# Bankers and Credit/Chapter 7

All these difficulties that we have been feeling and expressing about our own monetary system at home have been greatly increased and complicated abroad by the much madder orgy of money manufacture that went on in other countries and in some of them has gone on unchecked. It need not be said that to those of our home reformers who thought that the way to salvation was through more money, the Continental example was most alluring. Mr. Kitson, for instance, in his little book on Unemployment that has already been quoted in interpretation of Major Douglas, uttered on page 7 a glowing appreciation of the most notable example of the system's working.
"The German Government," he said, "refused to enslave their people during or since the war by borrowing from the world's moneylenders to the extent and in the manner our Government have done. They used and are still using their own national credit in the form of paper money instead of borrowing the ​credit of others, and they were not afraid of meeting the usurer's bogey—inflation! What have been the results? Although they suffered a terrible military defeat and are compelled to pay a war indemnity, they are to-day the most prosperous industrial nation in Europe. They have escaped the ruinous interest charges with which we and France are burdened! Their factories are running full time and they have but a very small percentage of unemployed—far, far less than any of the allied nations. Their industries are earning fabulous profits. They realize by experience that their cheap currency gives them an enormous advantage in trade competition over their riyals who are still deluded by the gold standard dear-currency theories! Hence they are capturing the world's markets as fast as their factories are able to turn out the goods. In short, whilst our orthodox Economists, financiers and Government officials are doing their best to strangle British enterprise by reviving their old and exploded financial theories, our sworn foe is invading our markets, capturing our trade, and that of our allies by adopting the very policy our orthodox Economists have condemned as impracticable and ruinous."
This passage is taken from Mr. Kitson's Foreword, which is dated May 20, 1921. It ​is rather difficult to understand how Major Douglas's scheme, which was Mr. Kitson's final remedy, would be applied to foreign trade. In Mr. Kitson's explanation of its working in the coal industry he merely says that "the price of coal for export shall be fixed" (he does not say by whom) "from day to day in relation to the world market and in the general interest." Obviously the coal would have to be sold at a price that could compete in the world market, and presumably the difference between this price (if too low) and the cost of production would be made good, as in the case of coal sold at home, by a draft from the Treasury on the national credit account; and the final results of this system have already been exposed by the Labour Party Committee's analysis.
In Germany there was no cumbersome machinery of a Douglas scheme; it was just a question of straightforward printing; firstly because the Government (like most others then and at most times) found some difficulty in otherwise balancing its Budget, secondly because for some years after the war the general confidence in Germany's recuperative power caused an enormous demand all over the world for German marks as a speculative "lock up" that was certain some day to go back to its ​old pre-war value; thirdly, perhaps, because the amounts that Germany was to pay in Reparations had not been settled and the German Government, yery naturally from its point of view, was not at all eager to set its finances in order, but preferred that their chaotic conditions should give as unflattering as possible an appearance to the country's capacity to pay; fourthly because the actual payments that Germany made increased the difficulties of her position. And so the amazing process went on, by which, according to some estimates, gamblers in German currency lost as much as Germany has paid, and the Reichsbank's note issue has been multiplied so many times that the figures of its weekly returns are on an astronomical scale. It is most interesting to consider that a really acute financial observer foresaw before the Armistice, and tried to prevent, the danger to which unlimited printing powers left in the hands of the defeated countries exposed them and the rest of the world. Dr. Alois Rasin, the late Czecho Slovakian Finance Minister, relates in his book on the Financial Policy of Czecho Slovakia during the First Year of its History that when he took office he meant, ​at first, to stop inflation by means of international intervention. "I requested," he writes (page 26), "the Minister for Foreign Affairs, Dr. Edward Benes, who was then staying in Paris in connexion with the settlement of the Armistice conditions, to endeavour to have an International Commission appointed to control the German Imperial and Austro-Hungarian Banks, whose duty should consist in the prevention of the issue of bank notes not covered by private liability in order to put a stop to the inflation. . . . This idea of international intervention came to nothing, either because the nations with sound currencies could not imagine the terrible conditions of a paper currency inflation and its disastrous consequences, or because they were not in the humour to champion the rights of the conquered."
