4. The Rescue of Germany (The Great August Crisis)

(THE GREAT AUGUST CRISIS)

The war has lasted sixteen years.

German guilt was a lie.

The Treaty of Versailles is the great crime of modern history.

Reparations are tribute.

In 1917 America joined the Allies against Germany because then her money was on that side.

Among nations, the debtor is dear to the creditor.

The Hoover debt holiday plan in 1931 was to protect two billions of American money in Germany, for now America is bound by what Germany owes her to be Germany’s political friend.

—SELECTIONS FROM CURRENT GERMAN SAYINGS

Again, for the third time, Germany was threatening to sink in the sea of insolvency with all her creditors on board; again it was the creditors who frantically worked at the pumps. Their anxiety was greater than Germany’s own. Why? For the singular reason that in this sea only creditors can drown.

If Germany sinks she will rise again, lightened by the loss of her creditors. Twice the creditors, unable otherwise to keep her afloat, have cast overboard great parcels of debt, and that at first was easy to do because the debt was political. The name of it was reparations. But now, in this third crisis, there are two kinds of debt and two kinds of creditors on board, all in the same dilemma. There is what survives of the original reparations debt, and there is now, besides, an enormous private debt, owing not by the German Government to other governments, but owing by the German Government, by all the German States, by German municipalities, by German banks, by German industry, to private lenders all over the world. This is new debt, created in the last six or seven years. The amount of it is nearly four billions of dollars. Roughly two thirds of it is owing to American banks, American investors, American lenders.

One value of this great private debt to Germany is that she can play it against the political debt.

As she watches her creditors working at the pumps she keeps saying: “Throw over the rest of the reparations debt. That is what is sinking us. Cast that away and the rest will float.”

Then to her private creditors alone she says: “Don’t you see how you can save yourselves? Only side with us and we will get rid of the reparations debt entirely. We tell you the rest will float.”

This suggestion tends to divide the creditors and they begin quarreling among themselves. But they cannot be sure that if the reparations debt be jettisoned the rest will float. They are not sure of anything about Germany. So, in frustration, they appoint an international committee of experts to examine the ship from both the German point of view and that of the creditors, to reconcile them, and to say what burden of debt the ship can afford to bear, Germany willing.

The first international committee of experts had to work in a diving bell. Germany then, in 1924, was totally submerged. By inflating her money until it was worthless she had committed an act of complete national insolvency, internal and external. Nothing like it had ever happened before. Nevertheless, the experts found the ship itself to be quite sound and so reported. All that was necessary was to float it again on a tide of confidence. Once afloat it could bear a reparations debt burden of $625,000,000 a year.

That was the Dawes Plan; and on the undertaking to make it work the German Government borrowed $200,000,000 gold from Great Britain, France and the United States, to begin a policy of fulfillment. Then immediately Germany at large launched herself upon a career of borrowing so amazing and reckless as to correspond to nothing that had ever happened before in the history of international finance, except, by contrast, her preceding career in bankruptcy by inflation. And this was the beginning of the private debt.

Five years later the Dawes Plan was sinking the ship. The sum of $625,000,000 a year was a disastrous thing in itself; but what made it very much worse was that the Dawes Plan did not say for how many years this burden should be carried. It had not fixed the total amount of reparations to be paid, only the annual payment on account. Unless the creditors would agree to fix a total, so that Germany might at least see the end of reparations, there was nothing for her to do but to embrace despair and sink again.

Then a second committee of international experts made an analysis of her resources and said she could afford to pay only $400,000,000 a year. That was the Young Plan; and on the undertaking to make that plan work, the German Government borrowed $300,000,000 from Great Britain, France and the United States, to launch a second policy of fulfillment.

But before the Young Plan had begun to work, the former head of the German Reichsbank and other Germans were going up and down in the world proclaiming the authentic propaganda that reparations still were bringing Germany to ruin; that unless she was relieved of that burden she would surely sink, and that if a second act of national insolvency, such as preceded the Dawes Plan, was the only way of escape, then this, with all its terrors, might come to seem the lesser German sacrifice.

It is weird to remember that with this propaganda running higher and higher, still Germany could continue to borrow abroad on a scale hitherto unheard of. American investors went on buying German bonds because the rate of interest was high; American banks went on putting their surplus funds on deposit in German banks for the same reason. They all said: “Oh, that is political propaganda about reparations. It has nothing to do with private finance or private investments.” Nobody could imagine that the Germans would attack their own credit and really mean it; or that a second act of national bankruptcy was possible. It was a little like the warning on the sinking of the Lusitania. There it was, cold and authentic, and nobody believed it.

