THE BURDEN OF THE LONDON SETTLEMENT
The settlement of Reparations communicated to Germany by the Allied
Powers on May 5, 1921, and accepted a few days later, constitutes the
definitive scheme under the Treaty according to which Germany for the
next two generations is to discharge her liabilities.[32] It will not
endure. But it is the _fait accompli_ of the hour, and, therefore,
deserves examination.[33]
The settlement falls into three parts comprising (1) provisions for the
delivery of Bonds; (2) provisions for setting up in Berlin an Allied
Committee of Guarantees; (3) provisions for actual payment in cash and
kind.
1. _The Delivery of Bonds._—These provisions are the latest variant of
similar provisions in the Treaty itself. Allied Finance Ministers have
encouraged themselves (or their constituents) with the hope that some
part of the capital sum of Germany’s liabilities might be anticipated
by the sale to private investors of Bonds secured on future Reparation
payments. For this purpose it was necessary that Germany should deliver
negotiable Bonds. These Bonds do not constitute any _additional_ burden
on Germany. They are simply documents constituting a title to the sums
which, under other clauses, Germany is to pay over annually to the
Reparation Commission.
The advantages to the Allies of marketing such Bonds are obvious. If
they could get rid of the Bonds they would have thrown the risk of
Germany’s default on to others; they would have interested a great
number of people all over the world in Germany’s not defaulting;
and they would have secured the actual cash which the exigencies of
their Budgets demand. But the hope is illusory. When at last a real
settlement is made, it may be practicable for the German Government to
float an international loan of moderate amount, well within the world’s
estimate of their minimum capacity of payment. But, though there are
foolish investors in the world, it would be sanguine to believe that
there are so many of such folly as to swallow at this moment on these
lines a loan of vast dimensions. It costs France at the present time
somewhere about 10 per cent to float a loan of modest dimensions on
the New York market. As the proposed German Bonds will carry 5 per
cent interest and 1 per cent sinking fund, it would be necessary to
reduce their price to 57 before they would yield 10 per cent including
redemption. It would be very optimistic, therefore, to expect to
market them at above half their par value. Even so, the world is not
likely to invest in them any large proportion of its current savings,
so that the whole amount even of the A Bonds, specified below, could
not be marketed at this price. Moreover, in so far as the service of
the Bonds marketed is within the _minimum_ expectation of Germany’s
capacity to pay (as it would have to be), the financial effect on the
Ally which markets the Bonds is nearly the same as though they were
to borrow themselves at the rate in question. Except, therefore, in
the case of those Allies whose credit is inferior to Germany’s, the
advantage compared with borrowing on their own credit would not be very
material.[34]
The details relating to the Bonds are not likely, therefore, to be
operative, and need not be taken very seriously. They are really a
relic of the pretenses of the Peace Conference days. Briefly, the
arrangements are as follows:
Germany must deliver 12 milliards of gold marks ($3,000,000,000) in A
Bonds, 38 milliards ($9,500,000,000) in B Bonds, and the balance of her
liabilities, provisionally estimated at 82 milliards ($20,500,000,000),
in C Bonds. All the Bonds carry 5 per cent interest and 1 per cent
cumulative sinking fund. The services of the series A, B, and C
constitute respectively a first, second, and third charge on the
available funds. The A Bonds are issued to the Reparation Commission
as from May 1, 1921, and the B Bonds as from November 1, 1921, but
the C Bonds shall not be issued (and shall not carry interest in
the meantime) except as and when the Reparation Commission is of
the opinion that the payments which Germany is making under the new
settlement are adequate to provide their service.
It may be noticed that the service of the A Bonds will cost
$180,000,000 per annum, a sum well within Germany’s capacity, and
the service of the B Bonds will cost $570,000,000 per annum, making
$750,000,000 altogether, a sum in excess of my own expectations of
what is practicable, but not in excess of the figure at which some
independent experts, whose opinion deserves respect, have estimated
Germany’s probable capacity to pay. It may also be noticed that
the aggregate face value of the A and B Bonds ($12,500,000,000)
corresponds to the figure at which the German Government have agreed
(in their counter–proposal transmitted to the United States) that their
aggregate liability might be assessed. It is probable that, sooner or
later, the C Bonds at any rate will be not only postponed, but canceled.
2. _The Committee of Guarantees._—This new body, which is to have a
permanent office in Berlin, is in form and status a sub–commission
of the Reparation Commission. Its members consist of representatives
of the Allies represented on the Reparation Commission, with a
representative of the United States, if that country consents to
nominate.[35] To it are assigned the various wide and indefinite powers
accorded by the Treaty of Peace to the Reparation Commission, for the
general control and supervision of Germany’s financial system. But its
exact functions, in practice and in detail, are still obscure.
According to the letter of its constitution the Committee might embark
on difficult and dangerous functions. Accounts are to be opened in
the name of the Committee, to which will be paid over in _gold or
foreign currency_ the proceeds of the German Customs, 26 per cent of
the value of all exports and the proceeds of any other taxes which
may be assigned as a “guarantee” for the payment of Reparation. These
receipts, however, chiefly accrue not in gold or foreign currency, but
in paper marks. If the Committee attempts to regulate the conversion
of these paper marks into foreign currencies, it will in effect become
responsible for the foreign exchange policy of Germany, which it would
be much more prudent to leave alone. If not, it is difficult to see
what the “guarantees” really add to the other provisions by which
Germany binds herself to make payments in foreign money.
I suspect that the only real and useful purpose of the Committee of
Guarantees is as an office of the Reparation Commission _in Berlin_,
a highly necessary adjunct; and the clause about “guarantees” is
merely one more of the pretenses, which, in all these agreements, the
requirements of politics intermingle with the provisions of finance.
It is usual, particularly in France, to talk much about “guarantees,”
by which is meant, apparently, some device for making sure that
the impossible will occur. A “guarantee” is not the same thing as
a “sanction.” When M. Briand is accused of weakness at the Second
Conference of London and of abandoning France’s “real guarantees,”
these provisions enable him to repudiate the charge indignantly. He
can point out that the Second Conference of London not only set up a
Committee of Guarantees but secured, as a new and additional guarantee,
the German Customs. There is no answer to that![36]
3. _The Provisions for Payment in Cash and Kind._—The Bonds and the
Guarantees are apparatus and incantation. We come now to the solid part
of the settlement, the provisions for payment.
