The Economic Consequences Of The Peace

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

      For one who spent in Paris the greater part of the six months  which succeeded the armistice an occasional visit to London was a  strange experience. England still stands outside Europe. Europe's  voiceless tremors do not reach her. Europe is apart and England  is not of her flesh and body. But Europe is solid with herself.  France, Germany, Italy, Austria, and Holland, Russia and Roumania  and Poland, throb together, and their structure and civilisation  are essentially one. They flourished together, they have rocked  together in a war which we, in spite of our enormous  contributions and sacrifices (like though in a less degree than  America), economically stood outside, and they may fall together.  In this lies the destructive significance of the Peace of Paris.  If the European civil war is to end with France and Italy abusing  their momentary victorious power to destroy Germany and  Austria-Hungary now prostrate, they invite their own destruction  also, being so deeply and inextricably intertwined with their  victims by hidden psychic and economic bonds. At any rate an  Englishman who took part in the Conference of Paris and was  during those months a member of the Supreme Economic Council of  the Allied Powers, was bound to become -- for him a new  experience -- a European in his cares and outlook. There, at the  nerve centre of the European system, his British preoccupations  must largely fall away and he must be haunted by other and more  dreadful spectres. Paris was a nightmare, and everyone there was  morbid. A sense of impending catastrophe overhung the frivolous  scene; the futility and smallness of man before the great events  confronting him; the mingled significance and unreality of the  decisions; levity, blindness, insolence, confused cries from  without-all the elements of ancient tragedy were there. Seated  indeed amid the theatrical trappings of the French saloons of  state, one could wonder if the extraordinary visages of Wilson  and of Clemenceau, with their fixed hue and unchanging  characterisation, were really faces at all and not the  tragic-comic masks of some strange drama or puppet-show.      The proceedings of Paris all had this air of extraordinary  importance and unimportance at the same time. The decisions  seemed charged with consequences to the future of human society;  yet the air whispered that the word was not flesh, that it was  futile, insignificant, of no effect, dissociated from events; and  one felt most strongly the impression, described by Tolstoy in  War and Peace or by Hardy in The Dynasts, of events marching on  to their fated conclusion uninfluenced and unaffected by the  cerebrations of statesmen in council: 

                   Spirit of the Years 

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

                   Spirit of the Pities 

          Why prompts the Will so senseless-shaped a doing? 

                   Spirit of the Years 

          I have told thee that It works unwittingly,          As one possessed not judging. 

      In Paris, where those connected with the Supreme Economic  Council received almost hourly the reports of the misery,  disorder, and decaying organisation of all Central and Eastern  Europe, Allied and enemy alike, and learnt from the lips of the  financial representatives of Germany and Austria unanswerable  evidence of the terrible exhaustion of their countries, an  occasional visit to the hot, dry room in the President's house,  where the Four fulfilled their destinies in empty and arid  intrigue, only added to the sense of nightmare. Yet there in  Paris the problems of Europe were terrible and clamant, and an  occasional return to the vast unconcern of London a little  disconcerting. For in London these questions were very far away,  and our own lesser problems alone troubling. London believed that  Paris was making a great confusion of its business, but remained  uninterested. In this spirit the British people received the  treaty without reading it. But it is under the influence of  Paris, not London, that this book has been written by one who,  though an Englishman, feels himself a European also, and, because  of too vivid recent experience, cannot disinterest himself from  the further unfolding of the great historic drama of these days  which will destroy great institutions, but may also create a new  world. 

      Before 1870 different parts of the small continent of Europe  had specialised in their own products; but, taken as a whole, it  was substantially self-subsistent. And its population was  adjusted to this state of affairs.      After 1870 there was developed on a large scale an  unprecedented situation, and the economic condition of Europe  became during the next fifty years unstable and peculiar. The  pressure of population on food, which had already been balanced  by the accessibility of supplies from America, became for the  first time in recorded history definitely reversed. As numbers  increased, food was actually easier to secure. Larger  proportional returns from an increasing scale of production  became true of agriculture as well as industry. With the growth  of the European population there were more emigrants on the one  hand to till the soil of the new countries and, on the other,  more workmen were available in Europe to prepare the industrial  products and capital goods which were to maintain the emigrant  populations in their new homes, and to build the railways and  ships which were to make accessible to Europe food and raw  products from distant sources. Up to about 1900 a unit of labour  applied to industry yielded year by year a purchasing power over  an increasing quantity of food. It is possible that about the  year 1900 this process began to be reversed, and a diminishing  yield of nature to man's effort was beginning to reassert itself.  But the tendency of cereals to rise in real cost was balanced by  other improvements; and -- one of many novelties -- the resources  of tropical Africa then for the first time came into large  employ, and a great traffic in oilseeds began to bring to the  table of Europe in a new and cheaper form one of the essential  foodstuffs of mankind. In this economic Eldorado, in this  economic Utopia, as the earlier economists would have deemed it,  most of us were brought up.      That happy age lost sight of a view of the world which filled  with deep-seated melancholy the founders of our political  economy. Before the eighteenth century mankind entertained no  false hopes. To lay the illusions which grew popular at that  age's latter end, Malthus disclosed a devil. For half a century  all serious economical writings held that devil in clear  prospect. For the next half century he was chained up and out of  sight. Now perhaps we have loosed him again.      What an extraordinary episode in the economic progress of man  that age was which came to an end in August 1914! The greater  part of the population, it is true, worked hard and lived at a  low standard of comfort, yet were, to all appearances, reasonably  contented with this lot. But escape was possible, for any man of  capacity or character at all exceeding the average, into the  middle and upper classes, for whom life offered, at a low cost  and with the least trouble, conveniences, comforts, and amenities  beyond the compass of the richest and most powerful monarchs of  other ages. The inhabitant of London could order by telephone,  sipping his morning tea in bed, the various products of the whole  earth, in such quantity as he might see fit, and reasonably  expect their early delivery upon his doorstep; he could at the  same moment and by the same means adventure his wealth in the  natural resources and new enterprises of any quarter of the  world, and share, without exertion or even trouble, in their  prospective fruits and advantages; or he could decide to couple  the security of his fortunes with the good faith of the  townspeople of any substantial municipality in any continent that  fancy or information might recommend. He could secure forthwith,  if he wished it, cheap and comfortable means of transit to any  country or climate without passport or other formality, could  despatch his servant to the neighbouring office of a bank for  such supply of the precious metals as might seem convenient, and  could then proceed abroad to foreign quarters, without knowledge  of their religion, language, or customs, bearing coined wealth  upon his person, and would consider himself greatly aggrieved and  much surprised at the least interference. But, most important of  all, he regarded this state of affairs as normal, certain, and  permanent, except in the direction of further improvement, and  any deviation from it as aberrant, scandalous, and avoidable. The  projects and politics of militarism and imperialism, of racial  and cultural rivalries, of monopolies, restrictions, and  exclusion, which were to play the serpent to this paradise, were  little more than the amusements of his daily newspaper, and  appeared to exercise almost no influence at all on the ordinary  course of social and economic life, the internationalisation of  which was nearly complete in practice.      It will assist us to appreciate the character and  consequences of the peace which we have imposed on our enemies,  if I elucidate a little further some of the chief unstable  elements, already present when war broke out, in the economic  life of Europe. 

  I. Population 

      In 1870, Germany had a population of about 40 million. By  1892 this figure had risen to 50 million, and by 30 June 1914 to  about 68 million. In the years immediately preceding the war the  annual increase was about 850,000, of whom an insignificant  proportion emigrated.(1*) This great increase was only rendered  possible by a far-reaching transformation of the economic  structure of the country. From being agricultural and mainly  self-supporting, Germany transformed herself into a vast and  complicated industrial machine dependent for its working on the  equipoise of many factors outside Germany as well as within. Only  by operating this machine, continuously and at full blast, could  she find occupation at home for her increasing population and the  means of purchasing their subsistence from abroad. The German  machine was like a top which to maintain its equilibrium must  progress ever faster and faster.      In the Austro-Hungarian empire, which grew from about 40  million in 1890 to at least 50 million at the outbreak of war,  the same tendency was present in a less degree, the annual excess  of births over deaths being about half a million, out of which,  however, there was an annual emigration of some quarter of a  million persons.      To understand the present situation, we must apprehend with  vividness what an extraordinary centre of population the  development of the Germanic system had enabled Central Europe to  become. Before the war the population of Germany and  Austria-Hungary together not only substantially exceeded that of  the United States, but was about equal to that of the whole of  North America. In these numbers, situated within a compact  territory, lay the military strength of the Central Powers. But  these same numbers -- for even the war has not appreciably  diminished them(2*) -- if deprived of the means of life, remain a  hardly less danger to European order.      European Russia increased her population in a degree even  greater than Germany -- from less than 100 million in 1890 to  about 150 million at the outbreak of war;(3*) and in the years  immediately preceding 1914 the excess of births over deaths in  Russia as a whole was at the prodigious rate of two million per  annum. This inordinate growth in the population of Russia, which  has not been widely noticed in England, has been nevertheless one  of the most significant facts of recent years.      The great events of history are often due to secular changes  in the growth of population and other fundamental economic  causes, which, escaping by their gradual character the notice of  contemporary observers, are attributed to the follies of  statesmen or the fanaticism of atheists. Thus the extraordinary  occurrences of the past two years in Russia, that vast upheaval  of society, which has overturned what seemed most stable --  religion, the basis of property, the ownership of land, as well  as forms of government and the hierarchy of classes -- may owe  more to the deep influences of expanding numbers than to Lenin or  to Nicholas; and the disruptive powers of excessive national  fecundity may have played a greater part in bursting the bonds of  convention than either the power of ideas or the errors of  autocracy. 

  II. Organization 

      The delicate organisation by which these peoples lived  depended partly on factors internal to the system.      The interference of frontiers and of tariffs was reduced to a  minimum, and not far short of three hundred millions of people  lived within the three empires of Russia, Germany, and  Austria-Hungary. The various currencies, which were all  maintained on a stable basis in relation to gold and to one  another, facilitated the easy flow of capital and of trade to an  extent the full value of which we only realise now, when we are  deprived of its advantages. Over this great area there was an  almost absolute security of property and of person.      These factors of order, security, and uniformity, which  Europe had never before enjoyed over so wide and populous a  territory or for so long a period, prepared the way for the  organisation of that vast mechanism of transport, coal  distribution, and foreign trade which made possible an industrial  order of life in the dense urban centres of new population. This  is too well known to require detailed substantiation with  figures. But it may be illustrated by the figures for coal, which  has been the key to the industrial growth of Central Europe  hardly less than of England; the output of German coal grew from  30 million tons in 1871 to 70 million tons in 1890, 110 million  tons in 1900, and 190 million tons in 1913.      Round Germany as a central support the rest of the European  economic system grouped itself, and on the prosperity and  enterprise of Germany the prosperity of the rest of the continent  mainly depended. The increasing pace of Germany gave her  neighbours an outlet for their products, in exchange for which  the enterprise of the German merchant supplied them with their  chief requirements at a low price.      The statistics of the economic interdependence of Germany and  her neighbours are overwhelming. Germany was the best customer of  Russia, Norway, Holland, Belgium, Switzerland, Italy, and  Austria-Hungary. she was the second-best customer of Great  Britain, Sweden, 'and Denmark; and the third-best customer of  France. She was the largest source of supply to Russia, Norway,  Sweden, Denmark, Holland, Switzerland, Italy, Austria-Hungary,  Roumania, and Bulgaria; and the second largest source of supply  to Great Britain, Belgium, and France.      In our own case we sent more exports to Germany than to any  other country in the world except India, and we bought more from  her than from any other country in the world except the United  States.      There was no European country except those west of Germany  which did not do more than a quarter of their total trade with  her; and in the case of Russia, Austria-Hungary, and Holland the  proportion was far greater.      Germany not only furnished these countries with trade but, in  the case of some of them, supplied a great part of the capital  needed for their own development. Of Germany's pre-war foreign  investments, amounting in all to about 31,250 million, not far  short of 3500 million was invested in Russia, Austria-Hungary,  Bulgaria, Roumania, and Turkey. And by the system of 'peaceful  penetration' she gave these countries not only capital but, what  they needed hardly less, organisation. The whole of Europe east  of the Rhine thus fell into the German industrial orbit, and its  economic life was adjusted accordingly.      But these internal factors would not have been sufficient to  enable the population to support itself without the co-operation  of external factors also and of certain general dispositions  common to the whole of Europe. Many of the circumstances already  treated were true of Europe as a whole, and were not peculiar to  the central empires. But all of what follows was common to the  whole European system. 

  III The Psychology of Society 

      Europe was so organised socially and economically as to  secure the maximum accumulation of capital. While there was some  continuous improvement in the daily conditions of life of the  mass of the population, society was so framed as to throw a great  part of the increased income into the control of the class least  likely to consume it. The new rich of the nineteenth century were  not brought up to large expenditures, and preferred the power  which investment gave them to the pleasures of immediate  consumption. In fact, it was precisely the inequality of the  distribution of wealth which made possible those vast  accumulations of fixed wealth and of capital improvements which  distinguished that age from all others. Herein lay, in fact, the  main justification of the capitalist system. If the rich had  spent their new wealth on their own enjoyments, the world would  long ago have found such a rgime intolerable. But like bees they  saved and accumulated, not less to the advantage of the whole  community because they themselves held narrower ends in prospect.      The immense accumulations of fixed capital which, to the  great benefit of mankind, were built up during the half century  before the war, could never have come about in a society where  wealth was divided equitably. The railways of the world, which  that age built as a monument to posterity, were, not less than  the pyramids of Egypt, the work of labour which was not free to  consume in immediate enjoyment the full equivalent of its  efforts.      Thus this remarkable system depended for its growth on a  double bluff or deception. On the one hand the labouring classes  accepted from ignorance or powerlessness, or were compelled,  persuaded, or cajoled by custom, convention, authority, and the  well-established order of society into accepting, a situation in  which they could call their own very little of the cake that they  and nature and the capitalists were co-operating to produce. And  on the other hand the capitalist classes were allowed to call the  best part of the cake theirs and were theoretically free to  consume it, on the tacit underlying condition that they consumed  very little of it in practice. The duty of 'saving' became  nine-tenths of virtue and the growth of the cake the object of  true religion. There grew round the non-consumption of the cake  all those instincts of puritanism which in other ages has  withdrawn itself from the world and has neglected the arts of  production as well as those of enjoyment. And so the cake  increased; but to what end was not clearly contemplated.  Individuals would be exhorted not so much to abstain as to defer,  and to cultivate the pleasures of security and anticipation.  Saving was for old age or for your children; but this was only in  theory -- the virtue of the cake was that it was never to be  consumed, neither by you nor by your children after you.      In writing thus I do not necessarily disparage the practices  of that generation. In the unconscious recesses of its being  society knew what it was about. The cake was really very small in  proportion to the appetites of consumption, and no one, if it  were shared all round, would be much the better off by the  cutting of it. Society was working not for the small pleasures of  today but for the future security and improvement of the race --  in fact for 'progress'. If only the cake were not cut but was  allowed to grow in the geometrical proportion predicted by  Malthus of population, but not less true of compound interest,  perhaps a day might come when there would at last be enough to go  round, and when posterity could enter into the enjoyment of our  labours. In that day overwork, overcrowding, and underfeeding  would come to an end, and men, secure of the comforts and  necessities of the body, could proceed to the nobler exercises of  their faculties. One geometrical ratio might cancel another, and  the nineteenth century was able to forget the fertility of the  species in a contemplation of the dizzy virtues of compound  interest.      There were two pitfalls in this prospect: lest, population  still outstripping accumulation, our self-denials promote not  happiness but numbers; and lest the cake be after all consumed,  prematurely, in war, the consumer of all such hopes.      But these thoughts lead too far from my present purpose. I  seek only to point out that the principle of accumulation based  in on equality was a vital part of the pre-war order of society  and of progress as we then understood it, and to emphasise that  this principle depended on unstable psychological conditions,  which it may be impossible to re-create. It was not natural for a  population, of whom so few enjoyed the comforts of life, to  accumulate so hugely. The war has disclosed the possibility of  consumption to all and the vanity of abstinence to many. Thus the  bluff is discovered; the labouring classes may be no longer  willing to forgo so largely, and the capitalist classes, no  longer confident of the future, may seek to enjoy more fully  their liberties of consumption so long as they last, and thus  precipitate the hour of their confiscation. 

  IV. The Relation of the Old World to the New 

      The accumulative habits of Europe before the war were the  necessary condition of the greatest of the external factors which  maintained the European equipoise.      Of the surplus capital goods accumulated by Europe a  substantial part was exported abroad, where its investment made  possible the development of the new resources of food, materials,  and transport, and at the same time enabled the Old World to  stake out a claim in the natural wealth and virgin potentialities  of the New. This last factor came to be of the vastest  importance. The Old World employed with an immense prudence the  annual tribute it was thus entitled to draw. The benefit of cheap  and abundant supplies, resulting from the new developments which  its surplus capital had made possible was, it is true, enjoyed  and not postponed. But the greater part of the money interest  accruing on these foreign investments was reinvested and allowed  to accumulate, as a reserve (it was then hoped) against the less  happy day when the industrial labour of Europe could no longer  purchase on such easy terms the produce of other continents, and  when the due balance would be threatened between its historical  civilisations and the multiplying races of other climates and  environments. Thus the whole of the European races tended to  benefit alike from the development of new resources whether they  pursued their culture at home or adventured it abroad.      Even before the war, however, the equilibrium thus  established between old civilisations and new resources was being  threatened. The prosperity of Europe was based on the facts that,  owing to the large exportable surplus of foodstuffs in America,  she was able to purchase food at a cheap rate measured in terms  of the labour required to produce her own exports, and that, as a  result of her previous investments of capital, she was entitled  to a substantial amount annually without any payment in return at  all. The second of these factors then seemed out of danger but,  as a result of the growth of population overseas, chiefly in the  United States, the first was not so secure.      When first the virgin soils of America came into bearing, the  proportions of the population of those continents themselves, and  consequently of their own local requirements, to those of Europe  were very small. As lately as 1890 Europe had a population three  times that of North and South America added together. But by 1914  the domestic requirements of the United states for wheat were  approaching their production, and the date was evidently near  when there would be an exportable surplus only in years of  exceptionally favourable harvest. Indeed, the present domestic  requirements of the United States are estimated at more than  ninety per cent of the average yield of the five years  1909-13.(4*) At that time, however, the tendency towards  stringency was showing itself, not so much in a lack of abundance  as in a steady increase of real cost. That is to say, taking the  world as a whole, there was no deficiency of wheat, but in order  to call forth an adequate supply it was necessary to offer a  higher real price. The most favourable factor in the situation  was to be found in the extent to which Central and Western Europe  was being fed from the exportable surplus of Russia and Roumania.      In short, Europe's claim on the resources of the New World  was becoming precarious; the law of diminishing returns was at  last reasserting itself, and was making it necessary year by year  for Europe to offer a greater quantity of other commodities to  obtain the same amount of bread; and Europe, therefore, could by  no means afford the disorganisation of any of her principal  sources of supply.      Much else might be said in an attempt to portray the economic  peculiarities of the Europe of 1914. I have selected for emphasis  the three or four greatest factors of instability -- the  instability of an excessive population dependent for its  livelihood on a complicated and artificial organisation, the  psychological instability of the labouring and capitalist  classes, and the instability of Europe's claim, coupled with the  completeness of her dependence, on the food supplies of the New  World.      The war had so shaken this system as to endanger the life of  Europe altogether. A great part of the continent was sick and  dying; its population was greatly in excess of the numbers for  which a livelihood was available; its organisation was destroyed,  its transport system ruptured, and its food supplies terribly  impaired.      It was the task of the peace conference to honour engagements  and to satisfy justice; but not less to re-establish life and to  heal wounds. These tasks were dictated as much by prudence as by  the magnanimity which the wisdom of antiquity approved in  victors. We will examine in the following chapters the actual  character of the peace. 

  NOTES: 

  1. In 1913 there were 25,843 emigrants from Germany, of whom  19,124 went to the United States. 

  2. The net decrease of the German population at the end of 1918  by decline of births and excess of deaths as compared with the  beginning of 1914, is estimated at about 2,700,000. 

  3. Including Poland and Finland, but excluding Siberia, central  Asia,and the Caucasus. 

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

      In chapters 4 and 5 I shall study in some detail the economic  and financial provisions of the treaty of peace with Germany. But  it will be easier to appreciate the true origin of many of these  terms if we examine here some of the personal factors which  influenced their preparation. In attempting this task I touch,  inevitably, questions of motive, on which spectators are liable  to error and are not entitled to take on themselves the  responsibilities of final judgment. Yet, if I seem in this  chapter to assume sometimes the liberties which are habitual to  historians, but which, in spite of the greater knowledge with  which we speak, we generally hesitate to assume towards  contemporaries, let the reader excuse me when he remembers how  greatly, if it is to understand its destiny, the world needs  light, even if it is partial and uncertain, on the complex  struggle of human will and purpose, not yet finished, which,  concentrated in the persons of four individuals in a manner never  paralleled, made them in the first months of 1919 the microcosm  of mankind.      In those parts of the treaty with which I am here concerned,  the lead was taken by the French, in the sense that it was  generally they who made in the first instance the most definite  and the most extreme proposals. This was partly a matter of  tactics. When the final result is expected to be a compromise, it  is often prudent to start from an extreme position; and the  French anticipated at the outset -- like most other persons -- a  double process of compromise, first of all to suit the ideas of  their allies and associates, and secondly in the course of the  peace conference proper with the Germans themselves. These  tactics were justified by the event. Clemenceau gained a  reputation for moderation with his colleagues in council by  sometimes throwing over with an air of intellectual impartiality  the more extreme proposals of his ministers; and much went  through where the American and British critics were naturally a  little ignorant of the true point at issue, or where too  persistent criticism by France's allies put them in a position  which they felt as invidious, of always appearing to take the  enemy's part and to argue his case. Where, therefore, British and  American interests were not seriously involved their criticism  grew slack, and some provisions were thus passed which the French  themselves did not take very seriously, and for which the  eleventh-hour decision to allow no discussion with the Germans  removed the opportunity of remedy.      But, apart from tactics, the French had a policy. Although  Clemenceau might curtly abandon the claims of a Klotz or a  Loucheur, or close his eyes with an air of fatigue when French  interests were no longer involved in the discussion, he knew  which points were vital, and these he abated little. In so far as  the main economic lines of the treaty represent an intellectual  idea, it is the idea of France and of Clemenceau.      Clemenceau was by far the most eminent member of the Council  of Four, and he had taken the measure of his colleagues. He alone  both had an idea and had considered it in all its consequences.  His age, his character, his wit, and his appearance joined to  give him objectivity and a defined outline in an environment of  confusion. One could not despise Clemenceau or dislike him, but  only take a different view as to the nature of civilised man, or  indulge, at least, a different hope.      The figure and bearing of Clemenceau are universally  familiar. At the Council of Four he wore a square-tailed coat of  a very good, thick black broadcloth, and on his hands, which were  never uncovered, grey suede gloves; his boots were of thick black  leather, very good, but of a country style, and sometimes  fastened in front, curiously, by a buckle instead of laces. His  seat in the room in the President's house, where the regular  meetings of the Council of Four were held (as distinguished from  their private and unattended conferences in a smaller chamber  below), was on a square brocaded chair in the middle of the  semicircle facing the fire-place, with Signor Orlando on his  left, the President next by the fire-place, and the Prime  Minister opposite on the other side of the fire-place on his  right. He carried no papers and no portfolio, and was unattended  by any personal secretary, though several French ministers and  officials appropriate to the particular matter in hand would be  present round him. His walk, his hand, and his voice were not  lacking in vigour, but he bore nevertheless, especially after the  attempt upon him, the aspect of a very old man conserving his  strength for important occasions. He spoke seldom, leaving the  initial statement of the French case to his ministers or  officials; he closed his eyes often and sat back in his chair  with an impassive face of parchment, his grey-gloved hands  clasped in front of him. A short sentence, decisive or cynical,  was generally sufficient, a question, an unqualified abandonment  of his ministers, whose face would not be saved, or a display of  obstinacy reinforced by a few words in a piquantly delivered  English.(1*) But speech and passion were not lacking when they  were wanted, and the sudden outburst of words, often followed by  a fit of deep coughing from the chest, produced their impression  rather by force and surprise than by persuasion.      Not infrequently Mr Lloyd George, after delivering a speech  in English, would, during the period of its interpretation into  French, cross the hearth-rug to the President to reinforce his  case by some ad hominem argument in private conversation, or to  sound the ground for a compromise -- and this would sometimes be  the signal for a general upheaval and disorder. The President's  advisers would press round him, a moment later the British  experts would dribble across to learn the result or see that all  was well, and next the French would be there, a little suspicious  lest the others were arranging something behind them, until all  the room were on their feet and conversation was general in both  languages. My last and most vivid impression is of such a scene  -- the President and the Prime Minister as the centre of a  surging mob and a babel of sound, a welter of eager, impromptu  compromises and counter-compromises, all sound and fury  signifying nothing, on what was an unreal question anyhow, the  great issues of the morning's meeting forgotten and neglected;  and Clemenceau, silent and aloof on the outskirts -- for nothing  which touched the security of France was forward -- throned, in  his grey gloves, on the brocade chair, dry in soul and empty of  hope, very old and tired, but surveying the scene with a cynical  and almost impish air; and when at last silence was restored and  the company had returned to their places, it was to discover that  he had disappeared.      He felt about France what Pericles felt of Athens -- unique  value in her, nothing else mattering; but his theory of politics  was Bismarck's. He had one illusion -- France; and one  disillusion -- mankind, including Frenchmen, and his colleagues  not least. His principles for the peace can be expressed simply.  In the first place, he was a foremost believer in the view of  German psychology that the German understands and can understand  nothing but intimidation, that he is without generosity or  remorse in negotiation, that there is no advantage he will not  take of you, and no extent to which he will not demean himself  for profit, that he is without honour, pride, or mercy. Therefore  you must never negotiate with a German or conciliate him; you  must dictate to him. On no other terms will he respect you, or  will you prevent him from cheating you. But it is doubtful how  far he thought these characteristics peculiar to Germany, or  whether his candid view of some other nations was fundamentally  different. His philosophy had, therefore, no place for  'sentimentality' in international relations. Nations are real  things, of whom you love one and feel for the rest indifference  -- or hatred. The glory of the nation you love is a desirable end  -- but generally to be obtained at your neighbour's expense. The  politics of power are inevitable, and there is nothing very new  to learn about this war or the end it was fought for; England had  destroyed, as in each preceding century, a trade rival; a mighty  chapter had been closed in the secular struggle between the  glories of Germany and of France. Prudence required some measure  of lip service to the 'ideals' of foolish Americans and  hypocritical Englishmen; but it would be stupid to believe that  there is much room in the world, as it really is, for such  affairs as the League of Nations, or any sense in the principle  of self-determination except as an ingenious formula for  rearranging the balance of power in one's own interests.      These, however, are generalities. In tracing the practical  details of the peace which he thought necessary for the power and  the security of France, we must go back to the historical causes  which had operated during his lifetime. Before the Franco-German  war the populations of France and Germany were approximately  equal; but the coal and iron and shipping of Germany were in  their infancy, and the wealth of France was greatly superior.  Even after the loss of Alsace-Lorraine there was no great  discrepancy between the real resources of the two countries. But  in the intervening period the relative position had changed  completely. By 1914 the population of Germany was nearly seventy  per cent in excess of that of France; she had become one of the  first manufacturing and trading nations of the world; her  technical skill and her means for the production of future wealth  were unequalled. France on the other hand had a stationary or  declining population, and, relatively to others, had fallen  seriously behind in wealth and in the power to produce it.      In spite, therefore, of France's victorious issue from the  present struggle (with the aid, this time, of England and  America), her future position remained precarious in the eyes of  one who took the view that European civil war is to be regarded  as a normal, or at least a recurrent, state of affairs for the  future, and that the sort of conflicts between organised Great  Powers which have occupied the past hundred years will also  engage the next. According to this vision of the future, European  history is to be a perpetual prize-fight, of which France has won  this round, but of which this round is certainly not the last.  From the belief that essentially the old order does not change,  being based on human nature which is always the same, and from a  consequent scepticism of all that class of doctrine which the  League of Nations stands for, the policy of France and of  Clemenceau followed logically. For a peace of magnanimity or of  fair and equal treatment, based on such 'ideology' as the  Fourteen Points of the President, could only have the effect of  shortening the interval of Germany's recovery and hastening the  day when she will once again hurl at France her greater numbers  and her superior resources and technical skill. Hence the  necessity of 'guarantees'; and each guarantee that was taken, by  increasing irritation and thus the probability of a subsequent  revanche by Germany, made necessary yet further provisions to  crush. Thus, as soon as this view of the world is adopted and the  other discarded, a demand for a Carthaginian peace is inevitable,  to the full extent of the momentary power to impose it. For  Clemenceau made no pretence of considering himself bound by the  Fourteen Points and left chiefly to others such concoctions as  were necessary from time to time to save the scruples or the face  of the President.      So far as possible, therefore, it was the policy of France to  set the clock back and to undo what, since 1870, the progress of  Germany had accomplished. By loss of territory and other measures  her population was to be curtailed; but chiefly the economic  system, upon which she depended for her new strength, the vast  fabric built upon iron, coal, and transport, must be destroyed.  If France could seize, even in part, what Germany was compelled  to drop, the inequality of strength between the two rivals for  European hegemony might be remedied for many generations.      Hence sprang those cumulative provisions for the destruction  of highly organised economic life which we shall examine in the  next chapter.      This is the policy of an old man, whose most vivid  impressions and most lively imagination are of the past and not  of the future. He sees the issue in terms of France and Germany,  not of humanity and of European civilisation struggling forwards  to a new order. The war has bitten into his consciousness  somewhat differently from ours, and he neither expects nor hopes  that we are at the threshold of a new age.      It happens, however, that it is not only an ideal question  that is at issue. My purpose in this book is to show that the  Carthaginian peace is not practically right or possible. Although  the school of thought from which it springs is aware of the  economic factor, it overlooks, nevertheless, the deeper economic  tendencies which are to govern the future. The clock cannot be  set back. You cannot restore Central Europe to 1870 without  setting up such strains in the European structure and letting  loose such human and spiritual forces as, pushing beyond  frontiers and races, will overwhelm not only you and your  'guarantees', but your institutions, and the existing order of  your society.      By what legerdemain was this policy substituted for the  Fourteen Points, and how did the President come to accept it? The  answer to these questions is difficult and depends on elements of  character and psychology and on the subtle influence of  surroundings, which are hard to detect and harder still to  describe. But, if ever the action of a single individual matters,  the collapse of the President has been one of the decisive moral  events of history; and I must make an attempt to explain it. What  a place the President held in the hearts and hopes of the world  when he sailed to us in the George Washington! What a great man  came to Europe in those early days of our victory!      In November 1918 the armies of Foch and the words of Wilson  had brought us sudden escape from what was swallowing up all we  cared for. The conditions seemed favourable beyond any  expectation. The victory was so complete that fear need play no  part in the settlement. The enemy had laid down his arms in  reliance on a solemn compact as to the general character of the  peace, the terms of which seemed to assure a settlement of  justice and magnanimity and a fair hope for a restoration of the  broken current of life. To make assurance certain the President  was coming himself to set the seal on his work.      When President Wilson left Washington he enjoyed a prestige  and a moral influence throughout the world unequalled in history.  His bold and measured words carried to the peoples of Europe  above and beyond the voices of their own politicians. The enemy  peoples trusted him to carry out the compact he had made with  them; and the Allied peoples acknowledged him not as a victor  only but almost as a prophet. In addition to this moral influence  the realities of power were in his hands. The American armies  were at the height of their numbers, discipline, and equipment.  Europe was in complete dependence on the food supplies of the  United States; and financially she was even more absolutely at  their mercy. Europe not only already owed the United States more  than she could pay; but only a large measure of further  assistance could save her from starvation and bankruptcy. Never  had a philosopher held such weapons wherewith to bind the princes  of this world. How the crowds of the European capitals pressed  about the carriage of the President! With what curiosity,  anxiety, and hope we sought a glimpse of the features and bearing  of the man of destiny who, coming from the West, was to bring  healing to the wounds of the ancient parent of his civilisation  and lay for us the foundations of the future.      The disillusion was so complete, that some of those who had  trusted most hardly dared speak of it. Could it be true? they  asked of those who returned from Paris. Was the treaty really as  bad as it seemed? What had happened to the President? What  weakness or what misfortune had led to so extraordinary, so  unlooked-for a betrayal?      Yet the causes were very ordinary and human. The President  was not a hero or a prophet; he was not even a philosopher; but a  generously intentioned man, with many of the weaknesses of other  human beings, and lacking that dominating intellectual equipment  which would have been necessary to cope with the subtle and  dangerous spellbinders whom a tremendous clash of forces and  personalities had brought to the top as triumphant masters in the  swift game of give and take, face to face in council -- a game of  which he had no experience at all.      We had indeed quite a wrong idea of the President. We knew  him to be solitary and aloof, and believed him very strong-willed  and obstinate. We did not figure him as a man of detail, but the  clearness with which he had taken hold of certain main ideas  would, we thought, in combination with his tenacity, enable him  to sweep through cobwebs. Besides these qualities he would have  the objectivity, the cultivation, and the wide knowledge of the  student. The great distinction of language which had marked his  famous Notes seemed to indicate a man of lofty and powerful  imagination. His portraits indicated a fine presence and a  commanding delivery. With all this he had attained and held with  increasing authority the first position in a country where the  arts of the politician are not neglected. All of which, without  expecting the impossible, seemed a fine combination of qualities  for the matter in hand.      The first impression of Mr Wilson at close quarters was to  impair some but not all of these illusions. His head and features  were finely cut and exactly like his photographs, and the muscles  of his neck and the carriage of his head were distinguished. But,  like Odysseus, the President looked wiser when he was seated; and  his hands, though capable and fairly strong, were wanting in  sensitiveness and finesse. The first glance at the President  suggested not only that, whatever else he might be, his  temperament was not primarily that of the student or the scholar,  but that he had not much even of that culture of the world which  marks M. Clemenceau and Mr Balfour as exquisitely cultivated  gentlemen of their class and generation. But more serious than  this, he was not only insensitive to his surroundings in the  external sense, he was not sensitive to his environment at all.  What chance could such a man have against Mr Lloyd George's  unerring, almost medium-like, sensibility to everyone immediately  round him? To see the British Prime Minister watching the  company, with six or seven senses not available to ordinary men,  judging character, motive, and subconscious impulse, perceiving  what each was thinking and even what each was going to say next,  and compounding with telepathic instinct the argument or appeal  best suited to the vanity, weakness, or self-interest of his  immediate auditor, was to realise that the poor President would  be playing blind man's buff in that party. Never could a man have  stepped into the parlour a more perfect and predestined victim to  the finished accomplishments of the Prime the Minister. The Old  World was tough in wickedness anyhow; the Old World's heart of  stone might blunt the sharpest blade of the bravest  knight-errant. But this blind and deaf Don Quixote was entering a  cavern where the swift and glittering blade was in the hands of  the adversary.      But if the President was not the philosopher-king, what was  he? After all he was a man who had spent much of his life at a  university. He was by no means a business man or an ordinary  party politician, but a man of force, personality, and  importance. What, then, was his temperament?      The clue once found was illuminating. The President was like  a nonconformist minister, perhaps a Presbyterian. His thought and  his temperament were essentially theological not intellectual,  with all the strength and the weakness of that manner of thought,  feeling, and expression. It is a type of which there are not now  in England and Scotland such magnificent specimens as formerly;  but this description, nevertheless, will give the ordinary  Englishman the distinctest impression of the President.      With this picture of him in mind, we can return to the actual  course of events. The President's programme for the world, as set  forth in his speeches and his Notes, had displayed a spirit and a  purpose so admirable that the last desire of his sympathisers was  to criticise details-the details, they felt, were quite rightly  not filled in at present, but would be in due course. It was  commonly believed at the commencement of the Paris conference  that the President had thought out, with the aid of a large body  of advisers, a comprehensive scheme not only for the League of  Nations, but for the embodiment of the Fourteen Points in an  actual treaty of peace. But in fact the President had thought out  nothing; when it came to practice his ideas were nebulous and  incomplete. He had no plan, no scheme, no constructive ideas  whatever for clothing with the flesh of life the commandments  which he had thundered from the White House. He could have  preached a sermon on any of them or have addressed a stately  prayer to the Almighty for their fulfilment; but he could not  frame their concrete application to the actual state of Europe.      He not only had no proposals in detail, but he was in many  respects, perhaps inevitably, ill-informed as to European  conditions. And not only was he ill-informed -- that was true of  Mr Lloyd George also -- but his mind was slow and unadaptable.  The President's slowness amongst the Europeans was noteworthy. He  could not, all in a minute, take in what the rest were saying,  size up the situation with a glance, frame a reply, and meet the  case by a slight change of ground; and he was liable, therefore,  to defeat by the mere swiftness, apprehension, and agility of a  Lloyd George. There can seldom have been a statesman of the first  rank more incompetent than the President in the agilities of the  council chamber. A moment often arrives when substantial victory  is yours if by some slight appearance of a concession you can  save the face of the opposition or conciliate them by a  restatement of your proposal helpful to them and not injurious to  anything essential to yourself. The President was not equipped  with this simple and usual artfulness. His mind was too slow and  unresourceful to be ready with any alternatives. The President  was capable of digging his toes in and refusing to budge, as he  did over Fiume. But he had no other mode of defence, and it  needed as a rule but little manoeuvring by his opponents to  prevent matters from coming to such a head until it was too late.  By pleasantness and an appearance of conciliation, the President  would be manoeuvred off his ground, would miss the moment for  digging his toes in and, before he knew where he had been got to,  it was too late. Besides, it is impossible month after month, in  intimate and ostensibly friendly converse between close  associates, to be digging the toes in all the time. Victory would  only have been possible to one who had always a sufficiently  lively apprehension of the position as a whole to reserve his  fire and know for certain the rare exact moments for decisive  action. And for that the President was far too slow-minded and  bewildered.      He did not remedy these defects by seeking aid from the  collective wisdom of his lieutenants. He had gathered round him  for the economic chapters of the treaty a very able group of  businessmen; but they were inexperienced in public affairs, and  knew (with one or two exceptions) as little of Europe as he did,  and they were only called in irregularly as he might need them  for a particular purpose. Thus the aloofness which had been found  effective in Washington was maintained, and the abnormal reserve  of his nature did not allow near him anyone who aspired to moral  equality or the continuous exercise of influence. His  fellow-plenipotentiaries were dummies; and even the trusted  Colonel House, with vastly more knowledge of men and of Europe  than the President, from whose sensitiveness the President's  dullness had gained so much, fell into the background as time  went on. All this was encouraged by his colleagues on the Council  of Four, who, by the break-up of the Council of Ten, completed  the isolation which the President's own temperament had  initiated. Thus day after day and week after week he allowed  himself to be closeted, unsupported, unadvised, and alone, with  men much sharper than himself, in situations of supreme  difficulty, where he needed for success every description of  resource, fertility, and knowledge. He allowed himself to be  drugged by their atmosphere, to discuss on the basis of their  plans and of their data, and to be led along their paths.      These and other various causes combined to produce the  following situation. The reader must remember that the processes  which are here compressed into a few pages took place slowly,  gradually, insidiously, over a period of about five months.      As the President had thought nothing out, the Council was  generally working on the basis of a French or British draft. He  had to take up, therefore, a persistent attitude of obstruction,  criticism, and negation, if the draft was to become at all in  line with his own ideas and purpose. If he was met on some points  with apparent generosity (for there was always a safe margin of  quite preposterous suggestions which no one took seriously), it  was difficult for him not to yield on others. Compromise was  inevitable, and never to compromise on the essential, very  difficult. Besides, he was soon made to appear to be taking the  German part, and laid himself open to the suggestion (to which he  was foolishly and unfortunately sensitive) of being 'pro-German'.      After a display of much principle and dignity in the early  days of the Council of Ten, he discovered that there were certain  very important points in the programme of his French, British or  Italian colleague, as the case might be, of which he was  incapable of securing the surrender by the methods of secret  diplomacy. What then was he to do in the last resort? He could  let the conference drag on an endless length by the exercise of  sheer obstinacy. He could break it up and return to America in a  rage with nothing settled. Or he could attempt an appeal to the  world over the heads of the conference. These were wretched  alternatives, against each of which a great deal could be said.  They were also very risky, especially for a politician. The  President's mistaken policy over the congressional election had  weakened his personal position in his own country, and it was by  no means certain that the American public would support him in a  position of intransigency. It would mean a campaign in which the  issues would be clouded by every sort of personal and party  consideration, and who could say if right would triumph in a  struggle which would certainly not be decided on its merits.  Besides, any open rupture with his colleagues would certainly  bring upon his head the blind passions of 'anti-German'  resentment with which the public of all Allied countries were  still inspired. They would not listen to his arguments. They  would not be cool enough to treat the issue as one of  international morality or of the right governance of Europe. The  cry would simply be that for various sinister and selfish reasons  the President wished 'to let the Hun off'. The almost unanimous  voice of the French and British Press could be anticipated. Thus,  if he threw down the gage publicly he might be defeated. And if  he were defeated, would not the final peace be far worse than if  he were to retain his prestige and endeavour to make it as good  as the limiting conditions of European politics would allow him?  But above all, if he were defeated, would he not lose the League  of Nations? And was not this, after all, by far the most  important issue for the future happiness of the world? The treaty  would be altered and softened by time. Much in it which now  seemed so vital would become trifling, and much which was  impracticable would for that very reason never happen. But the  League, even in an imperfect form, was permanent; it was the  first commencement of a new principle in the government of the  world; truth and justice in international relations could not be  established in a few months -- they must be born in due course by  the slow gestation of the League. Clemenceau had been clever  enough to let it be seen that he would swallow the League at a  price.      At the crisis of his fortunes the President was a lonely man.  Caught up in the toils of the Old World, he stood in great need  of sympathy, of moral support, of the enthusiasm of masses. But  buried in the conference, stifled in the hot and poisoned  atmosphere of Paris, no echo reached him from the outer world,  and no throb of passion, sympathy, or encouragement from his  silent constituents in all countries. He felt that the blaze of  popularity which had greeted his arrival in Europe was already  dimmed; the Paris Press jeered at him openly; his political  opponents at home were taking advantage of his absence to create  an atmosphere against him; England was cold, critical, and  unresponsive. He had so formed his entourage that he did not  receive through private channels the current of faith and  enthusiasm of which the public sources seemed dammed up. He  needed, but lacked, the added strength of collective faith. The  German terror still overhung us, and even the sympathetic public  was very cautious; the enemy must not be encouraged, our friends  must be supported, this was not the time for discord or  agitations, the President must be trusted to do his best. And in  this drought the flower of the President's faith withered and  dried up.      Thus it came to pass that the President countermanded the  George Washington, which, in a moment of well-founded rage, he  had ordered to be in readiness to carry him from the treacherous  halls of Paris back to the seat of his authority, where he could  have felt himself again. But as soon, alas, as he had taken the  road of compromise, the defects, already indicated, of his  temperament and of his equipment, were fatally apparent. He could  take the high line; he could practise obstinacy; he could write  Notes from Sinai or Olympus; he could remain unapproachable in  the White House or even in the Council of Ten and be safe. But if  he once stepped down to the intimate equality of the Four, the  game was evidently up.      Now it was that what I have called his theological or  Presbyterian temperament became dangerous. Having decided that  some concessions were unavoidable, he might have sought by  firmness and address and the use of the financial power of the  United States to secure as much as he could of the substance,  even at some sacrifice of the letter. But the President was not  capable of so clear an understanding with himself as this  implied. He was too conscientious. Although compromises were now  necessary, he remained a man of principle and the Fourteen Points  a contract absolutely binding upon him. He would do nothing that  was not honourable; he would do nothing that was not just and  right; he would do nothing that was contrary to his great  profession of faith. Thus, without any abatement of the verbal  inspiration of the Fourteen Points, they became a document for  gloss and interpretation and for all the intellectual apparatus  of self-deception by which, I daresay, the President's  forefathers had persuaded themselves that the course they thought  it necessary to take was consistent with every syllable of the  Pentateuch.      The President's attitude to his colleagues had now become: I  want to meet you so far as I can; I see your difficulties and I  should like to be able to agree to what you propose; but I can do  nothing that is not just and right, and you must first of all  show me that what you want does really fall within the words of  the pronouncements which are binding on me. Then began the  weaving of that web of sophistry and Jesuitical exegesis that was  finally to clothe with insincerity the language and substance of  the whole treaty. The word was issued to the witches of all  Paris: 

