CHAPTER V
The Legality of the Claim for Pensions
“The application of morals to international politics is more a thing to be desired than a thing which has been in operation. Also, when I am made a participant in crime along with many millions of other people, I more or less shrug my shoulders.”—Letter from a friendly critic to the author of The Economic Consequences of the Peace.
We have seen in the preceding chapter that the claim for Pensions and Allowances is nearly double that for Devastation, so that its inclusion in the Alliesʼ demands nearly trebles the bill. It makes the difference between a demand which can be met and a demand which cannot be met. Therefore it is important.
In The Economic Consequences of the Peace I gave reasons for the opinion that this claim was contrary to our engagements and an act of international immorality. A good deal has been written about it since then, but I cannot admit that my conclusion has been seriously disputed. Most American writers accept it; most French writers ignore it; and most English writers try to show, not that the balance of evidence is against me, but that there are a few just plausible, or just not–negligible, observations to be made on the other side. Their contention is that of the Jesuit professors of Probabilism in the seventeenth century, namely that the Allies are justified unless it is absolutely certain that they are wrong, and that any probability in their favor, however small, is enough to save them from mortal sin.
But most people in the countries of Germanyʼs former enemies are not ready to excite themselves very much, even if my view is accepted. The passage at the head of this chapter describes a common attitude. International politics is a scoundrelʼs game and always has been, and the private citizen can scarcely feel himself personally responsible. If our enemy breaks the rules, his action may furnish us with an appropriate opportunity for expressing our feelings; but this must not be taken to commit us to a cool opinion that such things have never happened before and must never happen again. Sensitive and honorable patriots do not like it, but they “more or less shrug” their shoulders.
There is some common sense in this. I cannot deny it. International morality, interpreted as a crude legalism, might be very injurious to the world. It is at least as true of these vast–scale transactions, as of private affairs, that we judge wrongly if we do not take into account everything. And it is superficial to appeal, the other way round, to the principles which do duty when Propaganda is blistering herd emotion with its brew of passion, sentiment, self–interest, and moral fiddlesticks.
But whilst I see that nothing rare has happened and that menʼs motives are much as usual, I do still think that this particular act was an exceptionally mean one, made worse by hypocritical professions of moral purpose. My object in returning to it is partly historical and partly practical. New material of high interest is available to instruct us about the course of events. And if for practical reasons we can agree to drop this claim, we shall make a settlement easier.
Those who think that it was contrary to the Alliesʼ engagements to charge pensions against the enemy base this opinion on the terms notified to the German Government by President Wilson, with the authority of the Allies, on November 5, 1918, subject to which Germany accepted the Armistice conditions.[93] The contrary opinion that the Allies were fully entitled to charge pensions if they considered it expedient to do so, has been supported by two distinct lines of argument: first that the Armistice conditions of November 11, 1918, were not subject to President Wilsonʼs notification of November 5, 1918, but superseded it, more particularly regarding Reparation; and alternatively that the wording of President Wilsonʼs notification properly understood does not exclude Pensions.
The first line of argument was adopted by M. Klotz and the French Government during the Peace Conference, and has been approved more recently by M. Tardieu.[94] It was repudiated by the whole of the American Delegation at Paris, and never definitely supported by the British Government. Responsible writers about the Treaty, other than French, have not admitted it.[95] It was also explicitly abandoned by the Peace Conference itself in its reply to the German observations on the first draft of the Treaty. The second line of argument was that of the British Government during the Peace Conference, and it was an argument on these lines which finally converted President Wilson. I will deal with the two arguments in turn.
1. Various persons have published particulars, formerly confidential, which allow us to reconstruct the course of the discussions about the Armistice. These begin with the examination of the Armistice Terms by the Allied Council of War on November 1, 1918.[96]
The first point which emerges is that the reply of the Allied Governments to President Wilson (which afterwards furnished the text of his notification of Nov. 5, 1918, addressed to Germany), defining their interpretation of the references to Reparation in the Fourteen Points, was drawn up and approved at the same session of the Supreme Council (that of November 1, 2) which drew up the relevant clauses of the Armistice Terms; and that the Allies did not finally approve the reply to President Wilson until after that they had approved that very draft of the Armistice Terms which, according to the French contention, superseded and negatived the terms outlined in the reply to President Wilson.[97]
The record of the proceedings of the Supreme Council (as now disclosed) lends no support to the existence in their minds of the duplicity which the French contention attributes to them. On the other hand, it makes it clear that the Council did not intend the references to Reparation in the Armistice Terms to modify in any way their reply to the President.
