Speech of Dr. Schacht, President of the Reichsbank, on the "Miracle of Finance" and the "New Plan" before the Economic Council of the German Academy at Berlin on 29 November 1938. Taken from special print of the Reichsbank [nach dem Sonderdruck der Reichsbank].
Since the seizure of power by National Socialism, critics abroad have used two special arguments against Germany in the economic field. The first was, that German finances were developing in a disastrous manner which had to lead to collapse in a very short time, and the second, that Germany would be shipwrecked by the shrinking of her foreign trade, her elimination from the world market and her efforts at self-sufficiency. Only recently, after a long but vain period of waiting for the collapse, people are beginning to correct themselves and to speak occasionally in a somewhat envious tone of the financial miracle, which has been built up in Germany, and of the commercial-political achievements of the so-called new plan. The catchword of the German financial miracle has even inspired a foreign journalist to write a biography of me, in which he depicts Schacht
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as a magician. (Note-N. Muehlen, "Der Zauberer". The Life and Loans of Dr. Hjalmar Horace Greeley Schacht "Zuerich 1938.")
And the Schacht commercial-political policy of the New Plan is the constant bane of all Most-Favored-Nations fanatics abroad who, from out of the abundance of their wealth, cannot conceive that a poor nation can yet have the courage to live according to its own laws instead of suffering according to the prescriptions of the rich. The unwilling recognition of our new economic-political methods also gave rise to further explanation and defense at home, in the process of which it did happen that I sometimes actually could not recognize my two brainchildren. Of course it is quite true that one cannot, during a period of formation exactly express oneself concerning all details, but the inner fundamentals must sometimes fail to be understood by the outsider, since too much talking endangers action. Now, however, that things have taken on a completed form, I believe that it would be both unobjectionable and useful for me as the originator to express myself publicly on these two questions. It will then be seen that there can be no question whatever of magic or artfulness, that the success of the two tasks was based, rather, on very simple, clear, fundamental ideas.
Yet I willingly agree with people abroad that it is difficult to comprehend the rise which Germany experienced after the changeover to National Socialism since, as was the case with our opponents, there was no understanding of any kind for the unheard-of oppression, deprivation of rights and economic misery which we were forced to undergo prior to 1933.
The collapse of German economy after Versailles had its climax in the credit crisis of 1931 (Note—13 July 1931). It was unleashed by the "run" of our creditors abroad who would have liked to collect the entire debt of no less than 25 billion Reichsmark on three months notice. The fraction which was actually transferred was still large enough to destroy our economy. All credit transactions ceased, payments had to be considerably restricted, all large banks showed themselves to be in need of restoration and one (Note—the Danat Bank) was even beyond restoration. Rates of interest reached insane heights, the number of bankruptcies mounted by leaps and bounds. Each individual collapse of necessity released a new chain of suspensions of payment and thus entire branches of economy, among them primarily agriculture, were soon facing ruin. The state of public finances became hopeless. Each increase in the tax rate only brought a decrease in receipts. All of these manifestations of
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economic decay had unequalled social misery as their inevitable result. The most staggering proof of this is found in the number of unemployed, which passed the 6-million mark in the winter of 1932/33 (Note—the peak was reached 15 February 1933 with 6,047,289 unemployed by actual count) and which, including invisible unemployment, amounted to almost 7 million. If in addition to this one considers that since 1926 the number of unemployed had never averaged less than 1.3 million per year, and that by 1930 the number already amounted to more than three million, then no further proof is needed that such constant mass unemployment constituted a political danger of the most serious order.
