8. The Commission will provide for the restitution by Germany of property which can be identified.

9. The Commission will receive, administer, and distribute all receipts from Germany in cash or in kind. It will also issue and market German bonds of indebtedness.

10. The Commission will assign the share of the pre-war public debt to be taken over by the ceded areas of Schleswig, Poland, Danzig, and Upper Silesia. The Commission will also distribute the public debt of the late Austro-Hungarian Empire between its constituent parts.

11. The Commission will liquidate the Austro-Hungarian Bank, and will supervise the withdrawal and replacement of the currency system of the late Austro-Hungarian Empire.

12. It is for the Commission to report if, in their judgment, Germany is falling short in fulfillment of her obligations, and to advise methods of coercion.

13. In general, the Commission, acting through a subordinate body, will perform the same functions for Austria and Bulgaria as for Germany, and also, presumably, for Hungary and Turkey.[138]

There are also many other relatively minor duties assigned to the Commission. The above summary, however, shows sufficiently the scope and significance of its authority. This authority is rendered of far greater significance by the fact that the demands of the Treaty generally exceed Germany's capacity. Consequently the clauses which allow the Commission to make abatements, if in their judgment the economic conditions of Germany require it, will render it in many different particulars the arbiter of Germany's economic life. The Commission is not only to inquire into Germany's general capacity to pay, and to decide (in the early years) what import of foodstuffs and raw materials is necessary; it is authorized to exert pressure on the German system of taxation (Annex II. para. 12(b))[139] and on German internal expenditure, with a view to insuring that Reparation payments are a first charge on the country's entire resources; and it is to decide on the effect on German economic life of demands for machinery, cattle, etc., and of the scheduled deliveries of coal.

By Article 240 of the Treaty Germany expressly recognizes the Commission and its powers "as the same may be constituted by the Allied and Associated Governments," and "agrees irrevocably to the possession and exercise by such Commission of the power and authority given to it under the present Treaty." She undertakes to furnish the Commission with all relevant information. And finally in Article 241, "Germany undertakes to pass, issue, and maintain in force any legislation, orders, and decrees that may be necessary to give complete effect to these provisions."

The comments on this of the German Financial Commission at Versailles were hardly an exaggeration:—"German democracy is thus annihilated at the very moment when the German people was about to build it up after a severe struggle—annihilated by the very persons who throughout the war never tired of maintaining that they sought to bring democracy to us.... Germany is no longer a people and a State, but becomes a mere trade concern placed by its creditors in the hands of a receiver, without its being granted so much as the opportunity to prove its willingness to meet its obligations of its own accord. The Commission, which is to have its permanent headquarters outside Germany, will possess in Germany incomparably greater rights than the German Emperor ever possessed, the German people under its regime would remain for decades to come shorn of all rights, and deprived, to a far greater extent than any people in the days of absolutism, of any independence of action, of any individual aspiration in its economic or even in its ethical progress."

In their reply to these observations the Allies refused to admit that there was any substance, ground, or force in them. "The observations of the German Delegation," they pronounced, "present a view of this Commission so distorted and so inexact that it is difficult to believe that the clauses of the Treaty have been calmly or carefully examined. It is not an engine of oppression or a device for interfering with German sovereignty. It has no forces at its command; it has no executive powers within the territory of Germany; it cannot, as is suggested, direct or control the educational or other systems of the country. Its business is to ask what is to be paid; to satisfy itself that Germany can pay; and to report to the Powers, whose delegation it is, in case Germany makes default, If Germany raises the money required in her own way, the Commission cannot order that it shall be raised in some other way; if Germany offers payment in kind, the Commission may accept such payment, but, except as specified in the Treaty itself, the Commission cannot require such a payment."

This is not a candid statement of the scope and authority of the Reparation Commission, as will be seen by a comparison of its terms with the summary given above or with the Treaty itself. Is not, for example, the statement that the Commission "has no forces at its command" a little difficult to justify in view of Article 430 of the Treaty, which runs:—"In case, either during the occupation or after the expiration of the fifteen years referred to above, the Reparation Commission finds that Germany refuses to observe the whole or part of her obligations under the present Treaty with regard to Reparation, the whole or part of the areas specified in Article 429 will be reoccupied immediately by the Allied and Associated Powers"? The decision, as to whether Germany has kept her engagements and whether it is possible for her to keep them, is left, it should be observed, not to the League of Nations, but to the Reparation Commission itself; and an adverse ruling on the part of the Commission is to be followed "immediately" by the use of armed force. Moreover, the depreciation of the powers of the Commission attempted in the Allied reply largely proceeds from the assumption that it is quite open to Germany to "raise the money required in her own way," in which case it is true that many of the powers of the Reparation Commission would not come into practical effect; whereas in truth one of the main reasons for setting up the Commission at all is the expectation that Germany will not be able to carry the burden nominally laid upon her.

* * * * *

It is reported that the people of Vienna, hearing that a section of the Reparation Commission is about to visit them, have decided characteristically to pin their hopes on it. A financial body can obviously take nothing from them, for they have nothing; therefore this body must be for the purpose of assisting and relieving them. Thus do the Viennese argue, still light-headed in adversity. But perhaps they are right. The Reparation Commission will come into very close contact with the problems of Europe; and it will bear a responsibility proportionate to its powers. It may thus come to fulfil a very different role from that which some of its authors intended for it. Transferred to the League of Nations, an appanage of justice and no longer of interest, who knows that by a change of heart and object the Reparation Commission may not yet be transformed from an instrument of oppression and rapine into an economic council of Europe, whose object is the restoration of life and of happiness, even in the enemy countries?

V. The German Counter-Proposals

The German counter-proposals were somewhat obscure, and also rather disingenuous. It will be remembered that those clauses of the Reparation Chapter which dealt with the issue of bonds by Germany produced on the public mind the impression that the Indemnity had been fixed at $25,000,000,000, or at any rate at this figure as a minimum. The German Delegation set out, therefore, to construct their reply on the basis of this figure, assuming apparently that public opinion in Allied countries would not be satisfied with less than the appearance of $25,000,000,000; and, as they were not really prepared to offer so large a figure, they exercised their ingenuity to produce a formula which might be represented to Allied opinion as yielding this amount, whilst really representing a much more modest sum. The formula produced was transparent to any one who read it carefully and knew the facts, and it could hardly have been expected by its authors to deceive the Allied negotiators. The German tactic assumed, therefore, that the latter were secretly as anxious as the Germans themselves to arrive at a settlement which bore some relation to the facts, and that they would therefore be willing, in view of the entanglements which they had got themselves into with their own publics, to practise a little collusion in drafting the Treaty,—a supposition which in slightly different circumstances might have had a good deal of foundation. As matters actually were, this subtlety did not benefit them, and they would have done much better with a straightforward and candid estimate of what they believed to be the amount of their liabilities on the one hand, and their capacity to pay on the other.

The German offer of an alleged sum of $25,000,000,000 amounted to the following. In the first place it was conditional on concessions in the Treaty insuring that "Germany shall retain the territorial integrity corresponding to the Armistice Convention,[140] that she shall keep her colonial possessions and merchant ships, including those of large tonnage, that in her own country and in the world at large she shall enjoy the same freedom of action as all other peoples, that all war legislation shall be at once annulled, and that all interferences during the war with her economic rights and with German private property, etc., shall be treated in accordance with the principle of reciprocity";—that is to say, the offer is conditional on the greater part of the rest of the Treaty being abandoned. In the second place, the claims are not to exceed a maximum of $25,000,000,000, of which $5,000,000,000 is to be discharged by May 1, 1926; and no part of this sum is to carry interest pending the payment of it.[141] In the third place, there are to be allowed as credit against it (amongst other things): (a) the value of all deliveries under the Armistice, including military material (e.g. Germany's navy); (b) the value of all railways and State property in ceded territory; (c) the pro rata share of all ceded territory in the German public debt (including the war debt) and in the Reparation payments which this territory would have had to bear if it had remained part of Germany; and (d) the value of the cession of Germany's claims for sums lent by her to her allies in the war.[142]

The credits to be deducted under (a), (b), (c), and (d) might be in excess of those allowed in the actual Treaty, according to a rough estimate, by a sum of as much as $10,000,000,000, although the sum to be allowed under (d) can hardly be calculated.

