Chapter II: Part 2

The Balance of Power is, in fact, becoming as obsolete as the Monopoly of Power enjoyed by the Roman Empire. It is a bankrupt policy which went into liquidation in 1914, and the high court of public opinion demands a reconstruction. The principle of that reconstruction was stated by President Wilson, a great seer whose ultimate fame will survive the obloquy in which he has been involved by the exigencies of American party-politics and the short-sightedness of public opinion in Europe. We want, he said, a Community of Power, and its organ must be the League of Nations. Nations must begin to co-operate and cease to counteract.

I am not advocating the League of Nations except in the limited way of attempting to show that the Balance of Power is impossible as an alternative unless you can re-create the conditions of a century ago, restore the individual independence of a number of fairly equal Powers, and guarantee the commonwealth of nations against privy conspiracy and sedition in the form of separate groups and alliances. But there is one supreme advantage in a Community of Power, provided it remains a reality, and that is that it need never be used. Its mere existence would be sufficient to ensure the peace; for no rebel State would care to challenge the inevitable defeat and retribution which a Community of Power could inflict. It has even been urged, and I believe it myself, that Germany would never have invaded Belgium had she been sure that Great Britain, and still less had she thought that America, would intervene. It was the Balance of Power that provoked the war, and it was the absence of a Community of Power which made it possible.

BASIS OF SECURITY

But no one who thinks that power--whether a Monopoly, a Balance, or even a Community of Power is the ultimate guardian angel of our peace, has the root of the matter in him. Men, said Burke, are not governed primarily by laws, still less by force; and behind all power stands opinion. To believe in public opinion rather than in might excludes the believer from the regular forces of militarism and condemns him as a visionary and blind. For advocates of the Balance of Power bear a striking resemblance to the Potsdam school; and even so moderate a German as the late Dr. Rathenau declared in his unregenerate days before the war that Germans were not in the habit of reckoning with public opinion. Nevertheless, there is a frontier in the world which for a century and more has enjoyed a security which all the armaments of Prussian militarism could not give the German Fatherland; and the absolute security of that frontier rests not upon a monopoly nor a community, still less upon a balance of power, but on the opinion held on both sides of that frontier that all power is irrational and futile as a guarantee of peace between civilised or Christian people.

Let us look at that frontier for a moment. It is in its way the most wonderful thing on earth, and it holds a light to lighten the nations and to guide our feet into the way of peace. It runs, of course, between the Dominion of Canada and the United States of America across the great lakes and three thousand miles of prairie; and from the military and strategic point of view it is probably the worst frontier in the world. Why then is it secure? Is it because of any monopoly or community or balance of power? Is it because the United States and the British Empire are under a common government, or because there is along that frontier a nicely-balanced distribution of military strength? No, it is secure, not in spite of the absence of force, but because of the absence of force; and if you want to destroy the peace of that frontier from end to end, all you need to do is to send a regiment to protect it, launch a _Dreadnought_ on those lakes, and establish a balance of power. For every regiment or warship on one side will produce a regiment or warship on the other; and then your race for armaments will begin, and the poison will spread until the whole of America becomes like Europe, an armed camp of victims to the theory of strategic frontiers and of the Balance of Power.

Those theories, their application, and their consequences recently cost the world thirty million casualties and thousands of millions of pounds within a brief five years, and yet left the frontiers of Europe less secure than they were before. Three thousand miles of frontier in North America have in more than a hundred years cost us hardly a life, or a limb, or a penny. As we put those details side by side we realise _quantula regitur mundus sapientia_--with how little wisdom do men rule the world. Yet the truth was told us long ago that he that ruleth his spirit is better than he that taketh a city, and we might have learnt by our experience of the peace that the only conquest that really pays is the conquest of oneself.

The real peace of that North American frontier is due to no conquest of Americans by Canadians or of Canadians by Americans, but to their conquest of themselves and of that foolish pride of "heathen folk who put their trust in reeking tube and iron shard." Let us face the facts, whatever the visionaries and the blind may say. So be it. The war is a fact, and so is the desolation it has wrought. But that Anglo-American frontier is also a fact, and so is that century of peace which happily followed upon the resolution to depend for the defence of that frontier on moral restraint instead of on military force. Verily, peace hath her victories not less renowned than those of war.

THE ALTERNATIVE

We have, indeed, to face the facts, and the facts about the Balance of Power must dominate our deliberations and determine the fate of our programmes. There may be no more war for a generation, but there can be no peace with a Balance of Power. There can be nothing better than an armed truce; and an armed truce, with super-dreadnoughts costing from four to eight times what they did before the war, is fatal to any programme of retrenchment and reform. We are weighted enough in all conscience with the debt of that war without the burden of preparation for another; and a Balance of Power involves a progressive increase in preparations for war.

