BETWEEN February 1933, when Hitler became Chancellor, and July 1934, the number of Germany's unemployed fell from six million to two and a half million. In the same period industrial production rose by one-third. The German trade recovery evidenced by these widely-published figures was extremely important for National Socialism, since Hitler's alleged success in overcoming the economic crisis justified his rule in the minds of millions of Germans. But a more thorough study reveals that the actual extent of German recovery was considerably smaller than suggested by the figures cited. Further, the recovery was achieved at the cost of enormous sacrifices, and these sacrifices seriously depleted Germany's strength. The present study attempts to lay the foundations for the belief that on June 30, 1934, a new stage of Nazi rule began. Up to that date the German Government was fighting to raise production and decrease unemployment; since then its struggle has been to hold its earlier gains. In judging its likelihood of success even in this restricted field we must take account of the special structure of German economics and of the degree to which Germany is dependent on the outside world.[i]

I. "THE GERMAN RECOVERY IS ENORMOUS"

Of all German economic figures none show an upward movement of such great scope as those covering unemployment. The table on the following page appears to confirm fully the assertion of the German Government that the basic evil of the economic crisis has been overcome.

GERMAN UNEMPLOYMENT[ii]
Date Unemployed Employed
End of February 1933 6,004,000 11,553,000
End of May 1933 5,039,000 13,200,000
End of August 1933 4,124,000 13,700,000
End of October 1933 3,745,000 14,100,000
End of December 1933 4,050,000 13,300,000
End of February 1934 3,374,000 13,967,000
End of May 1934 2,529,000 15,559,000
Improvement in 15 months 3,475,000 4,006,000

If one follows the official German comments on the situation in the labor market, the first thing noted is that a considerable part of the decrease in the number of unemployed has come to pass without any additional employment, but only by "substitute employment." The latest available figures show the situation at the end of February 1934; it is unlikely that any considerable change has come since that time. There were then employed: in voluntary labor camps, 230,000; in emergency farm work, 150,000; and in emergency relief work, 550,000; a total "substitute employment" of 930,000. These 930,000 are not included in the list of the unemployed and are recorded in the statistics of the Krankenkassen as employed, although they receive no wages. The sums received by them in cash are very much lower than unemployment doles, but the amount that the state has to spend for their maintenance is higher because of having to feed them.[iii]

In the summer of 1933 official measures were taken against "double earners," against female workers, the very young and the very aged. Persons who had two occupations were compelled to give up one. Women whose husbands had employment were discharged, aged and youthful workers were discharged and replaced by fathers of families (whose wives could thus be discharged), with the result that the aged were mainly placed under emergency relief and the young were assigned to voluntary labor service. Only one newspaper report tried to estimate the effect of these measures. It declares that unemployment was reduced by 300,000 in this manner without a corresponding increase in the number of persons employed. This estimate seems too low.

Further, moral pressure to reduce unemployment was applied from official sources in the summer of 1933, and is still being maintained. The effects of this are not to be underestimated. The smallest as well as the largest employers were alike obliged to increase the number of their employees in proportion to increases in their production, even if the new orders received could easily have been filled with the labor force already on hand. In addition, moral pressure also sought to prevent the discharge of workers, especially in the winter of 1933-34. Thousands of agriculturists and industrialists thus maintain much greater forces than actually required. Most of the reports of German stock companies show a much greater increase of working force than of production, although in 1933, in contrast with 1932, there was no shortening of the hours of labor. No estimates are available covering the number of unemployed who found work through these measures; but given the great influence of both government and party officials, the number must have amounted to some hundreds of thousands.

In the opinion of the foreign press, further factors contributing to the decrease of unemployment have been the employing of the formerly unemployed by the National Socialist Party itself, and the fact that socialists, communists, etc., are not included in the lists of the unemployed. But it is not possible to confirm or refute these statements.

The factors thus far named probably account for at least half the reduction in the number of unemployed in Germany. That this is so does not diminish the success of the German campaign against unemployment, for the problem in 1933 was above all to rescue the workless from their hopeless wandering through the streets. But it is important to make the facts clear if one is to understand the future prospects of the campaign against unemployment. The further course of German economic development depends not only on employing the 2½ million workers officially listed as unemployed in the summer of 1934; it depends also on the absorption of further millions into productive work.

