
Price inflation results when "demand" (money) increases more than
"supply" (goods and services), driving prices up; and in the experiment
of the 1930s, new money was created for the purpose of funding
productivity, so supply and demand increased together and prices
remained stable. Hitler said, "For every mark issued, we required the
equivalent of a marks worth of work done, or goods produced." In the
hyperinflationary disaster of 1923, on the other hand, money was
printed merely to pay off speculators, causing demand to shoot up while
supply remained fixed. The result was not just inflation but
hyperinflation, since the speculation went wild, triggering rampant
tulip-bubble-style mania and panic.

This
was also true in Zimbabwe, a dramatic contemporary example of runaway
inflation. The crisis dated back to 2001, when Zimbabwe defaulted on
its loans and the IMF refused to make the usual accommodations,
including refinancing and loan forgiveness. Apparently, the IMFs
intention was to punish the country for political policies of which it
disapproved, including land reform measures that involved reclaiming
the lands of wealthy landowners. Zimbabwes credit was ruined and it
could not get loans elsewhere, so the government resorted to issuing
its own national currency and using the money to buy U.S. dollars on
the foreign-exchange market. These dollars were then used to pay the
IMF and regain the countrys credit rating.⁸ According to a
statement by the Zimbabwe central bank, the hyperinflation was caused
by speculators who manipulated the foreign-exchange market, charging
exorbitant rates for U.S. dollars, causing a drastic devaluation of the
Zimbabwe currency.

The
governments real mistake, however, may have been in playing the IMFs
game at all. Rather than using its national currency to buy foreign
fiat money to pay foreign lenders, it could have followed the lead of
Abraham Lincoln and the American colonists and issued its own currency
to pay for the production of goods and services for its own people.
Inflation would then have been avoided, because supply would have kept
up with demand; and the currency would have served the local economy
rather than being siphoned off by speculators.

THE REAL WEIMAR THREAT AND HOW IT CAN BE AVOIDED

Is
the United States, then, out of the hyperinflationary woods with its
"quantitative easing" scheme? Maybe, maybe not. To the extent that the
newly-created money will be used for real economic development and
growth, funding by seigniorage is not likely to inflate prices, because
supply and demand will rise together. Using quantitative easing to fund
infrastructure and other productive projects, as in President Obamas
stimulus package, could invigorate the economy as promised, producing
the sort of abundance reported by Benjamin Franklin in Americas
flourishing early years.

There
is, however, something else going on today that is disturbingly similar
to what triggered the 1923 hyperinflation. As in Weimar Germany, money
creation in the U.S. is now being undertaken by a privately-owned
central bank, the Federal Reserve; and it is largely being done to
settle speculative bets on the books of private banks, without
producing anything of value to the economy. As gold investor James
Sinclair warned nearly two years ago:

"[T]he
real problem is a trembling $20 trillion mountain of over the counter
credit and default derivatives. Think deeply about the Weimar Republic
case study because every day it looks more and more like a repeat in
cause and effect . . . ."⁹

The
$12.9 billion in bailout funds funneled through AIG to pay Goldman
Sachs for its highly speculative credit default swaps is just one
egregious example.¹⁰ To the extent that the money generated
by "quantitative easing" is being sucked into the black hole of paying
off these speculative derivative bets, we could indeed be on the Weimar
road and there is real cause for alarm. We have been led to believe
that we must prop up a zombie Wall Street banking behemoth because
without it we would have no credit system, but that is not true. There
is another viable alternative, and it may prove to be our only
viable alternative. We can beat Wall Street at its own game, by forming
publicly-owned banks that issue the full faith and credit of the United
States not for private speculative profit but as a public service, for
the benefit of the United States and its people.¹¹

Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt,
her latest book, she turns those skills to an analysis of the Federal
Reserve and "the money trust." She shows how this private cartel has
usurped the power to create money from the people themselves, and how
we the people can get it back. Her earlier books focused on the
pharmaceutical cartel that gets its power from "the money trust." Her
eleven books include Forbidden Medicine, Natures Pharmacy (co-authored with Dr. Lynne Walker), and The Key to Ultimate Health (co-authored with Dr. Richard Hansen). Her websites are www.webofdebt.com and www.ellenbrown.com.

1. "Examiner Editorial: Get Ready for Obamas Coming Hyperinflation," San Francisco Examiner, April 29, 2009.
    
2. Martin Hutchinson, "Is It 1932 – or 1923?", Money Morning (April 9, 2009).
3. See Monthly Average Graphs, x-rate.com.
    
4. Stephen Zarlenga, The Lost Science of Money
   (Valatie, New York: American Monetary Institute, 2002), pages 590-600;
   S. Zarlenga, "Germanys 1923 Hyperinflation: A ‘PrivateAffair," Barnes Review (July-August 1999).
    
5. Henry C. K. Liu, "Nazism and the German Economic Miracle," Asia Times (May 24, 2005).
    
6. S. Zarlenga, op. cit.
    
7. Matt Koehl, "The Good Society?", Rense (January 13, 2005).
    
8. "Bags of Bricks: Zimbabweans Get New Money – for What Its Worth," The Economist (August 24, 2006); Thomas Homes, "IMF Contributes to Zimbabwes Hyperinflation," www.newzimbabwe.com (March 5, 2006).
    
9. Jim Sinclair, "Fed Actions a Bandaid on a Gaping Economic Wound," reprinted in Go for Gold, September 18, 2007.
    
10. Eliot Spitzer, "The Real AIG Scandal, Continued! The Transfer of $12.9 Billion from AIG to Goldman Looks Fishier and Fishier," Slate (March 22, 2009).
     
11. See Ellen Brown, "Cash Starved States Need to Play the Banking Game," webofdebt.com/articles (March 2, 2009).