How today’s fiscal austerity is reminiscent of World War I’s
economic misunderstandings When World War I broke out in August
1914, economists on both sides forecast that hostilities could
not last more than about six months. Wars had grown so expensive
that governments quickly would run out of money. It seemed that
if Germany could not defeat France by springtime, the Allied and
Central Powers would run out of savings and reach what today is
called a fiscal cliff and be forced to negotiate a peace
agreement. But the Great War dragged on for four destructive
years. European governments did what the United States had done
after the Civil War broke out in 1861 when the Treasury printed
greenbacks. They paid for more fighting simply by printing their
own money. Their economies did not buckle and there was no major
inflation. That would happen only after the war ended, as a
result of Germany trying to pay reparations in foreign currency.
This is what caused its exchange rate to plunge, raising import
prices and he