ENGLISH economists have long maintained that France must do two things in order to set Europe on the road to recovery and at the same time get reparations for herself.

First, she must ease the pressure on Germany for current payments on reparation account. It goes without saying that the object of this is peace and a chance for Europe to get to work. That it would accomplish its object does not seem to be open to doubt.

Second, France must make an immediate and drastic cut in the total amount of her reparation claim. The avowed aim of this proposal is a final settlement of the whole reparation question on a reasonable basis such as would enable Germany to raise foreign loans for reparation purposes. There is great weight of authority back of this second proposal. British financial opinion appears to support it unanimously and American financial opinion is much impressed with its practical sense. But American popular opinion and a considerable section of British popular opinion have little sympathy with it. The French have none at all. In these differences of opinion we have all the elements of a continuance of the disastrous deadlock of the past three years.

The question must be asked whether the proposals for a reduction of the reparation debt deserve to be regarded as practical proposals, or whether, on the contrary, insistence on them has not driven Europe away from peace and the reëstablishment of normal processes of industry and trade. It is asserted that the obligation resting on Germany is fantastic, more especially as she will be unable to create adequate export balances to meet an external debt of such magnitude. But the practicality of proposals for an immediate reduction of Germany's fantastic obligation is only to be judged after considering the even more fantastic obligations which France is facing.

When we examine in some detail the situation of France, both positively and in relation to Germany, it seems evident that all efforts to induce France to cut down her claim without offering her something tangible in exchange are bound to meet with her determined opposition. Her friends insist that she waive her ultimate rights for the sake of present advantages which she considers to be entirely too vague. She has been given to understand that there is little or nothing to be gotten out of Germany now, and that what she may expect in the future will represent only a small fraction of her total claim. The French are well able to recognize that Germany cannot pay much now, and in the view of the writer the French Government would be able and willing to ease the pressure if there were any assurance that the reparation claim would receive serious consideration later.

The French taxpayer is carrying a staggering load and if he is to be asked to carry still more account must be taken of his psychology. This has not been done. No sooner had the debt been fixed than a clamor arose for its immediate arbitrary reduction. This clamor has increased in vehemence with the passage of time and has driven France ineluctably into an effort to enforce her claim. It is not that the French stick out for this or that figure, ultimately. But the spirit of the agitation has been most disquieting to them. Its spokesmen have had little understanding of the difficulties of France, and the French have seen the possibility looming up that Germany will never be required to pay anything.

The French are sufficiently versed in economics to comprehend the difficulties that Germany or any country may be expected to encounter in paying off a large external debt. Their knowledge of economics, however, also tells them that what Germany does not pay they themselves will have to pay, that an internal debt is the same as an external debt so far as the taxpayer is concerned, and that there is no escape from it. Their problem is altogether too serious for them to be able to accept offhand predictions regarding Germany's future export surplus. In these predictions they observe a tendency to exaggerate the difficulties of the task laid on Germany by the Peace Treaty. It has been said, for example, that she will have to create new export industries, since the productive capacity of present industries has its limits. In reply to this, French economists have pointed out that taxation for the purpose of paying the debt will reduce consumption, and that surpluses available for export will presumably be created in this way, as well as by increase of production. When all is said, the discussion is an abstract one, both pro and con. The French do not deny the difficulties of the exchange problem, but they are not prepared to admit that these difficulties can be measured in advance. Not only can Germany's visible exports not be predicted; the wide field of her invisible exports, concerning which no precise facts were known even before the war, remains to be investigated.

More than this, two practical means of surmounting the exchange obstacles are ignored by the protagonists of debt reduction. For one thing, rates of interest can be lowered and the period of amortization of the capital can be extended. That proposals of this sort are more likely, as a matter of practical psychology, to appeal to a creditor than proposals of a reduction of principal has been demonstrated by the debt funding negotiations carried on in Washington by the British Chancellor of the Exchequer. Then again, portions of the annual instalment can, if necessary, remain in the debtor country for investment for the account of the creditor. It is by this means that a large part of the interest accruing on English capital loaned abroad is realized on by English bondholders and shareholders. In the case of the reparation debt the holdings thus acquired would be sold by the French Government to private investors. Objections have been made on the ground of the undesirability of the participation of foreigners in German industrial undertakings. But the possibilities of such a solution or partial solution are too great to be casually dismissed.

Two other arguments for immediate reduction of the debt have been advanced.

The one upon which the greatest stress has recently been laid is that the credit and morale of Germany will be reëstablished and reparation payments secured through the floating of an international loan for Germany. France has been told that she must take a business-like view of the situation. The January proposal of the British Government was that the German obligation be cut down 60 per cent. Here was something concrete and business-like so far as concerned Germany. On the other hand, France was asked to cut 9 billion dollars off her claim in return for nothing except new promises to pay. This was after having received in four years' time 100 million dollars on account of a total reparation claim of 15 billions. If France were offered 3 or 4 billion dollars cash she would probably be quite willing to tear up a considerably larger amount in face value of the German promises which she now holds. But no such offer has been made, for the simple reason that no such loan as has been suggested is possible, or was possible even before the French moved into the Ruhr. German credit is worthless, whether or no the capital debt is cut down, for the first essential of credit is lacking.

Liabilities have little to do with credit--they can be deferred. What ails German credit is that for three years Germany has been crying that she cannot pay. What ails German morale is that for three years it has been dinned into the ears of the German people that the debt is beyond their capacity. The atmosphere has been one of repudiation, which stifles confidence. When the agitation for reduction of the debt ceases the three things really necessary to German credit will have a chance: first and foremost, French confidence in the intentions of the debtor, and following from that, reasonable terms of payment and the restoration of normal earning power. If Germany could be induced to face her reparation debt the way Great Britain has faced the American debt the reparation problem would be on its way toward a solution.

It has been asserted--and this is the final argument for the immediate reduction of the obligation as at present fixed--that the earning capacity of Germany will be insufficient to meet the debt by taxation. It is idle to urge this. If we look forward over a period of years, the truth of the statement is seriously to be doubted. But if it be true, there is then no reason to doubt that the capacity of France will also be insufficient. This is the rock upon which all schemes for a present redistribution of the debt have been wrecked.

While a great deal of attention has been given by economists to Germany's export capacity, insufficient study seems to have been devoted to Germany's real economic capacity to meet the reparation charges by taxation, and to the situation of France in that respect. If it is to be assumed that a convincing case for drastic reduction of the debt has been made on the export argument, Germany's real capacity is beside the point. If it be assumed that the reduction is to be an arbitrary one and that it is to be effective immediately, the real capacity of France is also irrelevant. For three years these assumptions have monopolized the field. We are getting nowhere. The scope of the economic inquiry needs to be widened. Meanwhile, although the facts surrounding the subjects of debt burden, taxation and earning power are obscure, we must, for a better understanding of the reparation problem, interpret them to the best of our ability.

It is not easy to evaluate the real debt burdens faced by France and Germany and the rest of Europe. Information is available regarding the amounts of the obligations themselves in the currencies in which incurred, but other factors make the subject complex. Portions of the debts are external and portions are internal. Some of them are inactive (e.g., the reparation debt and the inter-allied debts except the English debt to the United States). Some should be set off against others, but it is impossible to say what these offsets will be. Unpaid interest is another doubtful item; will it ever be claimed? Then again, in attempting to measure the debt burden we find that part of it has been converted through depreciation of the currency into something else, which, though no less a real burden on those who have been impoverished by inflation, one hesitates to evaluate in a form comparable to the annual charge on a debt. But such an evaluation, theoretical though it may be, has to be at least attempted, for in an examination of the debts the question of inflation obtrudes at every point.

