REPORT OF THE AGENT GENERAL
FOR REPARATION PAYMENTS
BERLIN, June 10, 1927

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VIII. German Business Conditions.

The readjustment of German industry and trade to conditions of stabilization appears to have reached a fairly advanced stage. It is still only three and a half years since currency stability was tentatively effected and less than three years since it became fully safeguarded. Within that time German business enterprises have undertaken and largely completed a process of sweeping reorganization, the main outlines of which were described at length in the last Report. By the autumn of 1926, some of the most acute problems of readjustment were already yielding before increased production on the part of industry and growing purchasing power on the part of the people; in other respects, particularly in the stubborn problem of unemployment, the position was less encouraging and there were major difficulties still awaiting solution. Further progress toward recovery has been made in the intervening months. Unemployment has diminished somewhat more than can be explained on a purely seasonal basis, and the production and consumption of goods are proceeding generally at a higher rate than at any time since stabilization.

One important qualification must be observed, namely, that these favorable developments relate almost exclusively to internal conditions and to domestic markets. It is only natural that the first benefits of so sweeping a process of reconstruction should be visible in a strengthening of conditions at home, and in a revival of internal consumption and trade. But the real test of the value of the readjustment depends upon a further question, as to the power of German commerce and industry to compete again with the rest of the world. If what has thus far been done results only in quickening the pace and enlarging the volume of domestic business, the readjustment may be regarded as still incomplete and its present advantages as only transitory. It might even lead to over development internally with possibilities of new difficulties in the future. But if better domestic markets and the larger production therein implied bring more active foreign trade both ways, export as well as import, then it will be clear that German industry has reestablished itself on a competitive basis and the process of readjustment may be regarded as having been successfully completed. Individual concerns in Germany have undoubtedly succeeded even now in meeting this test, but it still remains to be seen whether industry as a whole is capable of enlarging its markets abroad.

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a. Phases of Readjustment.

The two most acute manifestations of the business crisis, and in a larger sense, of the process of readjustment, were commercial failures and unemployment. The period of acute business distress was short and severe, and by the time of the last Report commercial failures had already subsided to more or less normal figures. Unemployment, on the other hand, has presented a social and economic problem of the first order ever since the late autumn of 1925. Recently there have been encouraging reductions in the number of unemployed, but the problem still exists in substantial proportions.

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1. Commercial Failures and Liquidations.

The number of business failures during the past six months has been running well below what was regarded as usual before the war. In part, this comparative betterment is due to the severe process of elimination which business underwent in the winter and spring of 1925-1926; but it also reflects the return toward easier credit and business conditions. The bulk of the distressed concerns continues to consist of trading as distinguished from manufacturing establishments. The number of firms currently placed under the supervision of public authorities has followed about the same course as commercial failures and is now likewise at a relatively low level.

In contrast with the decline in the number of forced liquidations as shown above, concerns voluntarily dissolving have continued to outnumber greatly the new concerns being formed. The net reduction in all types of enterprises during the first quarter of 1927 was 4,606, as compared with a quarterly average of 4,935 during 1926. To some extent this process is a part of the general movement towards consolidation, which has been described at length in previous reports.

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2. Unemployment.

The radical measures undertaken by German industrial and commercial concerns to reduce operating costs involved, among other things, a very general reduction of staffs. These measures, which began actively in the autumn of 1925, furnished one of the causes which, together with the business crisis, brought about the rapid rise in unemployment during the winter of 1925-26. But as the business crisis receded, and production and distribution increased, unemployment did not decline correspondingly. The continuance of heavy unemployment throughout the past winter, when industrial activity was increasing, is partly the natural result of the ability of many branches of German industry to produce more goods with fewer hands than before the reorganization was undertaken. Those who were released by the process of reorganization were largely workmen of minimum skill and productivity for whom it was hard to find new work. Some of them doubtless belong to that group of workers existing in every country, who, by reason of age or disabilities, have difficulty in securing work except in periods of great activity. On the other hand it is now reported that in some trades, as for example, textiles, where production has increased very rapidly, additional skilled workmen are scarce and hard to find.

