 | Chapter 5Reparation The economic consequences of the peace |  |
3. Annual payments spread over a term of years
It is evident that Germany's pre-war capacity to pay an annual foreign tribute has not been unaffected by the almost total loss of her colonies, her overseas connections, her mercantile marine, and her foreign properties, by the cession of ten per cent of her territory and population, of one-third of her coal and of three-quarters of her iron ore, by two million casualties amongst men in the prime of life, by the starvation of her people for four years, by the burden of a vast war debt, by the depreciation of her currency to less than one-seventh its former value, by the disruption of her allies and their territories, by revolution at home and Bolshevism on her borders, and by all the unmeasured ruin in strength and hope of four years of all-swallowing war and final defeat.
All this, one would have supposed, is evident. Yet most estimates of a great indemnity from Germany depend on the assumption that she is in a position to conduct in the future a vastly greater trade than ever she has had in the past.
For the purpose of arriving at a figure it is of no great consequence whether payment takes the form of cash (or rather of foreign exchange) or is partly effected in kind (coal, dyes, timber, etc.), as contemplated by the treaty. In any event, it is only by the export of specific commodities that Germany can pay, and the method of turning the value of these exports to account for reparation purposes is, comparatively, a matter of detail.
We shall lose ourselves in mere hypothesis unless we return in some degree to first principles and, whenever we can, to such statistics as there are. It is certain that an annual payment can only be made by Germany over a series of years by diminishing her imports and increasing her exports, thus enlarging the balance in her favour which is available for effecting payments abroad. Germany can pay in the long run in goods, and in goods only, whether these goods are furnished direct to the Allies, or whether they are sold to neutrals and the neutral credits so arising are then made over to the Allies. The most solid basis for estimating the extent to which this 'process can be carried is to be found, therefore, in an analysis of her trade returns before the war. Only on the basis of such an analysis, supplemented by some general data as to the aggregate wealth-producing capacity of the country, can a rational guess be made as to the maximum degree to which the exports of Germany could be brought to exceed her imports.
In the year 1913 Germany's imports amounted to £538 million and her exports to £505 million, exclusive of transit trade and bullion. That is to say, imports exceeded exports by about £33 million. On the average of the five years ending 1913, however, her imports exceeded her exports by a substantially larger amount, namely, £74 million. It follows, therefore, that more than the whole of Germany's pre-war balance for new foreign investment was derived from the interest on her existing foreign securities, and from the profits of her shipping, foreign banking, etc. As her foreign properties and her mercantile marine are now to be taken from her, and as her foreign banking and other miscellaneous sources of revenue from abroad have been largely destroyed, it appears that, on the pre-war basis of exports and imports, Germany, so far from having a surplus wherewith to make a foreign payment, would be not nearly self-supporting. Her first task, therefore, must be to effect a readjustment of consumption and production to cover this deficit. Any further economy she can effect in the use of imported commodities, and any further stimulation of exports will then be available for reparation.
Two-thirds of Germany's import and export trade is enumerated under separate headings in the following tables. The considerations applying to the enumerated portions may be assumed to apply more or less to the remaining one-third, which is composed of commodities of minor importance individually.
