Reparations

I

THE reparation question is a continuing problem, marked by recurrent crises. Until the occupation of the Ruhr in 1923, these periods of excess strain arose with increasing frequency and intensity. Then came the work of the Dawes Committee, offering a modus vivendi to the disputing parties and bringing order out of reparation chaos.

Almost instantaneously the blighting effects of the controversy on the state of feeling in Europe and on the conditions of its economic life were removed. A marked recovery of industry and trade set in, and a degree of order was brought into the public finances of the Continent. In these processes the invigorating and stabilizing effects of the introduction of American capital, loaned principally to Germany, were strongly felt.

In this revival, which has continued up to the present, both France and Germany notably participated. Great strides have been taken by both countries back toward economic health, and an almost unbelievable improvement has been registered in Franco-German relations.

The reparation plan which gave the first impetus to these appeasements has had nearly five years of successful operation; and it is now proposed to revise it to some more permanent basis than that of an interim arrangement, which was all that it purported to be.

The new international committee, which is now examining the subject under the presidency of Owen D. Young, and which, when these words appear, will probably have completed its labors, has taken up the problem at the point where the Dawes Committee left off. The latter resuscitated Germany. It reorganized her currency and budget, and by the expedient of a foreign loan of $200,000,000 secured a breathing spell for her, without interrupting the flow of reparations to the ex-Allies. It prescribed an indeterminate series of annual reparation payments in an amount which it believed Germany could carry. Having done these vitally necessary things, it wisely stopped short of any attempt formally to fix Germany’s total obligation and to provide a permanent scheme of payments for its discharge. The committee was, in fact, debarred under its powers from dealing with this group of subjects. The new committee, however, has been convened for this precise purpose, and is able to approach these once bitterly controversial questions in the light of the experience gained from the operation of the Dawes Plan.

The circumstances in which the new committee meets are very different from those in which its predecessor assembled in January 1924. The latter met in the shadow of a dire emergency. The appalling confusion of the postArmistice period had culminated in an event which threatened widespread disaster. The cutting off of the Ruhr from Germany meant the economic dismemberment of a community which constituted a great and integral part of the Western European system. There was no semblance of agreement among the interested governments as to a substantive policy for meeting the common dangers of the situation. The Dawes Committee was called together by the Allied governments as a last expedient, resorted to with no show of confidence in the outcome, and only after a final stinging interchange of diplomatic insults on the subject of the powers to be accorded to it.

By these standards the Young Committee — or, as Mr. Young calls it, the Second Dawes Committee — has been faced with no crisis at all, but rather with the orderly completion of a certain period of trial of the Dawes régime. The project was conceived by Foreign Ministers Briand and Stresemann in the hopeful atmosphere of Geneva, and given form in a protocol signed there last September. Its authors aimed at the rational working out of a ‘final settlement’ by the conference method. Thus the Young Committee is the child of no ominous movement of events clamoring for attention, but rather of a belief in the power of reason to forestall any new movement of the kind.

The major question of statesmanship involved in the formulating of this project was whether or not the time was ripe for it. The reparation problem is an incredibly tangled one. Its roots reach deeply into the social-economic soil of a great complex of rival civilizations. Under the modus vivendi of the Dawes Plan, the controversy had been quiescent for half a decade. The question was, did this indicate that the problem was working itself out, albeit slowly, toward an ultimate solution, and that, if sleeping dogs were let alone, the process would go forward with increasing certainty to the end? Or was this quiescence only a lull before a new storm? Were the still-present irritations merely gathering force for a new explosion?

There are no certain answers to these questions. But it may at least be said that no external symptoms of a great emergency were present. And in this fact plainly lies one of the chief difficulties of the task of the new committee. The devil of impending calamity was a powerful ally of the Dawes Committee in its search for a temporary formula which would be acceptable to all; but the new body, in seeking a settlement of a much more binding character, is able to rely on no such adventitious aid.

The calibre of the individuals pressed into service on the new committee is evidence of a recognition of the difficulties which confront it. Collectively, it represents probably the best array of brains, character, and prestige that could have been brought together. In point of reputation and influence, in financial judgment and experience, and in practical grasp of European conditions, no stronger group of its kind has ever been assembled.

Five of its fourteen members, including its president, were members of the Dawes Committee. Germany, which was not represented in the predecessor body, is now included on a basis of full equality with France, Great Britain, Italy, and Belgium. A Japanese delegation has also been added. The United States participates in the persons of Owen D. Young and J. Pierpont Morgan. These two members, with their respective alternates, Thomas Nelson Perkins and Thomas W. Lamont, serve as individuals and not as delegates of their government. They nevertheless represent, in a very real sense, the vast influence of this country in world affairs.