Dr. Rasin must surely have written the passage about nations with sound currencies with a gently malicious intention. At the time of the Armistice it would have been difficult to find a country whose currency had not been debased during the war, and most of the Entente Powers, if they had understood the Czecho Slovakian proposal, would have hesitated to enforce on the conquered Governments a financial ideal which they saw no chance of ​reaching for themselves. It is also very doubtful whether such a prohibition could have been carried out effectively. To tell the central bankers of Germany and Austria that they were only to issue more notes when "covered by private liability"—that is, in the supply of advances to private borrowers—would only have stopped note printing on Government account as long as official and financial ingenuity had been unable to find a way round the restriction. But it might possibly have been effective and the difference that it might have made to Europe's history in the past four years is almost incalculable.
But that is another story. In fact there was the inflation in Germany that gave Mr. Kitson the text on which he preached so eloquently as quoted above, in company with a host of other less emphatic and confident exponents of the inflationary gospel. At that time, in 1921, he had a strong case. Unemployment was on an enormous scale both here and in the United States. He was able to quote an American Trade Journal as authority for a statement that "currency contraction had thrown out of employment some 4,000,000, operatives, and in the inflating countries there were few or none out of work." Whether unemployment was caused here and in America by currency ​contraction, reason has already been given for doubting: in both it was probably caused by the collapse of trade which followed the discovery, first made in the Far East, that if people stopped buying prices would fall back. But it is undoubtedly true that inflation, up to a certain point, stimulates the home demand for goods, and so maintains employment and also that, while it is proceeding, it gives a temporary help to the export trade of the country that indulges in it.
The benefit wrought by inflation in tae home market is easy enough to see. Since inflation means multiplication of money in relation to goods and a consequent rise in prices it is clear that this process, especially when it goes so fast that everybody can see what is happening, makes folk eager to get rid of their money quickly, because it will buy less if they keep it another day, and to buy goods, because they will be dearer if they wait. Dr. Rasin describes very graphically, in the work already cited, the result of "want of confidence in the Krone" in Czecho Slovakia, even in its comparatively mild manifestations during the war. "Thus," he says (page 15), "with every failure of the Central Powers an aversion to the Krone set in, manifesting itself in the purchase of foreign currency (especially at the time before ​the entry of the United States into the war), of securities expressed in foreign gold currencies, of national securities, and also of goods, furniture, clothes and linen. In these times peasant women sold only against materials and clothes and the wardrobes of the middle classes found their way into the villages, in exchange for flour, lard, butter and milk. The peasant women bought or bartered trousseaux for their daughters during the war; in many peasant cottages not only one but two pianos were to be found; and a peasant in the neighbourhood of Pisek, who already possessed every conceivable thing, finally bought himself a coffin with his paper Kronen."
It reminds one of Tony Weller's observation when Sam, consoling him for his bereavement, said that "there's a Providence in it all." "O' course there is," replied Mr. Weller, senior, with a nod of grave approval. "Wot 'ud become of the undertakers without it, Sammy?" (Pickwick Papers, vol ii, ch. 24.)
Such a state of things sets up feverish and quite artificial activity in trade, because in the headlong flight from the Krone or the mark or whatever it may be, everybody who has marks or Kronen hurries to turn them into anything else. And so the ordinary household becomes like a museum or a ship-chandler's shop, stuffed with ​a varied assortment of articles that are not at all wanted for the purposes of consumption, but are known to be going up in price because the currency is known to be falling in value because the Government is getting too much of it printed. Whether it is not better to submit to the evil of unemployment and meet it by a system of allowances as we did, than to avoid it by such an official swindle perpetrated at the expense of everyone who has, or expects to receive money, is a question that can be answered according to the taste and fancy of the inquirer. Mr. Kitson prefers the inflationary path and so did another manufacturer, Mr. T. B. Johnston, well-known in the pottery industry at Bristol, who wrote to the Times in August 1921 a letter in which he expressed, in more temperate language and with fewer italics and exclamatory ejaculations, conclusions much the same as Mr. Kitson's concerning the success with which Germany was capturing the trade of the world thanks to the inflation of her currency.
In this respect again it is easy to see that inflation, while it is taking place, gives a fillip to the exporter, because its effect upon rates of exchange, which are arrived at by chaffering among a set of exceptionally nimble-witted and well-informed dealers, is almost always much ​quicker than its effect on domestic prices and rates of wages, which are largely a matter of habit and convention, and are only shifted after a new and gradual process of awakening. Thus the exporter who is paid in foreign currencies, turns them into a rapidly increasing amount of his home money, which has lost value at home much more slowly than it has abroad.
