Monetary Reconstruction in Belgium 9780231886734

Citation preview

Monetary Reconstruction IN

By de l'Institut

Published

BELGIUM

LEON H. DUPRIEZ de Recherches de l'Universite

for

iconomiques de Louvain

et sociales

T H E C A R N E G I E E N D O W M E N T FOR

INTERNATIONAL PEACE

By

K I N G ' S C R O W N PRESS, 1947

New York

COPYRIGHT 1947 BY T H E CARNEGIE ENDOWMENT FOR INTERNATIONAL PEACE Printed

in the United States of

by The Vermont Printing

KING'S

America

Co.,Brattleboro,

CROWN

Vt.

PRESS

is a division of Columbia University Press organized for the purpose of making certain scholarly material available at minimum cost. Toward that end, the publishers have adopted every reasonable economy except such as would interfere with a legible format. The work is presented substantially as submitted by the author, without the usual editorial attention of Columbia University Press. Η Μs

Published in Great Britain and India by Geoffrey Cumberlege, Oxford University Press, London and Bombay

Preface I T WAS A T BRUSSEI-S IN 1920 that the Inter-Allied Financial Conference set the pattern of financial and monetary policy after the first world war. T h a t policy was based upon orthodox nineteenth century gold standard theory. Despite the inflationary experiences that many countries went through in the years that followed, indeed in some measure because of them, the gold standard was restored, at least in legal form if not in economic reality. Beginning with the Austrian stabilisation on a gold basis in 1922, the European countries pegged their currencies, one by one, on gold parities of their own choosing. Aided by a large and somewhat undiscriminating flow of credit to the war-devastated areas, the gold standard was maintained in operation until the financial panic in 1931.

In the ensuing decade of exchange instability, great advances were made in. monetary theory and practice. A much clearer knowledge was gained of the working of the credit system, and it became necessary in many countries to devise policies of conscious credit control. J . M. Keynes pointed out as early as 1923 that a shift was in process from the nineteenth century method of regulating the currency by reference to the available gold reserves and allowing the volume of credit to adjust itself to the supply of currency. This method of regulation gave scope for the free adjustment of international balances since national currencies were kept at parity with gold and the movements of gold in and out of central bank reserves were determined largely by international payments. T h e amount of credit available, and therefore the level of prices, in each country adjusted itself to the currency based on the gold reserves. T r a d e was free and exchange stability was maintained; but prices, production and employment in every

iv

MONETARY

RECONSTRUCTION

IN

BELGIUM

country were necessarily adjusted to the shifts in the balance of international payments. A f t e r 1931 monetary policy was directed, as Keynes had predicted, to regulating the volume of available credit in an effort to maintain prices, production and employment at stable levels within each country. T h e supply of currency, now divorced from the gold reserves in most countries, was adjusted to the volume of credit deemed necessary. T h i s necessarily involved sacrificing the freedom of international exchanges. T h e external balance of payments was n o longer the determining factor in, but was itself determined by, the national credit policy. Belgium, however, adhered to the gold bloc led by France after both Britain and the United States had depreciated their currency. T h e attempt to maintain the Belgian franc at its former gold parity, and at the same time to maintain free exchanges, led to a persistent deflationary pressure upon the Belgian credit system. T h e r e was a steady downward pressure on prices, with the usual accompaniments of public retrenchment, restricted production, falling wages and a rising volume of unemployment. T h e social distress thus engendered led to a crisis in 1935 and M. van Zeeland was called from the central bank to the office of Prime Minister. He decided to devalue the Belgian franc so as to relieve the strain upon the national economy. Professor Dupriez was given the task of calculating the extent of devaluation necessary to bring the Belgium price-level into parity with the British and American price-levels which by that time had come again into equilibrium after a prolonged period of instability. A f t e r studying the various elements of the price structure—import and export prices, fixed tariffs and cartellised prices, etc., etc.—he reported that adjustments would take six months to work themselves out; but the devaluation necessary was between 25 and 30 per cent. When the franc was finally stabilised six months later at 28 per cent below the old parity, the index-number of Belgian prices was within one per cent of parity with the British and American index-numbers. T h e author of this remarkably successful experiment in the practical application of monetary theory remained at the University of L o u v a i n throughout the G e r m a n occupation during the

PREFACE

ν

second w o r l d w a r a n d was actively associated w i t h the B e l g i a n resistance m o v e m e n t . H e was in a position t o watch closely the sophisticated " l o o t i n g by i n f l a t i o n " w h i c h he describes succinctly in the o p e n i n g section of the present study. T h e Nazi economists successfully transferred to the n a t i o n a l economies of their victims a large part of the monetary inflation by w h i c h they financed the costs of their conquests. T h e goods and services, a n d even the stolen art treasures, transferred to G e r m a n y were paid for by m a n i p u l a t i n g the credit and currency systems, a n d therefore the price-levels of the o c c u p i e d countries. In the second w o r l d w a r B e l g i u m fortunately did not u n d e r g o as serious destruction as was her fate in the first w o r l d war. A n t w e r p was heavily b o m b a r d e d ; but the tide of l i b e r a t i o n swept swiftly to the R h i n e so that the B e l g i a n people were largely spared the destruction visited by the o v e r w h e l m i n g air strength of the A l l i e s u p o n the territories where th Nazis elected to stand a n d fight. Nevertheless the credit inflation left by the Nazis called for p r o m p t and e x p e r t action. Professor D u p r i e z was one of the architects of this action. T h o s e w i t h i n B e l g i u m w h o h a d e x p e r t k n o w l e d g e of the monetary situ a t i o n worked in close b u t secret liaison w i t h the B e l g i u m gove r n m e n t in exile in L o n d o n , a n d t h r o u g h it, w i t h the British a n d A m e r i c a n governments. T h e story of this liaison is not the least interesting part of Professor Dupriez's study. It w o u l d serve n o purpose in this introduction to summarise the complicated story of the steps taken to sterilise r e d u n d a n t currency, to deflate a n d control price levels, to p i v o t an increased productivity u p o n h o l d i n g wages d o w n and e n s u r i n g an a d e q u a t e r a t i o n i n g system. B e l g i u m has a l o n g tradition of economic liberalism. Her leaders were backed by public o p i n i o n in their decision to rely u p o n free enterprise rather than state p l a n n i n g as the quickest road towards r e h a b i l i t a t i o n of the n a t i o n a l economy. T h a t road has not been w i t h o u t its disadvantages; b u t great strides have been m a d e towards e c o n o m i c recovery. T h e second w o r l d w a r was of so m u c h greater m a g n i t u d e than the first, and its e c o n o m i c effects were so much m o r e far-reaching, that it has been even m o r e difficult than it was a f t e r 1918 to get a clear picture of e c o n o m i c d e v e l o p m e n t s in the v a r i o u s countries. T h e machinery of i n t e r n a t i o n a l cooperation set u p by the U n i t e d

vi

MONETARY

RECONSTRUCTION

IN

BELGIUM

Nations is more elaborate than that of the League of Nations, but there has as yet been little public discussion of the economic conditions of European countries. In this second postwar period there has not yet been any conference comparable with the Brussels Financial Conference of 1920. In part this is because the issues are more complex and more difficult to diagnose. T h e guess may be ventured that we have by n o means comprehended as yet the f u l l extent of the difficulties and dangers that confront European reconstruction. T h e r e is so much more control and so much more dependence u p o n national government agencies, and there has been so much more loan assistance extended from the United Stats than there was in the first year or two after the last war, that it has been impossible to get a clear picture of the disastrous impoverishment and deterioration of the national economies. Professor Dupriez's clear and coherent account of the measures taken to cope with the situation in Belgium is therefore the more welcome. Here is a case where a gallant people have taken stock of a perilous situation and have embarked resolutely upon bold measures to deal with it. T h e danger has not passed, and mistakes have been made; but so far the results have been encouraging. T h e danger will not pass as long as the neighboring countries are in jeopardy. T h e Carnegie Endowment for International Peace has enlisted the services of economists in other European countries to make a survey of the monetary and economic situation comparable with that presented in this study of B e l g i u m by Professor Dupriez. It has done so in the belief that such information is necessary if public opinion is to be informed upon the progress of European reconstruction. March, 1947 J. B. Condliffe Associate Director, Division of History and Economics, Carnegie Endowment for International Peace

Contents I. The Development of the Problem before September, »944 II. Definition of Aims prior to Liberation

1

8

III. The Exchange of Circulation and the Census of Assets

17

IV. Special Taxation Problems

32

V. Foreign Exchange Policy

39

VI. Prices and Wages VII. Monetary Developments since October, 1944

50 62

VIII. Closing the Circuit

74

I X . General Appraisal

81

X. Principal Laws and Decrees X I . Bibliography

86 87

I The Development of the Problem before September, 1944 A T T H E T I M E of the liberation of the country, in September 1944, Belgium was fated with the problem of immediate definition of her monetary policy and of immediate action; for the inflation of the Belgian monetary system under the Germans was more rapid than the inflation that had taken place in most nonoccupied countries. T h e situation could not be solved by simply linking the franc to the pound sterling and the dollar; it could not be allowed to wait until final victory. Internal inflationary reactions would have been vigorous and could have precluded later attempts to maintain the standard of value. Quick action was the condition of success, and this was endorsed by public opinion as well as by economists.

T o understand the Belgian attitude toward the monetary problem, it is useful to examine first in what way inflation was imposed on the country, how extensive it was, and where the money had gone. It should furthermore be remembered that Belgium had undergone a previous experience of German looting by inflation and that, although serious blunders were committed in 1918-1920, public opinion was inclined to overstress them and to press for policies very different from those followed after the preceding war. Because of this recent history, the public was also quite aware of the nature of the problem, of its various implications, and of its size. Any soft policy of wishful thinking would have brought forth serious criticism. T h e inflation imposed on Belgium by Germany in the recent war took several forms:

2

MONETARY

RECONSTRUCTION

IN

BELGIUM

ι . T h e issuance of G e r m a n military money called Reichskreditkassenscheine s. T h e requisition, from the Belgian administration, of a monthly l u m p sum to cover "costs of occupation" 3. T h e development of the Belgian clearing credit on the Deutsche Verrechnungskasse T h e issuance of G e r m a n military money was an expedient used at the very start to cover the needs of invading troops until local machinery for creating paper currency could again be put into action. It never was used to any great extent because the Reichskreditkasse, which issued this money for use outside Germany, was legally bound not to exceed 3 billion Reichsmarks. T h e German monetary system had to be kept as sound as possible, and the Reichskreditkasse constantly needed to switch its issuing power from one country to another. Restriction of the issue wherever possible was therefore welcomed, but some legal tender for passing troops had to be maintained. Restriction on the circulation of Reichskreditkassenscheine was equally welcomed by Belgian authorities, because in 1918 when the Belgian currency was severed from the German, there had been wild speculation and last minute introduction of G e r m a n money into the country. A l t h o u g h the danger was not as great as if the legal currency of Germany itself had been in the country (as had been the case in 1918), nevertheless future developments were difficult to anticipate, and it was considered wise for both short-term and long-term reasons to restore a single Belgian circulation. T h u s the Reichskreditkassenscheine were withdrawn as early as 1941 and practically disappeared from circulation. T h e bank of issue withdrew the amount of 3,567 million francs in exchange for its own notes. T h e costs of occupation were first assessed at the rate of 1,250 million francs a month and, early in 1942, were raised to 1,500 million francs. These sums had to be paid by the Belgian Treasury unconditionally and without the slightest control over their use. It was quite clear from the beginning that they exceeded what could be called "costs of occupation" under the Hague agreements and that they enabled the Germans to purchase secretly anything that they wished to keep from the knowledge of

THE DEVELOPMENT

OF THE

PROBLEM

3

the Belgian administration. But although their needs grew in the course of years, these "costs" were increased only once. During the last years, the German administration apparently did not think it expedient to press for their increase, for the credit exchange system gave them every opportunity to draw whatever sum they needed without any discussion of principle. T h e "costs of occupation" up to September i, 1944 totaled 67 billion francs. T h e credit exchange was the third method used by the Germans to obtain Belgian money and thus to force the sale of goods and services in the occupied country. T h e German financial setup for the international "exchange" of goods was as follows: contrary to previous arrangements, all exchange rates were welldefined flat rates with no discrimination; all payments from any one country to any other were made through the Deutsche Verrechnungskasse. This was a central clearing house which debited and credited everyone in its books for any international transaction, but there was no limit to the amount which any country could register to its credit and debit; any quantity of goods and services could be transferred, without any actual payment, by a simple entry on the books. Germany used the system to empty occupied countries of their goods by simply incurring huge debts toward them. But the whole process was given a "commercial appearance," for the clearing house also served the function of paying for whatever international transactions were conducted in Europe. T h e economic implications of such an exchange clearing system are: Whenever any material was bought or requisitioned in any country, it was actually paid for by that country, for it could only be purchased with the country's money. Since trade was not bilateral, the Verrechnungskasse arrangement meant that the central bank was issuing money to the full amount of the credit that it was piling up in the central clearing house. T h e payment of any sum spent in Belgian money was thus forced on the Belgian administration, regardless of who might benefit by the purchase, and there was no way of escape. Similarly, any sum that was spent abroad for the use of Belgium would actually be paid by the foreign country involved, which in return would simply get a credit against Belgium in the central clearing house. This system

4

MONETARY

RECONSTRUCTION

IN

BELGIUM

meant that the net clearing credit Belgium had in the Verrechnungskasse corresponded to goods and services paid for in Belg i u m over and above what Belgium had paid a b r o a d . · A t the end of the occupation, the Belgian credit in the Verrechnungskasse amounted to 62,664 million francs, which corresponded closely to our credit in Germany itself, that is to the amount of "trade" which had gone only one way (transactions with other countries as a whole h a v i n g given rise to n o important credit or debit). In order to assess the inflationary effects of the occupation, additional facts should be taken into consideration: 1. Current public expenditures and receipts of the Belgian administration were disturbed by the war; for the entire 4 years there was a deficit of about 11 billion francs on current account. 2. T h e administration made a serious effort to cover part of its enormous financial burden by loans, either public or within the banking system. B u t it could make no patriotic appeal on behalf of its loans, and the general public abstained from subscribing. T h e gap between expenditures and receipts, therefore, could not be closed as tightly by credit as it was in free countries. In fact, 77,891 million francs were covered by "loans," but only 5,184 million of these were long-term loans; actually most of the money came from the liquid assets accruing within the credit, insurance, and financial establishments. T h e general picture of the origin of the inflationary development and of the form in which it materialized can be tabulated for the entire period of occupation. (See table on following page.) It is thus clear that the exactions of the German administration were considerably higher than the increase in the note issue and that most of the money drawn from the financial institutions was also absorbed by the Germans. In view of the fact that the usual G e r m a n practice was to pay (and even to pay well) for things and services—because it entailed less individual resistance than outright confiscation—the w h o l e of the monetary inflation in its wider implications may be attributed to the G e r m a n exactions. • In the case of persons displaced into Germany, the sums paid to their families in Belgium or transferred by them to Belgium were included in the clearing credits; the sums spent on the spot were not.