Consideration of American official policy relating to the Interallied debts is not within the powers of the committee. In this formal sense, therefore, American interests are not at issue, though the debts themselves figure as monumental objects in the reparation landscape. But in the sense that what happens to Europe is of prime importance to our manufacturers, farmers, and investors, American interests are, obviously, deeply involved. Our concern, broadly, is in the reaching of an agreement acceptable to the immediate parties, which will give assurance of continued stability in European affairs. And not the least of the grounds for expecting such an outcome lies in the exceptional equipment brought to the conference by the American members.

II

Circumstances require, as they did five years ago, that any settlement reached be by unanimous consent. And the inclusion of an official German representation now places a formal seal on this practical necessity. The exAllies long ago abandoned the pretension of explicitly dictating terms to Germany. It of course goes without saying that they still stand on their general rights to reparations, as conferred by the Treaty of Versailles; but the extent and real character of those rights were substantially modified, in effect though not technically, by the Dawes Plan.

The Plan placed Germany’s obligation (inclusive of all financial liabilities under the Treaty) at a standard annual amount of $595,000,000. Of this amount, $228,000,000 represented five per cent interest and one per cent sinking-fund installment on $3,800,000,000 mortgage bonds issued to the Allies by the German railways and German industry under the guaranty of the German Government. The annual payments, which are a charge on the railways and industry, will run until the bonds are retired in about thirtyseven years by operation of the sinking fund. The remainder of Germany’s annual obligation, $367,000,000, provided out of taxation, is in the form of an indeterminate annuity. It may be regarded as representing interest and a sinking-fund payment on a capital sum of a certain general magnitude. Assuming the same interest and sinking-fund rates as those carried by the bonds, the capital sum would be nearly $6,200,000,000. The entire capital debt, therefore, would be about $10,000,000,000, and it would be fully retired, with interest, by payment of the total annuity of $595,000,000 over a period of thirty-seven years.

The Dawes Committee specified no such details as to the composition of the total annuity, nor did it specify its period, for to have done so would have been equivalent to stating a new capital sum in revision of the debt fixed in 1921 by the Reparation Commission. That debt was determined under Treaty provisions requiring assessment of the property damage done to civilians of the Allied nationalities, plus an amount representing the capitalized value of Allied pension charges arising out of the war. This obligation (after various indeterminate deductions) came to about $31,000,000,000. Legally, the assessment still stands; practically, it is universally acknowledged to be of no effect. The Treaty figure has been effectively scaled down to about one third. Five years’ acceptance of the Dawes Plan has limited the claim of the Allies to one of the general magnitude of $10,000,000,000.

Again, the Plan, while not formally repudiating the conception of the reparation debt as a penalty for crime, which it derived from the war-guilt clauses of the Treaty, nevertheless specifically characterized the Dawes annuity as Germany’s equitable contribution to the reconstruction of Europe. Equity here meant an even distribution of taxpayers’ burdens among all the ex-belligerents. This is a profoundly difficult subject, as the Dawes Committee remarked. Nevertheless, a study of the evidence supports the broad conclusion that the committee’s award achieved substantial equity in this sense. And on these grounds the award has never been seriously questioned.

Such a definition of equity, however, is not one to which either the French or the Germans, at large, can be expected heartily to subscribe. To the popular mind everywhere, and especially in France and Germany, the idea of a personalized national war guilt has intense reality, and under such a conception equity concerns itself chiefly with the assessment of a proper penalty for crime.

On such grounds, many Frenchmen would insist, that the reparation obligation should be adjusted indefinitely upward and many Germans would believe that it should be reduced to nothing at all or assessed in the reverse direction. Few of either nationality, however, any longer strongly insist publicly on these views. The futility of such a controversy was evident to sensible men, and time, besides, has dulled its edge.

In this evolution it is, of course, the Germans who have had to make the greatest mental adjustment. Their liability still stands, but Germans generally now appear to regard it in a light which does credit to their political sagacity — as an obligation the discharge of which is dictated by the highest expediency, and the character of which they therefore presumably recognize as hardly to be distinguished from that of an authentic moral obligation. Thus, both France and Germany have come to the realistic conclusion that an obligation of the general magnitude implied by the Dawes Plan indubitably exists as a semipermanent fixture of the political landscape of Europe, and that any present attempt radically to alter it would be folly.

Political considerations plainly require that the new settlement contain the elements of a bargain. Each delegation must carry home something which its public will be prepared or can be persuaded to regard as more important than that which has been conceded. Each party came to the conference table to get something, and each was, therefore, prepared to give something.

The elements of the possible bargain which are perhaps the most difficult for the observer to weigh are those concerned with Germany’s desire to find some means of accelerating the evacuation of the Rhineland and of freeing herself from the system of financial control set up by the Dawes Plan.

The northern zone of the military occupation, centring on the bridgehead at Cologne and extending to a line south of Bonn, was evacuated on February 1,1926. The Treaty provides that the middle zone, centring on Coblenz and extending south to a line running westerly from Bacharach on the Rhine, shall be evacuated in 1930, and the southern zone, centring on Mainz, in 1935.

