1. Inflation: A symptom of conflict Inflations are not primarily economic problems with secondary social problems, but are instead primarily struggles over distribution with monetary consequences. Inflation is nothing more than the creation of additional purchasing power, permitting certain consumers to satisfy themselves without others voluntarily renouncing their share of GDP. Knut Borchardt (1972 essay) Germany’s Experience of Inflation in Perspectives on Modern German Economic History

2. Borchardt: Bruening Couldn’t Do It Borchardt’s 1979 argument Lack of maneuvering room for anti-cyclical policies in the German Slump Seriousness of downturn not evident until mid 1931 – German law prohibited Reichsbank from financing deficit Constraint on Reichsbank reinforced by agreement fixing the exchange rate – France certainly not amenable to extending a bailout loan – Memories of hyperinflation threatened capital flight Capital flight after Nazi gains in 1930 election contained by high interest Weimar economy stymied by distributional conflict – Political wage in post-WWI/post-hyperinflation Germany Compulsory arbitration...”Wage dictatorship” Wages rose irrespective of productivity  Profit Squeeze  Sick Economy » Unemployment remained high throughout late 1920s

3. A matter of leadership?...those holding positions of responsibility did not diagnose the great depression as a catastrophe, but even saw it as an opportunity for purgation in an otherwise unsolvable situation...revise wages and avoid yet higher unemployment. Borchardt...Room for Maneuver Henry Kissinger: Great Man Theory Gustav Stresemann (1878-1929) could have done it – Used Germany’s geopolitical dominance to assert German claims » “Broke the rules” set down by Versailles Treaty – Bruening similarly had to break the rules » Break golden fetters [like Nixon did with Kissinger blessing] » Capital controls to thwart capital flight...Where was the economic equivalent of Stresemann?... [instead, there was] the German curse of kleine, petty democratic-conservative leaders unable to advance the visions of Bismarck and Stresemann Henry Kissinger, Diplomacy

4. Borchardt and Ritschl, Could Bruening Do It? An Econometric Test of Borchardt’s High Wage Thesis The model, 1925-1938 Keynesian Consumption Function Investment function dependent on aggregate profits Depreciation dependent on past investment  K stock Tax revenues dependent on GDP Imports dependent on GDP and terms of trade Labor demand dependent GDP, K stock, and terms of trade Dummy Variable for Nazi regime

5. Policy Simulations Simulation Sim 1 – Industry proposal – Hold real wage at 1927 level – Balance budget like Bruening Sim 2 – Labor proposal – Hold wage at high 1929 level – No cuts in gov’t spending Sim 3 –Aggressive Wage Cuts – Earlier than Bruening’s Sim 4 – Cost Cutting plus absence of balanced budget – Bruening’s wage cuts – Spending at 1929 level Results Sim 1 & 2 – SR – labor strategy is superior to sound finance approach – LR – vice versa, industry proposal does significantly better Sim 3 & 4 – SR – austerity aggravates situation – LR – strong wage cuts plus fiscal austerity prove beneficial Austerity Rocks

6. Borchardt-Ritschl Conclusions The efficacy of fiscal policy with regard to employment depends heavily on the behavior of wages Evidence suggests that a major slump could not have been prevented by just avoiding balanced budget policies. In order to arrive at substantial reductions in unemployment, wage cuts appear to be necessary prerequisite in any case. Indeed it turns out that a pure wage cut strategy in the spirit of what Bruening set forth in the course of 1931 provided extended maneuvering room from 1931 on to the benefit of the Nazi economy. Thus Bruening’s well known claim that he was ousted 100 meters before reaching his goal is possibly not too mistaken after all.