The Economic Consequences of the Peace
by John Maynard Keynes

 Chapter 5: Reparations

 I. Undertakings Given Pride to the Peace Negotiations

     The categories of damage in respect of which the Allies were
 entitled to ask for reparation are governed by the relevant
 passages in President Wilson's Fourteen Points of 8 January 1918,
 as modified by the Allied governments in their qualifying Note,
 the text of which the President formally communicated to the
 German government as the basis of peace on 5 November 1918. These
 passages have been quoted in full at the beginning of chapter 4.
 That is to say, 'compensation will be made by Germany for all
 damage done to the civilian population of the Allies and to their
 property by the aggression of Germany by land, by sea, and from
 the air.' The limiting quality of this sentence is reinforced by
 the passage in the President's speech before Congress on 11
 February 1918 (the terms of this speech being an express part of
 the contract with the enemy), that there shall be 'no
 contributions' and 'no punitive damages'.
     It has sometimes been argued that the preamble to paragraph
 19(1*) of the armistice terms, to the effect 'that any future
 claims and demands of the Allies and the United States of America
 remain unaffected,' wiped out all precedent conditions, and left
 the Allies free to make whatever demands they chose. But it is
 not possible to maintain that this casual protective phrase, to
 which no one at the time attached any particular importance, did
 away with all the formal communications which passed between the
 President and the German government as to the basis of the terms
 of peace during the days preceding the armistice, abolished the
 Fourteen Points, and converted the German acceptance of the
 armistice terms into unconditional surrender, so far as affects
 the financial clauses. It is merely the usual phrase of the
 draftsman who, about to rehearse a list of certain claims, wishes
 to guard himself from the implication that such a list is
 exhaustive. In any case this contention is disposed of by the
 Allied reply to the German observations on the first draft of the
 treaty, where it is admitted that the terms of the reparation
 chapter must be governed by the President's Note of 5 November.
     Assuming then that the terms of this Note are binding, we are
 left to elucidate the precise force of the phrase -- 'all damage
 done to the civilian population of the Allies and to their
 property by the aggression of Germany by land, by sea, and from
 the air'. Few sentences in history have given so much work to the
 sophists and the lawyers, as we shall see in the next section of
 this chapter, as this apparently simple and unambiguous
 statement. Some have not scrupled to argue that it covers the
 entire cost of the war; for, they point out, the entire cost of
 the war has to be met by taxation, and such taxation is 'damaging
 to the civilian population'. They admit that the phrase is
 cumbrous, and that it would have been simpler to have said 'all
 loss and expenditure of whatever description'; and they allow
 that the apparent emphasis on damage to the persons and property
 of civilians is unfortunate; but errors of draftsmanship should
 not, in their opinion, shut off the Allies from the rights
 inherent in victors.
     But there are not only the limitations of the phrase in its
 natural meaning and the emphasis on civilian damages as distinct
 from military expenditure generally; it must also be remembered
 that the context of the term is in elucidation of the meaning of
 the term 'restoration' in the President's Fourteen Points. The
 Fourteen Points provide for damage in invaded territory --
 Belgium, France, Roumania, Serbia, and Montenegro (Italy being
 unaccountably omitted) -- but they do not cover losses at sea by
 submarine, bombardments from the sea (as at Scarborough), or
 damage done by air raids. It was to repair these omissions, which
 involved losses to the life and property of civilians not really
 distinguishable in kind from those effected in occupied
 territory, that the Supreme Council of the Allies in Paris
 proposed to President Wilson their qualifications. At that time
 -- the last days of October 1918 -- I do not believe that any
 responsible statesman had in mind the exaction from Germany of an
 indemnity for the general costs of the war. They sought only to
 make it clear (a point of considerable importance to Great
 Britain) that reparation for damage done to non-combatants and
 their property was not limited to invaded territory (as it would
 have been by the Fourteen Points unqualified), but applied
 equally to all such damage, whether 'by land, by sea, or from the
 air'. It was only at a later stage that a general popular demand
 for an indemnity, covering the full costs of the war, made it
 politically desirable to practise dishonesty and to try to
 discover in the written word what was not there.
     What damages, then, can be claimed from the enemy on a strict
 interpretation of our engagements?(2*) In the case of the United
 Kingdom the bill would cover the following items --
     (a) Damage to civilian life and property by the acts of an
 enemy government, including damage by air raids, naval
 bombardments, submarine warfare, and mines.
     (b) Compensation for improper treatment of interned
     It would not include the general costs of the war or (e.g.)
 indirect damage due to loss of trade.
     The French claim would include, as well as items
 corresponding to the above --

     (c) Damage done to the property and persons of civilians in
 the war area, and by aerial warfare behind the enemy lines.
     (d) Compensation for loot of food, raw materials, livestock,
 machinery, household effects, timber, and the like by the enemy
 governments or their nationals in territory occupied by them.
     (e) Repayment of fines and requisitions levied by the enemy
 governments or their officers on French municipalities or
     (f) Compensation to French nationals deported or compelled to
 do forced labour.
     In addition to the above there is a further item of more
 doubtful character, namely --
     (g) The expenses of the relief commission in providing
 necessary food and clothing to maintain the civilian French
 population in the enemy-occupied districts.
     The Belgian claim would include similar items.(3*) If it were
 argued that in the case of Belgium something more nearly
 resembling an indemnity for general war costs can be justified,
 this could only be on the ground of the breach of international
 law involved in the invasion of Belgium, whereas, as we have
 seen, the Fourteen Points include no special demands on this
 ground.(4*) As the cost of Belgian relief under (g), as well as
 her general war costs, has been met already by advances from the
 British, French, and United States governments, Belgium would
 presumably employ any repayment of them by Germany in part
 discharge of her debt to these governments, so that any such
 demands are, in effect, an addition to the claims of the three
 lending governments.
     The claims of the other Allies would be compiled on similar
 lines. But in their case the question arises more acutely how far
 Germany can be made contingently liable for damage done, not by
 herself, but by her co-belligerents, Austria-Hungary, Bulgaria,
 and Turkey. This is one of the many questions to which the
 Fourteen Points give no clear answer; on the one hand, they cover
 explicitly in point II damage done to Roumania, Serbia, and
 Montenegro, without qualification as to the nationality of the
 troops inflicting the damage; on the other hand, the Note of the
 Allies speaks of 'German' aggression when it might have spoken of
 the aggression of 'Germany and her allies'. On a strict and
 literal interpretation, I doubt if claims lie against Germany for
 damage done, e.g. by the Turks to the Suez Canal, or by Austrian
 submarines in the Adriatic. But it is a case where, if the Allies
 wished to strain a point, they could impose contingent liability
 on Germany without running seriously contrary to the general
 intention of their engagements.
     As between the Allies themselves the case is quite different.
 It would be an act of gross unfairness and infidelity if France
 and Great Britain were to take what Germany could pay and leave
 Italy and Serbia to get what they could out of the remains of
 Austria-Hungary. As amongst the Allies themselves it is clear
 that assets should be pooled and shared out in proportion to
 aggregate claims.
     In this event, and if my estimate is accepted, as given
 below, that Germany's capacity to pay will be exhausted by the
 direct and legitimate claims which the Allies hold against her,
 the question of her contingent liability for her allies becomes
 academic. Prudent and honourable statesmanship would therefore
 have given her the benefit of the doubt, and claimed against her
 nothing but the damage she had herself caused.
     What, on the above basis of claims, would the aggregate
 demand amount to? No figures exist on which to base any
 scientific or exact estimate, and I give my own guess for what it
 is worth, prefacing it with the following observations.
     The amount of the material damage done in the invaded
 districts has been the subject of enormous, if natural,
 exaggeration. A journey through the devastated areas of France is
 impressive to the eye and the imagination beyond description.
 During the winter of 1918-19, before Nature had cast over the
 scene her ameliorating mantle, the horror and desolation of war
 was made visible to sight on an extraordinary scale of blasted
 grandeur. The completeness of the destruction was evident. For
 mile after mile nothing was left. No building was habitable and
 no field fit for the plough. The sameness was also striking. One
 devastated area was exactly like another -- a heap of rubble, a
 morass of shell-holes, and a tangle of wire.(5*) The amount of
 human labour which would be required to restore such a
 countryside seemed incalculable; and to the returned traveller
 any number of milliards of pounds was inadequate to express in
 matter the destruction thus impressed upon his spirit. Some
 governments for a variety of intelligible reasons have not been
 ashamed to exploit these feelings a little.
     Popular sentiment is most at fault, I think, in the case of
 Belgium. In any event Belgium is a small country, and in its case
 the actual area of devastation is a small proportion of the
 whole. The first onrush of the Germans in 1914 did some damage
 locally; after that the battle-line in Belgium did not sway
 backwards and forwards, as in France, over a deep belt of
 country. It was practically stationary, and hostilities were
 confined to a small corner of the country, much of which in
 recent times was backward, poor, and sleepy, and did not include
 the active industry of the country. There remains some injury in
 the small flooded area, the deliberate damage done by the
 retreating Germans to buildings, plant, and transport, and the
 loot of machinery, cattle, and other movable property. But
 Brussels, Antwerp, and even Ostend are substantially intact, and
 the great bulk of the land, which is Belgium's chief wealth, is
 nearly as well cultivated as before. The traveller by motor can
 pass through and from end to end of the devastated area of
 Belgium almost before he knows it; whereas the destruction in
 France is on a different kind of scale altogether. Industrially,
 the loot has been serious and for the moment paralysing; but the
 actual money cost of replacing machinery mounts up slowly, and a
 very few tens of millions would have covered the value of every
 machine of every possible description that Belgium ever
 possessed. Besides, the cold statistician must not overlook the
 fact that the Belgian people possess the instinct of individual
 self-protection unusually well developed; and the great mass of
 German bank-notes(6*) held in the country at the date of the
 armistice shows that certain classes of them at least found a
 way, in spite of all the severities and barbarities of German
 rule, to profit at the expense of the invader. Belgian claims
 against Germany such as I have seen, amounting to a sum in excess
 of the total estimated pre-war wealth of the whole country, are
 simply irresponsible.(7*)
     It will help to guide our ideas to quote the official survey
 of Belgian wealth published in 1913 by the Finance Ministry of
 Belgium, which was as follows:

                             Million £3
             Land                264
             Buildings           235
             Personal wealth     545
             Cash                 17
             Furniture, etc.     120
                     Total     1,181

