I

IN ITS baldest aspect, if we view Germany alone and without reference to the situation of her neighbors, the reparation question is divisible into two parts: How much can Germany pay from time to time? How much can she pay in all?

The history of the past several years shows that substantial agreement regarding Germany's current capacity to pay has existed all along. The Schedule of Payments which was unanimously notified to Germany on May 1, 1921, provided for payments equivalent to 6 percent interest and amortization on a capital sum of 12 billion dollars--the A and B Bonds. 19 billions--the C Bonds--remained as a deferred obligation, without interest, until such a time as 26 percent of Germany's exports should be enough to meet the charges. This Schedule remained in force until the end of 1921. Then by unanimous consent the payments for 1922 were reduced to an amount equivalent to the interest on 8½ billion dollars. On January 2, 1923, France proposed a two years' partial moratorium and a comprehensive system of interallied civil control over the German coal industry, customs, etc. England rejected this offer, proposing instead a four years' nearly complete moratorium, the creation of an international financial council at Berlin, and in addition, as a fundamental condition, the reduction of the total sum of the debt. The French rejected the British proposal and on January 11 moved into the Ruhr.

The mark at that time stood at 7,000 to the dollar. The British attributed its fall to that point chiefly to the forced sale of marks for the procurement of foreign exchange to meet the 1921 cash payments, and they predicted a further collapse (which, when the German Government proceeded to finance passive resistance by printing paper marks, actually occurred). The French, on the other hand, attributed the fall to Germany's lack of adequate taxation measures and to her deliberate export of capital. Passing over this much debated point, it seems clear that the urgent question at New Year's, 1923, was whether Germany could meet the active part of the debt. Is not that still the urgent question? Agreement on the question as to who shall in the end pay the inactive portion of the debt cannot safely be made an indispensable condition of united action.

On the question of Germany's total capacity to pay there has been nothing approaching agreement during the past three years, except for a brief moment on the first day of May, 1921, when the Reparation Commission fixed the total figure. For a clear view of the problem it is necessary to appreciate that this question is a double one, involving (1) the ability of the German people to pay taxes over a long period of years, and (2) the ability of the German national economy to convert those taxes into foreign balances or other values suitable for the payment of an external debt.

The British stress the second half of the question, the French the first. The British argument is that payments by Germany will have to be made in foreign currencies procured by the sale of exported commodities, and that these payments will be limited to the relatively small annual excess of exports over import requirements, plus an additional small amount of specified German commodities, not otherwise exportable, which may be assimilated by the Allied nations if delivered in kind. This argument is supported by many writers on economic subjects. Others, while not prepared to dispute it in principle, believe it has been pressed much too far. There are economists of standing who are not prepared to say that they even know what an export surplus is. A study of the past throws little light upon many important factors involved. For example, the effect upon the export surplus of taxation on the tremendous scale required to meet the war debts cannot be known until such taxation has been levied over a considerable period of years. By bringing about a reduction of consumption, heavy taxation seems likely to render more home goods available for export and at the same time to reduce imports. The export surplus may well prove to be much more elastic than some economists believe. The fact is that the problem of the payment of large external debts is a new one, and it cannot be solved a priori. Both halves of the question of Germany's capacity to pay must be given due weight. The levying of adequate taxation is the first step.

One highly important means of making international payments other than through an export surplus has so far received little attention--namely, payment by delivery of industrial securities. Certain economists have objected that this would amount to nothing more than an exchange of German Government securities (the reparation bonds) for industrial securities, that the difficulties of paying interest and amortization through the export trade would remain, and that the proposition that the total debt must be reduced is therefore unaffected. The objection has no force. If Germany delivered securities annually to a capital value representing only the annual interest and amortization charges on the reparation debt (or such part of the charges as were not otherwise met), practically no burden on the exchanges would be entailed, for obviously the dividend payments would for many years be a relatively insignificant sum. There is a vast difference between 6 percent on 30 billion dollars and 6 percent on 6 percent of 30 billions. Moreover, a certain portion of the dividends would undoubtedly be left in Germany for reinvestment.[i] If there is any virtue in striving for five or ten years of mutual accommodation and peace, without, for the time being, concerning ourselves as to how all of the debt will finally be paid off, such a plan has much to recommend it. Its practical possibilities are at the moment receiving public attention in connection with the plan to bond the German railroad system.

