THE reparations controversy goes from bad to worse. "We are well out of it," one often hears it said. In one view--a short-sighted view--we are, perhaps, comfortably out of it. But are we rightly and honorably out of it? I do not see how, in common honesty, thoughtful Americans can hold that we are.

By entering the war we created and accepted responsibilities we have not yet discharged. Those responsibilities are to the peoples whose defeat our participation secured no less than to those with whom we were allied as victors. Just when it seemed that a German victory was to create a new hegemony in Europe, we threw our weight on the other side and made another outcome certain. Germany was left disarmed within diminished boundaries. France, freed of immediate danger, found herself just disappointingly and tantalizingly short of the position all her history had taught her to believe necessary to her permanent safety. The peoples of Eastern Europe were left to the difficult and precarious task of settling themselves down into a new political framework. Europe and its problems are in part our handiwork. Disowning them does not alter the fact.

If we entered the war merely to protect our own interests, we went farther than those interests demanded and meddled with matters which were not our concern. If we entered it to prevent what we thought to be an intolerable outcome, we are responsible for the other outcome we helped to secure. Doubtless if we had kept our troops at home Europe today would have been no less troubled than in fact it is. In all probability the outlook toward the future would have been darker. If we had done nothing more than scrupulously guard our own interests, Europe's problems, we may well believe, would have been even more desperate than they are. We merely helped to shape those problems--to determine just what they should be. Responsibilities, however, are for actual events, not for abstract or hypothetical states of affairs. For a little while we exerted a tremendous pressure upon the course of events in Europe. Then, satisfied that the European balance had been tipped definitely in one direction rather than the other, we left Europe to right herself as best she could.

Some will say that by agreeing to a treaty of peace we could not or would not accept, the states of Europe have released us from our responsibilities. Three different circumstances make it impossible to attach any weight to that point. First, Germany did not sign the treaty by choice. Her unwilling assent does not free us of our responsibilities to her. Our separate treaty, in which we saved our own interests, does not lessen the uncertainties of the position in Europe to which the war reduced her. Second, through our President, whom the Constitution makes our agent in such matters, we participated in the drafting of the treaty. That at the time we had a Senate which would not support the President, or a President who did not command the support of the Senate, is attributable to a peculiarity of our system of government--a peculiarity for which the states of Europe can hardly be held accountable. Third, the present economic problems of Europe, in their larger aspects, were created, not by the Treaty of Versailles, but by the war. The treaty, it is true, has not helped to lessen or simplify those problems. It has, beyond doubt, made some of them more difficult to solve. But it has done far less to aggravate them than the unsound financial policies of the separate states have done.

It is necessary, of course, to distinguish the "effects of the treaty" from the effects of the unwise decisions subsequently made by the Allied Governments "under the treaty." Save perhaps for the invasion of the Ruhr, all the various steps thus far taken in determining and collecting reparations payments have probably been within the terms of the treaty. Nevertheless they have been new decisions, new acts. A wholly different course of action, at once more moderate and more productive, would have been equally in conformity with the treaty. Those who have been clamoring for a revision of the Treaty of Versailles have really wanted a change of heart, or at least a change of policy, on the part of the Allied Governments. By obscuring this elementary but important distinction they have injured their own cause.

There is a partial excuse for the harsh and unproductive way in which reparation problems have been handled. The treaty was framed on the assumption that the United States would accept it and would help to administer it. It was on that premise that the other states represented at Paris agreed to its provisions. Our defection virtually revised the treaty for the worse. In two different ways it created a new situation not contemplated in the treaty.

