Lord Keynes.

A REVISION OF THE TREATY

A REVISION
OF THE TREATY

BEING A SEQUEL TO

THE ECONOMIC CONSEQUENCES
OF THE PEACE

BY
JOHN MAYNARD KEYNES, C.B.
FELLOW OF KINGʼS COLLEGE, CAMBRIDGE

NEW YORK
HARCOURT, BRACE AND COMPANY
1922

COPYRIGHT, 1922, BY
HARCOURT, BRACE AND COMPANY, INC.

PRINTED IN THE U. S. A. BY
THE QUINN BODEN & COMPANY
RAHWAY, N. J.

PREFACE

The Economic Consequences of the Peace, which I published in December 1919, has been reprinted from time to time without revision or correction. So much has come to our knowledge since then, that a revised edition of that book would be out of place. I have thought it better, therefore, to leave it unaltered, and to collect together in this Sequel the corrections and additions which the flow of events makes necessary, together with my reflections on the present facts.

But this book is strictly what it represents itself to be—a Sequel; I might almost have said an Appendix. I have nothing very new to say on the fundamental issues. Some of the Remedies which I proposed two years ago are now everybodyʼs commonplaces, and I have nothing startling to add to them. My object is a strictly limited one, namely to provide facts and materials for an intelligent review of the Reparation Problem as it now is.

“The great thing about this wood,” said M. Clemenceau of his pine forest in La Vendée, “is that, here, there is not the slightest chance of meeting Lloyd George or President Wilson. Nothing here but the squirrels.” I wish that I could claim the same advantages for this book.

J. M. Keynes.

Kingʼs College, Cambridge,

December 1921.

CONTENTS

CHAPTER I

CHAPTER II

CHAPTER III

CHAPTER IV

CHAPTER V

CHAPTER VI

CHAPTER VII

APPENDIX OF DOCUMENTS

A REVISION OF THE TREATY
BEING A SEQUEL TO
THE ECONOMIC CONSEQUENCES OF THE PEACE

CHAPTER I

The State of Opinion

It is the method of modern statesmen to talk as much folly as the public demand and to practise no more of it than is compatible with what they have said, trusting that such folly in action as must wait on folly in word will soon disclose itself as such, and furnish an opportunity for slipping back into wisdom,—the Montessori system for the child, the Public. He who contradicts this child will soon give place to other tutors. Praise, therefore, the beauty of the flames he wishes to touch, the music of the breaking toy; even urge him forward; yet waiting with vigilant care, the wise and kindly savior of Society, for the right moment to snatch him back, just singed and now attentive.

I can conceive for this terrifying statesmanship a plausible defense. Mr. Lloyd George took the responsibility for a Treaty of Peace, which was not wise, which was partly impossible, and which endangered the life of Europe. He may defend himself by saying that he knew that it was not wise and was partly impossible and endangered the life of Europe; but that public passions and public ignorance play a part in the world of which he who aspires to lead a democracy must take account; that the Peace of Versailles was the best momentary settlement which the demands of the mob and the characters of the chief actors conjoined to permit; and for the life of Europe, that he has spent his skill and strength for two years in avoiding or moderating the dangers.

Such claims would be partly true and cannot be brushed away. The private history of the Peace Conference, as it has been disclosed by French and American participators, displays Mr. Lloyd George in a partly favorable light, generally striving against the excesses of the Treaty and doing what he could, short of risking a personal defeat. The public history of the two years which have followed it exhibit him as protecting Europe from as many of the evil consequences of his own Treaty, as it lay in his power to prevent, with a craft few could have bettered, preserving the peace, though not the prosperity, of Europe, seldom expressing the truth, yet often acting under its influence. He would claim, therefore, that by devious paths, a faithful servant of the possible, he was serving Man.

He may judge rightly that this is the best of which a democracy is capable,—to be jockeyed, humbugged, cajoled along the right road. A preference for truth or for sincerity as a method may be a prejudice based on some esthetic or personal standard, inconsistent, in politics, with practical good.

We cannot yet tell. Even the public learns by experience. Will the charm work still, when the stock of statesmenʼs credibility, accumulated before these times, is getting exhausted?

In any event, private individuals are not under the same obligation as Cabinet Ministers to sacrifice veracity to the public weal. It is a permitted self–indulgence for a private person to speak and write freely. Perhaps it may even contribute one ingredient to the congeries of things which the wands of statesmen cause to work together, so marvelously, for our ultimate good.

For these reasons I do not admit error in having based The Economic Consequences of the Peace on a literal interpretation of the Treaty of Versailles, or in having examined the results of actually carrying it out. I argued that much of it was impossible; but I do not agree with many critics, who held that, for this very reason, it was also harmless. Inside opinion accepted from the beginning many of my main conclusions about the Treaty.[1] But it was not therefore unimportant that outside opinion should accept them also.

For there are, in the present times, two opinions; not, as in former ages, the true and the false, but the outside and the inside; the opinion of the public voiced by the politicians and the newspapers, and the opinion of the politicians, the journalists and the civil servants, upstairs and backstairs and behind–stairs, expressed in limited circles. In time of war it became a patriotic duty that the two opinions should be as different as possible; and some seem to think it so still.

This is not entirely new. But there has been a change. Some say that Mr. Gladstone was a hypocrite; yet if so, he dropped no mask in private life. The high tragedians, who once ranted in the Parliaments of the world, continued it at supper afterwards. But appearances can no longer be kept up behind the scenes. The paint of public life, if it is ruddy enough to cross the flaring footlights of to–day, cannot be worn in private,—which makes a great difference to the psychology of the actors themselves. The multitude which lives in the auditorium of the world needs something larger than life and plainer than the truth. Sound itself travels too slowly in this vast theater, and a true word no longer holds when its broken echoes have reached the furthest listener.

Those who live in the limited circles and share the inside opinion pay both too much and too little attention to the outside opinion; too much, because, ready in words and promises to concede to it everything, they regard open opposition as absurdly futile; too little, because they believe that these words and promises are so certainly destined to change in due season, that it is pedantic, tiresome, and inappropriate to analyze their literal meaning and exact consequences. They know all this nearly as well as the critic, who wastes, in their view, his time and his emotions in exciting himself too much over what, on his own showing, cannot possibly happen. Nevertheless, what is said before the world is, still, of deeper consequence than the subterranean breathings and well–informed whisperings, knowledge of which allows inside opinion to feel superior to outside opinion, even at the moment of bowing to it.

But there is a further complication. In England (and perhaps elsewhere also), there are two outside opinions, that which is expressed in the newspapers and that which the mass of ordinary men privately suspect to be true. These two degrees of the outside opinion are much nearer to one another than they are to the inside, and under some aspects they are identical; yet there is under the surface a real difference between the dogmatism and definiteness of the press and the living, indefinite belief of the individual man. I fancy that even in 1919 the average Englishman never really believed in the indemnity; he took it always with a grain of salt, with a measure of intellectual doubt. But it seemed to him that for the time being there could be little practical harm in going on the indemnity tack, and also that, in relation to his feelings at that time, a belief in the possibility of boundless payments by Germany was in better sentiment, even if less true, than the contrary. Thus the recent modification in British outside opinion is only partly intellectual, and is due rather to changed conditions; for it is seen that perseverance with the indemnity does now involve practical harm, whilst the claims of sentiment are no longer so decisive. He is therefore prepared to attend to arguments, of which he had always been aware out of the corner of his eye.

Foreign observers are apt to heed too little these unspoken sensibilities, which the voice of the press is bound to express ultimately. Inside opinion gradually affects them by percolating to wider and wider circles; and they are susceptible in time to argument, common sense, or self–interest. It is the business of the modern politician to be accurately aware of all three degrees; he must have enough intellect to understand the inside opinion, enough sympathy to detect the inner outside opinion, and enough brass to express the outer outside opinion.

Whether this account is true or fanciful, there can be no doubt as to the immense change in public sentiment over the past two years. The desire for a quiet life, for reduced commitments, for comfortable terms with our neighbors is now paramount. The megalomania of war has passed away, and every one wishes to conform himself with the facts. For these reasons the Reparation Chapter of the Treaty of Versailles is crumbling. There is little prospect now of the disastrous consequences of its fulfilment.

