Chapter XVI THE PHOENIX ARISES FROM ITS ASHES

IT IS WORTH WHILE paying more attention to the basis of the obviously successful foreign trade policy when looking at the monthly export figures of the Federal Republic, which rose from DM 300 million at the beginning of 1949 to almost DM 3 milliard at the end of 1956.

The principles can be reduced to two basic themes repeatedly mentioned in this book: on the one hand, the assumption of the absolute superiority of freedom over all attempts by the State to plan, guide or keep on a leash economic events, and on the other, the acknowledgment of the indivisibility of freedom.

Such an outlook does not allow any hesitation and knows no bargaining for position. Even less can this spirit be reconciled with ideas of a bilateral balance in trade relations between Governments. A foreign trade policy of this kind aims to achieve the same ends as economic policy at home is trying to realize. It is a matter of reducing protection in its various forms, such as foreign currency control, the quantitative limitation of exports by erecting high tariff walls and other administrative manipulations, and by overcoming the narrow-minded selfish thinking which has made life in Europe a torment. This ‘back garden ideology’ type of thinking has to be rapidly and thoroughly removed.

Thus when in 1948 we began to reintroduce economic freedom to Germany, it was for me almost a moral obligation to reach at the earliest possible moment the point where a policy of liberalization of foreign trade became possible. In spite of German backwardness in industry and other unhappy conditions, by the end of 1949 the degree of liberalization of private imports within the O.E.E.C. countries had been raised to 58.2% of the datum period between October 1948 and September 1949, and in October 1950 a further increase to 63.7% took place. We did not at that time make this change out of arrogance or even for reasons of an illusory imperialism; no, it was bitter need which forced us to expose our belief in the superiority of freedom to the hard test. The ruined German economy could not offer a living to the German people if it did not succeed within the shortest possible period in catching up with the level of output of the most progressive countries of the world.

The Switch to Success

We had to face the alternatives without pity or prejudice. If the German economy and the German still had sufficient power and energy to permit the experiment of a return to the world market through competition, then the path for German reconstruction was open. In particular there was then a chance to give the millions of refugees a decent occupation and to open the way to a standard of living for the German people commensurate with Western civilization. Insofar as this energy was lacking, successful reconstruction would have been unthinkable. Without relations with the world market and its best achievements there would have been no happy German future. Germany is inevitably dependent on the world market, whether as a purchaser of raw materials or as a seller of finished goods.

In this connection the Marshall Plan merits the special gratitude of the German people. This generous support deserves to be appreciated above all for its moral effects. It gave the German people the feeling of being no longer written off by the rest of the world but, on the contrary, of being able to share in the progress of the free world. But its economic and financial importance was no less great. Even so the Federal Government has never forgotten that it is its own responsibility to create from its own strength the ability to pay for our foodstuffs and raw materials by finished products. This policy made it imperative to open the doors, and to make the experiment, considered almost brutal, of forcing the German economy towards a higher level of achievement.

So from the moment when it became the responsibility of the Ministry for Economic Affairs, German trade policy was guided along the principle of liberalization in the widest sense of the word. This became particularly clear during the German E.P.U. crisis, when, in February 1951, as a result of our threatening indebtedness within the E.P.U. we were forced temporarily to suspend liberalization. Then recommendations were made to me from many quarters to betray the principle of freedom, and finally to forgo the idea of taking the lead. The Opposition said that, in the attempt to free European trade, we should take on the role of a modest fellow traveller, (cf. Chapter on ‘The Market Economy Conquers Planning’, p. 81.)

In the face of such short-sighted advice it was in our interest to use our own energies to encourage those countries which were not suffering from the same pressure to break through existing difficulties.

The German share of exports in the world market did not even reach 3% at that time and at this level was insufficient to support a successful programme of reconstruction. All German measures during this E.P.U. crisis in 1950/51 were taken with the intention, not only of safeguarding the principle of liberalization for ourselves, but of safeguarding it in general, and so enabling us to return to liberalization as soon as possible.

Liberalization All Round

This aim was achieved on January 8, 1952, with the return to liberalization to the extent of 56.8% of private imports (relevant year 1949). This policy finally triumphed on November 30, 1956, when the list of goods which could be imported from the Member States of the O.E.E.C. countries without limitation was so greatly enlarged that the Federal Republic, with a few exceptions, had in fact liberalized private imports from the O.E.E.C. area by almost 100%. This statement had been true for some time of private imports from the non-participating countries (i.e. those that use E.P.U. facilities but do not belong to the O.E.E.C. countries, e.g. Australia, New Zealand, India, South Africa, Vietnam).

