1. Most varied and contradictory opinions were expressed in Germany and elsewhere regarding the effects which the depreciation of the mark exercised on German economy.
It was often affirmed that only the inflation made it possible for German industry to continue to produce, there being the exceptional and interesting spectacle of extraordinary activity and prosperity in Germany at a time of general crisis in business in other countries, and especially in some of those who were victorious in the Great War.
To this view others objected that it was a question only of an "apparent prosperity," which concealed the real and continual loss of capital, the disintegration of productive apparatus, the increasing poverty of many classes of society, and the symptoms of a crisis, which, after having remained latent for a long time, burst forth with unparalleled violence in the last months of 1923.
In reality, from the Armistice onwards the economic and social situation of Germany remained extraordinarily complex. Light and shade, alternating phases of depression and prosperity, a strange combination of disintegrating forces and constructive energy, almost unforeseen changes of the situation, and apparently inexplicable contradictions characterize post-war German economy.
Before analysing the influences which monetary inflation exercised on German production we must discuss some theoretical considerations. On this question, as on many others, there is a striking contrast between the economists and the practical men. The latter have always asserted that the increase of the quantity of money, provoking an increase in prices, stimulated production, favoured exports, strengthened the productive equipment of the country and gave birth to new industries, which were put in a position to meet foreign competition. In short,
• Part of this was originally published in Rivista Banearía (1924) and part in Economía (1925).
it exercised influences mainly favourable to the general economy of the country, even if some classes with fixed incomes undeniably suffered from the effects of monetary depreciation.
2. To the theory, according to which the increase of the quantity of money stimulates production—a theory supported, as is well known, by Hume—the classical school is opposed. "However abundant may be the .quantity of money or bank-notes," wrote Ricardo,* "though it may increase the nominal prices of commodities; though it may distribute the productive capital in different proportions; though the Bank, by increasing the quantity of their notes, may enable A to carry on part of the business formerly engrossed by B and C, nothing will be added to the real revenue and wealth of the country. B and C may be injured and A and the Bank may be gainers, but they will gain exactly what B and C lose. There will be a violent and an unjust transfer of property, but no benefit whatever will be gained by the community."
Combating the opinion of Attwood, who contends that the increase of prices provoked by the new issues of paper money stimulated every producer to maximize his efforts, Mill observed that the expectation, on the part of traders, of still higher real profits (that is the command of a greater quantity of goods) must necessarily be illusory "since, all prices being supposed to rise equally, no one was really better paid for his goods than before."!
3. The classical theory, according to which the increase of the issues of paper money cannot provoke an increase of the total production of the country, was expounded, in a form which may be called final, by Wagner in his work on "Russian Paper Money." The results of Wagner's research are summarized in this proposition: "Paper-money is capital from the point of the private trader, but it is not so for the national economy."J
Total production depends on the quantity of concrete means of production existing at a given moment, and not on the quantity of monetary capital. If new money is created, which enters into competition with the money previously circulating, for the purchase of the
• "The High Price of Bullion," Works, edited by McCulloch, p. 286.
t Principles 0} Political Economy, edited by Ashley, London, 1926, p. 550. An interesting analysis of Attwood's idea is made by R. G. Hawtrey, Trade and Credit, pp. 64 and following. + Op. cit., p. 16.
existing means of production or consumption goods, then the consequence will be a rise in prices. If paper money is issued in a quantity larger than the amount of metallic money which formerly circulated, and for which the paper money is substituted, its sole effect is to direct the employment of existing resources into different channels. This change in the direction of production explains the variations and apparent expansions of production which were often observed after the issue of paper money. The entrepreneurs who came into the possession of newly issued paper—these were usually producers of war materials—attracted to themselves a part of the existing real resources, but this caused a shortage in other industries, which were therefore obliged to limit production. The quantity of goods existing at the time of the issues remained unchanged and therefore it is clear that the greater purchase of the means of production by one set of people must correspond to a reduced purchase by another set of people. The apparent prosperity of industry is only partial. It is true that new firms are established, but the articles which they make only take the place of other goods which would have been produced in normal conditions. To the prosperity of some regions or great towns, to which flowed the new paper money, there corresponds a depression in other places, just as prosperity of some social classes corresponds to the poverty of others.
These are the ideas of Wagner, which are not sul antially modified by certain observations with which he tempered a little the rigidity of the theory. He observes that total production could increase, following the issue of paper money, only in the case in which new firms, created by the inflation, were more productive than those whom the inflation had caused to restrict their output. It may be said that this happened, but, adds Wagner, "it may also be said that the contrary happened."* Repeating a discussion by Mill, Wagner observes moreover that if in the country where the paper money is issued gold is still in circulation, that gold is displaced gradually by the paper money and exported abroad in exchange for raw materials, machines, foodstuffs for the working classes—in short, in exchange for material goods which increase the available resources in the country with paper money. In another case the issue of paper money can provoke, indirectly, an increase of real resources and hence of total production, that is in the case of a country which has paper money and succeeds in inducing foreigners to accept notes in payment of goods. Therefore, according to Wagner,
the Russian policy which prohibited the exportation of paper money was not very wise. The two cases described by Wagner also applied to Germany during the depreciation of the mark.
