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Title: The Economic Consequences of the Peace

Author: John Maynard Keynes

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*** START OF THE PROJECT GUTENBERG EBOOK THE
ECONOMIC CONSEQUENCES OF THE PEACE ***

THE ECONOMIC
CONSEQUENCES OF
THE PEACE

by

JOHN MAYNARD KEYNES, C.B.
Fellow of King's College, Cambridge

New York
Harcourt, Brace and Howe
1920

PREFACE
The writer of this book was temporarily attached to the British Treasury
during the war and was their official representative at the Paris Peace
Conference up to June 7, 1919; he also sat as deputy for the Chancellor of
the Exchequer on the Supreme Economic Council. He resigned from these
positions when it became evident that hope could no longer be entertained
of substantial modification in the draft Terms of Peace. The grounds of his
objection to the Treaty, or rather to the whole policy of the Conference
towards the economic problems of Europe, will appear in the following
chapters. They are entirely of a public character, and are based on facts
known to the whole world.
J.M. Keynes.

King's College, Cambridge,
November, 1919.

CONTENTS
Chapter I. Introductory
Chapter II. Europe before the War
Chapter III. The Conference
Chapter IV. The Treaty
Chapter V. Reparation
Chapter VI. Europe after the Treaty
Chapter VII. Remedies

THE ECONOMIC CONSEQUENCES OF THE
PEACE

Chapter I

Introductory
The power to become habituated to his surroundings is a marked
characteristic of mankind. Very few of us realize with conviction the
intensely unusual, unstable, complicated, unreliable, temporary nature of
the economic organization by which Western Europe has lived for the last
half century. We assume some of the most peculiar and temporary of our
late advantages as natural, permanent, and to be depended on, and we lay
our plans accordingly. On this sandy and false foundation we scheme for
social improvement and dress our political platforms, pursue our
animosities and particular ambitions, and feel ourselves with enough margin
in hand to foster, not assuage, civil conflict in the European family. Moved
by insane delusion and reckless self-regard, the German people overturned
the foundations on which we all lived and built. But the spokesmen of the
French and British peoples have run the risk of completing the ruin, which
Germany began, by a Peace which, if it is carried into effect, must impair
yet further, when it might have restored, the delicate, complicated
organization, already shaken and broken by war, through which alone the
European peoples can employ themselves and live.
In England the outward aspect of life does not yet teach us to feel or realize
in the least that an age is over. We are busy picking up the threads of our
life where we dropped them, with this difference only, that many of us seem
a good deal richer than we were before. Where we spent millions before the
war, we have now learnt that we can spend hundreds of millions and
apparently not suffer for it. Evidently we did not exploit to the utmost the
possibilities of our economic life. We look, therefore, not only to a return to
the comforts of 1914, but to an immense broadening and intensification of
them. All classes alike thus build their plans, the rich to spend more and
save less, the poor to spend more and work less.
But perhaps it is only in England (and America) that it is possible to be so
unconscious. In continental Europe the earth heaves and no one but is aware
of the rumblings. There it is not just a matter of extravagance or "labor

troubles"; but of life and death, of starvation and existence, and of the
fearful convulsions of a dying civilization.

For one who spent in Paris the greater part of the six months which
succeeded the Armistice an occasional visit to London was a strange
experience. England still stands outside Europe. Europe's voiceless tremors
do not reach her. Europe is apart and England is not of her flesh and body.
But Europe is solid with herself. France, Germany, Italy, Austria and
Holland, Russia and Roumania and Poland, throb together, and their
structure and civilization are essentially one. They flourished together, they
have rocked together in a war, which we, in spite of our enormous
contributions and sacrifices (like though in a less degree than America),
economically stood outside, and they may fall together. In this lies the
destructive significance of the Peace of Paris. If the European Civil War is
to end with France and Italy abusing their momentary victorious power to
destroy Germany and Austria-Hungary now prostrate, they invite their own
destruction also, being so deeply and inextricably intertwined with their
victims by hidden psychic and economic bonds. At any rate an Englishman
who took part in the Conference of Paris and was during those months a
member of the Supreme Economic Council of the Allied Powers, was
bound to become, for him a new experience, a European in his cares and
outlook. There, at the nerve center of the European system, his British
preoccupations must largely fall away and he must be haunted by other and
more dreadful specters. Paris was a nightmare, and every one there was
morbid. A sense of impending catastrophe overhung the frivolous scene; the
futility and smallness of man before the great events confronting him; the
mingled significance and unreality of the decisions; levity, blindness,
insolence, confused cries from without,—all the elements of ancient tragedy
were there. Seated indeed amid the theatrical trappings of the French
Saloons of State, one could wonder if the extraordinary visages of Wilson
and of Clemenceau, with their fixed hue and unchanging characterization,
were really faces at all and not the tragi-comic masks of some strange
drama or puppet-show.

The proceedings of Paris all had this air of extraordinary importance and
unimportance at the same time. The decisions seemed charged with
consequences to the future of human society; yet the air whispered that the
word was not flesh, that it was futile, insignificant, of no effect, dissociated
from events; and one felt most strongly the impression, described by
Tolstoy in War and Peace or by Hardy in The Dynasts, of events marching
on to their fated conclusion uninfluenced and unaffected by the cerebrations
of Statesmen in Council:

Spirit of the Years
Observe that all wide sight and self-command
Deserts these throngs now driven to demonry
By the Immanent Unrecking. Nought remains
But vindictiveness here amid the strong,
And there amid the weak an impotent rage.

Spirit of the Pities
Why prompts the Will so senseless-shaped a doing?

Spirit of the Years
I have told thee that It works unwittingly,
As one possessed not judging.

In Paris, where those connected with the Supreme Economic Council,
received almost hourly the reports of the misery, disorder, and decaying
organization of all Central and Eastern Europe, allied and enemy alike, and
learnt from the lips of the financial representatives of Germany and Austria
unanswerable evidence, of the terrible exhaustion of their countries, an
occasional visit to the hot, dry room in the President's house, where the
Four fulfilled their destinies in empty and arid intrigue, only added to the
sense of nightmare. Yet there in Paris the problems of Europe were terrible
and clamant, and an occasional return to the vast unconcern of London a
little disconcerting. For in London these questions were very far away, and

our own lesser problems alone troubling. London believed that Paris was
making a great confusion of its business, but remained uninterested. In this
spirit the British people received the Treaty without reading it. But it is
under the influence of Paris, not London, that this book has been written by
one who, though an Englishman, feels himself a European also, and,
because of too vivid recent experience, cannot disinterest himself from the
further unfolding of the great historic drama of these days which will
destroy great institutions, but may also create a new world.

Chapter II

Europe before the War
Before 1870 different parts of the small continent of Europe had specialized
in their own products; but, taken as a whole, it was substantially self-
subsistent. And its population was adjusted to this state of affairs.
After 1870 there was developed on a large scale an unprecedented situation,
and the economic condition of Europe became during the next fifty years
unstable and peculiar. The pressure of population on food, which had
already been balanced by the accessibility of supplies from America,
became for the first time in recorded history definitely reversed. As
numbers increased, food was actually easier to secure. Larger proportional
returns from an increasing scale of production became true of agriculture as
well as industry. With the growth of the European population there were
more emigrants on the one hand to till the soil of the new countries, and, on
the other, more workmen were available in Europe to prepare the industrial
products and capital goods which were to maintain the emigrant
populations in their new homes, and to build the railways and ships which
were to make accessible to Europe food and raw products from distant
sources. Up to about 1900 a unit of labor applied to industry yielded year by
year a purchasing power over an increasing quantity of food. It is possible
that about the year 1900 this process began to be reversed, and a
diminishing yield of Nature to man's effort was beginning to reassert itself.
But the tendency of cereals to rise in real cost was balanced by other
improvements; and—one of many novelties—the resources of tropical
Africa then for the first time came into large employ, and a great traffic in
oil-seeds began to bring to the table of Europe in a new and cheaper form
one of the essential foodstuffs of mankind. In this economic Eldorado, in
this economic Utopia, as the earlier economists would have deemed it, most
of us were brought up.
That happy age lost sight of a view of the world which filled with deep-
seated melancholy the founders of our Political Economy. Before the
eighteenth century mankind entertained no false hopes. To lay the illusions
which grew popular at that age's latter end, Malthus disclosed a Devil. For

half a century all serious economical writings held that Devil in clear
prospect. For the next half century he was chained up and out of sight. Now
perhaps we have loosed him again.
What an extraordinary episode in the economic progress of man that age
was which came to an end in August, 1914! The greater part of the
population, it is true, worked hard and lived at a low standard of comfort,
yet were, to all appearances, reasonably contented with this lot. But escape
was possible, for any man of capacity or character at all exceeding the
average, into the middle and upper classes, for whom life offered, at a low
cost and with the least trouble, conveniences, comforts, and amenities
beyond the compass of the richest and most powerful monarchs of other
ages. The inhabitant of London could order by telephone, sipping his
morning tea in bed, the various products of the whole earth, in such quantity
as he might see fit, and reasonably expect their early delivery upon his
doorstep; he could at the same moment and by the same means adventure
his wealth in the natural resources and new enterprises of any quarter of the
world, and share, without exertion or even trouble, in their prospective
fruits and advantages; or he could decide to couple the security of his
fortunes with the good faith of the townspeople of any substantial
municipality in any continent that fancy or information might recommend.
He could secure forthwith, if he wished it, cheap and comfortable means of
transit to any country or climate without passport or other formality, could
despatch his servant to the neighboring office of a bank for such supply of
the precious metals as might seem convenient, and could then proceed
abroad to foreign quarters, without knowledge of their religion, language, or
customs, bearing coined wealth upon his person, and would consider
himself greatly aggrieved and much surprised at the least interference. But,
most important of all, he regarded this state of affairs as normal, certain,
and permanent, except in the direction of further improvement, and any
deviation from it as aberrant, scandalous, and avoidable. The projects and
politics of militarism and imperialism, of racial and cultural rivalries, of
monopolies, restrictions, and exclusion, which were to play the serpent to
this paradise, were little more than the amusements of his daily newspaper,
and appeared to exercise almost no influence at all on the ordinary course of
social and economic life, the internationalization of which was nearly
complete in practice.

It will assist us to appreciate the character and consequences of the Peace
which we have imposed on our enemies, if I elucidate a little further some
of the chief unstable elements already present when war broke out, in the
economic life of Europe.

I. Population

In 1870 Germany had a population of about 40,000,000. By 1892 this figure
had risen to 50,000,000, and by June 30, 1914, to about 68,000,000. In the
years immediately preceding the war the annual increase was about
850,000, of whom an insignificant proportion emigrated.[1] This great
increase was only rendered possible by a far-reaching transformation of the
economic structure of the country. From being agricultural and mainly self-
supporting, Germany transformed herself into a vast and complicated
industrial machine, dependent for its working on the equipoise of many
factors outside Germany as well as within. Only by operating this machine,
continuously and at full blast, could she find occupation at home for her
increasing population and the means of purchasing their subsistence from
abroad. The German machine was like a top which to maintain its
equilibrium must spin ever faster and faster.
In the Austro-Hungarian Empire, which grew from about 40,000,000 in
1890 to at least 50,000,000 at the outbreak of war, the same tendency was
present in a less degree, the annual excess of births over deaths being about
half a million, out of which, however, there was an annual emigration of
some quarter of a million persons.
To understand the present situation, we must apprehend with vividness what
an extraordinary center of population the development of the Germanic
system had enabled Central Europe to become. Before the war the
population of Germany and Austria-Hungary together not only substantially
exceeded that of the United States, but was about equal to that of the whole
of North America. In these numbers, situated within a compact territory, lay
the military strength of the Central Powers. But these same numbers—for
even the war has not appreciably diminished them[2]—if deprived of the
means of life, remain a hardly less danger to European order.

European Russia increased her population in a degree even greater than
Germany—from less than 100,000,000 in 1890 to about 150,000,000 at the
outbreak of war;[3] and in the year immediately preceding 1914 the excess
of births over deaths in Russia as a whole was at the prodigious rate of two
millions per annum. This inordinate growth in the population of Russia,
which has not been widely noticed in England, has been nevertheless one of
the most significant facts of recent years.
The great events of history are often due to secular changes in the growth of
population and other fundamental economic causes, which, escaping by
their gradual character the notice of contemporary observers, are attributed
to the follies of statesmen or the fanaticism of atheists. Thus the
extraordinary occurrences of the past two years in Russia, that vast
upheaval of Society, which has overturned what seemed most stable—
religion, the basis of property, the ownership of land, as well as forms of
government and the hierarchy of classes—may owe more to the deep
influences of expanding numbers than to Lenin or to Nicholas; and the
disruptive powers of excessive national fecundity may have played a
greater part in bursting the bonds of convention than either the power of
ideas or the errors of autocracy.

II. Organization

The delicate organization by which these peoples lived depended partly on
factors internal to the system.
The interference of frontiers and of tariffs was reduced to a minimum, and
not far short of three hundred millions of people lived within the three
Empires of Russia, Germany, and Austria-Hungary. The various currencies,
which were all maintained on a stable basis in relation to gold and to one
another, facilitated the easy flow of capital and of trade to an extent the full
value of which we only realize now, when we are deprived of its
advantages. Over this great area there was an almost absolute security of
property and of person.

These factors of order, security, and uniformity, which Europe had never
before enjoyed over so wide and populous a territory or for so long a
period, prepared the way for the organization of that vast mechanism of
transport, coal distribution, and foreign trade which made possible an
industrial order of life in the dense urban centers of new population. This is
too well known to require detailed substantiation with figures. But it may be
illustrated by the figures for coal, which has been the key to the industrial
growth of Central Europe hardly less than of England; the output of
German coal grew from 30,000,000 tons in 1871 to 70,000,000 tons in
1890, 110,000,000 tons in 1900, and 190,000,000 tons in 1913.
Round Germany as a central support the rest of the European economic
system grouped itself, and on the prosperity and enterprise of Germany the
prosperity of the rest of the Continent mainly depended. The increasing
pace of Germany gave her neighbors an outlet for their products, in
exchange for which the enterprise of the German merchant supplied them
with their chief requirements at a low price.
The statistics of the economic interdependence of Germany and her
neighbors are overwhelming. Germany was the best customer of Russia,
Norway, Holland, Belgium, Switzerland, Italy, and Austria-Hungary; she
was the second best customer of Great Britain, Sweden, and Denmark; and
the third best customer of France. She was the largest source of supply to
Russia, Norway, Sweden, Denmark, Holland, Switzerland, Italy, Austria-
Hungary, Roumania, and Bulgaria; and the second largest source of supply
to Great Britain, Belgium, and France.
In our own case we sent more exports to Germany than to any other country
in the world except India, and we bought more from her than from any
other country in the world except the United States.
There was no European country except those west of Germany which did
not do more than a quarter of their total trade with her; and in the case of
Russia, Austria-Hungary, and Holland the proportion was far greater.
Germany not only furnished these countries with trade, but, in the case of
some of them, supplied a great part of the capital needed for their own
development. Of Germany's pre-war foreign investments, amounting in all
to about $6,250,000,000, not far short of $2,500,000,000 was invested in

Russia, Austria-Hungary, Bulgaria, Roumania, and Turkey.[4] And by the
system of "peaceful penetration" she gave these countries not only capital,
but, what they needed hardly less, organization. The whole of Europe east
of the Rhine thus fell into the German industrial orbit, and its economic life
was adjusted accordingly.
But these internal factors would not have been sufficient to enable the
population to support itself without the co-operation of external factors also
and of certain general dispositions common to the whole of Europe. Many
of the circumstances already treated were true of Europe as a whole, and
were not peculiar to the Central Empires. But all of what follows was
common to the whole European system.

III. The Psychology of Society

Europe was so organized socially and economically as to secure the
maximum accumulation of capital. While there was some continuous
improvement in the daily conditions of life of the mass of the population,
Society was so framed as to throw a great part of the increased income into
the control of the class least likely to consume it. The new rich of the
nineteenth century were not brought up to large expenditures, and preferred
the power which investment gave them to the pleasures of immediate
consumption. In fact, it was precisely the inequality of the distribution of
wealth which made possible those vast accumulations of fixed wealth and
of capital improvements which distinguished that age from all others.
Herein lay, in fact, the main justification of the Capitalist System. If the rich
had spent their new wealth on their own enjoyments, the world would long
ago have found such a régime intolerable. But like bees they saved and
accumulated, not less to the advantage of the whole community because
they themselves held narrower ends in prospect.
The immense accumulations of fixed capital which, to the great benefit of
mankind, were built up during the half century before the war, could never
have come about in a Society where wealth was divided equitably. The
railways of the world, which that age built as a monument to posterity,

were, not less than the Pyramids of Egypt, the work of labor which was not
free to consume in immediate enjoyment the full equivalent of its efforts.
Thus this remarkable system depended for its growth on a double bluff or
deception. On the one hand the laboring classes accepted from ignorance or
powerlessness, or were compelled, persuaded, or cajoled by custom,
convention, authority, and the well-established order of Society into
accepting, a situation in which they could call their own very little of the
cake that they and Nature and the capitalists were co-operating to produce.
And on the other hand the capitalist classes were allowed to call the best
part of the cake theirs and were theoretically free to consume it, on the tacit
underlying condition that they consumed very little of it in practice. The
duty of "saving" became nine-tenths of virtue and the growth of the cake
the object of true religion. There grew round the non-consumption of the
cake all those instincts of puritanism which in other ages has withdrawn
itself from the world and has neglected the arts of production as well as
those of enjoyment. And so the cake increased; but to what end was not
clearly contemplated. Individuals would be exhorted not so much to abstain
as to defer, and to cultivate the pleasures of security and anticipation.
Saving was for old age or for your children; but this was only in theory,—
the virtue of the cake was that it was never to be consumed, neither by you
nor by your children after you.
In writing thus I do not necessarily disparage the practices of that
generation. In the unconscious recesses of its being Society knew what it
was about. The cake was really very small in proportion to the appetites of
consumption, and no one, if it were shared all round, would be much the
better off by the cutting of it. Society was working not for the small
pleasures of to-day but for the future security and improvement of the race,
—in fact for "progress." If only the cake were not cut but was allowed to
grow in the geometrical proportion predicted by Malthus of population, but
not less true of compound interest, perhaps a day might come when there
would at last be enough to go round, and when posterity could enter into the
enjoyment of our labors. In that day overwork, overcrowding, and
underfeeding would have come to an end, and men, secure of the comforts
and necessities of the body, could proceed to the nobler exercises of their
faculties. One geometrical ratio might cancel another, and the nineteenth

century was able to forget the fertility of the species in a contemplation of
the dizzy virtues of compound interest.
There were two pitfalls in this prospect: lest, population still outstripping
accumulation, our self-denials promote not happiness but numbers; and lest
the cake be after all consumed, prematurely, in war, the consumer of all
such hopes.
But these thoughts lead too far from my present purpose. I seek only to
point out that the principle of accumulation based on inequality was a vital
part of the pre-war order of Society and of progress as we then understood
it, and to emphasize that this principle depended on unstable psychological
conditions, which it may be impossible to recreate. It was not natural for a
population, of whom so few enjoyed the comforts of life, to accumulate so
hugely. The war has disclosed the possibility of consumption to all and the
vanity of abstinence to many. Thus the bluff is discovered; the laboring
classes may be no longer willing to forego so largely, and the capitalist
classes, no longer confident of the future, may seek to enjoy more fully
their liberties of consumption so long as they last, and thus precipitate the
hour of their confiscation.

IV. The Relation of the Old World to the New

The accumulative habits of Europe before the war were the necessary
condition of the greatest of the external factors which maintained the
European equipoise.
Of the surplus capital goods accumulated by Europe a substantial part was
exported abroad, where its investment made possible the development of
the new resources of food, materials, and transport, and at the same time
enabled the Old World to stake out a claim in the natural wealth and virgin
potentialities of the New. This last factor came to be of the vastest
importance. The Old World employed with an immense prudence the
annual tribute it was thus entitled to draw. The benefit of cheap and
abundant supplies resulting from the new developments which its surplus
capital had made possible, was, it is true, enjoyed and not postponed. But

the greater part of the money interest accruing on these foreign investments
was reinvested and allowed to accumulate, as a reserve (it was then hoped)
against the less happy day when the industrial labor of Europe could no
longer purchase on such easy terms the produce of other continents, and
when the due balance would be threatened between its historical
civilizations and the multiplying races of other climates and environments.
Thus the whole of the European races tended to benefit alike from the
development of new resources whether they pursued their culture at home
or adventured it abroad.
Even before the war, however, the equilibrium thus established between old
civilizations and new resources was being threatened. The prosperity of
Europe was based on the facts that, owing to the large exportable surplus of
foodstuffs in America, she was able to purchase food at a cheap rate
measured in terms of the labor required to produce her own exports, and
that, as a result of her previous investments of capital, she was entitled to a
substantial amount annually without any payment in return at all. The
second of these factors then seemed out of danger, but, as a result of the
growth of population overseas, chiefly in the United States, the first was not
so secure.
When first the virgin soils of America came into bearing, the proportions of
the population of those continents themselves, and consequently of their
own local requirements, to those of Europe were very small. As lately as
1890 Europe had a population three times that of North and South America
added together. But by 1914 the domestic requirements of the United States
for wheat were approaching their production, and the date was evidently
near when there would be an exportable surplus only in years of
exceptionally favorable harvest. Indeed, the present domestic requirements
of the United States are estimated at more than ninety per cent of the
average yield of the five years 1909-1913.[5] At that time, however, the
tendency towards stringency was showing itself, not so much in a lack of
abundance as in a steady increase of real cost. That is to say, taking the
world as a whole, there was no deficiency of wheat, but in order to call
forth an adequate supply it was necessary to offer a higher real price. The
most favorable factor in the situation was to be found in the extent to which
Central and Western Europe was being fed from the exportable surplus of
Russia and Roumania.

In short, Europe's claim on the resources of the New World was becoming
precarious; the law of diminishing returns was at last reasserting itself and
was making it necessary year by year for Europe to offer a greater quantity
of other commodities to obtain the same amount of bread; and Europe,
therefore, could by no means afford the disorganization of any of her
principal sources of supply.
Much else might be said in an attempt to portray the economic peculiarities
of the Europe of 1914. I have selected for emphasis the three or four
greatest factors of instability,—the instability of an excessive population
dependent for its livelihood on a complicated and artificial organization, the
psychological instability of the laboring and capitalist classes, and the
instability of Europe's claim, coupled with the completeness of her
dependence, on the food supplies of the New World.
The war had so shaken this system as to endanger the life of Europe
altogether. A great part of the Continent was sick and dying; its population
was greatly in excess of the numbers for which a livelihood was available;
its organization was destroyed, its transport system ruptured, and its food
supplies terribly impaired.
It was the task of the Peace Conference to honor engagements and to satisfy
justice; but not less to re-establish life and to heal wounds. These tasks were
dictated as much by prudence as by the magnanimity which the wisdom of
antiquity approved in victors. We will examine in the following chapters the
actual character of the Peace.

FOOTNOTES:
[1] In 1913 there were 25,843 emigrants from Germany, of whom 19,124 went
to the United States.
[2] The net decrease of the German population at the end of 1918 by decline of
births and excess of deaths as compared with the beginning of 1914, is estimated
at about 2,700,000.
[3] Including Poland and Finland, but excluding Siberia, Central Asia, and the
Caucasus.
[4] Sums of money mentioned in this book in terms of dollars have been
converted from pounds sterling at the rate of $5 to £1.

[5] Even since 1914 the population of the United States has increased by seven
or eight millions. As their annual consumption of wheat per head is not less than
6 bushels, the pre-war scale of production in the United States would only show
a substantial surplus over present domestic requirements in about one year out of
five. We have been saved for the moment by the great harvests of 1918 and
1919, which have been called forth by Mr. Hoover's guaranteed price. But the
United States can hardly be expected to continue indefinitely to raise by a
substantial figure the cost of living in its own country, in order to provide wheat
for a Europe which cannot pay for it.

Chapter III

The Conference
In Chapters IV. and V. I shall study in some detail the economic and
financial provisions of the Treaty of Peace with Germany. But it will be
easier to appreciate the true origin of many of these terms if we examine
here some of the personal factors which influenced their preparation. In
attempting this task, I touch, inevitably, questions of motive, on which
spectators are liable to error and are not entitled to take on themselves the
responsibilities of final judgment. Yet, if I seem in this chapter to assume
sometimes the liberties which are habitual to historians, but which, in spite
of the greater knowledge with which we speak, we generally hesitate to
assume towards contemporaries, let the reader excuse me when he
remembers how greatly, if it is to understand its destiny, the world needs
light, even if it is partial and uncertain, on the complex struggle of human
will and purpose, not yet finished, which, concentrated in the persons of
four individuals in a manner never paralleled, made them, in the first
months of 1919, the microcosm of mankind.
In those parts of the Treaty with which I am here concerned, the lead was
taken by the French, in the sense that it was generally they who made in the
first instance the most definite and the most extreme proposals. This was
partly a matter of tactics. When the final result is expected to be a
compromise, it is often prudent to start from an extreme position; and the
French anticipated at the outset—like most other persons—a double process
of compromise, first of all to suit the ideas of their allies and associates, and
secondly in the course of the Peace Conference proper with the Germans
themselves. These tactics were justified by the event. Clemenceau gained a
reputation for moderation with his colleagues in Council by sometimes
throwing over with an air of intellectual impartiality the more extreme
proposals of his ministers; and much went through where the American and
British critics were naturally a little ignorant of the true point at issue, or
where too persistent criticism by France's allies put them in a position
which they felt as invidious, of always appearing to take the enemy's part
and to argue his case. Where, therefore, British and American interests were
not seriously involved their criticism grew slack, and some provisions were

thus passed which the French themselves did not take very seriously, and
for which the eleventh-hour decision to allow no discussion with the
Germans removed the opportunity of remedy.
But, apart from tactics, the French had a policy. Although Clemenceau
might curtly abandon the claims of a Klotz or a Loucheur, or close his eyes
with an air of fatigue when French interests were no longer involved in the
discussion, he knew which points were vital, and these he abated little. In so
far as the main economic lines of the Treaty represent an intellectual idea, it
is the idea of France and of Clemenceau.
Clemenceau was by far the most eminent member of the Council of Four,
and he had taken the measure of his colleagues. He alone both had an idea
and had considered it in all its consequences. His age, his character, his wit,
and his appearance joined to give him objectivity and a, defined outline in
an environment of confusion. One could not despise Clemenceau or dislike
him, but only take a different view as to the nature of civilized man, or
indulge, at least, a different hope.
The figure and bearing of Clemenceau are universally familiar. At the
Council of Four he wore a square-tailed coat of very good, thick black
broadcloth, and on his hands, which were never uncovered, gray suede
gloves; his boots were of thick black leather, very good, but of a country
style, and sometimes fastened in front, curiously, by a buckle instead of
laces. His seat in the room in the President's house, where the regular
meetings of the Council of Four were held (as distinguished from their
private and unattended conferences in a smaller chamber below), was on a
square brocaded chair in the middle of the semicircle facing the fireplace,
with Signor Orlando on his left, the President next by the fireplace, and the
Prime Minister opposite on the other side of the fireplace on his right. He
carried no papers and no portfolio, and was unattended by any personal
secretary, though several French ministers and officials appropriate to the
particular matter in hand would be present round him. His walk, his hand,
and his voice were not lacking in vigor, but he bore nevertheless, especially
after the attempt upon him, the aspect of a very old man conserving his
strength for important occasions. He spoke seldom, leaving the initial
statement of the French case to his ministers or officials; he closed his eyes
often and sat back in his chair with an impassive face of parchment, his

gray gloved hands clasped in front of him. A short sentence, decisive or
cynical, was generally sufficient, a question, an unqualified abandonment of
his ministers, whose face would not be saved, or a display of obstinacy
reinforced by a few words in a piquantly delivered English.[6] But speech
and passion were not lacking when they were wanted, and the sudden
outburst of words, often followed by a fit of deep coughing from the chest,
produced their impression rather by force and surprise than by persuasion.
Not infrequently Mr. Lloyd George, after delivering a speech in English,
would, during the period of its interpretation into French, cross the
hearthrug to the President to reinforce his case by some ad hominem
argument in private conversation, or to sound the ground for a compromise,
—and this would sometimes be the signal for a general upheaval and
disorder. The President's advisers would press round him, a moment later
the British experts would dribble across to learn the result or see that all
was well, and next the French would be there, a little suspicious lest the
others were arranging something behind them, until all the room were on
their feet and conversation was general in both languages. My last and most
vivid impression is of such a scene—the President and the Prime Minister
as the center of a surging mob and a babel of sound, a welter of eager,
impromptu compromises and counter-compromises, all sound and fury
signifying nothing, on what was an unreal question anyhow, the great issues
of the morning's meeting forgotten and neglected; and Clemenceau silent
and aloof on the outskirts—for nothing which touched the security of
France was forward—throned, in his gray gloves, on the brocade chair, dry
in soul and empty of hope, very old and tired, but surveying the scene with
a cynical and almost impish air; and when at last silence was restored and
the company had returned to their places, it was to discover that he had
disappeared.
He felt about France what Pericles felt of Athens—unique value in her,
nothing else mattering; but his theory of politics was Bismarck's. He had
one illusion—France; and one disillusion—mankind, including Frenchmen,
and his colleagues not least. His principles for the peace can be expressed
simply. In the first place, he was a foremost believer in the view of German
psychology that the German understands and can understand nothing but
intimidation, that he is without generosity or remorse in negotiation, that
there is no advantage he will not take of you, and no extent to which he will

not demean himself for profit, that he is without honor, pride, or mercy.
Therefore you must never negotiate with a German or conciliate him; you
must dictate to him. On no other terms will he respect you, or will you
prevent him from cheating you. But it is doubtful how far he thought these
characteristics peculiar to Germany, or whether his candid view of some
other nations was fundamentally different. His philosophy had, therefore,
no place for "sentimentality" in international relations. Nations are real
things, of whom you love one and feel for the rest indifference—or hatred.
The glory of the nation you love is a desirable end,—but generally to be
obtained at your neighbor's expense. The politics of power are inevitable,
and there is nothing very new to learn about this war or the end it was
fought for; England had destroyed, as in each preceding century, a trade
rival; a mighty chapter had been closed in the secular struggle between the
glories of Germany and of France. Prudence required some measure of lip
service to the "ideals" of foolish Americans and hypocritical Englishmen;
but it would be stupid to believe that there is much room in the world, as it
really is, for such affairs as the League of Nations, or any sense in the
principle of self-determination except as an ingenious formula for
rearranging the balance of power in one's own interests.
These, however, are generalities. In tracing the practical details of the Peace
which he thought necessary for the power and the security of France, we
must go back to the historical causes which had operated during his
lifetime. Before the Franco-German war the populations of France and
Germany were approximately equal; but the coal and iron and shipping of
Germany were in their infancy, and the wealth of France was greatly
superior. Even after the loss of Alsace-Lorraine there was no great
discrepancy between the real resources of the two countries. But in the
intervening period the relative position had changed completely. By 1914
the population of Germany was nearly seventy per cent in excess of that of
France; she had become one of the first manufacturing and trading nations
of the world; her technical skill and her means for the production of future
wealth were unequaled. France on the other hand had a stationary or
declining population, and, relatively to others, had fallen seriously behind in
wealth and in the power to produce it.
In spite, therefore, of France's victorious issue from the present struggle
(with the aid, this time, of England and America), her future position

remained precarious in the eyes of one who took the view that European
civil war is to be regarded as a normal, or at least a recurrent, state of affairs
for the future, and that the sort of conflicts between organized great powers
which have occupied the past hundred years will also engage the next.
According to this vision of the future, European history is to be a perpetual
prize-fight, of which France has won this round, but of which this round is
certainly not the last. From the belief that essentially the old order does not
change, being based on human nature which is always the same, and from a
consequent skepticism of all that class of doctrine which the League of
Nations stands for, the policy of France and of Clemenceau followed
logically. For a Peace of magnanimity or of fair and equal treatment, based
on such "ideology" as the Fourteen Points of the President, could only have
the effect of shortening the interval of Germany's recovery and hastening
the day when she will once again hurl at France her greater numbers and
her superior resources and technical skill. Hence the necessity of
"guarantees"; and each guarantee that was taken, by increasing irritation
and thus the probability of a subsequent Revanche by Germany, made
necessary yet further provisions to crush. Thus, as soon as this view of the
world is adopted and the other discarded, a demand for a Carthaginian
Peace is inevitable, to the full extent of the momentary power to impose it.
For Clemenceau made no pretense of considering himself bound by the
Fourteen Points and left chiefly to others such concoctions as were
necessary from time to time to save the scruples or the face of the President.
So far as possible, therefore, it was the policy of France to set the clock
back and to undo what, since 1870, the progress of Germany had
accomplished. By loss of territory and other measures her population was to
be curtailed; but chiefly the economic system, upon which she depended for
her new strength, the vast fabric built upon iron, coal, and transport must be
destroyed. If France could seize, even in part, what Germany was
compelled to drop, the inequality of strength between the two rivals for
European hegemony might be remedied for many generations.
Hence sprang those cumulative provisions for the destruction of highly
organized economic life which we shall examine in the next chapter.
This is the policy of an old man, whose most vivid impressions and most
lively imagination are of the past and not of the future. He sees the issue in

terms, of France and Germany not of humanity and of European civilization
struggling forwards to a new order. The war has bitten into his
consciousness somewhat differently from ours, and he neither expects nor
hopes that we are at the threshold of a new age.
It happens, however, that it is not only an ideal question that is at issue. My
purpose in this book is to show that the Carthaginian Peace is not
practically right or possible. Although the school of thought from which it
springs is aware of the economic factor, it overlooks, nevertheless, the
deeper economic tendencies which are to govern the future. The clock
cannot be set back. You cannot restore Central Europe to 1870 without
setting up such strains in the European structure and letting loose such
human and spiritual forces as, pushing beyond frontiers and races, will
overwhelm not only you and your "guarantees," but your institutions, and
the existing order of your Society.
By what legerdemain was this policy substituted for the Fourteen Points,
and how did the President come to accept it? The answer to these questions
is difficult and depends on elements of character and psychology and on the
subtle influence of surroundings, which are hard to detect and harder still to
describe. But, if ever the action of a single individual matters, the collapse
of The President has been one of the decisive moral events of history; and I
must make an attempt to explain it. What a place the President held in the
hearts and hopes of the world when he sailed to us in the George
Washington! What a great man came to Europe in those early days of our
victory!
In November, 1918, the armies of Foch and the words of Wilson had
brought us sudden escape from what was swallowing up all we cared for.
The conditions seemed favorable beyond any expectation. The victory was
so complete that fear need play no part in the settlement. The enemy had
laid down his arms in reliance on a solemn compact as to the general
character of the Peace, the terms of which seemed to assure a settlement of
justice and magnanimity and a fair hope for a restoration of the broken
current of life. To make assurance certain the President was coming himself
to set the seal on his work.

When President Wilson left Washington he enjoyed a prestige and a moral
influence throughout the world unequaled in history. His bold and measured
words carried to the peoples of Europe above and beyond the voices of their
own politicians. The enemy peoples trusted him to carry out the compact he
had made with them; and the Allied peoples acknowledged him not as a
victor only but almost as a prophet. In addition to this moral influence the
realities of power were in his hands. The American armies were at the
height of their numbers, discipline, and equipment. Europe was in complete
dependence on the food supplies of the United States; and financially she
was even more absolutely at their mercy. Europe not only already owed the
United States more than she could pay; but only a large measure of further
assistance could save her from starvation and bankruptcy. Never had a
philosopher held such weapons wherewith to bind the princes of this world.
How the crowds of the European capitals pressed about the carriage of the
President! With what curiosity, anxiety, and hope we sought a glimpse of
the features and bearing of the man of destiny who, coming from the West,
was to bring healing to the wounds of the ancient parent of his civilization
and lay for us the foundations of the future.
The disillusion was so complete, that some of those who had trusted most
hardly dared speak of it. Could it be true? they asked of those who returned
from Paris. Was the Treaty really as bad as it seemed? What had happened
to the President? What weakness or what misfortune had led to so
extraordinary, so unlooked-for a betrayal?
Yet the causes were very ordinary and human. The President was not a hero
or a prophet; he was not even a philosopher; but a generously intentioned
man, with many of the weaknesses of other human beings, and lacking that
dominating intellectual equipment which would have been necessary to
cope with the subtle and dangerous spellbinders whom a tremendous clash
of forces and personalities had brought to the top as triumphant masters in
the swift game of give and take, face to face in Council,—a game of which
he had no experience at all.
We had indeed quite a wrong idea of the President. We knew him to be
solitary and aloof, and believed him very strong-willed and obstinate. We
did not figure him as a man of detail, but the clearness with which he had
taken hold of certain main ideas would, we thought, in combination with his

tenacity, enable him to sweep through cobwebs. Besides these qualities he
would have the objectivity, the cultivation, and the wide knowledge of the
student. The great distinction of language which had marked his famous
Notes seemed to indicate a man of lofty and powerful imagination. His
portraits indicated a fine presence and a commanding delivery. With all this
he had attained and held with increasing authority the first position in a
country where the arts of the politician are not neglected. All of which,
without expecting the impossible, seemed a fine combination of qualities
for the matter in hand.
The first impression of Mr. Wilson at close quarters was to impair some but
not all of these illusions. His head and features were finely cut and exactly
like his photographs, and the muscles of his neck and the carriage of his
head were distinguished. But, like Odysseus, the President looked wiser
when he was seated; and his hands, though capable and fairly strong, were
wanting in sensitiveness and finesse. The first glance at the President
suggested not only that, whatever else he might be, his temperament was
not primarily that of the student or the scholar, but that he had not much
even of that culture of the world which marks M. Clemenceau and Mr.
Balfour as exquisitely cultivated gentlemen of their class and generation.
But more serious than this, he was not only insensitive to his surroundings
in the external sense, he was not sensitive to his environment at all. What
chance could such a man have against Mr. Lloyd George's unerring, almost
medium-like, sensibility to every one immediately round him? To see the
British Prime Minister watching the company, with six or seven senses not
available to ordinary men, judging character, motive, and subconscious
impulse, perceiving what each was thinking and even what each was going
to say next, and compounding with telepathic instinct the argument or
appeal best suited to the vanity, weakness, or self-interest of his immediate
auditor, was to realize that the poor President would be playing blind man's
buff in that party. Never could a man have stepped into the parlor a more
perfect and predestined victim to the finished accomplishments of the Prime
Minister. The Old World was tough in wickedness anyhow; the Old World's
heart of stone might blunt the sharpest blade of the bravest knight-errant.
But this blind and deaf Don Quixote was entering a cavern where the swift
and glittering blade was in the hands of the adversary.