The foreign financial organization provided by the Dawes Plan embraces an Allied Agent General for Reparation Payments (an American), a transfer committee of six members of Allied nationalities (including the Agent General and one other American), a Commissioner of the Reichsbank (a Hollander) and seven foreign members out of a total of fourteen members of the Council of the bank, a Commissioner of the Railways (a Frenchman) and four foreign members out of a total of eighteen members of the Railway Board, a Commissioner of Controlled Revenues (an Englishman), a trustee of industrial debentures (an Italian), and a trustee of the railway bonds (a Belgian).

These visible and not wholly mute evidences of defeat, with whatever apparent equanimity endured, can be nothing else than galling to the German people. Imponderables such as this have from the first been factors of the highest importance in the reparation controversy. But, as things stand, the sands of the occupation are now running out, and the financial control in practice partakes more of the character of inoffensive observation, and at most of rarely exercised powers of veto rather than of operating interference. All in all, and unless numerous recent German comments on the subject are to be regarded as wholly for effect, it does not appear that German opinion is prepared to accept heavy material sacrifices for the purpose of hastening the disappearance of foreign intervention.

Germany and France each enter the conference facing the near approach of certain financial commitments, which might be liquidated painlessly if a binding agreement on reparations could now be reached. An increase in Germany’s standard reparation annuity of $595,000,000 will begin to run next fall by operation of the so-called prosperity index of the Dawes Plan. This index is compiled by taking as a standard the average statistics of certain economic activities in Germany for specified years, such as 1926 to 1929 and 1912 and 1913. The statistics embrace those relating to population, foreign trade, budgetary receipts and expenditures, railway traffic, and the consumption of coal, sugar, tobacco, beer, and alcohol. The standard index having been calculated by the prescribed formula, increases registered after September 1, 1929, will be reflected in the reparation annuity — for the year commencing September 1, 1929, by applying the percentage increase to half the standard annuity, and for succeeding years by applying it to the full standard annuity.

No authoritative estimates of the probable increase in the annuity are available; unofficial figures, however, set it at an annual amount of from two to three and a half per cent — that is to say, at an increase by such a percentage each year of the total of the annuity of the year preceding. In time the cumulative effect of this would be considerable, but for the first few years the effect would be slight. The importance of this factor in bringing about an immediate settlement of a binding character would therefore presumably not be great.

France, for her part, faces in August of this year the maturing of her special debt of about $400,000,000 to the United States for the purchase of surplus war stocks left in France. It is a large sum of money. Under the MellonBerenger funding agreement of April 29, 1926, — not yet presented to the French Parliament for ratification, — it is provided that this debt shall be merged in the general war-loan obligation. Ratification of the accord would thus render unnecessary the payment of the war-material debt in a capital sum; only the annual payment on the merged debt would be necessary. This annual payment would be only $32,500,000 in 1929 (thereafter rising gradually to a maximum of $125,000,000 a year in 1942 and succeeding years up to 1986, with a final payment of $118,000,000 in 1987).

Opposition to the accord is such as to make any present chances of ratification by Parliament very dubious, if not nonexistent. M. Poincaré, though he has not submitted the agreement for ratification, has kept it alive by making annual payments on account approximately equal to the scheduled annuities. It is presumed that the conclusion of a favorable settlement with Germany in which her obligations would be defined would make an early ratification by Parliament possible. Thus the treasury would be relieved from the considerable embarrassment of finding $400,000,000 in the near future.

From these facts it might appear that an early agreement with Germany is a matter of importance to the French Government. And this is so, but with limitations. For M. Poincaré is holding something in reserve. The coming into effect of the debt-funding agreement is contingent, in the words of the document itself, on ‘ratification in France,’ and experts in the French law have expressed the opinion that as this document, being a financial instrument, does not operate to increase the French public debt, the Government itself would be legally competent to ratify it, if it so desired, without submittal to Parliament. Undoubtedly such action would cause a great uproar in France. But M. Poincare is a man of courage and a lover of his country. He has publicly stated that rather than accept an unfavorable settlement with Germany he will fall back on the indeterminate annuity of $315,000,000 accorded to France under the Dawes Plan. Assuming an intransigent attitude by the Germans in the present negotiations, it seems distinctly possible that he will grasp the other horn of his dilemma and decide on governmental ratification of the American debt accord as being in his judgment the better course for France.

III

All in all, while the considerations just discussed undoubtedly played a part in bringing the conference together, it would seem that in themselves they were not of sufficient weight to carry the day against the obvious advantages of permitting time still further to soften this highly indurated problem. Other more tempting considerations must have been in the air at Geneva. Those considerations appear to have been, on the one side, a substantial, though undefined, concession to Germany on the annuities, and on the other side, as compensation to France and her ex-allies, the attractive idea of a large public sale or ‘commercialization’ of reparation bonds, the cash proceeds of which would fall as a capital sum into the hard-pressed treasuries of the creditor governments.