If the government of that time was incapable of any effective undertaking against this disaster, this was due to the fact that it disintegrated into party and interest groups and was enmeshed in inflexible parliamentary methods. A fatalistic resignation to a fate regarded as inevitable characterized national policy. It found a kind of economic justification in the classic national economy's widespread dogma concerning the powers of selfhealing, which are supposed to be latent in every crisis and to manifest their value in the natural course of events. The handling of this dogma was so unrealistic, so steeped in purely mechanical thinking, so lacking in any feeling for causes and relationships, that the result is a model of an economic policy as it should not be. Even a fleeting glance shows that the 1931 crisis cannot be compared to the prewar crises. In 1908 Germany had 25 billion marks worth of foreign assets, in 1931 an equal amount of foreign debts; in 1908 a few percent of .the employable population were unemployed, in 1931 nearly a third. Between 1905 and 1908 suspensions of payment rose 21 percent, between 1928 and 1931 they rose 95 percent. The causes of the economic crises before the World War were almost always based on economic events, which were influenced by crop fluctuations, technical achievements, human miscalculations, etc.. The economic crisis of 1931, on the other hand,- was nothing but the economic finis to senseless, violent political measures which turned all normal economic development topsy-turvy. It was not the economy which had failed the German economy least of all; it was the policy of the victorious powers of Versailles that had . failed. As a result economy could not help, only politics, which helped Germany-with the seizure of power by National Socialism.
The National Socialist government did not hesitate a moment with its measures for starting the economy going again, and in this connection it is very interesting to note that National
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Socialism never acted according to a preconceived theoretical economic program. Since I had been in personal contact with the leading men of National Socialism since the end of 1930, I was a witness of how the Fuehrer repeatedly rejected the manifold attempts to set up a detailed National Socialist economic program and clung to the ideological foundation of the party program. In 1933, therefore, economic declamation was immediately replaced by economic action. The ideas of so-called consumption financing, which were at first much talked about and which had in mind the indiscriminate distribution of a windfall of money by the state, were completely put aside. Thus the mistakes were avoided which we have today seen in the economic policy of the United States of America and France and which show how closely deflationary and inflationary crises are related.
Instead, all state aid was devoted from the very beginning to increasing production, at first in a so-called work-creating program through credit for restoration, repairs, etc. (Note—Above all by the law for the reduction of unemployment of 1 June 1933—Dokumente der Deutschen Politik Vol. 1, Doc. 71.) and then by the great and constantly growing armament program. The extent of this program and of the highway construction undertaken very soon showed that these two tasks alone would put all idle manpower to work, so that the other work-creating measures very soon became superfluous.
Of course all this work-creating and armament program could be put into operation only by the state and only with the aid of generous financing. There was no capital available for this financing. Rather, help had to be obtained through the creation of money. The classic theory of national economics permits the creation of money only when the goods circulating in the economy have already increased; on the other hand, it forbids production financing and above all any sudden and extreme expansion of credit. This theory is correct only in the free, unregulated economy which served the classical national economists as the source of their knowledge. In such an unregulated economy an extensive increase in money must lead to wage and price increases and thus to tensions which as an end result unleash an economic crisis. With National Socialism, however, Germany came under . an economy regulated to the greatest possible degree and to a constantly increasing extent by the state, which made it possible to prevent price and wage increases. Thus one of the main objections to production financing by credit was eliminated, and the credit money was used to produce a greater amount of goods. It remained only to establish limits for the amount to which the
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creation of money could go; for the creation of money by the state always carries with it the danger of excess, which leads to inflationary phenomena. It was not only important that the newly created money be covered by newly created goods; the type of goods produced was also important. Reduced to a , simple formula, the problem is as follows: The credit money made available for armament purposes produces a demand for consumers' goods through the payment of wages and salaries. The armament manufacturers, however, deliver military goods which are produced but not put on the market. From this follow two consequences: first, care must be taken that aside from armament manufacture an amount of consumer goods is produced which is sufficient to sustain the population including all those working for the armament industry ; second, the less there is consumed the more labor can be used for armaments, but the higher consumption rises the more manpower must be left for the production of consumer goods. Therefore, the standard of living and the extent of armament production are in an inverse ratio. The less I consume the more I save, and the more I save the more I am able to put into armaments. This means that armaments can in the last analysis be financed only by the building up of savings and not by the creation of money.