But if the President was not the philosopher-king, what was he? After all he
was a man who had spent much of his life at a University. He was by no
means a business man or an ordinary party politician, but a man of force,
personality, and importance. What, then, was his temperament?
The clue once found was illuminating. The President was like a
Nonconformist minister, perhaps a Presbyterian. His thought and his
temperament wore essentially theological not intellectual, with all the
strength and the weakness of that manner of thought, feeling, and
expression. It is a type of which there are not now in England and Scotland
such magnificent specimens as formerly; but this description, nevertheless,
will give the ordinary Englishman the distinctest impression of the
President.
With this picture of him in mind, we can return to the actual course of
events. The President's program for the World, as set forth in his speeches
and his Notes, had displayed a spirit and a purpose so admirable that the last
desire of his sympathizers was to criticize details,—the details, they felt,
were quite rightly not filled in at present, but would be in due course. It was
commonly believed at the commencement of the Paris Conference that the
President had thought out, with the aid of a large body of advisers, a
comprehensive scheme not only for the League of Nations, but for the
embodiment of the Fourteen Points in an actual Treaty of Peace. But in fact
the President had thought out nothing; when it came to practice his ideas
were nebulous and incomplete. He had no plan, no scheme, no constructive
ideas whatever for clothing with the flesh of life the commandments which
he had thundered from the White House. He could have preached a sermon
on any of them or have addressed a stately prayer to the Almighty for their
fulfilment; but he could not frame their concrete application to the actual
state of Europe.
He not only had no proposals in detail, but he was in many respects,
perhaps inevitably, ill-informed as to European conditions. And not only
was he ill-informed—that was true of Mr. Lloyd George also—but his mind
was slow and unadaptable. The President's slowness amongst the Europeans
was noteworthy. He could not, all in a minute, take in what the rest were
saying, size up the situation with a glance, frame a reply, and meet the case
by a slight change of ground; and he was liable, therefore, to defeat by the

mere swiftness, apprehension, and agility of a Lloyd George. There can
seldom have been a statesman of the first rank more incompetent than the
President in the agilities of the council chamber. A moment often arrives
when substantial victory is yours if by some slight appearance of a
concession you can save the face of the opposition or conciliate them by a
restatement of your proposal helpful to them and not injurious to anything
essential to yourself. The President was not equipped with this simple and
usual artfulness. His mind was too slow and unresourceful to be ready with
any alternatives. The President was capable of digging his toes in and
refusing to budge, as he did over Fiume. But he had no other mode of
defense, and it needed as a rule but little manoeuvering by his opponents to
prevent matters from coming to such a head until it was too late. By
pleasantness and an appearance of conciliation, the President would be
manoeuvered off his ground, would miss the moment for digging his toes
in, and, before he knew where he had been got to, it was too late. Besides, it
is impossible month after month in intimate and ostensibly friendly
converse between close associates, to be digging the toes in all the time.
Victory would only have been possible to one who had always a sufficiently
lively apprehension of the position as a whole to reserve his fire and know
for certain the rare exact moments for decisive action. And for that the
President was far too slow-minded and bewildered.
He did not remedy these defects by seeking aid from the collective wisdom
of his lieutenants. He had gathered round him for the economic chapters of
the Treaty a very able group of business men; but they were inexperienced
in public affairs, and knew (with one or two exceptions) as little of Europe
as he did, and they were only called in irregularly as he might need them for
a particular purpose. Thus the aloofness which had been found effective in
Washington was maintained, and the abnormal reserve of his nature did not
allow near him any one who aspired to moral equality or the continuous
exercise of influence. His fellow-plenipotentiaries were dummies; and even
the trusted Colonel House, with vastly more knowledge of men and of
Europe than the President, from whose sensitiveness the President's
dullness had gained so much, fell into the background as time went on. All
this was encouraged by his colleagues on the Council of Four, who, by the
break-up of the Council of Ten, completed the isolation which the
President's own temperament had initiated. Thus day after day and week

after week, he allowed himself to be closeted, unsupported, unadvised, and
alone, with men much sharper than himself, in situations of supreme
difficulty, where he needed for success every description of resource,
fertility, and knowledge. He allowed himself to be drugged by their
atmosphere, to discuss on the basis of their plans and of their data, and to be
led along their paths.
These and other various causes combined to produce the following
situation. The reader must remember that the processes which are here
compressed into a few pages took place slowly, gradually, insidiously, over
a period of about five months.
As the President had thought nothing out, the Council was generally
working on the basis of a French or British draft. He had to take up,
therefore, a persistent attitude of obstruction, criticism, and negation, if the
draft was to become at all in line with his own ideas and purpose. If he was
met on some points with apparent generosity (for there was always a safe
margin of quite preposterous suggestions which no one took seriously), it
was difficult for him not to yield on others. Compromise was inevitable,
and never to compromise on the essential, very difficult. Besides, he was
soon made to appear to be taking the German part and laid himself open to
the suggestion (to which he was foolishly and unfortunately sensitive) of
being "pro-German."
After a display of much principle and dignity in the early days of the
Council of Ten, he discovered that there were certain very important points
in the program of his French, British, or Italian colleague, as the case might
be, of which he was incapable of securing the surrender by the methods of
secret diplomacy. What then was he to do in the last resort? He could let the
Conference drag on an endless length by the exercise of sheer obstinacy. He
could break it up and return to America in a rage with nothing settled. Or he
could attempt an appeal to the world over the heads of the Conference.
These were wretched alternatives, against each of which a great deal could
be said. They were also very risky,—especially for a politician. The
President's mistaken policy over the Congressional election had weakened
his personal position in his own country, and it was by no means certain that
the American public would support him in a position of intransigeancy. It
would mean a campaign in which the issues would be clouded by every sort

of personal and party consideration, and who could say if right would
triumph in a struggle which would certainly not be decided on its merits?
Besides, any open rupture with his colleagues would certainly bring upon
his head the blind passions of "anti-German" resentment with which the
public of all allied countries were still inspired. They would not listen to his
arguments. They would not be cool enough to treat the issue as one of
international morality or of the right governance of Europe. The cry would
simply be that, for various sinister and selfish reasons, the President wished
"to let the Hun off." The almost unanimous voice of the French and British
Press could be anticipated. Thus, if he threw down the gage publicly he
might be defeated. And if he were defeated, would not the final Peace be far
worse than if he were to retain his prestige and endeavor to make it as good
as the limiting conditions of European politics would allow, him? But above
all, if he were defeated, would he not lose the League of Nations? And was
not this, after all, by far the most important issue for the future happiness of
the world? The Treaty would be altered and softened by time. Much in it
which now seemed so vital would become trifling, and much which was
impracticable would for that very reason never happen. But the League,
even in an imperfect form, was permanent; it was the first commencement
of a new principle in the government of the world; Truth and Justice in
international relations could not be established in a few months,—they must
be born in due course by the slow gestation of the League. Clemenceau had
been clever enough to let it be seen that he would swallow the League at a
price.
At the crisis of his fortunes the President was a lonely man. Caught up in
the toils of the Old World, he stood in great need of sympathy, of moral
support, of the enthusiasm of masses. But buried in the Conference, stifled
in the hot and poisoned atmosphere of Paris, no echo reached him from the
outer world, and no throb of passion, sympathy, or encouragement from his
silent constituents in all countries. He felt that the blaze of popularity which
had greeted his arrival in Europe was already dimmed; the Paris Press
jeered at him openly; his political opponents at home were taking advantage
of his absence to create an atmosphere against him; England was cold,
critical, and unresponsive. He had so formed his entourage that he did not
receive through private channels the current of faith and enthusiasm of
which the public sources seemed dammed up. He needed, but lacked, the

added strength of collective faith. The German terror still overhung us, and
even the sympathetic public was very cautious; the enemy must not be
encouraged, our friends must be supported, this was not the time for discord
or agitations, the President must be trusted to do his best. And in this
drought the flower of the President's faith withered and dried up.
Thus it came to pass that the President countermanded the George
Washington, which, in a moment of well-founded rage, he had ordered to be
in readiness to carry him from the treacherous halls of Paris back to the seat
of his authority, where he could have felt himself again. But as soon, alas,
as he had taken the road of compromise, the defects, already indicated, of
his temperament and of his equipment, were fatally apparent. He could take
the high line; he could practise obstinacy; he could write Notes from Sinai
or Olympus; he could remain unapproachable in the White House or even in
the Council of Ten and be safe. But if he once stepped down to the intimate
equality of the Four, the game was evidently up.
Now it was that what I have called his theological or Presbyterian
temperament became dangerous. Having decided that some concessions
were unavoidable, he might have sought by firmness and address and the
use of the financial power of the United States to secure as much as he
could of the substance, even at some sacrifice of the letter. But the President
was not capable of so clear an understanding with himself as this implied.
He was too conscientious. Although compromises were now necessary, he
remained a man of principle and the Fourteen Points a contract absolutely
binding upon him. He would do nothing that was not honorable; he would
do nothing that was not just and right; he would do nothing that was
contrary to his great profession of faith. Thus, without any abatement of the
verbal inspiration of the Fourteen Points, they became a document for gloss
and interpretation and for all the intellectual apparatus of self-deception, by
which, I daresay, the President's forefathers had persuaded themselves that
the course they thought it necessary to take was consistent with every
syllable of the Pentateuch.
The President's attitude to his colleagues had now become: I want to meet
you so far as I can; I see your difficulties and I should like to be able to
agree to what you propose; but I can do nothing that is not just and right,
and you must first of all show me that what you want does really fall within

the words of the pronouncements which are binding on me. Then began the
weaving of that web of sophistry and Jesuitical exegesis that was finally to
clothe with insincerity the language and substance of the whole Treaty. The
word was issued to the witches of all Paris:

Fair is foul, and foul is fair,
Hover through the fog and filthy air.

The subtlest sophisters and most hypocritical draftsmen were set to work,
and produced many ingenious exercises which might have deceived for
more than an hour a cleverer man than the President.
Thus instead of saying that German-Austria is prohibited from uniting with
Germany except by leave of France (which would be inconsistent with the
principle of self-determination), the Treaty, with delicate draftsmanship,
states that "Germany acknowledges and will respect strictly the
independence of Austria, within the frontiers which may be fixed in a
Treaty between that State and the Principal Allied and Associated Powers;
she agrees that this independence shall be inalienable, except with the
consent of the Council of the League of Nations," which sounds, but is not,
quite different. And who knows but that the President forgot that another
part of the Treaty provides that for this purpose the Council of the League
must be unanimous.
Instead of giving Danzig to Poland, the Treaty establishes Danzig as a
"Free" City, but includes this "Free" City within the Polish Customs
frontier, entrusts to Poland the control of the river and railway system, and
provides that "the Polish Government shall undertake the conduct of the
foreign relations of the Free City of Danzig as well as the diplomatic
protection of citizens of that city when abroad."
In placing the river system of Germany under foreign control, the Treaty
speaks of declaring international those "river systems which naturally
provide more than one State with access to the sea, with or without
transhipment from one vessel to another."
Such instances could be multiplied. The honest and intelligible purpose of
French policy, to limit the population of Germany and weaken her

economic system, is clothed, for the President's sake, in the august language
of freedom and international equality.
But perhaps the most decisive moment, in the disintegration of the
President's moral position and the clouding of his mind, was when at last, to
the dismay of his advisers, he allowed himself to be persuaded that the
expenditure of the Allied Governments on pensions and separation
allowances could be fairly regarded as "damage done to the civilian
population of the Allied and Associated Powers by German aggression by
land, by sea, and from the air," in a sense in which the other expenses of the
war could not be so regarded. It was a long theological struggle in which,
after the rejection of many different arguments, the President finally
capitulated before a masterpiece of the sophist's art.
At last the work was finished; and the President's conscience was still
intact. In spite of everything, I believe that his temperament allowed him to
leave Paris a really sincere man; and it is probable that to this day he is
genuinely convinced that the Treaty contains practically nothing
inconsistent with his former professions.
But the work was too complete, and to this was due the last tragic episode
of the drama. The reply of Brockdorff-Rantzau inevitably took the line that
Germany had laid down her arms on the basis of certain assurances, and
that the Treaty in many particulars was not consistent with these assurances.
But this was exactly what the President could not admit; in the sweat of
solitary contemplation and with prayers to God he had done nothing that
was not just and right; for the President to admit that the German reply had
force in it was to destroy his self-respect and to disrupt the inner equipoise
of his soul; and every instinct of his stubborn nature rose in self-protection.
In the language of medical psychology, to suggest to the President that the
Treaty was an abandonment of his professions was to touch on the raw a
Freudian complex. It was a subject intolerable to discuss, and every
subconscious instinct plotted to defeat its further exploration.
Thus it was that Clemenceau brought to success, what had seemed to be, a
few months before, the extraordinary and impossible proposal that the
Germans should not be heard. If only the President had not been so
conscientious, if only he had not concealed from himself what he had been

doing, even at the last moment he was in, a position to have recovered lost
ground and to have achieved some very considerable successes. But the
President was set. His arms and legs had been spliced by the surgeons to a
certain posture, and they must be broken again before they could be altered.
To his horror, Mr. Lloyd George, desiring at the last moment all the
moderation he dared, discovered that he could not in five days persuade the
President of error in what it had taken five months to prove to him to be just
and right. After all, it was harder to de-bamboozle this old Presbyterian than
it had been to bamboozle him; for the former involved his belief in and
respect for himself.
Thus in the last act the President stood for stubbornness and a refusal of
conciliations.

FOOTNOTES:
[6] He alone amongst the Four could speak and understand both languages,
Orlando knowing only French and the Prime Minister and President only
English; and it is of historical importance that Orlando and the President had no
direct means of communication.

Chapter IV

The Treaty
The thoughts which I have expressed in the second chapter were not present
to the mind of Paris. The future life of Europe was not their concern; its
means of livelihood was not their anxiety. Their preoccupations, good and
bad alike, related to frontiers and nationalities, to the balance of power, to
imperial aggrandizements, to the future enfeeblement of a strong and
dangerous enemy, to revenge, and to the shifting by the victors of their
unbearable financial burdens on to the shoulders of the defeated.
Two rival schemes for the future polity of the world took the field,—the
Fourteen Points of the President, and the Carthaginian Peace of M.
Clemenceau. Yet only one of these was entitled to take the field; for the
enemy had not surrendered unconditionally, but on agreed terms as to the
general character of the Peace.
This aspect of what happened cannot, unfortunately, be passed over with a
word, for in the minds of many Englishmen at least it has been a subject of
very great misapprehension. Many persons believe that the Armistice Terms
constituted the first Contract concluded between the Allied and Associated
Powers and the German Government, and that we entered the Conference
with our hands, free, except so far as these Armistice Terms might bind us.
This was not the case. To make the position plain, it is necessary briefly to
review the history, of the negotiations which began with the German Note
of October 5, 1918, and concluded with President Wilson's Note of
November 5, 1918.
On October 5, 1918, the German Government addressed a brief Note to the
President accepting the Fourteen Points and asking for Peace negotiations.
The President's reply of October 8 asked if he was to understand definitely
that the German Government accepted "the terms laid down" in Fourteen
Points and in his subsequent Addresses and "that its object in entering into
discussion would be only to agree upon the practical details of their
application." He added that the evacuation of invaded territory must be a
prior condition of an Armistice. On October 12 the German Government

returned an unconditional affirmative to these questions;-"its object in
entering into discussions would be only to agree upon practical details of
the application of these terms." On October 14, having received this
affirmative answer, the President made a further communication to make
clear the points: (1) that the details of the Armistice would have to be left to
the military advisers of the United States and the Allies, and must provide
absolutely against the possibility of Germany's resuming hostilities; (2) that
submarine warfare must cease if these conversations were to continue; and
(3) that he required further guarantees of the representative character of the
Government with which he was dealing. On October 20 Germany accepted
points (1) and (2), and pointed out, as regards (3), that she now had a
Constitution and a Government dependent for its authority on the
Reichstag. On October 23 the President announced that, "having received
the solemn and explicit assurance of the German Government that it
unreservedly accepts the terms of peace laid down in his Address to the
Congress of the United States on January 8, 1918 (the Fourteen Points), and
the principles of settlement enunciated in his subsequent Addresses,
particularly the Address of September 27, and that it is ready to discuss the
details of their application," he has communicated the above
correspondence to the Governments of the Allied Powers "with the
suggestion that, if these Governments are disposed to effect peace upon the
terms and principles indicated," they will ask their military advisers to draw
up Armistice Terms of such a character as to "ensure to the Associated
Governments the unrestricted power to safeguard and enforce the details of
the peace to which the German Government has agreed." At the end of this
Note the President hinted more openly than in that of October 14 at the
abdication of the Kaiser. This completes the preliminary negotiations to
which the President alone was a party, adding without the Governments of
the Allied Powers.
On November 5, 1918, the President transmitted to Germany the reply he
had received from the Governments associated with him, and added that
Marshal Foch had been authorized to communicate the terms of an
armistice to properly accredited representatives. In this reply the Allied
Governments, "subject to the qualifications which follow, declare their
willingness to make peace with the Government of Germany on the terms
of peace laid down in the President's Address to Congress of January 8,

1918, and the principles of settlement enunciated in his subsequent
Addresses." The qualifications in question were two in number. The first
related to the Freedom of the Seas, as to which they "reserved to themselves
complete freedom." The second related to Reparation and ran as follows:
—"Further, in the conditions of peace laid down in his Address to Congress
on the 8th January, 1918 the President declared that invaded territories must
be restored as well as evacuated and made free. The Allied Governments
feel that no doubt ought to be allowed to exist as to what this provision
implies. By it 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."[7]
The nature of the Contract between Germany and the Allies resulting from
this exchange of documents is plain and unequivocal. The terms of the
peace are to be in accordance with the Addresses of the President, and the
purpose of the Peace Conference is "to discuss the details of their
application." The circumstances of the Contract were of an unusually
solemn and binding character; for one of the conditions of it was that
Germany should agree to Armistice Terms which were to be such as would
leave her helpless. Germany having rendered herself helpless in reliance on
the Contract, the honor of the Allies was peculiarly involved in fulfilling
their part and, if there were ambiguities, in not using their position to take
advantage of them.
What, then, was the substance of this Contract to which the Allies had
bound themselves? An examination of the documents shows that, although
a large part of the Addresses is concerned with spirit, purpose, and
intention, and not with concrete solutions, and that many questions
requiring a settlement in the Peace Treaty are not touched on, nevertheless,
there are certain questions which they settle definitely. It is true that within
somewhat wide limits the Allies still had a free hand. Further, it is difficult
to apply on a contractual basis those passages which deal with spirit,
purpose, and intention;—every man must judge for himself whether, in
view of them, deception or hypocrisy has been practised. But there remain,
as will be seen below, certain important issues on which the Contract is
unequivocal.

In addition to the Fourteen Points of January 18, 1918, the Addresses of the
President which form part of the material of the Contract are four in
number,—before the Congress on February 11; at Baltimore on April 6; at
Mount Vernon on July 4; and at New York on September 27, the last of
these being specially referred to in the Contract. I venture to select from
these Addresses those engagements of substance, avoiding repetitions,
which are most relevant to the German Treaty. The parts I omit add to,
rather than detract from, those I quote; but they chiefly relate to intention,
and are perhaps too vague and general to be interpreted contractually.[8]
The Fourteen Points.—(3). "The removal, so far as possible, of all
economic barriers and the establishment of an equality of trade conditions
among all the nations consenting to the Peace and associating themselves
for its maintenance." (4). "Adequate guarantees given and taken that
national armaments will be reduced to the lowest point consistent with
domestic safety." (5). "A free, open-minded, and absolutely impartial
adjustment of all colonial claims," regard being had to the interests of the
populations concerned. (6), (7), (8), and (11). The evacuation and
"restoration" of all invaded territory, especially of Belgium. To this must be
added the rider of the Allies, claiming compensation for all damage done to
civilians and their property by land, by sea, and from the air (quoted in full
above). (8). The righting of "the wrong done to France by Prussia in 1871 in
the matter of Alsace-Lorraine." (13). An independent Poland, including "the
territories inhabited by indisputably Polish populations" and "assured a free
and secure access to the sea." (14). The League of Nations.
Before the Congress, February 11.—"There shall be no annexations, no
contributions, no punitive damages.... Self-determination is not a mere
phrase. It is an imperative principle of action which statesmen will
henceforth ignore at their peril.... Every territorial settlement involved in
this war must be made in the interest and for the benefit of the populations
concerned, and not as a part of any mere adjustment or compromise of
claims amongst rival States."
New York, September 27.—(1) "The impartial justice meted out must
involve no discrimination between those to whom we wish to be just and
those to whom we do not wish to be just." (2) "No special or separate
interest of any single nation or any group of nations can be made the basis

of any part of the settlement which is not consistent with the common
interest of all." (3) "There can be no leagues or alliances or special
covenants and understandings within the general and common family of the
League of Nations." (4) "There can be no special selfish economic
combinations within the League and no employment of any form of
economic boycott or exclusion, except as the power of economic penalty by
exclusion from the markets of the world may be vested in the League of
Nations itself as a means of discipline and control." (5) "All international
agreements and treaties of every kind must be made known in their entirety
to the rest of the world."
This wise and magnanimous program for the world had passed on
November 5, 1918 beyond the region of idealism and aspiration, and had
become part of a solemn contract to which all the Great Powers of the
world had put their signature. But it was lost, nevertheless, in the morass of
Paris;—the spirit of it altogether, the letter in parts ignored and in other
parts distorted.
The German observations on the draft Treaty of Peace were largely a
comparison between the terms of this understanding, on the basis of which
the German nation had agreed to lay down its arms, and the actual
provisions of the document offered them for signature thereafter. The
German commentators had little difficulty in showing that the draft Treaty
constituted a breach of engagements and of international morality
comparable with their own offense in the invasion of Belgium.
Nevertheless, the German reply was not in all its parts a document fully
worthy of the occasion, because in spite of the justice and importance of
much of its contents, a truly broad treatment and high dignity of outlook
were a little wanting, and the general effect lacks the simple treatment, with
the dispassionate objectivity of despair which the deep passions of the
occasion might have evoked. The Allied governments gave it, in any case,
no serious consideration, and I doubt if anything which the German
delegation could have said at that stage of the proceedings would have
much influenced the result.
The commonest virtues of the individual are often lacking in the spokesmen
of nations; a statesman representing not himself but his country may prove,
without incurring excessive blame—as history often records—vindictive,

perfidious, and egotistic. These qualities are familiar in treaties imposed by
victors. But the German delegation did not succeed in exposing in burning
and prophetic words the quality which chiefly distinguishes this transaction
from all its historical predecessors—its insincerity.
This theme, however, must be for another pen than mine. I am mainly
concerned in what follows, not with the justice of the Treaty,—neither with
the demand for penal justice against the enemy, nor with the obligation of
contractual justice on the victor,—but with its wisdom and with its
consequences.
I propose, therefore, in this chapter to set forth baldly the principal
economic provisions of the Treaty, reserving, however, for the next my
comments on the Reparation Chapter and on Germany's capacity to meet
the payments there demanded from her.
The German economic system as it existed before the war depended on
three main factors: I. Overseas commerce as represented by her mercantile
marine, her colonies, her foreign investments, her exports, and the overseas
connections of her merchants; II. The exploitation of her coal and iron and
the industries built upon them; III. Her transport and tariff system. Of these
the first, while not the least important, was certainly the most vulnerable.
The Treaty aims at the systematic destruction of all three, but principally of
the first two.

I

(1) Germany has ceded to the Allies all the vessels of her mercantile marine
exceeding 1600 tons gross, half the vessels between 1000 tons and 1600
tons, and one quarter of her trawlers and other fishing boats.[9] The cession
is comprehensive, including not only vessels flying the German flag, but
also all vessels owned by Germans but flying other flags, and all vessels
under construction as well as those afloat.[10] Further, Germany undertakes,
if required, to build for the Allies such types of ships as they may specify up
to 200,000 tons[11] annually for five years, the value of these ships being
credited to Germany against what is due from her for Reparation.[12]

Thus the German mercantile marine is swept from the seas and cannot be
restored for many years to come on a scale adequate to meet the
requirements of her own commerce. For the present, no lines will run from
Hamburg, except such as foreign nations may find it worth while to
establish out of their surplus tonnage. Germany will have to pay to
foreigners for the carriage of her trade such charges as they may be able to
exact, and will receive only such conveniences as it may suit them to give
her. The prosperity of German ports and commerce can only revive, it
would seem, in proportion as she succeeds in bringing under her effective
influence the merchant marines of Scandinavia and of Holland.
(2) Germany has ceded to the Allies "all her rights and titles over her
oversea possessions."[13] This cession not only applies to sovereignty but
extends on unfavorable terms to Government property, all of which,
including railways, must be surrendered without payment, while, on the
other hand, the German Government remains liable for any debt which may
have been incurred for the purchase or construction of this property, or for
the development of the colonies generally.[14]
In distinction from the practice ruling in the case of most similar cessions in
recent history, the property and persons of private German nationals, as
distinct from their Government, are also injuriously affected. The Allied
Government exercising authority in any former German colony "may make
such provisions as it thinks fit with reference to the repatriation from them
of German nationals and to the conditions upon which German subjects of
European origin shall, or shall not, be allowed to reside, hold property, trade
or exercise a profession in them."[15] All contracts and agreements in favor
of German nationals for the construction or exploitation of public works
lapse to the Allied Governments as part of the payment due for Reparation.
But these terms are unimportant compared with the more comprehensive
provision by which "the Allied and Associated Powers reserve the right to
retain and liquidate all property, rights, and interests belonging at the date
of the coming into force of the present Treaty to German nationals, or
companies controlled by them," within the former German colonies.[16]
This wholesale expropriation of private property is to take place without the
Allies affording any compensation to the individuals expropriated, and the
proceeds will be employed, first, to meet private debts due to Allied

nationals from any German nationals, and second, to meet claims due from
Austrian, Hungarian, Bulgarian, or Turkish nationals. Any balance may
either be returned by the liquidating Power direct to Germany, or retained
by them. If retained, the proceeds must be transferred to the Reparation
Commission for Germany's credit in the Reparation account.[17]
In short, not only are German sovereignty and German influence extirpated
from the whole of her former oversea possessions, but the persons and
property of her nationals resident or owning property in those parts are
deprived of legal status and legal security.
(3) The provisions just outlined in regard to the private property of Germans
in the ex-German colonies apply equally to private German property in
Alsace-Lorraine, except in so far as the French Government may choose to
grant exceptions.[18] This is of much greater practical importance than the
similar expropriation overseas because of the far higher value of the
property involved and the closer interconnection, resulting from the great
development of the mineral wealth of these provinces since 1871, of
German economic interests there with those in Germany itself. Alsace-
Lorraine has been part of the German Empire for nearly fifty years—a
considerable majority of its population is German speaking—and it has
been the scene of some of Germany's most important economic enterprises.
Nevertheless, the property of those Germans who reside there, or who have
invested in its industries, is now entirely at the disposal of the French
Government without compensation, except in so far as the German
Government itself may choose to afford it. The French Government is
entitled to expropriate without compensation the personal property of
private German citizens and German companies resident or situated within
Alsace-Lorraine, the proceeds being credited in part satisfaction of various
French claims. The severity of this provision is only mitigated to the extent
that the French Government may expressly permit German nationals to
continue to reside, in which case the above provision is not applicable.
Government, State, and Municipal property, on the other hand, is to be
ceded to France without any credit being given for it. This includes the
railway system of the two provinces, together with its rolling-stock.[19] But
while the property is taken over, liabilities contracted in respect of it in the
form of public debts of any kind remain the liability of Germany.[20] The
provinces also return to French sovereignty free and quit of their share of

German war or pre-war dead-weight debt; nor does Germany receive a
credit on this account in respect of Reparation.
(4) The expropriation of German private property is not limited, however, to
the ex-German colonies and Alsace-Lorraine. The treatment of such
property forms, indeed, a very significant and material section of the Treaty,
which has not received as much attention as it merits, although it was the
subject of exceptionally violent objection on the part of the German
delegates at Versailles. So far as I know, there is no precedent in any peace
treaty of recent history for the treatment of private property set forth below,
and the German representatives urged that the precedent now established
strikes a dangerous and immoral blow at the security of private property
everywhere. This is an exaggeration, and the sharp distinction, approved by
custom and convention during the past two centuries, between the property
and rights of a State and the property and rights of its nationals is an
artificial one, which is being rapidly put out of date by many other
influences than the Peace Treaty, and is inappropriate to modern socialistic
conceptions of the relations between the State and its citizens. It is true,
however, that the Treaty strikes a destructive blow at a conception which
lies at the root of much of so-called international law, as this has been
expounded hitherto.
The principal provisions relating to the expropriation of German private
property situated outside the frontiers of Germany, as these are now
determined, are overlapping in their incidence, and the more drastic would
seem in some cases to render the others unnecessary. Generally speaking,
however, the more drastic and extensive provisions are not so precisely
framed as those of more particular and limited application. They are as
follows:—
(a) The Allies "reserve the right to retain and liquidate all property, rights
and interests belonging at the date of the coming into force of the present
Treaty to German nationals, or companies controlled by them, within their
territories, colonies, possessions and protectorates, including territories
ceded to them by the present Treaty."[21]
This is the extended version of the provision which has been discussed
already in the case of the colonies and of Alsace-Lorraine. The value of the

property so expropriated will be applied, in the first instance, to the
satisfaction of private debts due from Germany to the nationals of the Allied
Government within whose jurisdiction the liquidation takes place, and,
second, to the satisfaction of claims arising out of the acts of Germany's
former allies. Any balance, if the liquidating Government elects to retain it,
must be credited in the Reparation account.[22] It is, however, a point of
considerable importance that the liquidating Government is not compelled
to transfer the balance to the Reparation Commission, but can, if it so
decides, return the proceeds direct to Germany. For this will enable the
United States, if they so wish, to utilize the very large balances, in the hands
of their enemy-property custodian, to pay for the provisioning of Germany,
without regard to the views of the Reparation Commission.
These provisions had their origin in the scheme for the mutual settlement of
enemy debts by means of a Clearing House. Under this proposal it was
hoped to avoid much trouble and litigation by making each of the
Governments lately at war responsible for the collection of private debts
due from its nationals to the nationals of any of the other Governments (the
normal process of collection having been suspended by reason of the war),
and for the distribution of the funds so collected to those of its nationals
who had claims against the nationals of the other Governments, any final
balance either way being settled in cash. Such a scheme could have been
completely bilateral and reciprocal. And so in part it is, the scheme being
mainly reciprocal as regards the collection of commercial debts. But the
completeness of their victory permitted the Allied Governments to
introduce in their own favor many divergencies from reciprocity, of which
the following are the chief: Whereas the property of Allied nationals within
German jurisdiction reverts under the Treaty to Allied ownership on the
conclusion of Peace, the property of Germans within Allied jurisdiction is
to be retained and liquidated as described above, with the result that the
whole of German property over a large part of the world can be
expropriated, and the large properties now within the custody of Public
Trustees and similar officials in the Allied countries may be retained
permanently. In the second place, such German assets are chargeable, not
only with the liabilities of Germans, but also, if they run to it, with
"payment of the amounts due in respect of claims by the nationals of such
Allied or Associated Power with regard to their property, rights, and

interests in the territory of other Enemy Powers," as, for example, Turkey,
Bulgaria, and Austria.[23] This is a remarkable provision, which is naturally
non-reciprocal. In the third place, any final balance due to Germany on
private account need not be paid over, but can be held against the various
liabilities of the German Government.[24] The effective operation of these
Articles is guaranteed by the delivery of deeds, titles, and information.[25] In
the fourth place, pre-war contracts between Allied and German nationals
may be canceled or revived at the option of the former, so that all such
contracts which are in Germany's favor will be canceled, while, on the other
hand, she will be compelled to fulfil those which are to her disadvantage.
(b) So far we have been concerned with German property within Allied
jurisdiction. The next provision is aimed at the elimination of German
interests in the territory of her neighbors and former allies, and of certain
other countries. Under Article 260 of the Financial Clauses it is provided
that the Reparation Commission may, within one year of the coming into
force of the Treaty, demand that the German Government expropriate its
nationals and deliver to the Reparation Commission "any rights and
interests of German nationals in any public utility undertaking or in any
concession[26] operating in Russia, China, Turkey, Austria, Hungary, and
Bulgaria, or in the possessions or dependencies of these States, or in any
territory formerly belonging to Germany or her allies, to be ceded by
Germany or her allies to any Power or to be administered by a Mandatory
under the present Treaty." This is a comprehensive description, overlapping
in part the provisions dealt with under (a) above, but including, it should be
noted, the new States and territories carved out of the former Russian,
Austro-Hungarian, and Turkish Empires. Thus Germany's influence is
eliminated and her capital confiscated in all those neighboring countries to
which she might naturally look for her future livelihood, and for an outlet
for her energy, enterprise, and technical skill.
The execution of this program in detail will throw on the Reparation
Commission a peculiar task, as it will become possessor of a great number
of rights and interests over a vast territory owing dubious obedience,
disordered by war, disruption, and Bolshevism. The division of the spoils
between the victors will also provide employment for a powerful office,
whose doorsteps the greedy adventurers and jealous concession-hunters of
twenty or thirty nations will crowd and defile.

Lest the Reparation Commission fail by ignorance to exercise its rights to
the full, it is further provided that the German Government shall
communicate to it within six months of the Treaty's coming into force a list
of all the rights and interests in question, "whether already granted,
contingent or not yet exercised," and any which are not so communicated
within this period will automatically lapse in favor of the Allied
Governments.[27] How far an edict of this character can be made binding on
a German national, whose person and property lie outside the jurisdiction of
his own Government, is an unsettled question; but all the countries
specified in the above list are open to pressure by the Allied authorities,
whether by the imposition of an appropriate Treaty clause or otherwise.
(c) There remains a third provision more sweeping than either of the above,
neither of which affects German interests in neutral countries. The
Reparation Commission is empowered up to May 1, 1921, to demand
payment up to $5,000,000,000 in such manner as they may fix, "whether in
gold, commodities, ships, securities or otherwise."[28] This provision has the
effect of intrusting to the Reparation Commission for the period in question
dictatorial powers over all German property of every description whatever.
They can, under this Article, point to any specific business, enterprise, or
property, whether within or outside Germany, and demand its surrender; and
their authority would appear to extend not only to property existing at the
date of the Peace, but also to any which may be created or acquired at any
time in the course of the next eighteen months. For example, they could
pick out—as presumably they will as soon as they are established—the fine
and powerful German enterprise in South America known as the Deutsche
Ueberseeische Elektrizitätsgesellschaft (the D.U.E.G.), and dispose of it to
Allied interests. The clause is unequivocal and all-embracing. It is worth
while to note in passing that it introduces a quite novel principle in the
collection of indemnities. Hitherto, a sum has been fixed, and the nation
mulcted has been left free to devise and select for itself the means of
payment. But in this case the payees can (for a certain period) not only
demand a certain sum but specify the particular kind of property in which
payment is to be effected. Thus the powers of the Reparation Commission,
with which I deal more particularly in the next chapter, can be employed to
destroy Germany's commercial and economic organization as well as to
exact payment.

The cumulative effect of (a), (b), and (c) (as well as of certain other minor
provisions on which I have not thought it necessary to enlarge) is to deprive
Germany (or rather to empower the Allies so to deprive her at their will—it
is not yet accomplished) of everything she possesses outside her own
frontiers as laid down in the Treaty. Not only are her oversea investments
taken and her connections destroyed, but the same process of extirpation is
applied in the territories of her former allies and of her immediate neighbors
by land.
(5) Lest by some oversight the above provisions should overlook any
possible contingencies, certain other Articles appear in the Treaty, which
probably do not add very much in practical effect to those already
described, but which deserve brief mention as showing the spirit of
completeness in which the victorious Powers entered upon the economic
subjection of their defeated enemy.
First of all there is a general clause of barrer and renunciation: "In territory
outside her European frontiers as fixed by the present Treaty, Germany
renounces all rights, titles and privileges whatever in or over territory which
belonged to her or to her allies, and all rights, titles and privileges whatever
their origin which she held as against the Allied and Associated Powers...."
[29]

There follow certain more particular provisions. Germany renounces all
rights and privileges she may have acquired in China.[30] There are similar
provisions for Siam,[31] for Liberia,[32] for Morocco,[33] and for Egypt.[34]
In the case of Egypt not only are special privileges renounced, but by
Article 150 ordinary liberties are withdrawn, the Egyptian Government
being accorded "complete liberty of action in regulating the status of
German nationals and the conditions under which they may establish
themselves in Egypt."
By Article 258 Germany renounces her right to any participation in any
financial or economic organizations of an international character "operating
in any of the Allied or Associated States, or in Austria, Hungary, Bulgaria or
Turkey, or in the dependencies of these States, or in the former Russian
Empire."

Generally speaking, only those pre-war treaties and conventions are revived
which it suits the Allied Governments to revive, and those in Germany's
favor may be allowed to lapse.[35]
It is evident, however, that none of these provisions are of any real
importance, as compared with those described previously. They represent
the logical completion of Germany's outlawry and economic subjection to
the convenience of the Allies; but they do not add substantially to her
effective disabilities.

II

The provisions relating to coal and iron are more important in respect of
their ultimate consequences on Germany's internal industrial economy than
for the money value immediately involved. The German Empire has been
built more truly on coal and iron than on blood and iron. The skilled
exploitation of the great coalfields of the Ruhr, Upper Silesia, and the Saar,
alone made possible the development of the steel, chemical, and electrical
industries which established her as the first industrial nation of continental
Europe. One-third of Germany's population lives in towns of more than
20,000 inhabitants, an industrial concentration which is only possible on a
foundation of coal and iron. In striking, therefore, at her coal supply, the
French politicians were not mistaking their target. It is only the extreme
immoderation, and indeed technical impossibility, of the Treaty's demands
which may save the situation in the long-run.
(1) The Treaty strikes at Germany's coal supply in four ways:—
(i.) "As compensation for the destruction of the coal-mines in the north of
France, and as part payment towards the total reparation due from Germany
for the damage resulting from the war, Germany cedes to France in full and
absolute possession, with exclusive rights of exploitation, unencumbered,
and free from all debts and charges of any kind, the coal-mines situated in
the Saar Basin."[36] While the administration of this district is vested for
fifteen years in the League of Nations, it is to be observed that the mines are
ceded to France absolutely. Fifteen years hence the population of the district

will be called upon to indicate by plebiscite their desires as to the future
sovereignty of the territory; and, in the event of their electing for union with
Germany, Germany is to be entitled to repurchase the mines at a price
payable in gold.[37]
The judgment of the world has already recognized the transaction of the
Saar as an act of spoliation and insincerity. So far as compensation for the
destruction of French coal-mines is concerned, this is provided for, as we
shall see in a moment, elsewhere in the Treaty. "There is no industrial
region in Germany," the German representatives have said without
contradiction, "the population of which is so permanent, so homogeneous,
and so little complex as that of the Saar district. Among more than 650,000
inhabitants, there were in 1918 less than 100 French. The Saar district has
been German for more than 1,000 years. Temporary occupation as a result
of warlike operations on the part of the French always terminated in a short
time in the restoration of the country upon the conclusion of peace. During
a period of 1048 years France has possessed the country for not quite 68
years in all. When, on the occasion of the first Treaty of Paris in 1814, a
small portion of the territory now coveted was retained for France, the
population raised the most energetic opposition and demanded 'reunion with
their German fatherland,' to which they were 'related by language, customs,
and religion.' After an occupation of one year and a quarter, this desire was
taken into account in the second Treaty of Paris in 1815. Since then the
country has remained uninterruptedly attached to Germany, and owes its
economic development to that connection."
The French wanted the coal for the purpose of working the ironfields of
Lorraine, and in the spirit of Bismarck they have taken it. Not precedent,
but the verbal professions of the Allies, have rendered it indefensible.[38]
(ii.) Upper Silesia, a district without large towns, in which, however, lies
one of the major coalfields of Germany with a production of about 23 per
cent of the total German output of hard coal, is, subject to a plebiscite,[39] to
be ceded to Poland. Upper Silesia was never part of historic Poland; but its
population is mixed Polish, German, and Czecho-Slovakian, the precise
proportions of which are disputed.[40] Economically it is intensely German;
the industries of Eastern Germany depend upon it for their coal; and its loss

would be a destructive blow at the economic structure of the German State.
[41]

With the loss of the fields of Upper Silesia and the Saar, the coal supplies of
Germany are diminished by not far short of one-third.
(iii.) Out of the coal that remains to her, Germany is obliged to make good
year by year the estimated loss which France has incurred by the
destruction and damage of war in the coalfields of her northern Provinces.
In para. 2 of Annex V. to the Reparation Chapter, "Germany undertakes to
deliver to France annually, for a period not exceeding ten years, an amount
of coal equal to the difference between the annual production before the war
of the coal-mines of the Nord and Pas de Calais, destroyed as a result of the
war, and the production of the mines of the same area during the year in
question: such delivery not to exceed 20,000,000 tons in any one year of the
first five years, and 8,000,000 tons in any one year of the succeeding five
years."
This is a reasonable provision if it stood by itself, and one which Germany
should be able to fulfil if she were left her other resources to do it with.
(iv.) The final provision relating to coal is part of the general scheme of the
Reparation Chapter by which the sums due for Reparation are to be partly
paid in kind instead of in cash. As a part of the payment due for Reparation,
Germany is to make the following deliveries of coal or equivalent in coke
(the deliveries to France being wholly additional to the amounts available
by the cession of the Saar or in compensation for destruction in Northern
France):—
(i.) To France 7,000,000 tons annually for ten years;[42]
(ii.) To Belgium 8,000,000 tons annually for ten years;
(iii.) To Italy an annual quantity, rising by annual increments from
4,500,000 tons in 1919-1920 to 8,500,000 tons in each of the six years,
1923-1924 to 1928-1929;
(iv.) To Luxemburg, if required, a quantity of coal equal to the pre-war
annual consumption of German coal in Luxemburg.

