The economics of inflation (a study of currency depreciation in post war germany)

A Sir Halley Stewart Publication w w w T he Ge tA ll co m THE ECONOMICS OF INFLATION .T w w w tA Ge he co m ll T w w w tA Ge he co m ll The Italian original LE VICENDE DEL MARCO TEDESCO First published by Universita Bocconi in i 31 FIRST PUBLISHED IN ENGLISH SECOND IMPRESSION T H I R D IMPRESSION I 937 19^3 1968 om The English edition has been substantially revised by the author Al l.c This book is copyright under the Berne Convention Apart from any fair dealing for the purpose of private study, research, criticism or review, as permitted under the Copyright Act, 1956, no portion may be reproduced by any process without written permission Enquiries should be addressed to the Publishers w w w T h eG et SBN 04 332005 PRINTED IN GREAT BRITAIN by Photolithography BY JOHN DICKENS & CO LTD NORTHAMPTON FOREWORD w w w T h eG et Al l.c om THE depreciation of the mark of 1914-23, which is the subject of this work, is one of the outstanding episodes in the history of the twentieth century Not only by reason of its magnitude but also by reason of its effects, it looms large on our horizon It was the most colossal thing of its kind in history: and, next probably to the Great War itself, it must bear responsibility for many of the political and economic difficulties of our generation It destroyed the wealth of the more solid elements in German society: and it left behind a moral and economic disequilibrium, apt breeding ground for the disasters which have followed Hitler is the foster-child of the inflation The financial convulsions of the Great Depression were, in part at least, the product of the distortions of the system of international borrowing and lending to which its ravages had given rise If we are to understand correctly the present position of Europe, we must not neglect the study of the great German inflation If we are to plan for greater stability in the future, we must learn to avoid the mistakes from which it sprang There is another reason why the history of this episode is peculiarly significant to students of the social sciences Accidents to the body politic, like accidents to the physical body, often permit observations of a kind which would not be possible under normal conditions In peaceful times we may speculate concerning the consequences of violent change But we are naturally precluded from verifying our conclusions: we cannot upset the smooth current of things for the advancement of abstract knowledge But when disturbance takes place, it is sometimes possible to snatch good from evil and to obtain insight into the working of processes which are normally concealed No doubt there are dangers here We must not ignore the possibility that the processes thus revealed are themselves abnormal: we must not infer, for instance, that propositions which apply to large inflations necessarily apply, without modification, to small inflations But the dangers are clear: it is not difficult to keep them in mind and to guard against them And the opportunities of fruitful research are enormous In this matter of the depreciation of the mark, there is hardly any branch of the theory of economic dynamics which is not illuminated by examination of its grim events For both these reasons, therefore, I hope that this book will obtain THE ECONOMICS OF INFLATION tA ll co m a wide circulation among the English-speaking public Its distinguished author, Professor Bresciani-Turroni, had very special opportunities for writing it; for he was working in Berlin during the years in which the events he describes took place: first as a member of the Reparations Commission, then as head of the Export Control, and finally as economic advisor to the Agent-General for reparations As they peruse the chapters in which he develops his beautifully lucid and essentially catholic explanations, many readers, I think, will feel that these appointments were among the few fortunate events of those troubled times I hope they will feel, too, a debt of gratitude to the trustees of the Sir Halley Stewart foundation for the generous grant which made it possible to make available in the English tongue the results of such valuable researches and to Mr and Mrs Sayers for the pains they have taken with the exacting and time-consuming task of translation THE LONDON SCHOOL OF ECONOMICS w w w T he Ge September 1937 LIONEL ROBBINS CONTENTS CHAPTER PAGE Foreign Exchanges and Internal Price Movements in Germany, 1914 to 1923 An Outline of Events, p 23 1914 to the Armistice, p 25 From the Armistice till the Signing of the Treaty of Versailles, p 28 From July 1919 to February 