If we make full allowance to Germany for her internal war debts at the gold values which they had when incurred (the value now is practically nil), the German percapita debt, including the entire reparation debt at its present figure, is $928. This compares to a French percapita debt of $816. If we add the prospective charges which France faces in order to complete the work of reparation (6.7 billion dollars, of which 4 billion is for the devastated area and 2.7 billion is for pensions) we reach a French percapita figure of $990. Allowing a future German pension cost of 3.7 billion dollars (i.e., at the same rate per casualty as the French) the German percapita debt would reach $988.

The French figure of $816 includes $166 for advances already made for reparation purposes (6.4 billion dollars) of which about 62 per cent was for the devastated areas and the remainder for pensions and separation allowances. If Germany should ultimately reimburse all the reparation advances, the French percapita debt would become $650. But as there is no immediate prospect of this we can scarcely approach the question of the French debt burden from any except the present basis.

The January proposals of the British Government for the reduction of the total reparation debt to 121/2 billion dollars (from about 31 billions) would change the present position substantially. Such a scaling down of Germany's obligation would leave Germany with a percapita burden of $625. France's share (52 per cent) in the reduced claim would just about pay her future reparation costs, leaving her with her present burden of $816, i.e., a burden 30 per cent larger than Germany, or, allowing for future German pension costs, 20 per cent larger.[i]

If the magnitude of this figure is appreciated, the British plan is clearly seen to be inacceptable from the French point of view. The French percapita debt burden is nearly four times that of the United States and over seven times what our percapita debt would be if the Allies should repay the war loans. To meet the debt charges the French have nothing like the income which our people enjoy.

When these debt burdens are compared with the best available figures of average pre-war savings, the indicated margin left for comfort and old age is fearfully small for the Frenchman and would be fearfully small for the German if he were really carrying the load of the reparation debt. The carrying charges on these debts, reduced to a pre-war basis of money values, amount to 70 per cent of the pre-war savings of the French and German taxpayer--savings which, if the estimates are anywhere near the truth, amounted to the miserably small sum of $37 per annum. But pre-war figures of earnings and savings are out of date. Earnings (i.e., real earnings in terms of commodities) have been seriously cut down by the death and disablement of productive workers, the destruction of plant and machinery, the deterioration of soil and transport, the stagnation of trade, the eight-hour day and other causes. The real extent and permanent effect of this impairment can only be conjectured. It is useless to speculate on the question of how heavily it will bear ten years from now on the two nations, positively or relatively. At present the margin over pre-war consumption and pre-war costs of government seems to be non-existent. How are the interest charges and other new costs of government to be met?

How is France going to carry the load? The possibility of getting much out of Germany for the time being does not seem good. France has to choose between inflation of the currency and increased taxation. The easiest way is inflation, and some authorities lightheartedly advise France to choose this method--to let the air in gradually. But if inflation is the way to meet the problem, why has England shunned inflation like the plague, and why the consternation about what it is bringing to Germany? Inflation is a levy on capital which pauperizes the middle classes who have invested their savings in government bonds. If France were to carry the load in this way she would merely add the troubles of inflation to her other problems.

Obviously the only sound way of meeting the new burdens is by increased taxation. But if heavy taxation is such a simple alternative, why is it that England finds her own situation so difficult? England appears to be shouldering a smaller percapita than France ($783 at par, or $751 at the exchange rate of December 31, 1922) out of a percapita income which was 24 per cent larger before the war than the French income. The burden of taxation in England on the individual and on industry is such as to make many Englishmen regard the future with acute misgivings. It would surprise some Englishmen to hear that the burden of taxation in France appears to be equally heavy.

In "The Economic Consequences of the Peace," Mr. J. M. Keynes, the leading exponent of debt reduction, said that the failure of the French to lay taxes is notorious. As will be shown further on, the writer has examined this statement in the light of tax and income statistics. Tax collection figures show that the French taxpayer in 1920 paid an amount equal to 11 per cent of his pre-war income, in 1921 16 per cent, and in 1922 18.3 per cent. In 1922 the English taxpayer paid 20 per cent on the basis of prewar income, and the German 5 per cent. When we consider the impairment of tax capacity in the devastated area, the French 1920 and 1921 figures must be considered remarkable. The General Secretary of the French Ministry of the Devastated Regions, writing in the "Encyclopaedia Britannica" (New Volumes), states that the devastated departments before the war used to account for 18 per cent of the total taxation of France, and that 2,000,000 families in the area had been ruined by the war.

The percapita earning power of the English is diminished by unemployment. The percapita earning power of the French, notwithstanding the partial reconstruction of the devastated area, is also unquestionably far below pre-war figures. It is obviously impossible to say how the 1922 tax figures of England and France actually compare on the basis of present income, but it does not seem unlikely that, contrary to a somewhat prevalent popular opinion, the French, and not the English, are the heaviest taxed people in the world today.

In considering the relative debt burden of France and Germany the question arises whether the heavier burden of France might be partially due to less rigorous taxation during the war. The fact is, however, that the costs of the war in Germany as well as in France were financed almost entirely by loans, if we are to believe, on the one hand, a German financial authority, Herr Arthur Feiler, writing in the "Encyclopaedia Britannica" (New Volumes), and, on the other hand, a publication on French public finance issued by the Bankers Trust Company of New York. One reason for this in both countries is to be found in the large proportion of men taken out of productive industry for the armies. France mobilized in all 19 per cent of her population and Germany 15 per cent. France moreover was deprived of all sources of revenue in the invaded departments.

France has carried her war debt and other government costs without depreciation of the currency below the level of 1920. In June, 1922, the French Minister of Finance stated that since 1920 the government had met all its ordinary expenditures by taxation.

In June, 1922, the French budget deficit was equivalent to the interest charges on reparation loans amounting to about 7 billion dollars. These loans represent a tremendous financial effort by the French people out of accumulated savings. But the liquid capital of the country is being exhausted, and the Treasury is facing enormous interest charges. The government has been criticized for not meeting part of this burden directly by taxation. So far as the loans cover current charges (pensions recoverable from Germany), and particularly so far as they may have been used to meet accumulated interest charges, the criticism is a valid one from the point of view of sound fiscal policy, granted we can ignore the question of tax capacity and the difficulties of public opinion. But so far as the costs of reconstruction are concerned, the criticism is without foundation, as reconstruction is too large an operation to be met to any appreciable extent out of income.

Arm-chair critics find it easy to plan French taxes which, having regard to the earning power of the taxpayer and the psychology of the man in the devastated area, no government could succeed in collecting. Mr. Bonar Law recently spoke of the tax burdens shouldered by the English. He said, if the writer remembers correctly, that these burdens, unless relieved by the settlement or partial settlement of debts owing to England, would mean a serious impairment of the English scale of living for a generation. France is apparently about to enter the phase of increased taxation. She needs all the support her friends can give her in order to make it a success.

