Exchange, Prices, and Production in Hyper-Inflation

CHAPTER IX

GENERAL EFFECTS OF INFLATION ON NATIONAL INCOME

§ DISTORTION OF REAL VALUES

THE most obvious effects of a depreciating currency are of course felt in the distribution, rather than in the production, of wealth and income. The practical nullification of contracts calling for future payment of fixed sums of money, such as occurred in Germany through the all but complete loss of value of the mark, transferred immense sums from creditor to debtor.1 This involved not only fixed interest securities such as bonds, debentures, preferred stock, and mortgages, but also insurance contracts, savings bank deposits, and a variety of other obligations including house rents. The vicissitudes of prices, with unequal responses to the inflationary stimulus, likewise took from one man and gave to another, and the burden of ordinary taxes was shifted according as payment could or could not be postponed. In all this there was of course no justice but there was no national loss of substance. The misery which the collapse of the currency brought to countless thousands of people, the tragic drama of their sudden plunge from well-being to utter poverty, the terror of uncertainty, akin to walking the pirates’ plank, which was the part of the whole population, all led to an erroneous conviction of national ruin. Inflation came to be regarded not as a blind god playing capriciously, though not destructively, with human fortunes but rather as a malevolent deity bent on smashing. The evils of inflation were plain; the counter-effects were somewhat obscure. Even those who had greatly benefited by depreciation were not always aware of their gains. The habit of thinking in monetary terms led to an enormous distortion of real values. In the earlier years of inflation real values were overestimated; in the later stages, and after stabilization, they were greatly minimized in the minds of their possessors.

If one may hazard a generalization it may be said with some approach to accuracy that it was the middle-class, including skilled and salaried workers as well as those with sizable fortunes in fixed-interest securities, which bore the brunt of the loss from depreciation, that the great mass of unskilled workers did not long suffer any extreme derogation from their previous status, and that landowners (especially if the land was mortgaged),2 the big industrialists, and merchants, materially improved their position.3 The gains of the latter classes were concealed with the coming of stabilization when, in accordance with law, balance sheets were made out in gold units of account. In order to be safe, resources were at that time generally undervalued, and this reduction in the monetary value of assets was compensated on the liability side by a minimization of liabilities to stockholders. A much too pessimistic view of the capacity of properties to produce income resulted in a shrinkage in their capitalized value, much as if they had been viewed through the small end of a telescope, and this was as true of the securities which represented shares in the property as of the property itself.4

The ploughing-in of inflation profits had resulted in great extensions and improvements in industrial plants and while a good many of these “improvements” later proved useless there was nevertheless a marked betterment in industrial equipment taken as a whole. Yet the prevailing undervaluation of assets by the class which had most benefited from inflation encouraged the belief that everybody had lost. This undervaluation was by no means a subterfuge. When stabilization of the currency was accomplished the expected crisis developed and the generally precarious position of German industry at that time justified a low valuation of productive assets. Presently, moreover, there developed a difficulty which was generally dubbed a shortage of “working capital.” The phrase is ambiguous but the trouble was undoubtedly due to the shock to credit which had resulted from the robbing of creditors by inflation, and to the fear that the stabilization might be but temporary. The general lack of confidence forced the banking organization to restrict credits if stability in the currency was to be preserved and, though the rigid restriction of credits was abundantly justified, it had an immediately depressing effect. Business was bound to be bad for the time being and there was no knowing how long this situation might last. Productive assets were consequently estimated to be worth much less than actually proved to be the case. Business recovery was in fact surprisingly rapid and has, till recently, been well sustained.

Another factor leading to the writing down of capital values was the rate of interest which prevailed during and as a result of inflation, a rate which has remained rather high down to the present day. Since the capitalized value of a property varies inversely with the interest rate the wealth of the country was computed at not much more than half what the same physical assets would have been held to have been worth in the pre-war and pre-inflation period. It should be noted also that the reparations burdens which fell on industry tended to diminish the value of German properties, to their owners, by the capitalized value of the payments to be made. Those burdens would, however, have been at least as great had there been no inflation. Such losses in individual wealth and in national income as they involve cannot therefore be charged to the depreciation of the currency.

