Re: Brescioni Torroni and The Great German Inflation

[Paul Davidson <pdavidson@xxxxxxx>]

At 11:56 PM 5/9/02 -0400, you wrote:

3.      One query.

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?

Anything is possible if you add enough assumptions-- An important
(monopoly, monpsony) agents can shift demand curve and/or supply curves--
by definition of monopoly and monopsony  from any position if there
is a difference in the behavior of such agents.



> 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?. 

No the shifting out of the D curve is due to inflationary expectations
raising the future quasi-rents expected (in nominal terms) relative to
the present nominal  cost of capital.
Paul 

>  
>
>
>
> <<< 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
> 523 SMC
> Knoxville, Tennessee 37996-0550
> work phone: (865) 974-4221
> fax: (865) 974-4601/  (865) 974-1686
> home phone and fax (865) 692-0802

Paul Davidson

Editor, JOURNAL OF POST KEYNESIAN ECONOMICS

Economics Department - University of Tennessee

523 SMC

Knoxville, Tennessee 37996-0550

work phone: (865) 974-4221

fax: (865) 974-4601/  (865) 974-1686

home phone and fax (865) 692-0802