Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.
The German public, it seems, is particularly fearful of letting inflation getting out of control. This is, in part, due to the legacy of the German hyperinflation of 1922-23. The mark-dollar exchange rate rose from 4.2 to one in 1914 to a peak of around 4.2 trillion marks to the dollar by November 1923. At its height, prices were rising so fast that waiters had to climb on tables to call out new menu prices in restaurants every half hour. A loaf of bread rise from 250 marks to 200 billion by November. Banknotes became sufficiently useless that workers had to bring wheelbarrows with them to work to collect their daily pay, and bundles were given to children to play with, being cheaper than actual toys.
It's no coincidence that Adolf Hitler's inexorable rise to power began in November 1923, the high point of Germany's inflation, when he organized the abortive Beer Hall Putsch in Munich. In an interview Hitler claimed the high cost of living was Germany's biggest problem, promising "We intend to make life cheaper." To this end he demanded that shops—many of which were in Jewish hands—be brought under state control. And he stressed, "We expect all kinds of miracles of these national stores.
A study of hyperinflation has confirmed that the Nazis benefitted much more from deflation than they did from rising prices. Although hyperinflation played a role in destabilising German politics and weakening its institutions in the 1920s, it was deflation and depression during the early 1930's that “brought the toxic plant into fruit” in the form of Nazism.
The hyperinflation of 1923 created winners and losers among the middle classes (those with mortgages or debts found some relief while those with savings lost them). Middle-class votes subsequently splintered between several different parties.
Yet virtually all classes lost out when Brüning’s government reacted to a projected fiscal deficit and gold outflows in 1930 with deflationary policies. The resulting economic tailspin hurt most groups in German society. Unemployment surged among both the working and middle classes. Businessmen went bankrupt. Civil servants were either laid off or had their wages repeatedly slashed. Creditors lost their savings and debtors had their homes repossessed when the banking system collapsed in 1931. The experience of deflation made Hitler’s promises to conquer unemployment and stabilise prices by any means necessary attractive to a wide range of groups in German society, making it into a mass political movement across Germany for the first ever time in the early-1930s. The rest, as they say, is history.
Deflation is now a greater risk than inflation in Europe. The euro zone’s underlying or “core” inflation rate is now as low as just 0.8%: the lowest level in the short-life of the single currency. Britain and America, by contrast, have yet to suffer from destabilising levels of inflation because of reflationary policies like quantitative easing. Neither it is clear that the same set of policies that the German public credits for its economic and political stability will work in places like Greece or Italy, with very different structural contexts. A selective memory of the past may prove worse than no memory at all.