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CONFIDENTIAL
May 18,
First Draft
RBCOMlffiNDED POLICIES FOR THE
ALLIED MILITARY GOVERNMENT IN GERMANY
CONCERNING
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MONEY, BANKING AHD INSURANCE
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3.
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THE PUBLIC DEBT
PUBLIC REVENUE AND TAXATION
PUBLIC EXPENDITURES
Gottfried Haberler and Howard S. Ellis
Division of Research and Statistics,
Board of Governors of the
Federal Reserve System
The following members of the Division collaborated in the
formulation of recommendations: Burke Knapp, Hans J. Dernburg,
Paul Hermberg; and Bruno Foaf Alexander Gerschenkron, and
Randall Hinshaw. With respect to insurance, FJi.Klopstock
of the Foreign Research Division, Federal Reserve Bank of
New York, also participated*
Recommendations
concerning 6ferta'in» f inaftcia'l
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confronting the Allied Military Government
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of'Germany
Introduction
The following four problems are .discussed: What should the
A.M.Gt-of Germany-dp with respect to
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Money, banking, insurance
The Public Debt
Public revenue and taxation
Public expenditures and budget control?
The recommendations refer to A»M*G* only,"that is tp> the short-run, a
period of, say, six months to a year*
It is assumed that there will be an agreement- between the
occupying powers on the fundamental principles of policy., even if the
military occupation is regionally divided between the Allies. .The
following proposals refer therefore to Germany as a whola* If different
policies were adopted by the occupying powers for the different areas
of occupation or if Germany was conquered piecemeal like Italy, the
following recommendations would have to- be modified;.
The four questions are closely interrelated especially the first
two and the second two* All of them are intimately connected with others
with which we are not concerned heref for example, the chances of maintaining strict price and wage control and rationing and the determination
of the external value of the Mark (Dollar-Mark exchange ratio). About
some of these related issues we shall have to make certain assumptions,
in order to have a basis on which to proceed*
First question: Money, bankingf insurance
Objectives, — The objective Ho-f all measures of monetary and credit control
will be the maintenance of an orderly monetary system*as a prerequisite
of a tolerably smooth functioning of the German economy* This implies
the avoidance of a runaway inflation* It will be hardly -possible to avoid
price inflation altogether, but hyper-inflation as in 1921-23 must be
avoided*. And it should be clearly realized that today inflation would
reach the stage of hyper-inflation much more quickly than after the last
war*
Importajioe of direct controls for checking inflation — In order to check
inflation it will be absolutely necessary to;maintain as far as p'ossible
price control, rationing and allocation in the sphere of consumption and
production* But it is very doubtful whether it will be possible to
- 2 enforce direct controls to the 'TOc"8$sarjr extent • The German administration
will be purged, police pow^r^curtailed/ regimentation loosened and the
present discipline*!^ likely tTrtti'Stnte'gr'a'teV" We "should fool ourselves,
if we did not anticipate suoh developments• The defeat will be a
terrific shock to the-who 16 pedple;- I f W r l d *be a mira'cle if war controls
could be continued with the present efficiency and gradually relaxed,
The victorious countries will bevlU6ky*if they can achieve a smooth and
orderly transition for themselves• In a defeated, disorganized, dispirited
country this is too much to expectf
If the direct controls break d,own it will be necessary to take
very drastic monetary and financial measures to check inflation or to
keep it at least in reasonable bounds* But even if direct controls* aVe
being maintained, drastic monetary measures.will be required in order to
supplement the direct control, to ease the pressure on them, counteract
an anticipated decline in their efficiency and to pave the way for
an eventual abolition .of the direct controls•
Strict Control over the Reichsbank and the Credit System — The most
important prerequisite for any monetary 'policy is a firm control over the
center and head of the German monetary and credit system -- t'he Reichsbank,
The German mpney and banking system is highly centralized and the measures
proposed below will make the bank's and' other financial .institutions,
more dependent on the Reichsbank for liquid funds than they are .now^
Therefore/ if tHe Reichsbank is under strict control, the whole banking
and credit structure and to a large extent Government finance can be
controlled^
Two Sources of Inflation — Two kinds of inflation can be distinguished —
.pent-up^ inflation and current inflation• Inflation threatens (a) from
'the loosening of the overhanging flood of liquid funds accumulated during
the war and (b) from a current deficit of Government finance, excessive
current bank credit extension to business and inv general a current excess
of money demand over the supply of good,s *•- a current inflationary gap.
The' current inflationary gap will be very serious in View of ths fact that
*the available stocks of goods will be at an extremely low level and that
current production, if it *can be' quickly' started, will be heavily concentrated on physical reconstruction creating^ income without a counterpart
in the form of consumable goods• .The^fi-'ituatton-WJll be- aggravated by
any measures taken to export from Germany for relief and reparation
purposes and relieved by imports into' Germany, for example* of ..the requirements of the occupation forces1,
A # M # Gv will have to deal* with both sources of inflation.
Accumulated liquid' funds (cash, deposits, and other near-money assets) must
be immobiliz-ed'-and current expenditures must be adjusted as nearly as
possible to the flow of available goods*
How to Deal with Pent-Up Inflation — In Germany as in the United States
the inbrietafy circulation has been almost quadrupled since the outbreak
bf *the war and will go still higher until- surrender. (For details see
Appendix) (The fltffed of money hate "been* damnfed^jup by direct
In technical' parlance$ the * Velocity off money'has been artifically reduced •
People are forced- to hold more money or inoney substitutes'by the fact
that there are no goods t'o spend on, and that rationing and price control
prevent them from bidding up-;prices* If this" dam, the direct controls,
becomes leaky and ^begins' to clrumble, the dammed-up flood has to be
removed if a general inundation, i.«e# a ^runaway inflation is to be prevented*
Various measures could be- takeh to ellminate^thjLs danger.'
In selecting measures of different types and severity, two principles
should be kept in mind: The measures should be- rather too drastic than
too mild, because it will- make things much easier if the initial measures
can be relaxefd than1 if they have to be tightened. The measures sKould be
as simple as possible; administrative feasibility must be an important
consideration* It is true that any simple method must involve a; certain
degree of injustice, but an attempt to apply high'standard's of social justice
to the problems of controlling the supply of money and deposits* from
***e v e r y beginning might involve delay in organizing the controls whifh
wbuld let inflation get out of tetnd. JLater^refinements will serve both
to achieve greater justice and more? effective bontrol o'f inflation at one
and* the 'same time*
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Alternative' recotnmendations -- In the following we recoitoend'thiree'
alternative schemes• Scheme A is crude and simple. Scheme C is more
complicated, but if administratively f^asiblb' more effective. Scheme B
is a compromise between A and C.
