A part of the burden, or even all of it, could of course be paid off by the export of capital goods. Shares of stock, bonds,2 business assets, land, buildings, would have to be transferred from German to foreign ownership. This would also reduce the total income of the people in the future, if not right away.
These various means, however, are the only ways by which the reparations obligations can be met. Goods or capital, which would otherwise have been consumed within the country, can be exported. To discuss which is more practical is not the task of this essay. The only question which concerns us is how the government can proceed in order to shift to the individual citizens the burden of payments, which devolves first of all on the German treasury. Three ways are possible: raising taxes; borrowing within the country; and issuing paper money. Whichever one of the three methods may be chosen, the nature of its effect abroad remains unaltered. These three ways differ only in their distribution of the burden among citizens.
If the funds are collected by raising a domestic loan, then subscribers to the loan must either reduce their consumption or dispose of a part of their capital. If taxes are imposed, then the taxpayers must do the same. The funds which flow from taxes or loans into the government treasury and which it uses to buy gold, foreign bills of exchange, and foreign currencies to fulfill its foreign liabilities are supplied by the lenders and the taxpayers through the sale abroad of commodities and capital goods. The government can only purchase available foreign exchange which comes into the country from these sales. So long as the government has the power to distribute only those funds which it receives from tax payments and the floating of loans, its purchases of foreign exchange cannot push up the price of gold and foreign currencies. At any one time, the government can buy only so much gold and foreign exchange as the citizens have acquired through export sales. In fact, the world prices of goods and services cannot rise on this account. Rather their prices will decline as a consequence of the larger quantities offered for sale.
However, if and as the government follows the third route, issuing new notes in order to buy gold and foreign exchange instead of raising taxes and floating loans, then its demand for gold and foreign exchange, which is obviously not counterbalanced by a proportionate supply, drives up the prices of various kinds of foreign money. It then becomes advantageous for foreigners to acquire more marks so as to buy capital goods and commodities within Germany at prices which do not yet reflect the new ratios. These purchases drive prices up in Germany right away and bring them once again into adjustment with the world market. This is the actual situation. The foreign exchange, with which reparations obligations are paid, comes from sales abroad of German capital and commodities. The only difference consists in how the government obtains the foreign exchange. In this case, the government first buys the foreign exchange abroad with marks, which the foreigners then use to make purchases in Germany, rather than the German government’s acquiring the foreign exchange from those within Germany who have received payment for previous sales abroad.
From this one learns that the continuing depreciation of the German mark cannot be the consequence of reparations payments. The depreciation of the mark is simply a result of the fact that the government supplies the funds needed for the payments through new issues of notes. Even those who wish to attribute the decline in the rate of exchange on the market to the payment of reparations, rather than to inflation, point out that the quotation for marks is inevitably disturbed by the government’s offering of marks for the purchase of foreign exchange.3 Still, if the government had available for these foreign exchange purchases only the number of marks which it received from taxes or loans, then its demand would not exceed the supply. It is only because it is offering newly created notes that it drives the foreign exchange rates up.
Nevertheless, this is the only method available for the German government to defray the reparations debt. Should it try to raise the sums demanded through loans or taxes, it would fail. As conditions with the German people are now, if the economic consequences of compliance were clearly understood and there was no deception as to the costs of that policy, the government could not count on majority support for it. Public opinion would turn with tremendous force against any government that tried to carry out in full the obligations to the Allied Powers. It is not our task to explore whether or not that might be a wise policy.
However, saying that the decline of the value of the German mark is not the direct consequence of making reparations payments but is due rather to the methods the German government uses to collect the funds for the payments, by no means has the significance attached to it by the French and other foreign politicians. They maintain that it is justifiable, from the point of view of world policy, to burden the German people with this heavy load. This explanation of the German monetary depreciation has absolutely nothing to do with whether, in view of the terms of the Armistice, the Allied demand, in general, and its height, in particular, are founded on justice.
The only significant thing for us, however, since it explains the political role of the inflationist procedure, is yet another insight. We have seen that if a government is not in a position to negotiate loans and does not dare levy additional taxation for fear that the financial and general economic effects will be revealed too clearly too soon, so that it will lose support for its program, it always considers it necessary to undertake inflationary measures. Thus inflation becomes one of the most important psychological aids to an economic policy which tries to camouflage its effects. In this sense, it may be described as a tool of anti-democratic policy. By deceiving public opinion, it permits a system of government to continue which would have no hope of receiving the approval of the people if conditions were frankly explained to them.
Inflationist policy is never the necessary consequence of a specific economic situation. It is always the product of human action—of man-made policy. For whatever the reason, the quantity of money in circulation is increased. It may be that the people are influenced by incorrect theoretical doctrines as to the way the value of money develops and are not aware of the consequences of this action. It may be that, in full knowledge of the effects of inflation, they are purposely aiming, for some reason, at a reduction in the value of the monetary unit. So no apology can ever be given for inflationist policy. If it rests on theoretically incorrect monetary doctrines, then it is inexcusable, for there should never, never be any forgiveness for wrong theories. If it rests on a definite judgment as to the effects of monetary depreciation, then to want to “excuse it” is inconsistent. If monetary depreciation has been knowingly engineered, its advocates would not want to excuse it but rather to try to demonstrate that it was a good policy. They would want to show that, under the circumstances, it was even better to depreciate the money than to raise taxes further or to permit the deficit-ridden, nationalized railroads to be transferred from government control to private hands.
Even governments must learn once more to adjust their outgo to income. Once the end results to which inflation must lead are recognized, the thesis that a government is justified in issuing notes to make up for its lack of funds will disappear from the handbooks of political strategy.