Hyperinflation as a catalyst of transformations: Path dependence through accelerated dynamics in post-First World War Austria

Abstract

Hyperinflations are a modern phenomenon often associated with periods of transition. By accelerating the dynamics that govern the financial, political and private spheres of life, hyperinflations necessitate a quickened decision-making process in which alternative choices are eliminated. Using the example of Austria following the First World War, this article shows that hyperinflations are likely to have a path-determining effect on multiple levels. While periods of transitions offer the rare opportunity for countries to break with historical path dependence, hyperinflations carry the risk of creating new path dependence prematurely. By speeding up dynamics during transformative processes, hyperinflations eliminate possible alternatives that might otherwise have been chosen. Hyperinflations are thus best understood as neither the cause nor the consequence of transitions, but as their accelerating catalyst.

Keywords:

• Hyperinflation
• path dependence
• Austria
• interwar

Acknowledgements

The author is indebted to Kent Weaver, Igor Guardiancich and participants of the Max Weber Programme’s Multidisciplinary Research Workshop on Path-Dependence in Welfare State Reforms. Further thanks go the organizers of the 6^th Graduate Conference in European History (GRACEH), held at Vienna in 2012, and to Dieter Segert for his helpful comments.

Notes

1. Bank of England Archive OV/28/52: Young to Treasury, 18 Mar. 1922.

2. Plumb, Growth of Political Stability, xvii.

3. Economic historians have mainly concentrated on identifying the path-determining effects of institutions. The quantitative approach is exemplified by Dell, “Persistent Effects of Peru’s Mining Mita.” Political scientists have shown more interest in how path dependence is overcome to produce institutional change. See Streeck and Thelen, “Institutional Change.”

4. The classic contemporary example from everyday life is the unpractical arrangement of letters on our keyboards. David, “Clio and QWERTY.”

5. Krasner, “Approaches” and Ebbinghaus, “Path Dependence.”

6. Kernbauer, Währungspolitik, 25.

7. Keynes, Economic Consequences, 368.

8. Lyon, “Yugoslavia’s Hyperinflation.”

9. At the time of the completion of this article it still remains to be seen whether Venezuelan hyperinflation will be accompanied by a regime change.

10. Friedman, “Counter-Revolution in Monetary Theory.”

11. Capie, “Conditions in which Very Rapid Inflation has Appeared.”

12. Paarlberg, Analysis and History of Inflation.

13. Pressburger, Oesterreichische Notenbank.

14. Kernbauer, Währungspolitik, 21; Matis, “Notleidende Millionäre.”

15. On Austrian post-war inflation see foremost: Bachinger und Matis, Der Österreichische Schilling; Suppanz, Die österreichische Inflation; Bachinger and Matis, “Die österreichische Nachkriegsinflation;” Teichova, “Die Inflation im Vergleich.”

16. de Bordes, Austrian Crown, 144–53.

17. “The valuation of money in terms of goods and foreign exchange always includes a speculative aspect, i.e. it always includes the expected development of future conditions. If one expects depreciation to continue because the Government is unwilling to limit its usage of the printing press, then money will be valued lower than it would have been valued if no more inflation had to be expected. Because one expects depreciation to continue, one tries to get rid of the domestic currency which loses purchasing power on a daily basis by buying goods, stocks or foreign exchange.” Ludwig Mises, “Inflation und Geldknappheit. – Gegen eine weitere Verwendung der Notenpresse.” Die Neue Freie Presse (henceforth NFP), 11 Mar. 1922, 2. See also Friedrich Herz, “Entspricht der Kurswert der Krone unserer wirtschaftlichen Lage?,” NFP, 18 Jan. 1921, 10.

18. The real cash balance of an economy, i.e. the real value of cash circulating within the economy outside the Bank of Issue, equals nominal circulation divided by the price level or exchange rate. During periods of high inflation, both circulation and prices increase, but prices increase faster so that real cash balances decline. Philip Cagan, “Monetary Dynamics of Hyperinflation.” The decline in cash balances did not go unnoticed by the economist and lawyer Wilhelm Rosenberg, who pointed out that before the war Austrian circulation stood at 500 million Swiss francs, whereas it had fallen to 200 million by May 1922. “Amerikanischer Vorschuss und Notenbank,” NFP, 24 May 1922, 1.

