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2018THE DJWES PLAN
IN THE MAKING

Rufus C. DawesTHE UNIVERSITY
OF ILLINOIS
LIBRARY

530.943
D32ld



THE DAWES PLAN IN THE MAKINGCharles E. Hughes
Secretary of StateTHE DAWES PLAN
IN THE MAKING

BY

RUFUS C. DAWES

WITH FOREWORD BY

FRANK O. LOWDEN

ILLUSTRATED

THE BOBBS-MERRILL COMPANY
INDIANAPOLIS	PUBLISHERSCopyright, 1925
By The Bobbs-Merrill Company

Printed in the United States of America

PRINTED AND BOUND
BY BRAUNWORTH & CO., INC.
BROOKLYN, NEW YORKFOREWORD

The appearance of this volume is an event in it-
self. It is now more than six years since the Ar-
mistice which ended the World War was signed.
During that time countless books have been written
upon the economic problems which resulted from
the war. There is not only a prolific but a brilliant
literature upon the general subject covering that
period. The leading economists and publicists of
the world have contributed to that literature. All
of it, however, was more or less controversial, as
was inevitable. It alternately criticized and praised
the Treaty of Versailles. It justified or condemned
the various conferences held from time to time to
bring about a settlement of the reparation question.
It was written largely from the standpoint of some
one or other of the nations involved. The writers
all agreed upon one thing and that was that the sit-
uation in Europe was desperate, if not hopeless.
That this literature served a most useful purpose,
however, no one can doubt. For every conceivable
view was presented with unusual ability. Out of
this extended and exhaustive discussion the facts of
the situation began to stand out in a strong and
clear light.

And now a volume appears, different from any
of those which have preceded it. This book tells a
story, not of divergent, but of converging national-

617932FOREWORD

istic views. It does not tell of recriminations among
the states of Europe, but of a sincere effort on the
part of all to come again into friendly cooperation.
It does not give the history of conferences worse
than futile, but of one successful beyond the ex-
pectations of"the- most sanguine. Suspicion had
given way to confidence.

This volume, written by Mr. Rufus C. Dawes, is
the first extended discussion from an official source
of the plan in its making. He was selected by Gen-
eral Dawes and Mr. Young to act as chief of the
staff of eight economic experts who accompanied
them from the United States to Paris. In this posi-
tion he acted as liaison between the two American
members of the Experts Committee and their staff
of experts. It was his duty carefully to examine
and in some cases brief the contemporaneous
studies and comments of the experts as well as to
advise the American members upon the economic
problems involved.

No one could be in a better position than Mr.
Dawes to write authoritatively on the economic
principles involved in the plan and the machinery
developed to make them effective.

Again, when Mr. Young was appointed First
Agent for Reparation Payments in Germany, he
selected Mr. Dawes for a place, during the installa-
tion of the plan, described by Commander Auld as
"Allied Charge-d' Affaires for Reparations"; when
Mr. Young was absent he left Mr. Dawes in charge
at Berlin, with full power of attorney. Here again
he had a unique opportunity to become conversantFOREWORD

with the environment in which the plan was operat-
ing.

As to the ability of Mr. Dawes, the reader of
this book will need no testimony of mine. He
served upon the Commission to report upon the
Pension Laws of Illinois and also as a member of
the recent Constitutional Convention in Illinios,
and has had a wide business experience, all of which
has qualified him as a practical economist.

ThisT5ooK does not end on a note of pessimism for
the future of Europe, but is serenely optimistic
throughout. It is a clear, straightforward story
told by an American business man of the achieve-
ment of practical men, thrown into the maelstrom
of Europe, in an effort to accomplish that which the
statesmen of Europe had for five years failed to
accomplish, namely, economic peace. Being largely
in diary form, it is therefore the gradual unfolding
of the principles that finally found full expression in
the report itself, and written with the full knowledge
and understanding of an actual participant in this
great achievement.

The years following the war were most distress-
ing ones for all of Europe. No nation, save Eng-
land alone, was able to balance its budget. The
currencies of all the nations upon the continent were
demoralized. The animosities of war, instead of
abating when peace was declared, were actually in-
creasing between some of the belligerents. Even
among the Allies themselves differences and jeal-
ousies had sprung up. Europe was indeed in a most
unhappy condition. To some it seemed an almostFOREWORD

hopeless condition. And all of this reacted inev-
itably on America and on the entire civilized world.

It was generally agreed that a sound and stable cur-
rency was the first thing required for a stabilized
Europe. It was equally certain that a sound and stable
currency was impossible until the several govern-
ments had found ways and means to live within their
incomes. For no independent nation yet has been
able long to indulge in expenditures beyond its actual
receipts without inflating its currency. Disinter-
ested observers had reached the almost unanimous
opinion that neither of these things could be accom-
plished without a consideration of the vexatious
reparation problem. Repeated and earnest efforts
made by the governments involved had failed, and
each failure naturally had aggravated the situation.

At this juncture, in December, 1923, the Repara-
tion Commission decided to appoint a committee of
experts to consider means of balancing the budgets
of the nations involved and the measures to be taken
to stabilize their currency. This was in response to
a suggestion of Secretary Hughes in a notable
speech which he had made a year before.

The American members of the committee thus
created were General Charles G. Dawes and Mr.
Owen D. Young.

When the Committee of Experts thus constituted
unanimously agreed on their report, popularly
known as the "Dawes Report" a new status quo in
the economic peace of Europe and the world was
created.

Their achievement illustrates well the importantFOREWORD

part America may play in international affairs by
simply furnishing leadership. We are the wealth-
iest nation on the globe. We are far enough re-
moved from the other civilized powers to be free
from the distracting influences which so often cloud
their judgment and restrict their freedom of will.

Frank 0. Lowden.NAMES AND ADDRESSES OF THE MEM-
BERS OF THE FIRST AND SECOND
EXPERT COMMITTEES OF THE
REPARATION COMMISSION

Great Britain: Sir Josiah Charles Stamp, K.B.E.,
~ D.Sc., F.C.I.S.

'' Tantallon," Park Hill Road,
Shortlands-Kent.

Sir Robert M. Kindersley, G.B.E.,
15 Charles Street,

Berkeley Square, London W.

The Rt. Hon. Reginald McKenna,
P.C.,

36 Smith Square,

Westminster, London.

France ;	Monsieur Edgard Allix,

7 rue Ribera, Auteuil, Paris.

Monsieur Jean Parmentier,
4 rue de Teheran, Paris.

Monsieur Laurent-Atthalin,
Banque de Paris et Pays-Bas,
3 rue d'Antin, Paris.

Italy:	Professor Federico Flora,

Bologne.

Doctor Alberto Pirelli,

Industriel, Milan.

Doctor Mario Alberti,

Credito Italiano, Milan.THE EXPERT COMMITTEES

Belgium :	Monsieur iSmile Francqui,

60 Avenue Louise,

Brussels.

Baron Maurice Houtart,
6 rue Saint Jacques,

Tournai.

Monsieur Albert-Edouard Janss-
en,

81 rue d'Arlon,

Brussels.

United States: General Charles G. Dawes,
Chicago, Illinois.

Mr. Owen D. Young,

New York.

Mr. Henry M. Robinson,
Los Angeles, California.CONTENTS

CHAPTER	PAGE

I THE EVOLUTION OF COMMITTEE OF EXPERTS-

PERSONNEL OF COMMITTEE-ARRIVAL IN

PARIS-PRELIMINARY CONFERENCES-OPEN-
ING SPEECHES-THE TREATY OF VERSAILLES

-THE SCOPE OF INDEMNITY CHARGES-THE •

METHOD OF ASSESSMENT—THE SUGGESTION
OF AMERICAN ECONOMISTS—ITS REJECTION
AND POSSIBLE EXPLANATION-FIXING THE IN-
DEMNITY-THE PROPOSALS OF VARIOUS GOV-
ERNMENTS-THE CONTROVERSY AS TO BASIS

OF CHARGES .........17

II EARLY MEETINGS-POINTS OF AGREEMENT-

ORGANIZATION BANKING AND BUDGET COM-
MITTEES-DOCTOR SCHACHT'S APPEARANCE

AND ADDRESS-ANNOUNCEMENT OF BANK-
ING PLAN AND BERLIN VISIT-EXPORTABLE

SURPLUS-EQUALITY OF TAX BURDEN AND

CREATION OF INTERNAL CREDIT-ITS PAY-
MENT ABROAD-ENGLISH BANK REPORTS-

EFFECT OF INTERNATIONAL PAYMENTS ON
COUNTRIES RECEIVING THEM-THE NECESSI-
TIES OF FRANCE-ITS RECONSTRUCTION WORK

IN RELATION TO REPARATION PAYMENTS-

PROGRESS TOWARD AGREEMENTS .... 52

III TRIP TO BERLIN—THE CONFUSION OF INFLA-^

TION-CHANGED RELATIONS OF PEOPLE TO

GOVERNMENT—RECEPTION BY CHANCELLORCONTENT S—Continued

CHAPTER PAGE
marx-poincare's comments on commit-
tee's work—-hopeful attitude of both

french and german governments-ruhr

invasion-passive resistance and conse-
quences-inflation-currencies in cir-
culation—the temporary stabilization

-ensuing crisis-slow recovery-ren-

\/ tenbank—^taxation system-new sched-
ules-compared to french-results in

austria......... . 88

IV \/commensurate burden of taxation in
germany-t-effect of depreciation of the

mark—Portion of burden of reparation

payments to be borne by railways and

private industries—Consideration of

new bank of issue—^ansfer of pay-
ments on reparations to creditors—ef-
fect of reparation payments on cur-
rency stability-memoranda by experts

on probable results from 6 i gold stand-
ard"-hope of solution upon leaving

berlin ..........130

V Formulation of report—attitude of

french prjess toward work of the com-
mittee—^j^alse rumor of resignation of
general dawes and effect on foreign ex-
change-comments and memoranda by

american experts on accumulation of
budget surplus within germany-discus-
sion of withdrawal of accumulations on

reparations payments-prospectus of

gold bank to be formed by doctor

schacht-announcement by committee

of plans for establishing new german
bank of issue .........166CONTENT S—Continued

CHAPTER PAGE
VI TAXATION REQUISITES OF A BALANCED BUDG-
ET-PRELIMINARY BUDGET FOR 1924-CON-
TROL OF PAYMENTS FROM TAXATION BY INDEX
OF PROSPERITY-OTHER SOURCES OF REPARA-
TION PAYMENTS-PREVIOUS PROPOSALS OF

GERMAN GOVERNMENT AS TO METHODS OF

PAYMENT ON REPARATIONS-RAILWAYS OF

GERMANY-IMPORTANCE OF RAILWAYS TO

ECONOMIC AND MILITARY CONDITIONS OF NA-
TION-OUTLINE OF BURDEN OF REPARATION'

PAYMENTS TO BE BORNE BY RAILWAYS-

REVENUES FROM OBLIGATIONS OF PRIVATE ^

INDUSTRY-OUTLINE OF AGENCIES TO INSURE

PERFORMANCE BY GERMANY.....209

VII STATUS OF REPARATION PROBLEM AT THE

TIME OF COMMITTEE'S MEETING-THE NEW

METHOD OF APPROACH-RESPONSIBILITY FOR.

CONVERSION OF INTERIOR PAYMENTS INTO
PAYMENTS ABROAD ASSUMED BY GERMANY'S
CREDITORS-WORK OF EXPERTS-RESTORA-
TION OF CONFIDENCE NECESSARY-COMPLE-
TION OF BANK PLAN-THE TRANSFER COM-

MITTEE—VtfHE AGENT GENERAL—t^HE COOR-
DINATION OF CONTROLS—OPENING OF
WORLD'S CREDIT TO GERMANY-SALE OF GER-
MAN SECURITIES TO RESTORE WORKING CAPI-
TAL-PLAN COMPLETED IN THREE MONTHS-

UNANIMITY OF ITS MEMBERS-FINAL SOLU-
TION FOR FUTURE DETERMINATION , , , 251

APPENDICES

NUMBER

1 THE EVOLUTION OF THE TERMS OF REF-
ERENCE TO THE COMMITTEES OF EXPERTS 285CONTENT S—Concluded

NUMBER	PAGE

2	RESOLUTIONS ADOPTED BY THE REPARA-
TION COMMISSION ON NOVEMBER 30,1923 297

3	BEPOBT OF COMMITTEES OF EXPERTS TO
REPARATION COMMISSION : COMPLETE OF-
FICIAL ENGLISH TEXT WITH ANNEXES . 299
INDEX.......513THE DAWES PLAN IN THE MAKINGTHE DAWES PLAN
IN THE MAKING

CHAPTER I

the evolution of committee of experts-personnel

of committee-arrival in paris-preliminary con-
ferences-opening speeches-the treaty of ver-
sailles— the scope of indemnity charges-the

method of assessment-the suggestion of ameri-
can economists—its rejection and possible ex-
planation-fixing the indemnity-the proposals

of various governments—the controversy as to
basis of charges.

It was in December, 1922, that Secretary of State
Hughes made his famous speech at New Haven in
which he proposed that men of prestige, experience
and honor be invited to consider the whole situation
and report upon the amounts that really ought to be
paid by way of reparations and upon a financial
plan for working out such payments, and expressed
the belief that without binding any of the nations or
the Reparation Commission, such a report might and
probably would correct many existing misconcep-
tions and bring to the solution of these problems an
enlightened public opinion. An account of the cor-

1718

THE DAWES PLAN

respondence and conferences which followed, and
which eventually led up to the organization of the
Committee of Experts has been prepared by Mr.
Leon Fraser, one of the legal advisers of the Rep-
aration Commission, and may be found in Appendix
No. 1. The full text of the Commission's final de-
cision is as follows:

"In order to consider in accordance with the pro-
visions of Article 234 of the Treaty of Versailles,
the resources and capacity of Germany, and after
giving her representatives a just opportunity to be
heard, the Reparation Commission decided to create
two Committees of Experts belonging to the Allied
and Associated countries. One of these Committees
would be entrusted with considering the means of
balancing the budget, and the measures to be taken
to stabilize the currency. The other would consider
the means of estimating the amount of exported
capital and of bringing it back into Germany."

The United States, alone among the Allied Pow-
ers, not being a signatory to the Treaty of Ver-
sailles, had no official representative upon the
Reparation Commission. It is represented by a so-
called unofficial observer, that is, unofficial only in
his relation to the Commission, for he is a very im-
portant official in his relation to the government at
Washington. This difficult position is now held by
Colonel James A. Logan, whose ability, tact and
rare good judgment have enabled him to be of great
service to his country without his ever having in-
volved his government in difficulty. In the case of
all the governments represented upon the Repara-IN THE MAKING

19

tion Commission, the names of those deemed
worthy of serving upon these Expert Committees1
were given by the respective governments to the
Reparation Commission, and invitations extended
by the Commission to the men named. In this man-
ner the following men were asked to serve: For
Great Britain, Sir Robert M. Kindersley and Sir
Josiah Stamp; for France, Monsieur Parmentier
and Monsieur Allix; for Belgium, Baron Houtart
and Monsieur Simile Francqui; and for Italy, Doctor
Alberto Pirelli and Professor Federico Flora.

Of these, three, Sir Josiah Stamp, Monsieur Allix
and Professor Flora, were eminent educators and
writers on economic subjects; three, Sir Robert
Kindersley, Monsieur Francqui and Doctor Pirelli,
were prominent in banking and business circles in
their respective countries; Baron Houtart was a
man of long public career in Belgium, while
Monsieur Parmentier was one of the most brilliant
of the younger men in the French public service and
a banker by profession.

In the case of the United States, the announce-
ment was made from Washington that the govern-
ment would view with approval an acceptance by
private citizens of such an invitation from the Rep-
aration Commission and also that Charles G.
Dawes and Owen D. Young had been suggested as
well qualified to serve upon the Committee, referred
to as No. 1, for finding means for balancing the
budget and stabilizing the currency. The Repara-
tion Commission in extending their invitations
designated Charles G. Dawes to serve also as Chair-20

THE DAWES PLAN

man of the Committee. Mr. Henry M. Eobinson, of
Los Angeles, was designated as the American mem-
ber of the Committee to report upon the accumula-
tion of German credits in foreign countries.

All of these men were educated as lawyers; all
had practised this profession and all had abandoned
it, Mr. Young to become Chairman of the Board of
the General Electric Company and of the Radio
Corporation of America, and Mr. Eobinson and
General Dawes to become bankers in Los Angeles
and Chicago, respectively. Mr. Eobinson had served
as one of the advisers at the Peace Conference and
also upon the Commission to consider the disposi-
tion of German ships. General Dawes had served
in France during the war as Chairman of the Pur-
chasing Board of the American Expeditionary
Forces and as a member of the Inter-allied Com-
mittee of Supplies for the Allied Armies. Later he
served, under President Harding, as the First Di-
rector of the United States Budget. All of these
men served without salaries, but the Reparation
Commission provided for their expenses. In the
case of the American members, however, all of the
expenses were assumed personally. A very early
date was fixed for the first meeting of these Com-
mittees and little time allowed to make preparations
and to gather a staff. General Dawes and Mr.
Young had never met, though they had many friends
in common.

Their first meeting was in Washington, December
twenty-seventh, where they met to consult with Sec-
retary Hughes and to pay their respects to theIN THE MAKING

21

President before their departure. Mr. Stuart M.
Crocker, a confidential associate and friend of Mr.
Young, came with him to this meeting, and General
Dawes was accompanied by his brother, Eufus C.
Dawes. Mr. Hughes made a long statement explain-
ing the correspondence and conversations that led
up to the appointment of these Committees, in which
he displayed a great capacity for clear condensed
statement. He believed that the restoration of
productivity in Germany was a world necessity, so
apparent as to force all nations to make at once the
most earnest effort to effect a settlement. The
nature of the inquiries submitted appeared to him
to give an unlimited scope to the Committee's work,
and to bring all the elements of the great problem
under its consideration. He believed there was a
great opportunity for the men on these Committees
and a great hope for the world in their creation.

It was at this meeting that Eufus C. Dawes was
designated as Chief of the Staff of Experts, and
Stuart M. Crocker as Secretary. Mr. Young con-
sulted with Secretary Hughes and with Secretary
Hoover and with Mr. Dwight Morrow and Mr.
Eoland Boyden, former Unofficial Observer at the
Separation Commission, upon the selection of a
staff of experts. Without there having been any
previous discussion between them, they all recom-
mended the same men. This greatly facilitated his
task of selection. There was no hesitation upon the
part of any of the men invited in accepting the ap-
pointment and their motives must have been to be of
service, since in no case could compensation be of-22

THE DAWES PLAN

fered beyond a guarantee that they would in the end
suffer no financial loss. To accept this service, they
were obliged to cancel all engagements and to leave
upon a moment's notice. The men thus selected
were:

Joseph S. Davis, Professor of Economics at
Leland Stanford University.

Edwin W. Kemmerer, Professor of Economics,
Princeton University.

Colonel Alan G. Goldsmith, Chief of the Western
European Division of the Department of Commerce.

Walter S. Tower, U. S. Commercial Agent at
London.

Chester Lloyd Jones, U. S. Commercial Agent at
Paris.

Charles E. Herring, U. S. Commercial Agent at
Berlin.

Mr. Robinson brought with him Mr. John E. Bar-
ber, of the First National Bank of Los Angeles; and
Colonel Leonard P. Ayres, now with the Cleveland
Trust Company, formerly Chief of the Statistical
Bureau of the American Army and one of the expert
advisers to the American Commissioners for the
Negotiation of the Peace in 1919; and also Mr.
John B. Gundry, of Cleveland. This completed the
organization of the Staff of Advisers.

On December 29, 1923, Mr. Young, General and
Mrs. Dawes, Mr. Crocker, Mr. Bufus Dawes and his
daughter, Jean, Mr. Tileston, who came as Mr.
Young's personal stenographer, and Mr. Alan G.
Goldsmith sailed from New York on the Steamer
America of the United States Lines. Mr. GoldsmithIN THE MAKING

23

brought with him a trunk-load of documents and
papers and was himself a walking- encyclopedia
of information. The Captain set aside the children's
playroom for conferences, and daily conferences en-
sued. Mr. Young quickly won the admiration and
deference of all. His well trained, orderly and agile
mind, his long experience in the practise of the law
and his familiarity with the management of great
enterprises and with international negotiations in
connection with them, all these, as well as an un-
usual patience, industry and instinct for method,
qualify him to assume the lead in any discussion of
this kind in whatsoever company he may find him-
self.

In the Treaty of Versailles, the Allied and As-
sociated Governments affirm, and Germany accepts,
the responsibility of Germany and her Allies for
causing all the loss and damage resulting as a con-
sequence of the war; but the Allied and Associated
Governments recognized that the reserves of Ger- f
many were not adequate to make complete repara-
tions for all such loss and damage. It was, there-
fore, required that Germany should undertake to
make compensation for all damages done to the
civilian population and their property during the
period of the war, to make restitution for cash and
property seized or sequestered, and to pay for all
pensions and compensations in the nature of pen-
sions awarded to naval and military victims of the
war.

The Eeparation Commission was constituted to
determine the amount of the damage for which com-24

THE DAWES PLAN

pensation was to be required and to arrange for its
collection. In limiting the power of this Commis-
sion, the more important provisions are to be found
in Section 12, Annex 2, Part 8 of the Treaty. "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 rep-
arations which Germany is required to pay shall
become a charge upon all her revenues prior to that
for 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 pro-
portionately as that of any of the powers repre-
sented on the Commission."

To facilitate the restoration of economic life of
the Allied and Associated countries, the Commis-
sion was directed to take from Germany as security
and acknowledgment of her debt, a first installment
of gold bonds in the amount of twenty billion gold
marks, payable, without interest, not later than in
May, 1921, another issue of forty billion marks,
bearing interest at 2y2% between 1921 and 1926, and
thereafter at 5%, and a further bond issue of forty
billion marks to be issued when, but not until, the
Commission is satisfied Germany can meet the in-
terest, and the sinking fund obligations upon such
bonds.

The framers of the Treaty, having laid down the
scope of the damages to the repair of which repara-
tion payments should be assigned, assumed, first,
that at least sixty billion marks would ultimately be
recoverable, second, that the damages were largerOwen D. Young
United States Member First Committee of ExpertsIN THE MAKING

25

than this amount, and third, that the application of
the rule of equality in the burden of taxation would
probably result in the ultimate ability of Germany
to pay more than the sixty billion marks, but the ad-
ditional amount was exceedingly indefinite. There-
fore, the Reparation Commission in subsequent
paragraphs was given the authority to provide for
further issues by way of acknowledgment and se-
curity, even beyond the aggregate of one hundred
billion marks, but they were forbidden to require
issuance of more than sixty billion marks until the
interest and sinking fund on that amount were fully
met. The Reparation Commission was also given
authority to extend the date or modify the form of
payments, but not to cancel any part of the indem-
nity fixed, except with the specific authority of all
the several powers represented on the Commission.

During the Peace Conference, there were theories
of methods other than the one adopted for fixing
the payments to be demanded from Germany that
were vigorously advocated.

The American Commission to negotiate peace had
organized a Division of Economics and Statistics
under the joint direction of Allyn A. Young, then a
professor of Cornell University, and Colonel Leon-
ard P. Ayres, then Chief of the Statistics Branch of
the General Staff of the United States Army, and
this Division submitted to this Commission, first a
document prepared by Mr. Paul Cravath, develop-
ing the conclusion that Germany could pay about
ten billion dollars in about twenty years, and ex-
pressing the opinion that the period of payments26

THE DAWES PLAN

ought to be restricted to about that time; and sec-
ond, a "Memorandum on Germany's Transferable
Assets." In this memorandum the argument was
made that the German assets available for repara-
tions were, first, such things as could be taken out
of the country, as gold, ships, railroad rolling stock,
cattle, coal, foreign securities, etc., and second, only
the excess of exports over imports. The income
from this latter source was computed to begin two
years after the signing of the peace and to be at the
rate of about five hundred million dollars or two
billion gold marks annually.

The total payments provided for under this plan
would have been about twelve billion dollars. It
was intended to cover the actual cost of the restora-
tion of property damaged in France, Belgium and
Italy and the losses at sea. At that time, the value
of property destroyed in France was computed to
be about six billion dollars, with an outside possi-
bility that it might reach ten billion dollars. This
estimate seems to be confirmed by the experience
of France in prosecuting her construction work,
for up to the first of January, 1924, when it was
officially estimated that the task was 62% complete,
the expenditures, without interest, amounted to
sixty-six billion francs, indicating a total cost of
about one hundred billion francs for the completed
reconstruction; and as the exchange value of the
franc averaged about eight cents during the period
of this reconstruction, the total actual expenditures
for reconstruction will be the equivalent of about
eight billion dollars.IN THE MAKING

27

When this "Memorandum on Germany's Trans-
ferable Assets" was submitted, it was found to be
far below the demands made by the representatives
of other countries, which were as high as sixty or
even one hundred twenty billion dollars. It ap-
peared in the discussions which followed that the
American economists were the only ones who gave
consideration to the principle that assets to be avail-
able for reparations must be transferable, and that
transferable assets could be acquired by Germany
for future payments only by exporting in the aggre-
gate more than it was obliged to import.

The Division was then asked to revise its figures
and to justify an estimate of a larger amount that
might be collected, and a second memorandum was
submitted, with a total of fifteen billion dollars
named as the amount which might be received, but
this addition was made by including the value of
public works in former German colonies, and the
ceded territories. The second memorandum suf-
fered the same fate as the first, and the amount
being so much smaller than the sums submitted by
the representatives of other countries, they were re-
quested to make a third effort. They succeeded by
including items which would represent a loss to
Germany, but no budget value to the recipients, in
naming the sum of eighteen and one-half billion dol-
lars, which was submitted, but with the warning on
the part of some of the members of the Division that
the figures had been "falsed" in the effort to in-
crease the estimate.

The estimates of Germany's capacity to pay made28

THE DAWES PLAN

in Mr. Keynes' book, The Economic Consequences
of the Peace, published several years later, followed
closely the same methods and reached almost the
same conclusions as the American Experts at the
Peace Conference. It is regrettable that arguments
and computations of the American experts did not
produce a greater effect at that time, and it would
appear that they were rejected not because of any
error discovered, but because it seemed more just
or more politic, or both, to base indemnities upon
equality of tax burden rather than upon the limit of
Germany's capacity to pay, and preferable to ex-
press the aggregate payable indefinitely. It is in-
teresting to recall not only that the idea of fixing
reparations upon capacity to pay was ably presented
at that time, but that Germany's capacity to pay
was measured as accurately then as it has ever been
since. That it was a deliberate decision is to be in-
ferred also from the statement of the German Gov-
ernment of May 29, 1919, from which the following
is an extract:

"Germany is prepared to make the payments in-
cumbent on her according to the program of Peace
agreed upon, up to the maximum amount of a hun-
dred milliard marks gold, namely twenty milliard
marks gold up to May 1, 1926, the remaining eighty
milliard marks gold afterward, by annual install-
ments bearing no interest. The principle is ac-
knowledged that these installments are to constitute
a definite percentage of the revenues of the German
Empire, and those of its federal states. The install-
ment will come nearly up to the budget of former
peace times. During the first ten years the install-IN THE MAKING	29

ments are not to exceed one milliard marks gold an-
nually. The German taxpayer is to be burdened no
less than the taxpayer of the most highly taxed state
represented on the Reparation Commission. In
conceding this, Germany acts upon the assumption
that she will have to make no further sacrifices of
territory beyond those mentioned and that she will
again be granted freedom of action at home and
abroad.''

The Reparation Commission, in April, 1921, an-
nounced the London Schedule. It provided for the
issue of:

"A" Bonds. Twelve billion gold marks to be de-
livered by July 1, 1921.

"B" Bonds. Thirty-eight billion gold marks to
be delivered by November 1, 1921.

These to be issued and delivered to the creditors
of Germany and to bear 5% interest and 1% for sink-
ing fund.

"C" Bonds. Eighty-two billion marks to be is-
sued only as and when the Commission is satisfied
that the payments which Germany is able to make
are sufficient to provide for the payment of interest
and sinking fund on such bonds.

Annual payments demanded of Germany were set
at two billion gold marks and 26% of the value of
German exports. The bonds to be issued uncondi-
tionally and distributed to Germany's creditors were
in the sum of fifty billion marks. Not more than
eighty-two billion additional bonds were ever to
be issued and none of these unless and until the pay-
ments of reparations collected from Germany from
year to year were in amounts sufficient to pay in-30

THE DAWES PLAN

terest and sinking fund of the bonds issued and to
be issued. Such a device could have no meaning
whatever as a definite fixing of reparation, except
as related to the method and effort of collecting an-
nual payments, and the method enjoined upon the
Commission was to establish the German scheme of
taxation upon a basis fully as heavy proportionately
as that of any of the powers represented on the
Commission. The taxation endured by other na-
tions seemed to them to be a satisfactory test of
capacity to pay. Should a similar burden rest upon
Germany, it was assumed the amounts to become
collectible would carry and ultimately discharge
fifty billion marks of bonds, and if more than neces-
sary for this purpose could be collected, then addi-
tional bonds would be issued but never to exceed in
the aggregate one hundred thirty-two billion marks.

The indemnity does not appear to have been fixed
at one hundred thirty-two billion marks; rather it
was an annual fixed payment, plus a variable an-
nuity, determined by the principle of equality of
taxation, and with the condition that the payment
of such annuities should never exceed the present
value of one hundred thirty-two billion marks.

At the Spa Conference, July, 1920, the division of
reparation receipts among the Allies was fixed as
follows: France 52%, Great Britain 22%, Italy 10%,
Belgium 8%, Greece, Koumania and Jugo-Slavia to-
gether 6i/2% and Japan and Portugal each %%.

The difficulties connected with the collection of
annual payments from Germany, whether in cash or
in goods,, required many conferences and created in-IN THE MAKING

31

creasing irritation, which culminated on January
11,1923, in the invasion of the Ruhr by French and
Belgian armed forces. During the latter part of
1922 and in January, 1923, there were many ex-
changes of views upon the general subject of an
abatement of reparation demands.

France agreed to accept her proportion of A
and B bonds already issued, that is 52% of fifty
billion marks, and such additional sums as she
would be required to pay on her inter-allied debts.
England proposed a moratorium for four years, a
payment of two billion gold marks annually for the
nest four years and two and one-half billion gold
marks for the following two years, and after ten
years, three and one-third billion gold marks, and
the creation of a Foreign Finance Council to deal
with such matters as the currency legislation, the
budget and the General Treasury administration,
and for the issuance of bonds; the obligation of
Germany to be evidenced by bonds, the first series
of fifty billion gold marks, 5% interest, but collec-
tion of interest to be suspended for four years and
in consideration of which a second issue of bonds
should be made in the sum of seventeen billion gold
marks, at 5% interest. Accompanying this was a
proposal for a partial cancellation of inter-allied
debts.

This proposal was not acceptable to France, Bel-
gium or Italy, and in the negotiations that followed,
the proposition of England has seemed to be that to
determine the capacity of Germany to pay is the
first requirement for settlement since it would be32

THE DAWES PLAN

foolish to expect to get more than Germany can pay.
France's position is that it is foolish to attempt to
fix again, and particularly now, what a nation like
Germany can pay over a period of fifty years. Each
seems to think its statement conclusive and to resent
the fact that it is not understood and accepted by
the other. In his letter of August 11, 1923, Curzon
says for England:

"It will not be contested that there can be no use
in demanding from Germany more than she is
capable of paying. What is the maximum she can
pay, is a question of supreme importance to all her
creditors. It is a question of establishing a fact, on
the ascertainment of which any political arrange-
ments or combinations for obtaining payment to the
fullest extent possible must be based."

And Poincare replies for France:

1 'The framers of the Peace Treaty rightly thought
that a country's capacity to pay was essentially
variable, that consequently a schedule of payments
ought to be itself capable of modification, and that
it would be for the Commission to take into account
the economical fluctuations, to postpone the dates
of payment when times were hard, and to advance
them when the situation became more favorable.
The idea of fixing once and for all Germany's ca-
pacity to pay never entered their heads. They could
never believe that cosmopolitan financiers, however
clever and experienced they might be, would be able
to foresee the future and draw definite conclusions
from uncertain and provisional data. They would
undoubtedly have been still more amazed if they had
been told that it was proposed to proceed to this
fixing of payment at the time when Germany hadIN THE MAKING

33

succeeded in arranging her own temporary bank-
ruptcy, thus reducing for some time her capacity of
payment to its lowest terms."

In May and June, 1923, the German Government
proposed to fix the total of indemnities at thirty
billion marks and suggested, as guarantees for the
payment of this amount, (1) the detachment of the
railway system of the Eeich to be held in separate
funds, obligations to be issued, having a first charge
on its earnings in the sum of ten billion gold marks
bearing 5% interest; (2) to secure the payment of a
further annual amount of five hundred million
marks by a direct mortgage on the entire business,
industry, banking, trade and traffic and agriculture
of the country, and all real estate; obligations to be
issued on these in the form of a first mortgage in
the sum of ten billion gold marks; and (3) a pledge
of customs duties and imports and excise taxes on
consumption of sugar, tobacco, beer, wine, etc., the
annual return from which was estimated at eight
hundred million marks.

These were some of the facts and conditions
brought to our attention in our reading and confer-
ences on board the boat. From our previous read-
ing of newspaper comments and discussions, we
realized that there seemed to be a general public
conviction that indemnities had been fixed definite-
ly at one hundred thirty-two billion marks and that
the first duty of the Committee would be to recog-
nize the impossibility of collecting any such sum and
to fix upon some more reasonable amount as the
basis of future adjustments. The gross burden of34

THE DAWES PLAN

indemnity charges laid on Germany, though more or
less indefinite, nevertheless seemed to be a factor
of the highest importance in connection with budg-
etary and currency adjustments.

But Mr. Young very early expressed the opinion
that the approach to this question could not be made
by reducing the aggregate charges against Germany
to an amount within Germany's capacity to pay
estimated at the present moment. It could never be
made to appear just and equitable to give to Ger-
many alone assurance that demands would never be
made upon her to such an extent as to jeopardize
her solvency, while other nations faced great diffi-
culties and great uncertainties as well. He felt that
France's ability to endure and survive was quite as
much to be considered as Germany's capacity to
pay, and that there was no advantage in saving
Germany if her salvation is to mean the destruction
of France. Some principle of justice and equity
must be laid down as the basis of any settlement
which the public opinion of the world could approve.
There was no appealing principle to be invoked to
support a policy of measuring the capacity of Ger-
many to pay and then extorting payments up to that
very limit. That might actually give to Germany a
great advantage over her creditors which would of-
fend a universal sense of justice, more especially by
reason of the fact that in the industrial competition
of the future, such an advantage might prove to be
more and more damaging to her competitors.
France, for instance, was certainly entitled to
equality of opportunity in the international indus-IN THE MAKING

35

trial competition of the future, and in order to as-
sure her and the other nations of this, there must
be some adjustment upon a basis of approximate
equality of the tax burden to be borne by all the na-
tions. And he was of the opinion that if Germany
were loaded with a burden no greater than her cred-
itors, she could reestablish her power of production;
and that the purchasing power of the world was in-
creasing so rapidly that its markets would absorb
the utmost production of Europe and America. But
it seemed impractical to him to discuss the fixing
of a definite charge against Germany on such a
basis as to enable her to discharge it without bear-
ing a burden of taxation equal to that of her com-
petitors. And in his opinion it would be practically
impossible, anyhow, to fix at this moment an
amount certain to be within her capacity for future
payments without that amount actually being far
below her ultimate capacity.

The present difficulty of making payments was
due to the low level of exports, which was only a
temporary condition. Outside payment could be
made only to the extent that there was a surplus of
exports over imports. But a disordered currency and
an unbalanced budget naturally checked production
and reduced the exports. If these things were cor-
rected, production would increase and with it ca-
pacity to pay and the capacity to pay could be
measured only by future experience. One thing was
certain, more would not be paid than could be paid.
He emphasized the importance of establishing con-
fidence and inspiring hope among the German36

THE DAWES PLAN

people. We all felt at the time that turning away
from the discussion of the definite obligation to be
fixed, and the measurement of capacity to pay based
upon the exportable surplus, and substituting for it
the principle of establishing equality in the burden
of taxation, would be introducing a novel idea to
which there might be some difficulty in converting
others.

But when we arrived in Paris we found that
others had reached the same conclusion by the same
reasoning, and none of them spoke of it as being the
rule of action laid down in the Treaty of Versailles.
It must have been the case that all of the members
of the Committee realized that a further discussion
of the problem which had engaged the attention of
the Reparation Commission and the premiers of
the various countries for the preceding twelve
months, would lead to no productive results unless
some novel approach could be found. The members
of the Committee would necessarily have to deal
with exactly the information that had, for so long
a time, been before the Reparation Commission,
without any conclusion having been reached. Upon
the contrary none of the inherent difficulties had
grown less with continued discussion, but had rather
become aggravated by pride of opinion and mutual
misunderstandings. The agreement to approach the
question by fixing a commensurate burden of taxa-
tion seemed to inject both the element of novelty
and a defensible moral principle. At any rate the
ready acquiescence of all of the members in this
principle established, at the outset, a common veiw-IN THE MAKING

37

point and a mutual understanding which persisted
throughout the entire conference.

At one of the conferences on the boat, General
Dawes gave us the outline of what he might say at
the opening meeting of the Committee. He will re-
fer to the crisis in the Great War, which brought all
the Allies to agreement upon the central command
under Foch, after four years of uncoordinated war-
fare. He will maintain that it is the pressure of
necessity alone that results in proper Allied co-
ordination, and that if the Committee succeeds in
devising a plan which is acceptable to the Repara-
tion Commission and the Allies, it will be only
because there now exists among the Allies a realiza-
tion of the common calamity which can be avoided
only by agreement upon a common and a common-
sense plan. We all thought it excellent, and he will
do it better on the day than he did it in the "dog
kennel" as he calls the conference room.

Paris, Tuesday, January 8, 1924.

Disembarking at eight o'clock Monday morning,
we left Cherbourg at twelve and reached Paris
after six o 'clock. All the newspaper men and many
old friends of General Dawes were there. Colonel
James A. Logan, the Unofficial Observer, was there
and spent the evening with Mr. Young and General
Dawes at the hotel. They discussed plans for avoid-
ing misstatements by newspapermen, and for meet-
ing so far as possible the necessity for getting out
some sort of news, under the pressure of which these
men work. They decided to issue only formal state-38

THE DAWES PLAN

ments, as far as possible. Colonel Logan is very
astute and diplomatic and an excellent adviser.

Poincare in supporting generally the national in-
terest has the support of all parties. The Treaty
must be upheld, the rights of France enforced, Ger-
many must be brought to realize the necessity of
complying with the terms of the Treaty, continuing
payments and ceasing their passive resistance. Who
could oppose such a policy? But his supporters are
divided; some think every effort should be exerted
to establish security and others think reparations
must be the chief object of their efforts. Different
policies are required to secure these respective ob-
jects. Then the Industrialists also form a strong
group. When Poincare turns from the general prin-
ciple of protecting national interests to a particular
policy, he will be opposed by one or more of these
groups. The emphasis laid upon "capacity to pay"
touches a sensitive nerve in Frenchmen now. They
think it is the enemies of France who stress this
question. The state of business, the falling franc,
and the abyss into which it may continue to fall,
creates apprehension that will make them anxious
indeed for a settlement.

In the afternoon General Dawes and Mr. Young
called in the newspaper men and handed them a
statement to the effect that they came over with
open minds and a sincere desire to be of service;
that they had given no interviews and would give
none except by formal statements and as to the con-
duct of the inquiry the only comment they had to
make was one which would doubtless express theIN THE MAKING

39

feeling of all the members, to wit: that time was the
essence of the value of this effort and the Commit-
tee ought to have continuous sessions.

General Dawes has made the first tentative draft
of his address and took me with him and Colonel
Logan this afternoon when he called upon Monsieur
Barthou to consult as to what ought to be included
and what omitted. Monsieur Barthou seemed to
be quite satisfied with the proposed speech, but sug-
gested that some reference ought to be made to Sec-
tion 234 of the Treaty of Versailles. The General
gave what at that moment appeared to me to be too
ready assent. It had seemed to us that too much
significance was attached to the mere willingness of
France to permit a study to be made of this whole
situation without limitation. When we came after-
ward to read carefully the procedure leading up to
this conference, we found, for the first time, that the
resolution providing for the Committee to investi-
gate the problems of currency stabilization and
budget balancing had a preamble to the effect that
this action was taken by the authority conferred in
Section 234. This section gives to the Reparation
Commission the right to alter times of payment but
not the aggregate amount of the total indemnity
fixed. Perhaps Monsieur Barthou had it in mind
that, with such a preamble, he could later claim that
the inquiries of the Committee must be held within
the same limitations as control the actions of the
Reparation Commission. (See Appendix I—Terms
of Reference.)

General Dawes was, therefore, right and very40 x THE DAWES PLAN

wise to give immediate assent to Monsieur Bar-
thou's request because he can comply with it merely
by reading the preamble and the resolution by
which the Committee was organized. To ignore the
preamble after his attention was called to it would
hardly seem defensible. The action of Sir Robert
Kindersley, in stating that his acceptance of the in-
vitation to serve upon the Committee was condi-
tioned upon his understanding that the Committee
had perfect freedom in making its inquiries, might
have the same sort of motive behind it. The motive
in both cases is probably precautionary. All parties
to the conference seem to enter it in good faith, de-
termined, if politically possible, to get results.

Tuesday, January 15,1924.

Yesterday was the first meeting of the Commit-
tee. It was called in the Hall of the Reparation
Commission, which was the dining-room of the Hotel
Astoria, the very room to which it was reported that
the Kaiser had invited his generals to join him at,
a triumphal dinner which he expected to give, at
Paris, in the fall of 1914. It was a formal setting.
Monsieur Barthou, President of the Reparation
Commission, opened the meeting. He said:

"Gentlemen: The Reparation Commission, in wel-
coming you to your official functions, desires both
to emphasize the importance of the task assigned to
you and to thank you for having accepted it, some
of you coming from so far, in a spirit of responsive-
ness and unselfishness which is universally ap-
preciated.Raymond PoincareIN THE MAKING

41

"We do not expect of yon the miracle of a sudden
solution of the reparation problem, but we confi-
dently hope that your competence, your experience
and your authority will contribute to hasten the re-
sults to which our efforts are directed. The Treaty
of Versailles is our charter, as it will be yours, and
it is within the framework of that Treaty, under
Article 234, that you will pursue your inquiry in full
independence and with signal impartiality.

"The balancing of the budget and the stabiliza-
tion of the currency which were closely connected,
are the preliminary and essential conditions for the
settling of reparation. We place at your disposal
the reports drawn up by our inter-allied services
and National Delegations, together with all docu-
ments you may require. You will be free to choose
your own procedure. Under the Treaty, Germany
is entitled to a just opportunity of being heard, and
you will hear her representatives in the manner you
may think most suitable. In the interest of all, we
earnestly hope that her government and administra-
tive services will facilitate your work, which is al-
ready so difficult and complex.

"Some solution must be found. It is not only
Germany and her creditors who are interested in
the reparation problem; it may be said without ex-
aggeration that the peace of the whole world de-
pends upon its settlement.

"Gentlemen, we ask you courageously to set to
work, to produce the opinions which the Commission
has unanimously demanded of you. Take your time,
but let it be no longer than is necessary. We expect42

THE DAWES PLAN

much of you. The whole Commission rejoices that
American citizens have come to cooperate with the
Allied experts; this will greatly reenforce the au-
thority of the Committee's findings.

"1 ask General Dawes, on behalf of the Repara-
tion Commission, to preside over your labors; his
well-known competence and that energy which is
known to legend, will help you to bring them to a
speedy and successful conclusion."

General Dawes said:

"Gentlemen of the Reparation Commission and
the Committee of Experts:—The difficulties in-
volved in the determination of Allied policy, both in
time of war and in time of peace, are little realized
by the average citizen in all countries. To him, it
seems strange that eventual common-sense agree-
ments, which, in times of emergency characterize
Allied policy, come about so slowly. He does not re-
alize the barriers which must first be beaten down,
erected by national pride and the pride and selfish
interest of different Allied officials) whose powers
are affected by any act of coercive inter-allied co-
ordination and the incessant misrepresentations and
intolerable interjections of those foul and carrion
loving vultures—the nationalistic demagogues of
all countries, who would exploit their pitiful person-
alities out of a common misfortune.

"Let me illustrate. Napoleon's sixty-fourth
maxim of war was 'Nothing in war is more impor-
tant than a central command—under one chief.' This
great principle was realized and accepted at the
beginning of the war by all the military authoritiesIN THE MAKING

43

of the world, and yet, after nearly four years of
warfare, and the unnecessary loss of tens of thou-
sands of lives and hundreds of millions in material
wealth, the German Army, on March 21,1918, struck
at the junction of the British and French Armies
and broke through because of the lack of a central
command controlling the proper disposition of re-
serves. The British Army was forced back upon its
own line of communications toward the channel
ports and the French Army was forced back upon
its own line of communications toward Paris and a
gap was opened. Then it was that the Allies, facing
the abyss, yielded a part of their sovereign power
for the time being to the Central Command under
Foch, which paved the way to Allied victory.

"What brought complete Allied cooperation in
time of war? Nothing but overwhelming emergency.
And when victory came and the Treaty of Ver-
sailles was signed, what again have we seen but
those same natural forces and immutable laws of
human nature 4which prevented an earlier agree-
ment upon a central allied command in time of war,
operating to prevent a common allied plan in time
of peace.

"What is the question of to-day! Upon what does
the success of this Committee depend? Upon power
of persuasion? Primarily, no. Upon honesty and
ability? Primarily, no. It depends chiefly upon
whether, in the public mind and conscience of the
Allies and of the world, there is an adequate con-
ception of the great disaster which faces each Ally
and Europe unless common sense is crowned King.44	THE DAWES PLAN

"Does this conception exist? We do not know,
but we shall know. To this knowledge of whether
this conception exists, the results of our work and
the actions of the Reparation Commission thereon
will perhaps be the final contribution. As an Amer-
ican citizen, invited to this place by the Reparation
Commission, I can speak neither for the government
of the United States nor for the American people,
but as an individual, I can say that I have read, in
shame and humiliation, the outpourings of the
American nationalistic demagogues who undertake
to lecture Europe in order to lift themselves into
some petty office or maintain political popularity.
Surely I have as much right as they to express my
individual opinion of the attitisde'lield by the great
inarticulate mind and conscience of my people. Mr.
Young and I will endeavor to express it in our ac-
tions upon this Committee. We come, humble in
opinion, knowing that there is no barrier against the
acquiring of knowledge like the pride of precon-
ceived opinion. We come, knowing that you know
much more about your own affairs than we do. We
come, realizing the sacrifices which you have made
for the victory to which our people also contributed,
and of which we share the benefits. We know that
thirteen hundred and eighty-five thousand of the
flower of France's youth, nine hundred and forty-
six thousand of Great Britain's youth, four hundred
and sixty thousand of Italy's youth, forty thousand
of Belgium's youth, and one hundred and twenty-
seven thousand of Serbia's youth, together with the
precious bodies of our own American youth, lieIN THE MAKING

45

buried close together here, across the sea. We know
that from their sacrifice has come the great desire
on the part of all peoples to make it worth while for
their sakes, as well as for those who now live and
are to live hereafter in the world.

"We come, only wanting to be helpful to you,
who, with superior knowledge and longer experi-
ence, will take the initiative in the search for a
common-sense agreement.

"We come, determined that nothing shall prevent
our full usefulness if we have any, to you, in a work
which is yours.

"In the last war, I was the Chief of Supply Pro-
curement for the American Expeditionary Forces,
under command of General Pershing. In the van-
guard of our army I came with empty hands. Our
great commander, General Pershing, at the date of
our entry into the war, was faced with the necessity
of building a line of communication and the other
installations which would care for his eventual
army. During the first seven months from the time
we landed in France, there were shipped to us from
America, only three hundred and fifty-seven thou-
sand ship tons of supplies, and yet, when the Amer-
ican Army sailed back to the United States, it had
required over seventeen million tons, of which ten
million had been furnished chiefly by France and
Great Britain, already stripped of resources by
three years of devastating warfare. When we came,
we stood empty-handed, reaching to our friends for
needed supplies. You may be sure we did not start
to tell our Allies what great men we were and how46

THE DAWES PLAN

much we knew. At their feet, humble in opinion, out
of their larger experience, we tried to learn the les-
sons of war emergency. Great Britain furnished us
ships to transport the bulk of our troops. We fired
only French ammunition from French guns; our ar-
tillery was carried into action by French horses;
we flew French aeroplanes; at the beginning it was
the Belgian locomotives which carried our mate-
rials. Italy furnished us men to work upon our
lines of communication. All of our Allies, from
their depleted stocks, helped us with a generosity,
to express gratification for which I find no ade-
quate terms, but there was one supply in which our
great government did not fail, and that was in the
supply of two million splendid men, who, under
General Pershing, marched and fought with your
heroic troops in the final great and victorious
struggle.

"With these memories of old associations, is it
surprising that I feel as if I had come among
friends? With the confidence and belief in each
other which we had during the war and the love
which has come from past associations in common
difficulties; with the belief that, in the Providence
of God, humanity is facing brighter days, and with
the prayer that however little, as individuals, may
be our contribution to better things, it will be all we
have, let us approach our common work.

' 'Now let us consider for a minute the situation here
as it is confronted by two American business men,
who, some three weeks ago, were invited by the Rep-
aration Commission to give it detailed attention inIN THE MAKING

47

connection with the proposed work which we start
to-day. Like other citizens of our own and other
countries, our information consisted of what we had
read in the newspapers and gained from conversa-
tion with others presumably better informed. We
had seen the Allies finally, really united under a
single command, obtain a military victory which we
had supposed was the precursor of a better world.
For five years since that time and the signing of the
Treaty of Versailles, we had seen the Allies losing
the unity of understanding which is always essen-
tial to real peace and progress. We had come to
know—in common with the citizens of all nations—
that at last that lack of power to agree upon a com-
mon attitude and common action, had brought all
Europe to a more critical and dangerous situation.

"Finding ourselves, then, as two American citi-
zens thus suddenly called by the Reparation Com-
mission, we devoted ourselves to making our own
diagnosis of our environment with the advantage—
if it may be called such—of access to expert infor-
mation.

"This is no time to mince words. What to-day,
at the inception of the work of this Committee, have
we found? In the first place we see an impenetrable
and colossal fog-bank of economic opinions, based
upon premises of facts which have changed so rapid-
ly as to have made the bulk of them worthless even
if they were in agreement. With all due respect to
the great ability of those experts who have wan-
dered through this gloomy labyrinth, they could not
have failed to come out in opposite directions. They48

THE DAWES PLAN

were confronted with the necessity of finding stable
conclusions when no conditions were stable. If, in
their computations, designed to clarify the mind,
they dealt with the mark, the next week the mark
was something else; if they dealt with the dollar,
the pound, the French or Belgian franc or the
Italian lira, there was one value in exchange for
each and another in internal purchasing power; if
they dealt with gold, there were values in pre-war
gold and post-war gold to be considered. In gen-
eral, we failed to find much value in economic argu-
ments based on what ought to be instead of on what
is—based, in other words on a constantly changing
status quo.

"In the meantime, while these immense libraries,
for they can be called by no other name, of legal
arguments, of more or less obsolete statistics and of
economic discussion, were being laboriously com-
piled for five years, the foundations of economic
Germany have well-nigh crumbled and with them,
the productivity of Germany. Again, as the world
has seen the economic life of Germany ebbing away,
the credit of all the European Allies has felt a pre-
liminary shock, because the world realizes that if
the German people lose their capacity to work, Ger-
many loses the capacity to pay these reparations
which are so great an element in European solvency.

"It would seem that the situation, as it has de-
veloped in the minds of your American members of
this Committee, must have been regarded in much
the same way by the Reparation Commission, to
whom this Committee of practical men, free fromIN THE MAKING

49

political pressure, owes its creation. Realizing that
the house was afire, they proposed to find some
water to put it out, without the further use of
mathematics involving the fourth dimension.

"By their instructions, they enable us to start our
work on the basis of a status quo. We are not asked
to determine the legality of the occupation of the
Ruhr; we are not asked to declare the political ef-
fects of this or that prospective act of common
sense; we are not asked to give our opinion upon
those things which politicians of all countries have
interjected into a situation which primarily de-
mands, for its proper consideration, business minds,
uninfluenced by political ambition or thought of per-
sonal consequences. Upon our report to the Rep-
aration Commission of a plan for the stabilization
of Germany's currency and the balancing of the
German budget, it is for them, not for us, to be con-
cerned with political effects.

i' The more I have talked with those here who are
nearest the situation, the more do I realize the great
wisdom which the Reparation Commission has
shown in defining the purpose of our convocation:
'In order to consider, in accordance with the provi-
sions of Article 234 of the Treaty of Versailles, the
resources and capacity of Germany' we are 'en-
trusted with considering the means of balancing the
budget and the measures to be taken to stabilize the
currency.' If, without fear or favor, we suggest a
plan for the stabilization of German currency and
the balancing of the German budget, which the Rep-
aration Commission deems fit to ratify, we will at50

THE DAWES PLAN

least have done this: we will have suggested that
which has enabled the Reparation Commission to
start Germany toward productivity; and the rees-
tablishment of German productivity is the starting
point of European prosperity.

"As the economic processes of Germany under a
stable currency and with a balanced budget are re-
vived, there will be demonstrated the capacity of
Germany to pay. Basic and controlling facts will
then first appear.

"Any common-sense individual can estimate the
distance a well man can run. Fifty medical experts,
gathered at the bedside of a dying patient, will give
fifty different estimates of how far he can run if
he gets well. The Reparation Commission and the
world, upon the question of Germany's capacity to
pay, have thus far been listening to the medical ex-
perts. Let us first help Germany to get well.

"Now that we are members of a Committee hav-
ing a definite and authoritatively defined object in
view, we are less concerned, for the moment, with
the present capacity of Germany to pay, than with
the present capacity and courage of this Committee
to act.

"What is the use of deferring plain statement on
this Committee ? Why waste time in formalities and
meaningless courtesies and conventionalities? Let
us make, thus early, one practical suggestion:

"Under President Harding, I established the sys-
tem of executive control set up by executive order
under which the first budget of the United States
was prepared, in accordance with our recent budgetIN THE MAKING

51

legislation. I hesitate to call myself an expert on
budget matters, lest I put my reputation for com-
mon sense under suspicion; but how could any one,
expert or non-expert, suggest anything worth while
about a German budget if the money collected
through taxes and disbursed under the budget would
not buy or pay for anything?

. "The first step which we should take, it seems to
me, is to devise a system for stabilizing Germany's
currency, so that we can get some water to run
through the budget mill. Let us build the mill after
we find the stream to turn its wheels."CHAPTER II

early meetings—points of agreement—organiza-
tion banking and budget committees—doctor
schacht's appearance and address—announcement
of banking plan and berlin visit—exportable sur-
plus-equality of tax burden and creation of

internal credit-its payment abroad-english

bank reports—effect of international payments
on countries receiving them—the necessities of
france—its reconstruction work in relation to
reparation payments—progress toward agreements.

Paris, January 15,1924.

The Committee met again in the afternoon and
proceeded at once to discuss the main features of
its problem. There seemed to be no hesitation on
the part of any of them in meeting squarely any
question that was presented, and there was at the
very outset a general acceptance of the opinion ex-
pressed by Mr. Young that as nearly as it could be
determined, a debt service charge ought to rest upon
the people of Germany, such as to produce a taxa-
tion burden equal, all things being considered, to the
burden resting upon the other nations, both to satis-
fy a universal sense of justice and to tend toward
establishing equality in the competitive industrial
conditions of the future.

There was agreement also that the first task

52THE DAWES PLAN

53

to be undertaken was to discover the means to
furnish a sound and stable currency and that this
was very urgent; that the balancing of the budget
would be comparatively easy, once stabilization be
accomplished and that in the meantime it was im-
portant that the Rentenmark be sustained; that a
new bank ought to be organized under the control
of men to be selected outside of, as well as from
within, Germany and that the chief function of this
bank would be to issue its notes, secured by gold re-
serves, to be used as the circulating currency of
Germany; that the capital for such a bank could be
secured from subscription partly from citizens of
other nations and partly from German Nationals,
and that by this means there might be accomplished
a recovery of capital belonging to Germans and now
in foreign hands, or hidden within Germany; and
that with a stabilized currency the budget could be
readily balanced by means of an international loan
of moderate amount,

Paris, January 21,1924.

The reaction from the opening address seems ex-
cellent. Hundreds of newspaper clippings are laid
on our desks and all comments are very favorable.
Among public men and business men of France the
feeling is that it gives great encouragement and
hope as to the outcome of the conference. The Eng-
lish papers commend it and the reports are that it
was well received in America.

Notwithstanding the inter-relationship of the two
questions submitted and the early decision that they54

THE DAWES PLAN

must be treated as one, the Committee for the con-
venient distribution of the work organized a Bank
Committee of which Mr. Young was made Chairman
and a Budget Committee of which Sir Josiah Stamp
was the Chairman.

Having learned that Doctor Schacht, the new
President of the Reichsbank, was seeking capital in
Holland and England, with fair prospects of suc-
cess, for the organization of a new German bank of
issue, the Committee invited him to Paris to explain
from his view-point the conditions in Germany and
his plans for the creation of a bank to provide cur-
rency. His first appearance before the Committee
was on Saturday, January nineteenth. What he
said to the Committee was imperfectly reported, but
is so vital to an understanding of the problem that
it seems advisable to include the gist of his address,
though it is probably unfair to him, for his state-
ment was of such a quality as to win the admiration
of the Committee, and this report hardly does him
justice.

He stated that when the United States entered the
war, the dollar was quoted at six marks. Inflation
continued during the war. Certain people believed
that inflation was the only means of avoiding un-
employment, but this was true only as long as the
workers were deceived by the very high paper rates,
for the real wages were in fact very low. When it
became impossible to foresee the value which a sum
received in the morning would have the following
evening, inflation had to cease. This point was
reached in July-August, 1923. The governmentSib Josiah C. Stamp
English Member First Committee of ExpertsIN THE MAKING

55

issued in August a so-called Gold Loan: five hun-
dred million marks were offered and one hundred
sixty-four million were sold. This loan had no real
guarantees and some of the small denominations
were still in circulation.

In addition large quantities of emergency cur-
rency had been issued, so-called "Notgeld" by all
sorts of private and semi-private persons, chambers
of commerce and corporations. Some of the per-
sons and companies issuing "Notgeld" might pos-
sess foreign currency money as security, but there
was no guaranty that this was the case. This "Not-
geld" was circulating at its face value, based on
paper marks. The Eailway Administration which
was now separated from the general budget, had
been forced to issue paper marks. Unfortunately
up till this time the Beichsbank had accepted "Not-
geld" at its counters and every one printing "Not-
geld" was increasing the circulation of paper
marks. The Reichsbank had to accept this currency
as no other was available, but this practise had
ceased by the end of 1923.

The amount of currency in circulation in Germany
before the war amounted to some six billion marks.
Deducting even 10% for the territorial losses of the
Reich, about five and four-tenths billions remain.
Taking into consideration the fact that all prices in
gold had increased by 70 or 80%, the sum actually
available was insufficient.*

*Note:—The gold mark value of the strictly legal tender in
circulation in Germany, exclusive of emergency money, as fur-
nished by the German Government January, 1924, is shown in
the following table:56

THE DAWES PLAN

Doctor Scliacht had suggested a gold loan secured
by real gold revenues which were to be procured by
taxes payable in gold exchange, for example a 2y2%
turnover tax, on all commercial undertakings in
foreign trade. As these transactions were carried
on in terms of foreign currency, the taxes could
easily be collected in foreign currencies and a real
gold loan would have resulted, with gold income
sufficient to meet interest payments. His sug-
gested plan was not adopted.

A bank known as the Rentenbank was formed ,
which was not in the true sense of the word a bank,
but rather an Administrative office. Every prop-
erty holder was charged with a mortgage of 4% on
his total assets. In case of real property this charge
was a first mortgage. Owners of movable property
had to sign a bond stating that their assets were
charged with an obligation of 4%. The total fixed
and movable assets were upon the basis of 1912 val-
uation estimated to be of a value of eighty billion
gold marks upon which 4% would be thirty-two hun-
dred million gold marks. This mortgage was to be
treated as security for the issuance of notes of the
Rentenbank (known as Rentenmarks), which were

1913

1920

1921
June, 1922
July, 1922
Dec. 1922

In Millions

6,670	February,

4,925.4	April,

4.350.1	May,

2.723.2	August,
1,730.0	December,

716.5

1923........ 513.3

1923........1,133.7

1923........ 761.2

1923........ 607.6

1923........ 496.6

In January, 1924, the total gold mark value of circulating
currencies in Germany, including the Rentenmark and other
non-legal-tender money was about twenty-nine hundred million
marks gold value.IN THE MAKING

57

the equivalent of the gold marks. The Rentenmarks
issued by the Rentenbank were distributed as fol-
lows: eight hundred millions set aside as reserve;
twelve hundred millions issued to Reich, (nine hun-
dred at 6% interest and three hundred at no inter-
est) ; and twelve hundred millions were to be issued
to commerce, industry and agriculture at rates to be
fixed later. The nine hundred millions issued to the
Reich at 6% were intended to be used to cover the
deficit up to April first. Of the twelve hundred
millions set aside for commerce, industry and agri-
culture, he thought this might be soon exhausted as
much credit was now required.

By the middle of November, inflation had pro-
ceeded so far that all calculations were made in
gold. The government entered into the foreign ex-
change market but without altering the downward
tendency—the dollar was then quoted at from three
hundred eighty to four hundred twenty billion
marks. Since the organization of the Rentenbank,
the Reich had not borrowed from the Reichsbank.
The total amount due from the government to the
Reichsbank was one hundred ninety-one trillion
marks. The three hundred million Rentenmarks is-
sued to the Reich, without interest, were intended to
redeem this sum. At the rate of three hundred
eighty billion marks to the dollar, these three hun-
dred million would not be sufficient, and Doctor
Schacht had thought it right to raise the dollar
quotation to something nearer the international
parity ruling on other Bourses. In six days he
brought up the dollar rate to four trillion two hun-58

THE DAWES PLAN

dred billion marks, and as 4.2 gold marks were
worth one dollar, one billion (our trillion) paper
marks were worth one gold mark and the relation
between gold marks and paper marks was estab-
lished. There were, therefore, the following cur-
rencies in circulation:

(1)	The gold marks of the gold loan.

(2)	The Rentenmarks.

(3)	Paper marks at the rate of one trillion to

the gold mark.

Of these the paper marks were legal tender.

German Nationals owned a certain amount of
foreign currency, partly inside and partly outside
of the country, which ought to be employed, if not
in use now, for purchase of raw materials. The only
way to secure these sums was by showing that they
could be profitably employed. Confidence must be
established. Doctor Schacht wished to establish a
bank to acquire and use such funds, and upon such
a basis as to gain the confidence of those who con-
trolled them. He wished to establish the bank in
Berlin and to have it connected in some way with
the Reichsbank, though it would naturally have to
be a separate organization. Its capital would be
furnished by public subscription either in Germany
or abroad, and he wished it to have foreign trustees,
and would suggest the Swiss National Bank,
through which German Nationals might subscribe
to the stock of the bank without having their names
published. Further capital might be paid in gold,
or any foreign currencies on a gold basis. All such
sums would be deposited with trustees outside ofIN THE MAKING

59

Germany and would be employed in Germany either
in opening credits or for issuing notes. The assets
of the bank would consist of notes, gold, gold ex-
change and paid up deposits outside of Germany
and neither the German nor any other government
could touch them. Doctor Schacht was aware of
the fact that the notes of such a bank would not be
currency, since it would have no connection with the
government. He did not see how a good govern-
ment currency could be obtained unless the budget
were balanced, the reparation problem solved, and
a favorable balance of trade established, but money
must be obtained immediately to meet the demands
of commerce.

Doctor Schacht stated that his plan was not a
permanent solution, but merely a scheme to restore
confidence and to prepare the way in a few years
to the return to a real gold basis. He naturally
could have only an idea as to the amount of foreign
currencies in the hands of German Nationals. The
Swiss National Bank had informed him that in its
opinion about one hundred fifty to two hundred mil-
lion Swiss francs were held by German Nationals
in Germany, and Mr. Vissering considered that
about three hundred million Dutch florins were so
held. Adding pounds sterling and dollars, Doctor
Schacht thought some one billion gold marks of
foreign notes were in the hands of German Nation-
als in Germany. The percentage of these sums
which could be attracted by his proposal would nat-
urally depend on the confidence with which it in-
spired the public. He hoped that some 60 to 80%60

THE DAWES PLAN

would be available. He thought that at first more
would be forthcoming from outside Germany, and
that later the notes in Germany would be attracted.

All the schemes that he had seen, such as the
Hirsch plan, were on the same lines as his own, and
did not provide for a permanent currency. He had
seen no other schemes which proposed to set up a
stable gold currency before the reparation question
was settled. His scheme was generally accepted in
Germany.

About two hundred million Rentenmarks sufficed
to redeem the Reich's debt to the Reichsbank. It
was easy to sell Rentenmarks for paper marks and
to redeem the debt. The reason it had been possible
to maintain stabilization was that the people were
forced to sell foreign credits and currencies and
owing to the reduction in the total purchasing pow-
er of paper marks, it was difficult to secure legal
tender. The Rentenmark came into circulation late
in November through payments to government em-
ployees and those of large companies. During the
last few weeks large amounts of foreign credits had
been sold, owing to the scarcity of currency and
credit. This could not continue and credit for com-
merce must be secured, or stabilization could not be
maintained. During the last few weeks the people
had been in good temper and money values were se-
cure, but production was halted. When all the
Rentenmarks were used up, it would be necessary to
give paper mark credits and invite the danger of
fresh inflation and the fall of both the Rentenmark
and the paper mark. Germany was in absolute needIN THE MAKING

61

of credit to buy raw material abroad. Figures for
the last few months showed an excess of exports
over imports. This probably indicated an inability
to finance the purchase of imported raw materials
and the exhaustion of her stocks. A fall in the value
of the Eentenmark was to be expected.

Industry and commerce were in a deplorable con-
dition. Only twelve hundred million Eentenmarks
were available and paper credits could not be in-
creased since that would destroy the value of the pa-
per marks and Eentenmarks. Moreover the Eenten-
mark could not be used outside of Germany. Industry
in Germany could make a fresh start with existing
equipment but it lacked working capital. In agri-
culture there was danger that the farmers would not
be able to sow. He wished with all his heart the
Committee might discover a solution, but he also
hoped that it would do nothing to interfere with his
scheme, and would even afford it moral support.

January 23,1924.

The condensed statement of the points of agree-
ment existing between the members of the Commit-
tee at its meeting did not indicate by any means the
scope of their discussion. In all essential matters
they had outlined the same plan for the organiza-
tion of a bank as was in the mind of Doctor Schacht,
the chief differences being the wider scope of the
Committee's plan and the matter of control, which
of course was vital. Doctor Schacht appeared be-
fore the Committee again on Monday and was close-
ly questioned in great detail as to all the conditions62

THE DAWES PLAN

and theories bearing upon the subject. At this time
it appeared that he intended to proceed to organize
a bank and that his conception of the urgency of the
situation or his desire to have the bank in all re-
spects according to his own plans might lead him to
act without regard to the action of the Committee.

When this became known, there was presented a
question to the members of the Committee—should
they announce their plan for the organization of
the bank or let Doctor Schacht announce it as his
plan? If it were Schacht's plan, it might have less
chance of success because of the lack of confidence
abroad; or at least there would be more support
abroad, of a plan announced by the Committee.
Moreover, the Committee would secure great pres-
tige at this particular time by announcing the plan
as its own. This was done and the announcement
appeared in the morning papers in the following
words:

"The Committee have reached the opinion that an
independent gold bank should be established in Ger-
many, partly by mobilizing some part of the free
reserves of gold and foreign currencies, which may
exist in the hands of German Nationals, and which
at present discharge no economic function, and
partly by cooperation of foreign capital. In their
view such a step will form part of the ultimate plan
to secure future budget equilibrium and stable cur-
rency. In this connection, the Committee think that
some of the features of the plan outlined before
them by Doctor Schacht will prove, in due course, to
be very useful, and they were glad to have the ad-
vantage of his views as a part of the whole field of
possible or alternative action to be reviewed. TheIN THE MAKING

63

President of the Committee, has, therefore, empha-
sized the need of allied unification in a program.
The Committee are convinced that foreign coopera-
tion in the management of such a bank is similarly-
desirable for ultimate success."

At the same time it was announced that the Com-
mittee would meet in Berlin on January thirtieth to
consider the formulation of a definite plan. This
incident served to bring the Committee to a deci-
sion promptly on an important matter and to put
them in a position in which they must agree, and
very quickly, on the details of the bank's organiza-
tion. It promises well for the early completion of
the work.

It was Mr. Young who suspected from some of
Doctor Schacht's expressions that it was his inten-
tion to begin immediately the work of organizing
the bank and who opened the discussion as to
whether the Committee ought to sit by and let this
be done. If Schacht could have organized his bank
immediately on a solid basis, it would carry Ger-
many over the crisis, which all seem to think is
impending. Only to-day there appeared in the news-
papers an interview with Luther, the Finance Min-
ister of Germany, in which he is reported to have
said that if Germany could not for a time at least be
relieved of the payment of the cost of the army of
occupation, it would fall so far behind in the rev-
enues of the government as to bring about in-
evitably the fall of the Rentenmark. What can he
mean except that it is the intention to inflate the
Eentenmark whenever the shortage of government64

THE DAWES PLAN

revenues seems to demand it? Such items of news
as this make one feel that it is a matter of supreme
importance, involving the welfare of a nation and of
the world and affecting also the comfort and even
the lives of thousands of innocent people, that the
new bank should be formed, and made to operate
quickly so as to prevent the collapse of the Renten-
mark.

Upon the other hand, can the new bank be estab-
lished upon such a basis as to secure the confidence
of the world if all control over its operations be left
entirely to Germans? Will not the fear that the
government would require an overissue of currency
to meet the government's need for revenue, be felt
abroad? It is almost as important to establish con-
fidence outside of Germany in its ability to rebuild
itself, as it is to reestablish faith and confidence
among its own people. It is important also for this
Committee to succeed and it can not afford to lose
the initiative now. It is to be hoped that a way will
be found to put into effect quickly whatever plan it
forms.

Before leaving for Berlin the Committee had for-
mulated its first tentative plan as follows:

SCHEME FOB THE CONSTITUTION OF THE
GOLD BANK

(1)	To establish German currency on a gold basis
and to put an end to inflation.

(2)	Paper marks would remain in circulation and
for the moment no effort would be made to replace
them entirely by notes of the new bank.

(3)	The new bank controlling the note issue, theIN THE MAKING

65

ratio of the paper mark to the gold mark should be
fixed at a trillion to one. The new bank to facilitate
the liquidation of the Reichsbank by providing in
exchange for the four hundred millions which rep-
resented its reserve notes of the bank. This liquida-
tion would take place on behalf of the Reichsbank
but under the control of the new bank, which would
remit to the Reichsbank shares in the new bank to
an amount equivalent to the excess of its assets.

(4)	The liquid capital of the new bank should be at
least four hundred million gold marks.

(5)	This capital might be subscribed half in Ger-
many and half abroad.

(6)	The new bank could be entirely independent of
all political power. Its Board of Directors should
be composed half of Germans and half of foreign-
ers; the Chairman should be a foreigner and have
a casting vote.

(7)	The new bank should alone have the privilege
of issuing notes to the exclusion of the Reich, the
states, the communes and any public or private
personality. The bank would be forbidden to lend
money to the state or to any of its administrative
branches.

" (8) The bank would be divided into two depart-
ments: the issue department whose seat should be
abroad in a neutral country and the bank depart-
ment whose seat should be in Germany. The issue
department would be placed under the supervision
of a Board of Controllers, instructed to insure that
at no moment should any notes be issued in favor
of any political power whatsoever.

(9) A state law should be passed laying down se-
vere penalties for any controller who had failed in
his duty as outlined above as well as any person
who might have given false information to the con-
trollers or persons delegated by them.

So far as our experts are concerned—meaning the66	THE DAWES PLAN

Staff of Experts—I think they would be glad to
suggest some amendments, particularly to Section
8, providing for a division into a banking depart-
ment and a department of issue. I think they would
prefer some other adjustment to guard against the
overissue of currency in order to meet the necessi-
ties of the fiscal balance.

The question as to whether it would be possible to
stabilize the currency without balancing the budget
emphazises immediately the necessity of a bank in-
dependent of government control and to be managed
by business men, some from Germany and some
from foreign countries. A government whose rev-
enues are insufficient will issue more money, or if
it controls a bank will have the bank issue more
money. Assuming that a new currency be estab-
lished and that the quantities of it emitted are just
sufficient to meet the demands of commerce and
establish a range of prices approximately the same
as price levels in other countries, then to increase
the volume of that currency merely to meet a def-
icit in the revenue of the government is to debase
the value of money. It purchases less within the
country than before. If it is exchangeable for any
other form of money, gold for instance, it is ex-
changed and purchases are made outside the coun-
try and the poor money drives out the gold at home.
If it is not exchangeable, it falls until like the late
lamented mark, it has practically no value. This se-
ries of events will occur whenever too much cur-
rency is issued. Therefore, the control over the
amount to be issued must be with the bank, whichDoctor H. Schacht
President ReiehsbankIN THE MAKING

67

will issue it only as the demands of trade require it.
The government would issue it chiefly to meet its
own needs. When the government needs money, it
ought to borrow it; it ought not to "make it."
Banks should issue the notes on banking principles
and in accordance with the requirements of business
and without any regard to the financial necessities
of the government for income. The government
should meet its deficit, if such occur, by borrow-
ing in the open market. In the case of Germany,
the bank must not be in any way responsible for
fiscal deficits and measures must be taken to safe-
guard its interests even if the government collapses.
This is not likely to happen, for assuming a stable
currency, there ought to be no difficulty in raising
sufficient money to sustain the government, repara-
tion payment for the moment being disregarded.

In considering the conditions under which the cur-
rency should be issued, it seems impossible to fix at
the outset exactly what percentage of reserves to
currency ought to be established, at least with preci-
sion, until more facts are developed, but Mr. Davis
has pointed out that a large reserve in foreign credits
may be accumulated by a new bank of issue, through
its business transactions, in addition to the funds
subscribed by the stockholders. For instance, the
capital of the Austrian Bank was thirty million gold
crowns, or three hundred eighty-five billion paper
crowns. The note circulation at its first statement
on January 7, 1923, was four thousand fifty-four
billion paper crowns. The reserve was at this same
date one thousand one hundred ninety-five billion68

THE DAWES PLAN

paper crowns or 29% of its circulation. This
reserve consisted of approximately fifty billion
paper crowns in gold, and one thousand one hun-
dred forty-five billion paper crowns in foreign
exchange of various kinds. The amount of capital
was, even at this time—seven days after the
bank was opened—less than one-third of the reserve
in gold assets, but on November 7, 1923, the note
circulation was six thousand four hundred ten bil-
lion paper crowns, 50% larger than on January sev-
enth. The resei've had increased to three thousand
four hundred eighty-one billion paper crowns or
more than 50% of the circulation. The reserve at
this time was nine times the capital.

There is also recognized the necessity of estab-
lishing a unified currency, and that in the future
there should be one bank of issue, and only one,
which should be given the power, and be charged with
the duty of fixing a definite relative value to all the
forms of currency that are to be kept in circulation.

These are some but by no means all of the impor-
tant matters to be considered in organizing a bank
of issue. Such a bank would deal through other
banks very largely, in placing loans, receiving the
guaranty of the bank through which the loan was
placed, but at the same time have the right to enter
into the so-called "open market" for money—thus
to keep a certain control over interest rates and the
flow of credit.

Such matters are recorded to give a general idea
of how these discussions ramify. We do not have
the advantage of attending the Committee's meet-IN THE MAKING

69

ings. It really is a Committee of Experts. Nearly
all of its members have been making a deep study
of these questions for five years. They have es-
tablished mutual confidences and they are very
rapidly approaching agreement on some of the im-
portant aspects of the problem. This agreement
comprises in the most general manner the fixing of
an equal tax burden as the basis of settlement, and
the stabilization of the currency through a bank of
issue. Assuming these conditions, there is to be
anticipated a surplus of revenue beyond the actual
needs of Germany for its own interior administra-
tion and this presents the problem of transferring
this surplus into foreign payments or shipments
upon reparation account.

Gold could not be shipped beyond the territorial
limits of a nation without depleting that nation's
supply, and the total quantities of gold in the world
are less than the amounts involved in these interna-
tional obligations. Money as represented by cur-
rency and credits, has its function as a medium of
exchange and measure of values, only within the
country itself. Paper francs and marks have no
value in our country except in limited amounts to be
used for the purchase of French or German goods.
They can be useful only by exchanging them for
foreign goods. The only method by which credits
can be created in a foreign country, is, in the last
analysis, by the delivery of goods or services in that
country. If by taxation, an internal surplus in Ger-
many were created, there would still remain the
problem of transferring that surplus. Should70	THE DAWES PLAN

checks upon the account be made without regard to
other conditions, these checks would have to be paid
in gold or by the transfer of foreign credits, and
both would soon be exhausted unless the supply of
them were continuously increased; and they could
be increased only by the exportation of goods.
Enough goods must be exported, first, to provide
the credit to buy from abroad such materials as are
needed to support the population and, second, to
supply the raw material for manufacturing the ex-
portable goods; only the surplus remainijig after
meeting these demands can be transferred in the
form of money or credits abroad, without exhaust-
ing the reserves of foreign credits and the domestic
supply of gold and thereby depreciating domestic
currency and lessening the power to make further
purchases abroad of even the raw materials neces-
sary to continued production. There must be a sur-
plus of exports, visible and invisible, consisting of
goods and services of every kind over the imports
of every kind necessary to sustain life and support
industry in any country, before that country can
make investments or payments abroad. It is in the
end this exportable surplus that measures the
capacity of a country to make annual payments
abroad.

It is the exportable surplus that makes payments
possible. But what makes exportable surplus? It
is in part that condition of affairs which makes men
contented and ambitious and eager to throw them-
selves into organized work for production. To give
to Germany a more definite statement of its obliga-IN THE MAKING

71"

tions and some control over the time of making its
payments ought in itself to help to produce this
state of mind and feeling. There has been too much
of a tendency to think of an exportable surplus as
a fixed factor in the problem, whereas, it is itself
as much a variable as any of the other factors. It
depends upon purchasing power abroad as well as
upon productive capacity at home, and settlement of
reparations would increase both. If the settlement
be such as to establish confidence and inspire hope
and to call forth the energies always released by
such feelings, productivity will be stimulated and
the exportable surplus will increase. Determining
capacity to pay is not the first step toward settle-
ments; the discussion of it seems actually to have
obstructed a settlement. It is more nearly correct
to say that a settlement is the first step toward de-
termining and developing the capacity to pay. But
for months the general public discussion has been
upon such topics as the capacity to pay measured
by the exportable surplus.

To some extent Germany has been injured in re-
cent months by being obliged to make payments and
deliveries of goods that were greatly needed at
home. Her capacity to pay at the present time has
been thereby reduced. To be relieved for a time of
such demands, and to permit the surplus of taxation
proceeds over administrative expenses to accu-
mulate, would enable her to build up her organiza-
tion for production and grow in the ability to make
payments later. On the other hand, such is the
gloomy view taken of conditions in Germany by72

THE DAWES PLAN

some writers, that they seem to doubt if there would
ever be a surplus of exports or an ability on the
part of Germany to make exterior payments in any
important sums, and some have even questioned its
ability to raise by taxation sufficient sums to bal-
ance its own budget.

If such gloomy forebodings be true, then neither
the method under discussion nor any other will ever
extract important payments from Germany. The
truth must, however, be determined by experience
and not argument. The world would never be satis-
fied to accept a logical demonstration of incapacity
to pay. But it has been so much impressed with
the danger of extorting too much as to prefer some
method that guards against this danger, without
abandoning the effort to make further collections.
. The important thing is to make some settlement
to put an end to discord and dissension, to find some
basis for the resumption of normal commerce, or in
the words of Secretary Hughes to reestablish con-
fidence. With confidence restored and business re-
sumed, there would be set up at once a flow of
capital to Germany. The exhaustion of woi'king
capital within Germany and the excess of such funds
in the United States would quickly establish a mar-
gin in the interest rates which would act with the
certainty of natural law to attract American capital
to Germany, at first, perhaps, in short-time credits,
but very soon in long-term bonds, the proceeds of
which would have as much weight in fixing rates
of exchange as credits transferred in payment for
exports. The proceeds of such investments wouldIN THE MAKING

73

also increase the capacity of Germany to produce
articles of export. The payment of interest upon
such investments would, in the end, also require the
shipment of goods out of Germany, but the period
of time within which the capacity of that nation to
produce could be developed, would be greatly ex-
tended. During the period of its greatest develop-
ment the United States constantly increased its
indebtedness to European countries. This indebted-
ness, expressed in the form of bonds on railroad and
other properties, represented the difference between
the aggregate necessities of this country for living
expenses and development, and the aggregate value
of its exported goods. It also resulted in such a de-
velopment of productive capacity as to enable this
nation to discharge the indebtedness within a few
years of great activity during the world crisis. The
estimated national wealth at the time these pay-
ments were made, was probably about five times the
estimated national wealth at the times when the in-
debtedness was incurred.

The German budget can not be balanced and a
surplus provided for reparations without taxing the
German people heavily. What is taken from them
in taxes is withdrawn from them in purchasing
power and thereby the domestic market for German
goods is restricted. To the extent that payments
are made to the Allied Nations, the purchasing pow-
er of these nations is increased. Prices in Germany
would ultimately fall and costs as well, and prices
would tend to rise in other countries, under which
circumstances Germany's exports would increase.74

THE DAWES PLAN

Everything seems to support both the justice and
the mutual advantages of establishing equality of
burden. That some risks must be taken at some
point along the line of this effort is certain. An
equality of the burden of taxation, whether it be
paid for reparations or not, tends toward industrial
equilibrium, and if being paid in taxes, it accu-
mulates only as a credit and can not be paid in rep-
aration, then no citizen of an Allied Nation can say
that justice and morality have been violated in the
forgiving of a debt, but will know that the debt fails
of collection because of the real poverty of the
debtor. The obligation should be stated upon a
sound and moral basis, and the method of collection
arranged so that relief may be had, at least tem-
porarily, whenever payments would be destructive
of the banking and currency system.

