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FOR a long time the idea seems to have been current abroad that the German people were in the possession of some magic formula which enabled them to bear any burden that might be imposed on them. In the light of experience and economic knowledge that is a foolish notion. What the German people have achieved since the war is certainly astonishing; but it has been achieved only at the price of tremendous sacrifices. As an English proverb has it, the last straw breaks the camel's back. Germany has been burdened to the point of collapse, and her back may now indeed be broken by a straw. What has brought Germany to such a pass? It will be profitable to consider in this connection, first, her resources, and then the factors that appear to have overwhelmed them.
Germany, an old country that looks back on a cultural development of considerably more than a thousand years, lies in the heart of Europe. Its inhabitants, notwithstanding provincial differences, share one and the same culture; and, with negligible exceptions, they speak one and the same language. As far as race and language are concerned, the population of present-day Germany is more homogeneous than that of almost any other state. In the south the Alps form a natural rampart, but in Germany itself there are no great dividing mountain chains. The whole country is opened up by large rivers, which are evenly distributed and constitute important arteries of commerce. Roads and railways give access to the remotest corners. The entire area of the country is thus available for economic exploitation.
About a quarter of Germany's total area is occupied by forests, which are carefully cultivated and managed with a provident eye to the future. Accordingly, timber forms a considerable part of the national wealth. Germany's forest assets have successfully weathered the numerous economic crises since the beginning of the war, but at present they are gravely affected by the dumping of lumber across the eastern frontier.
The natural resources include coal, of which there is an abundant supply in the Saar district and along the Rhine in the west, and on the upper Oder in the east; lignite in western and central Germany; and potash in the central and northern region. Favorable views are entertained by numerous authorities regarding the future production of petroleum, although the present output is inconsiderable. The water power available on the northern slopes of the Alps and in the mountains of middle Germany has been developed to a large extent and constitutes a permanent asset -- the more so as the large electric plants dependent on coal are coöperating with the water-power plants.
Up to the 'seventies of last century, Germany was chiefly an agricultural country. Today the industrial population is in the majority; about a third of the inhabitants earn their living by agriculture and forestry, but the greater part are occupied in industry, trade and commerce. The social distribution of the agricultural lands in Germany may be regarded as entirely sound. Nine-tenths of the soil is owned as freehold by farmers or peasant proprietors; about one-tenth consists of estates of large or medium size. As things are today, Germany is still able to feed her people with products of her own soil. This is an important point, which should never be lost sight of in discussing Germany's balance of trade and payments, especially in view of the fact that other industrial countries, such as England, are compelled to import a large part of their food from abroad.
Notwithstanding the cession of important districts in consequence of the Treaty of Versailles, which deprived Germany, for example, of Alsace-Lorraine and of the industrial districts in upper Silesia, industry plays a leading part in Germany today. The coal, iron, electrical, chemical and textile industries stand out. By far the most important commodity which Germany has to sell today is the labor and industry of her inhabitants. She thus may be described as being predominantly a "finishing" country. Many raw materials, especially metals, leather and the various materials used by her textile industries, have to be imported. By means of German coal and German labor these raw materials are transformed into goods for everyday consumption, and a considerable part of them is reëxported. These transactions make Germany's economic life an indissoluble part of the economic life of the world. She must buy raw materials abroad and must pay for them with finished products.
Unlike the other great Powers of Europe, but like the United States of America, Germany is composed of individual federal states, seventeen in number. An area of about 181,000 square miles is inhabited by something over 63,000,000 Germans. The individual states composing the United States, notwithstanding differences in size and importance, possess some semblance of equality. Prussia, however, with its 113,000 square miles and its 39,000,000 inhabitants, greatly outweighs the other members of the German federation.
