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He was doubtless aware that he hadn't dealt with the problem adequately in the General Theory. He believed, though, that he could see the outlines of a solution in the system that was being put in place in Germany by Hjalmar Schacht.

I gave a short account of Schacht's 'new plan' in the first essay in this series, quoting from the testimony of his assistant in the Reichsbank, Otto Puhl. (12) Although the details are complicated, the essential principle was a series of bilateral trade agreements aimed at ensuring that the imports of one party would always be balanced by exports to the other, and vice versa. Skidelsky (pp.228-9) describes the scheme as follows:

'Under Schacht’s New Plan of September 1934, bilateral clearing agreements were made with twenty-five countries in Europe and Latin America, designed to balance trade with Germany and each partner at fixed exchange rates, The partner was only allowed to sell as much to Germany as it bought from Germany, The aim of the system was to conduct foreign trade without foreign exchange. It was in effect a pure barter system between pairs of countries. By 1938, some 50 per cent of Germany’s trade was conducted through bilateral clearings; only 20 per cent was settled through the ‘free’ foreign exchange market.

'Under a bilateral clearing agreement, a German importer from, say, Hungary, instead of paying reichsmarks to the Hungarian exporter for exchange into pengos, would pay the reichmarks into the Hungarian Central Bank’s clearing account with the Reichsbank. German exporters to Hungary were paid reichsmarks from this account. The opposite process took place in Budapest. No actual exchange of national currencies took place. Credits which accumulated in the clearing of country A for its exports to country B could be used only to purchase imports from country B. The individual exporters in either country received payment in their own national currency from their central bank to the extent that importers made corresponding in-payments.' 

(12) Peter Brooke: 'Economics and the European Union, Part One: Germany before 1945', Irish Foreign Affairs, Vol 13, No 4, December 2020. Also accessible at

Under this system both the 'creditor' (the exporting nation) and the 'debtor' (the importing nation) were subject to a discipline that prevented the exporting country from overwhelming the importing country and thereby disrupting the efforts of the state to structure the economy for its own ends - in the German case rearmament and full employment. We may note in passing that under Schacht's system it would have been impossible for Germany to do to Greece what it was able to do under the system devised by Jacques Delors. 

According to an account published early in 1939:

'It is a system whose primary aim is to prevent the flight of capital, and thus to render impossible any resistance by capitalists. This is a rather important conclusion because, as we know, in France an attempt to rearm on anything like the Nazi scale, whilst maintaining free exchanges, has hitherto been doomed to failure by the fact that as soon as the State expanded its expenditure the private entrepreneur used the deficit to disinvest his capital and thereby nullified the effect the State expansion. Owing to the curtailment of private expenditure, employment did not increase to the maximum possible. Under the Nazi system, no such sabotage is possible. 

'Secondly, this system of foreign exchange control enables the Government to equate German exports and imports irrespective of the state of trade abroad and the size of the national income at home. If the demand for German products at a certain price should fall, that does not mean that Germany's national income has to fall until the demand for foreign goods is automatically curtailed sufficiently through a fall of income and employment, to equate exports and imports. Equilibrium is achieved by stiffening priorities on imports or by paying increased subsidies on exports. Thus, irrespective of the state of trade abroad, full employment can be maintained at home. The burden of the worsening of the terms of trade is not borne through fluctuation of employment, but directly. The fall of export prices below internal production costs does not prevent exports - nor does it involve losses for the individual exporter. 

'This is a very important point. We have been hearing a good deal lately about unfair competition by Nazi Germany through granting of subsidies. We were also told that if these subsidies were increased the German standard of life would continuously decrease and there would a "breakdown" of the system. A worsening of the terms of trade through a fall of foreign demand for German commodities is obviously unfavourable for the Germans. It is very questionable, however, whether they lose more by pushing their exports at the cheaper price and shifting the burden on to consumers (they could, but have not, shifted it on to "rearmament"; hitherto private consumption provided the "cushion") or whether they would lose more by adopting the individualist system, permitting the national income to shrink until an equilibrium is reached between imports and the new level of exports.' (pp.239-40) (13)

(13) Thomas Balogh: 'The economic background in Germany', International Affairs (Royal Institute of International Affairs, 1931-39), Vol.18, No.2 (March-April 1939), pp.227-48. I have added the division in paragraphs.