THE

DEVELOPMENT

OF THE

PROBLEM

5

ORIGIN AND N A T U R E OF B E L G I A N I N F L A T I O N

Public Expenditures

Million Francs

A. For the Belgian administration TOTAL A

87,758

B. Occupation costs Billeting of troops Indemnities to German nationals Net clearing credit Credit on Reichskreditkasse, including notes exchanged TOTAL Β

67,000 5,767 340 62,664

87,758

4,284 140,055

Ways and Means A. Ordinary receipts TOTAL A

65,102

B. Long-term loans Medium-term loans Short-term loans (market) TOTAL Β

5,184 36,738 35,738

C. Treasury bills in central bank Clearing and Reichskredilkasse credit Issue of small coins TOTAL C

13,927 66,948 3,433

65,102

77,891

84,308

W e should now determine how the monetary position of Belgium was affected by the foregoing facts in comparison with the normal years of average business conditions, 1936-1938 (by agreement among statistical organizations, this is now the accepted base of reference for normal pre-war conditions). (See table on following page.) T h e monetary circulation as a whole was therefore more than trebled. It is noteworthy that the entire circulation and the postal-check accounts suffered an almost parallel inflation. But the bank accounts suffered less inflation for two reasons: one was the fact that the usual bank customers held less of the additional cash than the wide group of producers and distributors w h o profited by the black market; another was that, either for fiscal reasons or as a precautionary measure due to war conditions,

6

MONETARY

RECONSTRUCTION

IN

EXPANSION OF N O M I N A L PURCHASING

Averages

Early May

1936-1938

1940

BELGIUM POWER

Early September

1944

(Mil(Million lion Francs) Francs)

Difference 1936-1938

Small coins and notes 1,456 National Bank notes 21,981 Luxemburg notes 158 Current accounts at Central Bank 3,467 Accounts at postal-check system 3,450 Current a c c o u n t s in banks 19,136

1,607 29,806 159

5,236 100,872

+ 3,780 + 78,891 — 158

360 459

909

4,117

+

650

119

4,668

10,947

+

7,497

317

13,546

43,113

+

23,977

225

49,648

50,695

164,285

+114,637

331

(Million Francs)

TOTAL

Per cent of 1936-1938

m o n e y balances were not held in the banks. T h e s e same conditions created a more than p r o p o r t i o n a t e increase in b a n k notes, w h i c h were m u l t i p l i e d by 4I/2. A comparison may be made between the monetary situation in September 1944 and our previous experience of 1918. In December 1918, after the exchange of G e r m a n Marks c i r c u l a t i n g in the country and a certain degree of deflation t h r o u g h a voluntary loan, the monetary circulation was at 307 per cent of the first 7 months of 1914. B a n k accounts were at 345 per cent, b u t the system was f u l l of l i q u i d assets in the f o r m of current accounts at the N a t i o n a l B a n k w h i c h represented unused money a n d potential inflation. N o t e s and sight liabilities were at 405 per cent. T h e figures prior to the exchange of M a r k s are not a v a i l a b l e as our currency was undistinguishable f r o m that of G e r m a n y . Inflation at that time was apparently a b o u t the same as in September 1944, b u t the fact that it proved impossible to sever the t w o currencies instantaneously proved a h a n d i c a p in 1918 and created a serious last-minute inflation. In this respect, the situation p r o v e d to be better in 1944, for G e r m a n m o n e y circulated only i n a small district in the East.

THE DEVELOPMENT

OF THE

PROBLEM

7

Politically, the monetary problem was easier to handle in 1944 than in 1918. Because of past experience, public opinion was very conscious of what an easy-going policy would mean; general support could be obtained for drastic measures, especially if they could be aimed particularly at war profiteers. There was general support for severe deflationary measures among those who were discussing and preparing post-war policies within the country. Such differences of opinion as existed tended to be over the means rather than the ends, for the views held on the statistical position and the levels to be aimed at were very similar. In the government-in-exile circles in London, the deflationary tendency also prevailed, especially after they became fully cognizant of the internal point of view.

II Definition of Aims prior to Liberation I T M A Y A S T O N I S H people outside occupied countries that the principle of monetary deflation should have been so widely accepted in Belgium, both by public opinion and by economists, so strikingly in contrast to the fears of deflation commonly experienced abroad. Moreover, it had to be maintained and explained that this deflation would be different from deflations in the past, that it would mean n o protracted depression. T h i s challenge was met.

T h e principle involved was as follows: the monetary circulation was more than trebled, but price controls had maintained official prices somewhere between 100 and 200 per cent, depending upon the individual case; and wage controls had maintained nominal wages at 133 per cent of the average of 1936-1938. T h e effect of inflation on purchasing power had thus only been evident on the black market, and there nobody would regret falling prices. Hence at the very moment of liberation, there was a unique opportunity to deflate existing cash holdings without any adverse reaction on wages. It was even reconcilable with a certain increase in wages, for without this the inflationary developments in prices would be ahead of those in wages, as they were in France. Production processes, which were at a standstill in any case, could be reorganized under this principle at least as well and certainly more soundly, with fewer increases in costs and prices. It was a case of bringing money into relation with wages and prices immediately in order to reorganize the Belgian economy on a sounder footing and to safeguard real incomes. For practical purposes, it was generally agreed that the wage level was the fact that, besides being the only one readily ascertainable, was the one of greatest political importance. Except for

DEFINITION

OF

AIMS

9

some degree of pressure on nominal wages, unavoidable at a time when real wages were below starvation level, it seemed expedient to establish levels of money circulation and prices in accordance with the level of wages attained. T h u s any deflation in factor costs, the only one that really mattered, was excluded; whereas any further inflation was opposed. Once this principle was agreed upon, a further consequence followed: the proposed deflation must be drastic and instantaneous. T h e r e were two reasons for this: one was that any delay would mean progressive increases in factor costs, especially in nominal wages, as inflation worked its way into the nation's economic life, and the amount of possible deflation would diminish with time. T h e other was that to fulfil the intent of such a deflation—to establish an equilibrium between prices, exchange rates, and inflation at the beginning—action must be taken before economic life started to reorganize. T h e practical organization of a very rapid monetary reform was obviously a difficult problem, for there had to be co-ordination between the plans made in London and those made in Brussels. Some things, such as exchange rates, had to be determined in L o n d o n before the liberation; other things, such as adequate preparation of administrative machinery, could be done only in Brussels. Furthermore, everything depended on the conditions in which the reconquest would leave the country and on the possibility of using local administrations without delay. It w o u l d not have been expedient to proceed with most of the measures before the complete liberation of the country, for any knowledge of the government's intentions might have invited serious fraud, both by the population and by the Germans, in territory still occupied. Actually the measures were taken when only a few coastal villages were still in G e r m a n h a n d s . · J u s t before the liberation of the country, the government in L o n d o n decided that the rate of exchange for the Belgian franc would be 176.625 francs to the pound, making an exchange rate of 43.70 francs to the U. S. dollar. In fact, this rate had appar• This was before von Rundstedt's offensive. Incidentally this left the Germans without any locally accepted currency in the Ardennes.

10

MONETARY

RECONSTRUCTION

IN

BELGIUM

ently been agreed upon at the Bretton Woods Conference. Why was it chosen? What did it mean for Belgium? T h e obvious answer to the first question is that this rate had been the rate of the Congolese franc within the Sterling Area since J u n e 1940 and that it therefore appeared as a sort of existing rate for the currency of free Belgium. Any other rate would have had to be substantiated by some conclusive evidence, but little evidence was available at the time. T h e rate established was the same as that of the French franc in J u n e 1940, which had been rather summarily adopted at that time for the Belgian franc because of a strange series of circumstances and arguments having nothing to do with economics. T h e Congolese franc had followed, and its rate had then been maintained after the fall of France despite its inflationary effects on Congolese prices. Four years later, the fear of upsetting the price system and the financial assets in the Congo certainly played a part in maintaining the sterling rate for Belgium itself. In any case, at that time, any international discussion of the exchange rates was a difficult matter. On the basis of existing monetary conditions, the rate of 176.625 to the pound was presumptuous and could have been considered "wishful thinking." Furthermore British and American experts might well have had some doubts as to the possibilities of immediate and drastic reform in a liberated country. But the Belgian authorities had to anticipate the proposed reforms, because otherwise exchange rates related to the actual inflation would have made all their efforts useless.* For internal economic conditions, the new exchange rate meant a 17 per cent depreciation against sterling, since the average rate of 1936-1938 was 146 francs to the pound. Against the dollar, the depreciation was 32 per cent. Acceptance of the 1940 rate of the • T h e status q u o of the Congolese rate which thus emerged from conflicting evidence and lack of clear arguments reacted on the rate of the Dutch guilder, already linked to the Belgian franc by previous agreement at 16.52 francs to the guilder. Although the Dutch monetary reform was only prepared and carried out much later, some circles in the Netherlands have criticized the devaluation thus accepted without taking into account the Dutch deflation.

DEFINITION

OF

AIMS

11

French franc therefore meant that Belgium would not pursue a full-fledged re-establishment of the value of the franc, with the corresponding degree of deflation, but that a somewhat easier policy was deemed satisfactory. On the basis of the then current British prices and wages, the exchange rate meant that the purchasing power parities with Britain, so important for our economic life, would be approximately as follows, and that these should become an aim for our general policy: Pound exchange rate: 176.625 P e r c e n t of depreciation from 1936-1938: 1 7 % Cost of living parity with British prices at 1 3 5 % : 162 Wages parity with British hourly wages at 1 4 5 % : 174 Wholesale prices parity with British prices at 1 5 5 % : 186 Normal monetary circulation (notes, bank and postal-check accounts) for price level at 1 6 2 % : 76 billion francs. As things stood in Belgium on the eve of the liberation, these relations meant that official wages could be increased nominally by 30 to 40 per cent without trouble, and that the adjustment of official prices involved some increases and some decreases. In fact, to students of conditions within Belgium, it appeared that the franc could have been established at 150 to the pound providing real wages could be increased rapidly, and that, in the long run, we would thus have reaped the social and financial advantages of avoiding depreciation in relation to sterling. But, although we did make plans on the basis of such a complete reform, we realized that the rate of the Congolese franc would probably weigh seriously in the decisions on the other side of the Channel. T h e type of price policy adopted to make the chosen level of prices gradually effective will be discussed later. L e t us now examine the fundamental problem facing the Belgian government: the excessive monetary circulation. T h e last estimate before the liberation, which we made in Brussels to show the situation to be handled, gave these probable figures f o r the end of September 1944:

12

MONETARY

RECONSTRUCTION

IN

BELGIUM

E S T I M A T E OF M O N E T A R Y S I T U A T I O N TO B E D E F L A T E D , SEPTEMBER

CIn millions

Monetary circulation Notes Bank accounts Postal checks Small coins and denominations

1944

of

francs)

1936-1938 Level

Estimate for Sept. 1944

Index Sept. 1944J1936-1938

46,694 22,505 19,133 3,524 1,400

163,000 101,000 48,000 11,000 5,000

347 448 252 312 358

These figures correspond closely with the statistical position as assessed above. T h e development of total monetary inflation appears a little lower only because current accounts at the National Bank are omitted; as these are interbank accounts, this is a correct procedure. T h e excessive circulation was therefore correctly assessed at 347 per cent of normal pre-war years. T o ascertain the degree of excess, two bases of comparison were possible: 1. On purely quantitative grounds, f o r a figured price level of 162 per cent, the circulation at 347 per cent of normal should be halved. If the Belgian money thereafter appeared entirely sound, this cut might appear a little too drastic, for the public might be willing to hold bigger real cash balances than before the war. But real cash holdings of 1936-1938 were already large, and as the monetary position might not prove clear immediately (as was, in fact, to result from the continuation of the war) people might want to hold smaller real cash balances. T h e need of goods for reconstruction might also be an inducement to spend cash balances even at high prices. Since this was the greater probability, halving the circulation was certainly not excessive. 2. On grounds of international comparison, we might consider it sufficient to deflate to the British level of inflation so as to induce n o natural tendency for an outflow or an inflow of funds. T h e level of British circulation (money plus bank accounts) was approximately 195 per cent of 1936-1938, which would put Belgian circulation at 181 per cent of normal. But such a consideration would not become valid for a long time in view of all the exchange controls. Moreover, it implied that Great Britain would

DEFINITION

OF

AIMS

13

d o n o t h i n g a b o u t its o w n circulation, or at least that we w o u l d have to u n d e r g o f u r t h e r reforms as B r i t a i n deflated her o w n position. T h i s basis f o r comparison, therefore, could not be considered. T h e scope of the p r o b l e m to be solved h a v i n g thus been established w i t h little diversity of o p i n i o n , it remained to be decided by w h a t m e t h o d the circulation c o u l d be a p p r o x i m a t e l y halved. O b v i o u s l y the purely classical methods of b o r r o w i n g in the market supported by patriotic appeals w o u l d be q u i t e inadequate for a p r o b l e m of such size; they w o u l d also p u t on the T r e a s u r y the immediate b u r d e n of a h i g h l y aggravated service of the p u b l i c debt. Effective deflation i m p l i e d methods of c o m p u l s i o n by w h i c h part of the cash balances w o u l d be definitely taken out of circulation or suppressed. Historical e x a m p l e s were few except in cases of wildest inflation. T h o s e that were k n o w n were unsatisfactory; they h a d t o be e x a m i n e d critically for their faults rather than for their benefits. G r e e c e h a d cut her banknotes in two in 1922, o n e half circulating as m o n e y and the other b e i n g transformed i n t o public debt; b u t inflation h a d c o n t i n u e d a n d the benefits were lost. Early in 1920, Czechoslovakia had e x c h a n g e d the nationalized A u s t r i a n K r o n e n at the rate of one to one, but w i t h a franchise per person w h i c h h a d reduced the net effect to something below 30 per cent. T h e results for the value of money were clearly good, but the c o u n t r y h a d been precipitated i n t o a violent crisis, and the g o v e r n m e n t felt obliged to maintain a rigorous credit policy for some time. In our view, however, this experience offered no deterrent to us. In the first place, the Czech Minister R a s i n was able to carry through his reform only in J a n u a r y 1920, o n the eve of a w o r l d crisis; whereas we w o u l d act before any reorganization of economic activity, under strongly e x p a n d i n g conditions. In the second place, Czechoslovakia was o b l i g e d to maintain restrictive policies because benefits were insufficient: but w e believed that, w i t h a d e q u a t e action, there w o u l d be n o need for f u r t h e r restrictive policies. H e n c e the field was really open for theoretical t h i n k i n g a n d new devices. N o w a choice h a d to be made between t w o methods. O n e of them was to consolidate all excess circulation, c h a n g e it i n t o p u b l i c debt, a n d f o l l o w this with a rigorous a n d all-inclusive tax-