The record, in so far as it is relevant to this point, may be summarized as follows:[98] M. Clemenceau called attention to the absence of any reference in the first draft of the Armistice Terms to the restitution of stolen property or to reparation. Mr. Lloyd George replied that there ought to be some reference to restitution, but that reparation was a Peace condition rather than an Armistice condition. M. Hymans agreed with Mr. Lloyd George. MM. Sonnino and Orlando went further and thought that neither had any place in the Armistice Terms but were ready to accept the Lloyd George–Hymans compromise of including Restitution but not Reparation. The discussion was postponed for M. Hymans to draft a formula. On its resumption next day, it was M. Clemenceau who produced a formula consisting of the three words Réparation des dommages. M. Hymans, M. Sonnino, and Mr. Bonar Law all expressed doubt whether this was in place in the Armistice Terms. M. Clemenceau replied that he only wanted to mention the principle, and that French public opinion would be surprised if there was no reference to it. Mr. Bonar Law objected: “It is already mentioned in our letter to President Wilson which he is about to communicate to Germany. It is useless to repeat it.”[99] This observation met with no contradiction, but it was agreed on sentimental grounds and for the satisfaction of public opinion to add M. Clemenceauʼs three words. The Council then passed on to other topics. At the last moment, as they were about to disperse, M. Klotz slipped in the words: “It would be prudent to put at the head of the financial questions a clause reserving the future claims of the Allies, and I propose to you the wording ‘without prejudice to any subsequent claims and demands on the part of the Allies.’”[100] It does not seem to have occurred to any of those present that this text could be deemed of material importance or otherwise than as protecting the Allies from the risk of being held to have surrendered any existing claims through failure to mention them in this document; and it was accepted without discussion. M. Klotz afterwards boasted that by this little device he had abolished the Fourteen Points, so far as they affected Reparation and Finance (although the very same meeting of the Allies had despatched a Note to President Wilson accepting them), and had secured to the Allies the right to demand from Germany the whole cost of the War. But I think the world will decide that the Supreme Council was right in attaching to these words no particular importance. Personal pride in so smart a trick has led M. Klotz, and his colleague M. Tardieu, to persist too long with a contention which decent persons have now abandoned.
There was an episode which has lately come to light connected with this passage which may be recounted as illustrating the pitfalls of the world. As M. Klotz only introduced his form of words as the Council was breaking up, it is likely that no undue attention was concentrated on it. But ill–fortune may dog any one, and the same state of affairs seems to have led to one of the scribes getting the words down wrong. Instead of revendication which means demand, the word renonciation which means concession got written in the text handed to the Germans for signature.[101] This word was not so suitable. But M. Klotz suffered less inconvenience from this mistake than might have been expected; since at the Peace Conference no one noticed that the French text of the Armistice Agreement as officially circulated, which M. Klotz used in arguing before the Reparation Committee, agreed in its wording with what he had intended it to be and not with the text which Germany had actually signed. Nevertheless it is the word renonciation which is still to be found in the official texts of the British and German Governments.[102]
2. The other line of argument raises more subtle intellectual issues and is not a mere matter of prestidigitation. If it be granted that our rights are governed by the terms of the Note addressed to Germany by President Wilson in the name of the Allies on November 5, 1918, the question depends on the interpretation of these terms. As Mr. Baruch and M. Tardieu have now published between them the greater part of the official reports (including very secret documents) bearing on the discussion of this problem during the Peace Conference, we are in a better position than before to assess the value of the Alliesʼ case.
The pronouncements by the President which were to form the basis of Peace provided that there should be “no contributions” and “no punitive damages,” but the invaded territories of Belgium, France, Rumania, Serbia, and Montenegro were to be restored. This did not cover losses from submarines or from air raids. Accordingly the Allied Governments, when they accepted the Presidentʼs formulas, embodied a reservation, on the point as to what “restoration” covered, in the following sentence: “By it (i.e., restoration of invaded territory) they understand that compensation will be made by Germany for all damage done to the civilian population of the Allies and to their property by the aggression of Germany by land, by sea, and from the air.”
The natural meaning and object of these words, which, the reader must remember, are introduced as an interpretation of the phrase “restoration of invaded territory,” is to assimilate submarine and cruiser aggression by sea and aeroplane and airship aggression by air to military aggression by land, which, in all the circumstances, was a reasonable extension of the phrase, provided it was duly notified beforehand. The Allies rightly apprehended that, if they accepted the phrase as it stood, “restoration of invaded territory” might be limited to damage resulting from military aggression by land.
This interpretation of the reservation of the Allied Governments, namely that it assimilated offensive action by sea or air to offensive action by land, but that “restoration of invaded territory” could not possibly include pensions and separation allowances, was adopted by the American Delegation at Paris. They construed the German liability to be in respect of the “direct physical damage to property of non–military character and direct physical injury to civilians”[103] caused by such aggression; the only further liability which they admitted being under a different part of the Presidentʼs pronouncements, namely, those relating to breaches of International law, such as the breach of the Treaty of Neutrality in favor of Belgium, and the illegal treatment of prisoners of war.
