review of economic conditions, 1924-1933 - the … two review of economic conditions, 1924—1933 a....

This PDF is a selection from an out-of-print volume from the NationalBureau of Economic Research

Volume Title: German Business Cycles, 1924-1933

Volume Author/Editor: Carl T. Schmidt

Volume Publisher: NBER

Volume ISBN: 0-87014-024-8

Volume URL: http://www.nber.org/books/schm34-1

Publication Date: 1934

Chapter Title: Review of Economic Conditions, 1924-1933

Chapter Author: Carl T. Schmidt

Chapter URL: http://www.nber.org/chapters/c4934

Chapter pages in book: (p. 25 - 114)

CHAPTER TWO

REVIEW OF ECONOMIC CONDITIONS,

1924—1933

A. The Course of thePost-Inflation Business Cycles

1. DEPRESSION, HALTING REVIVAL,DEFINITE RECOVERY, 1924-1925

The stabilization of German currency tore asidethe dense veil of paper marks that had obscured theVarious business journals, monographs and official reports constitute

the source for the materials presented in Part A. Particularly suggestivewere Reports of the Agent General for Reparation Payments, 1925—30(Berlin, 1925—30); James W. Angell, The Recovery of Germany; Institutfür Konjunkturforschung, Vierteljahrshefte zur Konjunkturforschung,\'ols. '—7 (Reimar Hobbing, Berlin, 1926—32); Fritz Naphtaii, Abbauund Aufbau: Rückblick auf das Wirtschaftsjahr 1925 So-cietats-Druckerei, Frankfurt a.M., 1926); Reichskreditgesellschaft, A-G.,Germany's Economic Development, semi-annual analyses, 1926—32 (Ber-lin, 1926—32); C. L. Roedler, Grundzuge der deutschen K,onjunhturbeweg-ung, 1920—25 (Frankfurt a.M., 1926); Erich Welter, Wachstum: Diedeutsche Wirtschaft im Jahre 1927; and Stockung: Die Wirt-schaft im Jahre 1929 (Frankfurter Societäts-Druckerei, Frankfurt a.M.,1928 and 1930); also Dreifache Krise. . . . (Societäts-Verlag, Frankfurta.M., 1931).

25]

features of German economy. With the return toan effective standard of money measurement, it is

possible to see more clearly the variety of factorsinfluencing that economy, no longer dominated bythe phenomena of inflation.

a. Post-stabilization Depression

The period immediately following the currencyreform was characterized by deep depression inmost aspects of economic activity. Scarcity of moneyand credit, lethargy in production and'trade, reduc-tion of government and business staffs—reflected insharp wage conflicts—were tokens of the economicdifficulties.

An extraordinary lack of ready money intensifiedthe need for credit. Interest rates were very high.The Reichsbank discount rate, which stood at ioper cent in January 1924, was far below the marketrates.2 The central bank, therefore, sought to pre-vent a rush of credit seekers by the introduction ofa rationing system.

After the return to the gold basis of reckoning, adecline in commodity prices was apparent. An evengreater decline in prices was probably retarded bythe slow abandonment of price-calculating methodsand risk charges that had been prevalent duringthe period of inflation. The few available statisticsof industrial production in the last months of 1923The average rate in January for day-to.day money was 87.64 per cent

per year.

[26

indicate that it was low. The number of unemployedreceiving public assistance—which rose from 139,000on August 1, 1923 to 1,533,000 Ofl January i, 1924—convey some impression of the extent of thedine.3

With the development of depression an inclina-tion to clear away the debris that had accumulatedduring the inflation became apparent. Many Gov-ernment officials and employees were dismissed. Atthe .same time, private business was obliged to resortto wholesale reductions of staff. Everywhere in theclear dawn after the nightmare of inflation therewas a calculation of incomes and costs. It was acalculation that generally led first to a scaling-downof costs by means of payroll reductions. Later it wasto lead to technical 'rationalization'.

b. Halting Revival

The depression that began with the stabilizationof the mark was pronounced in all aspects of Ger-man economy until January 1924. A scarcity of loancapital, declining prices, business inactivity, andgrowing unemployment were its chief features.Symptoms of recovery were apparent from Februaryto May. But there were also definite symptoms ofdepression during this period—tightness of credit,difficulties in the settlement of accounts, decline ofsecurity prices, a great increase in business failuresand a general lack of business confidence.a Statistisches Reichsamt, Wirtschaft und Statistik,, Vol. 4, passim.

27]

The relatively generous credit policy of theReichsbank at this time was probably an importantfactor in the impulse to recovery. The low discountrate of the central bank ('low' relative to marketrates) and its moderate rationing system made for arapidly broadening flow of credit.4 No doubt theReichsbank was desirous of doing all it could to pullbusiness out of the stabilization depression, but in theprocess it engendered a minor credit inflation. Its ac-count for discounted bills rose from Rm. 39,500,000on November 15,1923 toRm. 1,867,000,000 on April7, 1924. About Rm. i,ooo,ooo,ooo of this increaseoccurred during February and March. For a mOmentthere was danger of seriously threatening the re-cently achieved monetary stability. It was decided,on April 7, to hold to a rigorous policy of creditrestriction by means of rationing advances. Thedirectory of the Reichsbank ordered that the maxi-mum limit of credit extensions be the amount al-ready extended on April 7.

Indicative of the tightness of credit were the ratesfor monthly money, which rose rapidly in Februaryand had almost doubled by the beginning of May.During most of this period there was a downwardmovement in the price level of stocks. The generaldecline in commodity prices that ceased in Februarywas followed by an upturn lasting until the end ofIn the period February—May 1924, the average Reichsbank discount

rate was io per cent; the average rate for monthly money was percent.

[28

April—that is, until shortly after the restriction ofcredits by the Reich. Industrial production in gen-eral increased during the first months of 1924. Thereis also sign of more active business in the risingnumber of freight cars placed at the disposal ofshippers and in the figures for Reichsbank clearings.The industries catering to domestic consumptionwere enlivened by the upswing of business, and, asa consequence, imports of raw materials rose con-siderably. Exports, however, did not keep pace withimports. Statistics of the labor market give furtherindication of growing business activity. For the firsttime since August 1923 a decline in unemploymentwas apparent. But reviving domestic activity did notmitigate business difficulties; on the contrary, thenumber of business failures increased steadily.

Thus the business revival during the early part of1924 was a tempering of the depression that imme-diately followed currency stabilization. It was prob-ably engendered by an expansion of credit thatcontinued until bridled by the Reichsbank in April.The credit demands of private business werewhetted by the discount policy of the central bank.The result was a mild recurrence of inflation—thistime in bank credit rather than in paper marks.Brisker demand, especially for consumers' goods,set in. Prices rose, unemployment sank. But thestimulus was brief. Events during the middle of theyear showed that it was something of a surface swell

29]

that for a time stimulated the industries catering todomestic consumption.

After the restrictive policy of the Reichsbank hadbecome effective, and the expansion of the purchas-ing power had ceased, there was little doubt thatGerman economy was still depressed. During thesummer of 1924 characteristics of depression wereapparent: weakened consumer demand, fallingprices, increasing business failures, reduced imports,growing unemployment and curtailed production.

A significant manifestation of depression at thistime was an extensive reduction of the business ma-chinery, a general retrenchment, which was par-ticularly markedin banking and commercial organi-zations. It was reflected in growing numbers ofunemployed. Also symptomatic for this period wasthe relation between the establishment and theliquidation of business enterprises.. In the firstmonths of 1924 many new firms were founded, butin the 'summer there was a large increase in thenumber of liquidations.

A favorable symptom among many unfavorableones during the mid-summer of 1924 was a fairlysteady drop in money rates. Somewhat easier creditconditions were reflected not only in a decline ofinterest ,rates but also in a general tendency to ex-tend credits over longer periods. Easier money rates,together with a supporting action by the larger Ber-un banks, made for a slight recovery of the .stockmarket.

[30

c. Definite RecoveryNot until the middle of August, however, were

there clear indications of improvement in businessconditions. Probably an important influence in thedirection of economic recovery was the promulga-tion of the Dawes Plan although "it simply servedto set up the preliminary conditions—removal of theAllied pressure, stabilization of the national financesand currency, and the restoration of general confi-dence—which were necessary to make recovery pos-sible."

Among the first results of the Plan were the newReichsbank and currency laws—expressions of thecomplete adoption of the Reichsmark currency—and the successful flotation of the German ExternalLoan of 1924, amounting to 8oo million marks. Thisloan was of especial importance not only because itwas accompanied by a moratorium from reparationpayments during the first year of the new Plan butalso because it enormously strengthened the con-fidénce of the outside world in the German economy.Foreign capital now began to enter the country inthe form of private credits or of direct purchases ofinterest in German business concerns.

The growing inflow of foreign funds gave con-siderable relief. It made possible the resumption ofprojects that had been abandoned because of lackAngell, op. cit., p. 77. The Dawes Plan was submitted by the First Com-

mittee of Experts on April g, 1924. The Plan was approved by theresponsible powers on August i6 and went into effect on September z,1924.

3'II'

of capital; it restored self-confidence to business or-ganizations. Some funds were converted into marksfor the purpose of purchasing goods within Ger-many, thus supporting commodity prices; othercredits were at once expressed in increased imports.With the beginning of this period of the placing offoreign loans, the German balance of trade became'unfavorable', and this condition prevailed until theend of 1925.

During the autumn of 1924 there were reports ofcontract after contract for loans and for sales of in-terests in business organizations. In addition, a mul-titude of unrecorded agreements were concludedand there were considerable sales of securities onthe stock exchange to foreign capitalists. Further-more, the increased discounting of bills of exchangeand the acceptance of drafts by bankers in Englandand the United States added considerably to Germanborrowings abroad.

According to the Institut für Konjunkturfor-schung the total of foreign loans extended to Ger-many by the end of 1924 amounted to approximately1200 million Reichsmarks. Loans during the firstfour months of 1925 more than doubled this total.Although short-term foreign loans were discouragedby the Reichsbank and the financial administration,because of the dangers that would attend their sud-den withdrawal, a large volume was extended.Loans whose maturity period is more than one year are called

term'; those of briefer maturity period are known as 'short-term'.

[32

The business credits of the banks of issue—largelythose of the Reichsbank—expanded rapidly duringthe autumn of 1924. Savings bank deposits, almostcompletely wiped out through the process of infla-tion, again began to accumulate. Also, as was to beexpected from the large inflow of foreign funds,some relief in the money market was evidenced ina reduction of interest rates and in an improvementof credit conditions, particularly in the lengtheningof the loan periods. Nevertheless, money rates re-mained considerably above those in France, Eng-land and the United States—testimony to the con-tinuing scarcity of capital in Germany.

The stock exchange had, in general, been de-pressed since the return to a stable currency. A lowprice level for stocks reflected high interest rates andunfavorable business reports. A slow advance in thegeneral level of stock prices began in the summer,and continued during the autumn and winter untilFebruary 1925. Thereafter the course of prices wasgenerally downward.

Perhaps the most obvious manifestations of revivalare indexes representative of industrial productionand domestic trade. They show a fairly continuousrise from the summer of 1924 to the end of the springof 1925. But by the summer of there were signsof decreasing activity. Increases in the prices of in-dustrial commodities in foreign markets and therelatively stable German industrial price level madefor an increase in German exports. However, an

33]

even greater increase in imports augmented the im-port surplus. Unemployment was much lower inthe winter of 1924—25 than in the correspondingseason of the previous year.

The process of post-inflation business reorganiza-lion manifested itself in continued heavy businessmortality. Probably most of the concerns then fail-ing had been founded during the inflation period.Practices that had been attended with success at thattime now proved dangerous. Short-time debts in-curred during the currency inflation afforded easymeans of procuring funds, not only for purposes ofworking capital but also to expand buildings andequipment. Under later conditions of monetarystability, however, Reichsmark loans were expensiveand had to be repaid in full gold value at frequentintervals. It was perhaps inevitable, then, that manybusiness enterprises founded on a minimum of cap-ital must now, at a time of great capital scarcity,become dangerously embarrassed.

There is evidence, then, that by the beginning of1925 German economy had recovered, relative tothe very depressed state of the preceding winter. Aglance at the unemployment statistics for the winterof 1924—25 shows that 'recovery' implied by nomeans anything like a complete absorption of thelabor-power of the nation, and bankruptcy figuresindicate that the weeding-out process begun in thesummer of 1924 was still in full swing.

{34

2. RECESSION AND DEPRESSION, 1925—1926

By June 1925 the first outriders of the impendingrecession had come into view. The collapse of thevast Stinnes concern early in that month dealt aheavy blow to business confidence. To be sure, alarge consortium of banks intervened to prevent apanic, but the impulse towards tighter credit condi-tions and further declines of security prices wasgiven.

The downward tendency of mOney rates ceasedafter April 1925. Indeed, rates began to rise, firstslightly, then more precipitately in the summer. Anincrease in unemployment, a down-turn in indexesof industrial production, increases in the amountand number of bills protested, the growing numberof business liquidations and bankruptcies, duringJune, July and August, are indications that thecourse of German economy had definitely begun toswing downward. During the autumn productioncontinued to decline and unemployment rose rap-idly. Prices fell, though only moderately. Foreignborrowings increased considerably, but, since theywere largely conversions of short-time advances,they did not stem the recession.

