Published by EH.NET (March 2003)

Albrecht Ritschl, Deutschlands Krise und Konjunktur, 1924-1934:

Binnenkonjuktur, Auslandsverschuldung und Reparationsproblem zwischen

Dawes-Plan und Transfersperre. Berlin: Akademie Verlag, 2002. 297 pp.

$79.80 (cloth), ISBN: 3-05-003650-8.

Reviewed for EH.NET by Hans-Joachim Voth. Department of Economics, Universitat

Pompeu Fabra, Barcelona.

Wrong tales last longer, or so it seems. An op-ed piece for the Wall Street

Journal on January 29, 2003 recounted the old Kindleberger/Landes story

about how the withdrawal of funds in the runup to the 1929 crash in the US led

to a downturn in Germany. Never mind that the timing is all wrong, or that

domestic reasons as well as changes in US monetary policy possibly played a

more important role — it’s a good story, and connected with one of the most

dramatic episodes in twentieth-century economic history. Of twenty-six European

democracies in 1920, thirteen had become dictatorships by 1938. Nowhere were

the consequences more catastrophic than in the case of Germany — and nowhere

did economic breakdown loom larger as a contributing factor in the demise of

democracy. A mere five years after the end of hyperinflation, the country’s

economy began to turn down once more. With the possible exception of the US, no

other nation experienced a more severe depression. Unemployment skyrocketed to

six million and industrial production fell by half; by 1932, communists and

Nazis together held a majority of seats in parliament. Ever since, debate has

raged about the inevitability or otherwise of the final outcome — Hitler’s

rise to power. Was economic misery crucial? Did the prosperity of the roaring

twenties demonstrate that Germany’s economy was in perfectly good shape? Or was

Weimar already living on borrowed time? Once the downturn began, could it have

been mitigated? Questions such as these are not just for the economic

historians, who have debated them for decades [Borchardt 1991, Kershaw 1990].

In Germany, where politicians can score an easy goal by claiming that the other

side is “emulating Br?ning” (the German chancellor during the early 1930s whose

austerity policy allegedly aggravated the slump), they are also deeply

political. Albrecht Ritschl’s Deutschlands Krise und Konjunktur attempts

to rethink many of these vexed and contentious issues. The book is primarily

addressed to a German audience, but its argument and the new data it contains

will be of interest to other scholars working on the Great Depression. It is

also an example of a peculiar art form, which needs some explaining before we

can turn to the book’s contents.

In the Anglo-Saxon world, the Ph.D. separates amateurs from professional

scholars. Uniquely, Germany has two doctorates for young and aspiring

researchers — the first is often not much of an academic affair at all, and

mainly serves to reinforce social distinctions (the delight of being called

“Herr Doktor!”, grovelling treatment from realtors, etc.). The second

dissertation, the Habilitation, on the other hand, is often only

completed in one’s late 30s or early 40s, after half a decade or so of

indentured servitude. What it lacks in originality it makes up for in length —

the second dissertation has to be an ?ber-dissertation, often exceeding 500

pages. As a result, creativity is stifled, manuscripts are basically

unreadable, and the transition to independent scholarship comes much too late

for most scholars; no other institution has contributed more to the decline of

German academia as the Habilitation.

In contrast to the mostly mindless outpourings generated by this peculiarity of

the German system, Albrecht Ritschl’s book is a contribution to scholarship. It

is actually two books between a single set of covers — one that tries to

rectify numerous problems with the national accounts for interwar Germany, and

the other an economic analysis of the slump’s causes and the policy

alternatives that could have been pursued. Aficionados of German economic

history will be grateful for having the final set of estimates for GDP and

especially for government borrowing in published form. For much too long, these

calculations were similar to an iceberg in the cold waters of German economic

history, with only a small percentage visible above the waterline, and the main

volume of work removed from the public’s eye, being only available as

unpublished working papers or in manuscript form. Ritschl has not just reworked

published figures, but made use of the extensive range of semi-official sources

published in Germany at the time. He also collected substantial amounts of

archival material, which reveal the full extent of Nazi (and pre-Nazi)

government borrowing. While some scholars may quibble with some of the

assumptions, most of the revisions are likely to supplant or augment earlier

estimates. As a result, we can now say with greater certainty than before that

during the brief halcyon days of the Weimar Republic, growth was possibly

slower than previously thought, and that deficit spending during the Nazi

recovery was nowhere near as rampant as popular mythology claims. While not as

wide-ranging as other revisions of national accounts nor as important in its

implications, this is a thorough and useful addition to the literature.

