Reparations, trade and foreign exchange

Foreword

Any examination of specific payments between nations requires as a working basis a Payment-schedule of Debts. We therefore employ the Reparations Payment Schedule which obtained at the time of going to press. This Schedule may however be altered or temporarily suspended, in which case some slight alteration may be necessary in our figures. Our main argument, however, will not be affected.

A scaling-down of the present Payment Schedule would reduce the after-effects of the Indemnity ; a moratorium or the granting of foreign loans to Germany would merely postpone them.

The problem of Inter-Allied Indebtedness is similar to that of German Indebtedness to the Allies. This book covers both subjects. It necessarity deals with Foreign Exchange, In¬ dustrial Fluctuation, Exchange Speculation and Inflation, with special reference to Unemployment.

Fulmer, Bucks, November 1921.

L. L. B. A.

OUTLINE OF CONTENTS

PAGE

FOREWORD . 5

INTRODUCTION . 13

The Payment Schedule — System and methods of payment.

Chapter I The Present Situation . 25

Mechanism of payment — Effect on capitalistic industry — Outline of our argument — Necessity for dealing with side issues — Pros and cons of Reparations.

Chapter II Effect Of The Indemnity On The Economic

SYSTEM . 36

Nature of the present system of production and dis¬ tribution — The Indemnity causes unemployment in some industries — Unemployment spreads to other industries — The forthcoming Indemnity-slump — Nature of exchange-dumping.

Chapter III Pace

THE PROBLEM OF PAYMENT . 51

Objects of the Indemnity — Payments in money— Payment in securities — Payments in goods and ser¬ vices — Goods received on Reparations account may postpone demand for English products, thus causing unemployment — Suggested methods of preventing such unemployment — Some fallacies.

Chapter IV Allocation Of Indemnity Receipts . 80

The present method — Alternative methods : their good and bad points- — -Distributions in Kind ; in Money — Distribution of Indemnity receipts by means of reduced taxation — Why Indemnity-goods must first be bought instead of being received free — How the money spent on Indemnity-goods is paid to the British Government.

Chapter V The Problem Of Justice . 98

(a) Injustices in England — -Unequal distribution of Indemnity Benefits — -Import-merchants profit in¬ ordinately — Manufacturers suffer severely — Some workmen suffer unemployment — ( b ) Injustices in Germany — German exporters profit inordinately — German workmen suffer severely — Capitalists profit at the expense of their country — (c) Leakage in Reparation Payments — The Indemnity does more harm than good.

Chapter VI

REVIEW OF THE INDEMNITY PROBLEM . . . I09

Review of preceding chapters — Some conclusions.

Chapter VII The Indemnity As An Engine Of Industrial Progress

The difficulties of industrial growth — Monetary difficulties — Economic difficulties — Distress caused by economic change — Reparations as an aid to industrial progress — A suggested policy — Capitalisation of un¬ developed countries— Its strong and weak points — An example of the policy in operation.

Chapter VIII Foreign Exchange

How the Reichstag obtains sterling— Outline of the Theory of Foreign Exchange — The Indemnity as the cause of the Fall in the Mark.

Chapter IX Reparations And Exchange Speculation

The importance of Speculation in the Theory of Foreign Exchange under the paper currency system • — Principles of Exchange Speculation — The pre¬ sent Indemnity demands Speculation in marks by foreigners — The Reichstag relies on the Capital of foreign speculators in order to pay the Indemnity — The point of view of the English speculator — The danger of buying marks for the rise.

Chapter X Speculation In Marks

Pros and cons of Speculation — The supply and demand for marks — The probable course of the mark-

PACE l6 I

PAGE

exchange, and of the external price of German goods— Inter-action between the Indemnity, Ex¬ change-Speculation, the Price of German goods, and Unemployment in England.

CHAPTER XI GERMAN INFLATION AND GERMAN TAXATION . 2l8

German inflation is mainly due to the adverse foreign exchanges — German taxes are insufficient to pay for the pounds required. — Currency -inflation discourages speculation in marks, and therefore adds to the difficulties of meeting Indemnity Payments — Inflation is inevitable under the present Payment Schedule —

The Indemnity causes Inflation — Germany’s Financial Tactics— Currency-inflation and the fall in the mark —

The “ Flight from the mark ” — German taxation and the price of the mark— The difficulties of financial reform.

