Adam B. J. Klug
Princeton University
"We went too far in encouraging lending to Europe after the First World War. It turned out badly before we got through with it."
John H. Williams, testifying to Congress on the Marshall Plan in 1948. (Williams, 1952, 207)
"Deutschland kein Kolonialland ist."
Hjalmar Schacht (1927, 4)
Practically the whole amount of the reparations so far have been provided by the foreign lender, and mainly by the United States. The United States lends money to Germany. Germany transfers its equivalent to the Allies, the Allies pay it back to the United States government. Nothing real passes - no one is a penny the worse off. The engraver's dies, the printer's frames are busier, but no one eats less, no one works more. (Keynes, 1978, 280-1)
Keynes, therefore, saw American lending as a device, and a futile one at that, for transferring reparation payments. Some recent views are even harsher in their evaluation of American lending. Thus, the distinguished historian Stephen Schuker writes that Germany not only did not pay but that
The governments of the Weimar Republic, during the successive stages of inflation, stabilization and deflation, sought to manipulate the international monetary system for Germany's benefit. In the short run they did so successfully. Not only did they avoid paying net reparations to the Allies, they actually extracted the equivalent of reparations from the former allied powers, and principally from the United States. (Schuker, 1985, 336)
Like Walter Benjamin's Angel, the historian's face is always turned to the past, and it is all too easy to reach a conclusion like Schuker's with the benefit of hindsight. John H. Williams, writing in 1952, presented a different view of events from the perspective of an influential economist who supported the policy at the time of its implementation:
The eventual losses have been an almost insurmountable barrier to further private investment. The conclusion, however, that our capital exports were mistaken is easier to reach now than it was at the time. The restoration of economic stability and of the gold standard and the large rebound in European production and trade that accompanied them in the last half of the 1920s, and in turn it was in that period that our capital exports were really large - were conditions calculated to invite investment which, in turn, stimulated production and trade. (Williams, 1952, 76)
Williams goes on to argue that the collapse of lending resulted from the Great Depression, whose severity was unprecedented and completely unforeseen. He stresses what a successful strategy German borrowing appeared to be at the time:
With these loans she was able to make her reparation payments under the Dawes Plan, to rationalise her industries and increase her capacity to pay. There was a body of respectable economic opinion which held that this was a logical way of solving the reparations problem so far as the German end of it was concerned, though it left unsettled the recovery of net remittances from Germany. (Williams, 1952, 77)
This attitude on the part of what Schumpeter terms "economic opinion" was summed up thus by two economists involved in the reparation debate:
The success with which the new loan policy was meeting led many to believe that the so-called transfer problem had been proved a myth. It was urged that inasmuch as the foreign loans were, in the main, extended for productive purposes, they would ultimately lead to an export surplus on the part of Germany and automatically provide the means for German payments on both reparation and private debt accounts. The fact that no difficulties had been found in procuring the foreign exchange with which to meet reparation instalments was cited in evidence, and it was argued that, thanks to the productive character of the loans, Germany was rapidly achieving a permanent export surplus, ample to meet both reparation and debt requirements. (Moulton and Pasvolsky, 1932, 381)
Williams, for example, expressed such sentiments when he stated that the "experience of the last five years" (Williams, 1930, 78) contradicted "those who magnify transfer difficulties" and that: "Never was theoretical expectation more completely and precisely confounded" (Williams, 1930, 73).
This paper re-examines this controversy from the 1920s. It should be pointed out that it does not deal with what is traditionally called the transfer problem. The issues raised in that context concern the so-called "secondary burden" of transfer payments which results from the terms of trade turning against the transferor country. Here, in contrast to the transfer problem literature, a one-good model with a single small country is used throughout. The issue addressed is that of the possibility of easing the "primary burden" of reparations by using borrowing to smooth consumption over time and finance investment. Thus this paper is an attempt to answer Charles Maier's (1979) request for clarification of the reparations problem from a dynamic perspective.