14

MONETARY

RECONSTRUCTION

IN

BELGIUM

ation policy designed to reimburse all or part of this public debt. T h e other was a more direct monetary reform, which would simply diminish the value of cash holdings without creating any title to public debt and thus solve the problem instantaneously without prolonged and difficult fiscal remedies. T h e first of these methods would have been the obvious choice if inflation had been less important and if most of the nation's monetary turnover had not taken place for several years at enormous black market prices. T h e second method would have been the only choice if inflation had reached the point where consolidation of the money as public debt, coupled with the increase in purchasing power of the money in circulation inherent in the monetary reform, would have provoked a prohibitive increase in the service of the debt. T h e problem was so difficult that considerable discussion arose in competent circles as to which method would be the more expedient. T h e matter was settled, however, by the government in London which adopted the first choice. Because of the amount of the claims involved, the controversy actually had more to d o with the justice of each method and the social considerations than with monetary technique. T h o s e who advocated the blocking and consolidation consistently maintained that a franc was always a franc; and that, whatever the difficulty of such indirect methods, the government ought to go through the process of consolidation, and then tax excess profits and capital to reimburse this debt. T h e y hoped that, by sweeping administrative action, war profiteers could be found out and "soaked," for they believed that most of the excess purchasing power was in their hands. T h e y did not shrink from extensive government controls to succeed in this vast financial redistribution, and they believed that these controls would be immaterial to the reorganization of industry and commerce. T h e more drastic solution of those who would have preferred to diminish the nominal value of money and bank accounts was advocated for very different reasons. In the first place, these circles had some doubt of the political possibility of carrying to completion a long and protracted reform in the fact of the vested interests of taxpayers and of holders of public debt, and they

DEFINITION

OF

AIMS

15

therefore preferred an instantaneous blow. T h e y also considered that it was impossible to assess exactly what the special taxes could produce and that it would therefore be difficult to bring the taxation program into correct relation with the monetary reform. In addition, they expected that special taxes for other reasons, such as war damage indemnities, would be necessary. Second, in the light of economics, they considered that the more drastic solution would reduce necessary controls and allow a more rapid return to economic freedom. T h i r d , on grounds of social justice, they opposed the other solution. For they had been able to establish that, despite enormous black market prices, only a small percentage (perhaps 5 per cent) of the real durable wealth of the country had been transferred from former holders to war profiteers, while nominal claims accumulated rapidly in favor of the latter. T h e y believed that consolidation of these nominal claims by monetary reform enormously increased the purchasing power held by these profiteers and that no fiscal system based on individual taxation could adequately counteract this phenomenon. Therefore, they believed that an "objective" taxation of liquid claims, which the war-impoverished held in small quantities and the war-enriched held in large quantities, was the most effective method of dealing a fast and heavy blow at all war profiteers. T h i s is but a summary indication of the problems that were raised; we shall not examine these problems, although the arguments here involved will be raised in evaluating the reform as it was carried out. One further observation should be made about the administrative set-up which was very elaborate and played an important part in the reform. T h i s set-up was indispensable for the reform as it was carried out. T h e other type of monetary reform could have been effected in principle without any elaborate administrative machinery, by means of a decree containing only rules that could be applied automatically. It would therefore have been the only efficient alternative had military operations left the country in utter confusion. B u t even if the other choice had been made, the administrative measures that were taken would, on the whole, still have served very useful purposes. T h e y would simply have

16

MONETARY

RECONSTRUCTION

IN

BELGIUM

been somewhat less stringent and less complicated. Among the experts who worked on these matters, there was therefore general agreement on the exchange of the monetary circulation as it was effected; there was also agreement of principle on most other administrative measures that were taken. But there were differences of opinion on the extent and scope of certain controls.

III The Exchange of Circulation and the Census of Assets ON THE EVE of October 6, 1944, just over one month after the liberation of Brussells, the Belgian government issued a decree which froze instantaneously the whole of the note issue in notes of 100 francs or over (96 per cent of the nation's cash); organized a census of the note holdings to be carried out in five days; decided to distribute to the people within these same five days a living allowance in new money; organized the further retirement of the whole circulation, coupled with the blocking of part of the currency and the gradual issuance of new currency for the remainder. Experience showed that the entire program could probably have been carried out in 4 days instead of 5. Of course, such a sweeping administrative action could only have been carried out with extensive and careful preparation. This preparation rested on a critical examination of the exchange of the Marks in 1918 and on a careful survey of the administrative means at our disposal. T h e action could not have succeeded at such an early date if the preparations made in London and in Brussels had not been completely complementary. London printed the new notes, impossible to prepare in Belgium; Brussels provided the entire administrative machinery, ready in all its details. T h e decree was made public by radio on a Friday evening; on Sunday morning, the necessary forms were distributed to every household by the post office; on Monday morning, all banks and post offices were ready to begin operations. T h i s extensive action had several purposes, and it had to be organized in a manner to cope with several dangers. T h e purposes can be considered as fourfold: 1. T o contract the monetary

18

MONETARY

RECONSTRUCTION

IN

BELGIUM

c i r c u l a t i o n by b l o c k i n g part of it, to be transformed later into p u b l i c debt—thus t a k i n g it definitely out of the monetary system. 2. T o establish o n e of the m a i n bases of fiscal action against w a r profiteers by assessing exactly the l i q u i d holdings, w h i c h were considerable in their hands, and b l o c k i n g them. 3. T o e x c l u d e from circulation any b a n k notes w h i c h the G e r m a n s or the collaborators w h o h a d fled m i g h t h a v e carried away, a n d w h i c h m i g h t otherwise h a v e been used at a later date. 4. T o create a temporary but serious shortage of cash in order to cause a reaction in black market prices; this was effected by a temporary a d d i t i o n a l blocking of deposited currency. T e c h n i c a l l y it was necessary to take action suddenly and very rapidly so as not to allow time to the war profiteers to disperse their cash a m o n g smaller holders, by g i v i n g them a discount and thus to evade fiscal assessment. T h e suddenness of the move was also to k e e p p e o p l e f r o m h o l d i n g their money for later e x c h a n g e a b r o a d a n d f r o m e x p l o i t i n g any other loophole of w h i c h we m i g h t not have been aware. In any case, a " c l e a n " measure was an i m p o r t a n t c o n d i t i o n of p o p u l a r assent. N o w , this r e q u i r e m e n t for r a p i d action created a serious administrative problem. If the w h o l e of the actual circulation, a m o u n t i n g to about 300 m i l l i o n notes, was to be h a n d e d over the counter and counted, it w o u l d have taken several weeks, as had been shown by the experience of 1918. Furthermore, w e could not be sure in advance that it w o u l d be safe to oblige people, especially in rural areas, to transport large sums to the b a n k or post office, nor to require the rural post offices to h a n d l e and k e e p these sums as l o n g as they were valuable to any bearer. T h e very first r e q u i r e m e n t was, therefore, to organize the procedure in such a way that the note circulation w o u l d first be b l o c k e d at h o m e w h i l e its complete picture was taken, a n d that actual deposit or e x c h a n g e w o u l d proceed later in orderly fashion. A further c o m p l i c a t i o n was the need for some i m m e d i a t e circulation on a per capita basis. T h e p r o b l e m was h a n d l e d by a d o u b l e operation: 1. T h e head of each family was entitled t o exc h a n g e notes u p to the a m o u n t of 2,000 francs per m e m b e r of the family. T o d i m i n i s h operations at the counter, only one e x c h a n g e per family was permitted. T h e ration card of the f a m i l y h e a d ,

CIRCULATION

AND

ASSETS

19

w h o carried a special type card, had to be shown for each exchange. T o prevent any double exchange, coupon number 12 was cut off the "non-eatable products" ration card. 2. A l l notes held above those which were exchanged were to be declared on a special form. Anyone over the age of 21 years was entitled to make his own declaration, or the family head could make a single declaration for his whole family, but no one was permitted to make more than one declaration. W h e n this was handed over, coupon number 1 1 of the ration card was removed. T h e legal consequences of this double action were as follows: First, any notes which were neither declared nor exchanged became null and void, and deflation went into effect to the f u l l amount of their value. Second, no one would be allowed to deposit, within the next weeks, more than the amounts he had declared for the several denominations. T o safeguard the system against excessive declarations, in the hope of collecting notes from profiteers at a rebate, it was made an offense to declare more than one had. T h e picture of the circulation as it was on October 7, 1944 could thus be drawn very accurately, and dispersal of concentrated cash holdings under numerous heads was made very difficult. Being unable to weigh fully all consequences in so short a time, people seem to have been quite unwilling to declare f o r others; but they apparently helped each other, among friends, to increase their ready cash in the cases of some who did not possess the maximum 2,000 francs. Administratively, the whole process ran smoothly, and the declared notes were deposited in an orderly way. T h e post offices, which had played a big part in the declarations, received amounts only u p to 10,000 francs. A l l larger amounts were handled through the banking system. T h e totals, as of November 20, 1944, were computed as shown in the table on following page. T h i s indicates, from general averages, that almost 60 billion francs were held by people declaring more than 25,000 francs. B u t the minimum cash holdings of this higher group in the statistical table are very low; however, the group involves about 10 per cent of the total population, or probably about one-third of the number of declarations, hence the figure is of little use as an index of the concentration of cash holdings. It is more inter-

20

MONETARY

RECONSTRUCTION

IN

BELGIUM

EXCHANGE AND D E C L A R A T I O N OF T H E M O N E T A R Y CIRCULATION

Number

Exchange Declarations of: less than 5,000 5,000 to 10,000 10,000 to 15,000 15,000 to 20,000 20,000 to 25,000 more than 25,000

Value: Million Francs

14,363

207,600 182,700 142,600 782,000

1,107 3,640 J,314,000

68,686

87,796 esting to observe that notes to the amount of ίο to 13 billion francs were not declared at this time. T h i s figure was reduced by later declarations of returning prisoners and by the census of holdings of Belgian notes abroad. T h e final "incidental" deflation due to lack of declaration was to be somewhat above 4 billion francs, or about 4 per cent. We should now examine how the main purposes of the reform were served. T h e contraction of the monetary circulation was achieved by blocking and removing from the monetary circuit 60 per cent of the circulation over and above certain sums which were not blocked. This measure was not coextensive with the note census: it did not cover certain parts of the circulation, such as the 2,000 francs exchanged per capita and the additional 3,000 francs per account. Nor did it cover the notes deposited by public authorities, the notes of certain charitable organizations, and the cash holdings of the banking system. On the other hand, the scope of this measure was much wider than that of the note census in that it applied equally to bank accounts, to assets held in the postalcheck system, and even to savings-bank deposits, although the latter were in no way a part of the monetary circulation. There was, however, one important difference between the handling of the notes and of the bank and postal-check accounts: the latter were not blocked in so far as they did not exceed the balances held as of May 10, 1940. T h i s distinction could not be made for bank notes, which were held at that time instead of bank balances by all private persons who did not indulge in

CIRCULATION

AND

21

ASSETS

w i s h f u l thinking. Moreover, the l o w e r i n c o m e groups h a d n o b a n k accounts anyway. H e n c e the distinction was not justified, a n d it was subjected to deserved criticism. A general picture of the contraction o b t a i n e d by blocked accounts can be d r a w n as follows: E X T E N T OF T H E M O N E T A R Y D E F L A T I O N , AS OF D E C E M B E R 3 1 ,

(in billions

of

1944

francs)

Total Monetary Blocked Per Cent Circulation Circulation Blocked (free, frozen and blocked)* Coins and small denominations Bank notes Current accounts at Central Bank Bank accounts in Belgian francs Postal check system Total

6.4 91.6 3.6 42.7 11.0 155.3

39.8

43.5

16.4 2.6

43.3 23.6

58.8

37.8

If the non-declared notes are a d d e d to the total of the blocked circulation, w e find that a b o u t 63 b i l l i o n francs were w i t h d r a w n f r o m circulation, or between 38 a n d 39 per cent of the circulation of O c t o b e r 1944 (164 billion francs). B u t the notes w h i c h the government could issue immediately were insufficient to exchange in a short time for whatever r e m a i n e d in circulation b e y o n d the blocked accounts—accounts w h i c h a m o u n t e d t o a b o u t 58 b i l l i o n francs, or perhaps somewhat less, p r o v i d i n g people c o u l d be persuaded to leave their money in the b a n k s as l o n g as the sums were already k n o w n to fiscal authorities a n y w a y . T h e g o v e r n m e n t therefore had to provide for a g r a d u a l release of money; various measures were taken to insure p a y m e n t of current wages a n d salaries, to limit transfer of b a n k accounts into cash, a n d to permit slow release of small sums only. T h e r e is n o need to e x a m i n e here how the stringency due t o an insufficient supply of notes was gradually eased. T h e reform included, however, one more feature w h i c h was to • Excluding the notes not declared in the original census on Belgian territory.