Even when deductions are made for all "special influences" there remains for the period from the beginning of 1933 to the summer of 1934 a sharp reduction of unemployment which is to be accounted for by the increase of industrial production. The following table shows the extent of that increase, taking 1928 as 100. In addition to giving the index for the total production, it contains figures covering the production of crude steel, in order to show the increase in that key industry.

GERMAN INDUSTRIAL PRODUCTION
Production index Steel production per
(Institut für Konjunkturforschung) working day (in
thousands of tons)
1931 73.6 27.2
1932 61.2 18.9
1933 69.0 25.1
1933 1st quarter 64.1 20.6
1933 2nd quarter 67.6 25.5
1933 3rd quarter 70.8 25.1
1933 4th quarter 73.4 29.3
1934 1st quarter 81.8 35.0
April 1934 86.2 40.7
May 1934 87.0 43.0

It will be noted that the total German industrial production has increased more than a third in less than one and a half years. Incomparably greater was the increase of 86 percent in the production of steel merely from April 1933 to April 1934. This disproportionate development of the steel industry is explained by heavy orders for rails, cars and locomotives, by the increased manufacture of automobiles, and by new building activity.

But it would be an error to assume that the German trade recovery has been due merely to an increased production of durable goods. It is true, to be sure, that the production of such articles increased much more in the last year than the production of articles of consumption, precisely as it decreased in much greater extent in 1931 and 1932.[iv] But the relatively small increase in the case of articles of consumption was chiefly due to the fact that the production of foodstuffs hardly altered at all, whereas important branches of the consumption industry exhibited extraordinarily favorable developments. To this latter group belong the radio industry, which is strongly favored by the government, and the furniture and textile industry. The production of furniture shows an increase of almost 50 percent in one year, due to the government's policy of granting long-term loans at a very low rate of interest to newly-wed couples. The production of textiles has increased more than 20 percent, doubtless because of the requirements for uniforms for the national organizations. (The S.A. alone had 2½ million members in the spring of 1934.)

One of the greatest increases is recorded by the automobile industry. In 1931, 56,000 automobiles were sold; 41,000 in 1932; and 81,000 in 1933. The total value of the production rose in 1933 from 113 to 230 million marks, and this development has continued even more strongly in the current year. Thus in 1931 the sales of automobiles from January to June totalled 27,800; in the same period of 1932 they totalled 15,400; in 1933 they totalled 26,000; and in 1934 they reached 44,300. This increase is explained less by the active propaganda carried on by the government to encourage motoring -- the campaign includes also the constructing of a great network of automobile highways, which will be considered later in this article -- than by the fact that it has been made less costly to keep a car. At the beginning of 1933 there was one automobile in Germany for each 110 inhabitants, against about one to 26 in France. In Germany, along with a high tax on gasoline, there was also an extremely high tax on motor vehicles. This latter tax was abolished in April 1933 for newly-purchased autos, and in the case of old cars can be cleared by a single payment.

II. "THE GERMAN RECOVERY IS MODEST"

In view of the great reduction of unemployment in Germany, a considerable increase in the income of the working masses was naturally to be looked for. As a matter of fact, however, 1933 brought only a very slight increase as compared with the preceding year; and the increase from the first quarter of 1933 to the first quarter of 1934 also falls far short of what could be expected. This is shown by the following statistics of the Institut für Konjunkturforschung:

INCOME OF WAGE EARNERS, EMPLOYEES AND OFFICIALS
(in billions of marks)
 1929 1930 1931 1932 1933 1934
44.47 40.95 33.48 25.86 26.09 ----
1st quarter 6.30 6.00 6.80
2nd quarter 6.55 6.49
3rd quarter 6.58 6.83
4th quarter 6.43 6.77

Since these figures do not include the "income" of the unemployed from doles and other relief, which in 1933-34 amounted in round figures to one billion marks less than in the preceding year, the increase in the income of the whole body of workers is still smaller. In addition, in the last year wages must certainly have decreased still further, a tendency contrary to all ordinary experience at the beginning of an economic recovery. Unfortunately this belief cannot be checked statistically, since no investigations of wages have been made public in the last year.