This amounts in all to an annual average of about 25,000,000 tons.

These figures have to be examined in relation to Germany's probable
output. The maximum pre-war figure was reached in 1913 with a total of
191,500,000 tons. Of this, 19,000,000 tons were consumed at the mines,
and on balance (i.e. exports less imports) 33,500,000 tons were exported,
leaving 139,000,000 tons for domestic consumption. It is estimated that this
total was employed as follows:—

Railways 18,000,000 tons.
Gas, water, and electricity 12,500,000 "
Bunkers 6,500,000 "
House-fuel, small industry and agriculture 24,000,000 "
Industry 78,000,000 "
139,000,000 "

The diminution of production due to loss of territory is:—

Alsace-Lorraine 3,800,000 tons.
Saar Basin 13,200,000 "
Upper Silesia 43,800,000 "
60,800,000 "

There would remain, therefore, on the basis of the 1913 output,
130,700,000 tons, or, deducting consumption at the mines themselves, (say)
118,000,000 tons. For some years there must be sent out of this supply
upwards of 20,000,000 tons to France as compensation for damage done to
French mines, and 25,000,000 tons to France, Belgium, Italy, and
Luxemburg;[43] as the former figure is a maximum, and the latter figure is
to be slightly less in the earliest years, we may take the total export to
Allied countries which Germany has undertaken to provide as 40,000,000

tons, leaving, on the above basis, 78,000,000 tons for her own use as
against a pre-war consumption of 139,000,000 tons.
This comparison, however, requires substantial modification to make it
accurate. On the one hand, it is certain that the figures of pre-war output
cannot be relied on as a basis of present output. During 1918 the production
was 161,500,000 tons as compared with 191,500,000 tons in 1913; and
during the first half of 1919 it was less than 50,000,000 tons, exclusive of
Alsace-Lorraine and the Saar but including Upper Silesia, corresponding to
an annual production of about 100,000,000 tons.[44] The causes of so low an
output were in part temporary and exceptional but the German authorities
agree, and have not been confuted, that some of them are bound to persist
for some time to come. In part they are the same as elsewhere; the daily
shift has been shortened from 8-1/2 to 7 hours, and it is improbable that the
powers of the Central Government will be adequate to restore them to their
former figure. But in addition, the mining plant is in bad condition (due to
the lack of certain essential materials during the blockade), the physical
efficiency of the men is greatly impaired by malnutrition (which cannot be
cured if a tithe of the reparation demands are to be satisfied,—the standard
of life will have rather to be lowered), and the casualties of the war have
diminished the numbers of efficient miners. The analogy of English
conditions is sufficient by itself to tell us that a pre-war level of output
cannot be expected in Germany. German authorities put the loss of output at
somewhat above 30 per cent, divided about equally between the shortening
of the shift and the other economic influences. This figure appears on
general grounds to be plausible, but I have not the knowledge to endorse or
to criticize it.
The pre-war figure of 118,000,000 tons net (i.e. after allowing for loss of
territory and consumption at the mines) is likely to fall, therefore, at least as
low as to 100,000,000[45] tons, having regard to the above factors. If
40,000,000 tons of this are to be exported to the Allies, there remain
60,000,000 tons for Germany herself to meet her own domestic
consumption. Demand as well as supply will be diminished by loss of
territory, but at the most extravagant estimate this could not be put above
29,000,000 tons.[46] Our hypothetical calculations, therefore, leave us with
post-war German domestic requirements, on the basis of a pre-war
efficiency of railways and industry, of 110,000,000 tons against an output

not exceeding 100,000,000 tons, of which 40,000,000 tons are mortgaged to
the Allies.
The importance of the subject has led me into a somewhat lengthy
statistical analysis. It is evident that too much significance must not be
attached to the precise figures arrived at, which are hypothetical and
dubious.[47] But the general character of the facts presents itself irresistibly.
Allowing for the loss of territory and the loss of efficiency, Germany cannot
export coal in the near future (and will even be dependent on her Treaty
rights to purchase in Upper Silesia), if she is to continue as an industrial
nation. Every million tons she is forced to export must be at the expense of
closing down an industry. With results to be considered later this within
certain limits is possible. But it is evident that Germany cannot and will not
furnish the Allies with a contribution of 40,000,000 tons annually. Those
Allied Ministers, who have told their peoples that she can, have certainly
deceived them for the sake of allaying for the moment the misgivings of the
European peoples as to the path along which they are being led.
The presence of these illusory provisions (amongst others) in the clauses of
the Treaty of Peace is especially charged with danger for the future. The
more extravagant expectations as to Reparation receipts, by which Finance
Ministers have deceived their publics, will be heard of no more when they
have served their immediate purpose of postponing the hour of taxation and
retrenchment. But the coal clauses will not be lost sight of so easily,—for
the reason that it will be absolutely vital in the interests of France and Italy
that these countries should do everything in their power to exact their bond.
As a result of the diminished output due to German destruction in France,
of the diminished output of mines in the United Kingdom and elsewhere,
and of many secondary causes, such as the breakdown of transport and of
organization and the inefficiency of new governments, the coal position of
all Europe is nearly desperate;[48] and France and Italy, entering the
scramble with certain Treaty rights, will not lightly surrender them.
As is generally the case in real dilemmas, the French and Italian case will
possess great force, indeed unanswerable force from a certain point of view.
The position will be truly represented as a question between German
industry on the one hand and French and Italian industry on the other. It
may be admitted that the surrender of the coal will destroy German

industry, but it may be equally true that its non-surrender will jeopardize
French and Italian industry. In such a case must not the victors with their
Treaty rights prevail, especially when much of the damage has been
ultimately due to the wicked acts of those who are now defeated? Yet if
these feelings and these rights are allowed to prevail beyond what wisdom
would recommend, the reactions on the social and economic life of Central
Europe will be far too strong to be confined within their original limits.
But this is not yet the whole problem. If France and Italy are to make good
their own deficiencies in coal from the output of Germany, then Northern
Europe, Switzerland, and Austria, which previously drew their coal in large
part from Germany's exportable surplus, must be starved of their supplies.
Before the war 13,600,000 tons of Germany's coal exports went to Austria-
Hungary. Inasmuch as nearly all the coalfields of the former Empire lie
outside what is now German-Austria, the industrial ruin of this latter state,
if she cannot obtain coal from Germany, will be complete. The case of
Germany's neutral neighbors, who were formerly supplied in part from
Great Britain but in large part from Germany, will be hardly less serious.
They will go to great lengths in the direction of making their own supplies
to Germany of materials which are essential to her, conditional on these
being paid for in coal. Indeed they are already doing so.[49] With the
breakdown of money economy the practice of international barter is
becoming prevalent. Nowadays money in Central and South-Eastern
Europe is seldom a true measure of value in exchange, and will not
necessarily buy anything, with the consequence that one country, possessing
a commodity essential to the needs of another, sells it not for cash but only
against a reciprocal engagement on the part of the latter country to furnish
in return some article not less necessary to the former. This is an
extraordinary complication as compared with the former almost perfect
simplicity of international trade. But in the no less extraordinary conditions
of to-day's industry it is not without advantages as a means of stimulating
production. The butter-shifts of the Ruhr[50] show how far modern Europe
has retrograded in the direction of barter, and afford a picturesque
illustration of the low economic organization to which the breakdown of
currency and free exchange between individuals and nations is quickly
leading us. But they may produce the coal where other devices would fail.
[51]

Yet if Germany can find coal for the neighboring neutrals, France and Italy
may loudly claim that in this case she can and must keep her treaty
obligations. In this there will be a great show of justice, and it will be
difficult to weigh against such claims the possible facts that, while German
miners will work for butter, there is no available means of compelling them
to get coal, the sale of which will bring in nothing, and that if Germany has
no coal to send to her neighbors she may fail to secure imports essential to
her economic existence.
If the distribution of the European coal supplies is to be a scramble in which
France is satisfied first, Italy next, and every one else takes their chance, the
industrial future of Europe is black and the prospects of revolution very
good. It is a case where particular interests and particular claims, however
well founded in sentiment or in justice, must yield to sovereign expediency.
If there is any approximate truth in Mr. Hoover's calculation that the coal
output of Europe has fallen by one-third, a situation confronts us where
distribution must be effected with even-handed impartiality in accordance
with need, and no incentive can be neglected towards increased production
and economical methods of transport. The establishment by the Supreme
Council of the Allies in August, 1919, of a European Coal Commission,
consisting of delegates from Great Britain, France, Italy, Belgium, Poland,
and Czecho-Slovakia was a wise measure which, properly employed and
extended, may prove of great assistance. But I reserve constructive
proposals for Chapter VII. Here I am only concerned with tracing the
consequences, per impossibile, of carrying out the Treaty au pied de lettre.
[52]

(2) The provisions relating to iron-ore require less detailed attention, though
their effects are destructive. They require less attention, because they are in
large measure inevitable. Almost exactly 75 per cent of the iron-ore raised
in Germany in 1913 came from Alsace-Lorraine.[53] In this the chief
importance of the stolen provinces lay.
There is no question but that Germany must lose these ore-fields. The only
question is how far she is to be allowed facilities for purchasing their
produce. The German Delegation made strong efforts to secure the
inclusion of a provision by which coal and coke to be furnished by them to

France should be given in exchange for minette from Lorraine. But they
secured no such stipulation, and the matter remains at France's option.
The motives which will govern France's eventual policy are not entirely
concordant. While Lorraine comprised 75 per cent of Germany's iron-ore,
only 25 per cent of the blast furnaces lay within Lorraine and the Saar basin
together, a large proportion of the ore being carried into Germany proper.
Approximately the same proportion of Germany's iron and steel foundries,
namely 25 per cent, were situated in Alsace-Lorraine. For the moment,
therefore, the most economical and profitable course would certainly be to
export to Germany, as hitherto, a considerable part of the output of the
mines.
On the other hand, France, having recovered the deposits of Lorraine, may
be expected to aim at replacing as far as possible the industries, which
Germany had based on them, by industries situated within her own
frontiers. Much time must elapse before the plant and the skilled labor
could be developed within France, and even so she could hardly deal with
the ore unless she could rely on receiving the coal from Germany. The
uncertainty, too, as to the ultimate fate of the Saar will be disturbing to the
calculations of capitalists who contemplate the establishment of new
industries in France.
In fact, here, as elsewhere, political considerations cut disastrously across
economic. In a régime of Free Trade and free economic intercourse it would
be of little consequence that iron lay on one side of a political frontier, and
labor, coal, and blast furnaces on the other. But as it is, men have devised
ways to impoverish themselves and one another; and prefer collective
animosities to individual happiness. It seems certain, calculating on the
present passions and impulses of European capitalistic society, that the
effective iron output of Europe will be diminished by a new political
frontier (which sentiment and historic justice require), because nationalism
and private interest are thus allowed to impose a new economic frontier
along the same lines. These latter considerations are allowed, in the present
governance of Europe, to prevail over the intense need of the Continent for
the most sustained and efficient production to repair the destructions of war,
and to satisfy the insistence of labor for a larger reward.[54]

The same influences are likely to be seen, though on a lesser scale, in the
event of the transference of Upper Silesia to Poland. While Upper Silesia
contains but little iron, the presence of coal has led to the establishment of
numerous blast furnaces. What is to be the fate of these? If Germany is cut
off from her supplies of ore on the west, will she export beyond her
frontiers on the east any part of the little which remains to her? The
efficiency and output of the industry seem certain to diminish.
Thus the Treaty strikes at organization, and by the destruction of
organization impairs yet further the reduced wealth of the whole
community. The economic frontiers which are to be established between the
coal and the iron, upon which modern industrialism is founded, will not
only diminish the production of useful commodities, but may possibly
occupy an immense quantity of human labor in dragging iron or coal, as the
case may be, over many useless miles to satisfy the dictates of a political
treaty or because obstructions have been established to the proper
localization of industry.

III

There remain those Treaty provisions which relate to the transport and the
tariff systems of Germany. These parts of the Treaty have not nearly the
importance and the significance of those discussed hitherto. They are pin-
pricks, interferences and vexations, not so much objectionable for their
solid consequences, as dishonorable to the Allies in the light of their
professions. Let the reader consider what follows in the light of the
assurances already quoted, in reliance on which Germany laid down her
arms.
(i.) The miscellaneous Economic Clauses commence with a number of
provisions which would be in accordance with the spirit of the third of the
Fourteen Points,—if they were reciprocal. Both for imports and exports,
and as regards tariffs, regulations, and prohibitions, Germany binds herself
for five years to accord most-favored-nation treatment to the Allied and
Associated States.[55] But she is not entitled herself to receive such
treatment.

For five years Alsace-Lorraine shall be free to export into Germany, without
payment of customs duty, up to the average amount sent annually into
Germany from 1911 to 1913.[56] But there is no similar provision for
German exports into Alsace-Lorraine.
For three years Polish exports to Germany, and for five years Luxemburg's
exports to Germany, are to have a similar privilege,[57]— but not German
exports to Poland or to Luxemburg. Luxemburg also, which for many years
has enjoyed the benefits of inclusion within the German Customs Union, is
permanently excluded from it henceforward.[58]
For six months after the Treaty has come into force Germany may not
impose duties on imports from the Allied and Associated States higher than
the most favorable duties prevalent before the war and for a further two
years and a half (making three years in all) this prohibition continues to
apply to certain commodities, notably to some of those as to which special
agreements existed before the war, and also to wine, to vegetable oils, to
artificial silk, and to washed or scoured wool.[59] This is a ridiculous and
injurious provision, by which Germany is prevented from taking those steps
necessary to conserve her limited resources for the purchase of necessaries
and the discharge of Reparation. As a result of the existing distribution of
wealth in Germany, and of financial wantonness amongst individuals, the
offspring of uncertainty, Germany is threatened with a deluge of luxuries
and semi-luxuries from abroad, of which she has been starved for years,
which would exhaust or diminish her small supplies of foreign exchange.
These provisions strike at the authority of the German Government to
ensure economy in such consumption, or to raise taxation during a critical
period. What an example of senseless greed overreaching itself, to
introduce, after taking from Germany what liquid wealth she has and
demanding impossible payments for the future, a special and particularized
injunction that she must allow as readily as in the days of her prosperity the
import of champagne and of silk!
One other Article affects the Customs Régime of Germany which, if it was
applied, would be serious and extensive in its consequences. The Allies
have reserved the right to apply a special customs régime to the occupied
area on the bank of the Rhine, "in the event of such a measure being
necessary in their opinion in order to safeguard the economic interests of

the population of these territories."[60] This provision was probably
introduced as a possibly useful adjunct to the French policy of somehow
detaching the left bank provinces from Germany during the years of their
occupation. The project of establishing an independent Republic under
French clerical auspices, which would act as a buffer state and realize the
French ambition of driving Germany proper beyond the Rhine, has not yet
been abandoned. Some believe that much may be accomplished by a régime
of threats, bribes, and cajolery extended over a period of fifteen years or
longer.[61] If this Article is acted upon, and the economic system of the left
bank of the Rhine is effectively severed from the rest of Germany, the effect
would be far-reaching. But the dreams of designing diplomats do not
always prosper, and we must trust the future.
(ii.) The clauses relating to Railways, as originally presented to Germany,
were substantially modified in the final Treaty, and are now limited to a
provision by which goods, coming from Allied territory to Germany, or in
transit through Germany, shall receive the most favored treatment as
regards rail freight rates, etc., applied to goods of the same kind carried on
any German lines "under similar conditions of transport, for example, as
regards length of route."[62] As a non-reciprocal provision this is an act of
interference in internal arrangements which it is difficult to justify, but the
practical effect of this,[63] and of an analogous provision relating to
passenger traffic,[64] will much depend on the interpretation of the phrase,
"similar conditions of transport."[65]
For the time being Germany's transport system will be much more seriously
disordered by the provisions relating to the cession of rolling-stock. Under
paragraph 7 of the Armistice conditions Germany was called on to
surrender 5000 locomotives and 150,000 wagons, "in good working order,
with all necessary spare parts and fittings." Under the Treaty Germany is
required to confirm this surrender and to recognize the title of the Allies to
the material.[66] She is further required, in the case of railway systems in
ceded territory, to hand over these systems complete with their full
complement of rolling-stock "in a normal state of upkeep" as shown in the
last inventory before November 11, 1918.[67] That is to say, ceded railway
systems are not to bear any share in the general depletion and deterioration
of the German rolling-stock as a whole.

This is a loss which in course of time can doubtless be made good. But lack
of lubricating oils and the prodigious wear and tear of the war, not
compensated by normal repairs, had already reduced the German railway
system to a low state of efficiency. The further heavy losses under the
Treaty will confirm this state of affairs for some time to come, and are a
substantial aggravation of the difficulties of the coal problem and of export
industry generally.
(iii.) There remain the clauses relating to the river system of Germany.
These are largely unnecessary and are so little related to the supposed aims
of the Allies that their purport is generally unknown. Yet they constitute an
unprecedented interference with a country's domestic arrangements and are
capable of being so operated as to take from Germany all effective control
over her own transport system. In their present form they are incapable of
justification; but some simple changes might transform them into a
reasonable instrument.
Most of the principal rivers of Germany have their source or their outlet in
non-German territory. The Rhine, rising in Switzerland, is now a frontier
river for a part of its course, and finds the sea in Holland; the Danube rises
in Germany but flows over its greater length elsewhere; the Elbe rises in the
mountains of Bohemia, now called Czecho-Slovakia; the Oder traverses
Lower Silesia; and the Niemen now bounds the frontier of East Prussia and
has its source in Russia. Of these, the Rhine and the Niemen are frontier
rivers, the Elbe is primarily German but in its upper reaches has much
importance for Bohemia, the Danube in its German parts appears to have
little concern for any country but Germany, and the Oder is an almost
purely German river unless the result of the plebiscite is to detach all Upper
Silesia.
Rivers which, in the words of the Treaty, "naturally provide more than one
State with access to the sea," properly require some measure of
international regulation and adequate guarantees against discrimination.
This principle has long been recognized in the International Commissions
which regulate the Rhine and the Danube. But on such Commissions the
States concerned should be represented more or less in proportion to their
interests. The Treaty, however, has made the international character of these

rivers a pretext for taking the river system of Germany out of German
control.
After certain Articles which provide suitably against discrimination and
interference with freedom of transit,[68] the Treaty proceeds to hand over the
administration of the Elbe, the Oder, the Danube, and the Rhine to
International Commissions.[69] The ultimate powers of these Commissions
are to be determined by "a General Convention drawn up by the Allied and
Associated Powers, and approved by the League of Nations."[70] In the
meantime the Commissions are to draw up their own constitutions and are
apparently to enjoy powers of the most extensive description, "particularly
in regard to the execution of works of maintenance, control, and
improvement on the river system, the financial régime, the fixing and
collection of charges, and regulations for navigation."[71]
So far there is much to be said for the Treaty. Freedom of through transit is
a not unimportant part of good international practice and should be
established everywhere. The objectionable feature of the Commissions lies
in their membership. In each case the voting is so weighted as to place
Germany in a clear minority. On the Elbe Commission Germany has four
votes out of ten; on the Oder Commission three out of nine; on the Rhine
Commission four out of nineteen; on the Danube Commission, which is not
yet definitely constituted, she will be apparently in a small minority. On the
government of all these rivers France and Great Britain are represented; and
on the Elbe for some undiscoverable reason there are also representatives of
Italy and Belgium.
Thus the great waterways of Germany are handed over to foreign bodies
with the widest powers; and much of the local and domestic business of
Hamburg, Magdeburg, Dresden, Stettin, Frankfurt, Breslan, and Ulm will
be subject to a foreign jurisdiction. It is almost as though the Powers of
Continental Europe were to be placed in a majority on the Thames
Conservancy or the Port of London.
Certain minor provisions follow lines which in our survey of the Treaty are
now familiar. Under Annex III. of the Reparation Chapter Germany is to
cede up to 20 per cent of her inland navigation tonnage. Over and above
this she must cede such proportion of her river craft upon the Elbe, the

Oder, the Niemen, and the Danube as an American arbitrator may
determine, "due regard being had to the legitimate needs of the parties
concerned, and particularly to the shipping traffic during the five years
preceding the war," the craft so ceded to be selected from those most
recently built.[72] The same course is to be followed with German vessels
and tugs on the Rhine and with German property in the port of Rotterdam.
[73] Where the Rhine flows between France and Germany, France is to have
all the rights of utilizing the water for irrigation or for power and Germany
is to have none;[74] and all the bridges are to be French property as to their
whole length.[75] Finally the administration of the purely German Rhine
port of Kehl lying on the eastern bank of the river is to be united to that of
Strassburg for seven years and managed by a Frenchman to be nominated
by the new Rhine Commission.
Thus the Economic Clauses of the Treaty are comprehensive, and little has
been overlooked which might impoverish Germany now or obstruct her
development in future. So situated, Germany is to make payments of
money, on a scale and in a manner to be examined in the next chapter.

FOOTNOTES:
[7] The precise force of this reservation is discussed in detail in Chapter V.
[8] I also omit those which have no special relevance to the German Settlement.
The second of the Fourteen Points, which relates to the Freedom of the Seas, is
omitted because the Allies did not accept it. Any italics are mine.
[9] Part VIII. Annex III. (1).
[10] Part VIII. Annex III. (3).
[11] In the years before the war the average shipbuilding output of Germany was
about 350,000 tons annually, exclusive of warships.
[12] Part VIII. Annex III. (5).
[13] Art. 119.
[14] Arts. 120 and 257.
[15] Art. 122.
[16] Arts. 121 and 297(b). The exercise or non-exercise of this option of
expropriation appears to lie, not with the Reparation Commission, but with the
particular Power in whose territory the property has become situated by cession
or mandation.
[17] Art. 297 (h) and para. 4 of Annex to Part X. Section IV.
[18] Arts. 53 and 74.
[19] In 1871 Germany granted France credit for the railways of Alsace-Lorraine
but not for State property. At that time, however, the railways were private
property. As they afterwards became the property of the German Government,
the French Government have held, in spite of the large additional capital which
Germany has sunk in them, that their treatment must follow the precedent of
State property generally.
[20] Arts. 55 and 255. This follows the precedent of 1871.
[21] Art. 297 (b).
[22] Part X. Sections III. and IV. and Art. 243.
[23] The interpretation of the words between inverted commas is a little dubious.
The phrase is so wide as to seem to include private debts. But in the final draft of
the Treaty private debts are not explicitly referred to.
[24] This provision is mitigated in the case of German property in Poland and
the other new States, the proceeds of liquidation in these areas being payable
direct to the owner (Art. 92.)

[25] Part X. Section IV. Annex, para. 10: "Germany will, within six months from
the coming into force of the present Treaty, deliver to each Allied or Associated
Power all securities, certificates, deeds, or other documents of title held by its
nationals and relating to property, rights, or interests situated in the territory of
that Allied or Associated Power.... Germany will at any time on demand of any
Allied or Associated Power furnish such information as may be required with
regard to the territory, rights, and interests of German nationals within the
territory of such Allied or Associated Power, or with regard to any transactions
concerning such property, rights, or interests effected since July 1, 1914."
[26] "Any public utility undertaking or concession" is a vague phrase, the
precise interpretation of which is not provided for.
[27] Art. 260.
[28] Art. 235.
[29] Art. 118.
[30] Arts. 129 and 132.
[31] Arts. 135-137.
[32] Arts. 135-140.
[33] Art. 141: "Germany renounces all rights, titles and privileges conferred on
her by the General Act of Algeciras of April 7, 1906, and by the Franco-German
Agreements, of Feb. 9, 1909, and Nov. 4, 1911...."
[34] Art. 148: "All treaties, agreements, arrangements and contracts concluded
by Germany with Egypt are regarded as abrogated from Aug. 4, 1914." Art. 153:
"All property and possessions in Egypt of the German Empire and the German
States pass to the Egyptian Government without payment."
[35] Art. 289.
[36] Art. 45.
[37] Part IV. Section IV. Annex, Chap. III.
[38] "We take over the ownership of the Sarre mines, and in order not to be
inconvenienced in the exploitation of these coal deposits, we constitute a distinct
little estate for the 600,000 Germans who inhabit this coal basin, and in fifteen
years we shall endeavor by a plebiscite to bring them to declare that they want to
be French. We know what that means. During fifteen years we are going to work
on them, to attack them from every point, till we obtain from them a declaration
of love. It is evidently a less brutal proceeding than the coup de force which
detached from us our Alsatians and Lorrainers. But if less brutal, it is more
hypocritical. We know quite well between ourselves that it is an attempt to annex
these 600,000 Germans. One can understand very well the reasons of an
economic nature which have led Clemenceau to wish to give us these Sarre coal
deposits, but in order to acquire them must we give ourselves the appearance of
wanting to juggle with 600,000 Germans in order to make Frenchmen of them in
fifteen years?" (M. Hervé in La Victorie, May 31, 1919).

[39] This plebiscite is the most important of the concessions accorded to
Germany in the Allies' Final Note, and one for which Mr. Lloyd George, who
never approved the Allies' policy on the Eastern frontiers of Germany, can claim
the chief credit. The vote cannot take place before the spring of 1920, and may
be postponed until 1921. In the meantime the province will be governed by an
Allied Commission. The vote will be taken by communes, and the final frontiers
will be determined by the Allies, who shall have regard, partly to the results of
the vote in each commune, and partly "to the geographical and economic
conditions of the locality." It would require great local knowledge to predict the
result. By voting Polish, a locality can escape liability for the indemnity, and for
the crushing taxation consequent on voting German, a factor not to be neglected.
On the other hand, the bankruptcy and incompetence of the new Polish State
might deter those who were disposed to vote on economic rather than on racial
grounds. It has also been stated that the conditions of life in such matters as
sanitation and social legislation are incomparably better in Upper Silesia than in
the adjacent districts of Poland, where similar legislation is in its infancy. The
argument in the text assumes that Upper Silesia will cease to be German. But
much may happen in a year, and the assumption is not certain. To the extent that
it proves erroneous the conclusions must be modified.
[40] 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.
[41] It must not be overlooked, however, that, amongst the other concessions
relating to Silesia accorded in the Allies' Final Note, there has been included
Article 90, by which "Poland undertakes to permit for a period of fifteen years
the exportation to Germany of the products of the mines in any part of Upper
Silesia transferred to Poland in accordance with the present Treaty. Such
products shall be free from all export duties or other charges or restrictions on
exportation. Poland agrees to take such steps as may be necessary to secure that
any such products shall be available for sale to purchasers in Germany on terms
as favorable as are applicable to like products sold under similar conditions to
purchasers in Poland or in any other country." This does not apparently amount
to a right of preemption, and it is not easy to estimate its effective practical
consequences. It is evident, however, that in so far as the mines are maintained
at their former efficiency, and in so far as Germany is in a position to purchase
substantially her former supplies from that source, the loss is limited to the effect
on her balance of trade, and is without the more serious repercussions on her
economic life which are contemplated in the text. Here is an opportunity for the
Allies to render more tolerable the actual operation of the settlement. The
Germans, it should be added, have pointed out that the same economic argument
which adds the Saar fields to France allots Upper Silesia to Germany. For
whereas the Silesian mines are essential to the economic life of Germany, Poland
does not need them. Of Poland's pre-war annual demand of 10,500,000 tons,
6,800,000 tons were supplied by the indisputably Polish districts adjacent to
Upper Silesia. 1,500,000 tons from Upper Silesia (out of a total Upper Silesian
output of 43,500,000 tons), and the balance from what is now Czecho-Slovakia.
Even without any supply from Upper Silesia and Czecho-Slovakia, Poland could
probably meet her requirements by the fuller exploitation of her own coalfields

which are not yet scientifically developed, or from the deposits of Western
Galicia which are now to be annexed to her.
[42] France is also to receive annually for three years 35,000 tons of benzol,
60,000 tons of coal tar, and 30,000 tons of sulphate of ammonia.
[43] The Reparation Commission is authorized under the Treaty (Part VIII
Annex V. para. 10) "to postpone or to cancel deliveries" if they consider "that the
full exercise of the foregoing options would interfere unduly with the industrial
requirements of Germany." In the event of such postponements or cancellations
"the coal to replace coal from destroyed mines shall receive priority over other
deliveries." This concluding clause is of the greatest importance, if, as will be
seen, it is physically impossible for Germany to furnish the full 45,000,000; for
it means that France will receive 20,000,000 tons before Italy receives anything.
The Reparation Commission has no discretion to modify this. The Italian Press
has not failed to notice the significance of the provision, and alleges that this
clause was inserted during the absence of the Italian representatives from Paris
(Corriere della Sera, July 19, 1919).
[44] It follows that the current rate of production in Germany has sunk to about
60 per cent of that of 1913. The effect on reserves has naturally been disastrous,
and the prospects for the coming winter are dangerous.
[45] This assumes a loss of output of 15 per cent as compared with the estimate
of 30 per cent quoted above.
[46] This supposes a loss of 23 per cent of Germany's industrial undertaking and
a diminution of 13 per cent in her other requirements.
[47] The reader must be reminded in particular that the above calculations take
no account of the German production of lignite, which yielded in 1913
13,000,000 tons of rough lignite in addition to an amount converted into
21,000,000 tons of briquette. This amount of lignite, however, was required in
Germany before the war in addition to the quantities of coal assumed above. 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.
[48] Mr. Hoover, in July, 1919, estimated that the coal output of Europe,
excluding Russia and the Balkans, had dropped from 679,500,000 tons to
443,000,000 tons,—as a result in a minor degree of loss of material and labor,
but owing chiefly to a relaxation of physical effort after the privations and
sufferings of the war, a lack of rolling-stock and transport, and the unsettled
political fate of some of the mining districts.
[49] Numerous commercial agreements during the war ware arranged on these
lines. But in the month of June, 1919, alone, minor agreements providing for
payment in coal were made by Germany with Denmark, Norway, and
Switzerland. The amounts involved were not large, but without them Germany
could not have obtained butter from Denmark, fats and herrings from Norway, or
milk and cattle from Switzerland.

[50] "Some 60,000 Ruhr miners have agreed to work extra shifts—so-called
butter-shifts—for the purpose of furnishing coal for export to Denmark hence
butter will be exported in return. The butter will benefit the miners in the first
place, as they have worked specially to obtain it" (Kölnische Zeitung, June 11,
1919).
[51] What of the prospects of whisky-shifts in England?
[52] As early as September, 1919, the Coal Commission had to face the physical
impracticability of enforcing the demands of the Treaty, and agreed to modify
them as follows:—"Germany shall in the next six months make deliveries
corresponding to an annual delivery of 20 million tons as compared with 43
millions as provided in the Peace Treaty. If Germany's total production exceeds
the present level of about 108 millions a year, 60 per cent of extra production, up
to 128 millions, shall be delivered to the Entente and 50 per cent of any extra
beyond that, until the figure provided in the Peace Treaty is reached. If the total
production falls below 108 millions the Entente will examine the situation, after
hearing Germany, and take account of it."
[53] 21,136,265 tons out of a total of 28,607,903 tons. The loss of iron-ore in
respect of Upper Silesia is insignificant. The exclusion of the iron and steel of
Luxemburg from the German Customs Union is, however, important, especially
when this loss is added to that of Alsace-Lorraine. It may be added in passing
that Upper Silesia includes 75 per cent of the zinc production of Germany.
[54] In April, 1919, the British Ministry of Munitions despatched an expert
Commission to examine the conditions of the iron and steel works in Lorraine
and the occupied areas of Germany. The Report states that the iron and steel
works in Lorraine, and to a lesser extent in the Saar Valley, are dependent on
supplies of coal and coke from Westphalia. It is necessary to mix Westphalian
coal with Saar coal to obtain a good furnace coke. The entire dependence of all
the Lorraine iron and steel works upon Germany for fuel supplies "places them,"
says the Report, "in a very unenviable position."
[55] Arts. 264, 265, 266, and 267. These provisions can only be extended
beyond five years by the Council of the League of Nations.
[56] Art. 268 (a).
[57] Art. 268 (b) and (c).
[58] The Grand Duchy is also deneutralized and Germany binds herself to
"accept in advance all international arrangements which may be concluded by
the Allied and Associated Powers relating to the Grand Duchy" (Art. 40). At the
end of September, 1919, a plebiscite was held to determine whether Luxemburg
should join the French or the Belgian Customs Union, which decided by a
substantial majority in favour of the former. The third alternative of the
maintenance of the union with Germany was not left open to the electorate.
[59] Art. 269.
[60] Art. 270.

[61] The occupation provisions may be conveniently summarized at this point.
German territory situated west of the Rhine, together with the bridge-heads, is
subject to occupation for a period of fifteen years (Art. 428). If, however, "the
conditions of the present Treaty are faithfully carried out by Germany," the
Cologne district will be evacuated after five years, and the Coblenz district after
ten years (Art. 429). It is, however, further provided that if at the expiration of
fifteen years "the guarantees against unprovoked aggression by Germany are not
considered sufficient by the Allied and Associated Governments, the evacuation
of the occupying troops may be delayed to the extent regarded as necessary for
the purpose of obtaining the required guarantees" (Art. 429); and also that "in
case either during the occupation or after the expiration of the fifteen years, the
Reparation Commission finds that Germany refuses to observe the whole or part
of her obligations under the present Treaty with regard to Reparation, the whole
or part of the areas specified in Article 429 will be re-occupied immediately by
the Allied and Associated Powers" (Art. 430). Since it will be impossible for
Germany to fulfil the whole of her Reparation obligations, the effect of the
above provisions will be in practice that the Allies will occupy the left bank of
the Rhine just so long as they choose. They will also govern it in such manner as
they may determine (e.g. not only as regards customs, but such matters as the
respective authority of the local German representatives and the Allied
Governing Commission), since "all matters relating to the occupation and not
provided for by the present Treaty shall be regulated by subsequent agreements,
which Germany hereby undertakes to observe" (Art. 432). The actual Agreement
under which the occupied areas are to be administered for the present has been
published as a White Paper [Cd. 222]. The supreme authority is to be in the
hands of an Inter-Allied Rhineland Commission, consisting of a Belgian, a
French, a British, and an American member. The articles of this Agreement are
very fairly and reasonably drawn.
[62] Art. 365. After five years this Article is subject to revision by the Council of
the League of Nations.
[63] The German Government withdrew, as from September 1, 1919, all
preferential railway tariffs for the export of iron and steel goods, on the ground
that these privileges would have been more than counterbalanced by the
corresponding privileges which, under this Article of the Treaty, they would have
been forced to give to Allied traders.
[64] Art. 367.
[65] Questions of interpretation and application are to be referred to the League
of Nations (Art. 376).
[66] Art. 250.
[67] Art 371. This provision is even applied "to the lines of former Russian
Poland converted by Germany to the German gage, such lines being regarded as
detached from the Prussian State System."
[68] Arts. 332-337. Exception may be taken, however, to the second paragraph
of Art. 332, which allows the vessels of other nations to trade between German
towns but forbids German vessels to trade between non-German towns except

with special permission; and Art. 333, which prohibits Germany from making
use of her river system as a source of revenue, may be injudicious.
[69] The Niemen and the Moselle are to be similarly treated at a later date if
required.
[70] Art. 338.
[71] Art. 344. This is with particular reference to the Elbe and the Oder; the
Danube and the Rhine are dealt with in relation to the existing Commissions.
[72] Art. 339.
[73] Art. 357.
[74] Art. 358. Germany is, however, to be allowed some payment or credit in
respect of power so taken by France.
[75] Art. 66.

Chapter V

Reparation

I. Undertakings given prior to the Peace Negotiations

The categories of damage in respect of which the Allies were entitled to ask
for Reparation are governed by the relevant passages in President Wilson's
Fourteen Points of January 8, 1918, as modified by the Allied Governments
in their qualifying Note, the text of which the President formally
communicated to the German Government as the basis of peace on
November 5, 1918. These passages have been quoted in full at the
beginning of Chapter IV. That is to say, "compensation will be made by
Germany for all damage done to the civilian population of the Allies and to
their property by the aggression of Germany by land, by sea, and from the
air." The limiting quality of this sentence is reinforced by the passage in the
President's speech before Congress on February 11, 1918 (the terms of this
speech being an express part of the contract with the enemy), that there
shall be "no contributions" and "no punitive damages."
It has sometimes been argued that the preamble to paragraph 19[76] of the
Armistice Terms, to the effect "that any future claims and demands of the
Allies and the United States of America remain unaffected," wiped out all
precedent conditions, and left the Allies free to make whatever demands
they chose. But it is not possible to maintain that this casual protective
phrase, to which no one at the time attached any particular importance, did
away with all the formal communications which passed between the
President and the German Government as to the basis of the Terms of Peace
during the days preceding the Armistice, abolished the Fourteen Points, and
converted the German acceptance of the Armistice Terms into unconditional
surrender, so far as it affects the Financial Clauses. It is merely the usual
phrase of the draftsman, who, about to rehearse a list of certain claims,
wishes to guard himself from the implication that such list is exhaustive. In
any case, this contention is disposed of by the Allied reply to the German

observations on the first draft of the Treaty, where it is admitted that the
terms of the Reparation Chapter must be governed by the President's Note
of November 5.
Assuming then that the terms of this Note are binding, we are left to
elucidate the precise force of the phrase—"all damage done to the civilian
population of the Allies and to their property by the aggression of Germany
by land, by sea, and from the air." Few sentences in history have given so
much work to the sophists and the lawyers, as we shall see in the next
section of this chapter, as this apparently simple and unambiguous
statement. Some have not scrupled to argue that it covers the entire cost of
the war; for, they point out, the entire cost of the war has to be met by
taxation, and such taxation is "damaging to the civilian population." They
admit that the phrase is cumbrous, and that it would have been simpler to
have said "all loss and expenditure of whatever description"; and they allow
that the apparent emphasis of damage to the persons and property of
civilians is unfortunate; but errors of draftsmanship should not, in their
opinion, shut off the Allies from the rights inherent in victors.
But there are not only the limitations of the phrase in its natural meaning
and the emphasis on civilian damages as distinct from military expenditure
generally; it must also be remembered that the context of the term is in
elucidation of the meaning of the term "restoration" in the President's
Fourteen Points. The Fourteen Points provide for damage in invaded
territory—Belgium, France, Roumania, Serbia, and Montenegro (Italy
being unaccountably omitted)—but they do not cover losses at sea by
submarine, bombardments from the sea (as at Scarborough), or damage
done by air raids. It was to repair these omissions, which involved losses to
the life and property of civilians not really distinguishable in kind from
those effected in occupied territory, that the Supreme Council of the Allies
in Paris proposed to President Wilson their qualifications. At that time—the
last days of October, 1918—I do not believe that any responsible statesman
had in mind the exaction from Germany of an indemnity for the general
costs of the war. They sought only to make it clear (a point of considerable
importance to Great Britain) that reparation for damage done to non-
combatants and their property was not limited to invaded territory (as it
would have been by the Fourteen Points unqualified), but applied equally to
all such damage, whether "by land, by sea, or from the air" It was only at a

later stage that a general popular demand for an indemnity, covering the full
costs of the war, made it politically desirable to practise dishonesty and to
try to discover in the written word what was not there.
What damages, then, can be claimed from the enemy on a strict
interpretation of our engagements?[77] In the case of the United Kingdom
the bill would cover the following items:—
(a) Damage to civilian life and property by the acts of an enemy
Government including damage by air raids, naval bombardments,
submarine warfare, and mines.
(b) Compensation for improper treatment of interned civilians.
It would not include the general costs of the war, or (e.g.) indirect damage
due to loss of trade.
The French claim would include, as well as items corresponding to the
above:—
(c) Damage done to the property and persons of civilians in the war area,
and by aerial warfare behind the enemy lines.
(d) Compensation for loot of food, raw materials, live-stock, machinery,
household effects, timber, and the like by the enemy Governments or their
nationals in territory occupied by them.
(e) Repayment of fines and requisitions levied by the enemy Governments
or their officers on French municipalities or nationals.
(f) Compensation to French nationals deported or compelled to do forced
labor.
In addition to the above there is a further item of more doubtful character,
namely—
(g) The expenses of the Relief Commission in providing necessary food and
clothing to maintain the civilian French population in the enemy-occupied
districts.