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

      The subtlest sophisters and most hypocritical draftsmen were  set to work, and produced many ingenious exercises which might  have deceived for more than an hour a cleverer man than the  President.      Thus instead of saying that German Austria is prohibited from  uniting with Germany except by leave of France (which would be  inconsistent with the principle of self-determination), the  treaty, with delicate draftsmanship, states that 'Germany  acknowledges and will respect strictly the independence of  Austria, within the frontiers which may be fixed in a treaty  between that state and the principal Allied and Associated  Powers; she agrees that this independence shall be inalienable,  except with the consent of the council of the League of Nations',  which sounds, but is not, quite different. And who knows but that  the President forgot that another part of the treaty provides  that for this purpose the council of the League must be  unanimous.      Instead of giving Danzig to Poland, the treaty establishes  Danzig as a 'free' city, but includes this 'free' city within the  Polish customs frontier, entrusts to Poland the control of the  river and railway system, and provides that 'the Polish  government shall undertake the conduct of the foreign relations  of the free city of Danzig as well as the diplomatic protection  of citizens of that city when abroad.'      In placing the river system of Germany under foreign control,  the treaty speaks of declaring international those 'river systems  which naturally provide more than one state with access to the  sea, with or without transhipment from one vessel to another'.      Such instances could be multiplied. The honest and  intelligible purpose of French policy, to limit the population of  Germany and weaken her economic system, is clothed, for the  President's sake, in the august language of freedom and  international equality.      But perhaps the most decisive moment in the disintegration of  the President's moral position and the clouding of his mind was  when at last, to the dismay of his advisers, he allowed himself  to be persuaded that the expenditure of the Allied governments on  pensions and separation allowances could be fairly regarded as  'damage done to the civilian population of the Allied and  Associated Powers by German aggression by land, by sea, and from  the air', in a sense in which the other expenses of the war could  not be so regarded. It was a long theological struggle in which,  after the rejection of many different arguments, the President  finally capitulated before a masterpiece of the sophist's art.      At last the work was finished; and the President's conscience  was still intact. In spite of everything, I believe that his  temperament allowed him to leave Paris a really sincere man; and  it is probable that to this day he is genuinely convinced that  the treaty contains practically nothing inconsistent with his  former professions.      But the work was too complete, and to this was due the last  tragic episode of the drama. The reply of Brockdorff-Rantzau  inevitably took the line that Germany had laid down her arms on  the basis of certain assurances, and that the treaty in many  particulars was not consistent with these assurances. But this  was exactly what the President could not admit; in the sweat of  solitary contemplation and with prayers to God he had done  nothing that was not just and right; for the President to admit  that the German reply had force in it was to destroy his  self-respect and to disrupt the inner equipoise of his soul; and  every instinct of his stubborn nature rose in self-protection. In  the language of medical psychology, to suggest to the President  that the treaty was an abandonment of his professions was to  touch on the raw a Freudian complex. It was a subject intolerable  to discuss, and every subconscious instinct plotted to defeat its  further exploration.      Thus it was that Clemenceau brought to success what had  seemed to be, a few months before, the extraordinary and  impossible proposal that the Germans should not be heard. If only  the President had not been so conscientious, if only he had not  concealed from himself what he had been doing, even at the last  moment he was in a position to have recovered lost ground and to  have achieved some very considerable successes. But the President  was set. His arms and legs had been spliced by the surgeons to a  certain posture, and they must be broken again before they could  be altered. To his horror, Mr Lloyd George, desiring at the last  moment all the moderation he dared, discovered that he could not  in five days persuade the President of error in what it had taken  five months to prove to him to be just and right. After all, it  was harder to de-bamboozle this old Presbyterian than it had been  to bamboozle him; for the former involved his belief in and  respect for himself.      Thus in the last act the President stood for stubbornness and  a refusal of conciliations. 

  NOTES: 

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

      The thoughts which I have expressed in the second chapter  were not present to the mind of Paris. The future life of Europe  was not their concern; its means of livelihood was not their  anxiety. Their preoccupations, good and bad alike, related to  frontiers and nationalities, to the balance of power, to imperial  aggrandisements, to the future enfeeblement of a strong and  dangerous enemy, to revenge, and to the shifting by the victors  of their unbearable financial burdens on to the shoulders of the  defeated.      Two rival schemes for the future polity of the world took the  field -- the Fourteen Points of the President, and the  Carthaginian peace of M. Clemenceau. Yet only one of these was  entitled to take the field; for the enemy had not surrendered  unconditionally, but on agreed terms as to the general character  of the peace.      This aspect of what happened cannot, unfortunately, be passed  over with a word, for in the minds of many Englishmen at least it  has been a subject of very great misapprehension. Many persons  believe that the armistice terms constituted the first contract  concluded between the Allied and Associated Powers and the German  government, and that we entered the conference with our hands  free, except so far as these armistice terms might bind us. This  was not the case. To make the position plain, it is necessary  briefly to review the history of the negotiations which began  with the German Note of 5 October 1918, and concluded with  President Wilson's Note of 5 November 1918.      On 5 October 1918 the German government addressed a brief  Note to the President accepting the Fourteen Points and asking  for peace negotiations. The President's reply of 8 October asked  if he was to understand definitely that the German government  accepted 'the terms laid down' in the Fourteen Points and in his  subsequent addresses and 'that its object in entering into  discussion would be only to agree upon the practical details of  their application.' He added that the evacuation of invaded  territory must be a prior condition of an armistice. On 12  October the German government returned an unconditional  affirmative to these questions; 'its object in entering into  discussions would be only to agree upon practical details of the  application of these terms'. On 14 October, having received this  affirmative answer, the President made a further communication to  make clear the points: (1) that the details of the armistice  would have to be left to the military advisers of the United  States and the Allies, and must provide absolutely against the  possibility of Germany's resuming hostilities; (2) that submarine  warfare must cease if these conversations were to continue; and  (3) that he required further guarantees of the representative  character of the government with which he was dealing. On 20  October Germany accepted points (1) and (2), and pointed out, as  regards (3), that she now had a constitution and a government  dependent for its authority on the Reichstag. On 23 October the  President announced that, 'having received the solemn and  explicit assurance of the German government that it unreservedly  accepts the terms of peace laid down in his address to the  Congress of the United States on 8 January 1918 (the Fourteen  Points), and the principles of settlement enunciated in his  subsequent addresses, particularly the address of 27 September,  and that it is ready to discuss the details of their  application', he has communicated the above correspondence to the  governments of the Allied Powers 'with the suggestion that, if  these governments are disposed to effect peace upon the terms and  principles indicated,' they will ask their military advisers to  draw up armistice terms of such a character as to 'ensure to the  associated governments the unrestricted power to safeguard and  enforce the details of the peace to which the German government  has agreed'. At the end of this Note the President hinted more  openly than in that of 14 October at the abdication of the  Kaiser. This completes the preliminary negotiations to which the  President alone was a party, acting without the governments of  the Allied Powers.      On 5 November 1918 the President transmitted to Germany the  reply he had received from the governments associated with him,  and added that Marshal Foch had been authorised to communicate  the terms of an armistice to properly accredited representatives.  In this reply the allied governments, 'subject to the  qualifications which follow, declare their willingness to make  peace with the government of Germany on the terms of peace laid  down in the President's address to Congress of 8 January 1918,  and the principles of settlement enunciated in his subsequent  addresses'. The qualifications in question were two in number.  The first related to the freedom of the seas, as to which they  'reserved to themselves complete freedom'. The second related to  reparation and ran as follows: 'Further, in the conditions of  peace laid down in his address to Congress on 8 January 1918, the  President declared that invaded territories must be restored as  well as evacuated and made free. The allied governments feel that  no doubt ought to be allowed to exist as to what this provision  implies. By it they understand that compensation will be made by  Germany for all damage done to the civilian population of the  Allies and to their property by the aggression of Germany by  land, by sea, and from the air.'(1*)      The nature of the contract between Germany and the Allies  resulting from this exchange of documents is plain and  unequivocal. The terms of the peace are to be in accordance with  the addresses of the President, and the purpose of the peace  conference is 'to discuss the details of their application.' The  circumstances of the contract were of an unusually solemn and  binding character; for one of the conditions of it was that  Germany should agree to armistice terms which were to be such as  would leave her helpless. Germany having rendered herself  helpless in reliance on the contract, the honour of the Allies  was peculiarly involved in fulfilling their part and, if there  were ambiguities, in not using their position to take advantage  of them.      What, then, was the substance of this contract to which the  Allies had bound themselves? An examination of the documents  shows that, although a large part of the addresses is concerned  with spirit, purpose, and intention, and not with concrete  solutions, and that many questions requiring a settlement in the  peace treaty are not touched on, nevertheless there are certain  questions which they settle definitely. It is true that within  somewhat wide limits the Allies still had a free hand. Further,  it is difficult to apply on a contractual basis those passages  which deal with spirit, purpose, and intention; every man must  judge for himself whether, in view of them, deception or  hypocrisy has been practised. But there remain, as will be seen  below, certain important issues on which the contract is  unequivocal.      In addition to the Fourteen Points of 8 January 1918, the  addresses of the President which form part of the material of the  contract are four in number -- before the Congress of 11  February; at Baltimore on 6 April; at Mount Vernon on 4 July; and  at New York on 27 September, the last of these being specially  referred to in the contract. I venture to select from these  addresses those engagements of substance, avoiding repetitions,  which are most relevant to the German treaty. The parts I omit  add to, rather than detract from, those I quote; but they chiefly  relate to intention, and are perhaps too vague and general to be  interpreted contractually.(2*)      The Fourteen Points -- (3) 'The removal. so far as possible,  of all economic barriers and the establishment of an equality of  trade conditions among all the nations consenting to the peace  and associating themselves for its maintenance.' (4) 'Adequate  guarantees given and taken that national armaments will be  reduced to the lowest point consistent with domestic safety.' (5)  'A free, open-minded, and absolutely impartial adjustment of all  colonial claims', regard being had to the interests of the  populations concerned. (6), (7), (8), and (11) The evacuation and  'restoration' of all invaded territory, especially of Belgium. To  this must be added the rider of the Allies, claiming compensation  for all damage done to civilians and their property by land, by  sea, and from the air (quoted in full above). (8) The righting of  'the wrong done to France by Prussia in 1871 in the matter of  Alsace-Lorraine'. (13) An independent Poland, including 'the  territories inhabited by indisputably Polish populations' and  'assured a free and secure access to the sea'. (14) The League of  Nations.      Before the Congress, 11 February -- 'There shall be no  annexations, no contributions, no punitive damages...  Self-determination is not a mere phrase. It is an imperative  principle of action which statesmen will henceforth ignore at  their peril... Every territorial settlement involved in this war  must be made in the interest and for the benefit of the  populations concerned, and not as a part of any mere adjustment  or compromise of claims amongst rival States.'      New York, 27 September -- (1) 'The impartial justice meted  out must involve no discrimination between those to whom we wish  to be just and those to whom we do not wish to be just.' (2) 'No  special or separate interest of any single nation or any group of  nations can be made the basis of any part of the settlement which  is not consistent with the common interest of all.' (3) 'There  can be no leagues or alliances or special covenants and  understandings within the general and common family of the League  of Nations.' (4) 'There can be no special selfish economic  combinations within the League and no employment of any form of  economic boycott or exclusion, except as the power of economic  penalty by exclusion from the markets of the world may be vested  in the League of Nations itself as a means of discipline and  control.' (5) 'All international agreements and treaties of every  kind must be made known in their entirety to the rest of the  world.'      This wise and magnanimous programme for the world had passed,  on 5 November 1918, beyond the region of idealism and aspiration,  and had become part of a solemn contract to which all the Great  Powers of the world had put their signature. But it was lost,  nevertheless, in the morass of Paris -- the spirit of it  altogether, the letter in parts ignored and in other parts  distorted.      The German observations on the draft treaty of peace were  largely a comparison between the terms of this understanding, on  the basis of which the German nation had agreed to lay down its  arms, and the actual provisions of the document offered them for  signature thereafter. The German commentators had little  difficulty in showing that the draft treaty constituted a breach  of engagements and of international morality comparable with  their own offence in the invasion of Belgium. Nevertheless, the  German reply was not in all its parts a document fully worthy of  the occasion, because in spite of the justice and importance of  much of its contents, a truly broad treatment and high dignity of  outlook were a little wanting, and the general effect lacks the  simple treatment, with the dispassionate objectivity of despair,  which the deep passions of the occasion might have evoked. The  Allied governments gave it, in any case, no serious  consideration, and I doubt if anything which the German  delegation could have said at that stage of the proceedings would  have much influenced the result.      The commonest virtues of the individual are often lacking in  the spokesmen of nations; a statesman representing not himself  but his country may prove, without incurring excessive blame --  as history often records -- vindictive, perfidious, and  egotistic. These qualities are familiar in treaties imposed by  victors. But the German delegation did not succeed in exposing in  burning and prophetic words the quality which chiefly  distinguishes this transaction from all its historical  predecessors -- its insincerity.      This theme, however, must be for another pen than mine. I am  mainly concerned in what follows not with the justice of the  treaty -- neither with the demand for penal justice against the  enemy, nor with the obligation of contractual justice on the  victor -- but with its wisdom and with its consequences.      I propose, therefore, in this chapter to set forth baldly the  principal economic provisions of the treaty, reserving, however,  for the next my comments on the reparation chapter and on  Germany's capacity to meet the payments there demanded from her.      The German economic system as it existed before the war  depended on three main factors: I. Overseas commerce as  represented by her mercantile marine, her colonies, her foreign  investments, her exports, and the overseas connections of her  merchants. II. The exploitation of her coal and iron and the  industries built upon them. III. Her transport and tariff system.  Of these the first, while not the least important, was certainly  the most vulnerable. The treaty aims at the systematic  destruction of all three, but principally of the first two. 

                              I 

      (1) Germany has ceded to the Allies all the vessels of her  mercantile marine exceeding 1,600 tons gross, half the vessels  between 1,000 tons and 1,600 tons, and one-quarter of her  trawlers and other fishing boats.(3*) The cession is  comprehensive, including not only vessels flying the German flag,  but also all vessels owned by Germans but flying other flags, and  all vessels under construction as well as those afloat.(4*)  Further, Germany undertakes, if required, to build for the Allies  such types of ships as they may specify up to 200,000 tons(5*)  annually for five years, the value of these ships being credited  to Germany against what is due from her for reparation.(6*)      Thus the German mercantile marine is swept from the seas and  cannot be restored for many years to come on a scale adequate to  meet the requirements of her own commerce. For the present, no  lines will run from Hamburg, except such as foreign nations may  find it worth while to establish out of their surplus tonnage.  Germany will have to pay to foreigners for the carriage of her  trade such charges as they may be able to exact, and will receive  only such conveniences as it may suit them to give her. The  prosperity of German ports and commerce can only revive, it would  seem, in proportion as she succeeds in bringing under her  effective influence the merchant marines of Scandinavia and of  Holland.      (2) Germany has ceded to the Allies 'all her rights and  titles over her overseas possessions.'(7*)      This cession not only applies to sovereignty but extends on  unfavourable terms to government property, all of which,  including railways, must be surrendered without payment, while,  on the other hand, the German government remains liable for any  debt which may have been incurred for the purchase or  construction of this property, or for the development of the  colonies generally.(8*)      In distinction from the practice ruling in the case of most  similar cessions in recent history, the property and persons of  private German nationals, as distinct from their government, are  also injuriously affected. The Allied government exercising  authority in any former German colony 'may make such provisions  as it thinks fit with reference to the repatriation from them of  German nationals and to the conditions upon which German subjects  of European origin shall, or shall not, be allowed to reside,  hold property, trade or exercise a profession in them'.(9*) All  contracts and agreements in favour of German nationals for the  construction or exploitation of public works lapse to the Allied  governments as part of the payment due for reparation.      But these terms are unimportant compared with the more  comprehensive provision by which 'the Allied and Associated  Powers reserve the right to retain and liquidate all property,  rights, and interests belonging at the date of the coming into  force of the present treaty to German nationals, or companies  controlled by them', within the former German colonies.(10*) This  wholesale expropriation of private property is to take place  without the Allies affording any compensation to the individuals  expropriated, and the proceeds will be employed, first, to meet  private debts due to Allied nationals from any German nationals,  and second, to meet claims due from Austrian, Hungarian,  Bulgarian, or Turkish nationals. Any balance may either be  returned by the liquidating Power direct to Germany, or retained  by them. If retained, the proceeds must be transferred to the  reparation commission for Germany's credit in the reparation  account.(11*)      In short, not only are German sovereignty and German  influence extirpated from the whole of her former overseas  possessions, but the persons and property of her nationals  resident or owning property in those parts are deprived of legal  status and legal security.      (3) The provisions just outlined in regard to the private  property of Germans in the ex-German colonies apply equally to  private German property in Alsace-Lorraine, except in so far as  the French government may choose to grant exceptions.(12*) This  is of much greater practical importance than the similar  expropriation overseas because of the far higher value of the  property involved and the closer interconnection, resulting from  the great development of the mineral wealth of these provinces  since 1871, of German economic interests there with those in  Germany itself. Alsace-Lorraine has been part of the German  empire for nearly fifty years -- a considerable majority of its  population is German-speaking -- and it has been the scene of  some of Germany's most important economic enterprises.  Nevertheless, the property of those Germans who reside there, or  who have invested in its industries, is now entirely at the  disposal of the French government without compensation, except in  so far as the German government itself may choose to afford it.  The French government is entitled to expropriate without  compensation the personal property of private German citizens and  German companies resident or situated within Alsace-Lorraine, the  proceeds being credited in part satisfaction of various French  claims. The severity of this provision is only mitigated to the  extent that the French government may expressly permit German  nationals to continue to reside, in which case the above  provision is not applicable. Government, state, and municipal  property, on the other hand, is to be ceded to France without any  credit being given for it. This includes the railway system of  the two provinces, together with its rolling-stock.(13*) But  while the property is taken over, liabilities contracted in  respect of it in the form of public debts of any kind remain the  liability of Germany.(14*) The provinces also return to French  sovereignty free and quit of their share of German war or pre-war  dead-weight debt; nor does Germany receive a credit on this  account in respect of reparation.      (4) The expropriation of German private property is not  limited, however, to the ex-German colonies and Alsace-Lorraine.  The treatment of such property forms, indeed, a very significant  and material section of the treaty, which has not received as  much attention as it merits, although it was the subject of  exceptionally violent objection on the part of the German  delegates at Versailles. So far as I know, there is no precedent  in any peace treaty of recent history for the treatment of  private property set forth below, and the German representatives  urged that the precedent now established strikes a dangerous and  immoral blow at the security of private property everywhere. This  is an exaggeration, and the sharp distinction, approved by custom  and convention during the past two centuries, between the  property and rights of a state and the property and rights of its  nationals is an artificial one, which is being rapidly put out of  date by many other influences than the peace treaty, and is  inappropriate to modern socialistic conceptions of the relations  between the state and its citizens. It is true, however, that the  treaty strikes a destructive blow at a conception which lies at  the root of much of so-called international law, as this has been  expounded hitherto.      The principal provisions relating to the expropriation of  German private property situated outside the frontiers of  Germany, as these are now determined, are overlapping in their  incidence, and the more drastic would seem in some cases to  render the others unnecessary. Generally speaking, however, the  more drastic and extensive provisions are not so precisely framed  as those of more particular and limited application. They are as  follows:      (a) The Allies 'reserve the right to retain and liquidate all  property, rights and interests belonging at the date of the  coming into force of the present treaty to German nationals, or  companies controlled by them, within their territories, colonies,  possessions and protectorates, including territories ceded to  them by the present treaty.'(15*)      This is the extended version of the provision which has been  discussed already in the case of the colonies and of  Alsace-Lorraine. The value of the property so expropriated will  be applied, in the first instance, to the satisfaction of private  debts due from Germany to the nationals of the Allied government  within whose jurisdiction the liquidation takes place, and,  second, to the satisfaction of claims arising out of the acts of  Germany's former allies. Any balance, if the liquidating  government elects to retain it, must be credited in the  reparation account.(16*) It is, however, a point of considerable  importance that the liquidating government is not compelled to  transfer the balance to the reparation commission, but can, if it  so decides, return the proceeds direct to Germany. For this will  enable the United States, if they so wish, to utilise the very  large balances in the hands of their enemy-property custodian to  pay for the provisioning of Germany, without regard to the views  of the reparation commission.      These provisions had their origin in the scheme for the  mutual settlement of enemy debts by means of a clearing house.  Under this proposal it was hoped to avoid much trouble and  litigation by making each of the governments lately at war  responsible for the collection of private debts due from its  nationals to the nationals of any of the other governments (the  normal process of collection having been suspended by reason of  the war), and for the distribution of the funds so collected to  those of its nationals who had claims against the nationals of  the other governments, any final balance either way being settled  in cash. Such a scheme could have been completely bilateral and  reciprocal. And so in part it is, the scheme being mainly  reciprocal as regards the collection of commercial debts. But the  completeness of their victory permitted the Allied governments to  introduce in their own favour many divergencies from reciprocity,  of which the following are the chief: Whereas the property of  Allied nationals within German jurisdiction reverts under the  treaty to Allied ownership on the conclusion of peace, the  property of Germans within Allied jurisdiction is to be retained  and liquidated as described above, with the result that the whole  of German property over a large part of the world can be  expropriated, and the large properties now within the custody of  public trustees and similar officials in the Allied countries may  be retained permanently. In the second place, such German assets  are chargeable, not only with the liabilities of Germans, but  also, if they run to it, with 'payment of the amounts due in  respect of claims by the nationals of such Allied or Associated  Power with regard to their property, rights, and interests in the  territory of other enemy Powers,' as, for example, Turkey,  Bulgaria, and Austria.(17*) This is a remarkable provision, which  is naturally non-reciprocal. In the third place, any final  balance due to Germany on private account need not be paid over,  but can be held against the various liabilities of the German  government.(18*) The effective operation of these articles is  guaranteed by the delivery of deeds, titles, and  information.(19*) In the fourth place, pre-war contracts between  Allied and German nationals may be cancelled or revived at the  option of the former, so that all such contracts which are in  Germany's favour will be cancelled, while, on the other hand, she  will be compelled to fulfil those which are to her disadvantage.      (b) So far we have been concerned with German property within  Allied jurisdiction. The next provision is aimed at the  elimination of German interests in the territory of her  neighbours and former allies, and of certain other countries.  Under article 260 of the financial clauses it is provided that  the reparation commission may, within one year of the coming into  force of the treaty, demand that the German government  expropriate its nationals and deliver to the reparation  commission 'any rights and interests of German nationals in any  public utility undertaking or in any concession(20*) operating in  Russia, China, Turkey, Austria, Hungary, and Bulgaria, or in the  possessions or dependencies of these states, or in any territory  formerly belonging to Germany or her allies, to be ceded by  Germany or her allies to any Power or to be administered by a  mandatory under the present treaty.' This is a comprehensive  description, overlapping in part the provisions dealt with under  (a) above, but including, it should be noted, the new states and  territories carved out of the former Russian, Austro-Hungarian,  and Turkish empires. Thus Germany's influence is eliminated and  her capital confiscated in all those neighbouring countries to  which she might naturally look for her future livelihood, and for  an outlet for her energy, enterprise, and technical skill.      The execution of this programme in detail will throw on the  reparation commission a peculiar task, as it will become  possessor of a great number of rights and interests over a vast  territory owing dubious obedience, disordered by war, disruption,  and Bolshevism. The division of the spoils between the victors  will also provide employment for a powerful office, whose  doorsteps the greedy adventurers and jealous concession-hunters  of twenty or thirty nations will crowd and defile.      Lest the reparation commission fail by ignorance to exercise  its rights to the full, it is further provided that the German  government shall communicate to it within six months of the  treaty's coming into force a list of all the rights and interests  in question, 'whether already granted, contingent or not yet  exercised', and any which are not so communicated within this  period will automatically lapse in favour of the Allied  governments.(21*) How far an edict of this character can be made  binding on a German national, whose person and property lie  outside the jurisdiction of his own government, is an unsettled  question; but all the countries specified in the above list are  open to pressure by the Allied authorities, whether by the  imposition of an appropriate treaty clause or otherwise.      (c) There remains a third provision more sweeping than either  of the above, neither of which affects German interests in  neutral countries. The reparation commission is empowered up to 1  May 1921 to demand payment up to 31,000 million in such manner as  they may fix, 'whether in gold, commodities, ships, securities or  otherwise'.(22*) This provision has the effect of entrusting to  the reparation commission for the period in question dictatorial  powers over all German property of every description whatever.  They can, under this article, point to any specific business,  enterprise, or property, whether within or outside Germany, and  demand its surrender; and their authority would appear to extend  not only to property existing at the date of the peace, but also  to any which may be created or acquired at any time in the course  of the next eighteen months. For example, they could pick out --  as presumably they will as soon as they are established -- the fine  and powerful German enterprise in South America known as the  Deutsche Ueberseeische Elektrizittsgesellschaft (the D.U.E.G.),  and dispose of it to Allied interests. The clause is unequivocal  and all-embracing. It is worth while to note in passing that it  introduces a quite novel principle in the collection of  indemnities. Hitherto, a sum has been fixed, and the nation  mulcted has been left free to devise and select for itself the  means of payment. But in this case the payees can (for a certain  period) not only demand a certain sum but specify the particular  kind of property in which payment is to be effected. Thus the  powers of the reparation commission, with which I deal more  particularly in the next chapter, can be employed to destroy  Germany's commercial and economic organisation as well as to  exact payment.      The cumulative effect of (a), (b), and (c) (as well as of  certain other minor provisions on which I have not thought it  necessary to enlarge) is to deprive Germany (or rather to empower  the Allies so to deprive her at their will -- it is not yet  accomplished) of everything she possesses outside her own  frontiers as laid down in the treaty. Not only are her overseas  investments taken and her connections destroyed, but the same  process of extirpation is applied in the territories of her  former allies and of her immediate neighbours by land.      (5) Lest by some oversight the above provisions should  overlook any possible contingencies, certain other articles  appear in the treaty, which probably do not add very much in  practical effect to those already described, but which deserve  brief mention as showing the spirit of completeness in which the  victorious Powers entered upon the economic subjection of their  defeated enemy.      First of all there is a general clause of barrer and  renunciation: 'In territory outside her European frontiers as  fixed by the present treaty, Germany renounces all rights, titles  and privileges whatever in or over territory which belonged to  her or to her allies, and all rights, titles and privileges  whatever their origin which she held as against the Allied and  Associated Powers...'(23*)      There follow certain more particular provisions. Germany  renounces all rights and privileges she may have acquired in  China.(24*) There are similar provisions for Siam,(25*) for  Liberia,(26*) for Morocco,(27*) and for Egypt.(28*) In the case  of Egypt not only are special privileges renounced, but by  article 150 ordinary liberties are withdrawn, the Egyptian  government being accorded 'complete liberty of action in  regulating the status of German nationals and the conditions  under which they may establish themselves in Egypt.'      By article 258 Germany renounces her right to any  participation in any financial or economic organisations of an  international character 'operating in any of the Allied or  Associated States, or in Austria, Hungary, Bulgaria or Turkey, or  in the dependencies of these states, or in the former Russian  empire'.      Generally speaking, only those pre-war treaties and  conventions are revived which it suits the Allied governments to  revive, and those in Germany's favour may be allowed to  lapse.(29*)      It is evident, however, that none of these provisions are of  any real importance, as compared with those described previously.  They represent the logical completion of Germany's outlawry and  economic subjection to the convenience of the Allies; but they do  not add substantially to her effective disabilities. 

                              II 

      The provisions relating to coal and iron are more important  in respect of their ultimate consequences on Germany's internal  industrial economy than for the money value immediately involved.  The German empire has been built more truly on coal and iron than  on blood and iron. The skilled exploitation of the great  coalfields of the Ruhr, Upper Silesia, and the Saar, alone made  possible the development of the steel, chemical, and electrical  industries which established her as the first industrial nation  of continental Europe. One-third of Germany's population lives in  towns of more than 20,000 inhabitants, an industrial  concentration which is only possible on a foundation of coal and  iron. In striking, therefore, at her coal supply, the French  politicians were not mistaking their target. It is only the  extreme immoderation, and indeed technical impossibility, of the  treaty's demands which may save the situation in the long run.      (1) The treaty strikes at Germany's coal supply in four ways:      (i) 'As compensation for the destruction of the coal-mines in  the north of France, and as part payment towards the total  reparation due from Germany for the damage resulting from the  war, Germany cedes to France in full and absolute possession,  with exclusive rights of exploitation, unencumbered, and free  from all debts and charges of any kind, the coal-mines situated  in the Saar Basin.'(30*) While the administration of this  district is vested for fifteen years in the League of Nations, it  is to be observed that the mines are ceded to France absolutely.  Fifteen years hence the population of the district will be called  upon to indicate by plebiscite their desires as to the future  sovereignty of the territory; and, in the event of their electing  for union with Germany, Germany is to be entitled to repurchase  the mines at a price payable in gold.(31*)      The judgment of the world has already recognised the  transaction of the Saar as an act of spoliation and insincerity.  So far as compensation for the destruction of French coal-mines  is concerned, this is provided for, as we shall see in a moment,  elsewhere in the treaty. 'There is no industrial region in  Germany', the German representatives have said without  contradiction, 'the population of which is so permanent, so  homogeneous, and so little complex as that of the Saar district.  Among more than 650,000 inhabitants, there were in 1918 less than  100 French. The Saar district has been German for more than 1,000  years. Temporary occupation as a result of warlike operations on  the part of the French always terminated in a short time in the  restoration of the country upon the conclusion of peace. During a  period of 1,048 years France has possessed the country for not  quite 68 years in all. When, on the occasion of the first Treaty  of Paris in 1814, a small portion of the territory now coveted  was retained for France, the population raised the most energetic  opposition and demanded "reunion with their German fatherland,"  to which they were "related by language, customs, and religion".  After an occupation of one year and a quarter, this desire was  taken into account in the second Treaty of Paris in 1815. Since  then the country has remained uninterruptedly attached to  Germany, and owes its economic development to that connection.'      The French wanted the coal for the purpose of working the  ironfields of Lorraine, and in the spirit of Bismarck they have  taken it. Not precedent, but the verbal professions of the  Allies, have rendered it indefensible.(32*)      (ii) Upper Silesia, a district without large towns, in which,  however, lies one of the major coalfields of Germany with a  production of about 23% of the total German output of hard coal,  is, subject to a plebiscite,(33*) to be ceded to Poland. Upper  Silesia was never part of historic Poland; but its population is  mixed Polish, German, and Czechoslovakian, the precise  proportions of which are disputed.(34*) Economically it is  intensely German; the industries of eastern Germany depend upon  it for their coal; and its loss would be a destructive blow at  the economic structure of the German state.(35*)      With the loss of the fields of Upper Silesia and the Saar,  the coal supplies of Germany are diminished by not far short of  one-third.      (iii) Out of the coal that remains to her, Germany is obliged  to make good year by year the estimated loss which France has  incurred by the destruction and damage of war in the coalfields  of her northern provinces. In paragraph 2 of annex V to the  reparation chapter, 'Germany undertakes to deliver to France  annually, for a period not exceeding ten years, an amount of coal  equal to the difference between the annual production before the  war of the coal-mines of the Nord and Pas de Calais, destroyed as  a result of the war, and the production of the mines of the same  area during the year in question: such delivery not to exceed 20  million tons in any one year of the first five years, and 8  million tons in any one year of the succeeding five years'.      This is a reasonable provision if it stood by itself, and one  which Germany should be able to fulfil if she were left her other  resources to do it with.      (iv) The final provision relating to coal is part of the  general scheme of the reparation chapter by which the sums due  for reparation are to be partly paid in kind instead of in cash.  As a part of the payment due for reparation, Germany is to make  the following deliveries of coal or its equivalent in coke (the  deliveries to France being wholly additional to the amounts  available by the cession of the Saar or in compensation for  destruction in Northern France):      (a) to France 7 million tons annually for ten years;(36*)      (b) to Belgium 8 million tons annually for ten years;      (c) to Italy an annual quantity, rising by annual increments  from 4.5 million tons in 1919-20 to 8.5 million tons in each of  the six years 1923-4 to 1928-9;      (d) to Luxemburg, if required, a quantity of coal equal to  the pre-war annual consumption of German coal in Luxemburg.      This amounts in all to an annual average of about 25 million  tons. 