Germany is to pay in each year, until her aggregate liability is
discharged:
(1) Two milliard gold marks.
(2) A sum equivalent to 26 per cent of the value of her exports, or
alternatively an equivalent amount as fixed in accordance with any
other index proposed by Germany and accepted by the Commission.
(1) is to be paid quarterly on January 15, April 15, July 15, and
October 15 of each year, and (2) is to be paid quarterly on February
15, May 15, August 15, and November 15 of each year.
This sum, calculated on any reasonable estimate of the future value
of German exports, is materially less than the original demands of
the Treaty. Germany’s total liability under the Treaty amounts to 138
milliard gold marks (inclusive of the liability for Belgian debt). At
5 per cent interest and 1 per cent sinking fund, the annual charge on
this would be 8.28 milliard gold marks. Under the new scheme the annual
value of Germany’s exports would have to rise to the improbable figure
of 24 milliard gold marks before she would be liable for so much as
this. As we shall see below, the probable burden of the new settlement
in the near future is probably not much more than half that of the
Treaty.
There is another important respect in which the demands of the Treaty
are much abated. The Treaty included a crushing provision by which the
part of Germany’s nominal liability on which she was not able to pay
interest in the early years was to accumulate at compound interest.[37]
There is no such provision in the new scheme; the C Bonds are not to
carry interest until the receipts from Germany are adequate to meet
their service; and the only provision relating to back interest is for
the payment of _simple_ interest in the event of there being a surplus
out of the receipts.
In order to understand how great an advance this settlement represented
it is necessary to carry our minds back to the ideas which were
prevalent not very long ago. The following table is interesting, in
which, in order to reduce capital sums and annual payments to a common
basis of comparison, estimates in terms of capital sums are replaced
by annuities of 6 per cent of their amount:
In terms of Annuities
Estimates of expressed in Milliards
of Gold Marks.
1. Lord Cunliffe and the figure given
out in the British General Election
of 1918[38] 28.8
2. M. Klotz’s forecast in the French
Chamber, September 5, 1919 18
3. The Assessment of the Reparation
Commission, April 1921 8.28
4. The London Settlement, May 1921 4.6[39]
The estimate of The _Economic Consequences of the Peace_ (1919),
namely 2 milliards, was nearly contemporaneous with M. Klotz’s figure
of 18 milliards. M. Tardieu recalls that, when the Peace Conference
was considering whether a definite figure could be inserted in the
Treaty, the lowest figure which the British and French Prime Ministers
would accept, as a compromise to meet the pressure put upon them by
the American representatives, corresponded to an annuity of 10.8
milliards,[40] which is nearly two and a half times the figure which
they accepted two years later under the pressure, not of Americans, but
of facts.
There was yet another feature in the London Settlement which
recommended it to moderate opinion. The dates of payment were so
arranged as to reduce the burden on Germany during the first year. The
Reparation year runs from May 1 in each year to April 30 in the next;
but in the period May 1, 1921–April 30, 1922 only two, instead of four,
of the quarterly payments in respect of the export proportion will fall
due.
No wonder, therefore, that this settlement, so reasonable in itself
compared with what had preceded it, was generally approved and widely
accepted as a real and permanent solution. But in spite of its
importance for the time being, as a preservative of peace, as affording
a breathing space, and as a transition from foolish expectations, it
cannot be a permanent solution. It is, like all its predecessors, a
temporizing measure, which is bound to need amendment.
To calculate the total burden, it is necessary to estimate the value
of German exports. In 1920 they amounted to about 5 milliard gold
marks. In 1921 the volume will be greater, but this will be offset by
the fact that gold prices have fallen to less than two–thirds of what
they were, so that 4 to 5 milliard gold marks is quite high enough as
a preliminary forecast for the year commencing May 1, 1921.[41] It is,
of course, impossible to make a close estimate for later years. The
figures will depend, not only on the recovery of Germany, but on the
state of international trade generally, and more especially on the
level of gold prices.[42] For the next two or three years, if we are to
make an estimate at all, 6 to 10 milliards is, in my judgment, the best
one can make.
Twenty–six per cent of exports, valued at 6 milliards gold, will amount
to about 1½ milliard gold marks, making, with the fixed annual
payment of 2 milliards, 3½ milliards altogether. If exports rise to
10 milliards, the corresponding figure is 4½ milliards. The table
of payments in the near future is then as shown on the next page, all
the figures being in terms of milliards of gold marks. In the case of
payments after May 1, 1922, I give alternative estimates on the basis
of exports on the scale of 6 and 10 milliards respectively.
Not the whole of these sums need be paid in cash, and the value of
deliveries in kind is to be credited to Germany against them. This
item has been estimated as high as 1.2 to 1.4 milliard gold marks per
annum. The result will chiefly depend (1) on the amount and price of
the coal deliveries, and (2) on the degree of success which attends the
negotiations between France and Germany for the supply by the latter
of materials required for the repair of the devastated area. The value
of the coal deliveries depends on factors already discussed on p. 49,
above, the _price_ of the coal being chiefly governed by the internal
German price. At a price of 20 gold marks per ton and deliveries of
2,000,000 tons a month (neither of which figures are likely to be
exceeded, or even reached, in the near future), coal will yield credits
of .48 milliard gold marks. In the Loucheur–Rathenau Agreement[43] the
value of deliveries in kind to France, including coal, over the next
five years has been estimated at a possible total of 1.4 milliard gold
marks per annum. If France receives .4 milliard gold marks in coal, not
more than 35 per cent of the balance will be credited in the Reparation
account. If this were realized, the aggregate deliveries in kind might
approach 1 milliard. But, for various reasons, political and economic,
this figure is unlikely to be reached, and if as much as .75 milliards
per annum is realized from coal and reconstruction deliveries, this
ought to be considered a highly satisfactory result.
──────────────┬────────────────┬────────────────┬───────────────
│ 1921─22 │ 1922─23 and │ 1922─23 and
│ (Exports │ subsequently │ subsequently
│ 4 Milliards). │ (Exports │ (Exports
│ │ 6 Milliards). │ 10 Milliards).
