The end of Reparations [1 ed.]

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THE

END

OF

REPARATIONS

JONATIEAN CAPE-AND HARRISON SMITH, INCORPORATED, {39 EAST a6 STREET, NEW YORK, N. ¥.;9) WELLINGTON STREET, WEST, TORONTO, CANADA;4 VICTORIA STREET, WELLINGTON, NEW ZEALAND; JONATHAN CAPE. LTD, M BEDFORD SQUARE, LONDON, W. C. 1, ENGLAND —

OF

THE END REPARATIONS HJALMAR SCHACHT Translated by

LEWIS

GANNETT

New JONATHAN

CAPE

York &

HARRISON

SMITH

COPYRIGHT,

19%,

BY

JONATHAN CAPE AND

HARRISON SMITH, INC.

FIRST PUBLISHED, 1931

PRINTED IN THE PNITED STATES OF AMERICA

UY THE VAL.BABLOU PRESS AND HOUND RY THE J. P. TAPLEY COMPANY

CONTENTS I Il Hit TV

Tre Quesrion or Responsisinrey Brermne Germany Wurre Waar Is “Transrer’’? Frost tHe Dawes Pran to tHE Younc PLAN

V

i 14 28 48

Tre Exrerrs’ Conrerincr oF 1929

54

‘Tre German

Proposan

63

VIL Vil IX X XI XIL fxu I XIV XV

Losr Orrortunrmes Financtan Purcatory THe Hasve Protocot. Tre Sancrions Chause Currency Poticy Craners 1s Wortp Commence Tre Soctausr “System” “Pre Conrranicrions of Reparations Tre Execution or tit YounG Pian

72 &3 95 119 131 1758 177 1gt 203

y XVI , XVIL

Pan-Evropr? Tie Covontat Question

21g 2gt

System or Caos?

240

VI

XVIW

FONDREN

LIGRARY

»Jf-

Tue oF

Question

RESPONSIBILITY

WHAT is called the peace treaty of Versailles is no treaty, and it has not brought peace. The essence of a treaty is that two parties, after stating their cases, reach a common

agreement. The Treaty of Versailles was written by one party alone. It was presented to the Germans, and they were compelled, under threat of force, to sign it, It was an act of dictatorship, and does not deserve the title of treaty. Nor has the

Versailles treaty achieved peace. Peoples cannot live together in peace unless international agreements are honoured, and the Treaty of Versailles was erected upon a crass breach of an internationl promise. On January 8, 1918, the President of the United States, in a message to Gongress, laid down the

program

upon

which,

in his judgment,

peace

should be made. This message included the wellknown Fourteen Points. They had political as well 1

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as economic significance, and the two cannot be separated. Points 6 to 1g in general expressed the

neutral European view; these concerned the evacuation of occupied territories and the autonomous

development of the peoples of Southeastern Europe. New ideas for the future were included in Points 1, 2,.and 14, which treated the abandonment

of secret diplomacy, the freedom of the seas, and the creation of a league of nations, Of especial importance in making peace with Germany were Points 3, 4, and 5, which dealt with economic and commercial freedom, disarmament, and impartial adjustment of colonial claims. In the succeeding months this general program was further devel-

oped by President Wilson, in his speeches and writings, as an expression of a peace which should recognize neither victors nor vanquished, and no annexations or indemnities, but should look rather toward the juridical equality of all peopies. Accepting this statement of principles, the German

Government,

on October

5, 1918, asked the

American President to take steps to restore peace, Precisely one month later, en November 4, 1918,

the Government of the United States, in the socalled Lansing Note, informed the German Goyernment that the Allied Powers accepted the program of the American President, with the exception of the clause dealing with the freedom of the seas, adding that Germany should compensate “for all

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damage done to the civilian population of the Allies and their property by the aggression of Germany.”

