Economics and the Public Welfare. Benjamin M. Anderson

addition the Transfer Committee had the power by a two-thirds vote to suspend accumulations in Germany before reaching the five-billion-mark limit, if its members should decide that such an accumulation was a menace to the economic situation in Germany or to the interests of the creditor nations.

      Abandonment of Safeguards in Young Plan of 1929. These were significant safeguards. It was the abandonment of these safeguards, under the Young Plan of 1929 which succeeded the Dawes Plan, that was responsible for the collapse of Germany in 1931. Had the Dawes Plan been left alone, and properly administered, it would have accomplished its purpose.

      Safeguards Gave Priority to Private Credits over Reparations. These safeguards, though they did not in terms give priority to private credits to Germany over the reparations payments, did in fact give priority to private credits. The private creditor would have no obligation to protect the German exchange rates. He would get his payments whether this put the mark below the lower gold point or not. Reparations payments could only be transferred if the exchange rate were not thereby endangered.

      Without this priority for future private credits Germany could not have received the private credits which were later granted to her. The Dawes Plan explicitly stated that one of its purposes was to restore Germany’s foreign credit.

      The Schedule of Reparations Payments. For the first year, the fiscal year 1924-25, reparations payments were to be one billion marks. None of this was to come from the budget of the German government. Two hundred million of it was to come from interest on the German railway bonds and 800 million from the foreign loan. For subsequent years increasing amounts were to come from German sources. The total was to rise to 1,200 million marks in fiscal year 1926-27, 1,750 million marks in fiscal year 1927-28, and to reach the “standard years” payment of 2.5 billion marks in fiscal year 1928-29.

      How Could Foreign Loan Supply Both Gold Reserve and Reparations? The question naturally arises as to how the loan of 800 million marks could simultaneously provide a gold reserve for the Reichsbank and be used in making payments on reparations account. The answer is not difficult. The German government, receiving the loan in gold, was to turn it over to the new Reichsbank, receiving in exchange a deposit credit against which it could draw for payments in marks inside Germany. These payments financed the “deliveries in kind” of goods, including coal and other commodities, which were to be turned over to the creditors under reparations. These creditor countries were to get their money through the sale of the goods. This put no burden on mark exchange. The plan called for

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      substantial payments in kind and provided also an ingenious device whereby merchants in foreign countries and merchants in Germany might deal with one another, with the payments being made by the foreign merchants to their own governments, and the payments being made to the German exporters by the German government.

      Schedule of Reparations Too High. The one great defect of the Dawes Plan was that the schedule of reparations payments was put too high, though, as indicated above, safeguards provided for the correction of this if it should later turn out to be true.

      It is believed that in the conference which preceded the assembling of the nominal “experts” in Paris (the conferences among the real economic experts rather than the political experts) there had been reached an agreement by which the peak of payment should not exceed 1,800 million marks. With the assembling of the nominal “experts” a much larger sum was talked about by one of them. The French, unable to resist the temptation, jumped at this vast figure. The result was a compromise at 2,500 million marks, which was economically unrealistic, and which led to the unfortunate Young Plan of 1929, as a substitute for the Dawes Plan.

      The Magic of Sound Money. The Dawes Committee knew very well that the plan could not work unless German industry and finance revived. But the committee had no doubt that industry and finance would revive if sound currency were established, if men once more had money in which they believed and in which they could safely make contracts, and if freedom of private initiative were restored. The fact is, as we shall later see, that the inauguration of the Dawes Plan brought to Germany an extraordinary industrial revival.

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PART III

       THE FIRST PHASE OF THE NEW DEAL, 1924-32

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16

       Depression and Rally of 1924—The Beginning of the New Deal

      There came a very sharp reaction in business in early 1924. The Federal Reserve Index of Industrial Production (1923-25 base), which had stood above 100 in the early part of the year, dropped rapidly to 85 by the middle of the summer. Security prices dipped only moderately, and there was no real loss of financial confidence because high hopes were entertained of the outcome of the work of the Dawes Committee. It was recognized in financial circles that the industrial difficulties were due in large degree to the foreign situation, and very specially to the unsatisfactory export trade for agricultural commodities.

      There was a sharp dip in the prices of farm products, both an absolute drop and a drop in relation to the prices of other goods. Agriculture was under very great pressure. It needed a good export market at satisfactory prices for over twenty percent of its wheat, for fifty-five percent of its cotton, for forty percent of its tobacco and lard, and so on. With continental Europe slipping financially and, above all, with Germany utterly demoralized, this market was greatly impaired and gravely imperiled. With the high protective tariffs on manufactured goods, moreover, which prevented European manufactures from coming in in adequate volume to obtain the dollars needed for buying farm products, it was difficult for the farmers to see much hope.

      Many of the leaders of agriculture, including important senators and congressmen from the farm states, were turning in their bewilderment to new and strange legislative devices. Preponderantly Republican, the agricultural West had accepted with some enthusiasm the tariff on farm products passed in 1921. But very speedily the West had learned that this did no good. The American wheat producer did, to be sure, keep the Canadian wheat grower out of Chicago, but he continued to meet him in Liverpool. The protective tariff did no good to a commodity where an export surplus existed. And agriculture was an export industry.

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      Even in the case of those agriculture activities like dairying, where exports and imports were in approximate balance,¹ the inability of agricultural producers in export lines to get a satisfactory export market made for reactionary tendencies. Unable to get good prices for wheat and hogs and cotton, a good many farmers who had produced wheat and hogs and corn and cotton were crowding into the dairy industry. All agriculture felt the pressure that came from weakened export trade.

      Agriculture itself was so important in the total of our economic life that if it were depressed the rest of the industrial situation was pulled down. For the year 1919, agriculture, mining, and manufacturing may be compared as follows:

Net value of all agricultural products	40%
Net value of all mineral products	7%
Value added by all manufactures	53%2

      The importance of agriculture was declining in American economic life, partly through the decline in agricultural prices as compared with other prices, and partly through the shift of population from country to city which was under way. But agriculture remained in 1924 a factor of such great importance that definitely reactionary agricultural tendencies operated to