EXCURSUS IV
THE MARK EXCHANGE
The gold value of a countryʼs inconvertible paper money may fall, either because the Government is spending more than it is raising by loans and taxes and is meeting the balance by issuing paper money, or because the country is under the obligation of paying increased sums to foreigners for the purchase of investments or in discharge of debts. Temporarily it may be affected by speculation, that is to say by anticipation, whether well or ill founded, that one or other of the above influences will operate shortly; but the influence of speculation is generally much exaggerated, because of the immense effect which it may exercise momentarily. Both influences can only operate through the balance of debts, due for immediate payment, between the country in question and the rest of the world: the liability to make payments to foreigners operating on this directly; and the inflation of the currency operating on it indirectly, either because the additional paper money stimulates imports and retards exports, by increasing local purchasing power at the existing level of values or because the expectation that it will so act causes anticipatory speculation. The expansion of the currency can have no effect whatever on the exchanges until it reacts on imports and exports, or encourages speculation; and as the latter cancels out, sooner or later, the effect of currency expansion on the exchanges can only last by reacting on imports and exports.
These principles can be applied without difficulty to the exchange value of the mark since 1920. At first the various influences were not all operating in the same direction. Currency inflation tended to depreciate the mark; so did foreign investment by Germans (the “flight from the mark”); but investment by foreigners in German Bonds and German currency (an exact line between which and short–period speculation it is not easy to draw) operated sharply in the other direction. After the mark had fallen to such a level that more than 25 marks could be obtained for a dollar, numerous persons all over the world formed the opinion that there would be a reaction some day to the pre–war value, and that therefore a purchase of marks or mark Bonds would be a good investment. This investment proceeded on so vast a scale that it placed foreign currency at the disposal of Germany up to an aggregate value which has been estimated at from $800,000,000 to $1,000,000,000. These resources enabled Germany, partially at least, to replenish her food supplies and to restock her industries with raw materials, requirements involving an excess of imports over exports which could not otherwise have been paid for. In addition it even enabled individual Germans to remove a part of their wealth from Germany for investment in other countries.
Meanwhile currency inflation was proceeding. In the course of the year 1920 the note circulation of the Reichsbank approximately doubled, whilst on balance the exchange value of the mark had deteriorated only slightly as compared with the beginning of that year.
Moreover, up to the end of 1920 and even during the first quarter of 1921 Germany had made no cash payments for Reparation and had even received cash (under the Spa Agreement) for a considerable part of her coal deliveries.
After the middle of 1921, however, the various influences, which up to that time had partly balanced one another, began to work all in one direction, that is to say, adversely to the value of the mark. Currency inflation continued, and during 1921 the note circulation of the Reichsbank was nearly trebled, bringing it up to nearly six times what it had been two years earlier. Imports steadily exceeded exports in value. Some foreign investors in marks began to take fright and, so far from increasing their holdings, sought to diminish them. And now at last the German Government was called on to make important cash payments on Reparation account. Sales of marks from Germany, instead of being absorbed by foreign investors, had now to be made in competition with sales from these same investors. Naturally the mark collapsed. It had to fall to a value at which new buyers would come forward or at which sellers would hold off.[58]
There is no mystery here, nothing but what is easily explained. The credence attached to stories of a “German plot” to depreciate the mark wilfully is further evidence of the overwhelming popular ignorance of the influences governing the exchanges, an ignorance already displayed, to the great pecuniary advantage of Germany, by the international craze to purchase mark notes.
In its later stages the collapse has been mainly due to the necessity of paying money abroad in discharge of Reparation and in repaying foreign investors in marks, with the result that the fall in the external value of the mark has outstripped any figure which could be justified merely as a consequence of the present degree of currency inflation. Germany would require a much larger note issue than at present, if German internal prices were to become adjusted to gold prices at an exchange of more than 400 marks to the dollar.[1] If, therefore, the other influences were to be removed, if, that is to say, the Reparation demands were revised and foreign investors were to take heart again, a sharp recovery might occur. On the other hand, a serious attempt by Germany to meet the Reparation demands would cause the expenditure of her Government to exceed its income by so great an amount, that currency inflation and the internal price level would catch up in due course the external depreciation in the mark.
In either event Germany is faced with an unfortunate prospect. If the present exchange depreciation persists and the internal price level becomes adjusted to it, the resulting redistribution of wealth between different classes of the community will amount to a social catastrophe. If, on the other hand, there is a recovery in the exchange, the cessation of the existing artificial stimulus to industry and of the Stock Exchange boom based on the depreciating mark may lead to a financial catastrophe.[59] Those responsible for the financial policy of Germany have a problem of incomparable difficulty in front of them. Until the Reparation liability has been settled reasonably, it is scarcely worth the while of any one to trouble his head about a problem which is insoluble. When stabilization has become a practicable policy, the wisest course will probably be to stabilize at whatever level prices and trade seem most nearly adjusted to at that date.