The Belgian claim would include similar items.[78] If it were argued that in
the case of Belgium something more nearly resembling an indemnity for
general war costs can be justified, this could only be on the ground of the
breach of International Law involved in the invasion of Belgium, whereas,
as we have seen, the Fourteen Points include no special demands on this
ground.[79] As the cost of Belgian Belief under (g), as well as her general
war costs, has been met already by advances from the British, French, and
United States Governments, Belgium would presumably employ any
repayment of them by Germany in part discharge of her debt to these
Governments, so that any such demands are, in effect, an addition to the
claims of the three lending Governments.
The claims of the other Allies would be compiled on similar lines. But in
their case the question arises more acutely how far Germany can be made
contingently liable for damage done, not by herself, but by her co-
belligerents, Austria-Hungary, Bulgaria, and Turkey. This is one of the
many questions to which the Fourteen Points give no clear answer; on the
one hand, they cover explicitly in Point 11 damage done to Roumania,
Serbia, and Montenegro, without qualification as to the nationality of the
troops inflicting the damage; on the other hand, the Note of the Allies
speaks of "German" aggression when it might have spoken of the
aggression of "Germany and her allies." On a strict and literal
interpretation, I doubt if claims lie against Germany for damage done,—e.g.
by the Turks to the Suez Canal, or by Austrian submarines in the Adriatic.
But it is a case where, if the Allies wished to strain a point, they could
impose contingent liability on Germany without running seriously contrary
to the general intention of their engagements.
As between the Allies themselves the case is quite different. It would be an
act of gross unfairness and infidelity if France and Great Britain were to
take what Germany could pay and leave Italy and Serbia to get what they
could out of the remains of Austria-Hungary. As amongst the Allies
themselves it is clear that assets should be pooled and shared out in
proportion to aggregate claims.
In this event, and if my estimate is accepted, as given below, that Germany's
capacity to pay will be exhausted by the direct and legitimate claims which
the Allies hold against her, the question of her contingent liability for her

allies becomes academic. Prudent and honorable statesmanship would
therefore have given her the benefit of the doubt, and claimed against her
nothing but the damage she had herself caused.
What, on the above basis of claims, would the aggregate demand amount
to? No figures exist on which to base any scientific or exact estimate, and I
give my own guess for what it is worth, prefacing it with the following
observations.
The amount of the material damage done in the invaded districts has been
the subject of enormous, if natural, exaggeration. A journey through the
devastated areas of France is impressive to the eye and the imagination
beyond description. During the winter of 1918-19, before Nature had cast
over the scene her ameliorating mantle, the horror and desolation of war
was made visible to sight on an extraordinary scale of blasted grandeur. The
completeness of the destruction was evident. For mile after mile nothing
was left. No building was habitable and no field fit for the plow. The
sameness was also striking. One devastated area was exactly like another—
a heap of rubble, a morass of shell-holes, and a tangle of wire.[80] The
amount of human labor which would be required to restore such a
countryside seemed incalculable; and to the returned traveler any number of
milliards of dollars was inadequate to express in matter the destruction thus
impressed upon his spirit. Some Governments for a variety of intelligible
reasons have not been ashamed to exploit these feelings a little.
Popular sentiment is most at fault, I think, in the case of Belgium. In any
event Belgium is a small country, and in its case the actual area of
devastation is a small proportion of the whole. The first onrush of the
Germans in 1914 did some damage locally; after that the battle-line in
Belgium did not sway backwards and forwards, as in France, over a deep
belt of country. It was practically stationary, and hostilities were confined to
a small corner of the country, much of which in recent times was backward,
poor, and sleepy, and did not include the active industry of the country.
There remains some injury in the small flooded area, the deliberate damage
done by the retreating Germans to buildings, plant, and transport, and the
loot of machinery, cattle, and other movable property. But Brussels,
Antwerp, and even Ostend are substantially intact, and the great bulk of the
land, which is Belgium's chief wealth, is nearly as well cultivated as before.

The traveler by motor can pass through and from end to end of the
devastated area of Belgium almost before he knows it; whereas the
destruction in France is on a different kind of scale altogether. Industrially,
the loot has been serious and for the moment paralyzing; but the actual
money cost of replacing machinery mounts up slowly, and a few tens of
millions would have covered the value of every machine of every possible
description that Belgium ever possessed. Besides, the cold statistician must
not overlook the fact that the Belgian people possess the instinct of
individual self-protection unusually well developed; and the great mass of
German bank-notes[81] held in the country at the date of the Armistice,
shows that certain classes of them at least found a way, in spite of all the
severities and barbarities of German rule, to profit at the expense of the
invader. Belgian claims against Germany such as I have seen, amounting to
a sum in excess of the total estimated pre-war wealth of the whole country,
are simply irresponsible.[82]
It will help to guide our ideas to quote the official survey of Belgian wealth,
published in 1913 by the Finance Ministry of Belgium, which was as
follows:

Land $1,320,000,000 tons.
Buildings 1,175,000,000 "
Personal wealth 2,725,000,000 "
Cash 85,000,000 "
Furniture, etc. 600,000,000 "
$5,905,000,000 "

This total yields an average of $780 per inhabitant, which Dr. Stamp, the
highest authority on the subject, is disposed to consider as prima facie too
low (though he does not accept certain much higher estimates lately
current), the corresponding wealth per head (to take Belgium's immediate
neighbors) being $835 for Holland, $1,220 for Germany, and $1,515 for
France.[83] A total of $7,500,000,000, giving an average of about $1,000 per
head, would, however, be fairly liberal. The official estimate of land and

buildings is likely to be more accurate than the rest. On the other hand,
allowance has to be made for the increased costs of construction.
Having regard to all these considerations, I do not put the money value of
the actual physical loss of Belgian property by destruction and loot above
$750,000,000 as a maximum, and while I hesitate to put yet lower an
estimate which differs so widely from those generally current, I shall be
surprised if it proves possible to substantiate claims even to this amount.
Claims in respect of levies, fines, requisitions, and so forth might possibly
amount to a further $500,000,000. If the sums advanced to Belgium by her
allies for the general costs of the war are to be included, a sum of about
$1,250,000,000 has to be added (which includes the cost of relief), bringing
the total to $2,500,000,000.
The destruction in France was on an altogether more significant scale, not
only as regards the length of the battle line, but also on account of the
immensely deeper area of country over which the battle swayed from time
to time. It is a popular delusion to think of Belgium as the principal victim
of the war; it will turn out, I believe, that taking account of casualties, loss
of property and burden of future debt, Belgium has made the least relative
sacrifice of all the belligerents except the United States. Of the Allies,
Serbia's sufferings and loss have been proportionately the greatest, and after
Serbia, France. France in all essentials was just as much the victim of
German ambition as was Belgium, and France's entry into the war was just
as unavoidable. France, in my judgment, in spite of her policy at the Peace
Conference, a policy largely traceable to her sufferings, has the greatest
claims on our generosity.
The special position occupied by Belgium in the popular mind is due, of
course, to the fact that in 1914 her sacrifice was by far the greatest of any of
the Allies. But after 1914 she played a minor rôle. Consequently, by the end
of 1918, her relative sacrifices, apart from those sufferings from invasion
which cannot be measured in money, had fallen behind, and in some
respects they were not even as great, for example, as Australia's. I say this
with no wish to evade the obligations towards Belgium under which the
pronouncements of our responsible statesmen at many different dates have
certainly laid us. Great Britain ought not to seek any payment at all from
Germany for herself until the just claims of Belgium have been fully

satisfied. But this is no reason why we or they should not tell the truth about
the amount.
While the French claims are immensely greater, here too there has been
excessive exaggeration, as responsible French statisticians have themselves
pointed out. Not above 10 per cent of the area of France was effectively
occupied by the enemy, and not above 4 per cent lay within the area of
substantial devastation. Of the sixty French towns having a population
exceeding 35,000, only two were destroyed—Reims (115,178) and St.
Quentin (55,571); three others were occupied—Lille, Roubaix, and Douai
—and suffered from loot of machinery and other property, but were not
substantially injured otherwise. Amiens, Calais, Dunkerque, and Boulogne
suffered secondary damage by bombardment and from the air; but the value
of Calais and Boulogne must have been increased by the new works of
various kinds erected for the use of the British Army.
The Annuaire Statistique de la France, 1917, values the entire house
property of France at $11,900,000,000 (59.5 milliard francs).[84] An
estimate current in France of $4,000,000,000 (20 milliard francs) for the
destruction of house property alone is, therefore, obviously wide of the
mark.[85] $600,000,000 at pre-war prices, or say $1,250,000,000 at the
present time, is much nearer the right figure. Estimates of the value of the
land of France (apart from buildings) vary from $12,400,000,000 to
$15,580,000,000, so that it would be extravagant to put the damage on this
head as high as $500,000,000. Farm Capital for the whole of France has not
been put by responsible authorities above $2,100,000,000.[86] There remain
the loss of furniture and machinery, the damage to the coal-mines and the
transport system, and many other minor items. But these losses, however
serious, cannot be reckoned in value by hundreds of millions of dollars in
respect of so small a part of France. In short, it will be difficult to establish
a bill exceeding $2,500,000,000 for physical and material damage in the
occupied and devastated areas of Northern France.[87] I am confirmed in
this estimate by the opinion of M. René Pupin, the author of the most
comprehensive and scientific estimate of the pre-war wealth of France,[88]
which I did not come across until after my own figure had been arrived at.
This authority estimates the material losses of the invaded regions at from
$2,000,000,000 to $3,000,000,000 (10 to 15 milliards),[89] between which
my own figure falls half-way.

Nevertheless, M. Dubois, speaking on behalf of the Budget Commission of
the Chamber, has given the figure of $13,000,000,000 (65 milliard francs)
"as a minimum" without counting "war levies, losses at sea, the roads, or
the loss of public monuments." And M. Loucheur, the Minister of Industrial
Reconstruction, stated before the Senate on the 17th February, 1919, that
the reconstitution of the devastated regions would involve an expenditure of
$15,000,000,000 (75 milliard francs),—more than double M. Pupin's
estimate of the entire wealth of their inhabitants. But then at that time M.
Loucheur was taking a prominent part in advocating the claims of France
before the Peace Conference, and, like others, may have found strict
veracity inconsistent with the demands of patriotism.[90]
The figure discussed so far is not, however, the totality of the French
claims. There remain, in particular, levies and requisitions on the occupied
areas and the losses of the French mercantile marine at sea from the attacks
of German cruisers and submarines. Probably $1,000,000,000 would be
ample to cover all such claims; but to be on the safe side, we will,
somewhat arbitrarily, make an addition to the French claim of
$1,500,000,000 on all heads, bringing it to $4,000,000,000 in all.
The statements of M. Dubois and M. Loucheur were made in the early
spring of 1919. A speech delivered by M. Klotz before the French Chamber
six months later (Sept. 5, 1919) was less excusable. In this speech the
French Minister of Finance estimated the total French claims for damage to
property (presumably inclusive of losses at sea, etc., but apart from
pensions and allowances) at $26,800,000,000 (134 milliard francs), or more
than six times my estimate. Even if my figure prove erroneous, M. Klotz's
can never have been justified. So grave has been the deception practised on
the French people by their Ministers that when the inevitable enlightenment
comes, as it soon must (both as to their own claims and as to Germany's
capacity to meet them), the repercussions will strike at more than M. Klotz,
and may even involve the order of Government and Society for which he
stands.
British claims on the present basis would be practically limited to losses by
sea—losses of hulls and losses of cargoes. Claims would lie, of course, for
damage to civilian property in air raids and by bombardment from the sea,
but in relation to such figures as we are now dealing with, the money value

involved is insignificant,—$25,000,000 might cover them all, and
$50,000,000 would certainly do so.
The British mercantile vessels lost by enemy action, excluding fishing
vessels, numbered 2479, with an aggregate of 7,759,090 tons gross.[91]
There is room for considerable divergence of opinion as to the proper rate
to take for replacement cost; at the figure of $150 per gross ton, which with
the rapid growth of shipbuilding may soon be too high but can be replaced
by any other which better authorities[92] may prefer, the aggregate claim is
$1,150,000,000. To this must be added the loss of cargoes, the value of
which is almost entirely a matter of guesswork. An estimate of $200 per ton
of shipping lost may be as good an approximation as is possible, that is to
say $1,550,000,000, making $2,700,000,000 altogether.
An addition to this of $150,000,000, to cover air raids, bombardments,
claims of interned civilians, and miscellaneous items of every description,
should be more than sufficient,—making a total claim for Great Britain of
$2,850,000,000. It is surprising, perhaps, that the money value of Great
Britain's claim should be so little short of that of France and actually in
excess of that of Belgium. But, measured either by pecuniary loss or real
loss to the economic power of the country, the injury to her mercantile
marine was enormous.
There remain the claims of Italy, Serbia, and Roumania for damage by
invasion and of these and other countries, as for example Greece,[93] for
losses at sea. I will assume for the present argument that these claims rank
against Germany, even when they were directly caused not by her but by
her allies; but that it is not proposed to enter any such claims on behalf of
Russia.[94] Italy's losses by invasion and at sea cannot be very heavy, and a
figure of from $250,000,000 to $500,000,000 would be fully adequate to
cover them. The losses of Serbia, although from a human point of view her
sufferings were the greatest of all,[95] are not measured pecuniarily by very
great figures, on account of her low economic development. Dr. Stamp (loc.
cit.) quotes an estimate by the Italian statistician Maroi, which puts the
national wealth of Serbia at $2,400,000,000 or $525 per head,[96] and the
greater part of this would be represented by land which has sustained no
permanent damage.[97] In view of the very inadequate data for guessing at
more than the general magnitude of the legitimate claims of this group of

countries, I prefer to make one guess rather than several and to put the
figure for the whole group at the round sum of $1,250,000,000.
We are finally left with the following—

Belgium $2,500,000,000 [98]
France 4,000,000,000
Great Britain 2,850,000,000
Other Allies 1,250,000,000
Total $10,600,000,000

I need not impress on the reader that there is much guesswork in the above,
and the figure for France in particular is likely to be criticized. But I feel
some confidence that the general magnitude, as distinct from the precise
figures, is not hopelessly erroneous; and this may be expressed by the
statement that a claim against Germany, based on the interpretation of the
pre-Armistice engagements of the Allied Powers which is adopted above,
would assuredly be found to exceed $8,000,000,000 and to fall short of
$15,000,000,000.
This is the amount of the claim which we were entitled to present to the
enemy. For reasons which will appear more fully later on, I believe that it
would have been a wise and just act to have asked the German Government
at the Peace Negotiations to agree to a sum of $10,000,000,000 in final
settlement, without further examination of particulars. This would have
provided an immediate and certain solution, and would have required from
Germany a sum which, if she were granted certain indulgences, it might not
have proved entirely impossible for her to pay. This sum should have been
divided up amongst the Allies themselves on a basis of need and general
equity.
But the question was not settled on its merits.

II. The Conference and the Terms of the Treaty

I do not believe that, at the date of the Armistice, responsible authorities in
the Allied countries expected any indemnity from Germany beyond the cost
of reparation for the direct material damage which had resulted from the
invasion of Allied territory and from the submarine campaign. At that time
there were serious doubts as to whether Germany intended to accept our
terms, which in other respects were inevitably very severe, and it would
have been thought an unstatesmanlike act to risk a continuance of the war
by demanding a money payment which Allied opinion was not then
anticipating and which probably could not be secured in any case. The
French, I think, never quite accepted this point of view; but it was certainly
the British attitude; and in this atmosphere the pre-Armistice conditions
were framed.
A month later the atmosphere had changed completely. We had discovered
how hopeless the German position really was, a discovery which some,
though not all, had anticipated, but which no one had dared reckon on as a
certainty. It was evident that we could have secured unconditional surrender
if we had determined to get it.
But there was another new factor in the situation which was of greater local
importance. The British Prime Minister had perceived that the conclusion of
hostilities might soon bring with it the break-up of the political bloc upon
which he was depending for his personal ascendency, and that the domestic
difficulties which would be attendant on demobilization, the turn-over of
industry from war to peace conditions, the financial situation, and the
general psychological reactions of men's minds, would provide his enemies
with powerful weapons, if he were to leave them time to mature. The best
chance, therefore, of consolidating his power, which was personal and
exercised, as such, independently of party or principle, to an extent unusual
in British politics, evidently lay in active hostilities before the prestige of
victory had abated, and in an attempt to found on the emotions of the
moment a new basis of power which might outlast the inevitable reactions
of the near future. Within a brief period, therefore, after the Armistice, the
popular victor, at the height of his influence and his authority, decreed a
General Election. It was widely recognized at the time as an act of political
immorality. There were no grounds of public interest which did not call for

a short delay until the issues of the new age had a little defined themselves
and until the country had something more specific before it on which to
declare its mind and to instruct its new representatives. But the claims of
private ambition determined otherwise.
For a time all went well. But before the campaign was far advanced
Government candidates were finding themselves handicapped by the lack of
an effective cry. The War Cabinet was demanding a further lease of
authority on the ground of having won the war. But partly because the new
issues had not yet defined themselves, partly out of regard for the delicate
balance of a Coalition Party, the Prime Minister's future policy was the
subject of silence or generalities. The campaign seemed, therefore, to fall a
little flat. In the light of subsequent events it seems improbable that the
Coalition Party was ever in real danger. But party managers are easily
"rattled." The Prime Minister's more neurotic advisers told him that he was
not safe from dangerous surprises, and the Prime Minister lent an ear to
them. The party managers demanded more "ginger." The Prime Minister
looked about for some.
On the assumption that the return of the Prime Minister to power was the
primary consideration, the rest followed naturally. At that juncture there
was a clamor from certain quarters that the Government had given by no
means sufficiently clear undertakings that they were not going "to let the
Hun off." Mr. Hughes was evoking a good deal of attention by his demands
for a very large indemnity,[99] and Lord Northcliffe was lending his
powerful aid to the same cause. This pointed the Prime Minister to a stone
for two birds. By himself adopting the policy of Mr. Hughes and Lord
Northcliffe, he could at the same time silence those powerful critics and
provide his party managers with an effective platform cry to drown the
increasing voices of criticism from other quarters.
The progress of the General Election of 1918 affords a sad, dramatic history
of the essential weakness of one who draws his chief inspiration not from
his own true impulses, but from the grosser effluxions of the atmosphere
which momentarily surrounds him. The Prime Minister's natural instincts,
as they so often are, were right and reasonable. He himself did not believe
in hanging the Kaiser or in the wisdom or the possibility of a great
indemnity. On the 22nd of November he and Mr. Bonar Law issued their

Election Manifesto. It contains no allusion of any kind either to the one or
to the other but, speaking, rather, of Disarmament and the League of
Nations, concludes that "our first task must be to conclude a just and lasting
peace, and so to establish the foundations of a new Europe that occasion for
further wars may be for ever averted." In his speech at Wolverhampton on
the eve of the Dissolution (November 24), there is no word of Reparation or
Indemnity. On the following day at Glasgow, Mr. Bonar Law would
promise nothing. "We are going to the Conference," he said, "as one of a
number of allies, and you cannot expect a member of the Government,
whatever he may think, to state in public before he goes into that
Conference, what line he is going to take in regard to any particular
question." But a few days later at Newcastle (November 29) the Prime
Minister was warming to his work: "When Germany defeated France she
made France pay. That is the principle which she herself has established.
There is absolutely no doubt about the principle, and that is the principle we
should proceed upon—that Germany must pay the costs of the war up to the
limit of her capacity to do so." But he accompanied this statement of
principle with many "words of warning" as to the practical difficulties of
the case: "We have appointed a strong Committee of experts, representing
every shade of opinion, to consider this question very carefully and to
advise us. There is no doubt as to the justice of the demand. She ought to
pay, she must pay as far as she can, but we are not going to allow her to pay
in such a way as to wreck our industries." At this stage the Prime Minister
sought to indicate that he intended great severity, without raising excessive
hopes of actually getting the money, or committing himself to a particular
line of action at the Conference. It was rumored that a high city authority
had committed himself to the opinion that Germany could certainly pay
$100,000,000,000 and that this authority for his part would not care to
discredit a figure of twice that sum. The Treasury officials, as Mr. Lloyd
George indicated, took a different view. He could, therefore, shelter himself
behind the wide discrepancy between the opinions of his different advisers,
and regard the precise figure of Germany's capacity to pay as an open
question in the treatment of which he must do his best for his country's
interests. As to our engagements under the Fourteen Points he was always
silent.

On November 30, Mr. Barnes, a member of the War Cabinet, in which he
was supposed to represent Labor, shouted from a platform, "I am for
hanging the Kaiser."
On December 6, the Prime Minister issued a statement of policy and aims
in which he stated, with significant emphasis on the word European, that
"All the European Allies have accepted the principle that the Central
Powers must pay the cost of the war up to the limit of their capacity."
But it was now little more than a week to Polling Day, and still he had not
said enough to satisfy the appetites of the moment. On December 8, the
Times, providing as usual a cloak of ostensible decorum for the lesser
restraint of its associates, declared in a leader entitled "Making Germany
Pay," that "The public mind was still bewildered by the Prime Minister's
various statements." "There is too much suspicion," they added, "of
influences concerned to let the Germans off lightly, whereas the only
possible motive in determining their capacity to pay must be the interests of
the Allies." "It is the candidate who deals with the issues of to-day," wrote
their Political Correspondent, "who adopts Mr. Barnes's phrase about
'hanging the Kaiser' and plumps for the payment of the cost of the war by
Germany, who rouses his audience and strikes the notes to which they are
most responsive."
On December 9, at the Queen's Hall, the Prime Minister avoided the
subject. But from now on, the debauchery of thought and speech progressed
hour by hour. The grossest spectacle was provided by Sir Eric Geddes in the
Guildhall at Cambridge. An earlier speech in which, in a moment of
injudicious candor, he had cast doubts on the possibility of extracting from
Germany the whole cost of the war had been the object of serious suspicion,
and he had therefore a reputation to regain. "We will get out of her all you
can squeeze out of a lemon and a bit more," the penitent shouted, "I will
squeeze her until you can hear the pips squeak"; his policy was to take
every bit of property belonging to Germans in neutral and Allied countries,
and all her gold and silver and her jewels, and the contents of her picture-
galleries and libraries, to sell the proceeds for the Allies' benefit. "I would
strip Germany," he cried, "as she has stripped Belgium."

By December 11 the Prime Minister had capitulated. His Final Manifesto of
Six Points issued on that day to the electorate furnishes a melancholy
comparison with his program of three weeks earlier. I quote it in full:

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

Here is food for the cynic. To this concoction of greed and sentiment,
prejudice and deception, three weeks of the platform had reduced the
powerful governors of England, who but a little while before had spoken
not ignobly of Disarmament and a League of Nations and of a just and
lasting peace which should establish the foundations of a new Europe.
On the same evening the Prime Minister at Bristol withdrew in effect his
previous reservations and laid down four principles to govern his Indemnity
Policy, of which the chief were: First, we have an absolute right to demand
the whole cost of the war; second, we propose to demand the whole cost of
the war; and third, a Committee appointed by direction of the Cabinet
believe that it can be done.[100] Four days later he went to the polls.
The Prime Minister never said that he himself believed that Germany could
pay the whole cost of the war. But the program became in the mouths of his
supporters on the hustings a great deal more than concrete. The ordinary
voter was led to believe that Germany could certainly be made to pay the
greater part, if not the whole cost of the war. Those whose practical and
selfish fears for the future the expenses of the war had aroused, and those
whose emotions its horrors had disordered, were both provided for. A vote
for a Coalition candidate meant the Crucifixion of Anti-Christ and the
assumption by Germany of the British National Debt.

It proved an irresistible combination, and once more Mr. George's political
instinct was not at fault. No candidate could safely denounce this program,
and none did so. The old Liberal Party, having nothing comparable to offer
to the electorate, was swept out of existence.[101] A new House of Commons
came into being, a majority of whose members had pledged themselves to a
great deal more than the Prime Minister's guarded promises. Shortly after
their arrival at Westminster I asked a Conservative friend, who had known
previous Houses, what he thought of them. "They are a lot of hard-faced
men," he said, "who look as if they had done very well out of the war."
This was the atmosphere in which the Prime Minister left for Paris, and
these the entanglements he had made for himself. He had pledged himself
and his Government to make demands of a helpless enemy inconsistent
with solemn engagements on our part, on the faith of which this enemy had
laid down his arms. There are few episodes in history which posterity will
have less reason to condone,—a war ostensibly waged in defense of the
sanctity of international engagements ending in a definite breach of one of
the most sacred possible of such engagements on the part of victorious
champions of these ideals.[102]
Apart from other aspects of the transaction, I believe that the campaign for
securing out of Germany the general costs of the war was one of the most
serious acts of political unwisdom for which our statesmen have ever been
responsible. To what a different future Europe might have looked forward if
either Mr. Lloyd George or Mr. Wilson had apprehended that the most
serious of the problems which claimed their attention were not political or
territorial but financial and economic, and that the perils of the future lay
not in frontiers or sovereignties but in food, coal, and transport. Neither of
them paid adequate attention to these problems at any stage of the
Conference. But in any event the atmosphere for the wise and reasonable
consideration of them was hopelessly befogged by the commitments of the
British delegation on the question of Indemnities. The hopes to which the
Prime Minister had given rise not only compelled him to advocate an unjust
and unworkable economic basis to the Treaty with Germany, but set him at
variance with the President, and on the other hand with competing interests
to those of France and Belgium. The clearer it became that but little could
be expected from Germany, the more necessary it was to exercise patriotic
greed and "sacred egotism" and snatch the bone from the juster claims and

greater need of France or the well-founded expectations of Belgium. Yet the
financial problems which were about to exercise Europe could not be
solved by greed. The possibility of their cure lay in magnanimity.
Europe, if she is to survive her troubles, will need so much magnanimity
from America, that she must herself practice it. It is useless for the Allies,
hot from stripping Germany and one another, to turn for help to the United
States to put the States of Europe, including Germany, on to their feet again.
If the General Election of December, 1918, had been fought on lines of
prudent generosity instead of imbecile greed, how much better the financial
prospect of Europe might now be. I still believe that before the main
Conference, or very early in its proceedings, the representatives of Great
Britain should have entered deeply, with those of the United States, into the
economic and financial situation as a whole, and that the former should
have been authorized to make concrete proposals on the general lines (1)
that all inter-allied indebtedness be canceled outright; (2) that the sum to be
paid by Germany be fixed at $10,000,000,000; (3) that Great Britain
renounce all claim to participation in this sum and that any share to which
she proves entitled be placed at the disposal of the Conference for the
purpose of aiding the finances of the New States about to be established; (4)
that in order to make some basis of credit immediately available an
appropriate proportion of the German obligations representing the sum to
be paid by her should be guaranteed by all parties to the Treaty; and (5) that
the ex-enemy Powers should also be allowed, with a view to their economic
restoration, to issue a moderate amount of bonds carrying a similar
guarantee. Such proposals involved an appeal to the generosity of the
United States. But that was inevitable; and, in view of her far less financial
sacrifices, it was an appeal which could fairly have been made to her. Such
proposals would have been practicable. There is nothing in them quixotic or
Utopian. And they would have opened up for Europe some prospect of
financial stability and reconstruction.
The further elaboration of these ideas, however, must be left to Chapter
VII., and we must return to Paris. I have described the entanglements which
Mr. Lloyd George took with him. The position of the Finance Ministers of
the other Allies was even worse. We in Great Britain had not based our
financial arrangements on any expectations of an indemnity. Receipts from
such a source would have been more or less in the nature of a windfall; and,

in spite of subsequent developments, there was an expectation at that time
of balancing our budget by normal methods. But this was not the case with
France or Italy. Their peace budgets made no pretense of balancing and had
no prospects of doing so, without some far-reaching revision of the existing
policy. Indeed, the position was and remains nearly hopeless. These
countries were heading for national bankruptcy. This fact could only be
concealed by holding out the expectation of vast receipts from the enemy.
As soon as it was admitted that it was in fact impossible to make Germany
pay the expenses of both sides, and that the unloading of their liabilities
upon the enemy was not practicable, the position of the Ministers of
Finance of France and Italy became untenable.
Thus a scientific consideration of Germany's capacity to pay was from the
outset out of court. The expectations which the exigencies of politics had
made it necessary to raise were so very remote from the truth that a slight
distortion of figures was no use, and it was necessary to ignore the facts
entirely. The resulting unveracity was fundamental. On a basis of so much
falsehood it became impossible to erect any constructive financial policy
which was workable. For this reason amongst others, a magnanimous
financial policy was essential. The financial position of France and Italy
was so bad that it was impossible to make them listen to reason on the
subject of the German Indemnity, unless one could at the same time point
out to them some alternative mode of escape from their troubles.[103] The
representatives of the United States were greatly at fault, in my judgment,
for having no constructive proposals whatever to offer to a suffering and
distracted Europe.
It is worth while to point out in passing a further element in the situation,
namely, the opposition which existed between the "crushing" policy of M.
Clemenceau and the financial necessities of M. Klotz. Clemenceau's aim
was to weaken and destroy Germany in every possible way, and I fancy that
he was always a little contemptuous about the Indemnity; he had no
intention of leaving Germany in a position to practise a vast commercial
activity. But he did not trouble his head to understand either the indemnity
or poor M. Klotz's overwhelming financial difficulties. If it amused the
financiers to put into the Treaty some very large demands, well there was no
harm in that; but the satisfaction of these demands must not be allowed to
interfere with the essential requirements of a Carthaginian Peace. The

combination of the "real" policy of M. Clemenceau on unreal issues, with
M. Klotz's policy of pretense on what were very real issues indeed,
introduced into the Treaty a whole set of incompatible provisions, over and
above the inherent impracticabilities of the Reparation proposals.
I cannot here describe the endless controversy and intrigue between the
Allies themselves, which at last after some months culminated in the
presentation to Germany of the Reparation Chapter in its final form. There
can have been few negotiations in history so contorted, so miserable, so
utterly unsatisfactory to all parties. I doubt if any one who took much part
in that debate can look back on it without shame. I must be content with an
analysis of the elements of the final compromise which is known to all the
world.
The main point to be settled was, of course, that of the items for which
Germany could fairly be asked to make payment. Mr. Lloyd George's
election pledge to the effect that the Allies were entitled to demand from
Germany the entire costs of the war was from the outset clearly untenable;
or rather, to put it more impartially, it was clear that to persuade the
President of the conformity of this demand with our pro-Armistice
engagements was beyond the powers of the most plausible. The actual
compromise finally reached is to be read as follows in the paragraphs of the
Treaty as it has been published to the world.
Article 231 reads: "The Allied and Associated Governments affirm and
Germany accepts the responsibility of Germany and her allies for causing
all the loss and damage to which the Allied and Associated Governments
and their nationals have been subjected as a consequence of the war
imposed upon them by the aggression of Germany and her allies." This is a
well and carefully drafted Article; for the President could read it as
statement of admission on Germany's part of moral responsibility for
bringing about the war, while the Prime Minister could explain it as an
admission of financial liability for the general costs of the war. Article 232
continues: "The Allied and Associated Governments recognize that the
resources of Germany are not adequate, after taking into account permanent
diminutions of such resources which will result from other provisions of the
present Treaty, to make complete reparation for all such loss and damage."
The President could comfort himself that this was no more than a statement

of undoubted fact, and that to recognize that Germany cannot pay a certain
claim does not imply that she is liable to pay the claim; but the Prime
Minister could point out that in the context it emphasizes to the reader the
assumption of Germany's theoretic liability asserted in the preceding
Article. Article 232 proceeds: "The Allied and Associated Governments,
however, require, and Germany undertakes, that she will make
compensation for all damage done to the civilian population of the Allied
and Associated Powers and to their property during the period of the
belligerency of each as an Allied or Associated Power against Germany by
such aggression by land, by sea, and from the air, and in general all damage
as defined in Annex I. hereto."[104] The words italicized being practically a
quotation from the pre-Armistice conditions, satisfied the scruples of the
President, while the addition of the words "and in general all damage as
defined in Annex I. hereto" gave the Prime Minister a chance in Annex I.
So far, however, all this is only a matter of words, of virtuosity in
draftsmanship, which does no one any harm, and which probably seemed
much more important at the time than it ever will again between now and
Judgment Day. For substance we must turn to Annex I.
A great part of Annex I. is in strict conformity with the pre-Armistice
conditions, or, at any rate, does not strain them beyond what is fairly
arguable. Paragraph 1 claims damage done for injury to the persons of
civilians, or, in the case of death, to their dependents, as a direct
consequence of acts of war; Paragraph 2, for acts of cruelty, violence, or
maltreatment on the part of the enemy towards civilian victims; Paragraph
3, for enemy acts injurious to health or capacity to work or to honor towards
civilians in occupied or invaded territory; Paragraph 8, for forced labor
exacted by the enemy from civilians; Paragraph 9, for damage done to
property "with the exception of naval and military works or materials" as a
direct consequence of hostilities; and Paragraph 10, for fines and levies
imposed by the enemy upon the civilian population. All these demands are
just and in conformity with the Allies' rights.
Paragraph 4, which claims for "damage caused by any kind of maltreatment
of prisoners of war," is more doubtful on the strict letter, but may be
justifiable under the Hague Convention and involves a very small sum.

In Paragraphs 5, 6, and 7, however, an issue of immensely greater
significance is involved. These paragraphs assert a claim for the amount of
the Separation and similar Allowances granted during the war by the Allied
Governments to the families of mobilized persons, and for the amount of
the pensions and compensations in respect of the injury or death of
combatants payable by these Governments now and hereafter. Financially
this adds to the Bill, as we shall see below, a very large amount, indeed
about twice as much again as all the other claims added together.
The reader will readily apprehend what a plausible case can be made out for
the inclusion of these items of damage, if only on sentimental grounds. It
can be pointed out, first of all, that from the point of view of general
fairness it is monstrous that a woman whose house is destroyed should be
entitled to claim from the enemy whilst a woman whose husband is killed
on the field of battle should not be so entitled; or that a farmer deprived of
his farm should claim but that a woman deprived of the earning power of
her husband should not claim. In fact the case for including Pensions and
Separation Allowances largely depends on exploiting the rather arbitrary
character of the criterion laid down in the pre-Armistice conditions. Of all
the losses caused by war some bear more heavily on individuals and some
are more evenly distributed over the community as a whole; but by means
of compensations granted by the Government many of the former are in fact
converted into the latter. The most logical criterion for a limited claim,
falling short of the entire costs of the war, would have been in respect of
enemy acts contrary to International engagements or the recognized
practices of warfare. But this also would have been very difficult to apply
and unduly unfavorable to French interests as compared with Belgium
(whose neutrality Germany had guaranteed) and Great Britain (the chief
sufferer from illicit acts of submarines).
In any case the appeals to sentiment and fairness outlined above are hollow;
for it makes no difference to the recipient of a separation allowance or a
pension whether the State which pays them receives compensation on this
or on another head, and a recovery by the State out of indemnity receipts is
just as much in relief of the general taxpayer as a contribution towards the
general costs of the war would have been. But the main consideration is that
it was too late to consider whether the pre-Armistice conditions were
perfectly judicious and logical or to amend them; the only question at issue

was whether these conditions were not in fact limited to such classes of
direct damage to civilians and their property as are set forth in Paragraphs
1, 2, 3, 8, 9, and 10 of Annex I. If words have any meaning, or engagements
any force, we had no more right to claim for those war expenses of the
State, which arose out of Pensions and Separation Allowances, than for any
other of the general costs of the war. And who is prepared to argue in detail
that we were entitled to demand the latter?
What had really happened was a compromise between the Prime Minister's
pledge to the British electorate to claim the entire costs of the war and the
pledge to the contrary which the Allies had given to Germany at the
Armistice. The Prime Minister could claim that although he had not secured
the entire costs of the war, he had nevertheless secured an important
contribution towards them, that he had always qualified his promises by the
limiting condition of Germany's capacity to pay, and that the bill as now
presented more than exhausted this capacity as estimated by the more sober
authorities. The President, on the other hand, had secured a formula, which
was not too obvious a breach of faith, and had avoided a quarrel with his
Associates on an issue where the appeals to sentiment and passion would all
have been against him, in the event of its being made a matter of open
popular controversy. In view of the Prime Minister's election pledges, the
President could hardly hope to get him to abandon them in their entirety
without a struggle in public; and the cry of pensions would have had an
overwhelming popular appeal in all countries. Once more the Prime
Minister had shown himself a political tactician of a high order.
A further point of great difficulty may be readily perceived between the
lines of the Treaty. It fixes no definite sum as representing Germany's
liability. This feature has been the subject of very general criticism,—that it
is equally inconvenient to Germany and to the Allies themselves that she
should not know what she has to pay or they what they are to receive. The
method, apparently contemplated by the Treaty, of arriving at the final
result over a period of many months by an addition of hundreds of
thousands of individual claims for damage to land, farm buildings, and
chickens, is evidently impracticable; and the reasonable course would have
been for both parties to compound for a round sum without examination of
details. If this round sum had been named in the Treaty, the settlement
would have been placed on a more business-like basis.

