Economics and The Public Welfare

Chapter 65

Governmental Coercion and the Value of Money

It was prevailing doctrine among economists down to the first World War that governments could not coerce their peoples into accepting at face value a dishonored paper money. But the first World War brought an immense revival and intensification of governmental power. And in the years 1915 to 1918 a good many new techniques of price fixing and control of foreign exchange operations were introduced which tended to prevent transactions which would recognize the depreciation of irredeemable paper money.

After the war, during the currency disorders of 1919-1924, a good many ineffective efforts were made by various countries to use coercion to replace waning faith. The head of the Bank of Athens said about 1923 that in Greece they had tried to stop all export of currency and securities from Greece. They had succeeded pretty well, inside Greece, in controlling foreign exchange transactions, and they had got a good control of the mails and of the telegraph, but couriers, carrying currency and carrying securities, found it easy enough to slip through mountain passes, and the depreciation of the drachma went on in the outside foreign exchange markets.

Even where coercion might succeed in forcing a dishonored paper currency to be accepted at home, it continued to be true that nothing could prevent it from depreciating in the foreign exchange markets.

Currency Policy in Russia. We saw develop under the Bolshevik Regime in Russia an authority over the lives of the people unmatched until Hitler surpassed it, but Russia’s control of its currency never reached a point that would justify abandoning the older beliefs with respect to the power of the state over currency. The first Bolshevik policy, based on ideas of pure communism, was to ruin and discredit the currency in the naïve belief that direct action, direct control of production and consumption would make money unnecessary. Rubles were printed recklessly for the deliberate purpose of ruining them.

By 1921, however, Lenin had reached the conclusion that pure communism would not work, and the “New Economic Policy” announced by Lenin in his famous speech of October 17, 1921, frankly acknowledged a partial return to capitalism. The reestablishment of capitalism in Russia involved the redevelopment of a money held as closely as possible at a parity with gold. In the years that followed Russia had repeated slumps in the value of its currency, but always resisted them, and finally turned decisively toward heavy gold production, recognizing the need of gold both for international use and as an element of strength in the domestic currency situation.

Russia never succeeded in eliminating the black market in foreign exchange inside Russia. An official of the State Bank of Russia in 1927 or 1928 was told of a report made by an American traveling in Russia of the shooting of certain of the “comrades” in Moscow who had been caught speculating in foreign exchange. The official of the State Bank replied that they had changed their method of handling the problem. They had found it more effective to send agents of the Bank itself to the black bourse to buy and sell, and thus to regulate the exchange rates on the black bourse. He added that he was paying high rates of interest on deposits to Russian depositors, and was giving them assurances that he would not report their earnings to the tax collector. As late as 1938 there were reports from certain travelers of the existence of a black market in foreign exchange in Russia.

It was not usually possible to sell checks drawn on Russian banks in the foreign exchange markets, because usually transfer of funds on the books of Russian banks by outsiders would be forbidden. There was one case in the late 1930’s of an author who had some funds in a Russian bank as the result of royalties, and who found that the only way to make any use of these funds was to go to Russia and spend a few months living there, under which conditions the funds would be available. The power of the Russian state over the lives of its people was very great, but Russia could never get entirely free from the “tyranny of gold,” and Russia could never make its paper money a “thing-in-itself,” created by the state and held fixed by the state’s fiat.

The Tyranny of Hitler and the Tyranny of Gold. Hitler could. Hitler inherited a people, intelligent and docile, accustomed to bookkeeping and trained for generations in the tradition of state authority and respect for state authority such as no other modern country has ever exhibited. Fichte, Hegel, Bismarck, and a multitude of other less significant figures, including the Schulemeister, had drilled into the German people an attitude which made it possible for the German State under Hitler really to substitute the tyranny of Hitler for the tyranny of gold.

It did not come all at once. The efforts of the Bruening government and of the Reichsbank in the first year of the Standstill (1931-1932) to control foreign exchange transactions, and to prevent the transfer of funds out of Germany, were only partially successful. There was discussion in the Second Standstill Committee (Berlin, 1931-1932) in which French bankers were complaining that they knew of such transactions because the funds were coming to their own banks. A representative of the Reichsbank said, “If you will give me the names, I will put them in prison.” But the French bankers were, of course, under the banker’s obligation to protect the privacy of accounts which came to them lawfully under French law.

But as Hitler came in, the lines tightened. The exchange controls became very effective, while price fixing, covering a very wide range of commodities, became extraordinarily effective. Price fixing was accompanied by strict commodity control. The German farmer kept books which showed not merely what he had sold, but also all that he had produced, and all that he had consumed of his production in his own home.

Tricks were at first devised along lines like these. The farmer and the butcher would make a deal whereby the pigs were sold at the fixed price, but whereby the farmer’s little dog was sold to the butcher at an absurdly high price. If the little dog happened to come home, well, that was just what the little dog would do, and the butcher didn’t care. But very speedily the German Government clamped down on transactions like this. Severe penalties were imposed and the fixed price was made effective.

There was control over the books of every corporation. If funds accumulated, the corporation was directed to put substantial sums into government securities. In cases where bookkeeping was difficult to enforce—as with the tips of a waitress in a restaurant—the tax gatherer would come around each day to have an accounting with the waitress and to make his collections. Hitler had an enormous and very effective army of officials, and a very powerful and utterly ruthless secret police in the Gestapo. Hitler had succeeded in shattering family loyalties, breaking the ties between parents and children, and parents did not know but that their own sons and daughters might be members of Hitler’s Gestapo.

