1. Did High Wages or High Interest Rates Bring down the Weimar Republic? Hans-Joachim Voth The Journal of Economic History, Vol. 55, No. 4 (Dec. 1995)

2. Pre-war Germany Dynamic Economy, high Saving and Investment – 16% of domestic product devoted to capital formation Virtually no unemployment 1920s Deterioration of economic confidence  HYPERINFLATION Stabilization of currency in 1923  prosperity, rising output, exports, and employment Signs of economic weakness in late 1920s  investment dropped to 10.5% of GDP

3. Insured ^ : Unemployment overstated in these statistics; employment grew rapidly, driven by increased exports

4. Limited investment primary reason for slump caused by either: – Excessive wages  reduced profits (Borchardt thesis) – High interest rates undermined capital expansion (Voth) Capital inflows threatened renewed inflation Hjamar Schacht pursued a tight monetary policy which kept interest rates high (sterilization of capital inflows)

5. As unit labor cost increased, expansion rate of capital stock decreased (after 1930).

6. Voth The relationship between interest rates, real wages & investment is causal: Prices of capital and labor determine the rate of expansion of capital stock. Borchardt’s view: high price of labor discouraged investment because it squeezed firms profits But high labor cost might encourage investment – Substitute capital for labor Additionally, even had wages been constrained, investment would have been below historical levels by about 1/3

8. Error-correction model reveals no evidence of wages depressing investment Demand for capital in the German economy between 1925 and 1929 strongly reduced by high interest rates Simulation suggests that lower interest rates at the end of the 1920s would have caused significantly higher investment Strong substitution effects between capital and labor  High wages make for high investment relative to capital stock

9. Voth’s Conclusions “If, as Schumpeter suggested, domestic capital formation was crucial in determining the overall economic performance on Weimar Germany, the interest rates and not wage pressure were at the heart of sluggish growth” “Whatever may have been necessary to save the first German republic, the small-cake economy that- according to Borchardt- was directly responsible for its demise could hardly have been avoided through workers’ sacrifices. Instead, possible remedies for Weimar’s malaise of low investment could have been higher wages, or a return to the lower interest rates that had prevailed before WWI.”