IT is amazing how unreal the whole discussion about reparations has become. Argument is heaped upon argument to show that reparations can be paid or that they cannot be paid, that they can be transferred or that they cannot be transferred. The constant over-emphasis upon the exchange mechanism of goods rather than their production is well in keeping with certain superstitions current in economics. But the picture resulting from this tendency is very incomplete.

First let us direct our attention to some of the problems connected with the question whether reparations can or cannot be paid. Since, however, this whole discussion has been lost in such a maze of contradictory arguments, it may be well to use a simile drawn from individual rather than national economy -- though with the obvious reservation that a simile is a simile and does not prove anything, but merely illustrates and possibly clarifies. Suppose, then, that a professional man, an engineer or a doctor, has run down someone in the street and has to pay a huge damage claim. Assume that previous to this occurrence he had had no surplus income. Obviously he will have to increase his working hours or lower his standard of living if he is to pay the damages. If we are asked whether we think he will succeed we can only say that the damages can and will be paid if the man's physique (in the broadest sense of that term, including possible psychological limitations) will stand the strain. So with reparations. Reparations can be paid if the German producer's physique can stand the strain. Furthermore, while this statement applies to all producers, its validity is tested primarily in the case of a national economy by that large group of producers who would anyway approach the minimum level of subsistence, the workers. They have no reserve funds and will have to bear the brunt of the burden. In Germany more than in any other country this is almost equally true of the middle classes, so-called, since their reserve funds have been wiped out by inflation. Let me repeat: If the German producer in general and the German worker in particular can stand and will stand the strain upon his vitalfunctions, reparations can be paid.

But, it will be objected, German reparations so far have been paid out of international loans. Such a statement gives a mere accountant's view of the matter. No insight into the economic forces involved is derived by pointing out the fact that the total amount of reparations paid falls below the amount of loans made to Germany.

Even a general survey of international trade figures such as is usually undertaken in this connection proves little. Let us go back to our simile for a moment, slightly changing the premises. Suppose it were absolutely impossible for our engineer to make his damage payments by working harder and by living more cheaply. There might still be a chance of his borrowing money and building a plant in order to afford a better opportunity of turning his excess work into money. During the period of construction, his income (including current debt payments) would have to come out of the loan as part of the cost of promotion. If someone took the accounts of such an engineer, he could easily point out that the man was making his payments out of borrowed funds. But would this be considered a very striking observation? No. If he did not have to pay, he would not have to earn more; if he did not have to earn more, he would not have to build a plant; if he did not have to build a plant, he would not have to borrow money. This, I believe, is in essence the German situation today, and not that of a man "living" by borrowing, as Mr. Schacht and others have described it.

As was pointed out when Mr. Schacht chose to attack the use of foreign loans by German municipalities, the distribution of the 584 millions of marks of municipal loans taken up between January 1, 1925, and September 30, 1927, was as follows: 194 millions for electrical works, 65 millions for gas works, 80 millions for water works, 20 millions for harbors, 112 millions for means of transportation, and 96 millions for a Consolidated Loan of smaller municipalities spent for these same purposes.[i] For less urgent purposes (stadia, playgrounds, etc.) only about 77 millions were spent, and of course not out of the proceeds of these loans. The total annual burden upon municipal budgets due to such welfare charges (both old and new) is less than 0.5 percent. This seems a very small fraction indeed, and it ought to be borne in mind, moreover, that many of these expenditures are very important in order to keep the German working population in good physical shape, in view of the abominable housing conditions and the complete cessation of new construction of working-men's houses since the beginning of the war. It is rightly urged on all sides that if any extravagance on the part of municipal governments should occur in Germany, other means are available for curbing such a development, particularly since German municipal taxpayers have always kept a close watch upon the conduct of municipal finances. In fact, we find everywhere, even in towns with only 10,000 inhabitants, that carefully drawn-up budgets are available in print to every voter. These few facts must suffice to lay the bogy of uncontrolled spending by the public authorities. They ought to show at the same time that the foreign loans are really used for that construction of new productive plant which we saw our engineer might be forced into.