The question whether the conference project was well founded, in so far as it rested on such a basis, can be answered only by the event. But in any case the first response of public opinion in this country to the commercialization scheme was not such as to make its immediate realization on a large scale seem likely. Prior to the meeting of the committee, therefore, the basis of the contemplated bargain seemed to undergo a gradual modification. The suggestion was made that, even though commercialization on a large scale might not immediately be practicable, there could still very usefully be provided a framework for such a scheme, to be utilized when and as circumstances favored the public sale of bonds. In addition, it was suggested that there might be arranged some scheme of ‘ mobilization ’ — that is, the substitution of German reparation bonds for the obligations of the Allied Governments in the hands of private holders, thus permitting the retirement of portions of the public debts of the Allied Governments.

In this preconference evolution, a considerable part of the cash that under the first plan would have been immediately realizable disappeared from the picture, and with it presumably went a considerable part of the attractiveness of the scheme to the French. This seems to have involved some corresponding modification of French ideas as to the necessary concession to Germany — a drift of opinion which might have had embarrassing results, as the conference project was already well under way. Fortunately there appeared to be a way out. In lieu of any absolute reduction in the total of the German obligation from a figure of the general magnitude implied by the Dawes Plan, — namely, $10,000,000,000, — the term of payment of the debt might be lengthened to the period contemplated by the Allied debt-funding agreements with the United States. By extending the period to one of this length, say sixty years, the annual payments for sinking fund would be smaller. And, if the total annual payments were to be graduated in size in some manner roughly corresponding to the schedules of payments under the debt-funding agreements, the amounts required in the earlier years would be smaller still, though naturally those required in the later years would be correspondingly larger.

Without pretense of special insight into the minds of those who called the conference, one may say that, the foregoing hypotheses, based in part on published dispatches of a semiofficial character, provide the elements of a very reasonable basis of settlement. Let us look at the details.

Just before the opening of the conference the French and Belgian positions were repeatedly stated, though unofficially, to be that Germany should reimburse France and Belgium for the amount of their Interallied obligations, together with ninety to one hundred billion francs to cover reparation for French property damages (that is, excluding pensions), and an unnamed sum for reparations for Belgium, presumably relatively small. The English have never abandoned the position taken in the Balfour Note in 1922 that no more would be claimed from England’s European ex-allies and the Germans together than would be necessary to meet her American debt. Italy’s position has not been made clear, but it may be assumed to be the same, so far as her Interallied obligations are concerned, with perhaps several hundred million dollars added for reparations.

What does all this come to? Taking the Interallied debts to the United States, we find that their value, if the prescribed annuities are capitalized at 5 per cent (the rate used above in computing the approximate value of the Dawes Plan), is $5,900,000,000 (as shown in the Statistical Abstract of the United States), Out of this total England would look to Germany for $3,300,000,000 to care for her American debt; France would expect $1,700,000,000; Italy $426,000,000, and Belgium $192,000,000.

As reparations, France would claim an amount of $3,500,000,000 to $3,900,000,000, the dollar value of her franc claim, converted at the new depreciated value of 3.9 cents to the franc. This represents a large reduction from the real values expended in reconstruction, as the francs, when expended, had nearly twice the gold value of the franc to-day. Those expenditures, as made, amounting to about 86,000,000,000 francs direct cost, plus 14,000,000,000 for interest costs on reconstruction debt, had a value at the time of about $7,400,000,000.

The amounts which Belgium and Italy might claim as reparations, clear of their Interallied obligations, may be regarded as restricted practically to their shares of the Dawes Plan payments, less the amount of those obligations. Taking the value of the Dawes Plan at $10,000,000,000, Belgium’s share is about $440,000,000, out of which she has to meet her American debt of $192,000,000, leaving $248,000,000 for reparations; Italy, out of a share of $977,000,000, would meet her American debt of $426,000,000, leaving $551,000,000 for reparations.

If Italy and France were still required to meet their Interallied obligations to Great Britain, those matters would be for Interallied adjustment of shares in the total claim on Germany. (The share of France is now 53 per cent, and of England 22½ per cent.) Whatever those adjustments, the total claim on Germany remains unaffected. All the Interallied obligations wash out to a total of $5,900,000,000 to be recovered from Germany. If to this is added a maximum of $3,900,000,000 or a minimum of $3,500,000,000 for French reparations, with $250,000,000 for Belgian reparations and $550,000,000 for Italian damages, the Allied claim comes to a maximum of $10,600,000,000 or a minimum of $10,200,000,000.