A further intriguing provision of the plan was what was known as Transfer Protection. Under this device the German Government was to transfer marks to the Agent-General for Reparations who was responsible for converting them into foreign exchange for the Allies. He was not to do this, however, if the mark was consequently driven over the gold points, endangering the maintenance of the gold standard. This measure was regarded as sufficient both to deal with the transfer problem, and to buttress the monetary stability mentioned above. In practice, Germany's capital imports meant that there was never any lack of gold or foreign exchange and the clause was never invoked. The existence of this measure, however, justifies an analysis of German borrowing in 1924-9 predicated on the assumption that the transfer problem can be shunted on one side and the contemporary arguments of advocates of German borrowing, such as Williams, can be treated on their own merits.
The last aspect of the Dawes Plan which is important in what follows is the fact that the issue of the size of reparations debt was left open; the yearly payments alone were scaled down but 132 billion gold marks remained the nominal claim of the Allies, while a 'prosperity index', based on several indicators, such as the growth of exports, coal production and consumption of certain items was provided as a basis on which the size of the annual payments might be scaled up. Thus the German government could in effect influence the size of its debt by means of its economic decisions and had an incentive actually to restrict the growth of the economy. Furthermore, it is clear from the research of McNeil that neither the German, American nor British decision makers really believed that Germany would pay the full reparations debt (McNeil, 1986, 27).
Just how severe was the Great Depression in Germany is made completely clear by the second column of Table 1 (to be presented at the meeting) and against such a background it is hardly surprising that reparations payments were suspended.
The Dawes Plan did not end the history of reparations revision. In 1928 the American Agent-General for Reparations, Seymour Parker Gilbert, alarmed by the level of public expenditure in Germany and the process of "non-genuine transfers" of reparations facilitated by capital imports, succeeded, not without a little help from Schacht, in setting in train new attempts at reparations revision. This culminated in the Young Plan of 1929, which finally fixed the size of Germany's reparations debt, provided a new loan of about $300m and set up, for the first time, an international bank, the Bank for International Settlements, to service reparations payments. This plan never got off the ground and reparations were suspended in 1931. The final chapter in this tale was Schacht's suspension of much of the debt service in 1933, and his success in getting the European and British creditors to agree to a partial repudiation of the commercial debt. No agreement was ever reached with the United States about the private debts, and in the American case the German default was ultimately total.
3.1 Behaviour of firms The technology available to the country is described by a linear production function with one input, capital.
Qt = aKt (1)where Q is GDP at time t, and K the capital stock. This capital depreciates at rate d so that the net increase in the capital stock is:
\A\CO1(.,K, ) = It - dKt.(2) In accordance with some remarks by Ohlin (1926), in his survey of the German economy in 1925, I assume that the installation of capital is costly. This also enables one to derive an expression for the investment function. These costs are related to total investment expenditure by the following formula
J = (1 + \F(¿,2) \F(It,Kt))It. (3) (where ¿ is a parameter).Firms try to maximise the discounted value of their profits, which simply equals (1) minus (3). It is shown in the appendix that their profits will be maximised by selecting a fixed rate of capital accumulation
x = It/Kt. (4)The rate of growth of the economy simply equals this constant rate minus the rate of depreciation
x - d = g = \A\CO1(.,K, )/K. (5)It is also shown in the appendix that this rate of capital accumulation, x, depends on the interest rate and the technological parameters of the model.
3.2 Optimal paths By giving consumers the active role of maximising a utility function we can calculate the optimal path which gives them a preferred pattern of consumption over time. They maximise
U = º\S( ,°, ,0, )e-dtU(ct)dt (6) subject to º\S( ,°, ,0, )e-r(t)c(t)dt = ½ = -D(0) + º\S( ,°, ,0, ) q Ktc-rtdt (7)Here d is the subjective discount rate and ½ is total wealth. q is a-x(1+f/2). Wealth equals foreign asset holdings (-D(0), where D is debt) plus the present value of firms.
