Oskar Morgenstern, Die Preise im Konjunkturzyklus (1931)

Morgenstern’s two-installment periodical article explains how price rigidity can prolong depression by obstructing the reorganization of production. The first installment develops the argument through relative prices, production costs, and monopolistic behavior; the second examines German cartels and Austrian price movements before proposing changes in tariff policy. Its central distinction is between falling prices that express economic adjustment and artificially maintained prices that impede it. Price stability during depression, Morgenstern argues, can indicate weakness rather than resilience.

The opening qualifies the use of prices as indicators of the business cycle. Under free competition and moderate technical progress, price fluctuations can represent cyclical movements reasonably well. Rapid technical progress, however, can make falling prices compatible with prosperity, as recent American experience demonstrates. Conversely, stable prices in continental Europe need not be reassuring. Interpretation therefore requires disaggregating the general price level into wholesale and retail prices, raw materials and finished goods, and competitive and monopolized products.

Wenn außerdem bei einer Betrachtung des Verlaufes der Preisbewegung von hohen oder niedrigen Preisen die Rede ist, so handelt es sich niemals um die absolute, sondern ausschließlich um die relative Höhe der Preise.

English translation: Moreover, when high or low prices are discussed in considering the course of price movements, what is meant is never their absolute level, but exclusively their relative level.

This emphasis rules out treating a return to prewar prices as an economic objective in itself. Depression requires a transformation of the relationships among prices as economic conditions change. Elastic prices facilitate that transformation; rigidity obstructs it. Morgenstern presents recovery as movement from an existing price system toward a newly appropriate one, while cautiously saying that faster adjustment will probably help overcome the crisis. Where demand has declined but prices remain unchanged, he attributes the discrepancy to artificial restrictions and monopoly power. He distinguishes these from “political prices,” such as taxes and fees, which he sets aside in the theoretical discussion.

The crucial divide is not simply between wholesale and retail trade: monopoly can govern either. Raw-material monopolies have greater consequences than protected branded consumer goods because coal and iron enter numerous downstream production processes. Falling selling prices combined with rigid input prices squeeze manufacturers. Yet Morgenstern also explains why ordinary entrepreneurs resist reductions. Long-run accounting seeks coverage of overhead as well as direct production costs, whereas short-run decisions may require pricing on primary costs alone. Calculations based on past expenditure rather than current or expected costs further delay adjustment. Firms fear damaging their markets, while buyers expecting further reductions postpone purchases. These mechanisms help explain why competition during expansion can give way to agreements during depression.

Monopoly intensifies these obstacles. Producers can restrict output instead of lowering prices and exploit differences in purchasers’ ability to pay. Morgenstern also treats European wages as partly monopolistic, acknowledging workers’ fear that reductions will not be fully recovered during the next expansion. But he rejects the claim that cartel price reductions must necessarily await wage reductions: where genuine monopoly income exists, that income can itself be reduced.

The second installment makes the distinction between nominal and effective prices central. German iron prices stood as much as 78 percent above the world-market price in autumn 1930, even allowing for freight and duties. Export sales at world prices and rebates to downstream exporters suggest that domestic buyers disproportionately bore overhead costs. Secret, individually negotiated discounts make the damage more than a matter of expensive inputs:

Die Wettbewerbslage ist undurchsichtig, eine gewisse Irrationalität beherrscht auf diesem Gebiet das Wirtschaftsleben.

English translation: The competitive situation is opaque; a certain irrationality dominates economic life in this sphere.

Manufacturers cannot know whether competitors obtain better terms, making rational adaptation especially difficult precisely when productive equipment must be reorganized. Nor does discounting make the published price irrelevant: Morgenstern argues that it remains the highest effective price. Cartel practices thus impair both cost adjustment and the information on which competitive decisions depend.

The Austrian evidence shows why an aggregate decline can conceal consequential rigidity. The index of responsive commodity prices fell from 99.6 in September 1929 to 58.9 in September 1931, broadly following international movements. Austrian bar iron nevertheless remained at its elevated price while pig-iron output contracted sharply.

Man sieht also, daß die Produzenten Erzeugungseinschränkungen einer Preisherabsetzung vorgezogen haben.

English translation: One can therefore see that producers preferred reductions in output to a reduction in price.

Coal similarly resisted the international decline. Cotton goods showed substantial wholesale reductions but much smaller retail changes. Agricultural protection held domestic wheat prices far above the trajectory implied by world markets, while flour and bread prices barely moved. Sugar duties accompanied rising Austrian sugar prices despite falling world prices. These examples establish uneven adjustment rather than universal immobility, and Morgenstern acknowledges that the downstream effects of iron-price rigidity cannot readily be quantified.

The conclusion shifts from demands for government-imposed price cuts to removing the protection that sustains rigidity. Reducing or abolishing tariffs supporting raw-material cartels would expose them to international competition and ease downstream costs. Similar principles should govern retail policy, rather than petty administrative controls. Artificially preserved profitability also obstructs the restructuring of production.

Alle Schritte, die zu unternehmen wären, dürfen sich ausschließlich in der Richtung auf größere Freiheit und Beweglichkeit der einzelnen wirtschaftlichen Größen bewegen.

English translation: All steps to be undertaken must move exclusively toward greater freedom and flexibility of the individual economic variables.

The article’s enduring conceptual contribution is to connect recovery with the adjustment of relative prices, not merely the movement of a general index. Its account joins monopoly power, cost accounting, expectations, and market opacity to explain how institutions can turn price stability into a barrier to economic adaptation.