Here a beginning had been made with bilateral liberalization early in 1952 and, since March 1954, a gradual change took place to general liberalization within the O.E.E.C. area. Of private imports from the non-participating countries 97.9% (relevant year 1953) are now liberalized.

Germany thus has made a considerable contribution towards overcoming protectionism. This statement is all the more justified, as the Federal Republic is also pursuing the same kind of policy of decreasing quantitative limitations vis-à-vis other trade areas. Thanks to measures taken since February 14, 1954, and in particular the further broadening of liberalization during the middle of 1956, we succeeded in increasing the range of free private imports from the dollar area to 92.8%.

On May 16, 1956, a unified list of liberalization was put into force for a further group of countries, such as Brazil, Chile, Finland, Japan and Uruguay. This generous policy meant that at the beginning of 1957 about 90% of all private imports— calculated on the basis of 1953—and about 80% of total imports, were freed from quantitative limitations. The difference is explained by the fact that besides the few private imports still controlled by quantitative limitations, some Government traded goods (i.e. in West Germany the products from the controlled market in agriculture) remain outside the liberalized sector. The principle of freedom which has always characterized our foreign trade policy is best expressed in this abolition of quantitative limitations.

Universal Rules

Our conviction that bilateralism represents one of the worst relics of a tragic past made us readily agree to support all plans and methods to find unified rules for large areas. This above all is true of German participation in O.E.E.C., in the association of E.P.U. and in G.A.T.T. and in the International Monetary Fund. On this supra-regional plane there is no room for individual and limited rules of a bilateral sort which necessarily contradict the principle of freedom and discrimination. My ideal of a happy trade policy in a free world can only be regarded as fulfilled when trade policy between the different countries is no longer split, but rather when the whole of the free world has agreed to universal rules and principles. These thoughts have been explained in more detail in Chapter XIV.

The reduction of bilateral agreements has meant that the Central Banks no longer act as the providers of credit as in the recent past. That is not their function. With the overcoming of bilateralism on the other hand, international criss-crossing of credits will increase, which will make the balancing of payments a purely business affair on a private economic basis.

Liberalization, as also multilateralism, opens the way to an economically sensible flow of trade. Once foreign trade is freed from all restrictions then in international trade, too, goods will be exchanged according to the greatest national economic needs.

These generous principles must be adhered to when using other weapons of foreign trade. That is why for some considerable time I have tried to remove all special export subsidies. They are to be avoided in whatever form, for they almost always result in distrust. Insofar as on the German side they are a hangover from the past, the excuse may serve that for all too long we have had to abjure freedom in foreign trade. For that reason I particularly welcomed the date of December 31, 1955, when the Law to Encourage Exports expired. In the so-called Butler-Erhard statement of May 8, 1954, I undertook to oppose any prolongation of this law.

The Best Way to Encourage Exports

Those members of the German economy who every now and then demand export subsidies may like to listen to my old thesis, which has proved itself in the recent past, that the best help for exports is to keep the German price-level steady—at least more steady than that of other countries. The truth of this policy is at present expressed in our favourable foreign trade position; at the very least it promises greater successes than the use of questionable methods to encourage exports. To overcome export subsidies which disturb every natural flow of goods I proposed years ago that all measures in all countries to encourage exports should be permitted only within the framework of legal and clearly recognizable settlements. Moreover I suggested years ago—at the opening of the Frankfurt Fair on February 22, 1953—that a European institution should receive a list of all the measures taken by the various countries to encourage exports. Such publication should create the basis for international discussions to reduce these artificial protective measures.

The demand to remove all obstacles to trade must naturally also be expressed in tariff policy. On this point I have always stood for the principle—as in discussions about liberalization— that what is right in principle does not need to wait for an equivalent contribution from a trade partner to be realized. So, since 1955, when the domestic position of the Federal Republic made it appear sensible to reinforce competition, I have aimed to bring competition into Germany from beyond the frontiers by lowering tariffs. An autonomous reduction in tariffs was carried out in several stages, even though, according to my taste, more could and should have been done than the Government and Parliament allowed.

Some of the milestones on the way should be mentioned. The first tariff reduction on April 1, 1955, concerned 700 separate tariffs; they were followed by the ‘economic policy’ tariff reductions, which on July 1, 1956, were widened to include all products of the economy. A top tariff was laid down of 21% of value, and for the rest a graded reduction of tariffs was undertaken. Simultaneously an individual reduction of tariffs was foreseen for different foodstuffs, so that the tariff reductions agreed at the G.A.T.T. Conference of 1956 came into force almost without exception before their due date.

