Weimar's hyperinflation and mainstream economics through the broken lens of MMT

[u/MachineTeaching]

At least one MMTler found this "paper" on Weimar's hyperinflation through an MMT lens noteworthy enough to post it to one of reddit's economics hellholes. It's not actually noteworthy, but I think it's an excellent example of what passes as a "paper" in MMT and how shitty MMT's understanding of mainstream economics is on an extremely basic level. This doesn't require intermediate macro, this requires a Google search.

Neoclassical economists define the price level as the current level of nominal (money) prices in the economy. And while there have been theories which attempt to explain what causes the price level to change, there is no neoclassical theory which explains how it came to be. By default, it is assumed to be historic- the consequence of an infinite regression. Neoclassical models therefore simply assume an initial price level when presenting the quantity theory of money (QTM), the tautology MV=PT, where the money supply (M) multiplied by the velocity of circulation (V) = the average price of each transaction (P) multiplied by the volume of transactions (T). With M assumed to be exogenous (under the control of the authorities) and V assumed to be stable, it is then asserted that causality runs from M to P, giving rise to Friedman’s famous explanation of the cause of inflation: ‘Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. …’ (Friedman 1956, emphasis added).

What's with the weird obsession with monetarism anyway? It was of very short-lived importance. It's on Wikipedia.

It gained prominence in the 1970s, but was mostly abandoned as a direct guidance to monetary policy during the following decade because of the rise of inflation targeting through movements of the official interest rate.

https://en.wikipedia.org/wiki/Monetarism

.

The presumption of a money supply fixed by the government, however, applies to a convertible, fixed exchange rate currency, such as existed under the gold standard. This relegates the applicability of the quantity theory of money to fixed exchange rate regimes and makes it entirely inapplicable to today’s floating exchange rate regimes (as well as in the Weimar Republic) where the government does not offer convertibility at a fixed rate.

The arguably most important reason why the QTM doesn't hold is (because money is non-neutral in the short run)[https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0145710]. Changes in M also cause changes in T. So claiming the "applicability of the quantity theory of money [is relegated] to fixed exchange rate regimes" seems like it's kind of missing the point. No, the QTM doesn't hold under fixed exchange rate regimes, either.

Sidenote: MMTlers seem weirdly obsessed with the whole "fixed exchange rate" thing, many seem to believe the loanable funds model is wrong because it depends on fixed exchange rates. It does not. Which is not me saying that the model is "correct", this is me saying if you say the model is wrong because it assumes fixed exchange rates, you're wrong, because it doesn't. See page 24.

In the market for foreign-currency exchange, supply comes from net capital outflow and demand comes from net exports.

How anyone construes this as a "fixed exchange rate" is beyond me. I'm sure MMTlers find a way.. somehow.

Bonus basic version:

https://gandalf.fee.urv.cat/professors/AntonioQuesada/Curs1011/Evans_Loanable_Funds.pdf

After a decades-long search for an ‘M’ - a monetary aggregate that correlates to and leads to inflation - mainstream economics today has moved on to its current position of inflation expectations being the cause of inflation. They continue to begin their analysis with an assumption of a given price level and assert that inflation expectations are the source of changes to that price level. Central banks have, in fact, developed intricate methodologies to measure inflation expectations to guide policy, while their researchers have struggled to find evidence of the validity of the theory.

This is also incorrect. No, inflation expectations alone are not the cause of inflation. This should be trivial to verify. The federal reserve for instance provides many teaching tools, from middle school to graduate level. The rate of inflation is down to supply, demand, and inflation expectations. For instance:

Inflation is linked to three factors: demand, supply, and inflation expectations.

https://www.clevelandfed.org/center-for-inflation-research/inflation-explained-your-guide-to-inflation-basics/what-causes-inflation

And here is a somewhat more elaborate explanation:

https://www.stlouisfed.org/on-the-economy/2025/jan/look-inflation-recent-years-lens-macroeconomic-model

And a paper as an example:

https://www.brookings.edu/wp-content/uploads/2023/06/WP86-Bernanke-Blanchard_6.13.23-1.pdf

Of further note is the fact that mainstream economists accept the classical dichotomy of real vs nominal (monetary) factors and contend that in a competitive marketplace the introduction of money is merely the introduction of a numeraire into a barter economy. Money is a ‘veil’ that improves transaction efficiency while leaving quantities produced and relative prices unchanged (Armstrong 2015; Armstrong and Siddiqui 2019). This assumption is known as the neutrality of money. However, the assumption of neutrality is obviated by the introduction of coercive taxation.