The standard solution to problem (6) is
\F(\A\CO(.,c),ct) = b(r-d)where b is the inverse of the elasticity of marginal utility.
If the utility function is isoelastic, and the world rate of interest is constant, consumption grows at a constant rate which is positive if the world interest rate exceeds the discount rate.
ct = coeb(r-d)t (8) Substituting (8) in (7) yields. - \F(co,y-r) = -D(0) - \F(qKo,g-r) (9)Here y is the optimal rate of growth of consumption given by (7).
The appendix derives this result more fully, but it follows quite naturally from the separation of production and consumption decisions characteristic of neo-classical economics. In the appendix a result is derived for the value of the debt D(t), at later dates. The intuitive result holds that:
D(t) = \F(ct,y-r) - \F(qKt,g-r) (10)where consumption and the capital stock equal coeyt and Koegt.
This is very similar to a standard debt accounting equation (e.g. Dornbusch (1988)) except that it is consistent with optimal behaviour over time and has a more complex paramaterisation.
"the foreign borrowing taken as a whole has more than paid its way ... at the close of the calculation the values existing in Germany, less the foreign debt incurred were larger than at the beginning. No observer of the economic progress Germany has made since 1924 can doubt that such in fact has been the case." (Shepard Morgan, 1930, 20)
The reader should remember that all debt projections are made under the counterfactual assumption of no Great Depression. They suggest what would have happened had "business as usual" continued after 1929. The initial level of consumption consistent with a particular debt burden emerges as a solution to the optimal programme. This can be compared with the initial consumption level chosen by economic actors in Germany and serves as a benchmark against which to judge the optimality of their behaviour. In addition, sensitivity tests are carried out to determine exactly what rates of growth of consumption and output would have been sufficient to meet the Allies' reparations demands without drastic reduction of German consumption.
Any level of debt between zero and $500 per head (RM132 billion) can be regarded as consistent with a possible optimal path. Zero is the upper bound, because, as Holtfrerich (1985) has shown, the hyperinflation liquidated all of Germany's foreign debt. $500 per head was the Allies' original reparations claim of 1922. Since there was no private debt in 1924 and historians believe that the Allies had concluded by then that $500 per head was their maximum claim (McNeil, 1986, 99), this figure is the upper bound.
The results of calculating initial values of optimal consumption, using equation (9), are contained in Table 3 (available at the meeting). The debt/GNP ratios in the table reflect reparations debt ranging from zero to the official figure of RM132 billion (i.e. a debt to GNP ratio of three) with an intermediate figure of RM60 billion.
The data, which are based largely on Hoffman's series, as explained above, suggest that German consumtion in 1925 was almost 2.4 times higher than that necessary to sustain a situation of zero foreign debt, let alone the payment of reparations with interest. Clearly Germany was a long way from any optimal consumption path.
I have carried out extensive sensitivity analyses on this model, some representative results of which are presented in Tables 4-6 (to be presented at the meeting). For example, Tables 5 and 6 show that had it been possible to return to the rate of growth of output of about 3% which prevailed in 1880-1913, this would have entailed reductions of about 35% in initial consumption. It should be pointed out that Table 5 shows that even maintaining an initial level of zero debt would have involved a sacrifice of consumption by Germany (about 6% of initial consumption), or alternatively a return to the rates of growth of output attained before the war. The tables also show that with no change in the growth rate, reparations payments would have implied a reduction of 10% in initial consumption per head and a fall in the optimal consumption growth from 1.5% per year to 1.0% per year.
