Wilhelm Röpke on Business Cycles

I am currently reading Wilhelm Röpke’s excellent book “Crisis and Cycles” published in 1937. Röpke, a personal friend of Ludwig von Mises, was a German economics professor and an adherent of the Austrian school. As an advisor to Ludwig Erhard he was instrumental in the making of the German “Wirtschaftswunder” (which Mises never tired to point out was no wonder at all, but simply the expected outcome of sensible economic policies). Sadly, those people have almost been forgotten in Germany (and Austria), instead we are told that we owe our prosperity to the infamous “Sozialpartnerschaft” – a bad joke.

The book doesn’t provide new theoretical insights to those who are familiar with Austrian Business Cycle Theory, but is an application (by an outstanding economist) of the theory to world events. It is in this sense a “practical” book. There many interesting tidbits and I will certainly post about some of them in the future. But the most interesting piece of information for now is (surprise, surprise) statistical: it is from page 54 where the author discusses the shrinkage of production (this would nowadays be proxied by GDP) that occurred in various countries between end of 1928 to June 1932. The figures are taken from the third League of Nation’s (today’s UN) World Economic Survey and read as follows (Production in 1928 indexed to 100): Germany: 60.7; Great Britain: 89.4; USA: 53.2 (!); Sweden: 76.9 and France: 73.2.

Yes, you read correctly: the US, the most powerful economy at that time and source of innovation, was hit the most by the great depression – and by a big margin! After sobering up, I realized that this is consistent with the Austrian theory (although I have been studying this theory for the better part of the last ten years I had to let the numbers sink in, nevertheless), where the causes for the bust and its size are to be sought in the preceding boom. It is certainly the case that the “Roaring Twenties” where mostly an US phenomenon – European countries still licking wounds after WWI.

“So where does that leave us now?” you might ask.

America at that time was also the largest creditor nation on earth (before WWI it had been Britain), in fact the boom was to a large extent financed by capital inflows from a devastated Europe (and subsequently, partially lent out to “Emerging markets”). It was one reason why the Fed hesitated to raise interest rates despite the boom, for a higher US rate would have made it even more difficult for an allied Britain to finance its current account.

Now, ask yourself: who is the largest creditor nation nowadays? Who has so much “money” that despite breakneck growth at home there is still spare change to buy resources in Africa and condos in Manhattan, Hong Kong and Vancouver?

It is China that is the most vulnerable to higher rates and to a global slowdown….


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