The List of Liberalization

A complete account of the comprehensive attempts to free the movement of goods, payments and capital from restrictions would require a list of many other measures. For example, one should point to the introduction of a general exemption limit for smaller payments abroad; to the progressive reduction of the obligation to offer foreign currencies to the Government, the reduction in regulations on unpaid transactions for imports and exports; the removal of annoying individual permits for the transit trade. Also worth mentioning are the increasingly liberal regulations concerning foreign currency allowances for travel abroad, and the liberalization of the insurance business. Above all the reader should bear in mind the loosening of regulations concerning investment by foreigners in Germany, and investment abroad by Germans. Finally, the different stages of simplifying administrative procedures regarding imports and exports should be mentioned, and the permission for ‘every man’ to import, even though here the ideal of a total ‘debureau-cratization’ has certainly not yet been achieved.

Without a doubt these measures are important steps on the way towards a free market within the area of the free world. Nevertheless there should be no illusions that freedom will find its final complete expression within the framework of collaboration in O.E.E.C. and E.P.U. and within the competence of these institutions. That I have to make this statement six years after the coming into force of E.P.U. is not meant to denigrate the great success which E.P.U. can claim for itself, in particular as regards the defeat of bilateralism. Thanks to this institution, with the help of G.A.T.T. and the International Monetary Fund, we have today achieved an appreciable increase in the international exchange of goods in spite of the lack of an international price level which works. Thus, for example, the exports of the O.E.E.C. countries have more than doubled, from DM 71 milliard in 1948 to about DM 150 milliard in 1956.

The Final Percentages are Decisive

The remaining obstacles in the path of realizing a free foreign trade must neither be overlooked nor diminished. As we approach this critical frontier, where changes will have serious and noticeable effects nationally, the opposition of the protectionists will become stronger. To put this in a simpler but clearer form: to liberalize from nothing to 79% is relatively easy. Up to this limit it is almost in the national interest to grant freedom. In liberalizing from 80% to 90% the situation becomes more problematical, but when we arrive at 90 to 96%, then every one per cent of freedom becomes almost a dramatic affair. In this sector the true sentiment has to prove itself, for it is here that liberalization leads to healing results. Too many European countries stumble before this last hurdle, and only a few have the courage to overcome it.

In the same way as there are few chances to achieve the removal of quantitative limitations within the framework of E.P.U., so, unfortunately, one can hardly count on the possibility that convertibility as an instrument for overcoming currency control can be achieved with the help of this institution. Within the system of E.P.U. one speaks of structural debtor countries and creditor countries. This makes one think that the basis of accounting is too narrow to find final, fruitful solutions. Someone may (as I do) love the ‘European Payments Union’ with all his heart; but he would not want to deny that a widening of this regionally limited payments union, which to be complete leads to a world-embracing order of freely convertible currencies, must in every circumstance be preferred.

The Sign of Evil

The spirit of liberalization and the sterility of currency control are like fire and water. Currency control of any kind symbolizes everything that is bad for man. Only through mismanagement can the individual national economies conceive the crippling idea of having to stop competition. With it foreign trade becomes more and more an exercise in government power politics, and fulfils less and less its task of serving the economic well-being of all citizens in a free world.

This statement immediately raises the problems of the present German foreign trade situation. Unlike the time when I first took office, this is no longer distinguished by the anxiety of how to pay for apparently vast imports through exports. On the contrary, today it is a case of dealing with the difficulties which have now existed for over five years—apart from some interruptions—of an almost steadily increasing export surplus. In 1956 imports rose by about 16%, while exports at a level of nearly DM 1-5 milliard more rose by about 21%. The assumption generally made in 1955, that in the future imports and exports would level out more and more, has thus been proved wrong. The gold and foreign currency reserves of the Bank Deutscher Länder have in the meantime grown to almost DM 18 milliard; the development can be seen in detail from this table:

Gold and Foreign Currency holding of the Bank Deutscher Länder (in DM milliards)

End of year		Gold and Foreign Currency holdings
1949	+ 0.38	1953	+ 8.17
1950	- 0.66	1954	+ 10.95
1951	+ 1.52	1955	+ 12.81
1952	+ 4.64	1956	+ 17.58

These surpluses certainly express the real productive efficiency of the German economy, which should be acknowledged. Yet it would be false to attribute these trends exclusively to this productive efficiency. To a considerable extent this surplus is an expression of the fact that West Germany compared with other national economies has resisted the temptation of inflation relatively more courageously, or, put differently, that we have sinned less in this sense than some of our trading partners.

