4. Capital Is Made at Home*

Plans for the export of American capital to the European continent after the war are being widely discussed. The opposition generally argues that the loans will again lead to losses, this time for the taxpayer, since they would be granted through the government rather than by private investors. But Europe’s need for American credit is taken for granted.

The question must be raised, however, of how far Europe will really need American credit, and how far it will be able to rely on homemade capital. To clarify these issues it is useful and necessary to recall the financial development in Germany between the two wars. The outstanding features of that development are the subject of this chapter.

Briefly, the story is that in 1924 Germany began to absorb high amounts of foreign capital, but by mid-July 1931 the import of capital was suddenly stopped and she was forced to rely on her own resources. In one week she gave up her search for foreign credits and turned to capital autarchy. Nevertheless, as the world has meanwhile come to know to its sorrow, her industrial output was stupendous.

FROM CAPITAL AUTARCHY VIA CAPITAL IMPORTS TO CAPITAL AUTARCHY

Foreign capital did not flow into Germany in substantial amounts immediately after the war, when capital was urgently needed to replace depleted stocks and restore the worn-out industrial and transportation systems.¹ Nevertheless, in 1924, after the great inflation, Germany’s industrial and transportation systems were in good shape, for meanwhile, except during the dizzy last months of the inflation, the German entrepreneur had had more capital at his disposal than he actually needed. Capital was made at home, through the restrictions that inflation had imposed on consumption.

Nor was it through foreign loans that the budget and currency were stabilized in the fall of 1923. The stabilization was achieved through the rentenmark credit granted to the Reich and to industry and agriculture in the amount of 2,070 million marks,² and raised by the issuance of new mark bills. The latter were really nothing but the old mark bills. That they were covered by a mortgage on industry and agriculture was pure fiction. Nevertheless, the mere idea that they were covered was enough to reduce the velocity of the money in circulation, and therefore had the effect of an internal loan granted by the holders of the bills. Suddenly billions of marks in savings were available, and thereby billions of marks of capital. Capital had again been produced by a mere shift in consumption habits.

With this rentenmark loan the ground for German recovery was laid. Looking back, it seems highly likely that Germany, with her industry reconstructed by the inflation and her economy restored by the rentenmark loan, could have managed without new foreign capital. To be sure, she needed foreign raw materials, but short-term credits for this purpose had come in before 1924, and would also have been available later. At any rate, what was done during the era of capital imports was much less essential than what had already been achieved.

Foreign credits began to flow in after the acceptance of the Dawes Plan. According to generally accepted estimates of the maximum amount granted Germany,³ she received, from the summer of 1924 to the summer of 1930, about 15 to 16 billion marks in short-term credits (one-fourth from the United States) and 11 billion in long-term credits (one-half from the United States); there was an additional 7 billion in direct investments in securities, mortgages, real property, and the like, making a total of 33 to 34 billion marks. In July 1931, when approximately 3 billion marks had been withdrawn, short-term credits still amounted to 13.1 billion marks, long-term credits to 10.7 billion, and direct investments to 6 billion.⁴

But the spring of 1931 represented the turning point. The Reichsbank lost nearly 2 billion marks in gold and foreign currency in the two months after the crash of the Austrian Kreditanstalt in May of that year. In a panic the German Government sent the president of the Reichsbank to the European money centers in quest of new credits of at least 400 million dollars.⁵ On July 9 Dr. Luther arrived in London, on the 10th he was in Paris, and on the 11th he flew home. On the 13th he went to Basle to attend a meeting of the governors of the central banks. The credit of 100 million dollars which had been granted the Reich in June for three weeks was extended for three months⁶—for all practical purposes it was frozen anyhow—but a new credit grant was refused. The creditors were no longer willing to pour money into the bottomless German barrel. Germany was forced to act alone. On July 14 the government announced a bank holiday, and on the 15th centralized all foreign exchange dealings in the Reichsbank,⁷ which meant the first step toward full currency control. Germany was embarking upon a new policy: to live without importing capital.