Chapter XII Triangular Exchange-dumping And The World’s

TRADE . 248

Effects of triangular purchases of pounds on the exchanges of the intermediate centres — Industry becomes disorganised — Slumps and Inflation ensue—

The disease spreads throughout the world — -The power of German industry to damage the Trade of the world — Germany’s capacity to pay — Summary of the effects of the German Indemnity on the trade of the world — Concerning the future.

Chapter XIII Problems Of Inflation . 268

The Indemnity causes Inflation— Effect of Inflation on Foreign Trade and on Internal Trade — Inflation

PACE

causes Slumps — How Trade revives — Importance of Costs of Reproduction — How Retail Prices affect Slumps — The Circulation of Credit-Currency and its Effects on Trade — The Quantity Theory of Money — Alternative Endings to Inflation — Pro-Inflationists ■ — Illusory business Profits — Difficulty of Business Management during Inflation — The Aftermath .

APPENDICES

A. CONCERNING ECONOMIC PROPHECY

B. SPECULATIONS AS TO THE FUTURE

C. THE FUTURE COURSE OF EVENTS

D. INTER-ALLIED DEBTS

• 3 °7 . 308

• 311

• 315

E. THREE-POINT ARBITRAGE AND THE FOREIGN

EXCHANGES . 323

F. TEXT OF THE PAYMENT SCHEDULE . . . 332

G. SCHEME FOR REPARATION PAYMENTS PUT FOR¬

WARD BY THE FEDERATION OF BRITISH INDUSTRIES . . . . 34I

H. COMMENT ON REPARATIONS BY THE GUARANTY

TRUST COMPANY OF NEW YORK .... 348

Reparations, Trade and Foreign Exchange

Introduction

The Payment Schedule of the German Indemnity.

On May 5, 1 921 , the total sum due from Germany to the Allies was £6,600,000,000, of which the British Empire was to get 22 per cent., or £1,452,000,000. Payment was to be made by instalments spread over forty-two years ; con¬ sequently, apart from interest charges on unpaid instalments, the average payment would be approximately £157,000,000 a year.

Owing to the disturbed state of Germany in 1921 payment was to be relatively light to start with, being gradually increased as the capacity of Germany to pay increased. This capacity is adjudged by the Reparation Commission — a per¬ manent body composed of financial experts of the Allied Powers.

This Reparation Commission has power to dictate the time, place and amount of each succes¬ sive payment, and also the currency in which it shall be paid. Consequently the value of each instalment is variable. For instance, at the time of writing (November 1921) £20,000,000 is due for payment in cash on January 15th (£5,000,000 has already been received in kind) , to be followed on February 15th by a sum equal to 26 per cent, of the total German exports during the quarter before the last one, or about £13,750,000.

The Reparation Commission arranges the distri¬ bution among the Allies of moneys received on Reparation account.

The System of Payment.

On May 1, 1921, Germany was in default as regards the Treaty of Versailles. The Allies therefore issued an ultimatum (Appendix F), which resulted in an agreement. This agreement contains the Payment Schedule.

The Payment Schedule and the method of collection were ably described by Mr. Lloyd George in the House of Commons on May 5, 1921.

A comment of the Morning Post on May 6, 1921, was as follows :

According to the Treaty, £1,000,000,000 in gold was due on May 1 ; only £400,000,000 had been paid. . . . The Reparation Commission had cal¬ culated that £6,600,000,000 in gold was due. ... It was now proposed that Germany should pay a fixed sum of £100,000,000 a year, and a further annual amount equal to 25 per cent, of her exports. The whole point of the new scheme, he said, was that Germany’s annual liability would vary according to her capacity to discharge it. Germany would also be asked to issue a series of bonds, bearing interest at 6 per cent., and variable as to date of issue and delivery, according as the Reparation Commission considered that Germany was able to pay.

The following is an extract from Mr. Lloyd George’s speech on May 5th. We also append a statement by Sir L. Worthington-Evans concerning Reparation Bonds. These extracts are reprinted from the Morning Post by kind permission of the Editor.

