Germany's Ability to Finance the War

I

IT will at once be evident that the beginning of the war, its continuance, and its successful conclusion, involve by no means identical financial measures. The British Chancellor of the Exchequer has laid emphasis on the fact that the financial arrangements necessary to begin a war are relatively simple in nature and limited in character, and differ so fundamentally from those necessary to prosecute a long and exhausting war that he confidently expects Germany and Austria to fail, from their inability to provide the last hundred millions of ‘cash.'

German statesmen no doubt marvel at the public enunciation of such ancient economic fallacies by a chancellor of the exchequer, and feel surer than ever that the statesmen of their enemies are in their dotage. They deny that financial operations, in the ordinary sense of the woid, have any necessary relation to the outbreak of war, to the possibility of its indefinite continuance, or to its eventual prosecution to a successful issue. Indeed, if a German financier were asked the everyday question, where the money to fight a long and desperate war could possibly be found, he would look at his questioner with incredulity, amazed beyond words that so decrepit and antiquated an economic fallacy could actually come from the lips of one who spoke the mother-tongue of John Stuart Mill. Patiently he would reply that he was not aware that money, in the ordinary sense of the word, had any really essential relation to military campaigns. The calculations and arrangements usually connoted by the words ‘financing the war ’ are to modern Germans the product of habit rather than of reason or observation. The Germans have not only studied the premises of political economy; they have sufficient faith in their essential correctness to put them into practice.

Money, a German financier might explain, is not in itself value at all. The specie, on which technically the ordinary credit devices are supposed to be based, has, it is true, certain value as bullion, but as money it merely furnishes a convenient medium by means of which the comparative value of actual commodities at any given time can be expressed. Money is convenient and even necessary for the individual who wishes to dispose of his commodity without the necessity of actually hunting up another individual who has for exchange the commodity he wishes to obtain; but for the state it is no more necessary than ten-dollar bills are necessary to a man seated at the table with his dinner before him. What he wants is not money, but a knife and fork. Then, in the hope that so homely an illustration had made his meaning clear, the financier would conclude: wars are not fought with money, but with commodities and with men. In any proper sense of the word, therefore, the financing of the war connotes the measures by which the army can be put into the field, and sustained and reinforced by the nation at home while it is winning the campaign. Other arrangements are matters of convenience, not of necessity, and to this latter category belong all those that are commonly called in time of war financial measures.

To the German the significant questions are these: How can the resources of the nation most quickly and adequately be brought into actual use? How can they most easily and adequately be developed to produce the necessities of war? How can the economic life of the community be most easily and advantageously adjusted to the crisis so that it may bear as lightly as possible on the individual, and interfere as little as possible with ordinary business for profit? What measures will produce the best effect on public opinion in Germany and best sustain the morale of the people?

These are questions of expediency which really contain only two alternatives for the financier: can results be more easily and rapidly obtained by indirect or by direct action? Indirect action depends upon the use of money in the ordinary sense, and must fail without it; direct action requires neither money nor financial expedients.

The commonplaces of economic theory will make clear to any one that money is necessary as a nexus between producer and consumer chiefly because they are ignorant of each other’s location; because either one may not care to accept in exchange for his own commodity what the other is able to supply; or because they have not equal amounts in value to offer. No one sells in order to get money for its own sake. A man is anxious to turn his goods into money because he can easily exchange his money for the exact quantities of as many other commodities as he desires. Money is not a necessary factor in the exchange of a dozen eggs for a pound of butter; the entire operation has been successfully performed times beyond number by exchanging the commodities; but money is the only method, available for the ordinary individual, of turning eggs into an automobile. The feat might be performed without money, but it would involve so much trouble that it would surely be abandoned before completion.

From the enormous size of the modern economic structure — where the farmer in New Zealand depends upon having his mutton eaten in London, and the natives in the South Seas are clad in cotton cloth made in Lancashire — results an ignorance of the whereabouts of the customer so dense and so impenetrable that the individual to-day has absolutely no agency except money by means of which to effect the exchange necessary to satisfy the simplest needs of daily life. The complexity of the division of labor, the interrelation and interdependence of the various parts of the world, have accentuated this difficulty. The result is that all modern industry, and the present system of distribution, have been consciously organized upon the presupposition of the use of money, and therefore cease to operate at all when money is not available.

The real reason for the collapse of business is, however, that the individual possesses literally no facilities whatever for replacing the use of money as a method of locating those who wish to buy what he has to sell, or who wish to sell what he is anxious to buy. The difficulty of providing a substitute, not the inherent virtues or qualities of money itself, is the real measure of its necessity to the community. It stands for a method of conveying information about demand and supply, and the information is the indispensable thing, both to the individual and to the community.