Provisions Common to Sche'me A,« B and C
All three schemes are designed first and foremost to prevent a
runaway inflation in Gefrnany after surrender* and secondly, while maintaining precautions against long-run inflationary tendencies, to liberate
sufficient purchasing" power, to carry-on trade and production without
restraint, from the monetary side', upon a normal reviva,!,
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Bank holidays — Probably all banks will havfe closed their doors
voluntarily, but if not it will be necessary1to proclaim bank holidays
to avdid runs and to permit the organization of personnel, the:publication
of decrees concerning currency and deposits, and the preparation' of
forms• Once these administrative preparations are complete, the banks
should be reopened as soon as possible* in order to •interfere as little
as possible with ordinary economic life. When they reopen, the availability of deposits should be governed immediately by the rules- selected
from alternatives' described below, If the banks reopen before the exchange
of currency, which we treat presently, has been announced encashments
should be made in the old money or at least not in the new money to be
issued in the course of the exchange; if they are opened after the exchange
of money has been started or announced, new money should be usedt For
reasons which'will presently appear* it is necessary, on any of the
alternative- schemes for treating bank deposits, that the banks be reopened
by the final date for converting currency to new issues *
Mora-goriufo on private 'debt — A complete mbratprium on all debts, including
even rent due and* the other sjnall obligations is necessary during, the
bank holidays • When the banks are reopened.,, the moratorium shou,ld be
relaxed to a degree compatible* with whatever scheme is adopted for limited
availability of deposits. Provision-will need to be made for firms,
awaiting payment on cancelled government contracts, settlement of
uncollect&ble foreign claims, etc.
Exchange of currency -- In order to control the expenditure of cash
{currency), large amounts of which .will repose in the hands of businesses
and the^ public generally, it is necessary drastically to reduce its
volume and velocity of circulation. The only way to effectuate this with
certainty is to provide*a forced conversion to a new issue, since the
presentation of the old issues for exchange into new offers the occasion
for forcibly withholding a part of the money and for putting hoarded
money under control, according to one or another of the schemes presented
be^ow.
It is of the utmost importance to carry thr.dttgtrt;he exchange
within a short time after occupation, preferably within a week or a *
fortnight at most, since, though deposits may be adequately controlled
by the rules for transfer and encashment, the cash in the hands of the
German public will be sufficient to drive a l&rge price inflation.
Stamping of notes does not appear-to be technically practicable
because of the ease of falsification an^ because of the sheer magnitude
of the physical operation (which has to be carried through manually) in
a very limited..time• ... Our. recommendations as-to the conversion therefore
contemplate only newly printed notes•
These notes should be printed in advance in the UnitecL States
and Englarid, for issue."by the Allied-controlled Reichsbank, in sufficient
volume to meet the requirements of the firs£ month or so, including,
the initial exchange and subsequently, permitted encashments of deposits
according to one or other of the schemes presented below. It should
be determined now whether the German note presses ca-n be used after
occupation, and whether the' prospective facilities now and later-will
cover the need. None of the three schemes would entail a reissue of more
than, say, one-fourth the present German note circulation, and upon the
basis,of schemes B and C below the immediate n9ed for money might be
considerably less. If physical facilities are limited, it may be necessary
to omit the smallest denominations, say under 20 Marks, from the exchange
operation, A table in the Appendix indicates the total magnitudes
involved in various denominations* The issue of large denominations,
which facilitate evasion of exchange control, taxation, and.control of
inflation, should be avoided*
After the first conversion deadline, the authorities, should
announce a short 'grace period (perhaps two months) during which money not
yet converted would be accepted upon presentation of convincing evidence
cf unavoidable obstacles and of the legitimacy of the claim to convert
(e*g# that the ncJtes have not been ;smuggle_d .in from, abroad, etc,*) .
In principle, all banks and. the jpostal checking and savings
systems would act as agents for the exchange, crediting amounts to be
withheId-under the various schemesjto accounts held With .them by the
persons submitting currency for exchange. Persons without bank accounts
of any description might be Required to accept deposit credits with the
postal systems for any amount of currency to be withheld from them*
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The treatment of time and savings deposits (The German terms are:
"Ktindigungsgelder", "feste Gelder11 and "Spareinlagen")
General freeze — Inasmuch as these deposits aggregate to
something like 116 billion Marks out of a .total .of. 160
billion Marks, it is proposed that they should be immobilized, at least for other than absolutely indispensable
current needs. Since time and savings deposits in general
represent the ""hoards" of individuals and businesses,
rather than current operating funds, they appear to be
eligible for suoh immobilizing* We, therefore, recommend
an immediate freezing of these accounts Kith, the following
provisions for limited availability*
Exception for business 'needs --.If .the depositor can prove
that a time or -saving deposit originated from the. liqui*
dation of his business during the war and that it is
indispensable for .'tlfe resumption or psrjnitted, expansion
of the business, a transfer can be permitted. Under,Scheme
A and B for the treatment of demand deposits one-fourth
(or whatever the portion is) of the sum in question shall
be transferred to "free" demand deposit, while threefourths shall be indefinitely blocked on special account*.
Under Scheme C the whole sum-will be transferred to an'"old"
business account subject to the restrictions applicable
to these accounts* (See below)
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Consumer allowances -- Time and saving deposits not
recla&sified as business deposits are consumer deposits
subject to withdrawal restrictions. Initially, withdrawals
from such accounts might be governed by an over-all limit
of say 150 or 200 marks per month. An attempt may be made
later to distinguish between the needs of consumers according
to their family and employment status. Also, in order to
prevent simultaneous withdrawals from several different
accounts held by the sar-e person (including demand deposits
if Schemes <B or C for the treatment of such deposits were
adopted) a more refined procedure would require that data
concerning withdrawals be entered in the person's Arbeitsbuch
or such other document as may be determined.
