May

13

Have you seen this interesting graph of debt/GDP ratios of the G7 countries since 1946.

It's puzzling to me that in 1946, UK had 270% debt to GDP, and US and Canada had >100%, while at the same time Germany, Japan, and Italy had almost no debt.

I'm sure the allies didn't want another Versailles, but still this seems like an extreme outcome.

David Lillienfeld comments: 

Germany, Japan, and Italy also had almost no assets. Their currencies were worthless, hence no debt. I'm guessing that the same phenomenon occurred with the Confederacy as the end of the war approached.

Stefan Jovanovich retorts: 

David's answer is - alas - a muddle. The currency and the debt of the government of the Confederate States of America was officially worthless after the surrender at Appomattox. (Read Section 4. of Amendment XIV of the U.S. Constitution.) So were Germany's debts, currency and laws after the formal surrenders signed by the remaining German General Staff officers with first the Americans and British and then the Soviets. Germany, like the Confederacy, literally disappeared. That is why the line for Germany beginning in 1945 is flat at 0 until the reconstruction loans that were part of the Marshall Plan took effect in 1948. What is interesting is the other flat-line - the one for France. The Vichy French government never formally surrendered; one of deGaulle's marvelous bits of arrogance was to assert that Vichy itself was not a government and could have no recognition. Somehow that also became the rule for the debts of the Third French Republic (I don't know exactly how) as well. After the war, their debts, like those of Vichy and Germany, seem to have legally vanished. When deGaulle took charge after the Normany landings he was meticulous about asserting that he represented the Provisional Government of the French Republic (GPRF), not the Third Republic. Yet somehow the financial assets of that Republic - specifically the gold on deposit with the Federal Reserve bank - were "saved" and became the property of the new Fourth Republic that came into existence after deGaulle resigned in 1946. Italy, which had overthrown Mussolini and signed an Armistice with the Allies, and Japan, which retained its Imperial Rule, both continued to exist as governments; their debts were restructured but not officially abolished.

FWIW, Charles, I don't think the the parts of the graph that deal with the immediate aftermath of WW II have any meaning. They are another attempts to put prices on things for which there is no market. The statistics for the U.S. GDP during WW II are another example. As Higgs and others have pointed out, the "recovery" of the U.S. economy in WW II cannot, in any sense, be measured in dollars. We know what the U.S. "spent" but that money cannot be considered an "investment"; the factories had no value except to make things that only governments would want to buy and this was at a time when all the governments of the world, except the U.S., were broke.

 So, how did the U.S. "recover"? Sewell Avery and others conservatives feared that hard times would return; Truman was certain that the U.S. would need to return to Hoover and Roosevelt's managed economies. They were both wrong; just as the voters in Britain threw out the existing government, the voters in the U.S. decided that whatever they wanted, it wasn't what they already had. They voted for the war plants to be closed and the military to be demobilized, and they all went out and spent the money that they had been saving. The war had been financed by money created by the central banking system; what made this less than a fraud were the wartime restrictions on spending. The war debts were funded by the ability of the banks to draw on the deposits from the defense workers' and military inductees' pay. When WW II ended and triumphal march to socialism (ah, national health care) was at least temporarily post-poned, what came instead was a boom of spending on consumer goods by a population that had been on rationing for a decade and a half. That cash spending, plus the flood of borrowed money from consumer finance (something previously unknown except on a small scale for radios and cars) and home mortgages, did not (contrary to the usual myths) "pay off" the debt or inflate it away; but it did create incomes and the taxes that go with making money. That revenue was more than enough to fund the much smaller government and to sustain the rolling over of the maturing debts from the war. When the British and Canadians got tired of Laborism, much the same thing happened for them - as the graph illustrates.


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