If, therefore, we are to estimate the real value of the German offer of $25,000,000,000 on the basis laid down by the Treaty, we must first of all deduct $10,000,000,000 claimed for offsets which the Treaty does not allow, and then halve the remainder in order to obtain the present value of a deferred payment on which interest is not chargeable. This reduces the offer to $7,500,000,000, as compared with the $40,000,000,000 which, according to my rough estimate, the Treaty demands of her.

This in itself was a very substantial offer—indeed it evoked widespread criticism in Germany—though, in view of the fact that it was conditional on the abandonment of the greater part of the rest of the Treaty, it could hardly be regarded as a serious one.[143] But the German Delegation would have done better if they had stated in less equivocal language how far they felt able to go.

In the final reply of the Allies to this counter-proposal there is one important provision, which I have not attended to hitherto, but which can be conveniently dealt with in this place. Broadly speaking, no concessions were entertained on the Reparation Chapter as it was originally drafted, but the Allies recognized the inconvenience of the indeterminacy of the burden laid upon Germany and proposed a method by which the final total of claim might be established at an earlier date than May 1, 1921. They promised, therefore, that at any time within four months of the signature of the Treaty (that is to say, up to the end of October, 1919), Germany should be at liberty to submit an offer of a lump sum in settlement of her whole liability as defined in the Treaty, and within two months thereafter (that is to say, before the end of 1919) the Allies "will, so far as may be possible, return their answers to any proposals that may be made."

This offer is subject to three conditions. "Firstly, the German authorities will be expected, before making such proposals, to confer with the representatives of the Powers directly concerned. Secondly, such offers must be unambiguous and must be precise and clear. Thirdly, they must accept the categories and the Reparation clauses as matters settled beyond discussion."

The offer, as made, does not appear to contemplate any opening up of the problem of Germany's capacity to pay. It is only concerned with the establishment of the total bill of claims as defined in the Treaty—whether (e.g.) it is $35,000,000,000, $40,000,000,000, or $50,000,000,000. "The questions," the Allies' reply adds, "are bare questions of fact, namely, the amount of the liabilities, and they are susceptible of being treated in this way."

If the promised negotiations are really conducted on these lines, they are not likely to be fruitful. It will not be much easier to arrive at an agreed figure before the end of 1919 that it was at the time of the Conference; and it will not help Germany's financial position to know for certain that she is liable for the huge sum which on any computation the Treaty liabilities must amount to. These negotiations do offer, however, an opportunity of reopening the whole question of the Reparation payments, although it is hardly to be hoped that at so very early a date, public opinion in the countries of the Allies has changed its mood sufficiently.[144]

* * * * *

I cannot leave this subject as though its just treatment wholly depended either on our own pledges or on economic facts. The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable,—abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilized life of Europe. Some preach it in the name of Justice. In the great events of man's history, in the unwinding of the complex fates of nations Justice is not so simple. And if it were, nations are not authorized, by religion or by natural morals, to visit on the children of their enemies the misdoings of parents or of rulers.

FOOTNOTES:

[76] "With reservation that any future claims and demands of the Allies and the United States of America remain unaffected, the following financial conditions are required: Reparation for damage done. Whilst Armistice lasts, no public securities shall be removed by the enemy which can serve as a pledge to the Allies for recovery or reparation of war losses. Immediate restitution of cash deposit in National Bank of Belgium, and, in general, immediate return of all documents, of specie, stock, shares, paper money, together with plant for issue thereof, touching public or private interests in invaded countries. Restitution of Russian and Roumanian gold yielded to Germany or taken by that Power. This gold to be delivered in trust to the Allies until signature of peace."

[77] It is to be noticed, in passing, that they contain nothing which limits the damage to damage inflicted contrary to the recognized rules of warfare. That is to say, it is permissible to include claims arising out of the legitimate capture of a merchantman at sea, as well as the costs of illegal submarine warfare.

[78] Mark-paper or mark-credits owned in ex-occupied territory by Allied nationals should be included, if at all, in the settlement of enemy debts, along with other sums owed to Allied nationals, and not in connection with reparation.

[79] A special claim on behalf of Belgium was actually included In the Peace Treaty, and was accepted by the German representatives without demur.

[80] To the British observer, one scene, however, stood out distinguished from the rest—the field of Ypres. In that desolate and ghostly spot, the natural color and humors of the landscape and the climate seemed designed to express to the traveler the memories of the ground. A visitor to the salient early in November, 1918, when a few German bodies still added a touch of realism and human horror, and the great struggle was not yet certainly ended, could feel there, as nowhere else, the present outrage of war, and at the same time the tragic and sentimental purification which to the future will in some degree transform its harshness.

[81] These notes, estimated to amount to no less than six thousand million marks, are now a source of embarrassment and great potential loss to the Belgian Government, inasmuch as on their recovery of the country they took them over from their nationals in exchange for Belgian notes at the rate of Fr. 120 = Mk. 1. This rate of exchange, being substantially in excess of the value of the mark-notes at the rate of exchange current at the time (and enormously in excess of the rate to which the mark notes have since fallen, the Belgian franc being now worth more than three marks), was the occasion of the smuggling of mark-notes into Belgium on an enormous scale, to take advantage of the profit obtainable. The Belgian Government took this very imprudent step, partly because they hoped to persuade the Peace Conference to make the redemption of these bank-notes, at the par of exchange, a first charge on German assets. The Peace Conference held, however, that Reparation proper must take precedence of the adjustment of improvident banking transactions effected at an excessive rate of exchange. The possession by the Belgian Government of this great mass of German currency, in addition to an amount of nearly two thousand million marks held by the French Government which they similarly exchanged for the benefit of the population of the invaded areas and of Alsace-Lorraine, is a serious aggravation of the exchange position of the mark. It will certainly be desirable for the Belgian and German Governments to come to some arrangement as to its disposal, though this is rendered difficult by the prior lien held by the Reparation Commission over all German assets available for such purposes.

[82] It should be added, in fairness, that the very high claims put forward on behalf of Belgium generally include not only devastation proper, but all kinds of other items, as, for example, the profits and earnings which Belgians might reasonably have expected to earn if there had been no war.

[83] "The Wealth and Income of the Chief Powers," by J.C. Stamp (Journal of the Royal Statistical Society, July, 1919).

[84] Other estimates vary from $12,100,000,000 to $13,400,000,000. See Stamp, loc. cit.

[85] This was clearly and courageously pointed out by M. Charles Gide in L'Emancipation for February, 1919.

[86] For details of these and other figures, see Stamp, loc. cit.

[87] Even when the extent of the material damage has been established, it will be exceedingly difficult to put a price on it, which must largely depend on the period over which restoration is spread, and the methods adopted. It would be impossible to make the damage good in a year or two at any price, and an attempt to do so at a rate which was excessive in relation to the amount of labor and materials at hand might force prices up to almost any level. We must, I think, assume a cost of labor and materials about equal to that current in the world generally. In point of fact, however, we may safely assume that literal restoration will never be attempted. Indeed, it would be very wasteful to do so. Many of the townships were old and unhealthy, and many of the hamlets miserable. To re-erect the same type of building in the same places would be foolish. As for the land, the wise course may be in some cases to leave long strips of it to Nature for many years to come. An aggregate money sum should be computed as fairly representing the value of the material damage, and France should be left to expend it in the manner she thinks wisest with a view to her economic enrichment as a whole. The first breeze of this controversy has already blown through France. A long and inconclusive debate occupied the Chamber during the spring of 1919, as to whether inhabitants of the devastated area receiving compensation should be compelled to expend it in restoring the identical property, or whether they should be free to use it as they like. There was evidently a great deal to be said on both sides; in the former case there would be much hardship and uncertainty for owners who could not, many of them, expect to recover the effective use of their property perhaps for years to come, and yet would not be free to set themselves up elsewhere; on the other hand, if such persons were allowed to take their compensation and go elsewhere, the countryside of Northern France would never be put right. Nevertheless I believe that the wise course will be to allow great latitude and let economic motives take their own course.