However, another class of the German population has undoubtedly profited by the developments of the last year. The cash income of the German farmers, which in the harvest-year 1928-1929 amounted to 10.2 billion marks, but which had dropped to 6½ billions in 1932-1933, rose in 1933-1934 to 7¼ billions. This increase is due above all to the introduction of high protective tariffs, which in the last years before Hitler came to power had already made the prices of most German agricultural products independent of prices on the world market. Many measures adopted much earlier, however, did not become fully effective until last year.

In view of the great increase in industrial production and in the income of the farmers one would naturally expect to find that, despite the fact that the income of the wage earners remained the same, the total national income showed a marked increase. But the official German estimates for 1933 give a national income of 47 billion marks, or only one billion more than in 1932 -- an almost negligible improvement when compared with the recession in the preceding years.[v]

Reports regarding the very slight increase of the national income in 1933 are confirmed by the fact that retail sales in the same year, a year of economic recovery, were lower than in 1932, the year of the worst depression. The 1933 business of food stores amounted to 96.4 percent of their sales in 1932; that of the textile stores was 100.7 percent; and that of the furniture stores was 99.9 percent. And it is to be borne in mind in this connection that all these lines of business profited by the defection of customers from the department stores. The strong National Socialist propaganda against buying from department stores, chain stores and one-price stores resulted in 1933 in a falling off of the sales of the Warenhäuser to 81.3 percent of their 1932 turnover, while sales of the Kaufhäuser dropped to 86.5 percent of the 1932 figure.[vi] The first four months of this year, it is true, brought an increase of 9 percent in the total turnover of German retail undertakings as against 1933 (sales were especially small at the beginning of 1933), but a decrease of 4 percent as compared with the same months in 1932. Moreover, the turnover of the department stores has decreased further: the gain in the average sales is due solely to larger sales of the furniture and textile branches. The foregoing data are based on the value of sales. And since prices have risen in Germany in the last year, the development has been more unfavorable in respect of the quantities sold -- and, as a result, there has been a corresponding decrease in the purchasing power of wages.

Let us take March 1933 as the date of inception of the Hitler government's economic measures. Since then the official index of the cost of living has risen only from 116.6 to 120.5 percent. Rentals, taxes and social charges, which play a great rôle in this index, have remained unchanged. But wholesale prices have risen in the same period from 91.1 to 97.5 percent (for agricultural products alone from 82.5 to 94.6 percent). The increased wholesale prices for foodstuffs -- above all for butter, eggs, meat and vegetables -- and for textiles, have undoubtedly influenced retail prices to almost the same extent.

As is seen from the description given later in this article of the great decrease in Germany's exports, the trade recovery of the last year is exclusively a domestic movement. Production for domestic purposes has risen sharply -- and this fact appears to conflict with the fact that the national income and domestic consumption have hardly increased at all. In various more or less superficial studies in the non-German press an attempt has been made to explain this conflict. It is asserted that the German domestic economic recovery is exclusively due to the armament industries; that the entire additional production in 1933-34 has been for rearmament. There are no data available that enable an objective student either to confirm or refute the assertion that a part of last year's production served that end. But certainly armaments cannot be regarded as the sole reason for the increase in production. In the first place, comparison between an increase of production and stability of consumption do not take into consideration the fact that there are industries that manufacture means of production. A part of the increased production doubtless went to replace or install machinery and other means of production. In addition, the construction and improvement of streets and houses is also a very important factor. Finally, there has been much reserve production in 1933-34. The last year has seen a tendency to increase stocks on hand -- a fact officially confirmed in the spring of 1934, when the gold shortage set in. It was stated then that stocks of raw materials and half-finished and finished goods in the cotton, woollen, metal and rubber industries were adequate to take care of a consumption of from four to seven months, against less than three months a year earlier.

III. THE CAUSES OF THE RECOVERY

The German economic crisis reached its most acute stage in the summer of 1932. In the autumn of that year there came a small but general recovery, which can be characterized as a natural upward movement, since hardly any artificial government measures were in force at that time. But the very much stronger economic improvement of the last year must be ascribed in the main, if not altogether, to artificial measures.

