Goethe and problems with fiat money…

A nice speech by Jens Weidmann of Bundesbank. One does get to read about Goethe whenever you read on literature etc. However, it seems even Goethe knew about dangers of fiat money:

How does Johann Wolfgang von Goethe enter the equation when talking about the creation of money. Why have I widened the discussion further?

Let me remind you briefly of the “money creation” scene in Act One of the Second Part of Faust. Mephistopheles, 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 over night 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.

And then the trouble started:

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.

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.

Amazing really…

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