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THERE could have been no peace in Europe until the problem of reparations had been settled. That is the reason why the Conference of Experts which sat at Paris last year from February 11 until June 7 was of such surpassing importance. That is the reason why its conclusions were received with relief and approval by the world generally.
For ten years the question of reparations had been a thorn in the flesh of all Western Europe. The trouble began at the Peace Conference itself. During all those months in Paris, ten years ago, the American delegates had urged the importance of fixing Germany's obligations and reaching a final settlement. But the view of the British and French Prime Ministers, Mr. Lloyd George and Mr. Clemenceau, was that war-time passions were still running so high that their respective peoples would reject any reparations figures which they and the conference experts realized were within Germany's capacity to pay. Those were the days when certain leading men in England declared that Germany could be made to pay a capital sum equivalent at present values to £24,000 million, say 120 billion dollars; and some of the French put the figure at 200 billion dollars.
Most of the Allied statesmen knew that such figures were fantastic, and many of them professed themselves as eager to accept, as Germany's capital obligation, the estimates of the Allied experts which began at about 12 to 15 billion dollars on the low side and ran as high as 30 billion dollars. But both Mr. Lloyd George and Mr. Clemenceau declared it wholly beyond their power to gain from their Governments approval of such moderate sums, even the highest just mentioned. At this critical stage of the Peace Conference the American technical delegates, realizing what was quite manifest -- namely that failure to settle reparations would leave an open sore in Europe which might well lead to economic and even political disaster -- begged President Wilson to take a firm stand and to declare that he would sign no treaty which failed to fix Germany's financial obligation. He had taken an invincible stand on far less vital questions -- that of Fiume for instance -- so, why not on reparations? But Mr. Wilson argued that as France, Great Britain and the other Allied Powers were chiefly concerned with this particular matter, it was not America's job to try to cram down their throats a settlement which they declared was politically impossible for them. He was naturally much moved by the statements which (he told us at the time) both Mr. Lloyd George and Mr. Clemenceau made to him -- that to attempt to settle the extent of Germany's liability at so reasonable a figure as any of those proposed by the technical experts would cause their Governments to fall and their own consequent withdrawal from the Conference. Mr. Wilson felt that even if these Allied associates of his had magnified the danger of their situation, nevertheless it was not for him to assume the risk of standing out for settlement.
POSTPONEMENT BY THE PEACE CONFERENCE
Hence the reparation clauses of the Versailles Treaty,[i] while holding Germany responsible for all damage (including pensions) caused to the civilian populations of the Allied countries, admitted that complete reparation was beyond Germany's capacity to meet and proceeded to set up a Reparation Commission which was charged with the duty of fixing Germany's total liability within two years; thus postponing the matter to a time when peoples' passions would presumably have cooled and reason would have begun to prevail.
In such form, then, the Treaty was presented to Germany. She immediately seized upon these reparations clauses; pointed out very reasonably that by failing to fix Germany's liability they afforded her no chance to address herself intelligently to the heavy burden before her; and that therefore they made merely for continued unsettlement and a consequent diminution of her economic capacity to pay. The Germans proposed therefore to make final settlement by accepting a figure approximately equivalent to 25 billion dollars, present value, subject to certain diminutions on account of ceded property, public buildings, etc., which might leave the final net sum anywhere from 15 to 18 billion dollars. This was at a time (early June, 1919) when, it may be remembered, the reichsmark was worth about a quarter of its prewar value, and there was evidence that Germany could with an effort discharge the obligation which her delegates themselves proposed.
Here again the American experts prepared memoranda, urging President Wilson and the Allied premiers to weigh carefully these German counter-proposals, as constituting figures that with some increases were reasonable and far more advantageous to the Allies than anything that might be obtained later. This view of the case, however, received scant attention. The political world of Europe had to learn its lesson through the bitter experience of the coming years. So the German proposals were rejected. They naturally could never be revived, because from that time forward began the inflation of the mark and the consequent steady disintegration of the German economy to the point of collapse.
ATTEMPTS AT SETTLEMENT
Most readers of FOREIGN AFFAIRS recall the subsequent successive attempts made to settle the question of reparations. At the Allied Conference at Spa in 1920, a scheme as to division of receipts among the Allies was agreed to: in round figures, 52 percent for France, 22 percent for Great Britain, and so on. This division, being known as "The Spa Percentages," was modified by the Finance Ministers' Agreement of January 1925 and again slightly in the "Young Plan," now known officially as the "New Plan." In April 1921 the Reparation Commission announced Germany's obligation as fixed at 132 billion marks (about 32 billion dollars), to be represented by three classes of bonds, only two of which, "A" and "B," aggregating about 12½ billion dollars, were ever regarded as being collectible.
In June 1922 a Conference of Bankers was called at Paris to deal with the matter of reparations. But many of the European delegates, in considering any recommendations which they might be prepared to make, were greatly hampered by the political necessities of their governments; and so, aside from a sound and excellent summing up of the situation which they embodied in a report, the Conference made no progress.
It was in 1922 that the British Foreign Office issued the famous so-called Balfour Note, declaring that the British Government would not seek reparation payments from Germany, nor payment from Britain s allies on account of their war debts, in excess of the net amounts which the British Government would be obliged to remit to Washington. Thus, by the Balfour Note, the subject of German reparation payments to the Allied Governments and of the European governmental debts to the American Government were, perhaps for the first time, officially brought fairly and squarely together. For the British and European governments these two questions had always been considered to be part of one general question. They have never attempted to evade the fact of their indebtedness to the United States Government, but they have at all times made it abundantly clear that, in their own calculations and handling of the situation, they were bound to consider the two subjects as inextricably woven together. Nor, when the Balfour Note was issued, did the United States Government make any statement controverting this Allied method of conjoining the two subjects; although on several occasions before and since then the authorities at Washington have declared that the two subjects, German raparations and inter-Allied debts, had positively no relation to each other.
Meanwhile matters went from bad to worse. Whereas Germany was making considerable payments on reparations account, both in cash and in deliveries in kind, the economic situation in Germany was constantly weakening and the Germans were protesting that they were quite unable to pay the sums demanded of them. On both sides there were accusations of bad faith, France and Belgium in particular asserting that Germany was deliberately attempting to evade her obligations. The repercussions from the unending controversy began to make themselves felt in an industrial and commercial sense, not in Europe alone but in remote corners of the earth.