Thomas Balogh, who wrote this account, is described by Skidelsky (p.201) as a protégé of Hubert Henderson whom Keynes later (as he himself got more drawn into the American scheme) characterised as a 'Schachtian'. While Skidelsky calls Henderson a 'national capitalist', he calls Balogh a 'national socialist'. Balogh was to be influential in Britain in the post-war period. He continues his account of the German economy immediately before the war, perhaps indicating at least one of the reasons why Britain might have begun considering the possibility of war with Germany:

'There is, moreover, a further and even more dangerous aspect of German planned economy in foreign trade. The fixing of internal prices enables the Nazi entrepreneurs to give long-term contracts to producers in foreign countries at fixed mark prices. Hence they eliminate any risk of price fluctuations to the producers of those commodities. Germany mainly imports foodstuffs and raw materials. But as the price of foodstuffs and raw materials is very variable the fact that Germany can make long-term contracts at fixed prices is a very important inducement for the producers in those countries to conclude trade agreements with Germany. If, however, they conclude these agreements they must adapt their production to the German market. Hence they will be less able to sell elsewhere, and naturally that will in time establish a buying monopoly in favour of the Nazis. As soon as this monopolistic power is strong enough, Germany will be able to impose on these people her own terms, and they will then not be able to fight since alternative outlets for their products on favourable terms will not be available. Hence these satellite States will have to bear part of the burden of German rearmament. In this way we have a double threat, so far as the foreign trade relations of Germany and the world are concerned, against our commerce. The first threat is the possibility of Germany, by maintaining full employment, offering goods at cheaper prices than any individualistic producer is able to do, the second is that by using the planned method of economy she can obtain a favoured position.' (p.240)

It is often said (including by Keynes himself) that Schacht's bilateral agreements were designed to give Germany an unfair advantage with her trading partners, but according to Skidelsky (p.229):

'In fact, Germany often bought above, and sold below, the world market price: the terms of trade moved against Germany in the 1930s, and it failed to alter them in its favour till 1942, during the war itself. Germany was interested, not in exploiting its monopoly position, but in buying as much, and selling as little, of the materials it needed for rearmament. The bilateral clearing system, operated at an overvalued exchange rate, enabled it not to buy cheap and sell dear, but to buy more for less.'

Skidelsky gives as his authority an American economic historian, Larry Neal. Neal reviews an existing controversy on the question and concludes:

'If the German goal in negotiations of clearing agreements with smaller countries was to attain economic advantages, there were basically only two ways to attain it: either the exercise of monopsony power, which forced the small trading partner to accept lower than competitive prices on its products imported by Germany, or the use of monopoly power, which forced the small country to pay higher than competitive prices on the German exports it purchased. (14) The first technique appears to be what one textbook suggests was used when it states, "as Germany soon discovered, a lack of balance in its trade with other exchange control countries provided a means whereby it could take advantage of its buyer's position to exploit countries largely dependent on Germany for their support market." The difficulty with this suggestion is that the prices offered by Germany to its trading partners for its imported commodities were consistently above both the world price and the internal price within the partner country. Thus, the foreign foodstuffs it purchased from south-eastern European countries were acquired at prices from 20 to 40 per cent above the world market price. Basch cites the case of Germany paying prices for Romania's soybeans that were several times those charged overseas. Further, Germany on average paid more for the same commodity when it was imported from a clearing-agreement country than when it was imported from a non-clearing country.' (p.394). (15)

(14) Neal is using the word 'monopsony' to refer to the condition of a buyer without competition and 'monopoly' to refer to the condition of a seller without competition. In the previous extract instead of 'monopsony' Thomas Balogh talked about a 'buying monopoly'.

(15) Larry Neal: 'The Economics and finance of bilateral clearing agreements: Germany, 1934-8', Economic History Review, New Series, Vol 32, No.3, August 1979, pp. 391-404.

He discusses the possibility raised by Balogh that this was a policy of 'entrapment', that 'Greater future gains were purchased at the expense of present gains' or that 'Germany's unprofitable pricing policies were designed for political purposes' but concludes: 'In either case it appears from the evidence that Germany made a considerable investment over a number of years (at least five) to achieve a monopoly position that it never exploited.'