Fritz Machlup, Währung und Auslandsverschuldung. Bemerkungen zur Diskussion zwischen Schacht und seinen Kritikern (1928)

Fritz Machlup’s German article, based on a lecture delivered in Vienna on 12 June 1928, intervenes in the controversy between Hjalmar Schacht and his critics over German foreign borrowing. Machlup accepts that borrowing has been excessive and frequently unproductive, but rejects the inference that repayment necessarily threatens currency stability. His governing distinction separates the economic capacity to raise payments from the monetary mechanism of transferring them abroad.

Machlup establishes the scale of Germany’s capital imports by contrasting recent borrowing with prewar capital exports. He then challenges the identification of imported food and raw materials with unproductive consumption. Importing flour while manufacturing machinery domestically need not be less productive than importing machinery. What matters is the use of resources and their contribution to debt service, not the physical composition of imports. His confidence in private borrowing rests on its orientation toward profitability:

Soweit die Auslandskredite von der Privatindustrie aufgenommen wurden, können wir über die produktive Verwendung ganz beruhigt sein.

English translation: In so far as the foreign credits were taken up by private industry, we may be entirely at ease about their productive employment.

This judgment contrasts sharply with his treatment of public expenditure. Educational, recreational, and infrastructural projects may promise social benefits without yielding revenues sufficient to pay interest and amortization. Machlup therefore distinguishes profitability from the broader category of national economic productivity:

Jedenfalls ist der Teil der Gelder, die von auf „Gewinnstreben“ eingestellten Kreditnehmern aufgenommen wurden, ziemlich klein. Die sogenannte „volkswirtschaftliche Produktivität“ herrscht vor.

English translation: In any case the portion of the funds taken up by borrowers oriented towards "the pursuit of profit" is fairly small. The so-called "national-economic productivity" predominates.

The distinction supports a fiscal rather than a narrowly monetary criticism of borrowing. Private failures expose owners and creditors to losses; public failures shift repayment onto taxpayers. Even a profitable public investment cannot establish that the borrowing was justified:

Selbst wenn manche öffentliche Körper beweisen könnten, daß der Anleiheerlös für Betriebe aufgewendet wurde, denen man auch Rentabilität nicht absprechen kann, so ist damit noch nichts gesagt.

English translation: Even if some public bodies could prove that the loan proceeds were expended upon enterprises to which profitability too cannot be denied, nothing is thereby yet established.

Borrowed money can release ordinary revenues for other expenditure. Its consequences must therefore be assessed across the public budget, not merely through the project formally financed. The danger lies in future taxation, diminished purchasing power, and possible capital consumption—not automatically in currency instability.

The theoretical center traces borrowing and repayment through foreign exchange, monetary circulation, prices, and trade. Incoming loans expand domestic purchasing power and stimulate imports. Conversely, debtors’ accumulation of repayment funds withdraws purchasing power, encouraging exports or reducing imports. Machlup rejects projections that carry a borrowing-induced import surplus unchanged into a future repayment period: repayment itself alters the conditions governing trade. Securities transactions, interest-sensitive capital movements, and exchange reserves can assist or bridge this adjustment.

The mechanism nevertheless depends on monetary policy. Contraction begins as debtors accumulate payment balances, rather than necessarily through deliberate central-bank restriction. If the bank replaces the withdrawn purchasing power with new credit, it obstructs the adjustment required for transfer. Machlup accordingly criticizes Schacht’s effort to maintain an independently calculated adequate circulation. Offsetting loan inflows prevents the corresponding goods imports; replacing foreign borrowing with domestic credit creates purchasing power without supplying the foreign exchange needed for the resulting import demand.

Machlup extends this reasoning to reparations under the Dawes Plan. Taxation and the accumulation of revenues in the reparations agent’s account reduce domestic expenditure, helping generate the foreign exchange required for transfer. Relending these balances reverses the withdrawal and frustrates that process. His claim that successful collection makes transfer possible is thus conditional on keeping payment funds out of circulation.

The final discussion considers whether foreign tariffs invalidate this argument. Securities transfers and reduced imports provide adjustment channels besides increased exports. Recurrent reparations collection can also produce further price reductions when tariffs obstruct an initial export response. Yet protection remains harmful: falling German prices increase the real burden of unchanged nominal payments and can undermine the capacity to raise them. Machlup’s conclusion preserves the distinction between payment capacity and transfer. Unprofitable borrowing and trade barriers may damage earning power and fiscal resources without establishing an independent monetary impossibility of transfer. The decisive mechanism is purchasing-power withdrawal and market adjustment; the corresponding policy danger is credit expansion that neutralizes them.