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Nichols: US can learn from Germany’s economic crisis in 1920s

POSTED: February 23, 2009 1:00 a.m.

Is the economic crisis in the United States today similar to that of Weimar Germany in the 1920s?

In the U.S. recently, too many people bought houses, automobiles or services they could not really afford. As people failed to make mortgage payments, more and more homes went into foreclosure. Bad debts caused people to lose faith in the value of stocks and bonds and the stock exchanges in New York and other cities fell even on the day of President Barack Obama's inauguration.

We can look at Germany in the 1920s to try to discover lessons to learn from their massive economic crisis. However, Germany then and the United States now are quite different. The causes of our current economic crisis are self inflicted. German problems had a source in the foreign Allied demand for reparations after Germany was defeated in World War I.

During the First World War, German officials chose to borrow money to finance its war effort rather than to raise taxes, because increased taxes were highly unpopular. Germany thus ended the war with a large debt obligation. On top of that, Germany was punished economically by the Allies for starting the war.

World War I was sparked into flame when the heir to the Austro-Hungarian throne was assassinated in Serbia on June 28, 1914. Austria-Hungary issued an ultimatum to Serbia which if accepted would have indicated Serbia was no longer sovereign in its own territory. When Serbia rejected the ultimatum, Austria-Hungary declared war on Serbia. Then Russia mobilized as an ally of Serbia. That caused Germany to declare war on Russia.

France entered the war because it had a treaty alliance with Russia, and Britain entered when its ally Belgium was invaded by the Germans. Finally, the U.S. entered the war on April 6, 1917.

Thus there were many different reasons for the outbreak of WWI. To blame Germany as being exclusively responsible for that war was just not fair to the Germans. The web of military pacts, some of which were secret, caused the war to spread.

After Germany lost the war, the allied powers forced Germany to pay reparations of over 32 billion dollars (or 390 billion in today's dollars). That was more than the annual gross domestic product for that entire country. Payment was an almost impossible burden.

Prior to World War I, the exchange rate was about eight German marks for one U.S. dollar. After the German printing presses began to print night and day to pay reparations and other national obligations, the exchange rate reached an unbelievable rate of 1 trillion German marks for one U.S. dollar.

In my dad's stamp collection are several German stamps from the 1920s with an overprint of 1 million marks for just a single postage stamp. This hyperinflation ruined bank savings and forced almost a quarter of the German workers to become unemployed.

By the late 1920s, the inflation was brought into control with help from foreign banks. However economic turmoil gave the country a turbulent political climate in which the National Socialists Nazi party of Adolf Hitler could win seats in the federal legislature and permit Hitler to come to power legally in 1933.

Hitler thus used the economic crisis to become dictator. He began economic recovery by placing Germany on a path of preparation for war, and put people back to work. Many, or maybe most, of the German people thought Hitler's early government looked good in comparison with the disasters of the pre-Hitler days in the 1920s.

Although Obama's stimulus program ran into bipartisan difficulties at first, he did get most of what he wanted. We will thus increase the national debt to try to fix the bad debt mismanagement of the mortgage process. He is likely to request more billions as the situation grows more and more dangerous.

I hope the president's economic advisors give him the advice he needs not only to jump start the current American economy successfully, but also to put our country on the path of permanent long range economic stability. Nobody knows how much money federal programs will require to make credit flow, restore consumer confidence and turn the economy around.

In addition to borrowing we may choose to print more currency. In all this we must control our inflation. It must not become hyperinflation, as in Germany in 1923.

Should we listen to Santayana when he warned that those who do not learn from history are doomed to repeat it?

Tom Nichols is a retired college professor who lives in Gainesville. His column appears regularly and on gainesvilletimes.com.



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