The Young Plan itself involved the fixing of a final figure for the Reparations debt, the abandonment of transfer protection and the dismantlement of the Agent-General's office. From the economic point of view what matters is that the German economy was left with a debt of $140 per head in real terms according to my calculations, instead of an unspecified debt with an upper limit of $500, as was the case under the Dawes Plan. $140 at 1913 prices per head represents the Young obligations of 37 billion Reichsmarks plus the commercial debt Germany had built up in the interim. I now examine the implications of the acceptance of the Young Plan by the Reichstag and the Referendum of 1930.
The actual growth rates for 1925-9 generate immediate surpluses of about 12 billion R.M., in real terms, six times the forecast for surpluses made by the Germans to the Young Committee (James. 1985, 75). However, this implies extremely low levels of initial consumption of about $70 per head, increasing output or reducing the rate of growth of consumption yield more realistic paths for the current account which are almost exactly in line with what was projected at the Paris Conference. With a growth rate of 3.0% per annum, Germany ceases to be a net debtor after 18 years while, if consumption grows at 2.4% and the growth rate is 2.3% this process takes 23 years. All this can only be achieved at a very high cost, unrealistic falls of about 40% in the initial level of consumption. Those scenarios which maintain initial consumption at roughly the 1929 level of $183 per head result only in steeply rising current account deficits. The scenario of the second column on the left whereby consumption falls by about 15% is more realistic, but this is still greater than the 11% fall wich actually took place in 1929-1932. These results point to the conclusion that the Young Plan, if it was to lead to a German balance-of- payments surplus, necessarily involved a drastic reduction of living standards. A government such as Bruning's, concerned for its foreign credit position and determined to honour its reparation obligations would have had, according to the model, little choice but to cut public consumption and raise taxes. The hypothesis put forward by Fleisig (1974), that Bruning's motivation for meeting the Young schedule was to show concretely that Germany's task was impossible politically, is also supported by the draconian results with regard to the necessary reduction in consumption.
An acute business economist and observer of the international economic scene, with a confessed prediliction for equilibrium-type theories, Benjamin Anderson, was therefore correct when he stated that the Young Plan depended on Germany "reversing radically the whole course of economic life" and in particular reducing consumption (Anderson, 1945, 207).
There exist two possibilities for applying the existing theoretical literature to this above issue. One is to use Cohen's (1986) solvency index, and therefore to make the same calculations for Germany in the 1920s as he has made for developing countries in the 1980s. The other possibility is to exploit the fact that one can calculate at least the official costs of default in the German case, as these were set out in the Dawes Plan. It is, therefore, possible to asses whether these sanctions were sufficient to deter default. If they were indeed sufficient, we can conclude that Angell was correct to dismiss this possibility.
In this case the country's rulers maximize:
º\S( ,°, ,0, )e-dt(1n ct)dt s.t. \A\CO1(.,D, ) = rDt + Q0egt (11) Dt given, \A\CO1( ,lim,t®°) e-rtDt = 0. where d is the rate of time preference.Within this framework, based on the work of Eaton and Gersovitz (1981), it is assumed that a country may repudiate its debt if the cost of repaying it becomes "excessive". If a country does so its creditors immediately drive it into financial autarky and some actual financial penalties are paid by the defaulter. The country, therefore, has to chose between the benefits of remaining within the international loan market and the net gains from default, given the autarkic utility level which can be achieved with the domestic capital to which the country has access after it has defaulted on its debt. This autarkic level is defined as follows. Take a country which defaults at time t*. Assume that its resources are reduced by a factor ls-t at time s, and that it is forced into financial autarky after time t*. In this case a country defaulting at t* may receive the endowments (1 - ls-t*)Qs at time s, where Qt is output and equals aKt. The default penalty ls-t* need not be a constant and may become heavier or higher over time. At each point of time t therefore, the country has the ability to get an autarkic level of utility after default defined by:
Ua(Qt) = º\S( ,°, ,t, )e-btln(cs)ds s.t. cs = (1 - ls-t)Qs. (12)Call U(Qt, Dt) the utility the country would obtain by not defaulting at time t. This level of utility is derived from the solution of (7.1). The problem facing lenders is to set the default penalty lt at a level which ensures that we always have Ua(Qt) ² Ut(Dt,Qt) for all t. In an appendix it is proved that the solution to this problem implies that
d º\S( ,°, ,t, ) e -d(s-t) 1n(1-ls-t)ds = 1n (\F(ct,Qt)). (13) and that this in turn implies that the debt ceiling Dt is determined by Dt = - \F(lQt,(g-r)) (14)Since the growth rate is constant in this model, this formula is close to one advocated by Kemmerer, the chief economic advisor to the Dawes Committee, by which annual reparations payments would be a constant proportion of total output (see Dawes, 1939), as opposed to the use of the Prosperity Index.