Our trend of prices internationally compared is still relatively favourable. The cost of living index at present shows a level of 114 (1950 = 100), while our most important European partners in trade show price increases of 135, 140 and even more. Naturally this position offers great chances for exports. Yet it would be wrong to base export policy in the long run on the speculation that other countries will continue with this dangerous price policy.

With boom and full employment in almost all the main countries participating in world trade, we sense more than ever how greatly we lack a stabilizing factor beyond the limits of the domestic national economy. I come repeatedly to the same point: it is an odd, not to say a grotesque position that, in spite of different trends of prices in the individual national economies, the rates of exchange have remained immovable, as if between these two factors there existed no inner relation. Out of such a contradictory policy a considerable shift in the opportunities for export must inevitably result. In any case this is an important reason why the Federal Republic achieves ever-increasing export surpluses, which on the debit side make the taming of the boom at home more difficult.

Inevitably this development has led to the postponement of convertibility which I demanded again and again. In my view only the free convertibility of currencies can form a sane basis for a truly functioning free world market. According to all practical experience only in this way will a unified economic and financial policy which aims at stability be enforced in the national economies. With it the present distortions, as also the extreme positions of payments balances, would vanish.

The all-embracing function of convertible currencies can never be replaced in as complete a fashion by other measures. All attempts which have been directed in this way usually went no further than the beginning, and they have always remained unfinished. In my attempts to reduce the extreme creditor position of Germany I shall definitely not make use of those false measures of using currency policy as an instrument of trade policy. This seems to me to be no less harmful than the sterile attempt to neutralize the unrealistic rates of exchange by means of trade policy. In using such methods one asks: Who deceives whom? Here in practice there is only one way—to relinquish finally that practice which has led to a falsifying of the rates of exchange. Even though I am conscious of the political, tactical and technical difficulties and considerations, I regard it as absolutely essential to discuss this problem, which cries out for a solution on the broadest international terms.

We face today the great danger that the attempts to free world trade will become stuck, if we do not seriously begin to establish a working international currency order, and unless we agree on common rules for economic and trade policy.

Facing the Solution

As much as I am convinced that only in this manner can the imbalance be adjusted which has led to an extreme creditor position within the E.P.U. for Germany, I also see that the present situation demands independent German action. It would not become us in international discussions to brush aside all mistakes, or unrealistically to demand from our partners that they should bring their price levels down to the lower German level. What is expected of us is rather a way of changing our trade policies in such a manner that the debtor countries in particular, in spite of this price situation, will find better and new chances to export to Germany, or that in some other way the flow of their gold and foreign currency towards Germany will be slowed down. The following table of the monthly net movements on foreign exchange accounts gives a good idea of the size of these movements.

Net Movements in Foreign Exchange Accounts—1956 in DM Million

Monthly Averages
1950	- 25	1954	+ 227
1951	+ 168	1955	+ 160
1952	+ 203	1956	+ 389
1953	+ 299

In view of the present situation it seems to be almost essential to proceed logically to free the whole of foreign trade from Government shackles. Wherever possible liberalization must be enlarged (and not only within the E.P.U.), remaining quotas must be raised, and a further reduction in tariffs, which have repeatedly been cut in the recent past, is also desirable in the interest of Germany. Further, it should be demanded that everything possible should be done to make administration simpler.

A policy based on increasing imports must not lose itself in the thicket of narrow-minded domestic German sectional interests, since not one of the reductions in tariffs has so far worked out to our disadvantage. In the long run I also regard it as impossible to continue unchanged the import policy which we have so far pursued in agriculture.

The aim of arriving at an increase in our imports and simultaneously at a slackening of the tense position of our balance with the E.P.U. will have to be supported by a series of other measures. For example, the plans to increase stocks appreciably and the supply position of the German economy, which have already been discussed, should be borne in mind.

Generosity is Right

If every conceivable easing of imports is attempted in this manner, which in the long run will mean the abolishing of Government limitations of imports and the specially raised prices for some imported goods (foodstuffs), the question arises whether a reduction in the West German creditor position cannot also be achieved through financial measures: for example, through early repayments of debts. Proposals to establish foreign exchange credits to E.P.U. as a whole, or to individual foreign trade partners, or some other forms of financial help, need serious and sympathetic examination.