Germany is still a young political entity. After being compelled to achieve unity by means of two short wars, she remained at peace for over forty years, from 1871 to 1914. German unity was put to a severe test by the disastrous World War. Though it has emerged unscathed, the strain on the people was tremendous. The national debt, which had been moderate before the war, went up to enormous proportions, partly on account of loans and advances which Germany granted to her allies. Then came inflation and the destruction of the old currency. With the latter were also wiped out the old German debts, as far as they did not represent reparations imposed by international treaties. The practically complete destruction of Germany's mobile capital assets by the inflation constitutes the most important event in the modern economic history of Germany.
New debts have been contracted by Germany since the period of inflation. On March 31, 1931, these debts amounted to 11,000,000,000 marks, not including the obligations arising out of the Young Plan. They comprise the following items: for the conversion of old obligations, approximately 4,000,000,000 marks; internal debts dating from the past, approximately 651,000,000 marks; foreign and internal debts contracted since 1924, approximately 3,000,000,000 marks and 2,000,000,000 marks respectively. A very considerable part of the German national debt is made up of indemnities for losses caused by the war. For it includes not only the loans granted under the Dawes and Young Plans, which were mainly intended to enable Germany to meet her reparation payments, but also debts owing to Germans living abroad, beyond her eastern and western frontiers, who had suffered losses in consequence of the war. If, however, one considers that the Reich entirely owns the German Railway Company -- with its 30,000 miles of track, with stock amounting to 25,000,000,000 marks, and forming the largest railroad system under one management in the world -- it would seem reasonable to say that, taking the country as a whole, and regarding it as a covering corporation, the present liabilities are at least balanced by the assets.
Turning to the individual partners of the Reich, we find that Prussia is most favorably situated. The Prussian debt amounts to approximately 850,000,000 marks. Of all the German states Prussia owns the greatest amount of property, including large coal fields, considerable potash deposits and extensive forests. It would be safe to say that under commercial exploitation Prussia's assets would exceed her liabilities. Generally speaking, the same is also true of Bavaria and Saxony, even though they are not quite as well off as Prussia. At any rate, the total result shows that, in normal times, both the covering corporation, i.e., the Reich, and the individual partners, i.e., the several states, own property that could be converted into money sufficient to balance their present obligations.
In addition to these debts of the several states, the German Reich as a result of the war owes payments in money and in kind, as defined principally in the Young Plan, which is still in force. It is an established fact that in the long run wealth cannot be transferred for non-economic reasons without completely ruining the one who makes the payment and without placing the one who receives it in a dangerous situation. Competent economists accepted this as a cardinal truth long ago. But terrible convulsions have been necessary in order to convey it to wider circles.
From the economic point of view, the payment of the reparations has never been anything but madness. After her mobile capital had been destroyed through the inflation, Germany was for a long time urgently in need of the importation of capital; and this importation did actually take place in a considerable measure. But simultaneously, without any economic quid pro quo, capital was squeezed out by the reparations. According to computations made by neutral observers, which are almost certain to fall short of the actual figures, Germany has raised altogether 37,000,000,000 marks for reparation purposes, which includes 8,000,000,000 marks paid under the Dawes Plan and 2,700,000,000 marks paid under the Young Plan up to the inauguration of the Hoover holiday. During the same period Germany has imported foreign capital amounting to approximately 17,000,000,000 marks. Now it must of course be taken into consideration that of this amount little or nothing was received by the German Government, practically the whole amount going to municipalities and private corporations, whereas the reparation payments had to be made almost exclusively by the government. Nevertheless there is a very close connection between these two transactions, since it is obvious that the government, like any other body, can draw its resources only from the general economic reservoir.
Germany's mobile capital assets were almost completely swept away by the inflation. Quite obviously, then, if Germany meant to go on living and working, she had to repair the injuries suffered through the war, modernize her means of production, and export goods. She had to do this in order to earn the money with which to meet her foreign debts and her reparations. For this purpose she had to resort to considerable loans from foreign countries. The money borrowed was intended to be used partly for long-term investments and partly for plants and equipment. The appropriate form of these money transactions was therefore that of long-term loans, with gradual amortization. During the earlier part of the post-war period large transactions of this character were successfully carried through, especially by American financiers.[i] As it gradually became more difficult to dispose of bonds, while Germany still continued to be badly in need of capital, the borrowing came more and more to assume the form of short-term loans. No doubt in most cases of this sort hopes were held out -- of course without binding promises -- that within a reasonable time these short-term loans might be converted into long-term obligations.