These measures took two forms. They consisted, first, of tax reductions aimed at encouraging private investment activity. Reference has already been made to the abolishing of automobile taxes. A portion of delinquent taxes was also cancelled on condition that the persons owing them invest an equal amount in their business undertakings. Through a further decree of 1933, parts of the net profits of economic undertakings were exempted from taxation on condition that these sums be employed for replacing plants, machinery, etc. The most important measures in this group were decided on before Hitler came to power, but their execution falls in the period of National Socialist rule. The tax credit certificates were created by Chancellor von Papen in September 1932. During the year from October 1, 1932, to October 1, 1933, a part of the taxes due from industry, commerce and house-owners was remitted by the issuance, gratis, of these certificates. They fall due between 1934 and 1938, and can be employed in that period for the payment of taxes. If the certificates were sold on the stock exchange immediately after they were issued (as was possible at a small discount in 1933) they were equivalent to a reduction of taxes. But it was also possible to discount them at the banks in order to pay for new investments with the proceeds -- a step which the government induced many establishments to take.

The second and more important part of the government campaign against the economic crisis consisted of public works. Here again it was Hitler's predecessors, von Papen and von Schleicher, who inaugurated the program of creating work, but the sums expended for this purpose before Hitler took office (January 30, 1933) were very small, only a few hundred million marks. The following table shows the total amounts (in marks) made available up to the end of 1933 for creating employment:

Orders from the Reich railroads 961,000,000
Orders from the Reich post 111,000,000
Contribution for furthering national labor 100,000,000
Appropriated from the Reich budget 283,000,000
Appropriated from credit resources 2,313,000,000
-------------
    Total 3,768,000,000

There was, however, a difference in time between the authorization and actual expenditure of the moneys. Up to December 1933 only 1.2 billions in drafts for creating work were in circulation; but by June 1934 the amount had risen to over 2 billions. Only small additional sums were made available in the first half of 1934.

The most difficult problem of the campaign to create work was to secure the money. For four years there has been no market for new issues in Germany, and it proved utterly impossible to finance even a small part of the public works by the issuance of long-term Reich loans. The only way open was to finance them by short-term drafts. Officially these are three-month drafts, to comply with the Reichsbank's conditions for discountable commercial paper, but the debtor has the right to have them prolonged from 5 to 20 times, so that the actual term runs from 1½ to 5 years. The drafts are issued by the persons who carry out the public works, with the authorization of a special governmental body. Private concerns which accept the drafts in payment for material or work discount them at one of the public banks created for that purpose.

Only very general details have been made public as yet regarding the various categories of public works. Up to the beginning of 1934, the sum of 956 million marks had been used for the railroads and transport systems, 856 millions for building highways and bridges and regulating waterways, 722 millions for dwellings, and 322 millions for land reclamation and settlement. Most of this work was made possible through credits granted by the Reich to public bodies, which are to repay within from 20 to 25 years and meanwhile pay interest at from 3 to 5 percent. Subsidies that do not have to be repaid are granted only for repairing or building houses. The total subsidies granted for dwellings by the Reich amount to 500 millions, and they have allegedly resulted in the expenditure by house-owners of a further 2 billions. The greater part of this sum has been employed for repairs and for dividing up large apartments. In this way the number of apartments in Germany was increased by 31,000 in 1933, and by 12,000 more in the first quarter of 1934.

The financing of public works did not end with the issuance of the work-creation drafts mentioned above. The Reich had to guarantee the repayment of the drafts when they fell due, both to the private buyers and to the Reichsbank, which was to rediscount the greater part. This was made possible by the emission of a further 600 million marks of tax credit certificates in the spring of 1933, and in the autumn by depositing 820 millions of new employment treasury certificates with the Reichsbank. This paper becomes due at the same time as the drafts for creating work. The increase of the German public debt in 1933 is mainly due to these two emissions and to the issuance of tax credit certificates referred to above.

THE PUBLIC DEBT OF THE REICH
External
Long term Short term
December 31, 1932 2,638,000,000 430,000,000
June 30, 1933 2,598,000,000 407,000,000
December 31, 1933 1,900,000,000 283,000,000
March 31, 1934 1,804,000,000 257,000,000

Internal
Funded Floating Tax credit certificates
December 31, 1932 7,083,000,000 1,402,000,000 *
June 30, 1933 7,122,000,000 1,642,000,000 727,000,000
December 31, 1933 7,764,000,000 1,750,000,000 1,215,000,000
March 31, 1934 7,801,000,000 1,931,000,000 1,363,000,000
* A small amount of tax credit certificates was issued in the last quarter of 1932.

