The Group of 30 central bankers and economists has produced a new report, "Fundamentals of central banking: lessons from the crisis". It traces the history of central banking theory and practice, including the economic thought that underlies it. And it draws from it some important lessons about the causes of the 2008 crisis and the reasons for the very long, slow recovery. I've discussed the main themes of the report here (Forbes).
But in this post, I want to focus on a particular piece of economic history. This chart leapt out at me from the report:
Note that this chart starts only two years after the Weimar hyperinflation, hence Germany's elevated inflation rate at the start. This is important, as we shall see.
What struck me is how similar the profiles of the two countries are during the Depression. Both experienced Fisherian debt deflation - annualised CPI fall at peak was 10% for both countries. And both had very high levels of unemployment. German unemployment was actually higher than American, peaking at 30%.
But the recovery was very different. German unemployment fell rapidly during Hitler's tenure, while US unemployment remained elevated until after World War II. Looking at this chart, an alien from Mars who knew nothing of the history of the 20th century might think that the German government did a far better job of restoring its economy than the American government. After all, full employment is always a good thing, isn't it?
Hitler achieved that remarkable fall in unemployment through debt default, autarky and a massive programme of public works. Clearly, this works. So why do we avoid his approach like the plague?
The simple answer is that autarkic governments are usually brutal ones. They don't necessarily start that way, but that is what they become, as people fight against the closed economy and the ever-increasing levels of central control needed to keep it that way. Further, because autarky deprives countries of resources they can't produce themselves, autarkic governments often have expansionary ambitions; instead of trading for goods and services, they seize the means of producing them.
Hitler presided over one of the most murderous governments in history, directly responsible for the deaths of an estimated 13 million people. His attempt to create a European empire ended in defeat and destruction after the most expensive war in history. Looked at from this perspective, that remarkable fall in unemployment doesn't look so good, does it?
The US remains deeply scarred by the memory of unemployment. Google "Great Depression", and you are presented with pictures of soup kitchens, migrating farm workers and queues of out-of-work men, all of them from the United States: it is difficult to find pictures from other countries. We still read the novels of Steinbeck and the speeches of Franklin D. Roosevelt, both icons of this time. Many of the structures and policies put in place at that time to end unemployment remain today: for example, the Federal Reserve's mandate is as much to keep unemployment low as to maintain price stability, and both mainstream and heterodox economists wax lyrical about negative effects of tax and welfare changes on unemployment.
But even though the Great Depression in Germany was similar to that in the US, and German unemployment was actually higher, it does not seem to have left such lasting scars. It is the hyperinflation a decade earlier that is burned into German memory. Images of wheelbarrows full of cash, and walls papered with banknotes, are the iconic images of Germany's interwar disaster. And although this is often forgotten outside Germany, Germans still remember with horror the crippling public debt that blighted their economy and caused the Weimar and Danzig hyperinflations. The German obsession is thus with debt and inflation, rather than unemployment.
This might of course be due to the fact that German unemployment did not remain elevated for as long as unemployment in the US did. But I wonder if there is another reason.
Much of the "public works" was arms production, as Hitler prepared to take over the rest of Europe. You can end unemployment by starting wars. And we can't forget the work ethic of the concentration camps, either. "Arbeit Macht Frei", it says over the gate of Auschwitz - "Work Makes [You] Free". To start with, at least, people were sent to concentration camps to be worked to death, though later "work" was bypassed and the camps became merely killing grounds. You can end unemployment by making large numbers of people slaves, whom you can pretend are not "people" (this is of course also a very painful part of the US's history).
So I wonder if the means by which Hitler ended unemployment in the 1930s has actually left another scar, deeper and far more painful. Could it be that the reason why Germans remember hyperinflation and debt, rather than unemployment, is that the means by which the unemployment of the 1930s was brought to an end is too horrible to contemplate? Does this explain why successive German governments since World War II have resorted to mercantilism (export-led growth founded on repression of domestic demand), rather than public works, to keep unemployment low? And does this also explain the apparent callousness towards other EU countries that have both very high unemployment and very high debt?
I know that Germany wants to put the horror of its past behind it. But mercantilism and autarky are closely related, and the autarkic policies of previous German governments have twice resulted in world wars. Why is it taboo to suggest that mercantilist policies by the current German government might not end too well, and German hegemony in Europe might not turn out to be benign?
Nor do I wish to restrict my discussion of taboo subjects to Germany. We tamely accept and even encourage mercantilist policies in other countries. Yet history tells us that these lead to conflict at home and wars abroad. Why is it taboo to suggest that this time might not be different?
I am very uneasy about taboo subjects in historical analysis. If we are afraid to look at history, we cannot learn from it: and if we cannot learn from history, we are doomed to repeat it.
A poignant reminder
Morality in the Greek crisis
Fear the fear
Currency wars and the fall of empires - Pieria