American Consequences - January 2021

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As Fergusson observed, Havenstein’s successor as Reichsbank president, Dr. Hjalmar Schacht, managed with U.S. support to transform “the German financial system from chaos to stability in less than a week” after waving the “magical wand of currency stability.” Monetary authorities who believed devaluation was the path to economic nirvana were replaced by individuals with an actual clue. Just as devaluation was a choice, so was a return to stable money. A focus on government debt as the catalyst for economic and currency collapse misses the point. U.S. history is instructive in this regard. To see why, let’s now travel ahead in time to the U.S. in 1933, a little less than a decade after Germany’s tragic blunders. Franklin Delano Roosevelt had just replaced Herbert Hoover in the White House after Hoover chose policy that was inimical to economic growth. You guessed it! Taxes went up, so did regulation, and tariffs on 20,000-plus foreign goods were raised to record levels. The problem was that rather than learn from Hoover’s mistakes, FDR doubled down on them while committing new ones. One of his most egregious occurred during his first year in office. It was a substantial dollar devaluation. A dollar formerly exchangeable for 1/20th of an ounce of gold would now be worth 1/35th. Government debt that had been soaring (FDR himself promised deficits of $7 billion-plus) would be shrunken by the president, and the bill would be left at the doorstep of American individuals and businesses, along with investors whose capital commitments are the drivers of growth.

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American Consequences

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