The second book contained in this volume sets itself an altogether more

ambitious aim — to provide a new explanation for the severity of the Great

Depression in Germany, and to bury alternative interpretations that have been

offered in the past. The “big idea” is that a change in the seniority of debt,

agreed as part of the renegotiation of Germany’s reparations debts, shut off

access to foreign funds when they were needed most — after 1929, when the

country had entered into a severe recession and was about to plunge even

further. Deemed the main culprit for the outbreak of World War I in the

Versailles treaty, Germany was saddled with paying reparations of an

unspecified value. Until 1932, the volume of claims and the form of payment was

being negotiated — mostly at the conference table, sometimes at gunpoint (such

as in 1923, when the French and Belgian armies invaded the Ruhr because a

shipment of telegraph poles was overdue). After the hyperinflation, in 1924,

the Dawes Plan gave Germany access to a big loan, some relief from reparations

payment, as well as “transfer protection” — money to satisfy the allies could

only be sent abroad when the conversion of marks into foreign currency did not

undermine the currency’s stability. Implicitly, this enabled the Germans to try

and “crowd out” reparations by other borrowing — since the ability to repay

foreign debt is not unlimited, and since transfer protection effectively made

reparations payments junior debt. The idea that Weimar’s borrowing/spending

spree (resulting in gleaming new spas, public swimming pools, rapid

electrification of the railways, generous public housing programmes etc.) is

partly to blame for the brutal downturn after 1929 is not particularly novel.

Also, numerous others have highlighted the importance of transfer protection

under the Dawes Plan. What makes this variation of the tale interesting is the

claim that a radical change under the Young Plan drastically undermined the

ability to borrow abroad — with reparations the senior debt, who would want to

lend? Ritschl presents a theoretical model that demonstrates exactly how the

change in seniority might have made a difference. This is a laudable exercise,

but it is somewhat uninspiring — the model adds little or nothing to the

simple verbal argument, generates no surprising implications or new ways of

testing the basic hypothesis.

The book’s main shortcomings are its unwillingness to confront the data and an

inability to show any evidence that would substantiate its key arguments. This

applies both to the borrowing binge and the debt hangover after 1929. There is

some archival evidence that suggests that Germany was keen to pile the

non-reparation debt high in order to leave the allies dry, such as an

incriminating internal document from the Foreign Office in Berlin. In effect,

the Germans deliberately tried to ensure that there were “American Reparations

to Germany” (as Stephen Schuker called them (see Schuker 1988)) — Germany

borrowed more from US investors than it ever paid in reparations, and then

defaulted on its debts. Yet those crafty Krauts clearly did not all get

together to crowd out the reparations — there were also drastic steps to

curtail foreign borrowing, not least by one of the chief conspirators in

Ritschl’s tale, the President of the Reichsbank, Hjalmar Schacht. Any borrowing

should have been good borrowing in his book if Ritschl’s main thesis is

correct. Instead, he repeatedly railed against the evils of foreign borrowing

in any shape, size or form, effectively seized control over access to foreign

funds, and succeeded in bringing inflows to a standstill for an extended

period. What is also missing is some assessment of the level of foreign

borrowing that should have been expected and that would have been “normal” in

an economy recovering from a major shock — for example, by comparing the

volume of debt issuance with Third World countries stabilizing after

hyperinflations since 1945 [for an instructive list of cases, see Fischer,

Sahay and V?gh 2002].

If the story of a deliberate crowding out of reparations appears questionable,

the central hypothesis has even less to recommend it. The well of international

credit ran dry for pretty much every borrower around the world after 1929 —

which is the origin of the Kindleberger story. Without compelling empirical

evidence to show that Germany suffered more than everyone else, it is hard to

see how the highly idiosyncratic explanation for its troubles could be

plausible at all. There are a number of obvious variables one could and should

have checked before basing so many claims on so little — did the spreads of

German bonds widen dramatically over those of other borrowers in the London and

New York markets? Was it even harder for Germany to get access to credit than

for everyone else? To this reviewer’s dismay, the book makes no attempt to

address these questions, despite the easy availability of data and the wealth

of information in the forms of charts and tables that the author assembles.