The default penalty is now found by examining the provisions against default made under the Dawes Plan. Their legal framework is explained in Moulton's book The Reparations Plan, (Moulton 1924, 151), while their economic costs can be gleaned from Angell's account, (Angell 1929, 67) and from Auld's (Auld 1927, 201-9). They placed half the capital of the German railways in the form of bonds whose yearly interest would be paid directly to the Allies as part (about 40%) of the Reparations payments. The railways themselves were placed under the control of a French Railway Commissioner, who could take over the railways completely in the event of default. A further five billion marks worth of commercial and industrial debentures were also placed at the disposal of the Agent-General. In the event of a German default the Allies would, therefore, be able to enjoy half the capital income of the German railways, and, on the basis of Hoffman's data on the value of German companies, about 31% of the capital income of German business and industry. In 1925 this comes to only 1.9% of GDP, although in 1929 the returns to capital of the railways were one third higher than in 1925 and the returns in industry were more than twice as high. Taking an average of the returns in the corporate sector and in the railways over 1925-29, the potential default penalties are still only 1.9% of GDP.
The results of using these figures to calculate the debt ceiling using equation (14) are recorded in Table 10 (to be presented). Recall that the debt ceiling is that level of debt which maintains the ratio of debt to the present value of output equal to the default penalty, and this is that level which keeps the utility of continuing repayment equal to the utility achievable under autarky. At any higher level of debt, the default penalties will be insufficient to deter the country from defaulting and choosing autarky. Making this calculation yields a debt ceiling of $162 per head or a debt output ratio of 0.95. This is the maximum level of reparations debt which would have made it worthwhile not to repudiate, given the default penalties. Note, however, that this is higher than the figure of $140 per head calculated in the previous section which represents Germany's total debt under the Young Plan plus her commercial debt in 1929. Unfortunately, the Young Plan abolished the default provisions.
These results show that the default penalties were sufficient to force Germany to pay a moderate level of reparations. Clearly they would also have prevented default on the smaller commercial loans. There is, however, a great deal of uncertainty as to whether these penalties covered the commercial loans or not. One contemporary observer and adviser of American bankers, Benjamin Anderson, apparently did think that the default penalties would be used for this purpose, although the Dawes Plan stated no such thing explicitly (Anderson 1946, 120). The initial Dawes Loan, however, was covered by these penalties and there is evidence that lenders believed this measure would be repeated in other cases (Huertas and Cleveland 1985, 154-60). McNeil has shown in addition that American lenders did try to have the default penalties extended to their loans (McNeill, 1987, 73-4, 40-2).