──────────────┼────────────────┼────────────────┼───────────────
May 25 }│ │ .39 │ .65
July 15 }│ │ .50 │ .50
Aug. 15 }│ 1.00 │ .39 │ .65
Oct. 15 }│ │ .50 │ .50
Nov. 15 │ .26 │ .39 │ .65
Jan. 15 │ .50 │ .50 │ .50
Feb. 15 │ .26 │ .39 │ .65
April 15 │ .50 │ .50 │ .50
│ ──── │ ──── │ ────
Total │ 2.52 │ 3.56 │ 4.60
──────────────┼────────────────┼────────────────┼───────────────
Equivalent }│ │ │
in dollars }│ │ │
at $1 = 4 }│ $630,000,000 │ $890,000,000 │ $1,150,000,000
gold marks }│ │ │
──────────────┴────────────────┴────────────────┴───────────────
Now the payments were so arranged as to present no insuperable
difficulties during 1921. The instalment of August 31, 1921 (which
did not exceed the sum which the Germans had themselves offered for
immediate payment in their counterproposal of April 1921) was duly
paid, partly out of foreign balances accumulated before May 1 last,
partly by selling out paper marks over the foreign exchanges, and
partly by temporary advances from an international group of bankers.
The instalment of November 15,1921, was covered by the value of
deliveries of coal and other material subsequent to May 1, 1921. Even
the instalments of January 15 and February 15, 1922, might be covered
out of further deliveries, temporary advances, and the foreign assets
of German industrialists, if the German Government could get hold of
them. But the payment of April 15, 1922, must present more difficulty;
whilst further instalments follow quickly on May 15, July 15, and
August 15. Some time between February and August 1922 Germany will
succumb to an inevitable default. This is the maximum extent of our
breathing space.[44]
That is to say, in so far as she depends for payment (as in the
long run she must do) on current income. If capital, non–recurrent
resources become available, the above conclusion will require
modification accordingly. Germany still has an important capital asset
untouched—the property of her nationals now sequestered in the hands
of the Enemy–Property Custodian in the United States, of which the
value is rather more than 1 milliard gold marks. If this were to become
available for Reparation, directly or indirectly, default could be
delayed correspondingly.[45] Similarly the grant to Germany of foreign
credits on a substantial scale, even three–months’ credits from bankers
on the security of the Reichsbank’s gold, would postpone the date a
little, however useless in the long run.
In reaching this conclusion, one can approach the problem from three
points of view: (1) the problem of paying outside Germany, that is
to say, the problem of exports and the balance of trade; (2) the
problem of providing for payment by taxation, that is to say, the
problem of the Budget; (3) the proportion of the sums demanded to the
German national income. I will take them in turn, confining myself to
what Germany can be expected to perform in the near future, to the
exclusion of what she might do in hypothetical circumstances many
years hence.
(1) In order that Germany may be able to make payments abroad, it is
necessary, not only that she should have exports, but that she should
have a surplus of exports over imports. In 1920, the last complete
year for which figures are available, so far from a surplus there was
a deficit, the exports being valued at about 5 milliard gold marks and
the imports at 5.4 milliards. The figures for 1921 so far available
indicate not an improvement but a deterioration. The myth that Germany
is carrying on a vast and increasing export trade is so widespread,
that the actual figures for the six months from May to October 1921,
converted into gold marks, may be given with advantage:
─–──────────────────┬─────────────────┬──────────────────────────
│ Million Paper │ Million Gold Marks.[46]
│ Marks. │
├────────┬────────┼────────┬────────┬────────
│ │ │ │ │Excess
│Imports.│Exports.│Imports.│Exports.│ of
│ │ │ │ │Imports.
────────────────────┼────────┼────────┼────────┼────────┼────────
1921, May │ 5,487│ 4,512│ 374.4│ 307.9│ 66.5
” June │ 6,409│ 5,433│ 388.8│ 329.7│ 59.1
” July │ 7,580│ 6,208│ 413.7│ 338.7│ 75.0
” August │ 9,418│ 6,684│ 477.2│ 334.8│ 142.4
” September │ 10,668│ 7,519│ 436.6│ 307.7│ 128.9
” October[47] │ 13,900│ 9,700│ 352.6│ 246.0│ 106.6
├────────┼────────┼────────┼────────┼────────
Total for six months│ 53,462│ 40,056│ 2443.3│ 1864.8│ 578.5
────────────────────┴────────┴────────┴────────┴────────┴────────
In respect of these six months Germany must make a fixed payment of
1000 million gold marks plus 26 per cent of the exports as above,
namely 484.8 million gold marks, that is 1484.8 million gold marks
altogether, which is equal to about 80 per cent of her exports; whereas
apart from any Reparation payments, she had a _deficit_ on her foreign
trade at the rate of more than 1 milliard gold marks per annum. The
bulk of Germany’s imports are necessary either to her industries or
to the food supply of the country. It is therefore certain that with
exports of (say) 6 milliards she could not cut her imports so low as to
have the surplus of 3½ milliards, which would be necessary to meet
her Reparation liabilities. If, however, her exports were to rise to
10 milliards, her Reparation liabilities would become 4.6 milliards.
Germany, to meet her liabilities, must therefore raise the gold–value
of her exports to double what they were in 1920 and 1921 _without
increasing her imports at all_.
I do not say that this is impossible, given time and an overwhelming
motive, and with active assistance by the Allies to Germany’s export
industries; but does any one think it practicable or likely in the
actual circumstances of the case? And if Germany succeeded, would not
this vast expansion of exports, unbalanced by imports, be considered
by our manufacturers to be her crowning crime? That this should be
the case even under the London Settlement of 1921 is a measure of
the ludicrous folly of the figures given out in the British General
Election of 1918, which were six times as high again.
(2) Next there is the problem of the Budget. For Reparation payments
are a liability of the German _Government_ and must be covered by
taxation. At this point it is necessary to introduce an assumption as
to the relation between the gold mark and the paper mark. For whilst
the liability is fixed in terms of gold marks, the revenue (or the
bulk of it) is collected in terms of paper marks. The relation is a
very fluctuating one, best measured by the exchange value of the paper
mark in terms of American gold dollars. This fluctuation is of more
importance over short periods than in the long run. For in the long run
_all_ values in Germany, including the yield of taxation, will tend
to adjust themselves to an appreciation or depreciation in the value
of the paper mark outside Germany. But the process may be a very slow
one, and, over the period covered by a year’s budget, unanticipated
fluctuations in the ratio of the gold to the paper mark may upset
entirely the financial arrangements of the German Treasury.