IV

The Allies are thus in a position of claiming from Germany an amount approximately equivalent to the value of the Dawes Plan annuities. It is a remarkably strong position, from whatever angle examined. Politically, the total claim of $10,000,000,000 or thereabouts has the strength which five years’ operation of the Dawes Plan has given a figure of that general magnitude. Equitably, on the principle of even distribution of taxpayers’ burdens, it has the weight of the findings of the Dawes Committee behind it. And if the components of the claim and their purposes are scrutinized, it must be regarded as equally strong. The largest item goes into one pocket only to go out of the other. World opinion, with the precedents of history in mind, can hardly fail to regard such a claim by the victors in a great conflict as singularly moderate. From almost any point of view, it is difficult to see how Germany can expect to secure any substantially more favorable settlement.

Assuming that the Allied representatives stand on some figure around $10,000,000,000, it seems likely that the terms of payment will be so fixed, by prolonging the period, as to reduce the amount of the present annuity. Such an arrangement would offer a welcome relief, for the time being, to the German taxpayer, and in consequence would presumably be politically more acceptable in Germany. Some such arrangement appears at the present writing to be foreshadowed by the negotiations in progress at Paris.

Spreading the payments evenly over sixty years, a debt of $10,000,000,000 at 5 per cent would be discharged by an annuity of $528,000,000, representing interest of $500,000,000 and a sinkingfund installment of $28,000,000. That portion of the total annuity of $528,000,000 which would be required to care for the Allies’ debts to the United States of $5,900,000,000 would be $311,000,000, and if this portion were graduated in size to correspond with the Allies’ annuities to the United States it could now start at about $215,000,000 (gradually increasing to a maximum of about $425,000,000 near the end of the period in 1987.) The total commencing annuity to discharge the debt of $10,000,000,000 in sixty years would therefore be $432,000,000 (that is, $215,000,000 for the Allies’ debts and $217,000,000 for reparations), and the maximum annuity in the 1980’s would be about $642,000,000.

Whether German opinion would regard such a settlement as a real concession by the Allies is another question. Probably it would not. Doubtless the Germans will formulate demands for concessions of other kinds, and those the Allies could well afford to make. Clearly there are many reasons why the fixation of the debt is highly desirable, and if the Allies hope to figure as beneficiaries of a commercialization scheme, it is essential. For without a definite determination of Germany’s liability any sale of bonds on a really large scale would be impossible.

It does not follow that the debt, if fixed, must or will be fixed as a capital sum or entirely as a capital sum. A definite series of annuities is no less a fixation of a definite liability than the stating of a capital sum or the translating of the annuities at some explicitly stated rate into a capital sum. Since the war, political advantages have been seen in allowing intergovernmental settlements to remain stated in terms of annuities only. How real these advantages may be need not be discussed here. The result, at all events, is that the present (capital) value of such settlements may be interpreted at different figures, depending on the rate of interest assumed. The higher the interest rate, the lower the indicated capital value of the annuity series, and vice versa.

The reason for this can easily be demonstrated by the layman by considering how an annuity payment falling due say five years from now might be provided for by the investment to-day of a sum of money at compound interest. To meet a payment of $100 due five years hence, it would be sufficient at 5 per cent interest to set aside to-day $78.35. But if the interest earnings were to be only at the rate of 4 per cent, the present sum required would be $82.19. Differences of this sort in the interpretation of the present values of annuities do not, however, affect the general result of the settlement. The annuities are the thing, and they are not changed by changes in assumed interest rates. But with various unevenly graduated series of annuities receivable and payable, such as are or may be involved in a general settlement of reparations, present values are the only common denominator by which the whole position may be visualized and the general results weighed. Some interest rate must be assumed by the student, and if the same one is used for all the interrelated transactions affecting the various parties it is not very important whether it be 5 per cent or, say, 4 per cent, or even some other rate not greatly different from these.

V

Before arriving at its crucial task of fixing the annuities and of considering the feasibility of commercializing some part of the obligation, the present conference will be obliged, and at this writing has already begun, to take up several preliminary stages of investigation and negotiation. Two subjects in particular have to be canvassed — the ‘transfer problem,’ so called, and the matter of ‘capacity to pay.’

The transfer problem has been the subject of much controversy the past seven or eight years. It is a hypothetical dilemma relating to the international transfer of debt payments, which was first posed by J. M. Keynes, the English economist, at the time of the creation of the reparation and Interallied debts. One horn of the Keynesian dilemma is that the transfer of payments on large international obligations will prove impossible, owing to the inability of debtor countries to develop surpluses of exports over imports sufficiently great to procure the foreign currencies necessary for payment. The other horn is that, if such surpluses should in fact be developed, the industries of the receiving countries will be seriously embarrassed or ruined by the influx of foreign goods by which the payment is effected. Thus, under the Keynes doctrine, the creditors lose either way; and, under an extension of the doctrine to the affairs of the debtor country, efforts by the latter to purchase foreign currencies for debt payment by the offering of home currency in exchange would, in the absence of an export surplus, depreciate the value of the home currency, and if persisted in would result in its collapse.

