THE INDEMNITY FUTILITY
The real balance-sheet of the Franco-German War--Disregard of Sir
Robert Giffen's warning in interpreting the figures--What really
happened in France and Germany during the decade following the
war--Bismarck's disillusionment--The necessary discount to be
given an indemnity--The bearing of the war and its result on
German prosperity and progress.
In politics it is unfortunately true that ten dollars which can be seen
bulk more largely in the public mind than a million which happen to be
out of sight but are none the less real. Thus, however clearly the
wastefulness of war and the impossibility of effecting by its means any
permanent economic or social advantage for the conqueror may be shown,
the fact that Germany was able to exact an indemnity of a billion
dollars from France at the close of the war of 1870-71 is taken as
conclusive evidence that a nation can "make money by war."
In 1872, Sir Robert (then Mr.) Giffen wrote a notable article
summarizing the results of the Franco-German War thus: it meant to
France a loss of 3500 million dollars, and to Germany a total net gain
of 870 millions, a money difference in favor of Germany exceeding in
value the whole amount of the British National Debt!
An arithmetical statement of this kind seems at first sight so
conclusive that those who have since discussed the financial outcome of
the war of 1870 have quite overlooked the fact that, if such a
balance-sheet as that indicated be sound, the whole financial history of
Germany and France during the forty years which have followed the war is
meaningless.
The truth is, of course, that such a balance-sheet is meaningless--a
verdict which does not reflect upon Sir Robert Giffen, because he drew
it up in ignorance of the sequel of the war. It does, however, reflect
on those who have adopted the result shown on such a balance-sheet.
Indeed, Sir Robert Giffen himself made the most important reservations.
He had at least an inkling of the practical difficulties of profiting by
an indemnity, and indicated plainly that the nominal figures had to be
very heavily discounted.
A critic[18] of an early edition of this book seems to have adopted most
of Sir Robert Giffen's figures, disregarding, however, certain of his
reservations, and to this critic I replied as follows:
In arriving at this balance my critic, like the
company-promoting genius who promises you 150 per cent. for
your money, leaves so much out of the account. There are a few
items not considered, _e.g._ the increase in the French army
which took place immediately after the war, and as the direct
result thereof, compelled Germany to increase her army by at
least one hundred thousand men, an increase which has been
maintained for forty years. The expenditure throughout this
time amounts to at least a billion dollars. We have already
wiped out the "profit," and I have only dealt with one item
yet--to this we must add,--loss of markets for Germany involved
in the destruction of so many French lives and so much French
wealth; loss from the general disturbance throughout Europe,
and still greater loss from the fact that the unproductive
expenditure on armaments throughout the greater part of Europe
which has followed the war, the diversion of energies which is
the result of it, has directly deprived Germany of large
markets and by a general check of development indirectly
deprived her of immense ones.
But it is absurd to bring figures to bear on such a system of
bookkeeping as that adopted by my critic. Germany had several
years' preparation for the war, and has had, as the direct
result thereof and as an integral part of the general war
system which her own policy supports, certain obligations
during forty years. All this is ignored. Just note how the same
principle would work if applied in ordinary commercial matters;
because, for instance, on an estate the actual harvest only
takes a fortnight, you disregard altogether the working
expenses for the remaining fifty weeks of the year, charge only
the actual cost of the harvest (and not all of that), deduct
this from the gross proceeds of the crops, and call the result
"profit"! Such "finance" is really luminous. Applied by the
ordinary business man, it would in an incredibly short time put
his business in the bankruptcy court and himself in gaol!