b = \F(r-g,1+g) \F(Dt,Qt). (15) where b is the fraction of output devoted to debt service, and b ² l, where l is the default penalty.The important concession to realism in Cohen's approach lies in the fact that he does not assume that the economy is initially in a steady state, so that (15) only holds in year T, several years after the initial year of the calculation. Between years t and T the growth and interest rates can fluctuate from year to year. The analogue to equation (14) in this case is therefore:
D0 = b \I\SU(,,)\S(T,t =1) \F(Qt,P\S(t,1)(1+ri)) + \I\SU(,,)\S(T,t =1) \F(DT,P\S(T,i =1)(1+ri))). (16) From (15) we find that: DT = (\F(r-g,1+g)) \F(1,b) QT. (17) Substituting this expression in (5.8) and using the fact that QT = \I\SU(,,)\S(T,1)Q0(1+yt), yields the following expression for the resources devoted to debt service: b =\B\BC\[(\A\CO1( , , ,\I\SU(,,)\A\CO1(T,1) \F(P\S(T,1) (1+gi),P\S(t,1) (1+ri)) +) \F(P\S(T,1) (1+gi),\F(P\S(T,1) (1+ri),(\F(r- g,1+g))))) \A\CO1( , ,-1, , , , , , , , ,). \F(D0,Q0) . (18)In order to use (18) in a practical calculation one must decide on a value of T. In Cohen's calculations this was taken to be ten years after the initial year, following which the economy settles down to a steady state with constant interest and growth rates. In this case I take the initial year as 1924, and the final year as 1929. Continuing the counterfactual methodology of my previous discussion, after 1929 the economy is assumed to follow the average growth and interest rates which prevailed in 1925-29. In other words this is a solvency index with the Great Depression left out. Again it is a measure of the realism of expectations in the 1920s, given that contemporaries involved in negotiating the Young Plan like Thomas Lamont and analysing the Weimar economy like Angell stress that a Depression of such magnitude was completely unexpected, and that once underway, an upturn of the business cycle was regarded as just around the corner (Angell, 1932, 372), (Lamont, 1930, 94).
The following table shows values of the solvency index which is the proportion of GNP or exports needed to produce a trade surplus which would enable the debt to be serviced, given that the country must remain solvent. Cohen also uses exports as an appropriate measure of resources.
GNP EXPORTS Total Reparations 6.5% 37% A and B bonds only 2.5% 14%The index of solvency is used by Cohen in the following way: he compares the solvency index - in effect an indication of what should be repaid, to the amount the country actually did pay in the form of a trade surplus. The data in Tables 1 and 2 in section 2 make it clear enough that Germany was very much in deficit in 1925-9. Unsurprisingly, Germany did not make the required adjustment to debt repayment. This is true even if one considers the commercial debt. This was reduced to only $3 million by the hyperinflation, but Germany was not a net creditor even when one assumes the elimination of reparations. Therefore she should have had at least a balanced trade account on average during the 1920s, even when reparations are not taken into account. In one year, 1926, there was a small surplus, but this was only 2.6% of exports and only 1.2% of GNP. On the other hand, under the Bruning government, Germany did attempt an adjustment, and in 1931 the surplus was 7.9% of exports and only 1.5% of GNP. This shows, interestingly, that the adjustment achieved by Bruning was sufficient to render Germany solvent under the terms of the Young Plan.
How much of an adjustment would have been required from Germany in contemporary terms? In other words, how large a trade surplus did she have to create? Cohen calculated a value of 13% of exports for his solvency index for Latin America in 1984. This figure can be compared with the results given here in Table 7. Clearly the index suggests a very great adjustment, even by contemporary standards, if the whole reparations debt of 1922 was demanded. The A and B bonds alone or the slightly lower demands of the Young Plan debt would have involved a degree of adjustment comparable to that required in Latin America in the 1980s.
I have termed this theory, following the terminology of the time, "the productive credit view" (Von Sering, 1928, 201). The model of equations (1-9) can serve as a rational reconstruction and encapsulation of this school of thought. Surprisingly one can find discussions of dynamic planning by firms (Angell, 1929, 213), a linear production function (Moulton, 1925, 208), the implications of an infinite horizon, (Hawtrey, 1932, 110) and intertemporal solvency (Auld, 1928, 184). Even intertemporal optimisation in the Fisherian model was treated by F. A. Fetter in the context of borrowing to repair war devastation (Fetter, 1926, 103-4).