I undertake in the following chapters a double task, beginning with a chronicle of events and a statement of the present facts, and concluding with proposals of what we ought to do. I naturally attach primary importance to the latter. But it is not only of historical interest to glance at the recent past. If we look back a little closely on the two years which have just elapsed (and the general memory unaided is now so weak that we know the past little better than the future), we shall be chiefly struck, I think, by the large element of injurious make–believe. My concluding proposals assume that this element of make–believe has ceased to be politically necessary; that outside opinion is now ready for inside opinion to disclose, and act upon, its secret convictions; and that it is no longer an act of futile indiscretion to speak sensibly in public.

FOOTNOTE:

[1] “Its merely colorable fulfilment of solemn contracts with a defeated nation, its timorous failure to reckon with economic realities,” as Professor Allyn Young wrote in a review of my book. Yet Professor Young has thought right, nevertheless, to make himself a partial apologist of the Treaty, and to describe it as “a forward–looking document.”

CHAPTER II

From the Ratification of the Treaty Of Versailles to the Second Ultimatum Of London

I. The Execution of the Treaty and the Plebiscites

The Treaty of Versailles was ratified on January 10, 1920, and except in the plebiscite areas its territorial provisions came into force on that date. The Slesvig plebiscite (February and March, 1920) awarded the north to Denmark and the south to Germany, in each case by a decisive majority. The East Prussian plebiscite (July, 1920) showed an overwhelming vote for Germany. The Upper Silesian plebiscite (March, 1921) yielded a majority of nearly two to one in favor of Germany for the province as a whole,[2] but a majority for Poland in certain areas of the south and east. On the basis of this vote, and having regard to the industrial unity of certain disputed areas, the principal Allies, with the exception of France, were of opinion that, apart from the southeastern districts of Pless and Rybnik which, although they contain undeveloped coalfields of great importance, are at present agricultural in character, nearly the whole of the province should be assigned to Germany. Owing to the inability of France to accept this solution, the whole problem was referred to the League of Nations for final arbitration. This body bisected the industrial area in the interests of racial or nationalistic justice; and introduced at the same time, in the endeavor to avoid the consequences of this bisection, complicated economic provisions of doubtful efficiency in the interests of material prosperity. They limited these provisions to fifteen years, trusting perhaps that something will have occurred to revise their decision before the end of that time. Broadly speaking, the frontier has been drawn, entirely irrespective of economic considerations, so as to include as large as possible a proportion of German voters on one side of it and Polish voters on the other (although to achieve this result it has been thought necessary to assign two almost purely German towns, Kattowitz and Königshütte to Poland). From this limited point of view the work may have been done fairly. But the Treaty had directed that economic and geographical considerations should be taken into account also.

I do not intend to examine in detail the wisdom of this decision. It is believed in Germany that subterranean influence brought to bear by France contributed to the result. I doubt if this was a material factor, except that the officials of the League were naturally anxious, in the interests of the League itself, to produce a solution which would not be a fiasco through the members of the Council of the League failing to agree about it amongst themselves; which inevitably imported a certain bias in favor of a solution acceptable to France. The decision raises, I think, much more fundamental doubts about this method of settling international affairs.

Difficulties do not arise in simple cases. The League of Nations will be called in where there is a conflict between opposed and incommensurable claims. A good decision can only result by impartial, disinterested, very well–informed and authoritative persons taking everything into account. Since International Justice is dealing with vast organic units and not with a multitude of small units of which the individual particularities are best ignored and left to average themselves out, it cannot be the same thing as the cut–and–dried lawyerʼs justice of the municipal court. It will be a dangerous practice, therefore, to entrust the settlement of the ancient conflicts now inherent in the tangled structure of Europe, to elderly gentlemen from South America and the far Asiatic East, who will deem it their duty to extract a strict legal interpretation from the available signed documents,—who will, that is to say, take account of as few things as possible, in an excusable search for a simplicity which is not there. That would only give us more judgments of Solomon with the assʼs ears, a Solomon with the bandaged eyes of law, who, when he says “Divide ye the living child in twain,” means it.

The Wilsonian dogma, which exalts and dignifies the divisions of race and nationality above the bonds of trade and culture, and guarantees frontiers but not happiness, is deeply embedded in the conception of the League of Nations as at present constituted. It yields us the paradox that the first experiment in international government should exert its influence in the direction of intensifying nationalism.

These parenthetic reflections have arisen from the fact that from a certain limited point of view the Council of the League may be able to advance a good case in favor of its decision. My criticism strikes more deeply than would a mere allegation of partiality.

With the conclusion of the plebiscites the frontiers of Germany were complete.

In January 1920 Holland was called on to surrender the Kaiser; and, to the scarcely concealed relief of the Governments concerned, she duly refused (January 23, 1920). In the same month the surrender of some thousands of “war criminals” was claimed, but, in the face of a passionate protest from Germany, was not insisted on. It was arranged instead that, in the first instance at least, only a limited number of cases should be pursued, not before Allied Courts, as provided by the Treaty, but before the High Court of Leipzig. Some such cases have been tried; and now, by tacit consent, we hear no more about it.

On March 13, 1920, an outbreak by the reactionaries in Berlin (the Kapp “Putsch”) resulted in their holding the capital for five days and in the flight of the Ebert Government to Dresden. The defeat of this outbreak, largely by means of the weapon of the general strike (the first success of which was, it is curious to note, in defense of established order), was followed by Communist disturbances in Westphalia and the Ruhr. In dealing with this second outbreak, the German Government despatched more troops into the district than was permissible under the Treaty, with the result that France seized the opportunity, without the concurrence of her Allies, of occupying Frankfurt (April 6, 1920) and Darmstadt, this being the immediate occasion of the first of the series of Allied Conferences recorded below—the Conference of San Remo.

These events, and also doubts as to the capacity of the Central German Government to enforce its authority in Bavaria, led to successive postponements of the completion of disarmament, due under the Treaty for March 31, 1920, until its final enforcement by the London Ultimatum of May 5, 1921.

There remains Reparation, the chief subject of the chronicle which follows. In the course of 1920 Germany carried out certain specific deliveries and restitutions prescribed by the Treaty. A vast quantity of identifiable property, removed from France and Belgium, was duly restored to its owners.[3] The Mercantile Marine was surrendered. Some dyestuffs were delivered, and a certain quantity of coal. But Germany paid no cash, and the real problem of Reparation was still postponed.[4]

With the Conferences of the spring and summer of 1920 there began the long series of attempts to modify the impossibilities of the Treaty and to mold it into workable form.

II. The Conferences of San Remo (April 19–26, 1920), Hythe (May 15 and June 19, 1920), Boulogne (June 21, 22, 1920), Brussels (July 2–3, 1920), and Spa (July 5–16, 1920)

It is difficult to keep distinct the series of a dozen discussions between the Premiers of the Allied Powers which occupied the year from April 1920 to April 1921. The result of each Conference was generally abortive, but the total effect was cumulative; and by gradual stages the project of revising the Treaty gained ground in every quarter. The Conferences furnish an extraordinary example of Mr. Lloyd Georgeʼs methods. At each of them he pushed the French as far as he could, but not as far as he wanted; and then came home to acclaim the settlement provisionally reached (and destined to be changed a month later) as an expression of complete accord between himself and his French colleague, as a nearly perfect embodiment of wisdom, and as a settlement which Germany would be well advised to accept as final, adding about every third time that, if she did not, he would support the invasion of her territory. As time went on, his reputation with the French was not improved; yet he steadily gained his object,—though this may be ascribed not to the superiority of the method as such, but to facts being implacably on his side.

The first of the series, the Conference of San Remo (April 19–26, 1920), was held under the presidency of the Italian Premier, Signor Nitti, who did not conceal his desire to revise the Treaty. M. Millerand stood, of course, for its integrity, whilst Mr. Lloyd George (according to The Times of that date) occupied a middle position. Since it was evident that the French would not then accept any new formula, Mr. Lloyd George concentrated his forces on arranging for a discussion face to face between the Supreme Council and the German Government, such a meeting, extraordinary to relate, having never yet been arranged, neither during the Peace Conference nor afterwards. Defeated in a proposal to invite German representatives to San Remo forthwith, he succeeded in carrying a decision to summon them to visit Spa in the following month “for the discussion of the practical application of the Reparation Clauses.” This was the first step; and for the rest the Conference contented itself with a Declaration on German Disarmament. Mr. Lloyd George had had to concede to M. Millerand that the integrity of the Treaty should be maintained; but speaking in the House of Commons on his return home, he admitted a preference for a not “too literal” interpretation of it.