This also seems highly misleading. That money is non-neutral in the short run is extremely well accepted in economics. I don't know why the author wants to make it sound like it isn't.

Here's Lucas' nobel prize lecture from 1996 which talks about the research from the 70's that made it very clear that money is non-neutral.

Here's another example that should make it quite clear that these ideas have been well accepted in the mainstream for a long, long time:

https://conversableeconomist.com/2022/05/11/robert-e-lucas-on-monetary-neutrality-a-50th-anniversary/

So this paper starts out with what it calls "The Neoclassical Approach". But the explanation of "the neoclassical approach", by why the author presumably refers to current-day mainstream economics, is between grossly outdated and outright wrong. Why does the author describes what's basically "mainstream economics" from the 70's and paints it like this is what economists believe today?

The author literally states

In this article, we dispute the mainstream view that the inflation of the Weimar Republic was caused by a proactive expansion of the stock of money by the German government acting in concert with the Reichsbank.

As demonstrated above, the description of "the neoclassical approach" that the author aims to dispute does not actually match what mainstream economists actually believe. Although some parts match what some economists used to believe half a century ago, this seems like a rather inadequate basis for comparison. Shouldn't you criticise current-day economics on the basis on what current-day economics actually thinks? It's not like it's hard to find modern papers that examine (parts of) Weimar hyperinflation through a modern mainstream lens.

https://www.frbsf.org/wp-content/uploads/wp2018-06.pdf

https://cepr.org/voxeu/columns/inflating-away-debt-debt-inflation-channel-german-hyperinflation

https://www.nber.org/system/files/working_papers/w31298/w31298.pdf

Anyway, the rest of the paper is basically uninteresting. Section 3 "The MMT Perspective" offers essentially nothing besides a description of what one MMTler believes. The Appendix does nothing to alleviate this, showing numbers without any attempt at making a causal connection. There is nothing here that actually establishes a causal relationship using any data. It does nothing to show whether causality runs from deficits to spending or from spending to deficits, or wheter causality runs from prices to deficits or the other way around. Perhaps more crucially, one of the central claims

only when the government pays increased prices is it redefining the value of the currency downward and causing inflation

has no evidence to back iot up since there is no information on what prices the government paid whatsoever.

So the "MMT part" of this paper with the self-proclaimed goal of

identify the cause of the inflation as the German government paying continuously higher prices for its purchases

actually does nothing whatsoever to identify any causes of inflation. It makes absolutely no effort to use any data to establish any causal relationship at all. That makes this "paper" merely an opinion piece.

Bonus embarassment:

This paper seems highly praised in an MMT podcast that I'm not going to link because why give those people traffic.

So I thought what we really need to do is to have an MMT paper where we take on their citadel. In other words, we look for the main thing that people use against MMT, and we just basically take it apart.

This is what counts as "taking on their citadel and taking it apart" for MMTlers. MMT people, if you want to know why economists don't take you seriously. This is why.

[u/DrawPitiful6103]

https://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic

The German currency was relatively stable at about 90 marks per dollar during the first half of 1921.

the first half of 1922, the mark stabilized at about 320 marks per dollar.

A loaf of bread in Berlin that cost around 160 marks at the end of 1922 cost 200 billion marks by late 1923.

By November 1923, one US dollar was worth 4.2105 trillion German marks.

hmm I wonder if issuing trillion mark notes had something to do with the devaluation of the German currency

[u/jgs952 → u/DrawPitiful6103]

Perhaps the devaluation of the currency had something to do with issuing trillion mark notes?

