The Economic Journal, ioo {March 1990), 176-187

Printed in Great Britain

FISCAL REFORMS AND STABILISATION:FOUR HYPERINFLATION CASES EXAMINED

Gustavo H. B. Franco*

Most accounts, old and new, of the end of the European hyperinflations of the1920s attribute a key role to 'fiscal reforms' implemented simultaneously withthe stabilisations.^ Surprisingly, however, there has been little effort in detailingthe contents of these reforms. Indeed, budgets were balanced very quickly afterprice stability was achieved, but this fact in itself is not actually sufficient toestablish that these reforms effectively took place since inflation affects budgetdeficits in various respects,^ so that the influence of price stability on deflcitsmight very well be an important part of the explanation for this suddenbudgetary improvement. This paper attempts to assess this possibility, and itsbasic contention is that the presence of such 'reforms' can be disputed, onceevidence is provided on the nature of fiscal measures undertaken along withstabilisations and especially on the so called Oliveira-Tanzi effect, i.e. the factthat tax revenues were negatively affected by inflation.* The relevance ofalleged tax 'reforms' for the end of the hyperinflations has to be established bydistinguishing how much of the observed improvement in tax collection wasdue to ' reforms' and how much was a consequence of price stabihty. The paperis actually organised around this simple idea. The next three sections examinethe fiscal measures undertaken during the stabilisations of Austria, Hungary,Poland and Germany and the last section summarises the main findings,comments briefly on alternative routes to explain these stabihsations.

IAlthough the evolution of economic policy in Austria and Hungary followedvery specific paths, these countries share the origin of their problems - thesharp reductions in their territories and populations determined by thedismemberment of the Habsburg empire - and the fact they become basketcases of stabilisation programmes conceived and managed by the League ofNations, a more stringent and interventionist version of its outgrown, the IMFprogrammes of our days. Indeed, the empire dismemberment has caused manyproblems, some of them of a fiscal nature. Tables i and 2, reporting annualfiscal accounts of the new repubhcs, provide some indications in this direction.

* Under the usual caveats I would like to thank Gregor Binkert, L. A. Correa do Lago, BarryEichengreen, Winston Fritsch, Jeffrey Sachs, Lance Taylor, Susan Vitka and two anonymous referees fornumerous suggestions on earlier verions of the paper. The author is grateful to the Brazilian National Councilfor Research (CNPq) for financial support.

' Most notably the recent views of Sargent (1982) and Holtfrerich (1985)." See for example Blejer and Cheasty (1988) and also Tanzi et al. (1987).' The classic case is Argentina, and the most usual references are Tanzi (1978) and Oliveira (1967).

[ 176 ]

[ M A R C H 1990] FISCAL REFORMS AND STABILISATION 177

Table iAustria: Closed Accounts Budgets, 1920-4 (millions of gold crowns)

RevenuesExpendituresDeficitRev./Exp.

1920*

211-7567-5355-837-3

1921*

281-4673-8392-441-8

'922t

215-I672-5457-4

32-0

1923 (ist

Estimate**

'58-4299-5141-152-9

half):

Actual

210-5296-586-071-0

1923 (2nd

Estimate

188-7269-780-770-0

half)§

Actual

272-8296.7

23-991-9

'923II

483-3593-2'09-98.-5

'924II

623-4632-49-0%98-6

Sources and observations:* Fiscal years of 1919/20 and 1920/1, July to June, from Van Sickle (1931, pp. 66 and 72).t League of Nations, estimate for October of 1922 annualized, from League of Nations (1926 a, p. 33).: Ibid p. 49.§ Difference between values for 1923 full year and 1923 first halfII Full fiscal year, January-December, ibid. pp. i i o - i .** Original estimates of League's programme. All values converted into gold crowns with annual average

exchange rates from Walre de Bordes {1924, pp. i '4-39).

Table 2Hungary: Closed Accounts Budgets: ig2O-^ (millions of gold crowns)

ExpendituresRevenuesDeficit% Rev./Exp.

