5. A shortage of capital was not felt for a long time in Germany. The entire war period was characterized by great liquidity in the money market. It continued in 1919, 1920, and 1921, as may be read in the reports of the great German banks. In those years it was easy for entrepreneurs to procure capital by issuing shares and debentures, in order to enlarge their plant, and there was no scarcity of liquid resources.
A symptom of the abundance of capital in the German market was that for a long time German entrepreneurs, on the whole, felt no need of foreign loans—in marked contrast to what happened after the monetary stabilization. "The inflation," observed a banker during the congress of German bankers in 1925, "gave industry and commerce the opportunity to do without foreign loans." "So long as loans could be obtained in Germany which amortized themselves, thanks to the depreciation of the mark, there was no recourse to foreign credits. A firm who had debts abroad, which had to be repaid in full, was in an inferior position compared with his rivals who had contracted debts at home."f
Also, German entrepreneurs became creditors abroad during the inflation, since the equivalent in foreign money of part of the goods exported was left abroad.
f Löb, Auslandskredite und Auslandsbeteiligung in der deutschen Wirtschaft (paper read at the Congress of Bankers in September 1925).
6. So long as the workers adapted themselves to the fall in real wages, which was a result of the inflation, entrepreneurs experienced no "shortage of capital." The flow of subsistence goods for the working classes was very much reduced; but it was sufficient to maintain the workers during the productive process.
So long as there is great unemployment, the workers generally accept the fall in the rate of real wages; but when unemployment ceases the position of the workers is strengthened and they demand higher wages. But when the workers demand that real wages should return to the previous level, before the production of consumption goods can, thanks to improvements in the producing apparatus, be increased in proportion, the flow of consumption goods becomes insufficient and a shortage of capital appears.
The German financial papers agree that the symptoms of a shortage of capital were apparent from the second half of 1922. It was then that the resistance of the workers to the reduction in real wages (which was the result of the depreciation of the currency) became more and more insistent. The working classes sought to re-establish the earlier level of real wages and to keep it stable. The profits which entrepreneurs derived from the inflation decreased. They began to experience difficulties in financing their businesses. It is well known that from the beginning of the second half of 1922 there was an increasing demand for bank advances for entrepreneurs; a demand which the commercial credit banks, whose deposits were continually falling, were incapable of satisfying. The shortage of capital began to be felt, with the consequence that production was limited.*
It was then that the Reichsbank intervened by extending enormously its short-term loans. Thanks to these loans the shortage of capital was temporarily evaded. Employers were able to pay higher money wages; but the prices of all kinds of consumption goods increased immediately, and the attempt of the working classes to increase real wages came to nothing. They then obtained a fresh rise in money wages; there followed a new expansion of credit and a further rise of prices and of money w;jges. The consequence was a formidable increase in the volume of Reichsbank loans. It was observed in Austria as well as in Germany that the inflation proceeded with quickened pace especially after the so-called "system of the index" was applied to wages, i.e. after the workers had obtained money wages which varied with the index number oi the cost of living.
* Diskonto-Gesellschaft, Report for 1022, p. 10.
The last phase of the German inflation—from the summer of 1922 till November 1923—was notable for the way in which periods of capital shortage alternated with periods when—as after the occupation of the Ruhr—enormous issues of paper money created the appearance of abundant capital.
7. It was after the stabilization of the mark and the monetary reform of November 1923 that the shortage of capital became really very serious. "Stabilization" meant the end of the process which had provided the entrepreneurs with abundant financial means, at the expense of the owners of liquid capital, house-owners, small shareholders, salaried workers, and wage-earners. Once stabilization had been achieved, it was impossible to continue the financing of business by "forced saving." "Voluntary" saving, which was extremely rare, became the sole source of "capital."
A German financial paper rightly said how after the monetary reform "finance became the most difficult business of a commercial enterprise, whilst during the inflation it was the easiest." Profits from the inflation having disappeared, German entrepreneurs had to moderate the pace of expansion of their firms, to abandon great financial plans, and to rely entirely on themselves. It was no longer possible for them to free themselves from debt by repaying depreciated money. Numerous entrepreneurs had bought, in apparently favourable conditions, firms which, when the currency was stabilized, proved unproductive because of defective technical apparatus or commercial organization.
8. I will now elucidate some of the principal causes which made the shortage of working capital appear almost immediately.
(a) In the last phases of the inflation entrepreneurs had granted continual increases in nominal wages, which the giddy depreciation of the mark always rendered illusory. But after the inflation those increases became effective; in fact, one of the immediate and most typical consequences of the monetary stabilization was the sudden rise in the purchasing power of the working classes.
Another important circumstance was the rise in legal rents. As is well known, in 1923 expenditure on rent had practically disappeared from family budgets. After the stabilization legal rents were raised rapidly, so that towards the end of 1924 they had reached 70 per cent of their pre-war level. This rapid increase must obviously have had reactions on wages. Reading the German economic papers one discovers that the payment of wages constituted one of the principal financial difficulties in which were involved the many firms struck by the crisis.