II

Great sums of ready money have invariably been needed in Anglo-Saxon countries in order to begin a war, because those countries have invariably been caught unprepared. The government has lacked not only the necessary materials, but the knowledge of their whereabouts, and has had to find them by ordinary business methods, which meant buying them in the open market with money. England and the United States have always obtained in the same way the supplies and munitions needed to prosecute war, and have always found an abundant supply of stable currency the indispensable nexus between the government and its citizens by whom the commodities were produced. Of course, it has always been possible to requisition commodities, but such a method involved serious risks of undermining public confidence when applied to anything beyond the horses and carts which the community must continue to use till war had become a reality.

If money is indispensable, — and experience tells English and American financiers that it has always been to their statesmen the most difficult problem in times of war,— if England and France control the world’s financial structure and possess the lion’s share of its specie, is it not clear that Germany and Austria cannot finance the war at all, and therefore must eventually be beaten?

The German points out at once that these suppositions are really based upon the position and experience of individuals, and assume that the government will voluntarily accept the disadvantages which the outbreak of the war will place in the way of the use of money by individuals, and will allow its own necessities to wait upon the slow readjustment of the business world to the situation. The hastening of this readjustment, insist the Germans, is what the English and Americans have always called financing the war.

Money, however, is for a nation at war an expedient infinitely clumsy and haphazard when compared with the means placed at the disposal of the modern government by modern improvements in communication. Only for nations incapable of establishing promptly and accurately the location of the supplies which the government needs, is money of the slightest importance. Thorough, careful inquiry into the sources of supply, foresight in the organization of the national industrial fabric, skill in administering it and in securing intelligent coöperation, should furnish to a nation a direct method of conducting a war as much more efficient than money as the money-economy itself was more efficient than the crude barter in the market-place which preceded it. Apparently Germany is the only nation thoroughly to appreciate the significance of these postulates of political economy, and to realize their important bearing upon the vexed question of financing the war.

The true financing of Pan-Germanism for the actual conflict, therefore, was to German statesmen the adequate and efficient organization of industry. First and foremost they must be ready to put an army in the field and maintain it there. In the next place they must support the nation at home and prevent unnecessary suffering. They must provide some method of disposing of the products of domestic industry at home, and be prepared during the war to promote normal business for profit as against manufacturing for mere subsistence. This would involve, of course, the distribution of German products at home and abroad, and the purchase abroad of necessities which they could not make in Germany. These, they saw, were all the preparations necessary to begin the war, continue it, win it, and win it without paying too great a price for it.

Without doubt, such an organization of industry, of transportation, of methods of exchange, of banks and stock exchanges, would be an infinitely more elaborate attempt than had ever been made in history; and if it was to be sufficiently perfect to render the government— both at the outbreak of the war and during its continuance — independent of the ordinary currency troubles and financial readjustments which had invariably made the actions of Anglo-Saxon countries slow in time of war, it would have to be begun long before the war was in sight, and organized as carefully and as thoroughly, with as large a staff of assistants and experts, as the preparation of the army itself demanded. In fact, there must be two armies, one in the field doing the fighting, one at home doing the work, both of them coöperating under the direction of an intelligent and far-seeing administrator.

The great difficulty in beginning wars in the past, and the chief suffering experienced by the great bulk of the community, had been due, as the study of history proved to the German statesmen, entirely to the financial crisis and to the dislocation of industry consequent upon the calling of the army into the field and the removal of so many men from the factories and counting-houses. It was all absolutely needless suffering. They saw no reason whatever to doubt that intelligent prevision could successfully cope with every immediate result of the outbreak of war, and entirely obviate the usual effects upon the community at home.

Under the system of conscription employed in Germany, every man liable to military service, in every class of the service, was definitely known; his location, his employment, the size of his family, his private resources, were all elaborately catalogued. It was merely a matter of clerical work — and that was merely a question of time and patience — to establish with absolute precision the effect upon industry of calling to the colors any class of men liable to service. Why be so foolish as to wait until the actual crisis?

For the most part, too, the collection of statistics necessary to indicate the men liable to conscription had also furnished practically complete information about the very much larger number of men unfit for service or too young or too old to send into the field. Inquiry would show the number of women in industry, and the number of women unmarried and unemployed who would be available in a time of crisis. The completion of the compilation would promptly show the extent of the loss of hands in any industry, and a further simple calculation would show where the men were who were to take their places.

