programs that led to large budget deficits and large debts that the Federal Reserve bought with money that it
printed.
As a principle: Deflationary depressions are debt crises caused by there not being enough money in the hands of
debtors to service their debts. They inevitably lead to the printing of money, debt restructurings, and government
spending programs that increase the supply of, and reduce the value of, money and credit. The only question is
how long it takes for government officials to make this move.
In the case of the Great Depression, it took from the October 1929 peak to Roosevelt’s March 1933 action to make
the move. From that point until the end of 1936—the year the Federal Reserve tightened monetary policy and
caused the recession of 1937-38—the stock market returned over 200%, and the economy grew at an average real
rate of about 9%!
As a principle: During periods of severe economic distress and large wealth gaps, there are typically
revolutionarily large redistributions of wealth. When done peacefully these are achieved through large tax
increases on the rich and big increases in the supply of money that devalue debtors’ claims, and when done
violently they are achieved by forced asset confiscations.
In Roosevelt’s first 100 days in office he created a number of big government spending programs that were
paid for by big tax increases and big budget deficits financed by debt that the Federal Reserve monetized.
He provided jobs programs, unemployment insurance, Social Security supports, and labor- and union-friendly
programs. After his 1935 tax bill, then popularly called the “Soak the Rich Tax,” the top marginal income tax rate
for individuals rose to 75% (versus as low as 25% in 1930). By 1941, the top personal tax rate was 81%, and the
top corporate tax rate was 31%, having started at 12% in 1930. He also imposed a number of other taxes. Despite
all of these taxes and the pickup in the economy that helped to raise tax revenue, budget deficits increased from
around 1% of GDP to about 4% of GDP because the spending increases were so large. Specific developments
through the Great Depression are explained more completely in Chapter 2: “The Big Cycle of Money, Credit,
Debt, and Economic Activity” or in great detail in Part 2 of my book Principles for Navigating Big Debt Crises.
Meanwhile in Germany, Hitler continued to pursue nationalist policies, refusing to pay reparation debts to creditor
countries. He also stepped out of the League of Nations and took autocratic control of the country in 1934. By
holding the roles of both chancellor and president, he became Germany’s supreme leader. In democracies there
are always some laws that allow countries’ leaders to grab special powers. Hitler seized them all. He invoked
“Article 48” to put an end to many civil rights and suppress political opposition from the communists and forced
the passage of the “Enabling Act,” which allowed him to pass laws without the approval of the parliament and the
president. He pursued the autocratic advancement of the “Aryan race” and was ruthless against any opposition—
e.g., he took control of or censored newspapers and broadcasting companies, created a secret police force (the
Gestapo) to find and fight all opposition, deprived Jews of all rights of citizenship, and took control of the
Protestant Church’s finances and arrested church officials who opposed him. Declaring the Aryan race superior, he
prohibited non-Aryans from serving in government.
Hitler also took that same autocratic/fascist approach to building the economy, coupled with big fiscal and
monetary stimulation programs. To create a strong economy for Aryan Germans, Hitler quickly privatized state-
owned businesses and encouraged corporate investment that was paid for by borrowing. He acted strongly in
support of raising their living standards. For example, he set up Volkswagen to make cars affordable and accessible
to most people, and he directed the building of the Autobahn. He financed this substantially increased government
spending by forcing banks to buy government bonds. The debts that were produced were paid back by the earnings
of companies and the central bank (the Reichsbank) monetizing debt. These policies by and large worked well.
This is another good example of how borrowing in one’s own currency and increasing one’s own debt and
deficits can be highly productive if the money borrowed is put into investments that raise productivity that
produces more than enough cash flow to service the debt and, even if it doesn’t cover 100% of the debt service,
it can be very cost-effective in achieving the economic goals of the country.
As for the economic effects of these policies, when Hitler came to power in 1933 the unemployment rate was
25%. By 1938 it was nil. Per capita income between his coming to power and five years later in 1938
increased by 22% and real growth averaged over 8% per year between 1934 and 1938. Consistent with the
rise in the growth, as shown in the below charts, German equities rallied nearly 70% in a steady trend
between 1933 and 1938 until the onset of the hot war.