Cyclical fluctuations in Germany 1924 - 1929

Abstract

The object of this thesis is to ascertain the domestic causes of the Depression in Germany, and to assess their importance. In the earlier chapters I construct a simple, static, macro-economic model capable of generating those features which distinguish the operation of the German Economy during 1924-9, from that before 1913 or after 1948. Three sources of instability in 1924-9 are highlighted: the reduced willingness to hold long-term debt; the lower propensity to save; and the persistent inflationary pressures in labour and product markets. Jointly, these explain the low prices and short maturity distribution of German financial assets, the large capital imports, the Balance of Payments deficit on current account, the apparent over¬ valuation of the exchange rate, and the low rate of investment. And these together explain the especial instability of the German economy at that time. Chapters 6 to 9 consider the short-run behaviour of investment in the later 1920s. Fluctuations of inventory investment, which had been seriously destabilising during 1924-7, were less significant during 1927-9- The collapse of the domestic stock market in early 1927 bad identifiable effects on the fixed investment activity of the railways, communes, and smaller-scale industry. The 'closure' of foreign capital markets after mid 1928 had however no such discernible effects. The endemically low capacity utilis¬ ation, wages pressure, and the short-run nature of much invest¬ ment activity associated with expectations of lower costs of finance in the future, are more apposite explanations of the bulk of the reduction of industrial fixed investment in 1928-9. The basic economic instability (especially the financial - affecting the public and the agricultural sectors), coupled with the export collapse, converted the recession into a crisis.