Inter-war
Germany may not be the place you would look first for advice on tackling tricky
financial issues, but on the other hand somebody did manage to move the country
from the situation where you needed a wheelbarrow to buy a loaf of bread to the
country that could afford to spend so much on arms that it could rapidly
conquer the whole continent. That man was Hjalmar Schact: he was not a magician
but rather a financial expert who was not in hock to financiers. That is a rare
commodity and one we are in desperate need of just now.
What a
coincidence, then, that I spent yesterday at a conference with Professor
Richard Werner of Southampton University. A modest, self-effacing man, he has
nonetheless managed to persuade the Telegraph's City
correspondent to suggest something like the Schact Plan to solve the
Eurozone crisis. The solution is simple: create enough money through
quantitative easing to buy back the bad assets. According to Hurley, Werner
then suggests that governments should stop selling bonds but rather 'fund
themselves through loan contracts from banks in their countries', which strikes
me as rather odd when the more obvious proposal would be simply to continue to
issue money as public credit.
What
Richard does not tell us is what backed up the creation of vast amounts of new
German money that Schact created. That is a point I covered in my book Market,
Schmarket back in 2006. I like this better now, because it reminds us of the
importance of land. Effectively, Schacht used the German land and its wealth as
collateral:
‘Once
confidence in a currency is so severely damaged the only feasible response is
to create a new currency, which was a process managed by the Finance Minister
Hjalmar Schacht. In November 1923 he created a new parallel currency called the
Rentenmark; to create confidence it
was backed by land, in this case the most solid asset of the German economy. The Rentenmarks allowed economic
transactions to take place within the economy, although they were not legal
tender, had no fixed relation to the Reichsmark
they replaced, and could not be used for international payments. This made the Rentenmarks speculation proof.
Bizarrely, much of the speculation against the currency that had destroyed it
had actually been funded by loans from German banks. In The Magic of Money Schacht explains
how the Reichsbank made loans to
support the speculation against the German currency. Thus the government, which
has always been blamed for economic mismanagement and for printing too much
paper money, was not primarily responsible for the inflation. By 1924 the Rentenmark and Reichsmark were being treated equally
and the Rentenmark could be
withdrawn. The lessons of the German hyperinflation are twofold: first, that
financial speculators’ only motive is to make profits and that they are
unconcerned about the social and political consequences of their speculative
activity; but, nonetheless, governments can use political power to control this
speculation if they wish, exposing the myth of powerlessness.’
It just so happens that we are looking for an
independent and skilful financial expert for a rather important job just now. I
have suggested to Richard that he put together an application for the top job
at the Bank of England. If he is agreeable we could start an interesting
campaign, especially as the man who invented quantitative easing has much stronger credentials than most of the current front-runners.
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