Scott Sumner  

Are German schoolchildren taught about the 1929-32 deflation?

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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.

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COMMENTS (20 to date)
TravisV writes:

Prof. Sumner,

In the first sentence, I think you meant to write "Euro area economy," not "Japanese economy".

TravisV writes:

Some interesting posts that discuss German politics during the interwar period and the rise of Hitler:

Scott Sumner writes:

Travis, Thanks I fixed it.

I do not claim to understand monetary or macro issues. But I think I recall Scott saying "Do not argue from a price change." (right?)

Now here I see "The severe deflation of the early 1930s pushed Germany into a very deep depression with massive unemployment, ..."

I think maybe that is arguing from a price change if "deflation" has to do with prices. But maybe "deflation" in this context means a reduction in money supply.

In any case I gather Scott is sure the deflation caused the depression, and not the other way around as I would have guessed. Right?

Andrew_FL writes:

It also strikes me as "arguing from a price change" (or fallacious for the same reason such arguments are) to say that deflation was the cause of the economic crisis that help the Nazis consolidate power.

But "more precisely" (which I think should be "more accurately" based on the scientific definition of precision and accuracy) indicates that this is really referring to a falling level of spending, rather than a tendency of prices to fall, which is the effect of the former, not the cause.

So I don't wish to suggest Scott isn't already well aware of this since a careful reading of his post suggests it. I only wish it was clearer so no one would get the wrong impression.

Scott Sumner writes:

Richard, Good question. Actually, if you look at the equation of exchange:


you can see that, other things equal, depressions cause inflation, not deflation. That's why in the post I said "more precisely falling NGDP," to make clear I was talking about falling prices caused by less aggregate demand (less M*V).

Scott Sumner writes:

Andrew, Fair criticism, and you are right that "accurately" is more, well, accurate.

W. Peden writes:

There was certainly a lot of reasoning from a price change in the news reports on this story, e.g. "If prices are falling, this could result in people delaying purchases, and a deflationary spiral". (Goodness knows why people are supposed to be spending money on electronic goods!) As noted, in fact it's the lack of spending that causes the deflation. This is important, because the UK and the US are both moving towards deflation (or at least very low inflation) that isn't the result of an NGDP shock.

A simile: deflation is like sweat. A person can be sweating because they've been exercising or because they have a fever. You can't tell if someone's healthy just from the fact that they're sweating. The same goes for deflation: there's a mildly deflationary shock in all net oil-importing countries right now that is very much a good thing, and this shouldn't be confused with what's going on in the Eurozone.

Roger McKinney writes:

They're not going to teach it because they're not monetarists. Many in Germany are Austrian econ friendly and so reject monetarist assumptions and conclusions. The depression caused deflation and the depression resulted from a decade of loose monetary policies.

Julia writes:

In the European history class I took in Denmark, taught by a Danish professor of communist sypathies, I was taught that the inflation caused people to elect the Nazis.

I think the answer to the question in the title is "No". I went through the German school system and I certainly remember the hyperinflation in Weimar, but not the pre-Nazi deflationary period (so, if it was mentioned, it was not that big of a deal).

Any chance you can submit an improved version of this post to an European newspaper (and have them accept it)? Serious question.

Ray Lopez writes:


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.)

A certain historian named Ian Kershaw has a three volume tome on this topic, and it's not simple, unless you are referring to what a schoolchild believes.

Commander writes:

Since we obviously never know when "other things are equal", the equation of exchange is pretty much useless as an explanatory tool. I'm always amazed at how the monetarists manage to confuse themselves over a tautology.

Christian writes:

I also went through the German school system. It is true that the historic deflation in Germany is not taught. However, German students at school learn that high unemployment led to Hitler's rise. They are also taught that Hitler's investments into the military sector, which led to WWII, reduced unemployment.

vikingvista writes:
depressions cause inflation, not deflation.

When you write "all things being equal", you are being very selective about reducing the degrees of freedom in the exchange equation. You are assuming fixed NGDP, which is begging the question. You could just as well hold P constant and say depressions are *associated* (direction or indirection of causality cannot be discovered from the EE) with falling NGDP, or just falling V. Or even assume P is rising (since who knows the casual relationships affecting these 4, or 3 variables?

The exchange equation identity shows how some variables relate, but it explains about as much causality as the also true Y = C + G + I + X.

Scott Sumner writes:

W. Peden, Good analogy.

Roger, I certainly hope Austrians don't believe that depressions cause deflation. They are often associated, but only because of the way the monetary regime operates. Zimbabwe was in depression around 2008.

Julia, That's really sad.

Luis, I'm in a state of shock that Europeans don't know this.

Commander, There are certainly more sophisticated ways to make an argument, but I don't always know how much econ a commenter has, and hence where to start.

But as I said in my reply, it depends on the "other things equal" assumptions that you make.

Vikingvista, That's why I distinguished between depressions caused by falling AD (or MV) and depressions caused by other factors. But if you look at the impact of depressions on prices holding other things constant, it's inflationary. As I pointed out, many depressions occur because other things are not constant, i.e. MV falls.

Roger McKinney writes:

The depression did not cause the rise of Hitler. That's a good example of the post hoc fallacy. To see why Hitler rose to power check out Mises Omnipotent Government available in the literature section of for free.

Hint: Germany went full blown socialist in the 1870's. Parliament only got power from the monarchy with WWI. Socialism had destroyed the economy, but parliament was all socialist and they blamed residual capitalism, which didn't exist, for the failures. So parliament had no ideas for fixing anything. Parliamentarians did nothing but squabble and try to fine tune the failing socialism. Hitler was a socialist and convinced the people he could make socialism work by blaming foreigners and Jews for economic problems.

Geschichtlich writes:

Writing as a professional academic - and economic, no less - historian of modern Germany, this is a grotesque oversimplification of a complex issue. Read some decent scholarship, for the love of Pete, and stop overinterpreting historical events for the sake of contemporary axe-grinding. For shame.

Ognian Davchev writes:

I think Scott raises a very important issue here. Any time a conversation about money and inflation happens in Europe the widely held myth of Hitler rising due to the hyperinflation pops up with the impliecation that inflation has great economic and social costs and can lead to rise of radical parties in power.

The reality though is that recessions and unemployment are far more costly for society and lead to the rise of far worse fringe parties. Just look at recent election results in Europe.

Here is the timeline of Nazi election results post 1923 hyperinflation:

Election date |% votes |Reichstag seats
May 1924 |6.5 |32
December 1924 |3 |14
May 1928 |2.6 |12

Clearly five years after the dreaded hyperinflation the Nzis were on their way of becoming an irrelevant political force.
Then the Great depression gives Hitler 5 milion unemployed to work with and in 1930 the Nazis got 18.3% of the vote.

Scott has mentioned many times that there is no such thing as "public opinion". But a widely held belief such as the one about inflation leading to Nazis would help explain why there is so little preasure in Europe on the ECB to do it's job.

Did you see this?

"Europe has endured deflation before, and prospered"

"Europe has seen higher growth during deflations than inflations. In the past, Germany has done especially well out of falling prices, growing at 2.6 per cent during deflations against a measly 0.6 per cent when prices were going up."

"The writer is a managing director at Deutsche Bank."

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