THE new reparation plan proposed by the Dawes Committee on April 9, 1924, and accepted by the Allied and German Governments on August 30, 1924, has now been in operation for over a year. This period is sufficiently long to warrant an examination of how the new plan has worked. In undertaking this task, one must distinguish between its political, technical, and economic aspects.

Politically, the new plan has been a complete success. For fully three years, from the fall of 1921 to the fall of 1924, France's main grievance against Germany had been that Germany did not fulfil her reparation obligations. This reproach has now completely ceased. While there are still many Frenchmen who complain that Germany pays less than she might, there is not to be found a Frenchman who asserts that Germany pays less than she has to pay. In Germany, on the other hand, the feeling of restlessness which since the armistice had harassed even those who wished that Germany should pay France as much as possible, has given way to a feeling of security so far as foreign financial claims are concerned. Moreover, the wide-spread fear that the new reparation plan would interfere with the internal financial sovereignty of the German Government has largely been dispelled.

Technically, the new plan has likewise worked admirably. All payments due from Germany have been put punctually, or even prematurely, into the account opened with the Reichsbank by the Agent General for Reparation Payments. And the Agent General without difficulty or friction has withdrawn from this account the sums necessary to pay the German mine owners, chemical factories, etc. for the deliveries in kind destined for France and Belgium, to pay the German Railway Company for the cost of carrying those goods to the frontier, to pay the occupation armies and the interallied commissions for their cash expenses in Germany, to pay German citizens for what they furnished the foreign troops, to pay the interest on the Dawes loan, and so on. The fact that under the new plan the Agent General has been the only creditor of the German Government in the matter of reparation payments has had a most beneficial effect: it has assured both to German citizens and to foreign Governments a prompt fulfilment of their claims.

Economically, the new plan has worked satisfactorily so far as Germany and certain of the Allies, especially Great Britain, are concerned. The fear -- an unjustified fear, indeed, -- that the reparation payments might financially or economically injure Germany in the very first year has not been realized. Germany had to pay into the account of the Agent General an annuity of altogether 238.1 million dollars (1 billion gold marks). Out of this total, 190.5 millions were secured from the proceeds of the Dawes loan and 47.6 millions from the profits of the German Railway Company. Four-fifths, then, were paid by the foreign subscribers to the German loan and only one-fifth by Germany herself. Of course, it might be that part of the money furnished through the loan was spent by the Agent General in buying German raw materials which, if they had stayed in Germany and been used for manufactures, would have been of more benefit to German industry than they were when exported in crude form; but it might just as well be that part of that money was spent in buying goods which otherwise would not have found a purchaser willing to pay the price granted by the Agent General. Further, the $47,600,000 provided by the German Railway Company was not a big enough amount to affect materially the German economy.

The damage incurred by the debtor was then by no means heavy. But how about the profit to the creditors? In order to answer this question it is necessary to examine a little more closely how the Agent General has disposed of the sums paid into his account with the Reichsbank.

Since the Reparation Commission on October 13, 1924, constituted the service of the Dawes loan a first charge on all payments provided for under the new reparation plan, and since the Transfer Committee on October 31, 1924, recognized the priority of this debt service and gave it an absolute right of remittance, irrespective of the effect upon the exchange, the Agent General had first of all to satisfy the claims of the owners of the Dawes loan bonds. The net proceeds realized by the sale of those bonds amounted to the equivalent of about 190 million dollars. The facevalue of the American portion was $110,000,000, that of all other portions combined £21,720,000, 25,200,000 Swedish crowns, 100,000 Italian lire, and 15,000,000 Swiss franks. The total face-value of all together was $221,500,000 on October 10, 1924, when the agreement for the loan was concluded, a sum which -- mainly on account of the rise of the pound -- rose to $227,700,000 by March 31, 1925. The bonds mature within twenty-five years; they carry interest at the rate of 7 percent. The amortization of the American portion will amount each year to one twenty-fifth of the issue, redemption being by lot at 105 percent and accrued interest. For all the rest an equal annuity is provided for each year, including interest and amortization. The total service of interest and amortization of the American portion for the first year (October 16, 1924 to October 15, 1925) was $12,320,000, a sum which will decrease annually by $308,000 until it reaches $4,928,000 in the twenty-fifth year. The total service of all other portions combined is $10,100,000 (converted on the basis of the quotations of March 31, 1925). The total debt service requires, then, $22,420,000 in the first year and $15,028,000 in the last year. As the debt service started only one and a half months after the new reparation plan went into operation, the Agent General in the first Dawes year spent $18,469,000 on that service. This expense, which absorbed 7.8 percent of the total receipts of the Agent General was, of course, of no profit whatsoever to the Allies.

