Exchange, Prices, and Production in Hyper-Inflation

CHAPTER XIII

CONCLUSION

§ SUMMARY OF RESULTS

IF THE computations in the immediately preceding chapters may be trusted, the balance of material gains and losses, attributable to inflation, is distinctly on the side of gains. The returns from the sale of money abroad much more than balanced the losses on international trade in merchandise and capital items, and domestic production seems, on the whole, to have been substantially greater than would presumably have been achieved under a stable monetary standard. One is inclined to shrink from drawing the seemingly inevitable conclusion that the depreciation of the currency, nationally considered, was a benefit. The immense injustices consequent upon extreme depreciation are no doubt, in themselves, enough to damn the practice of inflation. Yet one would like to find a buttress for the policy of stable money in a demonstration that, just as in ethics, so also in the realm of economics, abuse of the currency could work nothing but ill. The facts however lie the other way.1 It is true that such gains as accrued to the German economy were due to special factors which are unlikely to recur. Part of these gains arose from the fact that a smaller total of reparations was paid than would, in all likelihood, have been exacted if a stable domestic monetary standard had been maintained. It is, however, to be hoped that the world has seen the last of intolerably severe punitive damages under the name of reparations, and that so dubious an opportunity of “gain” will, in consequence, not again be open to any nation. Such “gains” as the Germans may have attained on this score have not, in any event, here been taken into account. The receipts from the foreign sales of German currency, moreover, were on a scale which will perhaps never be repeated. The confidence of the outside world in German recuperative capacity after the war was nothing short of pathological. Prior to and during the war the Germans had been widely regarded as diabolically efficient and a world which was ignorant of the first principles of monetary matters bought marks in enormous volume on the assumption that a mark represented a definite share in the economic structure and must grow in value as German economic life revived.2 Such an illusion is not apt to be indulged again so long as the memory of what happened in the German case remains at all green. In the absence of any opportunity to exploit foreign buyers of currency, the almost inevitable losses in the international commodity transactions of a country which abandons a metal, and abuses a paper, standard will probably eliminate any future chance of a net national gain from inflation.

Even in the German case the gain may possibly have been apparent only. In the preceding chapter German production has been measured in relative terms. It is possible, however, that disturbed monetary conditions in any one important country may have such ramifications as to cripple trade all over the world. The relative status of production in the country of inflation would then furnish no reliable criterion of the absolute effect of the lapse from monetary stability. While it is impossible to appraise such imponderables, the writer is of the opinion that, except where international trade forms a very large part of the total commerce of any given political unit and where trade relations with the country of depreciated paper are very close, the repercussions of a monetary explosion, in their adverse aspects at any rate, are chiefly confined to the country in which the explosion takes place. No convincing evidence can be brought to show that the widespread depression of 1920-1921, for instance, was due to depreciation of any currency. On the contrary it was tied up with the almost universal appreciation of monetary units. In 1919 and the fore-part of 1920, on the other hand, when all of the important currencies were falling in value, world trade was extremely active. Furthermore, though it was not until late 1926 that practically all the important monetary units were stabilized relative to gold, world trade and production cannot be shown to have suffered unduly in the years 1922 to 1926. With some slight reservations, arising from an unproved but perhaps real adverse influence of German monetary phenomena on world economic activity, production in the Reich, as it developed up to 1924 in relation to that in other countries, may therefore be assumed to have measured the absolute effect of currency depreciation.

One or two other facets of the matter should, however, be considered. German inflation transformed the machinery for accumulation of capital goods and, though it does not appear that the collapse of the currency led to any reduction in the amount of real capital annually added to the wealth of the Reich, there may have been a decline in its quality. Especially in the later stages of inflation, investment in durable goods took on a bizarre aspect. Little effort was made to distinguish between such extensions of plant and equipment as would justify, in future yield, the present outlay, and those which would merely prevent the complete evanescence of the monetary values involved. The progress of inflation increasingly induced capital expenditures which had no prospect of showing a long-run profit. If, as seems to have been the case, the net effect of inflation was to divert a larger than usual share of production from immediate consumption to investment, the sudden reversion to a stable monetary standard was almost sure to lead to some dislocation. When monetary stability was restored there was no longer any strong tendency toward capital accumulation and the industries producing capital goods were therefore subjected to a sudden shrinkage in demand. Further than this, equipment which “may have been well suited to the production of commodities for which there was a ready market when money was rapidly depreciating, was superfluous, or very ill-adapted, to the conditions prevailing from the beginning of 1924 onward. Much of the apparatus installed in the years 1920 to 1923 was therefore scrapped in the reconstruction of industry which, under the name of “rationalization,” has been something of a fetich to the post-inflation German economy. The contraction of consumption essential to the accumulation of such equipment as had to be scrapped was, of course, a useless sacrifice and the marked improvement in German output in recent years is probably mainly due to real, instead of illusory, industrial betterments the introduction of which was retarded by inflation.3

The habit of individual saving, moreover, which for the time being had been destroyed by currency depreciation, was slow to revive when it once more became other than folly. The post-stabilization German economy has therefore continued to be saddled with high interest rates especially since its capital requirements are no longer being supplied through the inflationary stimulus to direct investment.4 Though the situation has been markedly alleviated by large draughts of capital from abroad the cost of capital has no doubt been greater than it would have been had German thrift been present in its old-time intensity. This development is not to be counted as direct loss. If the German people prefers to spend rather more and save rather less, and 10 ready to pay the high interest charges which such a preference, in part, imposes,5 the relatively small savings are compensated by relatively large immediate consumption. High interest rates are, nevertheless, an undesirable aftermath of inflation and should be given some place in the summation of its adverse effects. With all these reservations taken into account, however, it cannot but be asserted that, considering only the material aspects of the matter, the Germans, as a nation, profited rather than lost through the collapse of their currency. The adverse effects on the national psychology were no doubt of import, but they cannot be measured, and these effects will perhaps more quickly disappear than is ordinarily supposed. In foreign countries there is no disposition to recognize any decline in the German economic virtues. Germany’s credit abroad is excellent, the inflation episode is properly regarded as due to such temporarily invincible circumstance as not at all to reflect upon the essential business integrity of the nation, and the events of the past five years have fully demonstrated the economic vitality of the Reich.