§ EXTENT OF UNDERCAPITALIZATION

The extent of undercapitalization due to the general pessimism current at the time the mark was stabilized is indicated by the fact that, in the five years 1924 to the end of 1928, the monetary wealth of the German people is estimated to have increased as never before in a similar period.5 Real wealth has certainly not increased as rapidly as in some other quinquennia, since saving which, in its normal forms, was blasted by inflation has not yet fully recovered from the shock then suffered. It was not until 1927 that production reached the 1913 level while consumption has been relatively high since 1924. The growth in real wealth must therefore have been moderate. But improvement in the income from properties, the brightening of the economic prospect, and a gradual lowering of the rate of interest, have transformed capitalizations. The number of mark millionaires in Germany is said to have doubled in the period 1924 to 1928 and the prediction is made that, barring unforeseen catastrophes, this result will be repeated by 1933. If so, the pre-war figures will then have been surpassed.6 These changes are certainly due rather to a revised appraisal of properties which had been grossly undervalued in 1923 than to such gains in real wealth as may have occurred.

National wealth is a slippery concept and rapid changes in the estimates thereof are rather more likely to be due to psychological aberrations than to objective factors. Objective factors, however, acting upon the distribution of income, may seriously affect estimates of wealth. After the stabilization of the currency German wages rose at a considerably faster rate than production and, insofar as this occurred, wages must have been paid at the expense of other forms of income. Yet interest rates were high and rents were rising. The brunt of the increase in wages must therefore have fallen on profits, and the consequent relatively small rate of profits in the early stabilization years kept the capitalized value of industrial properties—one of the principal components of wealth—at a comparatively low level.7 After stabilization had been in effect for about two years, the rate of increase in wages slackened. The value of properties began then rapidly to rise. Though the improvement in wealth in recent years has been real, it has not, therefore, been as phenomenal as the estimates would, prima facie, indicate, and the difference, as compared with the inflation years, is not nearly as great as might be supposed. The real wealth which is only now beginning to show in capitalizations was, to a very considerable extent, accumulated in the inflation period.

Income is a much more accurate criterion of welfare than is wealth and, since national real income is a function of national production, an attempt will presently be made to appraise the effect of inflation on German production during the years when currency depreciation was rampant.

§ EFFECTS OF THE WAR VS. THE EFFECTS OF INFLATION

The effects of inflation must be carefully distinguished from those of the war. The proper comparison is not between the production of the inflation period and that of 1913 but between the actual production in the post-war years and that which would have been attained had there been no inflation. Such a comparison is, of course, incapable of being directly made. But, by observing the course of production in Germany as inflation proceeded, and by comparing this production with that of countries similarly affected by the war yet relatively slightly touched by inflation, some approximation to the real results of currency depreciation may perhaps be attained.

§ BENEFICIAL AND ADVERSE POSSIBILITIES OF INFLATION

So far as inflation affects national income at all, it may prove beneficial or the reverse. On the side of benefit it would seem that the real income of a country might be increased in several ways through the adoption of a paper currency which later suffers extreme depreciation. These ways are:

(1)   A costly metallic medium of exchange is dispensed with and replaced by one which costs almost nothing. The metal, of which part at any rate of the former circulating medium was composed, may then be exchanged for imported capital or consumers’ goods which would otherwise not be available. This is as true of metallic reserves as of the money in the hands of the people since, once the metallic standard is abandoned, the reserves serve no purpose and, on rational grounds, should be sold. Reckoned in terms of recurring income this gain from the abandonment of a metallic currency is equal to the interest on the former metallic stock, or more accurately, perhaps, to the average yield which is obtained from capital goods of a value equal to that of the sold metallic stock.

(2)   Sales abroad of the paper currency may be made for values in excess of those at which such sold currency is redeemed.

(3)   Business activity tends to be stimulated, and unemployment reduced, by the depreciation of the currency and the consequent real or nominal profits accruing to entrepreneurs. Further than this the general state of flux induced by currency depreciation makes adjustment to altered conditions easy and facilitates the reacquisition of markets temporarily lost.