I doubt if any one would ever have challenged this interpretation if the British Prime Minister had not won a General Election by promises to extract from Germany more than this interpretation could justify,[104] and if the French Government also had not raised unjustifiable expectations. These promises were made recklessly. But it was not easy for their authors to admit, so soon after they had been given, that they were contrary to our engagements.
The discussion opened with the delegations, other than the American, claiming that we had not committed ourselves to anything which precluded our demanding from Germany all the loss and damage, direct and indirect, which had resulted from the war. “One of the Allies,” says Mr. Baruch, “went even further, and made claim for loss and damage resulting from the fact that the Armistice was concluded so unexpectedly that the termination of hostilities involved it in financial losses.”
Various arguments were employed in the early stages, the British delegates to the Reparation Committee of the Peace Conference, namely, Mr. Hughes, Lord Sumner and Lord Cunliffe, supporting the demand for complete war costs and not merely reparation for damage. They urged (1) that one of the principles enunciated by President Wilson was that each item of the Treaty should be just, and that it was in accordance with the general principles of justice to throw on Germany the whole costs of the war; and (2) that Great Britainʼs war costs had resulted from Germanyʼs breach of the Treaty of Neutrality of Belgium, and that therefore Great Britain (but not necessarily, on this argument, all the other Allies) was entitled to complete repayment in accordance with the general principles of International law. These general arguments were, I think, overwhelmed by the speeches made on behalf of the American delegates by Mr. John Foster Dulles. The following are extracts from what he said: “If it is in accordance with our sentiment that the principles of reparation be severe, and in accord with our material interest that these principles be all inclusive, why, in defiance of these motives, have we proposed reparation in certain limited ways only? It is because, gentlemen, we do not regard ourselves as free. We are not here to consider as a novel proposal what reparation the enemy should in justice pay; we have not before us a blank page upon which we are free to write what we will. We have before us a page, it is true; but one which is already filled with writing, and at the bottom are the signatures of Mr. Wilson, of Mr. Orlando, of M. Clemenceau, and of Mr. Lloyd George. You are all aware, I am sure, of the writing to which I refer: it is the agreed basis of peace with Germany.” Mr. Dulles then recapitulated the relevant passages and continued: “Can there be any question that this agreement does constitute a limitation? It is perfectly obvious that it was recognized at the time of the negotiations in October and November 1918 that the reparation then specified for would limit the Associated Governments as to the reparation which they could demand of the enemy as a condition of peace. The whole purpose of Germany was to ascertain the maximum which would be demanded of her in the terms of peace, and the action of the Allies in especially stipulating at that time, for an enlargement of the original proposal respecting reparation is explicable only on the theory that it was understood that once an agreement was concluded they would no longer be free to specify the reparation which Germany must make. We have thus agreed that we would give Germany peace if she would do certain specified things. Is it now open to us to say, ‘Yes, but before you get peace you must do other and further things’? We have said to Germany, ‘You may have peace if among other things you perform certain acts of reparation which will cost you, say, ten million dollars.’ Are we not now clearly precluded from saying, ‘You can have peace provided you perform other acts of reparation which will bring your total liability to many times that which was originally stipulated’? No; irrespective of the justice of the enemy making the latter reparation, it is now too late. Our bargain has been struck for better or for worse; it remains only to give it a fair construction and practical application.”
It is a shameful memory that the British delegates never withdrew their full demands, to which they were still adhering when, in March 1921, the question was taken out of their hands by the Supreme Council. The American Delegation cabled to the President, who was then at sea, for support in maintaining their position, to which he replied that the American Delegation should dissent, and if necessary dissent publicly, from a procedure which “is clearly inconsistent with what we deliberately led the enemy to expect and cannot now honorably alter simply because we have the power.”[105]
After this the discussions entered on a new phase. The British and French Prime Ministers abandoned the contentions of their delegates, admitted the binding force of the words contained in their Note of November 5, 1918, and settled down to extract some meaning from these words which would compose their differences and satisfy their constituents. What constituted “damage done to the civilian population”? Could not this be made to cover military pensions and the separation allowances which had been made to the civilian dependents of soldiers? If so, the bill against Germany could be raised to a high enough figure to satisfy nearly every one. It was pointed out, however, as Mr. Baruch records, “that financial loss resulting from the absence of a wage–earner did not cause any more ‘damage to the civilian population’ than did an equal financial loss involved in the payment of taxes to provide military equipment and like war costs.” In fact, a separation allowance or a pension was simply one of many general charges on the Exchequer arising out of the costs of the war. If such charges were to be admitted as civilian damage, it was a very short step back to the claim for the entire costs of the war, on the ground that these costs must fall on the taxpayer who, generally speaking, was a civilian. The sophistry of the argument became exposed by pushing it to its logical conclusion. Nor was it clear how pensions and allowances could be covered by words which were themselves an interpretation of the phrase, “restoration of invaded territory.” And the Presidentʼs conscience, though very desirous by now to be converted (for he had on hand other controversies with his colleagues which interested him more than this one) remained unconvinced.
