Finance from Kaiser to F?hrer: Budget Politics in Germany, 1912-1934

Published by EH.NET (August 2001)

C. Edmund Clingan, Finance from Kaiser to F?hrer: Budget Politics in

Germany, 1912-1934. Westport, CT: Greenwood Press, 2000. x + 255 pp.

$67.50 (hardback), ISBN: 0-313-31184-6.

Reviewed for EH.NET by Michael Hughes, Department of History, Wake Forest

University.

Edmund Clingan, of the University of North Dakota, seeks here to rescue

discussions of German fiscal policy in the early 1930s from a narrow

determinism. He argues, provocatively but ultimately not completely

convincingly, that viable Keynesian alternatives existed to the deflationary

policies Chancellor Heinrich Br?ning pursued in the early 1930s.

Clingan rightly seeks to take a long-term perspective on German fiscal policy.

He points out that Germany began facing substantial budget deficits well

before World War I and that it had not by 1914 fully succeeded in establishing

policies to manage those deficits. Part of the problem was the relatively

limited claim on tax revenues by the central government, part was a political

stalemate that prevented effective tax and other legislation. He identifies a

budget crisis that had become acute, primarily because of rearmament costs,

by 1912. The costs of war and defeat exacerbated the problem, and policymakers

only solved it after hyperinflation compelled Germans to accept drastic tax

increases and expenditure cuts in 1923/24. Surprisingly, he does not cite

Niall Ferguson’s discussion of these issues in his Paper and Iron

(Cambridge: Cambridge University press, 1995, especially pages 23 to 27),

where Ferguson adds an important emphasis on the weakness of German capital

markets, an issue Clingan addresses for the 1920s and 30s.

A major theme for Clingan is the gradual “nationalization” of German fiscal

policy from 1912 to 1934. The pre-1918 Kaiserreich represented a federation of

originally sovereign princes under the Prussian monarchy. The states had

retained important tax privileges. The central government only succeeded in

fits and starts in securing central control of taxation by the early 1920s,

though it still had to assign certain taxes and revenues to the states. The

Nazis did succeed in eliminating the last vestiges of state power by 1934.

However, Clingan points out, Nazi polyocracy obviated that centralization

after 1934, as various competing satrapies in Hitler’s Third Reich pursued

independent budgetary policies.

The core of Clingan’s book rests on an argument he developed in his

dissertation about fiscal policy in the mid-20s. Germany suffered a recession

in 1925/26. The Finance Minister at the time, Peter Reinhold, pursued a policy

of deficit financing to stimulate the economy and to finance job-creation

programs. Germany came quickly out of that recession and secured substantial

growth in the period from 1926 to 1928. Clingan argues that Reinhold’s

policies were primarily responsible for that rapid recovery, not (as some have

argued) the opportunity to increase exports that Britain’s 1926 General

Strike offered.

Clingan extrapolates from that experience to argue that Germany could and

should have pursued similar deficit financing in the early 1930s and that

doing so would have moderated substantially the impact of the Depression. He

emphasizes that various respected individuals in early 1930s Germany proposed

pursuing just such policies, so that it is not anachronistic to suggest

Germany could have done so. He cites the work of Raymond L. Cohn (“Fiscal

Policy in Germany during the Great Depression,” in John Komlos and Scott

Eddie, editors, Selected Cliometric Studies on German Economic History

(Stuttgart: Franz Steiner Verlag, 1997)) arguing from the high employment

budget that German fiscal policies before 1933 were consistently restrictive

and that much less restrictive post-1932 policies contributed substantially

to Germany’s relatively rapid recovery from the Depression. Although Clingan

acknowledges the difficulties German governments experienced in securing

credits in the late 1920s and early 1930s, he argues that Germany could have

overcome this problem with legislation giving governments more flexibility in

taking on loans and with a series of careful, incremental steps from 1924 to

build confidence in the government as a borrower.

Clingan alludes to but does not completely satisfactorily address problems

with this Keynesian hypothesis. As Theo Balderston has shown (The Origins

and Course of the German Economic Crisis, 1923-1932 (Berlin: Haude &

Spener, 1993)), and as Clingan acknowledges, the hyperinflation of the early

1920s had devastated German credit markets. Germans, and many foreigners, not

surprisingly, no longer trusted the German state to preserve the value of the

currency and of any Reichsmark investments. German firms and individuals

tended to hoard profits and income, rather than investing them in Reichsmark

or real assets. Any sign of economic difficulties tended to spur capital

flight. Clingan may well be right that careful governmental cultivation of

credit markets in the mid-to-late 1920s could have made it easier to finance

reflationary budget deficits in the 1930s. However, that is by no means

certain and is more or less irrelevant to Germany’s actual policy options

after 1929. Given the realities of capital flight, Weimar Republic governments

would have found it extraordinarily difficult to compel Germans to loan money.

The Nazis’ ability successfully to pursue reflationary deficit policies

reflected several factors: 1) the desperation that had led to real changes in

attitudes toward deficits by 1933, 2) the end of reparations, 3) a more

positive attitude by investors after the Nazis had broken the trade unions and

the democratic system, which many German businessmen viewed as involved in the

creeping socialization of the German economy, and 4) the gradual

implementation from 1930 of controls on foreign trade that allowed a reflation

that did not spill over into foreign-exchange crises. Reflationary deficit

financing under Weimar was certainly theoretically possible. Indeed, one can

identify various prerequisites for making that theory reality. Unfortunately,

Clingan has not adequately addressed the problems other scholars have seen in

implementing such a process under the conditions that actually obtained, 1929

to 1932.

Clingan’s writing could be stronger. His paragraphing is weak, making

following his argument difficult. He relies too often on assertion rather than

argument. For example, he simply dismisses (p. 212), rather than comes to

grips with, Silverman and others’ evidence that businessmen were much more

willing to accept reflation from a right-wing dictatorial government after

1933 than from the earlier democratic governments they feared were

implementing creeping socialism in response to popular pressure.

Clingan raises some important questions, about the longer term development of

German fiscal policy, about ways deficit financing could have offered

alternatives to Weimar policymakers, and about the nature of Nazi successes in

overcoming the Depression. He does not convince this reviewer that deficit

financing to moderate the Depression was a practical alternative before

1932/33, that is, before Weimar democracy had already effectively collapsed.

Michael Hughes is Professor of History at Wake Forest University. His most

recent works include Shouldering the Burdens of Defeat: West Germany and

the Reconstruction of Social Justice (University of North Carolina Press,

1999) and “Hard Heads, Soft Money? West German Ambivalence about Currency

Reform,” German Studies Review 21, no. 2, pp. 309-27.