Quantitative Easing, Weimar Edition

This morning the Federal Reserve announced it was going to embark on a third round of "quantitative easing," a financial maneuver that already has its own nickname: QE3.

But what exactly is "quantitative easing"? Well, as The Washington Post helpfully explains,


"Create dollars out of thin air" is another way of saying, "Print money." Since the U.S. dollar is no longer backed by gold or any other commodity other than people's faith in the government, the Federal Reserve can just print up billions of dollars and hand them out. ("Print" in this situation is entirely metaphorical, of course: the government isn't actually printing paper bills, but rather just arbitrarily increasing the amount of "money" it has.)

Now, the average person might wonder: If creating money is that easy, then why don't we just print up $16 trillion and get ourselves out of debt? The answer is interesting: Although the government can increase the amount of cash floating around, it can't conjure actual value or worth. All it can do is put more money into circulation in an economic system whose underlying net worth remains the same. The end result is that, although the total amount of dollars in circulation increases, the cumulative value of things to buy remains the same — so the intrinsic worth of each dollar is diminished. Another word for this is inflation.



Quantitative Easing in Weimar Republic Germany

I'm not enough of an expert to know if 2012's QE3 will work as hoped, but I do know about a comparable moment in history when "quantitative easing" went haywire and ended up causing hyperinflation.

Travel back with me to Germany in 1923 and let's look at what can happen when a government starts printing money with no basis behind it.

The root causes of the hyperinflation in Weimar Germany are complicated and still debated: the wikipedia article on the topic is a good starting point if you're interested. Germany at the time (just as the U.S. does now) had a crushing national debt, and many other nations felt that Germany intentionally ignited inflation of the German Mark as a way to "inflate its way out of debt" — a strategy some have suggested for the U.S. now, in fact.

But as the citizens of Germany discovered in 1923, once inflation starts heating up, it can quickly reach a level of explosive combustion that even the government can't control. In the early '20s, the other nations of Europe, distrusting the stability of the German Mark, began demanding payment in either gold or foreign denominations. So the German government frantically began buying up other nations' currencies. But those other nations didn't trust that the Marks they were getting would keep their value, so they demanded a higher and higher exchange rate. So Germany simply starting printing up bills to pay the higher rates, but that only increased the doubts over the Mark's solvency, and exchange rates rose, and more money was printed, and it spiraled out of control. In early 1923 trust in the value of the German Mark completely collapsed, and it quickly descended toward worthlessness. With every passing month, week, day, hour, the Mark became worth less and less, and the government had to print more and more bills of higher and higher denomination. This lasted until late November 1923, when the Mark was discarded as a currency entirely, and a new national currency — the "Rentenmark" — was introduced, with 12 zeros being lopped off the old prices.

By chance I recently came into possession of a fascinating collection of these now worthless "inflation Marks" from the Weimar Republic. (So many are still floating around that you can pick them up fairly easily at flea markets and collectibles stores.) I scanned the bills and present them below for your edification as to what can happen when "quantitative easing" is overused:



Now we're up to February 1923. 100,000 Marks was by this time the equivalent of pocket change.

A few months later, in August 1923, 200,000 Mark bills were as commonplace. But this was just the beginning. (Starting with this bill, it's not entirely clear on which exact date each note was actually printed; the dates shown on the bills may be the dates that the issuance was authorized. I've done my best to keep them chronological.)








Does a similar fate await the United States?