The American delegates have recorded that the final argument which overbore the last scruples of the President was contained in a Memorandum prepared by General Smuts[106] on March 31, 1919. Briefly, this argument was, that a soldier becomes a civilian again after his discharge, and that, therefore, a wound, the effects of which persist after he has left the Army, is damage done to a civilian.[107] This is the argument by which “damage done to the civilian population” came to include damage done to soldiers. This is the argument on which, in the end, our case was based! For at this straw the Presidentʼs conscience clutched, and the matter was settled.
It had been settled in the privacy of the Four. I will give the final scene in the words of Mr. Lamont, one of the American delegates:[108]
“I well remember the day upon which President Wilson determined to support the inclusion of pensions in the Reparation Bill. Some of us were gathered in his library in the Place des États Unis, having been summoned by him to discuss this particular question of pensions. We explained to him that we couldnʼt find a single lawyer in the American Delegation that would give an opinion in favor of including pensions. All the logic was against it. ‘Logic! logic!’ exclaimed the President, ‘I donʼt care a damn for logic. I am going to include pensions!’”[109]
Well! perhaps I was too near these things at the time and have become touched in the emotions, but I cannot “more or less shrug my shoulders.” Whether or not that is the appropriate gesture, I have here set forth, for the inspection of Englishmen and our Allies, the moral basis on which two–thirds of our claims against Germany rest.
FOOTNOTES:
[93] I have given the exact text of the relevant passages in The Economic Consequences of the Peace, chapter v.
[94] The Truth about the Treaty, p. 208.
[95] E.g., The History of the Peace Conference of Paris, published under the auspices of the Institute of International Affairs delivers judgment as follows (vol. ii., p. 43): “It is this statement then (i.e., President Wilsonʼs notification of Nov. 5, 1918) which must be taken as the ruling document in any discussion as to what the Allies were entitled to claim by way of reparation in the Treaty of Peace, and it is difficult to interpret it otherwise than as a deliberate limitation of their undoubted right to recover the whole of their war costs.”
[96] The following particulars are taken from Les Négociations Secrètes et les Quatre Armistices avec pièces justificatives by “Mermeix,” published at Paris by Ollendorff, 1921. This remarkable volume has not received the attention it deserves. The greater part of it consists of a verbatim transcript of the secret Procès Verbaux of those meetings of the Supreme Council of the Allies which were concerned with the Armistice Terms. On the face of it this disclosure is authentic and is corroborated in part by M. Tardieu. There are many passages of extraordinary interest on points not connected with my present topic, as for example the discussion of the question whether the Allies should insist on the surrender of the German fleet if the Germans made trouble about it. Marshal Foch emerges from this record very honorably, as determined that nothing unnecessary should be demanded of the enemy, and that no blood should be spilt for a vain or trifling object. Sir Douglas Haig was of the same opinion. In reply to Col. House, Foch spoke thus: “If they accept the terms of the Armistice we are imposing on them, it is a capitulation. Such a capitulation gives us everything we could get from the greatest victory. In such circumstances I cannot admit that I have the right to risk the life of a single man more.” And again on October 31: “If our conditions are accepted we can wish for nothing better. We make war only to attain our ends, and we do not want to prolong it uselessly.” In reply to a proposal by Mr. Balfour that the Germans in evacuating the East should leave one–third of their arms behind them, Foch observed: “The intrusion of all these clauses makes our document chimerical, since the greater part of the conditions are incapable of being executed. We should do well to be sparing with these unrealizable injunctions.” Towards Austria also he was humane and feared the prolongation of the blockade which the politicians were proposing. “I intervene,” he said on October 31, 1918, “in a matter which is not a military one strictly speaking. We are to maintain the blockade until Peace, that is to say until we have made a new Austria. That may take a long time; which means a country condemned to famine and perhaps impelled to anarchy.”
[97] This is corroborated by M. Tardieu, op. cit., p. 71.
[98] See Mermeix, op. cit., pp. 226–250.
[99] This very important remark by Mr. Bonar Law is also quoted by M. Tardieu (op. cit., p. 70) and is therefore of undoubted authenticity.
[100] “Il serait prudent de mettre en tête des questions financières une clause réservant les revendications futures des Alliés et je vous propose le texte suivant: ‘Sous réserve de toutes revendications et réclamations ultérieures de la part des Alliés.’”