The world expected a new collapse. True, a heavy deflationary crisis shook Germany. But the deflation was not caused by capital withdrawals or by the lack of new capital influxes; it was government-made, to enable German exporters to compete with the British, who were being favored by the devaluation of the pound.⁸

At the beginning of September 1931 the first moratorium agreement for short-term credits was concluded. In June 1933 a partial transfer moratorium for the service of long-term loans was announced, followed by an almost total one in 1934.⁹ Nevertheless, until her war with the United States, Germany continuously repurchased her loans in foreign markets, where they were devalued by default. Thus she recovered from the 1931 crisis not only without capital imports but even while reducing her foreign debt.

Since the turning point Germany has produced capital in tremendous amounts, for domestic investment as well as for exportation. The Hitler era before the war was one of intensive industrial reconstruction, in which Germany’s capacity for production in general, and for the production of war material in particular, was enormously expanded. During those six years from 1933 through 1938 the capital produced for domestic investment was as follows (in billions of marks):¹⁰

1933	5.1
1934	8.2
1935	11.6
1936	13.8
1937	16.0
1938	19.0

Hitler’s statement¹¹ that Germany spent 90 billion marks on her armament from March 1933 to the outbreak of the war in 1939 is corroborated by estimates made in Great Britain and in this country.¹² And the output of armament represented capital production, inasmuch as it withdrew goods and services from consumption.

As for capital exports, Germany transferred, from the turning point in July 1931 to the outbreak of war in 1939, approximately 4.5 billion marks on her debt service; of this, it must be emphasized, approximately 3 billion was transferred during the pre-Hitler era.¹³ In addition, her foreign debt was reduced during these years by 14.3 billion marks, as shown in the table above. Of that amount 6 billion marks was accounted for by the depreciation of the creditor countries’ currencies,¹⁴ and only part of the remaining 8.3 billion represented actual repayments, for Germany was able, as shown in preceding table, to repurchase loans and marks in foreign hands well under par. Nevertheless, very substantial exports took place, and the capital exported was replaced by domestically created capital.

GERMANY’S FOREIGN DEBT, 1931-39^a

(in billions of marks)

Date	Moratorium Credits	Other Short-term Creditsb	Long-term Credits	Total
July 1931	6.3	6.8	10.7	23.8
Nov. 1931	5.4	5.2	10.7	21.3
Feb. 1932	5.0	5.1	10.5	20.6
Sep. 1932	4.3	5.0	10.2	19.5
Feb. 1933	4.1	4.6	10.3	19.0
Sep. 1933	3.0	4.4	7.4	14.8
Feb. 1934	2.6	4.1	7.2	13.9
Feb. 1935	2.1	4.6	6.4	13.1
Feb. 1936	1.7	4.6	6.1	12.4
Feb. 1937	1.2	4.2	5.4	10.8
Feb. 1938	0.9	4.1	5.0	10.0
Feb. 1939	0.8	4.1	4.6	9.5

^a Based on Statistisches Jahrbuch für das Deutsche Reich, 1937, p. 538; Economist, July 9, 1938, p. 65.

^b Including the clearing debts which accrued to the short-term debt from 1935; see Economist, February 11, 1939, p. 301.

It is very difficult to estimate the creditors’ losses. As far as the moratorium credits are concerned, it is generally estimated that the creditors lost 15 per cent when they sold their accounts; this would mean a loss of approximately 825 million marks, since 5.5 billion marks in these accounts was disposed of by 1939. Estimates on the repatriation of the foreign bonds range from 400 to 700 million dollars. Up to 1934, when approximately 300 million dollars in these accounts had been repatriated, the foreign creditors had lost about one-half through sales below par;¹⁵ later their loss was much higher.

These losses, however, are in all likelihood the minor part of the damage that foreign creditors suffered from their German investments, since the whole debt, so far as it was not paid back by the outbreak of the war, must be considered lost, at least for the time being. This would mean that besides their losses on the moratorium credits and repatriated bonds, the foreign creditors lost 3.9 billion dollars (9.5 billion marks) out of the 5.7 billion dollars (23.8 billion marks) that was due them in July 1931.