In May the Premiers met in privacy at Hythe to consider their course at Spa. The notion of the sliding scale, which was to play a great part in the Paris Decisions and the Second Ultimatum of London, now came definitely on the carpet. A Committee of Experts was appointed to prepare for examination a scheme by which Germany should pay a certain minimum sum each year, supplemented by further sums in accordance with her capacity. This opened the way for new ideas, but no agreement was yet in sight as to actual figures. Meantime the Spa Conference was put off for a month.

In the following month the Premiers met again at Boulogne (June 21, 1920), this meeting being preceded by an informal week–end at Hythe (June 19, 1920). It was reported that on this occasion the Allies got so far as definitely to agree on the principle of minimum annuities extensible in accordance with Germanyʼs economic revival. Definite figures even were mentioned, namely, a period of thirty–five years and minimum annuities of three milliard gold marks. The Spa Conference was again put off into the next month.

At last the Spa meeting was really due. Again the Premiers met (Brussels, July 2, 3, 1920) to consider the course they would adopt. They discussed many things, especially the proportions in which the still hypothetical Reparation receipts were to be divided amongst the claimants.[5] But no concrete scheme was adopted for Reparation itself. Meanwhile a memorandum handed in by the German experts made it plain that no plan politically possible in France was economically possible in Germany. “The Note of the German economic experts,” wrote The Times on July 3, 1920, “is tantamount to a demand for a complete revision of the Peace Treaty. The Allies have therefore to consider whether they will call the Germans sharply to order under the menace of definite sanctions, or whether they will risk creating the impression of feebleness by dallying with German tergiversations.” This was a good idea; if the Allies could not agree amongst themselves as to the precise way of altering the Treaty, a “complete accord” between them could be re–established by “calling the Germans sharply to order” for venturing to suggest that the Treaty could be altered at all.

At last, on July 5, 1920, the long–heralded Conference met. But, although it occupied twelve days, no time was found for reaching the item on the agenda which it had been primarily summoned to discuss—namely, Reparations. Before this dangerous topic could be reached urgent engagements recalled M. Millerand to Paris. One of the chief subjects actually dealt with, coal, is treated in Excursus I. at the conclusion of this chapter. But the chief significance of the meeting lay in the fact that then for the first time the responsible ministers and experts of Germany and the Allied States met face to face and used the methods of public conference and even private intimacy. The Spa Conference produced no plan; but it was the outward sign of some progress under the surface.

III. The Brussels Conference (December 16–22, 1920)

Whilst the Spa Conference made no attempt to discuss the general question of the Reparation settlement, it was again agreed that the latter should be tackled at an early date. But time passed by, and nothing happened. On September 23, 1920, M. Millerand succeeded to the Presidency of the French Republic, and his place as Premier was taken by M. Leygues. French official opinion steadily receded from the concessions, never fully admitted to the French public, which Mr. Lloyd George had extracted at Boulogne. They now preferred to let the machinery of the Reparation Commission run its appointed course. At last, however, on November 6, 1920, after much diplomatic correspondence, it was announced that once again the French and British Governments were in “complete accord.” A conference of experts, nominated by the Reparation Commission, was to sit with German experts and report; then a conference of ministers was to meet the German Government and report; with these two reports before it the Reparation Commission was to fix the amount of Germanyʼs liability; and finally, the heads of the Allied Governments were to meet and “take decisions.” “Thus,” The Times recorded, “after long wanderings in the wilderness we are back once more at the Treaty of Versailles.” The re–perusal of old files of newspapers, which the industrious author has undertaken, corroborates, if nothing else does, the words of the Preacher and the dustiness of fate.

The first stage of this long procedure was in fact undertaken, and certain permanent officials of the Allied Governments[6] met German representatives at Brussels, shortly before Christmas 1920, to ascertain facts and to explore the situation generally. This was a conference of “experts” as distinguished from the conferences of “statesmen” which preceded and followed it.

The work of the Brussels experts was so largely ignored and overthrown by the meetings of the statesmen at Paris shortly afterwards, that it is not now worth while to review it in detail. It marked, however, a new phase in our relations with Germany. The officials of the two sides met in an informal fashion and talked together like rational beings. They were representative of the pick of what might be called “international officialdom,” cynical, humane, intelligent, with a strong bias towards facts and a realistic treatment. Both sides believed that progress was being made towards a solution; mutual respect was fostered; and a sincere regret was shared at the early abandonment of reasonable conversations.

The Brussels experts did not feel themselves free to consider an average payment less than that contemplated at Boulogne. They recommended to the Allied Governments, accordingly, (1) that during the five years from 1921 to 1926 Germany should pay an average annuity of $750,000,000, but that this average annuity should be so spread over the five years that less than this amount would be payable in the first two years and more in the last two years, the question of the amount of subsequent payments, after the expiry of five years, being postponed for the present;

(2) That a substantial part of this sum should be paid in the form of deliveries of material and not of cash;

(3) That the annual expenses of the Armies of Occupation should be limited to $60,000,000, which payment need not be additional to the above annuities but a first charge on them;

(4) That the Allies should waive their claim on Germany to build ships for them and should perhaps relinquish, or postpone, the claim for the delivery of a certain number of the existing German vessels;

(5) That Germany on her side should put her finances and her budget in order and should agree to the Allies taking control of her customs in the event of default under the above scheme.

IV. The Decisions of Paris (January 24–30, 1921)

The suggestions of the Brussels experts furnished no permanent settlement of the question, but they represented, nevertheless, a great advance from the ideas of the Treaty. In the meantime, however, opinion in France was rising against the concessions contemplated. M. Leygues, it appeared, would be unable to carry in the Chamber the scheme discussed at Boulogne. Prolonged political intrigue ended in the succession of M. Briand to the Premiership, with the extreme defenders of the literal integrity of the Treaty of Versailles, M. Poincaré, M. Tardieu, and M. Klotz, still in opposition. The projects of Boulogne and Brussels were thrown into the melting–pot, and another conference was summoned to meet at Paris at the end of January 1921.

It was at first doubtful whether the proceedings might not terminate with a breach between the British and the French points of view. Mr. Lloyd George was justifiably incensed at having to surrender most of the ground which had seemed definitely gained at Boulogne; with these fluctuations negotiation was a waste of time and progress impossible. He was also disinclined to demand payments from Germany which all the experts now thought impossible. For a few days he was entirely unaccommodating to the French contentions; but as the business proceeded he became aware that M. Briand was a kindred spirit, and that, whatever nonsense he might talk in public, he was secretly quite sensible. A breach in the conversations might mean the fall of Briand and the entrance to office of the wild men, Poincaré and Tardieu, who, if their utterances were to be taken seriously and were not merely a ruse to obtain office, might very well disturb the peace of Europe before they could be flung from authority. Was it not better that Mr. Lloyd George and M. Briand, both secretly sensible, should remain colleagues at the expense of a little nonsense in unison for a short time? This view of the situation prevailed, and an ultimatum was conveyed to Germany on the following lines.[7]

The Reparation payments, proposed to Germany by the Paris Conference, were made up of a determinate part and an indeterminate part. The former consisted of $500,000,000 per annum for two years, $750,000,000 for the next three, then $1,000,000,000 for three more, and $1,250,000,000 for three after that, and, finally, $1,500,000,000 annually for 31 years. The latter (the indeterminate part) consisted of an annual sum, additional to the above, equal in value to 12 per cent of the German exports. The fixed payments under this scheme added up to a gross total of $56,500,000,000 which was a little less than the gross total contemplated at Boulogne but, with the export proportion added, a far greater sum.

The indeterminate element renders impossible an exact calculation of this burden, and it is no longer worth while to go into details. But I calculated at the time, without contradiction, that these proposals amounted for the normal period to a demand exceeding $2,000,000,000 per annum, which is double the highest figure that any competent person in Great Britain or in the United States has ever attempted to justify.

The Paris Decisions, however, coming as they did after the discussions of Boulogne and Brussels, were not meant seriously, and were simply another move in the game, to give M. Briand a breathing space. I wonder if there has ever been anything quite like it—best diagnosed perhaps as a consequence of the portentous development of “propaganda.” The monster had escaped from the control of its authors, and the extraordinary situation was produced in which the most powerful statesmen in the world were compelled by forces, which they could not evade, to meet together day after day to discuss detailed variations of what they knew to be impossible.

