The Reparation Problem, March 13, 1921


March 30, 1921                 THE NEW REPUBLIC

The Reparation Problem*

The discussion concerning German reparation has passed through various phases. In the first stage, thought was [centered] on the question of how much Germany owed. Statistics were complied to show the enormous havoc and ruin wrought by the German armies, and the question was debated as to the values in terms of which this damage should be computed. This phase then gave way to a second, in which the crucial question was deemed to be Germany's capacity. This, it was said, was the limiting factor in reparation. Germany should pay to the full extent of her capacity, the only question being what that capacity was.

Thought is now tending toward a third phase of the problem, which I trust will be the final and conclusive phase, namely, how much payment is the world willing to accept from Germany.

I, myself, have always believed that Germany's capacity to pay was very large. An industrious and intelligent population of sixty million persons, with a magnificent industrial equipment, can perform prodigies once it has a proper incentive. The United States by such an effort during the war period built up external credits at a rate which probably reached $8,000,000,000 per annum. This was done, to be sure, at a period of unusually high prices; but let us reduce our accomplishment by half, and again halve the result as allowance for our greater population and greater natural resources. Even this fractional remainder represents $2,000,000,000 per annum, a sum as large as any which it has been seriously suggested that Germany should pay. It is on account of such considerations as these that I have had little concern as to Germany’s capacity. At the Peace Conference I was favorable to a higher indemnity than many of my associates; and I have no sympathy today with the German assertion that the recent Paris program involves an impossible economic effort. I have, however, recently been much impressed with the difficulty in finding economic values in terms of which the world will be willing to accept payment from Germany. It must not be forgotten that paying is a two-sided transaction: Every payment involves the passage of something of value from one person to another. There must be something to give; it is equally essential that there be someone to receive.

Now, we have had, to date, nearly two years' experience with the actual operation of the Reparation Clauses of the Treaty. The final amount which Germany is to pay was, to be sure, not finally fixed, but the Treaty did fix an initial payment of five billion dollars, to be paid by May 1, 1921, and various clauses of the Treaty fixed the manner in which this payment should principally be made. These provisions, which are embodied in annexes to the Reparation Clauses, deal with the German assets which at the time of the Peace Conference the Allies selected as being those which they were particularly desirous of receiving from Germany. So insistent were they upon the right to receive reparation in these particular ways, that they demanded specific Treaty provisions giving them, in effect, an option upon the German commodities in question. These economic values which the Allies were so keen to secure from Germany in payment of reparation were ships, coal, machinery and reconstruction material, chemicals and dyestuffs, and German labor; and I think it may be of interest to you, and illustrate the point I wish to make, if we consider the actual experience of the Allies with these forms of payment.

Let us first consider ships. At the time of the Peace Conference, it would have seemed incredible that the Allies should not want, by way of reparation, all the ships that Germany had or could produce. The shipping clauses of the Treaty were among the most stringent that were drawn. Under them, Germany was to surrender practically her entire merchant marine, and to construct ships for the Allied account at the rate of about two hundred thousands tons per annum.

A day or two ago, I talked with a banker who had just arrived from England, and I asked him about the operation of these shipping clauses of the Treaty which were designed primarily for the benefit of Great Britain. He said that the British government had endeavored to sell the German ships, and on account of the lack of demand [page 2] the offering of these ships had depressed the market price, so that those now buying German ships would get them so cheaply that the old established ship operators whose ships had cost them, say, sixty dollars per ton, would be unable to operate in competition with the new owners of ex-German ships, and would be compelled to lay up their boats. I believe actually about one million tons of British shipping is now idle. My friend further stated that the result of Germany's building ships for British account was to depress the British ship building industry so that labor was thrown out of employment and capital diverted elsewhere. In Hamburg, on the contrary, the shipyards were active and thriving, the German laborers were finding employment, and he prophesied that a continuation of the present situation would mean that in the course of a few years the British shipbuilding industry -- one of England's great national assets -- would pass away.

