In politics it is unfortunately true that ten dollars which can be seen bulk more largely in the public mind than a million which happen to be out of sight but are none the less real. Thus, however clearly the wastefulness of war and the impossibility of effecting by its means any permanent economic or social advantage for the conqueror may be shown, the fact that Germany was able to exact an indemnity of a billion dollars from France at the close of the war of 1870⁠–⁠71 is taken as conclusive evidence that a nation can “make money by war.”

In 1872, Sir Robert (then Mr.) Giffen wrote a notable article summarizing the results of the Franco-German War thus: it meant to France a loss of 3500 million dollars, and to Germany a total net gain of 870 millions, a money difference in favor of Germany exceeding in value the whole amount of the British National Debt!

An arithmetical statement of this kind seems at first sight so conclusive that those who have since discussed the financial outcome of the war of 1870 have quite overlooked the fact that, if such a balance-sheet as that indicated be sound, the whole financial history of Germany and France during the forty years which have followed the war is meaningless.

The truth is, of course, that such a balance-sheet is meaningless⁠—a verdict which does not reflect upon Sir Robert Giffen, because he drew it up in ignorance of the sequel of the war. It does, however, reflect on those who have adopted the result shown on such a balance-sheet. Indeed, Sir Robert Giffen himself made the most important reservations. He had at least an inkling of the practical difficulties of profiting by an indemnity, and indicated plainly that the nominal figures had to be very heavily discounted.

A critic18 of an early edition of this book seems to have adopted most of Sir Robert Giffen’s figures, disregarding, however, certain of his reservations, and to this critic I replied as follows:

In arriving at this balance my critic, like the company-promoting genius who promises you 150 percent for your money, leaves so much out of the account. There are a few items not considered, e.g. the increase in the French army which took place immediately after the war, and as the direct result thereof, compelled Germany to increase her army by at least one hundred thousand men, an increase which has been maintained for forty years. The expenditure throughout this time amounts to at least a billion dollars. We have already wiped out the “profit,” and I have only dealt with one item yet⁠—to this we must add⁠—loss of markets for Germany involved in the destruction of so many French lives and so much French wealth; loss from the general disturbance throughout Europe, and still greater loss from the fact that the unproductive expenditure on armaments throughout the greater part of Europe which has followed the war, the diversion of energies which is the result of it, has directly deprived Germany of large markets and by a general check of development indirectly deprived her of immense ones.

But it is absurd to bring figures to bear on such a system of bookkeeping as that adopted by my critic. Germany had several years’ preparation for the war, and has had, as the direct result thereof and as an integral part of the general war system which her own policy supports, certain obligations during forty years. All this is ignored. Just note how the same principle would work if applied in ordinary commercial matters; because, for instance, on an estate the actual harvest only takes a fortnight, you disregard altogether the working expenses for the remaining fifty weeks of the year, charge only the actual cost of the harvest (and not all of that), deduct this from the gross proceeds of the crops, and call the result “profit”! Such “finance” is really luminous. Applied by the ordinary business man, it would in an incredibly short time put his business in the bankruptcy court and himself in gaol!

But were my critic’s figures as complete as they are absurdly incomplete and misleading, I should still be unimpressed, because the facts which stare us in the face would not corroborate his statistical performance. We are examining what is from the money point of view the most successful war ever recorded in history, and if the general proposition that such a war is financially profitable were sound, and if the results of the war were anything like as brilliant as they are represented, money should be cheaper and more plentiful in Germany than in France, and credit, public and private, should be sounder. Well, it is the exact reverse which is the case. As a net result of the whole thing Germany was, ten years after the war, a good deal worse off, financially, than her vanquished rival, and was at that date trying, as she is trying today, to borrow money from her victim. Within twenty months of the payment of the last of the indemnity, the bank rate was higher in Berlin than in Paris, and we know that Bismarck’s later life was clouded by the spectacle of what he regarded as an absurd miracle: the vanquished recovering more quickly than the victor. We have the testimony of his own speeches to this fact, and to the fact that France weathered the financial storms of 1878⁠–⁠9 a great deal better than did Germany. And today, when Germany is compelled to pay nearly 4 percent for money, France can secure it for 3.⁠ ⁠… We are not for the moment considering anything but the money view⁠—the advantages and disadvantages of a certain financial operation⁠—and by any test that you care to apply, France, the vanquished, is better off than Germany, the victor. The French people are as a whole more prosperous, more comfortable, more economically secure, with greater reserve of savings and all the moral and social advantages that go therewith, than are the Germans, a fact expressed briefly by French Rentes standing at 98 and German Consols at 83. There is something wrong with a financial operation that gives these results.

