Economics and The Public Welfare

Chapter 20

Germany, 1924-1928

Dramatic Upswing, 1924-1925. Following the inauguration of the Dawes Plan in 1924, there came a radical improvement in the whole German picture. The confidence of the Dawes Committee that private enterprise would work things out if only the budget could be balanced, the currency could be stabilized, and a political future assured under which the Germans could see that their reparations burdens were bearable, proved abundantly justified. The German Government and the German people set to work with a tremendous determination to make the plan work. The upswing in industrial production was extraordinary. Foreign capital flowed into Germany, attracted by the high rates of interest which the Germans were eager to pay to replenish working capital which had been largely wiped out in the period of inflation.

Causes of Short-lived Drastic Crisis, Late 1925. In late 1925 there came a short-lived but drastic commercial crisis in Germany. The main causes were the following:

1. Inflation Had Left Few Landmarks. The chaotic conditions of the several years preceding the Dawes Plan left few dependable landmarks on the basis of which economic reckoning could proceed. Assumptions had to be made, guesses had to be made, and, necessarily, many were erroneous. German tax experts in days before the war could ordinarily make advance estimates of revenues with a narrow margin of error. They could not in 1924. In a tranquil business situation every businessman will have tabulated experience, on the basis of which he can estimate his costs, markets, prices, and profits. No German industry was in this fortunate position in 1924. Many of the plans and calculations, therefore, made in 1924 were proved to be mistaken plans by the autumn of 1925. During the period when the mark was sinking rapidly in value, working capital largely disappeared. No small part of it was turned into fixed capital. It was better to build plants which might depreciate to 50% than to hold marks that might go to zero. In 1924 Germany found herself with a vast deal of idle plant equipment. The future might or might not validate this investment in any given case. Some of it proved to be well adapted to the market demands which developed in late 1924 and 1925. Some of it was partially adapted, some of it could not be used. Some of it was used for purposes which later turned out to be unprofitable. There were grave uncertainties, too, as to the foreign markets; important miscalculations were made. Some foreign markets proved much better than expected, others proved disappointing. But in all cases the calculations and plans which had to be made in 1924 rested on very inadequate data.

2. Inflation Had Wiped Out Working Capital. Germany in 1924 was desperately short of working capital. Current stocks of goods were very low, and cash and credit with which a manufacturer might purchase raw materials, pay wages, and carry “work in process” were desperately short. A minor but painful feature of the crisis of 1925 was the elimination of a great many pitiful small businesses with hopelessly inadequate capital. German businessmen had come home to Germany from the German parts of Poland and from Alsace-Lorraine with very inadequate capital, but with a desire to continue as businessmen, rather than as workmen. These men established a multitude of petty businesses, frequently retail merchandising. Dr. Oskar Wassermann of the Deutsche Bank gave figures for the number of tobacco dealers. In 1907 there were in Germany 29,487 such dealers. In 1924 there were 412,000. Large numbers of these small people were eliminated as independent entrepreneurs in the crisis of 1925—later to become clerks or workmen in the employ of larger houses.

3. Taxation Too Effective. Perhaps the greatest factor of all in the interruption of the strong revival was the extraordinary effectiveness of the taxation inaugurated after the Dawes Plan was set up. The German people and the German Government were determined that whatever else might not be done, they would balance their budget, and they inaugurated a system of taxation with ruthlessness and efficiency. The resulting revenues ran far beyond expectations and far beyond needs. The table on page 150 comparing actual revenues and budget estimates shows how greatly the tax experts underestimated the efficiency of their taxation:

4. Government Banks vs. Private Banks. It was unfortunate enough to take so much unneeded money away by taxation, but it was still worse that the government bodies put their excess tax money, not into the commercial banks where it could have been lent back to the businesses, but into government-controlled banking institutions. One-third or more of all bank deposits in Germany in 1925 were in public banks, chiefly deposits of public funds. These banks largely limited themselves to the purchase of prime bills of exchange i.e., “discounts,” rather than the slow “advances” of the sort which German banks ordinarily made to their business customers. The result was a relative excess of funds in the short term money market and an appalling scarcity of funds available for the working capital of businesses.

Actual Revenues and Budget Estimates * (In millions of reichsmarks)
Financial year ended March 31, 1925	Budget estimates	Actual receipts	Surplus (+) Deficit (—)
Taxes on income, sales, transport, etc.:
Income tax	1,344.0	2,213.3	+ 869.3
Corporation tax	144.0	313.9	+169.9
Tax on real and personal property	376.0	498.9	+ 122.9
Turnover tax:
(a) Ordinary	1,260.0	1,798.5	+ 538.5
(b) Extraordinary (luxury)	180.0	119.3	-60.7
Tax on bourse transactions	150.0	112.8	-37-2
Transport tax	230.0	312.6	+ 82.6
Other recurring taxes	424.0	316-3	-107.7
Nonrecurring taxes	36.0	79.0	+ 43.0
Customs, and taxes on tobacco, beer, etc.:
Customs	160.0	356.6	+ 196.6
Tobacco tax	360.0	513-7	+ 153.7
Beer tax	126.0	196.5	+ 70.5
Sugar tax	231.0	219.1	-11.9
Spirits monopoly	140.0	141.4	+ 1.4
Nonassigned	82.7	123.0	+ 40.3
Miscellaneous		7.6	+ 7.6
	5,243.7	7,322.5	+ 2,078.8

* Report of the Agent General for Reparations Payments, Nov. 30, 1925, pp. 32-33.

