Nothing can prove more clearly the catastrophic upheaval which has occurred during this period than a comparison between the world as it was, to all appearances at any rate, in 1929 and the situation today.
In those days there existed a system of international credit which appeared to function without friction and an active and fruitful exchange of capital from one country to another. Commercial relations between almost all countries seemed to be regulated on a solid basis by a clear and well-organized system of commercial treaties. Competent authorities, governments, parliaments, economic circles and public opinion were unanimous in recognizing as unreasonable and in condemning any policy of isolation. Every country was ready to welcome the goods of other countries in well-ordered exchanges. Industry worked at a profit. Agriculture, if not in Germany, at any rate in the majority of other countries, could live. The world opened itself wide to commerce. Banks evidenced a spirit of enterprise and granted credits to foreign countries. Investors were disposed to entrust their savings to foreign governments. In the majority of countries unemployment was still at that time an unknown problem. Those were the characteristic features of the period during which the Young Plan was conceived.
What an abyss between the glowing optimism of those days and the pessimism and despair of today! None of the promises of that period have been realized.
The desperate situation which prevails today is evidenced by the number of 25 million unemployed.... In Germany this state of things has most strongly shaken the confidence of the masses in the good functioning of the capitalist system.
A certain number of states have already found themselves obliged to suspend their payments abroad. This constitutes a grave warning not to delay taking the necessary measures in order that other great countries may not find themselves in the same position. I need not describe what would be the repercussions, the disastrous results on the world crisis of such further steps. In the present uncertainty there is no need to be surprised that the international circulation of capital and credit is, for the time, almost entirely arrested. The capitalists of wealthy countries, far from collaborating in a reasonable distribution of such capital, think only of withdrawing as rapidly as possible the credits which they have granted, and do so even though in their own countries capital can no longer find remunerative investment. The employer is often obliged, in order to make up his losses, to live on his capital. The capital which is in existence, and is destined to form the basis of fresh prosperity, shrinks steadily.
On the other hand, as a consequence of the increase in the value of gold, or as a result of the fall in prices, debtors are obliged to pay from 40 to so per cent more, and in this connection private debtors and debtor States are in exactly the same position. If an improvement of the situation does not speedily occur, we must expect a general adjustment of debts to become inevitable.
There remain two facts of a general character which I would also like to deal with.
The world has had to pass through crises in the past.... In one essential point, however, the present crisis is different from earlier ones. Formerly we had to deal with crises resulting from a lack of equilibrium between production and consumption, and a period of two to three years was generally sufficient to re-establish equilibrium. But upon the present crisis of international exchange there has been superimposed a second crisis - an unpre cedented crisis of credit. This credit crisis has causes peculiar to itself. The most important are the public international debts and political payments, which are contrary to all sound or reasonable economic principles. The crisis of international exchange will not be surmounted unless the credit crisis is also overcome, and the latter cannot be overcome unless the specific cause from which it results is ruthlessly swept aside. That is the first point.
The second point is this. Under the influence of political debts a complete displacement has taken place between debtor and creditor countries in the repartition of gold on the one hand and the exchange of merchandise on the other. Gold has accumulated in the two national economic systems which are creditors under the system of international debts, whereas Germany is today the only debtor country which is almost entirely lacking in gold. In the creditor countries gold has become sterile, and in Germany the absence of gold is causing a growing paralysis of the economic machinery.
On the other hand, the commercial balance of Germany has become favourable during the last two years, under the pressure of its external debt, which is closely linked with the political debts, whereas in former decades it was always unfavourable. In the same period a development in the contrary direction has taken place in the creditor countries
The German problem is the central problem of the whole of the world's difficulties.
The German situation is characterized by the following:
1. The high level of interest, which crushes agriculture and also industry;
2. The burden of taxation, which is so oppressive, in the opinion of the Special Advisory Committee, that it cannot be increased, but has yet been increased, in order to assure the very existence of the State, by the imposition of fresh taxes within the last few days;
3. The external debt, the service of which becomes ever more difficult by reason of the progressive diminution of the surplus of exports; and
4. Unemployment, which is relatively more widespread than in any other country whatever, and which constitutes from 20 to as per cent of the population a burden on public funds.