Suddenly in June, 1931, the lesser sacrifice did nevertheless become imminent. Germany was at the brink of national insolvency and calling on her creditors to forbear and save her from that disaster. Her inflated financial structure was about to fall. The Reichsbank was about to shut up. In that case, naturally, she would be obliged to default on the whole of her foreign debt, both political and private; and the private debt, owing not to governments but to foreign investors and foreign banks, had reached the prodigious total of nearly four billions of dollars. Could international finance afford to let such a thing happen? Were not Germany’s creditors obliged in their own interest to come to her rescue?

The most sympathetic of Germany’s creditors was Great Britain, not because she had more to lose than any other country—she had much less in jeopardy than the United States—but for other and complicated reasons. Every day in June the head of the Bank of England had New York on the telephone to tell American bankers how desperate the German situation was, how daily it grew worse, and why it behooved the United States to take great measures. Only the United States had the resources to save Germany. England alone was helpless to avert the calamity. France was obscure. The United States was obliged in its own interest to act. For suppose Germany failed. What would happen to American banks with enormous sums on deposit in German banks? And what would happen to the German bonds that had been sold to banks and private investors all over the United States? What would happen to American banks that had those German bonds in their investment reserves? When the head of the Bank of England was not calling New York, the British Government itself was calling Washington and saying the same things.

Such were the circumstances under which President Hoover proposed an international debt holiday. No reparations to be collected by the former Allies from Germany, no payments to be made by Europe on account of war debts to the United States Treasury, for a period of one year. The effect of this was a loan of $400,000,000 to Germany. That was the amount she would have had otherwise to pay away on account of reparations. And besides that effect, international finance at the same time made a direct loan of $100,000,000 to the German Reichsbank to meet any emergency. The money was provided by the Federal Reserve Bank of New York, the Bank of England and the Bank of France. On this day’s work international finance heaved a great sigh. Nothing less than the bankruptcy of Germany had been averted. For several days there was a wonderful rise in German bonds, in securities of all kinds, even in commodities, the whole world over.

What followed immediately was a headlong flight from the German mark. Private banks in England, France, Holland, Switzerland and the United States that had been keeping money in German banks because the rate of interest was high were, on second thought, more anxious than ever to call their deposits home, for after all, a year was a short time and nobody knew what would happen at the end of the holiday.

But that was not all. The Germans themselves were in flight from the mark. They had been stealing away from it quietly for a year or more; now they began to run. They took German marks to the Reichsbank and bought dollars in New York, pounds sterling in London, French francs in Paris. This could be done through the mechanism of foreign exchange; and when they had exchanged their marks at the Reichsbank for dollars payable in New York, pounds sterling payable in London and French francs payable in Paris, they had then only to wire to New York, to London and to Paris to keep their dollars, their pounds sterling and their francs on deposit. Germans who knew not how to convert German marks into foreign bank deposits through the mechanism of foreign exchange found simple ways to get rid of them. For example, they would go to the nearest border and tender the largest possible German mark bill for a small railroad ticket, wanting not the little journey into a foreign country but the change in Dutch guilders or Swiss francs, for hoarding.

The Hoover debt holiday plan took effect on June 30, and Germany on that date, with $400,000,000 less to pay out and $100,000,000 new credit borrowed at the same time, was half a billion dollars to the good. Nevertheless, within ten days Doctor Luther, head of the German Reichsbank, was going about Europe in an airplane, to Basle, to Paris, to London, saying Germany must have immediately the loan of half a billion dollars more. The whole benefit of the Hoover debt holiday plan had been swallowed up in the flight from the German mark, and Germany’s financial plight was much worse than before. The lesser German sacrifice, that is to say, the bankruptcy of Germany, now was really imminent.

International finance was horrified. Where was the end of this? The Germans rushing their own money out of Germany and Germany at the same time imploring her creditors to put more in, to save her and to save themselves!

“It is a sieve,” said the French. “A perfect sieve. Moreover, it is very probably a trap. Does Germany think that by threatening to repudiate her debts she can oblige her creditors to go on putting more and more in, merely in order to get a fixed amount out?”

The French were in a very strong position—much stronger than the English. The Bank of England had been steadily losing gold for a long time and was greatly worried about it, whereas the Bank of France had the second largest gold fund in the world and was steadily increasing it. The French knew very well that the idea of another great international loan to Germany would fail if they declined to support it. So they said: “Very well. We will consider taking part in another international loan to Germany provided the Germans will behave as debtors should. Debtors ought not to be cultivating a military spirit toward their creditors. Therefore, let the Germans disband their Steel Helmets, which represent the old military spirit again. Let them stop spending their creditors’ money for what they call pocket battleships, which are really very formidable sea weapons. Let them undo their bargain of union with Austria, which is contrary to the Treaty of Versailles.”