Nor could there be any uncertainty as to the industries sure to be closed down by the outbreak of war, those likely to stop, those likely to continue, and those which it was imperative should continue. The number of available workingmen, after the army had gone into the field, could be known as definitely in advance as the personnel of the men in the army; and if the War Department could provide beforehand for the location and equipment of every private in the German army, and draw up beforehand detailed orders telling him what to do and where to go when the mobilization was declared, entraining him at a certain point, detraining him at another point with food and munitions of war, it was an equally simple thing to provide beforehand for filling the gaps in the factories occasioned by the mobilization, and for shifting the labor from the industries least essential to those more essential.

Surely the waste of effort expended at the beginning of most wars by the attempts of many manufacturers to keep open until forced to close, might well be saved, and the extraordinary pressure which the war would bring to bear on some industries could just as well be provided for in advance.

It was similarly easy to catalogue the natural resources of the country, to establish what the country could make, what it could not, and what raw materials it did not produce of which large supplies would be required to prosecute the war. German firms could be created to make the things Germany would have to have in big quantities in time of emergency, and the development of industries which were not necessary could be prevented from becoming too extensive. Time, patience, an unlimited amount of clerical work, miles of records and statistics, compilations without end, — the correctness of all of which must constantly be verified,—a perfectly possible task, but one truly colossal! Indeed, to the observer there is something more extraordinary about this cataloguing and arranging of nearly seventy millions of people, and the attempt consciously to direct the activity of every soul toward a single purpose and a single end, than in all the boasted achievements of German science or in the elaborate arrangements for the army.

First and foremost, the statesmen must act with a full consciousness of the fact that the war would be fought with guns and powder, by human beings who would eat and would demand clothing, and not by automatons fed upon money. Especially must they remember that the munitions of war, which would be increasingly necessary as the conflict continued, were highly complex products of highly specialized machinery, operated by specially trained workmen. Factories would have to be created in time of peace, — factories sufficient in number, adequate in equipment and in personnel, to turn out with regularity in time of war a constant supply of munitions of war, sufficient in volume to meet not only the demands already estimated, but as large a demand as unforeseen factors might make imperative. The factories must be created and maintained in time of peace, not on a peace basis, but on a war basis. Their equipment and the number of hands must be sufficient at any time to begin manufacturing for an army in the field.

Here is the very simple basis of the so-called armament scandals of which the peace advocates have made so much capital. The armament firms, created and subsidized by the government, have insisted that if they were to continue operations they must have enough work to keep them from bankruptcy until such time as the war should arise. They have also very correctly represented,—and have found little opposition to their claim in Berlin,

— that to train their men sufficiently well to operate their factories on a war basis would require a constant manufacture of munitions actually needed in war. Men skilled in producing a certain commodity dependent for its manufacture upon a high grade of manual dexterity and a nicety of adjustment, must obtain their training in actual work.

Not less necessary would be an adequate supply of food. The Department of Agriculture has been so successful that there can be little doubt that the productivity of land in Germany is proportionately greater for the labor and capital invested than in any other country in the world, and so far-reaching have been its operations that the imperial government claims that over ninety per cent of the land in Germany is productive. The definiteness with which the Germans have catalogued the land, located the areas on which grain can be grown, and computed the maximum product from those varied areas, equals the exactitude with which they have tabulated the facts about the army. We should, indeed, be guilty of stupidity, if we supposed that the men directing the destinies of Germany had omitted from their elaborate calculations provision for so elemental a necessity as an entirely adequate supply of food. They knew on the first day of August precisely how much food they had on hand, and precisely where the new supplies were coming from. Not improbably they could have furnished a list of the men and women who would sow and reap the future harvests.

A third factor would be necessary: occupation for those who neither went to the front nor were utilized in the industries and pursuits directly bearing upon the prosecution of the war. German industries must be developed so that the things upon which Germans depended for comfort could be supplied in Germany. They would have no repetition of the situation which obtained during the Napoleonic wars, when Germany insisted upon buying English sugar, English tobacco, and English cloth, in the face of the fact that this benefited their enemies. No doubt the beet-sugar industry has been a valuable and important factor in German agriculture, and we need not assume that it was begun with a war in view to see that its development solved one of the important questions which the war would create. It was only necessary for the government to fill the gaps left by the determined movement to make Germany self-sufficing, in order to put German industry upon a war basis in time of peace.