Unless we can exorcise fear, we are doomed to repeat the sisyphean cycles of the past and painfully roll our programmes up the hill, only to see them dashed to the bottom, before we get to the top, by the catastrophe of war. Fear is fatal to freedom; it is fear which alone gives militarism its strength, compels nations to spend on armaments what they fain would devote to social reform, drives them into secret diplomacy and unnatural alliances, and leads them to deny their just liberties to subject populations. Fear is the root of reaction as faith is the parent of progress; and the incarnation of international fear is the Balance of Power.

INTERNATIONAL DISARMAMENT

BY MAJOR-GENERAL SIR FREDERICK MAURICE, K.C.M.G., C.B.

Director of Military Operations--Imperial General Staff, 1915-16.

Sir Frederick Maurice said:--This problem of the reduction of armaments is one of the most urgent of the international and national problems of the day. It is urgent in its economic aspect, urgent also as regards its relation to the future peace of the world. The urgency of its economic aspect was proclaimed two years ago at the Brussels conference of financiers assembled by the League of Nations. These experts said quite plainly and definitely that, so far as they could see, the salvation of Europe from bankruptcy depended upon the immediate diminution of the crushing burden of expenditure upon arms. That was two years ago. Linked up with this question is the whole question of the economic reconstruction of Europe. Linked up with it also is that deep and grave problem of reparations. It is no longer the case to-day, if it has ever been the case since the war, which I doubt, that sober opinion in France considers it necessary for France to have large military forces in order to protect her from German aggression in the near future. For the past two years, however, it has been the custom of those who live upon alarms to produce the German menace. There is a great body of opinion in France at this moment which feels that unless France is able to put the pistol to Germany's head, it will never be able to get a penny out of Germany.

You have the further connection of the attitude of America to the problem. America said, officially through Mr. Hoover and unofficially through a number of her leading financiers, that she was not ready to come forward and take her share in the economic restoration of Europe so long as Europe is squandering its resources upon arms. The connection is quite definitely and explicitly recognised in the Covenant of the League of Nations. Article 8 begins: "The principles of the League recognise that the maintenance of peace requires reduction of national armaments to the lowest point consistent with national safety, and the enforcement by common action of international obligations." These words were promulgated in 1919. Personally, I find myself in complete agreement with what Lord Robert Cecil said this morning, and what Lord Grey said a few days ago at Newcastle, that one of the prime causes of the war was Prussian militarism. By that I mean the influence of that tremendous military machine, which had been built up through years of labour in Germany, in moulding the public opinion of that country.

A GROUP OF NEW ARMIES

Well, how do we stand in regard to that to-day? We stand to-day in the position that the armaments of Germany, Austria, Hungary, Bulgaria, have all been compulsorily drastically reduced, but in their place you have a whole group of new armies. You have armies to-day which did not exist before the war, in Finland, Esthonia, Poland, Lithuania, and Czecho-Slovakia, and the sum total is that at this moment there are more armed men in time of peace in Europe than in 1913. Is there no danger that this machine will mould the minds of some other peoples, just as the German machine moulded the minds of the Germans? This is the position as regards the peace establishments of Europe to-day in their relation to the future peace of the world. What about the economic position? I have mentioned that certain Powers have had their forces drastically reduced, and that has brought with it a drastic reduction of expenditure, but I have before me the naval, military, and air force estimates of the eight principal Powers in Europe, leaving out Germany, Austria, and Bulgaria, whose forces have been compulsorily reduced.

At the economic conference of financiers in Brussels in 1920 it was mentioned with horror that 20 per cent. of the income of Europe was then being devoted to arms. I find that to-day 25 per cent. of the total income of these eight Powers is devoted to arms. I find, further, that of these eight Powers who have budgeted for a smaller service, only one--Yugo-Slavia--has managed to balance her budget, and the others have large deficits which are many times covered by their expenditure on arms. And this is going on at a time when all these eight nations are taxed almost up to their limit, when the whole of their industries are suffering in consequence, and when the danger of bankruptcy, which horrified the financiers in 1920, is even more imminent.

That being the case, what has been done in the last few years to remedy this matter, and why is more not being done? As you all know, this question is in the forefront of the programme of the League of Nations. And the League began to deal with it at once. Lord Robert Cecil will agree with me that the framers of the Covenant, of which he is one of the chief, could not foresee everything, and they did not foresee at the time the Covenant was framed, that machinery would be required to deal with this extraordinarily complex question of armaments. They created an organisation then called a Permanent Military Command, still in existence, to advise the Council of the League on all military matters. But when these gentlemen got to work upon such questions as reduction of armaments, they at once found themselves dealing with matters entirely beyond their competence, because into this problem enter problems of high politics and finance, and a thousand other questions of which soldiers, sailors, and airmen know nothing whatever.

