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Title: A Revision of the Treaty - Being a Sequel of The Economic Consequence of the Peace
Author: Keynes, John Maynard
Language: English
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[Illustration: LORD KEYNES.]

                       A REVISION OF THE TREATY

                              A REVISION
                             OF THE TREATY

                           BEING A SEQUEL TO

                       THE ECONOMIC CONSEQUENCES
                             OF THE PEACE


                       JOHN MAYNARD KEYNES, C.B.



                               NEW YORK
                      HARCOURT, BRACE AND COMPANY

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

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


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

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

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

                                              J. M. KEYNES.

      _December_ 1921.


                               CHAPTER I


  THE STATE OF OPINION                                             3

                              CHAPTER II

        THE SECOND ULTIMATUM OF LONDON                            11

          EXCURSUS I.—COAL                                        44

              EAST OF THE RHINE                                   57

                              CHAPTER III

      THE BURDEN OF THE LONDON SETTLEMENT                         64

          EXCURSUS III.—THE WIESBADEN AGREEMENT                   92

          EXCURSUS IV.—THE MARK EXCHANGE                         100

                              CHAPTER IV

      THE REPARATION BILL                                        106

              MAY 1, 1921                                        131

              THE ALLIES                                         138

                               CHAPTER V

      THE LEGALITY OF THE CLAIM FOR PENSIONS                     144

                              CHAPTER VI


                              CHAPTER VII

          EUROPE                                                 179


        I. SUMMARY OF SPA AGREEMENT (JULY 1920)                  203

       II. THE DECISIONS OF PARIS (JANUARY 1921)                 207

          (FEBRUARY 1921)                                        210

      IV. THE FIRST ULTIMATUM OF LONDON (MARCH 1921)             213

       V. THE GERMAN COUNTER–PROPOSAL (APRIL 1921)               215

          1921)                                                  219

     VII. THE SECOND ULTIMATUM OF LONDON (MAY 1921)              219

          1921)                                                  228


    INDEX                                                        240

                       A REVISION OF THE TREATY
                           BEING A SEQUEL TO

                               CHAPTER I

                         THE STATE OF OPINION

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

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

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

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

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

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

       *       *       *       *       *

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

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

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

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

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

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

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

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


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

                              CHAPTER II

                          ULTIMATUM OF LONDON

         I. _The Execution of the Treaty and the Plebiscites_

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

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

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

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

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

With the conclusion of the plebiscites the frontiers of Germany were

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

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

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

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

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

  II. _The Conferences of San Remo_ (_April_ 19–26, 1920), _Hythe_ (_May_
      15 _and June_ 19, 1920), _Boulogne_ (_June_ 21, 22, 1920), _Brussels_
      (_July_ 2–3, 1920), _and Spa_ (_July_ 5–16, 1920)

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

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

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

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

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

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

         III. _The Brussels Conference_ (_December_ 16–22, 1920)

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

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

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

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

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

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

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

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

          IV. _The Decisions of Paris_ (_January_ 24–30, 1921)

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

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

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

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

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

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

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

         V. _The First Conference of London_ (_March_ 1–7, 1921)

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

On March 1, 1921, Dr. Simons presented his counter–proposal to the
Allies assembled in London. Like the original counter–proposal of
Brockdorff–Rantzau at Versailles, it was not clear–cut or entirely
intelligible; and it was rumored that the German experts were divided
in opinion amongst themselves. Instead of stating in plain language
what Germany thought she could perform, Dr. Simons started from the
figures of the Paris Decisions and then proceeded by transparent
and futile juggling to reduce them to a quite different figure. The
process was as follows. Take the gross total of the fixed annuities of
the Paris scheme (_i.e._, apart from the export proportion), namely
$56,500,000,000, and calculate its present value at _8 per cent
interest_, namely $12,500,000,000; deduct from this $5,000,000,000
as the alleged (but certainly not the actual) value of Germany’s
deliveries up to date, which leaves $7,500,000,000. This was the
utmost Germany could pay. If the Allies could raise an international
loan of $2,000,000,000, Germany would pay the interest and sinking
fund on this, and in addition $250,000,000 a year for five years,
towards the discharge of the capital sum remaining over and above the
$2,000,000,000, namely, $5,500,000,000, which capital sum, however,
would not carry interest pending repayment. At the end of five years
the rate of repayment would be reconsidered. The whole proposal was
contingent on the retention of Upper Silesia and the removal of all
impediments to German trade.

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

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

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

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

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

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

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

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

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

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

   VI. _The Second Conference of London_ (_April_ 29–_May_ 5, 1921)

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

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

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

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

4. The sinking fund on the balance to vary with the rate of Germany’s

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                              EXCURSUS I


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

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

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

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

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

                   │ 1913.│ 1917.│ 1918.│ 1919.│ 1920.│ 1921 (first
                   │      │      │      │      │      │nine months)
  Germany exclusive│      │      │      │      │      │
   of Upper Silesia│130.19│111.66│109.54│ 92.76│ 99.66│    76.06
  Germany inclusive│      │      │      │      │      │
   of Upper Silesia│173.62│154.41│148.19│117.69│131.35│   100.60
  Per cent of 1913 │      │      │      │      │      │
   output          │100.00│ 88.90│ 85.40│ 67.80│ 75.70│    77.20

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

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

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

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

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

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

The figure of 100,000,000 tons, given in _The Economic Consequences
of the Peace_ for the _net_ German production (_i.e._, deducting
consumption at the mines themselves) in the near future _excluding_
Upper Silesia, should, therefore, be replaced by the figure of (say)
115,000,000 tons, _including_ such part of Upper Silesia as Germany is
now to retain.

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

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

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

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

                              EXCURSUS II


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

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

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

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

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

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

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

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

The French Government base their contention on the words “and in
general such other measures” in § 18, arguing that this gives them
an entirely free hand. The sentence taken as a whole, however,
supports, on the principle of _ejusdem generis_, the interpretation
that the other measures contemplated are of the nature of economic
and financial reprisals. This view is confirmed by the fact that the
rest of the Treaty narrowly limits the rights of occupying German
territory, which, as M. Tardieu’s book shows, was the subject of an
acute difference of opinion between France and her Associates at the
Peace Conference. There is _no_ provision for occupying territory on
the _right_ bank of the Rhine; and the only provision for occupation in
the event of default is that contained in Article 430. This Article,
which provides for _reoccupation_ of the _left_ bank in the event of
default, would have been entirely pointless and otiose if the French
view were correct. Indeed the theory, that at any time during the next
thirty years any Ally can invade any part of Germany on the ground that
Germany has not fulfilled every letter of the Treaty, is on the face of
it unreasonable.

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

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

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

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

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

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

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


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

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

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

[5] See Excursus VI.

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

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

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

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

[10] _The Times_, March 8, 1921.

[11] _The Times_, March 8, 1921.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[27] See _e.g._, my controversy with M. Brenier in _The Times_.

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

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

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

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

                              CHAPTER III


The settlement of Reparations communicated to Germany by the Allied
Powers on May 5, 1921, and accepted a few days later, constitutes the
definitive scheme under the Treaty according to which Germany for the
next two generations is to discharge her liabilities.[32] It will not
endure. But it is the _fait accompli_ of the hour, and, therefore,
deserves examination.[33]

The settlement falls into three parts comprising (1) provisions for the
delivery of Bonds; (2) provisions for setting up in Berlin an Allied
Committee of Guarantees; (3) provisions for actual payment in cash and

1. _The Delivery of Bonds._—These provisions are the latest variant of
similar provisions in the Treaty itself. Allied Finance Ministers have
encouraged themselves (or their constituents) with the hope that some
part of the capital sum of Germany’s liabilities might be anticipated
by the sale to private investors of Bonds secured on future Reparation
payments. For this purpose it was necessary that Germany should deliver
negotiable Bonds. These Bonds do not constitute any _additional_ burden
on Germany. They are simply documents constituting a title to the sums
which, under other clauses, Germany is to pay over annually to the
Reparation Commission.

The advantages to the Allies of marketing such Bonds are obvious. If
they could get rid of the Bonds they would have thrown the risk of
Germany’s default on to others; they would have interested a great
number of people all over the world in Germany’s not defaulting;
and they would have secured the actual cash which the exigencies of
their Budgets demand. But the hope is illusory. When at last a real
settlement is made, it may be practicable for the German Government to
float an international loan of moderate amount, well within the world’s
estimate of their minimum capacity of payment. But, though there are
foolish investors in the world, it would be sanguine to believe that
there are so many of such folly as to swallow at this moment on these
lines a loan of vast dimensions. It costs France at the present time
somewhere about 10 per cent to float a loan of modest dimensions on
the New York market. As the proposed German Bonds will carry 5 per
cent interest and 1 per cent sinking fund, it would be necessary to
reduce their price to 57 before they would yield 10 per cent including
redemption. It would be very optimistic, therefore, to expect to
market them at above half their par value. Even so, the world is not
likely to invest in them any large proportion of its current savings,
so that the whole amount even of the A Bonds, specified below, could
not be marketed at this price. Moreover, in so far as the service of
the Bonds marketed is within the _minimum_ expectation of Germany’s
capacity to pay (as it would have to be), the financial effect on the
Ally which markets the Bonds is nearly the same as though they were
to borrow themselves at the rate in question. Except, therefore, in
the case of those Allies whose credit is inferior to Germany’s, the
advantage compared with borrowing on their own credit would not be very

The details relating to the Bonds are not likely, therefore, to be
operative, and need not be taken very seriously. They are really a
relic of the pretenses of the Peace Conference days. Briefly, the
arrangements are as follows:

Germany must deliver 12 milliards of gold marks ($3,000,000,000) in A
Bonds, 38 milliards ($9,500,000,000) in B Bonds, and the balance of her
liabilities, provisionally estimated at 82 milliards ($20,500,000,000),
in C Bonds. All the Bonds carry 5 per cent interest and 1 per cent
cumulative sinking fund. The services of the series A, B, and C
constitute respectively a first, second, and third charge on the
available funds. The A Bonds are issued to the Reparation Commission
as from May 1, 1921, and the B Bonds as from November 1, 1921, but
the C Bonds shall not be issued (and shall not carry interest in
the meantime) except as and when the Reparation Commission is of
the opinion that the payments which Germany is making under the new
settlement are adequate to provide their service.

It may be noticed that the service of the A Bonds will cost
$180,000,000 per annum, a sum well within Germany’s capacity, and
the service of the B Bonds will cost $570,000,000 per annum, making
$750,000,000 altogether, a sum in excess of my own expectations of
what is practicable, but not in excess of the figure at which some
independent experts, whose opinion deserves respect, have estimated
Germany’s probable capacity to pay. It may also be noticed that
the aggregate face value of the A and B Bonds ($12,500,000,000)
corresponds to the figure at which the German Government have agreed
(in their counter–proposal transmitted to the United States) that their
aggregate liability might be assessed. It is probable that, sooner or
later, the C Bonds at any rate will be not only postponed, but canceled.

2. _The Committee of Guarantees._—This new body, which is to have a
permanent office in Berlin, is in form and status a sub–commission
of the Reparation Commission. Its members consist of representatives
of the Allies represented on the Reparation Commission, with a
representative of the United States, if that country consents to
nominate.[35] To it are assigned the various wide and indefinite powers
accorded by the Treaty of Peace to the Reparation Commission, for the
general control and supervision of Germany’s financial system. But its
exact functions, in practice and in detail, are still obscure.

According to the letter of its constitution the Committee might embark
on difficult and dangerous functions. Accounts are to be opened in
the name of the Committee, to which will be paid over in _gold or
foreign currency_ the proceeds of the German Customs, 26 per cent of
the value of all exports and the proceeds of any other taxes which
may be assigned as a “guarantee” for the payment of Reparation. These
receipts, however, chiefly accrue not in gold or foreign currency, but
in paper marks. If the Committee attempts to regulate the conversion
of these paper marks into foreign currencies, it will in effect become
responsible for the foreign exchange policy of Germany, which it would
be much more prudent to leave alone. If not, it is difficult to see
what the “guarantees” really add to the other provisions by which
Germany binds herself to make payments in foreign money.

I suspect that the only real and useful purpose of the Committee of
Guarantees is as an office of the Reparation Commission _in Berlin_,
a highly necessary adjunct; and the clause about “guarantees” is
merely one more of the pretenses, which, in all these agreements, the
requirements of politics intermingle with the provisions of finance.
It is usual, particularly in France, to talk much about “guarantees,”
by which is meant, apparently, some device for making sure that
the impossible will occur. A “guarantee” is not the same thing as
a “sanction.” When M. Briand is accused of weakness at the Second
Conference of London and of abandoning France’s “real guarantees,”
these provisions enable him to repudiate the charge indignantly. He
can point out that the Second Conference of London not only set up a
Committee of Guarantees but secured, as a new and additional guarantee,
the German Customs. There is no answer to that![36]

3. _The Provisions for Payment in Cash and Kind._—The Bonds and the
Guarantees are apparatus and incantation. We come now to the solid part
of the settlement, the provisions for payment.

Germany is to pay in each year, until her aggregate liability is

(1) Two milliard gold marks.

(2) A sum equivalent to 26 per cent of the value of her exports, or
alternatively an equivalent amount as fixed in accordance with any
other index proposed by Germany and accepted by the Commission.

(1) is to be paid quarterly on January 15, April 15, July 15, and
October 15 of each year, and (2) is to be paid quarterly on February
15, May 15, August 15, and November 15 of each year.

This sum, calculated on any reasonable estimate of the future value
of German exports, is materially less than the original demands of
the Treaty. Germany’s total liability under the Treaty amounts to 138
milliard gold marks (inclusive of the liability for Belgian debt). At
5 per cent interest and 1 per cent sinking fund, the annual charge on
this would be 8.28 milliard gold marks. Under the new scheme the annual
value of Germany’s exports would have to rise to the improbable figure
of 24 milliard gold marks before she would be liable for so much as
this. As we shall see below, the probable burden of the new settlement
in the near future is probably not much more than half that of the

There is another important respect in which the demands of the Treaty
are much abated. The Treaty included a crushing provision by which the
part of Germany’s nominal liability on which she was not able to pay
interest in the early years was to accumulate at compound interest.[37]
There is no such provision in the new scheme; the C Bonds are not to
carry interest until the receipts from Germany are adequate to meet
their service; and the only provision relating to back interest is for
the payment of _simple_ interest in the event of there being a surplus
out of the receipts.

In order to understand how great an advance this settlement represented
it is necessary to carry our minds back to the ideas which were
prevalent not very long ago. The following table is interesting, in
which, in order to reduce capital sums and annual payments to a common
basis of comparison, estimates in terms of capital sums are replaced
by annuities of 6 per cent of their amount:

                                  In terms of Annuities
        Estimates of             expressed in Milliards
                                     of Gold Marks.

  1. Lord Cunliffe and the figure given
       out in the British General Election
       of 1918[38]                             28.8

  2. M. Klotz’s forecast in the French
       Chamber, September 5, 1919             18

  3. The Assessment of the Reparation
       Commission, April 1921                  8.28

  4. The London Settlement, May 1921           4.6[39]

The estimate of The _Economic Consequences of the Peace_ (1919),
namely 2 milliards, was nearly contemporaneous with M. Klotz’s figure
of 18 milliards. M. Tardieu recalls that, when the Peace Conference
was considering whether a definite figure could be inserted in the
Treaty, the lowest figure which the British and French Prime Ministers
would accept, as a compromise to meet the pressure put upon them by
the American representatives, corresponded to an annuity of 10.8
milliards,[40] which is nearly two and a half times the figure which
they accepted two years later under the pressure, not of Americans, but
of facts.

There was yet another feature in the London Settlement which
recommended it to moderate opinion. The dates of payment were so
arranged as to reduce the burden on Germany during the first year. The
Reparation year runs from May 1 in each year to April 30 in the next;
but in the period May 1, 1921–April 30, 1922 only two, instead of four,
of the quarterly payments in respect of the export proportion will fall

No wonder, therefore, that this settlement, so reasonable in itself
compared with what had preceded it, was generally approved and widely
accepted as a real and permanent solution. But in spite of its
importance for the time being, as a preservative of peace, as affording
a breathing space, and as a transition from foolish expectations, it
cannot be a permanent solution. It is, like all its predecessors, a
temporizing measure, which is bound to need amendment.

To calculate the total burden, it is necessary to estimate the value
of German exports. In 1920 they amounted to about 5 milliard gold
marks. In 1921 the volume will be greater, but this will be offset by
the fact that gold prices have fallen to less than two–thirds of what
they were, so that 4 to 5 milliard gold marks is quite high enough as
a preliminary forecast for the year commencing May 1, 1921.[41] It is,
of course, impossible to make a close estimate for later years. The
figures will depend, not only on the recovery of Germany, but on the
state of international trade generally, and more especially on the
level of gold prices.[42] For the next two or three years, if we are to
make an estimate at all, 6 to 10 milliards is, in my judgment, the best
one can make.

Twenty–six per cent of exports, valued at 6 milliards gold, will amount
to about 1½ milliard gold marks, making, with the fixed annual
payment of 2 milliards, 3½ milliards altogether. If exports rise to
10 milliards, the corresponding figure is 4½ milliards. The table
of payments in the near future is then as shown on the next page, all
the figures being in terms of milliards of gold marks. In the case of
payments after May 1, 1922, I give alternative estimates on the basis
of exports on the scale of 6 and 10 milliards respectively.

Not the whole of these sums need be paid in cash, and the value of
deliveries in kind is to be credited to Germany against them. This
item has been estimated as high as 1.2 to 1.4 milliard gold marks per
annum. The result will chiefly depend (1) on the amount and price of
the coal deliveries, and (2) on the degree of success which attends the
negotiations between France and Germany for the supply by the latter
of materials required for the repair of the devastated area. The value
of the coal deliveries depends on factors already discussed on p. 49,
above, the _price_ of the coal being chiefly governed by the internal
German price. At a price of 20 gold marks per ton and deliveries of
2,000,000 tons a month (neither of which figures are likely to be
exceeded, or even reached, in the near future), coal will yield credits
of .48 milliard gold marks. In the Loucheur–Rathenau Agreement[43] the
value of deliveries in kind to France, including coal, over the next
five years has been estimated at a possible total of 1.4 milliard gold
marks per annum. If France receives .4 milliard gold marks in coal, not
more than 35 per cent of the balance will be credited in the Reparation
account. If this were realized, the aggregate deliveries in kind might
approach 1 milliard. But, for various reasons, political and economic,
this figure is unlikely to be reached, and if as much as .75 milliards
per annum is realized from coal and reconstruction deliveries, this
ought to be considered a highly satisfactory result.

                │     1921─22    │  1922─23 and   │  1922─23 and
                │    (Exports    │  subsequently  │  subsequently
                │  4 Milliards). │    (Exports    │    (Exports
                │                │  6 Milliards). │ 10 Milliards).
  May 25       }│                │       .39      │       .65
  July 15      }│                │       .50      │       .50
  Aug. 15      }│      1.00      │       .39      │       .65
  Oct. 15      }│                │       .50      │       .50
  Nov. 15       │       .26      │       .39      │       .65
  Jan. 15       │       .50      │       .50      │       .50
  Feb. 15       │       .26      │       .39      │       .65
  April 15      │       .50      │       .50      │       .50
                │      ────      │      ────      │      ────
        Total   │      2.52      │      3.56      │      4.60
  Equivalent   }│                │                │
    in dollars }│                │                │
    at $1 = 4  }│  $630,000,000  │  $890,000,000  │ $1,150,000,000
    gold marks }│                │                │

Now the payments were so arranged as to present no insuperable
difficulties during 1921. The instalment of August 31, 1921 (which
did not exceed the sum which the Germans had themselves offered for
immediate payment in their counterproposal of April 1921) was duly
paid, partly out of foreign balances accumulated before May 1 last,
partly by selling out paper marks over the foreign exchanges, and
partly by temporary advances from an international group of bankers.
The instalment of November 15,1921, was covered by the value of
deliveries of coal and other material subsequent to May 1, 1921. Even
the instalments of January 15 and February 15, 1922, might be covered
out of further deliveries, temporary advances, and the foreign assets
of German industrialists, if the German Government could get hold of
them. But the payment of April 15, 1922, must present more difficulty;
whilst further instalments follow quickly on May 15, July 15, and
August 15. Some time between February and August 1922 Germany will
succumb to an inevitable default. This is the maximum extent of our
breathing space.[44]

That is to say, in so far as she depends for payment (as in the
long run she must do) on current income. If capital, non–recurrent
resources become available, the above conclusion will require
modification accordingly. Germany still has an important capital asset
untouched—the property of her nationals now sequestered in the hands
of the Enemy–Property Custodian in the United States, of which the
value is rather more than 1 milliard gold marks. If this were to become
available for Reparation, directly or indirectly, default could be
delayed correspondingly.[45] Similarly the grant to Germany of foreign
credits on a substantial scale, even three–months’ credits from bankers
on the security of the Reichsbank’s gold, would postpone the date a
little, however useless in the long run.

In reaching this conclusion, one can approach the problem from three
points of view: (1) the problem of paying outside Germany, that is
to say, the problem of exports and the balance of trade; (2) the
problem of providing for payment by taxation, that is to say, the
problem of the Budget; (3) the proportion of the sums demanded to the
German national income. I will take them in turn, confining myself to
what Germany can be expected to perform in the near future, to the
exclusion of what she might do in hypothetical circumstances many
years hence.

(1) In order that Germany may be able to make payments abroad, it is
necessary, not only that she should have exports, but that she should
have a surplus of exports over imports. In 1920, the last complete
year for which figures are available, so far from a surplus there was
a deficit, the exports being valued at about 5 milliard gold marks and
the imports at 5.4 milliards. The figures for 1921 so far available
indicate not an improvement but a deterioration. The myth that Germany
is carrying on a vast and increasing export trade is so widespread,
that the actual figures for the six months from May to October 1921,
converted into gold marks, may be given with advantage:

                      │   Million Paper │  Million Gold Marks.[46]
                      │       Marks.    │
                      │        │        │        │        │Excess
                      │Imports.│Exports.│Imports.│Exports.│  of
                      │        │        │        │        │Imports.
  1921, May           │   5,487│   4,512│   374.4│   307.9│    66.5
    ”   June          │   6,409│   5,433│   388.8│   329.7│    59.1
    ”   July          │   7,580│   6,208│   413.7│   338.7│    75.0
    ”   August        │   9,418│   6,684│   477.2│   334.8│   142.4
    ”   September     │  10,668│   7,519│   436.6│   307.7│   128.9
    ”   October[47]   │  13,900│   9,700│   352.6│   246.0│   106.6
  Total for six months│  53,462│  40,056│  2443.3│  1864.8│   578.5

In respect of these six months Germany must make a fixed payment of
1000 million gold marks plus 26 per cent of the exports as above,
namely 484.8 million gold marks, that is 1484.8 million gold marks
altogether, which is equal to about 80 per cent of her exports; whereas
apart from any Reparation payments, she had a _deficit_ on her foreign
trade at the rate of more than 1 milliard gold marks per annum. The
bulk of Germany’s imports are necessary either to her industries or
to the food supply of the country. It is therefore certain that with
exports of (say) 6 milliards she could not cut her imports so low as to
have the surplus of 3½ milliards, which would be necessary to meet
her Reparation liabilities. If, however, her exports were to rise to
10 milliards, her Reparation liabilities would become 4.6 milliards.
Germany, to meet her liabilities, must therefore raise the gold–value
of her exports to double what they were in 1920 and 1921 _without
increasing her imports at all_.

I do not say that this is impossible, given time and an overwhelming
motive, and with active assistance by the Allies to Germany’s export
industries; but does any one think it practicable or likely in the
actual circumstances of the case? And if Germany succeeded, would not
this vast expansion of exports, unbalanced by imports, be considered
by our manufacturers to be her crowning crime? That this should be
the case even under the London Settlement of 1921 is a measure of
the ludicrous folly of the figures given out in the British General
Election of 1918, which were six times as high again.

(2) Next there is the problem of the Budget. For Reparation payments
are a liability of the German _Government_ and must be covered by
taxation. At this point it is necessary to introduce an assumption as
to the relation between the gold mark and the paper mark. For whilst
the liability is fixed in terms of gold marks, the revenue (or the
bulk of it) is collected in terms of paper marks. The relation is a
very fluctuating one, best measured by the exchange value of the paper
mark in terms of American gold dollars. This fluctuation is of more
importance over short periods than in the long run. For in the long run
_all_ values in Germany, including the yield of taxation, will tend
to adjust themselves to an appreciation or depreciation in the value
of the paper mark outside Germany. But the process may be a very slow
one, and, over the period covered by a year’s budget, unanticipated
fluctuations in the ratio of the gold to the paper mark may upset
entirely the financial arrangements of the German Treasury.

This disturbance has of course occurred on an unprecedented scale
during the latter half of 1921. Taxation in terms of paper marks,
which was heavy when the dollar was worth 50 paper marks, becomes
very inadequate when the dollar is worth 200 paper marks; but it is
beyond the power of any Finance Minister to adjust taxation to such a
situation quickly. In the first place, when the fall in the external
value of the mark is proceeding rapidly, the corresponding fall in the
internal value lags far behind. Until this adjustment has taken place,
which may occupy a considerable time before it is complete, the taxable
capacity of the people, measured in gold, is less than it was before.
But even then a further interval must elapse before the gold–value of
the _yield_ of taxation collectible in paper marks can catch up. The
experience of the British Inland Revenue Department well shows that the
yield of direct taxation must largely depend on the taxable assessments
of the _previous_ period.

For these reasons the collapse of the mark exchange must, if it
persists, destroy beyond repair the Budget of 1921–22, and probably
that of the first half of 1922–23 also. But I should be overstating my
argument if I were to base my conclusions on the figures current at the
end of 1921. In the shifting sands in which the mark is foundering it
is difficult to find for one’s argument any secure foothold.

During the summer of 1921 the gold mark was worth, in round figures,
20 paper marks. The internal purchasing power of the paper mark for
the purposes of working–class consumption was still nearly double
its corresponding value abroad, so that one could scarcely say that
equilibrium had been established. Nevertheless, the position was very
well adjusted compared with what it has since become. As I write
(December 1921) the gold mark has been fluctuating between 45 and
60 paper marks, while the purchasing power of the paper mark inside
Germany is for general purposes perhaps three times what it is outside

Since my figures of Government revenue and expenditure are based on
statements made in the summer of 1921, perhaps my best course is to
take a figure of 20 paper marks to the gold mark. The effect of this
will be to understate my argument rather than the contrary. The reader
must remember that, if the mark remains at its present exchange value
long enough for internal values to adjust themselves to that rate, the
items in the following account, the income and the outgoings and the
deficit, will all tend to be multiplied threefold.

At this ratio (of 20 paper marks=1 gold mark), a Reparation liability
of 3½ milliard gold marks (assuming exports on the scale of 6
milliards) is equivalent to 70 milliard paper marks, and a liability
of 4½ milliards (assuming exports of 10 milliards) is equivalent
to 90 milliard paper marks. The German Budget for the financial year
April 1, 1921, to March 31, 1922, provided for an expenditure of
93.5 milliards, exclusive of Reparation payments, and for a revenue
of 59 milliards.[48] Thus the present Reparation demand would by
itself absorb more than the whole of the existing revenue. Doubtless
expenditure can be cut down, and revenue somewhat increased. But the
Budget will not cover even the lower scale of the Reparation payments
unless expenditure is halved and revenue doubled.[49]

If the German Budget for 1922–23 manages to balance, _apart_ from any
provision for Reparation, this will represent a great effort and a
considerable achievement. Apart, however, from the technical financial
difficulties, there is a political and social aspect of the question
which deserves attention here. The Allies deal with the established
German Government, make bargains with them, and look to them for
fulfilment. The Allies do not extract payment out of individual
Germans direct; they put pressure on the transitory abstraction called
Government, and leave it to this to determine and to enforce which
individuals are to pay, and how much. Since at the present time the
German Budget is far from balancing even if there were no Reparation
payments at all, it is fair to say that not even a beginning has yet
been made towards settling the problem of how the burden is to be
distributed between different classes and different interests.

Yet this problem is fundamental. Payment takes on a different aspect
when, instead of being expressed in terms of milliards and as a
liability of the transitory abstraction, it is translated into a
demand for a definite sum from a specific individual. This stage is not
yet reached, and until it is reached the full intrinsic difficulty will
not be felt. For at this stage the struggle ceases to be primarily one
between the Allies and the German Government and becomes a struggle
between different sections and classes of Germans. The struggle will
be bitter and violent, for it will present itself to each of the
contesting interests as an affair of life and death. The most powerful
influences and motives of self–interest and self–preservation will be
engaged. Conflicting conceptions of the end and nature of Society will
be ranged in conflict. A Government which makes a serious attempt to
cover its liabilities will inevitably fall from power.