4. The theory, according to which monetary inflation provoked not an increase but only a change of direction in economic production, was generally accepted by economists. It is true that Thornton had already expounded a contrary opinion, studying the problem from a dynamic point of view and using in evidence the slow adaptation of salaries to the increaseof prices;* but the authority of later economists prevailed, and Thornton's important discussions were forgotten.
After the World War it was noticed that in some countries with depreciated currencies unemployment was very slight, while countries with stable or less depreciated currencies were troubled by a vast amount of unemployment. Now, the number of workers employed being an index of the total volume of production, it seemed clear that, contrary to the opinion prevailing among economists, inflation acted as a stimulus to production. There appeared to be further proof of this conclusion, when it was noticed that some countries suffered much unemployment after monetary stabilization.
II. "FORCED SAVING" IMPOSED ON SOME CLASSES BY THE INFLATION, AS THE SOURCE OF THE NEW RESOURCES
5. In practice, passing from one given level of prices and wages, corresponding to a given quantity of money, to a higher level, time is required, and during this interval some very interesting phenomena develop.
Even the case here examined reveals one of the fundamental characteristics and, if we like, one of the defects of the classical theories. Ricardo and Mill do not take account of the period of transition from one position of equilibrium to another. Now, periods of transition, as recent monetary experiences have shown, can be very long, and to neglect them and simply banish them into the category of "disturbing" circumstances is to wander too far from real life.
Let us suppose, following Bohm-Bawerk, that all the working capital
* "It must be admitted that, provided we assume an excessive issue of paper to li:t up, as it may for a time, the cost of goods, though not the price of labour, some augmentation of stock will be the consequence: for the labourer, according to this supposition, may be forced by this necessity to consume fewer articles, though he may exercise the same industry" (An Enquiry into the Nature and Effects of the Paper Credit of Great Britain, London, 1802, p. 263).
of manufacture is spent in wages. With a money capital of 100,000, for example, they pay in a given period for the work of 1,000 men who in their turn are able to buy 1,000 units of goods. The capitalists and other classes of consumers have, let us say, 20,000 units of money with which they buy 200 units of goods. (Let us suppose, for simplicity, that the velocity of circulation of money equals unity.) If, now, the money capital of the manufacturers becomes 120,000, thanks to new bankers' credits or to profits derived from governmental inflation, and wages increase only, let us suppose, from 100 to no, the manufacturers could absorb into their service, besides the 1,000 men previously employed, 91 other individuals in search of work. The total sum of the wages is offered by the workers in the market for goods where, as formerly, there are 1,200 units of goods, and where the workers newly employed enter into competition with the old workers and other classes of consumers. The new distribution of goods will be different from the former. The prices being raised from 100 to 116-7 the group of old workmen will secure 942 • 8 units of goods (instead of 1,000: in other words their real income has diminished); the other classes of consumers will be able to buy 171-4 units instead of 200; and the newly employed workers will take 85-7 units. The share enjoyed by the entire working class is increased, to the detriment of that obtained by classes with fixed incomes.
6. In the preceding example we have supposed that at the moment at which the issues of paper money are increased there exists a certain number of unemployed workers. If, instead, the entire supply of labour is occupied—a hypothesis too rigorous and unreal, because there is always a reserve of the forces of labour, constituted by the numbers of workers' families, by small proprietors and small rentiers who would become labourers if the rise of the cost of living seriously diminished their incomes; besides, a man's working hours can be prolonged by means of "overtime"—the phenomena are more complicated, but the result is not substantially different. If the real wages of the worker diminish as a result of the inflation, it means that for the reproduction of the "subsistence fund" for the working classes, it is- sufficient to employ a smaller sum of productive energies than before; that is, a part of the productive energies of the country can be employed in other ways, for example, in the creation of new and more efficient "means of production," which at a future time will make possible an ampler production of consumption goods. Hence prices will fall once more and the real wage of the workman, which has been temporarily depressed, will rise once more.
Then if we consider the relations between paper inflation and the means of production from a static point of view, as did the classical economists, it is certain that inflation does not increase the quantity of machines, industrial buildings, etc., which exist at a given time in a country. But from the dynamic point of view the conclusion is different. Thanks to the "forced saving" which paper inflation, by provoking an increase of prices, imposed on the workers previously employed, and on the classes of society with fixed incomes, it is quite possible that the total economic production is increased.*
This obviously presupposes that the wages are at the outset above the "minimum," and that the working classes are not willing to, or cannot effectively, oppose the reduction of real wages.
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