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A History Lesson for Scaremongers

Paul Krugman: At worst, we’re something like France in the 1920s, with its floating exchange rate and large wartime debt.

France emerged from World War I with very large debts. See the comparison, using the International Monetary Fund’s debt database, with Greece, the country the deficit scolds use to scare us nowadays on the chart here. The striking thing, of course, is the sharp decline in the debt to gross domestic product ratio. How did that happen? Actually, it happened thanks to speculators, who turned on France in 1926, sending the franc sharply lower. This in turn led to a large rise in prices, eroding the real value of the debt.

So, how did this affect the real French economy? Actually, France grew strongly during the 1920s. It suffered a severe but brief recession associated with the Poincarè stabilization of the franc — largely, I believe, because of the sudden fiscal austerity — but it didn’t last.

Then came the Great Depression, but that’s another story.

Now, France was far deeper in debt than we are, and its politics were arguably even more dysfunctional than those of early 21st-century America. Even so, however, French debt didn’t cause anything like the kind of apocalypse that deficit scolds routinely promise unless we do what they say. There was no sustained economic downturn — nothing at all like the hell Greece, Spain, Portugal and Ireland are going through; and while there was a burst of inflation, there was nothing like Weimar or Zimbabwe either.

I know that the scolds want their apocalypse; they really, really want to believe that unless we do their bidding, incredibly terrible things will happen.

But the most relevant historical example I can find offers no support at all for their scaremongering.

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