Exchange prices and production in hyper inflation germany 1920 1923

Publications of the International Finance Section of the Department of Economics and Social Institutions
in Princeton University
Walker Foundation
E. W. KEMMERER
Director of Research

EXCHANGE, PRICES, AND PRODUCTION
IN HYPER-INFLATION: GERMANY, 1920-1923



EXCHANGE,
PRICES, AND PRODUCTION
IN HYPER-INFLATION:
GERMANY, 1920-1923
BY

FRANK D. GRAHAM
Professor 0} Economics
in Princeton University

NEW YORK

Russell & Russell


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FOREWORD

I

HIS study is the first of a series to be published under the
auspices of the International Finance Section of the Department of Economics and Social Institutions in Princeton
University. This section was established as a memorial to
the late James Theodore Walker, Princeton 1927, with funds largely
provided by members of Mr. Walker's family. The function of the Section is research, advanced teaching and public service in the field of
international finance.
Since German reparations furnish perhaps the most important present
problems in this field it seemed fitting that this volume on the German
currency debacle in the immediate post-war years—a phenomenon closely
associated with reparations—should inaugurate the series. It is the
intention of the Section on International Finance to develop the fundamental rather than the ephemeral aspects of the subjects with which it
deals and the student of monetary problems will find matter in the
theoretical and statistical chapters of this book which will, I am sure,
be of permanent interest to scientific economists. At the same time the
careful analysis which Professor Graham has made of the effects of
inflation on German national economic life should engage the attention
of men of affairs. The rapidity of German recovery since 1924 has frequently been remarked. If, as Professor Graham suggests, the patient
was not as sick in 1924 as appearances indicated, and had in fact
slowly been improving since the end of the war, prevailing ideas should
be readjusted along two lines. In the first place, it is improbable that the
relative prosperity of Germany since 1924 is the flask in the pan that
many people have been disposed to regard it and, in the second, prosperity, though real, has not been as rapid as surface phenomena would

lead one to believe. The synthesis of these conclusions points to a tempered optimism for the future.
E. W. KEMMERER.



PREFACE

C

LIFFE-LESLIE once remarked that in social matters the greatest scientific progress is made when economic disorders raise
vexing questions as to their causes. In the study of social
phenomena, disorder is, it is true, the sole substitute for the
controlled experiments of the natural sciences. But it sometimes happens
that, in the midst of disorder, events move so rapidly that we are not able
properly to observe them; disorder may be excessive even to the most
detached of scientists. The course of inflation in Germany in the first
post-war quinquennium had so much of this character that it has seemed
to many to be incapable of throwing any light upon monetary problems.
This most striking of monetary experiences has, in consequence, evoked
a minimum of scientific curiosity.} In spite of the fact that statistics—
those notes of process on which the social scientist must so heavily rely—
were for some phenomena abandoned in Germany in this period and for
others are open to grave objection on the score of accuracy, it has seemed
to me that such an attitude implies an unwarranted surrender in the face
of difficulties which might with perseverance be surmounted. This book
is an attempt, therefore, to discover what actually happened in Germany
and either to bring the observed phenomena within the fold of accepted
theory or else so to modify that theory as to give it a more catholic
character. The actual course of events during inflation has not merely
an historical and scientific interest but is of considerable practical importance. Germany's present position as a nation with heavy international obligations has led to apprehension, both within and without

the Reich, as to the future in international finance. The fears of such
German competition as may issue out of the debtor status'may be dismissed as but thinly-veiled mercantilism but the question as to the possibility of ultimate transfer of the large sums involved in reparations
and interest payments must, perhaps, be treated with more respect. The
ability of the German economy to provide, within Germany, the funds
required, is, on the other hand, no longer seriously doubted. It is hoped

1
cf. Foreign Banking Systems, H. P. Willis and B. H. Beckhart, editors, Chap.
VIII, "The Banking System of Germany," Paul Quittner, Henry Holt and Company,
New York, 1929, p. 632, where it is declared that it would be useless to try to
connect the development of the German currency system from 1919 to 1923 with
any theories of money.


