“Reparations” Actually Paid by French. France wanted reparations, and the term reparations had a very real meaning to the French people. Here were the devastated northern provinces, and they wanted them repaired. The Germans were obligated under the treaty to repair them. When German payments were insufficient for the purpose, the French government anticipated them, borrowing to set the work going to restore the devastation. When critics of French financial policy pointed out how inadequate the taxation was in relation to the vast expenditures, the answer was, “The Boche will pay”; and when year after year the German payments were disappointingly small, the declamation changed from the indicative to the imperative mood, and the answer was, “The Boche must pay.”
Weak and Short-lived Ministries Afraid to Face Financial Facts. The French financial fabric was crumbling. Weak ministry succeeded weak ministry, each too much afraid of its own tenure of office to venture to tell the financial truth to the people, each holding onto office a few weeks longer, concealing the facts and waiting for the next ministry to tell the truth to the people. The franc slipped ominously in the foreign exchanges. A hectic inflation came in France. A financially collapsing Germany was blamed for the financial troubles of France, and the French Army moved in and occupied the Ruhr. This was on January 11, 1923. French economic evacuation of the Ruhr came November 15, 1923, and military evacuation July 1925.
Occupation of Ruhr Harmed Both Germany and France. The occupation of the Ruhr involved financial burdens rather than financial gains for France. It was demoralizing in the extreme to German industry and finance, both in the occupied and the unoccupied territory. Ordinary trade processes were dislocated. Military decisions were substituted for business contracts. The normal course of trade was interrupted. For example,
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shipments of coal from the Ruhr to East Prussia in cars which would have returned from East Prussia loaded with potatoes for Ruhr consumption—usual at the season when the occupation first began—were promptly stopped. France got very little coal and coke from the Ruhr compared with what she had been getting before the occupation. Unoccupied Germany likewise was unable to get coal in any quantity from the Ruhr and many of her industries were consequently in a precarious position. France experienced heavy losses and Germany’s abilities to make reparations payments were gravely impaired.
In the holding of part of Germany by armies of occupation under the terms of the peace treaty, the Allies had sought “guaranties” that Germany would perform her obligations under the treaty. In the seizing of the Ruhr, France sought in addition a “productive guaranty.” But the whole theory of guaranties and productive guaranties proved abortive. If Germany were to pay she must be put in a position of economic strength and not in a position of humiliating helplessness. Or at least so it seemed to us in that benighted time. We were not prepared in 1923 and 1924 to adopt the ideals and methods of Hitler, to occupy all of Germany, to turn the Germans into slaves, and to extract from an enslaved people by terroristic methods all their surplus over a bare subsistence. We turned to methods that were more humane, to methods designed to make it to the interest of Germany to pay what she could, and to methods designed to permit Germany and her conquerors to share in an expanding and productive economic life.
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The Reforms Needed. It was clear enough to informed students of economics and international finance what Europe and the United States needed to do to get things straightened out, long before the Ruhr crisis came. The elements in the problem were the following:
1. Reparations payments had been set far too high. They had to be reduced to magnitudes within the power of the German people to pay and to magnitudes that the German people recognized they could pay. It was necessary that they should be arrested entirely for a time, or almost entirely, and that a schedule should be established under which reparations payments could rise as Germany’s capacity to pay increased.
2. The debts of Britain, France, Italy, and Belgium to the United States, and of France, Italy, and Belgium to Great Britain, were likewise of a magnitude that looked pretty hopeless in the early postwar years. Indeed, the debts of the Continental countries to the United States and Britain were obviously greater that could be paid in full, even if a long schedule of payments were arranged. The British, as we shall see in our chapter dealing with the intergovernmental debts, made a settlement with us in which they asked for and received very moderate concessions on June 19, 1923. For several years the other debts made very little of a problem for the foreign exchanges, as no payments were made and we contented ourselves with allowing interest to accrue. But it was obviously necessary, if these countries were to enjoy private credit, that the question of their debts to the United States government be adjusted in a sound way.
3. All the Continental belligerents, victors and vanquished, had unbalanced budgets, and were borrowing and spending far more than the tax revenues collected; and all of them had currencies which, lacking gold redemption and increasing steadily in volume, were fluctuating violently and depreciating rapidly. There was great need for the balancing of budgets and for the stabilization of currencies with gold.
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4. As a means of facilitating the balancing of budgets and the stabilization of currencies, there was need of financial aid from the strong creditor countries. This should take the form of new loans, the proceeds of which were to be taken partly in gold, to build up the reserves of the banks of issue. These new loans would assist the financially stricken countries in reorganizing their finances, and above all, enable them to cease borrowing from the central banks of issue and ruining their currencies.
5. Finally, it was obviously necessary, if international credits were to be of any use or were ever to be repaid, that the movement of goods from country to country must be facilitated, that tariffs must be lowered, quotas or other trade barriers be removed, and that the men having bank balances in one country be free to dispose of them in the foreign exchange markets without encountering governmentally created difficulties.
Tying Foreign Loans to Internal Reforms. There was a great deal of discussion of these matters, much of which was summarized in the Conference on European Rehabilitation at the Institute of Politics at Williamstown, Massachusetts, in August 1922. This conference ran through about four weeks, and in the course of it there was a round-table discussion participated in by Paul D. Cravath, Paul Warburg, David Houston, former secretary of the Treasury, and this writer.
Much of the discussion hinged on the “vicious circle” that currencies could not be stabilized until budgets were balanced, but that budgets could not be balanced while currencies were depreciating. Europeans proclaimed their inability to make financial reforms unless the United States would make loans. Americans declared that the loans could not be made until the Europeans instituted the reforms. The answer was that we could straighten out this tangle by making one comprehensive settlement. Since budgets, currencies, reparations, foreign loans, and inter-Allied debts were all so intimately related it followed that we should tie them together in one comprehensive settlement.1
Warburg insisted that this was not politically feasible, that it was impossible to get things done simultaneously, that the best that could be hoped for was to