1920, p 29 From February 1920 to the Acceptance of the Ultimatum of London, p 30 From May 1921 to July 1922, p 32 July 1922 to June 1923, p 33 June 1923 to the Introduction of the Rentenmark, p 35 Summary of Exchange Rates and Prices from 1914 to 15 18 19 21 23 he Ge I tA ll co m Foreword List of Tables Appendix of Tables List of Diagrams Preface to the English Edition w w T 11 The National Finances, the Inflation and the Depreciation of the Mark PART ONE w The Helfferich Explanation of the Depreciation of the Mark, p 42 The Conditions of the National Finances during the War, />-47 Income and Expenditure of the Reich from 1919 to 1923, The Causes of the Depreciation of the Mark in 1919,-p 53 The Depreciation of the Mark during the Financial Year 1920-21,/) 55 The Discussions concerning the Financial Reform and the Financial Compromise of March 1922, p 57 The Conditions of the National Finances in 1921 and 1922 p 60 42 THE ECONOMICS OF INFLATION CHAPTER PAGE II The National Finances, the Inflation and the Depreciation of the Mark—continued TWO ll co PART m The Conditions of the Reich Budget after the Occupation of the Ruhr, /> 62 The Influences of the Depreciation of the Mark on the Receipts of the Reich, /> 64 Influences of the Depreciation of the Mark on the Expenditure of the Reich, p 68 The Errors and Weaknesses of German Financial Policy, p 70 The Policy of the Reichsbank, p 75 The Apparent Scarcity of the Circulating Medium, p 79 The Increase in the Issues of Paper Money, p 82 PART THREE Ge tA The Depreciation of the Mark and the Disequilibrium of the Balance of Trade, p 83 The Balance of Payments after the End of the War, p 86 Abnormal Conditions of the Foreign Exchange Market, /> 87 P A R T F O U R T he Payments under the Treaty of Versailles, p 93 The Influence of Reparation Payments on the Value of the Mark, p 95 P A R T F I V E The Influence of Speculation on the Value of the Mark, p 100 w The Influence of Certain Classes of German Industrialists on the Depreciation of the Mark, p 103 w A P P E N D I X TO C H A P T E R II w The Foreign Exchanges under Conditions of Inconvertible Paper Money 107 The Determination of Exchange Rates, p 107 Influence of Non-Merchandise Transactions on Exchange Rates,/) 112 The Influence of Transport Costs, p 114 Exchange Rates in the Case of Very Elastic Schedules of International Demand for Commodities, p 115 Relations between Exchange Rates and Prices of Domestic Commodities,/) 118 CONTENTS HAPTER in PAGE The Divergences between the Internal Value and the External Value of the Mark 120 Ge tA ll co m Some Historical Examples,/) 120 The Various Measures of the Depreciation of a Paper Currency, /> 121 Some Opinions on the Relations between the Internal and External Values of the Mark, p 124 Difficulties in ascertaining Exchange Rates and Internal Prices in Germany, p 125 The War Period, p 128 Relations between the External and Internal Values of the Mark after 1918, p 131 The Sensitiveness of the Various Classes of Prices, p 133 The Rapid Adaptation of Internal Prices to the Variations of the Exchange in the Last Phases of the Depreciation of the Mark, /> 136 Monetary Phenomena observed during the Last Phase of the Depreciation of the Mark, p 142 A P P E N D I X T O C H A P T E R I I I 146 he On Certain Methodological Questions regarding the Calculation of the Depreciation of the Mark w T Arithmetic and Harmonic Averages of the Value of the Gold Mark expressed in Paper Marks, p 146 The Geometric Mean of the Daily Exchange Rates of the Gold Mark, p 151 rv Relations between the Total Value and the Quantity of Paper Money in Circulation w w An Economic Sophism,/) 155 The Fall of the Total Value of the Paper Money in Circulation in an Advanced Phase of Inflation Explanation given by Keynes and Marshall,/) 158 Relations between the Quantity of Paper Money, Prices, and the Foreign Exchange Rates in an Advanced Phase of Monetary Depreciation, p 160 Variations in the Velocity of Circulation of the German 'Mark, 1914-22, p 166 The Total Real Value of Marks in Circulation in 1922 and 1923, p 173 Bortkiewicz's Views on the Causes of the Increase of the Velocity of the Circulation of the Paper Mark, p 175 Objections to the Bortkiewicz Theory,/) 176 155 io THE ECONOMICS OF INFLATION CHAPTER v PACK The Influences of the Depreciation of the Mark on Economic Activity 183 co m The Opinions of the Classical Economists about the Effects of the Monetary Inflation on Production, p 183 "Forced Saving" imposed on Some Classes by the Inflation, as the Source of the New Resources, />.i86 Relations between the Depreciation of the Mark and Unemployment, p 188 Economic Activity in