THE GRAVE PROBLEM OF WAR INDEMNITIES.

Pukekohe & Waiuku Times, Volume 4, Issue 99, 22 October 1915, Page 2 (Supplement)

THE GRAVE PROBLEM OF WAR INDEMNITIES.

Shall We Make Germany Pay Up as a Fitting Economic Punishment for Her Crime? FAIR COMPENSATION FOR BELGIUM.

By MEREDITH ATKINSON, M.A.

One of the usual features of military campaigns in the past has been the right of the soldier to pillage and plunder as his reward. The two armies which arc in this respect most distinguished in history are those of tiie Huns in the Middle Ages, and the Prussians of the 19th century, whose descendants of this century seem to run them very close. Some writers hold that the modern practice of levying an indemnity upon a defeated nation is but the present- day equivalent of the methods of pillage and sack. Others regard them as morally justifiable, on ute ground that they constitute a line upon the aggressor. This article is an attempt to analyse the economics of indemnities, and to show whether they are economically beneficial, rather than morally justifiable. The best moral case that could be made out for an indemnity in the present instance is the urgent need of restoring Belgium to something like her former prosperity. This can only be rightly achieved by a fine levied upon Germany for that purpose. But another question is, whether we shall demand from Germany a crushing indemnity, partly to repay the Allies for losses due to her aggression, partly to punish her and make it difficult for her to repeat the onslaught upon civilisation. GERMAN LUST FOR PLUNDER. Blucher, the Prussian General, remarked when he first saw London what a tine city it would be to .sack. The Germans have not merely retained their lust for material plunder, but have been talking freely, ever since the war began, about the tremendous indemnity to be levied upon the Aihes, especially England. Th ; s is the fruit of their success in 1871 in taking from France the enormous indemnity of two hundred millions. There is no doubt that it was their intention to repeat the experiment at the end of this war, and their people have been greatly buoyed up by extravagant promises to this effect. It would seem, therefore, that we need feel no moral compunction about demanding a huge monej payment from Germany, believing, as we do, that Germany wa* the aggressor, and deserves the severest possible punishment. I do not hold with those who would let her down gently, for it is evident that for her own sake the lesson should be a bitter one and civilisation must take no further risks. But ther remains the practical quest'on as to whether an indemnity would benefit the Allies, or punish Germany as most people believe.

and energy. There seems no doubt, however, that her effort was so successful as to cause her far less trouble than wjy". anticipated. RISE IN PRICES EXPLAINED. It is a well-known principle of economics that any great and sudden increase in currency—gold, silver, tanknotes, or bills —brings about a rise in prices. This puzzles most people, but is easily understood if for a moment it is forgotten that money is money, and it is treated as a commodity. In the ordinary markets, money exchanges for goods, and goods for money. If in any year the supply of wheat is greatly increased, wheat becomes unusually plentiful, money becomes cheap, other things being equal. Suppose that last year a thousand quarters of wheat exchanged for a thousand sovereigns, and that this year we have the same quantity of wheat, but a great increase in the quantity of sovereigns—say fifteen hundred instead of a thousand. It is obvious that one quarter of wheat will then be worth thirty shillings. In other words, prices have risen, money is relatively cheaper. This example can easily be extended to cover all commodities with the same total result, a rise in prices. Thus, it is quite conceivable that the Germans suffered from the unusual influx of currency. Had the payments be<m spread over 20 years, little or no injury would have resulted through that channel. For the supply of cash would not have been suddenly altered in amount, and the Germans would have had time to inaugurate and increase their industries to absorb in the best way the inflowing capital. OTHER BAD EFFECTS. Another effect upon Germany of the over-oupply of money was noticeable almost immediately. Speculation was encouraged in its most extravagant form. All over Germany enterprises were comenced without due regard for the consequences. The Germans were financially and commercially so yoofcg and inexperienced that they ventured upon enterprises which in other countries would have been scouted. an 1879 Bismarck declared that Germany was slowlv bleeding to death, and in 1831 he said: "It was towards 1877 that I was first struck with the general and growing distress in Germany as compared with France." Some French authorities have gone so far as fc. declare that the German Government was on the point of returning the indemnity! While this seems to be a ridiculous assumption, it is quite clear that the evidence was read as proving the economic unsoundness of indemnities. It seems to me that the chief economic lesson to be learned from this historic example is that the thing most fatal to national commerce is any sudden flunctuation in the fundamental conditions of trade. It is not changed conditions that are harmful, but sudden fluctuation in the fundamental mal situation which should be avoided at all cost. A nation can sustain over a period of years an economic change which, if compressed into one year, would bring upon it the most disastrous consequences. As soon as the final pavment was made by France, a crisis came upon Germany, followed by a depression lasting about seven years. It was in the eighties that Germany comenced her marvellous industrial development, with results that are familiar to us all. OTHERS FACTORS AT WORK. Though I believe that the foregoing statement of the effects, to be expected to follow the rapid payment ot a big indemnity is. in general, correct, other factors must be considered. In economics, as in all sciences, there is no fallacy more commonly found than the assumption that a single effect necessarily a single cause, or vice versa. It is of course, almost always true to sav that there is nothing singular in either cause or effect. Another fallacy hist as common is the assumption tha. since B follows after A, A is the cause of B. Applied to the question ot indemnities, this means that certain economic effects attributed to them may have other causes. Such, I believe to be the case of the French indemnity. The slump in trade in the 70 s was almost universal. England was suffering as a result of over-expansion in railway construction. It is possible for a nation to spend so much in building Swavs that it Las little left to grow the things that railways can carry Germany suffered somewhat from th,9 mistake: The high prices occasioned bv the influx of capital were succeeded bv low prices due to over-procrr.ee-tion.' Another great cause of depression was a succession of bad harvests from 1875 to 1877. Further, Germany was at the same time adopting the cold basis, thus contributing to the scarcity of gold felt in several countries.

