IMPOTENT DEMOCRACY

Chapter One (From: ACCOUNT SETTLED, DR. HJALMAR SCHACHT, 1949)

IMPOTENT DEMOCRACY

   IT was in 1923 that I gave up my position as principal of the Darmstaedter und Nationalbank to take public office as Reich’s Currency Controller. Colleagues reminded me that twelve years before I had expressed the wish to put my abilities at the service of the community. But I had stressed that I should not wish to do so before I was financially independent, for I never wanted to give up my freedom of thought and action. I did not want to be a dependent official but a creative collaborator.

   Financial independence is a fundamental requisite for any prominent statesman. The power to deprive a man of his livelihood, or even only to put obstacles in the way of his career or source of income, was one of the most common forms of pressure applied by Hitler. Latent resistance to the Hitler regime lasted a long time amongst the officials of the old Civil Service of the Reich, but it was broken in the end by such means. It ceased almost altogether when judges and higher officials lost their traditional immunity from dismissal. A statesman whose livelihood is dependent on his salary inevitably finds himself involved in an internal conflict when he observes that his own material interests, and therefore those of his family, are threatened by the loss of his official position as soon as his opinions and convictions diverge from the official view. I was unwilling ever to expose myself to such an eventuality. My freedom of thought and conscience were never to be for hire. It was a few years after the first world war, when Germany was at the peak of the inflation period, that the opportunity first arose for me to enter the service of the State. By the autumn of 1923 the unrestricted depreciation of the currency had reached such a pitch that it threatened to break up the whole structure of Germany’s national life. Wage-earners’ wives were in despair. ‘Whenever they went out to buy food they were involved in a hopeless struggle against the depreciation of the mark. The wages of their menfolk ran through their fingers like water even when, as was finally the case, they were paid daily. In this extraordinarily difficult situation the authorities called upon me to put a stop to the depreciation of the mark and stabilise the currency. I did not turn a deaf ear to this appeal. I gave up a profitable career and a safe position, but my work was successful. I re-established Germany’s currency. The German worker once again received a wage with a stable purchasing power. The threat to social stability was averted. For a while my name was in everyone’s mouth, and the Democratic politicians thoroughly exploited my success to bolster up their own policy. However, in the long run no one who has anything to do with money professionally can hope to remain popular.

   You will find names like Wrangel and Roon in any German history book, but you will usually look in vain for names like Georg von Siemens or David Hansemann [Leading German bankers and financiers of the middle nineties—Trans.] . And yet the work of von Siemens and Hansemann was no less important than that of Wrangel and Roon. Oddly enough, for the average citizen there is something very mysterious and incomprehensible about finance. The only thing about it which is quite clear to everyone is its importance. The obvious essential is that money should retain its purchasing power. Above all, it must allow people the chance to save, to put aside wealth for future use. It must therefore maintain its value in relation to all other commodities. The greater the number of people who, in the course of historical development, are excluded from the possession of landed property, the more important it is that the value of money should remain stable, because only then can they store up the product of their labours and preserve the property they have acquired. Money, in short, must retain its value; it must be sterling. That money is sometimes cheap and sometimes dear; that it is worth more in our youth than in later years; that the relation between the value of money and the value of commodities changes constantly—these are problems which are difficult for the average man to understand, and he cannot protect himself without help against his ignorance. During the terrible period of inflation after the first world war the Reichsbank was overwhelmed with thousands of suggestions, plans and schemes for stabilising the currency. Engineers in particular were much to the fore. For some reason or other the arithmetical nature of finance seems to inspire the mathematically-minded, and their efforts always tend in the one direction, towards the creation of an automatically functioning solution operating according to fixed mathematical rules. But the currency problem is not a problem which can be solved according to fixed rules. If it were, then perhaps a capable professor of mathematics would be the best financier after all.

   Monetary policy is not an exact science but an art. As such it is a sphere which will always remain mysterious to the man who is not capable of mastering that art, while appearing simplicity itself to the man who is. The art of monetary policy consists in keeping the relationship between the value of money and the value of the other commodities as steady as possible. Part of this art consists in constantly observing and correctly judging not only the movements of money but also the production and consumption of other commodities. Therefore it is essential that the financier should have a wide knowledge of national and international economic affairs. This is all the more necessary because economic conditions, costs of production, etc., are constantly being changed by technical inventions and new organisational measures.

   The fact that I, of all people, who have always been regarded as a representative of the individualistic economic conception, should have been called in to assist a Social- Democratic Government, was entirely due to the broad- mindedness and enlightenment of Fritz Ebert, who was at that time Reich’s President. ‘When I reminded him before my appointment that I was not a Socialist, he replied with a smile: “That’s quite beside the point. The question is: do you think you can solve the problem?” He was right: that was all that mattered. I replied in the affirmative, and I am happy to say that under Ebert’s gis the Social-Democratic Government of the day gave me a completely free hand to carry through my stabilisation policy. In later years, unfortunately, it seriously interfered with my plans.

