Source: Norman H. Davis, Box 44, Paris Peace Conference, Versailles Treaty, Manuscript Division, Library of Congress
Notes: The thirteen-page typescript is initialed "NHD" at the end of the document. Indented numbers indicated original pagination.
Soon after peace negotiations began, it became very evident that the economic and financial questions, including of course reparation, would be the most difficult, it not most important, ones to settle. Almost every other problem requiring solution revolved around these, and they could not be dealt with independently on sound, economic principles, because of conflicting political situations. With the countries most concerned, the difficulty in agreeing upon a sound, constructive, practical way for handling these problems, was increased by conflicting political complications and aspirations, and a lack of proper comprehension on the part of many of the delegates, of what sound, constructive principles were. The peoples in most of the countries and especially in France and England had been entirely misled as to Germany's capacity to repair the damage she had done, and, in fact, as to the cost of such reparation which Germany, in the negotiations leading up to the Armistice, had agreed to make good. Some of the delegates wanted to destroy Germany; some wanted to collect reparation, and others wanted to do both. Some wanted to collect more than Germany had agree to pay or could pay; and others wanted to take all her capital, destroy her, and then collect a large reparation bill.
Although the experts in the British Treasury had, as far back as the latter half of November 1918, made a study of the problem and had informed Mr. Lloyd George that all Germany could reasonably be expected to pay within a period of 25 to 30 years would be a capital sum of 2 to 3 billion pounds sterling, he had conducted his political campaign in December on the issue of forcing Germany to pay reparation and war costs,
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and in one speech had stated that Germany could pay 24 billion pounds. Practically all of the economists in England had likewise studies the problem and had come to substantially the same opinion as the experts of the British Treasury. Some of them were even doubtful of the advisability of requiring Germany to pay as much as 3 billion pounds, even if she were able to do so, because, in order to do so, it would necessarily require an efficient expansion of German commerce which might mean a corresponding decrease in the commerce of some other country - possibly even England.
In France, because of difficulties in the financial situation of the French Government, the politicians did not dare to tell their people the truth, and consequently misled them, but in a somewhat different way. The French budget had increased to about 22 billion francs, against receipts of about 8 billion francs from taxation. The bonded indebtedness of France and the note issue of the Bank of France had been increased unnecessarily because, during the war, the French officials had failed to meet the issue by increasing taxes sufficiently to meet their budget. During the war the taxes were only increased about 60%, and these were not being collected with regularity. After the cessation of hostilities, it was difficult for a Government to remain in power by doing so. As a result the people were told that this would all be set right by collecting from Germany, although there was no possibility of collecting a sufficient amount from Germany to meet this deficit.
As the negotiations developed, it became more and more apparent to the British and French that, by having failed to meet the issue in
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a straight-forward manner, the question was getting more complicated. The British people had been led to believe that Germany could pay and would be made to pay at least 20 billion pounds. The French also had been led to believe that something like this amount would be collected from Germany.
The Reparation Committee, appointed by the Peace Conference, was subdivided into three sub-committees: (1) to ascertain the amount of the bill against Germany, (2) to determine the amount which Germany could pay and how she should pay it, and (3) to report on what measures should be taken to enforce compliance. During the first month (February), the Committee was absorbed in an endeavor to agree upon what categories of damage should be chargeable to Germany. The British, seconded by practically all of the other delegations, endeavored to ignore the definite agreement made with Germany by the interchange of notes leading up to the Armistice, which defined what Germany would have to pay. Although it was impossible to read into this agreement any right to call upon Germany to pay war costs, the other delegations insisted upon demanding these costs from Germany. In the face of an explicit agreement which would not include such costs being chargeable to Germany, and also in the face of the admission on the part of practically all the experts who had given any thought to the matter that it would be impossible for Germany to pay such war costs and in fact most probably impossible for her to repair all the damage for which she was liable under the strictest interpretation of the agreement, the British, French, and other delegations insisted for a long time on including full war costs.
The preliminary studies of the sub-committee No. 1 soon showed conclusively that, exclusive of pensions and separation allowances, the
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amount of damage for which Germany was liable under the agreement would not exceed 25 to 30 billion dollars, and that if pensions and separation allowances were included, it would not exceed 40 billion dollars. It was finally agreed by the British and French that war costs could not be included. There was some doubt on the part of the American delegation as to whether or not pensions and separation allowances could be included, but we finally agreed to include these items in the categories of damage because we thought it just, and because we thought it would not increase the amount which Germany would eventually pay, which seemed to us more equitable and which was desired by the powers concerned.