As far as concerns private loans, which have not been as widely attacked, we can certainly leave it to the creditors to see to it that they are invested where they will produce a surplus. It is not credible that the great conservative banking houses of New York which have floated these loans did not know what an industrial security was. Here and there a failure may result, as it always does in industrial investment, but the bulk of these loans is as safely invested as can be.

It seems too obvious for further elaboration that without capital the Germans would be unable to develop their industrial plant. In the first place, such raw materials as are not available in Germany have to be imported. But even the importation of finished products will of course often be justified upon exactly these grounds. If, for example, American automobile tires are greatly superior to German tires, it may be desirable to import such tires, at least until German tires have reached the same high level of quality at the same price. The same may be true of a good deal of machinery more obviously "productive" than tires, as for example products of the International Harvester Company. It is impossible to analyze here in detail the figures of German imports and exports as they compare with 1913, although only such a detailed analysis would enable us to draw any definite conclusions regarding their significance for the German economy as a whole. Suffice it to quote the German Federal Bureau of Statistics:

"The high surplus of imports over exports and the considerably increased imports are explainable primarily . . . (in connection with) the considerable progress of industrial production. This is apparent from the rapid rise of the imports of raw materials which is highest since the war. The imports of finished products . . . contain a considerable number of wares serving as the basis of further production." And further on: "The exports of finished products show a decided increase. This is the more remarkable since the conditions for the increase of exports were not particularly favorable during 1927. While 1926 was characterized (at least in its first half) by a period of depression which stimulated exports, the year 1927 was under the influence of a domestic boom which impeded the increase of exports, particularly since the internal price level was rising. If in spite of these conditions the exports of finished products are 8% above those of the previous year, it must be considered an indication of the growing ability of German industrial products to compete in the markets of the world."[ii]

Certainly general statements about the total amount of imports and exports, such as are adduced by Mr. Keynes and others in their reasoning upon this problem, get us exactly nowhere, since our interest ought to be directed toward an understanding of the significance of these imports for the development of German national productivity. In order to render a conclusive account upon this question, it would be necessary to trace the various items of German import to their place of consumption -- an extremely difficult thing to do. And even if we undertook it, it would not be conclusive by itself because the composition of imports is caused by the comparative price of the different goods at home and abroad. Thus the imports of tires may rise rather than imports of rubber, because a real saving can be achieved by importing them, while the imports of rubber would not result in any material economy. The same reasoning applies, of course, from very necessary down to very unnecessary commodities.

It may be well, however, to give a few figures about the total German foreign trade and the part which foodstuffs play in it. Reckoning on the basis of 1913 values (in order to have a common denominator), we find that the total volume of trade (stated in millions of marks), taking exports and imports together, is just approaching the 1913 level:

Year Import Export Difference between Export and Import
1913 10,769.7 10,097.2 -- 672.5 
1926 7,966.7 7,340.2 -- 626.5 
1927 11,419.0 7,627.2 --3,791.8[iii]

But at the same time we find that there have been considerable shifts in the relative significance of different items of import and export.

Germany has lost some of her most important food-producing areas, namely the sparsely settled rye and wheat producing provinces of West Prussia and Posen, which have been transferred to Poland. As a result, the import of foodstuffs has increased from 25.1 percent of the total imports in 1913 to 31.2 percent in 1926 and 26.7 percent in 1927. While the real values of 1926 were still below 1913 (2,680.9 million marks as against 2,807.8 million marks in 1913), they have risen above the 1913 values in 1927 (3,103.4 million marks). At the same time exports of such articles have declined from 1,069.5 million marks in 1913 to 392.6 in 1926 and 349.1 in 1927, bringing their relative importance for the total exports from 10.5 percent in 1913 down to 5.3 percent in 1926 and 4.5 percent in 1927. In considering all these figures it ought to be borne in mind that German production in all essential agricultural products is well below the 1913 level of intensity.[iv]

