741. Effects of the war upon the commerce of belligerent and of neutral states.—The commerce of the United Kingdom in the period of the war has been treated at considerable length not only because it was itself an important factor in determining the outcome of the struggle, but also because it illustrated the general conditions of the period. War brought to the other belligerent states the same urgent need of imports, affected in a similar way the organization of production, and restricted exports. To the neutral states the war brought some dangers and some losses, but it brought also a great commercial opportunity. If they were in a position to supply the needs of the belligerents they could charge unheard of sums for their services. Individual merchants who seized the opportunity made great fortunes, in the Netherlands, in the Scandinavian states and in Spain. In neutral as well as in belligerent states, however, the waste of war brought loss and suffering; while some few individuals grew richer the mass of the people grew poorer.

742. Statistics of French commerce, 1913-1919.—The most important features in the commerce of France in the period of the war appear in the accompanying table. As the table does not take into account the depreciation of the French currency in the course of the war and gives merely nominal exchange equivalents, the reader should be cautious in the comparison of figures in the upper and lower part of a column, and in the comparison of these “paper” figures with figures representing actual gold dollars, as given in the statistics of the United States.9 Figures in any horizontal row are strictly comparable, since they represent an equal amount of depreciation.

743. Changes in imports and exports.—Attending first to the horizontal row giving conditions in 1913 we find France able to enjoy a surplus of imports by reason of her foreign investments, in Russia and other countries; the imports consisted mainly of industrial raw materials, to a less extent of food products, still less of manufactures. The country made payment for its imports mainly by finished manufactures, but exported also raw materials and food products. Now following down the vertical columns the reader will note an absolute decline of the value of exports, even in terms of a depreciated currency; this implied, of course, a much more serious shrinkage in the quantities of wares sold abroad. Accompanying this movement was a rapid expansion in the nominal value of the imports, sufficient in some branches to indicate an actual increase in the volume of trade, and resulting in a divergence in the values of imports and exports which signified that France was incurring a heavy debt abroad.

744. Changes in the direction of trade.—From Germany France had received in 1913 about 13 per cent of the total value of her imports, from Belgium about half as much; so that the closing of those two countries alone involved the source of one-fifth of the French import trade. Russia had not been so important as a source of supply, and trade with the Central Powers aside from Germany had not been considerable. The following table indicates the sources to which France turned to obtain the means for carrying on the war.

The exports of France, measured even in the inflated value of the period, declined in the case of most countries of commercial importance; the noteworthy exception was Italy, to which, in the course of the war, exports were double or triple the usual value of the preceding period of peace.

745. French finances during the war.—French finances were in bad condition at the outbreak of the war. Expenditures had increased greatly in the decade before 1914, and the government was slow to recognize the necessity of heavier taxes. In the years 1908-1914 every year but one had shown an actual deficit. After mobilization, which even in August, 1914, had called out nearly 4 million men and early in 1915 had called over 5 million, it was particularly difficult to devise and apply new taxes; while in the meantime the enemy had occupied some of the richest industrial districts, contributing normally about 15 per cent of the public revenue. In consequence the government raised by taxation only a small proportion of the funds required by the expenditures of the war period (Aug. 1, 1914—Apr. 1, 1919), about one-eighth, as compared with one-quarter in the United Kingdom and one-third in the United States. Stating figures approximately in milliards of francs the government incurred a total expenditure of 181, and met it as follows: 22 by taxes, 86 by loans placed at home, 26 by loans from the Bank of France, 27 by foreign loans, leaving a floating debt of 20 still to be provided for in 1919. The last three items had an important bearing on the commercial relations of France. Loans from the Bank of France took the form of bank notes, paper money, which inflated the currency and tended to raise the rate of foreign exchange on other countries far above the normal par; the unsettled finances evidenced by the floating debt tended to cause violent fluctuations of the rate; a foreign debt would, if interest were paid on it, involve remittance at high rates and would require an increase of exports if no other resource were available.

746. Damage done to the devastated districts.—The amount of the damage done to property in that part of France where the fighting took place will probably never be known with any approach to accuracy. The area affected was not very large, perhaps 10 per cent at most of the total area of France, of which the smaller part, perhaps 4 per cent of the total, lay in the devastated districts where the fighting was fiercest. Unfortunately for France her best coal and iron mines and almost one-third of her manufacturing industry lay within the area of invasion; from one-half to nine-tenths or more of some of the textile manufactures (woolen, cotton, flax and linen) and half of the metal workers, were in the occupied zone. France was seriously handicapped during the war by her inability to draw upon the resources of the occupied regions. Her dependence on imports from the United States and the United Kingdom would not have been nearly so great if she had been able to maintain her productive organization unimpaired. She suffered from the lack of product, but in spite of that she and her allies won the war. Then she faced a greater loss, that of plant, the accumulated capital of generations, represented not only in mines and factories, but also in dwelling houses, in roads and bridges, in the very fields themselves. In the devastated districts peace restored to her not an asset but a grievous liability. She owed to her own people the obligation of repairing the damage and restoring that which had been destroyed, at a time when she was crippled by other burdens which the war had cast upon her. Conservative estimates of the loss ranged from 10 to 15 milliards of gold francs; other estimates (unquestionably exaggerated for political purposes) went up to 65 or 75 or more.