In the early part of March, the delegates of sub-committee No. 2 had considerable difficulty in an endeavor to agree upon an amount which Germany might, with some reason, be expected to be able to pay. Lord Cunliffe, the British representative on the sub-committee had previously informed the Prime Minister that, in his opinion, Germany could pay 20 billion pounds. This probably accounts for the fact that Mr. Lloyd George named him as the British representative on this reparations committee, because he had conducted his political campaign on the principle of collecting a large amount from Germany, and he naturally selected representatives who advocated such a procedure and thought such a procedure possible. Lord Cunliffe was therefore naturally reluctant to reduce his figures, but finally indicated a willingness to agree upon 8 billion pounds as the amount which sub-committee No. 2 would report, provided his American delegate would agree upon reporting this amount. The French representative on this sub-committee, Mr. Loucheur, told me privately on several occasions that he was satisfied Germany could not
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pay this amount, but, in the face of public opinion, he could not advocate a smaller amount than the British representative advocated. Mr. Lamont, who acted as my alternate on this sub-committee, and I could not agree to this sum. Although Mr. Lamont was more optimistic than myself as to Germany's reasonable capacity to pay, he did not feel that she could be called upon to pay over 35 billion dollars as a maximum , and even then, that half of this should be paid in Germany currency at the par of exchange.
As it became more and more apparent that Germany's bill including pensions and separation allowances would not amount to anything like what people in England and France had been led to believe would be collected, and also that no one could conscientiously hazard a guess that Germany could pay (more than) 10 billion pounds, the matter became more difficult of solution because of the political questions involved. About this time, it was decided that it would be easier to agree upon the various categories of damage, if an agreement could be reached as to the division between the various Allies of the amounts to be received from Germany. An unofficial committee was then appointed, composed of Mr. Montague, the Under Secretary of State for India, representing the British, Mr. Loucheur representing the French, and myself. This committee was to talk the matter over frankly in order to arrive at an agreement as to how the sums collected from Germany should be divided, and as to what sums could be collected from Germany. In these conversations, the British first asked for 33 1/3 % against 50 % for the French. Finally, a tentative compromise was about arrived at, on the basis of 55% for the French and 25% for the British, and was to have been left to Mr. Lloyd George and Mr. Clemenceau. Nothing definite came of this because of
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another change in procedure. After discussing thoroughly Germany's ability to pay, we found that we were practically in accord: namely, all that Germany could reasonably be expected to pay in gold within 30 years would be a capital sum of approximately 15 billion dollars.
We then decided to report confidentially to the Heads of State just what our opinions were, and accordingly had a meeting with President Wilson, Mr. Lloyd George, and Mr. Clemenceau. Attached here-to is a memorandum which I dictated in the presence of Messrs. Montague and Loucheur, expressing our views. This memorandum was handed to the three Heads of State in the conference which we had with them. Mr. Lloyd George did not like this report. He admitted that it was probably correct, and that in fact he was satisfied that 5 billion pounds as a maximum was all that Germany could be elected to pay, but that on account of public opinion it was very difficult for him at that moment to get the British public to accept a settlement on the basis of our report. I presented an argument substantially along the lines of the attached memorandum "B." At the conclusion of this meeting, however, Mr. Lloyd George called me aside with Mr. Clemenceau and said, "There is nothing for us to do but simply to tell our people the facts, and that we cannot collect or cannot afford to collect anything like what we had anticipated." Mr. Clemenceau reluctantly assented. I thought some considerable progress had then been made, but shortly afterwards I was called to a meeting with President Wilson, Mr. Lloyd George, and Mr. Clemenceau, which Lord Sumner, Mr. Keynes of the British Treasury, and Mr. Loucheur also attended. Mr. Montague had gone to England and was not present. Lord Sumner presented a report arguing that Germany should be called upon to pay certain installments, including interest, which would have amounted to a capital sum of approximately 11 billion pounds, and it was
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apparent from this meeting that Mr. Lloyd George had decided not to face his people. Mr. Keynes supported my views. President Wilson told Mr. Lloyd George he thought we had reached an agreement in the previous meeting as to substantially what would be done. Mr. Lloyd George did not understand that we had, and then Lord Sumner, Mr. Keynes, Mr. Loucheur, and I were asked to try to come to an agreement among ourselves. These meetings then broadened out, and Mr. Lamont, and part of the time Mr. Strauss, and Lord Cunliffe were brought into the discussions.