It really is pure superstition on the part of financiers to regard short-term loans as safer than long-term ones. Even the most cursory investigation of the given facts and circumstances was bound to show that strictly short-term investments were not available in Germany for so large an amount of short-term money. Both lenders and borrowers were perfectly aware of the fact that it would not be possible to mobilize at any given moment the money borrowed in the form of short-term loans. Nevertheless, veritable mountains of such loans were heaped up. And now Austria and Germany, and in fact the whole of central Europe, perhaps even England, are in danger of being buried under their débris.
Before entering into a more detailed examination of the credit problem let us turn to the financial difficulties of the different governments. All countries without exception are involved in the world crisis, which was brought on largely through the terrible destruction wrought by the war; and in all countries alike its financial consequences appear in the fact that revenues from taxes are sinking more rapidly than expenses can be cut down. So far even the most prudent and pessimistic estimates have without exception been outdistanced by the actual facts. Last year, for example, the budget of the United States showed a deficit of approximately $900,000,000. In the current year, the deficit is expected to reach $1,500,000,000. Up to the moment of writing, the United States Government has not taken any definite steps to remedy this state of things by tax increases. In England the national deficit, in conjunction with other factors, has been threatening to involve the country in complete collapse. Mr. MacDonald, at the head of a National Cabinet, is doing his utmost to balance the budget. Even in France, where the crisis took a mild course as compared with other countries, the current deficit is estimated at 6,000,000,000 francs. For the time being, all these countries have financed their deficits by short-term obligations.
Germany, on the other hand, finds herself unable to obtain credit, even though by reason of her weakened economic condition the tendency of her revenues to sink without there being any corresponding decrease in expenditure has been particularly pronounced. She is barred from foreign credit by the wave of acute mistrust which has engulfed German values. Internal credit is all but unobtainable on account of the prevailing scarcity of capital. When therefore the budget deficit loomed up in a threatening manner, Chancellor Brüning and his Finance Minister had to face the extremely difficult task of restoring the balance by a ruthless cutting down of expenses and by a drastic increase of revenues. Hard as this was on the German people, there was no other way out. By this method Germany alone among the Great Powers has been able, during this period of unparalleled economic depression, to decrease her short-term obligations instead of adding to them. By August 1931 her floating debt had been reduced from 1,828,000,000 to 1,669,000,000 marks. For the present, Germany has balanced her budget; and while it would be rash to venture any definite predictions regarding the future, Finance Minister Dietrich has expressed his firm belief that it will be possible to balance the budget throughout the winter. It is true that most taxes have already been increased to such a degree that in the opinion of financial experts further additions would not result in increased revenues. But the Finance Minister still has other instruments in reserve, one of the most important of them being a sales tax. That is a tax, however, which should be resorted to only in case of extreme necessity. There might also be a modification of the government's policy regarding the importation of lumber; this would have a favorable effect on the unemployment situation, and by improving the economic status of the German landowners would produce increased revenues from taxes.
What has been said will serve to show that neither the general condition of Germany nor the status of her national budget could justify any pronounced distrust towards German Government bonds. Yet we find that the international loans floated under the Dawes Plan and the Young Plan, amply provided with guarantees as they are and bearing interest at the rate of 7 percent and 5½ percent respectively, are quoted at 45 percent and 35 percent of their par value; while the 6 percent Prussian Government bonds stand at 33 percent of their par value.[ii]
Nothing is to be found in the general condition of Germany or in its economic history that could justify such distrust or any suspicion that the German people might not be willing to pay their debts. For three-quarters of a century neither the Reich itself nor a single one of the component federal states has ever shirked its liability. From the unification of Germany in 1870 to the World War orderliness and prosperity increased steadily throughout the Empire. With exemplary patience and reasonableness the German people have gone through the sufferings of the war, the terrible defeat, the losses and humiliations imposed on them by unreasonably severe conditions of peace, the turbulent times of revolution, and the complete loss of their savings in consequence of the inflation. The broad masses have shown their temper and loyalty by promptly reviving their old will to work and to save. If we date the beginning of the era of reconstruction from the establishment of the new German currency, this sorely tried people has had only about six years in which to set its house in order.