At this Doctor Luther flew home to Berlin. He represented only the German Reichsbank, and nothing else of the German Government; he was therefore not competent to discuss political matters.

On his return a song of bitterness burst in Germany. The war still! The French again! They would take advantage of Germany’s desperate necessities to make humiliating political demands. Having ruined the Hoover plan by making difficulties about it until the grand effect was lost, now they would use their financial strength to force Germany into economic slavery.

The English, dreading more than any other nation a crash of the financial structure of Europe, spilled unction on these waters. They proposed a conference of prime ministers to be held in London and persuaded the German Chancellor to come by way of Paris and stop there in his best German manner for such impression as it might make on the implacable French nature. The German Chancellor did, taking with him his foreign minister and a body of eminent experts. The French received them at the railway station under an arch of flowers. Any one who even a little understands the French would know what that meant. It meant that the French were in a logical mood and that when the embracings were over they would find themselves astronomically removed from any point of view but their own. And so it was.

Yet what the Germans were saying was enough to make the blood of international finance run cold. They were saying that Germany had no plan of her own to propose. She had only the facts to present. It was up to her creditors to regard the facts and then decide whether to save Germany in order to save themselves. The Germans said they were talking not only of their political debt, that is to say, reparations, on account of which they were obliged to find $400,000,000 a year; they were thinking even more of Germany’s new private debt, amounting now to nearly four billions of dollars. This was money Germany and her nationals had borrowed during six years on their bonds and notes and short-dated I. O. U.’s from banks and from private investors in America, England, France, Holland, Switzerland, Scandinavia and elsewhere, and more from Americans than from any of the others. A great deal of it had been what is called short-term credit, that is to say, loans for short periods such as may be renewed again and again if the sky stays blue and yet such as may be suddenly called away at the first sign of bad weather. It had been dangerous to borrow so much short-term credit. They said they knew that all the time. Much of this short-term credit has been unwisely, some of it extravagantly, spent; they knew that also. Admitted it as a fact. Nevertheless, it was necessary to face the facts. Now many of those who had been lending Germany this money were calling for it back. But having spent it, how could Germany give it back, or, in any case, all at once? It was due and payable—yes. The creditors were within their rights to call for it back. But they were calling to the vast deep of ten thousand empty German tills. If they insisted, there was only one thing for Germany to do. That was to confess herself bankrupt and so treat all creditors alike. It was not Germany’s problem really. It was a problem for international finance to solve. The only way for the creditors to get interest or principal out of Germany, or reparations either, was to go on lending her the money to pay them.

At this point of the German discourse international finance began to shudder. For six years it had been pouring money into the German treasury, into German industry, into German banks, saying all the time: “If the world expects Germany to pay reparations it must lend her enormous sums of capital to build up her internal economy.” Now Germany saying to her creditors: “If you expect to be paid you must lend us the money to pay you with. To save your investments you must save Germany first.”

And what is it Germany must be saved from? First and always from reparations.

But the Germans were not through. They went on to say that unless international finance came to Germany’s rescue with an enormous new loan it might expect, first, a total eclipse of German solvency toward the outside world. After that, what? After that, communism—a red Germany, for what that would mean to the peace and comfort of her neighbors. And suppose this did not happen. Suppose for her own sake she could avoid going red in a political sense. Nevertheless, if now it becomes necessary for Germany to save herself with no more benefit of credit, she will be obliged to go red in an economic sense. She knows how to save herself. She has only to forget her creditors, forget the rules of capital, forget the arrangements by means of which international finance has been trying to support a high capital structure, and simply flood the markets of the world with unlimited quantities of cheap German goods.

So that was what the conference of prime ministers had to face in London.

First, in the obvious aspect, a sinking Germany—sinking for want of an international loan to keep herself afloat. An international loan would be normally the business of international bankers on its merits. But international finance at this time was practically unconscious. Germany had created a situation quite beyond its resources, its experience or its imagination. International finance is not a bank, not a gold hoard; it is a mechanism. It would be willing enough to take German bonds for half a billion more—if the bonds could be sold. But where could any more German bonds be sold? The world was already full of them, all selling at a terrible discount, because so many holders were trying to get rid of them. International finance, in short, was out of ideas. Possibly the prime ministers with all their heads together could think of something. Anyhow, that was the only hope; that was what the conference was for.

The conference took place in London in the third week of July. The seven principal powers of the world were represented. Six of them were anxious creditors; the seventh was the astonishing debtor. The United States was represented by Mr. Stimson, Secretary of State, and by Mr. Mellon, Secretary of the Treasury.