These

conditions

were

accepted

by Ger-

many. Thus was the judicial basis for the conclusion of peace formally established. There can be no doubt that President Wilson's Fourteen Points expressed a high ethical outlook. But what has grown out of these Fourteen Points! Secret diplomacy flourishes more than ever; France in particular has negotiated secret military agreements. The freedom of the seas does not exist; on the contrary, the sea powers are arming against one

another more vigorously than ever. Not a trace of economic and commercial freedom can be discovered; instead of free commerce we discover constant increases in the tariffs, bans on imports, recip-

rocal prohibitions, limitations upon freedom of domicile, restrictions on immigration, Instead of disarmament or even a lessening of armament the whole world, with the exception of the defeated Powers, is constantly increasing its armament. The colonial claims of the various colonial Powers have had no impartial adjudication; Germany’s colonies were simply taken from her, without consideration of her economic needs or the requirements of her population. The peoples of what was Austria-Hungary were not permitted autonomous development; instead, many millions of national minorities were forced into states alien to them, with which they

:

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did not want to be associated. In establishing the new Polish state, instead of merely assuring a free and secure access to the sea, a large section of German soil was handed over to Poland, cutting the German state into two pieces. That is the present aspect of the Fourteen Points, which the Allied Powers formally accepted, in a binding promise, as the basis for the peace with Germany. As little attention has been paid to the pledges of the Lansing Note with regard to reparations. The Versailles treaty requires of Germany not only compensation for damage done to the civilian population of the Allies and their property; it also imposes upon Germany an enormous indemnity, shamefully concealed under the word “reparations.” The question of this tribute was one of the first to arouse vigorous controversy among the representatives of the Allied and Associated Powers at the Paris peace conference. The economists in particular called attention to the fateful consequences of such a policy, which for twelve years has been exercising a most destructive influence upon the economic condition of the entire world. After the German people, confiding in the solemn promise of November 5, 1918, had disarmed, the Versailles treaty was, in violation of that pledge, imposed upon them. Under the pressure of the most bitter necessity the German Government

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found itself compelled, on June 28, 1919, to accept the treaty. At the time it expressed its protest against this treaty clearly and unequivocally, “Yielding to overwhelming force and without renouncing their view of the unprecedented injustice of the terms of peace.” This protest may have little formal significance, for the victors have the power. But never yet in history has a peace endured which did not have morality as its basis. And never yet in modern

history has a peace treaty so flown

in the face of the basic principles of morality as the Treaty of Versailles. Germany today may stand helpless before this treaty; its protest against it will keep the world breathless until justice and morality once again determine the course of human evolution. The immorality of the Versailles treaty was recognized from the very beginning, not only in Germany but abroad, One might produce as witnesses various members of the Allied camp who were shocked by it; but the most important fact is that the American people as a whole had an instinctive understanding of the fact and therefore refused to sign the Versailles treaty and concluded their own peace pact with Germany. The American people thereby let it be known that they wanted a just peace, not a violent peace. The expression of this sentiment by the American people is one of the few rays of light amid the gloom

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of these past years. It has peculiar importance because it was American intervention which tipped the scales of war so heavily against Germany and made it possible for the Allies to impose their violent peace upon Germany. If America had remained neutral the European War would certainly have ended in general exhaustion, which presumably would

have led to a tolerable understanding,

imposing no extraordinary injustice upon anyone. Only America was strong enough to bring complete victory to the Allies. America was strong enough to win the war, but not strong enough to mould the peace according to its own ideas. It took the first step, but not the second. Therein lies the essential justification for the fact that those who today long for a just and moral peace look so ardently to the American people. In public as in private life, when once you have stepped in and taken decisive action, you cannot suddenly withdraw. You cannot intervene, arms in hand, and decide the fate of Europe, and then, a few years later, declare that you will haye nothing to do with Europe's destiny. Responsibility means more than to make a beginning; it means carrying through to the end, The Allied statesmen themselves instinctively felt the immorality of their course. That is why they inserted the famous Article 231 into the treaty, imposing upon Germany the sole responsibility for

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the outbreak of the war. This unilateral accusation, which is no truer because seventeen states directed it against one state, was made the cornerstone of the entire treaty. If this one paragraph were to be disavowed, a large part of the treaty, including all the financial provisions, the reparations in particular, would fall. Since this Article 231 was imposed upon Germany, the most important historians in all civilized countries who have studied this question of war origins have denied its truth. A considerable litera-

ture has arisen, in the United States, in England, in Italy, and even in France, again and again demonstrating the untruth of Article 231. Here I shall confine myself to a single witness, the American professor Sidney B. Fay, who in his two-volume

work, The Origins of the World War, set down as the result of his investigations: “One must abandon the dictum of the Versailles Treaty that Germany and her allies were solely responsible. . . . It was based on evidence which was incomplete and not always sound. It is generally recognized by the best historical scholars in all countries to be no longer tenable or defensible. . . . Historically unsound, it should therefore be revised.” Is it not horrible to realize that such a verdict,

which would be supported by the leading historians of the world, can die away without effect upon the world, while injustice marches on? Is it not