Under any circumstances the tax payment ought
to be made and deposited to the credit of repara-
tions, but only such an amount could actually be
paid upon reparations as would be determined by
the development of international commerce. The
control of actual payments would be in the hands of
those who were charged with maintaining the sol-
vency of the bank and within reasonable limits, the
parity of the currency. No one knows what these
actual payments would be; it can not be exactly
estimated. All that is known is that it will be with-
in Germany's capacity and not more than in justice
and equity she ought to pay. It will be determined
by a practical demonstration and cease to be a sub-
ject of speculative controversy. For decades priorIN THE MAKING

75

to the war there was an increasing scale of expendi-
ture by cities, states and the Reich and a growing
volume of German investments abroad, and these
things could not have existed unless the collection
from taxes had been ample and the margin of ex-
ports, visible and invisible, a substantial amount
over all imports. The members of the Committee
seem to believe that with normal economic and bus-
iness conditions restored, this ability to support its
government and establish a favorable balance of
trade would again be demonstrated by Germany. If
it should not be, then there will be no trouble
created by an internal surplus and no problem of
converting an internal credit from surplus into a
foreign payment, for there would be no surplus and
no payment. But if Germany sustains herself as
a strong, virile and productive nation capable of
such vigorous industrial effort as she put forth be-
fore the war, then there will be such a surplus and
the problem of making payments abroad will doubt-
less require careful study. It will be a recurring
subject for discussion.

The relation between productivity and the power
to pay taxes is quite as direct as that between the
exportable surplus and the power to make payments
in foreign exchange. It is the extent jta. which pro-
duction is stimulated that determines both the maxi-
mum of revenue and the surplus of exports over
imports, and if Germany assumes and carries an
aggregate tax-burden, as large relatively as that
borne by France to-day, there will be surplus of
revenue above the necessary expenses of maintain-76

THE DAWES PLAN

ing the government. This surplus will be placed to
the credit of the reparation account. It will be de-
posited in the new bank and one of the important
functions of the bank, according to the plan as now
outlined, will be to arrange for the payments out of
this fund to the foreign creditors of Germany in
such a manner as to protect the solvency of the bank
and maintain the parity of the German currency,
not out of a tender feeling toward Germany but be-
cause only in this way can German production be
sustained and only by increasing production can
Germany make substantial payments.

There are so many mutual interests that some
agreement for common effort must be made. There
will be felt a little later an influence which may to
some extent lighten this burden of converting an in-
terior credit into an exterior payment. This is, that
when the payments become large it will be realized
that the receiving of them will mean that foreign
goods are to some extent displacing domestic goods
in the home market. Just as France found it imprac-
ticable to have Germans come into France to rebuild
its devastated area, because the French laborers
needed this employment themselves, so at some later
time there may be a demand that payments in goods
should not be made too rapidly for fear of dislocat-
ing the industrial organizations in the nations that
are receiving the payments.

This, of course, is a most important matter for all
the creditors of Germany and for the United States
as well, for it is the creditor of Germany's creditors.
This aspect of the problem is well expressed in to-IN THE MAKING

77

day's issue of the London Times, first by Mr. F. C.
Goodenough's statement at the annual meeting of
the stockholders of Barclay's Bank, and second by
Mr. "Walter Leaf in his annual report to the stock-
holders of the Westminster Bank. Mr. Goodenough
said: "Besides the payment for imported food-
stuffs, raw materials and manufactured articles,
which were normal before the war, we have now to
provide also for the interest on our debt to America.
. . . The total annual provision that will be re-
quired for the nest ten years to meet the debt will
amount at current rates of exchange, to the sum of
approximately thirty-seven million pounds per an-
num. . . . The real burden of the debt, however, is
measured by the volume of goods or services needed
to discharge it, and the amount of the burden will,
therefore, fluctuate with variations in dollar prices,
as the debt is payable in dollars." Mr. Walter Leaf
remarks: "One thing is certain; that reparations
paid by Germany can come through one channel
alone—through an excess of German exports over
imports. It is only by taking German goods that we
can receive German payments. ... It happens that
we have before us at this moment an excellent il-
lustration of the way in which international pay-
ments are made in goods. It will be within the
memory of all of you that some two years ago the
United States passed what is known as the Fordney
Tariff, a very high tariff designed with the special
intent of excluding foreign goods, and in the belief
that other countries could not dispense with the
products of the United States. Now how has the Ford-78	THE DAWES PLAN

ney Tariff worked? I have before me the figures
of trade between the United States and Great
Britain for the first nine months of 1923, and I com-
pare them with the first nine months of 1922. You
will suppose, or at least the authors of the tariff cer-
tainly supposed, that there wiy be a great falling
off in the exports from Great Britain to the United
States, while the exports from the United States to
Great Britain will be maintained. Well, what are
the facts? The exports from the United States to
Great Britain have in that period fallen off by more
than sixteen million pounds, while exports from
Great Britain to the United States have increased
by over ten million pounds. The balance of trade
in those nine months has moved nearly twenty-
seven million pounds in favor of this country. Sure-
ly this must give Mr. Fordney serious matter for
consideration. Naturally this can not be the actual
result of the tariff; it proves that there are opposite
influences which overcome the obstacles put in the
way of imports from abroad. There can be little
doubt that this influence is to be found in the re-
mittances which Great Britain is making to the
United States for the payment of the debt. So long
as the United States requires payments from us, so
long must they take it in the form of goods. And in
the meantime the Fordney Tariff has naturally in-
creased prices and put up the cost of production in
the United States, and has thereby hindered their
power of competition with us in neutral markets.
So that the tariff has been by no means an unmixed
misfortune to British trade, and it offers an impres-Charles G. Dawes
Chairman First Committee of ExpertsIN THE MAKING

79

sive example of the futility of political measures
which try to counteract the irresistible tendencies
of economic law."

Both of these eminent financiers declare that
debt between nations can be paid only in goods; one
states that annual payments by Great Britain to the
United States will amount to about thirty-seven
million pounds; the other reports that during the
first year when these payments became effective
there was a movement in the balance of trade be-
tween these nations in favor of Great Britain,
amounting to twenty-seven million pounds in nine
months, or at the rate of thirty-six million pounds
a year, and this in spite of tariff obstructions.

One of the merits of the plan under consideration
of the Committee is that it brings under the control
of a responsible organization the time of making
payments and the amount of payments to be
made at a particular time with due regard to
interests of both debtor and creditor. It may
be the debtor can not afford to pay nor the
creditor to receive. Time will disclose this. But it
would seem dangerous to fix now, definite sums
which must be paid at definite periods, no matter
how destructive the consequences might be to the
nation that pays, and to the nation that receives.
The creation of an internal credit in Germany need
not be drawn on if the payment would injure the
creditor; other forms of payment could be devised
or the credit could for the time being be left unused.
It is not to be doubted that if only certain large
initial payments could be made to put in order80

THE DAWES PLAN

financial budgets in some of the Allied Nations, this
credit would be left in Germany until a favorable
time and method could be found for the withdrawal.
Perhaps when the inescapable burdens of receiving
are as generally recognized as are the difficulties of
making payments, nations will be more inclined to
abate their claims. If the inference to be drawn
from the discussions of the English bankers from
whom I have quoted is sound, the United States
would as a consequence of complete debt collection,
experience an unfavorable movement in the balance
of trade of nearly half a billion dollars a year for a
period of about sixty years. Whether she would
continue to desire such an amount of foreign goods
to displace her own, it remains for the future to de-
termine. There seems to be no disposition now to
recognize this difficulty either on the part of the
United States or other creditor nations against
which the same forces would operate.

But at the same time the alleged danger of debt
collection may be greatly exaggerated. It seems
paradoxical to assert that an influx of wealth into
a country would produce poverty. It is doubtless
true that much of the goods by means of which pay-
ments are made would not compete with goods of
domestic manufacture and the use of such imported
goods would add to the comfort and improve the
living conditions of the people. The sale of Europe-
an securities would tend to prolong the period
during which the payments could be made out of
exportable surplus.

At the present moment there is need for largeIN THE MAKING

81

credits to be transferred to France and means may
be found, and ought to be found, to accomplish this.
No proposal ought to be made or can really be con-
sidered that does not include provisions for the
safety and security of France as the largest creditor
of Germany. In the first place, public opinion in
other countries would condemn it as unjust and in
the second place France would veto it. She has ex-
pended huge sums for the rebuilding of the dev-
astated areas and for the payment of pensions.
These expenditures she has charged to Reparation
Account and in this way she balances her budget.
There is a great sentiment of sympathy for the af-
flicted people of these districts, and feeling of the
obligation resting upon those who escaped such
burdens, to restore the homes and property of those
who suffered such losses. This sentiment was too
strong to be guided by prudence. They have built
too fast, from a banker's point of view, but no
threat of disaster could have stayed the hand of
France once it took up this work of repatriation of
the people of the devastated areas.

Up to December 31, 1923, the aggregate amount
charged by France to the reconstruction account, to
be collected from the reparation credit, is one hun-
dred eighteen billion francs; sixty-six billion of this
was for reconstruction proper, thirty-five billion for
pensions and seventeen billion for accrued interest.
The twenty-six billion gold marks belonging to
France of A and B Reparation bonds, at even
four and one-half francs to the gold mark just equal
this sum. And in the tentative budget for 1924,82

THE DAWES PLAN

which has been furnished from official sources,
there is provision for an expenditure of eight billion
francs more during this year. These are the ex-
penditures which under the Treaty of Versailles
were to be the first charge against Germany by way
of reparation, and there can be little doubt that the
pitiful necessity for reconstruction, as distinguished
even from pensions, was generally regarded as cre-
ating the moral basis for holding Germany re-
sponsible for the damages inflicted. To what extent
these damages were actual and the proceeds of
reparations required to repair them, is therefore a
matter of general interest, especially Since so many
seem to regard the fixing of reparation obligations
as merely a punitive measure. But the repair of
these devastated towns was an obligation imposed
upon and accepted by Germany, and the amounts
required to meet this particular charge will certain-
ly exceed the total that France is demanding from
Germany.

The greater part of this work was done at a time
when the general average of the exchange value of
the mark was eight cents or one-third of a gold
mark. The expenditure, therefore, was equal to
twenty-two billion gold marks for construction,
eleven and two-thirds billion gold marks for pen-
sions, and five and two-thirds billion gold marks for
interest, making thirty-nine and one-third billion
gold marks in all. These are the expenditures up to
December 31, 1923. The estimate from official
sources is that the work of construction is about
62% completed—as of January 1, 192 i. The totalIN THE MAKING

83

cost of reconstruction alone completed and without
considering interest or pensions, could not, there-
fore, be less than the equivalent of thirty-five bil-
lion gold marks, while the total amount of expendi-
tures for reconstruction, interest and pensions
would exceed fifty billion gold marks. Monsieur
Poincare's proposal was that France would accept
twenty-six billion gold marks and such additional
amounts only as might be required of her to settle
inter-allied indebtedness. A tour through these sad-
ly shattered towns and villages impresses one with
the burden of suffering as well as of paying that
France has been carrying, for even now, six years
after destruction, these towns are only a little more
than half rebuilt, and the greatest inconveniences
have been endured by their citizens.

The other items of this tentative budget only em-
phasize the weight of the burden France is carry-
ing. The budget shows that France's income from
direct taxes is fifty-one hundred million francs,
from indirect taxes seventeen thousand, one hun-
dred twenty-nine million francs and from miscel-
laneous taxes thirteen hundred seventy million
francs which may be augmented by legislation now
being discussed providing for a 20% increase. Her
administration expenses, on the other hand, are ten
thousand eight hundred thirty-one million francs
and interest on internal loans thirteen thousand five
hundred fifteen million francs. In addition to this
there is accruing interest upon her foreign loans
expressed in dollars and pounds and the reconstruc-
tion expenses just referred to.84

THE DAWES PLAN

To-day Mr. Young spoke about the work of the
Committee in investigating the railroads and how
this property might be used in reparations. This is
a subject which, of course, must be taken up again
in detail but for the present it would be enough to
epitomize the preliminary report of engineers to the
general effect that there existed in Germany about
thirty-eight thousand miles of road, of a value (on
the 1913 basis of costs) of about five billion dollars
and with an earning capacity, assuming restoration
of productivity, of about two hundred and fifty mil-
lion dollars, of which fifty million dollars ought to
be retained for construction and readjustment of
the system. Owing to the processes of inflation,
this property is free from any indebtedness. It was
purchased by the Reich in 1921 at a cost of three
hundred fifty-eight billion (our trillion) marks, now
worth less than one hundred dollars, but more than
sufficient at that time to discharge all the indebt-
edness of the states incurred in acquiring the
system.

How could this resource be used? Could bonds
be issued up to about three billion dollars and both
bonds and stock pledged with the bank as security
for reparation payments? Could such bonds be sold
in the United States or England or France? For
what period ought such bonds be issued and at what
rate of interest and amortization? Could this asset
be used to meet the more pressing needs of Ger-
many's creditors?

A continuing delivery of payments, whether in
cash or goods, is as essential for the welfare of Ger-
many's creditors as it is necessary for Germany toIN THE MAKING

85

obtain a temporary relief from excessive payments.
In some form it appears to be necessary to provide
for current payments to creditors by pledging prop-
erty, which insures future payments, and securing
cash by the sale of such pledges. Whether this be
by the pledge of railroad earnings or of specified
monopolies or of both, or by a general obligation of
the German Government with such securities, is a
matter yet to be decided.

The minimum of interference with Germany's
control of her own affairs is probably the policy
that will bring the maximum of payments to her
creditors, and in measuring thus carefully by actual
test the capacity of Germany to pay as indicated by
her increasing prosperity, there must of course be
established a system whereby all payments made
on reparation accounts or on account of any of the
established claims against her as fixed by the
Treaty or events that have followed, should be
treated as a whole. She could not be held responsi-
ble for an annual payment estimated to be at the
maximum of her ability to pay and then be forced
to pay additional sums either for the expenses of
armies of occupation or for deliveries of materials.
All the demands ought to be reduced to a cash basis
and the aggregate of all to be within her capacity
to pay. Unless this condition be recognized, Ger-
many could not be fully restored in the confidence
of the world and her industrial organizations could
not reestablish their credit. But if this limitation
be recognized, the public and private credit of Ger-
many would be restored and very quickly after the
new bank is functioning.86

THE DAWES PLAN

With credit restored, bonds issued upon the rail-
road system or upon the income of monopolies in
Germany, could be sold and the proceeds used by
the creditors of Germany in such a manner as to re-
assure the world that all the nations of Europe
would be at last on the road to recovery. The interests
of France require that Germany should be restored,
not only in order that reparation may be collected,
but that normal economic and business relations
may be resumed, and in the same manner, the pros-
perity of France is necessary for the welfare of
Germany. Not much would be gained for the wel-
fare of Europe if a plan were carried out which
restored Germany temporarily to normal economic
functioning and permitted France to fall into
economic confusion.

Before the opening of this conference, there
seemed to be great difficulties in the way of reach-
ing a common agreement. The divergent views of
the different governments as to the plan of fixing
and collecting reparations seemed irreconcilable.
England's insistence on, and France's rejection of,
the process proposed for measuring again, and this
time definitely and finally, Germany's ultimate
capacity to pay, and limiting the efforts to make
collections to such a sum when ascertained, had pro-
duced stubborn advocates and opponents, and
created irritation and apprehension. At the present
moment there is much hope that the Committee of
Experts may reach speedily a unanimous agreement
upon a plan which can be developed and explained
without involving the feeling of resistance that hasIN THE MAKING

87

been evoked by the discussion of the necessity of
fixing ultimate capacity to pay as the first step
toward settlement. For the Committee has already
agreed that fixing'an amount of annual payments,
to be determined by an attempt to establish in Ger-
many a scale of taxation commensurate with that
borne by the Allied Nations, is the logical approach;
they have also agreed that the stabilization of the
currency must be accomplished as the first step
toward the restoration of normal conditions and
that the organization of a new bank of issue is
necessary to accomplish this; and that such a bank
being established, both Germany and her creditors
could be protected against the collapse of Germany
by reason of demands being made upon her beyond
her capacity to make payments. Such a bank, being
under the control of an international Board of Di-
rectors, could suspend the payment of reparations
whenever such payments would destroy the stability
of the currency, endanger the solvency of the bank
or disrupt the industrial organization of the nation.
And the real measure of Germany's capacity to pay
could thus be made by actual experience, and the
contentious and theoretical discussion of it removed
from international conferences. Having apparently
come to an agreement upon these important pre-
liminary and fundamental principles, the Committee
is now considering the resources of Germany that
can be used to meet the immediate needs of her
creditors and the details of the practical methods
to be adopted whereby the general plan can be put
into effective operation.CHAPTER III

trip to berlin—the confusion of inflation—>
changed relations of people to government—re-
ception by chancellor marx—poincare's comments
on committee's work—hopeful attitude of both
french and german governments—ruhr invasion

-passive resistance and consequences—inflation

-currencies in circulation—the temporary sta-
bilization'—ensuing crisis-slow recovery—rent-

enbank-taxation system-new schedules—com-
pared to french—results in austria.

Berlin, January 31,1924,

The Committee with all of its followers left Paris
Monday evening and reached Berlin Tuesday eve-
ning about ten o'clock, and most of the members
went to the Esplanade Hotel. A full company of
uniformed police and an army of correspondents
and photographers met the train. There seems to
be a keen interest here in the activity of this Com-
mittee. The country between Cologne and Berlin,
and Berlin itself, has the general appearance of in-
activity; few of the factories are in operation. The
people really have a subdued appearance—several
of our party have commented upon this. But the
factories and buildings of all sorts appear intact
and very much up to date. We met on the train a

88THE DAWES PLAN

89

German professor who said that the nearer we came
to the study of German economies the more compli-
cated it would appear on account of the effects of
inflation. This was truly discouraging, for we had
read many discussions of the German budget and
of the German railways, for instance, which were
not as a matter of fact discussions of these things
themselves, but of the phenomena of inflation as af-
fecting them. Any study of German statistics, the
professor warned us, would be made most difficult
by the uncertainty of results secured by attempting
to translate movements measured by paper marks
into gold marks of pre-war value. He doubted if
statistics of the last year meant anything at all. He
spoke of the efforts he himself had made to develop
a formula for translating what was taking place into
some plain statement that would give a definite
meaning but said he had given it up. Taxes levied
to meet expenses when the paper mark was at say
twenty thousand to the gold mark, were collected
when the gold mark was worth one million paper
marks. Goods for export might be sold under simi-
lar conditions and statistics as to foreign trade were
unreliable. When accounts run into eighteen fig-
ures the mere labor of compiling them adds so much
to the burden of accountants as to cause great delay
and many mistakes. It is a small matter perhaps
but one that lays a heavy aggregate burden on ac-
countants. It is simple enough, one may say, to rec-
ord that $16.75 is now worth 70,350,000,000,000 paper
marks, but how many dollars could be bought with
726,350,649,426,000 paper marks, etc.? The banks90

THE DAWES PLAN

are all behind with their public statements, delayed
by this factor, or factoring.

Among other things, the professor said that the
reorganization of the German Government was
made necessary by the emergency under which the
Reich was obliged to lay its hands upon taxable re-
sources formerly reserved for the states. Speaking
very generally the land tax and other direct taxes
were levied by the states and the Reich collected
only indirect taxes. Under the new constitution the
Reich was given control over many forms of taxa-
tion formerly collected by the states. It was not a
very carefully designed system but an adjustment
hastily made to meet a sudden emergency, not de-
liberately adopted in recognition of the growth of
public feeling and opinion. It was not an evolution-
ary process and it would probably be found later on
to be much against both the habits and sentiments
of the people. In some cases the loyalty of the peo-
ple of Germany is to the states rather than the
Reich, and the new adjustment has not altered this
fundamental feeling.

Since we have been in Berlin our attention has
also been called again to the political divisions in
the Reichstag. In our own country both of the great
parties contain many representatives of farmers, of
laborers, of industrialists and in fact men of every
social grade and business activity and even of vary-
ing political sentiments. In Germany it is quite dif-
ferent. The farmers have their party, the indus-
trialists another, the extreme radicals are allied, and
also the more moderate. This is not an attempt toEN EOUTE STEAMSHIP AMERICA

Left to Hight: Colonel Goldsmith, Kufus C. Dawes, Mr. Tileston,
Me. Young, General Dawes, Captain Kind, S.S. America, Mr. Ceockee.

Meeting Place op Committee in BerlinIN THE MAKING

91

diagnose the political situation more than to say
that the verdict of a majority in our country is ac-
cepted as the opinion which must prevail, because it
is held by a majority of the people, all of whom
must bear the burden of the decision. Whereas, in
Germany, it may sometimes be regarded as a de-
cision imposed upon a minority by the majority,
which has a contrary interest, and does not share
the hardship incurred by it. These two conditions
make it very difficult for Germany to express itself
and work out its salvation with the same unity of
spirit as it displayed under the stimulus of war and
the direction of an imperial government, and raises
the question as to whether it would not be better for
Germany to act or appear to act, in carrying out
some of these necessary adjustments, under outside
pressure.

February 1, 1924.

To-day a newspaper correspondent said he had
just been talking with the ex-Dictator, Stresemann,
and that Stresemann had criticized Doctor Schacht
for going to Paris with his plan. For the first time,
he said, Schacht had secured assurances of help
from English and Holland banks, and had worked
out a sensible plan, which he was about to carry into
execution. Having revealed this to the Committee,
he might now have to see it presented as the Com-
mittee's plan, which from Stresemann's point of
view, vitiated it, because it would mean foreign con-
trol or interference with the German bank. But, the
reporter stated, even this seemed tolerable provid-92

THE DAWES PLAN

ing only the Ruhr should be evacuated, commercial
obstructions removed and government revenues re-
stored. He said he did not know exactly to what
extent the German demands would go, but that their
feeling about the Ruhr was one of desperate deter-
mination and that all Germans were united on this
point. For some days General Dawes has been say-
ing the test of this Committee's work would come
in the settlement they could propose as to the Ruhr,
and he had good hope that the Committee may find
a basis of settlement, but probably not one that
would involve the complete withdrawal of all troops.

In the meantime, members of the Committee have
ascertained that Doctor Schacht is in good stand-
ing with the government and is the logical person
with whom the Committee ought to work in making
plans for the bank.

On Tuesday they were invited in a body to call
upon the Chancellor, Herr Marx, and were received
by him surrounded by his staff in the very room
wherein the great Bismark formerly ruled.

"Gentlemen," said the Chancellor, "I am glad
that an opportunity is offered me of welcoming you
here in the name of the German Government after
a decision taken by the Reparation Commission on
November thirtieth last has entrusted you with the
task to look for ways and means of establishing
equilibrium in the German budget, as well as for
the measures to be taken with a view to stabilizing
German currency. The German Government thank-
fully appreciates it that you have come here in
order to examine on the spot the situation existingIN THE MAKING

93

in Germany. Our Government Departments will
leave nothing undone that may be of assistance to
you in the accomplishment of your task, which is so
difficult and which involves so heavy a responsibil-
ity. Your desiderata will be considered and your
questions will be answered with the utmost prompti-
tude and in a spirit of unreserved frankness. In
order to support you in your work the German Gov-
ernment has caused materials and data for a study
of German economy, German currency and German
finance to be collected, which collection of data will
shortly be handed to you. With a view to facilitat-
ing the official relations between the Committee
and the German Government Department, the Ger-
man Kriegslasten Commission (War Burdens Com-
mission), whose Chairman is the State Secretary,
Mr. Fischer, has been charged to represent, vis-a-vis
you, the German Government. Moreover a special
representative in the building is placed at your dis-
posal for the performance of your work, in order to
be the recipient of your desiderata."

The Chairman of the Committee, General Dawes,
replied as follows:

"Your Excellency, the Committee desires me to
express our appreciation of the opportunity to meet
you and your associates in the German Government.
As members of this Committee, we feel the great
importance of a common understanding among the
Allies upon some solution of the problems before
us, in which understanding it is most desirable and
important that the German Government participate.
It is our hope that such an understanding will be94

THE DAWES PLAN

attained. We thank you for the assurances of your
aid and cooperation."

These expressions on the part of the Chairman
were sufficiently reserved to escape criticism of his
fellow members, but Herr Marx was not so .for-
tunate. The papers or, at least, some of them, found
fault with him for having received the Committee.
The material prepared by the government to which
he referred was a full and well prepared book giving
essential facts concerning the commerce, currency,
finances and industry of Germany. A large build-
ing, formerly used by the Ministry of Finance, has
been put at the disposal of the Committee and their
assistants, about seventy people altogether.

In Berlin, as well as in Paris, there seems to be a
disposition on the part of the government to facili-
tate the work of the Committee.

On January eighteenth, Monsieur Poincare made
an address before the Chamber of Deputies, from
which the following extracts will be found to be in-
teresting :

"I do not doubt that the inquiry undertaken
under auspicious circumstances by the Commission
of Reparations will greatly facilitate our task of ad-
justing arrangements with Germany. . . . But it
must not be forgotten that the initiative in this
matter belongs to the French Government. It was
this government which, on the tenth of November
last, asked in conformity with Article 234 of the
Treaty of Versailles that the Reparation Commis-
sion should designate experts, not as has been
sought before, to evaluate the capacity of GermanyIN THE MAKING

95

to make payments, but to make an estimate at the
present time of its actual resources. I did not wish
to accept beforehand the German idea taken up a
year ago by the British Government of a conference
which should have as its object the definite valua-
tion of the pretended capacity to-day of Germany to
make payments; under that cover, one could not but
arrive at results exactly contrary to economic sci-
ence. . . . The excellent speech of Mr. Dawes, one
of the American experts, moreover, permits us to
think that now all discussion of this sort is elim-
inated, that Article 234 of the Treaty will be re-
spected and that the sophism about the definite
ability to pay will not deceive in any degree the two
Committees of Experts, and that they will be able
to continue in entire independence a work, in itself,
very vast and important. We are greatly pleased
to see this cooperation of the Allies establishing it-
self within the limits of the Treaty and with the
very valuable presence of our friends from Amer-
ica. ... In our opinion the work of these Commit-
tees will be in any case a first step toward a general
settlement. . . . Some newspapers have reproached
France for not having presented a constructive
plan. Long months ago we put one before our Al-
lies. We demanded a minimum of twenty-six
milliard gold marks corresponding to our percent-
ages in the A and B obligations. We agreed not to
have recourse against Germany for the rest of our
credit, except in such measure as we ourselves
should be required to pay inter-allied debts. The
work of the experts, therefore, should turn on the96

THE DAWES PLAN

following points: to seek to introduce into Germany
a sane and stable money, to establish a control of
the German budget during a certain period, to es-
tablish likewise a control over certain German re-
sources in such manner as to make of them financial
guarantees, either through the payment of annuities
or preferably, by the emission of loans. Such re-
sources which can be used as guarantees are among
others, as the Belgian-French studies indicate, the
customs duties, the railroads, coal, the electric in-
dustry, the tobacco monopoly and other receipts of
the same sort. ...

"We shall demand, so far as we are concerned,
from the experts to have the system of control put
in force by the French and Belgian Governments,
over those guarantees which we hold in the occupied
territories made a part of their system. The French
and Belgian authorities, or preferably, if the other
Allies will consent—and we hope that they will con-
sent—the inter-allied authorities shall keep in hand
this control, it being understood that the necessary
expenses of the occupation and exploitation of the
guarantees being paid, the excess shall be turned
over, as I have always said to the Reparation Com-
mission, and divided among the Allies, all the Allies,
in proportion to their rights. Once in posses-
sion of the work of the experts, the Commission can
estimate with full liberty the amount of the payments
in capital, which it shall consider it possible to de-
mand immediately from Germany. These amounts
of capital, we believe, might properly bear upon the
railroads of the occupied territories, which ought toIN THE MAKING

97

be given over to an inter-allied company, and which
would thus serve at the same time as payment for
reparations, and as a guarantee for the security of
France and Belgium. These amounts ought also to
rest upon shareholdings in certain mines of the
Ruhr in such manner that France may be assured
in the future of receiving coal which its industries
need. They ought to rest upon other shareholdings
given to the Allies, either in certain industries or
in certain products of Germany. ... We shall ask
that the task of the experts and of the Commission,
so important as it is, shall be accomplished as rapid-
ly as possible, without any reconsideration, I repeat
it, of the question of fixing the total German debt,
and without taking up discussion of the theoretic
problem of which Mr. Dawes spoke so wittily."

These remarks he made at the close of a very
long address, of which we have received only an im-
perfect translation, the earlier part of which was
devoted to a defense of the French policy of inva-
sion. He stated that the possibility of invasion had
been under long discussion between the Allied Gov-
ernments as the proper measure of enforcing de-
liveries under the Treaty, and having been in this
manner threatened against Germany, independent
action was taken by Belgium and France only when
it became apparent that Great Britain would not
cooperate; that it was essential that the inter-allied
front be reestablished and that the work of the Com-
mittee of Experts would be helpful in bringing this
about. He stated that actual deliveries of goods
and materials amounted to only twenty-eight million98	THE DAWES PLAN

gold marks or ninety million francs in 1922. During
1923 the French have taken in payments in kind not
less than one hundred thirty-five million four hun-
dred thirty thousand francs. He discussed passive
resistance briefly, declaring it was a suicidal policy
which France deplored, and dismissed as fables the
charges that France was promoting a movement for
independence in the Palatinate, denying that France
had any desire to annex the territories in question
or to have them brought under her political control.

This speech was not strictly a defense of the
French policy in general, but a reply to an attack
against the policy by Monsieur Herriot. It did not
cover all points under international discussion. It
seemed important coming at just this time because
it discloses a conception of the problem and methods
for solving it quite in harmony with the general
course being pursued by the Committee, and seems
to suggest the possibility of relaxing the strangle-
hold upon the Ruhr, while at the same time em-
phasizing the limits imposed for the Committee's
work.

Already we learn upon the best of authority that
the French are showing a desire to conciliate feeling
in the Ruhr. Export taxes are cut to a minimum.
Administration has been made more informal and
easy. The withdrawal of troops continues. There
is now only 40% of the number there was two
months ago. Reports from the newspapers and from
the Consul at Coblenz indicate an increasing willing-
ness on the part of France to modify the severe
regime established for the purpose of overcomingIN THE MAKING

99

the passive resistance which was recently sus-
pended.

This expressed preference of France for the sub-
stitution of an inter-allied for the French and Bel-
gian control of the guaranties seized, indicates a
strong desire on her part for the restoration of
allied harmony and unity of action, and her more
moderate attitude in the Ruhr to-day confirms this
impression. She would sacrifice a great deal to
bring this about. It was not until after the cessation
of passive resistance to the invasion of the Ruhr
that France secured important results from its de-
cision taken in January, 1923, to take possession of
this territory. During the ten months from January
to November she suffered from the continued criti-
cism of the English Government, and the passive
resistance of the German Government deprived her
of immediate returns, and threatened her with grave
disasters, the most dreaded of which was the widen-
ing of the breach between herself and her allies.
But whether her policy was right or not, her people
have steadily supported the government in carrying
it out, and at the present time undoubtedly feel that
events have vindicated it, and that the invasion has
compelled an attitude of acquiescence on the part of
the German Government and people in the terms of
the Treaty of Versailles and forced the German
Government to act according to the Treaty rather
than public sentiment. With this result there is
every appearance that the present French Govern-
ment is satisfied. It was with this object in view
that the policy of invasion was announced. But it100 THE DAWES PLAN

is hardly to be supposed that her people would al-
low or her allies demand the entire withdrawal of
all troops from this section. It seems to be very
generally recognized that this course of action, so
expensive to France, has created in Germany the
impression that its government must act under pres-
sure of outside force and that the German will can
not prevail, and that both to satisfy public opinion
within France, and in order not to deceive the peo-
ple of Germany, some outward show of force within
that territory must be maintained. Germany's at-
titude is more compliant now than it was in 1921
and 1922, and no economic settlement is possible
unless it remains so.

The invasion of the Ruhr was the culmination of
a series of disputes between Germany and the Allied
Powers, and the beginning of a new relationship be-
tween the Allies themselves, as well as between Ger-
many and the Allies. The tension of this great dis-
pute is relaxed, now that passive resistance has been
terminated, and in consequence the economic pres-
sure is lightened, but some review of these events
seems necessary to throw light on the present status
of the controversy.

After many previous disputes as to payment of
reparations and deliveries of coal, according to the
schedule of agreements, the Reparation Commis-
sion on March 15, 1921, declaring that Germany's
claims as to the amounts previously paid were gross-
ly inflated, demanded the payments of one billion
gold marks by March twenty-third, and twelve bil-
lion gold marks by May first. And on March 24,IN THE MAKING

101

1921, Germany, having failed to make the first pay-
ment, was declared to be in "default in respect to
the performance of her obligations and agreement."
Under the terms of the Reparation Recovery Act,
Great Britain at this time imposed a tax of 50% on
imports from Germany to be credited to Reparation
Account, and on April sixteenth the Reparation
Commission ordered the gold reserve of the Reichs-
bank to be placed in Cologne and Coblenz as secur-
ity. On May 3, 1921, the Reparation Commission
notified the Allies that Germany was in default in
respect of her obligations to the extent of at least
twelve billion gold marks, and on May 5, 1921, an
ultimatum was issued to Germany threatening the
occupation of the Ruhr in case of non-compliance.
On May eleventh the German Government accepted
this decision of the Reparation Commission, and
England withdrew its 50% punitive import levy
against German goods. During the balance of the
year 1921, there were agreements made for the de-
livery of coal and other goods and adjustments for
the extension of time within which specified pay-
ments were to be made. And on March 21,1922, the
Reparation Commission, announcing the details of
a part moratorium or cessation of payments, pro-
vided that in case of default of deliveries in kind
brought about by obstruction on the part of the Ger-
man Government, additional equivalent cash pay-
ments would be exacted at the end of the year.

In August, France refused to grant further mora-
torium without guaranties. Great Britain proposed
to reduce the total cash payments to not more than102

THE DAWES PLAN

26% of exports, which was not acceptable to France,
but a six-months release from cash payments was
granted to Germany. On December 26, 1922, the
Reparation Commission declared Germany to be in
voluntary default in timber deliveries to Prance in
1922, in consequence of which Great Britain sug-
gested that the threat of March 21, 1922, should be
executed and additional cash payments required.
But France and Belgium demanded that the threat
of May 5,1921, should be enforced and the Ruhr in-
vaded. In this critical time, January second to sev-
enth, a meeting of the Premiers was called, and
proposals for a modified settlement made by Great
Britain and by France and by Italy, but no agree-
ment could be reached. On J anuary ninth, the Rep-
aration Commission declared Germany in default
on coal deliveries, Great Britain voting in the nega-
tive, and on January eleventh French and Belgian
troops entered the Ruhr.

As to whether this action was justified legally
under the Treaty is a matter of dispute and prob-
ably will always be controverted. France claimed
that Part VIII of the Treaty gave her the right to
act in this manner under the circumstances, but by
paragraph 12, annex II, the Reparation Commis-
sion is constituted as the tribunal to interpret the
provisions of Part VIII and by paragraph 13 it is
provided that on questions of interpretation a unan-
imous vote of the Delegates is necessary. So, there-
fore, so long as France and England differ, there
can be no unanimous vote, and consequently no au-
thoritative decision. Germany has always main-IN THE MAKING

103

tained that the Euhr occupation was illegal, and
English jurists have made arguments to the same
conclusion.

Paragraph 18, annex II, Part VIII, of the Treaty
reads:

"The measures which the Allied and Associated
Powers shall have the right to take, in case of volun-
tary default by Germany, and which Germany
agrees not to regard as acts of war, may include
economic and financial prohibitions and reprisals
and in general such other measures as the respec-
tive governments may determine to be necessary in
the circumstances."

Germany, having been formally declared by the
authorized agency under the Treaty to be in volun-
tary default, France and Belgium with the acquies-
cence of Italy determined that the measure neces-
sary in the circumstances was the occupation of the
Ruhr. They claim that under international law,
outside of the Treaty, there is always the right to
take aggressive action in case of the voluntary de-
fault or failure on the part of one signatory party
to carry out an agreement, and therefore there could
not be any implied qualifications to words so clear
in themselves as "such other measures as the re-
spective governments may determine to be neces-
sary in the circumstances" and moreover they say
that by Article 248 of the Treaty, a first charge on
all the German assets is created in favor of repara-
tions and that this amounts to a mortgage which
implies the right, in case of voluntary default, to
seize the physical assets of the debtor.104

THE DAWES PLAN

The British argument is, that the boundaries of
Germany are definitely fixed by the Treaty and a
provision made that certain parts of it should be oc-
cupied for a period of fifteen years as a guaranty for
the carrying out of the Treaty, and that Article 430
in Part XIV reads: "In case during the occupation
the Reparation Commission finds that Germany
refuses to observe the whole or part of her obliga-
tions under the present Treaty with regard to rep-
arations, the whole or part of the areas specified
above will be reoccupied immediately"; that the
areas specified do not include the Ruhr and there-
fore the Ruhr is outside of the maximum military
occupation authorized for a reparation default; that
Part XIV relative to military guaranties is a spe-
cific provision on a special subject and prevents the
application to that subject of general words found
in other parts of the same instrument; that there
would be no point to the language of Article 430
permitting occupation if that were already provided
for by paragraph 18, Part VIII of annex II; and
that paragraph 18 is properly interpreted "may in-
clude economic and financial prohibitions and re-
prisals and in general such other like measures,"
since where general words follow specified words,
the general words are limited by the genus de-
scribed by the specific words; and further that it is
unthinkable that in a treaty framed to preserve the
peace and territorial integrity of Europe, there
should be an express provision permitting any and
all of the Allies entitled to reparation to seize any
part of the German's territory at will. They addIN THE MAKING

105

that in the case of ambiguity or doubt in treaty in-
terpretation the doubt should always be resolved in
favor of the party upon whom the terms are im-
posed, and that the obligation of Germany was not
to France and Belgium and Italy, but to the joint
partnership of all the Allied Powers, and one part-
ner may not forcibly collect the partnership debt for
his own account. And in reply to the point that on
May 5, 1921, England had voted, with the other na-
tions on the Reparation Commission, in favor of
threatening the occupation of the Euhr on the occa-
sion of a default, their argument is that England
had joined in this threat not on account of a reparar-
tion default, but because of a general failure of
Germany to carry out the Treaty, by the destruc-
tion of war materials, by the manner of conducting
the trials of war criminals, etc. etc., on account of
which Great Britain was proposing to denounce the
Treaty and act outside of it. In the case of repara-
tion default, it was claimed, the Treaty contains its
own sanctions, namely, economic and financial re-
prisals and the reoccupation of specified territories.

There was no dispute between the Allies about the
fact of default and the general failure of Germany
at that time to carry out in good faith the terms of
its agreements under the Treaty, but an irreconcil-
able controversy as to the legal methods of dealing
with such failure and default. The mere reoccupa-
tion of limited areas west of the Rhine appeared to
the French to be a totally inadequate remedy, and
particularly in view of the fact that the occupation
of the Ruhr had been threatened as an act of re-106

THE DAWES PLAN

prisal; accordingly France and Belgium, with the
announced purpose of compelling the German Gov-
ernment to accept the terms of the Treaty, substi-
tuted decisive action for the long series of futile
conferences, which culminated in the failure of the
governments to reach any agreement in the confer-
ence of January second to seventh. At this con-
ference the French were willing to accept their pro-
portion of the A and B bonds and to surrender all
claim to C bonds in consideration of the cancellation
of inter-allied indebtedness, but insisted upon guar-
anties involving some control over German finance,
territory and industry, to which the British could
not agree. The British proposed indemnity ex-
pressed in a new series of bonds with four years
moratorium and in an amount of about fifty billion
gold marks. But the Germans gave no evidence of
being willing to accept even the British minimum.
To the French they appeared to be trying to evade
responsibility under the Treaty and to escape the
financial burden of restoring northern France. This
expense they felt the Germans were better able to
carry than they were themselves. By taking the
Buhr, a vital part of Germany's economic structure,
they expected, not to collect reparations directly but
to create in Germany the willingness to pay. They
believed that Germany's default was due to the in-
fluence of the great industrialists, at that time very
prosperous and powerful, and that the occupation
of the Ruhr would force the industrialists to sup-
port the government in a policy of paying repara-
tions.Doctor Makx
Reichs ChancellorIN THE MAKING

107

There was at that time every appearance of a
break in the Allied front, a failure to agree on the
amount of reparations or the sanctions to enforce
payments, a dispute as to the legality of invasion
and the beginning of the discussion as to "capacity
to pay." And Germany was quick to act upon the
theory that this breach could be widened. Protest-
ing to the world that this invasion was illegal, its
government established the policy of passive re-
sistance. The railroad employees were ordered to
discontinue working. Even sabotage appears to
have been encouraged by industrial leaders and by
the government. Striking workmen were paid un-
employment doles which were called "indemnities
for fidelity to the Reich."

This passive resistance was an economic warfare
in which the Germans were as much deceived in
their estimates of opposing forces as their generals
were in 1914. It was intended by disturbing busi-
ness in England and America to isolate France and
create disagreement and dissensions among the Al-
lied Nations. But the repressive economic measures
put into effect by France as an offset to the strikes
and sabotage, forced Germany to the expenditure
of huge sums which in the end were supplied by the
printing presses. It was not the occupation of the
Ruhr, but rather the resistance to it, that caused the
mark to drop into the abyss. When on January 11,
1923, France invaded the Ruhr, the mark had al-
ready fallen in purchasing power to the point where
it would require four thousand to equal one gold
mark; by April it would have taken six thousand;108

THE DAWES PLAN

July, eighty-four thousand; August, one million one
hundred thousand; September, twenty-three mil-
lion; October, six billion; November, five hundred
billion and in December one trillion. But although
the contest was burdensome for France, she sus-
tained it without great disaster, and the hoped-for
intervention from England or America did not ap-
pear. Passive resistance was unconditionally
abandoned in October. It was for Germany a costly
failure and far more expensive than the payment of
reparations or passive submission to invasion from
the very outset could have been. Her currency sys-
tem was totally broken down, her industries de-
prived of the necessary raw materials, there was a
great increase in unemployment, the transportation
system was rendered ineffective, the farmers re-
fused to deliver food materials in exchange for the
depreciated currency, and political collapse and
social chaos were impending. It is doubtful if the
contest could have been prolonged. There was at
this time much real suffering in Germany, but it
was of short duration, for the suspension of passive
resistance, the stopping of the printing presses in
the manufacture of paper marks, and the organiza-
tion of the Eentenbank have brought about a very
sudden and marvelous improvement which has
lasted until this time, and if only some settlement
can be made, may continue until normal conditions
are fully restored.

The effects of this warfare both in France and
Germany seem to prepare the way for some rational
settlement. The German Government realizes theIN THE MAKING

109

necessity for some adjustment and that almost any
settlement is to be preferred to the conditions of the
past year, when her revenues were in part with-
drawn from her, her transportation system dislo-
cated, her people in the great industrial centers idle
and subsisting on doles which could be supplied only
by a process which was gradually expropriating the
property of its middle classes and exhausting the
working capital of the nation. And upon the other
hand, the sentiment of France is more compliant for
she feels that her will has prevailed and her policy
been vindicated. The criticism which threatened to
isolate her from the sympathy of the world has
dwindled and France obviously desires to see the
allied unity of action and harmony of motives re-
stored. Her needs also are so great and pressing
as to make her anxious to see such conditions re-
stored in Germany as to make subsequent repara-
tion payments possible. To accomplish this it is so
obviously necessary to remove the economic bar-
riers set up in the Euhr during the period of in-
vasion and passive resistance and to restore the
revenue of all the German territory and business to
the German Government, that there is little fear at
this moment that France will insist upon econom-
ically restrictive conditions in the industrial areas
of Germany. Both the expressions of her states-
men, her recent action in moderating the control of
the Ruhr, and the guarded but constructive attitude
of the French members of this Committee, afford
good grounds for believing that France will make
sacrifices to bring about a settlement which would110

THE DAWES PLAN

increase her chances of receiving payments, and
bring her into better relations with her old Asso-
ciates and Allies in the war. The experience of the
Ruhr taught both countries to dread and fear the
effects of a military settlement and to prefer to seek
an economic adjustment.

To trace the causes and explain the process and
effects of inflation will be the task of some philo-
sophic historian at some later time and the tragical
story will be full of lessons for the statesmen of the
future. Whether it had, as most Germans believe,
its origin in the deficit of exports as compared with
imports, and if so the extent to which this deficit
was caused by the accumulation of private credits
abroad or whether it originated in the deficit of
government revenues, and if so the extent to which
defective financing during the war contributed to
force it, or whether it was actually favored by influ-
ential industrialists because they saw a chance for
profiting by it at the expense of their employees, are
among the questions to be answered. The repetition
of the same experiences in Russia, Austria and
Germany provides the material for a study, which
ought to be productive of useful lessons. Particu-
larly now would it be interesting to know what the
later effects of this inflation in Germany will be
upon the industry and thrift and organizing power
of its people.

The first effect of the distribution of an excessive
amount of currency, aside from the payment of the
expenses of government, was the increase of prices
and the less rapid advance of wages, and this in-IN THE MAKING

111

creased the margin of profit to the manufacturer.
At the same time the purchasing power of the mark
for domestic goods within Germany did not decline
as rapidly as its value declined when exchanged for
foreign currencies. When the value of a mark was
five cents for exchange with dollars, it may have
had a purchasing power within Germany of as much
as nine cents. Goods manufactured in Germany and
sold abroad for foreign currencies produced a
double profit, the usual one plus the exchange
profit.

This resulted in great earnings for manufactur-
ers, but ultimately in a loss to the nation, for the
goods sold for pounds and dollars were produced by
labor that was paid in marks of constantly depre-
ciating value and sold at prices lower than the cost
would have been had the labor been paid in the same
currencies as that for which the goods were sold.
And as these earnings accumulated, they were ex-
pended in enlargements of plant, and the necessity
to express the value in some real property rather
than to keep it in marks was so urgent that much of
this construction is said to be unnecessary and
wasteful. But it accounts in part for the fact that
the railways and industrial plants of Germany are
said to be in better physical condition than they
have ever been before.

The first function of money to be destroyed was
its usefulness as a medium for savings. Its steady
fall soon convinced the public of the folly of saving
it, and this fundamentally reversed the standard of
conduct fixed by the wisdom of generations for the112

THE DAWES PLAN

building of fortunes. It encouraged waste and ex-
travagance and stimulated speculation. So long as
the disparity between the rise of prices and the
advance of wages continued, the workers were em-
ployed, the factories in active operation and there
was a deceptive appearance of great prosperity.
But business was becoming more and more a spec-
ulation and wages were losing their purchasing
power, so that as the demand for increased wages
became more insistent, production fell off, and
when the Ruhr was invaded and patriotic feeling
was appealed to in order to put an end to produc-
tion, financial and industrial chaos ensued. The fi-
nancing of the induced unemployment required the
issuance of currency in such amounts as to accel-
erate its already rapid decline in value and this
declining value itself created the necessity for the
issuing of more. If, at the end of August, one mil-
lion paper marks equaled in value one gold mark,
and by the end of September it took three million
paper marks to equal one gold mark, then, of course,
the actual purchasing power of all the money in cir-
culation at the end of September would have been
only one third of the value of the same volume of
currency at the end of August, and there was an
actual shortage of money. The currency in circula-
tion before the war was about six billion gold
marks. The total value as measured in gold marks
of the legal tender paper marks in circulation on
August 31, 1923, was two hundred eighty-two mil-
lion gold marks, and in spite of the activity of the
printing presses and the enormously increased vol-IN THE MAKING

113

ume of paper marks in circulation the total value of
legal tender paper marks in circulation on October
31, 1923, was only forty-seven million gold marks.
The more they printed the less its value, and the
less its value the more they printed, until the final
collapse in November when their money, having lost
its value as a medium of saving, lost its value also
as a medium of exchange.

The investigations of the Committee to report
upon the exported capital of Germany has es-
timated that Germany profited, by the sale abroad
of marks and credits in marks, to the extent of from
seven billion five hundred million to eight billion
five hundred million gold marks or about two billion
dollars. This profit, in itself large, was no com-
pensation to them for the loss and injury inflicted
upon their own people, for it destroyed the savings
that were invested in bonds or notes or credits at
banks and the incomes from pensions or life insur-
ance annuities, making paupers of most of the well-
to-do middle classes. It may be said that this was a
redistribution rather than the destruction of wealth,
and that what the creditor lost, the debtor gained,
and it is true that the aggregate of physical prop-
erty in Germany was not impaired. No buildings or
plants were destroyed by the process, and because
of the instinct to invest capital possessed in mone-
tary forms liable to depreciation, into fixed assets
of permanent value, industrial organizations had
actually improved and enlarged their plants and
equipments. But the destruction of all such per-
sonal property as bank deposits, notes, bonds and114

THE DAWES PLAN

annuities of every kind, has utterly despoiled a very
large portion of the German people of all their
property and savings and at the same time has en-
riched others by freeing them from the payment
of their debts. It has at the same time stimulated
speculation in exchanges and in stocks to an extent
that would have seemed inconceivable before this
experience. Many have profited largely by these
transactions. Those who have been freed from their
debts while retaining their property, and especially
those who have profited by speculation, have become
suddenly very rich, an experience which nearly al-
ways produces a state of elational insanity, and now
rush about spending lavishly and acting foolishly.
Their conduct offends the Germans and creates in
all Europe both resentment against all Germans and
the mistaken conviction that great wealth must
abound in any country which produces such spend-
thrifts in such numbers. The process by which
wealth is transferred from the thrifty and indus-
trious to such idlers and spendthrifts is a serious
shock and perhaps a permanent injury to any coun-
try. It must corrupt business morals, shatter busi-
ness organization and undermine the whole eco-
nomic structure of the country. And while it is
true that fixed capital remains unimpaired, working
capital has been destroyed or withdrawn from cir-
culation. The deposits in savings banks at the close
of 1913 were nearly twenty billion marks and at the
close of 1924, seven hundred sixty gold marks, and
the gold mark value of the total deposits of eight
large German banks at the present time are lessIN THE MAKING

115

than one-seventh of the total deposits of the same
banks in 1913.

The actual shortage of effective currency in the
midst of the unprecedented volume of paper money,
drove men to the importation of foreign currencies,
but as these had a more permanent value, they were
hoarded and came into only a limited circulation,
and were the medium of speculation, rather than ex-
change. Many of the municipalities issued currency,
then the great industrial companies and even
private business organizations issued their own
promises to pay. Some of these were secured and
some Were not, but such was the necessity for money
that they circulated, for a short time at least, with-
out much regard to the conditions of their ultimate
redemption. The government also issued, and cir-
culated as currency in small denominations, dollar
treasury bonds in the aggregate amount of fifty
million dollars, and treasury bonds of the states
were issued for general circulation. The railways
also issued money. But even assuming all these
currencies were redeemable, they were exchanged
upon a basis of value which made the total value of
all the currencies less than one-half of the normal
circulation of Germany before the war. All the
printing presses in the world could not have turned
out enough paper money to have restored the value
of the circulating currencies to that of the money
in use in 1913.

Perhaps the most surprising phenomena of the
whole experience was the abrupt termination of the
activity of the printing presses and the quick re-116

THE DAWES PLAN

covery of a certain degree of stability to the value
of outstanding issues, and the improvement, in spite
of the shock of price adjustments, of general busi-
ness, which immediately followed.

The climax of the inflation appears to have been
reached in October and at that time, we were told,
the food situation in German cities was more acute
than it had been at any time during or since the
war, and chiefly for the reason that the farmers re-
fused to exchange their products for paper marks.
The unemployed men numbered about four million
and business of every kind was almost suspended.

The termination of passive resistance in the Ruhr
during this month relieved the government of heavy
demands and the organization of the Rentenbank
provided the basis for confidence, which has carried
them through three critical months with steady im-
provement in all respects. This is the bank which
Doctor Schacht described as not indeed a bank, but a
piece of administrative machinery. It issues money
upon the security of mortgages on real and personal
property, the interest and principal of which are to
be collected through the administration of taxes.

The Rentenbank was organized as a bank of issue
by a "Decree on the Erection of the German Renten-
bank" of October 15, 1923. It came into operation
in the middle of November. It was organized to
take over the debt of the government to the Reichs-
bank, to provide credit to the government, while it
was balancing its budget and to furnish a stable
currency. It was scarcely expected that it could ac-
complish finally all these objects; it was intendedIN THE MAKING

117

more as a temporary measure. It is founded upon
a forced mortgage placed upon all fixed and mov-
able property in Germany. The value of this prop-
erty by the last assessment available was eighty
billion marks and the mortgage was made for 4%
of this or three billion two hundred million gold
marks. Each owner of property is to pay 6% inter-
est upon 4% of the assessed value of his property,
and receives an interest in the earnings of the bank,
and the bank has no outstanding stock. Upon the
security of this mortgage the bank was authorized
to issue three billion two hundred million Renten-
marks. There was no gold available and no foreign
exchange. These mortgages though by no means
readily exchangeable were regarded as the best
basis for currency available. Two billion four hun-
dred million marks have been issued by the bank;
eight hundred million are being withheld upon the
pretext that mortgages on property in the Ruhr are
of doubtful value and this amount of eight hundred
million as compared to the full amount of the au-
thorized issue is the relative value of Ruhr property
to the total value of German property.

Of these Rentenmarks, one billion two hundred
million was turned over to the government, three
hundred million of which was without interest and
discharged the government's debt to the Reichs-
bank, and nine hundred million was loaned to the
government at 6% interest. The balance was to be
loaned through the Reichsbank, one-half designated
for the use of the agricultural and one-half for in-
dustrial interests. The Rentenbank is autonomous118

THE DAWES PLAN

but the director of it is appointed by the chancellor.
Such was the actual shortage of money and so ur-
gent was the need for it that these Rentenmarks
were at once accepted. The farmers delivered the
goods in exchange for them. The food crisis was
passed. The needs of the government were for the
time being met, and the Reichsbank was strength-
ened. The paper mark became stable at the ratio of
a trillion to one. The government is much nearer
to balancing its budget than it has been since the
war, and the railroads are said to be earning their
expenses. Practically the entire amount reserved
for lending to industry and agriculture is unissued.
It may be put out to meet the demands of the
farmers next spring. At present they are trying to
hold it back. The amount in circulation now is one
billion three hundred seventy-four million marks.

The following table shows approximately the
various currencies and the amounts of each in cir-
culation at the end of January, 1924:

Approximate value
in millions of gold
marks on the basis
of: 1 gold mark=l
trillion paper
marks.

Legal Tender

1. Reichsbank notes (according to the re-

tuiu ao ui uauuai j' ox, Loan)........

2. Bank-notes issued by the four private

turn as of January 31, 1924).

483.7

banks of issue

.1

Other Currencies

3. Notgeld issued against security in

foreign currency:

(a)	Railways ......

(b)	Other Concerns

68.
1.4

4. Notgeld unsecured:

(a)	In occupied territory .

(b)	In unoccupied territory

132.0
27.6IN THE MAKING

119

5.	Rentenmarks (according to the Renten-

bank return as of January 31, 1924) 1,374.0

6.	Dollar Treasury Bonds (Dollarschatzan-

wiseungen, Law of March 2, 1923)...	210.0

7.	Gold Loan (W ertbestandige Anleihe,

Law of August 14, 1923)........................318.0

8.	Treasury Bonds and Interim Bonds is-

sued by the States ..................................50.0

9.	Certificates of the Hamburg and

Schleswig-Holstein Banks (Verrech-

nungsscheine) ..........................................35.0

10. Notgeld secured by 6% Treasury Bonds
and to the extent of ten million of
the gold loan:

(a)	Railways ......................................144.0

(b)	Other Concerns ........................110.0 2,953.8

Small Change in Rentenpfennigs........................5.8

Foreign Currencies held in Germany (Doctor
Schacht's estimate) ..........................................1,000.00

These currencies circulate upon a parity one with
the other and at a ratio of one trillion marks to the
gold mark or four trillion, two hundred billion
marks to the dollar. But all prices are named in
marks and a "mark" means a trillion marks or one
Rentenmark. The smallest denomination of paper
marks in circulation is for ten billion marks and it
is worth about one-fifth of one cent. This readjust-
ment created another shock and crisis, and prices at
the moment are high. Immediately" after the
organization of the Eentenbank, according to the re-
ports of the German Government, the real wages
measured in gold marks for all groups of workmen
was (November, 1923) 53% of the 1913 wages and
the wholesale trade index figures of prices at the
same time showed 139% as compared with 1913.
That is, the man who was lucky enough to have a
job received a little more than half of what he would
have received in 1913 and had to pay 40% more for120 THE DAWES PLAN

the necessities of life. This produced very great
hardships, but now prices are falling rapidly and
are probably about 112% of the 1913 range. The
wages of all the groups reported as late as Decem-
ber showed marked increase and justify the state-
ment that they are now. (February fifth) nearly, if
not quite 80% of the 1913 rate of wages. "With
wages 20% less and prices 12% higher than in 1913,
they may not be said to be prosperous, but they buy
less. They have learned a lesson in economy, and
unless another calamity intervenes, their condition
will improve.

It is interesting to speculate upon the probable
effect of these experiences upon the thrift and in-
dustry of the people. The first impulse to spend
money as quickly as possible in order to escape loss
from its depreciation must have induced great ex-
travagance and waste, but the later experience of
being forced to get along without income and in a
period of high prices must have had the effect of
forcing the most rigid economy. The great expendi-
ture of those whose speculations had made them
rich, has probably been productive of as much re-
sentment at home against extravagant expenditure,
as it has of suspicion abroad of the existence of
great amounts of concealed wealth in Germany.

The country has gone through every stage of the
experience of inflation, the first steps of which are
always so intoxicatingly pleasant—the rising prices
and wages, the great activity of exchanges and the
pleasure of perceiving that the hated creditor class
was being hurt and that debts were more easily dis-IN THE MAKING

121

charged. Such things made every German feel sure
that his country was being brought through great
difficulties with great skill. But the later effects
were as disagreeable as the first were pleasant—the
lack of work, the scarcity of money and later the
scarcity of food and all materials, the tragical in-
justice of the enforced expropriation of property
and the biting poverty of the great majority of the
people. These things have really shaken the con-
fidence of the people in the wisdom of the govern-
ment. Some of those who have been in Germany a
great deal in these recent years say that they be-
lieve the people generally would actually welcome
the appearance of outside coercion upon their gov-
ernment.

It is apparent from the expressions of Doctor
Schacht that he, and probably the most intelligent
Germans, were surprised at the general acceptance
of the Rentenmark by the people generally and the
agricultural interests in particular. The degree of
stabilization of currency so quickly accomplished
was utilized by the government for the improve-
ment of its revenues. The management of the na-
tional budget during a period of depreciating
currency presents insurmountable difficulties. Fu-
ture requirements of the number of marks required
to accomplish certain results can not be calculated
unless the future value of the mark be known; and
taxes that are assessed when the mark has a certain
value are collected when that value is much reduced.
So that it is no wonder that the revenues of the
government and of the railways were entirely insuf-122

THE DAWES PLAN

ficient during this period of inflation. Upon the
reappearance of stability, however, immediate
measures were taken to provide sufficient income
for the state.

The whole taxation system has been revised. The
Weimar Constitution conferred upon the Reich "the
legislation in respect of revenues in so far as totally
or partially they are claimed or utilized for its pur-
poses,"—this is quoted from a translation of the
statement submitted by the German Government to
this Committee,—"and furthermore a right of es-
tablishing principles concerning the admissibility
and the mode of collection of state taxes and
duties. As for the repartition of fiscal sovereignty
between the Reich and the component states, this
problem was settled by the Landessteuergesetz
(fiscal state legislation) of March 30, 1920. By vir-
tue of this legislation, the states and communities
are entitled to collect taxes, pursuant to their re-
spective home legislation (Landesricht) in so far as
this is not in contradiction with the Eeich's legis-
lation. The levying of taxes by the Reich excludes
the possibility for the communities of levying in
their turn identical taxes. The collection of any
supplementary taxes to Reich's taxation is illicit,
unless a special authorization by a Reich enactment
has been granted. The principal taxes left to
the states are taxes upon landed property and li-
censes. The communities are bidden to collect a tax
on entertainments. By way of compensation for the
income tax, the states and communities receive by
retrocession certain quotas amounting at first onIN THE MAKING

123

income tax to two-thirds; in the case of the inher-
itance tax to one-fifth; in that of real estate to one-
half ; and in that of the tax on turnover to one-tenth
for the states and one-twentieth for the communi-
ties. These proportions were increased by supple-
mental legislation of June 23, 1923, to meet
emergency caused by the falling mark."

It seems to be almost impossible to form any def-
inite conclusions from the study of taxation, revenue
and government expenditure in Germany during
1923, the year of the great inflation. Some severe
criticism has been made of the mildness of taxes and
the foolish inadequacy of railroad rates. How under
the circumstances it could have been otherwise to
outward appearances, or how any sane system could
have been applied to such conditions, it is difficult
to see. At the present moment, however, and since
December 19, 1923, the charge of shirking the bur-
dens of taxation can not be made against the Ger-
man Government. Indeed it would appear that the
accusation might be that their effort just at the
moment is to extract too much. A lower rate of
taxation in some cases would produce greater rev-
enue. In our own country we shrink from a tax on
sales, even of 1%. In the second emergency decree
of December, 1923, there was established in Ger-
many a tax on turnover, or sales tax, of 21/2% aug-
mented by a tax of 15% on special goods of luxury
and a tax of 5% and 10% for services of a special
kind, such as hotels, advertisements, etc.; also sub-
stantial taxes on sale of real estate, on the organiza-
tion of companies, on the sale of stocks and bonds,124

THE DAWES PLAN

on directors' fees (20%); on automobiles and
carriages; on railroad fares and freight charges; on
betting (10% of amount wagered for) and on lot-
teries (20%); on tobacco, beer, wine, sugar, matches,
etc.; and in addition to these and others, a tax on
incomes, 10% (fifty marks a month exempted) on
wages and salaries, and on the total income of 10%
of the revenue from fixed investments, and if the
income exceed two thousand marks per quarter
year, 20% on salaries and wages.

Of course this is not an attempt to outline a taxa-
tion system. It is enough to show that there is now
a serious attitude toward the subject of taxation.
Large revenues must be raised in addition to these
taxes by the cities and states, but these share in the
proceeds of the Reich's taxation. The turnover tax
of 2i/2% augmented by the income tax and the spe-
cial taxes might prove to be destructive of revenue
and of business too, if the ideas prevalent in Amer-
ica about the sales tax are sound. These taxes are
burdensome enough but whether they will produce
the revenue is another question. It would seem that
the system was hastily organized and probably
ought to be altered soon.

The business turnover tax in France is 1% plus
one-tenth for the benefit of departments and cities,
and produces more revenue than the income tax,
which is levied upon all incomes in excess of seven
thousand francs (now about three hundred fifty
dollars); it begins at 4% and increases rapidly with
the increasing size of the income. Upon an income
of eight thousand dollars the tax is about 25% andFIRST COMMITTEE IN SESSION AT BERLIN

Left to Bight, Sitting: Flora, Allix, Parmentier, Dawes, Young, Kin-
dersley, Stamp, Francqui, Houtart; Standing: Secretary Mac-
Fadyean, Denis, Matthieu

Newspaper Photographers in BerlinIN THE MAKING

125

upon an income of twenty-five thousand dollars
about 60%, and of course more on larger incomes.
In addition, the stamp and registration taxes pro-
duce large revenues—in 1922 a little more than
either the turnover or the income tax. There was
also a tax levied on war profits graduated and vary-
ing from 50% to 80% upon profits earned between
August, 1914, and June 30, 1920, which up to quite
recently was very productive, and heavy taxes upon
consumption, upon monopolies, upon customs, etc.,
an appalling list; and just now they are passing
legislation adding 20% to all these taxes. Except as
to the gross sales or turnover tax, the French sys-
tem appears the more burdensome, but comparison
is difficult.

Berlin, February 8,1924.

Doctor Schacht made an address yesterday at
Koningsberg in which he declared no other state
ever had such taxation burdens as Germany. '' Such
burdens are possible only temporarily, and during
a transition period and this is especially in view of
the loss of working capital through currency infla-
tion and the collapse of the formerly highly devel-
oped cooperative organization."

In the figures just furnished of estimates for the
budget of 1924, they estimate the proceeds of the
turnover tax (augmented) at about one billion, four
hundred million gold marks, of which two hundred
fifteen million goes to the states; the proceeds of
the income tax at about one billion four hundred
eighty-eight million marks, of which one billion126

THE DAWES PLAN

three hundred thirty-nine million goes to the states;
the estimated returns from passenger and foreign
taxes were two hundred thirty million; from racing
bets forty million; from tobacco three hundred sixty
million, etc., and from customs only one hundred
sixty million. The total estimated receipts for 1924
are five billion one hundred forty-four million gold
marks, which except for reparations and the ex-
penses connected therewith, is deemed sufficient to
meet their expenses. This would be probably about
80% of the taxes collected for the same purposes
before the war, and this fact, in view of their pres-
ent condition and past experiences, together with
the nature and extent of the taxes themselves as
fixed in December, are indicative of a realization on
the part of the German Government of the necessity
of severe and rigid taxation and of their confidence
in the recuperative powers of the nation.

The recovery of Austria from conditions even
worse and in the face of obstacles at least as great,
ought to give great encouragement to this confi-
dence.

The organization of a bank of issue was the main
feature of the reconstruction work being accom-
plished in Austria under the auspices of the League
of Nations. This bank was opened on January 1,
1922. The following statement of results antici-
pated and those achieved has been submitted to the
Committee:

The League scheme aimed at immediate and complete sta-
bilization of the crown; and at a reform of the budget resulting
in stable equilibrium at the end of 1924. The deficits till thatIN THE MAKING

127

date were to be met from the proceeds of an external loan
amounting (net) to about twenty million pounds secured by in-
ternational guarantees and certain Austrian gages. The progress
may be conveniently shown in the following tabular comparison:

League Anticipation
1. Value of the crown to be
maintained stable.

2.	£20,000,000 provided for 2

years budget deficits.

It was contemplated that the
greater part of this would be
spent in the first year.

3.	Equilibrium on a stable
basis was to be attained by
December, 1924.

4. Taxation was estimated to
average per month for 1923,
first half-year 26.5 million
g. c.; second half-year 31.4
million g. c.

No attempt was made to
form close estimates. It was
thought more prudent to
work on a maximum ex-
penditure basis. No great
importance should therefore
be attached to above figures.

Result
Fully achieved.

Value Jan. 1922, 1 of gold
value.	14272

Value August, 1923, to January,
19241, 1 of gold value with-
14298 out variation.

This exchange value has been
maintained in spite of an in-
crease in note issue from 1,517
in September, 1922, to 7,126
milliards in December, 1923.
The cover amounts to 55% of
issue and 100% cover is being
retained for new issues. The
difficulty is to avoid apprecia-
tion without giving the country
more currency than it needs
and so raising internal prices.

£9,000,000 only has been spent
in the 13 months January,
1922, to January, 1923, inclu-
sive.

Taxation receipts equaled ex-
penditure in January, 1924.
This may be only a temporary
equilibrium. It is due to a
great rise in receipts (due to
a prosperity of which some of
the causes are temporary), not
to a reduction in expenditure.

Average first half-year, 1923,
35.1.

Average July-October, 1923,
35.8.128 THE DAW

ES PLAN

5. Expenditure.

Was to be gradually reduced
to a basis of 350 million g. c.
a year or 29.2 million g. c.
per month by the end of
1924.

6.	Dismissals of personnel.

25,000 to be dismissed by
January, 1923.

50,000 to be dismissed by
July, 1923.

75,000 to be dismissed by
January, 1924.

100,000 to be dismissed by
July, 1924.

7.	Assigned revenues.

Customs and tobacco receipts.
The customs plus net tobac-
co receipts were estimated
at 6.6 million g. c. per month.
(The gross tobacco receipts
are technically taken as gage
but it was thought more
prudent to base estimates on
net yield.)

8. Unemployment.

Expected to be serious, but
no precise estimates made.

Changes in accounting arrange-
ments make a precise compari-
son of results with monthly
statements difficult. The
closed accounts for the first six
months of 1923 show an aver-
age monthly expenditure of
49.4 million g. c. and for July-
October, 1923, of 42.4 million
g. c. The rate of reduction
would require to be increased
in order to come down to 29.2
by December next.

By January, 1923—23,641
By July, 1923—45,030
By January, 1924—61,204

The actual customs plus net
tobacco receipts average per
month—

In first six months of 1923,
8.9 million g. c.

July-October, 1923, 12.6 million
g. c.

The gross receipts of customs
and tobacco average per month

In first six months of 1923,
13.1 million g. c.

In second six months of 1923,
18.6 million g. c.

In January, 1924, 24.5 million
g. c.

The numbers of unemployed
at different months were:

September, 1922 ....... 38,000

January, 1923 .........117,144

March, 1923 ...........167,417

May, 1923 ............132,226IN THE MAKING

129

July, 1923 ............ 92,789

September, 1923 ....... 83,891

November, 1923 ....... 75,7S0

December, 1923 ........ 77,782

January, 1924 ......... 95,069

There was therefore a serious
figure in March, 1923. This
was, however, never so serious
a percentage as in Great Brit-
ain, Czecho-Slovakia or Switz-
erland and was rapidly reduced.
The latest figures again give
cause for anxiety.

Other Statistics 1923

Commerce	Jan.	Mar.	May	July Sept. Nov.

Value of Imports (millions g. c.)..........90	143 98	123	138 169

Value of Exports (millions g. c.)............59	79 71	77	80 84

Adverse (visible) trade balance..............31	64 27	46	68 85

These figures are more important as showing the expanding
economic activity in Austria than as suggesting a serious adverse
balance. The "invisible exports"—for which no exact estimates
are available—are a very large factor and the "invisible im-
ports" are not of a corresponding importance. A visible adverse
balance in fact only reflects the fact that Austria is largely de-
pendent upon the financial earnings of Vienna.

Financial Statistics	Jan. Mar. May July Sept. Nov. Dec.

Note circulation (milliards g. c.) 4,110 4,459 4,837 5,684 6,225 6,578 7,126
Obligations to be met at sight

(milliards g. c.) .............. 279 329 343 535 374 617 649

Reserve in gold and foreign ex-
change (milliards g. c.) ....... 1,108 1,422 1,756 3,020 3,200 3,567 3,915

Percentage of reserve for note
circulation and obligations at

sight .......................... 25.2 29.7 33.9 48.6 48.5 49.6 50.4

Value of note circulation in gold

crowns ........................ 285 309 336 394 432 456 495

Savings at chief Joint Stock
Banks and Savings Banks in

millions of gold crowns ....... 7.7 13.3 18.1 23.5 30 35.1 38.2

Index figures	(in September, 1922, the savings were only two

million g. c. so that they increased twenty-fold
in 16 months).CHAPTEB IV

commensurate burden of taxation in germany—
effect of depreciation of the mark—portion of
burden of reparation payments to be borne by
railways and private industries—consideration of
new bank of issue—transfer of payments on rep-
arations to creditors—effect of reparation pay-
ments on currency stability-memoranda by

experts on probable results from ''gold standard"
-hope of solution upon leaving berlin.

Many of those who had followed the previous dis-
cussions about the reparation problem probably ex-
pected that this Committee would become involved
at once in a discussion of the aggregate charge to be
laid upon Germany and would regard the definite
fixing of this sum as the very first step toward bal-
ancing of the budget. That might have been neces-
sary had a definite burden ever been laid upon and
exacted from Germany, or at least any such burden
as one hundred thirty-two billion marks. Even upon
the fifty billion A and B bonds, definitely issued and
delivered to the respective creditors of Germany, no
regular payment of interest has been made. Pay-
ments have been made but not enough to cover the
I full interest charges. The C bonds were never is-
I sued; the conditions under which they might be

130THE DAWES PLAN

131

issued have never been realized. The issuance of
the A and B bonds was a device by which there was
created a very definite acknowledgment of a con-
tinuing obligation; they provided what might have
been considered as a convenient accounting method.
But if it was ever expected that they would be use-
ful in securing immediate funds by being sold to
private investors, or that they would prove of value
in clarifying the situation, such expectations have
not been fulfilled. They have rather served to ob-
scure the truth that the real demands made upon
Germany were for annual payments and for such
payments as could be made from the proceeds of
taxation in Germany, equal to that borne by her
creditors.

In July, 1921, the Separation Commission fixed
these payments at two billion marks a year, plus
26% of exports. This amount was not interest on
one hundred thirty-two billion marks, it bore no re-
lation to interest charges, but it was more than Ger-
many has actually paid. The Committee has found
it no more necessary than the Reparation Com-
mission did to assume the task of fixing definitely
the ultimate capacity of Germany to pay. It takes
the situation as it exists, submits a plan which in
its judgment will develop Germany's capacity to
pay more than she could pay in the lack of such a
plan. If after a few years these payments suffice
to meet the charges upon the A and B bonds out-
standing, then the payments may be distributed ac-
cording to the ownership of those bonds. If
fortunately there should be an excess, some portion132

THE DAWES PLAN

of the C bonds might be issued, or some entirely
new method of acknowledging the obligation em-
ployed. Having agreed that Germany ought to bear
equally with its creditors the burdens of reconstruc-
tion and that as nearly as could be determined she
ought to be taxed as heavily as the nations which
accepted her challenge and defeated her purpose,
they have avoided the fixing of Germany's ultimate
burden and have not even discussed it as a sub-
ject-matter within their province. The settlement
of this rests with powers signatory to the Treaty.

But all the time every member of the Committee
has known that there were two very difficult and
important questions that must be faced; first, by
what test could the Reparation Commission "satis-
fy itself that in general the German scheme of taxa-
tion is fully as heavy as that of any of the powers
represented on the Commission," as they were
bidden by the Treaty to do? And, second, having
fixed this, what limitation, if any, ought to be fixed
upon the payments to be made outside of Germany?

In answering these questions the Committee will
face the same difficulties that have perplexed the
Reparation Commission. In estimating what con-
stitutes a burden, there are many things to be con-
sidered that do not appear upon the surface.

In the "first place, it is necessary for purposes of
comparison to reduce the debts of all nations to
some common currency. The franc as measured by
its purchasing power to-day is probably worth nine
cents; its foreign exchange value is less than five
cents. The total indebtedness of France is aboutIN THE MAKING

133

four hundred fifty billion francs; at the old parity,
this would be about ninety billion dollars; measured
by the present purchasing power of the franc within
France, it would be about thirty-eight billion dollars
and measured by the foreign exchange value of the
franc (its purchasing power abroad) it would be
about twenty-two billion dollars. Even these re-
sults would require amendment owing to the fact
that some of the aggregate of France's indebted-
ness is payable in dollars and pounds. The real
weight of the debt, however, is actually determined
by the average value of the currency during the
whole period of paying the interest and the princi-
pal. If in the case of France large collections
should be made from Germany, the franc might
rise. If it should, its debt measured in dollars
would grow very rapidly, even though outstanding
bonds had been retired by the proceeds of the col-
lection.

This is one of the difficulties. Another is intro-
duced when it is assumed that the burden placed
upon Germany will create a credit in the Allied
nations, which ought to be deducted from the debts
of these nations at the present foreign exchange
values.

Moreover, the burdensomeness of a debt is re-
lated to the wealth of a nation and the gross income
of its people. A debt of a certain amount per capita
upon Germany and the United States would not be
equally burdensome. An equal amount of debt pro-
duces an unequal burden, because of the greater
wealth per capita in the United States.134 THE DAWES PLAN

Furthermore, the burden of taxation is divided
in some nations between states and federal govern-
ment and in other nations it is not, at least to the
same degree. The per capita taxation in Illinois is
forty dollars for state and local purposes and about
thirty dollars per capita for the Federal Govern-
ment. For purposes of comparison in Europe thirty
dollars is considered our burden of taxation, but in
Chicago it is not so considered. Another considera-
tion, which many think can not be overlooked, is that
as taxes must be paid from the surplus of income
over expenditures, there must be some study of the
minimum cost of existence in the various countries.
As taxes are a necessary part of the cost of living
(since in civilized life, sanitation and policing at
least are required), there must be some considera-
tion also of the scope of taxation in different na-
tions. In all countries some of the necessities of
family life are furnished by the state but more in
some than in others, and the cost of maintaining a
family is reduced in proportion as necessities are
supplied from the proceeds of taxation.

Another factor of great importance not often
mentioned must undoubtedly be considered in con-
nection with this problem, namely that the process
of inflation has extinguished internal indebtedness
in Germany. About ninety billion marks due from
the government of Germany to its own people was
wiped out by inflation. It can hardly be said that
after this process there was only a clean sheet left.
It is true there was no physical property destroyed,
only personal property, but to the extent of aboutIN THE MAKING

135

fifteen hundred marks per capita the individual
German had suffered the destruction of savings in-
vested in national bonds. He had lost his working
capital and undoubtedly had suffered a diminution
of his ability to pay. So far as he is personally con-
cerned, he feels he has already paid the costs of the
war, and if there is not some element of truth in
this view of the case, then it would be perfectly easy
for France, through inflation, to wipe out her own
internal indebtedness and thus free herself from
burden.

These and probably other serious difficulties are
encountered in the effort to establish a commen-
surate burden of taxation in different nations upon
the assumption that in all these nations the entire
proceeds of the taxes are to be expended within the
country and for the satisfaction of some real need
or desire of the taxpayers themselves. Under these
circumstances the money remains in the country; it
is collected from the people and being expended is
distributed among them and to a great extent re-
vivifies their ability to continue the process. If
bonds are outstanding, the people as taxpayers pro-
vide the funds to pay to themselves as bond-holders.
It necessarily lays a burden of unequal weight upon
different individuals but in the aggregate no nation-
al resources are directly reduced; the aggregate
wealth and the gross current income of the nation
remain almost unchanged. But when the proceeds
of taxation are to be paid outside of the nation it-
self, there is necessarily an exhaustion of resources
and a draft upon national wealth and income. This136

THE DAWES PLAN

is true whether the payment is made at the time the
taxes are collected or deferred. This creates a dou-
ble strain, one upon the economic resources of a
country and another upon the sentiment of the tax-
payer. The former is sufficiently apparent to have
attracted wide attention; the latter also must be
taken into consideration.

Men who spend lavishly in entertainment, groan
piteously in the payment of taxes, but their spirit
may be consoled by the contemplation of personal
or social benefits received in compensation. If
money is extorted from them in the payment of
taxes, a compensation is received in personal or
community benefits brought about by the expendi-
ture of the proceeds of taxation—sewers are main-
tained or the supply of water, roads are kept in
good condition, schools are established and the poor
and needy, sick and afflicted may be relieved. These
are personal and community advantages in which
every taxpayer participates. Such things tend to
lighten the burdens of paying taxes. When, how-
ever, a portion of the taxes collected is sent outside
of the country and no direct and immediate benefit
can be felt, the sense of injury and oppression in
connection with the payment of taxes is greatly ag-
gravated. It adds to the burden.

In any case, when the war was started, it became
inevitable that in the defeated countries, the moral
strain of making payments to some extent in foreign
currencies would have to be endured, and this as-
pect of the question must not be stressed too much.
In view of the fact, however, that these paymentsIN THE MAKING

137

must extend over a period of years, some considera-
tion must be given to the moral as well as to the
economic strain of making payments in foreign ex-
change. The strain must not be permitted to reach
the breaking point. The capacity to pay must be
measured by conditions, and requirements which
might reduce capacity to pay must not be enforced.

Taking into consideration all of these and other
complications, it is to be doubted if any economists
could produce a definite table of commensurate
burden that would be accepted by any other econ-
omist.

One of the members of the Committee has just
submitted a study of this problem but without de-
tailed discussion of the theories adopted. He begins
by stating that Germany had a burden of about five
billion gold marks per year as a debt service charge
at the end of the war as interest upon her own
internal debt, of which she was relieved by inflation;
then computing the indebtedness of Belgium,
France, Great Britain and Italy upon a gold ex-
change basis, he concludes that if Germany were to
carry a debt upon the same scale as these other na-
tions, that debt would be expressed in millions of
gold marks.

64,021 as the equivalent of the Belgian debt
106,404 " " " " " French debt
216,600 " " " " " English debt
29,264 " " " " " Italian debt

Her interest charges if the per capita indebted-
ness were equal to that of Great Britain would be138

THE DAWES PLAN

eleven billion gold marks. If the per capita in-
debtedness of Germany were equal to the average
of the four Allies, the interest on it would be about
six billion gold marks. "It will be seen, therefore,
that by the test of the Germans' own debt or of that
actually being borne by her victors, the German
people should be taxed to the extent of at least five
or six billion marks in addition to their own ad-
ministrative expenditures." But if the comparison
be made upon the national and local taxation borne
by Great Britain for example, an equivalent burden
for Germany would be twenty-four and eight-tenth
billion gold marks. "But a very large part of the
taxation of the United Kingdom is raised for the
purpose of paying interest and the sinking fund to
her own nationals and, therefore, returns to them
as income. In a narrow sense although a burden on
particular taxpayers, it is not a burden on the coun-
try as a whole."

He next asserts that it will be said that a mere
per capita comparison, irrespective of average
wealth, is impossible or misleading. At the period
of her greatest development, the per capita income
in Germany was 60% of that in Great Britain. Tak-
ing this into consideration and the greater ease of
paying interest on internal bonds, he considered
that nine billion marks might be regarded as a com-
mensurate burden for Germany, as compared with
England, and states that similar figures would be
supplied for comparison with the other Allies. It
is rather hoped that the conclusion of the Commit-
tee, assuming they pursue this study, will be an-
nounced without a confusing discussion of theIN THE MAKING

139

method of reaching it. There would be more agree-
ment as to the amount than as to the method of
computing it.

The burden of obligation created by the war has
condemned the people of all the Allied Nations to
the payment of the maximum of taxes which can be
borne without destroying the incentive to continued
and increased production. Since the creditors of
Germany are paying taxes to the utmost limit of
their capacity, the application of this rule of equal-
ity in the burden of taxation must certainly mean
that Germany also must pay taxes from year to
year to the utmost limit of her capacity. More than
this could never be extracted; less than this would
relieve Germany from the common hardship. And
this is not by any means inflicting a penalty; it is
rather distributing the burden.

The system of taxation established in one nation
as being that which would produce the maximum
of revenue, without destructive effect at a partic-
ular time, might, if transferred and applied to the
people of another nation, at the same time, result in
comparatively low revenues, in disturbed conditions
of business and even in distress that might lead to
emigration. Some modified scale of taxation, ad-
justed to the conditions existing in the country in
which it is applied, would not only produce greater
revenue, but would maintain and increase produc-
tion, whereby the capacity for later tax payments is
sustained. Any taxation which diminishes material-
ly the capacity to produce, reduces in the same
measure the ultimate capacity to pay taxes.

In considering a scheme of taxation in Germany140

THE DAWES PLAN

that shall be as heavy proportionately as that borne
by other nations, it is, therefore, not so important
to measure schedules item by item, as it is to make
certain that a system be established calculated to
secure the maximum of revenue without the destruc-
tion of productive power. In a practical way equal-
ity in the burden as between two nations, is
established when both nations are being taxed upon
this basis.

Yesterday Mr. Kemmerer submitted a sugges-
tion, which may change the method of attacking the
problem. Its simplicity commends it and all of our
experts have endorsed it as worthy of careful study
and more likely to lead to good results than any
suggestion heretofore made in this connection.

A Possible Alternative Plan

Require Germany to pay to the Allies annually
for a fixed period of years an amount representing
a definite percentage, for example, 20% or 25% of
her national and state revenues. If preferred, pay-
ments could be made annually for an indefinite
period of years until a predetermined sum, principal
and interest, has been paid. These annual payments
might be in lieu of all other reparation payments or
they might be supplemented by one or more other
payments, as for example, a payment in the form of
railway bonds.

