When Britain imposed its blockade of 1939, it leisurely negotiated with Switzerland a War Trade Agreement. Britain, mistress of the seas, was in a position to stop Swiss overseas commerce, but not to prevent Germany from making up much of the loss. Britain therefore agreed to grant navicerts virtually on demand so long as the Swiss did not increase the percentage of trade with the Reich above prewar levels. Britain also agreed to the concept of “compensation goods”—Swiss exports to Germany manufactured with materials let through the blockade, in exchange for Swiss exports to Britain manufactured with raw materials imported from Germany. This was a good deal for both the Allies and the Swiss, and as good a deal as Germany might have expected.
In 1939–1940 Britain, France, Belgium, and the Netherlands placed 540 million francs’ worth of military orders in Switzerland, while the total for German war industries was 88 million. But even that understates the imbalance, because most of Germany’s orders went to divisions of German companies that had been established in Switzerland after World War I to evade the arms-control provisions of the Versailles Treaty.2 In short, Switzerland was working for the Allied war effort, and for cash.
Germany was in no position to object, because it was in no position to overcome Swiss preferences with more cash or, more important, to interfere with Swiss commerce. Yes, the Rhine was one of Switzerland’s windows on the world, and Germany controlled it. But the French port of Marseilles and the Italian port of Genoa were at least as important to Swiss commerce as the ports of the lower Rhine. So, on April 25, 1940, Switzerland and Britain signed the accord. Switzerland then began negotiating a parallel agreement with the Reich. The German negotiators did not demand that Switzerland abrogate the accord with Britain, and did not seek a monopoly on Swiss trade.
As France was falling, however, Germany’s position hardened. On June 18, 1940, the Reich cut coal deliveries to Switzerland to zero, and the Swiss economy became thoroughly unbalanced. Force set the terms of trade.
In the 1930s the dictatorships had already begun to treat trade as an instrument of conflict. Prior to World War I, any company in a given European country that wanted to buy goods abroad would use domestic currency or gold to buy the foreign currency needed to pay the seller. But since the postwar dictatorships wanted to insulate their currencies from economic realities, they established exchange controls, meaning that they allowed only small amounts of their domestic currency out, or of other currencies in. They also prohibited domestic monetary gold markets. The dictators and their followers required foreign trade partners to deal with them through so-called “clearing” accounts. A German buyer of, say, Swiss products would make his deal. He would then deposit the price, in reichsmarks, in a special “clearing” account in Berlin, the managers of which notified the Swiss authorities that the price had been paid. The Swiss authorities would then guarantee that an equivalent amount of domestic currency had been placed in a clearing account in Switzerland, from which the seller could draw his payment. Any Swiss who bought products in Germany would deposit the price in Swiss francs into the Swiss clearing account, and then be authorized to draw on the reichsmarks in the German clearing account to pay his seller. Thus, clearing accounts in each country would be replenished by buyers and sellers. Although the system was supposed to keep international trade in balance, one country’s buyers sometimes ran up bills amounting to more than its sellers’ deposits. Then the second country’s government would make short-term deposits into the clearing account, effectively granting a line of credit both to domestic sellers and to foreign buyers. Some countries ran up clearing deficits that they would not clear promptly, effectively establishing long-term lines of credit for themselves and their suppliers. Because the value of the currencies of the countries that practiced exchange controls depended on negotiations with each of their trading partners, the system introduced an element of force into peacetime trade.
Now consider the demands that the Reich’s negotiators presented to the Swiss as German armies were surrounding their country in 1940. First, the Germans ordered the Swiss to forget about their War Trade Agreement with Britain, since Swiss industries were about to receive a set of orders from the Reich to be filled urgently. These orders, not any agreements, would set the limits to the quantities of arms Switzerland would deliver to the Reich. Even the arms the Allies had contracted for were to be delivered to the Reich. Second, the Germans stated that, since the value of their orders would be much greater than that of any goods the Reich was planning to send to Switzerland, there would be a clearing deficit of at least 150 million francs—which the Swiss would finance. All in all, a bad deal.