A distinguished British political leader said recently that the reparation problem is the relatively simple one of an expert determination of Germany's capacity to pay. The fact is, of course, that no one is capable of making an estimate anywhere near the truth. Any proposal for an expert determination of Germany's total capacity to pay is quite meaningless unless it be interpreted as the French did in October last when they declined the British suggestion of an inquiry of unlimited scope as being merely the plan for an arbitrary reduction of the debt under another name. If we look for some rational explanation of their action we shall be obliged to ask ourselves whether the theory of the export surplus (whatever its ultimate bearing on the problem) does not, as a basis for a present final solution, ignore some of the most fundamental facts of the economic and social situation of Europe.

II

If we consider the reparation question in its entirety we see the inadequacy of the view held by those economists who have been heard most often on the subject, namely that it is solely a problem in the mechanics of international payment. Taxation may or may not prove to have an important direct effect on the export surplus. But it is certain that the presence or absence of taxation in Germany is of the greatest practical significance if we are to regard the psychology of Germany's neighbors as part of the problem. Moreover, from the standpoint of practical policy Germany's debt burden and earning power cannot be regarded separately from the debt burden and earning power of her neighbors. In any consideration of the social and political aspects of the reparation question the comparative situation of Germany, France and England is supremely relevant. Economists should devote much more attention to the comparative study of debts, taxation and earning power as an integral part of the problem. It is because facts on a sufficiently broad scale are lacking that we witness such appalling clashes of opinion among political leaders, publicists and men of affairs.

The economic difficulties which Europe faced after the war were of two kinds. There was a real exhaustion due to an unparalleled loss of life and a dissipation of labor and wealth which could only be made good over generations. And there was a disorganization of the processes of production and distribution necessary to support the population and gradually to repair the exhaustion. This disorganization was, or should have been, temporary.

The actual exhaustion was represented on the human side by the premature removal of 7,500,000 productive units from the population of Europe and the disablement of millions more. The exhaustion involved in the destruction of property and the diversion of effort to negative ends arose from the direct destruction of accumulated wealth in the invaded areas, the extraordinary depreciation of plants and depletion of resources, and the damage arising from loss of the normal increment of wealth and social betterment.

Clearly, some substantial part of the war debts may be regarded as a measure of this destruction and damage. Only a small part of the direct costs of the war were paid by taxation; the greater part were financed by government borrowings which spread the burden of payment over into the future. After the war the restoration of the devastated areas was also financed by loans. Excluding the interallied obligations, these accumulated debts were internal debts and they were active debts in the sense that the interest charges had to be met. How to meet these charges became the dominating problem of every ex-belligerent government of Europe.

Such statistics as are available indicate that the annual charges on all the debts faced by the French and German peoples after the war would consume 70 percent of their average pre-war savings (estimated for both countries at $37 per capita, pre-war value). But the income out of which the taxpayer had formerly made those savings had been seriously cut down by the war. On the one hand there was less to distribute among the non-productive members of households, for industry had not recovered and the earning power of the productive members was less. On the other hand there were more non-producers to share the earnings of each producer, for France had lost over three percent of her population killed--all producers--and Germany two and one-half percent.

The debts had to be paid out of new savings, by means of taxation; or, as some suggested, out of accumulated savings, by means of a capital levy; or out of both by inflation of the currency. The nearest approach to a rational solution seemed to lie in heavy taxation assessed as equitably as possible over the next generations. This was a long and difficult process but it presented the only sure road back to social health. Attempts to compress it into a lesser period of time and to throw the burden on special classes are dubious, if not disastrous alternatives. A capital levy,--if such a thing is possible,--or even an attempt at one, seems likely to precipitate a collapse of security values and overthrow the system of credit by which the world lives. Inflation, besides being inequitable to persons of small means (including, we may note, those upon whom the advancement of learning and art depends), discourages savings and, if carried far enough, breaks down distribution and production.

