The treaty of peace imposes upon Germany charges for reparations which cannot fail to entail far-reaching changes in the trade between her and other countries. Through a period of thirty years, more or less, she will be compelled to make heavy remittances to other countries. Without entering now on any close estimate of her obligations, — more will be said presently of the treaty clauses which define them, — it may be premised that they require the regular payment to the Allies of sums quite beyond anything heretofore known in international transactions on government account. The German government will have to effect payments which cannot be less than $750,000,000 a year, and may reach, even exceed, a round billion.

The treaty provisions on this subject divide themselves into three parts. In the first place, Germany is to pay five billion dollars by May 1, 1921. (For simplicity, I reckon the gold mark as equal to a quarter of a dollar—20,000,000,000 marks equal to 5,000,000,000 dollars.) This first installment, however, will virtually not figure in the remittance operations. As credits toward making it up, Germany is to be allowed to count all the ships, securities, coal, machinery, cattle, and like immediate assets which she may turn over to the Allies until the date mentioned. Whatever remains to be paid after these credit items have been exhausted is to be charged with no interest, but is to be converted, on May 1, 1921, into interest-bearing bonds of the character described under the second head. It is impossible to say how much the credits will amount to, and how much will remain to be funded into the interest-bearing bonds. I should suppose that a very liberal estimate would be to allow one half of the total—two and one half billions—on account of the credit items, leaving an equal amount to be funded in 1921.

Second, Germany is to issue at once ten billion dollars of bonds, which are to bear interest at two and a half per cent, between 1921 and 1926, and after 1926 four per cent, with an additional one per cent for amortization. To this sum of ten billions must be added in 1921 the unpaid obligation under the first head, which, as has just been noted, can hardly amount to less than two and one half billions. The minimum of the principal of the bonds will then be twelve and one half billions. The interest charge on twelve and one half billions at two and a half per cent would be $312,500,000 for 1921-26, and after 1926, when the interest charge will be at the full six per cent, $750,000,000 a year. If the unpaid obligation under the first head is more than two and a half billions, as is probable enough, the interest charge will be so much higher.

Third, there is an indeterminate obligation, — a possible ten billion dollars more, — to be issued ‘when and not until the Reparation Commission is satisfied that Germany can meet the interest and sinking-fund obligations.’ How much more will be added on this score to the total interest charge, — that is, to the total remittances which Germany must make, — it would be rash to estimate. I should be surprised if the Reparation Commission were to find Germany able to meet obligations in excess of a billion a year; even that sum is a high maximum.

A considerable period of transition is thus provided for, during which Germany may prepare to pay and the Allies themselves may prepare to receive. Considerable changes may take place in the intervening period, and not a few difficulties may be obviated by foresight and preparation. But when all is said, a new factor of enormous importance will within a few years influence the international trade of all civilized countries. Germany will have to remit a billion a year, more or less, to foreign parts. How can it be accomplished?

Two questions stand out. First, how will the mechanism of international exchange operate, and what will happen to the rates of foreign exchange? And second, what will be the eventual effect on Germany’s imports and exports? These questions I will take up in order.

I.

Even if the case were of the simplest sort, — if both Germany and the reparation countries were on a specie basis, — no outflow of gold from Germany can be conceived which would bring about a fulfillment of the enormous requirements. If the German government were to undertake remittance by purchasing bills of exchange in the market, and were then to let gold be transferred to foreign countries, Germany would be completely drained of gold in a few months—at the latest, in a year.

In fact, however, Germany is deeply in the throes of a paper-money régime. The chance of her escaping from it at an early date is slender indeed. No gold can flow out of her circulating medium. For a considerable time she will have paper prices, and foreign exchange will be reckoned in depreciated paper. Under such conditions, how manage these extraordinary transactions?

Consider what rates of foreign exchange are to be expected. It is obvious that there will be a steady, insistent demand by the German Government month by month and year by year, for bills on London, Paris, New York, Amsterdam, Madrid, Copenhagen—anything that will serve for remittance. That demand will tend steadily to raise in Germany the price of exchange on foreign countries, and to depress in foreign countries exchange on Germany. And in consequence there will be a tendency for the prices of foreign exchange in that country to be kept higher than would accord with the course of commodity prices. For a long time there will be a divergence between the general price-level in Germany and the rates of foreign exchange. The divergence means that exporters will be in a position to profit. They can buy cheap—comparatively cheap—in Germany, sell the German goods abroad, draw on the foreign purchasers, and sell their exchange to advantage at home. Quite the reverse will be the situation of importers. They will not be able to sell to advantage in Germany, and will have to pay high for the means of remittance to the foreign vendors. The whole situation obviously will tend to attract labor and capital to the German exporting industries and to repel them from the importing industries. The greater the divergence between foreign exchange and the commodity price-level, the more rapid and extensive will be these transpositions of German industry.