This is only one, though a very important, aspect of the tremendous changes in the German foreign trade which are after all nothing but reflections of the complete transformation which the German national economy has to undergo at the present time. These transformations (or "rationalizations" as they are frequently referred to in Germany today) require capital and this capital is best supplied by the cheapest capital market. It so happens that the cheap capital markets of the world lie at present outside of Germany. Some German economists claim that it is advantageous to finance an industrial expansion abroad, because this leaves the equilibrium between consumption and production undisturbed and no curtailment of consumption for the purpose of investment becomes necessary. Such an advantage is at best only temporary, but under the conditions prevailing in Germany the contention has some force. German production was suffering severely from the complete destruction of the internal market. As a result of the inflation, incomes are generally so low that the accumulation of capital would not proceed at a rapid rate without cutting deeply into consumption or changing its direction profoundly. Even now, the rise of German savings has astounded many experts. By the time inflation had run its course savings accounts were almost annihilated; yet by April, 1925, the first billion had been accumulated; the second billion had been accumulated by March, 1926, the third by December, 1926, the fourth by June, 1927, the fifth by January, 1928. During the same period, according to J. Hoffmann, the turn-over declined very rapidly: 7.6 times in 1924, 4.2 times in 1925, 2.8 times in 1926 and only 1.2 times during the first half of 1927. The latter circumstance makes these deposits much more available for long term investment. But even though this development is phenomenal, these savings would not suffice to finance the German national economy as a whole. It should be noted that a total of upward of 5 billion marks has been taken from abroad in long term loans. And the movement still continues unchecked, for by April, 1928, savings reached 5.6 million marks and foreign loans 6.0 million marks. It appears that accumulation of capital at home proceeds at the same rate as foreign borrowing.[v] The rapid development of both these accounts and at the same time the maintenance of a high interest rate in Germany indicate the intensity with which capital is sought. For a certain length of time, capital would have flowed into Germany, reparations or no reparations, because it was and is needed to reorganize the national economy in almost every line of business. This is the basic reason for the high interest rates. But since reparations have to be paid, that is to say since a surplus of exports over imports has to be produced eventually, not less capital is needed, but more.

What I have just said is further supported by the general development of German foreign trade since the stabilization. The figures are difficult to interpret on account of the rapid change of the value of money (purchasing power), but there is little disagreement among competent students of these matters in Germany that the German exports show a steady upward trend. This is significant, even though for the time being the upward trend of German imports is similarly marked, in fact surpasses it; because, as I have said before, many of the German imports are going into more or less permanent plant equipment, and whenever this building of industrial plant stops (as in the spring of 1926) a surplus of exports immediately appears. All we need to keep in mind at the present time is that it still will take a great deal of further industrial expansion before the point is reached where the German national economy will permanently produce a surplus of exports sufficient to cover the entire reparation payments.

But, it is further objected, the international loans to Germany are made without consideration as to whether they increase the productivity of Germany or not. This myth of productivity of the individual loans has played a great rôle in discussions over these matters, and both Mr. Gilbert and Mr. Schacht have sinned in the way they have used it. In particular, an invidious distinction has been drawn between loans to states and municipalities on the one hand and industrial loans on the other. And even in the case of industrial loans a distinction has been attempted between those loans which were given to industries producing foreign exchange and loans to other industries. Thus Mr. Schacht said in October, 1926, before a commission of the German Parliament, that foreign loans must only be given where by their application the creation of foreign exchange is guaranteed. Later on it was urged (and this represented a modification somewhat of the earlier position) that a loan is productive only if its use increases the ability of a national economy to produce a certain quantity of goods with the same amount of labor as before, i.e. if it increases the national dividend. On this ground objection was raised to the taking of foreign loans for the construction of small dwellings to remove the abhorrent conditions under which millions of German workers live at present. This interference with municipal social policy had, incidentally, much to do with the decided recent shift toward the left in German politics.

