COMING so soon after widespread newspaper prophecies, the speeches of M. Poincaré and M. Briand and the travels of Mr. S. Parker Gilbert denote the preoccupation of European officials with the question of another war debt rearrangement. Speaking on this subject in the French Chamber on February 2, Aristide Briand said, "I do not believe -- and I have a right to say so -- that the year 1928 will end without great questions being settled." Neither M. Briand nor any other statesman has specified what these questions are; but the newspapers mention three, the settlement of which would lead to the "all-round solution of debts and reparations" referred to by the French Foreign Minister.

The first is the fixation of the capital reparation claim against Germany. Bound by their terms of reference, the Dawes Committee were prohibited from determining this figure, being unable to propound more than an expedient providing "a settlement extending in its application for a sufficient time to restore confidence." The scheme was a schedule of annuities disassociated from any amortization scheme. Has the confidence foreseen by the Report been restored? It is the verdict of Europe, through the League of Nations, that it has; even France, hitherto regarded as intransigent toward Germany, has not only welcomed Germany into the counsels of the League, but has also pursued a policy which has already knit together the economies of the two nations. This represents confidence in Germany only in the general sense; but, as the Agent General for Reparation Payments points out in his December 1927 report, it is "one of the principal factors to be relied upon in bringing about a mutually satisfactory settlement when the time for that arrives." In its specific application to German payments of reparations, confidence has not yet been reached, inasmuch as, according to the Agent General, "We are still in the testing period, and further experience is needed before it will be possible to form the necessary judgments." But the Agent General goes on to say that the reparation problem cannot be finally solved until Germany has been given a definite task to perform on her own responsibility, without the foreign supervision and transfer protection provided for by the Dawes Committee. A solution on these lines would be the fulfillment of their work.

Expert opinion seems on the whole to have endorsed the tacit manner in which General Dawes and his colleagues shelved the 1921 definition by the Reparation Commission of Germany's debt at 132,000,000,000 marks. No longer is it felt that Germany is a miraculous pitcher. The tendency is toward a business-like rearrangement in accordance with the philosophy of the Plan. Germany will enter the standard year scheduled by the Report this coming September, when her obligation becomes 2,500,000,000 marks -- say, $600,000,000 -- annually. Capitalized at 6 percent (5 for interest and 1 for amortization) this would aggregate 42,000,000,000 marks, say, $10,000,000,000. It is with some such figure as this that many of the prognosticators are engaged; others anticipate a trimming down to $7,500,000,000, or even less.

The debt total having been fixed, a second step would be necessary, in the minds of those who are most active in making the new proposals: the sale on world markets of the 16,000,000,000 marks of German railroad and industrial securities which have been pledged under the Dawes Plan, as the first move in the commercialization of the total liability. The proceeds would be paid into the treasuries of the creditor nations as partial liquidation of the German obligation. Of the $600,000,000 standard annuity, the railways contribute $158,000,000; industries, $72,000,000; transport tax, $70,000,000; and the budget $300,000,000. These amounts may be regarded as interest payments on mythical sums with the exception of the railroad and industrial bonds, which were materialized at 11,000,000,000 and 5,000,000,000 marks respectively, or $4,000,000,000 altogether. Such was the avoidance of arithmetical definition in the Report that it cannot even be gathered whether the liquidation of the railway and industrial first mortgages by issuance of bonds in world markets would be considered as extinguishing any capital reparation obligation of the German Government. In any fixation of the debt on the lines of the present discussions, the flotation of the bonds should constitute about 40 percent of total reparation, and it would therefore be an important move in its absorption in the mechanism of international finance.

The amounts involved are huge. Could the markets of the world absorb them? Would the railway and industrial bonds be a good credit risk? The plethora of funds that has poured into Germany since the Dawes Plan, despite the buffetings of the controversialists over the question of priority,[i] shows a high degree of investing faith. This faith is partly a testimonial to German discipline and recovery, but in the main it has been fostered by the general desire to promote world recovery, and, as the bankers are reputed to be in accord with, if not sponsors of, the plans for the new bond flotations, it would seem that financial operations even of the magnitude proposed would be carried out in the same spirit of coöperation as manifested itself in the united issue of the external loan of 1924.

It is coming to be realized that the German economy has obtained a lead over its competitors by its relative liberation from internal debt consequent upon currency revalorization. In a debt-encumbered Europe, this advantage is important. Not only were the German industries and railways enabled to start anew by paying their debts in a practically worthless currency; they sank the fruits of enterprise in plant. When the bottom appeared to be falling out of the mark, currency was partly frightened abroad and partly frozen into fixed assets. These latter have provided Germany with the foundation of rationalization.

The railways showed receipts of five billion marks in 1927; on the other side of the account, expenses are on such a mounting scale that they foreshadow increased tariffs to accommodate them. These additional expenses were not foreseen by the Dawes Committee, but neither was the phenomenal advance in German economy. The railways, for example, revealed in 1927 a 10 percent growth in earnings over the total for 1926. Quoting German statistics, the Trustee for the German Industrial Debentures under the Dawes Plan is an eloquent witness to the new-found economic vitality of Germany. Later statistics yield ample corroboration. In 1928 the export trade has not only exceeded the pre-war average value; it has almost reached the pre-war average value as increased by the wholesale price index, and reports indicate that if the figures for the first quarter of 1928 are maintained, the export volume of the whole year will be as great as before the war. "It is practically certain," says the New York Journal of Commerce, "that the export of manufactured wares will touch a new record high level, and that German competition will be everywhere increasingly felt." This promises excellent results for the German railways.

This is a comforting background for the mooted plan to float the bonds secured on German railroads and industrial undertakings. They would be as good a credit risk as there is in Germany. Many other factors, however, have to be taken into consideration before the step may be put through; and the major factor is the question whether the time is ripe to relieve the interest service of the railroad and industrial bonds from the transfer restriction of the Dawes Plan. Here we enter the region of politics. Public opinion, relieved from lingering war psychosis, is increasingly concerned with the abolition of reparation as an affair between sovereign governments involving servitudes. A definition of capital reparation obligation would be accompanied by the withdrawal of the trusteeship imposed on Germany through the various Dawes controllers. The mobilization of the railroad and industrial bonds might even be merged in the commercialization of the total German liability. This of course would not be done at once; protracted and careful study, combined with the fullest measure of coöperation by the bankers of the world, would be necessary in marketing the securities systematically.

Germany is undoubtedly restive under what the New York World has called an international receivership, but neither the Agent General's reports nor the facts of contemporary history justify the deduction that the Germans will try to torpedo the Dawes Plan. That way spells ruin for their credit, with an appeal to the sanctions of the Treaty of Versailles; a risk too catastrophic in its consequences to invite save during revolution. However, her statesmen are continually demanding that the "iron curtain" of the Rhineland be lifted, and this would undoubtedly be correlated with German acquiescence in the revision of reparations.

Who, then, will initiate discussions? Britain is even more passive than Germany; for the British policy is anchored to the Balfour Note, which undertakes not to collect more from her debtors (reparations included) than she has to pay in American war debt remittances. Provided that the Dawes schedule be adhered to, Great Britain in 1930 should obtain £33,000,000 a year from debts and reparations and will have to pay £38,000,000 a year to the United States. Italy has struck an even balance between her receipts and her payments. Her share of the Dawes annuities flows into a pool and is drained off in her payments to her creditors, leaving her no surplus for her treasury until 1950. She would be concerned if by the revision of the Dawes Plan she had to feed her war debt pool out of her Treasury surplus. France, in Poincaré's words, "would accept a combination which by marketing German bonds under the Dawes Plan will enable the Allies and Germany to pay their debts more quickly." Her share of reparations is 54½ percent but though her debt and reparations account leaves her with a handsome net receipt she is still lagging behind adequate compensation for the expenses incurred in repairing devastation.

France has now shaken off her former attitude that French reconstruction must be paid for out of German reparations. She has recovered confidence in her own ability to accomplish this great work. But her non-ratification of the debt settlements with Great Britain and the United States proves that she has not reconciled herself to any substantial reduction of reparations apart from a concurrent review of inter-governmental indebtedness. This brings in Washington. So far there has been no indication of any retreat by the Treasury Department from its stand concerning the lack of relation between debts and reparations and the inviolability of the settlements.

The simple facts are that 60 percent of German reparations are re-transmitted as through a conduit pipe by way of war debt remittances to Washington. The percentage will be reduced when Germany begins her payment of the standard annuity of $600,000,000. But before this is apportioned among the creditors it is subject to certain deductions, principally the service of the German external loan of 1924 and the costs of the various controls, which would diminish the total to, roughly, $575,000,000. Then there are certain creditors who have no score to settle with Washington. Let us say that the base would be about $560,000,000. Against this sum should be set about $235,000,000, representing the American share of the Dawes annuity and the average yearly remittances to America by the beneficiaries of the Dawes Plan in the first quinquennium. This would amount to about 40 percent of reparations. In view of the fact that war debt payments to the United States rise on an ascending scale, while the standard Dawes annuity remains unchanged, the percentage of reparations indirectly reaching Washington would advance correspondingly, and it would advance steeply if the Dawes Plan schedule were trimmed according to the new proposals without any parallel trimming of the war debts.

The new scheme would acknowledge this existing but implicit link between debts and reparations by treating them as a body of indebtedness capable of mutual accommodation. It would short-circuit the present indirect route of half of German reparations to Washington by commercializing reparations and remitting part of the proceeds to Washington via the Allied treasuries in discharge of the indebtedness to the United States. Five percent bonds would be sold on world markets, say at 80, yielding over $3,000,000,000. At 5 percent America's major war debts have a present value of about two billion dollars more than that sum, but, in view of the prospective price of the bonds, the creditors of Germany hope that the United States would be persuaded similarly to discount her claims in return for the business-like appeal of securing an all-round liquidation of war indebtedness. This is the reasoning of the far-seeing merchant. The amour propre of nations committed and recommitted to certain debt policies would be preserved. Commercialization instead of inter-governmental tinkering might well lift the whole affair out of its present groove.

[i] See Roland W. Boyden's "The Priority Question," in FOREIGN AFFAIRS, April 1928, p. 368.

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