But this was impossible for two reasons. Two different kinds of false
statements had been widely promulgated, one as to Germany's capacity to
pay, the other as to the amount of the Allies' just claims in respect of the
devastated areas. The fixing of either of these figures presented a dilemma.
A figure for Germany's prospective capacity to pay, not too much in excess
of the estimates of most candid and well-informed authorities, would have
fallen hopelessly far short of popular expectations both in England and in
France. On the other hand, a definitive figure for damage done which would
not disastrously disappoint the expectations which had been raised in
France and Belgium might have been incapable of substantiation under
challenge,[105] and open to damaging criticism on the part of the Germans,
who were believed to have been prudent enough to accumulate considerable
evidence as to the extent of their own misdoings.
By far the safest course for the politicians was, therefore, to mention no
figure at all; and from this necessity a great deal of the complication of the
Reparation Chapter essentially springs.
The reader may be interested, however, to have my estimate of the claim
which can in fact be substantiated under Annex I. of the Reparation
Chapter. In the first section of this chapter I have already guessed the claims
other than those for Pensions and Separation Allowances at
$15,000,000,000 (to take the extreme upper limit of my estimate). The
claim for Pensions and Separation Allowances under Annex I. is not to be
based on the actual cost of these compensations to the Governments
concerned, but is to be a computed figure calculated on the basis of the
scales in force in France at the date of the Treaty's coming into operation.
This method avoids the invidious course of valuing an American or a
British life at a higher figure than a French or an Italian. The French rate for
Pensions and Allowances is at an intermediate rate, not so high as the
American or British, but above the Italian, the Belgian, or the Serbian. The
only data required for the calculation are the actual French rates and the
numbers of men mobilized and of the casualties in each class of the various
Allied Armies. None of these figures are available in detail, but enough is
known of the general level of allowances, of the numbers involved, and of
the casualties suffered to allow of an estimate which may not be very wide
of the mark. My guess as to the amount to be added in respect of Pensions
and Allowances is as follows:

British Empire $7,000,000,000 [106]
France 12,000,000,000 [106]
Italy 2,500,000,000
Others (Including United States) 3,500,000,000
Total $25,000,000,000

I feel much more confidence in the approximate accuracy of the total
figure[107] than in its division between the different claimants. The reader
will observe that in any case the addition of Pensions and Allowances
enormously increases the aggregate claim, raising it indeed by nearly
double. Adding this figure to the estimate under other heads, we have a total
claim against Germany of $40,000,000,000.[108] I believe that this figure is
fully high enough, and that the actual result may fall somewhat short of it.
[109] In the next section of this chapter the relation of this figure to
Germany's capacity to pay will be examined. It is only necessary here to
remind the reader of certain other particulars of the Treaty which speak for
themselves:
1. Out of the total amount of the claim, whatever it eventually turns out to
be, a sum of $5,000,000,000 must be paid before May 1, 1921. The
possibility of this will be discussed below. But the Treaty itself provides
certain abatements. In the first place, this sum is to include the expenses of
the Armies of Occupation since the Armistice (a large charge of the order of
magnitude of $1,000,000,000 which under another Article of the Treaty—
No. 249—is laid upon Germany).[110] But further, "such supplies of food
and raw materials as may be judged by the Governments of the Principal
Allied and Associated Powers to be essential to enable Germany to meet her
obligations for Reparation may also, with the approval of the said
Governments, be paid for out of the above sum."[111] This is a qualification
of high importance. The clause, as it is drafted, allows the Finance
Ministers of the Allied countries to hold out to their electorates the hope of
substantial payments at an early date, while at the same time it gives to the
Reparation Commission a discretion, which the force of facts will compel
them to exercise, to give back to Germany what is required for the

maintenance of her economic existence. This discretionary power renders
the demand for an immediate payment of $5,000,000,000 less injurious than
it would otherwise be, but nevertheless it does not render it innocuous. In
the first place, my conclusions in the next section of this chapter indicate
that this sum cannot be found within the period indicated, even if a large
proportion is in practice returned to Germany for the purpose of enabling
her to pay for imports. In the second place, the Reparation Commission can
only exercise its discretionary power effectively by taking charge of the
entire foreign trade of Germany, together with the foreign exchange arising
out of it, which will be quite beyond the capacity of any such body. If the
Reparation Commission makes any serious attempt to administer the
collection of this sum of $5,000,000,000 and to authorize the return to
Germany of a part it, the trade of Central Europe will be strangled by
bureaucratic regulation in its most inefficient form.
2. In addition to the early payment in cash or kind of a sum of
$5,000,000,000, Germany is required to deliver bearer bonds to a further
amount of $10,000,000,000, or, in the event of the payments in cash or kind
before May 1, 1921, available for Reparation, falling short of
$5,000,000,000 by reason of the permitted deductions, to such further
amount as shall bring the total payments by Germany in cash, kind, and
bearer bonds up to May 1, 1921, to a figure of $15,000,000,000 altogether.
[112] These bearer bonds carry interest at 2-1/2 per cent per annum from
1921 to 1925, and at 5 per cent plus 1 per cent for amortization thereafter.
Assuming, therefore, that Germany is not able to provide any appreciable
surplus towards Reparation before 1921, she will have to find a sum of
$375,000,000 annually from 1921 to 1925, and $900,000,000 annually
thereafter.[113]
3. As soon as the Reparation Commission is satisfied that Germany can do
better than this, 5 per cent bearer bonds are to be issued for a further
$10,000,000,000, the rate of amortization being determined by the
Commission hereafter. This would bring the annual payment to
$1,400,000,000 without allowing anything for the discharge of the capital
of the last $10,000,000,000.
4. Germany's liability, however, is not limited to $25,000,000,000, and the
Reparation Commission is to demand further instalments of bearer bonds

until the total enemy liability under Annex I. has been provided for. On the
basis of my estimate of $40,000,000,000 for the total liability, which is
more likely to be criticized as being too low than as being too high, the
amount of this balance will be $15,000,000,000. Assuming interest at 5 per
cent, this will raise the annual payment to $2,150,000,000 without
allowance for amortization.
5. But even this is not all. There is a further provision of devastating
significance. Bonds representing payments in excess of $15,000,000,000
are not to be issued until the Commission is satisfied that Germany can
meet the interest on them. But this does not mean that interest is remitted in
the meantime. As from May 1, 1921, interest is to be debited to Germany on
such part of her outstanding debt as has not been covered by payment in
cash or kind or by the issue of bonds as above,[114] and "the rate of interest
shall be 5 per cent unless the Commission shall determine at some future
time that circumstances justify a variation of this rate." That is to say, the
capital sum of indebtedness is rolling up all the time at compound interest.
The effect of this provision towards increasing the burden is, on the
assumption that Germany cannot pay very large sums at first, enormous. At
5 per cent compound interest a capital sum doubles itself in fifteen years.
On the assumption that Germany cannot pay more than $750,000,000
annually until 1936 (i.e. 5 per cent interest on $15,000,000,000) the
$25,000,000,000 on which interest is deferred will have risen to
$50,000,000,000, carrying an annual interest charge of $2,500,000,000.
That is to say, even if Germany pays $750,000,000 annually up to 1936, she
will nevertheless owe us at that date more than half as much again as she
does now ($65,000,000,000 as compared with $40,000,000,000). From
1936 onwards she will have to pay to us $3,250,000,000 annually in order
to keep pace with the interest alone. At the end of any year in which she
pays less than this sum she will owe more than she did at the beginning of
it. And if she is to discharge the capital sum in thirty years from 1930, i.e. in
forty-eight years from the Armistice, she must pay an additional
$650,000,000 annually, making $3,900,000,000 in all.[115]
It is, in my judgment, as certain as anything can be, for reasons which I will
elaborate in a moment, that Germany cannot pay anything approaching this
sum. Until the Treaty is altered, therefore, Germany has in effect engaged

herself to hand over to the Allies the whole of her surplus production in
perpetuity.
6. This is not less the case because the Reparation Commission has been
given discretionary powers to vary the rate of interest, and to postpone and
even to cancel the capital indebtedness. In the first place, some of these
powers can only be exercised if the Commission or the Governments
represented on it are unanimous.[116] But also, which is perhaps more
important, it will be the duty of the Reparation Commission, until there has
been a unanimous and far-reaching change of the policy which the Treaty
represents, to extract from Germany year after year the maximum sum
obtainable. There is a great difference between fixing a definite sum, which
though large is within Germany's capacity to pay and yet to retain a little for
herself, and fixing a sum far beyond her capacity, which is then to be
reduced at the discretion of a foreign Commission acting with the object of
obtaining each year the maximum which the circumstances of that year
permit. The first still leaves her with some slight incentive for enterprise,
energy, and hope. The latter skins her alive year by year in perpetuity, and
however skilfully and discreetly the operation is performed, with whatever
regard for not killing the patient in the process, it would represent a policy
which, if it were really entertained and deliberately practised, the judgment
of men would soon pronounce to be one of the most outrageous acts of a
cruel victor in civilized history.
There are other functions and powers of high significance which the Treaty
accords to the Reparation Commission. But these will be most conveniently
dealt with in a separate section.

III. Germany's Capacity to pay

The forms in which Germany can discharge the sum which she has engaged
herself to pay are three in number—
1. Immediately transferable wealth in the form of gold, ships, and foreign
securities;

2. The value of property in ceded territory, or surrendered under the
Armistice;
3. Annual payments spread over a term of years, partly in cash and partly in
materials such as coal products, potash, and dyes.
There is excluded from the above the actual restitution of property removed
from territory occupied by the enemy, as, for example, Russian gold,
Belgian and French securities, cattle, machinery, and works of art. In so far
as the actual goods taken can be identified and restored, they must clearly
be returned to their rightful owners, and cannot be brought into the general
reparation pool. This is expressly provided for in Article 238 of the Treaty.

1. Immediately Transferable Wealth

(a) Gold.—After deduction of the gold to be returned to Russia, the official
holding of gold as shown in the Reichsbank's return of the 30th November,
1918, amounted to $577,089,500. This was a very much larger amount than
had appeared in the Reichsbank's return prior to the war,[117] and was the
result of the vigorous campaign carried on in Germany during the war for
the surrender to the Reichsbank not only of gold coin but of gold ornaments
of every kind. Private hoards doubtless still exist, but, in view of the great
efforts already made, it is unlikely that either the German Government or
the Allies will be able to unearth them. The return can therefore be taken as
probably representing the maximum amount which the German
Government are able to extract from their people. In addition to gold there
was in the Reichsbank a sum of about $5,000,000 in silver. There must be,
however, a further substantial amount in circulation, for the holdings of the
Reichsbank were as high as $45,500,000 on the 31st December, 1917, and
stood at about $30,000,000 up to the latter part of October, 1918, when the
internal run began on currency of every kind.[118] We may, therefore, take a
total of (say) $625,000,000 for gold and silver together at the date of the
Armistice.
These reserves, however, are no longer intact. During the long period which
elapsed between the Armistice and the Peace it became necessary for the

Allies to facilitate the provisioning of Germany from abroad. The political
condition of Germany at that time and the serious menace of Spartacism
rendered this step necessary in the interests of the Allies themselves if they
desired the continuance in Germany of a stable Government to treat with.
The question of how such provisions were to be paid for presented,
however, the gravest difficulties. A series of Conferences was held at
Trèves, at Spa, at Brussels, and subsequently at Château Villette and
Versailles, between representatives of the Allies and of Germany, with the
object of finding some method of payment as little injurious as possible to
the future prospects of Reparation payments. The German representatives
maintained from the outset that the financial exhaustion of their country
was for the time being so complete that a temporary loan from the Allies
was the only possible expedient. This the Allies could hardly admit at a time
when they were preparing demands for the immediate payment by Germany
of immeasurably larger sums. But, apart from this, the German claim could
not be accepted as strictly accurate so long as their gold was still untapped
and their remaining foreign securities unmarketed. In any case, it was out of
the question to suppose that in the spring of 1919 public opinion in the
Allied countries or in America would have allowed the grant of a
substantial loan to Germany. On the other hand, the Allies were naturally
reluctant to exhaust on the provisioning of Germany the gold which seemed
to afford one of the few obvious and certain sources for Reparation. Much
time was expended in the exploration of all possible alternatives; but it was
evident at last that, even if German exports and saleable foreign securities
had been available to a sufficient value, they could not be liquidated in
time, and that the financial exhaustion of Germany was so complete that
nothing whatever was immediately available in substantial amounts except
the gold in the Reichsbank. Accordingly a sum exceeding $250,000,000 in
all out of the Reichsbank gold was transferred by Germany to the Allies
(chiefly to the United States, Great Britain, however, also receiving a
substantial sum) during the first six months of 1919 in payment for
foodstuffs.
But this was not all. Although Germany agreed, under the first extension of
the Armistice, not to export gold without Allied permission, this permission
could not be always withheld. There were liabilities of the Reichsbank
accruing in the neighboring neutral countries, which could not be met

otherwise than in gold. The failure of the Reichsbank to meet its liabilities
would have caused a depreciation of the exchange so injurious to
Germany's credit as to react on the future prospects of Reparation. In some
cases, therefore, permission to export gold was accorded to the Reichsbank
by the Supreme Economic Council of the Allies.
The net result of these various measures was to reduce the gold reserve of
the Reichsbank by more than half, the figures falling from $575,000,000 to
$275,000,000 in September, 1919.
It would be possible under the Treaty to take the whole of this latter sum for
Reparation purposes. It amounts, however, as it is, to less than 4 per cent of
the Reichsbank's Note Issue, and the psychological effect of its total
confiscation might be expected (having regard to the very large volume of
mark notes held abroad) to destroy the exchange value of the mark almost
entirely. A sum of $25,000,000, $50,000,000, or even $100,000,000 might
be taken for a special purpose. But we may assume that the Reparation
Commission will judge it imprudent, having regard to the reaction on their
future prospects of securing payment, to ruin the German currency system
altogether, more particularly because the French and Belgian Governments,
being holders of a very large volume of mark notes formerly circulating in
the occupied or ceded territory, have a great interest in maintaining some
exchange value for the mark, quite apart from Reparation prospects.
It follows, therefore, that no sum worth speaking of can be expected in the
form of gold or silver towards the initial payment of $5,000,000,000 due by
1921.
(b) Shipping.—Germany has engaged, as we have seen above, to surrender
to the Allies virtually the whole of her merchant shipping. A considerable
part of it, indeed, was already in the hands of the Allies prior to the
conclusion of Peace, either by detention in their ports or by the provisional
transfer of tonnage under the Brussels Agreement in connection with the
supply of foodstuffs.[119] Estimating the tonnage of German shipping to be
taken over under the Treaty at 4,000,000 gross tons, and the average value
per ton at $150 per ton, the total money value involved is $600,000,000.[120]
(c) Foreign Securities.—Prior to the census of foreign securities carried out
by the German Government in September, 1916,[121] of which the exact

results have not been made public, no official return of such investments
was ever called for in Germany, and the various unofficial estimates are
confessedly based on insufficient data, such as the admission of foreign
securities to the German Stock Exchanges, the receipts of the stamp duties,
consular reports, etc. The principal German estimates current before the war
are given in the appended footnote.[122] This shows a general consensus of
opinion among German authorities that their net foreign investments were
upwards of $6,250,000,000. I take this figure as the basis of my
calculations, although I believe it to be an exaggeration; $5,000,000,000
would probably be a safer figure.
Deductions from this aggregate total have to be made under four heads.
(i.) Investments in Allied countries and in the United States, which between
them constitute a considerable part of the world, have been sequestrated by
Public Trustees, Custodians of Enemy Property, and similar officials, and
are not available for Reparation except in so far as they show a surplus over
various private claims. Under the scheme for dealing with enemy debts
outlined in Chapter IV., the first charge on these assets is the private claims
of Allied against German nationals. It is unlikely, except in the United
States, that there will be any appreciable surplus for any other purpose.
(ii.) Germany's most important fields of foreign investment before the war
were not, like ours, oversea, but in Russia, Austria-Hungary, Turkey,
Roumania, and Bulgaria. A great part of these has now become almost
valueless, at any rate for the time being; especially those in Russia and
Austria-Hungary. If present market value is to be taken as the test, none of
these investments are now saleable above a nominal figure. Unless the
Allies are prepared to take over these securities much above their nominal
market valuation, and hold them for future realization, there is no
substantial source of funds for immediate payment in the form of
investments in these countries.
(iii.) While Germany was not in a position to realize her foreign
investments during the war to the degree that we were, she did so
nevertheless in the case of certain countries and to the extent that she was
able. Before the United States came into the war, she is believed to have
resold a large part of the pick of her investments in American securities,

although some current estimates of these sales (a figure of $300,000,000
has been mentioned) are probably exaggerated. But throughout the war and
particularly in its later stages, when her exchanges were weak and her credit
in the neighboring neutral countries was becoming very low, she was
disposing of such securities as Holland, Switzerland, and Scandinavia
would buy or would accept as collateral. It is reasonably certain that by
June, 1919, her investments in these countries had been reduced to a
negligible figure and were far exceeded by her liabilities in them. Germany
has also sold certain overseas securities, such as Argentine cedulas, for
which a market could be found.
(iv.) It is certain that since the Armistice there has been a great flight abroad
of the foreign securities still remaining in private hands. This is exceedingly
difficult to prevent. German foreign investments are as a rule in the form of
bearer securities and are not registered. They are easily smuggled abroad
across Germany's extensive land frontiers, and for some months before the
conclusion of peace it was certain that their owners would not be allowed to
retain them if the Allied Governments could discover any method of getting
hold of them. These factors combined to stimulate human ingenuity, and the
efforts both of the Allied and of the German Governments to interfere
effectively with the outflow are believed to have been largely futile.
In face of all these considerations, it will be a miracle if much remains for
Reparation. The countries of the Allies and of the United States, the
countries of Germany's own allies, and the neutral countries adjacent to
Germany exhaust between them almost the whole of the civilized world;
and, as we have seen, we cannot expect much to be available for Reparation
from investments in any of these quarters. Indeed there remain no countries
of importance for investments except those of South America.
To convert the significance of these deductions into figures involves much
guesswork. I give the reader the best personal estimate I can form after
pondering the matter in the light of the available figures and other relevant
data.
I put the deduction under (i.) at $1,500,000,000, of which $500,000,000
may be ultimately available after meeting private debts, etc.

As regards (ii.)—according to a census taken by the Austrian Ministry of
Finance on the 31st December, 1912, the nominal value of the Austro-
Hungarian securities held by Germans was $986,500,000. Germany's pre-
war investments in Russia outside Government securities have been
estimated at $475,000,000, which is much lower than would be expected,
and in 1906 Sartorius v. Waltershausen estimated her investments in
Russian Government securities at $750,000,000. This gives a total of
$1,225,000,000, which is to some extent borne out by the figure of
$1,000,000,000 given in 1911 by Dr. Ischchanian as a deliberately modest
estimate. A Roumanian estimate, published at the time of that country's
entry in the war, gave the value of Germany's investments in Roumania at
$20,000,000 to $22,000,000, of which $14,000,000 to $16,000,000 were in
Government securities. An association for the defense of French interests in
Turkey, as reported in the Temps (Sept. 8, 1919), has estimated the total
amount of German capital invested in Turkey at about $295,000,000, of
which, according to the latest Report of the Council of Foreign
Bondholders, $162,500,000 was held by German nationals in the Turkish
External Debt. No estimates are available to me of Germany's investments
in Bulgaria. Altogether I venture a deduction of $2,500,000,000 in respect
of this group of countries as a whole.
Resales and the pledging as collateral of securities during the war under
(iii.) I put at $500,000,000 to $750,000,000, comprising practically all
Germany's holding of Scandinavian, Dutch, and Swiss securities, a part of
her South American securities, and a substantial proportion of her North
American securities sold prior to the entry of the United States into the war.
As to the proper deduction under (iv.) there are naturally no available
figures. For months past the European press has been full of sensational
stories of the expedients adopted. But if we put the value of securities
which have already left Germany or have been safely secreted within
Germany itself beyond discovery by the most inquisitorial and powerful
methods at $500,000,000, we are not likely to overstate it.
These various items lead, therefore, in all to a deduction of a round figure
of about $5,000,000,000, and leave us with an amount of $1,250,000,000
theoretically still available.[123]

To some readers this figure may seem low, but let them remember that it
purports to represent the remnant of saleable securities upon which the
German Government might be able to lay hands for public purposes. In my
own opinion it is much too high, and considering the problem by a different
method of attack I arrive at a lower figure. For leaving out of account
sequestered Allied securities and investments in Austria, Russia, etc., what
blocks of securities, specified by countries and enterprises, can Germany
possibly still have which could amount to as much as $1,250,000,000? I
cannot answer the question. She has some Chinese Government securities
which have not been sequestered, a few Japanese perhaps, and a more
substantial value of first-class South American properties. But there are
very few enterprises of this class still in German hands, and even their
value is measured by one or two tens of millions, not by fifties or hundreds.
He would be a rash man, in my judgment, who joined a syndicate to pay
$500,000,000 in cash for the unsequestered remnant of Germany's overseas
investments. If the Reparation Commission is to realize even this lower
figure, it is probable that they will have to nurse, for some years, the assets
which they take over, not attempting their disposal at the present time.
We have, therefore, a figure of from $500,000,000 to $1,250,000,000 as the
maximum contribution from Germany's foreign securities.
Her immediately transferable wealth is composed, then, of—
(a) Gold and silver—say $300,000,000.
(b) Ships—$600,000,000.
(c) Foreign securities—$500,000,000 to $1,250,000,000.
Of the gold and silver, it is not, in fact, practicable to take any substantial
part without consequences to the German currency system injurious to the
interests of the Allies themselves. The contribution from all these sources
together which the Reparation Commission can hope to secure by May,
1921, may be put, therefore, at from $1,250,000,000 to $1,750,000,000 as a
maximum.[124]

2. Property in ceded Territory or surrendered under the Armistice

As the Treaty has been drafted Germany will not receive important credits
available towards meeting reparation in respect of her property in ceded
territory.
Private property in most of the ceded territory is utilized towards
discharging private German debts to Allied nationals, and only the surplus,
if any, is available towards Reparation. The value of such property in
Poland and the other new States is payable direct to the owners.
Government property in Alsace-Lorraine, in territory ceded to Belgium, and
in Germany's former colonies transferred to a Mandatory, is to be forfeited
without credit given. Buildings, forests, and other State property which
belonged to the former Kingdom of Poland are also to be surrendered
without credit. There remain, therefore, Government properties, other than
the above, surrendered to Poland, Government properties in Schleswig
surrendered to Denmark,[125] the value of the Saar coalfields, the value of
certain river craft, etc., to be surrendered under the Ports, Waterways, and
Railways Chapter, and the value of the German submarine cables
transferred under Annex VII. of the Reparation Chapter.
Whatever the Treaty may say, the Reparation Commission will not secure
any cash payments from Poland. I believe that the Saar coalfields have been
valued at from $75,000,000 to $100,000,000. A round figure of
$150,000,000 for all the above items, excluding any surplus available in
respect of private property, is probably a liberal estimate.
Then remains the value of material surrendered under the Armistice. Article
250 provides that a credit shall be assessed by the Reparation Commission
for rolling-stock surrendered under the Armistice as well as for certain other
specified items, and generally for any material so surrendered for which the
Reparation Commission think that credit should be given, "as having non-
military value." The rolling-stock (150,000 wagons and 5,000 locomotives)
is the only very valuable item. A round figure of $250,000,000, for all the
Armistice surrenders, is probably again a liberal estimate.
We have, therefore, $400,000,000 to add in respect of this heading to our
figure of $1,250,000,000 to $1,750,000,000 under the previous heading.

This figure differs from the preceding in that it does not represent cash
capable of benefiting the financial situation of the Allies, but is only a book
credit between themselves or between them and Germany.
The total of $1,650,000,000 to $2,150,000,000 now reached is not,
however, available for Reparation. The first charge upon it, under Article
251 of the Treaty, is the cost of the Armies of Occupation both during the
Armistice and after the conclusion of Peace. The aggregate of this figure up
to May, 1921, cannot be calculated until the rate of withdrawal is known
which is to reduce the monthly cost from the figure exceeding
$100,000,000, which prevailed during the first part of 1919, to that of
$5,000,000, which is to be the normal figure eventually. I estimate,
however, that this aggregate may be about $1,000,000,000. This leaves us
with from $500,000,000 to $1,000,000,000 still in hand.
Out of this, and out of exports of goods, and payments in kind under the
Treaty prior to May, 1921 (for which I have not as yet made any
allowance), the Allies have held out the hope that they will allow Germany
to receive back such sums for the purchase of necessary food and raw
materials as the former deem it essential for her to have. It is not possible at
the present time to form an accurate judgment either as to the money-value
of the goods which Germany will require to purchase from abroad in order
to re-establish her economic life, or as to the degree of liberality with which
the Allies will exercise their discretion. If her stocks of raw materials and
food were to be restored to anything approaching their normal level by
May, 1921, Germany would probably require foreign purchasing power of
from $500,000,000 to $1,000,000,000 at least, in addition to the value of
her current exports. While this is not likely to be permitted, I venture to
assert as a matter beyond reasonable dispute that the social and economic
condition of Germany cannot possibly permit a surplus of exports over
imports during the period prior to May, 1921, and that the value of any
payments in kind with which she may be able to furnish the Allies under the
Treaty in the form of coal, dyes, timber, or other materials will have to be
returned to her to enable her to pay for imports essential to her existence.
[126]

The Reparation Commission can, therefore, expect no addition from other
sources to the sum of from $500,000,000 to $1,000,000,000 with which we

have hypothetically credited it after the realization of Germany's
immediately transferable wealth, the calculation of the credits due to
Germany under the Treaty, and the discharge of the cost of the Armies of
Occupation. As Belgium has secured a private agreement with France, the
United States, and Great Britain, outside the Treaty, by which she is to
receive, towards satisfaction of her claims, the first $500,000,000 available
for Reparation, the upshot of the whole matter is that Belgium may possibly
get her $500,000,000 by May, 1921, but none of the other Allies are likely
to secure by that date any contribution worth speaking of. At any rate, it
would be very imprudent for Finance Ministers to lay their plans on any
other hypothesis.

3. Annual Payments spread over a Term of Years

It is evident that Germany's pre-war capacity to pay an annual foreign
tribute has not been unaffected by the almost total loss of her colonies, her
overseas connections, her mercantile marine, and her foreign properties, by
the cession of ten per cent of her territory and population, of one-third of
her coal and of three-quarters of her iron ore, by two million casualties
amongst men in the prime of life, by the starvation of her people for four
years, by the burden of a vast war debt, by the depreciation of her currency
to less than one-seventh its former value, by the disruption of her allies and
their territories, by Revolution at home and Bolshevism on her borders, and
by all the unmeasured ruin in strength and hope of four years of all-
swallowing war and final defeat.
All this, one would have supposed, is evident. Yet most estimates of a great
indemnity from Germany depend on the assumption that she is in a position
to conduct in the future a vastly greater trade than ever she has had in the
past.
For the purpose of arriving at a figure it is of no great consequence whether
payment takes the form of cash (or rather of foreign exchange) or is partly
effected in kind (coal, dyes, timber, etc.), as contemplated by the Treaty. In
any event, it is only by the export of specific commodities that Germany

can pay, and the method of turning the value of these exports to account for
Reparation purposes is, comparatively, a matter of detail.
We shall lose ourselves in mere hypothesis unless we return in some degree
to first principles, and, whenever we can, to such statistics as there are. It is
certain that an annual payment can only be made by Germany over a series
of years by diminishing her imports and increasing her exports, thus
enlarging the balance in her favor which is available for effecting payments
abroad. Germany can pay in the long-run in goods, and in goods only,
whether these goods are furnished direct to the Allies, or whether they are
sold to neutrals and the neutral credits so arising are then made over to the
Allies. The most solid basis for estimating the extent to which this process
can be carried is to be found, therefore, in an analysis of her trade returns
before the war. Only on the basis of such an analysis, supplemented by
some general data as to the aggregate wealth-producing capacity of the
country, can a rational guess be made as to the maximum degree to which
the exports of Germany could be brought to exceed her imports.
In the year 1913 Germany's imports amounted to $2,690,000,000, and her
exports to $2,525,000,000, exclusive of transit trade and bullion. That is to
say, imports exceeded exports by about $165,000,000. On the average of
the five years ending 1913, however, her imports exceeded her exports by a
substantially larger amount, namely, $370,000,000. It follows, therefore,
that more than the whole of Germany's pre-war balance for new foreign
investment was derived from the interest on her existing foreign securities,
and from the profits of her shipping, foreign banking, etc. As her foreign
properties and her mercantile marine are now to be taken from her, and as
her foreign banking and other miscellaneous sources of revenue from
abroad have been largely destroyed, it appears that, on the pre-war basis of
exports and imports, Germany, so far from having a surplus wherewith to
make a foreign payment, would be not nearly self-supporting. Her first task,
therefore, must be to effect a readjustment of consumption and production
to cover this deficit. Any further economy she can effect in the use of
imported commodities, and any further stimulation of exports will then be
available for Reparation.
Two-thirds of Germany's import and export trade is enumerated under
separate headings in the following tables. The considerations applying to

the enumerated portions may be assumed to apply more or less to the
remaining one-third, which is composed of commodities of minor
importance individually.

Amount: Percentage
German Exports, 1913 Million of
Dollars Total Exports
Iron goods (including tin plates,
etc.) 330.65 13.2
Machinery and parts (including
motor-cars) 187.75 7.5
Coal, coke, and briquettes 176.70 7.0
Woolen goods (including raw and
combed wool and clothing) 147.00 5.9
Cotton goods (including raw cotton,
yarn, and thread) 140.75 5.6
982.85 39.2
Cereals, etc. (including rye, oats,
wheat, hops) 105.90 4.1
Leather and leather goods 77.35 3.0
Sugar 66.00 2.6
Paper, etc. 65.50 2.6
Furs 58.75 2.2
Electrical goods (installations, ma-
chinery, lamps, cables) 54.40 2.2
Silk goods 50.50 2.0
Dyes 48.80 1.9
Copper goods 32.50 1.3
Toys 25.75 1.0
Rubber and rubber goods 21.35 0.9
Books, maps, and music 18.55 0.8
Potash 15.90 0.6
Glass 15.70 0.6
Potassium chloride 14.55 0.6

Pianos, organs, and parts 13.85 0.6
Raw zinc 13.70 0.5
Porcelain 12.65 0.5
711.70 67.2
Other goods, unenumerated 829.69 32.8
Total 2,524.15 100.0

Amount: Percentage
German Imports, 1913 Million of
Dollars Total Exports
I. Raw materials:—
Cotton 151.75 5.6
Hides and skins 124.30 4.6
Wool 118.35 4.4
Copper 83.75 3.1
Coal 68.30 2.5
Timber 58.00 2.2
Iron ore 56.75 2.1
Furs 46.75 1.7
Flax and flaxseed 46.65 1.7
Saltpetre 42.75 1.6
Silk 39.50 1.5
Rubber 36.50 1.4
Jute 23.50 0.9
Petroleum 17.45 0.7
Tin 14.55 0.5
Phosphorus chalk 11.60 0.4
Lubricating oil 11.45 0.4
951.90 35.3
II. Food, tobacco, etc.:—
Cereals, etc. (wheat, barley, 327.55 12.2
bran, rice, maize, oats,

rye,
clover)
Oil seeds and cake, etc. (in-
cluding palm kernels, copra,
cocoa beans) 102.65 3.8
Cattle, lamb fat, bladders 73.10 2.8
Coffee 54.75 2.0
Eggs 48.50 1.8
Tobacco 33.50 1.2
Butter 29.65 1.1
Horses 29.05 1.1
Fruit 18.25 0.7
Fish 14.95 0.6
Poultry 14.00 0.6
Wine 13.35 0.5
759.30 28.3
III. Manufactures:—
Cotton yarn and thread and
cotton goods 47.05 1.8
Woolen yarn and woolen
goods 37.85 1.4
Machinery 20.10 0.7
105.00 3.9
IV. Unenumerated 876.40 32.5
Total 2,692.60 100.0

These tables show that the most important exports consisted of:—

1. Iron Goods, including tin plates (13.2 per cent),
2. Machinery, etc. (7.5 per cent),
3. Coal, coke, and briquettes (7 per cent),
4. Woolen goods, including raw and combed wool (5.9 per cent), and
5. Cotton goods, including cotton yarn and thread and raw cotton (5.6 per
cent),

these five classes between them accounting for 39.2 per cent. of the total
exports. It will be observed that all these goods are of a kind in which
before the war competition between Germany and the United Kingdom was
very severe. If, therefore, the volume of such exports to overseas or
European destinations is very largely increased the effect upon British
export trade must be correspondingly serious. As regards two of the
categories, namely, cotton and woolen goods, the increase of an export trade
is dependent upon an increase of the import of the raw material, since
Germany produces no cotton and practically no wool. These trades are
therefore incapable of expansion unless Germany is given facilities for
securing these raw materials (which can only be at the expense of the
Allies) in excess of the pre-war standard of consumption, and even then the
effective increase is not the gross value of the exports, but only the
difference between the value of the manufactured exports and of the
imported raw material. As regards the other three categories, namely,
machinery, iron goods, and coal, Germany's capacity to increase her exports
will have been taken from her by the cessions of territory in Poland, Upper
Silesia, and Alsace-Lorraine. As has been pointed out already, these districts
accounted for nearly one-third of Germany's production of coal. But they
also supplied no less than three-quarters of her iron-ore production, 38 per
cent of her blast furnaces, and 9.5 per cent of her iron and steel foundries.
Unless, therefore, Alsace-Lorraine and Upper Silesia send their iron ore to
Germany proper, to be worked up, which will involve an increase in the
imports for which she will have to find payment, so far from any increase in
export trade being possible, a decrease is inevitable.[127]
Next on the list come cereals, leather goods, sugar, paper, furs, electrical
goods, silk goods, and dyes. Cereals are not a net export and are far more
than balanced by imports of the same commodities. As regards sugar, nearly
90 per cent of Germany's pre-war exports came to the United Kingdom.[128]
An increase in this trade might be stimulated by a grant of a preference in
this country to German sugar or by an arrangement by which sugar was
taken in part payment for the indemnity on the same lines as has been
proposed for coal, dyes, etc. Paper exports also might be capable of some
increase. Leather goods, furs, and silks depend upon corresponding imports
on the other side of the account. Silk goods are largely in competition with
the trade of France and Italy. The remaining items are individually very

small. I have heard it suggested that the indemnity might be paid to a great
extent in potash and the like. But potash before the war represented 0.6 per
cent of Germany's export trade, and about $15,000,000 in aggregate value.
Besides, France, having secured a potash field in the territory which has
been restored to her, will not welcome a great stimulation of the German
exports of this material.
An examination of the import list shows that 63.6 per cent are raw materials
and food. The chief items of the former class, namely, cotton, wool, copper,
hides, iron-ore, furs, silk, rubber, and tin, could not be much reduced
without reacting on the export trade, and might have to be increased if the
export trade was to be increased. Imports of food, namely, wheat, barley,
coffee, eggs, rice, maize, and the like, present a different problem. It is
unlikely that, apart from certain comforts, the consumption of food by the
German laboring classes before the war was in excess of what was required
for maximum efficiency; indeed, it probably fell short of that amount. Any
substantial decrease in the imports of food would therefore react on the
efficiency of the industrial population, and consequently on the volume of
surplus exports which they could be forced to produce. It is hardly possible
to insist on a greatly increased productivity of German industry if the
workmen are to be underfed. But this may not be equally true of barley,
coffee, eggs, and tobacco. If it were possible to enforce a régime in which
for the future no German drank beer or coffee, or smoked any tobacco, a
substantial saving could be effected. Otherwise there seems little room for
any significant reduction.
The following analysis of German exports and imports, according to
destination and origin, is also relevant. From this it appears that of
Germany's exports in 1913, 18 per cent went to the British Empire, 17 per
cent to France, Italy, and Belgium, 10 per cent to Russia and Roumania, and
7 per cent to the United States; that is to say, more than half of the exports
found their market in the countries of the Entente nations. Of the balance,
12 per cent went to Austria-Hungary, Turkey, and Bulgaria, and 35 per cent
elsewhere. Unless, therefore, the present Allies are prepared to encourage
the importation of German products, a substantial increase in total volume
can only be effected by the wholesale swamping of neutral markets.

