Paul Krugman: Moveable Feast Macroeconomics


Ah, Paris in the 1920s. It was the era of Hemingway and F. Scott Fitzgerald, Gertrude Stein and Alice B. Toklas, sovereign debt and stabilization. Wait, what?

OK, I’ve written before about the notion that France in the 20s offers the closest thing I can find in the historical record to a crisis of the kind the deficit scolds keep warning us about. We’re not at all like Greece; we have our own currency, and our debts are in that currency. So we can’t run out of cash, even if the bond vigilantes turn out to be real and lose faith in America. At worst, we’re something like France in the 1920s, with its floating exchange rate and large wartime debt — except that our debt isn’t nearly as bad as a share of GDP, and we don’t have the lingering gold standard mentality that prevailed across the Western world back then.

So, what actually happened to 1920s France?

France emerged from World War I with very large debts. Here’s a comparison, using the IMF debt database, with the country the deficit scolds use to scare us nowadays:

The striking thing, of course, is the sharp decline in the debt to GDP ratio. How did that happen? Actually, it happened thanks to speculators, who turned on France in 1926, sending the franc sharply lower (yay, FRED has NBER macrohistory data!):

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 Poincare 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 scare-mongering.

Moveable Feast Macroeconomics –

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