I have no hesitation in saying that from our point of view one of the
most encouraging features of the whole situation is the extraordinary
collapse of German credit--extraordinary, I mean, in comparison with her
apparent successes in the campaign on land. The heavy decline in the
value of German and Austrian money in neutral countries is an absolutely
unmistakable sign that the finances of our enemies are, after eighteen
months of War, reaching a condition which before long must prove a
source of the gravest embarrassment to the Central Powers.
As I write, the exchange value of the sovereign in the United States is
about two per cent, below normal, and the same condition exists in
Holland and Scandinavia. Considering how much we have been buying
abroad, such a trifling depreciation in our credit is a wonderful
testimony to the stability of British institutions. But if we turn to
German and Austrian currency we find that it has declined in value from
twenty to thirty per cent. In other words, neutral countries are
beginning to show themselves unwilling to take German money; and as
Germany can now buy only from neutral countries, it is quite obvious
that she not only has a difficulty in paying for her purchases, but that
she has also to pay an exceedingly inflated price for them.
My readers will remember the sensation that was caused when, owing to
our heavy purchases of food and war material from America, the value of
the sovereign dropped something like six per cent. That meant that for
every hundred pounds we paid to America for goods bought we were losing
six pounds owing to the fall in the exchange; and when it is recalled
that our purchases were on a scale which involved hundreds of millions,
it will be seen that the decline was a very serious matter for us. But
so good was our credit that there was no difficulty in floating a huge
loan in America, and the result was that the value of the sovereign at
once appreciated, and it has never seriously dropped since; in fact, it
has steadily risen. The process was helped by selling American
securities, of which we hold huge sums. We can repeat both processes as
often as we like in reason, because our credit is good, and our holdings
of American securities are still enormous. Germany can do neither--
firstly, because her credit is utterly impoverished, and, secondly,
because, whatever she may sell, she and those with whom she would like
to deal have no security that the goods would have more than a very
slender chance of getting through the British blockade. Here, again, we
see how our overwhelming sea power is helping the cause of the Allies.
In spite of the huge sums we are spending, Germany is infinitely worse
off than we are, and there is every reason to believe that the
tremendous fall which her money is now experiencing means that her
credit abroad is rapidly nearing the exhaustion point.
The fall in the value of German money tends to show that our blockade is
operating with increasing stringency and success. It seems probable
enough that Germany can still manage to obtain through the neutral
countries many of the things of which she has most pressing need. But
apparently her export trade has been much more severely hit. She
depends for this trade upon the import of raw materials, most of which
are extremely bulky and quite unlikely to escape the unremitting
vigilance of the British Navy. Consequently Germany finds herself
unable to pay for her imports by the ordinary channels of international
trade, and the difficulty of paying at all has become serious. Nearly
all modern business is done on a paper basis; that is to say, on
promises to pay--in other words, on credit--and credit obviously depends
upon the financial stability of the concern or the nation which seeks
thus to obtain goods. That is why the continued decline in the value of
the paper mark shows the declining confidence of the neutral nations in
Germany's power to redeem her pledges when the time for payment comes.
Germany's ultimate solvency depends upon her ultimate victory, and we
can see by the reluctance of the neutral nations to give credit to
Germany that they are very far from satisfied with Germany's prospect of
coming out "on top." And when neutral financiers come to the conclusion
that the War will end in Germany's absolute bankruptcy--that is, in her
inability to pay more than a few shillings in the pound of her debts--
the value of her paper promises will sink almost to vanishing point, and
there will be such a financial crash as this world has never seen. The
faith of the neutral in German stability is wavering already, while the
Allies still hold the confidence of the world. That is a factor of
supreme importance. The day will come when not a single neutral will
trade with Germany except on a gold basis, and when that day dawns the
utter collapse of the Central Powers will assuredly be close at hand.
We have just seen a very striking evidence of Germany's impoverishment
in regard to the supply of wheat which Germany desired to purchase from
Rumania. If there is one commodity which Germany needs more than any
other to-day it is wheat. Rumania demanded that the wheat should be
paid for in gold in Bucharest. The German and Austrian Governments
offered anything and everything else except gold. They offered first
ammunition, then paper, then Rumanian Treasury bonds, ammunition, and
paper. The Rumanians, however, insisted upon gold, and the deal fell
through for the simple reason that Germany had no gold to spare. Few
instances have been more eloquent of the state to which Germany is
reduced. And what Rumania says to-day the rest of the neutrals are
likely enough to say to-morrow--"Either gold or no goods." We can be
quite sure that if Germany meets with a single great defeat in the
operations which are assuredly near at hand, there will be a revulsion
of feeling in the neutral countries which will render the demand for
gold insistent. And if Germany cannot find gold to pay for the wheat
she so sorely needs from Rumania, what are her prospects of finding it
for other countries?
