The German Business Cycle in the 1920 's: A Comment and Reply
IN a recent issue of this Review, an article by Malcolm Falkus contested a previous article of mine on the origins of the German economic downturn in i929.1 The point at issue is whether the decline of American foreign lending at the end of the i920's was the precipitating factor in the German downturn. I claimed that it was not and called for-but did not furnish-an explanation resting on domestic factors. Falkus demurred, attempting to resurrect the traditional story which asserted that the decline in capital inflow was the cause of the German downturn. The stories that appear in my article and in Falkus's article are quite different, and they are based largely on different kinds of evidence. There is, however, one critical point in the argument where we both employed the same kind of evidence. As this is a major point in the development of the argument, and as Falkus's use of evidence is unjustifiably incorrect, a comment on this point seemed necessary. Other points in the discussion will have to await further research. In my article, I assigned a central role in the origin of the German depression to inventory fluctuations. I then said that, "Recent research into the determinants of inventory investment in the United States has failed to uncover any significant or consistent relationship between credit conditions and inventory investment."2 After a few caveats about the use of this finding in a discussion about Germany, I concluded, "It is therefore entirely unreasonable to hypothesize a relationship between inventories and credit conditions in Germany in the late i920'S strong enough to explain the change in the former by changes in the latter."3 Falkus, in contrast, asserts that, "as emphasized by contemporaries, monetary stringency was inducing industries to cut back inventories [in i928-9]."4 His evidence for this extremely important assertion is meagre-and largely incorrect as we shall see. Falkus's evidence comes in three parts. First, there is a citation to the contemporary opinion mentioned in the passage just quoted. While contemporary opinion should never be ignored, we now know that contemporary observers in the late i920's were as often wrong about the nature of current economic events as they were right. Second, Falkus asserts that the levels of income and of