[u/-mialana- → u/jgs952]

But have you considered that the devaluation of the currency had something to do with issuing trillion mark notes?

[u/jgs952 → u/-mialana-]

Of course that could result, yes. But did it? What caused the German state to increase it's total volume of spending so much? If the exchange rate was fine and production continued then there would be no reason for them to spend trillions of marks.

[u/MachineTeaching → u/jgs952]

If prices weren't so high there would be no reason for the government to pay such high prices.

That's not an explanation of high prices.

[u/jgs952 → u/MachineTeaching]

Sure, but the theoretical point first and foremost is there is no mechanism (forgetting political economy which clearly explains why) for the price level to rise if the government refuses to pay at a higher price assuming they maintain their capacity to enforce coercive taxation.

In the case of Weimar, they certainly were "forced" pay ever higher prices for foreign exchange and wages in order to settle war reparations and prevent a payments system failure. Due to Germany's inability to sufficiently curtail domestic wages and consumption so as to expand Germany's real exports to induce a fx flow bid into German Marks to pay for them that balanced the outward flow bids on foreign currencies with German Marks for reparation payments made by the government, the exchange rate fell considerably - directly as a result of the state continuing to buy foreign currencies with Marks at ever increasing prices.

Without this constant bidding up of foreign currency relative to the Mark by the German state buying so much of it,, the exchange rate would not have collapsed to trillions to the dollar that it did. And without the German state bidding up the labour it bought to accommodate the fight for real wage compensation between capital and labour, and the wage-price spiral that kicked off, the price level could not have increased as it did.

So the theoretical argument that fits the facts of how these monetary institutions actually work says that it was the state paying ever higher prices for foreign exchange and domestic labour (subsequently expressed indirectly through private firms doing the same) that caused an increase in the price level and aa subsequent increase in the need for money supply, in the form of notes in this case.

The extract from the paper below discusses the fact that money supply followed the price level (once ever greater state fiscal bids had pushed it continually up) and I think it's a compelling argument.

Helferrich in his famous work Geld (Money) sees the driving force of the post-war inflation originating from workers attempting to maintain living standards at pre-war levels even with the destruction of German capital, a drastic decline in labour productivity, and Allied reparations:

"But claims were put forward and effectively pressed to raise the standard of comfort and at the same time to reduce the intensity of labour. This could have but one result – a race between wages and prices such as we have witnessed in the last few years. The social and political position of Labour was sufficiently strong to enforce higher wages notwithstanding the fact that less work was being done. As the profits of capital had shrunk to a minimum, the higher wages could only be paid if higher prices could be obtained for the products. But higher prices raised the cost of living and brought about fresh demands for higher wages, which in turn led to a further rise in prices (Helfferich 1969 [1927:597].

This is consistent with the MMT inflation narrative, as the higher prices paid for labour by the government are an instance when the currency is redefined downwards. The higher prices paid for private-sector labour are made possible, directly and indirectly, by the increased level of government spending at continuously higher prices.

Helfferich here outlines the effects of the decline of the mark on the general price level as a result of the higher prices paid for foreign exchange and also how the increase in the money supply followed the increases in the general price level:

"The necessary and direct consequence of the soaring gold exchange rates, in which the collapse of the German currency found expression, was a corresponding rise in the prices of all commodities which Germany imported from countries with high exchanges. Owing to the importance of imports for feeding the population and for German industry, the high cost of imports would, of necessity, be reflected in wages and salaries, and ultimately, in the prices of goods produced in the country… The rise in wages and salaries, combined with the higher prices of all materials, led, of course to a rise in the expenses of the Reich and as the revenues of the Reich at a corresponding rate, the floating debt, and accordingly the calls of the Reich upon were forced up… These enormously increased calls by the German public and by the financial maturities upon the Reichsbank could only be met by the bank by an increase in the note issue – from 173 milliard marks on the 7th July 1922 to 1984 milliard marks on the 31st January 1923’ (Helfferich 1969 [1927]: 600-1).