We then endeavored to arrive at an arrangement on another basis, and after many conversations almost agreed upon fixing a minimum and a maximum amount which Germany would be called upon to pay: namely, 25 billion dollars minimum and 35 to 40 billion dollars maximum, with the proviso that 5% could, with the approval of the Reparation Commission, be payable in German reichsmarks at the par of exchange, and that the maximum could be reduced to the minimum if, in the opinion of the Reparation Commission, Germany could not pay more. We would undoubtedly have arrived at a compromise agreement along the above lines, but about this time Mr. Lloyd George took the position that no amount whatever should be named, but that Germany should simply obligate herself to pay the amount of damage under the specific categories, and the Reparation Commission should be empowered to reduce this amount. While the American delegates always favored fixing a reasonable, definite amount which Germany should be called upon to pay, and always stated that it was a great mistake not to do so, Mr. Lloyd George and Mr. Clemenceau preferred the latter plan, in order to give them time to prepare their people to accept the real situation. About this time Mr. Lamont and I had luncheon with Mr. Lloyd Georges to discuss the matter. He told us that he had come
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to the conclusion that Mr. Keynes and ourselves were correct; that he was satisfied Germany could not pay anything like what Lords Sumner and Cunliffe calculated; but that even if we could agree upon 5 billion pounds (which in his opinion would be the maximum) it would not help the situation, because the public were expecting so much more. He also argued that Germany would rather leave it open and that later a reasonable amount could and would be fixed. Mr. Clemenceau also argued that leaving the amount open would be more satisfactory to the Germans. President Wilson argued that it was a great mistake to sacrifice a sound, constructive, financial and economic plan to political expediency, but he finally and reluctantly agreed that we should endeavor to work out some plan for leaving the amount open, with the understanding, however, that the Reparation Commission would not call upon Germany to pay more than, in its opinion, they were able to pay within one generation, and that the amount should be fixed by the Reparation Commission as soon after the ratification of peace as possible. The President reiterated from time to time that while he thought it just that Germany should repair the damage to the extent of her utmost capacity, he did not feel that it would be wise or just for Germany to assume a burden which she could not liquidate within a period of the next thirty years, because a burden which could not be lifted within that period would be too heavy to enable Germany ever to get on her feet, and it would be so large that she could not even pay the interest, which would be so large that she could not even pay the interest, which would accumulate at compound interest too fast to be overcome.
For political reasons, Mr. Lloyd George and Mr. Clemenceau insisted that Germany should sign a blanket obligation to pay the full amount of damage as found by the Reparation Commission under the categories, but
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that provision should be made for the Commission by unanimous vote to reduce this amount. They stated that, in case it were found subsequently that Germany could not pay this amount, they would then cancel such portion thereof as could not be paid. We then went off to work out a plan along the lines of this last suggestion.
As the reparation to be made by Germany concerned England and France so much more than the other countries and especially the United States, we could not well insist further on the complete adoption of our views as to the manner of handling the problem.
Leaving the amount of Germany's bill open for later determination, required the creation of a Reparation Commission with considerable power and latitude for ascertaining and regulating from time to time the amount which Germany should pay in accordance with her capacity. Although it was finally determined, in the Conditions of Peace presented to Germany, to follow this procedure, the British, French, and Italian delegates were especially anxious to have a certain amount of bonds issued and delivered by Germany upon the ratification of the Peace Treaty. Their object was to get some bonds which they thought could be used as a basis of credit and they also thought that payment could be exacted from Germany more easily if German bonds were issued and distributed. The American delegates were quite prepared to agree to something along this line, provided that the bonds to be issued and delivered forthwith by Germany should not exceed an amount which Germany might be expected to pay, and provided further, that such bonds should be distributed when, in the unanimous opinion of the Commission, Germany could pay the interest on same. It was finally agreed, therefore, that Germany should deliver bonds to the amount
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of 60 billion gold marks, to be held and subsequently distributed under the above conditions, and that Germany should obligate herself to deliver an additional 40 billion gold mark bonds, when, in the unanimous opinion of the Reparation Commission, she could pay the interest on same, and to deliver thereafter under the same conditions an additional amount of bonds to cover the balance of her indebtedness.