A second preferred claim which the Agent General has to fulfil before he may start on real reparation payments are, in accordance with the Allied Finance Ministers' Agreement of January 14, 1925, the expenses of administration of the Reparation Commission, the organisations created under the new plan, the Inter-Allied Rhineland High Commission, the Military Commission of Control, and the European Commission of the Danube. Those expenses, which before the establishment of the all-inclusive character of the annuities through the new plan had sometimes been excessive, were, according to the Finance Ministers' Agreement just mentioned, chargeable to the annuities only to a limited extent (in the first year altogether to $6,543,000 at the utmost, and the actual allocations of the Agent General for this purpose in the first year were indeed not more than $6,364,000).

It would be a mistake, however, to suppose that these were the only "overhead expenses" to be disbursed by the Agent General. All the other payments of the Agent General for occupation purposes must also be considered:

Payments (in 1000 dollars) France Great Britain Belgium Total
Reichsmarks to armies of occupation. . 8,102 3,484 870 12,456
Requisitions, damages, furnishings under
  Arts. 6, 8-12 of Rhineland Agreement 18,134 3,700 3,099 24,933
Payments for services rendered by the
  Reichsbahn to armies of occupation
  in the Ruhr 6,302 .... 955 7,257
Exploitation of mines and cokeries by
  the Régie 1,825 .... .... 1,825
------- ------- ------- -------
   Total 34,363 7,184 4,924 46,471

Thus the Agent General spent for the service of the Dawes loan, for the administration of the various commissions, and for other "overhead expenses" $18,469,000 plus $6,364,000 plus $46,471,000, or a total of $71,304,000. These 71.3 millions constitute exactly 30 percent of his total receipts (238.1 millions). He then had at his disposal 166.8 millions for reparation purposes. Up to the close of the first Dawes year he did not actually disburse however, more than 141.5 millions:

Payments (in 1000 dollars) France Great Britain Belgium Italy Others
Reparation recovery acts 5,977 36,964 .... .... ....
Deliveries of coal, coke, lignite 30,622 .... 10,643 8,648 ....
Transport of ditto 12,664 .... 2,831 3,188 ....
Deliveries, dyestuffs. } } } } 907a
Deliveries, pharmaceutical 1,230 1,801 893 2,193 907b
Deliveries, fertilisers 4,682 .... 69 .... ....
Deliveries, miscellaneous 4,932 .... 2,910c 413 10,683d
------- ------ ------- ------- -------
   Total 60,107 38,045 17,346 14,382 11,599
   a Japan. b Serb-Croat-Slovene State. c Including $261,000 for restoration of library of
Louvain. d Serb-Croat-Slovene State $7,156,000; Rumania $1,761,000; Portugal $1,126,000;
Greece $629,000; Poland $10,000.

On August 31, 1925, then, the Agent General had a cash balance of over 25 million dollars. On the other hand there were at this date certain outstanding liabilities on account of various powers (principally under contracts for deliveries in kind and the Reparation Recovery Acts) aggregating over 10 million dollars. In his report of September 10, 1925, the Agent General, Mr. S. Parker Gilbert, asserts that "to find the amount effectively received by any Power during the first year of the operation of the Experts' Plan, there must be added to the payments made on its account the amount of the liabilities indicated above outstanding on its behalf." It will be interesting to compare this "amount effectively received" by each Power with the share to which it was entitled according to the Finance Ministers' Agreement of January 14, 1925, "overhead expenses" being omitted in each case:

Country Received Claim
(in 1000 dollars)
France 67,814 81,955
Great Britain 38,135 39,639
Belgium 18,899 21,269
Italy 15,244 15,854
Serb-Croat-Slovene State 7,424 7,933
United States .... 3,646
Rumania 1,761 1,772
Portugal 1,174 1,188
Japan 907 1,188
Greece 629 634
Poland 10 18
------- -------
   Total 151,997 175,096

The Allies thus have received 23.1 million dollars less for reparation purposes than they should have got. This is due mainly to three causes:

1. According to the Finance Ministers' Agreement, the occupation costs chargeable to the first annuity were limited for France to $26,204,000. She was, however, actually accounted for at $34,363,000 (including, it is true, $8,127,000 for furnishings in the Ruhr and exploitation of mines and cokeries by the Régie).

2. The United States has not yet received its share in the first annuity.

3. The Agent General at the end of the first year had a balance of cash which, even after the deduction of the liabilities indicated above, and of the American claim, amounted to $11,328,000.

The most striking results of our examination are:

1. Great Britain received practically all that was due her. (The small deficiency of $1,504,000 is almost entirely explained by the fact that instead of the $5,955,000 to which she was entitled for occupation costs she was accounted for in this connection to the amount of $7,184,000.)

