Adam Tooze on our Financial Past and Future

Adam Tooze — historian of the Nazi economy, the First World War settlement, and the 2008 financial crisis — joins Tyler Cowen in April 2020 to range across the COVID-19 shock, the fragility of emerging markets, Keynes and Versailles, the fall of Weimar, Nazi macroeconomics, and how to find excellence in a future historian. Episode 95.

Key ideas

1. The 2020 shock would produce a swoosh, not a V, recovery. Unlike the post-Spanish-Flu rebound — itself entangled with World War I demobilisation — the COVID shutdown hit face-to-face service economies with no clear precedent. Tooze judged the likely path a ‘modified swoosh’: slow, uneven, shaped by periodic lockdowns rather than a clean bounce. He was sceptical of reading China’s single-province containment as a map for Western multi-city outbreaks.
2. Modest inflation (4–5%) would be a solution, not a problem. Massive central-bank asset purchases (quantitative easing — when a central bank creates money to buy government bonds and other assets, expanding its balance sheet) raised monetarist alarm. Tooze argued that the institutional underpinnings of a wage-price spiral — strong unions, wage indexation — had been dismantled from the Volcker shock of the early 1980s onward, making runaway inflation hard to sustain. Moderate inflation, by contrast, would erode the real value of government debt, just as it did in the 1950s and 1960s post-war recovery.
3. The Weimar Republic’s survival depended on the United States holding the ring. Tooze’s core argument from The Deluge: German centrist politics were viable in the 1920s only while US capital flowed to Europe and Washington moderated Franco-German tensions. When that financial architecture collapsed in the early 1930s, the parameters for all European politics shifted. Hitler’s 1.5% vote share in 1928 showed how narrow his base was before the Great Depression broke the liberal order.
4. The Nazis were adventurous macroeconomists but not Keynesians. Keynesianism — named for the British economist John Maynard Keynes — holds that modest government spending creates a multiplier effect: £1 of state outlay generates several pounds of private economic activity, stabilising the economy without permanently expanding the state. The Nazis did the opposite: they suppressed the multiplier, preventing armaments workers from spending freely so that money circled back into rearmament. The goal was a permanent war economy, not emergency stabilisation.
5. International financial history is continuous improvisation, not stable regimes. The Bretton Woods system (the post-1944 international monetary order pegging currencies to the dollar) is routinely over-praised: the agreement never fully operated until 1958, was effectively dead by 1967, and was abandoned by 1971. Tooze’s lesson is that the international monetary order is better understood as perpetual makeshift than as successive grand architectures — a caution he applied equally to eurozone fiscal arrangements and to reading the gold standard’s return in the 1920s.

Content

The COVID shock and the shape of recovery

Tooze opens by comparing the 2020 pandemic response to the Spanish Flu of 1918–19. No government attempted a comprehensive national lockdown then; the policy barely registered in Weimar Cabinet minutes or the Versailles Peace Conference archives he knows well. The cost of 2020’s approach was extraordinary, and the recovery shape correspondingly uncertain. He placed himself ‘in the swoosh camp, modified swoosh,’ noting the difficulty of imagining how a densely packed urban service economy like New York returns under a regime of periodic lockdowns and managed social distancing.

On the Chinese precedent, he was cautious: even granting the regime’s numbers, Wuhan-style containment of a single province cannot simply be transposed onto the US or European pattern of multiple simultaneous outbreaks. And given China’s still-low immunity, even its recovery path was ‘something closer to a swoosh than a V.‘

Financial fragility: the 2020 crisis compared to 2008

In 2008 the neuralgic point was clear: Citigroup and the balance sheets of systemically important banks. In 2020 the risk was more diffuse — a financial market crisis rather than a bank-centred one, affecting multiple credit markets simultaneously. Tooze described the concern as locating the weak hands: whoever holds concentrated losses combined with high leverage and is therefore most likely to be forced into fire sales that destabilise asset prices more broadly.

He flagged the Treasury market as a foundation of financial stability. The dangerous fortnight in mid-March 2020, when normal pricing relationships within the yield curve broke down — think of a smooth price gradient along a shelf of bonds suddenly developing gaps — was resolved by massive central-bank asset purchases. He treated the restoration of the safety function of government bond markets as contingently reassuring, not permanent.

On emerging markets, he identified a portfolio of vulnerabilities: foreign-currency debt, dependence on commodity exports, quasi-state companies with fragile balance sheets (Mexico’s Pemex, Brazil’s Petrobras, South Africa’s Eskom). South Africa topped his risk list: HIV prevalence of seven million-plus, a junk sovereign rating, and a currency already collapsed. Algeria — eighty-five percent oil-dependent — and Turkey — unwilling to seek IMF support despite widening credit default swap spreads — also featured.

