DR. HJALMAR SCHACHT
Reich Minister and President of the Reichsbank
The trade and prosperity of a country as well as its intellectual and cultural life depend on a flourishing world trade to such an extent that we must never tire of stressing the need for international economic co-operation. Although the leading economists in practically all countries have directed attention again and again to the national losses resulting from the world-wide economic depression, and have endeavoured to formulate recommendations for a real improvement, ignorance of the steps that must be taken to effect this purpose is still quite general, and there are no signs of a vigorous policy intended to reanimate trade intercourse between the various nations. Seeing that questions affecting world trade are always sure to attract intelligent interest in a country like Great Britain, I am glad of this opportunity for stating once more my views on these matters, more especially in so far as they affect the attitude of the new Germany towards world trade. I shall try to give a brief account of the conditions which, in my opinion, must be fulfilled before we can look forward to a genuine economic recovery throughout the world.
Even a cursory glance at the remnants of what is called “international economy” shows that the economic relations between the countries are largely in a state of utter confusion. Instead of making the world’s abundant supply of raw materials and foodstuffs available to all nations through the medium of commerce, valuable commodities are wilfully destroyed. Elsewhere, the production of certain goods is artificially restricted, although there are countries that are in urgent need of those very products. Long-term commercial treaties have been replaced, in numerous instances, by absolutely unsatisfactory arrangements concluded for periods that are far too short. International merchandise credits are indispensable to normal trade intercourse; and their scarcity has produced disastrous effects. Owing to the political insecurity, preference is given by financiers to short-term loans; and the erratic movements of the capital thus used have given rise to heavy fluctuations in the rates of exchange and have seriously affected the currency policy of the countries concerned. The position is made still worse by the excessively high tariff walls, by the maze of import quota regulations, import prohibitions, and clearing arrangements. Finally, there are many countries that have been forced by the shortage of foreign exchange to establish a special regime of currency administration that has resulted in the partial resurrection of the primitive system of barter transactions.
In one of the League of Nations reports issued some time ago, it was stated that the total value of world trade in 1934 was less than that of the combined foreign trades of Germany, Great Britain and the United States in 1929. This is not only due to an enormous shrinkage in the volume of trade, but also to the huge decline in prices, which – in the case of some commodities – was at times even more considerable. The demoralisation of the price-level started in the markets for raw materials and caused widespread selling, with disastrous effects upon production and employment in all countries. The currency devaluations (merely resorted to in some countries for reasons of commercial policy) further added to the existing demoralisation, and were so many heavy blows to the development of international economy. The subsequent rise of prices in the world’s markets has been of limited range only and has failed so far to restore sufficiently the vanished purchasing capacity of the countries depending upon the exportation of raw materials.
Many countries have now put their faith in measures intended to revive their domestic trade and industry, thus tending more or less to establish economic autarchy. Too often, however, the close interdependence of the home market and the foreign market is ignored. A trade boom in the former can only last on condition that it is supported by a healthy export and import trade. It is gratifying to note, therefore, that a few hopeful indications of an upward movement have lately appeared, even though it would be premature to infer from them that a structural improvement had already occurred.
Germany’s present world economic position is probably more troubled than that of most other countries. Prior to the War, the equilibrium of her situation in this respect was ensured by the proceeds derived from her flourishing foreign trade, by her important investments abroad, and by her large colonial empire; but the ruinous terms of the Versailles treaty put an end to all that. The victor Powers were guided by a foolish desire to keep her down for all time, economically as well as politically. This is the only intelligent reason that explains the excessive indemnities and the harsh economic conditions imposed upon a country already completely exhausted by war. The seizure of practically all our foreign investments, the forced surrender of valuable assets, the cession of provinces particularly important because of the foodstuffs and raw materials obtainable from them, and the refusal to return our colonies, have gravely endangered our future development and threatened our very existence.