Among the merits of this plan the following may
be mentioned:

First: The plan makes the motives of the Ger-IN THE MAKING

141

mans and of the Allied people move concurrently
instead of in opposite directions. The more Ger-
many prospers, the more she will be able to pay and
the larger will be the reparations the Allies will re-
ceive. It will be to the interest of the Allies, there-
fore, to see Germany prosperous.

Second: The uncertainties in connection with
reparation payments arising from fluctuations in the
value of gold, in terms of which amounts are stated,
would be eliminated. By the plan proposed, if the
value of gold should decline (i. e. the price level
should rise), Germany's revenue receipts would
likewise rise; and if the value of gold should rise
(i. e. the price level fall), Germany's revenue re-
ceipts would tend downward, so that in either case
the amounts payable to the Allies would vary with
the value of the money paid.

Third: Inasmuch as Germany would herself re-
ceive the major part of revenues collected and as
her officials would be publicly responsible to her
people for the expenditures of these revenues, there
would be strong public pressure for honesty in mak-
ing collections and keeping accounts.

Fourth: The plan gives Germany the maximum
degree of freedom in working out her own tax and
revenue program (gages, if thought necessary,
could of course be taken on this plan as well as on
any other).

Fifth: The plan has the merit of great simplic-
ity. The man in the street can not understand
"commensurate burden" but he can understand
"twenty cents on the dollar."142

THE DAWES PLAN

But nevertheless, even though the discussion of
the methods for ascertaining it may be avoided, it is
not likely that the basis of commensurate burden
for the ultimate settlement can be abandoned. It
furnishes a moral principle which all must recog-
nize. No man can question the justice of equalizing
the burden of the war. To deny it would be to set
up the absurd claim that Germany alone among
the nations was without fault in beginning and con-
ducting the war and that she must be rewarded for
her defeat by tremendous advantages at the expense
of the Allied Nations.

The Belgian proposals, submitted by Monsieur
Francqui, are being considered. As they are quite
long and poorly translated, a condensed statement
of them is made. The opening statement is that the
restoration of German economic life must be dealt
with from every aspect. Germany must be enabled
to distribute reasonable payments among its cred-
itors in order to meet the difficulties and in some
cases the otherwise inextricable difficulties faced by
these creditors, and this upon a permanent basis,
which implies due regard to the welfare of the cred-
itor nations, for their collapse would destroy
Germany. In the near future there probably will be
a surplus of German revenues even without the rail-
roads, which will soon yield large profits. Under
what circumstances and how can this surplus be
paid into the reparation fund for distribution? He
then quotes from Sir Josiah Stamp (without includ-
ing his full discussion which qualified this state-
ment) to the effect that Germany could soon raiseMoxsietjr. Emile Fbancqui
Belgian Member First Committee of ExpertsIN THE MAKING

143

eleven and one-half billion marks revenue and have
available for reparations four and one-half billions.
To provide that this be done would require danger-
ous interference in the internal affairs of Germany.
Other means must be found. Particularly because a
control over the disposition of revenues would not
presumably be effective in preventing the dumping
of German goods on the international markets.
Therefore, there ought to be eliminated from the
German budget the receipts which can be easily con-
trolled.

He refers to railway receipts and the various
taxes on consumption dealt with in the Belgian
study, which, he states, the German Government has
favorably received.

An organization ought to be created to demand
from German manufacturers a portion of the prof-
its realized from 1913 onward, especially those made
by the automatic cancellation of their debts brought
about by the collapse of the mark. The appropria-
tion to the reparation fund of railway profits,
monopoly receipts and levies on fortunes abnormal-
ly acquired through the fall of the mark, does in
fact chiefly affect those members of the community
whose capital has been abnormally augmented.

Could not the Committee suggest the organization
of a private company to operate such monopolies as
alcohol, tobacco and beverages under the same sys-
tem of control as that applied to the Bank of Issue ?
It is certain that the German Government would
as readily agree to the control of these monopolies
as they have to the international control of the144

THE DAWES PLAN

bank. The German Government has already indi-
cated its intention to operate the railroads through
a corporation upon a profit earning basis and the
organization of a company under international
superivision would be in conformity with their
plans.

Let the German Government receive all the or-
dinary shares in such a company, and let from one
hundred million to one hundred fifty million gold
mark issue of preferred shares be made to be sub-
scribed by individuals within and outside of Ger-
many for working capital. The company would be
placed under the direction of a board of managers,
consisting of Germans and foreigners in equal num-
bers, the chairman to be a German and one of the
foreign directors to be entrusted with the duties of
a comptroller, who would particularly see that rates
are fully applied in such a way as to make dumping
(through freight rebates) impossible. The company
would issue a certain number of bonds, the proceeds
of which would be assigned for reparations; after
payment of interest on the bonds, a moderate rate to
be paid on the preferred shares and the surplus di-
vided between the preferred and ordinary shares in
some ratio to be determined later; and a similar sys-
tem might be adopted in connection with the monop-
olies. At the close of his discussion he outlines this
arrangement, which presumably applies to the rail-
roads also. "The trustee accountant will only be
authorized to issue to the public a nominal amount
of bonds, determined by the ratio of two-thirds be-
tween interest on bonds outstanding and net earn-IN THE MAKING

145

ings of the company. The duration of concessions
of monopolies to these companies to be, for instance,
thirty-seven years. Each monopoly to issue bonds
and if these bonds were not retired out of earnings
within that time, the period of concession to be ex-
tended. On the other hand the German Government
will have, after the tenth year, the right to terminate
concessions by paying off the bonds in a lump sum.
This whole system to be directed by two trustees, a
trustee cashier, who would be especially entrusted
with the movement of currencies of all the com-
panies, and a trustee accountant, who would be con-
cerned "with the movement of the bills of all the
regies" (monopolies or controls). All these com-
panies to be inseparable parts of a whole of which
the proposed bank of issue is the base. Any
deficiencies of earnings below interest of one would
be made up from the surplus of the others.

"Whatever moderation may be shown in fixing
immediate payments, there is one guarantee which
can not be forgotten, the immediate organization of
means to insure future payments, i. e., the imme-
diate application of the measures sketched out
above for placing in the hands of the Allies a re-
liable pledge for the payments expected from Ger-
many."

Monday, February 11, 1924.

Our stay in Berlin is drawing to its end. We shall
leave on Wednesday. The government had taken
pains to prepare in advance information and to
furnish it as promptly and exactly as possible. As146

THE DAWES PLAN

for ourselves, Ambassador Houghton has on several
occasions been our most agreeable host, and in every
way both by advice and by introductions to Mr.
Young has been very useful indeed. We have seen
some very fine operatic performances as his guests,
and we have on our own account not failed to visit
the public kitchens and relief stations where the
poor are being fed. The general method of this
work pleased us in all particulars.

The Berlin Tageblatt printed a little article on
February seventh, which tells about the offices put
at the disposal of the Committee:

How THE ExPEBTS WoBK

9 Bellevuestrasse: From the noisy Potsdamer
Platz you enter this once aristocratic street, where
the dwellings have been replaced by offices. Walk-
ing past the Esplanade Hotel, you find between
houses a thoroughfare with a few columns indicat-
ing that here begins one of those private streets
frequently to be found in the Tiergarten quarter.
Between the columns there hangs a regular sign-
board Reichswirtschaftsrat—black upon white, not
at all official. The thoroughfare ends in a lawn
grown with old trees, and on it is built a large box,
the house of the Reichswirtschaftsrat in which the
experts will be residing for some weeks.

Formerly it was called Konigliches Wilhelm-
Gymnasium (grammar school), which has ceased to
exist for some months. Only the head-master is still
living in his old-fashioned house lying opposite the
school. A monument of the old emperor is still
there, too, but one feels that one does not longer
know why it is there. The weather is too cold;
otherwise one might see the experts taking theirIN THE MAKING

147

ease, during the sitting intervals, on the stone

benches of the monument.

When the house was rebuilt for the Reichswirt-
schaftsrat, many things were altered, but—to tell
the truth—a last remainder of school-atmosphere
was not wholly expelled. There is still a smell
of class work. In the entrance hall, we are wel-
comed by Sophocles; on the left and on the right,
there are two corridors, and then—another world.
On the door we read names which mean more to
mankind to-day: Young, Parmentier, Pirelli—the
rooms of the experts. A room has been placed at the
disposal of each expert; on the ground-floor there
are the Frenchmen and the Americans; on the first
floor are the Englishmen, the Italians and the Bel-
gians, on the second there is the chief secretary of-
fice. Mr. MacFadyean, Chief Secretary of the
Reparation Commission, has taken the management
of the offices into his hands and commands a nu-
merous auxiliary troop of technical officials, inter-
preters and lady typewriters, also two American
professors, statisticians and experts in bookkeeping.
A prodigy of an interpreter, Paul Mantoux, who
worked at the Peace Conference and was then ap-
pointed department chief of the secretary office of
the League of Nations, is not among the inter-
preters, but in return for this, we can show at least
one talent, the interpreter of the "War Cost Commis-
sion—Michaelis, who masters ten languages and has
been present at all the great international confer-
ences: Versailles, Brussels, Cannes and Genoa. The
interpreters, by the way, have important services to
render, for their help is used also for the conversa-
tions among the experts themselves. McKenna,
for instance, does not speak French. The work is,
of course, considerably simplified, if the assistance
of interpreters is not needed. We well remember
what impression it made when Walter Eathenau
repeated his speech himself in English and French.148

THE DAWES PLAN

A similar impression has been produced on the ex-
perts when they saw that several German referees,
such as Bergmann and Doctor Schacht, could answer
to English and French questions in the same lan-
guage so that the interpreter had to translate into
one language only.

With very few exceptions, the sittings take place
in the rooms of the experts, those of the First Com-
mittee in Mr. Young's room, those of the Second
Committee in Mr. Atthalin's room, even if German
referees are consulted. There is no pomp, no cere-
mony on the whole; no chairman, no standing orders.
They are sitting round the table smoking cigars or
cigarettes. General Dawes, of course, smokes his
pipe and speaks to the point. There is also a sit-
ting-room which is, however, seldom used. In for-
mer times it was the lower fourth form of the
grammar school; now it hears things more impor-
tant than the mysteries of the Greek verbs ending
in "mi."

Doctor Meyer, who keeps the experts in touch with
the War Cost Commission, is in a room which was
the ancient preparatory class, where he had once
been himself when a boy. The experts apply to him
with all their requests and he, then, gives his
orders, which are not always easy. It was also he
who received the two committees at the station.

Some of the experts know Berlin from former
visits; one even attended the lectures of the uni-
versity and speaks with veneration of Schmoller and
Wagner. Atthalin was here several times, also
McKenna. Both committees reside at the Espla-
nade Hotel. By the way, it is interesting that the
Americans, also, in formal things lay stress on their
non-cooperation in the Reparation Commission.
They pay for their stay themselves, whereas else the
Reparation Commission defrays the expenses. As,
however, the Reparation Commission is paid by
ourselves, Germany profits a little by the mannerIN THE MAKING

149

of accentuating the line of demarcation and we are
thankful for that, even if it is meant otherwise. "We
should, however, be more delighted to have seen the
Americans from the very beginning in the Repara-
tion Commission; Europe would then look quite dif-
ferent. In the hotel, the experts lead a very retired
life, only the chief secretary and the Belgian Franc-
qui have taken their wives with them. Things have
changed since that first visit of the Reparation
Commission. It was the time of the beginning fall
of the mark which caused the prices of German ar-
ticles to go down considerably and foreigners came
in troops to Germany and bought whatever they
could. Then a member was considerably late at a sit-
ting in Wilhelmstreet and made his excuse by saying
that he had been shopping "pour participer a
l'Ausverkauf" [in order to profit by the bargain
sale of Germany].

The Banking Committee has been devoting much
study to the preparation of the plan for the new
bank. This new bank of issue is designed to be the
essential agency for creating in Germany a unified,
stable and elastic currency, which will provide a
sound basis for domestic credit, facilitate the bal-
ancing of the budget and provide for the discharge
of its external obligations. The full attainment of
this purpose will promote the stabilization of other
European currencies and the resumption of normal
trade relations between the nations of Europe. The
temporary stability of the currency now prevailing
will facilitate the accomplishment of this plan, and
it is highly important to have the organization com-
pleted and the bank in operation before any dis-
turbance of present conditions occurs. They have150 THE DAWES PLAN

worked out an arrangement whereby the new bank
shall be organized under a charter of fifty years'
duration with a capital of four hundred million gold
marks and of this capital one hundred million marks
may be used to acquire the property of or to merge
with the Reichsbank. The bank will be managed by
a Board of Managers, all of whom are to be of Ger-
man nationality and to be selected by the president
of the bank, and presumably from the staff of vice-
presidents. This board will direct the discount and
credit policy of the bank, fix rates of interest and
draft regulations of policy. The General Board of
Directors shall consist of fourteen members, one-
half of whom shall be foreign and one-half of Ger-
man nationality. The foreign members of the first
General Board shall be appointed by an organiza-
tion committee composed of the president of the
Reichsbank and one member of the Committee of
Experts, and the Board in filling vacancies in the
future shall consult with reference to such election
the central Bank of Issue or any financial authority
of the country, whose citizen is to be chosen, but
citizens of the following nations are eligible: Eng-
land, France, Belgium, United States, Holland and
Switzerland. By unanimous vote the number of
German members of the Board may be increased.
A commissioner shall be appointed who shall be a
foreigner to be elected by a majority vote of not
less than nine members of the General Board of
which majority six shall be of foreign members,
whose duty it shall be to enforce the provisions of
the law relative to the issue of notes and main-IN THE MAKING

151

tenance of the bank's reserves. The power of the
bank to make loans to the government is strictly
limited and subject to the control of the General, as
distinguished from the Managing, Board. The bank
shall have the exclusive privilege of issuing circulat-
ing bank-notes as legal tender money, but all of the
conditions controlling this feature of its functioning
have not yet been determined. There is also in-
cluded in the plan an arrangement for supporting
and at some later time retiring the Rentenmarks in
circulation, as well as for providing for the per-
manent stabilization of the Reichsmark at the ratio
of a trillion to one gold mark.

In general it is proposed to establish this bank
upon a gold exchange basis as securely as existing
conditions and future fears will permit. As to the
exact restrictions by which this is to be accom-
plished, there is much difference of opinion, but the
final conclusion of their discussions may be found
in Annex No. 1, the Plan of the Bank as finally sub-
mitted.

All of the members of the Banking Committee are
devoting much labor to the task of preparing these
plans. Sir Robert M. Kindersley applies himself to
this work with indefatigable industry. His long ex-
perience in banking, his painstaking accuracy and
unassuming but great ability, make his contributions
to the completion of this work invaluable. The
president of the great banking firm of Lazard
Freres, a director of the Bank of England and the
chairman of the Board of Directors of the Hudson
Bay Company, Sir Robert brings to this work the152

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lessons of a wide experience. Mr. Henry M. Robin-
son, the American member of the Second Commit-
tee, has been invited to sit with this Banking Com-
mittee and thus has the unique experience of serv-
ing actively on both Committees. His intimate
knowledge of the technical features of banking and
his education in and the long practice of law, enable
him to be of the greatest service, and the value of
his contributions is cordially recognized by all. The
Belgian member, Monsieur Emile Francqui, is a man
who has had a remarkable and varied life in the de-
velopment of the Belgian Congo, in the building of
railroads in China, in the production of radium, in
banking and in the political life of Belgium. He un-
derstands well the theories of economists and tem-
pers every discussion with the highly practical sug-
gestions of a widely experienced business man. Like
Sir Josiah Stamp and Sir Robert Kindersley, Mon-
sieur Francqui is untiring in his industry. The
French member, Monsieur Parmentier, has gained
the admiration and respect of all the members of
the Committee, both by reason of his thorough tech-
nical knowledge and his excellent judgment and
tactful conduct. Doctor Alberto Pirelli, the Italian
member, is the head of one of the greatest indus-
tries of Italy, and a man of sound judgment and
wide knowledge. It is impossible to believe that any
men could be found better qualified by ability, ex-
perience, knowledge and judgment, to do this par-
ticular work than these very men appear to be.
There seems always to be a mutual respect between
them, and a cordial cooperation in their commonIN THE MAKING

153

task. Mr. Owen D. Young is chairman of the Com-
mittee, and has gained the admiration and esteem
of its members in the same degree as he had already
won that of all the Americans engaged in this work.

There have been conferences between the mem-
bers of the Committee and most of the men in Ger-
many prominent and influential in politics, finance
and business, the so-called "keymen," about the
bank plans, and upon general principles there is
substantial agreement.

There has also been a great deal of discussion all
the time about the matter of payments, outside of
Germany, on reparations. It is assumed that in
time there will be a substantial surplus of revenues
to be applied to reparations. Every one believes
it will be easy to use this surplus in making pay-
ments for reparations outside of Germany, to the
extent that there is a surplus of exports over im-
ports and nearly every one realizes that it will be
difficult and dangerous, if not impossible, to make
any payments beyond the limit of this surplus. But
the credit piled up in the bank may be used to in-
crease production and thus to make the surplus of
exports over imports larger. It seems very simple
to say that the surplus of governmental revenue
must be deposited in the bank to the credit of the
reparation account, and that this account shall be
in charge of a commissioner, who would act under
the direction of the Board in such a manner as to
protect the bank and maintain the parity of foreign
exchanges by refusing to draw upon the reparation
account when the mark was a certain number of154

THE DAWES PLAN

points below par, or by accepting and honoring
sight drafts at some times, and at others giving
notice that he would accept only sixty or ninety day
drafts. But there are many things to be considered,
and there is reason to exercise the greatest caution
because of the calamitous effect likely to be pro-
duced by a financial panic, or depreciation of the
currency during the very period so carefully
planned for Germany's reconstruction.

Mr. Kemmerer has written two discussions bear-
ing upon this matter, and Mr. Davis has commented
on them. Others have written and these men have
written other comments on different aspects of this
problem, but these are reproduced here both to show
the form in which material is presented to these
committeemen and to indicate just what factors
must, among others, be considered when planning a
method for making payments beyond the territorial
limits of a nation.

18 rue de Tilsitt, Paris.

January 26, 1924.

Memorandum for Mr. Dawes.

Subject: Effect of Reparation Payments on Cur-
rency Stability

By E. W. Kemmerer.

A question frequently raised is whether substan-
tial payments by Germany in the reparation account
would seriously endanger a gold standard currency
in Germany, if one should be established along
proper lines. In the judgment of the undersigned,
E. W. Kemmerer, J. S. Davis, Leonard P. AyresIN THE MAKING

155

and W. S. Tower, there would be no serious danger
to such a gold standard if the payments required
should not be very excessive. Briefly stated, the
fundamental reasoning underlying this opinion, is
as follows:

Gold moves in international trade for the same
reason and in response to the same fundamental
motives as does any other commodity, e. g., wheat,
copper, steel, etc. It always tends to seek the best
market and it moves in response to the profit-seek-
ing motives, from the place where it is relatively
cheap, to the place where it is relatively dear. It
is cheap where the supply is large, relative to the
demand—the chief factor in the demand being the
monetary one—and it is dear where the supply is
small relative to the demand. When gold is per-
forming an important function in a given country
which the public demands and for which it is willing
to pay in goods and services, as, for example, the
function of providing a stable currency through
serving as money in reserves against bank-note is-
sues or through actually circulating as money from
hand to hand, a progressive reduction in the supply
of gold, with a fairly constant demand, will make
gold increasingly valuable at home as compared
with other commodities (as well as decreasingly
valuable in the markets to which it flows), and this
increasing value at home and decreasing value
abroad will, under normal conditions, tend to check
its exportation.

A country that is a large producer of wheat and
which exported wheat in substantial quantities,
might increase its exports of wheat considerably in
order to provide funds abroad for the payment of
reparations, or for similar purposes, and to that
end might reduce materially its normal consump-
tion of wheat. The more wheat is exported, how-
ever, the scarcer wheat would become at home, and
the higher its price would become, as compared with156 THE DAWES PLAN

other goods. If an increasing proportion of the
home production should be exported for some time,
the price of wheat at home would become so high
that it would be cheaper for the country to export
something else than wheat, in order to provide the
necessary foreign credits. A country whose people
liked wheat products and were willing to pay for
them, clearly would not permit itself to be deprived
of all its wheat in order to provide values abroad
with which to make the necessary foreign payments.
Those values would be provided by the exportation
of a great number and variety of articles—all tend-
ing to be in such amounts and proportions as to
represent the minimum total sacrifice at home.
Given a reasonable length of time, prices of the dif-
ferent kinds of commodities would adjust them-
selves to this end.

The same principle applies in the case of gold,
which differs from wheat, from the point of view
of the present problem, chiefly in the fact that it is
usually more highly marketable in the world's mar-
kets than wheat, and that the chief demand for it is
the demand to meet the needs of a stable circulating
medium instead of a goods need. These differences
are of little importance from the standpoint of the
present problem. If the country on the gold stand-
ard has a strongly unfavorable balance of payments,
exchange rates rise to the gold export point and
gold flows out. The more gold flows out, the dearer
it becomes at home, this dearness being expressed
in:

(1)	Falling prices of those commodities and se-

curities whose prices are sensitive;

(2)	Rising interest rates, first on call and short

loans, and later on loans of longer matu-
rities.

A long continued outflow of gold usually results
in an increasing uneasiness on the part of the banksIN THE MAKING

157

and the financial public because it appears to be ex-
cessive and to threaten the monetary standard.

Furthermore, high and rising exchange rates pen-
alize the importer of goods and securities and bene-
fit the exporter, because the importer is compelled
to pay more for his exchange in terms of the home
money, while the exporter receives more in terms of
the home money for his foreign bills. Just the op-
posite situation, of course, develops in the country
which is receiving the gold.

These forces become cumulative, and soon check
the outflow of gold and cause payments abroad to
be effected by the shipments of other commodities
or securities which have become progressively
cheaper in terms of gold; in other words, the com-
modities and securities whose prices have been fall-
ing under the pressure of heavy gold shipments.
In the country receiving the gold, however, prices
will have been rising and. interest rates will have
been tending downward under the influence of this
influx of gold.

Of course a people, in time of great emergency,
may decide that a gold standard is a great luxury
which they can not afford, just as they may decide,
as a matter of patriotism, to forego the use of wheat
bread and eat only black bread. This, however, is
not likely to be the case among a highly civilized
people in time of peace. A country can always
have gold if it is willing to pay for it.

The natural economic forces above mentioned,
that come into play to protect a country from undue
drain of gold, may be strengthened by legislation
requiring:

(1^ Definite legal gold reserves against notes
and deposits with a progressive tax on
deficiencies, the proceeds of which would
go to the government;158

THE DAWES PLAN

(2) Publicity in regard to gold holdings of the
banks (and of the government, if it issues
notes), so that the public will be promptly
informed what is happening.

Of course if a country would import, in goods, serv-
ices, securities, etc., for a long period of time, more
than it should export and should pay the differ-
ences in gold, it would obviously sooner or later be
deprived of all of its gold, unless it should itself be a
great producer of gold. But it is equally true that
if it should import goods, services, securities and
gold in excess of its exports, other than coal, and
should pay for the differences entirely in coal, it
might be deprived of all its coal.

The foregoing discussion should not be inter-
preted to mean that it may not be advisable to place
some restrictions upon the rapidity with which the
Reparation Commission may draw against the funds
accumulated to its credit in the bank.

15 Bellevuestrasse, Berlin
February 4, 1924.

Subject: Some Notes on the Alleged Danger of a
Breakdown of the German Gold Standard through
Excessive Calls for Gold against the Reparation
Credits which it is proposed to build up in the
New Gold Bank in Berlin.

By E. W. Kemmerer

For the sake of illustration, assume that a billion
gold marks have been accumulated on deposit ac-
count in the Bank in Germany to the credit of rep-
paration account; assume that banks in France sell
for the account of the Reparation Commission to
French importers of goods from Germany, drafts
on this deposit in Germany payable in gold marksIN THE MAKING

159

which drafts French importers send to German ex-
porters in payment for the goods which they are
importing from Germany. The German exporter
deposits the draft or the proceeds thereof to his
own credit, either in the new gold Bank or in some
other German bank in which he keeps his account,
with the result that:

(1)	The German exporter now has the deposit
credit that the Reparation Commission formerly
had;

(2)	The French importer has the goods which
were exported from Germany for which he had
made full payment;

(3)	The Eeparation Commission has received its
money in France;

(4)	The German Government has been credited
with the corresponding amount on reparation ac-
count which it had previously placed in the new gold
Bank in Germany out of the proceeds of taxes;

(5)	The banks of Germany have lost no gold al-
though a transfer of gold may have resulted from
the new gold Bank to some other German bank in
which the German exporter keeps his account.

If the Reparation Commission should sell an un-
due amount of these drafts to French importers and
bankers, exchange rate in Paris on Berlin would
fall to the gold import point for France and gold
would move from Berlin to Paris. The counterpart
of this movement would be a rise of exchange rates
in Berlin on Paris to Berlin's gold export point and
the shipment of gold from Berlin to Paris.

If this situation should continue long, automatic
economic forces would come into play to check and
ultimately to stop the undue exportation of gold
from Germany to France. Among these forces
would be the following:

(1) Falling prices in Germany and rising prices
in France, which would make it increasingly prof-160 THE DAWES PLAN

itable for France to take her German credits in
goods and securities rather than in gold and, con-
versely, for Germany to pay France in goods and
securities rather than in gold;

(2)	Rising interest and discount rates in Ger-
many and falling interest and discount rates in
France which would make it increasingly profitable
for international bankers (including the French) to
divert floating funds to Germany and away from
France;

(3)	Decreased returns for the Reparation Com-
mission and decreased profits for French exporters
on each thousand marks of German credits in Berlin
against which they were drawing drafts because of
the low and declining number of francs obtainable
for each thousand gold marks at the reduced ex-
change rate prevailing in Paris on Berlin;

(4)	Increased profits for French merchants im-
porting merchandise, securities, etc., from Germany
because of the lower prices they would need to pay
for their Berlin drafts on account of the low ex-
change rates in Paris on Berlin;

(5)	The forcing of the Paris-Berlin exchange
rate out of equilibrium with the other internation-
al exchanges, with the resulting profit to bankers
in London, New York, Rotterdam and other finan-
cial centers, in transferring funds to Berlin by
arbitrage through Paris because gold mark credits
could be bought through Paris more cheaply than
by purchase of bills directly in Berlin. This would
force Paris to pay Berlin for the account of London,
New York, Rotterdam, etc., would force up exchange
rates in Paris on Berlin and stop the flow of gold
from Berlin to Paris;

(6)	The French would find it increasingly prof-
itable to remit to New York, London, Rotterdam,
etc., by arbitrage through Berlin because of the low
rates in Paris on Berlin, and because of the pre-e. w. kemmererIN THE MAKING

161

sumably low exchange rates in Berlin on other
cities, due to the scarcity of gold in Berlin, high in-
terest rates, etc.

Gold moves in international trade under the in-
fluence of the same fundamental forces as does any
other staple commodity. It goes from the place
where it is relatively redundant, therefore relative-
ly cheap, as compared with other goods, to the place
where it is relatively scarce and therefore relatively
dear; and it continues so to move so long as the dif-
ference in its value in the two countries is sufficient
to pay shipping expenses and to yield a reasonable
profit to the shipper. But every shipment of gold
lessens the supply of gold in the exporting country,
and thereby tends to make it dearer there in com-
parison with other goods. Every such shipment
likewise increases the supply of gold in the import-
ing country and thereby tends to make it cheaper
there in comparison with other goods. These forces,
both working in the same direction, soon check the
outward flow of gold for the same reason that they
would check an excessive exportation of wheat, or
any other commodity, say from the United States
to Germany.

If there is a fund in Germany to the credit of the
Allies, payments from that fund, if unrestricted,
will be made chiefly in commodities which Germany
will herself produce to advantage in the field of in-
ternational competition, or in commodities shipped
from other countries to the Allies and paid for out
of the proceeds of Germany's exports of her own
staples to those other countries. The Allies will re-
ceive their pay, for example, in coal, dyestuffs,
potash, and the like, directly from Germany, and
also in coffee from Brazil, cotton from the United
States, hides from Argentine, etc., for which Ger-
many will have paid by the shipment of her own
products to those countries. Under the play of in-162

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ternational economic forces, Germany would not
make her payments in any one commodity—coal,
dyestuffs, potash, or gold—because heavy pay-
ments in any one commodity would be uneconomic
for Germany to make and likewise uneconomic for
the Allies to receive. Payments would be made in
a great number of commodities and the varying pro-
portions of each in the total settlement would be
adjusted through price movements in Germany and
abroad, so that the goods exported from Germany
in connection with reparation payments would
probably be much the same in character and in per-
centage distribution as the goods exported from
Germany on her general trade account.

If the Allies should take too much of Germany's
total economic product, they would obviously im-
poverish Germany and in doing so reduce the health
and efficiency of Germany's population, and there-
by force a reduction in Germany's productivity
through causing (1) an increasing emigration of
German labor, (2) an increasing death rate, (3) a
decreasing birth rate, and (4) a decreased produc-
tive efficiency on the part of the German popula-
tion remaining at home.

In making the above statement, it is not intended
to take the position that no restriction whatever
should be placed upon the withdrawing of the funds
accumulated in the new gold Bank to the credit of
reparation account. The mere fact that the placing
of reasonable restrictions might inspire greater con-
fidence in the Bank among those not familiar with
the strength of the above mentioned automatic
economic forces might itself be sufficient reason to
justify some restrictions. It might, for example, be
provided that drafts on the account drawn by the
Allies or their representatives should be wholly or
in large part time drafts, instead of cables or de-
mand drafts; furthermore, that such drafts mightIN THE MAKING

163

always be paid by the new Bank in its own notes or
in deposit credits, so long as the mark were main-
tained on a gold basis, and that the Bank might have
the option of redeeming its notes in gold drafts on
New York or some other financial center on the gold
standard, in accordance with the principles of the
gold exchange standard. In this connection, it
should be understood that the price charged for
such drafts in Berlin should never be above the gold
export rate. Other possible restrictions will be men-
tioned in a subsequent memorandum.

In the above discussion it is assumed that the new
Bank will be required by law to maintain a reason-
able gold reserve—probably thirty to forty per
cent, in its own vaults for on deposit abroad—
a reserve adequate to take care of normal seasonal
swings in the demands for currency and in addition
to provide a reasonable factor of safety for emer-
gencies. It is also assumed that, in accordance with
the suggestion I made in a previous memorandum,
the deficiencies in this reserve mil be subjected to a
progressive tax somewhat similar to the one pro-
vided for in the United States Federal Reserve
Bank Law.

15 Bellevuestrasse, Berlin.

February 5, 1924.

Subject: Mr. Kemmerer's Memorandum of Feb-
ruary 4, 1924, entitled "Some Notes on the Al-
leged Danger of the Breakdown of the German
Gold Standard."

By J. S. Davis

This memorandum deals with a subject on which
I have been working for some days and on which I
have a memorandum in preparation. The point is164

THE DAWES PLAN

one of large importance on which it will be unfor-
tunate to have conclusions crystallize prematurely.
Such discussions as we have thus far had have
shown some differences of opinion which are likely
to be reconciled before long. In the meanwhile, how-
ever, I wish to record my inability, in spite of my
agreement with much of Mr. Kemmerer's memoran-
dum, to accept his conclusion, as stated, that, "If
this situation should continue long, automatic
economic forces would come into play to check and
ultimately to stop the undue exportation of gold
from Germany to France." That these forces would
operate in the direction Mr. Kemmerer points out,
is clear-; that they would operate to the extent of
stopping the undue exportation of gold, without the
interposition of additional important restrictions
upon withdrawal (beyond those mentioned in his
last paragraph) is, in my opinion, by no means cer-
tain. This will depend, among other things, upon
the size of the deposit in relation to the possible in-
crease of Germany's excess of exports (of goods
and services) over her imports (of goods and serv-
ices) ; and also upon the extent to which gold or
gold balances moved out of Germany affect foreign
prices and money markets. Given time, no limit
can be set to Germany's export surplus, but it is
incapable of rapid expansion in a brief period, at
least from the point at which it stands when fairly
normal economic conditions are regained; and the
extent to which gold movements will influence
prices, under post-war conditions, can not be pre-
dicted with confidence.

I believe there is a limit, not readily ascertainable
in advance, up to which withdrawals of such de-
posits will in no way endanger the stability of Ger-
many's currency, banking and exchange, but beyond
which such withdrawals would, even under such re-
strictions as suggested in Mr, Kemmerer's lastIN THE MAKING

165

paragraph, jeopardize this stability, and if contin-
ued, destroy it. Against exceeding this limit, I
believe that provision for safeguards must be care-
fully made,

Paris, February 17, 1924.

On Wednesday, before leaving Berlin, General
Dawes called upon Chancellor Marx to express the
appreciation of the Committee of the cooperation of
the German Government, and Herr Marx told him
privately that he felt that in the action of this Com-
mittee, there existed the last hope of a reasonable
economic settlement. Ambassador Houghton was
quite hopeful toward the latter part of the Commit-
tee's stay in Berlin, and no man knows better the
difficulties of the problem than he does.CHAPTER V

formulation" of report—attitude of french press
toward work of the committee—false rumor of
resignation of general dawes and effect on for-
eign exchange—comments and memoranda by
american experts on accumulation of budget sur-
plus within germany—discussion of withdrawal

of accumulations on reparations payments-

prospectus of gold bank to be formed by doctor
schacht—announcement by committee of plans
for establishing new german bank of issue.

Paris, February 17, 1924.

On the train returning to Paris General Dawes
talked quite confidentially of his conception of the
plan which ought to be formed and of the progress
already made, and at the risk of repetition it is
stated in his own words.

"The principles upon which the report must be
based, at this time, define themselves roughly in my
mind as follows:

"1. The whole report should be constructed
upon the fundamental principle that the people of
Germany must bear a burden of taxation for debt-
paying purposes, equal to that borne by the Allied
Nations. This principle is easy to state, but pre-
sents great difficulties when it comes to expressing
it in figures under present conditions.

166THE DAWES PLAN	167

"2. It is presupposed that the plan is an elastic
one, and that the burden of taxes upon Germany in-
creases in prosperous years and lessens in years of
depression, automatically. In this connection, in my
judgment, it will be necessary, within limits, to in-
voke the Kemmerer idea of fixing as a basis for
payments, a percentage of gross government in-
come.

"3. The plan, in its broader aspects, must be so
drawn as to impress on the public mind that it as-
sumes, in its eventual functioning, normal economic
conditions in Germany under a stabilized currency
and a balanced budget. Waiving, for the moment,
the question of an exportable surplus, the amount
which Germany might be expected to pay in taxes,
under recognition of the principle of a commen-
surate burden with that of the Allies, will perhaps
then resolve itself into at least a reasonably def-
inite figure. Since the plan is elastic, however, and
so drawn that income will increase with Germany's
prosperity, care should be had not to let the mini-
mum figure guess destroy perspective. The plan
must not assume, that, with a prosperous Germany,
the figure will not be commensurate to those ob-
taining in other countries. Ground exists for
optimism in viewing the future of Germany under
favorable economic conditions. If an estimated
minimum is in the minds of the experts, they must
remember that all these things are matters of esti-
mate, and that the business instinct of the world
assumes that with a restored Germany, all ordinary
limits will be exceeded. If the report is so drawn168

THE DAWES PLAN

as to run counter to this instinct, which is probably
right because it is an instinct, the report will fail
and the efforts of the committee fall to the ground.
The experts should remember that the leveling of
the economic barriers in the Ruhr is one of the ob-
jects sought to be accomplished by this effort, and
not the promulgation, through the world, of well
guarded opinions upon matters admittedly of esti-
mate only.

'' The creation of a bank of issue, operated under
allied supervision, as provided for in the bank plan
proposed by the committee, with the provision for
the deposit in the bank toward reparations of the
internal surplus arising from the scale of taxation
proposed roughly commensurate with that borne by
the Allies, makes possible the promulgation of the
idea of commensurate German taxation.

"4. Since the creation of the balance in the bank
for reparations account by the deposit of the in-
ternal taxation surplus, becomes the basis of any
payments, including deliveries in kind, which the
existence of any exportable surplus, or the transfer
of securities representing capital values renders
possible, the practicability of the creation of the de-
posit without adverse effects upon Germany's
internal business, must be explained. In this con-
nection, it will be remembered that the German
savings-bank deposits before the war were about
twenty billions of gold marks, indicating the large
amount of capital required by Germany in a normal
year's production and evidencing the large sum,
which can be accumulated internally before a con-IN THE MAKING

169

dition of normalcy is reached in German productiv-
ity, and it should be remembered that a large
balance of purchasing power in the hands of the
Allies, which can be spent only in Germany, will
have an effect in increasing the demand for Ger-
man goods, both necessities and luxuries. A portion
only of this balance can be transferred externally
through exchange and transfer of capital values and
the rest of it can not be spent anywhere else than
in Germany. It must be assumed, however, that the
Allies will not commit industrial suicide by allowing
this money to be used for the transfer of German
goods to such an extent as to cripple their own in-
dustry. It is evident that difficulties are involved
in this question, which require careful consideration.

"5. Since all agree that the return of German
productivity depends upon the economic reuniting
of the Ruhr with unoccupied Germany, we must
plan to provide for certain immediate definite guar-
antees to France, commensurate with the value of
the incomes which she is giving up in the Ruhr, in-
cluding deliveries in kind. This is one of the most
important features of the plan, involving discussion
of the possibility of immediately making the German
railway system the basis of creating revenue bear-
ing securities to be used in this connection. Prob-
ably other gages must be given. General supervi-
sion of the Ruhr, as distinguished from economic
control, must be conceded to France, not only in the
interest of her proper protection, but as safeguard-
ing the performance of the entire program in the
future.170

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"6. If resort is had to the creation of monop-
olies, under allied control, in certain resources of
income, such as those of tobacco, alcohol, etc., in
either furnishing gages to France or as guarantees
for reparation payments direct into the bank, it is
most desirable to have them limited and to have the
possibility of profit therefrom to the managing
agency, the smallest consistent with the proper ex-
ploitation of the revenue. With the world prejudice
existing against monopolies, intensified by the feel-
ing regarding the German industrialists, the plan
must not, even in appearance, turn over the German
people to private exploitation. As a principle, it is
wise to have the Allies deal with the German people
through their government and not assume direct re-
lations with them in the matter of the imposition of
collection of taxation. To obtain the minimum of
guarantees sufficient to effect the general economic
liberation of German business, it may be necessary
to resort to monopolies. I hope not, yet if so, it is
suggested that the German Government, with allied
supervision, be the agency used, as far as possible,
in their creation and functioning.

'' 7. The plan must suggest a moratorium of rep-
aration payments, with the exception of certain
necessary minimums like that necessary for an ap-
propriate force of occupation.

"8. Depending upon the conclusions of the Com-
mittee as to the present balancing of the budget,
the question of the amount and means of securing
a foreign loan for the balancing of the budget should
be covered. In regard to the bank, it is assumedIN THE MAKING

171

that the rate of earnings which the plan makes pos-
sible upon the stock of the bank will contribute a
sufficient inducement for the transfer of such por-
tion of its capital as is required from the allied
countries.

"9. The plan must be so drawn, in relation to
public opinion, as not only in its functioning to pro-
vide German business the necessary incentive for
recuperation, but to convince public opinion that it
is so constructed. On the other hand, it must give
the Allies the reasonable assurance of adequate rep-
arations."

This statement having been typed, Colonel Logan
showed it to Monsieur Barthou and made an en-
gagement for General Dawes to have a conference
with the latter Saturday afternoon. At this con-
ference there was a full discussion with Monsieur
Barthou of the general outline of the plan.

Mr. Young, Mr. Crocker and Mr. Tileston did not
return with us to Paris, but went to Nuremberg and
reached here on Sunday in time for the next meet-
ing of the Committee, which is on Monday, the
eighteenth, at eleven o'clock.

Now that the Committee is really "coming to
grips" with their problem, it does seem that the
hope of accomplishment is better than ever. It was
partly the context and partly the manner of report-
ing the chairman's speech that created about this
conference, in the public mind, an atmosphere of
frankness and freedom from diplomatic ceremony.
Such expressions as "foul and carrion loving vul-
tures, the nationalistic demagogues of all countries"172 THE DAWES PLAN

and "impenetrable fog banks of economic opinion"
attracted wide attention and favorable comment as
indicating, what is actually the case, that this Com-
mittee could work without the restrictions imposed
by personal political ambition and interest. The
emphasis placed upon "the great disaster which
faces each Ally and Europe unless common sense is
crowned king" really had a sobering effect upon
the politicians of European countries at least, and
especially as it was connected with the warning that
just as the war might have been lost through the
lack of unity of command so the prospect of a set-
tlement is now jeopardized by the present lack of
unity. These expressions, which have been char-
acterized as plain speaking, have drawn to the
attention of all public men the really grave disasters
which threaten all Europe. They all realize that
the world is sick and tired of this unsettlement and
alive to the danger of a catastrophe which may be-
fall unless some constructive action be taken
promptly. The action of the Committee in calling
in Doctor Schacht was taken as an indication of its
independence and courage. French papers were
surprised that there was no delay and no effort to
explain to the French public why the plans of a
German should be so carefully studied, but they ap-
proved of this action. It appeared abrupt and un-
diplomatic but businesslike and practical, and, so-
bered by threatened disaster, they have withheld all
criticism. Then the trip to Germany wras likewise
approved both here and in Germany and very great-
ly improved the chances for the complete coopera-James A. Logan
Unofficial Observer for United States at Reparation CommissionIN THE MAKING

173

tion of the German Government in the effort to
make a settlement.

The conditions that now exist in Germany seem
favorable to the gaining of support for any prac-
ticable plan that can be offered quickly. Germany
is demoralized but not too far gone to be saved by
prompt action. Her currency is for the moment
stabilized, taxes are being paid on the basis of gold
marks, the government pay-roll is being cut down,
and its revenues are rapidly overtaking its expendi-
tures. Doctor Schacht's plan has the unanimous
support of the German Government and leading
men of business. The adoption of this plan and the
universal acceptance in Germany of the justice of
bearing an equal burden of taxation seem to give
promise of cooperation from that country without
creating a corresponding opposition in other coun-
tries. There really appears to be the prospect of
more unity between the Allies and of better undei*-
standing with Germany.

Doctor Stresemann, the German Foreign Minister
and former Dictator, was quoted in the papers of
to-day as having said in a public speech at Elber-
field: "When I reflect on the negotiations con-
ducted in Paris and Berlin by the Committees of
Experts, for the first time I see the glimmer of
dawn on the horizon."

Tuesday, February 19, 1924.

The morning Herald contained to-day quite a
long article from which are taken the following
hopeful sentences. As a matter of political gossip,174

THE DAWES PLAN

it was stated that Poincare had called a conference
of the French members of the Reparation Commis-
sion and of the Committee of Experts and several
of his own ministers to discuss in detail the progress
being made by the Committee toward a decision.
They probably had before them this draft which
General Dawes handed to Barthou:

"As a result of their conversations in Berlin, the
members of the two Committees have returned here
more optimistic than ever on the possibility of ar-
riving at a unanimous report that will serve as the
basis for an entire European readjustment. Not
only did the Germans meet the experts with candor
and open their books to them, but they appeared to
be willing for the first time, virtually to commit the
financial future of Germany to these business men.
. . . From present indications, the experts favor
rgcommending tKe return of the economic control of
the Ruhr to Germany, the details of their plan dem-
onstrating that the net result of this will mean more
to France than if she insists on retaining her pres-
ent control of Euhr industries. Militarily and
politically but not economically France might still
retain control of the Ruhr. The maintenance of
economic barriers will be disapproved as well as the
present disseverance of the German railway system.
In return France would get the promise of regular
reparation payments, virtually guaranteed by the
new factor the Committee would introduce of an in-
ternational issuing bank absolutely controlling Ger-
man currency and furnishing the basis of the new
situation. This bank has been regarded from the
start as the key to the problem which the experts
had to solve."IN THE MAKING

175

February 21,1924.

Another comment from a New York paper which
has just been delivered may be found interesting.
It was about February eighth in Berlin that we were
called at midnight to the telephone and, General
Dawes not being available, it fell to my lot to deny
strenuously a report said to be circulating in Am-
sterdam and New York to the effect that he had re-
signed from the Committee. Doctor Schacht had just
made a speech which was interpreted in some quar-
ters as indicating friction between him and the
Committee. We realized this was a gambler's rumor
circulated for its effect on the stock exchange. The
Eentenmark and the paper mark are stabilized in
Germany for all practical purposes at a value for
the paper mark of four trillion, two hundred billion
to the dollar, and for the gold mark and Eentenmark
of four and two-tenths to the dollar, but upon the
exchanges there has been constant trading at fig-
ures varying somewhat from these. The New York
paper printed the following article:

"The German paper mark, which for nearly two
months had been the steadiest as well as the cheap-
est of all currency listed on the foreign exchange
market, suffered another dizzy sinking spell yester-
day. The break attracted international interest, for
it occurred not only in New York, but also in Lon-
don, Paris and Berlin and other countries. Ex-
planations were hard to find and those advanced
were based only upon unconfirmed rumors. From
December eleventh to Thursday the paper mark had
maintained a steady value here, the figure of
4,348,000,000,000 to the dollar having been un-176 THE DAWES PLAN

changed. In yesterday's dealings it was quoted at
an even 5,000,000,000,000 to the dollar. Even though
any quotation is purely nominal the slump attracted
attention; in fact, foreign exchange dealers said the
absence of any commercial dealings involving the
use of the paper mark made the break even more
puzzling.

"In London the paper marks suffered an equally
sharp reduction. Up to yesterday the quotation had
been given as 18,000,000,000,000 marks to the pound
sterling; yesterday the quotation was 21,500,000,-
000,000. This shrinkage amounted to a shade more
than 13 per cent. The shrinkage in New York was
an even 13 per cent.

"But the intangible factor in the situation and
the one to which the break was attributed pri-
marily, was the rumor that General Dawes had
abandoned suddenly his work on the sub-committee
of the Reparation Commission. This rumor was
current virtually in every active foreign exchange
house in the financial district; cables from abroad
had carried the rumor, and, once here, it was relayed
from house to house as a result of the efforts of
dealers to 'run it down' and learn for themselves
whether or not it was true. Neither a denial nor a
confirmation was obtained during the full day of
trading. The nearest approach to a denial that
could be found was the information that news serv-
ice from Paris had up to that time carried no mes-
sage on the subject.

"The rumored resignation of General Dawes was
attributed to several alleged grievances, one sup-
posedly being indignation over the Washington in-
cident and another on the supposition that all was
not well in the work of his special committee. Food
for the Dawes rumor was found in the fact that
other principal foreign exchange rates were lower.
The French franc gave way both in New York andIN THE MAKING

177

in London. The New York quotation was 4.52%
cents as low and 4.53 cents closing. This represented
a decline in a day of 12 to 12% points or one-sixth
of a cent. Belgian francs were off 10% points,
while the Italian lira gave way l1/^ points. The
English pound sterling was quoted at $4.29%, as
against the previous closing price of $4.321/8. This
represented a decline of 2% cents in a day, which
was considered unusually sharp."

Again on Tuesday, February nineteenth, here in
Paris, I was called at midnight by a newspaper edi-
tor who stated that other papers here had the story
of an interview with Mr. Young to the effect that
Poincare was obstructing the work of the Commit-
tee and that in consequence the American members
of the Committee intended to resign. Possibly a
prompt denial resulted in this rumor not being
printed. We did not see it, but the franc was selling
at its lowest point at just that time, and if such a
report had gained credence, it would not have
tended to strengthen it.

The discussions arising out of the memorandum
submitted by General Dawes on February eight-
eenth have only emphasized the importance and the
delicacy of the French position in the Ruhr. This
decisive act of invasion, defended and supported by
the French nation, has been criticized by many Eng-
lish and American writers. It has become a bone
of political contention in England and the subject
of much discussion in America. Whatever may be
the legal aspects of the case, and outside of France
and Belgium the preponderant opinion seems to be
adverse to the French claims, there is no doubt that178

THE DAWES PLAN

public opinion in France supports the position of
the French Government. The acrimonious discus-
sion has aroused the national pride of France and
the Frenchmen believe not only that their action was
right, legal and necessary, but that it was essential
to their safety and the protection of the nation's
interest. Those in control of the government, what-
ever their personal opinions may be, must respect
this public opinion. The necessity under which the
Committee is working, of coming to some unanimous
agreement, makes it unnecessary or even impossible
for them to discuss the propriety, legality or neces-
sity of the Ruhr invasion. They must take the
situation as they find it, and make such recom-
mendations as can be supported by the French and
Belgian members of the Committee. General Dawes,
however, on February twenty-second submitted to
Monsieur Barthou the following memorandum de-
signed to remind those who are responsible for
France's position of the importance of creating
throughout all the world the impression that the
basis is being laid for a lasting peace, and thus for
providing the conditions under which an extension
of credit would be made from those parts of the
world where it is redundant to the nations which are
so urgently in need of it.

"18 rue de Tilsitt,
"Paris, France.

"February 22, 1924.

"The following observations suggest themselves
as bearing upon the problems in connection with theIN THE MAKING

179

Ruhr situation, the solution of which will be deter-
mined chiefly by the attitude of France.

"(1) It is presumably desired by all, including
France, that in any new status quo established by
the acceptance of the experts' plan, the normal
economic functioning of Germany shall not be em-
barrassed.

"(2) Based upon the discouraging experiences
of France and all the Allies with the German spirit
of cooperation, in the past, France, with justifica-
tion, will probably urge that her full release of
economic pressure in the Euhr must not be complete
until the plan is accepted, not only by the Allies, but
by Germany. "When the plan is accepted by all, in-
cluding Germany, and an allied loan made to Ger-
many, either by the allied governments or the citi-
zens of those governments, including, it is hoped,
citizens of the United States, it is in practical effect,
a new treaty of economic peace between an al-
lied entente on the one side and Germany on the
other. If, in the mind of the world, it falls short of
this conception, the contribution of foreign capital
necessary to its establishment would be probably
greatly hindered.

"(3) It must be evident that the mere creation
of this new status quo of economic peace involves a
protection for France greater than that which can
come from an economic pressure in the Ruhr, which
can evidently result only in the complete economic
break-down of Germany, and the loss of any hope
for adequate reparations, thus dangerously jeop-
ardizing the present and future interests of France.180

THE DAWES PLAN

" (4) The great importance, therefore, of the de-
termination by France of her proper attitude in this
situation, is readily apparent. In my judgment, it
was only her courage to act in moving into the Ruhr
which has precipitated the conditions and emergen-
cies which have rendered possible an economic peace
which is really to be an economic peace. Had it not
been for that action, this Committee would not be
in existence.

"It is again that splendid courage of France, in
decision and action, in terms of the withdrawal of
economic pressure, upon which the new economic
peace must depend.

"(5) I fully realize how unimportant are the
opinions, as to what France should do, of outsiders,
who can not properly sense the minds, consciences
and instincts of the great mass of her people, as do
those who are charged in this crisis with the great
responsibility of determining her action. As one of
the elements, however^ which enters into their con-
siderations of a wise decision, the reaction of an
American upon certain things may possibly be use-
ful.

"Nothing is more timid than capital. It is essen-
tial to the operation of the plan that the decision
of France, as to the course which she is to pursue in
lifting the economic pressure as distinguished from
such military supervision in the Ruhr as will give
her protection, shall be such that foreign capital
may not be frightened from participation. Indeed,
the participation of foreign capital, in carrying out
the plan, may well be regarded by France as theIN THE MAKING

181

final evidence that at last a solution has been
reached which is durable, and which has behind it a
common allied interest in its continuance, thereby
affording the best safeguard for the future of
France.

"If France insists upon methods, in lifting the
economic pressure in the Ruhr, which creates the
impression upon the foreign investor that the new
status quo may be disturbed or changed by quick
or unconsidered decision, individual foreign capital
is not likely to participate. This would indicate that
the best possible plan for all concerned has not been
followed. The part of wisdom, therefore, would in-
dicate that when the present economic pressure is
lifted there shall be reasonable assurances that it
will not be reimposed, except for self-evidently suf-
ficient reason and by concerted action.

"On the other hand, if foreign capital is to par-
ticipate, it should be assured that its contribution
will not be asked until France and the Allies are
satisfied as to the sincere spirit of the promised co-
operation of Germany, and that the plan is in such
shape as to be launched in its entirety. The main-
tenance of some degree of economic pressure, there-
fore, pending the completion of the plan, would seem
justifiable, not only to bring about its speedier con-
summation, but to assure all that, when this pres-
sure is lifted and the plans once entered upon, it
will be continuous in its operation.

"The American individual investor, as distin-
guished from the European Allied Governments,
will look upon the plan chiefly from the standpoint182

THE DAWES PLAN

of safe investment. He is not influenced, as a
European Ally might be in considering an advance
of money through governmental banks, by any di-
rect thought of the effect of the advance upon rep-
aration payments. His probable attitude, therefore,
toward a prospective loan to Germany, and the
conditions under which it is issued, may be regarded
as good outside evidence as to what it is desirable
for France to decide in connection with the method
of dealing with the Ruhr situation.

"It is to be hoped, in the interest of the plan, that
consistent with her full protection, France will be
able to suggest methods which will impress the in-
dividual foreign investor with the safety of par-
ticipation in the loan to Germany."

In this connection it may be interesting to refer
to an article sent by request over the telegraph
wires by General Dawes to The Literary Digest and
published by that magazine in its issue of January
27, 1923:

"The resumption of the orderly progress of civili-
zation in Europe and the world depends upon a
reasonable settlement of the reparations question
under which, while proper reparations charges are
met, the incentive to effort on the part of the Ger-
man people is not destroyed. Nobody differs on this
point, but nearly everybody, for four years, differed
on how to bring it about. Public sentiment all over
the world at the end of the war was like molten lava
from a volcano, it was uncontrollable and not plas-
tic. It has not yet had time to cool off everywhere.
The position of the United States at the VersaillesIN THE MAKING

183

conference was for reasonable reparations, but pub-
lic sentiment in England and France at that_ time
made agreement impossible. The power of inter-
national negotiators since the war has always been
limited by public sentiment at home.^ Whenever a
negotiator stood for common sense in advance of
domestic public sentiment he was either compelled
to change front as Lloyd George did, or leave office
as did Briand. As time has gone on, public senti-
ment in England and the United States has cooled
down, so that common sense on the part of the
masses is again reasserting itself, irrespective of
nationalistic demagogues. The elemental changes in
public sentiment, however, are determined by events
and not by leaders. Germany, in the economic war
following the Great War, has dealt with a coalition
in disagreement between themselves, and this selfish
disagreement among the Allies, together with the re-
sults of the planned degradation of the mark, has
created a feeling among the German people that it is
possible to avoid payment of proper reparations. No
German government, strong enough to enforce col-
lection of the taxes involved by proper reparations,
has been possible in Germany up to this time because
this feeling existed. On the other hand, public sen-
timent in France, which suffered the most by the
war, could not be solidified behind a government
strong enough to put through a proposition for reas-
onable reparations. To the protest of the German
government against the invasion of armed troops
into a peaceful population the French national con-
science answers 'Belgium.'

''The invasion of the Ruhr by France, therefore,
is in my judgment essential, both to bring France to
a realization that only reasonable reparations can
be collected and to bring Germany to the knowledge
that it can not avoid its payment. It should be re-
membered that the great French army to-day is the184

THE DAWES PLAN

safeguard of civilization in Western Europe* No
one need fear Bolshevism at this time in Germany,
pending the inevitable ultimate decision of the Ger-
man people to form such a firm government that
it can take the economic measures which will get
them rid of the French Army, just as France did
when the German Army in 1871 occupied Paris. At
the same time demonstration of the impossibility of
the collection by armed forces of reparations di-
rectly from the German population, the underlying
business common sense of France, which needs
money, the fact that she now is dominating the sit-
uation and will not have a compromise forced on
her by others, will bring French sentiment the more
speedily to the reasonable view. Stinnes, the lead-
ing business man of Germany, in a recent address
before the German Economic Council, and Louis
Locheur, the leading business man of France, in an
address before the Chamber of Deputies, have each
outlined in terms of reason the solution of the rep-
arations question. As Stinnes says, the mark can
not be permanently stabilized by an international
credit. Germany can stabilize the mark and pay its
reparations only by an exportable surplus of mate-
rial, and can only create that surplus by a ten hour
day's work instead of an eight-hour day.

''Locheur's speech is practically to the same ef-
fect. The last event in my judgment necessary to
bring France and Germany to a common sense rep-
arations settlement was the invasion of the Buhr
district by France. I realize fully that what I have
said is not the present view generally of the press
of the United States or of our people. I have not
discussed the matter from the standpoint of right
or wrong. This immediate situation is not one in
which long distance academic discussions will have
much effect upon European realities. The last four
years show that in international matters events de-IN THE MAKING

185

termine policies rather than that policies determine
events. Two things are especially desirable in the
United States—less demagoguery in Senate debates,
where the pleasing of uninformed local constituen-
cies is an element in discussion, and more trust in
the strength and wisdom of President Harding, who
firmly, and taking one step at a time, is moving in
the right direction. In my judgment the United
States must face with courage instead of cowardice
its unavoidable responsibilities, and I do not believe
the policy of scuttle can with safety be ridden much
longer by the demagogue. Moral principle, the dic-
tates of humanity, as well as economic self-interest,
all combined, will force the United States, with un-
impaired sovereignty maintained, into that field of
international duty which since the war it has not
fully entered. In my judgment, irrespective of the
present condemnation by the American press of the
French move, it will be universally recognized and
acknowledged long within two years of this time that
the reasonable settlement of the reparations prob-
lems, which by that time should have been reached,
was made possible by the situation precipitated by
the French invasion of the Ruhr."

On the day after this statement of February 22,
1924, was submitted, Monsieur Poincare was re-
ported as stating to the Chamber of Deputies that
one of the members of the Experts Committee had
said, "If France were not in the Ruhr, we would not
be here." And although the memorandum was not
intended for publication, General Dawes, in an in-
terview, confirmed the assertion, and was widely
quoted to this effect. It certainly did no harm in
France.

The effect upon the bank and upon the exchange186

THE DAWES PLAN

value of the mark, of excessive calls for payment in
foreign exchanges of reparation credits, has already-
been discussed. An allied question of importance is
the effect upon the bank and upon the business of
Germany, of leaving large credits to reparation ac-
count in the bank. Sir Josiah Stamp had written a
discussion of this question, note number four, and
Mr. Joseph S. Davis of our staff has submitted a
comment upon it. His comments seem to cover the
whole subject so thoroughly and his views to be so
nearly in accord with those of Mr. Stamp that to in-
clude only Mr. Davis' discussion will be sufficient.

Confidential.

Reflections on Sir Josiah Stamp's Note No. 4

Joseph S. Davis

"1. Note No. 4 deals with the effects of the ac-
cumulation of budget surplus within Germany, and
reaches the provisional conclusions:

"A. That the raising of a large budget for the
progressive internal use, as is done in
Great Britain, is not identical in economic
effect with the raising of a similar budget,
a large part of which the community is
not entitled to handle.

"B. That the latter course, carried to an ex-
treme, would bring some rather extra-
ordinary economic consequences in its
train.

"2. These conclusions are expressed in muchSir Robert M. Kindersley
English Member First Committee of ExpertsIN THE MAKING

187

more conservative terms than the discussion leading
up to them. As qualified, I believe they are sound,
but I believe the discussion magnifies the dangers
to be anticipated and that, in their context, the con-
clusions are much stronger than can be supported.
With all due deference to Sir Josiah Stamp, I
wish, therefore, to suggest some criticism of his
discussion and some considerations which tend to
modify the effect of his note.

"a. criticisms

"3. I agree that there is a real danger of taking
from the German public for the benefit of reparation
creditors an excessive sum, either in budget sur-
pluses or in guaranteed revenues, and that this dan-
ger is not removed by limiting the amount of
withdrawal of this sum to the amount of Germany's
exportable surplus. But I believe this danger lies
in the possibility of reducing to an intolerably low
level the consumption of the German public and that
it is mitigated rather than intensified by the invest-
ment of withdrawable balances in Germany's in-
ternal development. The consequences of attempts
to collect too much will be seen in the early stages,
in abnormal death rates, emigration, and so on,
rather than only after a prolonged experience with
the system.

"4. Taxation, ipso facto, reduces the incomes at
the disposal of the taxpayers, but not necessarily
his personal consumption, as is suggested in para-
graph 2 of the note. At several points the note
exaggerates, in my opinion, the extent to which Ger-188

THE DAWES PLAN

man consumption would be reduced by a burden of

taxes that the government could collect.

"5. High taxation for an alien owner will reduce
the effective standard of living only to the extent
that it reduces consumption, not to the full extent of
the taxes so collected, for much of these will come
out of the taxpayer's ordinary savings. Moreover,
by no means all reductions in standards of living are
injurious to a people. The taxation may conceivably
be so high and so ill-arranged as to make the main-
tenance of health and efficiency impossible for large
sections of the population, and to drive them to emi-
gration in large numbers to escape such intolerable
conditions. But many economies in consumption
are possible in an advanced nation, even in the so-
called necessaries of life, without leading to such ex-
treme conditions. The note appears to underrate
the magnitude of such economies and the margin
afforded by the ordinary savings of a productive
nation. Even in periods of severe depression and
under highly abnormal conditions, such margins are
considerable, as have been illustrated in England
and France in the past three years.

"6. Capital expenditures, met out of taxation,
within the country, tend to be beneficial to the coun-
try if expended upon production goods, whether by
the government or by alien powers, at least to the
extent that the increased production resulting from
their creation exceeds the interest charge on the
funds so applied though it must be admitted that
part of this benefit may accrue to reparation credi-
tors later through increased exportable surpluses.IN THE MAKING

189

"7. The assumption that heavy investment in
Germany, on allied account, will not benefit the Ger-
man people, overlooks two important points: (1)
that the effect of such investment is to lower pro-
duction costs for domestic goods as well as the ex-
port goods, and so to increase the quantity of goods
at the command of consumers with given incomes;
and (2) to make for more continuous operations of
Germany's economic organization, well provided
with investment funds. The gain from the latter
source is of a special importance. The distribution
of productive effort between production goods and
consumption goods, between goods for export and
goods for domestic use, will continue to be made ac-
cording to economic forces, which, through the
medium of prices and interest rates, will ensure
against serious gluts of consumption goods and the
calamity of production falling 'still-born,' to which
the note makes reference. Misjudgments will still
occur, but such misjudgments, rather than the pro-
cess as a whole, will be responsible for such tem-
porary gluts as may be expected.

"8. The implication that the surplus that is be-
ing stored up in Germany must ultimately be with-
drawn is, in my view, unsound. There is no
likelihood that the investment as a whole will ever be
liquidated. The claims against it, first held by Ger-
many's reparation creditors, may be expected even-
tually to be widely distributed. Individuals will in-
deed shift their investments, or liquidate them, with
loss or gain. The claims upon Germany's increased
productive capital may ultimately be owned less and190

THE DAWES PLAN

less in the present reparation creditor nations, as
investors elsewhere become ready to absorb them.
But this process, if it occurs, is likely to be gradual
and according to the play of well understood eco-
nomic forces. It need not involve any large scale
attempt at liquidation, much less the withdrawal of
the capital goods themselves.

"b. supplementary considerations

"9. These disjointed criticisms can perhaps be
better appreciated in the light of another discussion
of the problem which in part overlaps and in part
goes beyond Sir Josiah Stamp's note and the fore-
going criticisms.

"10. In the first place, it must be emphasized
that in modern civilized nations a large portion of
current production is not devoted to producing
goods for current consumption. Much less than the
total production effort suffices for this. The bal-
ance—large in periods of business activity, small in
periods of depression—goes to increase the sum of
durable consumption goods, durable production
goods and auxiliary stocks of circulating capital.
The individual contents himself with a smaller
amount of current consumption goods than the in-
come at his disposal would enable him to purchase;
the balance of his income, apart from gifts, etc., he
saves; part of his savings he applies to the purchase
of durable consumption goods, and the rest he in-
vests in domestic and foreign securities.

"11. The effect of this, from a national stand-
point, is a steadily increasing supply of durable con-IN THE MAKING

191

sumption goods and production goods at home, and
in some measure abroad, in which individual savers
have rights of interest. And when the government
taxes its people for more than the cost of its cur-
rent services, it ordinarily invests the surplus
collectively in durable consumption goods and pro-
duction goods and has rights of interest in these
goods.

"12. Now the first effect of the plan to require
Germany to raise by taxation a surplus of revenue,
which it places at the disposal of the reparation
creditors, is to reduce the income at the disposal of
taxpayers. This may reduce their current consump-
tion in some measure; if so, it will affect their con-
sumption by trenching upon these elements which
are considered most dispensable, and even the so-
called necessities of life consist in no small degree
of such elements. It will, however, cut more heavily
into expenditures for durable consumption goods,
and still more heavily into their individual and cor-
porate savings. If taxation is properly arranged,
and is not impossibly heavy in the aggregate, it will
not reduce the health and efficiency of the people,
but will largely place at the disposal of the govern-
ment part of the savings the taxpayers would other-
wise accumulate, and some additional savings which
would not have been made except under pressure.
Part of these savings the government, in turn, puts at
the disposal of reparation creditors within Germany.

"13. Though measured in money terms, these
savings will consist fundamentally of a complex of
goods, for current consumption, for consumption as192

THE DAWES PLAN

durable goods, and for productive equipment; some
of them will be used in Germany and some in various
countries abroad. The process of consumption, sav-
ing and investment will be very much the same as if
no reparation arrangement was made, but there
will be three differences in effect: (a) the aggregate
savings may be somewhat increased at some cost to
German consumption; (b) consumption in the repa-
ration creditor nations may be slightly increased;
and, most particularly, (c) the rights of interest in
the aggregate German savings which are not di-
verted to immediate consumption will be vested to a
larger extent in the reparation creditor nations, or
their nationals, and to a smaller extent in the Ger-
man Government or German nationals.

"14. Just in what proportion these savings,
placed at the disposal of reparation creditors, will
be received—how much in consumption goods from
Germany or elsewhere, how much in production
goods in Germany and in other nations,—this will be
determined by the relative demand for consumer's
goods and producer's goods, upon the competition
of different countries for these goods, under much
the same conditions as always affect the balance be-
tween production for the present and production for
the future. This balance will be adjusted naturally
and gradually, if free play is given to economic
forces. Suffice it to say that to a large extent rep-
aration creditors will receive no goods, either direct
from Germany or from other countries to which
Germany ships goods, but interests in German and
foreign capital investments.IN THE MAKING

193

"15. The further consequences must not be over-
looked :

"(1) Increases in Germany's ability to produce
economically, in consequence of increased invest-
ment in Germany, will increase her power to export,
which tends directly to reduce the disparity between
the annual reparation charge and the exportable
surplus through which it can be currently with-
drawn. This process alone might solve the prob-
lem under discussion.

"(2) Germany's international credit will be
enhanced by her increased economic strength and
exporting power, with the result that private invest-
ment funds will tend to flow to Germany, thus sup-
plementing her balance of payments on current ac-
counts in such a way as to increase the opportunity
of Germany's reparations creditors, as such, to with-
draw reparation balances. This will be offset in
some measure by the flow of German private capital
abroad, especially in connection with enterprises re-
lated to Germany's exports.

"16. The danger of heaping up surpluses in-
vested in Germany to the account of reparation cred-
itors, increasing at compound interest, is smaller if
one realizes the existence of a certain automatic
check. The heavier the pressure of such investment
funds upon the German market, the lower will be
the rate of interest upon them, and the slower
the rate of increase. This same tendency to abun-
dance of investment funds, if it appears, will oper-
ate to alter in favor of wage earners, the proportion
of production going to wages as compared with in-194

THE DAWES PLAN

terest, and so to increase the real income of wage
earners.

"17. If this reasoning is correct, it is inaccurate
to say (as some writers have said) that Germany
can really pay reparation only to the extent that the
reparation creditors will increase their absorption
of goods in consequence of the reparation settle-
ment. Beyond certain limits, their peoples do not
wish, in fact, to increase their consumption. Most
of them would, in any event, increase their foreign
investments in the next generation. In the long
run, they will be found to prefer settlement largely
in this other form. Unquestionably much larger
sums in settlement of reparations can be absorbed
in the form of interests in productive enterprises
in Germany and scattered all over the world, which
will be built up as a result of German productive
effort in excess of the requirements of German pop-
ulation. Obligations between individuals are not
settled by forcing the creditor to take additional
goods, but in large degree by giving him interests
that he regards as valuable. In the long run, Ger-
many's reparation obligation, principal and inter-
est, will be settled, so far as it is settled, to a large
extent in the same fashion. If such form of payment
is possible for Germany and acceptable to her credi-
tors, who shall say that it can not effect a genuine
payment ?

"18. In short, it is not unreasonable to expect
that, if peace can be maintained, the reparation debt
of Germany will eventually be converted, in large
measure, into holdings of securities by nationals ofIN THE MAKING

195

reparation creditor countries based upon productive
wealth (a) in Germany; (b) in the creditor coun-
tries, themselves, and perhaps in even larger meas-
ure (c) in countries now in need of development;
that the long run effect will be to increase somewhat
the amount of such development; and that the prin-
cipal difference from the position that would obtain
if no reparation were exacted, will be that the Ger-
mans will hold a smaller proportion of their own and
foreign securities, while foreigners, particularly in
reparation creditor countries, will hold a iarger
proportion.

"19. In the early years, no doubt, that part of
Germany's production surplus which is devoted to
reparation account may have to be, in large measure,
invested in Germany, under the supervision of
trustees for her reparation creditors. For the time
this will present a considerable investment problem,
for which, however, Germany's entire investment
machinery can be utilized. If reasonable investment
wisdom is exercised, a proper balance among vari-
ous investments in Germany, and between Germany
and abroad, can be maintained. As international
confidence is restored, such securities can be ab-
sorbed by foreign private investors, individual and
corporate, and government interests as such will
diminish. In the meantime, such investments in
Germany can be sound only in so far as they enhance
the capacity of Germans and foreigners to absorb
German goods.

"20. It is true' that every extension of productive
equipment in durable goods increases the opportun-196

THE DAWES PLAN

ity for miscalculation of future demand, for bad in-
vestment judgment, and hence for the recurrence,
over a wider area, of industrial crises. But the
reparation arrangement in contemplation strength-
ens this tendency but little, and it is in other direc-
tions that one must look for means to prevent,
mitigate, or cure the evils which crises bring in their
train.

"conclusions:

"21. While admitting the force of Sir Josiah
Stamp's conclusions, expressed in their final conser-
vative form, my conclusion is that while certain
peculiar problems will undoubtedly be presented by
creating a surplus on reparation account which can
not, at least in the early years, be currently with-
drawn in full, the investment of this surplus in Ger-
many will rather benefit than injure Germany's
consumers, producers and economic organization,
and that the process will operate in the direction of
solving gradually the problems thus initially created,
instead of magnifying them until a new type of eco-
nomic calamity is at hand."

In his note number 6, Sir Josiah Stamp comments
upon this matter. He sets aside as impracticable
such tests for fixing indemnities, as "total cost of
the war," "moral compensation," and "need of the
Allies," and lays down as reasonable tests: the com-
mensurate burden qualified by the necessity of mod-
ifying it by keeping it within the "physical limit of
internal accumulation," and the "psychological
limits of taxation" and applying it with due regardIN THE MAKING

197

to the "limit of exportable surplus." The impor-
tance of this last matter has been fully demon-
strated, but it was believed that a way has been
found to escape it, in part, by delaying transfers of
wealth. He states that in his fourth note he had
only hinted at the psychological limit but had dis-
cussed the matter of internal accumulation and the
difficulties to be caused by it. He had received in
response a note by Professor Davis so helpful and
pertinent in criticism and suggestive in supplemen-
tary considerations that he appended it to his note
for members generally to study. In his previous
note he had said there was a great difference be-
tween raising a large revenue for internal use and
raising a similar revenue for an ultimate external
claim and the question to be considered is: are such
differences and consequences likely to be injurious
or helpful to Germany or the Allies? He proceeds
to say that "psychological reaction comes earlier
and lower than the limit of physical accumulation."

It must come for Germany at an earlier stage than
in England where the whole payment by the tax-
payer is directly beneficial to his country. The
psychological reaction to heavy taxation is to dis-
courage saving, to check enterprises and develop-
ment, to lower the standard of living and retard
growth of population by inducing emigration. He
agreed with paragraphs 4, 5 and 6 of Professor
Davis's note and with paragraph 7, that the surplus
accumulation would be good for Germany up to a
certain extent, and Professor Davis's points as to
lower production costs and increase of goods and198

THE DAWES PLAN

free investment funds are undoubtedly sound, but
this could not be carried on to an indefinite extent.
The question is at what point will important reac-
tion set in? Professor Davis suggests that the in-
terest on the accumulations in Germany to outside
creditors may never in fact be withdrawn, but the
accumulation itself will tend to make the return on
capital lower within Germany and there is no reason
why people should in the long run make investments
abroad. He agrees that the investments themselves
will not leave Germany but some time the interest
must be transferable.

He agrees with Professor Davis's remarks in
paragraphs 12 and 13, but his comment that the bal-
ance between production for the present and pro-
duction for the future would be adjusted naturally,
if free play be given to economic forces, suggested
the thought that an artificially induced balance is
just what is being studied; and there is not free play
to economic forces if there is any kind of unwilling-
ness to receive German goods but a desire to post-
pone receiving them. The bonds could be freed at
marketable rates only if full interest be payable at
once and in such form as to be usable for the non-
German purchases, so at this point the export sur-
plus must be capable of transferring interest at
least. Within moderate limits it could rightly be
hoped that "the investment of the surplus in Ger-
many will rather benefit than injure Germany's
enormous budgetary and economic organization and
that the process will operate in the direction of solv-
ing gradually the problems thus initially created."IN THE MAKING

199

But if it is agreed that the psychological limit is
reached earlier than the limit of advantageous in-
ternal accumulation, it is not necessary to determine
the precise limit of advantageous accumulation.

Mr. Francqui had stated that "it is known that
Germany is almost the only European country
whose commercial balance since the Armistice has
shown, if not a constant surplus, at least a very
slight deficit on the whole." But Sir Josiah Stamp
regarded the following figures as the most re-
liable that had been submitted:

deficits

191	9......................4.8 milliard gold marks

1920	......................1.9 milliard gold marks

192	1......................2.1 milliard gold marks

1922	......................2.2 milliard gold marks

1923	......................0.1 milliard gold marks

The above relating only to the visible imports and
exports.

In a later note Mr. Davis submitted his ideas as to
the possible use to be made of these accumulated
funds to the credit of the reparation account, which
in this connection will be found interesting.

"Subject: possible application of withdrawable

balances on reparation account.

"1. If it should prove necessary, in order to pro-
tect the stability of German currency and exchange,
to exercise restraint upon withdrawals from the
reparation account in the German bank of issue,
the balance on this account would tend to accumu-200

THE DAWES PLAN

late. Should such accumulation be permitted to con-
tinue indefinitely? Or should the balance, beyond a
certain point, be withdrawn and separately invested
in Germany?

"2. The bank of issue will have an interest in
keeping this deposit down to small proportions,
when it is not withdrawable. Deposits made on
reparation account tend to swell the domestic assets
(or reduce the domestic liabilities) while increasing
what are essentially foreign liabilities. If the bank
finds it difficult to transfer these balances to repa-
ration creditors, it will also find it difficult to pro-
vide gold assets to serve as reserve against them.

"The reserve requirements are understood to ap-
ply to this balance as well as to other deposits and
notes. Hence, the larger this balance, the lower the
reserve percentage tends to be and the greater the
bank's tendency to restrict domestic credits in order
to prevent the reserve percentage from falling too
low. Yet this restriction of domestic credits will
presumably leave the bank with reduced holdings of
ordinary paper and will force it to find other do-
mestic uses for these funds. This it will have to in-
vest in securities. Limited as it is in the choice of
investment securities (since government securities
are taboo) it may have to seek investments that are
not generally considered suitable for a central bank.

"3. If the investment of large amounts should
prove necessary, it is presumably sounder policy to
put the responsibility for such investment where it
belongs, namely, in the hands of representatives of
the reparation creditors. In this way, the bank willIN THE MAKING

201

be relieved of the necessity of keeping reserves
against balances that for the time are unwithdraw-
able, will not be forced to hold up its assets with
investment securities, and will not be embarrassed
in the performance of its proper functions.

"4. If such balances are to be invested on behalf
of reparation creditors, how can this investment be
managed 1 While it is probably unnecessary for the
present committee to deal with this problem in de-
tail, it is presumably desirable that the principle
should be recognized. Hence a consideration of how
it might be carried out is in point.

"5. Here a distinction should be drawn between
that part of the deposit that is likely to be with-
drawable in the near future, and that which prob-
ably can not be withdrawn for some considerable or
indefinite period. The investment of the assets cor-
responding to the first part is essentially a banking
problem, and there is no good reason for having it
handled by any agency but the bank itself, since the
sum will normally be loaned on short term com-
mercial paper, or invested in other liquid assets. It
would be undesirable for representatives of the
reparation creditors to compete in such an operation
with the bank itself. At most, it would be sufficient
for these representatives to satisfy themselves of
the quality of loans adequate to cover such a bal-
ance, and even this would probably be superfluous,
under the present plan for the bank, if the deposit
credit reached no large sum.

"6. The investment of the second part, however,
would be an investment problem proper, as con-202

THE DAWES PLAN

trasted with a problem of commercial banking. Here
the bank of issue has no peculiar advantage, and it
would seem inexpedient to charge it with the respon-
sibility of loading up its assets with the sort of se-
curities that might properly offset the accumulating
deposit balance.

"7. Probably the simplest procedure for the in-
vestment of this withdrawable balance would be to
create a sort of investment company in which the
Reparation Commission would hold the entire stock.
The directors of this company would consist chiefly,
if not wholly, of representatives of the reparation
creditor treasuries, perhaps the same as those sit-
ting on the subcommittees of the Reparation Com-
mission, who would have to do with current with-
drawals; but it might be advisable to have on the
board two or three others, possibly including the
comptroller of the bank of issue, provided the rep-
resentatives of the reparation creditor countries
should in any case constitute a majority of the
board. To this company, the bank might turn over
from time to time such sums as were for the time
not withdrawable by reparation creditors, beyond a
limited balance. The organization could be fairly
simple or quite elaborate, according to the extent of
the investment business involved, but it should be
permitted to do no business except as an investor
of these funds. It would naturally purchase sound
conservative securities in Germany, thus contribut-
ing to Germany's internal development, her ability
to render services (shipping, insurance, tourist,
etc.) to foreigners, and her ability to export. ItsIN THE MAKING

203

object would not be to earn the maximum possible
return, but to invest safely in securities that could
be readily liquidated. It would be subject to Ger-
man taxation as applied to other similar concerns in
Germany. Its earnings might be turned in to a
special account at the bank with reparation credi-
tors, subject to withdrawal in case the ordinary
reparation account were fully drawn out, but other-
wise diverted back to the company for further in-
vestment.

"8. The effect of this plan would be to interest
the reparation creditors in Germany's internal de-
velopment, to keep them in touch with Germany's
financial situation, and to make them in effect and
in some measure cooperators with Germany. If
such funds tended to accumulate rapidly for a time,
there would result a rise in the price of German
securities, which by attracting foreign private in-
vestment, would increase the private flow of pay-
ments to Germany and so make possible the
withdrawal of larger sums on reparation account.

"9. If in a certain period it proved that larger
sums could be withdrawn from Germany than were
available in either of the two accounts in the bank,
this investment company could liquidate a portion
of its investments and make the proceeds available
to the reparation creditors.

'' 10. Conceivably, of course, there may prove to
be no difficulty in withdrawing, from year to year,
the deposit created in the bank by the govern-
ment for the benefit of reparation creditors, or such
balances as would accumulate might prove to be com-204

THE DAWES PLAN

paratively small. If so, the machinery suggested in
this memorandum might be entirely un-utilized, or
developed only in a very small degree, as needed.
I believe it is impossible to prophesy how large
sums can be transferred abroad without injury to
the German currency and exchange. It will, in my
judgment, be the wisest policy to contemplate ma-
chinery that may be unnecessary, rather than leave
a possible contingency unprovided for.

"J. S. Davis."

The extent of the injury, if any, to be feared from
the accumulation of an internal surplus in Ger-
many or the difficulties to be encountered in trans-
ferring such balances into foreign exchange will
depend, of course, upon the margin of government
income over its necessary expenditures, out of which
margin these funds are accumulated. Some better
conception of what these sums will be, can be gained
from a study of the figures submitted in the budget
discussion. They will not at first be large, and as
business becomes normal, the currency stabilized,
and as a result production increases, the balance of
exports over imports may increase as rapidly as the
internal surplus.

February 20, 1924

After the Committee returned to Paris, Doctor
Schacht came for another conference. The situation
in Germany with respect to its currency and to
credit for industry is critical, and Doctor Schacht
will proceed at once to organize a bank, but upon
such a plan as to render easy its amalgamation withJoseph S. DavisIN THE MAKING

205

the new bank. In the interval this bank will issue its
currency notes only in large denominations, against
similar amounts of foreign exchange, and will grant
credits to private industry, endeavoring to main-
tain the volume of gold and foreign exchange at
50% of total liabilities.

He is working in perfect harmony with his gov-
ernment and there can be no doubt that his bank
will be authorized to do business at a very early
date, and it is probably most fortunate for Germany
that this step is being taken. There seems to be a
complete understanding between him and the Com-
mittee, after long conferences as to details.

Some references have been made to these confer-
ences. As his first appearance before the Commit-
tee Doctor Schacht made a statement which only
confirmed the opinion of its members as to the pre-
carious condition of German currency and credit.
Immediate action seemed to be necessary to estab-
lish the temporary stability already attained, and
immediate action could not be taken by the Com-
mittee, since it was their province only to report to
the Reparation Commission. To wait until their
report in all its details could be submitted, and the
Reparation Commission could consider it, arrive at
a decision and take the necessary action to make the
plan effective, would be to invite disaster. But Doc-
tor Schacht's plan, conceived as it was with the full
approval of his government, could be put into execu-
tion without delay. The German Government ur-
gently needed the application of some means of
promised relief, as public confidence appeared to be206

THE DAWES PLAN

weakening. It approved the organization of a pri-
vate bank to support the currency. The priority of
reparation obligations was a hindrance to the action
by the government itself.

