Analogies both tempt and mislead. Still, it is hard to avoid recalling the merry 1920s, the last occasion when international and domestic credit stimulated pundits to project endless prosperity premised upon ever-rising stock prices. Roger Babson saluted Hoover’s victory in 1928 as a veritable warranty of good times as far as the prophetic eye could see. In retrospect, it’s quite clear what first inflated and then pricked the credit bubble. The
Versailles peace treaty imposed upon defeated Germany an enormous reparations burden. As Keynes memorably warned in his classic polemic The Economic Consequences of the Peace, protectionist barriers to German exports, loss of Lorraine’s iron to France and Silesia’s coal to Poland, and expropriation of the loser’s entire merchant marine made it utterly impossible for the Germans to produce and sell the exports needed to pay the victors. And as Keynes presciently added, the vindictiveness of Versailles imperiled the stability of the infant Weimar republic.
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