When the Swiss balked, the Germans shut off the coal.
The Swiss tried to yield in a way that preserved the semblance of normal trade. In exchange for coal at the Reich’s price, Germany would get its war goods, and on credit. But Switzerland had to continue honoring at least some part of the agreement with Britain. Indeed, from the German perspective, without the navicerts that went along with Swiss production for Britain, the Reich would have to help feed Switzerland, and Swiss industry could not produce all sorts of things the Reich wanted.
No sooner was the ink dry, however, than it became clear that the clearing deficit would be bigger than had been agreed upon—the Germans were taking more and giving less. By July 1941 Reich orders and nonpayments forced yet another round of negotiations, which more than doubled the credit line—which had already more than doubled in an agreement from the previous summer—this time to 815 million francs. After this, the farce of negotiations was abandoned, and the credit line rose uncontrolled to something like 1.25 billion francs until 1943. Credit (sure to be unredeemed) ended up accounting for more than half of the merchandise exports to Germany.
That, however, did not mean that the Reich really paid for the remaining half of its imports from Switzerland, because the Reich delivered less and less of the coal, oil, and other essential materials that were part of the deal, and charged higher prices for them. In 1939 Switzerland had paid 129 million francs for about three million tons of coal from a variety of sources. In 1942 it paid a total of 168 million francs for a little less than two million tons, 96 percent of it from the Reich.3 In other words, the effective price of coal went up from 43 francs per ton to 88 per ton. The barbarian’s sword weighed heavy on the balance.
Consider the practical side of this arrangement. While the “clearing credits” piled up abstractly in Berlin, Swiss workers and suppliers, both foreign and domestic, had to be paid with real francs. Where did these francs come from? The Swiss National Bank printed them. But since few consumer goods were coming in or being produced, Swiss workers faced potentially disastrous inflation. The Swiss National Bank, however, sold the debt to the government, which issued bonds to sop up the cash. In short, to avoid inflation, the Swiss people were induced to buy what were, indirectly, the Reich’s war bonds.
Why did the Swiss political system agree to this? In part because the captains of heavy industry, the Vorort, and their workers were pushing for it. These Swiss citizens were delivering real merchandise to the Reich and getting paid with real Swiss money, even though all this produced net losses for Swiss society as a whole. The point was, Swiss workers and industrialists hated the Reich less than they loved their paychecks. It is a familiar reality of modern interest-group politics: A part of society manages to get the whole to subsidize a set of jobs and investments. It does not matter if the products are wasted or even if they go to enemies of the whole. During the Cold War, for example, a mighty lobby arose in the United States for shipping all sorts of goods to the Soviet Union. The industries involved were paid in good dollars corresponding to bad loans guaranteed by the U.S. government. And in the 1990s many American businesses were selling to China with loan guarantees from the taxpayer-financed U.S. Export-Import Bank, or were operating in China or Vietnam with capital guaranteed by the U.S. Overseas Private Investment Corporation. In other words, the American public was buying
Soviet, and later Chinese, war bonds.
What did the Reich get out of the arrangement with Swiss industry? Out of the total 2.5 billion francs in merchandise, about 1.35 billion was strategic materials. Of this some 600 million (28 percent of the total) was arms and ammunition, while the rest was machine tools (the biggest category), fuses and other timing devices, precision tools, and aluminum. The Germans also got about a billion francs’ worth of excellent dairy products. Moreover, the Reich took an average of a billion kilowatt-hours per year of electricity from the Swiss hydroelectric grid—12 percent of domestic production.4 In sum, during the war years Nazi Germany took an average of over twice as much from Switzerland as it had in 1938—but concentrated on war goods.