Industrial rationalization, however, is by no means the only important factor in the problem of unemployment in Germany. The problem itself is unusually complicated and it cannot be gauged by standards or solved by methods which might have sufficed in pre-war days. It must be recognized that there are new factors, many of them peculiar to Germany, and some of them apparently conflicting, which have grown out of the war. Among these are the more general entrance of women into industry, including household servants thrown out of employment by the impoverishment of their employers; the necessity for many people to work whose incomes disappeared through inflation; the inflow of German labourers from former German territory; the reduction of the naval and military establishments ; and the arrival at working age of unusually large groups of young people born before the war when the birth rate was exceptionally heavy. The existence of so large a body of unemployed for so long a period has necessitated extraordinary relief measures, and has now led to the preparation of a comprehensive unemployment insurance plan, briefly summarized in a preceding chapter, which is expected before long to be enacted into law.

In Germany, as in most other countries, accurate figures are lacking as to the total number of unemployed, but as a result of the experience gained by governmental bodies in extending relief, official figures are now available as of the middle of each month, showing at least the number receiving ordinary and emergency relief. Under the present German laws a person out of work may, under certain conditions, receive ordinary relief for a period not exceeding 52 weeks and may then receive emergency relief for a further period. Besides those in receipt of relief, there are further groups in many of the communes, who are kept from being unemployed only by receiving emergency work at ordinary wages. The figures published by the Ministry of Labour of the Reich, upon which the table below is based, show the number of persons receiving public assistance. The number of those in receipt of such assistance reached its highest point in January and February when, in any event, seasonal influences are most adverse to employment. In March a slight improvement appeared and with the coming of spring the number has declined rapidly. But it is still large, and however encouraging the decline may appear, it is not yet sufficient to give definite a

The figures in the foregoing relate to the wholly unemployed. But in any period of extensive unemployment there is usually a large group doing part time work, who may be regarded as partially unemployed. The only available figures of part time work are those contained in trade. union reports which are published by the Ministry of Labour. While these reports by no means cover the entire field, nevertheless the trade unions are estimated to include nearly one-third of the German industrial workers, and the experience of trade union members may be regarded as fairly representative of workers generally. When industry slackens the increase of part time work precedes increase of unemployment, and, conversely, when industry revives those who are working on part time are usually put on full time before new workers are engaged. The table below shows a steady decrease of part time workers during the past six months, whereas the number of totally unemployed has lagged behind and decreased more slowly. At the same time, the trade union reports indicate overtime work in certain branches of industry. In the following figures, reports from miners' unions are omitted as they over only the last four months.

Some information regarding the trades and occupations of the unemployed may be obtained from the following sources: the monthly figures of the trade unions showing the percentage of unemployed in each group of their membership, the monthly list of the trades and occupations of those receiving relief, and the monthly statistics regarding the trades and occupations of those applying to the labour exchanges for work. From the February figures of these sources it seems clear that while the unskilled workers were by far the largest group, the next largest groups were those in the building, the clothing, and the metal and machinery trades. To particularize further would lead too far, but unemployment in varying degrees appeared to exist in practically all the various trades and occupations. Among the trades and occupations which in the following month showed the most rapid improvement were the clothing and the building industries. There was also a substantial reduction among the unskilled labourers, but they still continued to be by far the largest group. Agricultural workers out of employment were not one of the large groups, but they naturally decreased notably with the coming of spring. The textile, leather and timber industries, over a longer period, have shown marked decreases in unemployment.

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b. Physical Volume of Production

Only a few German industries make their production figure's .promptly available; as for the rest, more or less informative opinions are occasionally expressed and sometimes figures are printed, but so tardily that their value is mainly historical. It is to be hoped that in time the value of definite current information will be more widely recognized, but for the present dependence must be placed mainly on the figures for the two basic industries, coal and lignite, and iron and steel. In both cases the average production during the last six months has exceeded by a substantial margin the average monthly production of both 1925 and 1926.

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1. Coal and Lignite.

German coal production, which received a marked stimulus a year ago with the beginning of the British coal stoppage, maintained itself at a high level throughout the winter. The resumption of coal mining in Great Britain and the gradual return of British coal to the world markets reduced the foreign demand for German coal, but production has nevertheless been running at a rate above that of a year ago. In part this high production is a measure of the depletion of stocks at the time the British coal stoppage came to an end, but it has coincided with other evidences of German industrial activity.

