People today tend to think there was something inherently wrong in the German people that they allowed Hitler to come into power. From a purely economic and financial standpoint, it’s not all that hard to understand.
The financial Apocalypse of the hyperinflation in Germany and Austria-Hungary came hard on the heels of that of the war itself. The German Reichsmark, the Austrian Schilling, and the Hungarian Forint ceased to have any meaning at all. For example, by the time the financial firestorm was stopped, the official exchange rate for the Reichsmark was 4.2 trillion to the U.S. dollar, while the black market rate was anywhere from 16 trillion on up.
The point here, however, is that society was in a state of complete meltdown. People were desperate for anything to restore order. As Germania, a large Berlin newspaper, reported on July 27, 1923, “It is a situation for a dictator. The conditions call for a Mussolini in bullet-proof armor with a revolver in either hand.”
Thanks solely to the efforts of Hjalmar Horace Greeley Schacht, “the Old Wizard,” the hyperinflation was brought under control. He accomplished this miracle by simultaneously instituting his “Rentenmark” system and demonetizing the old Reichsmark, although for a brief period people could exchange their old inflated Reichsmarks for new ones at the rate of a trillion to one.
Briefly, what Schacht did was establish an asset-backed, non-legal tender reserve currency, the Rentenmark, into which the new legal tender asset- and debt-backed official currency, the Reichsmark, could be converted on demand. The Rentenmark was backed by State-owned land and railroads, and was absolutely fixed in value and quantity. The system remained stable until demonetized by the Allies following World War II.
Unfortunately, the stable currency enabled Germany to finance its war effort with ease when the Nazis came into power. Ironically, Hitler became Chancellor of Germany when people in the early 1930s were afraid that the effects of the Great Depression would spread to Germany and trigger hyperinflation again. To ensure that order would be maintained, they elected the man who promised order at all cost — and who delivered on his promises.
What made Hitler’s ascent to power a virtual certainty, financially speaking, was that he promised economic and financial stability, at the same time the United States was listening to Keynes and destabilizing the economy and the currency in pursuit of the chimera of full employment. The German people knew what could happen to a nation when the currency was debauched, and they would pay any price to avoid it — and they did.
In another ironic twist, the United States only attained the full employment Keynes promised in the 1930s in 1943 and 1944 . . . to supply the war effort against Hitler. To oversimplify, Keynesian economics never delivered full employment. Adolf Hitler did, for both Germany and the United States.
On Monday, we’ll look at how to restore a stable currency and even achieve full employment, but without having to wait for a Hitler to try and conquer the world to do so.