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Title: A Revision of the Treaty

Author: John Maynard Keynes

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*** START OF THE PROJECT GUTENBERG EBOOK A REVISION OF
THE TREATY ***

Lord Keynes.

A REVISION OF THE TREATY

A REVISION
OF THE TREATY
BEING A SEQUEL TO

THE ECONOMIC CONSEQUENCES
OF THE PEACE

BY

JOHN MAYNARD KEYNES, C.B.
FELLOW OF KINGʼS COLLEGE, CAMBRIDGE

NEW YORK
HARCOURT, BRACE AND COMPANY
1922

COPYRIGHT, 1922, BY
HARCOURT, BRACE AND COMPANY, INC.
PRINTED IN THE U. S. A. BY
THE QUINN BODEN & COMPANY
RAHWAY, N. J.

PREFACE
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 everybodyʼs 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.
Kingʼs College, Cambridge,
December 1921.

CONTENTS

CHAPTER I
PAGE

The State of Opinion 3

CHAPTER II
From the Ratification of the Treaty of Versailles to
the Second Ultimatum of London 11
Excursus I.—Coal 44
Excursus II.—The Legality of Occupying Germany
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
Excursus V.—Receipts and Expenses prior to May
1, 1921 131

Excursus VI.—The Division of Receipts between
the Allies 138

CHAPTER V
The Legality of the Claim for Pensions 144

CHAPTER VI
Reparation, Inter–Ally Debt, and International
Trade 163

CHAPTER VII
The Revision of the Treaty and the Settlement of
Europe 179

APPENDIX OF DOCUMENTS
I. Summary of Spa Agreement (July 1920) 203
II. The Decisions of Paris (January 1921) 207
III. The Claims Submitted to the Reparation
Commission (February 1921) 210
IV. The First Ultimatum of London (March 1921) 213
V. The German Counter–Proposal (April 1921) 215
VI. The Reparation Commissionʼs Assessment
(April 1921) 219
VII. The Second Ultimatum of London (May 1921) 219
VIII. Summary of the Wiesbaden Agreement
(October 1921) 228
IX. Tables of Inter–Governmental Indebtedness 238

INDEX 240

A REVISION OF THE TREATY
BEING A SEQUEL TO
THE ECONOMIC CONSEQUENCES OF THE PEACE

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 statesmenʼs 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 listener.
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.

FOOTNOTE:
[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
From the Ratification of the Treaty Of Versailles to the Second
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 also.
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 lawyerʼs 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 assʼs 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
complete.
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 Georgeʼs 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 Germanyʼs 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 Germanyʼs 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
monthʼs 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
Germanyʼs 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 Britainʼs.” 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 DʼAbernon
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!ʼ 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 Georgeʼs 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 Britainʼs 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 Attorney–General.
The object of the Allies was to compel Germany to accept the Decisions
of Paris. But Germanyʼs 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 Treaty.
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 Germanyʼs
recovery.
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 lines.
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. Simonsʼs 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 Germanyʼs economic recovery.
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 more.
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
scheme.
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. Briandʼs 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 force.
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 Treatyʼs 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, Germanyʼs chief difficulty
lay. It has not been understood in England or in America how deep a wound
has been inflicted on Germanyʼs 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

COAL

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 Germanyʼs internal economy. Up to the
middle of 1921 Germanyʼs 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. Germanyʼs
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:

1921 (first
1913. 1917. 1918. 1919. 1920.
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 “Polandʼs pre–
war annual demand” for coal, where I should have said “pre–war Polandʼs
pre–war annual demand.” The mistake was not material, as I allowed for
Germanyʼs 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
Germanyʼs 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 Germanyʼs 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 LEGALITY OF OCCUPYING GERMANY EAST OF THE RHINE

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. Tardieuʼs 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.

FOOTNOTES:
[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 DʼAbernon and Sir John Bradbury for Great Britain, Seydoux and Cheysson for France,
dʼAmelio 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 dropped.
[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 milliards.
[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. Wirthʼs 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 Silesiaʼs 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 disappeared.

CHAPTER III
The Burden of the London Settlement

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
kind.
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 Germanyʼs 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
Germanyʼs default on to others; they would have interested a great number
of people all over the world in Germanyʼs 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 worldʼs 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 Germanyʼs 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
Germanyʼs, the advantage compared with borrowing on their own credit
would not be very material.[34]
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 Germanyʼs 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 Germanyʼs 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
Germanyʼs 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 Franceʼs
“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
discharged:
(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.
Germanyʼs 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 Germanyʼs 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 Treaty.
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 Germanyʼs 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. Klotzʼs 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. Klotzʼs 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 due.
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.