| German exports, 1913 | Amount: Million Dollars | Percentage of Total Exports |
| Iron goods (including tin-plates, etc.) | 330.65 | 13.2 |
| Machinery and parts (including motor-cars) | 187.75 | 7.5 |
| Coal, coke, and briquettes | 176.70 | 7.0 |
| Woollen goods (including raw and combined wool and clothing) | 147.00 | 5.9 |
| Cotton goods (including raw cotton, yarn and thread) | 140.75 | 5.6 |
| 982.85 | 39.3 | |
| Cereals, etc. (including rye, oats, wheat, hops) | 105.90 | 4.1 |
| Leather and leather goods | 77.35 | 3.0 |
| Sugar | 66.00 | 2.6 |
| Paper, etc. | 65.50 | 2.6 |
| Furs | 58.75 | 2.2 |
| Electrical goods (installations, machinery, lamps, cables) | 54.40 | 2.2 |
| Silk goods | 50.50 | 2.0 |
| Dyes | 48.80 | 1.9 |
| Copper goods | 32.50 | 1.3 |
| Toys | 25.75 | 1.0 |
| Rubber and rubber goods | 21.35 | 0.9 |
| Books, maps, and music | 18.55 | 0.6 |
| Potash | 15.90 | 0.8 |
| Glass | 15.70 | 0.6 |
| Potassium chloride | 14.55 | 0.6 |
| Pianos, organs, and parts | 13.85 | 0.6 |
| Raw zinc | 13.70 | 0.5 |
| Porcelain | 12.65 | 0.5 |
| 711.70 | 67.2 | |
| Other goods, unenumerated | 829.60 | 32.8 |
| Total | 2,524.15 | 100.0 |
| German imports, 1913 | Amount: Million Dollars | Percentage of Total Imports |
| 1. Raw materials:-- | ||
| Cotton | 151.75 | 5.6 |
| Hides and skins | 124.30 | 4.6 |
| Wool | 118.35 | 4.4 |
| Copper | 83.75 | 3.1 |
| Coal | 68.30 | 2.5 |
| Timber | 58.00 | 2.2 |
| Iron ore | 56.75 | 2.1 |
| Furs | 46.75 | 1.7 |
| Flax and flaxseed | 46.65 | 1.7 |
| Saltpetre | 42.75 | 1.6 |
| Silk | 39.50 | 1.5 |
| Rubber | 36.50 | 1.4 |
| Jute | 23.50 | 0.9 |
| Petroleum | 17.45 | 0.7 |
| Tin | 14.55 | 0.5 |
| Phosphorus chalk | 11.60 | 0.4 |
| Lubricating oil | 11.45 | 0.4 |
| 951.90 | 35.3 | |
| II. Food, tobacco, etc.:-- | ||
| Cereals, etc. (wheat, barley, bran, rice, maize, oats, rye, clover) | 327.55 | 12.2 |
| Oilseeds and cake, etc. (including palm kernels, copra, cocoa beans) | 102.65 | 3.8 |
| Cattle, lamb fat, bladders | 73.10 | 2.8 |
| Coffee | 54.75 | 2.0 |
| Eggs | 48.50 | 1.8 |
| Tobacco | 33.50 | 1.2 |
| Butter | 29.65 | 1.1 |
| Horses | 29.05 | 1.1 |
| Fruit | 18.25 | 0.7 |
| Fish | 14.95 | 0.6 |
| Poultry | 14.00 | 0.5 |
| Wine | 13.35 | 0.5 |
| 759.30 | 28.3 | |
| III. Manufactures:-- | ||
| Cotton yarn and thread and cotton goods | 47.05 | 1.8 |
| Woollen yarn and woollen goods | 37.85 | 1.4 |
| Machinery | 20.10 | 0.7 |
| 105.00 | 3.9 | |
| IV. Unenumerated | 876.40 | 32.5 |
| Total | 2,692.60 | 100.0 |
These tables show that the most important exports consisted of:
- (1) iron goods, including tin-plates (13.2%);
- (2) machinery, etc. (7.5%);
- (3) coal, coke, and briquettes (7%);
- (4) woollen goods, including raw and combed wool (5.9 %); and
- (5) cotton goods, including cotton yarn and thread and raw cotton (5.6%),
Next on the list come cereals, leather goods, sugar, paper, furs, electrical goods, silk goods, and dyes. Cereals are not a net export and are far more than balanced by imports of the same commodities. As regards sugar, nearly 90 per cent of Germany's pre-war exports came to the United Kingdom.[51] An increase in this trade might be stimulated by the grant of a preference in this country to German sugar or by an arrangement by which sugar was taken in part payment for the indemnity on the same lines as has been proposed for coal, dyes, etc. Paper exports also might be capable of some increase. Leather goods, furs, and silks depend upon corresponding imports on the other side of the account. Silk goods are largely in competition with the trade of France and Italy. The remaining items are individually very small. I have heard it suggested that the indemnity might be paid to a great extent in potash and the like. But potash before the war represented 0.6% of Germany's export trade, and about £3 million in aggregate value. Besides, France, having secured a potash field in the territory which has been restored to her, will not welcome a great stimulation of the German exports of this material.