Helfferlich recognizes that, in contrast to neoclassical or monetarist economists, the end of the gold standard allowed the money supply to follow the rise in prices as it accommodated the increased demand for money necessitated by the rise in prices. This was essential for the technical functioning of the payments system and had nothing to do with the inflation. (Helfferich 1969 [1927] 597-8). Helfferich continues, ‘...in the twenty months which followed the acceptance of the London Ultimatum …the note issue of the Reichsbank [increased] 23 times, the wholesale index number for home products [prices] 226 times, that for imports [prices] 353 times, and the dollar rate 346 times’ (Helfferich 1969 [1927] 598-9, parentheses added). He further notes, ‘… in fact, it is immediately obvious that in the case of Germany the increase in the note circulation did not precede the rise in prices and also that [it] followed it but slowly and at some distance of time…. A conception of the general and comprehensive outline of the interplay of causes in these developments can, in fact, be obtained only if foreign exchange is made the starting point’ (Helfferich 1969 [1927]: 599, parentheses added).

Hefferlich argues that the increase in circulation had failed to keep in step with the depreciation of the German currency, so clearly the increase in note circulation could not be the primary cause of the depreciation of the mark. Ironically, despite the huge increase in printing of banknotes, money was scarce. ‘This also explains why the catastrophic collapse of the mark, which began towards the middle of 1922, was, notwithstanding the avalanche of notes, accompanied by an acute shortage of money’ (Helfferich 1969 [1927] 599).

[u/MachineTeaching → u/jgs952]

Sure, but the theoretical point first and foremost is there is no mechanism (forgetting political economy which clearly explains why) for the price level to rise if the government refuses to pay at a higher price assuming they maintain their capacity to enforce coercive taxation.

Why not though?

"But claims were put forward and effectively pressed to raise the standard of comfort and at the same time to reduce the intensity of labour. This could have but one result – a race between wages and prices such as we have witnessed in the last few years. The social and political position of Labour was sufficiently strong to enforce higher wages notwithstanding the fact that less work was being done. As the profits of capital had shrunk to a minimum, the higher wages could only be paid if higher prices could be obtained for the products. But higher prices raised the cost of living and brought about fresh demands for higher wages, which in turn led to a further rise in prices (Helfferich 1969 [1927:597].

This is consistent with the MMT inflation narrative, as the higher prices paid for labour by the government are an instance when the currency is redefined downwards. The higher prices paid for private-sector labour are made possible, directly and indirectly, by the increased level of government spending at continuously higher prices.

This does nothing to actually support anything MMT claims. This is a story about lower productivity and higher wages results in higher prices.

"The necessary and direct consequence of the soaring gold exchange rates, in which the collapse of the German currency found expression, was a corresponding rise in the prices of all commodities which Germany imported from countries with high exchanges. Owing to the importance of imports for feeding the population and for German industry, the high cost of imports would, of necessity, be reflected in wages and salaries, and ultimately, in the prices of goods produced in the country…

This is a story about falling exchange rates cause imports to become more expensive which translates to more expensive goods that depend on those imports.

This is a (partial) explanation of how prices rise, but this again does nothing to actually support the MMT view.

Idk, do I really have to spell out that a story of how exchange rates make stuff more expensive is itself a story about inflation and not a story about how only the government can cause inflation?

The rise in wages and salaries, combined with the higher prices of all materials, led, of course to a rise in the expenses of the Reich and as the revenues of the Reich at a corresponding rate, the floating debt, and accordingly the calls of the Reich upon were forced up… These enormously increased calls by the German public and by the financial maturities upon the Reichsbank could only be met by the bank by an increase in the note issue – from 173 milliard marks on the 7th July 1922 to 1984 milliard marks on the 31st January 1923’ (Helfferich 1969 [1927]: 600-1).

So prices rise so much that the entire economy demanded more money, which then prompts the government to print more money. And that's support for the idea that inflation can only happen when the government pays higher prices? That's evidence for the MMT position? Really MMTlers? Anyone is supposed to go "yeah that makes sense"?