But were my critic's figures as complete as they are absurdly
incomplete and misleading, I should still be unimpressed,
because the facts which stare us in the face would not
corroborate his statistical performance. We are examining what
is from the money point of view the most successful war ever
recorded in history, and if the general proposition that such a
war is financially profitable were sound, and if the results of
the war were anything like as brilliant as they are
represented, money should be cheaper and more plentiful in
Germany than in France, and credit, public and private, should
be sounder. Well, it is the exact reverse which is the case. As
a net result of the whole thing Germany was, ten years after
the war, a good deal worse off, financially, than her
vanquished rival, and was at that date trying, as she is trying
to-day, to borrow money from her victim. Within twenty months
of the payment of the last of the indemnity, the bank rate was
higher in Berlin than in Paris, and we know that Bismarck's
later life was clouded by the spectacle of what he regarded as
an absurd miracle: the vanquished recovering more quickly than
the victor. We have the testimony of his own speeches to this
fact, and to the fact that France weathered the financial
storms of 1878-9 a great deal better than did Germany. And
to-day, when Germany is compelled to pay nearly 4 per cent. for
money, France can secure it for 3.... We are not for the moment
considering anything but the money view--the advantages and
disadvantages of a certain financial operation--and by any test
that you care to apply, France, the vanquished, is better off
than Germany, the victor. The French people are as a whole more
prosperous, more comfortable, more economically secure, with
greater reserve of savings and all the moral and social
advantages that go therewith, than are the Germans, a fact
expressed briefly by French Rentes standing at 98 and German
Consols at 83. There is something wrong with a financial
operation that gives these results.
The something wrong, of course, is that in order to arrive at any
financial profit at all essential facts have to be disregarded, those
facts being what necessarily precedes and what necessarily follows a war
of this kind. In the case of highly organized industrial nations like
England and Germany, dependent for the very livelihood of great masses
of their population upon the fact that neighboring nations furnish a
market for their goods, a general policy of "piracy," imposing upon
those neighbors an expenditure which limits their purchasing power,
creates a burden of which the nation responsible for that policy of
piracy pays its part. It is not France alone which has paid the greater
part of the real cost of the Franco-German War, it is Europe--and
particularly Germany--in the burdensome military system and the general
political situation which that war has created or intensified.
But there is a more special consideration connected with the exaction of
an indemnity, which demands notice, and that is the practical difficulty
with regard to the transfer of an immense sum of money outside the
ordinary operations of commerce.
The history of the German experience with the French indemnity suggests
the question whether in every case an enormous discount on the nominal
value of a large money indemnity must not be allowed owing to the
practical financial difficulties of its payment and receipt,
difficulties unavoidable in any circumstances which we need consider.
These difficulties were clearly foreseen by Sir Robert Giffen, though
his warnings, and the important reservations that he made on this point,
are generally overlooked by those who wish to make use of his
conclusions.
These warnings he summarized as follows:
As regards Germany, a doubt is expressed whether the Germans
will gain so much as France loses, the capital of the indemnity
being transferred from individuals to the German Government,
who cannot use it so profitably as individuals. It is doubted
whether the practice of lending out large sums, though a
preferable course to locking them up, will not in the end be
injurious.
The financial operations incidental to these great losses and
expenses seriously affect the money market. They have been a
fruitful cause, in the first place, of spasmodic disturbance.
The outbreak of war caused a monetary panic in July, 1870, by
the anxiety of people who had money engagements to meet to
provide against the chances of war, and there was another
monetary crash in September, 1871, owing to the sudden
withdrawal by the German Government of the money it had to
receive. The war thus illustrates the tendency of wars in
general to cause spasmodic disturbance in a market so
delicately organized as that of London now is.
And it is to be noted in this connection that the difficulties of 1872
were trifling compared to what they would necessarily be in our day. In
1872, Germany was self-sufficing, little dependent upon credit; to-day
undisturbed credit in Europe is the very life-blood of her industry; it
is, in fact, the very food of her people, as the events of 1911 have
sufficiently proved.
It is not generally realized how abundantly the whole history of the
German indemnity bears out Sir Robert Giffen's warning; how this flood
of gold turned indeed to dust and ashes as far as the German nation is
concerned.