     This total yields an average of £3156 per inhabitant, which Dr
 Stamp, the highest authority on the subject, is disposed to
 consider as prima facie too low (though he does not accept
 certain much higher estimates lately current), the corresponding
 wealth per head (to take Belgium's immediate neighbours) being
 £3167 for Holland, £3244 for Germany, and £3303 for France.(8*) A
 total of £31,500 million, giving an average of about £3200 per
 head, would, however, be fairly liberal. The official estimate of
 land and buildings is likely to be more accurate than the rest.
 On the other hand, allowance has to be made for the increased
 costs of construction.
     Having regard to all these considerations, I do not put the
 money value of the actual physical loss of Belgian property by
 destruction and loot above £3150 million as a maximum, and while I
 hesitate to put yet lower an estimate which differs so widely
 from those generally current, I shall be surprised if it proves
 possible to substantiate claims even to this amount. Claims in
 respect of levies, fines, requisitions, and so forth might
 possibly amount to a further £3100 million. If the sums advanced
 to Belgium by her allies for the general costs of the war are to
 be included, a sum of about £3250 million has to be added (which
 includes the cost of relief), bringing the total to £3500 million.
     The destruction in France was on an altogether more
 significant scale, not only as regards the length of the
 battle-line, but also on account of the immensely deeper area of
 country over which the battle swayed from time to time. It is a
 popular delusion to think of Belgium as the principal victim of
 the war; it will turn out, I believe, that taking account of
 casualties, loss of property, and burden of future debt, Belgium
 has made the least relative sacrifice of all the belligerents
 except the United States. Of the Allies, Serbia's sufferings and
 loss have been proportionately the greatest, and after Serbia,
 France. France in all essentials was just as much the victim of
 German ambition as was Belgium, and France's entry into the war
 was just as unavoidable. France, in my judgment, in spite of her
 policy at the peace conference, a policy largely traceable to her
 sufferings, has the greatest claims on our generosity.
     The special position occupied by Belgium in the popular mind
 is due, of course, to the fact that in 1914 her sacrifice was by
 far the greatest of any of the Allies. But after 1914 she played
 a minor role. Consequently, by the end of 1918, her relative
 sacrifices, apart from those sufferings from invasion which
 cannot be measured in money, had fallen behind, and in some
 respects they were not even as great as, for example,
 Australia's. I say this with no wish to evade the obligations
 towards Belgium under which the pronouncements of our responsible
 statesmen at many different dates have certainly laid us. Great
 Britain ought not to seek any payment at all from Germany for
 herself until the just claims of Belgium have been fully
 satisfied. But this is no reason why we or they should not tell
 the truth about the amount.
     While the French claims are immensely greater, here too there
 has been excessive exaggeration, as responsible French
 statisticians have themselves pointed out. Not above 10% of the
 area of France was effectively occupied by the enemy, and not
 above 4% lay within the area of substantial devastation. Of the
 sixty French towns having a population exceeding 35,000, only two
 were destroyed -- Reims (115,178) and St. Quentin (55,571); three
 others were occupied -- Lille, Roubaix, and Douai -- and suffered
 from loot of machinery and other property, but were not
 substantially injured otherwise. Amiens, Calais, Dunkerque, and
 Boulogne suffered secondary damage by bombardment and from the
 air; but the value of Calais and Boulogne must have been
 increased by the new works of various kinds erected for the use
 of the British army.
     The Annuaire statistique de la France, 1917, values the
 entire house property of France at £32,380 million (59.5 milliard
 francs).(9*) An estimate current in France of £3800 million (20
 milliard francs) for the destruction of house property alone is,
 therefore, obviously wide of the mark.(10*) £3120 million at
 pre-war prices, or say £3250 million at the present time, is much
 nearer the right figure. Estimates of the value of the land of
 France (apart from buildings) vary from £32,480 million to £33,116
 million, so that it would be extravagant to put the damage on
 this head as high as £3100 million. Farm capital for the whole of
 France has not been put by responsible authorities above £3420
 million.(11*) There remain the loss of furniture and machinery,
 the damage to the coal-mines and the transport system, and many
 other minor items. But these losses, however serious, cannot be
 reckoned in value by hundreds of millions sterling in respect of
 so small a part of France. In short, it will be difficult to
 establish a bill exceeding £3500 million, for physical and
 material damage in the occupied and devastated areas of northern
 France.(12*) I am confirmed in this estimate by the opinion of M.
 René Pupin, the author of the most comprehensive and scientific
 estimate of the pre-war wealth of France,(13*) which I did not
 come across until after my own figure had been arrived at. This
 authority estimates the material losses of the invaded regions at
 from £3400 million to £3600 million (10 to 15 milliards),(14*)
 between which my own figure falls half-way.
     Nevertheless, M. Dubois, speaking on behalf of the budget
 commission of the Chamber, has given the figure of £32,600 million
 (65 milliard francs) 'as a minimum' without counting 'war levies,
 losses at sea, the roads, or the loss of public monuments'. And
 M. Loucheur, the Minister of Industrial Reconstruction, stated
 before the Senate on 17 February 1919 that the reconstitution of
 the devastated regions would involve an expenditure of £33,000
 million (75 milliard francs) -- more than double M. Pupin's
 estimate of the entire wealth of their inhabitants. But then at
 that time M. Loucheur was taking a prominent part in advocating
 the claims of France before the peace conference, and, like
 others, may have found strict veracity inconsistent with the
 demands of patriotism.(15*)
     The figure discussed so far is not, however, the totality of
 the French claims. There remain, in particular, levies and
 requisitions on the occupied areas and the losses of the French
 mercantile marine at sea from the attacks of German cruisers and
 submarines. Probably £3200 million would be ample to cover all
 such claims. but to be on the safe side, we will, somewhat
 arbitrarily, make an addition to the French claim of £3300 million
 on all heads, bringing it to £3800 million in all.
     The statements of M. Dubois and M. Loucheur were made in the
 early spring of 1919. A speech delivered by M. Klotz before the
 French Chamber six months later (5 September 1919), was less
 excusable. In this speech the French Minister of Finance
 estimated the total French claims for damage to property
 (presumably inclusive of losses at sea, etc., but apart from
 pensions and allowances) at £35,360 million (134 milliard francs),
 or more than six times my estimate. Even if my figure prove
 erroneous, M. Klotz's can never have been justified. So grave has
 been the deception practised on the French people by their
 ministers that when the inevitable enlightenment comes, as it
 soon must (both as to their own claims and as to Germany's
 capacity to meet them), the repercussions will strike at more
 than M. Klotz, and may even involve the order of government and
 society for which he stands.
     British claims on the present basis would be practically
 limited to losses by sea-losses of hulls and losses of cargoes.
 Claims would lie, of course, for damage to civilian property in
 air raids and by bombardment from the sea, but in relation to
 such figures as we are now dealing with, the money value involved
 is insignificant -- £35 million might cover them all, and £310
 million would certainly do so.
     The British mercantile vessels lost by enemy action,
 excluding fishing vessels, numbered 2,479, with an aggregate of
 7,759,090 tons gross.(16*) There is room for considerable
 divergence of opinion as to the proper rate to take for
 replacement cost; at the figure of £330 per gross ton, which with
 the rapid growth of shipbuilding may soon be too high but can be
 replaced by any other which better authorities(17*) may prefer,
 the aggregate claim is £3230 million. To this must be added the
 loss of cargoes, the value of which is almost entirely a matter
 of guesswork. An estimate of £340 per ton of shipping lost may be
 as good an approximation as is possible, that is to say £3310
 million, making £3540 million altogether.
     An addition to this of £330 million, to cover air raids,
 bombardments, claims of interned civilians, and miscellaneous
 items of every description, should be more than sufficient --
 making a total claim for Great Britain of £3570 million. It is
 surprising, perhaps, that the money value of our claim should be
 so little short of that of France and actually in excess of that
 of Belgium. But, measured either by pecuniary loss or real loss
 to the economic power of the country, the injury to our
 mercantile marine was enormous.
     There remain the claims of Italy, Serbia, and Roumania for
 damage by invasion and of these and other countries, as for
 example Greece,(18*) for losses at sea. I will assume for the
 present argument that these claims rank against Germany, even
 when they were directly caused not by her but by her allies; but
 that it is not proposed to enter any such claims on behalf of
 Russia.(19*) Italy's losses by invasion and at sea cannot be very
 heavy, and a figure of from £350 million to £3100 million would be
 fully adequate to cover them. The losses of Serbia, although from
 a human point of view her sufferings were the greatest of
 all,(20*) are not measured pecuniarily by very great figures, on
 account of her low economic development. Dr Stamp (loc. cit.)
 quotes an estimate by the Italian statistician Maroi, which puts
 the national wealth of Serbia at £3480 million or £3105 per
 head,(21*) and the greater part of this would be represented by
 land which has sustained no permanent damage.(22*) In view of the
 very inadequate data for guessing at more than the general
 magnitude of the legitimate claims of this group of countries, I
 prefer to make one guess rather than several and to put the
 figure for the whole group at the round sum of £3250 million.
     We are finally left with the following --

                             Million £3
             Belgium              500(23*)
             France               800
             Great Britain        570
             Other Allies         250
                         Total  2,120

     I need not impress on the reader that there is much guesswork
 in the above, and the figure for France in particular is likely
 to be criticised. But I feel some confidence that the general
 magnitude, as distinct from the precise figures, is not
 hopelessly erroneous; and this may be expressed by the statement
 that a claim against Germany, based on the interpretation of the
 pre-armistice engagements of the Allied Powers which is adopted
 above, would assuredly be found to exceed £31,600 million and to
 fall short of £33,000 million.
     This is the amount of the claim which we were entitled to
 present to the enemy. For reasons which will appear more fully
 later on, I believe that it would have been a wise and just act
 to have asked the German government at the peace negotiations to
 agree to a sum of £32,000 million in final settlement without
 further examination of particulars. This would have provided an
 immediate and certain solution, and would have required from
 Germany a sum which, if she were granted certain indulgences, it
 might not have proved entirely impossible for her to pay. This
 sum should have been divided up amongst the Allies themselves on
 a basis of need and general equity.
     But the question was not settled on its merits.


     I do not believe that, at the date of the armistice,
 responsible authorities in the Allied countries expected any
 indemnity from Germany beyond the cost of reparation for the
 direct material damage which had resulted from the invasion of
 Allied territory and from the submarine campaign. At that time
 there were serious doubts as to whether Germany intended to
 accept our terms, which in other respects were inevitably very
 severe, and it would have been thought an unstatesmanlike act to
 risk a continuance of the war by demanding a money payment which
 Allied opinion was not then anticipating and which probably could
 not be secured in any case. The French, I think, never quite
 accepted this point of view; but it was certainly the British
 attitude; and in this atmosphere the pre-armistice conditions
 were framed.
     A month later the atmosphere had changed completely. We had
 discovered how hopeless the German position really was, a
 discovery which some, though not all, had anticipated, but which
 no one had dared reckon on as a certainty. It was evident that we
 could have secured unconditional surrender if we had determined
 to get it.
     But there was another new factor in the situation which was
 of greater local importance. The British Prime Minister had
 perceived that the conclusion of hostilities might soon bring
 with it the break-up of the political bloc upon which he was
 depending for his personal ascendancy, and that the domestic
 difficulties which would be attendant on demobilisation, the
 turnover of industry from war to peace conditions, the financial
 situation, and the general psychological reactions of men's
 minds, would provide his enemies with powerful weapons, if he
 were to leave them time to mature. The best chance, therefore, of
 consolidating his power, which was personal and exercised, as
 such, independently of party or principle to an extent unusual in
 British politics, evidently lay in active hostilities before the
 prestige of victory had abated, and in an attempt to found on the
 emotions of the moment a new basis of power which might outlast
 the inevitable reactions of the near future. Within a brief
 period, therefore, after the armistice, the popular victor, at
 the height of his influence and his authority, decreed a general
 election. It was widely recognised at the time as an act of
 political immorality. There were no grounds of public interest
 which did not call for a short delay until the issues of the new
 age had a little defined themselves, and until the country had
 something more specific before it on which to declare its mind
 and to instruct its new representatives. But the claims of
 private ambition determined otherwise.
     For a time all went well. But before the campaign was far
 advanced government candidates were finding themselves
 handicapped by the lack of an effective cry. The War Cabinet was
 demanding a further lease of authority on the ground of having
 won the war. But partly because the new issues had not yet
 defined themselves, partly out of regard for the delicate balance
 of a Coalition party, the Prime Minister's future policy was the
 subject of silence or generalities. The campaign seemed,
 therefore, to fall a little flat. In the light of subsequent
 events it seems improbable that the Coalition party was ever in
 real danger. But party managers are easily 'rattled'. The Prime
 Minister's more neurotic advisers told him that he was not safe
 from dangerous surprises, and the Prime Minister lent an ear to
 them. The party managers demanded more 'ginger'. The Prime
 Minister looked about for some.
     On the assumption that the return of the Prime Minister to
 power was the primary consideration, the rest followed naturally.
 At that juncture there was a clamour from certain quarters that
 the government had given by no means sufficiently clear
 undertakings that they were not going 'to let the Hun off'. Mr
 Hughes was evoking a good deal of attention by his demands for a
 very large indemnity(24*) and Lord Northcliffe was lending his
 powerful aid to the same cause. This pointed the Prime Minister
 to a stone for two birds. By himself adopting the policy of Mr
 Hughes and Lord Northcliffe, he could at the same time silence
 those powerful critics and provide his party managers with an
 effective platform cry to drown the increasing voices of
 criticism from other quarters.
     The progress of the General Election of 1918 affords a sad,
 dramatic history of the essential weakness of one who draws his
 chief inspiration not from his own true impulses, but from the
 grosser effluxions of the atmosphere which momentarily surrounds
 him. The Prime Minister's natural instincts, as they so often
 are, were right and reasonable. He himself did not believe in
 hanging the Kaiser or in the wisdom or the possibility of a great
 indemnity. On the 22nd of November he and Mr Bonar Law issued
 their election manifesto. It contains no allusion of any kind
 either to the one or to the other, but, speaking, rather, of
 disarmament and the League of Nations, concludes that 'our first
 task must be to conclude a just and lasting peace, and so to
 establish the foundations of a new Europe that occasion for
 further wars may be for ever averted'. In his speech at
 Wolverhampton on the eve of the dissolution (24 November), there
 is no word of reparation or indemnity. On the following day at
 Glasgow, Mr Bonar Law would promise nothing. 'We are going to the
 conference,, he said, 'as one of a number of allies, and you
 cannot expect a member of the government, whatever he may think,
 to state in public before he goes into that conference, what line
 he is going to take in regard to any particular question.' But a
 few days later at Newcastle (29 November) the Prime Minister was
 warming to his work: 'When Germany defeated France she made
 France pay. That is the principle which she herself has
 established. There is absolutely no doubt about the principle,
 and that is the principle we should proceed upon -- that Germany
 must pay the costs of the war up to the limit of her capacity to
 do so.' But he accompanied this statement of principle with many
 ' words of warning, as to the practical difficulties of the case:
 'We have appointed a strong committee of experts, representing
 every shade of opinion, to consider this question very carefully
 and to advise us. There is no doubt as to the justice of the
 demand. She ought to pay, she must pay as far as she can, but we
 are not going to allow her to pay in such a way as to wreck our
 industries.' At this stage the Prime Minister sought to indicate
 that he intended great severity, without raising excessive hopes
 of actually getting the money, or committing himself to a
 particular line of action at the conference. It was rumoured that
 a high City authority had committed himself to the opinion that
 Germany could certainly pay £320,000 million and that this
 authority for his part would not care to discredit a figure of
 twice that sum. The Treasury officials, as Mr Lloyd George
 indicated, took a different view. He could, therefore, shelter
 himself behind the wide discrepancy between the opinions of his
 different advisers, and regard the precise figure of Germany's
 capacity to pay as an open question in the treatment of which he
 must do his best for his country's interests. As to our
 engagements under the Fourteen Points he was always silent.
     On 30 November, Mr Barnes, a member of the War Cabinet, in
 which he was supposed to represent Labour, shouted from a
 platform, 'I am for hanging the Kaiser.'
     On 6 December, the Prime Minister issued a statement of
 policy and aims in which he stated, with significant emphasis on
 the word European, that 'All the European Allies have accepted
 the principle that the Central Powers must pay the cost of the
 war up to the limit of their capacity.'
     But it was now little more than a week to polling day, and
 still he had not said enough to satisfy the appetites of the
 moment. On 8 December The Times, providing as usual a cloak of
 ostensible decorum for the lesser restraint of its associates,
 declared in a leader entitled 'Making Germany pay,' that 'the
 public mind was still bewildered by the Prime Minister's various
 statements.' 'There is too much suspicion', they added, 'of
 influences concerned to let the Germans off lightly 'whereas the
 only possible motive in determining their capacity to pay must be
 the interests of the Allies.' 'It is the candidate who deals with
 the issues of today,' wrote their political correspondent, 'who
 adopts Mr Barnes's phrase about "hanging the Kaiser" and plumps
 for the payment of the cost of the war by Germany, who rouses his
 audience and strikes the notes to which they are most
     On 9 December, at the Queen's Hall, the Prime Minister
 avoided the subject. But from now on, the debauchery of thought
 and speech progressed hour by hour. The grossest spectacle was
 provided by Sir Eric Geddes in the Guildhall at Cambridge. An
 earlier speech in which, in a moment of injudicious candour, he
 had cast doubts on the possibility of extracting from Germany the
 whole cost of the war had been the object of serious suspicion,
 and he had therefore a reputation to regain. 'We will get out of
 her all you can squeeze out of a lemon and a bit more,' the
 penitent shouted, 'I will squeeze her until you can hear the
 pips, squeak'; his policy was to take every bit of property
 belonging to Germans in neutral and Allied countries, and all her
 gold and silver and her jewels, and the contents of her
 picture-galleries and libraries, to sell the proceeds for the
 Allies' benefit. 'I would strip Germany,' he cried, 'as she has
 stripped Belgium.'
     By 11 December the Prime Minister had capitulated. His final
 manifesto of six points issued on that day to the electorate
 furnishes a melancholy comparison with his programme of three
 weeks earlier. I quote it in full:

             1. Trial of the Kaiser.
             2. Punishment of those responsible for atrocities.
             3. Fullest indemnities from Germany.
             4. Britain for the British, socially and
             5. rehabilitation of those broken in the war.
             6. A happier country for all.

 Here is food for the cynic. To this concoction of greed and
 sentiment, prejudice and deception, three weeks of the platform
 had reduced the powerful governors of England, who but a little
 while before had spoken not ignobly of disarmament and a League
 of Nations and of a just and lasting peace which should establish
 the foundations of a new Europe.
     On the same evening the Prime Minister at Bristol withdrew in
 effect his previous reservations and laid down four principles to
 govern his indemnity policy, of which the chief were: First, we
 have an absolute right to demand the whole cost of the war;
 second, we propose to demand the whole cost of the war; and
 third, a committee appointed by direction of the Cabinet believe
 that it can be done.(25*) Four days later he went to the polls.
     The Prime Minister never said that he himself believed that
 Germany could pay the whole cost of the war. But the programme
 became in the mouths of his supporters on the hustings a great
 deal more concrete. The ordinary voter was led to believe that
 Germany could certainly be made to pay the greater part, if not
 the whole cost of the war. Those whose practical and selfish
 fears for the future the expenses of the war had aroused, and
 those whose emotions its horrors had disordered, were both
 provided for. A vote for a Coalition candidate meant the
 crucifixion of Antichrist and the assumption by Germany of the
 British national debt.
     It proved an irresistible combination, and once more Mr
 George's political instinct was not at fault. No candidate could
 safely denounce this programme, and none did so. The old Liberal
 party, having nothing comparable to offer to the electorate, was
 swept out of existence.(26*) A new House of Commons came into
 being, a majority of whose members had pledged themselves to a
 great deal more than the Prime Minister's guarded promises.
 Shortly after their arrival at Westminster I asked a Conservative
 friend, who had known previous Houses, what he thought of them.
 'They are a lot of hard-faced men', he said, 'who look as if they
 had done very well out of the war.'
     This was the atmosphere in which the Prime Minister left for
 Paris, and these the entanglements he had made for himself. He
 had pledged himself and his government to make demands of a
 helpless enemy inconsistent with solemn engagements on our part,
 on the faith of which this enemy had laid down his arms. There
 are few episodes in history which posterity will have less reason
 to condone -- a war ostensibly waged in defence of the sanctity
 of international engagements ending a definite breach of one of
 the most sacred possible of such engagements on the part of the
 victorious champions of these ideals.(27*)
     Apart from other aspects of the transaction, I believe that
 the campaign for securing out of Germany the general costs of the
 war was one of the most serious acts of political unwisdom for
 which our statesmen have ever been responsible. To what a
 different future Europe might have looked forward if either Mr
 Lloyd George or Mr Wilson had apprehended that the most serious
 of the problems which claimed their attention were not political
 or territorial but financial and economic, and that the perils of
 the future lay not in frontiers or sovereignties but in food,
 coal, and transport. Neither of them paid adequate attention to
 these problems at any stage of the conference. But in any event
 the atmosphere for the wise and reasonable consideration of them
 was hopelessly befogged by the commitments of the British
 delegation on the question of indemnities. The hopes to which the
 Prime Minister had given rise not only compelled him to advocate
 an unjust and unworkable economic basis to the treaty with
 Germany, but set him at variance with the President, and on the
 other hand with competing interests to those of France and
 Belgium. The clearer it became that but little could be expected
 from Germany, the more necessary it was to exercise patriotic
 greed and 'sacred egotism' and snatch the bone from the juster
 claims and greater need of France or the well-founded
 expectations of Belgium. Yet the financial problems which were
 about to exercise Europe could not be solved by greed. The
 possibility of their cure lay in magnanimity.
     Europe, if she is to survive her troubles, will need so much
 magnanimity from America, that she must herself practise it. It
 is useless for the Allies, hot from stripping Germany and one
 another, to turn for help to the United States to put the states
 of Europe, including Germany, on to their feet again. If the
 General Election of December 1918 had been fought on lines of
 prudent generosity instead of imbecile greed, how much better the
 financial prospect of Europe might now be. I still believe that
 before the main conference, or very early in its proceedings, the
 representatives of Great Britain should have entered deeply, with
 those of the United States, into the economic and financial
 situation as a whole, and that the former should have been
 authorised to make concrete proposals on the general lines (1)
 that all inter-Allied indebtedness be cancelled outright; (2)
 that the sum to be paid by Germany be fixed at £32,000 million;
 (3) that Great Britain renounce all claim to participation in
 this sum, and that any share to which she proves entitled be
 placed at the disposal of the conference for the purpose of
 aiding the finances of the new states about to be established;
 (4) that in order to make some basis of credit immediately
 available an appropriate proportion of the German obligations
 representing the sum to be paid by her should be guaranteed by
 all parties to the treaty; and (5) that the ex-enemy Powers
 should also be allowed, with a view to their economic
 restoration, to issue a moderate amount of bonds carrying a
 similar guarantee. Such proposals involved an appeal to the
 generosity of the United States. But that was inevitable; and, in
 view of her far less financial sacrifices, it was an appeal which
 could fairly have been made to her. Such proposals would have
 been practicable. There is nothing in them quixotic or Utopian.
 And they would have opened up for Europe some prospect of
 financial stability and reconstruction.
     The further elaboration of these ideas, however, must be left
 to chapter 7, and we must return to Paris. I have described the
 entanglements which Mr Lloyd George took with him. The position
 of the finance ministers of the other Allies was even worse. We
 in Great Britain had not based our financial arrangements on any
 expectation of an indemnity. Receipts from such a source would
 have been more or less in the nature of a windfall; and, in spite
 of subsequent developments, there was an expectation at that time
 of balancing our budget by normal methods. But this was not the
 case with France or Italy. Their peace budgets made no pretence
 of balancing, and had no prospects of doing so, without some
 far-reaching revision of the existing policy. Indeed, the
 position was and remains nearly hopeless. These countries were
 heading for national bankruptcy. This fact could only be
 concealed by holding out the expectation of vast receipts from
 the enemy. As soon as it was admitted that it was in fact
 impossible to make Germany pay the expenses of both sides, and
 that the unloading of their liabilities upon the enemy was not
 practicable, the position of the Ministers of Finance of France
 and Italy became untenable.
     Thus a scientific consideration of Germany's capacity to pay
 was from the outset out of court. The expectations which the
 exigencies of politics had made it necessary to raise were so
 very remote from the truth that a slight distortion of figures
 was no use, and it was necessary to ignore the facts entirely.
 The resulting unveracity was fundamental. On a basis of so much
 falsehood it became impossible to erect any constructive
 financial policy which was workable. For this reason amongst
 others, a magnanimous financial policy was essential. The
 financial position of France and Italy was so bad that it was
 impossible to make them listen to reason on the subject of the
 German indemnity, unless one could at the same time point out to
 them some alternative mode of escape from their troubles.(28*)
 The representatives of the United States were greatly at fault,
 in my judgment, for having no constructive proposals whatever to
 offer to a suffering and distracted Europe.
     It is worth while to point out in passing a further element
 in the situation, namely, the opposition which existed between
 the 'crushing' policy of M. Clemenceau and the financial
 necessities of M. Klotz. Clemenceau's aim was to weaken and
 destroy Germany in every possible way, and I fancy that he was
 always a little contemptuous about the indemnity; he had no
 intention of leaving Germany in a position to practise a vast
 commercial activity. But he did not trouble his head to
 understand either the indemnity or poor M. Klotz's overwhelming
 financial difficulties. If it amused the financiers to put into
 the treaty some very large demands, well there was no harm in
 that; but the satisfaction of these demands must not be allowed
 to interfere with the essential requirements of a Carthaginian
 peace. The combination of the 'real' policy of M. Clemenceau on
 unreal issues, with M. Klotz's policy of pretence on what were
 very real issues indeed, introduced into the treaty a whole set
 of incompatible provisions, over and above the inherent
 impracticabilities of the reparation proposals.
     I cannot here describe the endless controversy and intrigue
 between the Allies themselves, which at last after some months
 culminated in the presentation to Germany of the reparation
 chapter in its final form. There can have been few negotiations
 in history so contorted, so miserable, so utterly unsatisfactory
 to all parties. I doubt if anyone who took much part in that
 debate can look back on it without shame. I must be content with
 an analysis of the elements of the final compromise which is
 known to all the world.
     The main point to be settled was, of course, that of the
 items for which Germany could fairly be asked to make payment. Mr
 Lloyd George's election pledge to the effect that the Allies were
 entitled to demand from Germany the entire costs of the war was
 from the outset clearly untenable; or rather, to put it more
 impartially, it was clear that to persuade the President of the
 conformity of this demand with our pre-armistice engagements was
 beyond the powers of the most plausible. The actual compromise
 finally reached is to be read as follows in the paragraphs of the
 treaty as it has been published to the world.
     Article 231 reads: 'The Allied and Associated governments
 affirm and Germany accepts the responsibility of Germany and her
 allies for causing all the loss and damage to which the Allied
 and Associated governments and their nationals have been
 subjected as a consequence of the war imposed upon them by the
 aggression of Germany and her allies.' This is a well and
 carefully drafted article; for the President could read it as
 statement of admission on Germany's part of moral responsibility
 for bringing about the war, while the Prime Minister could
 explain it as an admission of financial liability for the general
 costs of the war. Article 232 continues: 'The Allied and
 Associated governments recognise that the resources of Germany
 are not adequate, after taking into account permanent diminutions
 of such resources which will result from other provisions of the
 present treaty, to make complete reparation for all such loss and
 damage.' The President could comfort himself that this was no
 more than a statement of undoubted fact, and that to recognise
 that Germany cannot pay a certain claim does not imply that she
 is liable to pay the claim; but the Prime Minister could point
 out that in the context it emphasises to the reader the
 assumption of Germany's theoretic liability asserted in the
 preceding article. Article 232 proceeds: 'The Allied and
 Associated governments, however, require, and Germany undertakes,
 that she will make compensation for all damage done to the
 civilian population of the Allied and Associated Powers and to
 their property during the period of the belligerency of each as
 an Allied or Associated Power against Germany by such aggression
 by land, by sea, and from the air, and in general all damage as
 defined in annex I hereto.'(29*) The words italicised, being
 practically a quotation from the pre-armistice conditions,
 satisfied the scruples of the President, while the additions of
 the words 'and in general all damage as defined in annex I
 hereto' gave the Prime Minister a chance in annex I.
     So far, however, all this is only a matter of words, of
 virtuosity in draftsmanship, which does no one any harm, and
 which probably seemed much more important at the time than it
 ever will again between now and judgment day. For substance we
 must turn to annex I.
     A great part of annex I is in strict conformity with the pre-
 armistice conditions or, at any rate, does not strain them beyond
 what is fairly arguable. Paragraph 1 claims damage done for
 injury to the persons of civilians or, in the case of death, to
 their dependants, as a direct consequence of acts of war;
 paragraph 2, for acts of cruelty, violence, or maltreatment on
 the part of the enemy towards civilian victims; paragraph 3, for
 enemy acts injurious to health or capacity to work or to honour
 towards civilians in occupied or invaded territory; paragraph 8,
 for forced labour exacted by the enemy from civilians; paragraph
 9, for damage done to property 'with the exception of naval and
 military works or materials' as a direct consequence of
 hostilities; and paragraph 10, for fines and levies imposed by
 the enemy upon the civilian population. All these demands are
 just and in conformity with the Allies' rights.
     Paragraph 4, which claims for 'damage caused by any kind of
 maltreatment of prisoners of war', is more doubtful on the strict
 letter, but may be justifiable under the Hague convention and
 involves a very small sum.
     In paragraphs 5, 6, and 7, however, an issue of immensely
 greater significance is involved. These paragraphs assert a claim
 for the amount of the separation and similar allowances granted
 during the war by the Allied governments to the families of
 mobilised persons, and for the amount of the pensions and
 compensations in respect of the injury or death of combatants
 payable by these governments now and hereafter. Financially this
 adds to the bill, as we shall see below, a very large amount,
 indeed about twice as much again as all the other claims added
     The reader will readily apprehend what a plausible case can
 be made out for the inclusion of these items of damage, if only
 on sentimental grounds. It can be pointed out, first of all, that
 from the point of view of general fairness it is monstrous that a
 woman whose house is destroyed should be entitled to claim from
 the enemy whilst a woman whose husband is killed on the field of
 battle should not be so entitled; or that a farmer deprived of
 his farm should claim but that a woman deprived of the earning
 power of her husband should not claim. In fact the case for
 including pensions and separation allowances largely depends on
 exploiting the rather arbitrary character of the criterion laid
 down in the pre-armistice conditions. Of all the losses caused by
 war some bear more heavily on individuals and some are more
 evenly distributed over the community as a whole; but by means of
 compensations granted by the government many of the former are in
 fact converted into the latter. The most logical criterion for a
 limited claim, falling short of the entire costs of the war,
 would have been in respect of enemy acts contrary to
 international engagements or the recognised practices of warfare.
 But this also would have been very difficult to apply and unduly
 unfavourable to French interests as compared with Belgium (whose
 neutrality Germany had guaranteed) and Great Britain (the chief
 sufferer from illicit acts of submarines).
     In any case the appeals to sentiment and fairness outlined
 above are hollow; for it makes no difference to the recipient of
 a separation allowance or a pension whether the state which pays
 them receives compensation on this or on another head, and a
 recovery by the state out of indemnity receipts is just as much
 in relief of the general taxpayer as a contribution towards the
 general costs of the war would have been. But the main
 consideration is that it was too late to consider whether the
 pre-armistice conditions were perfectly judicious and logical or
 to amend them; the only question at issue was whether these
 conditions were not in fact limited to such classes of direct
 damage to civilians and their property as are set forth in
 paragraphs 1, 2, 3, 8, 9, and 10 of annex I. If words have any
 meaning, or engagements any force, we had no more right to claim
 for those war expenses of the state which arose out of pensions
 and separation allowances, than for any other of the general
 costs of the war. And who is prepared to argue in detail that we
 were entitled to demand the latter?
     What had really happened was a compromise between the Prime
 Minister's pledge to the British electorate to claim the entire
 costs of the war and the pledge to the contrary which the Allies
 had given to Germany at the armistice. The Prime Minister could
 claim that although he had not secured the entire costs of the
 war, he had nevertheless secured an important contribution
 towards them, that he had always qualified his promises by the
 limiting condition of Germany's capacity to pay, and that the
 bill as now presented more than exhausted this capacity as
 estimated by the more sober authorities. The President, on the
 other hand, had secured a formula which was not too obvious a
 breach of faith, and had avoided a quarrel with his associates on
 an issue where the appeals to sentiment and passion would all
 have been against him, in the event of its being made a matter of
 open popular controversy. In view of the Prime Minister's
 election pledges, the President could hardly hope to get him to
 abandon them in their entirety without a struggle in public; and
 the cry of pensions would have had an overwhelming popular appeal
 in all countries. Once more the Prime Minister had shown himself
 a political tactician of a high order.
     A further point of great difficulty may be readily perceived
 between the lines of the treaty. It fixes no definite sum as
 representing Germany's liability. This feature has been the
 subject of very general criticism -- that it is equally
 inconvenient to Germany and to the Allies themselves that she
 should not know what she has to pay or they what they are to
 receive. The method, apparently contemplated by the treaty, of
 arriving at the final result over a period of many months by an
 addition of hundreds of thousands of individual claims for damage
 to land, farm buildings, and chickens, is evidently
 impracticable; and the reasonable course would have been for both
 parties to compound for a round sum without examination of
 details. If this round sum had been named in the treaty, the
 settlement would have been placed on a more business-like basis.
     But this was impossible for two reasons. Two different kinds
 of false statement had been widely promulgated, one as to
 Germany's capacity to pay, the other as to the amount of the
 Allies' just claims in respect of the devastated areas. The
 fixing of either of these figures presented a dilemma. A figure
 for Germany's prospective capacity to pay, not too much in excess
 of the estimates of most candid and well-informed authorities,
 would have fallen hopelessly far short of popular expectations
 both in England and in France. On the other hand, a definitive
 figure for damage done which would not disastrously disappoint
 the expectations which had been raised in France and Belgium
 might have been incapable of substantiation under challenge,(30*)
 and open to damaging criticism on the part of the Germans, who
 were believed to have been prudent enough to accumulate
 considerable evidence as to the extent of their own misdoings.
     By far the safest course for the politicians was, therefore,
 to mention no figure at all; and from this necessity a great deal
 of the complication of the reparation chapter essentially
     The reader may be interested, however, to have my estimate of
 the claim which can in fact be substantiated under annex I of the
 reparation chapter. In the first section of this chapter I have
 already guessed the claims other than those for pensions and
 separation allowances at £33,000 million (to take the extreme
 upper limit of my estimate). The claim for pensions and
 separation allowances under annex I is not to be based on the
 actual cost of these compensations to the governments concerned,
 but is to be a computed figure calculated on the basis of the
 scales in force in France at the date of the treaty's coming into
 operation. This method avoids the invidious course of valuing an
 American or a British life at a higher figure than a French or an
 Italian. The French rate for pensions and allowances is at an
 intermediate rate, not so high as the American or British, but
 above the Italian, the Belgian, or the Serbian. The only data
 required for the calculation are the actual French rates, and the
 numbers of men mobilised and of the casualties in each class of
 the various Allied armies. None of these figures are available in
 detail, but enough is known of the general level of allowances,
 of the numbers involved, and of the casualties suffered to allow
 of an estimate which may not be very wide of the mark. My guess
 as to the amount to be added in respect of pensions and
 allowances is as follows:

                                 Million £3

     British Empire              1,400
     France                      2,400(31*)
     Italy                         500
       (including United States)   700
                 Total           5,000

     I feel much more confidence in the approximate accuracy of
 the total figure(32*) than in its division between the different
 claimants. The reader will observe that in any case the addition
 of pensions and allowances enormously increases the aggregate
 claim, raising it indeed by nearly double. Adding this figure to
 the estimate under other heads, we have a total claim against
 Germany of £38,000 million.(33*) I believe that this figure is
 fully high enough, and that the actual result may fall somewhat
 short of it.(34*) In the next section of this chapter the
 relation of this figure to Germany's capacity to pay will be
 examined. It is only necessary here to remind the reader of
 certain other particulars of the treaty which speak for
     (1) Out of the total amount of the claim, whatever it
 eventually turns out to be, a sum of £31,000 million must be paid
 before 1 May 1921. The possibility of this will be discussed
 below. But the treaty itself provides certain abatements. In the
 first place, this sum is to include the expenses of the armies of
 occupation since the armistice (a large charge of the order of
 magnitude of £3200 million which under another article of the
 treaty -- no. 249 -- is laid upon Germany).(35*) But further,
 'such supplies of food and raw materials as may be judged by the
 governments of the Principal Allied and Associated Powers to be
 essential to enable Germany to meet her obligations for
 reparation may also, with the approval of the said governments,
 be paid for out of the above sum.'(36*) This is a qualification
 of high importance. The clause, as it is drafted, allows the
 finance ministers of the Allied countries to hold out to their
 electorates the hope of substantial payments at an early date,
 while at the same time it gives to the reparation commission a
 discretion, which the force of facts will compel them to
 exercise, to give back to Germany what is required for the
 maintenance of her economic existence. This discretionary power
 renders the demand for an immediate payment of £31,000 million
 less injurious than it would otherwise be, but nevertheless it
 does not render it innocuous. In the first place, my conclusions
 in the next section of this chapter indicate that this sum cannot
 be found within the period indicated, even if a large proportion
 is in practice returned to Germany for the purpose of enabling
 her to pay for imports. In the second place, the reparation
 commission can only exercise its discretionary power effectively
 by taking charge of the entire foreign trade of Germany, together
 with the foreign exchange arising out of it, which will be quite
 beyond the capacity of any such body. If the reparation
 commission makes any serious attempt to administer the collection
 of this sum of £31,000 million, and to authorise the return to
 Germany of a part of it, the trade of Central Europe will be
 strangled by bureaucratic regulation in its most inefficient
     (2) In addition to the early payment in cash or kind of a sum
 of £31,000 million, Germany is required to deliver bearer bonds to
 a further amount of £32,000 million or, in the event of the
 payments in cash or kind before 1 May 1921, available for
 reparation, falling short of £31,000 million by reason of the
 permitted deductions, to such further amount as shall bring the
 total payments by Germany in cash, kind, and bearer bonds up to 1
 May 1921, to a figure of £33,000 million altogether.(37*) These
 bearer bonds carry interest at 2 1/2% per annum from 1921 to
 1925, and at 5% plus 1% for amortisation thereafter. Assuming,
 therefore, that Germany is not able to provide any appreciable
 surplus towards reparation before 1921, she will have to find a
 sum of £375 million annually from 1921 to 1925, and £3180 million
 annually thereafter.(38*)
     (3) As soon as the reparation commission is satisfied that
 Germany can do better than this, 5% bearer bonds are to be issued
 for a further £32,000 million, the rate of amortisation being
 determined by the commission hereafter. This would bring the
 annual payment to £328O million without allowing anything for the
 discharge of the capital of the last £32,000 million.
     (4) Germany's liability, however, is not limited to £35,000
 million, and the reparation commission is to demand further
 instalments of bearer bonds until the total enemy liability under
 annex I has been provided for. On the basis of my estimate of
 £38,000 million for the total liability, which is more likely to
 be criticised as being too low than as being too high, the amount
 of this balance will be £33,000 million. Assuming interest at 5%,
 this will raise the annual payment to £3430 million. without
 allowance for amortisation.
     (5) But even this is not all. There is a further provision of
 devastating significance. Bonds representing payments in excess
 of £33,000 million are not to be issued until the commission is
 satisfied that Germany can meet the interest on them. But this
 does not mean that interest is remitted in the meantime. As from
 1 May 1921, interest is to be debited to Germany on such part of
 her outstanding debt as has not been covered by payment in cash
 or kind or by the issue of bonds as above,(39*) and 'the rate of
 interest shall be 5 per cent unless the commission shall
 determine at some future time that circumstances justify a
 variation of this rate.' That is to say, the capital sum of
 indebtedness is rolling up all the time at compound interest. The
 effect of this provision towards increasing the burden is, on the
 assumption that Germany cannot pay very large sums at first,
 enormous. At 5% compound interest a capital sum doubles itself in
 fifteen years. On the assumption that Germany cannot pay more
 than £3150 million annually until 1936 (i.e. 5% interest on £33,000
 million) the £35,000 million on which interest is deferred will
 have risen to £310,000 million, carrying an annual interest charge
 of £3500 million. That is to say, even if Germany pays £3150
 million annually up to 1936, she will nevertheless owe us at that
 date more than half as much again as she does now (£313,000
 million as compared with £38,000 million). From 1936 onwards she
 will have to pay to us £3650 million annually in order to keep
 pace with the interest alone. At the end of any year in which she
 pays less than this sum she will owe more than she did at the
 beginning of it. And if she is to discharge the capital sum in
 thirty years from 1936, i.e. in forty-eight years from the
 armistice, she must pay an additional £3130 million annually,
 making £3780 million in all.(40*)
     It is, in my judgment, as certain as anything can be, for
 reasons which I will elaborate in a moment, that Germany cannot
 pay anything approaching this sum. Until the treaty is altered,
 therefore, Germany has in effect engaged herself to hand over to
 the Allies the whole of her surplus production in perpetuity.
     (6) This is not less the case because the reparation
 commission has been given discretionary powers to vary the rate
 of interest, and to postpone and even to cancel the capital
 indebtedness. In the first place, some of these powers can only
 be exercised if the commission or the governments represented on
 it are unanimous.(41*) But also, which is perhaps more important,
 it will be the duty of the reparation commission, until there has
 been a unanimous and far-reaching change of the policy which the
 treaty represents, to extract from Germany year after year the
 maximum sum obtainable. There is a great difference between
 fixing a definite sum, which though large is within Germany's
 capacity to pay and yet to retain a little for herself, and
 fixing a sum far beyond her capacity, which is then to be reduced
 at the discretion of a foreign commission acting with the object
 of obtaining each year the maximum which the circumstances of
 that year permit. The first still leaves her with some slight
 incentive for enterprise, energy, and hope. The latter skins her
 alive year by year in perpetuity, and however skilfully and
 discreetly the operation is performed, with whatever regard for
 not killing the patient in the process, it would represent a
 policy which, if it were really entertained and deliberately
 practised, the judgment of men would soon pronounce to be one of
 the most outrageous acts of a cruel victor in civilised history.
     There are other functions and powers of high significance
 which the treaty accords to the reparation commission. But these
 will be most conveniently dealt with in a separate section.


