L. Albert Hahn: Reparations Transfer and Monetary Adjustment (1929)

L. Albert Hahn’s conference contribution, Kann, sofern die Umstellung von Produktion und Außenhandel gelingt, der Transfer valutarischen Schwierigkeiten begegnen?, examines whether transferring reparations abroad can destabilize Germany’s currency. Its three sections move from the general theory of international payments through the transitional mechanisms of adjustment to alternative configurations of international interest rates. Hahn’s central distinction is between maintaining exchange-rate parity and avoiding economic distress: transfer need not produce currency instability, but the adjustment securing it may impose a severe contraction on production, credit, and wages.

The opening grounds the argument in the Ricardian doctrine of an automatically equilibrating balance of payments. Reparations remove purchasing power from domestic residents and place it at foreigners’ disposal; goods consequently follow the redirected demand. Transport costs and tariffs increase the burden of this movement without making it theoretically impossible. Hahn thus separates the costs of adjustment from the possibility of adjustment itself.

He then reformulates the question assigned to him. If production and foreign trade have already been successfully restructured, the necessary foreign exchange is available by definition. The substantive problem concerns the interval before that restructuring occurs:

Die valutarischen Schwierigkeiten können immer nur in mangelhafter oder verzögerter Umstellung ihren Grund haben.

English translation: Currency difficulties can only ever have their origin in inadequate or delayed adjustment.

Hahn calls this interval the “Reaktionszeit”: the response time between the initial transfer operations that stimulate adjustment and the emergence of an adequate foreign-exchange supply. This temporal distinction organizes the detailed middle section. Initially, the reparations agent’s purchases encounter a market whose supply has not yet expanded, requiring the Reichsbank to meet the shortfall from its reserves.

Against a mechanical interpretation of reserve movements, Hahn rejects both Schacht’s claim that incoming foreign exchange necessarily creates corresponding inflation and its inverse, that outgoing reserves must produce cumulative deflation. Counteracting financial movements intervene. Nevertheless, he argues that even without them, adherence to the bank law would protect parity through monetary contraction. His limiting illustration is deliberately stark: if the last reserves were exhausted, the last banknote would also have been withdrawn, leaving no purchasing power to bid up foreign currencies.

Was hier entstehen würde, wären keine valutarischen Schwierigkeiten, sondern — und zwar selbstverständlich schon in einem sehr viel früheren Zeitpunkt — Wirtschaftskrisen schwersten Umfangs.

English translation: What would arise here would not be currency difficulties, but economic crises of the utmost severity—and, of course, at a much earlier point.

Parity preservation is therefore no assurance of economic tolerability. The argument’s force depends on distinguishing a stable exchange rate from the domestic consequences of defending it.

Under ordinary conditions, Hahn expects two mechanisms to prevent this extreme. First, foreign-exchange purchases raise the dollar toward the upper gold point, making foreign borrowing attractive because repayment at parity would yield an exchange gain. This incentive is especially powerful for short-term loans. Second, reserve sales withdraw domestic means of payment, restrict bank credit, and raise interest rates. Hahn traces this tightening whether the Reichsbank has already lent the reparations agent’s accumulated balances or the funds have only just been collected through taxation. In either case, the resulting interest differential attracts foreign capital and checks further contraction.

Such borrowing does not, he insists, postpone the necessary restructuring of production and trade. The higher exchange rate continues to encourage exports and discourage imports, while some monetary contraction remains necessary to sustain the interest margin attracting lenders:

Die einströmenden Auslandsgelder verhindern also nur die Exzesse in der Wirkung der Devisenkäufe des Reparationsagenten, nicht aber die Wirkung selbst.

English translation: The incoming foreign funds thus prevent only the excesses in the effect of the reparations agent’s foreign-exchange purchases, but not the effect itself.

Foreign credit consequently serves as a bridge through the response time, moderating adjustment rather than neutralizing it. Hahn initially treats a complete cessation of international lending as unrealistic: sufficiently higher interest rates should restore inflows. Yet he also considers the contrary assumption. Without foreign credit, contraction would deepen until falling prices and subsequently falling wages restored profitability and accelerated export adjustment. German workers would thereby bear an additional burden imposed by forcing restructuring ahead of its normal response time. This passage makes explicit the distributional cost beneath the claim of theoretical feasibility.

The final section relaxes the earlier assumption that domestic and foreign interest rates initially stand level. An existing differential attracting capital to Germany supplies foreign exchange before trade restructuring becomes necessary. If German rates instead fall because depression has reduced profitable investment opportunities, Hahn argues that the accompanying price decline will already have improved the trade balance. A foreign capital shortage presents the harder case: it delays compensating inflows and returns the analysis to contraction-driven adjustment.

His conclusion is conditional upon sound note-issue policy and sufficiently connected international capital markets. Political obstruction and distrust can interrupt those connections. The practical remedy for transitional crises is therefore the least obstructed possible access to foreign capital. Hahn closes by distinguishing legitimate emphasis on reparations’ economic burdens from a negotiating strategy founded on transfer’s absolute impossibility:

Eine Politik, die durch die Absperrung von Auslandsanleihen die praktische Undurchführbarkeit der Reparationszahlungen erweisen wollte, würde nicht ihr Ziel, sondern lediglich das erreichen, daß die deutsche Volkswirtschaft unnötigerweise in eine schwere Krise hineingestoßen würde.

English translation: A policy that sought to demonstrate the practical impossibility of reparations payments by blocking foreign loans would not achieve its aim, but would merely cause the German economy to be needlessly plunged into a severe crisis.

The contribution’s significance lies in this combination of confidence in international adjustment with recognition of its potentially harsh social costs. Hahn contests an absolute monetary barrier to transfer without claiming that transfer is painless; his policy argument is that obstructing the financial bridge would intensify the burden rather than establish impossibility.