Germany from October 1921 to the Summer of 1922, p 190 Certain Statistics of Production in Germany in the Years 1920-23, /> 192 Ge tA ll Disturbance in the Direction of Economic Activity, p 193 The Production of Instrumental Goods, p 197 The Expansion of Germany's Productive Equipment during the Inflation, p 201 The Formation of the Great Post-War Industrial Groups, /> 203 The Depreciation of the Mark and Germany's Foreign Trade w vi w w T he The Influences of the Monetary Inflation on Industrial Concentration, p 207 The Situation of the Private Credit Banks during the Inflation,/) 212 The Influence of the Inflation on Economic Production in an Advanced Phase of the Depreciation of the Mark, p 214 The Increase of Unproductive Work,/) 215 The Decline in the Intensity of Labour,/) 217 The Suspension of the Natural Selection of Firms, p 219 The Difficulties of National Production, p 220 The Economic Crisis caused by the Inflation in 1923,/) 220 Differences of Opinion between Economists about the Influence of the Paper Inflation on the Balance of Trade, p 224 Relations between Inflation and the Balance of Trade in Various Phases of the Depreciation of the Mark, p 225 Influences of the Depreciation of the Mark on the Volume of Exports, p 227 Influences of the Depreciation of the Mark on the Volume of Imports, p 230 224 45O T H E ECONOMICS OF INFLATION TABLE XI Wages (a) Nominal Wages of a Coal-miner (Hewer) in the Ruhr District* (1913 = 1) Month 1920 January February March April May June July August September October November December 1*3 16 60 60 60 • 7-2 • • • • • 7'3 7-9 79 8-7 8-7 9-8 • 9*9 99 tA 3*4 1921 ig22 IOO 181 696 IOO 20-3 2,115 IOO 104 233 261 io-7 304 108 109 410 2,430 2.430 3,067 7,640 27,621 844,187 m I I' I co Yearly average I I 'O 127 I2'8 ll Year 1914 1915 1916 1917 1918 1919 32-7 55-4 106-5 133-8 176 261-8 17-8 452-3 1923 22'lf IO*9+ 493 8J 862-oi he Ge • From 1914 to 1919 average annual earnings in cash; from January 1920 until November 1922, average monthly earnings in cash according to statistics of the mining authorities; from December 1922 onwards, wages according to the scales operating in the Rhine-Westphalia province (including allowances for a wife and two children, but excluding the coal supplied to the workmen) t Millions } Milliards (b) Real Wages of a Coal-miner (Hewer) in the Ruhr District* (1913 = 100) Month January February March April May June July August September October November December w w w T Year Annual average 1914 93*3 1915 813 1916 744 1917 627 1918 637 1919 82 • • 1920 0 70 62 693 664 726 74'4 880 91 -6 88-4 92 95*9 92*9 865 81-9 899 82 975 8*51 •QO'S 846 • 85-9 1921 844 87-3 1922 83 788 763 73-8 807 75-7 69-5 I( )23 47 75-6 862 79*9 696 70-8 47-6 756 78-5 74-7 516 526 62 55'7 VI 59-i 812 • Calculated from the beginning of February 1920 on the base of the official index number of the cost of living in the period in which the wages were consumed (that is, a nominal monthly wage divided by the index number of the cost of living from the 8th of the same month to the 7th of the next month) From September 1923 account was also taken of the methods of payment of wages APPENDIX OF TABLES 4SI TABLE XI (continued) (c) Average Wage per Hour (in Pfennig, Unskilled Workers) 1924 " 44*2 • 43*3 1925 549 1926 651 1927 66 652 66-i 739 65 66-7 74-i 42-4 55-5 56-8 448 58-3 65-2 May 48-0 595 652 June 50-2 606 July 501 62*0 August September October •• 5O-4 62-9 637 •• 52*9 54-2 649 65-0 71-7 776 65-0 71-7 65-6 719 78-3 79*7 657 72-6 80- 657 72-8 80-4 660 72 co 65*0 75*5 77*4 77-6 ll 635 5i'4 69'i 65-1 1928 73*7 71*5 71-7 tA December 5â-5 Ge November m Month January February March April Month 1926 1927 1928 100 109 I2O 73 IOI 102 109 I2X 78 85 104 103 "3 122 107 104 117 "5 90 in 105 122 128 91 in 105 122 128 86 109 104 121 126 87 108 105 124 126 I3O •• June July August September October 1925 99 T 68 w May 1924 w w January February March April he (d) Index Numbers of the Real Income of Unskilled Workers* (1924-26= 100) 90 109 108 124 109 no 126 91 — 121 107 109 •• 95 108 117 December IOI 98 * Calculated by the author on the basis of wages per hour and taking account of the cost of living, of total and partial employment, and of subsidies paid to the unemployed November THE ECONOMICS OF INFLATION 452 o t^ oo N 5- R 3O O T he Ge tA l l.c om iooo m 00 ° W ° Ifl M O O 00 N 1^ a ^ S ^ X * ° vO w w w ^-c'SS N I I "8 «B £ S £ S M I I APPENDIX OF TABLES 453 1-1-8 ^ » i1 ? ? f ? ^ r ^ ? "* $ "I & b* ob o Đ ^ oo 'o o M ô r ^ r ^ o o o o o o o o ^*1* S"~? oo ' b o i ^ i o r ^ o ^ t ^ o ^ N N r ^ r ^ O " N N r** n oo a ^ O O - ^ - v © v O m M « W W M M « M in M n M f M M he *?»• Ge •-E i l l