But approaching the problem from our angle, we recognize at once the delusion underlying these arguments. Economists are too often inclined to forget that we work in order to live and do not live in order to work. A higher standard of living for all is the ultimate goal of economic activity. Interest on foreign loans is a tribute which has to be paid to creditors abroad out of the total national dividend. Such tribute can be paid, on account of these loans, because more has been produced, or because the same amount has been produced but under more favorable conditions (reduced real wages). How far such tribute should be paid for one kind of service or another, concerns nobody but those who pay the tribute. Herrmann Schuhmacher, L. Albert Hahn, Adolf Weber, Edgar Salin, Wilhelm Röpke and a number of other German economists have pointed this out clearly in criticizing Mr. Schacht. Speaking practically, in this particular instance the question before the German people, who pay the tribute, is: Should we pay higher taxes from our income (which will probably mean less consumption of tobacco, jewelry and other such marginal necessities), in order to pay interest on a loan contracted to meet the costs of building dwelling houses for our laborers; or should we go without these dwelling houses and enjoy those marginal necessities instead? It was on this ground that the views of Mr. Gilbert and Mr. Schacht were challenged on all sides. It is a question simply of substituting one kind of consumption for another. Other and more effective means than the interference with foreign borrowing can be found to control the proper conduct of public finance.

The satisfactory balancing of national income and expenditure is in the end a political problem and beyond determination by purely economic criteria. It serves no good purpose to close one's eyes to that calamity, if it is a calamity.

Furthermore, it is elementary knowledge that in Germany as anywhere else capital is supplied to those who seek it through the capital market. Conditions of demand and supply will determine, on the basis of marginal utility, which requirements will be filled first and which last. As long as conditions are strictly competitive, the interest rate will operate as the most potent force of selection. Its function in this respect has been likened to a sieve. Given a stable exchange, the extent to which foreign capital will flow into a certain market depends upon the comparative interest rate and the intangible and important factor of security. These two factors combine to induce foreign capital to take up the safest, or most conservative, investments.[vi] In course of time there will occur a decline in the interest rate on such investments, since the increased demand for them is bound to raise their price. A correspondingly large amount of home capital will then become available for other investments. In other words, if German State and municipal loans are taken by foreign investors, some domestic capital will become available for industrial and other investments in Germany. If the capital needs of the very large German industrial concerns, such as the German General Electric, are supplied from abroad, the capital needs of some of the smaller though not at all necessarily less "productive" concerns will be supplied from the home market. Thus it happens that although the particular investments made by foreign investors may not increase the productivity of Germany directly, they may do so indirectly. This is exactly what happened in Germany in a previous period of rapid industrial expansion, in the 'sixties of the last century, when considerable funds were loaned to Germany, particularly by England, for the purpose of building gas works. Certainly the building of large power plants, of electric and other public utilities and the like, cannot be disassociated from the development of German national economy as a whole, which is the center of our discussion and the basis of all reparation payments. To sum up this argument: Germany as a whole greatly needs foreign capital. The interest on such capital is in the nature of a tribute. It ought to be as small as possible. Capital therefore ought to be borrowed by those who can get it on the best terms. These are the public agencies and the very largest industrial concerns.

