WEBVTT

NOTE XXXI. Currency and Credit Manipulation (continued)

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5. Credit Expansion

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It has been pointed out that it would be an error to look upon credit expansion exclusively

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as a mode of government interference with the market. The fiduciary media did not come

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into existence as instruments of government policies deliberately aiming at high prices

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and high nominal wage rates, at lowering the market rate of interest and at debt abatement.

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They evolved out of the regular business of banking.

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When the bankers, whose receipts for call money deposited were dealt with by the public

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as money substitutes, began to lend a part of the funds deposited with them, they had

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nothing else in view than their own business.

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They considered it harmless not to keep the whole equivalent of the receipts issued as

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a cash reserve in their vaults.

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They were confident that they would always be in a position to comply with their obligations

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and, without delay, redeem the notes issued, even if they were to lend a part of the deposits.

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Bank notes became fiduciary media within the operation of the unhampered market economy.

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The begetter of credit expansion was the banker, not the authority.

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But today credit expansion is an exclusive prerogative of government.

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As far as private banks and bankers are instrumental in issuing fiduciary media, their role is

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merely ancillary and concerns only technicalities.

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The governments alone direct the course of affairs.

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They have attained full supremacy in all matters concerning the size of circulation credit.

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While the size of the credit expansion that private banks and bankers are able to engineer

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on an unhampered market is strictly limited, the governments aim at the greatest possible

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amount of credit expansion.

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Credit expansion is the government's foremost tool in their struggle against the market

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economy.

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In their hands, it is the magic wand designed to conjure away the scarcity of capital goods,

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to lower the rate of interest or to abolish it altogether, to finance lavish government

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spending, to expropriate the capitalists, to contrive everlasting booms, and to make

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everybody prosperous.

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The inescapable consequences of credit expansion are shown by the theory of the trade cycle.

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Even those economists who still refuse to acknowledge the correctness of the monetary or circulation

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and Credit Theory of the Cyclical Fluctuations of Business have never dared to question the

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conclusiveness and irrefutability of what this theory asserts with regard to the necessary

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effects of credit expansion.

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These economists, too, must admit, and do admit, that the upswing is invariably conditioned

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by Credit Expansion, that it could not come into being and continue without credit expansion,

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and that it turns into depression when the further progress of credit expansion stops.

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Their explanation of the trade cycle, in fact, boils down to the assertion that what first

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generates the upswing is not credit expansion, but other factors.

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The credit expansion, which, even in their opinion, is an indispensable requisite of the general boom, is, they say, not the outcome of a policy deliberately aiming at low interest rates and at encouraging additional investment for which the capital goods needed are lacking.

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It is something which, without active interference on the part of the authorities, in a miraculous

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way always appears whenever these other factors begin their operation.

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It is obvious that these economists contradict themselves in opposing plans to eliminate

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the fluctuations of business by abstention from credit expansion.

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The naive supporters of the inflationist view of history are consistent when they infer

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It is clear from their, of course, utterly fallacious and contradictory tenets that credit

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expansion is the economic panacea.

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But those who do not deny that credit expansion is an indispensable condition of the boom

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disagree with their own doctrine in fighting the proposals to curb credit expansion.

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Both the spokesmen of the governments and the powerful pressure groups and the champions

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Those of the dogmatic unorthodoxy that dominates the university departments of economics agree

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that one should try to avert the recurrence of depressions, and that the realization of

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this end requires the prevention of booms.

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They cannot advance tenable arguments against the proposals to abstain from policies encouraging

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credit expansion.

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But they stubbornly refuse to listen to any such idea.

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They passionately disparage the plans to prevent credit expansion as devices which would perpetuate

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depressions.

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This attitude clearly demonstrates the correctness of the statement that the trade cycle is the

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product of policies intentionally aimed at lowering the rate of interest and engendering

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artificial booms.

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It is a fact that today measures aimed at lowering the rate of interest are generally

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be considered highly desirable, and that credit expansion is viewed as the efficacious means

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for the attainment of this end.

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It is this prepossession that impels all governments to fight the gold standard.

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Expansionism is the great slogan of our day.

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All political parties and all pressure groups are firmly committed to an easy money policy.

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If a bank does not expand circulation credit by issuing additional fiduciary media, either

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in the form of banknotes or in the form of deposit currency, it cannot generate a boom

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even if it lowers the amount of interest charged below the rate of the unhampered market.

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It merely makes a gift to the debtors.

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The inference to be drawn from the monetary cycle theory by those who want to prevent

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The Recurrence of Booms and of the Subsequent Depressions is not that the banks should not

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lower the rate of interest, but that they should abstain from credit expansion.