First, anyone familiar with financial problems might have expected that
the receipt of so large a sum of money by Germany would cause prices to
rise and so handicap export trade in competition with France, where the
reverse process would cause prices to fall. This result was, in fact,
produced. M. Paul Beaulieu and M. Leon Say[19] have both shown that this
factor operated through the value of commercial bills of exchange,
giving to the French exporter a bonus and to the German a handicap which
affected trade most perceptibly. Captain Bernard Serrigny, who has
collected in his work a wealth of evidence bearing on this subject,
writes:
The rise in prices influenced seriously the cost of production,
and the German manufacturers fought, in consequence, at a
disadvantage with England and France. Finally the goods
produced at this high cost were thrown upon the home market at
the moment when the increase in the cost of living was
diminishing seriously the purchasing power of the bulk of
consumers. These goods had to compete, not only with home
over-production due to the failure to sell abroad, but with
foreign goods, which, despite the tariff, were by their lower
price able to push their way into the German market, where
relatively higher prices attracted them. In this competition
France was particularly prominent. In France the lack of
metallic money had engendered great financial caution, and had
considerably lowered prices all around, so that there was a
general financial and commercial condition very different from
that in Germany, where the payment of the indemnity had been
followed by reckless speculation. Moreover, owing to the heavy
foreign payments made by France, bills drawn on foreign centres
were at a premium, a premium which constituted a sensible
additional profit to French exporters, so considerable in
certain cases that it was worth while for French manufacturers
to sell their goods at an actual loss in order to realize the
profit on the bill of exchange. The German market was thus
being captured by the French at the very moment when the
Germans supposed they would, thanks to the indemnity, be
starting out to capture the world.
The German economist Max Wirth ("Geschichte der Handelskrisen")
expressed in 1874 his astonishment at France's financial and industrial
recovery: "The most striking example of the economic force of the
country is shown by the exports, which rose immediately after the
signature of peace, despite a war which swallowed a hundred thousand
lives and more than ten milliards (two billion dollars)." A similar
conclusion is drawn by Professor Biermer ("Fuerst Bismarck als
Volkswirt"), who indicates that the Protectionist movement in 1879 was
to a large extent due to the result of the payment of the indemnity.
This disturbance of the balance of trade, however, was only one factor
among several: the financial disorganization, a fictitious expansion of
expenditure creating a morbid speculation, precipitated the worst
financial crisis in Germany which she has known in modern times.
Monsieur Lavisse summarizes the experience thus:
Enormous sums of money were lost. If one takes the aggregate of
the securities quoted on the Berlin Bourse, railroad, mining
and industrial securities generally, it is by thousands of
millions of marks that one must estimate the value of such
securities in 1870 and 1871. But a large number of enterprises
were started in Germany of which the Berlin Bourse knew
nothing. Cologne, Hamburg, Frankfurt, Leipzig, Breslau,
Stuttgart, had all their local groups of speculative
securities; hundreds of millions must be added to the thousands
of millions. These differences did not represent merely a
transfer of wealth, for a great proportion of the capital sunk
was lost altogether, having been eaten up in ill-considered and
unattractive expenditure.... There can be no sort of doubt that
the money lost in these worthless enterprises constitutes an
absolute loss for Germany.
The decade from 1870-1880 was for France a great recuperative period,
although for several other nations in Europe it was one of great
depression, notably, after the "boom" of 1872, for Germany. No less an
authority than Bismarck himself testifies to the double fact. We know
that Bismarck was astonished and dismayed by seeing the regeneration of
France after the war taking place more rapidly and more completely than
the regeneration of Germany. This weighed so heavily upon his mind that
in introducing his Protectionist Bill in 1879 he declared that Germany
was "slowly bleeding to death," and that if the present process were
continued she would find herself ruined. Speaking in the Reichstag on
May 2, 1879, he said:
We see that France manages to support the present difficult
business situation of the civilized world better than we do;
that her Budget has increased since 1871 by a milliard and a
half, and that thanks not only to loans; we see that she has
more resources than Germany, and that, in short, over there
they complain less of bad times.
And in a speech two years later (November 29, 1881) he returned to the
same idea:
It was towards 1877 that I was first struck with the general
and growing distress in Germany as compared with France. I saw
furnaces banked, the standard of well-being reduced, and the
general position of workmen becoming worse and business as a
whole terribly bad.
In the book from which these extracts are taken[20] the author writes as
an introduction to Bismarck's speeches:
Trade and industry were in a miserable condition. Thousands of
workmen were without employment, and in the winter of 1876-77
unemployment took great proportions, and soup-kitchens and
State workshops had to be established.
