Modern Economic Nonsense — The era of currency debasement
In the early 1900s, many countries struggled to pay for the Great War. Germany was no exception. By November 1918, reparations payments had pushed the country’s debt to about $25 billion — nearly half its Gross Domestic Product (GDP). Faced with growing national debt and a shrinking GDP, policymakers in Germany turned to another resource abundant in their country: its central bank, the Bank Deutscher Länder (the “Banking League of Cities”). As a result, between 1910 and 1923, German monetary authorities debased their currency at an unprecedented pace. In 1912 alone, they reduced the amount of gold in their coins by 20%. Understanding why this happened helps to understand how central banks operate. A central bank is essentially a commercial bank with one primary objective: keeping inflation low. Commercial banks lend money to businesses and consumers on-demand; if they don’t have enough cash on hand to make those loans, they get a loan from a lender like a securities broker or insurance company that has more cash than they need. The commercial bank expects to be paid back with interest within six months to a year — not so for a central bank lending money through its own operations. The result? A scarcity of cash for everyday transactions — and thus higher prices for goods and services — as people spend more of their money paying off existing debts instead of buying things…