D.R.d.F.
Berlin, Sept. 1, 1938 SECRET MATTER OF STATE
My Fuehrer:
There has been no possibility to explain verbally to you the financial situation of Germany, although I asked for this opportunity. I consider it my duty to describe to you the present situation and for further explanations and additions, I am at your disposal at any time.
1. Since the assumption of power, the definite policy has been followed to finance the large and once occurring expenditures for the first labor procurement and for the rearmament by means of loans. When this was not possible through the normal use of the money—and investment market, that is from the annual savings increase in Germany, the financing was arranged through the discounting of bills of exchange (trade and MEFO [Metallurgic Research Inc.] bills of exchange) at the Reichsbank, which means the printing of money. This creation of funds was of no danger to the currency because the increased circulation of money was offset by a corresponding increase of production. When, at the turn of 1937-1938, the state of full production was reached, the system of MEFO bills of exchange, which at that time amounted to 12 milliards RM, was abandoned, because this system by now would have resulted in inflation. Also it could be abandoned as the increasing income from taxes and the growing savings offered the possibility to cover the normal expenditures through taxes and loans. The income from federal taxes, from 1932 to 1937, increased from 6.5 milliards to 14 milliards. During the same period armament expenditures rose from % milliards to 11 milliards.
The development of the Reich debt is as follows:
In milliards RM.
12/31/1932 6/30/1938
Funded debt ......................... 10.4 19.
Current debt........................ 2.1 3.5
Debt (not subscribed to by public) ...... - 13.3
(Trade and MEFO Bills of
Exchange) ....................... 12.5 35.8
This shows that the Reich debt has tripled.
Provisions were made to cover the armament expenditures for the year 1938 (the same amount as in 1937) as follows:
5 milliards from the budget, that is taxes.
4 milliards from loans.
2 milliards from 6 months treasury notes (which means
__________ postponement of payment until 1939).
Total 11 milliards
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Income from taxes and the investment market offered the security that this program would be maintained within its limits.
2. During 1938 a basic change occurred.
(a) The armament expenditures increased to 14 milliards caused by "the retaking of Austria, the fortifications in the west, and the increased tempo of armament. I have provided for cover as follows:
6 milliards from the budget, that is taxes.
6 milliards from loans.
2 milliards from 6 months treasury notes (which means postponement of payment until 1939).
Total 14 milliards
The increase from 5 to 6 milliards charged to the budget is covered by the increase of corporations taxes, from 30 to 40 percent, and the transfer of certain tax incomes from the communities to the Reich. The amount of 6 instead of 4 milliards from loans can be obtained if the investment market is made unavailable for all other purposes, especially the building of homes; corresponding measures have been taken in collaboration with Minister Funk.
(b) It was intended to float another loan in September (the last loan was floated in April). This is very necessary because the increasing cash expenditure for the Army (900 millions in August, 1,200 millions in September) have completely exhausted the cash balances of the Reich. The cash resources will be exhausted during September; a statement regarding the proceeds resulting from a loan is not necessary, as the securing of funds by means of printing of currency is out of the question.
(c) The intended floating of a new loan is faced with the difficulty, that during the last weeks—since the middle of July and in an especially alarming degree—Reich obligations have appeared on the market and had to be absorbed by the Reich. If these obligations would not be taken up, Government issues would drop in value; because of it the floating of future loans by the Reich would be difficult or impossible. Up to now, 465 million RM's had to be absorbed.
(d) The reasons for the liquidation of Reich loans is found in;
(1) The necessity of industry to finance itself.
(2) A larger inventory of stocks (to safeguard against any temporary shortage of materials).
(3) The hoarding of money caused by the fear of the limitation of credit.
(4) And in the conversion of Reich obligations into material values caused primarily by a war—and inflation psychosis. The
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inflation psychosis is strengthened due to the wage and price increases since 1937 which now are very evident in the western territories. The war psychosis originates from the gossip by all circles of the people that war would begin on October 1.
3. The change in the situation, therefore, is due to the fact that we are steering towards a serious financial crisis, the forebodings of which have led already abroad to detailed discussions of this weak side in our economic preparations and to an apprehensive loss of confidence domestically.
To regain the confidence, it is most important to eliminate the inflation psychosis. For this purpose, the authorities should make declarations and give explanations in accordance with the following outline:
(a) Increase of the Reich debt is not inflation. The floating of loans has always been and is also now necessary for large, once-occurring national tasks. Even so, the Reich debt would rise to 50 milliards, it would only represent two thirds of the annual national income and the annual service of the debt would not be as much as the unemployment compensation payments during the year 1932.