The something wrong, of course, is that in order to arrive at any financial profit at all essential facts have to be disregarded, those facts being what necessarily precedes and what necessarily follows a war of this kind. In the case of highly organized industrial nations like England and Germany, dependent for the very livelihood of great masses of their population upon the fact that neighboring nations furnish a market for their goods, a general policy of “piracy,” imposing upon those neighbors an expenditure which limits their purchasing power, creates a burden of which the nation responsible for that policy of piracy pays its part. It is not France alone which has paid the greater part of the real cost of the Franco-German War, it is Europe⁠—and particularly Germany⁠—in the burdensome military system and the general political situation which that war has created or intensified.

But there is a more special consideration connected with the exaction of an indemnity, which demands notice, and that is the practical difficulty with regard to the transfer of an immense sum of money outside the ordinary operations of commerce.

The history of the German experience with the French indemnity suggests the question whether in every case an enormous discount on the nominal value of a large money indemnity must not be allowed owing to the practical financial difficulties of its payment and receipt, difficulties unavoidable in any circumstances which we need consider.

These difficulties were clearly foreseen by Sir Robert Giffen, though his warnings, and the important reservations that he made on this point, are generally overlooked by those who wish to make use of his conclusions.

These warnings he summarized as follows:

As regards Germany, a doubt is expressed whether the Germans will gain so much as France loses, the capital of the indemnity being transferred from individuals to the German Government, who cannot use it so profitably as individuals. It is doubted whether the practice of lending out large sums, though a preferable course to locking them up, will not in the end be injurious.

The financial operations incidental to these great losses and expenses seriously affect the money market. They have been a fruitful cause, in the first place, of spasmodic disturbance. The outbreak of war caused a monetary panic in July, 1870, by the anxiety of people who had money engagements to meet to provide against the chances of war, and there was another monetary crash in September, 1871, owing to the sudden withdrawal by the German Government of the money it had to receive. The war thus illustrates the tendency of wars in general to cause spasmodic disturbance in a market so delicately organized as that of London now is.

And it is to be noted in this connection that the difficulties of 1872 were trifling compared to what they would necessarily be in our day. In 1872, Germany was self-sufficing, little dependent upon credit; today undisturbed credit in Europe is the very lifeblood of her industry; it is, in fact, the very food of her people, as the events of 1911 have sufficiently proved.

It is not generally realized how abundantly the whole history of the German indemnity bears out Sir Robert Giffen’s warning; how this flood of gold turned indeed to dust and ashes as far as the German nation is concerned.

First, anyone familiar with financial problems might have expected that the receipt of so large a sum of money by Germany would cause prices to rise and so handicap export trade in competition with France, where the reverse process would cause prices to fall. This result was, in fact, produced. M. Paul Beaulieu and M. Léon Say19 have both shown that this factor operated through the value of commercial bills of exchange, giving to the French exporter a bonus and to the German a handicap which affected trade most perceptibly. Captain Bernard Serrigny, who has collected in his work a wealth of evidence bearing on this subject, writes:

The rise in prices influenced seriously the cost of production, and the German manufacturers fought, in consequence, at a disadvantage with England and France. Finally the goods produced at this high cost were thrown upon the home market at the moment when the increase in the cost of living was diminishing seriously the purchasing power of the bulk of consumers. These goods had to compete, not only with home overproduction due to the failure to sell abroad, but with foreign goods, which, despite the tariff, were by their lower price able to push their way into the German market, where relatively higher prices attracted them. In this competition France was particularly prominent. In France the lack of metallic money had engendered great financial caution, and had considerably lowered prices all around, so that there was a general financial and commercial condition very different from that in Germany, where the payment of the indemnity had been followed by reckless speculation. Moreover, owing to the heavy foreign payments made by France, bills drawn on foreign centres were at a premium, a premium which constituted a sensible additional profit to French exporters, so considerable in certain cases that it was worth while for French manufacturers to sell their goods at an actual loss in order to realize the profit on the bill of exchange. The German market was thus being captured by the French at the very moment when the Germans supposed they would, thanks to the indemnity, be starting out to capture the world.

The German economist Max Wirth (Geschichte der Handelskrisen) expressed in 1874 his astonishment at France’s financial and industrial recovery: “The most striking example of the economic force of the country is shown by the exports, which rose immediately after the signature of peace, despite a war which swallowed a hundred thousand lives and more than ten milliards (two billion dollars).” A similar conclusion is drawn by Professor Biermer (Fürst Bismarck als Volkswirt), who indicates that the Protectionist movement in 1879 was to a large extent due to the result of the payment of the indemnity.

This disturbance of the balance of trade, however, was only one factor among several: the financial disorganization, a fictitious expansion of expenditure creating a morbid speculation, precipitated the worst financial crisis in Germany which she has known in modern times. Monsieur Lavisse summarizes the experience thus:

Enormous sums of money were lost. If one takes the aggregate of the securities quoted on the Berlin Bourse, railroad, mining and industrial securities generally, it is by thousands of millions of marks that one must estimate the value of such securities in 1870 and 1871. But a large number of enterprises were started in Germany of which the Berlin Bourse knew nothing. Cologne, Hamburg, Frankfurt, Leipzig, Breslau, Stuttgart, had all their local groups of speculative securities; hundreds of millions must be added to the thousands of millions. These differences did not represent merely a transfer of wealth, for a great proportion of the capital sunk was lost altogether, having been eaten up in ill-considered and unattractive expenditure.⁠ ⁠… There can be no sort of doubt that the money lost in these worthless enterprises constitutes an absolute loss for Germany.

The decade from 1870⁠–⁠1880 was for France a great recuperative period, although for several other nations in Europe it was one of great depression, notably, after the “boom” of 1872, for Germany. No less an authority than Bismarck himself testifies to the double fact. We know that Bismarck was astonished and dismayed by seeing the regeneration of France after the war taking place more rapidly and more completely than the regeneration of Germany. This weighed so heavily upon his mind that in introducing his Protectionist Bill in 1879 he declared that Germany was “slowly bleeding to death,” and that if the present process were continued she would find herself ruined. Speaking in the Reichstag on May 2, 1879, he said:

We see that France manages to support the present difficult business situation of the civilized world better than we do; that her Budget has increased since 1871 by a milliard and a half, and that thanks not only to loans; we see that she has more resources than Germany, and that, in short, over there they complain less of bad times.

And in a speech two years later (November 29, 1881) he returned to the same idea:

It was towards 1877 that I was first struck with the general and growing distress in Germany as compared with France. I saw furnaces banked, the standard of well-being reduced, and the general position of workmen becoming worse and business as a whole terribly bad.

In the book from which these extracts are taken20 the author writes as an introduction to Bismarck’s speeches:

Trade and industry were in a miserable condition. Thousands of workmen were without employment, and in the winter of 1876⁠–⁠77 unemployment took great proportions, and soup-kitchens and State workshops had to be established.

