s Europe Repeating the 1930s?

by Martin Armstrong, Armstrong Economics:

Europe is now replicating the 1930s and the mistakes it made with austerity back then as well outside of Germany. Of course, Merkel has imposed the German view of austerity based on their experience but has ignored the opposite experience of the rest of Europe that led to the 1931 Sovereign Debt Crisis and mass defaults.

It was the year of 1925 when then chancellor of the Exchequer, Winston Churchill, returned Britain to the gold standard. Britain was trying desperately to reestablish itself as the financial capital of the world as if nothing had taken place. Returning to the gold standard resulted in wages being forced down to compete with America.John Maynard Keynes at the time pleaded that this was madness. The pound was overvalued against the dollar by 10% trying to reestablish confidence in Britain but the net result crippled exports and unemployment began to rise and workers engaged in strikes for having wages reduced even though the pound was worth more officially.

Churchill acted in an effort to restore Britain but he was dead wrong. Keynes proved to be correct and this lesson has still been ignored by Europe today. The overvalued pound led to deflation and ultimately forced the economic collapse in 1931. The capital was fleeing Britain and bankers were pleading for austerity to retain bond values. The Labour government collapsed and a coalition national government was formed. They ignored the pleas of the bankers and abandoned the gold standard overnight. The pound fell from $4.85 to $3.40 against the dollar.

NEVERTHELESS, despite the dire forecasts of ultimate catastrophic consequences if Britain abandoned the gold standard, the economy held and began to recover. There was no revolution in the streets as predicted. The devaluation of the pound actually stimulated the economy and the austerity crowd proved to be completely wrong. Within just four years, the British industrial production had risen by 25% and unemployment fell from 3 million to 2 million. It was this experience that provided the support for the economist George Warren (1874-1938) who convinced Roosevelt that austerity was wrong and devaluation would also kick-start the American Economy. None of Roosevelt’s Brains Trust was ever experienced in economics. Most were simply lawyers trying to get around the Constitution. They too argued for austerity as Merkel does today. However, Roosevelt looked at the events of 1925-1931 in Britain and listened to Warren. The dollar devaluation is what turned the economy around at that moment in time.


The USA share market began to recover from the depths of the Great Depression. History repeats, but I have stated it is like a Shakespeare play – the plot remains the same, but the actors change over hundreds of years. The lessons of history, therefore, repeat over and over again albeit by the same foolhardy reasoning.

Europe is trapped in similar orthodoxy to that of their prewar forebears. In Germany, they hold the firm belief that inflation is the greatest evil to inflict humankind. Yet the ECB has mastermind the greatest monetary expansion in history without success of stimulating anything. The policy of quantitative easing has been done only at the government level as taxes and tax enforcement has risen and thereby the people and consumption have been totally ignored for fear of inflation. This approach has created an economic nightmare that actually threatens to bankrupt the ECB. Unlike the US Federal Reserve which has the power to create elastic money, the ECB needs authority from government.

They do not flinch even when a quarter of high street shops close. They are like doctors laying the sick in the snow to see who will survive. Yet they hurl cash at friendly bankers and watch it vanish into the maws of directors and offshore speculators. And they dole out billions to prop up a euro of which they are not even members.

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