A lesson from the Weimar Republic about balancing the budget

Introduction:  This is another in a series of dashed off speculative opinions.  Normal procedure on the FM website for these topics would be 3 thousand word posts, supported by dozens of links.  I dont’ have the time to finish them, and too many of these outlines have accumulated in my drafts file.  Perhaps these will spark useful debate and research among this site’s readers. 

Contents

  1. Introduction
  2. Delong on the end of the Weimar Republic
  3. For more information and an Afterword

(1)  Introduction

If the economy does not recovery soon, I believe it will fall into another decline.  In the third year of this recession the reserves at all levels are drained — households, businesses, and governments — so another downturn might be worse than the first.  In this scenario the Democratic Party members of Congress will face a stark choice:  pass another large stimulus bill in  March or April or face electoral defeat in November.

Less obvious is the peril of the Republican Party.  Their strategy of “the worse, the bettter’ (see here for more) seems likely to win, riding on the “stimulus has not worked” platform.  But what do they do following success?  The Weimar Republic provides an example worth attention.  A balanced budget can destroy a nation.  Change does not necessarily mean better.  Hope is not enough.  As Weimar proved.

(3)  Delong on the end of the Weimar Republic

When economists speak of liquidationist economics, they usually mean the first two years of Hoover’s Administration.  Under the advice of Andrew Mellon, one of the foremost experts of that time, the government did little to arrest the unprecedented conflagration of what became the Great Depression.  While true, this is not the strongest example. 

The myth has become well-established that Germany’s hyper-inflation wrecked the Weimar Republic and brought Hitler to power.   While the hyper-inflation weakened its foundations, it was cured in November 1923 — the same month as the NAZI’s Beer Hall Putsch.  By 1928 it was a flyspeck party, getting 2.6% of the vote in the May elections (9th place).  The Depression and Weimar’s adoption of liquidationist economics gave Hitler his opportunity.

Excerpt from “Nazis and Soviets“, Chapter 15 of Slouching Towards Utopia?: The Economic History of the Twentieth Century, February 1997:

All this changed with the Great Depression. In the March 1930 election the Communists took 13.8% of the vote; the Nazis took 19.2% of the vote. Since neither Communist Ernest Thaelmann nor Nazi Adolf Hitler was interested in anything other than destroying the republic, a government could have the support of a parliamentary majority only with the active support and cooperation of the Social Democrats, the Center, and the “establishment” right wing parties.

And here the Great Depression made such a “grand coalition” impossible. The Social Democrats demanded an expansion of the welfare state: unemployment insurance, public works, and large budget deficits to reduce the impact of the Great Depression. The establishment parties demanded –wrongly–financial orthodoxy: balance the budget, cut spending, and restore confidence in non-socialist parties. Neither block thought that it could afford to compromise with the other and still survive as a political movement. So parliamentary government became impossible.

Subsequent elections in search of a viable parliamentary majority only made things worse. The Nazis took 38.4% of the vote in the elections of July 1932. The Communists and the Nazis together had a majority: no parliamentary majority was possible. The German constitution offered an out: if no parliamentary majority could be assembled, the Chancellor could ask the President–himself directly elected for a seven-year term–to rule by decree.

Heinrich Bruening, the leader of the Catholic Center party who became Chancellor when the Social Democrats and the establishment parties split in March 1930 under pressure from the Great Depression, was chosen Chancellor by the aging President of the Weimar Republic, the war hero Paul Hindenburg. Bruening sought to use this escape hatch to pass a policy of fiscal retrenchment and welfare state cutbacks. For as he promised Hindenburg, Bruening tried “at any price [to] make the government finances safe”: balancing the budget–reassuring investors that Germany was committed to financial orthodoxy–was Bruening’s first and nearly his only priority.

Thus Bruening spent the first months of his Chancellorship trying to balance the budget, only to find the economic situation outrunning him. The projected deficit tripled during his first three months as tax collections fell and social insurance spending rose.

On July 16, 1930 Bruening’s budget-balancing program was defeated in the Reichstag by 256 to 193. Bruening immediately reissued the entire program as a presidential emergency decree. By a very close vote, the Reichstag demanded that the decree be rescinded. In response Bruening dissolved the Reichstag, hoping that new elections would give him a mandate to continue purusing policies of fiscal austerity. The dissolution of the legislature blew up in his face: the Nazis gained 107 seats. The conservative establishment parties from which Bruening drew his base collapsed.

But Bruening still believed in the necessity of a balanced budget and the maintenance of the gold standard. Government expenditures were cut by one-third from 1928 to 1932. But fiscal retrenchment and welfare state cutbacks did no good, and some harm. The German economy slid further into the Great Depression.

… Even after the financial crises of 1931 made expansion possible — because Germany was no longer on the gold standard–Bruening continued to hope that balancing the budget would restore investor confidence. In the end he enforced deflation on the economy: a December 8, 1931 decree ordering the reduction of all fixed prices by ten percent, and a ten to fifteen percent cut in wages.

From our perspective such a fall in prices would not be expected to help the economy. Debts would be a larger burden on the lower-price economy, uncertainty about the stability of the financial system would be greater, and so investment would fall. Bruening’s deflationary and budget balancing measures did not help. British attempts to cancel the reparations burden came too late to restore confidence while Bruening was still in office. Unemployment rose. 

And as unemployment rose, the Nazi Party vote rose as well.  Why did higher unemployment raise the Nazi Party share of the vote? As the Great Depression deepened, old party allegiances were shaken and the formerly apathetic began to go to the polls. Voters were unlikely to move to the establishment parties: they had ruled the country and thus presumably bore some responsibility for the Depression.

Voters outside the industrial working class were unlikely to move to the Social Democrats: the Social Democrats were an explicitly “class” based party, their rhetoric and their form of organization making belonging somewhat uncomfortable for the middle class; and the Social Democrats carried the twin burdens in a strongly nationalist country of being officially “internationalist” and of having been the collaborators of the allies who had imposed the Versailles peace settlement. Indeed, Social Democratic voters tended to move to the Communists.

Disaffected voters were interested in a party that promised to do something about the Depression: that had a theory of who was responsible, a program, and a bias toward action rather than parliamentary talk. the Nazis had a theory of who was responsible: the Jews, the financiers, foreign capitalists, and the “November criminals”–the Social Democrats who had signed the Treaty of Versailles. They had a bias toward action. And they had a program, confused as it was: the overthrow of the Treaty of Versailles, German rearmament and national reassertion, and the drafting of industry into the service of the nation to provide unemployment.

For more information from the FM site

To read other articles about these things, see the FM reference page on the right side menu bar, including About the FM website page. Of esp relevance to this topic:

Afterword

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41 thoughts on “A lesson from the Weimar Republic about balancing the budget”

  1. Pingback: REFLEXÕES SOBRE A MORTE DA ZONA EURO, SOBRE OS CAMINHOS SEGUIDOS NA EUROPA A CAMINHO DOS ANOS 1930 | A Viagem dos Argonautas

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