The world has been swept by a catch phrase: "The debt is beyond Germany's capacity to pay." But it is not merely a question of how Germany can pay her debts. It is a question of how the French can pay theirs, even if Germany bears her share. It is a question of how all of Europe can meet its debts, internal as well as external. The ex-belligerents are facing debts amounting to 100,000 million dollars. Only twenty years ago the mind was with difficulty able to comprehend a merger of a thousand millions. The intelligence cannot grasp even the arithmetic of Europe's debts, much less their social significance. It is vain to try to predict how they can be paid or who will pay them. The "final settlements" which are proposed are illusions; only time and the processes of recuperation can solve the problem. The indispensable thing is to give these processes a chance to get going. Schemes for lightening the German load, while the authors are unable to say how France is to work out her end of the problem, result in nothing but the aggravation of Franco-German relations and the progressive destruction of confidence all round.


No one has attempted any real study of post-war income in France and Germany. Despite the difficulties, a start ought to be made on such an investigation. The present phase will run into decades, and it is vitally necessary that information be gathered on the subject which dominates all others--the ability of the taxpayer to meet the debt charges.

Dr. Helfferich's estimate of German pre-war income and M. Rene Pupin's estimate of French pre-war income must serve as the points of departure for any present discussion of earning power.[ii] All one can do is to take account in a general way of the losses which have been suffered since the income estimates were made. In placing the German losses in relation to the French losses one is open to the charge of laboring the obvious, since no one denies that France suffered much more severely from the war than Germany. But it is only by setting the losses off against one another as definitely as possible, and by bringing them into relation to income, that we may appreciate how useless it is to expect the French to agree to the solutions of the reparation problem which have been proposed.

It is also well to recall at this time the losses in northern France, for, with the rebuilding of the area, there is a certain tendency to regard the wound as almost healed.[iii] This is of course far from the truth. It will not be healed in the lifetime of this generation. Reconstruction mitigates the temporary injury which lay in the fact of 3 million people being driven from their homes and deprived of the means of making a livelihood. From the point of view of earning power reconstruction sets France on the road to recovery. But it is only a first step toward the reconstitution of her shattered national economy. The more lasting harm was in the stupendous loss of capital, viewed not as means of production but as accumulated savings. This loss carried with it a social menace. The rebuilding of northern France scarcely touches this problem; it merely converts the menace from a visible form into an invisible form--national debt.

It is also worth while to consider in their proper proportion the losses sustained by Germany, especially in view of the emphasis which has been laid on the damage resulting to Germany from territorial cessions and from inflation.

Germany's chief territorial losses were the restoration of Alsace-Lorraine to France, part of Schleswig to Denmark (after a plebiscite), the cession of part of Upper Silesia to Poland (also after a plebiscite), and the reëstablishment of Poland. Passing over the fact that the cessions were restitution of the spoils of former wars, it may be admitted that the losses are important from the view-point of national pride and as regards the control of raw material for Krupp's in time of war. The German war machine was fed from the iron mines of Lorraine. But if the aims of the German republic are in the direction of peaceful economic development, it is doubtful whether the losses are of the importance that has been attributed to them. The territorial control of raw materials is not essential to the prosperity of a manufacturing people, for, despite frontier lines, raw material inevitably seeks the place where skill and capacity for transforming it exist. It is significant that England's greatest industry--cotton spinning and weaving--is founded entirely on imported raw materials.

What were Germany's other capital losses? Her colonies are gone, but they were probably a source of prospective rather than actual income. She ceded 21/2 million tons of shipping to replace English ships torpedoed, but on June 30, 1922, her merchant fleet comprised 1,800,000 tons, or 35 per cent of her pre-war strength, and at the end of 1922 she had 416,000 tons under construction. Income-bearing foreign investments of 5 or 6 billion dollars went (as did an equal amount of French investments in Russia), but in October, 1922, Mr. Reginald McKenna estimated that Germany had gotten about a billion dollars of them back and other authorities have placed the amount at double that figure, or still higher.

What has Germany got left? The items are well known, but may be briefly recounted. She has her agriculture, which is an important element of her economic strength. She has all of her Westphalian mineral production and one-third of her pre-war Upper Silesian production. Her greatest productive physical assets are intact--her textile and chemical plants, her foundries, machine shops, instrument factories, and the rest of an enormous manufacturing industry based on metals. And above all she still has that upon which the prosperity of Germany was really based --the genius, skill and unparalleled organization of 60 million highly intelligent and industrious people.

In 1913 Dr. Helfferich, Director of the Deutsche Bank, estimated Germany's annual increment of wealth--that is to say, surplus income or savings--at between $2,000,000,000 and $2,125,000,000 (exclusive of increased money value of existing land and property) or $30 percapita on the basis of pre-war population. This was about 20 per cent of his estimate of Germany's gross income, which came to $149 percapita. To the pre-war surplus is now to be added 400 or 500 million dollars postwar savings on armaments, giving a total of $2,500,000,000, or $37 percapita.

M. Pupin's estimate of French gross income before the war was 7.15 billion dollars, or $185 percapita. Using 20 per cent as the rate of savings, for lack of any other estimate, we have an annual surplus of $1,430,000,000, or $37 per capita.[iv]

In "The Economic Consequences of the Peace" Mr. J. M. Keynes reduces Helfferich's figure by 1.8 billion dollars on account of dead and wounded (measured by the pension charge), loss of income from foreign investments and general loss due to lack of repairs, depletion of livestock, impoverishment of soil, etc.[v] He has calculated pensions at par of exchange. As the mark was at 50 per cent of par at the end of the war, Mr. Keynes' figure might be questioned, although as a measure of loss of national productivity rather than of the gold value of the pension charge it may be a fair approximation. If we accept Mr. Keynes' total of 1.8 billions as a deduction from savings and also deduct the prewar savings of the transferred population (say 5 million at $30) we arrive at a present percapita surplus of 8 or 9 pre-war dollars, or 12 or 14 1922 dollars. Whatever the actual figure, it is evident that the figure of French percapita savings has been reduced even lower by these same causes, since France's casualties were 111/2 per cent of her population against 9 per cent for Germany.

The chief remaining item of temporary loss resulting to Germany from the war concerns her income from shipping and from her foreign banking connections; this, estimated before the war at $125,000,000, may now, in view of the present strength of her merchant marine, be estimated at $100,000,000. German industry also sustained certain temporary losses through the readjustments necessitated by the breaking up of German industrial units in the ceded areas.

It is also true that post-war inflation has set in motion disintegrating forces, the effect of which cannot be measured. One such effect is an improverishment resulting from selling goods abroad at less than world prices and less than real replacement value. However, the recent practice of pricing and invoicing in foreign currencies has tended to check this loss, and its extent was probably largely confined to exports to Allied countries in Europe where high differential tariffs against German goods necessitate low pricing to meet competition. German shipments to these countries in 1920 were only 15 per cent of a total export trade of about 750 million dollars. Far offsetting this item was the profit to Germany through depreciation of marks held abroad, which was estimated in July, 1922, by Professor Singer of Hamburg at 31/2 billion dollars.

Assuming that the depreciation of the German currency is checked without serious social disturbances, no one would contend that the real damage to German productive capacity wrought by inflation, and eventually by deflation or stabilization, has been or will be at all comparable in intensity or duration to the loss of productivity and income sustained by France in the devastated area. This loss, which began to run in August, 1914, and is only now gradually being made good, cannot be calculated with any precision. The capital losses were about 71/2 billion dollars pre-war value; the ten invaded departments had previously contributed 18 per cent of the total taxation of France. According to the French authority already cited, municipal life ceased in 3,256 communes, 4,300,000 acres of agricultural lands were torn up, 3,500 industrial establishments and 220 coal pits were destroyed or badly damaged, 1,350,000 cows, sheep, goats, and draft animals disappeared, 3,500 bridges and many thousands of miles of roads and railroads were wrecked.

