23. But the fluctuations in the demand for capital are not sufficient to explain the German crisis. When the demand for capital slackens because of the blackening of the prospect of profits, the rate of interest, other things being equal, must fall. If, instead, it rises, as happened in Germany during 1928 and 1929 (see Diagram xxvm), it may be said that some changes also occurred in the supply of capital, and that it is necessary to take account of them in order to have a complete picture of the causes of the economic depression.
In the past years the supply of capital had come from two sources: (a) internal saving; (b) foreign loans, both long term and short term.
The indices we possess show that during 1928—after the effects on the capital market of the events of May 13th, 1927, formerly discussed had been overcome—issues of new securities were maintained at a high level, and that deposits at the savings banks increased considerably. From the examination of the balance sheets of joint-stock companies it seems probable that in 1928, despite the rise in wages, the "internal saving" of firms did not appreciably decline.
In the following years there was a slackening in the flow of saving, which was the consequence rather than the cause of the depression. And at the same time there were noted some important qualitative changes in the supply of capital. The lack of confidence in the internal political situation of Germany provoked a contraction in the supply of capital for long-term investments. Capitalists preferred to hold their savings available in the form of bank deposits on demand or at short notice, contenting themselves with a low interest rate. Thus there came about a very big divergence between interest rat;s for long-and short-term loans. To that must be added the influence of the flight of German capital, which was caused by various psychological crises mentioned a little earlier. Also, because of the critical financial situations of the Reich, the States and the local authorities, these bodies were often obliged to have recourse to bank credits, thus reducing the volume of credit available for private business and helping to harden the rate of interest.
24. But the changes which occurred in the supply of foreign capital were particularly important.
From 1925 onwards the influx of foreign capital into Germany was subject to the influence of two kinds of causes: (a) the variations in the need for capital by German business; (6) the situation of the international markets and other conditions of a psychological and political character, which made foreign capitalists more or less willing to invest their money in Germany.
In Diagram xxix the movement of the rate of interest for short-term loans •t Berlin is compared with the movement of the rate of interest for loans of the same kind in the international markets, i.e. at New York and London.*
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