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German Inflation Preferences

It has become a commonplace assesment in public debate to blame the German aversion to inflationary tendencies on the country’s hyperinflation of the 1920s, which in turn are believed to have led to the rise to power of Hitler. Even economists have taken to advancing this simplistic essentially cultural theory of historical continuity based on an intergenerational common memory. Yet, not only is this argument inherently flawed, it also replaces sound economic logic with an arbitrarily chosen historical event.

It’s not just that the historical memory argument is inherently faulty though, it also fails to address similar inflationary preferences in, say, Finland and the Netherlands, neither of which went through a comparable period of hyperinflation.

Germany effectively suffered through a period of high inflation beginning in 1914 as the government financed its war effort through a combination of inflationary and debt-based mechanisms. This debt, coupled with the reparations demanded in the Treaty of Versailles and the financial help promised by the government to the strikers in the Ruhr protesting against the Franco-Belgian occupation, enticed the Reichsbank to follow a permissive monetary expansionary course, which led to the 1922/1923 hyperinflation period.

The problem is that it is extremely difficult to find the link between this period and the Nazi Party’s popularity surge and Hitler’s rise to power, which really only set in with the 1930s. As late as 1928, the NSDAP won only 2.6% in national parliamentary elections. The party’s electoral success instead coincided with the contractionary fiscal and monetary policies pursued by German authorities in the face of the Great Depression and of course the resulting exploding unemployment figures (link). If monetary policy is to be blamed for Hitler’s rise to power it should be deflation not the hyperinflation that had occurred ten years earlier.

This especially as the country over the course of its history since has repeatedly allowed for higher inflation rates for political means. The labor market successes of the mid-30s of course were essentially built on an inflationary Ponzi Scheme (link). But the preeminence of political goals over a supposedly inherent and insurmountable inflation aversion may also be seen reflected in the Bundesbank’s attempts to prop up the Dollar at the US government’s pressing in the early 1970s. More recently, the inflationary spike caused by the politically-imposed conditions of the reunified Germanies’ monetary union provides another example.

What low inflation preference countries such as Germany, Finland, or the Netherlands have in common are higher savings and less debt in the private sector. This can indicatively be seen reflected in their international investment positions amongst others.


Now, evidently, higher inflation rates deteriorate savings and benefit debtors at the cost of creditors. In other words Finnish, Dutch, and German – whether household or commercial – investments will lose some of its value if the ECB were to follow a more expansionary monetary policy. Creditors in Southern countries such as Spain or Greece in turn would see their debt load ease to some extent.

There really is no need for ghosts from Germany’s difficult past to explain an inherently quite sensible – if egoistical, if you may – national position.

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