     The forms in which Germany can discharge the sum which she
 has engaged herself to pay are three in number --
     (1) immediately transferable wealth in the form of gold,
 ships, and foreign securities; (2) the value of property in ceded
 territory, or surrendered under the armistice; (3) annual
 payments spread over a term of years, partly in cash and partly
 in materials such as coal products, potash, and dyes.
     There is excluded from the above the actual restitution of
 property removed from territory occupied by the enemy, as, for
 example, Russian gold, Belgian and French securities, cattle,
 machinery, and works of art. In so far as the actual goods taken
 can be identified and restored, they must clearly be returned to
 their rightful owners, and cannot be brought into the general
 reparation pool. This is expressly provided for in article 238 of
 the treaty.

     1. Immediately transferable wealth

     (a) Gold. After deduction of the gold to be returned to
 Russia, the official holding of gold as shown in the Reichsbank's
 return of 30 November 1918 amounted to £3115,417,900. This was a
 very much larger amount than had appeared in the Reichsbank's
 return prior to the war,(42*) and was the result of the vigorous
 campaign carried on in Germany during the war for the surrender
 to the Reichsbank not only of gold coin but of gold ornaments of
 every kind. Private hoards doubtless still exist but, in view of
 the great efforts already made, it is unlikely that either the
 German government or the Allies will be able to unearth them. The
 return can therefore be taken as probably representing the
 maximum amount which the German government are able to extract
 from their people. In addition to gold there was in the
 Reichsbank a sum of about £31 million in silver. There must be,
 however, a further substantial amount in circulation, for the
 holdings of the Reichsbank were as high as £39.1 million on 31
 December 1917, and stood at about £36 million up to the latter
 part of October 1918, when the internal run began on currency of
 every kind.(43*) We may, therefore, take a total of (say) £3125
 million for gold and silver together at the date of the
     These reserves, however, are no longer intact. During the
 long period which elapsed between the armistice and the peace it
 became necessary for the Allies to facilitate the provisioning of
 Germany from abroad. The political condition of Germany at that
 time and the serious menace of Spartacism rendered this step
 necessary in the interests of the Allies themselves if they
 desired the continuance in Germany of a stable government to
 treat with. The question of how such provisions were to be paid
 for presented, however, the gravest difficulties. A series of
 conferences was held at Trèves, at Spa, at Brussels, and
 subsequently at Château Villette and Versailles, between
 representatives of the Allies and of Germany, with the object of
 finding some method of payment as little injurious as possible to
 the future prospects of reparation payments. The German
 representatives maintained from the outset that the financial
 exhaustion of their country was for the time being so complete
 that a temporary loan from the Allies was the only possible
 expedient. This the Allies could hardly admit at a time when they
 were preparing demands for the immediate payment by Germany of
 immeasurably larger sums. But, apart from this, the German claim
 could not be accepted as strictly accurate so long as their gold
 was still untapped and their remaining foreign securities
 unmarketed. In any case, it was out of the question to suppose
 that in the spring of 1919 public opinion in the Allied countries
 or in America would have allowed the grant of a substantial loan
 to Germany. On the other hand, the Allies were naturally
 reluctant to exhaust on the provisioning of Germany the gold
 which seemed to afford one of the few obvious and certain sources
 for reparation. Much time was expended in the exploration of all
 possible alternatives. but it was evident at last that, even if
 German exports and saleable foreign securities had been available
 to a sufficient value, they could not be liquidated in time, and
 that the financial exhaustion of Germany was so complete that
 nothing whatever was immediately available in substantial amounts
 except the gold in the Reichsbank. Accordingly a sum exceeding
 £350 million in all out of the Reichsbank gold was transferred by
 Germany to the Allies (chiefly to the United States, Great
 Britain, however, also receiving a substantial sum) during the
 first six months of 1919 in payment for foodstuffs.
     But this was not all. Although Germany agreed, under the
 first extension of the armistice, not to export gold without
 Allied permission, this permission could not be always withheld.
 There were liabilities of the Reichsbank accruing in the
 neighbouring neutral countries, which could not be met otherwise
 than in gold. The failure of the Reichsbank to meet its
 liabilities would have caused a depreciation of the exchange so
 injurious to Germany's credit as to react on the future prospects
 of reparation. In some cases, therefore, permission to export
 gold was accorded to the Reichsbank by the Supreme Economic
 Council of the Allies.
     The net result of these various measures was to reduce the
 gold reserve of the Reichsbank by more than half, the figures
 falling from £3115 million to £355 million in September 1919.
     It would be possible under the treaty to take the whole of
 this latter sum for reparation purposes. It amounts, however, as
 it is, to less than 4 % of the Reichsbank's note issue, and the
 psychological effect of its total confiscation might be expected
 (having regard to the very large volume of mark-notes held
 abroad) to destroy the exchange value of the mark almost
 entirely. A sum of £35 million, £310 million, or even £320 million
 might be taken for a special purpose. But we may assume that the
 reparation commission will judge it imprudent, having regard to
 the reaction on their future prospects of securing payment, to
 ruin the German currency system altogether, more particularly
 because the French and Belgian governments, being holders of a
 very large volume of mark-notes formerly circulating in the
 occupied or ceded territory have a great interest in maintaining
 some exchange value for the mark, quite apart from reparation
     It follows, therefore, that no sum worth speaking of can be
 expected in the form of gold or silver towards the initial
 payment of £31,000 million due by 1921.
     (b) Shipping. Germany has engaged, as we have seen above, to
 surrender to the Allies virtually the whole of her merchant
 shipping. A considerable part of it, indeed, was already in the
 hands of the Allies prior to the conclusion of peace, either by
 detention in their ports or by the provisional transfer of
 tonnage under the Brussels agreement in connection with the
 supply of foodstuffs.(44*) Estimating the tonnage of German
 shipping to be taken over under the treaty at 4 million gross
 tons, and the average value per ton at £330 per ton, the total
 money value involved is £3120 million.(45*)
     (c) Foreign securities. Prior to the census of foreign
 securities carried out by the German government in September
 1916,(46*) of which the exact results have not been made public,
 no official return of such investments was ever called for in
 Germany, and the various unofficial estimates are confessedly
 based on insufficient data, such as the admission of foreign
 securities to the German stock exchanges, the receipts of the
 stamp duties, consular reports, etc. The principal German
 estimates current before the war are given in the appended
 footnote.(47*) This shows a general consensus of opinion among
 German authorities that their net foreign investments were
 upwards of £31,250 million. I take this figure as the basis of my
 calculations, although I believe it to be an exaggeration; £31,000
 million would probably be a safer figure.
     Deductions from this aggregate total have to be made under
 four heads.
     (i) Investments in Allied countries and in the United States,
 which between them constitute a considerable part of the world,
 have been sequestrated by Public Trustees, custodians of enemy
 property, and similar officials, and are not available for
 reparation except in so far as they show a surplus over various
 private claims. Under the scheme for dealing with enemy debts
 outlined in chapter 4, the first charge on these assets is the
 private claims of Allied against German nationals. It is
 unlikely, except in the United States, that there will be any
 appreciable surplus for any other purpose.
     (ii) Germany's most important fields of foreign investment
 before the war were not, like ours, overseas, but in Russia,
 Austria-Hungary, Turkey, Roumania, and Bulgaria. A great part of
 these has now become almost valueless, at any rate for the time
 being; especially those in Russia and Austria-Hungary. If present
 market value is to be taken as the test, none of these
 investments are now saleable above a nominal figure. Unless the
 Allies are prepared to take over these securities much above
 their nominal market valuation, and hold them for future
 realisation, there is no substantial source of funds for
 immediate payment in the form of investments in these countries.
     (iii) While Germany was not in a position to realise her
 foreign investments during the war to the degree that we were,
 she did so nevertheless in the case of certain countries and to
 the extent that she was able. Before the United States came into
 the war, she is believed to have resold a large part of the pick
 of her investments in American securities, although some current
 estimates of these sales (a figure of £360 million has been
 mentioned) are probably exaggerated. But throughout the war and
 particularly in its later stages, when her exchanges were weak
 and her credit in the neighbouring neutral countries was becoming
 very low, she was disposing of such securities as Holland,
 Switzerland, and Scandinavia would buy or would accept as
 collateral. It is reasonably certain that by June 1919 her
 investments in these countries had been reduced to a negligible
 figure and were far exceeded by her liabilities in them. Germany
 has also sold certain overseas securities, such as Argentine
 cedulas, for which a market could be found.
     (iv) It is certain that since the armistice there has been a
 great flight abroad of the foreign securities still remaining in
 private hands. This is exceedingly difficult to prevent. German
 foreign investments are as a rule in the form of bearer
 securities and are not registered. They are easily smuggled
 abroad across Germany's extensive land frontiers, and for some
 months before the conclusion of peace it was certain that their
 owners would not be allowed to retain them if the Allied
 governments could discover any method of getting hold of them.
 These factors combined to stimulate human ingenuity, and the
 efforts both of the Allied and of the German governments to
 interfere effectively with the outflow are believed to have been
 largely futile.
     In face of all these considerations, it will be a miracle if
 much remains for reparation. The countries of the Allies and of
 the United States, the countries of Germany's own allies, and the
 neutral countries adjacent to Germany exhaust between them almost
 the whole of the civilised world; and, as we have seen, we cannot
 expect much to be available for reparation from investments in
 any of these quarters. Indeed there remain no countries of
 importance for investments except those of South America.
     To convert the significance of these deductions into figures
 involves much guesswork. I give the reader the best personal
 estimate I can form after pondering the matter in the light of
 the available figures and other relevant data.
     I put the deduction under (i) at £3300 million, of which £3100
 million may be ultimately available after meeting private debts,
     As regards (ii) -- according to a census taken by the
 Austrian Ministry of Finance on 31 December 1912, the nominal
 value of the Austro-Hungarian securities held by Germans was
 £3197,300,000. Germany's pre-war investments in Russia outside
 government securities have been estimated at £395 million, which
 is much lower than would be expected, and in 1906 Sartorius von
 Waltershausen estimated her investments in Russian government
 securities at £3150 million. This gives a total of £3245 million,
 which is to some extent borne out by the figure of £3200 million
 given in 1911 by Dr Ischchanian as a deliberately modest
 estimate. A Roumanian estimate, published at the time of that
 country's entry into the war, gave the value of Germany's
 investments in Roumania at £34,000,000-£34,400,000, of which
 £32,800,000-£33,200,000 were in government securities. An
 association for the defence of French interests in Turkey, as
 reported in the Temps (8 September 1919), has estimated the total
 amount of German capital invested in Turkey at about £359 million,
 of which, according to the latest Report of the council of
 foreign bondholders, £332,500,000 was held by German nationals in
 the Turkish external debt. No estimates are available to me of
 Germany's investments in Bulgaria. Altogether I venture a
 deduction of £3500 million in respect of this group of countries
 as a whole.
     Resales and the pledging as collateral of securities during
 the war under (iii) I put at £3100 million to £3150 million,
 comprising practically all Germany's holding of Scandinavian,
 Dutch, and Swiss securities, a part of her South American
 securities, and a substantial proportion of her North American
 securities sold prior to the entry of the United States into the
     As to the proper deduction under (iv) there are naturally no
 available figures. For months past the European Press has been
 full of sensational stories of the expedients adopted. But if we
 put the value of securities which have already left Germany or
 have been safely secreted within Germany itself beyond discovery
 by the most inquisitorial and powerful methods at £3100 million,
 we are not likely to overstate it.
     These various items lead, therefore, in all to a deduction of
 a round figure of about £31,000 million, and leave us with an
 amount of £3250 million theoretically still available.(48*)
     To some readers this figure may seem low, but let them
 remember that it purports to represent the remnant of saleable
 securities upon which the German government might be able to lay
 hands for public purposes. In my own opinion it is much too high,
 and considering the problem by a different method of attack I
 arrive at a lower figure. For leaving out of account sequestered
 Allied securities and investments in Austria, Russia, etc., what
 blocks of securities, specified by countries and enterprises, can
 Germany possibly still have which could amount to as much as £3250
 million? I cannot answer the question. She has some Chinese
 government securities which have not been sequestered, a few
 Japanese perhaps, and a more substantial value of first-class
 South American properties. But there are very few enterprises of
 this class still in German hands, and even their value is
 measured by one or two tens of millions, not by fifties or
 hundreds. He would be a rash man, in my judgment, who joined a
 syndicate to pay £3100 million in cash for the unsequestered
 remnant of Germany's overseas investments. If the reparation
 commission is to realise even this lower figure, it is probable
 that they will have to nurse, for some years, the assets which
 they take over, not attempting their disposal at the present
     We have, therefore, a figure of from £3100 million to £3250
 million as the maximum contribution from Germany's foreign
     Her immediately transferable wealth is composed, then, of:
 (a) gold and silver -- say £360 million; (b) ships -- £3120
 million; (c) foreign securities -- £3100-250 million.
     Of the gold and silver, it is not, in fact, practicable to
 take any substantial part without consequences to the German
 currency system injurious to the interests of the Allies
 themselves. The contribution from all these sources together
 which the reparation commission can hope to secure by May 1921
 may be put, therefore, at from £3250 million to £3350 million as a

