The Economics of Inflation

Costantino Bresciani-Turroni's The Economics of Inflation is a history of the German mark from 1914 through the stabilization of November 1923. Its causal argument starts at the bank of issue: Reichsbank finance for the Treasury and increasingly cheap credit for commerce drove the depreciation. First published in Italian in 1931, the book was substantially revised by its author for the 1937 English translation by Millicent E. Sayers, with a foreword by Lionel Robbins. Bresciani-Turroni treats the exchange's feedback into prices and the budget, and the swings in velocity, as amplifiers of a depreciation that began with the issues.

The Reichsbank's management held that discounting commercial bills, and excluding financial ones, would keep issues matched to trade and secure a normal reflux of notes. He grants the reflux and explains why it failed as a brake once governmental inflation kept prices rising and the bank kept meeting trade's demand for credit at those prices. Under those conditions the notes issued for commerce "must surpass the reflux of notes previously issued": old bills came back while new bills for the same physical stock carried larger nominal sums. The rule anchored credit to nominal values that Treasury borrowing was already inflating. With the discount rate below the rate of depreciation, expected price rises swelled demand, and Reichsbank credit became a transfer to its borrowers paid for by other classes.

The same depreciation shaped what Germany built. Against economists who held that inflation's whole effect is to redistribute existing resources, he argues that inflation, by forcing many classes to consume less, freed productive energies for new instruments of production. The capital was real, and the disequilibrium was so profound that, apart from particular cases, the national economy gained little. A large part of the new fixed capital later proved useless, as in iron and steel and in engineering. During the inflation, he judges, investment favored adding instruments of production over improving them. Large chemical and electrical concerns that adjusted and concentrated during the depreciation probably profited lastingly, though he stresses that they formed one part of the economy. Our inference is that forced saving can build real plant while inflation distorts the prices that should direct it.

On 16 November the Reichsbank stopped discounting Treasury bills, ending paper-mark finance for the government. Commercial paper-mark issues kept growing afterward and rentenmarks were added beside them, so legal circulation rose considerably. He explains the increase through demand: as distrust of the paper mark eased, holders stopped keeping their balances at a minimum, so velocity fell and trade needed more circulating medium. Legal money also displaced foreign exchange and the emergency monies of that autumn, including illegal Notgeld some industrialists had used for wages. Stabilization rested on ending the government's paper-mark finance and making a cap on the rentenmark credible.

The rentenmark was inconvertible paper. A holder could exchange it for mortgage bonds of equal nominal gold value, which traded well below par, so the conversion right could at most curb a depreciation. He credits the new name and belief in the mortgage guarantee with winning acceptance, and the public held rentenmarks where it had raced to spend paper marks. Confidence lasted, he argues, because a decree capped rentenmark issues, and the Rentenbank's management strengthened it by refusing the government's attempt to exceed the cap in December 1923. Fiscal balance followed stabilization, through spending cuts and taxes reassessed in stable values, helped by inflation's erosion of the public debt, and credit restriction came later.

The book's conclusion appears in the author-revised 1937 English edition, and its discussion of the 1931 banking panic is retrospective. Robbins's foreword is a separate voice, cautioning that hyperinflation's lessons apply to mild inflations with qualification. Bresciani-Turroni's findings are historical inference, short of a mathematical proof of the quantity theory or a forecast for any present currency. The book explains how an accommodating central bank turned its commercial rule into further issue, and how a currency recovered while its legal circulation grew. The Mises Institute's PDF of the 1968 third impression of the Sayers translation reproduces the 1937 text, and the cover shown belongs to the Institute's 2007 reprint.