On the basis of average daily output, coal production has tended to decline as the 1927 season advanced. In fact, the total production in April was the lowest since last June. The March total gives a somewhat exaggerated impression because of the unusual number of working days in that month.

The introduction of new machinery and improved methods have brought important economies in operation. The following diagram shows, for example, that the number of workmen of all classes engaged in the Ruhr coalfields is somewhat lower than in 1913, while the average daily output per miner is higher than that in 1913.

Exports of coal, coke and lignite have declined materially since last autumn, when under the influence of the British coal stoppage they were at their height. In the following table the exports of coke and lignite have been converted into their coal equivalent. The reparation deliveries include contract deliveries on reparation account as well as direct deliveries to the Powers.

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2. Iron and Steel.

The gradually increasing activity of the iron and steel industry that began a year ago has continued, and in April, 1927, the daily average production was higher than at any time since stabilization. The output of pig-iron, in April, was about 24 per cent and the production of steel about 27 per cent above the 1925 monthly averages. While comparisons with the pre-war output, either within the present frontiers of the Reich or within the frontiers as they then existed, are necessarily open to qualification, it is noteworthy that the output of German steel at present compares favorably with 1913 figures however calculated.

Blast furnaces, which were operating at about 65 1/2 per cent of estimated capacity during December, January and February, increased their activity in April to 68.7 per cent of capacity.

The rising volume of steel production in Germany together with the establishment of the international steel syndicate, to which reference was made in the last Report, has led to a change in the practice of the German Raw Steel Syndicate with respect to it control over the output of its members. Formerly the German Raw, Steel Syndicate (Rohstahlgemeinschaft) prescribed periodically certain percentages by which the basic quotas allotted to its members should be reduced. In December, 1926, for example, the percentage of reduction was specified at 20, but the majority of the mills in fact produced their full quotas or exceeded them. In substitution for this plan, limitations on production have now been related directly to the share of Germany in the total tonnage programme of the international syndicate. These programmes are fixed quarterly and the German share in them is allotted among the various producers according to their participation in the Rohstahlgemeinschaft. For the first quarter of 1927 the international syndicate's programme was reduced by 1,500,000 tons, partly in the expectation that reawakened British competition would affect the market for Continental steel. For the second quarter the programme was restored to 29,287,000 tons, where it stood in the last quarter of 1926. The German share in the international programme was exceeded by a considerable margin both at the end of 1926 and the beginning of 1927, and as a consequence German producers became liable to make substantial payments to the international syndicate.

The price of pig-iron has not changed as a result of the increased demand but has been consistently quoted at 86 reichsmarks per ton (Essen quotation) since October, 1925. The price of steel and core scrap increased almost without interruption from 47 reichsmarks per ton in May, 1926, to 66 reichsmarks per ton at the beginning of December, 1926. It declined to 59.5 reichsmarks per ton during February and the first part of March, but has since risen to 64.50 reichsmarks per ton.

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3. Textiles.

According to the index prepared by the Institut für Konjunkturforschung, textile production has shown an almost continuous increase since July, 1926, which was the low point in activity for that year. This index is made up on the basis of reports from a certain number of textile associations and covers only the production of cotton and flax yarns and fabrics. In April it stood at 117.5, as compared with 110.5 in January of this year and 76.6 last July. In the following table, which shows the index for the past six months, the basis used is July, 1924, to June, 1926 = 100:

The number of cotton-spinning spindles in Germany increased by 420,000, or 4 per cent, during the six months from July 31, 1920, to January 31, 1927. The total on the latter date was 10,900,000.

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4. Potash.

Sales of potash by the Potash Syndicate, which in the long run correspond fairly well with the production, have been running higher during recent months than in the corresponding months of a year ago. Total sales for the fertilizer year, May, 1926, to April, 27, were about 8 per cent higher than in the previous twelve months. The figures in the following table show total sales, in thousands of metric tons, in terms of pure potash for the fertilizer year May to April.

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c. Agricultural Yield.

Owing to the conditions described in the last Report, final figures for the 1926 crop have proved to be considerably below those for 1925. The bread cereals, which have an important bearing on the German import requirements, yielded as a whole about 20 per cent less than in 1925, but about 10 per cent more than the small crop of 1924. The potato crop, which is utilized for industrial as well as for food purposes, was substantially smaller than in either of the two preceding years. The following figures, which are taken from the final official reports, published in December, are considerably under the August 1, 1926, estimates.