In 1933 only 40 million marks of the Reich's foreign debts were paid. The considerable decrease shown in the indebtedness to creditors abroad is accounted for by the devaluation of the foreign currencies in which the debts were contracted. While the depreciation of the English and Swedish currencies had occurred mainly in 1931 and 1932, it was not taken into consideration in the statistics of the Reich until December 1933. Then the depreciation of the dollar, pound and Swedish crown was taken advantage of in order to exhibit a considerable decrease in Germany's indebtedness abroad.

Of interest for our purposes is only the second half of the table above, which shows that the Reich's internal indebtedness increased by 2,244 million marks in one year (exclusive of 600 million marks of tax credit certificates deposited with the Reichsbank as collateral for employment creation drafts). The first quarter of 1934 brought a further increase of 366 millions. In Germany this increase of the public debt is generally regarded as a small price to pay for diminishing unemployment. Whether this view is correct cannot, of course, be determined. There is also no object in comparing Germany's public debt with that of other countries. It still amounts per capita to less than that of most industrial countries, but only because the pre-war and war debts were wiped out (except for a tiny remnant) by the inflation ending in 1923. On the other hand, the German people, largely as a result of that inflation, is incomparably poorer than the peoples of the Western European industrial countries.

Of the greatest importance is the fact that the new debts of the Reich are without exception short-term debts. The government has announced its intention to cover debts falling due in the next years out of the ordinary budget, as shown by the table below. It asserts that these heavy payments will be possible because the economic improvement increases receipts from taxes and decreases expenses for the support of the unemployed.

Fiscal year Percent of total
(beginning Reich expenditure
April 1) Amounts due required
1934-35 917,000,000 15.5
1935-36 700,000,000 11.8
1936-37 780,000,000 13.2
1937-38 750,000,000 12.7
1938-39 715,000,000 12.1

Thus already in the current year, which began on April 1, 1934, almost one billion marks of tax credit certificates and treasury certificates become due. There is, of course, one alternative to meeting them from tax receipts -- to float a new long-term loan. But up to the present that has been quite out of the question. It is true that in the course of the last year, during which the market has had to absorb no new emissions, the quotations for old Reich loans rose slightly; but even as late as July of this year 6 percent Reich loans were quoted below par, and even so the ability of the market to absorb them was meager.[vii] Further, even if a new Reich loan were possible, it would have to be used for other purposes, for so far no means for carrying out future public works are available, and sums now on hand will be exhausted shortly.

The German program for creating work contains one project which will take several years to realize. That is the building of a network of automobile highways covering the whole country. These are being constructed by the German Railroads Company, the Reichsbahn. How they are being financed has not yet been disclosed, but certain preliminaries indicate that short-term drafts, renewable at the request of the debtor, are again to be issued. This will of course further increase the Reich's floating debt.

IV. IMMEDIATE EFFECTS OF THE RECOVERY

We have just considered one result of the German economic recovery -- the increase of the national indebtedness. The new debts fall due within a short time. Yet this is less important than two other results not yet shown.

In 1933 the public banks succeeded in placing the greater part of the new employment-creation drafts on the private money market. The capacity of the money market to absorb short-term paper was increased by the strict laws governing foreign currencies, which completely blocked German capital from moving into other countries. The transfer moratorium, which went into effect on June 30, 1933, and was made much more drastic on June 30, 1934, also added to the liquidity of the short-term money market. The Reichsbank, the final source of credit, was called on up to December 31, 1933, to rediscount only a third of the total of 1,200 million marks of employment-creation drafts then in circulation. But in the current year the total of such drafts in circulation increased much more rapidly than the amount of liquid funds on the money market. Up to July 1934, 2.2 billion marks of these drafts had been issued, and no less than 1.2 billions still remained in the Reichsbank's portfolio. The amount of these drafts will increase sharply in the next few months, as numerous public works come to completion. So a further heavy burdening of the Reichsbank can be expected.

The employment-creation drafts represent a first-class short-term investment for the Berlin money market, since they can be rediscounted by the Reichsbank at any time. But the situation is different for the Reichsbank. For this institution it means buying government obligations the most of which become due only after from 2 to 5 years. This is important in view of the German currency laws. The notes of the Reichsbank -- almost the only banknotes in circulation in the country -- are now covered up to 90 percent by commercial bills and up to almost 10 percent by stocks and bonds; the gold coverage has almost entirely disappeared. And the item of commercial bills (Handelswechsel), which amounted on June 30, 1934, to 3,392 million marks, includes the employment-creation drafts.