Regard it. In weight and size and shape it is the most august meeting of high statesmen since war time. Imagine the opening, the formal gestures, a speech by the British premier saying now every one must forget his own and think only of the whole, of what will be best to do for the good of the world, since only by unselfish international collaboration can they hope to solve the problem before them.

Suppose Germany shall speak next. Has she any plan of her own to propose?

No. Germany is helpless. She has no plan. She submits the facts and leaves the solution to her creditors. All she can think of is that an international loan of half a billion dollars will keep her afloat.

For how long?

That she cannot say. For a while at least. It would mean a breathing space.

What has Germany to offer for such a loan?

Nothing. Germany is helpless. She has nothing left to offer.

But what security?

None, except her promise to pay.

But her promises to pay already exceed her power of performance. Is not that the very problem?

That, of course, is the problem. The Germans admit it simply.

Will Germany be willing to secure such a loan by a lien on her customs receipts, as the French have suggested?

No.

Why not?

Because the German people will not submit to that humiliation. They will destroy any government that dares to propose it.

Will Germany make any political concessions to appease the French, such as to stop building battleships and to disband the troublesome Steel Helmets?

No.

Why not?

Again, because the German people will not suffer that humiliation. They would sooner go red.

But perhaps Germany will agree to stop working for a revision of the treaties? Perhaps she will agree, when this crisis is over, to return to the Young Plan and observe it faithfully, instead of trying meantime to get it revised?

Certainly not. Germany would tactfully remind her very distinguished collaborators that what they are dealing with is a financial crisis. It is a mistake, not to say a breach of concord, to load it with political difficulties.

Very well. But with nothing to yield, nothing to give, nothing to offer that has not already been twice exhausted, on what ground does Germany expect her creditors to lend her another half billion of dollars?

The answer is ready. Germany would think her creditors could see the importance of doing it on the ground of their own interest. Suppose they refuse. Suppose they let Germany go. In the first place, the financial consequences will be uncontrollable. They cannot be confined to Germany alone. Germany might have to sink, but her creditors would sink with her, and the effect might well be a world-wide financial crash. Secondly, that would be the end of responsible government in Germany. Suppose then nationalism were to rise in its extreme form, or else communism. In any case Germany would be obliged to save herself, even though to do so it were necessary to repudiate not only her debts but all other forms of economic restraint, cut wages, cut prices, and overwhelm the markets of the world with German goods.

Helpless Germany! Able to challenge her creditors. Able to threaten the political structure of Europe. Able to threaten the economic structure of the world. How had she arrived at this oblique eminence? By intending her mind to it? By taking advantage of the stupidity of the world? By drift of forces that happened to be working for her? And was threaten the right word? No member of the London conference, gazing at the Germans, could answer even the last of these questions.

The English were deeply agitated at the thought of Germany going economically red, much more than at the thought of political Bolshevism. A Royal Commission had just produced a mighty treatise on the necessity to restore the world’s price level. Its conclusion was that to stabilize prices at the fallen level would be a calamity. Prices at whatever cost or risk, even if necessary by a process of scientific international inflation, must be stabilized on a higher level, or else a great deal of the world’s capital representing what formerly had been a normal expectation of profit, would be forever lost. Dumping, therefore—the thought or word of it—filled the British mind with dismay. Russian dumping was terror enough. A campaign of propaganda to bar Russian goods from English markets was at that moment running in the London press. But how much more formidable would Germany be in that red economic rôle, with her skill, her experience, her long ambition to dominate the foreign markets of the world, and her powerful industrial machine—the most powerful and efficient in Europe! And how politely the Germans were saying it!

Yet there was no misunderstanding what they meant; moreover, the idea was rising in Germany. The German newspapers were saying that an economic policy of self-saving, with no further benefit of international finance, would have the advantage to “loosen political and financial bonds which were not unconditionally necessary and have hitherto acted only as brakes on our development.” And saying this at a time when the German Government held the German press in strict censorship.

The English could imagine those mountains of coal visible at the German pit heads breaking over Europe and running down into Italy, to the ruin of the British coal trade; they could see German manufactures underselling British goods everywhere in foreign markets. The British press touched the subject in a very guarded manner, hardly at all. But the London Times said it was understood that Mr. Ramsay MacDonald had taken the Germans aside and said to them that a policy of German dumping would bring them into conflict with England. He said England would retaliate, perhaps with no idea whatever in his head of how really it could.

Well, the mighty seven-power conference of six anxious creditors and one astonishing debtor failed to find a magic chemistry. It labored and brought forth two suggestions, then adjourned, pronouncing its own benediction. The suggestions were these: First, that since a new international loan to Germany was not immediately feasible, each of the six creditor governments should recommend to its bankers to leave in Germany the remainder of their deposits instead of calling them home. Second, that a third committee of international experts be called up to study Germany’s situation, analyze her necessities, and report.