If estimates of pre-war income and of losses of income due to the war are entitled to any credence, it will be seen that the French must meet their debt charges by reduced consumption, with nothing over for savings.

Great emphasis has been placed on the permanent damage done to the German economy by the loss of Lorraine and Upper Silesia, with special reference to coal and iron mines, blast furnaces and steel plants situated in these districts. The economic results of the cessions may be considered from the point of view of (a) percapita income, (b) German exports and foreign exchange requirements and (c) the effect on German industry as a whole.

Due to the cessions, Mr. J. M. Keynes attributed a loss of surplus income to Germany of 250 million dollars a year. If we take Dr. Helfferich's percapita figure of $30 the total would be more like 150 million dollars. But whatever the figure it is immaterial from the vital standpoint of percapita income of Germany and of France, as the 5 million inhabitants whose labor created this surplus were transferred with the soil. After the cession of Alsace-Lorraine, for example, Germany has a less income to divide among 1,800,000 fewer people, and France has a larger income to divide among 1,800,000 more people. It might perhaps be demonstrated that the earnings in Lorraine were above the average. Such a difference, if it exists, would have little effect on the general average of nations of 60,000,000 and 40,000,000 respectively.

Germany's principal losses in Lorraine were (in terms of annual production) 21 million tons of iron ore (or, including Luxembourg, 28 million tons, i.e., four-sevenths of Germany's total production), 4 million tons of pig iron (or, including Luxembourg and the Saar, 8 million tons, i.e., 40 per cent of Germany's annual capacity), 2.3 million tons of steel ingots (or, including Luxembourg and the Saar, about 51/2 million tons, i.e., 30 per cent of Germany's annual capacity), and about 6 million tons of rolling mill capacity (34 per cent of Germany's annual capacity). In Upper Silesia Germany lost 49 million tons annually of coal production (26 per cent of her total production). At pre-war prices the total value of these products is about 575 million dollars.[vi]

These statistics give a cumulative impression of losses far exceeding the realities. From the standpoint of German export balances and foreign exchange requirements it is apparent that, roughly speaking, the above losses can be regarded as consisting in fact of about 30 million tons of coal, 8 million tons of ore and 6 million tons of rolled steel. The remaining items, including the rest of the coal and the ore, are contained in the rolled steel as raw materials, and are included in its value. By thus eliminating duplicated items we find the net value of the lost production is about 230 million pre-war dollars. This figure, or some figure roughly comparable with it, represents the impairment of Germany's export surplus on account of coal and iron--an impairment composed partly of increased imports and partly of decreased exports.[vii]

It has been said that the cessions have seriously and permanently crippled Germany by destroying the self-contained character of the German steel industry and metal manufactures in respect to their supply of raw materials. The General Secretary of the German Union of Iron and Steel Manufacturers, writing in the Manchester Guardian, says: "The Rhineland and Westphalia sent coal and coke to Lorraine, Luxembourg and the Saar district, and the trains which bore these consignments carried iron ore, pig iron, the half-worked product, rolled iron and scrap iron back to the Rhineland and Westphalia."

But here again we have to consider the net and not the gross losses, as the function of the duplicated items in the German economy was merely that of giving employment to the transferred population, for whom Germany no longer has to provide. Moreover, the net loss of 30 million tons of coal has no permanent effect on Germany industry, judged from pre-war standards, as Germany exported 33 million tons before the war.[viii] The real loss, therefore, is about 8 million tons of Lorraine ore, required for her blast furnaces, and about 6 million tons of rolled steel (or its equivalent in iron and steel products), i.e., the effective net output of the ceded areas before the war.

So far as concerned ore requirements, Germany was not self-contained before the war. Taking Lorraine, Luxembourg and the Saar into account she consumed 46 million tons of ore, of which about 11 million were imported, 7 million produced in Germany proper (i.e., post-war Germany), and 28 million produced in Lorraine and Luxembourg. Together with the imports and the home production, the Lorraine surplus production of about 8 million tons kept the blast furnaces of Germany proper busy to their capacity of 26 million tons.

As the Lorraine iron industry is itself not self-contained, but depends on Westphalia for its coke, it does not appear that under the régime established by the treaty Westphalia need fear for its ore supply, nor that the German engineering and metal manufacturing industries need to anticipate difficulties respecting their requirements of Lorraine pig iron and steel. Such difficulties can be anticipated only on the supposition that the French will develop a gigantic manufacturing industry based on iron and steel, to rival German manufactures. This implies that the genius of the French race is industrial. This is a large assumption, which may, however, be admitted for the sake of argument. But there are other obstacles to such a development. A great industry of this kind cannot be established in a moment, or in years, either from the standpoint of building plants, of creating organizations or of training skilled labor; meanwhile Germany will be getting back her markets. And are the French going to stake millions in founding a finished industry to work up the Lorraine iron and steel surplus heretofore available to Germany, in face of the fact that the latter will control the coke on which the Lorraine blast furnaces depand?

Germany remains the natural market for much of the Lorraine product and she is bound to share in any prosperity which comes to France by the development of the Lorraine steel industry. It does not require rumors of Franco-German steel mergers to suggest that the natural interdependence of Lorraine and Westphalia may some day solve the reparation problem and end a quarrel of centuries.


The percapita debt burden of Germany has been mentioned as being $928 and that of France $816 (or $990 if we include expected costs of completing reparation). The carrying charges on debts of this size, at 4 per cent, are nearly $40, which is equivalent to $26 pre-war value or 70 per cent of pre-war savings. The method of arriving at the above figures is shown in Table A on the insert opposite page 78. It will be seen that burdens are regarded as still existing for internal debts which in Germany have been almost completely extinguished, and in France partially extinguished, by depreciation of the currency.

The alternative is to calculate the value at current rates of exchange. The results by this method (see Table B on insert) are: Germany $510, or $570 if we make an allowance for future German pension costs, as previously mentioned; France $652, or $825 if future costs of reparation are included. Reduction of the reparation debt to 121/2 billions, as was suggested in January, would reduce the German burden to $206 percapita (or $266 including German pensions).

There is something to be said for each method of calculation, but whichever is adopted ought to be taken uniformly as a basis for all debt comparisons. Among persons who are disposed to be critical of the French, there is a tendency to adopt one line of argument when comparing the French and German situation and the other line when comparing the French and English situation. The significance of this appears in the fact that if we leave to one side the future costs of reparation the French debt calculated on the one basis is higher and on the other basis lower than the English debt of $751 percapita.

It is frequently said that France is unreasonable in not agreeing to make sacrifices of her claims against Germany similar to those which England is prepared to make. The relative size of the debts of France and England at current rates of exchange and the supposed relative scale of taxation in those two countries are cited in support of this criticism. As will be shown, the taxation argument does not seem to be borne out by facts; as for the debt argument, it is inescapable that if France is regarded, at current rates of exchange, as carrying a lower debt than the English, she must be regarded, by the same reasoning, as carrying a much higher debt than Germany. On this basis, therefore, the primary reason urged for debt reduction, namely that Germany is carrying a heavier load than either France or England, falls to the ground.