(4)   Wealth is transferred from passive to active holders without charge to the recipients8 and without benefit of middlemen. Furthermore, many persons formerly living on the yield of fixed-interest investments are compelled to undertake productive work.

(5)   Profits tend to be “ploughed in” by investment in plant as the best means of providing against losses from continuing currency depreciation. The accumulation of capital may thus be accelerated and future income increased.

Disregarding the injustices which redistribution of wealth through currency depreciation entails, the advantages alleged above may be compensated, in part, altogether, or even far outweighed, by the following considerations:

(1)   Depreciation may become so extreme and incalculable as to check rather than stimulate business activity.

(2)   A rise in foreign exchange rates relative to internal prices may lead to great national losses on foreign trade. Insofar as goods are sold abroad on terms corresponding to the general domestic price level they will yield a sum of foreign exchange which will procure a relatively small volume of imports. Since the sole purpose of exports, nationally considered, is to provide for imports, this is of course a very serious matter. The converse case, theoretically possible should foreign exchange rates rise less than in proportion to the internal price level, is practically excluded since most potential exports will then find no market abroad.

(3)   The friction arising from maladjustment in the distribution of income may reduce productivity. This is an all-pervading factor but is most clearly seen in wage disputes.

(4)   Unproductive employment may be increased. Currency depreciation in Germany, for instance, was attended by a great augmentation of speculative activities (using that term in its broadest sense to cover much retail trade) and by a rising ratio of clerical to manual workers. The former were increasingly required to take care of the vastly extended bookkeeping necessary to cope with the phenomena of inflation. The necessity of calculation of the real meaning of price quotations absorbed a great portion of the effort of the increased number of clerical workers.9 Wage payment adjustments also required the services of a big clerical staff and the mere task of reckoning in the stellar magnitudes of the day was responsible for much loss of time.

(5)   When capital can be obtained by borrowing, not only without usance cost but without the necessity of repayment of anything but a fraction of the amount borrowed, production is abandoned in favor of mere business activity, and such production as is carried on is conducted by entrepreneurs of less average ability than where profits are possible only through skilful management. This loss is to be directly weighed against the productive advantage of a direct transfer of wealth from passive to active hands.

(6)   Resort may sooner or later be had to foreign paper currencies for carrying on domestic transactions. This is, in effect, the granting of a loan without interest to the foreign country the currency of which is so employed.

(7)   The disposition to save, in the current money at any rate, disappears. This may or may not be compensated by the tendency to save directly through the extension, out of profits, of the plant and equipment of industrial concerns, and by the purchase of durable goods on the part of the populace in general. Even if it is not so compensated the people may simply be producing (and consuming) more immediately consumable commodities in lieu of producing, in the present, less of such goods and a larger quantum of producers’ goods. This is by no means a direct loss; it is merely a substitution.

(8)   Commerce may be driven to barter which is, of course, an inconvenient and wasteful form of exchange.

§ SPECIAL CONSIDERATIONS IN THE GERMAN CASE

Some of these factors on the one side or on the other are, when separately considered, quite imponderable. All that can be done is to try to discover the net result of the conflicting groups of forces. Three special considerations applicable to German inflation should first, however, be noted:

(1)   Germany was busy, and presumably productive, during the long period after mid-summer 1920 when industrial activity in almost every other country was at a low ebb. This result would seem to be ascribable directly to the currency situation in Germany. The matter is considered in detail in a later chapter. German export industry, moreover, was stimulated throughout almost the whole inflation period by the relatively low status of the mark on the foreign exchange markets.

(2)   The invasion of the Ruhr in January 1923 was a heavy blow to German productivity and to per capita real income. The unoccupied part of Germany practically took over the support of the Ruhr population. This burden was concealed by the fact that resistance in the Ruhr was financed entirely by new issues of currency but it was just as real for all that. The new output of currency diminished the purchasing power of any given income and transferred to the citizens of the occupied Ruhr area the command over goods which would otherwise have remained in the unoccupied regions. But the same result would have occurred, in one form or another, had passive resistance been financed in other ways. Unless, therefore, the Ruhr occupation itself can be alleged to have been due to inflation it would be erroneous to attribute its results to that cause.

