Many baffled forecasters are asking just that, and studying what the US did wrong after the stock market crashed in 1929. But the more relevant policy errors might have been those made earlier across the Atlantic – in Weimar Germany from 1919 to 1923.
Policymakers have learned from the US mistakes. This time around, there has been no shrinkage of the money supply and no repetition of President Hoover’s increase in tariffs in 1930 and income taxes in 1932. On the contrary, money supply has expanded rapidly while fiscal policies have been expansionary and protectionism limited.
But look at the Weimar government. Suffering from the trauma of defeat in the First World War and the burden of reparations, it was too weak to raise taxes. It ran large budget deficits instead. Interest rates were kept far below the rate of inflation, while money supply expanded rapidly. About half of government expenditure was funded by newly printed money.
The great economist John Maynard Keynes provided an acid comment in 1920. “The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance.”
In Germany, the result was hyperinflation. By November 1923, the mark was worth one trillionth of its 1914 value. Pay packets were collected in wheelbarrows. Foreign depositors in German banks were wiped out.
The problem was solved by Chancellor Gustav Stresemann’s introduction of a new currency, the rentenmark, worth 1 trillion paper marks. He persuaded the Germans that money supply would be limited, and was able to negotiate more favourable terms with foreign creditors.
The US is nowhere near Weimar territory. At the current rate, it is monetising 15pc of its spending, well below the 50pc of pre-crisis Germany. And foreign creditors are moaning, but have not deserted the dollar. President Barack Obama seems to be unwilling to try further fiscal extravagance. Still, excessive inflation is probably a greater risk than a Great Depression.