In the first place, the treaty did not settle the reparations problem. Its provisions are tentative and indeterminate. Large and elastic powers are entrusted to the Reparations Commission. Power to modify the reparations clauses, and, in particular, to reduce the minimum figure set by the treaty, were given to the governments of the seven powers that were to be represented on the Reparations Commission. Nobody pretends that these indefinite arrangements were the best conceivable disposition of the matter. I believe that under all the conditions they came close to being the best disposition practicable. They held possibilities of evil and possibilities--probably somewhat larger--of good. At best these arrangements were bound to encounter serious difficulties, for they had to do with matters on which the Allies could reach no real agreement after months of discussion at Paris. The non-participation of the United States has made them well-nigh unworkable. Wise or unwise, our opinions, if we had remained in a position to assert them, would have had weight. The problems of reparations would not have degenerated into a series of quarrels between France and England. England, if she could have been forewarned of our withdrawal, might well have hesitated to commit herself to so unpromising an enterprise. A definite agreement at Paris--even one impossible from the outset--might have been preferable.

It is only reasonable to assume, moreover, that our influence would have counted toward sanity and moderation. This does not mean that we can claim any superior measure of wisdom or tolerance, but merely that we should have had no large immediate interests of our own at stake. For that reason our vision might have been clearer and our judgment more impartial. At the Paris Conference President Wilson and his colleagues strove, with partial success, to secure reparations provisions that would be both just and practicable. There is no reason to expect that that general attitude would have changed. It is safe to say that neither the French nor the British expected it to change.

There is another way in which our non-participation has increased the difficulty of the reparations settlement. It has changed the character of the problem itself, giving it a new admixture of political and military elements. The world knows with what tenacity France, in 1919, held that a military frontier at the Rhine was necessary to her safety, and with what reluctance she gave up that ambition. In exchange she got the general guarantees of the League of Nations and the arrangement by which Great Britain and the United States were to come to her help in case of an unprovoked attack by Germany. The League is weakened by our refusal to adhere to it, and we have rejected the proposed tripartite agreement. France finds that she has made a bad bargain. Or rather, because we have failed to honor our obligations, she may feel that she has made no bargain at all. Casting about for some means of regaining that liberty of action by which she can, in effect, reopen the whole question, she finds only the reparations clauses and their sanctions.

It would be unprofitable to try to find a single reasoned motive in recent developments of French policy with respect to reparations. Generally motives are mixed. Dissatisfaction with a present status may prompt action, even when no definite objective is clearly seen. One thing, however, is fairly certain, and that is that the French army did not go into the Ruhr solely in quest of reparations. French economic policy has features for which it is hard to find a rational explanation, but it is impossible to imagine that the members of the French Government really expected that coal could be had more cheaply and in larger quantities by sending soldiers to get it, or that cutting off Germany's richest industrial district would increase either her capacity or her willingness to pay. With the United States in the reparations councils, and with the promised guarantees made effective, France would not have had even a colorable pretext for invading the Ruhr.

During the past three years the Allied Governments and Germany together have managed to make a pretty complete fiasco of reparations. Germany has been derelict in that she has done little or nothing to put her own domestic finances in order--something that must be accomplished before she can make large foreign payments with any regularity. This is a matter of much larger consequence than her "voluntary defaults" under the terms of the treaty. The Allied Governments have been at fault in that they have done much to embarrass and nothing to help the efforts of the German Government to strengthen its domestic political and financial position. The worst single feature in the policy of Germany's creditors has been the French insistence upon the absurd and vicious system of "productive guarantees"--arrangements that produce little and guarantee nothing. It does not appear that until lately the Allied Governments had given any serious consideration to what is, after all, their most important problem, namely, the methods by which maximum payments can be secured from Germany with minimum friction and with a minimum of disturbing effects upon trade and finance.

Before the reparations clauses of the Treaty of Versailles were drafted various estimates were made of the amount Germany would be able to pay. Estimates that were based on her wealth, her total national income, or her taxable capacity may be put to one side, as having no practical importance--for a country cannot export its land, its income, or its taxes. The only estimates that can be given any weight were based on the premise that the limits were set by the means of payment that would be available. Assuming that the payments would be continued for a period, at the most, of not much more than thirty years, the estimates of the present worth or capital value of the maximum payments that Germany could be expected to make ran from 60,000,000,000 gold marks (I know of no careful estimate that gave a larger sum) down to a little more than half that figure.