THE OCCUPATION OF THE RUHR
Finally in January 1923, after the Reparation Commission had formally declared Germany in default, French and Belgian troops occupied the Ruhr and Premier Poincaré declared that there would be no withdrawal until satisfaction in reparations payments had been rendered. Western Europe was thereupon thrown into turmoil. The longer the Ruhr occupation lasted the worse conditions in Germany became, in the endeavor to maintain the passive resistance of the Ruhr population. The Government gave itself over to a policy of unlimited inflation; within a few months the value of the reichsmark had disappeared; and the German people were in dire distress, with no relief in sight.
Two things, however, were made clear by the occupation of the Ruhr: first, the Allied Governments realized that foreign troops could not, by invading Germany, fetch away the necessary reparations payments; second, Germany learned that no settlement, however burdensome, could be so bad as the unending punishment of domestic inflation and repudiation. Thus on both sides public opinion was prepared to welcome the appointment of the First Committee (Dawes Committee) of Experts. It convened at Paris early in 1924.
The work of the Dawes Committee covered several months, but according to those members of it who were also members of the Young Committee its work was not so arduous, complex or difficult as that of the Young Committee. In the first place, the situation in 1924 was so critical that by common agreement something had to be done. In the second place, Germany was not present at the Dawes Conference, so that the conferees, being all creditor experts so to speak, were united to a common end. The Dawes Plan was happily able to transfer the question of reparation "from the point of the sword to the point of the pen." It manifestly constituted the work of a rescue party, building a temporary bridge over existing difficulties. But as the Dawes report itself stated, it was designed only to facilitate "a final and comprehensive agreement." In other words, the Dawes Plan still left the question of Germany's total liabilities indefinite. What it succeeded in doing, however, was of enormous importance and value. It reconstituted the Reichsbank with ample capital and firmly reëstablished the German currency upon a gold exchange basis, thus enabling the Reich to obtain abroad sufficient loans to meet its own Treasury situation until such time as the budget could be actually brought into balance from Germany's own resources. Further, it provided that certain important State revenues of the Reich be set aside to help constitute a fund for German reparations; it laid mortgages amounting to four billions of dollars upon railway and industrial corporations of Germany; it set up various other controls. And at the head of the whole machinery for collection and remittance of reparation funds was appointed an Agent General of Reparations in the person of an American, Seymour Parker Gilbert. The Plan set up as a safeguard a Transfer Committee which was to have power to suspend transfer of German funds across the frontier in the event that, in the view of the committee, the exchanges were in danger. (As a matter of fact the Transfer Committee has never had occasion to invoke its powers to suspend transfers.) Taken all in all, the Dawes Plan set up receivership machinery for Germany and since the Plan went into effect on September 1, 1924, the Reich has in effect been in the hands of a receiver. That receivership is to be ended by termination of the Dawes Plan and inception of the new Young Plan, if and when it goes into effect. The date for the change provided in the Young Plan itself was September 1, 1929.
ANNUITIES UNDER THE DAWES PLAN
As to the annuities provided by the Dawes Plan, these began at a comparatively low figure ($235,000,000 per annum) and in the fifth year worked up to what has been known as the Standard Dawes Annuity, namely, two and one-half milliards of gold marks (say $587,500,000). The Plan provided that this payment was to be supplemented in future years by an Index of Prosperity, under the provisions of which, as the Reich prospered in certain directions, her reparations payments were also to increase. It has been generally figured that such increase would amount to about 3 percent per annum based upon the Standard Annuity. In other words, if the Dawes Plan had continued in effect, the Standard Annuity for 1930 might well have become 2,575 million marks.
There is no denial anywhere that the Dawes Plan has worked with remarkable success. This success has been due to several factors. One has plainly been the honest determination of the German people themselves to work out the terms of the Plan. Another potent factor has been the extraordinary rehabilitation of Germany's external credit; Germany's foreign long-term borrowings have been estimated by Dr. Schacht as amounting, in the five years of the Dawes Plan operation, to upwards of three billion dollars, in addition to large short-term current credits. A third cause of the success has been the extraordinary ability shown by the Agent General for Reparations Payments to carry out smoothly and without interruption the complex machinery of his office. And the skill which he has employed in transferring the large sums called for under the Plan without disturbance to German economy has been an achievement of high order.
To the world generally, however, it has long been understood that inasmuch as the Dawes Plan was of a temporary nature, it must sooner or later be superseded by something permanent. As early as his annual report of 1927 the Agent General pointed out that there could be no effective settlement of reparations until Germany's final liability had been determined, and he suggested that steps be taken to that end. Said he: "And as time goes on, and practical experience accumulates, it becomes always clearer that neither the reparation problem, nor the other problems depending upon it, will be finally solved until Germany has been given a definite task to perform on her own responsibility, without foreign supervision and without transfer protection." It is a matter of public knowledge that in private conversations which he had in the course of the next year with the heads of government in most of the European countries concerned, Mr. Gilbert urged that a second committee of experts be appointed to take up the question.
THE SECOND EXPERTS' COMMITTEE
These heads of governments, being assembled in Geneva in September 1928, discussed the question further, and finally determined upon a course of action embodied in the following Terms of Reference:
The Belgian, British, French, German, Italian and Japanese Governments, in pursuance of the decision reached at Geneva on September 16, 1928, whereby it was agreed to set up a committee of independent financial experts, hereby entrust to the Committee the task of drawing up proposals for a complete and final settlement of the obligations resulting from the existing Treaties and Agreements between Germany and the Creditor Powers. The Committee shall address its report to the Governments which took part in the Geneva decision and also to the Reparation Commission.
In the case of the Belgian, French, British, Italian and Japanese experts and their alternates, the Reparation Commission made the appointments upon the nominations of the respective Governments. The German experts were appointed by the German Government. The private American citizens who consented to serve were appointed by the Reparation Commission conjointly with the German Government. Prior to these last named appointments, the American Government was informed of the American nominees and interposed no objection to their acceptance of the appointment.
The first meeting of the Committee of Experts was convened at the Hotel George V at Paris on Monday, February 11, 1929. Its final meeting for the signature of the Report was held at the same place on Friday evening, June 7. The Committee sessions thus occupied almost exactly seventeen weeks.