(3) What relation do the demands bear to the third test of capacity,
the present income of the German people? A burden of 70 milliard paper
marks (if we may, provisionally, adopt that figure as the basis of our
calculations) amounts, since the population is now about 60 millions,
to 1170 marks per head for every man, woman, and child.

The great changes in money values have made it difficult, in all
countries, to obtain estimates of the national income in terms of money
under the new conditions. The Brussels Conference of 1920, on the basis
of inquiries made in 1919 and at the beginning of 1920, estimated the
German income per head at 3900 paper marks. This figure may have
been too low at the time, and, on account of the further depreciation
of the mark, is certainly too low now. A writer in the _Deutsche
Allgemeine Zeitung_ (Feb. 14, 1921), working on the statistics of
statutory deductions from wages and on income–tax, arrived at a figure
of 2333 marks per head. This figure also is likely to be too low,
partly because the statistics must mainly refer to earlier dates when
the mark was less depreciated, and partly because all such statistics
necessarily suffer from evasions. At the other extreme lies the
estimate of Dr. Albert Lansburgh, who, by implication (_Die Bank_,
March 1921), estimated the income per head at 6570 marks.[50] Another
recent estimate is that of Dr. Arthur Heichen in the _Pester Lloyd_
(June 5, 1921), who put the figure at 4450 marks. In a newspaper
article published in various quarters in August 1921 I ventured to
adopt the figure of 5000 marks as the nearest estimate I could make.
In fixing on this figure I was influenced by the above estimates, and
also by statistics as to the general level of salaries and wages. Since
then I have looked into the matter further and am still of the opinion
that this figure was high enough for that date.

I am fortified in this conclusion by the result of inquiries which I
addressed to Dr. Moritz Elsas of Frankfort–on–Main, on whose authority
I quote the following figures. The best–known estimate of the German
pre–war income is Helfferich’s in his _Deutschlands Volkswohlstand_
1888–1913. In this volume he put the national income in 1913 at 40–41
milliard gold marks, _plus_ 2½ milliards for net income from
nationalized concerns (railways, post office, etc.), that it is say,
an aggregate of 43 milliards or 642 marks per head. Starting from the
figure of 41 milliards (since the national services no longer produce
a profit) and deducting 15 per cent for loss of territory, we have a
figure of 34.85 milliards. What multiplier ought we to apply to this in
order to arrive at the present income in terms of paper marks? In 1920
commercial employees obtained on the average in terms of marks 4½
times their pre–war income, whilst at that time workmen had secured an
increase in their nominal wages of 50 per cent more than this, that is
to say, their wages were 6 to 8 times the pre–war figure. According
to the Statistischen Reichsamt (_Wirtschaft und Statistik_, Heft 4,
Jahrgang 1) commercial employees at the beginning of 1921 earned,
males 6⅔ times and females 10 times as much as in 1913.[51] On the
basis of the same proportion as in 1920 we arrive at an increase of
10 times in the nominal wages of workmen. The wages index number of
the _Frankfurter Zeitung_ for August 1921 estimates the wages per hour
at 11 times the pre–war level, but, as the number of working hours
has fallen from 10 to 8, these figures yield an increase of 8.8 times
in the wage actually received. Since the wages of male commercial
employees have increased less than this, since business profits in
terms of paper marks only reach this figure of increase in exceptional
cases, and since the income of the rentier, landlord, and professional
classes has increased in a far lower proportion, an estimate of an
8–fold increase in the nominal income of the country as a whole at
that date (August 1921) is likely to be an over–estimate rather than
an under–estimate. This leads to an aggregate national income, on the
basis of the Helfferich pre–war figures, of 278.80 milliard paper
marks, and to an income of 4647 marks per head in August 1921.

No allowance is made here for the loss by war of men in the prime
of life, for the loss of external income previously earned from
foreign investment and the mercantile marine, or for the increase of
officials. Against these omissions there may be set off the decrease of
the army and the increased number of women employees.

The extreme instability of economic conditions makes it almost
impossible to conduct a direct statistical inquiry into this problem
at the present time. In such circumstances the general method of Dr.
Elsas seems to me to be the best available. His results show that the
figure taken above is of the right general dimensions and is not likely
to be widely erroneous. It enables us, too, to put an upper limit of
reasonable possibility on our figures. No one, I think, would maintain
that in August 1921 nominal incomes in Germany averaged 10 times their
pre–war level; and 10 times Helfferich’s pre–war estimate comes to
6420 marks. _No_ statistics of national incomes are very precise, but
an assertion that in the middle of 1921 the German income per head per
annum lay between 4500 marks and 6500 marks, and that it was probably
much nearer the lower than the higher of these figures, say 5000 marks,
is about as near the truth as we shall get.

In view of the instability of the mark, it is, of course, the case
that such estimates do not hold good for any length of time and need
constant revision. Nevertheless this fact does not upset the following
calculation as much as might be supposed, because it operates to a
certain extent on both sides of the account. If the mark depreciates
further, the average income per head in paper marks will tend to rise;
but in this event the equivalent in paper marks of the Reparation
liability will, since it is expressed in terms of _gold_ marks, rise
also. A real alleviation can only result from a fall in the value of
_gold_ (_i.e._, a rise in world prices).

To the taxation in respect of the Reparation charge there must be added
the burden of Germany’s own government, central and local. By the most
extreme economies, short of repudiation of war loans and war pensions,
this burden could hardly be brought below 1000 paper marks per head (at
20 paper marks=1 gold mark), _i.e._, 60 milliards altogether, a figure
greatly below the present expenditure. In the aggregate, therefore,
2170 marks out of the average income of 5000 marks, or 43 per cent,
would go in taxation. If exports rise to 10 milliards (gold) and the
average income to 6000 paper marks, the corresponding figures are 2500
marks and 42 per cent.

There are circumstances in which a wealthy nation, impelled by
overwhelming motives of self–interest, might support this burden.
But the annual income of 5000 paper marks per head is equivalent in
exchange value (at an exchange of 20 paper marks to 1 gold mark) to
$62.50, and after deduction of taxation to about $35, that is to say
to less than 10 cents a day, which in August 1921 was the equivalent
in purchasing power in Germany of something between 20 cents and 25
cents in the United States.[52] If Germany was given a respite, her
income and with it her capacity would increase; but under her present
burdens, which render saving impossible, a degradation of standards is
more likely. Would the whips and scorpions of any Government recorded
in history have been efficient to extract nearly half their income from
a people so situated?

For these reasons I conclude that whilst the Settlement of London
granted a breathing space to the end of 1921, it can be no more
permanent than its predecessors.

                             EXCURSUS III

                        THE WIESBADEN AGREEMENT

In the summer of 1921 much interest was excited by reports of
confidential interviews between M. Loucheur and Herr Rathenau, the
Ministers of Reconstruction in France and Germany respectively. An
agreement was provisionally reached in August 1921 and was finally
signed at Wiesbaden on October 6, 1921[53]; but it does not come into
force until it has received the approval of the Reparation Commission.
This Commission, whilst approving the general principles underlying it,
have referred it to the principal Allied Governments on the ground that
it involves departures from the Treaty of Versailles beyond their own
competence to authorize. The British delegate, Sir John Bradbury, has
advised his Government that the Agreement should be approved subject
to certain modifications which he sets forth; and his Report has been

The Wiesbaden Agreement is a complicated document. But the essence of
it is easily explained. It falls into two distinct parts. First, it
sets up a procedure by which private French firms can acquire from
private German firms materials required for reconstruction in France,
without France having to make payment in cash. Secondly, it provides
that, whilst Germany is not to receive payment at once for any part
of these goods, only a proportion of the sum due is credited to her
immediately in the books of the Reparation Commission, the balance
being advanced by her to France for the time being and only brought
into the Reparation account at a later date.

The first set of provisions has met with unqualified approval from
every one. An arrangement which may possibly stimulate payment of
Reparation in the form of actual materials for the reconstruction
of the devastated districts satisfies convenience, economics, and
sentiment in a peculiarly direct way. But such supplies were already
arranged for under the Treaty, and the chief value of the new procedure
lies in its replacing the machinery of the Reparation Commission by
direct negotiation between the French and German authorities.[55]

The second set of provisions is, however, of a different character,
since it interferes with the existing agreements between the Allies
themselves as to the order and proportions in which each is to share
in the available receipts from Germany, and seeks to secure for
France a larger share of the earlier payments than she would receive
otherwise. A priority to France is, in my opinion, desirable; but such
priority should be accorded as part of a general re–settlement of
Reparation, in which Great Britain should waive her claim entirely.
Further, the Agreement involves an act of doubtful good faith on the
part of Germany. She has been protesting with great vehemence (and, I
believe, with perfect truth) that the Decisions of London exact from
her more than she can perform. But in such circumstances it is an act
of impropriety for her to enter voluntarily into an agreement which
must have the effect, if it is operative, of further increasing her
liabilities even beyond those against which she protests as impossible.
Herr Rathenau may justify his action by the arguments that this is a
first step towards replacing the Decisions of London by more sensible
arrangements, and also that, if he can placate Germany’s largest and
most urgent creditor in the shape of France, he has not much to fear
from the others. M. Loucheur, on the other hand, may know as well as I
do, though speaking otherwise, that the Decisions of London cannot be
carried out, and that the time for a more realistic policy is at hand;
he may even regard his interviews with Herr Rathenau as a foretaste of
more intimate relationships between business interests on the two sides
of the Rhine. But these considerations, if we were to pursue them,
would lead us to a different plane of argument.

Sir John Bradbury in his Report[56] on the Agreement to the British
Government has proposed certain modifications which would have the
effect of preserving the advantages of the first set of provisions,
but of nullifying the latter so far as they could operate to the
detriment of France’s Allies.

I consider, however, that exaggerated importance has been attached
to this topic, since the actual deliveries of goods made under the
Wiesbaden or similar agreements are not likely to be worth such large
sums of money as are spoken of. Deliveries of coal, dyestuffs, and
ships, dealt with in the Annexes to Part VIII. of the Treaty are
specifically excluded from the operation of the Wiesbaden Agreement
which is expressly limited to deliveries of plant and material, and
these France undertakes to apply _solely_ to the reconstitution of the
devastated regions. The quantities of goods, which French firms and
individuals will be ready to order from Germany at the full market
price, and which Germany can supply, for this limited purpose (so great
a part of the cost of which is necessarily due to _labor_ employed on
the spot and not to materials capable of being imported from Germany),
are not likely to amount, during the next five years, to a sum of money
which the other Allies need grudge France as a priority claim.

My other reserve relates to the supposed importance of the Wiesbaden
Agreement as a precedent for similar arrangements with the other
Allies, and raises the general issue of the utility of arrangements for
securing that Germany should pay in kind rather than in cash, for other
purposes than those of the devastated areas.

It is commonly believed that, if our demands on Germany are met by
her delivering to us not cash but particular commodities selected by
ourselves, we can thus avoid the competition of German products against
our own in the markets of the world, which must result if we compel her
to find foreign currency by selling goods abroad at whatever cut in
price may be necessary to market them.[57]

Most suggestions in favor of our being paid in kind are too vague to
be criticized. But they usually suffer from the confusion of supposing
that there is some advantage in our being paid directly in kind even in
the case of articles which Germany might be expected to export in any
case. For example, the Annexes to the Treaty which deal with deliveries
in kind chiefly relate to coal, dyestuffs, and ships. These certainly
do not satisfy the criterion of not competing with our own products;
and I see very little advantage, but on the other hand some loss and
inconvenience, in the Allies’ receiving these goods direct, instead of
Germany’s selling them in the best market and paying over the proceeds.
In the case of coal in particular, it would be much better if Germany
sold her output for cash in the best export markets, whether to France
and Belgium or to the neighboring neutrals, and then paid the cash
over to France and Belgium, than that coal should be delivered to the
Allies for which the latter may have no immediate use, or by transport
routes which are uneconomical, when neutrals need the coal and what the
Allies really require is the equivalent cash. In some cases the Allies
have re–sold the coal which Germany has delivered to them,—a procedure
which, in the case of an article for which freight charges cover so
large a proportion of the whole value, involves a preposterous waste.

If we try to stipulate the precise commodities in which Germany is to
pay us, we shall not secure from her so large a contribution, as if
we fix a reasonable sum which is within her capacity, and then leave
her to find the money as best she can. If, moreover, the sum fixed is
reasonable, the annual payments will not be so large, in proportion to
the total volume of international trade, that Great Britain need be
nervous lest the payments upset the normal equilibrium of her economic
life in any greater degree than is bound to result in any case from the
gradual economic recovery of so formidable a trade rival as pre–war

Whilst I make these observations in the interests of scientific
accuracy, I admit that projects, for insisting on payment in kind may
be very useful politically as a means of escaping out of our present
_impasse_. In practice the value of such deliveries would turn out to
be immensely less than the cash we are now demanding; but it may be
easier to substitute deliveries of materials in place of cash, which
will in practice result in a great abatement of our demands, than to
abate the latter in so many words. Moreover, protests, against leaving
Germany free to pay us in cash by selling goods how and where she can,
enlist on the side of revision all the latent Protectionist sentiment
which still abounds. If Germany were to make a strenuous effort to
pay us by exploiting the only method open to her, namely, by selling
as many goods as possible at low prices all over the world, it would
not be long before many minds would represent this effort as a plot to
ruin us; and persons of this way of thinking will be most easily won
over, if we describe a reduction in our demands, as a prohibition to
Germany against developing a nefarious competitive trade. Such a way
of expressing a desirable change of policy combines, with a basis of
truth, sufficient false doctrine to enable _The Times_, for example,
to recommend it in a leading article without feeling conscious of any
intellectual inconsistency; and it furnishes what so many people are
now looking for, namely, a pretext for behaving sensibly, without
having to suffer the indignity and inconvenience of thinking and
speaking so too. Heaven forbid that I should discourage them! It
is only too rarely that a good cause can summon to its assistance
arguments sufficiently mixed to insure success.

                              EXCURSUS IV

                           THE MARK EXCHANGE

The gold value of a country’s inconvertible paper money may fall,
either because the Government is spending more than it is raising by
loans and taxes and is meeting the balance by issuing paper money,
or because the country is under the obligation of paying increased
sums to foreigners for the purchase of investments or in discharge of
debts. Temporarily it may be affected by speculation, that is to say by
_anticipation_, whether well or ill founded, that one or other of the
above influences will operate shortly; but the influence of speculation
is generally much exaggerated, because of the immense effect which it
may exercise momentarily. Both influences can only operate through
the balance of debts, due for immediate payment, between the country
in question and the rest of the world: the liability to make payments
to foreigners operating on this directly; and the inflation of the
currency operating on it indirectly, either because the additional
paper money stimulates imports and retards exports, by increasing
local purchasing power at the existing level of values or because the
expectation that it will so act causes anticipatory speculation. The
expansion of the currency can have no effect whatever on the exchanges
until it reacts on imports and exports, or encourages speculation; and
as the latter cancels out, sooner or later, the effect of currency
expansion on the exchanges can only last by reacting on imports and

These principles can be applied without difficulty to the exchange
value of the mark since 1920. At first the various influences were
not all operating in the same direction. Currency inflation tended
to depreciate the mark; so did foreign investment by Germans (the
“flight from the mark”); but investment by foreigners in German Bonds
and German currency (an exact line between which and short–period
speculation it is not easy to draw) operated sharply in the other
direction. After the mark had fallen to such a level that more than
25 marks could be obtained for a dollar, numerous persons all over
the world formed the opinion that there would be a reaction some day
to the pre–war value, and that therefore a purchase of marks or mark
Bonds would be a good investment. This investment proceeded on so vast
a scale that it placed foreign currency at the disposal of Germany up
to an aggregate value which has been estimated at from $800,000,000
to $1,000,000,000. These resources enabled Germany, partially at
least, to replenish her food supplies and to restock her industries
with raw materials, requirements involving an excess of imports over
exports which could not otherwise have been paid for. In addition it
even enabled individual Germans to remove a part of their wealth from
Germany for investment in other countries.

Meanwhile currency inflation was proceeding. In the course of the year
1920 the note circulation of the Reichsbank approximately doubled,
whilst on balance the exchange value of the mark had deteriorated only
slightly as compared with the beginning of that year.

Moreover, up to the end of 1920 and even during the first quarter of
1921 Germany had made no cash payments for Reparation and had even
_received_ cash (under the Spa Agreement) for a considerable part of
her coal deliveries.

After the middle of 1921, however, the various influences, which up
to that time had partly balanced one another, began to work all in
one direction, that is to say, adversely to the value of the mark.
Currency inflation continued, and during 1921 the note circulation of
the Reichsbank was nearly trebled, bringing it up to nearly six times
what it had been two years earlier. Imports steadily exceeded exports
in value. Some foreign investors in marks began to take fright and,
so far from increasing their holdings, sought to diminish them. And
now at last the German Government was called on to make important cash
payments on Reparation account. Sales of marks from Germany, instead of
being absorbed by foreign investors, had now to be made in competition
with sales from these same investors. Naturally the mark collapsed. It
had to fall to a value at which new buyers would come forward or at
which sellers would hold off.[58]

There is no mystery here, nothing but what is easily explained. The
credence attached to stories of a “German plot” to depreciate the mark
wilfully is further evidence of the overwhelming popular ignorance of
the influences governing the exchanges, an ignorance already displayed,
to the great pecuniary advantage of Germany, by the international craze
to purchase mark notes.

In its later stages the collapse has been mainly due to the necessity
of paying money abroad in discharge of Reparation and in repaying
foreign investors in marks, with the result that the fall in the
external value of the mark has outstripped any figure which could be
justified merely as a consequence of the present degree of currency
inflation. Germany would require a much larger note issue than at
present, if German internal prices were to become adjusted to gold
prices at an exchange of more than 400 marks to the dollar.[1] If,
therefore, the other influences were to be removed, if, that is to
say, the Reparation demands were revised and foreign investors were to
take heart again, a sharp recovery might occur. On the other hand, a
serious attempt by Germany to meet the Reparation demands would cause
the expenditure of her Government to exceed its income by so great an
amount, that currency inflation and the internal price level would
catch up in due course the external depreciation in the mark.

In either event Germany is faced with an unfortunate prospect. If the
present exchange depreciation persists and the internal price level
becomes adjusted to it, the resulting redistribution of wealth between
different classes of the community will amount to a social catastrophe.
If, on the other hand, there is a recovery in the exchange, the
cessation of the existing artificial stimulus to industry and of the
Stock Exchange boom based on the depreciating mark may lead to a
financial catastrophe.[59] Those responsible for the financial policy
of Germany have a problem of incomparable difficulty in front of them.
Until the Reparation liability has been settled reasonably, it is
scarcely worth the while of any one to trouble his head about a problem
which is insoluble. When stabilization has become a practicable policy,
the wisest course will probably be to stabilize at whatever level
prices and trade seem most nearly adjusted to at that date.


[32] The preamble states that the settlement is “in accordance with
Article 233 of the Treaty of Versailles.” This Article prescribes
that the scheme of payments shall provide for the discharge of the
liabilities within _thirty_ years, any unpaid balance at the end of
this period being “postponed” or “handled otherwise.” In the actual
settlement, however, the initial limitation to thirty years has been

[33] This actual text is printed below in full, Appendix No. 7.

[34] It is not competent for a single Ally (_e.g._, Portugal) to claim
its share of the Bonds and market them at the best price obtainable.
Under the Treaty of Versailles Part VIII. Annex II. 13 (_b_) questions
relating to the marketing of these Bonds can only be settled by
_unanimous_ decision of the Reparation Commission.

[35] The Committee is to coöpt three representatives of neutrals when a
sufficient proportion of the Bonds to justify their representation has
been marketed on neutral Stock Exchanges.

[36] And it really is an adequate rejoinder to deputies like M.
Forgeot. If a partisan or a child wants a silly, harmful thing, it
may be better to meet him with a silly, harmless thing, than with
explanations he cannot understand. This is the traditional wisdom of
statesmen and nursemaids.

[37] The effect of this provision is discussed in _The Economic
Consequences of the Peace_, pp. 165–167.

[38] Cf. Baruch, _The Making of the Reparation and Economic Sections of
the Treaty_, p. 46; and Lamont, _What Really Happened at Paris_, p. 275.

[39] Assuming exports of 10 milliards, which is double the actual
figure of 1920.

[40] _The Truth about the Treaty_, p. 305.

[41] Exports for the six months May–October 1921 were valued at about
40 milliard paper marks (exclusive, I think, of deliveries of coal
and payments in kind to the Allies), as against imports valued at 53
milliard paper marks. If the monthly export figures are converted into
gold marks at the average exchange of the month, the exports for the
six months work out at about 1865 million gold marks, or at the rate of
rather less than 4 milliard gold marks per annum.

[42] In _The Economic Consequences of the Peace_, p. 203, I expressly
premised that my estimates were based on a value of money not widely
different from that existing at the date at which I wrote. Since then
prices have risen and fallen back again. The same proviso is necessary
in the case of the present estimates. It would have been more practical
if, in fixing Germany’s liability in terms of money for a long period
of years, some provision had been made for adjusting the real burden in
accordance with fluctuations in the value of money during the period of

[43] See Excursus III.

[44] I first published this prediction in August 1921. As this book
goes to press, the German Government have notified the Reparation
Commission (December 15, 1921) that, having failed in their attempt to
secure a foreign loan, they cannot find, apart from deliveries in kind,
more than 150 or 200 million gold marks towards the instalments of
January and February, 1922.

[45] The United States has the right to retain and liquidate all
property, rights, and interests belonging to German nationals and
lying within the territories, colonies, and possessions of the United
States on January 10, 1920. The proceeds of such liquidation are at
the disposal of the United States “in accordance with its laws and
regulations,” that is to say, at the disposal of Congress within the
limitations of the Constitution, and may be applied by them in any of
the three following ways: (1) the assets in question may be returned to
their original German owners; (2) they may be applied to the discharge
of claims by United States nationals with regard to their property,
rights, and interests in German territory, or debts owing to them by
German nationals, or to the payment of claims growing out of acts of
the German Government after the United States entered the war, and also
to the discharge of similar American claims in respect of those of
Germany’s Allies against whom the United States was at war; (3) they
may be turned over to the Reparation Commission as a credit to Germany
under this head.

[46] The rates for conversion of paper marks into gold marks have been
taken as follows: Number of paper marks per 100 gold marks in May,
1465.5; June, 1647.9; July, 1832; August, 1996.4; September, 2443.2;
October, 3942.6

[47] Provisional figures.

[48] The ordinary revenue and expenditure were estimated to balance
at 48.48 milliard paper marks. The extraordinary expenditure was
estimated at 59.68 milliards, making a total expenditure of 108.16
milliards. Included in this, however, were 14.6 milliards for various
Reparation items. These are in respect of various pre–May 1, 1921,
items and do not allow for payments under the London Settlement; but to
avoid confusion I have deducted these from the estimate of expenditure
as stated above. The extraordinary revenue was estimated at 10.5
milliards, making a total revenue of 58.98 milliards.

[49] I have allowed nothing so far for the costs of the Armies of
Occupation, which, under the letter of the Treaty, Germany is under
obligation to pay in addition to the sums due for Reparation proper.
As these charges rank in priority ahead of Reparation, and as the
London Agreement does not deal with them, I think Germany is liable to
be called on to pay these as they accrue in addition to the annuities
fixed in the London Settlement. But I am doubtful whether the Allies
intend in fact to demand this. Hitherto the expense of the Armies has
been so great as to absorb virtually the whole of the receipts (see
Excursus V. below), having amounted by the middle of 1921 to about
$1,000,000,000. In any case, it is now time that the agreement, signed
at Paris in 1919 by Clemenceau, Lloyd George, and Wilson, should be
brought into force, to the effect that the sum payable annually by
Germany to cover the cost of occupation shall be limited to 240 million
gold marks as soon as the Allies “are convinced that the conditions
of disarmament by Germany are being satisfactorily fulfilled.” If we
assume that this reduced figure is brought into force, as it ought to
be, the total burden on Germany for Separation and Occupation comes, on
the assumption of the lower figure for exports, to 3.8 milliard gold
marks, that is, to 76 milliard paper marks.

[50] “This estimate is based on an average wage of about 800 paper
marks monthly for male, and about 400 paper marks monthly for female,
employees.” Converting these figures at the rate of 12 paper marks
equal to 1 gold mark, he arrived at an aggregate national income
between 30 and 34 milliard gold marks. It is not easy to see how these
wage estimates, even assuming their correctness, can lead to so high an
aggregate figure.

[51] There are twice as many male commercial employees as there are

[52] For a full examination of the purchasing power of the paper mark
inside Germany, see an article by M. Elsas in the _Economic Journal_,
September 1921.

[53] A summary of this Agreement and other papers relating to it are
given in the Appendix No. 8.

[54] See Appendix No. 8.

[55] Incidentally the Wiesbaden Agreement sets up a fairer procedure
for fixing the prices of supplies in kind than that contemplated in
the Treaty. According to the Treaty the prices are fixed at the sole
discretion of the Reparation Commission. In the Wiesbaden Agreement
this duty is assigned to an Arbitral Commission consisting of a German
representative, a French representative, and an impartial third who are
to fix the prices, broadly speaking, on the basis of price existing in
France in each quarterly period subject to this price being not more
than 5 per cent below the German price.

[56] See Appendix No. 8.

[57] I return to the theoretical aspects of this question in Chapter VI.

[58] Any one, who can fully persuade himself of the unalterable truth
of the proposition that _every day_ the sales of exchange must exactly
equal the purchases, will have gone a long way towards understanding
the secret of the exchanges.

[59] Furthermore, every improvement in the value of the mark increases
the real burden of what Germany owes to foreign holders of marks and
also the real burden of the Public Debt on the Exchequer. A rate of
exchange exceeding 400 marks to the dollar has at least this advantage
that it has reduced these two burdens to very moderate dimensions.

                              CHAPTER IV

                          THE REPARATION BILL

The Treaty of Versailles specified the classes of damage in respect
of which Germany was to pay Reparation. It made no attempt to assess
the amount of this damage. This duty was assigned to the Reparation
Commission, who were instructed to notify their assessment to the
German Government on or before May 1, 1921.

An attempt was made during the Peace Conference to agree to a figure
there and then for insertion in the Treaty. The American delegates in
particular favored this course. But an agreement could not be reached.
There was no reasonable figure which was not seriously inadequate
to popular expectations in France and the British Empire.[60] The
highest figure to which the Americans would agree, namely, 140 milliard
gold marks, was, as we shall see later, not much above the eventual
assessment of the Reparation Commission; the lowest figure to which
France and Great Britain would agree, namely, 180 milliard gold marks,
was, as it has turned out, much above the amount to which they were
entitled even under their own categories of claim.[61]

Between the date of the Treaty and the announcement of its decision
by the Reparation Commission, there was much controversy as to what
this amount should be. I propose to review some of the details of
this problem, because, if men are in any way actuated by veracity in
international affairs, a just opinion about it is still relevant to the
Reparation problem.

The main contentions of _The Economic Consequences of the Peace_
were these: (1) that the claims against Germany which the Allies
were contemplating were impossible of payment; (2) that the economic
solidarity of Europe was so close that the attempt to enforce these
claims might ruin every one; (3) that the money cost of the damage
done by the enemy in France and Belgium had been exaggerated; (4) that
the inclusion of pensions and allowances in our claims was a breach of
faith; and (5) that our legitimate claim against Germany was within her
capacity to pay.

I have made some supplementary observations about (1) and (2) in
Chapters III. and VI. I deal with (3) here and in Chapter V. with (4).
These latter are still important. For, whilst time is so dealing with
(1) and (2) that very few people now dispute them, the amount of our
legitimate claim against Germany has not been brought into so sharp a
focus by the pressure of events. Yet if my contention about this can
be substantiated, the world will find it easier to arrange a practical
settlement. The claims of justice in this connection are generally
thought to be opposed to those of possibility, so that even if the
pressure of events drives us reluctantly to admit that the latter must
prevail, the former will rest unsatisfied. If, on the other hand,
restricting ourselves to the devastations in France and Belgium, we
can demonstrate that it is within the capacity of Germany to make full
reparation, a harmony of sentiment and action can be established.