2. France received much less than she was entitled to receive. (The large deficiency of $14,141,000 is only partly explained by the $8,127,000, which the Agent General spent for her in payment of furnishings in the Ruhr and of the exploitation through the Régie.)

The disadvantage suffered by France in comparison with Great Britain is even much larger than appears from the total sums received, since Great Britain got practically all payments as proceeds of the Reparation Recovery Acts,--thus in cash,--while France got only about one tenth in cash and nine tenths in kind. As prices in France are below world market prices, and as the countries receiving deliveries in kind are in general forbidden to reëxport the goods thus received, the French Government in reselling those goods often does not realize the amount with which those deliveries figure in the accounts of the Agent General. The Finance Committee of the French Chamber of Deputies had assumed that in the year 1925 France would lose 10 percent in reselling the German fuel and 20 percent in reselling the German chemical fertilisers. According to recent information, she is really losing as much as 25 percent in selling the German fuel.

It may then be figured that the sum of 67.8 million dollars which in the first Dawes year France has altogether received for reparation purposes probably does not represent a total profit for France of more than 60 million dollars.

Thus, while the new plan has worked satisfactorily from an economic point of view for Germany and certain of the Allies, above all for Great Britain, it has not been a success so far as France is concerned. In this respect, one of its main objects, if not its most important object, has so far not been obtained.

Since Germany, in the first year, has not paid more than 47.6 million dollars out of her own means, it is impossible to draw from the experiences of this first year any conclusions as to whether she will be able to pay, year for year, from September 1928 onwards, 596 million dollars. But it is possible to form an idea of how the plan will work in the next two years. Here again it will be wise to distinguish between the political, the technical, and the economic side of the problem.

Politically. So far as France is concerned, much will depend on what she will have to pay in turn to her former allies. Her net profits from reparation payments will doubtless not exceed 100 million dollars in either of the next two years. If she should be obliged to devote the major part of this sum to the service of her British and American debts, she certainly will be dissatisfied. In Germany the reparation obligations are not likely to cause any political unrest, unless Franco-German relations in general should be strained, in which case the reparation question might again become a political issue.

Technically, the plan will continue to work satisfactorily. While it will prove impossible for the German Government in the second year to pay, as the Experts assumed, $119,100,000 out of the proceeds of the sale to the public of the preference shares of the German Railway Company, this gap will promptly be filled by means of tax revenues. Nor will the transfer problem cause serious difficulties in the next two years, since most of the payments will, as heretofore, be effected by deliveries in kind.

Economically, the effects of the reparation payments for the Allies will be about the same as in the first year. As long as French prices are below world market prices, France will have a favorable balance of trade, her industrial plants will work at full capacity and the state will be able to dispose of the German deliveries in kind -- though at some loss. If French prices should rise -- as they might after a stabilisation of the franc -- there probably would be an industrial crisis and little demand for German goods; but if the French state were then willing to continue the sale of those German goods at reduced prices, it would probably not find it difficult to place them on the French market.

The effects of the reparation payments on German economy are, however, another story. Germany, as has been shown, had to pay in the first year not more than $47,600,000 out of her own means. If she should not be able to sell to the public the preference shares of the German Railway Company, she will have to pay of her own means $290,600,000 in the second year and $285,900,000 in the third year. Will she be able to do that?

In the first Dawes year there was no charge, under the Reparation Plan, on the German budget. In the second year this charge will amount to $119,100,000, and in the third year to $95,300,000. Since, according to the official statistics, the revenues of the Reich exceeded the expenses in the first year by $136,300,000, the Treasury may appear to be easily able to pay in the second and third years the sums due on reparation account. But the budget surplus was entirely obtained in the first six months; the last six months (March to August, 1925) showed a deficit of $4,000,000. While the situation of the Treasury may in reality be somewhat more favorable than appears from the official statistics, the tax reform of August, 1925, is likely even to reduce public revenues. It therefore seems doubtful whether it will be possible to pay in the near future the reparation charge on the budget out of current revenues. The statistics of the first month of the new year (September, 1925) are certainly not encouraging. Expenses (aside from reparation payments) exceeded revenues by $8,600,000 so that in paying $13,800,000 from budget revenues into the account of the Agent General the Treasury had to resort to former savings. The difficulty of paying this charge out of current revenues will be particularly great if German industry should further deteriorate.