Now the German method of financing the War has constituted one of the
most extraordinary gambles known in the history of finance. She has
piled up an enormous debt in paper. The _Economist_ estimates the total
of Germany's war credits up to the end of December last at 1,500 million
pounds sterling, and the average monthly war expenditure at 92.350
million pounds. Towards this Germany had raised up to September 15,
1915, 1,280 million pounds. In Germany these loans have been cited as a
proof that financially the country is impregnable. But this assertion
does not convince. The loans have been obtained only by wholesale
inflation through borrowing on Treasury bills from the Reichsbank. The
amount of these bills outstanding is carefully concealed from the world,
but it is certainly enormous, and it seems to be rising rapidly again,
though Germany's third loan was floated quite recently. The amount of
these bills on January 15 was estimated at 250 million pounds. It is
easier to trace the amount of the inflation of the currency by paper,
and by paper without any gold backing. Between July, 1914, and January
15, 1916, the amount of Reichsbank notes in circulation increased from
95 million pounds to 319 million pounds and the amount of Treasury notes
from 7 million pounds to 16 million pounds, while another 54 million
pounds in paper was added in the form of Loan Office notes. That is to
say, since the outbreak of war the amount of paper currency has
increased from 101 million pounds to 389 million pounds, or about 285
per cent. How much the financial position has been worsened by the
extension of banking credits we do not know, as the bi-monthly
statements of the great banks have, most significantly, been
discontinued. It is true that during the same period the amount of gold
in the Reichsbank has been increased by 55 million pounds. But a large
part of this increase, it is believed, came from the reserve of the
Austro-Hungarian Bank, and in any case it is not nearly sufficient to
have the smallest effect in counteracting the flood of paper. The
effects of the inflation of the currency and its debasement by the huge
issues of paper money are seen in the rapid collapse of the mark and the
equally rapid rise in prices which in Germany to-day is making the lives
of the poorer people well-nigh unbearable. And it is most noteworthy
that in those countries where Germany has been able to trade with the
greatest freedom the collapse of German credit is most unmistakable.
That is for Germany, as well as for ourselves, a grave and unmistakable
fact; it is verily the writing on the wall. Germany has been weighed
and found wanting in the balance of the neutral nations who are more
friendly disposed towards her.
To meet the expense of the War Germany has issued paper to her own
population on a scale of which the world has had no experience. In
return for the paper promises of the Government they have poured out
with a lavish hand everything of which the Government stood in need, and
it is impossible not to marvel at what is either patriotism or a very
high order of gullibility carried to the extremest limits. In either
case Germany's people have lent to her vast sums for a mere paper
security, quite apart from the amounts she has expended in other
countries and which she will have to pay for in gold or exports, which
come to the same thing. What, we may well ask, will be the position
when, after the War, German merchants want money--not paper--to resume
their trading with the rest of the world, to purchase the raw material
upon which the very life of her commerce depends? How is the Government
to raise the gigantic sums that will be required not merely to pay
interest on this stupendous pile of debt, but to begin to form a sinking
fund to pay it off?
My own view--and it is shared by many others--is that Germany's
borrowings on such a stupendous scale were made possible only because
the German people, convinced that they were really and truly the
supermen they fancied themselves to be, were firmly persuaded that they
were going to win the War "hands down." They were assured _ad nauseam_
that speedy victory was certain, that France was to be instantly crushed
and Russia crippled, that Britain could not intervene in anything like
decisive fashion in time to save her Allies, and that the end of the War
would come in a few months at most, with a triumphant Germany extorting
untold millions in the shape of indemnities from her trampled and
bleeding enemies. The War was to be, in fact, a highly profitable trade
undertaking, in which Germany's losses in killed and maimed were to be
more than compensated for by increased wealth drawn from the coffers of
her enemies, and especially England, the worst enemy of all.
But the War has not quite "panned out" to schedule, and Germany is
to-day rapidly realising the fact. "In my opinion," said Lord Inchcape,
speaking at the annual meeting of the National Provincial Bank of
England, "Germany is already irretrievably beaten, and no one knows this
better than she does herself." That is a very strong expression of
opinion from a man who is in a position to know what he speaks of when
he deals with matters of finance. As I have said before, I do not
believe that money alone can win the War, but there can be no reasonable
doubt that the growing financial difficulties of Germany are swiftly
bringing her to a position in which she will find it impossible to
oppose with any hope of success the steadily growing power of the
Allies. So much at least money can do and is doing, though the final
blow must be dealt in decisive military action. Otherwise Germany will
never be convinced that she is really and truly beaten, her people will
be told again that they are unconquerable, and she will begin with all
her wonderful organising powers to prepare for a renewed campaign of
aggression in the future.