Mr. Lloyd George : The Reparation Commission last week found that after deducting the amount already received, and after adding the Belgian debt, there was due from Germany £6,600,000,000. Of that figure France claims 52 per cent, and the British Empire 22 per cent. It was the duty of the Repara¬ tion Commission under the Treaty concurrently to make a schedule of payments of that amount. In order to be able to do so, it was necessary to amend one of the annexes of the Treaty. Otherwise the payments would have been too heavy.

New Scheme of Payment.

The last German proposal was that it should be extended over eighty or ninety years. The pro¬ posals of Paris were that they should extend over forty-two years. The Supreme Council met on Saturday and sat until this morning to consider the award of the Reparation Commission, the scheme of payment that should be submitted to Germany, the guarantees that these payments would be assured, and the sanctions by which these obligations would be enforced. I first of all will take the scheme of payment which was agreed to by the Supreme Council, which was adopted by the Reparation Com¬ mission, and which will be submitted to-night to the German representatives.

The Paris scheme, which was framed very care¬ fully by the experts of the Allied Powers, was one of forty-two annuities, beginning at £100,000,000 per annum, increasing at intervals of two or three years until at the end of eleven years a maximum of £300,000,000 per annum would be reached.

Those are fixed annuities, but in addition there is to be a variable sum equal to 12 per cent, on German exports.

The proposal of the London Conference is there should be one fixed sum, and that that should be £100,000,000, but that there should be a variable sum added to that per annum which would be equal to 26 per cent, of the German exports. Whether that is higher or lower than Paris depends on Ger¬ man prosperity. If the German exports do not improve, then it will be considerably lower than Paris, but if they approximate to the pre-war figure it will be equal to the Paris figure, and it is only in the event of Germany becoming exceedingly prosperous that the figures will exceed the Paris estimate.

Three German Bond Issues.1 The whole point of the new scheme is that Ger¬ many’s annual liabilities will vary according to her capacity to discharge them. In order to enable Germany to meet her liabilities and to adapt them to her capacity, and also to enable the Allies to have something to hand with which to raise money for reparation, it is proposed that three categories of bonds shall be issued :

Series A — £600,000,000 gold to be delivered by July 1 ; they will bear interest at the rate of 5 per cent, and 1 per cent, accumulating for the sinking fund.

Series B — Bonds for 38 milliard gold marks — equal to £1,900,000,000 — to be delivered by November 1.

1 The aggregate value of the three series is £6,600,000,000.— Author.

Series C — Bonds for the balance, estimated at 82 milliard gold marks— equivalent to £ 4,100,000,000 — to be delivered by November 1 this year.

But there is this important reservation — that the Commission is only to attach coupons and issue these bonds as and when it is satisfied that the payments to be made under the agreement are sufficient to provide for the interest and sinking fund. The first two series will be issued this year. The Reparation Commission will decide from time to time as to the capacity of Germany to pay and issue bonds accordingly.

Finding the Interest.

Now, I come to a very important question, which gave us a great deal of anxiety. It is clear that at first there will not be enough to pay the interest on the whole of the amount due. The debt is £6,600,000,000 and 6 per cent, on that will be £400,000,000 sterling.1

Then comes the question as to what is to be done with the interest in respect of the unissued bonds. Under the Treaty Germany was debited with interest at 5 per cent, on the whole of the debt due from her, with certain powers given to - the Reparation Commission to vary the amount. What is proposed to be done is that 25 per cent, of the exports will be devoted to the payment of the bonds which will be issued. If there is a balance over and above that for any given year it will be devoted to the pay¬ ment of interest on the unissued bonds, but in addition to that, x per cent, will be charged on exports, and the surplus over and above what is available for payment of the bonds issued, plus 1 per

1 Or about £33,000,000 a month. — Author.

cent, of the exports, will be devoted to payment of the interest on the unissued bonds. Beyond that, interest will be wiped out ; it will not be debited to Germany. It will not accumulate against her, and that is a very important concession.

Now I come to the method of payment. All those who have given real attention to this subject know the practical difficulty for Germany to pay France, Great Britain and Belgium outside her own frontier. The payment of the debt of £6,600,000,000 is a serious matter inside one's own country, but to pay outside one's own country even a much smaller amount is baffling to the ingenuity of eminent financiers. That is the practical difficulty which we have to solve.