It sounds very little. From the creditors’ point of view it was less than nothing. And yet Germany, with nothing to yield, nothing to give, nothing to offer, had won three major points.

First, she got her loan, though it was involuntary on the part of the lenders. When the principal American and English banks, together with such others as could be bullied or persuaded, agreed to leave their overdue deposits and short-term credits in the German banks, instead of calling them home, that was the equivalent of a loan of more than three quarters of a billion dollars to Germany. She had the money; she could continue to use it. It had simply been reloaned to her.

Secondly, Germany gained a third international committee of experts to protect her from her creditors; and the American member of this committee was Albert H. Wiggin, head of the Chase National Bank in New York, publicly committed to the proposition that reparations and war debts should be heavily scaled down or cancelled altogether, and that at the same time American tariffs should be reduced in order that Europe might sell more of its goods in American markets.

Thirdly, what Germany most wanted was to hang a mourning wreath upside down on the Young Plan, and that she did.

What the third international committee of experts represented was perhaps the last decline of the make-believe that there could ever be an economic approach to the problem of German reparations. How can there be, when the German Government itself officially speaks of reparations as tribute? People who believe reparations are tribute—and the Germans do deeply believe it—will not behave as if reparations were debt. Yet that is how the world has been expecting the Germans to behave. Nor can there be any purely economic solutions with Germany, private or other, so long as Germans keep thinking, “This is the sixteenth—” or, “This is the seventeenth year of the war.” Her principal creditors, remember, were her enemies in the war.

It is easy enough to make an economic analysis of the 1931 financial crisis in Germany. That can be done in one sentence. The great German machine, having been raised on borrowed capital to be the most powerful and the most efficient in Europe, was running on borrowed gas. Given that fact, any one would know what the consequences were bound to be. But what is the fact worth? Why was the German machine running on borrowed gas? Why were the Germans putting their own gas out of Germany for safe keeping, in the banks of foreign countries, and borrowing gas, that is to say, short-term credit, from other people? Why?

When in early July the head of the German Reichsbank was going about Europe in an airplane, soliciting an international loan of half a billion dollars (gas) to keep the German machine from stalling, to save Germany from bankruptcy—at that time the Germans’ own estimate of the amount of German money (gas again) on deposit in New York, London, Paris, Amsterdam and other foreign money centers was a billion dollars. There was so much German money on deposit in Paris alone that if it had been called for all in one day the French money market would have been demoralized. There was no danger of its being called for. The Germans did not want their own money; they wanted other people’s money.

These you may state as economic facts, bearing on the German crisis. They explain the crisis. Yet they are not themselves to be explained in economic terms. If the Germans had kept their own money at home there need not have been a financial crisis. They had enough gas of their own to keep their machine going. But they preferred to hoard their own in foreign countries. Seeing all this clearly, the French were unable to take a strictly financial view of the German crisis. They kept asking: “Why have the Germans brought this condition upon themselves?” Certainly not for economic reasons.

And remember that all this time the reparations debt has been not an economic burden, not a financial burden, but a mental burden only. Actual burden it never was, for the simple reason that never yet has Germany paid any reparations. She has made the world pay them for her; she has made her creditors pay themselves.

In the beginning she had resort to the naïve expedient of simply printing paper marks and selling them all over the world so long as anybody would buy them. And people did buy them in prodigious quantities. The lower they fell the more they bought, saying all the time, “Germany will never repudiate her money; it is unimaginable,” and thinking, therefore, it was a fine speculation to buy marks. The buyers of these marks, which were going to be repudiated, and the holders of German bonds receiving interest in those same marks—they paid the first reparations, not Germany. Germany took their money in exchange for her paper marks and handed it over to her creditors. When at last the cost of printing and shipping paper marks in bundles was more than the marks would bring, Germany stopped her printing presses, stopped paying reparations, and announced her total insolvency.

Then the French conceived the grim idea of collecting reparations by force. That was when they went into the Ruhr and seized the very heart of Germany’s industrial machine. All they proved was that you cannot collect reparations from an unwilling people by force. The Germans would not work their machine to produce tribute for the French. There were strikes and riots and, worse still, threat of wrecking the machine itself or jamming it by sabotage. Imagine it, when the slip of a monkey wrench in the hands of a sullen German workman might cost the French a million francs of tribute. That was the French problem in the Ruhr, where they had the industrial heart of Germany in their hands. Suppose they had said: “Very well, we shall take the machine into our own hands and run it.” But that would mean bringing workers and technicians from their own country. There would be no profit in that. Besides, if they did it, they would have a starving, idle German population on their hands. The Ruhr party cost the French more than they got out of it. No reparations that way.

