Learning from History
Between 1850 and 1914, world trade grew tenfold. The trend was driven by several factors: faster and bigger ships, transcontinental railways, and the establishment of international news and information systems, most prominently the telegraph, telephone and international press agencies. Furthermore, the leading industrial nations based their currencies on gold. Banks and investors had a high level of trust in the leading currencies, resulting in flourishing cross-border investments. Foreign exchange transactions where predictable as the gold price was internationally fixed and bills could be easily exchanged into gold.
Then, on August 1st, 1914, World War I broke out.
Several nations entangled in the war had to cease the backing of their currency through gold as their gold reserves were simply not large enough to cover the cost of war. The money printing machines started to work overtime.
After 1918 and the end of WW I, the powers in the world changed dramatically. Central Europe suffered substantial destruction and had lost over 16 million people with an additional 21 million wounded. France and Britain had significant liabilities with the United States as they financed the war largely through debt.
The democratically elected politicians on both sides of the isle are well advised to change their communication patterns to become more consistent and concrete, less Pathos and, above all, less aggressive and more to the point. Admittedly, this requires both parties to find some common ground on the issues at hand. Looking at history is a useful tool which can replace ineffective and unproductive hostility with experience, knowledge and an educated decision which can be intellectually communicated to the public.
While Germany also borrowed heavily to fund the war, the Treaty of Versailles, signed in May 1919, had a determining impact on the monetary policy of the country. It dictated the payment of substantial punitive reparations, well in excess of the country’s total gold and foreign exchange reserves. As the European economies were shattered, they had to buy goods and food from the United States, payable in cash. The US economy grew sharply. Germany, one of the leading economies in Europe, had to further pump money into circulation to service its debt and reparation obligations.
Germany went into a state of Hyperinflation.
On July 1, 1914, one US dollar was worth 4.20 Reichsmark. By the summer of 1921, the value was at 100 Reichsmark. In June of 1923, the value of the U.S. dollar skyrocketed to 150,000 Reichsmark, and shortly after, on November 20, 1923, it reached 4.2 trillion Reichsmark.
That was the day when the Reichsmark ceased to exist.
It was replaced by a new currency, the Rentenmark. With it came a new administration and a massive reduction of debt. But large parts of the population had lost everything – the nation became poor.
This was the brewing ground of one of the darkest periods in the history of mankind.
There are some striking similarities to current times. First, an exponential increase of international trade. Then, the financing of two major wars through debt. Third, an economic collapse of global proportions and, with it, substantial unemployment. Fourth, major deficit spending and a significant influx of fresh money on the market.
What can we learn from these historic events?
To what extend could history repeat itself?
Let me say this first: I do not believe that the United States and the world are heading into a hyperinflation or the devastating political landscape we experienced in the 1930’s and the first half of the 1940’s. For that, our capital markets are too strong; our democratic establishment is too deeply rooted and, after all, the economic downfall not steep enough. But we are left with the understanding that we can produce our economic output with a reduced workforce. This results in social disparities and political pressures. It inadvertently affects our social order. We also need to comprehend that our debt has reached “code red” levels and the proposals in discussion to reverse the spending trend and reduce the nation’s debt are homeopathic. We will have to make unpopular decisions and we will have to manage the effect on people’s confidence and therefore consumption. Furthermore, we are increasingly entangled in an international dispute regarding the re-balancing of the international trade to strengthen domestic output.
Implications on the Political Landscape
As the Republicans and Democrats fight over the right course to solve the issues at hand, significant parts of the population are suffering from a devaluation or loss of assets, increased personal debt, and unemployment. They are focused on their personal problems and look for leaders who promise to solve them quickly. This is an incubator for extremism, either from the left or the right. When looking at Germany’s political development during the 1920s, we can study how the suffering population was open to almost any grouping which promised a way out of misery. This allowed extremist right and left-wing thinking to be initially tolerated and, later, welcomed by the public. The democratic parliament was crushed between the push from the right, the NSDAP, and the communist left, the KPD.
While I do not see any such development reoccurring, we find the political establishment busy with a rather unproductive political Stellungskrieg, a positional warfare, while in its wake moderately extreme groupings are emerging and growing in popularity. It is time that we take certain measurements to reduce public debt, increase domestic output and consumption, and prepare the country for a new international balance of power where China is the global powerhouse along the United States. The key to acceptance and success of major political decisions is the management of the public’s opinion.
Implications on Managing the Public Opinion
Public perception determines the political process which affects the economic health of a country. Perception is reality and the careful management of the public opinion is a crucial element to the success of any political action.
Let’s look back to the 1920’s when mass media was in its infant shoes. The radio was the first platform which delivered any real time information to a disperse mass audience. Otherwise, newspapers and magazines were the main source of information. At the time, the media in Germany was largely controlled by Alfred Hugenberg, a right-wing extremist par excellence. He misused his media power to influence and infiltrate public perception which supported the brewing ground for fascism. News was replaced with hate-filled propaganda.
As times are very different today, I do not see the risk of repetition. But we are faced with a polar-opposite situation where virtually everybody can easily express his or her opinion using the digital space, at little or no cost. We have an abundance of message outlets in all disciplines: print, television, radio, and digital. There has never been a time where we consumed more “news” than today.
The risks of a controlled media environment versus a freely available mass communication platform are similar in certain ways. In times of hardship, people look for solutions which, over time, can lead to a change or loss of the person’s view and value system. Every time the leading democratic parties are occupied with their territorial battles, people look for other places to find solutions. Every time eloquent political statements are made without adequate substance and a clear path of “who, when, what, and anticipated costs, funding and results”, people lose confidence and look for alternatives. During the past election, the country did not primarily look for change, they were searching for leadership.
The current public relations work of both major political parties is weak, which creates a message vacuum to be happily filled by groups with extreme views, to whatever degree and with whatever color. They can reach the masses cheap, quick, constantly and in real-time.