These six years, moreover, have been anything but favorable years for healthy economic development. Rather, especially towards the end, have they been years of the most serious economic depression recorded in history. Nevertheless, what has been achieved during these six years is truly astonishing. In that space of time the German railway system has been completely restored and partly electrified. German shipping, which had been wiped out, has regained approximately the pre-war level. The electrification of the entire country has been carried out to the smallest details. German industries have been modernized and rationalized; they are hardly surpassed by those of any neighboring country. All the building and construction that had to be left undone during the times of war and revolution has probably been completed now. In addition to these achievements, the German nation, emaciated as it is, has transferred to the victor countries gold and paper to the amount of 27,000,000,000 marks.
The price Germany has had to pay for these magnificent achievements is a cruel one -- the progressive impoverishment of those classes of the population which used to be the prosperous ones. The effect of this progressive pauperization, and of the accompanying general unemployment, has been the radicalization of large masses of the population. First among the reasons for the distrust prevailing abroad regarding German values must certainly be set the fear of a political revolution in Germany.
Russian communism is today undergoing a severe economic crisis, and this cannot fail to lessen its power of attraction for the masses. Communism could only be established in Germany by means of an armed military coup. It may confidently be stated that the authorities representing orderly government are fully prepared for any such contingency, and we may also rely on the vigilance of the Prussian Government, which shares responsibility for the safety of Berlin.
The grave fears entertained by foreign observers regarding a government by the parties of the Right would also seem to be greatly exaggerated. As things are at present, it is not altogether impossible that such a government should come into power. But it may be taken for granted that if an ultra-conservative cabinet is formed it will be willing to cultivate good relations with other Powers and in the main adhere to the course now being followed in foreign politics.
On the basis of the actual facts, therefore, the acute distrust which is generally evinced towards the credit of the German state would seem to be unjustified and unreasonable. If some way could be found of providing the German Government with medium-term loans as a bridge for getting over the most hazardous stages in the development of the budget situation, no one would need to be excessively anxious about the future of German public finance.
Let us now return to the purely financial aspects of Germany's economic situation. As already stated, Germany's mobile capital assets were almost completely wiped out by the inflation. German industries had to procure capital from abroad to provide for their manifold reconstruction expenses, and they could not dispense with this foreign capital until they had been able to build up a sufficient capital reserve out of their own savings. At first this financing was carried out in a rational way, the loans being promptly converted into long-term bonds. But as the international economic crisis became more serious it became more and more difficult to place long-term bonds. The danger of these piled-up short-term loans hung over the economic life of the entire world like a dark cloud, observed by some economists and financiers, but ignored by the world in general until the summer and fall of 1931.
Probably the specific impulse that gave a start to the great credit crisis was provided by the Anschluss dispute. In Germany, however, the crisis had already made itself felt after the Reichstag elections in the autumn of 1930, at which time a considerable amount of foreign credit was withdrawn. When the shaky edifice of Austrian high-finance collapsed a wave of distrust and fear swept over the financial markets of the world. The lenders, with France at their head, France having granted a larger amount of short-term loans than any other country in the world, stumbled over one another's heels in their hasty endeavors to get hold again of the capital which they had loaned. What financial history has shown to be true at all times proved to be true in this case. Even under the most cautious financial administrations it is not feasible to repay the full amount of short-term loans if they all are called for at one and the same time. Reproaches were heaped upon German banks last summer when the general withdrawal of short-term loans compelled them to apply for a moratorium. But the conclusion of the moratorium agreements at the last moment saved not Germany alone, but the whole world, from worse calamities. These agreements, however, have many loopholes, and foreign creditors are availing themselves of every chance to withdraw more money from Germany, thus creating a dangerous situation which calls for the most serious attention of the German Government and the authorities of the Reichsbank.