But this was not all. The war indemnities demanded of Germany were of an extent incompatible with the most elementary economic considerations. For a long time, her rulers endeavoured to pursue a “policy of fulfilment” at all costs. The efforts made by her to that end have never been duly appreciated abroad. They were, however, bound to be in vain; because the only possible way of redeeming those political debts, i.e., the exportation of merchandise and the rendering of services, was barred by the creditor countries, anxious – as they were – to protect their home industries against the inrush of German products. To-day it may be regarded as practically certain that the inevitable effects of the Versailles system upon world economy were left out of account when the “peace treaty” was drawn up. I believe I may claim some credit for having passionately protested, from the very outset, against the senselessness of the reparations policy, and for pointing out that the German colonies should be returned by the mandatory Powers, not only for the benefit of Germany, but also for that of the world as a whole.
War loans and reparations are the root causes of the foreign-debt problem. During the period 1924-30, the immense sum of more than £2,000,000,000 (reckoning the British £ at 12t reichsmarks) was advanced to Germany by foreign creditors. The resulting debt was about equal in amount to Germany’s pre-war assets abroad. The proceeds of the loans, however, did not benefit Germany’s national economy in their entirety, a large part of them being required for reparation payments. The impression thus created that Germany possessed a satisfactory capacity for transfer was erroneous. It was bound to be shattered by the events of 1930 and 1931, when the foreign financiers, after first declining to grant any more loans to Germany, suddenly asked for the repayment of the short-term credits, the amount of which was very considerable. Grave sacrifices had then to be demanded of the country’s body economic, and almost all the reserves of gold and foreign currency had to be relinquished, but thanks to these measures the foreign indebtedness could be reduced to about £900,000,000. Still, even that sum is so large that the country’s diminished foreign-trade earnings are insufficient to provide the money required to pay interest and redeem the principal of the debts.
Foreign critics are apt to ignore the fact that Germany, more than any other debtor country, has complied with her obligations to the limits of possibility. Although the Reichsbank, too, sacrificed all its gold and foreign currency reserves in order to satisfy the claims of the foreign creditors, it was necessary to resort to the partial suspension of the debt service. An even greater sacrifice was the introduction of a currency regime, a measure which is naturally liable to serious objections from many points of view. Germany has never wavered in her determination to pay back her debts. It may be assumed that this fact will gradually receive universal recognition. All the same, it is a great pity that foreign observers took so long a time before they realised the economic absurdity of demanding the payment of capital debts by an industrial country (which, in the long run, can only make such payment by the exportation of commodities), whilst at the same time placing every obstacle in its way – such as tariff walls, import quotas, import prohibitions, boycotts, and similar modern devices – that will tend to render such exportation difficult.
The attempts of the victor Powers to extort from their defeated enemy “the uttermost farthing” led to so much general impoverishment that even now the country has not yet recovered from it. As Germany is so very closely linked up with the world’s economy, it was inevitable that such a situation should react upon international trade. In spite of all the existing difficulties, she still ranks third in so far as foreign commerce is concerned, being preceded by Great Britain and the United States only; and it is obvious that so important a purchaser country cannot be cold-shouldered without serious consequences to all other countries concerned.
In order to counteract the effects of the continued world-wide depression and to avert further menaces to the country’s body economic, the new Germany had to subject her foreign trade to systematic Government supervision. Although the term “plan” has been applied to the measures thus adopted, it does not follow that a system of “planned economy” has been or is going to be introduced. We continue to look upon individual initiative as the most valuable asset of our economic activities, more especially in the field of foreign trade. Our present economic policy is in no way influenced by any tendencies towards “planned economy.”
The New Plan (Germany’s “New Deal”) was announced by the Government in the autumn of 1934. Its objects are to adjust the amount of foreign exchange used for import purposes to the reduced amount of it earned by our export trade and to prevent any increase in our indebtedness to foreigners. We perfectly realise that measures such as these must complicate immensely our trade relations with other countries, and it was with a heavy heart that we decided to introduce them all the same. But as a certain minimum of foreign exchange is indispensable to us for the importation of vital necessities and as the amount earned by us is constantly shrinking, no other choice was left to us. We had to protect at all costs the good reputation enjoyed by the German merchant as regards his capacity and willingness to pay.
