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Fiscal News and Inflationary Expectations in Germany after World War I

Published online by Cambridge University Press:  03 March 2009

Steven B. Webb
Affiliation:
Assistant Professor of Economics at the University of Michigan.

Abstract

Inflation in Germany from 1919 to 1923 resulted from the accumulation and the anticipation of government deficits. Inflationary expectations depended therefore on fiscal news. Allied demands for reparations, the occupation of the Ruhr, and domestic revolts were important negative news and led to increased inflation. Tax reforms and eventually the end to government deficits were important positive news and ushered in periods of price stability. Political events were fiscal news as they changed the chances for the government to balance the budget.

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Articles
Copyright
Copyright © The Economic History Association 1986

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References

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10 Standard errors are in parentheses. The equation is estimated with a recursive CochraneOrcutt procedure.Google Scholar

11 See Tables I and 2 for sources. All variables are measured at or interpolated to the end of the month.Google Scholar

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14 High-powered money equals currency plus nongovemment deposits at the Reichsbank.Google Scholar

15 Actually the nominal deficit depended on lagged rather than current prices, making the nominal deficit predetermined. Webb, Steven B., “Government Revenue and Spending in Germany, 1919–1923,” in Feldman, Gerald et al. , eds., Inflation and Reconstruction in Germany after World War I (Berlin, 1986).Google Scholar

16 The model here is not linear, and therefore there is no analytic solution for rational expectations. Equation 2 is linear in logs, but equation 5 is linear without logs. See also Blanchard, Olivier J. and Kahn, Charles M., “The Solution of Linear Difference Models under Rational Expectations,” Econometrica, 48 (07 1980), pp. 1305–11.CrossRefGoogle Scholar

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18 This shows up in the monthly figures from which Table I was calculated. Accelerations of inflation also lowered real revenue, but in absolute terms not by as much as spending; Webb, “Revenue and Spending.”Google Scholar

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24 The treaty required the Allies to settle on a total reparation bill by May 1921.Google Scholar

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29 SOctober 1919 = (D/P – H) r = (172/6.2 – 6.5) 0.038 = 0.81.Google Scholar

30 SFebruary 1920 = (178/17.0 – 6.5) 0.038 = 0.15.Google Scholar

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35 Sources to Table 2.Google Scholar

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38 Data from Witt, “Tax Policies, Tax Assessment,” p. 466, and Webb, “Revenue and Spending.” In 1921 and 1922 the share of income-tax revenue from assessments was higher, but this may be partly because the inflation raised people's nominal incomes faster than the Reichstag indexed the brackets.Google Scholar

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41 The goldmark was a unit of account defined by the gold value of the prewar mark. Since the United States stayed on the gold standard, 4.2 goldmarks equalled a dollar. Except for inflation in the United States and deviations from purchasing power parity, a goldmark was worth a mark in 1913 prices. Although the interest rate was specified at 5 percent, the total interest charges remained indefinite, because the Reparation Commission retained discretion to decide when interest charges would begin on a major portion of the debt–the “C-bonds.”Google Scholar

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45 The actual transfer took place a year later.Google Scholar

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51 The increased deficit in the first quarter of 1923 (see Table 2) resulted from the stabilization that began in February, not from the invasion in January. Webb, “Revenue and Spending.”Google Scholar

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54 Vossische Zeitung, February 11–15, Finanz- und Handelsblatt.Google Scholar

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59 Flood and Garber, “Monetary Reform.”Google Scholar

60 From July 7 to November 15, changes in Flood and Garber's index of process consistency of the currency is correlated –.19 with changes in the log of the real value of currency. This relation has the predicted sign but is statistically insignificant (R 2 = 0.037 for 18 observations). The real currency value was computed with the exchange rate, because it is available for the same days as the currency stock and because it reacted swiftly to expectations. Zahien zur Geldeniwerrung, p. 47–49.Google Scholar

61 The new government was headed for the first time by someone from the relatively conservative Deutsche Volks Partei, Gustav Stresemann, and was composed of parties that, also for the first time, stretched from the Social Democrats to the Deutsche National Volks Partei. The Reichstag granted emergency powers to the new government.Google Scholar

62 Bundesarchiv, Koblenz (BAK), Reichskanzlei R 43 1/666, B1. 58; BAK, Finanzministerium R2/1974; ZSa, Reichswirtschaftsministerium RWM/711, B1. 55; ZSa, Reichsbank RB/ 6339, B1. 242–44.Google Scholar

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68 Schacht, Stabilization of the Mark, p. 118.Google Scholar

69 Havenstein was feeble and died on November 20, 1923.Google Scholar

70 Restnctions on foreign exchange holding by Germans made the arbitrage process sluggish and saved the Reichsbank from needing to use much of its gold reserves.Google Scholar

71 BAK: Nachlass Luther/667; Sargent, Thomas J., “The Ends of Four Big Inflations,” in Hall, Robert, ed., Inflation: Causes and Effects (Chicago, 1982);Google ScholarWirtschaft and Statistik, 4 (1924), pp. 56–57, 119–21, 180–82, 247–48.Google Scholar

72 Schacht, Stabilization of the Mark, pp. 151–56; BAK, Reichskanzlei R43 1/640, B 1. 244–92;Google ScholarMcGouldrick, Paul, “Operations of the German Central Bank and the Rules of the Game, 1879–1913,” in Bordo, Michael D. and Schwartz, Anna J., eds., A Retrospective on the Classical Gold Standard, 1921–1931 (Chicago, 1984).Google Scholar

73 Schacht, Stabilization of the Mark, pp. 156–59;Google Scholar see also James, Harold, “Did the Reichsbank Draw the Right Conclusions from the Great Inflation?” (manuscript, Cambridge University).Google Scholar

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