These were the real measures necessary for the financing of the war. Upon their success or failure the continuance and outcome of the war would surely depend. They were in the highest sense financial operations of magnitude, but their success would depend not upon money but upon capital. Years of effort in time of peace would be the effective prerequisite to the completion of such financial operations. The past poverty of Germany had not permitted her to accumulate a sufficient amount of capital for a development of such magnitude, and the war indemnity paid by France was barely enough to begin the process. The capital had to be borrowed from her enemies, from England and from France, the only nations who had it to spare. The financial operations by which this capital was borrowed year after year in London and in Paris by German companies and German individuals were in the truest sense the operations by which the war was financed. Their success is a byword of modern business circles.

III

When the actual moment came, nothing would need to be done beyond the execution of the plans already prepared. The army would, of course, go to the front. The positions vacated by whatever number of men should go would immediately be filled by an imperial employment bureau which would centralize the efforts and information of the local bureaus already established.

The shifting of labor to the war industries and to agriculture, and to the industries already selected for the employment of hands not otherwise provided for, was executed with the utmost success, without confusion and without delay. Practically no commercial crisis of any sort took place in Germany, and the number of the unemployed is officially stated to be under six per cent. Indeed, if anything, there are fewer men out of work than usual. The imperial government, also, has undertaken to provide for the families of the men at the front, and to furnish subsistence for the women left with a family and no income during the war.

The Imperial Bureau of Supplies promptly began the control, preservation, and apportionment of the supplies on hand, which have thus far proved entirely adequate, and are likely to remain so. This bureau had unquestionably begun its operations as soon as the decision to fight was taken, which was clearly some weeks before the declaration of war, and it was able therefore to accumulate great quantities of those commodities whose supply would in any way be likely to be deficient. Everything had been foreseen, and here again the prevision was proved accurate and the arrangements admirable.

A part of this bureau’s task was the regulation of prices. If the postulates of political economy mean anything, price is merely the exchange value of all commodities expressed in terms of money; and, unless there appears a serious deficiency in the supply, or an unusual increase in the demand, so that the two fail to offset each other, prices ought to remain the same. Unless, therefore, the war interfered with the supply or changed the demand, there was no reason at all why prices should change; and inasmuch as the average citizen looks upon prices as the real indication of prosperity, the government knew perfectly well that the maintenance of the same level of prices after the war began would have a beneficial effect of the utmost importance upon public opinion. Having provided already, therefore, for the maintenance of the supply, they had no intention of allowing individual greed to create war prices. Here again their dispositions have been completely successful. In all large centres in Germany the supply of necessities is adequate, and the prices practically identical with those before the war.

The problem of marketing the German produce which the war itself does not use, in exchange for the things which Germany cannot arrange to make and which are, nevertheless, important, has offered a greater problem. Should the war continue any length of time, the prosperity of Germany, the extent to which the burden of the war could be shifted to other shoulders, would obviously depend upon the extent to which Germany could produce more than she consumed, and upon the ability of German merchants to sell this surplus at a profit, German statesmen have studied the history of the past with great care, and particularly the history of the Napoleonic wars. The most striking feature in the economic history of that period was the persistent and lucrative trade between the belligerents. After England and France had blockaded on paper the whole of Europe, they proceeded to issue thousands upon thousands of licenses to break the blockade, and English goods, particularly English colonial goods, commanded high prices throughout the Continent and afforded the English large profits. The cause of this trade was clearly the inability of the Continent to procure these goods elsewhere.

The Germans now see clearly that Russia could very easily be isolated commercially from every part of the world except Germany and Austria, by the simple expedient of closing the Baltic and the Black seas. The mere existence of the German fleet would close the one; the Turkish government at Constantinople could easily close the other. Russia would then have no outlet for her agricultural produce, and would be unable to buy English and French goods at all. She would face commercial ruin, and the Germans calculate that before very long a brisk trade will be established between Germany, Austria, and Russia, in which Germany will be able to market her surplus of manufactured goods at war prices, in exchange for meat and grain which may conceivably be very essential for her. Thus, the war itself may solve the last problem of German finance.

IV

In all this, money played no part. Money, Germans felt, — and their experience has thus far proved the correctness of their understanding of the postulates of political economy,—was needed only as an exchange medium in domestic and foreign trade. Here, as usual, the amount of currency or specie needed would be inconsiderable. All really large transactions could be easily accomplished by mere bookkeeping through the centralized chain of German banks. Money would be needed, in the ordinary sense, not to begin or to prosecute the war, but to prepare for it.