THE LEAGUE'S COMMISSION

The first step was to remedy an oversight in the machinery, and that was done at the first meeting of the Assembly. The first meeting of the Assembly created a temporary mixed commission on armaments, which was composed of persons of recognised competence in political, social, and economic matters. It consisted of six members of the old Permanent Commission, and in addition a number of statesmen, employers, and representatives of labour. This body started to tackle this grave question. Before it began the first Assembly of the League had suggested one line of approach--that there should be an agreement to limit expenditure; that an attempt should be made to limit armaments by limiting budgets; and nations were asked to agree that they would not exceed in the two years following the acceptance of the resolution the budgeted expenditure on armaments of the current year.

That proposal did not meet with great success. It was turned down by seven Powers, notably by France and Spain. On the whole, I think France and Spain and the other Powers had some reason on their side, because it is not possible to approach this problem solely from the financial standpoint. You cannot get a financial common denominator and apply it to armaments. The varying costs of a soldier in Europe and in Japan have no relation to each other. The cost of a voluntary soldier in Great Britain has no relation to the cost of a conscript on the Continent. Therefore, that line of approach, when applied too broadly, is not fruitful. I think myself it is quite possible that you may be able to apply financial limitations to the question of material, the construction of guns and other weapons of war, because the cost of these things in foreign countries tends much more to a common level. I think this is a possible line of approach, but to try to make a reduction of armaments by reducing budgets on a wholesale scale I do not think will lead us anywhere at all. I may safely say that for the present that line of approach has been abandoned.

The Temporary Mixed Commission got to work, and in its first year, frankly, I cannot say it did very much. It concerned itself very largely with the accumulation of information and the collection of statistics, bearing rather the same relation to world problems as a Royal Commission does to our domestic problems. By the time the second Assembly met practically nothing had been done by the Commission. But other people had been at work, and our own League of Nations Union had put forward a proposal--a line of approach, rather, I would say, to this problem--which I for one think is extremely useful. It began by inquiring as to what armaments were for, which after all is a useful way of beginning, and the inquiry came to the conclusion that nations required them for three purposes--to maintain internal order; as a last resort for the enforcement of law and order; and to protect overseas possessions. After these purposes were served there was a large residuum left. That residuum could only be required for one purpose--to protect the country in question from foreign aggression. When you had gone thus far in your reasoning, you had obviously got into the zone where bargaining becomes possible, because it is obvious that by agreement you can get the force by which a nation is liable to become reduced. That line of approach received the general blessing at the second Assembly of the League of Nations. Things began to move, primarily because the Dominion of South Africa took a keen interest in this problem of the reduction of armaments, and South Africa appointed Lord Robert Cecil as its representative, and instructed him to press the matter on, and he did. The Assembly definitely instructed this temporary mixed Commission that by the time the third Assembly met plans should be prepared and concrete proposals put on paper.

WASHINGTON

Soon after that came the Washington Conference--a great landmark in the history of this problem. For reasons I need not go into in detail, the naval problem is very much easier than the military or air problem. You have as the nucleus of naval forces something quite definite and precise--the battleship--and it also happens that that particular unit is extremely costly, and takes a long time to build, and no man has yet ever succeeded in concealing the existence of a battleship. There you had three important points--a large and important unit in the possession of everybody concerned, very costly, so that by reducing it you make great reductions in expenditure. There was no possibility of avoiding an agreement about the construction of battleships, and it is to these facts mainly that the happy results of the Washington Conference were due.

But for the furtherance of the problem the point is this. The Washington Conference definitely established the principle of reduction of armaments on a great ratio. The ratio for battleships between Great Britain, the United States, Japan, France, and Italy, was settled as to 5, 5, 3, and 1.75. They all agreed on a definite ratio. All agreed to scrap a certain number of ships, to bring their tonnage down to a certain figure, and by doing that relatively they were left in the same position as before, with this advantage--that they at once obtained an enormous reduction in expenditure on armaments.

That opened up a new line of approach for the attack on this problem from the military and air standpoint. And the next development took place in February this year at the meeting of the Temporary Mixed Commission on armaments, when the Esher proposals were presented. There has been a great deal of talk about the Esher proposals, and I am glad of it, because the one thing wanted in this question is public interest. The Esher proposals were an endeavour to apply to land armaments this principle of reduction on a great ratio. And the line taken was this. It was necessary to find some unit in land armaments which corresponded with the battleships, and the unit selected by Lord Esher was the 300,000 regular soldiers of the peace armies in France, England, and Spain. It was selected because it happened to be the number to which the Austrian army was reduced by treaty, and with that unit he proposed a ratio for the armies of Europe, which would leave everybody relatively in much the same position as before, but would obtain an immediate reduction in numbers of standing armies and a great reduction of expenditure.