[88] La Richesse de la France devant la Guerre, published in 1916.

[89] Revue Bleue, February 3, 1919. This is quoted in a very valuable selection of French estimates and expressions of opinion, forming chapter iv. of La Liquidation financiere de la Guerre, by H. Charriaut and R. Hacault. The general magnitude of my estimate is further confirmed by the extent of the repairs already effected, as set forth in a speech delivered by M. Tardieu on October 10, 1919, in which he said: "On September 16 last, of 2246 kilometres of railway track destroyed, 2016 had been repaired; of 1075 kilometres of canal, 700; of 1160 constructions, such as bridges and tunnels, which had been blown up, 588 had been replaced; of 550,000 houses ruined by bombardment, 60,000 had been rebuilt; and of 1,800,000 hectares of ground rendered useless by battle, 400,000 had been recultivated, 200,000 hectares of which are now ready to be sown. Finally, more than 10,000,000 metres of barbed wire had been removed."

[90] Some of these estimates include allowance for contingent and immaterial damage as well as for direct material injury.

[91] A substantial part of this was lost in the service of the Allies; this must not be duplicated by inclusion both in their claims and in ours.

[92] The fact that no separate allowance is made in the above for the sinking of 675 fishing vessels of 71,765 tons gross, or for the 1855 vessels of 8,007,967 tons damaged or molested, but not sunk, may be set off against what may be an excessive figure for replacement cost.

[93] The losses of the Greek mercantile marine were excessively high, as a result of the dangers of the Mediterranean; but they were largely incurred on the service of the other Allies, who paid for them directly or indirectly. The claims of Greece for maritime losses incurred on the service of her own nationals would not be very considerable.

[94] There is a reservation in the Peace Treaty on this question. "The Allied and Associated Powers formally reserve the right of Russia to obtain from Germany restitution and reparation based on the principles of the present Treaty" (Art. 116).

[95] Dr. Diouritch in his "Economic and Statistical Survey of the Southern Slav Nations" (Journal of Royal Statistical Society, May, 1919), quotes some extraordinary figures of the loss of life: "According to the official returns, the number of those fallen in battle or died in captivity up to the last Serbian offensive, amounted to 320,000, which means that one half of Serbia's male population, from 18 to 60 years of age, perished outright in the European War. In addition, the Serbian Medical Authorities estimate that about 300,000 people have died from typhus among the civil population, and the losses among the population interned in enemy camps are estimated at 50,000. During the two Serbian retreats and during the Albanian retreat the losses among children and young people are estimated at 200,000. Lastly, during over three years of enemy occupation, the losses in lives owing to the lack of proper food and medical attention are estimated at 250,000." Altogether, he puts the losses in life at above 1,000,000, or more than one-third of the population of Old Serbia.

[96] Come si calcola e a quanto ammonta la richezza d'Italia e delle altre principali nazioni, published in 1919.

[97] Very large claims put forward by the Serbian authorities include many hypothetical items of indirect and non-material damage; but these, however real, are not admissible under our present formula.

[98] Assuming that in her case $1,250,000,000 are included for the general expenses of the war defrayed out of loans made to Belgium by her allies.

[99] It must be said to Mr. Hughes' honor that he apprehended from the first the bearing of the pre-Armistice negotiations on our right to demand an indemnity covering the full costs of the war, protested against our ever having entered into such engagements, and maintained loudly that he had been no party to them and could not consider himself bound by them. His indignation may have been partly due to the fact that Australia, not having been ravaged, would have no claims at all under the more limited interpretation of our rights.

[100] The whole cost of the war has been estimated at from $120,000,000,000 upwards. This would mean an annual payment for interest (apart from sinking fund) of $6,000,000,000. Could any expert Committee have reported that Germany can pay this sum?

[101] But unhappily they did not go down with their flags flying very gloriously. For one reason or another their leaders maintained substantial silence. What a different position in the country's estimation they might hold now if they had suffered defeat amidst firm protests against the fraud, chicane, and dishonor of the whole proceedings.

[102] Only after the most painful consideration have I written these words. The almost complete absence of protest from the leading Statesmen of England makes one feel that one must have made some mistake. But I believe that I know all the facts, and I can discover no such mistake. In any case I have set forth all the relevant engagements in Chapter IV. and at the beginning of this chapter, so that the reader can form his own judgment.

[103] In conversation with Frenchmen who were private persons and quite unaffected by political considerations, this aspect became very clear. You might persuade them that some current estimates as to the amount to be got out of Germany were quite fantastic. Yet at the end they would always come back to where they had started: "But Germany must pay; for, otherwise, what is to happen to France?"

[104] A further paragraph claims the war costs of Belgium "in accordance with Germany's pledges, already given, as to complete restoration for Belgium."

[105] The challenge of the other Allies, as well as the enemy, had to be met; for in view of the limited resources of the latter, the other Allies had perhaps a greater interest than the enemy in seeing that no one of their number established an excessive claim.

[106] M. Klotz has estimated the French claims on this head at $15,000,000,000 (75 milliard francs, made up of 13 milliard for allowances, 60 for pensions, and 2 for widows). If this figure is correct, the others should probably be scaled up also.

[107] That is to say, I claim for the aggregate figure an accuracy within 25 per cent.

[108] In his speech of September 5, 1919, addressed to the French Chamber, M. Klotz estimated the total Allied claims against Germany under the Treaty at $75,000,000,000, which would accumulate at interest until 1921, and be paid off thereafter by 34 annual installments of about $5,000,000,000 each, of which France would receive about $2,750,000,000 annually. "The general effect of the statement (that France would receive from Germany this annual payment) proved," it is reported, "appreciably encouraging to the country as a whole, and was immediately reflected in the improved tone on the Bourse and throughout the business world in France." So long as such statements can be accepted in Paris without protest, there can be no financial or economic future for France, and a catastrophe of disillusion is not far distant.

[109] As a matter of subjective judgment, I estimate for this figure an accuracy of 10 per cent in deficiency and 20 per cent in excess, i.e. that the result will lie between $32,000,000,000 and $44,000,000,000.

[110] Germany is also liable under the Treaty, as an addition to her liabilities for Reparation, to pay all the costs of the Armies of Occupation after Peace is signed for the fifteen subsequent years of occupation. So far as the text of the Treaty goes, there is nothing to limit the size of these armies, and France could, therefore, by quartering the whole of her normal standing army in the occupied area, shift the charge from her own taxpayers to those of Germany,—though in reality any such policy would be at the expense not of Germany, who by hypothesis is already paying for Reparation up to the full limit of her capacity, but of France's Allies, who would receive so much less in respect of Reparation. A White Paper (Cmd. 240) has, however, been issued, in which is published a declaration by the Governments of the United States, Great Britain, and France engaging themselves to limit the sum payable annually by Germany to cover the cost of occupation to $60,000,000 "as soon as the Allied and Associated Powers concerned are convinced that the conditions of disarmament by Germany are being satisfactorily fulfilled." The word which I have italicized is a little significant. The three Powers reserve to themselves the liberty to modify this arrangement at any time if they agree that it is necessary.

[111] Art. 235. The force of this Article is somewhat strengthened by Article 251, by virtue of which dispensations may also be granted for "other payments" as well as for food and raw material.

