Brescioni Torroni and The Great German Inflation

[Paul Davidson <pdavidson@xxxxxxx>]

At 11:40 PM 5/8/02 -0400, you wrote:

3.      I have the 1972 edition of Money and the Real World. I am assuming that you address the stabilization (the Rentemark) in the postcript to the 1978 second edition: Why Money Matters.
Yes . There I wrote:

        

As
long as the future is uncertain the state of expectations may be liable
to rapid unpredictable changes and hence the economic system is
potentially very unstable. Recognizing the mercurial possibility of the
economic system, man has, over time, devised certain institutions and
rules of the game, which, as long as they are operational, avoid such
catastrophes by providing a foundation for a conventionality of belief in
the stability of the system and hence in the quasistability of the state
of expectations. It is the existence of spot and forward markets, money,
and concurrent seriatim time-length money (forward) contracts and their
enforceability, as well as the expectations that these institutions will
continue to operate with continuity or `orderliness' for the foreseeable
future, which limits the magnitude of the elasticity of expectations@,
and keeps real world economic fluctuations in bounds. If these
institutions break down, as they did for example in Germany between
I922-1923, a modern monetary economy may exhibit violent instability. For
most developed interdependent production economies, however, where
production requires considerable calendar time and therefore contractual
commitments for the hiring of resources must occur a long time before
everyone can possibly know how valuable the outcome will be, such
instability will mean the breakdown of production flows. This occurrence
is so costly to society that most members of the economy will cling to
the hope that even a crippled monetary system can be resuscitated. This
hope maintains some stability in states of expectations, but if the
situation deteriorates so that almost everyone is completely uncertain as
to the meaning of contractual commitments then a catastrophic breach in
the continuity of the system is inevitable.

        

In his
classic study , BrescianiTurroni showed that although Germany had
suffered from double digit inflation since almost the beginning of World
War I, the inflation really began to accelerate at the end of I922.' The
period from the end of I922 to the end of I923 was different in that it
`was characterized by an enormous rise in nominal wagerates . . . due, in
great part, to the influence of the trade unions . . . the system of
fixing [indexing] wages became general" throughout Germany. The cost
of living index which had been calculated monthly before I922 was
calculated twice a month in I922, and weekly in I923 as more wages were,
geared to the index. But even that was found to be insufficient as each
increase in money wages pushed up domestic prices. By mid 1923 a daily
index was substituted by most industries as wages were paid daily. But
that only accelerated price increases, so that by the end of 1923 a daily
index of forecasted prices was being used. The result was an accelerating
inflation rate of over 400 per cent per month.

        

        

In
this historical period indexing failed either to limit inflation or to
stabilise and maintain the real wages of workers. In I920 and I921,
before widespread indexing, Bresciani indicates that the real income of
workers increased, while it decreased during I922 and 1923. Moreover,
real wages fluctuated wildly from month to month during the period
of
indexed labour contracts. For example, the real wages of coal miners
varied from highs (in January and May I922, March and October 1923) which
were approximately 80 per cent of 1913 real wages to lows that were about
half of the prewar real wage (in October and November I922, January, July
and November 1923)."

        

This
historical episode of widespread indexing can be viewed as simply a form
of incomes policy. Unfortunately it is the worst form of an
antiinflationary incomes policy since it will keep wages and prices
stable only if they are already stable and there is nothing which alters
expectations of their remaining stable.' Anything which touches off
expectations of inflation can, under the indexing scheme of Friedman's,
lead to unending inflation and wildly fluctuating real incomes. In other
words, under indexing, thinking that inflation will occur in the future
can make it so !

        

        

This
bootstrap theory of inflation under indexing can be readily analysed via
a Marshallian analysis of the interaction of the market period (spot)
prices and shortrun flow supply (forward) prices analysis that has been
developed in Chapter 4.  

[What the adoption of the rentemark did was void all previous index
contracts ? New contracts in rentrmarks were NOT index ? so despite the
fact that the growth in the rentenmark in 1924 exceeded the growth rates
of the old currency, inflation stopped almost dead in its tracks.... Sll
these statistics can be gleaned from Brescioni's study-- so that the
facts he provides does not support the quantity theory of money. ]

Paul

4.      In your article with Kregel (1980) Keynes´s paradigm...you use the German episode to illustrate the effects of widespread indexation: ¨it is the worst form of anti-inflationary incomes policy since it will keep wages and prices stable only if they are already stable and there is nothing which alters expectations of their remaining stable¨.

5.      Kaldor in the Scourge..also addressed the problem of indexation. He focussed not only on the extent to which indexing is applied but also on the indexation interval. ¨the faster the inflation, the more prices and incomes become indexed to inflation and while the spread of indexing tends to accelerate inflation considerable, it also shortens the lag of adjustment of prices to costs...the smaller the lag, the weaker are the forces that keep the wage/price spiral going¨ Thus hyperinflation are like great plagues of the past they burnt themselves out. P. 61. 1986.
Any comments on Kaldor?. Is there a limit to instability?.
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<<< Paul Davidson <pdavidson@xxxxxxx>  5/ 8  8:57a >>>

For the best history of the period and the switch to the Rentemark
see  Bresscioni-Torroni 's book on The Great German Inflation.  If this is
to difficult to get you can read about what this period meant and how the
Rentemark ended the great German inflation in my book MONEY AND THE REAL
WORLD., 2nd edition.

Paul

Paul Davidson

Editor, JOURNAL OF POST KEYNESIAN ECONOMICS

Economics Department - University of Tennessee

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