The German economy between the wars

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The German economy between the wars

• Lecture 3
• Stabilizing the mark 1920 1924 facts and
  counterfactuals.
• Dr. Cristiano Ristuccia
• car37_at_cam.ac.uk

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Agricultural excess supply

• Return of agricultural output from Eastern and
  Southern European countries
• Worldwide technological change
• Electrified railways
• Better marine infrastructure
• Chemical fertilisers
• Agricultural motorisation

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• Cyclical factors
• Deflationary policies in US and Britain ?
  interest rates increase ? fall in global demand
  for investment and consumption ? fall in
  international commodity prices
• Fall in international demand might have affected
  negatively Germany, but Germany sheltered by low
  real wages and devalued currency.

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• Ferguson (1996)
• Stabilisation was possible in 1920 through
• reduction of Budget deficit
• railway (Reichsbahn deficit 25 of total
  deficit) but how much of this deficit was due to
  the 250,000 excess workers? And how much was it
  to do with the cost of increasing the rolling
  stock - the 10 increase is to do with the
  requisitions by the allies
• subsidies to shipyards see above
• post office
• increase in taxation (particularly on
  consumption)
• stabilisation of the mark

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• In the event stabilization was achieved only at
  the end of 1923 and in the first half of 1924
• Before that date Germany had to endure increasing
  hyperinflation from May 1921 to Sep 1923.
• London Ultimatum May 1921
• Assassination of the moderate Foreign Minister
  Walter Rathenau in July 1922
• French/Belgian/Italian invasion of the Ruhr in
  Jan 1923 were catalyst for further acceleration
  in the inflationary process.
• The unresolved domestic and foreign deadlock over
  balancing the budget (taxation) and over the
  reparation issue continued to drive up
  inflationary expectations.
• Stabilisation achieved through a mix of
• Separating Central Banking from Government
  (independence of the Central Bank)
• Change of currency and return to the Gold
  Standard
• Government employees cut by 25
• Public sector salaries and wages cut by 30
• Substantial increase in unemployment
• End of all price and wage subsidies to the Ruhr
  passive resistance
• Draconian increases in direct and indirect
  taxation
• Resumption of coal shipments to the French
  Belgians and Italians
• Dawes Plan (and Loan) Placement of a Gold
  Loan

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Hyperinflation as a great redistribution mechanism

• Borrowers
• Industrialists and workers
• Farmers
• Borrowers for consumption
• Speculators
• Tax payers
• State