Are we preparing the way for a new Hitler in Europe?

The strong preference of Germany for 'sound money', which was a major factor in the design of the Eurozone monetary system, may be based on a tragic misunderstanding of it's own history. Many Germans seem to believe that the hyperinflation during the Weimar Republic was somehow to blame for the shift of Germany to the right, which culminated in the disaster of the Third Reich and WWII. In fact there is no direct connection between hyperinflation and Hitler's rise to power. The sequence of causes and events was as follows.

1. The German government, saddled with huge reparation demands imposed by the rest of Europe, which it could not afford, printed money in order to devalue them (they were denominated in German currency). This succeeded but wiped out the cash savings of the German middle class. Economic growth began to recover but then slowed as governments around the world introduced 'sound money' (essentially a reintroduction of the gold standard) at the same time as balancing budgets. A new government was duly elected.

2. This government attempted to introduce sound money policies in the face of economic headwinds by cutting government expenditure and increasing interest rates. The result was a severe recession and mass unemployment. Hitler, campaigning on populist xenophobic and racist ideas that allocated the blame for this crisis on other groups (mostly Slavs and Jews) soon rose to power by popular vote.

3. Once in power he dramatically increased government spending (and the deficit) in order to rearm the country. This classical demand stimulus restored vigorous economic growth and living conditions improved rapidly. His popularity rose and his hold on power became unbreakable. The rest is well-known.

What lessons are there from this? Austerity and sound money policies do not work in a recession and when the money supply is contracting. Stubbornly pursuing them in a democracy will hand power to anyone who is prepared to abandon them. We must just hope that the politicians who eventually do what is obviously necessary to restore economic growth in Europe are not extremists. It would be tragic if the same mistake was made within living memory due to a misunderstanding of history.