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Angela
Merkel told the German Bundestag last Wednesday that in the absence of a deal
on the eurozone debt crisis, “Nobody should take
for granted another fifty years of peace and prosperity in Europe: if the
euro fails, Europe fails”.
This
perhaps encapsulates Germany’s fears, born out of experience, and it
would be wrong to dismiss her statement, as many commentators have, as mere rhetoric.
The whole concept of the European Coal and Steel Community, the original
forerunner of the European Union, was to tie Germany and her neighbours together in a trade and political union to
prevent future wars between them.
The EU has
delivered peace and prosperity for Germany. It is reasonable to conclude, as
Merkel does, that the destruction of the euro will reverse the political
process. Post-war European politics has been largely based on these two
premises. But there is a deeper point to Merkel’s statement, which has
been forgotten in our modern world of fiat currencies: in history the
greatest threats to peace and social stability have usually been associated
with currency debasement. And here, Germany’s unhappy experience has
become rooted in its people’s psyche.
Germany’s
spending in the build-up and early years of the First World War was financed
purely by monetary inflation, and even by 1917, 85% of the cost was paid for
by new paper money. This came about as a result of the economic advice at the
time, principally from Georg Knapp, who believed that money is a government
product and should be free of other constraints. For the Kaiser, it was like
having a modern Keynesian economist advising a government today that it has a
right to finance itself through monetary inflation. It was therefore hardly
surprising that an ambitious Kaiser, having been shown how to finance the
expansion of Germany by attacking its neighbours,
actually did so.
The social
consequences of printing money are entirely supported by economic theory of
the Austrian School of economists and the lessons of history. It boils down
to a simple fact: any electorate can be patriotically roused for war, so long
as it doesn’t have to pay for it. And that is the lie behind monetary
inflation. If you print money to finance a war instead of raising taxes, for
a time, no one notices the cost.
Germany has
been through this lesson twice in the last century, so her people
instinctively understand the chaos that results. It is the rest of Europe,
with the exception perhaps of Austria, which has forgotten it. So let us
state it loud and clear: sound money is the best guarantee of peace, while
fiat money is a precondition for chaos.
So Angela
Merkel is right, but the pressure from other euroland
and G20 states will be difficult to resist. They have placed their trust in
an expanded bailout fund to be supported partly by the EU’s Asian
trading partners, which if it gets off the ground will do so at the expense
of the dollar. The trouble will come if the European Central Bank is also
expected to fund it, which so far is assumed by many but not discussed. Any
major injection of ECB money into the fund will be extremely controversial in
Germany, and therefore should not be taken as read.
Originally
published at Goldmoney here
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