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Rh May 5 1921 the amount of the war indemnity to be furnished by Germany and arranged the scheme of payments. By a renewed threat of an ultimatum the Government of the German Republic was forced on May 10 1921 to declare that they were " resolved to comply with the obligations placed on them by the Reparation Commission without reserve and without condi- tions." The total burden to be borne by the people of Germany was fixed at 132 milliards of gold marks, to be reduced, on the one hand, by the sums already paid on account of repara- tions and such sums as were to be credited to Germany according to the Peace Treaty or by decision of the Reparations Commis- sion, but to be increased, on the other hand, by the taking-over by Germany of Belgium's debt to the Allies. Germany was required to deliver bonds in three series, of which the first two, in amounts of 1 2 to 38 milliards of gold marks, were to be issued at latest by July i and Nov. i 1921 respectively, while the last series of 82 milliards subject to the above-mentioned modifica- tions was also to be issued and delivered by Nov. i 1921, but was only to be put into circulation by the Reparations Commis- sion so far as their bonds were secured by the German annual payments. The interest on the bonds was to be 5 %, the yearly sinking-fund i %. For this purpose Germany had to provide a fixed annuity of two milliards of gold marks, besides a variable annuity corresponding to 26% of the annual value of German exports, or a proportionate sum to be fixed by further agree- ments. According to the existing position shown by the amount of German exports this meant an annual payment of 3 to 3^ milliards of gold marks, added to which were the other bur- dens of the Peace Treaty, the cost of the occupation, payment for liquidation of foreign claims, and similar charges. On the basis of the current value of German money, this meant a yearly burden of about 60 milliards of paper marks.

The financial prospects for Germany in 1921, on these calcula- tions, might be regarded, from a German point of view, as ap- parently only too clear. If the 1921 estimates placed the total budget expenditure at about 108 milliards, with a revenue deficit of about 54 milliards, both these amounts would be increased (until means to cover the deficit had been found) by 50-60 milliards. And with this it could not be expected that the highest point had been reached. If the depreciation of German money went still further, as it must do if Germany was forced by finan- cial necessity to decrease the subventions for the cheapening of means of existence, and, in order to reduce the budget deficit, increased the postal and railway charges as well as the price of coal, the expenses of the Reich for official salaries, wages of labour and other requirements must grow automatically, and for this further cover must be found. A further increase of the floating debt, by resorting to the help of the printing-press in the issue of bank-notes, could only lead to a catastrophe. Only one alternative was visible, and that was to open up new sources of revenue for the Reich. But that would mean, in view of the concurrent financial requirements of the states and local govern- ments, that year by year an amount of perhaps 200 milliards of marks would have to be drawn forcibly into the Treasury through the power of the Government from the hands of private earners of income and possessors of property. It remained to be seen whether any Government, and particularly one so weakened by national disorganization, could exercise such power.

Apart from the internal financial difficulty, there was also the economic problem: how Germany was to make payments abroad in such immense amounts annually. Germany in 1921 had not only a financial but also an economic deficit. Its imports had exceeded exports annually since the end of the war by several milliards of gold marks. Only by increasing foreign indebtedness and by transferring abroad considerable parts of the property of the German population had it been possible hitherto to cover this economic deficit, and an enormous additional economic burden had already resulted from the liability for interest on this debt. This method of adding to the foreign debt and financ- ing the operation by transference of the substance of the people's wealth might be pursued still further in order to meet the de- mand for reparation payments. But its limits were bound to

be relatively narrow. For permanent use there could only be one really practical means of payment, by obtaining a favourable trade balance in an excess of exports over imports. Germany must strive to restrict internal consumption still further, and, to increase production, it must reduce imports and increase exports to the utmost. It was a strange piece of irony, and a contradic- tory policy difficult for Germany to understand, that the very Powers which were imposing the demand for reparations were at the same time hampering and restricting German production by economically closing up the Rhineland through the " sanc- tions " resorted to in 1921, instead of furthering such power of production and allowing it to develop. If they wilfully stimulated the imports of luxuries into Germany through the " hole in the west," although the stoppage of such imports would help to provide reparation money for them by economies on the part of German consumers; if they sought to render German exporta- tion more difficult by stringent customs regulations, in spite of the fact that an increase in German exports was the obvious economic method of complying with the reparation demand in spite, indeed, of the fact that, through the export index, accord- ing to which 26% of the value of the current German export trade was to be taken as the amount of the variable annuity, any increase in exports would mean a rise in the yearly amount payable the position would then become self -contradictory, and, for Germany, more and more hopeless.

Even without such embarrassments it remained to be seen how, on the one hand, Germany could attain the necessary in- crease in production in the short time contemplated, and whether, on the other hand, international commerce would be able to ad- just itself economically to an acceptance of Germany's increased supply of goods and services, while at the same time producers elsewhere had to deny themselves a market in Germany owing to its being without means to buy. 1

It must be sufficient here to indicate these problems, which faced all parties in 1921. The German Government had in May-July declared its fixed will to overcome them and to fulfil to the utmost the obligations that had been undertaken. It

1 It should be observed that in the middle of Aug. 1921 it was calculated by the Frankfurter Zeitung that the wholesale prices of commodities had risen i6-fold in Germany since 1914. Consequently a commodity which had cost 20 marks (then equal to i) before the war had come to cost 320 marks, which, as it happened, was also in mid-Aug. 1921 just about the value of l in the exchange market. That is to say, i sterling would buy in Germany just about the same amount of commodities at wholesale prices in mid-Aug. 1921 as before the war, in spite of the i6-fold rise. On the other hand, in England during the same period the rise in wholesale prices repre- sented an addition of 80%, so that in mid-Aug. 1921 it cost there about l l6s. to buy the same amount of commodities wholesale which could have been bought for l before the war. Consequently, in respect of this difference at all events, German manufacturers and traders were in a position of advantage over British in being able to underbid them in the sale of goods. To equalize wholesale prices of commodities in German and English currencies in mid-Aug. 1921, either the German prices would have had to show a 29-fold, and not a l6-fold, increase as compared with the pre-war level, or else the mark exchange would have had to stand at 180, instead of 320, marks to the l ; or, correspondingly, English prices would have to be lowered. The mark, however, actually depreciated still further in Sept. and Oct. 1921, reaching on Oct. 17 an exchange of 750 to the i. The explanation of the relatively low prices (in sterling) of German commodities at this time was presumably to be found in the higher productivity of the German workman and his lower standard of living, though the situation was also being affected by the difference in the economic conditions generally. German wages, though increased nominally about 8-fold as compared with the pre-war standard, were now much lower than British. But the fact here noted with regard to the relationship between prices and currency in the international market was in 1921 some set-off to the mischief done to Germany by the depreciation of the mark. The low German exchange was, in itself, an advantage to Germany in respect of her export trade in competition with England in the inter- national market, so far as the German capacity for exporting goods at all could be made effective, since it lowered the cost of German goods to the foreign purchaser. English manufacturers in the sum- mer of 1921 were in fact complaining that they were undersold. On the other hand, the depreciation of the mark was a severe handicap to Germany in buying anything abroad, including the materials required for producing goods for sale in the international market.

(Ed. E. B.)