Mr. Lloyd George successfully took care, however, that the bark should have no immediate bite behind it. The consideration of effective penalties was postponed, and the Germans were invited to attend in London in a monthʼs time to convey their answer by word of mouth.

M. Briand duly secured his triumph in the Chamber. “Rarely,” The Times reported, “can M. Briand in all his long career as a speaker and Parliamentarian have been in better form. The flaying of M. Tardieu was intensely dramatic, even if at times almost a little painful for the spectators as well as for the victim.” M. Tardieu had overstated his case, and “roundly asserting that the policy of France during the last year had been based on the conclusion that the financial clauses of the Treaty of Versailles could not be executed, had gained considerable applause by declaring that this was just the thesis of the pacifist, Mr. Keynes, and of the German delegate, Count Brockdorff–Rantzau,”—which was certainly rather unfair to the Paris Decisions. But by that date, even in France, to praise the perfections of the Treaty was to make oneself ridiculous. “I am an ingenuous man,” said M. Briand as he mounted the tribune, “and when I received from M. Tardieu news that he was going to interpellate me, I permitted myself to feel a little pleased. I told myself that M. Tardieu was one of the principal architects of the Treaty of Versailles, and that as such, though he knew its good qualities, he would also know its blemishes, and that he would, therefore, be indulgent to a man who had done his best in fulfilling his duty of applying it—mais voilà (with a gesture)—I did not stop to remember that M. Tardieu had already expended all his stock of indulgence upon his own handiwork.” The monstrous offspring of propaganda was slowly dying.

V. The First Conference of London (March 1–7, 1921)

In Germany the Paris proposals were taken seriously and provoked a considerable outcry. But Dr. Simons accepted the invitation to London and his experts got to work at a counter–proposal. “I was in agreement,” he said at Stuttgart on February 13, “with the representatives of Britain and France at the Brussels Conference. The Paris Conference shattered that. A catastrophe has occurred. German public opinion will never forget these figures. Now it is impossible to return to the Seydoux plan put forward at Brussels (i.e., a provisional settlement for five years), for the German people would always see enormous demands rising before them like a specter.... We shall rather accept unjust dictation than sign undertakings we are not firmly persuaded the German people can keep.”

On March 1, 1921, Dr. Simons presented his counter–proposal to the Allies assembled in London. Like the original counter–proposal of Brockdorff–Rantzau at Versailles, it was not clear–cut or entirely intelligible; and it was rumored that the German experts were divided in opinion amongst themselves. Instead of stating in plain language what Germany thought she could perform, Dr. Simons started from the figures of the Paris Decisions and then proceeded by transparent and futile juggling to reduce them to a quite different figure. The process was as follows. Take the gross total of the fixed annuities of the Paris scheme (i.e., apart from the export proportion), namely $56,500,000,000, and calculate its present value at 8 per cent interest, namely $12,500,000,000; deduct from this $5,000,000,000 as the alleged (but certainly not the actual) value of Germanyʼs deliveries up to date, which leaves $7,500,000,000. This was the utmost Germany could pay. If the Allies could raise an international loan of $2,000,000,000, Germany would pay the interest and sinking fund on this, and in addition $250,000,000 a year for five years, towards the discharge of the capital sum remaining over and above the $2,000,000,000, namely, $5,500,000,000, which capital sum, however, would not carry interest pending repayment. At the end of five years the rate of repayment would be reconsidered. The whole proposal was contingent on the retention of Upper Silesia and the removal of all impediments to German trade.

The actual substance of this proposal was not unreasonable and probably as good as the Allies will ultimately secure. But the figures were far below even those of the Brussels experts, and the mode of putting it forward naturally provoked prejudice. It was summarily rejected.

Two days later Mr. Lloyd George read to the German Delegation a lecture on the guilt of their country, described their proposals as “an offense and an exasperation,” and alleged that their taxes were “ridiculously low compared with Great Britainʼs.” He then delivered a formal declaration on behalf of the Allies that Germany was in default in respect of “the delivery for trial of the criminals who have offended against the laws of war, disarmament, and the payment in cash or kind of $5,000,000,000”; and concluded with an ultimatum[8] to the effect that unless he heard by Monday (March 7) “that Germany was either prepared to accept the Paris Decisions or to submit proposals which would be in other ways an equally satisfactory discharge of her obligations under the Treaty of Versailles (subject to the concessions made in the Paris proposals),” the Allies would proceed to (1) the occupation of Duisberg, Ruhrort, and Düsseldorf on the right bank of the Rhine, (2) a levy on all payments due to Germany on German goods sent to Allied countries, (3) the establishment of a line of Customs between the occupied area of Germany and the rest of Germany, and (4) the retention of the Customs paid on goods entering or leaving the occupied area.

During the next few days negotiations proceeded, to no purpose, behind the scenes. At midnight on March 6, M. Loucheur and Lord DʼAbernon offered the Germans the alternative of a fixed payment of $750,000,000 for 30 years and an export proportion of 30 per cent.[9] The formal Conference was resumed on March 7. “A crowd gathered outside Lancaster House in the morning and cheered Marshal Foch and Mr. Lloyd George. Shouts of ‘Make them pay, Lloyd George!ʼ were general. The German delegates were regarded with curiosity. General von Seeckt wore uniform with a sword. He wore also an eyeglass in the approved manner of the Prussian officer and bore himself as the incarnation of Prussian militarism. Marshal Foch, Field–Marshal Sir Henry Wilson, and the other Allied soldiers also wore uniform.”[10]

Dr. Simons communicated his formal reply. He would accept the régime of the Paris Decisions as fixed for the first five years, provided Germany was helped to pay by means of a loan and retained Upper Silesia. At the end of five years the Treaty of Versailles would resume its authority, the provisions of which he preferred, as he was entitled to do, to the proposals of Paris. “The question of war guilt is to be decided neither by the Treaty, nor by acknowledgment, nor by Sanctions; only history will be able to decide the question as to who was responsible for the world war. We are all of us still too near to the event.” The Sanctions threatened were, he pointed out, all of them illegal. Germany could not be technically in default in respect of Reparation until the Reparation Commission had made the pronouncements due from them on May 1. The occupation of further German territory was not lawful under the Treaty. The retention of part of the value of German goods was contrary to undertakings given by the British and Belgian Governments. The erection of a special Customs tariff in the Rhineland was only permissible under Article 270 of the Treaty for the protection of the economic interests of the Rhineland population and not for the punishment of the whole German people in respect of unfulfilled Treaty obligations. The arguments as to the illegality of the Sanctions were indisputable, and Mr. Lloyd George made no attempt to answer them. He announced that the Sanctions would be put into operation immediately.

The rupture of the negotiations was received in Paris “with a sigh of relief,”[11] and orders were telegraphed by Marshal Foch for his troops to march at 7 A.M. next morning.

No new Reparation scheme, therefore, emerged from the Conference of London. Mr. Lloyd Georgeʼs acquiescence in the Decisions of Paris had led him too far. Some measure of personal annoyance at the demeanor of the German representatives and the failure of what, in its inception, may have been intended as bluff, had ended in his agreeing to an attempt to enforce the Decisions by the invasion of Germany. The economic penalties, whether they were legal or not, were so obviously ineffective for the purpose of collecting money, that they can hardly have been intended for that purpose, and were rather designed to frighten Germany into putting her name to what she could not, and did not intend to perform, by threatening a serious step in the direction of the policy, openly advocated in certain French quarters, of permanently detaching the Rhine provinces from the German Commonwealth. The grave feature of the Conference of London lay partly in Great Britainʼs lending herself to a furtherance of this policy, and partly in contempt for the due form and processes of law.

For it was impossible to defend the legality of the occupation of the three towns under the Treaty of Versailles.[12] Mr. Lloyd George endeavored to do so in the House of Commons, but at a later stage of the debate the contention was virtually abandoned by the Attorney–General.

The object of the Allies was to compel Germany to accept the Decisions of Paris. But Germanyʼs refusal to accept these proposals was within her rights and not contrary to the Treaty, since they lay outside the Treaty and included features unauthorized by the Treaty which Germany was at liberty either to accept or to reject. It was necessary, therefore, for the Allies to find some other pretext. Their effort in this direction was perfunctory, and consisted, as already recorded, in a vague reference to war criminals, disarmament, and the payment of 20 milliard gold marks.