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Provisions with Respect to Dem&nd Deposits and Bank Notes
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Scheme' A:'
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General' character ' — This is the simplest scheme administratively,
but the crudest in its economic effects, the least equitable, and the
least flexible instrument (of the three plans) against inflation. In.
essence it "relies upon an immediate and once-&nd-forvall freeze of a
certain part of demand deposits and currency, the rest to be free, without administrative supervisiori of use. The fraction of deposits and
cash to be frozen would need to be high (possibly* 3/U)..to promise'
effectiveness against inflation.
Specific proposals of Scheme A -(a) Currency: Three-fourths (say) frozen; one^fourth
freely available in cash or as" a demand deposit with a bank-or the postal
checking system; freezing into blocked accounts carried through at the
time of currency conversion*
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(b) "Old" demand deposits ("old" * antedating the bank
holidays): three-fourths frozen; one-fourth freely available•
(c) Reichsbank Giro deposits, postal giro.deposits, savings
bank giPo deposits: 'Three-fourths frogen, one-fourth freely available.
(d) New deposits (new deposits « made.aft^r bank reopening,
whether by deposit of cash or by banking transfer): f ree, '• jeycept for
the pre-existing ("peace-time") rules ordinarily governing withdrawals
from time and savings deposits/]
Appraisal of Scheme — This scheme' involves a minimum of administration
because, after the initial freeze, only in the-base of savings deposits
does it require the banks to exercise any oversight over withdrawals
from deposits. There may be a certain psychological advantage in the
definiteness of the freezef The disadvantages are severe. In the first
place, once put into effect it allows no subsequent control over the free
deposits. If the fraction to be frozerfwere set too low, 'inflation could
develop from the- combination of free dash (which remains of necessity free
in any scheme) and the free deposits. There would be no recourse .except
a repetition of the currency-reissue operation plus additional freezing.
In the second place, since the degree of liquidity of different businesses
is not the same, a- uniform freeze will not remove all excess cash. On
the other hand, if the percentage of funds frozen is high (^0 or 75 per
cent) many business firms will become dependent on new bank loans for their
needs of cash (working capital). This has, however, the great advantage
that the control of the banks and in the last resort of the Reichsbank
over the flow of investment funds by the ordinary means of credit policy
is restored.
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An alternative policy "would be to supply working capital to
needy firms not by new loans but by releasing funds from"frozen deposits.
This procedure* however, appears to be inferior for two reasons: First,
once exceptions from the freeze are made, it will be hard to resist the
pressure for more and more exceptions * Secondly,, if. funds are -released
by unfreezing deposits/ the monetary authorities lpse control over
those amounts; if funds are put into circulation, by loans, control is
maintained, because the volume of loans can be contracted if necessary•
Scheme B:
General character — This scheme represents a compromise between Schemes
A and C and hence need not be traqed out in great detail* As under
Scheme A, a part of cash and demand and giro deposits would be definitely
frozen, (Possibly the. percentage need not be as large as under plan A,
say 50 per cent instead of 75 Ver cent)• But unlike Scheme A, the
"free" part, of demand-and giro deposits would not be entirely free but
would be subject to certain withdrawal restrictions similar to Scheme C,
These restrictions should, however, be regarded as temporary, forestalling
immediate psychological reactions which may result, .in;sudden withdrawals.
If these restrictions were permanent, Scheme B would not be simpler
thaji Scheme C and would have little to recommend it.
Scheme C:
General character — This scheme dispenses with the absolute freeze of a
portion of cash, demand, and giro deposits, afid instead relies upon rules
governing withdrawals from deposits,.
It involves some discretionary judgment by the individual banks
as to the legitimacy of proposed withdrawals in particular cases, and
it requires therefore close supervision of the German banking system by
the Allied government.. Scheme C is certainly more effective against
inflation than Scheme A, provided it is well administered and enforced;
it is more equitable; and it is more carefully adjusted to the requirements
of the particular business.
Special Provisions —
1, Currency: At the time of the currency exchange, all
individuals shall receive new currency up to the amount
of one monthfs consumer withdrawals from bank accounts
(150 or 200 Marks), the balance being credited to
"old" accounts. Businesses (including individual
entrepreneurs and professional persons) should accept
the entire' proceeds of the currency submitted for
exchange on "old" accounts from v/hich they may then make
withdrawals as outlined below* However, to avoid the
necessity of opening new accounts for businesses which
have no banking connection and only small cash holdings,
immediate exchange into the new currency might be
permitted fo'r such business.es up to the-amount of their
demonstrated needs for wage payments and till money
during the first-month following the exchaijge
2.
a)
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Old" demand, (bank'giro'and Reichsbank giro) deposits,
in all banking institutions and deposits of these
'categories Rising from new bank loans,or banking^
transfer's! (The German designation is TItaglich fallige
Gelder").
In general these deposits represent the operating funds
of business; while they should not be frozen and thus
• paralyze economic life,- their outpaymerrfc requires-',
precautions against inflationary effects.
b)
O'utpayments for 'businesses are authorized as follows:
1. Encashment: for the demonstrated requirements of payroll for ordinary labor (wage bill) and till money
requirements (not covered .in the currency exchange^.
2, Transfer by cheque or giro: for demonstrated ,
requirements for the following purposes-, viz:
•salaries above a certain minimum, raw materials and
other technical or professional costs of production,
taxes, debt -payment,. In the case of materials, the
Allied government may wish to require the bank to
receive a "priority certificate be-for^-ii; honors .
a chequei
c)
If an individual owns a demand (or similar) deposit but
cannot demonstrate ths necessity of withdrawals for
business purposes, his withdrawals shall be subject to
the rules governing consumer withdrawals from time and
savings deposits, provided however, that the owner of
such a demand (or similar) deposit is allowed the option
of transferring it to time and savings deposits at any time.
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New demand (and similar) deposits made by deposit of
cash: Free
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Bank payment of interest on deposits: payment shall be
made into the deposit upon which the interest is earned
and withdrawal shall be subject to the rules for that deposit,
5. Existing postal giro deposits:
These deposits require separate treatment because,
unlike deposits in ordinary banks, there is no contact
between depositors and officers*
a)
These deposits do not aggregate to quite 3 billion Marks,
but their velocity has been very high, sufficient indeed
to provide a turnover of 1?6 billion Marks annually.
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However,, it is not certain whether velocity already .
approaches close to a maximum set by the mere physical
operations of crediting, debiting, clearing through
the 20 old giro central offices, etc* We therefore
make two alternative recommendations(under c below)
based upon future experience with such accounts, one
easier to administer and less anti-inflationary, the
other more exacting and more effective.
b) Encashments to be governed by the same rules as obtain
for demand deposits, deposits made in- cash being free*
c
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Transfers within the postal giro system
1« Less severe alternative; free, i.e. no control.