 2. Property in ceded territory or surrendered under the armistace

     As the treaty has been drafted Germany will not receive
 important credits available towards meeting reparation in respect
 of her property in ceded territory.
     Private property in most of the ceded territory is utilised
 towards discharging private German debts to Allied nationals, and
 only the surplus, if any, is available towards reparation. The
 value of such property in Poland and the other new states is
 payable direct to the owners.
     Government property in Alsace-Lorraine, in territory ceded to
 Belgium, and in Germany's former colonies transferred to a
 mandatory, is to be forfeited without credit given. Buildings,
 forests, and other state property which belonged to the former
 kingdom of Poland are also to be surrendered without credit.
 There remain, therefore, government properties, other than the
 above, surrendered to Poland, government properties in Schleswig
 surrendered to Denmark,(50*) the value of the Saar coalfields,
 the value of certain river craft, etc., to be surrendered under
 the ports, waterways, and railways chapter, and the value of the
 German submarine cables transferred under annex VII of the
 reparation chapter.
     Whatever the treaty may say, the reparation commission will
 not secure any cash payments from Poland. I believe that the Saar
 coalfields have been valued at from £315 million to £320 million. A
 round figure of £330 million for all the above items, excluding
 any surplus available in respect of private property, is probably
 a liberal estimate.
     There remains the value of material surrendered under the
 armistice. Article 250 provides that a credit shall be assessed
 by the reparation commission for rolling-stock surrendered under
 the armistice as well as for certain other specified items, and
 generally for any material so surrendered for which the
 reparation commission think that credit should be given, 'as
 having non-military value'. The rolling-stock (150,000 wagons and
 5,000 locomotives) is the only very valuable item. A round figure
 of £350 million, for all the armistice surrenders, is probably
 again a liberal estimate.
     We have, therefore, £380 million to add in respect of this
 heading to our figure of £3250-350 million under the previous
 heading. This figure differs from the preceding in that it does
 not represent cash capable of benefiting the financial situation
 of the Allies, but is only a book credit between themselves or
 between them and Germany.
     The total of £3330 million to £3430 million now reached is not,
 however, available for reparation. The first charge upon it,
 under article 251 of the treaty, is the cost of the armies of
 occupation both during the armistice and after the conclusion of
 peace. The aggregate of this figure up to May 1921 cannot be
 calculated until the rate of withdrawal is known which is to
 reduce the monthly cost from the figure exceeding £320 million
 which prevailed during the first part of 1919, to that of £31
 million, which is to be the normal figure eventually. I estimate,
 however, that this aggregate may be about £3200 million. This
 leaves us with from £3100 million to £3200 million still in hand.
     Out of this, and out of exports of goods, and payments in
 kind under the treaty prior to May 1921 (for which I have not as
 yet made any allowance), the Allies have held out the hope that
 they will allow Germany to receive back such sums for the
 purchase of necessary food and raw materials as the former deem
 it essential for her to have. It is not possible at the present
 time to form an accurate judgment either as to the money-value of
 the goods which Germany will require to purchase from abroad in
 order to re-establish her economic life, or as to the degree of
 liberality with which the Allies will exercise their discretion.
 If her stocks of raw materials and food were to be restored to
 anything approaching their normal level by May 1921, Germany
 would probably require foreign purchasing power of from £3100 to
 £3200 million at least, in addition to the value of her current
 exports. While this is not likely to be permitted, I venture to
 assert as a matter beyond reasonable dispute that the social and
 economic condition of Germany cannot possibly permit a surplus of
 exports over imports during the period prior to May 1921, and
 that the value of any payments in kind with which she may be able
 to furnish the Allies under the treaty in the form of coal, dyes,
 timber, or other materials will have to be returned to her to
 enable her to pay for imports essential to her existence.(51*)
     The reparation commission can, therefore, expect no addition
 from other sources to the sum of from £3100 million to £3200
 million with which we have hypothetically credited it after the
 realisation of Germany's immediately transferable wealth, the
 calculation of the credits due to Germany under the treaty, and
 the discharge of the cost of the armies of occupation. As Belgium
 has secured a private agreement with France, the United States,
 and Great Britain, outside the treaty, by which she is to
 receive, towards satisfaction of her claims, the first £3100
 million available for reparation, the upshot of the whole matter
 is that Belgium may possibly get her £3100 million by May 1921,
 but none of the other Allies are likely to secure by that date
 any contribution worth speaking of. At any rate, it would be very
 imprudent for finance ministers to lay their plans on any other

 3. Annual payments spread over a term of years

     It is evident that Germany's pre-war capacity to pay an
 annual foreign tribute has not been unaffected by the almost
 total loss of her colonies, her overseas connections, her
 mercantile marine, and her foreign properties, by the cession of
 ten per cent of her territory and population, of one-third of her
 coal and of three-quarters of her iron ore, by two million
 casualties amongst men in the prime of life, by the starvation of
 her people for four years, by the burden of a vast war debt, by
 the depreciation of her currency to less than one-seventh its
 former value, by the disruption of her allies and their
 territories, by revolution at home and Bolshevism on her borders,
 and by all the unmeasured ruin in strength and hope of four years
 of all-swallowing war and final defeat.
     All this, one would have supposed, is evident. Yet most
 estimates of a great indemnity from Germany depend on the
 assumption that she is in a position to conduct in the future a
 vastly greater trade than ever she has had in the past.
     For the purpose of arriving at a figure it is of no great
 consequence whether payment takes the form of cash (or rather of
 foreign exchange) or is partly effected in kind (coal, dyes,
 timber, etc.), as contemplated by the treaty. In any event, it is
 only by the export of specific commodities that Germany can pay,
 and the method of turning the value of these exports to account
 for reparation purposes is, comparatively, a matter of detail.
     We shall lose ourselves in mere hypothesis unless we return
 in some degree to first principles and, whenever we can, to such
 statistics as there are. It is certain that an annual payment can
 only be made by Germany over a series of years by diminishing her
 imports and increasing her exports, thus enlarging the balance in
 her favour which is available for effecting payments abroad.
 Germany can pay in the long run in goods, and in goods only,
 whether these goods are furnished direct to the Allies, or
 whether they are sold to neutrals and the neutral credits so
 arising are then made over to the Allies. The most solid basis
 for estimating the extent to which this 'process can be carried
 is to be found, therefore, in an analysis of her trade returns
 before the war. Only on the basis of such an analysis,
 supplemented by some general data as to the aggregate
 wealth-producing capacity of the country, can a rational guess be
 made as to the maximum degree to which the exports of Germany
 could be brought to exceed her imports.
     In the year 1913 Germany's imports amounted to £3538 million
 and her exports to £3505 million, exclusive of transit trade and
 bullion. That is to say, imports exceeded exports by about £333
 million. On the average of the five years ending 1913, however,
 her imports exceeded her exports by a substantially larger
 amount, namely, £374 million. It follows, therefore, that more
 than the whole of Germany's pre-war balance for new foreign
 investment was derived from the interest on her existing foreign
 securities, and from the profits of her shipping, foreign
 banking, etc. As her foreign properties and her mercantile marine
 are now to be taken from her, and as her foreign banking and
 other miscellaneous sources of revenue from abroad have been
 largely destroyed, it appears that, on the pre-war basis of
 exports and imports, Germany, so far from having a surplus
 wherewith to make a foreign payment, would be not nearly
 self-supporting. Her first task, therefore, must be to effect a
 readjustment of consumption and production to cover this deficit.
 Any further economy she can effect in the use of imported
 commodities, and any further stimulation of exports will then be
 available for reparation.
     Two-thirds of Germany's import and export trade is enumerated
 under separate headings in the following tables. The
 considerations applying to the enumerated portions may be assumed
 to apply more or less to the remaining one-third, which is
 composed of commodities of minor importance individually.

 German exports, 1913        Amount       Percentage of
                            (million £3)   total exports

 Iron goods (including
   tin-plates, etc.)           66.13         13.2
 Machinery and parts
   (including motor-cars)      37.55          7.5
 Coal, coke, and briquettes    35.34          7.0
 Woollen goods (including
   raw and combined wool
   and clothing)               29.40           5.9
 Cotton goods (including
 raw cotton, yarn and thread)  28.15           5.6

                              196.57          39.2

 Cereals, etc. (including
    rye, oats, wheat, hops)    21.18           4.1
 Leather and leather goods     15.47           3.0
 Sugar                         13.20           2.6
 Paper, etc.                   13.10           2.6
 Furs                          11.75           2.2
 Electrical goods
   (installations, machinery,
   lamps, cables)              10.88           2.2
 Silk goods                    10.10           2.0
 Dyes                           9.76           1.9
 Copper goods                   6.50           1.3
 Toys                           5.15           1.0
 Rubber and rubber goods        4.27           0.9
 Books, maps, and music         3.71           0.8
 Potash                         3.18           0.6
 Glass                          3.14           0.6
 Potassium chloride             2.91           0.6
 Pianos, organs, and parts      2.77           0.6
 Raw zinc                       2.74           0.5
 Porcelain                      2.53           0.5

                              142.34          28.0

 Other goods, unenumerated    165.92          32.8

                     Total    504.83         100.0

 German imports, 1913        Amount          Percentage of
                           (million £3)       total imports

 1. Raw materials:

 Cotton                      30.35               5.6
 Hides and skins             24.86               4.6
 Wool                        23.67               4.4
 Copper                      16.75               3.1
 Coal                        13.66               2.5
 Timber                      11.60               2.2
 Iron ore                    11.35               2.1
 Furs                         9.35               1.7
 Flax and flaxseed            9.33               1.7
 Saltpetre                    8.55               1.6
 Silk                         7.90               1.5
 Rubber                       7.30               1.4
 Jute                         4.70               0.9
 Petroleum                    3.49               0.7
 Tin                          2.91               0.5
 Phosphorus chalk             2.32               0.4
 Lubricating oil              2.29               0.4

                            190.38              35.3

 II. Food, tobacco, etc.:

 Cereals, etc. (wheat,
   barley, bran, rice, maize,
   oats, rye, clover)        65.51               12.2
 Oilseeds and cake, etc.
   (including palm kernels,
    copra, cocoa beans)      20.53                3.8
 Cattle, lamb fat, bladders  14.62                2.8
 Coffee                      10.95                2.0
 Eggs                         9.70                1.8
 Tobacco                      6.70                1.2
 Butter                       5.93                1.1
 Horses                       5.81                1.1
 Fruit                        3.65                0.7
 Fish                         2.99                0.6
 Poultry                      2.80                0.5
 Wine                         2.67                0.5

                            151.86               28.3

 III. Manufactures:

 Cotton yarn and thread
   and cotton goods           9.41                1.8
 Woollen yarn and
   woollen goods              7.57                1.4
 Machinery                    4.02                0.7

                             21.00                3.9

 IV. Unenumerated           175.28               32.5

         Total              538.52              100.0

     These tables show that the most important exports consisted
 of: (1) iron goods, including tin-plates (13.2%); (2) machinery,
 etc. (7.5%); (3) coal, coke, and briquettes (7%); (4) woollen
 goods, including raw and combed wool (5.9 %); and (5) cotton
 goods, including cotton yarn and thread and raw cotton (5.6%),
 these five classes between them accounting for 39.2% of the total
 exports. It will be observed that all these goods are of a kind
 in which before the war competition between Germany and the
 United Kingdom was very severe. If, therefore, the volume of such
 exports to overseas or European destinations is very largely
 increased the effect upon British export trade must be
 correspondingly serious. As regards two of the categories,
 namely, cotton and woollen goods, the increase of an export trade
 is dependent upon an increase of the import of the raw material,
 since Germany produces no cotton and practically no wool. These
 trades are therefore incapable of expansion unless Germany is
 given facilities for securing these raw materials (which can only
 be at the expense of the Allies) in excess of the pre-war
 standard of consumption, and even then the effective increase is
 not the gross value of the exports, but only the difference
 between the value of the manufactured exports and of the imported
 raw material. As regards the other three categories, namely,
 machinery, iron goods, and coal, Germany's capacity to increase
 her exports will have been taken from her by the cessions of
 territory in Poland, Upper Silesia, and Alsace-Lorraine. As has
 been pointed out already, these districts accounted for nearly
 one-third of Germany's production of coal. But they also supplied
 no less than three-quarters of her iron-ore production, 38% of
 her blast furnaces, and 9.5% of her iron and steel foundries.
 Unless, therefore, Alsace-Lorraine and Upper Silesia send their
 iron ore to Germany proper, to be worked up, which will involve
 an increase in the imports for which she will have to find
 payment, so far from any increase in export trade being possible,
 a decrease is inevitable.(52*)
     Next on the list come cereals, leather goods, sugar, paper,
 furs, electrical goods, silk goods, and dyes. Cereals are not a
 net export and are far more than balanced by imports of the same
 commodities. As regards sugar, nearly 90 per cent of Germany's
 pre-war exports came to the United Kingdom.(53*) An increase in
 this trade might be stimulated by the grant of a preference in
 this country to German sugar or by an arrangement by which sugar
 was taken in part payment for the indemnity on the same lines as
 has been proposed for coal, dyes, etc. Paper exports also might
 be capable of some increase. Leather goods, furs, and silks
 depend upon corresponding imports on the other side of the
 account. Silk goods are largely in competition with the trade of
 France and Italy. The remaining items are individually very
 small. I have heard it suggested that the indemnity might be paid
 to a great extent in potash and the like. But potash before the
 war represented 0.6% of Germany's export trade, and about £33
 million in aggregate value. Besides, France, having secured a
 potash field in the territory which has been restored to her,
 will not welcome a great stimulation of the German exports of
 this material.
     An examination of the import list shows that 63.6% are raw
 materials and food. The chief items of the former class, namely,
 cotton, wool, copper, hides, iron ore, furs, silk, rubber, and
 tin, could not be much reduced without reacting on the export
 trade, and might have to be increased if the export trade was to
 be increased. Imports of food, namely, wheat, barley, coffee,
 eggs, rice, maize, and the like, present a different problem. It
 is unlikely that, apart from certain comforts, the consumption of
 food by the German labouring classes before the war was in excess
 of what was required for maximum efficiency; indeed, it probably
 fell short of that amount. Any substantial decrease in the
 imports of food would therefore react on the efficiency of the
 industrial population, and consequently on the volume of surplus
 exports which they could be forced to produce. It is hardly
 possible to insist on a greatly increased productivity of German
 industry if the workmen are to be underfed. But this may not be
 equally true of barley, coffee, eggs, and tobacco. If it were
 possible to enforce a regime in which for the future no German
 drank beer or coffee, or smoked any tobacco, a substantial saving
 could be effected. Otherwise there seems little room for any
 significant reduction.
     The following analysis of German exports and imports
 according to destination and origin is also relevant. From this
 it appears that of Germany's exports in 1913, 18% went to the
 British empire, 17% to France, Italy, and Belgium, 10% to Russia
 and Roumania, and 7% to the United States; that is to say, more
 than half of the exports found their market in the countries of
 the Entente nations. Of the balance, 12% went to Austria-Hungary,
 Turkey, and Bulgaria, and 35% elsewhere. Unless, therefore, the
 present Allies are prepared to encourage the importation of
 German products, a substantial increase in total volume can only
 be effected by the wholesale swamping of neutral markets.