(3)   The amount by which German income and consumption was diminished by reparations payments is not only not chargeable to inflation but was probably considerably diminished by reason of the collapse of the currency. Cash reparations and clearings payments, from the time of the armistice to the stabilization of the currency, amounted to 2365 million gold marks. This was not much more than the annual cash payment later made in a single standard Dawes Plan year. Had the Allies earlier cooperated with Germany in reconstruction measures, as they did under the Dawes Plan, there can be no doubt that Germany would, before 1924, have been able to make much larger cash payments than were actually realized. As a result of the collapse of the currency no cash payments were made (except to meet notes earlier given) from September 1922 till the inauguration of the Dawes Plan annuities in late 1924. It is not too much to say that inflation released the Germans from the necessity of making large payments which would otherwise have been abstracted from the German national economy.

§ GAINS AND LOSSES APPEAR IN PRODUCTION OR IN INTERNATIONAL TRADE

All the national gains and losses of inflation may be summed up under the heads of production and international exchange. The net result will appear in the physical volume of national production plus imports minus exports. Unless currency depreciation led to a more intensive using up of preexisting capital goods than would otherwise have occurred, and aside from the slight influence of high business activity there is no reason why this should be assumed, any increase or decrease in the annual volume of physical production over what might have been expected under stable currency conditions will measure the effect of inflation on the purely domestic economy. This is true whether capital equipment was or was not replaced or increased. The production was so much; whether it was used for replacement or increase of capital, or for consumption purposes, involved a choice between present and future final consumption but did not change the total output of goods in the present. It merely changed the nature of the goods or of their use. The total national income depended, however, not only on production but also on the volume of imports obtained for a given real cost in exported means of payment. Any change in the terms of trade arising from inflation must be computed along with the alteration in domestic output in order to arrive at the net result on the German national economy. Only the roughest sort of approximation may be hoped for, but an attempt will be made to estimate (a) the volume of physical production within the country and (b) the gains and losses in foreign transactions in money and goods, insofar as both were affected by the state of the currency. It seems best to dispose of the international aspect of the matter first. The two immediately succeeding chapters will therefore deal with foreign sales and purchases of money and of goods and these will be followed by a chapter appraising the physical volume of domestic production.

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10 The mortgage indebtedness alone, in 1913, was about 40,000,000,000 marks, or about one-sixth of the total German wealth. In 1923 this was worth less than one American cent. After stabilization a small part of some of these debts was reestablished by legislation, cf. Foreign Banking Systems, H. Parker Willis and B. H. Beckhart, Editors, Chapter VIII, “The Banking System of Germany,” Paul Quittner, Henry Holt and Company, New York, 1929, pp. 641 ff.

11 The distinction should be made between landowners and landlords. Urban landlords were heavy losers by reason of the rent limitation laws, though they were partly compensated, in some cases, by the elimination of their mortgage indebtedness. Rural landlords, or landowners, were subject to no, or but slight, restrictions on the yield of their properties and they were, in most instances, able to lift, at a nominal real cost, a heavy mortgage burden. An urban landlord is, in the main, a building-lord. He may not own the land at all.

12 The government, of course, also gained by getting rid of its debt. So far as the people in general are concerned this involves a shifting of the burden from those who would otherwise have had to pay taxes to meet the service of the debt to those who would be the recipients of interest.

13 cf. Germany’s Industrial Revival, Sir Philip Dawson, London, Williams and Norgate, Ltd., 1926, p. 106. Dawson says that the big banks and industrial concerns wrote down their assets in ratios of from 10: l to 50: 1. This gives an exaggerated picture, no doubt, since a number of concerns were later compelled to write off a considerable share of the assets they had counted upon at the time of stabilization. The general tendency, however, was certainly toward undervaluation. From January 1, 1924, onward, all accounts and statements of business concerns were required, by law, to be in gold marks. That corporation assets were very conservatively computed is shown by the fact that, in the course of the year 1926, stock prices more than doubled in value and thereafter maintained the level reached at the end of that year. This occurred despite the fact that, at no time since stabilization, has there been any undue optimism in Germany.

