Sovereign debt – what we can learn from history

Prof. Dr. Ritschl said that Germany was particularly well suited to illustrating the different ways in which debts were dealt with after major wars. The repayment of German war debts after the world wars was carried out in completely different ways. After the First World War, the Reichsbank had deliberately pursued inflation in order to devalue the debts. This led to hyperinflation in 1923 and ultimately to the collapse of the currency. After the Second World War, on the other hand, the USA pushed through debt relief for Germany. The focus was not on repayment, but on reconstruction – with the aim of creating a stable and democratic Germany in the middle of Europe.

Sovereign debt crises have existed since ancient times, explained Prof. Dr. Tobias Straumann in his presentation. However, they only became a global phenomenon when government bonds became tradable financial instruments in the 18th century and the debt possibilities of modern states expanded considerably as a result. Looking back, it is astonishing that developed economies have hardly ever gone bankrupt since the 19th century, but have been able to stabilize themselves through reforms even with high levels of debt. The situation was completely different in many emerging countries, which had repeatedly become insolvent. However, according to Straumann, history shows that even bankrupt states were given a chance again – provided they were prepared to implement reforms.

You can also find out in the video:

• What role government debt played in the French Revolution.
• What financial instruments the Third Reich used to keep inflation low despite rearmament.
• How England reduced its debt after the Second World War.