The differences between the maximum and minimum estimates did not turn upon matters of economic fact. They reflected, in the main, different degrees of optimism respecting the extent to which Germany would be assisted, or permitted, to make the largest payments possible. The policy of the Allied Governments during the past three years has been such as to give comfort to the pessimists. What in 1919 was a possible maximum is now impossible. It must be written down by a third or even a half. Unless there is a definite change in the administration of reparations, and unless the expenses of maintaining the armies of occupation are greatly reduced, the minimum estimates made in 1919 will prove to have been too large.

In most of the estimates a distinction was made between the immediate payments that might be made within the first few years and the later payments that depended upon Germany's ability to send or sell to other countries more than she bought from them. The estimates put the immediate payments at between 12,000,000,000 and 20,000,000,000 gold marks. Such things as the transfer of the German merchant marine, of railway rolling stock, of the Saar mines, of public property in ceded territories, and immediate deliveries in kind were included in the estimates. So far as such items were concerned most of the estimates have proved to be somewhat too large, partly because the credit finally allowed on account of merchant ships and other items was smaller than was indicated by prices prevailing where the estimates were made, and partly because the Allies refused to credit the reparations account with certain items--notably the German state railways in Alsace-Lorraine--which had been allowed for in some of the estimates.

At once the largest and the most uncertain item in the estimate of Germany's cash assets was the amount that might be realized from the sale of the foreign holdings of German citizens. The total value of such holdings before the war was possibly as much as 30,000,000,000 gold marks--although any estimate is hardly better than a guess. Some of these holdings were sold during the war, some were sequestered in enemy countries and assigned by the treaty to the settlement of other claims, some were small individual properties, and some were in Russia. Foreign holdings at the end of the war in the form of negotiable securities amounted probably to not more than 12,000,000,000 gold marks, and not more than half, or at the most three-fifths, of these were such as could be sold in the international market within a reasonable period of time without heavy loss. Shrunken though these assets were, the failure of the Allied Governments to try to harvest what they could of them seems inexplicable, although in this particular--as in others--the major portion of the blame must be put upon the weakness of Germany's financial policy. The amazing success of the operations attending France's payment of the indemnity of 5,000,000,000 francs in and after 1871 rested very largely upon her ability to induce her citizens to give up their holdings of foreign securities and to accept rentes instead. But, it will be remembered, French financial policy at that time was in the able hands of Thiers and Léon Say. In the present juncture, it is clear, France has neither sought nor given weight to the opinions of her competent economists. In Germany, such opinions may have been sought, but it does not appear that they have been followed.

The prospects for such payments as would arise out of a favorable balance of trade are in even worse state. Germany's financial policy has been such as to delay any wholesome and genuine recovery of export trade, while the creditor nations have done much to hinder such a recovery. To pay reparations Germany must export more than she did before the war, or import less, or both. During the past three years the volume of her foreign trade has been no more than two-fifths of what it was before the war. The increasing price of foreign exchange has from time to time given a temporary fillip to Germany's export industries, although it is far from certain that the total value of her exports would not have been greater if the depreciation of the mark had been less. But imports have consistently exceeded exports. German industries, even the export industries, are largely dependent on imported raw materials. Foods have continued to be imported. In some measure the depreciation of the mark has itself stimulated imports, by prompting importers to seek profits from the probable further rise of foreign exchange and of the prices of imported goods.

Despite the loss of the profits on her former carrying trade, the "invisible" balance of payments, reparations aside, has undoubtedly been in Germany's favor. The disparity between the amount of foreign currency that would buy a mark and what a mark would buy within Germany has led to large investments in German property on the part of capitalists in Holland and other West-European countries. (The gold the United States has been receiving from those countries has probably come, in considerable part, as an indirect result of such operations.) Germans, too, have been exporting capital, but in smaller amounts.