How Payment Will be Taken.

I now come to the fund out of which it is pro¬ posed to pay the interest on these bonds. There will be payments on account. The first payment will be within twenty-five days, and it will be a payment of £50,000,000. It will be paid in gold or in three months’ foreign bills or German Treasuiy drafts, endorsed by German banks on London, Paris and New York.

The next item will be payment in kind. There will be coal. (Labour cheers.) Well, the Germans, having destroyed the French and Belgian coal mines, will make up for it with their coal. (Cheers.) Then there will be aniline dyes, timber, and materials for the reparations of reconstruction of France. That condition, I am very glad to observe, has been agreed to. (Hear, hear.) I think it is a very sen¬ sible proposal. To a certain extent there will be labour, and that presents exceptional difficulty, because there are trade unions in France — (Labour cheers) — and I do not anticipate there will be any substantial sum derived from labour, but those payments in kind will aggregate a very considerable sum of money during the next five or ten years.

That is the second source of revenue and a very substantial one. The next is a duty of 25 per cent, on German exports. It is reversing the process of the Reparation Bill, but you can either collect in the country where the goods are received or you can collect in Germany. If any country prefers to collect in respect of the goods which come to that country in its own currency it can do so. Then that collection will be not in marks but in the equi¬ valent of gold, in bills. Many of them are negotiated on the English market. That will depend entirely on the recovery of Germany’s export trade. Before the war that trade was over £500,000,000. The value of that at present prices would be about £1,000,000,000. If Germany had a trade of that kind, then the 25 per cent, on her exports would be £250,000,000. That would be collected in paper, which is the equivalent of gold, because it is inter¬ national gold — bills of exchange.

Supervising the Collection.

A Sub-Commission will be appointed of the Reparation Commission sitting in Berlin to supervise this collection. It will have no authority to interfere in the administration. It is not a Commission set up in order to collect reparation ; it is purely a body to supervise and also to receive the payments. The receipts which I have already indicated — the value of the material receipts in kind which will be credited to Germany in a pool, and the actual 25 per cent, of the German exports — all that will be hypo¬ thecated to the payment of interest on bonds to be issued. Other German revenues will also be a pledge and a security for the payment of the interest on the bonds. Here the German proposals coincide with the proposals we make. That is the outline of the plan which has been adopted by the Supreme Council for the payment of the German annuities. We think it is fair and workable and will produce the necessary results. The German experts at Brussels were of opinion that Germany could pay three milliards of gold marks per annum. That is £150,000,000. That is equal probably to the amount that will be available for the first two or three years.

But if German prosperity develops, then certainly there will be much more — considerable amounts — available for this purpose. It will be available — that is the advantage of this scheme — in currency which is equally good here. These bills of exchange for export have just as much value in London as they have in New York or in Paris or in Berlin. I do not think this is an unfair demand to make on Germany. (Cheers.) Germany has one advantage in the depreciation of her mark. She has reduced her national debt. The capital and the interest on Germany’s national debt are between one-fifth and one-sixth of their nominal value. She has therefore a lighter national debt than ours, with a population of 60,000,000. The difficulty is not one of means on the part of the German people, but a difficulty of the means of payment, of currency, of exchange. That is met by our proposals.

Sir L. Worthington-Evans ( Secretary for War), replying to points raised in the debate, said that one of the best features of the arrangement was that the German bonds would be issued not merely to Germany’s ex-enemies but to the world at large. The £600,000,000 bonds, with coupons attached, would be given to the Reparation Commission, who would place them on the market.

An Hon. Member : At a discount ?

Sir L. Worthington-Evans : Of course. I don’t for a moment suggest that they can be put on the market at par. But it will be wise to put them on the market, even at a considerable discount, to make them lose the character of ex-enemy bonds. They will not be put on the market before their time. It is to the interest of the Allies that there should be a considerable margin behind the bonds, so that they shall not become wastepaper in the markets of the world.

* * *

The above extracts give a fair picture of the Indemnity problem as it stands at the time of writing.