This disturbance has of course occurred on an unprecedented scale
during the latter half of 1921. Taxation in terms of paper marks,
which was heavy when the dollar was worth 50 paper marks, becomes
very inadequate when the dollar is worth 200 paper marks; but it is
beyond the power of any Finance Minister to adjust taxation to such a
situation quickly. In the first place, when the fall in the external
value of the mark is proceeding rapidly, the corresponding fall in the
internal value lags far behind. Until this adjustment has taken place,
which may occupy a considerable time before it is complete, the taxable
capacity of the people, measured in gold, is less than it was before.
But even then a further interval must elapse before the gold–value of
the _yield_ of taxation collectible in paper marks can catch up. The
experience of the British Inland Revenue Department well shows that the
yield of direct taxation must largely depend on the taxable assessments
of the _previous_ period.
For these reasons the collapse of the mark exchange must, if it
persists, destroy beyond repair the Budget of 1921–22, and probably
that of the first half of 1922–23 also. But I should be overstating my
argument if I were to base my conclusions on the figures current at the
end of 1921. In the shifting sands in which the mark is foundering it
is difficult to find for one’s argument any secure foothold.
During the summer of 1921 the gold mark was worth, in round figures,
20 paper marks. The internal purchasing power of the paper mark for
the purposes of working–class consumption was still nearly double
its corresponding value abroad, so that one could scarcely say that
equilibrium had been established. Nevertheless, the position was very
well adjusted compared with what it has since become. As I write
(December 1921) the gold mark has been fluctuating between 45 and
60 paper marks, while the purchasing power of the paper mark inside
Germany is for general purposes perhaps three times what it is outside
Germany.
Since my figures of Government revenue and expenditure are based on
statements made in the summer of 1921, perhaps my best course is to
take a figure of 20 paper marks to the gold mark. The effect of this
will be to understate my argument rather than the contrary. The reader
must remember that, if the mark remains at its present exchange value
long enough for internal values to adjust themselves to that rate, the
items in the following account, the income and the outgoings and the
deficit, will all tend to be multiplied threefold.
At this ratio (of 20 paper marks=1 gold mark), a Reparation liability
of 3½ milliard gold marks (assuming exports on the scale of 6
milliards) is equivalent to 70 milliard paper marks, and a liability
of 4½ milliards (assuming exports of 10 milliards) is equivalent
to 90 milliard paper marks. The German Budget for the financial year
April 1, 1921, to March 31, 1922, provided for an expenditure of
93.5 milliards, exclusive of Reparation payments, and for a revenue
of 59 milliards.[48] Thus the present Reparation demand would by
itself absorb more than the whole of the existing revenue. Doubtless
expenditure can be cut down, and revenue somewhat increased. But the
Budget will not cover even the lower scale of the Reparation payments
unless expenditure is halved and revenue doubled.[49]
If the German Budget for 1922–23 manages to balance, _apart_ from any
provision for Reparation, this will represent a great effort and a
considerable achievement. Apart, however, from the technical financial
difficulties, there is a political and social aspect of the question
which deserves attention here. The Allies deal with the established
German Government, make bargains with them, and look to them for
fulfilment. The Allies do not extract payment out of individual
Germans direct; they put pressure on the transitory abstraction called
Government, and leave it to this to determine and to enforce which
individuals are to pay, and how much. Since at the present time the
German Budget is far from balancing even if there were no Reparation
payments at all, it is fair to say that not even a beginning has yet
been made towards settling the problem of how the burden is to be
distributed between different classes and different interests.
Yet this problem is fundamental. Payment takes on a different aspect
when, instead of being expressed in terms of milliards and as a
liability of the transitory abstraction, it is translated into a
demand for a definite sum from a specific individual. This stage is not
yet reached, and until it is reached the full intrinsic difficulty will
not be felt. For at this stage the struggle ceases to be primarily one
between the Allies and the German Government and becomes a struggle
between different sections and classes of Germans. The struggle will
be bitter and violent, for it will present itself to each of the
contesting interests as an affair of life and death. The most powerful
influences and motives of self–interest and self–preservation will be
engaged. Conflicting conceptions of the end and nature of Society will
be ranged in conflict. A Government which makes a serious attempt to
cover its liabilities will inevitably fall from power.
(3) What relation do the demands bear to the third test of capacity,
the present income of the German people? A burden of 70 milliard paper
marks (if we may, provisionally, adopt that figure as the basis of our
calculations) amounts, since the population is now about 60 millions,
to 1170 marks per head for every man, woman, and child.
The great changes in money values have made it difficult, in all
countries, to obtain estimates of the national income in terms of money
under the new conditions. The Brussels Conference of 1920, on the basis
of inquiries made in 1919 and at the beginning of 1920, estimated the
German income per head at 3900 paper marks. This figure may have
been too low at the time, and, on account of the further depreciation
of the mark, is certainly too low now. A writer in the _Deutsche
Allgemeine Zeitung_ (Feb. 14, 1921), working on the statistics of
statutory deductions from wages and on income–tax, arrived at a figure
of 2333 marks per head. This figure also is likely to be too low,
partly because the statistics must mainly refer to earlier dates when
the mark was less depreciated, and partly because all such statistics
necessarily suffer from evasions. At the other extreme lies the
estimate of Dr. Albert Lansburgh, who, by implication (_Die Bank_,
March 1921), estimated the income per head at 6570 marks.[50] Another
recent estimate is that of Dr. Arthur Heichen in the _Pester Lloyd_
(June 5, 1921), who put the figure at 4450 marks. In a newspaper
article published in various quarters in August 1921 I ventured to
adopt the figure of 5000 marks as the nearest estimate I could make.
In fixing on this figure I was influenced by the above estimates, and
also by statistics as to the general level of salaries and wages. Since
then I have looked into the matter further and am still of the opinion
that this figure was high enough for that date.