             Destination of Germany's  Origin of Germany's
                 exports                 imports
              Million £3 Per cent        Million £3 Per cent

 Great Britain  71.91     14.2            43.80       8.1
 India           7.53      1.5            27.04       5.0
 Egypt           2.17      0.4             5.92       1.1
 Canada          3.02      0.6             3.20       0.6
 Australia       4.42      0.9            14.80       2.8
 South Africa    2.34      0.5             3.48       0.6

 British empire  91.39    18.1            98.24      18.2

 France          39.49     7.8            29.21       5.4
 Belgium         27.55     5.5            17.23       3.2
 Italy           19.67     3.9            15.88       3.0
 U.S.A.          35.66     7.1            85.56      15.9
 Russia          44.00     8.7            71.23      13.2
 Roumania         7.00     1.4             3.99       0.7
 Austria-Hungary 55.24    10.9            41.36       7.7
 Turkey           4.92     1.0             3.68       0.7
 Bulgaria         1.51     0.3             0.40       ---
 Other counties 178.04    35.3           171.74      32.0

                504.47   100.0           538.52     100.0

     The above analysis affords some indication of the possible
 magnitude of the maximum modification of Germany's export balance
 under the conditions which will prevail after the peace. On the
 assumptions (1) that we do not specially favour Germany over
 ourselves in supplies of such raw materials as cotton and wool
 (the world's supply of which is limited), (2) that France, having
 secured the iron-ore deposits, makes a serious attempt to secure
 the blast furnaces and the steel trade also, (3) that Germany is
 not encouraged and assisted to undercut the iron and other trades
 of the Allies in overseas markets, and (4) that a substantial
 preference is not given to German goods in the British empire, it
 is evident by examination of the specific items that not much is
     Let us run over the chief items again: (1) Iron goods. In
 view of Germany's loss of resources, an increased net export
 seems impossible and a large decrease probable. (2) Machinery.
 Some increase is possible. (3) Coal and coke. The value of
 Germany's net export before the war was £322 million; the Allies
 have agreed that for the time being 20 million tons is the
 maximum possible export with a problematic (and in fact)
 impossible increase to 40 million tons at some future time; even
 on the basis of 20 million tons we have virtually no increase of
 value, measured in pre-war prices;(54*) whilst, if this amount is
 exacted, there must be a decrease of far greater value in the
 export of manufactured articles requiring coal for their
 production. (4) Woollen goods. An increase is impossible without
 the raw wool, and, having regard to the other claims on supplies
 of raw wool, a decrease is likely. (5) Cotton goods. The same
 considerations apply as to wool. (6) Cereals. There never was and
 never can be a net export. (7) Leather goods. The same
 considerations apply as to wool.
     We have now covered nearly half of Germany's pre-war exports,
 and there is no other commodity which formerly represented as
 much as 3 per cent of her exports. In what commodity is she to
 pay? Dyes? -- their total value in 1913 was £310 million. Toys?
 Potash? -- 1913 exports were worth £33 million. And even if the
 commodities could be specified, in what markets are they to be
 sold? -- remembering that we have in mind goods to the value not
 of tens of millions annually, but of hundreds of millions.
     On the side of imports, rather more is possible. By lowering
 the standard of life, an appreciable reduction of expenditure on
 imported commodities may be possible. But, as we have already
 seen, many large items are incapable of reduction without
 reacting on the volume of exports.
     Let us put our guess as high as we can without being foolish,
 and suppose that after a time Germany will be able, in spite of
 the reduction of her resources, her facilities, her markets, and
 her productive power, to increase her exports and diminish her
 imports so as to improve her trade balance altogether by £3100
 million annually, measured in pre-war prices. This adjustment is
 first required to liquidate the adverse trade balance, which in
 the five years before the war averaged £374 million; but we will
 assume that after allowing for this, she is left with a
 favourable trade balance of £350 million a year. Doubling this to
 allow for the rise in pre-war prices, we have a figure of £3100
 million. Having regard to the political, social, and human
 factors, as well as to the purely economic, I doubt if Germany
 could be made to pay this sum annually over a period of 30 years;
 but it would not be foolish to assert or to hope that she could.
     Such a figure, allowing 5% for interest, and 1% for repayment
 of capital, represents a capital sum having a present value of
 about £31,700 million.(55*)
     I reach, therefore, the final conclusion that, including all
 methods of payment -- immediately transferable wealth, ceded
 property, and an annual tribute -- £32,000 million is a safe
 maximum figure of Germany's capacity to pay. In all the actual
 circumstances, I do not believe that she can pay as much. Let
 those who consider this a very low figure, bear in mind the
 following remarkable comparison. The wealth of France in 1871 was
 estimated at a little less than half that of Germany in 1913.
 Apart from changes in the value of money, an indemnity from
 Germany of £3500 million would, therefore, be about comparable to
 the sum paid by France in 1871; and as the real burden of an
 indemnity increases more than in proportion to its amount, the
 payment of £32,000 million by Germany would have far severer
 consequences than the £3200 million paid by France in 1871.
     There is only one head under which I see a possibility of
 adding to the figure reached on the line of argument adopted
 above; that is, if German labour is actually transported to the
 devastated areas and there engaged in the work of reconstruction.
 I have heard that a limited scheme of this kind is actually in
 view. The additional contribution thus obtainable depends on the
 number of labourers which the German government could contrive to
 maintain in this way and also on the number which, over a period
 of years, the Belgian and French inhabitants would tolerate in
 their midst. In any case, it would seem very difficult to employ
 on the actual work of reconstruction, even over a number of
 years, imported labour having a net present value exceeding (say)
 £3250 million; and even this would not prove in practice a net
 addition to the annual contributions obtainable in other ways.
     A capacity of £38,000 million or even of £35,000 million is,
 therefore, not within the limits of reasonable possibility. It is
 for those who believe that Germany can make an annual payment
 amounting to hundreds of millions sterling to say in what
 specific commodities they intend this payment to be made, and in
 what markets the goods are to be sold. Until they proceed to some
 degree of detail, and are able to produce some tangible argument
 in favour of their conclusions, they do not deserve to be
     I make three provisos only, none of which affect the force of
 my argument for immediate practical purposes.
     First: if the Allies were to 'nurse' the trade and industry
 of Germany for a period of five or ten years, supplying her with
 large loans, and with ample shipping, food, and raw materials
 during that period, building up markets for her, and deliberately
 applying all their resources and goodwill to making her the
 greatest industrial nation in Europe, if not in the world, a
 substantially larger sum could probably be extracted thereafter;
 for Germany is capable of very great productivity.
     Second: whilst I estimate in terms of money, I assume that
 there is no revolutionary change in the purchasing power of our
 unit of value. If the value of gold were to sink to a half or a
 tenth of its present value, the real burden of a payment fixed in
 terms of gold would be reduced proportionately. If a gold
 sovereign comes to be worth what a shilling is worth now, then,
 of course, Germany can pay a larger sum than I have named,
 measured in gold sovereigns.
     Third: I assume that there is no revolutionary change in the
 yield of nature and material to man's labour. It is not
 impossible that the progress of science should bring within our
 reach methods and devices by which the whole standard of life
 would be raised immeasurably, and a given volume of products
 would represent but a portion of the human effort which it
 represents now. In this case all standards of 'capacity' would be
 changed everywhere. But the fact that all things are possible is
 no excuse for talking foolishly.
     It is true that in 1870 no man could have predicted Germany's
 capacity in 1910. We cannot expect to legislate for a generation
 or more. The secular changes in man's economic condition and the
 liability of human forecast to error are as likely to lead to
 mistake in one direction as in another. We cannot as reasonable
 men do better than base our policy on the evidence we have and
 adapt it to the five or ten years over which we may suppose
 ourselves to have some measure of prevision; and we are not at
 fault if we leave on one side the extreme chances of human
 existence and of revolutionary changes in the order of Nature or
 of man's relations to her. The fact that we have no adequate
 knowledge of Germany's capacity to pay over a long period of
 years is no justification (as I have heard some people claim that
 it is) for the statement that she can pay ten thousand million
     Why has the world been so credulous of the unveracities of
 politicians? If an explanation is needed, I attribute this
 particular credulity to the following influences in part.
     In the first place, the vast expenditures of the war, the
 inflation of prices, and the depreciation of currency, leading up
 to a complete instability of the unit of value, have made us lose
 all sense of number and magnitude in matters of finance. What we
 believed to be the limits of possibility have been so enormously
 exceeded, and those who founded their expectations on the past
 have been so often wrong, that the man in the street is now
 prepared to believe anything which is told him with some show of
 authority, and the larger the figure the more readily he swallows
     But those who look into the matter more deeply are sometimes
 misled by a fallacy much more plausible to reasonable persons.
 Such a one might base his conclusions on Germany's total surplus
 of annual productivity as distinct from her export surplus.
 Helfferich's estimate of Germany's annual increment of wealth in
 1913 was £3400 million to £3425 million (exclusive of increased
 money value of existing land and property). Before the war,
 Germany spent between £350 million and £3100 million on armaments,
 with which she can now dispense. Why, therefore, should she not
 pay over to the Allies an annual sum of £3500 million? This puts
 the crude argument in its strongest and most plausible form.
     But there are two errors in it. First of all, Germany's
 annual savings, after what she has suffered in the war and by the
 peace, will fall far short of what they were before and, if they
 are taken from her year by year in future, they cannot again
 reach their previous level. The loss of Alsace-Lorraine, Poland,
 and Upper Silesia could not be assessed in terms of surplus
 productivity at less than £350 million annually. Germany is
 supposed to have profited about £3100 million per annum from her
 ships, her foreign investments, and her foreign banking and
 connections, all of which have now been taken from her. Her
 saving on armaments is far more than balanced by her annual
 charge for pensions, now estimated at £3250 million,(57*) which
 represents a real loss of productive capacity. And even if we put
 on one side the burden of the internal debt, which amounts to 240
 milliards of marks, as being a question of internal distribution
 rather than of productivity, we must still allow for the foreign
 debt incurred by Germany during the war, the exhaustion of her
 stock of raw materials, the depletion of her livestock, the
 impaired productivity of her soil from lack of manures and of
 labour, and the diminution in her wealth from the failure to keep
 up many repairs and renewals over a period of nearly five years.
 Germany is not as rich as she was before the war, and the
 diminution in her future savings for these reasons, quite apart
 from the factors previously allowed for, could hardly be put at
 less than ten per cent, that is £340 million annually.
     These factors have already reduced Germany's annual surplus
 to less than the £ 3100 million at which we arrived on other
 grounds as the maximum of her annual payments. But even if the
 rejoinder be made that we have not yet allowed for the lowering
 of the standard of life and comfort in Germany which may
 reasonably be imposed on a defeated enemy,(58*) there is still a
 fundamental fallacy in the method of calculation. An annual
 surplus available for home investment can only be converted into
 a surplus available for export abroad by a radical change in the
 kind of work performed. Labour, while it may be available and
 efficient for domestic services in Germany, may yet be able to
 find no outlet in foreign trade. We are back on the same question
 which faced us in our examination of the export trade -- in what
 export trade is German labour going to find a greatly increased
 outlet? Labour can only be diverted into new channels with loss
 of efficiency, and a large expenditure of capital. The annual
 surplus which German labour can produce for capital improvements
 at home is no measure, either theoretically or practically, of
 the annual tribute which she can pay abroad.