Another object we had in mind when introducing Our New Plan was to base our trade intercourse with the various countries upon a more satisfactory foundation. It is through no fault of ours that, in a large number of cases, that intercourse is now governed by irksome bilateral arrangements concerning the interchange of goods and the methods of payment. Numerous foreign countries have seen fit to satisfy by way of clearing the claims of their nationals upon German firms, claims arising out of goods as well as capital transactions. I wish to emphasise, however, that we intend to comply with our obligations – as far as we possibly can – in any case, and that no compulsion is needed to make us do so. In our dealings with Great Britain we have already furnished proof of our earnest will by acting accordingly. We shall always be prepared to start discussions with any country whose commercial dealings with us have become subject to rigid bureaucratic methods, for the purpose of giving greater elasticity to expand again.
The fact that we have been able to improve our balance of trade proves that the New Plan is working successfully. With a view to the acquisition of a trade balance sufficient to meet the necessary capital and other liabilities, we have tried to increase our exports whilst maintaining imports at about their previous level. It is estimated that the export surplus thus obtained for 1937 amounts to some forty million pounds sterling. The trade figures also indicate the difficulties our commercial policy has to face. Imports at the rate of approximately thirty-five million pounds a month are barely sufficient to cover our requirements of raw materials and foodstuffs. Owing to the continued activity of our domestic markets, the consumption of goods is steadily increasing. There is presumably no country in which the demand for foreign foodstuffs and raw materials is more pressing than it is in Germany. Our country is not interested in customs barriers or other measures tending to make the import trade more difficult. All we ask is that other countries should absorb a sufficient amount of our industrial products, so that we may obtain the foreign exchange we need. Such foreign exchange would not be hoarded by us, but would be used for the importation of foreign commodities and thus for the stimulation of international trade. All countries naturally want to export their products, but a good many of them are by no means equally willing to import. That willingness, however, so essential to a general trade improvement-is nowhere greater than in Germany. We hear it said every now and then that these imports are solely required for the manufacture of armaments with which to threaten the peace of the world. Apart from the fact that our present arms policy is merely intended to provide us with adequate means of defence and to make up for past delay, it should be clearly understood that only a relatively small percentage of our imported raw materials is used by the armaments industry, whilst the major part of them is absorbed by the manufacture of articles for domestic consumption or for export. Seeing that our own soil does not yield a sufficient amount of foodstuffs and raw materials, we are as yet largely dependent upon products of foreign origin in order to keep our industries busy and to safeguard the vital needs of our people. Germany does not want something for nothing. She continues to be capable and willing to supply the world with the superior grade products turned out by her industries. Accordingly, those in charge of her economic policy regard it as their principal task to cultivate close trade relations with all countries and to improve and expand them wherever possible.
Germany is a sincere advocate of international trade, because she realises that she is certain to benefit from it. We do not think, however, that normal conditions likely to last can be restored to world economy by arbitrary and unnecessary measures in the domain of currency policy. I do not believe, therefore, that the devaluation of the reichsmark would contribute in any way towards the improvement of the international situation. It is quite impossible to effect such an improvement by currency manipulations. The latest wave of devaluation, far from improving the existing conditions, has only added fresh difficulties. The lack of stability in the world’s markets has increased, because some of the devalued currencies are subject to much fluctuation – a circumstance which deprives merchants of the safe basis of their calculation and confronts them with mathematical puzzles which, in many instances, admit of no solution at all. One reason why it cannot be said that the currency problem has been disposed of is that no definite ratio has been fixed so far for the principal currencies.
If international economy is really to return to healthy conditions, currencies must be internationally stabilised, and the restrictions imposed upon the interchange of goods and services between the various countries must be withdrawn as far as possible. In that way, a natural equilibrium will be established between the available production surpluses. The nations interested in world trade must therefore collaborate with one another and must compose their political differences. Mutual confidence must be restored. These conditions are indispensable if the disturbing factors are to be eliminated. Unfortunately, there is no evidence so far that a common basis for negotiations towards that end will be discovered in the immediate future.