From all that has been said so far, it ought to be clear that the problem of transfer is really a short-time question. It cannot become a permanent problem except as a result of the interference of political factors, first among which rank tariffs. But even tariffs could only temporarily delay an automatic disappearance of the transfer problem because there are limits to this as to all other types of political interference with economic forces. We may therefore say that even if a small part of the reparation payments should prove untransferable during the next few years, it would hardly entail a great crisis. The Agent General for Reparation Payments would do exactly what the foreigners investing in Germany do now, namely, he would buy the most conservative investments which could be gotten in the German capital market. Such securities could easily be turned into a trust fund deposited as collateral for security issues outside of Germany, if endorsed by the receiving governments, or they could be held until the international capital market was ready for their ultimate sale. A great deal of unnecessary agitation has been caused by writers on this subject when they assume that necessarily the entire amount of reparation payments would become non-transferable, when as a matter of fact all experience with the transfer plan so far shows clearly that at most a fraction of the payments would become non-transferable. It goes without saying that such reinvestments in Germany would further stimulate that building up of the German industrial machine which must eventually lead to an export surplus.

Nor is there any prospect, as a matter of fact, that the inflow of foreign capital into Germany will suddenly stop. It has recently been stated by a conservative New York investment house, and has been confirmed by cautious and well-informed students of the French capital market, that inside of three years French capital will be available for investment in Germany on such terms as will make it impossible for American bankers to compete. But if competition between capitalists all over the world is so active, and if everybody wishes to invest in the hen that is laying the golden eggs, Germany, is it not idle to talk about the "sudden" stop of all foreign capital? None of those who talk about this sudden stop have ever attempted to show why the inflow should stop suddenly, or when. It will stop when all profitable investments have been made, i.e. when German interest rates will have come down to international levels. In this connection it will be remembered that American labor leaders have recently protested against the loaning of American capital abroad. Whether their contentions are entirely sound may be doubted; but they are not answered by a general reference to the prosperity of the world at large such as Mr. Cassel made in Chicago.[vii] I do not see how it can be argued that it is in the interest of the American worker as a group that available American capital should go unhindered into cheaper labor markets abroad (particularly when there is a very sizable amount of unemployment in existence here already), as long as tariff barriers and other political interferences with the free interplay of economic forces continue. It seems that each one of these interferences brings in its train a host of others. As a matter of fact, tax exemption operates already as a force for keeping American capital in America, and is one of the forces interfering with the free movement of capital above referred to. Insofar as such "export-tariffs" upon capital came into existence, they would no doubt modify the assertion made above that the flow of capital into Germany will stop only when all profitable investments have been made.

But, it is next objected, all this plant which is being built up will not enable the German national economy to make any of these payments without sometime or other exporting a corresponding amount of goods, and this cannot be done without eventually underbidding producers in other countries. This is undoubtedly true, and it will be done by underbidding producers in other countries. When the German national economy is developed as highly as any other, so far as plant equipment is concerned, it will be able to undersell all others by keeping down its labor cost, that is, its real wages. Here we have the root and the crux of the entire situation. The old rule that high wages (relative to capital) stimulate high plant development (rationalization of industry), while low wages retard it,[viii] is modified by the introduction of another cost factor, taxes. These reduce all wages directly (10 percent income tax, even on very small incomes and wages taken at the source), increase the cost of production without either direct or indirect benefit (the industrial debentures and the transportation tax), and raise the price of goods consumed by the common laborer (sugar and tobacco taxes). All these factors combine to reduce the standard level of wages, as far as their real purchasing power is concerned, down to the point where they are balanced by organized resistance to lower wages -- and this resistance is considerable in Germany, on account of the strong development of labor unions. The second factor, combined with heavy corporation taxes and the like, takes the place of high wages in stimulating extensive plant development by thoroughgoing rationalization of industry.[ix]