At this impasse the nations of Europe joined to call on the United States, saying: “We are emotionally and politically mad. We have only sanity enough left among us to know that we are. Simply, we cannot think economically. You over there have the vision of distance. Think of a way in which we may go on here in Europe. For unless you can we shall go to pieces. Bring us a plan.” We did. We sent American experts to straighten them out; we gave them the Dawes Plan. Germany accepted it, crossed her heart for a policy of fulfillment, and borrowed $200,000,000 gold to get started with.

Since the Dawes Plan took effect—since 1924, that is to say—Germany’s net payments on account of reparations, according to her own figures, have amounted to $2,350,000,000.

In the same time, still according to her own statistics, she has borrowed from other countries the incredible sum of $3,750,000,000.

This is to say, that since 1924 she has borrowed $1,400,000,000 more than she has paid out on account of reparations.

Roughly, two thirds of this borrowed money came from the United States. The next largest part of it came from Great Britain. The rest of it from France, Holland, Switzerland, and other lending countries. More than three quarters of the total came from her former enemies.

Simply to say that Germany borrowed with one hand and paid reparations with the other, or that out of every dollar she borrowed she paid sixty-three cents in reparations and kept thirty-seven, does not tell the whole story. The money had a circular movement. It went one way into Germany, stopped there for ninety days, six months, a year or more, to work, and then went out another way, like water turning a mill wheel. It is important to remember this, for it explains many otherwise incomprehensible effects. The money did not just go in and out again; it was detained and put to work. That is what people who talk economics mean when they say that with borrowed money Germany built up her internal economy in order to be able to pay reparations and then paid them out of the increase of her wealth. She did build up her internal economy amazingly. She knew how to bend that stream of money on the wheel. And that is how it happens that she is to-day the second most powerful industrial nation in the world. The United States is first in the world. Germany is first in Europe.

She spent the borrowed money under three heads, namely: One, for housing of all kinds; two, on her industrial machine, to rebuild it, rationalize it, increase its power; and, three, for public works such as parks, baths, civic and recreation centers, schools, stadiums, exposition buildings, new city halls, new post offices, roads, even monuments.

A passion to build possessed them. Under the head of housing they completed in the one year 1930 more than 300,000 habitations. The great weight of new housing was for wage workers, state servants and people of moderate means. Any new housing project in the mass principle is called a settlement. So, workers’ settlements, railway employees’ settlements, post-office employees’ settlements, bachelors’ settlements. But settlements also in selected places for the well-to-do. What we should call real estate developments on a very large scale. The aggregate is prodigious. The only way to see it really is from the air because one settlement or one series of flat dwellings may be the size of a town. Moreover, you would have to drive an endless distance to see it from the ground. It is in character extensive and in new places. The cities have not been rebuilt. They have not changed much. These people do not tear down old things to build new ones. For new things new ground. All this change is in the environs.

The building passion overflowed necessity, became extravagant, experimental, sportive. New time, new materials, new shapes, new measures, new intentions. Churches all of steel and glass. The modernistic extreme in villas, morgues, hotels, schools, skyscrapers, commercial buildings. It was an architect’s festival.

Many creditors are scandalized by the signs of Germany’s extravagance with borrowed money, the French and the English more than Americans, since they have less understanding of extravagance in principle. The Germans admit it. They may say truthfully that they have been heard to denounce it themselves, to one another. All the same, they went on with it. And then, too, great sums were purposefully spent for the future, as for a new fourth bridge across the Rhine at Cologne, now one of the engineering marvels of Europe.

The French said: “There is no present necessity for this bridge. Why do you build it? You do not pay reparations with a bridge.”

The Germans said: “We shall sometime need it, and we build it now to keep our people employed.”

It was their instinct, or their wisdom, to increase their power and improve their conditions by any means possible, even though it was with creditors’ money they did it. And from their own point of view they were right. What they have built they will continue to possess. Gold they may lose; credit they may lose. But machines, factories, power plants, bridges, public buildings, roads, laboratories, better dwellings, parks—these things remain. They cannot fly away. What happens to the money seems relatively unimportant. Money is not things. It is merely the token of things. Destroy the token and there are the things still, physically untouched by a financial crisis. You can invent new tokens to represent them. That has happened before. Less than ten years ago was not German money wholly destroyed? The things it had represented, they were not destroyed, not even German credit, which was an intangible thing. A new money token was invented in place of the one that had been destroyed, and lo! Germany was in good credit again, the whole world anxious to become her creditor.

Moreover, by what may seem to have been reckless and extravagant use of borrowed money, Germany has created a great body of social wealth, visible as fine housing, recreational facilities and other means to human well-being, the existence of which tends to defeat what impulse there may have been to communism. If there was any real danger of communism in Germany, which is doubtful, it is greatly lessened by the fact that the German wage workers have much more comfort, well-being and freedom of ego to defend than ever before.