It seems likely that the progressive stagnation of.German business during the late spring and sum-mer of 1925 was related to a continuing scarcity ofloan capital. Just as revival in the autumn of 1924and the following winter paralleled widespread

35]

foreign borrowing, so the difficulties that becamemore and more apparent in mid-1925 were asso-ciated with a marked decline in the inflow of foreignfunds. Prior to the War German economy was gen-erally in a position to satisfy independently its cap-ital requirements. It was relatively easy to convertshort-term advances into long-term obligations bymeans of stock and bond issues. But in the post.inflation years the ability and willingness of thedomestic market to supply capital to industry wasmuch reduced. Thus, when foreign advances de-clined, or amounted largely to conversions of pre-vious loans, German borrowers were unable to turnto supplies of domestic capital. The issue of stocksin the face of a weakened stock market was difficult,and the demand for bonds was so slight in 1925 asalso to make their flotation inadvisable.

Enterprises that needed credit, therefore, had toresort to short-term borrowing. Demands for fundsoverwhelmed the banks. The desire to preserveliquidity caused them to turn down fresh demandsfor money, and even to call in older loans, especiallysmaller advances. Banking policy was rather morelenient with larger debtors than with smaller. Arestriction of credit advances to the large organiza-tions would at once have resulted in the abandon-ment of large projects and the sudden dismissal ofmany workers. Credit retrenchment, then, was madepossible by recalling medium and small loans.

In the autumn of 1925, since it was almost impos-[36

sible for industrial and commercial organizations toconsolidate debts, they had to seek short-term loansfrom the credit banks. As it became more and moreapparent that repayment would be difficult, thebanks, afraid of frozen credits, pressed for settle-ment and restricted further loans. This, of course,made the situation all the more tense.

During the autumn and winter of 1925—26 ifl-dustrial production—in most branches, at least—fellconsiderably below the levels it had reached in theearlier part of 1925. Raw materials and semi-manu-factured goods constitute roughly half of Germany'stotal imports, and the. greater part of the decline inimports at this time was in this category. It is prob-able that industrial difficulties were a determininginfluence towards restricting such imports, inducingmanufacturers to rely as much as possible on ac-cumulated stocks and more or less to limit produc-tion. Various indexes of domestic trade, too, showedmarked declines in the autumn and winter.

One of the most serious aspects of the recessionwas the great increase in unemployment during thewinter of 1925—26. Until October the number ofunemployed increased slowly, but thereafter it roserapidly. A growing number of business failures wasanother striking reflection of the business declineduring the autumn and winter. This was probablypart of the process of slow readjustment from condi-tions of inflation. The sudden recession may haveprecipitated the eradication of many superfluous

371

I-

business The majority of business or-.ganizations failing in this period were engaged intrading rather than in manufacturing; this indi-cates the extent to which the inflation had stimulateduneconomic distribution of goods. It is difficult,however, to estimate the gravity of the effects uponGerman economy of these many failures because thesize of the liabilities was not reported. -

The recession, as reflected in unemployment, com-mercial failures,, curtailed industrial production,inactivity on the security markets and reduced vol-ume of domestic trade, probably reached its nadirin January and February 1926. But at that very timesigns of easier credit conditions. became apparent.The first impulse in this direction would seem tohave come from inflowing long-term loans, mostlyfrom the United States. They allowed funding ofdebts and considerably lightened the burden of thebanks. As hand in hand with this capital inflow therates for short-term loans declined, the inclinationto purchase long-time paper awakened among in-vestors. A remarkably strong demand for mortgageFrom 1914 to 1923, comprising the whole period of the war and the in-

flation, about io,ooo new stock companies and about 45,000 limited lia-bility companies had been added to the number previously existing, andthis growth became accelerated toward the end of the period, under theunhealthy stimulus of inflation. It was only natural that the principalpart of the failures should be among these newer concerns; during thefirst ten months of 1925 two-thirds of the failures were of concernsfounded since 1919, and in the five succeeding months, which comprisedthe most acute period of the crisis, 58 per cent were o such concerns.'Report of the Agent General for Reparation Payments) June 15, 1926,

p. 45-[38

bonds developed. Share. prices fell throughout thesecond half of 1925, but after the beginning of 1926recovery was surprisingly quick, owing partly, per-haps, to increased purchases of stocks by foreigners.

• The extreme form that the recession took—wide-spread business failures and record unemployment—was a manifestation of industrial reorganizationthat became especially apparent 'at a time of éco-nomic decline.8 The recession was not the reflectionof difficulties in banking; rather, it was expressed inthe withdrawal of credit from unprofitable con-cerns, many of which had been unable to changepractices instituted during the inflation and werestill relying, for working capital, upon short-termloans. Other concerns, representing the great ma-jority of German business organizations, proceededto effect a sweeping reorganization that was notlimited to improving internal methods of adminis-tration and production, but in the case of many ofthe largest industries amounted to rebuilding thebusiness plant itself.9 Thus, burdens remaining from

the extent of business failures and unemployment was greaterthan the decline in production is apparent in many economic reportsof the time, Of course, production did decline considerably, but not inthe same proportion as the number of employed workers. For example,production of coal was only 5 per cent less in January 1926 than in Jan-uary 1925, but the number of workers was reduced 15 per cent. Here isan indication of drastic reorganization, which in, this case meant theclosing of inefficient mines. Similar reorganization was taking place inother industries. The great unemployment and heavy business mortal-ity, therefore, must be looked upon not only as a reflection of recessionbut also as an ugly aspect of 'rationalization'. (Frankfurter Zeitung,Wirtschaftskune, 1926, I, pp. 4, 5.)The activities of two giant enterprises—the Interessengemeinschaft

39:1

the inflation were removed. Unfruitful users ofshort-time credit retired from the market, while inother quarters perfected administration admittedthe accumulation of funds for the repayment ofdebt and the increase of working capital. As progresswas made in these directions, the volume of avail-able funds increased and the cost of credit to soundborrowers declined.

The recognition of the mistaken policies of tenyears, of the superfluity of business organizations, ofcontradictory industrial plans, led to an eager willto recast thoroughly the German productive ma-chinery. This was the period when the shibboleth'Rationalisierung' was shouted from every hill-top.American methods of production, 'Fordism', 'ra-tionalization'—these were the topics of the day.

3. RECOVERY AND PROSPERITY, 1926-1928

a. Business Consolidation During Depression

The spring of 1926 was a period of reorganizationand realignment during depression. The ranks ofthe unemployed were still swollen but productionwas increasing. The growing. number of railwaycars placed at the disposal of shippers, and especiallythe decline in business failures and protests of billsfür Farbenindustrie and the Vereinigte Stahlwerke—at this time werecharacteristic of the process that was so general. Both organizations con-centrated their productive plants in the most suitable localities; bothintroduced sweeping technical improvements; at the same time, agree-ments were concluded with foreign producers (Ibid., June 1926, p. 119).

[40

of exchange indicated that, so far as business activitywas concerned, the low point had been passed.

Seasonal factors strengthened the tendency to-wards recovery. However, the stocks of goods thathad accumulated during the recession were dimin-ishing and production was stimulated to an activitythat was more than seasonal. An export surplus con-tinued until June, and this, too, helped to reduce thestock of domestic goods. Thus German economyindependently worked itself free from its previousunliquia condition.

Although internal factors were probably respon-sible in large measure for the revival of German pro-duction, various influences that had their originsabroad were of great importance in maintaining andstrengthening it. One such factor was the protractedEnglish coal strike. The German coal' industry, ofcourse, was the first to profit by the decline in Eng-land's coal production. Before long, however, theiron industry, too, found itself called to fill increas-ing foreign orders.

Moreover, the stabilization of the French cur-rency late in 1926 may have been favorable to therecovery of Germany's foreign trade. In 1924 and1925 German exporters had been subject to thecompetition of exports in countries with inflatedcurrencies. To estimate the full implications of suchcompetition is difficult, but during periods whendeclines in currency exchanges had outrun priceadjustments in the countries of inflation, it was

41]

probably severe. Competition of this sort had largelyceased by the end of 1926.

Furthermore, the relative liquidity of the moneymarket and the concomitant rising activity in thestock market during the spring of 1926—one of theearliest indications of returning business optimism—were probably related to an increased inflow offoreign capital.

Easier credit conditions now enabled many busi-ness organizations to repay part of their short-termdebts, or to convert them into longer-term obliga-tions, to a large extent by foreign borrowing. In themoney markets the growing liquidity was reflectedin an expansion of the volume of funds offered forshort-term investment. Short-term money rates de-clined rapidly during the early part of 1926, reach-ing a level of relative equilibrium in April. Theeconomic organization also showed itself able toabsorb large volumes of new long-term issues, andthe rates on such issues tended to decline. Neverthe-less, the long-term market generally continued tobe ruled by relatively high rates. The large amountsof government loans that were offered probably re-stricted the supplies of long-term funds availablefor industrial and commercial purposes and sotended to keep rates high.

As noted above, a continuing inflow of long-termforeign credits undoubtedly played an important

• part in influencing the return of easier credit condi-tions. Probably large amounts of capital funds were

[42

accumulated by business enterprises but theiramount is difficult to estimate. Savings bank deposits,issues of bonds and stock shares, life insurance pre-mium payments, however, indicated that there wereconsiderable accretions of domestic capital.

The Reichsbank found in December. 1925 thatthe practice of rationing credit—instituted as anemergency measure in April 1925—was no longernecessary. Early in January it was abandoned. There-after, the central bank, aside from its usual discrim-ination in the purchase of eligible bills, attempted tolimit the use of its credit by relying exclusively uponthe bank rate.

Thus, diminishing domestic stocks of goods, va-rious stimuli to exports and relatively liquid creditconditions provided the support for a general re-vival of German economy in the spring of 1926.Unusual supplies of credit at relatively low rates,together with confidence in industrial earning capac-ity—provided by progress in industrial reorganiza-tion—soon carried stock prices to points above thosereached at the peak of the upswing in 1925. Variousindexes of domestic trade—such as freight car load-ings, Reichsbank clearings, postal check traffic—bearwitness to the accelerating recovery during 1926.

As indicated above, acute manifestations of thedepression of the winter of 1925—26 had been therapid rise in unemployment and the great numberof business failures. Although the latter declinedrapidly during the spring of 1926, unemployment

4311

remained high throughout the year. The closing ofmany business enterprises had much to do with ac-celerating the rise of unemployment during the re-cession and probably accounted for much of it evenin the summer of 1926. But a more continuous fac-tor was the radical reconstruction that German in-dustry and commerce were undergoing in the inter-ests of economy. Unemployment in this sense is tobe regarded less as an inheritance from thesion than as an aspect of the structural readjustment

- of the entire business system.

• b. Expansion

By the end of the winter 1926—27 the British coalstrike had ended and the inflow of capitalhad slowed down. Nevertheless, German economycontinued to expand at an accelerating tempo. Saleson both the security and the commodity marketswere increasing. Production in the coal, iron andmanufacturing industries, particularly in those mak-ing consumption goods, rose substantially. Indeed, itmay be said that every branch of industry .took partin the revival. The recovery seems to have beenquite as uniform in domestic business activity. In-creased domestic business made for a large volumeof imports, and the import balance grew. Further-more, it was reflected in fuller employment of laborand in increasing financial security of industrial andcommercial enterprises. Thus during 1927 recoverybroadened into a period of prosperity that continued

[

without serious interruption until the middle of1928. German commerce and industry were moreactive than at any time since the War.

As noted above, credit expansion, based uponReichsbank extensions and upon foreign loans, stim-ulated the process of expansion. However, revivingeconomic activity made for rapidly increasing de-mands for credit, money rates advanced, and by themiddle of 1927 increasing tension in credit condi-tions became apparent.

The level of stock prices had been rising rapidlyand with little interruption since the beginning of1926. This was in part related to growing confidencein the earning capacity of German industry, but itwas felt by the Reichsbank authorities to be evenmore a reflection of easy money conditions that gavesupport to speculators. The rise in stock prices wasconsidered to be disadvantageous to German econ-omy for it was believed that high stock prices mustbring in large amounts of foreign funds, whichwould be withdrawn again shortly with speculativeprofits, and would lead to loss on the part of theGerman credit structure. Finally, in May 1927, byinitiating an agreement among the leading privatebanks to curtail drastically stock exchange credits,the Reichsbank took steps to curb speculation. An-nouncement of this agreement precipitated a suddenand rapid fall in stock prices.

The Reichsbank had been out of technical con-tact with the money markets during most of 1926

451

and was obliged to exercise its influence by meansother than the discount rate and credit control. Inthe early part of 1927 it took steps to regain the con-trol of credit. For this purpose, it attempted to limitthe offers of foreign credit and the public funds,both of which had, been important factors in ren-dering the bank rate inoperative. This policy for atime proved effective. During the first half of 1927the volume of long-term loans from abroad wasdrastically reduced. Short credits, however, con-tinued to flow into Germany in considerable vol-ume. On the other hand, a counterfiow of Germancredits to foreign countries revealed a revival ofGerman capacity to invest in foreign countries. Idlegovernment funds, which at times had been a dis-turbing influence in the money markets, were muchdiminished in 1927. As the banks of issue, of whichthe Reichsbank is of chief importance, continued toexpand their business credits, the stimulus initiatedby foreign funds was retained by means of domesticcredit expansion. Thus for a time the Reichsbankpolicy had a measure of sUccess. But the power of thedomestic market to meet the capital needs of Ger-man economy proved inadequate, and by late spring1927 a revival of foreign borrowing was evident.Interest rates advanced, and the central bank wasforced to raise its discount rate. The demands forloan funds were very heavy, not only on the part ofindustrial and commercial enterprises, but also fromagriculture, which, because of two years of short

[46

P

crops, was in considerable credit difficulties. Further,large borrowing operations by the public authoritiesadded to the tension on the capital markets. Foreignlong-term loans continued to be placed in largevolume. Short-term borrowing, too, was consider-able. Nevertheless, the tension in the credit marketsdid not relax. The brief period of credit liquidityand of a slackened inflow of foreign funds had ended.

