The Economics of Inflation
The contemporary economist's study; still the technical reference on the hyperinflation.
Summary
Bresciani-Turroni was an economist who served on the Reparations Commission in Germany and observed the hyperinflation directly. His book, published in Italian in 1931 and in English in 1937, is the definitive economic analysis of the German inflation of 1914 to 1923.
The empirical work is exhaustive. He assembles price, wage, exchange rate, money supply, production, trade and distributional data and traces the relationships between them through each phase. His central conclusion is that the inflation was caused by the creation of money to finance government deficits, and that the balance of payments explanation offered by German officials at the time, which held that depreciation caused the inflation rather than the reverse, was wrong. He shows the causal sequence ran from note issue to exchange rate to prices.
His analysis of the consequences is what makes the book more than a monetary study. He documents the destruction of savings and of the rentier class, the transfer of wealth to debtors and to holders of real assets, the distortion of production toward capital goods and inventory accumulation, the collapse of capital markets, the effect on labour and on real wages, and the misallocation of investment into capacity that could not be sustained after stabilisation.
The book is technical and long, and the translation is dated. It remains the reference work on the German inflation and the source most later accounts draw from. Its causal argument has been broadly accepted, though some later work gives more weight to reparations and to the Ruhr occupation than Bresciani-Turroni allows.
Key takeaways 7
- The German inflation was caused by note issue financing government deficits, not by the balance of payments as German officials argued at the time.
- The causal sequence ran from money creation to exchange rate depreciation to domestic prices, which the data on timing establishes.
- Inflation transferred wealth from creditors, savers and the rentier class to debtors and holders of real assets on an enormous scale.
- Production was distorted toward capital goods and inventory accumulation because holding real assets was the only defence against currency depreciation.
- Investment during the inflation went into capacity that could not be sustained once the currency stabilised, which caused the post-stabilisation contraction.
- Real wages fell substantially during the inflation despite nominal wage indexation, because wages adjusted more slowly than prices.
- Stabilisation was achieved quickly once the fiscal deficit was closed, which confirms that the cause was fiscal and monetary rather than structural.
Who should read it
Economists and serious investors who want the definitive empirical analysis of a hyperinflation and its distributional and production consequences.
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