BOTH in Germany and outside there are many who find justification for the Hitler régime in the extensive rise of German industrial production and even more in the considerable decline in unemployment which has taken place in the last three years. Official German statements refer to an "economic miracle" and they attribute it to the daring spirit of the Nazi leaders who did not hesitate to violate the principles of orthodox finance. The economic upswing in Germany was most conspicuous in the first two years of the Nazi régime; but in 1935 the high rate of production was maintained, chiefly due to rearmament. However, a high price had to be paid for the beneficial effects of the work promotion program: First, rising imports and falling exports, which in turn led to the loss of nearly the entire German gold reserves, thus necessitating severe import restrictions and resort to substitutes. Second, a considerable expansion of the credit volume, offsetting entirely the deflation process of the previous depression years.

A year ago there was no way of evaluating the inflation in Germany and the writer then had to conclude that it was impossible to say where was the danger zone of the Reichsbank policy[i]. At that time, it was the scarcity of foreign raw materials which seemed the most harassing outcome of the artificial recovery. In the meantime, by restricting the consumption of the thoroughly disciplined German people, the German Government has been able to avert the danger of an immediate economic collapse as a result of a shortage of raw materials and food. What in fact became more pressing was the problem of creating the means to finance public works and rearmament through the same inflationist credit policy again and again. This problem of an economic perpetuum mobile is the paramount problem in Germany today.

Credit inflation has, of course, not been the only basis of recovery. During the last three years public works have been financed to the extent of at least three billion marks by ordinary budget means, that is, through taxation, and through more or less compulsory long-term loans. Moreover, Germany's foreign creditors have also contributed to the financing of public works, because the maturing interest has been held at home by means of a transfer moratorium. There is no way of telling whether the amount of the present Reich debt is already beyond the limit of what is economically bearable. We are concerned here with that greater part of recovery which has been promoted by inflation, that is, by short-term government certificates and bills sold to the Reichsbank and other credit agencies.

Even a few months ago it was impossible to estimate the German Government's floating indebtedness accurately. But the estimates of foreign newspapermen which placed the secret Reich debts at from 20 to 30 billions broke the silence of Nazi officials and of German statistical agencies. To refute the foreign estimates they at last revealed certain enlightening data. In two lucid articles, the Oesterreichischer Volkswirt (Austrian Economist)[ii] recently undertook the task of summing up the evidence to be gleaned from the German official publications in order to arrive at an exact total of Germany's floating debt. The figures, be it noted, represent minimum estimates, since obviously Nazi agencies would never publish data less favorable than justified by the actual situation. Calculations based on stamp tax collections on commercial bills, as recently published in Germany, indicate a considerably higher total debt. Although the official German explanation given for this divergency is only partly convincing, I omit estimates derived from tax collections and follow those supplied by the Vienna periodical.

The recorded floating domestic debt of the Reich in July 1935 amounted to 2,837 million marks. In addition there were in circulation 1,974 millions of 4 and 4½ percent Treasury certificates maturing within four years, and 913 million "advance tax certificates" (official figures). However, the major part of the 1934 public works program and of the 1935 rearmament program was not financed directly by the Reich; it was private business enterprises which drew "employment creation bills" and "special bills," respectively, on their banks. These bills are not recorded in the government statements, because "they have not as yet been presented for redemption." The ultimate obligation of the Reich to pay is, however, acknowledged by the orders placed with private companies for steel, machinery, arms, etc. The amount of "employment creation bills," 2,143 million marks, circulating in July 1935, recently came to the surface through a government announcement showing the consolidation of some of those bills by a new long-term loan. The amount of "special bills," on the other hand, can be computed from the recent increase in the total amount of "commercial bills" in circulation. Thus we arrive at the following table (figures in millions of marks):

February December 31, June 30,
1933a 1934 1935
Short-term Government debt 1,987 4,760 5,725
Employment creation bills 0 2,600 2,143
Special bills (approximately) 0 700 3,000
  To be deducted due to duplicationsb 300 1,350 1,380
                       Total 1,700 6,700 9,500
aBeginning of Nazi rule.
bA part of the Treasury certificates was issued to guarantee the payment of Government bills.

In spite of various recent long-term loans and the redemption of advance tax certificates from tax receipts, the floating debt of the Reich, maturing during the next five years, rose to 9½ billions. It has increased by 7,800 million since Hitler came to power (by 2,800 million in the first half of 1935). The 1935 increase in the floating debt has been at the rate of almost 600 million marks a month.

Germany is now in her third year of recovery. Yet private savings are still so low that they absorb only a very small part of the government's financial requirements. Moreover, recovery in Germany is restricted to the field of public contracts and purchases. Government orders in 1935 accounted for two-thirds of the German steel and machinery consumption, and of construction. In spite of the huge public spending there are scarcely any natural economic forces at work to promote recovery.

With these facts in mind, one comes to the conclusion that German credit expansion has now definitely entered the danger zone and that German financial policy is therefore now confronted with the necessity of making a most momentous decision. Certain German economic publications emphasize the task at hand and imply the necessity of refunding the short-term indebtedness. But that is not the main problem of today. Let us assume that in the next five years the Nazi régime is able to consolidate and retire maturities of 2 billions a year. Such an achievement would require drastic economies on the part of the government and on the part of every German citizen, for growth of capital is extremely slow as a result of low salaries and wages and the appropriation of most industrial profits for export subsidies. But even if all pending maturities were refunded, enormous additional issues of short term bills would be required to continue rearmament and public works at the 1935 tempo. If all savings are utilized for refunding old debts, the continuation of the present pace of credit expansion (the issuance of 600 million marks of bills per month) would ultimately lead to government bills circulating as currency. In that case domestic prices would rise rapidly and an inflation similar to that of the year 1923 would recur, with all its disastrous effects for the saving classes. An alternative would be the abandonment of the entire employment creation program, both for public works and for rearmament. This would lead to a sharp increase in unemployment and a tremendous augmentation of the distress of the working classes, already suffering from low wages. Probably the German Government will try to adopt an intermediary course. The question is whether at a slower pace of credit expansion the dangers of inflation could be avoided and the rise in unemployment averted. Compulsory loans, national sacrifices, and similar expedients of a dictatorial state may prolong the life of the present economic system; but they will not foster the natural recovery which alone would eliminate the necessity of public expenditures.

Whatever decision the German Government may take, Germany is on the verge of a new era. Its essence was clearly stated by a sentence in a recent German newspaper article: "The time has come when it is no longer the State that must help business, but it is business that must help the State."

[i] This writer outlined the scope of German recovery up to the fall of 1934 in an article "How Real Is the German Recovery?" in FOREIGN AFFAIRS, October 1934.

[ii] September 21 and October 12, 1935.

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