Joseph A. Schumpeter, A German View (March 1932)

Schumpeter’s journal article examines Franco-German economic relations during the world depression. Its five sections move from political psychology through reparations, commercial negotiations, and industrial competition to the prospects for French investment in Germany. The central argument is deliberately double-edged: the countries’ economic interests offer unusually favourable grounds for agreement, but economic compatibility cannot itself overcome the political antagonisms preventing cooperation. Schumpeter distinguishes the existence of a reasonable settlement from the conditions that would make governments able to implement it.

There is in politics a large irrational element even in economic matters.

This proposition governs the opening discussion of disarmament and the Polish corridor. National independence, victory, and humiliation give these questions a force disproportionate to their material consequences. Such feelings also shape elections and parliamentary politics: even leaders personally committed to reconciliation must accommodate them or risk losing office. Weak governing majorities in both countries further restrict policies whose benefits are distant or whose immediate popularity is doubtful. Schumpeter’s warning is therefore institutional as well as psychological. Businessmen and peace advocates mistake demonstrable mutual advantage for practical political feasibility; economic forces cannot independently produce the confidence required for recovery.

Reparations occupy the boundary between economic calculation and national symbolism. France regards payment as a sacred right and confirmation of victory, while Germany experiences it as dishonour even apart from the amount demanded. The economic case against continued payments turns on a contradiction: Germany can obtain the necessary foreign exchange only through exports, yet creditor countries resist those exports. Reparations thus aggravate depression, imperil private creditors, and contribute to the concentration of gold in France and America. Schumpeter nevertheless refuses to make monetary arrangements the sole explanation of the crisis, assigning substantial responsibility to post-war fiscal policy, particularly in England and Germany.

France is less susceptible than other creditors to these arguments. Political receipts strengthen its financial position; its remaining short-term exposure to Germany is comparatively small; and its willingness to accept deliveries in kind weakens the charge that creditors obstruct payment. Reparations also matter directly to its budget and armaments expenditure. Schumpeter consequently proposes a conditional sequence rather than a simple cancellation formula: France and Germany should first settle France’s net receipts, potentially through a moderate payment entirely in kind, secured by a tariff agreement against indirect obstruction. Joint action on the remaining international debts could follow. He stresses both the political boldness of this assumption and the impossibility of preserving the former scale of payments.

The third section examines the Franco-German economic committee as a test of actual cooperation. Agreements among producers have achieved more than observers expected, but their success has qualified foundations.

First, certain industrial groups brought together under the auspices of both governments, have been allowed to follow the line dictated by their interests without having to take account of the interests of the consumers or other industrial groups which might suffer from their monopolistic tendencies.

Agreement between business interests is not necessarily agreement in the general economic interest. Germany’s weaker tariff position also made its industrialists unusually conciliatory. Arrangements in porcelain, nitrogen, and electrical equipment helped avert a commercial rupture, while proposals concerning transport and overseas markets suggested further possibilities. Yet deepening depression encouraged increasingly restrictive French quotas. Cooperation remained vulnerable to the very crisis it was intended to mitigate.

Schumpeter then separates underlying commercial relations from trade distorted by reparations and borrowing. Germany’s agricultural protection obstructs agreement with many countries, but France presents relatively little competition in the politically sensitive staples. This removes a major domestic obstacle to freer bilateral trade. Meanwhile, foreign credits temporarily permit Germany to import more; their withdrawal forces increased exports to meet debt obligations. Exceptional export figures therefore cannot be treated as evidence of an enduring competitive threat.

The fourth section tests this argument industry by industry. Numerous smaller manufactures illustrate comparatively stable exchanges based on differing advantages. Textiles present difficulties but no necessarily destructive adjustment. Chemicals and potash show that producer agreements can contain rivalry, although Schumpeter does not equate monopolistic settlement with economic wisdom. Coal protection injures French consumers and manufacturers as well as foreign suppliers. German iron and steel reveal another distinction: labour-saving modernization can increase productive capacity while imposing financially ruinous capital charges.

In its present state the industry offers a very good, if sad, example of both the fact that technical and economical optima do not necessarily coincide, and of the absurdity of much that is firmly rooted in the economic policy of our day.

Machinery and motor cars expose the costs of national self-sufficiency: specialization could benefit both countries, whereas protection fosters industries without corresponding advantages. Nevertheless, Schumpeter concludes that genuine bilateral difficulties remain manageable. Removing reparations would reduce, rather than unleash, Germany’s export pressure, allowing more domestic absorption and restoring its capacity to buy abroad.

The final section rejects French finance as a shortcut to reconciliation. Productive investment differs from credit that conceals structural problems and postpones adjustment. Schumpeter controversially argues that Germany would have benefited from receiving less foreign credit after 1926. Industrial participation, short-term lending, and German securities issued in Paris each face distinct practical obstacles.

This flow of capital presupposes political and economic good will and, therefore, cannot create, although it may foster it.

The article’s relevance lies in this reversal of the expected causal order. Finance and trade can reinforce cooperation, but cannot substitute for its political prerequisites. Schumpeter offers substantial grounds for economic optimism while denying that those grounds warrant an optimistic political forecast.