german hyperinflation and the price revolution

central bank printing is a popular topic of concern among crypto people for obvious reason. but when they go looking for past examples in history they tend to fixate on hyperinflation in weimar germany. its recent and evocative and some uhh very famously bad things happened later on!

but i think this is a bad comparison to draw because the circumstances in the usa in the 2020s are nothing like those in germany in the 1920s. first ill explain why. then ill draw (i think) a better comparison earlier in history that people are less familiar with. and finally come up with some lessons we can take away from it

* * *

german hyperinflation

the most important thing to understand about german hyperinflation is that its the story of a militarily and economically weak nation destroying its money in a desperate bid to get better money

the causes of wwi are complex and a full treatment isnt necessary. the handwavey explanation is imperialism and autarky. germany wanted more land and more resources so it could compete on the same level with the vast empires of its day

that is to say, money put into the war was essentially an investment. germany depegged the mark from gold and borrowed heavily to finance their war effort. they expected to win, impose an indemnity on the vanquished, and use this money plus the surplus from new growth regions to repay their debts

but then they lost (oops)

all western front fighting took place outside german territory, so german industry was basically intact. the allied powers imposed massive war reparations on them for their aggression and the destruction they caused. they also demanded germany dismantle what military strength they had remaining. part of this was just deserts, part (especially for france) was revenge, and part was to cripple germanys ability to retaliate

the point im trying to stress is despite retaining substantial industrial capacity, germany was made weak and defenseless. germany was forced to turn over a lot of its current account to the allies. if they refused or defaulted, the allies would forcibly occupy their industrial heartland and extract payment in kind, by force. and there was nothing they could do to resist this

the allies demanded payment in hard currency. so germany, with no other real options, resorted to printing. they created large quantities of papiermarks backed by nothing and exchanged them for foreign money that the allies would accept as payment

this led to the now obvious vicious cycle. purchasing power of the mark worsened, so more marks were required to buy the same amount of foreign currency. so printing accelerated to keep pace and made the problem even worse

eventually german marks became totally worthless. this is the point you hear all the crazy stories about wheelbarrows of bills. workers buying groceries on their break because they wouldnt be able to afford them if they waited until the end of their shift. people burning cash to heat their homes. etc

the german economy was in shambles and they defaulted on their war indemnity. france occupied the ruhr valley and germany ordered its workers there to go on strike. domestically and internationally it was a disaster for everyone involved. the reichsbank attempted to square a circle to avoid choosing between unemployment and insolvency, and in the end they got both

germany dug itself out of its hole by establishing a new currency, the rentenmark, indexed to the price of gold bonds. it also created a new bank to issue these marks and hold the mortgage reserves that backed them. printing of paper marks ceased, a new reichsmark was issued tied to the rentenmark, and public confidence in the currency was restored

around the same time, the united states stepped in to restructure german war reparations and loaned them substantial sums to rebuild their economy. germany also redenominated all domestic debts that had been inflated to zero, albeit at a fraction of their nominal value. this was the beginning of an economic boom in weimar germany, comparable to the american roaring 20s, which likewise ended with the great depression

some points

one, its a matter of debate whether germany even understood what they were doing with their money. german monetary policy was heavily influenced by chartalism, the idea that money is necessarily a creature of the state, backed by its ability to levy taxes. its entirely plausible they thought they could just do this with no ill effects. for all criticism of the fed, they do at least understand theyre walking a tightrope here

two, the usd is the world reserve currency. the papiermark wasnt shit. this status could change, and its certainly not a license for the fed to do whatever they want. its likely in coming decades countries will be looking to hold some blend of national currencies precious metals and possibly crypto assets. but the usd is not getting replaced overnight and unsound monetary policy in the us has ripple effects through the entire global financial system. we are not paying a billion dollars for a loaf of bread without bringing down the entire world with us

three, the most important difference between germany then and the usa now is that germany had its balls in a vice. it had no ability to wage war and held debts enforceable by war. the united states still possesses the most powerful military in the world. it doesnt even matter if in a couple decades china or whoever has a stronger and more advanced one. as long as the us hasnt already lost a war and been forced to disarm, it still has the ability to cause enough pain to an enemy to deter unilateral imposition of terms