With this end in view it is necessary that I should take up again,
in the light of the fuller information now available, the statements
which I made in _The Economic Consequences of the Peace_ (p. 120) to
the effect that “the amount of the material damage done in the invaded
districts has been the subject of enormous, if natural, exaggeration.”
These statements have involved me in a charge, with which Frenchmen
as eminent as M. Clemenceau[62] and M. Poincaré have associated
themselves, that I was actuated not by the truth but by a supposed
hostility to France in speaking thus of the allegations of M. Klotz and
M. Loucheur and some other Frenchmen. But I still urge on France that
her cause may be served by accuracy and the avoidance of overstatement;
that the damage she has suffered is more likely to be made good if
the amount is possible than if it is impossible; and that, the more
moderate her claims are, the more likely she is to win the support of
the world in securing priority for them. M. Brenier, in particular, has
conducted a widespread propaganda with the object of creating prejudice
against my statistics. Yet to add a large number of noughts at the
end of an estimate is not really an indication of nobility of mind.
Nor, in the long run, are those persons good advocates of France’s
cause who bring her name into contempt and her sincerity into doubt by
using figures wildly. We shall never get to work with the restoration
of Europe unless we can bring not only experts, but the public, to
consider coolly what material damage France has suffered and what
material resources of reparation Germany commands. _The Times_, in a
leading article which accompanied some articles by M. Brenier (December
4, 1920), wrote with an air of noble contempt—“Mr. Keynes treats their
losses as matter for statistics.” But chaos and poverty will continue
as long as we insist on treating statistics as an emotional barometer
and as a convenient vehicle of sentiment. In the following examination
of figures let us agree that we are employing them to measure facts and
not as a literary expression of love or hate.

Leaving on one side for the present the items of pensions and
allowances and loans to Belgium, let us examine the data relating
to the material damage in Northern France. The claims made by the
French Government did not vary very much from the spring of 1919, when
the Peace Conference was sitting, down to the spring of 1921, when
the Reparation Commission was deciding its assessment, though the
fluctuations in the value of the franc over that period cause some
confusion. Early in 1919 M. Dubois, speaking on behalf of the Budget
Commission of the Chamber, gave the figure of 65 milliard francs “as a
minimum,” and on February 17, 1919, M. Loucheur, speaking before the
Senate as Minister of Industrial Reconstruction, estimated the cost at
75 milliards at the prices then prevailing. On September 5, 1919, M.
Klotz, addressing the Chamber as Minister of Finance, put the total
French claims for damage to property (presumably inclusive of losses
at sea, etc.) at 134 milliards. In July 1920 M. Dubois, by that time
President of the Reparation Commission, in a Report for the Brussels
and Spa Conferences, put the figure at 62 milliards on the basis of
pre–war prices.[63] In January 1921 M. Doumer, speaking as Finance
Minister, put the figure at 110 milliards. The actual claim which the
French Government submitted to the Reparation Commission in April 1921
was for 127 milliard paper francs at current prices.[64] By that time
the exchange value of the franc, and also its purchasing power, had
considerably depreciated, and, allowing for this, there is not so great
a discrepancy as appears at first sight between the above estimates.

For the assessment of the Reparation Commission it was necessary to
convert this claim from paper francs into gold marks. The rate to be
adopted for this purpose was the subject of acute controversy. On the
basis of the actual rate of exchange prevailing at that date (April
1921) the gold mark was worth about 3.25 paper francs. The French
representatives claimed that this depreciation was temporary and
that a permanent settlement ought not to be based on it. They asked,
therefore, for a rate of about frs. 1.50 or frs. 1.75 to the gold
mark.[65] The question was eventually submitted to the arbitration of
Mr. Boyden, the American member of the Reparation Commission, who,
like most arbitrators, took a middle course and decided that 2.20
paper francs should be deemed equivalent to 1 gold mark.[66] He would
probably have found it difficult to give a reason for this decision.
As regards that part of the claim which was in respect of pensions, a
forecast of the gold value of the franc, however impracticable, was
relevant. But as regards that part which was in respect of material
damage, no such adjustment was necessary[67]; for the French claim had
been drawn up on the basis of the current costs of reconstruction, the
gold equivalent of which need not be expected to rise with an increase
in the gold value of the franc, an improvement in the exchange being
balanced sooner or later by a fall in franc prices. It might have been
proper to make allowance for any premium existing, at the date of the
assessment, on the internal purchasing power of the franc over that of
its external exchange–equivalent in gold. But in April 1921 the franc
was not far from its proper “purchasing power parity,” and I calculate
that on this basis it would have been approximately accurate to have
equated the gold mark with 3 paper francs. The rate of 2.20 had the
effect, therefore, of inflating the French claim against Germany very

At this rate the claim of 127 milliard paper francs for material damage
was equivalent to 57.7 milliard gold marks, of which the chief items
were as follows:

                        │Francs (paper),│Marks (Gold),
                        │   millions.   │  millions.
  Industrial damages    │    38,882     │    17,673
  Damage to houses      │    36,892     │    16,768
  Furniture and fittings│    25,119     │    11,417
  Unbuilt-on land       │    21,671     │     9,850
  State property        │     1,958     │       890
  Public works          │     2,583     │     1,174
      Total             │   127,105     │    57,772

This total is one which I believe to be a vast, indeed a fantastic,
exaggeration beyond anything which it would be possible to justify
under cross–examination. At the date when I wrote _The Economic
Consequences of the Peace_, exact statistics as to the damage done were
not available, and it was only possible to fix a maximum limit to a
reasonable claim, having regard to the pre–war wealth of the invaded
districts. Now, however, much more detail is available with which to
check the claim.

The following particulars are quoted from a statement made by M. Briand
in the French Senate on April 6, 1921, supplemented by an official
memorandum published a few days later, and represent the position at
about that date:[68]

(1) The population inhabiting the devastated districts in April 1921
was 4,100,000, as compared with 4,700,000 in 1914.

(2) Of the cultivable land 95 per cent of the surface had been
releveled and 90 per cent had been plowed and was producing crops.

(3) 293,733 houses were totally destroyed, in replacement of which
132,000 provisional dwellings of different kinds had been erected.

(4) 296,502 houses were partially destroyed, of which 281,300 had been

(5) Fifty per cent of the factories were again working.

(6) Out of 2404 kilometers of railway destroyed, practically the whole
had been reconstructed.

It seems, therefore, that, apart from refurnishing and from the
rebuilding of houses and factories, the greater part of which had
still to be accomplished, the bulk of the devastation was already made
good out of the daily labor of France within two years of the Peace
Conference, before Germany had paid anything.

This is a great achievement,—one more demonstration of the riches
accruing to France from the patient industry of peasants, which makes
her one of the rich countries of the world, in spite of the corrupt
Parisian finance which for a generation past has wasted the savings
of her investors. When we look at Northern France we see what honest
Frenchmen can accomplish.[69] But when we turn to the money claims
which are based on this, we are back in the atmosphere of Parisian
finance,—so grasping, faithless, and extravagantly unveracious as to
defeat in the end its own objects.

For let us compare some of these items of devastation with the claims

(1) 293,733 houses were totally destroyed and 296,502 were partially
destroyed. Since nearly all the latter have been repaired, we shall
not be underestimating the damage in assuming, for the purposes of a
rough comparison, that, on the average, the damaged houses were _half_
destroyed, which gives us altogether the equivalent of 442,000 houses
totally destroyed. Turning back, we find that the French Government’s
claim for damage to houses was 16,768 million gold marks, that is to
say $4,192,000,000. Dividing this sum by the number of houses, we find
an average claim of $9,480, per house![70] This is a claim for what
were chiefly peasants’ and miners’ cottages and the tenements of small
country towns. M. Tardieu has quoted M. Loucheur as saying that the
houses in the Lens–Courrières district were worth 5000 francs ($1000)
a–piece before the war, but would cost 15,000 francs to rebuild after
the war, which sounds not at all unreasonable. In April 1921 the cost
of building construction in Paris (which had been a good deal higher
some months before) was estimated to be, in terms of paper francs,
three and a half times the pre–war figure.[71] But even if we take the
cost in francs at five times the pre–war figure, namely 25,000 paper
francs per house, the claim lodged by the French Government is still
three and a half times the truth. I fancy that the discrepancy, here
and also under other heads, may be partly explained by the inclusion
in the official French claim of indirect damages, namely, for loss of
rent—_perte de loyer_. It does not appear what attitude the Reparation
Commission took up towards _indirect_ pecuniary and business losses
arising in the devastated districts out of the war. But I do not think
that such claims are admissible under the Treaty. Such losses, real
though they were, were not essentially different from analogous losses
occurring in other areas, and indeed throughout the territory of the
Allies. The maximum claim, however, on this head would not go far
towards justifying the above figure, and we can allow a considerable
margin of error for such additional items without impairing the
conclusion that the claim is exaggerated. In _The Economic Consequences
of the Peace_ (p. 127) I estimated that $1,250,000,000 might be a fair
estimate for damage to house property; and I still think that this was
about right.

(2) This claim for damage to houses is exclusive of furniture and
fittings, which are the subject of a separate claim, namely, for 11,417
million gold marks, or about $2,850,000,000. To check this figure let
us assume that the whole of the furniture and fittings were destroyed,
not only where the houses were destroyed, but also in every case where
a house was damaged. This is an overstatement, but we may set it off
against the fact that in a good many cases the furniture may have been
looted and not recovered by restitution (a large amount has, in fact,
been recovered in this way), although the structure of the house was
not damaged at all. The total number of houses damaged or destroyed
was 590,000. Dividing this into $2,850,000,000, we have an average of
nearly $5,000 per house—an average valuation of the furniture and
fittings in each peasant’s or collier’s house of nearly $5,000! I
hesitate to guess how great an overstatement shows itself here.

(3) The largest claim of all, however, is for “industrial damages,”
namely, 17,673 million gold marks, or about $4,400,000,000. In 1919 M.
Loucheur estimated the cost of reconstruction of the coal mines at 2000
million francs, that is $400,000,000 at the par of exchange.[72] As
the pre–war value of all the coal mines in Great Britain was estimated
at only $650,000,000, and as the pre–war output of the British mines
was fifteen times that of the invaded districts of France, this figure
seems high.[73] But even if we accept it, there is still four thousand
million dollars to account for. The great textile industries of Lille
and Roubaix were robbed of their raw material, but their plant was not
seriously injured, as is shown by the fact that in 1920 the woolen
industry of these districts was already employing 93.8 per cent and the
cotton industry 78.8 per cent of their pre–war personnel. At Tourcoing
55 factories out of 57 were in operation, and at Roubaix 46 out of

Altogether 11,500 industrial establishments are said to have been
interfered with, but this includes every village workshop, and about
three–quarters of them employed less than 20 persons. Half of them were
at work again by the spring of 1921. What is the average claim made on
their behalf? Deducting the coal mines as above and dividing the total
claim by 11,500, we reach an average figure of nearly $35,000. The
exaggeration seems _prima facie_ on as high a scale as in the case of
houses and furniture.

(4) The remaining item of importance is for unbuilt–on land. The
claim under this head is for 9850 million gold marks, or about
$2,460,000,000. M. Tardieu (_op. cit._, p. 347) quotes Mr. Lloyd
George as follows, in the course of a discussion during the Peace
Conference in which he was pointing out the excessive character of
the French claims: “If you had to spend the money which you ask for
the reconstruction of the devastated regions of the North of France,
I assert that you could not manage to spend it. Besides, the land is
still there. Although it has been badly upheaved in parts, it has not
disappeared. Even if you put the Chemin des Dames up to auction, you
would find buyers.” Mr. Lloyd George’s view has been justified by
events. In April 1921 the French Prime Minister was able to tell his
Senate that 95 per cent of the cultivable land had been releveled and
that 90 per cent had been plowed and was producing crops. Some go so
far as to maintain that the fertility of the soil has been actually
improved by the disturbance of its surface and by its lying fallow
for several years. But apart from its having proved easier than was
anticipated to make good this category of damage, the total cultivated
area (excluding woodland) of the whole of the eleven Departments
affected was about 6,650,000 acres, of which 270,000 acres were in the
“zone of destruction,” 2,000,000 acres in the “zone of trenches and
bombardment,” and 4,200,000 acres in the “zone of simple occupation.”
The claim, therefore, averaged _over the whole area_, works out at
about $370 per acre and, averaged over the first two categories above,
at more than $1000 per acre. This claim, though it is described as
being in respect of unbuilt–on land, probably includes farm buildings
(other than houses), implements, live stock, and the growing crops of
August 1914. As experience has proved that the permanent qualities of
the land have only been seriously impaired over a small area, these
latter items should probably constitute the major part of the claim.
We have also to allow for destruction of woodlands. But even with high
estimates for each of these items, I do not see how we could reach a
total above a third of the amount actually claimed.

These arguments are not exact, but they are sufficiently so to
demonstrate that the claim sent in to the Reparation Commission is
untenable. I believe that it is at least four times the truth. But
it is possible that I have overlooked some items of claim, and it is
better in discussions of this kind to leave a wide margin for possible
error. I assert, therefore, that on the average the claim is not less
than two or three times the truth.

I have spent much time over the French claim, because it is the
largest, and because more particulars are available about it than
about the claims of the other Allies. On the face of it, the Belgian
claim is open to the same criticism as the French. But in this claim a
larger part is played by levies on the civilian population and personal
injuries to civilians. The material damage, however, was on a very
much smaller scale than in France. Belgian industry is already working
at its pre–war efficiency, and the amount of reconstruction still to
be made good is not on a great scale. The Belgian Minister for Home
Affairs stated in Parliament in February 1920 that at the date of the
Armistice 80,000 houses and 1100 public buildings had been destroyed.
This suggests that the Belgian claim on this head ought to be about a
quarter of the French claim; but in view of the greater wealth of the
invaded districts of France, the Belgian loss is probably decidedly
less than a quarter of the French loss. The claim, actually submitted
by Belgium, for property, shipping, civilians and prisoners (that is to
say, the aggregate claim apart from pensions and allowances) amounted
to 34,254 million Belgian francs. Inasmuch as the Belgian Ministry of
Finance, in an official survey published in 1913, estimate the entire
wealth of the country at 29,525 million Belgian francs, it is evident
that, even allowing for the diminished value of the Belgian franc,
which is our measuring rod, this claim is very grossly excessive. I
should guess that the degree of exaggeration is quite as great as in
the case of France.

The British Empire claim is, apart from pensions and allowances, almost
entirely in respect of shipping losses. The tonnage lost and damaged
is definitely known. The value of the cargoes carried is a matter of
difficult guesswork. On the basis of an average of $150 for the hull
and $200 for the cargo per gross ton lost, I estimated the claim in
_The Economic Consequences of the Peace_ (p. 132) at $2,700,000,000.
The actual claim lodged was for $3,835,000,000. Much depends on the
date at which the cost of replacement is calculated. Most of the
tonnage was in fact replaced out of vessels the building of which
commenced before the end of the war or shortly afterwards, and thus
cost a much higher price than prevailed in, _e.g._, 1921. But even so
the claim lodged is very high. It seems to be based on an estimate of
$500 per gross ton lost for hull and cargo together, any excess in this
being set off against the fact that no separate allowance is made for
vessels damaged or molested, but not sunk. This figure is the highest
for which any sort of plausible argument could be adduced, rather than
a judicial estimate. I adhere to the estimate which I gave in _The
Economic Consequences of the Peace_.

I forbear to examine the claims of the other Allies. The details, so
far as they have been published, are given in Appendix No. 3.

The observations made above relate to the claims for material damage
and do not bear on those for pensions and allowances, which are,
nevertheless, a very large item. These latter are to be calculated,
according to the Treaty, in the case of pensions “as being the
capitalized cost at the date of coming into force of the Treaty, on the
basis of the scales in force in France at such date,” and in the case
of allowances made during hostilities to the dependents of mobilized
persons “on the basis of the average scale for such payments in force
in France” during each year. That is to say, the French Army scale is
to be applied all round; and the result, given the numbers affected,
should be a calculable figure, in which there should be little room
for serious error. The actual claims were as follows in milliard gold

                   Milliard marks

  France                 33
  British Empire         37
  Italy                  17
  Belgium                 1
  Japan                   1
  Roumania                4

This does not include Serbia, for which a separate figure is not
available, or the United States. The total would work out, therefore,
at about 100 milliard gold marks.[76]

What does the aggregate of the claims work out at under all heads,
and what relation does this total bear to the final assessment of
the Reparation Commission? As the claims are stated in a variety of
national currencies, it is not quite a simple matter to reach a total.
In the following table French francs are converted into gold marks at
2.20 (the rate adopted by the Commission as explained above), sterling
approximately at par (on the analogy of the rate for francs), Belgian
francs at the same rate as French francs, Italian lire at twice this
rate, Serbian dinars at four times this rate, and Japanese yen at par.

                         Milliard marks

  France                       99
  British Empire               54
  Italy                        27
  Belgium                      16½
  Japan                         1½
  Jugo–Slavia                   9½
  Roumania                     14
  Greece                        2

There are omitted from this table Poland and Czecho–Slovakia, of
which the claims are probably inadmissible, the United States, which
submitted no claim, and certain minor claimants shown in Appendix No. 3.

In round figures, therefore, we may put the claims as lodged before the
Reparations Commission at about 225 milliard gold marks, of which 95
milliards was in respect of pensions and allowances, and 130 milliards
for claims under other heads.

The Reparation Commission in announcing its decision did not
particularize as between different claimants or as between different
heads of claim, and merely stated a lump sum figure. Their figure was
132 milliards; that is to say, about 58 per cent of the sums claimed.
This decision was in no way concerned with Germany’s capacity to pay,
and was simply an assessment, intended to be judicial, as to the sum
justly due under the heads of claim established by the Treaty of

The decision was unanimous, but only in face of sharp differences of
opinion. It is not suitable or in accordance with decency to set up a
body of interested representatives to give a judicial decision in their
own case. This arrangement was an offspring of the assumption which
runs through the Treaty that the Allies are incapable of doing wrong,
or even of partiality.

Nothing has been published in England about the discussions which led
up to this conclusion. But M. Poincaré, at one time President of the
Reparation Commission and presumably well–informed about its affairs,
has lifted a corner of the veil in an article published in the _Revue
des Deux Mondes_ for May 15, 1921. He there divulges the fact that
the final result was a compromise between the French and the British
representatives, the latter of whom endeavored to fix the figure at
104 milliards, and defended this adjudication with skilful and even
passionate advocacy.[77]

When the decision of the Reparation Commission was first announced,
and was found to abate so largely the claims lodged with it, I hailed
it, led away a little perhaps by its very close agreement with my own
predictions, as a great triumph for justice in international affairs.
So, in a measure, I still think it. The Reparation Commission went a
considerable way in disavowing the veracity of the claims of the Allied
Governments. Indeed, their reduction of the claims for items other than
pensions and allowances must have been very great since the claims for
pensions, being capable of more or less exact calculation,[78] can
hardly have been subject to an initial error of anything approaching
42 per cent. If, for example, they reduced the claim for pensions and
allowances from 95 to 80 milliards, they must have reduced the other
claims from 130 milliards to 52 milliards, that is to say, by 60 per
cent. Yet even so, on the data now available, I do not believe that
their adjudication could be maintained before an impartial tribunal.
The figure of 104 milliards, attributed by M. Poincaré to Sir John
Bradbury, is probably the nearest we shall get to a strictly impartial

To complete our summary of the facts two particulars must be added.
(1) The total, as assessed by the Reparation Commission, comprehends
the total claim against Germany _and her Allies_. It includes, that
is to say, the damage done by the armies of Austria–Hungary, Turkey,
and Bulgaria, as well as by those of Germany. Payments, if any, made
by Germany’s Allies must, presumably, be deducted from the sum due.
But Annex I. of the Reparation Chapter of the Treaty of Versailles
is so drafted as to render Germany liable for the whole amount. (2)
This total is exclusive of the sum due under the Treaty for the
reimbursement of sums lent to Belgium by her Allies during the war. At
the date of the London Agreement (May 1921) Germany’s liability under
this head was provisionally estimated at 3 milliard gold marks. But it
had not then been decided at what rate these loans, which were made in
terms of dollars, sterling, and francs, should be converted into gold
marks. The question was referred for arbitration to Mr. Boyden, the
United States Delegate on the Reparation Commission, and at the end of
September 1921 he announced his decision to the effect that the rate of
conversion should be based on the rate of exchange prevailing at the
date of the Armistice. Including interest at 5 per cent, as provided by
the Treaty, I estimate that this liability amounts at the end of 1921
to about 6 milliard gold marks, of which slightly more than a third is
due to Great Britain and slightly less than a third each to France and
the United States respectively.

I take, therefore, as my final conclusion that the best available
estimate of the sum due from Germany, under the strict letter of
the Treaty of Versailles, is 110 milliard gold marks, which may be
divided between the main categories of claim in the proportions—74
milliards for pensions and allowances, 30 milliards for direct damage
to the property and persons of civilians, and 6 milliards for war debt
incurred by Belgium.

This total is more than Germany can pay. But the claim exclusive of
pensions and allowances should be within her capacity. The inclusion of
a demand for pensions and allowances was the subject of a long struggle
and a bitter controversy in Paris. I have argued that those were right
who maintained that this demand was inconsistent with the terms on
which Germany surrendered at the Armistice. I return to this subject in
the next chapter.

                              EXCURSUS V


The provision in the Treaty of Versailles that Germany, subject to
certain deductions, was to pay $5000 millions (gold) before May
1, 1921, was so remarkably wide of facts and possibilities, that
for some time past no one has said much about this offspring of the
unimaginative imaginations of Paris. As it was totally abandoned by the
London Agreement of May 5, 1921, there is no need to return to what is
an obsolete controversy. But it is interesting to record what payments
Germany did actually effect during the transitional period.

The following details are from a statement published by the British
Treasury in August 1921:


                                                        Gold Marks.

  Receipts in cash                                       99,334,000
  Deliveries in kind:
    Ships                                               270,331,000
    Coal                                                437,160,000
    Dyestuffs                                            36,823,000
    Other deliveries                                    937,040,000

  Immovable property and assets not yet encashed      2,754,104,000
                                                 say $1,130,000,000

The immovable property consists chiefly of the Saar coalfields
surrendered to France, State property in Schleswig surrendered to
Denmark, and State property (with certain exceptions) in the territory
transferred to Poland.

The whole of the cash, two–thirds of the ships, and a quarter of
the dyestuffs accrued to Great Britain. A share of the ships and
dyestuffs, the Saar coalfields, the bulk of the coal and of the “other
deliveries,” including valuable materials left behind by the German
Army, accrued to France. Some ships, a proportion of the coal and other
deliveries, and the compensation, payable by Denmark in respect of
Schleswig, fell to Belgium. Italy obtained a portion of the coal and
ships and some other trifles. The value of German State property in
Poland could not be transferred to any one but Poland.

But the sums thus received were not available for Reparation. There had
to be deducted from them (1) the sums returned to Germany under the Spa
Agreement, namely 360,000,000 gold marks,[79] and (2) the costs of the
Armies of Occupation.

In September 1921 the Reparation Commission published an approximate
estimate, as follows, of the cost of occupation of German territory by
the Allied Armies from the Armistice until May 1, 1921:

                 │                     │   Cost per man
                 │       Total cost.   │     per day.
  United States  │      $278,067,610   │       $4.50
  Great Britain  │      £52,881,298    │        14s.
  France         │  Frs. 2,304,850,470 │    Frs. 15.25
  Belgium        │   Frs. 378,731,390  │    Frs. 16.50
  Italy          │    Frs. 15,207,717  │     Frs. 22

The conversion of these sums into gold marks raises the usual
controversy as to the rates at which conversion is to be effected.
The total was estimated, however, at three milliard gold marks,[80]
of which one milliard was owed to the United States, one milliard to
France, 900 millions to Great Britain, 175 millions to Belgium, and 5
millions to Italy. On May 1, 1921, France had about 70,000 soldiers on
the Rhine, Great Britain about 18,000, and the United States a trifling

The net result of the transitional period was, therefore, as follows:

(1) Putting on one side State property transferred to Poland, the whole
of the transferable wealth obtained from Germany in the two and a
half years following the Armistice under all the rigors of the Treaty,
designed as they were to extract every available liquid asset, just
about covered the costs of collection, that is to say, the expenses of
the Armies of Occupation, and left _nothing_ over for Reparation.

(2) But as the United States has not yet been paid the milliard owing
to her for her Army, the other Allies have received between them on
balance a surplus of about one milliard. This surplus was not divided
amongst them equally. Great Britain had received 450–500 million gold
marks _less_ than her expenses, Belgium 300–350 million _more_ than her
expenses, and France 1000–1200 millions _more_ than her expenses.[81]

Under the strict letter of the Treaty those Allies who had received
less than their share might have claimed to be paid the difference in
cash by those who had received more. This situation and the allocation
of the milliard paid by Germany between May and August 1921 were the
subject of the Financial Agreement provisionally signed at Paris on
August 13, 1921. This Agreement chiefly consisted of concessions
to France, partly by Belgium, who agreed in effect to a partial
postponement of her priority charge on two milliards out of the
first sums received from Germany for Reparation, and partly by Great
Britain, who accepted for the purposes of internal accounting amongst
the Allies themselves a lower value for the coal delivered by Germany
than the value fixed by the Treaty.[82] In view of these concessions
about future payment, the _first_ milliard in cash, received _after_
May 1, 1921, was divided between Great Britain and Belgium, the former
receiving 450 million gold marks in discharge of the balance still due
to her in respect of the costs of occupation, and the balance falling
to the latter as a further instalment of her agreed priority charge.
This Agreement was represented in the French press as laying new
burdens upon France, or at least as withdrawing existing rights from
her. But this was not the case. The Agreement was directed throughout
to moderating the harshness with which the letter of the Treaty and the
arrangements of Spa would have operated against France.[83]

The actual value of these deliveries is a striking example of how
far the value of deliverable articles falls below the estimates which
used to be current. The Reparation Commission have stated that the
credit which Germany will receive in respect of her Mercantile Marine
will amount to about 755 million gold marks. This figure is low,
partly because many of the ships were disposed of after the slump in
tonnage.[84] Nevertheless, this was one of the tangible assets of great
value, which it was customary at one time to invoke in answer to those
who disputed Germany’s capacity to make vast payments. What does it
amount to in relation to the bill against her? The bill is 138 milliard
gold marks, on which interest at 6 per cent for one year is 8280
million gold marks. That is to say, Germany’s Mercantile Marine in its
entirety, of which the surrender humbled so much pride and engulfed so
vast an effort, would about meet a month’s charges.

                              EXCURSUS VI


The Allied Governments took advantage of the Spa meeting (July 1920)
to settle amongst themselves a Reparation question which had given
much trouble in Paris and had been left unsolved[85]—namely, the
proportions in which the Reparation receipts are to be divided between
the various Allied claimants.[86] The Treaty provides that the receipts
from Germany will be divided by the Allies “in proportions which _have_
been determined upon by them in advance, on a basis of general equity
and of the rights of each.” The failure, described by M. Tardieu, to
reach an agreement in Paris, rendered the tense of this provision
inaccurate, but at Spa it was settled as follows:

  France                52  per cent.
  British Empire[87]    22     ”
  Italy                 10     ”
  Belgium                8     ”
  Japan and Portugal      ¾ of 1 per cent each;

the remaining 6½ per cent being reserved for the Serbo–Croat–Slovene
State and for Greece, Rumania, and other Powers not signatories of the
Spa Agreement.[88]

This settlement represented some concession on the part of Great
Britain, whose proportionate claim was greatly increased by the
inclusion of pensions beyond what it would have been on the basis of
Reparation proper; and the proportion claimed by Mr. Lloyd George in
Paris was probably nearer the truth (namely that the French and British
shares should be in the proportion 5 to 3). I estimate that France
45 per cent, British Empire 33 per cent, Italy 10 per cent, Belgium
6 per cent, and the rest 6 per cent would have been more exactly in
accordance with the claims of each under the Treaty. In view of all the
facts, however, the Spa division may be held to have done substantial
justice on the whole.

At the same time the priority to Belgium to the extent of $500,000,000
was confirmed; and it was agreed that the loans made to Belgium
during the war by the other Allies, for which Germany is liable under
Article 232[89] of the Treaty, should be dealt with out of the moneys
next received. These loans, including interest, will amount by the end
of 1921 to something in the neighborhood of $1,500,000,000, of which
$550,000,000 will be due to Great Britain, $500,000,000 to France, and
$450,000,000 to the United States.