What benefits did Switzerland receive? As it produced arms for the Reich, it kept some to build up its own army. The coal, oil, and other imports allowed by Germany were just enough to keep the Swiss economy together. The Third Reich milked Switzerland almost as if it had been occupied—but not quite. The clearing deficit for Germany ended up at about 7 percent of Swiss GDP (as much as 12 percent if one factors in higher prices for German goods), whereas countries that either had been occupied or were allied, such as Romania, wound up despoiled at three to four times that ratio. So, Switzerland’s trade with the Reich was about cutting losses, not getting rich.
On July 18, 1941, as the Soviet armies were surrendering by the millions, Reich negotiators forced the Federal Council to prohibit Swiss citizens from sending parcels abroad. The Germans had learned these parcels were used to fill British orders for the jewel bearings. Now they felt strong enough to stop it.
When the parcels stopped arriving in Britain, the British retaliated by eliminating navicerts for Switzerland except for food, tobacco, and “compensating exports,” which allowed goods to be imported to manufacture exports that the Germans would permit.
The jewel-bearing traffic now traveled by human smugglers, organized by Swiss manufacturers and the British Embassy. As late as July 1944, while the U.S. Army was driving up the Rhône valley, American soldiers captured two suspicious men who, it turned out, were part of this traffic.5 The Germans, who were generally more interested in exploiting the continent than in preventing its resources from leaking out, allowed the Swiss to sell watches for food. But the Swiss often used these sales to slip fine chronometer movements past the Germans by omitting the watch’s third hand. So, even in the dark days of 1942, as Switzerland was delivering 656 million francs in merchandise on credit to Germany, it managed to export 310 million francs’ worth of merchandise to the Allies.
Discussions between the Swiss and the Allies in 1942 consisted of polite Allied requests that the Swiss reduce their favors to the enemy, and Swiss protestations that they would like nothing better but could not do it. By the spring of 1943, however, the changing relative weight of swords meant that the Allies could squeeze the Swiss harder and that the Swiss could transfer some of their new pain to the Germans with less fear of dire consequences. In April 1943 the Allies cut off all food to Switzerland, a big sanction, and demanded something rather small—a reduction of 20 percent in industrial deliveries to Germany over the second half of 1943 as compared to the previous year, plus a cessation of credits to the Reich. In return, they promised to restore half the food shipments. In June the Swiss agreed.
The Germans had told the Swiss to reject the Allied terms, but by 1943 they were unable to punish Swiss disobedience. If the Reich cut off coal, the Swiss would stop all industrial deliveries. If Germany invaded—which made less sense for the Wehrmacht after its losses at Stalingrad and Kursk—Swiss industrial production would have to be restarted and reorganized. A Reich Ministry of Armaments memo of June 3, 1943, stated that although Swiss deliveries amounted to only 0.5 percent of Reich procurement, they were too important to be disrupted. Better to suffer shrinkage than disruption.6 Hence, the most efficient course of action for Germany was to take what exports the balance of power would give and to start paying cash for them. It was a sober calculation, despite the sensational claims of historian Werner Rings, who wrote that deliveries from unbombed Switzerland were big enough to make up for Allied bomb damage to German industry.7 In reality, Swiss production was both too small to fight over and too big to disrupt. Again, we see that the terms of wartime trade can be set only by the balance of power.
No sooner had the June 1943 agreement taken hold than the changing balance of power allowed the Allies to cast it aside and demand tighter restrictions. Since the Allies could not impose greater pain on the Swiss in the present, they gave a concrete example of the huge pain they could dish out in the future. The Anglo-American negotiators had gotten to know a Swiss delegate, Dr. Hans Sulzer, the head of a powerful company who was known for supporting the Allies. The Allies placed his firm on the blacklist, banning it from any world trade after the prospective Allied victory. It was a warning to the captains of Swiss industry. If the Allies could ruin Sulzer, they could ruin anybody. Unless Swiss industrialists accepted the pain of detaching from the German war economy, they would be ruined after the war. Sulzer’s name stayed on the list only a month. On December 19, 1943, to get Sulzer off the list and forestall further blacklisting, the Swiss government agreed to slash trade with the Reich by 50 percent in highly specific categories. In high-tech fields, reductions averaged 60 percent. In cheese, the Swiss cut 100 percent of trade.8 The Germans were furious, but now it was less worthwhile to invade Switzerland than it had been months earlier. By this time, the Germans would get what they could.