[101] That is to say, this text ran, “Sous réserve de toute renonciation et réclamation ultérieure,” instead of “Sous réserve de toutes revendications et réclamations ultérieures.”
[102] I record this episode as an historical curiosity. In my opinion it makes no material difference to the argument whether the text runs “revendications et réclamations” or “renonciation et réclamation”; for I regard either form of words as merely a protective phrase. But the plausibility of M. Klotzʼs position is decidedly weakened (if so weak a case is capable of further weakening) if it is the latter phrase which is authentic. The Editor of the Institute of International Affairs’ History of the Peace Conference of Paris, who was the first to discover and publish the discrepancy in question (vol. v., pp. 370–372), takes the view that the question of which text is used makes a material difference to the value of M. Klotzʼs argument.
[103] Baruch, op. cit., p. 19.
[104] As Mr. Baruch puts it (op. cit., p. 4): “At an election held after the Armistice and agreement as to the basic terms of peace, the English people, by an overwhelming majority, returned to power their Prime Minister on the basis of an increase in the severity of these terms of the peace, especially those of reparation.” (The italics are mine.)
[105] Baruch, op. cit., p. 25.
[106] This Memorandum, which has been published in extenso by Mr. Baruch (op. cit., p. 29 seq.), belonged to the category of most secret documents. It has been given to the world by itself without the accompanying circumstances which, without justifying its arguments (on which indeed no further light could be thrown beyond what we already have in the narrative of Mr. Baruch), might yet throw light on individual motives. I agree with the comment made by The Economist (Oct. 22, 1921) in reviewing Vol. IV. of the History of the Peace Conference of Paris (published under the auspices of the Institute of International Affairs), which has reprinted this Memorandum, that “a very serious injustice will be done to the reputation of General Smuts if this document continues to be reproduced and circulated without any explanation of the circumstances in which it was prepared.” Nevertheless it is well that the world should have this document, and it must take its place in a story which is more important to the world than the motives and reputations of individual actors in it.
[107] The following is the salient passage of the Memorandum: “After the soldierʼs discharge as unfit he rejoins the civilian population, and as for the future he cannot (in whole or in part) earn his own livelihood, he is suffering damage as a member of the civilian population, for which the German Government are again liable to make compensation. In other words, the pension for disablement which he draws from the French Government is really a liability of the German Government, which they must under the above reservation make good to the French Government. It could not be argued that as he was disabled while a soldier he does not suffer damage as a civilian after his discharge if he is unfit to do his ordinary work. He does literally suffer as civilian after his discharge, and his pension is intended to make good this damage, and is therefore a liability of the German Government.”
[108] What Really Happened at Paris, p. 272.
[109] Mr. Lamont adds that “it was not a contempt of logic, but simply an impatience of technicality; a determination to brush aside verbiage and get at the root of things. There was not one of us in the room whose heart did not beat with a like feeling.” These words not merely reflect a little naïvely the modern opportunistʼs impatience of legality and respect for the fait accompli, but also recall the atmosphere of exhaustion and the longing of everyone to be finished, somehow, with this dreadful controversy, which for months had outraged at the same time the intellects and the consciences of most of the participators. Yet, even so, to their lasting credit, the American Delegation had stood firm for the law, and it was the President, and he alone, who capitulated to the lying exigencies of politics.
CHAPTER VI
Reparation, Inter–Ally Debt, and International Trade
It is fashionable at the present time to urge a reduction of the Alliesʼ claims on Germany and of Americaʼs claims on the Allies, on the ground that, as such payments can only be made in goods, insistence on these claims will be positively injurious to the claimants.
That it is in the self–interest of the Allies and of America to abate their respective demands, I hold to be true. But it is better not to use bad arguments, and the suggestion that it is necessarily injurious to receive goods for nothing is not plausible or correct. I seek in this chapter to disentangle the true from the false in the now popular belief that there is something harmful in compelling Germany (or Europe) to “fling goods at us.”
The argument is a little intricate and the reader must be patient.
1. It does not make very much difference whether the debtor country pays by sending goods direct to the creditor or by selling them elsewhere and remitting cash. In either case the goods come on to the world market and are sold competitively or coöperatively in relation to the industries of the creditor, as the case may be, this distinction depending on the nature of the goods rather than on the market in which they are sold.
2. It is not much use to earmark non–competitive goods against the payment of the debt, so long as competitive goods are being sold by the debtor country in some other connection, e.g., to pay for its own imports. This is simply to bury oneʼs head in the sand. For example, out of the aggregate of goods which Germany would naturally export in the event of her exports being forcibly stimulated, it might be possible to pick out a selection of non–competitive goods; but it would not affect the situation in the slightest degree to pretend that it was these particular goods, and not the others, which were paying the debt. It is therefore useless to prescribe that Germany shall pay in certain specified commodities if these are commodities which she would export in any case, and useless, equally, to forbid her to pay in certain specified commodities, if that merely means that she will export these commodities to some other market to pay for her imports generally. No expedient on our part for making Germany pay us, or on Americaʼs part for making us pay her, in the shape of particular commodities affects the position, except in so far as it modifies the form of the paying countryʼs exports as a whole.