The allegation of default in paying the 20 milliard gold marks was manifestly untenable at that date (March 7, 1921); for according to the Treaty, Germany had to pay this sum by May 1, 1921, “in such instalments and in such manner as the Reparation Commission may fix,” and in March 1921 the Reparation Commission had not yet demanded these cash payments.[13] But assuming that there had been technical default in respect of the war criminals and disarmament (and the original provisions of the Treaty had been so constantly modified that it was very difficult to say to what extent this was the case), it was our duty to state our charges precisely, and, if penalties were threatened, to make these penalties dependent on a failure to meet our charges. We were not entitled to make vague charges, and then threaten penalties unless Germany agreed to something which had nothing to do with the charges. The Ultimatum of March 7 substituted for the Treaty the intermittent application of force in exaction of varying demands. For whenever Germany was involved in a technical breach of any one part of the Treaty, the Allies were, apparently, to consider themselves entitled to make any changes they saw fit in any other part of the Treaty.

In any case the invasion of Germany beyond the Rhine was not a lawful act under the Treaty. This question became of even greater importance in the following month, when the French announced their intention of occupying the Ruhr. The legal issue is discussed in Excursus II. at the conclusion of this Chapter.

VI. The Second Conference of London (April 29–May 5, 1921)

The next two months were stormy. The Sanctions embittered the situation in Germany without producing any symptoms of surrender in the German Government. Towards the end of March the latter sought the intervention of the United States and transmitted a new counter–proposal through the Government of that country. In addition to being straightforward and more precise, this offer was materially better than that of Dr. Simons in London at the beginning of the month. The chief provisions[14] were as follows:

1. The German liability to be fixed at $12,500,000,000 present value.

2. As much of this as possible to be raised immediately by an international loan, issued on attractive terms, of which the proceeds would be handed over to the Allies, and the interest and sinking fund on which Germany would bind herself to meet.

3. Germany to pay interest on the balance at 4 per cent for the present.

4. The sinking fund on the balance to vary with the rate of Germanyʼs recovery.

5. Germany, in part discharge of the above, to take upon herself the actual reconstruction of the devastated areas on any lines agreeable to the Allies, and in addition to make deliveries in kind on commercial lines.

6. Germany is prepared, “up to her powers of performance,” to assume the obligations of the Allies to America.

7. As an earnest of her good intentions, she offers $250,000,000 in cash immediately.

If this is compared with Dr. Simonsʼs first offer, it will be seen that it is at least 50 per cent better, because there is no longer any talk of deducting from the total of $12,500,000,000 an alleged (and in fact imaginary) sum of $5,000,000,000 in respect of deliveries prior to May 1, 1921. If we assume an international loan of $1,250,000,000, costing 8 per cent for interest and sinking fund,[15] the German offer amounted to an immediate payment of $550,000,000 per annum, with a possibility of an increase later in proportion to the rate of Germanyʼs economic recovery.

The United States Government, having first ascertained privately that this offer would not be acceptable to the Allies, refrained from its formal transmission.[16] On this account, and also because it was overshadowed shortly afterwards by the Second Conference of London, this very straightforward proposal has never received the attention it deserves. It was carefully and precisely drawn up, and probably represented the full maximum that Germany could have performed, if not more.

But the offer, as I have said, made very little impression; it was largely ignored in the press, and scarcely commented on anywhere. For in the two months which elapsed between the First and Second Conferences of London there were two events of great importance, which modified the situation materially.[17]

The first of these was the result of the Silesian plebiscite held in March 1921. The earlier German Reparation offers had all been contingent on her retention of Upper Silesia; and this condition was one which, in advance of the plebiscite, the Allies were unable to accept. But it now appeared that Germany was in fact entitled to most of the country, and, possibly, to the greater part of the industrial area. But this result also brought to a head the acute divergence between the policy of France and the policy of the other Allies towards this question.

The second event was the decision of the Reparation Commission, communicated to Germany on April 27, 1921, as to her aggregate liabilities under the Treaty. Allied Finance Ministers had foreshadowed 300 milliard gold marks; at the time of the Decisions of Paris, responsible opinion expected 160–200 milliards;[18] and the author of The Economic Consequences of the Peace had suffered widespread calumny for fixing on the figure of 137 milliards,[19] as being the nearest estimate he could make. The public, and the Government also, were, therefore, taken by surprise when the Reparation Commission announced that they unanimously assessed the figure at 132 milliards (i.e., $33,000,000,000).[20] It now turned out that the Decisions of Paris, which had been represented as a material amelioration of the Treaty which Germany was ungrateful not to accept, were no such thing; and that Germany was at that moment suffering from an invasion of her territory for a refusal to subscribe to terms which were severer in some respects than the Treaty itself. I shall examine the decision of the Reparation Commission in detail in Chapter IV. It put the question on a new basis and the Decisions of London could hardly have been possible otherwise.

The decision of the Reparation Commission and the arrival of the date, May 1, 1921, fixed in the Treaty for the promulgation of a definite Reparation scheme, provided a sufficient ground for reopening the whole question. Germany had refused the Decisions of Paris; the Sanctions had failed to move her; the régime of the Treaty was therefore reinstated; and under the Treaty it was for the Reparation Commission to propose a scheme.

In these circumstances the Allies met once more in London in the closing days of April 1921. The scheme there concerted was really the work of the Supreme Council, but the forms of the Treaty were preserved, and the Reparation Commission were summoned from Paris to adopt and promulgate as their own the decree of the Supreme Council.

The Conference met in circumstances of great tension. M. Briand had found it necessary to placate his Chamber by announcing that he intended to occupy the Ruhr on May 1. The policy of violence and illegality, which began with the Conference of Paris, had always included hitherto just a sufficient ingredient of make–believe to prevent its being as dangerous as it pretended to the peace and prosperity of Europe. But a point had now been reached when something definite, whether good or bad, seemed bound to happen; and there was every reason for anxiety. Mr. Lloyd George and M. Briand had walked hand–in–hand to the edge of a precipice; Mr. Lloyd George had looked over the edge; and M. Briand had praised the beauties of the prospect below and the exhilarating sensations of a descent. Mr. Lloyd George, having indulged to the full his habitual morbid taste for looking over, would certainly end in drawing back, explaining at the same time how much he sympathized with M. Briandʼs standpoint. But would M. Briand?

In this atmosphere the Conference met, and, considering all the circumstances, including the past commitments of the principals, the result was, on the whole, a victory for good sense, not least because the Allies there decided to return to the pathway of legality within the ambit of the Treaty. The new proposals, concerted at this Conference, were, whether they were practicable or not in execution, a lawful development of the Treaty, and in this respect sharply distinguished from the Decisions of Paris in the January preceding. However bad the Treaty might be, the London scheme provided a way of escape from a policy worse even than that of the Treaty,—acts, that is, of arbitrary lawlessness based on the mere possession of superior force.

In one respect the Second Ultimatum of London was lawless; for it included an illegal threat to occupy the Ruhr Valley if Germany refused its terms. But this was for the sake of M. Briand, whose minimum requirement was that he should at least be able to go home in a position to use, for conversational purposes, the charms of the precipice from which he was hurrying away. And the Ultimatum made no demand on Germany to which she was not already committed by her signature to the Treaty.

For this reason the German Government was right, in my judgment, to accept the Ultimatum unqualified, even though it still included demands impossible of fulfilment. For good or ill Germany had signed the Treaty. The new scheme added nothing to the Treatyʼs burdens, and, although a reasonable permanent settlement was left where it was before,—in the future,—in some respects it abated them. Its ratification, in May 1921, was in conformity with the Treaty, and merely carried into effect what Germany had had reason to anticipate for two years past. It did not call on her to do immediately—that is to say, in the course of the next six months—anything incapable of performance. It wiped out the impossible liability under which she lay of paying forthwith a balance of $3,000,000,000 due under the Treaty on May 1. And, above all, it obviated the occupation of the Ruhr and preserved the peace of Europe.

There were those in Germany who held that it must be wrong that Germany should under threats profess insincerely what she could not perform. But the submissive acceptance by Germany of a lawful notice under a Treaty she had already signed committed her to no such profession, and involved no recantation of her recent communication through the President of the United States as to what would eventually prove in her sincere belief to be the limits of practicable performance.