      These figures have to be examined in relation to Germany's  probable output. The maximum pre-war figure was reached in 1913  with a total of 191.5 million tons. Of this, 19 million tons were  consumed at the mines, and on balance (i.e. exports less imports)  33.5 million tons were exported, leaving 139 million tons for  domestic consumption. It is estimated that this total was  employed as follows: 

                                  Million tons           Railways                    18.0           Gas, water, and electricity 12.5           Bunkers                      6.5           House-fuel, small industry              and agriculture          24.0           Industry                    78.0                                      139.0 

      The diminution of production due to loss of territory is:                                  Million tons              Alsace-Lorraine         3.8              Saar Basin             13.2              Upper Silesia          43.8                                     60.8 

      There would remain, therefore, on the basis of the 1913  output, 130.7 million tons or, deducting consumption at the mines  themselves, (say) 118 million tons. For some years there must be  sent out of this supply upwards of 20 million tons to France as  compensation for damage done to French mines, and 25 million tons  to France, Belgium, Italy, and Luxemburg;(37*) as the former  figure is a maximum, and the latter figure is to be slightly less  in the earliest years, we may take the total export to Allied  countries which Germany has undertaken to provide as 40 million  tons, leaving, on the above basis, 78 million tons for her own  use as against a pre-war consumption of 139 million tons.      This comparison, however, requires substantial modification  to make it accurate. On the one hand, it is certain that the  figures of pre-war output cannot be relied on as a basis of  present output. During 1918 the production was 161.5 million tons  as compared with 191.5 million tons in 1913; and during the first  half of 1919 it was less than 50 million tons, exclusive of  Alsace-Lorraine and the Saar but including Upper Silesia,  corresponding to an annual production of about 100 million  tons.(38*) The causes of so low an output were in part temporary  and exceptional, but the German authorities agree, and have not  been confuted, that some of them are bound to persist for some  time to come. In part they are the same as elsewhere; the daily  shift has been shortened from 8 1/2 to 7 hours, and it is  improbable that the powers of the central government will be  adequate to restore them to their former figure. But in addition,  the mining plant is in bad condition (due to the lack of certain  essential materials during the blockade), the physical efficiency  of the men is greatly impaired by malnutrition (which cannot be  cured if a tithe of the reparation demands are to be satisfied --  the standard of life will have rather to be lowered), and the  casualties of the war have diminished the numbers of efficient  miners. The analogy of English conditions is sufficient by itself  to tell us that a pre-war level of output cannot be expected in  Germany. German authorities put the loss of output at somewhat  above thirty per cent, divided about equally between the  shortening of the shift and the other economic influences. This  figure appears on general grounds to be plausible, but I have not  the knowledge to endorse or to criticise it.      The pre-war figure of 118 million tons net (i.e. after  allowing for loss of territory and consumption at the mines) is  likely to fall, therefore, at least as low as to 100 million(39*)  tons, having regard to the above factors. If 40 million tons of  this are to be exported to the Allies, there remain 60 million  tons for Germany herself to meet her own domestic consumption.  Demand as well as supply will be diminished by loss of territory,  but at the most extravagant estimate this could not be put above  29 million tons.(40*) Our hypothetical calculations, therefore,  leave us with post-war German domestic requirements, on the basis  of a prewar efficiency of railways and industry, of 110 million  tons against an output not exceeding 100 million tons, of which  40 million tons are mortgaged to the Allies.      The importance of the subject has led me into a somewhat  lengthy statistical analysis. It is evident that too much  significance must not be attached to the precise figures arrived  at, which are hypothetical and dubious.(41*) But the general  character of the facts presents itself irresistibly. Allowing for  the loss of territory and the loss of efficiency, Germany cannot  export coal in the near future (and will even be dependent on her  treaty rights to purchase in Upper Silesia), if she is to  continue as an industrial nation. Every million tons she is  forced to export must be at the expense of closing down an  industry. With results to be considered later this within certain  limits is possible. But it is evident that Germany cannot and  will not furnish the Allies with a contribution of 40 million  tons annually. Those Allied ministers who have told their peoples  that she can have certainly deceived them for the sake of  allaying for the moment the misgivings of the European peoples as  to the path along which they are being led.      The presence of these illusory provisions (amongst others) in  the clauses of the treaty of peace is especially charged with  danger for the future. The more extravagant expectations as to  reparation receipts, by which finance ministers have deceived  their publics, will be heard of no more when they have served  their immediate purpose of postponing the hour of taxation and  retrenchment. But the coal clauses will not be lost sight of so  easily -- for the reason that it will be absolutely vital in the  interests of France and Italy that these countries should do  everything in their power to exact their bond. As a result of the  diminished output due to German destruction in France, of the  diminished output of mines in the United Kingdom and elsewhere,  and of many secondary causes, such as the breakdown of transport  and of organisation and the inefficiency of new governments, the  coal position of all Europe is nearly desperate;(42*) and France  and Italy, entering the scramble with certain treaty rights, will  not lightly surrender them.      As is generally the case in real dilemmas, the French and  Italian case will possess great force, indeed unanswerable force  from a certain point of view. The position will be truly  represented as a question between German industry on the one hand  and French and Italian industry on the other. It may be admitted  that the surrender of the coal will destroy German industry; but  it may be equally true that its non-surrender will jeopardise  French and Italian industry. In such a case must not the victors  with their treaty rights prevail, especially when much of the  damage has been ultimately due to the wicked acts of those who  are now defeated? Yet if these feelings and these rights are  allowed to prevail beyond what wisdom would recommend, the  reactions on the social and economic life of Central Europe will  be far too strong to be confined within their original limits.      But this is not yet the whole problem. If France and Italy  are to make good their own deficiencies in coal from the output  of Germany, then northern Europe, Switzerland, and Austria, which  previously drew their coal in large part from Germany's  exportable surplus, must be starved of their supplies. Before the  war 13.4 million tons of Germany's coal exports went to  Austria-Hungary. Inasmuch as nearly all the coalfields of the  former empire lie outside what is now German Austria, the  industrial ruin of this latter state, if she cannot obtain coal  from Germany, will be complete. The case of Germany's neutral  neighbours, who were formerly supplied in part from Great Britain  but in large part from Germany, will be hardly less serious. They  will go to great lengths in the direction of making their own  supplies to Germany of materials which are essential to her,  conditional on these being paid for in coal. Indeed they are  already doing so.(43*) With the breakdown of money economy the  practice of international barter is becoming prevalent. Nowadays  money in Central and south-eastern Europe is seldom a true  measure of value in exchange, and will not necessarily buy  anything, with the consequence that one country, possessing a  commodity essential to the needs of another, sells it not for  cash but only against a reciprocal engagement on the part of the  latter country to furnish in return some article not less  necessary to the former. This is an extraordinary complication as  compared with the former almost perfect simplicity of  international trade. But in the no less extraordinary conditions  of today's industry it is not without advantages as a means of  stimulating production. The butter-shifts of the Ruhr(44*) show  how far modern Europe has retrograded in the direction of barter,  and afford a picturesque illustration of the low economic  organisation to which the breakdown of currency and free exchange  between individuals and nations is quickly leading us. But they  may produce the coal where other devices would fail.(45*)      Yet if Germany can find coal for the neighbouring neutrals,  France and Italy may loudly claim that in this case she can and  must keep her treaty obligations. In this there will be a great  show of justice, and it will be difficult to weigh against such  claims the possible facts that, while German miners will work for  butter, there is no available means of compelling them to get  coal the sale of which will bring in nothing, and that if Germany  has no coal to send to her neighbours she may fail to secure  imports essential to her economic existence.      If the distribution of the European coal supplies is to be a  scramble in which France is satisfied first, Italy next, and  everyone else takes their chance, the industrial future of Europe  is black and the prospects of revolution very good. It is a case  where particular interests and particular claims, however well  founded in sentiment or in justice, must yield to sovereign  expediency. If there is any approximate truth in Mr Hoover's  calculation that the coal output of Europe has fallen by  one-third, a situation confronts us where distribution must be  effected with evenhanded impartiality in accordance with need,  and no incentive can be neglected towards increased production  and economical methods of transport. The establishment by the  Supreme Council of the Allies in August 1919 of a European coal  commission, consisting of delegates from Great Britain, France,  Italy, Belgium, Poland, and Czechoslovakia, was a wise measure  which, properly employed and extended, may prove of great  assistance. But I reserve constructive proposals for chapter 7.  Here I am only concerned with tracing the consequences, per  impossibile, of carrying out the treaty au pied de la  lettre.(46*)      (2) The provisions relating to iron ore require less detailed  attention, though their effects are destructive. They require  less attention, because they are in large measure inevitable.  Almost exactly 75% of the iron ore raised in Germany in 1913 came  from Alsace-Lorraine.(47*) In this the chief importance of the  stolen provinces lay.      There is no question but that Germany must lose these  orefields. The only question is how far she is to be allowed  facilities for purchasing their produce. The German delegation  made strong efforts to secure the inclusion of a provision by  which coal and coke to be furnished by them to France should be  given in exchange for minette from Lorraine. But they secured no  such stipulation, and the matter remains at France's option.      The motives which will govern France's eventual policy are  not entirely concordant. While Lorraine comprised 75% of  Germany's iron ore, only 25 % of the blast furnaces lay within  Lorraine and the Saar basin together, a large proportion of the  ore being carried into Germany proper. Approximately the same  proportion of Germany's iron and steel foundries, namely 25 per  cent, were situated in Alsace-Lorraine. For the moment,  therefore, the most economical and profitable course would  certainly be to export to Germany, as hitherto, a considerable  part of the output of the mines.      On the other hand, France, having recovered the deposits of  Lorraine, may be expected to aim at replacing as far as possible  the industries which Germany had based on them by industries  situated within her own frontiers. Much time must elapse before  the plant and the skilled labour could be developed within  France, and even so she could hardly deal with the ore unless she  could rely on receiving the coal from Germany. The uncertainty,  too, as to the ultimate fate of the Saar will be disturbing to  the calculations of capitalists who contemplate the establishment  of new industries in France.      In fact, here, as elsewhere, political considerations cut  disastrously across economic. In a rgime of free trade and free  economic intercourse it would be of little consequence that iron  lay on one side of a political frontier, and labour, coal, and  blast furnaces on the other. But as it is, men have devised ways  to impoverish themselves and one another; and prefer collective  animosities to individual happiness. It seems certain,  calculating on the present passions and impulses of European  capitalistic society, that the effective iron output of Europe  will be diminished by a new political frontier (which sentiment  and historic justice require), because nationalism and private  interest are thus allowed to impose a new economic frontier along  the same lines. These latter considerations are allowed, in the  present governance of Europe, to prevail over the intense need of  the continent for the most sustained and efficient production to  repair the destructions of war, and to satisfy the insistence of  labour for a larger reward.(48*)      The same influences are likely to be seen, though on a lesser  scale, in the event of the transference of Upper Silesia to  Poland. While Upper Silesia contains but little iron, the  presence of coal has led to the establishment of numerous blast  furnaces. What is to be the fate of these? If Germany is cut off  from her supplies of ore on the west, will she export beyond her  frontiers on the east any part of the little which remains to  her? The efficiency and output of the industry seem certain to  diminish.      Thus the treaty strikes at organisation, and by the  destruction of organisation impairs yet further the reduced  wealth of the whole community. The economic frontiers which are  to be established between the coal and the iron upon which modern  industrialism is founded will not only diminish the production of  useful commodities, but may possibly occupy an immense quantity  of human labour in dragging iron or coal, as the case may be,  over many useless miles to satisfy the dictates of a political  treaty or because obstructions have been established to the  proper localisation of industry. 

                              III 

      There remain those treaty provisions which relate to the  transport and the tariff systems of Germany. These parts of the  treaty have not nearly the importance and the significance of  those discussed hitherto. They are pinpricks, interferences and  vexations, not so much objectionable for their solid  consequences, as dishonourable to the Allies in the light of  their professions. Let the reader consider what follows in the  light of the assurances already quoted, in reliance on which  Germany laid down her arms.      (1) The miscellaneous economic clauses commence with a number  of provisions which would be in accordance with the spirit of the  third of the Fourteen Points -- if they were reciprocal. Both for  imports and exports, and as regards tariffs, regulations, and  prohibitions, Germany binds herself for five years to accord  most-favoured-nation treatment to the Allied and Associated  states.(49*) But she is not entitled herself to receive such  treatment.      For five years Alsace-Lorraine shall be free to export into  Germany, without payment of customs duty, up to the average  amount sent annually into Germany from 1911 to 1913.(50*) But  there is no similar provision for German exports into  Alsace-Lorraine.      For three years Polish exports to Germany, and for five years  Luxemburg's exports to Germany, are to have a similar  privilege,(51*) but not German exports to Poland or to Luxemburg.  Luxemburg also, which for many years has enjoyed the benefits of  inclusion within the German customs union, is permanently  excluded from it henceforward.(52*)      For six months after the treaty has come into force Germany  may not impose duties on imports from the Allied and Associated  states higher than the most favourable duties prevalent before  the war; and for a further two years and a half (making three  years in all) this prohibition continues to apply to certain  commodities, notably to some of those as to which special  agreements existed before the war, and also to wine, to vegetable  oils, to artificial silk, and to washed or scoured wool.(53*)  This is a ridiculous and injurious provision, by which Germany is  prevented from taking those steps necessary to conserve her  limited resources for the purchase of necessaries and the  discharge of reparation. As a result of the existing distribution  of wealth in Germany, and of financial wantonness amongst  individuals, the offspring of uncertainty, Germany is threatened  with a deluge of luxuries and semi-luxuries from abroad, of which  she has been starved for years, which would exhaust or diminish  her small supplies of foreign exchange. These provisions strike  at the authority of the German government to ensure economy in  such consumption, or to raise taxation during a critical period.  What an example of senseless greed overreaching itself, to  introduce, after taking from Germany what liquid wealth she has  and demanding impossible payments for the future, a special and  particularised injunction that she must allow as readily as in  the days of her prosperity the import of champagne and of silk!      One other article affects the customs rgime of Germany  which, if it was applied, would be serious and extensive in its  consequences. The Allies have reserved the right to apply a  special customs rgime to the occupied area on the left bank of  the Rhine, 'in the event of such a measure being necessary in  their opinion in order to safeguard the economic interests of the  population of these territories'.(54*) This provision was  probably introduced as a possibly useful adjunct to the French  policy of somehow detaching the left-bank provinces from Germany  during the years of their occupation. The project of establishing  an independent republic under French clerical auspices, which  would act as a buffer state and realise the French ambition of  driving Germany proper beyond the Rhine, has not yet been  abandoned. Some believe that much may be accomplished by a rgime  of threats, bribes, and cajolery extended over a period of  fifteen years or longer.(55*) If this article is acted upon, and  the economic system of the left bank of the Rhine is effectively  severed from the rest of Germany, the effect would be  far-reaching. But the dreams of designing diplomats do not always  prosper, and we must trust the future.      (2) The clauses relating to railways, as originally presented  to Germany, were substantially modified in the final treaty, and  are now limited to a provision by which goods coming from Allied  territory to Germany, or in transit through Germany, shall  receive the most favoured treatment as regards rail freight,  rates, etc., applied to goods of the same kind carried on any  German lines 'under similar conditions of transport, for example,  as regards length of route'.(56*) As a non-reciprocal provision  this is an act of interference in internal arrangements which it  is difficult to justify, but the practical effect of this,(57*)  and of an analogous provision relating to passenger traffic,(58*)  will much depend on the interpretation of the phrase, 'similar  conditions of transport'.(59*)      For the time being Germany's transport system will be much  more seriously disordered by the provisions relating to the  cession of rolling-stock. Under paragraph 7 of the armistice  conditions Germany was called on to surrender 5,000 locomotives  and 150,000 waggons, 'in good working order, with all necessary  spare parts and fittings'. Under the treaty Germany is required  to confirm this surrender and to recognise the title of the  Allies to the material.(60*) She is further required, in the case  of railway systems in ceded territory, to hand over these systems  complete with their full complement of rolling-stock 'in a normal  state of upkeep' as shown in the last inventory before 11  November 1918.(61*) That is to say, ceded railway systems are not  to bear any share in the general depletion and deterioration of  the German rolling-stock as a whole.      This is a loss which in course of time can doubtless be made  good. But lack of lubricating oils and the prodigious wear and  tear of the war, not compensated by normal repairs, had already  reduced the German railway system to a low state of efficiency.  The further heavy losses under the treaty will confirm this state  of affairs for some time to come, and are a substantial  aggravation of the difficulties of the coal problem and of export  industry generally.      (3) There remain the clauses relating to the river system of  Germany. These are largely unnecessary and are so little related  to the supposed aims of the Allies that their purport is  generally unknown. Yet they constitute an unprecedented  interference with a country's domestic arrangements, and are  capable of being so operated as to take from Germany all  effective control over her own transport system. In their present  form they are incapable of justification; but some simple changes  might transform them into a reasonable instrument.      Most of the principal rivers of Germany have their source or  their outlet in non-German territory. The Rhine, rising in  Switzerland, is now a frontier river for a part of its course,  and finds the sea in Holland; the Danube rises in Germany but  flows over its greater length elsewhere; the Elbe rises in the  mountains of Bohemia, now called Czechoslovakia; the Oder  traverses Lower Silesia; and the Niemen now bounds the frontier  of East Prussia and has its source in Russia. Of these, the Rhine  and the Niemen are frontier rivers, the Elbe is primarily German  but in its upper reaches has much importance for Bohemia, the  Danube in its German parts appears to have little concern for any  country but Germany, and the Oder is an almost purely German  river unless the result of the plebiscite is to detach all Upper  Silesia.      Rivers which, in the words of the treaty, 'naturally provide  more than one state with access to the sea', properly require  some measure of international regulation and adequate guarantees  against discrimination. This principle has long been recognised  in the international commissions which regulate the Rhine and the  Danube. But on such commissions the states concerned should be  represented more or less in proportion to their interests. The  treaty, however, has made the international character of these  rivers a pretext for taking the river system of Germany out of  German control.      After certain articles which provide suitably against  discrimination and interference with freedom of transit,(62*) the  treaty proceeds to hand over the administration of the Elbe, the  Oder, the Danube, and the Rhine to international  commissions.(63*) The ultimate powers of these commissions are to  be determined by 'a general convention drawn up by the Allied and  Associated Powers, and approved by the League of Nations'.(64*)  In the meantime the commissions are to draw up their own  constitutions and are apparently to enjoy powers of the most  extensive description, 'particularly in regard to the execution  of works of maintenance, control, and improvement on the river  system, the financial rgime, the fixing and collection of  charges, and regulations for navigation.'(65*)      So far there is much to be said for the treaty. Freedom of  through transit is a not unimportant part of good international  practice and should be established everywhere. The objectionable  feature of the commissions lies in their membership. In each case  the voting is so weighted as to place Germany in a clear  minority. On the Elbe commission Germany has four votes out of  ten; on the Oder commission three out of nine; on the Rhine  commission four out of nineteen; on the Danube commission, which  is not yet definitely constituted, she will be apparently in a  small minority. On the government of all these rivers France and  Great Britain are represented; and on the Elbe for some  undiscoverable reason there are also representatives of Italy and  Belgium.      Thus the great waterways of Germany are handed over to  foreign bodies with the widest powers; and much of the local and  domestic business of Hamburg, Magdeburg, Dresden, Stettin,  Frankfurt, Breslau, and Ulm will be subject to a foreign  jurisdiction. It is almost as though the Powers of continental  Europe were to be placed in a majority on the Thames Conservancy  or the Port of London.      Certain minor provisions follow lines which in our survey of  the treaty are now familiar. Under annex III of the reparation  chapter Germany is to cede up to 20% of her inland navigation  tonnage. Over and above this she must cede such proportion of her  river craft upon the Elbe, the Oder, the Niemen, and the Danube  as an American arbitrator may determine, 'due regard being had to  the legitimate needs of the parties concerned, and particularly  to the shipping traffic during the five years preceding the war',  the craft so ceded to be selected from those most recently  built.(66*) The same course is to be followed with German vessels  and tugs on the Rhine and with German property in the port of  Rotterdam.(67*) Where the Rhine flows between France and Germany,  France is to have all the rights of utilising the water for  irrigation or for power and Germany is to have none;(68*) and all  the bridges are to be French property as to their whole  length.(69*) Finally, the administration of the purely German  Rhine port of Kehl lying on the eastern bank of the river is to  be united to that of Strassburg for seven years and managed by a  Frenchman nominated by the new Rhine commission.      Thus the economic clauses of the treaty are comprehensive,  and little has been overlooked which might impoverish Germany now  or obstruct her development in future. So situated, Germany is to  make payments of money, on a scale and in a manner to be examined  in the next chapter. 

  NOTES: 

  1. The precise force of this reservation is discussed in detail  in chapter 5. 

  2. I also omit those which have no special relevance to the  German settlement. The second of the Fourteen Points, which  relates to the freedom of the seas, is omitted because the Allies  did not accept it. 

  3. Part VIII, annex III (1). 

  4. Part VIII, annex III (3). 

  5. In the years before the war the average shipbuilding output of  Germany was about 350,000 tons annually, exclusive of warships. 

  6. Part VIII, annex III (5). 

  7. Article 119. 

  8. Article 120 and 257. 

  9. Article 122. 

  10. Articles 121 and 297(b). The exercise or non-exercise of this  option of expropriation appears to lie, not with the reparation  commission, but with the particular Power in whose territory the  property has become situated by cession or mandation. 

  11. Article 297(h) and paragraph 4 of annex to part X, section  IV. 

  12. Articles 53 and 74. 

  13. In 1871 Germany granted France credit for the railways of  Alsace-Lorraine but not for state property. At that time,  however, the railways were private property. As they afterwards  became the property of the German government, the French  government have held, in spite of the large additional capital  which Germany has sunk in them, that their treatment must follow  the precedent of state property generally. 

  14. Articles 55 and 255. This follows the precedent of 1871. 

  15. Articles 297(b). 

  16. Part X, sections III and IV and article 243. 

  17. The interpretation of the words between inverted commas is a  little dubious. The phrase is so wide as to seem to include  private debts. But in the final draft of the treaty private debts  are not explicitly referred to. 

  18. This provision is mitigated in the case of German property in  Poland and the other new states, the proceeds of liquidation in  these areas being payable direct to the owner (article 92). 

  19. Part x, section IV, annex, paragraph 10: 'Germany will,  within six months from the coming into force of the present  treaty, deliver to each Allied or Associated Power all  securities, certificates, deeds, or other documents of title held  by its nationals and relating to property, rights, or interests  situated in the territory of that Allied or Associated Power...  Germany will at any time on demand of any Allied or Associated  Power furnish such information as may be required with regard to  the property, rights, and interests of German nationals within  the territory of such Allied or Associated Power, or with regard  to any transactions concerning such property, rights, or  interests effected since 1 July 1914.' 

  20. 'Any public utility undertaking or concession' is a vague  phrase, the precise interpretation of which is not provided for. 

  21. Article 260. 

  22. Article 235. 

  23. Article 118. 

  24. Articles 129 and 132. 

  25. Articles 135-7. 

  26. Articles 135 40. 

  27. Article 141: 'Germany renounces all rights, titles and  privileges conferred on her by the general Act of Algeciras of 7  April 1906, and by the Franco-German agreements of 9 February  1909 and 4 November 1911...' 

  28. Article 148: 'All treaties, agreements, arrangements and  contracts concluded by Germany with Egypt are regarded as  abrogated from 4 August 1914.' Article 153: 'All property and  possessions in Egypt of the German empire and the German states  pass to the Egyptian government without payment.' 

  29. Article 289. 

  30. Article 45. 

  31. Part IV, section IV, annex, chapter III. 

  32. 'We take over the ownership of the Sarre mines, and in order  not to be inconvenienced in the exploitation of these coal  deposits, we constitute a distinct little estate for the 600,000  Germans who inhabit this coal basin, and in fifteen years we  shall endeavour by a plebiscite to bring them to declare that  they want to be French. We know what that means. During fifteen  years we are going to work on them, to attack them from every  point, till we obtain from them a declaration of love. It is  evidently a less brutal proceeding than the coup de force which  detached from us our Alsatians and Lorrainers. But if less  brutal, it is more hypocritical. We know quite well between  ourselves that it is an attempt to annex these 600,000 Germans.  One can understand very well the reasons of an economic nature  which have led Clemenceau to wish to give us these Sarre coal  deposits, but in order to acquire them must we give ourselves the  appearance of wanting to juggle with 600,000 Germans in order to  make Frenchmen of them in fifteen years?' (M. Herv in La  Victoire, 31 May 1919). 

  33. This plebiscite is the most important of the concessions  accorded to Germany in the Allies' final Note, and one for which  Mr Lloyd George, who never approved the Allies' policy on the  eastern frontiers of Germany, can claim the chief credit. The  vote cannot take place before the spring of 1920, and may be  postponed until 1921. In the meantime the province will be  governed by an Allied commission. The vote will be taken by  communes, and the final frontiers will be determined by the  Allies, who shall have regard, partly to the results of the vote  in each commune, and partly 'to the geographical and economic  conditions of the locality'. It would require great local  knowledge to predict the result. By voting Polish, a locality can  escape liability for the indemnity and for the crushing taxation  consequent on voting German, a factor not to be neglected. On the  other hand, the bankruptcy and incompetence of the new Polish  state might deter those who were disposed to vote on economic  rather than on racial grounds. It has also been stated that the  conditions of life in such matters as sanitation and social  legislation are incomparably better in Upper Silesia than in the  adjacent districts of Poland, where similar legislation is in its  infancy. The argument in the text assumes that Upper Silesia will  cease to be German. But much may happen in a year, and the  assumption is not certain. To the extent that it proves erroneous  the conclusions must be modified. 

  34. German authorities claim, not without contradiction, that to  judge from the votes cast at elections, one-third of the  population would elect in the Polish interest, and two-thirds in  the German. 

  35. It must not be overlooked, however, that, amongst the other  concessions relating to Silesia accorded in the Allies' final  Note, there has been included article 90, by which 'Poland  undertakes to permit for a period of fifteen years the  exportation to Germany of the products of the mines in any part  of Upper Silesia transferred to Poland in accordance with the  present treaty. Such products shall be free from all export  duties or other charges or restrictions on exportation. Poland  agrees to take such steps as may be necessary to secure that any  such products shall be available for sale to purchasers in  Germany on terms as favourable as are applicable to like products  sold under similar conditions to purchasers in Poland or in any  other country.' This does not apparently amount to a right of  pre-emption, and it is not easy to estimate its effective  practical consequences. It is evident, however, that in so far as  the mines are maintained at their former efficiency, and in so  far as Germany is in a position to purchase substantially her  former supplies from that source, the loss is limited to the  effect on her balance of trade, and is without the more serious  repercussions on her economic life which are contemplated in the  text. Here is an opportunity for the Allies to render more  tolerable the actual operation of the settlement. The Germans, it  should be added, have pointed out that the same economic argument  which adds the Saar fields to France, allots Upper Silesia to  Germany. For whereas the Silesian mines are essential to the  economic life of Germany, Poland does not need them. Of Poland's  pre-war annual demand of 10.5 million tons, 6.8 million tons were  supplied by the indisputably Polish districts adjacent to Upper  Silesia, 1.5 million tons from Upper Silesia (out of a total  Upper Silesian output of 43.5 million tons) , and the balance  from what is now Czechoslovakia. Even without any supply from  Upper Silesia and Czechoslovakia, Poland could probably meet her  requirements by the fuller exploitation of her own coalfields  which are not yet scientifically developed, or from the deposits  of Western Galicia which are now to be annexed to her. 

  36. France is also to receive annually for three years 35,000  tons of benzol, 50,000 tons of coal tar, and 30,000 tons of  sulphate of ammonia. 

  37. The reparation commission is authorised under the treaty  (part VIII, annex V, paragraph 10) 'to postpone or to cancel  deliveries' if they consider 'that the full exercise of the  foregoing options would interfere unduly with the industrial  requirements of Germany'. In the event of such postponements or  cancellations 'the coal to replace coal from destroyed mines  shall receive priority over other deliveries'. This concluding  clause is of the greatest importance if, as will be seen, it is  physically impossible for Germany to furnish the full 45 million;  for it means that France will receive 20 million tons before  Italy receives anything. The reparation commission has no  discretion to modify this. The Italian Press has not failed to  notice the significance of the provision, and alleges that this  clause was inserted during the absence of the Italian  representatives from Paris (Corriere della Sera, 19 July 1919). 

  38. It follows that the current rate of production in Germany has  sunk to about sixty per cent of that of 1913. The effect on  reserves has naturally been disastrous, and the prospects for the  coming winter are dangerous. 

  39. This assumes a loss of output of fifteen per cent as compared  with the estimate of thirty per cent quoted above. 

  40. This supposes a loss of twenty-five per cent of Germany's  industrial undertakings and a diminution of thirteen per cent in  her other requirements. 

  41. The reader must be reminded in particular that the above  calculations take no account of the German production of lignite,  which yielded in 1913 13 million tons of rough lignite in  addition to an amount converted into 21 million tons of  briquette. This amount of lignite, however, was required in  Germany before the war in addition to the quantities of coal  assumed above. I am not competent to speak on the extent to which  the loss of coal can be made good by the extended use of lignite  or by economies in its present employment; but some authorities  believe that Germany may obtain substantial compensation for her  loss of coal by paying more attention to her deposits of lignite. 

  42. Mr Hoover, in July 1919, estimated that the coal output of  Europe, excluding Russia and the Balkans, had dropped from 679.5  million tons to 443 million tons -- as a result in a minor degree  of loss of material and labour, but owing chiefly to a relaxation  of physical effort after the privations and sufferings of the  war, a lack of rolling-stock and transport, and the unsettled  political fate of some of the mining districts. 

  43. Numerous commercial agreements during the war were arranged  on these lines. But in the month of June 1919 alone, minor  agreements providing for payment in coal were made by Germany  with Denmark, Norway, and Switzerland. The amounts involved were  not large, but without them Germany could not have obtained  butter from Denmark, fats and herrings from Norway, or milk and  cattle from Switzerland. 

  44. 'Some 60,000 Ruhr miners have agreed to work extra shifts --  so-called butter-shifts -- for the purpose of furnishing coal for  export to Denmark, whence butter will be exported in return. The  butter will benefit the miners in the first place, as they have  worked specially to obtain it' (Klnische Zeitung, 11 June 1919). 

  45. What of the prospects of whisky-shifts in England? 

  46. As early as 1 September 1919 the coal commission had to face  the physical impracticability of enforcing the demands of the  treaty, and agreed to modify them as follows: 'Germany shall in  the next six months make deliveries corresponding to an annual  delivery of 20 million tons as compared with 43 millions as  provided in the peace treaty. If Germany's total production  exceeds the present level of about 108 millions a year, 60% of  the extra production, up to 128 millions, shall be delivered to  the Entente, and 50% of any extra beyond that, until the figure  provided in the peace treaty is reached. If the toil production  falls below 108 millions the Entente will examine the situation,  after hearing Germany, and take account of it.' 

  47. 21,136,265 tons out of a total of 28,607,903 tons. The loss  of iron ore in respect of Upper Silesia is insignificant. The  exclusion of the iron and steel of Luxemburg from the German  customs union is, however, important, especially when this loss  is added to that of Alsace-Lorraine. It may be added in passing  that Upper Silesia includes 75% of the zinc production of  Germany. 

  48. In April 1919 the British Ministry of Munitions despatched an  expert commission to examine the conditions of the iron and steel  works in Lorraine and the occupied areas of Germany. The Report  states that the iron and steel works in Lorraine, and to a lesser  extent in the Saar Valley, are dependent on supplies of coal and  coke from Westphalia. It is necessary to mix Westphalian coal  with Saar coal to obtain a good furnace coke. The entire  dependence of all the Lorraine iron and steel works upon Germany  for fuel supplies 'places them', says the Report, 'in a very  unenviable position'. 

  49. Articles 264, 265, 266, and 267. These provisions can only be  extended beyond five years by the council of the League of  Nations. 

  50. Article 268 (a). 

  51. Article 268 (b) and (c). 

  52. The Grand Duchy is also deneutralised and Germany binds  herself to 'accept in advance all international arrangements  which may be concluded by the Allied and Associated Powers  relating to the Grand Duchy' (article 40). At the end of  September 1919 a plebiscite was held to determine whether  Luxemburg should join the French or the Belgian customs union,  which decided by a substantial majority in favour of the former.  The third alternative of the maintenance of the union with  Germany was not left open to the electorate. 

  53. Article 269. 

  54. Article 270. 

  55. The occupation provisions may be conveniently summarised at  this point. German territory situated west of the Rhine, together  with the bridge-heads, is subject to occupation for a period of  fifteen years (article 428). If, however, 'the conditions of the  present treaty are faithfully carried out by Germany', the  Cologne district will be evacuated after five years, and the  Coblenz district after ten years (article 429). It is, however,  further provided that if at the expiration of fifteen years 'the  guarantees against unprovoked aggression by Germany are not  considered sufficient by the Allied and Associated governments,  the evacuation of the occupying troops may be delayed to the  extent regarded as necessary for the purpose of obtaining the  required guarantees' (article 429); and also that 'in case either  during the occupation or after the expiration of the fifteen  years, the reparation commission finds that Germany refuses to  observe the whole or part of her obligations under the present  treaty with regard to reparation, the whole or part of the areas  specified in article 429 will be re-occupied immediately by the  Allied and Associated Powers , (article 430). Since it will be  impossible for Germany to fulfil the whole of her reparation  obligations, the effect of the above provisions will be in  practice that the Allies will occupy the left bank of the Rhine  just so long as they choose. They will also govern it in such  manner as they may determine (e.g. not only as regards customs,  but such matters as the respective authority of the local German  representatives and the Allied governing commission), since 'all  matters relating to the occupation and not provided for by the  present treaty shall be regulated by subsequent agreements, which  Germany hereby undertakes to observe' (article 432). The actual  agreement under which the occupied areas are to be administered  for the present has been published as a White Paper (Cd. 222).  The supreme authority is to be in the hands of an inter-Allied  Rhineland commission, consisting of a Belgian, a French, a  British, and an American member. The articles of this agreement  are very fairly and reasonably drawn. 

  56. Article 365. After five years this article is subject to  revision by the Council of the League of Nations. 

  57. The German government withdrew, as from 1 September 1919, all  preferential railway tariffs for the export of iron and steel  goods, on the ground that these privileges would have been more  than counterbalanced by the corresponding privileges which, under  this article of the treaty, they would have been forced to give  to Allied traders. 

  58. Article 367. 

  59. Questions of interpretation and application are to be  referred to the League of Nations (article 376). 

  60. Article 250. 

  61. Article 371. This provision is even applied 'to the lines of  former Russian Poland converted by Germany to the German gauge,  such lines being regarded as detached from the Prussian state  system'. 

  62. Articles 332-7. Exception may be taken, however, to the  second paragraph of article 332, which allows the vessels of  other nations to trade between German towns but forbids German  vessels to trade between non-German towns except with special  permission; and article 333, which prohibits Germany from making  use of her river system as a source of revenue, may be  injudicious. 

  63. The Niemen and the Moselle are to be similarly treated at a  later date if required. 

  64. Article 338. 

  65. Article 344. This is with particular reference to the Elbe  and the Oder; the Danube and the Rhine are dealt with in relation  to the existing commissions. 

