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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
Assistant Professor of Economics at the University of Michigan.


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.

Copyright © The Economic History Association 1986

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1 Barro, Robert J., Macroeconomics (New York, 1984), pp. 192–96, 383–85.Google Scholar

2 The interest rate and income, arguments in conventional money demand equations, fluctuated too little to noticeably affect real balances during the hyperinflations. Cagan, Phillip, “The Monetary Dynamics of Hyperinflation,” in Friedman, Milton, ed., Studies in the Quantity Theory of Money (Chicago, 1956), pp. 2735;Google ScholarWebb, Steven B., “Money Demand and Expectations in the German Hyperinflation: A Survey of the Models,” in Schmukler, Nathan and Marcus, Edward, eds., Inflation Through the Ages (New York, 1983).Google Scholar

3 The inflationary expectations term for each future period is eliminated by recursive substitutions of an expression with the money stock and expectations one period further into the future. Sargent, Thomas J., Macroeconomic Theory (New York, 1979), pp. 268–69;Google ScholarSargent, Thomas J. and Wallace, Neil, “Rational Expectations and the Dynamics of Hyperinflations,” International Economic Review, 14 (06 1973), pp. 328–50.Google Scholar

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6 The Reichsbank kept the annual discount rate at 5 percent until raising it to 6 percent on 28 July 1922, to 7 percent on 15 August 1922, to 8 percent on 21 September 1922, to 10 percent on 13 November 1922, to 12 percent on 18 January 1823, to 18 percent on 23 April, to 30 percent on 2 August, and to 90 percent on 15 September 1923. Statistisches Reichsamt, Wirrschaft undStatistik, 2–3 (1922–1923), passim. Before May 1921 a law restricted the share of government debt in the Reichsbank portfolio, but creative accounting sidestepped the constraint; Webb, Steven B., “Government Debt and Inflationary Expectations as Determinants of the Money Supply in Germany, 1919 to 1923,” Journal of Money, Credit, and Banking, 17 (11 1985, part 1), pp. 479–92.CrossRefGoogle Scholar

7 Webb, Steven B., “The Supply of Money and Reichsbank Financing of Government and Corporate Debt in Germany, 1919–1923,” this JOURNAL, 44 (06 1984), pp. 499507.Google Scholar

8 Reichskanzlei, , Akten der Reichskanzlei, Weimarer Republik, Das Kabinen Bauer [henceforth, Reichskanzlei Kabinett Bauer], Erdmann, Karl D. et al. , eds. (Boppard-am-Rhein, 19681978), pp. 4043.Google Scholar

9 Webb, “Determinants of the Money Supply.”Google Scholar

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

12 See footnote 3.Google Scholar

13 Blanchard, Olivier J., “Current and Anticipated Deficits, Interest Rates and Economic Activity,” European Economic Review, 25 (06 1984), pp. 727.CrossRefGoogle Scholar

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

17 Cagan, “The Monetary Dynamics of Hyperinflation,” pp. 80–81.Google Scholar

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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20 Hoffmann, Walther G., Das Wachsum der deuzschen Wirtschaft seit der Mitre des 19. Jahrhunderts (Berlin, 1965), p. 455;Google ScholarHoltfrerich, Die deutsche Inflation, p. 221. Billion equals milliard in German notation.Google Scholar

21 Sources to Tables 1 and 2.Google Scholar

22 Holtfrerich, Die deutsche Inflation, pp. 115–35;Google ScholarTinbergen, Jan, International Abstracts of Economic Statistics, International Conference of Economic Services, ed. (London, 1934), pp. 72, 82, 105, 210.Google Scholar

23 Vossische Zeitung, May 1, 1919 Finanz- und Handelsblatt.Google Scholar

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

25 Trachtenberg, Marc, Reparation in World Politics: France and European Economic Diplomacy, 1916–1923 (New York, 1980), pp. 116–18.Google Scholar

26 Vossische Zeitung, December 4, 1919, am., p. 1 December 12, 1919, p.m., pp. 1–2.Google Scholar

27 Reichskanzlei, Kabineri Bauer, pp. 389–93.Google Scholar

28 Sources to Tables 1 and 2.Google Scholar

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

31 Williamson, John G., Karl Helfferich, 1872–1924: Economist, Financier, Politician (Princeton, 1971), pp. 291327.Google Scholar

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33 Frenkel, Jacob A., “The Forward Exchange Rate, Expectations, and the Demand for Money: The German Hyperinflation,” American Economic Review, 67 (09 1977), pp. 188189; Zentrales Staatsarchiv-Potsdam [henceforth ZSa], Reichsbank RB/6435, B1. 15–17.Google Scholar

34 Webb, Steven B., “The German Inflation and Foreign Business Cycles, 1920–1922,” forthcoming in Explorations in Economic History.Google Scholar