It is out of this favorable balance of imports of capital, no doubt, that the German Government has been able to rake together the small amount of gold exchange it has been able to turn over to its creditors. But Germany and her creditors have allowed larger possible payments of the same sort to slip through their fingers. There has been no attempt at an efficient control of the foreign-exchange market in Germany.[i] Generally the best thing governments can do in such a situation is to get out of the way of the recovery of private business and financial enterprise. But Germany's problem cannot be solved by laissez-faire methods alone. For her a favorable balance of international payments is an artificial thing and must be created by artificial means. Restricting commodity imports alone, as by higher customs duties, will not accomplish the purpose. Invisible as well as visible imports must be dealt with. The German Government, as a large buyer of foreign exchange, must protect itself in some way against the competition of those of its citizens who want to export capital as well as against those who want to import goods.

The simplest and probably the most efficient method is to put the foreign-exchange market under strict supervision. I do not mean that the government should attempt to fix the rate at which foreign bills should be bought and sold, but that in some way, as by establishing a central market or by an efficient system of licensing, German buyers of foreign bills should be compelled to disclose their purposes and permit them to be passed upon. The export of German capital could in this manner be greatly decreased. The measures already taken to secure that end affect only relatively unimportant aspects of the problem. It might be difficult to curtail unnecessary imports of "luxury goods" drastically without incurring the opposition of France or of other countries which produce such goods. But it ought to be possible to cut down in some degree unnecessary imports of whatever sort.

As matters have gone, foreign funds out of which reparation payments might have been made have eluded Germany and her creditors, and the German Government has had to pay a ruinously high price for the funds she has been able to secure. The full price paid is not revealed by the quotations of foreign-exchange rates. The rest of it one will find in the wrecking of the finances and the monetary system of the country. The foreign-exchange operations of the government have been an important cause--not the only cause--of the downfall of the mark. From time to time the German Government, supplied with new marks of its own making, has come into the market as a buyer of foreign bills. To get any considerable part of the small and inelastic supply away from private buyers the price had to be bid up to an absurd figure--quite out of line with the general domestic price level. The prices of imported and exportable goods naturally followed the rise of foreign exchange, and--since foreign and domestic markets are connected in various ways--domestic prices also were bound to increase. The rise of foreign-exchange rates and of prices in general has been out of all proportion to the increase in the quantity of money in circulation. During the past few years money has not been "redundant" in Germany. It has been scarce. The output of marks, enormous as it has been, has not kept up with the rising price level, which in turn has lagged behind the increase of foreign-exchange rates. It is impossible for Germany to stabilize her currency until she can create a favorable balance of foreign payments in some other way than by bidding up the price of foreign bills.

Furthermore, as everybody knows, the depreciation of the mark has multiplied the difficulties of Germany's budget. A depreciating currency makes most sorts of taxes unproductive. And as taxes become unproductive larger issues of paper money are needed to make up the deficit in the budget. At best German taxation has been inadequate. Comparisons of the weight of taxation in Germany and in France are untrustworthy, by reason of the rapid changes of prices and incomes. Nor is there any particular reason why German taxes should not be considerably heavier than French--and that quite apart from the fact that, in proportion to the magnitude of her own financial problems, France is distinctly undertaxed. It is certain that taxes have been very much lighter in Germany than in either Great Britain or the United States. But in Germany there has been in addition a heavy burden of disguised taxation, unequal and unjust in its incidence, in the form of the general downward trend of the purchasing power of money incomes.

Germany, in short, has not done all that she could, or even what might reasonably have been expected of her. Through weakness or the lack of either courage or good-will, she has handicapped herself by her loose management of her finances and of her foreign-exchange operations. It may be, as is claimed in France, that German policy has changed for the worse since the days of Wirth and Rathenau. But the policies of the Allied Governments, and particularly of France, have been equally at fault. Preoccupied with non-productive sanctions, sacrificing ultimate for immediate results, proceeding according to no definite economic program, the Allies have permitted and in a measure compelled Germany to do far less than what, under a wiser régime, she might have done. It is true that they have adjured her to balance her budget. But they have not relaxed the persistent pressure that makes the stabilization of her currency--a necessary preliminary--impossible.