  66. Article 339. 

  67. Article 357. 

  68. Article 358. Germany is, however, to be allowed some payment  or credit in respect of power so taken by France. 

  69. Article 66. 

  I. Undertakings Given Pride to the Peace Negotiations 

      The categories of damage in respect of which the Allies were  entitled to ask for reparation are governed by the relevant  passages in President Wilson's Fourteen Points of 8 January 1918,  as modified by the Allied governments in their qualifying Note,  the text of which the President formally communicated to the  German government as the basis of peace on 5 November 1918. These  passages have been quoted in full at the beginning of chapter 4.  That is to say, 'compensation will be made by Germany for all  damage done to the civilian population of the Allies and to their  property by the aggression of Germany by land, by sea, and from  the air.' The limiting quality of this sentence is reinforced by  the passage in the President's speech before Congress on 11  February 1918 (the terms of this speech being an express part of  the contract with the enemy), that there shall be 'no  contributions' and 'no punitive damages'.      It has sometimes been argued that the preamble to paragraph  19(1*) of the armistice terms, to the effect 'that any future  claims and demands of the Allies and the United States of America  remain unaffected,' wiped out all precedent conditions, and left  the Allies free to make whatever demands they chose. But it is  not possible to maintain that this casual protective phrase, to  which no one at the time attached any particular importance, did  away with all the formal communications which passed between the  President and the German government as to the basis of the terms  of peace during the days preceding the armistice, abolished the  Fourteen Points, and converted the German acceptance of the  armistice terms into unconditional surrender, so far as affects  the financial clauses. It is merely the usual phrase of the  draftsman who, about to rehearse a list of certain claims, wishes  to guard himself from the implication that such a list is  exhaustive. In any case this contention is disposed of by the  Allied reply to the German observations on the first draft of the  treaty, where it is admitted that the terms of the reparation  chapter must be governed by the President's Note of 5 November.      Assuming then that the terms of this Note are binding, we are  left to elucidate the precise force of the phrase -- 'all damage  done to the civilian population of the Allies and to their  property by the aggression of Germany by land, by sea, and from  the air'. Few sentences in history have given so much work to the  sophists and the lawyers, as we shall see in the next section of  this chapter, as this apparently simple and unambiguous  statement. Some have not scrupled to argue that it covers the  entire cost of the war; for, they point out, the entire cost of  the war has to be met by taxation, and such taxation is 'damaging  to the civilian population'. They admit that the phrase is  cumbrous, and that it would have been simpler to have said 'all  loss and expenditure of whatever description'; and they allow  that the apparent emphasis on damage to the persons and property  of civilians is unfortunate; but errors of draftsmanship should  not, in their opinion, shut off the Allies from the rights  inherent in victors.      But there are not only the limitations of the phrase in its  natural meaning and the emphasis on civilian damages as distinct  from military expenditure generally; it must also be remembered  that the context of the term is in elucidation of the meaning of  the term 'restoration' in the President's Fourteen Points. The  Fourteen Points provide for damage in invaded territory --  Belgium, France, Roumania, Serbia, and Montenegro (Italy being  unaccountably omitted) -- but they do not cover losses at sea by  submarine, bombardments from the sea (as at Scarborough), or  damage done by air raids. It was to repair these omissions, which  involved losses to the life and property of civilians not really  distinguishable in kind from those effected in occupied  territory, that the Supreme Council of the Allies in Paris  proposed to President Wilson their qualifications. At that time  -- the last days of October 1918 -- I do not believe that any  responsible statesman had in mind the exaction from Germany of an  indemnity for the general costs of the war. They sought only to  make it clear (a point of considerable importance to Great  Britain) that reparation for damage done to non-combatants and  their property was not limited to invaded territory (as it would  have been by the Fourteen Points unqualified), but applied  equally to all such damage, whether 'by land, by sea, or from the  air'. It was only at a later stage that a general popular demand  for an indemnity, covering the full costs of the war, made it  politically desirable to practise dishonesty and to try to  discover in the written word what was not there.      What damages, then, can be claimed from the enemy on a strict  interpretation of our engagements?(2*) In the case of the United  Kingdom the bill would cover the following items --      (a) Damage to civilian life and property by the acts of an  enemy government, including damage by air raids, naval  bombardments, submarine warfare, and mines.      (b) Compensation for improper treatment of interned  civilians.      It would not include the general costs of the war or (e.g.)  indirect damage due to loss of trade.      The French claim would include, as well as items  corresponding to the above -- 

      (c) Damage done to the property and persons of civilians in  the war area, and by aerial warfare behind the enemy lines.      (d) Compensation for loot of food, raw materials, livestock,  machinery, household effects, timber, and the like by the enemy  governments or their nationals in territory occupied by them.      (e) Repayment of fines and requisitions levied by the enemy  governments or their officers on French municipalities or  nationals.      (f) Compensation to French nationals deported or compelled to  do forced labour.      In addition to the above there is a further item of more  doubtful character, namely --      (g) The expenses of the relief commission in providing  necessary food and clothing to maintain the civilian French  population in the enemy-occupied districts.      The Belgian claim would include similar items.(3*) If it were  argued that in the case of Belgium something more nearly  resembling an indemnity for general war costs can be justified,  this could only be on the ground of the breach of international  law involved in the invasion of Belgium, whereas, as we have  seen, the Fourteen Points include no special demands on this  ground.(4*) As the cost of Belgian relief under (g), as well as  her general war costs, has been met already by advances from the  British, French, and United States governments, Belgium would  presumably employ any repayment of them by Germany in part  discharge of her debt to these governments, so that any such  demands are, in effect, an addition to the claims of the three  lending governments.      The claims of the other Allies would be compiled on similar  lines. But in their case the question arises more acutely how far  Germany can be made contingently liable for damage done, not by  herself, but by her co-belligerents, Austria-Hungary, Bulgaria,  and Turkey. This is one of the many questions to which the  Fourteen Points give no clear answer; on the one hand, they cover  explicitly in point II damage done to Roumania, Serbia, and  Montenegro, without qualification as to the nationality of the  troops inflicting the damage; on the other hand, the Note of the  Allies speaks of 'German' aggression when it might have spoken of  the aggression of 'Germany and her allies'. On a strict and  literal interpretation, I doubt if claims lie against Germany for  damage done, e.g. by the Turks to the Suez Canal, or by Austrian  submarines in the Adriatic. But it is a case where, if the Allies  wished to strain a point, they could impose contingent liability  on Germany without running seriously contrary to the general  intention of their engagements.      As between the Allies themselves the case is quite different.  It would be an act of gross unfairness and infidelity if France  and Great Britain were to take what Germany could pay and leave  Italy and Serbia to get what they could out of the remains of  Austria-Hungary. As amongst the Allies themselves it is clear  that assets should be pooled and shared out in proportion to  aggregate claims.      In this event, and if my estimate is accepted, as given  below, that Germany's capacity to pay will be exhausted by the  direct and legitimate claims which the Allies hold against her,  the question of her contingent liability for her allies becomes  academic. Prudent and honourable statesmanship would therefore  have given her the benefit of the doubt, and claimed against her  nothing but the damage she had herself caused.      What, on the above basis of claims, would the aggregate  demand amount to? No figures exist on which to base any  scientific or exact estimate, and I give my own guess for what it  is worth, prefacing it with the following observations.      The amount of the material damage done in the invaded  districts has been the subject of enormous, if natural,  exaggeration. A journey through the devastated areas of France is  impressive to the eye and the imagination beyond description.  During the winter of 1918-19, before Nature had cast over the  scene her ameliorating mantle, the horror and desolation of war  was made visible to sight on an extraordinary scale of blasted  grandeur. The completeness of the destruction was evident. For  mile after mile nothing was left. No building was habitable and  no field fit for the plough. The sameness was also striking. One  devastated area was exactly like another -- a heap of rubble, a  morass of shell-holes, and a tangle of wire.(5*) The amount of  human labour which would be required to restore such a  countryside seemed incalculable; and to the returned traveller  any number of milliards of pounds was inadequate to express in  matter the destruction thus impressed upon his spirit. Some  governments for a variety of intelligible reasons have not been  ashamed to exploit these feelings a little.      Popular sentiment is most at fault, I think, in the case of  Belgium. In any event Belgium is a small country, and in its case  the actual area of devastation is a small proportion of the  whole. The first onrush of the Germans in 1914 did some damage  locally; after that the battle-line in Belgium did not sway  backwards and forwards, as in France, over a deep belt of  country. It was practically stationary, and hostilities were  confined to a small corner of the country, much of which in  recent times was backward, poor, and sleepy, and did not include  the active industry of the country. There remains some injury in  the small flooded area, the deliberate damage done by the  retreating Germans to buildings, plant, and transport, and the  loot of machinery, cattle, and other movable property. But  Brussels, Antwerp, and even Ostend are substantially intact, and  the great bulk of the land, which is Belgium's chief wealth, is  nearly as well cultivated as before. The traveller by motor can  pass through and from end to end of the devastated area of  Belgium almost before he knows it; whereas the destruction in  France is on a different kind of scale altogether. Industrially,  the loot has been serious and for the moment paralysing; but the  actual money cost of replacing machinery mounts up slowly, and a  very few tens of millions would have covered the value of every  machine of every possible description that Belgium ever  possessed. Besides, the cold statistician must not overlook the  fact that the Belgian people possess the instinct of individual  self-protection unusually well developed; and the great mass of  German bank-notes(6*) held in the country at the date of the  armistice shows that certain classes of them at least found a  way, in spite of all the severities and barbarities of German  rule, to profit at the expense of the invader. Belgian claims  against Germany such as I have seen, amounting to a sum in excess  of the total estimated pre-war wealth of the whole country, are  simply irresponsible.(7*)      It will help to guide our ideas to quote the official survey  of Belgian wealth published in 1913 by the Finance Ministry of  Belgium, which was as follows: 

                              Million 3              Land                264              Buildings           235              Personal wealth     545              Cash                 17              Furniture, etc.     120                      Total     1,181 

      This total yields an average of 3156 per inhabitant, which Dr  Stamp, the highest authority on the subject, is disposed to  consider as prima facie too low (though he does not accept  certain much higher estimates lately current), the corresponding  wealth per head (to take Belgium's immediate neighbours) being  3167 for Holland, 3244 for Germany, and 3303 for France.(8*) A  total of 31,500 million, giving an average of about 3200 per  head, would, however, be fairly liberal. The official estimate of  land and buildings is likely to be more accurate than the rest.  On the other hand, allowance has to be made for the increased  costs of construction.      Having regard to all these considerations, I do not put the  money value of the actual physical loss of Belgian property by  destruction and loot above 3150 million as a maximum, and while I  hesitate to put yet lower an estimate which differs so widely  from those generally current, I shall be surprised if it proves  possible to substantiate claims even to this amount. Claims in  respect of levies, fines, requisitions, and so forth might  possibly amount to a further 3100 million. If the sums advanced  to Belgium by her allies for the general costs of the war are to  be included, a sum of about 3250 million has to be added (which  includes the cost of relief), bringing the total to 3500 million.      The destruction in France was on an altogether more  significant scale, not only as regards the length of the  battle-line, but also on account of the immensely deeper area of  country over which the battle swayed from time to time. It is a  popular delusion to think of Belgium as the principal victim of  the war; it will turn out, I believe, that taking account of  casualties, loss of property, and burden of future debt, Belgium  has made the least relative sacrifice of all the belligerents  except the United States. Of the Allies, Serbia's sufferings and  loss have been proportionately the greatest, and after Serbia,  France. France in all essentials was just as much the victim of  German ambition as was Belgium, and France's entry into the war  was just as unavoidable. France, in my judgment, in spite of her  policy at the peace conference, a policy largely traceable to her  sufferings, has the greatest claims on our generosity.      The special position occupied by Belgium in the popular mind  is due, of course, to the fact that in 1914 her sacrifice was by  far the greatest of any of the Allies. But after 1914 she played  a minor role. Consequently, by the end of 1918, her relative  sacrifices, apart from those sufferings from invasion which  cannot be measured in money, had fallen behind, and in some  respects they were not even as great as, for example,  Australia's. I say this with no wish to evade the obligations  towards Belgium under which the pronouncements of our responsible  statesmen at many different dates have certainly laid us. Great  Britain ought not to seek any payment at all from Germany for  herself until the just claims of Belgium have been fully  satisfied. But this is no reason why we or they should not tell  the truth about the amount.      While the French claims are immensely greater, here too there  has been excessive exaggeration, as responsible French  statisticians have themselves pointed out. Not above 10% of the  area of France was effectively occupied by the enemy, and not  above 4% lay within the area of substantial devastation. Of the  sixty French towns having a population exceeding 35,000, only two  were destroyed -- Reims (115,178) and St. Quentin (55,571); three  others were occupied -- Lille, Roubaix, and Douai -- and suffered  from loot of machinery and other property, but were not  substantially injured otherwise. Amiens, Calais, Dunkerque, and  Boulogne suffered secondary damage by bombardment and from the  air; but the value of Calais and Boulogne must have been  increased by the new works of various kinds erected for the use  of the British army.      The Annuaire statistique de la France, 1917, values the  entire house property of France at 32,380 million (59.5 milliard  francs).(9*) An estimate current in France of 3800 million (20  milliard francs) for the destruction of house property alone is,  therefore, obviously wide of the mark.(10*) 3120 million at  pre-war prices, or say 3250 million at the present time, is much  nearer the right figure. Estimates of the value of the land of  France (apart from buildings) vary from 32,480 million to 33,116  million, so that it would be extravagant to put the damage on  this head as high as 3100 million. Farm capital for the whole of  France has not been put by responsible authorities above 3420  million.(11*) There remain the loss of furniture and machinery,  the damage to the coal-mines and the transport system, and many  other minor items. But these losses, however serious, cannot be  reckoned in value by hundreds of millions sterling in respect of  so small a part of France. In short, it will be difficult to  establish a bill exceeding 3500 million, for physical and  material damage in the occupied and devastated areas of northern  France.(12*) I am confirmed in this estimate by the opinion of M.  Ren Pupin, the author of the most comprehensive and scientific  estimate of the pre-war wealth of France,(13*) which I did not  come across until after my own figure had been arrived at. This  authority estimates the material losses of the invaded regions at  from 3400 million to 3600 million (10 to 15 milliards),(14*)  between which my own figure falls half-way.      Nevertheless, M. Dubois, speaking on behalf of the budget  commission of the Chamber, has given the figure of 32,600 million  (65 milliard francs) 'as a minimum' without counting 'war levies,  losses at sea, the roads, or the loss of public monuments'. And  M. Loucheur, the Minister of Industrial Reconstruction, stated  before the Senate on 17 February 1919 that the reconstitution of  the devastated regions would involve an expenditure of 33,000  million (75 milliard francs) -- more than double M. Pupin's  estimate of the entire wealth of their inhabitants. But then at  that time M. Loucheur was taking a prominent part in advocating  the claims of France before the peace conference, and, like  others, may have found strict veracity inconsistent with the  demands of patriotism.(15*)      The figure discussed so far is not, however, the totality of  the French claims. There remain, in particular, levies and  requisitions on the occupied areas and the losses of the French  mercantile marine at sea from the attacks of German cruisers and  submarines. Probably 3200 million would be ample to cover all  such claims. but to be on the safe side, we will, somewhat  arbitrarily, make an addition to the French claim of 3300 million  on all heads, bringing it to 3800 million in all.      The statements of M. Dubois and M. Loucheur were made in the  early spring of 1919. A speech delivered by M. Klotz before the  French Chamber six months later (5 September 1919), was less  excusable. In this speech the French Minister of Finance  estimated the total French claims for damage to property  (presumably inclusive of losses at sea, etc., but apart from  pensions and allowances) at 35,360 million (134 milliard francs),  or more than six times my estimate. Even if my figure prove  erroneous, M. Klotz's can never have been justified. So grave has  been the deception practised on the French people by their  ministers that when the inevitable enlightenment comes, as it  soon must (both as to their own claims and as to Germany's  capacity to meet them), the repercussions will strike at more  than M. Klotz, and may even involve the order of government and  society for which he stands.      British claims on the present basis would be practically  limited to losses by sea-losses of hulls and losses of cargoes.  Claims would lie, of course, for damage to civilian property in  air raids and by bombardment from the sea, but in relation to  such figures as we are now dealing with, the money value involved  is insignificant -- 35 million might cover them all, and 310  million would certainly do so.      The British mercantile vessels lost by enemy action,  excluding fishing vessels, numbered 2,479, with an aggregate of  7,759,090 tons gross.(16*) There is room for considerable  divergence of opinion as to the proper rate to take for  replacement cost; at the figure of 330 per gross ton, which with  the rapid growth of shipbuilding may soon be too high but can be  replaced by any other which better authorities(17*) may prefer,  the aggregate claim is 3230 million. To this must be added the  loss of cargoes, the value of which is almost entirely a matter  of guesswork. An estimate of 340 per ton of shipping lost may be  as good an approximation as is possible, that is to say 3310  million, making 3540 million altogether.      An addition to this of 330 million, to cover air raids,  bombardments, claims of interned civilians, and miscellaneous  items of every description, should be more than sufficient --  making a total claim for Great Britain of 3570 million. It is  surprising, perhaps, that the money value of our claim should be  so little short of that of France and actually in excess of that  of Belgium. But, measured either by pecuniary loss or real loss  to the economic power of the country, the injury to our  mercantile marine was enormous.      There remain the claims of Italy, Serbia, and Roumania for  damage by invasion and of these and other countries, as for  example Greece,(18*) for losses at sea. I will assume for the  present argument that these claims rank against Germany, even  when they were directly caused not by her but by her allies; but  that it is not proposed to enter any such claims on behalf of  Russia.(19*) Italy's losses by invasion and at sea cannot be very  heavy, and a figure of from 350 million to 3100 million would be  fully adequate to cover them. The losses of Serbia, although from  a human point of view her sufferings were the greatest of  all,(20*) are not measured pecuniarily by very great figures, on  account of her low economic development. Dr Stamp (loc. cit.)  quotes an estimate by the Italian statistician Maroi, which puts  the national wealth of Serbia at 3480 million or 3105 per  head,(21*) and the greater part of this would be represented by  land which has sustained no permanent damage.(22*) In view of the  very inadequate data for guessing at more than the general  magnitude of the legitimate claims of this group of countries, I  prefer to make one guess rather than several and to put the  figure for the whole group at the round sum of 3250 million.      We are finally left with the following -- 

                              Million 3              Belgium              500(23*)              France               800              Great Britain        570              Other Allies         250                          Total  2,120 

      I need not impress on the reader that there is much guesswork  in the above, and the figure for France in particular is likely  to be criticised. But I feel some confidence that the general  magnitude, as distinct from the precise figures, is not  hopelessly erroneous; and this may be expressed by the statement  that a claim against Germany, based on the interpretation of the  pre-armistice engagements of the Allied Powers which is adopted  above, would assuredly be found to exceed 31,600 million and to  fall short of 33,000 million.      This is the amount of the claim which we were entitled to  present to the enemy. For reasons which will appear more fully  later on, I believe that it would have been a wise and just act  to have asked the German government at the peace negotiations to  agree to a sum of 32,000 million in final settlement without  further examination of particulars. This would have provided an  immediate and certain solution, and would have required from  Germany a sum which, if she were granted certain indulgences, it  might not have proved entirely impossible for her to pay. This  sum should have been divided up amongst the Allies themselves on  a basis of need and general equity.      But the question was not settled on its merits. 

  II. THE CONFERENCE AND THE TERMS OF THE TREATY 

      I do not believe that, at the date of the armistice,  responsible authorities in the Allied countries expected any  indemnity from Germany beyond the cost of reparation for the  direct material damage which had resulted from the invasion of  Allied territory and from the submarine campaign. At that time  there were serious doubts as to whether Germany intended to  accept our terms, which in other respects were inevitably very  severe, and it would have been thought an unstatesmanlike act to  risk a continuance of the war by demanding a money payment which  Allied opinion was not then anticipating and which probably could  not be secured in any case. The French, I think, never quite  accepted this point of view; but it was certainly the British  attitude; and in this atmosphere the pre-armistice conditions  were framed.      A month later the atmosphere had changed completely. We had  discovered how hopeless the German position really was, a  discovery which some, though not all, had anticipated, but which  no one had dared reckon on as a certainty. It was evident that we  could have secured unconditional surrender if we had determined  to get it.      But there was another new factor in the situation which was  of greater local importance. The British Prime Minister had  perceived that the conclusion of hostilities might soon bring  with it the break-up of the political bloc upon which he was  depending for his personal ascendancy, and that the domestic  difficulties which would be attendant on demobilisation, the  turnover of industry from war to peace conditions, the financial  situation, and the general psychological reactions of men's  minds, would provide his enemies with powerful weapons, if he  were to leave them time to mature. The best chance, therefore, of  consolidating his power, which was personal and exercised, as  such, independently of party or principle to an extent unusual in  British politics, evidently lay in active hostilities before the  prestige of victory had abated, and in an attempt to found on the  emotions of the moment a new basis of power which might outlast  the inevitable reactions of the near future. Within a brief  period, therefore, after the armistice, the popular victor, at  the height of his influence and his authority, decreed a general  election. It was widely recognised at the time as an act of  political immorality. There were no grounds of public interest  which did not call for a short delay until the issues of the new  age had a little defined themselves, and until the country had  something more specific before it on which to declare its mind  and to instruct its new representatives. But the claims of  private ambition determined otherwise.      For a time all went well. But before the campaign was far  advanced government candidates were finding themselves  handicapped by the lack of an effective cry. The War Cabinet was  demanding a further lease of authority on the ground of having  won the war. But partly because the new issues had not yet  defined themselves, partly out of regard for the delicate balance  of a Coalition party, the Prime Minister's future policy was the  subject of silence or generalities. The campaign seemed,  therefore, to fall a little flat. In the light of subsequent  events it seems improbable that the Coalition party was ever in  real danger. But party managers are easily 'rattled'. The Prime  Minister's more neurotic advisers told him that he was not safe  from dangerous surprises, and the Prime Minister lent an ear to  them. The party managers demanded more 'ginger'. The Prime  Minister looked about for some.      On the assumption that the return of the Prime Minister to  power was the primary consideration, the rest followed naturally.  At that juncture there was a clamour from certain quarters that  the government had given by no means sufficiently clear  undertakings that they were not going 'to let the Hun off'. Mr  Hughes was evoking a good deal of attention by his demands for a  very large indemnity(24*) and Lord Northcliffe was lending his  powerful aid to the same cause. This pointed the Prime Minister  to a stone for two birds. By himself adopting the policy of Mr  Hughes and Lord Northcliffe, he could at the same time silence  those powerful critics and provide his party managers with an  effective platform cry to drown the increasing voices of  criticism from other quarters.      The progress of the General Election of 1918 affords a sad,  dramatic history of the essential weakness of one who draws his  chief inspiration not from his own true impulses, but from the  grosser effluxions of the atmosphere which momentarily surrounds  him. The Prime Minister's natural instincts, as they so often  are, were right and reasonable. He himself did not believe in  hanging the Kaiser or in the wisdom or the possibility of a great  indemnity. On the 22nd of November he and Mr Bonar Law issued  their election manifesto. It contains no allusion of any kind  either to the one or to the other, but, speaking, rather, of  disarmament and the League of Nations, concludes that 'our first  task must be to conclude a just and lasting peace, and so to  establish the foundations of a new Europe that occasion for  further wars may be for ever averted'. In his speech at  Wolverhampton on the eve of the dissolution (24 November), there  is no word of reparation or indemnity. On the following day at  Glasgow, Mr Bonar Law would promise nothing. 'We are going to the  conference,, he said, 'as one of a number of allies, and you  cannot expect a member of the government, whatever he may think,  to state in public before he goes into that conference, what line  he is going to take in regard to any particular question.' But a  few days later at Newcastle (29 November) the Prime Minister was  warming to his work: 'When Germany defeated France she made  France pay. That is the principle which she herself has  established. There is absolutely no doubt about the principle,  and that is the principle we should proceed upon -- that Germany  must pay the costs of the war up to the limit of her capacity to  do so.' But he accompanied this statement of principle with many  ' words of warning, as to the practical difficulties of the case:  'We have appointed a strong committee of experts, representing  every shade of opinion, to consider this question very carefully  and to advise us. There is no doubt as to the justice of the  demand. She ought to pay, she must pay as far as she can, but we  are not going to allow her to pay in such a way as to wreck our  industries.' At this stage the Prime Minister sought to indicate  that he intended great severity, without raising excessive hopes  of actually getting the money, or committing himself to a  particular line of action at the conference. It was rumoured that  a high City authority had committed himself to the opinion that  Germany could certainly pay 320,000 million and that this  authority for his part would not care to discredit a figure of  twice that sum. The Treasury officials, as Mr Lloyd George  indicated, took a different view. He could, therefore, shelter  himself behind the wide discrepancy between the opinions of his  different advisers, and regard the precise figure of Germany's  capacity to pay as an open question in the treatment of which he  must do his best for his country's interests. As to our  engagements under the Fourteen Points he was always silent.      On 30 November, Mr Barnes, a member of the War Cabinet, in  which he was supposed to represent Labour, shouted from a  platform, 'I am for hanging the Kaiser.'      On 6 December, the Prime Minister issued a statement of  policy and aims in which he stated, with significant emphasis on  the word European, that 'All the European Allies have accepted  the principle that the Central Powers must pay the cost of the  war up to the limit of their capacity.'      But it was now little more than a week to polling day, and  still he had not said enough to satisfy the appetites of the  moment. On 8 December The Times, providing as usual a cloak of  ostensible decorum for the lesser restraint of its associates,  declared in a leader entitled 'Making Germany pay,' that 'the  public mind was still bewildered by the Prime Minister's various  statements.' 'There is too much suspicion', they added, 'of  influences concerned to let the Germans off lightly 'whereas the  only possible motive in determining their capacity to pay must be  the interests of the Allies.' 'It is the candidate who deals with  the issues of today,' wrote their political correspondent, 'who  adopts Mr Barnes's phrase about "hanging the Kaiser" and plumps  for the payment of the cost of the war by Germany, who rouses his  audience and strikes the notes to which they are most  responsive.'      On 9 December, at the Queen's Hall, the Prime Minister  avoided the subject. But from now on, the debauchery of thought  and speech progressed hour by hour. The grossest spectacle was  provided by Sir Eric Geddes in the Guildhall at Cambridge. An  earlier speech in which, in a moment of injudicious candour, he  had cast doubts on the possibility of extracting from Germany the  whole cost of the war had been the object of serious suspicion,  and he had therefore a reputation to regain. 'We will get out of  her all you can squeeze out of a lemon and a bit more,' the  penitent shouted, 'I will squeeze her until you can hear the  pips, squeak'; his policy was to take every bit of property  belonging to Germans in neutral and Allied countries, and all her  gold and silver and her jewels, and the contents of her  picture-galleries and libraries, to sell the proceeds for the  Allies' benefit. 'I would strip Germany,' he cried, 'as she has  stripped Belgium.'      By 11 December the Prime Minister had capitulated. His final  manifesto of six points issued on that day to the electorate  furnishes a melancholy comparison with his programme of three  weeks earlier. I quote it in full: 

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

  Here is food for the cynic. To this concoction of greed and  sentiment, prejudice and deception, three weeks of the platform  had reduced the powerful governors of England, who but a little  while before had spoken not ignobly of disarmament and a League  of Nations and of a just and lasting peace which should establish  the foundations of a new Europe.      On the same evening the Prime Minister at Bristol withdrew in  effect his previous reservations and laid down four principles to  govern his indemnity policy, of which the chief were: First, we  have an absolute right to demand the whole cost of the war;  second, we propose to demand the whole cost of the war; and  third, a committee appointed by direction of the Cabinet believe  that it can be done.(25*) Four days later he went to the polls.      The Prime Minister never said that he himself believed that  Germany could pay the whole cost of the war. But the programme  became in the mouths of his supporters on the hustings a great  deal more concrete. The ordinary voter was led to believe that  Germany could certainly be made to pay the greater part, if not  the whole cost of the war. Those whose practical and selfish  fears for the future the expenses of the war had aroused, and  those whose emotions its horrors had disordered, were both  provided for. A vote for a Coalition candidate meant the  crucifixion of Antichrist and the assumption by Germany of the  British national debt.      It proved an irresistible combination, and once more Mr  George's political instinct was not at fault. No candidate could  safely denounce this programme, and none did so. The old Liberal  party, having nothing comparable to offer to the electorate, was  swept out of existence.(26*) A new House of Commons came into  being, a majority of whose members had pledged themselves to a  great deal more than the Prime Minister's guarded promises.  Shortly after their arrival at Westminster I asked a Conservative  friend, who had known previous Houses, what he thought of them.  'They are a lot of hard-faced men', he said, 'who look as if they  had done very well out of the war.'      This was the atmosphere in which the Prime Minister left for  Paris, and these the entanglements he had made for himself. He  had pledged himself and his government to make demands of a  helpless enemy inconsistent with solemn engagements on our part,  on the faith of which this enemy had laid down his arms. There  are few episodes in history which posterity will have less reason  to condone -- a war ostensibly waged in defence of the sanctity  of international engagements ending a definite breach of one of  the most sacred possible of such engagements on the part of the  victorious champions of these ideals.(27*)      Apart from other aspects of the transaction, I believe that  the campaign for securing out of Germany the general costs of the  war was one of the most serious acts of political unwisdom for  which our statesmen have ever been responsible. To what a  different future Europe might have looked forward if either Mr  Lloyd George or Mr Wilson had apprehended that the most serious  of the problems which claimed their attention were not political  or territorial but financial and economic, and that the perils of  the future lay not in frontiers or sovereignties but in food,  coal, and transport. Neither of them paid adequate attention to  these problems at any stage of the conference. But in any event  the atmosphere for the wise and reasonable consideration of them  was hopelessly befogged by the commitments of the British  delegation on the question of indemnities. The hopes to which the  Prime Minister had given rise not only compelled him to advocate  an unjust and unworkable economic basis to the treaty with  Germany, but set him at variance with the President, and on the  other hand with competing interests to those of France and  Belgium. The clearer it became that but little could be expected  from Germany, the more necessary it was to exercise patriotic  greed and 'sacred egotism' and snatch the bone from the juster  claims and greater need of France or the well-founded  expectations of Belgium. Yet the financial problems which were  about to exercise Europe could not be solved by greed. The  possibility of their cure lay in magnanimity.      Europe, if she is to survive her troubles, will need so much  magnanimity from America, that she must herself practise it. It  is useless for the Allies, hot from stripping Germany and one  another, to turn for help to the United States to put the states  of Europe, including Germany, on to their feet again. If the  General Election of December 1918 had been fought on lines of  prudent generosity instead of imbecile greed, how much better the  financial prospect of Europe might now be. I still believe that  before the main conference, or very early in its proceedings, the  representatives of Great Britain should have entered deeply, with  those of the United States, into the economic and financial  situation as a whole, and that the former should have been  authorised to make concrete proposals on the general lines (1)  that all inter-Allied indebtedness be cancelled outright; (2)  that the sum to be paid by Germany be fixed at 32,000 million;  (3) that Great Britain renounce all claim to participation in  this sum, and that any share to which she proves entitled be  placed at the disposal of the conference for the purpose of  aiding the finances of the new states about to be established;  (4) that in order to make some basis of credit immediately  available an appropriate proportion of the German obligations  representing the sum to be paid by her should be guaranteed by  all parties to the treaty; and (5) that the ex-enemy Powers  should also be allowed, with a view to their economic  restoration, to issue a moderate amount of bonds carrying a  similar guarantee. Such proposals involved an appeal to the  generosity of the United States. But that was inevitable; and, in  view of her far less financial sacrifices, it was an appeal which  could fairly have been made to her. Such proposals would have  been practicable. There is nothing in them quixotic or Utopian.  And they would have opened up for Europe some prospect of  financial stability and reconstruction.      The further elaboration of these ideas, however, must be left  to chapter 7, and we must return to Paris. I have described the  entanglements which Mr Lloyd George took with him. The position  of the finance ministers of the other Allies was even worse. We  in Great Britain had not based our financial arrangements on any  expectation of an indemnity. Receipts from such a source would  have been more or less in the nature of a windfall; and, in spite  of subsequent developments, there was an expectation at that time  of balancing our budget by normal methods. But this was not the  case with France or Italy. Their peace budgets made no pretence  of balancing, and had no prospects of doing so, without some  far-reaching revision of the existing policy. Indeed, the  position was and remains nearly hopeless. These countries were  heading for national bankruptcy. This fact could only be  concealed by holding out the expectation of vast receipts from  the enemy. As soon as it was admitted that it was in fact  impossible to make Germany pay the expenses of both sides, and  that the unloading of their liabilities upon the enemy was not  practicable, the position of the Ministers of Finance of France  and Italy became untenable.      Thus a scientific consideration of Germany's capacity to pay  was from the outset out of court. The expectations which the  exigencies of politics had made it necessary to raise were so  very remote from the truth that a slight distortion of figures  was no use, and it was necessary to ignore the facts entirely.  The resulting unveracity was fundamental. On a basis of so much  falsehood it became impossible to erect any constructive  financial policy which was workable. For this reason amongst  others, a magnanimous financial policy was essential. The  financial position of France and Italy was so bad that it was  impossible to make them listen to reason on the subject of the  German indemnity, unless one could at the same time point out to  them some alternative mode of escape from their troubles.(28*)  The representatives of the United States were greatly at fault,  in my judgment, for having no constructive proposals whatever to  offer to a suffering and distracted Europe.      It is worth while to point out in passing a further element  in the situation, namely, the opposition which existed between  the 'crushing' policy of M. Clemenceau and the financial  necessities of M. Klotz. Clemenceau's aim was to weaken and  destroy Germany in every possible way, and I fancy that he was  always a little contemptuous about the indemnity; he had no  intention of leaving Germany in a position to practise a vast  commercial activity. But he did not trouble his head to  understand either the indemnity or poor M. Klotz's overwhelming  financial difficulties. If it amused the financiers to put into  the treaty some very large demands, well there was no harm in  that; but the satisfaction of these demands must not be allowed  to interfere with the essential requirements of a Carthaginian  peace. The combination of the 'real' policy of M. Clemenceau on  unreal issues, with M. Klotz's policy of pretence on what were  very real issues indeed, introduced into the treaty a whole set  of incompatible provisions, over and above the inherent  impracticabilities of the reparation proposals.      I cannot here describe the endless controversy and intrigue  between the Allies themselves, which at last after some months  culminated in the presentation to Germany of the reparation  chapter in its final form. There can have been few negotiations  in history so contorted, so miserable, so utterly unsatisfactory  to all parties. I doubt if anyone who took much part in that  debate can look back on it without shame. I must be content with  an analysis of the elements of the final compromise which is  known to all the world.      The main point to be settled was, of course, that of the  items for which Germany could fairly be asked to make payment. Mr  Lloyd George's election pledge to the effect that the Allies were  entitled to demand from Germany the entire costs of the war was  from the outset clearly untenable; or rather, to put it more  impartially, it was clear that to persuade the President of the  conformity of this demand with our pre-armistice engagements was  beyond the powers of the most plausible. The actual compromise  finally reached is to be read as follows in the paragraphs of the  treaty as it has been published to the world.      Article 231 reads: 'The Allied and Associated governments  affirm and Germany accepts the responsibility of Germany and her  allies for causing all the loss and damage to which the Allied  and Associated governments and their nationals have been  subjected as a consequence of the war imposed upon them by the  aggression of Germany and her allies.' This is a well and  carefully drafted article; for the President could read it as  statement of admission on Germany's part of moral responsibility  for bringing about the war, while the Prime Minister could  explain it as an admission of financial liability for the general  costs of the war. Article 232 continues: 'The Allied and  Associated governments recognise that the resources of Germany  are not adequate, after taking into account permanent diminutions  of such resources which will result from other provisions of the  present treaty, to make complete reparation for all such loss and  damage.' The President could comfort himself that this was no  more than a statement of undoubted fact, and that to recognise  that Germany cannot pay a certain claim does not imply that she  is liable to pay the claim; but the Prime Minister could point  out that in the context it emphasises to the reader the  assumption of Germany's theoretic liability asserted in the  preceding article. Article 232 proceeds: 'The Allied and  Associated governments, however, require, and Germany undertakes,  that she will make compensation for all damage done to the  civilian population of the Allied and Associated Powers and to  their property during the period of the belligerency of each as  an Allied or Associated Power against Germany by such aggression  by land, by sea, and from the air, and in general all damage as  defined in annex I hereto.'(29*) The words italicised, being  practically a quotation from the pre-armistice conditions,  satisfied the scruples of the President, while the additions of  the words 'and in general all damage as defined in annex I  hereto' gave the Prime Minister a chance in annex I.      So far, however, all this is only a matter of words, of  virtuosity in draftsmanship, which does no one any harm, and  which probably seemed much more important at the time than it  ever will again between now and judgment day. For substance we  must turn to annex I.      A great part of annex I is in strict conformity with the pre-  armistice conditions or, at any rate, does not strain them beyond  what is fairly arguable. Paragraph 1 claims damage done for  injury to the persons of civilians or, in the case of death, to  their dependants, as a direct consequence of acts of war;  paragraph 2, for acts of cruelty, violence, or maltreatment on  the part of the enemy towards civilian victims; paragraph 3, for  enemy acts injurious to health or capacity to work or to honour  towards civilians in occupied or invaded territory; paragraph 8,  for forced labour exacted by the enemy from civilians; paragraph  9, for damage done to property 'with the exception of naval and  military works or materials' as a direct consequence of  hostilities; and paragraph 10, for fines and levies imposed by  the enemy upon the civilian population. All these demands are  just and in conformity with the Allies' rights.      Paragraph 4, which claims for 'damage caused by any kind of  maltreatment of prisoners of war', is more doubtful on the strict  letter, but may be justifiable under the Hague convention and  involves a very small sum.      In paragraphs 5, 6, and 7, however, an issue of immensely  greater significance is involved. These paragraphs assert a claim  for the amount of the separation and similar allowances granted  during the war by the Allied governments to the families of  mobilised persons, and for the amount of the pensions and  compensations in respect of the injury or death of combatants  payable by these governments now and hereafter. Financially this  adds to the bill, as we shall see below, a very large amount,  indeed about twice as much again as all the other claims added  together.      The reader will readily apprehend what a plausible case can  be made out for the inclusion of these items of damage, if only  on sentimental grounds. It can be pointed out, first of all, that  from the point of view of general fairness it is monstrous that a  woman whose house is destroyed should be entitled to claim from  the enemy whilst a woman whose husband is killed on the field of  battle should not be so entitled; or that a farmer deprived of  his farm should claim but that a woman deprived of the earning  power of her husband should not claim. In fact the case for  including pensions and separation allowances largely depends on  exploiting the rather arbitrary character of the criterion laid  down in the pre-armistice conditions. Of all the losses caused by  war some bear more heavily on individuals and some are more  evenly distributed over the community as a whole; but by means of  compensations granted by the government many of the former are in  fact converted into the latter. The most logical criterion for a  limited claim, falling short of the entire costs of the war,  would have been in respect of enemy acts contrary to  international engagements or the recognised practices of warfare.  But this also would have been very difficult to apply and unduly  unfavourable to French interests as compared with Belgium (whose  neutrality Germany had guaranteed) and Great Britain (the chief  sufferer from illicit acts of submarines).      In any case the appeals to sentiment and fairness outlined  above are hollow; for it makes no difference to the recipient of  a separation allowance or a pension whether the state which pays  them receives compensation on this or on another head, and a  recovery by the state out of indemnity receipts is just as much  in relief of the general taxpayer as a contribution towards the  general costs of the war would have been. But the main  consideration is that it was too late to consider whether the  pre-armistice conditions were perfectly judicious and logical or  to amend them; the only question at issue was whether these  conditions were not in fact limited to such classes of direct  damage to civilians and their property as are set forth in  paragraphs 1, 2, 3, 8, 9, and 10 of annex I. If words have any  meaning, or engagements any force, we had no more right to claim  for those war expenses of the state which arose out of pensions  and separation allowances, than for any other of the general  costs of the war. And who is prepared to argue in detail that we  were entitled to demand the latter?      What had really happened was a compromise between the Prime  Minister's pledge to the British electorate to claim the entire  costs of the war and the pledge to the contrary which the Allies  had given to Germany at the armistice. The Prime Minister could  claim that although he had not secured the entire costs of the  war, he had nevertheless secured an important contribution  towards them, that he had always qualified his promises by the  limiting condition of Germany's capacity to pay, and that the  bill as now presented more than exhausted this capacity as  estimated by the more sober authorities. The President, on the  other hand, had secured a formula which was not too obvious a  breach of faith, and had avoided a quarrel with his associates on  an issue where the appeals to sentiment and passion would all  have been against him, in the event of its being made a matter of  open popular controversy. In view of the Prime Minister's  election pledges, the President could hardly hope to get him to  abandon them in their entirety without a struggle in public; and  the cry of pensions would have had an overwhelming popular appeal  in all countries. Once more the Prime Minister had shown himself  a political tactician of a high order.      A further point of great difficulty may be readily perceived  between the lines of the treaty. It fixes no definite sum as  representing Germany's liability. This feature has been the  subject of very general criticism -- that it is equally  inconvenient to Germany and to the Allies themselves that she  should not know what she has to pay or they what they are to  receive. The method, apparently contemplated by the treaty, of  arriving at the final result over a period of many months by an  addition of hundreds of thousands of individual claims for damage  to land, farm buildings, and chickens, is evidently  impracticable; and the reasonable course would have been for both  parties to compound for a round sum without examination of  details. If this round sum had been named in the treaty, the  settlement would have been placed on a more business-like basis.      But this was impossible for two reasons. Two different kinds  of false statement had been widely promulgated, one as to  Germany's capacity to pay, the other as to the amount of the  Allies' just claims in respect of the devastated areas. The  fixing of either of these figures presented a dilemma. A figure  for Germany's prospective capacity to pay, not too much in excess  of the estimates of most candid and well-informed authorities,  would have fallen hopelessly far short of popular expectations  both in England and in France. On the other hand, a definitive  figure for damage done which would not disastrously disappoint  the expectations which had been raised in France and Belgium  might have been incapable of substantiation under challenge,(30*)  and open to damaging criticism on the part of the Germans, who  were believed to have been prudent enough to accumulate  considerable evidence as to the extent of their own misdoings.      By far the safest course for the politicians was, therefore,  to mention no figure at all; and from this necessity a great deal  of the complication of the reparation chapter essentially  springs.      The reader may be interested, however, to have my estimate of  the claim which can in fact be substantiated under annex I of the  reparation chapter. In the first section of this chapter I have  already guessed the claims other than those for pensions and  separation allowances at 33,000 million (to take the extreme  upper limit of my estimate). The claim for pensions and  separation allowances under annex I is not to be based on the  actual cost of these compensations to the governments concerned,  but is to be a computed figure calculated on the basis of the  scales in force in France at the date of the treaty's coming into  operation. This method avoids the invidious course of valuing an  American or a British life at a higher figure than a French or an  Italian. The French rate for pensions and allowances is at an  intermediate rate, not so high as the American or British, but  above the Italian, the Belgian, or the Serbian. The only data  required for the calculation are the actual French rates, and the  numbers of men mobilised and of the casualties in each class of  the various Allied armies. None of these figures are available in  detail, but enough is known of the general level of allowances,  of the numbers involved, and of the casualties suffered to allow  of an estimate which may not be very wide of the mark. My guess  as to the amount to be added in respect of pensions and  allowances is as follows: 

                                  Million 3 

      British Empire              1,400      France                      2,400(31*)      Italy                         500      Others        (including United States)   700                  Total           5,000 

      I feel much more confidence in the approximate accuracy of  the total figure(32*) than in its division between the different  claimants. The reader will observe that in any case the addition  of pensions and allowances enormously increases the aggregate  claim, raising it indeed by nearly double. Adding this figure to  the estimate under other heads, we have a total claim against  Germany of 38,000 million.(33*) I believe that this figure is  fully high enough, and that the actual result may fall somewhat  short of it.(34*) In the next section of this chapter the  relation of this figure to Germany's capacity to pay will be  examined. It is only necessary here to remind the reader of  certain other particulars of the treaty which speak for  themselves:      (1) Out of the total amount of the claim, whatever it  eventually turns out to be, a sum of 31,000 million must be paid  before 1 May 1921. The possibility of this will be discussed  below. But the treaty itself provides certain abatements. In the  first place, this sum is to include the expenses of the armies of  occupation since the armistice (a large charge of the order of  magnitude of 3200 million which under another article of the  treaty -- no. 249 -- is laid upon Germany).(35*) But further,  'such supplies of food and raw materials as may be judged by the  governments of the Principal Allied and Associated Powers to be  essential to enable Germany to meet her obligations for  reparation may also, with the approval of the said governments,  be paid for out of the above sum.'(36*) This is a qualification  of high importance. The clause, as it is drafted, allows the  finance ministers of the Allied countries to hold out to their  electorates the hope of substantial payments at an early date,  while at the same time it gives to the reparation commission a  discretion, which the force of facts will compel them to  exercise, to give back to Germany what is required for the  maintenance of her economic existence. This discretionary power  renders the demand for an immediate payment of 31,000 million  less injurious than it would otherwise be, but nevertheless it  does not render it innocuous. In the first place, my conclusions  in the next section of this chapter indicate that this sum cannot  be found within the period indicated, even if a large proportion  is in practice returned to Germany for the purpose of enabling  her to pay for imports. In the second place, the reparation  commission can only exercise its discretionary power effectively  by taking charge of the entire foreign trade of Germany, together  with the foreign exchange arising out of it, which will be quite  beyond the capacity of any such body. If the reparation  commission makes any serious attempt to administer the collection  of this sum of 31,000 million, and to authorise the return to  Germany of a part of it, the trade of Central Europe will be  strangled by bureaucratic regulation in its most inefficient  form.      (2) In addition to the early payment in cash or kind of a sum  of 31,000 million, Germany is required to deliver bearer bonds to  a further amount of 32,000 million or, in the event of the  payments in cash or kind before 1 May 1921, available for  reparation, falling short of 31,000 million by reason of the  permitted deductions, to such further amount as shall bring the  total payments by Germany in cash, kind, and bearer bonds up to 1  May 1921, to a figure of 33,000 million altogether.(37*) These  bearer bonds carry interest at 2 1/2% per annum from 1921 to  1925, and at 5% plus 1% for amortisation thereafter. Assuming,  therefore, that Germany is not able to provide any appreciable  surplus towards reparation before 1921, she will have to find a  sum of 375 million annually from 1921 to 1925, and 3180 million  annually thereafter.(38*)      (3) As soon as the reparation commission is satisfied that  Germany can do better than this, 5% bearer bonds are to be issued  for a further 32,000 million, the rate of amortisation being  determined by the commission hereafter. This would bring the  annual payment to 328O million without allowing anything for the  discharge of the capital of the last 32,000 million.      (4) Germany's liability, however, is not limited to 35,000  million, and the reparation commission is to demand further  instalments of bearer bonds until the total enemy liability under  annex I has been provided for. On the basis of my estimate of  38,000 million for the total liability, which is more likely to  be criticised as being too low than as being too high, the amount  of this balance will be 33,000 million. Assuming interest at 5%,  this will raise the annual payment to 3430 million. without  allowance for amortisation.      (5) But even this is not all. There is a further provision of  devastating significance. Bonds representing payments in excess  of 33,000 million are not to be issued until the commission is  satisfied that Germany can meet the interest on them. But this  does not mean that interest is remitted in the meantime. As from  1 May 1921, interest is to be debited to Germany on such part of  her outstanding debt as has not been covered by payment in cash  or kind or by the issue of bonds as above,(39*) and 'the rate of  interest shall be 5 per cent unless the commission shall  determine at some future time that circumstances justify a  variation of this rate.' That is to say, the capital sum of  indebtedness is rolling up all the time at compound interest. The  effect of this provision towards increasing the burden is, on the  assumption that Germany cannot pay very large sums at first,  enormous. At 5% compound interest a capital sum doubles itself in  fifteen years. On the assumption that Germany cannot pay more  than 3150 million annually until 1936 (i.e. 5% interest on 33,000  million) the 35,000 million on which interest is deferred will  have risen to 310,000 million, carrying an annual interest charge  of 3500 million. That is to say, even if Germany pays 3150  million annually up to 1936, she will nevertheless owe us at that  date more than half as much again as she does now (313,000  million as compared with 38,000 million). From 1936 onwards she  will have to pay to us 3650 million annually in order to keep  pace with the interest alone. At the end of any year in which she  pays less than this sum she will owe more than she did at the  beginning of it. And if she is to discharge the capital sum in  thirty years from 1936, i.e. in forty-eight years from the  armistice, she must pay an additional 3130 million annually,  making 3780 million in all.(40*)      It is, in my judgment, as certain as anything can be, for  reasons which I will elaborate in a moment, that Germany cannot  pay anything approaching this sum. Until the treaty is altered,  therefore, Germany has in effect engaged herself to hand over to  the Allies the whole of her surplus production in perpetuity.      (6) This is not less the case because the reparation  commission has been given discretionary powers to vary the rate  of interest, and to postpone and even to cancel the capital  indebtedness. In the first place, some of these powers can only  be exercised if the commission or the governments represented on  it are unanimous.(41*) But also, which is perhaps more important,  it will be the duty of the reparation commission, until there has  been a unanimous and far-reaching change of the policy which the  treaty represents, to extract from Germany year after year the  maximum sum obtainable. There is a great difference between  fixing a definite sum, which though large is within Germany's  capacity to pay and yet to retain a little for herself, and  fixing a sum far beyond her capacity, which is then to be reduced  at the discretion of a foreign commission acting with the object  of obtaining each year the maximum which the circumstances of  that year permit. The first still leaves her with some slight  incentive for enterprise, energy, and hope. The latter skins her  alive year by year in perpetuity, and however skilfully and  discreetly the operation is performed, with whatever regard for  not killing the patient in the process, it would represent a  policy which, if it were really entertained and deliberately  practised, the judgment of men would soon pronounce to be one of  the most outrageous acts of a cruel victor in civilised history.      There are other functions and powers of high significance  which the treaty accords to the reparation commission. But these  will be most conveniently dealt with in a separate section. 