Despite large imports of foreign capital and theimplied confidence in German economy, despite thegrowth of domestic capital supplies, interest ratesremained high. The urgency of Germany's needs forcapital led to demands that could not be satisfiedexcept at high rates of interest. An insufficient sup-ply of capital hampered the German economythroughout the years here considered. Capital scar-city was an ominous under-current over whose sur-face the industrial and commercial activities of thenation rose and fell.

4. RECESSION AND DEPRESSION, 1928-1932

a. Slow Decline

Consideration of the credit situation and thedeclining volume of production, together with thecontinued high level of trade and consumption,leads to the conclusion that by the middle of 1928German economy had entered a fairly late phase inthe process of expansion. Substantial capital cx-

471

penditures in industry and housing accommodationwere paralleled by a growing stringency of capitalsupplies. In view of the tightening of the moneymarkets abroad there was little prospect of easiercredit conditions. German economic activity, soclosely dependent upon the international creditsituation, was beginning to slacken. The stock mar-ket was inactive, the import balance had begun todecline, and industrial production, although large,tended to diminish. Costs of production, however,were rising, and commodity prices at wholesale con-tinued to advance.

Definite evidence of retardation in the rate ofexpansion, and even of absolute decline in activity,is afforded by various production series. During thespring output in the iron and steel industries de-clined considerably and would have fallen more butfor sustained exports. However, the volume of do-mestic trade continued on the whole to run higherthan in i927. There was thus a contrast, in the firsthalf of 1928, between a. large volume of trade and amoderate decline in the volume of production.

Unemployment in the winter of 1927—28 had beenmuch less severe than in the preceding two winters.But the seasonal decline during the spring and sum-mer of 1928 was not so pronounced as in i927. Thenumber of business failures, too, showed a rise overthe levels of the preceding year.

During the autumn of 1928 and the winter of1928—29 further indications of a decline in German

[48

business activity were evident. Factors of an extraor-dinary nature were involved. A labor dispute inthe Rhenish-Westphalian steel and iron plants ledto a lockout in November and the first few days ofDecember that reduced their output suddenly and toa very large extent. The effects of the lockout, ofcourse, extended into branches of production andtrade related to the iron industry. With the resump-tion of work in the mills a pronounced increase inproduction took place. This must be considered, atleast in large part, as compensation for the drop inproduction during November.

Production and distribution were further affectedby an unprecedentedly severe winter. The averagetemperature in February was the lowest since theinauguration of weather records in Berlin early 'inthe eighteenth century. A great amount of outdoorwork had to be abandoned during the long periodof extraordinary cold from December to March, andmuch indoor work dependent upon uninterruptedmaterial supplies and regular distribution was alsodisturbed.

Germany's position as a heavy borrower of for-eign capital made its economy sensitive to changesin the international money markets which were es-pecially marked in the twelve months after themiddle of 1928. Several factors tended to reduce thevolume of German borrowings from abroad, and,for a time in the spring of 1929, even led to heavynet withdrawals of foreign funds. Chief among these

491

factors were the extraordinary speculative activity inNew York, which until the autumn of 1929 attractedmoney from all parts of the world and tended totighten the market for long-term investments; inaddition, the uncertainty of the protracted negotia-tions on reparation payments tended to discouragelong-term loans. The United States, which had pro-vided most of the long-term funds invested in Ger-many and a large share of the short-term loans, nowchanged its position from lender to borrower in theinternational markets. The withdrawals of Americanfunds in Germany during the autumn of 1928 wereoffset by new loans from. various European countries.In the late winter of 1928—29 and in the spring of1929, however, there was a net outflow of foreignfunds from Germany, accompanied by a transfer ofdomestic funds abroad. In May it finally becameevident that an agreement on reparations was aboutto be reached, and considerable money returnedfrom abroad; this more than made up for the pre-vious outflow. Nevertheless, it seems probable thatuncertainties involved in the reparation meetingshad been sufficiently strong to restrain German busi-ness enterprises effectively.

The tightening credit situation reflected itself inthe security markets. After the beginning of 1929stock prices weakened considerably and a fairly cón-tinuous decline set in.

As was noted above, industrial production wasdeclining towards the end of 1928; in the winter of

[50

1928—29 it fell to low levels. However, an increaseoccurred during the late spring and summer of 1929.Manufactures for export were greatly stimulatedby favorable conditions in world trade. Further-more, the extraordinarily long and severe winter hadtended to postpone capital expenditures so thatbuilding construction practically did not begin untillate spring. Subsequently, however, nearly allbranches of industry experienced a heavy reductionin unfilled orders, bringing about a severe decline inindustrial activity.

Figures relating to domestic trade show fluctua-tions very similar to those in indexes of industrialproduction. Large declines during the winter werefollowed by increases in the second quarter of 1929that reflected a larger volume of trade than at thesame time in 1928. This activity, too; was doubtlessin large measure a compensation for the wintershrinkage. The volume of imports declined afterthe second quarter of 1928, but exports, particularlyof finished goods, rose. Domestic demand was fallingoff, but the expansion of sales abroad retarded theeffects on production.

Unemployment, as might be expected, was verygreat during the •severe winter of 1928—29. It de-dined with the return of warmer weather, but inthe autumn again rose rapidly. Business difficulties

were becoming more apparent, as reflected innumber of business failures and in the nominal

âhiounts bills protested.511

Recession was not unmistakably apparent untilthe summer of 1929. After then, however, there wasno doubt that activity was gradually declining andthat the probability of depression in the near futurewas strong. To be sure, the intense strain in themoney markets disappeared for a time in the au-tumn of 1929 and the spring of 19,30. This was pri-marily the result of a decline in capital expendituresand a lessened demand for capital, which in turnproceeded from curtailed production, particularlyof building and other forms of construction, de-clines in domestic trade, and a rising export balanceof trade, together with a resumption of capital im-ports. In 1930, the general decline was accelerated.Doubt and hesitation had been introduced into Ger-man business enterprise by the events accompanyingthe efforts of the 'Experts' Committee' in Paris toeffect further settlement of the reparation problem.Disorder in the public finances continued to be aserious factor of disturbance—particularly with re-spect to the cost of credit. Now, the decline in busi-ness activity in numerous other countries, reflectingitself conspicuously in a general fall of commodityprices, was a further element making for recessionin Germany. During 1930 and 1931 prices of securi-ties and commodities declined almost without in-terruption, industrial production and domestic tradefell off, imports were reduced and unemploymentrose. Exports continued fairly high (although they

[52

too were falling), tending to retard the downwardmovement.

b. Deepening Depression

Thus in the middle of 1930 Germany was in adeep depression, a situation similar to that in otherindustrial countries. But Germany was peculiarlysensitive to disturbances at home and abroad, espe-cially because of its vast short-term indebtedness.As was indicated above, credit conditions becamesomewhat easier during the first half of 1930, andforeign funds were again available in considerablevolume. But revelation of the strength of the ex-treme political parties in the Reichstag election inSeptember 1930 led to sudden distrust of Germany'seconomic stability. For some weeks thereafter theoutflow of foreign capital was heavy. Although bythe end of the year funds were returning, foreigncreditors remained alert and apprehensive.

In the late spring of .1931 a series of economic andpolitical disturbances, issuing immediately out ofthe failure of the Austrian Creditanstalt, impingedupon German economy and gave the impulse forrenewed exports of loan funds. By mid-summer theoutward flow of capital had taken on the aspect ofa panic., and the financial structure of Germany wasthreatened with collapse. Approximately 2.9 milliardReichsmarks of short.term credits were withdrawnin the first seven months of 1931, largely in June

I

and July.'° The summer witnessed several bank-ruptcies involving leading commercial organizationsand insolvency on the part of several large banks.The panic reached its climax in July and August,when the banks were temporarily closed. The stockexchanges were closed for the remainder of the year.Extraordinary measures of exchange and credit con-trol by the Reichsbank and the Government, amoratorium of political debts and conclusion byleading creditors of a 'Standstill Agreement', in-tended to retain foreign funds subject to partialrepayment from time to time, were attempted torelieve the highly critical tension. However, fundscontinued to flow out. It is estimated that about onemilliard Reichsmarks of short-term foreign debtswere repaid between July and November." Thereserve and credit position of the Reichsbank wasstrained to the utmost by the withdrawals of creditsfrom abroad. Government support was extended tothe banks. By a series of 'emergency decrees' theGovernment was able to exercise considerable con-trol over private enterprise in general.

The decline in industrial production seemed to beslackening somewhat during the spring of '93'. Butthe capital withdrawals and the credit panic duringthe summer led to renewed and sharp reduction.Output in all industries declined progressivelythroughout the remainder 'of the year and well into10 Report of the Special Advisory Committee, etc., Economist, January2, 1932.11 Frankfurter Zeitung, November 1, 1931, p. 5.

[54

the spring of 1932. However, output of consumptiongoods fell off somewhat less than that of productiongoods.12 The labor market was further seriously un-dermined from the summer of 1931 to the summerof Reduced industrial production, of bothcyclical and seasonal nature, led to record unemploy-ment of approximately 6,200,000 workers by March

The income of the working population wasfurther drastically reduced, not only because ofgrowing unemployment, but also because of a. largerproportion of part-time work and lowered wagerates.

Problems of government finance became moreserious as the general decline continued. More andmore the Reich, state and local governments wereforced to attempt. to reduce expenditures and to findnew sources of revenue. But their efforts were ham-pered increasingly by the demands •,for social reliefand the lowered national income. Thus the burdenof government on the economy became heavier dur-ing the course of the depression.

Reduced income and the gradual depletion ofreserves of purchasing power (which hitherto hadhelped to lighten the burdens of depression) werereflected in declining domestic trade and consump-tion. It is likely that the quality, as well as the quan-

By mid-summer, 1932, the output of production goods had to50 per cent of the 1928 average, whereas the output of consumptiongoods was maintained at about 75 per cent of that average.

In this period, too, 'invisible' unemployment was much increased;see Ch. II, footnote 52.

55]

tity, of goods consumed was lowered. Commodityprices declined further, until by the middle of 1932the general price index was about 5 per cent belowthe level of 1913. Foreign trade, too, was diminishedin value. Imports, reflecting the reduced industrialoutput, tended to decline throughout the year afterthe summer of 1931. Exports rose for a time in theautumn of 1931, particularly in response to largeorders from Russia, but thereafter fell steadily andrapidly. Increasing hindrances to foreign trade andthe competition of countries with depreciated cur-rencies seem to have hastened this decline.

The pressure on the German credit structure re-mained heavy during the autumn of 1931 and thesubsequent winter. Faced with declining deposits,the commercial and savings banks found impossibleany corresponding reduction of outstanding credits.The demands made on them could be met only bycontinued large discounts of bills with the Reichs-bank. Consequently the credit of the Reichsbankexpanded markedly at the same time that its reservesof gold and exchange were reduced. The decline ofthe surplus of• exports over imports necessitated thecontinuance of rigid control over foreign exchangeand further agreements with Germany's creditorsleading to reduction of interest rates and conversionof short-term advances into long-term credits. How-ever, during the early months of 1932 a decline inthe volume of commercial bills drawn and in thebanks' demands on the Reichsbank, a retardation of

[56

the decline in savings bank deposits, and the resump-tion of official trading on the German security mar-kets, indicated that the strain associated with thecredit panic had relaxed.

5. HESITANT REVIVAL,

The long depression seems to have reached itsnadir about the middle of 1932. Thereafter a res-toration of business confidence was increasinglyevident. Chief among the factors making for revivalwas a resumption of production that compensatedfor the extraordinary declines of 1931 and early1932. Industrial output was so much contracted af-ter the credit crisis that it was insufficient to meetcurrent consumer demands and the needs of main-taining industrial Thus, at least a mea-sure of revival was necessary to increase nearlyexhausted stocks of retailers, jobbers and manufac-turers, and to make industrial repairs and replace-ments. Moreover, as the necessity to liquidate oldcommodity stocks disappeared, the downward pres-sure on the price system relaxed. The steadying ofprices in itself was a stimulus to renewed activity inindustry and trade. Furthermore, the Lausánneagreement (June i6, 1932) to suspend reparationpayments and strenuously renewed efforts of theReich government to expand production and em-ployment led to an improvement of business senti-ment.

57]

Production in many lines of industry became in-creasingly active during the autumn; in others, thedecline in output was checked. The general indexof industrial production rose by nearly io per centin the three months, August to November. Improve-ment was most marked in the building, coal, ironand consumption goods industries. Increased pro-duction led to an expansion of employment. Thevarious indexes of industrial employment show con-siderable rises from August to November, in contrastto declines during the corresponding periods of 1930and 1931. Domestic trade was enlivened, too, thoughmore as a result of restocking by distributors thanbecause of increased consumption, Measures of con-sumption, indeed, indicate continued decline dur-ing the second half of 1932. Commodity prices gen-erally fell less rapidly, and there were pronouncedrises in many raw materials prices. In consequenceof steadier prices and increased industrial actiyity,imports of raw materials and semi-finished goodsrose. Exports also showed a revival in the autumn,but this was largely a seasonal movement.

The provisional consolidation of Germany's short-term foreign indebtedness, together with the virtualcancellation of reparations, contributed to greaterliquidity in the money markets. During the autumninterest rates declined, the pressure of banks on theirdebtors was reduced, and the prospects for convert-ing short-term credits into long-term loans im-proved. The prices of stocks, reflecting the easier

[58

credit conditions and the industrial revival, con-tinued to rise gradually. Signs of growing businesssecurity were manifest in the declining numbers ofbankruptcies, receiverships and bill protests. Never-theless, new long-term credits remained difficult toobtain except at costs that made their profitable useseem very doubtful.

