“The [sc. Weimar] German government struggled, however, within the confines of the rules of orthodox finance, that is, the gold standard. As the downturn began due to the combination of American and German policies already described, the German authorities responded to their external difficulties by depressing their internal economy. Schacht, president of the Reichsbank until March 1930 and chief German negotiator for the Young Plan, had consistently pursued a deflationary strategy. Hans Luther, his successor at the Reichsbank, followed suit, keeping the discount rate well above the rates in London and New York in attempt to reduce the bank's continuing loss of gold ... the fiscal authorities were even more aggressive in their deflationary efforts. The move toward highly restrictive government budgets came in the beginning of 1930. Heinrich Brüning, chancellor from March 1930 to May 1932, continued this, relentlessly attempting to deflate the economy to restore equilibrium in the manner of the gold standard. Germany, unable to pay its foreign bills at gold par, had to reduce internal prices until it could” (Temin 1989: 30–31).One also wonders how an “Austrian” policy of dismantling government and complete privatisation (anarcho-capitalism) or even more savage government spending cuts and abolition of the central bank (Misesian Classical liberalism) would not have collapsed the Weimar economy to even greater extent, and inflicted even greater suffering on the German people, radicalizing them even further and driving them into hands of extremists like communists and Nazis.
“Economic breakdown [sc. during the Great Depression] led to political upheaval which in turn destroyed the international status quo. Germany was the most striking example of this complex interaction. Without the depression Hitler would not have gained power. Mass unemployment reinforced all the resentments against Versailles and the Weimar democracy that had been smouldering since 1919. Overnight the National Socialists were transformed into a major party; their representation in the Reichstag rose from 12 deputies in 1928 to 107 in 1930. The deflationary policies of the Weimar leaders sealed the fate of the Republic” (Adamthwaite 1977: 34).
And, no, I am not saying that Baltic-style austerity in the US, the UK or Germany will lead to fascism, but it will result in greater votes for extremists of either the right or left. Not only are such deflationary polcies wrong on economic grounds, but also their social effects are too high a price to pay, and the worst case political outcomes of deflationary depression are catastrophic for human civilization. This is another reason why the 1930s Hayekian solution of doing nothing in response to depression was morally objectionable to many people.
Adamthwaite, A. P. 1977. The Making of the Second World War, Allen & Unwin, London and Boston. p. 34.
Temin, P. 1989. Lessons from the Great Depression, MIT Press, Cambridge, Mass.