The burden of this loss was not evenly distributed. The banks that granted the moratorium credits suffered relatively little, as in these accounts all except 780 million marks was paid off. It was the private investor who subscribed to the German loans who had to bear the heaviest burden.

CAN IT HAPPEN AGAIN?

There seems to be a certain feeling that such a disaster cannot occur again. Has this belief any valid basis? Obviously the answer depends on the cause of the disaster.

Popular opinion sees the cause in the alleged carelessness with which such huge sums were lent to borrowers abroad. This opinion, however, is undoubtedly mistaken. In the first place, it is not appropriate to speak of a lack of care in regard to an action that was taken by nearly all banks and investment houses, in accordance with public opinion of the time, and with the approval of the government. Second, an investment house can really be made responsible only for its examination of the individual debtor’s solvency and for the formulation of the indenture. In this instance the creditors proceeded with remarkable thoroughness; with negligible exceptions, none of the loans or credits given to Germany was defaulted through the insolvency or bankruptcy of the debtor.

Another explanation that has been put forward is that the loans were used not for production but for consumption purposes, such as the construction of “stadia, swimming pools, and ornamental buildings.”¹⁶ This is true only to a small extent, however, for most of the loans were granted to private industrial firms and public utilities. Furthermore, Germany’s productive capacity, whatever may be meant by that rather vague term, was increased sufficiently after 1923 to create a surplus production equivalent to the amount necessary for amortization and interest.

Still another explanation, frequently encountered, is that the default was caused by the German debtors’ lack of liquidity; especially the German banks are accused of having borrowed short and lent long.¹⁷ After the bank holidays, however, and the subsequent moratorium agreements of 1931, all short-term loans became long, and interest and amortization payments were nevertheless suspended in 1933.

The best of the usual explanations, and one that seems to be generally accepted nowadays, is that in regard to the loans of that period—in contrast to the big international loans of the nineteenth century—it was no longer possible to transfer the interest and amortization burden to the creditor countries. The argument is accurately summarized in the report of the Study Group of Members of the Royal Institute of International Affairs:¹⁸ “In the nineteenth century . . . the chief lending country, namely Great Britain, herself constituted a market with unlimited possibilities of expansion for the produce of the countries to which she lent; and her lending served to increase the output of precisely the commodities which she was ready to consume. But when the United States lent . . . there was only a somewhat weak presumption that Germany’s capacity to sell goods in world markets would thereby be increased, and virtually no presumption at all that the United States herself would be willing to increase her imports in proportion to the growth of her interest claims.”

Undoubtedly this is a very important aspect of the situation. Over and over again, especially during the settlement of reparations, failure to understand that large international payments can be accepted only in goods, not in money or gold, proved fatal. Whoever hopes to get his money back from abroad must be prepared to take goods or services.

Nevertheless, events since 1933 and particularly during the last years before World War II, show that the reasoning of the Royal Institute report is only partly correct. Although the creditor countries, reluctant to accept more imports, rationed them and imposed high duties on them, they could not prevent their arrival from Germany; these measures merely made importation harder for the debtor, who was forced to subsidize his exports. In the matter of a country’s ability to make payments abroad, it should never be forgotten that, despite the widely held opinion, no country is predestined to have an active or passive trade balance. A small deflationary pressure on the price level, or a small inflationary rise in the price level, will, under certain conditions, suffice to reverse the trend of the trade balance. This is especially clear from the change in the German trade balance between 1927, the year of the largest capital import, and 1931, the year of the largest capital export. In 1927 it showed an import surplus of 3,427 million marks, and in 1931 an export surplus of 2,872 million, a difference of 6,299 million.¹⁹

What actually prevented Germany from continuing the service on her debt was something else, as has meanwhile become obvious. In examining the reason for the German default, two periods must be distinguished: the first, from the end of 1932 to September 1934; the second, from that date to the war.