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The objective of credit expansion is to favor the interests of some groups of the population

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at the expense of others.

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This is, of course, the best that interventionism can attain when it does not hurt the interests

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of All Groups.

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But while making the whole community poorer, it may still enrich some strata.

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Which groups belong to the latter class depends on the special data of each case.

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The idea which generated what is called qualitative credit control is to channel the additional

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credit in such a way as to concentrate the alleged blessings of credit expansion upon

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in certain groups, and to withhold them from other groups.

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The credits should not go to the stock exchange, it is argued, and should not make stock prices

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soar.

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They should rather benefit the legitimate productive activity of the processing industries,

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of mining, of legitimate commerce, and, first of all, of farming.

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Other advocates of qualitative credit control want to prevent the additional credits from

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are being used for investment in fixed capital and thus immobilized.

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They are to be used instead for the production of liquid goods.

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According to these plans, the authorities give the banks concrete directions concerning

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the types of loans they should grant or are forbidden to grant.

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However, all such schemes are vain.

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Expansion in lending is no substitute for checks placed on credit expansion, the only

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means that could really prevent a rise in stock exchange quotations and an expansion

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of investment in fixed capital.

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The mode in which the additional amount of credit finds its way into the loan market

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is only of secondary importance.

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What matters is that there is an inflow of newly created credit.

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If the banks grant more credits to the farmers, the farmers are in a position to repay loans

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received from other sources and to pay cash for their purchases.

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If they grant more credits to business as circulating capital, they free funds which

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were previously tied up for this use.

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In any case, they create an abundance of disposable money for which its owners try to find the

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most profitable investment.

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Very promptly, these funds find outlets in the stock exchange or in fixed investment.

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The notion that it is possible to pursue a credit expansion without making stock prices

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rise and fixed investment expand is absurd.

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The typical course of events under credit expansion was, until a few years ago, determined

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by two facts.

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that it was credit expansion under the gold standard and that it was not the outcome of

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concerted action on the part of the various national governments and the central banks

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whose conduct these governments directed.

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The first of these facts meant that governments were not prepared to abandon the convertibility

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of their country's banknotes according to the rigidly fixed parity.

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The second fact resulted in a lack of quantitative uniformity in the size of credit expansion.

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Some countries got ahead of other countries and their banks were faced with the danger

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of a serious external drain upon their reserves in gold and foreign exchange.

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In order to preserve their own solvency, these banks were forced to take recourse to drastic

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credit restriction.

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Thus they created the panic and inaugurated the depression on the domestic market.

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The panic very soon spread to other countries.

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Businessmen in these other countries became frightened and increased their borrowing in

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order to strengthen their liquid funds for all possible events.

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It was precisely this increased demand for new credits which impelled the monetary authorities

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The policy of devaluation has to some extent altered this typical sequence of events.

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Menaced by an external drain, the monetary authorities do not resort to credit restriction

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and to raising the rate of interest charged by the central banking system.

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They devalue.

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Yet devaluation does not solve the problem.

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If the government does not care how far foreign exchange rates may rise, it can, for some

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time, continue to cling to credit expansion.

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But one day the crack-up boom will annihilate its monetary system.

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On the other hand, if the authority wants to avoid the necessity of devaluing again

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and again at an accelerated pace, it must arrange its domestic credit policy in such

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a way as not to outrun in credit expansion the other countries against which it wants

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to keep its domestic currency at par.

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Many economists take it for granted that the attempts of the authorities to expand credit

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will always bring about the same almost regular alternation between periods of booming trade

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and of subsequent depression.

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They assume that the effects of credit expansion will, in the future, not differ from those

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that have been observed since the end of the 18th century in Great Britain, and since the

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middle of the 19th century in Western and Central Europe and in North America.

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But we may wonder whether conditions have not changed.

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The teachings of the monetary theory of the trade cycle are today so well known, even

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outside of the circle of economists, that the naive optimism which inspired the entrepreneurs

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in the boom periods of the past has given way to a certain skepticism.

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It may be that businessmen will in the future react to credit expansion in a manner other

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The Chimera of Contra-Cyclical Policies

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An essential element of the unorthodox doctrines advanced both by all socialists and by all

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interventionists is that the recurrence of depressions is a phenomenon inherent in the

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very operation of the market economy.

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But while the socialists contend that only the substitution of socialism for capitalism

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can eradicate the evil, the interventionists ascribe to the government the power to correct

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the operation of the market economy in such a way as to bring about what they call economic

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stability.

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These interventionists would be right if their anti-depression plans were to aim at a radical

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abandonment of credit expansion policies.