[112] This is the effect of Para. 12 (c) of Annex II. of the Reparation Chapter, leaving minor complications on one side. The Treaty fixes the payments in terms of gold marks, which are converted in the above rate of 20 to $5.

[113] If, per impossibile, Germany discharged $2,500,000,000 in cash or kind by 1921, her annual payments would be at the rate of $312,500,000 from 1921 to 1925 and of $750,000,000 thereafter.

[114] Para. 16 of Annex II. of The Reparation Chapter. There is also an obscure provision by which interest may be charged "on sums arising out of material damage as from November 11, 1918, up to May 1, 1921." This seems to differentiate damage to property from damage to the person in favor of the former. It does not affect Pensions and Allowances, the cost of which is capitalized as at the date of the coming into force of the Treaty.

[115] On the assumption which no one supports and even the most optimistic fear to be unplausible, that Germany can pay the full charge for interest and sinking fund from the outset, the annual payment would amount to $2,400,000,000.

[116] Under Para. 13 of Annex II. unanimity is required (i.) for any postponement beyond 1930 of installments due between 1921 and 1926, and (ii.) for any postponement for more than three years of instalments due after 1926. Further, under Art. 234, the Commission may not cancel any part of the indebtedness without the specific authority of all the Governments represented on the Commission.

[117] On July 23, 1914, the amount was $339,000,000.

[118] Owing to the very high premium which exists on German silver coin, as the combined result of the depreciation of the mark and the appreciation of silver, it is highly improbable that it will be possible to extract such coin out of the pockets of the people. But it may gradually leak over the frontier by the agency of private speculators, and thus indirectly benefit the German exchange position as a whole.

[119] The Allies made the supply of foodstuffs to Germany during the Armistice, mentioned above, conditional on the provisional transfer to them of the greater part of the Mercantile Marine, to be operated by them for the purpose of shipping foodstuffs to Europe generally, and to Germany in particular. The reluctance of the Germans to agree to this was productive of long and dangerous delays in the supply of food, but the abortive Conferences of Treves and Spa (January 16, February 14-16, and March 4-5, 1919) were at last followed by the Agreement of Brussels (March 14, 1919). The unwillingness of the Germans to conclude was mainly due to the lack of any absolute guarantee on the part of the Allies that, if they surrendered the ships, they would get the food. But assuming reasonable good faith on the part of the latter (their behavior in respect of certain other clauses of the Armistice, however, had not been impeccable and gave the enemy some just grounds for suspicion), their demand was not an improper one; for without the German ships the business of transporting the food would have been difficult, if not impossible, and the German ships surrendered or their equivalent were in fact almost wholly employed in transporting food to Germany itself. Up to June 30, 1919, 176 German ships of 1,025,388 gross tonnage had been surrendered, to the Allies in accordance with the Brussels Agreement.

[120] The amount of tonnage transferred may be rather greater and the value per ton rather less. The aggregate value involved is not likely, however, to be less than $500,000,000 or greater than $750,000,000.

[121] This census was carried out by virtue of a Decree of August 23, 1918. On March 22, 1917, the German Government acquired complete control over the utilization of foreign securities in German possession; and in May, 1917, it began to exercise these powers for the mobilization of certain Swedish, Danish, and Swiss securities.

[122] 1892. Schmoller $2,500,000,000 1892. Christians 3,250,000,000 1893-4. Koch 3,000,000,000 1905. v. Halle 4,000,000,000[A] 1913. Helfferich 5,000,000,000[B] 1914. Ballod 6,250,000,000 1914. Pistorius 6,250,000,000 1919. Hans David 5,250,000,000[C]

[A] Plus $2,500,000 for investments other than securities.

[B] Net investments, i.e. after allowance for property in Germany owned abroad. This may also be the case with some of the other estimates.

[C] This estimate, given in the Weltwirtschaftszeitung (June 13, 1919), is an estimate of the value of Germany's foreign investments as at the outbreak of war.

[123] I have made no deduction for securities in the ownership of Alsace-Lorrainers and others who have now ceased to be German nationals.

[124] In all these estimates, I am conscious of being driven by a fear of overstating the case against the Treaty, of giving figures in excess of my own real judgment. There is a great difference between putting down on paper fancy estimates of Germany's resources and actually extracting contributions in the form of cash. I do not myself believe that the Reparation Commission will secure real resources from the above items by May, 1921, even as great as the lower of the two figures given above.

[125] The Treaty (see Art. 114) leaves it very dubious how far the Danish Government is under an obligation to make payments to the Reparation Commission in respect of its acquisition of Schleswig. They might, for instance, arrange for various offsets such as the value of the mark notes held by the inhabitants of ceded areas. In any case the amount of money involved is quite small. The Danish Government is raising a loan for $33,000,000 (kr. 120,000,000) for the joint purposes of "taking over Schleswig's share of the German debt, for buying German public property, for helping the Schleswig population, and for settling the currency question."

[126] Here again my own judgment would carry me much further and I should doubt the possibility of Germany's exports equaling her imports during this period. But the statement in the text goes far enough for the purpose of my argument.

[127] It has been estimated that the cession of territory to France, apart from the loss of Upper Silesia, may reduce Germany's annual pre-war production of steel ingots from 20,000,000 tons to 14,000,000 tons, and increase France's capacity from 5,000,000 tons to 11,000,000 tons.

[128] Germany's exports of sugar in 1913 amounted to 1,110,073 tons of the value of $65,471,500, of which 838,583 tons were exported to the United Kingdom at a value of $45,254,000. These figures were in excess of the normal, the average total exports for the five years ending 1913 being about $50,000,000.

[129] The necessary price adjustment, which is required, on both sides of this account, will be made en bloc later.

[130] If the amount of the sinking fund be reduced, and the annual payment is continued over a greater number of years, the present value—so powerful is the operation of compound interest—cannot be materially increased. A payment of $500,000,000 annually in perpetuity, assuming interest, as before, at 5 per cent, would only raise the present value to $10,000,000,000.

[131] As an example of public misapprehension on economic affairs, the following letter from Sir Sidney Low to The Times of the 3rd December, 1918, deserves quotation: "I have seen authoritative estimates which place the gross value of Germany's mineral and chemical resources as high as $1,250,000,000,000 or even more; and the Ruhr basin mines alone are said to be worth over $225,000,000,000. It is certain, at any rate, that the capital value of these natural supplies is much greater than the total war debts of all the Allied States. Why should not some portion of this wealth be diverted for a sufficient period from its present owners and assigned to the peoples whom Germany has assailed, deported, and injured? The Allied Governments might justly require Germany to surrender to them the use of such of her mines, and mineral deposits as would yield, say, from $500,000,000 to $1,000,000,000 annually for the next 30, 40, or 50 years. By this means we could obtain sufficient compensation from Germany without unduly stimulating her manufactures and export trade to our detriment." It is not clear why, if Germany has wealth exceeding $1,250,000,000,000. Sir Sidney Low is content with the trifling sum of $500,000,000 to $1,000,000,000 annually. But his letter is an admirable reductio ad absurdum of a certain line of thought. While a mode of calculation, which estimates the value of coal miles deep in the bowels of the earth as high as in a coal scuttle, of an annual lease of $5000 for 999 years at $4,995,000 and of a field (presumably) at the value of all the crops it will grow to the end of recorded time, opens up great possibilities, it is also double-edged. If Germany's total resources are worth $1,250,000,000,000, those she will part with in the cession of Alsace-Lorraine and Upper Silesia should be more than sufficient to pay the entire costs of the war and reparation together. In point of fact, the present market value of all the mines in Germany of every kind has been estimated at $1,500,000,000, or a little more than one-thousandth part of Sir Sidney Low's expectations.

[132] The conversion at par of 5,000 million marks overstates, by reason of the existing depreciation of the mark, the present money burden of the actual pensions payments, but not, in all probability, the real loss of national productivity as a result of the casualties suffered in the war.