Seasonal influences during the winter of 1932—33interrupted the rise in industrial output, employ-ment and trade, but in the early spring of 1933 thegeneral advance was resumed. Prices of raw materialsand finished goods became firmer, and this tendedto make more satisfactory the relationship betweenindustrial costs and income. But difficulties that hadbecome increasingly apparent during the course ofthe depression hindered the progress of revival.Despite the easing of the money markets, the sup-plies of long-term credits for industrial expansionremained meager. Domestic banks and business en-•terprises and foreign lenders were primarily inter-ested in the continuing liquidation of debts. Thepresence of a large reserve of domestic consumerpurchasing power might have acted as a support andstimulus for industrial once prices weresteady. However, the long depression had greatlyreduced both the incomes and the savings of individ-uals and business enterprises. The downward pres-sure on wages continued into 1933, and such busi-ness profits as accrued were applied to a considerableextent to the reduction of liabilities. Also, the grow-

ing resistance of world markets to German goodsmade improbable a stimulus from export trade. Al-though construction Costs were at a low point, themeager purchasing. power in domestic and foreignmarkets, together with the large surplus productivecapacity of many industries, threatened that returnson new investments would be inadequate. Therewas, then, little incentive to make extensive addi-tions to the existing plant.

Thus, the growing necessity of replacing capitalgoods and durable consumption goods, the deple-tion of commodity surpluses, the gradual increaseof credit liquidity together with more and morevigorous support of the economy by an aggressive,firmly entrenched government, provided the chiefimpulses in the direction of revival. But the contin-uance of economic distress among the masses ofurban and agricultural consumers, the decliningexport surplus, the uncertainties involved in obtain-ing and applying new .capital investments, made theprogress of the upswing slow and uncertain.

6. SUMMARY'4

The months immediately subsequent to currencystabilization were characterized, in general, by de-pression. In the last quarter of 1923, this was espe-

Twenty-four series pertaining to various aspects of German economyare presented in Chart i. This chart may be helpful in illuminating thecourse of the economy from 1924 to 1933.

[6o.

cially evident in large unemployment. The shortperiod of credit ex.pansion and increased businessactivity—February to April, 1924—which followedis probably to be attributed in large part to Reichs-bank policy. However, when the new currencyseemed endangered, credit was sharply curtailed.The underlying depressed situation again becameapparent in greater unemployment and a heavy tollof bankruptcies. After August there was considerableimprovement, accompanying the large borrowingof foreign funds that followed the acceptance of theDawes Plan. During the autumn and winter of 1924increasing activity was evident in indexes of indus-trial production, trade and employment. But thenumber of insolvencies remained high—a manifes-tation of structural reorganization in German econ-

After the beginning of 1925 the inflow of for-eign loans diminished markedly. This may accountfor the unclear picture of business during the earlymonths of that year. Production and consumptioncontinued to rise for a time, but by the end of springsymptoms of recession were apparent.

The cyclical upswing definitely came to an endin the summer of 1925. The sharp recession in theautumn of that year was characterized particularlyby accelerating increases in unemployment, businessfailures and liquidation. Industrial production andcommercial activity reflected their decline in• mosteconomic series. The essential difficulties were ap-parently in business organization rather than in

6i]

finance. Indeed, credit was withdrawn from un-profitable concerns, but it did not become suddenlyand universally unobtainable. More significantfactors involved in the recession were those asso-ciated with practices of administration and forms oforganization that had developed during the Warand the inflation and could not survive under condi-tions of currency stability. Also, German industryhad not yet had the opportunity to adapt itself tomore advanced methods of production. Administra-tive and technical reforms were necessary in orderto restore the world competitive strength of theGerman economy.

The depression that characterized the winter of1925—26 did not last long, reaching its turning-pointearly in i 926. Easier domestic credit conditions, im-proving business organization and industrial tech-nique, together with external stimuli—chiefly thecontinuing inflow of foreign capital and the severeBritish coal strike—made for gradual. but definiterecovery of German business during the late springand summer. Unemployment was one of the feweconomic series that failed to show very consider-able improvement by the autumn of 1926. However,heavy unemployment and the numerous businessfailures must be viewed, as aspects of structural re-organization.

Recovery broadened into a period of prosperityduring 1927 which continued until the spring of1928. Business activity was widely extended and its

[62

manifestations in production, consumption and em-ployment were fairly uniform. However, substantialcapital expenditures were paralleled by a growingstringency of capital supplies. By the end of spring,1928, it was apparent that the intensive activity wasgiving way to decline. To be sure, consumption andtrade were still at high levels and the labor marketwas in a relatively satisfactory condition. But moneyrates were rising, the physical volume of productionin certain industries was declining and there wereindications of increasing business difficulties. Theperiod of general economic advance—which, withqualifications, may be regarded as a time of pros-perity—now gave way to slow recession.

The autumn of 1928 was marked by a downwardtrend of business as a whole, a relatively stable vol-ume of consumption, a slowing down of capital ex-penditures and an expansion of exports. The lock-out in the Rhenish-Westphalian steel and iron, in-dustry in November 1928 accelerated the seasonalrise• in unemployment and reduced the activity ofother industries. In the early months of 1929 theeffects of the lockout were aggravated by weatherof unprecedented severity. The decline of industrialproduction during the winter was counterbalancedby increased activity during the spring and summerof 1929. However, other factors, particularly thoseconnected with credit, continued to exercise a re-straining influence. Credit stringency was aggravatedby protracted reparation negotiations, by extraordi-

63]

nary demands for capital in other countries, by theunsatisfactory financial showing of many publicbodies. Decline deepened into depression during thewinter. Throughout i 930 industrial production andcommercial activity continued to contract, unem-ployment rose, and commodity imports and pricesfell to low levels. In the autumn, after the growingstrength of the extreme political parties had becomeapparent, there was a heavy outflow of foreign cap-ital, but by the end of the year funds were returning.A series of pOlitical and economic disturbances dur-ing the spring and summer of 1931 gave the impulsefor a renewed outflow of loan funds, which in themiddle of the summer took on the aspect of a panic.Unusual measures of Government control were re-quired to prevent financial collapse. The decline ingeneral economic activity, as reflected in numerousindexes of production, trade and prices, was acceler-ated by the credit panic. The winter of 1931—32and the following spring found German economyin deep depression. During the summer and autumnof 1932 depression gave way to a hesitant revival.Production, employment and trade rose, prices werestrengthened, and the money markets recoveredfrom their paralysis. The growing necessity of fill-ing depleted commodity stocks and restoring out-worn capital and consumers' goods, together withthe gradual liquidation of the debt burden, seem tohave been the main reviving factors. Although theirinfluence extended into 1933, recovery was

[64

uncertain. The economy continued to labor underpowerful depressive burdens proceeding chieflyfrom the narrowness of both domestic and foreigncapital and commodity markets.

B. Significant Aspects of German Economy,1924—1933

The foregoing attempt to describe the totality ofthe cyclical course of German economy from early1924 to the spring of 1933 indicates that the fluc-tuations of an economy are the expression of a com-plex of changes in a great variety of processes andthat each of these processes is itself a complex ofvariables. Limitations of space and time, however,demand that the study confine itself to what areconsidered to be essential features of the ebb andflow of the economy.

This section is a summary reconsideration of as-pects of German economy that appear to be closelyconnected with the character of its cyclical fluctua-tions. They have already been emphasized, buthitherto the discussion has been built around theframework provided by the successive phases of thebusiness cycles—recovery, prosperity, recession, de-pression. It is believed that a review of some of theseaspects—one by one, rather than chronologically—may further illuminate the nature of the cyclicalfluctuations in the post-stabilization period.

6.5]

CHART 1

TIME SERIES ILLUSTRATIVE OF CYCLICAL FLUCTUATIONS

PerCent

120t

100

80

60

100

80

60

120

100

80

160F-

'4

12

120

100L

100

80.

fluctualions removed

**JUty 1931— March 1932, inclusive, not available

'1928=1002,g24_1926 100

100

[66

b. consumplion goods *

General indes ofstock prices 2**

Indes of wholesale prices

a.industrial finished goods3

b. raw materials md

semi-finished goods3

IN GERMAN ECONOMY, 1924- 1933

Index of industrial production

a. production goodsl*

1924 1925 1926 1927 1928 1929 1930 1931 1932 1933

c. agricultural producls3*

CHART 1

TIME SERIES ILLUSTRATIVE

(CONT.)

IN GERMAN ECONOMY,Per

100

Yearly increase in savingsbank deposits, Prussia3

2Per cent per year (not quoted in July and August, 1931)

3YearIy total in millions of (Decrease in 1931 of 909.6 million Rm.,

and in 1932 of 409.2 million Rm,)

OF CYCLICAL FLUCTUATIONS

of

a. regulated prices

b. 'free prices

Interest monthly

1924 1925 1926 1927 1928 1929 1930 1931 1932 1933

*Seasonal flucfuilions removed

67]

CHART 1 (CONT.)


[68

IN GERMAN ECONOMY, 1924-1933

Deposils, banks of issue

iiweslments2

Loans andof issuel*

1924 1925 1927

Seasonal removed

at end of month in millions of Reichsmarks

Total at end of year in mifliards of

Pf

per

r

120-

110-

bc -

90 -

80-

70 -

60 -

50 -

40 -

CHART 1 (CONT.)

I removed

cent of memberihip

69]


IN GERMAN ECONOMY, 1924-1933Per

70 -

60

-

40

20

I0

0

R.gut.ted wages

b. unikilled .orhrs

1924 1925 1926 1921 1928 1929 1930 1931 1932 1933

CHART 1 (CONT.)

ILLUSTRATIVE OF CYCLICAL FLUCTUATION5


Freight cars placed at1*disposal of shippers**

Value of drawn2*

3*Department, store sales

4*Postal check traffic

5*Reichsb.nk clearings

*Seasonal fluctuations removed

**NOYember 1924 data not available

Daily average per month in 1000 cars

2Monthly total in millions of Reichsmarks

[70

4Monthly total In milliards of Reichsmarks

5Monthly total in hundred millions of Reichsmarks

Th.ofcars

l60

1924 1925 1926 1927 1928 1929 1930 1931 1932 1933

CHART (CON T.)


Rm.

120 0—

1000


800 -

600 -

400

1200

1000

800

600

400

Number1600 -

1400

1200

l000

806

600

400

200

*SeISonaI removed

'Monthly in of Reichsmarls

1*of goods imported

Value of good5 eoported

Number ofbusiness failure5*

7.]

1924 1925 1926 1927 1928 1929 1930 1931 1932 1933

1. CAPITAL AND CREDIT

Through the mass of literature pertaining toGerman economy since the currency stabilizationthere runs, like a red thread, the term Kapitalnot—need for capital. Wherever one's interests lie—inagriculture or in industry, in state finances or incommunity affairs, in the universities or in thetransportation system—one meets with the opinionthat German economy is weakened by a lack ofcapital.

a. Capital Losses, 1914—1922

Explanation of the great capital losses of Ger-many is to be found in the story of the events thatoccurred from 1914 to 1923. The intense strain ofthe World War made heavy demands upon the sup-ply of capital goods, and much that was worn outor destroyed was not renewed or restored. Further-more, the requisitions of the victorious powers dur-ing the period 1918—23 led to additional largecapital losses. The diflicult years after the War,fraught with economic and political uncertainties,currency inflation and reparation quarrels, werecharacterized not only by reductio.n of capital sup-plies .but also by the accumulation of much ineffi-cient or superfluous production equipment.

Estimates in monetary terms of the net reductionin Germany's national income and wealth in theperiod of War and inflation are subject to wide mar-

[72

gins of error. Moulton and McGuire estimate thelosses sustained from 1914 to 1921 as a consequenceof reduction in productive capacity, depreciation ofplant and equipment, damage caused by the Rus-sian invasion of East Prussia, surrender of foreigninvestments and other properties in accordance withthe peace treaty, and from the decline in stocks ofconsumption goods, as amounting to 135 billiongold marks.'5 This would make the total loss highas 45 per cent of the 1913 wealth of Germany.1°Evidence of German production in the years im-mediately following the War indicates that this per-centage is somewhat too high.17 Nevertheless, in theabsence of more accurate data, it may serve to illus-trate the seriousness of Germany's economic lossesincurred during and immediately after the War.

National income in the inflation years, 1920—23,was undoubtedly much below the pre-War levels.18But no accurate estimate can be made of the loss of

H. G. Moulton and C. E. McGuire, Germany's Capacity to Pay (Mc.Craw-Hill, 1923), pp. tgo—3.

Karl Heliferich's estimate of Germany's national wealth in 1913 wasmifliard marks; Deutschlands Volkswohlstand, 1888—1913 (Stilke,

Berlin, 1915), p. 122.17 See J. W. Angel!, The Recovery of Germany, p. 15; F. D. Graham,Exchange, Prices, and Production in Hyper-Inflation, Germany, 1920—1923 (Princeton University Press, Princeton, 1931), pp. 277—320.18 See Graham, cit., for estimates of production in the years of theinflation. There is reason to believe that the national income in 1923,the year of the Ruhr invasion and final currency collapse, was roughly40 per cent below the 1913 level. In 1924, however, it was probably al-most as great as in (in terms of purchasing power of themark)—an indication of the very rapid recovery of German economyafter the currency stabilization.