Reports upon the condition of the 1927 crop are still too fragmentary to permit any forecast of the probable yield. Government and private agencies are endeavoring, however, to increase the crop, in the hope of making Germany less dependent upon foreign sources of supply.

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d. Housing Conditions and Building Activity.

The whole question of housing and rents has been one of Germany's most difficult post-war social and economic problems. The necessity for regulation as a protection against the worst effects of inadequate housing facilities has had the effect of discouraging private building, and in that way has probably prolonged the solution of the difficulty. Furthermore, the retardation of the building industry has undoubtedly had its effect upon the general business recovery of the country.

A housing shortage exists in Germany, as in many other countries, as a result of the war; and it is more pronounced than in some of the other countries, partly because even before the war housing facilities in Germany were inadequate. Progress in meeting the situation has been slow, and the annual rate of construction in post-war years has been less than before the war. Estimates of the shortage vary widely, but several years of construction at a rate considerably higher than that prevailing at present will doubtless be required to bring the supply into balance with the demand.

Supervision over the relations between landlord and tenant during the war had been found necessary in Germany as elsewhere, and as inflation progressed the measures of Governmental control became more severe. The States and communes placed limits on rents, protected tenants in other ways and restricted the freedom of house-owners in the utilization and disposition of their property. In March, 1922, the Reich intervened and passed a law providing for the actual fixation of legal rents throughout the country. But the advance in rents permitted under the law by no means kept pace with the depreciation of the old mark, and in December, 1923, at the end of the inflation period, rents are estimated to have been only about 20 per cent of the pre-war level. The Reich did not remove its control with the stabilization of the currency, but instead provided by successive laws and decrees that rates of rental should remain uniform for the entire country. Nevertheless, it has been recognized that the rates should be progressively raised, and July 1, 1926, was fixed as the date on which the pre-war level was to be reached. It was provided at the same time that this level should not be exceeded before March 31, 1927. The most recent decree of the Reich, issued on March 11, 1927, has provided that controlled rents shall be 110 per cent of the pre-war level as from April 1, 1927, and 120 per cent as from October 1st. Though these increased controlled rents, when compared with pre-war rents, are still materially below the general level of prices and the cost of living, nevertheless the increase represents progress towards eventual freedom from control under which rents will seek their own level.

In the meantime many efforts have been made by the Reich, the States and the communes to encourage building activity. Subsidies have been granted, and building has been encouraged by loans at favourable rates of interest. The Reich alone allotted 200 millions of reichsmarks in 1926-27 for loans of this character. During the past two or three years, moreover, most of the dwellings built have been financed from the proceeds of a heavy tax on rents levied under the Third Emergency Tax Decree of February 14, 1924. This subsidized building programme, however, has not succeeded in affording adequate relief, and, even though dwellings completed since July 1, 1918, are not subject to public control of rents, private capital has been reluctant to enter the field in competition with building subsidized by public funds.

The number of new buildings authorized, as well as the number of buildings completed, have recently shown an upward tendency, and are now considerably higher than a year ago. The following diagrams compiled from data published in Wirtschaft and Statistik illustrate the comparative movement.

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e. Domestic Trade.

The statistics as to domestic trade and business activity are still fragmentary and give but scanty material for general conclusions. All the available figures, however, indicate that domestic trade has maintained thus far in 1927 a volume considerably above the averages of either 1925 or 1926.

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1. Railway Traffic.

During the first four months of 1927 freight traffic on the German railways has been running about 20 per cent higher than in the corresponding period of 1926, which was a time of marked inactivity. In the summer and fall of 1926, freight traffic had a special stimulation arising from increased coal shipments as a result of the British coal stoppage. This largely disappeared around the turn of the year with the resumption of coal operations in England. Since then, the number of cars loaded with coal has been tending to diminish, but it is still from 15 to 20 per cent higher than a year ago, owing in part to the necessity of replenishing coal reserves but mainly to the larger manufacturing activity now under way. Coal, however, accounts for only a part of the total increase in freight traffic. The general movement of freight, as appears from the following diagram, is in substantially greater volume than in former years, though it reflects, as would be expected, similar seasonal influences.

