## Swipe to navigate through the chapters of this book

Published in:

2018 | OriginalPaper | Chapter

# 3. Before Hitler: The Expansionary Programme of the Brauns Commission

Author : Antonio Magliulo

Published in:

Publisher:

## Abstract

In spring 1931, Friedrich Hayek sent an article to Wilhelm Röpke, who at that time was the most authoritative member of the ‘Brauns Kommission,’ a board of experts appointed by Heinrich Bruning’s government to put forward proposals that might reduce the dramatic rise in unemployment. The Commission had just published a Report containing guidelines for an expansionary policy based on public works. This chapter provides the stylized facts that characterize the business cycle in which the Great Depression is embedded; examines the expansionary programme put forward by the Brauns Commission; Hayek’s criticism and Röpke’s defence; and explains how Heinrich Brüning’s government (30 March 1930–30 May 1932), after considering the Brauns (and Lautenbach) Plans, decided to continue with their deflationary policy. Adolf Hitler became Chancellor in January 1933.

### Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

• über 69.000 Bücher
• über 500 Zeitschriften

aus folgenden Fachgebieten:

• Automobil + Motoren
• Bauwesen + Immobilien
• Elektrotechnik + Elektronik
• Energie + Nachhaltigkeit
• Finance + Banking
• Management + Führung
• Marketing + Vertrieb
• Maschinenbau + Werkstoffe
• Versicherung + Risiko

Jetzt 90 Tage mit der neuen Mini-Lizenz testen!

### Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

• über 58.000 Bücher
• über 300 Zeitschriften

aus folgenden Fachgebieten:

• Bauwesen + Immobilien
• Finance + Banking
• Management + Führung
• Marketing + Vertrieb
• Versicherung + Risiko

Jetzt 90 Tage mit der neuen Mini-Lizenz testen!

Footnotes
1
The evidence for 1931 is only indirect. On the one hand, Hayek refers to an article by Röpke that appeared in May 1931. On the other hand, the author identification of the typescript (not reproduced in the reprint) reads: “F. A. Hayek, Wien”. Presumably, after September 1931 when he came to LSE, he would have identified himself as “F. A. Hayek, London”. Moreover, in a letter to Mises, 9 December 1931, Hayek refers explicitly to his “unpublished discussion with Röpke” (“seinerzeitige unveröffentlichte Auseinandersetzung mit Röpke”). The letter in question is preserved in the Austrian State Archives. The source is: Österreichisches Staatsarchiv, Archiv der Republik, Akten Sonderarchiv Moskau/Fonds 623: Mises, box 6, folder 81. I wish to thank prof. Hansjoerg Klausinger for these precious information and other suggestions.

2
On this period there exists a huge literature. We will mention only some basic works. On the Republic of Weimar, see Eick (1963), Schulze (1987), and Lee (2010). On the Great Depression and the German economic policy during the 1930s, see Kindleberger (1986), Temin (1989), Eichengreen (1992), Rothbard (1963 [2000]), Borchardt (1991), Patch (1998), and Nicholls (1994). On the Brauns Commission, see Klausinger (1995, 1999, 2001).

3
For example, one pound sterling contained 113.0016 grains of gold, and one dollar contained 23.22 grains. On the international market, one pound was exchanged with 4.866 dollars: the exchange rate was thus equivalent to the ratio between the quantity of gold contained in the single currencies (113.0016/23.22 = 4.866). Paper money could be converted into gold, but was greater than the existing gold reserves, meaning that banks would therefore be unable to convert all the paper money in circulation into gold. To guarantee gold convertibility, two systems were devised. The United Kingdom, from as early as the Bank Charter Act of 1844, placed a ‘maximum limit’ on the emission of banknotes not covered by gold. Other countries of continental Europe, including Germany and Italy, in addition to a ‘maximum limit,’ obliged their respective central banks to maintain a ‘minimum reserve’ of gold to cover the banknotes issued. In both cases, convertibility was guaranteed by an optimal relationship between gold reserves and monetary circulation. British legislation aimed at directly controlling the monetary aggregate (denominator), while continental European legislation aimed to regulate gold reserves (numerator). The minimum coefficient for obligatory reserves was placed at 40%.

4
Before the war, as already said, one pound sterling was worth 4.866 dollars (4.87 for simplicity). The gold convertibility of the two currencies made an oscillation of the exchange rate possible within margins corresponding to the costs of transport of gold from New York to London (which at that time were three cents for every pound in gold). The exchange rate should have been able to vary between a minimum of 4.84 and a maximum of 4.90 dollars per pound. An American debtor would never have been willing to pay more than 4.90 dollars for a pound, since it would in fact have been possible to buy gold in New York, transport it to London for three cents and then sell it at the price of 4.87 dollars per pound. Similarly, a British creditor would never have been willing to receive less than 4.84 dollars for a pound, as a payment in gold could have been demanded.