14 cf. “Die grossen Vermögen vor und nach dem Kriege,” Rudolph Martin, Westermanns Monatshefte, 873, May 1929, p. 256. The prospect of the immediate continuation in the rate of increase of German real or nominal wealth has been shattered by the world-wide depression of 1930.

15 The very fact that a generally low valuation was set on industrial properties when gold-value reckoning was again introduced in early 1924 probably enabled wage earners to secure an unusually large share of the national income. Competition would tend, for a time at any rate, to keep profits down to a fair return on invested capital rather than on reproduction cost. Properties built up during inflation were regarded as having cost almost nothing. This was, in a sense, true, since investment in capital was the only alternative to complete loss of substance. The result was to make it unnecessary to earn a return on plant and equipment and competition among employers tended to thrust the interest return, which must, under normal circumstances, have been paid to lenders of capital, into the lap of the laborer.

16 This is merely the principal argument for bank credit carried to its logical conclusion. The same phenomenon occurs in periods of a rapid increase in the world’s gold supply. At such times “the prosperous phases of business cycles have been relatively long and intense.” See Business Cycles: The Problem and its Setting, Wesley C. Mitchell, National Bureau of Economic Research, Inc., New York, 1928, p. 120.

17 Nominally equal prices might really be very different according to the terms of payment demanded.

• 1CLIFFE-LESLIE once remarked that in social matters the greatest scientific progress is made when economic disorders raise vexing questions as to their causes. In the study of social phenomena, disorder is, it is true, the sole substitute for the controlled experiments of the natural sciences. But it sometimes happens that, in the midst of disorder, events move so rapidly that we are not able properly to observe them; disorder may be excessive even to the most detached of scientists. The course of inflation in Germany in the first post-war quinquennium had so much of this character that it has seemed to many to be incapable of throwing any light upon monetary problems. This most striking of monetary experiences has, in consequence, evoked a minimum of scientific curiosity. In spite of the fact that statistics—those notes of process on which the social scientist must so heavily rely—were for some phenomena abandoned in Germany in this period and for others are open to grave objection on the score of accuracy, it has seemed to me that such an attitude implies an unwarranted surrender in the face of difficulties which might with perseverance be surmounted. This book is an attempt, therefore, to discover what actually happened in Germany and either to bring the observed phenomena within the fold of accepted theory or else so to modify that theory as to give it a more catholic character. The actual course of events during inflation has not merely an historical and scientific interest but is of considerable practical importance. Germany’s present position as a nation with heavy international obligations has led to apprehension, both within and without the Reich, as to the future in international finance. The fears of such German competition as may issue out of the debtor status may be dismissed as but thinly-veiled mercantilism but the question as to the possibility of ultimate transfer of the large sums involved in reparations and interest payments must, perhaps, be treated with more respect. The ability of the German economy to provide, within Germany, the funds required, is, on the other hand, no longer seriously doubted. It is hoped that the sequel will throw some light on the disappearance of the latter doubt as also on the prospect of future transfers undisturbed by any serious economic friction.
• 2in Germany. It is based very largely on official German statistics as published by the Statistische Reichsamt and the Institut für Konjunkturforschung. These statistics, for the period studied, are, no doubt, far from perfect, but nothing is gained by attempting to go behind them and there is no reason to suppose that such alternative sources as are available are at all superior. The hope is cherished, perhaps not without justification, that such errors as are involved do not vitiate the conclusions reached. The immense nominal magnitudes attained by all -monetary phenomena in Germany in the inflation-time tend to dwarf the influence of even very considerable imperfections in the statistics. I am far from supposing, nevertheless, that the results obtained are to be taken as clearly proven and I trust that the reader will be no more credulous. They are merely hypotheses