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However, they reject this idea in advance.

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What they want is to expand credit more and more, and to prevent depressions by the adoption

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of Special Contra-Cyclical Measures.

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In the context of these plans, the government appears as a deity that stands and works outside

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the orbit of human affairs, that is independent of the actions of its subjects, and has the

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power to interfere with these actions from without.

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It has at its disposal means and funds that are not provided by the people, and can be

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are only freely used for whatever purposes the rulers are prepared to employ them for.

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What is needed to make the most beneficent use of this power is merely to follow the

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advice given by the experts.

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The most advertised among these suggested remedies is contra-cyclical timing of public

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works and expenditure on public enterprises.

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The idea is not so new as its champions would have us believe.

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When depression came in the past, public opinion always asked the government to embark upon

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public works in order to create jobs and to stop the drop in prices.

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But the problem is how to finance these public works.

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If the government taxes the citizens or borrows from them, it does not add anything to what

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the Keynesians call the aggregate amount of spending.

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restricts the private citizen's power to consume or to invest to the same extent that it increases

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its own.

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If, however, the government resorts to the cherished inflationary methods of financing,

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it makes things worse, not better.

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It may thus delay for a short time the outbreak of the slump, but when the unavoidable payoff

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does come, the crisis is the heavier, the longer the government has postponed it.

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The interventionist experts are at a loss to grasp the real problems involved.

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As they see it, the main thing is to plan public capital expenditure well in advance

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and to accumulate a shelf of fully worked out capital projects which can be put into

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operation at short notice.

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This, they say, is the right policy, and one which we recommend all countries should adopt.

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However, the problem is not to elaborate projects, but to provide the material means for their execution.

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The interventionists believe that this could be easily achieved by holding back government expenditure in the boom

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and increasing it when the depression comes.

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Now, restriction of government expenditure may certainly be a good thing, but it does

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not provide the funds a government needs for a later expansion of its expenditure.

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An individual may conduct his affairs in this way, he may accumulate savings when his income

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is high and spend them later when his income drops.

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But it is different with a nation or all nations together.

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The Treasury may hoard a considerable part of the lavish revenue from taxes, which flows

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into the public exchequer as a result of the boom.

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As far and as long as it withholds these funds from circulation, its policy is really deflationary

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and contracyclical, and may, to this extent, weaken the boom created by credit expansion.

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But when these funds are spent again, they alter the money relation and create a cash-induced

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tendency toward a drop in the monetary unit's purchasing power.

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By no means can these funds provide the capital goods required for the execution of the shelved

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public works.

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The fundamental error of the interventionists consists in the fact that they ignore the

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shortage of capital goods.

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In their eyes, the depression is merely caused by a mysterious lack of the people's propensity

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both to consume and to invest.

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While the only real problem is to produce more and to consume less in order to increase

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the stock of capital goods available, the interventionists want to increase both consumption

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and investment.

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They want the government to embark upon projects which are unprofitable precisely because the

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factors of production needed for their execution must be withdrawn from other lines of employment

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in which they would fulfill once the satisfaction of which the consumers consider more urgent.

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They do not realize that such public works must considerably intensify the real evil,

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The Shortage of Capital Goods

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One could, of course, think of another mode for the employment of the savings the government

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makes in the boom period.

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The Treasury could invest its surplus in buying large stocks of all those materials which

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it will, later, when the Depression comes, need for the execution of the public works

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planned, and of the consumers' goods which those occupied in these public works will

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ask for.

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But if the authorities were to act in this way, they would considerably intensify the

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boom, accelerate the outbreak of the crisis, and make its consequences more serious.

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In dealing with the contra-cyclical policies, the interventionists always refer to the alleged

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success of these policies in Sweden.

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It is true that public capital expenditure in Sweden was actually doubled between 1932

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and 1939, but this was not the cause but an effect of Sweden's prosperity in the 30s.

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00:20:59.160 --> 00:21:04.420
This prosperity was entirely due to the rearmament of Germany.

229
00:21:04.420 --> 00:21:10.980
The Nazi policy increased the German demand for Swedish products on the one hand and restricted

230
00:21:10.980 --> 00:21:16.380
and, on the other hand, German competition on the world market for those products which

231
00:21:16.380 --> 00:21:18.420
Sweden could supply.

232
00:21:18.420 --> 00:21:27.900
Thus, Swedish exports increased from 1932 to 1938 in thousands of tons, iron ore from

233
00:21:27.900 --> 00:21:47.220
from 2219 to 12,485, pig iron from 31,047 to 92,980, ferro alloys from 15,453 to 28,605,

234
00:21:47.220 --> 00:22:03.820
Other kinds of iron and steel from 134,237 to 256,146, machinery from 46,230 to 70,605.