From this distance the most serious error in Great Britain's dealings with France appears to have been Mr. Lloyd George's failure to stand firmly by the provisions of the Treaty of Versailles until such time as experience had shown those provisions to be unworkable. Germany's minimum liability was fixed by the treaty at 60,000,000,000 gold marks--the largest figure reached by any of the more careful estimates. Further obligations were to be imposed on Germany when, and only when, the Reparations Commission was satisfied of Germany's ability to meet them. But from the very first the obvious intent of the treaty seems to have been disregarded. Time was wasted in a fruitless attempt to get an agreement with Germany upon a definite sum. From the beginning the figures suggested by the representatives of the Allied Governments were higher than the minimum named in the treaty. Such was the case at Boulogne and Brussels in 1920 and at Paris and London in 1921. Finally, by decision of the Reparations Commission, announced on April 27, 1921, Germany's total indebtedness was fixed at 132,000,000,000 gold marks. This in itself was less important than the further decision that Germany should pay 2,000,000,000 gold marks annually, plus an amount equal to 26 per cent of her exports. On any basis these are much larger figures than the minimum annual payments contemplated by the treaty.

Those, time has shown, were too large--much too large when the heavy payments demanded for the upkeep of the armies of occupation were added to them. Germany could not have met them. Nevertheless, I think, departing from them postponed a permanent solution of the reparations problem by several years. At Paris in 1919 a good deal was accomplished in securing recognition, reluctant though it was, of the fundamental limiting facts of the case. That work was undone, and the way was opened for the consolidation of the French political situation around nothing sounder than economic fantasies. Here again our non-participation has cost the world heavily. Assuming merely that, had we not withdrawn, the general position taken by the American representatives at Paris would have been maintained, it is distinctly probable that the past three years would have been years of progress instead of retrogression in the handling of the reparations problem.

Before the end of 1921 it became clear that the program agreed upon earlier would break down. Mr. Lloyd George began to move definitely in the direction of securing a revised and more moderate program. But when it became evident that M. Briand was willing to go some little distance with Mr. Lloyd George, M. Poincaré was put at the head of the French Government. Various palliatives--postponements and temporary reductions of payments and deliveries on account of reparations--saved the situation until late in the year 1922. But with the accession of the Bonar Law government the British attitude became more decided if not more moderate. The French attitude stiffened. Then came the break at Paris, the decision by a majority of the Reparations Commission that Germany had voluntarily defaulted in the deliveries required of her, and the seizure of the Ruhr.

Any careful study of the opposed proposals upon which France and Great Britain split at Paris will show that a final settlement of the problem of reparations is exceedingly difficult. The divergence expressed by the two documents is radical and complete. The differences are not confined to specific proposals. The two interpretations of the nature of the problem itself are as far apart as the poles.

With respect to the interallied debt, France would either cancel all of it now or postpone consideration of the matter until after reparations had been secured. Great Britain, as creditor, would give a receipt in full in exchange for an assignment to her by Italy of 1,500,000,000 gold marks of reparations credits, and a similar assignment of about 2,000,000,000 gold marks by France--the latter item being the amount of France's claim on account of Belgium's war debt. Despite the fact that these particular differences figured largely in the discussions, I doubt that in themselves they were unsurmountable obstacles to an agreement.

Great Britain proposed a moratorium of four years during which Germany would have to make no cash payments, but would have to continue deliveries in kind, although in reduced quantities. Germany would be obligated to stabilize her currency and balance her budget during the first part of this period. France proposed a partial moratorium of not more than two years. The moratorium would really be nominal. Deliveries in kind would continue. During the moratorium period an allied commission completely under French control would collect taxes on coal production and on exports from the occupied region, including the Ruhr. These taxes would be collected so far as possible in foreign currencies, and foreign bills of exchange originating in the region would be appropriated. With certain smaller items, these sources or "guarantees" were expected to produce 1,000,000,000 gold marks. They would be enough in themselves, very likely, to make the difference between the success or failure of the attempts Germany might make to put her finances in order.