• 3The publications of the Statistische Reichsamt which have been principally used are : Statistisches Jahrbuch für das deutsche Reich, Statistik des deutschen Reichs, Wirtschaft und Statistik, Monatliche Nachweise über den auswärtigen Handel Deutschlands, Zahlen zur Geldentwertung in Deutschland 1914 bis 1923, and Germany’s Economy, Currency and Finance. Sparing use has been made of forms of statistics already available in these sources and, where tables are given in the text, they are, in nearly all cases, the result of computations from the original data.
• 4The cessation of war found Germany in a financial position not markedly inferior to that of most of the other countries involved in the struggle. The far-reaching alterations in the Reichsbankgesetz in 1914 had permitted the suspension of specie payments, had removed the tax on excess Reichsbank note issues, had permitted the Reichsbank to use discounted Treasury bills in lieu of commercial bills as the non-cash cover for Reichsbank notes, and had made Reichskassenscheine and Darlehns-kassenscheine available to meet the “cash” reserve requirements. (The distinction between cash and non-cash cover was abolished in 1921.) This war legislation paved the way for all the coming currency difficulties but it did not differ very greatly from that adopted at the same time in practically all the countries then engaged in hostilities, nor did inflation in Germany, up to the time of the Armistice, much surpass that of some of the principal Entente Allies. The total circulation (including coin other than Reichsbank reserves) in the middle of 1914 is estimated to have been approximately six billions of marks; at the end of 1918 it was something more than five times as much, 32,936,700,000 marks. The total monetary circulation in Great Britain was about £180,000,000 when war broke out while four and a half years later the total of outstanding notes was more than double that sum and stood at approximately £394,000,000. Bank deposits, which in England are a more important index of inflation, had grown in about the same proportion. The total circulation in France (excluding reserves of the Bank of France) in mid-1914 was something over 8,000,000,000 francs (6.5 billion francs in gold and silver, less 4 billion Bank of France reserves, plus 5.8 billion in notes of the Bank of France) while at the end of 1918 the note circulation of the Bank of France amouted to over 30,000,000,000 francs or not quite four times the total pre-war volume of currency. By this date all the gold formerly in circulation had of course disappeared.
• 5The cessation of war found Germany in a financial position not markedly inferior to that of most of the other countries involved in the struggle. The far-reaching alterations in the Reichsbankgesetz in 1914 had permitted the suspension of specie payments, had removed the tax on excess Reichsbank note issues, had permitted the Reichsbank to use discounted Treasury bills in lieu of commercial bills as the non-cash cover for Reichsbank notes, and had made Reichskassenscheine and Darlehns-kassenscheine available to meet the “cash” reserve requirements. (The distinction between cash and non-cash cover was abolished in 1921.) This war legislation paved the way for all the coming currency difficulties but it did not differ very greatly from that adopted at the same time in practically all the countries then engaged in hostilities, nor did inflation in Germany, up to the time of the Armistice, much surpass that of some of the principal Entente Allies. The total circulation (including coin other than Reichsbank reserves) in the middle of 1914 is estimated to have been approximately six billions of marks; at the end of 1918 it was something more than five times as much, 32,936,700,000 marks. The total monetary circulation in Great Britain was about £180,000,000 when war broke out while four and a half years later the total of outstanding notes was more than double that sum and stood at approximately £394,000,000. Bank deposits, which in England are a more important index of inflation, had grown in about the same proportion. The total circulation in France (excluding reserves of the Bank of France) in mid-1914 was something over 8,000,000,000 francs (6.5 billion francs in gold and silver, less 4 billion Bank of France reserves, plus 5.8 billion in notes of the Bank of France) while at the end of 1918 the note circulation of the Bank of France amouted to over 30,000,000,000 francs or not quite four times the total pre-war volume of currency. By this date all the gold formerly in circulation had of course disappeared.