This proposal was subjected to a great deal of criticism, and I am sorry to say nine-tenths of the criticism appears to emanate from persons who have never read the proposal at all. It is a proposal which lends itself to a great deal of criticism, and the most effective criticism which could have been applied at the time it was presented was that it put the cart before the horse, and approached the problem from the wrong direction, for, as Lord Robert Cecil has said here this morning, what nations require is security. Some of them have clear ideas as to the way of obtaining it, but they all want it, and before you can expect people to reduce their armaments, which are, after all, maintained mainly for the purpose of providing security, you must give them something that will take the place of armaments.

A GENERAL DEFENSIVE PACT

In June an important development took place in this Temporary Commission. It was increased by the addition of a number of statesmen, and, amongst others, of men who ought to have been on it long ago. Lord Robert Cecil was added, and he at once proceeded to remedy what was a real difficulty in Lord Esher's proposals. He put forward a plan for providing security in the form, as the Assembly of the League had asked, of a definite written proposal--really a brief treaty. The purport of that treaty is included in the form of resolutions, which are roughly as follows:--No scheme for the reduction of armaments can be effective unless it is general; that in the present state of the world no Government can accept the responsibility for a serious reduction of armaments unless it is given some other equally satisfactory guarantee of the safety of its country; such guarantee can only be found in a general defensive agreement of all the countries concerned, binding them all to come to the assistance of any one of them if attacked.

A general defensive pact, with a proviso! It is obviously unreasonable to expect the States of the American continent to be ready to come over at any moment to help in Europe. It is obviously unreasonable to expect the States of Europe to bind themselves to come and fight in Asia. Therefore, there was this proviso added that an obligation to come to the assistance of the attacked country should be limited to those countries which belonged to the same quarter of the globe. Thus, you see, you are getting the obligation of the League into regional application. Personally my own conviction is that this is the line upon which many of the functions of the League will develop.

The main point of the situation as it is to-day is that you have got a committee working out in detail a general pact, which when it is formulated will be far more complete and satisfactory than the very general and vague Clause 10 of the Covenant. We have reached the position when practical proposals are beginning to emerge. What more is wanted? How can we help on this work? You will have gathered from what I said that it is my own conviction that with this problem of reduction of armaments is so closely linked up the problem of economic reconstruction and reparations that the whole ought to be taken together. I believe one of the reasons why so little progress has been made is that the economic problems have been entrusted, with the blessing of our and other Governments, to perambulating conferences, while the disarmament problem has been left solely to the League of Nations. I believe if you could get the whole of these problems considered by one authority--and there is one obvious authority--progress would be far more rapid.

There is another matter which concerns us as citizens--the attitude of our own Government to this question. I was delighted to see recently an announcement made by a Minister in the House of Commons that the Government was seriously in favour of a reduction of armaments on a great ratio. I was delighted to read the other day a speech, to which reference has already been made, by the Prime Minister. We have had a great many words on this question. The time has come for action, and quite frankly the action of our Government in the past two years with regard to this question has been neutral, and not always one of benevolent neutrality. Our official representatives at Geneva have been very careful to stress the difficulties, but up to the present I am unaware that our Government has ever placed its immense resources as regards information at the disposal of the one Englishman who has been striving with all his power and knowledge to get a definite solution. I believe there is going to be a change; I hope so. In any case, the best thing we can do is to see that it is changed, and that Lord Robert Cecil is not left to fight a lone battle.

THE APPEAL TO PUBLIC OPINION

There is something more. There is something wanted from each of us. Personally, I am convinced myself that this problem is soluble on the lines by which it is now being approached. I speak to you as a professional who has given some study to the subject. I am convinced that on the lines of a general pact as opposed to the particular pact, a general defensive agreement as opposed to separate alliances, followed by reduction on a great ratio, the practicability of which has been proved at Washington, a solution can be reached. Given goodwill--that is the point. At the last Assembly of the League of Nations a report was presented by the Commission, of which Lord Robert Cecil was a member, and it wound up with these words: "Finally, the committee recognises that a policy of disarmament, to be successful, requires the support of the population of the world. Limitation of armaments will never be imposed by Governments on peoples, but it may be imposed by peoples on Governments." That is absolutely true. How are we going to apply it? Frankly, myself, I do not see that there is a great deal of value to be got by demonstrations which demand no more war. I have every sympathy with their object, but we have got to the stage when we want to get beyond words to practical resolutions. We want definite concrete proposals, and you won't get these merely by demonstrations. They are quite good in their way, but they are not enough. What you want in this matter is an informed public opinion which sees what is practical and insists on having it.