1920-1*

574-'192-4387-5

33-5

1921-2*

386-4226-2160-258-5

.922-31

242-8170-872-070-4

'923-4t

409-5192-6216-947-0

1924-5 (ist

Estimate

186-3'43-842-577-2

half)t

Actual

205-9208-0— 2 0

IOI-O

1924-5

Estimate

393-9293-8100-174-6

t:

Actual

422-8453-'

-30-3107-2

Sources and observations:* Fiscal years from July to June, nominal values from Ecker-Racz (1933, p. 79) defiated with annual

average exchange rates computed from price level indexes from ibid. pp. 61-2.t Estimates from League's programme reproduced in Pasvolski (1928, p. 322).: Full year.

It is interesting and somewhat surprising to note that in both cases the levelsof expenditure before and after the stabilisations - which was achieved in theend of 1922 in Austria and in the beginning of 1924 in Hungary - were roughlysimilar. Their composition, however, was markedly different in both casesreflecting important adjustments of these economies to their new economicrealities. In the Austrian case, food subsidies, the operational deficit of staterailways, and administrative expenses associated with the excessive number ofgovernment officials were the items weighting more heavily on expenditures.Two years after the League's intervention, during the fiscal year of 1924, theshare of administrative expenses of total expenditure was reduced from 40-4 %in 1922 to 29-6%, but dismissals, which up to December of 1924 reached71,349 officials, implied an increase in the expenditures with pensions, whoseshare rose from 6-t % of expenditure in 1922 to i3"5% in 1924. The railways'

178 THE ECONOMIC JOURNAL [ M A R C H

deficit share was cut by half, reaching only i2-i % of total expenditure in 1924and most of it (63-2 %) corresponded to investment expenditure in electri-fication programmes (League of Nations, 1926a, p. 33). In parallel there hasbeen some significant increases in expenditure for social overhead.

A similar phenomenon is observed in Hungary, namely the Leagueprogramme marked significant shifts in the direction of expenditures withlittle, if at all, impact in the level of expenditures. The League's plan forHungary prescribed budget cuts in several directions in addition to reforms inthe administration, but from the beginning the League officials made it veryclear that a net increase in expenditure should be expected as the programmewas implemented. Like in Austria, the League insisted on dismissals - some10,000-15,000 officials in this case - but understood that the salaries of theremaining public officials, which numbered some 160,000, 'had so shrunk invalue it appeared neither possible nor compatible with the interests of the Stateto refuse to take steps to increase them' (League of Nations, 1926 b, p. 98).Savings would be obtained with respect to state undertakings and monopolies,especially with respect to tbe operational deficit of the state railway system. Butas observed in Austria, these savings would be mosdy offset by increasedexpenses with pension payments and investment outlays (p. i n ) .

For both countries, very significant increases in revenues explain the rapidbalancing the budget along with stabilisations. In Austria state revenues morethan doubled in real terms from 1922 to 1923 while the League's programmehad predicted an increase in revenues of only 33% for the fiscal year of 1923coming mostly from 'realistic' pricing policies for state undertakings andmonopolies, and only to a lesser degree from new taxation; rates of directtaxation were actually reduced (Van Sickle, 1931, p. 195). Unexpectedly,however, the new taxes failed to be effectively implemented and revenues frommonopolies were far below target; the yield of direct taxation and of

Table 3Austria and Hungary: Monthly Budgets (for the first reconstruction period)

Month*

I

2

3456

Totals

Expend.

45-452-052-0

5"-'49-246-8

296-5§

Austria f

Revenue

21-1

21-7

35-950-140-638-6

2O8-O§

Deficit

24-330-316-1

ro8-68-2

-88-5§

0/

/o

46-54'-769-098-082-582-5

70-1 §

Expend.

30-533-836-7

33-734-0

37-2205-9

Hungaryt

Revenue

"7-929-530-935-6

49-2

44-92080

Deficit

- 1 2 - 6

- 4 - 3- 5 - 8

"-9"5-2

7-72-1

'/o

58-7

87-384-2

105-6

'44-7I20'7ioro

Sources and observations:* For Austria month i is January of 1923 and for Hungary is June of 1924.t Collected directly from the Monthly Reports of the Commissioner-General, deflated with monthly average

exchange rates from Walre de Bordes (1924, pp. 114-39).J In gold crowns from Young (1925, vol. II, p. 326) and from the provisional budgets collected from the

Monthly Reports of the Commissioner Ceneral.§ The values differ slightly from those of Table i due to different methods of transforming paper crowns

into gold crowns.