The most important difference between the two plans, however, was with respect to the nature and degree of the surveillance to be exercised over Germany's economic life. The British plan was formulated on the premise that Germany should herself be made responsible, and that she should be left almost wholly free to find her own ways and means of making payments. It would do away with the so-called guarantees, and in their stead establish at Berlin an advisory Foreign Finance Council of six members, including representatives of neutral states (one an American) with the German Finance Minister as chairman and able to cast a deciding vote. In general, the British plan carefully avoids infringements of German sovereignty. The French plan would retain, strengthen, and increase the "guarantees." It gives the Committee on Guarantees not merely inquisitorial duties, but power also over the German budget and the Reichsbank. The British plan, in short, aims to enable Germany to make larger payments and to make them more easily and more willingly. The French plan leaves nothing to the uncertainties of the future. Its aim appears to be that not a mark anywhere now available shall be overlooked.

I have reviewed these two plans because they make perfectly clear the two diverging roads that are open in the treatment of reparations problems. There is no middle road. The governments that have tried to find one have failed. The issue is not one which invites the United States, or any other country, to play the rôle of mediator or arbiter. Mediation succeeds when the parties to a controversy are already close to an agreement, or when their demands really overlap, so that all that is left is a matter of bargaining. Arbitration always means compromise. There was a time when temporizing compromises with respect to reparations seemed worth trying. But, for reasons I have tried to suggest, they led finally in the wrong direction. Expediency no longer has any part in the problem. It has become a straightforward question of right and wrong.

We might, in accordance with a suggestion Secretary Hughes has sponsored, participate in an inquiry into Germany's capacity to pay. It is possible that some good would be done. Public opinion might back an impartial finding. But, on the whole, it would be an enterprise of minor importance. The total amount to be collected from Germany is not a matter on which Great Britain and France now disagree, even though the British plan submitted at Paris was more elastic than the French with respect to the distribution of the payments in successive years. The capital sum proposed in both plans is 50,000,000,000 gold marks. This is undoubtedly more than Germany can pay. But just now the question of the moratorium and the guarantees are vastly more important. If those questions can be settled, the final determination of the total amount to be paid can afford to wait.

Participation in a conference on international economic problems might possibly accomplish more. There is also a chance that it might accomplish little or nothing. Such a conference would be unprofitable if its discussions were restricted to technical questions of ways and means. The world's largest economic problems are essentially political problems. They are bound up with national policies and national attitudes. If anything really valuable is to be accomplished by an international economic conference each participant would have to be prepared to give up something as well as to advise others to give up something, to assume responsibilities as well as to try to allocate them. Moreover, to achieve results, one conference would hardly be sufficient. The adjustments to be made are difficult and complex. Sustained pressure in a rightly-chosen direction will be needed. A series of conferences or, better yet, a continuing participation in the world's economic councils, would accomplish more.

We can hardly expect to make our influence felt effectively in the settlement of European economic problems unless we are prepared to assume responsibilities other than those of an advisor or impartial referee. Even the cancellation of the debts European nations owe us would not, I imagine, be sufficient to secure for us any real influence upon the course of events. Outside of England those debts do not seem to have given rise to any really serious concern.

There is one way in which, more surely than in any other, we can help to put an end to Europe's uncertainties, so that she can turn her energies into her economic recovery--to her profit and ours. That is by taking up again the responsibilities we laid down in 1919. What Europe needs more than friendly counsel or even than loans is a lessening of her burden of fear and distrust.

[i] This point is ably developed by Professor B. Nogaro, of the Faculty of Law of the University of Paris, in his recent book, "Réparations, dettes interalliés, et restauration monétaire" (Paris, 1922).

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  • ALLYN A. YOUNG, Professor of Economics, Harvard, Director of the Bureau of Research of the War Trade Board, 1917-1918, Chief of the Division of Economics and Statistics on the American Delegation at the Paris Conference
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