In the 1920s, Britain embarked on a determined drive to work off the debt accumulated during the First World War through a programm of severe austerity. As the International Monetary Fund pointed out in a 2012 report, Britain failed; by the early 1930s, its debt was higher as a share of GDP than it was at the start of the 1920s.
The problem wasn’t fiscal austerity per se; it was fiscal austerity combined with equally severe monetary austerity as Britain returned the pound to its prewar price in gold. The combination drove down both output and prices, causing nominal GDP (that’s real GDP before adjusting for inflation) to shrink, thereby elevating the debt to GDP ratio. Read More »