In the existence of such sentiments, however, Germanyʼs chief difficulty lay. It has not been understood in England or in America how deep a wound has been inflicted on Germanyʼs self–respect by compelling her, not merely to perform acts, but to subscribe to beliefs which she did not in fact accept. It is not usual in civilized countries to use force to compel wrongdoers to confess, even when we are convinced of their guilt; it is still more barbarous to use force, after the fashion of inquisitors, to compel adherence to an article of belief because we ourselves believe it. Yet towards Germany the Allies had appeared to adopt this base and injurious practice, and had enforced on this people at the point of the bayonet the final humiliation of reciting, through the mouths of their representatives, what they believed to be untrue.

But in the Second Ultimatum of London the Allies were no longer in this fanatical mood, and no such requirement was intended. I hoped, therefore, at the time that Germany would accept the notification of the Allies and do her best to obey it, trusting that the whole world is not unreasonable and unjust, whatever the newspapers may say; that Time is a healer and an illuminator; and that we had still to wait a little before Europe and the United States could accomplish in wisdom and mercy the economic settlement of the war.

EXCURSUS I

COAL

The question of coal has always considerable importance for Reparation, both because (in spite of the exaggerations of the Treaty) it is a form in which Germany can make important payments, and also because of the reaction of coal deliveries on Germanyʼs internal economy. Up to the middle of 1921 Germanyʼs payments for Reparation were almost entirely in the form of coal. And coal was the main topic of the Spa Conference, where for the first time the Governments of the Allies and of Germany met face to face.

Under the terms of the Treaty Germany was to deliver 3,400,000 tons of coal per month. For reasons explained in detail in The Economic Consequences of the Peace (pp. 74–89) this total was a figure of rhetoric and not capable of realization. Accordingly for the first quarter of 1920 the Reparation Commission reduced their demand to 1,660,000 tons per month, and in the second quarter to 1,500,000 tons per month; whilst in the second quarter Germany actually delivered at the rate of 770,000 tons per month. This last figure was unduly low, and by the latter date coal was in short supply throughout the world and very dear. The main object of the Spa Coal Agreement was, therefore, to secure for France an increased supply of German coal.

The Conference was successful in obtaining coal, but on terms not unfavorable to Germany. After much bargaining the deliveries were fixed at 2,000,000 tons a month for six months from August 1920. But the German representatives succeeded in persuading the Allies that they could not deliver this amount unless their miners were better fed and that this meant foreign credit. The Allies agreed, therefore, to pay Germany something substantial for this coal, the sums thus received to be utilized in purchasing from abroad additional food for the miners. In form, the greater part of the sum thus paid was a loan; but, since it was set off as a prior charge against the value of Reparation deliveries (e.g., the ships), it really amounted to paying back to Germany the value of a part of these deliveries. Germanyʼs total cash receipts[21] under these arrangements actually came to about 360,000,000 gold marks,[22] which worked out at about 40s. per ton averaged over the whole of the deliveries. As at this time the German internal price was from 25s. to 30s. per ton, the German Government received in foreign currency substantially more than they had to pay for the coal to the home producers. The high figure of 2,000,000 tons per month involved short supplies to German transport and industry. But the money was badly wanted, and was of the utmost assistance in paying for the German food program (and also in meeting German liabilities in respect of pre–war debts) during the autumn and winter of 1920.

This is a convenient point at which to record the subsequent history of the coal deliveries. During the next six months Germany very nearly fulfilled the Spa Agreement, her deliveries towards the 2,000,000 tons per month being 2,055,227 tons in August, 2,008,470 tons in September, 2,288,049 tons in October, 1,912,696 tons in November, 1,791,828 tons in December, and 1,678,675 tons in January 1921. At the end of January 1921 the Spa Agreement lapsed, and since that time Germany has had to continue her coal deliveries without any payment or advance of cash in return for them. To make up for the accumulated deficit under the Spa Agreement, the Reparation Commission called for 2,200,000 tons per month in February and March, and continued to demand this figure in subsequent months. Like so much else, however, this demand was only on paper. Germany was not able to fulfil it, her actual deliveries during the next six months amounting to 1,885,051 tons in February 1921, 1,419,654 tons in March, 1,510,332 tons in April, 1,549,768 tons in May, 1,453,761 tons in June, and 1,399,132 tons in July. And the Reparation Commission, not really wanting the coal, tacitly acquiesced in these quantities. During the first half of 1921 there was, in fact, a remarkable reversal of the situation six months earlier. In spite of the British Coal Strike, France and Belgium, having replenished their stocks and suffering from a depression in the iron and steel trades, were in risk of being glutted with coal. If Germany had complied with the full demands of the Reparation Commission the recipients would not have known what to do with the deliveries. Even as it was, some of the coal received was sold to exporters, and the coal miners of France and Belgium were in danger of short employment.

The statistics of the aggregate German output of pit coal are now as follows, exclusive of Alsace–Lorraine, the Saar, and the Palatinate, in million tons:

The production of rough lignite (I will not risk controversy by attempting to convert this into its pit–coal equivalent) rose from 87.1 million tons in 1913 to 93.8 in 1919, 111.6 in 1920, and 90.8 in the first three–quarters of 1921.

The Spa Agreement supplied a temporary palliative of the anomalous conditions governing the price at which these coal deliveries are credited to Germany. But with the termination of this Agreement they again require attention. Under the Treaty Germany is credited in the case of coal delivered overland with “the German pithead price to German nationals” plus the freight to the frontier; and in the case of coal delivered by sea with the export price; provided in each case this price is not in excess of the British export price. Now for various internal reasons the German Government have thought fit to maintain the pithead price to German nationals far below the world price, with the result that she gets credited with much less than its real value for her deliveries of Reparation coal. During the year ending June 1921 the average legal maximum price of the different kinds of coal was about 270 marks a ton, inclusive of a tax of 20 per cent on the price,[23] which at the exchange then prevailing was about 20s., i.e., between a third and a half of the British price at that date. The fall in the mark exchange in the autumn of 1921 increased the discrepancy. For although the price of German coal was substantially increased in terms of paper marks, and although the price of British coal had fallen sharply, the movements of exchange so out–distanced the other factors, that in November 1921 the price of British coal worked out at about three and half times the price of the best bituminous coal from the Ruhr. Thus not only were the German iron–masters placed in an advantageous position for competing with British producers, but the Belgian and French industries also benefited artificially through the receipt by their Governments of very low–priced coal.

The German Government is in rather a dilemma in this matter. An increase in the coal tax is one of the most obvious sources for an increased revenue, and such a tax would be, from the standpoint of the exchequer, twice blessed, since it would increase correspondingly the Reparation credits. But on the other hand, such a proposal unites two groups against them, the industrialists, who want cheap coal for industry and the Socialists who want cheap coal for the domestic stove. From the revenue standpoint the tax would probably stand an increase from 20 per cent to 60 per cent; but from the political standpoint an increase from 20 per cent to 30 per cent is the highest contemplated at present, with a differential price in favor of domestic consumers.[24]

I take this opportunity of making a few corrections or amplifications of the passages in The Economic Consequences of the Peace which deal with coal.

1. The fate of Upper Silesia is highly relevant to some of the conclusions about coal in Chapter IV of The Economic Consequences of the Peace (pp. 77–84). I there stated that “German authorities claim, not without contradiction, that to judge from the votes cast at elections, one–third of the population would elect in the Polish interest, and two–thirds in the German,” which forecast turned out to be in almost exact accordance with the facts. I also urged that, unless the plebiscite went in a way which I did not expect, the industrial districts ought to be assigned to Germany. But I felt no confidence, having regard to the policy of France, that this would be done; and I allowed, therefore, in my figures for the possibility that Germany would lose this area.

The actual decision of the Allies, acting on the advice of the Council of the League of Nations to whom the matter had been referred, which we have discussed briefly above (pp. 12–14), divides the industrial triangle between the two claimants to it. According to an estimate of the Prussian Ministry of Trade 86 per cent of the total coal deposits of Upper Silesia fall to Poland, leaving 14 per cent to Germany. Germany retains a somewhat larger proportion of pits in actual operation, 64 per cent of the current production of coal falling to Poland and 36 per cent to Germany.[25]

The figure of 100,000,000 tons, given in The Economic Consequences of the Peace for the net German production (i.e., deducting consumption at the mines themselves) in the near future excluding Upper Silesia, should, therefore, be replaced by the figure of (say) 115,000,000 tons, including such part of Upper Silesia as Germany is now to retain.