I cannot see how Germany is to be preserved from national bankruptcy; I
cannot conceive any means by which she can hope to pay off the enormous
debt she has piled up. Her export trade is utterly smashed, and it must
take years to get it back even if the Allies are foolish enough after
the War to allow her the commercial privileges she has enjoyed in the
past, which is most unlikely. Her losses in men and material have been
stupendous, she is eating herself up, she is blazing away her piled-up
wealth at a time when she cannot keep going even a fraction of her
commerce to make up for the steady drain upon her. We at least are free
to trade overseas to as great an extent as we can manufacture, and it is
a very gratifying fact that the trade of the United Kingdom has in the
past few months shown a steady increase; February showed an advance of
10 million pounds on the corresponding month of 1915. We are not losing
our markets to the extent that Germany is, for the simple reason, again,
that our Fleet can keep open our trade routes. And we have also to pay
regard to the fact that the German is not going to be a popular
individual for a good many years to come in any civilised country. At
the best he is going to have a good deal of trouble to persuade any of
the Allies to do business with him on any terms whatever; at the worst
it is more than likely that he will find himself shut out completely by
an overwhelming tariff from every British, French, Russian, Italian, and
Japanese market. How, under such conditions, Germany will ever succeed
in paying her debts I cannot understand.
Borrowing in such a War as this is unavoidable for any of the
belligerents; it is impossible to defray the stupendous cost out of
income. The whole problem to be solved is whether it is possible to
secure by taxation the interest on the increased debts and also a margin
of revenue which during the War will help to pay for it, and after the
War will provide a sinking fund to gradually pay off the sums borrowed.
Germany's paper system is all wrong, because, in the first place, she
has not the gold to back it up, and, in the second place, because no
provision has been made by taxation to raise sums sufficient to provide
interest and sinking fund. Even before the War Germany's yearly budgets
have been showing a series of deficits, and with the stupendous amount
she has added to her debts it is difficult to see how after the War is
over she will be able to avoid defaulting. She will certainly not
succeed in securing any indemnity as she did from France in 1871; she
will far more probably find herself condemned to pay at least sufficient
money to provide for the rehabilitation, so far as is possible, of
Belgium.
There is, it is true, one aspect of the case which is to some extent
favourable to Germany. A great portion of her war debt--in fact,
practically the whole of it--is held at home, and it is quite possible
that at the end of the War the people who have entrusted her with their
savings will find themselves told that they will have to wait
indefinitely for their money. Repudiation on this scale would perhaps
enable Germany to keep herself right with the rest of the world and
avoid actual default in the international sense. But the effect on her
own people would be appalling! Now it is a very remarkable fact that
though the German Government has carefully kept from the mass of the
people any real knowledge of the facts of the situation as we know it
exists, it has during the past few months been allowing certain
newspapers to warn the public in guarded terms of what is coming. The
_Berliner Post_ states openly that the situation is "terrifying." That
is a good deal of an admission for a people who a few months ago were
setting out, as they themselves said, on a conquest of the world, and
were going to extort the cost from their beaten enemies. Warning the
German people that they must be prepared for very bad times, the _Post_
goes on to say:
Even the highest war indemnity that is thinkable cannot preserve us
from a stupendous addition to the Imperial Budget for 1916-17.
Without war damages we shall have to reckon upon an increase in the
yearly taxation of at least four milliards of marks. From a technical
point of view alone such amount cannot be procured immediately by
taxation. From the political point of view it would be a great
mistake if the population was not gradually acquainted with the
situation, which, looked upon as a whole, has something terrifying
about it.
Only by slowly being made accustomed to it can the situation become
softened for the people. Probably the State Secretary for Finance,
when he introduces his proposals for the new taxation, will give as
near as possible a review of what the annual deficit will be. German
people will only then be able to understand what wounds the War has
made and what great measures will be necessary for years to come to
heal them. At present the greatest part of the people probably has no
idea of the situation.
It is perhaps permissible to ask, in view of this outburst, what the
German people, deluded and hoodwinked for so long, are likely to say
when the full facts break upon their minds. It will be noted that the
_Berliner Post_ deals with the financial situation apart from the war
expenses, and finds very little comfort in it. The German people will
find still less to be exultant about when the whole truth appears, as
sooner or later it must, for it cannot be hidden much longer. Up to the
present Germany has imposed practically no new taxes; they will be on a
crushing scale when the German people have to set themselves to pay the
damages involved in the conflagration which they so wantonly provoked.
