The primary obligation of Germany is put into the form of 50 milliard gold mark 32-year bonds bearing no interest for four years, 4% for the next four and 5% thereafter. No provision is proposed for a sinking fund, but the bonds can be redeemed on terms which, if German credit recovers, will enable the interest and sinking fund on the loans required for redemption to be met out of the resultant saving on the interest on the bonds.

Germany is thus given a double inducement to borrow from the public to redeem the original bonds.1

(a). She frees herself from her direct liability to the allied Governments. (b.) She substitutes without additional cost a terminable for a perpetual liability.

The merits claimed for the plan are that its adoption will make the restoration of German credit possible and lead to the recovery of very substantial sums for reparation, while persistence in the policy of attempting to enforce impossible claims will end in the destruction of the créance altogether.

The present value of the primary obligation under the plan can not be precisely estimated owing to the redemption options.

If the adoption of the plan led to a rapid revival of German credit and Germany were able, by raising loans, to pay off the whole of the fixed annuity in the first few years, the present value might not be more, and might possibly be even less, than 30 milliards.

But if this happened the Allies would have actually received this 30 milliards and Germany would undoubtedly be in a position to pay for the service of the 2nd Series of bonds when they fall to be created ten years hence, and redeem that series also very rapidly. In that event this 2nd Series would be worth at least its present value on the 64 per cent. table-7.4 milliards-so that on this supposition the whole indemnity would have been collected in twelve or fifteen years (mainly in the first ten) and a present value of over 37 milliards realized.

On the worst assumption that no German loans become possible either now or in the future, that the 2nd Series of bonds has to be cancelled altogether and Germany merely pays the interest on the 1st Series as a perpetual annuity beginning four years hence at 2 milliards and rising four years later at 22 milliards, the present value on the 5 per cent. table is 392 milliards.

The burden on Germany (which will be reduced if she raises redemption loans on favorable terms) covers all financial liabilities under the treaty.

1These are not intended for issue to the public, but merely as security for the annual payments and as counters for purpose of accounting.

II. GERMANY'S PROPOSALS AND ALLIED

DISAGREEMENT

On April 20, 1923, Lord Curzon, British secretary for foreign affairs, raised the query in Parliament why Germany did not make an offer to settle the reparation impasse, which was then overshadowed by the Ruhr occupation. The German Government responded to this invitation in a note of May 2, addressed to the Governments, not to the Reparation Commission. This note which was premised on Ruhr evacuation and was assumed to involve an offer of 30,000,000,000 gold marks present value, met a varied reception. France and Belgium replied to it with categorical, but not identical, negatives on May 6. The British foreign minister criticized this separate action on May 8, and on May 13 forwarded his own reply, which, though negative, nevertheless advised Germany as to why the proposal was unsatisfactory and added suggestions as to the character of a satisfactory proposal.

On June 5 a new proposal was delivered in Paris and Brussels and on June 7 in London. The new note showed evident signs of trying to meet the objections. No responses were ever made to it. Instead, it engendered an argument between the British on the one side and France on the other, with Belgium leaning to the French arguments but maintaining a less definite opposition to the London attitude of securing an economic settlement.

The French ambassador at London on June 12 presented at the Foreign Office a "statement of the principles on which the French Government declare they will be guided in entering upon a discussion of the German proposals." On the 13th Marquess Curzon addressed to the French ambassador a note which has been called a questionnaire, and which raised searching questions as to the purposes and methods of the French Government. Belgium replied to this on July 3 and France on July 6 neither giving evidence of agreement with the British point of view. Accordingly, on July 20 Marquess Curzon addressed a note to France, Italy, Belgium and Japan in which the situation was discussed at length and which covered a draft identic reply to

the German note of June 5-7. The French reply of July 30 was not responsive. The Belgian was more so. Italy was "actuated by the firm desire to contribute in the most satisfactory manner toward making the action of the British Government achieve a speedy and effective general understanding." Japan foreshadowed an agreement in principle.

The correspondence reverted to a British-French argument again, with Belgium participating. The British note of August 11 received a pungent reply from Premier Poincaré on August 20 which reviewed reparation history and interallied debts and concluded "that France must first, in order to be able to discharge her debts, have recovered her contributive power, have repaired her disasters and have placed herself in a position to meet German competition on equal terms." Throughout the whole controversy French insistence on the cessation of German passive resistance in the Ruhr as a sine qua non to discussion so colored the situation that the British felt that, having spoken, they could not go further in fruitless interchange of notes.

The salient documents, which resulted in leaving the German proposal of June 5-7, unanswered are appended.

1. GERMAN MEMORANDUM OF JUNE 5-7, 1923. 1

1. After full and careful consideration, the German Government have stated their sincere belief as to Germany's capacity to make reparation payments. They would not be acting fairly, and they would not bring the problem any nearer its real solution if, for the sake of a temporary alleviation of the political difficulties of the moment, they were to promise 1 "Correspondence with the Allied Governments respecting Reparation Payments by Germany," p. 2. (Parl. Pap. 1923, Miscellaneous No. 5. Cmd. 1943). The English text is translated from the German.

The memorandum was covered by the following note from the German ambassador at London, Herr Sthamer, to Marquess Curzon:

"In accordance with instructions, I have the honor to communicate to you the following:

"The German Government have received from the allied Governments varying answers to their note of the 2nd May. In order to avoid anything which might render the continuation of the exchange of views more difficult, the German Government are of opinion that they should limit themselves in their answer to the points which are common to the replies of the allied Governments. Proceeding in accordance with this consideration, my Government have instructed me to communicate the inclosed memorandum to the British Government.

"I would add that a similar communication is being addressed to the Governments of the United States of America, France, Italy, Belgium and Japan."

more than, in their judgment, the German people can with the utmost effort perform.

Nevertheless, the question of Germany's capacity is one of fact on which different opinions can be held, and the German Government admit the great difficulty of arriving at any secure estimate in present conditions. For this reason they have offered to accept the decision of an impartial international tribunal as to the amount and method of payment. Germany can give no stronger proof than this of her determination to discharge reparation.

The German Government are also ready to supply all information necessary to form a reliable judgment on Germany's capacity to pay. They will, if it is wished, throw open to inspection all their financial records, and furnish any details that may be desired concerning the resources of German industry and business.

2. The German Government had proposed the flotation of big loans in order that large capital sums might accrue at the earliest possible moment to those powers entitled to reparation. Should loans on a great scale prove impracticable for a time, they are ready to substitute a scheme of annuities.

3. Since the allied Governments attach importance to Germany's furnishing forthwith precise indications as to the kind and mode of sureties which she contemplates offering, the German Government propose the following guaranties for the carrying into effect of the definitive reparation plan:

(a.) The Federal railway system, with all its appurtenances, will be

detached from the other state property and transformed into a separate fund, the accounts of which would be independent of the general financial administration and under its own control; and obligations in gold will be issued up to an amount of 10,000,000,000 gold marks, with a direct first charge on the assets of this administration and carrying interest at 5% as from the 1st July, 1927, thus securing an annual payment of 500,000,000 gold marks. (b.) To secure a further annual payment of 500,000,000 gold marks as from the 1st July, 1927, the German Government will at once subject the entire business, industry, banking, trade, traffic and agriculture of the country to a guaranty in the form of a first mortgage of 10,000,000,000 gold marks on real estate, whether industrial, municipal, agricultural or forest. The annual payment of 500,000,000 gold marks will be levied either indirectly and included in a general tax imposed also on other property, or directly on the objects charged.

(c.) In addition, the German Government will pledge as security for the yearly payments the customs duties on luxuries, the excise

duties on tobacco, beer, wine and sugar, and the receipts of the spirits monopoly. The gross yield of these customs and excise receipts, which in the years preceding the war averaged about 800,000,000 M., has now very considerably fallen on account of loss of territory and population and of the reduced consumption. With the recovery of the economic activity of Germany it will, however, automatically increase.

4. In conclusion, the German Government feel that they must lay emphasis on the following:

In a matter so vast and complicated real progress can not be made by the exchange of written documents, but can only be achieved by word of mouth at the conference table. Germany's capacity to pay depends on the character of the settlement as a whole. The method of payment can only be arranged in direct consultation with those who are to receive the payment. The guaranties can only be worked out in detail with the collaboration of those whom they are intended to serve. For the solution of all these questions oral discussion is essential.

Germany acknowledges her liability to make reparation. The German Government repeat their request that a conference be summoned to agree upon how they may best discharge this obligation. BERLIN, June 7, 1923.

2. FRENCH PRINCIPLES FOR DISCUSSION OF GERMAN PROPOSALS.1

(Summarized in British note of June 13, 1923.)

(i.) Passive resistance having ceased, the occupation of the Ruhr would continue, but under altogether different conditions, and with the cooperation of German organizations.

(ii.) France can sacrifice no part of her share of the A and B Bonds, but would agree to give up a portion of C Bonds, which could be employed for the payment of the interallied debts.

(iii.) The French Government recognize that Germany needs a certain time for balancing her budget; but, having lost no part of her riches, Germany should be able to hand over to the Allies a certain part of such of her resources as can be immediately realized, viz:

(1.) The railways on the left bank of the Rhine, which could be handed over to a company, in which France, Belgium, Great Britain, and even the Rhineland would hold shares.

(2.) Certain coal-mines in the Ruhr, appropriated by the German Reich, which might be handed over under similar conditions to an interallied company.

1Correspondence, p. 4.