The organization of a bank such as Schaeht had in
contemplation was a temporary measure only. It
would require subsequent readjustment to conform
with the general settlement of European contro-
versies. At the meeting on February ninth in Ber-
lin, Mr. Young made a statement accepted by the
other members of the Committee to the general ef-
fect that he did not think that the Committee could
assume the responsibility of preventing Doctor
Schacht from putting his plan into execution. He
fully understood that if Doctor Schacht succeeded,
he might create conditions in Germany which would
render more difficult the acceptance of the final
plan of the Committee. But he did not wish to have
the Committee find itself in the position of having
prevented the Germans from utilizing their re-
sources for maintaining an economic position
achieved with such difficulty and held so precari-
ously ; because such a failure might result in precipi-
tating the fall of the Rentenmark, and by thus
hampering the movements of foodstuffs and raw
materials lead to chaos in Germany. His chief con-
cern was not whether Doctor Schacht's plan would
necessarily avoid such a calamity. He wished to
prevent the Committee from assuming the respon-
sibility of placing obstacles in the way of Doctor
Schacht's plan. He thought it preferable to let
Doctor Schacht put his plan into operation, but toIN THE MAKING

207

make an arrangement with him whereby his bank
might be absorbed by the bank proposed by the
Committee in case the Reparation Commission
should accept and carry out the recommendation of
the Committee, and in accordance with this there
was drawn up a statement for publication, which
received the approval of Doctor Schacht after con-
ference with the heads of the German Government
and which reads as follows:

"The work of the First Expert Committee has
enabled it unanimously to lay down the broad lines
which it will recommend for the establishment of a
new German bank of issue on a gold basis, which
will exchange its own notes against those of the
Eentenbank and the Reich sbank.

"The general principles of this plan have been
communicated to Doctor Schacht, who is very clearly
of the impression, shared by the Experts themselves,
that if it is put into execution it will prove to be the
most important step towards the definite stabiliza-
tion of the German exchange and the balancing of
the budget.

"The Expert Committee will inform the Repara-
tion Commission that in its opinion the plan which
the Committee will submit should be put into prompt
operation.

"Doctor Schacht has informed the Committee
that, in making his plan for the formation of his gold
bank, he is so arranging matters as to facilitate its
absorption by the bank of issue, which will be pro-
posed by the Committee.

"The Expert Committee will meet Doctor Schacht
on the eighteenth inst. at Paris."

In subsequent meetings with Doctor Schacht in208

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Paris, a careful examination was made of those
features of his plan which were designed to facili-
tate the absorption contemplated, and it was agreed
that the Eeichsbank would use the voting power it
would possess in the bank to be organized by Doctor
Schacht to secure the consolidation of the Schacht
bank with the new bank of issue.

The issuing on February tenth of the statement
just given as to the harmony between the plans of
Doctor Schacht and the Committee and indicating
an intention to consolidate their efforts, undoubted-
ly had a strong effect in restoring confidence in
Germany and strengthening the position of the
Rentenmark.CHAPTER VI

taxation requisites of a balanced budget—prelim-
inary budget for 1924-control of payments from

taxation by index of prosperity—other sources of
reparation payments—previous proposals of ger-
man government as to methods of payment on
reparations—railways of germany—importance of
railways to economic and military conditions of
nation—outline of burden of reparation pay-
ments to be borne by railways-revenues from

obligations of private industry—outline of agen-
cies to insure performance by germany.

The balancing of a budget depends on maintain-
ing the proper ratio between revenues received and
money expended. Under normal conditions there
is something anomalous in the expression "an un-
balanced national budget.'' A nation can not spend
more than its income, except by borrowing, and it
can not borrow indefinitely to make up a shortage
in taxation receipts, for it is such receipts alone that
support its credit for borrowing. It must keep its
expenses within its income and as a result there is
among governments as much variation in the scale
of expenditures as there is among individuals. But
the extraordinary, abnormal and temporary ex-
penses of war, require amounts far beyond the im-

209210

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mediate taxable resources of any country and under
such circumstances, the present national income
must be supplemented by borrowing upon the basis
of the future taxation income of the government.

If the actual payment of these extraordinary ex-
penses is thus spread over future years, there ought
in theory, at least, to be no great additional strain
upon money, and it ought to be possible to keep the
currency convertible into gold at all times, and thus
to check the rise in prices and hold them within the
limits fixed by the increased volume of exchanges,
rather than to remove all limit to the advance of
prices by increasing indefinitely the supply of
money through the issue of non-convertible promis-
sory notes. To issue such notes is merely to avoid
the issuance of bonds, by forcing the people to make
a loan to the government without any assurance
that it will be repaid at the same value. When a gov-
ernment adopts such a policy, it discharges its im-
mediate obligations with a promise to pay at some in-
definite future time a stated sum, the value of which
is uncertain. It thereby balances its budget, but it
corrupts its currency. For the future the fiscal
needs of that government, not the state of com-
merce and credits, determine its monetary policy.
When it needs more money to pay its expenses, it
issues more currency, and thereby sooner or later
depreciates the value of it, so that the rise of prices
is aggravated, the expenses of conducting the gov-
ernment itself is increased, and a condition is
brought about under which the balancing of its
budget becomes a demonstrable impossibility.IN THE MAKING

211

A depreciating currency produces a shortage in
the revenues of government for the simple reason
that the taxes levied lose in value before they can
be collected. Such a condition when long continued,
destroys national credit, paralyzes industry, drives
metal money and foreign credits into hiding, wipes
out savings and investments, and deprives the peo-
ple of the incomes out of which taxes must be paid.

Germany pursued no such policy as this during
the years of strenuous warfare when all her re-
sources were taxed to the utmost. Her fiscal prob-
lems at that time were solved without debauching
her currency. It can not be believed that the burden
of reparation charges alone made this necessary, for
the aggregate paid while large, was still much less
than her war expenses had been. But whatever was
the origin of inflation and whatever caused it to
run its full course, as it did in other countries as
well as in Germany, it brought attendant difficulty
in the balancing of the budget.

The recovery of Austria, reduced as she was by
war, by dismemberment and by inflation, to the
verge of starvation, would confirm the opinion that
a sound and stable currency is the necessary condi-
tion of a balanced budget, and that with a stable
currency, the budget may easily be balanced, but not
necessarily upon the old scale of expenditures. But
it must not be forgotten that the transition from a
state of extreme inflation to a condition of stabiliza-
tion is not an easy one. The adjustment of prices
and wages creates a severe shock. The first effect is
a great increase in prices, as measured by the gold212

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standard, without a corresponding increase in
wages; a suspension of industry and a general crisis
in credits. It was during such a period that we vis-
ited Germany. Credit was restricted to a painful
degree but the stabilization to all appearances held,
and improvement was already perceptible in the
adjustment of prices and wages then in progress,
and in the growing faith and confidence of the peo-
ple. Nevertheless, a period of depression must fol-
low such a crisis, and the development of normal
ability to pay taxes will depend upon the restora-
tion of activity in business and the building up of
production.

The experiences of Austria might lead one to over-
estimate the recuperative powers of a nation, which
has had such an experience; or a keen perception of
the severity of the existing crisis might lead one
to under-estimate them. In the midst of such con-
ditions the estimates which must be made of the
taxation income of the German Governments, fed-
eral and state, and of their necessary expenditures,
are charged with much uncertainty.

Moreover there is an entirely new scheme of taxa-
tion and one to be applied by the Reich in some items
which formerly were under the control of the states.
These recent changes in the scheme of taxation and
the disrupted conditions of business add to the dif-
ficulties of making the estimates. But the creation
of a stable currency through the organization of a
sound bank of issue will have a great influence in
removing such uncertainties. Let the money system
of Germany be sound and stable and so establishedIN THE MAKING

213

as to gain the confidence of the business world, in
Germany and out of it, and the present depression
will gradually disappear and be followed by a state
of business activity and prosperity that will restore
the tax-paying ability of the people and enable the
government to make accurate estimates of its ex-
penses, and to collect its taxes in money of unvary-
ing purchasing power. At the same time it will
restore the credit of the government, so that if the
terms of the settlement permit, it can resume the
normal methods of fiscal adjustment by making
short time loans upon the basis of future taxation
receipts to cover any temporary deficiency. Ger-
many has been released from the burdens of past in-
debtedness by the depreciation of the mark and is
thus relieved of what in the United States, France,
England and the other Allied Nations is the largest
item of their budgets, the interest on the public
debts.

Assuming then, the stabilization of currency, the
restoration over all the country of the full control
of the German Government, the removal of eco-
nomic barriers, and the cessation of large engineer-
ing projects of improvement, and it seems absurd to
discuss seriously the mere balancing of the budget
as a problem, for there is no problem and the only
question is how much will be left, after balancing
its budget, for the creditors of Germany. This
seems to be the German view also, for the prelimin-
ary budget submitted in January, after due allow-
ances for uncertainties, shows a substantial surplus
of estimated income for the year 1924 over the prob-214

THE DAWES PLAN

able expenses of the government. And it is certain
that these estimates are conservative.

In considering these figures it must first of all be
assumed that the cessation of the Ruhr warfare will
give Germany the taxation income from the occupied
areas, and that German business will be relieved
from the economic restrictions that have fettered
it during the last year. It must also be remembered
that a settlement along the lines of the Committee's
plan, in itself, furnishes a great opportunity for the
reestablishment of fiscal equilibrium and at the
same time a large reward for its successful accom-
plishment, for there would be offered the extension
of foreign aid for the organization of an adequate
banking system to insure the stability of the cur-
rency, a foreign loan to meet immediate needs, the
restoration of the economic unity of the country
and a moratorium or material reduction of repara-
tion payments during the period of greatest stress.

The following figures have been submitted to the
Committee as the government's estimate of prob-
able income and expenditure for the fiscal year of
1924.

(8) Finance and Taxation Departments...... 380

Preliminary Survey of the Budget for 1924*

Revenue	Expenditure

In millions of In millions of
Gold Marks_Gold Marks

1. General Administration of the Reich
A. Ordinary budget

(1)	Taxes on property, traf-	(1) Interest on, and amor-

fic, trade and transfer	tis. of debt of Empire 156

(direct taxes) ........ 4,004 (2) Provision for invalids,

(2)	Customs and excise du-	war pensions, etc...... 810

ties (indirect taxes)... 1,080 (3) Army and Navy........ 450IN THE

MAKING

215

(4)	Police ................. 208

(5)	Industrial and cultural

purposes .............. 28

(6)	Unemployment benefit... 500
<7) Social and other ex-
penditure ............. 360

(8)	Finance and Taxation

Departments .......... 380

(9)	General administrative

expenses other than the
above ................. 250

(10)	Assignments to the

(3) Non-tax revenues from	States and Communes.. 1,800

........ Total of ordinary expendi-

Total of ordinary revenues.. 5,144	ture ................... 4,942

B. Extraordinary budget

CI) Revenues from the mint 90 (1) For war damages and

(2) Other revenues ........ 40	removal of effects of

the war ..............................6

(2)	Public buildings ....... 44

(3)	Settlement of war ex-

penditure ............. 20

(4)	Settlement of expendi-

ture for the Ruhr..... 60

Total of extraordinary rev-	Total of extraordinary ex-

enues .................... 130	penditures ............ ISO

Total of A and B.......... 5,274 Total of A and B....................5,072

II. Execution of the Treaty of Versailles

(1)	Cash Reparation Payments (discharge of debt due to the

Reichsbank for redemption of an exchequer bill given to

Belgium) ......................................................................................................52

(2)	Clearing Office payments ........................................................................6

(3)	Cost of Armies of Occupation ................................................................360

(4)	Rhineland Commission ..............................................................................34

(5)	Other Inter-Allied Commissions including Reparation Com..........18

(6)	Restitution, substitutions and dismantlement costs............................10

(7)	Home expenditure incurred by the carrying out of the T. of V.	160

Total of expenditure ............................................. 640

BALANCE:

Expenditure:

I. General Administration of the Reich ......................... 5,072

II. Execution of the Treaty of Versailles ........................ 640

Total of Expenditures ........................................ 5,712

Revenues ..................................................... 5,274

Deficit ................................................... 438

♦The figures of this table can only serve as a preliminary
estimate and are given with all reserve. This estimate of the
revenues assumes complete restoration of economic unity be-
tween occupied and unoccupied territory, renewed administrative
and fiscal supremacy in occupied territory on the part of the
Reich and the component states, that the taxes to be levied ac-
cording to the general laws of the Reich and the states are once
more directed into their treasuries.216 THE DAWES PLAN

The details of the first item of income amounting
to four thousand four million gold marks as the pro-
ceeds of taxes on property, traffic, trade and trans-
fer are as follows:

Million gold marks

From the personal income tax................1,344

From the corporation income tax....	144

From tax on capital................................376

From death duties..................................210

From turnover tax.................	1,260

From taxes on transactions.................440

From taxes on transports......................230

The Budget Committee has been supplied with
voluminous information and has pursued its work
with amazing industry and care, and while they see
chances for saving money in expenditures, and also
dangers of a shortage in some items of estimated
expenditure, they agree that in all probability one
will offset the other, and that there is every proba-
bility of the accomplishment of at least the results
that are tentatively forecast. There is no danger of
a shortage that would endanger stability of the cur-
rency, or that would be so large as not to yield easily
to the usual fiscal devices, such as increasing the
floating debt, or making short term loans, or by in-
creasing certain taxes under emergency.

Some brief discussion of the items of this budget
may be interesting. Of the personal income tax,
eight hundred sixty-four millions are anticipated
from the tax on salaries and wages and four hundred
eighty millions from the incomes derived from agri-
cultural, industrial and mining undertakings andIN THE MAKING

217j

from interest and dividends and from professional
earnings and from the super-tax on large incomes.
The first estimate, that on wages and salaries, has
been made upon the general assumption that the
number of unemployed would remain at three mil-
lion, which it was at the time the budget was pre-
pared and that the average wages would be four
gold marks per day. As this number decreases, the
income tax collected increases and the expenditure
for unemployment benefits is reduced. The number
of the unemployed in November rose to four million.
It is perhaps not perfectly safe to assume it will fall
much lower than three million, but as conditions
have improved and seem to be improving, there is
every reason to believe it will continue to decline.
And as for the second item of four hundred eighty
million marks, upon the income from personal
activity in business, it is, of course, extremely low,
but it is assessed not upon the profits actually
earned in 1923, but upon presumptive evidence of
past earnings. The profits of 1923 were made in
depreciating marks, which eventually lost the great-
er part of their value. The tax in 1925 will be levied
upon the earnings of 1924 and as to this particular
item ought to show a great increase.

The rate of death duties is regarded as being less
than that prevailing in other countries of Europe
and should be materially increased in future years.
The turnover tax of 2y2% is levied upon every sale,
and upon some articles several times, as they are
used in manufacturing other articles, or sold from
manufacturer to dealer and to retailer and to the218

THE DAWES PLAN

user. The estimated yield of one thousand two
hundred sixty million marks also seems to be con-
servative and postulated upon a continuing state of
depression. The one and one-tenth per cent, tax of a
similar nature in France, but not applicable in that
country to agriculture, produced in 1923 three bil-
lion francs. Upon the same volume of business a
two and one-half per cent, rate would have produced
in France six thousand eight hundred million
francs, or at four francs to the gold mark, about one
thousand seven hundred million marks. The esti-
mate that the gross business turnover in Germany
with a population of sixty million would be slightly
less than that of France, with a population of forty
millions, seems conservative and on the safe side.

The taxes on transactions, estimated to yield four
hundred forty million marks, contain the large item
of one hundred fifty million marks of taxes on trans-
fer of land, sixty-two million on stock exchange
transactions, fifty million on automobiles and
trucks, sixty-five million on bills of exchange and are
accepted as being, in the aggregate, safe to rely up-
on. And the total aggregate of the direct taxes, four
thousand four million marks, is also believed to be
safe, though many variations from detailed esti-
mates are expected.

The tax on capital (three hundred seventy-six
millions), corporations income tax (one hundred
forty-four millions), and on personal income (four
hundred eighty millions), an aggregate of one
thousand million marks is the total estimated yield
from all incomes, other than the incomes from wagesIN THE MAKING

219

and salaries, which is estimated at eight hundred
sixty-four millions. Even this latter figure seems
low since it is based on the assumption of a continua-
tion of excessive unemployment and a low rate of
wages, but the ratio between this and the tax return
upon all other incomes can only be excused by the
assumption that circumstances for the moment pre-
vent the application of an equitable tax in 1924 on
the incomes earned in 1923. With any real improve-
ment of business these taxes ought to yield much
more than these estimates, and the tax on all other
incomes ought to be very much larger than the tax
on wages and salaries.

One large item of customs and excise duties, total
one thousand eighty million gold marks, is customs
or taxes on imports one hundred sixty million
gold marks, which compares with the pre-war figure
of four hundred millions; and it was also calculated
that the application of rates now prevailing in Bel-
gium would produce six hundred million gold marks.
This estimate includes no tax on agricultural
products, and the farmers are demanding a duty on
cereals, which may become effective. The actual
yield is likely to be larger. Another large item is
the tax on tobacco (three hundred sixty million gold
marks). It is based on a consumption of nineteen
billion cigarettes, which is regarded as low, and the
rate is from 20% on ordinary pipe tobacco and
cigarettes to 40% on the better grades; and the tax
on sugar (two hundred thirty-two million gold
marks) and on beer (one hundred twenty-six million
gold marks) and spirits (one hundred twenty mil-220

THE DAWES PLAN

lion gold marks) are all based upon very low esti-
mates of consumption. In any prosperous year the
yield from these sources would be greater.

In a general way the estimates for expenditures
have been controlled by the same fundamental as-
sumption of continuing depression, being based
upon the present state of unemployment. The
crisis occasioned by the change from a depreciated
currency to a gold basis was really precipitated in
November. It has lasted more than two months and
the movement of prices indicates improvement. Un-
less a disturbance of the stability already estab-
lished occurs, it is certain that this experience will
be followed by a resumption of business activity and
the very great reduction of unemployment. This
will affect both sides of the balance sheet favorably.
The income from all taxes will increase and espe-
cially those on salaries and wages, and other in-
comes, and at the same time there will be reductions
in some of the large items of expenditure. For in-
stance, the items of unemployment benefit (five
hundred million gold marks), war pensions (eight
hundred ten million gold marks) and social and
other expenditures (three hundred sixty million
gold marks) would be reduced by a return of pros-
perity.

Then there are the items for the army (three hun-
dred forty-eight and one-half millions) and the navy
(one hundred one and one-half millions), which have
come under some criticism. The Treaty limits the
numbers of the army and as a matter of fact the
salaries are not excessive. The old army was oneIN THE MAKING

221

of conscription and the present one is paid. The
old army was of about eight hundred thousand men
with mobilization equipment for about four million.
The present army is of one hundred thousand men.
The expenses of the army for 1913 is compared with
the estimates for maintaining the new army of 1924,
as follows:

(2)	Quartermasters' service 6,319,000 3,055,000

(3)	Arms material arsenal. 86,212,000 56,208,000

The estimated expenses of maintaining an army
12of the size of the old army are nearly 60% of
the expenses of the old army, on just these items.

The doubtful item of this budget is probably the
one thousand eight hundred million marks set aside
for the states and communes. There is probably
the need and demand for more for this purpose, and
had the expectation been for higher gross revenues,
more would have been assigned to the states and
communes. This was an influence toward moderate
estimates of income on the part of the government.
Great expectations of receipts would have brought
greater demands from the states and communes;
and upon the other hand it probably was felt by the
members of the Committee that estimates, from
their standpoint, ought to be moderate, since in all
probability some credit must be sought to take care

(1) Training

1913	1924

11,816,000 6,240,000

(4) Clothing

54,154,000 23,544,000

158,501,000 89,047,000222

THE DAWES PLAN

of the claims of Germany's creditors, and the assur-
ance of improvement in the general conditions of
the country depends so much upon the fiscal balance
sheet of the government that the greatest care must
be taken not to hold out any false hopes of imme-
diate and complete recovery of the ability to balance
the budget and provide a surplus. Although the
Reich is charged with the administration of some of
the taxes formerly collected by the states, it is under
obligation to see that a portion of the proceeds of
such taxes is turned over to them. There is no clear
distinction between the functions of the Reich and
the state governments, nor as to the claims of the
latter upon revenues, which creates a great diffi-
culty for those who are charged with the administra-
tion of the finances of the Reich. To some extent
this confusion existed before the war and must have
been largely overcome during its conduct. But Ger-
many as a whole must bear its financial responsi-
bility to the creditor nations of the world, and this
responsibility can not be evaded by any distribution
of constitutional authority among subordinate states
or constituent parts of the country.

The population of Germany is about sixty million
and these figures forecast the ability on its part to
raise revenue this year just sufficient to meet the
costs of administering the government. Great
Britain with forty-eight million population must do
the same, and pay interest upon about seven billion
five hundred million pounds; France with forty mil-
lion population must, after meeting its expenses of
administration, pay interest on about four hundredIN THE MAKING

223

fifty billion francs; Italy upon one hundred eighty-
six billion seven hundred million lira; and the United
States upon about twenty-one billion dollars. It
would seem, by comparison, that eventually Ger-
many could also raise very substantial sums in ad-
dition to the amounts required to administer its
government. Or to make a comparison upon an-
other basis—the budget we have been considering
is that of the Reich, and state and municipal taxa-
tion will add about three billion marks making a
total for Reich and states of about eight thousand
two hundred forty million marks. Let us assume
that this tentative forecast is correct and the budget
balances except as to the expenses of Treaty
charges, and let us assume the necessary expenses
of the government increase by 20% on account of
conditions and tendencies referred to. We have then
nine thousand six hundred eighty-eight million
marks as the total taxation burden of the German
Reich and states for internal expenses. If the sum
of one thousand two hundred fifty million marks be
added for Germany's creditors, the total tax burden
becomes ten thousand nine hundred thirty-eight mil-
lion marks. Assuming the population by 1928 to be
sixty-four million, the per capita total tax burden
would be one hundred seventy-one gold marks or the
equivalent of about forty-three dollars.

This sum seems low when compared to our own
taxes, but we have not had such experiences as have
within recent years reduced the tax paying capacity
of the German citizen, and all of the money we pay
in taxes remains within our country and is returned224 THE DAWES PLAN

to us in facilities and improvements and without
any subtraction from our national wealth. Whereas
in Germany, the destruction of savings and invest-
ments of great classes of thrifty and industrious
people, and the wiping out of working capital adds
immeasurably to the burden of paying taxes. A
portion of the taxes paid must be sent out of the
country also, thereby reducing the national assets.
All things considered, this burden has been consid-
ered commensurate with the burden of other na-
tions. It will be, however, only slightly greater in
aggregate amount than it was in 1913, for then it
exceeded ten billion marks. But in 1913 it was all
expended within the country, whereas under the
plan proposed, 12% of it, besides an equal amount
out of the earnings of private property, would have
to be sent beyond its territorial limits, and without
producing any direct beneficial result other than
the cessation of present intolerable conditions.

If a system of control should be established
whereby expenditures were to be held to the lowest
point consistent with the maintenance of govern-
ment, there would not be much inducement to the
people to submit to stringent tax exactions merely
to increase the amount of payments to be made to
foreign creditors. As the gross amounts of taxes
paid increase, the benefits to be extended by the
government to the people ought also to be enlarged.

It is regarded by all as necessary both to leave
the maximum of freedom to the German Govern-
ment to control its system of taxation, and
also to permit the Germans to share in the proceedsReginald McKenna at right
Chairman Second Committee of ExpertsIN THE MAKING

225

of taxation beyond some fixed normal rate of ag-
gregate tax collections, and to receive progressively
a larger proportion of the surplus accruing over
expenses. But if Germany spends more money in
administration, as she feels her tax revenues and
prosperity growing, she must also spend more
money in paying her creditors. Such has been the
demoralization in Germany that it is not to be ex-
pected that this fixed normal rate of tax-payments
could be attained for four or five years. The budget
for 1924 is really regarded as likely to be balanced
and the 1925 budget is expected to show an im-
provement of between five hundred million and one
thousand million gold marks over that of 1924.

A normal year would hardly be expected before
1927 or 1928, and although it is expected the gross
collections for taxes might then be sufficient to pro-
vide two billion marks for interior payments, there
is a disposition not to suggest a compulsory mini-
mum amount of payments of over one and a quarter
billion marks from the budget surplus, and this
amount has been suggested as the normal payment.

But with this surplus of one and one-fourth bil-
lion marks as the standard normal rate of ac-
cumulation to the creditors of Germany after 1928,
some scheme for automatic additions to this mini-
mum amount ought to be provided in order to allow
Germany's creditors to share in her increasing
prosperity. The mere amount of increased taxation
income is not believed to be a conclusive measure of
her ability to increase payments to her foreign
creditors. It is one test, for almost any of the taxes226 THE DAWES PLAN

we have been considering would show a higher yield
in prosperous times than during a depression—the
income taxes, the taxes on gross sales, and the taxes
on exchanges, especially. But on the other hand, the
government may choose to raise less revenue than
it would if no outside obligations existed, and taxes
might be shifted by the Reich to the states. In gen-
eral, taxation income is not a fair criterion of pros-
perity and to make it the sole test might repress
beneficial expenditures and in some measure delay
economic development. Nor is the total volume of
exports by itself a fair criterion, though at the pres-
ent time by the tax of 26%, to some extent it serves
as such in theory only. Rather than to retain this
it was considered more rational to draw up some
index of prosperity and to increase the demands for
payment beyond that regarded as the minimum, say
one and one-fourth billion marks for the normal
year 1928, in the proportion that the index records
increasing prosperity. To prepare such an index is
a complicated problem, to solve which there are
present at this conference some exceptionally well
qualified men, the most competent of whom is Sir
Josiah Stamp, Chairman of the Budget Committee,
whose sound judgment and untiring industry are of
incalculable value. Much study has been given to
this problem, and the final result may be found in
Annex 2 (page 417) of the Committee's Report.
It is suggested also that the German Govern-
ment and its creditors should have protection
against any serious fluctuation in the general pur-
chasing power of gold as compared with the year
1928.IN THE MAKING

227

The point of contact between the Committee and
the German Government established at Berlin has
not been broken. There has been continued cor-
respondence and the representatives of the German
Government have been in Paris at different times
for conference. The scheme being worked on is
subject to change and no one except the members of
the Committee themselves know the exact status of
present agreements, and, of course, not even they
know the exact form it may eventually take. But
the foregoing is an outline of an adjustment that
has received tentative approval. The payments out-
lined, together with those to be described later, in-
clude all payments arising from Treaty charges and
all payments in fact upon Germany's obligations to
the Allied and Associated Powers. From a con-
sideration of Germany's condition, it is believed she
could not safely make any payments from her cur-
rent budget income during 1924, but could make
moderate payments in subsequent years up to 1928,
when the sum of one and one-fourth billion marks
might be raised by Germany through taxation, to be
applied upon her foreign obligations, and after that
more according to the increase of her prosperity,
and these amounts were considered to be all that
Germany could pay whether in cash or goods, and
without regard to the claims against her upon which
the payments were to be made, whether for repara-
tions, expenses of Armies of Occupation, or any
other Treaty obligations.

The sums which the Committee believes Germany
can safely provide and ought to be required to pay228

THE DAWES PLAN

out of her taxation income upon her Treaty obliga-
tions are: for 1924, nothing; for 1925, two hundred
fifty million gold marks in which year a special pro-
vision to be described later, is made; for 1926, one
hundred ten million marks; for 1927, five hundred
million marks; and for 1928, one thousand two hun-
dred fifty million marks. But these sums do not
meet the necessities of Germany's creditors, nor
exhaust the resources of the German nation that
might be applied to the payment of its obligations.
There is a possibility of larger payments from its
taxation income and also the opportunity to utilize
for payments certain valuable property owned by
the government and other properties privately
owned, but justly subject to the demand that it be
devoted in part to reparation payments.

The whole system of direct taxation went to pieces
in 1923 and for that reason and on account of the
confusion occasioned by the inflation there was a
very low scale of taxes upon the incomes of very
rich men; and this condition is necessarily thrown
over into 1924. But as soon as recovery takes place
and profits may be measured in a stable currency,
these large incomes in Germany should be subjected
to taxes as severe as those which are being imposed
in other countries. There is an especial reason to
support the justice of such taxes in Germany, which
does not exist in other countries, namely, that the
depreciation of the mark has in a particular manner
inured to the benefit of the very class of men who
being actively engaged in business, are in possession
of large incomes. The great profit that has beenIN THE MAKING

229

made by the wiping out, through depreciation of the
currency, of the entire indebtedness of large cor-
porations or of large business men, is itself a suit-
able subject for taxation in such an emergency,
because such a tax would fall on those who are
demonstrably able to meet it and because whatever
is taken from them by this sort of a tax is in fact the
recovery of a part of what has, through no intent of
their own, been taken by them without compensa-
tion from others.

The wiping out of bonded and mortgage indebted-
ness, the profit made by repaying in depreciated
currency the credits granted by the banks, and the
payment of taxes in money of depreciated value have
resulted in great accumulations of unearned wealth
in the hands of a relatively small number of German
business men. German authorities have estimated
the total mortgage debt encumbering agriculture be-
fore the war at the minimum figure of fifteen bil-
lion marks, and industry, as well, has been freed
from a great but not easily ascertainable burden.
The German Government itself considered the utili-
zation of these abnormal profits for the payment
of reparations. In a memorandum submitted on
June 7, 1923, to the Allied and Associated Govern-
ments, it expressed itself as follows:

The German Government propose the following
as a part "of a definite reparation settlement" (b)
to secure a further annual payment of five hundred
million gold marks as from July 1, 1927, the German
Government will at once subject the entire business,
industry, banking, trade, traffic and agriculture of230

THE DAWES PLAN

the country to a guarantee in the form of a first
mortgage of ten milliards gold marks on real estate
whether buildings, dwellings, lands or forests. The
annual dues of five hundred million gold marks will
be levied either indirectly in the form of a general
tax on all classes of property or on the specific ob-
jects of the mortgage.

This proposal by Doctor Cuno's Government was
subsequently several times confirmed by the suc-
cessive governments. The Committee has, there-
fore, been considering the means for mobilizing the
mortgage on industry and agriculture, which the
German Government has thus offered to constitute
for the benefit of its creditors. The suggestion is
that the German Government should subject a por-
tion of these assets to a new mortgage for the bene-
fit of its creditors in the sum of five billion marks.
All the mortgages on industrial undertakings will be
secured by indentures whenever the capital exceeds
one million gold marks, all other mortgages to be
entered in the legal form of the German land
register; all bonds upon such property placed in
good faith prior to April 1, 1924, to be protected in
their priority over this issue; the bonds thus created
to bear no interest the first year, 2y2% only on the
second year and 5% the third and following years,
and to be due in forty years and redeemable at any
time out of collections made from owners of prop-
erty who wish to discharge the mortgage obliga-
tions against it.

After full consideration and a careful study of
the best way in which to handle this valuable re-IN THE MAKING

231

source to the best advantage for Germany itself, as
well as for its creditors, it was decided that a mort-
gage debt to the amount of five billion marks on the
industries of Germany, fairly apportioned by the
German Government, payable at long maturities,
would not create a heavier burden than that which
would have existed had there been no depreciation
of the currency. At the same time it is suggested
to the German Government that a discriminating
burden upon the large industries for the benefit of
Germany's creditors ought not to be exacted, but
that a source of income might be available for the
uses of the government by equalizing the burden
over all industries, large and small, and over agri-
cultural and real estate interests as well. For the
Committee has decided not to demand what the Ger-
man Government offered in its note of June 7, 1923,
with respect to a mortgage upon the real estate of
Germany. Realizing the importance of agriculture
to a nation unable to provide its entire food supply,
and the great importance to any government of an
unhampered relation to its agricultural interests, it
has refrained not only from asking that a mortgage
should be placed upon the real estate of Germany
for the benefit of its creditors, but also from mak-
ing any specific suggestions as to the manner in
which Germany should use this asset. It has, how-
ever, besides suggesting the equalizing of the bur-
den over all interests in Germany with that to be
laid upon industries, indicated its opinion that a
large amount of agricultural indebtedness has been
discharged at merely nominal figures and that the232

THE DAWES PLAN

owners of equities in lands have realized substan-
tial profits at the expense of former creditors, and
that as a result of this, the government might, "with
justice, find a new source of revenue. The manner
in which this arrangement may be carried out is
more fully described in the "Plan for Industrial De-
bentures" which may be found in Annex No. 5.

The income to be derived from these bonds would
be: in 1924, nothing; in 1925, one hundred twenty-
five million gold marks; in 1926, two hundred fifty
million gold marks; and thereafter both the full in-
terest of 5% and the amortization of 1%, or three
hundred million marks. The payments to be made
out of the budget must be provided by the taxpayers
of Germany, but the payments to be made from the
interest on these industrial bonds lays no direct
burden on them but creates a relatively small bur-
den on those specific industries which have bene-
fited in a substantial manner by the misfortunes of
the nation. Both payments are of equal value to
Germany's creditors, but of unequal weight on the
German taxpayer and of very different economic
effect within that country. The industries which
will carry this burden to the great relief of the tax-
payers will not have an indebtedness so great as
that which would have been carried by the same
organizations had no depreciation taken place.

The Committee having suggested these specific
payments, the first up to the limit of what ought in
their judgment to be laid upon the taxpayers of
Germany, and the second, that which ought to be
made by specific industries, have proceeded to theIN THE MAKING

233

examination of another very large asset out of
which payments might be secured, that is the Rail-
way system, now the property of the Reich.

In the same memorandum of June 7, 1923, to
which reference has already been made, the German
Government proposed (a) the detachment of the
railway system of the Reich to be held in separate
fund, obligations to be issued, having a first charge
on its earnings in the sum of ten billion gold marks,
bearing 5% interest. This suggestion commends it-
self to the Committee, for it will be another source
of large collections that must be carried by private
property, without its being felt as a burden by the
taxpayers for the reason that the German Govern-
ment has never received an important income from
its railway system. The surplus earnings have here-
tofore been reinvested in the property itself.

This system of railways, having a replacement
value of more than twenty-five billion marks and an
earning capacity under favorable circumstances of
one billion marks, with freedom from important ob-
ligations in the form of indebtedness, is obviously
well adapted to supply the credit necessary to meet
the necessities of Germany's creditors during the
period of Germany's recuperation, within which
time no important payments could be made out of
her current income. The railway system, and the
manner in which it could be used as a medium for
reparation payments, is a subject so important and
interesting as to require a somewhat extended dis-
cussion of the manner by which additional payments
may be secured from this great asset of the German234 THE DAWES PLAN

Beich. And when we have ascertained what pay-
ments may be expected from this source we can, by
adding to them the payments from the budget re-
ceipts, and those from the industrial bonds, have
the total amount to be paid by the German Nation
from its taxation income and from private property
devoted to the purpose of discharging its foreign
obligations. That portion which is to be carried by
private property will be evidenced by bonds, not
such as the A and B bonds, which were, to some
extent, mere accounting devices, but bonds secured
by specific indentures and sustained by actual
values and earning capacity, and these bonds when
sold, either to Germans or the citizens of other na-
tions, will be purged of political complications. They
will then become the obligation of private com-
panies or of the German railway system, to indi-
viduals in Germany, and out of it, and thus be freed
from the appearance of being a part of the war
indemnity.

A full discussion of the condition of this system
of railways made by Sir William Acworth and
Monsieur Leverve may be found in Annex No. 3
and is of great interest.

The railways of Germany are, or in the end will
be, a very important factor in making the final ad-
justment, because of the variety of relationship this
system sustains to the government, to the domestic
and foreign business of the country, to the safety
of armies of occupation and to the raising of rev-
enues for the purposes of government. The system
belongs to the government; it has no bonded debtIN THE MAKING

235

and if consolidated into one operating unit will be
probably the largest one in the world. The opera-
tion of this system in the past has been by the
government, and actuated by political motives or a
conception of the public interest, rather than only
by the business interests of the system itself. It
was used to encourage by heavy rebates the sale of
German goods abroad; it was an important part of
the machinery by which the "dumping" so much
resented by the business men of other nations', was
accomplished. While it may be improbable that big
business would continue to receive such favors from
the present German Government, it nevertheless
would probably not be acceptable to the business
men of other nations that such a power should be
left unrestricted with the German Government dur-
ing the difficult period of readjustment which they
are all facing.

The great value of the system, its entire freedom
from bonded debt, the large earnings to be derived
by careful management, and the fact that it has not
heretofore contributed in an important way to the
German budget, make it available for use in the
payment of reparations and especially because soon-
er or later, and in large amounts, bonds may be sold
and the proceeds used directly for reparations. This
provides a strong motive to establish good working
conditions and the maximum of profits. Its proper
operation moreover is necessary in order to estab-
lish productivity in Germany, without which the
prosperity of her neighbors is threatened and the
hope of reparation payments withdrawn.236

THE DAWES PLAN

It is clearly brought out in the joint report of
Monsieur Leverve and Sir William Acworth that
the interests of the Allies, as well as Germany, re-
quire that the system should be operated as a unit
and "without any restrictions as between occupied
and unoccupied Germany. Without raising the
question as to whether political conditions in both
France and Germany compel the continuation of
some military restraint, the necessity for the re-
moval of economic restraint is apparent, at least
such restraint as in the past has prevailed. The
whole question of control and how it should be ex-
erted by the Allies over Germany really centers
round the railway system. The control of it means
the control of Germany and no army of occupation
could establish a control without taking over the
railway to insure its supplies.

In compliance with the Versailles Treaty (Article
212) the German railroads in occupied territories
were controlled by the Commander-in-Chief of the
Allied Armies and this control was carried out
through the medium of the Inter-Allied Commission
of Field Railways, which body has a representative
of the Minister of Communications of the Reich at
its disposal. The German railways were bound to
carry out all orders given with military purpose and
to supply statistical information as requested. The
administration and financial management was left
in the hands of the Reich. In case a state of siege
should be declared, the railroads were to be entirely
under the control of the Commander-in-Chief. For
a time this system worked very well, but after theIN THE MAKING

237

occupation of the Ruhr and the beginning of passive
resistance, the order issued by the Reich to all rail-
road men of the occupied territories to quit work,
compelled the Commander-in-Chief to place the
roads under military operation, and for this mili-
tary operation the so-called Franco-Belgian regie
was substituted after a period of two months. The
refusal of the British Government to have its zone
of occupation included in this regie has introduced
another zone of operation and an additional com-
plication.

The regie operated the roads of former occupied
territories (except the British zone) and the rail-
roads of the Ruhr. Considering the fact that this
regie took over the operation of the railways as the
direct result of the order of the German Govern-
ment to establish a general strike, it was hardly to
be expected that the roads would be managed in a
manner to meet the demands of German commerce.
It was, in fact, a strong weapon in the hands of the
Allies in the war of passive resistance. The traffic
between occupied territory and unoccupied Ger-
many is barely one-sixth of what existed prior to
the Ruhr occupation so far as the Frankfort Rail-
way district is concerned, and it is probable that the
same ratio prevails in other districts. There are
delays in the mails, difficulties in securing pass-
ports from unoccupied into occupied Germany and
hardships of travel imposed. Moreover a system of
requiring permits for shipping goods into occupied
territory has greatly obstructed business, but most
serious of all, French goods are shipped into Ger-238

THE DAWES PLAN

many with preferential tariff charges or without
any customs duty. This so-called "open hole" has
had disastrous effects upon the whole commercial
system of Germany. The Germans have bitterly
complained of these things.

Having now ceased the passive resistance and
withdrawn the general strike order, they hope for,
and ought to receive, as soon as possible, release
from the Franco-Belgian counter-offensive against
the measure of passive resistance. It is imperative-
ly necessary to remove these obstructions to com-
merce ; it is the first requirement in order to restore
the productive power of Germany, but it can hardly
be expected that this control established by Prance
and Belgium at such a cost would be at once entirely
withdrawn upon the mere promise of Germany to
accept a general program of settlement. It seems
to be a general opinion that to terminate abruptly
the military control would not be politically possible
from the standpoint of France nor necessary from
the German standpoint. The decision of this matter
rests with Allied Governments. But if economic
pressure over the railways is to be released
and military control over the occupied areas to be
maintained, whether in the Ruhr district or in the
territories set out in the Treaty for occupation, it
would seem to be a fact that sufficient control over
the railways would have to be continued to insure
the safety of the transports of the armies of occupa-
tion and the carrying out by Germany of its agree-
ments, and possibly to prevent another arbitrary
strike upon political pressure, and especially for theIN THE MAKING

239

protection of Allied interests in the revenues from
the railroad system for reparation purposes.

This need not involve the maintenance of large
forces nor the taking over the management of the
roads. It could be placed in the hands of some
board, the activities of which would be limited to the
gathering and publishing of statistics and to the
general observation of the operation of the roads,
until such a time as some dispute might arise as to
whether agreements were being carried out. In case
they were not being carried out, this board, under
conditions set forth in their organization, could take
over and operate the railways. At least it appears
that some assurance must be given that under all
circumstances the railways should be operated as a
unit and as the servant of commerce and not as a
weapon in commercial warfare, nor as an agency for
unrequited social service.

The matter of the control of the railway system
is one of the most vital importance, both to German
revival and Allied interest. It is the asset of great-
est value for reparation payments and also the es-
sential means for the support and protection of
troops so long as any measure of military control
is maintained. And from the German standpoint
its unified and unobstructed operation under the
most efficient management is necessary to reestab-
lish and sustain the prosperity of business and the
peace and comfort of the people.

It is proposed that a private company be organ-
ized to take over and operate the German railways
under a law which being approved by the Repara-240

THE DAWES PLAN

tion Commission will be adopted by the German
Government, which shall embody a contract between
the company and the government, of which the fol-
lowing shall be some of the terms: The company
will be of German nationality, and will operate the
railroads with power to fix tariffs, but without dis-
crimination, so as to yield a return sufficient to pay
interest on bonds and dividends on preferred stock
and a reasonable return on the common stock, and
the power of the German Government to control
rates will be limited to those set forth in the con-
tract, and no new direct tax upon the property or
business shall be levied. The term of the concession
shall be at least fifty years at the end of which pe-
riod, the company will return to the German Gov-
ernment the control and possession of the property,
providing the charges against it have been met.
These charges are determined by the bonds to be
issued and by the transport tax.

This company will be administered by a board of
at least eighteen members, half to be appointed by
the German Government and half annually by the
trustee for the bond-holders, and of the nine mem-
bers appointed by the German Government four at
least will represent the holders of preferred stock
and of the members appointed by the trustee five
may be German nationals. The Chairman of the
Board will be one of the German members repre-
senting shareholders, and will have a casting vote
and shall be elected annually. The business of the
Company will be conducted by a general manager of
German nationality. The foreign members of theIN THE MAKING

241

Board shall select a commissioner, who shall not be
a member of the Board, and shall be a person ac-
cepted as being in the first rank of railway men.
This official shall have the right of inspection for
himself and staff, and shall receive all reports and
returns, proposals for extensions or tariff changes
and everything of such a nature as to require the
attention of the general manager and will be en-
titled to call for any other reports, returns or sta-
tistics, such as he may consider necessary in order
to enable him to form an independent opinion. In
case of disagreement as to policies of management
between the commissioner and the manager, it shall
be submitted to the Board of Management. If the
property fails to realize the net receipts necessary
for interest on the bonds, the commissioner shall have
the right to take such action as the trustee for the
bond-holders and the foreign members of the Board
may consider necessary to protect the rights of the
bond-holders, including the right to operate, lease
or sell the railways in whole or in part.

The company shall issue to a trustee to be ap-
pointed by the Reparation Commission first mort-
gage bonds to the amount of eleven billion gold
marks, bearing interest at 5% and 1% for a sinking
fund. The payment of these bonds shall be guar-
anteed by the German Government. From and after
the fifth year, the bonds shall be amortized under
conditions to be determined by the trustee, by the
application of the annual payments provided for, or
by such additional sums as the German Government
may furnish for the purpose. These payments are242

THE DAWES PLAN

specified as follows, to be made from the gross re-
ceipts of the company before ascertainment of net
profits:

(1)	The amount of the transport tax, estimated
at about two hundred fifty million marks, which
may be employed by the trustee to secure a special
issue of bonds.

(2)	A sum sufficient to secure the interest on
the bonds. But the bond-holders will accept on ac-
count of interest in the first year three hundred
thirty million gold marks, the second year four hun-
dred sixty-five million gold marks, the third year
five hundred fifty million gold marks and in the
fourth and subsequent year six hundred sixty mil-
lion gold marks.

The Reparation Commission shall be entitled to
divide the bonds in any manner it may think ex-
pedient into different classes with varying rights or
to issue debentures against the deposit by the bonds
or any part of them. The Company shall not be
able to issue other bonds than these without the
authorization of a three-fourths majority of the
Board, of which majority two must be foreigners.
There shall be thirteen billion gold marks of com-
mon stock, and two billion gold marks of preferred
stock. This preferred stock will be sold by the com-
pany and three-fourths of the proceeds will be used
by the company and one-fourth will become the
property of the German Government, and all of the
common stock will belong to the German Reich. The
details of this organization may be found in Annex
No. 4.IN THE MAKING

243

It is not probable that divisible earnings will ac-
crue to the common stock, but the continued payment
of sis hundred sixty million gold marks annually
toward interest and amortization of eleven billion
five-per-cent. bonds will discharge the bonds in less
than fifty years, and as the bonds are discharged
the common stock increases in value, and ultimately
the entire property will revert to the German Gov-
ernment. So far as these railway bonds are con-
cerned, the position of Germany would not be much
different from that of the United States Railways,
at least until very recently. Upon the actual value
of its railways, Germany would be paying about
2y2% in interest and amortization for about fifty
years. Yery roughly speaking, since most of our
railways have been built from the proceeds of bonds
sold abroad and in amounts almost equal to their
actual cost, it is probably true that for many decades
there was sent abroad for the payment of interest
as large a percentage of the cost of our railways as
this. During recent years this railway system has
been a burden on the German taxpayers, for in the
readjustment since the war its operation has re-
sulted in losses.

The Committee recommends that a transport tax
of seven per cent, upon the gross revenues of the
railways be imposed for the benefit of Germany's
creditors, but in effect provides that this tax may
be used by the German Government for its own
needs for the years 1924 and 1925. The estimated
income from this source for 1924 is two hundred
fifty million marks. After 1925, the proceeds of this244 THE DAWES PLAN

tax will be paid to the reparation account, until it
amounts to two hundred ninety million marks which
is expected in 1926. After that the excess over two
hundred ninety million marks may be retained by
the German Government. The proceeds of this tax
may be employed by the Trustee to secure the issue
of another series of bonds for three billion marks.
The payment of this tax to Germany's creditors
shall continue during the period of the concession
of the railway property to the company, and this
period, it is specified, should be of sufficient length
to allow of the amortization of the eleven billion
bonds.

The payments to be expected as a result of the
general plan of the Committee so far as explained,
and especially the payments of 1924 and 1925, do not
afford the assurance of necessary relief to the credi-
tors of Germany. There are expenses of armies of
occupation in 1922 reported to us as being one hun-
dred sixty-one million marks, and in 1923, one hun-
dred fifty-five million marks. In the budget just ex-
amined the expenditure for 1924 was estimated at
three hundred sixty million marks. The Committee
makes it clear that the sums they name for future
payments comprise all amounts for which Germany
may be liable to the Allied and Associated Powers,
including reparation, restitution, all costs of armies
of occupation and commissions of control or super-
vision, and that payments made in goods are to be
placed to its credit upon the same basis as payments
made in cash.

But the business relations in Europe have becomeMonsieur Jean Parmentier
French Member First Committee of ExpertsIN THE MAKING

245

adjusted to the system of deliveries in goods of
commerce such as coal and its derivatives, timber,
etc., and these can not be terminated without injury.
In 1922 the deliveries in kind were six hundred
eighty-one million marks and in 1923 (the Ruhr not
included) four hundred sixteen million marks. The
demand for deliveries of goods in kind may be be-
tween five hundred million marks and seven hun-
dred fifty million marks, but such estimates are
uncertain for there is at times a difficulty in accept-
ing, as well as making, such deliveries. What is
taken in such forms reduces what may be taken in
cash and the effect of this condition may be to re-
duce both the expenses of armies of occupation and
the demands for deliveries of goods.

To meet the necessities of creditors while at the
same time taking every precaution to protect the sol-
vency of Germany, the Committee proposes a foreign
loan upon the security, assuming the consent of the
Reparation Commission and the Allied Powers, of
a first claim upon the German revenues and in the
sum of eight hundred million marks. This loan
would both provide for the financing of deliveries
in kind and be a source of strength to the bank and
the general credit conditions of Germany. For the
proceeds would be deposited in gold or gold ex-
change in the bank, and the government would make
its payments in connection with deliveries in kind
in its own currency and in bank credits. The gold
reserve of the bank would be increased, and if de-
sired, made the basis for an increase of currency.
This credit would come to the bank at the very time246

THE DAWES PLAN

it would be most needed. The proceeds of this would
be the bulk of the payment to be made in 1924. The
Committee suggests as a further precaution that
the proceeds of the foreign loan should all be ex-
pended within Germany in payment for deliveries
in kind and for the expenses of the administrations
created by the Allies. The loan is considered an in-
tegral part of the plan, as being essential to the
successful establishment of the new bank and for
the stabilization of the currency and the restoration
of credit and working capital. The credit estab-
lished by the loan is in gold and gold exchange; the
proceeds of the loan must be expended within Ger-
many. There is thus provided the means for meet-
ing the immediate and urgent need of the Allies in
so far as they can be supplied through the furnish-
ing of goods and without necessitating the transfer
of money abroad. In addition to the eight hundred
million marks secured from the loan, it is proposed
that only two hundred million marks should be de-
manded as interest on the railway bonds during
1924, and that the interest payment in 1925 on these
bonds should be increased by the same amount, as
the 1924 payment is reduced, namely—one hundred
thirty million dollars. The 1925 payment would
then be five hundred ninety-five million marks.

Assuming that the five hundred million marks of
preferred railway stock should be sold in 1925, the
annual payments in millions of marks may be ex-
pressed in the following table:	IN	THE MAKING			247
		R.R.	Trans-	Industrial Sale of	
		Bond	port	Deben- Seeuri-	
	Budget Interest		Tax	tures ties	Total
1924	• • • •	200	• • *	800	1000
1925	• • • •	595	• • »	125 500	1220
1926	110	550	290	250	1200
1927	500	660	290	300	1750
1928	1250	660	290	300	2500

If it should happen, however, that the railway
preferred stock could not be sold in 1925, then the
transport tax would be used. In any case the pay-
ment of the total amounts in the above table is
expected. If the transport tax is applied to the
payment of the 1925 annuity, then the German
Government could recover a similar amount out of
the preferred railway stock when sold. Or the 1925
payment might be two hundred fifty million marks
from transport tax, two hundred fifty million from
sale of preferred stock instead of five hundred mil-
lion from sale of preferred stock.

The payment of these amounts in the early years
is insured, first, by holding the demands well within
the amounts which a theoretical consideration of the
budget indicates as being payable, and, second, by
using five hundred million marks of outside money
from the sale of railway preferred stock, eight hun-
dred million marks from a foreign loan, reserving
for use if necessary about five hundred million
marks from the transport tax.

But even if the consideration of these figures
demonstrates the possibility of raising these
amounts, it is hardly to be supposed that creditors
would accept the mere promise of the present Ger-
man Government to make a sincere effort to have248

THE DAWES PLAN

its people sustain the taxes necessary to carry it
into execution. The offering of tangible guarantees
is necessary to give assurance to all nations that the
necessary taxes will actually be collected. Such
guarantees will also relieve the German people of
the political controversies certain to be engendered
if the continuation of payments were dependent en-
tirely on the popular will. In establishing such
guarantees, every precaution has been taken to avoid
any unnecessary interference with the actual con-
trol by the German Government over its revenues
and expenditures.

The proposal is that certain revenues—those de-
rived from customs, alcohol, tobacco, sugar and
beer—should be assigned to, and be under the con-
trol of, Germany's creditors; that the taxes col-
lected from these sources should pass directly into
the hands of this controlling agency; that the pay-
ments due to creditors should be made from such
funds and the balance given to Germany for its own
purposes. The estimated yield from these sources
for the year 1928 is about two billion marks, ex-
clusive of customs, and there is every assurance that
these assigned and controlled revenues will give a
large margin over the requirements for payments
from the budget, which at that time will be one bil-
lion two hundred and fifty million gold marks.
These revenues supply a security that the specified
payments will be made. There will be no induce-
ment for the German Government to check the pay-
ment of such taxes, for the lack of revenue from
this source would not excuse her from the repara-IN THE MAKING

249

tion demands, and any excess of taxation income
from this source over such demands would be re-
turned to it. The German Government could not
reduce the rate of the assigned revenues without the
consent of the Commissioner of Controlled Rev-
enues, who shall be appointed by the Reparation
Commission to take charge of these taxes. Such a
Commissioner should be given adequate powers to
supervise the collection of these taxes, and the plan
is that he should have five subcommissioners, one
for each of the controlled revenues. It would be
the duty of this Commissioner to see that the ad-
ministration was efficient and the accounting sys-
tem correct, but he would not be expected to
interfere with the administration of the law by
German officials, except in the case of maladminis-
tration, and in no case would there be any inter-
ference in the tariff policy of the German
Government.

An additional precaution to protect Germany
against the danger of deficiency of budgetary in-
come is afforded by specifying that if the yield of
these controlled revenues falls short of one billion
marks in 1926, or one and one-fourth billion marks
in 1927, the reparation payments will be diminished
by an amount equal to one-third of such deficiency,
and on the other hand, if they exceed these limits,
there will be an additional payment equal to one-
third of the excess, but the deduction or the addi-
tion shall in no case exceed two hundred fifty
million marks in each year. This system of control
is more fully explained on pages 391-395.250

THE DAWES PLAN

In this chapter there have been outlined the pay-
ments to be demanded from Germany and the
agencies which insure to the creditor nations the
performance by Germany of the terms of its con-
tract. The responsibility of converting these pay-
ments made from the proceeds of taxation and from
the earnings of specified properties into credits
outside of Germany is not placed on the German
Government. When the payments that have been
described in this chapter are made in the bank of
Germany to the credit of the Allied Nations, the
contract that is outlined in the plan of the Com-
mittee has been complied with. The German Gov-
ernment has no further obligations.CHAPTER VII

status of reparation problem at the time of com-
mittee's meeting-the new method of approach-

responsibility for conversion of interior payments
into payments abroad assumed by germany's cred-
itors—work of experts—restoration of confidence
necessary—completion of bank plan-the trans-
fer committee-the agent general—the coordina-
tion of controls—opening of world's credit to
germany—sale of german securities to restore
working capital—plan completed in three months
—unanimity of its members—final solution for
future determination.

The definite burden which had been laid upon
Germany by the action of the Reparation Commis-
sion was for the payment of two billion marks an-
nually, plus 26% of the value of its exported goods.
The bonds which were issued in connection with
these charges were not the measure of the indemnity
fixed, but the circumstances of their isssue left the
impression, throughout the world, that an indem-
nity of one hundred thirty-two billion marks was
laid as a definite obligation upon Germany, which
it was the intention of the Allied Powers to collect.
This impression might easily have been corrected
by a study of the proceedings at the Versailles Con-

251252 THE DAWES PLAN

ference, and at the various meetings of the Rep-
aration Commission. But to have corrected the
misapprehension would not apparently have pro-
duced favorable political results in any of the great
nations, and therefore the impression deepened into
conviction, which became the basis of all arguments
that the indemnity was one hundred thirty-two bil-
lion marks, and that this was beyond the capacity
of Germany to pay.

Under these circumstances it was urged, with al-
most universal approval, that the first step toward
a settlement ought to be to measure the capacity of
Germany to make payments, and then to fix the
limit of the demands within that capacity. This
capacity was obviously to be measured over a long
period of years by the surplus of goods which Ger-
many could export in excess of those which she re-
quired for subsistance and the maintenance of
production. The attempts that were made to
determine what this surplus might be brought forth
figures from various eminent economists, in which
all agreed to this extent, that it indicated the returns
to be expected would be much below what the cred-
itor nations had anticipated, and of which they stood
in great need. If the total demands to be made upon
Germany were limited to the sums that were to be
fixed by economists after a study of that country
under existing conditions, then it would happen both
that the creditor nations would be disappointed in
their expectations and that the people of Germany
would carry a burden of indebtedness much less
than the burden that was being carried by all ofIN THE MAKING

253

those nations which would he her future industrial
competitors. The contemplation of such a settle-
ment was offensive, both to the universal sense of
justice and to the sense of security in the field of
industrial competition. Demands had been made
upon France to reduce her claims below the mini-
mum of twenty-six billion marks out of the A
and B bonds, and such additional amounts as
might be necessary to cancel inter-allied indebted-
ness. But as France had already expended about
the sum of twenty-six billion marks in uncompleted
reconstruction and as her people were expecting re-
imbursement for these expenditures, the French
Government did not feel that it could reduce its
claim for reimbursement on this account, nor did
she regard it as possible to relinquish a claim for
further collections out of which to make payments
to the United States and to England. Her obliga-
tion to these countries amounted to a sum that would
be the equivalent of about thirty billion marks.
With a population of forty million as compared to
a population of sixty million in Germany, this in-
debtedness alone constituted a weight upon France
about equal to an indebtedness of Germany of about
forty-five billion marks. The relinquishment of a
claim by France for some additional reimbursement
might have looked like a repudiation of its obliga-
tion, or, at least, like the exercise of liberality at the
expense of her creditors. The continued pressure
upon France to make further concessions created
irritation and resentment within that country.

As has been stated before, it is not probable that254

THE DAWES PLAN

the Committee could have made much progress had
it pursued the effort to make a settlement along
such lines. Although it must have been recognized
by all of the members that the element of novelty in
the treatment of this problem would be, in itself, an
advantage, it was rather the conviction that justice
required it, that moved them to adopt the course
which at the. very first conference was outlined.
This course was to consider that the problem of
fixing the payments to be made by Germany and to be
delivered to its creditors, was a double problem, one
involving the burden to be assumed by Germany and
the other the manner of delivering the benefits to be
received by the creditor nations. In considering the
burden to be laid on Germany, it seemed both fair
from the standpoint of justice, and necessary from
the standpoint of creating equality in the industrial
conditions of all competing nations, that a burden of
taxation should be laid on Germany which should be
approximately equal to that which must be borne by
its creditors and competitors. And having reached
this conclusion the Committee faced an entirely dif-
ferent, although related, question as to whether and
to what extent the proceeds of such taxation could
be converted into foreign credits, and thus paid
upon the reparation account.

In all their subsequent discussions, they divided
the consideration of these questions, and in their
final report, as explained in the preceding chapters,
they outlined certain minimum requirements that
must be met by the German people in providing the
money that shall be available for payment to itsIN THE MAKING

255

creditors. When the German Government has com-
plied with this obligation, it will have fulfilled the
contract which the Plan of the Committee would em-
body. The responsibility for converting this ac-
cumulation of payments within Germany into such
form as would be acceptable to its creditors is as-
sumed by the Allied Powers. The system of control
consisting of Commissioners to supervise the opera-
tion of railways, the organization of mortgages and
the collection of taxes, is the method by which the
performance by Germany of the terms of its con-
tract is guaranteed, and with the exception of this
supervision, the outside governments will have no
further responsibility in connection with the raising
of the funds within Germany.

The very idea which at our earliest meeting was
expressed and emphasized by Mr. Young was never
out of the minds of the members of the Committee
in all of their meetings—that it was necessary, first,
to establish confidence throughout the world in the
certainty of the reconstruction of Germany, and at
the same time to inspire in the German people,
themselves, such hope for the future as to call forth
their greatest energy. Under the first part of the
Committee's plan, the payments to be demanded
of Germany upon its obligations are to be made
within Germany and in German money. These
payments having been thus made, the obligation of
Germany is discharged. Had the obligation been
placed on Germany to make such payments to its
creditors outside of Germany, no matter how great
the difficulties, then it is doubtful if the confidence256

THE DAWES PLAN

of the world could ever have been established in the
stability of the German currency, in the ability of
the German Government to balance its budget, or in
the restoration of the productive power of the Ger-
man people. And just as precautions were taken to
guard against excessive demands' in fixing the
amounts which were required from Germany to be
paid within that country, so the Committee has ex-
ercised care in fixing the conditions by which this
accumulated fund could be paid to German creditors
without destroying the power of that country to
make further payments. Nothing is to be asked
from Germany that she can not or ought not to pay,
and nothing is withheld from its creditors which
under any circumstances could be collected.

The Committee has in a general way considered
this problem as an adjustment between debtor and
creditor, with due regard to the future business re-
lations between them, and in making its adjustments
has realized that the interests of the creditors re-
quire that the credit of the debtor should be pro-
tected, and his productive power sustained. The
previous treatment of the problem had necessarily
sprung out of the conditions of war, and the Treaty
of settlement. This Treaty was a settlement dic-
tated by victorious nations upon a conquered people,
and this relationship, in spite of efforts to avoid it,
interfered with the unrestricted application of
economic law and business principles in making the
adjustments. By dividing the question into these
two component parts, there was accomplished a
satisfaction of war-engendered feeling by the an-IN THE MAKING

257

nouncement, as a moral principle, that commen-
surate burdens should be laid upon the people of all
nations, as a consequence of war and not of defeat
in the war, and at the same time an opportunity to
avoid the disputes as to the economic effects of
making an excessive demand by submitting this
matter to the test of experience under an adjust-
ment by which from year to year only such pay-
ments would be demanded as could be made without
injurious effect.

The calling of these Committees of Experts was a
direct result of the address made by Secretary
Hughes at New Haven in December, 1922. Nearly
a year elapsed before a formula could be found that
would satisfy all of the governments. As has been
stated, Secretary Hughes expressed to the members
of the Committee the very strong confidence that
their work would be successful. Both in his speech
and in his talk with the members of this Committee
before they left for France, Secretary Hughes laid
emphasis upon two ideas, and although they seemed
simple, over and over again the importance of them
was impressed upon, at least, the American mem-
bers of the Committee. These ideas were that a
settlement must lay the foundation for confidence
in the future of Germany, and restore conditions of
productivity within that country.

To carry out this plan required the gathering,
digesting and interpreting of a great mass of
material already collected by the Committee of
Guaranties, and of additional information affect-
ing the particular aspects of the problem to be258

THE DAWES PLAN

considered. The staff of experts assigned to the
American members were given this great task, and
in addition were called upon to submit opinions
upon all of the principles that would be involved
in making these adjustments. A similar staff of
expert economists and investigators was attached
to the Committee members from other nations.

Upon the shoulders of these men whose names are
well known in connection with other important
accomplishments, the great volume of this work
was laid, and without there being any prospect that
they will receive the credit and recognition which is
rightfully theirs, for such merit as there may be in
the finished plan of the Committee. It was gratify-
ing to observe that the papers prepared and the
opinions expressed by the members of the Amer-
ican staff received most respectful consideration by
the other members, as well as by the American mem-
bers of the Committee. But while the American
members of the Committee, at least, relied upon the
knowledge and were guided by the opinion of these
expert advisers, it is not to be assumed that any one
of them is responsible for, or has endorsed in detail
all of the conclusions that are embodied in the re-
port, itself.

There were conflicting opinions which required
adjustments, and for the compromises which neces-
sarily were made in order to bring about an agree-
ment, these expert advisers are not responsible. But
should the plan of the Committee meet with the ac-
claim of the world, then to the names of Dawes and
Young and Robinson will be added credit and re-IN THE MAKING

259

nown for performances for which a large part of
the credit ought to go to such men as Kemmerer,
Davis, Goldsmith, Ayres, Tower, Herring and
J ones. And when many of the circumstances
which attended the various conferences are recalled,
it is not to be doubted that General Dawes and
Mr. Young and Mr. Robinson would wish to ex-
press the very greatest obligation for the assist-
ance that was rendered by Colonel James A. Logan,
Unofficial Observer for the United States at the
Reparation Commission. His knowledge of the en-
tire situation and his great ability and good judg-
ment were always at their service and at all times
during the conference they were in close consulta-
tion with him, and greatly influenced by his advice.

The discussion by Doctor Kemmerer, which was
included in Chapter Four will give a suggestion of
the strong automatic forces tending toward the
equilibrium of currencies in international trade, and
should be reread by those who wish to understand
the full effect of the precautions taken in organizing
a plan for the transfer of credits out of Germany.
It is probable that the realization of the disastrous
consequences which might result from overstraining
the resources of Germany by the transfer of such
large credits, has led to an exaggeration of the
danger of such a condition being produced. The
multiplying of precautions against such a disaster
will certainly have an effect of strengthening the
confidence of the world in the soundness of the plan
and in the security of the bank and in general bus-
iness conditions in Germany.260

THE DAWES PLAN

With the establishment of complete confidence, it
is pertinent to remark that the new bank would have
very soon after its organization not only the entire
amount of the capital stock, four hundred million
marks, but, as pointed out in the last chapter, would
be strengthened by the use of eight hundred million
marks from the foreign loan, and the report of the
Second Committee indicated there was more than a
billion marks of foreign currencies in hiding within
Germany, and nearly six billion marks of foreign
credits held by Germans in banks throughout the
world, or in credits much of which could be trans-
ferred into bank balances. The greater part of this
would necessarily come into circulation and active
use as soon as the complete confidence of the world
was established in the soundness of the new bank. It
was, however, realized by every one that all those
restrictions must be thrown about the bank, which
would be necessary in order to assure the world that
it stood upon a sound foundation, and would operate
under such restrictions as to give assurance of the
stability of its currency.

But before discussing in detail the plan that was
finally adopted for the organization of the bank, it
may be well to mention other strong automatic
forces that would operate toward an equilibrium of
the currency values of the world, aside from the
ones connected with the operation of banks. These
are the effects produced on industrial activity by
the restoration of confidence and the inspiration of
hope among the people, and the resulting increase
in their productive power. The greatest burdenIN THE MAKING

261

that was laid on labor in Germany was the uncer-
tainty of its reward. As soon as the German laborer
knows that the mark he receives for a day's work
will have an unchanging purchasing power, he will
be relieved of what has been his greatest anxiety.
And when the managers of German enterprise are
freed from the uncertainty that is created by a lack
of confidence, their enterprise and activity will be
reawakened. The productive power of Germany
will be stimulated. The development of this pro-
ductive power will both increase the capacity of the
nation to pay taxes in German money, and increase
the exportable surplus of goods, which, in turn, will
provide the credit through which payments may be
made in foreign currencies or credits. At the same
time there will be, for a period at least, as a direct
result of higher taxes, a certain reduction in the
purchasing power of the German people, and this
will tend not only to the restriction of imports, but
to the exercise of wealth-producing thrift. Upon
such a scale as is now under consideration, it is
probable that the payment of such increase in taxa-
tion will register itself in an almost corresponding
increase in exports. The underlying presumption
is that confidence will be restored and production
upon a large scale reestablished. Should produc-
tion be reestablished on a large scale, then in view
of the forces set in operation as explained by Mr.
Kemmerer, there will be practically no danger of
calamity, or even difficulty in making foreign pay-
ments at the time and in the amounts as a surplus
accrues from the new scale of taxation.262

THE DAWES PLAN

Mr. Kemmerer's argument was made upon the
assumption that the new bank would be a gold bank,
and under ordinary circumstances there would be
no .dissent. But such has been the disturbance in
international trade in recent years that the old con-
ditions of exchangeability of the various currencies
upon the gold-standard basis have not been main-
tained. Strictly speaking, none of the great banks
of Europe is to-day upon a gold-standard basis. It
was the impression of the experts connected with
the American Committee, at least, that to establish
the new German bank upon a strict gold basis would
help the other banks to restore the same conditions.
But there was a great opposition from those who
seemed to be in a position to test the sentiment pre-
vailing in the banking circles of Europe. It is
difficult to determine whether this opposition
sprang from a fear that the establishment of such
a standard for the German bank would force the
other European banks to a premature acceptance
of the same conditions, or purely out of a kind of
jealous resentment, that a better banking system
should be established for Germany than existed for
any other great nation of Europe.

At any rate many suggestions were made of modi-
fications of the standard for exchangeability, and
especially of the character of assets which might be
held in the reserves against which currency was to
be issued, some of which received great support,
both in and out of the Committee, and all of which
seemed, from the standpoint of the American ex-
perts, to be of such a nature as to leave a dangerousIN THE MAKING

263

freedom to those who were to be in control of the
bank.

The bank plan as finally adopted will be found in
Annex No. 1. Sections 12 and 13 are those which
prescribe the conditions controlling the reserves
and the issuance of bank-notes. The modifications
from the original proposals for a bank upon a
strictly gold exchange basis are found in these
words:

"The Committee is of the opinion, however, that
at the inception of the bank, conditions will be un-
favorable for the application of the above rule of
convertibility; in this event this rule may be tem-
porarily modified by the affirmative vote of every
member but one of each of the following groups,
the Organizing Committee, the Managing Board and
the General Board. In case of such modification,
the bank shall make all possible efforts and use all
the means at its disposal in order to maintain the
rate of exchange of the mark at as near gold parity
as possible. Furthermore, in case of modification
of the above mentioned rule of convertibility of
notes, a return to convertibility will be permanently
established as soon as possible, by a simple major-
ity vote of the General Board, and of the Managing
Board."

That is to say that the rules laid down for the
convertibility of notes upon a gold-exchange basis
shall be enforced, unless at the outset all of the mem-
bers, except one of the Organization Committee
(which is composed of one member of the Commit-
tee of Experts and the present President of the264

THE DAWES PLAN

Beichsbank), and every member but one of the Man-
aging Board (which will be composed of Germans
connected actively with the operation of the bank),
and all of the members, with the exception of one,
of the General Board (consisting of fourteen mem-
bers, of which seven are Germans, and one is from
each of the following nationalities, British, French,
Italian, Belgian, American, Dutch and Swiss), are
of the opinion that the rule ought to be modified.

In other words, there must be practical unanimity
from the standpoint of German interests and from
the standpoint of Allied interest, that a deviation
from this strict rule is necessary for the stability of
the bank and the security of German business.
Should there be but two members of the Managing
Board, who would object to the suspension of this
rule, it could not be suspended, and should there be
but two among the seven representatives of foreign
nations who had objections, then the rule, as set
forth in the plan, would be enforced. But if in re-
sponse to the practically unanimous opinion of those
actually charged with the responsibility of manag-
ing the bank, whether Germans or foreigners, it be-
comes necessary to suspend, for the time being,
this rule of convertibility, then the rule may at any
time thereafter be restored by a mere majority vote,
and having once been restored, it can not thereafter
be altered.

This proposal could not be rejected. Upon the
other hand it was probably accepted by all of the
members of the Committee as being an improvementIN THE MAKING

265

over the original suggestion, in that it provided a
certain flexibility, which would enable those in con-
trol of the bank to make adjustments for its secur-
ity. To be denied any freedom whatever in the
matter, and to be held rigidly to a specified course
of action might have created a situation in which
even the unanimous judgment of all of the Direc-
tors and Managers of the bank could not avert dis-
aster. In such a case it is more likely that a con-
ference of Premiers with the German Government
would have resulted in such adjustments being
made as have in the other great banks of Europe
been made in order to avoid inevitable disaster.

The difficulties that were apprehended in con-
nection with this transfer of money seemed upon
closer study to grow less rather than greater, but
the knowledge of the universal fear of an injury
which might be created by too hasty withdrawals
has led the Committee to adopt every precaution,
which could be suggested to avoid it. The greatest
reliance is placed upon those automatic operations
of the law of supply and demand, which were so
clearly described in Mr. Kemmerer's paper. There
is not much danger under the circumstances, and
this release from the inflexible rule of convertibility
by the unanimous action of these respective bodies
in control of the bank, gives them necessary free-
dom of action to adopt the usual remedies, in case
of the appearance of danger universally recognized.

But nevertheless, and perhaps chiefly in order that
the confidence of the banking world might be estab-266

THE DAWES PLAN

lished in the permanence and security of this new
bank, there has been provided by the Committee a
special plan and method of bringing about the
transfer of reparation payments from German cur-
rency into foreign currency, together with sugges-
tions as to the use that may be made within Ger-
many of such balances as are not for the moment
transferable. And in general these plans provide
that the transfers of funds shall be made to the ex-
tent which in the judgment of the Committee the
foreign exchange market will permit, without threat-
ening the stability of the German currency; and
having laid down this rule, authority is given to
those in charge of the transfer of payments to
make investments in German bonds or securities.
When the accumulation of funds not transferable
shall have reached the sum of five billion marks the
payment for Treaty charges shall be reduced to
such an amount as is susceptible of transfer and the
Committee by a two-thirds vote shall have the power
to suspend the accumulation, even before reaching
the five billion marks.

The text of these provisions is here reproduced
in order that the reader may have complete knowl-
edge of the protection provided in the plan of the
Committee:

THE TBANSFEB
OF REPARATION' PAYMENTS
FROM GERMAN CURRENCY IN-
TO FOREIGN CURRENCY AND
THE USE OF BALANCES NOT TRANSFERREDIN THE MAKING

267

TRANSFER COMMITTEE

I.	The plan provides that all payments for
the account of reparations, however derived, are to
be first made in the form of deposits in the bank,
provided for in the plan, to the credit of 'The
Agent for Reparation Payments.' The withdrawals
from this deposit shall be made by the Agent for
Reparation Payments only, under the direction of a
Committee composed of five members known as
"The Transfer Committee.*

COMPOSITION AND SELECTION OF MEMBERS

II.	The Transfer Committee shall be composed
of six members; the Agent for Reparation Pay-
ments shall be a member and the Chairman; the
other five members shall be persons qualified to
deal with foreign exchange questions. They shall
consist of an American member, a French member,
an English member, an Italian member and a Bel-
gian member. Each of them shall be appointed by
the Reparation Commission, after the member of the
General Board of the Bank of the same nationality
has been consulted.

COOPERATION OF THE BANK

III.	The Committee will be in contact with the
President and the Commissioner of the Bank.

POWERS OF THE COMMITTEE

IV.	The Committee shall have power, and it
shall be its duty:

a. to apply such bank balances for payments268

THE DAWES PLAN

for deliveries in kind and payments under the Re-
paration Recovery Act, in accordance with the pro-
gram established periodically by the Reparation
Commission, after consultation with the Transfer
Committee as to the character and amount of such
deliveries;

b.	to convert these bank balances into foreign
currencies from time to time and, after conversion,
to remit them in accordance with the instructions of
the Reparation Commission.

Both the foregoing powers (a) and (b) to be
exercised to the extent to which in the judgment of
the Committee, the foreign exchange market will
permit, without threatening the stability of the Ger-
man currency.

c.	to invest from time to time in bonds or
other loans in Germany, such amounts as the Com-
mittee may deem wise. The Committee shall pro-
ceed to make these investments as soon as the
amount of the credits exceeds the sum which the
Bank will keep on deposit. On the other hand, the
Committee may sell the bonds which it has acquired,
or liquidate the loans which it has granted, when-
ever in its opinion the sums may be converted into
foreign exchange, or the Bank can accept additional
deposits.

RESTRICTION ON PURCHASE BY THE CREDITORS

V. The goods supplied by Germany to the cred-
itor countries under Paragraph IV above and
paid for by the Bank as above provided, shall be
for the sole use of the countries receiving them forHenry M. Robinson
United States Member Second Committee of ExpertsIN THE MAKING

269

their internal requirements, including the require-
ments of their colonies and dependencies. The goods
so delivered shall not be exported from the country
receiving them, except by agreement between the
Committee acting unanimously and the German
Government.

VI.	In addition to its powers under Paragraph
IV, the Committee may on the instructions of the
Reparation Commission and at the request of the
Creditor States, by debiting their accounts, transfer
marks to private individuals for the purpose of mak-
ing purchases in Germany, such reinvestment not to
be of a temporary character, and such property
being of classes contained in a schedule agreed to
between the Committee and the German Govern-
ment, and modified from time to time by similar
agreement. In arriving at such agreement, the Ger-
man Government shall be required to have due
regard to the necessity for making maximum pay-
ments to its creditors, but it shall also be entitled to
have regard to maintaining its control of its own
internal economy.

COOPERATION BY THE GERMAN GOVERNMENT AND THE

BANK

VII.	The German Government and the Bank
shall undertake to facilitate in every reasonable way
within their power the work of the Committee in
making transfers of funds, including such steps as
will aid in the control of foreign exchange. When
the Committee is of the opinion that the Bank's dis-
count rate is not in relation to the necessity of mak-270

THE DAWES PLAN

ing important transfers, it shall inform the
President of the Bank.

ATTEMPTS TO DEFEAT TRANSFER

VIII.	In the event of concerted financial
maneuvers either by the government or by any
group, for the purpose of preventing such transfers,
the Committee may take such action as may be
necessary to defeat such maneuvers; and in such
circumstances it may suspend the operation of Par-
agraph X, may accumulate the funds or employ
them in the purchase of any kind of property in
Germany.

TAX EXEMPTION PROVISION

IX.	The German Government shall not tax the
deposits in the Bank or goods purchased for the
creditor countries pending removal, nor any secur-
ities or loans representing investment of funds
pending transfer, nor any property purchased under
the provisions of the paragraph next preceding.
This exemption does not apply to property pur-
chased under Paragraph VI, but on the other hand,
there should be no tax discrimination against such
property.

PROVISIONS FOB LIMITATION OF ACCUMULATION

X.	a. When the accumulation of funds not
transferable under the provisions of subdivisions b
and c of Paragraph IV shall have reached the sum
of five (5) milliard gold marks (whether repre-
sented by bank deposits or loans), the payments
for Treaty charges provided for shall be reduced toIN THE MAKING

271

such an amount as will cover the transfers and
payments provided for under subdivisions b and c
of Paragraph IY without additional accumulation.
Such partial suspense of Germany's obligations
shall be operative only during the period that the
conditions of transfer necessitate, and the standards
of payment laid down in the plan shall be resumed
at any time when they can operate without the
limits of accumulation herein laid down being ex-
ceeded.

b.	The Committee shall have the power to sus-
pend accumulation before reaching five (5) milliard
gold marks, if two-thirds (2/3) of its members are
of the opinion that such accumulation is a menace to
the fiscal or economic situation or to the interests
of the creditor countries.

c.	The Committee shall, by a two-thirds (2/3)
majority, have power to waive the limit accumula-
tions under the conditions provided for in Para-
graph VIII.

The Agent General is here recognized as the
Chief of the organization created. He receives all
payments for the account of reparations, deposits
them in the bank, and withdraws such deposits under
the direction of the Transfer Committee, of which
he is Chairman, to pay for deliveries in kind or to
invest in bonds or other loans in Germany, and has
power to sell the bonds acquired and collect the
loans and to pay the balances to the creditors of272

THE DAWES PLAN

Germany. In commenting upon the functions of the
Transfer Committee the Report states:—

"They will control the transfer of cash to the
Allies by purchase of foreign exchange and gener-
ally so act as to secure the maximum of transfers
without bringing about instability of the currency.
We do not deny that this part of our proposal will
present difficulties of a novel character which can
only be solved by experience. But what are the
alternatives? In order that no difficulties with ex-
change or stability can possibly arise, the sum pay-
able for reparations may be definitely fixed at such
a figure as is certain beyond all doubt to be within
Germany's capacity to export in excess o'f her im-
ports. In this case the attainment of such certainty
would involve so low a figure as to be quite unac-
ceptable to her creditors and unwarrantably favor-
able to Germany. On the other hand the liability
may be fixed without regard to that excess of ex-
ports at all, and the discharge of the liability left
to uncontrolled events without any possible regard
to exchange difficulties. That way lies future insta-
bility and disaster. We are convinced that some
kind of coordinated policy with continuous expert
administration in regard to the exchange, lies at the
root of the reparation problem and is essential to
any practicable scheme in obtaining the maximum
sums from Germany for the benefit of the Allies."

It will be seen that the control of these payments
in foreign exchange will always be in the hands of
experts in foreign exchange, and men well trained
in the science of banking under instructions to limit
the transfers in such a manner as to protect the sta-
bility of the currency and the solvency of the central
bank.

In addition to the duties of the Agent General asIN THE MAKING

273

outlined above, he is designated as the coordinating
agent between the Reparation Commission and the
various Commissioners. "The Commissioners
would retain all responsibility for the carrying out
of the task entrusted to each, only subject to such
coordinating policies as may prove necessary in
order to avoid any duplication of effort, overlap-
ping of functions, unnecessary friction and gener-
ally all interference with the harmonious working
of the plan.

"In case of a difference of opinion between one
Commission and the Agent General for Reparation
Payments in his capacity as coordinator, the Com-
missioner can appeal to the Reparation Commis-
sion. The existence of this right of appeal will have
a salutary effect upon the relations of the Coordi-
nating Agency and the different Commissioners.

"To facilitate the interchange of information
which will develop a situation in its entirety for ap-
propriate action, a general Coordinating Board is
also suggested in which the various Commissioners
or representatives named by them will participate
together with the Agent General for Reparation
Payments and the Trustee. The Coordinating Board
is to have advisory powers only and is for the pur-
pose of giving information to the Agent General to
assist him in preparing coordinating orders."

The Agent for Reparation Payments in his ca-
pacity of receiving the funds, and as Chairman of
the Transfer Committee in disbursing them and as
Chairman of the Coordinating Board (from which
he may receive information and advice) will be an
official of great power and dignity, upon whose in-274 THE DAWES PLAN

itiative, wisdom and discretion the success of the
scheme will quite largely depend.

The economic consequences of inflation in Ger-
many, those to be expected immediately and those
to follow after in later years, are as pervasive in
the whole problem as they are elusive. They affect
the study of the problem of transferring funds and
credits out of Germany in a very important manner.
The following sentences are taken from the Report:

"The extinction of the German debt has after
all been at the expense of her own Nationals
who are her taxpayers. . . . The loss incurred
by individual holders of debt is exactly offset
by a corresponding profit to the taxpayers as
a whole." But in this process certain classes bene-
fited and others were despoiled. If nearly twenty
billion marks of savings-bank deposits were wiped
out and if the total bank deposits in January, 1924,
were only one-seventh of those existing in 1914,
then there must be accumulated at least forty billion
marks of capital more than is now in use before a
normal condition of working capital and credit can
be reestablished. If there be doubt as to Germany's
ability to establish such conditions as to make ex-
terior payments possible, certainly it will be a diffi-
cult matter both to accomplish that and accumulate
this lost working capital.

The Committee was not foolish enough to open
such intricate and controversial subjects as the
amount which has actually been paid for repara-
tions. Much has been paid, and some that has not
produced an economic benefit in the receivingIN THE MAKING

275

countries of an equal weight to the loss sustained
by Germany in making the payments. But among
Germans the idea persists that the actual payment
already made through reparation is about equal
in value to the loss of its working capital as
represented in bank deposits. They believe this
must be restored before normal conditions may be
considered as being reestablished. This would ex-
plain why they look so anxiously to the opening of
credits for their industry especially, and from
America in particular. They accept the plan, and
chiefly for the reason that it appears likely from
their point of view to reestablish mutual good will
and provide the basis for credit.

They do not believe that all international trade
ceases, when, for a period, exports are less than im-
ports; under such circumstances trade continues in
response to the necessities of the case, and the bal-
ance is taken care of, first out of invisible exports,
that is interest on foreign investments and services
of various kinds, and secondly and chiefly by a shift-
ing of credits and investments. And it is from this
shifting of credits and sale of securities that they
anticipate the earliest and most beneficial effects
from the substitution of this plan for the continued
control by the Reparation Commission, for after all
this is the alternative; the old control or the new
one must prevail from now on in the handling of the
reparation problem.