To make the matter clear by a concrete and extreme example, if we suppose that German currency was doubled in one night, its value in pounds sterling would be halved much more quickly than its value in goods and wages in Germany. And so the Solingen manufacturer who was selling safety razors in England for a shilling would be able to turn his shilling into 100 marks instead of 50, long before the prices of the goods and labour that he bought at home had risen pari passu and so he would be able, if competition made it desirable, to take a much lower price in England and still make a profit at the expense of his employees whom he would be paying in money that had lost value, without their demanding more of it. If he took a lower price in England the British Consumer would benefit and the English manufacturer of safety razors would justly complain that he was being subjected to unfair competi​tion caused by the depreciation of German currency. He would probably proceed to clamour for Protection and would be difficult to persuade that Protection in his own market would only make competition fiercer in neutral markets and would perpetuate the evil, which would best be cured by letting it work itself out.
It will be seen that both for the stimulation of home and export trade, the inflation must be continuous. As soon as it stops and the prices of goods are steadied at the new level arrived at, and higher home prices offset the advantage to the exporter from the large amount of home currency that he gets from his sales abroad, inflation is no longer a spur to production and export. Evidently therefore this remedy for unemployment, as advocated by Messrs. Kitson, Johnston, and many others, can only work for atime. There must be an end to the inflationary process and its apparent and questionable benefits. And its end, as seen in Russia, Austria, Poland and elsewhere, seems to be economic chaos, and a state of things which finally works its own cure because the country subjected to it is forced, with or without help from outside, to stop the process.
Even in its early and most flattering stages, there is a good deal of doubt about the extent ​of the benefits in the matter of export trade, alleged to be wrought by inflation. At the time when complaints by British producers were loudest, of ruthless competition by Germans with the help of the depreciated mark, it looked as if there must be something else besides currency depreciation that was helping Germany. Because at that time currency depreciation in Poland and Austria—to say nothing of Russia—was very much more acute; it seemed therefore that if debasing the currency was the short cut to fortune through international trade, Poland and Austria ought to be the dangerous competitors rather than Germany. Moreover the surprising fact appeared that some of the competition by which British industry at the time of the depression that began in 1920 was most fiercely attacked came from countries the currencies of which were at a premium as compared with sterling.
For instance in October 1921 there was a debate in the House of Commons on a Trade Facilities Bill and various examples were given of the alleged helplessness of British industry in the face of its foreign rivals. Sir Fortescue Flannery told the House that a ship went aground in the North Sea. She was brought off and taken into a Thames dry dock and tenders were invited for repairs. "The lowest ​Thames side tender was £6,700: a better one from the North of England was £5,500, but from Rotterdam a Dutch tender was received for £1,800." Naturally the ship went to Rotterdam to be repaired; but she herself had knocked a hole in the much battered bottom of the Safeguarding of Industry Act, designed to protect our industry against competition encouraged by depreciated currency. For this tender, offering to do a job for less than a third of the best British bid, came from a country with an appreciated currency. Sir Fortescue accounted for the puzzle by saying that Dutch labour is almost as highly paid as labour in the North of England, but the Dutchmen worked longer hours and were free from many of the restrictions that cramp the British workman's elbow, and employers were content with a smaller profit. It is true that Holland got steel from Germany at half the price of ours, but that could not account for the enormous difference between the two tenders. Better work, fewer restrictions, and organizers of industry who were not too greedy were the causes on this occasion of the foreigners' success and probably were in many of those that were ascribed to currency depreciation.
My own personal experience in the matter was also strange. I happened at about the ​same time in the Autumn of 1921, to need a saw for domestic purposes, went into one of the best tool shops in the City and got what seemed to be an excellent weapon at a reasonable price. Then I noticed on the blade the name of an American maker and observed to the shopkeeper that it seemed queer, with the dollar below four to the pound and thousands of unemployed in Sheffield, that we should be buying American saws. He evidently understood about the dollar exchange and what it meant, for he said that it certainly was queer and what was queerer still was that in spite of all that we read about slackness in Sheffield he could not get half the tools that he wanted from English manufacturers, and was glad enough to be able to get some from America, while the Sheffield people were thinking about beginning to wake up.