But besides this, Fi'ance receives certain Reparations in kind. If France receives more than her “ fair share,” she either has to pay over certain values to the other Allies, who have not received their fair share, or she has to forfeit certain cash payments from Germany which she would otherwise have received. The complicated regulations governing payments made in kind to France are set forth in White Paper Cmd. 1,547 of October 1921 — “ The Wiesbaden Agreement.”

In this book we assume Reparations to be payable in cash to one or other of the Allies at a minimum average rate of £10,000,000 a month. This is a conservative estimate.

For the sake of convenience we use the word “ Indemnity ” to signify Reparation Payments, although theoretically Germany does not pay the Allies “ an Indemnity ” — such is the sophist’s art ! We use the phrase “ The present Indem¬ nity ” to mean the schedule of Reparation payments in its present form.

Reparations are nominally due in gold marks.

At the time of writing the mathematics of the Indemnity are as follows :

13! Paper Marks = 1 Gold Mark.

20 Gold Marks = 1 Paper Pound.

1 Paper Pound = ? Golden Sovereigns

(perhaps 0'75).

A new scale of conversion will probably be adopted by the Reparation Commission for future payments, varying with the fall in the rate of ex¬ change, the rise in German internal prices, and pos¬ sibly with the index figures of the recipient country.

When England’s Allies receive Reparations in cash they usually receive payment in their own national paper currencies. Conversion rates with gold marks have to be adopted for this purpose.

Of the total Reparations due, whether paid in kind or in cash, France is to get 52 per cent., the British Empire 22 per cent., Italy 10 per cent., and Belgium 8 per cent. The remaining 8 per cent, is a floating balance.

When an Ally is due to receive a payment in cash from Germany, that Ally may decide to make over part of the payment to one of its creditors, e.g. to England or to America. Such arrangements are, however, outside the subject of Reparations. They are matters for private agreement among the Allies.

Although in this book we deal mainly with payments due to England, our arguments apply equally to other international payments. It is immaterial to our argument whether such pay¬ ments are “ German Reparations ” or “ Inter- Allied Debts.”

PART #

ECONOMIC ASPECTS OF THE INDEMNITY

CHAPTER I THE PRESENT SITUATION November 1921

Germany is beginning to pay the Indemnity. The method adopted is as follows :

The Reichstag spends marks in buying pounds, which it hands over to the British Government. The marks spent are the proceeds of German taxation, German loans, etc., while the pounds bought are obtained from any persons who will accept marks in exchange : for instance, German exporters who have sold goods for pounds in England.

Although the speed at which the Indemnity is paid depends on the decisions of the Reparation Commission, we may say roughly that payment will be made at the rate of £13,000,000 a month, of which England is to get her 22 per cent., or about £3,000,000 a month on an average.

In this book we shall, for the sake of brevity, argue the case of England only, although France, Belgium, and other Allies also receive Reparations.1

1 On September 30, 1921, ^38,704,000 had been transferred to the British Government to pay for the cost of the Rhine Occupation. Less than £1,000,000 had been paid to England in cash on Reparation account. The Rhine Occupation is a first charge on payments received from Germany, but the receipts on that account do not yet cover the cost.

Owing to the size and rapidity of Reparation payments, the German demand for pounds is at present greater than the German export-earned supply. The result is that the price of pounds has risen considerably and the external price of marks has fallen. Again, owing to this external depreciation of the mark, the net external prices of German goods (i.e. internal prices multiplied by the rate of exchange) are lower than the prices that can be quoted for similar commodities by English producers. The exchanges are, in fact, below purchasing-power parity. In many cases German net external prices are 50 per cent, lower than the prices of English manufactures ; consequently English producers are being under¬ sold both at home and abroad. English factories are left without orders and unemployment is rife.

At the present moment England is in the midst of a serious trade slump. But the present slump was not caused by German competition; it is merely the aftermath of the currency and credit inflation which has taken place both at home and abroad since 1914. It is a slump due to the gradual disappearance of accustomed markets, and not to the capture of markets by a foreign rival.