I am speaking to you as one who for a great many years believed absolutely that preparation for war was the means of securing peace. In 1919--when I had a little time to look round, to study the causes of the war and the events of the war--I changed my opinion. I then came quite definitely to the conclusion that preparation for war, carried to the point to which it had been carried in 1914, was a direct cause of war. I had to find another path, and I found it in 1919. Lord Robert may possibly remember that in the early days of the Peace Conference I came to him and made my confession of faith, and I promised to give him what little help I could. I have tried to keep my promise, and I believe this vital problem, upon which not only the economic reconstruction of Europe and the future peace of the world, but also social development at home depend, can be solved provided you will recognise that the problem is very complex; that there is fear to be overcome; that you are content with what is practical from day to day, and accept each practical step provided it leads forward to the desired goal. I therefore most earnestly trust that the Liberal party will take this question up, and translate it into practical politics. For that is what is required.

REPARATIONS AND INTER-ALLIED DEBT

BY JOHN MAYNARD KEYNES

M.A., C.B.; Fellow of King's College, Cambridge; Editor of _Economic Journal_ since 1912; principal representative of the Treasury at the Paris Peace Conference, and Deputy for the Chancellor of the Exchequer on the Supreme Economic Council, Jan.-June, 1919.

Mr. Keynes said:--I do not complain of Lord Balfour's Note, provided we assume, as I think we can, that it is our first move, and not our last. Many people seem to regard it as being really addressed to the United States. I do not agree. Essentially it is addressed to France. It is a reply, and a very necessary reply, to the kites which M. Poincaré has been flying in _The Times_ and elsewhere, suggesting that this country should sacrifice all its claims of every description in return for--practically nothing at all, certainly not a permanent solution of the general problem. The Note brings us back to the facts and to the proper starting-point for negotiations.

In this question of Reparations the position changes so fast that it may be worth while for me to remind you just how the question stands at this moment. There are in existence two inconsistent settlements, both of which still hold good in law. The first is the assessment of the Reparation Commission, namely, 132 milliard gold marks. This is a capital sum. The second is the London Settlement, which is not a capital sum at all, but a schedule of annual payments calculated according to a formula; but the capitalised value of these annual payments, worked out on any reasonable hypothesis, comes to much less than the Reparation Commission's total, probably to not much more than a half.

THE BREAKDOWN OF GERMANY

But that is not the end of the story. While both the above settlements remain in force, the temporary régime under which Germany has been paying is different from, and much less than, either of them. By a decision of last March Germany was to pay during 1922 £36,000,000 (gold) in cash, _plus_ deliveries in kind. The value of the latter cannot be exactly calculated, but, apart from coal, they do not amount to much, with the result that the 1922 demands are probably between a third and a quarter of the London Settlement, and less than one-sixth of the Reparation Commission's original total. It is under the weight of this reduced burden that Germany has now broken down, and the present crisis is due to her inability to continue these reduced instalments beyond the payment of July, 1922. In the long run the payments due during 1922 should be within Germany's capacity. But the insensate policy pursued by the Allies for the last four years has so completely ruined her finances, that for the time being she can pay nothing at all; and for a shorter or longer period it is certain that there is now no alternative to a moratorium.

What, in these circumstances, does M. Poincaré propose? To judge from the semi-official forecasts, he is prepared to cancel what are known as the "C" Bonds, provided Great Britain lets France off the whole of her debt and forgoes her own claims to Reparation. What are these "C" Bonds? They are a part of the London Settlement of May, 1921, and, roughly speaking, they may be said to represent the excess of the Reparation Commission's assessment over the capitalised value of the London Schedule of Payments, and a bit more. That is to say, they are pure water. They mainly represent that part of the Reparation Commission's total assessment which will not be covered, even though the London Schedule of Payments is paid in full.

In offering the cancellation of these Bonds, therefore, M. Poincaré is offering exactly nothing. If Great Britain gave up her own claims to Reparations, and the "C" Bonds were cancelled to the extent of France's indebtedness to us, France's claims against Germany would be actually greater, even on paper, than they are now. For the demands under the London Settlement would be unabated, and France would be entitled to a larger proportion of them. The offer is, therefore, derisory. And it seems to me to be little short of criminal on the part of _The Times_ to endeavour to trick the people of this country into such a settlement.