The red menace in all political senses is probably seven tenths conjuration.¹ The communists are four or five million all together. But they have no leadership. There is not one important mind among them. There is an idea in Germany that the rulers of Soviet Russia do not want Germany to go red—at least not yet. They are too fearful of the effect it might have on her efficiency and productive power and too anxious for the present to draw upon that efficiency and power for their own needs. Whether this is true or not, the Russians would be very intelligent to take that view and to maintain in Germany merely a tin façade of communism, numerically strong, politically weak.

The well-poised German’s view of communism is first of all cynical. He says: “It is something to have in the hand.” He means that when the German Government is having difficulties with the Reichstag it can rally supporters by waving the red menace or threatening to take support from the communists; and that when German statesmen are dealing with the outside world, as at the London conference, they can say: “Responsible government has its back to the wall in Germany. Uphold us for your own sake as much as for ours, for if this government falls we shall all of us have to face communism in Germany.” And it works. It has been working ever since the armistice.

None but a German can understand the involutions of German politics, and there is reason to doubt that a German does. Parties beginning at the center and shading right and left, parties within parties, parties left of the right and parties right of the left, all in a ceaseless way of quarreling, not about ideas as such but about the philosophy and theory of ideas. Any new idea has first to be examined from the point of view of party advantage, and then, if ever, on its merits. As you look at this ill-natured, monotonous eddy of grumbling disagreement, their whole political-mindedness apparently revolving in muddy innocence of realities, you will say it is hopeless, worse than drifting. How can there be a sense of direction among them? But then when you look at what lies behind them in the last ten years and at what they have done with their advantages against the world, you can almost imagine that a Machiavellian intelligence has been guiding them. Look again at the great eddy of political confusion and it may occur to you that here their disagreements cancel one another and all their passion for petty interference is absorbed, so that beyond it in the field of reality their true intelligence, their racial intuition, or whatever it is that leads them, is all the more free to act upon their destiny, without interference.

For example, during the July, 1931, crisis they passed from a republican form of government to a dictatorship and were hardly aware of it. The constitution was suspended in fact; they were governed by decree, their parliament was in a state of self-abnegation, employers were ordered to withhold fifty per cent, of wages due, scores of newspapers were shut up, a German could not cross the border without paying first a fine of twenty-five dollars, free comment touching the German Chancellor’s work at London was “verboten” lest it interfere with the result—and there was no protest. Under the circumstances a dictatorship was necessary. It could set itself up automatically. No party was responsible for it; therefore, no party cared. And the interminable sounds issuing from the eddy were the same as before.

And if Germany did go red, in a political sense, it would not be like Russian communism. The Germans have not the heart to destroy their own things. They overthrew a monarchy and destroyed nothing. It never occurred to them to destroy its human symbol, namely, the Kaiser. He was exiled on a pension, partly to appease the world; he was unwept because he had failed. But the Crown Prince was received back and now is active in German politics, at the extreme right. Least of all would the Germans destroy their tools, that is to say, their own industrial power, for that is their first source of hope.

Yet notwithstanding the reduction of the red menace, if it was real, and notwithstanding the social improvement in Germany, which is very real, many creditors are still scandalized. They keep saying: “From the German point of view, yes; but it was borrowed money. They spent it for such things as even the lenders cannot always afford. They must have known as they were spending it that they would be unable to pay it back when it was due.”

That is not exactly what they know. They probably thought very little about it; and, moreover, if they had thought about it they would not have cared. To understand this it will be necessary to go further with the German point of view.

To begin with, most of the money was coming from American lenders, and every German has it in his heart that his country was beaten by America, not by the Allies. But for the vast weight of American resources, first as they were loaned to the Allies and then as they went directly into the war, German victory had been inevitable, according to destiny. American money thwarted that destiny.

Then consider the emotional conviction under which now every process of the German mind takes place. How it was arrived at does not matter as a practical fact. The conviction is that there was a conspiracy to crush Germany. It did not succeed. Yet there will be no justice in the world until the Treaty of Versailles is destroyed; and the special infamy of that document is that it contains a confession of guilt extorted from a people reduced to their knees by the power of the whole world.

It follows that they have no sense of debt on account of reparations. Simply, reparations are tribute. It follows also that the secret German language about Germany’s principal creditors may be extremely ironical, with some special emphasis toward Americans, from whom it was so easy to borrow money to pay tribute with. How could they be expected to care very much about what happened to the money they borrowed? It was the money of their enemies, and as they were borrowing and spending it to increase their power they were counting the years the war had lasted—fourteen, fifteen, sixteen. And what a stupid world of lenders!