Interest on the German industrial debentures will first be due in the second Dawes year: $14,900,000 on April 1, 1926, and the same amount on August 25, 1926. In the third year this service will require twice as much, or $59,600,000. This means in the second year about 0.4 percent, and in the third year about 0.8 percent, of the business capital of each of the industrial and trading concerns upon which the industrial charge is imposed. This charge will not be a too heavy burden for those enterprises which yield high returns; they simply will pay a somewhat smaller dividend than they might grant otherwise to their owners. But there are many establishments which have been operated for quite a time without profit; for all those the reparation charge will involve a certain hardship, as most of them will be compelled to borrow from the banks, at a high rate of interest, the sums which they need in order to comply with this obligation.

Interest on the German railway bonds was paid to the amount of $47,600,000 in the first Dawes year. The German Railway Company could pay this sum promptly without difficulty, as revenues exceeded expenses by more than that. But the Railway Company in the second year will have to pay $141,700,000 of interest, and in the third year $131,000,000. Will it be able to do that out of current revenues? There are people who will say: "Certainly; all it has to do is to raise the freight and passenger rates by 10 percent." And they may quote in this connection the Agent General, who in his report of May 30, 1925, in referring to the report of the Commissioner for the German Railways, stated: "The figures given in the Commissioner's Report show the substantial extent to which freight tariffs have been reduced since September 1, 1924, particularly on goods of numerous classes, and the relatively low increase over pre-war passenger rates in Germany as compared with the rates in other countries." Freight rates have indeed been substantially reduced since September 1, 1924. But does this prove that they can be easily raised? Coal freight rates are still higher in Germany than in France, Belgium, Holland, Poland, Austria or Italy; and the same is true for many other kinds of goods. The increase over pre-war passenger rates in Germany in the spring of 1925 was relatively low as compared with the rates in some other countries, but since then the German passenger rates have been substantially raised. The increase over pre-war rates now varies between 65 percent for the fourth class and 50 percent for the first class.

Moreover, a comparison of the old and new passenger rates by themselves does not show the whole difference. At present whoever wants to go the 410 miles from Berlin to Munich at an average speed of more than 36 miles an hour has a choice between only two trains, a morning train carrying merely first and second class coaches -- the lowest fare being $13.34 -- and a night train carrying only first and second class sleepers -- the lowest fare being $15.72. Before the war there used to be nine such trains, seven of them carrying third class coaches with a fare of $5.03. In consequence, the number of passengers in the second class is now larger than before the war, while the number of passengers in the third class has decreased. That it is a dire economic necessity and not a taste for luxury which drives more passengers into the second class is easily proven by the fact that the number of first class passengers, which already before the war was infinitesimal (0.12 percent), is now only one-third of what it then was, while by far the greatest increase has taken place in the use of the fourth class. It therefore seems well-nigh impossible to raise either the freight or the passenger rates without seriously injuring German industry. And, so far as the passenger traffic is concerned, it even seems doubtful whether an increase of the rates would noticeably increase the returns. The experiences of the past are, to say the least, not encouraging: in spite of the large increase of rates, the revenues per passenger mile in the last fiscal year were only 8 percent higher than in 1913-14.

In view of all these economic difficulties it may seem surprising that serious technical difficulties are not to be foreseen for the Agent General in collecting the second and third annuities. But the new reparation plan has created an efficient safeguard: the controlled revenues (customs and taxes) which serve by way of security for the contributions to be made from the German budget, and by way of collateral security for the interest of the industrial and railway bonds, yield such high returns that all reparation payments can be easily covered from this source. It is then more of an internal German problem how the necessary surplus shall be raised. The methods which at first view present themselves -- an increase of taxes and of railway tariffs -- are not easily applicable. The consumers, who have little political power, already pay very high taxes; and the producers, who have much political power, are partly unable and altogether unwilling to pay more taxes than they do at present. As has been indicated, an increase of the railway rates might be harmful to the general German economy and perhaps even fruitless financially. A foreign loan would certainly offer a convenient provisory solution but would increase the difficulties of future years.

Germany was to recover economically in the first Dawes year. This object has not been obtained. German business has increased its foreign debts at an amazing rate, yet production is not larger than a year ago. The prospects of an economic recovery in the next two years are very poor: what Germany needs most of all is an up-to-date mass production, but such mass production is impossible without a strong domestic market, and since inflation has wiped out all former savings the purchasing power of the consumers will be slight as long as employers are unable or unwilling to pay fair wages and as long as business-men are less anxious to increase their turnover than to increase prices.

Thus we reach the following conclusions, drawn from recent experience and from the present status:

The execution of the new reparation plan did not present special difficulties in the first year.

The difficulties of the second and third year will be surmounted.

The real test is to come in the fourth or fifth year; in order successfully to meet this test Germany must get her businessmen to adapt production, prices, and wages to the necessities of the community.

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