22

MONETARY

RECONSTRUCTION

IN

BELGIUM

be a tool of monetary and economic policy during the period of reconversion: the provisional blocking of the 40 per cent of notes, bank accounts, and postal-check accounts not subjected to the 60 per cent permanent blocking, leaving only the basic franchises at the immediate disposal of the public. T h i s meant that the free circulation was limited to the following items: RELEASE OF FREE CIRCULATION IN 1 9 4 4

(in millions

of francs) Immediate Release

Coins and small denominations, not subject to census 6,400 Bank notes exchanged 14,363 Bank accounts as of May 10, 1940 15,400 Current accounts at National Bank 3,600 Private postal-check accounts as of M a y 10, 1940 less than 3,000 T o t a l postal-check accounts Additional 3,000 francs per acabout 11,000 count release or release of in notes 1.000 francs per employee; about 3,700 in public authorities' accounts, postal check etc. accounts 57,400

Total Release to Dec. 31,1944 6,400 40,800 (all notes) 15,900 3,400

8,100

Included in above

74,600

T h u s the private individual's free cash and bank holdings were virtually limited to the per capita basis, plus those sums necessary to pay wages. T h e only important exception to this rule was the allowance on bank balances as of May 1940. T h e remainder of the nation's cash was frozen and put under the discretionary power of the Minister of Finance, to be released as he saw fit. W h a t were the purposes of this far-reaching abandonment of the "rule of law?" T h e most immediate purpose, and a very important one, seems to have been to break the black market by causing an immediate monetary stringency which would take away purchasing power. In this respect, the provisional blocking was certainly an utter failure, and the reasons for this are obvious. O n the one hand, the reform provided for payment of current incomes, while nominal

CIRCULATION

AND

ASSETS

23

wages were increased 60 per cent at exactly the same moment. Since expenses on the black market were paid out of incomes much more than out of savings, the main source of purchasing power was not exhausted. On the other hand, hungry people will do without anything rather than food so that, as long as scarcity exists, no monetary measure can cope with the black market. A further idea behind the move for provisional blocking rested on a rather narrow view of the quantity theory of circulation. T h e government was obviously afraid to leave abnormal amounts of purchasing power in circulation at a time when only a limited amount of goods was available. It therefore entertained the idea that the circulation should first be unduly restricted and then released as production increased. N o w this does not take into account the psychological factors behind the "cash-balance" analysis of the quantity of money. Cash balances had to remain high, not only because the black marketeer had to be paid in cash, but also because the precautionary reaction to the current instability required larger amounts of cash on hand. T h e very limited rationing system, which broke down to an even greater extent in the winter of 1944-1945, provided neither for normal needs nor for any unexpected need, which would certainly be costly. T h e required change of habit would also have the effect of making people ill at ease with reduced balances. In view of these facts, there was certainly no reason to release cash in relation to the volume of the very restricted industrial activity and the official transactions in agricultural produce. Indeed, there would have been nothing inconsistent in freeing the circulation immediately at a point close to its ultimate level. T h i s does not, however, settle the whole problem. By freezing an important part of the non-blocked circulation, the Minister of Finance could free the 40 per cent according to needs, and could use this function to ensure certain priorities. In fact, releases on the 40 per cent frozen money would take the place of usual banking facilities, and credits and the monetary expansion would be directed in varous channels by public authority rather than by the banking system. T h e initial unconditional releases were of such a nature that the money was apportioned rather equally among consumers or used immediately f o r the paying of current

24

MONETARY

RECONSTRUCTION

IN

BELGIUM

incomes. All commercial balances were severely curtailed; maldistribution of the currency was such that small shopkeepers were especially affected and, in some cases, even the distribution of rationed products was hampered. It took time for the deblocking committees to work properly; as a result, this part of the monetary reform contributed much to rendering unpopular, among those who suffered from administrative delays, a reform which had, on the whole, received very wide public support at the start. It- is highly questionable that the apportionment of ready purchasing power by government authority through deblocking actually served any good purpose. It certainly worked more efficiently for big than for small business. Nor is there much to be said for handing this task over to new committees rather than to an experienced banking system. Furthermore, it introduces the principle that, since deblocking is in the long run a right, a one-way expansion of currency is organized, regardless of future needs. Meanwhile, this potential expansion is often overlooked by many in assessing their actual monetary positions, and the results may be conducive to wishful thinking. Following are the statistical results of the provisional freezing; figures are given from an early and a later date to show how deblocking proceeded: S C O P E OF PROVISIONAL FREEZING OF T H E

(in billions

of

October, Total Monetary Circulation C o i n s a n d small d e n o m inations B a n k notes Current accounts at C e n tral B a n k B a n k accounts in B e l g i a n francs Postal-check system Total

6.4 91.6

26.5

francs)

1944

Amount Frozen

CIRCULATION

November

Total Per Monetary CirculaCent Frozen tion

29.0

3.6

30,1945

Amount Frozen

Per Cent Frozen

6.9 126.1

19.6

15.5

3.5

0.1

0.3

42.7 11.0

10.9 1.7

25.6 13.2

57.5 19.6

7.8 0.6

13.6 3.3

155.3

39.1

25.2

213.6

28.1

13.2

CIRCULATION

AND

ASSETS

25

As things stood in October 1944, a total of 97.9 billion francs was taken out of a circulation of 155.3 billion which the government was pledged to hand back in free money at some later date, to the amount of 39 billion francs; 63 per cent of the circulation was thus suppressed in the short run, 38 per cent in the long run. In the space of 13 months, the frozen assets melted from 3g. 1 to 28.1 billion francs, or by about 28 per cent. Part of this was due to the release of small accounts, but most of it was due to the releases recommended by the deblocking committees. T h e following figures show how the process was at first very gradual, whereas at a later date needs were met more generously: R E L E A S E S F R O M FROZEN M O N E Y A C C O U N T S , M A D E BY DEBLOCKING COMMITTEES

(in millions of francs) February 28,1945 Industry and commerce War damages Total (including other items)

November

30,1945

Applications Allowances Applications Allowances 511 150 2,263 1,268 384 166 1,128 1,060 921

337

4,576

3,161

Since November 1945, the government has, for the first time, granted a general percentage release to the amount of 25 per cent of the provisionally blocked amounts. T h i s action reduced these amounts to 20 billion francs in December 1945; by the end of J u n e 1946, they had melted down to 16,200 million francs. T h e final aim in the general exchange of circulation was to assess a very important item of the private wealth (which was, however, a heavy political and national liability!) of the country for fiscal purposes. Although blocking did take part of the money out of circulation, it did not, except for non-declared notes, suppress it as a direct or indirect liability of the state. Extensive fiscal action was therefore necessary and could be taken only on a correct assessment of the private wealth of the country. Otherwise taxes might have been too heavy on assessed wealth, and public opinion would have been aroused. T h r e e f o l d action was thus required: confiscation of the assets of collaborationists, high

26

MONETARY

RECONSTRUCTION

IN

BELGIUM

taxation of excess profits in the war period, and a general capital levy. Furthermore, this knowledge w o u l d be useful for current income taxes. In this respect, the general registration of all monetary assets which people held, beyond their allowance of 2,000 francs per capita and their small coins, was only part of the picture. W i t h i n a few weeks of the exchange of notes, the government took action for the registration of other assets which would eventually be subject to taxation. L e t us examine the main types of assets. N o special census of landed property, including buildings, was necessary, for the government registration offices (cadastres) already had lists of all transfers made since May 10, 1940. Even though some peasants with war profits had been very eager to buy land and had done so at very high prices, the actual sales made during the war amounted only to about 5 per cent of the pre-war assessed value of the land (revenu cadastral). Naturally, not all of these sales were made to war profiteers, so the actual transfer of this type of real wealth to war profiteers remained on a rather limited scale. Special measures were needed for certain groups of assets: those which were particularly liquid and subject to easy transfer and those which had been increased d u r i n g the war as a means to evade present or future taxation. Such measures were: 1. W i t h d r a w a l of German currency in the eastern districts annexed by Germany. T h e local circulation was first stamped, and then measures similar to those involving Belgian currency were applied. Fraud was possible only on a very limited scale, for the armies were virtually at the border by this time, and intercourse w i t h Germany was impossible. 2. W i t h d r a w a l of fiscal stamps of higher denominations, which had been bought by some profiteers in the hope of escaping future monetary measures. 3. Deposit in banks, and declaration by the banks, of certain groups of assets acquired by some people for the same purpose of evasion: short-term government bonds—"Emprunts de la liberation, 1940"—due for reimbursement and held by speculators; checks to the bearer, held as cash for an indeterminate time;

CIRCULATION

AND

ASSETS

27

short-term Treasury certificates, on tax, issued to the bearer, during the war. 4. Freezing, and declaration by insurance companies, of all life insurance contracts issued since May 10, 1940. Single premium insurance had been used widely by profiteers; their method involved the use of the usual type of insurance contract, with high annual premiums, with a view to their redemption after completion of fiscal measures. Mortgages and other forms of debt not payable to the bearer presented no especially difficult problem of assessment. All mortgages had previously been registered, and the amount of indebtedness had greatly decreased during the war as the farmers became able to pay their debts, and as the business firms transformed their disappearing commercial stocks into liquid money. Debtors could be counted upon to declare correctly any debt within the country, for this would diminish their own fiscal liabilities. In regard to war profits, the determination of debt reimbursements was more important than the determination of existing debts, and this required more careful attention from fiscal authorities. These special problems were met not by special legislation but by the provisions organizing the various taxes. There remained two important items: foreign assets and Belgian bonds and shares. Both required prompt and special action. These were the facts about the foreign assets: In the summer of 1940, the Germans had imposed a general census of foreign assets held by Belgians, including all bonds and shares of Belgian companies operating in the Belgian Congo. They had further required that all foreign and Congolese stocks be deposited in the banks; their sale was subject to rather vague conditions, tantamount to anything from requisitioning to a simple right of preemption. Except for a few big holdings in Central Europe, these dangers were avoided. T h e combined action of the German blocking and of the allied blocking maintained the 1940 position substantially the same throughout the war. This remained true despite the international black market in stocks, in which German authorities and German banks took an active part; for, under segregated markets, stocks were usually valued higher on

28

MONETARY

RECONSTRUCTION

IN

BELGIUM

national than on foreign markets, hence the black market tended to bring them back to the home markets. A t the time of the liberation, the National B a n k of Belgium thus possessed all details of the G e r m a n census of 1940, while all declared stocks were on deposit in the banks. On moral grounds, this census could not be used, and in any case no discriminatory action could be taken against those w h o had not declared their assets. B u t the very fact that this census existed and that all details were in the banks made a new census much more easily achieved; at least all assets declared to the Germans could not escape. T h e r e remained the question of how much had been declared under compulsion in 1940. First, it was clear that companies had declared their assets, for their accounting would have betrayed them had they not done so. Second, the value of the short-term assets declared as being in the U. S. A . proved to be only a little lower than the amounts blocked as registered by U. S. A . authorities. T h e r e seemed to have been little fraud on assets for which title was out of reach of the Germans. T h i r d , private assets in foreign bonds and shares, which are important in Belgium, were only partially declared; how much was hidden is unknown, although for Congolese companies whose shares were not held abroad, the declaration appears to have been about 20 per cent of existing shares. T h e general census of foreign assets, to be used both for fiscal purposes and for foreign exchange control, was organized under a decree of October 6, 1944. Included were gold and gold coins (more as a matter of principle than as a useful item), foreign bank notes, foreign bonds and shares, Belgian bonds issued in foreign currencies, property and goods and general assets held abroad or held in foreign currencies. T h e results of this census are not known. T h e individual data are at the disposal of the appropriate authorities; the general position can be assessed by the G e r m a n census of 1940 and the various censuses made in the allied countries. It was a much more difficult proposition to organize the general census of Belgian bonds and shares in such a way as to deprive people of their rights, in favor of the state, if they did not declare their holdings. In Belgium, as in other countries of Con-

CIRCULATION

AND

ASSETS

29

tinental Europe, shares as well as bonds are usually payable to the bearer. People much prefer to maintain their holdings in this form, partly for reasons of tax evasion, but also partly f o r very legitimate reasons involving political accidents, such as invasions, and numerous regulations. Still, in the interest of social justice and of financial reorganization, a general census had to be taken. B u t it should not be done in such a way as to impose permanent controls over trade in stocks, because that would destroy the capital market and would be conducive to large scale capital evasion as soon as this proved possible. T h e census of bonds and shares had to be a "one-time" measure, construed in such a way that non-declared stocks could be declared null and void. T h e administrative measures involved were to be of considerable proportions. According to estimates, there were about 45 million bonds of public authorities and 7 million bonds of private corporations. Shares were estimated at 1 7 1 million, 107 million of them being quoted on the stock exchange; part of the latter were registered in name, while others could be excluded from the census because of their low value. It seemed that 20 to 25 per cent of the total was deposited with the banks. Bonds and shares in private hands and in safes were thus somewhere between 1 2 5 and 150 million. H a d a general deposit in the banks been required, the procedure would have taken at least several months— probably more than 6 months. Moreover, such a measure would have been resented, because it would have entailed high costs in relation to dividends, which were nil for most important companies and very low for others. Even a one per cent deduction from market value would be heavy at a time when earnings on shares were often not above 5 per cent. Furthermore, people had taken such varied measures of protection against seizure, bombing, and other hazards that no rapid census could possibly require all numbers to be given. T h e type of census adopted was the result of prolonged and careful consideration. Its basic principle was to block provisionally all shares and bonds in the hands of the people who possessed them and to make sales impossible, except through specified channels, until the reform could be completed. T h i s idea was thus akin to that of requiring the declaration of all bank notes,

30

MONETARY

RECONSTRUCTION

IN

BELGIUM

with the deposit of them to follow later. It rested on the principle that, after the census was closed, only the number of shares and bonds of each type that had been declared could be validated by the issuers; non-declared equities would therefore become valueless. In this way, it w o u l d be immaterial if one bond were replaced by another of the same type; hence it was possible to dispense with the registration numbers on the census forms and to carry through the entire census in a few weeks. In fact it was executed between the 16th and the 31st of October 1944. In practice, the system worked as follows: between the above dates, all Belgian and Congolese shares (except specified groups of equities considered to have lost all practical importance) held by persons residing in Belgium were to be declared, not by the owners, but by the persons w h o held them. T h u s any individual was made liable to declare stocks held in a safe or at home. For bonds and shares held in deposit at the banks, the liability rested on the banks, which were given a delay in time because of the amount of work involved. In every case the name of the owner was given. Later on, as soon as it proved possible, foreign holders of Belgian bonds and shares were also invited to declare their holdings. T h i s has now been accomplished in all but two countries. T h e declarations were all handed over the counters of the banks in three copies, serving three purposes, plus an additional copy serving as a receipt. T h e purposes were as follows: 1. O n e form was turned over immediately to the local taxation office, where it supplied a means of assessing the individual's wealth for purposes of capital levy and his war profits (if any) for purposes of excess profits tax. It also served to correct his recent income tax returns and to control those of future years. 2. Another form went to the central statistical office, where all declarations could be added, equity by equity, in order to determine the number of bonds and shares not declared. A l l nondeclared bonds and shares were later to be declared n u l l and void and corresponding title to be transferred to the state. 3. T h e third form was kept by the bank, where transfers of declared stocks could be made under a special administrative device. Here also w o u l d be organized at a later date the validation

CIRCULATION

AND

ASSETS

31

of declared stock and the clearance of all administrative regulations. As it appeared to the public in its novelty, the measure seemed so watertight that presumably scarcely anyone dared to r u n the risk of non-declaration. Although statistical results will not be available until sometime in the near future, it may be presumed that the general assessment of holdings in equities is fairly complete, and that, in this respect, an adequate basis exists for special taxation of capital and excess profits and for confiscation of collaboration profits. Correction of income tax declarations are now yielding big returns, and the declarations of the next years will have to be much more complete than in the past. T h e fiscal objectives of the measure are thus undoubtedly attained. It remains to be seen, however, to what extent the sanction of non-declaration, or invalidation, can be applied. T h i s will depend largely on the results of the statistical census and on the volume of non-declarations. T h e market cannot function indefinitely under the restrictive regulations imposed at first, the stringency of which has already been diminished. Clearance of the system as initially conceived is only possible if not too many stocks have changed hands since the original declarations. At the beginning, the market was kept closed entirely, and it was not until J u n e 4, 1945 that the stock exchange was reopened. T h i s shut-down of 9 months proved a severe strain on the financial market. A f t e r that, the system functioned for awhile as originally planned: stocks had to be deposited with the bank to become transferable, and no one was permitted to take stocks out of a bank deposit. T h i s also kept the market under strain. On December 3 1 , 1945, this prohibition was removed; bonds and shares are now handed back to their owners with a certificate of registration. A l l transfers imply previous registration with the bank where the declaration was made. It is to be hoped that, in the interest of the Belgian capital market, the scheme can soon proceed to its ultimate conclusion. T h e results of the general statistical census will soon be available to the Minister of Finance. It will then be high time to proceed with the general validation of declared stock and to let the public know how the various issues of stock will be declared " a l l clear."

