The Economic Consequences of the Peace
by John Maynard Keynes

Chapter 1 Introductory
Chapter 2 Europe Before the War
Chapter 3 The Conference
Chapter 4 The Treaty
Chapter 5 Reparation
Chapter 6 Europe After the Treaty
Chapter 7 Remedies

Chapter 1: Introductory

 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

Chapter 2: Europe Before the War

     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

 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
     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 régime 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
     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
     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
     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
     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.


 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.

Chapter 3: The Conference

     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
     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
     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
     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

             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
     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
     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.


 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.

Chapter 4: The Treaty

     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
     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
     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
     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
     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
     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.


     (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
     (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
     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
     (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 Elektrizitëtsgesellschaft (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
     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
     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.


     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
     (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

     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

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

     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
     (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 régime 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
     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.


     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
     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
     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 régime 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 régime 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 régime
 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
     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 régime, 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
     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.


 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

 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. Hervé 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' (Kölnische 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

 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

 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

 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

 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.

Chapter 5: Reparations

 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
     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
     (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.
 René 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.


     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
     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
             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
     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
     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
       (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
     (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
     (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.


     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
     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 Trèves, at Spa, at Brussels, and
 subsequently at Château 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
     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,
     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
     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
     We have, therefore, a figure of from £3100 million to £3250
 million as the maximum contribution from Germany's foreign
     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

 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

 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.


             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

 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
     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
     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
     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
     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.


     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
     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
     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 régime 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


     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
     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
     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.


 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

 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 financière 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

 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

 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

 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

 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

 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

 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
 Trèves 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

 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

  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

 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

 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

 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.

Chapter 6: Europe After the Treaty

     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
     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
     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
     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?


 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

 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.

Chapter 7: Remedies

 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

     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.


     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
     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
     (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
     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.


     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
     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
 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
     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
     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
     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*)


     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.


     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
     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
     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


 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

 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

 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
 position as it will soon disclose itself.