MMT fosters more economic inequality—hyperinflation targets the poor

MMT proponents argue that central banks can print money without triggering dangerous levels of inflation. This claim not only overlooks the theoretical considerations outlined above, it also ignores the dark history of debt monetization leading to hyperinflation. As Thomas Sargent famously documented in his 1982 classic, The Ends of Four Big Inflations, printing money and monetizing debt — even when that debt was partly denominated in local currency — led to devastating inflation in Austria, Hungary, Poland, and Weimar Germany during the first half of the 20th century.

Austria and Hungary — two states formed through the dissolution of the Austro-Hungarian Empire — found themselves greatly diminished in both size and power following WWI. Since Austria-Hungary was deemed an aggressor of the war, its successor states owed the Allies substantial amounts in war reparations. To pay off the reparations while alleviating large-scale food shortages and unemployment, the Austrian government ran significant deficits — which it financed by selling treasury bills to the Austrian section of the liquidated Austro-Hungarian bank. At the same time in Hungary, political turmoil led to considerable budget shortfalls, which the government financed by borrowing heavily from the Hungarian section of the bank and increasing the volume of low-interest loans issued to private entities. As a result, both the Austrian crown and the Hungarian krone depreciated rapidly while domestic prices rose. This led to flight from each currency by domestic actors and foreign investors alike and, ultimately, to hyperinflation in both countries.

Poland, meanwhile, emerged from WWI as an independent nation after over a century of foreign rule. Cobbled together from portions of Austria-Hungary, Germany, and Russia, Poland inherited inflated currencies from these three partitioning powers — each of which had financed their respective participation in WWI through the printing press — and an empty treasury. The fighting in Poland did not end in 1918, either, as the nation found itself in a second war with Soviet Russia that lasted until the fall of 1920. In order to settle this and other border disputes, and to rebuild after the devastating WWI occupation, Poland amassed substantial debt. Like both Austria and Hungary, Poland financed its deficit spending by printing massive amounts of currency. In 1918, one U.S. dollar was equivalent to nine Polish marks; by the end of 1923, that same dollar was worth 6,375,000 Polish marks.

Of the four post-WWI cases of hyperinflation Sargent covers, none looms larger in the historical imagination than that of Weimar Germany. Germany had financed its war effort through deficit spending and suspension of the gold standard, believing that it would be able to achieve a swift, decisive victory and pay off its debt by annexing wealthier territories and imposing reparations on its defeated enemies. What occurred was very much the opposite: Over four long years of fighting, Germany accumulated considerable war debt while significantly devaluing its currency, the German mark. And since Germany was on the losing side of the war, instead of being paid reparations, it owed staggering levels of reparations to the Allies at the war's end.

Making matters worse, the Reparations Commission demanded Germany pay 132 billion gold marks as part of the London Payment Plan. The German government responded by printing more German marks to pay what it owed, which only devalued its currency further. In 1922, Germany failed to pay an installment it owed to France, which prompted the French occupation of Germany's primary industrial region to ensure repayment. The German government responded by calling for what amounted to a strike, then offered the workers financial support — again, financed by printing more currency and issuing loans at interest rates far below the rate of inflation. By 1923, German currency was worthless: One U.S. dollar at the time was equivalent to 4,210,500,000,000 German marks.

But hyperinflation is not just a phenomenon of the distant past. In fact, instances of hyperinflation have occurred over recent decades in countries like Brazil, Zimbabwe, and Venezuela.

Brazil experienced hyperinflation in the final decades of the 20th century. This resulted from its decision to pay down high external debt but avoid raising taxes. Instead, the country turned to printing money. By 1990, inflation reached a monthly rate as high as 82.4%. Hyperinflation in Brazil was only resolved when it created a separate unit of account, the Unidade Real de Valor, or URV, to exist parallel to its existing currency, the cruzeiro. Ultimately, this new unit of account became the Brazilian real, replacing the cruzeiro and quashing the inflationary spiral.

For Zimbabwe, the trouble began in the late 1990s, when the government adopted several spending plans — including the compulsory government purchase of white-owned commercial farms and generous pension plans for veterans of the country's war of independence — without budgeting for them. This triggered panic among foreign investors, who pulled capital from the Zimbabwean markets, thereby causing a crash of the country's currency.

Subsequent unwise military ventures drove Zimbabwe further into debt. Meanwhile, the forced seizure of farmland and resulting violence nearly halted all agricultural production. Since the Zimbabwean economy was too fragile to grow its way out of debt, and imposing new taxes to raise revenue was a political non-starter, monetary and fiscal authorities began to monetize the country's debt by printing more money. This ultimately led to hyperinflation so extreme — at an estimated 79,000,000,000% per month in November 2008 — that Zimbabwe was effectively forced to substitute its own currency with the U.S. dollar shortly thereafter through a process economists call "dollarization."

The seeds of Venezuela's ongoing struggles with hyperinflation were sown in the early 2000s, when the nation's economy and the value of its currency, the bolívar, became heavily dependent on revenues from oil exports. The rise in oil prices that largely coincided with President Hugo Chávez's term in office — from 1998 until his death in 2013 — ensured a steady stream of foreign revenue into government coffers. This allowed the Chávez regime to increase deficit spending in pursuit of its socialist policy agenda.

Then in 2014 — a year after Chávez's successor, Nicolás Maduro, took office — the global price of oil collapsed, leading to a steep decline in government revenues. Foreign demand for the bolívar to purchase Venezuelan oil fell, contributing to a decline in the currency's value. The Venezuelan economy was already in recession at the time, but instead of pulling back on Chávez's generous social-welfare programs or increasing taxes, Maduro's regime responded by ramping up deficit spending and printing more currency to finance the government's debts. By 2016, hyperinflation had set in. At the end of 2018, inflation rates in Venezuela reached an estimated 80,000% per year.

As these examples demonstrate, the correlation between currency printing and hyperinflation is undeniable, the causal relationship intuitive. Yet MMT proponents continue to contest it. In their canonical MMT textbook Macroeconomics, William Mitchell, L. Randall Wray, and Martin Watts state that "[n]o simple proportionate relationship exists between rises in the money supply and rises in the general price level." Wray, a Bard College professor and one of MMT's key proponents in academia, has gone on to say "there is no empirical evidence to support the belief that raising interest rates fights inflation." Stephanie Kelton, author of The Deficit Myth and former advisor to Senator Bernie Sanders's presidential campaign, argues that inflation is the result, not of monetary policy, but of "overspending" — spending beyond what it takes for an economy to reach "full employment" (which she defines not according to the mainstream economic concept of "natural rate of unemployment," but as the 0% unemployment rate that would occur under a government jobs guarantee). Such claims fly in the face of both historical evidence and traditional macroeconomic theory. And it's worth remembering, too, that hyperinflation often hurts the poor the most, since consumption makes up a greater fraction of their incomes.