235
00:22:03.820 --> 00:22:15.260
The number of unemployed applying for relief was 114,000 in 1932 and 165,000 in 1933.

236
00:22:15.260 --> 00:22:25.140
It dropped as soon as German rearmament came into full swing to 115,000 in 1934 to 62,000

237
00:22:25.140 --> 00:22:31.300
in 1935 and was 16,000 in 1938.

238
00:22:31.300 --> 00:22:37.060
The author of this miracle was not Keynes, but Hitler.

239
00:22:37.060 --> 00:22:44.480
All this talk about contra-cyclical government activities aims at one goal only, namely to

240
00:22:44.480 --> 00:22:50.680
to divert the public's attention from cognizance of the real cause of the cyclical fluctuations

241
00:22:50.680 --> 00:22:52.640
of business.

242
00:22:52.640 --> 00:22:58.880
All governments are firmly committed to the policy of low interest rates, credit expansion

243
00:22:58.880 --> 00:23:00.760
and inflation.

244
00:23:00.760 --> 00:23:08.080
When the unavoidable aftermath of these short-term policies appears, they know only of one remedy

245
00:23:08.080 --> 00:23:12.480
to go on in inflationary ventures.

246
00:23:12.480 --> 00:23:20.980
6. Foreign Exchange Control and Bilateral Exchange Agreements

247
00:23:20.980 --> 00:23:27.200
If a government fixes the parity of its domestic credit or fiat money against gold or foreign

248
00:23:27.200 --> 00:23:34.300
exchange at a higher point than the market, that is, if it fixes maximum prices for gold

249
00:23:34.300 --> 00:23:40.940
and foreign exchange below the potential market price, the effects appear which Gresham's

250
00:23:40.940 --> 00:23:48.140
as law describes. A state of affairs results which, very inadequately, is called a scarcity

251
00:23:48.140 --> 00:23:55.540
of foreign exchange. It is the characteristic mark of an economic good that the supply available

252
00:23:55.540 --> 00:24:02.540
is not so plentiful as to make any intended utilization of it possible. An object that

253
00:24:02.540 --> 00:24:09.340
is not in short supply is not an economic good. No prices are asked for it or paid for

254
00:24:09.340 --> 00:24:10.700
for it.

255
00:24:10.700 --> 00:24:17.340
As money must necessarily be an economic good, the notion of a money that would not be scarce

256
00:24:17.340 --> 00:24:19.200
is absurd.

257
00:24:19.200 --> 00:24:24.680
What those governments who complain about a scarcity of foreign exchange have in mind

258
00:24:24.680 --> 00:24:27.380
is however something different.

259
00:24:27.380 --> 00:24:32.460
It is the unavoidable outcome of their policy of price fixing.

260
00:24:32.460 --> 00:24:39.540
It means that at the price arbitrarily fixed by the government, demand exceeds supply.

261
00:24:39.540 --> 00:24:45.020
If the government, having by means of inflation, reduced the purchasing power of the domestic

262
00:24:45.020 --> 00:24:52.220
monetary unit against gold, foreign exchange, and commodities and services, abstains from

263
00:24:52.220 --> 00:24:58.880
any attempt at controlling foreign exchange rates, there cannot be any question of a scarcity

264
00:24:58.880 --> 00:25:04.740
in the sense in which the government uses this term. He who is ready to pay the market

265
00:25:04.740 --> 00:25:11.120
price would be in a position to buy as much foreign exchange as he wants. But the government

266
00:25:11.120 --> 00:25:18.280
is resolved not to tolerate any rise in foreign exchange rates in terms of the inflated domestic

267
00:25:18.280 --> 00:25:25.420
currency. Relying upon its magistrates and constables, it prohibits any dealings in foreign

268
00:25:25.420 --> 00:25:31.420
Foreign Exchange on terms different from the ordained maximum price.

269
00:25:31.420 --> 00:25:36.960
As the government and its satellites see it, the rise in foreign exchange rates was caused

270
00:25:36.960 --> 00:25:43.480
by an unfavorable balance of payments and by the purchases of speculators.

271
00:25:43.480 --> 00:25:48.580
In order to remove the evil, the government resorts to measures restricting the demand

272
00:25:48.580 --> 00:25:51.340
for foreign exchange.

273
00:25:51.340 --> 00:25:56.460
Only those people should henceforth have the right to buy foreign exchange who need it

274
00:25:56.460 --> 00:26:00.180
for transactions of which the government approves.