These problems of the internal debts, many economists maintain, are irrelevant to the reparation question. Moreover, whereas an external debt will always present great difficulties in the mechanics of payment, an internal debt, they suggest, is a relatively simple thing, being a mere matter of internal distribution.[ii] Hence, they reason, there is no good reason why a creditor nation should hesitate to assume the burden of a debtor nation. Finance ministers the world over, responsible for assuring the service of the internal debts by forcing down the standards of living, do not find the matter so simple. They observe that the average man today finds the problem of making both ends meet a serious one. They are well aware that he demands something out of life over and above the bare necessities, and they have a realistic view of the situation created when a government demands this margin in taxes or takes it by inflation. They interpret the current history of Europe in terms of a struggle of individuals, of classes and of nations to preserve for themselves the margin which to them means decent living.

It is because this mere matter of distributing the internal debts is such a stubborn and menacing affair that the problem of adding to them by a distribution of the reparation debt is so difficult. Whatever form the internal distribution takes, whether it be inflation in Germany, high taxation and the threat of inflation in France, or high taxation and the threat of a capital levy in England, it is so much a part of the reparation problem as to be indistinguishable from it. All this is so obvious that an apology seems due the reader for laboring it. Yet it remains an undoubted fact that the history of the reparation problem is largely the story of a deadlock over the question as to whether or not the French internal debt is relevant to the discussion.

III

An appreciation of the fact that the internal debts are an important factor in the reparation problem does not imply--as yet --that the world or the Allies collectively are called upon to solve the fiscal problems of every nation of Europe. But it does imply effective recognition of those problems, and it requires that a real attempt be made to consider national fiscal burdens on a comparative basis and to construct a reparation policy based on realities.

At the end of the war both France and Germany found themselves with immense public debts, the result of financing their war expenditures chiefly by loans. France had a considerably higher per capita debt than Germany and, added to this, she had the costs of reconstruction to meet. The creation of the German reparation obligation, representing a valuation of the material damage done and the capitalized cost of pensions, was an attempt to equalize the burden by transferring to Germany a part of the French debt. Bringing the figures down to the end of 1922, the total capital burden which Germany faced--including her internal debt at its undepreciated value, the entire reparation debt to all the Allies, and an allowance for her own pensions--was 60.1 billion dollars. The burden which France faced, including interallied obligations and her requirements for reconstruction and pensions, was 38.1 billion dollars. If this burden be compared with Germany's on a per capita basis, Germany's population being 58 percent greater than that of France, it is found to be equivalent to 60.3 billion dollars. The British plan of January 2, 1923, would have knocked 19 billions off Germany's debt, leaving her with 41 billions; and would have reduced the French debt to Great Britain by 2 billions, leaving France with 36 billions,--or, again putting it in terms of comparison with Germany, 52 billions. If Germany were to pay the reduced amount, France's debt would be lowered to 30 billions, or, on a comparable basis, 47 billions.

As 60 percent of Germany's reparation obligation had in 1921 by common consent been deferred without interest, the active debt which Germany theoretically faced was 41 billion dollars. An additional portion having been deferred in 1922, the active debt which Germany actually bore in the four-year period to the end of 1922 was 36 billion dollars. The active debt which the French faced at New Year's, 1923 (i.e., excluding the interallied debts), was 32 billions, or, on a comparable basis with Germany, 51 billions. As this included not only actual but also prospective reparation loans, it might be compared with the German theoretically active debt of 41 billions. Excluding the prospective loans, the actual active French debt was 25 billions. During the four years France received from Germany for army costs and reparations about 400 million dollars, i.e., the interest on 2 billions. Her net active debt therefore was 23 billions, or, on the comparable basis, 36 billions, identical with the German active debt of 36 billions.