When the Fuehrer again appointed me to head the Reichsbank (on 16 March 1933) to support the financing of work-creation and armaments, these connections were quite clear to me since in the decades of my work with economic problems I had learned to distinguish the means of exchange which is money from the means of production which is savings capital. But I saw just as clearly that first I would have to build a bridge to this normal way of financing through savings because our income from taxes had decreased to a minimum and our capital market was empty. As long as the economy remained at its low level this state of affairs could not be changed. Consequently, the only correct way was for the bank of issue to put at our disposal the credits necessary for work-creation and armament production until the economy would yield profits again which would render possible a sufficient building up of savings and consolidation. Only then a change to the way of financing through taxes and loans could be —and would have to be—made. It was also clear to the .Reichsbank that it could release the forces to start the economy but could not rule them alone without the state. Despite this fact the Reichsbank took the risk of credit expansion which, from the first, was planned for sums of billions, because it was sure of finding
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the full support of the entire state machinery in its supreme task of currency protection.
The numerous measures which were taken in closest collaboration by all competent agencies during the time to follow all had the purpose of controlling the course of the credit expansion, of preventing a discrepancy between money and goods, and of putting superfluous money into armament loans. These measures fall into two groups according to their point of application. The first group is concerned purely with credit and finance policy. This includes the entire finance policy, lowering of interest, stockfloating legislation, supervision of banks, constant skimming of the money market by promissory notes of the gold discount bank, and, as the most important measure, control of share issuing. I especially stress this last-named measure, to which there is much opposition, because it will be essential for a long time yet, in order to safeguard the currency and maintain the interest level, to concentrate the means collecting on the capital market as far as possible on the financing of armament and the Four-Year-Plan. The second group of measures; on which the Reichsbank had to place the greatest emphasis, includes the direct eifects on prices and wages, which are entrusted to the Reich commissioner for price-fixing (Note—Appointed on 29 October 1936. Cf. Dokumente der deutschen Politik Vol. 4, Doc. 47) and the trustees of labor. They are to take the brunt of the pressure which is felt irt spite of control of credit and finance policy and are thus to protect our currency from alternate price and wage increases, which are rightly considered the characteristic symptom of an inflation. The importance of this function in itself means that price and wage control must be maintained and if necessary even strengthened, until an adequate consolidation of the short-term armament credits from the capital market has resulted.
The simultaneous operation of all the measures named has hitherto effected the maintenance of German currency. Spring 1938 signified a cut in our financial policy, because the German economy had reached a condition of full employment. As soon as a national economy has employed all available labor and means, however, any further extension of credit becomes not only senseless but harmful, for then newly created money can no longer cause new production of goods, but only competition for the available labor and raw materials; and such competition must, in spite of all state supervisory measures, drive prices and wages Up. Now, the term full employment is of course flexible. A national economy as great as the German one will still be able to mobilize a certain labor reserve and achieve certain results in
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the way of simplification and systematization. But a credit expansion in the previous manner was no longer possible, and from this the responsible parties drew the consequences. On 1 April 1938 the granting of credit by the issuing bank was discontinued and the financing of government contracts then became dependent on methods of taxation and loans. The issuance of treasury bonds against deliveries was the instrument used in preparing the transition.
Nevertheless the Reichsbank is not by these means freed of all risks. For the Reichsbank has, in addition to the credits granted by itself, gone even farther in that it has drawn in very considerable resources of the money market for the work-creation and the financing of armaments. While the term "capital market" includes all savings capital which is at the disposal of industry for a considerable length of time, the term "money market" is understood to mean the short term funds which mainly serve as the means of carrying on business; these are not invested as savings, but only loaned for a very short period as they are being circulated all the time. These funds form as it were the treasury of the German national economy. The Reichsbank has created fluctuating investments for these short-term monies—for which interest (even if at a low rate) is sought for the time when they are not being used—by offering them partly in the form of bills of exchange on the Gold Discount Bank and partly by direct sale of short-term securities on the money market, which can be converted by industry at any time into cash at the Reichsbank. Here therefore is one obligation of the Reichsbank, which in times of a limited money market can effect and on occasion already has effected, a harnessing of the Reichsbank, but which at times of a more fluid market must always lighten the burden of the Reichsbank. By means of this ingenious system even short-term cash reserves of German industry, which would otherwise lie idle or go into other short-term investments, are drawn into the financing of work-creating and armament. It is also apparent from this representation that in addition to the control of the capital market, central supervision of the money market was also necessary and will remain so for the time being in the interests of finance on the whole.