The productive credit view began as a justification for the Dawes Plan (Young, 1924, Auld, 1927) and appeared with greater vigour as the intellectual basis for the Young Plan (Williams, 1930, 77), (Angell, 1929, 330-5). This view even had footholds in Britain, (Guilleabaud, 1924) and even in Germany, (Weber, 1928), despite the objections of the Reichsbank's advisor (Bonn, 1928, 154) and Schacht himself (1926, 4-5, 14-15). The impact of Angell's Recovery of Germany (1929) can be traced in Stimpson's notebooks (Link, 1970, 400-1), of that of Auld in the notes of the German Foreign Ministry's reparations expert Karl Ritter (Akten zur deutschen auswŠrtigen Politik, series B, Band XVIII, No. 74) and of William's writings on the German Economics Ministry, (document reproduced in Maurer and Wengst 1980, 606-10).
Yet this approach had a crucial weakness: a lack of what an economic assistant to the Dawes Committee later termed a lack of "economic intelligence", i.e. "accurate information penetratingly interpreted" (Davis, 1975, 304). To highlight this point, I have constructed a set of "pseudo- data" presented here in Table 8, reflecting the actual beliefs about the German economy held by members of the productive credit school. These data can be compared and contrasted with those currently accepted by economic historians by means of the table shown here. The main, but not exclusive source of these incorrect estimates is Angell's Recovery of Germany (1929) supposedly "a sound piece of workmanship" (Economic Journal Review, March 1930), and an "exceptionally well-balanced piece of work" (Sir A. McFadyean, Economic Journal, March 1931), demonstrating "a thorough exploitation of statistical sources" (AER review by M. Hartshough, May 1930). At least in part the appearance of "the most remarkable economic recovery in the history of the World" (Angell, 1930, 81), derives from the special circumstances of the recovery from hyperinflation in 1924.
By feeding these data into the models set out above, the consistency of the views of the productive credit view can be judged. The results are summarised here in Table 9. Whatever initial value of debt/GNP is chosen between 0 and 3.5, all produce initial values of consumption within the range stated or implied by this contemporary literature. Neglecting repudiation risk explicitly (Angell, 1932, 177), was not a major failing, since Germany remains solvent with these "notional" data. Thus the Young Plan in particular appears to have been an honest mistake since the "notional" data and Table 8 suggest that Germany could have met her solvency criteria under the Young Plan, and in the first-best world of optimal borrowing, would have had her welfare substantially increased.
.c.; Notional Data Actual Data
(1924-1928) (1925-1929)
a. annual rate
growth of NNP 7.1% 2.4%
b. annual rate of
growth of capital
stock 6.2% 2.0%
c. annual rate of
growth of
consumtion 1.9% (low estimate)
3.6% (high estimate) 4.1%
d. GDP deflator - 1.4%
e. wholesale price
index -2% -
f. rate of interest 8.5% 4.4%
g. depreciation 7.0% 4.0%
h. capital stock
per head, 1924 $612 $877
(1925)
i. aggregate consumption
per head, 1924 $106 (low estimate)
$139 (high estimate) $163 (1925)
Sources: Notional data
a,b,e,f. Angell (1929)
c,i. Moulton and McGuire (1924), Angell (1929)
g. Thomas (1934)
h. Moulton and McGuire (1924), Stamp (1930)
Actual data
Hoffman (1965) except g. calculated from Balderston (1982)
All growth rates are geometric.
Test Actual Data Notional Data Optimal path adhered to with perfect capital markets not optimal optimal Default penalty deters default Default on A and B No default on A and B (i.e. size of the default penalty bonds is best strategy bonds, or on 70% of ensures a time-consistent the C bonds equilibrium) Cohen solvency index compared twice as insolvent as As solvent as Latin to its value for debtors Latin America in 1984 America in 1984. of the 1980s (With debt consisting of (With debt A and B bonds only, consisting of A and German solvency in B bonds only 1924=Latin America German is close to 1984) complete solvency).