IV Special Taxation Problems I N T H E P R E C E D I N G pages we have frequently mentioned that the blocking and statistical measures were established in order to prepare and facilitate a sweeping program of special taxes, designed to "mop u p " an important part of war inflation and the issue of public debt. Of course, this preparation for fiscal measures was not the sole reason for the deflationary action. But since the government had accepted the principle that no franc should be directly destroyed (except for the acceptance of a 34 per cent devaluation), and that the whole nominal amount of the circulation was to be recognized even at the expense of a tremendous increase in its purchasing power, only one course of action remained possible. T h e money taken out of circulation by blocking could not simply be transformed, on an ordinary interest basis and with right of free disposal, into public debt. T h a t would mean an intolerable burden on the nation's budget, for such a move would entail too many restrictions on the development of investments and too much restraint on other state expenses such as social security. Therefore the only solution was that, after blocking, extraordinary taxes must take away from most citizens their blocked accounts; and, to reimburse those with blocked accounts in excess of their fiscal obligations, free money must be obtained from others. In other words, funds were blocked where they were found, but taxation of a more or less equal amount must redistribute the final repayment through a method of individual assessments.

T h e tax program was achieved by four laws, dated October 15, 16, 17, and 18, 1945. These provide: 1. A special tax on profits accruing from delivering goods and services to the enemy.

SPECIAL

TAXATION

PROBLEMS

S3

s. A special tax on exceptional incomes and profits obtained during the war. 3. A capital levy. 4. A fiscal amnesty, allowing people to make additional declarations on their former returns, in relation with the recent assessments. T h e special tax on profits accruing from delivery of goods and services to the enemy is a 100 per cent tax, which amounts to complete confiscation of a form of profit that never should have existed. This measure does not need to be applied in cases of collaborators condemned by the courts; for in these the indemnities allowed to the exchequer include not only the profits but, usually, the actual value of the goods and services delivered, bringing the total indemnity for regular collaborators to an amount beyond an individual's wealth. T h e fiscal law applies rather to cases not subjected to the courts, where profits were reaped from more or less compulsory transactions. Such transactions were numerous, for the general policy under the occupation was not to stop economic life altogether but only to put an end to specific war production. T h a t this fiscal law does not constitute a punishment is revealed by the fact that the owners of business firms who were thrown out by the Germans and replaced by "special administrators" must pay the tax on profits made by the firm during such administration. T h e r e is, however, a distinction made between those who can show that the profits were made on goods and services rendered under compulsion and those who cannot prove such compulsion. T h e former are taxed only on abnormal profits, the latter on all profits. T h e special tax on exceptional incomes and profits obtained during the war is much wider in scope. It bears on all incomes and profits obtained between January 1, 1940 and December 3 1 , 1944 from industrial, commercial, and agricultural enterprises, and on any incomes whatsoever, in so far as they have not been regularly declared. T h u s wages, salaries, and professional incomes are excluded only in so far as they have been regularly declared for income tax. T h e assessment for this tax is based on the whole income of each individual rather than on any specific part of his

34

MONETARY

RECONSTRUCTION

IN

BELGIUM

activity. T h e general procedure is as follows: individual post-occ u p a t i o n wealth is determined f r o m the various statistical operations of O c t o b e r 1944. " N o r m a l profits," or pre-war profits, are ascertained from income-tax declarations, with certain special regulations a l l o w i n g for m i n i m u m " n o r m a l profits" according to capital entries on balance sheets a n d other such indications. T h e assets duly registered in O c t o b e r 1944 are then considered as the results of war profits, unless the taxpayer can show that he o w n e d them, or equivalent assets, at the b e g i n n i n g of 1940. T h e r e are certain special regulations designed to dispose rapidly of all small cases. T h e s e are the general results of this method of assessment: the w e a l t h retained by w a r profiteers is assessed fairly accurately, f o r loopholes are not numerous. T h e h i g h profits spent d u r i n g the w a r are not taken into consideration, because it is impossible t o determine them, and taxation a posteriori w o u l d involve considerable complication and injustice. T h e negative side of the balance sheet is, however, less satisfactory. T h e proof of " n o r m a l " pre-war profits must be allowed by any means whatsoever, for specific proofs were not required in 1940 and, in addition, w a r destruction may have p u t many people in serious trouble in this respect. Hence more war profits must escape under the h e a d i n g of " n o r m a l " pre-war profits than through insufficient declaration of present assets. Furthermore, the basic allowances also tend t o overlook a more or less important part of smaller profits. In a country where economic life had to g o underground as far as possible, and where there finally developed relations with black markets so far reaching as to force the participation of an i m p o r t a n t part of the w o r k i n g p o p u l a t i o n in order to maintain existence above starvation levels, this may prove an important factor in the final results. F o l l o w i n g are the tax rates on excess profits: 70% 80% 90% 95%

on on on on

excess excess excess excess

profits below 100,000 francs profits between 100,000 and 200,000 francs profits between 200,000 and 1,000,000 francs profits of over 1,000,000 francs

In evaluating these very high percentages, it must b e remem-

SPECIAL

TAXATION

PROBLEMS

35

bered that the taxable excess profits are actually the sums, stocks, landed property, etc. which entered the estate of the " w a r profiteer" since 1940. T h e y do not include any increase in the value of an estate between 1940 and 1944. T h i s should be borne in mind in case of any comparisons with the taxation schemes of, for example, the Netherlands or Denmark, where percentages may be lower but where the differences in estate valuations between 1940 and 1945 are included in taxable excess profits. But the economic implication is not as clear cut as the legal principle. Everywhere in Belgium stocks of merchandise have been replaced by sums of liquid capital as goods were requisitioned or disappeared from the market. I n so far as these sums exceed 1.6 times the value for which the stocks were registered in the balance sheets, they are considered as excess profits. But, at present prices, pre-war stocks cannot be reconstituted with the money received from former stocks; hence hidden reserves have actually been heavily taxed. T h i s is one of most serious causes of complaint. More unusual were the methods adopted in Belgium to put into effect the capital levy. Capital levies in the past had usually been dismal failures. Whenever the state had simply imposed on each individual a certain tax in relation to his estate, there had always arisen the difficulty of organizing a market for the assets that taxpayers had to sell in order to pay their taxes. T h e process was invariably slow, and the prolonged delays meant that most of the capital was actually paid out of income as if a higher income tax had been established. A notable example of this was the Italian capital levy, established after the first W o r l d W a r , which was to be paid in instalments over 15 years. T h e problem to be solved in 1945 could not permit of such delays. Moreover, with current income tax levels, the regular payment of the capital levy out of income over a number of years might have had an unfortunate effect on the income distribution over the country. More efficient and rapid methods were called for. T o this end, it was determined that the estate which would have to bear the levy would be that which resulted f r o m the statistical operations carried out in October 1944. A n "objective" levy was set, in so f a r as possible, on the several

86

MONETARY

RECONSTRUCTION

IN

BELGIUM

categories of goods, whereas a "subjective" levy on the real owner was applied only in so far as it was impossible to succeed in reaching him indirectly. Such a method was possible, of course, only if the levy were proportional and not progressive. T h i s appeared a sound measure in any case, for incomes were already taxed progressively; and a double progressive tax, first on capital and again on its income, seemed excessive. T h e levy was therefore established uniformly at 5 per cent. But, out of consideration for small holders, a small exemption from the capital levy was established: 40,000 francs for a man, plus 40,000 francs for his wife and 10,000 to 15,000 francs for each child, and an additional immunity up to 20,000 francs on deposits in savings accounts. T h e existence of the blocked and frozen accounts was the first factor to facilitate the capital levy. As special taxes were created in order to reimburse these accounts, blocked money was, of course, permitted as a means of payment. T h i s meant that heavy payments could be made without disturbing the normal monetary circulation. As the obvious first step, the 5 per cent due on all liquid assets was subtracted, as a tax accruing to the exchequer, directly from the blocked and, if necessary, frozen accounts. Direct taxes on any other assets, such as public debt, foreign assets, and landed property, can also be paid in this same way. T h i s method of compensation should reduce considerably the transfers of real property involved in the operation, especially with regard to war profits. Direct taxation is also applied to Belgian shares. T h e shareholder is amply not considered in this, the levy being paid directly by the company, while the value of the shares diminishes because of this payment of 5 per cent out of the net assets. Although the exchequer reserves the right of direct assessment, the following is the usual procedure: the company is required to hand over to the state a number of shares equal to 1 /20th of the existing shares. T h i s gives the state only the 1 / 2 i s t part of the assets, but, since nothing can escape through any underevaluation, this is acceptable. T h e merit of this measure is that it transfers title to the exchequer in a very short time without the difficult transfer of goods on the market. Of course, such a transfer of title does not solve the entire

SPECIAL

TAXATION

PROBLEMS

37

financial problem, because the state really wants money to reimburse its debts. Provision must therefore be made for the sale of these stocks. T h e y may be sold on the market, but an offer must first be made to the issuing companies who have a priority of redemption. Companies are also entitled to pay the levy with their liquid assets, including blocked accounts, instead of issuing shares. Until the new shares are sold on the market, no voting power is conferred on them. On the whole, it appears that so little delay is necessary in making assessments and payments on most property making u p an estate that transfers of title are, economically as well as legally, transfers of capital goods. T h i s is due partly to the new methods used and partly to the fact that, in inflationary situations, claims on the state make u p a very important part of the nation's private wealth and can be simply subjected to compensation. T h e only important exception is in the case of landed property, because forced sales, even by only a small percentage of those w h o owe the tax, would cause very serious price disturbances. T h e r e f o r e , the land tax is not declared due immediately but, for the present, falls due only as the land is transferred. By 1 9 5 1 , the land tax will become due in any case, this delay being necessary for a correct reassessment of values. It would be most unwise to make any definite prediction as to what revenue will be produced by these various taxes; the implications of the various measures are too complicated. J u d g m e n t on the excess profits tax should be particularly reserved. For property and income are very widely distributed in Belgium, which may diminish considerably the percentage of inflationary assets remaining in taxable hands and not offset by some loss such as the disappearance of commercial stocks. T h e capital levy of course rests on more ascertainable grounds. As an immediate proposition, the fiscal amnesty for additional declarations on the past 5 years is yielding important results. T h e Minister of Finance has estimated the returns from the 3 taxes at about 50 billion francs. T h i s figure is to be compared with the blocked circulation, which amounts to 58.8 billion francs. If nothing is withdrawn for other purposes, such as war damage indemnities, most of the blocked circulation should disappear as a liability for the state.

38

MONETARY

RECONSTRUCTION

IN

BELGIUM

T h e blocked accounts were at first sterilized without interest. It was the desire of the Minister of Finance to give them the character of a normal public debt, establishing a gradually increasing percentage of interest in order to defreeze them at 3 per cent in a few years, upon completion of the capital levy. But, against his opposition, parliament, under pressure of vested interests, set an immediate interest rate of 31/2 P e r c e n t · However, the accounts remain blocked, nor could they be deblocked without serious consequences for the money and the capital markets, especially with the stringency which has lately been developing on those markets.

ν Foreign Exchange Policy IN T H E DETERMINATION of Belgian economic policy, the rate of foreign exchange has an importance almost inconceivable in the larger countries of the world. A small country lying in the center of European communications, Belgium's price system is highly dependent upon its relation with the price systems of neighboring countries, especially that of Great Britain. Whereas internal relations are of first importance in the U. S. A. or the Sterling Area, Belgium's price system reacts immediately as an open economy. In the smaller country, the economy has to adapt itself to that of the larger area without having any appreciable effect on it. Thus the exchange rate plays a strategic role in economic policy; Belgium became most conscious of this fact in 1932-1934, and its monetary reform of 1935 was planned accordingly on the basis of purchasing power parities with Great Britain. Results proving the method to be factually correct have influenced recent policies.

As has already been stated, the rate was fixed by the Belgian government in London, before the liberation, at 176.625 francs to the pound. It was probably the best that could be obtained contractually, on the basis of existing monetary conditions, although it was incompatible with a full-fledged monetary reform. It introduced at the start an 18.5 per cent depreciation as against sterling and a 32.7 per cent depreciation as against the dollar, which meant immediate corresponding movements in prices and wages but diminished the necessary monetary deflation. For shortterm policy this was not of great importance, except that it lowered the Belgian franc as against the French franc—worth 0.625 Belgian francs under the occupation and 0.88 francs at the time of liberation—and that this new currency relationship was obviously wrong. For long-term policy it is more important, first

40

MONETARY

RECONSTRUCTION

IN

BELGIUM

because it jeopardizes the rights of all creditors, bond-holders, and life insurance policy holders and also burdens political life for years with increases in pensions, war damage indemnities, social security payments, fiscal scales, and so forth; second, because it creates an inferiority complex about the national currency which is detrimental to the capital market. Under the German occupation, the Belgian franc was at first fixed at 10 francs to the Reichsmark, but after a few months it was brought down to 12.50 to the Reichsmark for reasons we were never able to determine. At the time, the 10-franc rate seemed to establish a correct purchasing power parity between Belgium and Germany, while the French franc at 20 to the Reichsmark seemed undervalued. T h e 12.50 rate established a proper relation with France but undervalued Belgian currency a little as against Germany. On the whole, no serious objection could have been made against the rate at which we were introduced into the German clearing system, headed by the Deutsche Verrechnungskasse. Under war conditions, all differential pre-war rates were abolished, and all "transactions" were cleared at a flat rate. Under the system of the Deutsche Verrechnungskasse, any member of the system could make payments to any other member by a debit entry at the Verrechnungskasse which was offset by a credit entry in favor of the receiving country. Debits and credits could be piled up to any amount, and the receiving countries had no legal means to ward this off. Except in the case of government buying, a debit entry meant an act of deflation in the paying country; a credit entry meant compulsory inflation in the receiving country. Germany availed herself of this mechanism to export her inflation by "buying" things and services in Belgium beyond the minimum imports which had to be allowed to Belgium. From the very day of the liberation, the exchange mechanism was submitted to new principles in order to bring it into relation with the methods of the free countries. T h e clearing system was replaced by exchange agreements and mutual exchange credits; Belgium entered into a system of exchange controls akin to the British system. T h e new legal position was defined in two decrees, which were dated May 1, 1944 but were not published until September 5,

FOREIGN

EXCHANGE

POLICY

41

1944. These decrees abolished the pre-war gold parity of the franc and declared that "until a new gold parity of the franc is defined, the King establishes by decree the rates at which the National Bank of Belgium may buy and sell gold and foreign currencies." These rates are determined in accordance with agreements made with foreign powers. T h e present rates are thus not factual rates opposed to a theoretical parity. T h e concept of parity is provisionally abandoned, and the authorized rates are full-fledged official rates. T h i s new arrangement should make agreements under the Bretton Woods plan easier, as the government is entitled to negotiate new official rates, whereas parities are fixed by law. An exchange agreement had already been made with the Netherlands whereby exchange rates were determined and mutual exchange credits granted. Each country was to allow the other country to buy above current receipts of exchange to the amount of 500 million francs. Whenever the credit exceeded this amount, the country in debt was obliged to settle its account in gold or in acceptable foreign exchange. Belgian debts to Holland were registered in the accounts in francs and Dutch debits in guilder; but, as there was an exchange rate guarantee, it amounted to a debt in whichever currency remained highest. Such a bilateral agreement, by introducing some suppleness in international payments, proves useful under present circumstances of exchange control; but it is excessive to hail it, as is sometimes done in official circles, as a fundamental step in the return to free transactions. It remains an instrument for shortterm balance of payment, or accounting policy, and has no significance for the realization of more fundamental equilibrium between currencies. Among other, similar arrangements concluded, the most important was the one with the United Kingdom, made October 5, 1944, because it involved facilities with the whole of the Sterling Area. Furthermore, a special point was involved in this case: the Belgian Congo had been part of the Sterling Area during the entire war, and we attached great importance to having it back within the Belgian monetary system. Under the arrangement, the British government allowed the Belgian Congo to "secede" pre-

42

MONETARY

RECONSTRUCTION

IN

BELGIUM

maturely from the Sterling Area, and a reciprocal agreement was drawn up between the "Sterling A r e a " and the "Belgian A r e a , " comprising Belgium, L u x e m b u r g , and the Congo. A l l needs in the two areas are cleared through Brussels and London, and there is but one reciprocal credit. T h u s B e l g i u m became entitled to free from all restrictions its monetary relations with the Congo; in fact, all restrictions have already been removed. T h e reciprocal credits arranged under these regulations are as follows: Netherlands and its area:

Sterling Area: France and its area: Switzerland: Sweden: Denmark: Norway: Finland: Portugal: Argentina: Czechoslovakia: Italy:

Originally 500 million francs, with an additional proviso up to 1,000 million francs. Recently the additional credit from Belgium to the Netherlands has been increased to 2,500 million francs for expenses to be met up to J u n e 1, 1947 886 million francs 883 million francs 500 million for commercial, and 50 million for financial purposes 1,045 million francs 500 million francs 600 million francs 100 million francs (credit to Finland only) 176 million francs 110 million Argentine pesos 50 million francs 100 million francs

T h e total comes to something over 5 billion francs for foreign credits, plus 2.6 billion francs credit from Belgium to the Netherlands and Finland. In some cases, any excess must be paid in gold; in others, regular short-term interest-bearing credits are provided u p to certain amounts. On the whole, credits have accrued to Belgium since the original agreements were made. She is creditor against Great Britain, France, and the Netherlands; France has already been obliged to make payments, and the Netherlands has obtained credit. In Scandinavia and Switzerland, B e l g i u m has debit balances. It is not possible to assess, except in broad terms, what part Belgium's holdings in gold and foreign assets have played in

FOREIGN

EXCHANGE

POLICY

43

recent developments, nor to see exactly what the outcome of the present situation will be. One fact has certainly given the government a freer hand in exchange policy than has been the case in other countries, and, even before we could organize sufficient exports, has allowed us to buy more rapidly the consumer and producer goods that we needed. Belgium's gold reserve was big before the war and, notwithstanding some serious mishaps during the war, came through unscathed. According to the weekly statement of August 22, 1946, it amounts to 22,554 million francs plus a 10,493 million franc revaluation, or 33,048 million francs at present exchange rates against sight liabilities of 76,000 million francs. ( T h e relation, at the end of 1938, was 17,128 million francs in gold and 24,665 million francs in sight liabilities.) T h e Belgian government in L o n d o n had been able to meet its expenses out of the current favorable balance of payments of the Congo and had thus contracted an "internal debt." Private assets in most countries had been frozen since 1940. As has been stated, the policy adopted was to make a general assessment of foreign holdings of people residing in Belgium. A l l this information went to the exchange control which was given powers of supervision and control over all transactions. But, as the war came to an end, it was not deemed expedient to give the exchange control authorities the right to requisition private holdings. Holders of securities would have been especially disturbed, and, in any case, it would have been folly to use securities in efforts to maintain exchange rates; they should now be considered, in every respect, as a permanent asset of the country. Instead, it was deemed better to give the exchange control authorities the power to oblige those who needed foreign exchange to use first the foreign monies in their possession before obtaining any from the nation's central reserve. Most commercial and financial holdings could thus be drawn into circulation without requisitioning. In regard to exchange policy, the most immediate concern of a liberated country is the fact that it has been emptied of all its commercial stocks, which need to be replaced, that a certain amount of equipment must also be bought abroad, and that a number of primary needs of consumption must be taken care of immediately. Once production is resumed, home needs are so

44

MONETARY

RECONSTRUCTION

IN

BELGIUM

great that any priority for exports appears indefensible. Moreover, the difficulties of re-establishing commercial currents in the midst of a maze of regulations would considerably delay any such priorities. For a certain period, the intake of the country must therefore considerably exceed the outgo. A f t e r 1918, such a lack of balance existed during the whole period of re-expansion, until A p r i l 1920; but the 1920 crisis brought the commercial currents back into equilibrium. Would an analogous situation prevail this time? T h e r e was less physical destruction of basic plants this time, but the labor shortages in coal mines and the transport difficulties and regulations were more apt to block the way to recovery. Actually, the Belgian government was able to import considerable quantities of food and raw materials. Except for a short time early in 1946, there seems to have been no restrictive attitude; the general approach was, rather, to buy all that was necessary for reexpansion and to get the industrial system to work as rapidly as possible. Food bought to satisfy the main needs included processed American goods, not purchased by the countries in tighter straits on account of their relatively high import price. Exports are now increasing, production in various industries having expanded to the point where part of it is not urgently needed on the home market. B u t imports are also on a parallel increase to meet the growing expansion of economic activity. Hence the monthly deficit does not yet show a decrease. Coupled with this is the fact that we now accumulate credits on our immediate neighbors, who buy most of our goods, whereas it is the currencies of more distant countries that are desired. T h e relative ease with which Belgium has solved its balance of payments problem since the liberation is due to the fact that the country was the main military base for the last attack on Germany. British, American, and Canadian troops were here in great strength. As the British spearhead moved up in 3 days from Douai, the services of the port of Antwerp, completely saved from destruction by the resistance groups organized by port authorities, were used to the utmost. Belgium thus accumulated more credits in reverse lend lease than it owed in lend lease. Direct credits to the allies for various needs not covered by lend lease, such as salaries, also amounted to considerable sums. T h e s e needs of the

FOREIGN

EXCHANGE

POLICY

45

armies had a detrimental influence on the internal monetary position, which expanded rapidly, because we f o u n d no immediate counterpart to our credits; but as a later result of them the balance of payments was eased. T h e statistical position will be examined under V I I below. T h e above-mentioned exchange agreements were made only between European countries. Relations with the U n i t e d States were at first rather involved, as lend lease, military imports, direct imports, and so forth, were going on concurrently. In the autumn of 1945, the reciprocal debts under the various headings were the subject of a general agreement. Under this agreement, Belgium obtained a $100 million credit from the Export-Import Bank. O u t of this, $55 million was to pay the Foreign Economic Administration in settlement of existing liabilities; this is based on a credit of 30 years, at an interest rate of 2y & per cent a year. Another $45 million was free for new imports from the U. S. A . O n this amount, 21/2 per cent interest is due from the date of utilization. T h e credit is to be consolidated in 1950; its interest is to increase to 3 per cent in 1955 and to 3I/2 per cent in i960. In Canada, a credit of $100 million was negotiated in May 1946 at 3 per cent per annum. A very important question for liberated countries is to know how far they should g o into debt in order to finance their recovery. T h e r e can be little doubt about the necessity of credits to finance the first imports of merchandise, for the country is empty and must import before it can export. But this principle is valid only for the first year or two; the answer is less obvious when it comcs to later credits to finance new expansion, nationalization of the industrial equipment, etc. T h e paramount problem of the next years for many countries will be the amount of the internal government debt and of the external credits. It is d o u b t f u l that this can be settled satisfactorily; but it would be wise, as long as economic recovery is not impeded, to keep both amounts at their lowest possible level. T h e fact that interest rates now are much lower than they after 1918 should not allow us to dismiss the problem. A t time, we borrowed at nominal rates between 6 and 8 per with real rates on issue price always above 6 per cent. Loans

were that cent, were

46

MONETARY

RECONSTRUCTION

IN

BELGIUM

negotiated at various times between 1920 and 1926. T h e 1920 rate was 8 per cent; then rates were lower, and in 1926 the $150 million stabilization loan carried 7 per cent interest, whereas the Belgian government got only $90 out of each $100. Contractual amortization was heavy, and these loans were an obvious burden o n the Belgian economy. T h i s experience, of course, is not conducive to heavy borrowing. A t present, the loans are happily reduced to a modest amount. A critical examination of what happened in 1920-1926 should lead to the following conclusions. Some borrowing, such as has been done, is necessary in the preliminary stages of recovery, for the simple reason that in getting industry going the intake must precede the output, and consumption needs must also be met in so far as other sources of income are not available. As soon as production has been stepped up and prices begin to readjust to more normal costs of production, a price slump is likely to occur in which imports and exports will again balance normally. For some time, at least, no credits are needed for the balance of payments. Between 1920 and 1922, capital needs could again be met on the Belgian market, and this is likely to happen again as soon as our price system is readjusted more normally. Between 1922 and 1926, there was regular recourse to foreign borrowing; and the authorities claimed that these sums—which, except for the 1926 stabilization loan, were spent—were necessary to bolster the exchanges. Actually, until the end of 1925, exchange rates depreciated because currency conditions were unsound and, as long as the sums were spent, no amount of borrowing could save the balance of payments from further trouble. If more drastic steps had been taken in 1921 to insure sound money conditions, the country could have dispensed with most of this borrowing. Most of the capital needed would have been found through internal credit expansion and through higher real incomes. T h e outlook for the coming years is thus tied up with the question of whether the policy of monetary deflation and of maintenance of present exchange levels will be carried through to its logical conclusion. If we are to attempt to answer in the affirmative, foreign borrowing must remain on a limited scale. A d h e r i n g to the Bretton Woods agreements, Belgium became a

FOREIGN

EXCHANGE

POLICY

47

member, in the last days of December 1945, of the International Monetary F u n d and of the International Bank for Reconstruction and Development. T h e Belgian quota for each of these institutions is $225 million, or nearly 10 billion francs in each case. T h e gold to be transferred to the Fund amounts to about 21/2 million francs. Since the gold reserve of the National Bank is 31,166 million francs, the required amount is below the second limit—10 per cent of gold reserves—established by the agreement. T h e liability accepted in Belgian francs is nearly ηι/2 billion francs, which was about 10 per cent of the sight liabilities of the National Bank at the end of 1945. T h i s indicates the limit of the expansion of the Belgian monetary system which can result from the working of the Fund if Belgian money is asked. T h e position in case of outflowing funds is more intricate; the demand for foreign exchange is never fully covered by cash handed over by commerce but results largely from credit obtained from the banks. T h i s problem, like that under the old gold standard, depends largely on internal credit policy and industrial needs. B u t the possibility that local money may be issued by an international body, beyond the control of the local central bank, is new. I n the working of the system, the chief concern of the Belgian parliament was over the interpretation of Clause IV, Section 5t, implying that the F u n d must agree to a correction of exchange rates if it is satisfied that the change is necessary to rectify a fundamental disequilibrium. T h e Clause states clearly that the F u n d may not object to the social and political conditions of a member and require correction of these conditions rather than the exchange rate; but it is not clear what the agreement means by a fundamental disequilibrium. T h e text is construed entirely in terms of balances of payments; nowhere are mentioned any of the monetary problems which may arise along the way, of which unbalanced foreign payments are only the final outcome. It might therefore be feared that the interpretation could be too narrow, that the Fund could only consider monetary troubles after they had come to their last logical conclusion. A wider and more acceptable interpretation is to admit that the term covers monetary disequilibrium in the various forms of w h i c h economic theory is fully cognizant. Under this interpreta-

48

MONETARY

RECONSTRUCTION

IN

BELGIUM

tion, a country could take action as soon as any such monetary disequilibrium appeared inevitable and before it had gone so f a r as to inflict serious harm on the country's economy. Corrections should be permitted in due time and on good grounds; not after "casualties" have been listed and funds depleted by monetary reactions well ascertained in advance. T h e recent experience of the years 1932 to 1935 was such that this second interpretation alone was acceptable to the Belgian government. A f t e r the fall of the p o u n d sterling in 1932 and of the dollar in 1933, the Belgian franc was maintained at its parity until March 30, 1935. Import and export prices were lowered against internal costs, which brought about a very serious price dislocation. T h e economic system was dangerously stifled by grave price disparities, and even social trouble threatened in 1934. T h e country undoubtedly suffered from a very severe fundamental monetary disequilibrium. Yet, because import prices fell faster than export prices, the balance of payments remained in order, and there was no outflow of funds. Only in March 1935 did an exchange crisis occur. A speculative flight suddenly developed after a well-known economist, considering it his duty, issued a public warning that the exchange rate could not and should not be maintained. T h u s through events for which B e l g i u m had no responsibility, and without changing its parity, the nation h a d been on the verge of disaster and suffered undue delay in recovery from the big crisis. T h e lesson of this experience for B e l g i u m is clear. Grave internal trouble may arise if purchasing power disparities are created, especially in relation to British prices. But, even though every branch of economic activity may be stifled, it does not necessarily mean that the balance of payment gets out of order for at least a long time. How long would the crisis in 1935 have continued if speculative capital movements had been effectively hindered as the F u n d wished them to be hindered in the future? One shudders to think of it and its consequences. It is certain that any monetary disequilibrium must be treated as soon as it arises. T h e problem requires serious consideration, for the Bretton Woods agreements link all currencies directly to gold and do not explicitly recognize that the problems in certain neighboring

FOREIGN

EXCHANGE

POLICY

49

countries may be of such paramount importance as to require immediate action. For these reasons, the Belgian government, in proposing to parliament the adoption of the articles of agreement, wrote: " T h e expression 'fundamental disequilibrium' may obviously not apply only to a disequilibrium of the balance of payments; it should apply also to a disequilibrium arising, for any reason, in the level of prices and wages between two countries. Such disequilibrium could, for example, be brought about in Belgium independently of our own will if a country exercising a preponderant influence in world commerce were, for any reason, to modify its own parity. T h i s is one of the applications of Article IV, Section which the Belgian government proposes to defend eventually before the directorate of the Fund. Belgium will thus be able to maintain a rate of exchange ensuring the equilibrium of its prices in relation to world prices and allowing her to entertain her commercial relations abroad." T h e fundamental significance of this solemn warning is that the type of responsibility resting on smaller nations and the type of policy resulting therefrom are not exactly the same as those of the bigger economic units of the world. B u t it is not so much in the definition of regulations about international payments that these differences appear. T h e core of the matter lies in the various monetary policies of which payments are only the final outcome. W e still know very little about how great will be the differences between these policies and those of the old gold standard, and whether they will exert a profound influence on monetary developments. In these respects, the smaller countries are anxious to know how their relations with the bigger units can be settled in accordance with the rules of the Fund.