It was thus evident that currency depreciation among its trade rivals was by no means the only cause that was depressing British trade. My excellent American saw had probably been sold here cheap because its maker had the sense to see that the way to set trade going again was to get prices down and give the poor old public—bled white by the tax-gatherer and the wage earner and the captain of industry—a chance of buying some cheap goods and feeling ​for once that it was not being fleeced. Just as the cure for competition based on depreciated currency is to let the public have the goods as fast as the foreigner will turn them out and leave the foreign worker to find out that he is being swindled, as he very quickly would. Whereas what happened was that industry squealed, naturally wanting to have things arranged as comfortably as possible for itself, and the Government perpetrated the farce of the Safeguarding of Industry Act which was only redeemed by futility from being really mischievous.
And then there arose the curious belief that Germany was not only beating our trade by debasing the mark, but would surely be still more effective as a trade competitor if she had to pay an indemnity to the victorious Allies. So much so that it would pay England, as most likely to be affected by German competition, not to receive anything at all by way of indemnity from Germany. Fears of the consequences of the indemnity payment had been expressed by some of our leading statesmen even before the Reparation figure dictated by the Allies in their Memorandum of May 1921 had been agreed to by the Germans. After that, and during the very short time in which it was believed that Germany was really going ​to make an effort to make the payment demanded, these fears became one of the burning topics of the day.
It will be remembered that by the terms of the Allied ultimatum Germany had to acknowledge a liability to pay £6,600,000,000, with another possible £150,000,000 to cover unadjusted claims and accounts. Even in the ultimatum, however, the chance that Germany would be able to pay any such sum was by no means taken for granted. She was ordered to create and deliver partly by July 1 and partly by November 1, "A" and "B" bonds for £2,500,000,000, and she was to pay £100,000,000 a year and a sum equal to 26 per cent. of her exports. It was estimated that this sum would produce another £50,000,000, and so she would be paying £150,000,000 a year in all, which would provide 5 per cent. interest and I per cent. sinking fund for the extinction of the debt, on the £2,500,000,000 imposed on her. The balance of £4,100,000,000 odd was to be represented by "C" bonds to be issued and handed to the Reparations Commission, but they were only to be handed over by the Commission to the countries receiving the indemnity, as and when it was satisfied that Germany was able to provide for interest and sinking fund.
​Thus this Allied Ultimatum which has been so often held up to scorn and ridicule as an attempt at impossible and unconscionable extortion was in fact really rather an effort at moderation. It looks as if the £6,600,000,000 touch was put in to amuse the gallery in all the countries concerned, and produce an impression that the big promises that had been made might perhaps be fulfilled some day, while the actual amount definitely named was reasonable, and yet provision was made for the possibility that Germany's recovery might be much more rapid and complete than then seemed to be likely.
It was in fact a quite workable plan with one very important exception. The fixed sum of £100,000,000 a year, to be forthcoming at once, looked doubtfully large and one felt that it would better have been reduced with an addition to the sum to be based on the volume of Germany's exports. Nevertheless there seemed to be first a possibility that the scheme might work. But it was not to be. Such opinion here as had long been eloquent on the theme that the Allied claims on Germany were extravagant and impossible, loudly proclaimed that the task imposed was too heavy. These vociferations helped to make themselves true by frightening speculators in German marks ​into throwing them on the market and so putting the exchange against Germany and making it more difficult for her to make payments. Her first payment was handled by the Reparations Commission with a clumsiness that was amazing and upset the exchange markets much more than was necessary or healthy. The depreciation of the mark, due to these external causes, reduced its purchasing power at home and so made the task of the Government in making both ends meet all the more difficult, because expenses went up faster than the proceeds of taxes imposed before the fall, and so the Government, which was perhaps pleased to see its efforts to pay thus defeated, printed more and more notes to fill the gap and so made matters worse, and the vicious circle spun round faster and faster and continued to do so till its pace was still more quickened by the Ruhr occupation and passive resistance. And now some people say that it is all France's fault!