At this point in the discussion there usually ensues an extensive argument on the question whether or not Germany is more heavily taxed than some of the allied nations. It is impossible within the brief compass of this article to deal with the so-called "principle of commensurate taxation" as stated in the Dawes Plan.[x] A few general remarks must suffice. Stated as a principle of justice, there can be no doubt of its fairness, provided it has any definite meaning. But that is precisely the difficulty. One thing is certain, and that is that the commensurability of the tax burden cannot be measured by comparing the average tax burden per capita, as is so frequently done in popular discussions of this topic, but rather by comparing the average tax burden per unit of income. But there are almost unsurmountable difficulties in the way of such a calculation, since it involves an estimate of the national income. Furthermore, it is quite uncertain what ought to be considered a tax constituting part of the system of taxation. The ordinary textbook definitions which differentiate between taxes, fees and rates (charges of companies operated by the government) are here inadmissible. Both fees and rates contain elements which ought to be made part of any consideration of the tax burden. Last, but not least, it might be asked what is the meaning of the term "tax burden" anyway. There certainly exists a vital distinction between money spent for the conduct of an unprofitable war and money spent for the building of highways, bridges and railways. All this goes to show that this simple little principle, like many principles of justice, is exceedingly difficult, if not impossible to realize.[xi] I therefore find it hard to agree with the authors of the Dawes Plan when they say: "We have done our utmost to apply the principle of commensurate taxation." At any rate, there seems to be general agreement that a comparison of tax burdens ought to take into account the comparative national incomes, i.e. the comparative national wealth.

It is apparent that a rising German population cannot be taken as an index of rising German "prosperity" in any real sense. Yet this has been suggested by the Dawes Plan for the "index of prosperity." In order to appreciate fully why we cannot measure German prosperity by this or by any of the other tests mentioned in the Dawes Plan (total imports and exports, total budget receipts and expenditures, total railroad traffic, and certain consumption totals), we must constantly keep it in mind that we are dealing here with an enforced prosperity -- prosperity artificially stimulated by making German producers and particularly German workers produce more than they would ordinarily be inclined to produce. These facts ought to be borne in mind in order to interpret correctly the rapid rise in the German population since the war. Since 1919 the population has increased by 3,234,405, or more than half a million a year, and there are no indications that the rate is slowing down. It may be that this development, together with the growing expansion of the industrial plant, will be accompanied by a widening of the home market. Indications seem to point in this direction. Speaking generally, there are two major forms which this market expansion may take, either a permanent increase in the number of producers working the expanded plant at more or less stationary wages, or a gradual increase in the wages. In my opinion the former course will be taken, after a certain equilibrium has been reached between wages and prices. Until last year the market expansion followed both courses. Since then the wage level has not risen appreciably.

Undoubtedly the markets of the world as a whole will also continue to enlarge. But unless they expand so rapidly as to absorb the increasing surplus of goods produced by the growing German economy, this whole development must eventually lead to a gigantic dumping of German goods upon the markets of the world. As has been pointed out before, further difficulties may arise from the fact that part of the expansion of world markets will be in the form of goods not manufactured in Germany. But eventually the German market will have been highly protected from interference by outside producers. The German worker will have to buy in an expensive market in order to supply his products below cost to markets beyond his reach. In the meanwhile the English and the American worker will continue to suffer from considerable unemployment.

To clarify our conception of this utterly artificial situation, let us return to our earlier simile. Let us assume that our professional man, perhaps a doctor this time, had only one competitor in the particular area which he was serving and that this competitor was the very one who was to receive the damage payments. What would happen? Our heavily indebted man would add, let us say, two hours in the morning and two at night to his working schedule. But in order to fill these four hours of work, he would have to make strenuous efforts to cut into the practice of his competitor, who would in turn be much tempted to lay off, since he is receiving additional revenue without work. It is more likely than not that after the contest had run its course, the indebted doctor would have secured a considerable part of his competitor's practice. Nothing but this inevitable result is what we are predicting in national economies if the reparations are collected as planned. Even though there are many complications and qualifications, it is on the whole true that in so far as nations export the same wares, they stand to each other in the relation of these two (or more) competing doctors; they are competing like individuals. It is a fairly clear case of limited competition.[xii] If their markets are the same, it is inevitable that what the one gains the other loses. The only important qualification which we ought to keep in mind here is that over a considerable period of time the markets may themselves expand (or they may of course contract), which would have the same effect as an increase (or decrease) in the population of the area in which our two doctors were practising.