And now all of you will' be curious to learn what sums were and are involved. Naturally I do not disclose that. But one thing I should like to state emphatically and frankly. The figures which are disseminated about the total German foreign debt are fortunately considerably higher than the actual debts, and if it again becomes possible, which I hope will be the case in the not
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too distant future, to publish the actual figures of our totaldebt, the world will be astonished at how so much in the way of work-creation and armament could be achieved with so little use of credit.
The criticism of the extent of our money circulation which is occasionally heard should also be more restrained. In 1929 the total German circulation of legal tender was about 5,980 million marks. In the meantime the population of the German Reich has been increased by 14.9 million through the increase in births and through the addition of the Saar, of former Austria, and of the Sudeten Gau. This means, with the same circulation of money per capita, a sum of 7,370 million marks. Compared to this figure, the average circulation of legal tender for the first ten months of the current year is about 7,930 million marks, that is, only 560 million higher in comparison to 1929. Of course the circulation of legal tender was greatly increased in the critical month of September of this year; this is, however, less than the circulation increase of other states.
It is possible that no bank of issue in peacetimes carried on such a daring credit policy as the Reichsbank since the seizure of power by National Socialism. With the aid of this credit policy, however, Germany created an armament second to none, and this armament in turn made possible the results of our policy. Nevertheless, we are not dealing with a miracle, at least not in the financial field. The success is corroborated among other things by the increase in tax revenues (1932: 6.6, 1937: 14.0 billion marks) and the amount of the consolidation loans issued [from 1934 to date (Note—Concerning loans from 1934 to 1937 cf. Dokumente der Deutschen Politik Vol. 5 p. 334. Note 3. In 1938 there were also three 4^-percent Reich treasury bonds—3 to 18 January 1938 first series: 1400 million marks; 19 April to 4 May 1938 second series: 1966 million marks; 10 to 24 October 1938 third series: 1850 million marks.) about 13.5 billion without the loan at present being offered.] (Note—From 28
November 1938 to 9 January 1939 the fourth series of the percent treasury bonds—to the . amount of 1^ billion marks— was offered for subscription.) That is a finance policy of which we can be proud, but it is no miracle. The miracle is in an entirely different field. The basic political attitude of our people has changed miraculously in the few years since 1933. Fatalistic resignation has been replaced by iron will and fanatical faith in the future of our nation. Egotism and disunity have given way to strict national discipline. Instead of a weak and vacillating government, a single, purposeful, energetic personality is ruling
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today. That is the great miracle which has actually happened in Germany and which has had its effects in all fields of life and not least in that of economy and finance. There is no German financial miracle. There is only the miracle of the reawakening of German national consciousness and German discipline, and we owe this miracle to our Fuehrer Adolf Hitler.
I now turn to the second great complex of questions, that of commercial policy. First I should like to make a remark for the benefit of my friends at home. It is often very amusing for me to observe how, without prejudice to all work really achieved, one is repeatedly judged by slogans which have long since been cast off. One of the most popular slogans is that a man like Schacht can think only in terms of money and therefore, to paraphrased Lessing, cannot possess the only genuine ring of National Socialism. Such attitudes have such a tragic-comic effect because they come from people who are constantly calling for money but at the same time assert that money is of no importance.
The conception of the so-called New Plan (note—went into effect on 24 September 1934; cf. Dokumente der deutsehen Politik Volume 5 Page 352 f) with which we will now deal, proves exactly the opposite of so-called thinking in terms of money. The New Plan is the completely logical recognition that money alone is not enough; the important thing is the kind and amount of goods I can afford for money. One can neither make cannon nor bake bread with printed banknotes. What matters is simply and solely the possibility of supplying a sufficient amount of goods, and if one cannot produce these quantities of goods oneself, they will have to be obtained from somewhere through barter. In this barter money plays only the part of middleman in commerce.