The Germans with their fixed capital freed from
all indebtedness through inflation, hope under the
new plan to be able to borrow enough to restore276

THE DAWES PLAN

their working capital lost through the same process;
and the sums required for this purpose, though
large, are much smaller than would have been re-
quired if it had been their fixed capital which was
destroyed. With their capital thus restored, they
will work under the most favorable conditions to
establish that ultimate surplus of exports upon
which their solvency will depend.

Enough has been said in the course of these com-
ments to indicate the confusion and the contro-
versies created by the handling of the matter of
reparation under the Treaty of Versailles. The
reparation problem was only one of the many ad-
justments made under that historical document:
boundaries were fixed, new governments created, a
league of nations established, and mutual obliga-
tions formed between the contracting nations.

The arrangement for the distribution of authority
among the various bodies of control established
probably followed the precedents of other Treaties.
The source of authority was the Treaty and the au-
thority was granted by the governments. The Sep-
aration Commission and all the other bodies of con-
trol were the creatures of governments. It would be
idle to find fault with this arrangement as being a
political control. The governments were obliged to
act in their sovereign capacities and necessarily un-
der political restrictions. The day is past when any
part of such international agreements can be made
in secret. Every part of them is open to the world
and may arouse the fear and jealousy or excite the
hopes of masses of people. When all governmentsIN THE MAKING

277

are more or less democratical, such matters, being
of great importance to the general welfare, become
matters of general discussion. The relations between
governments and the cooperation of governments
under Treaties for the accomplishment of their com-
mon purposes, are political in their nature and must
be placed under political control.

But when economic interests of great importance
are placed under political control, there is necessa-
rily produced confusion, duplication of effort and
delay. In making political changes, delay may be
considered salutary, but its effect upon economic
processes is destructive and intolerable. The im-
portant subject of reparations was one of great eco-
nomic importance. The matter of dealing with it
under organizations necessarily of a political nature
had produced conditions almost unendurable and
threatened the world with a new disaster almost as
serious as that from which it was just then emerg-
ing. The people of Germany, prostrated by the
effects of inflation, found their industrial regions
under the control of outsiders, custom barriers
erected within their own country, their railroad sys-
tem divided and disorganized and until they could
gather their strength and resume the use of all their
own resources they could not hope to be able to meet
the demands of their creditors, nor even to maintain
the momentary stability of their curious currency.
They tottered on the verge of another and more ter-
rible collapse. The effects of such a disaster in
Germany would be felt by all the nations, but even
before sustaining them, these other nations would278 THE DAWES PLAN

soon have had a serious crisis to meet in the growing
distrust and resentful jealousy springing up be-
tween themselves.

It is perhaps as unprofitable to discuss what
might have been as to speculate about what might
hereafter be. But nowhere has there been heard,
either in France or Germany, any dissent from the
opinion so often expressed that a great disaster was
impending over Europe at the moment when the
Committees of Experts was called into existence.
This condition must be remembered in judging of
the work produced by these men. Any adjustment
will be a good one which averts the immediate dis-
aster. In no other manner than through the action
of this Committee to be endorsed by the Repara-
tion Commission and ratified by the contracting
governments can the Treaty of Versailles be rewrit-
ten. And by this process it can be rewritten in cer-
tain particulars only. The Report of the Committee
is a revisal of certain portions of the Versailles
Treaty, not a new adjustment outside of the Treaty.
It was limited to the scope of its inquiry, not only
by Section 134 to which reference has already been
made, but by all the conditions, political and eco-
nomic, which have grown up as a result of the war.
Let no man criticize it, therefore, as if it had been
prepared for a world unscarred by war, and by men
entirely free to work out at their leisure, novel and
scientific remedies for a hypothetical disease. In
less than three months the work of these Committees
was completed, and every day of delay for its final
presentation was a source of anxiety to the members.IN THE MAKING

279

Working under such limitations and under such
pressure it is not to be doubted that some errors
and omissions have marred their work.

But in general they have outlined a plan which
attempts to separate the political portions of the
Treaty from the economic ones and to place the
economic matters under a business control to the
extent that it is possible to create such a control
over adjustments in which the important interests
of government are concerned.

The acceptance of this report by the Reparation
Commission may be taken as evidence of a sincere
desire on its part to avoid a great disaster, for it will
be in effect an act of abdication of its powers. The
greater part of the authority and responsibility for
handling these important matters will be assumed
by the Agent General and the various Commission-
ers. The Reparation Commission will have as its
most important function the appointment of the
various Agents and Commissioners who will con-
duct, under business rules, the great work of
collecting reparations formerly entrusted to the
Commission itself.

The system outlined results in the minimum of
interference with the German administration and
avoids so far as possible interference by all other
governments in the agencies it creates. The Bank-
ing System of Germany is reorganized and com-
mitted to the management of Germans; its railroad
system mortgaged for Germany's creditors and
managed by German nationals; its special revenues
assigned as security but without interference in280

THE DAWES PLAN

their collections; and all exterior payments limited
in such a manner as to insure against injury by ex-
cessive payment under the control of an organiza-
tion so far removed from political influences as any
body of men in the world could be.

But the plan in the nature of things could not have
cancelled indemnities nor extinguished international
indebtedness. It could not have rescinded the
Treaty nor effaced the hardships which come as the
aftermath of war. At first it will be hailed with
relief, accepted with enthusiasm, and if so Ger-
many's credit will be reestablished, its industrial
machinery set to work. Thereafter complaints will
come, from the Germans, first, perhaps, that the con-
trol of railroad freight rates by outsiders is an im-
possible burden, and that no government ever ought
to have given up a control over an agency which in
regulating freight rates could both minister to jus-
tice as between its own citizens and add to the
national power in international competition by dis-
criminatory treatment of exporters. And when the
bank credits are restricted, it will be attributed to
the foreign supervision over the bank. And in other
parts of the world, as Germany gains in industrial
power, and the competition becomes severe, there
will arise the cry that the application of this plan has
increased the German production to such a point as
to remove opportunity from the workers of other
nations, and that the effect of collections of inter-
national debt is to lay a burden upon the laboring
men of all countries in order that the holders of the
bonds of the respective nations of the world may
continue to collect their interest.IN THE MAKING

281

If the plan is put into operation, even though the
immediate relief is felt as being salvation from great
disasters, the day may come when it will be held re-
sponsible for all the hardships which must be en-
dured in the future. The very existence of
indemnities and international obligations condemns
the world to serious strains which the most perfect
machinery could only relieve, but not remove. The
scars of war are not to be healed without suffering.
In the future there will be many who will say that
it is the plan and not the Treaty, the mistakes made
since the war and not the war, that have caused the
difficulties which are likely to present themselves.
But the unanimity of this Committee is the sign of a
better spirit, upon the further development of which
the peace and prosperity of the world depends. In
the operation of the plan there must always be ap-
plied that same spirit of Christian forbearance to
which Chancellor Marx appealed when it was being
formulated.

THE ENDAPPENDICES

No. 1. The Evolution of the Terms of Reference to the
Committees of Experts

No. 2. Resolutions Adopted by the Reparation Commis-
sion on November 30, 1923

No. 3. Report of Committees of Experts to Reparation
Commission: Complete English Text with An-
nexesAPPENDIX NO. 1

THE EVOLUTION OF THE TEEMS OF REFER-
ENCE TO THE COMMITTEES OF EXPERTS

On November 30, 1923, the Reparation Commission de-
cided to create two Committees of Experts, pursuant to
the authority vested in the commission by paragraph 7 of
Annex II of Part VIII of the Treaty of Versailles, which
reads in the pertinent part:

"The Commission is authorized to appoint all neces-
sary officers . . who may be required for the execution of
its functions . . to constitute committees whose members
need not necessarily be members of the Commission . . and
to delegate authority and discretion to officers, agents and
committees.''

The full text of the Commission's Decision, which indi-
cates the motives which led to its adoption and which also
defines the objects and scope of the two Committees'
labors, is expressed in the English text in the following
form:

"In order to consider, in accordance with the provi-
sions of Article 234 of the Treaty of Versailles, the re-
sources and capacity of Germany, and after giving her
representatives a just opportunity to be heard, the Repara-
tion Commission decided to create two Committees of Ex-
perts belonging to the Allied and Associated countries.

"One of these Committees would be entrusted with con-
sidering the means of balancing the Budget and the meas-
ures to be taken to stabilize the currency.

285286

APPENDICES

' 'The other would consider the means of estimating the
amount of exported capital and of bringing it back into
Germany."

The language just quoted should be read in the light of
the contemporaneous correspondence relative to its mean-
ing which was exchanged between M. Barthou, President,
French Delegate to the Reparation Commission and Mr.
Logan, U. S. Unofficial Observer at the Reparation Com-
mission (Annex T). The British interpretation of the
language is set forth in the letter of acceptance of Sir Rob-
ert Kindersley (Annex II). Article 234 of the Treaty of
Versailles, in the execution and application of which, ac-
cording to the Commission's Decision, the Committees are
created, provides as follows:

i ' The Reparation Commission shall after May 1, 1921,
from time to time, consider the resources and capacity of
Germany, and, after giving her representatives a just
opportunity to be heard, shall have discretion to extend
the date, and to modify the form of payments, such as are
to be provided for in accordance with Article 233; but not
to cancel any part, except with the specific authority of
the several Governments represented upon the Commis-
sion.''

In appreciating the true scope of the present terms of
reference to the Committee, it may be helpful briefly to
state the three prior proposed formulas which were put
forward, discussed and rejected—with some indication of
the reasons for their failure of adoption.

FORMULA I

The present committee idea developed late in October,
1923, partly as the result of the almost simultaneous occur-
rence of three events. The Germans had asked for a hear-
ing relative to Germany's financial situation and her abilityAPPENDICES

287

to pay reparations. Mr. Baldwin, to a degree stimulated
by the Imperial Conference then held in London, was
talking of a new international conference to discuss the
whole reparation problem. President Coolidge had just
stated publicly that his Administration still stood on Mr.
Hughes' New Haven speech of December, 1922, which held
out hopes of unofficial American expert participation.
The coincidence of these public happenings, especially
considering the existing impasse between France and Eng-
land as to the proper reparation policy and the daily de-
terioration of Germany's finances, germinated the pres-
ent committee idea and the idea became crystallized after
England and France approached Mr. Hughes, through
their representatives in Washington, and discovered that
he was friendly to the creation of an expert committee pro-
viding it represented a genuine effort to accomplish some-
thing.

Formula I for submission to the Experts appears to
have been fathered by M. Poincare about October 26th. (It
is to be remembered that the first negotiations concerning
the committees and the terms of reference were carried on
between the Governments. The negotiations which led up
to the present Committees were carried on between the
Reparation Commission and the Governments.) M. Poin-
care's formula would have the committees study "the
actual state of Germany's resources and capacity of pay-
ment." In French, actual (actuelle) means "present."

This limited formula found no favor either with Eng-
land or with Mr. Hughes. M. Poincare defended it legally
on the ground that the language of the Treaty providing
that the resources of Germany should be considered "from
time to time" intimated that these considerations were to
be frequent, periodic, and not once and for all time. He
defended it practically on the ground that no one but a
clairvoyant could forecast Germany's capacity to pay288

APPENDICES

twenty years hence. When pressed, he stated frankly that
he did not wish the Committees even to consider the re-
duction or cancellation of any part of the German debt
as fixed at 132 milliards. He advanced the legal argu-
ment that since the Commission was incompetent to reduce
or cancel any part of the German debt, (only the Govern-
ments may do this—Article 234) consequently it was in-
competent to appoint a committee which would consider,
or recommend, such a step. He insisted that whatever
committees were appointed should in no way usurp the
powers of, or replace, the Reparation Commission and
should in no way operate or recommend except pursuant
to the terms and within the scope of the Treaty of Ver-
sailles. Although ready to assent to this last limitation
neither England nor Mr. Hughes would accept the formula
limiting the inquiry to the "present" capacity of Germany
to pay; hence this formula was discarded.

FORMULA II

On November 7th the English, through Sir John Brad-
bury, offered an alternative and elastic formula proposing
that committees should be created "with a view of exam-
ining the capacity of payment of Germany and of making
proposals of a financial character likely to assure said
payments." There were indications that Belgium and
Italy would accept this language. Prance, through M.
Barthou, immediately proposed an amendment in the fol-
lowing terms: "With a view of examining, within the
limits of the "powers of the Reparation Commission, the
present capacity of payment of Germany and of making
proposals of a financial character likely to assure said
payments."

The French amendment, upon analysis, was really a
repetition of M. Poincare's first formula. The English
proposal designedly opened the door to a discussion of theAPPENDICES

289

entire reparation problem. M. Poineare quickly indicated
that so broad a reference was not acceptable to him. Lest
an attempt be made to have the English text adopted by
the Reparation Commission by majority vote, he called
attention to paragraph 13 of Annex II of the Treaty, to
the effect that questions involving the cancellation of the
whole or any part of the debt or obligations of Germany
required a unanimous vote, and he indicated that in his
view the appointment of a committee with power to con-
sider these questions would also require a unanimous vote.
Since France was in opposition, the adoption of the elastic
English formula could not, he suggested, be legally accom-
plished. In answer to Mr. Hughes' specific question as to
what was meant by "present" capacity, M. Poineare re-
plied that the maximum period which could be considered
should not extend beyond 1930. Mr. Hughes replied that
under these considerations the United States could not
participate even informally, and the three-cornered nego-
tiations between France, England and the United States
thereupon fell through.

FORMULA III

At the first meeting, (November 13th) of the Repara-
tion Commission after the failure of the proposals above
described, the Commission, acting in its own sovereign
capacity, took up the Committee subject and the matter
thereby entered into its second, and present, phase.

M. Barthou, the French Delegate, offered this text for
consideration, explaining that it was preliminary in its
character:

"This Committee should be charged with determining
the capacity of payment of Germany at the present mo-
ment and to provide the Reparation Commission with the
elements of a decision for fixing German payments during
the three years 1924, 1925 and 1926. In the opinion of290

APPENDICES

the French Delegation these experts, who will take the
Schedule of Payments as the basis of their work, should
study the evaluation of the internal and external resources
of Germany and particularly German assets abroad."

The proposal, upon scrutiny, proves to be even more
restricted in its scope than any of its predecessors. M.
Poincare interpreted "present" to mean until 1930;
formula III would stop at 1926. M. Poincare was willing
to permit the committees to operate within the scope of the
Treaty of Versailles. Formula III suggested that they
would operate within the limits of the Schedule of Pay-
ments—which was apparently an indirect method of indi-
cating not only that they could not discuss any reduction
of the debt fixed by the Schedule, but also that their sole
aim and function was to discover ways and means of get-
ting the Schedule of Payments carried out, i. e. the total
paid. In this connection it is important to remember that
the sum of 132 milliards was not fixed by the Treaty of
Versailles and that the popular opinion that any discus-
sion of the correctness or realizability of this sum amounts
to a destruction of the Treaty of Versailles or an amend-
ment thereof, is merely an illusion. Formula III, how-
ever, did contain an expression on a new subject—the
matter of investigating German assets abroad.

Considering the fact that the previous and more liberal
French proposals had not been acceptable, it was only
natural that the tentative formula III, above quoted,
should receive a luke-warm reception. The British Dele-
gate referred to it as a prescription which belonged to a
world in which a certain philosopher invented pills for
the treatment of earthquakes. However, the proposal led
to informal conferences between the individual Delegates
outside formal sessions, and to unofficial conferences be-
tween them and Mr. Logan that finally resulted in shap-
ing the present terms of reference which were introducedAPPENDICES

291

by M. Barthou and which were unanimously approved by
the Commission. Through Mr. Logan M. Barthou had
first ascertained that the present formula (coupled with
his letter of explanation) was sufficiently unrestricted in
its mode of expression to enable Mr. Hughes to give his
assurance that American experts would participate on
such a basis. Indeed, there was some highly confidential
intimation that the French would not obstruct a considera-
tion of the whole reparation problem even including debt
reduction, although if the report took any such form the
French members of the Committee would doubtless disso-
ciate themselves from that recommendation.

THE PRESENT FORMULA

"One of these Committees would be entrusted with
considering the means of balancing the Budget and the
measures to be taken to stabilize the currency.

4 4 The other would consider the means of estimating the
amount of exported capital and of bringing it back into
Germany."

This language seems simple and free of legal subtleties
or scholastic pit-falls. However, the letter of acceptance
of Sir Robert Kindersley reflects a sensitiveness lest even
this language be made the subject of controversy and dis-
closes a desire to pin a definite and a broad interpretation
upon it.

It would be a fault wholly to disengage the foregoing
text from its context and to ignore the preamble of the
Commission's decision in creating the Committees—"in
order to consider, in accordance with ike provisions of Ar-
ticle 234 of the Treaty of Versailles, the resources and
capacity of Germany . . the Commission decided to create
two Committees," etc. In other words, it appears that
the Commission was acting by virtue and in application
of its powers and duties under Article 234. It appears292

APPENDICES

logical that an advisory expert committee appointed by
the Commission to aid in the execution of Article 234
should have no greater powers than the Commission itself
under that Article. If any dispute as to the scope of the
operations of the Committees arise, it is anticipated that
arguments in restriction of their functions will be drawn
from the assumed limitations of Article 234 rather than
from the relatively clear wording of the paragraph
describing the Committees' duties with reference to the
German budget and currency. Article 234 is worth re-
peating :

"The Reparation Commission shall after May 1, 1921,
from time to. time, consider the resources and capacity of
Germany, and, after giving her representatives a just op-
portunity to be heard, shall have discretion to extend the
date, and to modify the form of payments, such as are to
be provided for in accordance with Article 233; but not to
cancel any part, except with the specific authority of the
several Governments represented upon the Commission.''

M. Poincare's deduction that the expression 6 i from time
to time'' limited the Commission to considering Germany's
capacity for successive brief periods only has already been
noted. This point may be raised again if and when it is
suggested that intelligent and effective methods of bal-
ancing Germany's budget cannot be had without due con-
sideration of the financial practicability of Germany's
meeting and discharging in toto the biggest single obliga-
tion with which that budget is supposed to be charged.

The more likely objection is that inasmuch as by
Article 234 the Reparation Commission cannot cancel any
part of the German debt except with the specific authority
of the several Governments, therefore its subsidiary
committee cannot consider this question reserved to govern-
mental action. The Paris Press has occasionally propa-
gated this fallacy. Even if the Commission cannot itself,APPENDICES

293

without the consent of the Governments, cancel any part
of the German debt, it can certainly discuss the question,
investigate the question, and make recommendations to the
Governments on the question, if, as the result of its in-
vestigating the resources of Germany it feels that such
action is necessary or appropriate. That the Commission
may consider the matter is conclusively proved by the
language of sub-paragraph (f) of paragraph 12 of Annex
II—"Decisions of the Commission relating to the total or
partial cancellation of the capital or interest of any veri-
fied debt of Germany must be accompanied by a state-
ment of its reasons.'' And again by paragraph 13 of An-
nex II to the effect that a unanimous vote of the Commis-
sion is necessary in questions involving "the cancellation
of the whole or any part of the debt or obligations of Ger-
many." Indeed, the very prohibition of Article 234 to
the effect that the Commission may not cancel, without
the authority of the several Governments, indicates with
great clearness that it was foreseen that as a result of its
investigations under Article 234 the Commission might be
led to the belief that it was necessary to cancel a part of
the German debt. To avoid this step without the consent
of the Governments the prohibition quoted was inserted.

By a fair construction of Article 234, therefore, and of
the present terms of reference, especially read in the light
of the chronological development of the previous restricted
formulas and in the light of the correspondence between
M. Barthou and Mr. Logan, it seems proper to conclude
that the Committees are empowered to make all and every
study and recommendations designed successfully to sta-
bilize German currency or balance the German budget,
quite irrespective of whether this study and these recom-
mendations involve directly or indirectly some considera-
tion of the global German reparation obligation.

It is highly to be hoped that none of these technicalities294

APPENDICES

will impede the free progress of the Committees' efforts—
or even be mentioned. This memorandum has accomplished
its full purpose by merely stating some of the legal aspects
of a situation which, in practice, should be met or circum-
vented on common sense, business grounds, with a com-
plete disregard of the legal niceties which, in the past, have
so often become instruments of obstruction in dealing with
the problems of the Treaty of Versailles.

L. F.

January 9,1924.

CORRESPONDENCE BETWEEN M. BARTHOU,
FRENCH DELEGATE, REPARATION COMMIS-
SION, AND MR. LOGAN, UNOFFICIAL AMERI-
CAN REPRESENTATIVE, REPARATION
COMMISSION
M. Barthou to Mr. Logan:—

Delegation Francaise
a la

Commission des Reparations.

Paris, 5 December 1923.

My dear Mr. Logan:—

I have just had a conversation with our colleague,
Monsieur Delacroix, upon the observations which you have
exchanged with us. In order to give you more definite
information, and to clear up points which might leave
doubts in your mind, we desire to furnish you with more
precise details.

The First Committee of Experts will endeavor to find:

(a)	The means of balancing the budget,

(b)	The measures to be taken to stabilize the currency.
Concerning the stabilization of the currency, the Ex-
perts would be invited first of all to determine the con-
ditions to be realized in order that a currency may be
stabilized, and then the measures to be progressively taken
so as to realize all of these conditions.

As the stabilization of the currency necessitates budget
equilibrium, the Experts would similarly be invited to
study in detail the receipts and the expenditures of the
Reich, and also of the different States.APPENDICES

295

The Reparation Commission would ask the Experts to
give it, in all sincerity, their professional opinion on the
questions submitted to them.

Monsieur Delacroix and I greatly hope that this fur-
ther information may lead your Government to acquiesce
in the acceptance by American Experts of the invitations
which will be sent to them to participate in the labors of
the committees. Furthermore, if you accept this sugges-
tion, I am quite prepared to submit it to the Reparation
Commission.

(Signed): Louis Barthou.

Mr. Logan's reply to M. Barthou:—

UNITED STATES UNOFFICIAL DELEGATION
REPARATION COMMISSION

Paris, 12 December 1923,

18 rue de Tilsitt.

My dear M. Barthou:—

I have not failed to inform my Government of your
letter of December 5. My Government is deeply inter-
ested in the economic recuperation of Europe and is grati-
fied to learn of the proposal for the establishment by the
Reparation Commission of two Committees of Experts for
the purposes stated. My Government notes the statement
in your letter that the first committee of experts will en-
deavor to find:

(a)	The means of balancing the budget of Germany,

and

(b)	The measures to be taken to stabilize its currency;
and that to this end the experts will be invited to deter-
mine the conditions to be realized in order that a currency
can be stabilized and the measures to be progressively
taken so as to realize all of the conditions and also that
they will be invited to study in detail the receipts and ex-
penditures of the Reich as well as of the different states.

It has been made clear in our interviews that the Gov-
ernment of the United States is not in a position to be rep-
resented on these committees but my Government believes
the proposed inquiries will be of great value and it views
with favor the acceptance by American experts of invita-
tions to participate in the work of the committees.296

APPENDICES

It is hoped that through these committees practicable
and just solution of the pending problem may be found.

Faithfully yours,
(Signed) James A. Logan, Jr.

11, Old Broad Street,

London, E. C. 2^

31st December 1923.

I beg to acknowledge the receipt of your letter of the
26th instant inviting me to serve upon a Committee 4 4 en-
trusted with considering the means of balancing the (Ger-
man) Budget and the measures to be taken to stabilize
the currency."

I have been in consultation with Sir Josiah Stamp. As
we understand the scope of the terms of reference they
cover consideration of all the actual and potential sources
of national revenue of Germany as an area defined by the
Peace Treaty, and all the elements of national expenditure
and obligation, whether definitive or not. In short, they
omit nothing that is relevant to a complete and practical
German Budget and to the establishment and maintenance
of a stable currency.

We note that our interpretation is confined by the pub-
lished correspondence between Monsieur Barthou and Mr.
Logan.

In these circumstances I have the honour to accept
your invitation.

I am, Sir,

Your obedient Servant,
(Signed) R. M. Kindersley.

The Secretary General,

Reparation Commission,

Paris.APPENDIX NO. 2

RESOLUTIONS ADOPTED BY THE REPARATION
COMMISSION ON NOVEMBER 30, 1923

In order to consider, in accordance with the provisions
of article 234 of the Treaty of Versailles, the resources and
capacity of Germany, and after giving her representa-
tives a just opportunity to be heard, the Reparation
Commission decides to create two committees of experts
belonging to the allied and associated countries.

One of these committees would be entrusted with con-
sidering the means of balancing the budget and the
measures to be taken to stabilize the currency.

The other would consider the means of estimating the
amount of exported capital and of bringing it back to
Germany.

MEMBERSHIP OF THE COMMITTEES
First committee

United States:

Charles G. Dawes, Chairman.

Owen D. Young.

Great Britain:

Sir Robert Molesworth Kindersley.

Sir Josiah Charles Stamp.

France :

Jean Parmentier.

Edgard Allix.

297298

APPENDICES

Italy :

Alberto Pirelli.

Federieo Flora.

Belgium :

Emile Francqui.

Baron Maurice Houtart.

Second committee

United States:

Henry M. Robinson.

Great Britain:

Reginald McKenna, Chairman.
France :

Andre Laurent-Atthalin.

Italy :

Mario Alberti.

Belgium :

Albert-Edouard Janssen.APPENDIX NO. 3

REPORT OF COMMITTEES OF EXPERTS TO REP-
ARATION COMMISSION: COMPLETE OFFICIAL
ENGLISH TEXT WITH ANNEXES

REPORT OF THE FIRST COMMITTEE OF
EXPERTS

letter from the chairman to the reparation
commission

April 9, 1924.
Your Committee of Experts has "unanimously adopted
a report upon the means of balancing the budget of Ger-
many and the measures to be taken to stabilize its
currency, which I now have the honor to submit.

Deeply impressed by a sense of its responsibility to
your commission and to the universal conscience, the com-
mittee bases its plan upon those principles of justice,
fairness, and mutual interest, in the supremacy of which
not only the creditors of Germany and Germany herself,
but the world, has a vital and enduring concern.

With these principles fixed and accepted in that com-
mon good faith which is the foundation of all business and
the best safeguard for universal peace, the recommenda-
tions of the committee must be considered not as inflicting
penalties, but as suggesting means for assisting the
economic recovery of all the European peoples, and the
entry upon a new period of happiness and prosperity
unmenaced by war.

299300

APPENDICES

Since, as a result of the war, the creditors of Germany
are paying taxes to the limit of their capacity, so also
must Germany pay taxes from year to year to the limit of
her capacity. This is in accord with that just and under-
lying principle of the Treaty of Versailles, reaffirmed by
Germany in her note of May 29, 1919, that the German
scheme of taxation must be " fully as heavy proportion-
ately as that of any of the powers represented on the
commission." More than this limit could not be expected,
and less than this would relieve Germany from the
common hardship and give her an unfair advantage in the
industrial competition of the future. This principle the
plan embodies.

The plan has been made to include flexible ad-
justments which, from the very beginning, tend to
produce the maximum of contributions consistent with the
continued and increasing productivity of Germany. The
conservative estimates of payments to be made in the near
future are dictated by business prudence in outlining the
basis of a loan, and should not destroy perspective as to
the effects to be registered in the aggregate of eventual
payments, which will annually increase. "With normal
economic conditions and productivity restored in Germany,
most hopeful estimates of amounts eventually receivable
will be found to be justified. Without such restoration,
such payments as can be obtained will be of little value in
meeting the urgent needs of creditor nations.

To insure the permanence of a new economic peace
between the Allied Governments and Germany, which in-
volves the economic readjustments presented by the plan,
there are provided the counterparts of those usual eco-
nomic precautions against default recognized as essential
in all business relations involving expressed obligations.
The existence of safeguards in no way hampers or embar-
rasses the carrying out of ordinary business contracts.APPENDICES

301

The thorough effectiveness of the safeguards should not
embarrass the normal economic functioning of Germany,
and is of fundamental importance to her creditors and to
Germany.

Great care has been taken in fixing conditions of
supervision over Germany's internal organization so as
to impose the minimum of interference consistent with
proper protection. This general plan, fair and reason-
able in its nature, if accepted, leads to an ultimate and
lasting peace. The rejection of these proposals by the
German Government means the deliberate choice of a
continuance of economic demoralization, eventually involv-
ing her people in hopeless misery.

In the preparation of this report, the committee has
carefully and laboriously covered the broad field of inves-
tigation. It has had the constant cooperation of able
staffs of experts, gathering information, digesting it and
presenting it. It conducted, on the ground, an examina-
tion of the officials of the German Government and
representatives of its labor, agriculture and industry.
It received from the German Government and its
representatives voluminous and satisfactory answers in
response to its written inquiries. In connection with
various features of its report, both for gathering informa-
tion and for advice, it has called to its assistance outside
experts of international reputation. The published re-
ports and statements of economists of world-wide standing
have been in its hands. It has had the benefit of the
accumulated information heretofore gathered by your
commission.

In its work, the full committee has held, since January
14, 1924, 54 meetings; the subcommittee on the stabiliza-
tion of the currency, composed of Monsieur Parmentier,
Sir Eobert Kindersley, Monsieur Francqui, and Professor
Flora, assisted by Mr. H. M. Robinson, under the chair-302

APPENDICES

manship of Mr. Owen D. Young, has held 81 meetings;
and the subcommittee on the balancing of the budget,
composed of Professor Allix, Baron Houtart, and Mon-
sieur Pirelli, under the chairmanship of Sir Josiah Stamp,
has held 63 meetings. They have had the assistance of
Mr. Andrew McFadyean, the general secretary. Again,
the time of the committee, outside of that consumed by the
meetings, has been given largely to investigation and
study.

In speaking of my colleagues and as bearing upon the
value of this report, I feel that I should make it known to
your commission and to the world, that their governments
have in no case limited their complete independence of
judgment and action, either before or after their appoint-
ment by you. Limited only by the powers granted by
your commission, each has performed his arduous and re-
sponsible work as a free agent. These men, searching for
truth and advice thereon, were answerable only to con-
science. In granting this freedom, the governments have
but followed your own spirit and intent in constituting
the committee, but in so doing, they have paid the highest
tribute which governments can bestow—complete confi-
dence in a time of crisis in human affairs. In their vision,
in their independence of thought, and above all, in their
spirit of high and sincere purpose, which rises above the
small things over which the small so often stumble, my
colleagues have shown themselves worthy of this trust.
That their work, which I now place in your hands, may
assist you in the discharge of your great responsibilities,
is their prayer and the knowledge hereafter, that it has
done so, will be their full reward.

Charles G. Dawes, Chairman.SUMMARY OF PABT I*

I. The Attitude of the Committee

(a)	The standpoint adopted has been that of business
and not polities.

(b)	Political factors have been considered only in so
far as they affect the practicability of the plan.

(c)	The recovery of debt, not the imposition of pen-
alties, has been sought.

(d)	The payment of that debt by Germany is her
necessary contribution to repairing the damage of the war.

(e)	It is in the interest of all parties to carry out this
plan in that good faith which is the fundamental of all
business. Our plan is based upon this principle.

(f)	The reconstruction of Germany is not an end in
itself; it is only part of the larger problem of the recon-
struction of Europe.

(g)	Guaranties proposed are economic, not political.

II. German Economic Unity

For success in stabilizing currency and balancing
budgets, Germany needs the resources of German territory
as defined by the Treaty of Versailles, and free economic
activity therein.

III. Military Aspects; Contingent Sanctions and
Guaranties

(a) Political guaranties and penalties are outside our
jurisdiction.

*The summary is furnished only for the convenience of the read-
ers. Parts I and II and the Annexes are the only authoritative
statement of the plan.

303304

APPENDICES

(b)	The military aspect of this problem is beyond our
terms of reference.

(c)	Within the unified territory, the plan requires

that, when it is in effective operation:

1.	If any military organization exists, it must

not impede the free exercise of economic
activities;

2.	There shall be no foreign economic control

or interference other than that proposed
by the plan.

(d)	But adequate and productive guaranties are pro-
vided.

IV. The Committee's Task

(a)	Stabilization of currency and the balancing of
budgets are interdependent, though they are provisionally
separable for examination.

(b)	Currency stability can only be maintained if the
budget is normally balanced; the budget can only be bal-
anced if a stable and reliable currency exists.

(c)	Both are needed to enable Germany to meet her
internal requirements and treaty payments.

V. Economic Future op Germany

(a)	Productivity is expected from increasing popula-
tion, technical skill, material resources, and eminence in
industrial science.

(b)	Plant capacity has been increased and improved
since the war.

VI. Currency and a Bank of Issue

(a)	All classes will benefit from stabilized currency,
especially labor.

(b)	Under present conditions rentenmark stability is
only temporary.APPENDICES

305

(c)	A new bank is set up or the Reichsbank reor-
ganized.

(d)	The main characteristics of the bank will be •

1.	To issue notes on a basis stable in relation

to gold' with an exclusive privilege;

2.	To serve as a banker's bank, establishing

the official rate of discount;

3.	To act as the Government banker, but free

of Government control;

4.	Advances to Government to be strictly

limited;

5.	To hold on deposit reparation payments;

6.	The capital of the bank will be 400,000,000

gold marks.

7.	It will be directed by a German president

and managing board, who can be assisted
by a German consultative committee;

8.	The due observance of its statutes will be

further safeguarded by a general board,
of which half of the members, including
a commissioner, will be foreign.

VII. Budget and Temporary Reparation Relief
Balancing the German budget requires:

(a)	Full economic and fiscal sovereignty, subject to
the supervision provided for in this report;

(b)	A stable currency;

(c)	Temporary relief from charges on the budget for
treaty obligations;

(d)	Such relief not . to suspend essential deliveries in
kind.

VIII. The Basic Principles of Germany's Annual

Burden

(a) Treaty obligations and continuity of balanced
budgets.306

APPENDICES

1.	Balancing the budget does not entail merely

provision for internal administrative ex-
penditure.

2.	Germany must also provide within the ut-

most limit of her capacity for her external
treaty obligations.

3.	The budget can be balanced without neces-

sarily dealing with the total capital debt
of Germany.

4.	It can not be continuously balanced unless

the annual charge is fixed for a consider-
able period, on a basis clearly prescribed
in advance.

(b) Commensurate taxation.

1.	Government internal debt has been practi-

cally extinguished by the depreciation of
the currency.

2.	New debt charge ought to be met commen-

surate with the burden of the French,
English, Italian, and Belgian taxpayer.

3.	The treaty recognizes this principle.

4.	It is morally sound.

5.	It is economically just in its influence on

costs of production.

6.	This principle has been applied to the full

limit of practicability.

fc) Allies' share in Germany's prosperity.

1.	Germany's creditors must share in the im-

provement in Germany's prosperity.

2.	This will be secured by an index of pros-

perity.

(d) There is an important difference between the Ger-
mans' capacity to pay taxes and Germany's capacity to
transfer wealth abroad.APPENDICES

307

IX. Normal Resources from Which Payments Are

Made

Germany will pay treaty charges from three sources:
(A) Taxes; (B) Railways; (C) Industrial debentures.
(A) From her ordinary budget.

1924-25	budget may be balanced if it is free from
peace treaty charges.

1925-26	budget receiving 500,000,000 gold marks
from special sources, may pay that sum for
reparation.

Gold marks

1926-2	7................... *110,000,000

1927-2	8................... *500,000,000

1928-2	9................... 1,250,000,000

This is considered a normal year and a standard pay-
ment; thereafter additional payments will be made, de-
pending on prosperity.

(B) From Railways:

1. Railway bonds—

(a)	Eleven milliards of first mortgage railway bonds
against a capital cost of twenty-six milliards will be
created for reparations;

(b)	These bonds bear 5 per cent interest and 1 per
cent sinking fund per annum;

(c)	In view of reorganization, interest is accepted as
follows:

Gold marks

1924-2	5..........................................330,000,000

1925-26.	.......................................465,000,000

1926-2	7..........................................550,000,000

1927-28	and thereafter..............660,000,000

Behind the bonds there will be created 2 milliards of

*Subjeet to addition or reduction in certain contingencies.308

APPENDICES

preference shares to be reserved for sale to the public, and
13 milliards of common stock; three-fourths of the pro-
ceeds of the preference shares will be applied, as required,
to the payment of debt and for capital expenditure of the
railways. The remaining 500 millions of preference
shares and all the common shares go to the German
Government.

2. Transport tax—

After 1925-26, 290,000,000 gold marks per annum for
reparation and balance to German Government.
(C) Industrial debentures.

1.	Five milliards of industrial debentures are

provided for reparation.

2.	The resulting charge on industry; is less

than that existing before the war and now
wiped out by depreciation.

3.	These bonds bear 5 per cent interest and 1

per cent sinking fund, i. e., 300,000,000
gold marks per annum.

4.	Pending economic restoration, interest and

sinking fund are accepted as follows:
First year: Nothing.

Second year: 125,000,000 gold marks.
Third year: 250,000,000 gold marks.
Thereafter: 300,000,000 gold marks.

X. Summary of Provision for Treaty Payments

(a) 1. Budget moratorium period.

First year: From foreign loans and part interest on
railway bonds:,

Gold marks

Total..................... 1,000,000,000

Second year: From part interest on railway bonds andAPPENDICES

309

on industrial debentures, budget contribution, through
sale of 500,000,000 gold mark railway shares:

Gold marks

Total..................... 1,220,000,000

2.	Transition period.

Third year: From interest on railway bonds and on
industrial debentures, from transport tax, and from
budget:

Gold marks

Total..................... 1,200,000,000

subject to contingent addition or reductions of 250,-
000,000 gold marks.

Fourth year: From interest on railway bonds and on
industrial debentures, from transport tax, and from
budget:

Gold marks

Total..................... 1,750,000,000

subject to contingent addition or reduction of 250,-
000,000 gold marks.

3.	Standard year.

Fifth year: From interest on railway bonds and on
industrial debentures, from transport tax, and from
budget:

Gold marks

Total..................... 2,500,000,000

Thereafter, 2,500,000,000 plus a supplement computed on
the index of prosperity. Interest on the securities, but
not the proceeds of their sale, is included in these
figures.

(b) The first year will begin to run from the date
when the plan shall have been accepted and put into
effective execution.310

APPENDICES

XI. Inclusive Amounts and Deliveries in Kind

(a)	The above sums cover all amounts for which Ger-
many may be liable to the Allied and Associated Powers.

(b)	Deliveries in kind are to be continued, but are
paid for out of balances in the bank.

XII.	How the Annual Payments Are Made by

Germany

(a)	The amounts will be raised in gold marks and
paid into the bank.

(b)	These payments cover Germany's annual obliga-
tion.

XIII.	How the Payments Are Reduced by the

Creditors

(a)	Germany's creditors will use these moneys in Ger-
many or convert them into foreign currencies.

(b)	Experience will show the rate and extent to which
the conversion can safely take place.

(c)	Danger to stability through excessive remittances
is obviated by a transfer committee.

(d)	Sums not remitted accumulate, but with a limita-
tion of amount.

XIY. Guaranties, in Addition to Railway and Indus-
trial Bonds

(a)	The following revenues are pledged as collateral
security for budget contributions and other payments:
Alcohol, tobacco, beer, sugar, customs.

(b)	The yield of these revenues is estimated to be sub-
stantially in excess of required payments.

(c)	The excess is returned to the German Government.

XV. External Loan—Its Conditions and Purpose
Foreign loan of 800,000,000 gold marks meets a double
purpose.APPENDICES

311

(a) Requirements of gold reserve of the new bank.

(i) Internal payments for essential treaty purposes in
1924-25.

XYI. Organization

The organization consists of:

(a)	A trustee for railway and industrial bonds;

(b)	Three commissioners of (1) railways, (2) tho
bank, (3) controlled revenues;

(c)	An agent for reparation payments, who will coor-
dinate the activities of the above and will preside over the
transfer committee.

XVII. The Nature of the Plan

(a) The plan is an indivisible unit.

(~b) The aim of the plan is; (1) To set up machinery
to provide the largest annual payments from Germany;
(2) To enable maximum transfers to be made to Ger-
many's creditors; (3) To take the question of 4 * what
Germany can pay" out of the field of speculation and put-
it in the field of practical demonstration; (4) To facili-
tate a final and comprehensive agreement upon all the
problems of reparations and connected questions, as soon
as circumstances make this possible.TEXT OF THE REPORT

We were invited by the Reparation Commission, by
decision of November 30, 1923, to " Consider the means of
balancing the budget and the measures to be taken to
stabilize the currency" of Germany.

"We have been in continuous session since January 14,
1924, in Paris, except for one fortnight spent in Berlin.

"We have called in to assist us eminent technical ad-
visers on the various questions which have been under
consideration, and have been in touch with representative
German opinion.

We have the honor to present the following report
which states the unanimous conclusions formed as a result
of our studies and inquiries.

Part I of this report states our conception of our task,
our conclusions, and the broad outline of our plan.

Part II indicates the considerations which guided us to
our conclusions, in particular so far as they result from
certain aspects of the present financial and economic con-
dition of Germany, which is here described.

Part III consists of a series of annexes which give the
technical detail of our several proposals, and should be
read as a supplement to the respective portions of Part I.

PART I.—THE COMMITTEE'S CONCLUSIONS AND

SCHEME

I. The Attitude of the Committee

We have approached our task as business men anxious
to obtain effective results. We have been concerned with

312APPENDICES

313

the technical and not the political aspects of the problem
presented to us. We have recognized indeed that political
considerations necessarily set certain limits within which
a solution must be found if it is to have any chance of
acceptance. To this extent, and to this extent only, we
have borne them in mind.

The dominating feature of the German Budget is Ger-
many's obligation to the Allies under the Treaty of
Versailles. We have been concerned with the practical
means of recovering this debt, not with the imposition of
penalties and the guarantees which we propose are eco-
nomic and not political. At the same time it is no
ordinary debt with which we deal, for Germany suffered
no appreciable devastation, and her primary moral obliga-
tion is toward those who have suffered so severely through
the war.

As regards past history, it has not seemed necessary
to establish the causes, nor the responsibility for those
causes, which have operated to produce the present state
of German finances and currency, except in so far as a
recognition of their character is required for the prescrip-
tion of remedies.

Finally, convinced as we are, that it is hopeless to
build any constructive scheme unless this finds its own
guarantee in the fact that it is to the interest of all the
parties to carry it out in good faith, we put forward our
plan relying upon this interest. We hope the character of
our plan will itself assist in securing this guarantee,
which is essential for its execution; but in the main, of
course, it must be for others to take such measures as are
necessary to maintain or assure it.

II. German Economic Unity

The committee has had to consider to what extent the
balancing of the budget and the stabilization of the cur-314

APPENDICES

rency could be reestablished permanently in Germany as
she actually is at the present moment, with limitations as
to her fiscal and economic rights over part of her area.

We should say at the outset that we have been unable
to find any practical means of ensuring permanent stabil-
ity in budget and currency under these conditions, and
we think it unlikely that such means exist. The solution
of the double problem submitted to us implies indeed the
restoration of Germany's credit both externally and inter-
nally, and it has appeared to us impossible to provide for
this restoration under the conditions mentioned. We
have, therefore, been compelled to make the assumption
that the fiscal and economic unity of the Reich will be
restored and our whole report is based on this hypothesis.

III. Military Aspects—Contingent Sanctions and
Guarantees

If political guarantees and penalties intended to insure
the execution of the plan proposed are considered desir-
able, they fall outside the committee's jurisdiction.

Questions of military occupation are also not within
our terms of reference.

It is, however, our duty to point out clearly that our
forecasts are based on the assumption that economic activ-
ity will be unhampered and unaffected by any foreign
organization other than the controls herein provided.
Consequently, our plan is based upon the assumption that
existing measures, in so far as they hamper that activity,
will be withdrawn or sufficiently modified so soon as
Germany has put into execution the plan recommended,
and that they will not be reimposed except in the case
of flagrant failure to fulfill the conditions accepted by
common agreement. In case of such failure it is plainly
for the creditor Governments, acting with the conscious-APPENDICES

315

ness of joint trusteeship for the financial interests of
themselves and of others who will have advanced money
upon the lines of the plan, then to determine the nature
of sanctions to be applied and the method of their rapid
and effective application.

In saying this we wish to add at once that if the eco-
nomic system now in operation in occupied territory is
modified, we are unanimously of the opinion that a settle-
ment of reparation must be reinforced by adequate and
productive securities. "We propose for this purpose a
system of control which we believe will be effective, and
at the same time such as not to impede the return to finan-
cial stability (see XIV below).

IV. The Committee's Task

As the terms of reference indicate, two principal prob-
lems were submitted to us for inquiry—the stabilization of
German currency and the balancing of the German
budget. It is self-evident that these problems are inter-
dependent. The currency of a country can not remain
stable unless its budget is normally balanced, for if expen-
diture continually exceeds receipts there will in time be
no alternative to the printing of new notes to meet the
excess; and the inflation will inevitably involve deprecia-
tion. On the other hand, the task of balancing a budget,
unless the currency is relatively stable, is an impossible
one, for a falling currency makes calculations both of
receipts and expenses unreliable, and in particular causes
a continual loss to the taxing authority through the neces-
sary interval of time between assessment and collection.
While, therefore, in the nature of things it is necessary
that the two problems should in the first instance be
studied separately—their interdependence must be con-
sistently borne in mind. In examining each of them
separately, we have assumed for the minute that the other316

APPENDICES

has been solved, without ever losing sight of the fact that
the stabilization of the currency and the balancing of the
budget are means designed to enable Germany to satisfy
her own essential requirements and to meet her Treaty
commitments, the fulfillment of which is so vital to the re-
construction of Western Europe. It must not be forgotten
that the performance of these commitments is of vital
importance, not only for the countries having a claim on
Germany, but also for Germany herself. It is, indeed,
clear that a Germany whose economy had again become
flourishing could not long resist a financial and economic
crisis in the nations surrounding her. In order that the
restoration of Germany may be definitive, the other
nations must also return to the conditions requisite for
their financial and economic existence and must likewise
be enabled to carry on the normal exchange of goods on
which the general prosperity depends.

Y. The Economic Potentialities of Germany

The task would be hopeless if the present situation of
Germany accurately reflected her potential capacity; the
proceeds from Germany's national production could not
in that case enable her both to meet the national needs
and to insure the payment of her foreign debts.

But Germany's growing and industrious population;
her great technical skill; the wealth of her material re-
sources ; the development of her agriculture on progressive
lines; her eminence in, industrial science; all these factors
enable us to be hopeful with regard to her future
production.

Further, ever since 1919 the country has been improv-
ing its plant and equipment; the experts specially
appointed to examine the railways have shown in their
report that expense has not been spared in improving
the German railway system; telephone and telegraphAPPENDICES

317

communications have been assured with the help of the
most modern appliances; harbors and canals have likewise
been developed; lastly, the industrialists have been enabled
further to increase an entirely modern plant which is now
adapted in many industries to produce a greater output
than before the war.

Germany is therefore well equipped with resources;
she possesses the means for exploiting them on a large
scale; when the present credit shortage has been overcome,
she will be able to resume a favored position in the activity
of a world where normal conditions of exchange are grad-
ually being restored.

Without undue optimism, it may be anticipated that
Germany's production will enable her to satisfy her own
requirements and raise the amounts contemplated in this
plan for reparation obligations. The restoration of her
financial situation and of her currency, as well as the
world's return to a sound economic position, seem to us
essential but adequate conditions for obtaining this result.

VI. Stability of the Currency—A New Bank op Issue

We propose to deal in the first place with the currency
problem.

The present financial and currency position in Ger-
many is stated in Part II. It will be seen that by means
of the rentenmark, stability has been attained for a few
months, but on a basis which, in the absence of other meas-
ures, can only be temporary.

The committee proposes the establishment of a new
bank of issue in Germany, or, alternatively, a reorganiza-
tion of the Reichsbank, as an essential agency for creating
in Germany a unified and stable currency. Such a cur-
rency, the committee believes, is necessary for the rehabili-
tation of Germany's finances, the balancing of her budget
and the restoration of her foreign credit. The principal318

APPENDICES

features of the bank plan, which is printed in Annex 1,
are as follows:

The bank is to have the exclusive right (with certain
minor qualifications) to issue paper money in Germany
for the period of its charter, fifty (50) years. All of the
many kinds of paper money now circulating in Germany
(except limited note issues of certain State banks) are to
be gradually withdrawn from circulation, giving place to
a single uniform paper currency, the bank-notes of the
new bank. These bank-notes will be protected by a nor-
mal legal reserve of thirty-three and one-third per cent,
and by other liquid assets. The reserve will be held
largely in the form of deposits in foreign banks.

The plan contemplates that as a permanent policy the
notes of the bank shall be redeemable in gold, but the com-
mittee is of the opinion that at the time of the inception
of the bank the situation will temporarily not allow of the
application of the rule of convertibility. It therefore sug-
gests that a currency should be created which will be kept
stable in relation to gold and as soon as conditions permit
be placed on a convertible basis.

Like the present Reichsbank, the new bank will serve as
a bankers' bank, rediscounting the safest category of short-
term bills, etc., and so establishing the official rate of dis-
count. It will also handle for the other banks the giro
system for the transfer of bank credits.

The bank will deal with the public, making short-time
commercial loans and discounts, effecting transfers, and
receiving deposits.

It will be the depository and the fiscal agent of the
German Government. It may make short-term loans to
the Government, but the amount and character of these
loans are strictly limited, and the granting of such loans
is carefully safeguarded. The German Government is to
participate in the profits of the bank but the bank is to
be entirely free from governmental control or interference.APPENDICES

319

Treaty funds collected in Germany are all to be de-
posited in the new bank to the credit of a special account
and are only to be withdrawable by the creditor nations
under conditions and safeguards which will adequately
protect the German exchange market and the interests of
the creditor nations and the German economy.

The new bank will have a capital of four hundred mil-
lion (400,000,000) gold marks, part to be subscribed in
Germany and part abroad. It is to be administered by a
German president and a German managing board, which
can have the assistance, as in the case of the Reichsbank,
of a consultative committee. Alongside of this German
managing board there is to be another board, called the
"General Board," which will consist of seven Germans
and, seven foreigners, one each of the following nationali-
ties; British, French, Italian, Belgian, American, Dutch
and Swiss. This general board is given broad powers in
such matters of bank organization and operation as might
affect the interests of the creditor nations. One of the
foreign members of the general board will be known as the
'6 commissioner.'' He will be responsible for seeing that
there is no infringement of the provisions relative to the
issuance of notes and the maintenance of the bank's re-
serves. Decisions of the general board will require a ma-
jority vote of ten of the fourteen members, unless* both the
president and the commissioner are included in the ma-
jority, in which case a simple majority will be sufficient.
Thus, cooperation by members of both groups is necessary
for action.

It has been suggested in various quarters that to ensure
the bank's independence of the Government, an issue de-
partment, which could be under the direction of the com-
missioner and which would be responsible for the reserve
and for the issue of notes, should be established abroad.
Such a guarantee is political rather than technical in char-320

APPENDICES

acter, and to propose it is outside the jurisdiction of the
committee.

A study of the annex is essential to a thorough com-
prehension of the committee's recommendations, and it has
contented itself with drawing attention here to the main
features to which it attaches importance.

Still assuming for the minute that the budget problem
has been successfully surmounted, we believe that our
recommendations furnish a practical method, not only of
stabilizing the German exchange, but of securing to Ger-
man economy those credits in stable value which are
essential to its reinvigoration and to the payment of rep-
aration.

Labor also will benefit, for its interests above all are
dependent upon stability. Some classes of the community
may have compensations in the amazing overturn of for-
tunes which inflation brings—some benefit and others
suffer. But for the working classes instability is wholly
evil; it has no compensation whatever. In this connection,
we may refer to the views expressed by the representative
of labor who appeared before us in Berlin: '4speaking not
for the whole of the German people, but merely for the
class which he represented, Herr Grassman stated that
the German working classes could not stand another period
of inflation. They must appeal to the world for a stable
currency which would render it possible for them to buy
something with their wages even four weeks after they had
received them." It is clear that if the statutes of the bank
are strictly observed there can be little danger of future
inflation. One of the advantages to be expected is that
foreign currencies immobilized in Germany, which are at
present economically sterile, will be mobilized in the form
of subscriptions or deposits to the bank and return to
economic uses.APPENDICES

321

VII. The Budget and Temporary Reparation Relief

Attention may now be directed to the other main aspect
of our problem, the balancing of the budget. "We propose
to deal first with the general budget of the Reich, and
secondly and separately with the railways, which at pres-
ent are contributing nothing to the general budget.

In addition to a stable currency and the economic unity
defined above, the budget requires certain relief from
immediate charges for treaty purposes, which, while secur-
ing the budgetary position, will not imply the cessation of
the payments indispensable to the Allies in the form of
deliveries in kind.

VIII. The Basic Principles of Germany's Annual

Burden

(a) treaty obligations and their bearing upon the
continuity of balanced budgets

It will be obvious that the balancing of the budget is,
like the stabilization of the currency, of little value unless
it can be maintained. It is not enough to be satisfied
that one or even several budgets will be balanced. It is
necessary to consider under what conditions, assuming
sound administration, financial as well as currency sta-
bility can be continuously insured, or rather under what
conditions such stability once gained is likely to be endan-
gered. It is inevitable, therefore, that we should look
forward, not indeed in the same detail but with proper
regard to the chief determining factors, to those later
years during which Germany will have gradually to liqui-
date her external treaty obligations.

We repudiate, of course, the view that Germany's full
domestic demands constitute a first charge on her resources
and that what is available for her treaty obligations is322

APPENDICES

merely the surplus revenue that she may be willing to
realize. But at the same time, if the prior obligation for
reparation that is fixed for Germany to pay, together with
an irreducible minimum for her own domestic expendi-
ture, make up in a given year a sum beyond her taxable
capacity, then budget instability at once ensues and cur-
rency stability is also probably involved. In that event,
an adjustment of the treaty obligations of the year is
obviously the only course possible. The amount that can
safely be fixed for reparation purposes tends therefore to
be the difference between the maximum revenue and min-
imum expenditure for Germany's own needs. We shall
naturally and inevitably be led to discuss later the amount
of reparation payments which can be made out of budget
resources and the method by which they can be effected,
if the postulates of a stable currency and of a balanced
budget are accepted. It would be to ignore both the plain
dictates of justice, the practical conditions which must
determine the acceptance or rejection of our proposals,
and the context and obvious purpose of our terms of ref-
erence, if we approached our task from any other angle.

It might, indeed be thought that if we have thus been
involved in a consideration of reparation payments, it
is only of such payments as are to be made during
the reconstruction period of the next few years. Our
task, it may be said, is to advise as to the way to
attain stabilization and a balanced budget, not as to
the sums to be demanded from Germany when that
aim has been achieved. But no such sharp division of
periods is possible, for the following reasons:

1. The basis on which the budget is balanced at the
end of the reconstruction period, and the sum it includes
for reparation, must obviously determine to a large extent
the sums payable in the following years. Otherwise, as
we have said, an equilibrium, though once attained, mightAPPENDICES

323

be rapidly lost. The effort would have been in vain and
the same problem would again present itself.

2. More important still is the fact that the success of
our proposals to attain financial stabilization depends
essentially upon the return of confidence. Without this
the return of German capital invested abroad, the attrac-
tion of foreign capital for the purposes mentioned in the
scheme and of foreign credits for the current conduct of
business, and even the proper collection of taxes, will
alike be impossible.

Such confidence can not be attained unless a settle-
ment is now made which both Germany and the outside
world believe will give an assurance that for a consider-
able period neither its finances nor its foreign relations
will be endangered by renewed disputes. Such an assur-
ance, as we shall see, does not mean making the charge on
Germany a uniform one over a period of years, nor even
deciding beforehand what the charge shall be in each of
these years. But it does mean settling beforehand the
method by which increases shall be determined.

When we speak of the adoption of such a method for
"a considerable period," we are thinking primarily of the
period which lenders and investors whose money is re-
quired as a part of our scheme will have in mind. As we
shall see, our scheme needs both foreign and internal sub-
scriptions to a bank of issue, and in particular an external
loan as an essential condition of enabling and assuring
reparation payments. We fully recognize both the neces-
sity and the justice of maintaining the principle embodied
in the treaty that Germany's payments should increase
with what may prove to be the increase in her future
capacity.

We also recognize that an estimate now made once for
all might well underestimate this, and that it is both just
and practicable that the Allies should share in any in-324

APPENDICES

creased prosperity. All that we regard as essential as
a condition of stabilization is that any such increased
demands to correspond with increasing capacity should
be determined by a method which is clearly defined
in the original settlement, and which is capable of auto-
matic, or at least professional, impartial, and practically
indisputable application.

This requirement we have tried to meet, as will be
seen, by providing that in addition to a fixed annual pay-
ment, there shall be a variable addition dependent upon a
composite index figure designed to reflect Germany's
increasing capacity.

It is outside the competence of the committee to estab-
lish a limit of years or of amount for the working of the
index, nor is it within their competence to fix the number
of annuities which Germany will have to pay, as this
would practically mean the fixation of a new German
capital debt. In any new arrangements made for a defi-
nite settlement of the various international financial
obligations arising out of the war it would be easy as
regards the German debt to apply our plan to those new
conditions.

(i) COMMENSURATE TAXATION

We have done our utmost to apply the principle of
commensurate taxation.

It is not open to dispute, as a simple principle of
justice, and it is contemplated by the treaty, that the
German people should be placed under a burden of taxa-
tion at least as heavy as that borne by the peoples of the
Allied countries. No single person in Germany, whether
speaking as an individual or representing any section of
the nation, has failed to accept that principle when it has
been squarely put to him. Any limitation upon it, if there
is one, must be a limitation of practicability and generalAPPENDICES

325

economic expediency in the interest of the Allies them-
selves. Obviously it is morally sound; and it would be
clearly repugnant to all sense of natural justice that the
taxpayers of countries with large and important regions
devastated by the war should bear the burden of restoring
them, while the taxpayer of Germany, on whose territory
the war caused no comparable devastation, escaped with a
lighter burden. The principle is, at the same time, eco-
nomically just, for it is obviously unfair and in every way
undesirable that the allied taxpayer should be penalized
by the fact either that taxes resulting from the war weigh
more heavily upon him as a consumer, or that in competi-
tion in his business he should be handicapped by greater
burdens on the costs of production, including wages, than
his German competitor bears.

"We have borne in mind both the importance of the
virtual extinction of debt in Germany and the general
burden of taxation in allied countries. As we indicate
more fully in Part II, there are many difficulties in
theory and practice, but in spite of them we have done our
utmost to secure that the proposals we make should
involve a "commensurate burden" in the fairest inter-
pretation and application of that principle which is
practicable. "We are satisfied that in what we propose we
are not imposing a heavier burden; we are also satisfied
that we have applied the principle as far as it is practi-
cable in the interests no less of the Allies than of Germany.

(c) AN INDEX OF PROSPERITY IS NECESSARY TO ENABLE THE

ALLIES TO SHARE IN THE INCREASED PROSPERITY OF

GERMANY

After a short period of recovery we believe that the
financial and economic situation of Germany will have
returned to a normal state, after which time the index
will begin to operate.326

APPENDICES

The system, of a variable annuity has the sanction of
usage in the schedule of payments. But we venture to
suggest for most careful consideration the advisability of
altering the existing index, constituted by the value of
exports. This index appears to us to be imperfect.

We are aware that there are cogent reasons both for
and against any test which may be suggested, and we do
not propose to examine them in detail. We are of opinion
that the undoubted shortcomings of particular indices are
neutralized to a large extent if a composite index is
chosen, and we have a reasonable assurance that a fair
measure of Germany's increasing prosperity will be ob-
tained. Our suggestions, after considering many various
alternatives for such an index, are given in Annex 2.

We take upon ourselves to recommend these sugges-
tions, as an indication, to the attention of the Reparation
Commission.

We are of opinion that at least during the period
within which the loan which we propose is being amor-
tized, the annual charge upon Germany should not be
heavier than that which would result from the application
of this index; nor would the committee accept any respon-
sibility for the balancing of the budget even in later years
if heavier payments than the above were called for.

We propose that an average of years (chiefly 1926,
1927, 1928, and 1929) should be taken as the base; that
the percentage increase shown by each of six sets of repre-
sentative statistics (railway traffic, population, foreign
trade, consumption of tobacco, etc., budget expenditure,
and consumption of coal) should be ascertained; and that
the average of these six percentages should be taken as
indicating the proportionate increase to be added to the
treaty sums demanded in a given future year.

Under this system Germany will retain her incentive
to develop, as she retains the major part of the advantageAPPENDICES

327

of any increase in prosperity, while the Allies obtain a
reasonable share in this increase and avoid the risk of
losing through a premature estimate of future capacity.

At the same time, the adoption of a method involving
not discretionary but automatic application gives the nec-
essary assurance from the commencement both to Ger-
many and the world that treaty demands will not, in the
period to which the settlement relates, be again the
subject of negotiation and dispute.

We propose, however, one further correcting factor
of quite a different character which is only a precaution-
ary measure and may never be actually involved. The
treaty prescribes Germany's obligations in terms of gold,
and for convenience we have expressed our estimate in the
same terms. But both the burden on Germany, and the
advantage to the Allies of treaty payments, consist of
goods and services. Gold is only a measure of value, and
over a long period of years may be an uncertain and de-
fective one. It is only in the case of really important
changes that any action is necessary and we therefore
propose that a reduction or increase of the figures both as
regards the standard and the supplementary payments
should be made automatically in correspondence with
changes in the general purchasing power of gold, when-
ever, by the decision of an impartial authority, such
changes amount to more than 10 per cent.

(d) THE DISTINCTION BETWEEN THE TAXPAYERSy "CAPACITY

TO PAY" IN GERMANY AND GERMANYCAPACITY TO PAY

THE ALLIES

There has been a tendency in the past to confuse two
distinct though related questions; i. e., first, the amount
of revenue which Germany can raise available for repara-
tion account, and, second, the amount which can be328

APPENDICES

transferred to foreign countries. The funds raised and
transferred to the Allies on reparation account can not, in
the long run, exceed the sums which the balance of pay-
ments makes it possible to transfer, without currency and
budget instability ensuing. But it is quite obvious that
the amount of budget surplus which can be raised by taxa-
tion is not limited by the entirely distinct question of the
conditions of external transfer. "We propose to distin-
guish sharply between the two problems, and first deal
with the problem of the maximum budget surplus and
afterwards with the problem of payment to the Allies.
In the past the varying conclusions formed as to Ger-
many's ''capacity" have often depended upon which of
these two methods has been chosen.

As a first method of approach the budgetary criterion
has obvious advantages and attractions. Eeparation must
first be provided for as an item in the budget.

The budget itself is the sum of decisions taken by a
single authority. It is capable of expert judgment and,
within narrower limits of error, of calculation and
analysis.

By comparison a country's "economic balance" defies
exact calculation. The balance, even at a given moment,
can only be estimated approximately, for the invisible ex-
ports and imports which constitute an important part of
it can not be known exactly. And a potential economic
balance is much more uncertain. It depends not on the
decisions of a single authority, but on the enterprise of
individual merchants and manufacturers. Eeparation
demands themselves will increase it. The extent to which
economic adaptation is possible over a long period of
years, under the pressure of external obligations, is a
matter of conjecture; an existing economic balance, before
such obligations have been in operation long enough to
have their effect on the economy of the country, gives aAPPENDICES

329

very uncertain criterion. The economic balance is, there-
fore, by comparison with the budget, incapable of close
calculation, 4 4 unmanageable,'' and too elastic.

But the limits set by the economic balance, if impos-
sible of exact determination, are real. For the stability
of a country's currency to be permanently maintained,
not only must her budget be balanced, but her earnings
from abroad must be equal to the payments she must
make abroad, including not only payments for the goods
she imports, but the sums paid in reparation. Nor can
the balance of the budget itself be permanently main-
tained except on the same conditions. Loan operations
may disguise the position—or postpone its practical re-
sults—but they can not alter it. If reparation can, and
must, be provided by means of the inclusion of an item
in the budget, i. e.: by the collection of taxes in ex-
cess of internal expenditure, it can only be paid abroad
by means of an economic surplus in the country's
activities.

We have, it will be seen, attempted to give effect to
both these sets of considerations by a method we believe
to be both logical and practical. "We estimate the amount
which we think Germany can pay in gold marks by con-
sideration of her budget possibilities; but we propose safe-
guards against such transfers of these mark payments into
foreign exchange as would destroy stabilization and there-
by endanger future reparation.

By comparison with a system which reduced the sums
considered possible on budget grounds because of con-
siderations based upon estimates of the possible economic
balance, this has the following advantages:

(a)	It enables the maximum sums to be obtained and
paid to the Allies' account.

(b)	Any limitation upon transfers into foreign cur-
rencies will depend upon the exact economic position as it330

APPENDICES

develops in fact and not upon a necessarily problematical
estimate of it; and the limitation will only apply so far as
it actually proves necessary.

(c) Even so far as the sums paid in reparation can
not be completely transferred, they can, under certain
conditions, be used by the Allies for internal investment
in Germany,

Above all, we recommend our proposal for these
reasons: It adjusts itself automatically to realities; the
burden which should rest upon the German taxpayer
should, in justice, so obviously be commensurate with that
borne by the Allied taxpayer that, in our view, nothing
but the most compelling and proved necessity should
operate to make it lighter. It would be both speculative
and unjust to attempt to forecast the possibilities of the
future exchange position and to determine Germany's
burden in advance with reference to a problematic esti-
mate of it. Experience and experience alone, can show
what transfer into foreign currencies can in practice be
made. Our system provides in the meantime for a proper
charge upon the German taxpayer, and a corresponding
deposit in gold marks to the Allies' account; and then
secures the maximum conversion of these mark deposits
into foreign currencies which the actual capacity of the
exchange position at any given time renders possible.

IX. The Normal Resources from Which Germany
Should Make Payments

With these principles in mind, we recommend that
Germany should make payment from the following
sources:

(a)	From her ordinary budget.

(b)	Prom railway bonds and transport tax.

(c)	From industrial debentures.

We proceed to consider each of these in turn.APPENDICES

331

(a) PROVISION FROM THE BUDGET FOR TREATY PAYMENTS;

BUDGET EQUILIBRIUM

To recommend what payments Germany can make
from her ordinary budget, and from what dates, is in
effect to answer the first of the two specific questions put
to us; i. e., how to "balance the German budget." For in
our view, if the economic and fiscal unity of the Reich is
restored, if a stable currency is established, and if the
budget is given temporary relief from treaty payments,
Germany should balance her budget from her own re-
sources by a vigorous internal effort supported by the
confidence which a general and stable settlement may be
expected to give, and she should thereafter be able to
maintain it in equilibrium, if the future charge for treaty
payments is determined by a method which assures that it
will not exceed her capacity.

In other words, we do not consider that an external
loan is needed—as in the case of Austria and Hungary—
to be devoted specifically to meeting ordinary deficits
during a transition period. External money is indeed an
essential part of our scheme, in part for the establishment
of a new bank of issue; in part to prevent an interruption
of deliveries in kind during the transition period; and
essentially to create the confidence upon which the whole
success of the scheme depends. But we do not propose
that it should be confined or devoted specially to meeting
deficits on ordinary expenditure even during a transition
period. On the contrary, as will be seen, we think that
from the beginning internal resources should meet internal
ordinary expenditure, and at a very early date should
suffice in addition to make substantial contributions
toward the external debt.

The present budget position is described in some detail
in Part II, which includes our criticisms and recommenda-332

APPENDICES

tions as to the measures we think practicable for econo-
mizing in expenditures and increasing taxation.

We confine ourselves here to our conclusions as to the
provision that can be made for meeting treaty payments.

1924-25	budget.—In the first year (1924-25) we con-
sider that the ordinary budget may balance. Even if
there is a deficit we are confident that it should not be
such as to endanger the stability of the currency, and that
at the worst the Government can meet it by the or-
thodox expedients—increases of existing taxation, further
emergency taxes, and internal loans.

Even if energetic measures are taken to obviate any
deficit in 1924-25, we are satisfied that neither by reduc-
tion of expenditures nor by an increase in receipts can
Germany be expected to provide out of budget resources
for any peace treaty payments to the Allies, and that any
demand for their payment would imperil both the struc-
ture of the budget and the stability of the currency. How
relief can be otherwise provided for the reparation
creditors will be considered separately.

The fundamental importance of the effect upon the
stability of the Eeich budget of the finances of the States
(Prussia, Bavaria, etc.) and of the communes has greatly
exercised us, and we have stated our views on the system
of subsidies and local expenditure in Part II.

1925-26	budget.—On passing to the budget for 1925-
26, it is obvious that the existing data are insufficient for
a precise judgment on its detailed prospects. Certain
general conclusions are, however, possible.

On the revenue side, the lapse of a whole year of cur-
rency stability and readjustment should of itself increase
receipts. The period of recuperation will not have been
long enough completely to restore the yield of the income
tax, but there will at least be gold mark profits of 1924-25APPENDICES

333

on which to frame a reasonable assessment. Consumption
taxes should be directly affected by returning prosperity.

On the expenditure side it may be hoped with some
degree of confidence that expenditure on unemployment
will exhibit a notable decrease. The expenditure on the
army is capable of reduction. An automatic decrease will
make itself felt in the pension charge. It is not to be
expected, on the other hand, that sums thus saved on these
or other heads will represent a net benefit to the budget.
In particular, and this remark applies also to the budgets
of the immediately succeeding years, increases in the sal-
ary charges of the Reich which can probably not be
entirely off-set by decreases in personnel must be antici-
pated.

Some increase of expenditure must therefore be ex-
pected. On the balance, however, we are of opinion that
the growth in receipts should be more than sufficient to
counterbalance any increase in expenditure. Whatever
views may be held about the eventual outcome of the
1924-25 budget, we are clear that the second year should
show a substantial improvement upon it. The result of
the first year therefore affects our view as to whether the
result of the following year will be actually an appreci-
able surplus. If it should prove that the 1924-25 budget
can not be balanced by taxation alone, the improvement
to be expected in the following year might not be more
than sufficient to secure the balance desired. If, on the
other hand, no loans were necessary in 1924-25, any im-
provement in the following year would be net surplus and
entirely available for meeting peace treaty charges.

We are clearly of the view that, if the two years are
taken together, receipts should be sufficient to cover
ordinary expenditure, and we do not exclude the possi-
bility of a small surplus. On the other hand it can not be
stated with certainty that the inclusion of a compulsory334

APPENDICES

liability for peace treaty charges will not destroy the
whole balance, and it is obviously vital that the mistake
should not be made of fixing as a first payment during
recovery a sum which the circumstances may not justify.

The stability of future reparation payments and
German credit in general might thus be endangered.

There is another factor that must be taken into
account. For the successful operation of the scheme for
dealing with the railways, to which we shall refer later, it
is necessary that the proceeds of the transport tax to the
extent of 250,000,000 gold marks should be withdrawn
for this year from the revenue side of the budget and
devoted to the payment of treaty charges.

On the other hand that scheme also provides for the
sale by the railway company of preference shares to the
nominal value of 2,000,000,000 gold marks, one-quarter of
the proceeds accruing to the profit of the German budget
and the balance providing for past and future capital
expenditure of the railways. For the successful execution
of the railway scheme we attach great importance to the
sale to the public of these preference shares and we feel
justified in assuming that before the end of the year
1925-26 the German Government will be in effective pos-
session of 500,000,000 gold marks as a result of this
transaction. The budget can therefore be reinforced to
that extent and after making allowance for the with-
drawal of 250,000,000 gold marks in respect of the
transport tax there will be a balance of 250,000,000 gold
marks which should be available for meeting peace treaty
charges.

By the procedure we have indicated any danger of
hampering future stability by a premature call upon the
ordinary resources of the German budget will be obviated
and there will be an additional inducement to transfer the
preference shares to private ownership.APPENDICES

335

We, therefore, recommend that in the year 1925-26
Germany should be required to meet peace treaty charges
out of her budget to the extent of 250,000,000 gold marks.
If, contrary to our expectations, the budget fails to realize
500,000,000 gold marks from the sale of preference shares,
we consider that any resultant deficit could be met by
an internal loan. .

The proceeds of the transport tax should thenceforth
not figure in the revenue side of the budget except to
the extent to which they exceed 250,000,000 gold marks in
1925-26 and 290,000,000 gold marks in subsequent years.

"We once more reserve the question of providing for
further reparation payments by other means.

The budget of later years.—As we have said already,
Germany's credit can not rest upon the mere establish-
ment of budget equilibrium. It must be clear that it can
be permanently maintained. It is, therefore, necessary
for us to consider what burden Germany can bear in the
near future without danger to that equilibrium. In this
connection, certain assumptions have necessarily been
made. It has been considered that if for two years the
budget is relieved from peace treaty charges and a stable
currency is reestablished, Germany ought in 1926 to be
making rapid strides toward complete recovery, and
should in three years, by 1928, reach a normal economic
condition. We have taken into account the probable yield
of her several taxes and her taxable capacity as a whole
and the probable changes in expenditure under these im-
proving conditions, and after making full allowance for
error we have reached definite conclusions as to the sums
which can be fixed for peace treaty charges without en-
dangering the stability of the budget. These results we
have considered in relation to the maximum probable rate
at which the national income can be expected to grow
from its present point and the maximum proportion of336

APPENDICES

that growth which can successfully be absorbed in tax-
ation.

We draw the conclusion that, allowance being made
for some inevitable growth in expenditure, the budgets for
the three subsequent years can safely provide for the
following maximum sums:

On the other hand, regard being had to the fact that
it is difficult to estimate the recuperative power of Ger-
many in 1926-27 and 1927-28, we would propose that
these amounts should be regarded as subject to modifica-
tion by a sum not exceeding 250,000,0000 gold marks on
the following plan: If the aggregate controlled revenues
as defined in Section XIV exceed 1 milliard in 1926-27 or
1,250,000,000 in 1927-28, an addition shall be made to the
above contributions equal to one-third of such excess.
Conversely, if those aggregate revenues fall short of 1
milliard in 1926-27 or 1,250,000,000 in 1927-28, the total
contributions shall be diminished by an amount equal to
one-third of the deficiency.

"We believe that at the end of the fiscal year 1928-29
the financial and economic situation of Germany will have
returned to a normal state, and that in this and subse-
quent years the ordinary budget should support the inclu-
sion of a sum of 1,250,000,000 gold marks. The total
sums, therefore, to be provided from ordinary budget
resources would be the standard payment of 1,250,000,000
plus the additional sum (already referred to) computed
upon the index of prosperity, as from 1929-30 onward.

We have considered carefully the question of the
amount to which the index should be applied and, as we

1926-27

1927-28

1928-29

Gold marks
110, 000, 000
500, 000, 000
1, 250, 000, 000APPENDICES

337

are desirous that in the earlier years of her recovery Ger-
man progress shall not be unduly handicapped by shortage
of new capital, we think that it will be desirable to apply
it to the purely budget contribution, 1,250,000,000 (or one-
half of the total standard payment) for the first five
years of the application of the index, viz. 1929-30 to 1933-
34. After that date, 1934-35, the index should apply on
the full amount of the contribution, namely, 2,500,000,000
gold marks.

(b) RAILWAYS

We have conducted, with the assistance of two eminent
railway experts, a close examination of the situation of
the German railways. The subject is an important one,
for the railways have been operated since the Armistice at
a constantly increasing loss, which has involved heavy
burdens upon the German budget.

Most, if not all, railway systems have passed through
a period of great difficulty since the war from causes
which were largely beyond their control. It is clear, how-
ever, from a study of the report drawn up by the experts,
which will be found in Annex 3, that the greatest diffi-
culties were of the Germans' own making. The German
railway administration can not but plead guilty to two
serious charges. In the first place, as is proved by the
reduction which it is now possible to make, they have been
enormously overstaffed, even when all account is taken
of the introduction of an eight-hour day and of peace-
treaty charges justifying temporary disorganization. In
the second place, the administration has indulged in ex-
travagant capital expenditure for which the official
excuse is that construction was largely undertaken to ward
off unemployment.

It is only just to observe that the situation has now
improved out of recognition, though more remains to be338

APPENDICES

done. The German Government has separated the rail-
ways from the ordinary administration and assimilated
them in form, so far as is possible, to a business concern.
Capital construction has been slackened and fares have at
any rate been raised to a point where the railways are not
only self-supporting but can provide some profit.

These measures are, however, insufficient. The capital
value of the railways is estimated by the experts on a con-
servative basis at 26 milliards. They are unencumbered
with old debts, for their prior charges were extinguished
by the depreciation of the mark, and these prior charges
absorbed half the gross profits in the pre-war period,
which amounted to approximately 1 milliard gold marks,
in spite of the fact that it was the custom to include in
operating and maintenance charges large expenditures
which might properly have been charged to capital
account.

The railway experts are convinced, and we share their
conviction, that under proper management, under unified
control, and with a proper tariff policy, the railways can
without difficulty earn a fair return upon their present
capital value.

Nor need it be thought that this improvement in
profits will be made at the expense of the German people
by increasing their fares and the cost of all goods trans-
ported by rail. It can be substantially provided by the
more economical administration of the railways themselves.

In saying this we have not in mind adequate wages,
but rather the elimination from operating and mainte-
nance charges of certain elements of waste and also
expenditure more properly chargeable to capital account.

The railway experts arrived, however, with considerable
reluctance at the conclusion that it would be useless to
expect anything approaching the full measure of improve-
ment which is possible, so long as the railways remain inAPPENDICES

339

the control of the Government. The whole spirit of the
Government's ownership in the past has been directed to
running the railways primarily in the interest of German
industry, and only secondarily as a revenue-producing
concern, and in their opinion a complete break with old
traditions is essential.

We accept their conclusions and we recommend the
conversion of the German railways into a joint stock com-
pany. It is not our intention thus to deprive Germany of
the administration of her railways in favor of the Allies;
on the contrary, our plan demands only a modest return
on the capital cost, and so long as this return is forth-
coming we do not anticipate any interference in the Ger-
man management of the undertaking.

"We would add that if, as the German Government has
itself proposed, the exploitation of the railways is
divided into several systems, this division should not
affect detrimentally their financial unity.

| The details of our proposals will be found in Annex
4, and we will content ourselves with giving only a broad
outline at this point.

The committee recommends that there should be paid
from the German railways 11 milliard gold marks to be
presented by first mortgage bonds bearing 5 per cent
interest and 1 per cent sinking fund per annum. The
capital cost of the German railways computed on a gold
mark basis is estimated by our experts at 26 milliards.
The net earnings of these railways before the war, after
liberal and indeed exaggerated charges to operating and
maintenance, were as high as 1 milliard. The interest and
sinking fund on these debentures represents less than 3
per cent of the capital cost, which is a very modest charge
on the capital investment compared with that required in
many other countries of the world.

Eealizing that during the period of reorganization of340

APPENDICES

the railways, full interest and sinking fund charges should
not be required, w$ think payments on account of interest
should be as follows:

This is regarded as a normal year.

In addition to the 11 milliards of bonds, the new rail-
way company is to have a capital of 2 milliards of
preference shares and the remainder of its capital cost,
namely 13 milliards, is to be represented by common stock;
1 y2 milliards of preference shares are to be set aside in
the treasury of the company, for sale to private persons
to provide funds for the payment of existing indebtedness
and future capital expenditures. The proceeds of the sale
of the other 500,000,000 of preference shares and all of
the common shares are to go to the German Government.

The railways are to be managed by a board of 18
directors of whom 9 will be chosen by the German Govern-
ment and the private holders of preference shares, and the
other 9 will be named by the trustee of the bonds, 5 of
whom may be German. It is therefore contemplated that
the board will have 14 German members. The chairman
of the board and the general manager of the railways will
be German.

It is contemplated that the railway company will be
free to conduct its business in such manner as it may
think proper, provided always, however, that the German
Government will have such control over its tariffs and
service as may be necessary to prevent discrimination and
to protect the public. Such government control, however,
is never to be exercised so as to impair the ability of the

1927-28 and thereafter

1924-25

1925-26

1926-27

Gold marks
330, 000, 000
465, 000, 000
550, 000, 000
660, 000, 000APPENDICES

341

railway company to earn a fair and reasonable return on
its capital cost.

The railway commissioner represents the interests of
the bondholders. His principal duty will be, in the ab-
sence of default in interest, to receive reports, statistical
and financial returns, and generally to see that the inter-
ests of the bondholders are not menaced.

(c) INDUSTRIAL DEBENTURES

The committee has been impressed with the fairness
and desirability of requiring as a contribution to repara-
tion payments from German industry, a sum of not less
than 5 milliards of gold marks, to be represented by first-
mortgage bonds bearing 5 per cent interest and 1 per cent
sinking fund per annum. This amount of bonds is less
than the total debt of industrial undertakings in Germany
before the war. Such indebtedness has for the most part
been discharged by nominal payments in depreciated cur-
rency, or practically extinguished. In addition the
industrial concerns have profited in many ways through
the depreciated currency, such as the long delayed pay-
ment of taxes, by subsidies granted and advances made by
the German Government, and by depreciation of emer-
gency money which they have issued. On the other hand
it is incontestably true that there have also in many in-
stances resulted losses, through the depreciation of cur-
rency, from the sale of output at fixed prices, and in
other ways.

It is unnecessary for the committee to make an esti-
mate of the total amount of such profits and losses; it is
sufficient to say that the committee is satisfied that a
burden of mortgage debt of the amount of 5 milliard gold
marks on the industries of Germany, fairly apportioned,
bearing a moderate rate of interest, and payable on long342

APPENDICES

maturity, does not create a burden greater than that which
would have existed had there been no depreciation of
currency.

In fact the fairness of such a proposal has been recog-
nized by the German Government itself in a proposal
submitted on June 7, 1923, to all the allied and associated
governments.

This proposal was later confirmed by persons in high
authority in the subsequent and present German Govern-
ments.

The offer referred to above was of 10 milliard gold
marks, covering business, industry, banking, trade, traffic
and agriculture. The request of the committee is for 5
milliards only and it suggests the exemption of agricul-
ture from the obligation of the mortgage.

Eealizing the importance of agriculture to a nation
unable to provide its entire food supply, we feel more
reserved in making a recommendation as to the burdens
which should fairly be put on it, though we can not close
our eyes to the fact that a very large amount of agricul-
tural indebtedness has been discharged at merely nominal
figures and the owners of equity in land have realized
substantial profits at the expense of their former creditors.

We desire to make it clear that the committee in
asking for mortgage bonds on industries does not recom-
mend in any sense an unfair or discriminating burden
against them, and so we do recommend that equalization
be properly and fairly made by the German Government
for the benefit of its own budget. If, in the opinion of
the German Government, a burden on other property
should be imposed in order to equalize the burden of
reparation payments on property other than industrial
property, we recommend that it be done in favor of the
German budget either by a further valorization tax or by
a specific lien or otherwise. If this course be followed andAPPENDICES	343

a fair and accurate system of direct taxation be adopted
the committee believes that all classes in Germany will be
called upon to make their fair and reasonable contribution
to peace treaty charges either through direct or indirect
taxation.

Realizing the depletion of the liquid capital supply in
Germany, and that a period should be provided for its
recuperation, we recommend that the interest on the 5
milliards of debentures above referred to be waived en-
tirely during the first year; that the interest during the
second year be 2y2 per cent; during the third year 5 per
cent; and thereafter 5 per cent plus 1 per cent sinking
fund. In the event of default in the payment of interest,
sinking fund, or principal on any of the said debentures,
provision has been made for recovery from the German
Government through the commissioner of controlled reve-
nues.