An examination of the import list shows that 63.6% are raw materials and food. The chief items of the former class, namely, cotton, wool, copper, hides, iron ore, furs, silk, rubber, and tin, could not be much reduced without reacting on the export trade, and might have to be increased if the export trade was to be increased. Imports of food, namely, wheat, barley, coffee, eggs, rice, maize, and the like, present a different problem. It is unlikely that, apart from certain comforts, the consumption of food by the German labouring classes before the war was in excess of what was required for maximum efficiency; indeed, it probably fell short of that amount. Any substantial decrease in the imports of food would therefore react on the efficiency of the industrial population, and consequently on the volume of surplus exports which they could be forced to produce. It is hardly possible to insist on a greatly increased productivity of German industry if the workmen are to be underfed. But this may not be equally true of barley, coffee, eggs, and tobacco. If it were possible to enforce a régime in which for the future no German drank beer or coffee, or smoked any tobacco, a substantial saving could be effected. Otherwise there seems little room for any significant reduction.
The following analysis of German exports and imports according to destination and origin is also relevant. From this it appears that of Germany's exports in 1913, 18% went to the British empire, 17% to France, Italy, and Belgium, 10% to Russia and Roumania, and 7% to the United States; that is to say, more than half of the exports found their market in the countries of the Entente nations. Of the balance, 12% went to Austria-Hungary, Turkey, and Bulgaria, and 35% elsewhere. Unless, therefore, the present Allies are prepared to encourage the importation of German products, a substantial increase in total volume can only be effected by the wholesale swamping of neutral markets.
| Destination of Germany's Exports | Origin of Germany's Imports | ||||
| Million Dollars | Per cent | Million Dollars | Per cent | ||
| Great Britain | 359.55 | 14.2 | 219.00 | 8.1 | |
| India | 37.65 | 1.5 | 135.20 | 5.0 | |
| Egypt | 10.85 | 0.4 | 29.60 | 1.1 | |
| Canada | 15.10 | 0.6 | 16.00 | 0.6 | |
| Australia | 22.10 | 0.9 | 74.00 | 2.8 | |
| South Africa | 11.70 | 0.5 | 17.40 | 0.6 | |
| Total: British Empire | 456.95 | 18.1 | 491.20 | 18.2 | |
| France | 197.45 | 7.8 | 146.05 | 5.4 | |
| Belgium | 137.75 | 5.5 | 86.15 | 3.2 | |
| Italy | 98.35 | 3.9 | 79.40 | 3.0 | |
| U.S.A. | 178.30 | 7.1 | 427.80 | 15.9 | |
| Russia | 220.00 | 8.7 | 356.15 | 13.2 | |
| Roumania | 35.00 | 1.4 | 19.95 | 0.7 | |
| Austria-Hungary | 276.20 | 10.9 | 206.80 | 7.7 | |
| Turkey | 24.60 | 1.0 | 18.40 | 0.7 | |
| Bulgaria | 7.55 | 0.3 | 2.00 | ... | |
| Other counties | 890.20 | 35.3 | 858.70 | 32.0 | |
| 2.522.35 | 100.0 | 2,692.60 | 100.0 | ||
The above analysis affords some indication of the possible magnitude of the maximum modification of Germany's export balance under the conditions which will prevail after the peace. On the assumptions (1) that we do not specially favour Germany over ourselves in supplies of such raw materials as cotton and wool (the world's supply of which is limited), (2) that France, having secured the iron-ore deposits, makes a serious attempt to secure the blast furnaces and the steel trade also, (3) that Germany is not encouraged and assisted to undercut the iron and other trades of the Allies in overseas markets, and (4) that a substantial preference is not given to German goods in the British empire, it is evident by examination of the specific items that not much is practicable.
Let us run over the chief items again: (1) Iron goods. In view of Germany's loss of resources, an increased net export seems impossible and a large decrease probable. (2) Machinery. Some increase is possible. (3) Coal and coke. The value of Germany's net export before the war was £22 million; the Allies have agreed that for the time being 20 million tons is the maximum possible export with a problematic (and in fact) impossible increase to 40 million tons at some future time; even on the basis of 20 million tons we have virtually no increase of value, measured in pre-war prices;[52] whilst, if this amount is exacted, there must be a decrease of far greater value in the export of manufactured articles requiring coal for their production. (4) Woollen goods. An increase is impossible without the raw wool, and, having regard to the other claims on supplies of raw wool, a decrease is likely. (5) Cotton goods. The same considerations apply as to wool. (6) Cereals. There never was and never can be a net export. (7) Leather goods. The same considerations apply as to wool.
