Monetary policy is all the rage at the moment around the world. It is unlikely you will go a day without hearing about hellish interest rate hikes, evil Central Bank governors, and destructive levels of inflation. But only a year or two ago people were lamenting unnecessarily low levels of inflation and economic growth. During that time, you probably heard some friend or relative of yours, maybe jokingly (maybe not), ask you, as a keen economics student, the eternal question: “Why don’t we just print more money?” The answer seemed so obvious it was hard to even express, so you just threw out some line about increasing the supply of money and creating excess inflation. However, in my opinion, looking back to past monetary crises is a much more fun and interesting way of tackling this question. So today, we are journeying all the way back to 17th Century Germany to learn about perhaps the most excellently named economic crisis of all time: Kipper und Wipper.
When looking at this monetary crisis, it’s important to first understand the geopolitical environment of continental Europe at the time. Germany, as we know it now, did not exist, and in fact wouldn’t exist as a unified country until 1871. Instead, it was known as the Kingdom of Germany, and was one of the main states of the Holy Roman Empire, along with the Kingdom of Italy and the Kingdom of Burgundy. But this Empire was, as Voltaire famously proclaimed, neither Holy, nor Roman, nor an Empire. The Holy Roman Empire began in 800 when Charlemagne, was crowned Roman Emperor by Pope Leo III, the first Roman Emperor in the West since the fall of Rome in the 5th Century. However, the Empire is said to have begun in earnest with the ascension of Otto I to the title in 962, beginning a continuous reign of Holy Roman Emperors until its dissolution in 1806 during the Napoleonic Wars. The Holy Roman Empire essentially stood as the worldly continuation of the Papal State, with the Holy Roman Emperor seen as the defender of Christendom.
At its peak, the empire was one of the biggest powers in Europe. Then came the Protestant Reformation. In 1517, the Holy Roman Emperor had been a part of the staunchly Catholic Habsburg dynasty for nearly 80 years, when Martin Luther nailed his Ninety-Five theses to the door of the Castle Church in Wittenburg, Germany on October 31st, splitting Western Christianity in two. States throughout the beleaguered Empire were forced to choose between Catholicism and Protestantism, with much of the North going the way of Luther, and the South remaining Catholic. The Peace of Augsburg (1555) kept all-out conflict at bay, however, in 1618 the nobility of member state Bohemia (which the Habsburgs separately ruled), deposed Holy Roman Emperor Ferdinand II as King of Bohemia, and supported a Protestant Candidate, Frederick V of the Palatinate. Ferdinand II retaliated by launching a military expedition into Bohemia, beginning the most destructive religious conflict in European history, one which would leave over 8 million people dead and destroy much of Central Europe: the Thirty Years’ War.
It is within this catastrophic conflict that our story of inflation takes place. Inflation was a relatively new concept in Europe, but one that had been discovered quite quickly following the massive influx of precious metals from the New World in the 16th century, as well as trade from Africa. Within the Holy Roman Empire, each member state had the right to mint its own currency, and the value of the currency was essentially determined by decree, not necessarily by the value of the metals their currencies were made of. So when the Thirty Years’ War broke out, the states needed ways to fund their massive armies, and with no effective system of taxation and a struggling trade environment, they sought to debase their own currencies, the pre-cash equivalent of printing more money. In order to do this, states began clipping their coins, which involved trimming off the edges and melting them down to form new coins, so that the actual value of the coin was less than its stated value. Hence, this period was known in German as Kipper und Wipper, with kipper meaning to clip, and wipper meaning to wag or see-saw, referring to the way currency exchangers would disrupt scales used to weigh coins against the standard, confusing onlookers as to whether the debased coins actually did weigh as much as the real ones. This soon became a case study in the infamous Gresham’s Law, which states that bad money will drive good money out of an economy.
The debasement began only within the debaser’s own territory, with the states hoarding piles of their own debased currency in order to fund the war effort. But eventually, the states started to realise that this wasn’t the most effective way of financing a war. Instead, government’s began hiring people to take debased currencies across borders and trade them for another state’s good coinage, then returning home and debasing that good currency for a tidy profit. This created a domino effect, as states began debasing their currency in order to recover their losses from accepting bad coinage (known as kippergeld), eventually leading to a slew of mints all around the Empire, producing debased currency that soon didn’t even contain any silver or gold. By 1622, everyone was in on the scheme, with everyone trying to make a coin worth less than the other’s and the reach of the crisis expanding further and further. The imperial economy had completely collapsed at this point. People were not willing to work as the money they would be paid in was completely worthless, tax revenue couldn’t be collected and all commerce stagnated. However, as is frequent in such crises, many upper-class citizens did quite well for themselves, profiting off the debasement of currency, and using it to buy swathes of land dispossessed during the early days of the war.
Little economic data exists from this period, but estimates state that the prices of basic foods rose by a factor of eight between 1620 and 1623, and that the average low-denomination coin in 1621 was worth about twenty percent of its face value. By 1623, nearly all of the low-denomination currency in the Holy Roman Empire was kippergeld, and the empire’s leaders had had enough. They reinforced the laws of the Mint Ordinance of 1559, which made the unsanctioned opening of a mint punishable by death, and created a fixed exchange rate for a common silver coin of the Holy Roman Empire, the Reichsthaler. The damage, however, had well and truly been done.
Even with the Kipper und Wipper crisis coming to an end in 1623, the Holy Roman Empire would have no reprieve, with the Thirty Year’s War lasting until the Peace of Westphalia in 1648. Even four hundred years on, there are lessons that can be learned from Kipper und Wipper. Fueling spending with freshly printed money is a completely unsustainable and artificial form of economic growth, which only serves to benefit in the very short term, and which in the long term can have disastrous consequences on inflation and the value of money in an economy.