we live in a peaceful world and in a society that likes to gloss over the realities of conflict with canards about trade and democracy and international summits etc. but when it comes down to it, all this stuff is built on whether you can or cannot force someone to do something through violence. and no one can really force the united states to do anything (not even the united states)

usa sovereign default would be the beginning of the end. but it wouldnt be the end. politicians call it unthinkable, but its the kind of thing you can get away with as long as anyone would need to spend millions of lives and trillions of dollars to get you to do otherwise. america couldnt conquer afghanistan or iraq but that doesnt mean anyone can conquer america

this isnt to say default is coming, but that several decades of inflating away debt followed by renewed discipline once the problem is handled is eminently feasible. france marched into the ruhr and germanys best option was to play bartleby and wait for a bailout. if america pulls some shit, its creditors batna is global collapse and mass death. its good to be the king

* * *

the price revolution

so the situation today is not a once great power laid low by defeat, forced to pay its debts at gunpoint. the usa is more like a vast empire, fat on past success, with poor monetary discipline enabled by the fact that its big and scary enough to get away with it. even better, it produces money thats desired by others, giving it structural advantage over its rivals despite running a constant trade deficit

maybe hmm also entangled in too many foreign wars? playing whackamole with insurgents in its outer dependencies while grappling with the specter of internal discord?? rich and prosperous but suffering from increasing stratification as the lower classes eat the ill effects of economic dysfunction while the powerful and clever enrich themselves at the teat???

the historical model we want isnt the 20th century german republic. its the 16th century spanish empire

for a lot of the 15th century, europe as a whole suffered from lack of hard currency, an event now called the great bullion famine. europe throughtout the middle ages ran a balance of payments deficit with the east. spices and luxury goods such as silks and porcelain flowed west from china india and southeast asia. but without much of value to trade in exchange, europe paid in gold and silver

the bullion famine began as precious metal deposits in central europe ran dry. this was made worse when the ming switched back from fiat to silver currency. european prices were pushed down and economic growth stagnated as money continuously exited the economy

this changed with the spanish conquest of the new world. first, plundered treasure came over the atlantic in the 1530s. then in the 1550s, massive silver deposits were discovered in potosi, in the bolivia highlands. unlike the supply shock from the aztec and inca treasure, this became a constant stream of money for spanish merchants and the spanish crown

in the 1570s, mercury deposits were also found, enabling the amalgamation of pure silver out of ore before crossing the ocean, massively increasing productivity. by the start of the 17th century, potosi accounted for more than half of silver production in the entire world

crypto people get hung up on the difference between fiat and hard money. i think a better thing to focus on here is demand inelasticity. if foreign countries need usd to settle debts and store value, overproduction of money can be absorbed by the market. the supply curve shifts, but demand is stable

compare this to the papiermark, swiftly undone by a collapse in demand once it was clearly unsound. theres all kinds of places in the world where some people refuse to accept the unstable local currency and instead demand dollars. but the idea of people refusing dollars for this reason is still unthinkable. this can change for sure but it hasnt yet and probably wont soon

in this way its not hard to see spanish production of silver as akin to usa production of usd. it doesnt matter that the spanish money printer was just digging it out of the earth. it matters that people wanted it

so... what happened?

for one, spain became the dominant military power in europe for a century. this isnt a history lesson so ill restrain myself from narrating the wars and the dynastic shifts. the important point is (aside from tactical innovations and battle-hardened soldiers) spain could rely on borrowing and printing to finance massive war efforts. this was only really countered by the habit it had of running too many wars at the same time

inflation ran hot for basically the entire spanish golden age. prices went up everywhere as money flowed from the new world, through spain, to the rest of europe. they went up faster closer to spain and slower the further away

european balance of payments with the east remained negative for some time, but now it had infinite free money to cover it. but it also had infinite free money to finance expeditions to the east. in a sense, it was new world silver that paid for the portuguese to set up in india, dutch takeover of the spice islands, direct trade routes with china and japan

bankers and arbitrageurs made out handily, and this period saw the fuggers and the genoese banking families make their fortunes. spain (and by extension the holy roman empire, under charles v) borrowed massive sums to finance wars and repaid them with new world specie. their national debt ballooned and eventually the spanish crown defaulted several times despite its might and its cash inflows

