Tuesday, June 25, 2019

European Central Bank: German word ‘schuld' can mean either 'debt' or 'guilt'

Emmanuel Macron, French president, with Mario Draghi, ECB president
Brussels, June 21, 2019

The German word ‘schuld' can mean either 'debt' or 'guilt' and Germans have a history of aversion to debt and fiat money (government-issued currency that is not backed by a metal such as gold or silver). The genesis of this obsession pre-dates the hyperinflation in the aftermath of the First World War.

In modern times Germans tend to opt for cash transactions even though Mastercard pointed out that more than 11,000 strains of bacteria had been discovered on German banknotes. The German Bundesbank (central bank) last February released the results of a survey which hailed cash as “still the quickest and most cost-effective form of payment at the point of sale.” German retailers settle approximately 20bn payments each year. “Three out of four payments at the point of sale are settled in cash,” Johannes Beermann, executive board member, explained. Cash payments also rank first in terms of share of turnover, accounting for roughly 51% of the €410bn total turnover in 2018.

Germans are big savers and savings banks continue to control 37% of all deposits. However, the savers were aghast during the euro crisis that the European Central Bank (ECB) would push interest rates to close to zero while risking high inflation.

On Friday June 21st at the EU summit in Brussels, Emmanuel Macron, president of France, doused Jens Weidmann, president of the Bundesbank, with irony and sarcasm in response to the latter’s recantation of strong opposition from 2012 to measures taken under the leadership of Mario Draghi, ECB president, to save the euro.

Draghi is retiring at the end of October 2019 and Weidmann wants his job.

The French president praised Draghi, a native of Italy, as one of the greatest European statesmen of recent decades — “We make all these communiqués that everyone has forgotten two weeks later. He, on a summer’s day in 2012, he said just a few words, ‘whatever it takes,’ and the response was immediate, and the memory is still bright.”

Draghi in a speech last week hinted that the Bundesbank president’s outspoken attacks on ECB policies had stoked the rise of populism.

The ECB president spoke at a forum in Sintra, Portugal, to mark 20 years of the euro. On July 26, 2012, he had made a momentous statement on the euro at a conference in London at a time of great uncertainty. "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough."

The ECB president made it clear that the most important line of defence that he proposed in 2012 did not have to be activated

"Monetary policy responded first in the summer of 2012 by acting to defuse the sovereign debt crisis, which had evolved from a tail risk for inflation into a material threat to price stability. Announcing Outright Monetary Transactions (OMT) established our commitment to counter unwarranted redenomination risks in sovereign debt markets and acted as a powerful circuit breaker.

While OMT was never activated, the effect of its announcement was equivalent to that of a large-scale asset purchase programme: spreads in vulnerable countries fell on average by more than 400 basis points (4%) over the next two years. The macroeconomic impact of OMT was also analogous to other purchase programmes: ECB research finds that the GDP and price effects of OMT were broadly in line with those estimated for the QE (bond-buying by central banks) that took place in the United States and the United Kingdom."

Weidmann was the only dissenter on the ECB's rate-setting governing council and he told the German constitutional court that the ECB's measures would pave the way for financing of governments by the central bank — a contravention of EU law.

President Macron added last Friday: “I am very happy that the members who at the time strongly opposed, and who even took legal action, against the decisions of Mario Draghi, against OMT, against all the mechanisms put in place, have been converted, perhaps belatedly, but with gusto.” The French president continued as journalists laughed: “I think it shows that we all have good in us and that we can all improve. And so I draw from that, above all, a lesson to be optimistic on the human spirit.

Money creation, Goethe, Faust and alchemy

John Maynard Keynes (1883-1946), the renowned British economist, who was a member of the British delegation at the post World War peace talks at Versailles in the first half of 1919 wrote, in his book on the vengeful peace, ‘The Economic Consequences of the Peace,’ “Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency,”* and in the new German Weimar Republic in 1921-23 hyperinflation would destroy the currency.

At the outbreak of the war in 1914 in for example Germany and Britain, convertibility of currency notes to gold was suspended. When the Reichsmark was replaced with the Rentenmark in November 1923, ironically the state benefitted most because the sum of all German domestic war debt, valued at 154bn Reichsmark, dropped to just 15.4 Pfennig on the day the Rentenmark was introduced.