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horrible to observe that men who took an active part in writing the Treaty of Versailles and even signed it, today admit the madness of its terms, yet

do not move the world one single inch toward revision? I am thinking of men like ex-Premier Nitti of Italy, Lloyd George, the former Prime Minister of England, and others. Has not one a right to expect as the very least that an impartial commission should make an official study of this question of responsibility for the war? But the politics of force pay no heed to such scruples. And

not only is the Treaty of Versailles

riddled with injustices; the Allies themselves violate its provisions with impunity. Germany, despite all the wrong done her, has struggled to the best

of her ability to carry out the Versailles treaty. But the Allies have not only repeatedly violated its terms; even today they refuse to execute them. The Ruhr invasion of course ranks first among the Allied violations of the treaty. It is well known that even the English privy councillors described the Ruhr invasion as a violation of the treaty. France has not yet made reparation or indemnity for that crime. The violation of the treaty in the matter of disarmament has even larger consequences. The treaty calls for the disarmament of Germany “in order to render possible the initiation of a general limi-

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tation of the armaments of all nations.” In their reply to the German observations on the draft treaty of peace the Allied and Associated Powers stated that the disarmament of Germany marked “the first steps towards that general reduction and limitation of armaments which they seek to bring

about as one of the most fruitful preventives of war, and which it will be one of the first duties of the League of Nations to promote.” They added that Germany must proceed with disarmament in order that the other Powers could safely follow suit. In the final protocol of Locarno of October, 1925, the contracting Powers again pledged themselves to seek the realization of disarmament by a general agreement. The representative of France on the Disarmament Commission of the League of Nations, M. Paul-Boncour, declared at Geneva on April 8, 1927, that the disarmament requirement of the Versailles treaty was not imposed upon one single signatory but represented a moral and legal obligation, imposed upon all its signers, for general disarmament. But with the exception of Germany and her immediate allies we have seen instead only a constant increase of preparations for war. And this has gone so far that not only is each Power arming itself, but France has been providing the financial sinews wherewith its little Eastern allies can also

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arm themselves. This is intolerable, not for Ger many alone but for the whole world; it is a sigua tion fertile with the germs of new imbroglios. Partly with the aid of the League of Nations th Allies have carried on, or at least tolerated, a whol series of other violations of law directed agains Germany. I shall mention oniy three of them here The treaty provided that inhabitants of Eupen an Malmedy should have the right to opt for Germa

nationality. Such option was prevented by the Bel gian authorities, by tricky procedures and outra geous pressure. The inhabitants of Upper Silesi were to be called upon to indicate by a vote whethe they wished

to be attached to Germany

or to Po

land. Although this referendum—despite the great est pressure by the Allies—gave a clear majority t Germany, a part of Upper Silesia was nevertheles handed over to Poland. The overwhelmingly Ge man territory of Memel was allowed, against it will, to fall completely under Lithuanian domina tion. Consider what it means when parts of th highly civilized and cultivated German people fal under the dominion of a little branch of the h man race which, however much one may respect i clearly stands far behind in culture and in civili tion. Despite all this iniquity Germany has consis ently sought to prove by her acts her will for peac Not only has she disarmed to the full extent d

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manded, while not the faintest shadow of disarmament, as provided by the treaty, has become visible on the other side; in the Locarno treaty she has gone further and voluntarily repeated her ceremonial approval of the new boundary on the West, and signed a series of arbitration treaties intended to make future wars impossible. Finally in the London Pact and later still in the Hague Protocol she has paid for the evacuation of the Rhineland by voluntarily accepting new and heavy burdens. And with all this Germany has not yet obtained the re-

turn of the Saar, which still suffers under alien domination, for the eventual return of which France is already demanding new financial sacrifices, although both the Dawes and the Young Plans characterized the reparations payments as “‘allinclusive amounts.” Why have I attached this long preface to my book? Not because I intend to venture a political discussion of these matters. The ensuing chapters will be dominated by economic considerations. But it would be false to let the world believe that Germany sees any moral justification for the injustices of the Versailles treaty, among the worst of which are the reparations provisions. If one accepts the tremendous injustice of the Versailles treaty as a moral and legal basis, then it is easy to set down the German demands for revision as unjust. At the second Conference of Experts, which met in

.

