The Economic Consequences of the Peace by John Maynard Keynes

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A further point of great difficulty may be readily perceived between the
lines of the Treaty It fixes no definite sum as representing Germany's
liability. This feature has been the subject of very general
criticism,--that it is equally inconvenient to Germany and to the Allies
themselves that she should not know what she has to pay or they what
they are to receive. The method, apparently contemplated by the Treaty,
of arriving at the final result over a period of many months by an
addition of hundreds of thousands of individual claims for damage to
land, farm buildings, and chickens, is evidently impracticable; and the
reasonable course would have been for both parties to compound for a
round sum without examination of details. If this round sum had been
named in the Treaty, the settlement would have been placed on a more
business-like basis.

But this was impossible for two reasons. Two different kinds of false
statements had been widely promulgated, one as to Germany's capacity to
pay, the other as to the amount of the Allies' just claims in respect of
the devastated areas. The fixing of either of these figures presented a
dilemma. A figure for Germany's prospective capacity to pay, not too
much in excess of the estimates of most candid and well-informed
authorities, would have fallen hopelessly far short of popular
expectations both in England and in France. On the other hand, a
definitive figure for damage done which would not disastrously
disappoint the expectations which had been raised in France and Belgium
might have been incapable of substantiation under challenge,[105] and
open to damaging criticism on the part of the Germans, who were believed
to have been prudent enough to accumulate considerable evidence as to
the extent of their own misdoings.

By far the safest course for the politicians was, therefore, to mention
no figure at all; and from this necessity a great deal of the
complication of the Reparation Chapter essentially springs.

The reader may be interested, however, to have my estimate of the claim
which can in fact be substantiated under Annex I. of the Reparation
Chapter. In the first section of this chapter I have already guessed the
claims other than those for Pensions and Separation Allowances at
$15,000,000,000 (to take the extreme upper limit of my estimate). The
claim for Pensions and Separation Allowances under Annex I. is not to be
based on the _actual_ cost of these compensations to the Governments
concerned, but is to be a computed figure calculated on the basis of the
scales in force in France at the date of the Treaty's coming into
operation. This method avoids the invidious course of valuing an
American or a British life at a higher figure than a French or an
Italian. The French rate for Pensions and Allowances is at an
intermediate rate, not so high as the American or British, but above the
Italian, the Belgian, or the Serbian. The only data required for the
calculation are the actual French rates and the numbers of men mobilized
and of the casualties in each class of the various Allied Armies. None
of these figures are available in detail, but enough is known of the
general level of allowances, of the numbers involved, and of the
casualties suffered to allow of an estimate which may not be _very wide_
of the mark. My guess as to the amount to be added in respect of
Pensions and Allowances is as follows:

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

I feel much more confidence in the approximate accuracy of the total
figure[107] than in its division between the different claimants. The
reader will observe that in any case the addition of Pensions and
Allowances enormously increases the aggregate claim, raising it indeed
by nearly double. Adding this figure to the estimate under other heads,
we have a total claim against Germany of $40,000,000,000.[108] I believe
that this figure is fully high enough, and that the actual result may
fall somewhat short of it.[109] In the next section of this chapter the
relation of this figure to Germany's capacity to pay will be examined.
It is only necessary here to remind the reader of certain other
particulars of the Treaty which speak for themselves:

1. Out of the total amount of the claim, whatever it eventually turns
out to be, a sum of $5,000,000,000 must be paid before May 1, 1921. The
possibility of this will be discussed below. But the Treaty itself
provides certain abatements. In the first place, this sum is to include
the expenses of the Armies of Occupation since the Armistice (a large
charge of the order of magnitude of $1,000,000,000 which under another
Article of the Treaty--No. 249--is laid upon Germany).[110] But further,
"such supplies of food and raw materials as may be judged by the
Governments of the Principal Allied and Associated Powers to be
essential to enable Germany to meet her obligations for Reparation may
also, with the approval of the said Governments, be paid for out of the
above sum."[111] This is a qualification of high importance. The clause,
as it is drafted, allows the Finance Ministers of the Allied countries
to hold out to their electorates the hope of substantial payments at an
early date, while at the same time it gives to the Reparation Commission
a discretion, which the force of facts will compel them to exercise, to
give back to Germany what is required for the maintenance of her
economic existence. This discretionary power renders the demand for an
immediate payment of $5,000,000,000 less injurious than it would
otherwise be, but nevertheless it does not render it innocuous. In the
first place, my conclusions in the next section of this chapter indicate
that this sum cannot be found within the period indicated, even if a
large proportion is in practice returned to Germany for the purpose of
enabling her to pay for imports. In the second place, the Reparation
Commission can only exercise its discretionary power effectively by
taking charge of the entire foreign trade of Germany, together with the
foreign exchange arising out of it, which will be quite beyond the
capacity of any such body. If the Reparation Commission makes any
serious attempt to administer the collection of this sum of
$5,000,000,000 and to authorize the return to Germany of a part it, the
trade of Central Europe will be strangled by bureaucratic regulation in
its most inefficient form.

2. In addition to the early payment in cash or kind of a sum of
$5,000,000,000, Germany is required to deliver bearer bonds to a further
amount of $10,000,000,000, or, in the event of the payments in cash or
kind before May 1, 1921, available for Reparation, falling short of
$5,000,000,000 by reason of the permitted deductions, to such further
amount as shall bring the total payments by Germany in cash, kind, and
bearer bonds up to May 1, 1921, to a figure of $15,000,000,000
altogether.[112] These bearer bonds carry interest at 2-1/2 per cent per
annum from 1921 to 1925, and at 5 per cent _plus_ 1 per cent for
amortization thereafter. Assuming, therefore, that Germany is not able
to provide any appreciable surplus towards Reparation before 1921, she
will have to find a sum of $375,000,000 annually from 1921 to 1925, and
$900,000,000 annually thereafter.[113]

3. As soon as the Reparation Commission is satisfied that Germany can do
better than this, 5 per cent bearer bonds are to be issued for a further
$10,000,000,000, the rate of amortization being determined by the
Commission hereafter. This would bring the annual payment to
$1,400,000,000 without allowing anything for the discharge of the
capital of the last $10,000,000,000.

4. Germany's liability, however, is not limited to $25,000,000,000, and
the Reparation Commission is to demand further instalments of bearer
bonds until the total enemy liability under Annex I. has been provided
for. On the basis of my estimate of $40,000,000,000 for the total
liability, which is more likely to be criticized as being too low than
as being too high, the amount of this balance will be $15,000,000,000.
Assuming interest at 5 per cent, this will raise the annual payment to
$2,150,000,000 without allowance for amortization.

5. But even this is not all. There is a further provision of devastating
significance. Bonds representing payments in excess of $15,000,000,000
are not to be issued until the Commission is satisfied that Germany can
meet the interest on them. But this does not mean that interest is
remitted in the meantime. As from May 1, 1921, interest is to be debited
to Germany on such part of her outstanding debt as has not been covered
by payment in cash or kind or by the issue of bonds as above,[114] and
"the rate of interest shall be 5 per cent unless the Commission shall
determine at some future time that circumstances justify a variation of
this rate." That is to say, the capital sum of indebtedness is rolling
up all the time at compound interest. The effect of this provision
towards increasing the burden is, on the assumption that Germany cannot
pay very large sums at first, enormous. At 5 per cent compound interest
a capital sum doubles itself in fifteen years. On the assumption that
Germany cannot pay more than $750,000,000 annually until 1936 (_i.e._ 5
per cent interest on $15,000,000,000) the $25,000,000,000 on which
interest is deferred will have risen to $50,000,000,000, carrying an
annual interest charge of $2,500,000,000. That is to say, even if
Germany pays $750,000,000 annually up to 1936, she will nevertheless owe
us at that date more than half as much again as she does now
($65,000,000,000 as compared with $40,000,000,000). From 1936 onwards
she will have to pay to us $3,250,000,000 annually in order to keep pace
with the interest alone. At the end of any year in which she pays less
than this sum she will owe more than she did at the beginning of it. And
if she is to discharge the capital sum in thirty years from 1930, _i.e._
in forty-eight years from the Armistice, she must pay an additional
$650,000,000 annually, making $3,900,000,000 in all.[115]