Under the Spa Agreement, therefore, sums received from Germany in cash,
and credits in respect of deliveries in kind were to be applied to the
discharge of her obligations in the following order:

1. The cost of the Armies of Occupation, estimated at $750,000,000 up
to May 1, 1921.

2. Advances to Germany for food purchases under the Spa Agreement, say

3. Belgian priority of $500,000,000.

4. Repayment of Allied advances to Belgium, say $1,500,000,000.

This amounts to about $2,850,000,000 altogether, of which I estimate
that about $750,000,000 is due to France, $850,000,000 to Great
Britain, $550,000,000 to Belgium, and $700,000,000 to the United

Very few people, I think, have appreciated how large a sum is due to
the United States under the strict letter of the Agreement. Since
France has already received almost two–thirds of her share as above,
whilst Belgium has had about one–third, Great Britain less than
one–third, and the United States nothing, it follows that, even on
the most favorable hypothesis as to Germany’s impending payments,
comparatively small sums are strictly due to France in the near future.

The Financial Agreement of August 13, 1921, was aimed at modifying the
harshness of these priority provisions towards France.[90] The details
of this Agreement have not yet been published, but it is said to make
a somewhat different provision from that contemplated at Spa for the
repayment of Allied war advances to Belgium.

The reception of this Agreement by the French public was a good
illustration of the effect of keeping people in the dark. The effect of
the Spa Agreement had never been understood in France, with the result
that the August Financial Agreement, which much improved France’s
position, was believed to interfere seriously with her existing rights.
M. Doumer never had the pluck to tell his public the truth, although,
if he had, it would have been clear that, in signing the Agreement
provisionally, he was acting in the interests of his country.

The mention of the United States invites attention to the anomalous
position of that country under the Peace Treaty. Her failure to ratify
the Treaty forfeits none of her rights under it, either in respect of
her share of the costs of the Army of Occupation (which, however, is
offset to a small extent by the German ships she has retained), or
in respect of the repayment of her war advances to Belgium.[91] It
follows that the United States is entitled, on the strict letter, to a
considerable part of the cash receipts from Germany in the near future.

There is, however, a possible offset to these claims which has been
mentioned already (p. 78) but must not be overlooked here. Under the
Treaty, private German property in an Allied country is, in the case
of countries adopting the Clearing House Scheme, applied in the first
instance to debts owing from German nationals to the nationals of the
Allied country in question, and the balance, if any, is retained for
Reparation. What is to happen in the case of similar German assets
in the United States is still undetermined. The surplus assets, the
value of which may be about $300,000,000,[92] will be retained, until
Congress determines otherwise, by the Enemy Property Custodian. There
have been negotiations from time to time for a loan in favor of Germany
on the security of these assets, but the legal position has rendered
progress impossible. At any rate this important German asset is still
under American control.


[60] A fairly adequate account of this controversy during the Peace
Conference can be pieced together from the following passages: Baruch,
_Making of Reparation and Economic Sections of the Treaty_, pp. 45–55;
Lamont, _What really happened at Paris_, pp. 262–265; Tardieu, _The
Truth about the Treaty_, pp. 294–309.

[61] For these figures see Tardieu, _op. cit._, p. 305.

[62] It is of these passages that M. Clemenceau wrote as follows in his
preface to M. Tardieu’s book: “Fort en thème d’économiste, M. Keynes
(qui ne fut pas seul, dans la Conférence, à professer cette opinion)
combat, sans aucun ménagement, ‘l’abus des exigences des Alliés’
(lisez: ‘de la France’) et de ses négociateurs.... Ces reproches et
tant d’autres d’une violence brutale, dont je n’aurais rien dit, si
l’auteur, à tous risques, n’eût cru servir sa cause en les livrant à
la publicité, font assez clairement voir jusqu’où certains esprits
s’étaient montés.” (In the English edition, M. Tardieu has caused the
words _fort en thème d’économiste_ to be translated by the words “with
some knowledge of economics but neither imagination nor character”—which
seems rather a free rendering.)

[63] At about the same date, the German Indemnity Commission
(_Reichsentschädigungskommission_) estimated the cost at 7228 million
gold marks, also on the basis of pre–war prices; that is to say, at
about one–seventh of M. Dubois’ estimate.

[64] The details of this claim, so far as they have been published,
are given in Appendix No. 3. The above figure comprises the items
for Industrial Damages, Damage to Houses, Furniture and Fittings,
Unbuilt–on Land, State Property, and Public Works.

[65] See M. Loucheur’s speech in the French Chamber, May 20, 1921.

[66] For this rate to be justified the exchange value of the franc in
New York must rise to about 11 cents.

[67] M. Loucheur’s statement to the French Chamber implied that the
rate of conversion was applicable to material damage as well as to
pensions, and I have assumed this in what follows; but precise official
information is lacking.

[68] The figures of damage done, given by M. Briand, are generally
speaking rather lower than those given ten months earlier (in June
1920) in a report by M. Tardieu in his capacity as President of the
Comité des Régions Dévastées. But the difference is not very material.
For purposes of comparison, I give M. Tardieu’s figures below together
with those of the amount of reconstruction completed at that earlier

                                 Destroyed.      Repaired.

 Houses totally destroyed          319,269          2,000
 Houses partially destroyed        313,675        182,000
 Railway lines                       5,534 kilos.   4,042 kilos.
 Canals                              1,596   ”        784   ”
 Roads                              39,000   ”      7,548   ”
 Bridges, embankments, etc.          4,785   ”      3,424   ”

                        Destroyed.   Cleared from    Leveled.   Plowed.
  Arable land
 (hectares)             3,200,000      2,900,000    1,700,000  1,150,000

                         Destroyed.   Reconstructed      Under
                                       and working.  reconstruction.
 Factories and works        11,500        3,540          3,812

A much earlier estimate is that made by M. Dubois for the Budget
Commission of the French Chamber and published as Parliamentary Paper
No. 5432 of the Session of 1918.

[69] A more recent estimate (namely, for July 1, 1921) has been given,
presumably from official sources, by M. Fournier–Sarlovèze, Deputy for
the Oise. The following are some of his figures:


 At the Armistice: Totally destroyed      289,147
                   Badly injured          164,317
                   Partially injured      258,419
 By July 1921:     Entirely rebuilt       118,863
                   Temporarily repaired   182,694


              │         │ Municipal │        │ Post   │
              │Churches.│ Buildings.│Schools.│Offices.│Hospitals.
 Destroyed    │ 1,407   │ 1,415     │ 2,243  │ 171    │       30
 Damaged      │ 2,079   │ 2,154     │ 3,153  │ 271    │      197
 Restored     │ 1,214   │   322     │ 720    │  53    │       28
 Temporarily  │         │           │        │        │
  patched up  │ 1,097   │   931     │ 2,093  │ 196    │      128


 At the Armistice: Totally destroyed   4,653,516
 By July 1921:     Leveled             4,067,408
                   Plowed              3,528,950


                              │   1914.    │  Nov. 1918. │ July 1921.
 Cattle                       │    890,084 │      57,500 │ 478,000
 Horses, donkeys, and mules   │    412,730 │      32,600 │ 235,400
 Sheep and goats              │    958,308 │      69,100 │ 276,700
 Pigs                         │    357,003 │      25,000 │ 169,000

[70] Even if we assumed that every house which had been injured at all
was totally destroyed, the figure would work out at about $7,000.

[71] M. Brenier, who has spent much time criticizing me, quotes
with approval (_The Times_, January 24, 1921) a French architect as
estimating the cost of reconstruction at an average of $2,500 per
house, and quotes also, without dissent, a German estimate that the
pre–war average was $1,200. He also states, in the same article, that
the number of houses destroyed was 304,191 and the number damaged
290,425, or 594,616 in all. Having pointed out the importance of not
overlooking sentiment in these questions, he then multiplies $2,500,
not by the number of houses but by the number of the _population_,
and arrives at an answer of $3,750,000,000. What is one to reply to
sentimental multiplication? What is the courteous retort to controversy
on these lines? (His other figures are clearly such a mass of
misprints, muddled arithmetic, confusion between hectares and acres
and the like, that, whilst an attack could easily make a devastated
area of them, it would be unfair to base any serious criticism on this
well–intentioned farrago. As a writer on these topics, M. Brenier is
about of the caliber of M. Raphaël–Georges Lévy.)

[72] M. Tardieu states that, on account of the subsequent rise in
prices, M. Loucheur’s estimate has proved, in terms of paper francs,
to be inadequate. But this is allowed for by my having converted paper
francs into dollars at the par of exchange.

[73] The Lens coal mines, which were the object of most complete
destruction, comprised 29 pits, and had, in 1913, 16,000 workmen with
an output of 4 million tons.

[74] I take these figures from M. Tardieu, who argues, most
illuminatingly, in alternate chapters, according to his thesis for the
time being, that reconstruction has hardly begun, and that it is nearly

[75] Francs are here converted at 2.20 to the gold mark and the £
sterling at the ratio of 1:20.

[76] This is exactly the figure of the estimate which I gave in _The
Economic Consequences of the Peace_ (p. 160). But I there added: “I
feel much more confidence in the approximate accuracy of the total
figure than its division between the different claimants.” This proviso
was necessary, as I had over–estimated the claims of France and
under–estimated those of the British Empire and of Italy.

[77] “Elle avait été le résultat d’un compromis assez pénible entre la
délégué français, l’honorable M. Dubois, et le représentant anglais,
Sir John Bradbury, depuis lors démissionnaire, qui voulait s’en tenir
au chiffre de cent quatre milliards et qui avait défendu la thèse du
gouvernement britannique avec une habileté passionnée.”

[78] The chief question of legitimate controversy in this connection
was that of the rate of exchange for converting paper francs into gold

[79] Made up of about £5,500,000 advanced by Great Britain, 772,000,000
francs by France, 96,000,000 francs by Belgium, 147,000,000 lire by
Italy, and 56,000,000 francs by Luxembourg.

[80] The German authorities have published a somewhat higher figure.
According to a memorandum submitted to the Reichstag in September
1921 by their Finance Minister, the costs of the Armies of Occupation
and the Rhine Provinces Commission up to the end of March 1921 were
mks. 3,936,954,542 (gold), in respect of expenditure met in the first
instance by the occupying Powers, and subsequently recoverable from
Germany, _plus_ mks. 7,313,911,829 (paper), in respect of expenditure
directly met by the German authorities.

[81] I do not vouch for the accuracy of these figures, which are rough
estimates of my own on the basis of incomplete published information.

[82] On the other hand Great Britain’s view was adopted as to the
valuation of shipping.

[83] In view of the political difficulties in which this Agreement
involved M. Briand’s Cabinet, the matter was apparently adjusted by
Great Britain and Belgium receiving their quotas as above, “subject to
adjustment of the final settlement” of the questions dealt with in the
Agreement. The net result on September 30, 1921, was that, including
the above sum, Great Britain had been repaid £5,445,000 in respect
of the Spa coal advances, and had also received, or was in course of
collecting, about £43,000,000 towards the expenses of the Army of
Occupation (approximately £50,000,000). Thus, as the result of three
years’ Reparations, Great Britain’s costs of collection had been about
£7,000,000 more than her receipts.

[84] To value these ships at what they fetched during the slump, yet to
value Germany’s liability for submarine destruction at what the ships
cost to replace during the boom, appears to be unjust. My estimate (in
_The Economic Consequences of the Peace_, p. 174) of the value of the
ships to be delivered was $600,000,000.

[85] M. Tardieu (_The Truth about the Treaty_, pp. 346–348) has given
an account of the abortive discussion of this question at the Peace
Conference. The French obtained at Spa a ratio very slightly _more_
favorable to themselves than that which they had claimed and Mr. Lloyd
George had rejected at Paris.

[86] For a summary of the text of this Agreement see Appendix No. 1.

[87] At the conference of Dominion Prime Ministers in July 1921 this
share was further divided as follows between the constituent portions
of the Empire:

 United Kingdom   86.85  │  New Zealand   1.75
 Minor colonies     .80  │  South Africa   .60
 Canada            4.35  │  Newfoundland   .10
 Australia         4.35  │  India         1.20

[88] The Spa Agreement also made provision that half the receipts from
Bulgaria and from the constituent parts of the former Austro–Hungarian
Empire should be divided in the above proportions, and that, of the
other half, 40 per cent should go to Italy and 60 per cent to Greece,
Rumania, and Jugoslavia.

[89] “Germany undertakes ... to make reimbursement of all sums which
Belgium has borrowed from the Allies and Associated Governments up to
November 11, 1918, together with interest at the rate of 5 per cent per
annum on such sums.” The priority for this repayment arranged at Spa is
a little different from the procedure contemplated in the Treaty, which
provided for repayment not later than May 1, 1926.

[90] See above, p. 135.

[91] Article 1 of the Treaty of Peace between Germany and the United
States, signed on August 25, 1921, and since ratified, expressly
stipulates that Germany undertakes to accord to the United States
all the rights, privileges, indemnities, reparations, and advantages
specified in the joint resolution of Congress of July 2, 1921,
“Including all the rights and advantages stipulated for the benefit
of the United States under the Treaty of Versailles which the United
States shall enjoy notwithstanding the fact that such Treaty has not
been ratified by the United States.”

[92] According to a statement published in Washington in August
1921 the Custodian had in his hands German property to the value of

                               CHAPTER V


 “The application of morals to international politics is more a thing
 to be desired than a thing which has been in operation. Also, when
 I am made a participant in crime along with many millions of other
 people, I more or less shrug my shoulders.”—Letter from a friendly
 critic to the author of _The Economic Consequences of the Peace_.

We have seen in the preceding chapter that the claim for Pensions and
Allowances is nearly double that for Devastation, so that its inclusion
in the Allies’ demands nearly trebles the bill. It makes the difference
between a demand which can be met and a demand which cannot be met.
Therefore it is important.

In _The Economic Consequences of the Peace_ I gave reasons for the
opinion that this claim was contrary to our engagements and an act
of international immorality. A good deal has been written about it
since then, but I cannot admit that my conclusion has been seriously
disputed. Most American writers accept it; most French writers ignore
it; and most English writers try to show, not that the _balance_ of
evidence is against me, but that there are a few just plausible, or
just not–negligible, observations to be made on the other side. Their
contention is that of the Jesuit professors of Probabilism in the
seventeenth century, namely that the Allies are justified unless it is
absolutely certain that they are wrong, and that any probability in
their favor, however small, is enough to save them from mortal sin.

But most people in the countries of Germany’s former enemies are not
ready to excite themselves very much, even if my view is accepted.
The passage at the head of this chapter describes a common attitude.
International politics is a scoundrel’s game and always has been, and
the private citizen can scarcely feel himself personally responsible.
If our enemy breaks the rules, his action may furnish us with an
appropriate opportunity for expressing our feelings; but this must not
be taken to commit us to a cool opinion that such things have never
happened before and must never happen again. Sensitive and honorable
patriots do not like it, but they “more or less shrug” their shoulders.

There is some common sense in this. I cannot deny it. International
morality, interpreted as a crude legalism, might be very injurious to
the world. It is at least as true of these vast–scale transactions,
as of private affairs, that we judge wrongly if we do not take into
account _everything_. And it is superficial to appeal, the other way
round, to the principles which do duty when Propaganda is blistering
herd emotion with its brew of passion, sentiment, self–interest, and
moral fiddlesticks.

But whilst I see that nothing rare has happened and that men’s motives
are much as usual, I do still think that this particular act was an
exceptionally mean one, made worse by hypocritical professions of moral
purpose. My object in returning to it is partly historical and partly
practical. New material of high interest is available to instruct us
about the course of events. And if for practical reasons we can agree
to drop this claim, we shall make a settlement easier.

       *       *       *       *       *

Those who think that it was contrary to the Allies’ engagements to
charge pensions against the enemy base this opinion on the terms
notified to the German Government by President Wilson, with the
authority of the Allies, on November 5, 1918, subject to which Germany
accepted the Armistice conditions.[93] The contrary opinion that the
Allies were fully entitled to charge pensions if they considered
it expedient to do so, has been supported by two distinct lines of
argument: first that the Armistice conditions of November 11, 1918,
were not _subject_ to President Wilson’s notification of November 5,
1918, but _superseded_ it, more particularly regarding Reparation;
and alternatively that the wording of President Wilson’s notification
properly understood does not exclude Pensions.

The first line of argument was adopted by M. Klotz and the French
Government during the Peace Conference, and has been approved more
recently by M. Tardieu.[94] It was repudiated by the whole of the
American Delegation at Paris, and never definitely supported by the
British Government. Responsible writers about the Treaty, other than
French, have not admitted it.[95] It was also explicitly abandoned by
the Peace Conference itself in its reply to the German observations on
the first draft of the Treaty. The second line of argument was that
of the British Government during the Peace Conference, and it was an
argument on these lines which finally converted President Wilson. I
will deal with the two arguments in turn.

1. Various persons have published particulars, formerly confidential,
which allow us to reconstruct the course of the discussions about the
Armistice. These begin with the examination of the Armistice Terms by
the Allied Council of War on November 1, 1918.[96]

The first point which emerges is that the reply of the Allied
Governments to President Wilson (which afterwards furnished the text of
his notification of Nov. 5, 1918, addressed to Germany), defining their
interpretation of the references to Reparation in the Fourteen Points,
was drawn up and approved at the _same_ session of the Supreme Council
(that of November 1, 2) which drew up the relevant clauses of the
Armistice Terms; and that the Allies did not finally approve the reply
to President Wilson until _after_ that they had approved that very
draft of the Armistice Terms which, according to the French contention,
superseded and negatived the terms outlined in the reply to President

The record of the proceedings of the Supreme Council (as now disclosed)
lends no support to the existence in their minds of the duplicity
which the French contention attributes to them. On the other hand,
it makes it clear that the Council did not intend the references to
Reparation in the Armistice Terms to modify in any way their reply to
the President.

The record, in so far as it is relevant to this point, may be
summarized as follows:[98] M. Clemenceau called attention to the
absence of any reference in the first draft of the Armistice Terms to
the restitution of stolen property or to reparation. Mr. Lloyd George
replied that there ought to be some reference to restitution, but that
reparation was a Peace condition rather than an Armistice condition.
M. Hymans agreed with Mr. Lloyd George. MM. Sonnino and Orlando went
further and thought that neither had any place in the Armistice
Terms but were ready to accept the Lloyd George–Hymans compromise of
including Restitution but not Reparation. The discussion was postponed
for M. Hymans to draft a formula. On its resumption next day, it was
M. Clemenceau who produced a formula consisting of the three words
_Réparation des dommages_. M. Hymans, M. Sonnino, and Mr. Bonar Law
all expressed doubt whether this was in place in the Armistice Terms.
M. Clemenceau replied that he only wanted to mention the principle,
and that French public opinion would be surprised if there was no
reference to it. Mr. Bonar Law objected: “It is already mentioned in
our letter to President Wilson which he is about to communicate to
Germany. It is useless to repeat it.”[99] This observation met with no
contradiction, but it was agreed on sentimental grounds and for the
satisfaction of public opinion to add M. Clemenceau’s three words.
The Council then passed on to other topics. At the last moment, as
they were about to disperse, M. Klotz slipped in the words: “It would
be prudent to put at the head of the financial questions a clause
reserving the future claims of the Allies, and I propose to you the
wording ‘without prejudice to any subsequent claims and demands on the
part of the Allies.’”[100] It does not seem to have occurred to any of
those present that this text could be deemed of material importance or
otherwise than as protecting the Allies from the risk of being held
to have surrendered any existing claims through failure to mention
them in this document; and it was accepted without discussion. M.
Klotz afterwards boasted that by this little device he had abolished
the Fourteen Points, so far as they affected Reparation and Finance
(although the very same meeting of the Allies had despatched a Note to
President Wilson accepting them), and had secured to the Allies the
right to demand from Germany the whole cost of the War. But I think
the world will decide that the Supreme Council was right in attaching
to these words no particular importance. Personal pride in so smart a
trick has led M. Klotz, and his colleague M. Tardieu, to persist too
long with a contention which decent persons have now abandoned.

There was an episode which has lately come to light connected with
this passage which may be recounted as illustrating the pitfalls
of the world. As M. Klotz only introduced his form of words as the
Council was breaking up, it is likely that no undue attention was
concentrated on it. But ill–fortune may dog any one, and the same state
of affairs seems to have led to one of the scribes getting the words
down wrong. Instead of _revendication_ which means _demand_, the word
_renonciation_ which means _concession_ got written in the text handed
to the Germans for signature.[101] This word was not so suitable. But
M. Klotz suffered less inconvenience from this mistake than might have
been expected; since at the Peace Conference no one noticed that the
French text of the Armistice Agreement as officially circulated, which
M. Klotz used in arguing before the Reparation Committee, agreed in its
wording with what he had intended it to be and not with the text which
Germany had actually signed. Nevertheless it is the word _renonciation_
which is still to be found in the official texts of the British and
German Governments.[102]

2. The other line of argument raises more subtle intellectual issues
and is not a mere matter of prestidigitation. If it be granted that
our rights are governed by the terms of the Note addressed to Germany
by President Wilson in the name of the Allies on November 5, 1918, the
question depends on the interpretation of these terms. As Mr. Baruch
and M. Tardieu have now published between them the greater part of
the official reports (including very secret documents) bearing on the
discussion of this problem during the Peace Conference, we are in a
better position than before to assess the value of the Allies’ case.

The pronouncements by the President which were to form the basis of
Peace provided that there should be “no contributions” and “no punitive
damages,” but the invaded territories of Belgium, France, Rumania,
Serbia, and Montenegro were to be restored. This did not cover losses
from submarines or from air raids. Accordingly the Allied Governments,
when they accepted the President’s formulas, embodied a reservation,
on the point as to what “restoration” covered, in the following
sentence: “By _it_ (_i.e._, restoration of invaded territory) they
understand that 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 natural meaning and object of these words, which, the reader
must remember, are introduced as an interpretation of the phrase
“restoration of invaded territory,” is to assimilate submarine and
cruiser aggression by sea and aeroplane and airship aggression by air
to military aggression by land, which, in all the circumstances, was
a reasonable extension of the phrase, provided it was duly notified
beforehand. The Allies rightly apprehended that, if they accepted the
phrase as it stood, “restoration of invaded territory” might be limited
to damage resulting from military aggression by land.

This interpretation of the reservation of the Allied Governments,
namely that it assimilated offensive action by sea or air to offensive
action by land, but that “restoration of invaded territory” could not
possibly include pensions and separation allowances, was adopted by the
American Delegation at Paris. They construed the German liability to be
in respect of the “direct physical damage to property of non–military
character and direct physical injury to civilians”[103] caused by such
aggression; the only further liability which they admitted being under
a different part of the President’s pronouncements, namely, those
relating to breaches of International law, such as the breach of the
Treaty of Neutrality in favor of Belgium, and the illegal treatment of
prisoners of war.

I doubt if any one would ever have challenged this interpretation
if the British Prime Minister had not won a General Election by
promises to extract from Germany more than this interpretation could
justify,[104] and if the French Government also had not raised
unjustifiable expectations. These promises were made recklessly. But it
was not easy for their authors to admit, so soon after they had been
given, that they were contrary to our engagements.

The discussion opened with the delegations, other than the American,
claiming that we had not committed ourselves to anything which
precluded our demanding from Germany all the loss and damage, direct
and indirect, which had resulted from the war. “One of the Allies,”
says Mr. Baruch, “went even further, and made claim for loss and
damage resulting from the fact that the Armistice was concluded so
unexpectedly that the termination of hostilities involved it in
financial losses.”

Various arguments were employed in the early stages, the British
delegates to the Reparation Committee of the Peace Conference, namely,
Mr. Hughes, Lord Sumner and Lord Cunliffe, supporting the demand for
complete war costs and not merely reparation for damage. They urged
(1) that one of the principles enunciated by President Wilson was that
each item of the Treaty should be just, and that it was in accordance
with the general principles of justice to throw on Germany the whole
costs of the war; and (2) that Great Britain’s war costs had resulted
from Germany’s breach of the Treaty of Neutrality of Belgium, and that
therefore Great Britain (but not necessarily, on this argument, all the
other Allies) was entitled to complete repayment in accordance with the
general principles of International law. These general arguments were,
I think, overwhelmed by the speeches made on behalf of the American
delegates by Mr. John Foster Dulles. The following are extracts from
what he said: “If it is in accordance with our sentiment that the
principles of reparation be severe, and in accord with our material
interest that these principles be all inclusive, why, in defiance of
these motives, have we proposed reparation in certain limited ways
only? It is because, gentlemen, we do not regard ourselves as free. We
are not here to consider as a novel proposal what reparation the enemy
should in justice pay; we have not before us a blank page upon which
we are free to write what we will. We have before us a page, it is
true; but one which is already filled with writing, and at the bottom
are the signatures of Mr. Wilson, of Mr. Orlando, of M. Clemenceau,
and of Mr. Lloyd George. You are all aware, I am sure, of the writing
to which I refer: it is the agreed basis of peace with Germany.”
Mr. Dulles then recapitulated the relevant passages and continued:
“Can there be any question that this agreement does constitute a
limitation? It is perfectly obvious that it was recognized at the time
of the negotiations in October and November 1918 that the reparation
then specified for would limit the Associated Governments as to the
reparation which they could demand of the enemy as a condition of
peace. The whole purpose of Germany was to ascertain the maximum which
would be demanded of her in the terms of peace, and the action of the
Allies in especially stipulating at that time, for an enlargement of
the original proposal respecting reparation is explicable only on the
theory that it was understood that once an agreement was concluded
they would no longer be free to specify the reparation which Germany
must make. We have thus agreed that we would give Germany peace if
she would do certain specified things. Is it now open to us to say,
‘Yes, but before you get peace you must do other and further things’?
We have said to Germany, ‘You may have peace if among other things
you perform certain acts of reparation which will cost you, say, ten
million dollars.’ Are we not now clearly precluded from saying, ‘You
can have peace provided you perform other acts of reparation which will
bring your total liability to many times that which was originally
stipulated’? No; irrespective of the justice of the enemy making the
latter reparation, it is now too late. Our bargain has been struck for
better or for worse; it remains only to give it a fair construction and
practical application.”

It is a shameful memory that the British delegates never withdrew their
full demands, to which they were still adhering when, in March 1921,
the question was taken out of their hands by the Supreme Council. The
American Delegation cabled to the President, who was then at sea,
for support in maintaining their position, to which he replied that
the American Delegation should dissent, and if necessary dissent
publicly, from a procedure which “is clearly inconsistent with what
we deliberately led the enemy to expect and cannot now honorably alter
simply because we have the power.”[105]

After this the discussions entered on a new phase. The British and
French Prime Ministers abandoned the contentions of their delegates,
admitted the binding force of the words contained in their Note of
November 5, 1918, and settled down to extract some meaning from
these words which would compose their differences and satisfy
their constituents. What constituted “damage done to the civilian
population”? Could not this be made to cover military pensions and the
separation allowances which had been made to the civilian dependents
of soldiers? If so, the bill against Germany could be raised to a
high enough figure to satisfy nearly every one. It was pointed out,
however, as Mr. Baruch records, “that financial loss resulting from the
absence of a wage–earner did not cause any more ‘damage to the civilian
population’ than did an equal financial loss involved in the payment
of taxes to provide military equipment and like war costs.” In fact,
a separation allowance or a pension was simply one of many general
charges on the Exchequer arising out of the costs of the war. If such
charges were to be admitted as civilian damage, it was a very short
step back to the claim for the entire costs of the war, on the ground
that these costs must fall on the taxpayer who, generally speaking, was
a civilian. The sophistry of the argument became exposed by pushing it
to its logical conclusion. Nor was it clear how pensions and allowances
could be covered by words which were themselves an interpretation of
the phrase, “restoration of invaded territory.” And the President’s
conscience, though very desirous by now to be converted (for he had on
hand other controversies with his colleagues which interested him more
than this one) remained unconvinced.

The American delegates have recorded that the final argument which
overbore the last scruples of the President was contained in a
Memorandum prepared by General Smuts[106] on March 31, 1919. Briefly,
this argument was, that a soldier becomes a civilian again after his
discharge, and that, therefore, a wound, the effects of which persist
after he has left the Army, is damage done to a civilian.[107] This is
the argument by which “damage done to the civilian population” came to
include damage done to soldiers. This is the argument on which, in the
end, our case was based! For at this straw the President’s conscience
clutched, and the matter was settled.