Personally, I do not think that at this juncture there is anything whatever to be done except to grant a moratorium. It is out of the question that any figure, low enough to do Germany's credit any good now, could be acceptable to M. Poincaré, in however moderate a mood he may visit London next week. Apart from which, it is really impossible at the present moment for any one to say how much Germany will be able to pay in the long run. Let us content ourselves, therefore, with a moratorium for the moment, and put off till next year the discussion of a final settlement, when, with proper preparations beforehand, there ought to be a grand Conference on the whole connected problem of inter-Governmental debt, with representatives of the United States present, and possibly at Washington.

THE ILLUSION OF A LOAN

The difficulties in the way of any immediate settlement now are so obvious that one might wonder why any one should be in favour of the attempt. The explanation lies in that popular illusion, with which it now pleases the world to deceive itself--the International Loan. It is thought that if Germany's liability can now be settled once and for all, the "bankers" will then lend her a huge sum of money by which she can anticipate her liabilities and satisfy the requirements of France.

In my opinion the International Loan on a great scale is just as big an illusion as Reparations on a great scale. It will not happen. It cannot happen. And it would make a most disastrous disturbance if it did happen. The idea that the rest of the world is going to lend to Germany, for her to hand over to France, about 100 per cent. of their liquid savings--for that is what it amounts to--is utterly preposterous. And the sooner we get that into our heads the better. I am not quite clear for what sort of an amount the public imagine that the loan would be, but I think the sums generally mentioned vary from £250,000,000 up to £500,000,000. The idea that any Government in the world, or all of the Governments in the world in combination, let alone bankrupt Germany, could at the present time raise this amount of new money (that is to say, for other purposes than the funding or redemption of existing obligations) from investors in the world's Stock Exchanges is ridiculous.

The highest figure which I have heard mentioned by a reliable authority is £100,000,000. Personally, I think even this much too high. It could only be realised if subscriptions from special quarters, as, for example, German hoards abroad, and German-Americans, were to provide the greater part of it, which would only be the case if it were part of a settlement which was of great and obvious advantage to Germany. A loan to Germany, on Germany's own credit, yielding, say, 8 to 10 per cent., would not in my opinion be an investor's proposition in any part of the world, except on a most trifling scale. I do not mean that a larger anticipatory loan of a different character--issued, for example, in Allied countries with the guarantees of the Allied Government, the proceeds in each such country being handed over to the guaranteeing Government, so that no new money would pass--might not be possible. But a loan of this kind is not at present in question.

Yet a loan of from £50,000,000 to £100,000,000--and I repeat that even this figure is very optimistic except as the result of a settlement of a kind which engaged the active goodwill of individual Germans with foreign resources and of foreigners of German origin and sympathies--would only cover Germany's liabilities under the London Schedule for four to six months, and the temporarily reduced payments of last March for little more than a year. And from such a loan, after meeting Belgian priorities and Army of Occupation costs, there would not be left any important sum for France.

I see no possibility, therefore, of any final settlement with M. Poincaré in the immediate future. He has now reached the point of saying that he is prepared to talk sense in return for an enormous bribe, and that is some progress. But as no one is in a position to offer him the bribe, it is not much progress, and as the force of events will compel him to talk sense sooner or later, even without a bribe, his bargaining position is not strong. In the meantime he may make trouble. If so, it can't be helped. But it will do him no good, and may even help to bring nearer the inevitable day of disillusion. I may add that for France to agree to a short moratorium is not a great sacrifice since, on account of the Belgian priority and other items, the amount of cash to which France will be entitled in the near future, even if the payments fixed last March were to be paid in full, is quite trifling.

A POLICY FOR THE LIBERAL PARTY

So much for the immediate situation and the politics of the case. If we look forward a little, I venture to think that there is a clear, simple, and practical policy for the Liberal Party to adopt and to persist in. Both M. Poincaré and Mr. Lloyd George have their hands tied by their past utterances. Mr. Lloyd George's part in the matter of Reparations is the most discreditable episode in his career. It is not easy for him, whose hands are not clean in the matter, to give us a clean settlement. I say this although his present intentions appear to be reasonable. All the more reason why others should pronounce and persist in a clear and decided policy. I was disappointed, if I may say so, in what Lord Grey had to say about this at Newcastle last week. He said many wise things, but not a word of constructive policy which could get any one an inch further forward. He seemed to think that all that was necessary was to talk to the French sympathetically and to put our trust in international bankers. He puts a faith in an international loan as the means of solution which I am sure is not justified. We must be much more concrete than that, and we must be prepared to say unpleasant things as well as pleasant ones.

The right solution, the solution that we are bound to come to in the end, is not complicated. We must abandon the claim for pensions and bring to an end the occupation of the Rhinelands. The Reparation Commission must be asked to divide their assessment into two parts--the part that represents pensions and separation allowances and the rest. And with the abandonment of the former the proportion due to France would be correspondingly raised. If France would agree to this--which is in her interest, anyhow--and would terminate the occupation it would be right for us to forgive her (and our other Allies) all they owe us, and to accord a priority on all receipts in favour of the devastated areas. If we could secure a real settlement by these sacrifices, I think we should make them completely regardless of what the United States may say or do.