These hypotheses have enjoyed a wide vogue and have exercised an important psychological influence on all past reparation negotiations. It is only recently that a realization of their inherent absurdity and their conflict with the facts of economic history has become at all general among students of economics. The Keynesians made the mistake of jumping to their conclusion before they had reflected upon a certain condition in international financial relations which had always existed, but which before the war was a very unobtrusive one. International debts of great magnitude have always existed, and the interest and sinkingfund payments on them have always been collected without the slightest economic disturbance. Before the war Europe was creditor to the world in the amount of fifty billion dollars in presentday values (thirty-three billions prewar, as estimated by Harvey E. Fisk), and every good debt was duly collected in cash, without any suspicion ever arising that such a thing as a transfer problem existed. The post-war vogue of this purely subjective ‘problem’ was the product of a vast and not unnatural astonishment on the part of the layman at the size of the widely advertised reparation and Interallied debts, and a complete lack of curiosity on the part of the Keynesians as to the nature of the processes involved in the international distribution of capital.

The facts are that the economic practicability of international debt collection depends on one factor only — the ability of the debtor to provide the annual interest and sinking-fund installment, out of taxation in the case of a public obligation, or out of earnings in the case of corporation debt. If the provision is duly made, the transfer of payment follows automatically and harmlessly as a result of one of two processes, depending upon the position of international trade at the time. One of those processes consists of further foreign borrowing by other enterprises of the debtor country, and the alternative process is the exportation of goods. By one process or the other, foreign exchange is rendered available to the nationals of the paying country, and either the one or the other process must always be characteristic of the economic position of every civilized nation.

Axiomatically, every country in its international trade relations for a given period has either a surplus of imports of goods (and services) over exports or a surplus of exports over imports. It is either importing a surplus or exporting one, and that surplus is part of the world surplus production — part of the stock of new capital in process of distribution by countries long of capital to countries short of capital.

The movement of a surplus of goods, as goods, is the trade aspect, or obverse face, of international economic relations. The movement of a surplus of goods, as capital, is the financial aspect, or reverse face, of precisely the same economic condition. An importing country is borrowing. It settles for its import balances by giving its securities. An exporting country is lending. It receives settlement of its export balances by taking securities (first taking its own previously given securities and then taking the securities of the debtors).

An importing country is short of new capital, as Germany is to-day, and the securities offered by its corporations to procure capital for productive enterprise are taken by the investors of the exporting country — such as the United States or England (English trade balances, including services, being really export balances, and not, as is widely believed, import balances). The surplus product shipped by the manufacturers of the export ing country is new capital savings being sent abroad for the account of the investors of that country. This product is taken by the enterprises of the importing country which are seeking new capital, and they emit, their securities against its receipt.

Germany to-day is an importing country, as was the United States before the war. This condition, in itself, is not broadly significant to the matter of economic strength or feebleness — for the strongest often borrow and the feeblest cannot borrow for lack of credit. It is rather an indication of trend. It indicates enterprise and expansion. A country that is borrowing is building. It is ploughing all its savings back into new enterprise, and still needs more. Since 1924, Germany has borrowed abroad on long-term bonds, according to the Reichs Credit Bank, some $1,800,000,000, of which about $1,200,000,000 was procured from the United States. It is clear that her borrowings have been used productively, that they have not been dissipated, that she has not, as the saying goes, paid reparations out of borrowed money. For, according to estimates of the authority just cited, her new capital formation while the borrowings have been going on has been about $4,800,000,000, after payment of reparations. And it is clear in another way that she is not living on borrowed capital, for she is regularly setting aside the interest and sinking fund on her borrowings out of taxation or earnings. It is a healthy process of reconstruction that is going on, and it will continue until Germany, rebuilt by foreign capital, will need no more, and — her productivity reestablished — will produce an export surplus of new capital of her own.

VI

Now as to the mechanics of debt settlement. It is clear to everyone that, when the time does arrive when Germany produces an export surplus, there will be available foreign exchange in the possession of her nationals through the shipment of that surplus abroad in exchange for dollars, pounds, francs, or guilders; and that the Reich or any individual German who owes a debt abroad will be able to procure this foreign currency by handing over to the German exporters (through the banks) the marks which have been saved to pay the debt. This is transfer of Stage II, as we may call it — the stage of an advanced national economic development.

Transfer of Stage I, the other alternative, is transfer as now effected by Germany. Germany is importing — borrowing. New prospective borrowers in Germany are offering their securities to prospective lenders. They want new capital. On the other hand, the Reich or individual Germans who owe debts abroad have set aside a certain amount of savings to meet their foreign obligations. This part of the new capital produced in Germany belongs to foreigners. Foreigners are lending to Germany, and they proceed to lend to Germans not only new foreign capital produced abroad, but also that part of the new capital produced in Germany which belongs to foreigners. It is through the lending of this latter — the actual savings set aside to pay foreign debts — that the transfer of the equivalent of those savings to the foreign bondholder is accomplished. A new foreign lender furnishes dollars to the banks in exchange for the new securities of the new borrower. The old debtor furnishes marks to the banks in exchange for the coupons or other evidences of maturing debt which have been presented by the old creditor. The banks deliver the dollars to the old creditor and the marks to the new debtor.