At the outset the Committee was plainly confronted with several major tasks, the chief of them being these:
1. The final determination of Germany's liability for reparations, this determination including the fixing of the amount of annuities which Germany should pay and the period of years over which they should be paid.
2. The abolition of foreign controls in Germany (taking Germany out of receivership), and the setting up of a new mechanism for the receipt and disbursement of the annuities and for the handling of the questions incidental to reparations.
3. The formation of a plan for the mobilization and ultimate issuance for sale on world markets of a certain portion of the German annuities.
The Committee felt itself obligated in a larger sense to devise a plan calculated to "banish the atmosphere of war, to obliterate its animosities, its partisanships, and its tendencious phrases." The Committee's work was to liquidate the war and to bring about a state of economic peace in Europe.
In order to arrive at the ends just described, in order to fix the German annuities, it was necessary for the Committee to take into account Germany's past performances; her present capacity; her condition -- economic, financial, and even political; the sums which she had already paid on account of reparations; the extent of her willingness to pay in the future; the legitimate requirements of the chief creditor powers; methods for future cooperation between the debtor and the creditor countries; and other kindred matters. Specifically, in order to fix the annuities the Committee had to reconcile two indeterminate and shifting viewpoints -- Germany's opinion of her capacity to pay, and the feeling of the chief creditor countries regarding the sums which they could accept in satisfaction of their requirements. To bring about this reconciliation implied, in the first instance, expert knowledge and study of a high order, and in the second place, an understanding of diplomatic and political expediency. This slow, long-drawn-out process filled up the four months of steady negotiation, inquiry, demand, refusal, impasses and crises; and then finally brought reconcilement in a spirit of excellent good-will. The final agreement, so far as the American delegates were concerned, was based upon their conviction that the annuities which Germany undertook to pay under it represented no more than her fair, equitable and economically feasible share of the cost of liquidating the war.
The first few weeks of the Conference were occupied largely with the exposition of Germany's situation by the German delegates, led ably by Dr. Schacht. He and his associates gave us in great detail information as to Germany's demand for capital in the last five years and the extent to which that demand had been fulfilled; Germany's external assets; the extent to which her industrial equipment and stocks of raw materials had been reconstituted; the present state of German industry and agriculture; the wage levels; the balance of foreign payments; the budgetary situation of the Reich; the extent of Germany's natural resources; comparison of the fiscal burdens of the Reich with those of other countries, and so on. The summing up of the German exposition was to the effect that, with the present transfer of one billion marks annually necessary for the service upon her foreign loans, Germany could not safely assume, without transfer protection, an obligation to pay over her frontier more than an additional one billion marks for reparations, thus making a total annual transfer burden of two billion marks.
DIVERGENCE IN THE EXPERTS' VIEWS
From this it appeared that although Dr. Schacht was making no tangible proposition, the extent of absolute obligation which he was prepared that Germany should assume was an annuity of one billion marks. Between this amount and the standard annuity of the Dawes Plan, two and one-half billion marks, such a great gulf was fixed that the Committee was impelled to put aside for the moment any immediate attempt to reach actual reconcilement upon figures, and to occupy its time in the endeavor to work out some machinery by which the heavier burden, which all the creditor experts felt that Germany should assume, could be rendered less difficult for the debtor to handle. For some weeks, therefore, the Committee's deliberations centered around the scheme for the Bank for International Settlements, which will be described later on in this paper, and also upon a plan for dividing Germany's obligations into categories which, while embodying larger aggregate annuities, could, in view of the safeguards provided, be safely assumed by Germany. These categories consisted of (a) unconditional payments, namely, amounts that under any and all conditions must be paid; (b) conditional or postponable payments, that is to say, amounts subject to safeguards for Germany's benefit; and (c) deliveries-in-kind, also constituting an easing of cash demand upon the debtor country.
With the rough framework of the International Bank sketched out, and with an accord upon the idea that Germany should be granted certain safeguards as to a very considerable portion of her annuities-payments, the Conference was then ready to go on with its work of determining the size of the annuities. Even so, however, the inherent difficulties in reaching a starting-point seemed only just beginning to make themselves felt. Neither side would propose anything approaching a definite figure, nor anything that could be considered as within the debatable area. All the experts (including the German, I think it is fair to assume) felt that with certain safeguards Germany could commit herself to pay an amount much in excess of one billion marks per annum. On the other hand, everybody knew that the creditor governments would be willing to content themselves with materially less than the two and one-half billion marks per annum of the Dawes Plan. But to get the creditor experts to begin to recede and to get the German experts to begin to reach a little higher ground proved at this stage of the Conference quite impossible.
THE PRINCIPLES OF SETTLEMENT
Consequently, just prior to the Easter holidays, Chairman Young, with the assent of the whole Committee, prepared a memorandum in which he laid down certain principles upon which a set of annuities might well be built up by either the creditor or debtor experts. The principles of Mr. Young's memorandum declared that, first, Germany should cover the net out-payments of the creditor governments, that is to say, the net sums that each and every one of them was obliged, under various international debt agreements, to remit in payment of the out-standing governmental indebtedness to Great Britain on the one hand and/or to the United States on the other. Second, such annuities must manifestly be sufficient to meet for Great Britain the terms of the Balfour Note. The scheme suggested for France was an additional sum for reparations equivalent in present value to say forty billion francs, this according to French calculations being considerably less than one-third of the amount that France had already expended on reparations account alone, irrespective of expenditures on account of pensions. Something additional was also provided on strictly reparations account in the cases of both Italy and Belgium.
Even with these guiding principles before them and recognized on all sides as constituting the basis for a fair start, neither the creditor nor the debtor experts were prepared to formulate these principles into actual propositions. Thereupon Chairman Young suggested that the only course of procedure left open was for the creditor experts to outline separately, country by country, to Dr. Schacht their minimum requirements for settlement. After the ensuing conferences between Dr. Schacht and the heads of each creditor delegation, it appeared that the creditors' minimum requirements, as indicated by these presentations, aggregated approximately 2,900 million marks per annum, a sum far in excess of the standard annuity. When this anomalous situation had become known to the public, critical world opinion began immediately to express itself, and the creditor delegates set to work to reduce the aggregate of their requirements to a point at least within the debatable area. They invoked the assistance of Chairman Young and finally evolved a proposition which, while by no means commanding the unqualified endorsement of the Chairman, at least furnished figures subject to discussion. The annuity thus disclosed amounted to 2,223 million marks, including 25 million marks a year for 37 years in settlement of the so-called Belgian Mark Claim.