Control over foreign exchange transactions in Germany and outside was tremendously effective. Men feared to buy dollars with marks in Germany or to hold dollars. If they had dollars, it was their duty to turn them over to the state, and they did so. On a German ship carrying passengers between New York and Bremerhaven, a special kind of ship money was employed which could not be spent off the ship, and ordinary German marks could not be used on the ship. The steward was absolutely afraid to take a tip in the regular marks. If he got a tip in dollars or in sterling, he could take that, but he must at once report to the purser and have it converted into ship’s money. When he left the ship, the ship’s money would be exchanged for him into regular marks, but it was made impossible for him to bring regular marks obtained outside Germany into Germany.

Between 1937 and 1938 the control over Reichsbank notes which got outside Germany was tightened decisively. Travelers leaving Germany made every effort to carry no paper marks over the border. It was dangerous to do so. In 1937, leaving Germany, an American banker found that he had taken with him, in the pocket of a suit he was not wearing, a ten-mark note. He turned it in at a bank in Paris and the bank took it at par of exchange. But when a similar thing happened in 1938, he found he had a useless piece of paper on his hands. Interested in testing the matter, he offered it at several banks, including one in Holland and two in Paris. In every case he was told that the note was “too good.” There was no way in which the bank could get it back into Berlin to be used.

German paper marks practically ceased to be dealt in outside Germany.

Deposits in German banks held in the outside world began to be very strictly controlled with the Standstill of 1931, and the controls grew stricter as time went on. They were blocked. You could not automatically transfer them. But arrangements were made whereby, for various purposes, they could be sold, in definitely limited amounts. “Travel marks” very quickly were created, which were sold at a discount from the official rate. The Swiss plan, adopted by agreement with the German banks at the Second Standstill in Berlin in the winter of 1931-1932, provided another type of mark. Mark deposits and mark credits held by foreigners could be used, under certain conditions, under the supervision of the Reichsbank, for investment in German securities or in German real estate. These marks also sold at a discount. The rates of discount were far from being free supply-and-demand rates. Always the government could intervene to limit the volume of such transactions.

There were “benevolent marks”—funds sent by people outside of Germany, under special controls, as gifts to people in Germany—with the payments supervised by the State, subject to income tax collected at the time. There was a very large number of different kinds of marks. Only the specialist in a great New York bank would know the details, and he would have to keep in daily touch with the German authorities in order to be sure of them.

The authoritative control of markets, both foreign and domestic, including the intimate searching into the bookkeeping and the pockets of the people, reached a degree of perfection which nobody would have dreamed possible on the basis of the previous history of money.

The Reichsbank’s gold reserve dwindled until it was microscopic. The published gold reserve of the Reichsbank in late September, 1939, after the outbreak of the war, was 77 million reichsmark as against, roughly, 11 billion reichsmark of outstanding notes—a microscopic gold reserve. The Reichsbank had more gold than that. It could have had, perhaps, as much as 700 million of reichsmark in undeclared reserves, but it still had an utterly inadequate gold reserve on the basis of all banking experience. During the war Germany went on holding her prices, holding her public finance, and holding her currency. The point is simply that she had found a way to dispense with gold. You need gold when free men are to be induced to take your currency at a fixed rate. You do not need gold if slaves can be coerced into taking your currency.

The British Empire versus the German Reich in Monetary Coercion. The British Empire tried no coercion down to the outbreak of the war in 1939. Sterling then collapsed violently. It had no vitality. Its prestige was largely gone. Britain turned toward German methods. Sterling in general was blocked. An “official sterling” at a fixed rate, for a limited number of transactions especially approved, was created. Commodity prices were fixed in England. A ban was put upon the reimporting into England of Bank of England notes, except as their history could be ascertained.

But the pound sterling ceased to be valid even within the limits of the British Empire. Very speedily the blocked balances included the balances of Canada, of Australia, of Eire, of Malaya, of New Zealand, and, above all, of India. Men in these countries, holding pound sterling balances in British banks, had to be prevented from using them by the same process of blocking that applied to Scandinavian countries, or other countries. Imperial power was not strong enough to make a pound valid throughout the Empire.

Is it realism to suppose that the whole world can hang together, under the International Monetary Fund, in the support of fixed foreign exchange rates, when the British Empire could not hang together in support of sterling within the British Empire?

Austria’s Return to a Free Exchange in 1934. Is it possible for a country with blocked exchange to return to a free exchange? We saw Germany, following the Standstill of 1931, with the exchange control that accompanied the Standstill, move steadily toward a tighter and tighter control of foreign exchange, with an increased blocking of balances owned by foreigners, and with the development of many different kinds of marks, some of which could be used for one purpose and some for another, but with ever tighter controls. We saw Italian exchange increasingly controlled in the period of the 1930’s. Is it possible to get out of this cycle once you get into it? We have an answer in the experience of Austria. Austria also went into “standstill,” with blocked foreign balances and strict exchange controls in 1931, and Austria returned to a free exchange in 1934. The difference was not that Austria was financially stronger than Germany. The difference was that Austria preferred freedom of exchange and commerce and worked toward it. Italy’s problem was complicated by the Ethiopian War. Austria had no such problem. Germany’s problem was complicated by a government which loved control, which deliberately sought Autarchie, and which in the latter years of the 1930’s was deliberately planning war and seeking self-sufficiency for war. Austria, financially and industrially weaker, but turning toward orthodox financial and monetary policy, achieved a free exchange 1 and maintained it from 1934 until she was absorbed by Germany in 1938.

• 1This point will be discussed at length in Chap. 34.