THE FRENCH INDEMNITY OF 1871. A great deal has been written about the economic effects of the payment by France to Gormany of two hundred million pounds, demanded by Bismarck after the Fianco-Pruss : an war. There is no doubt that Bismarck's intention was to crush France by impoverishment, and to make impossible any war of revenge. Nobody was more surprised than he at the success with which France relieved herself of this burden within two years. It must be remembered that 50 years ago such a Bum. was relatively enormous. If Bismarck had thought it was not' enough, he would not have hesitated to demand more. The war cost Germany £115.000,000. It would seem, therefore, that she "made a profit" or about one hundred millions—though we ought to reckon in her losses the wastage of many of men and the disturbance of trade. There is no doubt that the Germans expected nothing but benefit to their own industries, and years of extreme poverty for France. Neither result realiy followed. But it is extremely difficult to draw accurate conclusions. I will try to demonstrate the ways in which each of the two countries suffered or benefited in various ways. DID IT BENEFIT GERMANY? In his famous book, "The Great Illusion," Mr. Norman Angell declares that Germany suffered more than she benefited from the money France paid her. He says:— "The flood of gold turned, indeed, to dust and ashes so far as the German nation is concerned." His conclusion is that the exaction of a large indemnity must be rn all cases a disadvantage to the victorious nation. What is certainly undeniable is that, in the years following the war, the foreign trade of Frame continued to inrcease, whereas in Germany a 6erious depression ensued. French payments were made partly in money, but chiefly in commercial bills. This great and rapid invasion ot French money caused a serious rise of prices in Germany. When prices rise in a- particular country, exports are reduced, because more money can be made by seling in the home market. On the' other hand, when prices arc relatively low at home, traders export goods in larger quantities, because they can gain i higher profit abroad. It is further alleged that this indemnity increased the cost of living for the poor in Germany, lowered their purchasing power, and flooded the German market with t rench manufactures. Let us deal with this last effect first.

SPURIOUS PROSPERITY. It lias often been argued that the fact that France enjoyed a period or prosperity while paying the indemnity shows that the country which pays; the indemnity receives more benefit than the country to which it is paid. J.n« cannot be seriously maintained. It is true that some good must surely result from a country being compelled to work at tremendous speed to pay its debts, for it must gain something m skill and efficiency from the effort. But it is futile to blind oneself to the otner side of the picture. A great many factories had to be created merely to pay the bill, just as is the case in the present war.' When the final payment has been made, the reason for the existonce of those factories ceased to be. The nation, as now, had been using its capital for what, to itself, was an unproductive purpose. It was just as if the nation had entered upon an orgy of speculation, and had nothing to show for it at the end On the surface, it certainly looked as if Fiance were enjoying a period of abnormal prosperity,' whereas her prosperity was really spurious. No doubt she gamed somewhat from the compulsory thrift and increased energy which were needed, but few would claim that the price was not too high. THE CASE OF BELGIUM. There is a considerable difference, both economic and moral, in an indemnity paid to Belgium and that paid to England. The destruction of property and wastage of all forms of capital in Belgium is 60. serious that, without the quick payment of a large compensation, Belgium will be handicapped for many years to come. The mora', ease is undeniable. What is the

