A Template for Understanding Big Debt Crises

by Ray Dalio

In a desperate attempt to calm the inflationary spiral, on October 12 1922, the government stepped in to stop the ever-growing flight into foreign currency. Restrictions were put on German citizens purchasing foreign FX.101 Such capital controls are a classic lever to control inflationary depressions; they are rarely successful. The reasons for this are that a) capital controls have limited effectiveness at best because they are usually pretty easy to get around and b) trying to trap people typically leads them to want to escape even more. Not being able to get one’s money out of the country triggers a psychology that is analogous to the inability to get one’s money out of a bank: it produces fear that produces a run.