     This body is so remarkable a construction and may, if it
 functions at all, exert so wide an influence on the life of
 Europe, that its attributes deserve a separate examination.
     There are no precedents for the indemnity imposed on Germany
 under the present treaty; for the money exactions which formed
 part of the settlement after previous wars have differed in two
 fundamental respects from this one. The sum demanded has been
 determinate and has been measured in a lump sum of money; and so
 long as the defeated party was meeting the annual instalments of
 cash, no further interference was necessary.
     But for reasons already elucidated, the exactions in this
 case are not yet determinate, and the sum when fixed will prove
 in excess of what can be paid in cash and in excess also of what
 can be paid at all. It was necessary, therefore, to set up a body
 to establish the bill of claim, to fix the mode of payment, and
 to approve necessary abatements and delays. It was only possible
 to place this body in a position to exact the utmost year by year
 by giving it wide powers over the internal, economic life of the
 enemy countries who are to be treated henceforward as bankrupt
 estates to be administered by and for the benefit of the
 creditors. In fact, however, its powers and functions have been
 enlarged even beyond what was required for this purpose, and the
 reparation commission has been established as the final arbiter
 on numerous economic and financial issues which it was convenient
 to leave unsettled in the treaty itself.(59*)
     The powers and constitution of the reparation commission are
 mainly laid down in articles 233-41 and annex II of the
 reparation chapter of the treaty with Germany. But the same
 commission is to exercise authority over Austria and Bulgaria,
 and possibly over Hungary and Turkey, when peace is made with
 these countries. There are therefore analogous articles mutatis
 mutandis in the Austrian treaty(60*) and in the Bulgarian
     The principal Allies are each represented by one chief
 delegate. The delegates of the United States, Great Britain,
 France, and Italy take part in all proceedings; the delegate of
 Belgium in all proceedings except those attended by the delegates
 of Japan or the Serb-Croat-Slovene state; the delegate of Japan
 in all proceedings affecting maritime or specifically Japanese
 questions; and the delegate of the Serb-Croat-Slovene state when
 questions relating to Austria, Hungary, or Bulgaria are under
 consideration. Other Allies are to be represented by delegates,
 without the power to vote, whenever their respective claims and
 interests are under examination.
     In general the commission decides by a majority vote, except
 in certain specific cases where unanimity is required, of which
 the most important are the cancellation of German indebtedness,
 long postponement of the instalments, and the sale of German
 bonds of indebtedness. The commission is endowed with full
 executive authority to carry out its decisions. It may set up an
 executive staff and delegate authority to its officers. The
 commission and its staff are to enjoy diplomatic privileges, and
 its salaries are to be paid by Germany, who will, however, have
 no voice in fixing them. If the commission is to discharge
 adequately its numerous functions, it will be necessary for it to
 establish a vast polyglot bureaucratic organisation, with a staff
 of hundreds. To this organisation, the headquarters of which will
 be in Paris, the economic destiny of Central Europe is to be
     Its main functions are as follows:
     (1) The commission will determine the precise figure of the
 claim against the enemy Powers by an examination in detail of the
 claims of each of the Allies under annex I of the reparation
 chapter. This task must be completed by May 1921. It shall give
 to the German government and to Germany's allies 'a just
 opportunity to be heard, but not to take any part whatever in the
 decisions of the commission'. That is to say, the commission will
 act as a party and a judge at the same time.
     (2) Having determined the claim, it will draw up a schedule
 of payments providing for the discharge of the whole sum with
 interest within thirty years. From time to time it shall, with a
 view to modifying the schedule within the limits of possibility,
 'consider the resources and capacity of Germany... giving her
 representatives a just opportunity to be heard'.
     'In periodically estimating Germany's capacity to pay, the
 commission shall examine the German system of taxation, first, to
 the end that the sums for reparation which Germany is required to
 pay shall become a charge upon all her revenues prior to that for
 the service or discharge of any domestic loan, and secondly, so
 as to satisfy itself that, in general, the German scheme of
 taxation is fully as heavy proportionately as that of any of the
 Powers represented on the commission.'
     (3) Up to May 1921 the commission has power, with a view to
 securing the payment of £31,000 million, to demand the surrender
 of any piece of German property whatever, wherever situated: that
 is to say, 'Germany shall pay in such instalments and in such
 manner, whether in gold, commodities, ships, securities, or
 otherwise, as the reparation commission may fix'.
     (4) The commission will decide which of the rights and
 interests of German nationals in public utility undertakings
 operating in Russia, China, Turkey, Austria, Hungary, and
 Bulgaria, or in any territory formerly belonging to Germany or
 her allies, are to be expropriated and transferred to the
 commission itself; it will assess the value of the interests so
 transferred; and it will divide the spoils.
     (5) The commission will determine how much of the resources
 thus stripped from Germany must be returned to her to keep enough
 life in her economic organisation to enable her to continue to
 make reparation payments in future.(62*)
     (6) The commission will assess the value, without appeal or
 arbitration, of the property and rights ceded under the
 Armistice, and under the Treaty -- rolling-stock, the mercantile
 marine, river craft, cattle, the Saar mines, the property in
 ceded territory for which credit is to be given, and so forth.
     (7) The commission will determine the amounts and values
 (within certain defined limits) of the contributions which
 Germany is to make in kind year by year under the various annexes
 to the reparation chapter.
     (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 fulfilment 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.(63*)
     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 authorised to exert pressure on the German
 system of taxation (annex II, paragraph 12(b))(64*) and on German
 internal expenditure, with a view to ensuring 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 recognises 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 régime 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 to is 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 organ 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


     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 £35,000 million, 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 £35,000 million;
 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 anyone 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
     The German offer of an alleged sum of £35,000 million amounted
 to the following. In the first place it was conditional on
 concessions in the treaty ensuring that 'Germany shall retain the
 territorial integrity corresponding to the armistice
 convention,(65*) 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 £35,000
 million, of which £31,000 million is to be discharged by 1 May
 1926; and no part of this sum is to carry interest pending the
 payment of it.(66*) In the third place, there are to be allowed
 as credits 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 Germany 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.(67*)
     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 £32,000 million, 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 £35,000 million on the basis laid down by the
 treaty, we must first of all deduct £32,000 million 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 £31,500 million, as compared with the £38,000 million
 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.(68*) But the German delegation might 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
 recognised 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 1 May 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
     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 £37,000 million,
 £38,000 million, or £310,000 million. '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 than
 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.(69*)

     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
 civilised 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 authorised, by religion or by natural
 morals, to visit on the children of their enemies the misdoings
 of parents or of rulers.


 1. '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. While 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.'

 2. It is to be noticed, in passing, that they contain nothing
 which limits the damage to damage inflicted contrary to the
 recognised 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

 3. 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.

 4. A special claim on behalf of Belgium was actually included in
 the peace treaty, and was accepted by the German representatives
 without demur.

 5. 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 colour and humours of the
 landscape and the climate seemed designed to express to the
 traveller 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.

 6. 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. 1.20 = 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 ike
 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.

 7. 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.

 8. 'The wealth and income of the chief Powers', by J. C. Stamp
 (Journal of the Royal Statistical Society, July 1919).

 9. Other estimates vary from £32,420 million to £32,680 million.
 See Stamp, loc. cit.

 10. This was clearly and courageously pointed out by M. Charles
 Gide in L'Emancipation for February 1919.

 11. For details of these and other figures, see Stamp, loc. cit.

 12. 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 labour and materials at hand might force prices
 up to almost any level. We must, I think, assume a cost of labour
 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, hope 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.

 13. La Richesse de la France devant la Guerre, published in 1916.

 14. Revue Bleue, 3 February 1919. This is quoted in a very
 valuable selection of French estimates and expressions of
 opinion, forming chapter iv of La Liquidation financière 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 10 October 1919, in which he said: 'On 16 September
 last, of 2,246 kilometres of railway track destroyed, 2,016 had
 been repaired; of 1,075 kilometres of canal, 700; of 1,160
 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

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

 16. 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.

 17. 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 1,885 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.

 18. 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.

 19. 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' (article 116).

 20. Dr Diouritch in his 'Economic and statistical survey of the
 southern Slav nations' (Journal of the 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 a million, or more than one-third of the population of Old

 21 Come si calcola e a quanto ammonta la richezza d'Iialia e
 delle altre principali nazioni, published in 1919.

 22. 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.

 23. Assuming that in her case £3250 million are included for the
 general expenses of the war defrayed out of loans made to Belgium
 by her allies.

 24. It must be said to Mr Hughes' honour 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.

 25. The whole cost of the war has been estimated at from £324,000
 million upwards. This would mean an annual payment of interest
 (apart from sinking fund) of £31,200 million. Could any expert
 committee have reported that Germany can pay this sum?

 26. 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
 dishonour of the whole proceedings.

 27. 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 4 and at the beginning of
 this chapter, so that the reader can form his own judgment.

 28. 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?'

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

 30. The challenge of the other Allies, as well as of 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.

 31. M. Klotz has estimated the French claims on this head at
 £33,000 million (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.

 32. That is to say, I claim for the aggregate figure an accuracy
 within 25%.

 33. In his speech of 5 September 1919, addressed to the French
 Chamber, M. Klotz estimated the total Allied claims against
 Germany under the treaty at £315,000 million, which would
 accumulate at interest until 1921, and be paid off thereafter by
 34 annual instalments of about £31,000 million each, of which
 France would receive about £3550 million 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.

 34. As a matter of subjective judgment, I estimate for this
 figure an accuracy of 10% in deficiency and 20% in excess, i.e.
 that the result will lie between £36,400 million and £38,800

 35. 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 £312 million, 'as soon as the
 Allied and Associated Powers concerned are convinced that the
 conditions of disarmament by Germany are being satisfactorily
 fulfilled'.  The three Powers reserve to themselves the liberty
 to modify this arrangement at any time if they agree that it is

 36. Article 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

 37. This is the effect of paragraph 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 at the rate of 20 to £31.

 38. If, per impossibile, Germany discharged £3500 million in cash
 or kind by 1921, her annual payments would be at the rate of
 £362,500,000 from 1921 to 1925 and of £3150 million thereafter

 39. Paragraph 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 11 November 1918 up
 to 1 May 1921'. This seems to differentiate damage to property
 from damage to the person in favour of the former. It does not
 affect pensions and allowances, the cost of which is capitalised
 as at the date of the coming into force of the treaty.

 40. 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 siding fund from the outset, the annual
 payment would amount to £3480 million.

 41. Under paragraph 13 of annex II unanimity is required (i) for
 any postponement beyond 1930 of instalments due between 1921 and
 1926, and (ii) for any postponement for more than three years of
 instalments due after 1926. Further, under article 234, the
 commission may not cancel any part of the indebtedness without
 the specific authority of all the governments represented on the

 42. On 23 July 1914 the amount was £367,800,000.

 43. 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.

 44. 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
 Trèves and Spa (16 January, 14-16 February,and 4-5 March 1919)
 were at last followed by the agreement of Brussels (14 March
 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 behaviour 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 30 June 1919, 176 German ships of 1,025,388
 gross tonnage had been surrendered to the Allies in accordance
 with the Brussels agreement.

 45. 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 £3100 million or greater than
 £3150 million.

 46. This census was carried out by virtue of a decree of 23
 August 1916. On 22 March 1917, the German government acquired
 complete control over the utilisation of foreign securities in
 German possession; and in May 1917 it began to exercise these
 powers for the mobilisation of certain Swedish, Danish, and Swiss

 47.                              £3 (million)

  1892. Schmoller                    500
  1892. Christians                   650
  1893-4. Koch                       600
  1905. v. Halle                     800(†)
  1913. Helfferich                 1,000(‡)
  1914. Ballod                     1,250
  1914. Pistorius                  1,250
  1919. Hans David                 1,050()

 † Plus £3500 million for investments other than securities.

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

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

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

 49. In all these estimates I am conscious of being driven, by a
 fear of overstating the case against the treaty, into 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.

 50. The treaty (see article 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 £36,600,000
 (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'.

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

 52. 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
 million tons to 14 million tons, and increase France's capacity
 from 5 million tons to 11 million tons.

 53. Germany's exports of sugar in 1913 amounted to 1,110,073 tons
 of the value of £313,094,300, of which 838,583 tons were exported
 to the United Kingdom at a value of £39,050,800. These figures
 were in excess of the normal, the average total exports for the
 five years ending 1913 being about £310 million.

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

 55. 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 £3100 million
 annually in perpetuity, assuming interest, as before, at 5%,
 would only raise the present value to £32,000 million.

 56. As an example of public misapprehension on economic affairs,
 the following letter from Sir Sidney Low to The Times of 3
 December 1918 deserves quotation: 'I have seen authoritative
 estimates which place the gross value of Germany's mineral and
 chemical resources as high as £3250,000 million sterling or even
 more; and the Ruhr basin mines alone are said to be worth over
 £345,000 million. It is certain, at any rate, that the capital
 value of these natural supplies is much greater than the toil 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 100 to 200
 millions 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
 £3250,000 million sterling, Sir Sidney Low is content with the
 trifling sum of 100 to 200 millions 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 £31,000 for 999 years at £3999,000
 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
 £3250,000 million, 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 £3300 million, or a
 little more than one-thousandth part of Sir Sidney Low's

 57. 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.

 58. 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 shopkeeper will not
 save, the labourer 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.

 59. 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 been left with the reparation commission,
 in spite of its being an executive body composed of interested

 60. 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.

 61. Bulgaria is to pay an indemnity of £390 million by half-yearly
 instalments, beginning 1 July 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 later, and is authorised
 to tender advice to the reparation commission as to, for example,
 the reduction of the half-yearly instalments.

 62. 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.

 63. 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.

 64. 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.'

 65. Whatever that may mean.

 66. 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% interest on the outstanding capital.

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

 68. 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.

 69. 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.

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