viii

PREFACE

that the sequel will throw some light on the disappearance of the latter
doubt as also on the prospect of future transfers undisturbed by any
serious economic friction.
The subjects toward which inquiry has been directed involve the
status of Germany as a national unit only. Practically no attempt has
been made to deal with such changes in the distribution of wealth and
income among German nationals as arose out of inflation. These changes
were of great, perhaps of extreme, significance, but justice to this topic
requires the work of a social philosopher rather than that of a mere
economist.
The present book owes much to the financial and clerical assistance
provided by the International Finance Section of the Department of

Economics and Social Institutions in Princeton University, and to that
given by the John Simon Guggenheim Memorial Foundation, under the
auspices of which the author spent part of the years 1928 and 1929 in
Germany. It is based very largely on official German statistics as published by the Statistische Reichsamt and the Institut fur Konjunkturforschung. These statistics, for the period studied, are, no doubt, far from
perfect,2 but nothing is gained by attempting to go behind them and
there is no reason to suppose that such alternative sources as are available are at all superior.2 The hope is cherished, perhaps not without
justification, that such errors as are involved do not vitiate the conclusions reached. The immense nominal magnitudes attained by all
-monetary phenomena in Germany in the inflation-time tend to dwarf the
influence of even very considerable imperfections in the statistics. I am
far from supposing, nevertheless, that the results obtained are to be
taken as clearly proven and I trust that the reader will be no more credulous. They are merely hypotheses.
The publications of the Statistische Reichsamt which have been principally used are: Statistisches Jahrbuch fur das deutsche Reich, Statistik des
deutschen Reichs, Wirtschaft und Statistik, Monatliche Nachweise iiber
den auswartigen Handel Deutschlands, Zahlen zur Geldentwertung in
Deutschland 1914 bis 1923, and Germany's Economy, Currency and
Finance.3 Sparing use has been made of forms of statistics already avail2
In the matter of mark exchange rates, for instance, sizable differences developed, in the later stages of inflation, between the Berlin and other markets.
These were due to the obstruction of arbitrage transactions. At the time that
this occurred, however, the Berlin rate was alone of much significance. The
Berlin rates have therefore been used throughout. In the matter of prices the
alternative sources are the indices of the Berliner Tageblatt, the Frankfurter
Zeitung, and the Industrie- und Handelszeitung.
8
The latter compilation was published in English, as well as in German, for
use by the Committees of Experts of the Reparations Commission.


PREFACE

ix

able in these sources and, where tables are given in the text, they are, in
nearly all cases, the result of computations from the original data.
To get these data into usable and significant form was a very laborious task and, more than that, it called for ingenuity and technical skill
of a high order. To Miss Mabel S. Lewis, research assistant in the
International Finance Section at Princeton University, I am indebted
for all of this work. It was rendered not only with unremitting diligence
but with a cheerfulness which, in view of my frequent vacillations, was
extraordinary. Miss Lewis has also drawn all the charts.
I can but briefly express my appreciation of the unfailing courtesy and
assistance which came to me from many other sources. I should like,
however, to mention specifically Dr. Ernst Wagemann and the staff of
the Statistische Reichsamt, especially Dr. Otto Nathan; Dr. Hjalmar
Schacht and the staff of the statistical division of the Reichsbank; Mr.
F. W. Allport, American Commercial Attache in Berlin; Mr. J. H.
Riddle, formerly of the staff of the Agent-General for Reparations Payments ; the former German undersecretary of State, Julius Hirsch; Professor Melchior Palyi of the Handelshochschule, Berlin; Dr. Carl
Kottgen, Director-General of the Siemens-Schuckertwerke, Berlin ; Dr. E.
W. Schmidt of the Diskontogesellschaft, Berlin; Dr. Ernst Jdckh of the
Deutsche Hochschule fur Politik, Berlin; Mr. Magnus W. Alexander of
the National Industrial Conference Board, New York; and Sir Arthur
Salter and the staff of the League of Nations Library in Geneva.
The manuscript was read by Mr. H. C. Kuthe and by Professors
F. W. Fetter and C. R. Whittlesey of Princeton University and Chapter
VII was read by Professor J. G. Smith of the same institution. They are,
of course, by no means necessarily committed to the views here expressed
but their comments were most valuable. My wife has devoted much of
her time and attention to the work of revision, has criticized generously,
and has brought many obscurities into the realm of the intelligible.
Princeton, New Jersey
October 25, 1930.