3. On the other hand, it does us no harm to receive for nothing the proceeds of goods, even when they are sold competitively, if these goods would be sold on the worldʼs market in any case.
4. If the result of pressing the debtor country to pay is to cause it to offer competitive goods at a lower price than it would otherwise, the particular industries in the creditor country which produce these goods are bound to suffer, even though there are balancing advantages for the creditor country as a whole.
5. In so far as the payments made by the debtor country accrue, not to the country with which the debtorʼs goods are competing, but to a third party, clearly there are no balancing advantages to offset the direct disadvantages under 4.
6. The answer to the question, whether the balancing advantages to the creditor country as a whole outweigh the injury to particular industries within that country, depends on the length of the period over which the creditor country can reasonably expect to go on receiving the payments. At first the injury to the industries which suffer from the competition and to those employed in them is likely to outweigh the benefit of the payments received. But, as in the course of time the capital and labor are absorbed in other directions, a balance of advantage may accrue.
The application of these general principles to the particular case of ourselves and Germany is easy. Germanyʼs exports are so preponderantly competitive with ours, that, if her exports are forcibly stimulated, it is certain that she will have to sell goods against us. This is not altered by the fact that it is possible to pick out a few exports or potential exports, such as potash or sugar, which are not competitive. If Germany is to have a large surplus of exports over imports, she must increase her competitive sales. In the Economic Consequences of the Peace (pp. 175–185) I demonstrated this at some length on the basis of pre–war statistics. I showed not only that the goods she must sell, but the markets she must sell them in, were largely competitive with our own. The statistics of post–war trade show that the former argument still holds good. The following table shows the proportions in which her export trade was divided between the principal articles of export, (1) in 1913, (2) in the first nine months of 1920 (the latest period for which I have figures in this precise form), and (3) in the four months June to September 1921, these last figures representing, I think, a not exactly comparable classification, and being provisional only:
| Percentage of Total Exports. | |||||||||||||||
| 1913. | 1920 (Jan.–Sept.) |
1921 (June–Sept.) |
|||||||||||||
| Iron and steel goods | 13 | . | 2 | 20 | 22 | ||||||||||
| Machinery (including motor cars) | 7 | . | 5 | 12 | 17 | ||||||||||
| Chemicals and dies | 4 | 13 | 9 | . | 5 | ||||||||||
| Fuel | 7 | 6 | . | 5 | 7 | ||||||||||
| Paper goods | 2 | . | 5 | 4 | 3 | . | 5 | ||||||||
| Electrical goods | 2 | 3 | . | 5 | ? | ||||||||||
| Silk goods | 2 | 3 | 15 | ||||||||||||
| Cotton goods | 5 | . | 5 | 5 | |||||||||||
| Woolen goods | 6 | . | . | ||||||||||||
| Glass | . | 5 | 2 | . | 5 | 2 | |||||||||
| Leather goods | 3 | 2 | 4 | ||||||||||||
| Copper goods | 3 | . | 5 | 1 | . | 5 | ? | ||||||||
It is clear, therefore, that, though raw materials other than coal, such as potash, sugar, and timber may yield a trifle, Germany can only compass an export trade of great value by exporting iron and steel goods, chemicals, dyes, textiles, and coal, for these are the only export articles of which she can produce great quantities. It is also clear that there have been no very marked changes in the proportionate importance of the different export trades since the war, except that the exchange position has somewhat stimulated, relatively to the others, those export lines, such as iron goods, machinery, chemicals, dyes, and glass, which do not involve much importation of raw materials.
To compel Germany to pay a large indemnity is therefore the same thing as to compel her to expand some or all of the above–mentioned exports to a greater extent than she would do otherwise. The only way in which she can effect this expansion is by offering the goods at a lower price than that at which other countries care to offer them; putting herself in a position to offer them cheap, partly by the German working classes lowering their standard of life without reducing their efficiency in the same degree, and partly by German export industries being subsidized, directly or indirectly, at the expense of the rest of the community.