1922–23 and 1922–23 and
1921–22
subsequently subsequently
(Export 4
(Export 6 (Export 10
Milliards).
Milliards). Milliards).
May 25 .39 .65
July 15 .50 .50
1.00
Aug. 15 .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–monthsʼ
credits from bankers on the security of the Reichsbankʼs 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 Marks. Million Gold Marks.[46]
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 6,684 477.2 334.8 142.2
” 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 Germanyʼs
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 Germanyʼs 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 yearʼs 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 oneʼs
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 Germany.
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 Helfferichʼs 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
Helfferichʼs 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 Germanyʼs 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 published.[54]
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 Germanyʼs 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 Franceʼs
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
Alliesʼ receiving these goods direct, instead of Germanyʼs 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 Germany.
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 countryʼs 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 exports.
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.

FOOTNOTES:
[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
neglected.
[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 Germanyʼs 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 payment.
[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 Germanyʼs 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 female.
[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 Franceʼs
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
materially.
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
repaired.
(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
lodged.
(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 Governmentʼs 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
peasantsʼ and minersʼ 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 peasantʼs or collierʼs
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 48.[74]
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 Georgeʼs 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 marks:[75]

Milliard marks (gold).
France 33
British Empire 37
Italy 17
Belgium 1
Japan 1
Roumania 4
——
93

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 (gold).
France 99
British Empire 54
Italy 27
Belgium 16 ½
Japan 1½
Jugo–Slavia 9½
Roumania 14
Greece 2
—— —
223 ½

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 Germanyʼs 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 Versailles.

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 assessment.
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 Germanyʼs 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)
Germanyʼs 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

RECEIPTS AND EXPENSES PRIOR TO MAY 1, 1921

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:

Approximate Statement by the Reparation Commission of Deliveries made
by Germany from November 11, 1918, to April 30, 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
1,780,688,000
Immovable property and assets not
yet encashed 2,754,104,000
4,534,792,000
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 number.
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 Germanyʼs 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, Germanyʼs Mercantile

Marine in its entirety, of which the surrender humbled so much pride and
engulfed so vast an effort, would about meet a monthʼs charges.

EXCURSUS VI

THE DIVISION OF RECEIPTS AMONGST THE ALLIES

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 $90,000,000.
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 States.
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
Germanyʼs 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 Franceʼs 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.

FOOTNOTES:

[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. Tardieuʼs book:
“Fort en thème dʼéconomiste, M. Keynes (qui ne fut pas seul, dans la Conférence, à professer cette
opinion) combat, sans aucun ménagement, ‘lʼabus des exigences des Alliés’ (lisez: ‘de la France’) et
de ses négociateurs.... Ces reproches et tant dʼautres dʼune violence brutale, dont je nʼaurais rien dit,
si lʼauteur, à tous risques, nʼeût cru servir sa cause en les livrant à la publicité, font assez clairement
voir jusquʼoù certains esprits sʼétaient montés.” (In the English edition, M. Tardieu has caused the
words fort en thème dʼéconomiste 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. Duboisʼ 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. Loucheurʼs 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. Loucheurʼs 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. Tardieuʼs figures below together with those of the amount of reconstruction completed at
that earlier date:

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

Destroyed. Reconstructed and working. Under 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:

Inhabited Houses

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

Public Buildings

Municipal Post
Churches. Schools. Hospitals.
Buildings. Offices.
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

Cultivated Land

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

Live Stock

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. Loucheurʼs 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
finished.
[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 dʼun compromis assez pénible entre la délégué français, lʼhonorable
M. Dubois, et le représentant anglais, Sir John Bradbury, depuis lors démissionnaire, qui voulait sʼen
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 marks.
[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 Britainʼs view was adopted as to the valuation of shipping.
[83] In view of the political difficulties in which this Agreement involved M. Briandʼs 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 yearsʼ Reparations, Great Britainʼs 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 Germanyʼs 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 $314,179,463.

CHAPTER V
The Legality of the Claim for Pensions
“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
Alliesʼ 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 Germanyʼs 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 scoundrelʼs 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 menʼs 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 Alliesʼ 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 Wilsonʼs
notification of November 5, 1918, but superseded it, more particularly
regarding Reparation; and alternatively that the wording of President
Wilsonʼs 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 Wilson.[97]
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. Clemenceauʼs 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 Alliesʼ 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 Presidentʼs 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 Presidentʼs
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 Britainʼs war costs had resulted from Germanyʼs 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 Presidentʼs 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
Presidentʼs 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 couldnʼt 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 donʼt 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.

FOOTNOTES:
[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 Wilsonʼs 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 costs.”

