The Tyranny of Inflation: Fiscal and Monetary Policy in Germany’s Periclean Age
It is clear that in “Paper and Iron” Ferguson is following a path similar to that taken by John Neville Keynes and Joseph Schumpeter, advocates of a historical approach to economic analysis. In “History of Economic Analysis,” Schumpeter wrote that “[n]obody can hope to understand the economic phenomena of any, including the present, epoch, who has not an adequate command of historical facts and an adequate amount of historical sense of what might be described as historical experience.” John Neville Keynes, meanwhile, in his opus on economic methodology, “The Scope and Method of Political Economy”, commented that “history does not merely illustrate and confirm; it also brings mistakes to light, and shows where doctrines have been laid down without due qualification or limitation.” Ferguson’s revisionist history of Germany’s inflationary environment during the 1920s is an absorbing, multifaceted study of an exceptional era, which despite its acclamation as the advent of a new ‘Age of Pericles’ was marked by social upheaval and economic turbulence. Meticulously reinforced by economic data, underpinned by a detailed analysis of the established historiography, and situating the 1920s inflation within a greater economic milieu covering a thirty-year era of inflation beginning at the eclipse of the nineteenth century, “Paper and Iron” significantly advances the discussion regarding the consequences of German monetary and fiscal policies employed from the Wilhelmine Reich to the division of the German state in the aftermath of the Second World War.

In Ferguson’s study, he presents two fundamental lines of reasoning: that the German inflation experience covered a period longer than the 1914-1924 timeframe that has been conventionally considered for scholarly study, and that the economic costs imposed by the postwar inflation were far too high to facilitate industrial growth and to mitigate the impact of reparations on the Germany economy. Through this volume, Ferguson attempts to undermine historical analysis that sought to establish that the postwar inflation was ultimately beneficial in terms of output and investment growth. This school of thought cites high levels of employment and high real wages during 1920-1922 as evidence that that pursuit of inflation by the Weimar authorities was a commendable goal. In exploring the historical basis of the authorities’ pursuit of inflation, which, Ferguson asserts, was in essence a political decision, he exposes the inherent structural weaknesses of the very institutions tasked to maintain German monetary and economic stability. Ferguson writes that the German central bank found its command over monetary policy woefully surpassed by the extent of the economic influence of the privately-owned banks; according to the author, “the Reichsbank wielded only minimal control over the [German] money supply”, while Teutonic joint-stock banking institutions “created immense reservoirs of credit which the Reichsbank, in the absence of minimum reserve requirements or a significant level of short-term government borrowing at the Reichsbank, could not regulate.” Without a proper system for undertaking open-market operations, and thus ill-equipped to deal with changes in the monetary base, the central bank was relatively powerless in discharging its supposed dirigiste functions. Meanwhile, the government’s opportunity to manage the budget deficit was squandered through ill-conceived and poorly-implemented taxation policies and seemingly out-of-control fiscal measures which ensured that the Reich’s expenditures consistently outdistanced government revenues. In Ferguson’s view, the inherent feebleness of the German state apparatus in tax collection, combined with the passive monetary stance of the Reichsbank that ensured that the determination of the money stock largely rested on the demand for credit by government and industry, encouraged the establishment of an economic regime fundamentally characterized by long-term inflationary expectations. Therefore, the frail underpinnings of the German economy, with its fundamental deficiencies with respect to fiscal and monetary policy, were well-nigh incompatible with Teutonic ambitions of preeminence on the international stage – economic verities that had disastrous consequences for the European continent. ( )