What is particularly fatal is that an ever-growing number of young people have no possibility and no hope of finding employment and earning their livelihood. Despair and the political radicalization of the youthful section of the population are the consequences of this state of things
The former reserves of the Reichsbank are exhausted. The reserves in gold and foreign currency of which the Reichsbank can freely dispose are no more than 390 million marks for a fiduciary circulation of 3,800 million marks, which means that the legal cover for the currency circulating in the country, which should be 40 per cent, is now no more than about 10 per cent. If in the next few weeks we are to fulfil our obligations, this small cover will become even more insufficient
The foreign trade of Germany closed in 1931 with an excess of some 3 milliards of marks.... The forced development of this favourable balance has led in all countries to protective measures against German imports, with the consequence that the excess of exports rapidly diminished in 1932.
In view of the fact that the prices of all goods have fallen by so per cent as compared with the prices of 1928-1929, the loan charges on private German debts abroad have alone reached almost to the level of the normal annuity contemplated by the Dawes Plan.
Germany could not by herself arrest this development. No international decision has been taken up to now by the responsible statesmen to arrest this development. The very wise initiative of President Hoover in June 1931 was inspired by the idea of giving the world a respite destined to produce a solution of the most urgent economic problems. This goal, nevertheless, has not been reached. Sufficient account has not been taken of the reality of economic laws....
The external debt of Germany, with its very heavy interest charges, is, for the most part, attributable to the transfers of capital and the withdrawals of credits which have been the consequences of the execution of the Treaty of Versailles and of the reparations agreements. Thus, the Special Advisory Committee finds that the 18 milliard marks which were borrowed by Germany from other countries after the stabilization of her currency have been counterbalanced by an exodus of more than 10 milliard marks under the heading of reparation payments alone. At the present time, when we are beginning to convert into goods the value of money obligations, it is almost impossible to form an idea of the importance of the payments which have been made by Germany. I do not want to enter into a discussion of the question of what may have been the real value of those payments to the creditor countries which received them. It is natural that when goods to the value of several milliards are thrown on the market, there is not only a fall in prices, but there is also a non-economic utilization of those goods in the countries which receive them. Therefore, the profit realized by those who receive the goods is considerably inferior to the loss suffered by those who provide them....
It is often said that Germany would become a formidable competitor with other countries if she were freed from her political debts. I am firmly convinced that those fears are based on absolutely erroneous considerations. The lightening of the budget charges produced by inflation, through the reduction of the service of internal debts, only constitutes an apparent alleviation of the burden. Inflation has also destroyed private fortunes and savings; indeed, the whole of the resources in capital which the German economic system had at its disposal. The lightening of the budgetary burden was therefore illusory. A comparison between the fiscal charges in Germany and in other countries is problematical, because such a complete confiscation of fortunes as has taken place in Germany has not occurred elsewhere.
Inflation has, therefore, lessened the capacity for competition of the entire German economic system. The State and private economy have lost their reserves. The destruction of those reserves of capital was followed. by the contracting of fresh debts too rapidly and on too large a scale. The consequences became intolerable to the national economy. Agriculture and industry found themselves faced with the impossible task of meeting interest rates of 10 per cent and more for short-term credits, and only very little less for long-term credits. In addition, they are both crushed under the burden of taxation and fiscal charges. The present high level of public expenditure is to a large extent made necessary by social service obligations. On the other hand, the economic depression has automatically confronted the State with obligations which formerly fell upon private shoulders. The State has only assumed those obligations in view of its duty to prevent social distress and violent disturbances of public order which such distress threatens to bring about. For all these reasons, the German Government has gone to the very limit in the utilization of its resources and reserves. Public and private economy are today once more at the point where they found themselves after the inflation, that is to say they are devoid of any reserves and find themselves faced with an unemployment problem unprecedented in history. It is obvious that an industrial debtor country devoid of reserves, as Germany is now, could not constitute for a long time to come a menace to its competitors.
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