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Krautsource #7 - The Big German Money Scare

Jannis Brühl
Jannis Brühl
Welcome to Krautsource Issue #7. If you know people who might be interested in subscribing, please ask them to sign up
In this issue, I want to explain what historian Frederick Taylor meant when he said: “You can not understand Germany, if you do not Germans’ fear of inflation.”

You might have noticed that your favorite things have gotten more expensive - your Gurke, your Wurst, and your fuel. The Benzinpreis is even close to its 2012 all-time high.
The country is seeing the highest inflation since the early Nineties when the Deutschmark was replacing the old “Ostmark” in former communist East Germany. And now, the man who is supposed to watch over German inflation has left the stage.
Jens Weidmann has been president of the Bundesbank, the German central bank, for a decade. On Wednesday, he announced that he would resign at the end of the year.
The central banking system in the Eurozone is something special: All national central banks are closely integrated with the European Central Bank (ECB) - where decisions are made on how high interest rates are going to be. As all presidents of the national central banks of the Eurozone, Weidmann is part of the ECB council where he has been a contrarian voice in the last few years. (I am not going to bore you with more details of the monetary policy system, as I am sure you have other plans for the weekend than passing out.)
Weidmann stated he left because of “personal reasons”, but a central banker would never admit that he had problems with the policy of his colleagues out of courtesy. It is known that Weidmann was unhappy because he believes his international colleagues in the ECB are playing with fire: He is an inflation hawk, meaning he would like to raise interest rates to keep inflation - that is: the price of your Wurst - under control, while inflation “doves” want to keep using cheap money to support the economy. For this, they accept higher inflation risks.
Which camp is right will bee seen in the next months. Part of the rise in prices in Germany has been due to the expiration of an important government measure to help the economy during the pandemic: On January 1, the lowered German sales tax jumped back to its normal level. Also, the spike in energy prices comes after prices were crashing in 2020 due to the lockdowns, when the world needed less energy.
It is no coincidence that it is the German banker who breaks with the ECB consensus. German fears when it comes to money run much deeper than in other Western countries.
The origin of this trauma lies in the first German Democracy, which started with the crisis of hyperinflation in 1919 and only ended in 1923 with the introduction of a new currency.
In 1919, Germany had just lost a war, and later the country’s Western industrial area had been occupied by the French army, which prompted workers in the region to strike. The government printed money to support them, and to pay off the war’s winning countries with reparations (those were only two reasons among many). The inflation rate rose and rose, and then rose again, until one US-Dollar was worth more than 4 trillion Mark. Pockets, suitcases, the whole society was flodded with paper money, but those bills became less useful by the minute.
You can read an interesting account of what it was like to live through those crazy times here:
Then there was the man who drank two cups of coffee at 5,000 marks each, only to be presented with a bill for 14,000. When he asked why this was he was told he should have ordered the coffees at the same time because the price had gone up in between. And then there’s the story about the couple that took a few hundred million marks to the theater box office hoping to see a show, but discovered it wasn’t nearly enough. Tickets were now a billion marks each.
No Western country has seen this kind of inflation since. (But in Venezuela and Zimbabwe you could watch the catastrophe of hyperinflation unfold in the 21st century.)
From hyperinflation to Hitler?
But is the crisis today comparable to the chaos after World War I, as those warning of uncontrollable inflation suggest? Hyperinflation, by definition, starts at 50 percent. We are now at 4.1 percent. Also, central banks back then did not have as much experience and data as they have today, and did not coordinate among themselves.
It is important to note that while hyperinflation might have weakened the belief of many Germany in the new democracy, it was not directly responsible for Hitlers rise to power. That happened a decade later, and only after the world economic crisis of the early thirties, which had nothing to do with earlier hyperinflation. It was, in fact, a deflationary period. In 1928, in the first election after hyperinflation in which the Nazis were up for election, they won only 2.6 percent of the vote.
