Taxes and Devaluation: Parallels Between Weimar & US

Below, a medal commemorating Germany’s 1923 hyperinflation. The engraving reads: “On 1st November 1923 1 pound of bread cost 3 billion, 1 pound of meat: 36 billion, 1 glass of beer: 4 billion.” Man, I hope that this is not a forecast of parallels between Weimar & US. I will have to move away from microbeers.

The hyperinflation in Weimar Germany is a textbook example of what the US very realistically could one day face. The situation in which the US finds itself is very much similar to that of Germany after World War I. It, after all, was considered by the international community and the League of Nations – which the US did not join due to jingoism more than anything – a threat and had to foot the bill for damages for the war. This means Germany would have to continue paying down debt for the most massive World War in history.

Most people do not make this connection. They see only the monetary parallels between the two countries. But, the empire-building projects of both countries are very much at the forefront of what brought inflation and hyperinflation about.  What if one day the international community came together and, in a fit of austerity and restructuring of the US by global institutions, made the US pay for the damages it has caused hundreds of countries worldwide? The US would only have to increase printing to pay the expenses amid an environment whereby no nation or business wanted its exchange unit, the US Dollar.

John Maynard Keynes saw it this way:  ”The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance.”

In other words, Germany did not properly take loans out from international bankers or tax its population enough to avoid the need to print.  The tax increases would have been monumental, and none of the parties were interested in wearing the slogan during campaigns. So, the many parties silently took the program of currency devaluation, until hyperinflation set in in 1923.  They were not sure the Republic could survive politically if it took that route. From that, one might infer Weimar was already broke.

After all, 26% of German exports had to be paid, on top of an annual 2 billion gold marks. The Republic had to produce 50 billion gold marks at 5% interest, of which 9 billion had already been paid by 1922. After that was paid, Germany had to pay 82 billion gold marks without interest.

In the crisis stages, particularly the end of June 1923, the Minister of Finance had the “bright” idea of keeping the rate of taxation on a par with that of depreciation of the currency.  This flew in the face of Adam Smith’s axiom that taxpayers must know in advance what they are going to have to pay.  During May of 1923, the income tax had been multiplied 25 times, and in August it was announced that, when payment was due, the multiplier would be 40.

Obviously, though, the government could never collect enough taxes to keep up with currency depreciation, but they tried to keep up! They didn’t know what else to do. Tax, devalue, Tax, devalue like a moving object stuck between two hard places.

We here in the US are about to see our fair share of tax increases, as highlighted by the “fiscal cliff” and what SV calls “Austerity 2013.”

Moreover, in the historiography, it is not an uncommon assertion that, although hyperinflation in Weimar ended in 1925 or so, it is responsible for the rise of the Nazi state. In the US, we too see the onset of a police state.

From Silver Doctors:

• Silver prices rose from 12 Deutsche Marks in January 1919, only months following the conclusion of the First World War, to 543,750,000,000 Deutsche marks by the end of 1923.
• Gold rose from 170 Deutsche Marks to 87,000,000,000,000 by the end of the same period.

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