It is interesting to observe that the Allied reparation experts have now recommended the abandonment of the clauses of the Treaty which require Germany to construct new tonnage for delivery to the Allies. They also recommend that Germany be relieved from delivering further shipping which was in existence when the Treaty came into force, and even that some of the shipping which she has already delivered be returned to Germany. Certain it is that in future the Allies will not be prepared to accept any large number of German ships by way of reparation.

Let us pass on to coal. In coal there is probably one German asset which can be employed in reparation up to the full extent of Germany's capacity. This is certainly true for the time being, so far as France is concerned. Whether it will remain true after the Lens coal fields are restored and German coal comes into competition with French coal, will be another question. Even today, however, the problem of coal deliveries from Germany is by no means as simple as it seems. Cheap domestic coal and a steady export demand constitutes one of the most important sources of England's economic strength; and England -- as a belligerent who herself suffered great loss -- has very definite views, and a right to express them, with regard to Germany's reparation payments in coal.

If France gets great quantities of free coal from Germany, it means that French industry secures a marked advantage over British industry in the conversion of raw materials into finished products. It means that the British coal export trade will fall off. From the moment when the coal clauses of the Treaty were first proposed until the present day, there has been a constant divergence of views between Great Britain and France as to the amounts and prices for coal received by France from Germany. It has been England's constant effort -- and, from her point of view, an entirely proper effort -- to prevent France getting coal on a basis which would make it cheaper than British export coal. I surmise that the Spa arrangement under which France undertook to make a gold payment to Germany for German coal, was primarily due to British influence and to her desire to prevent France from getting German coal at a price much below that of British export coal.

However, coal may be accepted as one medium of direct reparation which may be taken by the Allies to the value of, say, $100,000,000 a year, for the next three or four years. Once, however, the French coal mines are reconstructed, it must be recognized that France's attitude toward German coal will be the same as the attitude of all the Allies toward German economic values which are directly competitive with their own industries.

Under the machinery and reconstruction material clauses of the Treaty, all of the Allies have had for nearly two years an option, within reasonable limits, on all such machinery and reconstruction supplies as Germany's great industries could produce. At the time when these clauses were being drawn, M. Loucheur, now Economic Minister in the Briand cabinet, stated frankly to me that these clauses were sought primarily for political effect. He stated that he was vigorously opposed to permitting Germany to supply the machinery and equipment to be reinstalled in the devastated regions. This, he said would be to give Germany a stranglehold on the economic life of northern France, as, once German machinery was installed, all replacements and spare parts would have to be supplied by Germany, and orders for enlargements and new installations would similarly go to Germany.

That this statement correctly represented the French viewpoint, is shown by the figures for agricultural and industrial machinery which Germany has supplied to date. A recent report of the Reparation Commission showed that up to October, 1920, France had not accepted one single piece of machinery from Germany under Annex 4 of the Reparation Clauses. Belgium has taken a few thousand dollars' worth only. Thus, although France, Belgium and the other Allies have for many months had the right to get free of cost all such German machinery as they wished to order, yet they have in practice availed themselves of these rights only to the most insignificant extent.

With the dyestuffs situation, we are, I believe, all generally familiar. During the war the Allied governments encouraged the development of national industries in dyestuffs. Since peace, practically all of the Allied nations have taken steps to prevent the competitive import of German dyestuffs, which would destroy their newborn domestic industries.

There remains to be considered, labor. The French originally insisted, over a good deal of objection from the Americans, that they must have a treaty right to German labor for the purpose of actually restoring the devasted regions. Elaborate provisions were drafted requiring Germany to provide up to 500,000 laborers to work in the devastated regions under the direction of an inter-Allied commission. These provisions were eliminated at the last moment, as savoring too much of slavery. But Germany offered voluntarily to supply such labor, and I had the opportunity of participating in numerous conferences between the Reparation Commission and the German delegates when we sought to effect an arrangement whereby Germany could make reparation in this manner. After long and detailed discussion, the French government was compelled to reject reparation in this form, on account of the objections raised by the French labor unions to the importation of foreign labor.