I am fortified in this conclusion by the result of inquiries which I
addressed to Dr. Moritz Elsas of Frankfort–on–Main, on whose authority
I quote the following figures. The best–known estimate of the German
pre–war income is Helfferich’s in his _Deutschlands Volkswohlstand_
1888–1913. In this volume he put the national income in 1913 at 40–41
milliard gold marks, _plus_ 2½ milliards for net income from
nationalized concerns (railways, post office, etc.), that it is say,
an aggregate of 43 milliards or 642 marks per head. Starting from the
figure of 41 milliards (since the national services no longer produce
a profit) and deducting 15 per cent for loss of territory, we have a
figure of 34.85 milliards. What multiplier ought we to apply to this in
order to arrive at the present income in terms of paper marks? In 1920
commercial employees obtained on the average in terms of marks 4½
times their pre–war income, whilst at that time workmen had secured an
increase in their nominal wages of 50 per cent more than this, that is
to say, their wages were 6 to 8 times the pre–war figure. According
to the Statistischen Reichsamt (_Wirtschaft und Statistik_, Heft 4,
Jahrgang 1) commercial employees at the beginning of 1921 earned,
males 6⅔ times and females 10 times as much as in 1913.[51] On the
basis of the same proportion as in 1920 we arrive at an increase of
10 times in the nominal wages of workmen. The wages index number of
the _Frankfurter Zeitung_ for August 1921 estimates the wages per hour
at 11 times the pre–war level, but, as the number of working hours
has fallen from 10 to 8, these figures yield an increase of 8.8 times
in the wage actually received. Since the wages of male commercial
employees have increased less than this, since business profits in
terms of paper marks only reach this figure of increase in exceptional
cases, and since the income of the rentier, landlord, and professional
classes has increased in a far lower proportion, an estimate of an
8–fold increase in the nominal income of the country as a whole at
that date (August 1921) is likely to be an over–estimate rather than
an under–estimate. This leads to an aggregate national income, on the
basis of the Helfferich pre–war figures, of 278.80 milliard paper
marks, and to an income of 4647 marks per head in August 1921.
No allowance is made here for the loss by war of men in the prime
of life, for the loss of external income previously earned from
foreign investment and the mercantile marine, or for the increase of
officials. Against these omissions there may be set off the decrease of
the army and the increased number of women employees.
The extreme instability of economic conditions makes it almost
impossible to conduct a direct statistical inquiry into this problem
at the present time. In such circumstances the general method of Dr.
Elsas seems to me to be the best available. His results show that the
figure taken above is of the right general dimensions and is not likely
to be widely erroneous. It enables us, too, to put an upper limit of
reasonable possibility on our figures. No one, I think, would maintain
that in August 1921 nominal incomes in Germany averaged 10 times their
pre–war level; and 10 times Helfferich’s pre–war estimate comes to
6420 marks. _No_ statistics of national incomes are very precise, but
an assertion that in the middle of 1921 the German income per head per
annum lay between 4500 marks and 6500 marks, and that it was probably
much nearer the lower than the higher of these figures, say 5000 marks,
is about as near the truth as we shall get.
In view of the instability of the mark, it is, of course, the case
that such estimates do not hold good for any length of time and need
constant revision. Nevertheless this fact does not upset the following
calculation as much as might be supposed, because it operates to a
certain extent on both sides of the account. If the mark depreciates
further, the average income per head in paper marks will tend to rise;
but in this event the equivalent in paper marks of the Reparation
liability will, since it is expressed in terms of _gold_ marks, rise
also. A real alleviation can only result from a fall in the value of
_gold_ (_i.e._, a rise in world prices).
To the taxation in respect of the Reparation charge there must be added
the burden of Germany’s own government, central and local. By the most
extreme economies, short of repudiation of war loans and war pensions,
this burden could hardly be brought below 1000 paper marks per head (at
20 paper marks=1 gold mark), _i.e._, 60 milliards altogether, a figure
greatly below the present expenditure. In the aggregate, therefore,
2170 marks out of the average income of 5000 marks, or 43 per cent,
would go in taxation. If exports rise to 10 milliards (gold) and the
average income to 6000 paper marks, the corresponding figures are 2500
marks and 42 per cent.
There are circumstances in which a wealthy nation, impelled by
overwhelming motives of self–interest, might support this burden.
But the annual income of 5000 paper marks per head is equivalent in
exchange value (at an exchange of 20 paper marks to 1 gold mark) to
$62.50, and after deduction of taxation to about $35, that is to say
to less than 10 cents a day, which in August 1921 was the equivalent
in purchasing power in Germany of something between 20 cents and 25
cents in the United States.[52] If Germany was given a respite, her
income and with it her capacity would increase; but under her present
burdens, which render saving impossible, a degradation of standards is
more likely. Would the whips and scorpions of any Government recorded
in history have been efficient to extract nearly half their income from
a people so situated?
For these reasons I conclude that whilst the Settlement of London
granted a breathing space to the end of 1921, it can be no more
permanent than its predecessors.
EXCURSUS III
THE WIESBADEN AGREEMENT
In the summer of 1921 much interest was excited by reports of
confidential interviews between M. Loucheur and Herr Rathenau, the
Ministers of Reconstruction in France and Germany respectively. An
agreement was provisionally reached in August 1921 and was finally
signed at Wiesbaden on October 6, 1921[53]; but it does not come into
force until it has received the approval of the Reparation Commission.
This Commission, whilst approving the general principles underlying it,
have referred it to the principal Allied Governments on the ground that
it involves departures from the Treaty of Versailles beyond their own
competence to authorize. The British delegate, Sir John Bradbury, has
advised his Government that the Agreement should be approved subject
to certain modifications which he sets forth; and his Report has been
published.[54]
The Wiesbaden Agreement is a complicated document. But the essence of
it is easily explained. It falls into two distinct parts. First, it
sets up a procedure by which private French firms can acquire from
private German firms materials required for reconstruction in France,
without France having to make payment in cash. Secondly, it provides
that, whilst Germany is not to receive payment at once for any part
of these goods, only a proportion of the sum due is credited to her
immediately in the books of the Reparation Commission, the balance
being advanced by her to France for the time being and only brought
into the Reparation account at a later date.
