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

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 Moreover, in a letter to Mises, 9 December 1931, Hayek refers explicitly to his “unpublished discussion with Röpke” (“seinerzeitige unveröffentlichte Auseinandersetzung mit Röpke”).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.

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).

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%.

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.

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.

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.

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).

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).

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

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).

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

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).

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).

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