Until the third quarter of 1944 the Allies still had no power to offer Switzerland military protection, and no capacity to fulfill any of its economic needs. But by 1943 they had already gained power over the future. The German trade negotiators must have marveled at how the Allies were fine-tuning Swiss trade from far away. In 1944 the Allies pressed new demands, and by August of that year the Swiss had agreed to cut the previously agreed-on quotas in half again.
The final stroke against German economic domination of Switzerland came on one of the first trains to Geneva through liberated France. The train carried no economic goods to tip the balance, but rather an Allied delegation headed by Lauchlin Currie, assistant to the president of the United States. Along with his British counterpart, Dingle Foot, Currie told the Swiss that the Allies wanted Germany to receive no militarily useful items. Above all, they wanted Switzerland to stop Germany’s railroad traffic through the Alpine tunnels. Complying with the first demand was legally easy; the Federal Council banned all shipments of arms and ammunition, to any country. The second was tougher, for the Reich had an undeniable legal right to use the tunnels. But the Swiss could no more afford to alienate the new masters of the continent by continuing to comply with the 1909 tunnel treaty than they had been able to afford, in 1940, to alienate the masters of that hour by complying with the War Trade Agreement of April 25, 1940. So the Swiss stopped the traffic, violating their obligation to Germany as they had earlier violated their deal with Britain.
This, emphatically, is not to say that Swiss politicians treated the two sets of obligations as morally or politically equivalent. On the contrary, the Currie delegation was greeted with spontaneous joy wherever it went, because it represented the lifting of a horrible incubus. Rather, the point is that the vast qualitative differences between the Nazis and the Allies could not efface the fact that their military capacities were commensurable.
Even as Allied victory loomed, Switzerland faced tighter economic restrictions. After all, through 1944 Switzerland got 97 percent of its coal from Germany, and almost that much in 1945. As the deliveries from Germany were stopping, no one could foresee when or from where the next trainload of coal, other fuels, or metals was coming. Nevertheless, the Swiss recognized that the day’s principal business was to determine the kind of life that the world would live after the war, and thus they were delighted that their economic problems were being imposed by a future Allied victory rather than by continuing German ext
ortion.
Money and Gold
The war forced the world to conduct ordinary economic dealings in hard currency—that is, in currency universally acceptable and reconvertible to gold. But World War II also shrank the supply of such currencies and cut the number of monetary gold markets. Until 1939 the world’s hard currencies were the U.S. dollar, the British pound sterling, and the Swiss franc. In that year, however, the pound sterling lost its status as a hard currency when Britain declared war. Instead of using the London money markets, Germany bought dollars in New York with Swiss francs. In July 1941 the dollar, too, ceased to be a hard currency, when the government froze European assets in the United States. When America entered the war, the U.S. Treasury would still exchange foreign banks’ dollars for gold, but the gold would be frozen in American vaults. The only currency that could still be exchanged for gold (and the gold carried away) was the Swiss franc.
Demand for the Swiss franc was widespread, as was the demand for gold, among the Axis, the Allies, the neutrals, and the occupied peoples. After the Allies froze the two-thirds of Swiss gold reserves that had been sent to New York and London for safekeeping—stripping the franc of its normal backing—the Swiss National Bank had a strong incentive to buy gold with francs, in a very competitive market, to support the franc. Unfortunately, because imports and consumer-good production levels were very low, printing so many francs created a “currency overhang” that portended inflation. Hence the bank was being forced to fight against the insolvency of its currency at the risk of inflating it. Moreover, as the Reich and the Allies exchanged gold for francs and foreign currencies under their own special conditions, and as Portuguese, Spaniards, and Romanians reconverted francs and other currencies for gold, and as countless private parties bought up gold, the Swiss economy was mightily troubled.
Between the Alps and a Hard Place Page 14