The plan will be found in Annex 5.

X. Summary of Provision for Treaty Payments

We are now in a position to summarize the full provi-
sion we contemplate for treaty payments:

Budget moratorium period—

Gold marks

First year. From foreign loan and
part interest (200,000,000) on rail-
way bonds........................ 1,000,000,000

Second year. From interest on rail-
way bonds (including 130,000,000
balance from first year) and interest
on industrial debentures and budget
contribution, including sale of railway
shares............................ 1,220,000,000344:

APPENDICES

Transition period—

Third year. From interest on railway
bonds and industrial debentures, from
transport tax and from budget (sub-
ject to contingent addition or reduc-
tion not exceeding 250,000,000 gold

marks) ........................... 1,200,000,000

Fourth year. From interest on railway
bonds and industrial debentures, from
transport tax and from budget (sub-
ject to contingent addition or reduc-
tion not exceeding 250,000,000 gold

marks) ........................... 1,750,000,000

Standard year—

Fifth year. From interest on railway
bonds and industrial debentures, from
transport tax and from budget...... 2,500,000,000

The first year will begin to run from the date
when the plan shall have been accepted and made effec-
tive.

We must point out that the total figures indicated for
each year must include the sums paid by the German
budget, the railway company, or the debtors on industrial
debentures, whoever may be the actual recipients of these
sums, the Reparation Commission, the capitalists who pur-
chased securities, or even the debtors themselves if they
have repurchased their bonds.

These figures clearly do not include the proceeds from
the sale of capital assets which may be effected by the
creditor governments. As soon as the plan is put into
execution, the Reparation Commission will be in possession
of bonds for 16 milliard marks, which may be sold to the
extent to which the financial markets are capable of ab-
sorbing them. Subsequently, bonds representing theAPPENDICES

345

transport tax and the contribution from the budget may-
be issued, and will enable the governments to realize the
capital of their claims.

XI. Inclusive Amounts.—Deliveries in Kind

the inclusive nature of the payment

Before passing from this part of our report we desire
to make it quite clear that the sums denoted above in our
examination of the successive years comprise all amounts
for which Germany may be liable to the allied and associ-
ated powers for the costs arising out of the war, including
reparation, restitution, all costs of all armies of occupa-
tion, clearing-house operations to the extent of those
balances which the Reparation Commission decide must
legitimately remain a definitive charge on the German
Government, commissions of control and supervision, etc.
Wherever in any part of this report or its annexes we
refer to treaty payments, reparation, amounts payable to
the Allies, etc., we use these terms to include all charges
payable by Germany to the allied and associated powers
for these war costs. They include also special payments
such as those due under articles 58, 124, and 125 of the
Treaty of Versailles.

The funds to be deposited in the special account in
the bank are to be available for the foregoing purposes,
notwithstanding anything in this report which may be
interpreted to the contrary, though in saying this we are
not to be read as prejudicing questions of distribution or
questions of priority between the various categories of
charges.

"We venture to emphasize the fact that from the point
of view from which we are called upon to regard the ques-
tion these obligations of Germany are one, and that any
addition to one category of charges can only be made at
the expense of another.346

APPENDICES

The committee have noted the important fact that Ger-
many is not in a position to ascertain her liabilities out
of the peace treaty as demands are made upon her from
time to time during the year, which can not be calculated
beforehand. It appears to us a matter of impossibility
for any budget to be scientifically compiled and satisfac-
torily balanced under such an arrangement, and that,
therefore, means should be found to bring this system to
an end. The difficulty will be satisfactorily met if Ger-
many's liabilities for any particular year are absolutely
limited according to our plan and, as suggested above,
made inclusive of all possible charges whether in or out-
side Germany, including the costs of the administrative
controls which are set up by our plan.

DELIVERIES IN KIND

We have given special attention to the question of de-
liveries in kind; in their financial effects, deliveries in
kind are not really distinguishable from cash payments
and they can not in the long run exceed the true surplus
of German production over consumption available for ex-
port without either upsetting the exchange or rendering
foreign loans necessary.

Having made this clear, we have to remember that:

1.	Deliveries in kind are dealt with in the treaty.

2.	They are now an inevitable part of the economic
conditions of several of the Allies and can not be wholly
removed without considerable dislocation.

3.	If the principle is not carried too far, they may
represent a stimulus to German productivity and there-
fore the creation of a greater export surplus.

4.	They may help in avoiding such surplus being ab-
sorbed by the prior action of private German investment
abroad. In this connection, the maintenance of the systemAPPENDICES

347

of deliveries in kind, if not carried too far, may act in a
manner to keep the transfer as large as possible and to
give the Allies priority.

While, therefore, we recognize the necessity for the
continuance of deliveries in kind, we think that unless
they can be confined to natural products of Germany, such
as those specifically dealt with in the treaty (coal, coke,
dyestuffs, etc.) and in the second place to exports which
do not entail the previous importation into Germany of a
large percentage of their value, they tend to be uneco-
nomic in character.

In the first two years of the operation of the plan the
available finance is so restricted that there will be an
automatic limitation of deliveries, but in the later period
the program must be carefully and periodically considered
in advance by the Reparation Commission in conjunction
with the committee referred to in Section XIII if ex-
change difficulties are to be avoided.

We refer below to the necessity of expending almost
exclusively within Germany the sums available for treaty
payments in 1924-25 and 1925-26. In these circumstances,
the Allied Governments will doubtless consider whether it
is not advisable to continue the system whereby the costs
of armies of occupation were a first charge upon the pro-
ceeds of deliveries in kind made to the Governments which
maintain the armies.

Where we have referred to payments for deliveries in
kind in this report we have intended to include therein
payments in Germany arising through the operation of the
reparation recovery acts.

XII. How the Payments Are To Be Made

All payments for the account of reparations (whether
from interest and sinking fund on railways or industrial
debentures, the transport tax, or from the budget contri-348

APPENDICES

bution) will be paid in gold marks or their equivalent in
German currency into the bank of issue to the credit of
the "Agent for reparation payments." This payment is
the definitive act of the German Government in meeting
its financial obligations under the plan. It is easier to
estimate the burden that Germany's economic and fiscal
resources can bear than the amount of her wealth that can
be safely transferred abroad, and it is the former and not
the latter that has formed the first objective of the com-
mittee.

XIII. How the Payments Are To Be Received

The use and withdrawal of the moneys so deposited
will be controlled by a committee, consisting of the agent
for reparation payments (a coordinating official under
the Reparation Commission, whose position and duties are
defined later in this report) and five persons skilled in
matters relating to foreign exchange and finance, repre-
senting five of the allied and associated powers. This
committee will regulate the execution of the program for
deliveries in kind and the payments under the reparation
recovery act, in such a manner as to prevent difficulties
arising with the foreign exchange.

They will also control the transfer of cash to the Allies
by purchase of foreign exchange and generally so act as
to secure the maximum transfers, without bringing about
instability of currency. Fuller details as to their func-
tions will be found in Annex 6. If the payments by Ger-
many on reparation account, in the long run, exceed the
sums that can be thus transferred by deliveries or by
purchase of foreign currencies, they will of course begin
to accumulate in the bank. Up to a certain point, in nor-
mal circumstances not exceeding two milliards, these
accumulations will form part of the short money opera-
tions of the bank.APPENDICES

349

Beyond this point, the committee will find employment
for such funds in bonds or loans in Germany under the
conditions laid down in the annex, but, for economic and.
political reasons, an unlimited accumulation in this form
is not contemplated. We recommend that a limit of five
milliards be placed upon all funds accumulating in the
hands of the reparation creditors in Germany. If this
limit is reached, the contributions from the budget are to
be reduced below the standards set out in our plan, so
that they are not in excess of the withdrawals from the
account and the accumulation is not further increased. In
this contingency, the payments by Germany out of the
budget and, the transport tax would be reduced until such
time as the transfers to the Allies can be increased and
the accumulation be reduced below the limit named.

We do not deny that this part of our proposal will
present difficulties of a novel character which can only
be solved by experience. But what are the alternatives?

In order that no difficulties with exchange or stability
can possibly arise, the sum payable for reparation may
be definitely fixed at such a figure as is certain beyond
all doubt to be within Germany's capacity to export in
excess of her imports. In this case the attainment of such
certainty would involve so low a figure as to be quite un-
acceptable to her creditors and unwarrantably favorable
to Germany.

On the other hand, the liability may be fixed without
regard to that excess of exports at all, and the discharge
of the liability left to uncontrolled events without any
possible regard to exchange difficulties. That way lies
future instability and disaster.

We are convinced that some kind of coordinated policy,
with continuous expert administration in regard to the
exchange, lies at the root of the reparation problem and
is essential to any practicable scheme in obtaining the350

APPENDICES

maximum sums from Germany for the benefit of the
Allies.

XIV. Guarantees in Addition to Bailway and Indus-
trial Bonds

It is plainly not enough to demonstrate the feasibility
of raising the sums under consideration. It is desirable,
in the common interest, that means should be devised for
securing that the possible surplus is actually established.
The greater the extent to which payment may be ren-
dered automatic and a matter of habit and independent
of fluctuating political attitude toward reparation, the
less will be the friction and the greater will be the real
stability of the German budget. In the last resort the best
security is the interest of the German Government and
people to accept in good faith a burden which the world
is satisfied to be within their capacity, and to liquidate as
speedily as possible a burden which is and should be
onerous.

Creditors, however, are not usually satisfied with a
moral security, and experience and the present condition
of Germany's finances are such as to reinforce their nat-
ural desire for tangible and productive guarantees.

These are no less vital in the interest of Germany her-
self, who will be relieved of a large part of her political
troubles if the main source of political controversy is re-
moved by a system which no longer makes the payment of
reparation depend upon the constant maintenance or
renewal of governmental decisions. In particular, it is
vital in the interests of our scheme, which depends for its
success on the assured belief of the whole world in the
regular observance of a settlement once made.

On the other hand, we do not hesitate to reject as un-
desirable, for the purpose which all have in view, save in
certain extreme events, any system which would involveAPPENDICES

351

directly or indirectly the virtual control of all Germany's
revenue and expenditure. It would involve the controll-
ing authority in responsibility for all financial troubles,
and it might be a pretext for them.

The use of this safeguard general budgetary control
should be reserved for the case of Germany's willful fail-
ure to meet the obligations now laid upon her.

If, as we believe, the payments which we have sug-
gested can be made without compromising budget stability,
it is in our opinion not impossible to establish a system
under which a combination of self-interest and latent
pressure will suffice to assure sound financial admin-
istration. We believe that the object can be attained if,
without in any way impairing the first charge which now
exists in favor of reparation on all Germany's assets, cer-
tain specific revenues are assigned to, and under the con-
trol of, Germany's creditors. These revenues will furnish
a collateral, but not a primary, security and we suggest
that they should be the taxes on customs, alcohol, tobacco,
beer, and sugar. We propose for this purpose that they
should pass directly into the hands of an impartial and
effective control; that the treaty payments should first
be deducted by the controlling authority for the account
of the Allies; and that Germany should only have the
use for her own purposes of such balances as may remain.

We believe that this system contains the greatest de-
gree of effectiveness without involving the Allies in the
onus of responsibility for any breakdown in the execution
of the plan.

We recommend that the control should be instituted
forthwith in spite of the fact that the budget supports
no peace treaty charge in the year 1924-25.

We make this recommendation for two reasons: Ger-
many, by instituting this control, puts this part of the
plan into execution in a definite and public manner, and352

APPENDICES

in the second place early action will insure that control is
in effective operation at the moment when part of the
revenues are retained by Germany's creditors.

We would add that while leaving untouched the exist-
ing alcohol monopoly, we do not, in view of reports
received from technical experts, propose the transforma-
tion of consumption duties into new monopolies, though
we recommend certain important new regulations with
regard to the sale of tobacco.

CONTROLLED REVENUES—THEIR YIELD

The estimate made by the German officials of these
revenues for the year 1928-29, exclusive of customs, was
1,700,000,000 gold marks.

The technical advisers specially consulted by the com-
mittee have estimated the yield at 2,146,000,000 gold
marks.

There is every prospect, therefore, that the assigned
and controlled revenues will give a large margin over the
treaty charge payments, even in the standard year, of
1,250,000,000 gold marks. The revenues are a security for
a payment otherwise fixed. This principle renders pos-
sible a system of control which, while equally effective, is
much more simple in operation, and is strengthened by the
association of Germany's self-interest. Once the treaty
charges are met she is entitled to the whole balance and
therefore she has the fullest inducement to increase the
yield. But she can touch no part of the revenues in a
given period until the treaty charges are fully met; so that
every increase operates in the first instance to increase
the Allies' security.

We have suggested above that in the years 1926-27 and
1927-28 the amount of reparation to be paid should be
dependent to some extent on the yield of these particular
revenues. In order that there may be no misunderstand-APPENDICES

353

ing, we desire to state clearly that in our opinion this
arrangement should be strictly confined to the two years
in question and be regarded as exceptional.

We believe it to be of the greatest importance that the
revenues should normally be regarded strictly as secu-
rity, and should not be relied upon in the ordinary course
as the determinant of the actual sum to be paid as repara-
tion. In particular, if the yield of the revenues exceeds
the amount to be secured, the excess should accrue to the
German Government. Our reasons for holding these opin-
ions are more fully stated in Part II.

XV. External Loan—Its Conditions and Purpose

An integral part of our scheme is the issue by Ger-
many of a foreign loan of 800,000,000 gold marks; this
loan is primarily essential for the successful establishment
of the new bank and to ensure the stabilization of the cur-
rency. The deposit of this amount in the new bank will
be an important and necessary contribution to its gold
reserves and enlarge the basis of its currency issues. It
will thus be enabled in the second place, without impair-
ing its usefulness for the above, to play an important part
in solving the problem created by Germany's immediate
and more urgent obligations to the Allies which do not
necessitate the transfer of money abroad.

We have already stated our conclusion that Germany
should not be called upon in the years 1924-25 and 1925-
26 to provide for any treaty charges out of ordinary
budget resources, and we have deferred to this point indi-
cation of means by which a complete suspension of pay-
ments may be avoided.

The current liabilities of Germany under the treaty
other than liabilities for cash payments in foreign cur-
rencies, comprising the most essential deliveries in kind,
and costs under a number of other heads, are known to be354

APPENDICES

considerable. Although their precise amount is not easily
determinable, they aggregate to a large amount and if no
arrangement is made for meeting or reducing them they
form a formidable obstacle in the way of a complete
solution.

In the year 1924-25, the extra-budgetary resources can
be relied upon to provide 200,000,000 gold marks, being
interest on railway bonds. The question arises whether
a further sum can be provided.

We first considered whether Germany would have suf-
ficient credit at the outset to meet the full amount of her
charges by loans or capital assets. In our view, it is
impossible to say that she could obtain funds, until her
position is well established, adequate to discharge them.
But it does not follow that the most pressing of the de-
mands can not be met, for a considerable sum can cer-
tainly be raised upon the good security that the plan
provides, with a clear prospect of improved international
political position and of stability. The question is, there-
fore, whether the claims upon Germany can be so re-
duced by agreement among the Allied creditors as to come
within this potential credit. If they can, then obviously
the greater the reduction, the more moderate the sum to
be raised and the greater the probability of Germany
successfully raising a loan. If not, then the loan will not
be forthcoming, stability can not be insured, and neither
this plan nor any other can come into being. The suc-
cessful launching of the scheme depends therefore upon
three main factors:

(а)	Limitation of payments for all purposes, to
1,000,000,000 gold marks of which at least 800,000,000
must be spent in Germany for the first year, and there-
after to such sums as are available under the plan during
the succeeding years;

(б)	Cooperation between the Allies and Germany inAPPENDICES

355

securing political conditions which will incline the inves-
tors of the world favorably toward the German loan upon
good security; and

(c) A loan of 800,000,000 gold marks which will serve
the double purpose of assuring currency stability and
financing essential deliveries in kind during the prelim-
inary period of economic rehabilitation.

It will be seen that under the plan, among the differ-
ent revenues available, ample and sufficient security
could be found to form the basis of such a loan, both as
to interest and sinking fund.

Obviously, the first loan should be fully secured, but
it is equally true, that it is neither in the interest of a
first loan nor of the Reparation Commission to create
a situation which would prejudice the flotation of subse-
quent German loans or the realization of the capital assets
provided for in the plan.

The amount required for the service of this first and
any subsequent loans must be deducted from the sums
which in subsequent years can, in accordance with our
plan, be placed at the disposal of Germany's creditors.
In effect the loan is only an anticipation of the sums sub-
sequently available which, it is necessary to emphasize,
represent in our opinion the maximum burden and there-
fore one not capable of increase.

It is not for us to offer suggestions as to the priority
of claims or how the sums should be distributed. On this
aspect of the matter we confine ourselves to stating that
in the interest of currency stability and to aid the suc-
cessful inauguration of the new bank, the proceeds of the
loan should be used exclusively for financing internal pay-
ments, such as deliveries in kind (whether direct or by
the operation of the reparation recovery act), and that
part of the costs of the armies of occupation which rep-
resents expenditure in Germany by or on behalf of these356

APPENDICES

armies. But we do assert that, if as we believe, Germany's
credit will be good enough to float such a loan, it is nat-
ural and necessary that her credit should be employed to
ease the burden on her creditors during the period of her
own recovery.

In the year 1925-26, the problem is somewhat differ-
ent in character. The reasons which make a foreign loan
essential in the first year should have disappeared. If
confidence is in process of reestablishment a large reflux
of capital to Germany is to be expected. People, whose
object in transferring money abroad or in hoarding for-
eign notes within Germany has been simply to insure
against further loss, will, to a great extent, reconvert this
capital into German currency. Other things being equal,
the German currency and exchange situation will continue
to improve, a phenomenon which has been clearly exhib-
ited in the last 12 months in Austria.

The exchange position of Germany will, therefore, be
relatively strong and her budget position relatively weak.
In the few succeeding years the position will be exactly
reversed; the exchange will become normal, but weaker
than during the abnormal period of reconstruction, while
budget resources should be enormously strengthened.

In view of these facts, we see no danger, and perhaps
positive advantage, in requiring that during 1925-26 de-
liveries in kind and that part of the costs of the armies
of occupation spent in Germany by or on behalf of the
armies should be financed up to 1,220,000,000 gold marks
by sums raised in Germany itself.

The above sum is made up of (1) railway interest,
partly carried over from the first year, amounting to
595,000,000 gold marks; (2) the transport tax to the
amount of 250,000,000 gold marks; (3) interest on indus-
trial debentures amounting to 125,000,000 gold marks; and
(4) 250,000,000 gold marks from the budget provided byAPPENDICES

357

the sale of railway preference shares belonging to the
German Government. If for any reason the whole of the
above sums are not provided, the balance should be raised
by a German internal loan.

XVI. Organization

The committee's plan provides for a commissioner of
the bank of issue, a commissioner of railways, a commis-
sioner of controlled revenues, the last-named to have under
his control a certain number of sub-commissioners severally
entrusted with the special revenues under consideration
and if the need arise for a commissioner of industrial
debenture.

The plan also provides for an agent for reparation
payments.

In order that the machinery thus set up by our plan
may function properly, both in relation to the Reparation
Commission and in its German environments, there must
be an agency between the Reparation Commission and the
various commissioners. We suggest that this coordinating
agency devolve upon the agent for reparation payments.

The commissioners would retain all responsibility for
the carrying out of the task entrusted to each, only subject
to such coordinating policies as may prove necessary in
order to avoid any duplication of effort, overlapping of
functions, unnecessary friction and generally all interfer-
ence with the harmonious working of our plan.

In case of a difference of opinion between one com-
missioner and the '' Agent General for Reparation Pay-
ments" in his capacity as coordinator, the commissioner
can appeal to the Reparation Commission. The existence
of this right of appeal will have a salutary effect upon the
relations of the coordinating agency and the different
commissioners.358

APPENDICES

To facilitate the interchange of information which will
develop a situation in its entirety for appropriate action a
general coordinating board is also suggested in which the
various commissioners of representatives named by them
will participate together with the " Agent for Reparation
Payments'' and the trustee. The coordinating board is
to have advisory powers only and is for the purpose of
giving information to the agent general to assist him in
preparing coordinating orders.

These suggestions are naturally far from exhausting
this important subject, one of the most important of our
plan. They are laid down simply as an indication, as
the drafting of the rules for such a coordinating will
devolve upon the Separation Commission so far as they
have power, and upon the various Governments.

Rules should be laid down for the rendering of period-
ical reports and for the publication of such as the public
interest may require.

We desire however to record in this connection that the
expense of the new machinery provided for by the plan
can and should be contained within limited amounts and
in any case be included in the annuities already contem-
plated.

Trustee. The plan also provides for the appointment
of a Trustee with the following duties:

He will receive and administer the railway and indus-
trial bonds and will be accountable to the Reparation Com-
mission for these and all other securities.

He will ensure the service (interest and amortisation)
of the railway and industrial bonds by means of funds re-
mitted to him for this purpose by the agent for reparation
payments.

He will fix the conditions of the amortisation of the
bonds and if necessary the redemption at par of all or a
part of the bonds not yet amortised, by means of any sup-APPENDICES

359

plementary payments which may be made by the German
Government, the railway company or industry.

With the authorization of the Reparation Commission
and for its benefit, the trustee may sell the bonds which
he holds, and may use the mortgage bonds and deeds
which he holds to secure new securities which he may him-
self issue.

Both the agent and the trustee should be appointed
by the Reparation Commission.

In framing the organization of control, the committee
has adopted as fundamental the principle that, if the plan
is to yield the best financial results, it is desirable that
control should be of such a nature as not to involve the
assumption of responsibility by the commissioner for Ger-
man administration, though the committee recognizes that
this principle can not be adhered to in case default under
the plan arises.

VXII. The Nature of the Plan

In concluding this part of our report, there are sev-
eral points which we desire to emphasize.

In the first place we regard our report as an indi-
visible whole. It is not possible in our opinion, to achieve
any success by selecting certain of our recommendations
for adoption and rejecting the others, and we would
desire to accept no responsibility for the results of such
a procedure nor for undue delay in giving execution to
our plan.

In the second place, as we have remarked earlier, our
plan is strictly dependent upon the restoration of Ger-
many's economic sovereignty, and it is important to ob-
serve that the operation of the plan will be proportionately
postponed if there is a delay in effecting that restoration.
The various dates which we mention in the report must
be interpreted in the light of the above remark.360

APPENDICES

From the standpoint of the taxpayer in creditor
countries the plan means in due course an annual relief
to the extent of 2y2 milliards, plus such additional amount
as the index of prosperity may provide.

On the other hand from the standpoint of the taxpayer
in Germany the plan means a direct burden of only one-
half this sum, viz, 1^4 milliards per year, and the trans-
port tax, plus such additional amount as may represent
only a relatively small share in increased prosperity. The
German taxpayer can look without anxiety upon the re-
mainder of the payment of 2y2 milliards, for it represents
a relatively small burden on German industry, which has
been the beneficiary of substantial special profits and only
a modest return on a large capital invested in railroads
which are yielding him no relief in taxation in his budget
at present, such capital having been accumulated prior to
the war. We are satisfied that the contributions from
railway and industrial debentures will not be reflected to
any substantial degree in a burden to the individual Ger-
man taxpayer; as regards the railways it will only
require the same kind of return as exists in similar enter-
prises in many countries.

Our purpose has been to set up a machinery which
will secure the maximum payment which Germany can
make in each year in her own currency- We do not
speculate on the amount which can annually be paid in
foreign currency or on Germany's capacity to make a
total payment.

The committee is confident that it lies within the
power of the German people to respond to the burdens
imposed by the plan, without impairing a standard of
living comparable to that of the Allied countries and their
neighbors in Europe, who are likewise subject to heavy
burdens, largely resulting from the catastrophe of the
war.APPENDICES

361

We have not concealed from ourselves the fact that
the reconstruction of Germany is not an end in itself. It
is only part of the larger problem of the reconstruction
of Europe.

We would point out finally that while our plan does
not, as it could not properly, attempt a solution of the
whole reparation problem, it foreshadows a settlement ex-
tending in its application for a sufficient time to restore
confidence, and at the same time is so framed as to facili-
tate a final and comprehensive agreement as to all the
problems of reparation and connected questions as soon
as circumstances make this possible.PART II

I. The Currency Position

The conditions at the outset of our inquiry.—"When we
started our investigations the value of German currency
had been stable for some two months. It would not have
been pretended, however, by any authority that German
currency had been stabilized. It would perhaps be juster
to apply the term "unstable equilibrium" than the term
"stability" to this transition period, which has fortu-
nately continued to the present day. The elements of
permanent stability, even if the repercussions of the
budget situation are momentarily left out of account, were
then and are still wanting.

One of the first steps which the committee took was
to request Doctor Schacht, the governor of the Reichsbank
and the currency commissioner of the Reich, to give evi-
dence before them with a view to their being fully in-
formed of the existing currency situation.

Quantity of currency.—The total circulation, although
so enormous in nominal values, was, when reduced to
its gold equivalent at that date, something over 3 milliard
gold marks only, whereas the pre-war circulation in Ger-
many had amounted to 6 milliard gold marks. Prima
facie, therefore, the amount of currency seemed deficient
rather than excessive, and not likely in itself to be a
cause of further depreciation. In proportion as the Ger-
man mark dwindled in value and became less and less
utilizable for the threefold function of standard of value,
instrument of payment and medium of saving, foreign

362APPENDICES

363

currencies naturally became by force of circumstances,
more and more sought after in Germany. The Germans
resorted increasingly to the currencies of countries with a
comparatively stable exchange, not only to invest their
savings, but also to define and even settle their transac-
tions, and the presence of such currencies in Germany
increased ever more as the mark depreciated further.

In spite of this extended use of foreign currencies in
Germany, the shortage of purchasing power made itself
increasingly felt, leading first the German Government,
then the States and municipalities, and finally the great
industrial and agricultural organizations and even private
firms to supplement the currency shortage by new instru-
ments of payment. These token currencies, expressed in
gold or paper marks, sprang up in Germany in the sum-
mer of 1922, at a moment when the need became urgent
to find new means to meet the requirements of current
transactions, the old mark on the verge of its collapse no
longer answering such requirements.

At the end of 1923, we find in Germany an absolutely
heterogeneous monetary circulation, which included be-
sides the foreign money in circulation or hoarded (dollars,
pounds, florins, gulden, Swiss francs, French francs,
Scandinavian crowns, etc.—the old paper marks, dollar
treasury bonds (Dollarschatsanweisungen), bonds of the
gold loan (Wertbestandige Anleihe), 6 per cent Treasury
bonds (6 per cent Schatzanweisugen), rentenmarks, and,
lastly, a whole set of odd emergency currencies (Notgeld)
expressed either in gold or in paper marks.

Backing.—The security of the rentenmarks is a mort-
gage on real and to some extent on personal property.
The so-called gold loan is repayable in legal tender on a
gold basis but has no gold backing. The various forms of
emergency money were for the most part based on no
security at all. The gold reserve of the Reichsbank364

APPENDICES

amounted to some 467,000,000, but 200,000,000 thereof was
specifically earmarked as security for the dollar loan
issued by the Reich in 1923.

Taken as a whole therefore the liquid backing of the
currency is wholly inadequate for a permanent system.

Interchangeaiility.—The rentenmark is not actually
legal currency within the country nor available for any
purposes of foreign trade. The old currencies with their
vast denominations remain the legal currency, but prices
are everywhere expressed in rentenmarks. It is there-
fore obviously necessary that payments should be made
indifferently either in Reichmarks or in rentenmarks at
a fixed relation between them. The Reichsbank accord-
ingly accepts rentenmarks at the rate of 1 rentenmark for
1,000,000,000,000 paper marks, and rentenmarks are also
accepted in payment of taxes at the same rate.

Annex 7 to the present report shows in some detail the
curious monetary situation in Germany at the end of Jan-
uary last.

The present tranquillity.—As the committee have re-
marked, the elements of currency stability were not to be
found in such a situation. The temporary equilibrium of
the German exchange has been ascribed to various causes
by different authorities; some lay stress upon psycho-
logical factors, and in particular a renewal of confidence,
the exact basis of which it would be difficult to determine,
but which took account of the efforts being made by the
German Government to balance its budget, and of the
appointment of the Committees of Experts by the Rep-
aration Commission; others refer to a decrease in internal
consumption which with the lack of credit, accompanied
by what was probably an excessive restriction in impor-
tation, reduced the demands both for the circulating
medium and for foreign currencies.

Credit facilities.—The exportation of the rentenmarkAPPENDICES

365

is prohibited. Its existence was of no assistance in the
maintenance of foreign trade. The Reichsmark was too
discredited to be any longer available for the purpose
of meeting foreign obligations. Credit was only obtain-
able abroad at dangerously high rates of interest.

At the same time, the currency depreciation and its
secondary effect had produced a serious dearth of liquid
capital in Germany itself. The stringency may be indicated
by the fact that (according to figures furnished us)
the savings bank deposits had fallen from 10,700,000,000
at the end of 1913 to 760 gold marks at the end of 1922;
the credit accounts in the eight large Berlin banks
amounted to 7,400,000,000 at the end of 1913 and to about
1,000,000,000 at the end of 1922. The figures for 1923
are not yet available but can scarcely exhibit an improve-
ment. Leaving for the moment out of account capital
which in one form or another had been exported, liquid
capital in monetary forms liable to depreciation had been
steadily converted into fixed assets with a permanent in-
trinsic value. The private individual had purchased
consumable commodities, while industrial enterprises had
largely extended their plant and equipment. The motor
was in good, perhaps in unusually good, condition, but
the motive power and lubrication were apparently lacking.

Immobile credit resources.—On the other hand, there
was general agreement that not inconsiderable resources
were available in the shape of German balances abroad
and foreign currencies in the pockets of the population
in Germany itself. This latter item alone has been esti-
mated at 1.2 milliard gold marks by the committee
appointed to consider the means of estimating the amount
of German exported capital. It was reasonable to sup-
pose that a large proportion of these resources would be
available if complete confidence in the stability of Ger-
man currency could be restored and maintained.366

APPENDICES

As stated in Part I, the committee considers that this
end can best be secured by the institution under proper
safeguards of a new bank which should absorb the exist-
ing currencies, liquidate the rentenbank, and transform
the Reichsbank, and provide, against recognized banking,
cover the foreign currencies necessary for the revival of
Germany's languishing trade. The plan for this bank
is given in Annex 1.

Psychological considerations seem imperatively to re-
quire an institution which should be so far new in its
policy and its administration as to detach it entirely from
the errors of the recent past and restore the older tradi-
tions of German banking.

The interim bank.—"While coming to this conclusion
and while reducing the general plan to details, the com-
mittee had to deal with an actual change in the situation
as it originally presented itself. The committee were in-
formed that a scheme for a gold bank was in preparation.
It was expressly and admittedly limited to providing the
means of carrying on foreign trade. When first sub-
mitted it contained some features which the committee
would not have recommended, and it omitted others which
seemed to the committee to be essential to any permanent
settlement of the problem as a whole. Moreover, an
attempt to settle particular difficulties in isolation and
without reference to other essential requirements appeared
to the committee to involve certain risks.

The committee, therefore, without expressing any opin-
ion on the plan as given to them in outline, assured them-
selves in consultation with the authorities responsible for
Germany's monetary policy that the bank would be so
organized as to facilitate its absorption into a new bank
of issue which might be set up in accordance with the
recommendations of the committee.APPENDICES

367

II. Consideration Regarding the Measurement of
Germany's Burden

(a) commensurate taxation

In Part I we refer to the fact that we have taken
full account of this principle. But it is necessary for us
to make some further observations thereon.

The principle of the "commensurate burden," as it
has been called, unimpeachable in abstract statement, is
exceedingly difficult to translate into quantitative meas-
urement as a basis for practical action. While obviously
sound and just, it does not easily admit of precise and
arithmetical calculation. "What at first sight seems to be
a simple conception, on examination is found to be com-
plex and in some respects not reducible to exact definition.

Now the ordinary expenditure which has to be pro-
vided for in the German budget is reduced, in part by
the restriction upon her military preparations but above
all by the practical extinction of her internal debt.

If Germany had sustained the burden of her own debt,
as the Allies have done, and not obliterated it by inflation,
she would have had to raise 4^ to 5 milliards per annum
in addition to her domestic expenditure.

This would make it both just and practicable to add
a provision in her budget which should bear some corre-
spondence to the provision made in the Allies' budget for
their war expenditure.

But the raising of any particular sum from one section
of her inhabitants, to be paid back to another section
within her borders, is a "burden" in a different sense
from the payment of such a sum by the whole population
to people abroad—different in more than the economic
sense—and it is difficult to bring such a task into direct
relation with the problem of reparations. It is a measure368

APPENDICES

of what individual taxpayers, rather than a nation, may
be capable of bearing.

In the first case the interest paid forms a part of the
national income, as it is expended it provides profits and
a stimulus for internal trade and so increases further the
income of the country, and in particular it is itself an
important source of internal taxation.

A payment in respect of a debt to foreigners has no
comparable advantages to the country making it. The
extinction of the German debt has after all been at the
expense of her own nationals, who are her taxpayers; they
have sustained as holders of German bonds, not only the
burden which they have already escaped as taxpayers, but
that which they would have borne in future years to meet
the service of the internal debt if its value had not been
destroyed by depreciation. The process of extinction has
indeed (except in its incidence as between different in-
dividuals and classes) had the same results both to the
treasury and to the German taxpayer regarded collec-
tively with a capital levy devoted to debt extinction.

The loss incurred by individual holders of debt is ex-
actly offset by a corresponding profit accruing to the
taxpayers as a whole.

It renders both practicable and just a greater charge
for other war debts than would otherwise have been pos-
sible. A large proportion of the richest taxpayers of the
country have obtained the relief without themselves sus-
taining the cost. They are a proper source of taxation
commensurate with that weighing upon the corresponding
classes in allied countries and in particular upon the in-
dustrial classes. To them as individual taxpayers a tax
is a tax whether its ultimate destination is the payment
of a war debt due to fellow citizens or to foreigners. And
under the system wTe propose it may be regarded as a tax
in internal currency without the complications which re-APPENDICES

369

suit from the question of how sums so received can be
converted into foreign exchange. For this special prob-
lem we provide special safeguards. The German taxpayer
should regard a payment in respect of war debt exactly
as an allied taxpayer regards a similar payment. Its ulti-
mate destination need not concern him, and is certainly
no justification for him to attempt to evade it.

The facts as to the burden, actually being borne by the
Allies for debt service are perhaps a better approach to
the actual problem. If the German burden per head for
debt were as onerous as the burden for debt existing upon
the inhabitants of Belgium, France, Great Britain, and
Italy taken together, then the German debt charge would
approximate to 6 milliards. But in this case, again, the
charge is to a considerable extent in the nature of a redis-
tribution of annual wealth among the members of each
nation and has little relation to the problem of a national
burden in the collective sense.

In the third place, it may be said that if the German
people were burdened as heavily as the members of the
most heavily taxed of the allied countries are taxed for
all purposes, excluding debt charge, we should have an
expression of the commensurate burden principle in a lim-
ited and strictly defensible sense. But even here theoreti-
cal and practical difficulties prevent exactness.

In the search for the "commensurate" it is not
enough to compute the burden as a per capita charge, it
must be related to per capita wealth or income; it is con-
sidered by many that justice requires a "minimum of
subsistence" to be first deducted from such per capita
income; the amount of the minimum is not exactly deter-
minable and it seems to vary as between different coun-
tries of different climates, different economic develop-
ment, and different customs, e. g., as between Spain and
the United States; it may even vary between different370

APPENDICES

periods in the same country. As a rough working assump-
tion, such a minimum may be regarded as varying in pro-
portion to the per capita income of different countries.
Furthermore, over any period of time this burden per
head in the allied countries must change and what might
be a valid comparison to-day in taxation in those countries
may be quite different in 10 years' time. The comparison
of statistics of total taxation, national and local, in each
country presents many technical difficulties. Moreover,
statistics of total national income and income per head
are at present either very defective or wholly lacking.
Notwithstanding these difficulties it is possible to com-
pute roughly what total budget charge would be borne
by the German people if they were subject to taxation
(central and local) on the same scale per unit of income
as in Great Britain, and by deducting from the result
the necessary domestic expenditure to derive an arith-
metical balance which could be, theoretically at any rate,
assigned to the payment of reparation.

Combining these various aspects, we have reached the
view that the "commensurate burden'' principle for Ger-
many, when she is fully restored to economic prosperity,
would more than justify all the practical conclusions we
have set down and that they are in every way morally
defensible.

There are, of course, good reasons of a political, eco-
nomic, and psychological character for confining the
actual requirements of budget accumulation within Ger-
many to limits wTell below the figure that would be
arrived at from the consideration of this principle by
itself. Different individuals will differ in the degree of
importance they assign to such reasons. It is perhaps
unnecessary to state these aspects in detail and sufficient
to register our united conviction that all our recommen-
dations and suggestions are well within what can beAPPENDICES

371

morally justified on the principle of "commensurate bur-
den,' ' whatever limitations may be placed upon that prin-
ciple. In this sense, therefore, the justice and moderation
of our proposals ought to be fully recognized by the Ger-
man people themselves.

In the above discussion we have disregarded the ques-
tion of railway profits. Inasmuch as budget revenue is
not derived from profits on railways elsewhere, no ques-
tion arises as to whether railway profits are a burden (in
the sense of a tax). Such profits in other countries form
a part of the ordinary profits of private concerns accru-
ing to individuals, and it may be said therefore that in
Germany the position of the taxpayer is the same, whether
such profits go to individuals or to the Allies as repa-
ration.

On the other hand, the German railway profits might
go in relief of taxation burdens if they were not applied
to reparations. Moreover, it is difficult to say that the
abstraction of the profits of so important an undertaking
as the railways of a country from that country, instead of
leaving them there to be enjoyed individually or collec-
tively by the inhabitants, is not a "burden" in the
international sense, even if it is not a part of the indi-
vidual commensurate burden of taxation.

(b) EXPORT STATISTICS AS AN INDEX OF PROSPERITY

In Part I we have suggested an index of prosperity
and indicated that in our opinion it was a fairer test than
the existing index, namely, export statistics. The use of
the latter in isolation has certain definite defects, to some
of which we desire to draw attention.

1, Foreign trade only covers part of the area of total
trade, and if foreign trade at a given moment only covers
a small part of the area, total trade may be moving in a
direction opposed to that of foreign trade.372

APPENDICES

2.	Artificial conditions, such as alterations in trans-
port charges, may affect the trade figure in the absence
of any real change in the value or volume of exports.

3.	The export statistics, more especially when no ex-
port duty is in force, may be subject to changes in
presentation and frequently furnish material for con-
troversy.

4.	Reparation payments themselves are, and can only
be, financed by an excess of exports. It follows that an
increased reparation payment in one year furnishes an
increased base for the following year. This process is
cumulative, and the basis for the index is continuously
raised, so to speak, at compound interest, even though
actual prosperity may be stationary.

5.	In a country with an economic life such as that
of Germany invisible exports may increase more rapidly
than physical exports, and there may be a growing pros-
perity which is not reflected in export statistics.

(C) MEASUREMENT BY YIELD OF PARTICULAR TAXES

We have laid some stress in Part I on the fact that
certain revenues were chosen strictly as guarantees and
that fluctuations in their yield were not to be regarded
(save in 1926-27 and 1927-28 exceptionally) as determin-
ing the payments due by Germany. The following are
the broad principles justifying this standpoint:

1.	It is desirable that the German Government and
the German people should be themselves interested in
increasing the yield of the controlled revenues, and
should be under no temptation to discriminate against
these taxes in favor of others.

2.	The year's liability, which under our plan includes
an allowance for increased prosperity, will already have
been established by one test, in which, moreover, the yield
of the controlled revenues indirectly forms one element.APPENDICES

373

Having applied one test, it would be unfair to apply a
second and to choose whichever gives the higher result.

3.	The year's liability ought not to vary with the
fortuitous yield of particular taxes. The character and
level of these taxes should be chosen with a view to their
suitability as security and not with a view to their appro-
priateness for fixing obligations.

Unless the liability of the year is definitely fixed and
unless the German Government can proceed to estimate
its resources by reference to the whole and not part of
the taxable field, the difficulties of forming a satisfactory
budget are aggravated and German credit is affected.

4.	Common sense requires that the reparation liabili-
ties ought not to rest even indirectly upon the rate of
particular taxes, or otherwise every change in rates or
methods of collection, even when thoroughly justified by
social or political reasons, must be scrutinized with such
a degree of care and perhaps suspicion that it becomes
a fruitful source of friction and dispute.

III. The German Budget for 1924-25, and the Fiscal

System

The 1924-25 budget.—The German Government pre-
pared and submitted to us the outline of a provisional
budget for 1924-25 which estimates a small excess of
receipts over the ordinary administrative charges of the
country. (Annex 8.)

While the committee have spent a great deal of time
upon the details of this budget, and have put many ques-
tions in writing to the government and in oral cross-
examination of the officials upon its chief features, the
subject is so vast in its ultimate implications, espe-
cially having regard to the constitution of the Reich, that
no finality could possibly be reached, especially in a
matter which to the Germans themselves is full of diffi-
culty and doubt. Nevertheless, we believe that the ground374

APPENDICES

has been explored to a sufficient extent to justify us in
feeling that even a prolonged examination could not sub-
stantially alter our conclusions. To some of the more
salient points we shall make particular reference.

The conditions under which the budget estimates were
made.—It should, however, be first remarked that in
general the budget must necessarily be in the nature of
an experiment and the individual items in it somewhat
arbitrary estimates. At the time of our investigation
Germany was passing through an acute economic crisis,
the direct result and the culminating point of a deprecia-
tion of the currency so catastrophic as practically to de-
stroy the currency and reduce the budget to all but a
shadow. The habit of saving has been destroyed, and it
will require time and the restoration of confidence to
reestablish it. The existing wealth is maldistributed in an
almost unparalleled degree. The cessation of depreciation,
with the consequent removal of the premium on export
and the stabilization of prices at a level which is momen-
tarily at any rate above that of the world level, has had
important reactions. Finally, the state of employment
and the fiscal and economic machinery of Germany have
been violently deranged by the events of 1923; a return
to normal conditions in this respect can not be effected
overnight.

Assumption underlying the budget.—It should be most
carefully noted that the budget is not made up to repre-
sent the financial expectations of actual existing condi-
tions. As we have remarked above, the general budget
as presented anticipates a credit balance, and the German
Finance Minister appeared to be reasonably confident of
his ability to live up to these estimates, provided three
essential conditions were fulfilled:

1. That the bank of issue which would serve as a
basis for the grant of credits would be established.APPENDICES

375

2.	That the full development of German economic life
should not be restricted by . the severance of the Ruhr and
the Ehineland.

3.	That Germany enjoyed complete freedom in her
economic relations with other countries.

The first and second of these conditions will be ful-
filled if our recommendations are accepted, and they
appear to us to be essential to budget equilibrium. As
regards the third, we understand that Germany's com-
mercial freedom is restored under the terms of the treaty
in less than 12 months' time.

We are not, however, satisfied that the budget as
framed is not exposed to a real risk of deficit. The Ger-
man fiscal year begins on the 1st of April and even if our
recommendations are accepted a certain lapse of time will
be necessary before an absolutely normal administrative
situation can be reestablished.

For this, if for no other reason, we conclude that on
the existing basis of taxation the estimated revenue may
not be realized, even allowing for certain possible under-
estimates under particular headings.

On the expenditure side, the only item on which a
saving may emerge of any great significance relatively
to the possible deficit is the provision of relief for unem-
ployed. The sum allocated to this purpose (500,000,000
gold marks) is estimated on the assumption that the exist-
ing amount of unemployment will continue throughout the
year. It appears to us that this is unduly pessimistic and
any reduction in the number will both relieve the expendi-
ture and the revenue side of the budget, inasmuch as the
wages earned by a laborer are subject to direct, and
through the medium of his expenditure, to indirect,
taxation.

Taking one item with another, however, we can not
justifiably state that the results are likely to be any376

APPENDICES

better than have been indicated in their estimate. But if,
for this year 1924, there was a deficit (we have just seen
that this possibility can not be absolutely disregarded) we
can assert that it would not be of an extent to endanger
the stability of the currency, or force the German Govern-
ment to have recourse to other than the conventionally
authorized expedients for meeting it, such as increases of
existing taxation, further emergency taxes, or small in-
ternal loans.

Moreover, so many of the settlements due in the year
1924 will fall to be made in the year 1925-26, that fiscally
these two years tend to be merged into one period, and, as
will be seen later, we have no doubt that in that period
ordinary budget receipts will fully equal ordinary budget
expenditure.

, Special features in the fiscal system.—The Income
Tax.—"We do not propose to comment in any detail on the
existing taxes, but there are certain broad features which
call for notice.

We have been unable to escape the conclusion that the
wealthier classes of Germany have, in recent years not
been reached properly by the system of taxation in force,
either to an extent which the taxation of the working
classes would justify, or to an extent comparable with the
burden upon the wealthier classes in other countries.

It is, of course, common knowledge that, with a con-
tinually depreciating currency, many classes of business
men tend to obtain as profit a larger share than is normal
of the total produce of industry. Many of their expenses
are in the nature of fixed charges; moreover, generally
speaking, paper-mark wages have not advanced as rapidly
as paper-mark prices have increased, so that the share of
the business proprietor in the total produce of industry,
altogether apart from the special profits made by him onAPPENDICES

377

redeeming debentures or mortgages at nominal figures,
has tended to be greater than is normal.

Direct taxes, such as income tax, are necessarily
assessed for completed periods and during a time of
rapidly rising prices the burden of any particular year,
based on the profits of previous years, is small relatively
to the profits of the year itself. Moreover, the process of
return, assessment, and appeal for such a tax, necessarily
occupies further time and by the date when substantive
liability is fixed in paper marks its real burden is far less
than was originally intended. Further delay in payment
of that liability intensifies this effect. It was not until
the inflation movement was well advanced in Germany
that any serious effort was made to combat this evil.
Although the rates of income tax according to the nominal
scales rose to nearly 60 per cent on the highest incomes,
statistics of cases furnished to us by the German Govern-
ment show that in effect, even in the year 1920, the
burden of actual tax (measured in gold) on the higher in-
comes, instead of being 50 to 60 per cent, was only half
those rates upon the income of the year (measured in
gold). This was undoubtedly one of the primary causes
for the budgetary difficulties of Germany, and the dispar-
ity was very much greater in the later periods. It can
be said with confidence that the wealthier classes have
escaped with far less than their proper share of the
national burden, and we have put it as a matter for the
serious consideration of the German Government whether
they should not, facing even the admitted administrative
difficulties, review the assessments of recent years in the
case of these particular classes of taxpayers and reassess
their liability upon a gold basis.

The whole system of direct taxation went to pieces in
1923 and, for 1924, the income tax, as is easily understood,
is in abeyance. The profits of industry in 1923 expressed378

APPENDICES

in nominal figures of paper marks have no meaning unless
they can be resolved into the profits of the particular
dates on which they were made and then reduced to a com-
mon denominator of gold values. A profit of 1,000 marks
made in January, 1923, is obviously quite a different
amount from 1,000 marks made in September. We can
well believe the German Government finds it impossible
to use the year 1923 as a basis for income tax assessment
in 1924.

They have been driven to temporary expedients of a
very makeshift character, not rising to a higher normal
burden than 25 per cent, with the intention of rescheming
and reassessing the income tax proper in 1925.

These expedients do not reassure us upon the general
question as to the taxation of the wealthy classes, and, in
our judgment, if they desire the Allies and their own
working classes to realize their good faith in this matter,
the German Government should publish at an early date
their definite intentions with regard to the scales of in-
come taxation that are to be applied during 1925-26 to the
actual profits of 1924-25 for the final adjustment of the
fiscal year 1924-25.

The 1924-25 budget estimates 1,344,000,000 gold marks
as the income tax yield, of which all but 480,000,000 gold
marks is estimated to be assessed on wages.

We have drawn the German Government's attention to
the absence in the temporary measures of any proper
provision at present for dealing with income from abroad.
They were asked to furnish us with details of the com-
parative position of different incomes drawn from divi-
dends in the years 1920-21, 1923-24, and 1924-25. The
reply is given in Annex 9 as indicating the present posi-
tion of direct taxation in Germany.

Special taxation on those wlfio have specially profited
by depreciation of currency.—Currency depreciation, onAPPENDICES

379

the scale it has occurred in Germany, has brought into
existence a new and special type of "windfall" wealth
which is a suitable subject for taxation in an emergency.

The ultimate profit or loss to industry and agriculture
as a whole of the depreciation era may be difficult to cal-
culate. There are many cases, however, of industrial and
other undertakings which were not only able to make
large profits but succeeded in paying off prior charges at
a trifling fraction of their value when incurred.

If a mortgage or debenture of 10,000 marks has been
paid off for practically nothing, a "windfall" profit to
the debtor (at the expense of the impoverished creditor)
has been made to that extent. If it has not yet been paid
off, but the debt can in due course be discharged by
worthless paper marks, the "windfall" is a potential one.
In this last case, it has been decided by the German Gov-
ernment to "valorize" the debt at 15 per cent and the
windfall to the creditor is to be restricted to 85 per cent.
On this remarkable improvement in his position, the Gov-
ernment proposes to levy a tax of 2 per cent, or 1.7 on the
whole debt. In the case where the debt has been paid off,
the Government will take the actual difference between
the gold price paid and 16.7 per cent. In our view, such
special taxation, if justified in principle at all, as we be-
lieve it to be, is justified at much higher rates. But
certain rights of taxation are being given to the Federal
States which encroach upon this area of taxation, and,
for the rest, our proposals (Section IX (c) of Part I) in
regard to industrial debentures cover what might other-
wise have been independent recommendations under the
head of taxation.

Similar extraordinary profits have been made through
State subventions and through the repayment in depre-
ciated currency of bank loans, State advances, and other
similar obligations.380

APPENDICES

The 'Reich and the States.—The third special feature
to which we would refer is the financial relation between
the Eeich and the States and communes.

The more complete financial centralization that took
place after the war in accordance with the Weimar consti-
tution has not fundamentally changed the character of
the relations between the Eeich and the States. Although
the Eeich is charged with the administration of taxes
formerly undertaken by the States, it is under obligation
to cede the major part of the proceeds of the income tax,
for example, to them. The States discharge wholly or in
part many of the functions of government, and there is
no clear principle connecting their resources with their
obligations. When in difficulties, they press the Eeich for
larger subventions (as precentage of the yield of taxa-
tion), just as in turn the needy communes press the States
for greater financial aid.

The situation has hitherto been governed by merely
political or administrative opportunism rather than by
clear financial principle. The Eeich can either yield to
the pressure for higher percentages in subvention or they
can confer upon the States the right to exploit particular
fields of taxation for themselves. The check by the States
upon the communes is equally unsatisfactory. It is almost
impossible to ascertain the true cost of any of the single
functions of government in view of its division between
these three constitutional entities, and in the absence of
proper aggregated financial statistics of the States and
still more of the communes.

The changes that have taken place completely falsify
any comparison which could be established between the
pre-war Eeich budget and that for 1924-25.

Moreover, these relations are once more under review.
During the period of rapid depreciation the resources of
the States and communes, together with regular alloca-APPENDICES

381

tions from the revenues of the Reich, were inadequate to
their needs. Their financial situation was similar to that
of the Eeich itself.

The expedient adopted by the Reich of multiplying the
issue of notes was not open to the States and communes,
who had necessarily to be supplied with continuously in-
creased subsidies from the Reich, and this proceeding was
one of the principal causes of the utter breakdown of the
German finances.

The resultant chaos has been such that no up-to-date
statistics are available, and the States have not yet framed
their budget on a gold basis. It is in our opinion essential
that at the earliest possible moment the preparation of
complete statistics of the receipts and expenditures of the
States and communes should be resumed.

The importance of the question may be seen if it is
realized that the Reich budget, after allowing for the sub-
sidies, contains little more than one-third of the total ex-
penditure, one-third being met by the States and one-
third by the communes. It would be quite possible for the
communal budgets to be enjoying considerable prosperity
at the same time that the Reich budget is in serious
difficulties.

We do not pretend to be in a position to make detailed
recommendations; the subject is a complicated one and
involves the consideration of social and political factors,
many of which have deep roots in historic traditions.

Moreover, if our recommendations are accepted in their
entirety, self-inte'rest alone may almost confidently be
relied upon to force the German Government to make
provident arrangements with the States, and it has already
given us an assurance that the regime of increased sub-
sidies has come to an end and will not be revived.

It is clear, however, that in the near future the Ger-
man Government must take steps to put the relations382

APPENDICES

between the Reich and its component parts on a regular
basis which shall insure that the latter are not a constant
drain upon Federal resources; the existing hole in the
budget must be plugged.

It does not suffice, in our judgment, for the Reich to
remain in supine contentment with the present situation
merely because it has been the result of constitutional
evolution. Germany waged war as an undivided whole
and the financial responsibility of the Reich to the Allies
can not be qualified or weakened by an attitude of passive
acquiescence in the undiminished rights of subordinate
areas. So long as Germany has any external obligations
they must be paramount, and the resources normally to be
assigned to the States and communes must be clearly de-
fined, and care must be taken to secure that these
resources are not more than adequate to legitimate needs.

Where further assistance must be given by the Federal
Treasury, the amount of such assistance should again be
strictly proportioned to the necessities of each case and
subordinated to continually increasing central supervision
by the Federal Treasury of local expenditure.

In considering the budget as drafted in 1924-25, we
have felt compelled to assume that the assignment to the
States amounting to 1,800,000,000 gold marks is an irre-
ducible figure, and that if the States themselves have
budgeted for the receipt of this sum the Reich will be
unable to escape the liability in one form or another.
This is the most probable assumption which we can make
in a matter which bristles with political difficulties, and it
is supported by the estimates submitted to us of the
revenue and expenditure in 1924-25 of Prussia, Saxony,
and Bavaria; in each case deficits are disclosed.

FURTHER COMMENTS UPON PARTICULAR TAXES

1. The committee recognize that the taxation of eachAPPENDICES

383

large nation to-day is the product of many factors, includ-
ing its historical evolution, its economic conditions, its
political ideas, its constitutional framework, and its social
psychology. What is a good system for one country may
be quite unacceptable for another. Even though the same
elements may exist in two systems, the importance played
by those several elements in the whole may be quite differ-
ent. If a similar total burden is being raised in two
countries, it is almost certain that the manner in which it
is being spread over the community and the particular
devices adopted to raise it will be very different.

2. For these and other similar reasons we do not re-
gard it as particularly profitable to pass the German
budget in detailed review merely to suggest that each
particular tax can be raised to a rate or level found in
some allied country for that tax, and thus to impose upon
Germany the maximum burden borne under each head in
any of the creditor countries. To do this would be to lose
sight of the principle we have referred to above, and also
to ignore the question of the total burden. For example,
to state that Germany could stand increases in the rates
on tobacco, beer, spirits, etc., to the level of those in
England, while ignoring the existence of her high turn-
over tax, which England does not impose; or to state that
Germany could bear increased rates of death duties, while
wholly ignoring the existence of her capital taxes, would
be to destroy the balance of her system, and be oblivious
to the total burden thus accumulated. The committee
would desire to avoid being dogmatic as to the way in
which a given sum shall be raised by the German Govern-
ment. Having come to the conclusion that a given burden
can be borne, it is for Germany to suit her own conditions
in prescribing the ways in which it shall be obtained. At
the same time, diverse as the systems in the allied coun-
tries themselves are, the committee offers the following384

APPENDICES

suggestions as the subject of their common agreement and
as suited, in their judgment, to German conditions:

1. Tobacco

Eminent technical experts have made the following
suggestions, which we commend to the notice of the Ger-
man Government: *

"While they believe that the institution of a tobacco
monopoly would entail heavy immediate expenditure, thus
causing economic disorder, the technical experts recom-
mend that the free manufacture and sale of tobacco should
only be allowed to continue if subject to the regulations
of the following scheme:

1.	No factory, nor wholesale or retail tobacco shop
may in future be established nor may any existing estab-
lishment be enlarged without the permission of the State.

2.	The introduction of tobacco substitutes in manu-
facture is prohibited.

3.	The number of existing factories must be reduced
by abolishing, with a fair indemnity, those which are
really not industrial in character, while all factories which
have been proved by experience to be incapable of pro-
ducing goods at a fair cost price must be expropriated.

4.	Products manufactured in the various factories
shall still be sold with their trade-mark, while the sale
price to the consumer shall be indicated on each package;
each box or packet to be sealed with a band representing
the State guarantees.

5.	Existing manufacturers shall form a consortium
according to the category of goods produced. This con-
sortium, while collectively undertaking to supply the
State with the quantities required for consumption, shall

* These suggestions are contained in a report drawn up by M.
Mayer and M. Aliprandi, which will be put at the disposal of the
Reparation Commission, together with a report on indirect taxes
drawn up by M. Hulin and M. Mazzuechelli.APPENDICES

385

have to deliver its products at its own expense and exclu-
sively to the State warehouses indicated.

6.	The products manufactured shall be bought by the
State at a price to be fixed at regular intervals.

7.	Prices shall be fixed in conformity with the results
obtained in one or two State factories, to be run for ex-
perimental purposes and for the control of prices.

8.	Importers of foreign manufactured products shall
be free to continue their business on the sole condition
that they sell the imported products to the State ware-
houses, under the same conditions of delivery as home
manufacturers who deliver the goods produced in their
factories.

In regard to sale organization, the technical experts
make the following recommendations:

1.	The State shall use the wholesale dealers' ware-
houses for its own purposes.

2.	Eetail sales must be carried out exclusively by
licensed retail dealers.

3.	The retail dealers must only sell State products
bearing the proper guarantee band at the price fixed on
the package.

4.	The remuneration of retail dealers shall be fixed
at regular intervals by a certain rate of commission on
the sale price to the consumer, such rate not to exceed
an average of 12 per cent. Bonuses within this limit of
12 per cent would encourage the most energetic retail
dealers and thus develop the turnover.

5.	Payment for manufactured products delivered to
retail dealers shall be made to the warehouse supplying
them by means of check or postal order (not in cash and
without credit) minus the commission above stated.

6.	A small number of State retail shops shall be in-
stituted in order to obtain reliable estimates and to control
the expenses of sale.386

APPENDICES

On the basis of this plan the technical experts make
the following estimate of the profit to be obtained by the

State:

Swiss francs

Cost of manufacture................... 476,160, 000

Manufacturer's profit and additional gen-
eral expenses (35 per cent of the cost

of manufacture).................... 166, 656, 000

Expenses for the warehouse service and
general expenses of the sale organiza-
tion (1 per cent of the gross re-
ceipts) ............................ 20, 906, 400

Cost of delivery to retailers (12 per cent

of the gross receipts)............... 230,876,800

Additional expenses for transport (80,000
tons X average distance of 25 kilo-
meters X 0.25 franc)................................500,000

Annuity payment in the event of the in-
demnification of one-fourth of the
present manufacturers............... 16,975,000

Total expenses................... 912,074,200

Gross receipts (according to Tables

V and VI)......................... 2,090,640,000

Net profit for State.................... 1,178,565,800

That is..........gold marks..... 856,515,000

Percentage of net profit................................56.4

The technical experts have the following observations
to make on the above table:

1. An annuity payment is provided for, which would
correspond to the amounts to be allowed for the indemni-
fication of the small factories to be closed down.APPENDICES	387

2.	The cost prices of a free industry distributed
amongst a large number of factories are higher than those
of a monopoly. Consequently the costs of manufacture
under a monopoly system are increased by 35 per cent in
order to allow the manufacturer a reasonable profit.

3.	With this organization, which leaves the factories
and retail establishments in their present form, the taxes
now collected by the German Government would no longer
have to be deducted, with the sole exception of the tax
on wholesale dealers to the amount of 6,000,000.

Under a system of sale, organized in conformity with
this scheme the technical experts put forward the results

of such a plan as under:

Gross receipts (amount expended by con-	Gold marks

sumers) ......................................................1, 523, 960, 000

Profit obtained by the State from which
must be deducted the taxes at present

collected by the Reich............................856,515,000

Customs, tax on turnover............................6, 000, 000

Net profit obtained by the State................850, 515, 000

The technical experts consider that it would be pre-

ferable to entrust the sale organization to an entirely
autonomous organization, the constitution of which might
well be based on the example of the Swedish monopoly.
On the other hand, it is their opinion that the present
fiscal organization of the German Reich should be used
for the supervision of the tax.

In conclusion, the technical experts believe that during
the first period, which would not exceed two years, the
estimate of the guaranteed net profit might be based on
the assumption that each inhabitant spends only 26 Swiss
francs per annum, which is the figure now obtaining in
Austria. Such a figure would yield a net profit of 657,-
000,000 gold marks, on the following estimate.388

APPENDICES

Swiss francs

Gross receipts 26 X 62 millions... 1, 612, 000, 000

or 657,000,000 gold marks.

To recapitulate, the guaranteed revenues for the pay-
ment of reparation which Germany might obtain by the
tobacco tax would be as follows:

A considerably larger sum can be realized from the
German duties, while decreasing the burden falling on
the German consumer. The less efficient factories will be
eliminated and substitutes will be abolished; surplus
profits of the intermediaries will be reduced, leaving them
nevertheless a reasonable margin. Without introducing
the monopoly reform, standard factories will be instituted
(one or two factories to control costs and few selling
shops) and the sales will be strictly disciplined.

The proceeds would be paid periodically by the
"Service of assigned revenues," either:

(a) In the case of the adoption of the "assiette" sug-
gested by the technical experts, on the basis of 60 per cent
of the gross revenue (as the technical experts themselves
have calculated that 40 per cent represents purchase price
of manufactured tobacco, plus cost of distribution, etc.,
the remaining 60 per cent represents an absolutely net
profit from the duty); or

Total expenditure #
Net profit.........

707, 917, 000
904, 082, 000

1924-25

1925-26

1926-27

1927-28

Gold marks
German estimate.... 498, 000, 000

do...... 657,000,000

do...... 657,000,000

do...... 856,000,000

* Expenditure shown in the table on the previous page reduced by
36-33.72 with the exception of the expropriation annuity.APPENDICES

389

(b) Otherwise, on the basis of a sum in gold marks
for every kilogram of tobacco taxed, according to the
various chief qualities of the tobacco; this sum to be fixed
by the technical experts.

2. Indirect taxes generally

The rates appear to the committee to be unduly low,
and, as prosperity grows, to be susceptible of increase
without diminishing consumption.

3. Turnover tax

It is our general opinion that this tax should at the
earliest possible moment, be somewhat reduced in favor
of other forms of taxation.

4. Taxes on motor transport

It is considered that the present total burden is too
low and that a substantial further sum might be raised
without detriment either by a tax on petrol or a supple-
mentary duty on motor cars, or by a combination of these
means.

5. Death duties

The yield from these duties is extraordinarily low
judged by almost any standard. It is not satisfactorily
accounted for by the temporary depreciation in capital
values which is due to lack of profits and trade output.
Not only is the total yield low judged by any test as to
capital values, but the actual rates of duty being imposed
are also, in the committee's judgment, inadequate. "While
not unmindful of the effect of the relation between these
duties and the capital tax in general, the committee thinks
that the position disclosed in the following table, compiled
by the German Government, indicates that there is con-390

APPENDICES

siderable room for increased taxation "under this head. It
will be observed that where the rate in Germany is nomi-
nally higher than that in other countries, it is in those
scales where the tax may be least influential in its effect
upon total yield.

Annual taxation on capital, in the committee's judg-
ment, tends to become a part of the income tax system and
to discriminate between income derived from work and
that derived from investment. In this case, therefore,
taxation of capital by annual payments is in a different
category from ordinary succession duties.

FISCAL BURDEN CONSTITUTED BY THE DEATH DUTIES IN GER-

MANY, BELGIUM, GREAT BRITAIN, AND FRANCE

[Burden expressed in percentage"				
Property left (in gold marks) *	Ger- many	Belgium	Great Britain	France
WIFE AND THREE CHILDREN				
20,000 ....................  200,000 ...................  2,000,000 .................  6,000,000 .................	1.5 2.9 5.9 7.5	2.1  2.7  3.8 4.8	3.0 5.0 15.9 22.8	3.5 6.1 11.5 14.4
BROTHER				
20,000 ....................  200,000 ..................  2,000,000 .................  6,000,000 .................	7.8 17.4 30.0 30.0	8.3 11.4 17.0 22.2	3.0  5.0 19.2 25.9	23.3  36.0  50.1  56.2
PERSON NEXT OF KIN				
20,000 ....................  200,000 ...................  2,000,000 .................  6,000,000 .................	18.2 40.6 70.0 70.0	16.7  22.8 34.8 44.5	3.0 5.0 23.5 29.8	36.8 48.3 61.0 66.5

MANY, BELGIUM, GREAT BRITAIN, AND FRANCE

*The foreign currency has been converted into gold marks on the
basis of the average rates of exchange quoted for the currency at
issue on the Berlin Stock Exchange in the month of January, 1924.
According to these quotations 1,000 gold marks were equivalent to—
55.5 pounds sterling in round numbers, or 5,000 French francs in
round numbers, or 5,550 Belgian francs in round numbers.APPENDICES

391

IV. Proposal for Control of Kevenues Assigned as

Security

It is necessary to elaborate in rather fuller detail the
recommendations which we have made in Part I of this
report for the assignment of the taxes, etc., on tobacco,
alcohol, sugar, beer and of the customs revenue as security
for payment of the sums charged annually on the German
budget.

As regards the year 1926-27, 1927-28, as already indi-
cated, the assigned revenues will play a special part in
our plan. They will not only serve as a guarantee to
creditors, but also as a means of measuring the contingent
addition to, or deduction from, the total amount of rep-
aration payments laid down in the plan. If the yield of
these revenues falls short of one milliard in 1926-27 or 1%
milliards in 1927-28, the reparation payments will be
diminished by an amount equal to 1/3 of such deficiency;
on the other hand, if they exceed those limits, there will
be an additional payment equal to 1/3 of the excess; both
deduction and addition however are limited to an amount
of 250 million in each year.

In 1928-29, and subsequent years, the amount of Ger-
many's obligation is fixed by the standard payment, plus
supplementary payment (and into the computation of the
latter, the increased consumption of these taxed articles
will enter).

The total yield of the controlled revenues will be paid
into the account of the agent for reparation payments as
from the time when the plan is put into execution.

In the first year in which there is a charge on the
budget and in all subsequent years, the amounts required
to meet the charge will be retained and the balance will
be periodically released to the German Government.392

APPENDICES

We propose that there should be one commissioner to
supervise the controlled revenues and under him a sub-
.commissioner for each of the five controlled revenues.

In order that the Reparation Commission may be in a
position to secure an officer of the greatest experience and
efficiency as chief commissioner, the area of selection
should be as wide as possible and not confined to the Allied
countries.

He should have the assistance of a consultative and
advisory committee on which each of the interested allied
countries would be represented.

The various German services of the assigned revenues
.would be obliged to deposit, through the receiving offices,
(immediately on receipt, the amount received under the
head of the revenues in question at the nearest branch
of the central bank acting as treasurer.

A.	Funds.—The separate branches should pay the
sums into the central bank to an account at the disposal
of the commissioner, who should afterwards provide for
the periodical "reversements" to the German Government
of sums in excess of the proportion of the year's peace
treaty payments accrued to date.

B.	Audit.—The commissioner would impose such
methods of independent audit as he might desire to ascer-
tain that all assigned revenues:

1.	Were properly obtained from the public, and

2.	Flowed through the control administration.

C.	Detailed responsibility for management.—He would
not be obliged to assume responsibility for detailed admin-
istration except in the case and in the manner indicated
below. It would be his duty to see at all times that the
administration was reasonably efficient and the account-
ing system honest and accurate. But since the interests ofAPPENDICES

393

the Allies are not affected so long as the revenues are suf-
ficient, with an adequate margin, to meet the annual
charges, it would not be his duty in such circumstances to
interfere with the details of control.

He would therefore not normally be obliged to insist
on the exact tariffs or the exact form of administration
which would, in his view, secure the utmost yield, and he
would not therefore be obliged (unless the need arose) to
assume the responsibility of detailed direction with the
administrative expense on staff, etc., which -that would
involve nor would he be required to have such an elaborate
and expensive accounting and calculating personnel as
would enable him to certify that every mark was accurately
accounted for (which is obviously a very different thing
from seeing that the system is honest and efficient).

If the need arose his control would become automati-
cally more active, more responsible, more difficult and, of
necessity, more expensive. For if the revenues were in
danger of being insufficient, it would be his duty to take
every possible measure to increase their productivity.
This increase in the active character of the control would
be in exact proportion to the need for it. He would thus
reform and direct administration in detail only if and so
far as necessary,

D. The technical control would consist, in the ordinary
course, of the right:

(a) to obtain all information and examine all books;

(i) to visit and inspect the factories subject to duties,
iand to ascertain that approved standards are maintained;

(c)	to send experts to report and advise and, in case of
actual necessity arising, to exercise detailed control;

(d)	to propose higher technical standards;

(e)	to require prior advice of all administrative regu-
lations.394

APPENDICES

In settling the constitution of the control body, it
should be borne in mind that it may be concerned with the
issue of bonds guaranteed by the said assigned revenues,
if it is desired to create an international bond other than
the railway one.

The German Government should be asked not to reduce
the rate of the assigned revenues without the consent of
the commissioner, which would not be given until the con-
sultative committee had had an opportunity of consider-
ing the proposal and approved it by a majority; on the
other hand, it is considered necessary that the German
Government should be encouraged, regard being had to the
rates prevailing in other countries, to effect increases in
the taxation of alcohol, beer and sugar.

The above system makes it unnecessary in relation to
the problem of security, to insist on an increase in any
particular tax, though we suggest to the German Govern-
ment that it is to their interest, especially having regard
to the rates prevailing in other countries to effect increases
in the taxation of alcohol, beer and sugar. But all inter-
ference in the German Government's tariff policy is to be
avoided.

To sum up this subject we would lay down the follow-
ing general principles:

1. The main lines on which the control should work
ought to be decided by the countries interested. These
main lines establishing the principle of a control develop-
ing automatically as required, and becoming complete con-
trol as soon as the revenues appeared to be insufficient,
should therefore be laid down in protocols signed by all
the countries whose interests are mainly involved.

2- These main lines should be elaborated into detailed
instructions by international experts (in practice of the
nationalities of the countries interested).APPENDICES

395

3.	With this safeguard, the execution of the control is
entrusted to a single impartial person (with the necessary
staff) so as to secure the rapid and consistent administra-
tive decisions required for an efficient control.

4.	His responsibility to the Reparation Commission
should not be of a day to day order, but a periodical
•report should be made by him upon the condition and
yield of the gage revenues.

5.	In the event of the revenues for a given year prov-
ing insufficient, the whole system outlined in this scheme
(working of the railways, a mortgage on industrial prop-
erty, the control of the revenues assigned as security) will
be prolonged as required for the purpose of making good
the deficit.

The committee desires to express its high appreciation
of the valuable and efficient cooperation received through-
out its task from the general secretary, Mr. Andrew
McFadyean, and to thank his assistant, Monsieur Denis,
the interpreters, and all the staff for their ungrudging
services.

Charles G. Dawes, Chairman.

Owen D. Young.

Robert M. Kindersley.

J. C. Stamp.

J. Parmentier.

Edgard Allix.

Alberto Pirelli.

Federico Flora.

E. Francqui.

Maurice Houtart.

Paris, April 9, 1924.ANNEX NO. 1 TO THE REPORT OF THE FIRST
COMMITTEE OF EXPERTS

PLAN FOR THE ORGANIZATION OF A BANK OF
ISSUE IN GERMANY

I. Name and Location

The Bank, hereinafter designated as the "New Bank,"
shall bear a new and suitable title, unless, in conformity
with paragraph (b) Section III below, the Organization
Committee shall decide to use the Reichsbank for putting
the present plan into operation. It shall be a private cor-
poration, and its charter shall be for fifty (50) years.
The new Bank shall have its principal office in Berlin and
such branches and agencies as its Managing Board shall
determine.

II. Capital

a. The Bank shall have a cash paid-up capital of four
hundred million (400,000,000) gold marks, which shall be
in registered or bearer shares of one hundred (100) marks
each. These shares shall be issued as follows:

1,000,000 shares to represent assets of the Reichsbank;
3,000,000 shares for subscription in Germany and abroad.
i. All shares shall be alike, and after the initial sub-
scriptions have been accepted, no restrictions shall be
imposed upon their purchase and sale, other than such
general restrictions of German law as shall apply to the
purchase and sale of shares of other banks.

c. Shares whether sold in Germany or abroad shall be
paid for entirely in gold, and/or foreign bills, at their cur-
rent gold values.

396APPENDICES

397

d. Subject to the preceding provision of this Section,
the shares of the new Bank shall be allotted and sold on
such terms as to prices, times of payment and other con-
ditions, as are most advantageous to the Bank.

III. Organization Committee

a.	For the purpose of taking the preliminary steps for
the Bank's corporate organization, there shall be created
a temporary committee, to be known as 4' The Organization
Committee." This Committee shall consist of two (2)
members, the President of the Reichsbank, and one (1)
person who shall have been a member of one of the Com-
mittees of Experts acquainted with the discussions which
resulted in the drafting of the plan for the Bank.

b.	The Organization Committee shall have power gen-
erally to interpret any ambiguities appearing in the plan,
provided always such interpretation shall not interfere
with the principles involved. It shall also have power if
it deems wise, to carry out this plan by the transforma-
tion of the Reichsbank, under suitable legislation, rather
than by the organization of a new corporation. It shall
frame the statutes regulating the administration of the
Bank. These statutes shall in particular include provi-
sions concerning:

1.	the form and character of the share certificates of
the Bank;

2.	the formalities to be fulfilled for the transfer and
pledging of the registered share certificates;

3.	the cancellation of share certificates lost or de-
stroyed ;

4.	the method by which the German shareholders shall
elect the German members of the General Board;

5.	the nature of the reports published by the Bank, as
well as the method and place of their publication;

6.	the nature and duties of the permanent Committees,
of the Managing Board and the officials of the Bank;398

APPENDICES

7.	the administrative Departments to be created within
the Bank;

8.	the date and place o£ the regular meetings of the
Managing Board and of the General Board;

9.	the special meetings of the Managing Board and of
the General Board.

IV. Administration and Management

The Bank shall be administered by a Managing Board,
under the chairmanship of a President, all of whom shall
be of German nationality.

V. The President of the Bank

a.	For the purpose of this memorandum only, the
Chairman of the Managing Board and of the General
Board is hereinafter called "The President"; he shall be
the managing director of the Bank. Subject to the limi-
tations imposed by law, he shall perform such duties as
are assigned to him by the Bank's statutes.

b.	The President may be elected from among the mem-
bers of the General Board, or chosen from outside the
Board. The election by the Board of a non-member as
President shall operate to vacate automatically the seat
of that German member of the General Board having a
term of two (2) years or more yet to run, whose election
was obtained by the smallest share vote, unless some other
member of the General Board, having a two (2) years9
term or more yet to run, shall resign at the time, and his
resignation be accepted by the Board. A President, elected
from outside the General Board shall, by the fact of his
election, become a member of the Board.

c.	The first President shall be the President of the
Reichsbank; his term of office shall be six months. Sub-
sequently, the President, who must be of German nation-
ality, shall be appointed by a majority vote of not less
than nine (9) members of the General Board, of whichAPPENDICES

399

majority at least six (6) votes shall be the votes of Ger-
man members; this appointment shall be countersigned by
the President of the Reich.

d. The President shall direct the Managing Board and
shall take the chair at its meetings. In case of a tie vote,
he shall have the casting vote. He shall appoint the offi-
cials of the Bank on the recommendation of the Managing
Board. He shall organize the distribution of their work
and duties in the Bank, and shall exercise disciplinary
powers over the officials and employees, these powers being
provided for in a special clause of the statutes to be
approved by the General Board.

VI. Managing Board

a.	The administration of the Bank shall be entrusted
to a Managing Board which shall be the administrative
and executive body. This Board shall be under the chair-
manship of the President. It shall adopt its decisions by
majority vote and in conformity with the regulations laid
down in the statutes and by law. In particular it shall
direct the currency, discount, and credit policy of the
Bank. It shall fix the rates of interest and shall draft all
regulations concerning the policy of the Bank.

b.	The members of the Managing Board shall be ap-
pointed by the President for a period to be fixed by the
Organization Committee, subject to the approval of the
General Board, whose decision in this connection shall be
adopted by a majority of nine (9) votes, at least six (6)
of which shall be given by the German members; these
appointments shall be countersigned by the President of
the Reich.

c.	The members of the Managing Board shall occupy
no other remunerated post, neither shall they accept any
honorary post without the previous consent of the General
Board.

d.	The salaries and pensions of the members of the400

APPENDICES

Managing Board and of the President shall be fixed by
the General Board, the salaries and pensions of the senior
staff of the Bank shall be fixed by the Managing Board
with the approval of the President, and in case of the
junior staff, by the Managing Board alone.

e. The Managing Board may, if they think fit, obtain
the assistance of a consultative body composed of German
members chosen from agriculture, commerce and industry.

VII. General Board

a.	There shall be created a General Board, consisting
of fourteen (14) members hereinafter called "the Mem-
bers of the General Board." One-half (%) of these
members shall be of foreign and the other half (%) of
German nationality.

b.	Each member of the General Board shall be chosen
for a period of three (3) years, except in the case of the
first election or appointment. In the case of the first term
of office, three (3) German members and three (3) foreign
members shall serve for a term of one (1) year; two (2)
German members and two (2) foreign members shall serve
for a term of two (2) years, and two (2) German members
and two (2) foreign members shall serve for a term of three
(3) years. At the first meeting of the General Board
chosen, the members shall decide, by lot, the term for
which each shall serve, namely, one, two, or three years.

c.	Subject to the provisions of paragraph (b) of this
section, and to the provisions of this plan that apply to all
members of the General Board, members of German na-
tionality shall be chosen in such a manner and under such
conditions as the stockholders of German nationality shall
decide, in accordance with German law. The manner and
conditions so decided upon shall be incorporated in the
statutes. The manner of selecting the first group of Ger-
man members shall be determined by the Organization
Committee as provided for in Section III of this plan. NoAPPENDICES

401

plan shall be adopted for the first selection of German
members that does not meet with the approval of the
President of the Eeichsbank.

d.	The foreign members of the first General Board
shall be appointed by the Organization Committee. They
shall be chosen with due regard to their professional qual-
ifications and financial experience. In making the ap-
pointments, the Organization Committee may consult the
principal foreign banks of issue and/or any other author-
ities in financial matters whose advice it may desire.

e.	In case of vacancy in a position of a foreign member
of the General Board, arising from death, resignation or
other cause, there shall be a new election of another person
of the same nationality to fill the vacant place. This elec-
tion shall be by the foreign members of the Board who are
in active membership at the time this election is held.
Unanimity less one vote shall be necessary for an election.
The new member shall always be chosen from among the
nationals of the country of the member whose vacancy he
is to fill. Before electing any foreign members of the Board
the Board shall consult, with reference to said election, the
Central Bank of Issue of the country whose national is
to be chosen and/or any other financial authorities of
that country whom it may desire to consult.

/. The foreign members shall be chosen, one from each
of the following nationalities, British, French, Italian,
Belgian, American, Dutch, and Swiss.

g.	On the unanimous vote of the General Board, the
number of German members may be increased.

h.	No Government official, or other person receiving
(compensation from the German Government, or from any
foreign Government shall become one of the General Board.

i.	Except as otherwise provided for by the Bank's
statutes, decisions of the Board shall be by a majority vote
of the ten (10) members, or by a simple majority vote if
the President and the Commissioner are included in the402

APPENDICES

majority. Should a member not be able to attend a meet-
ing of the Board, it will always be open to him to empower
one of his colleagues, by registered letter or by telegram,
to vote for him and on his behalf.

j. At each of its meetings, and at least once every
month, the General Board shall examine the reports sub-
mitted to it by the President and the Commissioner. It
shall adopt decisions on all the proposals made to it by
the President and the Commissioner, provided that these
decisions do not encroach upon the rights reserved to the
President and the Managing Board as specified in Sec-
tions V and VI above.

k. The metal reserve of the Bank and the office for the
printing of the notes shall be in Germany, but the General
Board may, by a three-quarters (%) majority vote, decide
that either or both be transferred abroad to a neutral
country.

VIII. The Commissioner

а.	The Commissioner, who shall be a foreigner, shall
be elected by a majority vote of not less than nine (9)
members of the General Board, of which majority at least
six (6) votes shall be those of foreign members. The
Commissioner's term of office shall be fixed by the Organ-
ization Committee.

б.	The Commissioner may be elected from among the
members of the Board of foreign nationality, or may be
chosen from outside the Board, from citizens of any one of
the foreign countries represented on the Board. The elec-
tion by the Board of a non-member to the position of
Commissioner shall operate to vacate automatically, the
position of the citizen of the country of which the Com-
missioner is a citizen. A Commissioner elected from
outside the Board shall, by the fact of his election, become
a member of the Board.

c. If, at the first election, the person chosen as Com-APPENDICES

403

missioner should be a member whose term, as decided by
lot, in accordance with paragraph b of Section VII of this
scheme, should only be one year, the term of this member
shall automatically be increased to two (2) years. In
this case, one of the two foreign members who have been
assigned to two (2) years' term, shall have his term re-
duced to one (1) year. The decision as to which of the
two foreign members shall have his term thus reduced
from two (2) years to one (1) shall be made by lot.

d.	It shall be an essential duty of the Commissioner to
enforce the provisions of the law and the statutory regula-
tions relative to the issue of notes and the maintenance of
the Bank's reserves which guarantee that issue. To this
effect, the Commissioner shall have the right to have fur-
nished to him all statistics and documents which he may
deem useful for the accomplishment of his task, and when-
ever it appears to him necessary, he may make any
investigations either in person or through his assistants.
He shall be entitled to be present at the meetings of the
Managing Board in Berlin.

e.	The office entrusted with the custody of the reserve
of notes shall only deliver notes when authorized by the
Commissioner so to do.

/. The Commissioner shall be bound to the greatest
secrecy in regard to all information he may obtain on the
commercial operations of the Bank.