275
00:26:00.180 --> 00:26:06.060
Commodities, the importation of which is superfluous in the opinion of the government, should no

276
00:26:06.060 --> 00:26:08.300
longer be imported.

277
00:26:08.300 --> 00:26:14.180
Payment of interest and principle on debts due to foreigners is prohibited.

278
00:26:14.180 --> 00:26:17.240
Citizens must no longer travel abroad.

279
00:26:17.240 --> 00:26:24.220
The government does not realize that such measures can never improve the balance of payments,

280
00:26:24.220 --> 00:26:28.760
if imports drop, exports drop concomitantly.

281
00:26:28.760 --> 00:26:34.080
The citizens who are prevented from buying foreign goods, from paying back foreign debts

282
00:26:34.080 --> 00:26:39.720
and from traveling abroad, will not keep the amount of domestic money thus left to them

283
00:26:39.720 --> 00:26:41.700
in their cash holdings.

284
00:26:41.700 --> 00:26:47.280
They will increase their buying, either of consumers or of producers' goods, and thus

285
00:26:47.280 --> 00:26:52.460
bring about a further tendency for domestic prices to rise.

286
00:26:52.460 --> 00:26:57.600
But the more prices rise, the more will exports be checked.

287
00:26:57.600 --> 00:27:00.560
Now the government goes a step further.

288
00:27:00.560 --> 00:27:04.840
It nationalizes foreign exchange transactions.

289
00:27:04.840 --> 00:27:10.880
Every citizen who acquires, through exporting, for example, an amount of foreign exchange,

290
00:27:10.880 --> 00:27:17.360
is bound to sell it at the official rate to the Office of Foreign Exchange Control.

291
00:27:17.360 --> 00:27:24.200
If this provision, which is tantamount to an export duty, were to be effectively enforced,

292
00:27:24.200 --> 00:27:28.700
export trade would shrink greatly or cease altogether.

293
00:27:28.700 --> 00:27:34.160
The government certainly does not like this result, but neither does it want to admit

294
00:27:34.160 --> 00:27:39.800
that its interference has utterly failed to achieve the ends sought, and has produced

295
00:27:39.800 --> 00:27:48.800
a State of Affairs which is, from the government's own point of view, much worse even than the previous State of Affairs.

296
00:27:48.800 --> 00:28:01.800
So the government resorts to a makeshift. It subsidizes the export trade to such an extent that the losses which its policy inflicts upon the exporters are compensated.

297
00:28:01.800 --> 00:28:20.800
On the other hand, the Government Bureau of Foreign Exchange Control, stubbornly clinging to the fiction that foreign exchange rates have not really risen, and that the official rate is an effective rate, sells foreign exchange to importers at this official rate.

298
00:28:20.800 --> 00:28:28.800
If this policy were to be really followed, it would be equivalent to paying bonuses to the merchants concerned.

299
00:28:28.800 --> 00:28:33.440
They would reap windfall profits in selling the imported commodity on the

300
00:28:33.440 --> 00:28:39.520
domestic market. Thus the authority resorts to further makeshifts. It either

301
00:28:39.520 --> 00:28:45.480
raises import duties or levies special taxes on the importers or burdens

302
00:28:45.480 --> 00:28:51.600
their purchases of foreign exchange in some other way. Then of course foreign

303
00:28:51.600 --> 00:28:57.640
exchange control works. But it works only because it virtually acknowledges

304
00:28:57.640 --> 00:29:01.120
What is the market rate of foreign exchange?

305
00:29:01.120 --> 00:29:08.080
The exporter gets for his proceeds in foreign exchange the official rate plus the subsidy,

306
00:29:08.080 --> 00:29:11.380
which together equal the market rate.

307
00:29:11.380 --> 00:29:17.760
The importer pays for foreign exchange the official rate plus a special premium, tax

308
00:29:17.760 --> 00:29:22.880
or duty, which together equal the market rate.

309
00:29:22.880 --> 00:29:28.600
The only people who are too dull to grasp what is really going on and let themselves

310
00:29:28.600 --> 00:29:34.360
be fooled by the bureaucratic terminology are the authors of books and articles on new

311
00:29:34.360 --> 00:29:40.780
methods of monetary management and on new monetary experience.

312
00:29:40.780 --> 00:29:46.640
The monopolization of buying and selling of foreign exchange by the government vests the

313
00:29:46.640 --> 00:29:50.440
control of foreign trade in the authorities.

314
00:29:50.440 --> 00:29:54.680
It does not affect the determination of foreign exchange rates.

315
00:29:54.680 --> 00:29:59.680
It does not matter whether or not the government makes it illegal for the press to publish

316
00:29:59.680 --> 00:30:03.900
the real and effective rates of foreign exchange.