2. I beg leave to correct a misleading passage in a footnote to p. 79 of The Economic Consequences of the Peace. I there spoke of “Polandʼs pre–war annual demand” for coal, where I should have said “pre–war Polandʼs pre–war annual demand.” The mistake was not material, as I allowed for Germanyʼs diminished requirements for coal, due to loss of territory, in the body of the text. But I confess that the footnote, as published, might be deemed misleading. At the same time it is, I think, a tribute to the general accuracy of The Economic Consequences that partizan critics should have fastened so greedily on the omission of the word “pre–war” before the word “Poland” in the footnote in question. Quite a considerable literature has grown up round it. The Polish Diet devoted January 20, 1921, to the discussion and patriotic analysis of this footnote, and concluded with a Resolution ordering the chief speech of the occasion (that of Deputy A. Wierzlicki) to be published throughout the world in several languages at the expense of the State. I apologize for any depreciation in the Polish mark for which I may have been so inadvertently responsible. Mr. Wierzlicki begins: “A book appeared by Keynes ... the author of a well–known work on India, that pearl of the English crown, that land which is a beloved subject of study to the English. Through such studies a man may win himself name and fame,”—which was certainly a little unscrupulous of me. And he concludes: “But England too must believe in facts! And if Keynes, whose book is impregnated with a humanitarian spirit and with understanding of the necessity to get up beyond selfish interests, if Keynes is convinced by actual data that he has done a wrong, that he has wrought confusion in the ideas of statesmen and politicians as regards Upper Silesia, then he too will see with his eyes and must become the friend of Poland, of Poland as an active factor in the development of the natural wealth of Silesia.” I owe it to so generous and eloquent a critic to quote the corrected figures, which are as follows: the Polish lands, united by the Peace Treaty into the new Polish State, consumed in 1913 19,445,000 tons of coal, of which 8,989,000 tons were produced within that area and 7,370,000 tons were imported from Upper Silesia (the total production of Upper Silesia in that year being 43,800,000 tons).[26] The Silesian Plebiscite has been preceded and followed by a mass of propagandist literature on both sides. For the economic questions involved see, particularly, on the Polish side: Wierzlicki, The Truth about Upper Silesia; Olszewski, Upper Silesia, Her Influence on the Solvability and on the Economic Life of Germany, and The Economic Value of Upper Silesia for Poland and Germany respectively; and on the German side: Sidney Osborne, The Upper Silesian Question and Germanyʼs Coal Problem, The Problem of Upper Silesia (papers by various authors, not all on the German side, with excellent maps, edited by Sidney Osborne), various pamphlets by Professor Schulz–Gavernitz, and documents circulated by the Breslau Chamber of Commerce.

3. My observations on Germanyʼs capacity to deliver reparation coal have been criticized in some quarters[27] on the ground that I made insufficient allowance for the compensation which is available to her by the more intensive exploitation of her deposits of lignite or brown coal. This criticism is scarcely fair, because I was the first in popular controversy to call attention to the factor of lignite, and because I was careful from the outset to disclaim expert knowledge of the subject.[28] I still find it difficult, in the face of conflicting expert opinions, to know how much importance to attach to this material. Since the Armistice there has been a substantial increase in output, which was 36 per cent higher in the first half of 1921 than in 1913.[29] In view of the acute shortage of coal this output must have been of material assistance towards meeting the situation. The deposits are near the surface, and no great amount of capital or machinery is needed for its production. But lignite briquette is a substitute for coal for certain purposes only, and the evidence is conflicting as to whether any further material expansion is economically practicable.[30]

The process of briquetting the rough lignite is probably a wasteful one, and it is doubtful whether it would be worth while to set up new plant with a view to production on a larger scale. Some authorities hold that the real future of lignite and its value as an element in the future wealth of Germany lie in improved methods of distillation (the chief obstacle to which, as also to other uses, lies in its high water content), by which the various oils, ammonia and benzine, latent in it can be released for commercial uses.

It is certainly the case that the future possibilities of lignite should not be overlooked. But there is a tendency at present, just as was the case with potash some little time ago, to exaggerate its importance greatly as a decisive factor in the wealth–producing capacity of Germany.

EXCURSUS II

THE LEGALITY OF OCCUPYING GERMANY EAST OF THE RHINE

The years 1920 and 1921 have been filled with excursions and with threats of excursions by the French Army into Germany east of the Rhine. In March 1920 France, without the approval of her Allies, occupied Frankfort and Darmstadt. In July 1920 a threat to invade Germany by the Allies as a whole was successful in enforcing the Spa Agreement. In March 1921 a similar threat was unsuccessful in securing assent to the Paris Decisions, and Duisberg, Ruhrort, and Düsseldorf were occupied accordingly. In spite of the objections of her Allies France continued this occupation when, by the acceptance of the second Ultimatum of London, the original occasion for it had disappeared, on the ground that so long as the Upper Silesian question was unsettled, it was in the opinion of Marshal Foch just as well to retain this hold.[31] In April 1921 the French Government announced their intention of occupying the Ruhr, though they were prevented from carrying this out by the pressure of the other Allies. In May 1921 the Second Ultimatum of London was successfully enforced by a threat to occupy the Ruhr Valley. Thus, within the space of little more than a year the invasion of Germany, beyond the Rhine, was threatened five times and actually carried out twice.

We are supposed to be at peace with Germany, and the invasion of a country in time of peace is an irregular act, even when the invaded country is not in a position to resist. We are also bound by our adhesion to the League of Nations to avoid such action. It is, however, the contention of France, and apparently, from time to time, that of the British Government also, that these acts are in some way permissible under the Treaty of Versailles, whenever Germany is in technical default in regard to any part of the Treaty, that is to say, since some parts of the Treaty are incapable of literal fulfilment, at any time. In particular the French Government maintained in April 1921 that so long as Germany possessed any tangible assets capable of being handed over, she was in voluntary default in respect of Reparation, and that if she was in voluntary default any Ally was entitled to invade and pillage her territory without being guilty of an act of war. In the previous month the Allies as a whole had argued that default under Chapters of the Treaty, other than the Reparation Chapter, also justified invasion.

Though the respect shown for legality is now very small, the legal position under the Treaty deserves nevertheless an exact examination.

The Treaty of Versailles expressly provides for breaches by Germany of the Reparation Chapter. It contains no special provision for breaches of other Chapters, and such breaches are, therefore, in exactly the same position as breaches of any other Treaty. Accordingly, I will discuss separately default in respect of Reparation, and other defaults.

Sections 17 and 18 of the Reparation Chapter, Annex II. run as follows:

“(17) In case of default by Germany in the performance of any obligation under this part of the present Treaty, the Commission will forthwith give notice of such default to each of the interested Powers, and will make such recommendations as to the action to be taken in consequence of such default as it may think necessary.

“(18) The measures which the Allied and Associated Powers shall have the right to take in case of voluntary default by Germany, and which Germany agrees not to regard as acts of war, may include economic and financial prohibitions and reprisals, and in general such other measures as the respective Governments may determine to be necessary in the circumstances.”

There is also a provision in Article 430 of the Treaty, by which any part of the occupied area which has been evacuated may be reoccupied if Germany fails to observe her obligations with regard to Reparation.

The French Government base their contention on the words “and in general such other measures” in § 18, arguing that this gives them an entirely free hand. The sentence taken as a whole, however, supports, on the principle of ejusdem generis, the interpretation that the other measures contemplated are of the nature of economic and financial reprisals. This view is confirmed by the fact that the rest of the Treaty narrowly limits the rights of occupying German territory, which, as M. Tardieuʼs book shows, was the subject of an acute difference of opinion between France and her Associates at the Peace Conference. There is no provision for occupying territory on the right bank of the Rhine; and the only provision for occupation in the event of default is that contained in Article 430. This Article, which provides for reoccupation of the left bank in the event of default, would have been entirely pointless and otiose if the French view were correct. Indeed the theory, that at any time during the next thirty years any Ally can invade any part of Germany on the ground that Germany has not fulfilled every letter of the Treaty, is on the face of it unreasonable.

In any case, however, §§ 17, 18 of Annex II. of the Reparation Chapter only operate after a specific procedure has been set on foot by the Reparation Commission. It is the duty of the Reparation Commission to give notice of the default to each of the interested Powers, including presumably the United States, and to recommend action. If the default is voluntary—there is no provision as to who is to decide this—then the paragraphs in question become operative. There is no warrant here for isolated action by a single Ally. And indeed the Reparation Commission have never so far put this procedure in operation.