This review will, perhaps, gives a new appreciation of the complexity of the reparation problem. We have considered the use of German labor outside of Germany and have seen that it has been rejected. We have considered the use of German labor and materials inside of Germany to produce goods which will then be exported from Germany. We have seen that these arrangements in actual operation have not been satisfactory to the Allies, and that the amount of reparation in this form which they will accept will probably be very limited. We have considered the taking of ownership of what is located in Germany and not physically capable of removal. We have seen that the Allies are opposed, in principle, to doing this on any large scale. [page 3]

As to all of these matters, we have not speculated. We know the actual attitude of the Allies as developed and officially expressed by action during twenty months of experimentation. The summary of our conclusion is that the Allies are unwilling to take directly from Germany economic values in any large amount.

Now, if the Allies are unwilling to accept from Germany any large amount in values which Germany has to tender them directly, how can the greater reparation demands be met? The remaining possibility for us to consider is a triangular operation whereby other countries than the Allies will buy German economic values, the proceeds thus accruing to Germany therefrom to be transferred to the Allies in terms of a currency which is of such value that it can readily be converted into sterling, francs or lira, as the case may be, to meet the Allied reconstruction and pension budgets.

Now, when we say that the Allies themselves will not accept direct reparation from Germany in any large amount, but that they are counting upon the rest of the world's doing so, what is really meant by the phrase "rest of the world" is the United States. There are, to be sure, the European neutrals and South America, but the combined buying power of some of these nations is by no means large, and the currency of some of them is materially depreciated. It is the United States and the United States alone which has a population of sufficient numbers and wealth, a standard of living sufficiently high, and currency at such a premium as to constitute a medium for the payment of large reparation through such a triangular operation as I describe.

But will America complacently play this role? I believe not. We have had some experience with receiving German ships. For upwards of two years the Leviathan has lain tied to her dock, while many thousands of dollars are expended to prevent the rats from consuming her interior. We have had our experience with German chemicals and dyestuffs, and are at present rigorously preventing their importation under the only remaining exercise of war control, pending the passage of legislation which will permanently exclude them and protect our new dyestuffs industry. The President has just recommended an increase in our tariff, designed to prevent competition from foreign labor's maintaining a lower standard of living, and unquestionably the effect of this tariff will be to exclude to a great extent textiles and other imports, which Germany is peculiarly adapted to supply.

The Allies during twenty months of practical experience have come to a realization of the havoc which would be caused by receiving a great quantity of economic values direct from Germany. Their present attitude is perfectly clear to anyone who will carefully observe. I see no reason why our attitude will not be the same. I think it safe to assume that the United States is not prepared to offer herself as a medium through which German reparation will be paid, with all that this would involve in the flooding of this country with German goods, with a consequent depression of American industry and loss and injury to both capital and labor.

It is such considerations as these which lead me to doubt the practicability of the recent demands upon Germany. These demands probably do not exceed Germany's capacity. But capacity to give is immaterial unless there is a corresponding willingness and capacity to receive. It is from this latter point of view that the demands seem faulty.

It should not be inferred from this statement that I approve of the German course at London and disapprove of the Allied action on the Ruhr. This action is due not to Germany's failure to accept literally the demands made, but is, rather, due to the impression of evasiveness and insincerity apparently created by her counter-proposals. It may well be that severe measures are required to bring about a proper German attitude. This is more to be desired than gold. But let us hope that in the meantime the Allies will carefully reexamine their demands in the cold light of reason, so as to be assured of a formula which, when properly accepted by Germany, will actually achieve a permanent solution.


* Delivered at the luncheon discussion on foreign affairs, under the auspices of the League of Free Nations Association, New York City, March 12, 1921.