The first point which must be established is that there is a variety of goods which Germany cannot manufacture, at least not in sufficient quantities for her population. It should really be self-evident that from this state of affairs arises the effort to tap as far as possible 'all productive sources of the country which have not yet been opened up. An industrial country which depends on imports cannot always be assured of disposing abroad of its goods in exchange for which it wants to import other goods; economic or political crises may prevent this. Criticism of the so-called efforts toward autarchy therefore appears more than ridiculous to me. The furtherance of production of domestic raw materials has very little relation to the rejection of foreign trade. Foreign trade is founded not only on economic necessity but also
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on efforts toward cultural exchange. Even if all countries were autarchic in the most fundamental necessities of life, there would still develop an international trade in innumerable cultural goods and in the consumer articles characteristic of an advanced civilization. Proof of this is found in the fact, among others, that highly developed industrial countries generally maintain a more active commercial trade among one another than with more primitive economic areas. The trade between Great Britain and Germany was never so active as at the time of their keenest competition in the international markets.
But Germany is certainly not autarchic and never will be in all fields. She is dependent to a large extent on the import of foodstuffs and raw materials. The imports must be paid for with "Devisen", that is, with foreign currency. We do not possess this foreign currency; we can obtain it only by exporting our goods. I have already mentioned that Germany entered the crisis of 1931 with a foreign debt of no less than 25 billion marks. If more proof had been needed, it was shown beyond any doubt in the course of this crisis that German exports could not be i^reased so far as to cover not only the necessary imports in goods, but also the payments on the debts. The impossibility of this was caused not so much by the fact that Germany could not have produced the necessary amount of export goods, but rather by the fact that foreign nations were either unable or unwilling to accept this quantity of German goods. The American and English tariff increases, the French continental quotas, etc., prove this with absolute clarity. And so Germany was laid under the necessity of, first, paying for a certain quantity of imports, and second, continuing the unproductive payments on the debts. Both together exceeded German strength, and therefore the first measure that had to precede a new German trade policy was to limit the payment on loans. Thus there was no other possibility than to introduce, to an increasing extent, the transfer moratorium, with which you are familiar. '
When the payment on foreign debts had thus been restricted, goods traffic also had to be regulated, if the foreign currency problem was to be mastered. Entrusted by the Fuehrer with the task of solving this problem, I, as Minister of Economics (Note— from 30 July 1934 to 26 November 1937) reverted to quite simple and primitive thought processes. I told myself that one should never buy more than one can pay for and if one cannot pay for everything that one would like to buy, one must first buy what one needs most urgently and must buy it where one can obtain
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it most advantageously. This again involves the danger of an incorrect application of the principles of the Classic National Economy which has lost its basis. The classic theory immediately answers the question, where can one buy to the best advantage: of course, where it is cheapest. That is completely unthinkable today, for if one has no foreign currency for payment, the question of where it is cheapest is not so important as the question of where one can get the goods at all. And if the seller of the goods does not insist on selling only for foreign tender, which I do not have, but is willing to take goods in exchange, the whole classic national-economic law loses its basis. All in all, this simple and primitive economic thought was based on the main question of whether the rest of the world was willing or able to renounce a market which consisted of almost 70 million people at that time and which today consists of almost 80 million, or whether they wanted to retain this market. According to the classic theory one should have assumed that anyone who cannot receive the payment he wants in foreign currency for his goods would renounce the sale of these goods. Far from it. It has been shown that, in contrast to everything which classical national economy has hitherto taught, not the producer but the consumer is the ruling factor in economic life. And this thesis is somewhat connected with general social and political observations, because it establishes the fact that the number of consumers is considerably larger than the number of producers, a fact which exercises a not inconsiderable social and political pressure.
