Re: Brescioni Torroni and The Great German Inflation

["Esteban Perez" <eperez@xxxxxxxxxxxx>]

1.	In her review of BT´s book (1938) Joan Robinson also remarked that the facts did not support Bresciani-Turroni´s QT approach. ¨Professor Turroni is a strong adherent of the Allied or the Quantity theory of Money.¨and ¨the stabilization was no doubt a firm a courageous act of policy, but it provides no argument to support the view that inflation at an advanced stage, can be checked by limiting the quantity of money¨.


2.	Money is a link between the present and the future and as you wrote ¨this link can exist only if there is a continuity over time of contractual commitments denominated in money units. It is the synchronous existence of money and money contracts over an uncertain future which is the basis of a monetary sistem whose maxim is ´money buys goods and goods buy money; but goods do not buy goods¨ (Money and the Real World, 1972, p. 142). The relationship between wage rigidity and money´s liquidity premium is also  clear.

3.	One query.

In Davidson and Kregel (1984),  p.146 under indexation an increase in spot prices shifts inwardly the flow-supply function and the total supply function. This raises forward prices inducing an ouward shift in the demand curve. Money wages increase and the increase in forward prices raises the marginal efficiency of durables. The increase in D by raising prices would under indexation raise money wages and shift again the flow-supply curve...

In 1981 (in Kredit und Kapital) , you point out however (if I recall correctly) , that under expectations of higher inflation, lenders increase their demand for those assets that can keep pace with inflation, i.e., for which there is a well developed spot market. Yet durable assets that are used in the production process, because of their high carrying costs do not have a well developed spot market. Wealth is diverted to non-productive uses, unemployment increases... 	

Is it posible that D shifts instead inwardly, due for example to the weight or importance certain agents, or reflecting a shift away from durable assets used in the process of production that outweighs the increase in money wages. If D shifts inwardly then widespread indexation need not lead to an uneding inflation spiral.  Is it a possibility? and what exactly are your assumptions underlying the outward shift of D.Are you assuming a process of capital accumulation and if so isn´t Graham (1930) and not Bresciani Turroni the relevant ecoomist for the German episode?.



<<< Paul Davidson <pdavidson@xxxxxxx>  5/ 9  1:06p >>>
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?.
>----------------------------------------------------------
>
>
><<< 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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