From 1918 to the end of 1922 the French Government had borrowed about 6½ billions for reparation purposes, and 1½ billions in addition. Since 1920 France has, through heavily increased taxation, balanced her budget of permanent expenditures, the ordinary budget. In this budget are included all debt service charges except those contracted on account of Credit National Loans, Sinistré Annuities, and, since 1922, such other general reconstruction debt as has been incurred. Until 1922 the service charges on approximately eight-tenths of the active French debt were paid out of taxation. In 1922 and 1923 the proportion fell to seven-tenths. It was in order to cover all such charges by means of current revenue that Premier Poincaré's fiscal reform measure was lately passed by the French Chamber. In face of the great loss in taxing power involved in the devastation of her most prosperous industrial area, the collections in 1920 amounted, in terms of commodity prices, to 11 percent of the estimated pre-war income of her population; in 1922 the collections amounted to 18.3 percent; and in 1923 to about 16.7 percent. Germany, in so far as she met her obligations by taxation, met them on a gradually diminishing scale, the 1920 tax collections being 9½ percent and the 1922 collections 5 percent of estimated pre-war income. Excluding 639 millions capital value of State properties in former German territories ceded to Poland, etc., credited on capital account, Germany during four years paid the Allies for reparations and army costs about 1⅓ billion dollars, which was equivalent to four years' charges (at 5 percent) on about 7 billion dollars. Of this sum, 180 millions were in ships (really a capital delivery), 200 millions in rolling stock, 500 millions in deliveries in kind and 450 millions in cash.[iii] A large part of the last named was paid in 1921. The liquidated value of German properties seized abroad, when determined, will be an additional credit on capital account. Meanwhile it has been estimated at 1½ billions, which figure, however, includes ½ billion in the United States.[iv] As the German Government borrowed in four years nearly 4.7 billion dollars, it may be said to have met the reparation payments and payments to its citizens for property liquidated abroad by internal loans and borrowed several billions besides for the ordinary budget. All the Government borrowings and the war debt, amounting to 20 billion dollars, were paid off by an internal transfer of wealth through depreciation of the currency.

IV

The argument for an immediate reduction of the German debt which makes the deepest impression on the average person is not the one concerned with the mechanics of international payment, nor that dealing with restoration of German credit. It is the argument that a man confronted with an impossible debt will make no effort to pay it. But if impossible means impossible from the point of view of the German taxpayer, what is to be said of the debts which the French taxpayer faces? If, on the other hand, it means impossible from the point of view of international payments, is it believable that the average German is acutely conscious of the difficulties of that highly technical question? What weighs on popular psychology is taxation, and the prospect of future taxation, rather than any technical obstacles to the transfer of wealth across frontiers. There is no peace for Europe in the conception that the German is crushed by the thought of future difficulties with the export surplus but that the Frenchman is able to view his present and future tax bills with equanimity.

Certainly the psychology of the Germans should not be ignored. Nor, on the other hand, should the psychology of the French. But the latter has been ignored--and many solid facts along with it. Many people who in general sympathize with France regard her policy in occupying the Ruhr as unwise. They instinctively appreciate the situation, but they do not clearly understand it. For if the French have acted as a normal man would act were he in the Frenchman's shoes, then a clear comprehension of that fact would lead, not to the judgment that the French policy was unwise, but to the judgment that it was inevitable. And from that point a search would proceed for the means of removing the causes of the occupation.

It can scarcely be doubted that the Ruhr was seized primarily as a pledge and not as a means of getting current reparation payments. It has been predicted that a failure to realize a profit on the occupation would bring the French out of the Ruhr. It seems likely, on the contrary, that so long as the basic causes for the occupation remain such a contingency will only strengthen the French in their conviction that the pledge must be retained. The French seized the Ruhr because they were unable to view their problems with scientific detachment,--because, too, they had not learned to trust the Germans and because they were profoundly disquieted by the attitude of the Allies. In having so soon withdrawn evidences of moral support and of sympathetic understanding of French problems, the United States and Great Britain put an unbearable strain on human nature. The key to a peaceful settlement lies in making it clear to the French that they have that support and that their difficulties are comprehended.

We in America will have to answer the charge of having left our job unfinished. But whatever our failure in the past, our only means of approach to the problem today is to probe the reasons for the Anglo-French misunderstanding which is the immediate cause of the present paralysis of Europe, and to make up our minds as to the direction our efforts to compose the difference should take. The serious aspect of the misunderstanding today,--the aspect which makes unavoidable the invidious task of showing why British policy has so seriously disturbed the French,--is that a large and influential section of British opinion believes that the occupation of the Ruhr is morally indefensible and denounces it as an act of aggression.