VI Prices and Wages I N ORDER T O appraise the price and wage policy, the situation in August 1944, on which policies were formulated, should first be described. Retail food prices were, of course, a dominant factor in an economy where the satisfaction of other needs—except for local travel, cinemas, rents, water, gas, electricity and repairs of all kinds—were reduced to a minimum. As official rations were below subsistence levels for persons staying in bed, both official and black market prices have to be taken into account. Prisoners were kept alive, where possible, by an extra meal supplied by the Red Cross, whereas free persons were left to take care of themselves. T h e y did not g o any hungrier than was necessitated by their incomes and their ingenuity, and this gave the black market an important role. T h e r e is no use to criticizc the large profits made by a number of persons; the fact is that aside from these, hundreds of thousands of people drudged along amidst great risks to bring the food to the cities on foot, on bicycles, in elcctric cars, or in any way possible, and that only in this way did they earn sufficient income to keep alive. It is also a fact that, if all the nondeclared food had been handed over to the Food Administration for regular distribution, the German administration would never have allowed a ration of much over 1,600 calories, and the country would have starved. Even those w h o fared the worst would have had less. T h e bitter experience of Holland, where distribution was more orderly, proved that the people of Belgium were right in going underground, to as great a degree as was possible, with their food distribution.

T h e extent of the needs to be covered respectively on official and black markets can be judged by the following comparison,

PRICES

AND

WAGES

51

although the needs beyond the official rations were partially filled only by a few staple products, such as flour, potatoes, meat, and butter. J U L Y 1 9 4 4 RATIONS COMPARED TO NORMAL CONSUMPTION·

(in grams, per 30 days) Bread, or equivalent in flour, etc. Potatoes Coffee (Burnt malt in 1944) Butter Margarine Sugar Jam Meat Cheese

1939

July 1944

12,900 16,800 200 654 180 2,310

7,500 9,000 100 300 50 1,000 600 600 100

?

3,240 400

Percentage July 1944 58 54 50 46 28 43 ? 19 25

In 1944 there was no provision for rice, dried peas and beans, cocoa, fish (except herring in winter), eggs, milk (except for children), bacon, lard, suet, or oil. Vegetables and fruit were free of control, but scarce in big cities on account of market regulations and priority buying by the Germans. T h e above figures explain the pattern of prices in August 1944. It is more difficult to ascertain the general position of wholesale prices, as no regular survey of black market prices could be organized in this field. Official prices were rather tight under the "Commissariat aux prix et aux salaires," which the Germans obliged Belgium to set up as a separate administration. In fact, the Germans kept a close watch themselves on the wholesale price system, which had to be kept in close relation with, and generally somewhat lower than, the corresponding German prices. T h i s basis permitted an increase at first, but later increases were more difficult to obtain. Prices seem to have increased to about 170 per cent on an average, with an advantage for agricultural prices, allowed to rise to about 185 per cent to stimulate production, and • From Jean Colard, L'alimentation de la Belgique sous l'occupation allemande 1940-1944, pp. 32, 136. The 1939 estimates are Professor Bigwood's.

52

MONETARY

RECONSTRUCTION

IN

BELGIUM

A V E R A G E O F F I C I A L AND B L A C K M A R K E T FOOD P R I C E S *

Prices July

1,1918-

June 30,1939 Francs Bread Flour Potatoes Coffee Butter Lard Bacon Suet Sugar Meat—beef Meat—pork Milk Eggs

1.91 2.00 0.61 18.90 23.00 11.90 14.90 5.80 4.20 25.00 22.00 1.60 0.68

August 19-14 Official Prices Francs

Per Cent of 1938-39

2.90

152

1.46 none 45.70 none 29.80 none 82.50 35.10 33.85 2.87 1.62

240 198 200 196 140 154 180 238

Black

Market

Francs

Per Cent of 1938-39

56 7 2,120 308 327 265 308 101 194 225 10 8

2,791 1,162 ll,217t 1.339 2,749 1,777 5,318 2,416 776 1,021 631 1,198

• B l a c k m a r k e t prices taken in 5 2 cities. T h e s e a v e r a g e s are naturally lower t h a n prices in big cities, f N o m i n a l . N o t b o u g h t e x c e p t by special restaurants.

with a smaller increase for industrial prices. Contrary to what happened in free countries, wholesale prices were offirially less inflated than retail prices. Most rigidly banned were increases in wages. When the Germans entered Belgium, wages were already 124 per cent of the 1936-1938 level on account of price increases due to the blockade. After that, only an 8 per cent increase was permitted, putting wages at 133 per cent of the 1936-1938 level. With black market prices where they were during most of the period of the occupation, this was less than a famine wage and could only be maintained on the hypocritical assumption that people lived on their official rations. Actually, employers spent additional sums on their employees equal to about 20 per cent of the nominal wage. T h i s was done through various devices, such as meal distributions, or rations of the product of the mill allowed for so-called "personal use" but really destined to be sold. Not only coal, flour, and tobacco, but even steel sheets were known to be distributed

PRICES

AND

WAGES

53

for such personal use! Salaried personnel received only an 80 per cent increase over 1936-1938, and all o t h e r fixed incomes were not increased. U n d e r these circumstances, a n d w i t h the objective of a deflation of the currency, the wage level played a strategic röle in the determination of the general price policy. It was obvious that wages c o u l d not be deflated w i t h o u t all the economic disadvantages of a deflation in the cost structure. Y e t the social pressure for an increase of n o m i n a l wages w o u l d be very great in the reaction against the iron-wages imposed by the Germans. T h e fact that such an increase w o u l d be of little use if the goods were not forthcoming, and w o u l d be purposeless if they were, d i d not make it possible to escape the increase. O f course, it could be kept w i t h i n bounds if the monetary deflation came rapidly and if the armies b r o u g h t food b e h i n d them. T h e logical policy to pursue seemed to be a readjustment of B e l g i a n economy w i t h a general increase of prices similar to that allowed for wages, w h i c h should be kept as low as possible. Indiv i d u a l prices, both o n wholesale a n d o n retail markets, were related to the G e r m a n price system a n d d o m i n a t e d by local scarcities. Hence, they h a d to be reshuffled anyway and put into relation w i t h w o r l d prices, the sooner the better, so as not to reorganize p r o d u c t i o n o n a false basis. T h i s action was also necessary in order to b r i n g internal prices into relation w i t h the exchange rates chosen. A s all p r o d u c t i o n was at a standstill, a n d all current orders cancelled, e v e r y t h i n g h a v i n g t o be recognized for B e l g i a n and allied needs with new sources of raw materials, there was n o need for concern over the deflationary aspects of lower prices as l o n g as wages were not deflated. N o t h i n g could be gained by b r i n g i n g wages u p to an indeterminate level of prices instead of b r i n g i n g prices d o w n in relation to a much more clearly defined level of wages. W a g e increases h a d to be discussed in September 1944, before the far-reaching consequences of deflation could be e x p l a i n e d fully to a people whose past e x p e r i e n c e had made them entirely aware of the consequences of inflation. T h e r e f o r e , the only basis for discussion was the rate of the p o u n d sterling and the level of British wages. As was shown a b o v e ( C h a p . II), on the basis of

54

MONETARY

RECONSTRUCTION

IN

BELGIUM

p u r c h a s i n g power parities, the level of B e l g i a n n o m i n a l wages, all other things b e i n g e q u a l , could be b r o u g h t u p to about 175 per cent of 1936-1938—the years taken as n o r m a l . B u t all other things were not equal, a l t h o u g h the differences should not b e overstressed in terms of the l o n g view. P u r c h a s i n g power parity considerations should obviously be considered w i t h a l o n g view and in preparation f o r f u t u r e reintegration into w o r l d economy. I n the immediate future, intense scarcities on segregated markets w o u l d render immaterial a n d useless any nice computations. Internal costs were b o u n d to be higher for some time due to demechanization and lack of efficiency. B u t , o w i n g to o u r low nomin a l wages before 1940, intense industrial effort m i g h t allow h i g h e r nominal wages in future. Discussions were further complicated by the fact that they were conducted first w i t h miners' organizations. T h e difficult position r e g a r d i n g personnel in w h i c h all Western E u r o p e a n mines find themselves today were already obvious. I n r e l a t i o n to other types of workers they were u n d e r p a i d , so it was proper to start by givi n g the miners an advance over all other workers. T h e i r agreem e n t provided, therefore, for a basic increase of 40 per cent o n wages as of May 10, 1940, plus a 20 per cent bonus to cover exceptional costs of l i v i n g until these c o u l d be reduced. T h e 1940 wages had to be used as basis, because subsequent wage relations were changed to favor those w h o w o r k e d on G e r m a n orders. A c t u a l l y , the 40 per cent increase covered a moderate appreciation of purchasing p o w e r parities, whereas the 60 per cent overestimated the parity; computations as of May 1940, instead of 1936-1938, were based on a period in w h i c h B e l g i a n relative nominal wages were higher a n d real wages were lower than in pre-war conditions. W h e n the time came to lay d o w n general rules for industry as a whole, there was strong pressure to get the same n o m i n a l increase as the miners. T h e extra allowance for work in the coalpits could not be maintained. A n overall average increase of 60 per cent on the May 10, 1940 wage level was therefore agreed u p o n at the " C o n f i r e n c e n a t i o n a l e d u travail." M i n i m u m wages to be p a i d to c o m m o n laborers and to qualified w o r k m e n were raised more than the average; women's wages received special considera-

PRICES

AND

WAGES

55

tion and were increased 75 per cent. Somewhat later, the wages of personnel working for allied services were fixed a little higher than the industrial wages of qualified men, probably as a measure to facilitate recruitment. U n d e r these circumstances, it was not long before qualified workers had to be paid above the agreed wages; otherwise they were not forthcoming. In his report of May 1945, the president of the Price Regulation Board estimated that, on the average, wages had been increased by about 80 per cent as compared with May 1940, or 105 per cent of 1936-1938. For purposes of comparison it should be stated that there were some additional costs for employers after J u n e 1, 1945, when the Belgian social security scheme, along lines similar to the Beveridge report, was put into force for industrial workers. If pre-war wage relations could be considered normal, Belgian wages at this time were out of line by about 20 per cent. Although this might not be thought an ideal position at the starting point, world relations were still fluid, and discrepancies of limited amounts might still arise or disappear in the course of time. I n order to keep down nominal wages and incomes in general, the next move had to be based on a policy of low cost of living and effective distribution of food; demands for nominal increases should be met with facts about increases in real wages. T h e effective distribution of adequate rations proved a very difficult problem until the armies moved well into Germany; the food administration had been severely dislocated by the liberation. It was not until the spring of 1945 that the situation became substantially better. Nevertheless a clear-cut price policy was adopted. T h e retail prices of food were, as a rule, established at about 60 per cent above the 1936-1938 prices, with a few individual adjustments. Foreign products, however, were not always available at such prices, because of the high transport and insurance costs. In addition, some internal prices to the producer had to be kept higher to ensure adequate production under abnormal conditions. B u t it was felt that the government, just as in Great Britain, should tide over the period of exceptional costs and maintain strategic prices in such a way as to avoid any general shift to higher prices and costs, which would certainly have jeopardized the exchange rate.

56

MONETARY

RECONSTRUCTION

IN

BELGIUM

T h e v a r i o u s f o o d p r i c e s w e r e t h e r e f o r e a d j u s t e d to b e m o r e i n r e l a t i o n w i t h n o r m a l pre-war prices a n d , t o a c e r t a i n d e g r e e , w i t h f o r e i g n prices. B u t t h e total a d j u s t m e n t w a s c a l c u l a t e d t o o b t a i n the p r o p e r l e v e l of prices. I n M a y 1945, the r a t i o n cost 58 p e r c e n t above May

1940 prices, b u t 82 p e r c e n t a b o v e

the

1936-1938

prices. T h i s a g a i n a l l o w s f o r a s m a l l s h i f t as against p r e - w a r p r i c e r e l a t i o n s . T h e cost o f this p o l i c y w a s a subsidy of 483 m i l l i o n f r a n c s f o r the last 3 m o n t h s of 1944. S i n c e t h e n precise figures a r e u n o b t a i n a b l e , b u t subsidies h a v e b e e n several b i l l i o n francs, t h e b r e a d subsidy b e i n g the most i m p o r t a n t . C o a l prices w e r e also d e t e r m i n e d in r e l a t i o n w i t h this g e n e r a l p o l i c y a n d , o n a c c o u n t of the l o w efficiency of w o r k in the pits, subsidies m o u n t e d h i g h , c o s t i n g 280 m i l l i o n francs in 1944, a n d s u m s r u n n i n g i n t o the b i l l i o n s of francs a f t e r 1944. T h e G o v e r n m e n t w a s a f r a i d to a l l o w c o a l prices t o rise, r e l a t i v e t o the p r e v a i l i n g h i g h p r o d u c t i o n costs. T h i s w o u l d h a v e d i s t u r b e d the official p r i c e prog r a m . C o a l subsidies, t h o u g h s u b s t a n t i a l , h a v e r e m a i n e d b e l o w the B r i t i s h l e v e l a n d h a v e r e c e n t l y b e e n c u r t a i l e d . E a r l y in the s u m m e r of 1946, s u b s i d i e s w e r e suppressed, b u t the price increase a l l o w e d was k e p t f a r b e l o w t h e a m o u n t necessary t o c o v e r p r o d u c t i o n costs. S u b s i d i e s w e r e r e p l a c e d by loans, b u t this s i t u a t i o n c a n last o n l y a very short time, a n d the w h o l e c o a l p r o b l e m r e m a i n s a c u t e . Rents were

fixed

at 40 p e r c e n t a b o v e pre-war. T h e

cost of

p u b l i c services w a s i n c r e a s e d b e t w e e n 25 a n d 65 per c e n t , d e p e n d i n g o n the i n d i v i d u a l case, w i t h m o r e i m p o r t a n t services at 50 p e r cent. O f f i c i a l r e t a i l prices of i n d u s t r i a l p r o d u c t s h a d n o m a t e r i a l i m p o r t a n c e b e f o r e t h e s u m m e r of 1945. W h o l e s a l e prices h a d t o be g i v e n m o r e l e e w a y , b o t h b e c a u s e of the h i g h e r costs of p r o c u r i n g r a w m a t e r i a l s a n d b e c a u s e of h i g h e r p r o d u c t i o n costs r e s u l t i n g f r o m i n c r e a s e d w a g e s a n d d i s o r g a n i z a t i o n of t h e i n d u s t r i a l process. T h e l a t t e r cause w e i g h e d

heavily

a n d c o u l d o n l y be o v e r c o m e g r a d u a l l y . A s a t r a n s i t i o n a l m e a s u r e , h o w e v e r , h i g h e r w h o l e s a l e prices c o u l d prices w e r e

also higher

abroad;

and,

be t o l e r a t e d , furthermore,

for there

such was

m o m e n t a r i l y n o n e e d to sell in f o r e i g n p a r t s against severe c o m p e t i t i o n . T h e a i m w a s n o t to h a v e w h o l e s a l e prices i m m e d i a t e l y in close r e l a t i o n w i t h strategic p r i c e s — i n t e n d e d t o k e e p the w h o l e