   German Social Democracy had enjoyed its heyday in the nineties under the leadership of Bebel, Wilhelm Liebknecht and Voilmar. It had won great victories in the political struggle. I believe that, on the whole, no other working class throughout the world succeeded in achieving such a high average standard of living as did the German. The Social-Democratic leaders who followed the great men of those earlier days were not of the same high quality. Ebert was the only man amongst them who really had the calibre of a statesman. Those who occupied the leading positions around him were generally no more than capable trade-union secretaries—such personally estimable men as Otto Braun, Severing, Loebe, Hermann Mueller and others. The much-praised talent of the Germans for organisation, which was naturally shared by the Social Democratic Party, has one great disadvantage, a tendency towards excessive bureaucracy, a tendency which spells death to all initiative. The original drive and vigour of German Social Democracy was weakened by this flaw.

   But everything depends on initiative, on the ability to seize an opportunity, on vigorous action. All those currency projects which embody new ideas and suggestions for establishing automatically functioning principles are fruitless. It is not a question of the percentage of gold or bills behind the notes in circulation, or of note control, or the discount rate, but simply and solely a matter of the temperature and the pulse of economic life. In monetary policy, just as in medical therapy, correct diagnosis is the secret of successful treatment. All that is required after that is vigour and determination in carrying out the recovery plan.

   In the inflation of 1923 there were three main measures which were decisive to the stabilisation of the mark. They were the abolition of private paper currency; the diminution of the volume of legal means of payment; and the credit bar.

   As the volume of bank-notes officially issued by the Reichsbank proved unable to keep pace with the rapid rate of currency depreciation, and a shortage of notes developed everywhere, both municipal administrations and large-scale industrial undertakings began to print their own paper money, which nominally had the same value as the notes officially issued by the Reichsbank. Naturally, this unofficial paper money depreciated at the same rate as the official notes printed by the Reichsbank, and the printing of such paper money thus proved a very profitable business, since when it was issued its value was considerably higher than when it was later redeemed. This unofficial paper money was, of course, not legal tender, but if economic life was not to break down altogether then the banks, including the Reichsbank itself, had to accept it in just the same way as they accepted the official notes. Some firms ruthlessly exploited the situation by paying in the biggest possible sums of the money they had themselves printed to one branch of the Reichsbank whilst drawing out an equivalent sum at a neighbouring branch in official bank-notes, which were, of course, the only legal tender and could therefore be used abroad, or, at least, could be used abroad more readily than the unofficially printed paper money. Director Schlitter of the Deutsche Bank once gave me an illustration of the cynical callousness with which this private printing of paper money was carried on. Schlitter once went to a conference with old August Thyssen, the iron and steel magnate, who was as acquisitive as he was cunning. On the way Schlitter brought the conversation round to the question of this emergency currency and observed cautiously: “Herr Thyssen, we have so much of your paper money In hand; what’s really going to happen to it?” At first Thyssen made no reply, but then after a while when they were both about to get out of the car, he said: “That’s an interesting point, Herr Schlitter: what is going to happen to it?”

    My first measure as Reich’s Currency Controller was to issue instructions that no more of this emergency currency was to be accepted by the Reichsbank. This undermined the entire basis of the private issue of currency. Notes which the Reichsbank refused to accept were valueless. This first measure was quite sufficient to make me very unpopular both with the municipalities and with the large-scale industrial undertakings. For the latter the fact that the blow was delivered by a man whom they regarded as one of themselves, the Director of a big bank, added insult to injury. I was practically mobbed. They threatened me; they pleaded with me; they painted the probable consequences in the most violent colours. But I remained adamant. I was determined at all costs to put an end to the misery of the great masses of Germany’s working people and to guarantee them a stable wage once more.

   My second measure was directed against speculation in foreign exchange. On November 20th, 1923, the Reichsbank had let the exchange rate of the United States dollar climb to 42 billion marks with the firm intention of maintaining it at that level. However, private speculators continued to buy dollars at an even higher rate. The groups who indulged in this speculation did not believe that I would succeed in keeping the exchange rate at its official level, and so they merrily went on buying foreign exchange on a rising market, paying up to 12 billion dollars ‘per Termin’, which meant that at the end of the month the dollars had to be paid for with legal tender, that is to say, with Reichsbank notes. When settlement day came round at the end of the month the dollar purchasers needed marks from the Reichsbank to meet their commitments, but the Reichsbank refused to give them Reichsbank notes and handed out Rentenbank notes instead. This Rentenbank had been established as an auxiliary institution to assist in the stabilisation of the mark, and the notes it issued did not have the character of official bank-notes. In short, they were not normal legal tender. But naturally, the foreign groups who had sold the dollars demanded payment in money which was legal tender, and the German dollar purchasers were now unable to comply. Nothing remained for them but to sell their stores of foreign currency to the Reichsbank which now secured dollars which had been bought speculatively for as much as iz billion marks at the official rate of 42 billion marks. Speculators lost many millions on this unprofitable transaction. Naturally, my unpopularity was greatly increased, but the well-being of the great mass of the German people meant more to me than the troubles of individual speculators. The dollar rate of exchange, officially fixed by the Reichsbank at 42 billion marks, had to be maintained at all costs. I was not prepared to allow private speculation to drive it up again. It was, in fact, held.