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Paris in February, 1929, my French colleague spoke, at the first official session, as if Germany were under a moral obligation to make the reparations payments which were demanded of her. I replied im-

mediately that I was astonished to hear the word “morality” used in that connexion. If desired, I was ready to discuss the moral basis of reparations in extenso, and I had a good deal to say on the subject. But I had been under the impression that this was an economic conference and I was therefore prepared, without discussing moral considerations,

to confine

myself

to economic

discussions,

which, it seemed to me, was the only possible way to bring the conference to success. But in that case, I wanted to hear no more of “morality.” In all the further sessions of the conference the word “moral” was not heard once.

If therefore the following chapters of this book omit moral and political considerations, let no one be in doubt that the so-called reparations demands have an immoral foundation. That does not alter the technical legal status of the treaties. It is true that Germany was forced to sign the Versailles treaty. That does not wipe out the historic fact that immoral treaties cannot last. Indeed Articles 2go ff. of the Versailles treaty themselves abrogate the treaties concluded by Germany and her allies during the war, because they were “forced.” That is a classic example of the prejudice of the Versailles

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treaty. Morality cannot And

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have a double standard.

in the end morality is always stronger

than

force, and the moral outcome of the Treaty of Versailles is a breach of solemn promises and a terrific and unjustified attack upon the honour of the German people. No one in the world can believe that this will ever be forgotten by a people which counts Luther and Kant among its sons and in its contributions to human civilization ranks second to no people on earth.

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GERMANY

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GERMANY’S

payments

to other countries, like all international payments, can be made in either of two forms. They may be made in mobile values, in the form of goods which can in one way or another be transported from one country to another. Raw materials, manufactured goods and semi-manufactures belong in this category. The precious metals, particularly gold, are the most valuable of such moveable goods. And it

makes no difference whether such moveable goods, owned by Germany, are in Germany or abroad. The second form of payment is by transfer of the ownership

or

use

of immobile

goods,

as,

for

in-

stance, railroads, factories, farms, etc. Here again it makes no difference whether such possessions are held in Germany or abroad. Payments are, in general, most desirable when made in goods which can be rapidly revaluated, or, to use the current expression, turned into money. Money itself, exchange, promissory notes, in so far i4

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as they are in terms of stable currencies, shares of stock and similar evidences of ownership are of this type. The economic difficulties of making such rapidly available, i. e., mobilizable, payments on a sufficiently large scale, led to the inclusion in the Versailles treaty and in subsequent agreements of “payments in kind.” Immediately after the Armistice Germany began to make large deliveries in kind, of cattle, railroad carriages, locomotives, coal, etc., to the Allied Powers; these were in addition to the war material which had to be surrendered. Furthermore all merchant ships of more than 1600 tons gross were delivered. All the German property sequestered in the Allied countries was expropriated and set against the reparations account. Finally, under the Dawes Plan a whole system of payments in kind was built up, so that about half the Dawes payments were to be made in kind and half in cash. It soon became evident that these extensive payments in kind were disagreeable to the

countries receiving them, because of the effect on their industries. So they were reduced in the Young Plan, and provision was made

for a gradual, even-

tually complete, abandonment of in kind. The difficulty of making great ments brought forward, for the first the so-called transfer problem. The problem never arose in connexion

these payments unilateral paytime in history, reason why this with earlier in-

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demnities but made its first serious appearance today is solely that the Versailles treaty demanded payments which

are economically

impossible

and

socially intolerable. The mere fact that the transfer problem could arise is in itself evidence of the unreasonable dimensions of the reparations demands. Especially in the removal of mobile German property every conceivably tenable economic limit was surpassed. The tremendous cost of the World War—estimated at between 200 and 220 billions of dollars, without counting the indirect losses—led the victorious states consciously and deliberately to violate the most fundamental principles of international law with regard to the inviolability of private property. The active capital of individual German citizens who happened to be subject to attack was simply taken away from them. This ominous violation of law cannot be excused by the fact that the German Government is required to indemnify its citizens, which it is financially incapable of doing. The consequences of this alienation of German private property abroad can hardly be predicted. Its effect upon world economics has already been considerable and will be greater. Bolshevism and a growing international uneasiness are among the immediate consequences of this procedure. Germany suffered a further loss of liquid capital by currency inflation. The mad suggestion that

