Are German schoolchildren taught about the 1929-32 deflation?
By Scott Sumner
Today it was announced that the
Japanese eurozone economy had officially slipped into deflation, although as Paul Krugman pointed out the problem is not new at all. If you look at fundamentals such as inflation expectations embedded in the bond market, the eurozone has been sliding toward disaster for several years.
On the BBC this morning a reporter was discussing policy options of the ECB, and mentioned that the Germans were opposed to monetary stimulus, partly because they were taught as schoolchildren that the 1923 hyperinflation led to the rise of Hitler. Actually, the Nazi Party was still tiny in late 1929, after six years of price stability under a gold price peg. Hyperinflation was a problem, and probably made a few savers more sympathetic to the Nazis. But it certainly was not what put them in power.
How did the Nazis go from being a tiny party in 1929, to the largest single party in 1932? The answer is simple—deflation (or more precisely falling NGDP.) The severe deflation of the early 1930s pushed Germany into a very deep depression with massive unemployment, and a desperate German electorate turned to the Nazis. (More precisely a third of the electorate.)
Germany has done better than any other country in facing up to the crimes of its past. But it’s not enough to be repentant, one must also learn the proper lessons from history. German schoolchildren must be taught that deflationary monetary policies put Hitler in power. This is especially so because pressure from Germany was one of the factors that caused the ECB to tighten monetary policy in 2011, a decision that led to the current deflation. Fortunately for Germany, the costs of this policy are borne primarily by other countries, and unlike 1929-32 the deflation is very mild, but if it all falls apart after the Greek elections you can be sure that German taxpayers will pick up much of the tab from the bailouts that follow.
PS. Over at TheMoneyIllusion I propose a solution to the eurozone crisis.