19. Simmel, Philosophie des Geldes, 506–54.

20. de Bordes, Austrian Crown, 163–4.

21. In 1904 this figure had stood at 30.5%. After reaching its nadir in 1922, it gradually rose back to 24% by 1932. Abortion was illegal in Austria and abortion arrests increased from 288 in 1921 to 376 in 1922 and 460 in 1923. See also Hofstätter, Die arbeitende Frau.

22. Vocelka, Österreichische Geschichte, 98.

23. Nohlen and Stöver, Elections in Europe, 198.

24. Sargent, “The End of Big Inflations.”

25. Kernbauer, Währungspolitik, 35–8.

26. Santaella, “Stabilization Programs and External Enforcement.”

27. Piétri, La reconstruction de l’Autriche.

28. Although in full control of the Vienna Province and posing a serious political threat, the Socialists never managed to dethrone the Christian-Socials during the interwar period. See e.g. Czeike, “Wien.”

29. Ausch, Als die Banken fielen.

30. Bachinger and Matis, “Inflation in Austria after World War I (1918–1922),” 320.

31. Kernbauer, März and Weber, “Die wirtschaftliche Entwicklung.”

32. It is worth quoting the classic account by Charles Gulick: “After several months of sham prosperity, however, the adverse consequences of the inflation became apparent. Other countries began to protect themselves against Austrian ‘currency dumping’ by high tariffs and import prohibitions. The faster the crown fell, the more difficult it became for the entrepreneur to secure the foreign exchange needed for the purchases of raw materials. From one turnover to another the working capital of industry became smaller and smaller. Restriction of production was the unavoidable consequence. Credit was dear, 20 per cent and more, and difficult to obtain. The rate of exchange rushed down so rapidly that the whirling note-printing presses were unable to maintain the pace. Thus the gold value of the continuously increasing circulation rapidly decreased, producing a grave tightening of money. Therefore, toward the end of the summer of 1921, the period of good trade, the Inflationskonjunktur, was approaching its end.” Gulick, From Habsburg to Hitler, 157.

33. Unemployment grew further after stabilisation, though partially due to the reforms initiated and not just because of stabilisation. See Wicker, “Terminating Hyperinflation;” Kernbauer, Währungspolitik, 48; Bachinger and Matis, “Die österreichische Nachkriegsinflation 1918–1922,” 86–7. Weber, “Grosse Hoffnungen und k(l)eine Erfolge,” 180–1.

34. Weber, “Zusammenbruch, Inflation und Hyperinflation,” 18.

35. Sokal, “Austrian Banks.”

36. Weber, “Grosse Hoffnungen und k(l)eine Erfolge,” 180–1.

37. Kernbauer and Weber, “Die Wiener Grossbanken;” Weber, “Zusammenbruch, Inflation und Hyperinflation,” 28.

38. See e.g. Kernbauer, Währungspolitik, 48–9; Weber, “Zusammenbruch, Inflation und Hyperinflation,” 28–9; Bachinger and Matis, “Inflation in Austria after World War I (1918–1922),” 322–3. But also Bauer, Die österreichische Revolution.

39. Minkowski, Le temps vécu.

40. Jahoda, Lazarsfeld and Zeisel, Die Arbeitslosen von Marienthal, 83–92. Ellenberger, “A Clinical Introduction,” 106.

41. Neurath, “Sixty Years Since Marienthal.”

42. People were sensitive to the changes in tobacco prices. The NFP published a report on 9 Nov. 1922 that rumours about an increase in tobacco prices were not accurate and reported on 20 Oct. that tobacco prices would be increased by 25% to 30% within two days. NFP, Morgenblatt, “Keine Erhöhung der Preise für Rauchmaterialien,” 9 Nov. 1922, 9. NFP, Morgenblatt, “Neuerliche Erhöhung der Rauchwarenpreise,” 20 Oct. 1922, 11. Another article in the NFP observed that in the middle-class districts, consumption of higher quality products had fallen while in working-class neighbourhoods expensive tobaccos were being consumed, and noted that the number of female smokers had increased too. NFP, Nachmittagsblatt, “Die Erhöhung der Rauchwarenpreise,” 23 Oct. 1922, 5.