John Plender wrote in the Financial Times in 2011:

"...mercantilism and the fear of sophisticated finance have historically gone hand in hand in Germany and other parts of northern Europe. In the 15th century the cities of the Hanseatic League were profoundly suspicious of credit. They largely excluded foreign bankers. Merchants tried to balance trade bilaterally, relying partly on barter while making some use of coin. The economic historian Raymond de Roover reckoned the League’s credit institutions were about two centuries behind the Italians in 1500."

Seven YearsWar (1756–63), was a major conflict that involved all the great powers of Europe with generally, France, Austria, Saxony, Sweden, and Russia aligned on one side against Prussia, Hanover, and Great Britain on the other.

Frederick the Great, who was king of Prussia from 1740 to 1786, helped to fund the war by debasing the coinage.

In 2012, the 180th anniversary of the death of Johann Wolfgang von Goethe (1749-1832), the renowned German writer, Faust, his most famous creation which was based on a centuries-old legend, was deployed against modern-day money printing, known as quantitative easing (QA), in his hometown of Frankfurt, host to two central banks in modern times — the Deutsche Bundesbank and the European Central Bank.

The experience of Frederick the Great's money shenanigans and that of 1790s France may have influenced Goethe.  

Jens Weidmann, president of the Bundesbank presented a well-known German parable to an audience of bankers in September 2012:       

Let me remind you briefly of the “money creation” scene in Act One of the Second Part of Faust. Mephistopheles (the spirit of the Devil), disguised as a fool, talks to the Emperor, who is in severe financial distress and says:

“In this world, what isn’t lacking, somewhere, though? Sometimes it’s this, or that: here’s what’s missing’s gold”

The Emperor finally responds to Mephistopheles’ subtle attempt to persuade him,

“I’m tired of the eternal ‘if and when’: We’re short of gold, well fine, so fetch some then”

To which Mephistopheles replies:

“I’ll fetch what you wish, and I’ll fetch more”

In the commotion of the nocturnal masquerade ball, he persuades the Emperor to sign a document – a document which Mephistopheles has reproduced overnight and then distributed as paper money. 

Those involved are quite taken by the initial success of this measure. The Chancellor is delighted to announce: 

“See and hear the scroll, heavy with destiny, – (referring to the paper money that has been created) – that’s changed to happiness our misery”

He reads, “To whom it concerns, may you all know, This paper’s worth a thousand crowns or so” 

A little later, Mephistopheles stirs up the general elation even further by saying:

“Such paper’s convenient, for rather than a lot Of gold and silver, you know what you’ve got. You’ve no need of bartering and exchanging, Just drown your needs in wine and love-making.”

Those concerned are so overjoyed by this apparent blessing that they do not even suspect that things could get out of hand.

In the Second Part of Faust, the state can get rid of its debt to begin with. At the same time, private consumer demand rises sharply, fuelling an upswing. In due course, however, all this activity degenerates into inflation, destroying the monetary system because the money rapidly loses its value.

Weidmann continued:

"It is very striking that Goethe throws light in this way on the potentially hazardous connection between paper money creation, public finances and inflation – and thus on one core problem of uncovered monetary systems. This is all the more remarkable given that Faust and Goethe are not generally immediately associated with economics, especially not with such central areas of conflicting monetary policy priorities.

The fact that Faust can indeed be interpreted in economic terms has been demonstrated, not least, by Professor Adolf Hüttl, who used to be Vice-President of the former Land Central Bank in Hesse. I am delighted that he is in attendance here today. Back in 1965, he wrote a very insightful article in the Bundesbank’s staff magazine about “Money in the Second Part of Goethe’s Faust.”

In the mid-1980s, while teaching in Sankt Gallen, Professor Hans Christoph Binswanger – who I am pleased to say is also here today – took a similar line and brought out a book entitled “Money and Magic: a Critique of the Modern Economy in the Light of Goethe’s Faust.”

Binswanger’s thesis is that Goethe was portraying the modern economy with its creation of paper money as a continuation of alchemy by other means. While traditional alchemists attempted to turn lead into gold, in the modern economy, paper was made into money.

Indeed, the fact that central banks can create money out of thin air, so to speak, is something that many observers are likely to find surprising and strange, perhaps mystical and dreamlike, too – or even nightmarish."

*There is no evidence that Vladimir Ilyich Ulyanov (Lenin) made a comment on destroying capitalism by debauching the currency.