A comparison of the latest reports of the Reichsbank with those of the preceding year shows only a small increase both of the holdings of commercial bills and of the note circulation. On June 30, 1933, its commercial bills amounted to 3,212 millions; but since then it has acquired a further 360 millions of stocks and bonds. Its holdings of commercial paper appear very large in comparison with the period before the financial chaos of 1931. On June 30, 1930, holdings of commercial bills were only 1,777 millions. One may perhaps characterize everything that has happened since then as "reflation." The deflationary results of the withdrawals of foreign credits in 1931 were offset at that time by the Reichsbank's inflationary policies; the deflation of the following years, in which the emergency credits of the Reichsbank were paid back, was more than compensated for by the rediscounting of the employment-creation drafts. It is still impossible to say exactly what is the danger zone of this Reichsbank policy.

Another phase of the German economic situation has recently attracted very much greater attention, namely the altered conditions in Germany's foreign trade and the losses of gold caused thereby. The results of this can be realized only through a comprehension of the country's economic structure. There is no great country in the world less adapted to "autarchy" than Germany, none less able to shape its economic policy regardless of international repercussions. Germany must import the majority of its requirements of iron ore, copper, rubber, gasoline, wool, cotton and vegetable oils from other countries. It secures the funds to pay for such imports mainly from two sources -- from exports of industrial finished goods (in normal times more than a quarter of the German industrial laborers work for the export trade), and from services to foreign countries (shipping, insurance, etc.). But when economic conditions become better in Germany, imports naturally rise, while at the same time the export trade has a tendency to fall. When German industrial concerns find a good domestic market close at hand, there is less incentive for them to reduce their costs of production and increase their exports. This was demonstrated repeatedly in the last decade. In 1927 and 1928 the German export trade showed a heavy import surplus; but in 1929 -- when the depression began in Germany, many months earlier than elsewhere -- the value of the country's exports became equal to that of its imports. In the following three years there were very considerable export surpluses -- partly explainable, however, by the fact that the prices of raw materials imported in 1929-32 declined more than the prices of the finished goods which were exported.

These are, so to say, the automatic effects of Germany's economic situation on her foreign trade. But they do not by themselves explain the extent of the latest changes in the foreign trade situation. The decline of German exports is due also to the anti-German feeling of great numbers of foreign consumers of German goods, created by the anti-Jewish policy of the Hitler government and by the cessation of payment of Germany's foreign debts. Russia's attitude toward the new Germany has also put an end almost completely to German exports to that country. Exports were further hampered by the depreciation of the dollar and the pound sterling, while the cost of imports was increased by the higher prices of foreign raw materials such as wool, rubber, etc. The result of all these factors is shown by the following table:

GERMAN FOREIGN TRADE (MONTHLY AVERAGES)
(in millions of marks)
1932 1933 1934, 1st quarter 1934, 2nd quarter
Imports 389 350 383 385
  Raw materials 201 202 236 242
  Foodstuffs 124 90 85 78
Exports 478 406 365 331
  Industrial finished goods 374 315 278 257
Trade balance +89 +56 -18 -54
+ favorable balance - unfavorable balance

In 1933 German foreign trade still did not exhibit the full effects of the government's economic policies. A good harvest in that year helped keep imports of foodstuffs down, and imports of industrial raw materials were still small in the first half of the year. But in the first quarter of 1934 about 20 percent more iron ore, 70 percent more copper, 50 percent more wood, 30 percent more oil and gasoline, 40 percent more rubber, 45 percent more hides and furs and 25 percent more wool were imported than in the first quarter of 1933. The value of the imports rose even more. From April 1933 to April 1934 the quantity of industrial raw materials imported increased by 35 percent, but their value by 43 percent; whereas the value of industrial finished products exported decreased by 21 percent.[viii] Many foreign commentators have interpreted the heavy imports as meaning only that Germany is rearming, since the increase was greater than the increase of the country's economic turnover. The lack of data makes it impossible to confirm or refute this assertion.

