German Inflation as Distributional Conflict

1. German Inflation as Distributional Conflict Tullio: Reichsbank reaction function reflects Adherence to real bills doctrine  meet the “needs of trade” Concern with full employment “Rational inflation”: Inflation beats the alternative Laursen and Pedersen Holtfrerich Keynesian inflation: Inflation as Wage – Price Spiral Demand as trigger Endogenous money: Ms = f(Md) … and V adjusts if Msdoesn’t Joan Robinson’s review of Bresciani-Turroni’sEconomics of Inflation Exchange Rate Shock(May 1921)  Depreciation Increased Demand Increased Cost of Living Full Employment Wage Demands Wages Up Budget Deficit (1923) Prices Up Tight Money  r  I  Y  u  W and P steady…but at what price?

2. Occupation of the Ruhr January 1923

3. Robinson (St. Joan): The Keynesian Mantra/Price as Markup over Wage • For inflation to persist, demand must maintain full employment so wages rise continuously • Money and its velocity can only cause inflation via low rate of interest that spurs investment and consumption spending • For inflation to continue, Ms must meet transactions demand lest interest rate rises and demand slows • In early stages of German inflation, tight money might have ended inflation • In German case, hyperinflation triggered by • Depreciation of the Mark (May 1921) • Budget deficit measured in “gold marks” was declining prior to London Ultimatum so it wasn’t the trigger • Budget deficit in support of passive resistance, early 1923 • Reichsbank effort to stem depreciation briefly reversed inflation...but budget deficit overwhelmed stabilization effort

4. St. Joan on Stabilization • “...inflation had reached such a pitch to bring itself to and end.” • In hyperinflation, German Mark ceased to function as money Dollarization: the dollar, copper, what-net as units of account • No expectation of ongoing inflation in dollar prices • End of rush to real assets  Demand fell • Unemployment rose  Wage and Price Inflation ceased Inflation self-destructed, “blew itself to pieces.” • Currency reform (1 Reichsmark = 1 billion Mark) and end of money creation beside the point (for Robinson a làKeynesian doctrine) Marxian aside: Inflation with wage lag eventually self-destructs High profit carries seeds of own destruction Inflation  Profits up  Investm’t  Expansion  Reduced unempl  Wages Up {Graham and Bresciani-Turroni make similar observations}

5. Burdiken and Burkett (BB): Conflict over shares Inflation is never a technical economic problem…Inflation proceeds as long as there is no political and economic resolution to the problem of distribution and growth. Leonard Rapping, Essays in Post-Keynesian Inflation …inflation is the symptom of deep-rooted social and economic contradiction and conflict…Inflation is the way that claims expressed in nominal terms are temporarily reconciled. But it will continue and indeed accelerate so long as the basic conflicts of real claims and real power continue. James Tobin, Development in an Inflationary World Inflation: Too much money many chasing too few goods? But, according to Burdiken and Burkett, • Must be accompanied by money creation • Can proceed at expense of a “passive” sector w/fixed nominal claims • The conflict does not necessarily accelerate Concern with interactive effects of fiscal deficits/wage-price dynamics/ relative real wage (and profit) aspirations

6. Burdiken and Burkett (BB): Conflict over shares • Wage as function of unemployment and expected inflation • Unemployment as function of real wage • Real wage as outcome of conflict • Ignore impact of inflation on union strike funds • Ignore impact of unemployment benefits on wage demands • Ignore impact of productivity on wage [productivity didn’t vary much for them] • Ignore war of attrition over 8-hour day, the ultimate distributional issue • For workers: Nominal wage growth demanded increases with • Real wage aspiration gap/expected inflation/employment rate • For firms: Price increases with • Excess of real wage over target (based on target markup)/expected inflation • For economy: unemployment increases with increase in real wage growth • Real wage growth increases or decreases with expected inflation • Depends on relative strengths of worker and firm responses to expected inflation • Real wage growth decreases with increase in unemployment rate • Real wage growth decreases with lagged wage increase • Lagged wage increase reduces worker aspiration gap and increases firm aspiration gap

7. Burdiken and Burkett (BB): Econometric Concerns and Tests • Test for stationarity of real variables: ΔW… ΔW… Δu…Δpeall pass {forward premium  pe} BB assume constant worker real wage and firm markup targets. Then ΔW = .09 +.15 Δu – 1.78 ΔW-1 – 2.61 ΔW-1Δu - .92 Δpe – 1.90 ΔpeΔu Δu = -.27 + .66 Δu-1 + 1.81 ΔW net effect of u is negative Test robustness of results…all pass Farley – Hinich tests BB Conclusions/Observations • High unemployment of late 1923 broke back of wage-price spiral • Labor forced to concede 8 – hour day • {Labor lost the War of Attrition} • It wasn’t expectation of stabilization following fiscal and monetary reforms (Sargent’s claim) • It wasn’t the Dawes Loan • Looking ahead to administered wages and prices of late Weimar Republic (1927+), unemployment ceased at act a disciplining device  Segue to Borchardt and German Slump: Wages Too High