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Germany herself encouraged this inflation is answered by the mere fact that no country which participated in the war escaped inflation, Indeed even neutral countries suffered from the disease. Even during the war inflation occurred everywhere; but it is the fault of the unreasonable economic terms of the treaty that the horrors of in-

flation were so heightened in Germany and dragged out for so long a period. And it was the terrific political pressure upon Germany from without which was exclusively responsible for the acuteness of German inflation. Even financially sophisticated people often assume that Germany gained a certain advantage from the fact that her internal loans were wiped out by the depreciation of her currency. This assumption rests upon another common impression, that the state is something different from its citizens. That has a certain de jure meaning. But de facto the state is the sum of its citizens. These citizens lent their money to the state, and received

in return certificates of indebtedness representing their capital, and interest. Now if the obligations of the state are virtually cancelled by currency depreciation, the same process wipes out the capital of the citizens, and the citizens, who compose the state, are just so much the poorer. Inflation was no relief to Germany; the precise contrary is the fact. Not only the pre-war debts of the state, but

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also all the war loans, which represented the accumulated savings of private citizens, and their liquid capital, were destroyed by inflation. How much capital value the German people lost by inflation may never be accurately known. It can hardly be estimated. If the war loans, totalling about a hundred billion marks subscribed during the war by the German people, down to the very poorest among them, were suddenly erased, that means that the equivalent of those loans had been used up in the war and could never be recovered. Germany’s share of the costs of the war is reckoned as at least 150 billion marks;

American

estimates

set a still higher figure. But that was spent for national defence. What hurt bitterly was only that the effort failed. It hurt still more, because it made our helplessness so evident, to watch the foreigners, from

the Army

of Occupation

on, buying us out

with their better money throughout this inflation period. They bought our goods cheap and robbed us of the value of our labour; they bought our houses, and stock in our businesses, for the cost of a sandwich, And it was only slight consolation that so many of them, speculating in our currency, themselves suffered losses. The

loss by direct

payments

to the Allies,

in

money and in kind, presents a much clearer picture. We hear so much talk of Germany's future payments that we forget what tremendous sums

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have already been squeezed out of that country. Let us first sum up what Germany paid between the Armistice and September 1, 1924, when the Dawes Plan came into force. In that period Germany paid, in gold or foreign exchange, about two billion marks. By the fact that she was required to renounce to the Allied Powers all her advances to her own allies (Austria Hungary, Bulgaria and Turkey) and the rights and interests of her private citizens in public-utility undertakings and concessions in those countries and in Russia, Morocco and China as well, Germany lost about g billion marks. Germany had to deliver shipping and railroad material to a value of about 61% billion marks. The

so-called

payments

in kind

(cattle,

coal

and

coal products, chemicals, manufactured goods and building materials) amounted to about 314 billion marks. That adds up to about 21 billion marks. In addition to these payments in money and material Germany suffered a loss of about 3 billion marks in the non-military material left behind in

enemy territory, and of property, for which no in the ceded portions of This 29 billions was a figure takes no account render of military goods razing of fortresses and

about 5 billions in state compensation was made, former German territory. real economic loss, ‘This of the destruction or sur(munitions, warships, the destruction of munitions

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factories, etc.) , although the machinery, apparatus and equipment destroyed in the so-called war industries alone represented an economic loss of at least 214 billion marks. If this equipment had been used for the production of peace goods, instead of being destroyed, this unreasonable loss might have

been spared Naturally accept these reparations

us. the Reparation Commission did not figures when recording credits to the account under the Versailles treaty. It

is obvious that, except for payments in specie, goods

have a different value for the receiver than for the giver. And values were reckoned as low as possible. ‘The Reparation Commission credited German coal, for instance, at the German domestic price instead of at world-market rates. The German merchant ships were set down at far lower figures than were the British ships, lost during the war, for which Germany had to pay compensation. But the worst example is in the case of the sale of requisitioned or abandoned German property. Most of the German property liquidated by the Allies was tossed away at about a quarter of its objective value, although for its former owners the property was worth far more than that. The experience of decades, an accumulated nexus of knowledge and relationships, which could not possibly be. transferred to a third party, was tied up in these properties which Germans had built up abroad. The single