These facts, formerly overlooked, are now, perhaps, exaggerated by popular opinion. For Principle (3), enunciated above, requires attention. Our industries will be subjected to strong competition from Germany, just as they were before the war, whether we exact Reparation or not; and we must not ascribe to the Reparation policy inconveniences which would exist in any case. The remedy lies not in the now popular nostrums for prescribing the form in which Germany shall pay, but in reducing the aggregate amount to a reasonable figure. For by prescribing the manner in which she shall pay us we do not control the form of her export trade as a whole; and by absorbing for reparation purposes the whole of a particular type of export, we compel her to expand her other exports to pay for her imports and other international obligations. On the other hand, we can secure from her moderate payments, on the sort of scale, for example, on which she might have been building up new foreign investments, without stimulating her exports as a whole to a greater activity than they would enjoy otherwise. This is the correct course for Great Britain from the standpoint of her own self–interest only.
The practical application of Principles (5) and (6) is also clear. So far as (5) is concerned, Great Britain is to receive not the whole of the indemnity, but about a fifth of it; whilst (6) provides the argument which to me has always appeared decisive. The permanence of reparation payments on a large scale for a long period of years is, to say the least, not to be reckoned on. Who believes that the Allies will, over a period of one or two generations, exert adequate force over the German Government, or that the German Government can exert adequate authority over its subjects, to extract continuing fruits on a vast scale from forced labor? No one believes it in his heart; no one at all. There is not the faintest possibility of our persisting with this affair to the end. But if this is so, then, most certainly, it will not be worth our while to disorder our export trades and disturb the equilibrium of our industry for two or three years; much less to endanger the peace of Europe.
The same principles apply with one modification to the United States and to the exaction by her of the debts which the Allied Governments owe. The industries of the United States would suffer, not so much from the competition of cheap goods from the Allies in their endeavors to pay their debts, as from the inability of the Allies to purchase from America their usual proportion of her exports. The Allies would have to find the money to pay America, not so much by selling more as by buying less. The farmers of the United States would suffer more than the manufacturers; if only because increased imports can be kept out by a tariff, whilst there is no such easy way of stimulating diminished exports. It is, however, a curious fact that whilst Wall Street and the manufacturing East are prepared to consider a modification of the debts, the Middle West and South is reported (I write ignorantly) to be dead against it. For two years Germany was not required to pay cash to the Allies, and during that period the manufacturers of Great Britain were quite blind to what the consequences would be to themselves when the payments actually began. The Allies have not yet been required to begin to pay cash to the United States, and the farmers of the latter are still as blind as were the British manufacturers to the injuries they will suffer if the Allies ever try seriously to pay in full. I recommend Senators and Congressmen from the agricultural districts of the United States, lest they soon suffer the same moral and intellectual ignominy as our own high–Reparation men, to invest at once in a little caution in their opposition to the efforts of Mr. Hardingʼs Administration to secure for itself a free hand to act wisely in this matter (and even perhaps generously) in accordance with the progress of opinion and of events.
The decisive argument, however, for the United States, as for Great Britain, is not the damage to particular interests (which would diminish with time), but the unlikelihood of permanence in the exaction of the debts, even if they were paid for a short period. I say this, not only because I doubt the ability of the European Allies to pay, but because of the great difficulty of the problem which the United States has before her in any case in balancing her commercial account with the Old World.
American economists have examined somewhat carefully the statistical measure of the change from the pre–war position. According to their estimates, America is now owed more interest on foreign investments than is due from her, quite apart from the interest on the debts of the Allied Governments; and her mercantile marine now earns from foreigners more than she owes them for similar services. Her excess of exports of commodities over imports approaches $3000 millions a year;[110] whilst, on the other side of the balance, payments, mainly to Europe, in respect of tourists and of immigrant remittances are estimated at not above $1000 millions a year. Thus, in order to balance the account as it now stands, the United States must lend to the rest of the world, in one shape or another, not less than $2000 millions a year, to which interest and sinking fund on the European Governmental War Debts would, if they were paid, add about $600 millions.
Recently, therefore, the United States must have been lending to the rest of the world, mainly Europe, something like $2000 millions a year. Fortunately for Europe, a fair proportion of this was by way of speculative purchases of depreciated paper currencies. From 1919 to 1921 the losses of American speculators fed Europe; but this source of income can scarcely be reckoned on permanently. For a time the policy of loans can meet the situation; but, as the interest on past loans mounts up, it must in the long run aggravate it.
Mercantile nations have always employed large funds in overseas trade. But the practice of foreign investment, as we know it now, is a very modern contrivance, a very unstable one, and only suited to peculiar circumstances. An old country can in this way develop a new one at a time when the latter could not possibly do so with its own resources alone; the arrangement may be mutually advantageous, and out of abundant profits the lender may hope to be repaid. But the position cannot be reversed. If European bonds are issued in America on the analogy of the American bonds issued in Europe during the nineteenth century, the analogy will be a false one; because, taken in the aggregate, there is no natural increase, no real sinking fund, out of which they can be repaid. The interest will be furnished out of new loans, so long as these are obtainable, and the financial structure will mount always higher, until it is not worth while to maintain any longer the illusion that it has foundations. The unwillingness of American investors to buy European bonds is based on common sense.