We have now covered nearly half of Germany's pre-war exports, and there is no other commodity which formerly represented as much as 3 per cent of her exports. In what commodity is she to pay? Dyes? -- their total value in 1913 was £10 million. Toys? Potash? -- 1913 exports were worth £3 million. And even if the commodities could be specified, in what markets are they to be sold? -- remembering that we have in mind goods to the value not of tens of millions annually, but of hundreds of millions.
On the side of imports, rather more is possible. By lowering the standard of life, an appreciable reduction of expenditure on imported commodities may be possible. But, as we have already seen, many large items are incapable of reduction without reacting on the volume of exports.
Let us put our guess as high as we can without being foolish, and suppose that after a time Germany will be able, in spite of the reduction of her resources, her facilities, her markets, and her productive power, to increase her exports and diminish her imports so as to improve her trade balance altogether by £100 million annually, measured in pre-war prices. This adjustment is first required to liquidate the adverse trade balance, which in the five years before the war averaged £74 million; but we will assume that after allowing for this, she is left with a favourable trade balance of £50 million a year. Doubling this to allow for the rise in pre-war prices, we have a figure of £100 million. Having regard to the political, social, and human factors, as well as to the purely economic, I doubt if Germany could be made to pay this sum annually over a period of 30 years; but it would not be foolish to assert or to hope that she could.
Such a figure, allowing 5% for interest, and 1% for repayment of capital, represents a capital sum having a present value of about £1,700 million.[53]
I reach, therefore, the final conclusion that, including all methods of payment -- immediately transferable wealth, ceded property, and an annual tribute -- £2,000 million is a safe maximum figure of Germany's capacity to pay. In all the actual circumstances, I do not believe that she can pay as much. Let those who consider this a very low figure, bear in mind the following remarkable comparison. The wealth of France in 1871 was estimated at a little less than half that of Germany in 1913. Apart from changes in the value of money, an indemnity from Germany of £500 million would, therefore, be about comparable to the sum paid by France in 1871; and as the real burden of an indemnity increases more than in proportion to its amount, the payment of £2,000 million by Germany would have far severer consequences than the £200 million paid by France in 1871.
There is only one head under which I see a possibility of adding to the figure reached on the line of argument adopted above; that is, if German labour is actually transported to the devastated areas and there engaged in the work of reconstruction. I have heard that a limited scheme of this kind is actually in view. The additional contribution thus obtainable depends on the number of labourers which the German government could contrive to maintain in this way and also on the number which, over a period of years, the Belgian and French inhabitants would tolerate in their midst. In any case, it would seem very difficult to employ on the actual work of reconstruction, even over a number of years, imported labour having a net present value exceeding (say) £250 million; and even this would not prove in practice a net addition to the annual contributions obtainable in other ways.
A capacity of £8,000 million or even of £5,000 million is, therefore, not within the limits of reasonable possibility. It is for those who believe that Germany can make an annual payment amounting to hundreds of millions sterling to say in what specific commodities they intend this payment to be made, and in what markets the goods are to be sold. Until they proceed to some degree of detail, and are able to produce some tangible argument in favour of their conclusions, they do not deserve to be believed.[54]
I make three provisos only, none of which affect the force of my argument for immediate practical purposes.
First: if the Allies were to 'nurse' the trade and industry of Germany for a period of five or ten years, supplying her with large loans, and with ample shipping, food, and raw materials during that period, building up markets for her, and deliberately applying all their resources and goodwill to making her the greatest industrial nation in Europe, if not in the world, a substantially larger sum could probably be extracted thereafter; for Germany is capable of very great productivity.
Second: whilst I estimate in terms of money, I assume that there is no revolutionary change in the purchasing power of our unit of value. If the value of gold were to sink to a half or a tenth of its present value, the real burden of a payment fixed in terms of gold would be reduced proportionately. If a gold sovereign comes to be worth what a shilling is worth now, then, of course, Germany can pay a larger sum than I have named, measured in gold sovereigns.