The first set of provisions has met with unqualified approval from
every one. An arrangement which may possibly stimulate payment of
Reparation in the form of actual materials for the reconstruction
of the devastated districts satisfies convenience, economics, and
sentiment in a peculiarly direct way. But such supplies were already
arranged for under the Treaty, and the chief value of the new procedure
lies in its replacing the machinery of the Reparation Commission by
direct negotiation between the French and German authorities.[55]
The second set of provisions is, however, of a different character,
since it interferes with the existing agreements between the Allies
themselves as to the order and proportions in which each is to share
in the available receipts from Germany, and seeks to secure for
France a larger share of the earlier payments than she would receive
otherwise. A priority to France is, in my opinion, desirable; but such
priority should be accorded as part of a general re–settlement of
Reparation, in which Great Britain should waive her claim entirely.
Further, the Agreement involves an act of doubtful good faith on the
part of Germany. She has been protesting with great vehemence (and, I
believe, with perfect truth) that the Decisions of London exact from
her more than she can perform. But in such circumstances it is an act
of impropriety for her to enter voluntarily into an agreement which
must have the effect, if it is operative, of further increasing her
liabilities even beyond those against which she protests as impossible.
Herr Rathenau may justify his action by the arguments that this is a
first step towards replacing the Decisions of London by more sensible
arrangements, and also that, if he can placate Germany’s largest and
most urgent creditor in the shape of France, he has not much to fear
from the others. M. Loucheur, on the other hand, may know as well as I
do, though speaking otherwise, that the Decisions of London cannot be
carried out, and that the time for a more realistic policy is at hand;
he may even regard his interviews with Herr Rathenau as a foretaste of
more intimate relationships between business interests on the two sides
of the Rhine. But these considerations, if we were to pursue them,
would lead us to a different plane of argument.
Sir John Bradbury in his Report[56] on the Agreement to the British
Government has proposed certain modifications which would have the
effect of preserving the advantages of the first set of provisions,
but of nullifying the latter so far as they could operate to the
detriment of France’s Allies.
I consider, however, that exaggerated importance has been attached
to this topic, since the actual deliveries of goods made under the
Wiesbaden or similar agreements are not likely to be worth such large
sums of money as are spoken of. Deliveries of coal, dyestuffs, and
ships, dealt with in the Annexes to Part VIII. of the Treaty are
specifically excluded from the operation of the Wiesbaden Agreement
which is expressly limited to deliveries of plant and material, and
these France undertakes to apply _solely_ to the reconstitution of the
devastated regions. The quantities of goods, which French firms and
individuals will be ready to order from Germany at the full market
price, and which Germany can supply, for this limited purpose (so great
a part of the cost of which is necessarily due to _labor_ employed on
the spot and not to materials capable of being imported from Germany),
are not likely to amount, during the next five years, to a sum of money
which the other Allies need grudge France as a priority claim.
My other reserve relates to the supposed importance of the Wiesbaden
Agreement as a precedent for similar arrangements with the other
Allies, and raises the general issue of the utility of arrangements for
securing that Germany should pay in kind rather than in cash, for other
purposes than those of the devastated areas.
It is commonly believed that, if our demands on Germany are met by
her delivering to us not cash but particular commodities selected by
ourselves, we can thus avoid the competition of German products against
our own in the markets of the world, which must result if we compel her
to find foreign currency by selling goods abroad at whatever cut in
price may be necessary to market them.[57]
Most suggestions in favor of our being paid in kind are too vague to
be criticized. But they usually suffer from the confusion of supposing
that there is some advantage in our being paid directly in kind even in
the case of articles which Germany might be expected to export in any
case. For example, the Annexes to the Treaty which deal with deliveries
in kind chiefly relate to coal, dyestuffs, and ships. These certainly
do not satisfy the criterion of not competing with our own products;
and I see very little advantage, but on the other hand some loss and
inconvenience, in the Allies’ receiving these goods direct, instead of
Germany’s selling them in the best market and paying over the proceeds.
In the case of coal in particular, it would be much better if Germany
sold her output for cash in the best export markets, whether to France
and Belgium or to the neighboring neutrals, and then paid the cash
over to France and Belgium, than that coal should be delivered to the
Allies for which the latter may have no immediate use, or by transport
routes which are uneconomical, when neutrals need the coal and what the
Allies really require is the equivalent cash. In some cases the Allies
have re–sold the coal which Germany has delivered to them,—a procedure
which, in the case of an article for which freight charges cover so
large a proportion of the whole value, involves a preposterous waste.
If we try to stipulate the precise commodities in which Germany is to
pay us, we shall not secure from her so large a contribution, as if
we fix a reasonable sum which is within her capacity, and then leave
her to find the money as best she can. If, moreover, the sum fixed is
reasonable, the annual payments will not be so large, in proportion to
the total volume of international trade, that Great Britain need be
nervous lest the payments upset the normal equilibrium of her economic
life in any greater degree than is bound to result in any case from the
gradual economic recovery of so formidable a trade rival as pre–war
Germany.
Whilst I make these observations in the interests of scientific
accuracy, I admit that projects, for insisting on payment in kind may
be very useful politically as a means of escaping out of our present
_impasse_. In practice the value of such deliveries would turn out to
be immensely less than the cash we are now demanding; but it may be
easier to substitute deliveries of materials in place of cash, which
will in practice result in a great abatement of our demands, than to
abate the latter in so many words. Moreover, protests, against leaving
Germany free to pay us in cash by selling goods how and where she can,
enlist on the side of revision all the latent Protectionist sentiment
which still abounds. If Germany were to make a strenuous effort to
pay us by exploiting the only method open to her, namely, by selling
as many goods as possible at low prices all over the world, it would
not be long before many minds would represent this effort as a plot to
ruin us; and persons of this way of thinking will be most easily won
over, if we describe a reduction in our demands, as a prohibition to
Germany against developing a nefarious competitive trade. Such a way
of expressing a desirable change of policy combines, with a basis of
truth, sufficient false doctrine to enable _The Times_, for example,
to recommend it in a leading article without feeling conscious of any
intellectual inconsistency; and it furnishes what so many people are
now looking for, namely, a pretext for behaving sensibly, without
having to suffer the indignity and inconvenience of thinking and
speaking so too. Heaven forbid that I should discourage them! It
is only too rarely that a good cause can summon to its assistance
arguments sufficiently mixed to insure success.