Still, the mythical, dystopian story of German hyperinflation survived the World War II. Historian Carl-Ludwig Holtfrerich argues that in the years after the war, the argument of looming inflation was used as a bogeyman to keep prices in Germany low - in order to export more goods and create new prosperity after the war.
This thinking is also why you will find a lot of goldbugs in Germany: people who have an almost religious belief in gold as the best investment and protection against inflation. Even though it has long been debunked that gold is a superior investment compared to other asset classes, many peoples’ belief in it is unshakeable. (I once spent an evening with a friend in a German bar sitting next to a dating couple. The guy spent the whole night mansplaining to the woman how the ECB wants to steal our money and she should put all her money in gold. I felt so sorry for her that I ordered another drink for myself.)
Deutschmark Pride
After World War II, militarism, jingoism and other aggressive displays of national pride were taboo in Germany (see my last issue). But the new Deutschmark was a good substitute. Because Weidmanns predecessors at the Bundesbank did not print money in excess to satisfy the spending habits of politicians (that is at least how these Bundesbankers surely saw it), the German currency stayed “hard”.
Germans were proud of their currency. The Mark became the symbol of the country’s post-war prosperity. There is some truth to the stereotype of the 1980s or 1990s German tourist in Italy or Turkey boasting about how “weak” the local currency is and how much food, drink and local kitsch he can afford with a handful of his superior Deutschmark.
This is why the introduction of the Euro, while being pushed by German political elites like chancellor Helmut Kohl, was met with scepticism by some Germans. Why take away what had worked so well since the war? To this day, you can hear the theory of a “Teuro”(teuer meaning expensive): that under the cover of the new currency, things have gotten much more expensive. The theory has been mostly debunked.
Still, the Euro became a target for political attacks: The nationalist AfD, now infamous for its xenophobic rhetoric, was actually founded as a party of “Euro sceptics”. They aggressively campaigned against the ECB supporting debt-ridden Southern European countries like Greece and Italy, and picked up votes of people nostalgic about the Deutschmark. This summer, the party started pushing the “inflation is coming back and it is dangerous for your wealth” line again.
Politics and the fuel price
Speaking of politics: If SPD, Greens and FDP are going to form a government (negotiations should be finished until December), they will be facing calls to depress prices - for example by lowering the taxes on fuel. But that demand seems bizarre to me. First of all, the increase is mostly due to skyrocketing market prices. Economies worldwide are restarting, and the oil producing countries are not pumping up what the world needs. Therefore, the German government can only influence a small part of the price via the energy tax.
But even if the liberal and “low-tax” FDP as part of the future government might be tempted to lower that tax, there is a dilemma: All three parties have promised to put the fight against climate change on top of the new governments’ agenda. And this of course includes high prices for fossil fuel. Driving a fuel car is supposed to become more expensive and thus unattractive. So expect no help at the pump from SPD and Greens, the two bigger parties in the most likely future coalition government, who have committed to steering the economy towards sustainability.
In addition, the government has an additional interest in low interest rates, which in turn might keep inflation high: Without cheap money, leading the German economy towards climate neutrality might become very hard. Those negotiating Germany’s future know: The new world will be an expensive one.
Source: Gipsmuseum Walkenried. (CC BY-ND 2.0 - https://creativecommons.org/licenses/by-nd/2.0/)
Source: Gipsmuseum Walkenried. (CC BY-ND 2.0 - https://creativecommons.org/licenses/by-nd/2.0/)
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Jannis Brühl
Jannis Brühl @jbruehl

This is my newsletter about German politics and history for an international audience. Why stay national and not take journalism to the global stage? Expect a lot of Realpolitik, plenty of Zeitgeist and maybe even some Schadenfreude.

I have been a journalist for more than a decade, working in New York City, Berlin and Cologne, and now head the technology news team at a major German media house in Munich. I hold a Masters degree in Political Science and American Cultural Studies. And I like rap music.

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