35 Sources to Table 2.Google Scholar

36 S = (D/P – H) r = (231/14.1 – 6.4) 0.034 = 0.31 billion.Google Scholar

37 Witt, Peter-Christian, “Tax Policies, Tax Assessment and Inflation: Toward a Sociology of Public Finances in the German Inflation 1914–1923,” in Schmukler and Marcus, ed., Inflation Through the Ages.Google Scholar

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

39 Witt, Peter-Christian, “Finanzpolitik und sozialer Wandel in Krieg und Inflation 1918–1924,” in Mommsen, Hans, Petzina, Dietmar, and Weisbrod, Bernd, eds., Industrielles System und politische Entwicklung in der Weimarer Republik (Düsseldorf, 1974), p. 424.Google Scholar

40 Felix, David, Walther Rathenau and the Weimar Republic: The Politics of Reparations (Baltimore, 1971), p. 29;Google ScholarWitt, Peter-Christian, “Staatliche Wirtschaftspolitik in Deutschland 1918–1923: Entwicklung und Zerstörung einer modernen wirtschaftspolitischen Strategic”, in Feldman, et al. , eds., The German Inflation.Google Scholar

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

42 Webb, “Revenue and Spending.”Google Scholar

43 See footnote 20.Google Scholar

44 Wirth considered several plans for raising more revenue. The most specific proposal was an amendment to the corporate tax, which he estimated would bring in about 5 billion marks, in 1913 values. Laubach, Ernst, “Die Politik der Kabinette Wirth, 1921/1922,” Historische Studien, 402 (1968), p. 65.Google Scholar

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

46 Holtfrerich, Die deutsche Inflation, p. 189.Google Scholar

47 We must remember that Europe had no experience with hyperinflation since the French Assignats of the 1790s. As of spring 1922, Austria and the Soviet Union had each experienced only a couple of months of inflation rates over 50 percent per month, and the inflation rates there seemed headed down again. The extreme parts of their hyperinflations did not come until late summer 1922 in Austria and late 1923 in the Soviet Union.Google Scholar

48 Trachtenberg, Reparation in World politics, pp. 243–75; Vossische Zeitung, August 1, 1922, a.m. and p.m., p. 1.Google Scholar

49 Frankfurter Zeitung, July 4, 1922, p. 1;Google ScholarHoltfrerich, Carl-Ludwig, “U.S. Capital Exports to Germany 1919–1923 Compared to 1924–1929,” Explorations in Economic History, 23 (01 1986), pp. 132;Google ScholarWebb, “Determinants of the Money Supply.” By fall 1922 and thereafter, discounted corporate debt accounted for about one-third of the Reichsbank's money creation; Zahlen zur Geldentwertung, p. 52. Hence in Figure 1 the value of high-powered money exceeds the value of government debt after October 1922.Google Scholar

50 Maier, Charles S., Recasting Bourgeois Europe: Stabilization in France, Germany, and Italy in the Decade after World War I (Princeton, 1975), pp. 293–94.Google Scholar

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

52 Reichskanzlei, Kabinett Cuno, pp. 139.Google Scholar

53 Holtfrerich, Carl-Ludwig, “U.S. Capital Exports to Germany 1919–1923 Compared to 1924–1929,” Explorations in Economic History, 23 (01 1986), p. 399.CrossRefGoogle Scholar

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

55 Feldman, Gerald D., Iron and Steel in the German Inflation, 1916–1923 (Princeton, 1977), pp. 352–58;Google ScholarVossische Zeitung, 03 2, 20, 24, 28, 1923, p. 1.Google Scholar

56 Vossische Zeitung, April 16, 1923, p. 1; Reichskanzlei, Kabinen Cuno, pp. 399–400, 424–25.Google Scholar

57 Feldman, Iron and Steel, p. 371–79; Holtfrerich, Die deutsche Inflation, p. 309–10.Google Scholar

58 Cagan, “Monetary Dynamics of Hyperinflation,” pp. 55–57.Google Scholar

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

63 BAK, Reichskanzlei R43 1/666, BI. 17–23; see also Reichskanzlei, Kabineti Fehrenbach, p. 449, for an early mention of this deadline.Google Scholar

64 Habedank, Heinz, Die Reichsbank in der Weimarer Republik: Zur Rolle der Zentralbank in der Politik des deutschen Imperialismus 1919–1933 (Berlin, 1981), pp. 2021, 90–91.Google Scholar

65 Schacht, Hjalmar, The Stabilization of the Mark (London, 1927), p. 117.Google Scholar

66 Schuker, Stephen A., The End of French Predominance in Europe: The Financial Crisis of 1924 and the Adoption of the Dawes Plan (Chapel Hill, 1976), pp. 181–86.Google Scholar

67 Of the 1,200 million goldmarks, 300 were earmarked to pay off the government's debt to the Reichsbank.Google Scholar

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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