EXCURSUS IV
THE MARK EXCHANGE
The gold value of a country’s inconvertible paper money may fall,
either because the Government is spending more than it is raising by
loans and taxes and is meeting the balance by issuing paper money,
or because the country is under the obligation of paying increased
sums to foreigners for the purchase of investments or in discharge of
debts. Temporarily it may be affected by speculation, that is to say by
_anticipation_, whether well or ill founded, that one or other of the
above influences will operate shortly; but the influence of speculation
is generally much exaggerated, because of the immense effect which it
may exercise momentarily. Both influences can only operate through
the balance of debts, due for immediate payment, between the country
in question and the rest of the world: the liability to make payments
to foreigners operating on this directly; and the inflation of the
currency operating on it indirectly, either because the additional
paper money stimulates imports and retards exports, by increasing
local purchasing power at the existing level of values or because the
expectation that it will so act causes anticipatory speculation. The
expansion of the currency can have no effect whatever on the exchanges
until it reacts on imports and exports, or encourages speculation; and
as the latter cancels out, sooner or later, the effect of currency
expansion on the exchanges can only last by reacting on imports and
exports.
These principles can be applied without difficulty to the exchange
value of the mark since 1920. At first the various influences were
not all operating in the same direction. Currency inflation tended
to depreciate the mark; so did foreign investment by Germans (the
“flight from the mark”); but investment by foreigners in German Bonds
and German currency (an exact line between which and short–period
speculation it is not easy to draw) operated sharply in the other
direction. After the mark had fallen to such a level that more than
25 marks could be obtained for a dollar, numerous persons all over
the world formed the opinion that there would be a reaction some day
to the pre–war value, and that therefore a purchase of marks or mark
Bonds would be a good investment. This investment proceeded on so vast
a scale that it placed foreign currency at the disposal of Germany up
to an aggregate value which has been estimated at from $800,000,000
to $1,000,000,000. These resources enabled Germany, partially at
least, to replenish her food supplies and to restock her industries
with raw materials, requirements involving an excess of imports over
exports which could not otherwise have been paid for. In addition it
even enabled individual Germans to remove a part of their wealth from
Germany for investment in other countries.
Meanwhile currency inflation was proceeding. In the course of the year
1920 the note circulation of the Reichsbank approximately doubled,
whilst on balance the exchange value of the mark had deteriorated only
slightly as compared with the beginning of that year.
Moreover, up to the end of 1920 and even during the first quarter of
1921 Germany had made no cash payments for Reparation and had even
_received_ cash (under the Spa Agreement) for a considerable part of
her coal deliveries.
After the middle of 1921, however, the various influences, which up
to that time had partly balanced one another, began to work all in
one direction, that is to say, adversely to the value of the mark.
Currency inflation continued, and during 1921 the note circulation of
the Reichsbank was nearly trebled, bringing it up to nearly six times
what it had been two years earlier. Imports steadily exceeded exports
in value. Some foreign investors in marks began to take fright and,
so far from increasing their holdings, sought to diminish them. And
now at last the German Government was called on to make important cash
payments on Reparation account. Sales of marks from Germany, instead of
being absorbed by foreign investors, had now to be made in competition
with sales from these same investors. Naturally the mark collapsed. It
had to fall to a value at which new buyers would come forward or at
which sellers would hold off.[58]
There is no mystery here, nothing but what is easily explained. The
credence attached to stories of a “German plot” to depreciate the mark
wilfully is further evidence of the overwhelming popular ignorance of
the influences governing the exchanges, an ignorance already displayed,
to the great pecuniary advantage of Germany, by the international craze
to purchase mark notes.
In its later stages the collapse has been mainly due to the necessity
of paying money abroad in discharge of Reparation and in repaying
foreign investors in marks, with the result that the fall in the
external value of the mark has outstripped any figure which could be
justified merely as a consequence of the present degree of currency
inflation. Germany would require a much larger note issue than at
present, if German internal prices were to become adjusted to gold
prices at an exchange of more than 400 marks to the dollar.[1] If,
therefore, the other influences were to be removed, if, that is to
say, the Reparation demands were revised and foreign investors were to
take heart again, a sharp recovery might occur. On the other hand, a
serious attempt by Germany to meet the Reparation demands would cause
the expenditure of her Government to exceed its income by so great an
amount, that currency inflation and the internal price level would
catch up in due course the external depreciation in the mark.
In either event Germany is faced with an unfortunate prospect. If the
present exchange depreciation persists and the internal price level
becomes adjusted to it, the resulting redistribution of wealth between
different classes of the community will amount to a social catastrophe.
If, on the other hand, there is a recovery in the exchange, the
cessation of the existing artificial stimulus to industry and of the
Stock Exchange boom based on the depreciating mark may lead to a
financial catastrophe.[59] Those responsible for the financial policy
of Germany have a problem of incomparable difficulty in front of them.
Until the Reparation liability has been settled reasonably, it is
scarcely worth the while of any one to trouble his head about a problem
which is insoluble. When stabilization has become a practicable policy,
the wisest course will probably be to stabilize at whatever level
prices and trade seem most nearly adjusted to at that date.
FOOTNOTES:
[32] The preamble states that the settlement is “in accordance with
Article 233 of the Treaty of Versailles.” This Article prescribes
that the scheme of payments shall provide for the discharge of the
liabilities within _thirty_ years, any unpaid balance at the end of
this period being “postponed” or “handled otherwise.” In the actual
settlement, however, the initial limitation to thirty years has been
neglected.
[33] This actual text is printed below in full, Appendix No. 7.
[34] It is not competent for a single Ally (_e.g._, Portugal) to claim
its share of the Bonds and market them at the best price obtainable.
Under the Treaty of Versailles Part VIII. Annex II. 13 (_b_) questions
relating to the marketing of these Bonds can only be settled by
_unanimous_ decision of the Reparation Commission.
[35] The Committee is to coöpt three representatives of neutrals when a
sufficient proportion of the Bonds to justify their representation has
been marketed on neutral Stock Exchanges.
[36] And it really is an adequate rejoinder to deputies like M.