1990] FISCAL REFORMS AND STABILISATION 179

commodity taxes, in contrast, more than doubled the League's originalestimates (League of Nations, 1926a, p. 50; Van Sickle, 1931, pp. 203-4).Table 3 shows that for the first six months ofthe League's intervention revenueswere, on average, about 70 % of expenditures and in the second semester thiswas raised to numbers between 82-5% and 98-0% of expenditures, which maybe indicative of the size of the Austrian fiscal deficit correcting for the effect ofinflation on tax yields, or if we control for the Oliveira-Tanzi effect.

In the Hungarian plan the League's experts seemed more aware of theimportance of the effects of inflation on the real yield of taxation, asthey referred to the 'proved results ofthe Austrian experience' and argued that'a substantial part' ofthe required increase in revenues 'may be expected fromthe automatically better returns (in terms of gold value) from existing taxes (asin the case of Austria) when the stabilisation of the currenty is effected'(League of Nations, 1926 A, pp. 64-6). Yet, the League's experts could neverexpect a full repetition of the Austrian experience, and thus they devised somescope for fresh taxation.A new land tax was introduced, but its contribution tototal revenues during the first reconstruction period was only 3-7% (p. 112).All other taxes remained unchanged at least during the first six months of theprogramme. As in Austria, revenues were grossly underestimated, especially forthe first six months ofthe programme, so that even with the expenditure targetsbeing exceeded by nearly 10 %, the budget was balanced in September of 1924,the fourth month of the scheme, as seen in Table 3. Again the maincontribution to this performance came from taxes that the programme leftuntouched, or reduced, such as the turnover and commodity tax and customsduties,* and mostly as a result of the Oliveira-Tanzi effect.

In sum, the stabilisation programmes determined important shifts in thedirection of expenditure in both countries which actually represented asignificant part ofthe adjustment of these economies to their new frontiers: thegradual resolution of issues like surplus officials and inefficient railways did nothave a significant impact on the levels of expenditure, because dismissals werecompensated by pension payments and by badly needed increases in realwages,* because of the new demands for social overhead and also becauserailways efficency required economies but also extensive investment outlays.On the revenues side, a key role would be played by the Oliveira-Tanzi effect,which was recognised in the League's final reports on both programmes,according to which 'budget equilibrium followed [the stabilisation], it did notprecede' (League of Nations, 1926a, pp. 75-6 and 19266, p. 37).

II

Poland had lost its independence a century before in the Congress of Vienna,when she was partioned among the Russian, German and Habsburg empires.In 1919 Poland was reunified, but with frontiers very different from the ones

* Several imports prohibitions were substituted by tariffs during 1924, which, in addition to a moderaterecovery of imports explains part of the recovery of customs revenues.

' In 1923 middle grade government officials' wages stood at 56% of their 1914 values. See InternationalLabour Office (1925, p. 93).

l8o THE ECONOMIC JOURNAL [MARCH

Table 4Poland: Closed Accounts Budgets, 1921-4 (millions of zloty)

RevenuesExpenditureDeficit% Rev./Exp.Property taxjInvest, expandfCoins/notes§Debt 11

I

2477322-584-8

74-574-858-5—16-3

1922

II

•43-9324-9i8ro44'310-5

71-3—

12-4

I

203-4

488-0284-6

58-3—

129-8—

33-7

'923

II

i75->

473'5298-4

37-02-0

•84-3—

1-8

I

539-9620-4

80-587-092-6

44'576-1

76-3

1924

II

831-6986-4154-884-396-9

* 37-4*76-216-2

I

818-29260107-888-434-6n.a.185-6

•5-9

1925

II

800-2

895'495'289-423'9n.a.115-3

15-2

Sources and observations.* From the preliminary accounts.t For 1922 consists of the Extraordinary Property Tax enacted by Michalski and for the later periods

consists of Grabski's Capital Levy.X Refers mostly to state railways.§ Includes small notes and subsidiary coins.II Includes internal and external debt. From Republic of Poland (1926, pp. 173-6 and 1931, p. 80-3).