In the first period the balance of trade became unfavorable and the acquisition of foreign exchange ceased, simply because Germany started on a policy of credit expansion to combat unemployment. During this credit expansion the exchange rate of the mark was not lowered, although it had previously risen substantially through the devaluation of other countries’ currencies. In these circumstances it was only natural—according to all rules of the purchasing-power parity theory, the classical theory of exchange-that the balance of trade became passive; it turned from an export surplus of 1,072 million marks in 1932 to an import surplus of 284 million in 1934.²⁰ Thus from June 1934 the default on interest and amortization on long-term loans was inevitable.

The second period began with the so-called “New Plan” of Schacht in September 1934. Again the balance of trade was reversed, this time toward an export surplus, brought about by an intricate system of import rationing, not by deflationary measures.

In addition, exports were fostered.²¹ The technique of the so-called Exportförderung (promotion of exports) changed as time went on, but the fundamental idea was always that through defaulting on her foreign loans Germany could depreciate her foreign bonds. Furthermore, by restricting the use of certain mark balances and securities held by people abroad (Auslandssperrmark, Effektensperrmark, Auswanderer sperrmark), she depreciated these assets too, and was thus able to repurchase them at a fraction of their face value. With the profits from this procedure her exports were subsidized and, in consequence, substantially increased.

But the foreign exchange gained by these methods did not go to Germany’s creditors; on the contrary, the creditors were forced through false pretexts to make great and ever new concessions. The foreign exchange was used to finance propaganda abroad, to build up gigantic stores of raw material for the war, and to amass a secret fund of gold and foreign exchange. The Germany that was then professing not to have sufficient foreign exchange for her creditors had all the foreign exchange she needed for her war preparations. Incredible as it seems today, it is clear that a substantial part of Germany’s war preparations was financed by her foreign creditors, very much against their will.

Thus Germany’s bankruptcy was not caused by her economic situation. A country that is able to turn its balance of trade in its own favor whenever it wishes cannot be considered incapable of acquiring foreign exchange. In the last analysis, the German default was deliberate and political. Germany succeeded through fraud and superior capacity to negotiate, especially on the part of Schacht, who played adroitly on the creditors’ weakness and disunity and their governments’ unwillingness to protect what they considered the interest of one group.

Finally, it should be remembered that in all countries the position of creditors, in comparison with that of industrialists, suffers from an inherent weakness. Industrialists will continue their export business even if the debts accumulated from former exports have not been paid. They would rather give away goods, if the gifts come out of the pockets of the bondholders, than turn down new business.²² That is why most countries are reluctant to use all possible means of collecting their external debts, so long as there is a chance of continuing exports to debtor nations.

Can all this happen again? There seems to be no reason why it cannot. On the contrary, the chances are even greater than before, for the debtor countries in Europe have meanwhile learned how independent they can really be of the goodwill of their creditors.

WILL EUROPE NEED CAPITAL IMPORTS AFTER THIS WAR?

In order to judge whether Europe is going to need foreign credits after the present war, let us look back and see whether Europe really needed the capital imports of the twenties.

Foreign loans and credits to Europe, and especially to Germany, are customarily divided into two classes: stabilization loans, intended either to balance internal budgetary deficits or to balance deficits of foreign exchange; and loans for the reconstruction and expansion of productive capacity.

As for stabilization loans, it has already been mentioned that in Germany both the budget and the currency were stabilized with the rentenmark credits—a strictly internal loan granted by the holders of the rentenmark notes. The stability of the rentenmark itself was assured simply by the fact that it was kept scarce. The transformation of the rentenmark into the so-called Reichsmark, which was based on gold, was quite unimportant. Therefore the gold and foreign exchange acquired by the Reichsbank from the proceeds of the Dawes loan—and in that respect the Dawes loan itself—were superfluous.

But even if in the past gold and foreign exchange were really necessary to stabilize the currency, will they be required for this purpose after the present war? In this connection a distinction must be made between stabilizing transactions that counteract capital movements and those that counteract other items of the balance of payments.