German Trade (1913) According to Destination and Origin
Destination of Origin of
Germany's Exports Germany's Imports
Million Million
Per cent Per cent
Dollars Dollars
Great Britain 359.65 14.2 219.00 8.1
India 37.65 1.5 135.20 5.0
Egypt 10.85 0.4 29.60 1.1
Canada 15.10 0.6 16.00 0.6
Australia 22.10 0.9 74.00 2.8
South Africa 11.70 0.5 17.40 0.6
Total: British Empire 456.95 18.1 491.20 18.2

France 197.45 7.8 146.65 5.4
Belgium 137.75 5.5 86.15 3.2
Italy 98.35 3.9 79.40 3.0
U. S. A. 178.30 7.1 427.80 15.9
Russia 220.00 8.7 356.15 13.2
Roumania 35.00 1.4 19.95 0.7
Austria-Hungary 276.20 10.9 206.80 7.7
Turkey 24.60 1.0 18.40 0.7
Bulgaria 7.55 0.3 2.00 ...
Other countries 800.20 35.3 858.70 32.0
2,522.35 100.0 2,692.60 100.0

The above analysis affords some indication of the possible magnitude of the
maximum modification of Germany's export balance under the conditions
which will prevail after the Peace. On the assumptions (1) that we do not
specially favor Germany over ourselves in supplies of such raw materials as
cotton and wool (the world's supply of which is limited), (2) that France,
having secured the iron-ore deposits, makes a serious attempt to secure the
blast-furnaces and the steel trade also, (3) that Germany is not encouraged
and assisted to undercut the iron and other trades of the Allies in overseas

market, and (4) that a substantial preference is not given to German goods
in the British Empire, it is evident by examination of the specific items that
not much is practicable.
Let us run over the chief items again: (1) Iron goods. In view of Germany's
loss of resources, an increased net export seems impossible and a large
decrease probable. (2) Machinery. Some increase is possible. (3) Coal and
coke. The value of Germany's net export before the war was $110,000,000;
the Allies have agreed that for the time being 20,000,000 tons is the
maximum possible export with a problematic (and in fact) impossible
increase to 40,000,000 tons at some future time; even on the basis of
20,000,000 tons we have virtually no increase of value, measured in pre-
war prices;[129] whilst, if this amount is exacted, there must be a decrease of
far greater value in the export of manufactured articles requiring coal for
their production. (4) Woolen goods. An increase is impossible without the
raw wool, and, having regard to the other claims on supplies of raw wool, a
decrease is likely. (5) Cotton goods. The same considerations apply as to
wool. (6) Cereals. There never was and never can be a net export. (7)
Leather goods. The same considerations apply as to wool.
We have now covered nearly half of Germany's pre-war exports, and there
is no other commodity which formerly represented as much as 3 per cent of
her exports. In what commodity is she to pay? Dyes?—their total value in
1913 was $50,000,000. Toys? Potash?—1913 exports were worth
$15,000,000. And even if the commodities could be specified, in what
markets are they to be sold?—remembering that we have in mind goods to
the value not of tens of millions annually, but of hundreds of millions.
On the side of imports, rather more is possible. By lowering the standard of
life, an appreciable reduction of expenditure on imported commodities may
be possible. But, as we have already seen, many large items are incapable of
reduction without reacting on the volume of exports.
Let us put our guess as high as we can without being foolish, and suppose
that after a time Germany will be able, in spite of the reduction of her
resources, her facilities, her markets, and her productive power, to increase
her exports and diminish her imports so as to improve her trade balance
altogether by $500,000,000 annually, measured in pre-war prices. This

adjustment is first required to liquidate the adverse trade balance, which in
the five years before the war averaged $370,000,000; but we will assume
that after allowing for this, she is left with a favorable trade balance of
$250,000,000 a year. Doubling this to allow for the rise in pre-war prices,
we have a figure of $500,000,000. Having regard to the political, social, and
human factors, as well as to the purely economic, I doubt if Germany could
be made to pay this sum annually over a period of 30 years; but it would not
be foolish to assert or to hope that she could.
Such a figure, allowing 5 per cent for interest, and 1 per cent for repayment
of capital, represents a capital sum having a present value of about
$8,500,000,000.[130]
I reach, therefore, the final conclusion that, including all methods of
payment—immediately transferable wealth, ceded property, and an annual
tribute—$10,000,000,000 is a safe maximum figure of Germany's capacity
to pay. In all the actual circumstances, I do not believe that she can pay as
much. Let those who consider this a very low figure, bear in mind the
following remarkable comparison. The wealth of France in 1871 was
estimated at a little less than half that of Germany in 1913. Apart from
changes in the value of money, an indemnity from Germany of
$2,500,000,000 would, therefore, be about comparable to the sum paid by
France in 1871; and as the real burden of an indemnity increases more than
in proportion to its amount, the payment of $10,000,000,000 by Germany
would have far severer consequences than the $1,000,000,000 paid by
France in 1871.
There is only one head under which I see a possibility of adding to the
figure reached on the line of argument adopted above; that is, if German
labor is actually transported to the devastated areas and there engaged in the
work of reconstruction. I have heard that a limited scheme of this kind is
actually in view. The additional contribution thus obtainable depends on the
number of laborers which the German Government could contrive to
maintain in this way and also on the number which, over a period of years,
the Belgian and French inhabitants would tolerate in their midst. In any
case, it would seem very difficult to employ on the actual work of
reconstruction, even over a number of years, imported labor having a net
present value exceeding (say) $1,250,000,000; and even this would not

prove in practice a net addition to the annual contributions obtainable in
other ways.
A capacity of $40,000,000,000 or even of $25,000,000,000 is, therefore, not
within the limits of reasonable possibility. It is for those who believe that
Germany can make an annual payment amounting to hundreds of millions
sterling to say in what specific commodities they intend this payment to be
made and in what markets the goods are to be sold. Until they proceed to
some degree of detail, and are able to produce some tangible argument in
favor of their conclusions, they do not deserve to be believed.[131]
I make three provisos only, none of which affect the force of my argument
for immediate practical purposes.
First: if the Allies were to "nurse" the trade and industry of Germany for a
period of five or ten years, supplying her with large loans, and with ample
shipping, food, and raw materials during that period, building up markets
for her, and deliberately applying all their resources and goodwill to making
her the greatest industrial nation in Europe, if not in the world, a
substantially larger sum could probably be extracted thereafter; for
Germany is capable of very great productivity.
Second: whilst I estimate in terms of money, I assume that there is no
revolutionary change in the purchasing power of our unit of value. If the
value of gold were to sink to a half or a tenth of its present value, the real
burden of a payment fixed in terms of gold would be reduced
proportionately. If a sovereign comes to be worth what a shilling is worth
now, then, of course, Germany can pay a larger sum than I have named,
measured in gold sovereigns.
Third: I assume that there is no revolutionary change in the yield of Nature
and material to man's labor. It is not impossible that the progress of science
should bring within our reach methods and devices by which the whole
standard of life would be raised immeasurably, and a given volume of
products would represent but a portion of the human effort which it
represents now. In this case all standards of "capacity" would be changed
everywhere. But the fact that all things are possible is no excuse for talking
foolishly.

It is true that in 1870 no man could have predicted Germany's capacity in
1910. We cannot expect to legislate for a generation or more. The secular
changes in man's economic condition and the liability of human forecast to
error are as likely to lead to mistake in one direction as in another. We
cannot as reasonable men do better than base our policy on the evidence we
have and adapt it to the five or ten years over which we may suppose
ourselves to have some measure of prevision; and we are not at fault if we
leave on one side the extreme chances of human existence and of
revolutionary changes in the order of Nature or of man's relations to her.
The fact that we have no adequate knowledge of Germany's capacity to pay
over a long period of years is no justification (as I have heard some people
claim that, it is) for the statement that she can pay $50,000,000,000.
Why has the world been so credulous of the unveracities of politicians? If
an explanation is needed, I attribute this particular credulity to the following
influences in part.
In the first place, the vast expenditures of the war, the inflation of prices,
and the depreciation of currency, leading up to a complete instability of the
unit of value, have made us lose all sense of number and magnitude in
matters of finance. What we believed to be the limits of possibility have
been so enormously exceeded, and those who founded their expectations on
the past have been so often wrong, that the man in the street is now
prepared to believe anything which is told him with some show of authority,
and the larger the figure the more readily he swallows it.
But those who look into the matter more deeply are sometimes misled by a
fallacy, much more plausible to reasonableness. Such a one might base his
conclusions on Germany's total surplus of annual productivity as distinct
from her export surplus. Helfferich's estimate of Germany's annual
increment of wealth in 1913 was $2,000,000,000 to $2,125,000,000
(exclusive of increased money value of existing land and property). Before
the war, Germany spent between $250,000,000 and $500,000,000 on
armaments, with which she can now dispense. Why, therefore, should she
not pay over to the Allies an annual sum of $2,500,000,000? This puts the
crude argument in its strongest and most plausible form.

But there are two errors in it. First of all, Germany's annual savings, after
what she has suffered in the war and by the Peace, will fall far short of what
they were before, and, if they are taken from her year by year in future, they
cannot again reach their previous level. The loss of Alsace-Lorraine,
Poland, and Upper Silesia could not be assessed in terms of surplus
productivity at less than $250,000,000 annually. Germany is supposed to
have profited about $500,000,000 per annum from her ships, her foreign
investments, and her foreign banking and connections, all of which have
now been taken from her. Her saving on armaments is far more than
balanced by her annual charge for pensions now estimated at
$1,250,000,000,[132] which represents a real loss of productive capacity.
And even if we put on one side the burden of the internal debt, which
amounts to 24 milliards of marks, as being a question of internal
distribution rather than of productivity, we must still allow for the foreign
debt incurred by Germany during the war, the exhaustion of her stock of
raw materials, the depletion of her live-stock, the impaired productivity of
her soil from lack of manures and of labor, and the diminution in her wealth
from the failure to keep up many repairs and renewals over a period of
nearly five years. Germany is not as rich as she was before the war, and the
diminution in her future savings for these reasons, quite apart from the
factors previously allowed for, could hardly be put at less than ten per cent,
that is $200,000,000 annually.
These factors have already reduced Germany's annual surplus to less than
the $500,000,000 at which we arrived on other grounds as the maximum of
her annual payments. But even if the rejoinder be made, that we have not
yet allowed for the lowering of the standard of life and comfort in Germany
which may reasonably be imposed on a defeated enemy,[133] there is still a
fundamental fallacy in the method of calculation. An annual surplus
available for home investment can only be converted into a surplus
available for export abroad by a radical change in the kind of work
performed. Labor, while it may be available and efficient for domestic
services in Germany, may yet be able to find no outlet in foreign trade. We
are back on the same question which faced us in our examination of the
export trade—in what export trade is German labor going to find a greatly
increased outlet? Labor can only he diverted into new channels with loss of
efficiency, and a large expenditure of capital. The annual surplus which

German labor can produce for capital improvements at home is no measure,
either theoretically or practically, of the annual tribute which she can pay
abroad.
IV. The Reparation Commission.
This body is so remarkable a construction and may, if it functions at all,
exert so wide an influence on the life of Europe, that its attributes deserve a
separate examination.
There are no precedents for the indemnity imposed on Germany under the
present Treaty; for the money exactions which formed part of the settlement
after previous wars have differed in two fundamental respects from this one.
The sum demanded has been determinate and has been measured in a lump
sum of money; and so long as the defeated party was meeting the annual
instalments of cash no consequential interference was necessary.
But for reasons already elucidated, the exactions in this case are not yet
determinate, and the sum when fixed will prove in excess of what can be
paid in cash and in excess also of what can be paid at all. It was necessary,
therefore, to set up a body to establish the bill of claim, to fix the mode of
payment, and to approve necessary abatements and delays. It was only
possible to place this body in a position to exact the utmost year by year by
giving it wide powers over the internal economic life of the enemy
countries, who are to be treated henceforward as bankrupt estates to be
administered by and for the benefit of the creditors. In fact, however, its
powers and functions have been enlarged even beyond what was required
for this purpose, and the Reparation Commission has been established as
the final arbiter on numerous economic and financial issues which it was
convenient to leave unsettled in the Treaty itself.[134]
The powers and constitution of the Reparation Commission are mainly laid
down in Articles 233-241 and Annex II. of the Reparation Chapter of the
Treaty with Germany. But the same Commission is to exercise authority
over Austria and Bulgaria, and possibly over Hungary and Turkey, when
Peace is made with these countries. There are, therefore, analogous articles
mutatis mudandis in the Austrian Treaty[135] and in the Bulgarian Treaty.
[136]

The principal Allies are each represented by one chief delegate. The
delegates of the United States, Great Britain, France, and Italy take part in
all proceedings; the delegate of Belgium in all proceedings except those
attended by the delegates of Japan or the Serb-Croat- Slovene State; the
delegate of Japan in all proceedings affecting maritime or specifically
Japanese questions; and the delegate of the Serb-Croat-Slovene State when
questions relating to Austria, Hungary, or Bulgaria are under consideration.
Other allies are to be represented by delegates, without the power to vote,
whenever their respective claims and interests are under examination.
In general the Commission decides by a majority vote, except in certain
specific cases where unanimity is required, of which the most important are
the cancellation of German indebtedness, long postponement of the
instalments, and the sale of German bonds of indebtedness. The
Commission is endowed with full executive authority to carry out its
decisions. It may set up an executive staff and delegate authority to its
officers. The Commission and its staff are to enjoy diplomatic privileges,
and its salaries are to be paid by Germany, who will, however, have no
voice in fixing them, If the Commission is to discharge adequately its
numerous functions, it will be necessary for it to establish a vast polyglot
bureaucratic organization, with a staff of hundreds. To this organization, the
headquarters of which will be in Paris, the economic destiny of Central
Europe is to be entrusted.
Its main functions are as follows:—
1. The Commission will determine the precise figure of the claim against
the enemy Powers by an examination in detail of the claims of each of the
Allies under Annex I. of the Reparation Chapter. This task must be
completed by May, 1921. It shall give to the German Government and to
Germany's allies "a just opportunity to be heard, but not to take any part
whatever in the decisions of the Commission." That is to say, the
Commission will act as a party and a judge at the same time.
2. Having determined the claim, it will draw up a schedule of payments
providing for the discharge of the whole sum with interest within thirty
years. From time to time it shall, with a view to modifying the schedule

within the limits of possibility, "consider the resources and capacity of
Germany . . . giving her representatives a just opportunity to be heard."
"In periodically estimating Germany's capacity to pay, the Commission
shall examine the German system of taxation, first, to the end that the sums
for reparation which Germany is required to pay shall become a charge
upon all her revenues prior to that for the service or discharge of any
domestic loan, and secondly, so as to satisfy itself that, in general, the
German scheme of taxation is fully as heavy proportionately as that of any
of the Powers represented on the Commission."
3. Up to May, 1921, the Commission has power, with a view to securing the
payment of $5,000,000,000, to demand the surrender of any piece of
German property whatever, wherever situated: that is to say, "Germany
shall pay in such installments and in such manner, whether in gold,
commodities, ships, securities, or otherwise, as the Reparation Commission
may fix."
4. The Commission will decide which of the rights and interests of German
nationals in public utility undertakings operating in Russia, China, Turkey,
Austria, Hungary, and Bulgaria, or in any territory formerly belonging to
Germany or her allies, are to be expropriated and transferred to the
Commission itself; it will assess the value of the interests so transferred;
and it will divide the spoils.
5 The Commission will determine how much of the resources thus stripped
from Germany must be returned to her to keep enough life in her economic
organization to enable her to continue to make Reparation payments in
future.[137]
6. The Commission will assess the value, without appeal or arbitration, of
the property and rights ceded under the Armistice, and under the Treaty,—
roiling-stock, the mercantile marine, river craft, cattle, the Saar mines, the
property in ceded territory for which credit is to be given, and so forth.
7. The Commission will determine the amounts and values (within certain
defined limits) of the contributions which Germany is to make in kind year
by year under the various Annexes to the Reparation Chapter.

8. The Commission will provide for the restitution by Germany of property
which can be identified.
9. The Commission will receive, administer, and distribute all receipts from
Germany in cash or in kind. It will also issue and market German bonds of
indebtedness.
10. The Commission will assign the share of the pre-war public debt to be
taken over by the ceded areas of Schleswig, Poland, Danzig, and Upper
Silesia. The Commission will also distribute the public debt of the late
Austro-Hungarian Empire between its constituent parts.
11. The Commission will liquidate the Austro-Hungarian Bank, and will
supervise the withdrawal and replacement of the currency system of the late
Austro-Hungarian Empire.
12. It is for the Commission to report if, in their judgment, Germany is
falling short in fulfillment of her obligations, and to advise methods of
coercion.
13. In general, the Commission, acting through a subordinate body, will
perform the same functions for Austria and Bulgaria as for Germany, and
also, presumably, for Hungary and Turkey.[138]
There are also many other relatively minor duties assigned to the
Commission. The above summary, however, shows sufficiently the scope
and significance of its authority. This authority is rendered of far greater
significance by the fact that the demands of the Treaty generally exceed
Germany's capacity. Consequently the clauses which allow the Commission
to make abatements, if in their judgment the economic conditions of
Germany require it, will render it in many different particulars the arbiter of
Germany's economic life. The Commission is not only to inquire into
Germany's general capacity to pay, and to decide (in the early years) what
import of foodstuffs and raw materials is necessary; it is authorized to exert
pressure on the German system of taxation (Annex II. para. 12(b))[139] and
on German internal expenditure, with a view to insuring that Reparation
payments are a first charge on the country's entire resources; and it is to
decide on the effect on German economic life of demands for machinery,
cattle, etc., and of the scheduled deliveries of coal.

By Article 240 of the Treaty Germany expressly recognizes the
Commission and its powers "as the same may be constituted by the Allied
and Associated Governments," and "agrees irrevocably to the possession
and exercise by such Commission of the power and authority given to it
under the present Treaty." She undertakes to furnish the Commission with
all relevant information. And finally in Article 241, "Germany undertakes to
pass, issue, and maintain in force any legislation, orders, and decrees that
may be necessary to give complete effect to these provisions."
The comments on this of the German Financial Commission at Versailles
were hardly an exaggeration:—"German democracy is thus annihilated at
the very moment when the German people was about to build it up after a
severe struggle—annihilated by the very persons who throughout the war
never tired of maintaining that they sought to bring democracy to us....
Germany is no longer a people and a State, but becomes a mere trade
concern placed by its creditors in the hands of a receiver, without its being
granted so much as the opportunity to prove its willingness to meet its
obligations of its own accord. The Commission, which is to have its
permanent headquarters outside Germany, will possess in Germany
incomparably greater rights than the German Emperor ever possessed, the
German people under its régime would remain for decades to come shorn of
all rights, and deprived, to a far greater extent than any people in the days of
absolutism, of any independence of action, of any individual aspiration in
its economic or even in its ethical progress."
In their reply to these observations the Allies refused to admit that there was
any substance, ground, or force in them. "The observations of the German
Delegation," they pronounced, "present a view of this Commission so
distorted and so inexact that it is difficult to believe that the clauses of the
Treaty have been calmly or carefully examined. It is not an engine of
oppression or a device for interfering with German sovereignty. It has no
forces at its command; it has no executive powers within the territory of
Germany; it cannot, as is suggested, direct or control the educational or
other systems of the country. Its business is to ask what is to be paid; to
satisfy itself that Germany can pay; and to report to the Powers, whose
delegation it is, in case Germany makes default. If Germany raises the
money required in her own way, the Commission cannot order that it shall
be raised in some other way; if Germany offers payment in kind, the

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

It is reported that the people of Vienna, hearing that a section of the
Reparation Commission is about to visit them, have decided
characteristically to pin their hopes on it. A financial body can obviously
take nothing from them, for they have nothing; therefore this body must be
for the purpose of assisting and relieving them. Thus do the Viennese argue,
still light-headed in adversity. But perhaps they are right. The Reparation
Commission will come into very close contact with the problems of Europe;
and it will bear a responsibility proportionate to its powers. It may thus
come to fulfil a very different rôle from that which some of its authors
intended for it. Transferred to the League of Nations, an appanage of justice

and no longer of interest, who knows that by a change of heart and object
the Reparation Commission may not yet be transformed from an instrument
of oppression and rapine into an economic council of Europe, whose object
is the restoration of life and of happiness, even in the enemy countries?

V. The German Counter-Proposals

The German counter-proposals were somewhat obscure, and also rather
disingenuous. It will be remembered that those clauses of the Reparation
Chapter which dealt with the issue of bonds by Germany produced on the
public mind the impression that the Indemnity had been fixed at
$25,000,000,000, or at any rate at this figure as a minimum. The German
Delegation set out, therefore, to construct their reply on the basis of this
figure, assuming apparently that public opinion in Allied countries would
not be satisfied with less than the appearance of $25,000,000,000; and, as
they were not really prepared to offer so large a figure, they exercised their
ingenuity to produce a formula which might be represented to Allied
opinion as yielding this amount, whilst really representing a much more
modest sum. The formula produced was transparent to any one who read it
carefully and knew the facts, and it could hardly have been expected by its
authors to deceive the Allied negotiators. The German tactic assumed,
therefore, that the latter were secretly as anxious as the Germans themselves
to arrive at a settlement which bore some relation to the facts, and that they
would therefore be willing, in view of the entanglements which they had
got themselves into with their own publics, to practise a little collusion in
drafting the Treaty,—a supposition which in slightly different circumstances
might have had a good deal of foundation. As matters actually were, this
subtlety did not benefit them, and they would have done much better with a
straightforward and candid estimate of what they believed to be the amount
of their liabilities on the one hand, and their capacity to pay on the other.
The German offer of an alleged sum of $25,000,000,000 amounted to the
following. In the first place it was conditional on concessions in the Treaty
insuring that "Germany shall retain the territorial integrity corresponding to
the Armistice Convention,[140] that she shall keep her colonial possessions

and merchant ships, including those of large tonnage, that in her own
country and in the world at large she shall enjoy the same freedom of action
as all other peoples, that all war legislation shall be at once annulled, and
that all interferences during the war with her economic rights and with
German private property, etc., shall be treated in accordance with the
principle of reciprocity";—that is to say, the offer is conditional on the
greater part of the rest of the Treaty being abandoned. In the second place,
the claims are not to exceed a maximum of $25,000,000,000, of which
$5,000,000,000 is to be discharged by May 1, 1926; and no part of this sum
is to carry interest pending the payment of it.[141] In the third place, there
are to be allowed as credit against it (amongst other things): (a) the value of
all deliveries under the Armistice, including military material (e.g.
Germany's navy); (b) the value of all railways and State property in ceded
territory; (c) the pro rata share of all ceded territory in the German public
debt (including the war debt) and in the Reparation payments which this
territory would have had to bear if it had remained part of Germany; and (d)
the value of the cession of Germany's claims for sums lent by her to her
allies in the war.[142]
The credits to be deducted under (a), (b), (c), and (d) might be in excess of
those allowed in the actual Treaty, according to a rough estimate, by a sum
of as much as $10,000,000,000, although the sum to be allowed under (d)
can hardly be calculated.
If, therefore, we are to estimate the real value of the German offer of
$25,000,000,000 on the basis laid down by the Treaty, we must first of all
deduct $10,000,000,000 claimed for offsets which the Treaty does not
allow, and then halve the remainder in order to obtain the present value of a
deferred payment on which interest is not chargeable. This reduces the offer
to $7,500,000,000, as compared with the $40,000,000,000 which, according
to my rough estimate, the Treaty demands of her.
This in itself was a very substantial offer—indeed it evoked widespread
criticism in Germany—though, in view of the fact that it was conditional on
the abandonment of the greater part of the rest of the Treaty, it could hardly
be regarded as a serious one.[143] But the German Delegation would have
done better if they had stated in less equivocal language how far they felt
able to go.

In the final reply of the Allies to this counter-proposal there is one
important provision, which I have not attended to hitherto, but which can be
conveniently dealt with in this place. Broadly speaking, no concessions
were entertained on the Reparation Chapter as it was originally drafted, but
the Allies recognized the inconvenience of the indeterminacy of the burden
laid upon Germany and proposed a method by which the final total of claim
might be established at an earlier date than May 1, 1921. They promised,
therefore, that at any time within four months of the signature of the Treaty
(that is to say, up to the end of October, 1919), Germany should be at liberty
to submit an offer of a lump sum in settlement of her whole liability as
defined in the Treaty, and within two months thereafter (that is to say,
before the end of 1919) the Allies "will, so far as may be possible, return
their answers to any proposals that may be made."
This offer is subject to three conditions. "Firstly, the German authorities
will be expected, before making such proposals, to confer with the
representatives of the Powers directly concerned. Secondly, such offers
must be unambiguous and must be precise and clear. Thirdly, they must
accept the categories and the Reparation clauses as matters settled beyond
discussion."
The offer, as made, does not appear to contemplate any opening up of the
problem of Germany's capacity to pay. It is only concerned with the
establishment of the total bill of claims as defined in the Treaty—whether
(e.g.) it is $35,000,000,000, $40,000,000,000, or $50,000,000,000. "The
questions," the Allies' reply adds, "are bare questions of fact, namely, the
amount of the liabilities, and they are susceptible of being treated in this
way."
If the promised negotiations are really conducted on these lines, they are not
likely to be fruitful. It will not be much easier to arrive at an agreed figure
before the end of 1919 that it was at the time of the Conference; and it will
not help Germany's financial position to know for certain that she is liable
for the huge sum which on any computation the Treaty liabilities must
amount to. These negotiations do offer, however, an opportunity of
reopening the whole question of the Reparation payments, although it is
hardly to be hoped that at so very early a date, public opinion in the
countries of the Allies has changed its mood sufficiently.[144]

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

FOOTNOTES:
[76] "With reservation that any future claims and demands of the Allies and the
United States of America remain unaffected, the following financial conditions
are required: Reparation for damage done. Whilst Armistice lasts, no public
securities shall be removed by the enemy which can serve as a pledge to the
Allies for recovery or reparation of war losses. Immediate restitution of cash
deposit in National Bank of Belgium, and, in general, immediate return of all
documents, of specie, stock, shares, paper money, together with plant for issue
thereof, touching public or private interests in invaded countries. Restitution of
Russian and Roumanian gold yielded to Germany or taken by that Power. This
gold to be delivered in trust to the Allies until signature of peace."
[77] It is to be noticed, in passing, that they contain nothing which limits the
damage to damage inflicted contrary to the recognized rules of warfare. That is
to say, it is permissible to include claims arising out of the legitimate capture of
a merchantman at sea, as well as the costs of illegal submarine warfare.
[78] Mark-paper or mark-credits owned in ex-occupied territory by Allied
nationals should be included, if at all, in the settlement of enemy debts, along
with other sums owed to Allied nationals, and not in connection with reparation.
[79] A special claim on behalf of Belgium was actually included In the Peace
Treaty, and was accepted by the German representatives without demur.
[80] To the British observer, one scene, however, stood out distinguished from
the rest—the field of Ypres. In that desolate and ghostly spot, the natural color
and humors of the landscape and the climate seemed designed to express to the
traveler the memories of the ground. A visitor to the salient early in November,
1918, when a few German bodies still added a touch of realism and human
horror, and the great struggle was not yet certainly ended, could feel there, as

nowhere else, the present outrage of war, and at the same time the tragic and
sentimental purification which to the future will in some degree transform its
harshness.
[81] These notes, estimated to amount to no less than six thousand million
marks, are now a source of embarrassment and great potential loss to the Belgian
Government, inasmuch as on their recovery of the country they took them over
from their nationals in exchange for Belgian notes at the rate of Fr. 120 = Mk. 1.
This rate of exchange, being substantially in excess of the value of the mark-
notes at the rate of exchange current at the time (and enormously in excess of the
rate to which the mark notes have since fallen, the Belgian franc being now
worth more than three marks), was the occasion of the smuggling of mark-notes
into Belgium on an enormous scale, to take advantage of the profit obtainable.
The Belgian Government took this very imprudent step, partly because they
hoped to persuade the Peace Conference to make the redemption of these bank-
notes, at the par of exchange, a first charge on German assets. The Peace
Conference held, however, that Reparation proper must take precedence of the
adjustment of improvident banking transactions effected at an excessive rate of
exchange. The possession by the Belgian Government of this great mass of
German currency, in addition to an amount of nearly two thousand million marks
held by the French Government which they similarly exchanged for the benefit
of the population of the invaded areas and of Alsace-Lorraine, is a serious
aggravation of the exchange position of the mark. It will certainly be desirable
for the Belgian and German Governments to come to some arrangement as to its
disposal, though this is rendered difficult by the prior lien held by the Reparation
Commission over all German assets available for such purposes.
[82] It should be added, in fairness, that the very high claims put forward on
behalf of Belgium generally include not only devastation proper, but all kinds of
other items, as, for example, the profits and earnings which Belgians might
reasonably have expected to earn if there had been no war.
[83] "The Wealth and Income of the Chief Powers," by J.C. Stamp (Journal of
the Royal Statistical Society, July, 1919).
[84] Other estimates vary from $12,100,000,000 to $13,400,000,000. See Stamp,
loc. cit.
[85] This was clearly and courageously pointed out by M. Charles Gide in
L'Emancipation for February, 1919.
[86] For details of these and other figures, see Stamp, loc. cit.
[87] Even when the extent of the material damage has been established, it will be
exceedingly difficult to put a price on it, which must largely depend on the
period over which restoration is spread, and the methods adopted. It would be
impossible to make the damage good in a year or two at any price, and an
attempt to do so at a rate which was excessive in relation to the amount of labor
and materials at hand might force prices up to almost any level. We must, I
think, assume a cost of labor and materials about equal to that current in the
world generally. In point of fact, however, we may safely assume that literal
restoration will never be attempted. Indeed, it would be very wasteful to do so.
Many of the townships were old and unhealthy, and many of the hamlets

miserable. To re-erect the same type of building in the same places would be
foolish. As for the land, the wise course may be in some cases to leave long
strips of it to Nature for many years to come. An aggregate money sum should
be computed as fairly representing the value of the material damage, and France
should be left to expend it in the manner she thinks wisest with a view to her
economic enrichment as a whole. The first breeze of this controversy has already
blown through France. A long and inconclusive debate occupied the Chamber
during the spring of 1919, as to whether inhabitants of the devastated area
receiving compensation should be compelled to expend it in restoring the
identical property, or whether they should be free to use it as they like. There
was evidently a great deal to be said on both sides; in the former case there
would be much hardship and uncertainty for owners who could not, many of
them, expect to recover the effective use of their property perhaps for years to
come, and yet would not be free to set themselves up elsewhere; on the other
hand, if such persons were allowed to take their compensation and go elsewhere,
the countryside of Northern France would never be put right. Nevertheless I
believe that the wise course will be to allow great latitude and let economic
motives take their own course.
[88] La Richesse de la France devant la Guerre, published in 1916.
[89] Revue Bleue, February 3, 1919. This is quoted in a very valuable selection
of French estimates and expressions of opinion, forming chapter iv. of La
Liquidation financière de la Guerre, by H. Charriaut and R. Hacault. The general
magnitude of my estimate is further confirmed by the extent of the repairs
already effected, as set forth in a speech delivered by M. Tardieu on October 10,
1919, in which he said: "On September 16 last, of 2246 kilomètres of railway
track destroyed, 2016 had been repaired; of 1075 kilomètres of canal, 700; of
1160 constructions, such as bridges and tunnels, which had been blown up, 588
had been replaced; of 550,000 houses ruined by bombardment, 60,000 had been
rebuilt; and of 1,800,000 hectares of ground rendered useless by battle, 400,000
had been recultivated, 200,000 hectares of which are now ready to be sown.
Finally, more than 10,000,000 mètres of barbed wire had been removed."
[90] Some of these estimates include allowance for contingent and immaterial
damage as well as for direct material injury.
[91] A substantial part of this was lost in the service of the Allies; this must not
be duplicated by inclusion both in their claims and in ours.
[92] The fact that no separate allowance is made in the above for the sinking of
675 fishing vessels of 71,765 tons gross, or for the 1855 vessels of 8,007,967
tons damaged or molested, but not sunk, may be set off against what may be an
excessive figure for replacement cost.
[93] The losses of the Greek mercantile marine were excessively high, as a result
of the dangers of the Mediterranean; but they were largely incurred on the
service of the other Allies, who paid for them directly or indirectly. The claims
of Greece for maritime losses incurred on the service of her own nationals would
not be very considerable.
[94] There is a reservation in the Peace Treaty on this question. "The Allied and
Associated Powers formally reserve the right of Russia to obtain from Germany

restitution and reparation based on the principles of the present Treaty" (Art.
116).
[95] Dr. Diouritch in his "Economic and Statistical Survey of the Southern Slav
Nations" (Journal of Royal Statistical Society, May, 1919), quotes some
extraordinary figures of the loss of life: "According to the official returns, the
number of those fallen in battle or died in captivity up to the last Serbian
offensive, amounted to 320,000, which means that one half of Serbia's male
population, from 18 to 60 years of age, perished outright in the European War. In
addition, the Serbian Medical Authorities estimate that about 300,000 people
have died from typhus among the civil population, and the losses among the
population interned in enemy camps are estimated at 50,000. During the two
Serbian retreats and during the Albanian retreat the losses among children and
young people are estimated at 200,000. Lastly, during over three years of enemy
occupation, the losses in lives owing to the lack of proper food and medical
attention are estimated at 250,000." Altogether, he puts the losses in life at above
1,000,000, or more than one-third of the population of Old Serbia.
[96] Come si calcola e a quanto ammonta la richezza d'Italia e delle altre
principali nazioni, published in 1919.
[97] Very large claims put forward by the Serbian authorities include many
hypothetical items of indirect and non-material damage; but these, however real,
are not admissible under our present formula.
[98] Assuming that in her case $1,250,000,000 are included for the general
expenses of the war defrayed out of loans made to Belgium by her allies.
[99] It must be said to Mr. Hughes' honor that he apprehended from the first the
bearing of the pre-Armistice negotiations on our right to demand an indemnity
covering the full costs of the war, protested against our ever having entered into
such engagements, and maintained loudly that he had been no party to them and
could not consider himself bound by them. His indignation may have been partly
due to the fact that Australia, not having been ravaged, would have no claims at
all under the more limited interpretation of our rights.
[100] The whole cost of the war has been estimated at from $120,000,000,000
upwards. This would mean an annual payment for interest (apart from sinking
fund) of $6,000,000,000. Could any expert Committee have reported that
Germany can pay this sum?
[101] But unhappily they did not go down with their flags flying very gloriously.
For one reason or another their leaders maintained substantial silence. What a
different position in the country's estimation they might hold now if they had
suffered defeat amidst firm protests against the fraud, chicane, and dishonor of
the whole proceedings.
[102] Only after the most painful consideration have I written these words. The
almost complete absence of protest from the leading Statesmen of England
makes one feel that one must have made some mistake. But I believe that I know
all the facts, and I can discover no such mistake. In any case I have set forth all
the relevant engagements in Chapter IV. and at the beginning of this chapter, so
that the reader can form his own judgment.

[103] In conversation with Frenchmen who were private persons and quite
unaffected by political considerations, this aspect became very clear. You might
persuade them that some current estimates as to the amount to be got out of
Germany were quite fantastic. Yet at the end they would always come back to
where they had started: "But Germany must pay; for, otherwise, what is to
happen to France?"
[104] A further paragraph claims the war costs of Belgium "in accordance with
Germany's pledges, already given, as to complete restoration for Belgium."
[105] The challenge of the other Allies, as well as the enemy, had to be met; for
in view of the limited resources of the latter, the other Allies had perhaps a
greater interest than the enemy in seeing that no one of their number established
an excessive claim.
[106] M. Klotz has estimated the French claims on this head at $15,000,000,000
(75 milliard francs, made up of 13 milliard for allowances, 60 for pensions, and
2 for widows). If this figure is correct, the others should probably be scaled up
also.
[107] That is to say, I claim for the aggregate figure an accuracy within 25 per
cent.
[108] In his speech of September 5, 1919, addressed to the French Chamber, M.
Klotz estimated the total Allied claims against Germany under the Treaty at
$75,000,000,000, which would accumulate at interest until 1921, and be paid off
thereafter by 34 annual installments of about $5,000,000,000 each, of which
France would receive about $2,750,000,000 annually. "The general effect of the
statement (that France would receive from Germany this annual payment)
proved," it is reported, "appreciably encouraging to the country as a whole, and
was immediately reflected in the improved tone on the Bourse and throughout
the business world in France." So long as such statements can be accepted in
Paris without protest, there can be no financial or economic future for France,
and a catastrophe of disillusion is not far distant.
[109] As a matter of subjective judgment, I estimate for this figure an accuracy
of 10 per cent in deficiency and 20 per cent in excess, i.e. that the result will lie
between $32,000,000,000 and $44,000,000,000.
[110] Germany is also liable under the Treaty, as an addition to her liabilities for
Reparation, to pay all the costs of the Armies of Occupation after Peace is signed
for the fifteen subsequent years of occupation. So far as the text of the Treaty
goes, there is nothing to limit the size of these armies, and France could,
therefore, by quartering the whole of her normal standing army in the occupied
area, shift the charge from her own taxpayers to those of Germany,—though in
reality any such policy would be at the expense not of Germany, who by
hypothesis is already paying for Reparation up to the full limit of her capacity,
but of France's Allies, who would receive so much less in respect of Reparation.
A White Paper (Cmd. 240) has, however, been issued, in which is published a
declaration by the Governments of the United States, Great Britain, and France
engaging themselves to limit the sum payable annually by Germany to cover the
cost of occupation to $60,000,000 "as soon as the Allied and Associated Powers
concerned are convinced that the conditions of disarmament by Germany are

being satisfactorily fulfilled." The word which I have italicized is a little
significant. The three Powers reserve to themselves the liberty to modify this
arrangement at any time if they agree that it is necessary.
[111] Art. 235. The force of this Article is somewhat strengthened by Article
251, by virtue of which dispensations may also be granted for "other payments"
as well as for food and raw material.
[112] This is the effect of Para. 12 (c) of Annex II. of the Reparation Chapter,
leaving minor complications on one side. The Treaty fixes the payments in terms
of gold marks, which are converted in the above rate of 20 to $5.
[113] If, per impossibile, Germany discharged $2,500,000,000 in cash or kind by
1921, her annual payments would be at the rate of $312,500,000 from 1921 to
1925 and of $750,000,000 thereafter.
[114] Para. 16 of Annex II. of The Reparation Chapter. There is also an obscure
provision by which interest may be charged "on sums arising out of material
damage as from November 11, 1918, up to May 1, 1921." This seems to
differentiate damage to property from damage to the person in favor of the
former. It does not affect Pensions and Allowances, the cost of which is
capitalized as at the date of the coming into force of the Treaty.
[115] On the assumption which no one supports and even the most optimistic
fear to be unplausible, that Germany can pay the full charge for interest and
sinking fund from the outset, the annual payment would amount to
$2,400,000,000.
[116] Under Para. 13 of Annex II. unanimity is required (i.) for any
postponement beyond 1930 of installments due between 1921 and 1926, and (ii.)
for any postponement for more than three years of instalments due after 1926.
Further, under Art. 234, the Commission may not cancel any part of the
indebtedness without the specific authority of all the Governments represented
on the Commission.
[117] On July 23, 1914, the amount was $339,000,000.
[118] Owing to the very high premium which exists on German silver coin, as
the combined result of the depreciation of the mark and the appreciation of
silver, it is highly improbable that it will be possible to extract such coin out of
the pockets of the people. But it may gradually leak over the frontier by the
agency of private speculators, and thus indirectly benefit the German exchange
position as a whole.
[119] The Allies made the supply of foodstuffs to Germany during the Armistice,
mentioned above, conditional on the provisional transfer to them of the greater
part of the Mercantile Marine, to be operated by them for the purpose of
shipping foodstuffs to Europe generally, and to Germany in particular. The
reluctance of the Germans to agree to this was productive of long and dangerous
delays in the supply of food, but the abortive Conferences of Trèves and Spa
(January 16, February 14-16, and March 4-5, 1919) were at last followed by the
Agreement of Brussels (March 14, 1919). The unwillingness of the Germans to
conclude was mainly due to the lack of any absolute guarantee on the part of the

Allies that, if they surrendered the ships, they would get the food. But assuming
reasonable good faith on the part of the latter (their behavior in respect of certain
other clauses of the Armistice, however, had not been impeccable and gave the
enemy some just grounds for suspicion), their demand was not an improper one;
for without the German ships the business of transporting the food would have
been difficult, if not impossible, and the German ships surrendered or their
equivalent were in fact almost wholly employed in transporting food to Germany
itself. Up to June 30, 1919, 176 German ships of 1,025,388 gross tonnage had
been surrendered, to the Allies in accordance with the Brussels Agreement.
[120] The amount of tonnage transferred may be rather greater and the value per
ton rather less. The aggregate value involved is not likely, however, to be less
than $500,000,000 or greater than $750,000,000.
[121] This census was carried out by virtue of a Decree of August 23, 1918. On
March 22, 1917, the German Government acquired complete control over the
utilization of foreign securities in German possession; and in May, 1917, it
began to exercise these powers for the mobilization of certain Swedish, Danish,
and Swiss securities.
[122]
1892. Schmoller $2,500,000,000
1892. Christians 3,250,000,000
1893-4. Koch 3,000,000,000
1905. v. Halle 4,000,000,000 [A]
1913. Helfferich 5,000,000,000 [B]
1914. Ballod 6,250,000,000
1914. Pistorius 6,250,000,000
1919. Hans David 5,250,000,000 [C]

[A] Plus $2,500,000 for investments other than securities.
[B] Net investments, i.e. after allowance for property in Germany owned abroad.
This may also be the case with some of the other estimates.
[C] This estimate, given in the Weltwirtschaftszeitung (June 13, 1919), is an
estimate of the value of Germany's foreign investments as at the outbreak of war.
[123] I have made no deduction for securities in the ownership of Alsace-
Lorrainers and others who have now ceased to be German nationals.
[124] In all these estimates, I am conscious of being driven by a fear of
overstating the case against the Treaty, of giving figures in excess of my own
real judgment. There is a great difference between putting down on paper fancy
estimates of Germany's resources and actually extracting contributions in the
form of cash. I do not myself believe that the Reparation Commission will
secure real resources from the above items by May, 1921, even as great as the
lower of the two figures given above.