F. D. G.



CONTENTS
PAGE

Foreword by E. W. Kemmerer
Preface

v
vii

PART I. HISTORICAL BACKGROUND
CHAPTER

I. Introduction
II. Factors in Inflation
III. Business Regulation under Inflation

3
16
78

PART II. THEORY

IV. Price and Exchange Rate Theory and the Facts in Germany
V. Price and Exchange Rate Theory and the Facts in Germany
(continued)

97
127

PART III. COURSE OF INFLATION STATISTICALLY MEASURED

VI. Price and Exchange Rate Theory and the Facts in Germany
(concluded)
VII. Price Relationships under the Influence of Inflation
VIII. Price Movements and Foreign Trade

153
174
209

PART IV. EFFECTS OF INFLATION ON THE GERMAN ECONOMY

IX.
X.
XL
XII.
XIII.

General Effects of Inflation on National Income
Gains from the Sale of Money Abroad
Losses on Foreign Trade in Merchandise and Capital Goods
Business Activity and Production
Conclusion

Bibliography

241
250
260
277
321
329

Index
Part II will be of most interest to the student of monetary phenomena
and Part III will appeal, perhaps, to the statistically-minded. The general reader may prefer to omit these parts and this may be done without
much loss of continuity.



LIST OF TABLES
PAGE

I.

Expenditures, revenues other than from short-term
borrowing, and deficits of the Reich; 1914-1919
II. National debt of Germany, issues of paper currency, index of wholesale prices, and index of
dollar exchange rates against paper marks; 19141918
Treasury bills discounted by the Reich, issues of
paper currency, index of wholesale prices, and
index of dollar exchange rates against paper
marks; 1919-1923
IV. Revenue and expenditure of the Reich; 1920-1923

7

7

III.

V. Discounted Treasury bills outstanding and issues
of Reichsbank notes; 1919-1923
VI. Reichsbank holdings of Treasury bills, ratio of
such holdings to total Treasury bill discounts, and
ratio of Reichsbank note issues to holdings of
Treasury bills; 1919-1923
Reichsbank discount of commercial bills, total bills
discounted, and note issues; 1922 and 1923
VIII. Commercial bills discounted by the Reichsbank as
a percentage of total note circulation; 1914-1923
IX. Bank deposits and money in circulation in Germany ; 1913 and 1920-1924
X. Authorized monetary circulation other than stablevalue issues of 1923; 1913-1923

13
40-1
46

59~6o

VII.

XL
XII.

Gold value of total circulation in Germany on the
basis of purchasing power parities; 1918-1923
Relation of index of wholesale prices to index of
total circulation and resulting rough index of rate
of monetary turnover; 1918-1923

63
64
67
71
101

105-6


LIST OF TABLES
PAGE

XIII.

XIV.

XV.

Purchasing power pars of twelve European inconvertible paper currencies expressed as percentages
of the exchange rate of each of the currencies
against the dollar; 1919-1923
Index numbers of the volume of circulating
medium, of internal and external prices, and of
exchange rates; 1914-1923

118-20

1

5^>-9

Index of the dispersion of prices in Germany;
1920-1923

176

Index numbers of wholesale prices of imported
goods, of industrial raw materials, of exported
goods, finished goods, domestic goods; retail
prices; wages of unskilled workers, of skilled
workers; prices of stock exchange securities; housing rentals; all expressed as percentages of the index number of general wholesale prices; 19201923

178-9

Index numbers of wholesale prices of imported
goods, exported goods (maehinery), and domestic goods, expressed as percentages of the index of
external prices; 1920-1923

183

XVIII.