This proposition the German delegates promptly rejected, and, the ice having been broken, undertook to present a proposition of their own. Their figures constituted roughly an annuity of 1,650 million marks per annum. But it was specified that even of this amount no portion should be put in the category of unconditional payments unless amelioration were afforded to Germany through certain measures which in the view of the creditor delegates had the distinct color of political conditions. In the early days of the Conference, Dr. Schacht had been frank in stating to many of the creditor experts that in his view Germany's capacity to pay would be extremely limited unless it were possible for her to establish direct contact with East Prussia, gain access to the raw materials in her lost colonies, and improve her export trade through lower European tariff barriers. Dr. Schacht had never declared that the Polish Corridor must be abolished forthwith, or that the German colonies must be restored to the Reich, but he had dwelt to such an extent upon the economic importance of certain changes in the status quo that when, although in strictly economic and non-political language, they were introduced into the German proposition of April 16, the creditor experts at once looked upon these conditions as political and the situation of the whole Conference became tense. Chairman Young endeavored to save the situation by pointing out the value that would lie in attempting, at any rate, to agree initially upon annuities for the first ten or fifteen years of the period, believing that if that could be accomplished it would be a comparatively easy matter to arrive at the later annuities whose present value would bulk so much less. This procedure seemed reasonable, because of the fact, for instance, that the difference for the first year between the German annuity proposition of 1,650 million marks and the Allied first year proposition of approximately 1,800 million marks was inconsiderable.
A subcommittee was immediately appointed in the hope of working out this reconcilement upon early years. It held an all-day session on April 18. But the German delegates were unwilling to agree to any change in their proposals, they declined to graduate their proposed annuity of 1,650 million marks by even small annual amounts, and they refused to withdraw what they called the economic, but the creditor experts designated the political conditions.
Thus came a breakdown in the Conference which at the time looked almost complete. It was followed on that same night of April 18 by the sudden death of Lord Revelstoke of the British delegation, and the Conference adjourned for a few days. During that period there were signs in Germany of considerable currency disturbance. Early the next week, Dr. Schacht requested Chairman Young to assist the German delegation in preparing a new set of figures which in themselves might meet the ideas of the Chairman, and which he and his American colleagues could justifiably declare as sound, as being within Germany's capacity, and as meeting reasonably the requirements of the creditor governments. From this request emanated what were destined to become the final figures of the Conference, namely, an annuity which although it began at a figure of 1,675 million marks the first year, remained constant for the entire period of 37 years at 2,050.6 (including service on the Dawes Loan) million marks, and yielded an amount sufficient within that time to cover the out-payments of the creditor governments, plus the excess sums they agreed to accept on strictly reparations account. Germany's payments were to run for 21½ years beyond the 37-year period in order to cover various items, but chiefly the net out-payments of the creditor governments to the United States Government during that final period.
This set of annuities, as suggested by the Chairman and his American colleagues, was finally accepted, first, by the German delegation and then by the creditor delegations; but in both instances with such difficult conditions attached that several weeks of the Conference were consumed in the endeavor, which finally proved successful, to work out an adjustment. In the very last week of the Conference the Belgian Mark Settlement loomed up again as a formidable obstacle to agreement. But when all the experts undertook to recommend to their respective governments that the new Young Plan should not go into effect until the Belgian mark difficulty had been adjusted, the Belgian delegates accepted this solution and with their associates signed the Report as stated on the evening of June 7.[ii] It was thereupon transmitted to the governments concerned as representing under their terms of reference the proposals of the Second Committee of Experts. The Conference, having successfully concluded its labors, adjourned sine die.
LEADING FEATURES OF THE REPORT
What, now, is the nature of the new Plan and of the Report, and in what manner does it primarily affect advantageously or otherwise the interests of the creditor governments on the one hand and the German Government on the other? First of all, as heretofore stated, the Plan attempts to scrap completely the Reparation Commission and similar post-war machinery and to transfer Germany's debt from the political to the commercial field. Thus by the very nature of the future handling of "reparations" the annuities will lose even that name and simply become swallowed up in the general flow of international trade and of international exchange.
As for Germany, the Report (Chapter IV, "The Study of Germany's Economic Conditions") states: "As a substitute to the present system of transfer protection with its semi-political control, its derogation from Germany's initiative, and its possible reactions upon credit, we are recommending a scheme of annuities appreciably smaller than the Dawes obligations and subject to new and elastic conditions, which are described at length in the succeeding chapters of the present Report. As an internal burden to be borne by annual taxation the scheme we proposed is materially less; it is closely assimilated to commercial and financial obligations; it carries with it welcome freedom from interference and supervision and it is provided with adequate safeguards against any period so critical as to endanger Germany's economic life."
The foregoing is, it must be remembered, a statement to which the German delegates subscribed equally with their creditor associates. Now what are the actual financial advantages accruing to Germany? The Magazin der Wirtschaft, a leading impartial and most authoritative German economic publication, says: "What enormous progress the new settlement means as compared with conditions immediately following the war, and how near we are to the amount which Germany herself offered at former conferences, is shown by a brief historical survey. At the great conference in London in 1925, Germany offered payments of 1,600 to 1,700 millions a year for five years. This corresponds strikingly to the present beginning annuities. The proposals of Cuno in June, 1924, with their annuities of two milliards, correspond rather closely to the present average annuity." This German publication adds that, using 4 percent as the rate of discount and including the index of prosperity, the present value of what Germany was obligated to pay under the Dawes Plan would, if continued for 56 years, be almost 72 milliards (equivalent to about 18 billions of dollars), whereas, according to this publication, the present value of Germany's obligations under the new Young Plan will be about 44½ milliard marks (11 billions of dollars).