Table 5Poland: Monthly Budgets, December of ig2j to May 1924 (millions of zloty)

December 1923*January 1924FebruaryMarchAprilMayJune

Propertytax

1-6

1-8

28-036-718-0

4-33-8

All other

revenues

30-532-848-0

70-5103-2

94797-•

Totalrevenues

32-1

35-676-0

107-2121-2

9 9 0100-9

Investexpendit.*

42-16-9O-I

3-89-59 '

15-1

Totalexpendit.

96-0

70-385-5

109-1

107-3

•05-5142-7

% Exp./revs.

33-450-6

88-898-3

112-9

93-870-7

Source and Observations:• Preliminary figures from Republic of Poland (1926, pp. 173-6). The totals reported for investment

expenditure are not reported in the later closed accounts from which the totals for expenditure were taken.t Grabski's capital levy. From Republic of Poland (1931, pp. 80-3).

of 1815; the new Poland was by all means an entirely new country. Thecomparison between the first budgets of the new republic and those followingthe stabilisation, shown in Table 4, reveals that the Polish levels of expenditurenearly tripled in real terms between 1922 and 1925. This increase expressed theoverall growth and development of the Polish public sector, which was beingbuilt out of the ruins of the bureaucracy left out by the three partitioningempires. It also reflected the pressures generated by the needs of reconstruction:Poland suffered severe devastations in her territory from the war with SovietUnion, which lasted until 1920.

The influence of inflation on state revenues was very clearly observed by

FISCAL REFORMS AND STABILISATION l8l

contemporaries,* but even so the stabilisation programme that started inDecember of 1923 decided to anticipate the collection of the new capital levyintroduced in June of 1923 and scheduled to be collected during 1924-6. Thelatter represented an important contribution to state revenues especially duringthe first months of the programme, as shown in Table 5, but yet again therecovery of the yields of existing taxes played the most important role to theobserved budgetary improvement (Rose, 1924, p. 11). Little was accomplishedin the expenditure side; general savings and expenditure cuts were proposed aspart of the usual rhetoric of austerity and sacrifices, but the observed increase inpublic expenditure from 1923 to 1924 goes opposite to the discourse.

The remarkable fact about the role of Polish finances in the process ofstabilisation is that despite the very significant improvement, the budget wasnot balanced as a consequence of the stabilisation programme. It is true that thegovernment was separated from the central bank, but it is surprisinglyneglected that the government retained powers to print small notes and coins'that were extensively exercised in 1924 and 1925. During those years the totalissuing of money by the Treasury reached approximately 450 million zlotyrepresenting more than twice the existing money supply at the onset ofstabilisation. Interestingly, however, the increases in debt and in the issue ofmoney by the Treasury during 1924 and 1925 entered the Polish budgetaryaccounts as 'extraordinary revenues', an accounting trick which was noted byseveral historians of the episode*, but confused a number of others such as JohnParke Young*, Ragnar Nurske^", and more recently Thomas Sargent".Indeed, the failure to take account of the true fiscal situation of Poland during1924 and 1925 seriously undermines these authors' views on the Polishstabilisation which are centred on the alleged move to a balanced budget.

In August of 1925, after a year and a half of stable prices, the zloty wasallowed to float and was then stabilised again at a lower level. The Londonfinancial press attributed the devaluation to the 'coin inflation' (Mlynarski,1926, pp. 3-4), but in general it was widely accepted that the collapse wasdetermined by a number of adverse circumstances including harvest failures,weak terms of trade, a tariff war with Germany, the dismal results of the Dillonand Reed loan and the deterioration in competitiveness determined by thewage inflation observed after the stabilisation. Nurske himself denied theinfluence of fiscal policy on the episode (League of Nations, 1946, p. 26) and

° For example Young (1924, pp. 23-4). It was also noted by the summit of former ministers of finance,who gathered in mid 1923. See Strasburger (1924) and Zweig (1944, p. 36).