Let us imagine the situation when reparation payments come to an end. We shall find a highly developed German industrial system competing with a somewhat crippled system in other parts of Europe. Tremendous economic power will have been built up under political pressure from the outside. I should not be astonished if the German industrial system would have almost to double in order to produce the requisite surplus of exportable goods. But is this really likely to happen? Could such a development of German economic power take place without a somewhat corresponding increase in her political power? Her rôle in Europe would become overshadowing, providing (to come back to our starting point) the German worker would stand the strain.

Instead of pressing forward to this conclusion, let us hope that producers the world over will be intelligent enough to force a reduction in reparations in order to eliminate the necessity for creating this industrial leviathan. Why should the English, the American, or the French producer endure the enforced idleness which the compulsory and unnatural sweating of German producers entails for him? Germany has the capacity to pay; but I maintain the paradox that by common consent reparations will be reduced as the German capacity to pay them increases.

[i] Cf. official memorandum of the German Government to S. Parker Gilbert of October, 1927.

[ii] Cf. Wirtschaft und Statistik, Vol. 8, pp. 58-9 (1928).

[iii] These and all following figures are taken from the "Statistisches Jahrbuch fuer das Deutsche Reich 1927;" the Monatliche Ausweise ueber den auswaertigen Handel Deutschlands, Jan. 1927 and Jan.-Apr. 1928; and Wirtschaft und Statistik, 1927 and 1928.

[iv] All these figures have to be taken with a grain of salt, because the year 1926 was not a usual one. The first half saw a considerable depression in Germany, while the effects of the English coal strike later stimulated a rather rapid recovery. During the year 1927 the surplus of imports over exports became very heavy again; but the total quantities were still below the level of 1913. However, the territory was larger in 1913.

[v] It might be objected at this point that perhaps these loans were after all absorbed by excessive consumption. A glance at the development of the German wage level will dispel any such misgivings. There can be no doubt that the German worker has not at all benefited by that phenomenal rise in industrial productivity since the war, while he has carried the burden of unemployment as everywhere else. In fact his wages at times lag somewhat behind the rising price level; weekly wages for skilled labor rose from about 35 marks in 1913 to about 46 marks in 1926, that is about 42 percent, but the price level rose about 51 percent during the same interval.

[vi] Some qualifications should be made to this statement, on account of the obscure problems arising out of the frictions impeding international movements of capital; but on the whole it is true that the increased sales resistance encountered in connection with international loans will be compensated for by striking evidence of the soundness of the investment in all other respects.

[vii] Speaking at the University of Chicago, June, 1928.

[viii] This statement is of course made subject to the clause, "to the extent to which additional capital is available."

[ix] This statement seems to run counter to the widely accepted argument about the inhibitory effect of heavy taxation on industrial development. A brief reflection will show that everything depends upon the nature of the tax and the time it is levied. If a certain tax is suddenly sprung upon the manufacturing community, it may well be that such a tax will force the marginal producers out of business. But if the tax burden is known in advance, it will probably cause a different distribution of capital among the various possible trades, provided the buoyancy within the economy as a whole remains unaltered. This latter situation seems to prevail in Germany today.

[x] "It is not open to dispute, as a simple principle of justice, that the German people should be placed under a burden of taxation at least as heavy as that borne by the allied countries." (Report of the First Committee of Experts Part I, VIII, b.)

[xi] Cf. Wilhelm Gerloff,"Steuerbelastung und Wiedergutmachung" (1924), and Waldemar Holz, "Sind internationale Vergleiche steuerlicher Belastungen möglich?" (1924).

[xii] A. C. Pigou calls it 'monopolistic competition.' Cf. The Economics of Welfare. Cf. also the article by Edwin F. Gay in the April, 1926, issue of FOREIGN AFFAIRS, "War Loans or Subsidies?", in which this proposition was clearly stated.

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