Between the Alps and a Hard Place (18 page)

Next to this array, the Allies' economic weapons were few and could easily become counterproductive. The Allies could no more help Switzerland economically than they could militarily. Prior to the war Great Britain had sold Switzerland some 300,000 tons of coal per year, as against Germany's 1.8 million. The British would have been delighted to make up any quantity of coal that the Germans might refuse to sell—provided they could buy what they wanted on the Swiss market. But once the German counterblockade was in place, the Allies could neither supply coal to Switzerland nor count on any Swiss deliveries. Consequently, when the Allies made requests of the Swiss, they were not necessarily dealing with people capable of fulfilling them. The Allies and the Swiss might make a deal for
quantities of jewel bearings, but the Germans would not allow the trade to pass. Allied threats against the Swiss failed for the same reason: When the Allies asked the Swiss not to produce so many arms for the Reich, or asked the Swedes not to send the Reich so much iron ore, and made their point by restricting
navicerts
, these neutrals expressed genuine sorrow but noted that they couldn't live without German coal and steel deliveries. That is why Allied economic warriors did not press their points too far with the Swedes, and especially with the Swiss.

Through the war the Reich got about 1.35 billion Swiss francs' worth of war goods from Switzerland (out of some 2.5 billion in total deliveries). This included machine tools especially useful for producing tanks and airplanes, timing devices, and more. Yet this war materiel amounted to only about 0.6 percent of the Reich's total military procurement of 210 billion reichsmarks—not a lot. But then again, the Reich “paid” for most of this merchandise with reichsmarks credits in Berlin's Reichsbank, which no rational person expected would ever be redeemed.

Meanwhile, the Allies, and the “dollar zone” of Latin America, absorbed a total of about 1.6 billion francs' worth of Swiss exports. Some of these exports were the high-tech jewel bearings for aircraft navigation, on which the Swiss had something of a world monopoly. After 1941 the jewel bearings had to be smuggled through German-controlled territory. But about three-fourths of Swiss wartime exports to the Allies were watches. These went exclusively to the military, freeing Allied watch factories for other war production. This amounted to a smaller percentage of Anglo-American military procurement, but it too was paid for with a kind of credit—gold that could not be removed from the New York Federal Reserve Bank until
after postwar negotiations.

All told, Swiss merchandise made no real difference to the outcome of the war. But both the Axis and the Allies wanted Swiss francs, and wound up with roughly 3 billion of them. The Germans paid for them in gold, delivered in Bern. The Allies paid for them in gold, locked up in New York. For the Allies, the francs were very useful. For the Reich, they were a vital means of obtaining specialty metals and oil.

Before the war international merchandise trade directly accounted for fully 20 percent of the Swiss economy. (By comparison, the figure was under 3 percent for the United States.) That trade was spread widely. In 1938, 15.7 percent of Swiss exports went to Germany, while 17.1 percent went to France and the border countries Belgium, the Netherlands, and Luxembourg. Britain took 11.2 percent, the United States and Canada 8.1 percent, and such places as Argentina, Japan, and India about 3 percent each. The rest was spread evenly throughout the world.
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Roughly the same was true of imports. Switzerland, however, ran a perpetual, large merchandise trade deficit. This was more than made up for by income from Swiss investments around the world, notably in the U.S., from tourism, and from the sale to foreigners of patents and services such as banking and insurance. The Swiss economy was also perhaps the world's most open, having resisted some of the global trends of the 1930s toward exchange controls and blatant import quotas. Its currency was formally convertible to gold by central banks, and informally by private parties, since the Swiss gold market was free and the National Bank was statutorily required to maintain the value of the franc between 190 and 215 grains
of gold. Hence, of all the world's economies, Switzerland's was perhaps the most vulnerable to disruption by war.

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.
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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.
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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.
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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.