The fundamental injustice which has been done the French, and which has had its powerful reflex on French psychology, is that no effective recognition has ever been given to their reconstruction difficulties, to the resolution with which they have been dealing with them, and to the restraint which they have exercised in their policy toward Germany. Not only have these things not been effectively recognized in British policy, they have been misrepresented to the British public. One read in certain British publications that France was whining about the easy problem of repairing her devastated areas, that her failure to lay taxes was notorious, that she was a Shylock seeking her pound of flesh.

Convinced that the reparation question is one only of German export balances, British economists and financial authorities gave the problems of France much less attention than they deserved, and in dismissing them as they frequently did with inaccurate generalizations they created misunderstanding both at home and across the Channel. Manchester, the industrial center and home of economic doctrine, had been hard hit by the trade depression. Trade did not recover and the conviction grew that it would not recover until France reduced the German debt. France stood firm, and the agitation became very bitter. Month in and month out the great English Liberal journal, The Manchester Guardian, voiced the idea that France was responsible for the ills of Europe and for the unemployment in "England's devastated area." J. M. Keynes asserted that the existence of a large reparation debt would, by stimulating Germany's export industry, present a distinct danger to the foreign trade by which England lives. The smaller the debt, the better, presumably, for trade. What was France to think of all this?

In stressing in their campaign the crushing weight of the German debt the English Liberals made it extremely difficult for any German Government to lay taxes for reparation purposes. Whatever the other contributing causes, it cannot be doubted that this agitation had a powerful influence on the flight from the mark and the destruction of German credit. The wealth of Germany was transferred bodily to the industrialists and they were paying no taxes. All the distinguishing characteristics of repudiation were present. What were the French to think of it?

The French Government, in its struggle to collect taxes and carry Germany's burden for her, was handicapped by the threat of a loss of the ultimate right to reparations. The British plan of January, 1923, represented a sincere view of the best method of getting reparations. It was put forward as a means of securing "a complete and final settlement in the general interest of Europe," with the intimation that it was Britain's last word on reparations. But it was not calculated to accomplish its purpose. The French Government was expected to go to its people with the statement not only that nothing could be gotten from Germany at the moment, but that the greater part of their claim was to be definitely relinquished. While the scars of invasion were still fresh the French Government was to explain to three million people in the devastated area that Germany's future export balances would be insufficient to pay the reparation debt. It was impossible. The British plan was rejected and the danger--which seemed to the French imminent--of being left to deal with the problem alone, without guarantees of any sort, moral or otherwise, was met by the occupation of the Ruhr.

It would be absurd to lay at the door of the British all or nearly all of the responsibility for the French occupation of the Ruhr. It is equally absurd to lay all the responsibility on the French, and--a practical matter--such a charge offers a discouraging basis for negotiation. Let us try to deal with the matter candidly on the assumption that by acts of commission or omission everyone shares in the responsibility--the United States, England, France, and Germany.[v]

The makers of British financial policy have been struggling with two fundamental inconsistencies. In the first place, they have not had the same realistic view of German credit which they had of British credit when they funded the American debt. In considering the position of Germany, more importance has been given to the difficulties of the export surplus than to the psychological bases of credit. In the second place, while they have been convinced that the reconstruction of Europe depends on "writing off through one great transaction the whole body of interallied indebtedness" (Balfour note of August 1, 1922), they have not felt able, presumably for reasons of international comity and British credit, to press this view on the American people. The effort to induce France none the less to cancel her claims on Germany seems to the French illogical and inequitable.

Since the agreement was reached for the appointment of the Expert Committees, the pressure on France for a reduction of the total sum of the debt has been suspended. Its definite abandonment might be expected to encourage in France the tendency to favor a withdrawal from the Ruhr. But probably an immediate and decisive change of policy by either England or France is out of the question. Recent discussions in the French press have been directed towards the possibility of a tacit abandonment of the debt reduction policy by England and the release of the Ruhr from economic interference by France but not from military occupation. The reëstablishment of Germany as an economic unit would furnish grounds for inaugurating the plan of placing a mortgage of some 2 billion dollars on the German railway system, a portion of the proceeds to be used for stabilization purposes in Germany and a portion to be turned over to France. But those who favor an immediate reduction of the Treaty debt are scarcely likely to allow the plan to die in peace. If public opinion can nevertheless be fortified in the view that such an arbitrary reduction is unnecessary and unjust, there is ground for hope that the protests of economists will gradually grow fainter and that the settlement of the experts will prove to be the foundation of a permanent reparation policy.