§ INFERENCES FOR THE FUTURE

The burden of reparations is still heavy, but the elasticity of demand for both exports and imports, convincingly demonstrated in the inflation years,6 leaves small room for the opinion that the necessary increase in the export-import ratio will not occur. The national economic structure was not impaired seriously, if at all, by the currency débâcle ; the terrific external pressure which, in the years 1920-1923, led to aberrations even from the ordinarily erring course of exchange rates, prices, and international trade under depreciated paper monetary standards has been withdrawn; the requisite price adjustments are proceeding slowly and surely toward a new equilibrium in international transactions in which reparations payments will play a normal and undisturbing rôle. As yet the easing of the credit situation which the adoption of the Dawes Plan occasioned, and the facilities for borrowing abroad thus opened up, have had the effect of postponing the actual impact of reparations on German national income while readjustment to the new international economic position is going forward. It cannot definitely be concluded, even with the revision of the Dawes Plan carried out in 1929 under the chairmanship of Owen D. Young, that no further troubles will eventuate. But the loans already floated have operated to bring about a status analogous to that which would have obtained if reparations payments had been graded upwards from a low level at the start, while experience since 1924 has tended to show that, provided a rational method is pursued, the reparations obligations now laid upon the Germans can be met without serious difficulty.7 The ethics of reparations will perhaps always be an open question but, on the possibility of payment and transfer, indisputable fact is laying an ardent controversy quietly to sleep. Nor is there any reason to suppose that the interest charges on the private debt obligations incurred by the Germans since 1924, or those which may hereafter be assumed, will obstruct the machinery of international finance. Oiled with credit at appropriate times, and operated with some circumspection, that machinery will function indefinitely under any load likely to be put upon it by commercial transactions. Properly invested, all borrowings will yield, within the borrowing country, at least enough to pay interest, and the possible range of expansion of exports and contraction of imports of any given country over an extended period, is so great as to ensure the transfer to the lender of any excess of interest on old borrowings over the borrower’s receipts from current loans. No transfer problem has ever arisen out of commercial transactions in the past and there is no reason to believe that any such problem will appear in the future. The older theories of money and of foreign exchange failed to take into account the possible effects of enormous absolute burdens imposed without regard for economic realities, and certain modifications which the German experience suggests have been set forth above. But those older theories were fundamentally sound and the policy of laissez-faire to which they point is valid still. The play of prices brings about, under our very eyes, the adjustments which we are prone to believe can never be effected, and the secular growth of international trade, in spite of all obstacles thrust in its way by mercantilistic governments, gradually reduces the problems of the present to the commonplaces of the future. The mills of international finance grind slowly but their capacity is great. It is also flexible. The one condition is that the hoppers be not unduly loaded in the effort to get the whole grist from a single grinding. So much for the economics of the question. What politics has in store is, however, an inscrutable mystery. It can only be said that such financial difficulties as may occur will almost certainly arise from political rather than from economic sources.

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8 It is possible that the mere shift in wealth and income may have involved an economic loss through the operation of the law of diminishing utility. But, if this occurred, it is too intangible for measurement.

9 It should be noted to the credit of German private business men that practically no losses were sustained during the inflation period by foreign creditors of German business concerns provided the debts were denominated in foreign currencies.

10 cf. The Recovery of Germany, James W. Angeli, Yale University Press, New Haven, 1929. Some of the immense properties acquired through inflation, particularly the ponderous acquisitions of Hugo Stinnes, proved to be white elephants when order in currency matters had been reestablished. Professor Angeli seems to be of the opinion that most of the capital investments of the inflation years were wasted. This seems to the present writer to be an exaggeration. In general, he is of the opinion that Professor Angeli overstates the evil effects of inflation.

11 Deposits in savings banks, however, within a couple of years began to grow surprisingly. The height of interest rates marks the hunger for capital rather than its absolute shortage.

12 The imposition is relatively light since foreign capital may be obtained at rates not greatly above those prevailing on similar investments in the country from which the capital comes.

13 cf. supra, Chap. VIII.

14 For a detailed discussion of this question the reader is referred to an article by the present writer entitled “Germany’s Capacity to Pay and the Reparation Plan,” American Economic Review, Vol. XV, No. 2, June 1925, pp. 209-227.

• 1cf. 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.
• 2In 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.
• 3The latter compilation was published in English, as well as in German, for use by the Committees of Experts of the Reparations Commission.
• 4Treasury 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.
• 5A 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.
• 6Germany’s Economic and Financial Situation, Statistisches Reichsamt, Zentralverlag G.m.b.H., Berlin, 1923, p. 28.
• 7Zahlen zur Geldentwertung in Deutschland 1914 bis 1923, Statistisches Reichsamt, Verlag von Reimar Hobbing, Berlin, 1925, p. 46.
• 8CLIFFE-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.
• 9in 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
• 10The 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.
• 11The 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.
• 12The 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.
• 13The 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.
• 14The 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.