73]4

capital in these years. It is of interest here to notecertain influences of the inflationary disturbancesupon the accumulation of capital. Possibly the evilsof the German inflation have been exaggerated, atleast in terms of the national economy; nevertheless,its consequences were very serious. It is true thatthere was considerable saving during this period,both on the part of individuals and of corporate en-terprises. Indeed, after the stabilization it lookedat first as if the German economy were plentifullysupplied with capital goods—machines, factorybuildings and other production equipment. Closerexamination, however, revealed that a considerablepart of these goods was highly depreciated andeconomically ineffective. The rapid and almost con-tinuous inflation of the currency stimulated invest-rnent of surplus income in every variety of durablegoods, regardless of whether or not it could promiseadequate future productiveness. Of paramount im-portance at the moment was the conversion of dizzilydepreciating paper marks into anything tangible.Later, during the period of industrial 'rationaliza-tion', from 1925 to 1928, it was found necessary toscrap much of such 'inflation capital'.

Furthermore, the inflation reduced the loans ofinnumerable creditors to utter worthlessness andthereby sapped the foundations of the confidenceessential to a restoration of the old credit system.Also, bitter memories of sudden dissipation of hard-won savings and investments acted as a brake upon

[74.

incentives to save; even after the stabilized currencyseemed quite secure. These factors undoubtedlycontributed to the scarcity of loan-fund capital andthe credit restrictions of the months immediatelyfollowing stabilization. Probably most of the Ger-man foreign investments that remained at the endof the War were wiped out during the inflation pe-riod. Finally, the spectaculaf 'flight from the mark'led to a very appreciable export of capital fromGermany.19

Thus, "at the close of 1923 German business wasnearly bankrupt. The inflation and subsequent sta-bilization had wiped out most of its working capital,and not only were there no funds available for re-construction, there was often not even enough tocarry on daily operations." 20 Germany was in direneed of loan-fund capital. This need was most acuteimmediately after stabilization, but the effects ofthe decade of war and inflation were felt through-out the period here considered. They were woundsthat could not be healed in the course of seven oreight years.

The so-called McKenna Committee, which was appointed by the Rep-aration Commission in November 1923 for the purpose of determiningthe amount of German capital abroad, and the means for bringing itback to Germany, estimated it to be approximately 6.75 milliard marks.This amount, however, does not appear to be identical with the 'flightfrom the mark'. See Reports of the Expert Committee appointed by theReparation Commission (London, 1924), pp. 126—38. See also Angell,op. cit., pp. 17—60, and Graham, op. cit., passirn, for consideration of theeffects of the inflation upon German economy.20AngeIt, op. cit., p. '90.

75]

0

The work of reconstruction was closely depend-ent upon the processes of capital accumulation. Theneeds of a growing. population, accustomed to rela-tively high standards of living, and obligations topay large foreign political debts required greaterproductivity. But extension and renovation of theeconomic machinery—entailing vast capital invest-ments—was a precedent condition

/to such

increased productivity.2' The public authorities, inaddition to borrowing in order to subsidize the erec-tion of dwellings, sought funds in large amounts tofulfill sweeping programs of construction for otherpublic purposes—stadia, schools and museums, aswell as railways, power plants, canals and harbors.

Germany's population increased from 62,846,000 in 1924 to about65,092,000 in 1930—a growth of approximately 374,000 each year.

The population pressure was especially felt in the lack of-adequatehousing facilities. As in other countries, a shortage of dwellings was aconsequence of the War. But it was especially pronounced in Germanybecause even before the War housing had been inadequate. The Reich,state and commune governments were much interested in encouragingbuilding construction, and about half the funds used for such purposesfrom 1924 to 1930 were obtained through the public authorities (seeReports of the Agent General for Reparation Payments, December io,1927, p. 156; May 21, 1930, p. Furthermore, the working popula-tion was increasing more rapidly than the total population. It has beenestimated that at the beginning of 1930 the number of potential incomeproducers was 5 per cent greater than in 1925, whereas the total popula-tion had grown by only per cent (Statistisches Jahrbuch für dasDeutsche Reich, 1931, pp. 7. t8). For this reason alone, therefore, it wassocially desirable that Germany's capital equipment expand relativelymore than its total population.

The reparation burden was a special factor making for productiveexpansion. With very little left of its pre-War foreign investments, itwas necessary for German economy to prepare to meet this obligationultimately by the exportation of goods and services.

[76

Further demands for loan-fund capital, less social innature, came from private enterprise, which wasinterested in improving plant and equipment forthe purpose of lowering production costs and ex-panding profits. Agriculture, by reason of specialdifficulties confronting it, also became a heavy andconsistent borrower. As the activity of trade andindustry began to gather momentum, heavy de-mands were made for the purpose of carrying goodsthrough the processes of production and distribu-tion,

b. Domestic Accumulation of Capital, 1924—1933

The internal accumulation of capital made greatprogress during• the years i 92 4—30, but it was notnearly sufficient to satisfy this combination of de-inands. The relatively high interest rates, the almostcontinuously strained condition of the money mar-kets, manifested the size and urgency of Germany'sneed for capital.

It is difficult to form a clear picture of the extentof domestic capital accumulation during the yearsafter the Nevertheless, several authoritieshave essayed estimates. James W. Angel! fixes thetotal of domestic savings in the years 1924—2 8 at 24

" "The question of the magnitude of these savings has been a highlycontroversial one in Germany. The estimates vary widely, and areoften based on entirely dissimilar methods. No figure can be reachedwhich is assuredly correct, and the estimate finally selected must neces-sarily rest to a considerable extent on individual judgment." (Angell,op. cit., p. 326).

77:1

to 25 milliard Reichsmarks.23 He approximates theannual distribution of total savings, in millions ofReichsmarks, as follows:

1924 1,0001925 3,5001926 3,0001927

1928

Total 24,000—25,000

The most extensive estimate, in terms of the periodembraced, was made by Erich Welter, financialeditor of the Frankfurter Zeitung:

Net Domestic Additions to Capital, 1925—1930

(in millions of Reichsmarks)1925 6,5001926 7,5001927 9,0001928 9,0001929 7,5001930 "probably less thati" 6,ooo

Total 45,000

Welter suggests that national saving declined rap-This total is the sum of net public security issues, land mortgages,

estimated savings of business enterprises, savings deposits, insurance andgovernment savings, etc., less estimated duplications. Allowing forestimated losses in agriculture, the net domestic addition to domesticcapital is approximated at 20 to 21 milliard Reichsmarks (Ibid., pp.326, 327, 408).24 See Frankfurter Zeitung, May 8, 1931, p. Wirtschaftskurve .

der Frankfurter Zeitung, Vol. 7, Nr. 1928, pp. 301—5; H. R. Knicker-bocker in the New York Evening Post, January 29, 1932, p. 2. Welter'sestimates are based upon various evidences of increase of loan-fundcapital.

[78

idly in the first half of 1931, and that after the bankcredit crisis of the summer, capital accumulationgave to net capital consumption.25 The generaltendency portrayed in estimates of national savings

TABLE 2

EVIDENCE OF THE VOLUME OF SAVINGS, 1924-1931'(in millions of Reichsmarks)

TOTAL SAVINCSANNUAL VOLUME ANNUAL EXCESS OF

DEPOSITS INOF I)OMESTIC INSURANCE PREMIUMS

S PA RK ASS E NCAPITAL ISSUES OVER PAYMENTS

AT END OF YEAR

BONDS STOCKS

1924 440 148

1925 1.629 i,o8o 6561926 3,091 988 5921927 4,665 2,841 1,438 7591928 6,990 2,905 1,339 871

1929 9,0i6 874

1930 10,400 2,667 555 9731931 9,722 1,333 7841932 9,917 558 145

'Statistisches Jahrbuch, 1928—1932, Institut für Konjunktur-forschung, Viertelfahrshefte zur Konjunkturforschung, 1926—1933, pas-si in.

is fairly well confirmed by such evidences of capitalformation, published currently, as the annual vol-25 Estimates of capital accumulation in 1925, 1926 and 1927 made bythe Reichskreditgesellschaft—a bank indirectly owned by the Reich—are 6.4, 6.3 and 7.6 milliard Reichsmarks. These figures are arrivedat l)y deducting capital imports, less such as was used for currencycover, from the estimated surplus of production (Reichskredit-gesellschaft, Germany's Economic Development During the SecondHalf of the l'ear 1927, p. 15).

A study by the German Institut für Konjunkturforschung indicatesthat the increase in capital goods iii German economy, 1924—28, wasabout 42 milliarcl Reichsrnarks. Subtracting capital imports from this

79]

ume of savings bank deposits, new capital issues andthe excess of insurance premiums over payments.

On the basis of such evidence as this it may besaid that the accumulation of capital immediatelyafter currency stabilization was much below that inthe period immediately preceding the War. After1924 there was a rapid increase, but beginning in1929 a decline in the rate of accumulation setin. The years 1931 and 1932 have probably wit-nessed a net reduction in domestic capital

Total national savings during the years 1924—30were surprisingly large, in view of the extraordinarypolitical and economic difficulties of the precedingdecade (at a guess, these savings might be put some-where between 40 and 45 milliard Reichsmarks).Nevertheless they were not nearly sufficient to meetthe needs of the economy.27total gives the sum of 28 milliard Reichsmarks as representing domes-tic additions to capital supplies (Institut für Konjunkturforschung,Vierteljahrshefte zur Konjunkturforschung, Sonderheft 22, Kapital-bildung und Investitionen in der deutschen Volkswirtschaft, 1924 bis1928, Berlin, 1930).

The widely-quoted estiniate of Karl Heliferich is that national say-ings in amounted to approximately milliard gold marks(bc. cit.). In terms of mark purchasing power in 1928 this wouldamount to about 13 milliard.

Reichskreditgesellschaft, Germany's Economic Situation at the Turnof 193.2—33, p. 40.

There is reason to believe that the proportion of national incomesaved in the post-inflation period was less than before the War. Oneof the most significant factors making for a reduction in savings inrecent years is the change in the distribution of personal income.Since the War there has been a pronounced decline in the totalamount of large individual incomes. For instance, the total of per-sonal incomes over marks a year is estimated to have fallen from

[8o

Evidence of the inadequacy of capital is affordedby the relatively high interest rates prevailing inGermany throughout this period and by the con-sequent inflow of foreign funds. Discount rates ofprivate banks in leading financial centers may beconsidered representative for present purposes.

29.9 per cent of national income in 1913 (in terms of 1928 markpurchasing power) to 23.8 per cent in 1928. This shift is especiallymarked in the higher income brackets. The sum of incomes over50,000 marks (1928 purchasing power) amounted to 10.7 per cent ofnational income in 1913 and only 3.5 per cent in 1928 (see Stat istischesJahrbuch . . . . , 1931, p. 533).

The post-War growth in the burden of government—manifested inheavy per capita tax charges—has also tended to decrease the volumeof national savings. Angell (op. cit., p. estimates the total 'real'cost of government to be 65 per cent greater in 1928 than in 1913.Reparation payments, moreover, have been an outright drain on sav-ings. Saving tends, of course, to be relatively larger on the part ofindividuals receiving higher (or 'surplus') incomes than of individualsof smaller means. A reduction in the total amount of 'surplus' in-comes should lead, ceteris paribus, to a reduction in national savings.

Furthermore, fear of the loss of individual wealth—exaggerated bymemories of losses incurred during the inflation period—may havecontributed to restrain somewhat the willingness to save even afterstabilization was effected (see Erich Welter, Die Ursachen des Kapital-mangels in Deutschland, Mohr, Tübingen, 1931, passim).

The estimates of national income and savings appear to indicatethat although total annual income after 1926 was greater than inigig, the proportion saved was less than in the last pre-War year.Thus, out of a total income in 1913 oF 65—69 milliard marks (1928Reichsmark purchasing power), something like 12,000 or 13,000 mil-lion, or 17 to 20 per cent, was saved (Heliferich, cit., p. 122;

Statistisches Reichsamt, Das deutsche Votkseinkommen vor und nachdem Kriege, Einzelschrift Nr. 24. . . . , Berlin, p. 69). In 1928,however, out of a total income of approximately 75 milliard, therewas a saving of 9 milliard, at most, or about 12 per cent (see Wirt-schaftskurve . . . der Frankfurter Zeitung, Vol. 7, Nr. 3, 1928, pp.301—5).

8i]

TABLE 3

PRIVATE DISCOUNT RATES ON PRIME BANKERS'ACCEPTANCES1

(annual averages)

YEAR BERLIN LONDON PARIS NEW YORK

!913 4.98 4.39 3.84 5.581924 9.202 3.46 5.21 3.11

1925 7.62 4.13 5.77 3.321926 4.88 4.46 5.66 3.591927 5.47 4.23 2.91 3.451928 6.54 4.16 2.98 4.101929 8.87 5.26 3.46 5.031930 4.43 2.57 2.32 2.461931 3.60 1.57 1.581932 4.95 i.88 1.31 1.31

Statistisches Jahrbuch. . . . , 1928, supplement, pp. 168—9; Federal Re-serve Bulletin, 1928—33, passlm.'December rate.'Average of eleven months, no rate available for August 1931.