317
00:30:03.900 --> 00:30:10.920
As far as foreign trade is still carried on, only these real and effective rates are in

318
00:30:10.920 --> 00:30:12.640
force.

319
00:30:12.640 --> 00:30:18.640
In order to conceal better the true state of affairs, governments are intent upon eliminating

320
00:30:18.640 --> 00:30:22.940
all reference to the real foreign exchange rate.

321
00:30:22.940 --> 00:30:28.860
Foreign trade, they think, should no longer be transacted by the intermediary of money.

322
00:30:28.860 --> 00:30:30.920
It should be barter.

323
00:30:30.920 --> 00:30:36.040
They enter into barter and clearing agreements with foreign governments.

324
00:30:36.040 --> 00:30:41.300
Each of the two contracting countries should sell to the other country a quantity of goods

325
00:30:41.300 --> 00:30:48.040
and services and receive in exchange a quantity of other goods and services.

326
00:30:48.040 --> 00:30:53.800
In the text of these treaties, any reference to the real market rates of foreign exchange

327
00:30:53.800 --> 00:30:55.640
is carefully avoided.

328
00:30:55.640 --> 00:31:02.120
However, both parties calculate their sales and their purchases in terms of the world

329
00:31:02.120 --> 00:31:05.760
market prices expressed in gold.

330
00:31:05.760 --> 00:31:12.280
These clearing and barter agreements substitute bilateral trade between two countries for

331
00:31:12.280 --> 00:31:17.280
the triangular or multilateral trade of the liberal age.

332
00:31:17.280 --> 00:31:23.400
But they in no way affect the fact that a country's national currency has lost a part

333
00:31:23.400 --> 00:31:30.040
of its purchasing power against gold, foreign exchange and commodities.

334
00:31:30.040 --> 00:31:36.200
As a policy of foreign trade nationalization, foreign exchange control is a step on the

335
00:31:36.200 --> 00:31:41.720
way toward a substitution of socialism for the market economy.

336
00:31:41.720 --> 00:31:44.760
From any other point of view, it is abortive.

337
00:31:44.760 --> 00:31:50.200
That can certainly neither in the short run nor in the long run affect the determination

338
00:31:50.200 --> 00:31:56.440
of the rate of foreign exchange.

339
00:31:56.440 --> 00:32:00.260
Remarks about the Nazi barter agreements

340
00:32:00.260 --> 00:32:05.020
The barter and clearing agreements which the Nazi government of the Reich concluded with

341
00:32:05.020 --> 00:32:11.280
various foreign countries have been misinterpreted by the vast literature on the subject.

342
00:32:11.280 --> 00:32:17.600
As these misinterpretations are the basis of many current errors concerning monetary problems,

343
00:32:17.600 --> 00:32:22.280
it seems expedient to devote a few remarks to them.

344
00:32:22.280 --> 00:32:27.180
The considerations which motivated foreign governments to enter into such agreements

345
00:32:27.180 --> 00:32:30.080
with the Reich were not uniform.

346
00:32:30.080 --> 00:32:35.600
Neither were the political and economic consequences of these agreements homogeneous.

347
00:32:35.600 --> 00:32:40.720
We may deal with the problems involved by discussing, first, the case of the agreement

348
00:32:40.720 --> 00:32:47.160
with Switzerland and then those with the countries of the European Southeast.

349
00:32:47.160 --> 00:32:53.200
The Swiss banks had, before Hitler seized power, lent comparatively enormous sums to

350
00:32:53.200 --> 00:32:54.840
German business.

351
00:32:54.840 --> 00:33:01.440
Moreover, one of Switzerland's main industries, tourism, depended to a great extent on German

352
00:33:01.440 --> 00:33:03.020
patrons.

353
00:33:03.020 --> 00:33:09.020
The German foreign exchange control laws gave the German authorities the power to prohibit

354
00:33:09.020 --> 00:33:15.280
all payments to Swiss banks, and to prevent Germans from visiting the country.

355
00:33:15.280 --> 00:33:20.740
The clearing agreement was the only means for the Swiss to salvage at least a part of

356
00:33:20.740 --> 00:33:27.080
their German assets, and to induce the Reich to permit a limited number of Germans to spend

357
00:33:27.080 --> 00:33:30.460
a holiday in the Swiss hotels.

358
00:33:30.460 --> 00:33:35.140
The case of the Balkan agreements is even more interesting, as their meaning was still

359
00:33:35.140 --> 00:33:38.940
more distorted by misinterpretation.

360
00:33:38.940 --> 00:33:40.980
Let us look at an example.