Furthermore, as contrasted with the Standard Dawes Annuity of two and one-half milliard marks, the annuities under the new schedule of payments will not rise for ten years above 2,000 million marks, and for a part of that period they will be under 1,800 million marks. This saving to Germany compared with the payments required by the Dawes Plan in these ten years is very great. It amounts in present value to well over $1,000 million. It will mean that the German budget will receive average relief in the next three years of 750,000,000 marks per annum, the present value of which is approximately $500,000,000. In the next five years the German budget will be relieved to the extent of approximately 3,400,000,000 marks, the present value of which is $730,000,000. Extending the above calculations to a period of ten years, the savings to the German budget under the Young schedule of payments, as compared with the Dawes Plan, will be $1,320,000,000, the present value of which at 5½ percent discount is $1,040,000,000.
Aside from the purely financial benefits which will accrue to Germany under the Plan, de-control will mean material economies to the Reich and abolition of the costly machinery set up during the post-war period. Finally, the financial credit of Germany benefits enormously from the definitive fixing of the reparations burden at a reasonable figure. While of course opinions varied, many of the Germans were inclined to believe that the acceptance of the new Plan might mean that Germany's domestic credit would fall to a 5-5½ percent basis within the next three years (the last German internal loan was made on an 8.30 percent basis). Her foreign credit will, of course, also improve. The effects of such general improvement upon the cost of Germany's extensive short term borrowing should be most favorable.
Quite aside from the functions which it will perform as Trustee for the creditors, the Bank for International Settlements should also prove of great service to Germany. Its governor and directors (the latter coming from the leading commercial countries of the world) will be thrown into confidential relations with Germany's leading financial and economic authorities. They will thus always have at their disposal the information to permit the rendering of prompt aid in the unlikely event of transfer or other difficulties arising. The Bank for International Settlements, as a matter of fact, offers in my opinion greater protection to German economy than the old Transfer Committee or any other suggested body could offer. With the Germans coöperating loyally with the Bank they need have no fear of the future.
ADVANTAGES TO THE CREDITOR GOVERNMENTS
Let us now consider the advantages of the new Plan to the creditor governments. Of all the countries interested in reparations, France stands to gain most from the successful operation of the new Plan. France's actual receipts are of course much less than they would have been had the Dawes Plan continued in full effect for thirty-seven years. But two principles for which the French have always contended are recognized and given validity by the experts: first, that the chief sums which France desired to receive on account of reparations proper should in the last analysis have priority; second, that the term of payment of reparations should continue as long as the term of payment of the Inter-Ally Debts. The German acceptance of a 59-year term of payment represents for France the attainment of an objective sought with great stubbornness for the past five years. Failing to secure approval of any general cancellation of the Inter-Ally Debts, France felt that the next best thing was to obtain formal recognition by the Allied powers and by Germany of the fact that, as a matter of finance and public economy, the debts and reparations were related problems.
France's success in arranging to receive for herself the bulk of the unconditional portion of the German annuities will enable her to attain an object which has long been uppermost in the minds of her statesmen, that is to say, the steady commercialization of a considerable part of the German annuities. France has felt that nothing would so impress the German mind with the future commercial character of its reparation debt as the knowledge that its obligations were to a considerable extent reduced to the form of bearer bonds and scattered throughout the investment markets of the world. To be sure, the total amount of such bonds issued to private investors may be nothing like as great as the French had originally hoped, the diminution being due to the limited amount of the unconditional annuities, namely about 700 million marks per annum. It is obvious that no public loan issues could be made against annuities subject to postponement.
Now, if the total amount of annuities available for debt service is only about 135 to 145 million dollars per annum, it is obvious, taking into account both interest and sinking fund, that the amount of reparation bonds that can be issued to the public will not greatly exceed, over the total thirty-seven year period of annuity payments, two or two and a quarter billion dollars. The French authorities have expressed themselves as expectant that, of this possible total, French investors themselves will absorb perhaps three-quarters or even four-fifths.
At the Second Hague Conference, which adjourned sine die on January 20, 1930, an agreement was reached which provided for a possible issue in the spring of 1930 of German annuity bonds in the amount of 300 million dollars, of which 100 million dollars or its equivalent might be turned over to the German Government for the rather pressing requirements of the Reichspost and Reichsbahn. The plan of the creditor governments to share with Germany in the proceeds of the first German annuity bond issue was deemed highly expedient. Of the total issue (300 million dollars or its equivalent) the American investment market might be invited to share to the extent of 75 million dollars, more or less. It is not improbable that these are the only German reparations bonds that the American investment markets will ever have a chance to offer -- an amount far below the fantastic figures which some of our head-line writers have for several years been predicting would be "dumped" upon the American market.
Great Britain's likely gains from the reparations settlement are less apparent but perhaps not less real, allowing for scale, than those of France. British reconstruction has proved one of the most complex of all post-war economic problems. Anything which makes for peace and for stability in Europe thus acquires a significance, as far as Great Britain is concerned, perhaps out of proportion to the actual advance made. The settlement at Paris is directly favorable to Great Britain in that from now on she will figure on full coverage for whatever sum she must pay the United States. Compared with the past -- except as to very recent years -- this will mean real relief for the British tax-payer; for as long as the New Plan lasts Britain is completely relieved from providing funds for her debt to the United States. Great Britain, it is true, abandons in part a claim to some £90,000,000 of arrears (debts already paid to the United States Government), but this claim would have been most difficult to establish. In the final analysis, while Great Britain made no great direct monetary gain as a result of the New Plan, the mere fact of a settlement is of substantial benefit to her.
Italians have reasons for satisfaction at the outcome of the Conference. Before it started, Italy's reparations receipts, even supposing Germany agreed to meet the Dawes Annuity for 37 years, would not have been sufficient to cover her payments to Great Britain and the United States. Now she is assured coverage for all outpayments and in addition a surplus of about $7,000,000 a year payable unconditionally for 37 years. Furthermore, Italy has much to gain through the successful functioning of the new Bank for International Settlements. Italy is one of these "dear" money countries which may greatly benefit through the occasional investment by the Bank of some part of its free funds within its borders. Considering that the Conference reduced Germany's obligations by a minimum of 450,000,000 marks per year, the relative improvement of Italy's position as a result of the settlement appears all the more striking. The injustice which Italy felt had been done to her at Spa has been repaired.
