1 THE GERMAN BALANCE OF PAYMENT SCHOOL AND THE LATIN AMERICAN NEO- STRUCTURALISTS Alcino Câmara and Matias Vernengo 1 INTRODUCTION The conventional view of hyperinflation is based on the seminal paper by Cagan (1956). Cagan’s contribution represents a restatement of the quantity theory of money. According to this view hyperinflation is the result of fiscal imbalances. In that sense, the end of hyperinflationary processes has to be related to credible fiscal reforms (Sargent, 1982). This is the dominant interpretation of hyperinflation. According to the quantity theory of money the origins of any inflationary process are to be found in irresponsible fiscal policies of governments. Budget deficits lead to the rise of a supply in money, and consequently higher prices. The solution to an inflationary process is to restore the principles of sound money either by reducing expenditure or raising revenues. According to this view, it is the privilege of seignorage that allows governments to finance themselves through the inflation tax. Clearly, money supply is exogenous and controlled by the central bank within the framework of the quantity theory of money. The origins of the dominant view on hyperinflation can be traced back to the German hyperinflation and to Bresciani-Turroni’s interpretation of that episode. 2 Two challenging views were raised against the conventional approach to hyperinflation. First, during the German hyperinflation an alternative to the quantity theory of money was raised by what became known as the Balance of Payments school, according to which hyperinflation was caused by the imposition of reparations. German officials who argued that reparations and depreciation were the actual cause 1 We would like to thank Franklin Serrano and Lance Taylor for their comments, and Thorsten Block for providing the translation of the Bortkiewicz paper. The responsibility for any remaining errors is ours entirely. 2 Although the monetarist view of hyperinflation developed by Bresciani is still dominant, other aspects of his analysis are now considered inaccurate. In particular the view according to which the fall of the Weimar Republic and the rise of the Nazi regime can be attributed to hyperinflation. On the latter see Holtfrerich (1986) and Feldman (1997).