In this case restrictions would have to be placed
upon transfers to the postal giro system from
deposits with other (more closely controlled)
institutions,
2 # More severe alternative: same requirements as
for transfers of demand deposits, i.e. business
purpose to be demonstratedf
Measures conberftifag private' debts'-~* Not enough is» known' about the volume
of outstanding pf-ivfete'.debts b'f different t-ypes to'tnake detailed recommendations. -It is* pfbbabl-fe> however, that" as in" the United States the high
degree o'f liquidity of Individuals and' ntfn-<flnanc ial businesses has resulted in a shrinkage of the outstanding debt of all descriptions such as
mortgages,* corporate bondfc,- bank debts of industry, etc. There is certainly
only a negligible volume- of consumer debts butstandiftg.
It has been recommended already that a moratorium should bo
declared'durinr the bank holiday. It may ba- n jfcessary to proclaim a
somawhat longer moratorium, at least for certain types of debt during which
the situation can bo reviewed and further measures decided upon. It should,
however, be clearly realized that debt payments on interest and capital by
individuals and non-Mnancial businesses to banks and oth-er financial
institutions (su'ch as in-surance institutions) is an anti-inflationary
factor which ought to-be encouraged. The most important type of such debt
is undoubtedly mortgages on real estate. There will b^ a big problem in
Germany with respect to mortgages on bombed houses. But the present
government is already iaced wi-th this problein and has undoubtedly taken
measures to solve'it. This situation v/ill have to be taken as point of
departure.
Prohibition of importation and exportation of German currency —
The
importation and exportation of German currency should bo forbidden from
the outset. This is necessary in order to prevent the flight of capital
particularly by guilty persons and to prevent any Germans from attempting
to escape the exchange of German currency and to take advantage of the
(presumably more advantageous) terms of exchange in portions of the present
Reich taken over by foreign countries.
German currency outside Germany and in ceded provinces -- Any currency
outside of Germany should be added to the general foreign clains to be
settled by reparations or otherwise. German currency circulating in those
portions of the present Keich which are transferred to other countries
through boundary changes should be changed into the new local currency
and will represent u claim on tho Reich by the foreign governments "which
have taken over the territory.
How to deal with current inflation -- A distinction was made above between
pent-up inflation and current inflation. The Schemes which we have iust
discussed are, in the main, designed to remove th'3 dung^r of the pent-up
inflation. The danger of a current inflation is, however, just as pressing
if not greater. The importance of direct controls has already been
emphasized. It goes without saying that a control of wages will be a
factor of strategic importance; but it falls outside the art*a of the
present memorandum. To the extent that current inflation results from
a current cash deficit of th^ Government, we daal with it under questions
three and four below. As far as tht arou covered by the present question
is concerned, what needs to be stressed ie the necessity of strict credit
control.
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Control ox' new credits --» Even if tho Government budget wore balanced by
non-inflationary methods, inflation could result from credit inflation
on private account. Because of the partial freezing of deposits and the
large holdings of Government securities by the financial institutions (for
details see question two below and Appendix B ) , business will depend on
the banks and the banks in turn will depend on the Redchsbank for liquid
funds. This is especially true if Scheme A or B was adopted* But also
under Scheme C, the question of new loans to trade and industry will soon
arise.
Not much need be said about the rules of credit control beyond
stressing its importance; for well-established principles of monetary' and
banking policy will have to be applied. Policies with respect to new
loans will have to be integrated with the general policy concerning the
conversion of German industry from war to peace production. The degree
of strictness of credit control, tho choice of methods and the institutional
setting (authority delegated to the commercial banks, closeness of supervision by tho Reichsbank undor Allied control) will largely depend upon
the extent to which direct controls4can bo maintained and on their effectiveness. These are factors which cannot yet be foreseen.
This much may be said, however. If it is tho policy of tho
Allies to rid the German economy of totalitarian control by the Governnent
an effort should be rnado to replace direct control of investment, prict3s,
etc* gradually by the traditional methods of control through monetary and
credit policies.
Second Question:
Tho Public Debt
Objectives -- Y/hat the A.M.G. should do concerning the Geru^an public debt
should be entirely subordinated to the short-run objectives formulated
abovo under Question One, A repudiation or a formal recognition of the
Hitler debt should be avoided. Whether a defeated Germany will be able
to carry an internal debt, the annual service of which requires at this
time already 8 billion, is doubtful. It depends on many factors which
cannot be foreseen now nor at tho time of surrender. But is is u question
which should bo left for th-3 future German Government to decide.
Facts about tho Public Debt — More detailed statistical data will be
found in ths Appendix, Tho basic facts are those: At tho moment of
occupation (if it com^s this year) the Reich dobt will probably amount
to at least RM 350 billion of which about Rli 150 billion will be long-term
and about RM 200 billion short-term. The problem of tho long-term debt
is mainly one of maintaining interest payments. Ihere are no large issues
maturing in the next few years and annual amortization payments aro not
large. Nearly all of the short-term debt, however, will mature during the
first six months of occupation.
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Thor sh.ortrterm debt falls into throe nearly equal parts• One-third
is held by the Reiciisbank ahd Its subsidiaries; one-third is held by
institutions which hold balances: on behalf of foreigners or by foreign
banks; one-third1 by German crodit institutions. (See Appendix, p.
)
Of the long-term debt over 8 per cent is held by public monetary
and credit institutions; almost '60 per cunt by commercial banks, savings,
banks, credit cooperatives, etc*; 17 por cent by insurance institutions;
and only a small fraction, 15 per cent at most, by the public.
What to do with the Reich, debt — The part hald by the Reichsbank and other
public institutions does not present any problem because these institutions
are agencies of the Reich government. It may be presumed that the part of
the short-term debt which is owned by or held ori behalf of foreigners will
be frozen by ths occupying authorities and dealt with together with
reparations and other foreign claims. The really pressing problem arises
in connection with the holdings of the Reich debt by German credit institutions — one-third of the short-term and the bulk of the long-term dsbt*
The debt held by the public (individual and non-financial businesses) is
comparatively small'and should not cause much trouble.