Third: I assume that there is no revolutionary change in the yield of nature and material to man's labour. It is not impossible that the progress of science should bring within our reach methods and devices by which the whole standard of life would be raised immeasurably, and a given volume of products would represent but a portion of the human effort which it represents now. In this case all standards of 'capacity' would be changed everywhere. But the fact that all things are possible is no excuse for talking foolishly.
It is true that in 1870 no man could have predicted Germany's capacity in 1910. We cannot expect to legislate for a generation or more. The secular changes in man's economic condition and the liability of human forecast to error are as likely to lead to mistake in one direction as in another. We cannot as reasonable men do better than base our policy on the evidence we have and adapt it to the five or ten years over which we may suppose ourselves to have some measure of prevision; and we are not at fault if we leave on one side the extreme chances of human existence and of revolutionary changes in the order of Nature or of man's relations to her. The fact that we have no adequate knowledge of Germany's capacity to pay over a long period of years is no justification (as I have heard some people claim that it is) for the statement that she can pay ten thousand million pounds.
Why has the world been so credulous of the unveracities of politicians? If an explanation is needed, I attribute this particular credulity to the following influences in part.
In the first place, the vast expenditures of the war, the inflation of prices, and the depreciation of currency, leading up to a complete instability of the unit of value, have made us lose all sense of number and magnitude in matters of finance. What we believed to be the limits of possibility have been so enormously exceeded, and those who founded their expectations on the past have been so often wrong, that the man in the street is now prepared to believe anything which is told him with some show of authority, and the larger the figure the more readily he swallows it.
But those who look into the matter more deeply are sometimes misled by a fallacy much more plausible to reasonable persons. Such a one might base his conclusions on Germany's total surplus of annual productivity as distinct from her export surplus. Helfferich's estimate of Germany's annual increment of wealth in 1913 was £400 million to £425 million (exclusive of increased money value of existing land and property). Before the war, Germany spent between £50 million and £100 million on armaments, with which she can now dispense. Why, therefore, should she not pay over to the Allies an annual sum of £500 million? This puts the crude argument in its strongest and most plausible form.
But there are two errors in it. First of all, Germany's annual savings, after what she has suffered in the war and by the peace, will fall far short of what they were before and, if they are taken from her year by year in future, they cannot again reach their previous level. The loss of Alsace-Lorraine, Poland, and Upper Silesia could not be assessed in terms of surplus productivity at less than £50 million annually. Germany is supposed to have profited about £100 million per annum from her ships, her foreign investments, and her foreign banking and connections, all of which have now been taken from her. Her saving on armaments is far more than balanced by her annual charge for pensions, now estimated at £250 million,[55] which represents a real loss of productive capacity. And even if we put on one side the burden of the internal debt, which amounts to 240 milliards of marks, as being a question of internal distribution rather than of productivity, we must still allow for the foreign debt incurred by Germany during the war, the exhaustion of her stock of raw materials, the depletion of her livestock, the impaired productivity of her soil from lack of manures and of labour, and the diminution in her wealth from the failure to keep up many repairs and renewals over a period of nearly five years. Germany is not as rich as she was before the war, and the diminution in her future savings for these reasons, quite apart from the factors previously allowed for, could hardly be put at less than ten per cent, that is £40 million annually.
These factors have already reduced Germany's annual surplus to less than the £100 million at which we arrived on other grounds as the maximum of her annual payments. But even if the rejoinder be made that we have not yet allowed for the lowering of the standard of life and comfort in Germany which may reasonably be imposed on a defeated enemy,[56] there is still a fundamental fallacy in the method of calculation. An annual surplus available for home investment can only be converted into a surplus available for export abroad by a radical change in the kind of work performed. Labour, while it may be available and efficient for domestic services in Germany, may yet be able to find no outlet in foreign trade. We are back on the same question which faced us in our examination of the export trade -- in what export trade is German labour going to find a greatly increased outlet? Labour can only be diverted into new channels with loss of efficiency, and a large expenditure of capital. The annual surplus which German labour can produce for capital improvements at home is no measure, either theoretically or practically, of the annual tribute which she can pay abroad.
| Chapter 5Reparation The economic consequences of the peace | |