It seems fair, however, that we should take account of the burdens which inflation has imposed upon certain classes of the German people and calculate the internal debts at the gold value at which incurred, where this value has since been reduced.[ix] These calculations are shown in Table A. The rates used are calculated from price index numbers in order to represent the real internal value, since the rates of exchange during the war, especially in the case of France, were artificially high. The debt incurred in France since 1917 is calculated at present rates of exchange (December 31, 1922), as the internal purchasing value of French currency is now higher than when these debts were incurred, and the present rate represents the nearest approach to a correct estimate of the burden on the basis of redemption value.[x]

An examination of official figures seems to show that a misapprehension exists as to the scale of taxation in France. Even such a friendly critic as the London Times says in its issue of January 4, 1923: "The point is imperfectly understood in France that this country has a balanced budget simply because she has borne a burden of taxation much greater than that of France."

Figures appearing in the French Journal Officiel show that in 1922 France collected by taxation about 21.2 billion francs, or 550 francs percapita. There being no reliable figures of present percapita income we are obliged to transform this sum to a 1913 basis, in order to get an idea of the burden on income. Using the average of the 1922 wholesale and retail price index numbers (312 on a pre-war base of 100) we find that 550 1922 francs had a purchasing power equivalent to 176 pre-war francs, i.e., 18.3 per cent of the average pre-war income (960 francs--$185--Pupin's estimate).

Official figures published in the London Economist show that in 1922 Great Britain collected in taxes about £793,000,000 or £17 percapita. Using the 1922 average wholesale and retail index number (170) we find that £17 had a pre-war purchasing power of £10, i.e., 20 per cent of the average pre-war income (£50 equals $243, Stamp's estimate).

Tax figures appearing in the official German Reichanzeiger (except for the item of bank taxes, which has been estimated at a billion marks) show that German tax collections in 1922 amounted to 457 billion marks, or 7,500 per head, which at the 1922 price index of 24,606 is 30 pre-war marks, i.e., 5 per cent of pre-war income (625 marks equals $149, Helfferich's estimate). Taxes in Germany are not adjusted upward rapidly enough to keep pace with depreciation of the currency. The difficulties in the way are obvious, but the fact remains that the profits of industry, accumulating under the stimulus of inflation, have not been taxed.[xi]

While the subject of determining the real tax burden on income today is a difficult one, the facts seem to show that the French are carrying an extremely heavy load, even on a pre-war basis of earning power.

The comparative figures of French and English taxation, viz., 18.3 per cent and 20 per cent, respectively, are very striking. In common with many people the writer had supposed English taxation to be far and away the heaviest in the world. It is true that income figures have to be taken with reserve, as the subject is an extremely difficult one, but the estimates of pre-war income used are generally accepted as the best in existence. How, then, is this apparent popular misconception to be accounted for?

One explanation is that the yield on French taxes has been increasing with the reestablishment of industry in the devastated area. Another is that the English raise half of their revenue by income tax--the most easily recognizable form of tax burden--while the French raise ony 40 per cent in this manner. Then, again, the English burden is more readily comprehended, for practically all the income tax is assessed under a single legislative act, while in France it is assessed under several acts. The English income tax law a year ago provided for a standard tax of 6 shillings in the pound, i.e., 30 per cent of income, and now provides for 5 shillings, i.e., 25 per cent of income. The implication of this in the popular mind is that English taxation, when one also takes into account indirect taxes, is much greater than 20 per cent. This assumption of course is not correct, as the average income tax rate is substantially pulled down by the reduced rates for incomes under £225 and by the exemptions of incomes under £150.

The heavy direct tax and the simplicity and universality of the standard rate make the English taxpayer keenly aware of what he is paying. He has something definite to go on, and he makes himself heard in the newspapers and at public meetings. The French taxpayer does not have this advantage and in any case he pays less in direct taxes. As for indirect taxes, like everyone else he can only know what they amount to by considering total national taxation in its relation to national income. This is too much for the average citizen, and he suffers in silence. But the burden on income is there all the same.


Certain facts relating to the reparation debt deserve more attention than they have received, and certain misapprehensions regarding the French claim require to be set right.

The general reparation debt as assessed against Germany by the Reparation Commission in May, 1921, is 132 billion gold marks (31.4 billion dollars), less the values of state properties in ceded territories. The debt is fixed as a lump sum and no details have been given out by the Reparation Commission showing what the various national claims were put in at or how it is divided between material damage and pensions. Information as to the amounts of these claims, however, is available.

The debt comprises the total liability against all the ex-enemy powers for which, as a joint and several debt, Germany remains liable. As such it will presumably be subject to considerable deductions on account of cessions of state properties by Germany, Austria and Hungary, the final valuation of which has not yet been made. At a guess the writer places these deductions at 2 billion dollars, leaving the net general debt at 29.4 billion dollars. Besides this, Germany is required under the heading of reparation to make good Belgium's war borrowings from the United States, Great Britain and France, estimated at 11/2 billion dollars. The total obligation may therefore be taken as being about 31 billion dollars.

The mode of meeting the interest and amortization charges on the debt is governed by a "Schedule of Payments" prescribed by the Reparation Commission, which provides for annual payments of 500 million dollars plus an amount equal to 26 per cent of Germany's exports. Germany's capacity to pay is conceived to be her foreign exchange capacity or export surplus. On the other hand, the treaty contemplates that taxation in Germany shall be as heavy as in any of the principal Allied countries, and that this shall be taken into account in periodically estimating Germany's capacity to pay. Here the term capacity carries the meaning of taxable capacity or economic surplus.

The shares of the various Allies in the general claim of 29.4 billions were fixed by interallied agreement in 1920 (prior, it might be remarked, to the determination of the debt). Subject to certain provisions about Austria and Hungary, the shares are as follows:


  Per Cent Millions of Dollars
France  52 15,300
British Empire  22 6,470
Italy  10 2,940
Belgium   8 2,360
Japan   0.75 220
Portugal   0.75 220
Serbia   5 1,470
Others   1.5 440
  ---- -------
  100 Per Cent 29,420 Million Dollars

According to a statement published by the Reparation Commission, total payments and cessions by Germany to December 31, 1922, amounted to 1,985 million dollars (the dollar being taken at 4 gold marks). Details of this statement, covering cash items, deliveries in kind, the value of state properties in ceded territories, and miscellaneous receipts, will be found in Table D on the insert opposite page 78.

The burden on the mark exchange caused by the reparation payments consisted of external payments of 240 million dollars a year, in cash and in kind, for reparations to Belgium and for occupation costs. Besides this Germany delivered a total of 384 million dollars worth of ships and rolling stock. Her total external effort was, therefore, about 336 millions a year, which is interest at 4 per cent on 81/2 billion dollars. The rest of the 31 billion dollar reparation debt was inoperative.[xii]

The total economic effort of Germany under the Peace Treaty is somewhat more. External settlements were made for pre-war debts estimated at 150 million dollars, identifiable objects carried off by the German armies were restored to their owners, and paper marks to the value of 150 million dollars and services in kind were furnished to the Armies of Occupation. The estimated value of the state properties in territories ceded by Germany is 640 million dollars.

The distribution of the assets delivered on reparation account is given on Table E on insert. This table shows 98 million dollars received by France on reparation account.

Table F shows that what France has spent for reparations and what she expects to be obliged to spend, according to the French Government's budget report, August, 1922, amounts to 13 billion dollars (francs converted to dollars at .0734, rate of December 31, 1922). In comparing this figure of 13 billion dollars with the French share of 15.3 billion dollars in the total claim, the approximate character of both figures has to be borne in mind.