5
In fact, if gold flows were neutralized by compensatory monetary manoeuvres, or if domestic prices were rigid, the economic system would slide into a double disequilibrium, both internal and external, which would eventually undermine the stability of exchange rates.

6
Fixed exchange rates favour an international division of labour in conformity with the principle of comparative advantages and ensure the monetary stability (internal and external) that is indispensable for the formation of the savings needed to finance new investments. They preserve namely the two classic basic premises for economic growth: the division of labour and the accumulation of capital. A fixed or stable exchange rate indicates that an internal and external equilibrium has been achieved. If the exchange rate is fixed or stable, this means that any trade deficit—caused by domestic demand greater than national production, and namely by investments greater than domestic savings—is financed with a stable inflow of savings (capital) from abroad (and vice versa). Fluctuations in the exchange rate indicate instead the existence of a double disequilibrium, both internal and external. In particular, an outflow of gold indicates an excess of domestic demand over production (and of investments over savings) that is not financed by a stable inflow of foreign savings. Fixed exchange rates thus ensure balanced and sustainable growth and are guaranteed by a money supply proportional to gold reserves and by flexible domestic prices: three golden rules.

7
Eichengreen (1992, 249) writes: ‘In fact, the Fed did respond in the immediate aftermath of the Wall Street crash. Employing expansionary open market operations, it doubled its holdings of government securities between October and November.’ See also Kindleberger (1986, Chapter 3).

8
The manoeuvre envisaged lower public spending and higher public revenues, with reductions of 6% in unemployment benefits and subsidies to companies in difficulty, of 4–18% in wages to public employees, and of 6% in war pensions. Taxes on sugar and petrol were increased, and an additional tax on incomes was introduced (Eichengreen 1992, 274–275).

9
See Haberler (1963) and Hagemann (ed.) (2002) on business cycle theories during the interwar period.

10
On Röpke’s secondary deflation see Haberler (1963, 58–61), Hudson (1985), Klausinger (1999), and Gregg (2010, Chapter 5). A similar case of secondary deflation was analysed by some Italian economists: see Magliulo (2012).

11
For more details, see Klausinger (2012) and Magliulo (2016).

12
Eichengreen (1992, 295) writes: ‘In principle, the Fed could have used expansionary open market operations to prevent the decline in money supply. It refused to do so for fear of endangering the gold parity.’ On the contrary, Rothbard (1963 [2000], 261–262) points out: ‘From the end of September to the end of the year, bank reserves fell at an unprecedented rate, from $2.36 billion to$1.96 billion, a drop of $400 million in three months. The Federal Reserve tried its best to continue its favourite nostrum of inflation—pumping$268 million of new controlled reserves into the banking system (the main item: an increase of \$305 million in bills discounted). But the public, at home and abroad, was now calling the turn at last.’ And he goes on: ‘Actually, the Federal Reserve should have deflated instead of inflated, to bolster confidence in gold, and also to speed up the adjustments needed to end the depression’ (262–263).

13
About Röpke’s opinion on the Lautenbach Plan, we found in the literature several and different assessments. According to Kindleberger (1986, 171), ‘The Lautenbach plan was actively discussed in the Reichsbank in a meeting on 15 September 1931, and opposed by, among others, Salin, Hilferding, and Röpke.’ Nicholls (1994, 54–55) states: ‘Among those who expressed qualified support for the Lautenbach’s scheme were Eucken and Röpke … The events of the summer had made hopes of a foreign loan remote, and Germany could not restart the world economy on her own. He made it clear he would much prefer an international action to a German one, but felt that something would have to be done to stop the disastrous process of contraction… he was clearly in favour of risking the Lautenbach scheme, even though he thought it should be carried out cautiously, step by step, to avoid damaging Germany’s standing abroad.’ Finally, Patch (1998, 202) writes, as we have seen, ‘Six participants supported Lautenbach’s plan (Colm, Heimann, Lautenbach, Neisser, Rittershausen, and Röpke).’ We still find a preference for foreign loans in Röpke (1933b, 441).

14
On the controversial issue, if and how Hayek changed his mind during the Seventies about the phenomenon of secondary deflation, see Magliulo (2016).