Every author who deals with this period seems to tell broadly the same
tale, however much they may differ in detail. "If only we could get back
to the general position of things before the war," said M. Block in
1879. "But salaries diminish and prices go up."[21]
At the very time that the French millions were raining in upon Germany
(1873) she was suffering from a grave financial crisis, and so little
effect did the transfer of the money have upon trade and finance in
general, that twelve months after the payment of the last of the
indemnity we find the bank rate higher in Berlin than in Paris; and, as
was shown by the German economist Soetbeer, by the year 1878 far more
money was in circulation in France than in Germany.[22] Hans Blum,
indeed, directly ascribed the series of crises between the years 1873
and 1880 to the indemnity: "A burst of prosperity and then ruin for
thousands."[23] Throughout the year 1875 the bank rate in Paris was
uniformly 3 per cent. In Berlin (Preussische Bank, which preceded the
Reichs Bank) it varied from 4 to 6 per cent. A similar difference is
reflected by the fact that, between the years 1872 and 1877, the
deposits in the State savings banks in Germany actually fell by roughly
20 per cent., while in the same period the French deposits _increased_
about 20 per cent.
Two tendencies plainly show the condition of Germany during the decade
which followed the war: the enormous growth of Socialism--relatively
much greater than any which we have ever since seen--and the immense
stimulus given to emigration.
Perhaps no thesis is commoner with the defender of war than this: that,
though one may not be able in a narrow economic sense to justify an
enterprise like that of 1870, the moral stimulus which victory gave to
the German people is accepted as being of incalculable benefit to the
race and the nation. Its alleged effect in bringing about a national
solidarity, in stimulating patriotic sentiment and national pride, in
the wiping out of internal differences and Heaven knows what, are claims
I have dealt with at greater length elsewhere, and I wish only to note
here that all this high-falutin does not stand the test of facts. The
two phenomena just mentioned--the extraordinary progress of Socialism
and the enormous stimulus given to emigration during the years which
immediately followed the war--give the lie to all the claims in
question. In 1872-73, the very years in which the moral stimulus of
victory and the economic stimulus of the indemnity should have kept at
home every able-bodied German, emigration was, relatively to the
population, greater than it has ever been before or since, the figures
for 1872 being 154,000 and for 1873 134,000.[24] And at no period since
the fifties was the internal political struggle so bitter--it was a
period of repression, of prescription on the one side and class-hatred
on the other--"the golden age of the drill-sergeant," some German has
called it.
It will be replied that, after the first decade, Germany's trade has
shown an expansion which has not been shown by that of France. Those who
are hypnotized by this, quietly ignore altogether one great fact or
which has affected both France and Germany, not only since the war, but
during the whole of the nineteenth century, and that factor is that the
population of France, from causes in no way connected with the
Franco-Prussian War, since the tendency was a pronounced one for fifty
years before, is practically quite stationary; while the population of
Germany, also for reasons in no way connected with the war, since the
tendency was also pronounced half a century previously, has shown an
abounding expansion. Since 1875 the population of Germany has increased
by twenty million souls. That of France has not increased at all. Is it
astonishing that the labor of twenty million souls makes some stir in
the industrial world? Is it not evident that the necessity of earning a
livelihood for this increasing population gives to German industry an
expansion outside the limits of her territory which cannot be looked for
in the case of a nation whose social energies are not faced with any
such problem? There is this, moreover, to be borne in mind: Germany has
secured her foreign trade on what are, in the terms of the relative
comfort of her people, hard conditions. In other words, she has secured
that trade by cutting profits, in the way that a business fighting
desperately for life will cut profits, in order to secure orders, and by
making sacrifices that the comfortable business man will not make.
Notwithstanding the fact that France has made no sensational splash in
foreign trade since the war, the standard of comfort among her people
has been rising steadily, and is without doubt generally higher to-day
than is that of the German people. This higher standard of comfort is
reflected in her financial situation. It is Germany, the victor, which
is to-day in the position of a suppliant in regard to France, and it is
revealing no diplomatic secrets to say that, for many years now, Germany
has been employing all the wiles of her diplomacy to obtain the official
recognition of German securities on the French Bourses. France
financially has, in a very real sense, the whip hand.
That is not all. Those who point triumphantly to German industrial
expansion, as a proof of the benefits of war and conquest, ignore
certain facts which cannot be ignored if that argument is to have any
value, and they are these:
1. Such progress is not peculiar to Germany; it is shown in an equal or
greater degree (I am speaking now of the general wealth and social
progress of the average individual citizen) by States that have had no
victorious war--the Scandinavian States, the Netherlands, Switzerland.
