Deflationary policy

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Heinrich Brüning, Chancellor 1930–1932

The deflationary policy was characteristic of Heinrich Brüning's economic policy during the Great Depression . He was the first Chancellor of a presidential cabinet in the Weimar Republic . This policy was characterized by strict budget restructuring and state-mandated wage and price cuts. This considerably exacerbated the deflation that had already been triggered by the global economic crisis . The goal was to shrink the German economy, the lower prices ( internal devaluation ) should make German products attractive on the world market and boost exports . Research has disputed whether the deflationary policy also served the goal of eliminating Germany's reparation obligations.

Reasons for the policy of deflation

The main reason for the deflationary policy remains controversial to this day. According to one view, the main goal was to reduce and cancel reparation payments, according to another view, the deflation policy corresponded above all to the ideas of the time of an optimal medium-term economic policy.

Reparations payments

In his doctoral thesis published in 1962, the historian Wolfgang Helbich cited evidence that Brüning's main goal was not to overcome the crisis, but to lower or cancel reparations, as achieved by his successor Franz von Papen at the Lausanne Conference in July 1932 . Brüning wanted to demonstrate to the victorious powers that Germany could no longer generate the foreign currency necessary for the reparation transfer despite the utmost efforts, and wanted to meet the demands of the Young Plan for monetary stability . The thesis of a reparation-political motivation of the deflation policy is widespread to this day. The Berlin historians Henning Köhler and Philipp Heyde, on the other hand, believe that Brüning and his colleagues were honestly convinced that there was no alternative to their politics. The revision of the reparation obligations as a motive of the deflationary policy is conspicuously only mentioned in public speeches of the Chancellor and his coworkers, whereas in the internal discussions the reparations do not play a prominent role.

Contemporary economic policy ideas

The deflation policy corresponded to the mainstream economic policy of the time, the so-called liquidation thesis . At the time, deflation was a cleansing process in which prices continued to fall until market equilibrium was restored. The depression resulting from deflation is salutary, precisely because "inefficient" businesses are being eliminated. Above all, however, the competing industrial nation, which is the first to hit rock bottom, has price competitive advantages and can therefore create the most powerful economic turnaround through increasing exports.

Joseph Schumpeter published an article in the magazine Der Deutsche Volkswirt in March 1929 , in which he explained that Germany was in a depression because of an allegedly excessive wage policy and social policy, which were combated by a mixture of wage and price cuts and austerity policies should. This was exactly the concept of Brüning's deflationary policy. Friedrich August von Hayek recommended a deflationary policy (also in the United States) in order to break wage rigidity. In the 1970s, he admitted this as a mistake.

activities

Austerity policy

With the help of emergency ordinances , direct taxes on wages , income and sales and, above all, indirect taxes such as taxes on sugar , beer and tobacco were increased. In addition, social spending and wages and salaries in the public sector have been cut and public investments have been cut back as far as possible.

Deflationary policy

Brüning's goal was to increase international competitiveness through falling prices and wages ( internal devaluation ). With the emergency ordinance of July 26, 1930, the government was empowered to cancel price fixing. Appeals to the economy followed to lower prices, underpinned by the threat of state intervention. After the pound sterling was removed from the gold currency standard and its devaluation from September 20, 1931, the 4th Emergency Ordinance of December 8, 1931 ordered wage, price and rent reductions to the level of 1927 and further intensified deflation. These measures spared the Reichswehr and, because of Hindenburg, until spring 1932 also the largely bankrupt East Elbe agrarians . When Brüning planned the suspension of these subsidies with the Osthilfeverordnung and instead planned foreclosures of the goods to settle the unemployed , he was dismissed by Hindenburg. Overall, the cost of living was reduced by around 20%, the gross hourly wages a little more. Up to 15% of the 20% deflation is likely to be due to Brüning's policies. Brüning's deflationary policy was reinforced by the economic consequences of the global economic crisis and the Reichsbank's contractionary monetary policy . As a result of the electoral successes of the NSDAP and the German banking crisis, there was a flight of capital through which the Reichsbank lost more than half of its gold and foreign exchange holdings. Because of the gold standard , it was forced to raise the discount and Lombard rates sharply.

Consequences of the deflationary policy

With regard to the economic and social consequences, the deflationary policy is seen as a fatal mistake, which not least favored Adolf Hitler's seizure of power .