Literature
Borchardt, K. (1991). Perspectives on Modern German Economic History and Policy. Cambridge: Cambridge University Press. CrossRef
Eichengreen, B. (1992). Golden Fetters. New York and Oxford: Oxford University Press.
Eick, E. (1963). A History of the Weimar Republic. Cambridge: Harvard University Press.
Gregg, S. (2010). Wilhelm Röpke’s Political Economy. Cheltenham and Northampton: Edward Elgar. CrossRef
Haberler, G. (1963). Prosperity and Depression. New York: Atheneum.
Hagemann, H. (Ed.). (2002). Business Cycle Theory: Selected Texts, 1860–1939. London: Pickering and Chatto.
Hayek, F. A. (1931a [1935]). Prices and Production (2nd ed.). London: Routledge & Kegan (1st ed. 1931).
Hayek, F. A. (1931b). Konjunkturankurbelung durch Investitionen? In H. Klausinger (Ed.), F. A. Hayek Geld und Konjunktur (I, 499–506). Tübingen: Mohr Siebeck.
Hayek, F. A. (1932 [1984]). Das Schicksal der Goldwährung. Deutsche Volkswirt, February. Reprinted under the title The Fate of the Gold Standard. In R. McCloughry (Ed.), Money, Capital and Fluctuations: Early Essays (pp. 118–135). London: Routledge & Kegan.
Hayek, F. A. (1933 [1939]). Der Stand und die nächste Zunkunft der Konjinktur forschung. Translated into English under the title The Present State and Immediate Prospects of the Study of Industrial Fluctuations. In F. A. Hayek, Profits, Interest and Investment (pp. 171–182). London: Routledge.
Hayek, F. A. (1975a). A Discussion with Friedrich A. von Hayek (pp. 1–20). Held at the American Enterprise Institute on April 9, 1975. Washington, DC: American Enterprise Institute for Public Policy Research.
Hayek, F. A. (1975b). Full Employment at Any Price? (pp. 3–52) (Occasional Paper 45). London: The Institute of Economic Affairs.
Hicks, J. R. (1967). The Hayek Story. In J. R. Hicks (Ed.), Critical Essays in Monetary Theory (pp. 203–215). Oxford: Oxford University Press.
Hudson, M. (1985). German Economists and the Depression of 1929–1933. History of Political Economy, 1, 35–50. CrossRef
Keynes, J. M. (1930 [1971]). A Treatise on Money. In The Collected Writings of J.M. Keynes (Vols. V, VI). London: Macmillan.
Keynes, J. M. (1931 [1973]). An Economic Analysis of Unemployment. In The Collected Writings of J.M. Keynes (Vol. XIII, pp. 343–367). London: Macmillan.
Kindleberger, C. P. (1986). The World in Depression 1929–1939 (Revised and Enlarged Edition). Berkeley: University of California Press.
Klausinger, H. (1995). Schumpeter and Hayek: Two Views of the Great Depression Re-examined. History of Economic Ideas, 3, 93–127.
Klausinger, H. (1999). German Anticipations of the Keynesian Revolution? The Case of Lautenbach, Neisser and Röpke. The European Journal of the History of Economic Thought, 3, 378–403. CrossRef
Klausinger, H. (2001). Gustav Stolper, Der deutsche Volkswirt, and the Controversy on Economic Policy at the End of the Weimar Republic. History of Political Economy, 2, 241–267. CrossRef
Klausinger, H. (2012). Introduction. In Business Cycles, Part. II, Collected Works of F.A. Hayek (pp. 1–43). Carmel: Liberty Fund.
Lee, S. J. (2010). The Weimar Republic (2nd ed.). London and New York: Routledge.
Magliulo, A. (2012). The Great Depression of 1929 in Italy: Economists’ Views and Government Policy. In M. Psalidopoulos (Ed.), The Great Depression in Europe: Economic Thought and Policy in a National Context (pp. 153–185). Athens: Alpha Bank, Historical Archives.
Magliulo, A. (2016). Hayek and the Great Depression of 1929: Did He Really Change His Mind? European Journal of the History of Economic Thought, 1, 31–58. CrossRef
Nicholls, A. J. (1994). Freedom with Responsibility: The Social Market Economy in Germany 1918–1963. Oxford: Clarendon Press.
Overy, R. J. (1996). The Nazi Economic Recovery 1932–1938 (2nd ed.). Cambridge: Press Syndicate of the University of Cambridge.
Patch, W. L. (1998). Heinrich Brüning and the Dissolution of the Weimar Republic. Cambridge: Cambridge University Press.
Robbins, L. (1934 [1971]). The Great Depression. New York: Freeport. Reprinted in 1971.
Röpke, W. (1931). Praktische Konjunkturpolitik. Die Arbeit der Brauns-Kommission. Weltwirtschaftliches Archiv, 34, 423–464.
Röpke, W. (1933a). Die sekundäre Krise und ihre Überwindung. In Economic Essays in Honour of Gustav Cassel. London: Frank Cass.
Röpke, W. (1933b). Trends in German Business Cycle Policy. Economic Journal, 171, 427–441. CrossRef
Röpke, W. (1936). Crises and Cycles. London: William Hodge (Originally Published in German in 1932).
Röpke, W. (1937 [1963]). Economics of Free Society. Chicago: Henry Regnery Company (First Published in Austria in 1937).
Rothbard, R. M. (1963 [2000]). America’s Great Depression (5th ed.). Auburn: Mises Institute (1st ed. 1963).
Schulze, H. (1987). La repubblica di Weimar. La Germania dal 1917 al 1933 (German Edition, 1982). Bologna: Il Mulino.
Temin, P. (1989). Lessons from the Great Depression. Cambridge: MIT Press.
Tooze, A. (2007). The Wages of Destruction: The Making and Breaking of the Nazi Economy. London: Penguin Books.