' The Treasury was authorised to issue coins up to 150 million zloty for the fiscal year of 1924,representing nearly half of the existing money supply, and for 1925 this total was doubled, Zdziechowski

(•925. PP- 45-6)-' For example Robin {1932, p. 35). See also Heilperin (i 931, pp. 135-6); Zweig (1944, p. 40) and Landau

and Tomaszewski (1984, pp. 278-9).° Young (1925, vol. II, pp. 182-4). The source of Young's figures was the Polish Statistical Annuary of

1923, published in 1924, so that it could not bring but budget estimates.'° League of Nations (1946, p. 26)." Sargent (1982, pp. 71-2) reproduces a table with budgetary data from Young (1925, vol. II, p. 65),

though without mentioning that the figures for 1924 and 1925 correspond to the budget proposed by thegovernment (not even the budget effectively passed in the case of 1925), thus very different from the closedaccounts budgets shown in Table 4.

l82 THE ECONOMIC JOURNAL [ M A R C H

Sargent's explanation for the 1925 episode does not involve these issues:referring to the second part of the League of Nations report on post-warinflations — the part not authored by Nurske — he argued that the collapse hadbeen due to the 'premature relaxation of exchange controls' (Sargent, 1982,p. 73), though the existence of the latter is not mentioned anywhere in theliterature'^. In addition, Sargent mentioned 'the tendency of the central bankto make private loans at insufficient interest rates' (p. 73), but in the League'sreport there is no mention of that. The report only argued that there had beenno credit contraction corresponding to the reserves losses after April of 1925, asprescribed by the so called 'rules of the game'. It says nothing about credit atsubsidized rates, and again no mention of that could be found elsewhere.

I l l

The 'emergency' fiscal decrees of October n t h and December 7th and 19th- which corresponded to the 'reforms' to which the German stabilisation hasbeen usually attributed - were attempts to place the existing tax system 'on agold basis' and did not introduce any new taxes (Republic of Germany, 1924,pp. 74-9B; Robert, 1926, pp. 137-44 ^"^ Bresciani-Turroni, 1937, pp. 67-74).Indeed, the astonishing growth in tax revenues after the stabilisation observedin Table 6 was generated by the existing taxes (Bresciani-Turroni, 1937,P- 357)-

In the German case too we observe that the levels of expenditure before andafter the stabilisation were very similar, the improvements to the budgetarysituation being almost entirely due to increased tax revenues. Thus the'reforms' observed in Germany had the same character of the ones that havebeen implemented by the League in Austria and Hungary, namely they werepredominantly changes in the composition of expenditure with little effect onthe level of expenditures. In this respect it is remarkable that in 1922/3, forexample, payments on account of the Treaty of Versailles represented 38% oftotal expenditure while for 1924/5 only 13% of total spending was budgetedto this purpose, due to the revision of the London Schedule of reparationspayments accomplished by the Dawes Plan (Republic of Germany, pp. 32, 77).The service of the domestic public debt was another item that had its share overtotal expenditures significantly changed, especially during the two yearspreceding the period covered by Table 7. During 1919 and 1920, when pricesgrew by approximately 900 %, the real value of the stock of the public debt fellfrom 58,515 million gold marks - which represented more than seven timespublic expenditures in 1919-20 - to 5,424 million (pp. 29-32). Already in thefiscal year of 1921-2 the service of this debt claimed only 7% of totalexpenditures (p. 32 and Statistisches Reichsamt, 1923, p. 42), and in 1923-4it was reduced further to 3 % (Republic of Germany, 1924, p. 77).

" The League's report mentioning of' foreign trade controls' appears to relate to what in the modernjargon would be termed commercial policy, which is consistent with all accounts of the 1925 episode. Leagueof Nations (1946, p. 108).