Index numbers of wholesale prices of imported
goods, industrial raw materials, and finished

goods, expressed as percentages of the index of external prices; 1920-1923

194

XIX.

Index numbers of general wholesale and retail
prices expressed as percentages of the index of external prices; 1920-1923

198

Index numbers of wages of skilled and unskilled
workers, and of cost of living, expressed as percentages of the index of external prices; 1920-1923

203

Response of imports and exports, by classes, to
major movements in the price ratio index

234

Germany's balance of payments, 1919-1922, together with floating obligations to foreigners outstanding at the beginning of the period

257

XVI.

XVII.

XX.

XXI.
XXII.


LIST OF TABLES
PAGE

XXIII. Actual and potential payments on imports, actual
and potential receipts on exports, potential payments and receipts as a percentage of actual, and
the actual return on foreign trade as a percentage
of the potential return; 1922 and 1923
XXIV. Number of German joint-stock and limited-liability companies in 1913, 1919. 1922, 1923
XXV. Number of bankruptcies in Germany 1913, 19191923
XXVI. Percentage of trade union workers unemployed;
1913, 1920-1923
XXVII. Index of physical volume of production of agricultural products; 1920-1927
XXVIII. Index of physical volume of industrial production; 1920-1927
XXIX. Production of coal and lignite, iron ore, pig-iron
and ferro-alloys, and steel in Germany; average
of 1909-1913, annually 1920-1925
XXX. Index of combined railroad traffic and traffic on
inland waterways in Germany; 1920-1924
XXXI. Comparative indices of traffic on German railroads
and inland waterways; 1913, 1920-1924
XXXII. Index number of combined traffic on German railroads and inland waterways compared with index
numbers of production; 1920-1924
XXXIII. Link relatives of the indices of combined traffic on
railroads and waterways, of industrial, and of
agricultural production

XXXIV. Indices of per capita consumption of certain food
products compared with indices of production;
1920/21-1924/25
XXXV. Expenditures for profit-yielding installations contained in the ordinary budget of the German state
railway (amortization) and their share in the total
working expenses; 1913/14, 1920-1923
XXXVI. Weight (in tons) of certain classes of rolling stock
on German railroads; 1921-1926

272
279
280
281
285
287

293
297-9

300

301

302

305

308
309

LIST OF TABLES
XXXVII. Construction of new buildings other than dwellings; 1913, 1920-1924

311

XXXVIII. Number of machines owned by German farmers;
1906/07 and 1924/25
312
XXXIX. Number of workers employed in various industries; 1913, 1919, 1922, 1923
313
XL. Unemployment among trade union members, by
months; 1922 and 1923
317


LIST OF CHARTS
PAGE

I.

II.

III.

IV.
V.

VI.

VII.

VIII.

IX.

X.
XI.

Import of certain raw materials of German industry
and export of products manufactured therefrom; 1922
and 1923
27
Revenue of the Reich, 1920-1922, in paper marks and in
gold marks calculated on the basis of the wholesale price
index
39
Percentage ratio of taxes to total revenue, and monthly
average index of dollar exchange rates (1913 = 1 ) ;
April 1920 to November 1923
42
Treasury bills and their distribution; January 1920September 1922
61
Gold value of total circulation in Germany (millions
of dollars) on the basis of purchasing power parities;
1918-1923 (logarithmic and arithmetic scales)
102
Indices of volume of circulating medium and of exchange rates in percentage relation to the index of
wholesale prices (October 1922 = 100 in each case) ;
October 1922-November 1923