To believe that stabilization loans are necessary to counteract capital movements would be to overlook the profound changes that have occurred in the past fifteen years. The gold standard, so far as it required that paper notes be convertible into gold in all circumstances and for an indefinite time, has been abandoned wherever it has been put to the test. It will never again be considered the ideal solution. Governments and nations alike will never again be willing to suffer deflations just because a foreign creditor has lost his confidence. Nowadays stable domestic credit and price systems are deemed more important than a stable exchange rate. The change in attitude, which began before 1931, became general when Britain went off the gold standard in that year. Gold is no longer sacrificed to restore the confidence of people who wish to withdraw or export their capital. Either the exchange rate is allowed to drop until bull speculation replaces bear speculation in the currency, and the drop is stopped, or the exodus of capital is prohibited, as in Germany in 1931 and in Britain in 1939.

If today governments are thus determined not to sacrifice gold and foreign exchange in order to maintain parity when capital is withdrawn, then stability loans that provide a fund of gold and foreign exchange for this purpose are superfluous. Such funds will not save a currency in a troubled world, anyhow. Control of exchange will be the method, at least in the near future; especially will the defeated countries have to resort to it. Stabilization loans of this type are outdated.

In regard to stabilization loans intended to counteract other items of the balance of payments, it must not be forgotten that the first requirement for currency stabilization is a sound financial and credit policy. In comparison with such a policy stabilization credits are of minor importance. Either the deficit which they are supposed to bridge is of a transitory character, in which case the banks of the country will easily find the needed amounts in the free market; or the deficit is caused by a basic disturbance of the purchasing-power parity, in which case stabilization credits are useless, mere drops of water on a hot stone. Their disregard of these facts is the basic fallacy of the Keynes and White plans. Currency stability, too, is basically made at home.

Germany until 1931 enjoyed not too little but too much credit to bridge the deficits in her balance of payments. The loans she received concealed her basic economic maladjustments and delayed their correction. This made the situation acute when the withdrawal of the credits began, after the world had finally recognized her ills.

In addition to the stabilization loans were those for the reconstruction and expansion of productive capacity. How essential were loans of this type in the postwar development of the German economy?

I have already mentioned the paradox that an essential part of the reconstruction of Germany’s industrial equipment, as far as it was worn out during the war, was accomplished during the inflation that ended in 1923. What followed was merely the finishing touch.

It is true that all who did not profit from the inflation were impoverished. It is also true that forced savings or forced capital production in the amounts of those days is certainly highly objectionable. Yet the German inflation does indicate how much capital can be produced by inflationary credit expansion. If administered in less gigantic doses it need not have such severe consequences for the social structure.

To be sure, at the end of the inflation, when the currency was stabilized, a severe capital (or rather monetary) stringency arose in Germany, but this stringency had nothing to do with the need for capital in the true sense of “real” capital. Of the latter there was enough, even more than enough. What happened at that time was a typical scramble for liquidity, such as occurs at the end of every boom—in this case an inflation boom—and such propulsions can be moderated through an easy-money policy by the central bank.

From 1924 to 1931 foreign loans poured into Germany in the huge amounts mentioned above. But whether they actually augmented Germany’s productive capacity is open to question. Her balance of payments raises some doubts. Of the net capital import of 17.3 billion marks from 1924 to 1930, only 2.4 billion was used to buy merchandise; the remainder was spent on the transfer of interest payments (2.7 billion marks), on reparations (10.1 billion) and for the import of gold and foreign currency (2.1 billion).²³ Thus only a relatively small part of the gigantic capital influx was used for really productive purposes, and we may therefore conclude that only a small part was needed for such purposes.

Modern highly industrialized countries seem to be capital autarchies—that is, they make their capital at home. And they are able to do so because their economic systems are elastic with respect to their productive and their credit-creating capacity. They are no longer either Robinson Crusoe’s island or colonies of the nineteenth century, from which many people even today derive their conception of capital production.

As for productive elasticity, it is a commonplace that modern industrialized countries possess more industrial equipment than can be fully employed when demand for goods is declining. And even when demand is not declining, new plants and equipment can be built, roads, houses, railroads, can be constructed, with a relatively small amount of additional labor. Productive capacity is so large and so elastic that the needs for investment and renovation, in addition to current consumption needs, can be satisfied without difficulty—in contrast to Robinson Crusoe’s island, which had not even an ax, and in contrast to colonial countries, which have no plants, roads, railroads, ports, or other such facilities. In Europe all these facilities will be available after the present war—if they are not totally destroyed by bombing. A certain restriction in consumption will have to be borne, it is true; Europeans will not be able to travel in air-conditioned trains immediately after the war.

