Keynes, Lenin, and Hyperinflation

Keynes, Lenin, and Hyperinflation

Gary North 

In 1919, John Maynard Keynes became an international figure of considerable influence because of his book, The Economic Consequences of the Peace. It was a critique of the Versailles Treaty's imposition of reparations payments on Germany in the aftermath of World War I.

In that book, Keynes made the following observations.

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become 'profiteers', who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose.

This became one of the most widely quoted statements from the book. Yet the book really was not about inflation, Lenin, and the destruction of capitalism. But the quotation was simply too good to resist for defenders of the traditional gold standard.
Beginning in the 1970's, the authenticity of the quotation from Lenin was called into question by a series of economists and historians. There is no reference to this in Lenin's collected works. The hostility to the gold standard is so great, that this is one time that Keynes was called into question by his academic acolytes. If it is a question of attacking the gold standard or calling Keynes into question, Keynesians are willing to call Keynes into question. First things first.

Yet it turns out that Keynes was right, and the critics of Keynes on this one particular point have been wrong. Lenin said far more than the brief extract attributed to him by Keynes. Lenin made it very clear why he believed that inflation will ultimately destroy capitalism. He was overseeing the process of this destruction, and his use of paper money was central in his organizational plans. Here is what he said:

Hundreds of thousands of rouble notes are being issued daily by our treasury. This is done, not in order to fill the coffers of the State with practically worthless paper, but with the deliberate intention of destroying the value of money as a means of payment. There is no justification for the existence of money in the Bolshevik state, where the necessities of life shall be paid for by work alone.Experience has taught us it is impossible to root out the evils of capitalism merely by confiscation and expropriation, for however ruthlessly such measures may be applied, astute speculators and obstinate survivors of the capitalist classes will always manage to evade them and continue to corrupt the life of the community. The simplest way to exterminate the very spirit of capitalism is therefore to flood the country with notes of a high face-value without financial guarantees of any sort.

Already even a hundred-rouble note is almost valueless in Russia. Soon even the simplest peasant will realise that it is only a scrap of paper, not worth more than the rags from which it is manufactured. Men will cease to covet and hoard it so soon as they discover it will not buy anything, and the great illusion of the value and power of money, on which the capitalist state is based will have been definitely destroyed.
This is the real reason why our presses are printing rouble bills day and night, without rest.

This statement was reprinted in an article by a pair of economists, Michael V. White and Kurt Schuler, who included it in their article, "Who Said 'Debauch the Currency': Keynes or Lenin?" It was published in the Journal of Economic Perspectives, Volume 23, Number 2 (Spring 2009), p. 217. This is a publication of the American Economic Association. The article is online.
The reason why scholars did not find it in the collected works of Lenin is that this was reported in newspapers at the time. The authors of the journal article describe this article. "A report of an interview with Lenin was published on April 23, 1919, by the Daily Chronicle in London and the New York Times. Dated April 22 and cabled from Geneva, the article claimed to be based on 'authentic notes of an interview with Vladimir Ulianoff Lenin, the high priest of Bolshevism, which were communicated to me by a recent visitor to Moscow.'"
Because the author of the article was not identified, skeptics may decide to criticize it as a hoax. But Lenin never indicated that it was a hoax, nor did he challenge Keynes's summary statement. He commented on Keynes' book in 1920, but he did not single out Keynes' statement as a misrepresentation.

IS THE OBSERVATION CORRECT?

The hyperinflations that occurred in Germany, Austria, and Hungary in the early 1920's did not destroy capitalism. They certainly dispossessed investors and bonds, life insurance policies, bank accounts, and other investments that were tied to the value of the respective fiat currencies. Other capitalists prospered, however. Anybody who had purchased real estate by means of a mortgage, or any farmer who had operated his farm by means of money borrowed from a bank, benefitted greatly. There were winners and losers, but more losers than winners.

Except during wartime, and except in the immediate aftermath of the lost war, only one Western nation has ever indulged in hyperinflation: the state of Israel in the mid-1980's. The German and Austrian hyperinflations ended in 1924. The memory of the hyperinflation in Germany has kept German central bankers from inflating their currencies on this scale.
There have been periods of what can be called repressed inflation, where nations inflate their currencies, but control prices and wages by law in order to conceal the effects of this policy. Nevertheless, we have never seen a situation in the West in which capitalism has been called into question as a result of hyperinflation. Lenin was wrong. Keynes was wrong.
Hyperinflation is a short-term phenomenon. By its very nature, it disrupts market processes. But that means it disrupts legal and above-board market processes. It makes black marketeering profitable. It is true that, in reaction against the profiteering of the great inflations immediately after World War I, there was considerable hostility against capitalists, and especially Jewish capitalists, who had profited as a result. But because Jews were mostly urban, and hyperinflation hurt cities far more than the countryside, where barter was possible, urban Jews on the whole were dispossessed of their property. It is true that many farmers did really well as a result of hyperinflation, but one of the titles of the world's shortest books is this: Famous Jewish Farmers. 

Hyperinflations redistribute wealth. They do not last long, because it is not possible to conduct economic affairs in a currency that has collapsed. You can pay off old debt with it, but you cannot buy anything of value with it. It destroys the division of labor in the legal markets, and it transfers the division of labor into the black markets. Because hyperinflation is not understood by most people, there are a few winners in the period of hyperinflation, and there are lots of losers. But we have not seen a move directly from hyperinflation to socialism or communism.

It is often said that Hitler was a result of the hyperinflation in Germany. This is not an accurate assessment. The Weimar Republic operated for nine years after the hyperinflation before Hitler came to power in 1933. It was not socialist. It had what we would call welfare state tendencies, but it was not marked by the state's ownership of the means of production. It was more like the New Deal than the USSR. So, for that matter, was Hitler's Germany.
Hyperinflation is a bugaboo within the Right. It should not be. 

The problem of central banking is not that it leads to hyperinflation. The problem with central banking is the endless cycle of booms and busts, euphoria and disappointment. These periods tend to increase the central governments' control over the economy, especially during periods of big bank bailouts. There is a move towards Keynesianism, but there is not a move toward socialism or communism. The victims of hyperinflation do not call for the overthrow of capitalism. They have not even gone so far as to call for the cessation of central banking. Central banking came into its own during World War I, and it has never surrendered territory since then. Germany and Austria did not abolish their central banks after 1923. If the hyperinflation of the 1921-23 period did not persuade the voters that the pre-gold coin standard was superior to central banking, then central bankers are safe in seeing no threat to their control over national economies around the world.

Hyperinflation is not in our future. The massive debts of the modern welfare state are not such that they can be paid off by two or three years of hyperinflation. The political promises made by central governments to the masses of the population are promises that are thought to extend down through the ages: irrevocable. The fiscal burdens of Social Security and Medicare cannot be relieved by hyperinflation. Hyperinflation produces the destruction of the currency, and a currency revision follows. The political promises of the modern welfare state will still be on the books in the aftermath of any hyperinflation. This is why there is no payoff to the government or the central bank from hyperinflation. 

Hyperinflation calls attention to the incompetence of central bankers. This is why central bankers do not indulge in it, except when governments force them to do so.
The 450% inflation in the state of Israel in 1984 did not lead to a call to shut down the central bank. The bank stopped inflating. Capitalism remained intact. It will take more than hyperinflation to destroy either capitalism or central banking.