It is, in my judgment, as certain as anything can be, for reasons which
I will elaborate in a moment, that Germany cannot pay anything
approaching this sum. Until the Treaty is altered, therefore, Germany
has in effect engaged herself to hand over to the Allies the whole of
her surplus production in perpetuity.

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

There are other functions and powers of high significance which the
Treaty accords to the Reparation Commission. But these will be most
conveniently dealt with in a separate section.

III. _Germany's Capacity to pay_

The forms in which Germany can discharge the sum which she has engaged
herself to pay are three in number--

1. Immediately transferable wealth in the form of gold, ships, and
foreign securities;

2. The value of property in ceded territory, or surrendered under the
Armistice;

3. Annual payments spread over a term of years, partly in cash and
partly in materials such as coal products, potash, and dyes.

There is excluded from the above the actual restitution of property
removed from territory occupied by the enemy, as, for example, Russian
gold, Belgian and French securities, cattle, machinery, and works of
art. In so far as the actual goods taken can be identified and restored,
they must clearly be returned to their rightful owners, and cannot be
brought into the general reparation pool. This is expressly provided for
in Article 238 of the Treaty.

1. _Immediately Transferable Wealth_

(_a_) _Gold_.--After deduction of the gold to be returned to Russia, the
official holding of gold as shown in the Reichsbank's return of the 30th
November, 1918, amounted to $577,089,500. This was a very much larger
amount than had appeared in the Reichsbank's return prior to the
war,[117] and was the result of the vigorous campaign carried on in
Germany during the war for the surrender to the Reichsbank not only of
gold coin but of gold ornaments of every kind. Private hoards doubtless
still exist, but, in view of the great efforts already made, it is
unlikely that either the German Government or the Allies will be able to
unearth them. The return can therefore be taken as probably representing
the maximum amount which the German Government are able to extract from
their people. In addition to gold there was in the Reichsbank a sum of
about $5,000,000 in silver. There must be, however, a further
substantial amount in circulation, for the holdings of the Reichsbank
were as high as $45,500,000 on the 31st December, 1917, and stood at
about $30,000,000 up to the latter part of October, 1918, when the
internal run began on currency of every kind.[118] We may, therefore,
take a total of (say) $625,000,000 for gold and silver together at the
date of the Armistice.

These reserves, however, are no longer intact. During the long period
which elapsed between the Armistice and the Peace it became necessary
for the Allies to facilitate the provisioning of Germany from abroad.
The political condition of Germany at that time and the serious menace
of Spartacism rendered this step necessary in the interests of the
Allies themselves if they desired the continuance in Germany of a stable
Government to treat with. The question of how such provisions were to be
paid for presented, however, the gravest difficulties. A series of
Conferences was held at Treves, at Spa, at Brussels, and subsequently at
Chateau Villette and Versailles, between representatives of the Allies
and of Germany, with the object of finding some method of payment as
little injurious as possible to the future prospects of Reparation
payments. The German representatives maintained from the outset that the
financial exhaustion of their country was for the time being so complete
that a temporary loan from the Allies was the only possible expedient.
This the Allies could hardly admit at a time when they were preparing
demands for the immediate payment by Germany of immeasurably larger
sums. But, apart from this, the German claim could not be accepted as
strictly accurate so long as their gold was still untapped and their
remaining foreign securities unmarketed. In any case, it was out of the
question to suppose that in the spring of 1919 public opinion in the
Allied countries or in America would have allowed the grant of a
substantial loan to Germany. On the other hand, the Allies were
naturally reluctant to exhaust on the provisioning of Germany the gold
which seemed to afford one of the few obvious and certain sources for
Reparation. Much time was expended in the exploration of all possible
alternatives; but it was evident at last that, even if German exports
and saleable foreign securities had been available to a sufficient
value, they could not be liquidated in time, and that the financial
exhaustion of Germany was so complete that nothing whatever was
immediately available in substantial amounts except the gold in the
Reichsbank. Accordingly a sum exceeding $250,000,000 in all out of the
Reichsbank gold was transferred by Germany to the Allies (chiefly to the
United States, Great Britain, however, also receiving a substantial sum)
during the first six months of 1919 in payment for foodstuffs.