Every author who deals with this period seems to tell broadly the same tale, however much they may differ in detail. “If only we could get back to the general position of things before the war,” said M. Block in 1879. “But salaries diminish and prices go up.”21

At the very time that the French millions were raining in upon Germany (1873) she was suffering from a grave financial crisis, and so little effect did the transfer of the money have upon trade and finance in general, that twelve months after the payment of the last of the indemnity we find the bank rate higher in Berlin than in Paris; and, as was shown by the German economist Soetbeer, by the year 1878 far more money was in circulation in France than in Germany.22 Hans Blum, indeed, directly ascribed the series of crises between the years 1873 and 1880 to the indemnity: “A burst of prosperity and then ruin for thousands.”23 Throughout the year 1875 the bank rate in Paris was uniformly 3 percent. In Berlin (Preussische Bank, which preceded the Reichs Bank) it varied from 4 to 6 percent. A similar difference is reflected by the fact that, between the years 1872 and 1877, the deposits in the State savings banks in Germany actually fell by roughly 20 percent, while in the same period the French deposits increased about 20 percent.

Two tendencies plainly show the condition of Germany during the decade which followed the war: the enormous growth of Socialism⁠—relatively much greater than any which we have ever since seen⁠—and the immense stimulus given to emigration.

Perhaps no thesis is commoner with the defender of war than this: that, though one may not be able in a narrow economic sense to justify an enterprise like that of 1870, the moral stimulus which victory gave to the German people is accepted as being of incalculable benefit to the race and the nation. Its alleged effect in bringing about a national solidarity, in stimulating patriotic sentiment and national pride, in the wiping out of internal differences and Heaven knows what, are claims I have dealt with at greater length elsewhere, and I wish only to note here that all this highfalutin does not stand the test of facts. The two phenomena just mentioned⁠—the extraordinary progress of Socialism and the enormous stimulus given to emigration during the years which immediately followed the war⁠—give the lie to all the claims in question. In 1872⁠–⁠73, the very years in which the moral stimulus of victory and the economic stimulus of the indemnity should have kept at home every able-bodied German, emigration was, relatively to the population, greater than it has ever been before or since, the figures for 1872 being 154,000 and for 1873 134,000.24 And at no period since the fifties was the internal political struggle so bitter⁠—it was a period of repression, of prescription on the one side and class-hatred on the other⁠—“the golden age of the drill-sergeant,” some German has called it.

It will be replied that, after the first decade, Germany’s trade has shown an expansion which has not been shown by that of France. Those who are hypnotized by this, quietly ignore altogether one great fact or which has affected both France and Germany, not only since the war, but during the whole of the nineteenth century, and that factor is that the population of France, from causes in no way connected with the Franco-Prussian War, since the tendency was a pronounced one for fifty years before, is practically quite stationary; while the population of Germany, also for reasons in no way connected with the war, since the tendency was also pronounced half a century previously, has shown an abounding expansion. Since 1875 the population of Germany has increased by twenty million souls. That of France has not increased at all. Is it astonishing that the labor of twenty million souls makes some stir in the industrial world? Is it not evident that the necessity of earning a livelihood for this increasing population gives to German industry an expansion outside the limits of her territory which cannot be looked for in the case of a nation whose social energies are not faced with any such problem? There is this, moreover, to be borne in mind: Germany has secured her foreign trade on what are, in the terms of the relative comfort of her people, hard conditions. In other words, she has secured that trade by cutting profits, in the way that a business fighting desperately for life will cut profits, in order to secure orders, and by making sacrifices that the comfortable business man will not make. Notwithstanding the fact that France has made no sensational splash in foreign trade since the war, the standard of comfort among her people has been rising steadily, and is without doubt generally higher today than is that of the German people. This higher standard of comfort is reflected in her financial situation. It is Germany, the victor, which is today in the position of a suppliant in regard to France, and it is revealing no diplomatic secrets to say that, for many years now, Germany has been employing all the wiles of her diplomacy to obtain the official recognition of German securities on the French Bourses. France financially has, in a very real sense, the whip hand.

That is not all. Those who point triumphantly to German industrial expansion, as a proof of the benefits of war and conquest, ignore certain facts which cannot be ignored if that argument is to have any value, and they are these:

1. Such progress is not peculiar to Germany; it is shown in an equal or greater degree (I am speaking now of the general wealth and social progress of the average individual citizen) by States that have had no victorious war⁠—the Scandinavian States, the Netherlands, Switzerland.