V

Political leaders appreciate the peril of Europe's position, but to be able to meet it they must find a basis of vital common conviction upon which a common public sentiment can be constructed. Justice is the only foundation for an effective and enduring public opinion. A peaceable solution of the reparation problem therefore seems impossible unless there can be some agreement on the question as to what Germany ought to pay.

British economists assert that the determination of capacity to pay is a purely scientific matter. The author of an important unsigned contribution on reparations in The Manchester Guardian Reconstruction Number of September 28, 1922, said: "The world has suffered too much from the disastrous results of intruding ethics into financial and economic questions." This will not do. The question of Germany's capacity to pay cannot be examined in a scientific vacuum. Within limits, what the Germans can pay depends on what they themselves and their neighbors believe they ought to pay. What Germany can pay will be limited to what the average German believes he ought to pay or must pay in taxes. If he is human, he will not pay more than that, for taxation means reduced consumption--a colorless scientific term for sacrifice and privation.

Upon what are to rest the convictions of the German people and of their neighbors as to Germany's moral obligation in the matter? During the war the German people believed they were fighting a defensive battle and there is no evidence that they have changed their minds. The acknowledgment of responsibility contained in the Treaty of Versailles was signed under duress. More than that, the Germans have been assured by various authorities that the inclusion of pensions in the treaty definition of reparations was a breach of faith.[vi] It does not seem reasonable to expect that on the grounds of being responsible for the war they will spontaneously pay crushing taxes to meet the reparation debt. To state this is merely to look facts in the face. A tremendous debt has to be paid and powerful motives to that end are essential. On the other hand, in view of the calamity which has overtaken ex-enemy and Allied nations alike, German responsibility for the war cannot satisfy the Allied peoples as being the only criterion by which to measure the effort which the German people ought to make. The problem of Europe is how to preserve Germany as well as France.

Is there a formula capable of appealing both to the Allies and to the Germans as being founded in substantial justice? If there is one, it is the principle that in the common task of restoring Europe the German people ought to face, and must be held to facing, a total burden at least equal to that of their neighbors. When the reparation problem is firmly anchored to this principle we may hope for agreement on a working policy having as its object the adjustment of current burdens now, and continuously hereafter, on the basis of mutual accommodation and in accordance with observed facts as to limitations of the payment of external debts.

The Treaty of Versailles lays down the governing principle of the reparation settlement as equality of tax burdens; and the debt fixed under the treaty provisions places a total burden on Germany not unequal today to the total burden which the French are facing. Efforts to upset that settlement at the present time can have nothing but a destructive effect. A sympathetic understanding of the difficulties of the German people does not obscure the fact that the treaty settlement offers substantial equality as regards "permanent" burdens. Inflation is a fearful affliction, but in its indirect effects on the earning power of the population through the breakdown of production it is, relatively speaking, a temporary thing once confidence can be restored--as witness Austria. In general, the disorganization prevailing in Germany today is comparable to the temporary disorganization caused in France by the devastation of the Northern Departments, though it is capable of being repaired much more promptly. These things pass, but the "permanent" burdens will continue for many years.

In order to get a comparative view of the debts of Germany and France these may be regarded--as in this discussion--as having in general the magnitude in terms of gold which they had when incurred, whether they are paid off suddenly by inflation or gradually by taxation. The accumulated savings of the middle-class German have been sacrificed to pay off his share of the public debt, and the social burden of the debt will remain for many years. Although it is rather theoretical, there seems to be much to support the view that the social burdens of two debts of equal original value will, over an extended period, be much the same, provided the per capita earning power is similar.

