A book about the 1920s written in the 1970s is again oddly topical.
Adam Fergusson’s When Money Dies analyses the hyperinflation that wrecked the German economy under the Weimar Republic. It has become something of an underground classic since being recommended by Warren Buffett in the wake of the 2008 crisis.
It seems particularly relevant in the light of the latest British inflation figures. They are nothing like the old Weimar levels, nor is there any serious prospect of them reaching those levels, but the danger of inflation is precisely that it seems so innocuous at first.
It operates on the same basis as drug addiction. At first, taken in small quantities, the drug makes the future addict feel good and seems to do no harm. In the same way, inflation gives the illusion that more wealth is circulating, which makes everyone feel better: order books are full, business has access to cheap capital, unemployment is reduced, and a depreciating currency helps exports. So it seems a little more will do no harm... then a little more... then a little more...
Soon the situation is out of control. The decision to take another fix is revealed as less and less of a free choice, as the addiction takes on a momentum of its own. Kicking the habit will involve pain and suffering. That thought is enough to postpone it – but the longer it is postponed, the greater the pain and suffering will have to be. That thought prompts further postponement.
Finally, the inevitable crisis forces a choice, or takes all choice away – as the patient collapses, or comes under the control of an external authority: the drug addict is committed or imprisoned; the inflationary state is forced to hand control of its economy over to the IMF.
Inflation is, in effect, a country borrowing from its own future – and at a high rate of interest. An old fashioned view of economics has inflation as an alternative to unemployment, but inflation is at best a postponement of unemployment. Sooner or later, the underlying weaknesses of an economy must be addressed – and the later one leaves it, the harder that process will be.