361
00:33:40.980 --> 00:33:47.180
The Reich and one of the southeastern countries of Europe, we may call it Balkania, concluded

362
00:33:47.180 --> 00:33:52.880
an agreement concerning the mutual exchange of commodities which could be bought or sold

363
00:33:52.880 --> 00:33:56.580
on the world market for $20 million.

364
00:33:56.580 --> 00:34:04.420
Balkania had to give a world market value of $10 million in food and raw materials.

365
00:34:04.420 --> 00:34:10.260
Germany had to give a world market value of $10 million in manufactured goods.

366
00:34:10.260 --> 00:34:15.900
The peculiar feature of the bargain was that these commodities bought and sold were in

367
00:34:15.900 --> 00:34:22.820
the terms of the contract not valued according to their world market price, but at a higher

368
00:34:22.820 --> 00:34:28.540
rate, let us say 10% above the prices of the world market.

369
00:34:28.540 --> 00:34:35.980
For the goods Germany had to buy, Balkania was charged 11 million instead of 10. But,

370
00:34:35.980 --> 00:34:41.880
on the other hand, Balkania was credited for the goods it sold with 11 million instead

371
00:34:41.880 --> 00:34:49.380
of 10. This overvaluation was totally, or at least to a great extent, concealed in the

372
00:34:49.380 --> 00:34:55.380
rate of exchange between the Reichsmark and the Balkan, the monetary unit of Balkania's

373
00:34:55.380 --> 00:35:09.860
Let us assume that the dollar was actually worth 10 Balkans on the world market.

374
00:35:09.860 --> 00:35:16.220
By virtue of the barter agreement, Balkania sold to Germany food and raw materials for

375
00:35:16.220 --> 00:35:24.420
which English businessmen offered 100 million Balkans for 110 million, and bought manufactured

376
00:35:24.420 --> 00:35:30.620
Goods, which she could buy from English or American exporters for 100 million Balkans

377
00:35:30.620 --> 00:35:33.540
for 110 million.

378
00:35:33.540 --> 00:35:38.740
In order to understand the meaning of this strange procedure, we have to realize that

379
00:35:38.740 --> 00:35:45.700
the loss and the gain from these overvaluations compensated each other only for the whole

380
00:35:45.700 --> 00:35:49.900
nations, but not for the individual citizens.

381
00:35:49.900 --> 00:35:55.900
For Socialist Germany, where under Hitler all business was nationalized, this made no difference

382
00:35:55.900 --> 00:35:57.100
at all.

383
00:35:57.100 --> 00:36:04.340
But in Balkania, domestic production and domestic trade were still based on private ownership.

384
00:36:04.340 --> 00:36:09.260
Only the foreign trade of Balkania was controlled by the government.

385
00:36:09.260 --> 00:36:14.880
There it was of great consequence that those burdened by the overvaluation of the imported

386
00:36:14.880 --> 00:36:22.800
Goods and those favored by the overvaluation of the exported goods were not the same people.

387
00:36:22.800 --> 00:36:28.680
The terms of the Barter Agreement resulted therefore in a shift of income from some groups

388
00:36:28.680 --> 00:36:34.700
of citizens, of course the black sheep of the government, to other groups of citizens,

389
00:36:34.700 --> 00:36:37.760
of course the government's pet children.

390
00:36:37.760 --> 00:36:43.440
The government of Balkania distributed the boon of the transaction in this way.

391
00:36:43.440 --> 00:36:51.440
1. Higher prices paid to the producers of the exported food and raw materials, 5 million.

392
00:36:51.440 --> 00:36:59.440
2. Gains, legal and illegal, of the government agency entrusted with the execution of the Barter Agreement

393
00:36:59.440 --> 00:37:04.440
and of the friends of the government managing it, 1 million.

394
00:37:04.440 --> 00:37:09.440
3. Gains retained by the Treasury, 4 million.

395
00:37:09.440 --> 00:37:15.960
The losses of the transaction, on the other hand, were distributed in this way.

396
00:37:15.960 --> 00:37:17.400
1.

397
00:37:17.400 --> 00:37:22.840
Higher prices of imported commodities paid by those who were favored by the higher prices

398
00:37:22.840 --> 00:37:25.000
of the exported goods.

399
00:37:25.000 --> 00:37:26.680
1 million.

400
00:37:26.680 --> 00:37:27.840
2.

401
00:37:27.840 --> 00:37:31.800
Higher prices of imported goods paid by other citizens.

402
00:37:31.800 --> 00:37:33.640
5 million.

403
00:37:33.640 --> 00:37:34.920
3.