With respect to earning power, the advantage seems to lie with Germany on account of her superior plant and her smaller human losses. Fundamental earning power resides in labor and tools of production. Germany's plant has been improved and her merchant marine is being rapidly rebuilt. Her foreign investment losses are comparable with those of the French. German capital has been exported and German sovereignty over certain mineral areas has been transferred, but the loss of capital (even on the most unfavorable hypothesis, i.e., that it is permanently gone) does not imply any substantial impairment of Germany's long-term earning power, nor does the transfer of Lorraine mean that Germany will be unable to secure either there or elsewhere the iron ore formerly supplied to Germany proper out of the Lorraine excess production. Arguments on this subject could be prolonged indefinitely, but the facts can only gradually become known. It seems reasonably clear that until Germany pays enough to reduce the French debt substantially there will be no necessity for reconsidering the present distribution of the burdens. When that time comes, the internal effect on the German economy of long-continued alienation of resources will be a factor requiring consideration. On this point it would seem that if economics comprises an organized system of natural law, the alienation of resources to the extent permitted by the laws of international exchange will be possible and harmless from the point of view of internal economy.

But these things are not practical questions now. It is the current problem which presses for attention. We have seen pronounced inflation in Germany--and if the operation of the new French tax program does not succeed we may see it in France. The problem of today, tomorrow, and indeed of the next several years is to accommodate hard-pressed debtors in such measure as is possible without throwing intolerable burdens on hard-pressed creditors, until, little by little, the accumulated effects of productive labor alleviate in some measure the deep-seated exhaustion. There is no quick-acting panacea for exhaustion. Crises and relapses must be dealt with as they arise in the hope that with prompt, continuous and understanding treatment peace and confidence will return, industry will revive, and gradually increasing prosperity will finally make the quarrel over the capital debt easier of solution. In general, the condition of industry in Europe today would not be discouraging if a halt could be called to that quarrel. Production has been mounting, steadily if painfully. Unemployment in England has been reduced 45 percent from the high figure. France is working. These things indicate that the quarrel may prove vastly easier of settlement, if left to nature to settle, than we now imagine. But until Europe gets on its feet the reparation question will be a day-to-day problem of limited objectives. To reach those objectives will be infinitely difficult, and perhaps impossible on a rational basis. It seems certain to prove so unless concerted action is taken on every point where agreement is possible, so that the area of agreement may little by little be widened and confidence restored.

The fundamental obstacle to a solution by agreement is that the problem has not been seen in its real proportions. If we really appreciated how deeply the war ate into the economic and social fabric of Europe we would be content for some years with a continuing system of partial moratoria aimed at keeping both debtor and creditor alive. We would seek a working arrangement freed from the ruinous effects of the struggle to find, here and now, a solution which can only come with a new generation of productive workers. In its chronic aspect reparations is the problem of the exhaustion of Europe--a vast tangle of social and economic questions reaching out into every European household. If we appreciated that fact we would reject the idea that an immediate final solution is the necessary preliminary to the reëstablishment of productivity,--we would see the problem in the diametrically opposite sense, namely that the reëstablishment of industry is the essential preliminary to the final solution. Only continuing productivity over a long period of time will make good the exhaustion of Europe; and social health will be restored only in proportion as the exhaustion is alleviated.

There can be no doubt that all the war debts--internal, reparation, and interallied--form one single problem. In the solution of this problem the policy of the United States will be an important if not determining factor. In the words of President Coolidge, we desire "to see France paid and Germany revived," and as the creditor of Europe we "would not wish to assume the role of an oppressive creditor, but would maintain the principle that financial obligations between nations are likewise moral obligations, which international faith and honor require should be discharged." As a statement of principles, no truly constructive policy could go further than this today. Proposals for the cancellation of the interallied debts by the United States, like proposals for the reduction of the German obligation by France, merely prolong the quarrel which paralyzes Europe. Until debtor nations shall have paid taxes toward the extinguishment of their obligations over a considerable period of time, and until facts as to the limitations on the international transfer of wealth can take the place of prophecies, all such proposals will encounter insuperable psychological obstacles. So far as we may now judge, a partial redistribution of the reparation and the interallied debts seems bound to come some day, but the time is not yet ripe. When it does come it will be only by the spontaneous act of the creditor nations, in whose intelligence and goodwill confidence must meanwhile be reposed.

