Annual data for thirteen countries revealed three long up trends and down trends in inflation that were matched by growth rates in M2 and nominal GDP but not real GDP in each country and cross-country averages. Inflationary expectations as estimated by bond rates less real growth trends indicated little inflation expectation until the 1960s. Central banks had credibility to keep inflation low even during wartime. It was lost as inflation rose in the 1970s and regained only as inflation fell subsequently. Although relationships with annual data were not as reliable as with ten-year averages, annual inflation was significantly related to annual M2 growth and inflationary expectations which should not be ignored in central bank decision making.

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Bond Market Inflation Expectations and Long-Term Trends in Broad Monetary Growth and Inflation in Industrial Countries, 1880-2001

Why did Europe create the European Central Bank in the image of the Bundesbank? More generally, what accounts for the current consensus over how a central bank should conduct monetary policy? Germany's experience of hyperinflation and deflation illustrate the West's disastrous experiments in monetary arrangements in the first half of the twentieth century. With the 1948 currency reform, Germany and the Western world started down a more promising path toward monetary arrangements that would provide monetary and economic stability.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2183374_code1851421.pdf?abstractid=2183374&mirid=1&type=2

German Monetary History in the First Half of the Twentieth Century

The recent debate on the Eurozone failed to appreciate a particular characteristic of European crisis experiences, namely their fundamentally political character. To make my argument, I borrow from Dani Rodrik (2000) the framework of a “political trilemma” between cross-border economic integration, national institutions and democracy (in the sense of mass politics) and discuss its relation to the more commonly known “macroeconomic trilemma” as well as some limitations of the framework. The recent experience of a European debt crisis and the experience of Europe's Great Depression can be interpreted as a “political trilemma”: both reflect the problem of designing effective policy responses to major economic shocks within the environment of deep economic integration across political boundaries and the regime choices that this involves. Within this framework I highlight some aspects of the 1930s that are informative to the policy choices in Europe today. Once we accept that some policy choices should be avoi...

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Crises and Policy Responses within the Political Trilemma: Europe, 1929-1936 and 2008-2011

Experimental studies consistently indicate that human information processing and decision making violate basic precepts of rationality. Yet rational choice theory is increasingly used to model organizations, politics, and international relations. Experimental evidence of cognitive bias is often discounted as a methodological artifact because analysis, organization, specialization, and the presence of strong incentives are presumed to eliminate bias outside the laboratory. A controversy in the historiography of the Paris Peace Conference of 1919 provides an opportunity to address that assumption. Did "the vindictiveness of the British and French peace terms; the exclusion of Germany and Russia from the peace conferences . . . the foolish attempts to draw the blood of reparations and war debts . . . usher in a second vast military conflagration" (Kennan, 1996)? Or, was the peace treaty "a flexible instrument crafted by relatively well intentioned and rational leaders" (Ikenberry, 2000)? The extensive record of primary and secondary sources was used to reconstruct beliefs, strategies, and actions of the decision makers over an extended time frame. That pattern was tested against three conceptions of rationality: The pure form of noncooperative game theory, the semi-strong form of Williamson's "contractual man", and the strongly bounded form of behavioral theory. Hypotheses regarding the structure and implementation of the Treaty derived from these three paradigms were tested. Both semistrong and strongly bounded conceptions of rationality accounted for the structure of the Treaty. Only the behavioral conception of rationality could account for the systematic failure in treaty implementation and the evolution of the Allied policy of appeasement. This strategy permitted the Hitler regime to repeatedly and unilaterally deviate from the provisions of the Treaty to improve its political, economic, territorial, and military position at the direct expense of the Allies. The tragic course of the war that followed is directly attributable to policy errors of the 1930's which derived from earlier errors in the initial construction of the Treaty.

https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=602007

Essence of Conflict: Cognitive Illusions, War Guilt, and the Origins of Appeasement

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Business cycles and economic policy, 1914-1945: a survey

(1991). Hyperinflation and Stabilization in Weimar Germany. History: Reviews of New Books: Vol. 19, No. 3, pp. 125-126.

T. Hunt Tooley

Papers

Hyperinflation and Stabilization in Weimar Germany