It had been settled in the privacy of the Four. I will give the final
scene in the words of Mr. Lamont, one of the American delegates:[108]

 “I well remember the day upon which President Wilson determined to
 support the inclusion of pensions in the Reparation Bill. Some of us
 were gathered in his library in the Place des États Unis, having been
 summoned by him to discuss this particular question of pensions. We
 explained to him that we couldn’t find a single lawyer in the American
 Delegation that would give an opinion in favor of including pensions.
 All the logic was against it. ‘Logic! logic!’ exclaimed the President,
 ‘I don’t care a damn for logic. I am going to include pensions!’”[109]

Well! perhaps I was too near these things at the time and have
become touched in the emotions, but I cannot “more or less shrug my
shoulders.” Whether or not that is the appropriate gesture, I have here
set forth, for the inspection of Englishmen and our Allies, the moral
basis on which two–thirds of our claims against Germany rest.


[93] I have given the exact text of the relevant passages in _The
Economic Consequences of the Peace_, chapter v.

[94] _The Truth about the Treaty_, p. 208.

[95] _E.g._, _The History of the Peace Conference of Paris_, published
under the auspices of the Institute of International Affairs delivers
judgment as follows (vol. ii., p. 43): “It is this statement then
(_i.e._, President Wilson’s notification of Nov. 5, 1918) which must be
taken as the ruling document in any discussion as to what the Allies
were entitled to claim by way of reparation in the Treaty of Peace,
and it is difficult to interpret it otherwise than as a deliberate
limitation of their undoubted right to recover the whole of their war

[96] The following particulars are taken from _Les Négociations
Secrètes et les Quatre Armistices avec pièces justificatives_ by
“Mermeix,” published at Paris by Ollendorff, 1921. This remarkable
volume has not received the attention it deserves. The greater part of
it consists of a verbatim transcript of the secret _Procès Verbaux_
of those meetings of the Supreme Council of the Allies which were
concerned with the Armistice Terms. On the face of it this disclosure
is authentic and is corroborated in part by M. Tardieu. There are many
passages of extraordinary interest on points not connected with my
present topic, as for example the discussion of the question whether
the Allies should insist on the surrender of the German fleet if the
Germans made trouble about it. Marshal Foch emerges from this record
very honorably, as determined that nothing unnecessary should be
demanded of the enemy, and that no blood should be spilt for a vain or
trifling object. Sir Douglas Haig was of the same opinion. In reply to
Col. House, Foch spoke thus: “If they accept the terms of the Armistice
we are imposing on them, it is a capitulation. Such a capitulation
gives us everything we could get from the greatest victory. In such
circumstances I cannot admit that I have the right to risk the life of
a single man more.” And again on October 31: “If our conditions are
accepted we can wish for nothing better. We make war only to attain
our ends, and we do not want to prolong it uselessly.” In reply to
a proposal by Mr. Balfour that the Germans in evacuating the East
should leave one–third of their arms behind them, Foch observed: “The
intrusion of all these clauses makes our document chimerical, since
the greater part of the conditions are incapable of being executed.
We should do well to be sparing with these unrealizable injunctions.”
Towards Austria also he was humane and feared the prolongation of the
blockade which the politicians were proposing. “I intervene,” he said
on October 31, 1918, “in a matter which is not a military one strictly
speaking. We are to maintain the blockade until Peace, that is to say
until we have made a new Austria. That may take a long time; which
means a country condemned to famine and perhaps impelled to anarchy.”

[97] This is corroborated by M. Tardieu, _op. cit._, p. 71.

[98] See Mermeix, _op. cit._, pp. 226–250.

[99] This very important remark by Mr. Bonar Law is also quoted by M.
Tardieu (_op. cit._, p. 70) and is therefore of undoubted authenticity.

[100] “Il serait prudent de mettre en tête des questions financières
une clause réservant les revendications futures des Alliés et je vous
propose le texte suivant: ‘Sous réserve de toutes revendications et
réclamations ultérieures de la part des Alliés.’”

[101] That is to say, this text ran, “Sous réserve de toute
renonciation et réclamation ultérieure,” instead of “Sous réserve de
toutes revendications et réclamations ultérieures.”

[102] I record this episode as an historical curiosity. In my opinion
it makes no material difference to the argument whether the text runs
“revendications et réclamations” or “renonciation et réclamation”;
for I regard either form of words as merely a protective phrase. But
the plausibility of M. Klotz’s position is decidedly weakened (if
so weak a case is capable of further weakening) if it is the latter
phrase which is authentic. The Editor of the Institute of International
Affairs’ _History of the Peace Conference of Paris_, who was the first
to discover and publish the discrepancy in question (vol. v., pp.
370–372), takes the view that the question of which text is used makes
a material difference to the value of M. Klotz’s argument.

[103] Baruch, _op. cit._, p. 19.

[104] As Mr. Baruch puts it (_op. cit._, p. 4): “At an election held
_after the Armistice and agreement as to the basic terms of peace_, the
English people, by an overwhelming majority, returned to power their
Prime Minister _on the basis of an increase in the severity of these
terms of the peace_, especially those of reparation.” (The italics are

[105] Baruch, _op. cit._, p. 25.

[106] This Memorandum, which has been published _in extenso_ by Mr.
Baruch (_op. cit._, p. 29 _seq._), belonged to the category of most
secret documents. It has been given to the world by itself without the
accompanying circumstances which, without justifying its arguments
(on which indeed no further light could be thrown beyond what we
already have in the narrative of Mr. Baruch), might yet throw light on
individual motives. I agree with the comment made by _The Economist_
(Oct. 22, 1921) in reviewing Vol. IV. of the _History of the Peace
Conference of Paris_ (published under the auspices of the Institute
of International Affairs), which has reprinted this Memorandum, that
“a very serious injustice will be done to the reputation of General
Smuts if this document continues to be reproduced and circulated
without any explanation of the circumstances in which it was prepared.”
Nevertheless it is well that the world should have this document, and
it must take its place in a story which is more important to the world
than the motives and reputations of individual actors in it.

[107] The following is the salient passage of the Memorandum: “After
the soldier’s discharge as unfit he rejoins the civilian population,
and as for the future he cannot (in whole or in part) earn his own
livelihood, he is suffering damage as a member of the civilian
population, for which the German Government are again liable to make
compensation. In other words, the pension for disablement which he
draws from the French Government is really a liability of the German
Government, which they must under the above reservation make good to
the French Government. It could not be argued that as he was disabled
while a soldier he does not suffer damage as a civilian after his
discharge if he is unfit to do his ordinary work. He does literally
suffer as civilian after his discharge, and his pension is intended
to make good this damage, and is therefore a liability of the German

[108] _What Really Happened at Paris_, p. 272.

[109] Mr. Lamont adds that “it was not a contempt of logic, but
simply an impatience of technicality; a determination to brush aside
verbiage and get at the root of things. There was not one of us in the
room whose heart did not beat with a like feeling.” These words not
merely reflect a little naïvely the modern opportunist’s impatience
of legality and respect for the _fait accompli_, but also recall the
atmosphere of exhaustion and the longing of everyone to be finished,
somehow, with this dreadful controversy, which for months had outraged
at the same time the intellects and the consciences of most of the
participators. Yet, even so, to their lasting credit, the American
Delegation had stood firm for the law, and it was the President, and he
alone, who capitulated to the lying exigencies of politics.

                              CHAPTER VI


It is fashionable at the present time to urge a reduction of the
Allies’ claims on Germany and of America’s claims on the Allies, on the
ground that, as such payments can only be made in goods, insistence on
these claims will be positively injurious to the claimants.

That it is in the self–interest of the Allies and of America to abate
their respective demands, I hold to be true. But it is better not to
use bad arguments, and the suggestion that it is necessarily injurious
to receive goods for nothing is not plausible or correct. I seek in
this chapter to disentangle the true from the false in the now popular
belief that there is something harmful in compelling Germany (or
Europe) to “fling goods at us.”

The argument is a little intricate and the reader must be patient.

1. It does not make very much difference whether the debtor country
pays by sending goods direct to the creditor or by selling them
elsewhere and remitting cash. In either case the goods come on to the
world market and are sold competitively or coöperatively in relation to
the industries of the creditor, as the case may be, this distinction
depending on the nature of the goods rather than on the market in which
they are sold.

2. It is not much use to _earmark_ non–competitive goods against the
payment of the debt, so long as competitive goods are being sold by the
debtor country in some other connection, _e.g._, to pay for its own
imports. This is simply to bury one’s head in the sand. For example,
out of the aggregate of goods which Germany would naturally export
in the event of her exports being forcibly stimulated, it might be
possible to pick out a selection of non–competitive goods; but it would
not affect the situation in the slightest degree to pretend that it was
these particular goods, and not the others, which were paying the debt.
It is therefore useless to prescribe that Germany shall pay in certain
specified commodities if these are commodities which she would export
in any case, and useless, equally, to forbid her to pay in certain
specified commodities, if that merely means that she will export these
commodities to some other market to pay for her imports generally. No
expedient on our part for making Germany pay us, or on America’s part
for making us pay her, in the shape of particular commodities affects
the position, except in so far as it modifies the form of the paying
country’s exports _as a whole_.

3. On the other hand, it does us no harm to receive for nothing the
proceeds of goods, even when they are sold competitively, if these
goods would be sold on the world’s market in any case.

4. If the result of pressing the debtor country to pay is to cause it
to offer competitive goods at a lower price than it would otherwise,
the particular industries in the creditor country which produce these
goods are bound to suffer, even though there are balancing advantages
for the creditor country as a whole.

5. In so far as the payments made by the debtor country accrue, not to
the country with which the debtor’s goods are competing, but to a third
party, clearly there are no balancing advantages to offset the direct
disadvantages under 4.

6. The answer to the question, whether the balancing advantages to
the creditor country as a whole outweigh the injury to particular
industries within that country, depends on the length of the period
over which the creditor country can reasonably expect to go on
receiving the payments. At first the injury to the industries which
suffer from the competition and to those employed in them is likely to
outweigh the benefit of the payments received. But, as in the course of
time the capital and labor are absorbed in other directions, a balance
of advantage may accrue.

The application of these general principles to the particular case of
ourselves and Germany is easy. Germany’s exports are so preponderantly
competitive with ours, that, if her exports are forcibly stimulated,
it is certain that she will have to sell goods against us. This is not
altered by the fact that it is possible to pick out a few exports or
potential exports, such as potash or sugar, which are not competitive.
If Germany is to have a _large_ surplus of exports over imports, she
must increase her competitive sales. In the _Economic Consequences of
the Peace_ (pp. 175–185) I demonstrated this at some length on the
basis of pre–war statistics. I showed not only that the goods she must
sell, but the markets she must sell them in, were largely competitive
with our own. The statistics of post–war trade show that the former
argument still holds good. The following table shows the proportions in
which her export trade was divided between the principal articles of
export, (1) in 1913, (2) in the first nine months of 1920 (the latest
period for which I have figures in this precise form), and (3) in the
four months June to September 1921, these last figures representing, I
think, a not exactly comparable classification, and being provisional

                                    │   Percentage of Total Exports.
        German Exports.             ├───────┬────────────┬─────────────
                                    │ 1913. │   1920     │    1921
                                    │       │(Jan.─Sept.)│ (June─Sept.)
  Iron and steel goods              │ 13.2  │    20      │     22
  Machinery (including motor cars)  │  7.5  │    12      │     17
  Chemicals and dies                │  4    │    13      │      9.5
  Fuel                              │  7    │     6.5    │      ?
  Paper goods                       │  2.5  │     4      │      3.5
  Electrical goods                  │  2    │     3.5    │      ?
  Silk goods                        │  2    │     3      │}
  Cotton goods                      │  5.5  │     3      │}    15
  Woolen goods                      │  6    │    ..      │}
  Glass                             │   .5  │     2.5    │      2
  Leather goods                     │  3    │     2      │      4
  Copper goods                      │  1.5  │     1.5    │      ?

It is clear, therefore, that, though raw materials other than coal,
such as potash, sugar, and timber may yield a trifle, Germany can only
compass an export trade of great value by exporting iron and steel
goods, chemicals, dyes, textiles, and coal, for these are the only
export articles of which she can produce great quantities. It is also
clear that there have been no very marked changes in the proportionate
importance of the different export trades since the war, except that
the exchange position has somewhat stimulated, relatively to the
others, those export lines, such as iron goods, machinery, chemicals,
dyes, and glass, which do not involve much importation of raw materials.

To compel Germany to pay a large indemnity is therefore the same thing
as to compel her to expand some or all of the above–mentioned exports
to a greater extent than she would do otherwise. The only way in which
she can effect this expansion is by offering the goods at a lower price
than that at which other countries care to offer them; putting herself
in a position to offer them cheap, partly by the German working classes
lowering their standard of life without reducing their efficiency
in the same degree, and partly by German _export_ industries being
subsidized, directly or indirectly, at the expense of the rest of the

These facts, formerly overlooked, are now, perhaps, exaggerated
by popular opinion. For Principle (3), enunciated above, requires
attention. Our industries will be subjected to strong competition
from Germany, just as they were before the war, whether we exact
Reparation or not; and we must not ascribe to the Reparation policy
inconveniences which would exist in any case. The remedy lies not in
the now popular nostrums for prescribing the _form_ in which Germany
shall pay, but in reducing the aggregate _amount_ to a reasonable
figure. For by prescribing the manner in which she shall pay _us_ we do
not control the form of her export trade as a whole; and by absorbing
for reparation purposes the whole of a particular type of export, we
compel her to expand her other exports to pay for her imports and
other international obligations. On the other hand, we can secure
from her moderate payments, on the sort of scale, for example, on
which she might have been building up new foreign investments, without
stimulating her exports as a whole to a greater activity than they
would enjoy otherwise. This is the correct course for Great Britain
from the standpoint of her own self–interest only.

The practical application of Principles (5) and (6) is also clear. So
far as (5) is concerned, Great Britain is to receive not the whole
of the indemnity, but about a fifth of it; whilst (6) provides the
argument which to me has always appeared decisive. The _permanence_ of
reparation payments on a large scale for a long period of years is,
to say the least, not to be reckoned on. Who believes that the Allies
will, over a period of one or two generations, exert adequate force
over the German Government, or that the German Government can exert
adequate authority over its subjects, to extract continuing fruits on a
vast scale from forced labor? No one believes it in his heart; no one
at all. There is not the faintest possibility of our persisting with
this affair to the end. But if this is so, then, most certainly, it
will not be worth our while to disorder our export trades and disturb
the equilibrium of our industry for two or three years; much less to
endanger the peace of Europe.

The same principles apply with one modification to the United States
and to the exaction by her of the debts which the Allied Governments
owe. The industries of the United States would suffer, not so much from
the competition of cheap goods from the Allies in their endeavors to
pay their debts, as from the inability of the Allies to purchase from
America their usual proportion of her exports. The Allies would have
to find the money to pay America, not so much by selling more as by
buying less. The farmers of the United States would suffer more than
the manufacturers; if only because increased imports can be kept out by
a tariff, whilst there is no such easy way of stimulating diminished
exports. It is, however, a curious fact that whilst Wall Street and
the manufacturing East are prepared to consider a modification of the
debts, the Middle West and South is reported (I write ignorantly) to be
dead against it. For two years Germany was not required to pay cash to
the Allies, and during that period the manufacturers of Great Britain
were quite blind to what the consequences would be to themselves when
the payments actually began. The Allies have not yet been required to
begin to pay cash to the United States, and the farmers of the latter
are still as blind as were the British manufacturers to the injuries
they will suffer if the Allies ever try seriously to pay in full. I
recommend Senators and Congressmen from the agricultural districts
of the United States, lest they soon suffer the same moral and
intellectual ignominy as our own high–Reparation men, to invest at once
in a little caution in their opposition to the efforts of Mr. Harding’s
Administration to secure for itself a free hand to act wisely in this
matter (and even perhaps generously) in accordance with the progress of
opinion and of events.

The decisive argument, however, for the United States, as for Great
Britain, is not the damage to particular interests (which would
diminish with time), but the unlikelihood of permanence in the exaction
of the debts, even if they were paid for a short period. I say this,
not only because I doubt the ability of the European Allies to pay, but
because of the great difficulty of the problem which the United States
has before her in any case in balancing her commercial account with the
Old World.

American economists have examined somewhat carefully the statistical
measure of the change from the pre–war position. According to their
estimates, America is now owed more interest on foreign investments
than is due from her, quite apart from the interest on the debts of
the Allied Governments; and her mercantile marine now earns from
foreigners more than she owes them for similar services. Her excess
of exports of commodities over imports approaches $3000 millions a
year;[110] whilst, on the other side of the balance, payments, mainly
to Europe, in respect of tourists and of immigrant remittances are
estimated at not above $1000 millions a year. Thus, in order to balance
the account as it now stands, the United States must lend to the rest
of the world, in one shape or another, not less than $2000 millions a
year, to which interest and sinking fund on the European Governmental
War Debts would, if they were paid, add about $600 millions.

Recently, therefore, the United States must have been lending to the
rest of the world, mainly Europe, something like $2000 millions a
year. Fortunately for Europe, a fair proportion of this was by way of
speculative purchases of depreciated paper currencies. From 1919 to
1921 the losses of American speculators fed Europe; but this source of
income can scarcely be reckoned on permanently. For a time the policy
of loans can meet the situation; but, as the interest on past loans
mounts up, it must in the long run aggravate it.

Mercantile nations have always employed large funds in overseas trade.
But the practice of foreign investment, as we know it now, is a very
modern contrivance, a very unstable one, and only suited to peculiar
circumstances. An old country can in this way develop a new one at a
time when the latter could not possibly do so with its own resources
alone; the arrangement may be mutually advantageous, and out of
abundant profits the lender may hope to be repaid. But the position
cannot be reversed. If European bonds are issued in America on the
analogy of the American bonds issued in Europe during the nineteenth
century, the analogy will be a false one; because, taken in the
aggregate, there is no natural increase, no _real_ sinking fund, out
of which they can be repaid. The interest will be furnished out of new
loans, so long as these are obtainable, and the financial structure
will mount always higher, until it is not worth while to maintain any
longer the illusion that it has foundations. The unwillingness of
American investors to buy European bonds is based on common sense.

At the end of 1919 I advocated (in _The Economic Consequences of the
Peace_) a reconstruction loan from America to Europe, conditioned,
however, on Europe’s putting her own house in order. In the past
two years America, in spite of European complaints to the contrary,
has, in fact, made _very large_ loans, much larger than the sum I
contemplated, though not mainly in the form of regular, dollar–bond
issues. No particular conditions were attached to these loans, and
much of the money has been lost. Though wasted in part, they have
helped Europe through the critical days of the post–Armistice period.
But a continuance of them cannot provide a solution for the existing
disequilibrium in the balance of indebtedness.

In part the adjustment may be effected by the United States taking the
place hitherto held by England, France, and (on a small scale) Germany
in providing capital for those new parts of the world less developed
than herself—the British Dominions and South America. The Russian
Empire, too, in Europe and Asia, may be regarded as virgin soil, which
will at a later date provide a suitable outlet for foreign capital.
The American investor will lend more wisely to these countries, on the
lines on which British and French investors used to lend to them, than
direct to the old countries of Europe. But it is not likely that the
whole gap can be bridged thus. Ultimately, and probably soon, there
must be a readjustment of the balance of exports and imports. America
must buy more and sell less. This is the only alternative to her
making to Europe an annual present. Either American prices must rise
faster than European (which will be the case if the Federal Reserve
Board allows the gold influx to produce its natural consequences),
or, failing this, the same result must be brought about by a further
depreciation of the European exchanges, until Europe, by inability
to buy, has reduced her purchases to articles of necessity. At first
the American exporter, unable to scrap all at once the processes of
production for export, may meet the situation by lowering his prices;
but when these have continued, say for two years, below his cost of
production, he will be driven inevitably to curtail or abandon his

It is useless for the United States to suppose that an equilibrium
position can be reached on the basis of her exporting at least as
much as at present, and at the same time restricting her imports by
a tariff. Just as the Allies demand vast payments from Germany, and
then exercise their ingenuity to prevent her paying them, so the
American Administration devises, with one hand, schemes for financing
exports, and, with the other, tariffs which will make it as difficult
as possible for such credits to be repaid. Great nations can often act
with a degree of folly which we should not excuse in an individual.

By the shipment to the United States of all the bullion in the
world, and the erection there of a sky–scraping golden calf, a short
postponement may be gained. But a point may even come when the United
States will refuse gold, yet still demand to be paid,—a new Midas
vainly asking more succulent fare than the barren metal of her own

In any case the readjustment will be severe, and injurious to important
interests. If, in addition, the United States exacts payment of the
Allied debts, the position will be intolerable. If she persevered
to the bitter end, scrapped her export industries and diverted to
other uses the capital now employed in them, and if her former
European associates decided to meet their obligations at whatever
cost to themselves, I do not deny that the final result might be to
America’s material interest. But the project is utterly chimerical.
It will not happen. Nothing is more certain than that America will
not pursue such a policy to its conclusion; she will abandon it as
soon as she experiences its first consequences. Nor, if she did, would
the Allies pay the money. The position is exactly parallel to that
of German Reparation. America will not carry through to a conclusion
the collection of Allied debt, any more than the Allies will carry
through the collection of their present Reparation demands. Neither, in
the long run, is serious politics. Nearly all well–informed persons
admit this in private conversation. But we live in a curious age when
utterances in the press are deliberately designed to be in conformity
with the worst–informed, instead of with the best–informed, opinion,
because the former is the wider spread; so that for comparatively long
periods there can be discrepancies, laughable or monstrous, between the
written and the spoken word.

If this is so, it is not good business for America to embitter her
relations with Europe, and to disorder her export industries for two
years, in pursuance of a policy which she is certain to abandon before
it has profited her.

For the benefit of any reader who enjoys an abstract statement,
I summarize the argument thus. The equilibrium of international
trade is based on a complicated balance between the agriculture and
the industries of the different countries of the world, and on a
specialization by each in the employment of its labor and its capital.
If one country is required to transfer to another without payment
great quantities of goods, for which this equilibrium does not allow,
the balance is destroyed. Since capital and labor are fixed and
organized in certain employments and cannot flow freely into others,
the disturbance of the balance is destructive to the utility of the
capital and labor thus fixed. The _organization_, on which the wealth
of the modern world so largely depends, suffers injury. In course of
time a new organization and a new equilibrium can be established.
But if the origin of the disturbance is of temporary duration, the
losses from the injury done to organization may outweigh the profit of
receiving goods without paying for them. Moreover, since the losses
will be concentrated on the capital and labor employed in particular
industries, they will provoke an outcry out of proportion to the injury
inflicted on the community as a whole.


[110] In the year of boom to June 1920, on a total trade of $13,350
millions, the excess of exports over imports was $2870 millions. In
the year, partly one of depression, to June 1921, on a total trade of
$10,150 millions, the excess of exports was $2860 millions.

                              CHAPTER VII


The deeper and the fouler the bogs into which Mr. Lloyd George leads
us, the more credit is his for getting us out. He leads us in to
satisfy our desires; he leads us out to save our souls. He hands us
down the primrose path and puts out the bonfire just in time. Who, ever
before, enjoyed the best of heaven and hell as we do?

In England, opinion has nearly completed its swing, and the Prime
Minister is making ready to win a General Election on Forbidding
Germany to Pay, Employment for Every one, and a Happier Europe for
All. Why not, indeed? But this Faustus of ours shakes too quickly his
kaleidoscope of halos and hell–fire, for me to depict the hues as they
melt into one another. I shall do better to construct an independent
solution, which is _possible_ in the sense that nothing but a change in
the popular will is necessary to achieve it, hoping to influence this
will a little, but leaving it to those, whose business it is, to gage
the moment at which it will be safe to embroider such patterns on a
political banner.

If I look back two years and read again what I wrote then, I see that
perils which were ahead are now passed safely. The patience of the
common people of Europe and the stability of its institutions have
survived the worst shocks they will receive. Two years ago the Treaty,
which outraged Justice, Mercy, and Wisdom, represented the momentary
will of the victorious countries. Would the victims be patient? Or
would they be driven by despair and privation to shake Society’s
foundations? We have the answer now. They have been patient. Nothing
very much has happened, except pain and injury to individuals. The
communities of Europe are settling down to a new equilibrium. We are
almost ready to turn our minds from the avoidance of calamity to the
renewal of health.

There have been other influences besides that patience of the common
people which often before has helped Europe through worse evils. The
actions of those in power have been wiser than their words. It is
only a slight exaggeration to say that no parts of the Peace Treaties
have been carried out, except those relating to frontiers and to
disarmament. Many of the misfortunes which I predicted as attendant
on the execution of the Reparation Chapter have not occurred, because
no serious attempt has been made to execute it. And, whilst no one
can predict with what particular sauce the makers of the Treaty will
eat their words, there can no longer be any question of the actual
enforcement of this Chapter. And there has been a third factor, not
quite in accordance with expectations, paradoxical at first sight, but
natural, nevertheless, and concordant with past experience,—the fact
that it is in times of growing profits and not in times of growing
distress that the working classes stir themselves and threaten their
masters. When times are bad and poverty presses on them they sink back
again into a weary acquiescence. Great Britain and all Europe have
learned this in 1921. Was not the French Revolution rather due perhaps
to the growing wealth of eighteenth–century France—for at that time
France was the richest country in the world—than to the pressure of
taxation or the exactions of the old régime? It is the profiteer, not
privation, that makes man shake his chains.

In spite, therefore, of trade depression and disordered exchanges,
Europe, under the surface, is much stabler and much healthier than
two years ago. The disturbance of minds is less. The organization,
destroyed by war, has been partly restored; transport, except in
Eastern Europe, is largely repaired; there has been a good harvest,
everywhere but in Russia, and raw materials are abundant. Great Britain
and the United States and their markets overseas have suffered a
cyclical fluctuation of trade prosperity of a greater amplitude than
ever before; but there are indications that the worst point is passed.

Two obstacles remain. The Treaty, though unexecuted, is not revised.
And that part of organization, which consists in currency regulation,
public finance, and the foreign exchanges, remains nearly as bad as
it ever was. In most European countries there is still no proper
balance between the expenditure of the State and its income, so that
inflation continues and the international values of their currencies
are fluctuating and uncertain. The suggestions which follow are mainly
directed towards these problems.

       *       *       *       *       *

Some contemporary plans for the reconstruction of Europe err in
being too paternal or too complicated; also, sometimes, in being too
pessimistic. The patients need neither drugs nor surgery, but healthy
and natural surroundings in which they can exert their own recuperative
powers. Therefore a good plan must be in the main _negative_; it must
consist in getting rid of shackles, in simplifying the situation, in
canceling futile but injurious entanglements. At present every one is
faced by obligations which they cannot meet. Until the problem set to
the Finance Ministers of Europe is a _possible_ one, there can be
little incentive to energy or to the exercise of skill. But if the
situation was made such that an insolvent country could have only
itself to blame, then the highest integrity and the most accomplished
financial technique would, in each separate country, have its chance. I
seek by the proposals of this chapter, not to prescribe a solution, but
to create a situation in which a solution is possible.

In their main substance, therefore, my suggestions are not novel. The
now familiar project of the cancelation, in part or in their entirety,
of the Reparation and Inter–allied Debts, is a large and unavoidable
feature of them. But those who are not prepared for these measures must
not pretend to a serious interest in the Reconstruction of Europe.

In so far as such cancelation or abatement involves concessions by
Great Britain, an Englishman can write without embarrassment and with
some knowledge of the tendency of popular opinion in his own country.
But where concessions by the United States are concerned he is in more
difficulty. The attitude of a section of the American press furnishes
an almost irresistible temptation to deal out the sort of humbug (or
discrete half–truths) which are believed to promote cordiality between
nations; it is easy and terribly respectable; and what is much worse,
it may even do good where frankness would do harm. I pursue the
opposite course, with a doubting and uneasy conscience, yet supported
(not only in this chapter but throughout my book) by the hope, possibly
superstitious, that openness does good in the long run, even when it
makes trouble at first.

So far, Reparation on a large scale has not been collected from
Germany. So far, the Allies have not paid interest to the United States
on what they owe. Our present troubles, when they are not attributable
to the after–effects of war and the cyclical depression of trade, are
due, therefore, not to the enforcement of these claims, but to the
uncertainties of their possible enforcement. It follows, therefore,
that merely to put off the problem will do us no good. That is what we
have been doing for two years already. Even to reduce our Reparation
demands to Germany’s maximum actual capacity and really force her
to pay them, might make matters worse than they are. To write down
inter–ally debts by half and then try to collect them, would be an
aggravation, not a cure, of the existing difficulties. The solution,
therefore, must not be one which tries to extract the last theoretical
penny from everybody; its main object must be to set the Finance
Ministers of _every_ country a problem not incapable of wise solution
over the next five years.