But, doubters will ask, are we in any better case? I will quote in
answer Sir George Paish, one of our leading financial authorities. "We
may confidently expect," he recently declared, "that the nation after
the War will have as much capital for investment as before the War."
In twelve months of war Great Britain has been able to buy and to pay
for nearly 900 million pounds of Colonial and foreign produce and goods
for home consumption and for war purposes. In addition she has found
something like 350 million pounds of money for her Allies, Colonies, and
customers. She has met her own war expenses, amounting to 1,000 million
pounds, exclusive of the 350 million pounds supplied to her Allies and
Colonies for war purposes. This great amount of money has been found
with surprising ease. But it is during the current year that we shall
feel the severest strain. We have to maintain upon the seas a Fleet
even more powerful than that of last year, to provide our Allies,
Colonies, and friends with at least 400 million pounds in loans, and to
support in the field forces numbering nearly four million men, which
will cost anything up to 2,000 million pounds. And in spite of these
gigantic liabilities we find to-day that British credit stands
practically unimpaired, while that of Germany is rapidly falling, and
may soon vanish altogether. If the War has done nothing else, it has
given the world such an example of financial stability as has never been
seen.
It is the deliberate opinion of Sir George Paish that our position after
the War will be just about where we stood at the beginning. We shall
have sold a great many of our foreign securities, but, on the other
hand, we shall have bought others from our Allies, customers, and
Colonies, and, on balance, neither our home nor our foreign wealth will
have been appreciably reduced. What we shall have lost will be our new
savings. This loss amounts already to about 600 million pounds; if the
War lasts another year it will have reached 1,000 million pounds in
comparison with what our wealth would have been but for the War.
Of course, we shall have created a great debt. Already our debt,
including the pre-war debt, is about 2,200 million pounds, and the debt
charge and current Government expenses are about 300 million pounds.
But it must be remembered that some 100 million pounds of this is
interest which accrues to British investors, and that a large part of
this interest will still be available for new capital purposes. Our
losses in men will be grievous. But it must be recalled that one lesson
of the War is that the whole nation is learning to work harder and more
efficiently and that, in consequence, it is very doubtful whether our
productive capacity has been seriously, if at all, reduced. When our
men return from the War we shall have an enormous supply of labour
available, and for the full employment of that labour we shall be able
to find the capital. Will Germany be in anything like so favourable a
position?
The bold and courageous policy of Mr McKenna in grappling adequately
with the problem of finance has secured the emphatic approval of the
entire nation. New burdens have been cheerfully shouldered; the country
has shown unmistakably that it is prepared to make any sacrifices to win
the War, and we have seen the income-tax doubled with far less protest
than would have been aroused by the addition of a penny a few years ago.
The nation has set itself to meet the cost of the War in the only
possible way, by reducing all unnecessary expenditure, public and
private, and devoting itself to the maintenance of our essential
services, anxious only that so long as efficiency is secured money shall
not be spared. We have boldly faced the enormous additional taxation
rendered necessary by the gigantic war expenditure, and therein we have
a tremendous advantage over Germany, who is only now beginning to
consider the new taxes that will be required, and does not seem
particularly gratified by the prospect with which she finds herself
faced. Ominous mutterings of the coming storm are already to be heard,
and when that storm breaks not even the iron discipline with which the
Prussians have dragooned the entire German people will suffice to
protect them from the wrath of those whom they have so grossly deceived.
I do not know whether the German Government will dare to attempt to
impose anything like the taxation which would be necessary to make
provision for the war debt, but I am at least certain that as matters
stand in Germany to-day the people have neither the will nor the ability
to find the money. They have been fed with lying assurances that the
money is to be found by someone else, and their rage and disappointment
when they find out how they have been deceived will, beyond doubt, lead
to consequences little foreseen by the light-hearted blunderers who set
half the world in flames eighteen months ago.
I do not think that either now or in the future we need fear any
comparison between the financial position of Britain and of her enemy.
We are, and always have been, a far wealthier nation than the Germans;
our credit is good, while Germany's is tottering to complete collapse;
our resources in capital are as yet not seriously touched; our trade,
even though its volume be diminished by the withdrawal of men for the
Army and for munition making, still goes on as far as we can carry it.
The real financial strength of the British Empire has as yet not been
fully marshalled for the fray, and should the day ever come when money
must be found beyond the resources of ordinary taxation there are vast
reservoirs of strength which will yield supplies in abundance. For we
are in this War to win--let there be no mistake about that--and to gain
a complete and lasting victory there is no sacrifice that our people,
properly instructed, will refuse to make. "To the last man and the last
shilling" if necessary must be our motto. Our people ask only for a
definite and a strong lead; if they get that, we need have no fear of
the outcome of the greatest struggle we have ever been called upon to
wage.