The new foreign trade system demanded that export and import be subjected to a certain control, but it would not necessarily have forced the whole German trade policy into the extreme of bilateral trade agreement systems, which we find today as the ruling factor not only in German trade policy but also—connected with the German distress—in the rest of Europe, and which is so very distasteful to our rich cousins in America. This extreme bilateral trade agreement system was forced on us by our foreign creditors; for they thought that with the control of our exports to their countries they would have a suitable means of obtaining payment for their capital demands, which could no longer be fully satisfied from Germany. A surprising development resulted here: in the creditor countries, which resorted to this clearing traffic toward us, a difference of opinion very soon arose as to who should be given preference, the exporter of goods, who wants to export to Germany, or the creditor, who wants to collect interest from Germany. The practical development of this prob-EC-611
lem.vvas effected essentially in favor of the producer of goods and less in favor of the capital creditor. And if I just now said that the consumer and not the producer has become the decisive factor in economic life, one would almost be tempted to add here that in credit and capital traffic the debtor and not the creditor has the decisive position, in the last analysis. If the debtor absolutely cannot pay, it is up to the creditor to help him, or he must dispense with payment. Of course it is different if the debtor does not want to pay; the keeping of contracts and respect for private property will of necessity always form the basis of all communal society. At any rate, it is a false assumption that the bilateral trade system, with which Germany is today supporting her economy, arose from our deliberate judgment. Oh, no. It is a natural and necessary result of the war tributes and the clearings which were forced on us. As soon as our creditors are ready to cooperate with us in removing the effects of the war tributes, a door will be opened through which we can come to many-sided trade and to free international payment traffic.
The New Plan, therefore, is not anything unnatural or fantastic. It arose from the emergency conditions into which Germany was forced by the rest of the world. The unusual aspect of the New Plan was only that its conception freed itself from all preconceived theoretical dogmas and in practice took those measures which could bring relief.
If there is anything remarkable about the New Plan it is again only the fact that German organization under National Socialist leadership succeeded in conjuring up in a very short time the whole apparatus of supervision of imports, direction of exports, and promotion of exports. The success of the New Plan can be proved by means of a few figures. Calculated according to quantity, the import of finished products was throttled by 63 percent between 1934 and 1937. On the other hand, the import of ores was increased by 132 percent, of petroleum by 116, of grain by 102 and of rubber by 71 percent. According to value, the passive trade balance, which amounted to 284 million marks in 1934, gave way to an active balance of 550 in 1936, and of 443 million marks in 1937. The so-called new goods debts, finally, were cut down to about half within two years.
These figures show how much the New Plan contributed to the execution of the armament program as well as to the securing of our food. Of course, we had to pay a high price for this success. At the time I called my own New Plan horrible, and today I hold the same opinion. I have been told that once at an exposition, a
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merchant, who knew how to combine annoyance and humor happily, decorated his booth with the approximately 40 forms which an export merchant must fill out today in order to carry on his business. I am of exactly the same opinion as this man, but for the time being this cannot be helped. I certainly do not believe that the main function of a merchant is to carry out the demands of an economic bureaucracy. In fact I am of the opinion that his business should be as voluminous and good as possible and that he should fill out as few forms as possible. As long, however, as our scarcity of foreign currency exists our foreign trade control must be kept up.
I do not know when we will be able to reduce it. I hope that it will be soon. Among the prerequisites therefor are the improvement of our raw material situation and the elimination of the conflicts between credit and trade policy. In this connection I still hope that a national-economic textbook going at least a little further than pre-war thinking, might finally be published in the United States of America. As long as these prerequisites have not been fulfilled the New Plan must remain in effect. It demands Sacrifices, but it also guarantees success. Yes, the weight of the 80 million German consumers so strongly affects particularly the European countries around Germany that it cannot as yet be foreseen which economic-political changes in the European trade will result. In any case, the New Plan has shown that we do not intend to have our economic life directed from the outside, but wish to form it ourselves and are in a position to do so.
I do not wish for these two statements about the financial miracle and the New Plan to imply a purely polemic attitude toward the rest of the world.
In fact, I hope and desire that my statements might lead to an understanding within and without our borders. This understanding is that the nations serve the prosperity of their fellow countrymen better by a peaceful policy of mutual regard of interests and the will to understand each other than by attempts at suppression and violence as were made by Versailles. The national-economic and cultural will to live of a great nation cannot be permanently enslaved. Even from times of greatest weakness and worst enslavement national forces always grow again for which a leader rises at the proper time, as Adolf Hitler arose for us. We are going through a time of struggle today, and measures during a time of struggle are often rough and not always conventional. It is foolish to cling to these disadvantages of fighting methods and, therefore, to be less peaceable. When
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the foreign countries are ready to respect our rights to life and our possibilities of existence, the methods also will become peaceable.