To the voice of the German sympathizers who said that Germany could not possibly pay, was added that of those who maintained that Germany could only pay by damaging our trade. This view was put by Mr. McKenna with all that lucidity and force for which his utterances are so justly noted. In a paper read ​before the Institute of Chartered Accountants on June 15, 1921, he showed that in order to pay the final liability of close on £400,000,000 a year, that would be necessary when all the £6,600,000,000 of indemnity bonds had been issued, Germany's exports must amount to not less than £1,200,000,000. "German foreign trade," he continued, "could not be expanded to this point and such a large exportable surplus could not be maintained unless wages were kept extremely low by comparison with those paid in competing countries. . . . At this moment wages in Germany—I speak of course of real wages—are not more than half those paid in this country, and yet the German workman is labouring for long hours with great efficiency and with apparent contentment, or at any rate acquiescence. We may, perhaps, find the reason for this industrial facility in the superiority of his present lot over his recent condition. During the war all classes in Germany suffered very great privations in consequence of the blockade. We remember to what straits they were reduced—clothes made of paper, food substitutes of every kind, an almost complete absence of fats, very little oil, and indeed, general privation such as no other people suffered. Though the German workman may be ill paid now, by comparison with ​what he endured in the war he is tolerably well off."
Mr. McKenna went on to show that since Germany and Great Britain were by far the greatest exporters of manufactured and partly manufactured goods before the war, the brunt of the competition which her indemnity effort would produce would fall upon our trade, and suggested that in order to avoid the grave damage to us that would be involved by Germany's meeting her obligations under the Reparations scheme, Germany should be required to send to this country and to France and the rest of the Allied countries, to each according to its requirements, articles such as coal, timber, potash and sugar, all of which she produces in large quantities. He admitted, however, that by these means nothing like the agreed figures of the indemnity figure could possibly be paid, and did not explain why France should be expected, because we did not like the prospect of fierce trade competition, to reduce her demands upon Germany. Indeed there can be little doubt that the frankness with which the effects of the indemnity payment were discussed here in the light of its expected damage to British trade, must have been one of the reasons why France later on decided to take a line of her own in dealing with Germany, ​rather than proceed in step with a leisurely partner who seemed to fear nothing quite so much as success in getting payment from his late enemy.
A Memorandum dated May 17, 1921, and addressed to the Prime Minister by the employers and workmen of the Iron and Steel Industry expressed its grave concern "at the possibility that, unless there is a rigid control of the whole of Germany's export trade, any Reparation settlement will have the effect, either by maintaining the exchange in a depreciated condition or otherwise, of encouraging the general export trade of Germany."
In June of the same year Mr. Edgar Crammond, well known as a bold and hard-working statistician, was telling the Bankers' Institute that Germany would "become the central workshop of the world, although operating under depressing conditions and at famine wages; her central shop would stretch out its tentacles to all markets of the world, aided by the boundless passion and tenacity of a people fighting for its life with the whole force of its concentrated productive machinery."
Fears such as these echoed by statesmen, bankers, statisticians and producers must have been balm to the spirit of Germany, showing her that important classes here feared the ​effects of her payment and would thus be most reluctant to press her: time and currency chaos were on her side; she only had to leave things drifting and go on printing notes and she might, with luck, escape the indemnity payment altogether.
How much ground was there for these fears? They always seemed to me enormously exaggerated if not altogether baseless. Of course it was easy to make our flesh creep by imagining the scope of the trade that Germany would have to do before she could place an export surplus of £400,000,000 a year at the disposal of her victorious enemies. But that was most unlikely to happen and could only happen if the world at large had shown an effective demand for industrial goods such as would have justified the hopes of tremendous trade expansion that were current at the end of the war.
That she could provide a surplus of £150,000,000 a year, the figure at which she was asked to begin, and gradually increase it ought surely to have been a programme which need not have terrified British industry, because British industry would, from the circumstances of the case, have had a double handicap in her favour. For Germany industry would have had to bear the taxation involved by the ​indemnity payment and British industry would have been freed from taxation to the extent of the share of the indemnity received by Britain. It is true that Germany, by wiping out the value of her currency, has also wiped out her internal debt, incidentally ruining her investors; but taxes imposed for purposes of payments abroad have a much heavier weight than those which are merely collected to be paid out again at home; if Germany had to turn goods into dollars and relieved us from this uncomfortable duty laid on us by our debt to America, then with this double advantage British industry, if its organization and spirit were fit to carry on the tradition of those who had built it up, ought to have been able to deal so effectively with German competition that Germany could only have been able to pay the indemnity by supplying markets which Britain, for reasons entirely of her own, was prepared to leave her.