                    I. _The Revision of the Treaty_

The Reparation Commission have assessed the Treaty claims at 138
milliard gold marks, of which 132 milliards are for pensions and
damage and 6 milliards for Belgian debt. They have not stated in what
proportions the 132 milliards are divided between pensions and damages.
My own assessment of the Treaty claims (p. 131 above) is 110 milliards,
of which 74 milliards are for pensions and allowances, 30 milliards for
damage and 6 milliards for Belgian debt.

The arguments of Chapter VI make it incumbent on those who are
convinced by them to abandon as dishonorable the claims to pensions and
allowances. This reduces the claims to 36 milliards, a sum which it may
not be in our interest to exact in full, but which is probably within
Germany’s theoretical capacity to pay.

Apart from clearing out of the way various clauses which are no longer
operative or useful, and from terminating the occupation on conditions
set forth below, I should limit my Revision of the Treaty to this
simple stroke of the pen. Let the present assessment of 138 milliard
gold marks be replaced by 36 milliard gold marks.

We are strictly entitled under the Armistice Terms to these 36
milliards; and if prudence recommends an abatement below that figure,
such abatement can properly be made, on terms, by those and those only
who are entitled to the claims. I estimate with some confidence that
this sum of 36 milliards is divisible between the Allies about in the
proportions shown in the table below.

The payment by Germany of 5 per cent interest and 1 per cent sinking
fund on this total sum is not, in my judgment, theoretically
impossible. But it could only be done by stimulating her export
industries in a manner injurious and irritating to Great Britain, and
by imposing on her Treasury a financial problem of such difficulty that
it would tend to unsound finance and to weak, unstable Governments.
Even though this payment is theoretically possible, I do not think that
it is practically obtainable over a period of thirty years.

                  │Damage.│Belgian Debt.│Total.
  British Empire  │    9  │        2    │   11
  France          │   16  │        2    │   18
  Belgium         │    3  │       ..    │    3
  Italy           │    1  │       ..    │    1
  United States   │   ..  │        2    │    2
  Others          │    1  │       ..    │    1
                  │   30  │        6    │   36

I recommend, therefore, that, as a separate arrangement from the
Revision of the Treaty as above, the British Empire should waive the
whole of their claims, with the exception of 1 milliard gold marks
reserved for a special purpose explained below, and should undertake
to square the claims of Italy and the minor claimants by cancelation
of debt owing from them; thus leaving Germany to pay 18 milliards to
France and 3 milliards to Belgium (on the assumption that the United
States also would forego the trifle due to her). This sum should be
discharged by an annual payment of 6 per cent of the sum due (being
5 per cent interest and 1 per cent sinking fund) over a period of
thirty years. With the assistance of minor measures to ease the opening
period, it is reasonable to suppose that this amount could be paid
without serious injury to any one.

In so far as it proves convenient to discharge this liability in goods,
and not in cash, so much the better. But I see no advantage in laying
stress on this. It would be wiser to leave Germany to find the money as
best she can, any payment in goods being by mutual agreement, as in the
Wiesbaden plan.

It may lead, however, to great anomalies to fix the annual payments
in terms of _gold_ over so long a period as thirty years. If gold
prices fall, the burden may become intolerable. If gold prices rise,
the claimants may be cheated of their expectations. The annual payment
should be adjusted, therefore, by some impartial authority, with
reference to an index number of the commodity–value of gold.

The other Treaty change relates to the Occupation. It would promote
peaceable relations in Europe if, as a part of the new settlement, the
Allied troops were withdrawn altogether from German territory, and all
rights of invasion for whatever purpose waived, except by leave of a
majority vote of the League of Nations. But in return, the British
Empire and the United States should guarantee to France and Belgium
all reasonable assistance, short of warfare, in securing satisfaction
for their reduced claims; whilst Germany should guarantee the complete
de–militarization of her territory west of the Rhine.

                 II. _The Satisfaction of the Allies_

_France._—Is it in the interest of France to accept this settlement?
If it is combined with further concessions from Great Britain and
the United States by the cancelation of her debts to them, it is
overwhelmingly in her interest.

What is her present balance–sheet of claims and liabilities? She
is entitled to 52 per cent of what Germany pays. On p. 75 I have
calculated what this will be under the London Settlement, (_a_) on
the basis of German exports at the rate of 6 milliards, namely 3.56
milliard gold marks; and (_b_) on the basis of exports at the rate
of 10 milliards, namely 4.60 milliard gold marks. France’s share,
therefore, is 1.85 milliards per annum on assumption (_a_), and 2.39
milliards on assumption (_b_). On the other hand, she owes the United
States $3634 million and the United Kingdom £557 million. If these sums
be converted into gold marks at par, and the annual charge on them is
calculated at 5 per cent for interest and 1 per cent for sinking fund,
her liability is 1.48 milliards per annum. That is to say, if Germany
pays in full and if the more favorable assumption (_b_) is adopted
as to the growth of her exports, the most for which France can hope
under existing arrangements is a net sum of .91 milliard gold marks
(£45,500,000 gold) per annum. Whereas under the revised scheme she will
not only be entitled to a greater sum, namely 1.08 milliard gold marks
(£54,000,000 gold) per annum; but, inasmuch as she will be accorded a
priority on Germany’s available resources, and as the total charge is
within Germany’s capacity, she may reasonably expect to be paid.

My proposal provides for the complete restoration of the devastated
provinces at a fair valuation of the actual damage done, and it
abandons other rival claims which stand in the way of the priority of
this paramount claim. But apart from this, about which opinions will
differ, and apart from the increased likelihood which it affords of
really getting payment, France will actually receive a larger sum than
if the letter of the existing agreements is adhered to all round.

_Belgium_ is entitled at present to 8 per cent of the receipts, which
under the London Settlement would amount to 280 million gold marks per
annum on assumption (_a_) and 368 million on assumption (_b_). Under
the new proposal she will receive 180 million gold marks per annum
and will gain in certainty what she loses in possible receipts. The
satisfaction of her existing priority should be adjusted by mutual
agreement between herself and France.

_Italy_ would gain immensely. She is entitled to 10 per cent of the
receipts under the London Settlement (together with some claims on
problematical receipts from Austria and Bulgaria); that is to say, 326
million gold marks per annum on assumption (_a_) and 460 million on
assumption (_b_). But these sums are far below the annual charge of her
obligations towards the United Kingdom and the United States, which,
converted into gold marks on the same basis as that employed above in
the case of France, amounts to 1000 million gold marks per annum.

                  III. _The Assistance of New States_

I have reserved above, out of the claims of Great Britain, a sum of
one milliard gold marks, with the object, not that she should retain
this sum for herself, but that she should use it to ease the financial
problems of two states for which she has a certain responsibility,
namely Austria and Poland.

_Austria’s_ problems are well known and attract a general sympathy. The
Viennese were not made for tragedy; the world feels that, and there
is none so bitter as to wish ill to the city of Mozart. Vienna has
been the capital of degenerate greatness, but, released from imperial
temptations, she is now free to fulfil her true rôle of providing for
a quarter–part of Europe the capital of commerce and the arts. Somehow
she has laughed and cried her way through the last two years; and
now, I think, though on the surface her plight is more desperate than
before, a very little help will be enough. She has no army, and by
virtue of the depreciation of her money a trifling internal debt. Too
much help may make of her a lifelong beggar; but a little will raise
her from despondency and render her financial problem no longer beyond

My proposal, then, is to cancel the debts she owes to foreign
governments, including empty claims to Reparation, and to give her a
comparatively small sum out of the milliard gold marks reserved from
British claims on Germany. Credits placed at her disposal in Berlin,
equivalent in value to 300 million gold marks, to be available, as
required, over a period of five years, might be enough.

For the other new States, the cancelation of debt owing, and, in the
case of Hungary, of Reparation claims, should be enough, except for

_Poland_, too, must be given a possible problem, but it is not easy
to be practical with so impracticable a subject. Her main problem can
be solved only by time, and the recovery of her neighbors. I deal
here only with the urgent question of making just possible for her a
reorganization of currency, and of facilitating a peaceable intercourse
between herself and Germany. For this purpose I would assign to her the
balance of the reserved milliard, namely, 700 million gold marks, of
which the annual interest should be available to her unconditionally,
but of which the capital should be employed only for a currency
reorganization, under conditions to be approved by the United States
and Great Britain.

In its essentials this scheme is very simple. I think that it satisfies
my criterion of leaving every Finance Minister in Europe with a
possible problem. The rest must come gradually, and I will not burden
the argument of this book by considering along what lines the detailed
solutions should be sought.

Who are the losers? Even on paper—far more in reality—every
continental country gains an advantage. But on paper the United States
and the United Kingdom are losers. What is each of them giving up?

Under the London Settlement Great Britain is entitled to 22 per cent
of the receipts, which is from 780 to 1010 million gold marks per
annum (£39,000,000 to £50,500,000 gold) according to which assumption
is adopted as to the volume of German exports. She is owed by various
European governments (including Russia, see Appendix No. IX.)
£1,800,000,000, which at 6 per cent for interest and sinking fund is
£108,000,000 per annum. On paper she would forego these sums, say
£150,000,000 per annum, altogether. In actual fact, her prospects of
securing more than a fraction of this amount are remote. Great Britain
lives by commerce, and most Englishmen now need but little persuading
that she will gain more in honor, prestige, and wealth by employing
a prudent generosity to preserve the equilibrium of commerce and
the well–being of Europe, than by attempting to exact a hateful and
crushing tribute, whether from her victorious Allies or her defeated

The United States would forego on paper a capital sum of about 6500
million dollars, which, at 6 per cent, represents an annual charge
of $390,000,000 (£78,000,000 gold). But in my opinion the chance of
her being actually paid any considerable amount of this, if she tries
to exact it, is decidedly remote.[111] Is there any likelihood of
the United States joining in such a scheme _soon enough_ (for I feel
confident she will cancel these debts in the end) to be useful?

Most Americans, with whom I have discussed this question, express
themselves as personally favorable to the cancelation of the European
debts, but add that so great a majority of their countrymen think
otherwise that such a proposal is at present outside practical
politics. They think, therefore, that it is premature to discuss it;
for the present, America must pretend she is going to demand the money
and Europe must pretend she is going to pay it. Indeed, the position is
much the same as that of German Reparation in England in the middle
of 1921. Doubtless my informants are right about this public opinion,
the mysterious entity which is the same thing perhaps as Rousseau’s
General Will. Yet, all the same, I do not attach, to what they tell me,
too much importance. Public opinion held that Hans Andersen’s Emperor
wore a fine suit; and in the United States especially, public opinion
changes sometimes, as it were, _en bloc_.

If, indeed, public opinion were an unalterable thing, it would be a
waste of time to discuss public affairs. And though it may be the
chief business of newsmen and politicians to ascertain its momentary
features, a writer ought to be concerned, rather, with what public
opinion should be. I record these platitudes because many Americans
give their advice, as though it were actually immoral to make
suggestions which public opinion does not now approve. In America,
I gather, an act of this kind is considered so reckless, that some
improper motive is at once suspected, and criticism takes the form of
an inquiry into the culprit’s personal character and antecedents.

Let us inquire, however, a little more deeply into the sentiments and
emotions which underlie the American attitude to the European debts.
They want to be generous to Europe, both out of good feeling and
because many of them now suspect that any other course would upset
their own economic equilibrium. But they don’t want to be “done.” They
do not want it to be said that once again the old cynics in Europe have
been one too many for them. Times, too, have been bad and taxation
oppressive; and many parts of America do not feel rich enough at the
moment to favor a light abandonment of a possible asset. Moreover,
these arrangements, between nations warring together, they liken much
more closely than we do to ordinary business transactions between
individuals. It is, they say, as though a bank having made an unsecured
advance to a client, in whom they believe, at a difficult time when
he would have gone under without it, this client were then to cry
off paying. To permit such a thing would be to do an injury to the
elementary principles of business honor.

The average American, I fancy, would like to see the European nations
approaching him with a pathetic light in their eyes and the cash in
their hands, saying, “America, we owe to you our liberty and our
life; here we bring what we can in grateful thanks, money not wrung
by grievous taxation from the widow and orphan, but saved, the best
fruits of victory, out of the abolition of armaments, militarism,
Empire, and internal strife, made possible by the help you freely gave
us.” And then the average American would reply: “I honor you for your
integrity. It is what I expected. But I did not enter the war for
profit or to invest my money well. I have had my reward in the words
you have just uttered. The loans are forgiven. Return to your homes and
use the resources I release to uplift the poor and the unfortunate.”
And it would be an essential part of the little scene that his reply
should come as a complete and overwhelming surprise.

Alas for the wickedness of the world! It is not in international
affairs that we can secure the sentimental satisfactions which we all
love. For only individuals are good, and all nations are dishonorable,
cruel, and designing. In deciding whether Italy (for example) must pay
what she owes, America must consider the consequences of trying to make
her pay,—so far as self–interest is concerned, in terms of economic
equilibrium between America and Italy, and, so far as generosity is
concerned, in terms of Italian peasants and their lives. And whilst the
various Prime Ministers will telegraph something suitable, drafted by
their private secretaries, to the effect that America’s action makes
the moment of writing the most important in the history of the world
and proves that Americans are the noblest creatures living, America
must not expect adequate or appropriate thanks.

Nevertheless, since time presses, we cannot rely on American
assistance, and we must do without it if necessary. If America
does not feel ready to participate in a Conference of Revision and
Reconstruction, Great Britain should be prepared to do her part in the
cancelation of paper claims, irrespective of similar action by the
United States.

The simplicity of my plan may be emphasized by summarizing it. (1)
Great Britain, and if possible America too, to cancel all the debts
owing them from the Governments of Europe and to waive their claims to
any share of German Reparation; (2) Germany to pay 1260 million gold
marks (£63,000,000 gold) per annum for 30 years, and to hold available
a lump sum of 1000 million gold marks for assistance to Poland and
Austria; (3) this annual payment to be assigned in the shares 1080
million gold marks to France and 180 million to Belgium.

This would be a just, sensible, and permanent settlement. If France
were to refuse it, she would indeed be sacrificing the substance to
the shadow. In spite of superficial appearances to the contrary, it
is also in the self–interest of Great Britain. Perhaps British public
opinion, profoundly altered though it now is, may not yet be reconciled
to obtaining nothing. But this is a case where a wise nation will do
best by acting in a large way. I have not neglected to consider with
care the various possible devices by which Great Britain might get, or
appear to get, something for herself from the settlement. She might
take, for instance, in satisfaction of her claims some of the C Bonds
under the London Settlement, which, having a third priority after
provision for the A and B Bonds, can be given a nominal value but are
really worth nothing. She might, in lieu of receiving a share of the
proceeds of the German customs, stipulate that her goods should be
admitted into Germany free of duty. She might seek a partial control
over German industries, or obtain the services of German organization
for the future exploitation of Russia. Plans of this sort attract an
ingenious mind and are not to be discarded too hastily. Yet I prefer
the simple plan, and I believe that all these devices are contrary to
true wisdom.

There is a disposition in some quarters to insist that any concessions
to France by Great Britain and the United States, affecting Reparation
and Inter–Ally Debt, should be conditional on France’s acceptance of a
more pacific policy towards the rest of the world than that to which
she herself appears to be inclined. I hope that France will abandon her
opposition to proposals for reduced military and naval establishments.
What a handicap her youth will suffer if she maintains conscription
whilst her neighbors, voluntarily or involuntarily, have abandoned
it! Does she realize the impossibility of friendship between Great
Britain and _any_ neighboring Power which embarks on a large program
of submarines? I hope, too, that France will forget her dangerous
ambitions in Central Europe and will limit strictly those in the Near
East; for both are based on rubbishy foundations and will bring her no
good. That she has anything to fear from Germany in the future which
we can foresee, except what she may herself provoke, is a delusion.
When Germany has recovered her strength and pride, as in due time she
will, many years must pass before she again casts her eyes Westward.
Germany’s future now lies to the East, and in that direction her hopes
and ambitions, when they revive, will certainly turn.

France has an opportunity now of consolidating her national position
into one of the stablest, safest, richest on the face of the earth;
self–contained; well– but not over–populated; the heir of a peculiar
and splendid civilization. Neither whining about devastated districts,
which are easily repaired, nor boasting of military hegemonies, which
can quickly ruin her, let her lift up her head as the leader and
mistress of Europe in the peaceful practices of the mind.

Nevertheless, these objects are not to be gained by bargaining and
cannot be imposed from without. Therefore they must not be dragged
into the Reparation Settlement. This Settlement must be offered France
on one condition only,—that she accepts it. But if, like Shylock, she
claims her pound of flesh, then let the Law prevail. Let her have her
bond, and let us have our bonds too. Let her get what she can from
Germany and pay what she owes to the United States and England.

The chief question for dispute is, perhaps, whether an annual payment
by Germany of £63,000,000 (gold) is enough. I admit that the payment
of a somewhat larger sum may prove to be within her capacity. But I
recommend this figure because on the one hand it is sufficient to
restore the destruction done in France, yet on the other is not so
crushing that, to make Germany pay it, we need be in a position to
invade her every spring and autumn. We must fix the payment at an
amount which Germany herself will recognize as not unjust, and which is
sufficiently within her maximum capacity to leave her some incentive to
work and pay it off.

Suppose that we knew the theoretical maximum of Germany’s capacity
to produce and sell abroad a surplus of goods, or could hit on some
sliding scale which would automatically absorb year by year whatever
surplus there was; should we be wise to demand it? The project of
extracting at the point of the bayonet—for that is what it would
mean—a payment so heavy that it would never be paid voluntarily,
and to go on doing this until all the makers of the Peace Treaty of
Versailles have been long dead and buried in their local Valhallas, is
neither good nor sensible.

My own proposals, moderate though they may seem in comparison with
others, throw on Germany a very great burden. They procure for France
an enormous benefit. Frenchmen, having fed to satiety on imaginary
figures, are nearly ready, I think, to find a surprising flavor and
piquancy in real ones. Let them consider what a tremendous financial
strength my scheme would give them. Freed from external debt, they
would receive in real values each year for thirty years a payment
equivalent in gold to nearly half the gold reserve now held by the Bank
of France; and at the end of the set period Germany would have paid
back ten times what she took after 1870.

Is it for Englishmen to complain? Are they really losers? One cannot
cast up a balance–sheet between incommensurables. But peace and amity
might be won for Europe. And England is only asked (as I fancy she
knows pretty well, by now, in her bones) to give up something which she
will never get anyhow. The alternative is that we and the United States
will be jockeyed out of our claims amidst a general international


[111] This scheme is in no way concerned with the debt of Great Britain
to the United States, which is excluded from the above figures. The
question of the right treatment of this debt (which differs from the
others chiefly because the interest on it is capable of being actually
collected in cash) raises other issues with which I am not dealing
here. The above proposals for cancelation relate solely to the debts
owing by the Governments of Continental Europe to the Governments of
Great Britain and the United States.

                         APPENDIX OF DOCUMENTS

                    I. THE SPA AGREEMENT, JULY 1920

 (_A_) _Summary[112] of the Agreement upon Reparations between the
   Allies, signed by the British Empire, France, Italy, Japan, Belgium,
   and Portugal._

ARTICLE 1 provides that in pursuance of the Treaty of Versailles the
sums received from Germany for reparations shall be divided in the
following proportions:

  France              52 per cent.
  British Empire      22    ”
  Italy               10    ”
  Belgium              8    ”
  Japan and Portugal     ¾ of 1 per cent each.

The remaining 6½ per cent is reserved for the Serbo–Croat–Slovene
State and for Greece, Rumania, and other Powers not signatories of the

ARTICLE 2 provides that the aggregate amount received for reparation
from Austria–Hungary and Bulgaria, together with amounts that may be
received in respect of the liberation of territories belonging to the
former Austro–Hungarian Monarchy, shall be divided:

  (_a_) As to half in the proportions mentioned in Article 1.

  (_b_) As to the other half, Italy shall receive 40 per cent, while 60
    per cent is reserved for Greece, Rumania, and the Serbo–Croat–Slovene
    State and other Powers entitled to reparations but not signatories of
    the Agreement.

ARTICLE 3 provides that the Allied Governments shall adopt measures to
facilitate if necessary the issue by Germany of loans destined for the
internal requirements of that country and to the prompt discharge of
the German debt to the Allies.

ARTICLE 4 deals in detail with the keeping of accounts by the
Reparation Commission.

ARTICLE 5 secures to Belgium her priority of £100,000,000 gold and
enumerates the securities affected by such priority.[113]

ARTICLE 6 deals with the valuation of ships surrendered under the
various Peace Treaties, and provides for the allocation of sums
received for the hire of such ships. It deals also with questions
outstanding as to the decisions taken by the Belgian Prize Courts.
Belgium receives compensation out of the shares of other Allied Powers.

ARTICLE 7 refers to the Allied cruisers, floating docks, and material
handed over under the Protocol of January 10, 1920, as compensation for
the German warships which were sunk.

ARTICLE 8 declares that the same Protocol shall apply to the proceeds
of the sale of ships and war material surrendered under the naval
clauses of the Treaty, virtually including the proceeds of naval war
material sold by the Reparation Commission.

ARTICLE 9 gives Italy an absolutely prior claim to certain specified
sums as a set–off to amounts due to her by Austria–Hungary and Bulgaria.

ARTICLE 10 reserves the rights of Poland and declares that this
Agreement shall not apply to her.

ARTICLE 11 maintains the rights of countries who lent money to Belgium
before November 11, 1918, and makes provision for repayment immediately
after satisfaction of the Belgian claim to priority in respect of

ARTICLE 12 maintains the rights of the Allied Powers to the repayment
of credits granted to ex–enemy Powers for the purposes of relief.

ARTICLE 13 reserves the question of fixing the cost of the armies of
occupation in Germany on a uniform basis for discussion with the United
States of America.

 (_B_) _The Allied Note to Germany on the Subject of Coal Deliveries_

1. The German Government undertakes to place at the disposal of the
Allies, from August 1, 1920, for the ensuing six months, 2,000,000 tons
of coal per month, this figure having been approved by the Reparation

2. The Allied Governments will credit the Reparation accounts with
the value of this coal, as far as it is delivered by rail or inland
navigation, and it will be valued at the German internal price in
accordance with Paragraph 6 (A), Annex V., Part VIII., of the Treaty of
Versailles. In addition, in consideration of the admission of the right
of the Allies to have coal of specified kind and quality delivered to
them, a premium of five gold marks, payable in cash by the party taking
delivery, shall be applied to the acquisition of foodstuffs for the
German miners.

3. During the period of the coal deliveries provided for above, the
stipulations of Paragraphs 2, 3, and 4 of the draft Control Protocol of
July 11, 1920, shall be put in force at once in the modified form of
the Annex hereto. (See below.)

4. An agreement shall be made forthwith between the Allies for
distribution of the Upper Silesian coal output by a Commission on which
Germany will be represented. This agreement shall be submitted for the
approval of the Reparation Commission.

5. The Commission, on which the Germans shall be represented, shall
meet forthwith at Essen. Its purpose shall be to seek means by which
the conditions of life among the miners with regard to food and
clothing can be improved, with a view to the better working of the

6. The Allied Governments declare their readiness to make advances
to Germany equal in amount to the difference between the price paid
under Paragraph 2 above, and the export price of German coal, f.o.b.
in German ports, or the English export price, f.o.b. in English ports,
whichever may be the lowest, as laid down in Paragraph VI. (B) of
Annex V., Part VIII., of the Treaty of Versailles. These advances
shall be made in accordance with Articles 235 and 251 of the Treaty of
Versailles. They shall enjoy an absolute priority over all other Allied
claims on Germany. The advances shall be made at the end of each month,
in accordance with the number of tons delivered and the average f.o.b.
price of coal during the period. Advances on account shall be made by
the Allies at the end of the first month, without waiting for exact

7. If by November 15, 1920, it is ascertained that the total deliveries
for August, September, and October 1920 have not reached 6,000,000
tons, the Allies will proceed to the occupation of a further portion of
German territory, either the region of the Ruhr or some other.


1. A permanent delegation of the Reparation Commission will be set up
at Berlin, whose mission will be to satisfy itself by the following
means that the deliveries of coal to the Allies provided for under the
Agreement of July 15, 1920, shall be carried out: The programmes for
the general distribution of output, with details of origin and kind,
on the one hand, and the orders given to ensure deliveries to the
Allied Powers on the other hand, shall be drawn up by the responsible
German authorities and submitted by them for the approval of the said
delegation a reasonable time before their despatch to the executive
bodies responsible for their execution.

2. No modification in the said programme which may involve a reduction
in the amount of the deliveries to the Allies shall be put into effect
without prior approval of the Delegation of the Reparation Commission
in Berlin.

3. The Reparation Commission, to which the German Government must
periodically report the execution by the competent bodies of the orders
for deliveries to the Allies, will notify to the interested Powers any
infraction of the principles adopted herein.

            II. THE PARIS DECISIONS,[114] JANUARY 29, 1921

1. In satisfaction of the obligations laid on her by Articles 231 and
232 of the Treaty of Versailles, Germany shall pay, apart from the
restitutions which she must effect in conformity with Article 238 and
all obligations under the Treaty:

(1) Fixed annuities, payable in equal instalments at the end of each
six months, as follows:

                                   milliard gold marks
  (_a_) Two        annuities of       2       (May 1, 1921–May 1, 1923)
  (_b_) Three           ”             3       (May 1, 1923–May 1, 1926)
  (_c_) Three           ”             4       (May 1, 1926–May 1, 1929)
  (_d_) Three           ”             5       (May 1, 1929–May 1, 1932)
  (_e_) Thirty–one      ”             6       (May 1, 1932–May 1, 1963)

(2) Forty–two annuities, reckoning from May 1, 1921, equivalent to 12
per cent of the value of Germany’s exports, levied on the receipts
from them and payable in gold two months after the conclusion of each
six–monthly period.

To ensure that (2) above shall be completely carried out, Germany will
accord to the Reparation Commission every facility for verifying the
amount of the exports and for establishing the necessary supervision.

2. The German Government shall deliver forthwith to the Reparation
Commission Bearer Bonds payable at the due dates laid down in Article
1 (1) of the present scheme, and of an amount equal to each of the
six–monthly instalments payable thereunder. Instructions will be given
with the object of facilitating, on the part of such Powers as may
require it, the mobilisation of the portion accruing to them under the
Agreements which they have established amongst themselves.

3. Germany shall be entitled at any time to anticipate the fixed
portion of her obligation.

Payments made by her in anticipation shall be applied in reduction of
the fixed annuities prescribed in Article 1 (1), discounted at a rate
of 8 per cent up to May 1, 1923, 6 per cent from May 1, 1923, to May 1,
1925, and 5 per cent after May 1, 1925.

4. Germany shall not embark on any credit operation abroad, directly
or indirectly, without the approval of the Reparation Commission.
This restriction applies to the Government of the German Empire, the
Government of the German States, German provincial and municipal
authorities, and also to companies and enterprises controlled by these
Governments and authorities.

5. In pursuance of Article 248 of the Treaty of Versailles all the
assets and revenues of the German Empire and its constituent States
are held in guarantee of the complete execution by Germany of the
provisions of this scheme.

The receipts of the German Customs, by land and sea, in particular the
receipts of all import and export duties and all supplementary taxes,
constitute a special pledge for the execution of the present Agreement.

No modification shall be introduced, liable to diminish the yield of
the Customs, without the Reparation Commission approving the Customs
Legislation and Regulations of Germany.

The whole of the receipts of the German Customs shall be credited to
the account of the German Government, by a Receiver–General of the
German Customs, nominated by the German Government with the assent of
the Reparation Commission.

In the event of Germany failing to meet one of the payments laid down
in the present scheme:

(1) The whole or part of the receipts of the German Customs shall be
taken over from the Receiver–General of the German Customs by the
Reparation Commission and applied by it to the obligations in which
Germany has defaulted. In this event the Reparation Commissions shall,
if it deems necessary, itself assume the administration and collection
of the Customs receipts.

(2) The Reparation Commission shall be entitled, in addition, to
require the German Government to impose such higher tariffs or to
take such other measures to increase its resources as it may deem

(3) If this injunction is without effect, the Commission shall be
entitled to declare the German Government in default and to notify this
state of affairs to the Governments of the Allied and Associated Powers
who shall take such measures as they think justified.

                                     (Signed) HENRI JASPAR.
                                              D. LLOYD GEORGE.
                                              ARISTIDE BRIAND.
                                              C. SFORZA.
                                              K. ISHII.

  PARIS, _January 29, 1921_.