5. Foreign Loans to States and Municipalities. The foreign flotations of German loans, particularly those placed in the United States, were to a very great extent loans to German states and municipalities, rather than to German businesses. There were important short credits given by foreign banks, especially American banks, to German banks, and to some extent short credits made by foreign and German banks “on joint account” to German businesses, with the German banks supervising the loan and sharing the risk, but with the American or other foreign banks providing most of the money.

In the autumn of 1925 one found in London and in Paris an inadequate understanding of the German situation. In The Netherlands the understanding was much clearer. In Sweden the German picture was well understood. Swedish banks urged the view that the German state and municipal loans which had been floated abroad, chiefly in the United States, were making trouble rather than doing good. The governing bodies already had too much money, as a result of the very heavy taxes. These loans gave them more. They were able to outbid business for labor and supplies, much of which they used in construction, which Germany could not afford with capital so acutely scarce. They thus raised the costs of general industry, the more so as officials, for political reasons, often wished to be generous to labor, and were not as sagacious and prudent as businessmen would be in their purchase of supplies. This was regarded as a special handicap to the export industries, which needed to expand if Germany were to carry through the Dawes Plan programme.

The Swedish bankers urged that the United States should cease to make these state and municipal loans.

In Berlin one found an extraordinarily clear understanding on the part of the German banks, Mr. Parker Gilbert (the Agent General for Reparations Payments), the Reichsbank, and the German Treasury of what was happening in Germany. The heads of several of the banks, Mr. Gilbert, and representatives of the Reichsbank and the Treasury all wished a cable sent to New York saying that although loans to the German industries were desirable and would do a great deal of good, loans to the states and municipalities should stop. The cable was sent. On the day that the cable from Berlin reached New York, Dr. Schacht, the head of the Reichsbank, personally appeared in New York to urge on the American banking community that there should be no more state and municipal loans made to Germany.1

Dr. Schacht made a tremendous effort then, and in the years that followed, to hold down Germany’s borrowings from foreign countries.

But under the impact of the gigantic flood of bank money generated by the policy of the Federal Reserve System in 1924, money was superabundant in New York and the illusion of unlimited capital was growing. The market for high yield foreign bonds in the United States seemed insatiable, and the American investment bankers were trying to supply the market. In late 1925 the agents of fourteen different American investment banking houses were in Germany soliciting loans from the German states and municipalities. It was impossible to control the competitive money market in New York, and it was difficult for the head of the Reichsbank to control the states and municipalities in Germany.

Rarely has an economic situation been more fully and clearly understood by the men responsible for its management than was the German picture in late 1925.2

Hopefulness of Germany in the Midst of the Crisis. In the midst of this crisis, moreover, one found a hopefulness among the humble people. It seemed strange at a time when 6% of all the bills of exchange in the country had gone to protest, when unemployment was increasing every day, and when the newspapers were full of bankruptcy notices. German workmen showed with pride the new, shiny silver marks, which they trusted. They had a good currency again. They were suffering, yes. Times were hard, yes. But the inflation had been infinitely worse. Again and again workmen said, “No more war, no more inflation.” And it was not only the workmen. In October of 1925 an able French banker met for the first time the head of one of the great German banks at the latter’s home. The two men had hardly exchanged greetings before the German said to the Frenchman, “Of course we both hate socialism, but we must none the less support the parties of the Left, for that means peace. We must put down the Nationalists in both our countries.” And the French banker cordially agreed.

Turn Upward to Full Employment in Spring of 1926. The German tide turned upward again in the spring of 1926. Prices of securities of the German Bourse had an extraordinary rally, industry moved, employment grew full, and Germany had a period of nearly three years of strong, sustained industrial activity with excellent business profits.

Full Employment for Three Years at Extremely High Interest Rates. It must be said that this German business rally was on the basis of extremely high interest rates. There were occasionally times when the rates on call money, Taegliches Geld, were low. Thus on March 20, 1926, that rate dropped from 3% to 2%, after having averaged over 8.5% from March, 1925, through December, 1925. But thirty-day paper was still 7% in March, 1926, the discount rate on prime bills of exchange still 5%, while bank “advances” remained between 11% and 14%.

These bank advances in Germany were in general much slower loans than ordinary customer’s paper in the United States. They were the typical business loan made by German bank to German business. The lowest rate on these bank advances between 1924 and 1929 was 9%, and this was on three loans made by Goldschmidt of the Darmstaedter Und National-bank in 1927.

Cheap Money Not Essential for Full Employment. The theory that cheap money is essential for business revival and business activity received a pretty sharp test in this period, I think. The British, with much lower rates, and with rates held unduly low on the theory that cheap money was necessary for good business, went through a prolonged stagnation, with high unemployment. The Germans, more flexible, making the necessary readjustments in wages and other costs, endured both high interest rates and cruelly high taxation, but still did business and made money, with very full employment.

Cheap money plays no such dominating role as Keynes and Hawtrey and their followers would have us believe.

Throughout this period Germany continued to get a very great volume of foreign loans, much exceeding the total reparations she paid during the period. But never during the whole period from the inauguration of the Dawes Plan to her credit collapse in 1931 did she have enough liquid capital to make an easy working capital situation for her industries.

• 1This point will be discussed at length in Chap. 34.
• 2I have not been able to find that this article was ever published. However, the reader will find much of it in two books by Veblen: Imperial Germany and the Industrial Revolution, New York, 1915; and The Nature of Peace and the Terms of Its Perpetuation, New York, 1917.