In other words, the paper-money régime, bad as it is in every other respect, will not stand in the way of the fulfillment of Germany’s obligations. Rather, it will facilitate their fulfillment. The artificial conditions of foreign exchange will serve to turn her efforts more rapidly to the satisfaction of the reparation requirements. It is odd, but none the less true, that the monetary disorder which would embarrass her export trade under ordinary conditions, is likely to facilitate the extraordinary operations called for by the treaty. No doubt this will be regarded in some quarters as evidence of astute design; in reality it is the fortuitous outcome of an unexpected combination of circumstances.

II.

So much as to the first of the outstanding features of the case—the mechanism of payment. Turn now to the second: the concrete form in which the payments must be effected.

There is but one possibility. The substance of the payments will be in goods and in goods only. Germany can remit only by sending out merchandise, and the limit of remittance is found in the possible excess of merchandise exports over merchandise imports. The extent of reparation that can be secured is limited by the available amount of exportable goods.

In many estimates and speculations concerning the maximum which Germany can be made to pay, figures have been put together showing her total wealth and total resources. All such calculations are quite beside the case. Statistics of wealth, property, total possessions, have nothing to do with reparation possibilities. That part only of her property and wealth can be considered for reparation purposes which can be delivered to the Allies and used by them. Her fixed wealth in the form of lands, houses, railroads, factories, is quite unavailable (subject to an exception, not important, presently to be mentioned). Nothing in the way of plant can be moved away or put at the disposal of foreigners. The one and only way in which payments can be made to foreigners is by turning over to them things which they can take and will take. These things obviously include such easily movable assets as gold and securities; but everything of this kind will have been exhausted before the sustained flow of reparation payments sets in. They include also the exportable goods, wares and merchandise; and these are the assets which alone remain for utilization. If the reparations are to be stated in terms of a capital sum, — a total representing the present value of a series of payments spread over many years, — that sum is simply the capitalized value of the maximum excess of Germany’s merchandise exports over her merchandise imports. Somehow a huge ‘favorable’ balance of trade—never has the phrase had greater irony—must be rapidly developed. Exports must expand, imports must shrink. By this process, and by this process only, can the wherewithal be provided for sending to other countries what is due on reparation account.

Before proceeding to the corollaries that flow from this proposition, let me note the one qualification to be attached to it. There is a conceivable way in which lands, houses, and railroads in Germany could be used for reparation purposes: namely, that foreign investors should but this irremovable property, and arrange to pay the purchase price to the reparation countries. In view of the extreme difficulty of handling investments thus left in Germany; in view of the drain impending in any event upon the available savings of foreign countries; in view, too, of the extreme reluctance of the German government and the German people thus to part with the command of their own industrial outfit—this possibility seems to me almost negligible. Moreover, it would promptly lead, as the conversant reader need hardly be informed, to further remittance out of Germany. The interest and profits on these investments of foreigners in Germany would have to be sent; and for these again the only resource would be merchandise exports. There is here no serious qualification of the main proposition. To repeat, the only way in which Germany can meet her obligations is by an excess of merchandise exports equal in value to the interest and amortization of the reparation bonds; that is, not far from a billion dollars a year.

It is not the purpose of this paper to consider the statistical aspects of the case or to figure how far it is possible that Germany will really succeed, by whatever method, in sending out this enormous excess of exports. In no one year before the war did her total exports reach the sum of two and one half billion dollars; during the four or five years preceding the war they were, on the average, but two billions a year. The imports, as is familiar to all conversant with these matters, had exceeded the exports for many years, and during the pre-war period were greater than the exports by several hundred millions of dollars annually. During the reparation period, not only must the excess be quite the other way, but the reversal must be upon an enormous scale. True, the general rise in gold prices may somewhat facilitate the change; all monetary transactions mean less than formerly in terms of commodities. But even so, the task is a most formidable one, and he would be rash who would make prediction as to the outcome. My present purpose, however, is not to weight figures or hazard statistical guesses. I would have the reader note the inevitable changes in the currents of trade, of industry, and of opinion also.