So long as Germany remains unable to satisfy in full her large requirements of raw materials and foodstuffs in the world’s markets, the Government must take steps to ensure that the utmost use is made of the resources that are open to her at home. In that way, the difficulty of obtaining an adequate supply of foreign exchange can be partly overcome. Besides that, the Government is animated by a legitimate desire that the opportunities for work provided in recent years by our own efforts and without foreign assistance for the benefit of the many millions of industrious workers who were forced to idleness during the years of deflation, shall continue to be available.
Germany is making every endeavour to widen her food basis in a systematic manner and to augment the home production of raw materials by means of the new Four-Year Plan. To those of our critics who assert that the measures adopted by us are intended to establish an autarchic regime, I would reply: If you will withdraw your protectionist legislation and thus enable us to find sufficient markets for our manufactured articles, we shall be much better able to cover our requirements of foodstuffs and raw materials by paying for them with our exports. So long as this remains undone, we shall be forced to adhere to our present policy and to deal in those markets only where people are willing to buy our own manufactures under the terms of barter arrangements. The difficulties imposed upon our export trade must necessarily determine our commercial policy and therefore react upon world trade in general; but it would be wrong to hold us responsible for these results. Formerly, most of our surplus of manufactured articles was absorbed by the European countries, which are our natural markets, and most of our imports were purchased in the overseas countries, which are our natural purveyors. For a variety of reasons we should be glad to see a return to these conditions, although we can quite understand that world trade may possibly prefer different channels in future.
Countries or political entities like the British Empire or France constitute almost self-sufficient economic units. Their resources include nearly all the vitally important raw materials and foodstuffs, and their foreign trade is increasingly concerned with territories subject to their own sovereignty; but opportunities like these are possessed by very few nations only.
In this connection I would like to briefly touch upon a subject to which I have referred several times elsewhere. It is the problem of Germany’s lack of space, or, in other words, her colonial problem. I submit that its bearing upon the return of normal conditions in international economy is far from being adequately appreciated. Italy and Japan, who were faced with similar problems, have solved them in their own way, and have thus joined the ranks of the “satisfied” nations. Germany is now the only Great Power without any colonial possessions of her own. Her demand for the return of her former colonies – at present governed under a mandatory system – is the best possible proof of her sincere love of peace, because it is extremely unlikely that those territories would be of any use to her in the event of a war. The reasons advanced by the mandatory Powers for their refusal to comply with Germany’s wish have been refuted so often that I need not refute them again. I have repeatedly explained my views on our Colonial problem, for instance before an audience at Frankfort-on-Main and in an article contributed to the American periodical, “Foreign Affairs.” All I want to emphasise in this context is that the return of our colonies would solve the problem created by our lack of space and would also dispose of the raw material and currency questions. The conviction that something must be done to repair the injustice inflicted upon us by the Versailles treaty in depriving us of the use of our colonies, is gradually gaining ground throughout the world. Thus, for instance, the Paris representative of The Times contributed an article to that paper some time ago entitled, “Colonial Revision,” which contained, among other matters, the following:
The colonial problem will be the next great question to be faced in Europe. Here as in England there are thoughtful people who think that revision of the distribution of colonies is inevitable sooner or later, and that the sooner the fact is frankly faced the easier and less costly revision will be.
As far as Germany is concerned, the colonial problem is essentially an economic problem. Her vital rights cannot be withheld from her for ever. Although the return of our colonies could not immediately relieve us of all our troubles regarding raw materials and space, it could and would render valuable aid to us in our reconstruction programme. In addition, it would tend to diminish the pressure of our exports and to increase our purchasing capacity, and would thus assist in promoting world trade and general prosperity.
When, on September 30th, 1936, I made a statement on behalf of the Government and the Reichsbank regarding the Three Power Currency Agreement, this was interpreted, in some quarters, as a refusal on the part of Germany to collaborate with the other Powers concerned. Nothing could be further from the truth than such an allegation. Germany is quite willing to enter into any discussions of the currency problem. It is certain, however, that a mere devaluation of the reichsmark would not alter the existing conditions in any way. The point that matters is the restoration of normal methods of making international payments and thus the re-establishment of the freedom of international commerce. A mere devaluation will ensure neither the one nor the other. That can only be done by tackling the international debt problem and that of raw-material supplies. No discussion will produce any positive results unless and until these questions are made part of it.