The Beginning of the Depression in Germany, 1927-30: Investment and the Capital Market

Abstract

Tn the international economic history of the slump the explanation of the depression in Germany remains an under-researched topic. It is surprising that economic historians continue to neglect it, when we consider the dominant position of Germany, after the U.S.A. and U.K., in the world economy at the time. 1 It is surprising too that political history with its unremitting interest in the collapse of the Weimar republic has not generated a more systematic interest in the slightly earlier, and obviously related, economic collapse.2 An adequate explanation of the depression in Germany must be capable of explaining its severity, which was unparalleled in German history and surpassed at that time only by the severity of the slump in the U.S.A. An elementary Keynesian analysis enables us to identify three depression-inducing shocks on the goods market: firstly, the decline in the rate of aggregate investment after I928; secondly, the decline in the value and volume of exports after I929; and thirdly, the decline in government consumption of goods and services (and the steady reduction of the government's fiscal deficit) after I929. These are set out in Table I. The rate of decline of these three magnitudes was precipitous. Real net investment (according to Hoffman's rather rough deflation procedures) fell by 7.6 mrd. Rm. (in I913 prices) between I928 and I932. Real exports fell by 4.3 mrd. Rm. (in I9I3 prices) between I929 and I932, while government consumption fell, in current prices, by 2.4 mrd. Rm. in the same period. These three falls represented I4 per cent, 8 per cent, and 3 per cent respectively of the appropriate measure of NNP in I928 or I929. Between 1928 and I932 the fiscal balance of the consolidated public household (all levels of government) improved by i .8 mrd. Rm.3