The German government must consciously and deliberately grapple with the task. No country, Germany least of all, would rely solely on automatic trade-adjustments for the procurement of this enormous supply of foreign exchange. There must be search for ways of deliberately stimulating exports and deliberately checking imports.

Import restrictions are an obvious device. They have been utilized in Great Britain and France and other European countries during the war, and for essentially the same reason—namely, that the ordinary mechanism of foreign trade did not bring about that diminution in the purchase of foreign goods which was deemed necessary in the public interest. Germany may be expected to prohibit some imports and to impose high duties upon others. Import restrictions doubtless will, in part, be sumptuary in character, designed to lessen the consumption of articles of luxury, even of comfort. It is quite within the bounds of possibility that they will also have a slant in the direction of protection. Such combination of fiscal and protectionist policies is familiar enough.

But restriction of imports will not alone suffice. Exports must be enlarged as well as imports lessened. The circumstance that German imports consist in large part of raw materials and indispensable food-supplies puts a limit on the effective application of import restrictions. But devices for promoting exports may be expected to be utilized to the limit. And their utmost utilization cannot be consistently objected to by the reparation countries. Among available devices are export bounties, special rates of transportation for exported goods, and specially reduced prices of export commodities. Remission of taxes, or reduction of taxes, on exporting industries might also be on the list.

Under ordinary circumstances practices of this sort are to be condemned in the interest of the very country that applies them. Though they may promote export trade, they do so to the disadvantage of the exporting country itself. Their advocacy and defense usually rest upon a crass mercantilism. But in a case like the present all ordinary reasoning ceases to apply and all ordinary objections cease to have weight. When it comes to the tremendous task of financing these reparation dues, any and every device for promoting exports would seem to be in order. They may mean a loss to the exporting country; but Germany as an exporting country obviously is doomed to incur a loss. She is under the necessity of turning to any and every possible device for meeting the necessities of the case.

Consider now, however, another consequence. Suppose that Germany does promote exports in every possible way. What sound and fury there will be from the protectionists and mercantilists of other countries! Here is Germany the vanquished the necessitous, the country compelled to disgorge, entering on the very career of a ‘war after the war’ which these same protectionists and mercantilists had most feared and reprobated. She prohibits imports or imposes high duties. So far from constituting a docile market to which the conquerors can ship goods without let or hindrance, she arrogantly refuses admission to their wares. And as regards exports, here is penetration with a vengeance. A sinister Germany emerges, bent upon trade-conquest. The very steps for forcing export trade which have been so often placarded before an abhorrent world as deeds of the arch criminal are now resorted to more deliberately and upon a greater scale than ever before.

Not only will there be horror and wrath among the staunch protectionists in countries hostile to Germany, but those gentry of the same trend of opinion in the Fatherland will rejoice. They will find in the achievement of a Weltmarkt some compensation for their humiliation. Germany’s exports will be permeating the world and bringing countries near and distant ‘within the sphere of her influence.’ Notwithstanding the plain fact that these exports, being so much tribute, yield nothing at all to the country, the mercantilist attitude will infallibly remain. That attitude colors so indelibly the thinking of the ordinary man and the everyday financial writer, that it may persist even in the face of this reductio ad absurdum. Germany is selling, selling, selling; and is not this the way in which nations always get rich? True, the sales serve merely to enable the country to meet the obligations of defeat. None the less, they will be deemed by those astute folk evidences of commercial victory.

Further, it is obvious that there is much in the deliberate plans and expectations of the Allies which runs entirely counter to this sort of commercial change. Their own trade programmes are flatly inconsistent with the programme which they impose on Germany through the reparation requirements. They have been solicitous to promote their own export trade and to supplant Germany in every foreign market. The British have ousted the Germans from every cranny throughout the Orient, South America, Africa, the Levant. French and Italians are no less bent on the same end. Germany’s colonies are gone. Whatever open-door principle may be accepted for colonies under the mandatory system, it is tolerably certain that every mandatory power will find ways of making the market open most of all for its own goods.

Germany’s ships are gone, too—at least, for many years to come. True, there is exaggeration in the current talk about the necessity of a merchant marine of a country’s own for the purpose of enabling it to carry on an export trade. Export trade can be developed without ships, as is amply proved by the pre-war experience of the United States. Even foreign ships, when they bring imports into Germany, must plan to secure freights out of Germany also. But some interrelation doubtless there is: your own ships may be made to act as instruments for promoting your own trade; and the absence of a merchant marine will constitute a handicap upon the development of Germany’s export trade. And yet, — it is so obvious as to seem wearisome, although persistently overlooked in most public talk, — it is only by exporting that Germany can make reparation. The Allied countries, so far as they smother Germany’s exports, as they persistently are trying to do, are cutting off the nose to spite the face.