(a similar pattern repeated with louis xiv of france, who strongarmed many of the same banking families into financing his wars later on, then left his own countrys finances in shambles by time he died)

constantly rising prices, worst in spain, ruined many small scale merchants, and especially anyone making a fixed income. large merchants profited handsomely as did foreign bankers to the extent they could absorb or avoid consequences of sovereign default. smallholders lesser clergy and government officials saw their income rise slower than prices and gradually got squeezed out

especially in the second phase, as inflation ramped harder, spanish industry became totally uncompetitive due to price differences, and the country ran a massive trade deficit with the rest of europe. tho never called by this name in its time, mercantilism started to be laid out in 17th century britain and france, and its not hard to sum it up as "dont do what spain did"

anyway the point is the usa today isnt in the position of a small weak country printing to pay their danegeld. its a large prosperous empire, with a unique ability to create money out of thin air that enables it to spend beyond its means. we arent looking at exponential inflation that destroys the domestic economy in years. we are looking at decades or even another century of steadily rising prices that taper off as competing powers gradually exploit the imbalance for their benefit

* * *


but we arent in crypto for our intellectual edification. professional bloggers and pundits can draw the comparison and smile and be like "and there you have it." we here tho because we want to get rich or improve the world or overturn the social order! so what are the practical lessons we can take away from this?

we can look at winners and losers. common people get screwed, fixed incomes get super screwed. (there are rumors already that the us cooks the cpi numbers to keep social security and pension payments down.) landowners depend on their ability to raise rents in step with prices. investors and speculators, especially those trading at the boundary between the system and the outside, have the most to gain

balance of payments stayed negative between europe and asia before and after the price revolution. the difference was before there was a money shortage and after there was a money surplus. europe paid handsomely for spices and luxury goods because it couldnt produce anything of value to trade. this changed only with colonialism and industrialization

the point isnt to say that those are necessarily good. both obviously had an enormous human cost. the point is overproduction of money is a condition youre subject to. and changing this condition is not going to change the broader economic or geopolitical outlook to be more favorable. what will change it is production of value which present conditions may be exploited to enable

what im trying to say is, the most short term profitable thing you can do in this macro environment is arb between fantasia and the real world. the most long term profitable thing you can do is suck cash out of the cash dispenser and invest it in real assets, real companies, and ambitious projects

china kinda gets this. they used to play the game, take usd they got from trade and reinvest it in tbills. (lyn alden explains this way better than i ever could and most of my opinions about international finance are blatantly stolen from her.) now china dumps it into colonization of central asia and east africa. its unclear how much of this is real infrastructure development and how much is convoluted graft. but you cant say theyre not at least trying to grab what they can get and deploy it productively

tech gets this too, and by extension crypto, tho they tell themselves cute bedtime stories about where this money actually comes from. tech vcs have been complaining almost nonstop since 2010 about a funding environment of "too much money chasing too few deals." this has reached absurd heights since the covid bounce, where anyone with a pulse and a pdf can raise a few million. a lot of this money goes into worthless enterprise startups and stupid d2c shit, just like a lot of crypto vc money goes into glorified ponzis. but that isnt like, the way it has to be

i think the most important thing investors can be doing right now is taking all this money they pointlessly have for no real reason and dumping it into real ass shit. in tech, that means deep tech: step change technologies in aeronautics, biology, energy production, robotics, and other similar fields. in crypto that means real defi infrastructure that can operate outside of the aegis of the american empire. this especially means more anon founders and funds, and more privacy tech to preserve anonymity against committed attackers. i think we have decades, not years, but being able to jettison is the difference between building lifeboats or going down with the ship

for people with their own smaller personal wealth, the whole hard assets productive assets etc discourse is well trod enough. the one thing id say is think about how youd protect it, and how you expect to keep people on your side

im excited for where things are going to go and want to do my part to provide a bit of historical perspective on how we might get there