(b) The printing of money without a corresponding production
increase is self deception. The Third Reich, therefore, will not choose the way of inflation but will continue to float loans, the subscription to which is as much a patriotic duty as is the safest investment.
(c) The hoarding of money is not only a crime against the nation as a whole, but also it is foolishness.
(d) A planned regulation and distribution of government expenditures will see to it that prices and wages are not forced up by government offices competing against each other.
(e) The over-employment in public offices has caused idleness, double work and frictions. A thorough simplification will remedy this.
If you, my Fuehrer, would inform the German people along these lines already at the annual party-meeting, it would put a stop to the inflation psychosis and it would be an important step for the possibility to float further loans and with it, would stabilize our financial policy.
4. The second step is to clarify our foreign policy. As every war in the future will be fought not only with military means but also will be an economic war of greatest scope, I consider it my unavoidable duty to present to you, my Fuehrer, in fullest truthfulness and sincerity my deep anxiety for the future of Germany,
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which is based on my knowledge of the economic conditions of our country and also those of the outside world.
Whether or not the war stays localized in the event of a showdown with Czechoslovakia depends mainly on England. Judging from my knowledge of England and the English people, gained over many years, the now repeatedly expressed attitude to take action is no bluff, which fact undoubtedly can be discerned in their careful English way of expression. Even if Chamberlain and Halifax would not want war, the war mongers and possible successors, Churchill-Eden, stand behind them.
The fact that England is not ready for war militarily, does not prevent England from entering it. Because she possesses two great trump cards. One is the soon expected active participation of the United States of America in the war. At present, two tendencies prevail in the United States, one is a propaganda of hate against Germany of the greatest scope, mainly supported by Jewish circles, and the other is the continuing economic crisis, the solution to which can be found only in a European war because of the failure of every experiment tried by Roosevelt. American industry, now only occupied to the extent of 25%, would at once be converted into a war industry of unimaginable production capacity, altogether different from 1914-1918.
The second trump card is, Germany shows financial and economic weaknesses, although she has a head start militarily. Germany's self-sufficiency for the required war needs is only in the early stages. In my opinion, it is Utopia to think that we can secure the necessary raw materials with imports from the southeast and by the exploitation of our own resources. Economically, we are in a position which corresponds with Germany's situation in 1917. The Western powers would not run against the west wall but would let Germany's economic weakness take effect until we, after early military successes, become weaker and weaker and finally will lose our military advantage due to deliveries of armaments and airplanes by the United States. But also a decisive point is the attitude and morale of the people. From it depends the spirit with which the army will fight. It is difficult for a nation that already experienced and lost a war within a generation —to raise the inner strength, morally and physically, which is so vital to the victory of a new war. When the restitution of our military freedom, the occupation of the Rhineland and liberation of Austria was involved, the whole nation was deeply convinced of our rights and the necessity of our actions. But the people's attitude towards the Czech situation is different. Should this
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problem again result in a world war, then the German people's confidence in you, my Fuehrer, would be shaken in its roots; because it believes you will never put our nation in the same situation as in 1914-18. And it would not be able to bear for very long the sufferings of war, large and small, such as the rationing of fats, bombing attacks, the loss of husbands and sons.
Most important is: "Time works in our favor". (1) The increase in power which we gain each month and each year through the completion of our military and primarily our economic preparations, is considerably greater than the added strength which the Western powers gain from their own re-armaments. (2) Certain powers inside France, growing month by month, try to break the alliance with Czechoslovakia, although I am now of the opinion that France, probably with clenched fists and a heavy heart, would fulfill her duty as an ally in order not to lose face as a major power and to keep her national honor. (3) In America a reaction against the Jewish propaganda of hatred is noticeable; this reaction requires time to develop. Each improvement of the economic conditions in the United States of America reduces the urge to find a solution of her difficulties in a war and it strengthens the prevailing tendency of the broad masses of the American people to stay aloof from European quarrels.
We therefore can only gain by waiting. For this reason, the fanatical desire of the Communists, Jews, and Czechs, is to involve us now in a war because they see in the present situation the last possibility to cause a world war out of the Czech problem and consequently the possibility to destroy the hated Third Reich. I am firmly convinced that, if Germany awaits her hour with the calmness of the strong against all provocations and completes her armaments in the meantime and especially creates a balance between military and economic preparations which now does not exist, and the creation and publicizing of a demand which is convincing in its righteousness to the German people and the outside world—the demand, for instance, for the right of selfdetermination by the Sudeten Germans would weaken any slogan coined by England to take her people into war against Germany— would put Czechoslovakia in the wrong before the world, the day will not be far off when the final death thrust can be dealt to the Czechs.
I am, my Fuehrer, in steadfast loyalty.
Your very devoted (signed) Schwerin-Krosigk
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