The transfer under Stage I is thus complete — marks for dollars, without movement of goods. Nor has any threat to the stability of the mark been involved, since marks have not been put up at auction on the exchange market, but changed into dollars in a normal way under an equal pressure of demand against supply. Reparations have been effectually transferred out of Germany, since the reparation creditors take dollars, pounds, francs, lire, or guilders indiscriminately to meet their foreign obligations or to be exchanged into other currencies through the multifarious operations of international finance. Transfers all work around to their ultimate destination through the sea of international trade, without causing a ripple on its broad surface.

This is transfer of Stage I. And either Stage I or Stage II is always in effect. It is immaterial how soon Stage II eventuates. It will come in good time, as determined by the processes of economic development. These are processes which naturally come to fruition over periods measured by decades rather than years. The idea that the month-to-month development of trade balances has to be anxiously watched to see whether transfers are still going to be possible is an absurdity.

The supposed threat to creditor nations under Stage II (the German export stage) is nonexistent, for the reason that if the creditors become importing countries they will become so from a shortage of capital, and, as capital is goods, they will be short not only of productive capacity, but of product, and the character of the imported product as competitive or noncompetitive on the home market will be, broadly, of no consequence to them at all.

And a related idea that imports will be artificially stimulated by the pressure of foreign debt seeking to be paid is equally without reality. Imports arise on account of shortage of capital. Debt collection is a purely passive factor in international economic relations. The active factor is the distribution of world surplus production, and in that distribution all settlements are automatically provided for. It could not be otherwise. Those great processes of economic fertilization could not be of such preposterous futility as to be balked by mere bookkeeping. And the history of the nineteenth century supports this statement.

The so-called transfer problem, though a complete economic nonentity, bulks large in the important field of the psychology of reparations. For this great myth, or humbug, or mere confusion of thought, as one prefers, has traveled faster and further than the answer to it. The Dawes Committee solved the psychological difficulty as it existed in 1924 by setting up a Transfer Committee with power to stop transfers to the Allies should the stability of the mark be threatened. It never has been threatened, and the annuities have been duly transferred as set aside in marks by the German Government.

But ‘transfer protection,” so called, is still a factor in the reparation problem. The German delegates to the conference appear to value it highly. At least, if they arc correctly reported, they intimate that, in its absence, Germany would have to be extremely cautious in the matter of the size of the annuity which she would definitely bind herself to pay. Reports of the discussion seem to suggest that the transfer problem no longer as formerly broods over the councils of reparations as an authentic spectre of economic woe, but now figures merely as a part of the horse trade. The Allies are interested in commercialization of reparation bonds, and such bonds, to be salable, must be free of any such flaw as would be implied by the existence of any authority to suspend transfer of the interest in case of some supposed threat to the stability of the mark. It appears that a compromise is being worked out in conference, whereby a part of the debt will have ‘transfer protection’ and a part will be an unqualified obligation.

VII

Another question which will occupy the conference is that of ‘capacity to pay.” It is not wholly, or even chiefly, as economic experts that the committee may be looked to for an authoritative definition of Germany’s capacity to pay. It is rather as men having an understanding of political and social realities, and, withal, being in a position to shape their definition from facts demonstrated by experience through the operation of the Dawes Plan. As a scientific conception, national capacity to pay is hardly more than a figure of speech.

Capacity to pay means ability to support taxes—an elusive subject, of very restricted economic implications. The productive capacity of any one of the great industrial nations of the modern world is a colossal thing. Economically, the margin of that capacity over subsistence requirements has not nearly been exhausted, even by the burdens imposed by the greatest of all conflicts. But man does not live by bread alone, and when taxation reaches out for a fifth of Everyman’s earnings, as in Europe, not science but only something greater than science can undertake to measure the remaining margin of political stability and social safety.

Dealing in a practical way with yield of taxes and other fiscal aspects, S. Parker Gilbert, the Agent General for Reparations, said in December 1928 that ‘no question can fairly arise in the light of practical experience thus far as to the ability of the Budget of the Reich to provide the full amount of its standard contribution to the plan,’ and he similarly confirmed the ability of the railways and industry to carry their charges under the plan.1 Mr. Gilbert is a competent and impartial authority. But there may well be an honest difference of opinion on the subject, and the Germans do not appear to agree with Mr. Gilbert.