And surely it ought to have been obvious that the German competition which was thought so formidable, was not going to be made more so by the indemnity payment, because German industry was certain, whether an indemnity was imposed or no, to make every effort to sell goods all over the world.
But this was a time of curious delusions, and many people, even among those who were cry​ing out loudest against the high taxation that was alleged to be strangling our own industry, were quite ready to talk in a way that implied that the imposition of an indemnity on Germany, and the high taxation involved by it, were going to make German industry work all the harder and all the better.
And so we seem to be led to the curious conclusion that the royal road to the capture of the world's trade lies through two gates, the first of which is currency debasement, and the second is the obligation to pay a crushing indemnity. But was there any reason to suppose that because the German employer and workman were going to be taxed to pay an indemnity they would therefore work harder and better? Perhaps there might be a few highly patriotic souls who could really maintain such an effort in order to free the Fatherland from economic bondage. But to most of them—though German patriotism is surely a marvellous force—the effect of this payment would seem to be more likely to have a damping effect on the daily and yearly effort. If there were no indemnity to pay and all that German industry earned went into its own pocket and that of Germany, then one might well imagine that the "boundless passion and tenacity" spoken of by Mr. Crammond would ​be devoted to the recovery of the economic strength of the Fatherland.
More than a year later—in October 1922—Mr. McKenna was discoursing on the subject of Reparations and International debts, at an American Bankers' Association Convention, held in New York. He reminded his hearers of the results of the payment of the French indemnity after 1871, and Bismarck's observation that the next time he defeated France he would insist upon paying an indemnity; and went on to show that in spite of full employment and hard work in Germany and the advantage given to the German exporter by the falling mark ("so much so that there is hardly anywhere a manufacturer, producing goods for export, who does not complain of German competition") German exports "are still barely equal to imports" and "the conclusion seems inevitable that Germany has no present capacity to obtain a surplus from the export of goods." Further, that if she could pay she could only do so by exports of manufactured goods, in the teeth of competition, and the result would be that she and her competitors would work longer for less wages, cut profits and reduce imports, and that a "general lowering of the standard of life" would result.
​But surely this would be a most curious effect to follow a great flood of production of cheap goods poured out upon a world which for years had been suffering from scarcity and dearness of goods and over-production of money. From the point of view of the taxpayer and consumer—and we are all of us both—the effect of a big indemnity payment on the countries that receive it would seem to be highly beneficial, if it is used wisely and is not allowed to promote inflation and inflammation as happened in Germany after 1872. We at least could always haye made an excellent use of any money that we were likely to receive from Germany by using it in payment of our debt to America, and after that if there were anything more, in restoring the foreign investments that we had to sell during the war, to the detriment of our strength as a financial centre. Mr. McKenna, however, seemed to think that not only could Germany not produce an exportable surplus, but that it was equally impossible for France or any of the Allied debtors. He thought that Germany could pay something, namely the amount of her foreign assets which he estimated at a billion dollars—£200,000,000. England he showed to be the only debtor possessing any large accumulation of foreign assets—enough ​to cover her debt to the United States two or three times over. France and italy he believed to have no similar reserves, and so he concluded that "these international debts are far too great for the capacity of any of the debtor countries except England."
My own yiew has already been expressed that France and italy ought to have been released from their debts to England on the day after the Armistice, and that this act would have cost us nothing, and would have had an immeasurable effect for good on Europe's financial atmosphere. But Mr. McKenna surely proves too much in implying that it is not possible for a nation like Germany, gifted with great natural resources and with unrivalled powers of work and application, to produce a very considerable exportable surplus if she made the necessary effort and the necessary diversion of her productive power.
For how, except by producing an exportable surplus, can England and Germany have in the past accumulated the foreign assets which now alone, in his view, give them the power to make payments abroad? Germany may have done it by selling marks to speculators. But we, as Mr. McKenna shows in the course of this very address, have done it by doing just what he seems to think that Germany ​cannot do. "For over two centures," he said, "British capital has been lent to other countries. Year by year England produced more than she either consumed herself or could exchange for the products of other nations, and she could not obtain a market for the surplus unless she gave the purchaser a long credit. Foreign loans and foreign issues of all kinds were taken up in England, and the proceeds were spent in paying for the surplus production." Quite so; we had an exportable surplus, and sold it abroad, giving credit to the buyers. When we think of all that has been said about Germany's power to compete, there seems to be no reason why Germany should not provide an exportable surplus, and sell the goods and services abroad just as we and she and perhaps other countries were doing before the war. As we all remember in those days her "peaceful penetration" in Italy, Mexico, Brazil, and other places was supposed to be a menace both to our trade and to our financial supremacy. What she did then in order to invest she can do now in order to pay her debts.