The following solution is believed to be adequate from the point
of view of the military Government: The A.M.G, shall appoint a trustee of
the Reich Debt associated with the Reichsbank who would announce that
during the interim period the amortization of th'3 long-term debt would
bs suspended and maturities would bj automatically renewed at' the original
conditions. Interest would be paid by the Reichsbank on behalf of the
Reich, but to blocked accounts and not in ceush*. M^t^rjLng..short-term
securities, both of the discount and interest-bearing tiype", would be ~cohverted into a uniform Reich treasury bill bearing interest at around two to
three per cent. The institutional holders of such billa would be allowed"
to discount them with the Reichsbank against credit jon a blocked noninterss.t-bearing account and they would be free to repurchase such bills
from tho Reichsbank by debit to these accounts.
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The crucial question is to formulate the rules which ths Reichsbank should observe in releasing funds from those blocked accounts. Such
releases must be made, since otherwise the banks and other financial institutions could not meet their obligations. It would seem to be unnecessary
and perhaps impossible to set up very specific rules. It is a question which
should be left to the supervisors of the Reichsbunk to decide. What should
be said by way of a general rule is this: The Reichsbunk will set free
such balances on giro-account to the extent to which the banks need funds
to meet the legitimate cash requirements of their depositors within the
limits of the withdrawal restrictions formulated earlier. YvTiether funds
should be released to provide for new loans "to trade and industry will be
a question of the general credit policy of the Reichsbank which was discussed above in connection with question one.
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Third Question:
Public Revenue and Taxation
Objective -- Even if accumulated liquid funds are wholly or partly
immobilized and the danger of inflation from this source ("pent-up inflation")
is removed or substantially reduced, the danger of a."current" inflation
resulting from an excess of public expenditure over taxes and non-inflationary
borrowing still exist. Every effort should be made to reduce public
deficits. Strict control over public finances, central government, State
and local,should be instituted on the revenue and expenditure side.
Maintenance of existing taxes -- On the revenue side it is recommended
that A.M.G. maintains all existing taxes, with the exception of discriminatory leview on racial and religious minorities which should be immediately
abolished. (From the financial point of Iriew the removal of the discriminatory levies is an unimportant matter.) All fees, contributions (except those
for the Nazi partyj including social insurance contributions (unemployment,
old age, sickness insurance) should be collected. Tho samo holds for postal,
telegraph, telephone fees, railroad fares, etc.
New taxes -- As after the last war, there will undoubtedly bo a sharp
decline in public revenue* Therefore it will probably be necessary to raise
taxes in order to keep inflation in check. If this becomes necessary a
rise of the turnover tax (which is now 2 per cent) is recommended and
possibly an extension of its base to all kinds cf commodity and service
transactions. If prices rise, postal, telegraph, telephone and railroad
freight and passenger rates should be promptly raised. Similarly excise
taxes and import duties (if they are not on an a# valorem basis) should be
raised in order to keep pace with rising prices.
It should be emphasized that arguments used in the United States
against sales taxes (which correspond to the German turnover tax) are not
applicable to a defeated country in the throes of an inflation. Income
taxes in Germany are high anyway and a capital levy, which one might think
of as an alternative, is much too slow and cumbersome as an anti-inflation
measure; at any rate it is net the kind of tax one would recommend to the
Mil itary Gcv^rniiient •
It goes without saying that public borrowing must be strictly
control13d. If the Reichsbank, its subsidiaries and through it the whole
German banking system is undor strict control, there should be no technical
difficulties about that.
Fourth Question:
Expenditure and Budget Control
Introduction —
No specific recommendations can bo made on this subject,
because very little is known about German Government expenditure. The last
detailed figures were publiched in 1935*
General Principle -It will be probably easier to control expenditures through controlling revenues. But an effort should be made to control at least some
types of public expenditure directly.. Such control should extend not only
- 14 -
to the Reich Government but also^to State Governments (or what is left of
them), municipalities, Governnen€' enterpris~efc"sTicli" &&' railroads, postal,
telegraphy telephone ,administr^t4-.on, -Government banks, Government-ownod or
controlled industries, etc.
Types of expenditures .specially ••watched
.Special attention should be paid to the following ,types of
expenditures:
"Expenditures for Military.and for Nazi Party purposes. These
should, of course, be stopped altogether* Police expenditures '&?&'clxf&bly ~
akin to expenditures fdr Nazi Party purposes. ,But the police problem wil^
havo to be tackled directly, rather thau through financial controls.
Expenditures for War Vetorans, demobilized soldiers and officers••
Unemployment relief.
Reconstruction of public buildings, museums, administrative
buildings, parks, etc.
Expenditures for these and similar purposes could be easily
increased tremendously without going beyond the standards which we or, the
British would sp ply at home* Yve must be clear, however, and it^ cannot be
emphasized too strongly that in defeated an$ occupied-Germany much,stricter
standards will have to be applied. Otherwise inflation will .ensue and
nothing will be left for reparations•
A question which is likely to be of: great importance is the
treatment of Reich obligations to industries for unfinished or unpaid,
war contracts. Little is known about the German methods of paying for war
material. Supposing, .however, that payments to German war industries are
outstanding, it would seem to be rather anomalous, if the A.M.G. took any
steps to effect such payments. It would seem to be natural to cancel all
such claims. If this procedure creates difficulties for industrial firms
which can be permitted to continue production or to be converted to peacetime production, other ueans of financing them will have to be found, for example through bank credit.
-15AFPENDIX A
Currency Circulation during the War
Circulation of notes and coin iri Germany has more than tripled
since the beginning of the war, us the following table shows:
Table I
Currency Circulation, 193S-I4.3
(Billions of Reichsrnarks}
Increase
in Year
1938
1939
2.5
19U1
19142
19U3
5-5
5.0
9.2
Circulation,
End of Yoar
Inde:
10.lt
iii.5
16.8
22.5
162
211+
27.5
56.5
265
551
100
159
Of the total currency in circulation at the end of 191+2, notes
comprised 93 »8 PQr cent and coin 6.2 per cent. The composition of the
note circulation at the end of 191+2 is shown in Table II. It will be
seen that the denomination accounting for the largest sum in reichsmarks
i£ the 50-Trjirk note, while the denomination which embraces the largest
number of notes is the 20*-mark note. Notes cf 20 marks and less account
for two-fifths cf the value of th'3 total note circulation and for four-fifths
of the total number of notes outstanding.
Bank and Postal Deposits since 1938
As Table III shows, bank deposits in Germany have risen
since 1938 by almost exactly the same proportion as has currency in
circulation.