[125] The Treaty (see Art. 114) leaves it very dubious how far the Danish
Government is under an obligation to make payments to the Reparation
Commission in respect of its acquisition of Schleswig. They might, for instance,
arrange for various offsets such as the value of the mark notes held by the
inhabitants of ceded areas. In any case the amount of money involved is quite
small. The Danish Government is raising a loan for $33,000,000 (kr.
120,000,000) for the joint purposes of "taking over Schleswig's share of the
German debt, for buying German public property, for helping the Schleswig
population, and for settling the currency question."
[126] Here again my own judgment would carry me much further and I should
doubt the possibility of Germany's exports equaling her imports during this
period. But the statement in the text goes far enough for the purpose of my
argument.
[127] It has been estimated that the cession of territory to France, apart from the
loss of Upper Silesia, may reduce Germany's annual pre-war production of steel
ingots from 20,000,000 tons to 14,000,000 tons, and increase France's capacity
from 5,000,000 tons to 11,000,000 tons.
[128] Germany's exports of sugar in 1913 amounted to 1,110,073 tons of the
value of $65,471,500, of which 838,583 tons were exported to the United
Kingdom at a value of $45,254,000. These figures were in excess of the normal,
the average total exports for the five years ending 1913 being about
$50,000,000.
[129] The necessary price adjustment, which is required, on both sides of this
account, will be made en bloc later.
[130] If the amount of the sinking fund be reduced, and the annual payment is
continued over a greater number of years, the present value—so powerful is the
operation of compound interest—cannot be materially increased. A payment of
$500,000,000 annually in perpetuity, assuming interest, as before, at 5 per cent,
would only raise the present value to $10,000,000,000.
[131] As an example of public misapprehension on economic affairs, the
following letter from Sir Sidney Low to The Times of the 3rd December, 1918,
deserves quotation: "I have seen authoritative estimates which place the gross
value of Germany's mineral and chemical resources as high as
$1,250,000,000,000 or even more; and the Ruhr basin mines alone are said to be
worth over $225,000,000,000. It is certain, at any rate, that the capital value of
these natural supplies is much greater than the total war debts of all the Allied
States. Why should not some portion of this wealth be diverted for a sufficient
period from its present owners and assigned to the peoples whom Germany has
assailed, deported, and injured? The Allied Governments might justly require
Germany to surrender to them the use of such of her mines, and mineral deposits
as would yield, say, from $500,000,000 to $1,000,000,000 annually for the next
30, 40, or 50 years. By this means we could obtain sufficient compensation from
Germany without unduly stimulating her manufactures and export trade to our
detriment." It is not clear why, if Germany has wealth exceeding
$1,250,000,000,000. Sir Sidney Low is content with the trifling sum of
$500,000,000 to $1,000,000,000 annually. But his letter is an admirable reductio

ad absurdum of a certain line of thought. While a mode of calculation, which
estimates the value of coal miles deep in the bowels of the earth as high as in a
coal scuttle, of an annual lease of $5000 for 999 years at $4,995,000 and of a
field (presumably) at the value of all the crops it will grow to the end of recorded
time, opens up great possibilities, it is also double-edged. If Germany's total
resources are worth $1,250,000,000,000, those she will part with in the cession
of Alsace-Lorraine and Upper Silesia should be more than sufficient to pay the
entire costs of the war and reparation together. In point of fact, the present
market value of all the mines in Germany of every kind has been estimated at
$1,500,000,000, or a little more than one-thousandth part of Sir Sidney Low's
expectations.
[132] The conversion at par of 5,000 million marks overstates, by reason of the
existing depreciation of the mark, the present money burden of the actual
pensions payments, but not, in all probability, the real loss of national
productivity as a result of the casualties suffered in the war.
[133] It cannot be overlooked, in passing, that in its results on a country's surplus
productivity a lowering of the standard of life acts both ways. Moreover, we are
without experience of the psychology of a white race under conditions little
short of servitude. It is, however, generally supposed that if the whole of a man's
surplus production is taken from him, his efficiency and his industry are
diminished, The entrepreneur and the inventor will not contrive, the trader and
the shopkeeper will not save, the laborer will not toil, if the fruits of their
industry are set aside, not for the benefit of their children, their old age, their
pride, or their position, but for the enjoyment of a foreign conqueror.
[134] In the course of the compromises and delays of the Conference, there were
many questions on which, in order to reach any conclusion at all, it was
necessary to leave a margin of vagueness and uncertainty. The whole method of
the Conference tended towards this,—the Council of Four wanted, not so much a
settlement, as a treaty. On political and territorial questions the tendency was to
leave the final arbitrament to the League of Nations. But on financial and
economic questions, the final decision has generally be a left with the Reparation
Commission,—in spite of its being an executive body composed of interested
parties.
[135] The sum to be paid by Austria for Reparation is left to the absolute
discretion of the Reparation Commission, no determinate figure of any kind
being mentioned in the text of the Treaty Austrian questions are to be handled by
a special section of the Reparation Commission, but the section will have no
powers except such as the main Commission may delegate.
[136] Bulgaria is to pay an indemnity of $450,000,000 by half-yearly
instalments, beginning July 1, 1920. These sums will be collected, on behalf of
the Reparation Commission, by an Inter-Ally Commission of Control, with its
seat at Sofia. In some respects the Bulgarian Inter-Ally Commission appears to
have powers and authority independent of the Reparation Commission, but it is
to act, nevertheless, as the agent of the latter, and is authorized to tender advice
to the Reparation Commission as to, for example, the reduction of the half-
yearly instalments.

[137] Under the Treaty this is the function of any body appointed for the purpose
by the principal Allied and Associated Governments, and not necessarily of the
Reparation Commission. But it may be presumed that no second body will be
established for this special purpose.
[138] At the date of writing no treaties with these countries have been drafted. It
is possible that Turkey might be dealt with by a separate Commission.
[139] This appears to me to be in effect the position (if this paragraph means
anything at all), in spite of the following disclaimer of such intentions in the
Allies' reply:—"Nor does Paragraph 12(b) of Annex II. give the Commission
powers to prescribe or enforce taxes or to dictate the character of the German
budget."
[140] Whatever that may mean.
[141] Assuming that the capital sum is discharged evenly over a period as short
as thirty-three years, this has the effect of halving the burden as compared with
the payments required on the basis of 5 per cent interest on the outstanding
capital.
[142] I forbear to outline the further details of the German offer as the above are
the essential points.
[143] For this reason it is not strictly comparable with my estimate of Germany's
capacity in an earlier section of this chapter, which estimate is on the basis of
Germany's condition as it will be when the rest of the Treaty has come into
effect.
[144] Owing to delays on the part of the Allies in ratifying the Treaty, the
Reparation Commission had not yet been formally constituted by the end of
October, 1919. So far as I am aware, therefore, nothing has been done to make
the above offer effective. But, perhaps in view of the circumstances, there has
been an extension of the date.

Chapter VI

Europe after the Treaty
This chapter must be one of pessimism. The Treaty includes no provisions
for the economic rehabilitation of Europe,—nothing to make the defeated
Central Empires into good neighbors, nothing to stabilize the new States of
Europe, nothing to reclaim Russia; nor does it promote in any way a
compact of economic solidarity amongst the Allies themselves; no
arrangement was reached at Paris for restoring the disordered finances of
France and Italy, or to adjust the systems of the Old World and the New.
The Council of Four paid no attention to these issues, being preoccupied
with others,—Clemenceau to crush the economic life of his enemy, Lloyd
George to do a deal and bring home something which would pass muster
for a week, the President to do nothing that was not just and right. It is an
extraordinary fact that the fundamental economic problems of a Europe
starving and disintegrating before their eyes, was the one question in which
it was impossible to arouse the interest of the Four. Reparation was their
main excursion into the economic field, and they settled it as a problem of
theology, of polities, of electoral chicane, from every point of view except
that of the economic future of the States whose destiny they were handling.
I leave, from this point onwards, Paris, the Conference, and the Treaty,
briefly to consider the present situation of Europe, as the War and the Peace
have made it; and it will no longer be part of my purpose to distinguish
between the inevitable fruits of the War and the avoidable misfortunes of
the Peace.
The essential facts of the situation, as I see them, are expressed simply.
Europe consists of the densest aggregation of population in the history of
the world. This population is accustomed to a relatively high standard of
life, in which, even now, some sections of it anticipate improvement rather
than deterioration. In relation to other continents Europe is not self-
sufficient; in particular it cannot feed Itself. Internally the population is not
evenly distributed, but much of it is crowded into a relatively small number
of dense industrial centers. This population secured for itself a livelihood

before the war, without much margin of surplus, by means of a delicate and
immensely complicated organization, of which the foundations were
supported by coal, iron, transport, and an unbroken supply of imported food
and raw materials from other continents. By the destruction of this
organization and the interruption of the stream of supplies, a part of this
population is deprived of its means of livelihood. Emigration is not open to
the redundant surplus. For it would take years to transport them overseas,
even, which is not the case, if countries could be found which were ready to
receive them. The danger confronting us, therefore, is the rapid depression
of the standard of life of the European populations to a point which will
mean actual starvation for some (a point already reached in Russia and
approximately reached in Austria). Men will not always die quietly. For
starvation, which brings to some lethargy and a helpless despair, drives
other temperaments to the nervous instability of hysteria and to a mad
despair. And these in their distress may overturn the remnants of
organization, and submerge civilization itself in their attempts to satisfy
desperately the overwhelming needs of the individual. This is the danger
against which all our resources and courage and idealism must now co-
operate.
On the 13th May, 1919, Count Brockdorff-Rantzau addressed to the Peace
Conference of the Allied and Associated Powers the Report of the German
Economic Commission charged with the study of the effect of the
conditions of Peace on the situation of the German population. "In the
course of the last two generations," they reported, "Germany has become
transformed from an agricultural State to an industrial State. So long as she
was an agricultural State, Germany could feed forty million inhabitants. As
an industrial State she could insure the means of subsistence for a
population of sixty-seven millions; and in 1913 the importation of
foodstuffs amounted, in round figures, to twelve million tons. Before the
war a total of fifteen million persons in Germany provided for their
existence by foreign trade, navigation, and the use, directly or indirectly, of
foreign raw material." After rehearsing the main relevant provisions of the
Peace Treaty the report continues: "After this diminution of her products,
after the economic depression resulting from the loss of her colonies, her
merchant fleet and her foreign investments, Germany will not be in a
position to import from abroad an adequate quantity of raw material. An

enormous part of German industry will, therefore, be condemned inevitably
to destruction. The need of importing foodstuffs will increase considerably
at the same time that the possibility of satisfying this demand is as greatly
diminished. In a very short time, therefore, Germany will not be in a
position to give bread and work to her numerous millions of inhabitants,
who are prevented from earning their livelihood by navigation and trade.
These persons should emigrate, but this is a material impossibility, all the
more because many countries and the most important ones will oppose any
German immigration. To put the Peace conditions into execution would
logically involve, therefore, the loss of several millions of persons in
Germany. This catastrophe would not be long in coming about, seeing that
the health of the population has been broken down during the War by the
Blockade, and during the Armistice by the aggravation of the Blockade of
famine. No help, however great, or over however long a period it were
continued, could prevent those deaths en masse." "We do not know, and
indeed we doubt," the report concludes, "whether the Delegates of the
Allied and Associated Powers realize the inevitable consequences which
will take place if Germany, an industrial State, very thickly populated,
closely bound up with the economic system of the world, and under the
necessity of importing enormous quantities of raw material and foodstuffs,
suddenly finds herself pushed back to the phase of her development, which
corresponds to her economic condition and the numbers of her population
as they were half a century ago. Those who sign this Treaty will sign the
death sentence of many millions of German men, women and children."
I know of no adequate answer to these words. The indictment is at least as
true of the Austrian, as of the German, settlement. This is the fundamental
problem in front of us, before which questions of territorial adjustment and
the balance of European power are insignificant. Some of the catastrophes
of past history, which have thrown back human progress for centuries, have
been due to the reactions following on the sudden termination, whether in
the course of nature or by the act of man, of temporarily favorable
conditions which have permitted the growth of population beyond what
could be provided for when the favorable conditions were at an end.
The significant features of the immediate situation can be grouped under
three heads: first, the absolute falling off, for the time being, in Europe's
internal productivity; second, the breakdown of transport and exchange by

means of which its products could be conveyed where they were most
wanted; and third, the inability of Europe to purchase its usual supplies
from overseas.
The decrease of productivity cannot be easily estimated, and may be the
subject of exaggeration. But the primâ facie evidence of it is overwhelming,
and this factor has been the main burden of Mr. Hoover's well-considered
warnings. A variety of causes have produced it;—violent and prolonged
internal disorder as in Russia and Hungary; the creation of new
governments and their inexperience in the readjustment of economic
relations, as in Poland and Czecho-Slovakia; the loss throughout the
Continent of efficient labor, through the casualties of war or the
continuance of mobilization; the falling-off in efficiency through continued
underfeeding in the Central Empires; the exhaustion of the soil from lack of
the usual applications of artificial manures throughout the course of the
war; the unsettlement of the minds of the laboring classes on the
fundamental economic issues of their lives. But above all (to quote Mr.
Hoover), "there is a great relaxation of effort as the reflex of physical
exhaustion of large sections of the population from privation and the mental
and physical strain of the war." Many persons are for one reason or another
out of employment altogether. According to Mr. Hoover, a summary of the
unemployment bureaus in Europe in July, 1919, showed that 15,000,000
families were receiving unemployment allowances in one form or another,
and were being paid in the main by a constant inflation of currency. In
Germany there is the added deterrent to labor and to capital (in so far as the
Reparation terms are taken literally), that anything, which they may
produce beyond the barest level of subsistence, will for years to come be
taken away from them.
Such definite data as we possess do not add much, perhaps, to the general
picture of decay. But I will remind the reader of one or two of them. The
coal production of Europe as a whole is estimated to have fallen off by 30
per cent; and upon coal the greater part of the industries of Europe and the
whole of her transport system depend. Whereas before the war Germany
produced 85 per cent of the total food consumed by her inhabitants, the
productivity of the soil is now diminished by 40 per cent and the effective
quality of the live-stock by 55 per cent.[145] Of the European countries
which formerly possessed a large exportable surplus, Russia, as much by

reason of deficient transport as of diminished output, may herself starve.
Hungary, apart from her other troubles, has been pillaged by the Romanians
immediately after harvest. Austria will have consumed the whole of her
own harvest for 1919 before the end of the calendar year. The figures are
almost too overwhelming to carry conviction to our minds; if they were not
quite so bad, our effective belief in them might be stronger.
But even when coal can be got and grain harvested, the breakdown of the
European railway system prevents their carriage; and even when goods can
be manufactured, the breakdown of the European currency system prevents
their sale. I have already described the losses, by war and under the
Armistice surrenders, to the transport system of Germany. But even so,
Germany's position, taking account of her power of replacement by
manufacture, is probably not so serious as that of some of her neighbors. In
Russia (about which, however, we have very little exact or accurate
information) the condition of the rolling-stock is believed to be altogether
desperate, and one of the most fundamental factors in her existing economic
disorder. And in Poland, Roumania, and Hungary the position is not much
better. Yet modern industrial life essentially depends on efficient transport
facilities, and the population which secured its livelihood by these means
cannot continue to live without them. The breakdown of currency, and the
distrust in its purchasing value, is an aggravation of these evils which must
be discussed in a little more detail in connection with foreign trade.
What then is our picture of Europe? A country population able to support
life on the fruits of its own agricultural production but without the
accustomed surplus for the towns, and also (as a result of the lack of
imported materials and so of variety and amount in the saleable
manufactures of the towns) without the usual incentives to market food in
return for other wares; an industrial population unable to keep its strength
for lack of food, unable to earn a livelihood for lack of materials, and so
unable to make good by imports from abroad the failure of productivity at
home. Yet, according to Mr. Hoover, "a rough estimate would indicate that
the population of Europe is at least 100,000,000 greater than can be
supported without imports, and must live by the production and distribution
of exports."

The problem of the re-inauguration of the perpetual circle of production and
exchange in foreign trade leads me to a necessary digression on the
currency situation of Europe.
Lenin is said to have declared that the best way to destroy the Capitalist
System was to debauch the currency. By a continuing process of inflation,
governments can confiscate, secretly and unobserved, an important part of
the wealth of their citizens. By this method they not only confiscate, but
they confiscate arbitrarily; and, while the process impoverishes many, it
actually enriches some. The sight of this arbitrary rearrangement of riches
strikes not only at security, but at confidence in the equity of the existing
distribution of wealth. Those to whom the system brings windfalls, beyond
their deserts and even beyond their expectations or desires, become
"profiteers,", who are the object of the hatred of the bourgeoisie, whom the
inflationism has impoverished, not less than of the proletariat. As the
inflation proceeds and the real value of the currency fluctuates wildly from
month to month, all permanent relations between debtors and creditors,
which form the ultimate foundation of capitalism, become so utterly
disordered as to be almost meaningless; and the process of wealth-getting
degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning
the existing basis of society than to debauch the currency. The process
engages all the hidden forces of economic law on the side of destruction,
and does it in a manner which not one man in a million is able to diagnose.
In the latter stages of the war all the belligerent governments practised,
from necessity or incompetence, what a Bolshevist might have done from
design. Even now, when the war is over, most of them continue out of
weakness the same malpractices. But further, the Governments of Europe,
being many of them at this moment reckless in their methods as well as
weak, seek to direct on to a class known as "profiteers" the popular
indignation against the more obvious consequences of their vicious
methods. These "profiteers" are, broadly speaking, the entrepreneur class of
capitalists, that is to say, the active and constructive element in the whole
capitalist society, who in a period of rapidly rising prices cannot help but
get rich quick whether they wish it or desire it or not. If prices are
continually rising, every trader who has purchased for stock or owns

property and plant inevitably makes profits. By directing hatred against this
class, therefore, the European Governments are carrying a step further the
fatal process which the subtle mind of Lenin had consciously conceived.
The profiteers are a consequence and not a cause of rising prices. By
combining a popular hatred of the class of entrepreneurs with the blow
already given to social security by the violent and arbitrary disturbance of
contract and of the established equilibrium of wealth which is the inevitable
result of inflation, these Governments are fast rendering impossible a
continuance of the social and economic order of the nineteenth century. But
they have no plan for replacing it.
We are thus faced in Europe with the spectacle of an extraordinary
weakness on the part of the great capitalist class, which has emerged from
the industrial triumphs of the nineteenth century, and seemed a very few
years ago our all-powerful master. The terror and personal timidity of the
individuals of this class is now so great, their confidence in their place in
society and in their necessity to the social organism so diminished, that they
are the easy victims of intimidation. This was not so in England twenty-five
years ago, any more than it is now in the United States. Then the capitalists
believed in themselves, in their value to society, in the propriety of their
continued existence in the full enjoyment of their riches and the unlimited
exercise of their power. Now they tremble before every insult;—call them
pro-Germans, international financiers, or profiteers, and they will give you
any ransom you choose to ask not to speak of them so harshly. They allow
themselves to be ruined and altogether undone by their own instruments,
governments of their own making, and a press of which they are the
proprietors. Perhaps it is historically true that no order of society ever
perishes save by its own hand. In the complexer world of Western Europe
the Immanent Will may achieve its ends more subtly and bring in the
revolution no less inevitably through a Klotz or a George than by the
intellectualisms, too ruthless and self-conscious for us, of the bloodthirsty
philosophers of Russia.
The inflationism of the currency systems of Europe has proceeded to
extraordinary lengths. The various belligerent Governments, unable, or too
timid or too short-sighted to secure from loans or taxes the resources they
required, have printed notes for the balance. In Russia and Austria-Hungary
this process has reached a point where for the purposes of foreign trade the

currency is practically valueless. The Polish mark can be bought for about
three cents and the Austrian crown for less than two cents, but they cannot
be sold at all. The German mark is worth less than four cents on the
exchanges. In most of the other countries of Eastern and South-Eastern
Europe the real position is nearly as bad. The currency of Italy has fallen to
little more than a half of its nominal value in spite of its being still subject
to some degree of regulation; French currency maintains an uncertain
market; and even sterling is seriously diminished in present value and
impaired in its future prospects.
But while these currencies enjoy a precarious value abroad, they have never
entirely lost, not even in Russia, their purchasing power at home. A
sentiment of trust in the legal money of the State is so deeply implanted in
the citizens of all countries that they cannot but believe that some day this
money must recover a part at least of its former value. To their minds it
appears that value is inherent in money as such, and they do not apprehend
that the real wealth, which this money might have stood for, has been
dissipated once and for all. This sentiment is supported by the various legal
regulations with which the Governments endeavor to control internal prices,
and so to preserve some purchasing power for their legal tender. Thus the
force of law preserves a measure of immediate purchasing power over some
commodities and the force of sentiment and custom maintains, especially
amongst peasants, a willingness to hoard paper which is really worthless.
The presumption of a spurious value for the currency, by the force of law
expressed in the regulation of prices, contains in itself, however, the seeds
of final economic decay, and soon dries up the sources of ultimate supply. If
a man is compelled to exchange the fruits of his labors for paper which, as
experience soon teaches him, he cannot use to purchase what he requires at
a price comparable to that which he has received for his own products, he
will keep his produce for himself, dispose of it to his friends and neighbors
as a favor, or relax his efforts in producing it. A system of compelling the
exchange of commodities at what is not their real relative value not only
relaxes production, but leads finally to the waste and inefficiency of barter.
If, however, a government refrains from regulation and allows matters to
take their course, essential commodities soon attain a level of price out of
the reach of all but the rich, the worthlessness of the money becomes
apparent, and the fraud upon the public can be concealed no longer.

The effect on foreign trade of price-regulation and profiteer-hunting as
cures for inflation is even worse. Whatever may be the case at home, the
currency must soon reach its real level abroad, with the result that prices
inside and outside the country lose their normal adjustment. The price of
imported commodities, when converted at the current rate of exchange, is
far in excess of the local price, so that many essential goods will not be
imported at all by private agency, and must be provided by the government,
which, in re-selling the goods below cost price, plunges thereby a little
further into insolvency. The bread subsidies, now almost universal
throughout Europe, are the leading example of this phenomenon.
The countries of Europe fall into two distinct groups at the present time as
regards their manifestations of what is really the same evil throughout,
according as they have been cut off from international intercourse by the
Blockade, or have had their imports paid for out of the resources of their
allies. I take Germany as typical of the first, and France and Italy of the
second.
The note circulation of Germany is about ten times[146] what it was before
the war. The value of the mark in terms of gold is about one-eighth of its
former value. As world-prices in terms of gold are more than double what
they were, it follows that mark-prices inside Germany ought to be from
sixteen to twenty times their pre-war level if they are to be in adjustment
and proper conformity with prices outside Germany.[147] But this is not the
case. In spite of a very great rise in German prices, they probably do not yet
average much more than five times their former level, so far as staple
commodities are concerned; and it is impossible that they should rise
further except with a simultaneous and not less violent adjustment of the
level of money wages. The existing maladjustment hinders in two ways
(apart from other obstacles) that revival of the import trade which is the
essential preliminary of the economic reconstruction of the country. In the
first place, imported commodities are beyond the purchasing power of the
great mass of the population,[148] and the flood of imports which might
have been expected to succeed the raising of the blockade was not in fact
commercially possible.[149] In the second place, it is a hazardous enterprise
for a merchant or a manufacturer to purchase with a foreign credit material
for which, when he has imported it or manufactured it, he will receive mark
currency of a quite uncertain and possibly unrealizable value. This latter

obstacle to the revival of trade is one which easily escapes notice and
deserves a little attention. It is impossible at the present time to say what the
mark will be worth in terms of foreign currency three or six months or a
year hence, and the exchange market can quote no reliable figure. It may be
the case, therefore, that a German merchant, careful of his future credit and
reputation, who is actually offered a short period credit in terms of sterling
or dollars, may be reluctant and doubtful whether to accept it. He will owe
sterling or dollars, but he will sell his product for marks, and his power,
when the time comes, to turn these marks into the currency in which he has
to repay his debt is entirely problematic. Business loses its genuine
character and becomes no better than a speculation in the exchanges, the
fluctuations in which entirely obliterate the normal profits of commerce.
There are therefore three separate obstacles to the revival of trade: a
maladjustment between internal prices and international prices, a lack of
individual credit abroad wherewith to buy the raw materials needed to
secure the working capital and to re-start the circle of exchange, and a
disordered currency system which renders credit operations hazardous or
impossible quite apart from the ordinary risks of commerce.
The note circulation of France is more than six times its pre-war level. The
exchange value of the franc in terms of gold is a little less than two-thirds
its former value; that is to say, the value of the franc has not fallen in
proportion to the increased volume of the currency.[150] This apparently
superior situation of France is due to the fact that until recently a very great
part of her imports have not been paid for, but have been covered by loans
from the Governments of Great Britain and the United States. This has
allowed a want of equilibrium between exports and imports to be
established, which is becoming a very serious factor, now that the outside
assistance is being gradually discontinued. The internal economy of France
and its price level in relation to the note circulation and the foreign
exchanges is at present based on an excess of imports over exports which
cannot possibly continue. Yet it is difficult to see how the position can be
readjusted except by a lowering of the standard of consumption in France,
which, even if it is only temporary, will provoke a great deal of discontent.
[151]

The situation of Italy is not very different. There the note circulation is five
or six times its pre-war level, and the exchange value of the lira in terms of
gold about half its former value. Thus the adjustment of the exchange to the
volume of the note circulation has proceeded further in Italy than in France.
On the other hand, Italy's "invisible" receipts, from emigrant remittances
and the expenditure of tourists, have been very injuriously affected; the
disruption of Austria has deprived her of an important market; and her
peculiar dependence on foreign shipping and on imported raw materials of
every kind has laid her open to special injury from the increase of world
prices. For all these reasons her position is grave, and her excess of imports
as serious a symptom as in the case of France.[152]
The existing inflation and the maladjustment of international trade are
aggravated, both in France and in Italy, by the unfortunate budgetary
position of the Governments of these countries.
In France the failure to impose taxation is notorious. Before the war the
aggregate French and British budgets, and also the average taxation per
head, were about equal; but in France no substantial effort has been made to
cover the increased expenditure. "Taxes increased in Great Britain during
the war," it has been estimated, "from 95 francs per head to 265 francs,
whereas the increase in France was only from 90 to 103 francs." The
taxation voted in France for the financial year ending June 30, 1919, was
less than half the estimated normal post-bellum expenditure. The normal
budget for the future cannot be put below $4,400,000,000 (22 milliard
francs), and may exceed this figure; but even for the fiscal year 1919-20 the
estimated receipts from taxation do not cover much more than half this
amount. The French Ministry of Finance have no plan or policy whatever
for meeting this prodigious deficit, except the expectation of receipts from
Germany on a scale which the French officials themselves know to be
baseless. In the meantime they are helped by sales of war material and
surplus American stocks and do not scruple, even in the latter half of 1919,
to meet the deficit by the yet further expansion of the note issue of the Bank
of France.[153]
The budgetary position of Italy is perhaps a little superior to that of France.
Italian finance throughout the war was more enterprising than the French,
and far greater efforts were made to impose taxation and pay for the war.

Nevertheless Signor Nitti, the Prime Minister, in a letter addressed to the
electorate on the eve of the General Election (Oct., 1919), thought it
necessary to make public the following desperate analysis of the situation:
—(1) The State expenditure amounts to about three times the revenue. (2)
All the industrial undertakings of the State, including the railways,
telegraphs, and telephones, are being run at a loss. Although the public is
buying bread at a high price, that price represents a loss to the Government
of about a milliard a year. (3) Exports now leaving the country are valued at
only one-quarter or one-fifth of the imports from abroad. (4) The National
Debt is increasing by about a milliard lire per month. (5) The military
expenditure for one month is still larger than that for the first year of the
war.
But if this is the budgetary position of France and Italy, that of the rest of
belligerent Europe is yet more desperate. In Germany the total expenditure
of the Empire, the Federal States, and the Communes in 1919-20 is
estimated at 25 milliards of marks, of which not above 10 milliards are
covered by previously existing taxation. This is without allowing anything
for the payment of the indemnity. In Russia, Poland, Hungary, or Austria
such a thing as a budget cannot be seriously considered to exist at all.[154]
Thus the menace of inflationism described above is not merely a product of
the war, of which peace begins the cure. It is a continuing phenomenon of
which the end is not yet in sight.
All these influences combine not merely to prevent Europe from supplying
immediately a sufficient stream of exports to pay for the goods she needs to
import, but they impair her credit for securing the working capital required
to re-start the circle of exchange and also, by swinging the forces of
economic law yet further from equilibrium rather than towards it, they favor
a continuance of the present conditions instead of a recovery from them. An
inefficient, unemployed, disorganized Europe faces us, torn by internal
strife and international hate, fighting, starving, pillaging, and lying. What
warrant is there for a picture of less somber colors?
I have paid little heed in this book to Russia, Hungary, or Austria.[155] There
the miseries of life and the disintegration of society are too notorious to
require analysis; and these countries are already experiencing the actuality

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

FOOTNOTES:
[145] Professor Starling's Report on Food Conditions in Germany. (Cmd. 280.)
[146] Including the Darlehenskassenscheine somewhat more.
[147] Similarly in Austria prices ought to be between twenty and thirty times
their former level.
[148] One of the moat striking and symptomatic difficulties which faced the
Allied authorities in their administration of the occupied areas of Germany
during the Armistice arose out of the fact that even when they brought food into
the country the inhabitants could not afford to pay its cost price.
[149] Theoretically an unduly low level of home prices should stimulate exports
and so cure itself. But in Germany, and still more in Poland and Austria, there is
little or nothing to export. There must be imports before there can be exports.
[150] Allowing for the diminished value of gold, the exchange value of the franc
should be less than 40 per cent of its previous value, instead of the actual figure

of about 60 per cent, if the fall were proportional to the increase in the volume of
the currency.
[151] How very far from equilibrium France's international exchange now is can
be seen from the following table:

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

1913 140,355 114,670 25,685
1914 106,705 81,145 25,560
1918 331,915 69,055 262,860
Jan.-Mar. 1919 387,140 66,670 320,470
Apr.-June 1919 421,410 83,895 337,515
July 1919 467,565 123,675 343,890
These figures have been converted, at approximately par rates, but this is
roughly compensated by the fact that the trade of 1918 and 1919 has been valued
at 1917 official rates. French imports cannot possibly continue at anything
approaching these figures, and the semblance of prosperity based on such a state
of affairs is spurious.
[152] The figures for Italy are as follows:
Excess of
Monthly Imports Exports Imports
Average $1,000 $1,000 $1,000

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

[153] In the last two returns of the Bank of France available as I write (Oct. 2
and 9, 1919) the increases in the note issue on the week amounted to
$93,750,000 and $94,125,000 respectively.
[154] On October 3, 1919, M. Bilinski made his financial statement to the Polish
Diet. He estimated his expenditure for the next nine months at rather more than
double his expenditure for the past nine months, and while during the first period
his revenue had amounted to one-fifth of his expenditure, for the coming months
he was budgeting for receipts equal to one-eighth of his outgoings. The Times
correspondent at Warsaw reported that "in general M. Bilinski's tone was
optimistic and appeared to satisfy his audience."
[155] The terms of the Peace Treaty imposed on the Austrian Republic bear no
relation to the real facts of that State's desperate situation. The Arbeiter Zeitung
of Vienna on June 4, 1919, commented on them as follows: "Never has the

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

Chapter VII

Remedies
It is difficult to maintain true perspective in large affairs. I have criticized
the work of Paris, and have depicted in somber colors the condition and the
prospects of Europe. This is one aspect of the position and, I believe, a true
one. But in so complex a phenomenon the prognostics do not all point one
way; and we may make the error of expecting consequences to follow too
swiftly and too inevitably from what perhaps are not all the relevant causes.
The blackness of the prospect itself leads us to doubt its accuracy; our
imagination is dulled rather than stimulated by too woeful a narration, and
our minds rebound from what is felt "too bad to be true." But before the
reader allows himself to be too much swayed by these natural reflections,
and before I lead him, as is the intention of this chapter, towards remedies
and ameliorations and the discovery of happier tendencies, let him redress
the balance of his thought by recalling two contrasts—England and Russia,
of which the one may encourage his optimism too much, but the other
should remind him that catastrophes can still happen, and that modern
society is not immune from the very greatest evils.
In the chapters of this book I have not generally had in mind the situation or
the problems of England. "Europe" in my narration must generally be
interpreted to exclude the British Isles. England is in a state of transition,
and her economic problems are serious. We may be on the eve of great
changes in her social and industrial structure. Some of us may welcome
such prospects and some of us deplore them. But they are of a different kind
altogether from those impending on Europe. I do not perceive in England
the slightest possibility of catastrophe or any serious likelihood of a general
upheaval of society. The war has impoverished us, but not seriously;—I
should judge that the real wealth of the country in 1919 is at least equal to
what it was in 1900. Our balance of trade is adverse, but not so much so
that the readjustment of it need disorder our economic life.[157] The deficit
in our Budget is large, but not beyond what firm and prudent statesmanship
could bridge. The shortening of the hours of labor may have somewhat
diminished our productivity. But it should not be too much to hope that this
is a feature of transition, and no one who is acquainted with the British

workingman can doubt that, if it suits him, and if he is in sympathy and
reasonable contentment with the conditions of his life, he can produce at
least as much in a shorter working day as he did in the longer hours which
prevailed formerly. The most serious problems for England have been
brought to a head by the war, but are in their origins more fundamental. The
forces of the nineteenth century have run their course and are exhausted.
The economic motives and ideals of that generation no longer satisfy us: we
must find a new way and must suffer again the malaise, and finally the
pangs, of a new industrial birth. This is one element. The other is that on
which I have enlarged in Chapter II.;—the increase in the real cost of food
and the diminishing response of nature to any further increase in the
population of the world, a tendency which must be especially injurious to
the greatest of all industrial countries and the most dependent on imported
supplies of food.
But these secular problems are such as no age is free from. They are of an
altogether different order from those which may afflict the peoples of
Central Europe. Those readers who, chiefly mindful of the British
conditions with which they are familiar, are apt to indulge their optimism,
and still more those whose immediate environment is American, must cast
their minds to Russia, Turkey, Hungary, or Austria, where the most dreadful
material evils which men can suffer—famine, cold, disease, war, murder,
and anarchy—are an actual present experience, if they are to apprehend the
character of the misfortunes against the further extension of which it must
surely be our duty to seek the remedy, if there is one.
What then is to be done? The tentative suggestions of this chapter may
appear to the reader inadequate. But the opportunity was missed at Paris
during the six months which followed the Armistice, and nothing we can do
now can repair the mischief wrought at that time. Great privation and great
risks to society have become unavoidable. All that is now open to us is to
redirect, so far as lies in our power, the fundamental economic tendencies
which underlie the events of the hour, so that they promote the re-
establishment of prosperity and order, instead of leading us deeper into
misfortune.
We must first escape from the atmosphere and the methods of Paris. Those
who controlled the Conference may bow before the gusts of popular

opinion, but they will never lead us out of our troubles. It is hardly to be
supposed that the Council of Four can retrace their steps, even if they
wished to do so. The replacement of the existing Governments of Europe is,
therefore, an almost indispensable preliminary.
I propose then to discuss a program, for those who believe that the Peace of
Versailles cannot stand, under the following heads:

1. The Revision of the Treaty.
2. The settlement of inter-Ally indebtedness.
3. An international loan and the reform of the currency.
4. The relations of Central Europe to Russia.

1. The Revision of the Treaty

Are any constitutional means open to us for altering the Treaty? President
Wilson and General Smuts, who believe that to have secured the Covenant
of the League of Nations outweighs much evil in the rest of the Treaty, have
indicated that we must look to the League for the gradual evolution of a
more tolerable life for Europe. "There are territorial settlements," General
Smuts wrote in his statement on signing the Peace Treaty, "which will need
revision. There are guarantees laid down which we all hope will soon be
found out of harmony with the new peaceful temper and unarmed state of
our former enemies. There are punishments foreshadowed over most of
which a calmer mood may yet prefer to pass the sponge of oblivion. There
are indemnities stipulated which cannot be enacted without grave injury to
the industrial revival of Europe, and which it will be in the interests of all to
render more tolerable and moderate.... I am confident that the League of
Nations will yet prove the path of escape for Europe out of the ruin brought
about by this war." Without the League, President Wilson informed the
Senate when he presented the Treaty to them early in July, 1919, "...long-
continued supervision of the task of reparation which Germany was to
undertake to complete within the next generation might entirely break
down;[158] the reconsideration and revision of administrative arrangements
and restrictions which the Treaty prescribed, but which it recognized might

not provide lasting advantage or be entirely fair if too long enforced, would
be impracticable."
Can we look forward with fair hopes to securing from the operation of the
League those benefits which two of its principal begetters thus encourage us
to expect from it? The relevant passage is to be found in Article XIX. of the
Covenant, which runs as follows:
"The Assembly may from time to time advise the
reconsideration by Members of the League of treaties which
have become inapplicable and the consideration of
international conditions whose continuance might endanger
the peace of the world."
But alas! Article V. provides that "Except where otherwise expressly
provided in this Covenant or by the terms of the present Treaty, decisions at
any meeting of the Assembly or of the Council shall require the agreement
of all the Members of the League represented at the meeting." Does not this
provision reduce the League, so far as concerns an early reconsideration of
any of the terms of the Peace Treaty, into a body merely for wasting time?
If all the parties to the Treaty are unanimously of opinion that it requires
alteration in a particular sense, it does not need a League and a Covenant to
put the business through. Even when the Assembly of the League is
unanimous it can only "advise" reconsideration by the members specially
affected.
But the League will operate, say its supporters, by its influence on the
public opinion of the world, and the view of the majority will carry decisive
weight in practice, even though constitutionally it is of no effect. Let us
pray that this be so. Yet the League in the hands of the trained European
diplomatist may become an unequaled instrument for obstruction and delay.
The revision of Treaties is entrusted primarily, not to the Council, which
meets frequently, but to the Assembly, which will meet more rarely and
must become, as any one with an experience of large Inter-Ally
Conferences must know, an unwieldy polyglot debating society in which
the greatest resolution and the best management may fail altogether to bring
issues to a head against an opposition in favor of the status quo. There are
indeed two disastrous blots on the Covenant,—Article V., which prescribes
unanimity, and the much-criticized Article X., by which "The Members of

the League undertake to respect and preserve as against external aggression
the territorial integrity and existing political independence of all Members
of the League." These two Articles together go some way to destroy the
conception of the League as an instrument of progress, and to equip it from
the outset with an almost fatal bias towards the status quo. It is these
Articles which have reconciled to the League some of its original
opponents, who now hope to make of it another Holy Alliance for the
perpetuation of the economic ruin of their enemies and the Balance of
Power in their own interests which they believe themselves to have
established by the Peace.
But while it would be wrong and foolish to conceal from ourselves in the
interests of "idealism" the real difficulties of the position in the special
matter of revising treaties, that is no reason for any of us to decry the
League, which the wisdom of the world may yet transform into a powerful
instrument of peace, and which in Articles XI.-XVII.[159] has already
accomplished a great and beneficent achievement. I agree, therefore, that
our first efforts for the Revision of the Treaty must be made through the
League rather than in any other way, in the hope that the force of general
opinion and, if necessary, the use of financial pressure and financial
inducements, may be enough to prevent a recalcitrant minority from
exercising their right of veto. We must trust the new Governments, whose
existence I premise in the principal Allied countries, to show a profounder
wisdom and a greater magnanimity than their predecessors.
We have seen in Chapters IV. and V. that there are numerous particulars in
which the Treaty is objectionable. I do not intend to enter here into details,
or to attempt a revision of the Treaty clause by clause. I limit myself to
three great changes which are necessary for the economic life of Europe,
relating to Reparation, to Coal and Iron, and to Tariffs.
Reparation.—If the sum demanded for Reparation is less than what the
Allies are entitled to on a strict interpretation of their engagements, it is
unnecessary to particularize the items it represents or to hear arguments
about its compilation. I suggest, therefore, the following settlement:—
(1) The amount of the payment to be made by Germany in respect of
Reparation and the costs of the Armies of Occupation might be fixed at

$10,000,000,000.
(2) The surrender of merchant ships and submarine cables under the Treaty,
of war material under the Armistice, of State property in ceded territory, of
claims against such territory in respect of public debt, and of Germany's
claims against her former Allies, should be reckoned as worth the lump sum
of $2,500,000,000, without any attempt being made to evaluate them item
by item.
(3) The balance of $7,500,000,000 should not carry interest pending its
repayment, and should be paid by Germany in thirty annual instalments of
$250,000,000, beginning in 1923.
(4) The Reparation Commission should be dissolved, or, if any duties
remain for it to perform, it should become an appanage of the League of
Nations and should include representatives of Germany and of the neutral
States.
(5) Germany would be left to meet the annual instalments in such manner as
she might see fit, any complaint against her for non-fulfilment of her
obligations being lodged with the League of Nations. That is to say, there
would be no further expropriation of German private property abroad,
except so far as is required to meet private German obligations out of the
proceeds of such property already liquidated or in the hands of Public
Trustees and Enemy Property Custodians in the Allied countries and in the
United States; and, in particular, Article 260 (which provides for the
expropriation of German interests in public utility enterprises) would be
abrogated.
(6) No attempt should be made to extract Reparation payments from
Austria.
Coal and Iron.—(1) The Allies' options on coal under Annex V. should be
abandoned, but Germany's obligation to make good France's loss of coal
through the destruction of her mines should remain. That is to say, Germany
should undertake "to deliver to France annually for a period not exceeding
ten years an amount of coal equal to the difference between the annual
production before the war of the coal mines of the Nord and Pas de Calais,
destroyed as a result of the war, and the production of the mines of the same

area during the years in question; such delivery not to exceed twenty
million tons in any one year of the first five years, and eight million tons in
any one year of the succeeding five years." This obligation should lapse,
nevertheless, in the event of the coal districts of Upper Silesia being taken
from Germany in the final settlement consequent on the plebiscite.
(2) The arrangement as to the Saar should hold good, except that, on the one
hand, Germany should receive no credit for the mines, and, on the other,
should receive back both the mines and the territory without payment and
unconditionally after ten years. But this should be conditional on France's
entering into an agreement for the same period to supply Germany from
Lorraine with at least 50 per cent of the iron-ore which was carried from
Lorraine into Germany proper before the war, in return for an undertaking
from Germany to supply Lorraine with an amount of coal equal to the
whole amount formerly sent to Lorraine from Germany proper, after
allowing for the output of the Saar.
(3) The arrangement as to Upper Silesia should hold good. That is to say, a
plebiscite should be held, and in coming to a final decision "regard will be
paid (by the principal Allied and Associated Powers) to the wishes of the
inhabitants as shown by the vote, and to the geographical and economic
conditions of the locality." But the Allies should declare that in their
judgment "economic conditions" require the inclusion of the coal districts in
Germany unless the wishes of the inhabitants are decidedly to the contrary.
(4) The Coal Commission already established by the Allies should become
an appanage of the League of Nations, and should be enlarged to include
representatives of Germany and the other States of Central and Eastern
Europe, of the Northern Neutrals, and of Switzerland. Its authority should
be advisory only, but should extend over the distribution of the coal
supplies of Germany, Poland, and the constituent parts of the former
Austro-Hungarian Empire, and of the exportable surplus of the United
Kingdom. All the States represented on the Commission should undertake
to furnish it with the fullest information, and to be guided by its advice so
far as their sovereignty and their vital interests permit.
Tariffs.—A Free Trade Union should be established under the auspices of
the League of Nations of countries undertaking to impose no protectionist

tariffs[160] whatever against the produce of other members of the Union,
Germany, Poland, the new States which formerly composed the Austro-
Hungarian and Turkish Empires, and the Mandated States should be
compelled to adhere to this Union for ten years, after which time adherence
would be voluntary. The adherence of other States would be voluntary from
the outset. But it is to be hoped that the United Kingdom, at any rate, would
become an original member.