As is apparent in Table the annual averages ofrepresentative short-term money rates in Berlinafter stabilization were considerably higher thancorresponding rates in London and New York, and,with one exception, much higher. than those inParis. The spread between German and foreignlong-term money rates was even greater.

c. Inflow of Foreign Capital, 1924—1930

Capital imports to Germany took the form notonly of long- and short-term loans but also of directparticipation in domestic business enterprise, ofpurchases of stock shares, buildings and land. How-

[82

TABLE 4

ESTIMATE OF FOREIGN INVESTMENTS IN GERMANY'1924—1931

(in milliards of Reichsmarks at end of year)SHORT-TERM LONG-TERM OTHER TOTAL

YEARIN VESTMENT INVESTMENT INVESTMENTS INVESTMENTS

1924 Unknown i.o Unknown Unknown1925 Unknown 2.5 Unknown Unknown£926 4.1 4.1 3.5 11.71927 6.6 5.4 4.5 16.51928 9.0 7.0 5.5 21.51929 11.7 7.3 6.o 25.01930 10.3 9.2 6.o 25.5

July£931 8.o 9.0 6.o

1 Report of Committee Appointed on the Recom?nendation of theLondon Conference, £931, Annex ui, in the Economist, August 22.1931, Supplement.

The distribution of the foreign investment of 23 milliard Reichsmarksin Germany in July 1931 was indicated, to be as follows:*SHORT-TERM

Public authorities o8Banks on current accounts, acceptance

credits and other liabilities 5.1

Other short-termReichsbank and Golddiskontbank credits o.6 8.o

LONG-TERMForeign issues 8.5Mortgage credits, etc. o.iGerman internal issues 0.4 9.0

OTHERShares and other holdings 4.0Real estate 2.0 6.o

23.0'Ibid., Annex IV. Investigations by the German government, madesubsequent to the report of the Wiggin Committee, show that thetotal commercial foreign debt, and especially the amount borrowed

at short-term, was larger in July 1931 than is indicated in the aboveestimate. The short-term loans were fixed at 13.1 milliard Reichs-marks and the long-term investments at 10.7 milliard. Other invest-ments were held to amount to 5.9 milliard. This would bring thetotal foreign capital in Germany in July 1931 to about 29.7 milliardReichsmarks and probably to about 32 milliard in December 1930.In February 1932 the short-term debt was estimated to amount to8.7 milliard, and the long-term debt, to 10.3 milliard (see Frank.furter Zeitung, November 1, 1931, p. Wirtschaft und Statistik, Vol.13, Nr. i6, Pp. 486—8).

ever, there is reason to believe that loans have madeup the bulk of the capital inflow.28

The committee appointed on the recommenda-tion of the London conference of July 20—23, 1931(generally known as the Wiggin Committee) esti-

• mated the investment of foreign capital in Germany• to be. as shown in Table 4. The foreign loans areestimated by the German Registry Office for ForeignIndebtedness to have been reduced between July1931 and October 1932 by milliard Reichsmarks,representing a reduction of 3.8 milliard in short-term credits and of 0.5 miliiard in long-term

29

Thus the inflow of foreign funds was very rapiduntil 1929, but afterward, just as in the case of do-mestic capital accumulation, the rate of increasedeclined. In 1931 and 1932 increase of foreign in-vestments gave way to net decrease.

The differential between German and foreignAngell, op. Cit., p. 192.

Reichsamt, Wirtschaft und Statistik, Vol. •Nr.pp. 273—6.

[84

interest rates was so continuously large that it suf-ficed to ensure a fairly steady volume of long-termloans from abroad (even during the recession of1925—26) until about the end of 1928. The remark-ably rapid upward trend of German economy in theperiod 1924—28 paralleled the uninterrupted andequally rapid increase in the capital supply madeavailable by domestic saving and long-term borrow-ing from abroad. The decline in 1929 of loans oflông maturity is attributable in part to Reichsbankpolicy of reducing foreign borrowing, but more tostrained conditions in foreign speculative markets.In 1930, however, loans of this type were again ex-tended in large amount to German economy.

The inflow of short-term credits manifests a muchcloser relationship with fluctuations of Germaneconomy. In 1925, reflecting high industrial produc-tion and heavy raw materials imports, and the con-sequent need for credits, the inflow of short-termfunds was maintained at the high level of approxi-mately 200 million Reichsmarks per How-ever, towards the end of the year, with the begin-fling of recession, production sank and money ratesdeclined. The inflow of short.term credits also felloff, and for a time during the first half of 19,26 therewas even an outflow. With the beginning of recov-ery was initiated another period of heavy inflow of

According to an estimate in Vierteljahrshefte zur Konjunkturfor-schung, 1929 (Institut für Konjunkturforschung), I, p. 4L.

85J

short-term funds from abroad, which continued al-most without interruption throughout 1927 and1928. During the first half of there was a rapidwithdrawal of foreign short credits; afterward fundsagain flowed into Germany. In 1930 and 1931, yearsof sharp decline in business activity., a succession ofdisturbances—to a large extent political—shook theconfidence of creditors. Heavy withdrawals of for-eign money began in the autumn of 1930; after sub-siding for a time, they were renewed in 1931, andfinally in the summer took on the character of a runon the German financial structure.31 Financial col-lapse was averted only by unusual measures of debtmoratorium and governmental control of economicactivities. The efflux continued, though at a slowerrate, during the remainder of 1931 and during 1932.

Germany was able in the post-inflation years tobegin rebuilding its own investments in foreigncountries. The Wiggin Committee estimated thatGerman investments abroad from the beginning of1926 to the end of amounted to approximately.9.7 milliard Reichsmarks.32

The short-term credits are estimated to have declined one milliardReichsmarks between the end of July 1931 and the beginning ofNovember (Frankfurter Zeitung, November i, 1931, p. 5).

Report of Committee Appointed on the Recommendation of theLondon Conference, 1931, Annex III, in the Economist, August 22,1931, Supplement.

The application of new capital supplies in the years 1924—28 (fromdomestic as well as foreign sources) is shown by the Institut für Kon-junkturforschung to have been as follows:*

[86

- -

PLANT AND EQUIPMENT COMMODITY STOCKS

AMOUNT IN PER- AMOUNT IN PER-

MILLIONS CENT- MILLIONS CENT-

OF KEICHS- AGE OF OF REICRS- AGE OF

MARKS TOTAL MARKS TOTAL

Industry 3548 13.3 5408 43.3Electric power, gas

and water plants 2596 9.7 6oTransportation 4379 16.3 —g8 —o.8

Agriculture 2402 8.9 239 1.9

Handicraft 705 2.6 566 4.5Retail trade 628 2.3 4437 35.5Wholesale trade 335 1.3 i88o 15.1

Residential construc-tion 5438 20.3

Public administra-tion 5677 21.1

Public welfare andsocial insurance 341 1.3

Other economicgioups 781 2.9

Total 26830 100.0 12492 100.0

Total investment in plant and equipment 26830 million ReichsmarksTotal investment in commodity stocks ... 12492

Increase in the gold stocks of the banks ofisSUe 2274

* Statistisches Jahrbuch, 1931, p. 536. (This table is taken fromInstitut für Konjunkturforschung, Vierteljahrshefte zur Konjunktur-forschung, Sonderheft 22, Kapitalbildung und Investitionen in derdeutschen Volkswirtschaft, 1924 bis 1928, Berlin, 1930).

Thus, of the capital supplies made available to German economyin 1924—28 something like 26 per cent went to industry; ig per centwas taken by commercial enterprises; 34 per cent went to the gov-ernments and public utilities; 7 per cent was used for agriculturalpurposes; and 14 per cent was invested in dwellings. About two-thirdsof the total was applied to extension of plant and equipment.

The above table gives some clue to the amount of capital placedin enterprises not subject to the profits criteria of private economy.Most of the items listed tinder public' administration, public welfareand social insurance, and residential construction, and possibly also

87]

d. The the Money Marketand the Credit System

•The urgent demands for capital, not only fromindustry and agriculture but also from the federaland local governments, the insufficiency of domesticsavings and the consequent importation of foreignfunds, made for almost continuous tension in theGerman money markets in the years here underreview. At times the peculiar credit situation maderesponsible banking control well-nigh impossible.This was especially pronounced in the relationshipbetween the inflow of foreign money and the policyof the Reichsbank. The central bank's attempts tocontrol domestic money markets were often frus-trated by the behavior of foreign funds. When thetransportation, belong in this category. The governmental policy ofliberally subsidizing construction has done much to diminishthe capital supplies to private industry and commercial en-terprises. It is possible that many of these funds have been investedunprofitably, from the viewpoint of private economy. Of course, in-vestments whose pecuniary returns do not cover interest expensesmay still be socially desirable.

There has probably also been much uneconomic application ofcapital in private enterprise, especially in the case of agriculture.Moreover, investment that from the standpoint of the national econ-omy is excessive was apparently widespread in manufacturing indus-try. Basking in the shelter of tariffs and cartels, numerous industrieshave been encouraged to expandS their productive capacity beyondall possible social needs (Cf. Nachkriegskapitalismus, published by theFrankfurter Zeitung, Frankfurt a.M., 1931, pp. 35—44; Angell, op. cit.,pp. 208—1 1, 250; Ernst Wagemann, Zinshöhe und Kapitalverteilung, inKapital und Kapitalismus, Bernhard Harms, ed., Reimar Hobbing, Ber-lin, 1930, pp. 356—73; Ausschuss zur Untersuchung der Erzeugungs undAbsatzbedingungen der deutschen Wirtschaft, Die deutsche Eisenerzeug-ende Industrien, Mittler & Sohn, Berlin, 1930, passirn).

[88

Reichsbank lowered its discount rate, the differen-tial between foreign and domestic rates was reduced,foreign money tended to flow out, and credit mar-kets were tightened rather than eased. When, on theother hand, it raised its rate, in order to check creditexpansion, the rate differential widened, foreignmoney tended to enter Germany and its policy wasagain rendered nugatory. On several occasions creditrationing was resorted to in order to effect a .restric-.tive policy. Also, the Reichsbank encouraged th.eformation of an official advisory council whosepose it was to check extravagant foreign borrowingsof the various municipalities and municipally-ownedenterprises. However, it appears that the net effectof these extraordinary measures was to shift demandfrom foreign to domestic markets, to raise moneyrates, and finally to make for increased private bor-rowing from abroad, much of it at short-term. Also,the Reichsbank was frequently embarrassed by thelending operations of governmental bodies. Further-more, large foreign purchases of German stockshares, especially in 1926 and 1927, seem to havebeen responsible for pushing up share prices tolevels at which stock'yields were far below the yieldsof first-class' bonds.33 This rise in stock prices wasundesirable in that it brought speculative erraticfunds into German markets and also absorbed exces-

"By the end of 1926 the average dividend return on shares listedon the Berlin Bourse . . . . was barely per cent. This compare4with an average interest rate on bonds of 714 per cent.". (Report ofthe Agent General for Reparation Payments, June zo, 1927, p. 71.)

89]

sive amounts of domestic credit. Early in 1927 theReichsbank forced a contraction in the use of crediton the stock market. Share prices fell rapidly, and,except for a slight revival in the spring of 1928,continued to decline until the exchanges were closedin July 1931.

Large domestic issues of securities throughoutthe period 1924—30 exerted heavy pressure on theGerman money markets. By the end of 1930 ap-proximately 21 milliard Reichsmarks of stocks andbonds had been absorbed within Germany. But theamount of potential offerings far exceeded the ab-sorptive capacity of the domestic markets. When-ever there were indications of easier credit condi-tions, the markets were immediately overwhelmedwith loan applications. Large and continuous de-mands for funds on the part of local governmentsprobably did much to add to the pressure. Some re-lief was afforded by the sale of securities in foreigncountries.

The relatively great volume of short-term loans,supported to a large extent by foreign funds, hasprobably been one of the greatest potential dangersfor the entire economy. The Institut für Konjunk-turforschung has estimated that the total volume ofoutstanding debts at the end of 1930 was approxi-mately 90 milljard Reichsmarks of which about 35per cent consisted of short-term credits. In 1913 thevolume of short-term debts was not more than 15

[90

per cent of the total debt.34 But not only was theproportionate amount of short credits much greaterthan before the War. Since the stabilization suchcredits have also been used to a large degree forpurposes that were formerly satisfied by long-termloans. In the years 1924—30 domestic capital sup-plies were inadequate to meet demands; neverthe-less, high interest rates did not reduce the pressurefor funds. Such rates attracted foreign lenders, but,because of political and economic uncertainties,many of these lenders were willing to extend creditsonly on the condition that they be subject to with-drawal at short notice. Thus a situation was createdin which large amounts of funds that nominallymight be recalled within a few months were usedfor fixed-capital purposes. It was a situation thatcould suddenly become acute and could threatenfinancial stability. "The fact that the (German)banks . . . . allowed themselves to be made thebuffers between industrial and agricultural debtors,bent on long investments, and the commercial andbanking creditors, wishing for a quick return oftheir money, has shaken their foundations com-pletely. It made them the chief sufferers, when, ow-ing to political and commercial panic, billions weresuddenly withdrawn."

Institut für Konjunkturforschung, Wochenbericht, Vol. 4, Nr. 26,September 23, 1931.

M. J. Bonn, Banking and Credit, in The Present Economic State ofGermany (Notgemeinschaft der deutschen Wissenschaft, Berlin, .1931),p. For an interesting account of the relationships between foreign

91]

The 'panic' was precipitated in the middle of1931 by the accelerated withdrawals of foreign bal-ances from the German banks, which led to a rapidincrease in domestic withdrawals of deposits andculminated in a general assault on the country'sbanking structure. The banks and stock exchangewere closed and vigorous measures of governmentalcontrol were invoked. The weeks subsequent to thepanic witnessed the gradual resumption of bankingoperations, extension of the Reichsbank's controlover foreign exchange, and inauguration of a mora-torium for the larger part of foreign creditors'claims against German industry. During the earlyautumn most of the domestic funds withdrawn dur-ing the crisis flowed back to the banks. But the for-eign credits withdrawn during 193 i—estimated toamount to 3 milliard Reichsmarks—did not return.The lending capacity of the German banks wasmuch reduced not only in consequence of loss ofresources during the cr.edit crisis, but also becausethe danger of renewed domestic withdrawals re-quired greater insistence than formerly that loansbe liquid.

