Rudolf von Havenstein was the Central Bank Governor of Germany before, during, and following World War I. Though he served his country in this capacity for fully 15 years, he is generally remembered as the architect of Germany’s disastrous hyperinflation during the years from 1921 to 1923. Havenstein’s name is often invoked today as a cautionary tale to central bankers who play with fire experimenting with quantitative easing and negative interest rates.
Von Havenstein began his career working as a German lawyer. He was born before the country achieved unification in March 10, 1857 in Meseritz within the province of Posen. His family worked as government officials. Because of this, he studied law himself in Heidelberg and then Berlin.
Havenstein followed in his family footsteps into public service when he began serving in the Prussian Justice Service as a judge through 1887. His career took a decisive turn in 1890 when he began serving at the Prussian Ministry of Finance. Von Havenstein attained the highest financial post in Prussia by 1900 when he was elevated to the top job of President of the Prussian State Bank. He served ably in this capacity from 1900 to 1908.
Von Havenstein received his ultimate promotion in 1908 when the Kaiser Wilhelm II elevated him to President of the Reichsbank. He worked in this critical capacity from 1908 to 1923. Von Havenstein’s signature is featured on all German Reichsbank bank notes during these years. When the First World War erupted, Rudolf Von Havenstein went along with the Kaiser and advocated paying for the war by borrowing money instead of introducing an income tax on Germans. To this effect, he played an instrumental part in the introduction of German war bonds when the war broke out.
Germany paid dearly for this decision to finance the war with debt instead of an income tax, in particular after they lost the war and became saddled with an enormous war indemnity to pay for the other nations’ costs as well. During the war, the gold standard had already been suspended in Germany, ending fiscal responsibility. With the war over and the nation’s finances in shambles, the national war debt still remained.
Von Havenstein did not see any other way out of the financial disaster than to print up enough money to cover the debts and boost the economy with additional government spending. At the time, economic academics believed that the money supply had nothing to do with the level of inflation in a country.
As Von Havenstein printed more money, the value of a gold Mark increased astronomically in value. One gold Mark bought slightly more than 100 paper German Marks in January of 1919. By November of 1923, the same amount of gold purchased an astonishing 100 trillion paper German Marks. At this low point in his otherwise illustrious career, Rudolf Von Havenstein died on November 20th of 1923.
The end result of the fiscal policies pursued by Rudolf Von Havenstein was that the crippling hyperinflation completely destroyed the German economy. The Weimar Republic collapsed economically as well as politically. Government institutions dramatically weakened in the aftermath of the financial and political collapse. German politics dramatically destabilized. The negative shift in the political spectrum that resulted led to the rise of Adolph Hitler less than ten years later. It contributed to the outbreak of World War II.
Critics of today’s experimental fiscal and monetary policies are once again drawing comparisons with the life and times of Von Havenstein. In June of 2016, the 30 year Swiss interest rate turned negative, and the 30 year Japanese yields followed suit shortly thereafter. Germany’s 10 year yields turned negative in June as well.
The European Central Bank just began purchasing corporate bonds of non financial companies in an effort to turn their yields lower as well. The lessons of Von Havenstein appear to have been lost on modern day economic policy makers who are desperately searching for solutions to crippled economic growth in industrial nations.