The Economic Catastrophe That Germany Can't Forget

Originally published on September 16, 2011 11:38 am

For troubled European countries, the European Central Bank could be like a giant ATM.

After all, the ECB has the unique ability to print unlimited amounts of euros. It could lend that money to the governments in need.

The problem with this idea? Europe's biggest economy hates it.

Cue inflation-fearing, deep-pocketed Germany. The thought of hitting up a central bank's ATM would send many Germans fleeing in panic.

To understand why Germany is so freaked out about a central bank lending money to troubled governments, you need to go back nearly 100 years — to when the German central bank did just that.

After World War I, Germany was deep in debt. Soldiers back from the war needed money for pensions. War widows needed compensation. Reparations to France and Britain were enormous. And no other country would lend it money.

So Germany's central bank printed a bunch of money and loaned it to the government. The result was possibly the most destructive case of inflation in history.

During the Weimar inflation, people carted money around in wheelbarrows to do their shopping. At one point, it cost a million marks to mail a letter. The currency was so worthless, it was used as wallpaper in German bathrooms. Money started losing value by the second:

"There's this famous example that somebody sits in a pub and orders a beer," says historian Carl Ludvig-Holtfrerich. "Immediately, when the waiter carries the beer to his table, he orders the second one. The waiter says, 'Well, you haven't finished!' And he says, 'Yes, but if I don't order now, prices will be double by the time I finish my first beer!' "

This is Weimar humor. But the result of the hyperinflation was an economic catastrophe.

Many Germans believe it helped lay the groundwork for the rise of the Nazi party — a belief that has left the nation with a profound fear of inflatoin.

"This historical experience tells every policy maker: You don't mess around with inflation," says Klaus Frankenberger, an editor in Frankfurt. "Never. You don't do this."

Fast forward 70 years from Germany's inflation nightmare to 1992. European countries are setting up the euro, and the new currency needs a new central bank.

In 1992, Germany was the biggest economy in Europe, and it had a lot of influence over the shape of the new European Central Bank.

So it's no surprise that the ECB wound with its headquarters in Frankfurt, and with a single mission: Keep inflation in check.

That's it.

The ECB is not supposed to be bailing out governments, according to many Germans. It's not supposed buy the bonds of troubled countries.

But for more than a year now — ever since Greece first put up its hand and said, "We need help" — that's exactly what the ECB been doing.

The ECB says it's not just printing money to buy the bonds of Greece and other troubled countries. When the bank buys the bonds of Germany and other troubled countries, it takes an equivalent of money out of circulation.

But Germans are not impressed.

Just last week, Jurgen Stark, the top ranking German at the ECB, resigned. The official line is that he resigned for personal reasons. But it's no secret that he hated the bond buying program.

When Stark resigned, the markets freaked out. His resignation — and the market reaction — was a reminder that there's still deep opposition in Germany to the ECB's tactics in fighting the debt crisis. And in the long run, the ECB needs Germany's support.

Correction: An earlier version of this story incorrectly quoted a former Bundesbank president as criticizing the bond buying program of the European Central Bank. In fact, he was criticizing the bond buying program of the US Federal Reserve.

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MICHELE NORRIS, Host:

These days, many European countries are struggling to dig themselves out of debt and many have turned to one place for cash - the European Central Bank. That's because it has the unique ability to print unlimited amounts of euros, and it could in theory lend that money to the governments in need. There's just one problem, Europe's biggest economy hates that idea.

Zoe Chace and Caitlin Kenney with NPR's Planet Money team explain.

CAITLIN KENNEY: To understand why Germany is so freaked out about a central bank lending money to governments in trouble, you need to go back nearly 100 years, when the German central bank did just that.

ZOE CHACE: After the First World War, Germany was in a hole of debt. No other country would lend it money. So Germany's central bank stepped in. It printed a bunch of money and lent it to the government.

KENNEY: But it printed too much money - way too much. Historian Carl Ludwig-Holtfrerich says the money started losing value by the second.

CARL LUDWIG: There's this famous example that somebody sits in a pub and orders a beer. And immediately when the waiter carries the beer to his table, he orders the second one. And the waiter says, well, you haven't finished. Yes, but if I don't order now, prices will be double before I finish my first beer.

(SOUNDBITE OF LAUGHTER)

CHACE: You may have heard of this - the hyperinflation of the Weimar Republic, arguably the most destructive case of inflation in history. People carted money around in wheelbarrows to do their shopping. At one point, it cost one million marks to mail a letter. The bills were so worthless, they were used as wallpaper in German bathrooms.

KENNEY: This catastrophic economic policy, many Germans believe it led to what happened next, something much worse - Adolf Hitler. Here's journalist Klaus Frankenberger.

KLAUS FRANKENBERGER: If you have gone through hyperinflation of the 1920s or after the war, and you saw what social distress, dislocation it brought, and eventually, you know, prepared the way for the Nazi to takeover, these historical experience tell every policy maker: You don't mess around with inflation. Never. You don't do this.

CHACE: So, fast forward 70 years from Germany's inflation nightmare to 1992. European countries are setting up the euro. This brand new currency needs a brand new central bank.

KENNEY: Germany was the biggest economy in Europe, so it had a lot of influence. The central bank's building, it's physically located in Germany in Frankfurt. The central bank's mission, also very German.

CHACE: Keep inflation in check. That's it.

KENNEY: It's so important to them, they even want children to understand it. They have this cartoon on their website which depicts inflation as this scary monster.

(SOUNDBITE OF A CARTOON)

UNIDENTIFIED WOMAN: Wait a second. I know you. You're inflation.

UNIDENTIFIED MAN: Ooh, well done. Because you're so clever, I'm going to give everyone here a cash price.

WOMAN: No, don't.

MAN: Wow, this is great.

WOMAN: No, it's not. If there's too much money around for the same number of products, it pushes up prices and money loses its value.

CHACE: This, in the German mindset, is all the central bank is supposed to worry about - inflation. It's not supposed to be bailing out governments. It's not supposed create money in order to buy the bonds of deadbeat countries.

KENNEY: But ever since Greece first put up its hand and said, we need help, someone needs to loan us money, that's exactly what the European Central Bank been doing, for more than a year now.

CHACE: The European Central Bank says that buying bonds doesn't mean it's putting more money into circulation. But Germans hate it. Germans like Helmut Schlesinger. He was there when the European Central Bank was created in 1992, and doesn't like to see a central bank with mission creep, a central bank doing the thing that Germans fear most.

HELMUT SCHLESINGER: We must have the monetary process under control. And not saying, well, say let us buy 600 billion of government bonds by the central banks in half a year. And then we hope that everything is fine. As we can see, it's not so much fine.

CHACE: Greece, Portugal, the rest of the troubled countries, they're still in trouble.

KENNEY: And Schlesinger not the only former central banker who's worried about this. There's a new ex-central banker who just resigned from the European Central Bank last week, Jurgen Stark, the top-ranking German. Officially, the central bank says he resigned for personal reasons, but it's no secret he too hated the bond-buying program.

CHACE: After his resignation, markets freaked out. It sent the message that there's still not consensus in Europe over how to fight the debt crisis. Germany is the biggest economy in Europe. The European Central Bank has to have them on the team.

KENNEY: So there's a battle going on in the heart of Europe at the central bank in Frankfurt, over how to balance the memory of a German national trauma with the needs of its struggling neighbors.

Caitlin Kenney.

CHACE: Zoe Chace, NPR News. Transcript provided by NPR, Copyright NPR.