747. Territorial gains of France.—The treaty of peace rendered France some benefits that may be put on the other side of the account. Most important to her, among the territorial changes, was the restoration of the provinces of Alsace and Lorraine, which Germany had taken and had held since 1871. Lorraine included the richest bed of iron ore in Europe; from that province Germany had derived, since the development of the basic process of steel manufacture, three-fourths of her annual supply of ore. The phosphate slag, which was a by-product of the basic process, was a valuable fertilizer; and a great bed of potash in Alsace offered another important agricultural resource. To atone to some extent for the wanton damage done to the French coal mines, which could not be repaired for years, Germany ceded ownership in the coal mines of the Saar basin, on the border of Lorraine, which did not, however, become a part of France, but was left under international control. These changes doubled French capacity for iron production. They left her still short of coal, particularly of the coking variety needed for blast furnaces; and promised to render her the greatest return if she shipped her ore to the Ruhr district of Germany to be smelted.

748. The question of reparation; Germany’s quick assets.—Important as were these territorial changes for the future of France they offered little help in her present emergency. She needed immediately a great fund of fluid wealth, which could be used to repair the damage done to her by the war, and felt that she had the right to look to Germany, the deliberate aggressor in the conflict, to make good the losses which she had suffered.

Reference to the table of costs of the war in a preceding chapter will show the lamentable inadequacy of German resources to make good the total losses for which Germany was responsible. The costs could have been met only in small part even if the total national wealth of Germany as it was before the war could have been expropriated. Some parts of that wealth, indeed, could be and were taken; such were securities representing German investments in foreign countries, and ships, which could be moved to any part of the world without losing their value. In the aggregate these items went but a little way toward meeting the total costs. Another item, the stock of precious metals which the German government had accumulated and retained, was not so readily available as it appeared to be; on that stock was based the whole structure of public and private credit in Germany, and a drain upon it, if excessive, would cause a collapse that would seriously affect the solvency of the country. Germany was in such desperate straits at the close of the war that the allies of the Entente were forced to allow her to buy food from the outside with part of the gold reserve, and saw it melting away before their eyes. In sum, the “quick assets” of Germany were pitifully small to meet the bill of costs; they were estimated to amount to several milliard dollars, but when the necessary deductions were made they offered scarcely one milliard for reparations.

749. Principle conditioning Germany’s capacity to pay.—Most of the wealth of Germany was fixed in the country, and was not directly available for reparation. There was no sense in confiscating and distributing it. The reader will better understand that essential point if he will face the question: how could the benefits arising from the ownership of that wealth be transferred to other countries to be enjoyed in them? Suppose that you are granted, to repair your losses in the war, the ownership of a German farm or factory; how will you get any good from it? You want some real material good, something that you could enjoy yourself, or could exchange to advantage. A piece of paper would not satisfy you. Gold would be acceptable, but the Germans had little of that left, needed a minimum amount to enable them to continue in business, and could get more only as they bought it abroad. To pay you something real the Germans would have to ship out something real, whether they paid it directly to you or bought with it “foreign exchange,” that is, the right to something real, gold or its material equivalent, in the country in which you live. After the initial payment of the country’s quick assets, Germany could pay only a sum equal in value to the excess of German exports over imports during any period of time that might be determined. This was the fundamental principle limiting the amount of payment in reparations that could effectively be imposed.

750. Practical limits of amount and period of payments.—There were, therefore, two factors to be considered in fixing the amount to be exacted: the amount per year that Germany could pay, and the number of years over which payments should extend. Trustworthy investigators reached the conclusion that Germany before the war, with its productive organization unimpaired, would have been able to pay about one milliard dollars a year. Here was given the maximum for one factor. Various considerations set a limit to the other factor, the period of time during which payments should be exacted. On this as on other points there was no general agreement; the situation at the close of the war was too tense to permit participants in it to judge the question calmly. Fair-minded friends of the western allies believed, however, that the interests of the allies themselves required the limitation of the period during which the payment should be made to a definite and reasonably short time, say thirty years, the span of a human generation. This restriction was prompted by regard to justice, by the impropriety of visiting on future generations the sins of their ancestors. It accorded with considerations of political expediency; the payment of reparations was certain to introduce an element of strain in international relations, both economic and political, which must not be too long continued. Finally, and practically of the greatest importance, the benefit to be derived from reparations grew rapidly less as the time of payment was extended. The reader doubtless knows how quickly sums mount up when they are put at compound interest. He should realize that payments to be made in the future shrink correspondingly when their present value is computed by a process of discount. How much will you give for my pledge to pay one dollar fifty years hence? You are foolish if you offer more than a small fraction over five cents, when the rate of interest is 6%.