Since September 14, 1930, Germany has repaid to her foreign creditors, in gold and in paper, short-term loans amounting to approximately 4,000,000,000 marks. Considering the scarcity of capital in Germany this is an enormous achievement. There is no banking system in the world that could accomplish it without being shaken to its foundations.
The "standstill" agreements have been concluded for a period of six months only. The question as to what is to happen afterwards therefore becomes of the most pressing urgency. In view of the serious deterioration of Germany's general economic situation, repayments on a large scale are not likely to be possible. From German banking circles comes the suggestion that German debtors, taking advantage of the "standstill" arrangement, might engage to repay their foreign debts directly to the German Government. The latter would thereupon guarantee the amounts in question to the individual foreign creditors and would give them notes; these notes would run for five or six years, would bear interest and would be subject to amortization. Each creditor would thereupon be granted a further guarantee for the respective amount from the government or the central banking institution of his own country.The creditors would thus receive negotiable paper guaranteed by the governments of two different countries. In this way it would become possible to thaw the frozen credits resulting from the moratorium, and the German debtors would have a chance to wipe out their debts by means of savings and surpluses from the trade balance. Proposals of this nature were published almost simultaneously by Herr Schmitz, of the German Dye Trust, and by M. Franqui, the well-known Belgian financier. It seems likely that the solution of the immediate moratorium problem will be found somewhere in that direction.
The German trade balance, after remaining disturbingly unsatisfactory for a long time after the revolution, has recently improved in a very promising manner. France must reckon with an excess of imports over exports amounting to about 12,000,000,000 francs. On the other hand, it requires no particular optimism to predict that Germany will be found to have enjoyed an excess of exports over imports amounting to 2,000,000,000 marks in the year 1931. A large excess of exports is imperative for Germany if she is to provide for the interest and amortization of her foreign debts. If her neighbors should make it impossible for her to meet these obligations, as France has already done in part, and as Switzerland is trying hard to do, this could only result in a reductio ad absurdum. It could only mean that they expect Germany to make payments while barring her from every possibility to do so.
But now the reparations problem is hanging like the sword of Damocles over the head of Germany and -- is it not true to add? -- over the head of the whole world. The Hoover holiday was a wise and courageous step and served the general good. Many authorities have expressed the opinion that the best thing to do now would be to prolong it. On this point, however, French views conflict sharply with those of other countries, and only the future can show whether a way out can be found that is both feasible and satisfactory. Certainly, however, it is deeply to be deplored that for the time being the general uncertainty regarding the final revision of the whole question of war debts, which is among the decisive factors of the terrible economic crisis that is upon us, is apparently to be perpetuated.
At this writing, it is not yet possible to see clearly whether as a result of Premier Laval's visit the United States has resigned the lead in the reparations question to France. Even the most capable and enterprising French statesmen, Premier Laval among them, have their hands completely tied while the present French Chamber remains in power. In the domain of international affairs it is well-nigh impossible for them to arrive at any independent decisions until after the elections next spring. For that reason it is most difficult to venture a favorable prediction concerning even a temporary solution of the reparations problem. But this much may be confidently asserted: the more vigorously the United States brings its initiative and influence to bear on the reparations question, the more favorable will be the prospects of a fair and reasonable solution conducive to the welfare of the world.
We have tried to show that German finances are not beset with any obscure, incalculable, or unmanageable problems. Their underlying conditions do not by any means warrant a pessimistic attitude. A nation crushingly defeated in the greatest war in history finds itself engulfed in a world-wide economic crisis of unparalleled severity just at the moment when it seemed on the point of gaining firm foothold again. Yet if the moratorium and reparations problems are dealt with in a fair and sensible way we have every reason to view Germany's financial future in the light of sane optimism.
[i] As an example in this connection we may take the bonds of the German United Steelworks.
[ii] These were the Amsterdam quotations at the end of September 1931.