PAYMENT IN KIND. When o::e country is in debt to an ..thcr it is usual for the greater part of the debt to be pa ; d. not in money, but in goods. Australia, for example, pays the interest on her debt to England chieflv by exports of her special commodities. 'Without going fu.'v at the moment into the problem of mfernat'onal exchange, suffice it to say th.it Australia's debt to England, being duo ci English creditor-, creates claims upon Australia which are discharged oy English demands for Australian goods. The same happened largely between France and Germany. Let us say that erne hundred mill ; ons of the indemnity was paid in rash. The other hundred was booked by Germany to her own credit, and represented her claim upon French goods. The German Government could sue that claim just as if it were banknotes. By its means, the public services cou!d be pa'd for and the Government's finances strengthened. So the money steadily circulated throughout Germany, and stimulated the demand of the German public for goods. German industries were not well enough developed to supply German wants, whereas French industries were exceedingly advanced. and France lay only next door. This increased purchasing power of the Germans was, therefore, largely used to buy French goods. Hence the industry of her enemy was stimulated. It must not, of course, be forgotten that ultimately France did pay the money, drawing it from her increased thrift

economic position ? Belgium's need for capital will be so great that none of the bad effects of a rapid influx need be anticipated. Her shattered industries can readily absorb large amounts of new capital. Germany would haveto work very hard to pay the sum which would be ao adequate compensation, over a period short enough to do the Belgians justice, 'i'he compensation would be paid in the way nuir usual in the modern credit system. Belgium would be credited with, say, the amount of one hundred million pounds payable by Germany. The entry of that amount in the Belgian books, so to speak, would be enough to allow Belgium to purchase goods in Germany and other lands for the reconstruction of her industries. She could, if she wished, also lend part of the money to other countries, including even Germany, which would then have to pay her an annual interest, in addition to the principal. HOW GERMANY WOULD PAY. If Britain compelled Germany to pay an indemnity, the machinery of the modern credit system would be more capable than it was fifty years ago of effecting payment without bad result. The British Government would hold German bonds representing claims upon Germany. Tttese would be much the same as money lent to the Government by investors, but without payment of interest or principal. The bonds could be bought.and sold in th» markets in the ordinary way, Germany paying interest on them to Britain, and it ieeming them in her own time Britain could use the new capival either to reduce her National Debt or to invest in her new industries abroad. If Germany were able to pay the debt "* very rapidly, financial disturbance in > England would possibly result. On the other hand, the world will be so hungry for capital after the war that it is almost as likely the absorption would be natitial and rapid. Another use of the indemnity would be to lend a large portion to Germany —just as America is now lending to Britain and France the credit she has heaped up at their expense. In general, it can be sa ; d that the financial devices of modern times are much more capable of dealing with difficult situations than those of fifty years ago. With the lesson of 1871 before her Britain would prohably avoid realising the new assets too suddenly. SHALL GERMANY PAY? It will be seen that my argument thus far is rather against the assumption that indemnities are economically unsound. But I think the most serious consideration ha 9 not yet been urged. It is that the enforcement ot a huge indemnity is a direct encouragement to a war of revenge. It seems to me that the exaction of compensation for Belgium will in itself be a terrible economic punishment for Germany, and its moral effect will be no less noteworthy. The bitterness 01 her punishment would probably be sufficehtly increased by the payment of comparatively small indemnities to all the other allies. This would be a great humility to ou renemy, and a further moral justification of the policy of the Allies. On the whole, it would 6eem best that the size of the indemnity be determined largely by the state of feeling of the German people with regard to their own Government at the end of the war. If they show an irresistible intention to remove the military caste' from their throne of despotism, much of the good effect due to an indemnity will have been achieved. A great many matters involved in the final settlement will surely depend upon this same condition —the state of mind of the mass of the German people. If they show themselves to be submissive to the War Lord, and as aggressive towards other nations as before, then the case for a big indemnity will be strengthened. We must wait and see. SOME CONCLUSIONS. My general conclusion is that the problem of indemnities cannot be solved apart from the special circumstances of the time. The conditions in 1871 are in many respects radically different from those of 1915. A complete prediction of the effects in the present instance is impossible, but it is almost certain that they would not be nearly so bad as they were in the '7o's. On the whole, I think it is tri« to say that the Allies could very conveniently absorb an indemnity or » thousand millions without showing grave signs of economic indigestion. From the purely economic point of view therefore do not think we have much to fear in regard to an indemnitv. The moral considerations involved, both now and for the future, should, however, bt. given tfteir due weight. By that I do not mean that Germany should not be severely punished, biit rather tnat we should try to weigh up the desults not merely for five or ten years, but for several generations. The proopsal made above seems, in the light of present circumstances, to be tne most reasonable.