But the above table by no means shows the entire decline of German exports. Since the summer of 1933 an ever-increasing part of these has consisted of the so-called "supplementary exports." These exports, which amounted in the first six months of 1934 to several hundred million marks, are made at prices below the costs of production. The losses of the exporters are compensated for through the profits gained by buying back German foreign bonds and German scrip. In this manner the country's foreign creditors receive a part payment on their claims, and in return they subsidize German exports. This complicated "double currency" system -- the export currency as well as that in which foreign creditors receive payments is devalued, while the domestic currency is kept stable -- has not been successful in increasing German exports materially, and on the other hand has caused resentment abroad. We will not go here into the details of this method which prevented, at least until the summer of 1934, an open depreciation of the mark: only its effect is of importance for our purposes. And that effect is that while the German foreign trade statistics for the first six months of 1934 show an adverse balance of 217 million marks, the Reichsbank's gold reserves were drawn upon much more heavily in the same period, since only a part of the exports was paid for in foreign currency.

The results of the latest development in Germany's foreign trade are well known. The Reichsbank on December 31, 1933, still possessed 396 million marks in gold and foreign exchange reserves. By June 30, 1934, these reserves had dropped to 77 millions, although no payments had been made to foreign creditors in the meantime. The heavy imports required for public works have in the last few months resulted in losses of 60 to 70 million marks in gold per month. German gold reserves are, practically speaking, exhausted. The point at which continuation of imports on the former scale became impossible was reached on June 30.

V. CONCLUSIONS

The creation of employment through public works in order to further industrial production was discussed long before Hitler came into office. The von Papen and von Schleicher governments, as set forth above, decided on extensive programs for creating employment; the results came almost exclusively in 1933, that is, after the National Socialists had come to power. But in 1932, when the question whether Germany should or should not resort to an active economic policy to conquer the depression was being discussed with great fervor, there was no general consensus of opinion in favor of creating employment. Briefly stated, the main argument of those in favor of it was that every increase of industrial production and sales leads to an expansion of the volume of credit, and that the reverse is also true, namely, that the expansion of the credit volume leads to an increase of production. Opponents of the program pointed to Germany's very special economic situation, which did not permit making experiments. The program, they said, would have a prospect of success only if it were carried out on a very extensive scale. They pointed out that Germany did not stand alone in the world but was dependent on the repercussions of its economic policy abroad; and it was doubtful whether it could carry through a grandiose policy of credit expansion until a natural economic recovery could consolidate whatever temporary successes might attend the policy of artificially creating employment.

The most recent developments have demonstrated that these fears -- which, as said, were already finding expression in 1932 -- were not unjustified. As to the second objection, it is enough to say here that even if a country can finance public works through cheap, long-term loans, that still means laying future tax burdens on the people, even though the burden is distributed over many years or decades and there is no acute danger of exhausting the means at hand. But Germany, where for years the people have been able to put aside only meagre savings, and where there are no capital reserves worth mentioning, was compelled to place the whole burden on the very next budgets and, for mobilizing the actual funds, had to call on the bank of issue for aid.

Seriously as one may regard the situation just set forth, it is less important today than the direct consequences of Germany's dependence on other countries. This must be considered when we inquire whether it is conceivable that a policy of credit expansion and public works might prove permanently successful in, say, the United States, and yet would produce only temporary successes in Germany. The decisive difference is that Germany at the beginning of the employment-creation policy had only very small gold reserves and no investments abroad (but on the contrary very considerable debts to foreign countries), whereas a great part of the world's gold reserve was heaped up in the United States. If Germany were a producer of staple commodities which -- if prices were reduced sufficiently, that is, if sacrifices were made at home -- could be changed at any time into gold, and thus into indispensable foreign goods, then the lack of gold would be less important. But the sale of Germany's most important products -- machinery, apparatus and chemicals -- depends not only on the price and on the sentiment of the outside world toward Germany, but also on the economic situation of those countries that are buyers of German products. For this reason any special German trade recovery, any recovery there in advance of recovery abroad, is especially difficult.[ix] The difficulty might be overcome, as it has been overcome in past years, if the world had confidence in Germany to such an extent that it was willing to finance German imports of indispensable raw materials. But if Germany is isolated both politically and economically, and if German prices rise at the same time, thus hampering export trade, the danger becomes acute that Germany's shortage of gold will compel her to put an end to imports of raw materials and thus to the employment-creation policy.

