Weimar Republic Policies Imagined Today
In quantum physics, string theory suggests the possibility of alternative universes. Science fiction imagines what those alternative worlds look like.
When thinking of alternative realities historically speaking, many turn to the assassination of John F. Kennedy. What would the world look like had he not been assassinated and his presidency continued?
Stephen King’s novel, “11/22/63” thrilled readers with a time machine that allowed the main character an opportunity to stop Lee Harvey Oswald before he changed history. In so doing, the world moved to an alternative reality string.
Often, we find these alternate reality strings applied to compare one moment in history to current times. In this light, it might be interesting to explore the fiscal and monetary policies of Germany during and after World War I.
During the war, Germany elected to finance its war effort by issuing bonds. Confident in their ability to win, they felt the bonds issued during the war could be repaid with the resources acquired in victory. Their other financing choice would have been to pay the war’s cost by increasing taxes.
The German’s decided to deficit finance the war expecting better times in the future (the spoils of war) to more than cover the cost. So long as they win, the strategy would make sense.
Much of the current U.S. deficit financing is similarly tied to the hope that the borrowing done today will not be a burden to the economy of the future. In other words, implicit in our deficit spending is the belief that economic growth will keep it from becoming a problem.
In Germany’s case, they bet wrong; they lost the war. So when they started their “post-war” period they faced significant debts that had to be serviced and eventually paid.
To compound Germany’s post-war problems, the Treaty of Versailles, which laid out the terms of peace, required Germany to make substantial payments to the victors as reparations for their costs. With a weakened post-war economy and a fair amount of social unrest throughout the country, the German government could not raise taxes to cover all these obligations. Their only path was to print money.
German Marks were printed, used to buy foreign currency in the open market, and the foreign currency was used to pay German debts. The world became flooded with the German currency and its value collapsed. Prices for goods valued in Marks soared.
In 1919, a loaf of bread cost 1 mark. By 1923 with so much money in circulation that the same loaf of bread cost 100 billion marks. That increase is staggering and hard to imagine in the world we live in today, but it was very much the reality in the early 1920s.
Could our use of debt devolve into a similar economic calamity? It depends on whether we stick to a course of growing our economy or not.
Some claim that recent steps to put money in the hands of American’s displaced by the pandemic is similar to Germany’s printing money in the 1920s. It’s not.
Germany had already reached the tipping point. They had no other option for paying their outstanding obligations, they had to just print money and let inflation soar. The tipping point was reached when the size of the obligations relative to the size of their economy made repayment with taxes impossible.
The U.S., despite the recent spike in our national debt, is not yet at that tipping point. Our economy is still large and robust, and although our debt is not insignificant, it is still affordable.
However, we all need to keep in mind that borrowing to fund current spending cannot go on forever. We have to remember this because it is an incredibly attractive proposition, especially to politicians. They can spend on new ideas without anyone feeling the cost. You don’t need to raise taxes when spending can be financed with debt.
For that reason, we believe it is incredibly important that we remain cautious about debt financing. Equally important to recognize is that debt we’ve already incurred mandates we grow our economy over the long-term. We feel we cannot afford to pursue policies that will impede future growth. Doing so could put us in a bind to meet current obligations.
So long as we grow, we have options.
If you want to discuss this more, give me a call.