But this was not all. Although Germany agreed, under the first extension
of the Armistice, not to export gold without Allied permission, this
permission could not be always withheld. There were liabilities of the
Reichsbank accruing in the neighboring neutral countries, which could
not be met otherwise than in gold. The failure of the Reichsbank to meet
its liabilities would have caused a depreciation of the exchange so
injurious to Germany's credit as to react on the future prospects of
Reparation. In some cases, therefore, permission to export gold was
accorded to the Reichsbank by the Supreme Economic Council of the
Allies.

The net result of these various measures was to reduce the gold reserve
of the Reichsbank by more than half, the figures falling from
$575,000,000 to $275,000,000 in September, 1919.

It would be _possible_ under the Treaty to take the whole of this latter
sum for Reparation purposes. It amounts, however, as it is, to less
than 4 per cent of the Reichsbank's Note Issue, and the psychological
effect of its total confiscation might be expected (having regard to the
very large volume of mark notes held abroad) to destroy the exchange
value of the mark almost entirely. A sum of $25,000,000, $50,000,000, or
even $100,000,000 might be taken for a special purpose. But we may
assume that the Reparation Commission will judge it imprudent, having
regard to the reaction on their future prospects of securing payment, to
ruin the German currency system altogether, more particularly because
the French and Belgian Governments, being holders of a very large volume
of mark notes formerly circulating in the occupied or ceded territory,
have a great interest in maintaining some exchange value for the mark,
quite apart from Reparation prospects.

It follows, therefore, that no sum worth speaking of can be expected in
the form of gold or silver towards the initial payment of $5,000,000,000
due by 1921.

(_b_) _Shipping_.--Germany has engaged, as we have seen above, to
surrender to the Allies virtually the whole of her merchant shipping. A
considerable part of it, indeed, was already in the hands of the Allies
prior to the conclusion of Peace, either by detention in their ports or
by the provisional transfer of tonnage under the Brussels Agreement in
connection with the supply of foodstuffs.[119] Estimating the tonnage of
German shipping to be taken over under the Treaty at 4,000,000 gross
tons, and the average value per ton at $150 per ton, the total money
value involved is $600,000,000.[120]

(_c_) _Foreign Securities_.--Prior to the census of foreign securities
carried out by the German Government in September, 1916,[121] of which
the exact results have not been made public, no official return of such
investments was ever called for in Germany, and the various unofficial
estimates are confessedly based on insufficient data, such as the
admission of foreign securities to the German Stock Exchanges, the
receipts of the stamp duties, consular reports, etc. The principal
German estimates current before the war are given in the appended
footnote.[122] This shows a general consensus of opinion among German
authorities that their net foreign investments were upwards of
$6,250,000,000. I take this figure as the basis of my calculations,
although I believe it to be an exaggeration; $5,000,000,000 would
probably be a safer figure.

Deductions from this aggregate total have to be made under four heads.

(i.) Investments in Allied countries and in the United States, which
between them constitute a considerable part of the world, have been
sequestrated by Public Trustees, Custodians of Enemy Property, and
similar officials, and are not available for Reparation except in so far
as they show a surplus over various private claims. Under the scheme for
dealing with enemy debts outlined in Chapter IV., the first charge on
these assets is the private claims of Allied against German nationals.
It is unlikely, except in the United States, that there will be any
appreciable surplus for any other purpose.