Weekly gross receipts of the German Railway Company have shown much the same tendency as the physical volume of freight traffic and since the first of the year have been running from 15 to 20 per cent higher than a year ago. Net receipts from freight traffic alone during the first four months of this year were about 28 per cent higher than in the same period of 1926. Net receipts from passenger traffic, however, have been running only slightly higher than in the previous year.

More detailed comment on railway traffic will be found in the report of the Commissioner for the German Railways.

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2. Clearings.

Transfers of funds through the postal check system, which is widely utilized for settling small accounts especially at retail, have been relatively large ever since September, 1926. The marked increase which then began, and which has continued except for seasonal variation since then, has brought a volume of transfers from 15 to 20 per cent higher than the level of preceding comparable periods. Too much reliance, however, cannot be placed on postal check figures as a general index of business conditions, for, as is illustrated in the diagram below. the figure for postal check traffic during the first eight months of 1926 coincided closely with the figures for the same eight months of 1925, though the two periods themselves were widely different in character. The volume of funds transferred through the clearing section of the Reichsbank, which handles settlements between banks and the larger business concerns, has rapidly risen, according to the reported figures. The following diagrams show the relative course of postal check traffic and Reichsbank clearings.

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3. Turnover Tax Returns.

Returns from the turnover tax, if allowance is made for delays in collection and changes in the rate of tax, give a fair reflection of the volume of goods exchanged. The following diagram shows the estimated business turnover on a quarterly basis, after making the necessary adjustments in the returns, for the whole period from January, 1924, to March 31, 1927. The returns for the past six months indicate that the exchange of goods has been proceeding at a rate well above that of either of the two preceding years.

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4. Post Office Transactions

The figures for important transactions of the Postal service, while not yet reported for recent months, show moderate growth during the winter months of 1926-27. Parcels mailed and telegrams sent were from 10 to 20 per cent higher than in the corresponding period twelve months before. Telephone traffic also increased, though in smaller degree. The monthly averages for 1926, however, which were influenced by dull business during the first part of the year, were either about the same as in 1925 or slightly less. The total income of the Post Office tended to increase but was more or less irregular owing in part to special settlements.

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f. Consumption.

It appears from such meagre figures as are available that the volume of goods consumed in Germany continues to rise. In making comparisons with preceding years, however, it is necessary to bear in mind that the close of the inflation left a large part of the German population under the need of doing without many articles of ordinary consumption. The increases noted from year to year since then start from a low base, and comparisons are apt to be misleading. The main point to observe is that the tendency to rise has continued, and that the high unemployment during 1926 and the business crisis in the same year did not do more than to check the rate of advance temporarily.

The average weekly purchase made by each of the 1,700,000 members of the principal co-operative stores has continued to increase, even when allowance is made for the increase in the price level, and at the same time to reflect with marked fidelity the seasonal purchasing habits of the people. In the first three months of 1927 the average was 31 per cent higher than during the corresponding period of 1926, which in turn was 19 per cent higher than during the corresponding period of 1925. The average weekly purchase during the full year 1926 was 20 per cent higher than during 1925.

The production of meat under public control, which represents about two-thirds of the meat consumed in Germany, was 9 per cent higher in the first quarter of 1927 than in the corresponding quarter of 1926. For the entire year 1926 the production was about 6 per cent higher than in 1925. Meat consumption per capita may be roughly estimated at 48 kilograms in 1926 compared with 47 in 1925 and 43 in 1924.

The estimated figures for the consumption of sugar, coffee, tobacco and beer, as shown in the following table, were likewise higher during the first quarter of 1927 than in the first quarter of 1926. For sugar, coffee and beer the figures for the entire year 1926 were higher than in 1925, but for tobacco they were about the same in the two years. The heavy figures for imports of coffee in the first and third quarters of each year are due to half-yearly settlements of accounts between importers and the customs authorities for storage in non-official warehouses.

The foregoing evidence of a gradual upward trend in consumption agrees in general with the results of a study made by the Institut für Konjunkturforschung on retail trade in Germany, which indicates that the retail sales of clothing, furniture and foodstuffs were substantially higher in the last six months than in the corresponding months a year ago.

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g. Wages.