           I.—_Damage to Property (Reconstitution Values)_

                                                            Frs. (Paper)
  Industrial damages                                       38,882,521,479
  Damage to buildings (_propriété bâtie_)                  36,892,500,000
  Damage to furniture and fittings (_dommages
       mobiliers_)                                         25,119,500,000
  Damage to land (_propriété non bâtie_)                   21,671,546,225
  Damage to State property                                  1,958,217,193
  Damage to public works                                    2,583,299,425
  Other damages                                             2,359,865,000
  Shipping losses                                           5,009,618,722
  Damages suffered in Algeria and colonies                     10,710,000
    Do. abroad                                              2,094,825,000
  Interest at 5 per cent on the principal
      (33,000,000,000 francs, in round figures,
      between November 11, 1918, and May 1, 1921,
      or 30 months), say, in round figures                  4,125,000,000

                      II.—_Injuries to Persons_

                                               Frs. (Paper)
  Military pensions                           60,045,696,000
  Allowances to families of mobilised men     12,936,956,824
  Pensions accorded to civilian victims of
      the war and their dependants               514,465,000
  Ill–treatment inflicted on civilians and
      prisoners of war                         1,869,230,000
  Assistance given to prisoners of war           976,906,000
  Insufficiency of salaries and wages            223,123,313
  Exactions by Germany to the detriment
      of the civilian population               1,267,615,939
        Total of the French claims           218,541,596,120

                             GREAT BRITAIN

                                       £                Frs.
  Damage to property                7,936,456
  Shipping losses                 763,000,000
  Losses abroad                    24,940,559
  Damage to river and canal
      shipping                      4,000,000
  Military pensions             1,706,800,000
  Allowances to families of
      mobilised men                                 7,597,832,086
  Pensions for civilian victims    35,915,579
  Ill–treatment inflicted on
      civilians and prisoners          95,746
  Assistance to prisoners of war       12,663
  Insufficiency of salaries and
      wages                             6,372
                               ──────────────  ──────────────────
                               £2,542,070,375  Frs. 7,597,832,086
                               ══════════════  ══════════════════


  Damage to property                           Lire 20,933,547,500
  Shipping losses                                     £128,000,000
  Military pensions                          Francs 31,041,000,000
  Allowances to families of mobilised men     Francs 6,885,130,395
  Civilian victims of the war and prisoners    Lire 12,153,289,000
                          Total                Lire 33,086,836,000
                            ”                Francs 37,926,130,395
                            ”                         £128,000,000


  Damage to property (present value)    Belgian Frcs.   29,773,939,099
  Shipping losses (present value)       Belgian Frcs.   180,708,250
  Military pensions                      French Frcs.   1,637,285,512
  Allowances to families of mobilised
      men                                 French Frcs.    737,930,484
  Civilian victims and prisoners of war  Belgian Frcs.  4,295,998,454
                      Total              Belgian Frcs. 34,254,645,893
                        ”                 French Frcs.  2,375,215,996

The other claims may be summarised as follows:

  Japan              297,593,000 yen (shipping losses).
    ”                454,063,000 yen (allowances to families of mobilised
                     ───────────   men).
                     832,774,000 yen.

  Jugo–Slavia      8,496,091,000 dinars (damage to property).
       ”          19,219,700,112 francs (injuries to persons).
  Rumania          9,734,015,287 gold francs (property losses).
    ”              9,296,663,076 gold francs (military pensions).
    ”             11,652,009,978 gold francs (civilians and prisoners of
                  31,099,400,188 gold francs.

  Portugal        1,944,261 contos (1,574,907 contos for property loss).
  Greece          4,992,788,739 gold francs (1,883,181,542 francs for
                       property loss).
  Brazil          £1,216,714 (shipping £1,189,144), plus 598,405 francs.
  Czecho–Slovakia 6,944,228,296 francs and 5,614,947,990 kroner
                    618,204,007 francs and 1,448,169,845 kroner (Bolshevist
                  ─────────────            ─────────────
                  7,612,432,103 francs and 7,063,117,135 kroner.
  Siam            9,179,298 marks, gold, plus 1,169,821 francs.
  Bolivia         £16,000.
  Peru            £56,236, plus 107,389 francs.
  Haiti           $80,000, plus 532,593 francs.
  Cuba            $801,135.
  Liberia         $3,977,135.
  Poland          21,913,269,740 francs gold, plus 500,000,000 marks gold.
  European      }
  Danube        }   1,834,800 francs gold, 15,048 francs French, and
  Commission    }       488,051 lei.


The following declaration was delivered to Dr. Simons by Mr. Lloyd
George, speaking on behalf of the British and Allied Governments, by
word of mouth:

“The Allies have been conferring upon the whole position and I am now
authorised to make this declaration on their behalf:

“The Treaty of Versailles was signed less than two years ago. The
German Government have already defaulted in respect of some of its most
important provisions: the delivery for trial of the criminals, who have
offended against the laws of war, disarmament, the payment in cash or
in kind of 20,000,000,000 of gold marks (£1,000,000,000). These are
some of the provisions. The Allies have displayed no harsh insistence
upon the letter of their bond. They have extended time, they have even
modified the character of their demands; but each time the German
Government failed them.

“In spite of the Treaty and of the honourable undertaking given at Spa,
the criminals have not yet been tried, let alone punished, although the
evidence has been in the hands of the German Government for months.
Military organisations, some of them open, some clandestine, have been
allowed to spring up all over the country, equipped with arms that
ought to have been surrendered. If the German Government had shown in
respect of reparations a sincere desire to help the Allies to repair
the terrible losses inflicted upon them by the act of aggression of
which the German Imperialist Government was guilty, we should still
have been ready as before to make all allowances for the legitimate
difficulties of Germany. But the proposals put forward have reluctantly
convinced the Allies either that the German Government does not intend
to carry out its Treaty obligations, or that it has not the strength to
insist, in the face of selfish and short–sighted opposition, upon the
necessary sacrifices being made.

“If that is due to the fact that German opinion will not permit it,
that makes the situation still more serious, and renders it all the
more necessary that the Allies should bring the leaders of public
opinion once more face to face with facts. The first essential fact for
them to realise is this—that the Allies, whilst prepared to listen to
every reasonable plea arising out of Germany’s difficulties, cannot
allow any further paltering with the Treaty.

                            _The Ultimatum_

“We have therefore decided—having regard to the infractions already
committed, to the determination indicated in these proposals that
Germany means still further to defy and explain away the Treaty, and
to the challenge issued not merely in these proposals but in official
statements made in Germany by the German Government—that we must
act upon the assumption that the German Government are not merely in
default, but deliberately in default; and unless we hear by Monday that
Germany is either prepared to accept the Paris decisions or to submit
proposals which will in other ways be an equally satisfactory discharge
of her obligations under the Treaty of Versailles (subject to the
concessions made in the Paris proposals), we shall, as from that date,
take the following course under the Treaty of Versailles.

“The Allies are agreed:

  (1) To occupy the towns of Duisburg, Ruhrort, and Düsseldorf, on the
      right bank of the Rhine.

  (2) To obtain powers from their respective Parliaments requiring their
      nationals to pay a certain proportion of all payments due to Germany
      on German goods to their several Governments, such proportion to be
      retained on account of reparations. (This is in respect of goods
      purchased either in this country or in any other Allied country from

  (3) (_a_) The amount of the duties collected by the German Customs
      houses on the external frontiers of the occupied territories to be
      paid to the Reparation Commission.

      (_b_) These duties to continue to be levied in accordance with the
       German tariff.

      (_c_) A line of Customs houses to be temporarily established on the
      Rhine and at the boundary of the _têtes des ponts_ occupied by the
      Allied troops; the tariff to be levied on this line, both on the
      entry and export of goods, to be determined by the Allied High
      Commission of the Rhine territory in conformity with the instructions
      of the Allied Governments”.

                      GOVERNMENT, APRIL 24, 1921

The United States Government have, by their Note of April 22, opened
the possibility, in a way which is thankfully acknowledged, of solving
the reparations problem once more by negotiations ere a solution is
effected by coercive measures. The German Government appreciates this
step in its full importance. They have in the following proposals
endeavoured to offer that which according to their convictions
represents the utmost limit which Germany’s economic resources can
bear, even with the most favourable developments:

1. Germany expresses her readiness to acknowledge for reparation
purposes a total liability of 50 milliard gold marks (present value).
Germany is also prepared to pay the equivalent of this sum in
annuities, adapted to her economic capacity up to an aggregate of 200
milliard gold marks. Germany proposes to mobilise her liability in the
following way:

2. Germany to raise at once an international loan, of which amount,
rate of interest, and amortisation quota are to be agreed on. Germany
will participate in this loan, and its terms, in order to secure the
greatest possible success, will contain special concessions, and
generally be made as favourable as possible. Proceeds of this loan to
be placed at the disposal of the Allies.

3. On the amount of her liability not covered by the international
loan Germany is prepared to pay interest and amortisation quota in
accordance with her economic capacity. In present circumstances she
considers the rate of 4 per cent the highest possible.

4. Germany is prepared to let the Powers concerned have the benefit
of improvements in her economic and financial situation. For this
purpose the amortisation quota should be made variable. In case an
improvement should take place, the quota would rise, whilst it would
correspondingly fall if developments should be in the other direction.
To regulate such variations an index scheme would have to be prepared.

5. To accelerate the redemption of the balance, Germany is ready to
assist with all her resources in the reconstruction of the devastated
territories. She considers reconstruction the most pressing part of
reparation, because it is the most effective way to combat the hatred
and misery caused by the war. She is prepared to undertake, herself,
the rebuilding of townships, villages, and hamlets, or to assist in
the reconstruction with labour, material, and her other resources, in
any way the Allies may desire. The cost of such labour and material
she would pay herself. (Full details about this matter have been
communicated to the Reparation Commission.)

6. Apart from any reconstruction work Germany is prepared to supply
for the same purpose, to States concerned, any other materials, and
to render them any other services as far as possible on a purely
commercial basis.

7. To prove the sincerity of her intention to make reparation at once,
and in an unmistakable way, Germany is prepared to place immediately at
the disposal of the Reparation Commission the amount of one milliard
gold marks in the following manner: First, 150,000,000 gold marks in
gold, silver, and foreign bills; secondly, 850,000,000 gold marks in
Treasury bills, to be redeemed within a period not exceeding three
months by foreign bills and other foreign values.

8. Germany is further prepared, if the United States and the Allies
should so desire, to assume part of the indebtedness of the Allies to
the United States as far as her economic capacity will allow her.

9. In respect of the method by which the German expenditures for
reparation purposes should be credited against her total liability,
Germany proposes that prices and values should be fixed by a commission
of experts.

10. Germany is prepared to secure subscribers for the loan in every
possible way by assigning to them public properties or public income
in a way to be arranged for.

11. By the acceptance of these proposals all other German liabilities
on reparation account are cancelled, and German private property abroad

12. Germany considers that her proposals can only be realised if the
system of sanctions is done away with at once; if the present basis of
German production is not further diminished; and if the German nation
is again admitted to the world’s commerce and freed of all unproductive

These proposals testify to the German firm will to make good damage
caused by the war up to the limit of her economic capacity. The amounts
offered, as well as mode of payment, depend on this capacity. As far as
differences of opinion as to this capacity exist, the German Government
recommend that they be examined by a commission of recognised experts
acceptable to all the interested Governments. She declares herself
ready in advance to accept as binding any decision come to by it.
Should the United States Government consider negotiations could be
facilitated by giving the proposals another form, the German Government
would be thankful if their attention were drawn to points in which the
United States Government consider an alteration desirable. The German
Government would also readily receive any other proposals the United
States Government might feel inclined to make.

The German Government is too firmly convinced that the peace and
welfare of the world depend on a prompt, just, and fair solution of
the reparation problem not to do everything in their power to put the
United States in a position which enables them to bring the matter to
the attention of the Allied Governments.—_Berlin, April 24, 1921._


The Reparation Commission, in discharge of the provisions of Article
233 of the Treaty of Versailles, has reached a unanimous decision to
fix at 132 milliard gold marks the total of the damages for which
reparation is due by Germany under Article 232 (2) and Part VIII.,
Annex I. of the said Treaty.

In fixing this figure the Commission have made the necessary deductions
from the total of damages to cover restitutions effected or to be
effected in discharge of Article 238, so that no credit will be due to
Germany from the fact of these restitutions.

The Commission have not included in the above figure the sum
corresponding to the obligation, which falls on Germany as an addition
in virtue of Article 232 (3), “to make reimbursement of all sums which
Belgium has borrowed from the Allied and Associated Governments up to
November 11, 1918, together with interest at the rate of 5 per cent per
annum on such sums.”


The Allied Powers, taking note of the fact that, in spite of the
successive concessions made by the Allies since the signature of the
Treaty of Versailles, and in spite of the warnings and sanctions agreed
upon at Spa and at Paris, as well as of the sanctions announced in
London and since applied, the German Government is still in default
in the fulfilment of the obligations incumbent upon it under the
terms of the Treaty of Versailles as regards (1) disarmament; (2) the
payment due on May 1, 1921, under Article 235 of the Treaty, which
the Reparation Commission has already called upon it to make at this
date; (3) the trial of the war criminals as further provided for by
the Allied Notes of February 13 and May 7, 1920; and (4) certain other
important respects, notably those which arise under Articles 264 to
267, 269, 273, 321, 322, and 327 of the Treaty, decide:—

  (_a_) To proceed forthwith with such preliminary measures as may be
    required for the occupation of the Ruhr Valley by the Allied Forces on
    the Rhine in the contingency provided for in Paragraph (_d_) of this

  (_b_) In accordance with Article 233 of the Treaty to invite the
    Reparation Commission to prescribe to the German Government without
    delay the time and manner for securing and discharging the entire
    obligation incumbent upon that Government, and to announce their
    decision on this point to the German Government at latest on May 6.

  (_c_) To call upon the German Government categorically to declare
    within a period of six days from the receipt of the above decision its
    resolve (1) to carry out without reserve or condition their obligations
    as defined by the Reparation Commission; (2) to accept without reserve
    or condition the guarantees in respect of those obligations prescribed
    by the Reparation Commission; (3) to carry out without reserve or delay
    the measures of military, naval, and aerial disarmament notified to the
    German Government by the Allied Powers in their Note of January 29,
    1921, those overdue being completed at once, and the remainder by the
    prescribed dates; (4) to carry out without reserve or delay the trial
    of the war criminals and the other unfulfilled portions of the Treaty
    referred to in the first paragraph of this Note.

  (_d_) Failing fulfilment by the German Government of the above
    conditions by May 12, to proceed to the occupation of the Valley of
    the Ruhr and to take all other military and naval measures that may be
    required. Such occupation will continue so long as Germany fails to
    comply with the conditions summarised in Paragraph (_c_).

                           (Signed) HENRI JASPAR.
                                    A. BRIAND.
                                    D. LLOYD GEORGE.
                                    C. SFORZA.

  _Schedule of Payments Prescribing the Time and Manner for Securing
    and Discharging the Entire Obligation of Germany for Reparation under
    Articles 231, 232, and 233 of the Treaty of Versailles._

The Reparation Commission has, in accordance with Article 233 of the
Treaty of Versailles, fixed the time and manner for securing and
discharging the entire obligation of Germany for Reparation under
Articles 231, 232, and 233 of the Treaty as follows:—

This determination is without prejudice to the duty of Germany to make
restitution under Article 238, or to other obligations under the Treaty.

1. Germany will perform in the manner laid down in this Schedule her
obligations to pay the total fixed in accordance with Articles 231,
232, and 233 of the Treaty of Versailles by the Commission—viz.
132 milliards of gold marks (£6,600,000,000) less (_a_) the amount
already paid on account of Reparation; (_b_) sums which may from time
to time be credited to Germany in respect of State properties in
ceded territory, etc.; and (_c_) any sums received from other enemy
or ex–enemy Powers in respect of which the Commission may decide that
credits should be given to Germany, _plus_ the amount of the Belgian
debt to the Allies, the amounts of these deductions and additions to be
determined later by the Commission.

2. Germany shall create and deliver to the Commission in substitution
for bonds already delivered or deliverable under Paragraph 12 (_c_)
of Annex 2 of Part VIII. (Reparation) of the Treaty of Versailles the
bonds hereinafter described.

(_A_) Bonds for an amount of 12 milliard gold marks (£600,000,000).
These bonds shall be created and delivered at latest on July 1, 1921.
There shall be an annual payment from funds to be provided by Germany
as prescribed in this agreement, in each year from May 1, 1921, equal
in amount to 6 per cent of the nominal value of the issued bonds, out
of which there shall be paid interest at 5 per cent per annum, payable
half–yearly on the bonds outstanding at any time, and the balance to
sinking fund for the redemption of the bonds by annual drawings at par.
These bonds are hereinafter referred to as bonds of Series (_A_).

(_B_) Bonds for a further amount of 38 milliard gold marks
(£1,900,000,000). These bonds shall be created and delivered at the
latest on November 1, 1921. There shall be an annual payment from funds
to be provided by Germany as prescribed in this agreement in each year
from November 1, 1921, equal in amount to 6 per cent of the nominal
value of the issued bonds, out of which there shall be paid interest
at 5 per cent per annum, payable half–yearly on the bonds outstanding
at any time and the balance to sinking fund for the redemption of the
bonds by annual drawings at par. These bonds are hereinafter referred
to as bonds of Series (_B_).

(_C_) Bonds for 82 milliards of gold marks (£4,100,000,000), subject
to such subsequent adjustment by creation or cancellation of bonds as
may be required under Paragraph (1). These bonds shall be created and
delivered to the Reparation Commission, without coupons attached, at
latest on November 1, 1921; they shall be issued by the Commission as
and when it is satisfied that the payments which Germany undertakes to
make in pursuance of this agreement are sufficient to provide for the
payment of interest and sinking fund on such bonds. There shall be an
annual payment from funds to be provided by Germany as prescribed in
this agreement in each year from the date of issue by the Reparation
Commission equal in amount to 6 per cent of the nominal value of the
issued bonds, out of which shall be paid interest at 5 per cent per
annum, payable half–yearly on the bonds outstanding at any time, and
the balance to sinking fund for the redemption of the bonds by annual
drawings at par. The German Government shall supply to the Commission
coupons for such bonds as and when issued by the Commission. These
bonds are hereinafter referred to as bonds of Series (_C_).

3. The bonds provided for in Article 2 shall be signed German
Government bearer bonds, in such form and in such denominations as the
Reparation Commission shall prescribe for the purpose of making them
marketable, and shall be free of all German taxes and charges of every
description present or future.

Subject to the provisions of Articles 248 and 251 of the Treaty of
Versailles these bonds shall be secured on the whole of the assets and
revenues of the German Empire and the German States, and in particular
on the specific assets and revenues specified in Article 7 of the
agreement. The service of the bonds of Series (_A_), (_B_), and (_C_)
shall be a first, second, and third charge respectively on the said
assets and revenues and shall be met by the payments to be made by
Germany under this Schedule.

4. Germany shall pay in each year until the redemption of the bonds
provided for in Article 2 by means of the sinking funds attached

  (1) A sum of two milliard gold marks (£100,000,000).

  (2) (_a_) A sum equivalent to 25 per cent of the value of her exports
      in each period of 12 months starting from May 1, 1921, as determined
      by the Commission; or

      (_b_) Alternatively an equivalent amount as fixed in accordance with
      any other index proposed by Germany and accepted by the Commission.

  (3) A further sum equivalent to 1 per cent of the value of her exports
      as above defined, or alternatively an equivalent amount fixed as
      provided in (_b_) above.

Provided always that when Germany shall have discharged all her
obligations under this Schedule, other than her liability in respect
of outstanding bonds, the amount to be paid in each year under this
paragraph shall be reduced to the amount required in that year to meet
the interest and sinking fund on the bonds then outstanding.

Subject to the provisions of Article 5, the payments to be made in
respect of Paragraph (1) above shall be made quarterly before the end
of each quarter, _i.e._ before January 15, April 15, July 15, and
October 15 each year, and the payments in respect of Paragraphs (2)
and (3) above shall be made quarterly, November 15, February 15, May
15, August 15, and calculated on the basis of the exports in the last
quarter but one preceding that quarter, the first payment to be made
November 15, 1921.

5. Germany will pay within 25 days from this notification one milliard
gold marks (£50,000,000) in gold or approved foreign bills or in drafts
at three months on the German Treasury, endorsed by approved German
banks and payable in London, Paris, New York, or any other place
designated by the Reparation Commission. These payments will be treated
as the first two quarterly instalments of the payments provided for in
compliance with Article 4 (1).

6. The Commission will within 25 days from this notification, in
accordance with Paragraph 12 (_d_), Annex II. of the Treaty as amended,
establish the special Sub–Commission, to be called the Committee of
Guarantees. The Committee of Guarantees will consist of representatives
of the Allied Powers now represented on the Reparation Commission,
including a representative of the United States of America, in the
event of that Government desiring to make the appointment.

The Committee shall co–opt not more than three representatives of
nationals of other Powers whenever it shall appear to the Commission
that a sufficient portion of the bonds to be issued under this
agreement is held by nationals of such Powers to justify their
representation on the Committee of Guarantees.

7. The Committee of Guarantees is charged with the duty of securing
the application of Articles 241 and 248 of the Treaty of Versailles.

It shall supervise the application to the service of the bonds provided
for in Article 2 of the funds assigned as security for the payments to
be made by Germany under Paragraph 4. The funds to be so assigned shall

  (_a_) The proceeds of all German maritime and land customs and duties,
    and in particular the proceeds of all import and export duties.

  (_b_) The proceeds of the levy of 25 per cent on the value of all
    exports from Germany, except those exports upon which a levy of not
    less than 25 per cent is applied under the legislation referred to in
    Article 9.

  (_c_) The proceeds of such direct or indirect taxes or any other
    funds as may be proposed by the German Government and accepted by the
    Committee of Guarantees in addition to or in substitution for the funds
    specified in (_a_) or (_b_) above.

The assigned funds shall be paid to accounts to be opened in the name
of the Committee and supervised by it, in gold or in foreign currency
approved by the Committee. The equivalent of the 25 per cent levy
referred to in Paragraph (_b_) shall be paid in German currency by the
German Government to the exporter.

The German Government shall notify to the Committee of Guarantees any
proposed action which may tend to diminish the proceeds of any of the
assigned funds, and shall, if the Committee demand it, substitute some
other approved funds.

The Committee of Guarantees shall be charged further with the duty
of conducting on behalf of the Commission the examination provided
for in Paragraph 12 (_b_) of Annex 2 to Part VIII. of the Treaty of
Versailles, and of verifying on behalf of the said Commission, and if
necessary of correcting, the amount declared by the German Government
as the value of German exports for the purpose of the calculation of
the sum payable in each year under Article 4 (2) and the amounts of
the funds assigned under this Article to the service of the bonds.
The Committee shall be entitled to take such measures as it may deem
necessary for the proper discharge of its duties.

The Committee of Guarantees is not authorised to interfere in German

8. Germany shall on demand, subject to the prior approval of the
Commission, provide such material and labour as any of the Allied
Powers may require towards the restoration of the devastated areas
of that Power, or to enable any Allied Power to proceed with the
restoration or development of its industrial or economic life. The
value of such material and labour shall be determined by a valuer
appointed by Germany and a valuer appointed by the Power concerned,
and, in default of agreement, by a referee nominated by the Commission.
This provision as to valuation does not apply to deliveries under
Annexes III., IV., V., and VI. to Part VIII. of the Treaty.

9. Germany shall take every necessary measure of legislative and
administrative action to facilitate the operation of the German
Reparation (Recovery) Act, 1921, in force in the United Kingdom, and
of any similar legislation enacted by any Allied Power, so long as
such legislation remains in force. Payments effected by the operation
of such legislation shall be credited to Germany on account of the
payment to be made by her under Article 4 (2). The equivalent in German
currency shall be paid by the German Government to the exporter.

10. Payment for all services rendered, all deliveries in kind, and all
receipts under Article 9 shall be made to the Reparation Commission by
the Allied Power receiving the same in cash or current coupons within
one month of the receipt thereof, and shall be credited to Germany on
account of the payments to be made by her under Article 4.

11. The sum payable under Article 4 (3) and the surplus receipts by the
Commission under Article 4 (1) and (2) in each year, not required for
the payment of interest and sinking fund on bonds outstanding in that
year, shall be accumulated and applied so far as they will extend, at
such times as the Commission may think fit, by the Commission in paying
simple interest not exceeding 2½ per cent per annum from May 1,
1921, to May 1, 1926, and thereafter at a rate not exceeding 5 per cent
on the balance of the debt not covered by the bonds then issued. No
interest thereon shall be payable otherwise.

12. The present Schedule does not modify the provisions securing the
execution of the Treaty of Versailles, which are applicable to the
stipulations of the present Schedule.


This Agreement, signed by M. Loucheur and Herr Rathenau at Wiesbaden
on October 6, 1921, is a lengthy document, consisting of a Protocol,
Memorandum, and Annex. The effective clauses are to be found mainly
in the Annex. The full text has been published in a British White
Paper [Cmd. 1547]. This White Paper also contains (1) an explanatory
Memorandum, (2) the Decision of the Reparation Commission, and (3) a
Report from Sir John Bradbury to the British Treasury. Extracts from
these three documents are given below.

                      1. _Explanatory Memorandum_

In order to understand the arrangements proposed by the Wiesbaden
Agreement, it is necessary to bear in mind certain provisions of the
Treaty of Versailles, the application of which is affected by it.

The Treaty itself provides in the Reparation Chapter, Part VIII.,
and in some of its Annexes, for the partial liquidation of Germany’s
reparation indebtedness by deliveries in kind. The important passages
in this connection are Paragraph 19 of Annex II. and Annex IV.,
which together make extensive provision for the delivery, through
the Reparation Commission, to the Allied and Associated Powers of
machinery, equipment, tools, reconstruction material, and, in general,
all such material and labour as is necessary to enable any Allied Power
to proceed with the restoration or development of its industrial or
economic life.

Germany’s obligation being stated in terms of gold and not in terms
of commodities, provision has necessarily been made in all cases
for crediting Germany, from time to time, with the fair value, as
assessed by the Reparation Commission, of such deliveries. Moreover,
since the proportions received by the respective Powers in kind need
not necessarily correspond exactly with their respective shares
in Germany’s reparation payments, as determined by Inter–Allied
agreement, provision is further necessarily made in the Treaty
to render each Power accountable not only to Germany, but to the
Reparation Commission, for the value of these deliveries. Thus, on
the one hand, the Treaty stipulates as between the Allies and Germany
that the value of services under the Annexes shall be credited towards
the liquidation of Germany’s general obligation, and the Schedule
of Payments assigns the value of Annex deliveries to the service of
the bonds handed over by Germany as security for her debt. On the
other hand, the Treaty provides that for the purpose of equitable
distribution as between the Allies, the value of Annex deliveries
shall be reckoned in the same manner as cash payments effected in the
year, and the Schedule of Payments stipulates that the value of the
deliveries received by each Power shall, within one month of the date
of delivery, be paid over to the Reparation Commission, either in cash
or in current coupons.

Further, the Treaty imposes upon the Reparation Commission not only the
duty of fixing prices, but also of determining the capacity of Germany
to deliver goods demanded by any of the Allies, and, by implication,
of deciding between the competing demands which are made upon that
capacity by the Allies themselves.

The Wiesbaden Agreement provides for the delivery by a German
company[116] to French “sinistrés” of “all plant and materials
compatible with the productive capacity of Germany, her supply of
raw materials and her domestic requirements,” that is to say, of the
articles and materials which can be demanded under Annex IV. and
Paragraph 19 of Annex II., which are, by the terms of the Agreement,
in so far as France is concerned, virtually suspended, the obligations
of Germany to deliver to France under the other Annexes remaining

Any question as to the capacity of Germany to satisfy the requirement
of France, and all questions of price, are to be settled by a
Commission of three members, one French and one German, and a third
selected by common agreement or nominated by the Swiss President.

The aggregate value of the deliveries to be made under the Agreement,
and of the deliveries to be made under Annexes III., V. and VI.
(hereafter, for the sake of brevity, called the “Annex deliveries”) in
the period expiring on the 1st May 1926, is fixed at a maximum of 7
milliard gold marks.

In regard to the Annex deliveries the Agreement in no way modifies
the Treaty provisions under which Germany is credited and France
debited forthwith with the value, but special provisions, which are
financially the essential part of the Agreement, are made for bringing
to reparation account the value of the Agreement deliveries. These
special provisions are designed to secure that Germany shall only be
credited on reparation account at the time of delivery with a certain
proportion of them, and that deliveries not thus accounted for, which
may be called “excess deliveries,” shall be liquidated over a period
of years beginning at the earliest on 1st May 1926. The provisions
themselves are somewhat intricate, comprising, as they do, a series of
interacting limitations, and they require some elucidation.

