“There is not a menace in the world today like that of growing public indebtedness and mounting public expenditures,.....We want to reverse things.” President Warren Harding
Germany - 1921
“Speculation on the stock exchange has spread to all ranks of the population and shares rise like air balloons to limitless heights…. My banker congratulates me on every new rise, but he does not dispel the secret uneasiness which my growing wealth arouses in me… it already amounts to millions.” -German Investor, When Money Dies by Adam Ferguson
After World War One, both Germany and the US slipped into a Depression. By 1923 the US economy had fully recovered without any stimulus. Germany by contrast hyperinflated their currency the mark, causing economic collapse in the same year.
USA - 1919
By 1919, the Spanish flu had killed 675,000 people and unemployment jumped from 4 percent to nearly 12 percent. GNP declined 17 percent. The Secretary for Commerce, Herbert Hoover felt the only option was Federal intervention. President Harding disagreed:
“We will attempt intelligent and courageous deflation, and strike at government borrowing which enlarges the evil, and we will attack high cost of government with every energy”.
Federal spending was cut from $6.3 billion in 1920 to $3.2 billion in 1922. Federal taxes fell from $6.6 billion in 1920 to $4 billion in 1922. The national debt was reduced by one-third.
By the late summer of 1921, signs of recovery were already visible. The following year, unemployment was back down to 6.7 percent and it was only 2.4 percent by 1923. How is this possible?
The Harding administration’s “avowed purpose was to withdraw as far as possible from exerting any influence on the economic life of the country except the encouragement that might be derived from a balanced budget and nonintervention with private enterprise.”
He even vetoed a popular bill that gave bonuses to WW1 veterans on the basis that it would put an extra tax burden on citizens. Harding felt relief efforts should be local to each state. It's hard to imagine this approach today.
Devin Roundtree argues that the shortness of the 1920 Depression was due to the government’s decision to allow interest rates to rise, prices to fall, and unhealthy banks and businesses to fail. ‘The Roaring Twenties were a time of unprecedented prosperity. GNP expanded year after year without inflation. Productivity improved, and real wages increased.’
Germany 1921 - Parallels to today
In April 1921, the Reparations Commission announced the "London payment plan", ordering Germany to pay reparations in gold or foreign currency in annual installments of two billion gold marks, plus 26% of the value of Germany's exports. Despite German outcry at these demands, they were accepted the following month.
As the German Mark started to inflate, speculative behavior increased and tax evasion was rife. The prime Minister of Bavaria introduced populist measures which had little effect in reducing the growing inequality. Gluttony became a penal offence described as ‘one who habitually devotes himself to the pleasures of the table to such a degree that he might arouse discontent.’ The crippling debt that Germany faced was poorly understood by people. Germans perceived the dollar as going up in value as opposed to the mark weakening.
By August 1921 the government started panic buying stronger currencies like the dollar, signaling the beginning of the end for the German mark. Survival essentials ultimately became expensive the fastest. The price of butter increased by 3300% in 8 years. Eventually the speed of inflation became unmeasurable. It wasn’t until the government pegged their currency to gold, renamed the Reichsmark to Rentenmark and removed 12 zeros from the currency, that calm was restored.
The idea of ‘courageous deflation’, as proposed by Harding is politically impossible in the west today. There is no leader who even discusses it. And yet 10 years after the 2008 crisis, we are more indebted than ever. The economic recovery that was supposed to pay off the Quantitative Easing didn’t come in time. Are we now delaying the pain that Harding took upfront and thereby causing a much worse problem?
Those who held gold in Germany, an asset that couldn’t be inflated during the crisis did best. It operated as a type of disaster insurance. The Jewish population were resented by poorer Germans in the aftermath for their gold holding. Some argue that this laid fertile ground for Hitler's rise in the 1930’s.
Universal basic Income (UBI) and Bitcoin
Even if you are in the minority that thinks Hardings' approach is intuitively the most sensible, what is actually politically possible in today's environment?
If Bitcoin were to succeed as an un-inflatable asset, or even if Gold continues its rise, how could the resentment towards those who hold these ‘disaster insurance assets’ be mitigated? How could you get a small amount of these assets into the hands of the least well off in society now, as a type of insurance against high inflation? I don’t think that posting small amounts of gold to people is realistically possible. Not only would theft be rife, fraud would be trivial compared with the high cost of ‘assaying’ or checking the quality of each piece.
You could give the bottom 30% of income earners the option to receive part of their UBI in Bitcoin, via exchanges. These will be mostly younger people who are tech savy enough to store it properly, have been hit the worst by rising asset prices and are most likely to revolt if things get worse. If the value drops to $0, very little will be lost. But if Bitcoin continues its rise, amid a global collapse in other assets, you will have provided a safety net for those who need it most, and possibly avoided the potential for serious social unrest. Those who can afford it are already doing this with their bailout cheque in the US (graph below) . Maybe those who can’t, should have the option as well.