113
Purchasing power pars of the currencies of Sweden,
Switzerland, Spain, Norway, and the Netherlands, expressed as percentages of dollar exchange rates; 19191923
121
Purchasing power pars of the currencies of Czechoslovakia, Great Britain, and Denmark, expressed as percentages of dollar exchange rates; 1919-1923
121
Purchasing power pars of the currencies of Belgium,
France, Italy, and Germany, expressed as percentages
of dollar exchange rates; 1919-1923
122
Indices of volume of circulating medium, of internal
and external prices, and of exchange rates; 1918-1923 160
Indices of volume of circulating medium, of internal
and external prices, and of exchange rates, by periods;
1919-1923
161


:viii

LIST OF CHARTS
PAGE

XII. Price and circulation indices in the War-period
XIII. Cycles in the movements of internal prices and in the
volume of circulating medium; 1918-1923
XIV. Cycles in the movements of exchange rates and internal
prices; 1918-1923
XV. Indices of classified prices expressed as percentages of
the index of general wholesale prices; 19201923

XVI. Indices of import, export, and domestic commodity
prices expressed as percentages of the index of external
prices; 1920-1923
XVII. Cycles in the movements of prices of imported and of
domestic commodities; June 1918-June 1922
XVIII. Cycles in the movements of prices of imported and of
domestic commodities; June 1922-December 1923
XIX. Indices of prices of imported goods, industrial raw materials, and finished goods expressed as percentages of
the index of external prices; 1920-1923
XX. Indices of wholesale and retail prices expressed as percentages of the index of external prices; 1920-1923
XXI. Cycles in the movements of wholesale and retail prices;
1920-1923
XXII. Indices of wages of skilled and unskilled workers, and
of cost of living, expressed as percentages of the index
of external prices; 1920-1923
XXIII. Cycles in the movements of the wages of unskilled
workers and of cost of living, 1920-1923
XXIV. Relative monthly volume of import of certain classes of
commodities with a downward trend; May 1921-December 1923
XXV. Relative monthly volume of import of certain classes of
commodities with no decided trend in either direction;
May 1921-December 1923
XXVI. Relative monthly volume of import of certain classes
of commodities with an upward trend; May 1921December 1923
XXVII. Relative monthly volume of export of certain classes
of commodities with an upward trend; May 1921December 1923

162
169
169

180

184
191
191

195
199
201

204
206

217

218

219

221


LIST OF CHARTS
XXV11I. Relative monthly volume of export of certain classes of
commodities with no decided trend in either direction;
May 1921-December 1923
XXIX. Selected charts showing the best, indifferent, and worst
inverse correlations of the relative monthly volume of
import of certain classes of commodities with the price
ratio index; May 1921-December 1923

XXX. Selected charts showing the best, indifferent and worst
direct correlations of the relative monthly volume of
export of certain classes of commodities with the price
ratio index; May 1921-December 1923
XXXI. Selected charts showing the best, indifferent, and worst
inverse correlations of the relative monthly volume of
import of certain commodities with the price ratio index;
May 1921-December 1923

223

229

231

236

XXXII. Selected charts showing the best, indifferent, and worst
direct correlations of the relative monthly volume of
export of certain commodities with the price ratio index; May 1921-December 1923
237
XXXIII. Correlation of movements in the ratio of actual to
potential return on foreign trade with the movements in
the price ratio index; 1922 and 1923
274
XXXIV. Link relatives of the index numbers of agricultural production, industrial production, traffic on railroads and
inland waterways, and aggregate real income of the industrial population; 1920-1923
316