Table II
COMPOSITION OF NOTE CIRCULATION IN GERI1A1IY,END OF 19lj2
Millions of Roichsnarks
•
Denomination
1 RM
2 RM a
5 RM a
10 RM
20 RK
50 RM
100 RM
1,000 RM
Total notes
Total coin
Total currency
a
Aiiiount
Outstanding
290
227
% of
Total
l.ljS
•9
Amount
Outstanding
(Cumulative)
1.1#
2.0
7U7
2.9
2,393
6,82+5
9.3
3,657
9,763
5,180
I9i+
25.639
.8
% of
Total
(Cumulative)
290
517
1,261+
26.7
38.1
20.2
Millions of Notes
10,502 .
20,265
25,i+l+5
25,639
1+.9
U+.2
1+0.9
79.0
99.2
100.0
100.C$
1,701+
27,3^+3
Rentenbank notes. All othir notes are issues by th-:; Roichsbank.
Nuiiibsr
of
Not os
i
290.0
113.5
11+9.1+
239.3
31*2.3
195.3
51.8
«<^
1,381.8
% of
Total
21.0%
8.2
10.8
17.3
21+.9
ll+.l
3.7
.0
100.0;^
Number
of Notes
(Cumulative)
290.0
i+03.5
552-9
792.2
1.131+.5
1.329.3
1,331.6
1,381.8 ,
% of
Total
(Cumulative)
21.0#
29.2
I4O.O
57.3
82.2
96.3
100.0
100.0
-17Table III
Deposits, All Banks, 1938-^3
(Billions of Reichsnarks)
B
End
of
D
Total
Deposits
(B4C)
Index
Savings
Deposits
Other
Deposits
(D4E)
1938
1*2
100
19U
21U
283
2k
53
73
96
18
90
119
19U2
191+3
a
11*9
355
E
Time
Deposits
37
1*6
53
16
21
a
Demand
Deposits
a
30
31
Estimated
Deposits of several large German banks are shown in the table on tho
following page.
In addition to deposits with banks are tho doiaand deposits with
the postal Giro System* As etc be soon in Table IV, these are snail relative
to total bank deposits.
Table IV
Postal Giro System
(Billiuns of Reichsmarks)
End
of
1938
I9I4O
191+1
Deposits
Index
Number of Accounts
(Millions)
1.3
1.3
100
11+1
182
211*
1-3
1.3
1.5
1.6
2.U
2.8
Table V
Deposits at Individual Large Banks - End of 1942
Deposits
Deutsche Bank
Dresdner Bank
Commerzbank
14.9
85.1
85
10C.0
100.0
3,325
7,936
4,240
65.2
34.8
577
229
71.6
28.4
740
2,585
100.0
12,176
100.0
806
100.0
3,325
100.0
-13
510
425
33
4.3
50.4
42.0
3.3
287
2,492
1,356
105
58.81
32.01
2.5'
10
143
76
4 .4
62 .4
33 .2
——
82
525
48
.9
20 . 3
77 .0
1 .9
1,011
100.0
4,240
100.0
2,585
100.0
60.1
39.9
100.Ol 2,535
6,2
93.8
368
9.2
1G3
3,641
90.8
2,372
Total
5,632
100.0
4,009
100.0
2,535
Demand deposits
Tlxno deposits and
fixed money
Total
3,820
1,812
67.8
32.2
2,592
1,417
64.7
35.3
1,524
1,011
5,332
100.0
4,009
120
i 1,136
I
535
21
6.6
82.7,
29.5
1.2
124
846
396
51
1,812
100'.0
1,417
Time deposits and
fixed money due:
within 7 days
up to 3 months
up to 12 months
after 12 months
Total
i
8.8|
59.71
27.91
3.5
100.0
Bank der
Cred it-Aristai¥
Deutschen Arbeit
Bankverein
W~T
W
120
686
806
878
11,298
100.0 12,176
347
5,285
Credit institutions
Others
Three Berlin
branch banks
6*4
93.6
7.2
92.8
229
100.0
1,990
2.6
100.0
22.3
77.7
I
-19Not included in tho above figuros are the deiaand deposits held
at the Reichsbank by bwnks, firms, and tho German government. Those are
shown in the table below:
Table VI
Denand Deposits at Reichsbank
(Billions of Reichsmarks)
End
of
tal
Index
1938
1939
19^4-0
1-5
100
2.0
2.6
132
168
.1
.2
.2
3.6
239
•3
5.3
3U6
.4
8.2
532
•O
19142
Public
Deposits
Private
Deposits
1.8
2.U
34
U.9
7-5
-20APPENDIX B
Course of German Public Debt, 1938-U;
The rate of increase in the German public debt since the beginning
of the war has been notably rapid• Between December $1, 1938* a n ^ December ~$
19li3* the Reich debt rose from 26.1 to 253•! billion reichsmarks -- an increase of almost tenfold. The relative increase during this period was much
greater than for either the United States or Great Britain, as the following
table shows:
Table VII
Rate of Increase in Rational Debt
End of 1938
100
100
100
National debt, Germany
National debt, United States
National debt, Great Britain
End of I9I4.3
970
U31
2i+6
In absolute terms, however, the picture is less unfavorable
to Germany* This is shown in Table VIII, in which the national debt per
capita for each of the three countries is expressed in terms of dollars•
•
Table VIII
Per Capita Debt
End of
United States
Great Britain
a
Germany b
c
1938
1939
191+0
•^303
320
U37
19^42
191+3
810
1,253
$612
661
838
1,062
1,281
1,506
262
1+60
1,085
o d
c
0118
190
334
5h3
786
1,01+5
a
At present exchange rate (fcl = $lj..O35)«
b Per capita figures for Germany are computed on the basis of the
pre-Anschluss population.
c
At official pre-war parity (RM1 - &«i|0).
& At estimated purchasing-power parity (RM1 S
The above figures provide only a very rough basis for international
comparison, because of the difficulty, under present conditions, of selecting
satisfactory rates for converting into dollar terms figures expressed in
pounds or in marks. The pre-war official dollar^mark parity was a virtually
-21-..
meaningless figure, and is wholly so now.' "On the basis of purchasing-powerparity calculations, the appropriate mark rate would appear at present to
be more like ^.29 than &«ij.O. At the official rate of ^.l+G per,mark,, the
German per capita debt at the end of 19i|-3 was greater than that of the
United States but less than that of Great Britain. At- the purchasing-powerparity rate, the per capita debt for Germany was the lowest of the three.