   The third of the decisive measures adopted to put an end to inflation came into operation at the beginning of April, 1921.. Big business interests had once again used the excessive credits they had asked for and obtained to start hoarding foreign exchange. In order to make them realise once and for all that they must subordinate their operations to the monetary policy of the Reichsbank, I suddenly barred all further credit against bills. In normal times these bills were the usual means of obtaining credit from the Reichsbank. It was unprecedented that the Reichsbank should refuse to discount good commercial bills. When its credit was called on to an excessive degree, that is to say, when too many bills were presented, the Reichsbank would merely raise the discount rate, and continue to raise it, until the deduction was more than the bill holders cared to pay and they preferred to do without the credit. However, in times of currency depreciation such as we had just experienced, this discount screw necessarily failed to operate effectively. It did not matter in the least whether the presenter of a bill had to pay io or i per cent discount when within a few weeks, or even within a few days, money itself would depreciate by 50 per cent and even more. This was the reason why I did not have recourse to the usual method of raising the discount rate, but adopted instead the harsh but only really effective means of blocking all credit. The measure was immediately successful. To the extent that business interests needed money they had to surrender their hoarded sums of foreign exchange to the Reichsbank, and within the space of two months equilibrium had been restored so successfully that throughout my whole subsequent period of office the mark remained stable. Big business interests had been brought to realise not only that the Reichsbank was stronger than they were, but that it was now determined to use its strength vigorously whenever necessary.

   All in all, this struggle with the speculators over the rate of exchange lasted eight months. It was waged with vigour and determination, and private interests were ruthlessly ignored in the interests of the community as a whole. My victory did not make me popular with the private interests concerned, but it saved Germany from the toils of inflation. Even the experts did not always grasp my methods, which contradicted every classical theory, and the great mass of the people naturally failed to understand the significance of what was taking place. Even to-day I still receive letters blaming me for the currency depreciation which followed the first world war, or abusing me for not having treated the old red-stamped thousand-mark notes better than the later green-stamped ones, and so on. It was in this period that the press first dubbed me a ‘Financial Wizard’, because in money matters in particular the simple and the natural is the most difficult for people to grasp.

   As long as I remained President of the Reichsbank, whether under a democratic regime or under Hitler, Germany’s currency remained stable no matter how great her economic difficulties. It is true that I had to resign on two occasions, but each time it was in face of a crisis which had not been brought about by me, but against which I had given repeated warnings, and which finally occurred solely because my monetary and finance policy was not carried out. The first crisis was due to excessive borrowings abroad by the democratic regime, and the second to excessive Government expenditure under Hitler. The indictment at the Nuremburg proceedings charged me with having resigned my position as President of the Reichsbank under Hitler in order to evade my responsibility.

   The reproach is perfectly justified, but ought not to be a reproach. A man can be responsible only for things which are within his control. That was not the case with me either in 1930 when I resigned, or in 1939 when I resigned again under Hitler. On each of those occasions official policy worked against me and against the currency. If I had consented to tolerate that I should have deserved reproach. As all my previous warnings had been ignored, nothing remained open to me but to emphasise them by my resignation. My opposition to the policy of the government was in vain; I had to give way to higher powers.

   By the peace terms dictated at Versailles and by the subsequent so-called Dawes Plan, Germany was burdened with an obligation to pay milliards of marks annually to her former enemies. These payments were to be made not in marks but in foreign exchange. However, the only way in which Germany could obtain foreign exchange was through her export trade. Now a very considerable portion of her export revenue was paid out again to obtain the foodstuffs and raw materials she needed. In view of the difficulties placed in the way of Germany’s export trade by other countries export revenue was hardly sufficient to make the necessary purchases of foodstuffs and raw materials, and it was certainly not sufficient to pay the milliards required for reparations as well. The German democratic governments in the second half of the twenties thought they could gain time if they took up credits abroad to pay the milliards of marks required for reparations and essential imports of foodstuffs and raw materials, and therefore they had recourse to constant borrowings. Not only the individual Laender and municipalities, but also private firms were encouraged by the government to take up loans abroad. With these foreign loans, which were naturally made in foreign exchange, Germany’s democratic governments paid the milliards of marks required annually for reparations account, and also for such imports as could not be paid for from export revenues.

   In those years loans poured into Germany like a flood, and it was perhaps inevitable that they were not always used for purchasing only essential imports, and that in fact many non-essential things were imported. Now this operated against the over-riding necessity for economy which should still have been the chief principle of Germany’s economic system and, in addition, the importation of these non-essential goods unfavourably affected the interests of her own manufacturing industries. In the six years from i 924 to 1930 Germany borrowed as much from abroad as the United States had borrowed in the forty years before the first world war. If this foreign money had come into Germany in the form of long-term capital investments there would have been much less objection to the process. But in the form of credit, and particularly in the form of short-term credit, this indebtedness was a constant danger. Foreign exchange had now to be obtained not only to pay for essential imports of foodstuffs and raw materials and to pay reparations, but also to make interest and amortisation payments on these foreign loans and credits. Germany’s export industries were unable to shoulder such a burden because they could not find adequate markets abroad.

   From i 924 onwards I constantly opposed the taking of foreign credit and the acceptance of foreign loans, and I did so not only confidentially in my official relations with governmental circles, but also publicly. Of course, all the immediate beneficiaries of these loans, the industrialists, the municipal administrations, the Laender governments and the Reich’s Government itself, were against me. Democratic governments were unable to make up their minds to give up this system of borrowing, because it brought temporary relief. They could not, or would not, see that in the end it must inevitably lead to financial collapse.