PART I
HISTORICAL BACKGROUND



CHAPTER I

INTRODUCTION
§ SCOPE AND CHARACTER OF GERMAN INFLATION

G

ERMANY, in common with other warring countries, departed from the gold standard at the outbreak of hostilities
in 1914. On November 20, 1923, the German paper mark,
after having fallen to an infinitesimal fraction of its former
value, was made redeemable in the newly introduced rentenmark at a
trillion to one.1 The rentenmark, after a short but honorable existence
during which its gold value remained substantially stable at that of
the original gold mark, was supplanted by the present standard reichsmark.2 The latter is also of equal gold value with the German pre-war
currency unit and is convertible, in practice, into dollar exchange at the
old rate.3
The regime of inconvertible and depreciating paper money thus ran
for a little less than a decade. The progress of depreciation was, however, very unevenly distributed over these ten years. During most of the
war-period the exchange value of the mark did not fall greatly from par
1
A trillion according to American and French nomenclature, a billion according to English and German. American usage will be adhered to throughout. The
following notation will help to keep the reader clear if he is accustomed to the
English and German usage.

NUMBER
1,000,000
1,000,000,000
1,000,000,000,000
1,000,000,000,000,000
1,000,000,000,000,000,000
1,000,000,000,000,000,000,000
I ,OOO,OOO,OOO,OOO^XX3,OOO,OOO,OOO

AMERICAN
AND FRENCH
NOMENCLATURE

Million
Billion or Milliard
Trillion
Quadrillion
Quintillion
Sextillion
Septillion

ENGLISH
AND GERMAN
NOMENCLATURE

Million
Milliard
Billion
Thousand Billion
Trillion

Thousand Trillion
Quadrillion

2
The rentenmark was supplanted only in its capacity as the standard currency
unit. Rentenmarks still circulate alongside the standard reichsmark but are
gradually being retired.
3
1 gold mark = 23.82 American cents.

4.198 gold marks = $1.00.


4

HYPER-INFLATION: GERMANY, 1920-1923

with the dollar and if, when the issue of the conflict was no longer in
doubt, it sank heavily, it was still quoted in December 1918 at more
than twelve American cents. During the peace negotiations, however,
German exchange continued to fall fast. This downward movement persisted till February 1920 when the descent was checked at just a shade
below one cent per mark, that is, at about 1/24 of its pre-war value.
A quick recovery then set in which carried the rate to nearly 3c in May.
Though there was some reaction from this figure relative stability at a
level of from 1^2 to 2c was attained in June. By early 1920 the period
of immediate adjustment to post-war conditions may therefore be considered to have been completed. Not until September 1921 did the value
of the mark again fall below one American cent and as late as June 1922
it still sold for about 1/3 of a cent. From then onward the decline was
vertiginous till the final collapse in November 1923. At the latter date
forty-two billion (42,000,000,000) marks were worth but a single

American cent. Without a complete ouster of the currency concerned, no
corresponding depreciation appears in the long and varied annals of
monetary history. Never before had a paper money fallen at so rapid a
rate over such an extended period. In 1913 the mark was solidly based
on gold; in 1923 its value was, as one writer has said, something more
ridiculous than zero.
Not only in magnitude of depreciation was the German currency
experience unique. Its quality was also peculiar. In this respect the most
informative comparison is not so much with other times as with other
countries at the same time. Many of the phenomena which occurred in
Germany were, it is true, more or less closely paralleled in neighboring
countries the currencies of which were undergoing contemporaneous depreciation. But the degree of deviation of exchange rates from the course
of internal prices was much greater in Germany than elsewhere and this
resulted in domestic business being carried on at a price level very
largely divorced from that of the outside world. The extent of governmental intervention in external commercial and financial transactions,
as well as in the domestic markets, was greater than in any other country
organized on a capitalistic basis. Upon no other country was foreign
tribute assessed on anything like the same scale and no other country was
forced to pay any sizable sum on this account. The difficulty of securing foreign or domestic loans in any measure adequate to the need found
no parallel in any other land with the possible exception of the Succession States and Russia. Finally, the will to check depreciation in
Germany was much weaker than in other countries since the Germans
were convinced, by no means without justification, that improvement
in the public finances would lead to still more severe exactions on the