   III. GERMANY'S CAPACITY TO PAY 

      The forms in which Germany can discharge the sum which she  has engaged herself to pay are three in number --      (1) immediately transferable wealth in the form of gold,  ships, and foreign securities; (2) the value of property in ceded  territory, or surrendered under the armistice; (3) annual  payments spread over a term of years, partly in cash and partly  in materials such as coal products, potash, and dyes.      There is excluded from the above the actual restitution of  property removed from territory occupied by the enemy, as, for  example, Russian gold, Belgian and French securities, cattle,  machinery, and works of art. In so far as the actual goods taken  can be identified and restored, they must clearly be returned to  their rightful owners, and cannot be brought into the general  reparation pool. This is expressly provided for in article 238 of  the treaty. 

      1. Immediately transferable wealth 

      (a) Gold. After deduction of the gold to be returned to  Russia, the official holding of gold as shown in the Reichsbank's  return of 30 November 1918 amounted to 3115,417,900. This was a  very much larger amount than had appeared in the Reichsbank's  return prior to the war,(42*) and was the result of the vigorous  campaign carried on in Germany during the war for the surrender  to the Reichsbank not only of gold coin but of gold ornaments of  every kind. Private hoards doubtless still exist but, in view of  the great efforts already made, it is unlikely that either the  German government or the Allies will be able to unearth them. The  return can therefore be taken as probably representing the  maximum amount which the German government are able to extract  from their people. In addition to gold there was in the  Reichsbank a sum of about 31 million in silver. There must be,  however, a further substantial amount in circulation, for the  holdings of the Reichsbank were as high as 39.1 million on 31  December 1917, and stood at about 36 million up to the latter  part of October 1918, when the internal run began on currency of  every kind.(43*) We may, therefore, take a total of (say) 3125  million for gold and silver together at the date of the  armistice.      These reserves, however, are no longer intact. During the  long period which elapsed between the armistice and the peace it  became necessary for the Allies to facilitate the provisioning of  Germany from abroad. The political condition of Germany at that  time and the serious menace of Spartacism rendered this step  necessary in the interests of the Allies themselves if they  desired the continuance in Germany of a stable government to  treat with. The question of how such provisions were to be paid  for presented, however, the gravest difficulties. A series of  conferences was held at Trves, at Spa, at Brussels, and  subsequently at Chteau Villette and Versailles, between  representatives of the Allies and of Germany, with the object of  finding some method of payment as little injurious as possible to  the future prospects of reparation payments. The German  representatives maintained from the outset that the financial  exhaustion of their country was for the time being so complete  that a temporary loan from the Allies was the only possible  expedient. This the Allies could hardly admit at a time when they  were preparing demands for the immediate payment by Germany of  immeasurably larger sums. But, apart from this, the German claim  could not be accepted as strictly accurate so long as their gold  was still untapped and their remaining foreign securities  unmarketed. In any case, it was out of the question to suppose  that in the spring of 1919 public opinion in the Allied countries  or in America would have allowed the grant of a substantial loan  to Germany. On the other hand, the Allies were naturally  reluctant to exhaust on the provisioning of Germany the gold  which seemed to afford one of the few obvious and certain sources  for reparation. Much time was expended in the exploration of all  possible alternatives. but it was evident at last that, even if  German exports and saleable foreign securities had been available  to a sufficient value, they could not be liquidated in time, and  that the financial exhaustion of Germany was so complete that  nothing whatever was immediately available in substantial amounts  except the gold in the Reichsbank. Accordingly a sum exceeding  350 million in all out of the Reichsbank gold was transferred by  Germany to the Allies (chiefly to the United States, Great  Britain, however, also receiving a substantial sum) during the  first six months of 1919 in payment for foodstuffs.      But this was not all. Although Germany agreed, under the  first extension of the armistice, not to export gold without  Allied permission, this permission could not be always withheld.  There were liabilities of the Reichsbank accruing in the  neighbouring neutral countries, which could not be met otherwise  than in gold. The failure of the Reichsbank to meet its  liabilities would have caused a depreciation of the exchange so  injurious to Germany's credit as to react on the future prospects  of reparation. In some cases, therefore, permission to export  gold was accorded to the Reichsbank by the Supreme Economic  Council of the Allies.      The net result of these various measures was to reduce the  gold reserve of the Reichsbank by more than half, the figures  falling from 3115 million to 355 million in September 1919.      It would be possible under the treaty to take the whole of  this latter sum for reparation purposes. It amounts, however, as  it is, to less than 4 % of the Reichsbank's note issue, and the  psychological effect of its total confiscation might be expected  (having regard to the very large volume of mark-notes held  abroad) to destroy the exchange value of the mark almost  entirely. A sum of 35 million, 310 million, or even 320 million  might be taken for a special purpose. But we may assume that the  reparation commission will judge it imprudent, having regard to  the reaction on their future prospects of securing payment, to  ruin the German currency system altogether, more particularly  because the French and Belgian governments, being holders of a  very large volume of mark-notes formerly circulating in the  occupied or ceded territory have a great interest in maintaining  some exchange value for the mark, quite apart from reparation  prospects.      It follows, therefore, that no sum worth speaking of can be  expected in the form of gold or silver towards the initial  payment of 31,000 million due by 1921.      (b) Shipping. Germany has engaged, as we have seen above, to  surrender to the Allies virtually the whole of her merchant  shipping. A considerable part of it, indeed, was already in the  hands of the Allies prior to the conclusion of peace, either by  detention in their ports or by the provisional transfer of  tonnage under the Brussels agreement in connection with the  supply of foodstuffs.(44*) Estimating the tonnage of German  shipping to be taken over under the treaty at 4 million gross  tons, and the average value per ton at 330 per ton, the total  money value involved is 3120 million.(45*)      (c) Foreign securities. Prior to the census of foreign  securities carried out by the German government in September  1916,(46*) of which the exact results have not been made public,  no official return of such investments was ever called for in  Germany, and the various unofficial estimates are confessedly  based on insufficient data, such as the admission of foreign  securities to the German stock exchanges, the receipts of the  stamp duties, consular reports, etc. The principal German  estimates current before the war are given in the appended  footnote.(47*) This shows a general consensus of opinion among  German authorities that their net foreign investments were  upwards of 31,250 million. I take this figure as the basis of my  calculations, although I believe it to be an exaggeration; 31,000  million would probably be a safer figure.      Deductions from this aggregate total have to be made under  four heads.      (i) Investments in Allied countries and in the United States,  which between them constitute a considerable part of the world,  have been sequestrated by Public Trustees, custodians of enemy  property, and similar officials, and are not available for  reparation except in so far as they show a surplus over various  private claims. Under the scheme for dealing with enemy debts  outlined in chapter 4, the first charge on these assets is the  private claims of Allied against German nationals. It is  unlikely, except in the United States, that there will be any  appreciable surplus for any other purpose.      (ii) Germany's most important fields of foreign investment  before the war were not, like ours, overseas, but in Russia,  Austria-Hungary, Turkey, Roumania, and Bulgaria. A great part of  these has now become almost valueless, at any rate for the time  being; especially those in Russia and Austria-Hungary. If present  market value is to be taken as the test, none of these  investments are now saleable above a nominal figure. Unless the  Allies are prepared to take over these securities much above  their nominal market valuation, and hold them for future  realisation, there is no substantial source of funds for  immediate payment in the form of investments in these countries.      (iii) While Germany was not in a position to realise her  foreign investments during the war to the degree that we were,  she did so nevertheless in the case of certain countries and to  the extent that she was able. Before the United States came into  the war, she is believed to have resold a large part of the pick  of her investments in American securities, although some current  estimates of these sales (a figure of 360 million has been  mentioned) are probably exaggerated. But throughout the war and  particularly in its later stages, when her exchanges were weak  and her credit in the neighbouring neutral countries was becoming  very low, she was disposing of such securities as Holland,  Switzerland, and Scandinavia would buy or would accept as  collateral. It is reasonably certain that by June 1919 her  investments in these countries had been reduced to a negligible  figure and were far exceeded by her liabilities in them. Germany  has also sold certain overseas securities, such as Argentine  cedulas, for which a market could be found.      (iv) It is certain that since the armistice there has been a  great flight abroad of the foreign securities still remaining in  private hands. This is exceedingly difficult to prevent. German  foreign investments are as a rule in the form of bearer  securities and are not registered. They are easily smuggled  abroad across Germany's extensive land frontiers, and for some  months before the conclusion of peace it was certain that their  owners would not be allowed to retain them if the Allied  governments could discover any method of getting hold of them.  These factors combined to stimulate human ingenuity, and the  efforts both of the Allied and of the German governments to  interfere effectively with the outflow are believed to have been  largely futile.      In face of all these considerations, it will be a miracle if  much remains for reparation. The countries of the Allies and of  the United States, the countries of Germany's own allies, and the  neutral countries adjacent to Germany exhaust between them almost  the whole of the civilised world; and, as we have seen, we cannot  expect much to be available for reparation from investments in  any of these quarters. Indeed there remain no countries of  importance for investments except those of South America.      To convert the significance of these deductions into figures  involves much guesswork. I give the reader the best personal  estimate I can form after pondering the matter in the light of  the available figures and other relevant data.      I put the deduction under (i) at 3300 million, of which 3100  million may be ultimately available after meeting private debts,  etc.      As regards (ii) -- according to a census taken by the  Austrian Ministry of Finance on 31 December 1912, the nominal  value of the Austro-Hungarian securities held by Germans was  3197,300,000. Germany's pre-war investments in Russia outside  government securities have been estimated at 395 million, which  is much lower than would be expected, and in 1906 Sartorius von  Waltershausen estimated her investments in Russian government  securities at 3150 million. This gives a total of 3245 million,  which is to some extent borne out by the figure of 3200 million  given in 1911 by Dr Ischchanian as a deliberately modest  estimate. A Roumanian estimate, published at the time of that  country's entry into the war, gave the value of Germany's  investments in Roumania at 34,000,000-34,400,000, of which  32,800,000-33,200,000 were in government securities. An  association for the defence of French interests in Turkey, as  reported in the Temps (8 September 1919), has estimated the total  amount of German capital invested in Turkey at about 359 million,  of which, according to the latest Report of the council of  foreign bondholders, 332,500,000 was held by German nationals in  the Turkish external debt. No estimates are available to me of  Germany's investments in Bulgaria. Altogether I venture a  deduction of 3500 million in respect of this group of countries  as a whole.      Resales and the pledging as collateral of securities during  the war under (iii) I put at 3100 million to 3150 million,  comprising practically all Germany's holding of Scandinavian,  Dutch, and Swiss securities, a part of her South American  securities, and a substantial proportion of her North American  securities sold prior to the entry of the United States into the  war.      As to the proper deduction under (iv) there are naturally no  available figures. For months past the European Press has been  full of sensational stories of the expedients adopted. But if we  put the value of securities which have already left Germany or  have been safely secreted within Germany itself beyond discovery  by the most inquisitorial and powerful methods at 3100 million,  we are not likely to overstate it.      These various items lead, therefore, in all to a deduction of  a round figure of about 31,000 million, and leave us with an  amount of 3250 million theoretically still available.(48*)      To some readers this figure may seem low, but let them  remember that it purports to represent the remnant of saleable  securities upon which the German government might be able to lay  hands for public purposes. In my own opinion it is much too high,  and considering the problem by a different method of attack I  arrive at a lower figure. For leaving out of account sequestered  Allied securities and investments in Austria, Russia, etc., what  blocks of securities, specified by countries and enterprises, can  Germany possibly still have which could amount to as much as 3250  million? I cannot answer the question. She has some Chinese  government securities which have not been sequestered, a few  Japanese perhaps, and a more substantial value of first-class  South American properties. But there are very few enterprises of  this class still in German hands, and even their value is  measured by one or two tens of millions, not by fifties or  hundreds. He would be a rash man, in my judgment, who joined a  syndicate to pay 3100 million in cash for the unsequestered  remnant of Germany's overseas investments. If the reparation  commission is to realise even this lower figure, it is probable  that they will have to nurse, for some years, the assets which  they take over, not attempting their disposal at the present  time.      We have, therefore, a figure of from 3100 million to 3250  million as the maximum contribution from Germany's foreign  securities.      Her immediately transferable wealth is composed, then, of:  (a) gold and silver -- say 360 million; (b) ships -- 3120  million; (c) foreign securities -- 3100-250 million.      Of the gold and silver, it is not, in fact, practicable to  take any substantial part without consequences to the German  currency system injurious to the interests of the Allies  themselves. The contribution from all these sources together  which the reparation commission can hope to secure by May 1921  may be put, therefore, at from 3250 million to 3350 million as a  maximum.(49*) 

  2. Property in ceded territory or surrendered under the armistace 

      As the treaty has been drafted Germany will not receive  important credits available towards meeting reparation in respect  of her property in ceded territory.      Private property in most of the ceded territory is utilised  towards discharging private German debts to Allied nationals, and  only the surplus, if any, is available towards reparation. The  value of such property in Poland and the other new states is  payable direct to the owners.      Government property in Alsace-Lorraine, in territory ceded to  Belgium, and in Germany's former colonies transferred to a  mandatory, is to be forfeited without credit given. Buildings,  forests, and other state property which belonged to the former  kingdom of Poland are also to be surrendered without credit.  There remain, therefore, government properties, other than the  above, surrendered to Poland, government properties in Schleswig  surrendered to Denmark,(50*) the value of the Saar coalfields,  the value of certain river craft, etc., to be surrendered under  the ports, waterways, and railways chapter, and the value of the  German submarine cables transferred under annex VII of the  reparation chapter.      Whatever the treaty may say, the reparation commission will  not secure any cash payments from Poland. I believe that the Saar  coalfields have been valued at from 315 million to 320 million. A  round figure of 330 million for all the above items, excluding  any surplus available in respect of private property, is probably  a liberal estimate.      There remains the value of material surrendered under the  armistice. Article 250 provides that a credit shall be assessed  by the reparation commission for rolling-stock surrendered under  the armistice as well as for certain other specified items, and  generally for any material so surrendered for which the  reparation commission think that credit should be given, 'as  having non-military value'. The rolling-stock (150,000 wagons and  5,000 locomotives) is the only very valuable item. A round figure  of 350 million, for all the armistice surrenders, is probably  again a liberal estimate.      We have, therefore, 380 million to add in respect of this  heading to our figure of 3250-350 million under the previous  heading. This figure differs from the preceding in that it does  not represent cash capable of benefiting the financial situation  of the Allies, but is only a book credit between themselves or  between them and Germany.      The total of 3330 million to 3430 million now reached is not,  however, available for reparation. The first charge upon it,  under article 251 of the treaty, is the cost of the armies of  occupation both during the armistice and after the conclusion of  peace. The aggregate of this figure up to May 1921 cannot be  calculated until the rate of withdrawal is known which is to  reduce the monthly cost from the figure exceeding 320 million  which prevailed during the first part of 1919, to that of 31  million, which is to be the normal figure eventually. I estimate,  however, that this aggregate may be about 3200 million. This  leaves us with from 3100 million to 3200 million still in hand.      Out of this, and out of exports of goods, and payments in  kind under the treaty prior to May 1921 (for which I have not as  yet made any allowance), the Allies have held out the hope that  they will allow Germany to receive back such sums for the  purchase of necessary food and raw materials as the former deem  it essential for her to have. It is not possible at the present  time to form an accurate judgment either as to the money-value of  the goods which Germany will require to purchase from abroad in  order to re-establish her economic life, or as to the degree of  liberality with which the Allies will exercise their discretion.  If her stocks of raw materials and food were to be restored to  anything approaching their normal level by May 1921, Germany  would probably require foreign purchasing power of from 3100 to  3200 million at least, in addition to the value of her current  exports. While this is not likely to be permitted, I venture to  assert as a matter beyond reasonable dispute that the social and  economic condition of Germany cannot possibly permit a surplus of  exports over imports during the period prior to May 1921, and  that the value of any payments in kind with which she may be able  to furnish the Allies under the treaty in the form of coal, dyes,  timber, or other materials will have to be returned to her to  enable her to pay for imports essential to her existence.(51*)      The reparation commission can, therefore, expect no addition  from other sources to the sum of from 3100 million to 3200  million with which we have hypothetically credited it after the  realisation of Germany's immediately transferable wealth, the  calculation of the credits due to Germany under the treaty, and  the discharge of the cost of the armies of occupation. As Belgium  has secured a private agreement with France, the United States,  and Great Britain, outside the treaty, by which she is to  receive, towards satisfaction of her claims, the first 3100  million available for reparation, the upshot of the whole matter  is that Belgium may possibly get her 3100 million by May 1921,  but none of the other Allies are likely to secure by that date  any contribution worth speaking of. At any rate, it would be very  imprudent for finance ministers to lay their plans on any other  hypothesis. 

  3. Annual payments spread over a term of years 

      It is evident that Germany's pre-war capacity to pay an  annual foreign tribute has not been unaffected by the almost  total loss of her colonies, her overseas connections, her  mercantile marine, and her foreign properties, by the cession of  ten per cent of her territory and population, of one-third of her  coal and of three-quarters of her iron ore, by two million  casualties amongst men in the prime of life, by the starvation of  her people for four years, by the burden of a vast war debt, by  the depreciation of her currency to less than one-seventh its  former value, by the disruption of her allies and their  territories, by revolution at home and Bolshevism on her borders,  and by all the unmeasured ruin in strength and hope of four years  of all-swallowing war and final defeat.      All this, one would have supposed, is evident. Yet most  estimates of a great indemnity from Germany depend on the  assumption that she is in a position to conduct in the future a  vastly greater trade than ever she has had in the past.      For the purpose of arriving at a figure it is of no great  consequence whether payment takes the form of cash (or rather of  foreign exchange) or is partly effected in kind (coal, dyes,  timber, etc.), as contemplated by the treaty. In any event, it is  only by the export of specific commodities that Germany can pay,  and the method of turning the value of these exports to account  for reparation purposes is, comparatively, a matter of detail.      We shall lose ourselves in mere hypothesis unless we return  in some degree to first principles and, whenever we can, to such  statistics as there are. It is certain that an annual payment can  only be made by Germany over a series of years by diminishing her  imports and increasing her exports, thus enlarging the balance in  her favour which is available for effecting payments abroad.  Germany can pay in the long run in goods, and in goods only,  whether these goods are furnished direct to the Allies, or  whether they are sold to neutrals and the neutral credits so  arising are then made over to the Allies. The most solid basis  for estimating the extent to which this 'process can be carried  is to be found, therefore, in an analysis of her trade returns  before the war. Only on the basis of such an analysis,  supplemented by some general data as to the aggregate  wealth-producing capacity of the country, can a rational guess be  made as to the maximum degree to which the exports of Germany  could be brought to exceed her imports.      In the year 1913 Germany's imports amounted to 3538 million  and her exports to 3505 million, exclusive of transit trade and  bullion. That is to say, imports exceeded exports by about 333  million. On the average of the five years ending 1913, however,  her imports exceeded her exports by a substantially larger  amount, namely, 374 million. It follows, therefore, that more  than the whole of Germany's pre-war balance for new foreign  investment was derived from the interest on her existing foreign  securities, and from the profits of her shipping, foreign  banking, etc. As her foreign properties and her mercantile marine  are now to be taken from her, and as her foreign banking and  other miscellaneous sources of revenue from abroad have been  largely destroyed, it appears that, on the pre-war basis of  exports and imports, Germany, so far from having a surplus  wherewith to make a foreign payment, would be not nearly  self-supporting. Her first task, therefore, must be to effect a  readjustment of consumption and production to cover this deficit.  Any further economy she can effect in the use of imported  commodities, and any further stimulation of exports will then be  available for reparation.      Two-thirds of Germany's import and export trade is enumerated  under separate headings in the following tables. The  considerations applying to the enumerated portions may be assumed  to apply more or less to the remaining one-third, which is  composed of commodities of minor importance individually. 

  German exports, 1913        Amount       Percentage of                             (million 3)   total exports 

  Iron goods (including    tin-plates, etc.)           66.13         13.2  Machinery and parts    (including motor-cars)      37.55          7.5  Coal, coke, and briquettes    35.34          7.0  Woollen goods (including    raw and combined wool    and clothing)               29.40           5.9  Cotton goods (including  raw cotton, yarn and thread)  28.15           5.6 

                               196.57          39.2 

  Cereals, etc. (including     rye, oats, wheat, hops)    21.18           4.1  Leather and leather goods     15.47           3.0  Sugar                         13.20           2.6  Paper, etc.                   13.10           2.6  Furs                          11.75           2.2  Electrical goods    (installations, machinery,    lamps, cables)              10.88           2.2  Silk goods                    10.10           2.0  Dyes                           9.76           1.9  Copper goods                   6.50           1.3  Toys                           5.15           1.0  Rubber and rubber goods        4.27           0.9  Books, maps, and music         3.71           0.8  Potash                         3.18           0.6  Glass                          3.14           0.6  Potassium chloride             2.91           0.6  Pianos, organs, and parts      2.77           0.6  Raw zinc                       2.74           0.5  Porcelain                      2.53           0.5 

                               142.34          28.0 

  Other goods, unenumerated    165.92          32.8 

                      Total    504.83         100.0 

  German imports, 1913        Amount          Percentage of                            (million 3)       total imports 

  1. Raw materials: 

  Cotton                      30.35               5.6  Hides and skins             24.86               4.6  Wool                        23.67               4.4  Copper                      16.75               3.1  Coal                        13.66               2.5  Timber                      11.60               2.2  Iron ore                    11.35               2.1  Furs                         9.35               1.7  Flax and flaxseed            9.33               1.7  Saltpetre                    8.55               1.6  Silk                         7.90               1.5  Rubber                       7.30               1.4  Jute                         4.70               0.9  Petroleum                    3.49               0.7  Tin                          2.91               0.5  Phosphorus chalk             2.32               0.4  Lubricating oil              2.29               0.4 

                             190.38              35.3 

  II. Food, tobacco, etc.: 

  Cereals, etc. (wheat,    barley, bran, rice, maize,    oats, rye, clover)        65.51               12.2  Oilseeds and cake, etc.    (including palm kernels,     copra, cocoa beans)      20.53                3.8  Cattle, lamb fat, bladders  14.62                2.8  Coffee                      10.95                2.0  Eggs                         9.70                1.8  Tobacco                      6.70                1.2  Butter                       5.93                1.1  Horses                       5.81                1.1  Fruit                        3.65                0.7  Fish                         2.99                0.6  Poultry                      2.80                0.5  Wine                         2.67                0.5 

                             151.86               28.3 

  III. Manufactures: 

  Cotton yarn and thread    and cotton goods           9.41                1.8  Woollen yarn and    woollen goods              7.57                1.4  Machinery                    4.02                0.7 

                              21.00                3.9 

  IV. Unenumerated           175.28               32.5 

          Total              538.52              100.0 

      These tables show that the most important exports consisted  of: (1) iron goods, including tin-plates (13.2%); (2) machinery,  etc. (7.5%); (3) coal, coke, and briquettes (7%); (4) woollen  goods, including raw and combed wool (5.9 %); and (5) cotton  goods, including cotton yarn and thread and raw cotton (5.6%),  these five classes between them accounting for 39.2% of the total  exports. It will be observed that all these goods are of a kind  in which before the war competition between Germany and the  United Kingdom was very severe. If, therefore, the volume of such  exports to overseas or European destinations is very largely  increased the effect upon British export trade must be  correspondingly serious. As regards two of the categories,  namely, cotton and woollen goods, the increase of an export trade  is dependent upon an increase of the import of the raw material,  since Germany produces no cotton and practically no wool. These  trades are therefore incapable of expansion unless Germany is  given facilities for securing these raw materials (which can only  be at the expense of the Allies) in excess of the pre-war  standard of consumption, and even then the effective increase is  not the gross value of the exports, but only the difference  between the value of the manufactured exports and of the imported  raw material. As regards the other three categories, namely,  machinery, iron goods, and coal, Germany's capacity to increase  her exports will have been taken from her by the cessions of  territory in Poland, Upper Silesia, and Alsace-Lorraine. As has  been pointed out already, these districts accounted for nearly  one-third of Germany's production of coal. But they also supplied  no less than three-quarters of her iron-ore production, 38% of  her blast furnaces, and 9.5% of her iron and steel foundries.  Unless, therefore, Alsace-Lorraine and Upper Silesia send their  iron ore to Germany proper, to be worked up, which will involve  an increase in the imports for which she will have to find  payment, so far from any increase in export trade being possible,  a decrease is inevitable.(52*)      Next on the list come cereals, leather goods, sugar, paper,  furs, electrical goods, silk goods, and dyes. Cereals are not a  net export and are far more than balanced by imports of the same  commodities. As regards sugar, nearly 90 per cent of Germany's  pre-war exports came to the United Kingdom.(53*) An increase in  this trade might be stimulated by the grant of a preference in  this country to German sugar or by an arrangement by which sugar  was taken in part payment for the indemnity on the same lines as  has been proposed for coal, dyes, etc. Paper exports also might  be capable of some increase. Leather goods, furs, and silks  depend upon corresponding imports on the other side of the  account. Silk goods are largely in competition with the trade of  France and Italy. The remaining items are individually very  small. I have heard it suggested that the indemnity might be paid  to a great extent in potash and the like. But potash before the  war represented 0.6% of Germany's export trade, and about 33  million in aggregate value. Besides, France, having secured a  potash field in the territory which has been restored to her,  will not welcome a great stimulation of the German exports of  this material.      An examination of the import list shows that 63.6% are raw  materials and food. The chief items of the former class, namely,  cotton, wool, copper, hides, iron ore, furs, silk, rubber, and  tin, could not be much reduced without reacting on the export  trade, and might have to be increased if the export trade was to  be increased. Imports of food, namely, wheat, barley, coffee,  eggs, rice, maize, and the like, present a different problem. It  is unlikely that, apart from certain comforts, the consumption of  food by the German labouring classes before the war was in excess  of what was required for maximum efficiency; indeed, it probably  fell short of that amount. Any substantial decrease in the  imports of food would therefore react on the efficiency of the  industrial population, and consequently on the volume of surplus  exports which they could be forced to produce. It is hardly  possible to insist on a greatly increased productivity of German  industry if the workmen are to be underfed. But this may not be  equally true of barley, coffee, eggs, and tobacco. If it were  possible to enforce a regime in which for the future no German  drank beer or coffee, or smoked any tobacco, a substantial saving  could be effected. Otherwise there seems little room for any  significant reduction.      The following analysis of German exports and imports  according to destination and origin is also relevant. From this  it appears that of Germany's exports in 1913, 18% went to the  British empire, 17% to France, Italy, and Belgium, 10% to Russia  and Roumania, and 7% to the United States; that is to say, more  than half of the exports found their market in the countries of  the Entente nations. Of the balance, 12% went to Austria-Hungary,  Turkey, and Bulgaria, and 35% elsewhere. Unless, therefore, the  present Allies are prepared to encourage the importation of  German products, a substantial increase in total volume can only  be effected by the wholesale swamping of neutral markets. 

  GERMAN TRADE (1913) ACCORDING TO DESTINATION AND ORIGIN 

              Destination of Germany's  Origin of Germany's                  exports                 imports               Million 3 Per cent        Million 3 Per cent 

  Great Britain  71.91     14.2            43.80       8.1  India           7.53      1.5            27.04       5.0  Egypt           2.17      0.4             5.92       1.1  Canada          3.02      0.6             3.20       0.6  Australia       4.42      0.9            14.80       2.8  South Africa    2.34      0.5             3.48       0.6 

   Total,  British empire  91.39    18.1            98.24      18.2 

  France          39.49     7.8            29.21       5.4  Belgium         27.55     5.5            17.23       3.2  Italy           19.67     3.9            15.88       3.0  U.S.A.          35.66     7.1            85.56      15.9  Russia          44.00     8.7            71.23      13.2  Roumania         7.00     1.4             3.99       0.7  Austria-Hungary 55.24    10.9            41.36       7.7  Turkey           4.92     1.0             3.68       0.7  Bulgaria         1.51     0.3             0.40       ---  Other counties 178.04    35.3           171.74      32.0 

                 504.47   100.0           538.52     100.0 

      The above analysis affords some indication of the possible  magnitude of the maximum modification of Germany's export balance  under the conditions which will prevail after the peace. On the  assumptions (1) that we do not specially favour Germany over  ourselves in supplies of such raw materials as cotton and wool  (the world's supply of which is limited), (2) that France, having  secured the iron-ore deposits, makes a serious attempt to secure  the blast furnaces and the steel trade also, (3) that Germany is  not encouraged and assisted to undercut the iron and other trades  of the Allies in overseas markets, and (4) that a substantial  preference is not given to German goods in the British empire, it  is evident by examination of the specific items that not much is  practicable.      Let us run over the chief items again: (1) Iron goods. In  view of Germany's loss of resources, an increased net export  seems impossible and a large decrease probable. (2) Machinery.  Some increase is possible. (3) Coal and coke. The value of  Germany's net export before the war was 322 million; the Allies  have agreed that for the time being 20 million tons is the  maximum possible export with a problematic (and in fact)  impossible increase to 40 million tons at some future time; even  on the basis of 20 million tons we have virtually no increase of  value, measured in pre-war prices;(54*) whilst, if this amount is  exacted, there must be a decrease of far greater value in the  export of manufactured articles requiring coal for their  production. (4) Woollen goods. An increase is impossible without  the raw wool, and, having regard to the other claims on supplies  of raw wool, a decrease is likely. (5) Cotton goods. The same  considerations apply as to wool. (6) Cereals. There never was and  never can be a net export. (7) Leather goods. The same  considerations apply as to wool.      We have now covered nearly half of Germany's pre-war exports,  and there is no other commodity which formerly represented as  much as 3 per cent of her exports. In what commodity is she to  pay? Dyes? -- their total value in 1913 was 310 million. Toys?  Potash? -- 1913 exports were worth 33 million. And even if the  commodities could be specified, in what markets are they to be  sold? -- remembering that we have in mind goods to the value not  of tens of millions annually, but of hundreds of millions.      On the side of imports, rather more is possible. By lowering  the standard of life, an appreciable reduction of expenditure on  imported commodities may be possible. But, as we have already  seen, many large items are incapable of reduction without  reacting on the volume of exports.      Let us put our guess as high as we can without being foolish,  and suppose that after a time Germany will be able, in spite of  the reduction of her resources, her facilities, her markets, and  her productive power, to increase her exports and diminish her  imports so as to improve her trade balance altogether by 3100  million annually, measured in pre-war prices. This adjustment is  first required to liquidate the adverse trade balance, which in  the five years before the war averaged 374 million; but we will  assume that after allowing for this, she is left with a  favourable trade balance of 350 million a year. Doubling this to  allow for the rise in pre-war prices, we have a figure of 3100  million. Having regard to the political, social, and human  factors, as well as to the purely economic, I doubt if Germany  could be made to pay this sum annually over a period of 30 years;  but it would not be foolish to assert or to hope that she could.      Such a figure, allowing 5% for interest, and 1% for repayment  of capital, represents a capital sum having a present value of  about 31,700 million.(55*)      I reach, therefore, the final conclusion that, including all  methods of payment -- immediately transferable wealth, ceded  property, and an annual tribute -- 32,000 million is a safe  maximum figure of Germany's capacity to pay. In all the actual  circumstances, I do not believe that she can pay as much. Let  those who consider this a very low figure, bear in mind the  following remarkable comparison. The wealth of France in 1871 was  estimated at a little less than half that of Germany in 1913.  Apart from changes in the value of money, an indemnity from  Germany of 3500 million would, therefore, be about comparable to  the sum paid by France in 1871; and as the real burden of an  indemnity increases more than in proportion to its amount, the  payment of 32,000 million by Germany would have far severer  consequences than the 3200 million paid by France in 1871.      There is only one head under which I see a possibility of  adding to the figure reached on the line of argument adopted  above; that is, if German labour is actually transported to the  devastated areas and there engaged in the work of reconstruction.  I have heard that a limited scheme of this kind is actually in  view. The additional contribution thus obtainable depends on the  number of labourers which the German government could contrive to  maintain in this way and also on the number which, over a period  of years, the Belgian and French inhabitants would tolerate in  their midst. In any case, it would seem very difficult to employ  on the actual work of reconstruction, even over a number of  years, imported labour having a net present value exceeding (say)  3250 million; and even this would not prove in practice a net  addition to the annual contributions obtainable in other ways.      A capacity of 38,000 million or even of 35,000 million is,  therefore, not within the limits of reasonable possibility. It is  for those who believe that Germany can make an annual payment  amounting to hundreds of millions sterling to say in what  specific commodities they intend this payment to be made, and in  what markets the goods are to be sold. Until they proceed to some  degree of detail, and are able to produce some tangible argument  in favour of their conclusions, they do not deserve to be  believed.(56*)      I make three provisos only, none of which affect the force of  my argument for immediate practical purposes.      First: if the Allies were to 'nurse' the trade and industry  of Germany for a period of five or ten years, supplying her with  large loans, and with ample shipping, food, and raw materials  during that period, building up markets for her, and deliberately  applying all their resources and goodwill to making her the  greatest industrial nation in Europe, if not in the world, a  substantially larger sum could probably be extracted thereafter;  for Germany is capable of very great productivity.      Second: whilst I estimate in terms of money, I assume that  there is no revolutionary change in the purchasing power of our  unit of value. If the value of gold were to sink to a half or a  tenth of its present value, the real burden of a payment fixed in  terms of gold would be reduced proportionately. If a gold  sovereign comes to be worth what a shilling is worth now, then,  of course, Germany can pay a larger sum than I have named,  measured in gold sovereigns.      Third: I assume that there is no revolutionary change in the  yield of nature and material to man's labour. It is not  impossible that the progress of science should bring within our  reach methods and devices by which the whole standard of life  would be raised immeasurably, and a given volume of products  would represent but a portion of the human effort which it  represents now. In this case all standards of 'capacity' would be  changed everywhere. But the fact that all things are possible is  no excuse for talking foolishly.      It is true that in 1870 no man could have predicted Germany's  capacity in 1910. We cannot expect to legislate for a generation  or more. The secular changes in man's economic condition and the  liability of human forecast to error are as likely to lead to  mistake in one direction as in another. We cannot as reasonable  men do better than base our policy on the evidence we have and  adapt it to the five or ten years over which we may suppose  ourselves to have some measure of prevision; and we are not at  fault if we leave on one side the extreme chances of human  existence and of revolutionary changes in the order of Nature or  of man's relations to her. The fact that we have no adequate  knowledge of Germany's capacity to pay over a long period of  years is no justification (as I have heard some people claim that  it is) for the statement that she can pay ten thousand million  pounds.      Why has the world been so credulous of the unveracities of  politicians? If an explanation is needed, I attribute this  particular credulity to the following influences in part.      In the first place, the vast expenditures of the war, the  inflation of prices, and the depreciation of currency, leading up  to a complete instability of the unit of value, have made us lose  all sense of number and magnitude in matters of finance. What we  believed to be the limits of possibility have been so enormously  exceeded, and those who founded their expectations on the past  have been so often wrong, that the man in the street is now  prepared to believe anything which is told him with some show of  authority, and the larger the figure the more readily he swallows  it.      But those who look into the matter more deeply are sometimes  misled by a fallacy much more plausible to reasonable persons.  Such a one might base his conclusions on Germany's total surplus  of annual productivity as distinct from her export surplus.  Helfferich's estimate of Germany's annual increment of wealth in  1913 was 3400 million to 3425 million (exclusive of increased  money value of existing land and property). Before the war,  Germany spent between 350 million and 3100 million on armaments,  with which she can now dispense. Why, therefore, should she not  pay over to the Allies an annual sum of 3500 million? This puts  the crude argument in its strongest and most plausible form.      But there are two errors in it. First of all, Germany's  annual savings, after what she has suffered in the war and by the  peace, will fall far short of what they were before and, if they  are taken from her year by year in future, they cannot again  reach their previous level. The loss of Alsace-Lorraine, Poland,  and Upper Silesia could not be assessed in terms of surplus  productivity at less than 350 million annually. Germany is  supposed to have profited about 3100 million per annum from her  ships, her foreign investments, and her foreign banking and  connections, all of which have now been taken from her. Her  saving on armaments is far more than balanced by her annual  charge for pensions, now estimated at 3250 million,(57*) which  represents a real loss of productive capacity. And even if we put  on one side the burden of the internal debt, which amounts to 240  milliards of marks, as being a question of internal distribution  rather than of productivity, we must still allow for the foreign  debt incurred by Germany during the war, the exhaustion of her  stock of raw materials, the depletion of her livestock, the  impaired productivity of her soil from lack of manures and of  labour, and the diminution in her wealth from the failure to keep  up many repairs and renewals over a period of nearly five years.  Germany is not as rich as she was before the war, and the  diminution in her future savings for these reasons, quite apart  from the factors previously allowed for, could hardly be put at  less than ten per cent, that is 340 million annually.      These factors have already reduced Germany's annual surplus  to less than the  3100 million at which we arrived on other  grounds as the maximum of her annual payments. But even if the  rejoinder be made that we have not yet allowed for the lowering  of the standard of life and comfort in Germany which may  reasonably be imposed on a defeated enemy,(58*) there is still a  fundamental fallacy in the method of calculation. An annual  surplus available for home investment can only be converted into  a surplus available for export abroad by a radical change in the  kind of work performed. Labour, while it may be available and  efficient for domestic services in Germany, may yet be able to  find no outlet in foreign trade. We are back on the same question  which faced us in our examination of the export trade -- in what  export trade is German labour going to find a greatly increased  outlet? Labour can only be diverted into new channels with loss  of efficiency, and a large expenditure of capital. The annual  surplus which German labour can produce for capital improvements  at home is no measure, either theoretically or practically, of  the annual tribute which she can pay abroad. 