• 6The cessation of war found Germany in a financial position not markedly inferior to that of most of the other countries involved in the struggle. The far-reaching alterations in the Reichsbankgesetz in 1914 had permitted the suspension of specie payments, had removed the tax on excess Reichsbank note issues, had permitted the Reichsbank to use discounted Treasury bills in lieu of commercial bills as the non-cash cover for Reichsbank notes, and had made Reichskassenscheine and Darlehns-kassenscheine available to meet the “cash” reserve requirements. (The distinction between cash and non-cash cover was abolished in 1921.) This war legislation paved the way for all the coming currency difficulties but it did not differ very greatly from that adopted at the same time in practically all the countries then engaged in hostilities, nor did inflation in Germany, up to the time of the Armistice, much surpass that of some of the principal Entente Allies. The total circulation (including coin other than Reichsbank reserves) in the middle of 1914 is estimated to have been approximately six billions of marks; at the end of 1918 it was something more than five times as much, 32,936,700,000 marks. The total monetary circulation in Great Britain was about £180,000,000 when war broke out while four and a half years later the total of outstanding notes was more than double that sum and stood at approximately £394,000,000. Bank deposits, which in England are a more important index of inflation, had grown in about the same proportion. The total circulation in France (excluding reserves of the Bank of France) in mid-1914 was something over 8,000,000,000 francs (6.5 billion francs in gold and silver, less 4 billion Bank of France reserves, plus 5.8 billion in notes of the Bank of France) while at the end of 1918 the note circulation of the Bank of France amouted to over 30,000,000,000 francs or not quite four times the total pre-war volume of currency. By this date all the gold formerly in circulation had of course disappeared.
• 7The cessation of war found Germany in a financial position not markedly inferior to that of most of the other countries involved in the struggle. The far-reaching alterations in the Reichsbankgesetz in 1914 had permitted the suspension of specie payments, had removed the tax on excess Reichsbank note issues, had permitted the Reichsbank to use discounted Treasury bills in lieu of commercial bills as the non-cash cover for Reichsbank notes, and had made Reichskassenscheine and Darlehns-kassenscheine available to meet the “cash” reserve requirements. (The distinction between cash and non-cash cover was abolished in 1921.) This war legislation paved the way for all the coming currency difficulties but it did not differ very greatly from that adopted at the same time in practically all the countries then engaged in hostilities, nor did inflation in Germany, up to the time of the Armistice, much surpass that of some of the principal Entente Allies. The total circulation (including coin other than Reichsbank reserves) in the middle of 1914 is estimated to have been approximately six billions of marks; at the end of 1918 it was something more than five times as much, 32,936,700,000 marks. The total monetary circulation in Great Britain was about £180,000,000 when war broke out while four and a half years later the total of outstanding notes was more than double that sum and stood at approximately £394,000,000. Bank deposits, which in England are a more important index of inflation, had grown in about the same proportion. The total circulation in France (excluding reserves of the Bank of France) in mid-1914 was something over 8,000,000,000 francs (6.5 billion francs in gold and silver, less 4 billion Bank of France reserves, plus 5.8 billion in notes of the Bank of France) while at the end of 1918 the note circulation of the Bank of France amouted to over 30,000,000,000 francs or not quite four times the total pre-war volume of currency. By this date all the gold formerly in circulation had of course disappeared.
• 8The cessation of war found Germany in a financial position not markedly inferior to that of most of the other countries involved in the struggle. The far-reaching alterations in the Reichsbankgesetz in 1914 had permitted the suspension of specie payments, had removed the tax on excess Reichsbank note issues, had permitted the Reichsbank to use discounted Treasury bills in lieu of commercial bills as the non-cash cover for Reichsbank notes, and had made Reichskassenscheine and Darlehns-kassenscheine available to meet the “cash” reserve requirements. (The distinction between cash and non-cash cover was abolished in 1921.) This war legislation paved the way for all the coming currency difficulties but it did not differ very greatly from that adopted at the same time in practically all the countries then engaged in hostilities, nor did inflation in Germany, up to the time of the Armistice, much surpass that of some of the principal Entente Allies. The total circulation (including coin other than Reichsbank reserves) in the middle of 1914 is estimated to have been approximately six billions of marks; at the end of 1918 it was something more than five times as much, 32,936,700,000 marks. The total monetary circulation in Great Britain was about £180,000,000 when war broke out while four and a half years later the total of outstanding notes was more than double that sum and stood at approximately £394,000,000. Bank deposits, which in England are a more important index of inflation, had grown in about the same proportion. The total circulation in France (excluding reserves of the Bank of France) in mid-1914 was something over 8,000,000,000 francs (6.5 billion francs in gold and silver, less 4 billion Bank of France reserves, plus 5.8 billion in notes of the Bank of France) while at the end of 1918 the note circulation of the Bank of France amouted to over 30,000,000,000 francs or not quite four times the total pre-war volume of currency. By this date all the gold formerly in circulation had of course disappeared.
