The German Business Cycle in the 1920's

Abstract

T HE starting-point of this article is an interpretation of the German business recessions of I926 and I929 recently put forward by Prof. Temin.1 Temin's principal concern was to challenge the orthodox views of, for example, Schmidt and Landes,2 who emphasized the part played in the depression by reduced flows of foreign investments into Germany. Temin concluded that lessening foreign capital did not initiate the depression; the causes were domestic, not foreign. Domestic factors produced a decline in demand for foreign capital, and the reduced flow was thus endogenous, not exogenous, to the German economy. The reasoning behind this conclusion is straightforward. Any autonomous falling off in the flow of foreign capital, Temin argues, would have an impact on the economy by producing a credit crisis, which in turn would be reflected in an adverse balance of payments, since lower imports of capital would enhance the gap to be covered by German gold and foreign exchange reserves. But, and this is the cardinal point of the argument, there was in fact no credit crisis during the two downturns. That there was no credit shortage in Germany is shown by first of all examining the behaviour of interest rates. In the earlier depression interest rates were falling for much of the period and reached very low levels. In I929, although interest rates were rising, they were not rising at a rate out of line with that of the previous two years; nor were they absolutely as high as in I925, at the very beginning of the period. Second, and this is another critical part of the argument, there was no balance-of-payments problem in the periods under consideration. In I926, indeed, there was a surplus,3 in stark contrast both to the immediately preceding and to the succeeding years. In I929 there was a sharp reduction in the current-account deficit, although some increase in the total deficit due to lower imports of long-term capital; but (a) the growth in the deficit was not substantial enough to influence the credit market, and (b) there was, in any case, no strong link to be found in Germany between the investment market (the amount of credit creation) and the state of the balance of payments. Moreover, even if there had been some slowing down in the rate of credit creation in Germany during i 929,4 this could hardly have caused the depression of that year. This follows from the fact that there is a lag of at least a year between a change in the rate of credit creation and its effect on the level of national income.