[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. Klotzʼs 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. Klotzʼs 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 mine.)
[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 soldierʼs 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
Government.”
[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 opportunistʼs 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
Reparation, Inter–Ally Debt, and International Trade

It is fashionable at the present time to urge a reduction of the Alliesʼ claims
on Germany and of Americaʼs 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 oneʼs 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 Americaʼs 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 countryʼs 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 worldʼs 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 debtorʼs 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. Germanyʼs 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 only:

Percentage of Total Exports.
1920 1921
1913.
(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 7
Paper goods 2.5 4 3.5
Electrical goods 2 3.5 ?
Silk goods 2 3
Cotton goods 5.5 5 15
Woolen goods 6 . .
Glass .5 2.5 2
Leather goods 3 2 4
Copper goods 3.5 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 community.
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. Hardingʼs 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 Europeʼs 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 business.
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 contract.
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 Americaʼs 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.

FOOTNOTE:
[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 Revision of the Treaty and the Settlement of Europe

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 Societyʼs 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 Germanyʼs 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 Germanyʼs
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. Franceʼs 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 Germanyʼs available
resources, and as the total charge is within Germanyʼs 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.
Austriaʼs 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 solution.
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.
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 enemy.
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
Rousseauʼs General Will. Yet, all the same, I do not attach, to what they tell

me, too much importance. Public opinion held that Hans Andersenʼs
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 culpritʼs 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 donʼt 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
Americaʼs 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 Franceʼs 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. Germanyʼs 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 Germanyʼs 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 disgust.

FOOTNOTE:
[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. Summary of 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
Agreement.
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
£100,000,000.
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
Commission.
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 mines.
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 figures.
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.

Annex

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 Germanyʼs 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 indispensable.
(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.

III. Claims Submitted to the Reparation Commission by the Various
Allied Nations, as Published by the Commission,[115] February
23, 1921

France

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
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
══════════ ═══════════

Italy

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
══════════════

Belgium

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– 8,496,091,000 dinars (damage to property).
Slavia
” 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
war).
———————
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– 6,944,228,296 francs and 5,614,947,990 kroner (war–
Slovakia losses).
618,204,007 francs and 1,448,169,845 kroner
(Bolshevist
invasion).
—————— ——————
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.

IV. The First Ultimatum of London, March 3, 1921

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
Germanyʼs 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 Germany.)

(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”.

V. The German Counter–proposal, as Transmitted to the United
States 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
Germanyʼs 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
released.
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 worldʼs commerce and freed of all unproductive
expenditure.
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.

VI. The Assessment Announced by the Reparation Commission, April 30,
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.”

VII. The Second Ultimatum of London, May 5, 1921

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 Note.
(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.
Hayashi.

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 thereto—

(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 be—

(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
administration.
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.

VIII. The Wiesbaden Agreement, October 6, 1921

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 Germanyʼs 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.
Germanyʼs 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 Germanyʼs 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 Germanyʼs 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 unaffected.
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 yearʼs 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 Germanyʼs annual reparation payment in respect of
Annex deliveries, deferred payments already matured, and the
35 or 45 per cent of current deliveries.

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 Franceʼs 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 Germanyʼs 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 Germanyʼs 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 Bradburyʼs 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 yearsʼ 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 Governments.
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.

IX. Tables of Inter–Governmental Indebtedness

(A) Advances by the United States Government to other Governments (as in
July 1921)

Credits granted
Surplus War
under Liberty Food Relief.
[117]
Materials Sale.
Loan Acts.
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 $84,093,879.09

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

Serb–Croat–Slovene
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
—————————

FOOTNOTES:
[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.

INDEX
Allied debts, 170 f., 183, 193 f., 238
Armistice negotiations, 145, 148 f.
Army of Occupation, expenses of, 84n., 133 f., 140, 191
Austria, 130, 190, 191

Balfour, A. J., 148n.
Baruch, 72n., 106n., 153, 155, 156, 159, 160n.
Belgian priority, 135–6, 139–40, 190, 204
Reparation claims, 123–4, 197
Boulogne Conference, 19
Boyden, 112, 130
Bradbury, Sir John, 93, 95, 128n., 129, 216
Brenier, 109, 110, 118n.
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, 84n., 108, 149, 150
Coal, 44 f., 75, 98
Cunliffe, Lord, 72, 156
Curzon, Lord, 57n.

DʼAhernon, Lord, 31
Decisions of London, 95
Disarmament of Germany, 16–19
Dominion Prime Ministersʼ Conference, 139
Doumer, 111, 141
Dubois, 110, 115n., 128n.
Dulles, John Foster, 156–7

East Prussia (plebiscite), 11
Economic Consequences of the Peace, 5, 39, 45, 51, 55n., 71, 72, 74n.,
107, 108, 114, 119, 124, 126n., 127n., 144, 146n., 166, 173
Elsas, Dr. Moritz, 88–9, 92n.
Exports, German, 79 f., 99, 165 f.