• 9The cessation of war found Germany in a financial position not markedly inferior to that of most of the other countries involved in the struggle. The far-reaching alterations in the Reichsbankgesetz in 1914 had permitted the suspension of specie payments, had removed the tax on excess Reichsbank note issues, had permitted the Reichsbank to use discounted Treasury bills in lieu of commercial bills as the non-cash cover for Reichsbank notes, and had made Reichskassenscheine and Darlehns-kassenscheine available to meet the “cash” reserve requirements. (The distinction between cash and non-cash cover was abolished in 1921.) This war legislation paved the way for all the coming currency difficulties but it did not differ very greatly from that adopted at the same time in practically all the countries then engaged in hostilities, nor did inflation in Germany, up to the time of the Armistice, much surpass that of some of the principal Entente Allies. The total circulation (including coin other than Reichsbank reserves) in the middle of 1914 is estimated to have been approximately six billions of marks; at the end of 1918 it was something more than five times as much, 32,936,700,000 marks. The total monetary circulation in Great Britain was about £180,000,000 when war broke out while four and a half years later the total of outstanding notes was more than double that sum and stood at approximately £394,000,000. Bank deposits, which in England are a more important index of inflation, had grown in about the same proportion. The total circulation in France (excluding reserves of the Bank of France) in mid-1914 was something over 8,000,000,000 francs (6.5 billion francs in gold and silver, less 4 billion Bank of France reserves, plus 5.8 billion in notes of the Bank of France) while at the end of 1918 the note circulation of the Bank of France amouted to over 30,000,000,000 francs or not quite four times the total pre-war volume of currency. By this date all the gold formerly in circulation had of course disappeared.
• 10cf. Foreign Banking Systems, H. P. Willis and B. H. Beckhart, editors, Chap, VIII, “The Banking System of Germany,” Paul Quittner, Henry Holt and Company, New York, 1929, p. 632, where it is declared that it would be useless to try to connect the development of the German currency system from 1919 to 1923 with any theories of money.
• 11In the matter of mark exchange rates, for instance, sizable differences developed, in the later stages of inflation, between the Berlin and other markets. These were due to the obstruction of arbitrage transactions. At the time that this occurred, however, the Berlin rate was alone of much significance. The Berlin rates have therefore been used throughout. In the matter of prices the alternative sources are the indices of the Berliner Tageblatt, the Frankfurter Zeitung, and the Industrie- und Handelszeitung.
• 12The latter compilation was published in English, as well as in German, for use by the Committees of Experts of the Reparations Commission.
• 13Treasury notes, a fiduciary currency. These were, however, issued rather sparingly. The maximum issue was 356 million marks. Reichskassenscheine had been legal as cash cover in pre-war days but their issue had been closely restricted and few had been available. These Treasury notes are to be carefully distinguished from Treasury bills, a short-term security not used as money.
• 14A form of currency issued by officially established Loan Bureaus against the pledge of securities (or commodities) by borrowers other than the government and the larger banks and business concerns. During the war these notes formed an important share of the circulating medium but thereafter remained comparatively stable in absolute figures (7 to 14 billion marks) and were of constantly declining relative importance. They played but a slight ròle from 1921 onward.
• 15Germany’s Economic and Financial Situation, Statistisches Reichsamt, Zentralverlag G.m.b.H., Berlin, 1923, p. 28.
• 16Zahlen zur Geldentwertung in Deutschland 1914 bis 1923, Statistisches Reichsamt, Verlag von Reimar Hobbing, Berlin, 1925, p. 46.
• 17Committee on Currency and Foreign Exchanges After the War (Cunliffe Committee) First Interim Report, H. M. Stationery Office, London, 1924, p. 5.