Macro-economic policy and votes in the thirties: Germany (and The Netherlands) during the Great Depression
Erwan Mahe is mad about the ECB. And the Germans. And leads us to a graph that shows that it wasn’t hyperinflation which made people vote for the NSDAP – but economic depression. I’ve added data from the Netherlands to this graph to show that the Netherlands, which unlike Germany after 1933 did stay in the gold block, did much worse than Germany (it was actually the last country to leave gold). Which does not mean that I endorse the NSDAP or the German re-armament programs: post-war history clearly shows that aggregate expenditure can be increased by increasing purchasing power of households, too. But in an economic sense (employment, production) the reflation of the German economy did work.
from Erwan Mahe (graph slightly adapted, M.K.)
The present German monetary position is based on a totally skewed view of their own history. I am constantly told that Germany’s intransigence is fuelled by fears of a return of the hyperinflation of the Weimar Republic and the ensuing rise of the Nazi Party (NSP). Despite the conventional wisdom, the Nazis were not carried to power in 1933 by fears of hyperinflation which dated from 1921-1924, but by the population’s utter frustration with the extremely painful deflation drive imposed by Heinrich Aloysius Maria Elisabeth Brüning from 1930!
Just consider the sequence of events: The Nazis were receiving between 2% and 3% of the vote from 1924 to 1928. Then the government sent the economy into a veritable deflationist depression in 1930-1933, as unemployment peaked to 30% in 1932. The Nazis then skyrocketed to 37.3% of the vote in the elections of July 1932, 33.1% in November of the same year and finally 43.9% in March 1933.
Faced with the parallel rise of the German Communist Party (the descendants of the Spartacists) who were at the time far more revolutionary than their modern peers, President Hindenburg decided to appoint Hitler Chancellor of the Republic on 30 January 1933. This surge in extremist formations may recall some events of today.
As such, I still do not understand this German obsession with price stability at the expense of the other macroeconomic indicators, like the unemployment rate, which explain the disastrous way in which ECB has interpreted its mandate (“a single needle compass, the fight against“), despite founding texts which clearly give it plenty of leeway to intervene, as can be seen in the following excerpt (http://www.ecb.int/ecb/orga/tasks/html/index.fr.html):
“without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2.” (Treaty article 105.1).
“The objectives of the Union (Article 2 of the Treaty on European Union) are a high level of employment and sustainable and non-inflationary growth”.
To help Germany find its road to Damascus, I would like to suggest that the following simple graph be published in all the country’s newspaper and displayed in all school rooms.
(M.K.: I changed the graph by adding the comparable Dutch data. The Dutch data show GDP, the German data show ‘Bruto Sozial Product’ which, according to the source, is however close to GDP. Source for the Dutch data: CBS).
It is enough to compare the movement in these curves with the vote scores of the NSP to understand that the moralistic postures of Brüning-Laval-Mellon-Schäuble can only lead to catastrophe.
The contemporary enthusiasts of the Treasury View, who dream of bringing back the gold standard with a euro totally controlled a central bank under German control, may be surprised by events in the months ahead, if they are truly honest with themselves.