[133] It cannot be overlooked, in passing, that in its results on a country's surplus productivity a lowering of the standard of life acts both ways. Moreover, we are without experience of the psychology of a white race under conditions little short of servitude. It is, however, generally supposed that if the whole of a man's surplus production is taken from him, his efficiency and his industry are diminished, The entrepreneur and the inventor will not contrive, the trader and the shopkeeper will not save, the laborer will not toil, if the fruits of their industry are set aside, not for the benefit of their children, their old age, their pride, or their position, but for the enjoyment of a foreign conqueror.

[134] In the course of the compromises and delays of the Conference, there were many questions on which, in order to reach any conclusion at all, it was necessary to leave a margin of vagueness and uncertainty. The whole method of the Conference tended towards this,—the Council of Four wanted, not so much a settlement, as a treaty. On political and territorial questions the tendency was to leave the final arbitrament to the League of Nations. But on financial and economic questions, the final decision has generally be a left with the Reparation Commission,—in spite of its being an executive body composed of interested parties.

[135] The sum to be paid by Austria for Reparation is left to the absolute discretion of the Reparation Commission, no determinate figure of any kind being mentioned in the text of the Treaty Austrian questions are to be handled by a special section of the Reparation Commission, but the section will have no powers except such as the main Commission may delegate.

[136] Bulgaria is to pay an indemnity of $450,000,000 by half-yearly instalments, beginning July 1, 1920. These sums will be collected, on behalf of the Reparation Commission, by an Inter-Ally Commission of Control, with its seat at Sofia. In some respects the Bulgarian Inter-Ally Commission appears to have powers and authority independent of the Reparation Commission, but it is to act, nevertheless, as the agent of the latter, and is authorized to tender advice to the Reparation Commission as to, for example, the reduction of the half-yearly instalments.

[137] Under the Treaty this is the function of any body appointed for the purpose by the principal Allied and Associated Governments, and not necessarily of the Reparation Commission. But it may be presumed that no second body will be established for this special purpose.

[138] At the date of writing no treaties with these countries have been drafted. It is possible that Turkey might be dealt with by a separate Commission.

[139] This appears to me to be in effect the position (if this paragraph means anything at all), in spite of the following disclaimer of such intentions in the Allies' reply:—"Nor does Paragraph 12(b) of Annex II. give the Commission powers to prescribe or enforce taxes or to dictate the character of the German budget."

[140] Whatever that may mean.

[141] Assuming that the capital sum is discharged evenly over a period as short as thirty-three years, this has the effect of halving the burden as compared with the payments required on the basis of 5 per cent interest on the outstanding capital.

[142] I forbear to outline the further details of the German offer as the above are the essential points.

[143] For this reason it is not strictly comparable with my estimate of Germany's capacity in an earlier section of this chapter, which estimate is on the basis of Germany's condition as it will be when the rest of the Treaty has come into effect.

[144] Owing to delays on the part of the Allies in ratifying the Treaty, the Reparation Commission had not yet been formally constituted by the end of October, 1919. So far as I am aware, therefore, nothing has been done to make the above offer effective. But, perhaps in view of the circumstances, there has been an extension of the date.



CHAPTER VI

EUROPE AFTER THE TREATY

This chapter must be one of pessimism. The Treaty includes no provisions for the economic rehabilitation of Europe,—nothing to make the defeated Central Empires into good neighbors, nothing to stabilize the new States of Europe, nothing to reclaim Russia; nor does it promote in any way a compact of economic solidarity amongst the Allies themselves; no arrangement was reached at Paris for restoring the disordered finances of France and Italy, or to adjust the systems of the Old World and the New.

The Council of Four paid no attention to these issues, being preoccupied with others,—Clemenceau to crush the economic life of his enemy, Lloyd George to do a deal and bring home something which would pass muster for a week, the President to do nothing that was not just and right. It is an extraordinary fact that the fundamental economic problems of a Europe starving and disintegrating before their eyes, was the one question in which it was impossible to arouse the interest of the Four. Reparation was their main excursion into the economic field, and they settled it as a problem of theology, of polities, of electoral chicane, from every point of view except that of the economic future of the States whose destiny they were handling.

I leave, from this point onwards, Paris, the Conference, and the Treaty, briefly to consider the present situation of Europe, as the War and the Peace have made it; and it will no longer be part of my purpose to distinguish between the inevitable fruits of the War and the avoidable misfortunes of the Peace.

The essential facts of the situation, as I see them, are expressed simply. Europe consists of the densest aggregation of population in the history of the world. This population is accustomed to a relatively high standard of life, in which, even now, some sections of it anticipate improvement rather than deterioration. In relation to other continents Europe is not self-sufficient; in particular it cannot feed Itself. Internally the population is not evenly distributed, but much of it is crowded into a relatively small number of dense industrial centers. This population secured for itself a livelihood before the war, without much margin of surplus, by means of a delicate and immensely complicated organization, of which the foundations were supported by coal, iron, transport, and an unbroken supply of imported food and raw materials from other continents. By the destruction of this organization and the interruption of the stream of supplies, a part of this population is deprived of its means of livelihood. Emigration is not open to the redundant surplus. For it would take years to transport them overseas, even, which is not the case, if countries could be found which were ready to receive them. The danger confronting us, therefore, is the rapid depression of the standard of life of the European populations to a point which will mean actual starvation for some (a point already reached in Russia and approximately reached in Austria). Men will not always die quietly. For starvation, which brings to some lethargy and a helpless despair, drives other temperaments to the nervous instability of hysteria and to a mad despair. And these in their distress may overturn the remnants of organization, and submerge civilization itself in their attempts to satisfy desperately the overwhelming needs of the individual. This is the danger against which all our resources and courage and idealism must now co-operate.

On the 13th May, 1919, Count Brockdorff-Rantzau addressed to the Peace Conference of the Allied and Associated Powers the Report of the German Economic Commission charged with the study of the effect of the conditions of Peace on the situation of the German population. "In the course of the last two generations," they reported, "Germany has become transformed from an agricultural State to an industrial State. So long as she was an agricultural State, Germany could feed forty million inhabitants. As an industrial State she could insure the means of subsistence for a population of sixty-seven millions; and in 1913 the importation of foodstuffs amounted, in round figures, to twelve million tons. Before the war a total of fifteen million persons in Germany provided for their existence by foreign trade, navigation, and the use, directly or indirectly, of foreign raw material." After rehearsing the main relevant provisions of the Peace Treaty the report continues: "After this diminution of her products, after the economic depression resulting from the loss of her colonies, her merchant fleet and her foreign investments, Germany will not he in a position to import from abroad an adequate quantity of raw material. An enormous part of German industry will, therefore, be condemned inevitably to destruction. The need of importing foodstuffs will increase considerably at the same time that the possibility of satisfying this demand is as greatly diminished. In a very short time, therefore, Germany will not be in a position to give bread and work to her numerous millions of inhabitants, who are prevented from earning their livelihood by navigation and trade. These persons should emigrate, but this is a material impossibility, all the more because many countries and the most important ones will oppose any German immigration. To put the Peace conditions into execution would logically involve, therefore, the loss of several millions of persons in Germany. This catastrophe would not be long in coming about, seeing that the health of the population has been broken down during the War by the Blockade, and during the Armistice by the aggravation of the Blockade of famine. No help, however great, or over however long a period it were continued, could prevent those deaths en masse." "We do not know, and indeed we doubt," the report concludes, "whether the Delegates of the Allied and. Associated Powers realize the inevitable consequences which will take place if Germany, an industrial State, very thickly populated, closely bound up with the economic system of the world, and under the necessity of importing enormous quantities of raw material and foodstuffs, suddenly finds herself pushed back to the phase of her development, which corresponds to her economic condition and the numbers of her population as they were half a century ago. Those who sign this Treaty will sign the death sentence of many millions of German men, women and children."