As to Belgium, aside from the recent settlement of the mark question, as already explained, her outpayments are fully covered under the Plan and she will receive in addition a minimum of some 13 million dollars a year surplus in each of the next 37 years. The Plan confirms the fact that Belgium is to be compensated for war damages, which she suffered in considerably greater proportion than any other belligerent.
POLITICAL BENEFITS FOR GERMANY
On the political side, the benefits which Germany will presumably derive from the final settlement of the reparations problem are so well known that they need hardly be stressed. The final withdrawal of Allied troops from the Rhineland five or six years ahead of schedule and the obliteration of this sign that Germany lost the war are what the German statesmen have constantly been striving for. It is manifestly to France's great advantage also to make early withdrawal of her troops from the Rhineland and consequently to strengthen the Locarno sentiment. Someone has said that the German complex is "isolation" and that the French complex is "security." The reparations settlement goes far to banish both these complexes. The better the political relations between France and Germany, the more certain is peace in Europe. If such problems as Polish-German relations, the Macedonian frontier question, the question of minorities, and so on, are to be solved without new troubles, it must be because France and Germany coöperate to this end. For this reason perhaps more than any other the French and Germans have done a good stroke of business in settling the reparations problem on terms favorable to themselves. German statesmen have often expressed the hope that the reparations settlement might eventually lead to possible revision of certain clauses of the Versailles Treaty, particularly those which affect Germany's eastern frontier. It remains to be seen whether the accord does not serve to bring some moderate treaty revision within the realm of possibilities for the long future.
As to the United States, the American experts at Paris received word in May from Washington that the Administration would recommend to Congress concessions as regards the sums which the German Government was obligated to pay on account of the costs of the American Army of Occupation in the Rhineland, to the same extent to which the chief creditor governments proposed to give up the payments due them for army costs. Except for this concession the New Plan covers all the sums due the United States Government from Germany, including what is known as Mixed Claims. The chances that the American Government will receive fully and without delay payment of all these claims against Germany seem to be surer under the Young Plan than they would have been under the Dawes Plan. I may add that the report that the proposed American concession came as a result of a request from the American experts at Paris to the Administration at Washington was without foundation. Mr. Young and his associates made no request or suggestion to Washington on this point. It may well be argued, however, that President Hoover would wish, in the matter of Army Costs of Occupation, to show towards the German people fully as much leniency as the chief creditor Governments were showing. The gesture which President Hoover made at this moment was a happy and a helpful one.
THE BANK FOR INTERNATIONAL SETTLEMENTS
The proposed Bank for International Settlements (B. I. S.) is designed as the chief mechanism for the carrying out of the Young Plan, and the experts at Paris were inclined to believe that for the long future it might prove to be the most constructive accomplishment of the Conference. The primary purpose of the Bank is to perform a limited set of functions, first in the receipt and disbursement of the German annuities. But early in the Conference Dr. Schacht presented to Chairman Young the idea of an International Bank the workings of which might contribute to the legitimate growth of Germany's export trade, an increase which Dr. Schacht and his colleagues not unnaturally felt was important for the development and maintenance of Germany's capacity to fulfill her obligation under the Plan. M. Francqui of Belgium also had a scheme for a Bank to handle the reparation payments.
With these various tentative suggestions before them, the experts set to work to devise an institution whose primary purpose, as I say, is to handle the annuity payments, but whose scope can be greatly extended in case, in years to come, there proves to be a specific and practicable demand for it to function in branches of economic life not now served. In addition to dealing with the annuities, the Bank will from the start undertake to coordinate such plans as the creditor governments may from time to time desire to put into effect for the commercialization of the unconditional annuities -- that is to say, the issuance to the public of German Government bonds the service of which will rest upon such annuities.
SAFEGUARDS FOR GERMANY'S BENEFIT
It follows from the nature of these various operations that the Bank, being a depositary under the Plan for both short and long term deposits (in an amount now figured at about $100,000,000), will perform certain banking functions. Particularly it is expected that the Bank will, in time of financial strain, furnish to the Reichsbank certain credit facilities looking to the regular and uninterrupted payment of the German annuities. It is provided, too, that in the event that Germany should, owing to developments now unforeseen, meet serious and continued difficulty in discharging her obligations under the Plan, the Bank shall have the important power of convening a committee whose duty shall be to explore the situation completely and to proffer plans for remedy. Thus we see a safeguard clause of great importance for Germany, provision having been made that this committee, "having (in case of postponement of transfer) satisfied themselves that the German authorities have used every effort in their power to fulfil their obligations," shall make its recommendations as to future procedure. The committee shall of course have no power of revision, but its recommendations should carry great weight, as it will be composed largely of the heads of the leading central banks of issue. It may be noted that the Allied creditors grant to Germany a far greater measure of postponement and thus protection than they receive under their respective debt agreements with the United States Government.
It must, however, be manifest that the necessity for convening such a special committee will be rendered much more remote by the very protection which Germany will enjoy in the regular functioning of the Bank's directorate itself. That board will in time be the regular meeting place of the representatives of the twelve or fifteen leading central banks of the world. They will be able periodically to report to one another on economic and financial conditions prevailing in the regions from which they come and, by reason of being thoroughly posted in advance, to minimize or even prevent through coöperative methods the development of perilous economic or exchange conditions. With a common aim from the very start -- namely, the maintenance of currency and credit stability throughout the world and, within the limits proper, the promotion of trade and prosperity -- these men should come to know, appreciate and collaborate with one another in a manner and to a degree not heretofore considered possible. There will be no need to convert such men to such ideas of coöperation as I have suggested: they are already converted.
There are those, too, who believe that in time the Bank may be entrusted with gold settlement funds. It would be exceedingly rash to predict anything concrete along these lines. But certainly the present method of international gold settlements is slow, clumsy, hazardous, expensive and unscientific. A reading of the statutes of the Bank for International Settlements shows that while its Organization Committee realized this fact, they wisely left the devising of proper means of dealing with it entirely to the Bank's board and staff. The B. I. S., in its design, is intended to help carry on in the international field some part of the work now done by central banks in the national fields. And being under the control of the existing central banks, being inhibited, further, from doing business in the several countries except through or with the consent of the central banks of those countries, the B. I. S. can hardly become the serious competitor, the "super-bank," that some critics have feared. It ought, as the Report suggests, to "become an increasingly close and valuable link in the coöperation of Central Banking institutions generally -- a coöperation essential to the continuing stability of the world's credit structure."