  (1) In no case is credit to be given to Germany in any one year for
    Annex and Agreement deliveries together to an amount exceeding one
    milliard gold marks.

  (2) In no case is credit to be given to Germany in any one year for
    more than 45 per cent of the value of the Agreement deliveries or for
    more than 35 per cent if the value of the Agreement deliveries exceeds
    one milliard gold marks.

The effect of the above is to prescribe that 55 per cent (or, if the
Agreement operates successfully, 65 per cent) of the value of the
Agreement deliveries _as a minimum_ will be the object of deferred
payment by instalments. If the Agreement deliveries reached really high
figures, the operation of the milliard limitation would make the carry
forward much more than 65 per cent.

The excess deliveries are to be liquidated with interest at 5 per cent
per annum in 10 equal annual instalments as from 1st May 1926, subject
to certain conditions:—

  (1) France shall in no case be debited in one year for Agreement
    deliveries with an amount which, when added to the value of her Annex
    deliveries in that year, would make her responsible for more than her
    share (52 per cent) of the total reparation payments made by Germany in
    that year.

  (2) Agreement deliveries continue after 1st May 1926, with the same
    provisions for deferred payment. If in any year between May 1926 and
    May 1936 the amount (not exceeding 35 or 45 per cent) of the value of
    that year’s Agreement deliveries to be credited to Germany, together
    with the annual instalment to repay the debt incurred in respect of the
    period ending 1st May 1926, exceeds one milliard, the excess is to be
    carried forward from year to year until a year is reached in which no
    such excess is created by the payment. But in no case shall the amount
    credited, even if it is less than one milliard gold marks, exceed the
    limit laid down by the preceding condition.

  (3) Any balance with which Germany has not been credited on 1st May
    1936 is to be credited to her with compound interest at 5 per cent in
    four half–yearly payments on 30th June and 31st December 1936 and 30th
    June and 31st December 1937. But, again, these half–yearly payments
    shall not be made if the effect of making them would be to exceed the
    limit laid down in Condition 1 above.

  (4) Agreement deliveries continue indefinitely after 1st May 1936, with
    power, however, to Germany to arrest them whenever the execution of
    them would result in France owing more than 52 per cent of Germany’s
    annual reparation payment in respect of Annex deliveries, deferred
    payments already matured, and the 35 or 45 per cent of current

From the above it is to be noted that, while there is a limitation for
the first five years of the amount of Agreement deliveries which can be
demanded, there is—

  (1) No point at which the right of France to demand these special
    deliveries automatically terminates.

  (2) No final limitation upon the value of the deliveries which can be
    demanded by France during the lifetime of the Agreement.

  (3) No definitely prescribed period within which France’s debt to
    Germany and to the other partners in reparation shall be liquidated.

       *       *       *       *       *

It remains necessary to draw attention to one subsidiary point of a
financial character under the Schedule of Payments. Part of Germany’s
annual reparation liability consists of the payment of 26 per cent of
the value of German exports in each period of twelve months, and part
of the security for the payment consists of the proceeds of a levy of
25 per cent on the value of all German exports. The French Government
has undertaken to support a request, to be submitted by the German
Government to the Reparation Commission, for the inclusion in the
exports which form the basis of these calculations of that part only of
the value of the deliveries made under the Agreement which is credited
to Germany and debited to France during any particular year.

If it can be assumed that any part of the special deliveries to be made
under the Agreement would, in the absence of the Agreement, have been
diverted to Germany’s ordinary external trade, then the concession
desired will have the effect of diminishing the annual payments made by
Germany for the benefit of the Allies as a whole.

  2. _Decision of the Reparation Commission on October 20, 1921, after
    considering the Franco–German Agreement of October 6, 1921_

The French Government, having submitted to the Reparation Commission
in accordance with Paragraph 3 of the Memorandum thereto attached
the Agreement between the representatives of the French and German
Governments signed at Wiesbaden on the 6th instant, the Commission has
come to the following decision:—

  (1) It entirely approves the general principles underlying the
    Agreement whereby special arrangements are proposed for enabling
    Germany to liquidate the largest possible proportion of her reparation
    obligations in the form of goods and services, more especially with a
    view to the speedier restoration of the Devastated Regions.

  (2) At the same time, it considers that the Agreement involves
    certain departures from the provisions of Part VIII. of the Treaty of
    Versailles, notably Article 237, Paragraphs 12 and 19 of Annex II. and
    Paragraph 5 of Annex IV.

  (3) As the Commission has no power to authorise such departures, it
    decides to refer the question to the Governments represented on the
    Commission, with a copy of the Memorandum and its Annex, recommending a
    favourable examination of them.

  (4) The Commission recommends that reasonable facilities for deferred
    payment in respect of the exceptional volume which, if the arrangements
    are successful, the deliveries in kind to France are likely to assume
    during the next few years, should be accorded to France, subject to
    any safeguards which the Allied Governments may regard as necessary to
    protect their respective interests.

  3. _Concluding Recommendations of Sir John Bradbury’s Report to the
    British Government (October 26, 1921)_

The safeguards which are envisaged as necessary by my Italian and
Belgian colleagues on the Reparation Commission and myself, and for
which we presume that our respective Governments will desire to
stipulate are—

  (1) That a limit of time should be laid down after the expiration of
    which no new deferment of debit should be permitted and the liquidation
    of the existing deferred debits should commence to be made by regular
    annual instalments.

The precise length of this period should be determined upon an estimate
of the time necessary to carry out the main work of reconstruction,
regard being had to the time required by Germany to effect the
necessary supplies. In view of the delays which are inevitable in
regard to operations of the magnitude of those contemplated, the
prescribed period might be reasonably somewhat longer than the four and
a half years’ initial period under the agreement, but it should not
exceed seven years.

  (2) That in no circumstances should the aggregate amount for which
    debit against France for the time being stands deferred be allowed to
    exceed a prescribed amount, say, 4 milliard gold marks.

  (3) That a provision should be inserted for the payment by France to
    the general reparation account from time to time (within the limits
    of the deferred debits for the time being outstanding) of any amounts
    which may be necessary to secure that the other Allies shall receive
    their proper proportions of the amounts due from Germany under the
    Schedule of Payments.

Subject to the introduction of these safeguards, to which it would
not appear that legitimate exception could be taken, the arrangements
contemplated by the agreement may be expected to accelerate the
solution of the Reparation problem on practical lines in a manner
advantageous to France without prejudicing the interests of other
Powers, and it is upon this ground that the Reparation Commission has
unanimously recommended them for favourable examination by the Allied

If the Allied Governments approve the general scheme, subject to
whatever safeguards they may decide to be necessary, there will
remain certain subsidiary points for the Reparation Commission to
consider—amongst other:—

  (1) The proposed omission of the excess deliveries from the index
    figure determining the annual liability under the Schedule of Payments,
    until such time as these deliveries are finally brought to account for
    reparation purposes.

  (2) The special arrangements for substitution in respect of articles
    of which France is entitled to restitution by identity, involving in
    certain cases money payments; and

  (3) The special arrangements in regard to the delivery of coal and the
    prices to be credited and debited, which in several particulars affect
    the interest of other Powers.


 (_A_) _Advances by the United States Government to other Governments
                          (as in July 1921)_

                 │ Credits granted │               │              │
                 │  under Liberty  │  Surplus War  │ Food Relief. │
                 │ Loan Acts.[117] │Materials Sale.│              │
                 │                 │               │              │
  Armenia        │                 │               │ $8,028,412.15│
  Austria        │                 │               │              │
  Belgium        │  $347,691,566.23│ $27,588,581.14│              │
  Cuba           │     9,025,500.00│               │              │
  Czecho–Slovakia│    61,256,206.74│  20,621,994.54│  6,428,089.19│
  Esthonia       │                 │  12,213,377.88│  1,785,767.72│
  Finland        │                 │               │  8,281,926.17│
  France         │ 2,950,762,938.19│ 400,000,000.00│              │
  Great Britain  │ 4,166,318,358.44│               │              │
  Greece         │    15,000,000.00│               │              │
  Hungary        │                 │               │              │
  Italy          │ 1,648,034,050.90│               │              │
  Latvia         │                 │   2,521,869.32│  2,610,417.82│
  Liberia        │        26,000.00│               │              │
  Lithuania      │                 │   4,159,491.96│    822,136.07│
  Poland         │                 │  59,636,320.25│ 51,671,749.36│
  Rumania        │    23,205,819.52│  12,922,675.42│              │
  Russia         │   187,729,750.00│     406,082.30│  4,465,465.07│
  Serbia         │    26,175,139.22│  24,978,020.99│              │
    Totals       │$9,435,225,329.24│$565,048,413.80│$84,093,963.55│

                 │              │  Interest   │
                 │    Grain     │ accrued and │      Total[118]
                 │ Corporation  │unpaid up to │     Obligations.
                 │              │  July 1921. │
  Armenia        │ $3,931,505.34│             │    $11,959,917.49
  Austria        │ 24,055,708.92│             │     24,055,708.92
  Belgium        │              │ $34,000,000 │    409,280,147.37
  Cuba           │              │             │      9,025,500.00
  Czecho–Slovakia│  2,873,238.25│   6,000,000 │     97,179,528.72
  Esthonia       │              │             │     13,999,145.60
  Finland        │              │             │      8,281,926.17
  France         │              │ 284,000,000 │  3,634,762,938.19
  Great Britain  │              │ 407,000,000 │  4,573,318,358.44
  Greece         │              │             │     15,000,000.00
  Hungary        │  1,685,835.61│             │      1,685,835.61
  Italy          │              │ 161,000,000 │  1,809,034,050.90
  Latvia         │              │             │      5,132,287.14
  Liberia        │              │             │         26,000.00
  Lithuania      │              │             │      4,981,628.03
  Poland         │ 24,353,590.97│             │    135,661,660.58
  Rumania        │              │   2,500,000 │     38,628,494.94
  Russia         │              │  19,000,000 │    211,601,297.37
  Serbia         │              │   3,500,000 │     54,653,160.21
    Totals       │$56,899,879.09│$943,500,000 │$11,084,767,585.68

 (_B_) _Advances by the British Government to Other Governments (as on
                           March 31, 1921)_

  _Allied Governments[119]_—

    France             £557,039,507    6    8
    Russia              561,402,234   18    5
    Italy               476,850,000    0    0
    Belgium             103,421,192    8    9
    Serbia               22,247,376   12    5
    Montenegro              204,755   19    9
    Rumania              21,393,662    2    8
    Portugal             18,575,000    0    0
    Greece               22,577,978    9    7
    Belgian Congo         3,550,300    0    0
                       ───────────────────────£1,787,262,007  18  3

  Loans for Relief—
    Austria              £8,605,134    9    9
    Rumania               1,294,726    0    8
         Kingdom          1,839,167    3    7
    Poland                4,137,040   10    1
    Czecho–Slovakia         417,392    3    3
    Esthonia                241,681   14    2
    Lithuania                16,811   12    4
    Latvia                   20,169    1   10
    Hungary                  79,997   15   10
    Armenia                  77,613   17    2
    Inter–Allied Commission
         on the Danube        6,868   17    6
                           ───────────────────     16,736,603  6  2
  Other Loans (Stores, etc.)—
    Czecho–Slovakia      £2,000,000    0   0
    Armenia                 829,634    9   3
                           ────────────────────     2,829,634  9  3
            Total                              £1,806,828,245 13  8


[112] The following is the official summary issued at the time. The
complete text of the Agreement has not been published.

[113] Of which the most tangible were 400,000,000 Danish kroner payable
in respect of Sleswig, certain sums were from Luxemburg for coal,
any balance available in respect of German ships seized as prizes in
Brazilian ports, and any balance available towards reparation out of
German assets in the United States.

[114] So far as I am aware, no complete official text of these
decisions has been published in English. The above is translated from
the French text.

[115] The Commission published at the same time a warning that it had
not adopted these claims, but was about to examine them.

[116] The arrangement under which a German private company is to be
created to deal directly with the orders without the intervention of
the French and German Governments is intended to obviate the delays
which experience has shown to be inseparable from the employment of the
present machinery. It does not appear to have any important bearing on
the general financial situation, since the deliveries will clearly have
to be financed by the German Government and will ultimately be paid for
by means of a reparation credit in account with the German Government.

[117] This is a net figure and allows for repayments made up to
July 1921, of which the chief items are $78,000,000 by France, and
$111,000,000 by Great Britain.

[118] The totals at the foot of these two columns include miscellaneous
items for interest not entered in the particulars given in the columns
themselves. A further sum of about $250,000,000 will have accrued for
interest by February 1922.

[119] These accounts include interest, except in the case of Belgium
and Serbia, from whom interest has not been charged, and in the case of
Russia, where no interest has been entered up since January 1918.


  Allied debts, 170 f., 183, 193 f., 238

  Armistice negotiations, 145, 148 f.

  Army of  Occupation,  expenses of, 84_n._, 133 f., 140, 191

  Austria, 130, 190, 191

  Balfour, A. J., 148_n._

  Baruch, 72_n._, 106_n._, 153, 155, 156, 159, 160_n._

  Belgian priority, 135–6, 139–40, 190, 204
    Reparation claims, 123–4, 197

  Boulogne Conference, 19

  Boyden, 112, 130

  Bradbury, Sir John, 93, 95, 128_n._, 129, 216

  Brenier, 109, 110, 118_n._

  Briand, 24, 25, 27, 41, 69, 114

  British Reparation Claims, 124, 211

  Brockdorff–Rantzau, 29

  Brussels Conference (Experts), 22–3

  Brussels Conference (League of Nations), 86

  Brussels Conference (Premiers), 19

  Bulgaria, 130, 190

  Clemenceau, 84_n._, 108, 149, 150

  Coal, 44 f., 75, 98

  Cunliffe, Lord, 72, 156

  Curzon, Lord, 57_n._

  D’Ahernon, Lord, 31

  Decisions of London, 95

  Disarmament of Germany, 16–19

  Dominion Prime Ministers’ Conference,   139

  Doumer, 111, 141

  Dubois, 110, 115_n._, 128_n._

  Dulles, John Foster, 156–7

  East Prussia (plebiscite), 11

  _Economic Consequences of the Peace_, 5, 39, 45, 51, 55_n._, 71, 72,
      74_n._, 107, 108, 114, 119, 124, 126_n._, 127_n._, 144, 146_n._,
      166, 173

  Elsas, Dr. Moritz, 88–9, 92_n._

  Exports, German, 79 f., 99, 165 f.

  Financial Agreement of Paris (Aug. 1921), 135, 141 f.

  Foch, Marshal, 31, 33, 57, 148_n._

  Forgeot, 70_n._

  Fournier–Sarlovèze, 116_n._

  Frankfurt, Occupation of, 15, 57

  French Reparation Claim, 107 f., 117 f., 210

  George, Lloyd, 1, 17, 18, 21, 27, 30, 33, 41, 84_n._, 121, 138_n._, 139,
      150, 155, 179, 198

  German Budget, 81 f.

  German Counter–proposal (March 1921), 28–30

  German Counter–proposal (April 1921), 36 f., 215 f.

  German individual income, 86 f.

  German property in United States, 77, 143

  Gladstone, 6

  Guarantees, Committee of, 68 f., 225 f.

  Haig, Sir Douglas, 148_n_.

  Harding, President, 171

  Heichen, Dr. Arthur, 87

  Helfferich, 88, 90

  _History of the Peace Conference of Paris_, 147_n._, 152_n._, 160_n._

  House, Col., 148_n._

  Hughes, W. M., 156

  Hungary, 192

  Hymans, 150

  Hythe Conference, 18

  Invasion of Germany, 31, 32, 36

  Italian Reparation Claims, 127, 211

  Italy, 190

  Kaiser, trial of, 14

  Kapp, “Putsch,” 15

  Klotz, 24, 72, 109, 111, 147, 151 f.

  Lamont, J. W., 106_n._, 161, 162_n._

  Lansburgh, Dr. Albert, 87

  Law, Bonar, 150

  League of Nations, 12, 61, 188

  Leipzig trials, 15

  Lévy, Raphaël–Georges, 118_n._

  Leygues, 21, 24

  Lignite, 55

  London Conference I., 28, 34

  London Conference II., 40

  London Settlement, 64 f., 72, 73, 81, 84_n._, 130, 188 f., 221

  London  Ultimatum I., 30, 35, 213

  London Ultimatum II., 16, 19, 31_n._, 42, 44, 57, 219 f.

  Loucheur, 31, 92, 95, 109, 110, 112_n._, 117, 120

  Loucheur–Rathenau Agreement; _vide_ Wiesbaden Agreement

  Mark Exchange, 81, 100 f.

  Mercantile Marine of Germany, 16, 137

  “Mermeix,” 148_n._, 149_n._

  Millerand, 18, 20

  Newspaper opinion, 7

  Nitti,  18

  Occupation, Army of, 84_n._, 133, 140

  Occupation of Germany, 188, 214, 219

  Occupation of Germany, legality of, 32, 41, 57 f.

  Orlando, 150

  Paris decisions, 18, 26, 32, 34, 39, 40, 57, 207

  Payment in kind, 97 f., 168

  Pensions, 125, 146 f., 185

  Poincaré, 24, 108, 128, 129

  Poland, 192 f.

  Poland’s coal, 52

  Private opinion, 7, 8

  Rathenau, 92, 95

  Reparation Claims, 126 f., 210 f.

  Reparation and International Trade, 163 f.

  Reparation Bill, 39, 106 f., 185

  Reparation Bonds, 58 f., 101, 207, 221

  Reparation Commission, 21, 32, 35, 45, 47, 59, 61, 66_n._, 67, 68, 73,
      93, 106, 110, 118, 126, 156, 221 f., 235

  Reparation Commission, Assessment of, 27, 127 f., 219

  Reparation, Estimates of, 39, 72

  Reparation Receipts, division of, 138 f., 203

  Restitution, 16, 149, 150

  Revision of Treaty, 185 f.

  Ruhr, Occupation of, 36, 41, 58, 204

  Ruhr riots, 15

  San Remo Conference, 15, 18

  Sanctions, 32, 36, 57_n._

  Schlesvig (plebiscite), 11

  Simons, 28, 29, 32, 38_n._, 213

  Smuts, General, 160

  Sonino, 150

  Spa Coal Agreement, 45 f., 102, 133, 136, 205

  Spa Conference, 18, 19, 45, 138, 203

  Sumner, Lord, 156

  Tardieu, 24, 27, 60, 72, 106_n._, 107_n._, 108_n._, 114_n._, 117,
      120_n._, 121_n._, 138, 147, 148_n._, 149_n._, 150_n._, 151, 153

  _The Times_, 18, 20, 22, 27, 32, 55_n._, 100, 110, 117_n._

  United States, 36, 38, 78_n._, 143

  United States and Inter–Allied Debts, 170, 183, 194 f., 238

  United States, Treaty rights of, towards Germany, 77, 78, 130, 140, 142

  Upper Silesia, 11, 30, 32, 39, 52, 54

  Westphalian riots, 15

  Wierzlicki, 53

  Wiesbaden Agreement, 76, 92 f., 187, 211 f.

  Wilson, President, 146 f., 151 f., 157, 160, 161–162

  Young, Allyn, 5_n._



_First published in London, December, 1919, and in New York, January,
1920. Afterwards reprinted in French, German, Italian, Spanish, Dutch,
Flemish, Danish, Swedish, Rumanian, Russian, and Chinese, these
editions, of which the chief are mentioned below, amounting in all to
140,000 copies._


 London: Macmillan and Co., 1919.


 London: Labour Research Department, 1920.

  [Out of print.]


 New York: Harcourt, Brace and Co. 1920. $2.50.


 Paris: Editions de la Nouvelle Revue Française. 1920.


 München: Duncker und Humblot. 1920.


 Amsterdam: Uitgevers–Maatschappij Elsevier. 1920.


 Milano: Fratelli Treves. 1920.


 Stockholm: Albert Bonnier. 1920.


 Madrid: Calpe. 1920.

 10. DE ECONOMISCHE GEVOLGEN VAN DEN VREDE. Vlaamsche Uitgave vertaing
 van G. W.

 Brussel: Uitgeverij _Ons Vaderland_. 1920.


 Bucaresti: Editura _Viata Romineasca_. 1920.


 Stockholm: W. Tullbergs Boktryckeri. 1921.



_THE NATION_, Dec. 13, 1919.—“This is the first heavy shot that has
been fired in the war which the intellectuals opened on the statesmen
the moment they realized what a piece of work the Treaty was.”

_WESTMINSTER GAZETTE_, Dec. 20, 1919.—“Mr. Keynes has produced a
smashing and unanswerable indictment of the economic settlement.... It
is too much to hope that the arbiters of our destinies will read it and
perhaps learn wisdom, but it should do much good in informing a wide
section of that public which will in its turn become the arbiters of

_SUNDAY CHRONICLE_, Dec. 21, 1919.—“No criticism of the Peace which
omits, as Mr. Keynes seems to me by implication to omit, the aspect of
it not as a treaty, but as a sentence, has any right to be heard by the
European Allied peoples.”

_THE SPECTATOR_, Dec. 20, 1919.—“The world is not governed by
economical forces alone, and we do not blame the statesmen at Paris for
declining to be guided by Mr. Keynes if he gave them such political
advice as he sets forth in his book.”

_THE TIMES_, Jan. 5, 1920.—“Mr. Keynes has written an extremely
‘clever’ book on the Peace Conference and its economic consequences....
As a whole, his cry against the Peace seems to us the cry of an
academic mind, accustomed to deal with the abstractions of that
largely metaphysical exercise known as ‘political economy,’ in revolt
against the facts and forces of actual political existence....
Indeed, one of the most striking features of Mr. Keynes’s book is the
political inexperience, not to say ingenuousness, which it reveals....
He believes it would have been wise and just to demand from Germany
payment of £2,000,000,000 ‘in final settlement of all claims without
further examination of particulars.’”

_THE ATHENÆUM_, Jan. 23, 1920.—“This book is a perfectly well–equipped
arsenal of facts and arguments, to which every one will resort for
years to come who wishes to strike a blow against the forces of
prejudice, delusion, and stupidity. It is not easy to make large
numbers of men reasonable by a book, yet there are no limits to which,
without undue extravagance, we may not hope that the influence of
this book may not extend. Never was the case for reasonableness more
powerfully put. It is enforced with extraordinary art. What might
easily have been a difficult treatise, semi–official or academic,
proves to be as fascinating as a good novel.”

_FORTNIGHTLY REVIEW_, March 1, 1920.—“Mr. Keynes’s book has now been
published three months, and no sort of official reply to it has been
issued. Nothing but the angry cries of bureaucrats have been heard. No
such crushing indictment of a great act of international policy, no
such revelation of the futility of diplomats has even been made.”

_TIMES LITERARY SUPPLEMENT_, April 29, 1920.—“Mr. Keynes ... has
violently attacked the whole work of those who made the Treaty in a
book which exhibits every kind of ability except the political kind....
Mr. Keynes knows everything except the elements of politics, which
is the science of discovering, and the art of accomplishing, the
practicable in public affairs.”

_TIMES_ (“Annual Financial and Commercial Review”), Jan. 28,
1921.—“The almost unhealthy greed with which Mr. Keynes’s book on _The
Economic Consequences of the Peace_ was devoured in a dozen countries
was but a symptom of the new desire to appreciate, and, if possible, to
cope with, the economic consequences not only of the peace but of the

_LIVERPOOL COURIER_, Feb. 2, 1921.—“In the eyes of the world—at
least, of the world that is not pro–German—the reparation costs are
wholly inadequate. It is true that in the eyes of Mr. J. M. Keynes
it is wicked to charge Germany with the cost of war pensions, but we
imagine that the average man with a simple sense of simple justice does
not agree with Mr. Keynes.”

“REALIST” in the _ENGLISH REVIEW_, March 1921.—“The operation of
indemnity–payment must be followed through to its remorseless end....
The cry ‘Germany must pay’ has still a good healthy sound about it.”

_ENGLISH REVIEW_, June 1921.—“What Mr. Maynard Keynes predicted in his
remarkable book is coming only too true. All over Europe the nations
are standing to arms, thinking boundaries, while trade languishes,
production stagnates, and credit lapses into the relativities.”


JOSEPH P. COTTON in the _EVENING POST_, New York, Jan. 30, 1920.—“Mr.
Keynes’s book is the first good book on peace and the reconstruction
of Europe. The writing is simple and sincere and true ... a great book
with a real message.”

PAUL D. CRAVATH in the _SUN AND NEW YORK HERALD_, Feb. 2, 1920.—“No
English novel during or since the war has had such a success as this
book. It should be read by every thoughtful American. It is the first
serious discussion of the Peace Treaty by a man who knows the facts and
is capable of discussing them with intelligence and authority.”

HAROLD J. LASKI in the _NATION_, New York, Feb. 7, 1920.—“This is
a very great book. If any answer can be made to the overwhelming
indictment of the Treaty that it contains, that answer has yet to
be published. Mr. Keynes writes with a fullness of knowledge, an
incisiveness of judgment, and a penetration into the ultimate causes
of economic events that perhaps only half–a–dozen living economists
might hope to rival. Nor is the manner of his book less remarkable than
its substance. The style is like finely–hammered steel. It is full of
unforgettable phrases and of vivid portraits etched in the biting acid
of a passionate moral indignation.”

F. W. TAUSSIG, Harvard University, in the _QUARTERLY JOURNAL OF
ECONOMICS_, Feb. 1920.—“Mr. Keynes needs no introduction to
economists. The high quality of his work is known. This book shows the
sure touch, the wide interests, the independent judgment, which we
expect. It shows, also, fine spirit and literary skill.... Coming to
the economic provisions of the Treaty, I find myself in general accord
with what Mr. Keynes says. He makes out an estimate of what Germany can
do in the way of reparation.... The maximum cannot, in his judgment,
exceed ten billions of dollars. Some such figure, it is not improper
to say, was reached independently by Professor A. A. Young in his
estimates for the American financial advisers.”

_FINANCIAL WORLD_, New York City, Feb. 16, 1920.—“There is a thousand
dollars of information in it for the average business man.”

FRANK A. VANDERLIP in _CHICAGO NEWS_, March 3, 1920.—“I regard it
as the most important volume published since the Armistice. It is
certain to have a profound effect on world thought. It is a deep
analysis of the economic structure of Europe at the outbreak of the
war, a brilliant characterisation of the Peace Conference, a revealing
analysis of the shortcomings of the Treaty, a dissection of the
reparation claims, done with the scientific spirit and steadiness of
hand of a great surgeon, a vision of Europe after the Treaty, which is
the most illuminating picture that has yet been made of the immediate
situation on the Continent, and, finally, constructive remedial
proposals. Every chapter bears the imprint of a master hand, of a mind
trained to translate economic data, and of absolutely unfaltering
courage to tell the truth.”

ALVIN JOHNSON in the _NEW REPUBLIC_, April 14, 1920.—“There has been
no failure anywhere to recognise that Keynes’s _Economic Consequences
of the Peace_ requires an ‘answer.’ Too many complacencies have been
assailed by it.... What progress are his critics making in their
attack on it?... There is surprisingly little effort made by American
reviewers to refute the charge that the Treaty is in many respects
in direct violation of the preliminary engagements, nor is anywhere
a serious attempt made to show that those engagements were not
morally binding.... The critics have not seriously shaken Keynes’s
characterization of the Treaty. They have not been able to get far away
from agreement with him as to what the Treaty should have been. They
admit the desirability of revision.”

_DETROIT FREE PRESS_, Nov. 21, 1921.—“Only once have I seen Viviani
go into action gradually. It was after his last trip to the United
States. He was talking in a subdued conversational tone when suddenly
he thought of John Maynard Keynes’s book, _The Economic Consequences
of the Peace_. His face, hitherto motionless, twitched a little. His
words accelerated slowly. The current of his emotion spread curiously
through the muscles of his whole body, until the figure which had been
relaxed from head to foot became tense in every fibre. In a moment he
was denouncing, with the sonorous blast of his anger, the book which
he said he had encountered in every country in the New World, as ‘a
monument of iniquity,’ a monster which confronted him everywhere in
South or North America, and which for some (to him) incredible reason
everyone seemed to believe as the gospel truth about the pact of

                          TRANSCRIBER’S NOTE

-Plain print and punctuation errors fixed.

-Table at page 238 has been splitted into two tables, because of its large

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