IX. Loans, Discounts and Investments

a.	The Bank shall make no loans or discounts having
a maturity at the time the advance is made, in excess of
three (3) months.

b.	The Bank shall discount no notes or bills bearing
less than three (3) names of known solvency, except that
for one name there may be substituted collateral in the
form of warrants relating to bona-fide commercial trans-
actions or to goods. Such definition shall not be taken as404

APPENDICES

including any notes issued or bills drawn in financial
transactions or secured by stocks, bonds or other invest-
ment securities but may include Treasury Bills of the
German Government.

c.	The Bank may, with the special authorization of the
General Board voting in the conditions laid down in para-
graph (i) of Section VII, accept the long term bonds of
the Reich as collateral for loans with maturities not ex-
ceeding three (3) months, if the loans bear two (2)
responsible names, in addition to the collateral, one of
these names being the name of a commercial bank doing
business in Germany. Provided: that loans collaterally
secured by the long term securities of the Reich shall never
exceed the amount of the Bank's net paid-in capital and
surplus, except by the unanimous vote of all the members
of the General Board save one.

d.	The Bank shall make no loans nor advances on the
security of real estate, mining property, oil property or
stock shares; nor on the security of Government obliga-
tions, except as otherwise provided for in this plan. The
Bank may, however, take mortgages or titles to such prop-
erty, stock shares and Government debt bonds as addi-
tional security for loans previously made in good faith in
accordance with provisions herein made.

e.	Subject to the provisions contained in Article a, the
Bank shall make no loans, discounts, or other advances
directly or indirectly, to the German Reich, any German
State, Communes or other German Governmental units, or
to any foreign Government or Governmental units, nor
shall it invest its funds in the bonds, debentures or other
debt of any such Government unit, except as otherwise
specifically authorized by its constitutive law. The de-
posit accounts and current accounts in the Bank, of the
German Reich, the German States, the German Communes
or other German Governmental units, shall never show a
debit balance.APPENDICES

405

/. The Bank shall not accept time bills of exchange
drawn against it.

g.	The Bank may not buy or sell merchandise, produce,
real estate or stock shares of other corporations for its
own account.

h.	The restrictions contained in the preceding para-
graph shall not operate to prevent the Bank from buying
such real estate, equipment and supplies as it needs for its
own banking business, or from selling such property as
may come into its possession in connection with the guar-
antee of statutory loans. Moreover, the Bank shall not be
prevented, by the above restrictions, from buying in prop-
erty where it needs to do so, in order to protect itself in
the collection of statutory loans previously made in good
faith and not paid at maturity.

X. Service of the Reich's Treasury

a. The Managing Board is authorized to make advances
from time to time to the Reich, but the amount outstand-
ing at any one time shall never exceed 100 million marks.
Such advances shall, in no case, be for a longer period
than three months and in no case shall the Reich be in-
debted to the Bank at the end of the Bank's financial
year, which shall coincide with that of the Reich. In con-
sideration of these facilities, the Reich and its Treasury
shall conduct all their domestic and foreign banking busi-
ness through the medium of the Bank.

~b. The Managing Board shall also be empowered to
grant advances to the Post Office and the Railways for
reasonable amounts on condition that these organizations
shall entrust the Bank, except in so far as the Bank might
modify this condition, with the whole of their Treasury
Service; but the total amount of loans outstanding to the
Post Office and the Railways together shall never exceed
200 million gold marks.406

APPENDICES

XI. Service of the Separation Treasury

The Bank will receive on deposit, sums paid for repara-
tions, it being understood that the relationship between it
and the Committee entrusted with Reparation receipts
shall be solely those of banker and customer.

This Treasury Service will proceed in conformity with
the provisions of Annex. . . to the General Report. The
maximum amount to be held on deposit for reparation ac-
count shall at no time exceed two (2) milliards of marks in
conformity with Section X (a) of this Annex, except as
otherwise provided therein.

XII. Bank Notes

a.	The Bank shall have the exclusive right of issuing
and circulating bank-notes in Germany during the period
of its charter.

b.	The German Government may not itself issue any
kind of paper money for circulation in Germany, during
the period of the Bank's charter, nor shall it permit any
German State, Commune, City, other governmental unit,
corporation or private individual, to issue or circulate
paper money in Germany during the period of the Bank's
charter, with the exception of the Banks of Baden, Ba-
varia, Saxony and Wurtemberg, which shall retain their
charter of issue for sums not to exceed their present legal
quota. The notes of the Rentenbank shall be gradually
withdrawn from circulation tinder the conditions pre-
scribed in Section XV and the Appendix hereto.

c.	During the period of the Bank's charter, the Reich
shall not issue any coins for circulation in Germany (ex-
cept gold coins, containing approximately their full value
in gold metal) of a larger denomination than five (5)
marks; and shall not issue coins of five (5) marks or less,
in excess of twenty (20) marks per capita of her popula-APPENDICES

407

tion. All coins, other than gold coins, issued by the Gov-
ernment, shall be issued through the Bank. They shall be
received by the Government in unlimited quantity at their
nominal value, in payment of all taxes and other govern-
ment dues.

d.	The bank may issue notes for circulation, against
gold coin or bullion, statutory discounts as defined in Sec-
tion IX, demand credits in foreign banks and foreign com-
mercial trade bills, with maturities of three (3) months or
less, taken at their present gold values at current rate of
exchange.

e.	The notes of the Bank, as well as metallic currency,
shall be receivable in unlimited quantities for all taxes and
other government dues in Germany. The notes shall be
unlimited legal tender, unless otherwise specifically pro-
vided by contract, for all debts, public and private.

/. The notes of the Bank shall be accepted at their
nominal value for all payments made to the Bank, both at
the head office of the Bank in Berlin, and at all branches
of the Bank located in Germany.

g. Notes shall be payable to bearer at the head office
of the Bank in Berlin on presentation. The notes shall
also be payable on presentation at the other offices and
branches of the Bank, to the extent permitted by their cash
reserves and monetary requirements. Payments may be
made in any of the following forms, at the option of the
Bank:

1.	German gold coins of the present legal standard of

weight and fineness, at par;

2.	gold bars, in denominations of not less than one (1)

thousand gold marks, and not more than thirty-
five (35) thousand gold marks, at their pure gold
equivalent in German gold coin of the present
legal standard of weight and fineness;

3.	demand drafts, payable in gold or in foreign cur-408

APPENDICES

reneies at current market gold values, and drawn
on funds located abroad in solvent banks to be
specified by the Bank's statutes provided that
the premia above the gold pars (or gold values, in
the case of currencies not on a gold basis) charged
by the Bank for such drafts shall never exceed
the amount necessary to cover shipping expenses,
including interest for the time of transit, on gold
bars shipped in substantial quantities from Ber-
lin to the foreign financial centre on which the
draft is drawn.

The Committee is of opinion, however, that, at the in-
ception of the Bank, conditions will be unfavorable for
the application of the above rule of convertibility in this
event, this rule may therefore be temporarily modified by
the affirmative vote of every member but one of each of
the following groups:

1.	The Organization Committee.

2.	The Managing Board.

3.	The General Board.

In case of such modification, the Bank shall make all
possible efforts and use all the means at its disposal in
order to maintain the rate of exchange of the mark at as
near gold parity as possible. Furthermore, in case of mod-
ification of the above mentioned rule of convertibility of
notes, a return to convertibility will be permanently estab-
lished as soon as possible, by a simple majority vote of the
General Board, and of the Managing Board.

h. While the Bank shall not make reimbursement for
notes that have been lost or completely destroyed, it shall
replace worn or torn notes, on application, by notes in
good condition, at their nominal value; provided that such
replacement shall not be required in the case of any note
unless the part of the note presented shall constitute more
than one-half of the note.APPENDICES

409

i. The notes of the Bank shall bear the facsimile sig-
nature of the President and the seal of the Commissioner.

XIII. Reserves

a. The Bank shall always carry a normal reserve of at
least thirty-three and one-third (33 1-3)% of the total
amount of its notes outstanding, subject to the following
qualification:

In exceptional circumstances, the reserve against notes
may be reserved below thirty-three and one-third
(33 1-3)%. on the proposal of the Managing Board, by a
decision of the General Board; but said decision of the
General Board shall require the affirmative vote of every
member of the Board save one. In case of such a reduction
in the reserve, the Bank shall incur the following penal-
ties, the proceeds of which it shall pay to the Reich; when-
ever the reserve against notes shall be less than thirty-three
and one-third (33 1-3) % of the notes outstanding and shall
so continue for more than one week the Bank shall pay the
following deficiency tax upon the amount by which the said
reserve is less than thirty-three and one-third (33 1-3)%
of the notes outstanding:

When the reserve is below thirty-three and one-third
(33 1-3)% and not below thirty (30)% a tax of three
(3)% per annum;

When the reserve is below thirty (30)% and not below
twenty-seven (27)%, a tax of five (5)% per annum;

When the reserve is below twenty-seven (27)% and
not below twenty-five (25)%, a tax of eight (8)% per
annum;

When the reserve is below twenty-five (25)% a tax of
eight (8) % per annum plus one (1) % per annum for each
one (1)% the per cent tax figure is below twenty-five
(25)%.410

APPENDICES

b.	No discount rate or rediscount rate shall be below
five (5)% per annum when the reserve mentioned in the
preceding paragraph shall have continuously, for one week
or more, been below thirty-three and one-third (33 1-3)%
of the bank note liabilities there mentioned.

c.	"Whenever a deficiency tax is payable, a percentage
equal to at least one-third (1-3) of the percentage rate of
the tax payable shall be added to the Bank's discount rate
and rediscount rate, in addition to any increase in the said
rates required to comply with the provisions of the preced-
ing paragraph.

d.	The above-mentioned legal reserve may be kept in
gold bars or gold coin, at any office of the Bank, and/or in
the form of demand deposits, made payable in gold or its
equivalent, at the rates at which the deposits were made,
in banks of high standing located in foreign financial
centres.

e.	The Bank shall also hold a special reserve of gold
and gold deposits, of the same character required to be
held against its notes in circulation, to the amount of
twelve (12)% of its deposit liabilities. Whenever the
above reserve is continuously, for one week or more, below
said twelve (12)%, the Bank shall pay a deficiency tax of
four (4) % per annum on the amount by which the reserve
is less than twelve (12)% and not less than ten (10)%; a
tax of eight (8) % per annum on the amount by which it is
less than ten (10)% and not less than eight (8)%; and a
tax of ten (10)% per annum in addition to said eight
(8)% for each one (1)% by which the percentage figure
is below eight (8)%.

/. In order to assure adequate liquidity in the assets
securing the Bank's deposit liabilities, the Bank shall at all
times hold in addition to its afore-mentioned gold reserve
of twelve (12)% demand deposits in Germany and abroad,
cheques on other banks, and statutory notes and bills of aAPPENDICES

411

commercial character, payable at call or on time with ma-
turities of less than thirty (30) days to the amount of not
less than thirty (30)% of the Bank's total deposit liabil-
ities.

g.	The above-mentioned reserves and the liquid assets
above described shall be segregated for the service of the
Bank's deposits.

XIV. Profits

The net profits of the Bank, at the end of each finan-
cial period, shall be employed as follows:

a. Twenty (20)% shall be transferred to surplus or re-
serve until the Bank's actual net paid-up capital and sur-
plus shall amount to twelve (12)% of its average liabilities
on circulating notes, on the fifteenth day of the six pre-
ceding months. If the ratio shall again fall below this
twelve (12)%, the above-mentioned allotment of twenty
(20)% of the net profits to surplus or reserve shall con-
tinue. When and so long as the ratio of the Bank's net
capital and surplus or reserve to its average liabilities on
circulating notes, as above computed, shall exceed twelve
(12)%, the Bank may use its discretion as to the percent-
age of its net profits it will transfer to surplus or reserve
provided that the percentage thus transferred shall nev<*r
exceed twenty (20)%.

h.	A sum shall be assigned to the payment of dividends
sufficient to pay eight (8)% per annum on the Bank's
shares.

c. The balance of the net profits shall be divided as
follows:

1.	One-half (%) to the shareholders, in dividends or to

a special fund to be used for the maintenance of a
uniform dividend policy.

2.	One-half (%) to the Government, as a franchise tax412

APPENDICES

for the Bank's exclusive privilege of issuing cir-
culating bank-notes.

d.	The dividends of the Bank and other income derived
from its capital shares owned by foreigners residing
abroad, shall be exempt from all German income taxes,
present and future; provided that this exemption shall
not apply to general taxes imposed in Germany upon the
real property of the Banks in general. The Bank, how-
ever, in consideration of the percentage of profits accru-
ing to the Government "under paragraph c 2, shall not be
subject to any corporation tax or business tax levied in
Germany by the Reich, the States or any other govern-
mental unit.

e.	Such privileges not inconsistent with this plan, now
enjoyed by the Reichsbank, as may be specified by the Or-
ganization Committee as desirable and advantageous to the
new Bank shall be given to it.

XV. Liquidation of the Rentenbank

The Rentenmarks shall gradually be withdrawn from
circulation by the Bank in accordance with the provisions
contained in the Appendix attached.

XVI. Dollar-schatzanweisungen
(treasury bills in dollars)

a. The German Government shall abandon all its rights
to the proceeds from the liquidation of the Reichsbank
(unless the present plan is put into execution by means of
the transformation of the Reichsbank), in return for which
the latter will give the Government an undertaking to as-
sume responsibility for the repayment of the said bills not
in excess of 210 million gold marks, under conditions to be
settled by the Reichsbank with the holders q£ these bills.APPENDICES

413

6. At the same time, in order to guarantee the good
faith of this operation, that is to say, in order to guarantee
the Reichsbank against any loss resulting from this opera-
tion, the German Government shall hand over to the
Eeichsbank gold bills for an amount equal to and falling
due at the same date as the dollar bills in circulation. As
soon as the liquidation of these dollar bills has been com-
pleted, the Reichsbank will return to the German Govern-
ment the portion (if any) of the bills which it has re-
ceived, and which has not been employed in ensuring the
liquidation.

XVII. The Reichsbank

a.	If the present plan is put into execution by means
of the transformation of the Reichsbank, the latter shall
redeem the outstanding circulating notes in its new notes,
at the rate of one billion (1,000,000,000,000) marks to one
(1) gold mark. The old notes shall be immediately with-
drawn from circulation and cancelled.

b.	The Reichsbank, in case it is continued, shall meet
the same reserve requirements against the outstanding
notes which it undertakes to exchange, in accordance with
the provisions of paragraph a of this section, as are re-
quired to be held against bank notes outstanding by Sec-
tion XIII of this plan.

c.	If the Reichsbank is to be liquidated, this operation
will be carried out by the new Bank which would be then
set up, and which would have to assume responsibility for,
or itself carry out, the exchanges provided for in para-
graphs a and b above.

XVIII. Penalties

A penalty in the form of fine or imprisonment or both
shall be provided for the punishment of any person or
persons wilfully giving incorrect information, directly or414

APPENDICES

indirectly, to the President, the General Board, the Com-
missioner or his assistants.

XIX. Measures to be Taken by the German Govern-
ment For the Execution of the Plan

All the undertakings which the German Government
will have to enter into in connection with the Bank, for
the execution of this plan, including the assignment for
the withdrawal of the rentenmark, of funds, to be re-
ceived from the rentenbank's mortgages, shall be embodied
in a special contract between the Bank and the German
Government. This contract as well as the Statutes of the
Bank, shall be duly approved by the German Parliament.

appendix to annex i
the liquidation of the rentenbank

(Appendix provided for in Section XY of the plan for
the bank.)

The Deutsche rentenbank was founded, and its opera-
tions regulated, by the decree of October 15, 1923.

The capital and the initial reserve were fixed by this
decree at 3,200,000,000 rentenmarks, to be furnished half
by agriculture and half by industry and commerce,
including the banks.

The rentenbank holds a general mortgage, expressed
in gold marks, on industrial, agricultural, and commercial
property, amounting to 4 per cent of the value of this
property as assessed for the Wehrbeitraggesetz.*

These mortgages bear 6 per cent interest for the bene-
fit of the rentenbank.

The rentenbank is authorized to issue bank notes ex-
pressed in rentenmarks up to the amount of the capital
and initial reserve (3,200,000,000 gold marks).

* The amount of this mortgage already amounts to 3,700,000,000
gold marks.APPENDICES

415

The rentenbank must open credits to the Reich during
the two years following its foundation up to the amount
of 1,200,000,000 rentenmarks, of which 900,000,000 will
bear 6 per cent interest and 300,000,000 will bear no
interest. The rentenbank is authorized moreover to open
credits to the Reichsbank and to the private banks up to
1,200,000,000 rentenmarks, in order to finance private
economy.

Up to the present the rentenbank has placed in circula-
tion:

1.	Seven hundred million, which have been delivered
to the Reichsbank in order to provide for the credits to
be granted by the latter to German manufacturers and
merchants. This sum is therefore guaranteed by drafts
or credits redeemable in rentenmarks. If and when the
rentenbank is liquidated, no attention need be paid to
them.

2.	One milliard one hundred million rentenmarks
which have been advanced to the Reich without any secur-
ity but the signature of the latter, 900,000,000 of which
bear 6 per cent interest per annum and 200,000,000 bear
no interest.

In so far as concerns this latter sum of 1,100,000,000
the new bank (or the Reichsbank, if it is maintained)
would assume the obligation vis-a-vis the holders of these
notes to redeem them gradually within 10 years. To this
effect the rentenbank would undertake to remit to the
bank, as fast as they came in, all sums received from its
debtors, whether from the property holders affected by
the rentenbank mortgage or from the State, up to the sum
of 1,100,000,000.

This undertaking of the rentenbank vis-a-vis the bank
would be covered by all the mortgages and guarantees
which it holds, as well as by the guarantee of the German
Government itself.416

APPENDICES

It should, moreover, be understood that all profits
accruing to the Eeich in virtue of its participation in the
bank would be assigned by priority to the amortization of
its debt of 1,100,000,000.

As soon as the payments by the rentenbank or by the
Reich itself, as stated above, reach the figure of 1,100,-
000,000 the German Government and the rentenbank will
be released from all liability vis-a-vis the bank.ANNEX NO. 2 TO THE REPORT OF THE FIRST
COMMITTEE OF EXPERTS

BASIS OF COMPARISON

1.	In addition to the standard contribution referred to
in paragraph VIII c, there shall be paid for 1929-30 and
following years a supplementary sum according to the
growth in prosperity of Germany. This increase in pros-
perity for any year shall be measured by the extent to
which the index, as defined below, on the statistics of the
completed preceding year, exceeds the average statistics
of the base years.

COMPONENTS OF THE INDEX

2.	For the purpose of computing the index, the follow-
ing statistics shall be employed:

а.	the total of German exports and imports taken to-
gether ;

б.	the total of budget receipts and expenditure taken
together, including those of the States of Prussia, Saxony
and Bavaria (after deducting from both sides the amount
of the Peace Treaty payments included in the year);

c.	railroad traffic as measured by the statistics of the
weight carried;

d.	the total money value of the consumption of sugar,
tobacco, beer and alcohol, within Germany (measured by
the prices actually paid by the consumer);

e.	total population of Germany (computed from the
last available census data, vital statistics and emigration
records);

417418

APPENDICES

/. the consumption of coal (and lignite reduced to coal
equivalent) per capita.

the index: base

3.	In computing the base, the average statistics for the
three years 1927, 1928 and 1929 shall be taken for b budget
receipts and expenditure, for e population and for / coal
consumption per capita, and for the six years 1912 and
1913, 1926, 1927, 1928 and 1929 for the other categories
(after appropriate adjustments for the differences in
population and the altered gold values to make the three
earlier years comparable with the three later years in this
respect). The percentage change for each of these six
groups, compared with the base, shall be separately com-
puted and an arithmetical average of the six percentage
results taken as the index.

payment to which the index is applied

4.	The index percentage shall be applied to the amount
of the standard payment, viz. 2,500 millions, to give the
supplement for the year, except that for the five years
1929-30 to 1933-34 it shall apply to 1,250 millions, or one
half of the standard payment only.

minute adjustments ignored

5.	The supplementary payment is to be reckoned only
for each completed half per cent of the index, i. e. an
index average of 11.35 per cent, would be reckoned as 11
per cent.

computation of supplement

6.	For the year 1929-30, the computation of the sup-
plement shall be made after the end of that year by com-
paring • the statistics of 1929 itself with the index base.APPENDICES

419

DEFICIENCIES

7.	In the event of the index in any year producing, as
the supplement, a minus quantity, the basis payment
should continue to be made, but subsequent supplementary
payments shall not accrue due until allowance has been
made therefrom for such deficiency or 44minus'' payment
of previous years.

DIFFICULTIES IN APPLICATION

8.	Any disputed points upon the application of the sta-
tistics of this index shall be referred to the Finance Sec-
tion of the League of Nations for arbitration.

CHANGES IN THE VALUE OF GOLD

9.	The German Government and the Reparation Com-
mission should each have the right in any future year, in
case of a claim that the general purchasing power of gold
as compared with 1928 has altered by not less than 10 per
cent, to ask for a revision on the sole and single ground of
such altered gold value. The alteration to be made may
apply both to the standard contribution and the supple-
mentary payment. Failing mutual agreement, a decision
should be given by an arbitral committee appointed by the
League of Nations. After decision, the altered basis should
stand for each succeeding year until a claim be made by
either party that there has again been a change, since the
year to which the alteration applied, of not less than 10
per cent.

The alterations under this paragraph should be made
by reference to such generally approved index numbers of
prices (German or non-German), singly or in combination
as the arbitration may decide.ANNEX NO. 3 TO THE REPORT OF THE FIRST
COMMITTEE OF EXPERTS

NOTE BY THE FIRST COMMITTEE OF EXPERTS

Of the assets and revenues of the German Reich and its
constituent States subject to the application of Article 248
of the Peace Treaty, the German railway system is unde-
niably the most important and also that which can be the
most easily utilized for the purpose of reparation.

The German railway system comprises about 53,000
kilometres of lines, and the rolling-stock will very shortly
amount to:

Locomotive engines (excluding electric and motor

engines) ................................ 30,850

Passenger vehicles ............................ 69,253

Wagons ..................................... 748,753

A considerable portion of this rolling-stock is of recent
construction. Two-thirds of the whole (18,000 locomotives
and 500,000 passenger vehicles and wagons) were brought
into service in the last ten years. The rolling-stock at
present possessed by the German railway system is very
superior both in quality and quantity to that which was in
use before the war.

Speaking generally, it may be said that the equipment
of the German railways is modern and fully up to the level
of the latest improvements in railway technique.

The capital cost of the system amounts to not less than
26 milliard gold marks.

420APPENDICES

421

The Experts called in the services of eminent railway
specialists, and requested them to make a study of the Ger-
man railways; their report is attached.

GENERAL REPORT ON THE GERMAN RAILWAYS
MADE TO THE FIRST EXPERT COMMITTEE

BY SIR WILLIAM AC WORTH AND M. LEVERVE

26th March 1924.

In our earlier Reports we described the situation of the
German railways and replied to various questions asked by
the Committee, especially as to the amount of net revenue
which we considered they could yield for reparation pur-
poses. We have now, as requested by the Committee,
brought together in a single document the essential por-
tions of these reports together with our own conclusions.

We desire to thank the German Minister of Railways
and his staff for the manner in which they have assisted
our enquiry in Berlin with information both verbal and
documentary. • In the short time at our disposal it has
naturally not been possible for us to push our investiga-
tions very far, but we trust that the Report which we now
present is adequate for the purposes of the Committee, and
we think its substantial accuracy may be relied on.

CAPITAL INVESTED IN THE GERMAN RAILWAYS

In a preliminary report we stated that the capital value
of the German railways might safely be taken at not less
than 20 milliard gold marks. An official publication shows
that the debt of the several States specifically entered as
railway debt, less that portion of it applicable to the ceded
territories, amounted in 1914 to 17.93 milliard gold marks.
In March, 1920, at which date the railways were trans-
ferred from the ownership of the several States to that of
the German Reich, the invested capital was reckoned as422

APPENDICES

25-28 milliard gold marks. This large increase is explained
by the fact that at the date of the transfer.:

a.	the value of the railways of the separate States was
written up to conform to the real amount of capital that
had been invested in them, much of which had never been
or had ceased to be represented by railway debt:

b.	there was added to the old capital the value of the
additions made during the war. Between March, 1920, and
March, 1923, the capital invested was further increased to
25.86 milliard g. m. The expenditure for the current year
and that which will still need to be incurred in payment
for commitments already entered into will put the final
figure well over 26 milliard g. m.

The above figures represent capital invested, which is
sometimes a very different thing from capital value. But
in this case the capital value of the German railway system
which comprises 53,000 kilometres at 500,000 gold marks
per kilometre may be taken to be fully equal to the capital
invested. Now a large part of the system is double
tracked; the lines, stations, yards and buildings have been
constructed to a high standard, and they are very amply
equipped with up-to-date rolling stock. A comparison
with the capital cost per kilometre of the railways of other
important countries, taking account of all the factors on
both sides, gives good grounds for saying that the German
figure of investment is by no means an excessive represen-
tation of actual cost.

NET REVENUE ATTAINABLE

We think that a net annual revenue of one milliard g.
m. per annum can reasonably be expected from the Ger-
man railways. This is very slightly more than the net
revenue earned before the war; but it was then earned
very easily. No attempt was made to maximize netAPPENDICES

423

revenue, which was much more than sufficient to meet the
interest on the railway debt.

On the one hand, the tariffs were kept low; especially
for passengers. The guiding principle was, as has been
recently expressed in a brochure published by Dr. Sarter,
whose statement, as he is a highly placed official in the
Transport Ministry, may be taken as authoritative. 4 4 The
State Railways ought primarily to have regard to the pro-
gressive development of the economic life of the country
and to treat the attainment of net revenue as only of sec-
ondary importance.9 9

On the other hand, the operating expenses were unduly
high; the staff was unnecessarily large; and magnificent
stations and enormous shunting yards were worked at
great expense. Moreover, as is shown by the figures which
we have given above, the working expenses included year
by year large sums for improvements and additions which
might properly have been charged to capital.

It may be thought—seeing that for some years past the
gross receipts of the German railways have not covered
their expenses, and that recently the expenditure was sev-
eral times as great as the receipts, while even now the earn-
ings are only equal to the expenditure—that this estimate
of ours is unduly sanguine.

But it is to be remembered that since the war almost
every country has gone through a similar experience.
Even in the United States, where there was no currency
depreciation, the net income of the railways in 1920 was
almost negligible; whereas in England, where currency de-
preciation is quite small, the receipts in 1921 fell short of
the expenses. But in both countries the situation has now
completely changed, and if in other countries the railways
have still not regained financial equilibrium, experience
sufficiently shows that this phase is only temporary. And
Germany has one special circumstance of the first im-424

APPENDICES

portance in her favour. On the railways of England and
America, the wages of the railway staff are roughly double
what they were before the war. No such advance has
taken place in Germany. On the contrary, the average
wage is at present, we are informed, only 75% of the pre-
war wage. It is proposed in the current year to increase
this percentage to 93% of the pre-war average. But there
is no prospect of any such increase above the pre-war
standard as has taken place in the two countries men-
tioned. And this for two reasons: the cost of living has not
increased in Germany, as it has here, and, as German
wages in other occupations have not risen, railway wages
do not compare unfavorably.

Naturally we do not suggest that a milliard of net rev-
enue is attainable at the outset. But we think a substan-
tial sum can be obtained very shortly, and that the full
amount should be reached within a period of three years.
It should be arrived at in the manner following:

During the war there was imposed in Germany, as in
other countries, a transport tax. This tax still continues
to be levied. It is included in the rates charged to the
public but is paid over by the railways direct to the Fi-
nance Ministry and forms therefore no portion of the
railway revenue. It is a tax on the gross receipts, and is
fixed at 7 % on all receipts from freight traffic other than
coal, and at 10% to 16%, according to class, on passenger
traffic. On the average it amounts to 6% of the total
gross receipts. It is estimated to produce in the year 1924,
227 million gold marks. If in future years the traffic
increases, or if the same volume of traffic is charged at a
higher rate, naturally the proceeds of the tax will increase
proportionately. It seems safe to assume that its yield
will not fall below the present figure. Moreover, as it is
levied on the gross and not on the net income, it is inde-
pendent of any variations in the cost of operation. If, asAPPENDICES

425

we recommend, the German railways in future are re-
quired to pay over the proceeds of this tax to the Repara-
tion Commission, the Commission will have from the outset
« safe and important source of revenue at their disposal.

There remains a sum of 800 million gold marks in
round figures to be obtained, and it can, in our judgment,
be obtained as net profit on the railways, on condition
that the tariffs are fixed at a reasonable level, that the
number of employees is reduced to a reasonable figure,
and that in all other matters curtailment of expenses is
secured by economical operation on business lines.

Before the war the German railways spent 70 marks
for every 100 marks which they earned. In technical rail-
way language the "operating ratio" was 70%. This was
an unusually high ratio, especially having regard to the
fact that the railways paid no taxes. It was a goo^ deal
higher than the English ratio, much higher than the ratio
in France. But in every country there has been since the
war, a marked increase in the ratio, and we do not think
that under post-war conditions the German railways can be
expected to operate at a ratio so low as 70%. Not only
have they now to bear the transport tax, but, though a
great rise in wages—the main cause of the rise of the
operating ratio in other countries—is not to be expected
in Germany, the increased cost of materials, coal and steel
particularly, seems likely to be permanent. We think how-
ever that an operating ratio of 80% ought to be attain-
able. We base this opinion in the first place on our
investigation of German conditions, and especially on two
facts:

(1) that new rolling stock has been acquired in the last
few years in such large measure that the need of repairs
and renewals will be exceptionally small for some years
to come, and426

APPENDICES

(2) that the recent very large expenditure on fitting
the freight wagons with continuous brakes should result in
important operating economies.

In the second place, we think our knowledge of what
has happened and is happening in other comparable coun-
tries justifies us in asserting in broad terms that, given
efficient and economical management, there is no apparent
reason why the operating ratio should not be brought back
in a short time to 80% in Germany as it has already been
brought back elsewhere.

In England and America, as we have said, the wages
of the staff have doubled, but the tariffs are only roughly
50% above the pre-war tariffs. In the result, the operat-
ing ratio has become much higher than before and stands
at present at about 80%. But the remaining 20%, calcu-
lated on a greatly increased gross revenue, suffices to give
a return of over 4% on the railway capital.

Now in Germany a gross revenue of 4,000 million g. m.
per annum is in sight at the present moment. With a
gross revenue of 4,000 million g. m. per annum and an
operating ratio of 80%, the net revenue would be 800 mil-
lion g. m. And this sum added to the 227 million g. m. of
the transport tax yields a total of over one milliard g. m.

And the whole of this sum can be made available for
Reparation. The fall of the mark has wiped out the pre-
war railway debt; the plan before the Committee will, we
understand, relieve the railways under the new manage-
ment of responsibility for the debts recently incurred; and
capital has been so lavishly spent in the last few years that
there can be no justification for further expenditure for
some years to come. In future years we assume that,
under commercial management, new capital will not be
spent, unless with the assurance that the resulting profits
or economies will at least suffice to meet the interest.APPENDICES

427

We shall revert to the matter of receipts and expendi-
ture when we come to discuss the budget estimate for the
year commencing April, 1924.

Meanwhile it may be useful to approach the subject
from another point of view.

One milliard is less than 4% on the railway capital of
26 milliards. If we deduct the transport tax, which cer-
tainly does not exceed in amount the taxation levied on
railways in other countries, the German railways are only
required to earn a fraction over 3% on their capital. And
as already stated, we have no reason to think that the Ger-
man railways are over-capitalized. 3% can hardly be re-
garded as an excessive rate of interest.

In England the Rates Tribunal is required by Statute
to permit the railways, provided that their management is
efficient and economical, to charge rates adequate to pro-
duce net income of roundly one milliard g. m. on a capital
somewhat less than that of the German railways. In
America, the Interstate Commerce Commission, also acting
under statutory authority, has decided that 5%% is a
reasonable return on railway capital, and has authorized
rates regarded as sufficient to produce this return.

If the German railways are required to pay very little
more than 3% for reparations, they ought, under efficient
and economical commercial management, to earn a sub-
stantial surplus over and above, which can be applied in
relief of the general taxation of the country. At the same
time, it should be understood that the profits on railways,
like those of other commercial undertakings, vary from
year to year. There are good times and bad times. The
milliard w^hieh we have assumed as a reasonable return
must be regarded as an average one year with another.

As we have already said the full net revenue will not
be attained from the outset. A period of some years will
probably need to elapse. For the German traffic has been428,

APPENDICES

seriously affected by the occupation of the Rhine-Ruhr
railways.

Time will be needed after the railways have been re-
organized as a united system to bring the new system into
work and to re-establish completely the old traffic. And
this reorganization will mean expenditure. Further, the
necessary reform of the management will take time to
carry out and will not produce its full effect at once.

For all these reasons and naturally without committing
ourselves to mathematical accuracy we think it reasonable
to estimate that the net revenue apart from the transport
tax, and after providing for building up of an adequate
reserve, will increase as follows:

1st year...............

2nd year..............

3rd and 4th years.......

5th and subsequent years

......400 million gold marks

......550 million gold marks

700 to 750 million gold marks
...... 800 million gold marks

MEASURES TO OBTAIN RESULTS

It is evident in the first place, that the railways in com-
mon with every other German undertaking, can only give
satisfactory results if the currency is stabilized and politi-
cal and social tranquillity prevails.

As for the measures to be taken to obtain the results
indicated above, we may repeat: the railways must be
worked as a commercial enterprise, that is to say, with the
determination on the one hand so to fix the rates as to
produce all the receipts that can be obtained, and on the
other hand to reduce the expenditure to a minimum. The
management of the German railways has hitherto been far
from working to this standard. We shall show later that
since the war the tariffs both for passenger and freight
have been kept too low, with the object of encouraging in-
dustry and commerce, and especially of favouring Ger-APPENDICES

429

man export. The tariffs are still regarded as they were
before the war, primarily as a weapon in the hands of
German trade, and only secondarily as a source of railway
revenue.

On the other hand, the expenditure on rolling stock
and works of every kind has been extravagant since the
war, and the staff employed is at the same time much too
large and badly paid.

It is therefore indispensable to make a radical change
in the policy followed by the railways hitherto. But we do
not believe that any German management will have the
strength necessary to fight successfully against the tradi-
tional mental attitude, unless there is behind it the con-
stant pressure of an expert control, established and
maintained in the interests of the Allies, to supervise the
management in the matter both of tariffs and of expen-
diture.

We shall deal later with the question of the Control in
greater detail.

Further, we regard a complete change in the organiza-
tion as essential. We think that the recent establishment
of a separate undertaking, with a separate budget and
with a certain measure of independence, though it is a
move in the right direction, does not go far enough. The
undertaking, though separate, still remains a Government
undertaking. In our judgment it is necessary to go fur-
ther and, while leaving to Germany the ownership of the
railways, to entrust the management for a period of years
to a commercial company, which will be German, but with
a board of directors containing representatives both of the
share holders and of the creditor Allied Powers.

What this period of years should be, how the company
should be constituted, with what powers, and with what
restrictions, is a matter which we understand the Commit-430

APPENDICES

tee itself will deal with. We need only urge that the Com-
pany and its management must have adequate freedom in
the matter both of tariffs and operation. And if we may
vary the phrase of Dr. Sarter, we think that a commercially
managed railway company ought to treat the attainment
of an adequate net revenue as of primary importance,
while at the same time having regard to the progressive
development of the economic life of the country, and be-
ing careful not to kill or even impair the productive
capacity of the goose that lays the golden eggs.

Moreover, as we have already said, the financial result
which we have mentioned can only be attained on condition
that the entire German railways are either united in one
system under a single management, or divided in a reason-
able manner into several systems working in harmony,
with the same tariffs and under the same general regula-
tions. If we had to contemplate separate systems wholly
out of harmony with each other, the results obtained
would certainly not correspond to our estimate of the net
revenue obtainable.

Though that estimate assumes the existence of an un-
divided German railway system, it will of course be under-
stood that, in making this assumption we do not express
any opinion as to the course of action which the Allied
Governments may think it desirable to adopt or on the
general question of military or economic guarantees for
reparation and security.

Finally, our estimate takes for granted that the rail-
ways will not be required to carry traffic for the Govern-
ment or the community, unless their services are paid for
at a commercial rate. Hitherto the German railways have
carried free for the Post Office not only mails but parcel
traffic. The railways of Great Britain receive at the pres-
ent time from the Post Office payments for similar thoughAPPENDICES

431

smaller services amounting to more than four million
pounds sterling per annum. There are other instances of
a similar kind but of less importance with which it is not
necessary to deal here.

FUTURE CAPITAL EXPENDITURE

We shall see later that the expenditure incurred since
the war for new works, and especially for rolling stock has
been very large. It has in our judgment gone much be-
yond the real needs of the railways.

For rolling stock alone there has been charged against
the various budgets, a sum of more than 3 milliard gold
marks, which has enabled the railways to acquire more
than 18,000 new locomotives and more than 400,000 new
carriages and wagons.

We think therefore that, broadly speaking, the capital
account can be entirely closed for some years to come, with-
out any injury to the railways. But at the same time we
must not fail to call attention to the statement of the Ger-
man Government that the capital expenditure to be in-
curred in the year 1924 will amount to over 500 million
gold marks, and that to complete the programme a further
expenditure of 236 million gold marks will be required in
1925. We think that this programme ought to be exam-
ined in detail, and very drastically cut down.

Still, after a certain time it will no doubt be necessary
to incur new expenditure in enlarging stations or building
new lines. But as we have already said, a commercial ad-
ministration will not embark on new capital expenditure
unless it is evident that it will be directly reproductive.
The cost can therefore be paid either directly, out of in-
creased net revenue, or if it is sufficiently important to
justify this course, by loans charged on the increased rev-
enue without trenching on the revenue pledged for repara-
tions.432

APPENDICES

THE RAILWAY BUDGET—ORDINARY BUDGET

It seems desirable to examine the estimate for the ordi-
nary budget for the financial year from April 1, 1924 to
March 31, 1925—in German financial matters called the
year 1924—which has been drawn up by the German ad-
ministration.

It has been drawn upon the supposition that the Rhine-
Westphalian Railways have been restored to German man-
agement. But even if and when this happens, it is probable
that there will be confusion at the outset; a certain
time must necessarily elapse before the normal working
can be resumed and the ordinary currents of traffic re-
stored ; and further, certain exceptional expenses will have
to be incurred which it is impossible to estimate exactly.

This budget is therefore somewhat theoretical, and may
be considered as representing the results to be obtained in
the year 1925 rather than in the year 1924. Subject to
these reservations, we will proceed to summarize and ex-
amine it.

Ordinary Budget Including the Rhine-Westphalian
Railways

a.	Salaries and Wages........................... 1,631,007,000 gold marks

b.	Cost of Material:

Supplies and consumable stores.. 545,000,000
Maintenance of way and works 294,480,000
Maintenance and renewal of
rolling stock and mechanical

I. EXPENSES.

plant ............

Other material costs
Reserves ...........

... 394,000,000
... 140,513,000
... 200,000.000

Interest and repayment of debt 325,000,000

1,898,993,000

Total

3,530,000,000

II. RECEIPTS.

Passenger traffic
Freight traffic .
Miscellaneous ...

850,000,000 gold marks
2,700,000,000
130,000,000

Total

3,680,000,000

Surplus

150,000,009APPENDICES

433

Receipts

The receipts for the budget in 1924 have been calcu-
lated by assuming a traffic somewhat greater than that
in 1913, but less than that in 1921 and 1922, in which years
jthe traffic was swelled by the activity of trade due to the
fall of the mark.

The figures are as follows:	:

Actual in 1913 Estimate for 1924

Passenger kilometres____35,122 millions 40,000 millions

Ton kilometres .........57,251 millions 60,000 millions

The passenger receipts have been calculated on the
basis of the tariffs which were in force at the time when
the budget was framed. Later on, when we come to deal
with tariffs, we shall point out that the 3rd and 4th class
fares were too low, and that the 1st class fares which affect
only a trifling number of passengers, were too high. Since
March 1st the 3rd and 4th class fares have been increased
by 36%, and the 1st class fares have been slightly reduced.
We may assume that the result will be an increase in pas-
senger receipts of 30%, which will raise the budget esti-
mate of 850 million to roughly 1,100 million marks.

The freight receipts have been calculated on the basis
of an average charge of 4.5 gold pfennigs per ton kilo-
metre. The tariffs in force last February, at the time of
our visit to Berlin, gave a higher average receipt per ton
kilometre of 5.5 gold pfennigs. But a general reduction of
10% was made on March 1st, and others are in contempla-
tion with the special object of encouraging national trade
and industry. As we shall explain later, these reductions
do not seem to us justified under present conditions. If
rates were maintained at a reasonable level, we may as-
sume that the freight receipts would be about 10% above
the budget estimate of 2,700 million marks, that is, theywould amount to 2,970 million marks. The receipts side of
the budget would then be as follows:

Passenger traffic
Freight traffic .
Miscellaneous ...

Total .....

APPENDICES

Million Gold Marks

.........1,100

.........2,970

......... 130

4,200

EXPENSES

As for the estimate of expenses for 1924, it is to be
noted that the expenditure for staff, 1,631,007,000 gold
marks, represents about 54% of the actual working expen-
diture of 3,005 million gold marks. If we exclude interest
and repayment of debt, and reserve, neither of which are
properly included in working expenses, this proportion is
much the same as that on the railways of the adjacent
countries. We pointed out in previous Notes that the staff
was unreasonably large. In 1919 there were 1,121,111
permanent staff and workmen employed; at the end of
1.923 the number was still very nearly one million. They
must have been extraordinarily badly paid, for the^per-
centage of the wage bill to the total expenditure was re-
duced in the budgets of 1922 and 1923 to 29% and 20%
respectively, a figure absolutely abnormal.

The expenditure for 1924 has been calculated on the
basis of a staff reduced to 793,000 although on the 1st of
January the number was still 936,800. A very drastic re-
duction is therefore implied, and is in fact being carried
through at this moment. But there will be no saving in
money. Increase of wages will more than counterbalance
the decrease in the number of staff, for an increase of
salaries and wages amounting to 18% on the average is
budgeted for. A table of the variations in the average
payment is given below:APPENDICES

435

Average payment per employee per annum in g-old marks

Permanent staff
Workmen ......

Year 1914
2,352
1,331

Feb. 1924
1,634
1,060

Budget
Estimate
for 1924
1,972
1,338

Average ......................

Percentage of pre-war average

1,718

100%

1,293
75%

1,595

93%

We feel bound to say that the increase proposed is en-
tirely reasonable. The remuneration of the staff, especi-
ally in the upper and middle ranks, is quite inadequate,
and if good work is expected, it must be paid at its market
rate.

A reserve of 200 million marks has been included to
provide for contingencies, a course which we cannot other
than approve.

The total expenses for the year 1924, including this re-
serve and interest and repayment of debt, to which we
shall refer later are set down in

the budget as............... 3,530 million gold marks

With the tariffs on the basis
which we have taken above, the

receipts will be.............. 4,200 million gold marks

This would give a surplus of 670 million gold marks
This surplus would be net profit because the reserve of 200
million and 325 million gold marks for interest and repay-
ment of the new debt has been included in the expenses.

Further it is to be remembered that the transport tax
represents in effect a further net profit from the railways.
If we reckoned this tax at 10% on the passenger receipts
and at 7 % on the receipts from freight other than coal, we
should obtain for 1924 a figure of 276 million gold marks.

The total net income of the railways would then be
670-[-276=946 million marks, which is very close to the
milliard which we have suggested is attainable within a
few years.436

APPENDICES

But as we have said already, these results are appli-
cable to the entire German railways worked as a single sys-
tem, including the Rhine-Westphalian lines, under normal
conditions. Certainly they will not be obtained in the
year 1924, though they should be obtained very shortly
thereafter.

The sum of 325 millions set down in the budget for in-
terest and repayment of debt during the year 1924 is
divided into:

This debt represents liabilities recently incurred, for
the old debt has practically disappeared. The total amount
of the current debt is 312 million marks. Particulars are
given in the reply of the Government to questions asked by
the Committee. There are short term loans, overdue ac-
counts, bills of exchange maturing, advances made by the
Ministry of Finance or by the Reichsbank, and emergency
currency issued by the railways which has to be redeemed.
The interest charge for these debts is quite large. In cer-
tain cases we are told that interest is running at the rate
of one-tenth of 1% per diem, that is 36% per annum.
Evidently debts of this kind should be paid off as soon as
possible.

In addition to these current debts amounting to 312
millions, it is estimated that further debt will need to be
incurred as follows :

Interest and Repayment of Debt

Million gold marks

Interest .............

Repayment ..........

Cost of Administration

99
225
1

325. APPENDICES	487

Million gold marks

Commitments for extraordinary expenses

up to March 31, 1924................ 110

For the expenditure of the extraordinary-

budget during the financial year 1924..	387

For expenditure which will be necessary
when the Rhine-Westphalian Railways
are handed back .................... 200

697

Add debt already incurred.............. 312

Total debt, actual and anticipated... 1,009

As we have said, the ordinary budget for 1924 provides
an amount of 225 million marks for repayment of debt.
But it is evident that these expenditures charged on the
extraordinary budget tend to increase rapidly, and it is
therefore necessary to cut down the extraordinary budget.
To this question we now turn.

THE EXTRAORDINARY BUDGET
A budget of extraordinary expenditure has been drawn
up for the interim period from November 15th, 1923, to
March 31st, 1924. It covered originally an expenditure of
220 million, but was subsequently reduced to 170 million
marks divided as follows:

CHAPTER I

Million gold marks

Dwellings ..............................................................8

Additional rolling stock..........................77

Kunze Knorr brake..............................................3

Miscellaneous ........................................................15

CHAPTER II

Doubling of road..................................................6

Electrification ......................................................6

Stations ..................................................................32

Repair shops ........................................................13

Miscellaneous ........................................................10

Total ............................... 170438

APPENDICES

These expenses are to be covered partly by credits al-
ready available, and partly by new credits to an amount
of 110 millions.

The Ministry has also furnished us with a statement of
other extraordinary expenses which in their judgment are
still necessary for the financial year 1924. We summarize
them as follows:

CHAPTER I

Million gold marks

Dwellings ..............................................................15

Additional rolling stock........................................110

Electric rolling stock............................................20

Kunze Knorr brake..............................................28

Miscellaneous .. ♦.................................................40

CHAPTER II

New tracks ............................................................10

Doubling of road..................................................13

Electrification ......................................................10

Stations ................................................................94

Repair shops ........................................................36

Miscellaneous ........................................................11

Total ............................... 387

In addition to this expenditure of 387 million marks in
1924, it is estimated that a further sum of 236 millions
will subsequently be required merely to complete works
already begun. This represents the final state of a pro-
gramme amounting altogether to 1,610 million marks.

This estimated expenditure, which will have to be cov-
ered by loans, has, so we are told, already been reduced to
an absolute minimum. All the same, we think it ought to
be reexamined point by point in order to stop or at least
postpone work not absolutely necessary, except where it
has been carried to such a point that it had better be com-
pleted.

The works and the rolling stock of the German rail-APPENDICES

439

ways were very fully adequate before the war. Since the
war no money has been spared to enlarge works and build-
ings and to renew and even increase the rolling stock to
an extent which will make it impossible to justify any new
expenditure of this nature for some years to come. We
give below particulars as to the rolling stock which bear
out this statement.

ROLLING STOCK

Below is a comparison based on figures furnished to us
in Berlin, of the German railway rolling stock before the
war and in 1924. We have ignored electric locomotives
and motor cars :

Steam locomotives Carriages Wagons

End of 1913 ..............................27,940	62,050	657,150

January 1924 ....................................29,966	67,800	723,100

Further rolling stock ordered last year from private
firms and not yet delivered amounts to:

Locomotives Carriages	Wagons

884	1,453	25,653

Delivery of this stock was due by the beginning of May,
but has been delayed owing to the occupation of the Ruhr.
It is not now expected to be complete till the end of the
year.

These figures show that the whole of the rolling stock
handed over, either at the Armistice or together with the
territory ceded under the Treaty of Peace, has been re-
placed by new; old and out-of-date rolling stock, which
could only be replaced to a very small extent during the
war, has been written off and replaced since 1920; a con-
siderable quantity of additional rolling stock has been
built.

It is worth while producing a table showing the loco-
motives written off and replaced for each year of the last
eleven:—440;

APPENDICES

In 1913 there were written off.....				
In 1914	a <	a tt	, 379	a
In 1915	it t	tt tt	, , 253	a
In 1916	a t	a tt	237	tt
In 1917	tt t	tt tt	220	tt
In 1918	tt t	it tt	. , , , 167	tt
In 1919	it t	a tt	191	tt
In 1920	a t	tt tt	..... 690	it
In 1921	a t	tt tt	.....1,849	a
In 1922	i i i	tt a	.....1,585	tt
In 1923	a t	a a	.....1,500	tt
Total ....			.....7,671	tt

440;

The same thing has happened with carriages and
wagons. We give a table showing the new rolling stock
acquired since 1914 :

Steam locomotives Carriages Wagons

Delivered: 1914-1918 		8,859	11,832	181,196

•Delivered: 1919-1923 		8,506	12,313	246,388

Ordered but not yet delivered..	884	1,453	25,653

The same thing has happened with carriages and
wagons. We give a table showing the new rolling stock
acquired since 1914 :

Steam locomotives Carriages Wagons

Delivered: 1914-1918 ......................8,859	11,832	181,196

•Delivered: 1919-1923 ......................8,506	12,313	246,388

Ordered but not yet delivered..	884	1,453	25,653

18,249	25,598	453,237

The result is that 18,249 locomotives and 478,835 car-
riages and wagons, two-thirds of the entire stock, have
been built within the last ten years; and that accordingly
the rolling stock of the German railways is much superior
to that which they possessed in 1914.

Replacement of rolling stock on this colossal scale has
necessarily entailed enormous expenditure. We are un-
able to give the actual cost, for it is spread over various
budgets.

The figures which have been given to us show an ex-
penditure, up to the end of 1922 only, of 2,267,774,488
marks.

This figure does not include the cost of replacing the
rolling stock handed over to the Allied Powers in 1919,
1920 and 1921, which was paid for by special creditAPPENDICES

441

granted by the Ministry of Finance, amounting when re-
duced to gold marks to 739,347,006.

The replacement of rolling stock written off is charged
against the ordinary railway budget. Additions to rolling
stock are charged against the extraordinary railway
budget.

From November 15, 1923, to April 1, 1924, rolling stock
to an amount of 150 million gold marks will be so charged.

A further expenditure of 50 million marks in the or-
dinary budget and of 110 million marks in the extraordi-
nary budget is proposed for the year 1924.

KUNZE KNORR CONTINUOUS BRAKE

The application of the Kunze Knorr continuous brake
to freight trains has also implied large expenditure. It
was decided in 1918, while the war was still going on, to
adopt this policy in order to release a large number of
brakesmen, and to make possible an increase of speed of
freight trains, more especially of military trains. This
policy has been energetically pursued since the war; on
the one hand, all the new wagons ordered have been fitted
with continuous brakes, and on the other hand, the equip-
ment of the old stock has been pushed on.

The entire programme is expected to be completed by
April 1, 1925. The total expenditure will amount to 400
million marks, of which 117 millions still remain to be
paid. But it should be said that the Kunze Knorr Com-
pany has agreed to spread the payment over a period ter-
minating only on October 1, 1926.

TARIFFS

FREIGHT TARIFFS

A study of the freight tariffs of any country at any
time involves prolonged investigation of a vast mass of
bewildering detail. To present in brief outline the broad442

APPENDICES

general effect is almost impossible. Certainly the short
time available has not made the task possible for us. In
Germany its difficulty is increased by various special cir-
cumstances.

In 1921 the whole basis of the freight tariffs was altered
by the abandonment for a large part of the traffic of flat
mileage rates, and the substitution therefor of Stafeltarife,
that is, rates under which the charge per mile decreases as
the mileage increases. Simultaneously, most of the excep-
tional tariffs, under which the bulk of the traffic had
hitherto passed, were withdrawn. Many of them have
since been restored in a modified form. And this is only
the railway side of the difficulty.

The currency question complicates the whole story.
Tariff advances were at the outset made in the shape of
percentage increases of existing rates. Then came a period
when an index figure was adopted with a varying multipli-
cator. Finally in November, 1923, the tariffs were calcu-
lated on a gold basis. The result, as we are informed, was
that the freight tariffs were found to be on a level so high
in comparison with the capacity of the traffic to bear the
rates, that reductions on a large scale became absolutely
necessary.

We are far from satisfied that this was or is the case.
We feel convinced that further investigation would sup-
port our general conclusions that the freight rates have
been, and are proposed to be, reduced in a manner and to
an extent which cannot be justified from the railway point
of view, and that this has resulted from the training and
mental attitude of the officials, who have been brought up
to share the views expressed in the quotation from Dr.
Sarter which we have given above.

At the same time we feel it necessary to utter a note of
warning. Our conclusion, that freight tariffs might be a
good deal higher than the German officials think they canAPPENDICES

443

profitably be, is based mainly on the average receipts per
ton-kilometre to-day as compared with the pre-war figures.
We are told that these figures give a misleading impres-
sion of present-day facts. And numerous comparisons of
certain important rates and classes of rates, pre-war and
post-war, have been submitted to us, which would, if typi-
cal, put a different complexion on the matter. In spite of
these tables we still adhere to the opinion we have ex-
pressed. But the Committee will appreciate that what we
have said is only an expression of opinion, and cannot
claim to be a considered judgment based on fully ascer-
tained statistical facts.

We have found it impossible to satisfy ourselves how
high the present German freight tariffs really are. The
earliest documents submitted to us stated that the freight
tariffs might be assumed to be double the pre-war tariffs.
The facts do not seem to us to bear out this statement. Be-
fore the war the freight charge per ton-kilometre averaged
3.36 gold pfennigs. It is estimated by the officials that in
November, 1923, at the moment when the gold mark was
substituted for paper marks of indefinite value as the
medium of payment for railway services, the average rate
was double the pre-war. In other words, according to the
official estimate, the average rate in November, 1923,
should have been 6.72 pfennigs per ton-kilometre. But
this is no more than an estimate, and we doubt its accu-
racy.

Prom this date there began a process which is still con-
tinuing of repeated and important reduction of rates
regarded as excessive. There is statistical ground for believ-
ing that in the early part of January, 1924, the average
rate was 5.89 pfennigs, an advance, that is, not of 100%
but of 75% above the pre-war average. On January 20th
a number of important reductions came into force, and the
estimate, based on such statistics as were available, was in44£

[APPENDICES

the middle of February that the then average rate was 5.55
pfennigs, an advance on pre-war rates of 65%. The re-
ductions are however still going on, and some of them are
of great importance. On March 1st an all round reduction
of 10% was made on a large part of the traffic.

The budget estimate of freight traffic receipts is made
on the assumption that the average freight rate during the
year will have been brought down to not more than 4.50
gold pfennigs, which is equivalent to an advance over the
pre-war tariffs of only 33%. No doubt this estimate errs,
as was intended, on the side of caution.

On this policy we will make two observations. Taken
as a whole, we have difficulty in believing that all par-
ticular reductions made and proposed can be justified.
Even assuming that in certain cases reductions have been
and are desirable in the interest of the railways, we
feel convinced that reductions are being conceded which
need not be made, and that at least in some cases the per-
centage of reduction is unnecessarily large. We have
learned that exceptional tariffs involving great reductions,
both for import of raw materials and for export of Ger-
man produce, are being very freely introduced. The im-
port rates for jute have been reduced by 25%; for raw
cotton and raw wool by 50%. A reduction of the rate for
miscellaneous wares exported by sea, amounting to 30%,
is on the point of coming into force; and a reduction of
30% to 40% in the rates for steel and iron exported by sea
is contemplated.

There is a point in connection with the freight tariffs
and freight revenues which, though the precise facts are
obscure, is of considerable importance. The Budget esti-
mate for 1924 assumes, apparently with good reason, that
the ton-kilometres to be carried in 1924 will be roughly
equal to those of 1913. But conditions have greatly
changed in the interval. The number of tons carried hasAPPENDICES

145

fallen apparently by about 20%, while tlie distance the
average ton travels has increased in corresponding ratio.
The German officials adduce three main causes for the in-
crease in the average length of haul:

(1)	The introduction in 1921 of Stafeltarife;

(2)	Changes in the previous currents of traffic conse-
quent on the war and the establishment of new political
frontiers;

(3)	Diversion of traffic in consequence of the occupa-
tion of the Rhine-Ruhr territory.

The effect of (1) will be permanent; the effect of (2)
will probably diminish with time; the effect of (3) will
presumably be only temporary. We cannot estimate what
proportion of the ascertained results has been due to these
three causes respectively. But it is clear that, if in future
years the tonnage does not increase, while the average
length of haul goes back to anything approaching the pre-
war figure, the effect on the railway revenue will be quite
serious.

Before we leave the question of freight tariffs, we de-
sire to make one observation. We have admitted that the
facts are obscure; that our investigations have not been
and could not be pushed very far. We have acknowledged
that we have hesitated as to certain conclusions. It may
well be that, where we have expressed a definite opinion,
time will prove the opinion wrong.

All this we have had in mind; it does not affect the
thing which from the point of view of the Committee is the
really important matter, that we retain the conviction that
the German railways can and should produce a net rev-
enue of one milliard gold-marks per annum available for
reparation. Our forecast may well prove erroneous on
certain points, too optimistic in one direction, too pessi-
mistic in others. But our estimate is based on broader
grounds than tariff details and to it we adhere.446

APPENDICES

PASSENGER TARIFFS

The German railways have nominally four classes of
passengers; but first-class carriages are not run on local
trains, and fourth-class carriages are not run on express
trains. The fares before the war were respectively at 7
pfennigs, 4.5 pfennigs, 3 pfennigs and 2 pfennigs per kilo-
metre. In April, 1917, the transport tax, amounting to
16%, 14%, 12% and 10% on the gross receipts from the
four classes respectively was introduced.

In spite of the tax, which is estimated to amount for
1924 to 85 million gold-marks, the railway management
did not raise fares till September, 1923. At this date the
fares were increased, including tax, to 19.6 pf., 9.9 pf., 3.3
pf. and 2.2 pf. per kilometre, for the 4 classes respectively.
Therefore the 3rd and 4th class fares were only increased
by the amount of the tax, while the 1st and 2nd class fares
were more than doubled. The result of fares so obviously
out of proportion was to empty the higher classes. Accord-
ingly in December last, the 1st and 2nd class fares were
reduced by one-third. But even then, the 1st class fare
was four times the 3rd class, and six times the 4th class.
Naturally the 1st class was absolutely empty, being used
by seven passengers out of 10,000, while seven passengers
out of 100 traveled 2nd class. A good deal more than half
the passengers travel in the 4th class, and a good deal more
than one-third in the 3rd class. Seeing that a 3rd class
passenger could till a few weeks ago travel 30 kilometres,
and a 4th class passenger 45, for one gold mark with an
ordinary ticket, and that more than half the total number
of passengers in fact travel with season tickets issued at a
rate roughly one-half of the ordinary rate—could travel,
that is, respectively 60 and 90 kilometres for one mark—it
is not surprising to find it admitted that the rates for pas-
senger traffic have been quite insufficient to cover theAPPENDICES

447

working expenses. At length, as from the 1st of March,
while the 1st class fares have been further reduced to a
level which may possibly secure a few additional 1st class
passengers, the 3rd and 4th class fares have been increased
by 36%. The fares of the four classes are now 9 pf., 6 pf.,
4.5 pf., and 3 pf., per kilometre, and the ratio between the
classes is less unreasonable than hitherto.

We can hardly think that these new fares will be un-
duly burdensome to the German public, seeing that the
German 3rd class fares per kilometre will still be only half
the corresponding fare either in England or in the United
States. But the public have so long been accustomed to
be carried at non-commercial rates that we think some fall-
ing off of traffic is to be expected, at least at the outset.
We have accordingly estimated that a 36% increase in
fare will only produce a 30% increase in receipts.

FUTURE CONTROL—THE RAILWAY COMMIS-
SIONER

It is evident from the facts and figures set out above,
that the German Government has since the war run the
railways in a manner which cannot be defended. On the
receipts side it has failed to raise the revenue which might
have been and ought to have been raised. On the expendi-
ture side it has spent capital not merely on restoring the
pre-war situation, but on betterments of all kinds which
under the existing conditions cannot be justified. The
railways have not merely been restored to their pre-war
state of efficiency, but have been brought up to a much
higher standard, a standard which to the best of our
knowledge is superior to that of any other country. We
are given to understand that even inside the Ministry itself
this policy has been severely criticised. The excuse is that448

APPENDICES

the pressure on the one hand of the great manufacturers
to keep their works going and to avoid a wholesale dis-
missal of employees, which might lead to revolts or even
revolution, was too strong to be resisted; while on the other
side, the poverty of the mass of the population was so
great that the Government was compelled to maintain rail-
way rates at a low level. Whatever may have been the
reason, there can be no doubt of the facts.

Our own view is that, while the reasons above had con-
siderable weight, the action taken was by no means wholly
due to external pressure. The officials in the tariff sec-
tion of the Ministry were, as we have repeatedly said, only
too ready to subordinate railway interests to non-railway
circumstances. And the executive officers, whether
charged with engineering or traffic management, were af-
flicted with what it is not too strong to describe as megalo-
mania. They regarded it as due to the dignity of the
German Reich that buildings should be magnificent, that
railway plant should be up to a very high standard, that
such and such services should be given, and so on. They
had never been taught the commercial necessity of cutting
their coat according to their cloth.

Now the mere transference of the railways from State
to Company management will not of itself alter this men-
tal attitude. A large part of the Board will be German;
the General Manager will be German; and his responsible
officials will be the same men who have inspired and car-
ried out the railway policy of the past. We think it there-
fore essential that a Eailway Commissioner should be
appointed by and on behalf of the Allies to supervise and,
if it should hereafter become necessary, to control in their
interest the German management. We will therefore, in
concluding this Report, deal with what in our opinion
should be the functions of the Railway Commissioner and
the organization of his staff.APPENDICES

449

THE RAILWAY COMMISSIONER

The Railway Commissioner must be a person who is
acknowledged in the railway world as being in the first
rank. It must be left for him, when appointed, to say
what assistance he needs, in order to be able to assume re-
sponsibility for control of all branches of railway manage-
ment. It will be his duty also to consider how far it is
necessary to have local representatives in any or each of
the districts into which the German railway system may
hereafter be divided.

We assume that when appointed he will produce to the
Board an outline of the organization and the staff that he
regards as necessary, and it will be for the Board to ap-
prove his scheme. He must have the right to receive of
course all reports, statistical and financial returns, pro-
posals for extra-routine expenditure, whether on capital
or revenue account, for changes in tariffs or for the con-
cession of exceptional rates and the like, when they are of
such importance as would normally require the sanction of
the General Manager. He must also have the right to
call for any further reports, returns and statistics, as he
may think necessary, in order to enable him to form an in-
dependent judgment.

Being in possession of full and up to date information
as to everything that is happening or is proposed, his first
duty will be to decide whether to approve or disapprove.
If he disapproves, or even hesitates to approve, he will dis-
cuss the matter with the General Manager. He may be of
opinion that things are going wrong, or that a course of
action inconsistent with the railways being able to earn a
financial return is likely to be adopted. In such a case it
will be his duty, if he fails to induce the General Manager
to modify his policy, to bring the matter to the attention
of the Board in order that they may be in a position to450

APPENDICES

take such action as they think fit. It is to be hoped that,
if the right man is appointed to the post, he will be able
to work in entire harmony with the General Manager; and
that the General Manager, so far from resenting his inter-
ference, will welcome his support in putting a stop on the
one hand to unnecessary expenditure, and in enforcing on
the other hand the establishment and the maintenance of
tariffs proper and adequate to secure for the railways as
much net revenue as can reasonably be obtained without
unduly hampering the trade of the country.

A second function of the Commissioner will naturally
be to make for the foreign members of the Board reports
on any points which they may regard as of serious im-
portance. We may suggest the reasonableness of the
greatly reduced German export tariffs as a sample of this
class of question. It is clear that the Allied Nations have
a right to claim that the net revenue of the German rail-
ways should not be reduced in order to give to German
manufactures an unreasonable advantage in overseas
markets.

It does not seem necessary to discuss in detail what
would be the position of the Commissioner if the German
railways failed to yield the net revenue fixed as reasonable
for reparation purposes. We assume that, broadly speak-
ing, in this case the Commissioner General will take over
the functions of the General Manager, and that, in lieu
of discussing with the General Manager or recommending
to the Board of Directors, he would be empowered to issue
positive orders, whether for stopping expenditure which
he considered unjustifiable or for an increase which he
considered reasonable in existing tariffs. It is evident that
it would be necessary to require the German Government
to agree in advance that, if payment on the agreed scale
failed to be reached or even if there was serious danger
that this failure would occur in the immediate future, theAPPENDICES

451

Commissioner, as the representative of the Allies, should
be entitled to enter into full control.

Signed: W. M. Acworth.
G. Leverve.ANNEX NO. 4 TO THE REPORT OP THE FIRST
COMMITTEE OF EXPERTS

CONCESSION OF THE WORKING OF THE RAIL-

WAYS

The working of the German railways shall be legally
transferred to a company by a fixed date. The law will
ratify the contract to be entered into between the German
Government and the company to which the concession is
made. The contract will provide that no change can be
made in the conditions of the concession without the con-
sent of the company and the trustee for the bondholders
referred to below.

The law will further provide that the company shall
have a monopoly of all railway extension in Germany.

The charter of the company will be annexed to and ap-
proved by this law. Before being submitted to the German
Parliament the law will have to be approved by the
Reparation Commission.

The conditions under which the working of the German
railway system will be transferred to the Company by this
law, shall be as set forth below.

The Company will be of German nationality.

The Company shall be responsible for the working, up-
keep and normal development of the railways, including
rolling stock and equipment, and will be entitled, subject
to the provisions hereinafter contained as to the powers of
the German Government and the Railway Commissioner,
to conduct its business in such manner as the company may
think proper.

452APPENDICES

453

The German Government shall have such control over
the tariffs and service of the railways as may be necessary
to prevent discrimination and to protect the public, but
such control shall never be exercised so as to impair the
ability of the railroad Company to earn a fair and reason-
able return on its capital value, including adequate pro-
vision for its bonds and preferred shares, a return on its
ordinary shares and adequate reserves for all purposes in-
cluding amortisation of capital. The plan to accomplish
the foregoing shall be worked out by the Organization
Committee hereinafter referred to.

The Company shall as from the commencement of the
concession be entitled to charge the tariffs then in force.
Thereafter the Company shall be entitled to vary the
tariffs or any of them from time to time, subject to the
provisions of Articles 365 and 378 of the Treaty of Ver-
sailles.

It shall be the duty of the Organization Committee to
settle the manner in which, subject always to the preceding
provision, the control of the German Government over the
service and the tariffs shall be exercised.

The term of the concession shall be at least of sufficient
length to allow of the amortisation of the bonds according
to the provisions hereinafter contained. On the expiration
of the concession, the company shall return to the German
Government free from all charge, the whole of the railway
undertaking, including all rolling stock and equipment, in
thoroughly good and complete working order.

As the consent of the German States is necessary under
the German Law of 1920 for any alienation of or charge
upon the German railways, the German Government shall
make in this respect all necessary arrangements with the
States concerned. These arrangements shall be ratified
by the law granting the concession.454

APPENDICES

This law shall confer upon the Company the right to
mortgage any property belonging to the railways.

It shall also contain an undertaking that neither the
Reich nor the States nor any public authority shall impose
on the Railway Company any new direct tax, whether
upon receipts either gross or net, or upon movable or im-
movable property or in respect of the employees of the
company or otherwise howsoever.

THE RAILWAY COMPANY
Article I

capital of the company

The total capital which will be created, added to the
first mortgage bonds for eleven (11) milliard marks gold
referred to below, will correspond to the capital cost of the
German railway system (26 milliard marks gold).

Preference shares will be created to the amount of 2
milliard gold marks, bearing a fixed rate of dividend and
entitled to participation in the profits of the railways,
after payment of the annual payments mentioned below.
This dividend and this participation as also the terms on
which the German Government may pay off or re-pur-
chase these shares, will be fixed by agreement between the
German Government and the Organization Committee de-
scribed below.

These preference shares will be sold by the Company
for the profit of the German Government and of the Com-
pany itself, one-fourth (^4) of the sum thus obtained will
be the property of the German Government and three-
fourths (%) the property of the Company. The sales of
shares will be made under such conditions that the Ger-
man Government will receive the whole sum due to it with-appendices

455

in two years. if the German Government so requires, the
proceeds of the first sale of shares may be reserved for its
use.

The balance of the capital cost of the German railway
system (viz. 13 milliard gold marks) will be represented
by ordinary shares, to be owned by the German Govern-
ment and to be kept or sold by it as it prefers.

Article ii

administration and management

The Company will be administered by a Board of Di-
rectors of at least eighteen (18) members, who shall all be
business men of experience or railway experts. Half (^)
of these will be appointed by the German Government and
half by the Trustee referred to below.

As soon as preference shares are issued to the public,
the holders of these shares shall be entitled to elect four
members of the Board in place of four members appointed
by the German Government.

The Organization Committee will also fix the duration
of the term of office of the Directors of each class.

Of the nine (9) members of the Board of Directors ap-
pointed by the Trustee, five (5) may be German nationals.

The Chairman of the Board will be elected for one
year by a three-fourths (%) majority of the members of
the Board and will be eligible for re-election as long as he
possesses the necessary qualifications.

As soon as the preference shareholders shall elect di-
rectors, the Chairman shall be chosen from the directors
so elected.

He will in addition to his vote as a member of the
Board, have a second or casting vote.

The General Manager of the Company shall be of Ger-
man nationality.456

APPENDICES

He will not be eligible for a seat on the Board. He will
be appointed by a three-fourths (%) majority vote of the
Board.

He may be removed by the same majority. If how-
ever his removal is requested by the Commissioner (pro-
vided for in Article III below) on account of violation of
the Charter of the Company or of failure to comply with
the instructions of the Board of Directors, he may be re-
moved by a simple majority vote of the Board.

Whatever decisions may be taken with regard to the
operation of the railways, it must be understood that any
breaking up of the working of the system into local divi-
sions must not in any event affect the financial and tariff
unity of the undertaking.

Article III

commissioner

The Railway Commissioner shall be a person accepted
in the railway world as being in the front rank.

He shall be appointed by a majority vote of the foreign
members of the Board of Directors.

He shall not be a member of the Board.

He will have an adequate staff of experts in railway
matters and in accountancy.

The Commissioner will have a general right of inspec-
tion over the whole railway system and all the railway in-
stallations and subdivisions, either in person or by deputy.

He shall also be entitled to receive all reports, statisti-
cal and financial returns, proposals for extra-routine ex-
penditure whether on "capital" or "revenue" account,
for changes in tariffs or for the concession of exceptional
rates, and the like, which are of such a nature as would
normally require the sanction of the General Manager.

The Railway Commissioner will further be entitled toappendices

457

call for any other reports, returns, or statistics which he
may consider necessary in order to enable him to form an
independent opinion. All this information shall be fur-
nished promptly, fully, and accurately at his request. If
any measure in connection with construction, operation, or
tariffs tends substantially to menace the rights or interests
of the bondholders or of the Reparation Commission, as de-
fined below, and in particular to endanger the payment
at the due dates, referred to in Article V below, he shall
discuss the question with the General Manager. If he can-
not persuade the latter to change his line of conduct, he
must lay the question before the Managing Board, in order
that it may take any measures it may deem necessary.

If the service of the bonds hereinafter mentioned is in
jeopardy, the Commissioner shall have regard to the pro-
visions for the security of the bondholders hereinafter con-
tained.

The expenses of the Railway Commissioner and his
staff shall be an operating charge upon the receipts of the
railways.

Article IV
bonds

The Company shall forthwith, after its creation, issue
without payment and for the purpose of reparation, to a
Trustee appointed by the Reparation Commission, first
mortgage bonds to a nominal amount of 11 milliard gold
marks carrying interest at 3% per annum for the first
financial year of the Company, at 4% plus a bonus of 25
millions for the second, 5% for the third and subsequent
years, and to be amortised by a sinking fund as herein-
after provided.

Payment of these bonds shall be guaranteed by the
German Government and they shall be signed both on458

APPENDICES

behalf of the Company and by the Finance Minister act-
ing on behalf of the German Government.

These bonds shall be secured by a first registered mort-
gage or charge on the corpus and revenues of all immov-
able property used by or belonging to the Company pres-
ent or future, and by a first floating charge on all its fixed
and movable plant, rolling stock and all installations. The
Company shall be authorized by the concession to create
this mortgage and charge, the duration of which shall not
be limited to the period of the concession.

This mortgage and this first floating charge shall be
expressed to be in favor of the Trustee to be appointed by
the Reparation Commission, provided always that the
Company and the German Government shall be entitled at
any time, with the consent of the Trustee, to sell or dispose
of any particular property used by the Railway Company
which may be considered to be no longer needed by the
latter, upon such terms as to the application of the pro-
ceeds of the sale as may be agreed upon by the Trustee.

The service of the bonds shall be assured by the follow-
ing payments which shall be made to the Trustee from the
gross receipts of the Company and before the ascertain-
ment of any net profits; that is to say:

million gold marks

a.	for the first financial year of the Company.. 350

b.	for the second financial year.............. 465

c.	for the third financial year................ 550

d.	for the fourth and subsequent financial years 660

If in any year the German railways fail to realize re-
ceipts sufficient to allow of the payments above mentioned
(it being understood that the Company may draw upon
whatever reserves may be available for this purpose until
such reserves are exhausted), the Railway Commissioner
shall have the right to take such action as the Trustee for
the bondholders may consider is necessary to protect theAPPENDICES

459

rights of the bondholders, including the right to operate,
to lease, or to sell all or any of the railways and property
subject to the mortgage or charge of the bonds.

From and after the end of the fourth year from the
date of the formation of the Company, the bonds shall be
amortised, under the conditions to be determined by the
Trustee with the approval of the Eeparation Commission,
by the application in each year of such part of the annual
payments above mentioned as shall not be required for the
interest on the bonds.

The German Government and the Company shall also
be entitled at any time to pay to the Trustee sums addi-
tional to the above payments with the authorization of the
Reparation Commission which shall ascertain from the
Transfer Committee that the transfer of these additional
funds does not disturb the transfer of the annual pay-
ments. Any sums so paid shall be applied first to the dis-
charge of any interest in arrear and next upon six months
public notice in redeeming at par all or any part of the
bonds for the time being outstanding.

The Eeparation Commission shall be entitled, with a
view to the mobilization of the bonds, to divide the same in
any manner which it may think expedient into different
classes with different rights—as to priority of charge, rate
of interest, repayment of capital and otherwise—against
the annual payments to be made by the Company, and to
issue to the public upon such terms and generally in such
manner as the Commission may think proper, bonds,
debentures, debenture stock, certificates of indebtedness or
other securities of any nature secured upon the whole or
any part of the bonds.

The Company shall not be able to issue other bonds
than those referred to above without the authorization of a
three-fourths majority of the members of the Board, of
which majority two must be foreigners.460

APPENDICES

All payments of interest and capital in respect of the
bonds shall be free from all German taxation except in so
far as the persons entitled thereto may be liable under
German law to the payment of German direct taxation.

Subject as herein provided the form of the said bonds
and all provisions as to the enforcement and repayment
thereof including drawings and giving time for payment
shall be settled by the Trustee with the approval of the
Separation Commission.

Article V

enforcement of government guarantees

If the company shall at any time make default in meet-
ing the service of the bonds, the Trustee may in lieu of or
in addition to the measures mentioned in the last preced-
ing Article present the accrued coupons or any bonds due
for repayment to the Commissioner of Controlled
Revenues who shall pay them at their face value out of the
portion of the receipts of the assigned revenues falling to
the share of the German Government. The coupons and
bonds so paid shall be included at their face value in the
repayments made by the Commissioner of Controlled
Revenues to the German Government. The amounts so
paid may only be repaid by the Company to the Govern-
ment after the necessary provision has been made for the
current and the next coupons on the bonds and for the
fixed dividend for the current year on the preference
shares.

Article VI

transportation tax

The Company shall on behalf of the Government pay
to the Reparation Commission the proceeds of the trans-
portation tax as at present levied, i. e.} a tax of 7 % on theAPPENDICES

461

gross receipts from all freight traffic other than coal, and
a tax of 10% to 16% according to class, on the gross re-
ceipts from all passenger traffic. This payment shall be
made during the first and each of the following years of
the concession and until the conclusion of any extension,
even if in the course of the concession the whole of the
bonds have been paid off.

The rate of the transportation tax shall not be reduced
during the whole of the concession. The proceeds of the
tax may be employed by the trustee to secure the issue of a
special series of bonds for 3 milliard gold marks, or there-
abouts.

Article VII

financial arrangements

The bank account shall be kept at the new Bank. Pay-
ments by the Company hereinbefore prescribed shall be
paid to the account of the Eailway Commissioner. The
latter shall transfer these sums to the credit of the agent
for Reparation payments.

Article VIII

anticipatory redemption of bonds

If all the first mortgage bonds should be redeemed be-
fore the expiration of the term of the concession by special
subsidy by the German Government to the Company, the
Government shall be entitled to require that the functions
of the Railway Commissioner hereinbefore mentioned shall
come to an end and that the foreign directors shall be re-
placed by German directors. In default of other arrange-
ments, the transportation tax shall continue to be paid to
the Reparation Commission.462

APPENDICES

The German Government shall in that case also have
the right to purchase or repurchase the preference shares
at par, plus dividend and arrears of dividend if accrued.

Article IX

organization committee

A temporary Committee with the title of the c 6 Organi-
zation Committee of the German Railway Company" shall
be constituted in order to work out, subject to the forego-
ing provisions, the details necessary for the creation of
the German railway company and the execution of this
plan. The Committee shall consist of two delegates ap-
pointed by the German Minister of Railways, the railway
specialists, Sir William Acworth and M. Leverve, who are
familiar with the discussions which have led to the adop-
tion of this scheme, or a nominee or nominees to be ap-
pointed by them jointly together with a fifth member of
neutral nationality to be chosen by the four thus appointed
or, in default of such choice, to be appointed by the
Reparation Commission.

This Organization Committee will come to an end as
soon as may be after the Railway Company has been con-
stituted, the Railway Commissioner appointed and this
plan has been put into operation. The expenses of the
Committee and of their staff shall be an operating charge
upon the receipts of the German railways.

Article X

arbitration

The law to be enacted^ by the German Parliament shall
provide that so long as the functions of the Railway Com-
missioner hereinbefore mentioned shall not have come to
an end, if any dispute or difference should arise betweenAPPENDICES

463

the Reparation Commission or any Government repre-
sented thereon, on the one side, and the Company and the
German Government, or either of them, on the other side,
or between the Company and the German Government, as
to the interpretation of any provision of the said law, or
of the charter of the Company, or of this plan, or as to
anything to be done under any of them respectively,
whether in respect of the capital and obligations of the
Company or of its external, or internal management, or
otherwise howsoever, the same shall be referred to the de-
cision of an arbitrator who, if the German Government so
desires, shall be of neutral nationality to be nominated by
the President for the time being of the Permanent Court of
International Justice, and the decision of the arbitrator so
appointed shall be final.ANNEX NO. 5 TO THE REPORT OF THE FIRST
COMMITTEE OF EXPERTS

PLAN FOR INDUSTRIAL DEBENTURES

THE AMOUNT AND FORM

I.	The German Government shall provide bonds or
debentures of industrial concerns to a total nominal value
of five (5) milliards of gold marks, bearing five per cent
(5%) interest and one per cent (1%) for sinking fund
per annum. These bonds shall be the individual obliga-
tions of the several concerns and shall be secured as to
principal, interest, and sinking fund payments by a first
mortgage on the plant and property of the respective con-
cerns making them.

The term "industrial concerns" shall include not only
manufacturing concerns, but navigation, mining and any
other similar concerns which the Organization Committee
may indicate.

DELIVERY TO TRUSTEE

II.	The mortgage bonds or debentures above provided
for, with suitable coupons covering the interest payments,
shall be delivered by the German Government to the Trus-
tee to be appointed by the Eeparation Commission, who
will hold them, collect the coupons thereon, paying the
proceeds into the account of the Agent for reparation pay-
ments, or dispose of them in whole or in part from time to
time under the orders of the Eeparation Commission. The
debtor may make proposals to the Trustee for their imme-
diate or gradual redemption, and the Committee recom-

464APPENDICES

465

mends that the Trustee be empowered to give preference to
such proposals of redemption and especially those of which
the redemption would be effected by the use of foreign
currencies, before offering such bonds in the open market
or otherwise. In the event that no proposals of a satisfac-
tory plan of redemption are made to the Trustee by any
individual maker of the bonds within six months after such
bonds shall have been delivered to him by the German
Government, then the Trustee in his discretion, but with
due regard to the protection of the credit of the debtor
shall be free to dispose of the same in such manner and on
such terms as the Reparation Commission may authorize.

GUARANTEE BY GERMAN GOVERNMENT

III.	The German Government shall guarantee the prin-
cipal, interest and sinking fund payments on such bonds;
in consequence, in case of default the matured coupons can
be presented to the Commissioner of Controlled Revenues,
who shall purchase them at their nominal value, by means
of the funds under his control which are destined to be
paid over to the German Government. The Commissioner
will include the coupons for their nominal value in the
"reversements" to the German Government, which will
have recourse against the defaulting debtor.

The German Government might, by means of subsidies,
encourage the re-purchase of the bonds by the mortgagors
and thus free itself from its guarantee.

TAX-EXEMPTION PROVISION

IV.	The said bonds and mortgages until redeemed shall
be exempt from taxation in Germany, unless they shall be
held by German nationals, in which case they shall be
taxed like other similar bonds and mortgages so held by
German nationals and without discrimination.466

APPENDICES'

TEMPORARY ORGANIZATION COMMITTEE

V.	A temporary Organization Committee shall be
formed for the purpose of taking all necessary measures
within the scope of the foregoing plan and for fixing the
details of organization. This Committee shall include a
representative of the German Government, a representa-
tive of industry, two members appointed by the Repara-
tion Commission and a fifth member of neutral nationality
to be chosen by the four thus appointed, or in default of
such choice to be appointed by the Reparation Commission.

POWERS OF THE ORGANIZATION COMMITTEE

VI.	A. The Organization Committee shall have all
powers to work out the details of the plan in such form as
may be fair alike to the German Government, to the indus-
trial concerns and to the Reparation Commission, bearing
in mind that it is the purpose and intent of the plan to en-
sure for reparations account the payment of the 5 mil-
liards of gold marks with interest thereon at 5% per
annum and a sinking fund of not less than 1% thereon,
which in and of itself will determine the maturity of the
bonds.

B. The Organization Committee shall have the power
to determine the form and character of the mortgages, and,
in case the concerns are too small to make individual mort-
gage issues practical and desirable, the Committee shall
have power to devise some method of handling them, or
may waive them altogether, provided the total sum of 5
milliards is maintained.ANNEX NO. 6 TO THE REPORT OF THE FIRST
COMMITTEE OF EXPERTS

THE TRANSFER OF REPARATION PAYMENTS
FROM GERMAN CURRENCY INTO FOREIGN
CURRENCY AND THE USE OF BALANCES NOT
TRANSFERRED

TRANSFER COMMITTEE

I.	The plan provides that all payments for the account
of reparations, however derived, are to be first made in
the form of deposits in the bank, provided for in the plan,
to the credit of "The agent for reparation payments.''
The withdrawals from this deposit shall be made by the
agent for reparation payments only, under the direction
of a committee composed of five members known as "the
transfer committee."

COMPOSITION AND SELECTION OF MEMBERS

II.	The transfer committee shall be composed of six
members; the agent for reparation payments shall be a
member and the chairman; the other five members shall
be persons qualified to deal with foreign-exchange ques-
tions. They shall consist of an American member, a
French member, an English member, an Italian member,
and a Belgian member. Each of them shall be appointed
by the Reparation Commission, after the member of the
general board of the bank of the same nationality has
been consulted.

