Download Did High Wages of High Interest Rates Bring down the Weimar

Did High Wages or High Interest
Rates Bring down the Weimar
Republic?
Hans-Joachim Voth
The Journal of Economic History, Vol. 55, No. 4 (Dec. 1995)
Pre-war Germany
• Dynamic Economy, high Saving and Investment
– 16% of domestic product devoted to capital formation
• Virtually no unemployment
1920s
• Deterioration of economic confidence
 HYPERINFLATION
• Stabilization of currency in 1923
 prosperity, rising output, exports, and employment
• Signs of economic weakness in late 1920s
 investment dropped to 10.5% of GDP
: Unemployment overstated in
these statistics; employment
grew rapidly, driven by increased
exports
Insured
^
• Limited investment primary reason for slump
caused by either:
– Excessive wages reduced profits (Borchardt thesis)
– High interest rates undermined capital expansion (Voth)
• Capital inflows threatened renewed inflation
• Hjamar Schacht pursued a tight monetary policy which kept
interest rates high (sterilization of capital inflows)
As unit labor cost increased, expansion rate of capital stock decreased
(after 1930)
.
Voth
The relationship between interest rates, real wages & investment
is causal:
• Prices of capital and labor determine the rate of expansion of
capital stock.
Borchardt’s view: high price of labor discouraged investment
because it squeezed firms profits
• But high labor cost might encourage investment
– Substitute capital for labor
Additionally, even had wages been constrained, investment would
have been below historical levels by about 1/3
• Error-correction model reveals no evidence of wages depressing
investment
• Demand for capital in the German economy between 1925 and 1929
strongly reduced by high interest rates
• Simulation suggests that lower interest rates at the end of the 1920s
would have caused significantly higher investment
• Strong substitution effects between capital and labor
High wages make for high investment relative to capital stock
Voth’s Conclusions
• “If, as Schumpeter suggested, domestic capital formation was
crucial in determining the overall economic performance on
Weimar Germany, the interest rates and not wage pressure were
at the heart of sluggish growth”
• “Whatever may have been necessary to save the first German
republic, the small-cake economy that- according to Borchardtwas directly responsible for its demise could hardly have been
avoided through workers’ sacrifices. Instead, possible remedies
for Weimar’s malaise of low investment could have been higher
wages, or a return to the lower interest rates that had prevailed
before WWI.”