By fixing the Reparation payments well within Germany's capacity to pay,
we make possible the renewal of hope and enterprise within her territory,
we avoid the perpetual friction and opportunity of improper pressure arising
out of Treaty clauses which are impossible of fulfilment, and we render
unnecessary the intolerable powers of the Reparation Commission.
By a moderation of the clauses relating directly or indirectly to coal, and by
the exchange of iron-ore, we permit the continuance of Germany's industrial
life, and put limits on the loss of productivity which would be brought
about otherwise by the interference of political frontiers with the natural
localization of the iron and steel industry.
By the proposed Free Trade Union some part of the loss of organization and
economic efficiency may be retrieved, which must otherwise result from the
innumerable new political frontiers now created between greedy, jealous,
immature, and economically incomplete nationalist States. Economic
frontiers were tolerable so long as an immense territory was included in a
few great Empires; but they will not be tolerable when the Empires of
Germany, Austria-Hungary, Russia, and Turkey have been partitioned
between some twenty independent authorities. A Free Trade Union,
comprising the whole of Central, Eastern, and South-Eastern Europe,
Siberia, Turkey, and (I should hope) the United Kingdom, Egypt, and India,
might do as much for the peace and prosperity of the world as the League of
Nations itself. Belgium, Holland, Scandinavia, and Switzerland might be
expected to adhere to it shortly. And it would be greatly to be desired by
their friends that France and Italy also should see their way to adhesion.

It would be objected, I suppose, by some critics that such an arrangement
might go some way in effect towards realizing the former German dream of
Mittel-Europa. If other countries were so foolish as to remain outside the
Union and to leave to Germany all its advantages, there might be some truth
in this. But an economic system, to which every one had the opportunity of
belonging and which gave special privilege to none, is surely absolutely
free from the objections of a privileged and avowedly imperialistic scheme
of exclusion and discrimination. Our attitude to these criticisms must be
determined by our whole moral and emotional reaction to the future of
international relations and the Peace of the World. If we take the view that
for at least a generation to come Germany cannot be trusted with even a
modicum of prosperity, that while all our recent Allies are angels of light,
all our recent enemies, Germans, Austrians, Hungarians, and the rest, are
children of the devil, that year by year Germany must be kept impoverished
and her children starved and crippled, and that she must be ringed round by
enemies; then we shall reject all the proposals of this chapter, and
particularly those which may assist Germany to regain a part of her former
material prosperity and find a means of livelihood for the industrial
population of her towns. But if this view of nations and of their relation to
one another is adopted by the democracies of Western Europe, and is
financed by the United States, heaven help us all. If we aim deliberately at
the impoverishment of Central Europe, vengeance, I dare predict, will not
limp. Nothing can then delay for very long that final civil war between the
forces of Reaction and the despairing convulsions of Revolution, before
which the horrors of the late German war will fade into nothing, and which
will destroy, whoever is victor, the civilization and the progress of our
generation. Even though the result disappoint us, must we not base our
actions on better expectations, and believe that the prosperity and happiness
of one country promotes that of others, that the solidarity of man is not a
fiction, and that nations can still afford to treat other nations as fellow-
creatures?
Such changes as I have proposed above might do something appreciable to
enable the industrial populations of Europe to continue to earn a livelihood.
But they would not be enough by themselves. In particular, France would
be a loser on paper (on paper only, for she will never secure the actual
fulfilment of her present claims), and an escape from her embarrassments

must be shown her in some other direction. I proceed, therefore, to
proposals, first, for the adjustment of the claims of America and the Allies
amongst themselves; and second, for the provision of sufficient credit to
enable Europe to re-create her stock of circulating capital.

2. The Settlement of Inter-Ally Indebtedness

In proposing a modification of the Reparation terms, I have considered
them so far only in relation to Germany. But fairness requires that so great a
reduction in the amount should be accompanied by a readjustment of its
apportionment between the Allies themselves. The professions which our
statesmen made on every platform during the war, as well as other
considerations, surely require that the areas damaged by the enemy's
invasion should receive a priority of compensation. While this was one of
the ultimate objects for which we said we were fighting, we never included
the recovery of separation allowances amongst our war aims. I suggest,
therefore, that we should by our acts prove ourselves sincere and
trustworthy, and that accordingly Great Britain should waive altogether her
claims for cash payment in favor of Belgium, Serbia, and France. The
whole of the payments made by Germany would then be subject to the prior
charge of repairing the material injury done to those countries and
provinces which suffered actual invasion by the enemy; and I believe that
the sum of $7,500,000,000 thus available would be adequate to cover
entirely the actual costs of restoration. Further, it is only by a complete
subordination of her own claims for cash compensation that Great Britain
can ask with clean hands for a revision of the Treaty and clear her honor
from the breach of faith for which she bears the main responsibility, as a
result of the policy to which the General Election of 1918 pledged her
representatives.
With the Reparation problem thus cleared up it would be possible to bring
forward with a better grace and more hope of success two other financial
proposals, each of which involves an appeal to the generosity of the United
States.

The first is for the entire cancellation of Inter-Ally indebtedness (that is to
say, indebtedness between the Governments of the Allied and Associated
countries) incurred for the purposes of the war. This proposal, which has
been put forward already in certain quarters, is one which I believe to be
absolutely essential to the future prosperity of the world. It would be an act
of far-seeing statesmanship for the United Kingdom and the United States,
the two Powers chiefly concerned, to adopt it. The sums of money which
are involved are shown approximately in the following table:—[161]

By By
By
Loans to United United Total
France
States Kingdom
Million Million Million Million
Dollars Dollars Dollars Dollars
United
Kingdom 4,210 .... .... 4,210
France 2,750 2,540 .... 5,290
Italy 1,625 2,335 175 4,135
Russia 190 2,840 [162] 800 3,830
Belgium 400 490 [163] 450 1,340
Serbia and
Jugo-
Slavia 100 100 [163] 100 300
Other Allies 175 395 250 820
Total 9,450 [164] 8,700 1,775 19,925

Thus the total volume of Inter-Ally indebtedness, assuming that loans from
one Ally are not set off against loans to another, is nearly $20,000,000,000.
The United States is a lender only. The United Kingdom has lent about
twice as much as she has borrowed. France has borrowed about three times
as much as she has lent. The other Allies have been borrowers only.
If all the above Inter-Ally indebtedness were mutually forgiven, the net
result on paper (i.e. assuming all the loans to be good) would be a surrender
by the United States of about $10,000,000,000 and by the United Kingdom
of about $4,500,000,000. France would gain about $3,500,000,000 and Italy
about $4,000,000,000. But these figures overstate the loss to the United
Kingdom and understate the gain to France; for a large part of the loans
made by both these countries has been to Russia and cannot, by any stretch
of imagination, be considered good. If the loans which the United Kingdom
has made to her Allies are reckoned to be worth 50 per cent of their full
value (an arbitrary but convenient assumption which the Chancellor of the
Exchequer has adopted on more than one occasion as being as good as any

other for the purposes of an approximate national balance sheet), the
operation would involve her neither in loss nor in gain. But in whatever
way the net result is calculated on paper, the relief in anxiety which such a
liquidation of the position would carry with it would be very great. It is
from the United States, therefore, that the proposal asks generosity.
Speaking with a very intimate knowledge of the relations throughout the
war between the British, the American, and the other Allied Treasuries, I
believe this to be an act of generosity for which Europe can fairly ask,
provided Europe is making an honorable attempt in other directions, not to
continue war, economic or otherwise, but to achieve the economic
reconstitution of the whole Continent, The financial sacrifices of the United
States have been, in proportion to her wealth, immensely less than those of
the European States. This could hardly have been otherwise. It was a
European quarrel, in which the United States Government could not have
justified itself before its citizens in expending the whole national strength,
as did the Europeans. After the United States came into the war her
financial assistance was lavish and unstinted, and without this assistance the
Allies could never have won the war,[165] quite apart from the decisive
influence of the arrival of the American troops. Europe, too, should never
forget the extraordinary assistance afforded her during the first six months
of 1919 through the agency of Mr. Hoover and the American Commission
of Relief. Never was a nobler work of disinterested goodwill carried
through with more tenacity and sincerity and skill, and with less thanks
either asked or given. The ungrateful Governments of Europe owe much
more to the statesmanship and insight of Mr. Hoover and his band of
American workers than they have yet appreciated or will ever acknowledge.
The American Relief Commission, and they only, saw the European
position during those months in its true perspective and felt towards it as
men should. It was their efforts, their energy, and the American resources
placed by the President at their disposal, often acting in the teeth of
European obstruction, which not only saved an immense amount of human
suffering, but averted a widespread breakdown of the European system.[166]
But in speaking thus as we do of American financial assistance, we tacitly
assume, and America, I believe, assumed it too when she gave the money,
that it was not in the nature of an investment. If Europe is going to repay the
$10,000,000,000 worth of financial assistance which she has had from the

United States with compound interest at 5 per cent, the matter takes on
quite a different complexion. If America's advances are to be regarded in
this light, her relative financial sacrifice has been very slight indeed.
Controversies as to relative sacrifice are very barren and very foolish also;
for there is no reason in the world why relative sacrifice should necessarily
be equal,—so many other very relevant considerations being quite different
in the two cases. The two or three facts following are put forward, therefore,
not to suggest that they provide any compelling argument for Americans,
but only to show that from his own selfish point of view an Englishman is
not seeking to avoid due sacrifice on his country's part in making the
present suggestion. (1) The sums which the British Treasury borrowed from
the American Treasury, after the latter came into the war, were
approximately offset by the sums which England lent to her other Allies
during the same period (i.e. excluding sums lent before the United States
came into the war); so that almost the whole of England's indebtedness to
the United States was incurred, not on her own account, but to enable her to
assist the rest of her Allies, who were for various reasons not in a position
to draw their assistance from the United States direct.[167] (2) The United
Kingdom has disposed of about $5,000,000,000 worth of her foreign
securities, and in addition has incurred foreign debt to the amount of about
$6,000,000,000. The United States, so far from selling, has bought back
upwards of $5,000,000,000, and has incurred practically no foreign debt.
(3) The population of the United Kingdom is about one-half that of the
United States, the income about one-third, and the accumulated wealth
between one-half and one-third. The financial capacity of the United
Kingdom may therefore be put at about two-fifths that of the United States.
This figure enables us to make the following comparison:—Excluding loans
to Allies in each case (as is right on the assumption that these loans are to
be repaid), the war expenditure of the United Kingdom has been about three
times that of the United Sates, or in proportion to capacity between seven
and eight times.
Having cleared this issue out of the way as briefly as possible, I turn to the
broader issues of the future relations between the parties to the late war, by
which the present proposal must primarily be judged.

Failing such a settlement as is now proposed, the war will have ended with
a network of heavy tribute payable from one Ally to another. The total
amount of this tribute is even likely to exceed the amount obtainable from
the enemy; and the war will have ended with the intolerable result of the
Allies paying indemnities to one another instead of receiving them from the
enemy.
For this reason the question of Inter-Allied indebtedness is closely bound up
with the intense popular feeling amongst the European Allies on the
question of indemnities,—a feeling which is based, not on any reasonable
calculation of what Germany can, in fact, pay, but on a well-founded
appreciation of the unbearable financial situation in which these countries
will find themselves unless she pays. Take Italy as an extreme example. If
Italy can reasonably be expected to pay $4,000,000,000, surely Germany
can and ought to pay an immeasurably higher figure. Or if it is decided (as
it must be) that Austria can pay next to nothing, is it not an intolerable
conclusion that Italy should be loaded with a crushing tribute, while Austria
escapes? Or, to put it slightly differently, how can Italy be expected to
submit to payment of this great sum and see Czecho-Slovakia pay little or
nothing? At the other end of the scale there is the United Kingdom. Here the
financial position is different, since to ask us to pay $4,000,000,000 is a
very different proposition from asking Italy to pay it. But the sentiment is
much the same. If we have to be satisfied without full compensation from
Germany, how bitter will be the protests against paying it to the United
States. We, it will be said, have to be content with a claim against the
bankrupt estates of Germany, France, Italy, and Russia, whereas the United
States has secured a first mortgage upon us. The case of France is at least as
overwhelming. She can barely secure from Germany the full measure of the
destruction of her countryside. Yet victorious France must pay her friends
and Allies more than four times the indemnity which in the defeat of 1870
she paid Germany. The hand of Bismarck was light compared with that of
an Ally or of an Associate. A settlement of Inter-Ally indebtedness is,
therefore, an indispensable preliminary to the peoples of the Allied
countries facing, with other than a maddened and exasperated heart, the
inevitable truth about the prospects of an indemnity from the enemy.
It might be an exaggeration to say that it is impossible for the European
Allies to pay the capital and interest due from them on these debts, but to

make them do so would certainly be to impose a crushing burden. They
may be expected, therefore, to make constant attempts to evade or escape
payment, and these attempts will be a constant source of international
friction and ill-will for many years to come. A debtor nation does not love
its creditor, and it is fruitless to expect feelings of goodwill from France,
Italy, and Russia towards this country or towards America, if their future
development is stifled for many years to come by the annual tribute which
they must pay us. There will be a great incentive to them to seek their
friends in other directions, and any future rupture of peaceable relations will
always carry with it the enormous advantage of escaping the payment of
external debts, if, on the other hand, these great debts are forgiven, a
stimulus will be given to the solidarity and true friendliness of the nations
lately associated.
The existence of the great war debts is a menace to financial stability
everywhere. There is no European country in which repudiation may not
soon become an important political issue. In the case of internal debt,
however, there are interested parties on both sides, and the question is one
of the internal distribution of wealth. With external debts this is not so, and
the creditor nations may soon find their interest inconveniently bound up
with the maintenance of a particular type of government or economic
organization in the debtor countries. Entangling alliances or entangling
leagues are nothing to the entanglements of cash owing.
The final consideration influencing the reader's attitude to this proposal
must, however, depend on his view as to the future place in the world's
progress of the vast paper entanglements which are our legacy from war
finance both at home and abroad. The war has ended with every one owing
every one else immense sums of money. Germany owes a large sum to the
Allies, the Allies owe a large sum to Great Britain, and Great Britain owes a
large sum to the United States. The holders of war loan in every country are
owed a large sum by the State, and the State in its turn is owed a large sum
by these and other taxpayers. The whole position is in the highest degree
artificial, misleading, and vexatious. We shall never be able to move again,
unless we can free our limbs from these paper shackles. A general bonfire is
so great a necessity that unless we can make of it an orderly and good-
tempered affair in which no serious injustice is done to any one, it will,
when it comes at last, grow into a conflagration that may destroy much else

as well. As regards internal debt, I am one of those who believe that a
capital levy for the extinction of debt is an absolute prerequisite of sound
finance in everyone of the European belligerent countries. But the
continuance on a huge scale of indebtedness between Governments has
special dangers of its own.
Before the middle of the nineteenth century no nation owed payments to a
foreign nation on any considerable scale, except such tributes as were
exacted under the compulsion of actual occupation in force and, at one
time, by absentee princes under the sanctions of feudalism. It is true that the
need for European capitalism to find an outlet in the New World has led
during the past fifty years, though even now on a relatively modest scale, to
such countries as Argentine owing an annual sum to such countries as
England. But the system is fragile; and it has only survived because its
burden on the paying countries has not so far been oppressive, because this
burden is represented by real assets and is bound up with the property
system generally, and because the sums already lent are not unduly large in
relation to those which it is still hoped to borrow. Bankers are used to this
system, and believe it to be a necessary part of the permanent order of
society. They are disposed to believe, therefore, by analogy with it, that a
comparable system between Governments, on a far vaster and definitely
oppressive scale, represented by no real assets, and less closely associated
with the property system, is natural and reasonable and in conformity with
human nature.
I doubt this view of the world. Even capitalism at home, which engages
many local sympathies, which plays a real part in the daily process of
production, and upon the security of which the present organization of
society largely depends, is not very safe. But however this may be, will the
discontented peoples of Europe be willing for a generation to come so to
order their lives that an appreciable part of their daily produce may be
available to meet a foreign payment, the reason of which, whether as
between Europe and America, or as between Germany and the rest of
Europe, does not spring compellingly from their sense of justice or duty?
On the one hand, Europe must depend in the long run on her own daily
labor and not on the largesse of America; but, on the other hand, she will
not pinch herself in order that the fruit of her daily labor may go elsewhere.

In short, I do not believe that any of these tributes will continue to be paid,
at the best, for more than a very few years. They do not square with human
nature or agree with the spirit of the age.
If there is any force in this mode of thought, expediency and generosity
agree together, and the policy which will best promote immediate friendship
between nations will not conflict with the permanent interests of the
benefactor.[168]

3. An International Loan

I pass to a second financial proposal. The requirements of Europe are
immediate. The prospect of being relieved of oppressive interest payments
to England and America over the whole life of the next two generations
(and of receiving from Germany some assistance year by year to the costs
of restoration) would free the future from excessive anxiety. But it would
not meet the ills of the immediate present,—the excess of Europe's imports
over her exports, the adverse exchange, and the disorder of the currency. It
will be very difficult for European production to get started again without a
temporary measure of external assistance. I am therefore a supporter of an
international loan in some shape or form, such as has been advocated in
many quarters in France, Germany, and England, and also in the United
States. In whatever way the ultimate responsibility for repayment is
distributed, the burden of finding the immediate resources must inevitably
fall in major part upon the United States.
The chief objections to all the varieties of this species of project are, I
suppose, the following. The United States is disinclined to entangle herself
further (after recent experiences) in the affairs of Europe, and, anyhow, has
for the time being no more capital to spare for export on a large scale. There
is no guarantee that Europe will put financial assistance to proper use, or
that she will not squander it and be in just as bad case two or three years
hence as she is in now;—M. Klotz will use the money to put off the day of
taxation a little longer, Italy and Jugo-Slavia will fight one another on the
proceeds, Poland will devote it to fulfilling towards all her neighbors the
military rôle which France has designed for her, the governing classes of

Roumania will divide up the booty amongst themselves. In short, America
would have postponed her own capital developments and raised her own
cost of living in order that Europe might continue for another year or two
the practices, the policy, and the men of the past nine months. And as for
assistance to Germany, is it reasonable or at all tolerable that the European
Allies, having stripped Germany of her last vestige of working capital, in
opposition to the arguments and appeals of the American financial
representatives at Paris, should then turn to the United States for funds to
rehabilitate the victim in sufficient measure to allow the spoliation to
recommence in a year or two?
There is no answer to these objections as matters are now. If I had influence
at the United States Treasury, I would not lend a penny to a single one of
the present Governments of Europe. They are not to be trusted with
resources which they would devote to the furtherance of policies in
repugnance to which, in spite of the President's failure to assert either the
might or the ideals of the people of the United States, the Republican and
the Democratic parties are probably united. But if, as we must pray they
will, the souls of the European peoples turn away this winter from the false
idols which have survived the war that created them, and substitute in their
hearts for the hatred and the nationalism, which now possess them, thoughts
and hopes of the happiness and solidarity of the European family,—then
should natural piety and filial love impel the American people to put on one
side all the smaller objections of private advantage and to complete the
work, that they began in saving Europe from the tyranny of organized force,
by saving her from herself. And even if the conversion is not fully
accomplished, and some parties only in each of the European countries
have espoused a policy of reconciliation, America can still point the way
and hold up the hands of the party of peace by having a plan and a
condition on which she will give her aid to the work of renewing life.
The impulse which, we are told, is now strong in the mind of the United
States to be quit of the turmoil, the complication, the violence, the expense,
and, above all, the unintelligibility of the European problems, is easily
understood. No one can feel more intensely than the writer how natural it is
to retort to the folly and impracticability of the European statesmen,—Rot,
then, in your own malice, and we will go our way—

Remote from Europe; from her blasted hopes;
Her fields of carnage, and polluted air.

But if America recalls for a moment what Europe has meant to her and still
means to her, what Europe, the mother of art and of knowledge, in spite of
everything, still is and still will be, will she not reject these counsels of
indifference and isolation, and interest herself in what may prove decisive
issues for the progress and civilization of all mankind?
Assuming then, if only to keep our hopes up, that America will be prepared
to contribute to the process of building up the good forces of Europe, and
will not, having completed the destruction of an enemy, leave us to our
misfortunes,—what form should her aid take?
I do not propose to enter on details. But the main outlines of all schemes for
an international loan are much the same, The countries in a position to lend
assistance, the neutrals, the United Kingdom, and, for the greater portion of
the sum required, the United States, must provide foreign purchasing credits
for all the belligerent countries of continental Europe, allied and ex-enemy
alike. The aggregate sum required might not be so large as is sometimes
supposed. Much might be done, perhaps, with a fund of $1,000,000,000 in
the first instance. This sum, even if a precedent of a different kind had been
established by the cancellation of Inter-Ally War Debt, should be lent and
should be borrowed with the unequivocal intention of its being repaid in
full. With this object in view, the security for the loan should be the best
obtainable, and the arrangements for its ultimate repayment as complete as
possible. In particular, it should rank, both for payment of interest and
discharge of capital, in front of all Reparation claims, all Inter-Ally War
Debt, all internal war loans, and all other Government indebtedness of any
other kind. Those borrowing countries who will be entitled to Reparation
payments should be required to pledge all such receipts to repayment of the
new loan. And all the borrowing countries should be required to place their
customs duties on a gold basis and to pledge such receipts to its service.
Expenditure out of the loan should be subject to general, but not detailed,
supervision by the lending countries.

If, in addition to this loan for the purchase of food and materials, a
guarantee fund were established up to an equal amount, namely
$1,000,000,000 (of which it would probably prove necessary to find only a
part in cash), to which all members of the League of Nations would
contribute according to their means, it might be practicable to base upon it a
general reorganization of the currency.
In this manner Europe might be equipped with the minimum amount of
liquid resources necessary to revive her hopes, to renew her economic
organization, and to enable her great intrinsic wealth to function for the
benefit of her workers. It is useless at the present time to elaborate such
schemes in further detail. A great change is necessary in public opinion
before the proposals of this chapter can enter the region of practical politics,
and we must await the progress of events as patiently as we can.

4. The Relations of Central Europe to Russia

I have said very little of Russia in this book. The broad character of the
situation there needs no emphasis, and of the details we know almost
nothing authentic. But in a discussion as to how the economic situation of
Europe can be restored there are one or two aspects of the Russian question
which are vitally important.
From the military point of view an ultimate union of forces between Russia
and Germany is greatly feared in some quarters. This would be much more
likely to take place in the event of reactionary movements being successful
in each of the two countries, whereas an effective unity of purpose between
Lenin and the present essentially middle-class Government of Germany is
unthinkable. On the other hand, the same people who fear such a union are
even more afraid of the success of Bolshevism; and yet they have to
recognize that the only efficient forces for fighting it are, inside Russia, the
reactionaries, and, outside Russia, the established forces of order and
authority in Germany. Thus the advocates of intervention in Russia, whether
direct or indirect, are at perpetual cross-purposes with themselves. They do
not know what they want; or, rather, they want what they cannot help seeing

to be incompatibles. This is one of the reasons why their policy is so
inconstant and so exceedingly futile.
The same conflict of purpose is apparent in the attitude of the Council of
the Allies at Paris towards the present Government of Germany. A victory
of Spartacism in Germany might well be the prelude to Revolution
everywhere: it would renew the forces of Bolshevism in Russia, and
precipitate the dreaded union of Germany and Russia; it would certainly put
an end to any expectations which have been built on the financial and
economic clauses of the Treaty of Peace. Therefore Paris does not love
Spartacus. But, on the other hand, a victory of reaction in Germany would
be regarded by every one as a threat to the security of Europe, and as
endangering the fruits of victory and the basis of the Peace. Besides, a new
military power establishing itself in the East, with its spiritual home in
Brandenburg, drawing to itself all the military talent and all the military
adventurers, all those who regret emperors and hate democracy, in the
whole of Eastern and Central and South-Eastern Europe, a power which
would be geographically inaccessible to the military forces of the Allies,
might well found, at least in the anticipations of the timid, a new
Napoleonic domination, rising, as a phoenix, from the ashes of
cosmopolitan militarism. So Paris dare not love Brandenburg. The argument
points, then, to the sustentation of those moderate forces of order, which,
somewhat to the world's surprise, still manage to maintain themselves on
the rock of the German character. But the present Government of Germany
stands for German unity more perhaps than for anything else; the signature
of the Peace was, above all, the price which some Germans thought it worth
while to pay for the unity which was all that was left them of 1870.
Therefore Paris, with some hopes of disintegration across the Rhine not yet
extinguished, can resist no opportunity of insult or indignity, no occasion of
lowering the prestige or weakening the influence of a Government, with the
continued stability of which all the conservative interests of Europe are
nevertheless bound up.
The same dilemma affects the future of Poland in the rôle which France has
cast for her. She is to be strong, Catholic, militarist, and faithful, the
consort, or at least the favorite, of victorious France, prosperous and
magnificent between the ashes of Russia and the ruin of Germany.
Roumania, if only she could be persuaded to keep up appearances a little

more, is a part of the same scatter-brained conception. Yet, unless her great
neighbors are prosperous and orderly, Poland is an economic impossibility
with no industry but Jew-baiting. And when Poland finds that the seductive
policy of France is pure rhodomontade and that there is no money in it
whatever, nor glory either, she will fall, as promptly as possible, into the
arms of somebody else.
The calculations of "diplomacy" lead us, therefore, nowhere. Crazy dreams
and childish intrigue in Russia and Poland and thereabouts are the favorite
indulgence at present of those Englishmen and Frenchmen who seek
excitement in its least innocent form, and believe, or at least behave as if
foreign policy was of the same genre as a cheap melodrama.
Let us turn, therefore, to something more solid. The German Government
has announced (October 30, 1919) its continued adhesion to a policy of
non-intervention in the internal affairs of Russia, "not only on principle, but
because it believes that this policy is also justified from a practical point of
view." Let us assume that at last we also adopt the same standpoint, if not
on principle, at least from a practical point of view. What are then the
fundamental economic factors in the future relations of Central to Eastern
Europe?
Before the war Western and Central Europe drew from Russia a substantial
part of their imported cereals. Without Russia the importing countries
would have had to go short. Since 1914 the loss of the Russian supplies has
been made good, partly by drawing on reserves, partly from the bumper
harvests of North America called forth by Mr. Hoover's guaranteed price,
but largely by economies of consumption and by privation. After 1920 the
need of Russian supplies will be even greater than it was before the war; for
the guaranteed price in North America will have been discontinued, the
normal increase of population there will, as compared with 1914, have
swollen the home demand appreciably, and the soil of Europe will not yet
have recovered its former productivity. If trade is not resumed with Russia,
wheat in 1920-21 (unless the seasons are specially bountiful) must be scarce
and very dear. The blockade of Russia, lately proclaimed by the Allies, is
therefore a foolish and short-sighted proceeding; we are blockading not so
much Russia as ourselves.

The process of reviving the Russian export trade is bound in any case to be
a slow one. The present productivity of the Russian peasant is not believed
to be sufficient to yield an exportable surplus on the pre-war scale. The
reasons for this are obviously many, but amongst them are included the
insufficiency of agricultural implements and accessories and the absence of
incentive to production caused by the lack of commodities in the towns
which the peasants can purchase in exchange for their produce. Finally,
there is the decay of the transport system, which hinders or renders
impossible the collection of local surpluses in the big centers of
distribution.
I see no possible means of repairing this loss of productivity within any
reasonable period of time except through the agency of German enterprise
and organization. It is impossible geographically and for many other
reasons for Englishmen, Frenchmen, or Americans to undertake it;—we
have neither the incentive nor the means for doing the work on a sufficient
scale. Germany, on the other hand, has the experience, the incentive, and to
a large extent the materials for furnishing the Russian peasant with the
goods of which he has been starved for the past five years, for reorganizing
the business of transport and collection, and so for bringing into the world's
pool, for the common advantage, the supplies from which we are now so
disastrously cut off. It is in our interest to hasten the day when German
agents and organizers will be in a position to set in train in every Russian
village the impulses of ordinary economic motive. This is a process quite
independent of the governing authority in Russia; but we may surely predict
with some certainty that, whether or not the form of communism
represented by Soviet government proves permanently suited to the Russian
temperament, the revival of trade, of the comforts of life and of ordinary
economic motive are not likely to promote the extreme forms of those
doctrines of violence and tyranny which are the children of war and of
despair.
Let us then in our Russian policy not only applaud and imitate the policy of
non-intervention which the Government of Germany has announced, but,
desisting from a blockade which is injurious to our own permanent
interests, as well as illegal, let us encourage and assist Germany to take up
again her place in Europe as a creator and organizer of wealth for her
Eastern and Southern neighbors.

There are many persons in whom such proposals will raise strong
prejudices. I ask them to follow out in thought the result of yielding to these
prejudices. If we oppose in detail every means by which Germany or Russia
can recover their material well-being, because we feel a national, racial, or
political hatred for their populations or their Governments, we must be
prepared to face the consequences of such feelings. Even if there is no
moral solidarity between the nearly-related races of Europe, there is an
economic solidarity which we cannot disregard. Even now, the world
markets are one. If we do not allow Germany to exchange products with
Russia and so feed herself, she must inevitably compete with us for the
produce of the New World. The more successful we are in snapping
economic relations between Germany and Russia, the more we shall
depress the level of our own economic standards and increase the gravity of
our own domestic problems. This is to put the issue on its lowest grounds.
There are other arguments, which the most obtuse cannot ignore, against a
policy of spreading and encouraging further the economic ruin of great
countries.

I see few signs of sudden or dramatic developments anywhere. Riots and
revolutions there may be, but not such, at present, as to have fundamental
significance. Against political tyranny and injustice Revolution is a weapon.
But what counsels of hope can Revolution offer to sufferers from economic
privation, which does not arise out of the injustices of distribution but is
general? The only safeguard against Revolution in Central Europe is indeed
the fact that, even to the minds of men who are desperate, Revolution offers
no prospect of improvement whatever. There may, therefore, be ahead of us
a long, silent process of semi-starvation, and of a gradual, steady lowering
of the standards of life and comfort. The bankruptcy and decay of Europe, if
we allow it to proceed, will affect every one in the long-run, but perhaps not
in a way that is striking or immediate.
This has one fortunate side. We may still have time to reconsider our
courses and to view the world with new eyes. For the immediate future
events are taking charge, and the near destiny of Europe is no longer in the
hands of any man. The events of the coming year will not be shaped by the

deliberate acts of statesmen, but by the hidden currents, flowing continually
beneath the surface of political history, of which no one can predict the
outcome. In one way only can we influence these hidden currents,—by
setting in motion those forces of instruction and imagination which change
opinion. The assertion of truth, the unveiling of illusion, the dissipation of
hate, the enlargement and instruction of men's hearts and minds, must be
the means.
In this autumn of 1919, in which I write, we are at the dead season of our
fortunes. The reaction from the exertions, the fears, and the sufferings of the
past five years is at its height. Our power of feeling or caring beyond the
immediate questions of our own material well-being is temporarily
eclipsed. The greatest events outside our own direct experience and the
most dreadful anticipations cannot move us.

In each human heart terror survives
The ruin it has gorged: the loftiest fear
All that they would disdain to think were true:
Hypocrisy and custom make their minds
The fanes of many a worship, now outworn.
They dare not devise good for man's estate,
And yet they know not that they do not dare.
The good want power but to weep barren tears.
The powerful goodness want: worse need for them.
The wise want love; and those who love want wisdom;
And all best things are thus confused to ill.
Many are strong and rich, and would be just,
But live among their suffering fellow-men
As if none felt: they know not what they do.

We have been moved already beyond endurance, and need rest. Never in the
lifetime of men now living has the universal element in the soul of man
burnt so dimly.
For these reasons the true voice of the new generation has not yet spoken,
and silent opinion is not yet formed. To the formation of the general opinion
of the future I dedicate this book.

The End

FOOTNOTES:
[157] The figures for the United Kingdom are as follows:
Net Excess of
Monthly Imports Exports Imports
Average $1,000 $1,000 $1,000

1913 274,650 218,850 55,800
1914 250,485 179,465 71,020
Jan.-Mar. 1919 547,890 245,610 302,280
April-June 1919 557,015 312,315 244,700
July-Sept. 1919 679,635 344,315 335,320
But this excess is by no means so serious as it looks; for with the present high
freight earnings of the mercantile marine the various "invisible" exports of the
United Kingdom are probably even higher than they were before the war, and
may average at least $225,000,000 monthly.
[158] President Wilson was mistaken in suggesting that the supervision of
Reparation payments has been entrusted to the League of Nations. As I pointed
out in Chapter V., whereas the League is invoked in regard to most of the
continuing economic and territorial provisions of the Treaty, this is not the case
as regards Reparation, over the problems and modifications of which the
Reparation Commission is supreme without appeal of any kind to the League of
Nations.
[159] These Articles, which provide safeguards against the outbreak of war
between members of the League and also between members and non-members,
are the solid achievement of the Covenant. These Articles make substantially
less probable a war between organized Great Powers such as that of 1914. This
alone should commend the League to all men.
[160] It would be expedient so to define a "protectionist tariff" as to permit (a)
the total prohibition of certain imports; (b) the imposition of sumptuary or
revenue customs duties on commodities not produced at home; (c) the
imposition of customs duties which did not exceed by more than five per cent a
countervailing excise on similar commodities produced at home; (d) export
duties. Further, special exceptions might be permitted by a majority vote of the
countries entering the Union. Duties which had existed for five years prior to a
country's entering the Union might be allowed to disappear gradually by equal
instalments spread over the five years subsequent to joining the Union.
[161] The figures in this table are partly estimated, and are probably not
completely accurate in detail; but they show the approximate figures with
sufficient accuracy for the purposes of the present argument. The British figures

are taken from the White Paper of October 23, 1919 (Cmd. 377). In any actual
settlement, adjustments would be required in connection with certain loans of
gold and also in other respects, and I am concerned in what follows with the
broad principle only. The total excludes loans raised by the United Kingdom on
the market in the United States, and loans raised by France on the market in the
United Kingdom or the United States, or from the Bank of England.
[162] This allows nothing for interest on the debt since the Bolshevik
Revolution.
[163] No interest has been charged on the advances made to these countries.
[164] The actual total of loans by the United States up to date is very nearly
$10,000,000,000, but I have not got the latest details.
[165] The financial history of the six months from the end of the summer of
1916 up to the entry of the United States into the war in April, 1917, remains to
be written. Very few persons, outside the half-dozen officials of the British
Treasury who lived in daily contact with the immense anxieties and impossible
financial requirements of those days, can fully realize what steadfastness and
courage were needed, and how entirely hopeless the task would soon have
become without the assistance of the United States Treasury. The financial
problems from April, 1917, onwards were of an entirely different order from
those of the preceding months.
[166] Mr. Hoover was the only man who emerged from the ordeal of Paris with
an enhanced reputation. This complex personality, with his habitual air of weary
Titan (or, as others might put it, of exhausted prize-fighter), his eyes steadily
fixed on the true and essential facts of the European situation, imported into the
Councils of Paris, when he took part in them, precisely that atmosphere of
reality, knowledge, magnanimity, and disinterestedness which, if they had been
found in other quarters also, would have given us the Good Peace.
[167] Even after the United States came into the war the bulk of Russian
expenditure in the United States, as well as the whole of that Government's other
foreign expenditure, had to be paid for by the British Treasury.
[168] It is reported that the United States Treasury has agreed to fund (i.e. to add
to the principal sum) the interest owing them on their loans to the Allied
Governments during the next three years. I presume that the British Treasury is
likely to follow suit. If the debts are to be paid ultimately, this piling up of the
obligations at compound interest makes the position progressively worse. But
the arrangement wisely offered by the United States Treasury provides a due
interval for the calm consideration of the whole problem in the light of the after-
war position as it will soon disclose itself.

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