The finality of all fact about the Germans is that they have the feelings, the mentality and the motives of an injured race. Their sense of injury is obsessional, so deep and so ugly as to seem a national psychosis, as it probably is. Germany against the world is the one thought that will unite them; and that never fails. Self-commiseration is their emotional habit.

They believe it themselves when they tell you Germany is poor. You must not be deceived by appearances. There is bitter distress just beneath the surface. There is no fat, or, if there is, then it is not good fat. Germany’s tissues are white, if you could only see them. Reparations do that. She is helpless; she is at the mercy of her creditors. Her middle class has been destroyed. Can you destroy a middle class without suffering? People come to look. They see Germans eating and bathing and trying to be gay, but this is desperation, the behavior of a people living in fear of deluge. Really it is not so. They are not gay. If the shops are busy that is because they are afraid of their own money and spend it in order to hoard things instead. They remember inflation. And if they go out to dine once more in a good way, it is because they do not know what will happen to-morrow.

One who had heard this theme too much and heard it again from a group of tense, earnest Germans at dinner in Berlin last July, tried turning their minds around.

“I imagine myself to be a German,” he said. “The year is 1924. I am gazing at the heavens. Do you remember that after the armistice, or, as other people say, after the war, there came a craze for heaven gazing in Germany? That is when you began to build these wonderful Planetariums.”

“Yes,” they said, a little bewildered.

“I imagine I was a German in 1924,” he continued, “at a planetarium, as every one else was, and as I sat gazing at the celestial mechanism, suddenly I saw the future of Germany, clearly, like a dream.”

“What was it?” they asked. “What did you see?”

“Wait,” he said. “First, do you remember what it was like in 1924? The enemy tarried in the Rhineland, holding it for hostage of good behavior. The French were in the Ruhr, squeezing the very heart of Germany. Foreign commissions were seated in Berlin, watching and minding everything. Germany was insolvent. Her money was worthless. A million marks would hardly buy a cold supper.”

The Germans groaned.

“Then the vision,” he said. “I imagine that as a German I saw what would happen to Germany in the next six years. I saw that in 1930 she would be free of foreign control, the enemy would be out of the Rhineland, the French would be out of the Ruhr. I saw that in 1930 Germany would be the best equipped nation in Europe, paramount in Europe for industrial power and second in the world only to the United States. I saw that in 1930 she would be the best housed nation in Europe, if not in the world. I saw that in 1930 her exports would pass Great Britain’s for the first time, and this had been her life-long ambition. I saw that in 1930 she would hold the blue ribbon of the sea against England, with the two newest and fastest ships on the Atlantic, and that she would have once more a great merchant marine, all new and modern, besides building ships for other nations in successful competition with England’s shipbuilding industry. I saw that in 1930 she would be first in aviation among European nations, with the largest land plane in the world, the largest sea plane in the world and the finest airports. I saw that in 1931 she would be strong enough to say ‘no’ to the French when as a condition for an international loan they proposed that Germany disband her weaponless army of Steel Helmets and stop building battleships. I saw one of the new ten-thousand-ton battleships and reflected on the folly of Germany’s enemies. They thought to limit the strength of her sea weapons with a piece of writing, which says a German warship shall not exceed ten thousand tons. All they did was to stimulate German inventiveness, for under this limitation she had made a sea weapon in ten thousand tons that was probably equal to any 25,000-ton warship in the world. I saw that in 1931 she would be strong enough to dare say officially, ‘Reparations are tribute,’ which was notice that she was almost strong enough to repudiate them. And I saw that meanwhile, during six years, she had borrowed much more from her enemies than she had paid them as reparations, which meant that she herself had paid no reparations at all. I saw that in 1931 she would be strong enough, without weapons, to threaten the political peace of Europe and strong enough to threaten the economic rhythm of the world by letting loose the full power of her industries and laboratories. There the vision ended. I imagined I had been asleep. It was a dream. What a fabulous dream! And yet all of it has come true.”

“It has come true,” said the Germans, with not the slightest rift in their gloom. It was deeper than ever. “Such things as you mention are true,” they said. “But you are not a German. You cannot imagine what it is like. The situation of Germany is desperate.”

What were they thinking of then? Their lost colonies? The French empire? The new French fortifications? Their isolation? The guilt phrase in the Versailles Treaty? You will never know. It may be they were thinking how awkward it was for the stream of American money out of which they had been paying reparations to dry up suddenly. Unless it rises again they may have to decide whether actually to pay something by way of tribute or repudiate reparations before they are quite ready to risk it.

¹ Since this was written Von Hindenburg has been reëlected president of the German republic.