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This had some important psychological consequences. They are less obvious but they probably had great influence on production. The continued depreciation of the currency and the uncertainty of the future, which it caused, produced a depression of working-class spirit and the will to work declined.

The "dollar rate" was the theme of all the discussions among employees or workers.

Thus on the whole the banks were weakened by the inflation. They lost a considerable part of their capital and reserves, as was shown after the compilation of the "gold balance sheet".

From many facts observed during the inflation it is apparent thatone of the motives which induced firms to unite themselves in "vertical"groups was the desire to exploit systematically the monetary depreciation.

Even many foreigners, who regarded the "prosperity" of Germany with envy, exaggerated the influence exercised by the depreciation of the mark on German production.

The results of Wagner's research are summarized in this proposition: "Paper-money is capital from the point of the private trader, but it is
not so for the national economy.

The classical theory, according to which the increase of the issues of paper money cannot provoke an increase of the total production of the country, was expounded, in a form which may be called final, by Wagner in his work on "Russian Paper Money."

To the theory, according to which the increase of the quantity of money stimulates production—a theory supported, as is well known, by Hume—the classical school is opposed.

THE OPINIONS OF THE CLASSICAL ECONOMISTS ABOUT THE EFFECTS OF THE MONETARY INFLATION ON PRODUCTION

Most varied and contradictory opinions were expressed in Germany and elsewhere regarding the effects which the depreciation of the mark exercised on German economy.

But, according to the graph, in 1920 the psychological crisis provoked by the imposition of the Treaty of Versailles was weakened and little by little confidence in the German currency was re-established; in fact, the velocity of circulation of the mark fell.

VARIATIONS IN THE VELOCITY OF CIRCULATION OF THE
GERMAN MARK—1914-22

For some time after the outbreak of the war it was observed in
Germany that not all the paper money issued remained effectively
in circulation. During the war and also after the Armistice paper
money was extensively hoarded, especially in the country.

I refer to a famous article by Keynes in which he shows that in an advanced phase of monetary inflation new note-issues are accompanied by an increase in the velocity of the circulation of the currency, and that the influence exercised by the velocity of circulation on prices and the exchange can be greater than that of successive issues of paper money.

Whilst in Germany itself economists and financiers thought they had found in the fall of the total value of the circulating money the proof of the non-existence of the "so-called inflation," outside Germany the scientific explanation of the phenomenon was given.

The argument on which the pretended demonstration was based is an example of an interesting economic sophism. It admitted that the nominal value of the paper money issued was certainly enormous; but the "real" value, that is the gold value according to the exchange rate, of the mass of notes in circulation, was much lower than that of the money circulating in Germany before the war

AN ECONOMIC SOPHISM

During 1923, when in Germany every obstacle to the issue of paper money had been removed, and the circulation was rising to increasingly fantastic figures, eminent financiers and politicians maintained and endeavoured to show that there was neither monetary nor credit inflation in Germany.

It may be observed that this influence does not appear always to have been that indicated by the Purchasing Power Parity doctrine, which is a theory of foreign exchanges in "the long run," rather than a description of what happens "in the short run."

Together with the dominant influence of the German monetary inflation on the exchange rate of the mark, but entirely secondary, was that of the variations of gold prices in the world market.

Even before the World War there had often existed some divegence between the purchasing power of a depreciated paper currency in the country in which it was issued (its internal value) and the purchasing power of the same money in terms of gold (or silver) and foreign goods (its external value).

"Bankers and industrialists are in agreement. This has been proved every time in the numerous attempts made in Austria to re-establish the currency; the same thing happened in Russia in 1862. In the United States the attempt to eliminate the premium was opposed with veritable fanaticism. The adversaries of paper money and of protection are called traitors by the company of industrial egoists."