404
00:37:34.920 --> 00:37:40.680
Fair Prices of Imported Goods Paid by the Government, for example for arms, railroad

405
00:37:40.680 --> 00:37:44.520
equipment, etc., 4 million.

406
00:37:44.520 --> 00:37:51.000
It is obvious that the friends of the government and the peasants producing food and raw materials

407
00:37:51.000 --> 00:37:58.920
realized gains of 5 million, whereas the non-agricultural sections of the population were burdened with

408
00:37:58.920 --> 00:38:02.640
5 million additional expenditure.

409
00:38:02.640 --> 00:38:08.000
Such an effect was in line with Balkania's whole economic policy.

410
00:38:08.000 --> 00:38:13.560
Like many other contemporary governments, the rulers of Balkania made every effort to

411
00:38:13.560 --> 00:38:21.520
favor the agricultural section of the population at the expense of the non-agricultural section.

412
00:38:21.520 --> 00:38:26.280
The political consequences of these agreements were twofold.

413
00:38:26.280 --> 00:38:32.720
As government became dependent on the Reich, but its power at home increased.

414
00:38:32.720 --> 00:38:38.520
The government now disposed of a fund which could be used for the benefit of its friends,

415
00:38:38.520 --> 00:38:44.040
who were on the payroll of the company or government agency entrusted with the execution

416
00:38:44.040 --> 00:38:46.040
of the Barter Agreement.

417
00:38:46.040 --> 00:38:51.880
Moreover, the government had the power to discriminate against those groups of the peasantry

418
00:38:51.880 --> 00:38:58.600
who did not support the government or who were members of a linguistic or religious minority.

419
00:38:58.600 --> 00:39:05.760
The products which had to be exported to Germany were purchased only from the sympathetic producers.

420
00:39:05.760 --> 00:39:11.120
The non-sympathizers were barred from the enjoyment of the benefits of the treaty.

421
00:39:11.120 --> 00:39:17.360
They had to sell their entire crop at the lower prices corresponding to the world market

422
00:39:17.360 --> 00:39:18.720
prices.

423
00:39:18.720 --> 00:39:24.220
In Yugoslavia, for instance, the Catholic Croat peasants complained that the government

424
00:39:24.220 --> 00:39:27.040
purchased only from Serbs.

425
00:39:27.040 --> 00:39:32.080
It is impossible to discover whether this complaint was really well founded.

426
00:39:32.080 --> 00:39:39.460
In any case, the Croats did not blame the Nazis, they blamed the Yugoslavian government.

427
00:39:39.460 --> 00:39:44.500
The Barter Agreements gave Germany a kind of monopoly of the trade with the countries

428
00:39:44.500 --> 00:40:14.500
from the Nazi point of view, this practice meant a skillful use of the domestic economic antagonisms within these countries for the achievement of their own political ends to the governments of the Balkan states, these barter agreements offered an opportunity of initiating a policy favoring the farming class at the expense of the non-agricultural class.

429
00:40:14.500 --> 00:40:16.180
Classes.

430
00:40:16.180 --> 00:40:21.540
What the industrial countries of Western and Central Europe achieved by tariffs and other

431
00:40:21.540 --> 00:40:27.020
measures discriminating against the products of foreign agriculture, and what the United

432
00:40:27.020 --> 00:40:33.620
States achieved by some of the agricultural measures of the New Deal, was in Romania,

433
00:40:33.620 --> 00:40:40.900
Hungary, Bulgaria and Yugoslavia achieved by the Barter Treaties with Germany.

434
00:40:40.900 --> 00:40:46.660
Faced with the problem of this German economic offensive in the Balkans, Great Britain was

435
00:40:46.660 --> 00:40:47.720
helpless.

436
00:40:47.720 --> 00:40:53.700
It had to withdraw from markets where it could buy only at prices higher than those in other

437
00:40:53.700 --> 00:40:54.700
countries.

438
00:40:54.700 --> 00:40:59.600
Consequently, the governments of the Balkan countries concerned declared that there were

439
00:40:59.600 --> 00:41:06.060
no pounds available for the payment of imports from Great Britain and refused to grant import

440
00:41:06.060 --> 00:41:07.060
licenses.

441
00:41:07.060 --> 00:41:13.060
Commerce between Great Britain and these countries was severely restricted.

442
00:41:13.060 --> 00:41:20.060
The same was no less true with regard to all other countries of Western Europe and of America.

443
00:41:20.060 --> 00:41:25.060
Such was the true nature of these much talked about clearing agreements,

444
00:41:25.060 --> 00:41:32.060
which were hailed by many authors as the dawn of a new age of monetary management.