   IV. THE REPARATION COMMISSION 

      This body is so remarkable a construction and may, if it  functions at all, exert so wide an influence on the life of  Europe, that its attributes deserve a separate examination.      There are no precedents for the indemnity imposed on Germany  under the present treaty; for the money exactions which formed  part of the settlement after previous wars have differed in two  fundamental respects from this one. The sum demanded has been  determinate and has been measured in a lump sum of money; and so  long as the defeated party was meeting the annual instalments of  cash, no further interference was necessary.      But for reasons already elucidated, the exactions in this  case are not yet determinate, and the sum when fixed will prove  in excess of what can be paid in cash and in excess also of what  can be paid at all. It was necessary, therefore, to set up a body  to establish the bill of claim, to fix the mode of payment, and  to approve necessary abatements and delays. It was only possible  to place this body in a position to exact the utmost year by year  by giving it wide powers over the internal, economic life of the  enemy countries who are to be treated henceforward as bankrupt  estates to be administered by and for the benefit of the  creditors. In fact, however, its powers and functions have been  enlarged even beyond what was required for this purpose, and the  reparation commission has been established as the final arbiter  on numerous economic and financial issues which it was convenient  to leave unsettled in the treaty itself.(59*)      The powers and constitution of the reparation commission are  mainly laid down in articles 233-41 and annex II of the  reparation chapter of the treaty with Germany. But the same  commission is to exercise authority over Austria and Bulgaria,  and possibly over Hungary and Turkey, when peace is made with  these countries. There are therefore analogous articles mutatis  mutandis in the Austrian treaty(60*) and in the Bulgarian  treaty.(61*)      The principal Allies are each represented by one chief  delegate. The delegates of the United States, Great Britain,  France, and Italy take part in all proceedings; the delegate of  Belgium in all proceedings except those attended by the delegates  of Japan or the Serb-Croat-Slovene state; the delegate of Japan  in all proceedings affecting maritime or specifically Japanese  questions; and the delegate of the Serb-Croat-Slovene state when  questions relating to Austria, Hungary, or Bulgaria are under  consideration. Other Allies are to be represented by delegates,  without the power to vote, whenever their respective claims and  interests are under examination.      In general the commission decides by a majority vote, except  in certain specific cases where unanimity is required, of which  the most important are the cancellation of German indebtedness,  long postponement of the instalments, and the sale of German  bonds of indebtedness. The commission is endowed with full  executive authority to carry out its decisions. It may set up an  executive staff and delegate authority to its officers. The  commission and its staff are to enjoy diplomatic privileges, and  its salaries are to be paid by Germany, who will, however, have  no voice in fixing them. If the commission is to discharge  adequately its numerous functions, it will be necessary for it to  establish a vast polyglot bureaucratic organisation, with a staff  of hundreds. To this organisation, the headquarters of which will  be in Paris, the economic destiny of Central Europe is to be  entrusted.      Its main functions are as follows:      (1) The commission will determine the precise figure of the  claim against the enemy Powers by an examination in detail of the  claims of each of the Allies under annex I of the reparation  chapter. This task must be completed by May 1921. It shall give  to the German government and to Germany's allies 'a just  opportunity to be heard, but not to take any part whatever in the  decisions of the commission'. That is to say, the commission will  act as a party and a judge at the same time.      (2) Having determined the claim, it will draw up a schedule  of payments providing for the discharge of the whole sum with  interest within thirty years. From time to time it shall, with a  view to modifying the schedule within the limits of possibility,  'consider the resources and capacity of Germany... giving her  representatives a just opportunity to be heard'.      'In periodically estimating Germany's capacity to pay, the  commission shall examine the German system of taxation, first, to  the end that the sums for reparation which Germany is required to  pay shall become a charge upon all her revenues prior to that for  the service or discharge of any domestic loan, and secondly, so  as to satisfy itself that, in general, the German scheme of  taxation is fully as heavy proportionately as that of any of the  Powers represented on the commission.'      (3) Up to May 1921 the commission has power, with a view to  securing the payment of 31,000 million, to demand the surrender  of any piece of German property whatever, wherever situated: that  is to say, 'Germany shall pay in such instalments and in such  manner, whether in gold, commodities, ships, securities, or  otherwise, as the reparation commission may fix'.      (4) The commission will decide which of the rights and  interests of German nationals in public utility undertakings  operating in Russia, China, Turkey, Austria, Hungary, and  Bulgaria, or in any territory formerly belonging to Germany or  her allies, are to be expropriated and transferred to the  commission itself; it will assess the value of the interests so  transferred; and it will divide the spoils.      (5) The commission will determine how much of the resources  thus stripped from Germany must be returned to her to keep enough  life in her economic organisation to enable her to continue to  make reparation payments in future.(62*)      (6) The commission will assess the value, without appeal or  arbitration, of the property and rights ceded under the  Armistice, and under the Treaty -- rolling-stock, the mercantile  marine, river craft, cattle, the Saar mines, the property in  ceded territory for which credit is to be given, and so forth.      (7) The commission will determine the amounts and values  (within certain defined limits) of the contributions which  Germany is to make in kind year by year under the various annexes  to the reparation chapter.      (8) The commission will provide for the restitution by  Germany of property which can be identified.      (9) The commission will receive, administer, and distribute  all receipts from Germany in cash or in kind. It will also issue  and market German bonds of indebtedness.      (10) The commission will assign the share of the pre-war  public debt to be taken over by the ceded areas of Schleswig,  Poland, Danzig, and Upper Silesia. The commission will also  distribute the public debt of the late Austro-Hungarian empire  between its constituent parts.      (11) The Commission will liquidate the Austro-Hungarian Bank,  and will supervise the withdrawal and replacement of the currency  system of the late Austro-Hungarian empire.      (12) It is for the commission to report if, in their  judgment, Germany is falling short in fulfilment of her  obligations, and to advise methods of coercion.      (13) In general, the commission, acting through a subordinate  body, will perform the same functions for Austria and Bulgaria as  for Germany, and also, presumably, for Hungary and Turkey.(63*)      There are also many other relatively minor duties assigned to  the commission. The above summary, however, shows sufficiently  the scope and significance of its authority. This authority is  rendered of far greater significance by the fact that the demands  of the treaty generally exceed Germany's capacity. Consequently  the clauses which allow the commission to make abatements, if in  their judgment the economic conditions of Germany require it,  will render it in many different particulars the arbiter of  Germany's economic life. The commission is not only to inquire  into Germany's general capacity to pay, and to decide (in the  early years) what import of foodstuffs and raw materials is  necessary; it is authorised to exert pressure on the German  system of taxation (annex II, paragraph 12(b))(64*) and on German  internal expenditure, with a view to ensuring that reparation  payments are a first charge on the country's entire resources;  and it is to decide on the effect on German economic life of  demands for machinery, cattle, etc., and of the scheduled  deliveries of coal.      By article 240 of the treaty Germany expressly recognises the  commission and its powers 'as the same may be constituted by the  Allied and Associated governments', and 'agrees irrevocably to  the possession and exercise by such commission of the power and  authority given to it under the present treaty'. She undertakes  to furnish the commission with all relevant information. And  finally in article 241, 'Germany undertakes to pass, issue, and  maintain in force any legislation, orders, and decrees that may  be necessary to give complete effect to these provisions'.      The comments on this of the German financial commission at  Versailles were hardly an exaggeration: 'German democracy is thus  annihilated at the very moment when the German people was about  to build it up after a severe struggle -- annihilated by the very  persons who throughout the war never tired of maintaining that  they sought to bring democracy to us... Germany is no longer a  people and a state, but becomes a mere trade concern placed by  its creditors in the hands of a receiver, without its being  granted so much as the opportunity to prove its willingness to  meet its obligations of its own accord. The commission, which is  to have its permanent headquarters outside Germany, will possess  in Germany incomparably greater rights than the German emperor  ever possessed; the German people under its rgime would remain  for decades to come shorn of all rights, and deprived, to a far  greater extent than any people in the days of absolutism, of any  independence of action, of any individual aspiration in its  economic or even in its ethical progress.'      In their reply to these observations the Allies refused to  admit that there was any substance, ground, or force in them.  'The observations of the German delegation', they pronounced,  'present a view of this commission so distorted and so inexact  that it is difficult to believe that the clauses of the treaty  have been calmly or carefully examined. It is not an engine of  oppression or a device for interfering with German sovereignty.  It has no forces at its command; it has no executive powers  within the territory of Germany; it cannot, as is suggested,  direct or control the educational or other systems of the  country. Its business is to ask what is to be paid; to satisfy  itself that Germany can pay; and to report to the Powers, whose  delegation it is, in case Germany makes default. If Germany  raises the money required in her own way, the commission cannot  order that it shall be raised in some other way. if Germany  offers payment in kind, the commission may accept such payment,  but, except as specified in the treaty itself, the commission  cannot require such a payment.'      This is not a candid statement of the scope and authority of  the reparation commission, as will be seen by a comparison of its  terms with the summary given above or with the treaty itself. Is  not, for example, the statement that the commission 'has no  forces at its command' a little difficult to justify in view of  article 430 of the treaty, which runs: 'In case, either during  the occupation or after the expiration of the fifteen years  referred to above, the reparation commission finds that Germany  refuses to observe the whole or part of her obligations under the  present treaty with regard to reparation, the whole or part of  the areas specified in article 429 will be reoccupied immediately  by the Allied and Associated Powers'? The decision as to whether  Germany has kept her engagements and whether it is possible for  her to keep them is left, it should be observed, not to the  League of Nations, but to the reparation commission itself; and  an adverse ruling on the part of the commission to is be followed  'immediately' by the use of armed force. Moreover, the  depreciation of the powers of the commission attempted in the  Allied reply largely proceeds from the assumption that it is  quite open to Germany to 'raise the money required in her own  way', in which case it is true that many of the powers of the  reparation commission would not come into practical effect;  whereas in truth one of the main reasons for setting up the  commission at all is the expectation that Germany will not be  able to carry the burden nominally laid upon her. 

      It is reported that the people of Vienna, hearing that a  section of the reparation commission is about to visit them, have  decided characteristically to pin their hopes on it. A financial  body can obviously take nothing from them, for they have nothing;  therefore this body must be for the purpose of assisting and  relieving them. Thus do the Viennese argue, still light-headed in  adversity. But perhaps they are right. The reparation commission  will come into very close contact with the problems of Europe;  and it will bear a responsibility proportionate to its powers. It  may thus come to fulfil a very different role from that which  some of its authors intended for it. Transferred to the League of  Nations, an organ of justice and no longer of interest, who knows  that by a change of heart and object the reparation commission  may not yet be transformed from an instrument of oppression and  rapine into an economic council of Europe, whose object is the  restoration of life and of happiness, even in the enemy  countries? 

   V. THE GERMAN COUNTER-PROPOSALS 

      The German counter-proposals were somewhat obscure, and also  rather disingenuous. It will be remembered that those clauses of  the reparation chapter which dealt with the issue of bonds by  Germany produced on the public mind the impression that the  indemnity had been fixed at 35,000 million, or at any rate at  this figure as a minimum. The German delegation set out,  therefore, to construct their reply on the basis of this figure,  assuming apparently that public opinion in Allied countries would  not be satisfied with less than the appearance of 35,000 million;  and, as they were not really prepared to offer so large a figure,  they exercised their ingenuity to produce a formula which might  be represented to Allied opinion as yielding this amount, whilst  really representing a much more modest sum. The formula produced  was transparent to anyone who read it carefully and knew the  facts, and it could hardly have been expected by its authors to  deceive the Allied negotiators. The German tactic assumed,  therefore, that the latter were secretly as anxious as the  Germans themselves to arrive at a settlement which bore some  relation to the facts, and that they would therefore be willing,  in view of the entanglements which they had got themselves into  with their own publics, to practise a little collusion in  drafting the treaty -- a supposition which in slightly different  circumstances might have had a good deal of foundation. As  matters actually were, this subtlety did not benefit them, and  they would have done much better with a straightforward and  candid estimate of what they believed to be the amount of their  liabilities on the one hand, and their capacity to pay on the  other.      The German offer of an alleged sum of 35,000 million amounted  to the following. In the first place it was conditional on  concessions in the treaty ensuring that 'Germany shall retain the  territorial integrity corresponding to the armistice  convention,(65*) that she shall keep her colonial possessions and  merchant ships, including those of large tonnage, that in her own  country and in the world at large she shall enjoy the same  freedom of action as all other peoples, that all war legislation  shall be at once annulled, and that all interferences during the  war with her economic rights and with German private property,  etc., shall be treated in accordance with the principle of  reciprocity'; that is to say, the offer is conditional on the  greater part of the rest of the treaty being abandoned. In the  second place, the claims are not to exceed a maximum of 35,000  million, of which 31,000 million is to be discharged by 1 May  1926; and no part of this sum is to carry interest pending the  payment of it.(66*) In the third place, there are to be allowed  as credits against it (amongst other things): (a) the value of  all deliveries under the armistice, including military material  (e.g. Germany's navy); (b) the value of all railways and state  property in ceded territory. (c) the pro rata, share of all ceded  territory in the Germany public debt (including the war debt) and  in the reparation payments which this territory would have had to  bear if it had remained part of Germany; and (d) the value of the  cession of Germany's claims for sums lent by her to her allies in  the war.(67*)      The credits to be deducted under (a), (b), (c), and (d) might  be in excess of those allowed in the actual treaty, according to  a rough estimate, by a sum of as much as 32,000 million, although  the sum to be allowed under (d) can hardly be calculated.      If, therefore, we are to estimate the real value of the  German offer of 35,000 million on the basis laid down by the  treaty, we must first of all deduct 32,000 million claimed for  offsets which the treaty does not allow, and then halve the  remainder in order to obtain the present value of a deferred  payment on which interest is not chargeable. This reduces the  offer to 31,500 million, as compared with the 38,000 million  which, according to my rough estimate, the treaty demands of her.      This in itself was a very substantial offer -- indeed it  evoked widespread criticism in Germany -- though, in view of the  fact that it was conditional on the abandonment of the greater  part of the rest of the treaty, it could hardly be regarded as a  serious one.(68*) But the German delegation might have done  better if they had stated in less equivocal language how far they  felt able to go.      In the final reply of the Allies to this counter-proposal  there is one important provision, which I have not attended to  hitherto, but which can be conveniently dealt with in this place.  Broadly speaking, no concessions were entertained on the  reparation chapter as it was originally drafted, but the Allies  recognised the inconvenience of the indeterminacy of the burden  laid upon Germany and proposed a method by which the final total  of claim might be established at an earlier date than 1 May 1921.  They promised, therefore, that at any time within four months of  the signature of the treaty (that is to say, up to the end of  October 1919), Germany should be at liberty to submit an offer of  a lump sum in settlement of her whole liability as defined in the  treaty, and within two months thereafter (that is to say, before  the end of 1919) the Allies 'will, so far as may be possible,  return their answers to any proposals that may be made.'      This offer is subject to three conditions. 'Firstly, the  German authorities will be expected, before making such  proposals, to confer with the representatives of the Powers  directly concerned. Secondly, such offers must be unambiguous and  must be precise and clear. Thirdly, they must accept the  categories and the reparation clauses as matters settled beyond  discussion.'      The offer, as made, does not appear to contemplate any  opening up of the problem of Germany's capacity to pay. It is  only concerned with the establishment of the total bill of claims  as defined in the treaty -- whether (e.g.) it is 37,000 million,  38,000 million, or 310,000 million. 'The questions', the Allies'  reply adds, 'are bare questions of fact, namely, the amount of  the liabilities, and they are susceptible of being treated in  this way.'      If the promised negotiations are really conducted on these  lines, they are not likely to be fruitful. It will not be much  easier to arrive at an agreed figure before the end of 1919 than  it was at the time of the conference; and it will not help  Germany's financial position to know for certain that she is  liable for the huge sum which on any computation the treaty  liabilities must amount to. These negotiations do offer, however,  an opportunity of reopening the whole question of the reparation  payments, although it is hardly to be hoped that at so very early  a date, public opinion in the countries of the Allies has changed  its mood sufficiently.(69*) 

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

  NOTES: 

  1. 'With reservation that any future claims and demands of the  Allies and the United States of America remain unaffected, the  following financial conditions are required: Reparation for  damage done. While armistice lasts, no public securities shall be  removed by the enemy which can serve as a pledge to the Allies  for recovery or reparation of war losses. Immediate restitution  of cash deposit in National Bank of Belgium, and, in general,  immediate return of all documents, of specie, stock, shares,  paper money, together with plant for issue thereof, touching  public or private interests in invaded countries. Restitution of  Russian and Roumanian gold yielded to Germany or taken by that  Power. This gold to be delivered in trust to the Allies until  signature of peace.' 

  2. It is to be noticed, in passing, that they contain nothing  which limits the damage to damage inflicted contrary to the  recognised rules of warfare. That is to say, it is permissible to  include claims arising out of the legitimate capture of a  merchantman at sea, as well as the costs of illegal submarine  warfare. 

  3. Mark-paper or mark-credits owned in ex-occupied territory by  Allied nationals should be included, if at all, in the settlement  of enemy debts, along with other sums owed to Allied nationals,  and not in connection with reparation. 

  4. A special claim on behalf of Belgium was actually included in  the peace treaty, and was accepted by the German representatives  without demur. 

  5. To the British observer, one scene, however, stood out  distinguished from the rest -- the field of Ypres. In that  desolate and ghostly spot, the natural colour and humours of the  landscape and the climate seemed designed to express to the  traveller the memories of the ground. A visitor to the salient  early in November 1918, when a few German bodies still added a  touch of realism and human horror, and the great struggle was not  yet certainly ended, could feel there, as nowhere else, the  present outrage of war, and at the same time the tragic and  sentimental purification which to the future will in some degree  transform its harshness. 

  6. These notes, estimated to amount to no less than six thousand  million marks, are now a source of embarrassment and great  potential loss to the Belgian government, inasmuch as on their  recovery of the country they took them over from their nationals  in exchange for Belgian notes at the rate of Fr. 1.20 = Mk. 1.  This rate of exchange, being substantially in excess of the value  of the mark-notes at the rate of exchange current at the time  (and enormously in excess of the rate to which the mark-notes  have since fallen, the Belgian franc being now worth more than  three marks), was the occasion of the smuggling of mark-notes  into Belgium on an enormous scale, to take advantage of the  profit obtainable. The Belgian government took this very  imprudent step partly because they hoped to persuade the peace  conference to make the redemption of these bank-notes, at the par  of exchange, a first charge on German assets. The peace  conference held, however, that reparation proper must ike  precedence of the adjustment of improvident banking transactions  effected at an excessive rate of exchange. The possession by the  Belgian government of this great mass of German currency, in  addition to an amount of nearly two thousand million marks held  by the French government which they similarly exchanged for the  benefit of the population of the invaded areas and of  Alsace-Lorraine, is a serious aggravation of the exchange  position of the mark. It will certainly be desirable for the  Belgian and German governments to come to some arrangement as to  its disposal, though this is rendered difficult by the prior lien  held by the reparation commission over all German assets  available for such purposes. 

  7. It should be added, in fairness, that the very high claims put  forward on behalf of Belgium generally include not only  devastation proper, but all kinds of other items, as, for  example, the profits and earnings which Belgians might reasonably  have expected to earn if there had been no war. 

  8. 'The wealth and income of the chief Powers', by J. C. Stamp  (Journal of the Royal Statistical Society, July 1919). 

  9. Other estimates vary from 32,420 million to 32,680 million.  See Stamp, loc. cit. 

  10. This was clearly and courageously pointed out by M. Charles  Gide in L'Emancipation for February 1919. 

  11. For details of these and other figures, see Stamp, loc. cit. 

  12. Even when the extent of the material damage has been  established, it will be exceedingly difficult to put a price on  it, which must largely depend on the period over which  restoration is spread, and the methods adopted. It would be  impossible to make the damage good in a year or two at any price,  and an attempt to do so at a rate which was excessive in relation  to the amount of labour and materials at hand might force prices  up to almost any level. We must, I think, assume a cost of labour  and materials about equal to that current in the world generally.  In point of fact, however, we may safely assume that literal  restoration will never be attempted. Indeed, it would be very  wasteful to do so. Many of the townships were old and unhealthy,  and many of the hamlets miserable. To re-erect the same type of  building in the same places would be foolish. As for the land,  the wise course may be in some cases to leave long strips of it  to Nature for many years to come. An aggregate money sum should  be computed as fairly representing the value of the material  damage, and France should be left to expend it in the manner she  thinks wisest with a view to her economic enrichment as a whole.  The first breeze of this controversy has already blown through  France. A long and inconclusive debate occupied the Chamber  during the spring of 1919, as to whether inhabitants of the  devastated area receiving compensation should be compelled to  expend it in restoring the identical property, or whether they  should be free to use it as they like. There was evidently a  great deal to be said on both sides; in the former case there  would be much hardship and uncertainty for owners who could not,  many of them, hope to recover the effective use of their property  perhaps for years to come, and yet would not be free to set  themselves up elsewhere; on the other hand, if such persons were  allowed to take their compensation and go elsewhere, the  countryside of northern France would never be put right.  Nevertheless I believe that the wise course will be to allow  great latitude and let economic motives take their own course. 

  13. La Richesse de la France devant la Guerre, published in 1916. 

  14. Revue Bleue, 3 February 1919. This is quoted in a very  valuable selection of French estimates and expressions of  opinion, forming chapter iv of La Liquidation financire de la  Guerre, by H. Charriaut and R. Hacault. The general magnitude of  my estimate is further confirmed by the extent of the repairs  already effected, as set forth in a speech delivered by M.  Tardieu on 10 October 1919, in which he said: 'On 16 September  last, of 2,246 kilometres of railway track destroyed, 2,016 had  been repaired; of 1,075 kilometres of canal, 700; of 1,160  constructions, such as bridges and tunnels, which had been blown  up, 588 had been replaced; of 550,000 houses ruined by  bombardment, 60,000 had been rebuilt; and of 1,800,000 hectares  of ground rendered useless by battle, 400,000 had been  recultivated, 200,000 hectares of which are now ready to be sown.  Finally, more than 10,000,000 metres of barbed wire had been  removed.' 

  15. Some of these estimates include allowance for contingent and  immaterial damage as well as for direct material injury. 

  16. A substantial part of this was lost in the service of the  Allies; this must not be duplicated by inclusion both in their  claims and in ours. 

  17. The fact that no separate allowance is made in the above for  the sinking of 675 fishing vessels of 71,765 tons gross, or for  the 1,885 vessels of 8,007,967 tons damaged or molested, but not  sunk, may be set off against what may be an excessive figure for  replacement cost. 

  18. The losses of the Greek mercantile marine were excessively  high, as a result of the dangers of the Mediterranean; but they  were largely incurred on the service of the other Allies, who  paid for them directly or indirectly. The claims of Greece for  maritime losses incurred on the service of her own nationals  would not be very considerable. 

  19. There is a reservation in the peace treaty on this question.  'The Allied and Associated Powers formally reserve the right of  Russia to obtain from Germany restitution and reparation based on  the principles of the present treaty' (article 116). 

  20. Dr Diouritch in his 'Economic and statistical survey of the  southern Slav nations' (Journal of the Royal Statistical Society,  May 1919), quotes some extraordinary figures of the loss of life:  'According to the official returns, the number of those fallen in  battle or died in captivity up to the last Serbian offensive  amounted to 320,000, which means that one-half of Serbia's male  population, from 18 to 60 years of age, perished outright in the  European war. In addition, the Serbian medical authorities  estimate that about 300,000 people have died from typhus among  the civil population, and the losses among the population  interned in enemy camps are estimated at 50,000. During the two  Serbian retreats and during the Albanian retreat the losses among  children and young people are estimated at 200,000. Lastly,  during over three years of enemy occupation, the losses in lives  owing to the lack of proper food and medical attention are  estimated at 250,000.' Altogether, he puts the losses in life at  above a million, or more than one-third of the population of Old  Serbia. 

  21 Come si calcola e a quanto ammonta la richezza d'Iialia e  delle altre principali nazioni, published in 1919. 

  22. Very large claims put forward by the Serbian authorities  include many hypothetical items of indirect and non-material  damage; but these, however real, are not admissible under our  present formula. 

  23. Assuming that in her case 3250 million are included for the  general expenses of the war defrayed out of loans made to Belgium  by her allies. 

  24. It must be said to Mr Hughes' honour that he apprehended from  the first the bearing of the pre-armistice negotiations on our  right to demand an indemnity covering the full costs of the war,  protested against our ever having entered into such engagements,  and maintained loudly that he had been no party to them and could  not consider himself bound by them. His indignation may have been  partly due to the fact that Australia, not having been ravaged,  would have no claims at all under the more limited interpretation  of our rights. 

  25. The whole cost of the war has been estimated at from 324,000  million upwards. This would mean an annual payment of interest  (apart from sinking fund) of 31,200 million. Could any expert  committee have reported that Germany can pay this sum? 

  26. But unhappily they did not go down with their flags flying  very gloriously. For one reason or another their leaders  maintained substantial silence. What a different position in the  country's estimation they might hold now if they had suffered  defeat amidst firm protests against the fraud, chicane, and  dishonour of the whole proceedings. 

  27. Only after the most painful consideration have I written  these words. The almost complete absence of protest from the  leading statesmen of England makes one feel that one must have  made some mistake. But I believe that I know all the facts, and I  can discover no such mistake. In any case, I have set forth all  the relevant engagements in chapter 4 and at the beginning of  this chapter, so that the reader can form his own judgment. 

  28. In conversation with Frenchmen who were private persons and  quite unaffected by political considerations, this aspect became  very clear. You might persuade them that some current estimates  as to the amount to be got out of Germany were quite fantastic.  Yet at the end they would always come back to where they had  started: 'But Germany must pay; for, otherwise, what is to happen  to France?' 

  29. A further paragraph claims the war costs of Belgium 'in  accordance with Germany's pledges, already given, as to complete  restoration for Belgium'. 

  30. The challenge of the other Allies, as well as of the enemy,  had to be met; for in view of the limited resources of the  latter, the other Allies had perhaps a greater interest than the  enemy in seeing that no one of their number established an  excessive claim. 

  31. M. Klotz has estimated the French claims on this head at  33,000 million (75 milliard francs, made up of 13 milliard for  allowances, 60 for pensions, and 2 for widows). If this figure is  correct, the others should probably be scaled up also. 

  32. That is to say, I claim for the aggregate figure an accuracy  within 25%. 

  33. In his speech of 5 September 1919, addressed to the French  Chamber, M. Klotz estimated the total Allied claims against  Germany under the treaty at 315,000 million, which would  accumulate at interest until 1921, and be paid off thereafter by  34 annual instalments of about 31,000 million each, of which  France would receive about 3550 million annually. 'The general  effect of the statement (that France would receive from Germany  this annual payment) proved', it is reported, 'appreciably  encouraging to the country as a whole, and was immediately  reflected in the improved tone on the Bourse and throughout the  business world in France.' So long as such statements can be  accepted in Paris without protest, there can be no financial or  economic future for France, and a catastrophe of disillusion is  not far distant. 

  34. As a matter of subjective judgment, I estimate for this  figure an accuracy of 10% in deficiency and 20% in excess, i.e.  that the result will lie between 36,400 million and 38,800  million. 

  35. Germany is also liable under the treaty, as an addition to  her liabilities for reparation, to pay all the costs of the  armies of occupation after peace is signed for the fifteen  subsequent years of occupation. So far as the text of the treaty  goes, there is nothing to limit the size of these armies, and  France could, therefore, by quartering the whole of her normal  standing army in the occupied area, shift the charge from her own  taxpayers to those of Germany -- though in reality any such  policy would be at the expense not of Germany, who by hypothesis  is already paying for reparation up to the full limit of her  capacity, but of France's allies, who would receive so much less  in respect of reparation. A White Paper (Cmd. 240) has, however,  been issued, in which is published a declaration by the  governments of the United States, Great Britain, and France  engaging themselves to limit the sum payable annually by Germany  to cover the cost of occupation to 312 million, 'as soon as the  Allied and Associated Powers concerned are convinced that the  conditions of disarmament by Germany are being satisfactorily  fulfilled'.  The three Powers reserve to themselves the liberty  to modify this arrangement at any time if they agree that it is  necessary. 

  36. Article 235. The force of this article is somewhat  strengthened by article 251, by virtue of which dispensations may  also be granted for 'other payments' as well as for food and raw  material. 

  37. This is the effect of paragraph 12 (c) of annex II of the  reparation chapter, leaving minor complications on one side. The  treaty fixes the payments in terms of gold marks, which are  converted in the above at the rate of 20 to 31. 

  38. If, per impossibile, Germany discharged 3500 million in cash  or kind by 1921, her annual payments would be at the rate of  362,500,000 from 1921 to 1925 and of 3150 million thereafter 

  39. Paragraph 16 of annex II of the reparation chapter. There is  also an obscure provision by which interest may be charged 'on  sums arising out of material damage as from 11 November 1918 up  to 1 May 1921'. This seems to differentiate damage to property  from damage to the person in favour of the former. It does not  affect pensions and allowances, the cost of which is capitalised  as at the date of the coming into force of the treaty. 

  40. On the assumption which no one supports and even the most  optimistic fear to be unplausible, that Germany can pay the full  charge for interest and siding fund from the outset, the annual  payment would amount to 3480 million. 

  41. Under paragraph 13 of annex II unanimity is required (i) for  any postponement beyond 1930 of instalments due between 1921 and  1926, and (ii) for any postponement for more than three years of  instalments due after 1926. Further, under article 234, the  commission may not cancel any part of the indebtedness without  the specific authority of all the governments represented on the  commission. 

  42. On 23 July 1914 the amount was 367,800,000. 

  43. Owing to the very high premium which exists on German silver  coin, as the combined result of the depreciation of the mark and  the appreciation of silver, it is highly improbable that it will  be possible to extract such coin out of the pockets of the  people. But it may gradually leak over the frontier by the agency  of private speculators, and thus indirectly benefit the German  exchange position as a whole. 

  44. The Allies made the supply of foodstuffs to Germany during  the armistice, mentioned above, conditional on the provisional  transfer to them of the greater part of the mercantile marine, to  be operated by them for the purpose of shipping foodstuffs to  Europe generally, and to Germany in particular. The reluctance of  the Germans to agree to this was productive of long and dangerous  delays in the supply of food, but the abortive conferences of  Trves and Spa (16 January, 14-16 February,and 4-5 March 1919)  were at last followed by the agreement of Brussels (14 March  1919). The unwillingness of the Germans to conclude was mainly  due to the lack of any absolute guarantee on the part of the  Allies that, if they surrendered the ships, they would get the  food. But assuming reasonable good faith on the part of the  latter (their behaviour in respect of certain other clauses of  the armistice, however, had not been impeccable and gave the  enemy some just grounds for suspicion), their demand was not an  improper one; for without the German ships the business of  transporting the food would have been difficult, if not  impossible, and the German ships surrendered or their equivalent  were in fact almost wholly employed in transporting food to  Germany itself. Up to 30 June 1919, 176 German ships of 1,025,388  gross tonnage had been surrendered to the Allies in accordance  with the Brussels agreement. 

  45. The amount of tonnage transferred may be rather greater and  the value per ton rather less. The aggregate value involved is  not likely, however, to be less than 3100 million or greater than  3150 million. 

  46. This census was carried out by virtue of a decree of 23  August 1916. On 22 March 1917, the German government acquired  complete control over the utilisation of foreign securities in  German possession; and in May 1917 it began to exercise these  powers for the mobilisation of certain Swedish, Danish, and Swiss  securities. 

  47.                              3 (million) 

   1892. Schmoller                    500   1892. Christians                   650   1893-4. Koch                       600   1905. v. Halle                     800()   1913. Helfferich                 1,000()   1914. Ballod                     1,250   1914. Pistorius                  1,250   1919. Hans David                 1,050() 

   Plus 3500 million for investments other than securities. 

   Net investments, i.e. after allowance for property in Germany  owned abroad. This may also be the case with some of the other  estimates. 

   This estimate, given in Weltwirtschaftszeitung (13 June 1919),  is an estimate of the value of Germany's foreign investments as  at the outbreak of war. 

  48. I have made no deduction for securities in the ownership of  Alsace-Lorrainers and others who have now ceased to be German  nationals. 

  49. In all these estimates I am conscious of being driven, by a  fear of overstating the case against the treaty, into giving  figures in excess of my own real judgment. There is a great  difference between putting down on paper fancy estimates of  Germany's resources and actually extracting contributions in the  form of cash. I do not myself believe that the reparation  commission will secure real resources from the above items by May  1921 even as great as the lower of the two figures given above. 

  50. The treaty (see article 114) leaves it very dubious how far  the Danish government is under an obligation to make payments to  the reparation commission in respect of its acquisition of  Schleswig. They might, for instance, arrange for various offsets  such as the value of the mark-notes held by the inhabitants of  ceded areas. In any case the amount of money involved is quite  small. The Danish government is raising a loan for 36,600,000  (kr. 120,000,000) for the joint purposes of 'taking over  Schleswig's share of the German debt, for buying German public  property, for helping the Schleswig population, and for settling  the currency question'. 

  51. Here again my own judgment would carry me much further and I  should doubt the possibility of Germany's exports equalling her  imports during this period. But the statement in the text goes  far enough for the purpose of my argument. 

  52. It has been estimated that the cession of territory to  France, apart from the loss of Upper Silesia, may reduce  Germany's annual pre-war production of steel ingots from 20  million tons to 14 million tons, and increase France's capacity  from 5 million tons to 11 million tons. 

  53. Germany's exports of sugar in 1913 amounted to 1,110,073 tons  of the value of 313,094,300, of which 838,583 tons were exported  to the United Kingdom at a value of 39,050,800. These figures  were in excess of the normal, the average total exports for the  five years ending 1913 being about 310 million. 

  54. The necessary price adjustment which is required on both  sides of this account will be made en bloc later. 

  55. If the amount of the sinking fund be reduced, and the annual  payment is continued over a greater number of years, the present  value -- so powerful is the operation of compound interest --  cannot be materially increased. A payment of 3100 million  annually in perpetuity, assuming interest, as before, at 5%,  would only raise the present value to 32,000 million. 