AMERICA'S TRADE INTEREST
All this may sound hifalutin. Yet this in fact is the feature in which the American industrial and commercial community has a vital interest. And it follows automatically that the banking system of the United States must be deeply concerned from the start in the successful functioning of any institution the operations of which may have so great an influence upon the stability of the exchanges, and therefore directly upon the maintenance of America's export trade. We can hardly forget that the development of our foreign trade, which in 1928 amounted (exports and imports) to nearly $10,000,000,000, is largely dependent upon the prompt and regular functioning of our international banking system. Nor must we forget that the regular functioning of the international banking system is in turn largely dependent upon the maintenance of the gold standard.
In this connection it may be useful to point out that especially during the last five years, marking the period in which the Inter-Ally debt payments have been made in large volume, and Germany's reparation payments under the Dawes Plan have been steadily increasing, the strain upon the international exchanges has been heavy. This period has marked the efforts of the great European nations to resume the gold standard. In turn Austria, Hungary, Germany, Great Britain, Belgium, Italy and France have returned to the gold (or gold exchange) standard and, except in the case of France, have done so with the active and important coöperation of American banking interests, including in certain instances the Federal Reserve Banks of this country. That is a feature of the economic history of the last five years which has been of striking and particular importance to American trade. And it would appear that, for the long future, the proposed B. I. S. is likely to furnish one of the most ready means of international banking coöperation, in the favorable results of which America is possibly -- because of her enormous volume of foreign trade -- most concerned.
THE ATTITUDE OF OFFICIAL WASHINGTON
Now from public comment it would appear that the idea has gained ground that the Administration at Washington has, through the statements of the Secretary of State, declared that such coöperation shall cease. I do not read Secretary Stimson's declarations in that light. The President and he would be among the last persons in the world to attempt to turn back the hands of the clock and to declare that the international banking cooperation which has been an immense contribution to American prosperity shall never be again. What certain of the officials at Washington have apparently feared has been lest the particular form of coöperation planned should give color to the idea that the American banking system was engaged in the collection of German reparations. For years past Washington has endeavored to establish the thesis that there is no possible connection between German reparation payments to Germany's government creditors and the payments by those governments of their debts to the United States Government. Clearly there has never been any connection in law between these two great international movements of funds. Nothing was said or done at the Paris Conference -- nor does the new Plan contain any feature -- which can be construed as releasing the Allied Governments from their heretofore executed debt agreements with the United States Government. But with the stability of the world exchanges dependent upon the smooth and proper handling of these two great series of payments there is necessarily a close relationship between them in fact. Why not recognize -- not any legal -- but the indubitable economic link between these two sets of payments?
Here are the concrete figures making up this link: The average payments of Germany to her creditors under the new Plan will be $495,000,000 per annum. The average net payments of those recipients to the United States Government will be $325,000,000. During the 58-year period when Germany will be paying over to her creditors a capital sum of say nine billions of dollars, the United States will be receiving from approximately those same recipients almost six billion dollars. This is an economic link that it would be hard to ignore.
From this brief survey it is obvious that the United States Government, quite aside from its proper and frequently expressed desire to see America's export trade and the international payments therefor maintained without interruption, has a direct interest in the smooth functioning of the new machinery of the International Bank. For from this time forward, the new Plan gives an economic sanction to the validity of the Inter-Allied debt agreements with our Government which heretofore they have not possessed. Whether we like it or not, Germany has underwritten the debts of the Allied Governments to our Government. In an address at Berlin on June 28 last, Dr. Schacht, the chief German expert, in describing certain of the proceedings at Paris, declared: "All representations on the part of the German experts that Germany had nothing in the world to do with the Allied debts broke down. . . ." And the first thought of the American experts in the early discussions as to the advantages of the proposed B. I. S. was that, with the great interest of our own Government in the regular processes of foreign debt payments, the authorities at Washington would consider it appropriate to have the head (a private individual not appointed by the Government), of one of the Federal Reserve Banks nominate the two American directors of the Bank. Directors nominated in this manner, just as the foreign central bank heads are to make nominations, would obviously carry great authority in their judgments and be well able to express views fairly representative of opinion at Washington as well as at large. Washington's rejection of this view at the time caused great concern in Conference circles, not so much in the American delegation as among the European experts, who felt that their painstaking efforts to eliminate German reparations once and for all from the political field were being negatived by the Washington declaration which, to the foreign experts, seemed to be based upon political rather than economic considerations.
But there has been too much misunderstanding over this whole matter. First of all, the bylaws of the new Bank will prevent any official of any government from serving as a director. So just how the view first obtained that an American Government official was to be invited to serve does not appear. Of course some method of coöperation will be worked out in harmony with the Administration's views. Whatever its wishes may be as to the desirability of a Reserve Bank head publicly nominating the two American directors, no member of President Hoover's official family has offered the slightest objection to the idea that such Reserve Bank head shall be privately consulted and that his privately expressed views as to nominees shall carry great weight.
MAINTENANCE OF THE GOLD STANDARD
I may perhaps be accused of having laid too much emphasis upon the importance of this international coöperation in affairs of economics and finance. But such importance will always exist. At this particular moment this necessity is vital because of the importance of handling evenly and regularly the great exchange problems created by the obligations to transfer each year to the United States Government the large credits heretofore provided for. The same necessity exists in connection with the handling of the net payments due America on account of her immense export trade. Further, we cannot ignore the fact that the maintenance of the gold standard abroad may be menaced. Eminent European economists have felt that it would require another fifteen years to reconstitute the liquid capital destroyed by the war. This is a condition to be reckoned with. It can be met only through constant and continued coöperation on the part of the American community. It would be a sad commentary upon our intelligence if, because of the adverse attitude of a few of our legislators, perhaps not all of them thorough students of economics, we should awake some morning to find that the value of maintaining the gold standard was seriously questioned in Europe. Then we should be in danger of being left sitting disconsolate on our pile of that once precious metal, our share constituting almost a half of the entire world's present supply.