Also, inconvenient facts are largely ignored or belittled. In fact, Germany did

borrow — the famous Lee Higginson loan of 1930 — even after the change in

debt seniority rules. Ritschl notes that the conditions were not generous,

perhaps even humiliating. Yet he fails to resolve the conundrum: how could the

country obtain a loan at all if the prospect of repayment was nil? More

importantly, as recent work by Temin and Ferguson shows, political decisions —

and not the letter of the Young Plan — stood between Germany and further fresh

loans in 1931. Had the Reich not decided to build a pocket battleship and to

pursue a misguided tariff union with Austria (violating the spirit of the

Versailles treaty, and probably its letter), France would most likely have

extended fresh credit [Temin and Ferguson 2003]. Also, the author’s own data

show clearly that commercial paper issuance abroad revived in 1930, after a

brief downturn in late 1929, and that it only dried up for good towards the end

of the year (p. 120). If the seniority clause was as important as the author

claims, then it evidently took contemporaries at least eighteen months to

figure this out; and by the time they allegedly did, there were plenty of other

reasons not to lend. An externally imposed credit crunch may be the right

explanation for at least some of the German Slump’s severity; yet Ritschl’s

seniority-clause story cannot be squared with the available evidence.

True to the cliometric tradition, the book presents some counterfactuals of

German GDP during the 1920s and 1930s. Had the Reich paid up and transferred

the reparations instead of borrowing right, left and center, it could have

avoided most of the downturn, or so Ritschl argues. Between 1928 and 1931,

there would have been healthy growth, while the 1920s would have been more

subdued. Except for a small dip in 1932, the slump could have been avoided

almost entirely: Germany’s depression would have looked more like that of

France than the US experience. The underlying cause is that actual policy was

pro-cyclical twice — during the expansion and during the downturn. In

traditional accounts, the villain in the piece is Heinrich Br?ning, a dour and

ascetic Catholic whose austerity measures were designed to aggravate the slump

in a bid to show that Germany could not pay reparations. Ritschl substitutes

his story of externally imposed fiscal discipline due to credit constraints,

and turns Br?ning’s gratuitous hairshirt exercise into the just punishment for

the Republic’s debt-financed consumption mania during the 1920s. The story is

problematic on several counts. First of all, the counterfactuals are predicated

on using the Keynesian import multiplier. This is despite the fact that a good

part of the book is actually devoted to showing that Keynesian interpretations

do not apply to interwar Germany, that the fiscal multipliers are unstable,

etc. This reviewer was troubled to see the author return so happily to the same

analytical toolkit at the earliest convenience, having spent so much time

dismantling it just a few pages before. Also, it seems altogether unlikely that

Germany could have emulated the relatively good French performance, as Ritschl

argues. This was largely due to a unique set of circumstances that sheltered

the latter from the contractionary impulse that was being transmitted via the

gold standard [Eichengreen 1992, Eichengreen 2002]. Finally, how likely is it

that Germany could have borrowed much more in 1931 or 1932 if it had been more

restrained in the late 1920s, given the worldwide turmoil on financial markets

and the severe crisis in the US?

Given the unfortunate lack of compelling data analysis and the lack of cohesion

overall, it is to be feared that many of the interesting and challenging ideas

in this work may not find their way into peer-refereed journals. Yet it would

be useful if at least the data revisions could be presented and published in

English so that they may serve as a basis for future substantive work on the

many fascinating questions that Weimar’s economic history continues to raise.


Borchardt, Knut, Perspectives on Modern German Economic History and

Policy (Cambridge, New York: Cambridge University Press, 1991).

Eichengreen, Barry, Golden Fetters: The Gold Standard and the Great

Depression, 1919-1939 (New York: Oxford University Press, 1992).

Eichengreen, Barry, “Still Fettered after All These Years,” Macintosh Lecture,

delivered at Queen’s University, 2002.

Fischer, Stanley, Ratna Sahay and Carlos V?gh, “Modern Hyper- and High

Inflations,” Journal of Economic Literature, XL (2002), 837-80.

Kershaw, Ian (editor), Weimar: Why Did German Democracy Fail? (New York:

St. Martin’s Press, 1990).

Schuker, Stephen, “American “Reparations” to Germany,” Studies in

International Finance, 61 (1988).

Temin, Peter and Thomas Ferguson, “Made in Germany: The German Currency Crisis

of July 1931,” Research in Economic History, forthcoming (2003).

Hans-Joachim Voth is Associate Professor of Economics at Universitat Pompeu

Fabra, Barcelona, a Research Fellow in the International Macro Program at the

CEPR, London, and a Research Fellow at the Centre for History and Economics,

King’s College, Cambridge. His latest publications include “With a Bang, not a

Whimper: Pricking Germany’s Stockmarket Bubble in 1927 and the Slide into

Depression” (Journal of Economic History, 2003), “Factor Prices and

Productivity Growth during the British Industrial Revolution” (with Pol Antr?s,

Explorations in Economic History, 2003, forthcoming) and “The Longest

Years — New Estimates of Labor Input in Britain, 1760-1830″ (Journal of

Economic History, 2001).