  56. As an example of public misapprehension on economic affairs,  the following letter from Sir Sidney Low to The Times of 3  December 1918 deserves quotation: 'I have seen authoritative  estimates which place the gross value of Germany's mineral and  chemical resources as high as 3250,000 million sterling or even  more; and the Ruhr basin mines alone are said to be worth over  345,000 million. It is certain, at any rate, that the capital  value of these natural supplies is much greater than the toil war  debts of all the Allied states. Why should not some portion of  this wealth be diverted for a sufficient period from its present  owners and assigned to the peoples whom Germany has assailed,  deported, and injured? The Allied governments might justly  require Germany to surrender to them the use of such of her mines  and mineral deposits as would yield, say, from 100 to 200  millions annually for the next 30, 40, or 50 years. By this means  we could obtain sufficient compensation from Germany without  unduly stimulating her manufactures and export trade to our  detriment.' It is not clear why, if Germany has wealth exceeding  3250,000 million sterling, Sir Sidney Low is content with the  trifling sum of 100 to 200 millions annually. But his letter is  an admirable reductio ad absurdum of a certain line of thought.  While a mode of calculation which estimates the value of coal  miles deep in the bowels of the earth as high as in a coal  scuttle, of an annual lease of 31,000 for 999 years at 3999,000  and of a field (presumably) at the value of all the crops it will  grow to the end of recorded time, opens up great possibilities,  it is also double-edged. If Germany's total resources are worth  3250,000 million, those she will part with in the cession of  Alsace-Lorraine and Upper Silesia should be more than sufficient  to pay the entire costs of the war and reparation together. In  point of fact, the present market value of all the mines in  Germany of every kind has been estimated at 3300 million, or a  little more than one-thousandth part of Sir Sidney Low's  expectations. 

  57. The conversion at par of 5,000 million marks overstates by  reason of the existing depreciation of the mark, the present  money burden of the actual pensions payments, but not, in all  probability, the real loss of national productivity as a result  of the casualties suffered in the war. 

  58. It cannot be overlooked, in passing, that in its results on a  country's surplus productivity a lowering of the standard of life  acts both ways. Moreover, we are without experience of the  psychology of a white race under conditions little short of  servitude. It is, however, generally supposed that if the whole  of a man's surplus production is taken from him, his efficiency  and his industry are diminished. The entrepreneur and the  inventor will not contrive, the trader and shopkeeper will not  save, the labourer will not toil, if the fruits of their industry  are set aside, not for the benefit of their children, their old  age, their pride, or their position, but for the enjoyment of a  foreign conqueror. 

  59. In the course of the compromises and delays of the  conference, there were many questions on which, in order to reach  any conclusion at all, it was necessary to leave a margin of  vagueness and uncertainty. The whole method of the conference  tended towards this -- the Council of Four wanted, not so much a  settlement, as a treaty. On political and territorial questions  the tendency was to leave the final arbitrament to the League of  Nations. But on financial and economic questions the final  decision has generally been left with the reparation commission,  in spite of its being an executive body composed of interested  parties. 

  60. The sum to be paid by Austria for reparation is left to the  absolute discretion of the reparation commission, no determinate  figure of any kind being mentioned in the text of the treaty.  Austrian questions are to be handled by a special section of the  reparation commission, but the section will have no powers except  such as the main commission may delegate. 

  61. Bulgaria is to pay an indemnity of 390 million by half-yearly  instalments, beginning 1 July 1920. These sums will be collected,  on behalf of the reparation commission, by an inter-Ally  commission of control, with its seat at Sofia. In some respects  the Bulgarian inter-Ally commission appears to have powers and  authority independent of the reparation commission, but it is to  act, nevertheless, as the agent of the later, and is authorised  to tender advice to the reparation commission as to, for example,  the reduction of the half-yearly instalments. 

  62. Under the treaty this is the function of any body appointed  for the purpose by the principal Allied and Associated  governments, and not necessarily of the reparation commission.  But it may be presumed that no second body will be established  for this special purpose. 

  63. At the date of writing no treaties with these countries have  been drafted. It is possible that Turkey might be dealt with by a  separate commission. 

  64. This appears to me to be in effect the position (if this  paragraph means anything at all), in spite of the following  disclaimer of such intentions in the Allies' reply: 'Nor does  paragraph 12 (b) of annex II give the commission powers to  prescribe or enforce taxes or to dictate the character of the  German budget.' 

  65. Whatever that may mean. 

  66. Assuming that the capital sum is discharged evenly over a  period as short as thirty-three years, this has the effect of  halving the burden as compared with the payments required on the  basis of 5% interest on the outstanding capital. 

  67. I forbear to outline further details of the German offer as  the above are the essential points. 

  68. For this reason it is not strictly comparable with my  estimate of Germany's capacity in an earlier section of this  chapter, which estimate is on the basis of Germany's condition as  it will be when the rest of the treaty has come into effect. 

  69. Owing to delays on the part of the Allies in ratifying the  treaty, the reparation commission had not yet been formally  constituted by the end of October 1919. So far as I am aware,  therefore, nothing has been done to make the above offer  effective. But perhaps, in view of the circumstances, there has  been an extension of the date. 

      This chapter must be one of pessimism. The treaty includes no  provisions for the economic rehabilitation of Europe -- nothing  to make the defeated Central empires into good neighbours,  nothing to stabilise the new states of Europe, nothing to reclaim  Russia; nor does it promote in any way a compact of economic  solidarity amongst the Allies themselves; no arrangement was  reached at Paris for restoring the disordered finances of France  and Italy, or to adjust the systems of the Old World and the New.      The Council of Four paid no attention to these issues, being  preoccupied with others -- Clemenceau to crush the economic life  of his enemy, Lloyd George to do a deal and bring home something  which would pass muster for a week, the President to do nothing  that was not just and right. It is an extraordinary fact that the  fundamental economic problem of a Europe starving and  disintegrating before their eyes, was the one question in which  it was impossible to arouse the interest of the Four. Reparation  was their main excursion into the economic field, and they  settled it as a problem of theology, of politics, of electoral  chicane, from every point of view except that of the economic  future of the states whose destiny they were handling.      I leave, from this point onwards, Paris, the conference, and  the treaty, briefly to consider the present situation of Europe,  as the war and the peace have made it; and it will no longer be  part of my purpose to distinguish between the inevitable fruits  of the war and the avoidable misfortunes of the peace.      The essential facts of the situation, as I see them, are  expressed simply. Europe consists of the densest aggregation of  population in the history of the world. This population is  accustomed to a relatively high standard of life, in which, even  now, some sections of it anticipate improvement rather than  deterioration. In relation to other continents Europe is not  self-sufficient; in particular it cannot feed itself. Internally  the population is not evenly distributed, but much of it is  crowded into a relatively small number of dense industrial  centres. This population secured for itself a livelihood before  the war, without much margin of surplus, by means of a delicate  and immensely complicated organisation, of which the foundations  were supported by coal, iron, transport, and an unbroken supply  of imported food and raw materials from other continents. By the  destruction of this organisation and the interruption of the  stream of supplies, a part of this population is deprived of its  means of livelihood. Emigration is not open to the redundant  surplus. For it would take years to transport them overseas,  even, which is not the case, if countries could be found which  were ready to receive them. The danger confronting us, therefore,  is the rapid depression of the standard of life of the European  populations to a point which will mean actual starvation for some  (a point already reached in Russia and approximately reached in  Austria). Men will not always die quietly. For starvation, which  brings to some lethargy and a helpless despair, drives other  temperaments to the nervous instability of hysteria and to a mad  despair. And these in their distress may overturn the remnants of  organisation, and submerge civilisation itself in their attempts  to satisfy desperately the overwhelming needs of the individual.  This is the danger against which all our resources and courage  and idealism must now co-operate.      On 13 May 1919 Count Brockdorff-Rantzau addressed to the  peace conference of the Allied and Associated Powers the Report  of the German economic commission charged with the study of the  effect of the conditions of peace on the situation of the German  population. 'In the course of the last two generations,' they  reported, 'Germany has become transformed from an agricultural  state to an industrial state. So long as she was an agricultural  state, Germany could feed 40 million inhabitants. As an  industrial state she could ensure the means of subsistence for a  population of 67 millions; and in 1913 the importation of  foodstuffs amounted, in round figures, to 12 million tons. Before  the war a total of 15 million persons in Germany provided for  their existence by foreign trade, navigation, and the use,  directly or indirectly, of foreign raw material.' After  rehearsing the main relevant provisions of the peace treaty the  report continues: 'After this diminution of her products, after  the economic depression resulting from the loss of her colonies,  her merchant fleet and her foreign investments, Germany will not  be in a position to import from abroad an adequate quantity of  raw material. An enormous part of German industry will,  therefore, be condemned inevitably to destruction. The need of  importing foodstuffs will increase considerably at the same time  that the possibility of satisfying this demand is as greatly  diminished. In a very short time, therefore, Germany will not be  in a position to give bread and work to her numerous millions of  inhabitants, who are prevented from earning their livelihood by  navigation and trade. These persons should emigrate, but this is  a material impossibility, all the more because many countries and  the most important ones will oppose any German immigration. To  put the peace conditions into execution would logically involve,  therefore, the loss of several millions of persons in Germany.  This catastrophe would not be long in coming about, seeing that  the health of the population has been broken down during the war  by the blockade, and during the armistice by the aggravation of  the blockade of famine. No help, however great, or over however  long a period it were continued, could prevent these deaths en  masse.' 'We do not know, and indeed we doubt,' the Report  concludes, 'whether the delegates of the Allied and Associated  Powers realise the inevitable consequences which will take place  if Germany, an industrial state, very thickly populated, closely  bound up with the economic system of the world, and under the  necessity of importing enormous quantities of raw material and  foodstuffs, suddenly finds herself pushed back to the phase of  her development which corresponds to her economic condition and  the numbers of her population as they were half a century ago.  Those who sign this treaty will sign the death sentence of many  millions of German men, women and children.'      I know of no adequate answer to these words. The indictment  is at least as true of the Austrian, as of the German,  settlement. This is the fundamental problem in front of us,  before which questions of territorial adjustment and the balance  of European power are insignificant. Some of the catastrophes of  past history, which have thrown back human progress for  centuries, have been due to the reactions following on the sudden  termination, whether in the course of Nature or by the act of  man, of temporarily favourable conditions which have permitted  the growth of population beyond what could be provided for when  the favourable conditions were at an end.      The significant features of the immediate situation can be  grouped under three heads: first, the absolute falling off, for  the time being, in Europe's internal productivity; second, the  breakdown of transport and exchange by means of which its  products could be conveyed where they were most wanted; and  third, the inability of Europe to purchase its usual supplies  from overseas.      The decrease of productivity cannot be easily estimated, and  may be the subject of exaggeration. But the prima facie evidence  of it is overwhelming, and this factor has been the main burden  of Mr Hoover's well-considered warnings. A variety of causes have  produced it: violent and prolonged internal disorder as in Russia  and Hungary; the creation of new governments and their  inexperience in the readjustment of economic relations, as in  Poland and Czechoslovakia; the loss throughout the continent of  efficient labour, through the casualties of war or the  continuance of mobilisation; the falling off in efficiency  through continued underfeeding in the Central empires; the  exhaustion of the soil from lack of the usual applications of  artificial manures throughout the course of the war; the  unsettlement of the minds of the labouring classes on the  fundamental economic issues of their lives. But above all (to  quote Mr Hoover), 'there is a great relaxation of effort as the  reflex of physical exhaustion of large sections of the population  from privation and the mental and physical strain of the war'.  Many persons are for one reason or another out of employment  altogether. According to Mr Hoover, a summary of the unemployment  bureaux in Europe in July 1919 showed that 15 million families  were receiving unemployment allowances in one form or another,  and were being paid in the main by a constant inflation of  currency. In Germany there is the added deterrent to labour and  to capital (in so far as the reparation terms are taken  literally), that anything which they may produce beyond the  barest level of subsistence will for years to come be taken away  from them.      Such definite data as we possess do not add much, perhaps, to  the general picture of decay. But I will remind the reader of one  or two of them. The coal production of Europe as a whole is  estimated to have fallen off by 30 per cent; and upon coal the  greater part of the industries of Europe and the whole of her  transport system depend. Whereas before the war Germany produced  85 per cent of the total food consumed by her inhabitants, the  productivity of the soil is now diminished by 40 per cent and the  effective quality of the livestock by 55 per cent.(1*) Of the  European countries which formerly possessed a large exportable  surplus, Russia, as much by reason of deficient transport as of  diminished output, may herself starve. Hungary, apart from her  other troubles, has been pillaged by the Roumanians immediately  after harvest. Austria will have consumed the whole of her own  harvest for 1919 before the end of the calendar year. The figures  are almost too overwhelming to carry conviction to our minds; if  they were not quite so bad, our effective belief in them might be  stronger.      But even when coal can be got and grain harvested, the  breakdown of the European railway system prevents their carriage;  and even when goods can be manufactured, the breakdown of the  European currency system prevents their sale. I have already  described the losses, by war and under the armistice surrenders,  to the transport system of Germany. But even so, Germany's  position, taking account of her power of replacement by  manufacture, is probably not so serious as that of some of her  neighbours. In Russia (about which, however, we have very little  exact or accurate information) the condition of the rolling-stock  is believed to be altogether desperate, and one of the most  fundamental factors in her existing economic disorder. And in  Poland, Roumania, and Hungary the position is not much better.  Yet modern industrial life essentially depends on efficient  transport facilities, and the population which secured its  livelihood by these means cannot continue to live without them.  The breakdown of currency, and the distrust in its purchasing  value, is an aggravation of these evils which must be discussed  in a little more detail in connection with foreign trade.      What then is our picture of Europe? A country population able  to support life on the fruits of its own agricultural production  but without the accustomed surplus for the towns, and also (as a  result of the lack of imported materials and so of variety and  amount in the saleable manufactures of the towns) without the  usual incentives to market food in return for other wares; an  industrial population unable to keep its strength for lack of  food, unable to earn a livelihood for lack of materials, and so  unable to make good by imports from abroad the failure of  productivity at home. Yet, according to Mr Hoover, 'a rough  estimate would indicate that the population of Europe is at least  100 million greater than can be supported without imports, and  must live by the production and distribution of exports '.      The problem of the re-inauguration of the perpetual circle of  production and exchange in foreign trade leads me to a necessary  digression on the currency situation of Europe.      Lenin is said to have declared that the best way to destroy  the capitalist system was to debauch the currency. By a  continuing process of inflation, governments can confiscate,  secretly and unobserved, an important part of the wealth of their  citizens. By this method they not only confiscate, but they  confiscate arbitrarily; and, while the process impoverishes many,  it actually enriches some. The sight of this arbitrary  rearrangement of riches strikes not only at security, but at  confidence in the equity of the existing distribution of wealth.  Those to whom the system brings windfalls, beyond their deserts  and even beyond their expectations or desires, become  'profiteers,' who are the object of the hatred of the  bourgeoisie, whom the inflationism has impoverished, not less  than of the proletariat. As the inflation proceeds and the real  value of the currency fluctuates wildly from month to month, all  permanent relations between debtors and creditors, which form the  ultimate foundation of capitalism, become so utterly disordered  as to be almost meaningless; and the process of wealth-getting  degenerates into a gamble and a lottery.      Lenin was certainly right. There is no subtler, no surer  means of overturning the existing basis of society than to  debauch the currency. The process engages all the hidden forces  of economic law on the side of destruction, and does it in a  manner which not one man in a million is able to diagnose.      In the latter stages of the war all the belligerent  governments practised, from necessity or incompetence, what a  Bolshevist might have done from design. Even now, when the war is  over, most of them continue out of weakness the same  malpractices. But further, the governments of Europe, being many  of them at this moment reckless in their methods as well as weak,  seek to direct on to a class known as 'profiteers' the popular  indignation against the more obvious consequences of their  vicious methods. These 'profiteers' are, broadly speaking, the  entrepreneur class of capitalists, that is to say, the active and  constructive element in the whole capitalist society, who in a  period of rapidly rising prices cannot but get rich quick whether  they wish it or desire it or not. If prices are continually  rising, every trader who has purchased for stock or owns property  and plant inevitably makes profits. By directing hatred against  this class, therefore, the European governments are carrying a  step further the fatal process which the subtle mind of Lenin had  consciously conceived. The profiteers are a consequence and not a  cause of rising prices. By combining a popular hatred of the  class of entrepreneurs with the blow already given to social  security by the violent and arbitrary disturbance of contract and  of the established equilibrium of wealth which is the inevitable  result of inflation, these governments are fast rendering  impossible a continuance of the social and economic order of the  nineteenth century. But they have no plan for replacing it.      We are thus faced in Europe with the spectacle of an  extra-ordinary weakness on the part of the great capitalist  class, which has emerged from the industrial triumphs of the  nineteenth century, and seemed a very few years ago our  all-powerful master. The terror and personal timidity of the  individuals of this class is now so great, their confidence in  their place in society and in their necessity to the social  organism so diminished, that they are the easy victims of  intimidation. This was not so in England twenty-five years ago,  any more than it is now in the United States. Then the  capitalists believed in themselves, in their value to society, in  the propriety of their continued existence in the full enjoyment  of their riches and the unlimited exercise of their power. Now  they tremble before every insult -- call them pro-Germans,  international financiers, or profiteers, and they will give you  any ransom you choose to ask not to speak of them so harshly.  They allow themselves to be ruined and altogether undone by their  own instruments, governments of their own making, and a Press of  which they are the proprietors. Perhaps it is historically true  that no order of society ever perishes save by its own hand. In  the complexer world of Western Europe the Immanent Will may  achieve its ends more subtly and bring in the revolution no less  inevitably through a Klotz or a George than by the  intellectualisms, too ruthless and self-conscious for us, of the  bloodthirsty philosophers of Russia.      The inflationism of the currency systems of Europe has  proceeded to extraordinary lengths. The various belligerent  governments, unable or too timid or too short-sighted to secure  from loans or taxes the resources they required, have printed  notes for the balance. In Russia and Austria-Hungary this process  has reached a point where for the purposes of foreign trade the  currency is practically valueless. The Polish mark can be bought  for about 1 1/2d and the Austrian crown for less than 1d, but  they cannot be sold at all. The German mark is worth less than 2d  on the exchanges. In most of the other countries of Eastern and  south-eastern Europe the real position is nearly as bad. The  currency of Italy has fallen to little more than a half of its  nominal value in spite of its being still subject to some degree  of regulation; French currency maintains an uncertain market; and  even sterling is seriously diminished in present value and  impaired in its future prospects.      But while these currencies enjoy a precarious value abroad,  they have never entirely lost, not even in Russia, their  purchasing power at home. A sentiment of trust in the legal money  of the state is so deeply implanted in the citizens of all  countries that they cannot but believe that some day this money  must recover a part at least of its former value. To their minds  it appears that value is inherent in money as such, and they do  not apprehend that the real wealth which this money might have  stood for has been dissipated once and for all. This sentiment is  supported by the various legal regulations with which the  governments endeavour to control internal prices, and so to  preserve some purchasing power for their legal tender. Thus the  force of law preserves a measure of immediate purchasing power  over some commodities and the force of sentiment and custom  maintains, especially amongst peasants, a willingness to hoard  paper which is really worthless.      The preservation of a spurious value for the currency, by the  force of law expressed in the regulation of prices, contains in  itself, however, the seeds of final economic decay, and soon  dries up the sources of ultimate supply. If a man is compelled to  exchange the fruits of his labours for paper which, as experience  soon teaches him, he cannot use to purchase what he requires at a  price comparable to that which he has received for his own  products, he will keep his produce for himself, dispose of it to  his friends and neighbours as a favour, or relax his efforts in  producing it. A system of compelling the exchange of commodities  at what is not their real relative value not only relaxes  production, but leads finally to the waste and inefficiency of  barter. If, however, a government refrains from regulation and  allows matters to take their course, essential commodities soon  attain a level of price out of the reach of all but the rich, the  worthlessness of the money becomes apparent, and the fraud upon  the public can be concealed no longer.      The effect on foreign trade of price-regulation and  profiteer-hunting as cures for inflation is even worse. Whatever  may be the case at home, the currency must soon reach its real  level abroad, with the result that prices inside and outside the  country lose their normal adjustment. The price of imported  commodities, when converted at the current rate of exchange, is  far in excess of the local price, so that many essential goods  will not be imported at all by private agency, and must be  provided by the government, which, in re-selling the goods below  cost price, plunges thereby a little further into insolvency. The  bread subsidies now almost universal throughout Europe are the  leading example of this phenomenon.      The countries of Europe fall into two distinct groups at the  present time as regards their manifestations of what is really  the same evil throughout, according as they have been cut off  from international intercourse by the blockade, or have had their  imports paid for out of the resources of their allies. I take  Germany as typical of the first, and France and Italy of the  second.      The note circulation of Germany is about ten times(2*) what  it was before the war. The value of the mark in terms of gold is  about one-eighth of its former value. As world prices in terms of  gold are more than double what they were, it follows that mark  prices inside Germany ought to be from sixteen to twenty times  their pre-war level if they are to be in adjustment and proper  conformity with prices outside Germany.(3*) But this is not the  case. In spite of a very great rise in German prices, they  probably do not yet average much more than five times their  former level, so far as staple commodities are concerned; and it  is impossible that they should rise further except with a  simultaneous and not less violent adjustment of the level of  money-wages. The existing maladjustment hinders in two ways  (apart from other obstacles) that revival of the import trade  which is the essential preliminary of the economic reconstruction  of the country. In the first place, imported commodities are  beyond the purchasing power of the great mass of the  population,(4*) and the flood of imports which might have been  expected to succeed the raising of the blockade was not in fact  commercially possible.(5*) In the second place, it is a hazardous  enterprise for a merchant or a manufacturer to purchase with a  foreign credit material for which, when he has imported it or  manufactured it, he will receive mark currency of a quite  uncertain and possibly unrealisable value. This latter obstacle  to the revival of trade is one which easily escapes notice and  deserves a little attention. It is impossible at the present time  to say what the mark will be worth in terms of foreign currency  three or six months or a year hence, and the exchange market can  quote no reliable figure. It may be the case, therefore, that a  German merchant, careful of his future credit and reputation, who  is actually offered a short-period credit in terms of sterling or  dollars, may be reluctant and doubtful whether to accept it. He  will owe sterling or dollars, but he will sell his product for  marks, and his power, when the time comes, to turn these marks  into the currency in which he has to repay his debt is entirely  problematic. Business loses its genuine character and becomes no  better than a speculation in the exchanges, the fluctuations in  which entirely obliterate the normal profits of commerce.      There are therefore three separate obstacles to the revival  of trade: a maladjustment between internal prices and  international prices, a lack of individual credit abroad  wherewith to buy the raw materials needed to secure the working  capital and to re-start the circle of exchange, and a disordered  currency system which renders credit operations hazardous or  impossible quite apart from the ordinary risks of commerce.      The note circulation of France is more than six times its  prewar level. The exchange value of the franc in terms of gold is  a little less than two-thirds its former value; that is to say,  the value of the franc has not fallen in proportion to the  increased volume of the currency.(6*) This apparently superior  situation of France is due to the fact that until recently a very  great part of her imports have not been paid for, but have been  covered by loans from the governments of Great Britain and the  United States. This has allowed a want of equilibrium between  exports and imports to be established, which is becoming a very  serious factor, now that the outside assistance is being  gradually discontinued.(7*) The internal economy of France and  its price level in relation to the note circulation and the  foreign exchanges is at present based on an excess of imports  over exports which cannot possibly continue. Yet it is difficult  to see how the position can be readjusted except by a lowering of  the standard of consumption in France, which, even if it is only  temporary, will provoke a great deal of discontent.      The situation of Italy is not very different. There the note  circulation is five or six times its pre-war level, and the  exchange value of the lira in terms of gold about half its former  value. Thus the adjustment of the exchange to the volume of the  note circulation has proceeded further in Italy than in France.  On the other hand, Italy's 'invisible' receipts, from emigrant  remittances and the expenditure of tourists, have been very  injuriously affected; the disruption of Austria has deprived her  of an important market; and her peculiar dependence on foreign  shipping and on imported raw materials of every kind has laid her  open to special injury from the increase of world prices. For all  these reasons her position is grave, and her excess of imports as  serious a symptom as in the case of France.(8*)      The existing inflation and the maladjustment of international  trade are aggravated, both in France and in Italy, by the  unfortunate budgetary position of the governments of these  countries.      In France the failure to impose taxation is notorious. Before  the war the aggregate French and British budgets, and also the  average taxation per head, were about equal; but in France no  substantial effort has been made to cover the increased  expenditure. 'Taxes increased in Great Britain during the war',  it has been estimated, 'from 95 francs per head to 265 francs,  whereas the increase in France was only from 90 to 103 francs.'  The taxation voted in France for the financial year ending 30  June 1919 was less than half the estimated normal post bellum  expenditure. The normal budget for the future cannot be put below  3880 million (22 milliard francs), and may exceed this figure;  but even for the fiscal year 1919-20 the estimated receipts from  taxation do not cover much more than half this amount. The French  Ministry of Finance have no plan or policy whatever for meeting  this prodigious deficit, except the expectation of receipts from  Germany on a scale which the French officials themselves know to  be baseless. In the meantime they are helped by sales of war  material and surplus American stocks and do not scruple, even in  the latter half of 1919, to meet the deficit by the yet further  expansion of the note issue of the Bank of France.(9*)      The budgetary position of Italy is perhaps a little superior  to that of France. Italian finance throughout the war was more  enterprising than the French, and far greater efforts were made  to impose taxation and pay for the war. Nevertheless, Signor  Nitti, the Prime Minister, in a letter addressed to the  electorate on the eve of the General Election (October 1919),  thought it necessary to make public the following desperate  analysis of the situation: (1) The state expenditure amounts to  about three times the revenue; (2) all the industrial  undertakings of the state, including the railways, telegraphs,  and telephones, are being run at a loss. Although the public is  buying bread at a high price, that price represents a loss to the  government of about a milliard a year; (3) exports now leaving  the country are valued at only one-quarter or one-fifth of the  imports from abroad; (4) the national debt is increasing by about  a milliard lire per month; (5) the military expenditure for one  month is still larger than that for the first year of the war.      But if this is the budgetary position of France and Italy,  that of the rest of belligerent Europe is yet more desperate. In  Germany the total expenditure of the empire, the federal states,  and the communes in 1919-20 is estimated at 25 milliards of  marks, of which not above 10 milliards are covered by previously  existing taxation. This is without allowing anything for the  payment of the indemnity. In Russia, Poland, Hungary, or Austria  such a thing as a budget cannot be seriously considered to exist  at all.(10*)      Thus the menace of inflationism described above is not merely  a product of the war, of which peace begins the cure. It is a  continuing phenomenon of which the end is not yet in sight.      All these influences combine not merely to prevent Europe  from supplying immediately a sufficient stream of exports to pay  for the goods she needs to import, but they impair her credit for  securing the working capital required to re-start the circle of  exchange and also, by swinging the forces of economic law yet  further from equilibrium rather than towards it, they favour a  continuance of the present conditions instead of a recovery from  them. An inefficient, unemployed, disorganised Europe faces us,  torn by internal strife and international hate, fighting,  starving, pillaging, and lying. What warrant is there for a  picture of less sombre colours?      I have paid little heed in this book to Russia, Hungary, or  Austria.(11*) There the miseries of life and the disintegration  of society are too notorious to require analysis; and these  countries are already experiencing the actuality of what for the  rest of Europe is still in the realm of prediction. Yet they  comprehend a vast territory and a great population, and are an  extant example of how much man can suffer and how far society can  decay. Above all, they are the signal to us of how in the final  catastrophe the malady of the body passes over into malady of the  mind. Economic privation proceeds by easy stages, and so long as  men suffer it patiently the outside world cares little. Physical  efficiency and resistance to disease slowly diminish,(12*) but  life proceeds somehow, until the limit of human endurance is  reached at last and counsels of despair and madness stir the  sufferers from the lethargy which precedes the crisis. Then man  shakes himself, and the bonds of custom are loosed. The power of  ideas is sovereign, and he listens to whatever instruction of  hope, illusion, or revenge is carried to him on the air. As I  write, the flames of Russian Bolshevism seem, for the moment at  least, to have burnt themselves out, and the peoples of Central  and Eastern Europe are held in a dreadful torpor. The lately  gathered harvest keeps off the worst privations, and peace has  been declared at Paris. But winter approaches. Men will have  nothing to look forward to or to nourish hopes on. There will be  little fuel to moderate the rigours of the season or to comfort  the starved bodies of the town-dwellers.      But who can say how much is endurable, or in what direction  men will seek at last to escape from their misfortunes? 

  NOTES: 

  1. Professor Starling's Report on Food Conditions in Germany  (Cmd. 280). 

  2. Including the Darlehenskassenscheine somewhat more. 

  3. Similarly in Austria prices ought to be between twenty and  thirty times their former level. 

  4. One of the most striking and symptomatic difficulties which  faced the Allied authorities in their administration of the  occupied areas of Germany during the armistice arose out of the  fact that even when they brought food into the country the  inhabitants could not afford to pay its cost price. 

  5. Theoretically an unduly low level of home prices should  stimulate exports and so cure itself. But in Germany, and still  more in Poland and Austria, there is little or nothing to export.  There must be imports before there can be exports. 

  6. Allowing for the diminished value of gold, the exchange value  of the franc should be less than forty per cent of its previous  value, instead of the actual figure of about sixty per cent if  the fall were proportional to the increase in the volume of the  currency. 

  7. How very far from equilibrium France's international exchange  now is can be seen from the following table: 

    Monthly      Imports     Exports     Excess of imports     average     (31,000)    (31,000)        (31,000)     1913         28,071      22,934           5,137     1914         21,341      16,229           5,112     1918         66,383      13,811          52,572  Jan-Mar 1919    77,428      13,334          64,094  Apr-June 1919   84,282      16,779          67,503  July 1919       93,513      24,735          68,778 

      These figures have been converted at approximately par rates,  but this is roughly compensated by the fact that the trade of  1918 and 1919 has been valued at 1917 official rates. French  imports cannot possibly continue at anything approaching these  figures, and the semblance of prosperity based on such a state of  affairs is spurious. 

  8. The figures for Italy are as follows: 

     Monthly      Imports     Exports     Excess of imports     average      (31,000)    (31,000)        (31,000)   1913            12,152       8,372           3,780   1914             9,744       7,368           2,376   1918            47,005       8,278          38,727  Jan-Mar 1919     45,848       7,617          38,231  Apr-June 1919    66,207      13,850          52,357  July-Aug 1919    44,707      16,903          27,804 

  9. In the last two returns of the Bank of France available as I  write (2 and 9 October 1919) the increases in the note issue on  the week amounted to 318,750,000 and 318,825,000 respectively. 

  10. On 3 October 1919 M. Bilinski made his financial statement to  the Polish Diet. He estimated his expenditure for the next nine  months at rather more than double his expenditure for the past  nine months, and while during the first period his revenue had  amounted to one-fifth of his expenditure, for the coming months  he was budgeting for receipts equal to one-eighth of his  outgoings. The Times correspondent at Warsaw reported that 'in  general M. Bilinski's tone was optimistic and appeared to satisfy  his audience'! 

  11. The terms of the peace treaty imposed on the Austrian  republic bear no relation to the real facts of that state's  desperate situation. The Arbeiter Zeitung of Vienna on 4 June  1919 commented on them as follows: 'Never has the substance of a  treaty of peace so grossly betrayed the intentions which were  said to have guided its construction as is the case with this  treaty... in which every provision is permeated with ruthlessness  and pitilessness, in which no breath of human sympathy can be  detected, which flies in the face of everything which binds man  to man, which is a crime against humanity itself, against a  suffering and tortured people.' I am acquainted in detail with  the Austrian treaty and I was present when some of its terms were  being drafted, but I do not find it easy to rebut the justice of  this outburst. 

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

  It is difficult to maintain true perspective in large  affairs. I have criticised the work of Paris, and have depicted  in sombre colours the condition and the prospects of Europe. This  is one aspect of the position and, I believe, a true one. But in  so complex a phenomenon the prognostics do not all point one way;  and we may make the error of expecting consequences to follow too  swiftly and too inevitably from what perhaps are not all the  relevant causes. The blackness of the prospect itself leads us to  doubt its accuracy; our imagination is dulled rather than  stimulated by too woeful a narration, and our minds rebound from  what is felt 'too bad to be true'. But before the reader allows  himself to be too much swayed by these natural reflections, and  before I lead him, as is the intention of this chapter, towards  and ameliorations remedies and the discovery of happier  tendencies, let him redress the balance of his thought by  recalling two contrasts -- England and Russia, of which the one  may encourage his optimism too much, but the other should remind  him that catastrophes can still happen, and that modern society  is not immune from the very greatest evils.      In the chapters of this book I have not generally had in mind  the situation or the problems of England. 'Europe' in my  narration must generally be interpreted to exclude the British  Isles. England is in a state of transition, and her economic  problems are serious. We may be on the eve of great changes in  her social and industrial structure. Some of us may welcome such  prospects and some of us deplore them. But they are of a  different kind altogether from those impending on Europe. I do  not perceive in England the slightest possibility of catastrophe  or any serious likelihood of a general upheaval of society. The  war has impoverished us, but not seriously -- I should judge that  the real wealth of the country in 1919 is at least equal to what  it was in 1900. Our balance of trade is adverse, but not so much  so that the readjustment of it need disorder our economic  life.(1*) The deficit in our budget is large, but not beyond what  firm and prudent statesmanship could bridge. The shortening of  the hours of labour may have somewhat diminished our  productivity. But it should not be too much to hope that this is  a feature of transition, and no one who is acquainted with the  British working man can doubt that, if it suits him, and if he is  in sympathy and reasonable contentment with the conditions of his  life, he can produce at least as much in a shorter working day as  he did in the longer hours which prevailed formerly. The most  serious problems for England have been brought to a head by the  war, but are in their origins more fundamental. The forces of the  nineteenth century have run their course and are exhausted. The  economic motives and ideals of that generation no longer satisfy  us: we must find a new way and must suffer again the malaise, and  finally the pangs, of a new industrial birth. This is one  element. The other is that on which I have enlarged in chapter 2  -- the increase in the real cost of food and the diminishing  response of Nature to any further increase in the population of  the world, a tendency which must be especially injurious to the  greatest of all industrial countries and the most dependent on  imported supplies of food.      But these secular problems are such as no age is free from.  They are of an altogether different order from those which may  afflict the peoples of Central Europe. Those readers who, chiefly  mindful of the British conditions with which they are familiar,  are apt to indulge their optimism, and still more those whose  immediate environment is American, must cast their minds to  Russia, Turkey, Hungary, or Austria, where the most dreadful  material evils which men can suffer -- famine, cold, disease,  war, murder, and anarchy -- are an actual present experience, if  they are to apprehend the character of the misfortunes against  the further extension of which it must surely be our duty to seek  the remedy, if there is one.      What then is to be done? The tentative suggestions of this  chapter may appear to the reader inadequate. But the opportunity  was missed at Paris during the six months which followed the  armistice, and nothing we can do now can repair the mischief  wrought at that time. Great privation and great risks to society  have become unavoidable. All that is now open to us is to  redirect, so far as lies in our power, the fundamental economic  tendencies which underlie the events of the hour, so that they  promote the re-establishment of prosperity and order, instead of  leading us deeper into misfortune.      We must first escape from the atmosphere and the methods of  Paris. Those who controlled the conference may bow before the  gusts of popular opinion, but they will never lead us out of our  troubles. It is hardly to be supposed that the Council of Four  can retrace their steps, even if they wished to do so. The  replacement of the existing governments of Europe is, therefore,  an almost indispensable preliminary.      I propose then to discuss a programme, for those who believe  that the Peace of Versailles cannot stand, under the following  heads: 

      I. The revision of the treaty.      II. The settlement of inter-Ally indebtedness.      III. An international loan and the reform of the currency.      IV. The relations of Central Europe to Russia. 