1990] FISCAL REFORMS AND STABILISATION 183

Table 6Germany: Revenues and expenditures, May of ig2j to October of 1924

(millions of gold marks)

Period

"923MayJuneJulyAugustSeptemberOctoberNovember i-io

10-2020-30

TotalDecember i-io

10-2020-31

Total

"924January

I-IO10-2020-31

TotalFebruaryMarchAprilMayJune

Expenditures

284-7496-4473-9883-6689-2235-8134-2

28-5

258-7421-4

'79-9"65-7'53-8499-4

63-9180-4

' 9 9 '443-4478-6485-6472-1511-0

440-9

Revenues

"23-348-248-311-714-4

1-2

0 1

0-410-6I II32-8

42-988-8

164-5

98-4'53-6'85-9437-9339-8526-8396-4449-5382-3

Rev. %/Exp.

43-39-7

10-2

"-32-1

0-5O-I

"-54"2-6

18-2

25-957-B

32-9

154-0

85-.93-399-071-0

108-4

83-988-086-7

Sources: Original paper mark figures on a io days basis from Thelwell (1924) p. 28 and (1925) p. 33,deflated weekly exchange rates against sterling from The Economist, various issues (1923).

Table 7Germany: Revenues and Expenditures, 1921-5 (millions of gold marks)

Yea 1921/2* 1922/3* 1923/4*1 '924/5

ExpenditureRevenuesDeficit% rev./exp.

6,651-3

2,927-4

3.723-944-0

3.950-61,488-12,462-5

37-7

5,768-01,802-5

3.965-531-2

6.895-07,786-2-39"-2

112-9

Sources and observations:* The values for 1921/2, 1922/3 and for the period March-July of 1923 correspond to the figures reported

in Republic of Germany (1924, p. 32).t The figures for August-December of 1923 are from Table 6. For January-March of 1924 the figures are

also from Thelwell (1924, p. 33 and 1925, p. 30).

184 THE ECONOMIC JOURNAL [ M A R C H

Another important development was the increase in expenditure for broadlydefined social purposes - a natural development within the framework of theWeimar state - that actually maintained a strong upward tendency throughoutthe 1920s (Andic and Veverka, 1964, p. 237). It has often been observed thata decree of October 27th, 1923 established that approximately 25% of allpublic employees would be dismissed, 10% by January of 1924 (Republic ofGermany, 1924, p. 78). It has been less often emphasised that the wages oftheremaining officials were increased by 50% to 90% in real terms after thestabilisation, very much like what happened to the real wages of othercategories of workers,^* so that the net result of these measures on the publicservice's wage bill might not have been significant. In sum, it seems clear thatthe deficit was eliminated mostly by the effect of price stability on tax revenues;whatever minimal overall fiscal restraint, real or rhetorical, would serve nopurpose other than speeding the strict balancing of the budget, which mighthave been very useful for the negotiations towards foreign financial support byreassuring the government's adherence to orthodox finance.

IVThe fiscal 'reforms' introduced during the stabilisations comprised mostlyshifts in the direction of expenditure with little impact, if at all, on the netbudgetary result. The dismantling of the overstaffed bureaucracies of theformer empires, the fact that domestic public debts were destroyed by inflationand the external debt — in the German case — was drastically reduced by theDawes Plan, did not represent meaningful reductions in public expenditure dueto many new influences acting on the contrary direction. The marked increasesin government expenditure for social purposes, and the recomposition of wagesof public employees, more than made up for the savings often quoted asindications of strict austerity oriented fiscal policies.

The recovery of the real yield of taxation after the stabilisation through theOliveira-Tanzi effect was the key to budget balance in all four cases examined.This means basically that budget deficits were to an overwhelming extentproducts of inflation, or that, to use today's terminology, 'inflation correcteddeficits' were balanced or at least manageable. 'True' tax reforms had takenplace at some point before the stabilisations, most likely during previousstabilisation attempts such as Erzberger's in 1921 Germany, Hegedlis in 1921Hungary and Michalski's in 1922 Poland. All these programmes werespecifically designed to address the fiscal issue, but the fact that they failed toarrest inflation does not imply that they failed in their purposes, it suggestsinstead that fiscal balance was not a sufficient condition for stabilisation at amoment when other fundamental causes of inflation were still in full work.Indeed, one should note that simple causal relations between the hyper-

" In general the real wages of all categories recovered very quickly from the trough they reached at theend ofthe inflation regaining their pre-war levels late in 1924, Bry (i960, p. 62) and International LabourOffice (1925, pp. 16-7). As regards government officials specifically estimates for their levels of real wages,asa percentage of 1914, in October of 1923 are 44% (skilled) a n d 6 i % (unskilled). In June 1924 these levelswould be 87% and 99% respectively.