   As late as May 27th, 1930, just a year before Germany broke down financially under the burden of her foreign indebtedness, Tarnow, the official spokesman of the parliamentary Social Democratic Party, declared: “Above all, the strangling of the municipalities in the matter of foreign credits was a mistake.” Later on the leader of the Centre (Catholic) Party, Bruening, adopted a more reasonable attitude. Addressing the Reichstag as Reich’s Chancellor on October i3th, 1931, he declared that in previous years there had been an inflation of credit from abroad which had turned men’s heads, thrown a smoke screen over everything, and led to a growth of public and private indebtedness which the German people must now reduce at all costs. Referring to something I had said two days before in a speech at the meeting of the so-called ‘Harzburger Front’, Bruening added: “One of the gentlemen who was in Harzburg has told us before that we have built up our economic system to a great extent on short-term borrowed money.” Unfortunately this clarity of vision was given to the Centre Party too late. Just a year before this session of the Reichstag, Bruening had himself taken up an American loan of 125 million dollars, or 500 million Reich’s marks, to be paid back in three annual instalments, although even then it was clear that this would be impossible. As on many other occasions, I once again expressed my views before the Commission of Inquiry into the monetary and credit system appointed by the Reichstag in the autumn of 1926, when I made the following remarks concerning the question of foreign credits: “The primary result of the present great volume of foreign credit is a steady increase in the annual total of interest and amortisation payments which burdens our economic system; that is to say, our balance of payments, which looks extremely favourable at the moment owing to the great influx of foreign capital, must grow steadily worse throughout the coming years, when we shall be called upon to make interest and amortisation payments abroad. Economically speaking the position is that the borrowers, whether they are individual industrialists, limited liability companies, municipalities, or even the Reich itself have contracted debts abroad without being in a position to meet the annual payments in foreign exchange from their own resources, and in fact they have done so in the hope that at the crucial moment the German economic system as a whole will provide them with the foreign exchange necessary to make these interest and amortisation payments.

   This is a hope and an expectation which must, of course, prove completely illusory, for if we are not to—day in a position to provide the requisite foreign payments from our own economic resources in the form of foreign exchange obtained from our export surplus and our foreign earnings, then it is naturally quite out of the question that we shall be able to do so in the future.”

   Laymen are not always able to understand such complexities because they think: money is money. The reparation burden imposed on Germany seriously raised the so-called transfer problem for the first time in modern history: the problem, that is to say, of turning the money of one country into the money of another. The characteristic of foreign money is that it can only be spent abroad. With an American dollar you can buy things only in the United States and nowhere else. Of course, the layman will immediately retort that he can always find someone in Germany to take his dollar, and that is true, but he does not realise that in the last resort his dollar will be accepted only by people who have something to pay for in the United States. All the banks and agents who buy dollars in Germany are only middle men acting for those who receive dollars from the United States and those who need dollars to pay for goods, or meet debts, in the United States.

   I concluded my remarks before the Commission of Inquiry with the words: “In consequence, for the past two and a half years the Reichsbank has drawn the attention of business interests to the danger of unlimited foreign credits.” In the years which followed I repeated this warning every few months, not only to the government but publicly. I pointed out again and again that a highly-developed industrial country with a powerful productive machine did not need foreign credits at all except to obtain such raw materials for its industries and such foodstuffs for its people as were not produced, or not produced in sufficient quantities, at home, and that these foreign credits must not exceed the sum of foreign exchange obtained by its export trade. Normally speaking, all highly-developed industrial countries provide money for the granting of credits abroad, and they do not take money on credit from abroad except for the limited purposes I have described. This form of foreign credit must always cancel itself out in short-term industrial export turnover.

   Unfortunately my warnings were not heeded by Germany’s business interests, her municipalities, or her government. The system of lavish borrowing was so convenient that I was roundly condemned for attempting to disturb it. And yet anyone could calculate with the greatest ease the moment when this foreign-loan system must break down. The borrowed money was used in part for reparations payments, and in part for the purchase of foreign goods. Germany’s export revenues were not large enough to meet all her foreign commitments. The financial expert could therefore see the day coming with certainty when foreign capitalists would finally realise the truth of the matter and the influx of foreign credit would cease. The German debtor, lacking sufficient commodity exports, would then begin to sell the German mark abroad in order to meet his foreign indebtedness. And that would inevitably lead to currency depreciation. The stability of the mark was once again at stake, and it was the German government which endangered it.