Standard wage scales in Germany remained almost stationary throughout 1926 except for a very slight rise in September. In the early part of 1927 there were some signs of a resumption of an upward tendency. The increases were no doubt associated to some extent with the growing activity of business, but a more practical reason from the standpoint of the worker was that a general advance in house rents subject to public control took place as of April 1, 1927.

The figures on which the following diagram is based are those compiled by the Statistical Office of the Reich and cover twelve important industries, showing the weighted average of the weekly wage scales fixed by agreement between employers and employees.

It is too much to assume that the standard wage scales illustrated in the foregoing diagram are broadly representative of the money income of German workers. Supplements to the contract or tariff rates are often paid in successful industries on the score of efficiency. It is reported also from several of the leading industries that whereas the number of workers and employees on the payrolls was much reduced upon the reorganization of industry, nevertheless the money payments represented in the payrolls remained about where they were. The explanation appears to be two-fold: first, that wages based upon output still command as a rule the former unit price, whereas improved methods and new machinery permit the worker to increase the number of units produced; and second, that the wages and salaries paid to office workers, who had been at a special disadvantage ever since the inflation, have been somewhat increased. No reliable figures from public sources are at present available to show the influence of these factors, or how far they have affected the general purchasing power of the people.

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h. Prices.

The general trend of wholesale prices in Germany during most of the past twelve months has been moderately upward. This contrasts with a moderate downward movement in Great Britain and the United States.

The varying price tendencies in the three countries are illustrated by the indexes of basic commodity prices which appear in the diagram given below. Indexes of this kind are more sensitive and move more rapidly and widely than the more comprehensive official indexes of general prices, which are based on a very large number of commodities. But though they sometimes exaggerate the movement of the general level of prices, they are valuable as showing promptly the price tendencies of commodities which form the. basis of industry.

The index numbers for Great Britain and the United States given in the foregoing diagram are those prepared by the Federal Reserve Bank of New York. The index for Germany is that of the Economic Service of the Transfer Committee. Each covers 20 basic commodities of generally comparable importance but not identical. The indexes all show price changes in terms of the 1913 average, and accordingly illustrate tendencies only; they do not compare, in terms of money, the actual price level of one country with that of another. The German index, which was formerly the lowest of the three, has now become the highest. This change in position is due quite as much to a decline of basic commodity prices in Great Britain and the United States as to the rise of such prices in Germany. British prices of basic commodities, which had been running only slightly above German prices up to July, 1926, rose sharply under the influence of the coal stoppage, but when that influence was removed in December, declined with even greater precipitancy than they had risen. Prices of basic commodities in the United States, except for temporary variations, have tended downward during the entire period.

A more comprehensive measure of the general level of wholesale prices in Germany than has been available heretofore is provided in a new index prepared by the Reich Statistical Office. It takes into account 400 commodities, is well balanced, and covers raw materials, agricultural products, semi-manufactured goods, and a considerable range of finished industrial products. This index stood at 132 in May, 1926, at 137 in December, and at 137 in May, 1927.

The rise which the new general index shows in German wholesale prices up to December, 1926, was due almost wholly to rising prices for farm products, principally cereals, which more than offset the declining prices of industrial finished goods. The poor crop of 1926, together with the protective tariff, had a marked effect on grain prices. In the early part of 1927 the index for the agricultural group contained in this index declined, and there were also some indications of a rise in prices of finished goods as well as raw materials; but it is still too early to estimate the importance of these movements. The prices of industrial raw materials on the whole have been very steady. The contrary movement of agricultural products and industrial finished goods, as illustrated in the diagram on page 111 [immediately above], tended to neutralize each other and to keep within narrow limits the resulting changes reported in the new general index.

In the further diagram which appears below, the new general index for wholesale prices is compared with the index of the cost of living, as calculated by the Reich Statistical Office. This index of the cost of living has risen slowly since March, 1926. By April, 1927, the rise amounted to about 6 per cent, owing largely to the gradual rise in regulated house-rents, estimated by the Statistical Office for the period at 26 per cent, and to an increase in the cost of foodstuffs amounting to about 7 per cent. Prices of clothing and miscellaneous articles included in the index declined. The cost of living index is based upon the average of four months in 1913-1914. The wholesale price index is based upon the average for the whole of 1913.

Section IX, Conclusions

Table of Contents