Economic impact

The course of the price index shows the deflation from 1929 to 1932, the price-adjusted gross national product the simultaneous severe recession. From 1935 onwards, the economic upturn was largely determined by armaments spending.

Deflation led to just as devastating confusion and planning uncertainty as the previous hyperinflation of 1923. In addition, deflation caused the monetary value (e.g. of loans) to increase while real assets depreciated. As a result, even solid companies appeared to be over-indebted and had to go into bankruptcy despite full order books ( debt deflation ). One of the contemporary critics of the deflationary policy was Anton Erkelenz . He warned that the deflation policy is “a justified attempt to free Germany from the grip of reparations payments, but in reality it means nothing more than suicide for fear of death. The deflationary policy does much more damage than 20 years of reparations payments [...] The fight against Hitler is the fight against deflation, against the enormous destruction of factors of production. "

The main aim of the deflationary policy was to promote exports by making German products cheaper and therefore more competitive. However, since the time of mass unemployment due to the global economic crisis, most trading partners have been less willing than ever to allow the German Reich to generate foreign trade surpluses and thereby import unemployment themselves. On the one hand, most countries around the world pursued a more or less pronounced deflation policy at the time. Many important trading partners also adopted a strong protective tariff policy (such as the United States with the Smoot-Hawley Tariff Act ). Great Britain and 30 other nations also abandoned the gold standard relatively early and increased their competitiveness in foreign trade by devaluing the currency ( currency war ). As a result, an increase in German exports through internal devaluation (deflation) was completely hopeless. As a result, the goal of a positive trade balance was achieved, albeit not through an increase in exports, but because the German economic crisis and the shortage of foreign exchange led to a sharp decline in imports. The negative balance of the capital account could not be balanced, so that there was no inflow of foreign currency.

Economic data 1928–1932
year Foreign trade in millions of RM Export in millions of RM Imports in millions of RM Export - import = surplus in millions of RM Average gold and foreign exchange holdings in mill. RM Gross national product in billion RM Industrial production (1928 = 100)
1928 26,277 12,276 14.001 −1,725 2,405.4 88.1 100
1929 26,930 13,483 13,447 +360.00 2,506.3 88.4 100
1930 22,429 12,036 10,393 +1,643 2,806.0 82.4 087
1931 16,326 09,599 06,727 +2,872 1,914.4 69.0 070
1932 10,406 05,739 04,667 +1,072 0974.6 56.7 058
Development of the unemployment rate from 1928 to 1935. During the phase of Brüning's deflationary policy (highlighted in violet), the unemployment rate rose from 15.7% to 30.8%.

Distributional effects

The burdens of the deflationary policy were unevenly distributed: While people with permanent jobs were able to maintain their real income for the most part due to the sometimes dramatic fall in prices (even if they believed they were disadvantaged because of the falling nominal wages) and capital owners benefited, workers and unemployed people who were easily terminable suffered in particular under the crisis which the government's policy was constantly exacerbating. It pursued a pro-cyclical economic policy : the state cut its spending in an economic crisis and thus made it worse.

Political Consequences

After the banking crisis in July 1931, the President of the Reich Statistical Office, Ernst Wagemann, and the Chairman of the Association of Rheinischer Braunkohlenwerke Paul Silverberg , independently of one another, presented plans in this direction. The Wagemann Plan , which was also supported by Hitler, and the Silverberg Plan proposed an anti-cyclical economic policy in the form of inflation as a growth stimulus . In contrast, representatives of the trade unions and social democrats in the so-called WTB plan (named after the authors Wladimir Woytinsky , Fritz Tarnow and Fritz Baade ) of January 1932 directed their focus to long-term relief of the state treasury and the short-term initial spark for economic development through massive job creation measures. Since Briining failed to implement all of these plans for various reasons (including fear of inflation and the goal of a balanced budget), they could be used against him by the right-wing extremist parties . The demand for credit expansion was particularly widespread among the National Socialists since 1931.