   The dependence of Germany’s currency on foreign countries and on the mistaken financial policy of her democratic governments made the question of foreign credits the centre of Reichsbank policy again and again and led to constant conflicts between the Reichsbank and the government. Finally, in the summer of 1929 the Reichsbank openly opposed a project for the floating of a Reich’s loan through an American banking house. A few months later there was again an open conflict on the same matter and this, taken together with my objection to a falsification of the Young Plan which the Reich’s Government had consented to, led me to tender my resignation. In left-wing political circles my resistance to this tinkering with the Young Plan was looked on with a very jaundiced eye, and my resignation from the government of the day was condemned as a betrayal of democracy. It is therefore necessary to repeat the official declaration of the Reich’s Government on the matter. On March 7th, 1930, the Reich’s Finance Minister Moldenhauer declared in the Reichstag: “All negotiations with Schacht were conducted in a thoroughly friendly spirit, and I personally have never had any serious dispute with him . . . Dr. Schacht is taking this step because he no longer feels able to take responsibility for the Young Plan. No one can deny that in doing so he is causing the government a certain embarrassment at the moment. . . I regret his resignation, but I recognise that he has chosen the path that a man in his situation had to choose.”

   Foreign credits contributed not a little to the growth of unemployment in Germany. As the money obtained by means of these loans could be used only for the purchase of foreign goods it meant that many home producers of such goods were put out of business. Germany’s purchasing power was certainly increased for the time being by these loans, but only abroad, and not at home. The short-sightedness of such a policy was almost incredible. For a long time, too, foreign countries failed to grasp the essentials of the situation. Without going any further into the matter they relied on Germany’s sense of responsibility. Even at the so-called Young Conference in Paris in the summer of 1929 the general tendency was still to make Germany ‘credit-worthy’, and this, of course, though it made a continuation of reparations payments possible for a while, in the long run still further increased her burden. And even at the second conference at The Hague at the beginning of 1930 the proposed Young Loan was coupled with a railway and postal loan for the Reich, which meant a continuation of the foreign-loan system. In the meantime, however, both bankers and the general public had become distrustful, particularly as the main condition of the Young Plan—that it should be accepted or rejected as a whole and none of its parts rejected separately—was ignored by the Conference. The Young Loan turned out to be an unqualified financial failure for the bank consortium which floated it.

   As the whole foreign-credit policy was outside my sphere of influence, and as all my attempts to persuade the government to abandon the policy of taking up foreign loans proved unsuccessful, nothing remained for me to do but to resign my position as President of the Reichsbank. I had constantly warned both Germany and foreign countries, and I was now unwilling and unable to take any responsibility for measures over which I had no influence and which undermined the basis of my own currency policy. The same conflict between government policy and Reichsbank policy arose again in 1938 under Hitler and also led to my resignation. I resigned my position as President of the Reichsbank in March, 1930, and the expected financial collapse took place in the summer of 1931.

   Even at that time I had not confined myself merely to seeking to influence my own government, but I had constantly sought to convince foreign governmental circles that it was impossible for Germany to pay reparations in foreign exchange. Now that I was free of all official restrictions I took up the struggle against the burden of reparations with redoubled zeal. In the years after my first resignation from the position of President of the Reichsbank up to the time when I again accepted the position I wrote many articles on the reparations problem and delivered numerous speeches and lectures, not only in Germany but in other countries, including Switzerland, Denmark, Sweden, Roumania, Italy, and the United States. In particular, in the autunm of 1930 I toured the United States and delivered fifty lectures in an endeavour to drive home the insolubility of the reparations problem. In consequence, in June, 1931, President Hoover succeeded in putting through a one-year moratorium for reparations payments, and this was followed in July, 1932, by the Lausanne Agreement, as a result of which reparations were practically abolished.

   Later on Hitler tried to denigrate this Lausanne Agreement, but he made false statements and gave inaccurate figures. The Lausanne Agreement between Germany and the reparations powers provided for the complete abolition of all reparations obligations with the exception of a reserved sum of three milliard marks. When one considers that Germany’s reparations obligations under the Versailles Treaty amounted to 120 milliard marks, and that even the Dawes and Young Plans provided for the payment of approximately two milliard marks annually for more than a generation, one can estimate the great progress represented by the Lausanne Agreement towards a solution of the reparations problem. Even the final sum of three milliard marks existed only on paper and there was no likelihood of its ever being translated into reality, since a condition of payment was that the international money market should be prepared to grant Germany a loan of the same amount. No one in Lausanne supposed that there would ever be any prospect of this. The agreement included the whole provision merely in order, as the Chinese say, to save the face of the reparations powers. Their representatives were unwilling to return home completely empty-handed. In any case, the fact which must be placed on record is that the reparations problem was settled before Hitler came to power. It was the first diplomatic success of a German government before Hitler, but it came too late. The writ for new Reichstag elections had already been issued and shortly after the signing of the Lausanne Agreement the General Election resulted in a decisive victory for Hitler, giving him 230 seats in the new Reichstag.

   Just as the democratic governments showed no understanding for my struggle against the acceptance of foreign loans, so they showed none for my struggle against reparations. Even during the Young Conference in the summer of 1929 the government repeatedly left me and my collaborators in the lurch. After I had signed the Young Plan the government knowingly and deliberately left me in complete ignorance of certain concessions which had been made to the former enemy powers contrary to the provisions of the Young Plan. When in New York in October, 1930, I announced for the first time that the continued payment of reparations would in all probability soon become impossible, the Reich’s Government promptly issued a public disavowal. And when in March, 1931, a journalist in Stockholm asked me what I would do if I became Reich’s Chancellor the next day and I answered that my first action would be to stop the payment of reparations, I was once again promptly and publicly rebuked by the German Government.