In the final judgment, one cannot get very far away from the question of relative national burdens. A burden which may be regarded as too hard or impossible for Germany, viewing Germany by herself, cannot be deemed truly so if the shifting of it would throw even more difficult burdens on her neighbors. According to the estimates of a leading authority, Harvey E. Fisk, of the Bankers Trust Company, the percentages of the income of the population taken by national and local taxation in 1926 (or 1926-1927) were in England 23.6 per cent, in Belgium 19.8 per cent, in France 19.7 per cent, in Italy 19.5 per cent, in Germany 17.9 per cent (and in the United States 8.9 per cent). Adjustments during that year to the average of the Dawes Plan payments on a sixty-year annuity basis (that is, $528,000,000 a year on $10,000,000,000) would have changed the percentages of the two principal protagonists to: Germany, 22.3 per cent; France, 18.2. By further adjusting the percentage of France to the average basis of her British and American debt annuities ($58,000,000 to England and $90,000,000 to the United States), her percentage would be 19.5 per cent.2

All such figures include indefinite factors on the income side, and, if one raises the question as to the purposes for which taxes are raised, highly controversial elements on the expenditure side. It is an infinitely complicated subject. But the results broadly may be taken as confirming that the Dawes settlement was as fair a settlement, from the aspect of relative tax burdens, as could have been made.

This being so, Germany cannot with very good grace plead incapacity to pay the Dawes Plan annuity. And, what is no less significant, the new committee is not likely to consider getting very far away from such a figure (unless, as above suggested, by assessing an equivalent burden through taking a lower annuity for sixty years instead of something like the present annuity for the thirty-seven years implied by the Dawes Plan). For a voyage on the uncharted sea of a brandnew inquiry on ‘capacity to pay’ would disclose rocks of controversy which not only are the members of the conference under no obligation personally to hazard, but which would place in jeopardy the great gains achieved during the past five years in the state of public feeling on the reparation question. The channel which was opened by the Dawes Committee and has now been marked by the Dawes Plan offers the only safe and practicable course.

Germany, as any great nation similarly situated would do, will pay what she thinks it in her best interest to pay. A Berlin editor, unnamed but described by a leading American newspaper correspondent in Europe as ‘certainly no Nationalist,’ was recently quoted as saying, ‘It is not a question of what Germany must pay, so much as a question of what Germany is willing to pay.’ No one can quarrel with this. It is a perfectly fair and realistic statement of what everyone knows. And it is not at all different from Poincare’s famous saying of seven years ago, for which in those stormy days he earned unlimited vituperation, that it was all a question of Germany’s ‘will to pay.’

The attitude of the taxpayer is the chief element in national capacity to pay. The war taught us that, given an object of sufficient importance in the public mind, capacity to pay is, for all practical purposes, unlimited. To-day, of course, no such situation exists. Nevertheless, with her industry reviving and her foreign markets expanding, Germany to-day has a stake in the preservation of good relations with the ex-Allies which is worth many times the five or ten dollars a head which the reparation bill will annually cost her; and her present leaders have given every indication of recognizing that fact.

Germany can afford to bind herself for sixty years, if need be, just as the Allies have bound themselves to the United States. For time will work on her side. Intergovernmental debts can never be other than an irritant in international relations, and before six decades of debt collection have dragged themselves out creditors are likely to discover that the results are not all clear profit. The United States is the final creditor, and in our search for foreign markets to take our surplus products we shall one day doubtless ask ourselves whether a principle so highly regarded in domestic trade as the cultivation of customer goodwill has any importance in the interchanges of foreign commerce; and, if it has, what its probable value is as compared with the three dollars a head which we propose to collect annually on the debt settlements. Eventually our statesmen may welcome the tender of a liquidating payment, whether in cash or some other form of valuable consideration, as offering a politically feasible means of wiping the slate clean.

The Germans in the present juncture, knowing that time will continue to work toward further downward revision, are doubtless not enthusiastic about having too much of their obligation converted into bonds running to the investing public. For their responsible leaders are aware that no German government could ever dream of offering to compromise commitments of such a character. Some concession by Germany in the direction of a commercialization scheme, however, seems highly probable. It follows that there will be counter-concessions by the Allies — in part, perhaps, of a kind to be arranged by separate agreement between the governments, similar to the arrangement for the evacuation of the Ruhr, which was entered into concurrently with the adoption of the Dawes Plan.

It seems reasonable to expect as a result of the conference a considerable advance — perhaps a very great advance — in the long process of untying the reparation knot. It would be unreasonable to expect a ‘final settlement,’ for no settlement can be final until the last payment is made.

  1. The standard annuity of $595,000,000 began to rim September 1, 1928. For the four years of the Dawes Plan ended that date, Germany paid, on an increasing annual scale, an average of $325,000,000 a year. For the six prior years, commencing at the date of the Armistice, she paid in cash and materials, according to the valuations of the Reparation Commission, an average of $212,000,000 a year. — AUTHOB
  2. Mr. Fisk estimates German national income during the fiscal year 1926-1927 at 10.7 billion dollars and French national income during the year 1926 at 7.8 billion dollars. The present value of the annuities payable by France over sixty-two years under the Franco-British debtfunding agreement, at 5 per cent, is about $1,100,000,000. — AUTHOR