Whither now will Germany export? In part, no doubt, directly to the reparation countries and to the other Allies; in part to third countries, which in turn will send commodities to reparation countries.

All protectionists, especially in the Allied countries, most of all in the reparation countries, most of all in the reparation countries, will furiously oppose direct exports into their own domains. Everything points to a maintenance, even to a strengthening, of the protectionist attitude in France and Italy. Exports from Germany to those countries will long be resented. Great Britain has always been a better customer for Germany than the others, and may continue to be a good customer. No one can foretell what will be the commercial policy of Great Britain after the first burst of passion has run its course. And who can say whether the United States tariff system will be relaxed? Moreover, the protectionist feeling has been so intensified by the hatred engendered during the war, that tariff duties on imports from Germany are likely to be reinforced by boycotting. At the very best, the direct exports from Germany to the Allies may hold their own; they will hardly be allowed to increase.

Elsewhere, too, the possibilities are dubious, in view of the attitude of the Allies as described in the preceding paragraphs. No German colonies remain. This market was at no time a large one, — the Germans themselves exaggerated its importance, — but such as it was and is, what between chicanery and the natural influence of political preponderance, the lion’s share will fall to their rivals. A somewhat similar situation must be contemplated, at least for many years to come, in South America and the Orient. All the Allies, and particularly the British, will try to reap the fruits of the policy which they followed during the war—ousting German firms and banks, and cutting out all German connections, with the express object of securing the trade which Germany had built up.

The only direction in which a considerable expansion of German trade may be looking for is in Eastern Europe, and especially Russia. Here the possibilities are considerable, but they are to be welcomed. On all but bald chauvinistic and mercantilist grounds the development of Russia by Germany is to the advantage of both countries and to that of the world. And everything in the political and social situation of the two peoples points to the probability of their eventual economic coöperation. The ulterior political and social consequences no one can predict. The experiments in a reconstruction of society of which they are likely to be the scene during the coming generation will be among the most instructive that have ever come under the observation of the economist. Whatever their course and outcome, they seem likely to be accompanied by trade developments in which Germany will supply manufactured goods to Russia, and Russia will make payments in large measure through the export of food and raw materials. Here is a source from which Germany may procure the wherewithal for her reparation payments.

III.

Such are the prospects. How are they to be assessed by the cool-headed? What is there of real good and real ill to Germany and the Allies?

We may brush aside the notion that all this is a cause of loss to the Allies, — say to France, — not of gain. Something of the kind has been propounded, not only by militant mercantilists, but by many persons who have prejudices of quite another sort. Advocates of peace have been disposed to urge that militarist exactions cannot under any circumstances be of real advantage to the victors themselves. The effects of the Franco-German indemnity of 1871 have been adduced as a warning example. Doubtless that indemnity was not an unmixed boon to the Germans. But none the less it was a clear source of material gain to them, promoting in no small measure the first steps in Germany’s remarkable industrial development. France, too, will gain from her reparations; she will at least be better off with them than she would have been without them. She will secure tangible economic gain.

And yet France—to use that country still as typical—must face the fact that the gain will not be secured without some disturbance of existing conditions and without some possibilities of unwelcome concomitants. Goods come from Germany’s gratis. They may be dubbed reparations—not gifts, but mere replacements of what was destroyed or taken; yet for the moment they are virtually the same as gifts. The goods so supplied take the place of similar goods which might have been secured in other ways, perhaps are being secured at the very time in other ways. At least the possibility of changes and readjustments in France herself must be faced.

Two kinds of cases may arise, corresponding to the two forms which Germany’s export trade may assume. There may be direct export of goods from Germany to France, as of coal, iron, woolens. The labor and capital which formerly produced these same things in France will then be free to turn to something else, perhaps must turn to something else. Indeed, France must somehow direct a part of her productive forces to the actual work of reparation—to rebuilding villages, factories, railways. Needless to say, the protectionists will endeavor with all their might to prevent the diversion to this task of forces now engaged in familiar industries. True, the treaty of peace prescribes specifically that Germany must deliver to France quantities of coal, cattle, machinery, materials, furniture. Yet if these same things should be sold by German exporters for delivery in France, there will infallibly be resentment.