2. Even if it were special to Germany, which it is not, we should be entitled to ask whether certain developments of German political evolution, which preceded the war, and which one may fairly claim have a more direct and understandable bearing upon industrial progress, are not a much more appreciable factor in that progress than the war itself⁠—I refer particularly, of course, to the immense change involved in the fiscal union of the German States, which was completed before the Franco-German War of 1870 had been declared; to say nothing of such other factors as the invention of the Thomas-Gilchrist process which enabled the phosphoric iron ores of Germany, previously useless, to be utilized.

3. The very serious social difficulties (which have, of course, their economic aspect) that do confront the German people⁠—the intense class friction, the backwardness of parliamentary government, the survival of reactionary political ideas, wrapped up with the domination of the “Prussian ideal”⁠—all difficulties which States whose political development has been less marked by successful war (the lesser European States just mentioned, for instance)⁠—are not faced with in the same degree. These difficulties, special, among the great European nations, to Germany, are certainly in a large measure a legacy of the Franco-German War, a part of the general system to which that war gave rise, the general character of the political union which it provoked.

The general ascription of such real progress as Germany has made to the effects of the war and nothing else⁠—a conclusion which calmly ignores factors which have evidently a more direct bearing⁠—is one of those a priori judgments repeated, parrot fashion, without investigation or care even by publicists of repute; it is characteristic of the carelessness which dominates this whole subject. This more general consideration, which does not properly belong to the special problem of an indemnity, I have dealt with at greater length in the next section. The evidence bearing on the particular question, as to whether in practice the exaction of a large monetary indemnity from a conquered foe can ever be economically profitable or of real advantage to the conqueror, is of a simpler character. If we put the question in this form, “Was the receipt of the indemnity, in the most characteristic and successful case in history, of advantage to the conqueror?” the reply is simple enough: all the evidence plainly and conclusively shows that it was of no advantage; that the conqueror would probably have been better without it.

Even if we draw from that evidence a contrary conclusion, even if we conclude that the actual payment of the indemnity was as beneficial as all the evidence would seem to show it was mischievous; even if we could set aside completely the financial and commercial difficulties which its payment seems to have involved; if we ascribe to other causes the great financial crises which followed that payment; if we deduct no discount from the nominal value of the indemnity, but assume that every mark and thaler of it represented its full face value to Germany⁠—even admitting all this, it is still inevitable that the direct cost of preparing for a war and of guarding against a subsequent war of retribution must, from the nature of the case, exceed the value of the indemnity which can be exacted. This is not merely a hypothetical statement, it is a commercial fact, supported by evidence which is familiar to us all. In order to avoid repaying, with interest, the indemnity drawn from France, Germany has had to expend upon armaments a sum of money at least equal to that indemnity. In order to exact a still larger indemnity from Great Britain, Germany would have to spend a still larger sum in preparations, and to guard against repayment would be led into indefinite expenditure, which has only to go on long enough inevitably to exceed the very definite indemnity. For, it must be remembered that the amount of an indemnity extractable from a modern community, of the credit era, has very definite limits: an insolvent community can pay more. If the Statesmen of Europe could lay on one side, for a moment, the irrelevant considerations which cloud their minds, they would see that the direct cost of acquisition by force must in these circumstances necessarily exceed in value the property acquired. When the indirect costs are also considered, the balance of loss becomes incalculably greater.

Those who urge that through an indemnity, war can be made to “pay” (and it is for them that this chapter is written), have before them problems and difficulties⁠—difficulties of not merely a military, but of a financial and social character⁠—of the very deepest kind. It was precisely in this section of the subject that German science failed in 1870. There is no evidence that much progress has been made in the study of this phase of the problem by either side since the war⁠—indeed, there is plenty of evidence that it has been neglected. It is time that it was scientifically and systematically attacked.

Those who wish well for Europe will encourage the study, for it can have but one result: to show that less and less can war be made to pay; that all those forces of our world which daily gain in strength make it, as a commercial venture, more and more preposterous. The study of this department of international polity will tend to the same result as the study of any of its facets: the undermining of those beliefs which have in the past so often led to, and are today so often claimed as the motives likely to lead to, war between civilized peoples.