In fact it is very puzzling, in view of all the complaints of manufacturers about the cut-throat competition which Germany is alleged to have been carrying on, to account for her ​recent failure to produce a big trade balance in her favour. If she was really capturing the world's markets as fast as Mr. Kitson and other people thought, her trade with the rest of the world should surely have been on a basis most satisfactory to herself. Yet we find that when a bevy of foreign experts, including Professor Cassel of Stockholm, Professor Jenks of New York, Mr. R. H. Brand, a partner in Lazard Brothers' London house, and Mr. J. M. Keynes, went to Berlin in the Autumn of 1922, at the German Government's invitation, to advise it concerning measures for the stabilization of the mark, it was faced by the difficulty, among many others, of determining whether the adverse balance of trade which was alleged to make stabilization impossible without help from outside, really existed. Finding itself unable to arrive at solid results from the figures supplied to it by the German Government, it made calculations of its own which brought it to the conclusion that the adverse trade balance could not be very great.
In view of the wild fluctuations in the mark it was naturally very difficult for Germany to present any trade figures which gave anything like a true picture of her trade, and the report of these sympathetic experts seemed to confirm the general belief that Germany—as was ​most natural from her point of view—was not making serious efforts either to show what her industry was doing in the matter of exports, or to put any brake on the pace at which her finances were slipping into chaos. Why should she do so as long as there was a chance of reducing the Indemnity Bill by looking as bankrupt as possible? These learned gentlemen point out that "no other currency has fallen into decay with so great a potential support still unused," referring to the store of gold in the Reichsbank; and they call on the Government to practise economy and collect its taxes rigorously, and remind it that "capital expenditure for the public services should not be charged to revenue but paid for out of funded internal loans," thus showing that the Government had been printing notes not only to stop the gap between income and expenditure but also, for the provision of capital expenditure, which ought to have been paid for by loans subscribed to by investors.
In fact it seems very likely that the great additions made by Germany to capital equipment go far to account for her failure to balance her foreign trade account. It was noted above that in August 1921 Mr. T. B. Johnston, a well-known Bristol manufacturer, ​had written to the Times echoing Mr. Kitson's contention that Germany's currency policy was winning the world's trade for her. His views having been questioned by the Times City editor and others, Mr. Johnston sent over a qualified investigator, Mr. E. S. Dane, to look into the state of Germany. Mr. Dane wrote an interesting and impartial report, published under the title of What is Germany doing? Mr. Johnston, in his preface to it dated July 1922, says that its findings largely substantiate his early contentions, and that "huge profits are being made by the German industrialists on their export trade." And yet Mr. Dane, when he came to the trade figures, was also tempted, without doubting the sincerity of the statisticians, to consider whether the figures were accurate. "Taking English and American returns as a basis," he added, "it seems that Germany does not yet export goods in the ordinary way of commerce to nearly the extent which she did before the war." He maintains, however, that the export trade is undoubtedly thriving, though he goes on to admit that many foreign orders have been cancelled recently owing to unsatisfactory delivery.
He thus leaves his readers puzzled and bewildered as all investigators must who in 1922 tried to find out what Germany's export ​trade was doing, but incidentally and as by a side-wind, he blew to bits the contention of Messrs. Kitson and Johnston that there was no unemployment in Germany. They were quite right in a sense because the unemployed were got rid of by putting two men to do one job. "Government offices," he says, "are enormously over-staffed, and the late Dr. Rathenau estimated the number of 'Invisible unemployed' at four millions. Taking into consideration the decreased area of Germany, officialdom experienced an increase of 49 per cent. in 1920, compared with 1914—a remarkable figure considering the disappearance of the army and navy." It certainly is a remarkable figure and helps to account for many things. But it was on the point of capital expenditure that we turned to Mr. Dane. "Capital construction," he says, "is being indulged in on a colossal scale; one sees new factories and buildings, the latest machines, and improvements everywhere. Germany is, in fact, going through much the same phase in an intenser form as we experienced in the days of E.P.D. The causes in her case are the finance policy, the non-collection of taxes and the ever-rising prices, which make construction cheaper to-day than it will be to-morrow. . . . We have the anomaly of a ​bankrupt nation preparing for the greatest building boom on record, equipping a floating exhibition ship to capture foreign markets and inaugurating huge canalization, electric power and other schemes."