The latest phase of Germany's economic development, which began in the autumn of 1932, ended on June 30, 1934. Up to that date it was still possible to burden future budgets and to pay for required foreign raw materials. Up to that date, moreover -- the date of the so-called second revolution -- the greatest efforts of the German Government were devoted to winning over the masses and keeping the S.A. satisfied by shielding the employed from the danger of unemployment and by holding out prospects of work for the unemployed. Since that date one thing can be said with certainty: the difficulty of continuing the employment-creation policy will henceforth be incomparably greater than it was in the preceding year and a half.

The number of unemployed in Germany will drop to one million within a year -- such was the assertion made in the spring of 1934 by Fritz Reinhardt, Secretary of State in the Ministry of Finance, who is in charge of financing the "labor battle." He assumed at that time that the new public credits and the new public works would be sufficient to absorb further millions of unemployed. Now, however, the struggle must be concentrated on maintaining the successes already achieved, and that is the chief difference between the present and the preceding economic phase. The reduction of unemployment achieved in June was very small, and the results of the gold shortage are intensified by the fact that the German harvest this year is very poor.

Answering the question as to what would happen if Germany should not be in a position to import the raw materials formerly regarded as indispensable, Chancellor Hitler said on July 13: "We shall, through our own ability, and thanks to the genius of our inventors and chemists, find ways of making ourselves independent of imports of those raw materials that we ourselves are in a position to manufacture or find substitutes for." It is announced that Germany can produce artificial wool, artificial rubber, artificial gasoline, and many other products. This has not been done heretofore because it was far cheaper to import foreign raw materials. The implication of the new policy is that after the introduction of substitute materials, Germany's ability to export will be further reduced by another increase of the costs of production, and that the standard of living will probably also be lowered further. The question also arises as to whether German consumption, which already in 1933 increased far less than production increased, will not decline after goods made of "genuine" raw materials are exhausted.

On June 22, 1934, it was decreed that foreign currency for payment of imports would be granted only to the extent that such currency was received daily by the Reichsbank from exports and other payments from abroad. In view of the not inconsiderable reserves of foreign materials on hand, the effects of this drastic quota on imports will not be felt for some months. It is possible that the critical point will not be reached before the coming winter. The development of German production and German unemployment in the interval will furnish the first direct answer as to the true value of the German recovery.

[i] The figures quoted above for German unemployment and production are taken from official German statistics. What follows is also based exclusively on German statements, above all those of the official Statistisches Reichsamt (National Bureau of Statistics), as published in "Wirtschaft und Statistik," and those of the Institut für Konjunkturforschung (Institute for Business Research), which is maintained by the Reich Government. In America and other foreign countries the opinion is widely held that German statistics, or at least part of them, are falsified -- that more favorable figures than are justified by the actual situation are made public in order to convince the German people of the success of National Socialist rule. Knowing how most of the important economic statistics are determined in Germany, the author does not share this opinion. Moreover, the limits and even the doubtful character of the German trade recovery of 1933-34 can be recognized quite clearly from the official German statements. In addition, dependable private reports which come from Germany make it appear probable that the statistics are correct. This valuation applies to those statistics which show a great recovery as well as to those that show only a slight improvement.

[ii] The "unemployed" column gives the number of unemployed registered in the labor bureaus; the number of employed is taken from the reports of the German Krankenkassen of the number of workers registered there.

[iii] There was also a labor service at the beginning of 1933, but persons thus employed were recorded as unemployed.

[iv] The index of the production of durable goods increased in the year ending May 1, 1934, from 54 to 80, and that of articles of consumption from 79 to 95.

[v] The national income was 76 billions in 1929 and 70 billions as late as 1930.

[vi] German statistics list as Warenhäuser those department stores that handle provisions; department stores that do not handle groceries, meats, etc. are listed as Kaufhäuser.

[vii] A first small issue attempted at the end of June 1934 was unsuccessful.

[viii] The import figures of May and June, 1934, are less characteristic, since certain import restrictions were imposed in April.

[ix] In 1933 Germany sold 50 percent of its exports to countries where, according to reports of the German Institut für Konjunkturforschung, the economic situation either was holding its own or declining; only a relatively small part went to countries experiencing a considerable trade recovery.

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