The original claim submitted by the French Government to the Reparation Commission in February, 1921, embraced: (a) a valuation of property damage, founded, among other things, on a survey of real property in every city and commune of France made for tax purposes in 1910 on the basis of actual sale values; and (b) a detailed estimate of pensions, separation allowances and other injuries to persons, capitalized at 5 per cent.

As the French pension law was passed in 1919, the claim for injuries to persons was made in paper francs. The capital sum claimed was 78 billion paper francs. On May 20, 1921, M. Loucheur, the Minister of the Liberated Regions, stated in the French Chamber that the latter sum had been converted to gold marks by the Reparation Commission at the rate of 2.20, which gives a figure of about 351/2 billion gold marks, or 81/2 billion dollars.

The property damage was evaluated at about 39 billion prewar (gold) francs (i.e., 35 billion plus interest) in the following manner:


  Millions of Millions of Millions of
  Gold Francs Gold Marks Pre-War Dollars
    (These columns added by writer)
Damage in Devastated Area 30,600 24,815 5,906
  etc 4,061 3,293 784
  ------- ------- -------
   Total Without Interest 34,661 28,108 6,690
Interest at 5 per cent, Nov. 11,      
  1918, to 1 May, 1921 4,125 3,345 796
  ------- ------- ------
   Total With Interest 38,786 31,453 7,486

Of the damage in the devastated area, about 26 per cent was damage to industry, 24 per cent to houses, farm buildings and public buildings, 17 per cent to furniture and fittings, 29 per cent to unbuilt-on property and 4 per cent to state property and public works.

Estimated costs of reconstruction of the devastated area were placed at 127 billion paper francs on the basis of actual 1920 prices, i.e., at an average rate of 4 paper francs on the total claim of about 31 billion gold francs, which was close to the current price index numbers.[xiii] But the claim itself was, in fact, stated in pre-war (gold) francs.

On February 22, 1921, the Reparation Commission published a summary of the various claims received, giving the French claim in the form most easily intelligible to the public, i.e., in reconstruction costs expressed in paper francs. Among the items was 127 billion paper francs for the devastated area.

This item provoked a sweeping and wholly unfounded denunciation of the French claim by Mr. J. M. Keynes. Taking the figure of 127 billion paper francs, Mr. Keynes estimated that it represented a gold claim by the French Government of 58 billion gold marks, whereas if he had investigated the matter he would have found that he was overstating the claim as actually made 21/3 times, the real figure being 24.8 billion gold marks.[xiv]

It can be seen that by operation of the French percentage the French share in the total German debt, i.e., a share of 15.3 billion dollars, is substantially composed of the original claim of 71/2 billion dollars for property damage and interest, without any allowance for the post-war depreciation of gold, and of 81/2 billion dollars for pensions, calculating the latter from paper francs at the rate of 2.20 paper francs to the gold mark.


For three years the reëstablishment of industry and trade has been held up awaiting agreement on schemes for the immediate and mathematical solution of a social and political problem which it will take a quarter of a century to solve. In terms of mathematics the problem starts with three unknown quantities: the economic surplus of France, which seems to be a minus quantity; the economic surplus of Germany, which seems to be close to zero; and a burden of debt which is so large as to be incomprehensible. Every argument has started and ended in a vicious circle, which can only be broken by recognizing that treaties are treaties and debts are debts until abrogated by common consent. There is no other fixed point. Let us see whether, starting from that firm ground, France will not feel sufficient assurance regarding the future to be able to make concessions regarding the present. Let us see whether Germany, given relief for the present, will not be able to face the future from a healthier point of view in the knowledge that restitution must be made.

The history of the past three years may be searched in vain for anything calculated to convince Germany that she must make restitution. One may reasonably think that the occupation of the Ruhr is intended to supply this vital need and that it does not mean that France sets any great store by it as a means of obtaining large immediate cash benefits. If this is the case a firm pronouncement by the Allies in support of the Treaty of Versailles would remove the principal raison d'etre of the occupation. It is said that France does not really want reparations, that she is bent on the military and the industrial domination of the Continent. Is it not more likely that France needs and wants reparation, but that she is not at all sure whether the rest of the world means to see that she gets reparations?

France is now wrestling single-handed with the problem. It is difficult to believe that she would not welcome a chance of approaching it in more peaceful fashion, in cordial agreement with her Allies. Obviously she must have guarantees, which must include the pledging of tangible assets by Germany. But a more important guarantee would be one which can be supplied only by the Allies--a guarantee which can be made effective by a mere statement of policy, provided that it is an unmistakable one. The threat of force must lie behind it, as it lies behind all the institutions of society. But the threat need not be an active one, and force need never be invoked if the United States and England make it clearer to Germany that reparation must be made. If the German people, and through them the industrialists, cannot be reached by a policy combined of firmness and conciliation, the outlook for Europe is black.

As an American, the writer could wish that the United States might take the lead in such a policy. But until England and France are united the possibility of effective action by America seems remote. The United States is not likely to be called in as an arbiter, and if she were it would be a painful if not impossible business for a nation of 110 million people, 3,000 to 6,000 miles distant, to make up its collective mind in a hurry as to the merits of a controversy between France and England. The United States is too good a friend of both. For this reason, the writer believes that the solution lies with England; and if it can be done without impertinence to the British people, for whom he has a profound respect, he would like to suggest that a British program along the following lines ought to command the support of France, of the American people and even of the Germans:

1.~ The Allies to make it plain to Germany that the debt as at present established must stand, subject to a re-examination of the question in ten years' time.

2.~ Germany to be called upon to cease printing paper money and to balance her budget by taxation within a year; also to submit to measures of financial control.

3.~ Subject to satisfactory guarantees, including the pledging of assets, the Ruhr to be gradually evacuated and Germany to be granted a moratorium for two years, except for deliveries of certain essential commodities and an initial cash payment of 250 million dollars from present foreign balances.

4.~ An investigation to be started by the League of Nations into the budgets and fiscal and tax systems of Germany, of the powers claiming reparation and of such other ex-belligerents as may desire it. The investigation also to include an examination into Germany's foreign exchange operations. A first report to be rendered prior to the expiration of the moratorium. A second report on the same subjects, plus a study of economic resources and national income to be made four years later, and a final report four years after that. The complete text of all reports to be given immediate publicity in English, French, German, and Italian.

5.~ The first report of the League to be examined by a sub-committee of bankers, including American and German members. The committee to submit recommendations to the Reparation Commission as to the fixation of Germany's payments for a period of four years after the moratorium. These recommendations to include proposals on the subject of payments by delivery of German industrial securities.

6.~ Payments for a further period of four years to be fixed after a similar examination of the second report of the League of Nations. A world conference, if necessary, to be summoned at the expiration of ten years to consider the final report of the League.

7.~ The principle to be accepted that, if proper guarantees can be obtained, German products, instead of being delivered directly on reparation account, shall be allowed to follow their natural export channels and create foreign balances in a normal way.

8.~ The principle to be accepted that payments may, if necessary, be extended over a longer period of years than now contemplated.

9.~ The principle to be accepted that advantageous discounting provisions will be offered to Germany as an incentive to discharge portions of her capital obligation through the raising of loans.

10.~ The governments concerned to agree to introduce measures looking to the repeal of differential tariffs which have been erected against German goods.