Forgeot. If a partisan or a child wants a silly, harmful thing, it
may be better to meet him with a silly, harmless thing, than with
explanations he cannot understand. This is the traditional wisdom of
statesmen and nursemaids.
[37] The effect of this provision is discussed in _The Economic
Consequences of the Peace_, pp. 165–167.
[38] Cf. Baruch, _The Making of the Reparation and Economic Sections of
the Treaty_, p. 46; and Lamont, _What Really Happened at Paris_, p. 275.
[39] Assuming exports of 10 milliards, which is double the actual
figure of 1920.
[40] _The Truth about the Treaty_, p. 305.
[41] Exports for the six months May–October 1921 were valued at about
40 milliard paper marks (exclusive, I think, of deliveries of coal
and payments in kind to the Allies), as against imports valued at 53
milliard paper marks. If the monthly export figures are converted into
gold marks at the average exchange of the month, the exports for the
six months work out at about 1865 million gold marks, or at the rate of
rather less than 4 milliard gold marks per annum.
[42] In _The Economic Consequences of the Peace_, p. 203, I expressly
premised that my estimates were based on a value of money not widely
different from that existing at the date at which I wrote. Since then
prices have risen and fallen back again. The same proviso is necessary
in the case of the present estimates. It would have been more practical
if, in fixing Germany’s liability in terms of money for a long period
of years, some provision had been made for adjusting the real burden in
accordance with fluctuations in the value of money during the period of
payment.
[43] See Excursus III.
[44] I first published this prediction in August 1921. As this book
goes to press, the German Government have notified the Reparation
Commission (December 15, 1921) that, having failed in their attempt to
secure a foreign loan, they cannot find, apart from deliveries in kind,
more than 150 or 200 million gold marks towards the instalments of
January and February, 1922.
[45] The United States has the right to retain and liquidate all
property, rights, and interests belonging to German nationals and
lying within the territories, colonies, and possessions of the United
States on January 10, 1920. The proceeds of such liquidation are at
the disposal of the United States “in accordance with its laws and
regulations,” that is to say, at the disposal of Congress within the
limitations of the Constitution, and may be applied by them in any of
the three following ways: (1) the assets in question may be returned to
their original German owners; (2) they may be applied to the discharge
of claims by United States nationals with regard to their property,
rights, and interests in German territory, or debts owing to them by
German nationals, or to the payment of claims growing out of acts of
the German Government after the United States entered the war, and also
to the discharge of similar American claims in respect of those of
Germany’s Allies against whom the United States was at war; (3) they
may be turned over to the Reparation Commission as a credit to Germany
under this head.
[46] The rates for conversion of paper marks into gold marks have been
taken as follows: Number of paper marks per 100 gold marks in May,
1465.5; June, 1647.9; July, 1832; August, 1996.4; September, 2443.2;
October, 3942.6
[47] Provisional figures.
[48] The ordinary revenue and expenditure were estimated to balance
at 48.48 milliard paper marks. The extraordinary expenditure was
estimated at 59.68 milliards, making a total expenditure of 108.16
milliards. Included in this, however, were 14.6 milliards for various
Reparation items. These are in respect of various pre–May 1, 1921,
items and do not allow for payments under the London Settlement; but to
avoid confusion I have deducted these from the estimate of expenditure
as stated above. The extraordinary revenue was estimated at 10.5
milliards, making a total revenue of 58.98 milliards.
[49] I have allowed nothing so far for the costs of the Armies of
Occupation, which, under the letter of the Treaty, Germany is under
obligation to pay in addition to the sums due for Reparation proper.
As these charges rank in priority ahead of Reparation, and as the
London Agreement does not deal with them, I think Germany is liable to
be called on to pay these as they accrue in addition to the annuities
fixed in the London Settlement. But I am doubtful whether the Allies
intend in fact to demand this. Hitherto the expense of the Armies has
been so great as to absorb virtually the whole of the receipts (see
Excursus V. below), having amounted by the middle of 1921 to about
$1,000,000,000. In any case, it is now time that the agreement, signed
at Paris in 1919 by Clemenceau, Lloyd George, and Wilson, should be
brought into force, to the effect that the sum payable annually by
Germany to cover the cost of occupation shall be limited to 240 million
gold marks as soon as the Allies “are convinced that the conditions
of disarmament by Germany are being satisfactorily fulfilled.” If we
assume that this reduced figure is brought into force, as it ought to
be, the total burden on Germany for Separation and Occupation comes, on
the assumption of the lower figure for exports, to 3.8 milliard gold
marks, that is, to 76 milliard paper marks.
[50] “This estimate is based on an average wage of about 800 paper
marks monthly for male, and about 400 paper marks monthly for female,
employees.” Converting these figures at the rate of 12 paper marks
equal to 1 gold mark, he arrived at an aggregate national income
between 30 and 34 milliard gold marks. It is not easy to see how these
wage estimates, even assuming their correctness, can lead to so high an
aggregate figure.
[51] There are twice as many male commercial employees as there are
female.
[52] For a full examination of the purchasing power of the paper mark
inside Germany, see an article by M. Elsas in the _Economic Journal_,
September 1921.
[53] A summary of this Agreement and other papers relating to it are
given in the Appendix No. 8.
[54] See Appendix No. 8.
[55] Incidentally the Wiesbaden Agreement sets up a fairer procedure
for fixing the prices of supplies in kind than that contemplated in
the Treaty. According to the Treaty the prices are fixed at the sole
discretion of the Reparation Commission. In the Wiesbaden Agreement
this duty is assigned to an Arbitral Commission consisting of a German
representative, a French representative, and an impartial third who are
to fix the prices, broadly speaking, on the basis of price existing in
France in each quarterly period subject to this price being not more
than 5 per cent below the German price.
[56] See Appendix No. 8.
[57] I return to the theoretical aspects of this question in Chapter VI.
[58] Any one, who can fully persuade himself of the unalterable truth
of the proposition that _every day_ the sales of exchange must exactly
equal the purchases, will have gone a long way towards understanding
the secret of the exchanges.
[59] Furthermore, every improvement in the value of the mark increases
the real burden of what Germany owes to foreign holders of marks and
also the real burden of the Public Debt on the Exchequer. A rate of
exchange exceeding 400 marks to the dollar has at least this advantage
that it has reduced these two burdens to very moderate dimensions.