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goal attained, and it was a short-sighted one, was to get rid of German competition. An incident from the days immediately following the war will show how childishly these matters are often handled. In that time of deepest German distress a German firm sought to sell its foreign business. The foreign purchaser, who had a considerable political stake in the deal, had agreed upon the price, but demanded that the “secret portfolio” be included in the sale. Asked what he meant by that, the foreigner replied that he meant

the papers which showed just how the German house had carried on its business! And since no such “secret portfolio” existed the sale fell through. Making no allowance whatever for good will, the losses which German industry suffered by the liquidation of private property in the Allied countries must be set at more than 11 billion marks. Over and above this weakening of the German economic structure, which was felt the more acutely because German industry abroad had been peculiarly profitable, is the theft of the German colonies. I shall have occasion later in this book to discuss this matter in more detail. For German industry the colonies, like the foreign plants, represented hopes for the future, a possible escape from the ever more difficult conditions of investment and production at home. But even without evaluating these future prospects, the theft of the colonies

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meant a loss in actual values of between 80 and 100 billion marks, Until the Dawes Plan came into operation, Germany had the further burden of the cost of the occupation troops, which amounted in all to 514 billion marks, and though part of this was re-expended on the spot, the total represents an unproductive expense. After the Dawes Plan restored Germany’s credit, the private loans made to Germany from abroad made it possible for reparations to flow freely again, and in cash. During the five years when the Dawes Plan was working, from September 1, 1924, to August 31, 1929, Germany paid about 8 billion marks, approximately half of it in cash and half in payments in kind.

Up to the Ruhr invasion, then, Germany made reparations payments totalling 29 billion marks, and under the Dawes Plan 8 billions; by the seizure of German private property abroad she lost 11 billions, and she lost her colonies, worth from 80 to 100 billion marks. Germany's own war costs amounted

to about

150 billions,

most

of which,

since new capital could hardly be created during the war, was drawn directly from the national capital supply. Germany's losses by inflation cannot be reckoned, And upon this washed out national economy the Young Plan imposed a further burden of future obligations the present value of which is 40 billion marks. Of this, up to the publication of this

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book, g billion marks have already been paid, and Germany's foreign debt to private individuals has been further increased to a corresponding degree. One still meets naive people who express the opinion that the reparations asked of Germany con-

stitute no greater burden than was the 4 billion gold-mark indemnity which Germany in 1871 asked

and received from France. Such an opinion is based upon complete ignorance of economic proportions. If, for the purpose of comparison, one takes the years immediately preceding the wars—i869 for France and 1913 for Germany—and balances the all-inclusive French indemnity of 4 billion gold marks against the 48 billions already paid by Germany, as reckoned above, plus the 4o billions of Young Plan requirements, a total of 88 billions exclusive of the 80 to 100 billions lost in the colonies,

one has the following picture: Ratio: France to Germany Indemnity, per capita 110 mks. 1350 mks. 1: 12 Proportion of the national capital in the last peace-year 3.2% 38¢ 11g Proportion of the national income in the last peace-year 25% 220% 1:9 Proportion of the national supply of metal currency 100 22004 12°92 France

Germany

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This calculation omits the loss of the German colonies, as I have said, whereas after 1871 Germany deliberately gave France a free hand in her colonial policy in North Africa. The incomparably higher cost of the occupation is also left out of consideration. But the most important fact is the difference in the direct war losses. The war of 18701871 lasted only seven months and hardly affected the national capital of France. The World War lasted four and a half years, and destroyed an unprecedentedly large proportion of the German national capital. The comparison with 1871 really demonstrates how unreasonably and cruelly large were the sums required of Germany. That virtually no convertible capital was left in Germany was a thoroughly familiar fact to the experts of the Dawes Committee. The Dawes Report states clearly and explicitly that Germany cannot meet her payments by transferring remnants of her capital, but that reparations must be paid from an economic surplus in the country’s activities, especially, since the payments are to be made to foreign countries, from an export surplus. So the Dawes Plan properly regards the first of the two possible methods of payment cited above, by the transfer of goods, services and similar mobile goods, as the only possible method. Nevertheless I wish here to refer also to the second method of payment, by the transfer abroad of