The American representative took the position that these bonds could not be used as a very satisfactory basis of credit, because investors generally would not care to purchase them until the policy of the Reparation Commission had been definitely settled, and until the investors and business men of the world were convinced that the sum which Germany was to be called upon to pay was not beyond her ability to meet.
Subsequently, in the negotiations with Belgium, it was decided that Germany should, in addition to the 60 billion gold mark bonds, deliver 4 6to 5 billion gold mark bonds, the amount necessary to cover the loans received by Belgium from England, France, and the United States up until the Armistice.
In their reply to the conditions of peace, the Germans argued very strongly against leaving the amount of their indebtedness open for future determination, on the ground that it would be very difficult for them to get their people to buckle down to work unless they knew what they would eventually have to pay and felt some hope in their ability to pay it. An unanswerable argument was made by them to the effect that, under the conditions presented, the harder they worked and the more they saved, the more they would have to pay, without knowing what the limit was, which was a poor incentive to buckle
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down and get through with the job.
In their counter-proposals, also, the Germans offered, under certain conditions to pay, in annual installments without interest, beginning in 1926, 100 billion marks gold. After making the deductions in accordance with the German proposal, their offer amounted substantially to about 8 billion dollars capital sum. This offer of the Germans was, in a way, encouraging, because we did not feel that they had reached their limit and we were hopeful for a time of being able to agree upon a definite, reasonable amount to be exacted. Mr. Lloyd George and Mr. Clemenceau, however, finally refused to do this, but proposed that, instead of waiting for two years in order to settle the amount of Germany=s bill, the Reparation Commission should entertain a proposal from the Germans to be presented within four months, thinking that the Germans might undertake to restore the damaged areas in France and Belgium, and issue obligations for the balance of their liability to be agreed upon.
The American delegation took the position that Germany should be permitted to retain, at least for a period of 18 months, one-third of their present mercantile marine, which is essential for their own requirements, and that the coal, dye-stuffs, and other materials to be furnished by Germany under the treaty should not be taken for re-sale to other countries, but that such amounts only would be taken as were essential to meet the domestic requirements of France. The British and French, and especially Loucheur, agreed with this verbally, but they refused to put it in an agreement now with Germany. Mr. Clemenceau especially was of the opinion that Germany must be forced to sign the treaty without further concessions, but that all the necessary concessions would be made thereafter in order to make the plan workable and practical.
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We were strongly of the opinion that it was of the greatest importance, especially for France and Italy, to use German obligations as a basis of credit for restoring their industrial life, and that this could not be done unless Germany issued obligations in which investors would have confidence. We felt that 10 or 15 billion dollars, or securities to the amount which would have the confidence of the investing public could be used to the extent necessary within the immediate future, would be worth very much more to the Allies than many times that amount several years later. We think, however, that as soon as Peace is ratified, the Powers concerned will realize this more forcibly than they do at present, and that in the near future it may be possible for them to arrive at some such arrangement with Germany which will solve the difficulty.
I am also of the opinion that France and England will eventually realize that it is most inadvisable to collect the full amount of Germany's liability, even if she is able to pay it, because, in the remote possibility of her being able to do so, it would be to a great extent detrimental to British and French industry. Mr. Lloyd George and M. Loucheur admitted that they would no doubt within two or three years desire to have Germany's bill cut down considerably, because by that time their people would realize that Germany could only pay a very large sum by restricting imports and increasing exports to the extent that Germany would be closed to them as a market and that they would not only become dumping grounds for German exports, but their own exports to other countries would have to give way to those from Germany. The problem is not therefore so much what Germany can pay, but what the Allies can afford to have her pay. While it would have been better to face this fact now and have Germany issue obligations for a reasonable, definite amount which could be used as a
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basis of credit for the immediate resumption of European industrial life, I am hopeful that the Reparation Commission, which has power to do so, will adopt a sound policy and constructive, definite plan within the near future.