(ii.) Germany's most important fields of foreign investment before the
war were not, like ours, oversea, but in Russia, Austria-Hungary,
Turkey, Roumania, and Bulgaria. A great part of these has now become
almost valueless, at any rate for the time being; especially those in
Russia and Austria-Hungary. If present market value is to be taken as
the test, none of these investments are now saleable above a nominal
figure. Unless the Allies are prepared to take over these securities
much above their nominal market valuation, and hold them for future
realization, there is no substantial source of funds for immediate
payment in the form of investments in these countries.

(iii.) While Germany was not in a position to realize her foreign
investments during the war to the degree that we were, she did so
nevertheless in the case of certain countries and to the extent that
she was able. Before the United States came into the war, she is
believed to have resold a large part of the pick of her investments in
American securities, although some current estimates of these sales (a
figure of $300,000,000 has been mentioned) are probably exaggerated. But
throughout the war and particularly in its later stages, when her
exchanges were weak and her credit in the neighboring neutral countries
was becoming very low, she was disposing of such securities as Holland,
Switzerland, and Scandinavia would buy or would accept as collateral. It
is reasonably certain that by June, 1919, her investments in these
countries had been reduced to a negligible figure and were far exceeded
by her liabilities in them. Germany has also sold certain overseas
securities, such as Argentine cedulas, for which a market could be
found.

(iv.) It is certain that since the Armistice there has been a great
flight abroad of the foreign securities still remaining in private
hands. This is exceedingly difficult to prevent. German foreign
investments are as a rule in the form of bearer securities and are not
registered. They are easily smuggled abroad across Germany's extensive
land frontiers, and for some months before the conclusion of peace it
was certain that their owners would not be allowed to retain them if the
Allied Governments could discover any method of getting hold of them.
These factors combined to stimulate human ingenuity, and the efforts
both of the Allied and of the German Governments to interfere
effectively with the outflow are believed to have been largely futile.

In face of all these considerations, it will be a miracle if much
remains for Reparation. The countries of the Allies and of the United
States, the countries of Germany's own allies, and the neutral countries
adjacent to Germany exhaust between them almost the whole of the
civilized world; and, as we have seen, we cannot expect much to be
available for Reparation from investments in any of these quarters.
Indeed there remain no countries of importance for investments except
those of South America.

To convert the significance of these deductions into figures involves
much guesswork. I give the reader the best personal estimate I can form
after pondering the matter in the light of the available figures and
other relevant data.

I put the deduction under (i.) at $1,500,000,000, of which $500,000,000
may be ultimately available after meeting private debts, etc.

As regards (ii.)--according to a census taken by the Austrian Ministry
of Finance on the 31st December, 1912, the nominal value of the
Austro-Hungarian securities held by Germans was $986,500,000. Germany's
pre-war investments in Russia outside Government securities have been
estimated at $475,000,000, which is much lower than would be expected,
and in 1906 Sartorius v. Waltershausen estimated her investments in
Russian Government securities at $750,000,000. This gives a total of
$1,225,000,000, which is to some extent borne out by the figure of
$1,000,000,000 given in 1911 by Dr. Ischchanian as a deliberately modest
estimate. A Roumanian estimate, published at the time of that country's
entry in the war, gave the value of Germany's investments in Roumania at
$20,000,000 to $22,000,000, of which $14,000,000 to $16,000,000 were in
Government securities. An association for the defense of French
interests in Turkey, as reported in the _Temps_ (Sept. 8, 1919), has
estimated the total amount of German capital invested in Turkey at about
$295,000,000, of which, according to the latest Report of the Council of
Foreign Bondholders, $162,500,000 was held by German nationals in the
Turkish External Debt. No estimates are available to me of Germany's
investments in Bulgaria. Altogether I venture a deduction of
$2,500,000,000 in respect of this group of countries as a whole.

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