From all this mass of queer and conflicting evidence it will appear that if Germany has not an exportable surplus at present, she is very well equipped for getting one as soon as it is made clear to her that it will pay her best in the long run to try to meet the payments demanded on indemnity account. "With a properly limited currency," said Professor Cannan in one of the Manchester Guardian Commercial's "Reconstruction" numbers, "Germany will soon find her feet again and be able to pay a good deal, if she is willing. I have no patience with those who imagine that how much she can pay can be discovered by an examination of her balance of trade, either before the war or now. One of the most certain things in economics is that a country's balance of trade depends on what she chooses or is obliged to pay." Just as we, as Mr. McKenna showed, year by year produced more than we consumed and lent the balance to our customers, so Germany can produce more than she consumes and pay the money raised by her sale of the balance to her ​creditors or to parties named by her creditors. It will be remembered that Mr. McKenna's interesting analysis pointed out that we could not obtain a market for our surplus unless we gave the purchaser a long credit. Under present circumstances this difficulty of a market is solved, in part, by the fact that all the Allied creditors of Germany are debtors of the United States, and that the United States with their huge consuming power can hardly refuse to admit European goods in payment of what is owed them by the Allies. It is true that they have lately put their tariff wall up a little higher in accordance with the prevalent fashion by which the Governments of the world, having solemnly agreed through their representatives at a Brussels Conference that the exchange of goods between all countries should be furthered in every way, are doing their utmost to restrict it, by tariffs and preferences and licences and other devices dear to the politician and the bureaucrat, and exasperating to the business man except when they keep out goods that compete with what he makes or owns. But in spite of their raised tariff the United States haye been buying more and selling less, as a creditor must unless he will go on lending more.
As far as we are concerned all that we are ​likely to get from Germany for some years to come can be paid by her through the sale of goods to America, or to other countries from which America takes goods. If the time comes when our share of what she pays is more than we need for the service of our debt to America, then we shall have to lend to other countries that want loans the proceeds of the goods that Germany exports on our account. For example Germany can build railways in Russia, or if Russia has not returned within the economic community of nations, in Hungary, Rumania, Brazil or anywhere else; and Russia or whoever it may be will owe to us the railway which Germany will have built on our account and so we shall rebuild part of our fabric of investment, so much of which had to be pulled down during the war and exchanged for things that were more pressingly needed.
Some of our manufacturers will, like true Britons, gnash their teeth at the thought of anybody but themselves selling anything to anybody; but let me remind them once more that they will have a big enough pull, in the taxation laid on Germany and escaped by us through the indemnity, to enable them to beat Germany when they want to; to say nothing of the fact that they seem to be able to hold ​their own as it is, partly because a British contract is preferred; at least in the Federation of British Industries Bulletin of July 17, 1923, it was recorded that the Paterson Engineering Company of London had obtained the contract for a water supply for Reval, although several of the competing tenders, one of which was German, were lower than theirs.
Whence it follows that Germany can only pay an indemnity if the world has been allowed by its Governments to settle down into a state of sufficient political recovery and tranquillity to enable the manufacturer and the merchant and the financier and the investor to go forward in confidence to a great effort of expansion and construction and reconstruction. There is an enormous amount of work waiting to be done, millions of people wanting to do it, other millions wanting it to be done, and thousands of organizers and financiers ready to start it and carry it through, if the statesmen who are supposed to interpret the will of the nations would only get out of the way and leave free play to mankind's entirely sensible instinct in favour of growing, producing and exchanging the goods that it needs for its comfort.
If such a state of things could happen Germany's capacity to pay would look very different. By her policy of currency debase​ment she has wiped out her internal debt and also the debts and charges of her industry and her agriculture. And even now after all that we have heard about the impossible demands of the Allies, it is quite likely that Germany may yet prove to haye been let off much too lightly, unless someone can devise some ingenious scheme by which the Allies will benefit from an unexpectedly quick recovery of her economic strength, without discouraging her effort to secure it.