A better view of the burd^ri.of the public debt can be obtained by
expressing ,the debt as a percentage of national income. This procedure
makes possible significant international comparisons without the necessity
of converting figures into a common monetary unit, but the ratios thus obtained
must be interpreted with caution, since available national-income estimates
for war-time Germany leave much to be desired, and since national income
figures in time of war do not havo the same significance as in time of peace.
These considerations should be bcrnc in mind in examining Table IX.
Table IX
National Debt as a Percentage of National Income
United States
Groat Britain
160.1$
1938
1939
19U0
59-2
57-8
60.6
90.3
19U2
Germany
32.7%
51+-7
93-0
136.0
171 -k
172.1+
188.8
204.2
According to the above figures, the debt-income ratio for Germany
at the end,of 1938 was much imre favprable than fox- either of the other two
countries, whilo at the end of I9k2t Germany occupied an intermediate position
between the United States and Great Britain. The latter country was consistently in the least favorable position •
The growth and changing composition of the German public debt since
1938 are shown in Table X:
Table X
German Public Debt, 1938-1+3
Billions of Reichsmarks
End of
1958
1959
1940
1941
1942
1945
Total
Debt
26.1
i4l+.6
78.5
127.5
255.1
Total
Long
Term
21.0
25.7
ia.8
65.0
86.1+
110.8
Total
Short
Terra
5.1
18.9
56.5
64.5
93.0
li|2.5
% in
Long
Term
80. 4
57.6
55.4
49-5
46.9
45.8
% in
Short
Term
19.6
42.4
46.6
50.5
55.1
56.2
It will be seen that the fraction of the total debt in short-term
obligations has steadily increased since tho beginning of the war, rising
-22from less than one-fifth of the total at the end of 1938
the total at the end of
U
well over half
Ownership of German Public Debt
As Table XI shows, much the greater part of the German public debt is
held by institutions.
Table XI
Ownership of German Debt, End of 191*3
Billions of Reichsmarks
Total
Debt
"External" institutions
Verrechnungskasse
Reichskreditkasso
Konversionskasse
Central banks of
Bohemia-Moravia,
Netherlands
Total
Monetary institutions
Reichsbank
Rentenbank
Golddiskontbank
Postal checking, savings
Total
Other credit institutions
Commercial banks
Credit cooperatives
Savings banks
Mortgage and other
special institutions
Total
16.6
8.6
Long
% Term
.1+
5-1
2,0
12.3
8.6
•9
5.1
31.2..
1+2,0
2.0
1+.2
16.5
.8
1.7
2.01.1
8.3
56.5
3.5
6.1
22.3
9.2
23.9
9-i+
27.1
1+.0
10.9
1+9.7
9.8
U+.9
17.0
68.5
6.7
1+2.0
1.8$ - 1.0
3.1
,2.2
• 5.5
i+7-3
8.3
3.6
2.7
112.1
1.1
1.5
1.1+
UU»3
66.1
59-7
7.7
11.2
3.0
7.7
6.9
1+.5
18.9
7.5
11.2
18.9
10.1
17.0
Total debt held byinstitutions
218.7
86.1+
91+.2
85.0
Residual, including debt
held by public
Total debt
314..1+
253.1
Insurance institutions
Insurance companies
Social-insurance funds
Total
Short
Term
16.6
6.5%
3.1+ i
•9
31.2
efo
13.6
16.6
100.0?? 110.8
%
11.1%
6.0
.6
3.6
21.9
29.6
2.2
• 1-5
33.3
19.9
6.1
18.8
ll+.O
JL4..3
13.2
1.2
1+6.0
.8
32.3
121+.5
87.5
17.8
15.0
100.o£ II+2.3
1
12.5
100.07S
-23-
More than a fourth (27*1 par cent) of the German debt is held by
the savings banks. The savings banks hold somewhut less than half (L\k*9 VeT
cent) of the long-term debt and about an eighth (13*2 per cant) of the .shortterm debt.
The largest single creditor of the Reich is the Reichsbank, which
holds l6»5 per cent of the German debt. The percentage is considerably
greater if the debt held by four Reichsbank subsidiaries is added. Thus
the Verrechnungskasse, which handles clearing arrangements with other
countries, holds 6.5 per cent of the .debt, and .thq .Reichskreditkasse, a wartime agency concerned with financing German military operations in the field,
holds 3*h per cent* A third subsidiary, the Goiddiskontbank, holds 1.7 per
cent of the Reich debt, and another .ij. per cent is held by the Konversionskasse, which was established in 1933 to administer German foreign debts.
Thus well over a fourth (23.5 por cent) of tho German, debt is owned by the
Reichsbank and its subsidiaries. All of this is short-term.
Other important creditors of the Reich are the commercial banks,,
the credit cooperatives, and the insurance companies. The conuiiereial banks
hold 9*U per cent of the total debt. They rani: next to the Reichsbank in
their holdings of the short-term dsbt, accounting for ll+.O per cent of the
'total. The c-redit cooperatives hold 6.7 per cont of tha total debt, and the
'insurance companies hold 3»O per cent. Most' of the former, and all of the
latter is long-term.
Comparison of Public with Private Debt
Because of the great increase in German public debt,* the ratio of
private to-public debt has changed radically in recent years. This is shown
'in Table XII.
Table XII
German Private and Public Debt
(Billions of Reichsmarks)
1932.
