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By Root 854 0

thus gaining an export edge on those like England and the United States who would return to gold at a prewar rate. England broke with gold in 1931, regaining the ground lost to France in 1925. Germany was boosted in 1931 when President Herbert Hoover placed a moratorium on war reparations payments. The moratorium became permanent as a result of the 1932 Lausanne Conference. After 1933 and the rise of Hitler, Germany increasingly went its own way and withdrew from world trade, becoming a more autarkic economy, albeit with links to Austria and Eastern Europe. The United States moved in 1933, also devaluing against gold and regaining some of the competitive edge in export pricing lost to England in 1931. Finally it was the turn of France and England to devalue again. In 1936, France broke with gold and became the last major country to emerge from the worst effects of the Great Depression while England devalued again to regain some of the advantage it had lost against the dollar after FDR’s devaluations in 1933.

In round after round of devaluation and default, the major economies of the world raced to the bottom, causing massive trade disruption, lost output and wealth destruction along the way. The volatile and self-defeating nature of the international monetary system during that period makes Currency War I the ultimate cautionary tale for today as the world again confronts the challenge of massive unpayable debt.

Currency War I began in 1921 in Weimar Germany when the Reichsbank, Germany’s central bank, set about to destroy the value of the German mark through massive money printing and hyperinflation. Presided over by Reichsbank head Dr. Rudolf von Havenstein, a Prussian lawyer-turned-banker, the inflation proceeded primarily through the Reichsbank’s purchases of bills from the German government to supply the government with the money needed to fund budget deficits and government spending. This was one of the most destructive and pervasive monetary debasements ever seen in a major developed economy. A myth has persisted ever since that Germany destroyed its currency to get out from under onerous war reparations demanded by England and France in the Treaty of Versailles. In fact, those reparations were tied to “gold marks,” defined as a fixed amount of gold or its equivalent in non-German currency, and subsequent treaty protocols were based on a percentage of German exports regardless of the paper currency value. Those gold- and export-related specifications could not be inflated away. However, the Reichsbank did see an opportunity to increase German exports by debasing its currency both to make German goods more affordable abroad—one typical reason for a debasement—as well as to encourage tourism and foreign investment. These methods could provide foreign exchange needed to pay reparations without diminishing the amount of reparations directly.

As inflation slowly began to take off in late 1921, it was not immediately perceived as a threat. The German people understood that prices were going up, but that did not automatically translate into the equivalent notion that the currency was collapsing. German banks had liabilities nearly equal to their assets and so were largely hedged. Many businesses owned hard assets such as land, plant, equipment and inventories that gained nominal value as the currency collapsed and therefore were also hedged. Some of those companies also owed debts that evaporated as the amounts owed became worthless, and so were enriched by being relieved of their debts. Many large German corporations, predecessors of today’s global giants, had operations outside of Germany, which earned hard currency and further insulated their parent companies from the worst effects of the collapse of the mark.

Capital flight is a traditional response to currency collapse. Those who could convert marks into Swiss francs, gold or other stores of value did so and moved their savings abroad. Even the German bourgeoisie was not immediately alarmed as losses in the value of their currency were offset by stock market gains.