The League of Nations is the only proper instrument at hand for conducting the investigation. It would be a mistake if the inquiry were so conceived as merely to prolong and intensify the controversy of the past three years. Its purposes should be to give confidence to the French and German people, to give some understanding of the situation to the American people and, finally, to bring out some real facts on the most difficult problem with which man has ever been faced. No hectic conference, summoned without adequate preparation and dished up on the world's breakfast table every day for a month or two, would serve any of these purposes. Europe has suffered a plague of such conferences already.

The common people of France and Germany should not be led to believe that any magic formula can be devised which will solve the reparation problem. They should be given confidence that their interests are in proper hands and then discouraged from thinking about the investigation and encouraged to get back to the healing pursuits of peace. No financial report will ever solve the problem of the debts of Europe, though it will help. While it is in the making, Europe, through facing its obligations and thinking of its daily work will, let us hope, get onto the only real road to recovery.

So far as the United States is concerned, the investigation must be made to serve the purpose of creating a proper understanding of what America might do to help a Europe which will be helping itself. Facts are needed. The United States has had its fill of abstract argument and abuse of France. The campaign in the Manchester Guardian for the "moral isolation" of our late Ally accomplishes nothing. American sympathy with France is not so easily to be alienated. Moreover, the raising of a moral issue by the Manchester free traders may be viewed with reserve. Manchester was the headquarters of a violent agitation of a similar sort during our Civil War. At that time the issue was the moral obliquity of the North in interfering with the raw material supply of the Lancashire cotton mills.

The British attitude towards the proposed plan might be expected to depend on the judgment formed as to its possibilities for stabilizing conditions on the Continent and for bringing the United States into the settlement. In the minds of many Englishmen, however, there is another vitally important consideration. It is maintained by the economists of Manchester and Cambridge Universitv that if the German export industry is stimulated for the purpose of paying reparations, German competition on the world market will be a menace to English trade and industry.[xv] The serious depression in England has made it inevitable that reasoning of this kind would obtain a wide hearing, although voices have not been lacking to suggest that what British industry needs is peace--peace now--that future competition with Germany will take care of itself, that British goods will always sell on their quality and on the reputation of British manufacturers and merchants for square dealing.

It is evident that if the foregoing competition argument of what might be called "the Manchester school" were accepted by the British people and carried to its logical conclusion, substantial restitution by Germany would be barred out, unless France were able to collect the claim by herself.

The influence of writers on economic subjects in England is known to be enormous. In all fairness, then, let us ask whether there is not here a legitimate reason for grave disquietude in the minds of the French as to the meaning of the reparation deadlock of the past three years. Back of the argument that Germany can never pay, back of the argument for reduction of the debt as a practical means of getting reparations, is there something that may have driven the French into the Ruhr--that something being the English domestic bogie of a strong commercial Germany? If that bogie is as real to the English people as it is to the economists, the solidarity of the Entente Cordiale is seriously threatened. Why has the question of security, despite a decisive victory, recently attained such importance in the minds of the French? Perhaps they argue that future military support, if necessary to their national existence, would not be easier to obtain than the moral support which they have looked for in collecting thir reparation claim, and which they do not feel they have had. When the British Government in January formally adopted their debt reduction thesis, the Temps gave expression to French opinion in these words: "The whole equilibrium of Europe is at stake. The Allied peoples on the Continent can no longer count on anything but their own strength and their own policy to safeguard their prosperity, their security and their independence. Let them see to the future."

[i]The British proposal also provided for a net reduction of the French debt to Great Britain by about 2 billion dollars, or $50 percapita.

[ii]Figures in this section are taken from estimates of national incomes appearing in a paper by the leading authority on the subject, Sir Josiah Stamp, in Journal of Royal Statistical Society, London, July, 1919.

[iii]"France, whining about devastated districts which are easily repaired," J. M. Keynes, A Revision of the Treaty, p. 186.

[iv]Population figures used for all debt, taxation and income calculations are official figures published by the League of Nations in 1920, as follows: Post-War (1920 figures)--France, 38,500,000 (including Alsace-Lorraine, 1,800,000); Germany, 60,800,000; United Kingdom, 47,000,000. Pre-War (1913)--France, 39,750,000; Germany, 67,500,000 (including a population of about 5,000,000 in Alsace-Lorraine, Schleswig, Upper Silesia, since transferred); United Kingdom, 46,000,000.

Dr. Stamp rates Helfferich's estimate of pre-war income as Grade I, i.e., not likely to be inaccurate to a greater extent than 10 per cent, and Pupin's estimate as Grade II, i.e., not likely to be inaccurate to a greater extent than 20 per cent.

Dr. Stamp's estimate of British 1913-14 income (11.25 billion dollars) works out at $243 percapita (£50 pre-war). Dr. King's estimate of U. S. 1910 income works out at $364 percapita.



  Millions of Dollars
Loss of human productiveness (pensions, 5 billion marks) 1,250
Income from foreign investments 375
General loss of productiveness 200

Mr. Keynes' figure for foreign investments was contained in one of 500 million which included ships. Prof. E. M. Patterson (Annals of the American Academy of Political and Social Science, Nov., 1922) estimates pre-war income from shipping at 125 million and income from foreign investments at 375 million. In calculating losses, this figure probably should be considerably reduced on account of new investments.

[vi]Figures assembled from various sources, including "Encyclopaedia Britannica," League of Nations Monthly Bulletin of Statistics, and German, British, French, and other authorities writing in the 7th Reconstruction Number (September, 1922) of the Manchester Guardian. Pre-war price of coal taken at $2.80; ore at $1.25; pig iron at $19.00; ingot steel at $20.00; rolled steel at say $23.00.

[vii]It is not intended to suggest that Upper Silesian coal was used in the production of Lorraine pig iron, but in considering the German export position as a whole the effect is the same, subject to differences in price between Upper Silesian and Westphalian coal.

[viii]For the next six years, however, Germany will presumably have to import coal to replace deliveries of Westphalian coal and coke which she is required by the Treaty to make on reparation account.

Over half the Upper Silesian coal was consumed on the spot. Poland appears to be in no position, either legally or practically, to prevent the remainder going to Germany as required. Legally, its exportation to Germany is to be permitted for fifteen years under the terms of the plebiscite award. Practically, Poland cannot take the coal, on account of transport difficulties (see article by Judge Von Stoephasius, of Upper Silesia, in Manchester Guardian, 7th Reconstruction No.).

[ix]In Germany part of this burden is indirect, as a considerable portion of the debt is not held by the public, but by the Reichsbank. Since currency notes are issued against it, however, the effect on the public is the same.

[x]Debt figures used in the tables have been assembled from information appearing in "French Public Finance," published by the Bankers Trust Company, New York (1922) and from the Report on the 1923 Budget Bill, French Chamber of Deputies (1922). As the German fiscal year ends March 31, three-quarters of the annual debt reported as incurred at the end of the fiscal year has been carried back one year and the index number of such previous year used. During the war only wholesale index numbers were available. An example of the method of calculating the rates of exchange on a price index basis is as follows: The French 1916 index number was 188. This divided into .193 (par of exchange) gives .103, the rate used.

[xi]Tax figures given include national but not local taxes. The figures are tax collections, not assessments.