During the months after the crisis, the Germanmoney markets—severed from foreign markets bycapital and the German money markets, see Angell, op. cit., pp. 195—205. See also Reports of the Agent General for Reparation Payments,.7925—1930, passim; Wilhelm Prion, Der deutsche Geld- und Kapital-markt seit der Stabilisierung, in Strukturwandlungen der deutschenVo!kswirtschaft, II, pp. (Bernhard Harms, ed., Reimar Hob-bing, Berlin, 1928).

[92

'standstill' agreements and by exchange control, andno longer subject to influence by surplus govern-ment funds—became closely dependent upon theReichsbank. The enormous losses of foreign and do-mestic funds, and' difficulties attending the liquida-tion of 'frozen' loans led to rigidity and tightness inthe financial markets. The Reichsbank sought tocounteract this by reducing its discount rate and bydirectly stimulating a general lowering of interestrates. Furthermore, the central bank undertook tothaw out German credits that were frozen in othercountries, sponsored agreements to facilitate thetransfer of payments arising in foreign trade, tight-ened its control of exchange, and encouraged theconversion of foreign short-term loans into long-term loans. During 1932, largely as a result of thesemeasures, the tension of the money markets relaxedand the confidence of debtors and creditors wasgradually restored.

2. INDUSTRIAL PRODUCTION

During most of the inflation period German in-dustry—stimulated by brisk demand and protectedfrom effective foreign competition—was active.Many new enterprises were founded, establishedfirms expanded their plants and there was a wideextension of cartels, trusts and combines. But therewas little incentive to make technical and adminis-trative improvements. Labor was cheap, competi-

93]

tion from abroad was not greatly feared and profitshad to be invested quickly in tangibles so as to pre-vent their dissipation.

After stabilization, however, the stimuli originat-ing with the currency depreciation disappeared andGerman industry was once more exposed to worldcompetition. Many enterprises that had prosperedduring inflation found adjustment to the changedsituation difficult. Administrative and financial, aswell as technical, reorganization was necessary. Theurgent need for 'rationalization' became an out-standing topic of the Private business wasassisted in the reorganization of its productive proc-esses by agencies, subsidized by the Reich, whichsought to extend rationalization into almost everybranch of economic life.

This more or less radical reorganization of Ger-man industry was especially pronounced from 1925to 1927. The process of correction and improvementeliminated unprofitable business units that had beenfounded during the inflation. Many aggregated con-cerns were disintegrated or were reorganized from'vertical' trusts into 'horizontal' combinations inorder to control the output of identical products

The Reichskuratorium für Wirtschaftlichkeit, the German centralrationalization bureau, defines rationalization as "the adoption andemployment of all the means of increasing efficiency which are fur-nished by technical science and systematic organization. Its aim is toraise the general level of prosperity by cheaper, more plentiful andbetter quality goods." Quoted by Robert A. l3rady in The Meaningof Rationalization: An Analysis of the Literature, Quarterly Journalof Economics, May 1932, p. 527.

[94

through the concentration of manufacture in ef-ficient enterprises.. Inability to carry the cost of reor-ganization, as well as technical and administrativedifficulties, led to many business failures. Germanindustry did not have capital sufficient to financerationalization alone. Foreign funds had to be se-cured. The larger and better-known industrial or-ganizations were able to secure the necessary capitalfrom abroad directly, but most firms were forced toseek foreign capital by way of the German moneymarkets; this tended to make these funds moreexpensive.

In spite of many difficulties, reorganization andreadjustment were carried on with characteristicthoroughness. The speed with which this was ef-fected was made possible mainly by the large andrapid investment of foreign capital in Germanyafter the stabilization. By 1928 the productive ca-pacity of the leading manufacturing industries wasprobably from 30 to 40 per cent greater than in1913. But the foreign trade possibilities had not ex-panded enough, nor was the home market suf-ficiently expansive to support so large a productivecapacity. The actual physical volume of industrialoutput of the leading manufacturing industries wasprobably "less than 15 per cent above the 1913 vol-ume." After the period of swift recovery and ex-pansion had ended, the lack of markets for therationalized German industrial system became star-37 Angeil, op. cit., p. 183.

951

tlingly clear. There was not only the burden ofexcess plant capacity, in the face of heavy capitalcharges, but also a pressure from labor for higherwages. Rationalization led to the elimination ofthousands of workers, and heavy unemploymentmade for growing social charges. Industries partici-pating largely in export trade were able to sustaintheir output better than those manufacturing goodschiefly for sale in domestic markets. "It is possiblethat the development in Germany from the reor-ganization of the currency in 1924 up to the end of1927, which was characterized by rising wages andretail prices and by a rapid rationalization and in-crease of productive capacity in manufacturingindustries, also produced a lack of balance whichcalled for subsequent adjustment, although the liq-uidation period was somewhat delayed by the goodbusiness conditions abroad in 1928 and in the firsthalf of 1929." 38

3. AGRICULTURAL PRODUCTION

In the post-inflation period German agriculturehas faced many difficulties. Problems of productiontechnique and finance have been made the harderbecause of the lack of fertile soils and the inertiaof habits and customs among the peasants. Withinthe new boundaries created by the Treaty of Ver-

League of Nations, The Course and Phases of the World EconomicDepression (Geneva, 1931), pp. 232—3.

[96

sailles more land has been cultivated, yet in theleading crops the yield per acre has generally beenless in the. post-inflation period than in the yearsimmediately preceding the War.8° That is, Ger-many's agricultural productivity has declined. Thisreflects not only the cultivation of inferior land, butalso the inability of agriculture to effect soil andequipment renovations and imprbvements.

Inflation deprived the German farmers of muchof their savings and stimulated investment in unpro-ductive tangible goods. Stabilization exposed themto the influences of world markets, and, despite pro-tective tariffs, the prices of German agriculturalproducts have tended to decline with world prices.The competition of the dairy and vegetable prod-ucts from Denmark and The Netherlands, whichhad progressed greatly in their technique of produc-tion and marketing during the War and post-Waryears, was especially difficult to meet. The farmerswere forced to borrow in an economy that was al-most bare of loan capital. Interest rates were exces-sive and many loans were contracted to supplynecessary working capital and funds to pay off olddebts and taxes.4° Although there had been a "para-

See Ch. I, Part A."Until the credit collapse of July 1931 mortgage loans were given

up to 40 per cent of the value of the farm and cost from 91/2 to toper cent. The short-term personal credits of the farmer were stillmore expensive." Max Sering, in The Present Economic State of Ger-many (study completed under the auspices of the Notgemeinschaftder Deutschen Wissenschaft, privately printed in Germany, iggi).

97]

lyzing accumulation of debt", much of it was in-curred merely in order to keep the existing systemin operation and did not add to the effectiveness ofthe latter. Furthermore, during the relatively pros-perous post-inflation years, several crops were infe-rior, and the larger crops from 1928 to 1932 wereharvested at a time of falling agricultural prices. Inthis period, also, the prices of non-agricultural com-modities were considerably more above their 1913level than the prices of agricultural products, thatis, the farmers have had to pay relatively high pricesfor industrial products. Thus the German farmershave been unable to save much. Indeed, in order tokeep from sinking more deeply into debt, they havebeen obliged to lower their standards of

The following table gives evidence of the price disparity underwhich German agriculture is suffering:

PERCENTAGE CHANGE FROM

AVERAGE OF 1925—29 TO

FEBRUARY 1933

Prices of goods sold by farmersPrices of agricultural products —45

Prices of goods bought by farmersPrices of agricultural equipment

(machines, fertilizer, fuel, etc.) —20

Prices of household furnishings —35

Prices of clothing —30

Interest rates —22

'Tariff' wages ± .0Social insurance + 7Despite the offsetting factors of reduced production costs and in-

creased agricultural output, the purchasing power of the agriculturalpopulation was much ieduced during the period 1928—32 (see Institutfür Konjunkturforschung, Vierteljahrshefte zur Konjunkturforschung,Vol. 7, Nr. 4, pp. 197—203).

[98

Credit difficulties have steadily increased with thedeepening depression in recent years. While theydid not materially interfere with the harvesting ofcrops in 1931 and 1932, they adversely influencedthe marketing of agricultural produce. High inter-est rates and uncertainty concerning agriculturalprices curtailed purchasing by cooperatives, middle-men and fabricators of foodstuffs, whowere inclinedto leave the storage of crops to the producers and todepend upon 'hand-to-mouth' buying. This addedanew to the burdens carried by agriculture and con-tributed to further price declines.

The efforts to extend 'rationalization' into agri-culture met with obstacles. The mechanization ofproduction made some progress, but it is difficult toapply to German cultivation, much of which issmall-scale, mixed and devoted to root crops. "Thecommercial side is also bad. In the main the prevail-ing methods of selling the crops and getting them tomarket are costly and inefficient, and the bookkeep-ing practices are antiquated." 42 The conservatismof the small farmers, who constitute the majority ofthe agricultural population, has also obstructedgreater reorganization. Although agricultural tech-nique and marketing methods have improvedwithin recent years, much opportunity for furthercost reduction still

The Govçrnment has made extensive attempts torelieve agriculture. It has imposed tariffs for the42 Angell, op. cit., Pp. 251—2.

99]

benefit of German producers, has made largeamounts of credits available to farmers and hasexerted pressure to reduce interest rates on agricul-tural loans. However, this relief has been effected ata high cost to the economy as a whole.

Angel!, writing in 1928, summarized the conse-quences of the agricultural difficulties as follows:"The failure to increase agricultural productionmeans that food prices are relatively high, while atthe same time Germany must continue to buy animportant part of her foodstuffs in other countries.

Nearly all of these commodities come in overheavy protective duties . . . and in most cases theresulting increase in import prices is also reflectedin domestic prices. Agriculture is thereby helpedsomewhat, but at a heavy cost to industry and com-merce. The high price of foods in turn raises thecost of living of the working classes, and this entailshigher money wages. Industrial costs of productionare forced up to correspond, and the exportingpower of the industries themselves is thus restricted,which is particularly undesirable in the present gen-eral situation of the country. Removal of the agri-cultural tariff would help the domestic price situa-tion, but the current depression in agriculture itselfwould then be seriously aggravated. At the sametime imports from abroad would be increased, anda further burden would then be placed on the al-ready strained international financial position."43ibid., 252—3.

{ioo

The very length and depth of the recession anddepression in German industry during the years1928—32 greatly increased the agricultural difficul-ties. In periods of less severe industrial depressionthe consumption of domestic farm products by thenon-agricultural population was not seriously re-stricted. Purchases of industrial products and of im-ported foodstuffs tended to be reduced before thoseof domestic foodstuffs. This, for instance, was trueof the depression in 1926. But after 1928, with thecontinual decline in German purchasing power, theimports of agricultural products steadily decreased.This meant that fluctuations in the demand forfoodstuffs must be more and more fully reflected inGerman agriculture. The sharp decline of consump-tion during 1931 and 1932 thereforeled to especiallydrastic reductions in the prices of agricultural prod-ucts. The consequent reduction of farmers' purchas-ing power was, in turn, an important factor inindustrial depression. Thus, difficulties peculiar toindustry and to agriculture in their interaction wereheavily depressive influences on the economy.

4. THE PRICE SYSTEM

There is evidence that the system of prices inGermany during the post-inflation period—espe-cially as reflected in commodity prices, wages andstock prices—has been characterized by much thesame cyclical pattern as have other aspects of the

ioi]

economy.. This pattern has been evident not only inprices subject to the influence of competing marketfactors but also in those subject to regulation bypublic and private organizations—namely, in theprices of certain industrial commodities and inwages.

Regulation of prices, particularly by industrialassociations, is far-flung and includes such impor-tant commodities as coal, iron and steel products,phosphates, chemicals, paper, glass, cement, porce-lain and electrical equipment. The extent to whichprice fluctuations are checked by the process ofprice fixing is difficult to judge. It has been esti-mated that in recent years regulation has applied toat least fifty per cent of the commodity price systemand to ninety per cent of the wage system.44 Thisrigidity is lessened by the widespread practice ofgranting rebates. Relatively high sensitivity tochanges in general business conditions and absenceof monopolistic fixation are manifest in the pricesof agricultural commodities, textiles, hides and im-ported goods.

The movements of the general index of whole-sale prices from the beginning of 1924 to the end"Ernst Wagemann, Einfuhrung in die Konjunkturlehre (Queue &Meyer, Leipzig, 1929), p. 63.

The general index (prepared by the Statistisches Reichsamt) is a

weighted arithmetic mean of re'ative prices on the base, 100.

It includes about 8oo price quotations relating to some 400 agricul-tural commodities, i uclustrial raw materials and finished products (seeChart i).

[102

of 1929 were within rather narrow limits. Duringmost of this period its fluctuations were between132 and per cent of the 1913 average. This waslargely a manifestation of the relative stability, ofraw materials and of semi-finished goods, which aresubject to considerable regulation. However, theindexes for the prices of agricultural products andfinished goods show relatively wide fluctuations.48Despite these differences in amplitude, there issimilarity in the cyclical movement the com-modity price groups during the period 1924—29.After the beginning of 1930 all price indexes showaccelerating decline of wide amplitude.47

In general, commodity prices sank during the pe-riod of depression and uncertainty of the first halfof 1924, but rose towards the end of that year andduring most of 1925. A downward movement set inagain late in 1925 and early in 1926 but soon gaveway to another rise, beginning, in the case of agri-cultural products, in the spring of 1926, and in thecase of raw materials and manufactured goods, inthe spring of 1927. The advance was continued, ora relatively stable level was maintained, until latein 1928 ,and eór.ly in .1929, when a 'long downwardsweep began. The decline was especially steep in thelatter half of i 931,: the general index fell approxi-

Compared with the price relationship of 1913, agricultural pricessince the stabilizatio.n have been continuously at a disparity with theprices of commodities. This has made for a shift inthe distribution of national income, to the disadvantage of agriculture.