19144-
Private debt
6h (&?%)
60 (17$)
Public debt
29 (31%)
290 (83%)
~J
"150
Appendix C
Policy Recommendations on Treatment of German Insurance Claims
(Prepared in consultation with F« H # Klopstock, Foreign
Research Division, Federal Reserve Bank, New York)
I«
Life Insurance
In order to prevent wholesale conversion of life insurance
policies into cash, it is recommended that the contractual right of the
policyholder to surrender his policy be temporarily suspended* In case
the notice of surrender has been received prior to the suspension, but
payment of the cash value of the policy has not yet been made, the notice
of surrender should be declared voidf Exceptions to the prohibition
of policy surrenders should be granted only in hardship cases»
It is recommended that the contractual right of the policyholder
to call for a policy loan should be suspended»
If the policyholder can prove his inability to remit the premium
required under the policy contract, insurance companies should automatically
charge the amount of the premium due against the cash value of the policy
as a loan and continue the policy in force, provided, of course, that
the unencumbered cash value is sufficientt If the policy has not been
in force long enough to have a cash value attached to it and would thus
ordinarily lapse in case of default of the policyholder on his premium
payment, a grace period of several months should be allowed over and
above the period provided by the policy contract during which time the
policy would remain in force in spite of the fact that a premium has
fallen due and has not been paid*
It is recommended that all payments to beneficiaries of industrial
life insurance policies should be permitted without any restrictions
whatsoever* Claims arising from other life insurance policies, payable
on the death of the insured or the maturity of the endowment, should be
transferred to blocked accounts of the beneficiary to be held with the
insurance company if the company so chooses * In the latter case, the
accounts should bear the same interest as savings deposits and be subject
to the same withdrawal restrictions as savings deposits under the schemes
for blocking proposed above* However, claims arising from policies payable
upon the death of the insured should be satisfied up to an amount of
RM. 1,000 without restrictions in order to provide for funeral and other
expenses in connection with the death of the insured*
II•
Insurance other than Life Insurance
Insurance companies should be permitted to pay accident, health,
property, and fire claims of individuals in cash or by credit to fre©
accounts up to an amount of RM 500. Any further payments to individuals,
- 25"or any payments to corporations* should be permitted only to "old" bank
accounts subject to the usual withdrawal restrictions» In order to
protect the liquid position of insurance companies, however, .they should
not be required to make payments to blocked accounts at any faster
rate than withdrawals from those accounts are to be permitted*
Basis for Recommendations
!• Life Insurance
Prohibition of Surrenders;» Life insurance claims may arise
through action ot the policyholder, such as surrender of the policy against
cash payment or through involuntary occurrences, such as the death of
the policyholder or maturity of an endowment policy, It seems advisable
to prevent the appearance of claims arising out of willful terminations •
Policyholders may withdraw cash by two principal methods: they
may either surrender their policies and take the cash surrender value, or
they may borrow on their policies and thus withdraw some of the reserve
while keeping the policy in forcef In case of surrender of policies,
insurance companies must refund to the policyholder a portion of the
reserve accumulated against the policy• Wholesale surrenders are
undesirable in view of the fact that they would deprive companies of their
liquid reserves at a time when they would not be able to find a market
for their investments, which chiefly consist of government bonds• Another
objection against the surrender of policies is that it would furnish
policyholders with large amounts of currency accumulated during the life
of the insurance contract.
Prohibition of Policy Loans• Policy loans are in reality
advances against policy claims and, like the surrender of policies, a means
of drawing down a part of the reserve accumulated against the policy*
Policyholders have the right to call for policy loans at any time, and
they may repay the loans in part or in whole at any time. Policy loans,
unless forbidden, would present policyholders with an opportunity to
circumvent the prohibition of policy surrenderst
Prevention of Lapse of Policy Contracts• In normal times,
lapse of insurance policies results from the unwillingness or inability
of the policyholders to maintain premium payments on their policies# During
the period of large-scale economic disturbances, which are likely to follow
the invasion of Germany, many policyholders will by force of circumstances
have to discontinue their policies• Since in. many cases the policyholders
will .be able to resume payments with the passing of the emergency, it
would be unfair to them to permit loss of their savings due to temporary
inability to meet premium payments*
Claims of Beneficiaries• A more liberal policy should be "pursued
as regards terminations which do not result from any action on the part
of the policyholder and represent the accomplishment -of the purposes for
which the policy was originally purchased* The general principle in the
-26 treatment of these^ claims should be to permit contract fulfillment up
to an amount large enough to satisfy the immediate needs of the beneficiary*
In case of industrial policies, the face amounts of which averaged
only RM 390 at the end of 19hlf restrictions on payments to beneficiaries
would only cause hardships as the insured amount is ordinarily required
for covering the burial and other expenses arising in connection with
the death of the insured; For the^&ame reason,-beneficiaries of policies
payable upon the death of the policyholder should be permitted to
receive up to RM 1,000 in cash* The excess over RM 1,000 should be
treated as a special form of saving* In order to protect the liquidity
of the insurance companies it seems advisable to -allow these deposits
to be left with the insurance companies rather than to require their
transfer to banks or savings banks* This provision can be changed later,
if necessary^ The resulting savings deposits should be treated according
to the general plan outlined above on page 5* But care should be taken
to make sure that the depositor does not make simultaneous withdrawals
from deposits held with different institutions,
II•
Insurance other than Life Insurance
Interference with the contractual relations between the insurers
and the insured should bo kept to*a minimum so that the insurance industry
will be able to continue the performance of its vital functions without
impairments If they are in a position to do so, insurance companies
should be permitted to pay all claims, including large claims, into
blocked (noldff) bank accounts, since it makes no appreciable difference
whether funds representing insurance claims are held in the blocked
accounts of insurance companies or in those of'polioyholders• An
imposition of restrictions on claim payments would only be followed by
cancellation of policies and the stoppage*of-premium payments. But it
is recommended that in order to relieve the pressure upon insurance
companies resulting from large claim payments at a time when their claim
reserves m$.y be relatively illiquid, they should not be required to make
payments to "old" bank accounts except to the extent that withdrawals from
these accounts are to be permitted«- Insurance companies might be required
to pay interest at a low" rate (l to 2 per cent) on such matured but
untransferred claims*
Accident, sickness, and fire give rise to extraordinary
expenditures on the part of the injured person* It is, therefore, recommended
that individuals who havofprotected themselves against such contingencies
by the purchase of an insurance policy"be authorised to receive some part
of their claims in cash* If the claim payments are made to "old" bank,
accounts, the above-mentioned contingencies would, inmost cases, lead to
applications for a license to withdraw cash because of hardship* The
suggested procedure would make such applications unnecessary up to an
,amount of RM 500 ajxl would thus save the administrative agencies a great
deal of work#
*
-27In this connection, it may be noted that damage to property
caused by the war is not considered an insurable risk in Germany. The
reimbursement oi' injured parties is regulated by the war property damage
decree (Kriegssachschadenverordnung) of November 30* 19^-0 an<3 a number of
executive orders issued under this decree. Under these regulations, claim
payments by the Reich Governiaont to injured persons are limited to comparatively small amounts. It may be well to continue these regulations essentially
unchanged.
@FedFRASER