   I quote only these few examples. They show that the democratic governments neither understood the situation nor had the courage and determination to act. In the meantime Germany’s economic situation deteriorated rapidly. Within three months of my declaration in Stockholm, Hoover took the initiative and proclaimed a one- year reparations moratorium. Unemployment figures rose higher and higher and increasingly burdened the Reich’s budget, whilst at the same time, in consequence of the decline of production, government revenue from taxation steadily decreased. Reich’s Chancellor Bruening began to reduce government expenditure ruthlessly. Wages and salaries were cut. During the year 1932 the official unemployment figure topped the six million mark. In 1932 the average stock-exchange quotation for Reich and Laender loans sank to 63 per cent, and for municipal loans actually as low as 51 per cent. Within the short space of five years world foreign trade suffered the same fate as Germany’s foreign trade and declined to one-third of the record volume of 1929. After the financial collapse in the summer of 1931 Germany’s currency had to be artificially maintained by means of a moratorium for foreign payments.

   In reality it had ceased to function internationally at all. The fact that Germany’s democratic governments had shown themselves completely helpless in face of this development, was the cause of Hitler’s unparalleled electoral victory in July, 1932. Democratic governments had not succeeded in bringing about any economic recovery at home and they were unable to secure aid, or even encouragement, from abroad. The Hoover moratorium, which, incidentally, also came much too late, was merely the confirmation of an already existing fact. Is it therefore surprising that the German people sank deeper and deeper into despair? In the end there were six and a half million unemployed. That meant that in the industrial districts every third, and often every second family, had no income and was dependent on State support. Material standards were depressed to a very low level, and spiritual apathy set in. Men and women lost their dignity as human beings and all confidence in themselves as individuals. A political movement which promised to show the way out of such a material and spiritual impasse was sure of a tremendous following. On the other hand, a Democracy which could offer no way out, despite the fact that it had full power, was committing political suicide.

   The first indication of this became evident at the Reichstag elections in September 1930. The small parliamentary National Socialist Party in the Reichstag suddenly jumped from 12 to io8 members. It may seem astonishing that it was National Socialism and not Communism which profited chiefly by the situation but this was due to the basic sound common sense of the German people even in their direst need. It should be recalled that National Socialism first appeared on the political scene as a right- wing radical movement, and it was only many years later that the party betrayed its original programme. It was not so much that the electors unconsciously preferred the national standpoint to the international; they were primarily attracted by the support given to religion, the maintenance of property, the encouragement of private enterprise and the emphasis on personal values. Communism, on the other hand, wanted to remove religion from the sphere of government, and its general attitude towards personality, family and property ran counter to the natural feelings of the German people. When National Socialism announced: ‘We take our stand on the basis of positive Christianity’, that naturally sounded more attractive in the ears of the German people than the Communist slogan ‘Religion is a private matter’. Karl Mueller hits the nail on the head in the introduction to his church history when he writes: “From the dawn of history religion has not been merely the private affair of the individual or the family, but the affair of the whole people and the State as well. The well-being of all classes of the community depends on the right religion, and thus the whole of life in all its stages, in all its regular phases and unusual occurrences, in all its joy and happiness, its sorrows and sufferings, is imbued with and enshrined in religious customs and usages. All culture, both material and spiritual, is indissolubly connected with religion.” Hitler saw this more clearly than his Communist opponents, and he used it to his own advantage. It was only much later that his attitude in this respect was seen to be equally fraudulent, but in the meantime he profited from the deception.

   When I returned from my United States tour at the beginning of December, 1930, a friend of mine, the bank director, Herr von Stauss, invited me to come to his house to meet Goering, and I went. About four weeks later I also accepted an invitation from Goering to come to his house to meet Hitler, for I felt a very understandable desire to have a closer look at the man who had succeeded in creating such a striking political movement in so short a space of time.

   At that time Goering was living in a moderate-sized flat in the Schoneberg quarter of Berlin, furnished in solid German middle-class fashion. Frau Goering, his first wife, who provided us with a simple evening meal, made a very good impression on me. Unfortunately she suffered from serious heart trouble. Hitler arrived only after the meal was over. Apart from myself and my wife there was only one other guest present, and that was Fritz Thyssen. The talk consisted of a two-hour speech by Hitler, but it contained nothing calculated to shock us. Everything he said revolved around the two points which were closest to the heart of all Germans, namely the recovery of political equality with foreign nations, and the problem of how to provide the six and a half million unemployed with work. The first problem could be solved only by building up a German army big enough to protect us from violent political invasions such as the occupation of the Ruhr, and to ward off new threats. For the moment a beginning could be made with the solution of the second problem only by government intervention, that is to say, by building roads, erecting houses, reclaiming barren land and so on, as well as by the work involved in re-armament. It was a programme such as any political party in Germany might have adopted. Even Social Democracy had always been in favour of a defensive force. At the Nuremberg Trials the former Reich’s Minister of the Interior, Carl Severing, had to admit that the disarmament clauses of the Versailles Treaty had first been violated as early on as 1933, and that with the approval of the Social Democratic Government of the day.