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ownership of immobile goods. It is of course possible for German real estate, factories, railroads and such property to pass into foreign hands—a procedure usually known as alienization (Uberfremdung) . After the collapse of Germany, and in particular after the menace of Bolshevism seemed to have disappeared, foreign capital did in fact begin to play an increasing rele in German industry. A cautious official statistical investigation led to the conclusion that at least one billion dollars of foreign money was invested in German industry. Another estimate of the German real estate in foreign hands, chiefly in the cities, set this figure at close to $g00,000,000 in pre-war values. Nine per cent of the houses in Berlin are owned by foreigners. Thus, even allowing for the current depreciation of values, about $1,750,000,000 of foreign capi-

tal is already invested in German industrial plants or in real estate in Germany; and it is safe to say that almost all of this has flowed in since the war. Is it probable that the payment of reparations can and will be aided by an increasing foreign participation in the ownership of German corporations and of German land? In general, No. It is of course possible that certain foreign manufacturers

or capitalists will take part in German ture or commerce.

manufac-

But such alienization has limits;

every state and people, particularly a progressive people, has a natural tendency to direct its own

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economic destiny. The national currents and social problems of modern countries are such that largescale alienization of German industry would produce nationalist and social reactions which would make peaceful conduct of foreign industry impossible. Investment of foreign capital in the grand manner is possible only in colonial countries, and even there, with the increase of nationalism and the rise in general standards, the same tendency to substitute native for foreign capital and direction soon makes itself felt. No advanced industrial people will long peacefully submit to working in the main

for foreign capital and

under

foreign man-

agement and direction. This whole complex of problems was discussed in the Committee of Experts that worked out the Dawes Plan and a negative conclusion was reached. Obviously this does not apply to isolated and occasional instances of foreign ownership and activity such as already exists in Germany and is common throughout the world, but, as a mass phenomenon, alien control of the mass of a working people will not be endured. It is of course even less possible to have foreign control of agricultural production, for the peasant with his land is an intimate product of: national life, The payment of reparations by the sale to foreigners of German immobile values cannot there-

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fore be considered as a serious factor in the problem, and no economist will contest the finding of the Dawes Plan that Germany, now that all her transferable mobile goods have been taken from her, can pay reparations only by means of annual surpluses in her national economy.

+ EE Wuart

Is “TRANSFER’’?

ALTHOUGH the Transfer Problem has been clearly explained by the leading economists of the world, particularly Sir Josiah Stamp, mistaken impressions of it are still current. Recently an American associate of the Agent General for Reparations, who had been close to the transfer mechanism in Germany for more than five years, ventured to state publicly that it was not true that Germany had been making her reparations payments

out of foreign

loans,

for since

the

Dawes Loan of 1924 the German Government had not borrowed money abroad.

What is the real machinery for payment of the German reparations? Germany's citizens pay their government sufficient taxes to permit it to devote an average of two billion marks a year to the payment of reparations. The taxes are paid in German money. But the Allied countries want to be paid, not in German, but in their own currencies. So the German Government must buy foreign money with German money. Such foreign currency, called 28

WHAT

IS “TRANSFER”?

29

bills of exchange, is for the most part earned by the export of goods, or by commercial services rendered by German

citizens abroad. In so far as these citi-

zens do not themselves utilize this foreign exchange for the purchase of goods abroad, they sell it to the banks, in the last analysis to the Reichsbank. It is through the Reichsbank that the government buys its two billion marks in bills of foreign exchange each year. These bills of exchange are then transferred to the Allies. This mechanism assumes that each year foreign trade or commercial services rendered abroad produce a surplus of two billion marks in foreign exchange—that is, that after providing private industry with such foreign exchange as it needs, two billions remain. (In order to make the procedure as simple as. possible I am here omitting mention of the question of payments in kind, also the circumstance that foreign exchange can be built up out of the interest on foreign stocks and bonds and similar revenues.)

