A history of commerce

by Clive Day

748. The question of reparation; Germany’s quick assets.—Important as were these territorial changes for the future of France they offered little help in her present emergency. She needed immediately a great fund of fluid wealth, which could be used to repair the damage done to her by the war, and felt that she had the right to look to Germany, the deliberate aggressor in the conflict, to make good the losses which she had suffered.

Reference to the table of costs of the war in a preceding chapter will show the lamentable inadequacy of German resources to make good the total losses for which Germany was responsible. The costs could have been met only in small part even if the total national wealth of Germany as it was before the war could have been expropriated. Some parts of that wealth, indeed, could be and were taken; such were securities representing German investments in foreign countries, and ships, which could be moved to any part of the world without losing their value. In the aggregate these items went but a little way toward meeting the total costs. Another item, the stock of precious metals which the German government had accumulated and retained, was not so readily available as it appeared to be; on that stock was based the whole structure of public and private credit in Germany, and a drain upon it, if excessive, would cause a collapse that would seriously affect the solvency of the country. Germany was in such desperate straits at the close of the war that the allies of the Entente were forced to allow her to buy food from the outside with part of the gold reserve, and saw it melting away before their eyes. In sum, the “quick assets” of Germany were pitifully small to meet the bill of costs; they were estimated to amount to several milliard dollars, but when the necessary deductions were made they offered scarcely one milliard for reparations.

749. Principle conditioning Germany’s capacity to pay.—Most of the wealth of Germany was fixed in the country, and was not directly available for reparation. There was no sense in confiscating and distributing it. The reader will better understand that essential point if he will face the question: how could the benefits arising from the ownership of that wealth be transferred to other countries to be enjoyed in them? Suppose that you are granted, to repair your losses in the war, the ownership of a German farm or factory; how will you get any good from it? You want some real material good, something that you could enjoy yourself, or could exchange to advantage. A piece of paper would not satisfy you. Gold would be acceptable, but the Germans had little of that left, needed a minimum amount to enable them to continue in business, and could get more only as they bought it abroad. To pay you something real the Germans would have to ship out something real, whether they paid it directly to you or bought with it “foreign exchange,” that is, the right to something real, gold or its material equivalent, in the country in which you live. After the initial payment of the country’s quick assets, Germany could pay only a sum equal in value to the excess of German exports over imports during any period of time that might be determined. This was the fundamental principle limiting the amount of payment in reparations that could effectively be imposed.

750. Practical limits of amount and period of payments.—There were, therefore, two factors to be considered in fixing the amount to be exacted: the amount per year that Germany could pay, and the number of years over which payments should extend. Trustworthy investigators reached the conclusion that Germany before the war, with its productive organization unimpaired, would have been able to pay about one milliard dollars a year. Here was given the maximum for one factor. Various considerations set a limit to the other factor, the period of time during which payments should be exacted. On this as on other points there was no general agreement; the situation at the close of the war was too tense to permit participants in it to judge the question calmly. Fair-minded friends of the western allies believed, however, that the interests of the allies themselves required the limitation of the period during which the payment should be made to a definite and reasonably short time, say thirty years, the span of a human generation. This restriction was prompted by regard to justice, by the impropriety of visiting on future generations the sins of their ancestors. It accorded with considerations of political expediency; the payment of reparations was certain to introduce an element of strain in international relations, both economic and political, which must not be too long continued. Finally, and practically of the greatest importance, the benefit to be derived from reparations grew rapidly less as the time of payment was extended. The reader doubtless knows how quickly sums mount up when they are put at compound interest. He should realize that payments to be made in the future shrink correspondingly when their present value is computed by a process of discount. How much will you give for my pledge to pay one dollar fifty years hence? You are foolish if you offer more than a small fraction over five cents, when the rate of interest is 6%.

With due regard to all the factors in the settlement sober and competent students of the question believed that the maximum payment which should be imposed on Germany might amount to a lump sum in present value of ten to fifteen milliards of dollars.