(b) As has been shown, in the last phase of the inflation, interest rose to very high rates; it obviously contained a high premium against the future depreciation of the currency. Real interest was low or more often negative. But after the stabilization interest pressed heavily on business because, the psychological influences of the inflation still continuing, even rates of interest on new debts remained very high for some time.
(ic) After the monetary stabilization the fiscal burden of industry increased enormously and suddenly. During the inflation the rate of taxes had been incessantly raised. Actually, thanks to the rapidity of the depreciation, the rates were ineffective and the fiscal burden was reduced almost to zero. Furthermore, entrepreneurs profited in many ways from the depreciation, because the levy on wages, the processing taxes, etc., were turned over only slowly into the State Treasury. In the autumn of 1923 the inflation was practically the only form of taxation and it weighed almost exclusively on capitalists, workers, and private and Government salaried employees.
But after the stabilization the high direct taxes became effective. Also new extraordinary taxes were introduced with the object of rapidly restoring the equilibrium of the National Budget. From the extreme position dtplored during the inflation, things went to the opposite extreme; the fiscal burden became disproportionate to the contributive capacity of German business. For 1925-26 it amounted to a good 11 milliard gold marks, taking account of the Reich, State, and Local Government taxes; that was very much higher than the pre-war figure.
The rise in the public receipts also had consequences of a political character, i.e. the financial power of the Reich was reinforced. In a certain sense it may be said that the financial strength of the Reich increased as that of the great groups of industrial firms decreased.
Possessing a bigger income, the Reich, State, and Local Governments could, during 1924 and 1925, considerably increase the salaries of officials, civil and war pensions, contributions to assurance societies, unemployment subsidies, and other expenses of a social character.* According to official figures the total annual expenditure (Reich, State,
• In particular the "beneficial" expenditure of Local Governments increased considerably. Calculations made for sixty-seven Rhine municipalities show that expenditure per inhabitant rose from 10-20 marks in 1924 to 12-34 marks in 1925 (in 1914 it was 3 ■ 17 marks).
and Local Government) for salaries and pensions amounted in 1925 to about 4,600 million gold marks—very much more than that spent during the inflation.
(d) To the heavy fiscal burden which was imposed on industry immediately after the monetary stabilization, it is necessary to add new charges of a social character (social insurance and unemployment contributions). According to official estimates, in 1924 they amounted to 1,692 million marks. The employers and the workers paid about a half each. In 1925 the charge was raised probably to 2,220 million marks.*
iv. THE POST-STABILIZATION FALL IN THE DEMAND FOR INSTRUMENTAL GOODS 9. Owing to the insufficiency of working capital, industries were obliged to reduce their demand for instruments of production very much. This decline in the demand for instrumental goods was one of the fundamental characteristics of the situation in Germany after the monetary reform. To take a random example from the many referred to in the German Press: "The Phönix company has suspended the construction of new plant owing to lack of money. Only essential repairs are now being carried out."
Moreover, the various State departments restricted or suspended orders for materials for new plant. The sudden fall in the demand for the means of production meant crises in the engineering, iron and steel, and coal industries. It was these groups of industries which bore the brunt of the stabilization crisis.
At the same time, for reasons formerly explained, there was an increase in the demand for goods for final consumption by the working classes, salaried workers, capitalists, and house-owners, who had a greater purchasing power than before.
As a result of the change in demand there appeared simultaneously an over-production of instrumental goods and an under-production of goods for direct consumption.
The most obvious sign of the former phenomenon was the accumulation of stocks of unsold coal and iron.| In some months of 1925 the
• "Deutsche Wirtschafts und Finanzpolitik" (in the Veröffentlichungen des Reichsverbandes der deutschen Industrie, 1925, p. 45).
t The Bericht des Reichskohlenverbandes for 1924-25 contains some interesting particulars about the coal crisis and its causes. It shows especially a fall in production, the closing down of mines, and the dismissal of workmen. The daily output, which amounted to 470,000 tons in January 1925, was reduced to 417,300 tons in May of unsold stocks of coal and coke represented an immobilized capital of about 150 million gold marks. In the struggle for the acquisition of minerals which there had been during the inflation, more attention was paid to the quantity than to the quality of production. A competent judge writes on this point: "The prosperity of the industries consuming coal, which had been dependent on the inflation, caused rapid development of all the mines. Thousands of new workers were employed and millions of gold marks were invested in new plant. Not even Hugo Stinnes saw through the veil raised by the inflation; the artificial prosperity deceived him about the future of coal; indeed, all his declarations and forecasts expressed an unconditional confidence, almost fanatical, in the future of coal." Overtaken by the stabilization crisis the mining industry found itself heavily burdened by firms, with very small returns, which produced coal of poor quality which was therefore no longer saleable. Between the end of 1923 and October 1925, 63 mines in the Ruhr area were closed.
On the other hand, stocks of goods for direct consumption were very scarce at the beginning of 1924, as an official enquiry showed. The replacement of these stocks, either by increased home production, or by using foreign credits (see below) was one of the first concerns of industry.*
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