467468

APPENDICES

COOPERATION OF THE BANK

III.	The committee will be in contact with the presi-
dent and the commissioner of the bank.

POWERS OF THE COMMITTEE

IV.	The committee shall have power, and it shall be its
duty: (a) To apply such bank balances for payments for
deliveries in kind and payments under the reparation
recovery act, in accordance with the program established
periodically by the Reparation Commission, after consul-
tation with the transfer committee as to the character and
amount of such deliveries.

(~b) To convert these bank balances into foreign cur-
rencies from time to time and after conversion to remit
them in accordance with the instructions of the Repara-
tion Commission.

Both the foregoing powers (a) and (b) to be exercised
to the extent to which, in the judgment of the committee,
the foreign exchange market will permit, without threaten-
ing the stability of the German currency.

(c) To invest from time to time in bonds or other
loans in Germany such amounts as the committee may
deem wise. The committee shall proceed to make these in-
vestments as soon as the amount of the credits exceeds
the sum which the bank will keep on deposit. On
the other hand, the committee may sell the bonds which
it has acquired or liquidate the loans which it has granted
whenever in its opinion the sums may be converted into
foreign exchange, or the bank can accept additional
deposits.

RESTRICTION ON PURCHASE BY THE CREDITORS

V.	The goods supplied by Germany to the creditor
countries under paragraph IV (a) above and paid for byAPPENDICES

469

the bank as above provided shall be for the sole use of the
countries receiving them for their internal requirements,
including the requirements of their colonies and depen-
dencies. The goods so delivered shall not be exported
from the country receiving them, except by agreement
between the committee acting unanimously and the
German Government.

VI.	In addition to its powers under paragraph IV,
the committee may, on the instructions of the Eeparation
Commission and at the request of the creditor states, by
debiting their accounts, transfer marks to private indi-
viduals for the purpose of making purchases in Germany,
such reinvestment not to be of a temporary character, and
such property being of classes contained in a schedule
agreed to between the committee and the German Govern-
ment and modified from time to time by similar agree-
ment. In arriving at such agreement the German
Government shall be required to have due regard to the
necessity for making maximum payments to its creditors,
but it shall also be entitled to have regard to maintaining
its control of its own internal economy.

COOPERATION BY THE GERMAN GOVERNMENT AND THE BANK

VII.	The German Government and the bank shall
undertake to facilitate in every reasonable way within
their power the work of the committee in making transfers
of funds, including such steps as will aid in the control
of foreign exchange. When the committee is of the opin-
ion that the bank's discount rate is not in relation to the
necessity of making important transfers, it shall inform
the president of the bank.

ATTEMPTS TO DEFEAT TRANSFER

VIII.	In the event of concerted financial maneuvers
either by the Government or by any group, for the pur-
pose of preventing such transfers, the committee may take470

APPENDICES

such action as may be necessary to defeat such maneuvers;
and in such circumstances it may suspend the operation
of paragraph X, may accumulate the funds or employ
them in the purchase of any kind of property in Germany.

TAX-EXEMPTION PROVISION

IX.	The German Government shall not tax the de-
posits in the bank or goods purchased for the creditor
countries pending removal, nor any securities or loans
representing investment of funds pending transfer, nor
any property purchased under the provisions of the para-
graph next preceding. This exemption does not apply
to property purchased under paragraph VI, but on the
other hand, there should be no tax discrimination against
such property.

PROVISIONS FOR LIMITATION OF ACCUMULATION

X.	(a) When the accumulation of funds not transfer-
able under the provisions of subdivisions (b) and (c) of
paragraph IV shall have reached the sum of 5 milliard
gold marks (whether represented by bank deposits or
loans), the payment for treaty charges provided for shall
be reduced to such an amount as will cover the transfers
and payments provided for under subdivision (~b) and (c)
of paragraph IV without additional accumulation. Such
partial suspense of Germany's obligations shall be opera-
tive only during the period that the conditions of transfer
necessitate, and the standards of payment laid down in
the plan shall be resumed at any time when they can
operate without the limits of accumulation herein laid
down being exceeded.

(b) The committee shall have power to suspend ac-
cumulation before reaching 5 milliard gold marks, if two-
thirds of its members are of the opinion that such accumu-APPENDICES

471

lation is a menace to the fiscal or economic situation in
Germany or to the interests of the creditor countries.

(c) The committee shall, by a two-third majority, have
power to waive the limit accumulations under the condi-
tions provided for in paragraph VIII.ANNEX NO. 7 TO THE REPORT OF THE FIRST
COMMITTEE OF EXPERTS

NOTE OF THE CURRENCIES CIRCULATING IN
GERMANY IN JANUARY, 1924 *

Chapter I.—Paper-Mark Currency

a. legal tender

1.	Beichsmarks.—Reichsmarks are issued by the Reichs-
bank under a pivilege granted to it by the banking law of
March 14, 1875. In 1913 the circulation of paper marks
amounted to 2.1 milliard; on January 31, 1924, it had
reached the figure of 483.7 trillion (English) paper marks,
representing 483.7 million gold marks at the rate of 1 gold
mark—1 billion paper marks.

2.	Notes of private 'banks.—Banks, which at the time
of the promulgation of the law of March 14, 1875, had the
right to issue notes, have retained this privilege. The
number of these banks, which was originally 32, has de-
creased progressively; at the present time there are only
four private banks, namely: Bayerische Banken, Sach-
siche Bank, Badische Bank, Wurtembergische Notenbank.

The total circulation of notes issued by these four
institutions amounted in 1913 to 140,000,000 gold marks.
At the end of January, 1924, it represented about 100,000
gold marks.

3.	Beichskassenscheine.—These currency notes were
issued at the time of the formation of the Reichsbank

* In the English text of this' document the English system of
enumeration is followed throughout.

472APPENDICES

473

(1875) in order to make it possible to place the fiduciary
circulation on a sound basis by means of the withdrawal
of the State notes then in circulation. The issue was origi-
nally fixed at 120,000,000 gold marks, corresponding ex-
actly to the war treasure (in gold) deposited at Spandau.
The circulation, which reached the figure of 320,000,000
in 1920 progressively decreased until August, 1923, wThen
it still amounted to 200,000,000 gold marks. At that date
the Eeichskassenscheine in circulation were completely
withdrawn.

4. DarlehensJcassenscheine.—(Bonds issued by the
Darlehenskassen during the war.) The issue reached its
maximum figure in October, 1922 (14 milliard paper
marks); these bonds ceased to figure in the statements as
from August, 1923, when the circulation amounted to only
11 milliard paper marks, corresponding to less than 10,000
gold marks.

B. AUXILIARY INSTRUMENTS OF PAYMENT

1. Issue of secured notgeld.—The issue of notgeld
(emergency currency) was regulated by the law of July
17, 1922. This currency was issued with a view to supple-
menting that issued by the Reich, the Reichsbank, and the
private banks of issue, the total value of which in circula-
tion was constantly decreasing as a result of the fall of
the mark. The previous authorization of the minister of
finance was necessary. The notgeld was to be secured
by a deposit in fixed values, earmarked in favor of the
Reich Minister of Finance, and corresponding to the
amount placed in circulation, less the actual or estimated
expenses of issue. This asset was to remain at the Reichs-
kreditanstalt at Berlin, which would allow interest at 2
per cent less than the rate of discount of the Reichsbank.
The cover for the notgeld might also consist of three474

APPENDICES

months treasury bonds; but in this case it was the Reichs-
bank which would issue the notgeld and accept the de-
posit in treasury bonds offered as guarantee.

Authorization to issue notgeld was granted to public
and private organizations for a total figure which at the
end of 1923 amounted to 7.6 trillion paper marks, corre-
sponding to 7.6 million gold marks. -The circulation of
this notgeld amounted on December 31, 1923, to 3.4 tril-
lion paper marks; that is, 3.4 million gold marks. An
endeavor has since been made to withdraw the notgeld
from circulation; a decree of January 2, 1924, prescribed
the complete withdrawal in certain unoccupied territories.
On January 31, 1924, the circulation amounted to 1.4
trillion paper marks, or 1.4 million gold marks.

2. Issue of unsecured notgeld.—Numerous emergency
currencies have been issued without authorization from the
German Government, and without the formation of a guar-
antee deposit, both by public and private organizations
and even by private individuals.

The amount of this notgeld issued without authoriza-
tion or guarantee and in circulation at the end of January,
1924, is estimated by the German Government as follows:

3. Railway notgeld.—In order to cover the working
deficit, the Reich railways issued 114 trillion paper marks
during 1922 and 1923. This currency was secured by a
Reich deposit at the Reichsbank of 90,000,000 rentenmarks.
At the end of January, 1924, 56,000,000 were still in cir-
culation.

In unoccupied territory
In occupied territory .

Gold marks
27,600,000
132,000,000APPENDICES

475

Chapter II.—Instruments of Payment in Gold or at a
Fixed Value

1.	Bentenmark.—The rentenbank was created by the
decree of October 15, 1923. The method of creation and
operation is known.

The issue of notes in rentenmarks began on November
15, 1923.

According to the balance sheet of the rentenbank on
January 31, 1923, the amount issued at that date was
1,374,000,000 rentenmarks.

The introduction of the rentenmark has stopped the
issue of notgeld of fixed value.

2.	Dollar treasury bonds (Dollarschatzanweisungen).
—The law of March 2, 1923, authorized the issue of dollar
treasury bonds for a total amount of $50,000,000 (210,-
000,000 gold marks). These bonds, issued in denomina-
tions of from $5 to $100, do not bear interest, but are re-
deemable in gold at 120 per cent on April 15, 1926.

These treasury bonds have been fully subscribed. They
have been used in Germany as a means of payment.

3.	Gold loan (Wertbestandige Anleihe).—This loan
authorized by the law of August 14, 1923, is for a total
sum of 500,000,000 gold marks, which has been fully sub-
scribed. The bonds are expressed in dollars. The small
denominations of from one-tenth to $5 do not bear inter-
est and are redeemable at 170 per cent on September 2,
1935. Bonds for $10 or more bear 6 per cent interest and
are redeemable at par on the same date. These large de-
nominations were issued first for a total sum of 164,-
000,000 gold marks. Subsequent issues of large denom-
inations raised this figure to 204,000,000 gold marks.

In October, 1923, the monetary situation having become
intolerable on account of the fall of the paper mark, and
wage earners having insisted upon being paid in currency476

APPENDICES

of fixed value, the Reich decided (the preparations for the
issue of the rentenmark not being sufficiently advanced)
to issue small denominations of the gold loan.

These small denominations were issued up to a total
amount of 296,000,000 gold marks, 4,000,000 of which were
exchanged against rentenmarks in January, 1924, in ac-
cordance with the privilege granted to the holders in this
respect.

As will be seen later, 10,000,000 of this gold loan have
been assigned as partial security for the notgeld of a fixed
value issued by the railways.

At the end of January, 1924, therefore, the circulation
was as follows:

4.—Notgeld secured by 6 per* cent treasury hands (6
per cent Schatzanweisungen).—Since the small gold loan
certificates proved insufficient for the monetary circula-
tion, the Provinces, towns, chambers of commerce, and the
larger industrial undertakings were given authority to
create emergency currency on a gold mark basis, to be cov-
ered by gold loan certificates of large denominations.
Owing to the scarcity of the latter, the authorities issuing
notgeld were given permission to provide cover in the form
of 6 per cent treasury bonds expressed in dollars and gold
marks, specially created for this purpose by the decree of
October 20, 1923. These bonds fall due on December 1,
1932, and are redeemable at par in German currency on
a gold basis.

The total amount of notgeld thus secured (exclusive
of the notgeld issued by the railways and to which we will

Large notes
Small notes

Gold marks
194,000,000
292,000,000

Total

486,000,000APPENDICES

477

refer later) stood at 110,000,000 gold marks on January
31, 1924.

This notgeld is to be gradually withdrawn from cir-
culation against redemption in loan bonds or German cur-
rency. Redemption was to begin on January 15, 1924, and
it is hoped that the full amount will have been called in
not later than April 1, 1924.

5.	Treasury "bonds and interim bonds issued by the
States.—Certain States issued fixed value loans, some of
the certificates for which were of such small denominations
that they still serve as instruments of payment. The total
value of these bonds amounts to about 50,000,000 gold
marks. Attempts are being made to recall these small de-
nominations by converting them into larger denominations.

6.	Certificates issued by the banks of Hamburg and
Schleswig-Holstein.—Two banks, the Hamburger Bank
von 1923 A. G. and the Schleswig-Holsteinische Goldgiro-
bank A. G., were authorized by the Reich Minister of
Finance to deliver, in exchange for currencies, "discount
certificates" (Yerrechnungsscheine), which still serve as
instruments of payment. It is the intention of the German
Government to dispense with these gold certificates as soon
as a gold currency has been reinstated. The Hamburger
Bank issued certificates to the amount of 25,000,000 gold
marks. No particulars are available regarding the amount
issued by the Schleswig-Holsteinische Goldgirobank, but
the figure is inconsiderable.

7.	Notgeld issued by the railways.—In order to cover
their deficit, the German railways were authorized to issue,
in addition to the paper mark notgeld referred to above,
notgeld having stable value to the amount of 200,000,000
gold marks—10,000,000 of this issue were secured by gold
loan bonds, as explained above, the remaining 190,000,000
being secured by 6 per cent treasury bonds, as already478

APPENDICES

stated. The notgeld issued by the railways amounted to
131,900,000 on January 31, 1924. This emergency cur-
rency is to be withdrawn from circulation by means of a
loan to be issued later by the railways.

TABLE OF INSTRUMENTS OF PAYMENT IN CIRCULATION IN
GERMANY IN JANUARY, 1924

Approximate
value in millions
of gold marks *

I. Instruments of payment expressed
in paper marks:

Eeichsbank notes (as per re-
turn dated 31/1/24)...... 483.7

Notes of the four private banks

of issue ..................................0.1

Notgeld issued by the rail-
ways and secured by a de-
posit of 90,000,000 renten-
marks at the Eeichbank 56.0
Notgeld issued against the
deposit of security in cur-
rencies . ¥................................1.4

Notgeld issued without cover—

In occupied territory...... 132.0

In unoccupied territory.. 27.6

Total ....................... 700.8

II. Instruments of payment expressed
in gold or having fixed value:

Eentenmarks (as per renten-
bank return of 31/1/24).. 1,374.0

* Calculated on the basis of 1 gold mark=l billion paper marks.APPENDICES

479

Approximate
value in millions
of gold marks

Dollar treasury bonds (Dol-
larscliatzanweisungen, law of

March 2, 1923)........... 210.0

Gold loan (Wertbestandige
Anleihe, law of August 14,

1923) ................... 486.0

Notgeld secured by 6 per cent
treasury bonds (6 per cent
Schatzanweisungen, law of

October 20, 1923)......... 110.0

Treasury bonds and interim

bonds issued by the States.. 50. 0
Certificates issued by the
banks of Hamburg and
Schleswig-Holstein (V er-
rechnungsscheine) ........ 35.0

Notgeld issued by the rail-
ways and secured by 6 per
cent treasury bonds (10,-
000,000 of which are secured
by gold loan)............ 131. 9

Total ......................... 2,396.9

III. Denominational currency in rentenpfen-

nigs ................................ 158.0

Grand total.................... 3.255.7

Note.—This total does not include the foreign currencies at pres-
ent in Germany, which, according to the estimate made by the Sec-
ond Committee of Experts, would amount to 1,200,000',000 gold
marks, a figure which has been confirmed by a German authoritative
source.ANNEX NO. 8 TO THE REPORT OF THE FIRST COMMITTEE OF EXPERTS

Provisional Survey op the Budget for 1924 *

I. GENERAL ADMINISTRATION OF THE REICH
A. Ordinary Budget

	In millions of—				In millions		of—
				Expenditure			
Jttevenue	Gold		Dol-		Gold		1 Dol-
	m'ks	3J	lars		m'ks		1 lars
1. Taxes on property, traffic, trade				1. Interest on, and amortis, of debt			
and transfer (direct taxes) ...	4,004	200.2	1,001.0	of Empire .................	156	7.8"	39.0
2. Custom and excise duties (indirect				2. Provision for invalids, war pen-			
taxes) ............... ......	1,080	54.0	270.0	sions, etc..................	810	40.5	202.5
3. Nontax revenues from public serv-				3. Army and Navy..............	450	22.5	112.5
ices ........................	60	3.0	15.0	4. Police .......................	208	10.4	52.0
				5. Industrial and cultural purposes	28	1.4	7.0
				6. Unemployment benefit ........	500	25.0	125.0
				7. Social and other expenditure...	360	18.0	90.0
				8. Finance and taxation depart-			
				ments .....................	380	19.0	95,0
				9. General administrative expenses			
				other than the above........	250	12.5	62.5
				10 Assignments to the States and			
				communes .................	1,800	90.0	450.0
Total of ordinary revenues..	5,144	257.2	1,286.0	Total of ordinary expenditure	4,942	247.1	1,235.5
B. Extraordinary Budget							
1. Revenue from the mint.........	90	4.5	r 22.5	1. For war damages and removal of			
2. Other revenues ................	40	2.0	10.0	effects of the war...........	6	0.3	1.5
				2. Public buildings..............	44	2.2	11.0
				3. Settlement of war expenditure..	20	1.0	5.0
				4. Settlement of expenditure for			
				the Ruhr ..................	60	3.0	15.0
				Total of extraordinary expen-			
Total extraordinary revenues	130	6.5	32.5	diture .................	""130	6.5	32.5
Total of A and B..........	5,274	263.7J	1,318.5	Total of A and B..........	5,072	253.6	1,268.0
							II. EXECUTION OF THE TREATY OF VERSAILLES

1. Cash reparation payments......	52	2.6	13.0
(Discharge of debt due to			
the Reichsbank for redemption			
of an exchequer bill given to			
Belgium.) .................			
2. Clearing office payments......	6	0.3	1.5
3. Cost of armies of occupation...	360	18.0	90.0
4. Rhineland commission.........	34	1.7	8.5
5. Other interallied commissions in-			
cluding reparation commission	18	0.9	4.5
6. Restitution, substitutions, and			
dismantlement costs ........	10	0.5	2.5
7. Home expenditure incurred by			
the carrying out of the Treaty			
of Versailles ...............	160	8.0	40.0
Total of expenditure........	640	32.0	160.0

BALANCE

I. General administration of the Reieh. . .
II. Execution of the treaty of Versailles.

Total of expenditure
Revenues ..........

Deficit

5,072	253.6
640	32.0
5,712	285.6
5,274	263.7
438	21.9

* The figures of this table can only serve as a preliminary estimate and are given with all reserve. This estimate
of the revenues assumes complete restoration of economic unity between occupied and unoccupied territory, renewed
administrative and fiscal supremacy in occupied territory on the part of the Reich and the component States, that the
taxes to be levied according to the general laws of the Reich and the States are once more directed into their treasuries.ANNEX NO. 9 TO THE REPORT OF THE FIRST
COMMITTEE OF EXPERTS

COMPARATIVE POSITION OF DIFFERENT IN-
COMES DRAWN FROM DIVIDENDS IN THE

YEARS 1920-21, 1923-24, AND 1924-25

Question Submitted to the German Government by
the First Committee of Experts

Assume four men with incomes in gold marks: 15,000,
100,000, 500,000, 1,000,000; (a) wholly from dividends of
German industrial companies; (b) one-half from German
and one-half from foreign companies. What amount of
income tax (or its substitutes) plus capital tax will be
payable on the scales for 1920-21, 1923-24, 1924-25,
respectively ?

Reply op the German Government

For the following reasons it is impossible to make reli-
able estimates of the kind desired:

1.	Because the fiscal burden for 1920-21 can not be
calculated owing to the influence of the depreciation of
the currency.

2.	Because no assessment exists for 1923 based on slid-
ing scale rates for that year; indeed for 1923 prepayments
and payments of balance were collected which were regu-
larly calculated on a coefficient of the 1922 taxes and were
therefore not entirely immune from the influence of the
depreciation of the currency.

3.	Because no income tax levied on a sliding scale

482APPENDICES

483

exists so far for 1924; the prepayments for 1924 are col-
lected more according to external standards; the actual
income for 1924 will not be assessed until 1925, when it
will be based upon a tariff which will be determined by
law in the course of the year 1924.

Particulars concerning the form of the taxes will be
found in the memorandum transmitted (see for 1920-21 :
English text, pages 81, 96; French text, pages 81-97; for
1923-24: English text, pages 83-84, 96; French text, pages
84, 97). Reference should be made to the statement con-
cerning the budget estimates of the wages tax and the
prepayments on the income and corporation taxes for 1924
transmitted as V (a) II 1480, of February 16, 1924.

It should further be pointed out that income from divi-
dends to the amount mentioned existed in Germany before
the war to a limited extent only and is unlikely to be
found after 1922, owing to economic developments during
the period of depreciation of the currency.

As early as 1920, there were only six taxpayers in
Germany who had an income from investments of from
3,000,000 to 10,000,000 paper marks, that is, from 200,000
to 667,000 gold marks and 66 with an income from in-
vestments of from 1,000,000 to 3,000,000 paper marks, that
is, about 67,000 to 200,000 gold marks. From about the
middle of 1922 income from investments had practically
disappeared.

In view of the circumstances mentioned above, any
estimates are attended with exceptional difficulties. An
attempt is made below to employ available bases for valu-
ation as required in the questionnaire.

The estimates given in the inclosed table showing the
charge on incomes from dividends of 50,000, 100,000,
500,000, and 1,000,000 gold marks fulfill the conditions
set forth in the questionnaire—

(a) That the whole income is drawn from dividends
of German Industrial companies.484

APPENDICES

(i) That half the income is drawn from German and
half from foreign industrial companies.

It was necessary, in drawing up this table, to include
in the calculation of the charges on income derived from
dividends of German industrial companies, the taxes which
had to be paid by the German companies if they distrib-
uted dividends to the amounts in question; it must not be
forgotten that this tax is deducted before the distribution
of the dividends. In converting the income in gold into
paper marks and the taxes in paper marks into gold marks,
the rate of the dollar has been used as the basis. This was
possible because the income is indicated in gold, and there-
fore the calculation of the tax at the dollar rate affords a
basis for comparison.

In making the calculation the following assumptions
have been made:

I. For 1920-21.—The dividend has been paid to the
taxpayer in 1920. The tax paid by the company has first
been deducted from the profits which the company made
in 1919 and on which it paid the tax in 1920. A further
prior charge consists of the 10 per cent tax on revenue
from capital which was deducted from the German divi-
dends of the taxpayer at the time of their receipt in 1920
and which he paid in 1921 for his foreign dividends.
From the remaining revenue, after deduction of the tax
on revenue from capital, the taxpayer has paid his income
tax for 1920 according to schedule. In estimating the ac-
tual fiscal burden, account has been taken of the fact that
the income was obtained in the year 1920; that the cor-
poration tax and the tax on revenue from capital were
paid at the time of receiving the dividends, that is also in
1920, and that on the other hand the tax on revenue from
capital in respect of foreign dividends and the income tax
were not paid until 1921, and were therefore paid in a de-
preciated currency. On the basis of the average dollarAPPENDICES

485

rate, one gold mark was in 1920 equivalent to 15 paper
marks and in 1921 to 24.9 paper marks.

Example 1.—Let us assume the income from dividends
in German companies in 1920 to be 50,000 gold marks
=750,000 paper marks. Before distributing 750,000
paper marks, a company in 1920 had to pay an average
tax of 127,500 paper marks. The 750,000 paper marks due
to the person receiving dividend were, upon receipt, re-
duced by 10 per cent; that is, by 75,000 paper marks. In
1920, therefore, 202,500 paper marks were paid in taxes=
13,500 gold marks. From the remaining 675,000 paper
marks he had to pay the sum of 356,600 paper marks in
income tax=14,321 gold marks in 1921. The total charge
was therefore 27,821 gold marks.

Example 2.—Let us assume the income from dividends
in German companies in 1920 to be 25,000 gold marks =
375,000 paper marks and from foreign companies 25,000
gold marks, making a total of 50,000 gold marks = 750,000
paper marks. Before distributing 375,000 paper marks,
German companies had, in 1920, to pay an average tax
of 63,750 paper marks = 4,250 gold marks. The 375,000
paper marks in German dividends due to the recipient
were, upon receipt, reduced by 10 per cent; that is, by
37,500 paper marks = 2,500 gold marks.

In 1920, therefore, 6,750 gold marks were paid in taxes.
In 1921 the person drawing dividends had in the first
place to pay a 10 per cent tax on revenue from capital on
the 375,000 paper marks; that is, 37,500 paper marks =
1,506 gold marks. Furthermore, after deduction of the
tax on revenue from capital he had to pay on the remain-
ing 675,000 paper marks an income tax of 356,600 paper
marks = 14,321 gold marks. In this case the 1921 taxes
thus amount to 15,827 gold marks. Including the 1920
taxes the total charge is therefore 22,577 gold marks.

II. For 1923-24.—It is assumed that the dividends for486

APPENDICES

1923 have been distributed to the shareholders. In the
total prior charge the tax on fortunes has not been taken
into account. Only the corporation tax which under the
law of March 20, 1923, on the depreciation of currency,
was paid by the company for the business year 1922,
which year was taken as the basis for the distribution of
dividends, has been indicated as the prior charge. On the
basis of the tariff the prior charge amounted to 45 per
cent. Owing, however, to the great depreciation of cur-
rency in 1923, the gold value on the date of payment was
insignificant. The prior charge has been indicated there-
fore at only 3 per cent, since the dollar rate at the time
of the payment of the tax, that is on April 25, amounted
to 29,200, namely about fifteen times the average dollar
rate for 1922 (1,885.78). In many cases, owing to delay
in closing the taxes the prior charge was, as a result of the
rapid depreciation of currency, much less than 3 per cent.
In the case of the person receiving dividends, the tax in-
dicated is that which he had to pay as increased prepay-
ments and payment of balance for 1923.

Since there was no proper assessment for income tax
on a sliding scale for 1923, the payments of balance for
1923 have been determined according to the taxpayer's
capacity to pay on the basis of his gold mark payments
in 1923, and in certain cases on the basis of a lavish
expenditure.

If, on the basis of the material at its disposal the
finance office can assume that the taxpayer had a gold
mark income of 50,000 or 100,000 marks, a charge of at
least 25 per cent may be allowed for.

If there are really cases of still higher incomes, a
charge of 35 per cent on 500,000 gold marks and of 40
per cent on 1,000,000 gold marks will be paid. The total
charge therefore amounts to 28 per cent in the case of
incomes of 50,000 and 100,000 gold marks derived from
dividends paid by German companies; if half of the incomeAPPENDICES

487

is derived from foreign companies half of the prior charge
constituted by the corporation tax does not come into con-
sideration and the total charge therefore amounts to 26y2
per cent. For incomes of 500,000 gold marks the total
charge represents 38 per cent or 36^/2 per cent, for 1,000,-
000 gold marks 43 per cent or 41% per cent.

III. For 1924-25.—It is assumed that the dividend for
1924 is distributed to the shareholders. The prior charge
indicated is the tax which the company has paid as cor-
poration tax prepayments and payment of balance for
1923.

The example of 50,000 gold marks has been calculated
as follows—1 gold mark was 449 paper marks, according
to the average rates of exchange of the dollar for 1922;
50,000 gold marks therefore equal 22,450,000 paper marks.

First prepayment (under the currency depreciation
law of March 20, 1923) 20 per cent = 4,490,000 paper
marks, paid on May 25 (1 gold mark = 12,190 paper
marks) =369 gold marks.

Second prepayment (under the law for increases of
July 9-August 11, 1923), 600x10 per cent=l,347,000,000
paper marks, paid on August 25 (value of the gold
mark = 1,120,000) = 1,203 gold marks.

Payment of balance on January 10, 1924 (under ar-
ticle I, section 2, of the second fiscal emergency decree),
0.60 gold mark on each 1,000 marks of the 1922 fiscal
debt; the 1922 fiscal debt in respect of dividends amounted
to 45 per cent of the sum of 22,450,000 paper marks in-
dicated above; that is, to 10,102,500 paper marks. Conse-
quently, the final payment of 0.6 per thousand in gold =
6,061 gold marks. The total prior charge, therefore,
amounts to 7,633 gold marks.

In the case of the person receiving the dividend the
only payments demanded are those to be paid as income-
tax prepayments and as tax on fortunes in 1924. Ten per
cent only is first deducted at the source from the revenue488

APPENDICES

from investments as income-tax prepayment; this is, there-
fore 5,000 gold marks on 50,000 gold marks. For the tax
on fortunes it is assumed that the dividends paid by Ger-
man companies average 1 per cent of the quoted value;
even this computation must, however, be too high for a
great many German companies at the present time.

In the case of foreign companies it is assumed that the
dividends amount to 5 per cent of the quoted value of the
share; 50,000 marks in dividends from German companies,
therefore, represent a quoted value of 5,000,000 marks.

For the shareholders' payments in respect of the tax
on fortunes this is valued at only half the quoted value—
that is, 2,500,000 marks—since the company itself has to
pay a tax on fortunes for which the fortune is assumed
to be at least the total quoted value of the shares.

On a total fortune of 2,500,000 marks the tax on for-
tunes amounts to 17,500 marks. The provisional charge
on an income of 50,000 marks from dividends from Ger-
man companies is therefore as follows:

Gold marks

Tax on corporations.............. 7, 633

Deduction at the source from revenue

from investments .............. 5 , 000

Tax on fortunes.................. 17, 500

Total ....................... 30,133

If half the dividends come from a foreign company,
the charge in respect of the tax on capital is as follows:

Twenty-five thousand marks from German companies.
Quoted value 2,500,000 (1 per cent interest), half of
which is counted; that is, 1,250,000 marks.

Twenty-five marks from foreign companies. Quoted
value 500,000 marks (5 per cent interest) counted in full,
since the company does not pay the tax on fortunes in
Germany.APPENDICES

489

The quoted value used for the tax on fortunes is there-
fore 1,750,000 marks and the sum paid in respect of the
tax 11,375 marks.

As half of the dividends come from foreign companies,
the deduction at the source on half the revenue from in-
vestments in this case also provisionally does not come into
consideration. The finance office is, however, entitled to
collect prepayments from the taxpayer with due consider-
ation to his requirements. No sum is, however, included
in the inclosed table on this account; for, as explained
above, the calculations for 1924-25 constitute only pro-
visional tax payments, which represent prepayments on
the definite income tax for 1924. For the 1924 income,
the taxpayer will still be assessed at the beginning of 1925,
and he will then have to make considerable postpayments,
which are correspondingly higher in the case of income
from foreign dividends from which no deduction at the
source has been made in Germany. No sum could be in-
cluded for postpayments, as the necessary regulations
must first be enacted by law during the course of 1924
(in particular the rates of taxation.)

Income in gold marks	Definitive charge		Charge in  respect of
	Corpora- tion tax, tax on rev- enue from capital, in- come tax, 1920-21	Corpora- tion tax, in- come tax, 1923-24	corporation tax and tax on fortunes;  nonrecur- rent charge in respect of income tax prepay- ments, 1924-25
50,0001 ..................	27,821	14,000	30,133
50,000 2 ..................	22,577	13,250	17,691
3 00,000 1 .................	57,586	28,000	60,266
100,000 2 .................	47,098	26,500	37,133
500,000 1 .................	295,707	190,000	313,830
500,000 2 ..................	243,267	182,500	194,415
1,000,0001 ...............	593,357	430,000	627,660
1,000,000 2 ...............	488,477	415,000	388,830

1 German companies.

-2 Half from German and half from foreign companies.

1 German companies.

-2 Half from German and half from foreign companies.REPORT OF THE SECOND COMMITTEE OF
EXPERTS

Covering Letter

Dear Mr. Chairman : I have the honor to present the
unanimous report of the committee appointed by the
Reparation Commission to inquire into the amount of
German exported capital and to consider the means of
bringing it back to Germany.

In laying before you the resiilt of our labors may I
be permitted in the name of the committee to express the
hope that our work may assist in solving the problems in-
volved in the execution of the treaty of peace.

I remain, yours faithfully.

R. McKenna.

The Chairman, Reparation Commission.

Text of the Report

In pursuance of a decision of the Reparation Com-
mission of the 30th of November, 1923, we were created a
committee to consider the means of estimating the amount
of German exported capital and of bringing it back to
Germany. We were convened in Paris on the 21st of
January, 1924, and we have held together 38 meetings,
first in Paris, then in Berlin, and finally again in Paris.
ViTq have examined numerous witnesses and have availed
ourselves of the services of trained economists, technical
advisers and expert accountants. "We have also studied the
published works on the subject by well-known economists,
and each member of the committee has furnished reports
on particular problems.

490APPENDICES

491

Our estimates relate to the 31st of December, 1923.
Later events may, of course, have either increased or de-
creased the amount of German capital abroad.

In our investigation of the amount of capital owned by
Germans in foreign countries, we were confronted by
very considerable difficulties. There are many ways by
which Germans can acquire capital abroad, but in most
cases no precise figures can be given. It is nearly always
a matter of estimate, and the utmost we could hope to do
with any degree of certainty was to lay down limits be-
tween which the actual amount is to be found. The
distance which divides these limits marks the want of pre-
cision of the material at our disposal.

One method of investigation, to institute an inquiry
through bankers and business men in those countries in
which German capital is believed to be deposited or in-
vested, was rejected by us at the outset. We have availed
ourselves of all information of a public or official char-
acter supplied from countries outside Germany, but we
were of opinion that it would be neither proper nor useful
to request the disclosure of specific transactions which
in general would have been entered into under an implied
condition of secrecy. Moreover, we felt that even though
all obtainable information were freely given to us, it must
be extremely defective, as much German capital in foreign
countries is certain in existing circumstances to be hidden
in various ways under assumed names.

The method we have adopted is altogether different.
Our first step was to form an estimate of the total value
of German capital abroad at the outbreak of war.

Next we considered what was the net reduction in this
total at the time of the Armistice. We took into account
on one side the balance of trade, advances by Germany to
her Allies, loss by seizure and sequestration of property
confirmed by the Versailles Treaty and loss through depre-.492

APPENDICES

ciation of the value of property and securities. On the
other side we considered the sales of German securities, the
sales of gold, the accumulation of interest, and finally the
effect on the trade balance of the imports into Germany
from occupied territories. These imports were commodi-
ties either requisitioned without payment, or paid for, in
the case of Belgium and Poland, largely by marks which
remained in the country, and, in Rumania and occupied
France, as well as in Belgium and Poland, by local cur-
rencies which the German Government caused to be
printed and issued for the purpose.

Finally, starting from the basis of the remaining pre-
war German assets, we examined in detail the various
means by which Germans can have increased or diminished
their capital abroad during the period from the Armis-
tice to the close of the year 1923. The reliability of our
final estimate depends upon the completeness of our ex-
amination of the different elements which make up the
total of German foreign acquisitions and of the various
ways in which such acquisitions may have been expended.

The chief method by which Germans have acquired
foreign assets since the Armistice has been by the sale
of mark bank balances. Our estimate of the total sum
under this head has been obtained by a procedure found-
ed upon the principle that every foreign sale by a German
of a mark bank balance creates at the moment of sale a
corresponding holding of a foreign bank balance in Ger-
many. The periodic totals of foreign balances shown in
the books of the German banks were disclosed to us, and
with the assistance of expert accountants we have been
able to ascertain the net proceeds expressed in gold de-
rived from the sale of marks. It is interesting to note
that the foreign assets acquired in this way amounted to
between seven and eight milliards of gold marks, the whole
of which in consequence of the final devaluation of theAPPENDICES

493

mark was lost by more than one million foreigners who
at one time or another were buyers of mark credits.

This figure is one of the credit factors in estimating
the final total.

Other principal sources of German foreign assets have
been the sale of goods, securities, real estate, precious
metals and mark bank notes; interest accumulations, tour-
ist expenditure in Germany, German holdings in ceded
territories in Poland, Dantzig, etc., foreign money ex-
pended by the Allied armies of occupation, remittances
from Germans abroad, earnings of shipping, railway and
canal freights for foreign goods in transit through Ger-
many, insurance profits, etc.

On the other hand, German foreign assets have been
expended on the purchase of goods imported, cash pay-
ments to the Allies, interest paid on German securities
held abroad, German tourist expenditure, etc.

On all these heads of receipt and expenditure, the
German statistical records and estimates, official data,
bankers, and business reports, and other similar evidence,
have been subjected by us to the most critical scrutiny, and
their reliability has been tested by our examination of wit-
nesses and inspection of original sources of information.
Our investigations and the evidence obtained led us to dis-
card entirely the values of German imports and exports
as stated in the official reports, and to revalue all com-
modities on the basis of the then current world prices with
such allowances as the special circumstances of German
trade at the time may have rendered necessary.

After a close examination of all the factors which make
up the total sum, we are of opinion that German capital
abroad of every kind, including capital of varying degrees
of liquidity and capital invested in participations in for-
eign companies and firms, and after taking into account
all credit and debit items, was at the end of the year 1923494

APPENDICES

not less than 5.7 milliard gold marks and not more than
7.8 milliard gold marks, and we think that the middle
figure of 6% milliard gold marks is the approximate total.

We draw special attention to the foreign currency in
Germany, which, though not included in our valuation of
capital held abroad, is so closely akin to a foreign asset
that it must not be overlooked. It may indeed be said
that this currency, the total of which we estimate at not
less than 1 milliard two hundred million gold marks, is a
German holding in the most liquid form for conversion
into foreign assets.

On the other hand, on a broad view of German finan-
cial capacity, the value of the property in Germany held
by foreigners should not be left out of account. The an-
nual yield from this property, whether in the form of
rent, interest, or dividends, is at present inconsiderable
and may at any time become subject to special taxation,
particularly in the case of rent in respect of real estate
purchased at the low prices current in recent years. We
estimate, after very close study of the question, that the
5 real estate and securities owned in Germany by foreigners
represent a value of from 1 to 1% milliard gold marks.

The committee have thought it desirable to give in an
annex to this report additional information in respect of
their estimates of German assets abroad in 1914 as well as
of the principal credit and debit factors, both during and
since the war, that have gone to make up the final total
of German capital abroad.

The second part of our inquiry was to investigate the
means of bringing exported capital back to Germany.

The so-called flight of capital in this instance was in
the main the result of the usual factors. It arose princi-
pally from the failure of the Government to bring its
budget into proper relation, and, as a corrollary of such
Qnssi ;oajip aqi pwe stooj o&rej jo Suisiej aiy. uiojjAPPENDICES

495

of paper money. Secondly, it was due to the action of
speculators and timid investors who sold their marks
against the currency of other countries, while the exporters
of goods retained abroad all that was possible of the pro-
ceeds of their sales. In the particular case under inquiry,
however, the flight of capital was accentuated by the atti-
tude of the people of Germany toward payments to her
war creditors and was marked by new and ingenious de-
vices and schemes for evading restrictive legislation and
for cloaking the real ownership of foreign balances.

The failure of the methods employed, both old and
new, demonstrates the final ineffectiveness of restrictive
legislation when successful evasion is so richly rewarded.
Neither legal enactment nor severe penalties resulted in
disclosure of assets abroad or hampered the flight of capi-
tal. We feel that this would have been true whether the
Government had or had not used its best endeavors to
enforce the laws and regulations.

In our opinion the only way to prevent the exodus of
capital from Germany and to encourage its return is to
eradicate the cause of the outward movement. Inflation
must be permanently stopped. If the issue of currency is
strictly confined within the true limits of national require-
ments on a stable basis of value, the German with capital
abroad will feel assured that he will suffer no loss in
bringing it home; the speculator can no longer look for a
profit from the sale of marks. We have already seen in
the case of Austria how, when the currency is fairly sta-
bilized, the necessities of foreign trade tend to bring back
existing foreign balances. Restrictive legislation, which in
the main has proved futile in preventing the export of
capital, becomes superfluous the moment there is no longer
any inducement to evade the law. It is indeed to be
feared the laws purporting to compel the return of capi-
tal would have the reverse effect to that which might be
wished.496

APPENDICES

The method of securing a currency in Germany capable
of maintaining a sufficiently stable international value
covers the whole question of budgetary equilibrium and
the establishment of a bank of issue on a sound basis.
These matters, which fall outside the scope of our inquiry,
have been referred by the Reparation Commission to an-
other committee whose conclusions we have the advantage
of knowing. If effect is given to their recommendations,
we think that a considerable part of the German assets
now in foreign countries will return in the ordinary course
of trade.

While we are of opinion that special legislation to
prevent the export of capital or compel its return is not
required when a country's finance is on a stable basis, we
recognize that in the case of Germany a period of transi-
tion must necessarily ensue before stability can be obtained
and confidence restored. We suggest that during this
period an amnesty should be granted for a limited time
from the penalties imposed by existing enactments and
that special terms be offered for subscriptions to Govern-
ment loans made in foreign currencies. Well-conceived
measures of this kind would be helpful in hastening the
return of capital and the final restoration of financial
equilibrium in Germany, conditions which are essential
to the payment of reparation.

We desire to express our sincere thanks to the officers
of the Reparation Commission, and to the economists,
statisticians, and expert accountants who have aided us,
for whose valuable assistance we are greatly indebted.

Reginald McKenna, Chairman<
Henry M. Robinson,

Andre Laurent-Atthalin.

Mario Alberti.

Albert E. Janssen.

April 9, 1924.ANNEX

Summary
I. Assets abroad in 1914.

II. Period of the war:

а.	Surplus of imports and Germany's advances

to her Allies.

б.	Depreciation of pre-war foreign assets; se-

questration and liquidation measures;

c.	Profits realized by Germany in occupied ter-

ritories ;

d.	Sale of gold and German securities;

e.	Eeturn from German assets abroad.

III. Post-war period:

а.	Surplus of imports and cash payments made

by Germany under the Peace Treaty;

б.	Sales to foreigners of mark credits and bank-

notes ;

c.	Sales of gold.

d.	Sales of German real property and German

securities ;

e.	Expenditure by foreigners traveling in Ger-

many and by Germans traveling abroad;

f.	Expenditures by the armies of occupation;

g.	Earnings from shipping, insurance, transit,

etc.;

h.	Income from German investments abroad and

from foreign investments in Germany; re-
mittances made by Germans residing abroad;
497498

APPENDICES

i. German private property in ceded territories;
j. Foreign bank notes in Germany.

I. Assets Abroad in 1914

The value of German assets abroad in 1914 has been
estimated by different economists at sums varying be-
tween 20 and 35 milliard gold marks. Besides these
unofficial estimates two estimates of an official nature, as
well as a census, have been made by the German Govern-
ment. The earlier of these two official estimates is that
made in 1905 by the imperial admiralty; the later one was
supplied by the German Government in 1924 in reply to
a question raised by the second Committee of Experts.
The census, which only covered securities, was made by the
German Government during the war, in August, 1916.

In the question put to the German Government the
committee not only asked for an estimate of the foreign
assets held by German nationals in 1914, but also re-
quested it to submit its comments on the various estimates
already made by German economists.

All these documents—estimates of German economists,
and those of neutral, allied and associated countries, offi-
cial estimates and census, and the replies of the German
Government—have been examined and compared. Taking
into account all the factors of valuation, the committee has
come to the conclusion that the figure of 28 milliard gold
marks may be accepted as representing the value of Ger-
man assets abroad at the time of the declaration of war,
it being understood that this figure of 28 milliards com-
prises only the assets abroad belonging to German nation-
als residing in Germany and not those belonging to
German nationals residing abroad. In this estimate se-
curities have been taken at their face value in gold marks.APPENDICES

499

II. Period of the War

(a)	surplus of imports and germany *s advances to her

allies

The difficulty encountered by Germany in exporting
her goods during the war, as well as her persistent en-
deavors to increase her imports by every possible means,
in order to provide for the requirements of her armies,
naturally produced a surplus of imports, considerably in
excess of the figures of the normal pre-war deficit. To
this deficit in Germany's foreign trade balance must be
added the sums advanced by Germany to her allies to
enable them to pay for their imports, for which she re-
ceived no corresponding return. The figure indicated for
these two items may be considered to be reliable and
amounts to an aggregate sum of 15.2 milliard gold marks,
subject to the modifications referred to in paragraph (c).

(b)	depreciation of pre-war foreign assets; sequestra-

tion and liquidation measures

Various estimates of the reduction in German assets
abroad during the war as a result of depreciation have
been made by several economists, whose figures are gener-
ally based on an estimated total of from 20 to 25 milliard
gold marks for German assets in 1914. Their estimates
seem too low, if we take as a basis the figure of 28 mil-
liards adopted by the committee for German assets abroad
in 1914. This impression is moreover confirmed by in-
formation which the committee has obtained by its own
investigation.

It is impossible to adopt a definite figure in determin-
ing the value of the assets seized and liquidated in the
allied and associated countries. On the basis of informa-
tion obtained by the committee from the Government of500

APPENDICES

the allied and associated powers as well as from Germany,
the committee has been able to estimate at approximately
16.1 milliard gold marks the reduction in German assets
abroad during the war, as a result of depreciation and
liquidation and sequestration measures. In adopting this
figure no allowance has been made for the fact that cer-
tain German assets abroad may have been utilized to cover
the payment of imports, nor for the fact that German
assets abroad may have increased owing to the accumula-
tion of the interest accruing on these assets. These several
items are discussed elsewhere. The above figure therefore
represents a net reduction in German assets abroad for
which Germany during the war period received no return.
These assets underwent a further decrease in value during
the period following hostilities, which decrease was taken
into account.

Lastly, the committee is of opinion that both during
and since the war, the category of assets in neutral coun-
tries has likewise undergone a reduction in value, and that
in particular the greater part of such securities held by
Germans has no longer a value equivalent to their face
value, even taking into account the effect of the decline
in the value of gold.

(c) PROFITS REALIZED BY GERMANY IN OCCUPIED TERRITORIES

An examination of German economic measures taken in
Belgium during the war, to which the attention of the
committee was called, suggested that substantial profits
had accrued to Germany from the exploitation of occupied
territories. Consequently the committee has made a care-
ful study covering not only German operations in Belgium
and northern France but also those in Poland and
Rumania.

No attention has been paid to the purely military
aspects of these operations, such as, for instance, requisi-APPENDICES

501

tions intended to provide for the partial subsistence of the
German occupying troops. Quite apart from such matters,
however, it was found that the profits realized by Ger-
many by requisitions and by other methods in occupied
territories are closely connected with the deficit of the
German balance of trade. With the help of German
official documents, in particular reports by the military
administration drawn up during the war and German
{memoranda estimating the value of war damages, the com-
mittee has ascertained that the profits realized by Ger-
many were principally obtained as follows:

Germany obtained in occupied territories considerable
quantities of commodities which, through the operation of
centralized importing companies specially created for this
purpose were transported to Germany for internal con-
sumption. Most of these goods were either not paid for
at all, or were paid for in paper marks which were sub-
sequently left in the country and amounted in the case of
Belgium to 6 milliard paper marks, or were purchased
through the medium of issues of local paper currency.
The special object of such issues, according to a statement
by the German staff, was to enable Germany and her
allies to receive goods from occupied territories free of
charge during the whole period of hostilities.

By requisition or in exchange for paper marks or local
currency Germany also obtained considerable quantities
of the currency of invaded countries. Thus, in the north
of France the German military authorities imposed on
towns fines and levies for which payment was required in
German money, gold coin, or notes of the Bank of France.

Finally, foreign assets were required by Germany,
especially in Belgium and France, notably by means of
sequestration of securities, coupons, and other credits, and
these, like the bank notes mentioned above, served in part
to pay for imports from neighboring neutral countries.502

APPENDICES

It must also be pointed out that when the German coal
centrale in Belgium issued export licenses for coal for
Holland, Switzerland, or Sweden, the German authority
kept for itself the foreign currency thus obtained, and
forced the mines to accept paper marks.

The committee has adopted the figure of from 5.7 to
6 milliard gold marks as corresponding to that portion of
the profits derived from this exploitation of Belgium,
northern France, Poland, Lithuania, Rumania, etc., rep-
resenting imports for which no payment was made and
which, in consequence, had not been allowed for in her
balance of accounts.

(d)	SALE OF GOLD AND GERMAN SECURITIES

The sale of gold and securities was the principal means
whereby Germany paid for her imports during the war.
The export of gold, which took place mainly during the
early years of the war, reached a total amount of 1 mil-
liard gold marks.

As regards German securities, widely diverging esti-
mates have been made of the amounts sold. In our opin-
ion the total figure is not far from 1 milliard gold marks.

(e)	RETURN FROM GERMAN ASSETS ABROAD

The revenue which Germany derived from her assets
abroad was very considerably diminished immediately
after the declaration of war and further reductions
occurred during the period of hostilities.

It should, indeed, be noted that interest ceased to be
paid on the assets held by Germany in countries with
which she was at war. Some of these assets were sold dur-
ing the war and the depreciation of others became very
marked toward the end.

On the other hand, the industrial securities, particu-APPENDICES

503

larly those of neutral countries, continued to pay interest
at rates frequently higher than before the war.

While the committee has been unable to determine
exactly the variations for each year of the war in the reve-
nue derived from German assets abroad, it has at least
been able to make an estimate which may be taken as very
nearly accurate.

III. Post-war Period

(a) surplus of imports and cash payments made by
germany under the peace treaty

One of the main causes of the reduction of German
assets abroad during the post-war period arose from the
necessity for Germany to cover the deficit in her trade bal-
ance and to meet the cash payments which had to be made
to the Allies under the Treaty of Versailles. These two
items together amount to between 9 and 10 milliard gold
marks.

As already stated in the report the figures given in
the official German foreign trade statistics are quite in-
accurate for certain periods. This observation applies par-
ticularly to the figures originally published.

For this reason, it was necessary to revise completely
the balance given for every year. Taking into account the
various factors entering into the calculation, the commit-
tee is of opinion that this revision has made it possible
to reach a figure more nearly equal to the actual excess
of imports than had been the case in previous reports deal-
ing with this question. The fixing of the amount of the
deficit in the trade balance is of true importance, since
any valuation that is to be made of German assets remain-
ing abroad largely depends on the figure finally adopted
for that deficit.

The cash payments made by Germany to the Allies—to504

APPENDICES

the Reparation Commission, under the reparation recovery-
act, payments to the clearing office, etc.—do not give rise
to dispute.

(b) SALE TO FOREIGNERS OF MARK CREDITS AND BANK

NOTES

Germany has acquired foreign assets in large volume
since the armistice through opening credit accounts in her
banks for the benefit of foreigners. These credits were
paid for by the foreigners in the money or credits of other
countries, and as they underwent a constant shrinkage in
real value through the depreciating value of the mark,
German economy profited largely from the transactions.
The committee made a careful study of the values so ac-
quired by an investigation, with the aid of expert account-
ants, of the mark credit balances on foreign account in the
principal banks of Germany during the post-war years.

It was found that there had been during this five-year
period more than a million individual accounts of this
kind. In most cases the mark credits of these accounts
had not been immediately utilized and had undergone a
process of shrinkage through the depreciation of mark
values that amounted to a veritable evaporation.

The work of the expert accountants was directed to
determine as nearly as possible the aggregate amount of
the shrinkages in these very numerous accounts that was
due to the depreciation of the value of the mark. With
this end in view the leading banks in Germany were asked
to transcribe from their books the data showing the credit
balances and the amounts of debits in the accounts of all
foreigners at the close of each month from the end of 1918
to the end of 1923.

After the sums indicated had been converted to gold
equivalents at the current rate of exchange, it was possible
to draw close inferences as to the total gains accruing toAPPENDICES

505

German economy as a whole. The data furnished by the
banks were submitted to careful checking by the expert
accountants, and it was found that they had been cor-
rectly compiled.

Credits in German marks were purchased by the citi-
zens of a great many nations, but the largest amounts were
taken by the citizens of a relatively restricted group of
countries.

The methods used in determining the value of the
assets acquired by the German banks in this way were sub-
jected to an interesting check which consisted of taking a
single account of a foreigner who had engaged in spec-
ulative operations on a considerable scale, and converting
the figures of the transactions to a gold basis for every
day on which any debit or credit entry was recorded. The
results indicated that there was no tendency for this de-
tailed method of conversion to yield results materially
different from those found by the more general mass
methods that it was necessary to employ in computing the
figures for Germany as a whole.

When the whole inquiry, which was of considerable
length, had been completed it was found that Germany
had profited by the sale of mark credits by an amount of
from 7 to 8 milliards of gold marks. In addition the sale
of paper marks in foreign countries had resulted in profits
amounting to from 600 to 700 millions of gold marks, or a
total from these two sources of 7.6 to 8.7 milliards of gold
marks.

(c) SALES OF GOLD

German official statistics record sales abroad by Ger-
imany principally in the years 1919-1921 and 1923 of gold
to a total amount of l1/^ milliard gold marks. The ac-
curacy of these figures is not disputed.506

APPENDICES

(d)	SALES OF GERMAN REAL PROPERTY AND GERMAN

SECURITIES

During the period characterized by the rapid deprecia-
tion of the mark, sales of real property to foreigners
reached an unwonted development in Germany.

In estimating the proceeds of such sales, the commit-
tee had before it various statistics indicating in detail the
number and amount of sales of real property to foreigners
since the war in some of the principal towns of Germany,
and also in districts of varying economic character.

As regards securities, Germany was able during the
first part of the post-war period to market some of her
securities abroad, but as soon as her financial position be-
came more uncertain most of these transactions were sus-
pended.

In the aggregate the committee considers that sales
of German real property and securities to foreigners
amounted to about IV2 milliard gold marks.

(e)	EXPENDITURE BY FOREIGNERS TRAVELING IN GERMANY

AND BY GERMANS TRAVELING ABROAD

During the five years which have elapsed since the
Armistice, considerable sums have been spent in Germany
by large numbers of foreigners who have traveled and
lived in the country. Our estimate of the expenditure by
these travelers was facilitated by the official statistics
kept by the largest German towns and by the German
Government. The committee was able to obtain a fairly
exact idea of the number of foreigners who came to Ger-
many during the period in question, the average length of
their stay and the daily expenditure of each traveler.

As against this, numerous German travelers belonging
mostly to the wealthier classes have stayed in foreign
countries, especially in the last two or three years. TheirAPPENDICES

507

expenditure has to be deducted from the expenditure by
foreigners in Germany referred to above, and very con-
siderably reduces the amount of the German assets real-
ized from that source.

(f) EXPENDITURE BY ARMIES OF OCCUPATION

During the post-war period, a certain sum has been
realized by Germany through the expenditure in foreign
currency, or in marks bought with foreign currency, by
the troops occupying German territory.

Each of the Governments having or having had armies
of occupation in Germany has supplied the committee with
a detailed estimate of the expenditure made by the offi-
cers and men or by the various army services. These
estimates were checked in several ways by a series of cal-
culations relating to each army's different methods. The
results of these different calculations have been combined.

(g)	EARNINGS FROM SHIPPING, INSURANCE, TRANSIT, ETC.

Earnings from shipping, insurance, commissions,
transit, were an important source of German income prior
to 1914, but during the war such earnings in great meas-
ure disappeared. In the five years 1919-1923 some of
the lost ground has been regained, particularly in the field
of shipping and insurance, and the committee has taken
this item into account.

(h)	INCOME FROM GERMAN INVESTMENTS ABROAD AND FOR-
EIGN INVESTMENTS IN GERMANY—REMITTANCES MADE BY

GERMANS RESIDING ABROAD

The total amount of the income produced by German
assets abroad since 1919 is of course substantially below
that produced by German assets abroad before the war.
The assets held abroad by Germany since the war repre-508

APPENDICES

sent indeed only a small and for some part unproductive
fraction of her pre-war holdings. It is true, on the other
hand, that the payments which Germany has had to make
since 1919 in respect of German securities held by for-
eigners have been inconsiderable. After a careful study
of the question, the committee came to the conclusion that
a set-off of the two items—income from German invest-
ments abroad and income from foreign investments in
Germany—resulted in a small balance in Germany's favor
for the whole of the post-war period.

The remittances sent to Germany by German nationals
residing abroad and German connections and sympathizers
amount to a considerable figure in Germany's favor.

(i) GERMAN PRIVATE PROPERTY IN CEDED TERRITORIES

Most of the valuations of German property abroad
have taken little or no account of the value of German
private property in the ceded territories of Silesia, Posen,
Danzig, etc.

These properties are included in our own estimate in
so far as, according to the definition adopted by the com-
mittee, they are owned by Germans residing in Germany.
Although it is very difficult to determine with any pre-
cision the extent of these properties, the committee con-
sidered that it should not exclude from its valuation
certain industrial assets, particularly those in Upper
Silesia.

(j) FOREIGN BANK NOTES IN GERMANY

There is in Germany a large quantity of foreign bank
notes (dollars, florins, Scandinavian crowns, Swiss francs,
pounds sterling, and more especially in the occupied ter-
ritory, Belgian and French francs). The exceptional plight
of the German mark has influenced Germans in acquiringAPPENDICES

509

stable currencies wherever possible and on a large scale.
These foreign notes have remained in the country instead
of finding their way abroad again through the normal
channel of trade, as would have been the case in ordinary
circumstances.

Various estimates of the total amount of such notes
were made in Germany, particularly toward the end of
1923. The committee has compared the different esti-
mates with the information which it collected in Germany
and other countries. In its opinion, the value of the for-
eign notes existing in Germany at the end of 1923 amounted
to about 1.2 milliard gold marks.INDEXINDEX

Acworth, William (Sir)

railway system discussed, 234,
236

report on German railways,
421-451
Agriculture, Germany
mortgages in relation to, 231,
342

Alberti, Mario,

Expert Committee, (foreword),
298, 496
Allix, Edgard,

Expert Committee, (foreword),
19, 297
American Capital,

loaned to Germany,

probable effect, 72-73
Appendix
No. 1, Evolution of Terms of
Eeference to Committees
of Experts, 285-296
No. 2, Resolutions Adopted by
the Reparation Commis-
sion on November 30,
1923, 297-298
No. 3, Report of Committees
of Experts to Reparation
Commission, 299-509
Army, Germany,

(see, Germany, Army)

Assets

(see, Transferable assets)
Assigned Revenues

(see, Revenues, German)
Austria
bank of issue,

organization and operation,
126-129

budget and expenditures, 127
budget in relation to stabilized

currency, 211
currency in

(see, Currency in Austria)

League of Nations Rehabilita-
tion Plan, 126-129
revenues assigned, 128
statistics, 126-129
taxation

(see, Taxation in Austria)
Austrian Bank,

capital, 67
Ayres, Leonard P.,

Economics and Statistics Di-
vision, 25
quoted on,

effect of payments on gold
standard currency, 154-
155

Staff of Advisers, 22

Banking Committee,
organization, 54
plan and scope,

formula adopted, 291
plans for new German bank
of issue, 149-151

Banking System of Germany
bank of issue, new
administration and manage-
ment, 318, 398-403
capital, 260, 318, 320
commissioner, 319, 357, 402-
403

loans, discounts and invest-
ments, 403-405
Organization Committee,

319, 397-398
plans for, 149-151
policy and function, 317-320
primary importance of plan,
174

profits, 411-412
reserves, 409-411
bank organized by Dr. Schaclit,
204-205

effects of exporting on, 158
establishment of new bank,514

INDEX

committee suggestion, 53, 62
Schacht plan, 91, 92
suggested constitution, 64
llamDurg and Schleswig-Hol-
stein

Banks, certificates of, 119
interest rates on reparation

surplus, 193
interim bank project, 366
new institution plan, 263-273
operation of bank of issue in

relation to taxation, 168
pre-war savings bank accounts,
168

Reichsbank, 54, 317, 319, 398,

412, 413
Rentenbank established, 56
conditions improved by, 108,
116

liquidation, 414
reparation surplus,

effect on bank, 186
Banks,

European,

gold and other standards,
262

Banks of Issue,

Austria,

organization and operation,
126-129
Barber, John E.,

Staff of Advisers, 22
Barthou, Louis
conference wTith General Dawes,
171

letter to Mr. Logan regarding
Expert Committee, 294-295
Berlin Tageblatt,

article on Expert Committee,
146-149
Bonds,

A, B and C Series
(see, Bonds, London Sched-
ule)

(see, Bonds, reparation)
Dollar Treasury,

German currency, 119
German,

circumstances of issue, 251
industrial debentures, 246-247,
464-466
Expert Committee Plan, 232
London Schedule Proposal,
1921, 29

railway, German,

interest 1924-1928, 246-247
maturity of, 243
plan for issuance, 241-243,
244

Treasury and Interim,

German states, 119
Trustee, 358
Bonds, Reparation,

A and B series, 29
capacity to pay, 131
France's share, 31, 81, 106
interest on, 130
C series, 29
railroad bond issue,
possibilities of, 84-85
Boyden, Roland,

Unofficial Observer, Repara-
tion Commission, 21
Bradbury, John (Sir),

Formula II for reparations,
288-289
Budget,

annual payments,

German 1924-1928, 246-247
expenses, 1922-1924, 244
taxation, as source of income
for, 209
Budget Committee,

plan and scope,

formula adopted, 291
organization, 54
Budget of Austria,

stabilized currency in relation
to, 211
Budget of France,

income from taxes, 83
reparations account to balance,
81

Budget of Germany,

balance of, sought by commit-
tee, 53
balancing of, 209, 305

difficulties from inflation,
211

foreign loan, 170
method, 331

surplus for reparations, 213
basis of balance, 322
Budget for 1924, Preliminary

Survey, 214-215
"capacity to pay," 328
continuity of balance, 321
creditor control of, 350INDEX

515

criterion of payment, 329
effect of currency stabiliza-
tion, 213
equilibrium, 331
estimated income, 1924,

surplus shown, 213
expenditures, 1924,

estimated, 220, 331
handling of reparation surplus,
186

item for states and communes,
221

provisional survey of, 480
railway budget for 1924, 432
Reich budget, 223, 381

relation to states and com-
munes, 332
reparation surplus,

withdrawal of, 189
underlying assumption, 374
year,

1924-1925,	332, 373, 374

1925-1926,	333
1926 on, 335

Capital,

(see, Currency)

(see, Money)

Capital, German
exported, 490

method of determining

amount, 491-494
prevention of exodus, 495
summary, 497
Coal,

German default in delivery to
France, 100
Controlled Revenues

(see, Revenues, German)
Coordinating Board,

creation of, 273-274
Cost op Living,

German workmen, 119-120
Cravath, Paul

Economics and Statistics Di-
vision, 25
Crocker, Stuart M.

Secretary, Expert Committee,
21

Cuno's Government,

reparation payment plan, 229-
230

Currency,

(see, also, Money)

common currency for interna-
tional comparison, 132
depreciation through monetary

policy, 210
gold standard, 155-158
stabilization, 304
Currency in Austria,

exchange values, 127
Currency in Germany,

backing, 363
credit facilities, 364
depreciation,

corporations benefited, 229
effect on international debt,
306

Dollar Treasury Bonds, 119
" Effect of Reparation Pay-
ments on Currency Stabil-
ity, " 154
effect of Ruhr invasion, 107
effects of inflation, 110
Gold Loan, 119
gold standard currency,

Davis' memorandum, 163
affected by payments, 154-
155

Kemmerer's memorandum,
158-163

immobile credit resources, 365
instruments of payment, 475

table of, 478
interchangeability, 346
kinds and amount in circula-
tion, 118-120, 362, 363,
372

mark inflation, 54

effects of, 110-116
mark values,

reduction in foreign markets,
175

new bank created as means of

stabilizing, 317
"notgeld," 55, 473
secured and unsecured, 118,
119, 474
paper mark vs. pre-war gold

mark, 89
paper money,

after creation of new bank,
318, 406516

INDEX

parity necessary, 76
Rentenmark, 117, 118, 119

acceptance of, 121
stability of, 317, 362, 364, 414
stabilization, 87

Davis, Joseph S.,

quoted on,

dangers to German gold

standard, 163
effect of payments on gold
standard currency, 154-155
handling of reparation sur-
plus, 186
Reparation fund application,

199-204
Staff of Experts, 22
Dawes, Charles G.,

chairman, Expert Committee,

(foreword), 297, 302
interview with German Chan-
cellor, 93
quoted on,

plan for Germany, 166
reparations article in Liter-
ary Digest, 182
report of resignation, 175
Dawes, Rufus C.,

Chief of Staff, Expert Com-
mittee, 21
Debentures

(see, Industrial Debentures)
Debt,

expressed in common currency,

132
German,

payment increases, 225-226
national,

computation of, 133
interest items, 222-223
war,

Germany's on scale of other

nations, 137
Germany's per capita indebt-
edness, 137-138
payments in foreign curren-
cy inevitable, 136
Deficits,

Germany, 199
Devastation,

French expenditure to repair,
82

German obligation to repair,
82

Deliveries in Kind

economic limitation, 346
Dollarschatzanwiseungen
(see, Bonds, Dollar Treasury)

Economic Conditions,
apportionment of current pro-
duction, 190
economic balance,

variability, 328
Germany, 119, 122, 261-262
consequences of inflation,

274-278
creation of monopolies, 170
future of, 304
handling of reparation sur-
plus, 186
necessitv for economic uni-
ty, 303, 313
normality, 335
potentialities, 316
private investments increas-
ed by economic strength,
193

gold standard currency, 155-
158

international,

United States responsibility,

resulting from World War,
182

Ruhr situation, 179
taxation in relation to, 135
European Securities,

sale affecting exportable sur-
plus, 80
Exchange,

Austrian,

value of, 127
effect on stability of currency,
329

Expenditures, 224-225
control, 224
German,

army, 333

general national, 321
salaries of Reich, 333
unemployment, 333
Expert Committee,

Banking CommitteeINDEX

517

(see, Banking Committee)
Berlin visit, 88-94
conference with Dr. Schacht,
204

creation of, 285

described by Berlin Tageblatt,

146-149
First Committee,

attitude, 303
basis of report, 299
conclusions, 312
flexibility of plan, 300, 324
membership, 297
nature of plan, 311
number of meetings, 301
purpose, 297, 304, 315
vision, 322
German cooperation, 93
meeting, first, 40
personnel, (foreword), 19
plan and scope,

adoption, 291-296
Formula I, 286-288
Formula II, 288-289
Formula III, 289-291
problems encountered, 251
provisions for executive ad-
ministration of plan, 357-
359

public opinion of work done

by, 171
Schacht bank plan,

alternate plan by Commit-
tee, 207-208
Second Committee,

membership, 298
purpose, 297
report, 490
work of, 257-259
work in Berlin,

discussion of, with Poincare,
174
Exports,

German,

increased by investments,
193

restrictions applicable, 268-
269

relation to national industry,
70

surplus to apply to repara-
tions, 153

Flora, Federico,

Expert Committee, (foreword),
19, 298
Fordney Tariff,

trade of Great Britain with
America affected by, 77-
78

Foreign Credits, 69-70
Foreign Exchange,

decrease in mark value, 175
rates,

lowered by Dawes rumor,
176

Foreign Loans,

essential to Germany, 179
means of balancing German

budget, 170
to Germany,

affected by Euhr policy, 181
Foreign Trade,

exchange rates affected by
gold shipments, 157
France,

budget of

(see, Budget of France)
currency in

(see, Currency in France)
estimated property loss, 26
indebtedness compared with

Germany's, 253
internal indebtedness, 135
population, 222

reconstruction expenditures of,
253

Franco-Belgian Mgie,

Ruhr railway operation, 237
Francqui, Emile,

Expert Committee, (foreword),
19, 298

plan for reparation payments,

142
quoted on,

German deficit, 199
work on Banking Committee,
152

Fraser, Leon

Expert Committee,

report of organization, 18
French,

situation affected by English
criticism, 99518

INDEX

Ftods,

accumulation by bank limited,

270-271, 348
German,

available for reparations,
234

German,

bank,

cooperation with Transfer
Committee, 269-270
capacity to pay reparations,

252
government,

cooperation with Expert

Committee, 93
cooperation with Transfer
Committee, 269-270
obligation under Reparation
Commission's action, 251
German Markets,

taxation affecting, 73
Germany,

adoption of Committee's plan,

advantages, 214
army,

maintenance, 220
assets abroad, 498, 503-509
depreciation, 499
return from, 502
assets and possible payments,
26

bank of issue,

plans for, 149-151
banking in,

(see, Banking in Germany)
bond installments as debt se-
curity, 24
budget of

(see, Budget of Germany)
"capacity to pay,"

individual, 327
national, 327
Chancellor, Herr Marx, 92
commensurate taxation,
relation to 'i commensurate
burden," 367
creation of monopolies, 170
credit restoration, 85, 86, 323
currency in

(see, Currency in Germany)
current liabilities, 353
expenditures,

estimate for 1924, 220
in relation to taxation, 224
fiscal system,

income tax, 376
foreign loan essential, 179
Government's support of Dr.

Schacht's plan, 173
imports during war, 502
imports from France '1 open

hole," 238
income, 1924

estimated, 213-215
increase of prosperity, 323
indebtedness per capita, 137-
138

index of prosperity, 226, 325,

371, 372, 417-419
industrial debentures,

plan for, 464-466
inflation period, 120-121
interference in, 301
internal control,

essential to her prosperity,
8o

internal indebtedness, 134
legal tender in circulation, 118
population, 222

production and reparation rev-
enue, 190

profits from occupied terri-
tory, 500
property fixed and movable,
mortgage on, 117
value, 117
railways

(see, Railways in Germany)
readjustment of monetary pol-
icy, 213
Reich,

relations with States and
communes, 380
reparation surplus,

withdrawal of, 189
resources, 307, 316
resources and capacity to pay,
Formula III and results of,
289-291

plan of Committee study

adopted, 291-296
study according to Formula
I, 286-288INDEX

519

study according to Formula
II, 288-289
responsibility for war losses,
23

surplus of estimated income,

1924, 213
taxation in

(see, Taxation in Germany)
Gold Loan,

German, 119
Gold Standard Currency, 155-
158

Goldsmith, Alan G.,

Staff of Experts, 22
Goodenough, F. C.,

quoted on,

England's debt to America,
77

Great Britain,

(see also, United Kingdom)
balance of trade against U. S.,
79

exports,

increase to U. S. through
Fordney tariff, 78, 79
imports,

Fordney tariff effect on U.
S. products, 77-78
population, 222
tax on German imports, 101
Guaranties,

Committee of,

material collected as basis
of settlement, 257-258
creditor control of certain
taxes, 350
Gundry, John B.,

Staff of Advisers, 22

Hamburg and Schleswig-Hol-
stein Banks,

certificates issued by, 119
Herring, Charles E.,

Staff of Experts, 22
Houghton, Ambassador,

host of Expert Committee,
146

II out art, Maurice,

Expert Committee, (foreword),
19, 298
Hughes, Charles E.,

Reparation Commission pro-
posed by, 17

Income

(see, Revenues)

Index of Prosperity,

German, 226, 417-419
export statistics as, 371
measurement of, 372
'' Industrial Concerns, ''

defined, 300
Industrial Debentures, 246-
247, 464-466
Expert Committee plan, 232
interest on, 343
Organization Committee, 466
source of reparation payments,
341

Industries in Germany,

mortgages, 230-231
Inter-Allied Commission of

Field Railways, 236
Interest,

national debts, 222-223
railways bonds, 1924-1928,
246-247
International Debts,

expressed in common currency,
132

International Trade,

gold standard currency in, 155
Investments,

American loans to Germany,

effects of, 72-73
foreign loan to Germany, 179
Germany,

economic strength increases

private investment, 193
increase in production and
exports, 193
on allied account, 189
reparation account in form
of, 195

relation to reparation credits,
192

reparation surplus invested in
Germany, 196, 198

Janssen, Albert-Edouard,
Expert Committee, (foreword),
298, 496
Jones, Chester Lloyd,

Staff of Experts, 22

Kemmerer, Edwin W.,

" Effect of Reparation Pay-520

INDEX

ments on Currency Stabil-
ity, '' 154
plan for reparation payments,

140
quoted on,

dangers to German gold

standard, 158-163
effect of payments on gold
standard currency, 154-
155

Staff of Experts, 22
Kindersley, Robert M.,

Committee membership accept-
ed, 296

Expert Committee, (foreword),
19, 297

work on Banking Committee,
151, 152

Labor,

Austria,

unemployment, 128
Laurent-Atthalin, Monsieur,
Expert Committee, (foreword),
298, 496
Leaf, Walter,

quoted on,

German reparations through
exports, 77
League of Nations,

Austrian rehabilitation plan
and results, 126-129
Leverve, Monsieur,

railway system discussed, 234,
236

report on German railways,
421-451
Literary Digest,

General Dawes' article on re-
parations, 182

Loan

German foreign, 310, 332
conditions of, 353
proposed by Expert Commit-
tee, 245-246
purpose, 353
Logan, James A.,

letter to M. Barthou regarding
Expert Committee, 295-
296

Unofficial Observer, Repara-
tion Commission, 18, 259

Marx, Herr,

German Chancellor,

interview by Expert Com-
mittee, 92, 93
McKenna, Reginald,

Expert Committee, (foreword),
298, 490, 496
Military Aspects,

contingent sanctions, 303
intervention in Germany, 314
Money

(see also, Currency)

decrease in mark value, 175
effects of gold shipments out

of Germany, 158
exchange rates,

effect of Dawes rumor, 175
foreign loans to Germany af-
fected by Ruhr policy,
181

French franc,

reduction in value, 176
German,

circulation of, 118-120

gold standard currency, 154-
158

national monetary policies, 210
Monopolies,

creation of in Germany, 170
Moratorium,

France requires guaranties to
continue, 101
Mortgages,

German industry and agricul-
ture reparation payments,
229-233
"Notgeld, " 55, 473
secured, 119, 474, 476
secured and unsecured, 118,
474

Parmentier, Jean,

Expert Committee, (foreword),
19, 279

work on Banking Committee,
152

Payments of Reparation

(see, Reparation payment)
Pirelli, Alberto,

Expert Committee, (foreword),
19, 298INDEX

521

work on Banking Committee,
152

Poincar£, M.,

address,

Chamber of Deputies, 94-97
Formula I for reparations,
286-288

Population of European Coun-
tries, 222-223
Production in Germany,

estimate of future, 317
reparation revenue,

effect upon, 190
Prosperity,

German,

Allies' share in, 306
index of, 226, 325, 417, 419

Railways,

income affected by war,
operating ratio, 425-426
Railways in Germany,
administration, 337
annual revenue,

committee estimate, 422
budget,

annual, 432-437
extraordinary, 437-439
Committee report, 420-451
Concession of working of,
452-463

control necessary to compel
completion of German
agreement, 238-239
earning power, 339
expenditures, 423-431
fares,

(see, tariffs)

, financial condition, 338
Kunze Knorr Continuous

Brake, 441
locomotives

(see, rolling stock)
management, 339
operating company, 454-463
board of directors, powers

of, 455-456
bonds, 457-460, 461
Organization Committee,' 462
procedure, 240-242
transportation tax, 460-461
operating ratio, 425-426

operation policy changes, 428-

430, 447-451
private ownership, 334, 452-454

proposal, 239-243
railway commissioner, 447-451
appointment and powers,
357, 456-475
replacement value, 233
revenue for reparation, 233,

307, 420-428, 464-466
rolling stock, 420, 439-441
Ruhr district operation, 237
sale of shares, 334
tariffs,

freight, 441-445
passenger, 446-447
traditions, 338
tariff reduction,

German passive resistance,
237

transport taxes, 334, 424
valuation, 420, 421-422
Versailles Treaty rulings, 236
Reconstruction,

devastated France,

progressing slowly, 83
Reference Terms,

evolution of, 285-296
Ruhr railways operation, 237
Reichstag,

political divisions, 90-91
Rentenbank, 108, 116-118

(see also, Banking System of

Germany)

established, 56
Rentenmarks,

issue of, 117-118, 119
Reparation,

General Dawes' article in Lit-
erary Digest, 182
German default in timber de-
livery, 102
importance of German rail-
ways, 420
percentage division to Allies,
Spa Conference Proposal, 30
plan and scope of Committees,
adoption, 291-296
evolution of, 285-296
Formula I, 286-288
Formula II, 288-289
Formula III, 289-291522

INDEX

present capacity to pay stud-
ied,

proposal of Formula I, 286-
288

surplus available, 75, 76
Reparation Account,

import tax levied by Great •
Britain for credit to, 101
Reparation Commission,

conference held by Poincare,
174

execution of Article 234, 285-
286

Expert Committee

(see also, Expert Commit-
tee)

adoption of plan and scope,
291

creation of, 285
London Schedule for bonds

proposed, 29
proposed by Hughes, 17
provisions for executive ad-
ministration of plan, 357-
359

purpose of, 23-24
United States representation,
18

Reparation Funds,

application under Davis plan,
199-204
investment, 200
procedure, 201-203
investment company,

organization plan, 202-204
plan covering formation,
202-203

railway operating company,
bonds issued, 457-460
transportation tax, 460-461
reserve requirements, 200
surplus invested in Germany,

196, 198
transport tax proceeds, 243-
244

Reparation Payments,

Agent, 357

amount fixed by Commission,

July, 1921, 131
amount, inclusive, 310
basis, 74, 75, 194

gross government income,
167

payments, 1925, 247
taxation surplus, 168
collection plans, 86
Commission's findings, 100
common currency for compu-
tation of, 132
controlled revenues, 391-395
"Effect of Reparation Pay-
ments on Currency stabil-
ity," 154

effect on gold standard cur-
rency, 154
enforcement, 315
exchange on, 467
France's receipt for 1922-1923,

97-98
Francqui plan, 142
French plan, 95-97
German Government plan, 229-
230

German railroads as medium,
84

Germany's capacity to pay,
31, 71-72, 321
determined, 354
Germany's failure to pay, 100,
314

Germany's proposal of 1923,
33

guarantees necessary, 248, 310,
350

handling of reparation surplus,

186, 470
industrial debentures, 341, 464-
466

Kemmerer plan, 140
logical basis for taxes, 191
made in foreign currencies,
136

method of making, 310, 347
moratorium of, 170
organization for, 311
outside of Germany, 153
payments injurious to credi-
tors, 79, 80
plan of Expert Committee, 227-

228, 349, 359
provision for, 329
receipt by creditors, 310, 348
restriction of use, 468
securities as, 194-195
sources, 330INDEX

523

summary of provision for, 308
temporary relief, 321
transfer committee,

authority to transfer arbi-
trarily, 270
transfer of German currency to
foreign currency, 206-273
Resources,

German, 307, 316
Revenues, German,

assigned,

Reparation Commission to
control, 249-250
control by creditors proposed,

248
controlled,

as security, 352, 391-395
commissioner, 357, 392-395
taxation, 223-226
Robinson, Henry M.,

adviser on Banking Committee,
152

Expert Committee, (foreword),

298, 496
report on German foreign
credits, 20
Ruhr Invasion, 31, 100-109
British attitude, 104
effect on Germany, 108
evacuation question, 92
French policy, 98-99, 177
effect on foreign capital,
180

relation to economic peace,
180

French and Belgian demand

for, 102
General Dawes' Literary Di-
gest article, 183
means to ultimate settlement,
184-185

return of economic control to
Germany, 169, 174, 214

Schacht, Dr.,

Expert Committee,

conference with, 204-208
plan supported by German

Government, 173
quoted on,

taxation in Germany, 125
report of Expert Committee,
54

Securities,

as reparation payments, 194-
195

Spa Conference,

division of reparation receipts,
30

Staff of Experts,

personnel, 21-22

Stamp, Josiah C.,

chairman, Budget Committee,
54

Expert Committee, (foreword),

19, 297
quoted on

German deficit, 199
handling of reparation sur-
plus, 186
work on Banking Committee,
152

Stock Exchange,

affected by rumor of Dawes
resignation, 175

Stresemann, Herr,

quoted on,

Schacht plan, 91
work of Expert Committee,
173

Taxation,

basis for, 134
economic aspect, 135
economic reaction, 197
German liability to, 300
international credit dependent

upon, 209
productivity, relation between,
75

Taxation in Austria,

League of Nations plan, 127-
129

Taxation in France, 124-125
business turnover tax, 124-125
income from, 83

Taxation in Germany, 225-22G
alcohol, 350

bank deposits exempt, 270
based on economic conditions,

167
beer, 350
capital tax, 218
changes in scheme of, 212
commensurate, 306, 324, 367524

INDEX

computation and collection,

122-124
control of system, 224
corporations and large busi-
ness men benefited by
currency depreciation, 229
customs, 350
death duties, 217, 389
direct system of,

collapse in 1923, 228
proportionate increase, 228
effect on living standards, 187-
188

effects of operation of bank

of issrue, 168
estimated taxes, 1924, 216-220
exempt items, 270
general comments on, 382, 388
imports tax, 219
income tax, 216-217, 376, 482-
489

indirect taxes, 389
industrial debentures,

tax exempt provision, 465
logical taxable basis, 191
London Schedule of 1921, 30
market affected by, 73
per capita, 223-224
percentage comparable to that
of other nations, 35, 52,
87, 132, 137-140, 166, 254
political control, 90
proceeds of 1924 tax, 125-126
proper sources, 368
railway system, 232-233
railway transport tax,

period of 1924-1928, 246-247
proposed, 243-244
rates, 123-124

resources for payment, 307
revision of, 122
special, 378
sugar, 350

tobacco tax, 219, 350, 384, 386,

387

transactions tax, 218
transport, 308, 334
turnover tax, 217, 389
Weimar Constitution ruling,
122

Taxation in United Kingdom,
138

Timber,

German default in delivery to
France, 102
Tower, Walter s.,

quoted on,

effect of payments on gold
standard currency, 154-155
Staff of Experts, 22
Trade,

gold standard currency in, 155
Transfer Committee,
accumulation of funds by
bank subject to limitation,
270-271, 470
cooperation,

German bank, 469
German Government, 469
functions of, 271-274
funds may be transferred arbi-
trarily, 270
membership, 467
power of, 468
reparation payments,

German bank, 267
membership, 267
powers of, 267-268
Transferable Assets,

in Germany, 26
Treaty Payments,

inclusive nature of, 345
standard of, 327
summary of, 343
yearly definition of, 345
Treaty of Versailles,

Article 234, 39, 41, 94, 95, 285-
286

interpretation adopted, 291-
296

Article 248, 103
subject of dispute, 327

United Kingdom

(see also, Great Britian)
taxation in

(see. Taxation in United
Kingdom)

United States,

balance of trade in favor of

Great Britain, 79
exports,

reduction by Fordney tariff,
77-78INDEX

525

Keparation Commission repre-
sentation, 18
responsibility in world affairs,
185

Verrechnungscheine, 119
Wages,

adjustment during inflation,
211

German workmen, 119-120
Wertbestandige Anleihe,

(see, Gold Loan)

Wheat,

trade in, 155
World War,

Allies' losses, 44
economic conditions resulting,
182

Germany's responsibility, 23

Young, Allyn A.,

Economics and Statistics Divi-
sion, 25
Young, Owen D.,

chairman, Bank Committee, 54
Expert Committee, (foreword),

297
quoted on,

German Bank planned by Dr.

Schacht, 206-207
reconstruction of Germany,
255

training and ability, 23
work on Banking Committee,
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