If, on the other hand, Germany is alleged to be in default under some other Chapter of the Treaty, then the Allies have no recourse except to the League of Nations; and they are bound to bring into operation Article 17 of the Covenant, which provides for the case of a dispute between a member of the League and a non–member. That is to say, apart from procedure by the Reparation Commission as set forth above, breaches or alleged breaches of this Treaty are in precisely the same position as breaches of any other treaty between two Powers which are at peace.

According to Article 17, in the event of a dispute between a member of the League and a State which is not a member of the League, the latter “shall be invited to accept the obligations of membership in the League for the purposes of such dispute, upon such conditions as the Council may deem just. If such invitation is accepted, the provisions of Articles 12 to 16 inclusive shall be applied, with such modifications as may be deemed necessary by the Council. Upon such invitation being given, the Council shall immediately institute an inquiry into the circumstances of the dispute, and recommend such action as may seem best and most effectual in the circumstances.”

Articles 12 to 16 provide, amongst other things, for arbitration in any case of “disputes as to the interpretation of a Treaty; as to any question of international law; as to the existence of any fact which, if established, would constitute a breach of any international obligation; or as to the extent and nature of the reparation to be made for any such breach.”

The Allies as signatories of the Treaty and of the Covenant are therefore absolutely precluded in the event of a breach or alleged breach by Germany of the Treaty, from proceeding except under the power given to the Reparation Commission as stated above, or under Article 17 of the Covenant. Any other act on their part is illegal.

In any case it is obligatory on the Council of the League, under Article 17, to invite Germany, in the event of a dispute between Germany and the Allies, to accept the obligations of membership in the League for the purposes of such dispute, and to institute immediately an inquiry into the circumstances of the dispute.

In my opinion the protest addressed by the German Government to the Council of the League of Nations in March 1921 was correctly argued. But, as with the inclusion of pensions in the Reparation Bill, we reserve the whole stock of our indignation over illegality between nations for the occasions when it is the fault of others. I am told that to object to this is to overlook “the human element” and is therefore both wrong and foolish.

FOOTNOTES:

[2] More exactly, out of 1,220,000 entitled to vote and 1,186,000 actual voters, 707,000 votes or seven–elevenths were cast for Germany, and 479,000 votes or four–elevenths for Poland. Out of 1522 communes, 844 showed a majority for Germany and 678 for Poland. The Polish voters were mainly rural, as is shown by the fact that in 36 towns Germany polled 267,000 votes against 70,000 for Poland, and in the country 440,000 votes against 409,000 for Poland.

[3] Up to May 31, 1920, securities and other identifiable assets to the value of 8300 million francs and 500,000 tons of machinery and raw material had been restored to France (Report of Finance Commission of French Chamber, June 14, 1920), also 445,000 head of live stock.

[4] Up to May, 1921, the cash receipts of the Reparation Commission amounted to no more than 124,000,000 gold marks.

[5] See Excursus VI.

[6] Lord DʼAbernon and Sir John Bradbury for Great Britain, Seydoux and Cheysson for France, dʼAmelio and Giannini for Italy, Delacroix and Lepreux for Belgium, and, in accordance with custom, two Japanese. The German representatives included Bergmann, Havenstein, Cuno, Melchior, von Stauss, Bonn, and Schroeder.

[7] The text of these Decisions is given in Appendix No. 2.

[8] The full text is given in Appendix No. 4.

[9] Compare this with the fixed payment of $500,000,000 and an export proportion of 26 per cent proposed in the second Ultimatum of London, only two months later.

[10] The Times, March 8, 1921.

[11] The Times, March 8, 1921.

[12] A week or two later the German Government made a formal appeal to the League of Nations against the legality of this act; but I am not aware that the League took any action on it.

[13] A few weeks later the Reparation Commission endeavored to put the action of the Supreme Council in order, by demanding one milliard marks in gold ($250,000,000), that is to say, the greater part of the reserve of the Reichsbank against its note issue. This demand was afterwards dropped.

[14] The full text is given in Appendix No. 5.

[15] The practicability of such a loan on a large scale is of course more than doubtful.

[16] The German Government is reported also to have offered, alternatively, to accept any sum which the President of the United States might fix.

[17] After the enforcement of the Sanctions and the failure of the counter–proposals, the Cabinet of Herr Fehrenbach and Dr. Simons was succeeded by that of Dr. Wirth.

[18] As late as January 26, 1921, M. Doumer gave a forecast of 240 milliards.

[19] Exclusive of sums due in repayment of war loans made to Belgium.

[20] Exclusive of sums due in repayment of war loans made to Belgium.

[21] Under the Spa Agreement (see Appendix No. 1) Germany was to be paid in cash 5 gold marks per ton for all coal delivered, and, in the case of coal delivered overland, “lent” (i.e., advanced out of Reparation receipts) the difference between the German inland price and the British export price. At the date of the Spa Conference this difference was about 70s. per ton (100s. less 30s.), but this sum was not to be advanced in the case of the undetermined amount of coal delivered by sea. The advances were made by the Allies in the proportions, 61 per cent by France, 24 per cent by Great Britain, and 15 per cent by Belgium and Italy.

[22] For details of these payments see p. 133.

[23] This very valuable tax, first imposed in 1917, yielded in 1920–21 mks. 4½ milliards.

[24] Dr. Wirthʼs first Government prepared a Bill to raise the tax to 30 per cent, with power, however, to reduce the rate temporarily to 25 per cent. It was estimated that the 30 per cent tax would bring in a revenue of 9.2 milliard marks.

[25] The same authority estimates that 85.6 of Upper Silesiaʼs zinc ore production and all the zinc smelting works fall to Poland. This is of some importance, since before the war Upper Silesia was responsible for 17 per cent of the total world production of zinc. Of the iron and steel production of the area 63 per cent falls to Poland. I am not in a position to check any of these figures. Some authorities ascribe a higher proportion of the coal to Poland.

[26] These are the figures according to the Polish authorities. But it is difficult to obtain accurate pre–war figures for an area which was not coterminous with any then existing State; and these totals have been questioned in detail by Dr. W. Schotte.

[27] See e.g., my controversy with M. Brenier in The Times.

[28] In The Economic Consequences of the Peace, p. 92 n., I wrote as follows: “The reader must be reminded in particular that the above calculations take no account of the German production of lignite.... I am not competent to speak on the extent to which the loss of coal can be made good by the extended use of lignite or by economies in its present employment; but some authorities believe that Germany may obtain substantial compensation for her loss of coal by paying more attention to her deposits of lignite.”

[29] That is to say, production in the middle of 1921 was at the rate of about 120,000,000 tons per annum. At that time the legal maximum price was 60 paper marks per ton (i.e., 5s. or less); so that the national profit on the output in terms of money cannot have been a very material amount.

[30] In order to secure the increased output the number of miners was increased much more than in proportion, namely from 59,000 in 1913 to 171,000 in the first half of 1921. As a result, the cost of production of lignite rose much faster than that of coal. Also since its calorific value is much less than that of coal per unit of weight (even when it is briquetted), it can only compete with coal, unless it is assisted by preferential freight rates, within a limited area in the neighborhood of the mines.

[31] At the Paris Conference of August 1921 Lord Curzon tried unavailingly to persuade France to abandon this illegal occupation. The so–called “Economic Sanctions” were raised on October 1, 1921. The occupation still continues, though both the above pretexts have now disappeared.

CHAPTER III

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 Germanyʼs 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 Germanyʼs default on to others; they would have interested a great number of people all over the world in Germanyʼs 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 worldʼs 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 Germanyʼs 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 Germanyʼs, 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 Germanyʼs 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 Germanyʼs 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 Germanyʼs 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 Franceʼs “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. Germanyʼs 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 Germanyʼs 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 Germanyʼs 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:

The estimate of The Economic Consequences of the Peace (1919), namely 2 milliards, was nearly contemporaneous with M. Klotzʼs 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.

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–monthsʼ credits from bankers on the security of the Reichsbankʼs 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:

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 Germanyʼs 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 Germanyʼs 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 yearʼs 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 oneʼs 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 Helfferichʼs 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 Helfferichʼs 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 Germanyʼs 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 Germanyʼs 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 Franceʼs 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 Alliesʼ receiving these goods direct, instead of Germanyʼs 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 countryʼs 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.