Everyone knows that Jens Weidmann, head of the German Bundesbank, is not a big fan of expansionary monetary policy. Now he’s taking things a bit further by analogizing recent monetary stimulus to “the scene in Faust, when the devil Mephistopheles, ‘disguised as a fool,’ convinces an emperor to issue large amounts of paper money.”
A relevant issue to consider about this is that Goethe’s Faust was published in 1808 and is based on a traditional German folk tale. By 1808 a few places in the world—England, Belgium—were perhaps beginning to see the first signs of the industrial business cycle, but by and large the world was an agricultural economy. Agricultural economies are overwhelmingly dominated by “real” factors. This is something we see to this day where something like a drought can deal a huge shock to American corn production and therefore grain prices worldwide. In an economy like that, simply issuing paper money to cover the governments bills really is just tempting ruinous inflation. But one would hope that contemporary European policymakers, both in the ECB and elsewhere, could see that 1808 conditions don’t apply in 2012.
One quick way of seeing the difference is to note that agricultural economies don’t really suffer from unemployment—they suffer from failed harvests and starvation. Europe’s problem (thankfully) isn’t starvation, it’s that lots of people are not working even while lots of storefronts and offices are empty, lots of assembly lines are idling and lots of construction equipment is out of use.