But the statistics of the German

balance of payments since 1924 reveal clearly that such a surplus in exchange has not existed in any single year. The parliamentary commission set up by the Reichstag to investigate German economic conditions published a careful study of the German balance of payments. This showed that foreign trade, including invisible as well as visible movements and payments, had produced a deficit total-

”

30

THE

END

OF

REPARATIONS

ling, in the years 1924-1929 inclusive, 10.7 billion

marks. That is an annual average of 134 billion marks. Only in one year, 1926, as a result of the English coal strike which caused an abnormal

in-

crease in Germany’s foreign coal shipments, was there an export surplus, of 356 million marks. So according to the original intention of the Dawes Plan there was in no year any proper occasion for tribute payments. For the total balance of international payments was, even in 1926, passive, since

interest and amortization had to be paid upon the foreign debts. Of course these deficits in Germany's balance of payments have been paid in one way or another— in the same way, in fact, in which a private citizen balances his own books when he has a deficit—by remaining in debt. But Germany has not followed the only reasonable course and remained

in debt

to the countries receiving reparations; instead she has borrowed money from private citizens. Since Germany could not make up the deficits in her balance of payments out of her own resources, foreigners lent her the money. Whether this money is lent to the German Government or to German individuals or corporations makes no difference to the Transfer Problem. The procedure, to illustrate, is as follows: The United Steel Works borrows $25,000,000 (100,000,000 marks) abroad. The United Steel Works spends this money to build a

WHAT

IS “TRANSFER”?

31

new blast furnace or to extend its coal pits. Since it pays for this work not in dollars but in marks, it sells its dollars to the Reichsbank, which gives it marks in exchange. This is the way the Reichsbank acquires the foreign money which it sells to the government, to be used in making reparations payments, in exchange for marks. But the government obtains the means to buy these dollars, as we have seen, by taxing German industry, including the United Steel Works, which means taxing its clients, its officers and its workers. And it is

thus with loans made not only to the German national government, but to the federal states, the cities, groups of cities and innumerable public and private corporations; and it is thus that the transfer of reparations is made possible. Had Germany, after the Dawes Plan took effect,

not borrowed made

the

money

reparations

abroad,

it could not have

payments.

It

would

have

lacked the necessary bills of foreign exchange, which have been created out of a natural surplus in our balance of international payments. This reveals the tremendous importance of foreign loan policies for the reparations problem, That the Dawes experts clearly foresaw this significance is evident from the oft-cited passage in the Dawes Plan: “For the stability of a country’s currency to be permanently maintained, not only must her budget be balanced, but her earnings from abroad

32

THE

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OF REPARATIONS

must be equal to the payments she must make abroad, including not only payments for the goods she imports but the sums paid in reparation. Nor can the balance of the budget itself be permanently maintained except on the same conditions. Loan operations may disguise the position—or postpone its practical results—but they cannot alter it. If reparation can, and must, be provided by means of the inclusion of an item in the budget—i. e., by the collection of taxes in excess of internal expenditure—it can only be paid abroad by means of an economic surplus in the country’s activities.” Unfortunately the position has been thoroughly disguised by loans. The government Statistical Bureau

at the end of September,

1930, reckoned

the short-term foreign debt at between 10.8 and 11.8 billion marks, and the long-term at 9.3 billion marks, a total of more than go billions. In October,

1930, the Reich added

to this a further

credit of 500,000 marks. Throughout my service as President of the Reichsbank I continually sought to call attention to the relation between foreign loans and the Transfer Problem. I did not act in the interest of my own country alone, but primarily in the interest of the private creditors who made these loans to us. My opponents, most of whom belonged to the Socialist camp, constantly urged the most generous acceptance of foreign credits, and since they

WHAT

IS “TRANSFER”?

controlled

or effectively influenced

machinery

of the new

Germany,

33

the political

they constantly

succeeded in carrying out their program. They were, at bottom, motivated by a desire to secure profitable employment for the masses of industrial workers who formed the bulk of their electoral following. Since systematic increase of industrial export and agricultural production can be achieved only slowly and painfully, they reached their goal by handing out building contracts which did not and cannot in future yield an economic return. I said in a speech made at Bochum in Noyember, 1927, that, even then, careful investigations by the Reichsbank revealed the fact that if the cities had not undertaken a series of luxury, or at least not urgently necessary, expenditures, they would, in all probability, have needed no foreign loans. Among these luxury, or not urgently necessary, expenditures I included the building by German cities of stadiums, swimming pools, parks, public squares, dining halls, convention halls, hotels, offices, planetariums,

airports,

theatres,

museums,

etc., and

the

purchase of land. What Germany spent on housing alone was overdone and uneconomic. Today many of the new workers’ houses stand empty, because, unfortunately, the workers cannot pay the high rents which are necessary to pay interest on the investment. A housing shortage is always relative, that is, local;

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