2. Even if it were special to Germany, which it is not, we should be
entitled to ask whether certain developments of German political
evolution, which _preceded the war_, and which one may fairly claim have
a more direct and understandable bearing upon industrial progress, are
not a much more appreciable factor in that progress than the war
itself--I refer particularly, of course, to the immense change involved
in the fiscal union of the German States, which was completed before the
Franco-German War of 1870 had been declared; to say nothing of such
other factors as the invention of the Thomas-Gilchrist process which
enabled the phosphoric iron ores of Germany, previously useless, to be
utilized.
3. The very serious social difficulties (which have, of course, their
economic aspect) that _do_ confront the German people--the intense class
friction, the backwardness of parliamentary government, the survival of
reactionary political ideas, wrapped up with the domination of the
"Prussian ideal"--all difficulties which States whose political
development has been less marked by successful war (the lesser European
States just mentioned, for instance)--are not faced with in the same
degree. These difficulties, special, among the great European nations,
to Germany, are certainly in a large measure a legacy of the
Franco-German War, a part of the general system to which that war gave
rise, the general character of the political union which it provoked.
The general ascription of such real progress as Germany has made to the
effects of the war and nothing else--a conclusion which calmly ignores
factors which have evidently a more direct bearing--is one of those _a
priori_ judgments repeated, parrot fashion, without investigation or
care even by publicists of repute; it is characteristic of the
carelessness which dominates this whole subject. This more general
consideration, which does not properly belong to the special problem of
an indemnity, I have dealt with at greater length in the next section.
The evidence bearing on the particular question, as to whether in
practice the exaction of a large monetary indemnity from a conquered foe
can ever be economically profitable or of real advantage to the
conqueror, is of a simpler character. If we put the question in this
form, "Was the receipt of the indemnity, in the most characteristic and
successful case in history, of advantage to the conqueror?" the reply is
simple enough: all the evidence plainly and conclusively shows that it
was of no advantage; that the conqueror would probably have been better
without it.
Even if we draw from that evidence a contrary conclusion, even if we
conclude that the actual payment of the indemnity was as beneficial as
all the evidence would seem to show it was mischievous; even if we could
set aside completely the financial and commercial difficulties which its
payment seems to have involved; if we ascribe to other causes the great
financial crises which followed that payment; if we deduct no discount
from the nominal value of the indemnity, but assume that every mark and
thaler of it represented its full face value to Germany--even admitting
all this, it is still inevitable that _the direct cost of preparing for
a war and of guarding against a subsequent war of retribution must, from
the nature of the case, exceed the value of the indemnity which can be
exacted_. This is not merely a hypothetical statement, it is a
commercial fact, supported by evidence which is familiar to us all. In
order to avoid repaying, with interest, the indemnity drawn from France,
Germany has had to expend upon armaments a sum of money at least equal
to that indemnity. In order to exact a still larger indemnity from
Great Britain, Germany would have to spend a still larger sum in
preparations, and to guard against repayment would be led into
indefinite expenditure, which has only to go on long enough inevitably
to exceed the very definite indemnity. For, it must be remembered that
the amount of an indemnity extractable from a modern community, of the
credit era, has very definite limits: an insolvent community can pay
more. If the Statesmen of Europe could lay on one side, for a moment,
the irrelevant considerations which cloud their minds, they would see
that the direct cost of acquisition by force must in these circumstances
necessarily exceed in value the property acquired. When the _indirect_
costs are also considered, the balance of loss becomes incalculably
greater.
Those who urge that through an indemnity, war can be made to "pay" (and
it is for them that this chapter is written), have before them problems
and difficulties--difficulties of not merely a military, but of a
financial and social character--of the very deepest kind. It was
precisely in this section of the subject that German science failed in
1870. There is no evidence that much progress has been made in the study
of this phase of the problem by either side since the war--indeed, there
is plenty of evidence that it has been neglected. It is time that it was
scientifically and systematically attacked.
Those who wish well for Europe will encourage the study, for it can have
but one result: to show that less and less can war be made to pay; that
all those forces of our world which daily gain in strength make it, as
a commercial venture, more and more preposterous. The study of this
department of international polity will tend to the same result as the
study of any of its facets: the undermining of those beliefs which have
in the past so often led to, and are to-day so often claimed as the
motives likely to lead to, war between civilized peoples.