Debate about the lack of alternatives to deflation policy

Today there is agreement that the alternative, mentioned by Carl-Ludwig Holtfrerich , of turning away from the gold standard and devaluing the Reichsmark as opposed to continued deflation would have been the better way in principle. According to Knut Borchardt , however, this path was not open, since under the Young Plan to settle the Allied reparations claims this would have been understood as an attempt to unilaterally change the rules of the game and would have been answered with massive capital deductions. Accordingly, Brüning's plan was by no means to plunge the German Reich into a severe economic crisis with a cold heart in order to then persuade the Allies to give up the reparation claims, but on the contrary was the failed attempt to procure foreign currency and to settle the reparation claims. Borchardt believes that Brüning's deflationary policy was the only possible answer to the German debt problem and lack of access to credit. He sees the problem as a typical foreign debt crisis . According to Gerald D. Feldman , both Borchardt and Holtfrerich's contributions are very illuminating. But Borchardt overlooked the fact that Brüning and the then Reichsbank President Hans Luther pursued the deflation policy not simply out of a predicament, but out of honest conviction.

Borchardt's view has not gone unchallenged. According to Ursula Büttner , Michael North , Charles P. Kindleberger , Heinrich August Winkler and Hans Mommsen , the Reichsbank Act and the Young Plan have lost their importance since the German banking crisis in the summer of 1931 because they could no longer be adhered to anyway. The Allies would have resigned themselves to a departure of the Reichsmark from the gold standard, the devaluation of which on the British model was generally expected abroad. At the latest since September 1931, when Great Britain and 30 other nations devalued their currencies and thus suddenly became 20% cheaper than German goods on the world market, it was possible to move away from the gold parity of the Reichsmark. This would have considerably expanded the economic policy room for maneuver, but an economic recovery in Germany would also have reduced the pressure exerted on the Allies to approve formal waiver of war debts. Because of Brüning's fixation on maximum goals in the reparations question, alternatives to deflationary policy were not even considered in his cabinet. As part of the Layton Committee of 1931 on the question of the creditworthiness of the German Reich, the Wiggin Layton Report came to the conclusion that the amount of the reparations in the economic situation prevailing at the time could not be paid and that this insolvency on the German side was not possible was culpably caused. The fear of the German people against inflation (after the bad experiences with hyperinflation of 1923 ) also spoke against the departure from the gold standard . According to North , this was deliberately fueled in order to reduce criticism of the consequences of the deflationary policy. The minutes of the secret conference of the Friedrich List Society of September 1931 do not confirm this resolution.

According to Knut Borchardt, an expansionary economic policy was not even possible due to the state of the state budget. It must be admitted that since the German banking crisis, the public capital market for state borrowing was no longer available. Despite the restrictive provisions of the Reichsbank Act, credit financing for job creation measures via the Society for Public Works (see also Public Works Exchange ) and the Accepting Bank was legally possible, but it meant circumventing the Reichsbank laws and required rediscounting by the Reichsbank. Only with the Papen government did a sluggish economic recovery set in.