In declaring for this policy in the House of Commons yesterday, Mr. Asquith has given the Liberal Party a clear lead. I hope that they will make it a principal plank in their platform. This is a just and honourable settlement, satisfactory to sentiment and to expediency. Those who adopt it unequivocally will find that they have with them the tide and a favouring wind. But no one must suppose that, even with such a settlement, any important part of Germany's payments can be anticipated by a loan. Any small loan that can be raised will be required for Germany herself, to put her on her legs again, and enable her to make the necessary annual payments.

THE OUTLOOK FOR NATIONAL FINANCE

BY SIR JOSIAH STAMP, K.B.E., D.SC.

Assistant Secretary Board of Inland Revenue, 1916-19. Member of Royal Commission on Income Tax, 1919.

Sir Josiah Stamp said:--In discussing the problem of National Finance we have to decide which problem we mean, viz., the "short period" or the "long period," for there are distinctly two issues. I can, perhaps, illustrate it best by the analogy of the household in which the chief earner or the head of the family has been stricken down by illness. It may be that a heavy doctor's bill or surgeon's fee has to be met, and that this represents a serious burden and involves the strictest economy for a year or two; that all members of the household forgo some luxuries, and that there is a cessation of saving and perhaps a "cut" into some past accumulations. But once these heroic measures have been taken and the burden lifted, and the chief earner resumes his occupation, things proceed on the same scale and plan as before. It may be, however, that the illness or operation permanently impairs his earning power, and that the changes which have to be made must be more drastic and permanent. Then perhaps would come an alteration of the whole ground plan of the life of that family, the removal to a smaller house with lower standing charges and a changed standard of living. What I call the "short period" problem involves a view only of the current year and the immediate future for the purpose of ascertaining whether we can make ends meet by temporary self-denial. What I term the "long distance" problem involves an examination of the whole scale upon which our future outlay is conditioned for us.

The limit of further economies on the lines of the "Geddes' cut" that can become effective in 1923, would seem to be some 50 or 60 millions, because every 10 per cent. in economy represents a much more drastic and difficult task than the preceding, and it cuts more deeply into your essential national services. On the other side of the account one sees the probable revenue diminish to an almost similar extent, having regard to the effect of reductions in the rate of tax and the depression in trade, with a lower scale of profits, brought about by a lower price level, entering into the income-tax average. It looks as though 1923 may just pay its way, but if so, then, like the current year, it will make no contribution towards the reduction of the debt. So much for the "short period." Our worst difficulties are really going to be deep-seated ones.

THE TWO PARTS OF A BUDGET

Now a national budget may consist of two parts, one of which I will call the "responsive" and the other the "non-responsive" portion. The responsive portion is the part that may be expected to answer sooner or later--later perhaps rather than sooner--to alterations in general conditions, and particularly to price alterations. If there is a very marked difference in general price level, the salaries--both by the addition or remission of bonuses and the general alteration in scales for new entrants--may be expected to alter, at any rate, in the same direction, and that part of the expense which consists of the purchase of materials will also be responsive. The second, or non-responsive part, is the part that has a fixed expression in currency, and does not alter with changed conditions. This, for the most part, is the capital and interest for the public debt.

Now the nature and gravity of the "long distance" problem is almost entirely a question of the proportions which these two sections bear to each other. If the non-responsive portion is a small percentage of the total the problem will not be important, but if it is larger, then the question must be faced seriously. Suppose, for example, that you have now a total budget of 900 million pounds, and that, in the course of time, all values are expressed at half the present currency figure. Imagine that the national income in this instance is 3600 million pounds. Then the burden, on a first approximation, is 25 per cent. Now, if the whole budget is responsive, we may find it ultimately at 450 million pounds out of a national income of 1800 million pounds, _i.e._ still 25 per cent. But let the non-responsive portion be 400 million pounds, then your total budget will be 650 million pounds out of a national income of about 2000 million pounds, or 33-1/3 per cent., and every alteration in prices--or what we call "improvement" in the cost of living--becomes an extraordinarily serious matter as a burden upon new enterprise in the future.

Let me give you a homely and familiar illustration. During the war the nation has borrowed something that is equivalent to a pair of boots. When the time comes for paying back the loan it repays something which is equivalent to two pairs or, possibly, even to three pairs. If the total number of boots produced has not altered, you will see what an increasing "pull" this is upon production. There are, of course, two ways in which this increasing pull--while a great boon to the person who is being repaid--must be an increased burden to the individual. Firstly, if the number of people making boots increases substantially, it may still be only one pair of boots for the same volume of production, if the burden is spread over that larger volume. Secondly, even supposing that the number of individuals is not increased, if the arts of production have so improved that two pairs can be produced with the same effort as was formerly necessary for one, then the debt may be repaid by them without the burden being actually heavier than before.