1990] FISCAL REFORMS AND STABILISATION 185

inflations and the fiscal disequilibria would tend to oversimplify the fact thatthese countries faced huge problems of adjustment to the new economicrealities. The redrawing of Central Europe's economic and political map -which turned into isolated pieces a customs union that endured for a century- deliberately penalised Austria and Hungary, and created a new country -Czechoslovakia - meant to be, for geopolitical reasons, a 'local champion',having received 'a disproportionally large share of the former Monarchy'seconomic potential' (Berend and Ranki, 1974, p. 182; Bloomfield, 1984,p. 252; and Pasvolski, 1928, p. 329).^* Austrians, for example, would seriouslyquestion their 'viability' as a country in the early i92OS ^ when adjustmentproblems would appear especially dramatic given that international capitalmarkets were closed, the political stability was uncertain and protectionism wasgeneralised in the Danubean region.

Germany was a special case in this regard since she was not badly hit byterritorial changes, but by the reparations obligation. In fact one can hardlydissociate the latter with the hyperinflation if we consider that Germany wastransferring nearly 80 % of her exports - or nearly a quarter of her GDP - asreparations.^* This point is often missed in view of the misleading presentationof the issue made by Machlup (1976), who questions the 'severity of theGerman transfer problem' (p. 385) on the basis of figures for 1924-8, i.e. afterthe Dawes Plan had written off a great part of the reparations debt, reducedthe annual burden to mere 3-6% of exports in 1924 and to 10-9% on averagefor 1925-8, and provided a large loan to help recycling these amounts.

These transfer problems were made even harder by another circumstance,namely a very strong pressure exercised by workers to recover 1914 real wages.In the beginning of 1920 real wages in these countries stood between half andtwo thirds of 1914 levels (International Labour Office, 1925, pp. 13-7) and atthe same time the labour movement was extraordinarily strengthened by theformidable increase in trade union membership: in Germany the 2,437thousand enrolled in 1914 turned into 9,163 thousand in 1920. For Austria andHungary these numbers rose from 147 and 107 thousand in 1914 to 901 and 722thousand (in 1919) respectively (International Labour Office, 1921, pp. 2-3and Bry, i960, p. 32). The combination of balance of payments problems anda wage push of very significant proportions (and under flexible exchange ratesand currency substitution!) most likely contributed very significantly, if notdecisively, to inflation. This is certainly not the place to explore theseconnections further; our purpose is merely to outline the problems involvedand suggest that, regarding 'fundamentals', the necessary conditions for thesestabilisations comprised many problems outside the fiscal sphere. Moreover, as

" It is not surprising, given this background, that the Czech could show strong balance of paymentsposition as early as in 1920, and could stabilise their currency in 1921.

" For example Pasvolski (1928, p. 108).* Keynes (1922, p. 51) reports that for every six months between May and October of 1921 the amounts

paid represented 79-6 % of exports revenues of this same period. Applying to the values for exports for1923 and 1924 the rules established by the 'London Schedule', namely 26% of exports plus 2,000 milliongold marks, one obtains ratios of 76-4% and 65-7% respectively. However, these values were not actuallypaid as Cermany entered into a partial moratorium in the second half of 1922.

l86 THE ECONOMIC JOURNAL [ M A R C H

put by Dornbush (1985, p. 12), 'the question of how stabilisation was achievedis not exactly the same as that of why hyperinflation occurred in the first place'.In this respect the process of ' doUarisation' played a crucial role as acoordination device for pricing decisions, as recently observed.^' Indeed, thesestabilisations involved the combination of many elements, most likely none ofwhich sufficient in itself.

Rio de Janeiro

Date of receipt of final typescript: June ig8g

REFERENCES

Andic, S. and Veverka, J. (1964). 'The growth of government expenditure in Germany since theUnification.' Finazarchiv, vol. 23, no. 2, pp. 198-243.

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