Financial Agreement of Paris (Aug. 1921), 135, 141 f.
Foch, Marshal, 31, 33, 57, 148n.
Forgeot, 70n.
Fournier–Sarlovèze, 116n.
Frankfurt, Occupation of, 15, 57
French Reparation Claim, 107 f., 117 f., 210

George, Lloyd, 1, 17, 18, 21, 27, 30, 33, 41, 84n., 121, 138n., 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, 148n.
Harding, President, 171
Heichen, Dr. Arthur, 87

Helfferich, 88, 90
History of the Peace Conference of Paris, 147n., 152n., 160n.
House, Col., 148n.
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., 106n., 161, 162n.
Lansburgh, Dr. Albert, 87
Law, Bonar, 150
League of Nations, 12, 61, 188
Leipzig trials, 15
Lévy, Raphaël–Georges, 118n.
Leygues, 21, 24
Lignite, 55
London Conference I., 28, 34
London Conference II., 40
London Settlement, 64 f., 72, 73, 81, 84n., 130, 188 f., 221
London Ultimatum I., 30, 35, 213
London Ultimatum II., 16, 19, 31n., 42, 44, 57, 219 f.
Loucheur, 31, 92, 95, 109, 110, 112n., 117, 120
Loucheur–Rathenau Agreement; vide Wiesbaden Agreement

Mark Exchange, 81, 100 f.

Mercantile Marine of Germany, 16, 137
“Mermeix,” 148n., 149n.
Millerand, 18, 20

Newspaper opinion, 7
Nitti, 18

Occupation, Army of, 84n., 133, 140
Occupation of Germany, 188, 214, 219219
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.
Polandʼs 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, 66n., 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, 57n.
Schlesvig (plebiscite), 11
Simons, 28, 29, 32, 38n., 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, 106n., 107n., 108n., 114n., 117, 120n., 121n.,
138, 147, 148n., 149n., 150n., 151, 153
The Times, 18, 20, 22, 27, 32, 55n., 100, 110, 117n.

United States, 36, 38, 78n., 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, 5n.

BY THE SAME AUTHOR

THE ECONOMIC CONSEQUENCES OF THE
PEACE
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.

1. The Economic Consequences of the Peace.
London: Macmillan and Co., 1919.

2. The Economic Consequences of the Peace.
London: Labour Research Department, 1920.
[Out of print.]

3. The Economic Consequences of the Peace.
New York: Harcourt, Brace and Co. 1920. $2.50.

4. Les Conséquences économiques de la Paix. Traduit de lʼAnglais par Paul
Franck.
Paris: Editions de la Nouvelle Revue Française. 1920.

5. Die wirthschaftlichen Folgen des Friedensvertragens. Übersetzt von
M. J. Bonn und C. Brinkmann.
München: Duncker und Humblot. 1920.

6. De Economische Gevolgen van den Vrede. Met een Inleiding van Mr. G.
Visserig.
Amsterdam: Uitgevers–Maatschappij Elsevier. 1920.

7. Le conseguenze economiche della Pace. Traduzione di Vincenzo Tasco.
Prefazione di Vincenzo Giuffrida.
Milano: Fratelli Treves. 1920.

8. Fredens Ekonomiska Foljder. Översättning av Evert Berggrén.
Stockholm: Albert Bonnier. 1920.

9. Las Consecuencias económicas de la Paz. Traducción por Juan Uña.
Madrid: Calpe. 1920.

10. De Economische Gevolgen van den Vrede. Vlaamsche Uitgave vertaing
van G. W.
Brussel: Uitgeverij Ons Vaderland. 1920.

11. Urtmarile economice a le Păch.
Bucaresti: Editura Viata Romineasca. 1920.

12. Ekonomitjeskija Posledstvija Mira.
Stockholm: W. Tullbergs Boktryckeri. 1921.

PRESS NOTICES

British
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 theirs.”

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. Keynesʼs 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. Keynesʼs 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. Keynesʼs 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 war.”

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.”

American
Joseph P. Cotton in the EVENING POST, New York, Jan. 30, 1920.—“Mr. Keynesʼs 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 Keynesʼs 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 Keynesʼs 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 Keynesʼs 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 Versailles.”

TRANSCRIBER’S NOTE
—Plain print and punctuation errors fixed.
—Table at page 238 has been splitted into two tables, because of its large dimension.
—The transcriber of this project created the book cover image using the front cover of the
original book. The image is placed in public domain.

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