Now, however, we are entering upon another slump of a different character : a slump which is being brought about by foreign competition, made effective by the collapse of the foreign exchanges. This exchange collapse is chiefly due to the fact that the German Government buys a large number of pounds on Reparation account, not only from

Germans in Germany and from Englishmen in England but also from foreigners in other countries.

These triangular purchases of pounds from other countries turn nearly all the exchanges of the world against Germany and in England’s favour. The results are firstly “ exchange¬ dumping” by foreigners in England, and secondly loss of markets abroad. We are, however, only just beginning to feel the effects of this dumping ; the trouble has hardly yet begun.

The aim of this book is to show that if payments are continued in their present form and at their present rapidity our economic plight will increase and our own industrial paralysis will spread to other nations.

Concerning Capitalism.

To advocate either the postponement or can¬ cellation 1 of Indemnity payments implies pro- German sympathies ; it also seems to imply a lack of common sense, for is it not obvious to any man that to receive something for nothing is excellent economy ? But what is true in the case of the private person is not necessarily true in the case of the nation. In economics things are not always as they seem at first sight ; phenomena often have consequences in direct antithesis to themselves. The phenomena may be beneficial while they last ; the after-effects harmful.

To receive goods from Germany without having

1 We by no means advocate cancellation. We advocate a revision of the payment-system.

to pay for them would be excellent economy if only we lived under another sort of economic system : a system in which there was no competi¬ tion, no division of labour, no production in anticipation of demand, and no bank-credit system, or at all events a credit system very different from our own.

Under the Capitalist system, however, the receipt of bonus goods has a damaging effect on the recipient country.

In saying this we are not advocating any new economic system. Capitalism is only in its infancy. Its faults are many, but their eradication will be possible as soon as economists learn their difficult subject and as soon as the management of currency and credit is more widely understood.

Apart from governmental misconduct in paper currency emissions, the chief diseases from which Capitalism suffers are ignorance of economic cycles on the part of traders, hysterical investment on the part of the general public, and short-sighted mismanagement of credit on the part of the loansdepartments of competing banks during periods of booming trade. When these faults have been eradicated. Capitalism will be more tolerable.1

In this book we shall point out many of the faults of Capitalism, but we do not want the reader to think that we advocate any revolutionary “ cures ” for the economic and therefore for the

1 The present-day Labour Problem is mainly a problem of distribution. Money and finance are the mechanisms of distribution. Their mismanagement causes labour troubles.

social diseases of Europe. We merely point out why under the present economic system the Indemnity, if continued in its existing form, will do considerable harm.

The Outline of our Argument.

The gist of our argument is as follows :

PART I

1. The Indemnity cannot be paid in money ;

it can only be paid in goods.

2. The transfer of goods from Germany to

England can only be effected (efficiently) by sale and purchase.

3. Under these circumstances the Indemnity

itself would not be paid unless the pounds spent on the German goods were handed over by Germany to the British Govern¬ ment and used in relief of English taxation.

4. This is the present Indemnity system.

5. German goods cannot be sold in large quanti¬

ties in England unless their prices are below those of similar or competitive English products. The Indemnity there¬ fore implies considerable undercutting of English prices.

6. This dumping postpones the demand for

English products and will therefore lead to stagnation and unemployment in several English industries.

7. Stagnation in some industries spreads to

others, being accentuated by the credit machine. The result will be a widespread slump.

8. This Indemnity-slump will be in addition

to the present slump (1920-21), which is not caused either by dumping or by foreign competition, but by the collapse of foreign markets unaccompanied by dumping.

9. If the present slump is prolonged and aggra¬

vated by a further Indemnity-slump, serious industrial and political complications will ensue.

PART II

1. The German Government has to buy pounds

in order to effect Indemnity payments.

2. The intense demand for pounds turns the

rates of exchange against Germany. The net external prices of German products fall below those quoted by English producers. Germany dumps her goods in England.

3. The progressive decline in the German mark

also causes us to lose the German market.

4. In its scramble to obtain pounds the Reichstag

buys not only by the direct Berlin-London route, but also triangularly via other countries, e.g. Spain.

5. Two exchange transactions are thus entailed,

firstly the buying of pesetas by Germany, and then the buying of pounds by German agents in Spain.

6. These triangular purchases send the mark

in favour of Spain and the peseta in favour of England.