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. Léon 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 ("Fürst 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: