Paris Peace Conf. 185.119/1

Memorandum by the Advisory Counsel of the American Mission to the Inter-Allied Council on War Purchases and Finance ( Cravath )

Preliminary Suggestions Regarding Indemnities

Note.—Definite conclusions regarding the amount of the indemnities to be paid to the Allies by the Central Powers and the manner of their payment must await a more adequate interchange of views and information than has thus far been possible. The following memorandum has been hastily prepared from the point of view of an American, primarily for the purpose of presenting in concrete form some of the principal problems to be considered in the forthcoming deliberations. The tentative conclusions offered are subject to radical change in the light of fuller information and discussion.—P. D. C.


The subject of the indemnities to be recovered by the Allies from the Central Powers is so complex and has thus far been so inadequately studied that only preliminary observations can be offered at this early stage of the discussion. The following suggestions are intended to present some of the principal questions which must be considered. So far as the writer’s own views are presented they are provisional and subject to modification in the light of fuller information and discussion.

In the absence of instructions as to the attitude of the United States Government I have avoided any consideration of the position of the United States in respect of indemnities. The United States is at least entitled to present a claim for the losses due to the sinking and injuring of her merchant ships and their cargoes by German submarines. If the United States is to share in the indemnities the discussion in this memorandum would be applicable if the term “Associated Governments” were substituted wherever the term “Allies” is used.

In the interests of simplicity I have confined my observations to the indemnities to be paid by Germany without considering the other enemy powers. For the same reason I have assumed that Germany would continue as a single nation with substantially her present territory except Alsace and Lorraine, German Poland and her Colonies. If the German Empire should be divided between two or more governments the question of apportioning the burden of the indemnity among the various governments would have to be considered.

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I have not attempted in this memorandum to discuss the claims of neutrals. They will doubtless assert claims for injuries done by Germany through the sinking of their ships and cargoes. Claims of that kind may have already been admitted by Germany. The question will arise whether the claims of neutrals should be allowed to rank pari passu with those of the Allies, or should be subordinated to them.

II.—The Basis for Determining the Indemnity

It is probable that the indemnities to be paid by the Central Powers to the Allies will be measured not by the amounts of the claims which the Allies can establish, but rather by the amounts which the Central Powers will be able to pay.

Although the aggregate of the claims which the Allies can establish will probably be in excess of the ability of the Central Powers to pay, it is none the less important that the amounts of the respective claims should be established by the uniform application of sound principles, so that the Allies may share in proper proportions in the distribution of the aggregate amount of the indemnities which it is finally deemed wise to exact.

It is therefore essential at the outset to determine the basis upon which the indemnities to be claimed by the various Allies should be determined.

It seems very clear that for the basis of determining the indemnities to be paid by Germany we must refer to President Wilson’s “Fourteen Points,” as qualified by his note to the German Government dated November 5th.9 In the latter note it is stated that the “Allied Governments …10 declare their willingness to make peace with the Government of Germany on the terms of peace laid down in the President’s address to Congress in January, 1918 (the ‘Fourteen Points’), and the principles of settlement in his subsequent addresses,” subject to certain qualifications which he proceeds to state. While I have not seen the communication from the Allies stating these qualifications, I am informed that the statement contained in the President’s note to Germany of November 5, correctly and fully states them. None of the other of the President’s addresses to Congress referred to in this note deals with the question of indemnities.

In the President’s “Fourteen Points” the only references to indemnities are contained in Point VII., relating to Belgium, Point VIII. relating to France, and Point XI. relating to Roumania, Serbia, and Montenegro. These Points provide in substance for the evacuation and restoration of the invaded portions of France, Belgium, Roumania, [Page 586] Serbia and Montenegro. Clearly, the term “restoration” is here used as equivalent to reparation for damage done and the return of property taken.

The qualifications by the Allies of the foregoing provisions are stated in the President’s note of November 5th, as follows:—

“By it (the provisions regarding restoration) they (the Allies) understand that compensation will be made by Germany for all damage done to the civilian population of the Allies, and to their property, by the aggression of Germany, by land, by sea and from the air.”

It could plausibly be argued that the foregoing language, inasmuch as it purports simply to construe the provisions of the Fourteen Points, can have no wider application than those Points, and therefore relates only to the damages suffered by the civilian population of the invaded districts. I think the sounder construction of the provision is that it broadens the scope of the “Fourteen Points” so as to include the damages suffered by the civilian population of the Allies, without regard to the places where such damages were inflicted.

It may be claimed that the basis for indemnities is broadened by the following provision of Article XIX. of the Armistice: “Reparation for damage done.” I have not seen the French original of the Armistice, but from the English translation I would infer that the words quoted were intended as a heading for the provisions that follow. But even if they be considered as a substantive provision I do not think that they could fairly be deemed to enlarge the provisions of the President’s “Fourteen Points,” as qualified by his note of November 5th.

It may be contended that, inasmuch as the President’s “Fourteen Points,” as qualified by his note of November 5th, do not expressly exclude indemnities, the Allies are free to claim them. This contention impresses me as being wholly without merit. President Wilson was authorised to invite the Germans to enter into negotiations for an armistice with a view to a treaty of peace which should be based upon the Fourteen Points as qualified by his note. While the Fourteen Points are general in their terms, and do not purport to cover details, it seems to me clear that they must be assumed to have covered the essentials of the peace, and it is not now open to the Allies to insist on new essentials not foreshadowed by the Fourteen Points.

III.—Analysis of the Damages Suffered by the Allies

Upon the basis above stated the following would seem to be the principal items of damages for which indemnity could be claimed:—

(A) Damages done to the property of civilians in the occupied districts of each country, including the value of money and securities removed which cannot be returned in their original form.

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(B) The damages resulting from personal injuries suffered by the civil population of the occupied districts.

(C) Damages to person and property suffered by the civil population of the Allied countries, outside of the occupied districts.

(Note.—Damages to civilians and their property caused by air raids and bombardment from the sea are included.)

(D) Damages for the loss of, and injury to, ships and cargoes due to the “aggression” of the enemy.

I think that reparation can be claimed for all Allied ships and cargoes destroyed or damaged by Germany, even if in the lawful exercise of the rights of war. The entire war should be regarded as the “aggression” of Germany referred to, and, therefore, the damages to be claimed in this connection need not be confined to those caused by attacks upon the sea which were in violation of the rules of war.

The following items of damage, while capable of being supported by plausible arguments, are not so clear:—

(E) The damage suffered by the civilian population of the Allied countries through the losses of trade and commerce, and the profits thereof, as the result of the war. In the case of Belgium, practically all of whose trade was lost, this would be a very large item, and it might be possible to establish it with reasonable certainty. In the case of England, none of whose territory was occupied, and in the case of France and Italy, only a comparatively small part of whose territory was occupied, the question becomes much more complex and involves the difficult problem of estimating consequential damages.

(F) Damages suffered by the civilians due to the death or incapacity of soldiers upon whom they were dependent for support. The widow and children of an Allied soldier killed in the war nave suffered a material loss in the strictest sense of the term. The recovery of damages for such a loss due to the negligence of an individual could be had in the courts of any civilized country. I think, however, it requires a somewhat forced construction of the language under consideration to extend it to such damages as these.

The foregoing classification is by no means complete, but I think it covers the great bulk of the items which can be seriously claimed.

My impression is that the British Government will not press for a wider basis for indemnities than that stated in sub-divisions (A) to (D) inclusive, provided the governments of France, Italy and Belgium take the same view. On the other hand, if the Continental Allies should press for a broader basis, the British Government would doubtless feel constrained to present a claim based upon the same theories as those on which the other Allies compute their claims.

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There is every indication that the French Government will be disposed to claim indemnities upon a much more liberal scale than is here advocated. Indeed, in the conferences of French officials on this subject, no attention seems to have been paid to France’s acceptance of President Wilson’s Fourteen Points as modified by his note to Germany of November 5th.

It seems to be the purpose of the French Government to claim as a part of the indemnity for France the repayment, with compound interest, of the indemnity paid by France to Germany as a result of the Franco-Prussian War. Upon the record there is no basis for this claim except as part of the “righting” of the “wrong done to France by Prussia in 1871 in the matter of Alsace and Lorraine.” This does not impress me as a sound claim.

There will also be a disposition on the part of the French to secure what is practically the cost of their war pensions, by claiming indemnification for the damages suffered by French civilians through the death or incapacity of soldiers upon whom they were dependent for support. As stated above, it seems to me that this claim, although plausible, will be difficult to sustain.

Representatives of the French Government have even gone so far as to propose that France should be indemnified for the entire cost of the war. Clearly this claim cannot be sustained upon the basis of the President’s Fourteen Points as qualified by his note to Germany of November 5th. Similar claims are being made by election orators in England, but I have no reason to believe that they are countenanced by the responsible financial officers of the British Government.

Italy may be counted upon to compute her claim upon at least as liberal a basis as France. I understand that, recognising that it may not be feasible to enforce her claim for indemnity in full against Austria, Italy will claim a share of the indemnity to be paid by Germany, upon the ground that Germany was at war with Italy, and that it was the German Divisions rather than the Austrian Divisions which were responsible for the Caporetto disaster. The Italians assume that Hungary and the German portion of Austria are in a position to pay an indemnity, but perhaps not one of sufficient magnitude to place Italy in relatively as favourable a position as the Allies. It seems to be assumed that the portions of the late Austrian Empire to be comprised in the friendly governments that are expected to emerge from its wreck (especially Czecho-Slovia and Jugo-Slovia) will not be required to share in the burden of indemnities.

I confess that this claim of Italy impresses me as not without merit. It was at the instance of Great Britain and France that she entered the war against the Central Powers. She was at war with Germany quite as much as with Austria. It seems to me that when it comes to indemnities, [Page 589] Italy should not suffer simply because Austria, who happened to be her principal immediate foe, is less able to respond than Germany, the principal foe of all the Allies.

A similar question will doubtless arise in connection with indemnity claims of Greece, Serbia, Roumania and Montenegro.

France and Belgium are likely to join in the following contention, which, although plausible, impresses me as unsound. Certain countries have suffered greater losses to their civilian population in proportion to their total population than others. Presumably such losses in Belgium and France per capita greatly exceed those of Great Britain. Therefore (it may be contended), if the aggregate amount of the indemnities which the Central Powers are able to pay is not sufficient to meet all claims, the claims of Belgium and France should be preferred to such an extent that when all the indemnities shall have been distributed the final net loss in each country per capita will be the same.

It may also be proposed that the distribution of indemnities among the various Allies should be governed, to some extent at least, by their respective contributions to the aggregate cost of the war. This would not appear to be a sound basis upon the theory that the indemnities are to represent, not reimbursement for the cost of the war, but simply reparation for damage done to civilians and their property.

In my opinion the only sound rule would be that (possibly subject to the preference in favour of Belgium mentioned below) the aggregate of the indemnities collected from the Central Powers should be divided pro rata among the Allies in proportion to the amounts of their respective claims against all the enemy countries as established upon a fair and uniform application of the principles finally adopted.

Belgium will doubtless claim some preference in the distribution of the indemnities. Her people hold a large amount of paper currency issued by the Germans, which represents that much money, securities, and other property taken by the German Government from the Belgians in payment for which the currency was issued. There is force in the contention that the right to have the value of this currency returned to the Belgian Government is entitled to a preference.

The Belgians may also claim that as their country was invaded wholly without right in a war directed against France and Great Britain, their claim for damages inflicted by German aggression should be paid in full before any payment by way of indemnity is made to the other Allies.

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I have discussed the claims now being put forward either officially or semi-officially on behalf of the Allied Governments for the purpose of calling attention to the questions which are likely to arise in the preliminary discussions. Of course it may well be that the position finally taken by all of those governments will more clearly recognise the limitations which seem to have been imposed by their acceptance of the President’s Fourteen Points than now seems to be the case.

An interesting question arises as to who would be the beneficiaries of the indemnities paid on account of ships and cargoes sunk by the Germans. With unimportant exceptions, the owners of the ships and cargoes have already been indemnified by the insurance companies, who, in turn, have been fully protected by the premiums paid. In most cases these premiums were paid by the owners of the ships and cargoes. These premiums increased freight rates, which in turn increased prices. The ultimate burden of these losses was, therefore, borne chiefly by the people of the country whose citizens paid the freights upon the cargoes destroyed. I should, therefore, say that each State should receive the portion of the indemnities based on the destroyed cargoes which belonged to its citizens and the ships by which these cargoes were carried. In the case of ships which were under charter, the Government to whose citizens the ships were chartered should receive the indemnities based upon the loss of those particular ships. For instance, a large number of British ships were operated by the French under charter. Presumably the hire of those ships was sufficiently large to cover the losses. Therefore, France, or the people of France, have already indemnified the British shipowners for the ships lost. The French Government should, therefore, get the indemnities paid on account of these ships.

Property taken by Germany from any of the Allies that is returned in its original form should not count as part of the recipient’s indemnity.

It would be fruitless to attempt at this time to estimate the aggregate amounts of the claims of the Allies against the Central Powers. The amounts would vary widely, depending upon the basis adopted for their computation. Even if a definite basis were assumed, the data are not now available on which to base anything approaching a reliable computation. It may even be that we are wrong in the assumption with which this memorandum begins, that the aggregate claims computed upon what is assumed to be the sound basis will exceed the ability of the Central Powers to pay. Presumably all the Allies are now busily engaged in computing their claims, and no doubt ample opportunity will be afforded to check up these claims when presented.

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IV.—How Much Can Germany Pay

We now come to the consideration of the question as to how much Germany can pay. I will consider this question by itself in the first instance, and discuss later the question as to how much it is wise to require Germany to pay.

Information bearing on this question is being assembled by representatives of the American, British and French Treasuries. The discussion in this memorandum will be based upon a forecast of the results of this investigation, which, while subject to material change, is sufficiently near the truth to answer the purposes of the present preliminary discussion.

The indemnity which Germany can pay may be sub-divided into the following classes:—

Cash items (by which is meant items of money and property which are capable of immediate payment or delivery).
Deferred items (by which is meant items of cash and property to be delivered in instalments in the future).

1.—cash items

The cash items which the Allies could extract from Germany in case she were required to give up all her resources of this kind may be roughly estimated as follows:—

Gold and silver $750,000,000
Ships (the German merchant ships, including sailing ships, available for ocean trade, including those, about a third of the total, already in possession of the Allies), 5,000,000 tons at the liberal price of $15 per ton $750,000,000
Investments of the German Government and of German citizens in Alsace and Lorraine, of which investments France would expect to become the owner $250,000,000
Investments of the German Government and German citizens in German colonies for which Germany should receive compensation from the nations by whom the colonies are taken over $50,000,000
German property in Allied countries already seized by Allied Governments $1,000,000,000
Other investments in foreign countries owned by the German Government or by German citizens $2,000,000,000
Total $4,800,000,000

(Note.—The foregoing items do not include property such as works of art, specie and railroad rolling stock taken from Allied countries which can be restored in their original form.)

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The foregoing is a rough estimate of the aggregate value of the cash items which it would be theoretically possible for Germany to turn over to the Allies. I will discuss later the question as to the extent to which it would be wise to require their delivery.

I have assumed that, without counting as part of the indemnity, property in Germany belonging to citizens of the Allied nations, much of which has been seized by the German Government during the war, will be restored to the owners or appropriate reimbursement made.

Most of the property included in the foregoing statement is not the property of the German Government but of German citizens. I assume that the German Government could be required to requisition the private property of its citizens so far as is required for the payment of the indemnity, and compensate its citizens for this property with German Government obligations. To require Germany to do this would be going very far. In the case of the indemnity imposed on France after the war of 1871, the French Government was left to its own devices in raising the money. Perhaps in the case of the so-called “Cash Items” of the indemnity to be imposed on Germany, the better way would be to fix the aggregate sum to be paid by Germany within, say, a year, and give her the privilege of paying part of the indemnity in ships and part in securities representing German investments in foreign countries. Thus would be avoided the embarrassment of requiring the German Government to requisition the private property of her citizens. The Allies would be relying upon the Government and people of Germany raising the indemnity as quickly as possible in order to get rid of the occupation of German territory by its enemies.

It is assumed that so far as the indemnity is concerned no value will be attributed to naval vessels and munitions of war surrendered by Germany to the Allies, nor to the sovereignty of Alsace and Lorraine, which will be considered by France as mere restitution (subject to proper reimbursement for German investments), nor to the control of the German colonies (subject to reimbursement for German investments therein), which will probably not be looked upon as having a money value.

If practically all Germany’s ships were taken as part of the indemnity, it would be necessary to lease part of them back to Germany in order to enable her to carry on her commerce. The best form of lease would be one which provided for a series of annual payments representing in the aggregate the value of the ships, which would be payable annually with interest during a specified period of years, say ten, at the end of which period the ships would become the property of Germany.

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2.—deferred items

A limited amount could be paid from year to year by Germany in kind, that is, by the delivery of German products not required for consumption at home, such as coal (which France and Italy will require from Germany in considerable quantities), iron and potash. It would be possible for the German Government to arrange with its producers of coal, iron and potash to deliver a certain amount thereof each year in return for German currency or German Government obligations, so that the German Government could deliver them to the Allies on account of the indemnity.

On the whole I should be disposed to reject any plan which involved substantial future payments in kind, and to favour the simpler form of cash payments in annual instalments. The most convenient form to provide for such payments would be by the delivery of obligations of the German Government bearing interest and maturing in annual series over as long a period of years as might be necessary.

France and Italy may prefer long term interest bearing obligations with no provision for paying the principal in instalments inasmuch as they could treat the entire annual interest receipts as applicable to the reduction of their taxes.

Other modes of paying the deferred instalments of the indemnity have been suggested, but it seems to me that none of them differ in ultimate result from the plan above suggested.

One suggestion is that Germany should be required to pay to the Allies a tax upon her exports or upon all of her products, or upon products of certain kinds, such as coal, iron, steel and potash. Any such plan on last analysis is nothing more than the payment to the Allies annually of a portion of Germany’s profits. Her ability to make payments abroad would still be largely dependent on her exports exceeding her imports.

It has been suggested that Germany’s mines of coal, iron, potash and other important minerals, should be turned over to the Allies either by way of payment of an indemnity or as security. Apart from the inherent objection to the wholesale seizure of German private property which this plan would involve it would be necessary to arrange for the operation of the mines by the German people, and the Allies could not receive more than the profits resulting from such operation. This would simply be another way of paying to the Allies a portion of the annual savings of the German people. There would be the same difficulty in enforcing such an arrangement, and the same limitations in respect of Germany’s ability to make payments abroad, as exist in the case of the simpler plan of money payments in instalments.

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I now approach the problem of how large a volume of annual payments, by way of principal and interest, Germany could assume if she were forced to the limit of her capacity. The discussion which follows is based upon the following table10a giving the financial position of Germany, and for the purposes of comparison, the financial position of Great Britain, France, the United States, and Italy.

This table summarizes a large mass of information which has been gathered.

It should be remarked at the outset that the amount which Germany could pay to its own citizens upon an internal debt is one thing, and the amount which she could pay upon an external debt held in other countries is quite a different thing. I shall, however, for purposes of simplicity, discuss the subject in the first instance without considering the difficulty of effecting payments in other countries than Germany.

I will assume for the purpose of the argument that Germany, notwithstanding the loss of Alsace and Lorraine and German Poland, will, through the absorption of the German portion of Austria, continue to have as large earnings and as large a volume of foreign commerce as before the war, allowing of course for a reasonable period to recover from the shock of the war. It should be remarked that this is an extreme assumption, especially in view of the large amount of the mineral resources which Germany will lose by giving up Alsace and Lorraine and Poland. The extent of this loss is shown by the estimate made by a competent authority, that while before the war Germany produced annually 20,000,000 tons of iron and steel, against a production of 5,000,000 tons by France, after the war Germany will produce only 14,000,000 tons, against about 11,000,000 tons by France. Her production of coal and potash will also be reduced.

Assuming Germany to have parted with all of the cash items which she can spare without destroying or seriously impairing her industrial efficiency, her ability to make annual payments upon an indemnity will in the long run be limited by her annual national savings. According to the best information that has been available, her national savings before the war were at the rate of about $2,500,000,000 per year.

With a proper allowance for the fall in the purchasing power of money during the war, and for possible economies in the expenditure of the German people—this would represent the ultimate possible limits of an indemnity payable in instalments. Presumably there will be a substantial saving in the annual expenditure for the maintenance of the army and navy. On the other hand, this saving will be partially [Page 595] if not entirely offset by enormous expenditures for pensions. Certainly Germany cannot do more than devote to the payment of an indemnity the entire earnings of her people over and above the amount required for their living expenses and the maintenance of the Government. As will be pointed out below, they cannot do nearly so much.

We now come to a consideration of the practical difficulties in effecting payment outside of Germany. In the long run indemnities paid by Germany would be of no value except to the extent that they could be transferred to Allied countries. Assuming that under the head of “cash items” Germany has lost at the outset all the gold and foreign investments that she can spare, no way is left by which she can make payments in foreign countries except by her collections in other countries, which must chiefly be from exports, or to be more exact, by her collections from other countries in excess of her payments to those countries. Before the war the balance of trade was against Germany. The year before the war she imported about $400,000,000 more than she exported. This adverse trade balance was doubtless offset by freights which she received, and income from foreign investments.

It accordingly follows that if after the war Germany is to pay a large indemnity abroad, through the excess of exports over imports, she will have, by rigid economy, to reduce her imports, and, by commercial energy, increase her exports. The experience of the war has undoubtedly enabled her to make great progress in this regard. For four years she has existed without imports of any considerable magnitude. She will undoubtedly enjoy some permanent advantage in this regard as a result of the habits of economy which her people have formed, and their success in finding substitutes of domestic production for many things which before the war were regarded as essential imports. On the other hand, she has withdrawn from the manufacture of products which require imported raw materials. Without resuming these imports she cannot resume her normal production, and place her people in a position to make the savings which would be required for the large annual payments on account of an indemnity. For a time she will have to make very heavy purchases abroad in order to replenish her depleted stocks and regain her industrial efficiency.

There has not been time for such an analysis of Germany’s pre-war imports and exports as will be necessary to form an estimate of the probable relation of her imports to her exports after the war. It could hardly be hoped that year in year out Germany would have a favourable balance of trade exceeding $1,000,000,000 per year. It is doubtful if this amount will be reached. I should consider $500,000,000 per year a safer estimate.

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several of the items given in this table are provisional estimates, which will be revised on the strength of further information expected from the respective governments

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Germany Gt. Britain France Italy U. S. A.
Total national wealth of all kinds (pre-war estimates) $75,000,000,000 $75,000,000,000 $60,000,000,000 $20,000,000,000 $250,000,000,000
Total annual national pre-war income from all sources 10,000,000,000 11,000,000,000 7,000,000,000 3,000,000,000 40,000,000,000
Total Government debt at end of war* 40,000,000,000 40,000,000,000 28,000,000,000 12,000,000,000 23,000,000,000
Total Government debt before the war 1,200,000,000 3,540,000,000 6,580,000,000 2,890,000,000 971,562,590
Total present income from taxation. 1,888,175,000 4,000,000,000 1,502,000,000 872,000,000 6/30/19
Percentage of debt to national wealth 53.33% 53.33% 46.67% 60% 9.2%
Annual pre-war increase in national wealth. 2,500,000,000 2,500,000,000 900,000,000 400,000,000 (1916)
Percentage of present annual income from taxation upon pre-war national income. 18.88% 36.36% 21.45% 29.06% 10%
Percentage of present annual income from taxation upon pre-war national increase in wealth 75.52% 160% 166.8% 218% 80%
Annual expenditure after peace, subdivided into
(a) Expenses 1,500,000,000 1,500,000,000 1,500,000,000 855,000,000 2,000,000,000
(b) Interest charges, without provision for sinking fund 2,000,000,000 2,000,000,000 1,400,000,000 600,000,000 950,000,000
Percentage of above expenses provided for by present scale of taxation 53.94% 114.28% 51.79% 59.93% 135.59%
Pre-war trade
Total imports 2,672,850,000 3,843,670,000 1,701,000,000 729,000,000 1,792,596,480
Total exports 2,239,200,000 3,174,100,000 1,400,000,000 502,000,000 2,484,018,292
Favourable balance in black; adverse balance in red a 433,650,000 a 669,570,000 a 301,000,000 a 227,000,000 690,000,000
1913 1913 1912 1912 1916
Pre-war expenditures on Army and Navy {A. 302,150,000
N. 55,215,000
A. 140,355,000
N. 221,825,000
A. 200,000,000
N. 100,000,000
A. 100,000,000
N. 62,000,000
A. 122,392,362
N. 155,029,425

*Figures indicate gross debt.

Note.—In comparing pre-war figures with post-war figures allowance must always be made for the very great fall in the purchasing power of money which has taken place during the war.

a Editor’s note: These figures appear in red on the original.

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I therefore offer the provisional estimate that it will not be feasible for Germany to make annual indemnity payments to the Allies for a long period of years in excess of $1,000,000,000 a year, and that the payments should not be less than $500,000,000 per year.

It should be noted that if the German ships are taken by the Allies and leased backed [sic] to Germany under the plan above discussed, the annual payments by way of rental would automatically reduce what would otherwise be the balance of trade in favour of Germany.

The extent to which it would be possible for Germany to provide for the payment of an indemnity by means of new external loans is apt to be very much exaggerated. In the first place, it is doubtful whether for several years after the war Germany’s credit would be sufficiently restored to enable her to place large loans among foreign investors. The very existence of her large indemnity obligations would make such an operation difficult. In the second place, there is the more radical difficulty that the placing of foreign loans to apply on her indemnity payments does not change the essential character of Germany’s burden. Her burden would be lightened only to the extent of the advantage of transferring her debt to more friendly hands, and of the interest that might be saved by placing loans among investors at a lower rate of interest than that carried by the deferred instalments of the indemnity. A foreign loan would simply substitute new foreign creditors for old ones. In each case the interest and principal of the debt could be paid in the long run only out of the profits of Germany’s industry and commerce and with the aid of her exports. As I point out later, foreign loans may prove to be a method of enabling Germany eventually to anticipate the payment of the indemnities in whole or in part; that is to say, she may be able to substitute foreign investors for the Allied Governments as the holders of the external debt represented by the unpaid indemnity instalments.

V.—How Much Is It Wise to Require Germany to Pay

I start with the assumption that the Allies will not make the mistake of imposing such terms as would ruin, or seriously cripple, German industry and commerce. Only a prosperous Germany could make for a considerable period the annual indemnity payments that are contemplated. Therefore, to destroy Germany’s prosperity would be to destroy her ability to make the indemnity payments.

I also assume that the Allies desire to keep Germany as a customer for their products. Only by becoming prosperous can Germany make her normal volume of purchases abroad. The importance of this consideration is shown by the following statement of [Page 599] Germany’s imports from the United States and the principal allied countries during the year 1913:—

From The United States $427,800,000
Great Britain 219,025,000
France 146,050,000
British India 135,450,000
Belgium 86,150,000
Italy 79,425,000

I also assume that the Allies would not desire so to burden Germany with obligations as to force her people into revolution. In the long run, Germany can secure money with which to make annual indemnity payments only by taxing her people. Clearly a people which is required for a generation or more to pay all of its annual savings in taxes would lose courage and be an easy prey to the forces of disorganisation and rebellion. It would, therefore, seem necessary to leave the Germans some part of their annual savings.

It should also be assumed that Germany must be left sufficient liquid assets to enable her to maintain her solvency and the ordinary machinery for credit and commerce. She should not, therefore, be bereft of all her gold or of all her quick assets. She should be allowed to retain some basis for her currency and some working capital.

For similar reasons Germany should not be forced to completely destroy by taxation or capital levy the value of her large internal debt. That debt represents the interest of its holders in the income from the national wealth. To destroy this debt would simply result in a shifting of the ownership of the national wealth. A substantial part of the German debt is owned by banks. A still larger part is owned by investors, who in turn have pledged their holdings with the banks as collateral for loans. To completely destroy, or radically impair the value of this debt, would cripple, if not ruin, the banks, and might destroy the entire financial structure on which Germany depends for the maintenance of her commerce and industry. It would take years for Germany to recover from such a shock.

Having regard to the foregoing considerations, it becomes necessary to estimate the amount of the indemnity which it would be wise to require Germany to pay, having regard, solely, to the selfish interests of the Allies. Estimates will vary according to the temperament of the person making the estimate.

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In order to start the discussion, I venture to hazard a provisional estimate that it would be unwise to exact an indemnity which would exceed the following limits:—

Cash items—
Minimum $2,000,000,000
Maximum $3,000,000,000
Average annual payment for a considerable period—
Minimum $500,000,000
Maximum $1,000,000,000

It would doubtless be wise to require smaller annual payments during the few years following the war, and thereafter for gradually increasing payments based upon Germany’s probable progress in recovering from the shock of the war.

An indemnity upon this scale will, to many, seem moderate. On the other hand it should be borne in mind that there is an important school of economists in Germany and elsewhere who have been contending for months that Germany would come out of the war economically ruined unless she could collect a large indemnity. It should also be borne in mind that Germany’s present scale of taxation will produce only about half of the revenue annually required to pay the expenses of the Government and the interest upon the internal debt. It will therefore be necessary for Germany not only practically to double her taxes for the purpose of meeting internal requirements but to add enough more to provide the annual indemnity payments.

As already stated the foregoing suggestions are based upon the assumption that Germany is to be given an opportunity of becoming prosperous so that the annual payments by way of indemnity can be continued for a considerable period of years, upon the theory that in this way a much larger sum will ultimately be collected than would be obtained if an attempt were made to force the payment of the largest amount which could possibly be squeezed out during a limited period of military occupation, say five years. Under the latter policy a larger amount in cash items and a larger amount in annual payments might be extracted under the lash of an army of occupation, but the result would be to leave Germany in a condition of industrial and commercial paralysis, with all the consequences of such a condition.

People talk loosely about the enormous value of Germany’s natural resources, particularly her coal, iron and potash, as furnishing an indication of the magnitude of the indemnity which she can pay. This reasoning is wholly illusive. These natural resources are serviceable in paying an indemnity only to the extent of the profit which [Page 601] will result from their exploitation. If their operation is left in the hands of the German people, only the profit remaining after expenses of operation, including living expenses of the Germans employed in their operation, would be available. The same would be true if the property were seized by the Allies and operated for their account. In either case the profits which resulted from their operation would have to be gotten out of Germany chiefly through exports. Of course if the property were operated by the Allies the resulting profits might be exported in kind, but this would not change the ultimate result.

VI.—The French Indemnity of 1871

It will be instructive in the present situation to consider how France paid to Germany the indemnity of 1871 of five milliards of francs. This indemnity was payable in funds of Prussia, Great Britain and several other neutral countries. The German armies were to occupy France until the indemnity had been paid in full. It was paid within three years. The export of merchandise seems to have played a minor part in the payment of this indemnity. Probably only about half a milliard was paid by the shipment of metallic currency. Some was paid from the proceeds of French rentes marketed in England and elsewhere outside of France. By far the greater part was paid from the proceeds of the sale of French foreign investments. As was stated in one of the official reports on the Finance of France, “the result was substantially the same as if the French had sent their securities to Berlin, and as if they had sent their savings to Berlin in order to purchase securities, just as they had formerly been sending them to Italy, to the United States, to Turkey and to Austria, to buy Italian, American or Turkish obligations, or shares or bonds of the Austrian railroads.” In other words, the payment of the French indemnity was accomplished chiefly by the mobilisation during a period of less than three years of assets which I have classed as “Cash Items.” The process could not have been carried on indefinitely. When the indemnity was paid, France had doubtless nearly exhausted her accumulation of available “cash items.”

VII. What Security Can Germany Give for the Deferred Payments

The answer to this question is bound to be very unsatisfactory. An arrangement for Allied control of the customs and tax receipts of [Page 602] Germany, similar to that frequently resorted to in the case of small or weak nations, is manifestly impracticable. It may be assumed that Germany would have few transferable assets which could be pledged, as they would have been taken, as far as seemed wise, under the head of “Cash Items.” The pledge of internal resources, such as mines and factories, would not be feasible if Germany is to be permitted to continue as an independent and prosperous nation. For a certain number of years the indemnity could be enforced by Allied occupation of German territory, just as Germany occupied certain French territory after 1871 until the indemnity was paid. This remedy is, however, an expensive one, whether the cost of it be borne by the Allies or by Germany. If borne by Germany it would simply reduce by that much her surplus profits available for the payment of indemnities. I think, therefore, that it may be assumed that a military occupation of portions of Germany as a means of enforcing payment of an indemnity would have to be limited to a comparatively short period.

I therefore conclude that there is no available form of security for the payment of the deferred instalments of the indemnity after the military occupation of Germany ceases. Thereafter the Allies would have to rely upon the embarrassment which Germany would suffer if she defaulted in her obligations and thereby became insolvent and dishonoured in the markets of the world. In case of default she could be made to suffer economic privations through concerted action of the Allies. Such pressure, while it lasted, would, of course, only result in further reducing her ability to pay.

The fear that the payment of annual indemnity instalments could not be enforced after the termination of the military occupation of Germany may result in Allied pressure for an arrangement which will force Germany to pay the largest indemnity that can be squeezed out of her during the period of military occupation, regardless of the condition in which Germany will be left at the end of this process.

I think the Allies cannot avoid taking their chances as to the collection of the deferred instalments after military occupation of Germany ceases. The more moderate the indemnity the better the chance of the deferred instalments being paid. It is very doubtful whether the German people could be forced to carry the burden of a colossal indemnity extending over a long period of years. The people of Great Britain and France would hardly go to war to enforce an indemnity. Therefore the aim of the Allies should be to keep their indemnities within such limits of moderation that the German people would feel that the consequences of default—commercial dishonour and isolation—would be more serious than the burdens of the indemnity.

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VIII.—Tentative Program

For the purpose of providing a basis for discussion the following tentative proposals are offered for consideration in the light of the foregoing observations:

The Enemy Governments to return all securities, specie and other property taken from the occupied portions of Allied countries, in so far as the identical property can be returned. Claims for damages for property which cannot be returned, or which has been returned in an injured condition, to be treated as part of the claims for damages suffered by the civilian population of the Allied countries which are to be dealt with as hereinafter provided.
The citizens of Allied countries to be restored to the enjoyment of their property which was in enemy countries at the outbreak of the war whether or not such property has been seized. In case property cannot be returned uninjured full monetary restitution to be made which is not to be deemed part of the indemnities hereinafter provided for.
By the uniform application of approved principles the claims of all Allied Governments for damage done to their civilian population and to their property to be ascertained.
The amounts of the indemnities to be exacted from the Central Powers to be determined. It may be that the aggregate claims of the Allies would be sufficiently moderate to be taken as the measure of the indemnities to be exacted. This, however, seems improbable.
The aggregate of the indemnities so ascertained to constitute a single fund in which all the Allies will share in proportion to their respective claims, subject to such preferences in favour of Belgium as may be approved. It may be that further discussion will develop other claims that should be preferred.
Each Ally to credit upon its claim the value of any German property within its borders of which it shall have taken possession during the war, and also the value of any German property of which it may become the owner through the acquisition of German territory. For illustration France should credit upon its claim the value of German property within its borders seized during the war, and the value of any German property in Alsace and Lorraine which it may acquire. The value of any enemy ships retained by the Allies should constitute a part of the general indemnity fund and each Ally should allow a suitable credit on account of its indemnity claim for the value of the ships which it retains. Subject to the adjustment of such credits and to such preferences as may be allowed, all amounts coining into the indemnity fund from whatever source to be distributed pro rata among the Allies in accordance with the amounts of their respective claims.
The following arrangements to be made respecting the German indemnity (presumably somewhat similar arrangements would be made with the other enemy Governments):
Germany to be required to pay a specific sum, say $3,000,000,000 (representing what I have termed the “Cash Items”) within a limited period, say one year, this payment to be made at the option of Germany in gold or in the currency of the various [Page 604] allied or neutral countries, subject to suitable regulations to prevent too large a payment being made in the currency of any one country.
This payment to be secured by part or all of Germany’s stocks of gold, her merchant ships, and selected foreign investments of Germany and her nationals, other than those which have been taken by the Allies under paragraph 2. Presumably the military occupation of portions of Germany provided for in the armistice would continue at the expense of Germany, at least until the payments provided for in this sub-division were made.
Require Germany to pay an additional sum, say, $15,000,000,000, payable in 28 equal annual instalments, which should include interest at the rate of 5 per cent, per annum upon the deferred payments. This would involve an average annual payment of $1,000,000,000 a year. It might, however, be well to provide for smaller payments for the first few years, with correspondingly larger payments for the subsequent years, Germany to have the privilege of anticipating any or all of the payments.
In order to encourage economy in the expenditures of the German Government, it might be well to provide for a minimum annual indemnity payment based upon an assumed annual expenditure by the German Government, with a provision that the annual indemnity payment would increase in some fixed proportion to any increase in annual expenditure for governmental purposes.
Require neither any specific pledge of property nor the appropriation of specific income for the payment of the deferred instalments. It might be wise, however, to provide that the military occupation of portions of Germany should continue until some specific amount of the deferred instalments, say $5,000,000,000 had been paid. The lien on the assets mentioned in subdivision (B) of this paragraph might be continued.
It would doubtless be prudent to add a provision that in case Germany should default in any of her payments she should be subjected to certain specific penalties, such as the exclusion of her ships from Allied Ports and the exclusion of her exports from the markets of Allied countries or their admission to those markets only upon the payment of a large import duty. Such pressure could in any event be applied in case of default, but there would be a manifest advantage in specifically providing for it in advance.

The foregoing plan leaves Germany free to adopt her own measures to provide funds for the payment of the indemnity. There is much to be said in favour of allowing Germany this freedom. As already pointed out, the only effective arrangement for enforcing the payment of an indemnity is by the expensive procedure of military occupation. Any attempt to secure the appropriation of specific receipts in payment of the deferred instalments of the indemnity would hamper Germany without affording real security. On the other hand, if Germany is given a free hand she will have the incentive to use to the full her resources of energy and ingenuity to make such arrangements [Page 605] as from time to time may be feasible to enable her to get rid of the burden of the indemnity. No one can foresee the changes that may occur in industry, commerce and trade. Arrangements that to-day would seem to encourage or aid the payment of the indemnity might have just the opposite effect ten years hence. The measures which France adopted to pay the indemnity of 1871 were undoubtedly very different from those expected by the wisest financiers of both Germany and France. Among the expedients which Germany might eventually adopt would be the placing of foreign loans to enable her to anticipate the payment of the indemnity in whole or in part. Her credit might so improve that she could place loans, not only in neutral countries, but even in Allied countries.

I feel constrained to add that, with my present light, I do not see how Germany, weakened as she will be by the shock of the war and by the loss of important territory containing a large part of her mineral resources, will be able to pay so large an indemnity as is provided for in the tentative program above outlined. I assume there was the same difficulty in 1871 in foreseeing how France would be able to pay the indemnity imposed upon her by Germany. The tentative program now presented is based upon the hope that the mere existence of the indemnity and the natural ambition of the German people to rid the nation of this burden will stimulate them to degrees of energy and ingenuity which cannot now be foreseen.

In formulating the suggestions offered in this memorandum I have taken into account the undoubted desire of the peoples of the Allied countries to impose upon Germany as large an indemnity as she is likely to be able to pay. Very different conclusions would be reached if the Allied Governments should finally adopt what seems to me the broader and saner view that, in the long run, it would be better for the Allied nations themselves to err on the side of leniency, and to avoid imposing on Germany an indemnity of such magnitude as to require her to be subject to an army of occupation for several years and to a crushing burden of external debt for a generation or more.

Paul D. Cravath

  1. Foreign Relations, 1918, supp. 1, vol. i, p. 468.
  2. Omission indicated in the original memorandum.
  3. Printed on pp. 596597.