At the end of 1919 I advocated (in The Economic Consequences of the Peace) a reconstruction loan from America to Europe, conditioned, however, on Europeʼs putting her own house in order. In the past two years America, in spite of European complaints to the contrary, has, in fact, made very large loans, much larger than the sum I contemplated, though not mainly in the form of regular, dollar–bond issues. No particular conditions were attached to these loans, and much of the money has been lost. Though wasted in part, they have helped Europe through the critical days of the post–Armistice period. But a continuance of them cannot provide a solution for the existing disequilibrium in the balance of indebtedness.
In part the adjustment may be effected by the United States taking the place hitherto held by England, France, and (on a small scale) Germany in providing capital for those new parts of the world less developed than herself—the British Dominions and South America. The Russian Empire, too, in Europe and Asia, may be regarded as virgin soil, which will at a later date provide a suitable outlet for foreign capital. The American investor will lend more wisely to these countries, on the lines on which British and French investors used to lend to them, than direct to the old countries of Europe. But it is not likely that the whole gap can be bridged thus. Ultimately, and probably soon, there must be a readjustment of the balance of exports and imports. America must buy more and sell less. This is the only alternative to her making to Europe an annual present. Either American prices must rise faster than European (which will be the case if the Federal Reserve Board allows the gold influx to produce its natural consequences), or, failing this, the same result must be brought about by a further depreciation of the European exchanges, until Europe, by inability to buy, has reduced her purchases to articles of necessity. At first the American exporter, unable to scrap all at once the processes of production for export, may meet the situation by lowering his prices; but when these have continued, say for two years, below his cost of production, he will be driven inevitably to curtail or abandon his business.
It is useless for the United States to suppose that an equilibrium position can be reached on the basis of her exporting at least as much as at present, and at the same time restricting her imports by a tariff. Just as the Allies demand vast payments from Germany, and then exercise their ingenuity to prevent her paying them, so the American Administration devises, with one hand, schemes for financing exports, and, with the other, tariffs which will make it as difficult as possible for such credits to be repaid. Great nations can often act with a degree of folly which we should not excuse in an individual.
By the shipment to the United States of all the bullion in the world, and the erection there of a sky–scraping golden calf, a short postponement may be gained. But a point may even come when the United States will refuse gold, yet still demand to be paid,—a new Midas vainly asking more succulent fare than the barren metal of her own contract.
In any case the readjustment will be severe, and injurious to important interests. If, in addition, the United States exacts payment of the Allied debts, the position will be intolerable. If she persevered to the bitter end, scrapped her export industries and diverted to other uses the capital now employed in them, and if her former European associates decided to meet their obligations at whatever cost to themselves, I do not deny that the final result might be to Americaʼs material interest. But the project is utterly chimerical. It will not happen. Nothing is more certain than that America will not pursue such a policy to its conclusion; she will abandon it as soon as she experiences its first consequences. Nor, if she did, would the Allies pay the money. The position is exactly parallel to that of German Reparation. America will not carry through to a conclusion the collection of Allied debt, any more than the Allies will carry through the collection of their present Reparation demands. Neither, in the long run, is serious politics. Nearly all well–informed persons admit this in private conversation. But we live in a curious age when utterances in the press are deliberately designed to be in conformity with the worst–informed, instead of with the best–informed, opinion, because the former is the wider spread; so that for comparatively long periods there can be discrepancies, laughable or monstrous, between the written and the spoken word.
If this is so, it is not good business for America to embitter her relations with Europe, and to disorder her export industries for two years, in pursuance of a policy which she is certain to abandon before it has profited her.
For the benefit of any reader who enjoys an abstract statement, I summarize the argument thus. The equilibrium of international trade is based on a complicated balance between the agriculture and the industries of the different countries of the world, and on a specialization by each in the employment of its labor and its capital. If one country is required to transfer to another without payment great quantities of goods, for which this equilibrium does not allow, the balance is destroyed. Since capital and labor are fixed and organized in certain employments and cannot flow freely into others, the disturbance of the balance is destructive to the utility of the capital and labor thus fixed. The organization, on which the wealth of the modern world so largely depends, suffers injury. In course of time a new organization and a new equilibrium can be established. But if the origin of the disturbance is of temporary duration, the losses from the injury done to organization may outweigh the profit of receiving goods without paying for them. Moreover, since the losses will be concentrated on the capital and labor employed in particular industries, they will provoke an outcry out of proportion to the injury inflicted on the community as a whole.
FOOTNOTE:
[110] In the year of boom to June 1920, on a total trade of $13,350 millions, the excess of exports over imports was $2870 millions. In the year, partly one of depression, to June 1921, on a total trade of $10,150 millions, the excess of exports was $2860 millions.