VU Research Portal Financial government policy, 1940-1990 Barendregt, J. 1992 document version Publisher's PDF, also known as Version of record Link to publication in VU Research Portal citation for published version (APA) Barendregt, J. (1992). Financial government policy, 1940-1990. (Serie Research Memoranda; No. 1993-2). Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam. 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Barendregt Research-Memorandum 1993-2 December 1992 vrije Universiteit amsterdam Financial government policy, 1940-19901 by J. Barendregt, December 1992 1. Introduction The 1940s - war and reconstruction - are an interlude in the financial history of the Netherlands. The financial consequences of the Gennan occupation require special attention, especially the ballooning State debt and money supply (section 2), as well as the way these major financial problems have been handled after liberation (section 3). When the reconstruction had been completed in the beginning of the 1950s, the new Keynesian ideas on government spending as an instrument for economie policies could be put into effect. Successive governments aimed at stabilizing the economy by means of the budget but, partly due to lengthy procedures, this policy proved to intensify cyclical swings instead (section 4). Moreover, the building up of a welfare state and a weakened position in the Cabinet of the Minister of Finance undermined budget discipline, so that large deficits developed which led to a domina- ting role of the government on financial markets as a borrowing party (section 5). Yet, the growth of semi-private or collective savings enabled the state to cover its deficits entirely on the Dutch market (section 6). 2. War (1940-1945) As in other countries, one of the conditions of surrender to Nazi Germany was the acceptance of German occupation money, the so-called Reichskre- ditkassenscheine. The Dutch monetary authorities (Ministry of Finance and Central Bank) feared the effects of a mixed circulation. They therefore agreed to provide the German troops and civil service in the Netherlands with Dutch money. Thus the Germans could finance their expenditure at least on the same footing as before the agreement.2 Their demands, thou- gh, became stiffer and stiffer (special tributes to the war included). Eventually, the payments reached the total sum of ƒ 9 billion. Next, there were government expenses caused by the war, such as the organization of food distribution, evacuation costs, the compensation of war damage3 and even expenses for extra policemen and the 'Nederlandse Landwacht', a police force set up to fight against the resistance move- ment. All in all, expenditure solely caused by the occupation amounted to ƒ11 billion at the end of the war in May 1945. Considering the fact that total State expenditure had not exceeded ƒ 1 billion in 1939 - even if this was a year with increasing defense expenditu­ re because of growing international tension - we notice that the occupa­ tion had a ballooning effect on State budget and State debt. Increasing expenses forced the State to borrow about ƒ 10 billion, although State income covered normal expenditure (see Table 1). It issued five long-term loans to the tune of ƒ 3.5 billion. And it financed the remainder with short-term debt.4 As from Autumn 1944 the private sector did not want to lend to the State anymore. Henceforth the administration had to rely on the Central Bank. Despite all the lending to the State, the liquidity of the private sector had increased tremendously. The administration had spent all its Table 1 - Confrontation of income and expenditure of the Dutch State (in min ƒ) All State State expenditure Rest State State expenditure caused by the German income deficit (a) occupation (b) (a) 1939 1051 . 1051 867 184 1940 1748 737 1011 1005 743 1941 3574 2323 1251 1750 1824 1942 3827 2196 1631 1912 1915 1943 3769 2368 1401 2022 1747. 1944 4418 2746 1672 1884 2534 lst half of 1945 1876 700 1176 478 1398 Total 19211 11070 8141 9051 10161 since 1940 Source: J. Barendregt, Ch. 2. 2 borrowed money. Moreover, the possession of floating debt had given a huge (potential) lending power to the Dutch financial institutions. Full financial integration of the Dutch economy into the German economy occurred on the lst of April 1941, when the German authorities lifted the exchange controls between the two countries. The Dutch guilder virtually had become a German mark now, with a value of 1,327 reichs- marks. In this sense the Netherlands were put at a disadvantage vis-a-vis countries such as Belgium and France where the German (military) authorities put up a stronger resistance against the wishes of the Reich. Consequently, the exchange controls between Germany and these coun­ tries had not been abolished. Now reichsmarks flooded into the Nether­ lands, because German balance of payments deficits with the Netherlands could not be controlled any longer by the Dutch authorities. A huge transfer of reichsmark assets into guilder assets also started, because national governments and international investors distrusted the reich­ smark. Belgium, for instance, tried to pay the Dutch with reichsmarks, but it refused to accept reichsmarks from them. In that way it wanted to minimize its reichsmark possessions and burdened the Dutch with ever larger amounts of this currency (Trip, 47-48). At the end of the war the German balance of payments debt to the Netherlands had grown to ƒ 6.7 billion.5 This debt accumulated at the Central Bank. In total the purcha- sing power of the Dutch private sector increased by ƒ 8.3 billion to ƒ 10.9 billion in 1940-1945 (Lieftinck 1946, 11). Recent, adapted figures show less growth, but it is still an alarming growth (see Table 2). However, at the production side the quantity and quality of goods and services offered to the Dutch population declined. Many causes can be mentioned for this. We shall name a few. The Allies blocked Dutch sea harbours, so that sea trade was only possible with Northern and Eastera Europe. Production declined mostly due to forced migration of many Dutch labourers to Germany and elsewhere, and deportations of Jews and others. German confiscations of animals, stocks, transport material and other means of production and an increasing production for the Reich further decreased production. The growing scarcity of goods meant that soon after the invasion purchasing power could not find its way to the market completely. Thus a money overhang developed. The export surplus with Germany and the increasing State debt stimulated this development. The money overhang clearly rnanifested itself in the financial sector. The credit accounts of the banks, for instance, more than doubled during the occupation - they increased by nearly Dfl 4 billion - and mortgages 3 feil by Dfl 200 to 300 million. In addition, life insurance premiums rosé by Dfl 0.7 billion - they increased from Dfl 156 million (1940) to Dfl 381 million (1944). State loans became an advantageous investment for the money overhang, especially since the closing of the Stock Exchange. Private individuals lent approximately ƒ 3 billion to the State. The Central Bank, private banks and Giro banks lent ƒ 4.5 billion (De Roos, Wieringa, 217; De Jong, 240-241; CBS 1989, 145; Herstelbank, 49). Due to the money overhang price rises could be expected. Therefore, the authorities took several countermeasures. First of all they controlled prices. Nevertheless, a black market developed. Especially to hit the black marketeers, who were supposed to accumulate their wealth in the highest denominations, the ƒ 1000,- and ƒ 500,- bills were taken out of circulation in March 1943. As from the beginning of 1944 the increasing supply of reichsmarks and State debt started to become a problem for the Dutch central bank. Bank note reserves of the Central Bank had fallen to ƒ 180 million, whereas the bank note circulation itself had amounted to ƒ 3.5 billion. Thus, the national-socialist president Rost van Tonningen proposed to the German civil service in the Netherlands either to have Dutch money printed abroad or introducé the reichsmark as the official currency in the Nether­ lands (Barendregt, Ch. 2). Later, there were serious fuel problems for the printers of paper money. Distribution also became critical after a major strike in the transport sector (railways). The paper supply became critical as well. Municipalities of cities such as Rotterdam and The Hague already had printed their own emergency money, in case of financial straits. Rost van Tonningen warned the head of the German civil service, Seyss- Inquart, that he feared a complete monetary disorganization would erupt early Summer 1945 (Barendregt, Ch. 2). The Central Bank probably would have had to decide to overprint the old bank notes with zeros in order to increase their value and local currencies would have been issued indeed, if the still occupied Northern and Western parts of the Nether­ lands had not been liberated in May 1945.