  I. THE REVISION OF THE TREATY 

      Are any constitutional means open to us for altering the  treaty? President Wilson and General Smuts, who believe that to  have secured the covenant of the League of Nations outweighs much  evil in the rest of the treaty, have indicated that we must look  to the League for the gradual evolution of a more tolerable life  for Europe. 'There are territorial settlements', General Smuts  wrote in his statement on signing the peace treaty, 'which will  need revision. There are guarantees laid down which we all hope  will soon be found out of harmony with the new peaceful temper  and unarmed state of our former enemies. There are punishments  foreshadowed over most of which a calmer mood may yet prefer to  pass the sponge of oblivion. There are indemnities stipulated  which cannot be enacted without grave injury to the industrial  revival of Europe, and which it will be in the interests of all  to render more tolerable and moderate... I am confident that the  League of Nations will yet prove the path of escape for Europe  out of the ruin brought about by this war.' Without the League,  President Wilson informed the Senate when he presented the treaty  to them early in July 1919, '... long-continued supervision of  the task of reparation which Germany was to undertake to complete  within the next generation might entirely break down;(2*) the  reconsideration and revision of administrative arrangements and  restrictions which the treaty prescribed, but which it recognised  might not provide lasting advantage or be entirely fair if too  long enforced, would be impracticable.'      Can we look forward with fair hopes to securing from the  operation of the League those benefits which two of its principal  begetters thus encourage us to expect from it? The relevant  passage is to be found in article XIX of the covenant, which runs  as follows: 'The assembly may from time to time advise the  reconsideration by members of the League of treaties which have  become inapplicable and the consideration of international  conditions whose continuance might endanger the peace of the  world.'      But alas! Article V provides that 'Except where otherwise  expressly provided in this covenant or by the terms of the  present treaty, decisions at any meeting of the assembly or of  the council shall require the agreement of all the members of the  League represented at the meeting.' Does not this provision  reduce the League, so far as concerns an early reconsideration of  any of the terms of the peace treaty, into a body merely for  wasting time? If all the parties to the treaty are unanimously of  opinion that it requires alteration in a particular sense, it  does not need a League and a covenant to put the business  through. Even when the assembly of the League is unanimous it can  only 'advise' reconsideration by the members specially affected.      But the League will operate, say its supporters, by its  influence on the public opinion of the world, and the view of the  majority will carry decisive weight in practice, even though  constitutionally it is of no effect. Let us pray that this be so.  Yet the League in the hands of the trained European diplomatist  may become an unequalled instrument for obstruction and delay.  The revision of treaties is entrusted primarily, not to the  council, which meets frequently, but to the assembly, which will  meet more rarely and must become, as any one with an experience  of large inter-Ally conferences must know, an unwieldy polyglot  debating society in which the greatest resolution and the best  management may fail altogether to bring issues to a head against  an opposition in favour of the status quo. There are indeed two  disastrous blots on the covenant -- article V, which prescribes  unanimity, and the much-criticised article X, by which 'The  members of the League undertake to respect and preserve as  against external aggression the territorial integrity and  existing political independence of all members of the League.'  These two articles together go some way to destroy the conception  of the League as an instrument of progress, and to equip it from  the outset with an almost fatal bias towards the status quo. It  is these articles which have reconciled to the League some of its  original opponents, who now hope to make of it another Holy  Alliance for the perpetuation of the economic ruin of their  enemies and the balance of power in their own interests which  they believe themselves to have established by the peace.      But while it would be wrong and foolish to conceal from  ourselves in the interests of 'idealism' the real difficulties of  the position in the special matter of revising treaties, that is  no reason for any of us to decry the League, which the wisdom of  the world may yet transform into a powerful instrument of peace,  and which in articles XI-XVII(3*) has already accomplished a  great and beneficent achievement. I agree, therefore, that our  first efforts for the revision of the treaty must be made through  the League rather than in any other way, in the hope that the  force of general opinion, and if necessary, the use of financial  pressure and financial inducements, may be enough to prevent a  recalcitrant minority from exercising their right of veto. We  must trust the new governments, whose existence I premise in the  principal Allied countries, to show a profounder wisdom and a  greater magnanimity than their predecessors.      We have seen in chapters 4 and 5 that there are numerous  particulars in which the treaty is objectionable. I do not intend  to enter here into details, or to attempt a revision of the  treaty clause by clause. I limit myself to three great changes  which are necessary for the economic life of Europe, relating to  reparation, to coal and iron, and to tariffs.      Reparation. If the sum demanded for reparation is less than  what the Allies are entitled to on a strict interpretation of  their engagements, it is unnecessary to particularise the items  it represents or to hear arguments about its compilation. I  suggest, therefore, the following settlement:      (1) The amount of the payment to be made by Germany in  respect of reparation and the costs of the armies of occupation  might be fixed at 32,000 million.      (2) The surrender of merchant ships and submarine cables  under the treaty, of war material under the armistice, of state  property in ceded territory, of claims against such territory in  respect of public debt, and of Germany's claims against her  former Allies, should be reckoned as worth the lump sum of 3500  million, without any attempt being made to evaluate them item by  item.      (3) The balance of 31,500 million should not carry interest  pending its repayment, and should be paid by Germany in thirty  annual instalments of 350 million, beginning in 1923.      (4) The reparation commission should be dissolved or, if any  duties remain for it to perform, it should become an appanage of  the League of Nations and should include representatives of  Germany and of the neutral states.      (5) Germany would be left to meet the annual instalments in  such manner as she might see fit, any complaint against her for  non-fulfilment of her obligations being lodged with the League of  Nations. That is to say, there would be no further expropriation  of German private property abroad, except so far as is required  to meet private German obligations out of the proceeds of such  property already liquidated or in the hands of public trustees  and enemy-property custodians in the Allied countries and in the  United States; and, in particular, article 260 (which provides  for the expropriation of German interests in public utility  enterprises) would be abrogated.      (6) No attempt should be made to extract reparation payments  from Austria.      Coal and iron. (1) The Allies' options on coal under annex V  should be abandoned, but Germany's obligation to make good  France's loss of coal through the destruction of her mines should  remain. That is to say, Germany should undertake 'to deliver to  France annually for a period not exceeding ten years an amount of  coal equal to the difference between the annual production before  the war of the coal-mines of the Nord and Pas de Calais,  destroyed as a result of the war, and the production of the mines  of the same area during the years in question; such delivery not  to exceed 20 million tons in any one year of the first five  years, and 8 million tons in any one year of the succeeding five  years.' This obligation should lapse, nevertheless, in the event  of the coal districts of Upper Silesia being taken from Germany  in the final settlement consequent on the plebiscite.      (2) The arrangement as to the Saar should hold good, except  that, on the one hand, Germany should receive no credit for the  mines, and, on the other, should receive back both the mines and  the territory without payment and unconditionally after ten  years. But this should be conditional on France's entering into  an agreement for the same period to supply Germany from Lorraine  with at least 50% of the iron ore which was carried from Lorraine  into Germany proper before the war, in return for an undertaking  from Germany to supply Lorraine with an amount of coal equal to  the whole amount formerly sent to Lorraine from Germany proper,  after allowing for the output of the Saar.      (3) The arrangement as to Upper Silesia should hold good.  That is to say, a plebiscite should be held, and in coming to a  final decision 'regard will be paid (by the principal Allied and  Associated Powers) to the wishes of the inhabitants as shown by  the vote, and to the geographical and economic conditions of the  locality'. But the Allies should declare that in their judgment  'economic conditions' require the inclusion of the coal districts  in Germany unless the wishes of the inhabitants are decidedly to  the contrary.      (4) The coal commission already established by the Allies  should become an appanage of the League of Nations, and should be  enlarged to include representatives of Germany and the other  states of Central and Eastern Europe, of the northern neutrals,  and of Switzerland. Its authority should be advisory only, but  should extend over the distribution of the coal supplies of  Germany, Poland, and the constituent parts of the former  Austro-Hungarian empire, and of the exportable surplus of the  United Kingdom. All the states represented on the commission  should undertake to furnish it with the fullest information, and  to be guided by its advice so far as their sovereignty and their  vital interests permit.      Tariffs. A free trade union should be established under the  auspices of the League of Nations of countries undertaking to  impose no protectionist tariffs(4*) whatever against the produce  of other members of the union. Germany, Poland, the new states  which formerly composed the Austro-Hungarian and Turkish empires,  and the mandated states should be compelled to adhere to this  union for ten years, after which time adherence would be  voluntary. The adherence of other states would be voluntary from  the outset. But it is to be hoped that the United Kingdom, at any  rate, would become an original member. 

      By fixing the reparation payments well within Germany's  capacity to pay, we make possible the renewal of hope and  enterprise within her territory, we avoid the perpetual friction  and opportunity of improper pressure arising out of treaty  clauses which are impossible of fulfilment, and we render  unnecessary the intolerable powers of the reparation commission.      By a moderation of the clauses relating directly or  indirectly to coal, and by the exchange of iron ore, we permit  the continuance of Germany's industrial life, and put limits on  the loss of productivity which would be brought about otherwise  by the interference of political frontiers with the natural  localisation of the iron and steel industry.      By the proposed free trade union some part of the loss of  organisation and economic efficiency may be retrieved which must  otherwise result from the innumerable new political frontiers now  created between greedy, jealous, immature, and economically  incomplete, nationalist states. Economic frontiers were tolerable  so long as an immense territory was included in a few great  empires; but they will not be tolerable when the empires of  Germany, Austria-Hungary, Russia, and Turkey have been  partitioned between some twenty independent authorities. A free  trade union, comprising the whole of Central, Eastern, and  south-Eastern Europe, Siberia, Turkey, and (I should hope) the  United Kingdom, Egypt, and India, might do as much for the peace  and prosperity of the world as the League of Nations itself.  Belgium, Holland, Scandinavia, and Switzerland might be expected  to adhere to it shortly. And it would be greatly to be desired by  their friends that France and Italy also should see their way to  adhesion.      It would be objected, I suppose, by some critics that such an  arrangement might go some way in effect towards realising the  former German dream of Mittel-Europa. If other countries were so  foolish as to remain outside the union and to leave to Germany  all its advantages, there might be some truth in this. But an  economic system, to which everyone had the opportunity of  belonging and which gave special privilege to none, is surely  absolutely free from the objections of a privileged and avowedly  imperialistic scheme of exclusion and discrimination. Our  attitude to these criticisms must be determined by our whole  moral and emotional reaction to the future of international  relations and the peace of the world. If we take the view that  for at least a generation to come Germany cannot be trusted with  even a modicum of prosperity, that while all our recent allies  are angels of light, all our recent enemies, Germans, Austrians,  Hungarians, and the rest, are children of the devil, that year by  year Germany must be kept impoverished and her children starved  and crippled, and that she must be ringed round by enemies; then  we shall reject all the proposals of this chapter, and  particularly those which may assist Germany to regain a part of  her former material prosperity and find a means of livelihood for  the industrial population of her towns. But if this view of  nations and of their relation to one another is adopted by the  democracies of Western Europe, and is financed by the United  States, heaven help us all. If we aim deliberately at the  impoverishment of Central Europe, vengeance, I dare predict, will  not limp. Nothing can then delay for very long that final civil  war between the forces of reaction and the despairing convulsions  of revolution, before which the horrors of the late German war  will fade into nothing, and which will destroy, whoever is  victor, the civilisation and the progress of our generation. Even  though the result disappoint us, must we not base our actions on  better expectations, and believe that the prosperity and  happiness of one country promotes that of others, that the  solidarity of man is not a fiction, and that nations can still  afford to treat other nations as fellow-creatures?      Such changes as I have proposed above might do something  appreciable to enable the industrial populations of Europe to  continue to earn a livelihood. But they would not be enough by  themselves. In particular, France would be a loser on paper (on  paper only, for she will never secure the actual fulfilment of  her present claims), and an escape from her embarrassments must  be shown her in some other direction. I proceed, therefore, to  proposals, first, for the adjustment of the claims of America and  the Allies amongst themselves; and second, for the provision of  sufficient credit to enable Europe to re-create her stock of  circulating capital. 

   II. THE SETTLEMENT OF INTER-ALLY INDEBTEDNESS 

      In proposing a modification of the reparation terms, I have  considered them so far only in relation to Germany. But fairness  requires that so great a reduction in the amount should be  accompanied by a readjustment of its apportionment between the  Allies themselves. The professions which our statesmen made on  every platform during the war, as well as other considerations,  surely require that the areas damaged by the enemy's invasion  should receive a priority of compensation. While this was one of  the ultimate objects for which we said we were fighting, we never  included the recovery of separation allowances amongst our war  aims. I suggest, therefore, that we should by our acts prove  ourselves sincere and trustworthy, and that accordingly Great  Britain should waive altogether her claims for cash payment, in  favour of Belgium, Serbia, and France. The whole of the payments  made by Germany would then be subject to the prior charge of  repairing the material injury done to those countries and  provinces which suffered actual invasion by the enemy; and I  believe that the sum of 31,500 million thus available would be  adequate to cover entirely the actual costs of restoration.  Further, it is only by a complete subordination of her own claims  for cash compensation that Great Britain can ask with clean hands  for a revision of the treaty and clear her honour from the breach  of faith for which she bears the main responsibility, as a result  of the policy to which the General Election of 1918 pledged her  representatives.      With the reparation problem thus cleared up it would be  possible to bring forward with a better grace and more hope of  success two other financial proposals, each of which involves an  appeal to the generosity of the United States. 

    Loans to   By United States  By United Kingdom By France Total                  Million 3       Million 3       Million 3 Million  3  United Kingdom     842             --             --        842  France             550             508            --      1,058  Italy              325             467            35        827  Russia              38             568(5*)       160        766  Belgium             80              98(6*)        90        268  Serbia and      Jugoslavia      20             202            20         60  Other Allies        35              79            50        164 

  Total            1,900(7*)       1,740           355      3,995 

      The first is for the entire cancellation of inter-Ally  indebtedness (that is to say, indebtedness between the  governments of the Allied and Associated countries) incurred for  the purposes of the war. This proposal, which has been put  forward already in certain quarters, is one which I believe to be  absolutely essential to the future prosperity of the world. It  would be an act of farseeing statesmanship for the United Kingdom  and the United States, the two Powers chiefly concerned, to adopt  it. The sums of money which are involved are shown approximately  in the above table.(8*)      Thus the total volume of inter-Ally indebtedness, assuming  that loans from one Ally are not set off against loans to  another, is nearly 34,000 million. The United States is a lender  only. The United Kingdom has lent about twice as much as she has  borrowed. France has borrowed about three times as much as she  has lent. The other Allies have been borrowers only.      If all the above inter-Ally indebtedness were mutually  forgiven, the net result on paper (i.e. assuming all the loans to  be good) would be a surrender by the United States of about  32,000 million and by the United Kingdom of about 3900 million.  France would gain about 3700 million and Italy about 3800  million. But these figures overstate the loss to the United  Kingdom and understate the gain to France; for a large part of  the loans made by both these countries has been to Russia and  cannot, by any stretch of imagination, be considered good. If the  loans which the United Kingdom has made to her allies are  reckoned to be worth 5o % of their full value (an arbitrary but  convenient assumption which the Chancellor of the Exchequer has  adopted on more than one occasion as being as good as any other  for the purposes of an approximate national balance sheet), the  operation would involve her neither in loss nor in gain. But in  whatever way the net result is calculated on paper, the relief in  anxiety which such a liquidation of the position would carry with  it would be very great. It is from the United States, therefore,  that the proposal asks generosity.      Speaking with a very intimate knowledge of the relations  throughout the war between the British, the American, and the  other Allied treasuries, I believe this to be an act of  generosity for which Europe can fairly ask, provided Europe is  making an honourable attempt in other directions not to continue  war, economic or otherwise, but to achieve the economic  reconstitution of the whole continent. The financial sacrifices  of the United States have been, in proportion to her wealth,  immensely less than those of the European states. This could  hardly have been otherwise. It was a European quarrel, in which  the United States government could not have justified itself  before its citizens in expending the whole national strength, as  did the Europeans. After the United States came into the war her  financial assistance was lavish and unstinted, and without this  assistance the Allies could never have won the war,(9*) quite  apart from the decisive influence of the arrival of the American  troops. Europe, too, should never forget the extraordinary  assistance afforded her during the first six months of 1919  through the agency of Mr Hoover and the American commission of  relief. Never was a nobler work of disinterested goodwill carried  through with more tenacity and sincerity and skill, and with less  thanks either asked or given. The ungrateful governments of  Europe owe much more to the statesmanship and insight of Mr  Hoover and his band of American workers than they have yet  appreciated or will ever acknowledge. The American relief  commission, and they only, saw the European position during those  months in its true perspective and felt towards it as men should.  It was their efforts, their energy, and the American resources  placed by the President at their disposal, often acting in the  teeth of European obstruction, which not only saved an immense  amount of human suffering, but averted a widespread breakdown of  the European system.(10*)      But in speaking thus as we do of American financial  assistance, we tacitly assume, and America, I believe, assumed it  too when she gave the money, that it was not in the nature of an  investment. If Europe is going to repay the 32,000 million worth  of financial assistance which she has had from the United States  with compound interest at 5%, the matter takes on quite a  different complexion. If America's advances are to be regarded in  this light, her relative financial sacrifice has been very slight  indeed.      Controversies as to relative sacrifice are very barren and  very foolish also; for there is no reason in the world why  relative sacrifice should necessarily be equal -- so many other  very relevant considerations being quite different in the two  cases. The two or three facts following are put forward,  therefore, not to suggest that they provide any compelling  argument for Americans, but only to show that from his own  selfish point of view an Englishman is not seeking to avoid due  sacrifice on his country's part in making the present suggestion.  (1) The sums which the British Treasury borrowed from the  American Treasury, after the latter came into the war, were  approximately offset by the sums which England lent to her other  allies during the same period (i.e. excluding sums lent before  the United States came into the war); so that almost the whole of  England's indebtedness to the United States was incurred, not on  her own account, but to enable her to assist the rest of her  allies, who were for various reasons not in a position to draw  their assistance from the United States direct.(11*) (2) The  United Kingdom has disposed of about 31,000 million worth of her  foreign securities, and in addition has incurred foreign debt to  the amount of about 31,200 million. The United States, so far  from selling, has bought back upwards of 31,000 million, and has  incurred practically no foreign debt. (3) The population of the  United Kingdom is about one-half that of the United States, the  income about one-third, and the accumulated wealth between  one-half and one-third. The financial capacity of the United  Kingdom may therefore be put at about two-fifths that of the  United States. This figure enables us to make the following  comparison: Excluding loans to allies in each case (as is right  on the assumption that these loans are to be repaid), the war  expenditure of the United Kingdom has been about three times that  of the United States, or in proportion to capacity between seven  and eight times.      Having cleared this issue out of the way as briefly as  possible, I turn to the broader issues of the future relations  between the parties to the late war, by which the present  proposal must primarily be judged.      Failing such a settlement as is now proposed, the war will  have ended with a network of heavy tribute payable from one Ally  to another. The total amount of this tribute is even likely to  exceed the amount obtainable from the enemy; and the war will  have ended with the intolerable result of the Allies paying  indemnities to one another instead of receiving them from the  enemy.      For this reason the question of inter-Allied indebtedness is  closely bound up with the intense popular feeling amongst the  European Allies on the question of indemnities -- a feeling which  is based, not on any reasonable calculation of what Germany can,  in fact, pay, but on a well-founded appreciation of the  unbearable financial situation in which these countries will find  themselves unless she pays. Take Italy as an extreme example. If  Italy can reasonably be expected to pay 3800 million, surely  Germany can and ought to pay an immeasurably higher figure. Or if  it is decided (as it must be) that Austria can pay next to  nothing, is it not an intolerable conclusion that Italy should be  loaded with a crushing tribute, while Austria escapes ? Or, to  put it slightly differently, how can Italy be expected to submit  to payment of this great sum and see Czechoslovakia pay little or  nothing? At the other end of the scale there is the United  Kingdom. Here the financial position is different, since to ask  us to pay 3800 million is a very different proposition from  asking Italy to pay it. But the sentiment is much the same. If we  have to be satisfied without full compensation from Germany, how  bitter will be the protests against paying it to the United  States. We, it will be said, have to be content with a claim  against the bankrupt estates of Germany, France, Italy, and  Russia, whereas the United States has secured a first mortgage  upon us. The case of France is at least as overwhelming. She can  barely secure from Germany the full measure of the destruction of  her countryside. Yet victorious France must pay her friends and  allies more than four times the indemnity which in the defeat of  1870 she paid Germany. The hand of Bismarck was light compared  with that of an Ally or of an associate. A settlement of  inter-Ally indebtedness is, therefore, an indispensable  preliminary to the peoples of the Allied countries facing, with  other than a maddened and exasperated heart, the inevitable truth  about the prospects of an indemnity from the enemy.      It might be an exaggeration to say that it is impossible for  the European Allies to pay the capital and interest due from them  on these debts, but to make them do so would certainly be to  impose a crushing burden. They may be expected, therefore, to  make constant attempts to evade or escape payment, and these  attempts will be a constant source of international friction and  ill-will for many years to come. A debtor nation does not love  its creditor, and it is fruitless to expect feelings of goodwill  from France, Italy and Russia towards this country or towards  America, if their future development is stifled for many years to  come by the annual tribute which they must pay us. There will be  a great incentive to them to seek their friends in other  directions, and any future rupture of peaceable relations will  always carry with it the enormous advantage of escaping the  payment of external debts. If, on the other hand, these great  debts are forgiven, a stimulus will be given to the solidarity  and true friendliness of the nations lately associated.      The existence of the great war debts is a menace to financial  stability everywhere. There is no European country in which  repudiation may not soon become an important political issue. In  the case of internal debt, however, there are interested parties  on both sides, and the question is one of the internal  distribution of wealth. With external debts this is not so, and  the creditor nations may soon find their interest inconveniently  bound up with the maintenance of a particular type of government  or economic organisation in the debtor countries. Entangling  alliances or entangling leagues are nothing to the entanglements  of cash owing.      The final consideration influencing the reader's attitude to  this proposal must, however, depend on his view as to the future  place in the world's progress of the vast paper entanglements  which are our legacy from war finance both at home and abroad.  The war has ended with everyone owing everyone else immense sums  of money. Germany owes a large sum to the Allies; the Allies owe  a large sum to Great Britain; and Great Britain owes a large sum  to the United States. The holders of war loan in every country  are owed a large sum by the state; and the state in its turn is  owed a large sum by these and other taxpayers. The whole position  is in the highest degree artificial, misleading, and vexatious.  We shall never be able to move again, unless we can free our  limbs from these paper shackles. A general bonfire is so great a  necessity that unless we can make of it an orderly and  good-tempered affair in which no serious injustice is done to  anyone, it will, when it comes at last, grow into a conflagration  that may destroy much else as well. As regards internal debt, I  am one of those who believe that a capital levy for the  extinction of debt is an absolute prerequisite of sound finance  in every one of the European belligerent countries. But the  continuance on a huge scale of indebtedness between governments  has special dangers of its own.      Before the middle of the nineteenth century no nation owed  payments to a foreign nation on any considerable scale, except  such tributes as were exacted under the compulsion of actual  occupation in force and, at one time, by absentee princes under  the sanctions of feudalism. It is true that the need for European  capitalism to find an outlet in the New World has led during the  past fifty years, though even now on a relatively modest scale,  to such countries as Argentina owing an annual sum to such  countries as England. But the system is fragile; and it has only  survived because its burden on the paying countries has not so  far been oppressive, because this burden is represented by real  assets and is bound up with the property system generally, and  because the sums already lent are not unduly large in relation to  those which it is still hoped to borrow. Bankers are used to this  system, and believe it to be a necessary part of the permanent  order of society. They are disposed to believe, therefore, by  analogy with it, that a comparable system between governments, on  a far vaster and definitely oppressive scale, represented by no  real assets, and less closely associated with the property  system, is natural and reasonable and in conformity with human  nature.      I doubt this view of the world. Even capitalism at home,  which engages many local sympathies, which plays a real part in  the daily process of production, and upon the security of which  the present organisation of society largely depends, is not very  safe. But however this may be, will the discontented peoples of  Europe be willing for a generation to come so to order their  lives that an appreciable part of their daily produce may be  available to meet a foreign payment the reason for which, whether  as between Europe and America, or as between Germany and the rest  of Europe, does not spring compellingly from their sense of  justice or duty?      On the one hand, Europe must depend in the long run on her  own daily labour and not on the largesse of America; but, on the  other hand, she will not pinch herself in order that the fruit of  her daily labour may go elsewhere. In short, I do not believe  that any of these tributes will continue to be paid, at the best,  for more than a very few years. They do not square with human  nature or agree with the spirit of the age.      If there is any force in this mode of thought, expediency and  generosity agree together, and the policy which will best promote  immediate friendship between nations will not conflict with the  permanent interests of the benefactor.(12*) 

   III. AN INTERNATIONAL LOAN 

      I pass to a second financial proposal. The requirements of  Europe are immediate. The prospect of being relieved of  oppressive interest payments to England and America over the  whole life of the next two generations (and of receiving from  Germany some assistance year by year to the costs of restoration)  would free the future from excessive anxiety. But it would not  meet the ills of the immediate present -- the excess of Europe's  imports over her exports, the adverse exchange, and the disorder  of the currency. It will be very difficult for European  production to get started again without a temporary measure of  external assistance. I am therefore a supporter of an  international loan in some shape or form, such as has been  advocated in many quarters in France, Germany, and England, and  also in the United States. In whatever way the ultimate  responsibility for repayment is distributed, the burden of  finding the immediate resources must inevitably fall in major  part upon the United States.      The chief objections to all the varieties of this species of  project are, I suppose, the following. The United States is  disinclined to entangle herself further (after recent  experiences) in the affairs of Europe, and, anyhow, has for the  time being no more capital to spare for export on a large scale.  There is no guarantee that Europe will put financial assistance  to proper use, or that she will not squander it and be in just as  bad case two or three years hence as she is in now: M. Klotz will  use the money to put off the day of taxation a little longer,  Italy and Jugoslavia will fight one another on the proceeds,  Poland will devote it to fulfilling towards all her neighbours  the military role which France has designed for her, the  governing classes of Roumania will divide up the booty amongst  themselves. In short, America would have postponed her own  capital developments and raised her own cost of living in order  that Europe might continue for another year or two the practices,  the policy, and the men of the past nine months. And as for  assistance to Germany, is it reasonable or at all tolerable that  the European Allies, having stripped Germany of her last vestige  of working capital, in opposition to the arguments and appeals of  the American financial representatives at Paris, should then turn  to the United States for funds to rehabilitate the victim in  sufficient measure to allow the spoliation to recommence in a  year or two?      There is no answer to these objections as matters are now. If  I had influence at the United States Treasury, I would not lend a  penny to a single one of the present governments of Europe. They  are not to be trusted with resources which they would devote to  the furtherance of policies in repugnance to which, in spite of  the President's failure to assert either the might or the ideals  of the people of the United States, the Republican and the  Democratic parties are probably united. But if, as we must pray  they will, the souls of the European peoples turn away this  winter from the false idols which have survived the war that  created them, and substitute in their hearts, for the hatred and  the nationalism which now possess them, thoughts and hopes of the  happiness and solidarity of the European family -- then should  natural piety and filial love impel the American people to put on  one side all the smaller objections of private advantage and to  complete the work that they began in saving Europe from the  tyranny of organised force, by saving her from herself. And even  if the conversion is not fully accomplished, and some parties  only in each of the European countries have espoused a policy of  reconciliation, America can still point the way and hold up the  hands of the party of peace by having a plan and a condition on  which she will give her aid to the work of renewing life.      The impulse which, we are told, is now strong in the mind of  the United States to be quit of the turmoil, the complication,  the violence, the expense, and, above all, the unintelligibility  of the European problems, is easily understood. No one can feel  more intensely than the writer how natural it is to retort to the  folly and impracticability of the European statesmen -- Rot,  then, in your own malice, and we will go our way -- 

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

      But if America recalls for a moment what Europe has meant to  her and still means to her, what Europe, the mother of art and of  knowledge, in spite of everything, still is and still will be,  will she not reject these counsels of indifference and isolation,  and interest herself in what may prove decisive issues for the  progress and civilisation of all mankind?      Assuming then, if only to keep our hopes up, that America  will be prepared to contribute to the process of building up the  good forces of Europe, and will not, having completed the  destruction of an enemy, leave us to our misfortunes, what form  should her aid take?      I do not propose to enter on details. But the main outlines  of all schemes for an international loan are much the same. The  countries in a position to lend assistance, the neutrals, the  United Kingdom and, for the greater portion of the sum required,  the United States, must provide foreign purchasing credits for  all the belligerent countries of continental Europe, Allied and  ex-enemy alike. The aggregate sum required might not be so large  as is sometimes supposed. Much might be done, perhaps, with a  fund of 3200 million in the first instance. This sum, even if a  precedent of a different kind had been established by the  cancellation of inter-Ally war debt, should be lent and should be  borrowed with the unequivocal intention of its being repaid in  full. With this object in view, the security for the loan should  be the best obtainable, and the arrangements for its ultimate  repayment as complete as possible. In particular, it should rank,  both for payment of interest and discharge of capital, in front  of all reparation claims, all inter-Ally war debt, all internal  war loans, and all other government indebtedness of any other  kind. Those borrowing countries who will be entitled to  reparation payments should be required to pledge all such  receipts to repayment of the new loan. And all the borrowing  countries should be required to place their customs duties on a  gold basis and to pledge such receipts to its service.      Expenditure out of the loan should be subject to general, but  not detailed, supervision by the lending countries.      If, in addition to this loan for the purchase of food and  materials, a guarantee fund were established up to an equal  amount, namely 3200 million (of which it would probably prove  necessary to find only a part in cash), to which all members of  the League of Nations would contribute according to their means,  it might be practicable to base upon it a general reorganisation  of the currency.      In this manner Europe might be equipped with the minimum  amount of liquid resources necessary to revive her hopes, to  renew her economic organisation, and to enable her great  intrinsic wealth to function for the benefit of her workers. It  is useless at the present time to elaborate such schemes in  further detail. A great change is necessary in public opinion  before the proposals of this chapter can enter the region of  practical politics, and we must await the progress of events as  patiently as we can. 

   IV. THE RELATIONS OF CENTRAL EUROPE TO RUSSIA 

      I have said very little of Russia in this book. The broad  character of the situation there needs no emphasis, and of the  details we know almost nothing authentic. But in a discussion as  to how the economic situation of Europe can be restored there are  one or two aspects of the Russian question which are vitally  important.      From the military point of view an ultimate union of forces  between Russia and Germany is greatly feared in some quarters.  This would be much more likely to take place in the event of  reactionary movements being successful in each of the two  countries, whereas an effective unity of purpose between Lenin  and the present essentially middle-class government of Germany is  unthinkable. On the other hand, the same people who fear such a  union are even more afraid of the success of Bolshevism; and yet  they have to recognise that the only efficient forces for  fighting it are, inside Russia, the reactionaries, and, outside  Russia, the established forces of order and authority in Germany.  Thus the advocates of intervention in Russia, whether direct or  indirect, are at perpetual cross-purposes with themselves. They  do not know what they want; or, rather, they want what they  cannot help seeing to be incompatibles. This is one of the  reasons why their policy is so inconstant and so exceedingly  futile.      The same conflict of purpose is apparent in the attitude of  the council of the Allies at Paris towards the present government  of Germany. A victory of Spartacism in Germany might well be the  prelude to revolution everywhere: it would renew the forces of  Bolshevism in Russia, and precipitate the dreaded union of  Germany and Russia; it would certainly put an end to any  expectations which have been built on the financial and economic  clauses of the treaty of peace. Therefore Paris does not love  Spartacus. But, on the other hand, a victory of reaction in  Germany would be regarded by everyone as a threat to the security  of Europe, and as endangering the fruits of victory and the basis  of the peace. Besides, a new military power establishing itself  in the East, with its spiritual home in Brandenburg, drawing to  itself all the military talent and all the military adventurers,  all those who regret emperors and hate democracy, in the whole of  Eastern and Central and south-eastern Europe, a power which would  be geographically inaccessible to the military forces of the  Allies, might well found, at least in the anticipations of the  timid, a new Napoleonic domination, rising, as a phoenix, from  the ashes of cosmopolitan militarism. So Paris dare not love  Brandenburg. The argument points, then, to the sustentation of  those moderate forces of order which, somewhat to the world's  surprise, still manage to maintain themselves on the rock of the  German character. But the present government of Germany stands  for German unity more perhaps than for anything else; the  signature of the peace was, above all, the price which some  Germans thought it worth while to pay for the unity which was all  that was left them of 1870. Therefore Paris, with some hopes of  disintegration across the Rhine not yet extinguished, can resist  no opportunity of insult or indignity, no occasion of lowering  the prestige or weakening the influence of a government with the  continued stability of which all the conservative interests of  Europe are nevertheless bound up.      The same dilemma affects the future of Poland in the role  which France has cast for her. She is to be strong, Catholic,  militarist, and faithful, the consort, or at least the favourite,  of victorious France, prosperous and magnificent between the  ashes of Russia and the ruin of Germany. Roumania, if only she  could be persuaded to keep up appearances a little more, is a  part of the same scatter-brained conception. Yet, unless her  great neighbours are prosperous and orderly, Poland is an  economic impossibility with no industry but Jew-baiting. And when  Poland finds that the seductive policy of France is pure  rhodomontade  and that there is no money in it whatever, nor  glory either, she will fall, as promptly as possible, into the  arms of somebody else.      The calculations of 'diplomacy' lead us, therefore, nowhere.  Crazy dreams and childish intrigue in Russia and Poland and  thereabouts are the favourite indulgence at present of those  Englishmen and Frenchmen who seek excitement in its least  innocent form, and believe, or at least behave as if foreign  policy was of the same genre as a cheap melodrama.      Let us turn, therefore, to something more solid. The German  government has announced (30 October 1919) its continued adhesion  to a policy of non-intervention in the internal affairs of  Russia, 'not only on principle, but because it believes that this  policy is also justified from a practical point of view'. Let us  assume that at last we also adopt the same standpoint, if not on  principle, at least from a practical point of view. What are then  the fundamental economic factors in the future relations of  Central to Eastern Europe?      Before the war Western and Central Europe drew from Russia a  substantial part of their imported cereals. Without Russia the  importing countries would have had to go short. Since 1914 the  loss of the Russian supplies has been made good, partly by  drawing on reserves, partly from the bumper harvests of North  America called forth by Mr Hoover's guaranteed price, but largely  by economies of consumption and by privation. After 1920 the need  of Russian supplies will be even greater than it was before the  war; for the guaranteed price in North America will have been  discontinued, the normal increase of population there will, as  compared with 1914, have swollen the home demand appreciably, and  the soil of Europe will not yet have recovered its former  productivity. If trade is not resumed with Russia, wheat in  1920-1 (unless the seasons are specially bountiful) must be  scarce and very dear. The blockade of Russia lately proclaimed by  the Allies is therefore a foolish and short-sighted proceeding;  we are blockading not so much Russia as ourselves.      The process of reviving the Russian export trade is bound in  any case to be a slow one. The present productivity of the  Russian peasant is not believed to be sufficient to yield an  exportable surplus on the pre-war scale. The reasons for this are  obviously many, but amongst them are included the insufficiency  of agricultural implements and accessories and the absence of  incentive to production caused by the lack of commodities in the  towns which the peasants can purchase in exchange for their  produce. Finally, there is the decay of the transport system,  which hinders or renders impossible the collection of local  surpluses in the big centres of distribution.      I see no possible means of repairing this loss of  productivity within any reasonable period of time except through  the agency of German enterprise and organisation. It is  impossible geographically and for many other reasons for  Englishmen, Frenchmen, or Americans to undertake it; we have  neither the incentive nor the means for doing the work on a  sufficient scale. Germany, on the other hand, has the experience,  the incentive, and to a large extent the materials for furnishing  the Russian peasant with the goods of which he has been starved  for the past five years, for reorganising the business of  transport and collection, and so for bringing into the world's  pool, for the common advantage, the supplies from which we are  now so disastrously cut off. It is in our interest to hasten the  day when German agents and organisers will be in a position to  set in train in every Russian village the impulses of ordinary  economic motive. This is a process quite independent of the  governing authority in Russia; but we may surely predict with  some certainty that, whether or not the form of communism  represented by Soviet government proves permanently suited to the  Russian temperament, the revival of trade, of the comforts of  life and of ordinary economic motive are not likely to promote  the extreme forms of those doctrines of violence and tyranny  which are the children of war and of despair.      Let us then in our Russian policy not only applaud and  imitate the policy of non-intervention which the government of  Germany has announced, but, desisting from a blockade which is  injurious to our own permanent interests, as well as illegal, let  us encourage and assist Germany to take up again her place in  Europe as a creator and organiser of wealth for her eastern and  southern neighbours.      There are many persons in whom such proposals will raise  strong prejudices. I ask them to follow out in thought the result  of yielding to these prejudices. If we oppose in detail every  means by which Germany or Russia can recover their material  well-being, because we feel a national, racial, or political  hatred for their populations or their governments, we must be  prepared to face the consequences of such feelings. Even if there  is no moral solidarity between the nearly related races of  Europe, there is an economic solidarity which we cannot  disregard. Even now, the world markets are one. If we do not  allow Germany to exchange products with Russia and so feed  herself, she must inevitably compete with us for the produce of  the New World. The more successful we are in snapping economic  relations between Germany and Russia, the more we shall depress  the level of our own economic standards and increase the gravity  of our own domestic problems. This is to put the issue on its  lowest grounds. There are other arguments, which the most obtuse  cannot ignore, against a policy of spreading and encouraging  further the economic ruin of great countries. 

      I see few signs of sudden or dramatic developments anywhere.  Riots and revolutions there may be, but not such, at present, as  to have fundamental significance. Against political tyranny and  injustice revolution is a weapon. But what counsels of hope can  revolution offer to sufferers from economic privation which does  not arise out of the injustices of distribution but is general?  The only safeguard against revolution in Central Europe is indeed  the fact that, even to the minds of men who are desperate,  revolution offers no prospect of improvement whatever. There may,  therefore, be ahead of us a long, silent process of  semi-starvation, and of a gradual, steady lowering of the  standards of life and comfort. The bankruptcy and decay of  Europe, if we allow it to proceed, will affect everyone in the  long run, but perhaps not in a way that is striking or immediate.      This has one fortunate side. We may still have time to  reconsider our courses and to view the world with new eyes. For  the immediate future events are taking charge, and the near  destiny of Europe is no longer in the hands of any man. The  events of the coming year will not be shaped by the deliberate  acts of statesmen, but by the hidden currents, flowing  continually beneath the surface of political history, of which no  one can predict the outcome. In one way only can we influence  these hidden currents -- by setting in motion those forces of  instruction and imagination which change opinion. The assertion  of truth, the unveiling of illusion, the dissipation of hate, the  enlargement and instruction of men's hearts and minds, must be  the means.      In this autumn of 1919 in which I write, we are at the dead  season of our fortunes. The reaction from the exertions, the  fears, and the sufferings of the past five years is at its  height. Our power of feeling or caring beyond the immediate  questions of our own material well-being is temporarily eclipsed.  The greatest events outside our own direct experience and the  most dreadful anticipations cannot move us. 

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

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

  NOTES: 

  1. The figures for the United Kingdom are as follows: 

     Monthly      Net imports     Exports     Excess of imports     average      (31,000)        (31,000)        (31,000)   1913            54,930          43,770          11,160   1914            50,097          35,893          14,204  Jan-Mar. 1919   109,578          49,122          60,456  April-June 1919 111,403          62,463          48,940  July-Sept 1919  135,927          68,863          67,064 

      But this excess is by no means so serious as it looks; for  with the present high freight earnings of the mercantile marine  the various 'invisible' exports of the United Kingdom are  probably even higher than they were before the war, and may  average at least 345 million monthly. 

  2. President Wilson was mistaken in suggesting that the  supervision of reparation payments has been entrusted to the  League of Nations. As I pointed out in chapter 5, whereas the  League is invoked in regard to most of the continuing economic  and territorial provisions of the treaty, this is not the case as  regards reparation, over the problems and modifications of which  the reparation commission is supreme, without appeal of any kind  to the League of Nations. 

  3. These articles, which provide safeguards against the outbreak  of war between members of the League and also between members and  non-members, are the solid achievement of the covenant. These  articles make substantially less probable a war between organised  Great Powers such as that of 1914. This alone should commend the  League to all men. 

  4. It would be expedient so to define a 'protectionist tariff' as  to permit (a) the total prohibition of certain imports; (b) the  imposition of sumptuary or revenue customs duties on commodities  not produced at home; (c) the imposition of customs duties which  did not exceed by more than 5% a countervailing excise on similar  commodities produced at home; (d) export duties. Further, special  exceptions might be permitted by a majority vote of the countries  entering the union. Duties which had existed for five years prior  to a country's entering the union might be allowed to disappear  gradually by equal instalments spread over the five years  subsequent to joining the union. 

  5. This allows nothing for interest on the debt since the  Bolshevik Revolution. 

  6. No interest has been charged on the advances made to these  countries. 

  7. The actual total of loans by the United States up to date is  very nearly 32,000 million, but I have not got the latest  details. 

  8. The figures in this table are partly estimated, and are  probably not completely accurate in detail; but they show the  approximate figures with sufficient accuracy for the purposes of  the present argument. The British figures are taken from the  White Paper of 23 October 1919 (Cmd. 377). In any actual  settlement, adjustments would be required in connection with  certain loans of gold and also in other respects, and I am  concerned in what follows with the broad principle only. The sums  advanced by the United States and France, which are in terms of  dollars and francs respectively, have been converted at  approximately par rates. The total excludes loans raised by the  United Kingdom on the market in the United States, and loans  raised by France on the market in the United Kingdom or the  United States, or from the Bank of England. 

  9. The financial history of the six months from the end of the  summer of 1916 up to the entry of the United States into the war  in April 1917 remains to be written. Very few persons, outside  the half-dozen officials of the British Treasury who lived in  daily contact with the immense anxieties and impossible financial  requirements of those days, can fully realise what steadfastness  and courage were needed, and how entirely hopeless the task would  soon have become without the assistance of the United States  Treasury. The financial problems from April 1917 onwards were of  an entirely different order from those of the preceding months. 

  10. Mr Hoover was the only man who emerged from the ordeal of  Paris with an enhanced reputation. This complex personality, with  his habitual air of weary Titan (or, as others might put it, of  exhausted prize-fighter), his eyes steadily fixed on the true and  essential facts of the European situation, imported into the  councils of Paris, when he took part in them, precisely that  atmosphere of reality, knowledge, magnanimity, and  disinterestedness which, if they had been found in other quarters  also, would have given us the Good Peace. 

  11. Even after the United States came into the war the bulk of  Russian expenditure in the United States, as well as the whole of  that government's other foreign expenditure, had to be paid for  by the British Treasury. 

  12. It is reported that the United States Treasury has agreed to  fund (i.e. to add to the principal sum) the interest owing them  on their loans to the Allied governments during the next three  years. I presume that the British Treasury is likely to follow  suit. If the debts are to be paid ultimately, this piling up of  the obligations at compound interest makes the position  progressively worse. But the arrangement wisely offered by the  United States Treasury provides a due interval for the calm  consideration of the whole problem in the light of the after-war 

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