I know of no adequate answer to these words. The indictment is at least as true of the Austrian, as of the German, settlement. This is the fundamental problem in front of us, before which questions of territorial adjustment and the balance of European power are insignificant. Some of the catastrophes of past history, which have thrown back human progress for centuries, have been due to the reactions following on the sudden termination, whether in the course of nature or by the act of man, of temporarily favorable conditions which have permitted the growth of population beyond what could be provided for when the favorable conditions were at an end.

The significant features of the immediate situation can be grouped under three heads: first, the absolute falling off, for the time being, in Europe's internal productivity; second, the breakdown of transport and exchange by means of which its products could be conveyed where they were most wanted; and third, the inability of Europe to purchase its usual supplies from overseas.

The decrease of productivity cannot be easily estimated, and may be the subject of exaggeration. But the prima facie evidence of it is overwhelming, and this factor has been the main burden of Mr. Hoover's well-considered warnings. A variety of causes have produced it;—violent and prolonged internal disorder as in Russia and Hungary; the creation of new governments and their inexperience in the readjustment of economic relations, as in Poland and Czecho-Slovakia; the loss throughout the Continent of efficient labor, through the casualties of war or the continuance of mobilization; the falling-off in efficiency through continued underfeeding in the Central Empires; the exhaustion of the soil from lack of the usual applications of artificial manures throughout the course of the war; the unsettlement of the minds of the laboring classes on the above all (to quote Mr. Hoover), "there is a great fundamental economic issues of their lives. But relaxation of effort as the reflex of physical exhaustion of large sections of the population from privation and the mental and physical strain of the war." Many persons are for one reason or another out of employment altogether. According to Mr. Hoover, a summary of the unemployment bureaus in Europe in July, 1919, showed that 15,000,000 families were receiving unemployment allowances in one form or another, and were being paid in the main by a constant inflation of currency. In Germany there is the added deterrent to labor and to capital (in so far as the Reparation terms are taken literally), that anything, which they may produce beyond the barest level of subsistence, will for years to come be taken away from them.

Such definite data as we possess do not add much, perhaps, to the general picture of decay. But I will remind the reader of one or two of them. The coal production of Europe as a whole is estimated to have fallen off by 30 per cent; and upon coal the greater part of the industries of Europe and the whole of her transport system depend. Whereas before the war Germany produced 85 per cent of the total food consumed by her inhabitants, the productivity of the soil is now diminished by 40 per cent and the effective quality of the live-stock by 55 per cent.[145] Of the European countries which formerly possessed a large exportable surplus, Russia, as much by reason of deficient transport as of diminished output, may herself starve. Hungary, apart from her other troubles, has been pillaged by the Romanians immediately after harvest. Austria will have consumed the whole of her own harvest for 1919 before the end of the calendar year. The figures are almost too overwhelming to carry conviction to our minds; if they were not quite so bad, our effective belief in them might be stronger.

But even when coal can be got and grain harvested, the breakdown of the European railway system prevents their carriage; and even when goods can be manufactured, the breakdown of the European currency system prevents their sale. I have already described the losses, by war and under the Armistice surrenders, to the transport system of Germany. But even so, Germany's position, taking account of her power of replacement by manufacture, is probably not so serious as that of some of her neighbors. In Russia (about which, however, we have very little exact or accurate information) the condition of the rolling-stock is believed to be altogether desperate, and one of the most fundamental factors in her existing economic disorder. And in Poland, Roumania, and Hungary the position is not much better. Yet modern industrial life essentially depends on efficient transport facilities, and the population which secured its livelihood by these means cannot continue to live without them. The breakdown of currency, and the distrust in its purchasing value, is an aggravation of these evils which must be discussed in a little more detail in connection with foreign trade.

What then is our picture of Europe? A country population able to support life on the fruits of its own agricultural production but without the accustomed surplus for the towns, and also (as a result of the lack of imported materials and so of variety and amount in the saleable manufactures of the towns) without the usual incentives to market food in return for other wares; an industrial population unable to keep its strength for lack of food, unable to earn a livelihood for lack of materials, and so unable to make good by imports from abroad the failure of productivity at home. Yet, according to Mr. Hoover, "a rough estimate would indicate that the population of Europe is at least 100,000,000 greater than can be supported without imports, and must live by the production and distribution of exports."

The problem of the re-inauguration of the perpetual circle of production and exchange in foreign trade leads me to a necessary digression on the currency situation of Europe.

Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers,", who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

In the latter stages of the war all the belligerent governments practised, from necessity or incompetence, what a Bolshevist might have done from design. Even now, when the war is over, most of them continue out of weakness the same malpractices. But further, the Governments of Europe, being many of them at this moment reckless in their methods as well as weak, seek to direct on to a class known as "profiteers" the popular indignation against the more obvious consequences of their vicious methods. These "profiteers" are, broadly speaking, the entrepreneur class of capitalists, that is to say, the active and constructive element in the whole capitalist society, who in a period of rapidly rising prices cannot help but get rich quick whether they wish it or desire it or not. If prices are continually rising, even trader who has purchased for stock or owns property and plant inevitably makes profits. By directing hatred against this class, therefore, the European Governments are carrying a step further the fatal process which the subtle mind of Lenin had consciously conceived. The profiteers are a consequence and not a cause of rising prices. By combining a popular hatred of the class of entrepreneurs with the blow already given to social security by the violent and arbitrary disturbance of contract and of the established equilibrium of wealth which is the inevitable result of inflation, these Governments are fast rendering impossible a continuance of the social and economic order of the nineteenth century. But they have no plan for replacing it.

We are thus faced in Europe with the spectacle of an extraordinary weakness on the part of the great capitalist class, which has emerged from the industrial triumphs of the nineteenth century, and seemed a very few years ago our all-powerful master. The terror and personal timidity of the individuals of this class is now so great, their confidence in their place in society and in their necessity to the social organism so diminished, that they are the easy victims of intimidation. This was not so in England twenty-five years ago, any more than it is now in the United States. Then the capitalists believed in themselves, in their value to society, in the propriety of their continued existence in the full enjoyment of their riches and the unlimited exercise of their power. Now they tremble before every insult;—call them pro-Germans, international financiers, or profiteers, and they will give you any ransom you choose to ask not to speak of them so harshly. They allow themselves to be ruined and altogether undone by their own instruments, governments of their own making, and a press of which they are the proprietors. Perhaps it is historically true that no order of society ever perishes save by its own hand. In the complexer world of Western Europe the Immanent Will may achieve its ends more subtly and bring in the revolution no less inevitably through a Klotz or a George than by the intellectualisms, too ruthless and self-conscious for us, of the bloodthirsty philosophers of Russia.

The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance. In Russia and Austria-Hungary this process has reached a point where for the purposes of foreign trade the currency is practically valueless. The Polish mark can be bought for about three cents and the Austrian crown for less than two cents, but they cannot be sold at all. The German mark is worth less than four cents on the exchanges. In most of the other countries of Eastern and South-Eastern Europe the real position is nearly as bad. The currency of Italy has fallen to little more than a halt of its nominal value in spite of its being still subject to some degree of regulation; French currency maintains an uncertain market; and even sterling is seriously diminished in present value and impaired in its future prospects.

But while these currencies enjoy a precarious value abroad, they have never entirely lost, not even in Russia, their purchasing power at home. A sentiment of trust in the legal money of the State is so deeply implanted in the citizens of all countries that they cannot but believe that some day this money must recover a part at least of its former value. To their minds it appears that value is inherent in money as such, and they do not apprehend that the real wealth, which this money might have stood for, has been dissipated once and for all. This sentiment is supported by the various legal regulations with which the Governments endeavor to control internal prices, and so to preserve some purchasing power for their legal tender. Thus the force of law preserves a measure of immediate purchasing power over some commodities and the force of sentiment and custom maintains, especially amongst peasants, a willingness to hoard paper which is really worthless.