751. Provisions of the Treaty of Versailles regarding reparations.—By the Treaty of Versailles (article 231) Germany accepted “the responsibility of Germany and her allies for causing all the loss and damage to which the Allied and Associated Governments and their nationals have been subjected as a consequence of the war imposed upon them by the aggression of Germany and her Allies.” The treaty itself recognized that the resources of Germany were not sufficient for complete reparation, but, most unfortunately, did not itself fix a definite sum, the maximum which Germany might reasonably be expected to pay with reference to the practical factors which have been sketched in the preceding section. Some of the European leaders in the Entente had held out extravagant prospects of indemnity to their people, and were unwilling as yet to confess the facts. The exact terms of payment were therefore left to be settled later by a Reparations Commission which was given far-reaching powers to get the most it could up to a limit set so high that it manifestly exceeded German capacity to pay. Then followed a period of bitter contest in which the Allies by threats, by fiscal penalties, and by actual occupation of German territory sought to make good their claims, while the Germans fell behind in payment and stolidly professed their inability to meet the demands imposed upon them. Recovery and reconstruction were seriously delayed, both in western and in central Europe.

752. London settlement of May, 1921.—A substantial approach toward a practicable settlement of the question of reparations was made in conditions drawn up in London in May, 1921, and imposed on Germany under threat of an occupation of the district of the Ruhr. The terms are complicated, and are not worth a detailed description for they will probably be amended, but they are of interest as indicating the form that the final settlement may possibly take. A summary of the most important provisions follows: figures are stated in milliards of gold marks, a unit roughly equal to 250 million dollars.

Germany was bound to annual payments under two heads: first a fixed sum of 2 milliards, second, a sum equal in amount to about one quarter (26%) of the value of German exports for the year, but not less than 1 milliard. On the basis of these annual payments of a minimum of 3 milliard the allies were to issue German bonds of a face value of 50 milliard, on which 5% interest could be paid and still leave available half a milliard a year to be employed in a sinking fund toward the extinction of the debt; after a period of about thirty-seven years Germany would be free. The allies hoped to realize the present value of the bonds by selling them to investors, and thus get ready funds for economic reconstruction; while they professed to believe that the minimum of 3 milliard marks a year was well within the German capacity to pay. Germany before the war had, indeed, an export trade amounting to 8 milliard marks and over, while this arrangement assumed only about 4 milliard, but assumed that the exports could carry the burden of a heavy tax. The provision for the variable payment of 26% of the exports assured the allies that they would share in Germany’s prosperity if it actually did return; and arrangements were made for the possible issue of more bonds on this basis up to the amount of 82 milliard, making the total capital sum 132 milliard—over thirty thousand million dollars. The bonds were to be distributed among the allied states in the following proportions: France 52 per cent of the issue, United Kingdom 22, Italy 10, Belgium 8, and the remainder to other countries.

753. Objectionable aspect of reparation payments.—Attention should now be directed to an interesting and important feature of the reparation question. Germany, as has been said, could pay an indemnity only by a surplus of exports over a long period of years. Likewise, the allies in the long run could receive an indemnity only in the form of a surplus of imports. Might not this flow of goods, forced by pressure on Germany, be a curse rather than a blessing to the country receiving it; might it not undermine home industries? Or, if a tariff protected the producer at home might it not simply divert this flow to neutral markets, where the British or French exporter would find himself crowded out by a competition that was fierce and unyielding because of the military pressure behind it—the military pressure of his own home government! If Germany endured the strain would she not at the end of a generation rule the markets of the world, win the world by losing the war? The situation sounds so paradoxical that it is hard to realize how serious is its import. Only by a surplus of exports could Germany pay. What form could these exports take which would not injure some interests in the allied countries?

It is probable that considerations of this kind will lead in time to a considerable moderation of the demands imposed upon Germany. And it is significant that even in 1921 arrangements were being made for the payment in kind, by the delivery of coal, timber, building material of all kinds, of a considerable fraction of the sum due to France.