See Chart t.

mately 40 per cent from March 1929 to January1932, nearly 12 per cent of this fall occurring dur-ing the last six months of Commodity pricescontinued to fall during 1932, although more grad-ually, and attained a fairly stable level early in 1933.Marked severity of decline is apparent in the pricesof agricultural products and raw materials; duringthe later period of depression, however, 'regulated'prices also dropped sharply.

The fluctuations of 'tariff' wages 48—the onlyavailable quotations indicative of the prices of laborservices—display a similar pattern. In 1924 and 1925regulated wage rates advanced rapidly. After a pe-riod of relative stability in 1926 (when the businessrecession reflected itself in a cessation of advance inwages rather than in absolute decline), another risebegan, which continued until about the end of1929. For about a year thereafter wages changed lit-tle, but in 1931 a sharp drop occurred, followed bya continuous gradual decline in 1932.

Comparison of the cyclical amplitudes of individ-ual prices and price groups subject to regulationwith those of 'free' prices and price groups showsthat the movements of the former were quite stable..during the years i 924—30 whereas the' latter fluc-tuated violently. In fact, there is evidence that the

"Wage rates in Germany are governed in large part by a comp1exnetwork of legally binding agreements, usually territorial within eachindustry, which are made between the unions on the one side andthe employers, or more commonly the employers' associations, on theother." Angel!, The Recovery of Germany, p. 273.

[104

cyclical swings of unregulated prices were more pro-nounced than before the War.49 It would seem quitepossible, as has been suggested, that regulation ofparticular commodity prices and of wages may haveled to an aggravation of the cyclical movements .innon-regulated prices and in physical quantities,such as employment.50 However, such influence asprice regulation may have exerted until 1930 waslargely diminished in later years, particularly afterthe middle of 1931, when the overwhelming forceof world depression made itself felt in abrupt de-clines in all commodity prices and in wages.

5. EMPLOYMENT

Mature capitalistic countries have long sufferedfrom cyclical fluctuations in employment. The in-crease in unemployment is one of the most seriousconsequences of business depression in general, andstress is often laid upon the need for 'stabilization'as a means of allaying this disturbance of economiclife.

In Germany since 1924, however, the blackshadow of a vast army of jobless people has dark-ened not only the periods of general depression butalso periods that might otherwise be called 'pros-perous'. Between 1924 and 1928 German economyno doubt effected a substantial recovery, measured

See Ch. III, Sec. d.See Ernst Wagemann, Einfuhrung in die Konjunkturlehre, pp.

:105]

in terms of production and trade, from the difficul-ties accompanying inflation. But a national econ-omy that year after year was incapable of assuringall that full employment means to each of its will-ing workers should not have been sweepingly char-acterized as 'rehabilitated'.

During most of the inflation period unemploy-ment was relatively slight. Only during 1923 did itassume really severe proportions. By the beginningof the post-stabilization period—that is, the winterof 1923—24—about one-fourth of all trade unionmembers were without work. In the succeedingyears, 1924—32, unemployment figures almost alwaysindicate highly unfavorable conditions in the labormarket.5' This was especially pronounced duringthe winter months—labor was very sensitive to sea-sonal influences. During the one hundred and ninemonths from April 1924 to April 1933 the totalreported number of unemployed workers fell below500,000 in only four months, fluctuating between500,000 and i,00o,ooo in twenty months, be-tween 1,000,000 and 3,000,000 during forty-ninemonths, and rising to between 3,ooo,ooo and 6,200,-ooo during anOther thirty-six months.5251 See Chart i.52 These figures represent Only the extent of unemployment as an-nounced by the labor exchanges. During the recession and depressionof 1928—32, however, the incentive for jobless workers to report to theexchanges was much reduced. This was a consequence of the grow-ing restrictions on unemployment benefits and of the declining prob-ability of securing employment through the governmental agenciesThere was, then, a steady increase in the number of unemployed not

[ro6

The labor market was, indeed, sensitive to cyclicalfluctuations. The periods of industrial revival andhigh business activity—that is, 1924—25 and 1927—2 8—were characterized by steady increases in em-ployment. Like0wise in recession and depressionperiods, particularly in that of 1928—32, employ-ment fell to very low levels. The amplitudes of thesecyclical fluctuations were very wide.

But, as indicated above, a wide underlying stra-tum of unemployment was chronic throughout theyears 1924—33, even during the periods of relativeprosperity. The trend of industrial production wasdefinitely upward from 1924 to 1928, but the trendof unemployment did not decline. Rather, it ap-pears to have risen too. This may be attributedpartly to the production of more goods with fewerworkers than formerly.

The steps taken by German industry soon afterthe currency stabilization for the purpose of reduc-ing costs of operation included a considerable re-duction of working staffs. According to estimatesmade by the Statistisches Reichsamt, at least twomillion workers were set free by this 'rationaliza-tion' movement alone between 1925 andImprovement in industrial technique and organiza-tion has often led to a rise in unemployment, butincluded in the official statistics. The Institut für Konjunhturfor-schung estimated that such 'invisible unemployment comprised ap-proximately 1,500,000 persons in the middle of 1932.

Quoted in Wirtschaftslage, Kapitalbildung, Finanzen (AilgemeinerDeutscher Gewerkschaftsbund, Berlin, 1930), p. io.

107]

the rationalization effected so thoroughly andquickly after stabilization overloaded the labor mar-ket to an extraordinary degree.

However, factors other than the rationalization ofindustry also made for chronic u,nemployment inthe post-inflation period. Large numbers of youngmen and women, born before the War at a time ofan especially high birth-rate, came to maturity dur-ing the years i 924—31 and so were added to thoseseeking work. Furthermore, the War and the infla-tion led to increases in the industrial working popu-lation from such unusual causes as immigrationfrom the ceded German territories, the reduction ofthe army and navy, the impoverishment of manypersons who had formerly lived on pensions andinterest incomes. Calculations of the Institut fürKonjunkturforschung indicate that the number ofpersons eligible for gainful employment during theyears 1926—30, in thousands, was as follows:

BEGINNING OF TOTAL OVER i8 C8ANGE DURING

YEAR YEARS OF AGE YEAR

1926 28,301 +5°S1927 28,804 +4661928 29,270 +4371929 29,707 +3601930 90,067 +404

Thus, from the end of 1925 to the beginning of1930 the working population increased nearly twomillion. If the estimate that the process of rational-

Quoted in the Report of the Agent General for Reparation Payments,May 21, 1930, p. 297.

[io8

ization added two million to the total of unemployedis accepted, it is apparent that it was desirable dur-ing this period to provide employment for roughlyfour million workers. A comparison of the unem-ployment figures for 1925 and 1929 would indicatethat most of these workers did find employment.That is, the growing productivity of Germany ac-tually prevented unemployment from rising to evenhigher levels.

Furthermore, it is believed that the years 1933—36 will be characterized by an absolute reduction inthe number of those seeking employment. The In-stitut für Konjunkturforschung has estimated thatduring those four years the year-to-year increase inworking population will give way to decrease—a re-flection of the low birth-rate during the World War.This should for a time tend to reduce unemploy-ment. However, the ability of the economy to ab-sorb the nation's labor power will determine theactual level of unemployment.ESTIMATE OF FUTURE WORKING POPULATION1 (in thousands)

BEGINNING OF TOTAL OVER i8 CHANGE DURING

YEAR YEARS OF AGE YEAR

1930 30,067 +4041931 30,471 +3581932 30,829 +4061933 31,235 —20

'934 31,215 —147

1935 —200'

.1936 30,868 —169

1937 30,699 +731938 30,772 +34'

1 Ibid., p. 297.

109]

Thus, the acute problem of unemployment inGermany during the years 1924—33 was more thana reflection of sharp cyclical fluctuations. The cyc-lical movements of unemployment were superim-posed upon a deep stratum of unemployment thatwas present throughout this period. The basicallyhigh level of unemployment seems to have beenlargely the result of structural changes, particularlyin population and in industrial technique and or-ganization. However, it is likely that these 'struc-tural factors' will become less important in thedecade 1930—40.

6. FOREIGN TRADE AND THE BALANCEOF INTERNATIONAL PAYMENTS

During the seven years, 1924—30 inclusive, Ger-many's foreign indebtedness grew to somethingover 28 milliard Reichsmarks. German investmentsabroad amounted to 9.7 milliard. The net inflow ofcapital therefore was approximately 18 milliardReichsmarks. At the same time, German economyreceived 4 milliard for services, shipping, etc.;paid interest of 2.5 milliard upon its commercialdebts; increased its holdings of gold and foreign ex-change by 2.1 milliard; made reparation paymentsto the extent of 10.3 milliard, and paid for a surplusof imports over exports amounting to 6.3 milliard.

Table 5 may give some idea of the role of capital[110

TA

BL

E 5

GE

RM

AN

Y'S

BA

LA

NC

E O

F IN

TE

RN

AT

ION

AL

PA

YM

EN

TS,

192

4-19

32'

(in

mill

ions

of

Rei

chsm

arks

)19

2419

2519

261927

1928

1929

1930

193!

1932

Inco

me

Capital inflow

3669

3222

1641

4646

6958

4459

3678

3817

729

Commodity exports

7810

9546

10677

iiii8

12627

13632

12175

9733

5814

Services (shipping, insurance

trad

e,re

para

tion

serv

ices

, etc

.) 2

274

462

532

645

672

712

538

436

Col

d ex

port

s47

656

574

510

192

Inte

rest

inco

me

325

320

340

335

382

400

400

300

200

Tot

al12

078

14026

13246

17318

20639

19713

1698

315

939

7338

Out

goCapital outflow

750

87

1034

854

2852

1991

3195

6494

1299

Commodity

impo

rts

9626

1199

098

8414078

1391

213

676

10617

6955

4777

Reparation

paym

ents

281

1057

1191

1584

1999

2501

1699

990

162

Gol

d im

port

s12

5556

662

412

293

134

572

Inte

rest

expense

i66

326

513

68o

945

1200

1400

1500

1100

Tot

al12078

14026

13246

17318

20659

19713

i6g8

315939

Yea

rs 1

924—

25,Statistisches

Jahr

buch

, '93

',.pp. 534—5; years 3926—32, Statistisches

Jahr

buch

, 193

3, p

p.498—9.

BS

urpl

usof

ser

vice

s.8E

xpor

t sur

plus

.

imports in Germany's international balance of pay-ments. During the period of large net capital im-ports, that is, from the beginning of 1924 to the endof 1929, the commodity import balance was on thewhole very large. Only in the early part of 1926—a time of depression—and in the last months of 1929was there an export surplus. From 1930 to 1933 anexport balance was persistent.

Before the War, when the international financialposition of Germany was strong, its foreign tradewas characterized by an import surplus. In the pe-riod 1908—13 this amounted to an annual averageof about 1,400 million marks. Its surplus incomefrom foreign investments and services enabled itnot only to pay for a surplus of imports over exportsbut also to invest more funds abroad. However, inthe post-inflation years of recovery (when the in-come from foreign investments was practically gone)a large inflow of foreign loans balanced the tradedeficit and reparation payments.

The fluctuations in the volume of commoditiesimported, especially raw materials, reflected quiteclosely the changes in general internal economicconditions. This relationship between imports anddomestic economy is to be explained largely by thedependence of German industry upon foreignsources for essential raw materials.

Fluctuations in exports must be explained on adifferent basis. The sudden rise in exports duringthe depression of early 1926 undoubtedly reflected

[112

a certain amount of necessitous selling and provedto be merely a temporary exaggeration of the grad-ual tendency of exports to increase. That exportsshowed no tendency to decline at this time is alsoan indication of the essentially local nature of theGerman recession and depression of 1925—26. Fromthat time until the autumn of 1927, German econ-omy was passing from depression to great businessactivity, and a quickened domestic market gaveGerman merchants little incentive to seek out newforeign markets. From the later months of 1927until the autumn of 1929 exports expanded quitecontinuously. The diminution of business at home,together with the greater exporting capacity derivedfrom large production, encouraged the developmentof export trade. Such an expansion was made pos-sible by the increased power of foreign markets tobuy—reflection of the economic activity prevailingin many countries. In the years 1930—32, with theadvent of world-wide depression, export oppOrtuni-ties became fewer, and German sales abroad de-clined. Resistance to German goods in world mar-kets became increasingly pronounced duringand early 1933, largely as a result of rising trade bar-riers and increasing competition from countrieswith depreciated currencies. However, owing to acombination of circumstances peculiar to the de-pression, Germany's surplus of exports over importswas large during 1930—32. Prices of raw materialsin world markets fell relatively more than prices of

113]

finished goods. This price differential was of greatadvantage to German exporting manufacturers, whodoubtless made strenuous efforts to maintain their.sales in foreign markets. Furthermore, the severityof the depression in Germany drasticallythe demand for goods from abroad. The surplus inthe three years 1930—32 from commodity exportsand services to foreigners, estimated to total nearly6.7 milliard Reichsmarks, was thus largely a concom-itant of depressive circumstances.

[ii4

review of economic conditions, 1924-1933 - the … two review of economic conditions, 1924—1933 a....

Documents