The two countries dealt with their debts very differently. Britain was a model of orthodoxy, returning to the gold standard and running huge primary surpluses to pay its debts; France, with a weaker political system, ended up inflating away much of its debt and accepting a big devaluation of the franc.He then shows graphs that show a bigger gain in postwar GDP growth, which I guess is proof that inflation confers wonderful general economic benefits. (I am not putting the graphs on this page, so if you want to see them, go to his blog.)
First, Krugman overdoes it with the whole "virtue" thing. There was no "virtue" in Great Britain overvaluing its Pound Sterling following the war; virtue, after all, requires honesty and the Brits were not being honest about what World War I had done to its economy. (Like Krugman, they were in the "let's pretend we still are rich" mode of thinking.) Murray Rothbard in America's Great Depression noted that British financial policy was a disaster:
Great Britain, in particular, faced a grave economic problem. It was preparing to return to the gold standard at the pre-war par (the pound sterling equaling approximately $4.87), but this meant going back to gold at an exchange rate higher than the current free-market rate. In short, Britain insisted on returning to gold at a valuation that was 10-20 percent higher than the going exchange rate, which reflected the results of war and postwar inflation. This meant that British prices would have had to decline by about 10 to 20 percent in order to remain competitive with foreign countries, and to maintain her all-important export business.However, notes Rothbard, because of the political power of Britain's labor unions, the needed wage contractions did not take place:
But no such decline occurred, primarily because unions did not permit wage rates to be lowered. Real-wage rates rose, and chronic large-scale unemployment struck Great Britain. Credit was not allowed to contract, as was needed to bring about deflation, as unemployment would have grown even more menacing—an unemployment caused partly by the postwar establishment of government unemployment insurance (which permitted trade unions to hold out against any wage cuts)..As a result, Great Britain suffered from high unemployment during the 1920s. Indeed, had the Brits been "virtuous" instead of, well, British, they would have been willing to be honest about the real value of the pound and let it fall to market levels. To make matters worse, the USA through the actions mostly of the New York Federal Reserve Bank, actively increased the U.S. money supply, an action which did stabilize the pound at the higher price -- but at a high cost both to the British economy and ultimately to the USA itself.
Postwar France suffered from both inflation and political instability, as outlined by Benjamin Anderson in Economics and the Public Welfare. Anderson notes that by late July 1926, the French franc had fallen in value to about two cents. He writes:
Every day the housewife of Paris found that her bread and her herring and her wine were rising in price. A German housewife in the late autumn of 1925, speaking of the French housewife, said "Poor thing." The German housewife had been there herself.That is the side of inflation Krugman claims does not exist, or is reluctant to admit. But when one writes that printing money will bring back prosperity, one is not going to admit the downside of inflation.