[i] The reinvestment abroad of interest accruing from foreign securities is usual. In an address before the American Bankers Association in New York, October 4, 1922, Reginald McKenna, former Chancellor of the British Exchequer, said: "If we take the whole field of British foreign investment, we find that every year England has returned in loans more than she has received in interest, and the balance of the world indebtedness to her has been steadily growing."

[ii] It sometimes is even stated that a country is no poorer because of a large internal debt.

[iii] In addition, identifiable Allied property carried off by the German armies was restored to the value of 100 million dollars, as estimated by the Germans; pre-war private debts to Allied nationals were paid to the estimated amount of 150 million dollars; and paper marks to the value of 150 millions were delivered to the armies of occupation and spent in Germany.

For a more detailed discussion of the German payments and of debt and taxation figures, with citations from original documents, see the writer's article contributed under the pen-name "Alpha" to the September, 1923, number of FOREIGN AFFAIRS.

[iv] This is a rough estimate by Mr. Maurice Frere, the economist of the Reparation Commission. Messrs. Moulton and McGuire, in "Germany's Capacity to Pay," express the view that Germany has lost, and should be credited, 2½ billions for this item. As Mr. Moulton shows that the German Government up to March 31, 1923, had reimbursed its nationals for property confiscated abroad only to the amount of 70 million dollars (140 million at the internal value of the mark) it seems premature to accept his valuation.

Mr. Moulton estimated Germany's total deliveries at about 6 billion dollars, i.e., three times the Reparation Commission figure. The principal items on which his figures are in excess of the figures of the Reparation Commission include 2½ billions for the item just mentioned, 700 millions for State property in ceded territories, 225 millions for material abandoned by the German armies after the Armistice, 150 millions for rolling stock and 700 millions for merchant marine. An exhaustive valuation of State properties by the Reparation Commission is still under way. The data on which to base a valuation of abandoned material are unsatisfactory; the matter has been the subject of negotiation with the Germans and is still unsettled. The same comment is applicable to railway rolling stock. Regarding the shipping item there is a large discrepancy in values. The Reparation Commission figure was based on values on January 10, 1920, the date when the treaty became effective, notwithstanding the inflated values ruling then. The ships delivered averaged over ten years of age, and the Reparation Commission's gross figure of $103 per ton for cargo steamers corresponds roughly, taking account of depreciation, to English estimates current in January, 1920, of $186 a ton for new cargo steamers, as published in "Fairplay." On the other hand, 57 cargo vessels in service sold early in 1920 on the basis of $159 a ton for a twelve-year-old vessel. Mr. Moulton's figure appears to average $208 a ton for all vessels, and consequently more than that for cargo ships. It is a difficult question and Mr. Moulton's figure does not seem to be entitled to greater credence than the Commission's. The amount paid by the German Treasury for ships, to March 31, 1923, was 65 million dollars (136 million at internal purchasing value of the mark). As a matter of equity, as distinct from the legal aspect involved in the fact that title to the vessels passed on January 10, 1920, the economic loss to Germany caused by their transfer, if calculated on earning power, was by no means to be measured by the inflated values of January, 1920, as the whole shipping trade shortly suffered a collapse.

In connection with the general question of valuation, it will be useful to know what values are adopted by the German Government when it comes to the matter of reimbursing its nationals. In Messrs. Moulton and McGuire's book we find that up to March 31, 1923, the total payments out of the Treasury for all treaty charges amounted to 1½ billion dollars (or at the internal purchasing value of the mark, 3 billion dollars). This figure naturally contains nothing representative of the value of cessions of State property.

[v] Those interested in the legality of the Ruhr occupation under the treaty clause providing for "economic and financial prohibitions and reprisals and in general such other measures as the respective governments may determine to be necessary," are referred to Lord Curzon's note of August 11, 1923, and M. Poincaré's reply of August 20, 1923. (These two notes are reprinted, in parallel columns, in a pamphlet issued in September, 1923, by the Council on Foreign Relations, 25 West 43rd St., New York, and obtainable at that address while the supply lasts.)

[vi] For a discussion of this matter see "The Making of the Reparation and Economic Sections of the Treaty," by B. M. Baruch; New York, Harper's, 1920.

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