For the year 1920 the gross government revenue of Germany, as estimated by the League of Nations, was 687 marks per head, which at an average price index of 1,150 was 60 pre-war marks, or 91/2 of pre-war income. What portion of this represented taxation was not stated. In 1921 German tax collections were about 76.8 billion marks, or 1,263 per head. At a price index of 1,480 this is equivalent to 85 pre-war marks, or 13.6 per cent on income.

French taxation in 1920, as estimated by the League of Nations, was 475 francs per head. At an index number of 438 this was equivalent to 108 pre-war francs, or 11 per cent of income. In 1921 French tax collections of 19.6 billion francs came to 509 francs per head. At an index number of 327 this was 156 pre-war francs, or 16 per cent of pre-war income. This remarkable showing for 1920 and 1921, considering the impairment of tax capacity in the devastated departments in 1919-20, has already been commented on.

National taxation in the United States in 1920, as estimated by the League of Nations, was $54 per head, or on a pre-war basis of values about $25, i.e., 7 per cent of estimated income of $364. It should be noted that the proportion of local to total taxation in the United States is higher than in Europe. A recent estimate in the Budget (New York) places the total cost of government in the United States in 1921 at 81/2 billion dollars, of which 4 billion was cost of state, municipal and county governments. This is $77 per head, or $47 on a pre-war basis. This is a burden of 13 per cent on income.

The burden of income might be expressed the other way round, viz., the French 1922 income, before allowing for impairments due to the war, could be calculated at 960 francs (pre-war estimate) times 3.12 (1922 index) equals 2,995 francs, of which 550 francs paid in taxes is 18.3 per cent.

1922 price index numbers from League of Nations Monthly Bulletin of Statistics, January, 1923:


  Wholesale Retail  
  Prices (Cost of Living) Average
France 327 296 312
Great Britain 159 181 170
Germany 34,184 15,027 24,606

Pre-war francs at $0.193; pre-war sterling $4.8665; pre-war marks $0.238.

[xii]The figure of 81/2 billion dollars calculated on a 4 per cent basis is for illustration only. The debt is supposed to carry 5 per cent interest and 1 per cent for amortization.

[xiii]Retail, quarter ending December, 1920, 450; quarter ending March, 1921, 338. Wholesale, January, 1921, 407.

[xiv]Mr. Keynes' statements appeared in "A Revision of the Treaty" (1922). He expressed himself in the following terms:

"When we look at northern France we see what honest Frenchmen can accomplish. But when we turn to the money claims based on this, we are back in the atmosphere of Parisian finance--so grasping, faithless and extravagantly unveracious as to defeat in the end its own objects . . . (Here followed six pages of criticisms based on the figure of 58 billions) . . . These arguments are not exact, but they are sufficiently so to demonstrate that the claim sent in to the Reparation Commission is untenable. I believe that it is at least four times the truth. But it is possible that I have overlooked some items of claim, and it is better in discussions of this kind to leave a wide margin for possible error. I assert, therefore, that on the average the claim is not less than two or three times the truth."

These are plain words. The writer must admit that when he read them he understood them to mean that the French nation had attempted to perpetrate a gigantic fraud; and this charge seemed to be supported by the details given. Upon re-reading the chapter, however, he found the following reservation in a footnote three pages before the remark about the honest Frenchmen: "M. Loucheur's statement to the French Chamber implied that this rate of conversion (2.20) was applicable to material damage as well as to pensions, and I have assumed this in what follows, but precise official information is lacking."

Turning to the Journal Officiel and The Temps in which M. Loucheur's speech was reported verbatim, the writer finds nothing to lend color to this assumption of Mr. Keynes. The Temps of May 22, 1921, reports that M. Loucheur, in the course of a reply to criticisms regarding the London ultimatum notifying the debt to Germany, made the following remarks pertinent to the question of exchange: " In connection with the pension problem, the Reparation Commission . . . decided that the gold mark which at present is worth 3 francs 75 centimes paper, would be calculated at an average rate of 2 francs 20 centimes paper. Convinced of the necessity of fixing an average rate, it made a considerable reduction from the current rate of exchange. The rate of 2.20 was a disillusionment to me; I had thought that the gold mark should be calculated at 1.50 or 1.75. For reparations in kind the Commission took the coefficient for the depreciation of gold and applied it to the 1914 value of real estate . . . . If an exchange rate of 2.20 is taken for pensions and the 1914 value is taken for reparations the difference between the figure fixed by the agreement of Paris and that of London is by no means so large as has been alleged."

It is clear from this that the rate of 2.20 was applicable to pensions alone and that reparation for property damage was calculated at pre-war value. Moreover, in the same debate it was stated by M. Forgeot, Deputy from the Marne, that the total property damage had been estimated at 35 billion pre-war francs, and in the leading article of the same issue of the Temps the editor stated that he had under his eyes a table showing the exact figure of 34,661 million gold francs. Furthermore, in the Chamber of Deputies Document No. 2312 of March 11, 1921, M. de Lasteyrie showed the amounts actually claimed in gold under the various categories and gave a resumé of the methods of valuation employed. And finally, in the appendix of Mr. Keynes' book itself, appears a copy of the Reparation Commission communiqué, in which it is stated that the interest charge on the property losses was calculated on a round sum of 33 billion francs.

In view of his erroneous premise, Mr. Keynes' detailed criticisms of the French figures do not require answer. Attention might be drawn, however, to one point in connection with house damages, to which he devoted considerable space. In calculating the amount claimed per house destroyed, Mr. Keynes divided the total amount claimed for residences, farm buildings and public buildings by the number of residences alone, swelling the resulting figure per house by 40 per cent from this cause alone. Mr. Keynes stated that "the French Government's claim for damage to houses was . . . an average claim of $9,100 per house." The real figure was $2,300. The claim for houses was one of the principal items making up what Mr. Keynes referred to as "a vast, indeed a fantastic, exaggeration beyond anything which it would be possible to justify under cross-examination."

This seems to dispose of Mr. Keynes' remarks on the question of the general magnitude of the French claim. He asserts that "the claim is not less than two or three times the truth." As a matter of fact he has represented it as 21/3 times larger than it is. What, then, is Mr. Keynes' quarrel with the claim?

There is another aspect of the matter, however, that comes to mind in reading Mr. Keynes' strictures on the French. This is the implication that the claim must have been prepared in such an obscure fashion as to make any doubtful points of valuation included in it an attempt at fraud rather than an open presentation of a technical question for settlement. The French claim was a printed report of 1,100 pages. The claim is not a public document, but it is not impossible for serious students of the reparation question to obtain access to it. Those who study it will be satisfied that the claim is a complete exposition of a remarkably thorough and scientific work of valuation.

[xv]"If the volume of such exports to overseas or European destinations is very largely increased the effect on British export trade must be correspondingly serious."--J. M. Keynes, "The Economic Consequences of the Peace." p. 178. "Germany's exports are so preponderantly competitive with ours that if her exports are forcibly stimulated it is certain that she will have to sell goods against us . . . . To compel Germany to pay a large indemnity is the same thing as to compel her to expand . . . (her) exports to a greater extent than she would do otherwise. The only way in which she can effect this expansion is by offering the goods at a lower price than that at which other countries care to offer them. . . . The remedy lies . . . in reducing the aggregate amount (of reparations) to a reasonable figure . . . . We can secure from her moderate payments . . . without stimulating her exports as a whole to a greater activity than they would enjoy otherwise. This is the correct course for Great Britain from the standpoint of her own self-interest only."--J. M. Keynes, "A Revision of the Treaty," pp. 155 to 158.

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