Keynes, Versailles, and the 1920s

Asked whether Keynes was right about the Treaty of Versailles (the post-World War I peace settlement), Tooze gave a nuanced no. Keynes’s The Economic Consequences of the Peace (1919) was brilliant as political advocacy but damaging in practice: it handed arguments to German nationalists who had no genuine intention of accepting a reparations burden that Tooze — citing 1920s evidence — believes the Weimar economy could have borne at a reasonable scale (2–3% of national income). The front-loading of demands in the weakest years was the valid critique; the book’s hidden agenda was a plea to Americans for large-scale debt concessions, on which Keynes was entirely right.

On the gold standard: Britain’s return to the prewar parity in 1925 (the gold standard — a system in which a currency is pegged to a fixed quantity of gold — makes currencies internationally comparable but removes a government’s ability to devalue to boost employment) was, Tooze argues, not simply an error about employment optimisation. The Tory government’s aim was to deflate and break the bargaining power of the Triple Alliance of railway workers, miners, and dockers — class policy dressed as monetary policy. Keynes’s alternative was not floating exchange rates but a better-managed fixed parity.

The fall of Weimar

Tooze’s answer is structural rather than cultural. In the 1928 elections, Hitler won 1.5% of the vote; the centrist majority was intact. The Republic’s fate depended on the US providing what he calls ‘a steady rain of dollars’ and moderating intra-European aggression. When American financial engagement collapsed in the early 1930s, centrist politics ceased to be the optimal strategy for any German actor, and some form of alternative to the Republic became likely — though not predetermined as Nazism.

He does not let German elites off: a large fraction made choices that were catastrophic for themselves and the world. But his distinctive contribution, developed in The Deluge, is to show how the collapse of the dollar-anchored international order shifted what was locally rational for every potential challenger state simultaneously — Germany, Japan, and Mussolini’s Italy all radicalised at the same moment.

Nazi macroeconomics

Tooze insists Hitler was personally a conservative on money — an anti-inflation hawk who had to be persuaded into large-scale monetary finance. The creative macroeconomist was Hjalmar Schacht, the Reichsbank president who had learned to think outside monetary convention while stabilising the currency in the 1923–24 hyperinflation.

The Nazis were not Keynesian because Keynesianism is, at root, a liberal programme: a small, intermittent state intervention (the famous multiplier — if the multiplier is three, every pound of government spending generates three pounds of economic activity) that reserves most economic activity for the private sector. The Nazi programme was the opposite: sustained state direction aimed at rearmament, with active financial repression to prevent consumer spending from diverting resources. ‘They’re macroeconomists, the Nazis. They’re adventurous macroeconomists. They’re doing massive intervention, but they’re not Keynesian.’

On Germany’s economic backwardness, Tooze holds to his reading from The Wages of Destruction: the 1930s German economy was genuinely inferior to both Britain and the United States, not the industrial powerhouse of retrospective imagination. The transatlantic productivity gap was universal across all sectors; the intra-European gap reflected Britain’s structural advantage (an agricultural workforce below 10% by 1911, fully commercialised) versus Germany’s large peasant-farm labour force. This backwardness is, in his account, the key to understanding why Nazi ideology — with its focus on Lebensraum (living space in the east, to achieve food self-sufficiency) — was both genuine and, from a material-balance perspective, strategically incoherent.

Italy, the eurozone, and the limits of technocratic fixes

On Italy — with eighteen years of flat per capita income heading into the COVID shock — Tooze’s diagnosis was political rather than technical. The likely outcome was warehousing vast quantities of Italian government debt on the ECB balance sheet and hoping it gets forgotten: not the worst of all outcomes, but inherently unstable if German political actors keep litigating it. The AfD (Alternative für Deutschland, the German right-wing populist party) originated not as an anti-immigration movement but as an anti-ECB movement opposed precisely to this kind of monetary risk-sharing. The German constitutional court’s involvement made burying the problem quietly — the Keynesian technocratic fix Cowen preferred — unreliable.

The Adam Tooze production function

In a closing segment on his working methods, Tooze offered two habits. On writing: he writes every day, treating it like exercise rather than a test of courage — even ten minutes keeps a project top of stack so that when longer time opens up, the mind is already oriented. On reading: Twitter became his metabolic system — the discipline of nuggetising an article into 280 characters forces clarity about what the core finding actually is. He traces both habits to his grandparents’ breakfast table, which he describes as ‘analog breakfast table Twitter’: multilingual, voraciously synthetic, always asking ‘what is the thing worth sharing here?‘

Related

• Adam Tooze — speaker; historian of Nazi Germany, the post-WWI settlement, and the 2008 financial crisis
• Tyler Cowen — host
• Kenneth Rogoff on Monetary Moves, Fiscal Gambits, and Classical Chess — fellow Conversations with Tyler episode on monetary policy, sovereign debt, and economic history
• Andrew Ross Sorkin on Market Bubbles, Banking Rules, and the Real Lessons of 1929 — financial history and systemic risk; complements Tooze on the mechanics of financial crises