   Hitler’s whole speech showed that there was no question of any particularly new ideas or proposals, but merely of the will and the determination to act. His remarks contained nothing fundamentally new or revolutionary, but they did indicate the will to take action. Outwardly both Hitler and Goering were simple and restrained. There was nothing at all to indicate that one day Goering’s ambition would run to entertaining scores of guests with the finest and choicest foods served up on golden dishes instead of giving them pea-soup on ordinary plates.

   Nothing that I heard at this meeting remotely tempted me to join Hitler’s party. Apart from the vigour of its propaganda there was nothing new in it, and that did not constitute a programme. Certainly, the effect of this propagandistic vigour on the great mass of the electorate was not to be under-estimated. An examination of Hitler’s party programme showed that most of its demands could readily be accepted by any party. But cannot as much be said of most political programmes? All of them say they want the best for the greatest possible number. There was even a certain spiritual poverty visible in the National Socialist programme. For instance, economic problems were treated very sketchily. ‘Public interest goes before private interest’, and ‘The breaking of interest slavery’, two simple slogans, almost exhausted the economic part of the programme. Neither was of any real significance but each had a tremendous emotional appeal. Anyone could attach what meaning he liked to them. Their attitude to the Jewish question was undoubtedly extravagant, but on the other hand the student of the party programme was soothed by the assurance that Jews were to be granted the same legal rights and guarantees as foreigners, and were to be allowed to go into business, practise as doctors, work as teachers, manage landed estate and so on. There was nothing in the programme, or in any other manifestos of the Party, to indicate that later on the Jews would be denied all such rights. On the contrary, such a violation of legal principles seemed to be in flagrant contradiction to the party programme. There was also no indication whatever in the programme of any extension of German rule to non-German territory. All that was mentioned was the question of Germany’s colonies.

   Hitler’s book Mein Kampf was in a different category from the party programme. It was not an official party document but a militant propaganda piece. It was only after Hitler’s accession to power that the book enjoyed such enormous sales, thanks largely to official encouragement. Prior to that, its circulation had not been very great. For popular mass propaganda the style of the book is much too ponderous, quite apart from the fact that one can only regard it as an assault on the German language. Hardly ten per cent of those who owned a copy of this book can even have read it, much less have understood it. However, the title of the book, its size and the comprehensive nature of its table of contents conveyed the impression to the masses that here was a keen brain confronting and analysing major social and political problems and presenting well-founded conclusions. The ignorant and the uneducated were not in a position to recognize the semi-literacy of it all.

   What remained with me as a permanent impression from the evening spent with Hitler, was some conception of the temperament of the man, and this enabled me to understand the growth of the National Socialist movement better than I could have done merely from the existing economic and political circumstances. This Hitler had an infectious élan and a vigorous determination which, if once it could be exercised from the seats of the mighty, would not waste much time with theoretical considerations, but would get down to practical action at once. Unless the democratic governments themselves took vigorous action, then Hitler’s strength as an agitator was bound to tell.

   The only action I took as a result of my meeting with Hitler was to go to Reich’s Chancellor Bruening and give it as my opinion that as the National Socialists were already the second strongest party in the Reichstag, he should take them into the government and introduce them to the practical tasks and responsibilities of governing. From what Hitler had said at our meeting I had no doubt that at that time, the beginning of 1931, he would have been prepared to enter the government. But it was impossible to persuade Bruening to take action. It was a full year before he began to see reason, and then it was too late. By that time Hitler’s following had grown so tremendously that he was no longer willing to play second fiddle. In Nuremberg the former Reich’s Finance Minister von Krosigk gave evidence to the effect that in the spring of 1932 Bruening had observed that it was time the National Socialists were introduced to the responsibilities of government; they could not be left in the opposition for ever. My suggestion along the same lines in March 1931 was turned down by Bruening. He was always too late.

   Thus nothing remained for me to do but wait. I did not enter into any closer relations with Hitler or Goering. I remained aloof from the party, though from time to time I made the acquaintance of this or that party member. I never had a very high regard for party politics. Even as a young man, at the age of twenty-six and later, I repeatedly refused safe Reichstag seats, and when I helped to found the Democratic Party in 1919, I still refused a seat in parliament.

   The economic situation of Germany had not been improved by the after effects of the financial collapse in the summer of 1931. Again and again, hopes of diplomatic success had to be postponed. Certain conservative circles exploited this situation to bring the Reich’s Chancellor into discredit with the Reich’s President, and at the end of May 1932, Bruening was forced to resign. During the financial crisis he had once again approached me for advice. It was the collapse of the policy of foreign borrowing, that I had foreseen and prophesied, which brought about the financial crisis. In the autumn of 1930 Bruening once again succeeded in obtaining a dollar loan of 125 million dollars, or 500 million marks, from the United States, and with this sum he hoped to be able to counter the effects of the great increase in the National Sodalist poll. I was in the United States at the time and I heard there of the successful conclusion of the negotiations for the loan, of which I had been told nothing while I was in Germany. I found myself in the embarrassing situation which confronts every man who opposes the policy of his own government and goes abroad: should I publicly declare my opposition to the action of my government or not? Where was the dividing line between a true concern for the well-being of my country and a form of high treason? It was a problem which later frequently troubled my allies in the resistance to Hitler. The leading spirit in the loan consortium, who was a personal friend of mine, naturally asked me whether I thought the loan was a wise and sound piece of business. All I could answer was: “As far as its soundness is concerned, I believe that one day you will see your money again, but perhaps the maturity dates will have to be altered. As for the wisdom of the matter, all political loans strike me as questionable.”