Elasticity of production was the strength of the European countries after the 1914-18 war. They have since acquired in addition elasticity of money and credit. With the abandonment of the gold standard, governments and central banks are no longer forced to restrict their credits in order to maintain the parity of their currency. There is no longer such a thing as need for the so-called external discount policy. Now there exists only the so-called internal discount policy, which is used to manipulate the business cycle and the capital and credit supply. The supply of credit can be raised and the interest rate lowered at will; the effect is merely a change in the distribution of income between debtors and creditors. The “slight inflation” that arises from such inflationary expansions of credit restricts current consumption, through raising the prices of goods, and directs economic activity toward the production of capital goods, as described above.²⁴

This method of capital reconstruction undoubtedly has certain disadvantages. If loans from abroad—the alternative procedure-must be repaid and are not just gifts, the nations of Europe have to consider whether the disadvantages of creating capital at home can be borne more easily than what they call “tribute”—that is, payments to a foreign country for interest and capital, with the deflationary crises and the thousands of other inconveniences that can follow in their wake. The decision will depend on the marginal productivity of the imported capital, which may be extremely high if the industrial apparatus is completely destroyed. If this is not the case, they will prefer to make their capital at home by restricting current consumption. If it is given them as a present they would, of course, prefer foreign capital.

The capital exported in the ’twenties turned out to have been largely a gift. Most of the capital exported to Europe is lost, probably forever, as everybody realizes. Why is there nevertheless such an eagerness to export capital again? The basic reason, of which some of the experts themselves may not be conscious, is perhaps the fact that capital export, especially in its modern form wherein it is combined with the export of goods, means creating a ready market for certain products that could not otherwise be sold because they are too expensive. These goods can compete abroad, not because they are cheap but because the credit that finances their exportation is cheap: the foreign country is offered the expensive goods in conjunction with relatively cheap credit. Thus it could be said that the exports are reduced in price at the expense of those who lend capital or extend credit. This is especially true if the foreign country plays with the idea of not paying back the loan, or of repaying it only in part. Indeed, the importer will tolerate even the highest price if he knows that in the last resort not he but the exporting country pays for the import. As soon as capital is exported which will not be repaid at all, or will not be repaid fully, capital export becomes merely a subsidy paid to the export interests by the bondholder or, in the case of government-financed loans, by the taxpayer.

Of course, under specific conditions political loans will have to be granted. With them this chapter is not concerned. Nor does this discussion deal with loans for relief and rehabilitation, which are granted for noneconomic purposes. It deals only with loans for currency stabilization and for the reconstruction of productive capacity. If these are contemplated, the history of international loans during the period between the wars should always be kept in mind.

^* I am grateful to Miss Hedwig Wachenheim for her collaboration in compiling the statistical data used in this chapter. It appeared first in Social Research, May 1944.

¹ A certain amount of capital entered Germany through speculation in mark notes and exchange, in the form of small loans and through the sale of securities abroad. It is doubtful, however, whether Germany’s industrial equipment profited from it, since reparation payments had already started at that time (May 1921). For details see Report of the Second Committee of Experts to Reparation Commission, April 9, 1924, in Rufus Cutler Dawes, The Dawes Plan in the Making, Indianapolis, 1925, pp. 490 ff., also pp. 503 ff.; Economist, August 16, 1921, p. 222.

² Of this total, 1,200 million went to the Reich and 870 million to industry and agriculture; see Hjalmar Schacht, The Stabilization of the Mark, tr. by Ralph Butler, London, 1927, p. 182.

³The Problem of International Investment, A Report by a Study Group of Members of the Royal Institute of International Affairs, London, 1937, p. 236.

⁴Statistisches Jahrbuch für das Deutsche Reich, 1937, p. 538; C. R. S. Harris, Germany’s Foreign Indebtedness since July 1931, London, 1935, pp. 8-9.