Individual evidence

  1. ↑ Wolfgang J. Helbich: The reparations in the Brüning era. On the significance of the Young Plan for German politics from 1930 to 1932 . Colloquium Verlag, Berlin 1962.
  2. ↑ See for example Hermann Graml : Between Stresemann and Hitler. The foreign policy of the presidential cabinets Brüning, Papen and Schleicher . Oldenbourg Verlag, Munich 2001; Hans-Ulrich Wehler : German history of society , volume 4. CH Beck, Munich 2003, ISBN 3-406-32264-6 , p. 516.
  3. ^ Henning Köhler: Job creation, settlement and reparations in the final phase of the Brüning government. In: Vierteljahrshefte für Zeitgeschichte 17 (1969), pp. 276–306 ( PDF file, 5.6 MB ).
  4. ↑ Philipp Heyde: The end of the reparations. Germany, France and the Young Plan 1929–1932. Schöningh, Paderborn 1998.
  5. ↑ a b c d Ursula Büttner: Weimar. The overwhelmed republic 1918–1933. Performance and failure in the state, society, economy and culture . Klett-Cotta, Stuttgart 2008, ISBN 978-3-608-94308-5 , p. 424 f.
  6. ↑ a b Jürgen Ivert, Susanne Krausz (ed.): Historical debates and controversies in the 19th and 20th centuries . Franz Steiner Verlag, Wiesbaden 2002, ISBN 978-3515082532 , p. 234.
  7. ^ Lawrence H. White, The Clash of Economic Ideas. The Great Policy Debates and Experiments of the Last Hundred Years . Cambridge University Press, Cambridge (MA) 2012, p. 94; Laurence H. White: "Did Hayek and Robbins Deepen the Great Depression?" In: Journal of Money, Credit and Banking , Issue 40, 2008, pp. 751–768 ( doi : 10.1111 / j.1538-4616.2008.00134.x ).
  8. ↑ Federal Archives, files of the Reich Chancellery: The restructuring policy of the Brüning I cabinet : "The Third Emergency Ordinance for Securing the Economy and Finances, published on October 6, 1931, one day before the Brüning I cabinet resigned, corrected only a few undesirable developments in the summer crisis, could not, however, respond to the devaluation of the British pound on September 20, 1931. "
  9. ↑ Federal Archives, files of the Reich Chancellery: The restructuring policy of the Brüning II cabinet : “In a note dated December 16, 1931, Ministerialrat Feßler summarized the basic ideas of the Fourth Emergency Ordinance again. As a result of the economic policy measures, the low point should be suddenly reached from which the economy could begin its recovery. The price cuts combined with lower rents, salaries, wages and public tariffs would eventually lead to the downsizing of the economy. The economic upswing that would then set in would restore public finances and strengthen Germany's position in international negotiations. The external prerequisite for Germany's recovery is the unhindered export of German goods, which is not restricted by any customs measures from foreign countries. "
  10. ↑ a b c d Michael North (ed.): German economic history, a millennium at a glance . Second edition, CH Beck, Munich 2005, ISBN 3-406-50266-0 , p. 324 f.
  11. ↑ a b c d e Michael North (ed.): German economic history, a millennium at a glance . Second edition, CH Beck, Munich 2005, p. 329.
  12. ^ Hans Frambach: “How to Fight Unemployment? A Review of the Strategy Discussion in 'Der Deutsche Volkswirt', 1930-1932 ". In: Jürgen Georg Backhaus (Ed.): The Beginnings of Scholarly Economic Journalism. The Austrian Economist and The German Economist . Springer, New York 2011, ISBN 978-1-4614-0078-3 , pp. 109–124, here p. 122.
  13. ↑ Monthly report of the military economic staff on the “state of the economic situation. 1. 2. 1938 “BA-MA Wi IF 5/543, quoted from: Friedrich Forstmeier, Hans-Erich Volkmann (ed.), Economy and Armaments on the Eve of the Second World War , Droste, Düsseldorf 1981, p. 85.
  14. ↑ Willi Albers et al. (Ed.), Concise Dictionary of Economics , Volume 9, Gustav Fischer et al., Stuttgart et al. 1982, ISBN 3-525-10260-7 , p. 85.
  15. ↑ Henry Ashby Turner : The Big Entrepreneurs and the Rise of Hitler . Siedler Verlag, Berlin 1985, p. 319.
  16. ↑ Jürgen Ivert, Susanne Krausz (Ed.): Historical debates and controversies in the 19th and 20th centuries . Franz Steiner Verlag, Wiesbaden 2002, p. 242.
  17. ^ Heinrich August Winkler, Elisabeth Müller-Luckner: The German State Crisis 1930-1933. Scope of action and alternatives . Oldenbourg, Munich 1992, ISBN 9783486559439 .
  18. ↑ Reinhard Sturm: "Destruction of Democracy 1930–1933" (website of the Federal Agency for Civic Education), cf. especially the summary of the discussion in alternatives to Brüning's deflationary policy .
  19. ^ Hans Ulrich Wehler: German History of Society , Volume 4. CH Beck, Munich 2003, p. 526.
  20. ^ Haim Shamir: Economic Crisis and French Foreign Policy, 1930-1936. Brill, Leiden 1989, p. 71.
  21. ↑ Tilman Koops (ed.): The Brüning I u. II. March 30, 1930 to October 10, 1931. October 10, 1931 to June 1, 1932. Boldt, Boppard 1982, p. Lxvvi.
  22. ^ Astrid Luise Mannes: Heinrich Brüning. Life · Work · Fate. Olzog, Landsberg 1999, p. 115: “The Wiggin-Layton report on the creditworthiness of the Reich supports the German position; He absolves Germany of any fault in its current situation and indirectly recognizes that Germany is forced to pursue a deflationary economic policy due to its payment obligations to other countries. "
  23. ^ Heinrich August Winkler: Weimar 1918-1933. The history of the first German democracy. Fourth edition. CH Beck, Munich 2005, p. 419: "The recommendation to have the credit situation in Germany checked by experts marked a historic breakthrough in the dispute over reparations."
  24. ↑ Detlev Humann: "Labor Battle". Job creation and propaganda in the Nazi era 1933–1939. Wallstein, Göttingen 2011, p. 46 ff.