With due regard to all the factors in the settlement sober and competent students of the question believed that the maximum payment which should be imposed on Germany might amount to a lump sum in present value of ten to fifteen milliards of dollars.

751. Provisions of the Treaty of Versailles regarding reparations.—By the Treaty of Versailles (article 231) Germany accepted “the responsibility of Germany and her allies for causing all the loss and damage to which the Allied and Associated Governments and their nationals have been subjected as a consequence of the war imposed upon them by the aggression of Germany and her Allies.” The treaty itself recognized that the resources of Germany were not sufficient for complete reparation, but, most unfortunately, did not itself fix a definite sum, the maximum which Germany might reasonably be expected to pay with reference to the practical factors which have been sketched in the preceding section. Some of the European leaders in the Entente had held out extravagant prospects of indemnity to their people, and were unwilling as yet to confess the facts. The exact terms of payment were therefore left to be settled later by a Reparations Commission which was given far-reaching powers to get the most it could up to a limit set so high that it manifestly exceeded German capacity to pay. Then followed a period of bitter contest in which the Allies by threats, by fiscal penalties, and by actual occupation of German territory sought to make good their claims, while the Germans fell behind in payment and stolidly professed their inability to meet the demands imposed upon them. Recovery and reconstruction were seriously delayed, both in western and in central Europe.

752. London settlement of May, 1921.—A substantial approach toward a practicable settlement of the question of reparations was made in conditions drawn up in London in May, 1921, and imposed on Germany under threat of an occupation of the district of the Ruhr. The terms are complicated, and are not worth a detailed description for they will probably be amended, but they are of interest as indicating the form that the final settlement may possibly take. A summary of the most important provisions follows: figures are stated in milliards of gold marks, a unit roughly equal to 250 million dollars.

Germany was bound to annual payments under two heads: first a fixed sum of 2 milliards, second, a sum equal in amount to about one quarter (26%) of the value of German exports for the year, but not less than 1 milliard. On the basis of these annual payments of a minimum of 3 milliard the allies were to issue German bonds of a face value of 50 milliard, on which 5% interest could be paid and still leave available half a milliard a year to be employed in a sinking fund toward the extinction of the debt; after a period of about thirty-seven years Germany would be free. The allies hoped to realize the present value of the bonds by selling them to investors, and thus get ready funds for economic reconstruction; while they professed to believe that the minimum of 3 milliard marks a year was well within the German capacity to pay. Germany before the war had, indeed, an export trade amounting to 8 milliard marks and over, while this arrangement assumed only about 4 milliard, but assumed that the exports could carry the burden of a heavy tax. The provision for the variable payment of 26% of the exports assured the allies that they would share in Germany’s prosperity if it actually did return; and arrangements were made for the possible issue of more bonds on this basis up to the amount of 82 milliard, making the total capital sum 132 milliard—over thirty thousand million dollars. The bonds were to be distributed among the allied states in the following proportions: France 52 per cent of the issue, United Kingdom 22, Italy 10, Belgium 8, and the remainder to other countries.

753. Objectionable aspect of reparation payments.—Attention should now be directed to an interesting and important feature of the reparation question. Germany, as has been said, could pay an indemnity only by a surplus of exports over a long period of years. Likewise, the allies in the long run could receive an indemnity only in the form of a surplus of imports. Might not this flow of goods, forced by pressure on Germany, be a curse rather than a blessing to the country receiving it; might it not undermine home industries? Or, if a tariff protected the producer at home might it not simply divert this flow to neutral markets, where the British or French exporter would find himself crowded out by a competition that was fierce and unyielding because of the military pressure behind it—the military pressure of his own home government! If Germany endured the strain would she not at the end of a generation rule the markets of the world, win the world by losing the war? The situation sounds so paradoxical that it is hard to realize how serious is its import. Only by a surplus of exports could Germany pay. What form could these exports take which would not injure some interests in the allied countries?

It is probable that considerations of this kind will lead in time to a considerable moderation of the demands imposed upon Germany. And it is significant that even in 1921 arrangements were being made for the payment in kind, by the delivery of coal, timber, building material of all kinds, of a considerable fraction of the sum due to France.

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