The presumption of a spurious value for the currency, by the force of law expressed in the regulation of prices, contains in itself, however, the seeds of final economic decay, and soon dries up the sources of ultimate supply. If a man is compelled to exchange the fruits of his labors for paper which, as experience soon teaches him, he cannot use to purchase what he requires at a price comparable to that which he has received for his own products, he will keep his produce for himself, dispose of it to his friends and neighbors as a favor, or relax his efforts in producing it. A system of compelling the exchange of commodities at what is not their real relative value not only relaxes production, but leads finally to the waste and inefficiency of barter. If, however, a government refrains from regulation and allows matters to take their course, essential commodities soon attain a level of price out of the reach of all but the rich, the worthlessness of the money becomes apparent, and the fraud upon the public can be concealed no longer.

The effect on foreign trade of price-regulation and profiteer-hunting as cures for inflation is even worse. Whatever may be the case at home, the currency must soon reach its real level abroad, with the result that prices inside and outside the country lose their normal adjustment. The price of imported commodities, when converted at the current rate o exchange, is far in excess of the local price, so that many essential goods will not be imported at all by private agency, and must be provided by the government, which, in re-selling the goods below cost price, plunges thereby a little further into insolvency. The bread subsidies, now almost universal throughout Europe, are the leading example of this phenomenon.

The countries of Europe fall into two distinct groups at the present time as regards their manifestations of what is really the same evil throughout, according as they have been cut off from international intercourse by the Blockade, or have had their imports paid for out of the resources of their allies. I take Germany as typical of the first, and France and Italy of the second.

The note circulation of Germany is about ten times[146] what it was before the war. The value of the mark in terms of gold is about one-eighth of its former value. As world-prices in terms of gold are more than double what they were, it follows that mark-prices inside Germany ought to be from sixteen to twenty times their pre-war level if they are to be in adjustment and proper conformity with prices outside Germany.[147] But this is not the case. In spite of a very great rise in German prices, they probably do not yet average much more than five times their former level, so far as staple commodities are concerned; and it is impossible that they should rise further except with a simultaneous and not less violent adjustment of the level of money wages. The existing maladjustment hinders in two ways (apart from other obstacles) that revival of the import trade which is the essential preliminary of the economic reconstruction of the country. In the first place, imported commodities are beyond the purchasing power of the great mass of the population,[148] and the flood of imports which might have been expected to succeed the raising of the blockade was not in fact commercially possible.[149] In the second place, it is a hazardous enterprise for a merchant or a manufacturer to purchase with a foreign credit material for which, when he has imported it or manufactured it, he will receive mark currency of a quite uncertain and possibly unrealizable value. This latter obstacle to the revival of trade is one which easily escapes notice and deserves a little attention. It is impossible at the present time to say what the mark will be worth in terms of foreign currency three or six months or a year hence, and the exchange market can quote no reliable figure. It may be the case, therefore, that a German merchant, careful of his future credit and reputation, who is actually offered a short period credit in terms of sterling or dollars, may be reluctant and doubtful whether to accept it. He will owe sterling or dollars, but he will sell his product for marks, and his power, when the time comes, to turn these marks into the currency in which he has to repay his debt is entirely problematic. Business loses its genuine character and becomes no better than a speculation in the exchanges, the fluctuations in which entirely obliterate the normal profits of commerce.

There are therefore three separate obstacles to the revival of trade: a maladjustment between internal prices and international prices, a lack of individual credit abroad wherewith to buy the raw materials needed to secure the working capital and to re-start the circle of exchange, and a disordered currency system which renders credit operations hazardous or impossible quite apart from the ordinary risks of commerce.

The note circulation of France is more than six times its pre-war level. The exchange value of the franc in terms of gold is a little less than two-thirds its former value; that is to say, the value of the franc has not fallen in proportion to the increased volume of the currency.[150] This apparently superior situation of France is due to the fact that until recently a very great part of her imports have not been paid for, but have been covered by loans from the Governments of Great Britain and the United States. This has allowed a want of equilibrium between exports and imports to be established, which is becoming a very serious factor, now that the outside assistance is being gradually discontinued. The internal economy of France and its price level in relation to the note circulation and the foreign exchanges is at present based on an excess of imports over exports which cannot possibly continue. Yet it is difficult to see how the position can be readjusted except by a lowering of the standard of consumption in France, which, even if it is only temporary, will provoke a great deal of discontent.[151]

The situation of Italy is not very different. There the note circulation is five or six times its pre-war level, and the exchange value of the lira in terms of gold about half its former value. Thus the adjustment of the exchange to the volume of the note circulation has proceeded further in Italy than in France. On the other hand, Italy's "invisible" receipts, from emigrant remittances and the expenditure of tourists, have been very injuriously affected; the disruption of Austria has deprived her of an important market; and her peculiar dependence on foreign shipping and on imported raw materials of every kind has laid her open to special injury from the increase of world prices. For all these reasons her position is grave, and her excess of imports as serious a symptom as in the case of France.[152]

The existing inflation and the maladjustment of international trade are aggravated, both in France and in Italy, by the unfortunate budgetary position of the Governments of these countries.

In France the failure to impose taxation is notorious. Before the war the aggregate French and British budgets, and also the average taxation per head, were about equal; but in France no substantial effort has been made to cover the increased expenditure. "Taxes increased in Great Britain during the war," it has been estimated, "from 95 francs per head to 265 francs, whereas the increase in France was only from 90 to 103 francs." The taxation voted in France for the financial year ending June 30, 1919, was less than half the estimated normal post-bellum expenditure. The normal budget for the future cannot be put below $4,400,000,000 (22 milliard francs), and may exceed this figure; but even for the fiscal year 1919-20 the estimated receipts from taxation do not cover much more than half this amount. The French Ministry of Finance have no plan or policy whatever for meeting this prodigious deficit, except the expectation of receipts from Germany on a scale which the French officials themselves know to be baseless. In the meantime they are helped by sales of war material and surplus American stocks and do not scruple, even in the latter half of 1919, to meet the deficit by the yet further expansion of the note issue of the Bank of France.[153]

The budgetary position of Italy is perhaps a little superior to that of France. Italian finance throughout the war was more enterprising than the French, and far greater efforts were made to impose taxation and pay for the war. Nevertheless Signor Nitti, the Prime Minister, in a letter addressed to the electorate on the eve of the General Election (Oct., 1919), thought it necessary to make public the following desperate analysis of the situation:—(1) The State expenditure amounts to about three times the revenue. (2) All the industrial undertakings of the State, including the railways, telegraphs, and telephones, are being run at a loss. Although the public is buying bread at a high price, that price represents a loss to the Government of about a milliard a year. (3) Exports now leaving the country are valued at only one-quarter or one-fifth of the imports from abroad. (4) The National Debt is increasing by about a milliard lire per month. (5) The military expenditure for one month is still larger than that for the first year of the war.

But if this is the budgetary position of France and Italy, that of the rest of belligerent Europe is yet more desperate. In Germany the total expenditure of the Empire, the Federal States, and the Communes in 1919-20 is estimated at 25 milliards of marks, of which not above 10 milliards are covered by previously existing taxation. This is without allowing anything for the payment of the indemnity. In Russia, Poland, Hungary, or Austria such a thing as a budget cannot be seriously considered to exist at all.[154]

Thus the menace of inflationism described above is not merely a product of the war, of which peace begins the cure. It is a continuing phenomenon of which the end is not yet in sight.

All these influences combine not merely to prevent Europe from supplying immediately a sufficient stream of exports to pay for the goods she needs to import, but they impair her credit for securing the working capital required to re-start the circle of exchange and also, by swinging the forces of economic law yet further from equilibrium rather than towards it, they favor a continuance of the present conditions instead of a recovery from them. An inefficient, unemployed, disorganized Europe faces us, torn by internal strife and international hate, fighting, starving, pillaging, and lying. What warrant is there for a picture of less somber colors?

