Tuesday , October 26 2021
Home / Scott Sumner /It’s not what you don’t know; it’s what you know that ain’t so

It’s not what you don’t know; it’s what you know that ain’t so

Summary:
In a recent post, I listed a bunch of myths that we teach to our students. One of them was specifically applicable to the German population—the myth that hyperinflation put the Nazis in power. In fact, it was deflation (and unemployment) that transformed the Nazis from a small political party in 1929 to a major party in 1932. I don’t know if anyone at Bloomberg reads my posts, but just a couple of days later they did a story on this myth. They pointed out that the more educated the German, the more likely they are to believe the myth: There was hyperinflation during the Weimar era, and it did contribute to a general sense of chaos that undermined the fledgling republic. But that peaked in 1923, the year Hitler botched a putsch and went to jail — a full decade

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In a recent post, I listed a bunch of myths that we teach to our students. One of them was specifically applicable to the German population—the myth that hyperinflation put the Nazis in power. In fact, it was deflation (and unemployment) that transformed the Nazis from a small political party in 1929 to a major party in 1932.

I don’t know if anyone at Bloomberg reads my posts, but just a couple of days later they did a story on this myth. They pointed out that the more educated the German, the more likely they are to believe the myth:

There was hyperinflation during the Weimar era, and it did contribute to a general sense of chaos that undermined the fledgling republic. But that peaked in 1923, the year Hitler botched a putsch and went to jail — a full decade before he seized power. By contrast, the monetary and economic event that contributed directly to the Nazi takeover was the crisis of the early 1930s, and in particular the deflation, or general fall in prices, that caused mass unemployment (see chart).

That’s not how Germans “remember” history, however. Haffert, Redeker and Rommel did surveys in which they asked participants to estimate inflation in 1923 and 1932. Most thought that prices were also soaring in 1932. Almost nobody knew that prices fell that year. The biggest surprise as that the more educated respondents were, the more likely they were to be wrong.

As I pointed out in my previous post, the people putting out these myths have an agenda:

There are at least two reasons why Germans and non-Germans alike should care about this backstory. The first is that the truth is always better than a myth. The second is that the myth in this case has for many years been a political power tool wielded by German conservatives against the ECB, which is a short taxi ride from the Bundesbank on which it was modelled.

This myth partly explains why the Eurozone double-dip recession of 2008-13 was far deeper than the US recession, despite the supposed “cause” (subprime mortgage defaults and banking stress) occurring in the US.  Of course, the actual cause of both recessions was tight money—and money was much tighter in the Eurozone.

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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