Now, coming back to the general problem. The two ways in which the alteration in price level can be prevented from resulting in a heavier individual burden than existed at the time when the transaction was begun, are a large increase in the population with no lower average wealth, or a large increase in wealth with the same population--which involves a greatly increased dividend from our complex modern social organism with all its mechanical, financial, and other differentiated functions. Of course, some of the debt burden is responsive, so far as the annual charge is concerned, on that part of the floating debt which is reborrowed continually at rates of interest which follow current money rates, but, even so, the burden of capital repayment remains. An opportunity occurs for putting sections of the debt upon a lower annual charge basis whenever particular loans come to maturity, and there may be some considerable relief in the annual charge in the course of time by this method.

What are the prospects of the two methods that I have mentioned coming to our rescue in this "long distance" problem? It is a problem to which our present "short distance" contribution is, you will admit, a very poor one, for we have not so far really made any substantial contribution from current revenue towards the repayment of the debt.

A CENTURY OF THE NATIONAL DEBT

Historical surveys and parallels are notoriously risky, particularly where the conditions have no precedent. They ought, however, to be made, provided that we keep our generalisations from them under careful control. Now, after the Napoleonic wars we had a national debt somewhat comparable in magnitude in its relation to the national wealth and income with the present debt. What happened to that as a burden during the 100 years just gone by? If it was alleviated, to what was the alleviation due? I would not burden you with a mass of figures, but I would just give you one or two selected periods. You can find more details in my recent book on _Wealth and Taxable Capacity_. We had a total debt of--

850 million pounds in 1817 841 " " " 1842 836 " " " 1857 659 " " " 1895 800 " " " 1903

and before this last war it had been reduced to 707 million pounds. In 1920, of course, it was over 8000 million pounds. Such incidents as the Crimean and the Boer wars added materially to the debt, but apart therefrom you will see that there is no tremendous relief by way of capital repayment to the original debt. Similarly, in a hundred years, even if we have no big wars, it is quite possible we may have additions to the national debt from smaller causes. Yet the volume of the debt per head fell from £50 to £15.7, so you will see that the increasing population made an enormous difference. The real burden of the debt is of course felt mainly in its annual charge. I will take this, therefore, rather than the capital:--

In 1817 the charge was 32 million pounds " 1842 " " " 28 " " " 1857 " " " 28.8 " " In 1895 the charge was 25 million pounds " 1903 " " " 27 " " " 1914 " " " 24 " "

Here you will see that the reduction from 32 to 24 was 25 per cent. or a much greater reduction than the reduction of the _total_ capital debt, and this, of course, was contributed to by the lower rates of interest which had been brought about from time to time. When we take the annual charge per head the fall is much more striking. In the hundred years it decreased from 37s. to 10s. This, however, was a money reduction, and the _real_ burden per head can only be judged after we have considered what the purchasing power of that money was. Now, the charge per head, reduced to a common basis of purchasing power, fell as follows:--

Index figure 1817 260 1842 242 1857 191 1895 210 1914 118

In the year 1920 the charge per head was £7.16 and my purchasing power index figure 629. You will see that the _real_ burden in commodities moved down much less violently than the _money_ burden, and the relief was not actually so great as it looks, because prices were far lower in 1914 than they were early in the nineteenth century.

In view of the fact that our debt is approximately ten times that of the last century, let us ask ourselves the broad question: "Can we look forward to nothing better than the reduction of our debt by 450 millions in thirty-seven years?"

The nineteenth century was one long contest between two opposing forces. The increase in the population, together with the power to make wealth, were together enormously effective in decreasing the burden. Against them was the ultimate tendency to lower prices, and the former of these two forces slowly won the day.

I hesitate to say that we can expect anything at all comparable with the wonderful leap forward in productive power during the early Victorian era. I hope that in this I may prove to be wrong. Anyway I do not think that in our lifetime we can expect these islands to double their population.

THE CAPITAL LEVY

If we cannot look forward to any great measure of relief through these channels, to what then must we look? By far the most important alternative remedy which has been put to us is that of a Capital Levy; it has the enormous virtue that it would repay on one level of prices the debts incurred at that level; in short, it would give back one pair of boots at once for every pair it has borrowed, instead of waiting and stretching out over future generations the burden of two pairs. It is so attractive that one cannot wonder there is a tendency to slur over its less obvious difficulties.