I have digressed considerably in order to show America's vital interest in the reparations settlement as proposed under the Young Plan. Returning now to certain final features of that Plan, I venture to point out again that the Report of the Committee of Experts makes plain that, in accordance with its terms of reference, the Committee's conclusions are simply in the nature of "proposals for a complete and final settlement of the reparation problem." This attitude is made clear in one of the early clauses of the Report which says: "We have realized, like our predecessors, that political factors necessarily set certain limits within which a solution had to be found if our proposals were to secure acceptance," that is, by the Governments. In fact, at one stage of the Conference one of the European delegates complained that "our work as experts is being ruined by our limitations as politicians." But, as I have explained in some detail, such political considerations were, in the minds of the Committee, sufficiently reconciled at the end and, as the Report states, " the Committee is satisfied that the scheme it recommends is within its terms of reference."
DISTRIBUTION BY THE GOVERNMENTS
Chief of these political problems was, of course, the question of the proportions in which the German annuities should be distributed. Discussion over this question necessarily claimed much time from the chief creditor experts. In fact, on one occasion when they seemed far from agreement one of them made an earnest plea for compromise, saying what a misfortune it would be to have the creditor experts fail at the last to achieve "the most difficult task of the Conference, namely, agreement among the creditors," as contrasted with the lesser task of agreement with Germany. These recommendations as to distribution of the German annuities were of course no concern of the German experts; but in the Report the general statement was made that they were "drawn up after careful examination of the existing distribution arrangement (Spa percentages) and of other relevant considerations laid before them (the creditor experts) and with due regard to the rights and equities of the other countries (Greece, Portugal, Poland, Rumania, Serbia, Japan and the United States of America) having a share in the Dawes annuities." It has been for the Governments concerned to declare that in the main the distribution arranged at Paris is acceptable to them.
Other important features of the Young Report (upon which the Governments acted favorably at the Second Hague Conference in January) are embodied in the chapter entitled "Liquidation of the Past." Under this general heading recommendations were made concerning the various unsettled claims and counterclaims arising out of the peace treaties between the Allies on the one hand and all the Central Powers (except Turkey) on the other; and among the Succession States themselves. These claims and counter-claims, which ran into billions of dollars, have been finally disposed of on a sensible basis. The series of complicated interlocking documents which will put the settlement into effect have received the approval of the Great Powers in principle, though at the time of writing they are still being elaborated in detail at Paris. These present discussions, however, should not affect the general lines of the arrangements made at The Hague, which among other things dispose for good of the so-called " optants question" between Hungary and Rumania and relieve Austria of all further danger of being required to make reparations payments.
The Young Committee permitted itself to consider the foregoing claims (although, strictly speaking, they did not fall within the Committee's terms of reference) because their settlement manifestly formed an integral part of the general settlement of the reparations question. In other words, the Committee made every effort to end the exercise of measures sanctioned under the Versailles Treaty but calculated, if continued, to keep war memories alive. The Committee expressed "their unanimous desire that the remaining financial questions arising out of the War should be settled as soon as possible, in order to promote the spirit of international harmony and collaboration." It reflects great credit on the interested Governments that they should have acted so promptly and so favorably upon the Committee's recommendations concerning the complicated and difficult problems involved.
As to the general conclusions of the Report, the German delegates made it clear (with the exception of Dr. Vögler, who resigned and left the Conference two or three weeks before its end) that while they were by no means convinced of the capacity of Germany under all conditions to fulfil its obligations under the Plan, nevertheless as a whole they were prepared to accept and heartily support it. Naturally the action of the Committee in so unanimously recommending the abolition of all foreign control in Germany went far to meet the views of the German experts. The abolition of the Index of Prosperity was another favorable factor. The huge liens on German railways and industries aggregating 16 billion marks were swept away, as was the transport tax. The imposition of a direct tax on railway revenues, to flow directly to the unconditional annuities, was in accord with German ideas.
On the general question of Germany's capacity, certainly if any group were ever justified in its conclusions through the process of painstaking study, it was the group of experts at Paris which gave the most patient inquiry and consideration to all the factors involved in Germany's capacity to pay. "These statements (as made by the German delegation) have been present in the consideration of the Experts and in a large measure their conclusions have been influenced by them," is a declaration made early in the Report, and reflected upon almost every page of it. As for the burden on the budget of the Reich, it is pointed out that the average increase necessary to fulfil the annuities of the 20 years is less than one quarter of one percent per annum, and "indeed the substantial reduction of the budgetary contribution as compared with the Dawes Plan makes possible an immediate resumption of the tax reduction program which has been in progress since 1924."
Finally, it is a truism to say that the adoption of the Young Plan ought to prove an immense stimulus to the European economy. The restoration of confidence, the renewed friendliness, the fresh methods of coöperation through the International Bank and otherwise -- all these factors should go far to tranquilize Western Europe, and to hasten all the processes of reconstruction.
MR. YOUNG'S ACHIEVEMENT
I cannot close without being permitted to say that to Owen D. Young, more than to any other one man, the settlement at Paris was due. His active and efficient part in the construction of the Dawes Plan was already a tradition in Europe and it was only natural that, seeking as experienced and as disinterested a Chairman as possible, the European experts should have promptly and unanimously chosen Mr. Young to guide their deliberations. The task which he undertook bristled with difficulties. On every side lay pitfalls, not dug for the Chairman, but inherent in the situation. His work was a work of infinite understanding and infinite patience. I mention understanding particularly because at the Conference all the dregs of distrust and enmity that had been eddying about since the days of the Armistice and the writing of the Versailles Treaty were finally drained off; they all came to the top and had to be dealt with and dispersed. All the bitterness that had lain in men's hearts, all the hard things said, and all those that men had not dared say, came creeping forth and had to be met. To understand these men and these things took great understanding, deep wisdom. Mr. Young had them both. And patience, to meet the trying ups-and-downs of negotiation, of point and counterpoint; patience in the face of bitter personal criticism against him and his methods that successively filled the French, the Belgian, and even the British press. To meet all these situations the Chairman had patience, sagacity, resource. His was a leadership that was never demanded by him, but was freely accorded to him by all his associates, because of their clear recognition of his fairness, his character, and his eminent capacity to be a leader of both affairs and men.
[i] See part VIII of the Treaty, Articles 231-247.
[ii] In the summer of 1929 an arrangement was signed between the German and Belgian Governments settling the mark question by payments for 37 years by Germany to Belgium: at 5½ percent discount these payments have a present worth of 315,000,000 marks.