PRICES

AND

WAGES

57

e c o n o m i c system from inflation—but to create conditions in which these prices w o u l d in time fall back to the "strategic" level. T h e m a i n requisite for such a readjustment towards relationship with decreased costs was, of course, to increase p r o d u c t i o n as rapidly as possible. A t one stroke, this w o u l d reduce the scarcity d e m a n d at h i g h prices and w o u l d materially decrease the high average costs of production. O n the other hand, a conservative price policy carried o u t at the expense of production w o u l d defeat its own purpose. In practice, a r u l i n g was handed d o w n a l l o w i n g producers either to increase their pre-war prices by 65 per cent or to file w i t h the Price R e g u l a t i o n Board a justification for further increase. I n principle, costs of raw materials a n d of wages actually paid were allowed for; all other items of the cost of production were increased 65 per cent on their pre-war level. Contrary to practice under the Germans, n o allowance was made for additional costs due to a low level of production. B u t as the claims on w h i c h the B o a r d had to decide were d r a w n u p by the producers, wide margins of profit were obtained l o n g before most industries attained n o r m a l levels of production. T h e controls proved effective in m a i n t a i n i n g prices of raw materials a n d of semi-finished products, b u t they were less and less effective as they approached the consumer. T h i s was partly d u e to the difficulties involved in c o n t r o l l i n g numerous finished products w i t h a new and small staff, partly because of the principle that strategic prices should especially be controlled o n account of their influence on the future. T h e scarcities involved were the cause, in the later stages of p r o d u c t i o n , of high prices, high profits, wages higher than the official rate, and low efficiency. In the m i d d l e stages, h i g h profits but more n o r m a l conditions prevailed. H o w e v e r , profits were curtailed in some of the basic industries. In the iron a n d coal industries, in many instances, controls m a i n t a i n e d decidedly insufficient prices, more because of their strategic position for the future than for their immediate influence on costs in other industries. Nevertheless, state subsidies were virtually confined to the coal industry where high current costs m i g h t have driven u p all other prices h a d they been covered entirely by h i g h prices. M o r e recently, the price policy o n coal

58

MONETARY

RECONSTRUCTION

IN

BELGIUM

has been reversed, a n d higher coal prices are to be accepted in the cost structure. B u t , for political reasons, coal prices are still kept far below p r o d u c t i o n costs; and, almost alone, the coal industry is laboring under bad financial conditions. Since coal is the bottleneck in industrial production, this very short-sighted policy sacrifices the industry to political slogans. A l t h o u g h the monetary policy f o l l o w i n g the deflation measures has not yet been discussed, it seems proper to describe how prices and wages have moved since the general principles were defined. T h i s will shed light on the general economic conditions u n d e r w h i c h the monetary policy could be pursued after the deflation of 1944. T h e wage and price system has labored under conditions of w h a t might be called " o v e r e m p l o y m e n t " and excessive d e m a n d . In most cases, d e m a n d has remained m u c h higher than supply at official prices, and markets have developed w h i c h can be called " b l a c k " wherever controls are stringent, and " f r e e " where they are lax or nonexistent. In a parallel way, vacant jobs are m u c h more numerous than available men; although, early in 1946, production in the m a i n industries could be estimated at about 65 to 70 per cent of the 1936-1938 level. It proved to be a slow and difficult process to redistribute the w o r k i n g force from odd jobs, military work, repair shops, clearance house work, small commerce at high profits, and so forth, to regular industrial work. Redistribution can be completed only as these various activities tend to disappear or become unremunerative t h r o u g h smaller profit margins and overcrowding. U n d e r such conditions, it became impossible in 1945 to refuse all increases in n o m i n a l wages, and the official wage level h a d to be revised once by an overall 20 per cent increase and at other times by various special adjustments. Furthermore, actual wages were very often above regulated wages, and, as of the spring of 1946, scarcity on the labor market was still pushing u p unofficial wages. A n o t h e r factor is the dislocation of normal wage relations. T y p i c a l of this dislocation is the fact that a skilled w o r k m a n gets about 214 times his pre-war wage, whereas an unskilled w o m a n in the same plant gets 314 times her pre-war wage. Unofficial wages tend to produce serious and unjustified differences between work-

PRICES

AND

WAGES

59

ers in the main industries and laborers in the building trade, in tailoring, in catering, etc. Whatever the final average level of wages, the present relative wage setup can certainly not be maintained as a long-term proposition. Although it is impossible to speak of a "wage level," wages as a whole seem to be about si/ 4 times what they were in 1936-1938. T h e shifts occurring in the price system since 1944 are somewhat more intricate, but they begin to show the type of reaction to be expected from larger supplies of goods. T h e official retail prices of food have, on the whole, been kept the lowest of any prices. T h e cost of the now increased ration in January 1946 was 2 1 2 per cent of what it would have cost before the war. B u t a much more important result has been obtained in terms of real income on the food market. In March, the normal adult ration was estimated at 2,274 calories per day, including normal consumption of vegetables, fruits, fish, and eggs, which were free and available up to 230 calories.* T h i s may be compared with an average of 2,700 calories for all persons before the war and a ration of 1,400 calories during most of the war. On account of the higher special rations as well as less waste, the deficiency has actually been brought down to less than 400 calories. T h i s means that expenses for supplements on the black market have fallen drastically and that the quantities of food involved in the black market are very much reduced. Recently, prices on the black market have been much lower, and some of these markets are in process of disappearing altogether. T h u s the margin of income left for expenses other than food has been re-established and is once more generally substantial. On the market for industrial goods, the position is more complicated. Here the supply on regular and black markets was generally low during the occupation, and black market prices were accordingly high, though usually not nearly as high as food prices. Expansion of production has increased official supplies, but needs have also increased. In processed goods, uncontrolled commerce • At the same date, a miner got 3 4 7 1 calories by the same method of computation, and a heavy worker got 2,771 calories. Since then, the position as a whole has deteriorated because of bread restrictions, but the meat ration has become substantial, and available unrationed food is on the increase.

60

MONETARY

RECONSTRUCTION

IN

BELGIUM

has increased materially. B u t it is impossible to draw a definite line between black markets and free markets, for degrees of control shade off from one case to another. In many free markets there are wide margins of profit, whereas some irregular supplies are sold very near official prices. T h e situation is entirely fluid, and price relations are far from those which would result from normal cost relations. Here also, radical changes are due within the next year or two. I n many cases, we have already witnessed important price reductions bringing the price of goods, even on free markets, more or less into close relationship with production costs. T h i s has already taken place with fish and eggs; it has virtually been accomplished with paper, copper, and cement; and it is proceeding with most meat and tailored textile goods. O f course, under a general pressure of the market, prices would be compressed still farther; but in the most important cases, the greater part of the way to lower prices has already been covered, and in these recent months, reductions have been rather general. It is apparent that the basic trend is towards reduction; it may be this process that will show us the way out of a price level excessive in comparison with foreign countries. Owing to the importance of the adjustments required by normal cost relations, it may be wondered whether, in some not distant future when scarcities generally relax, the price contraction may become general, and whether that might imply a contraction in business. Of course, this depends very much on the degree of price contraction we can obtain before any slump sets in abroad. If an early relaxation of controls allows us to obtain abundant supplies ahead of other countries, the export market may be the alternative to a falling demand. In any case, the present situation leads to one obvious conclusion. T h e price-cost adjustment seems momentarily to be a more potent factor on the market than the monetary condition (in so far as it is not out of control). Despite inflationary developments still going on, especially on the labor market, the forces tending to adjust the market strains are gathering strength, and they are beginning to react on the price system. T h e price movements of the immediate future will therefore be determined more bv the forces originating in the system of real exchange than i n the

PRICES

AND

WAGES

61

monetary sphere. In this there are m a n y analogies w i t h events in 1920. In M a y 1946, the g o v e r n m e n t took general action to counteract inflationary developments. T h i s was d u e to strong pressure of workers' unions to obtain higher n o m i n a l wages. Prime Minister V a n A c k e r believed rightly that repeated attempts to o b t a i n higher real wages by increases in n o m i n a l wages w o u l d jeopardize the value of the franc and w o u l d furthermore prove futile. In the face of strong political pressure, under conditions of overemployment a n d rapid d e v e l o p m e n t of " b l a c k m a r k e t " wages, he could ward off the danger only by some spectacular action to decrease prices. A n overall decrease of 10 per cent in retail prices, including prices of all p u b l i c services, was therefore enforced; decreases in wholesale prices were smaller, as the real g r o u n d for c o m p l a i n t was to be f o u n d in excessive commercial margins. Considered as a whole, these measures were a success, the decreases in prices b e i n g effectively a p p l i e d w i t h very few exceptions. T h e reason for this success lies in the fact that the Prime Minister w e n t a l o n g w i t h the spontaneous trend of prices and simply systematized and hastened the trend. G o o d s in m a n y fields were f o r t h c o m i n g toward this very m o m e n t , hence the r e d u c t i o n had n o adverse effect on supply. Eggs were, however, an important exception; they disappeared from the market very suddenly. In the longer run, the systematic character of the decrease of prices has placed difficulties in the way of a correct price policy. In order to o b t a i n more normal price relations, some prices—such as tramway fares, dairy products, coal, steel—had to be increased w h i l e the general price level was being reduced. T h i s has resulted in strong resistance on the part of the p u b l i c , w h i c h interprets any such action as a failure of past measures. T h e r e may therefore have to be restrictive p r o d u c t i o n policies in the key industries of coal a n d dairy products, where actually p r o d u c t i o n should be most stimulated in the p u b l i c interest.

VII Monetary Developments since October, 1944 T H E S W E E P I N G monetary measures prepared before the liberation and applied in October 1944 were planned to remedy the inflation resulting from the German occupation. They could not be put off to a later date, because the price developments in the interim would have been entirely out of hand. But, as the war had not come to an end, the country was faced with new causes of monetary expansion beyond and above what would have been caused in any case by transition toward a normal budget. These new developments and their causes should be analyzed. Let us first examine the facts. T h e table on page 63 compares the position in 1936-1938 with the positions in October 1944 and in February and July 1946: T h e figures reveal that after the October 1944 measures Belgian economy in no way labored under the stress of deflationary conditions. On the contrary, re-expansion of the currency proceeded in 1944 and 1945, for various reasons, at a rapid rate; and one of the main concerns of the authorities was to check this process. Recently they have succeeded in this respect. Since early February 1946, there has been no general expansion other than a certain amount of "defreezing," and bank accounts alone have increased somewhat. We shall now consider the following:

1. 2. and 3. 4.

T h e present position compared with foreign developments. T h e tendency of the purchasing power to distribute itself, the reason therefor. T h e reasons for the re-expansion of the currency. T h e immediate prospects.

For comparison with foreign circulations, total money only

DEVELOPMENTS

0

a

c J;

SINCE

os

£ »
Ο VJ

fa) S ε ij υ «j Έ «3 ο •φ σι

^ §

Η Ζ Μ s α. Ο J ω > Μ Q

>

α < ζ

ο Ρ

Ο \ό

C

-ι

J ~ Ϊ

ε κ ο Ο! Μ ο

U ζ

rrs ' Λ Ον

^ κ

£ β ί 00 £

ΛΜ

ίί OS C ο ^ ~

ΙΟ Ο CM

to Ol if)

Ο σ> CM

>r> 0 CM OO Γ-

σ> m 00 V

Ο Ο iq

Γσι if) ο" CM

σι m σ> 00

σ>

OO

„ U c β

σι 00 f-H

>f) 0 0

00 00 0 to 00

to CM 00 0 CM

σ; or) cC 00

00

00 C)

to ·—< PH

ΓΟΟ

iO •—1

CM Ο —Η

Ο Ο TT id

to 00 CM ITS CM

10 if) 00

ΓΟΟ ·

ο ο •"f to

CM r^ 00 0" Ο

to

l

m

s

I— „1 ·

_

(A υ 0 C

•σ Ί3 c rt Ε Crt

00 σ>

CM Ο l-H

ο C

ο C C

00 i3 ρΟ

ευ

Χ 3 —I

Γιο •"ι 00

CM

r^

>f) iO 00

00 if)

if)

σ> if) to to*

if) Tf

.5

ο if) 00

•Ψ on r-Γ m

'So ω Μ

«to Ξ

σ> m

0" to •-Η

CJ) ao

σ; ρ—«

to 00 ·-'

O) 00

0 00 •>»> to" CD

«

if) 00 CM V to

00 CM to O) -" ίο •Φ CM CM

r»

—

C

Ο -φ ΙΟ ο Μ

T

I

O

N

ο

I

'—'

B

E

L

G

-ο ε

,,Ο on — T f ΙΟ •φ 00 on r ,—Ϊ CM on m ο

3 Q C " Β 2 *ί3 j Ο _ 3 — Ο

C 3 0 α C

PQ

c a 3 Ο to W λ Λ υ υ Β « "E •υ Ό η α; « "(3 Ό TJ c C tn J3 «J Έ, c JD o; Ό

,

y

CO ο h

'S·3 η ο α

Ή.

Λ c "ο CA υ Β C 0 HH υ

ϋ ά

C

η Λ

g £ 2 ·, c