DAVID GREENE, host:
As we just heard, Chancellor Merkel in Germany doesn't believe countries can spend their way out of the current economic crisis. She's worried massive government spending could unleash runaway inflation. It's a fear that recalls a painful episode in Germany's economic history. David Kestenbaum of NPR's Planet Money team explains.
DAVID KESTENBAUM: Let me describe one piece of paper for you. It's German currency from 1923. It says 50 million marks on it. This one piece of paper was worth 50 million marks. Germany underwent what is now the textbook case of hyperinflation. It happened just after the First World War. Germany had debts to pay and it had gotten into that bad habit of basically printing money.
Unidentified Man: In October 1923, it was noted by the British embassy in Berlin that the number of marks to the pound equaled the number of yards from the Earth to the sun.
KESTENBAUM: This is an actor reading from a history called "When Money Dies: The Nightmare of the Weimar Collapse" by Adam Fergusson.
Unidentified Man: Dr. Schacht, Germany's National Currency Commissioner, explained that at the end of the Great War one could in theory have bought 500 billion eggs for the same price as that for which, five years later, only a single egg could be procured.
WESTERVELT: And some people worry we might be heading for inflation soon. The amount of money in an economy is determined by its central bank. The central bank is supposed to be independent of politics. In this current crisis, the Federal Reserve, our central bank, and central banks around the world, have been taking unprecedented historic steps to make credit available. It's basically pushed money into the economy. The head of Germany's central bank has warned this could lead to inflation, and here is Chancellor Angela Merkel earlier this month.
Chancellor ANGELA MERKEL (Germany): (Through translator) We must return to an independent central bank policy and to a policy of reason. Otherwise in 10 years time, we'll be in exactly the same situation.
KESTENBAUM: Merkel worried the central banks might be bowing to political pressure and losing their independence. Josef Joffe is editor of the German newspaper Die Zeit. He says concern about inflation is in the German DNA. It's in his. He worries there's just too much money in the economy.
Mr. JOSEF JOFFE (Die Zeit): Tim Geithner and Bernanke and the president and Larry Summers think they can soak it up again when the time comes. But meanwhile they are pumping unprecedented liquidity into the American global system. And I just can only say, good luck, Mr. President, in soaking up that excess liquidity. And I think that's what Mrs. Merkel reacted to. I mean if the Germans believe in one god, it's the independence of the central bank.
KESTENBAUM: So are we at risk of catching a nasty case of inflation down the road? I took our U.S. economy in for a kind of doctor's office visit to a place that gives this advice out to countries all the time — the International Monetary Fund.
Mr. CARLO COTTARELLI (IMF): I'm Carlo Cottarelli. I'm the director of the fiscal affairs department of the IMF.
KESTENBAUM: (Foreign language spoken)
Mr. COTTARELLI: (Foreign language Spoken)
KESTENBAUM: I'm going to give you a hypothetical. Suppose we have a country, GDP say around $13 trillion, its central bank has been pushing as much money as possible into the economy. Meanwhile the government is racking up a huge debt. Would the IMF tell this county to be worried about inflation?
Mr. COTTARELLI: I mean what we have been telling not this country, but all our members, is that there is a need in the short run for macroeconomic policies to support economic activity. But there is a need for every central bank, for every government, to have a strategy, to start thinking now about how to exit when the moment comes.
KESTENBAUM: That could be difficult, he says.
Raising interest rates, pulling money back out of the economy, is often unpopular. It's been said the role of a central bank is to pull away the punch bowl just as the party gets going. That time is definitely still in the future. As we all know, it's still a pretty lousy party.
David Kestenbaum, NPR News.
GREENE: And if you'd like your own lesson on how inflation can spin out of control, visit our Planet Money Web site at npr.org/money.
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