I have paid little heed in this book to Russia, Hungary, or Austria.[155] There the miseries of life and the disintegration of society are too notorious to require analysis; and these countries are already experiencing the actuality of what for the rest of Europe is still in the realm of prediction. Yet they comprehend a vast territory and a great population, and are an extant example of how much man can suffer and how far society can decay. Above all, they are the signal to us of how in the final catastrophe the malady of the body passes over into malady of the mind. Economic privation proceeds by easy stages, and so long as men suffer it patiently the outside world cares little. Physical efficiency and resistance to disease slowly diminish,[156] but life proceeds somehow, until the limit of human endurance is reached at last and counsels of despair and madness stir the sufferers from the lethargy which precedes the crisis. Then man shakes himself, and the bonds of custom are loosed. The power of ideas is sovereign, and he listens to whatever instruction of hope, illusion, or revenge is carried to him on the air. As I write, the flames of Russian Bolshevism seem, for the moment at least, to have burnt themselves out, and the peoples of Central and Eastern Europe are held in a dreadful torpor. The lately gathered harvest keeps off the worst privations, and Peace has been declared at Paris. But winter approaches. Men will have nothing to look forward to or to nourish hopes on. There will be little fuel to moderate the rigors of the season or to comfort the starved bodies of the town-dwellers.

But who can say how much is endurable, or in what direction men will seek at last to escape from their misfortunes?

FOOTNOTES:

[145] Professor Starling's Report on Food Conditions in Germany. (Cmd. 280.)

[146] Including the Darlehenskassenscheine somewhat more.

[147] Similarly in Austria prices ought to be between twenty and thirty times their former level.

[148] One of the moat striking and symptomatic difficulties which faced the Allied authorities in their administration of the occupied areas of Germany during the Armistice arose out of the fact that even when they brought food into the country the inhabitants could not afford to pay its cost price.

[149] Theoretically an unduly low level of home prices should stimulate exports and so cure itself. But in Germany, and still more in Poland and Austria, there is little or nothing to export. There must be imports before there can be exports.

[150] Allowing for the diminished value of gold, the exchange value of the franc should be less than 40 per cent of its previous value, instead of the actual figure of about 60 per cent, if the fall were proportional to the increase in the volume of the currency.

[151] How very far from equilibrium France's international exchange now is can be seen from the following table:

Excess of Monthly Imports Exports Imports Average $1,000 $1,000 $1,000

1913 140,355 114,670 25,685 1914 106,705 81,145 25,560 1918 331,915 69,055 262,860 Jan.-Mar. 1919 387,140 66,670 320,470 Apr.-June 1919 421,410 83,895 337,515 July 1919 467,565 123,675 343,890

These figures have been converted, at approximately par rates, but this is roughly compensated by the fact that the trade of 1918 and 1919 has been valued at 1917 official rates. French imports cannot possibly continue at anything approaching these figures, and the semblance of prosperity based on such a state of affairs is spurious.

[152] The figures for Italy are as follows:

Excess of Monthly Imports Exports Imports Average $1,000 $1,000 $1,000

1913 60,760 41,860 18,900 1914 48,720 36,840 11,880 1918 235,025 41,390 193,635 Jan.-Mar. 1919 229,240 38,685 191,155 Apr.-June 1919 331,035 69,250 261,785 July-Aug. 1919 223,535 84,515 139,020

[153] In the last two returns of the Bank of France available as I write (Oct. 2 and 9, 1919) the increases in the note issue on the week amounted to $93,750,000 and $94,125,000 respectively.

[154] On October 3, 1919, M. Bilinski made his financial statement to the Polish Diet. He estimated his expenditure for the next nine months at rather more than double his expenditure for the past nine months, and while during the first period his revenue had amounted to one-fifth of his expenditure, for the coming months he was budgeting for receipts equal to one-eighth of his outgoings. The Times correspondent at Warsaw reported that "in general M. Bilinski's tone was optimistic and appeared to satisfy his audience."

[155] The terms of the Peace Treaty imposed on the Austrian Republic bear no relation to the real facts of that State's desperate situation. The Arbeiter Zeitung of Vienna on June 4, 1919, commented on them as follows: "Never has the substance of a treaty of peace so grossly betrayed the intentions which were said to have guided its construction as is the case with this Treaty ... in which every provision is permeated with ruthlessness and pitilessness, in which no breath of human sympathy can be detected, which flies in the face of everything which binds man to man, which is a crime against humanity itself, against a suffering and tortured people." I am acquainted in detail with the Austrian Treaty and I was present when some of its terms were being drafted, but I do not find it easy to rebut the justice of this outburst.

[156] For months past the reports of the health conditions in the Central Empires have been of such a character that the imagination is dulled, and one almost seems guilty of sentimentality in quoting them. But their general veracity is not disputed, and I quote the three following, that the reader may not be unmindful of them: "In the last years of the war, in Austria alone at least 35,000 people died of tuberculosis, in Vienna alone 12,000. Today we have to reckon with a number of at least 350,000 to 400,000 people who require treatment for tuberculosis.... As the result of malnutrition a bloodless generation is growing up with undeveloped muscles, undeveloped joints, and undeveloped brain" (Neue Freie Presse, May 31, 1919). The Commission of Doctors appointed by the Medical Faculties of Holland, Sweden, and Norway to examine the conditions in Germany reported as follows in the Swedish Press in April, 1919: "Tuberculosis, especially in children, is increasing in an appalling way, and, generally speaking, is malignant. In the same way rickets is more serious and more widely prevalent. It is impossible to do anything for these diseases; there is no milk for the tuberculous, and no cod-liver oil for those suffering from rickets.... Tuberculosis is assuming almost unprecedented aspects, such as have hitherto only been known in exceptional cases. The whole body is attacked simultaneously, and the illness in this form is practically incurable.... Tuberculosis is nearly always fatal now among adults. It is the cause of 90 per cent of the hospital cases. Nothing can be done against it owing to lack of food-stuffs.... It appears in the most terrible forms, such as glandular tuberculosis, which turns into purulent dissolution." The following is by a writer in the Vossische Zeitung, June 5, 1919, who accompanied the Hoover Mission to the Erzgebirge: "I visited large country districts where 90 per cent of all the children were ricketty and where children of three years are only beginning to walk.... Accompany me to a school in the Erzgebirge. You think it is a kindergarten for the little ones. No, these are children of seven and eight years. Tiny faces, with large dull eyes, overshadowed by huge puffed, ricketty foreheads, their small arms just skin and bone, and above the crooked legs with their dislocated joints the swollen, pointed stomachs of the hunger oedema.... 'You see this child here,' the physician in charge explained; 'it consumed an incredible amount of bread, and yet did not get any stronger. I found out that it hid all the bread it received underneath its straw mattress. The fear of hunger was so deeply rooted in the child that it collected stores instead of eating the food: a misguided animal instinct made the dread of hunger worse than the actual pangs.'" Yet there are many persons apparently in whose opinion justice requires that such beings should pay tribute until they are forty or fifty years of age in relief of the British taxpayer.



CHAPTER VII

REMEDIES

It is difficult to maintain true perspective in large affairs. I have criticized the work of Paris, and have depicted in somber colors the condition and the prospects of Europe. This is one aspect of the position and, I believe, a true one. But in so complex a phenomenon the prognostics do not all point one way; and we may make the error of expecting consequences to follow too swiftly and too inevitably from what perhaps are not all the relevant causes. The blackness of the prospect itself leads us to doubt its accuracy; our imagination is dulled rather than stimulated by too woeful a narration, and our minds rebound from what is felt "too bad to be true." But before the reader allows himself to be too much swayed by these natural reflections, and before I lead him, as is the intention of this chapter, towards remedies and ameliorations and the discovery of happier tendencies, let him redress the balance of his thought by recalling two contrasts—England and Russia, of which the one may encourage his optimism too much, but the other should remind him that catastrophes can still happen, and that modern society is not immune from the very greatest evils.