One Hundred Years of Austerity

by Carol Matlack, Bloomberg People have been preaching austerity for centuries. But fiscal austerity is a modern invention and has produced its fair share of disasters. People have been preaching austerity for a very long time. Ancient Greek philosophers, Jesus’s disciples, Benjamin Franklin—they’re all part of a chorus of voices over the centuries who’ve warned us against the dangers of debt and profligate spending. Fiscal austerity, though, is a modern invention. It wasn’t until after World War I that governments started making serious efforts to address debt and other problems by cutting their spending. One reason is that, until the early 20th century, most countries had such small budgets that there wasn’t much to cut. (The U.S. federal budget on the eve of World War I equalled about 2.5 percent of the national economy; now, it’s around 20 percent, and that in turn is much lower than the figure in some other countries.) Nowadays, fiscal austerity is often associated with the International Monetary Fund, which has required budget cutting as a condition for bailouts in scores of troubled economies. In other cases, though, governments have embraced austerity for reasons of their own, such as fighting inflation or repaying foreign debt. Some of these efforts—such as Germany’s and Japan’s in the 1930s and Romania’s in the 1980s—were catastrophic failures. Elsewhere, the record has been less clear-cut. The British are still debating the impact of Prime Minister Margaret Thatcher’s budget cuts in the early 1980s. Some countries have recovered fairly quickly after taking IMF-prescribed austerity medicine, while others suffered prolonged economic misery. Muddying the picture still further, the IMF usually requires structural economic reforms, such as deregulating industries and labor markets, in addition to budget austerity. That, along with such other factors as interest-rate changes and currency devaluations, makes it harder to gauge the effect of austerity. The euro zone debt crisis adds a new wrinkle to the story. Countries pursuing austerity programs frequently have devalued their currencies, which can help spur growth as exports become more competitive. But Greece and other bailed-out European economies can’t devalue, because they’re part of a shared currency. Mark Blyth, a Brown University professor who has written a book on the history of austerity, warns that it is a “dangerous idea.” The biggest danger, he writes, comes “when everyone tries it at once,” as happened when Japan and Germany cut spending during a global depression. Europe’s recent debt crisis is another example, Blyth contends. “If every similar state saves at the same time by cutting spending, the result is the shrinkage of everyone’s economy since they are one another’s trading partners and sources of income. Perversely, their debt goes up, not down, relative to their shrinking GDP.” The IMF itself has admitted that it erred in pushing for austerity in major advanced economies after the 2008 financial crisis. Here’s a look back at some notable austerity programs over the past century.

A bank basement full of banknotes at the time of the mark devaluation in Germany in the 1920s.

Photographer: Albert Harlingue/Roger Viollet/Getty Images

Germany’s Weimar Republic The 1919 Treaty of Versailles required Germany to pay heavy reparations for World War I, hobbling its economy and leading to hyperinflation in the 1920s. To combat inflation, a government elected in 1928 imposed strict austerity, raising taxes while slashing public spending by about one-third. Bad move: The economy plunged into deflation, and by 1932, unemployment had risen to more than 30 percent. The resulting economic misery set the stage for Adolf Hitler’s rise to power.

Japanese farm laborers, circa 1930, during the time of the Showa Depression.

Photographer: Hulton Archive/Getty Images

Japan’s Showa Depression After a financial crisis in 1927, Tokyo adopted deflationary policies in an effort to return to the gold standard. Government spending was cut about 20 percent. The result was one of the worst economic downturns in modern history. Peasants’ incomes were cut in half as the price of rice and other commodities tumbled. The crisis spurred protests, assassinations, and increased the power of the military—which, in turn, helped propel Japan into World War II. Continue Reading>>>

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