Second, there is the indirect process. Germany, for example, exports to Russia, and Russia sends flax, wool, timber to France. If this takes place, France in turn cannot export to Russia as much as she might if Germany were out of the way. The expansion of her exports meets with a competition which will be arraigned as illegitimate, if not wicked: the competition of a country which is deliberately developing exports in every possible direction by every possible means. So with Great Britain. Germany will ‘invade’ markets coveted by Great Britain and will rouse the ire of the British traders.

In sum, the reparation countries cannot get the substance of what they have insisted on without disturbance and readjustment in their own industrial organization. It is indeed conceivable, though highly improbable, that all the imports into, say, France which the reparation payments will bring about, will take the form exclusively of food and raw materials not produced within her limits at all; or so produced that the imports will always supplement the domestic supply, never displace any part of it. Even so, some disturbance of existing conditions seems inevitable throughout the countries and the branches of trade coming within the scope of these extraordinary operations. Imports and exports will shift as trade-balances and international price-relations come to be readjusted, and the several countries and the several industries within them must in some measure submit to corresponding modifications.

There is more. Eventually the wind-up of the whole reparation business will come; and then a second series of readjustments must ensue, in the opposite direction. A return must take place to international and domestic trade in which reparation payments no longer play a part. The pains of transition will have to be suffered twice: first, while the economic world adjusts itself to the process by which reparation is accomplished, and again, when the cessation of this process compels a return to the old and more normal state of things. There will have to be a double set of adjustments, one at the beginning of the process, another at its end. The lost motion necessarily arising from shift and change is an offset to the tangible material advantages secured by the reparation countries during the period of reparation itself.

To all this may be added a word of warning—which, in the utterances of the fervid foreign-trade promoters, would become a prediction of disaster—on the future export trade of European countries. Some real basis there may be for the forebodings of our friends the mercantilists. It must be admitted that the countries of Western Europe are under a virtual necessity to maintain and even to increase exports, in order to secure the wherewithal to pay for the food and raw materials which they must have. Their needs for these things vary in degree: France, perhaps, is least necessitous, Great Britain most so; but all are in essentially the same case, and all must count on maintaining an export trade. In such trade, as must further be admitted, established position, connection, prestige, habit, custom count heavily. Such factors tell in disposing of goods under any conditions, and tell perhaps most of all in selling for export. Germany will have been compelled during the reparation period to develop by main force a great export business. When the end of the period comes, there will no more be an automatic cessation of her exports than at the beginning there was an automatic start of those exports. She will be in possession of an export market which, however distributed geographically, will be well established. Having developed it, she will be in better position to hold it.

A word of caution as I conclude. I have spoken about the future in terms not sufficiently guarded. Much of what has preceded is matter of speculation; and it might have been wiser to give warning at every stage how careful one must be in venturing on prediction. We are still some way from 1921, and a long way from 1926; and not until 1926 are the reparation provisions planned to be in full effect. Many things may happen before that time, in the political field as well as in the economic. The reparation programme as it stands in the Treaty may be much altered, perhaps quite upset. It remains to be seen how far the conditions assumed in the present analysis of the case will prove to obtain. My forecast must be understood to be of a hypothetical nature. Only if the assumed premises hold good, is it to be expected that the consequences will ensue as predicted.

One remark may be made about the probable or possible future of the reparation programme. France and the other Allies need disposable means at once—ready funds. They must market the German bonds, or else their own securities based on these bonds, presumably with some sort of endorsement or guaranty. Market them they must, in order to command the resources they need at this very moment. But once they have put the securities in the hands of investors, they have given hostages to fortune. Thereafter they must permit, nay, facilitate, German arrangements for export. A distinguished French statesman—one whose name, were I free to give it, would carry weight—remarked to me, in the course of a conversation in which the inevitableness of Germany’s expanding exports was pointed out: ‘If this proves to be the case, — if Germany cannot pay without competing with us and displacing us in the export trade of Russia and Siberia, — we will simply cancel the reparations.’ The answer is that, when once the Allies have cashed in the German reparations by selling the securities to investors, no cancellation is possible. Either they must refrain from the initial commitment or else they must allow the contract to be carried out to the bitter end.

And so, like all the international arrangements that the war has led to, this one faces a problematic future. Who can say what sort of a world we shall find ourselves in ten years hence?

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