   That was the last foreign loan Germany received. Six months later the Oesterreichische Kreditanstalt in Vienna collapsed, and foreign creditors then realised that their German investments were in danger. Long-term loans could not, of course, be cancelled, but over and above these loans there were a great number of current short- term credits. Wherever possible notice was now given to end these credits, and when they fell due they were not renewed. German debtors thereupon approached the Reichsbank with big demands for foreign exchange in order to meet their obligations. They had plenty of German money at their disposal, so they were by no means bankrupt, but the Reichsbank now had to sacrifice its gold and foreign exchange. When I resigned my position as President of the Reichsbank in the spring of 1930 I left behind no less than three milliard marks in gold and foreign exchange. That was considerably more than the Reichsbank had ever held even before the first world war. This fund was now tapped for their benefit and it began to melt away like snow in the sun. The Governors of the Reichsbank, with Luther at their head, believed that the best way to stop a run on the Treasury was to pay out promptly, but they overlooked the fact that what might well be true of inland payments was not true of foreign payments. At home the bank-note presses could pile up an inexhaustible reserve to meet whatever payments might become necessary, but where foreign demands were concerned the Reichsbank had only a limited reserve of foreign exchange at its disposal, and, in addition, its size was publicly recorded every week in the official statement of the Reichsbank. In this way foreign creditors could readily follow the weekly diminution of Germany’s foreign-exchange resources and calculate for themselves just how long it would be before they were exhausted. The result was a real run because all Germany’s creditors were anxious to get their money back as quickly as possible before the reserves were exhausted. No one wanted to be too late and have to go away empty handed. Everyone raced like mad to get out of the trap before its jaws closed. A statement of the Reich’s Statistical Office shows the magnitude of the demands made by foreign creditors which the Reichsbank had to meet. For the end of September 1930, the statement gives a total short-term credit figure owed by Germany to foreign countries of between io8 and ii 8 milliard marks, of which 83 milliard marks were due from banks alone. Gold and foreign-exchange reserves totalling three milliard marks in the hands of the Reichsbank did not mean much compared with such an enormous volume of short-term indebtedness at a time of tottering confidence.

   It would have been wise and just to do voluntarily and in good time what could easily be foreseen as inevitable, namely to stop all repayments. It would have been wise because to deprive the Reichsbank of all its gold and foreign exchange was a great threat to the currency, and it would have been just because as things stood creditors whose demands happened to mature earlier were unfairly favoured at the expense of those whose demands matured later. The devil, as the proverb says, takes the hindmost. At a conference which took place on June 3rd, 1931, at the Weisser Hirsch in Dresden I publicly suggested that this sort of thing should be prevented, but the Reichsbank ignored my advice.

   The Darmstaedter und Nationalbank, the so-called Danatbank, was more heavily involved in this business than any other German bank, and as it had invested the proceeds in German assets which were not readily convertible, it not only lacked foreign exchange, but was unable even to raise sufficient German money to buy the foreign exchange it needed to meet its foreign liabilities. In the middle of July, 1931, it suspended payments. It was in this situation that I was summoned by Bruening. I took part in a stormy session under Bruening’s chairmanship at which the representatives of the various Ministries engaged in confused and hopeless debates. In vain I strove to persuade them to accept my view that the Danatbank should be left to go into liquidation and that its big creditors should recoup themselves as far as they were able from its assets at the risk of receiving less than twenty shillings in the pound, whilst small depositors should have their claims met in full up to a maximum of approximately xo,ooo marks each either by a bank consortium or by the State.

   Whenever such cases arose, I have always maintained that a large-scale capitalist, and, in fact, any large-scale creditor, ought to know for himself how to invest his money, and where to invest it, and that he should therefore be left to take the consequences. Small creditors, on the other hand, are often ignorant and therefore their interests require special protection. Such cases should be judged less from a legal than from a social standpoint. I took the same attitude in 1924, after the inflation, when the question of revalorizing mortgage deeds and debentures was under discussion. I was opposed to a formalistic revalorization according to abstract principles, and in favour of giving priority to the claims of socially weaker elements. My social ideas were rejected then just as they were rejected once again in the case of the Danatbank, whose troubles were largely of its own making. At the expense of the community, big creditors received the same proportion as small creditors and a new leaden weight was added to the crushing burden Germany already had to carry.

   This new experience naturally did not increase my willingness to co-operate in the carrying out of such a policy and I therefore refused Bruening’s appeal to me to accept the Herculean task of cleaning up this Augean stable. I refused to change my mind even when Reich’s President Hindenburg sent Meissner [ ‘Staatssekretar’, Meissner’s official German title, is not the equivalent of our ‘Secretary of State’; it signifies rather the Head of a Department .—Trans.], the Chief of his Presidial Chancellory, to try and persuade me. I pointed out that the Reichsbank was the appropriate body for carrying out such a task and that it would be wrong to create two overlapping authorities. My real reason was that I had no desire to carry out decisions which had been adopted against my advice.