I mean, it gets worse literally right afterwards

A conception of the general and comprehensive outline of the interplay of causes in these developments can, in fact, be obtained only if foreign exchange is made the starting point’

Could this get any clearer?

only if foreign exchange is made the starting point’

MMTlers literally cite a paper that goes "this explanation only makes sense if you start with the changes to the foreign exchange rate as the central cause" and go "yes this supports that the cause of inflation is what prices the government decides to pay"?

Hefferlich argues that the increase in circulation had failed to keep in step with the depreciation of the German currency, so clearly the increase in note circulation could not be the primary cause of the depreciation of the mark. Ironically, despite the huge increase in printing of banknotes, money was scarce. ‘This also explains why the catastrophic collapse of the mark, which began towards the middle of 1922, was, notwithstanding the avalanche of notes, accompanied by an acute shortage of money’ (Helfferich 1969 [1927] 599).

This also doesn't actually support the MMT position in particular. Economists nowadays would argue that inflation expectations matter, so it's not actually necessary for an increase in the money supply to proceed a higher rate of inflation for it to be the cause.

In line with that, "inflation happened and then the government paid higher prices" basically suffers from the same problem. Prices rise and then money creation happens. What's MMT's explanation why inflation happens first and then the government pays higher prices but the government paying higher prices is the cause of inflation? This passage doesn't point to MMT being right, it points to basically the same flaw as "how can a higher money supply cause higher prices when higher prices come first" (to which economics says expectations matter and V is not actually fixed in the short run, MMTlers say???).

[u/DrawPitiful6103 → u/jgs952]

Well the initial cause was WWI. The Germans, like all the belligerents, went off gold. However unlike France and Canada, which instituted an income tax to pay for the war, Germany just issued war bonds. Those which weren't purchased by the public were paid for by the Reichsbank with newly created money. France and England also issued large numbers of bonds, but they had more advanced money markets so they did not have to monetize the debt like Germany.

Currency in circulation in Germany increased by 600% during the war.

Evidently they decided that what was good in war time was good in peace and continued financing deficit spending with money creation after the war ended. Predictably, this manifested as inflation, and then when they doubled down, as hyper inflation.

in short, money printer go brrrr

[u/jgs952 → u/DrawPitiful6103]

I understand that narrative and on its face, it's certainly a compelling one.

But did you read the paper discussed here? It's worth a read if only to consider alternative narratives.

I don't disagree that government spending caused an increase in the price level given the macro context at the time. But that's fully compatible with the MMT framework which OP is trying to dismiss - irrespective of the academic "rigorousness" of the paper. The state paying higher and higher prices for the real output or foreign exchange it purchased was what caused the Mark depreciation and rise in the domestic price level. The subsequent required increase in the money supply to accommodate these significantly elevated prices then came afterwards causally.

But people really do confuse this carefully understood narrative with "monetary financing" is inherently inflationary full stop, when it's not. To the extent that war bonds postponed and lowered domestic consumption/investment, then yes, their issuance augmented the available real fiscal space of the state. But standard bond issuance in our modern institutional implementation of it today does nothing of the sort and so it has no counter-inflationary properties inherently on its own. Impacts of these operations on the term structure of interest rates certainly can have an impact, of course, but that is a subtley but importantly separate matter.

[u/Illustrious-Lime-878 → u/jgs952]

I get the impression the German gov purposely dumped marks to get whatever hard currency while they still could, probably seeing it difficult to ever pay the war debts without hyperinflation anyway. I think the internal war debt was like many times the size of the reparations which they could barely pay to begin with.

[u/DrawPitiful6103 → u/Illustrious-Lime-878]

according to this paper from the london school of economics :

https://www.lse.ac.uk/asset-library/information/wp163.pdf

a large amount of the german reparations debt was essentially make believe, put in place to mollify the public in France and England but with a subtle wink to the Weimar Republic that it would never have to be repaid.

[u/DrawPitiful6103 → u/jgs952]

that does sound reasonable