⁵Financial Chronicle, July 11, 1931, p. 75.

⁶Ibid., July 18, 1931, p. 336.

⁷ Claude William Guillebaud, The Economic Recovery of Germany, London, 1939, p. 21.

⁸ On September 21, 1931, Great Britain suspended the gold standard, and on December 8, 1931, the Brüning government cut all income from interest, wages, social insurance, and relief, as well as prices; see Reichsgesetzblatt, 1931, I, p. 699.

⁹ Guillebaud, op. cit., pp. 63-65.

¹⁰ Reichskreditgesellschaft, Deutschlands Wirtschaftliche Lage in der Jahresmitte 1939, Berlin, 1939, p. 5.

¹¹ In a Reichstag address of September 1, 1939: Monatshefte für auswärtige Politik, 1939, p. 907.

¹²Banker (London), February 1937, p. 114; Fritz Lehmann and Hans Staudinger, “Germany’s Economic Mobilization for War,” National Industrial Conference Board, Conference Board Economic Record, New York, 1940, pp. 290-309.

¹³Banker, July 1938, p. 14; Guillebaud, op. cit., p. 63.

¹⁴ Allen Thomas Bonnel, German Control over International Economic Relations, Urbana, 111., 1940, p. 118.

¹⁵ Harris, op. cit., p. 38.

¹⁶ Schacht in Frankfürter Zeitung, November 19, 1927.

¹⁷ Young Plan Advisory Committee Report, Economist, Supplement, January 2, 1932, p. 5.

¹⁸The Problem of International Investment (cited above), p. 13.

¹⁹Statistisches Jahrbuch, 1938, p. 254.

²⁰Ibid., 1938, p. 254.

²¹ In the early days of the Nazi regime exports were promoted by giving the exporter as a subsidy the difference between the low market price paid in foreign exchange for the German bonds repurchased abroad and their nominal Reichsmark value. Blocked mark accounts were bought up by the “Golddiskont” bank at a heavy discount; the discount was also used to subsidize the exporter, as was the gain from the repurchase of the scrip certificates issued after June 1933 in part payment of interest on Germany’s long-term debt. In the middle of 1934, however, the issue of scrip was stopped and the buying of German bonds abroad through the Exportförderung was limited to cases in which payment did not become due until twelve months after the sale. From then on exports were subsidized from a fund (800 million marks in 1935 and 1,000 million in 1936) produced by a levy on the annual turnover. Throughout this period exports were subsidized also by the use of blocked marks (Banker, February 1937, p. 161).

²² The German-Swiss dealings are a case in point. Although Germany owed money to Swiss citizens for the credits granted her from 1924 to 1930, Switzerland paid for the German coal deliveries of later years by putting the money at the disposal of German tourists traveling in Switzerland. Instead of seeing to it that her own nationals, who were Germany’s creditors, were paid out of the coal deliveries, Switzerland reciprocated by new services. Schacht cleverly used Switzerland’s biggest export industry, tourism.

²³The Problem of International Investment (cited above), p. 238.

²⁴ Dr. H. Neisser in Social Research, August 1944, pages 369-381, has pointed out that my “position is surprisingly close to the position of certain Keynesians, who have argued . . . that the amount of saving necessary for expanding the current rate of output is always automatically created by increasing the current rate of investment.” He thinks that capital can be made by inflation only if a totalitarian government can tell the people “how much to save or how much to spend” and if “a certain historically obtained standard of living must be maintained for the major part of the population.” To this I would agree to a certain extent, but would raise the question whether a country urgently seeking capital abroad has not to lower rather than to raise “the historically obtained standard of living” by opposing instead of encouraging wage increases.

It is, incidentally, not the aim of this chapter to prove that capital must or should be made at home rather than be imported, but that it can be made at home under certain conditions.

What the article teaches for the problems of today (Fall 1948) is that the effect of a sound internal monetary and fiscal policy on the balance of payments is much stronger than is generally assumed and that no foreign loans, however lavishly granted, can correct deficits in the balance of payments for the long run if the debtor countries indulge in an inflationary monetary and fiscal policy.