In these considerations we should remember that West Germany would here have the chance to express its gratitude for the aid granted to it in the early post-war period in a psychologically effective manner; and further, perhaps Germany could also settle its accounts from a purely political view in an honourable way. It is only logical if the chances of a truly private export of capital are examined, even though the possibilities in the immediate future should not be overestimated. In the Federal Republic itself a shortage in the capital market will persist in the foreseeable future.

Great Importance of Foreign Trade

To turn briefly to the trends of German exports in the past few years, the total volume of foreign trade in 1956 ran at DM 59 milliard. In interpreting this figure it should be remembered that in the year of the foundation of E.P.U.—in 1950—the value of imports and exports at DM 19.7 milliard was exactly a third of the present value, even though the Marshall Plan imports, which were not paid for by German efforts, were included. The proportion of the turnover of foreign trade of the gross national income has now grown by more than 30% (imports 163%; exports 16.9% = 32% of the gross national income); the proportion of imports in 1949 was 9.9%, of exports 5.2%—a total which is less than half of the present figures with a national income which has more than doubled. It is also remarkable that during past years foreign trade has constantly increased in importance within the framework of the whole economy; its share today is appreciably larger than in the period of the last pre-war years. In 1936 it was only 24% of the gross national income.

Imports as well as exports have constantly risen in recent years, the steady transition from total currency control and absolute bureaucratization of foreign trade to increasingly freer forms has shown clear advantages. The statistics of foreign trade prove the truth of this statement (cf. graph on page 63).

This favourable development allowed Germany to move back into third position in world trade. Though the lead of the U.S.A. is still considerable, that of Great Britain has decreased in a not unappreciable way during the past few years. Even a few years ago the German proportion of exports in world trade was much less than that of Canada and France.

Exports in Percentages of World Exports

	USA.	Great Britain	Federal Republic	France	Canada
1950	18.3	11.0	3.6	5.5	5.3
1955	18.6	9.8	7.4	5.8	5.3
1956	20.7	9.8	8.1	5.1	5.4

The details of the West German share in the world market are clearly reflected in the following table:

Proportion of German Foreign Trade in the World Market Federal Republic

I. in % of World Imports			II. in % of World Exports
(1) 12.9		1913	(1) 13.1
(1) 9.1	(2) 6.5	1929	(1) 9.9	(2) 7.5
(1) 8.1	(2) 5.7	1937	(1) 9.4	(2) 7.1
	4.6	1950		3.6
	4.4	1951		4.6
	4.8	1952		5.5
	4.9	1953		6.0
	5.8	1954		6.9
	6.7	1955		7.5
	6.9	1956		8.1

(1) From 1913 until 1937 for the German Reich.

(2) Estimated by the Ministry for Economic Aflfairs for the Federal Republic.

The picture given here would remain incomplete if we did not take a glimpse at the structure of our foreign trade. This is all the more necessary since foreign trade can only fulfil its task when it creates the basis for a complete balance of the national economy, and, in the special German situation, opens up the possibility of giving employment to millions of refugees.

It is significant that the proportion of finished goods has constantly increased and today constitutes 80% of total exports.

This development is also expressed in a constantly shrinking proportion of exports of raw materials, which is now barely 6%, while in 1948 a quarter of our export income came from the sale of raw materials.

Breakdown of Trade into Percentage Rates

	1948*		1953		1954		1955		1956
	Imps.	Exps.	Imps.	Exps.	Imps.	Exps.	Imps.	Exps.	Imps.	Exps.
Foodstuffs	49.2	2.0	36.6	2.6	37.0	2.3	31.2	2.7	32.7	2.7
Raw Materials	26.2	25.2	32.6	8.0	28.5	7.7	29.7	6.1	29.4	5.6
Half-finished Goods	13.7	29.5	15.2	14.7	18.0	13.1	20.1	12.7	18.7	12.4
Finished Goods	11.0	45.3	15.6	74.7	16.6	76.9	19.0	78.5	18.6	79.1

^* Combined economic area

The favourable trend of our foreign trade is well expressed in the index of volume (1950 = 100 as a basis), and when internationally compared is particularly impressive. To avoid wrong conclusions all price movements have been eliminated from the picture given below.

Index of Export Volume ( 1950 = 100 )

	Fred Rep.	France	Great Brit.	Norway	Switz.	Canada	U.S.A.
1952	154	104	93	102	119	123	130
1954	223	125	99	120	136	117	133
1956*	335	113	125	157	183	139	153

^* September or October figures