The amount of supplies which they felt they must have on hand at the outbreak of the war was so enormous that to collect it by any direct method such as they proposed to employ after the war had begun, would simply be an open confession of their intention to fight, which would warn their enemies, unnecessarily, months before the time. They knew also from the experience of Agadir that any such sum of money as they would need could not be borrowed in London or Paris at all. They therefore devised, possibly with no idea that it would be so soon needed, the recent war levy, a direct tax upon property of all sorts, amounting to two hundred and fifty million dollars, which they explained was necessary to render the armies efficient. This was entirely true. With it they purchased, in Germany and abroad, every conceivable sort of supplies necessary to put the nation in a position to make war. When the moment came they would need the actual commodities, and not the money; and at that, moment they would need to be thinking in the War Office about everything except ‘finance.’ Moreover, as the government already owned the railroads, the telegraph, and everything the army could use, the transportation of the army and its supplies to the front involved the sending of a few orders, and not the expenditure of money at all. The government, as a matter of fact, was particularly anxious to keep specie out of the people’s hands, to prevent them from hoarding it.

Money in time of war, as at any other time, therefore, the Germans concluded, meant currency; and currency meant some medium of exchange which would be accepted by the people at face value. So long as the public confidence in the government was unshaken, and ultimate success was believed certain, a paper currency would serve the purpose much better than specie. The banking system, to be sure, collected gold as assiduously as it could during the months preceding the war, and is supposed to have vastly increased the German gold reserve, which was to give stability to the paper currency and furnish a firm basis for such international exchange as they might eventually find necessary. The central banking system, however, long since highly organized, and accustomed to accept as security a great variety of credit values, could absolutely control all exchange, could accept as collateral for loans whatever the individual had to offer and issue him paper credits. There would be plenty of real value because there would be plenty of work; the government would see to that.

The banks would make loans to the manufacturer and establish a checking account on which they would pay him paper, which he in turn would pay his employees, who would pay it out for commodities. The dealers would pay it back into the banks, where the whole transaction would, as usual, be canceled. With adequate supervision the system ought to work as usual, and so long as there is work, should guarantee Germany absolutely from panic or suffering.

The real root of economic crises seems to have been a lack of foresight, where ignorance allowed individuals to compete with each other, and gave some of them a chance to take advantage of others’ necessities. Most crises have been due far more to a lack of intelligence than to a real deficiency of means in the community. The new bond issue is not concerned with the financing of the war at all, but with the necessary readjustments after the war is over.

The war might, conceivably, if all the economic premises of Pan-Germanism proved themselves true, give Germans some rather considerable financial advantages, which would go far toward lightening the burden of the generation now alive, and toward shifting the ‘cost’ of the war to some extent to the shoulders of their enemies. Of course the war would promptly suspend all ordinary facilities for the payment of the interest on German loans abroad, or of the dividends on German stocks due to foreigners. Unless the financial world is very wrong indeed, the German liabilities to foreign nations enormously exceed the payments due from foreign nations to them. The difference between what they owe and what is owed them, the war will present to German citizens, and this will be literally, for the time being, clear gain. Just so much more of the German gross income would be available for use in Germany, and it could hardly fail to be a very large sum; just so much of the produce raised by Germans, with which these debts would normally have been paid, would be available for German consumption.

So much the community might consume, and be exactly where it would have been ‘financially’ if the war had never broken out at all; by so much would the war instantly impoverish Germany’s enemies, by whom these commodities would normally have been consumed. These financial handicaps could be increased very easily by the levy of contributions and ransoms from the hostile territory occupied by the German armies. Every bushel of wheat which could be diverted from French stomachs into German ones would mean so much financial gain for Germany.

Gold, when it could be got, has been seized consistently, in the hope of embarrassing domestic exchange in Belgium and France, where gold has been almost as habitually used in ordinary life as in England. Germany had so long been accustomed to paper currency that the issue at the outbreak of the war of the flood of new notes was accepted almost as a matter of course by the community. Paper currency, without elaborate provision for redemption in specie, will not be so acceptable in France and Belgium. It is therefore good finance to demand the payment of ransoms in gold. All these, however, are the mere incidentals of the correct financing of the war, as understood by German statesmen.

As observers, we are not yet in a position to pass upon the ultimate validity of these measures. We can only point out that they seem to conform accurately to the experience of history, and to be nothing more than the literal application of the simple postulates of political economy. So far as we can tell, if private letters are any evidence of what conditions in Germany at present are, every indication points toward the overwhelming success of German finance, and gives us slight reason to suppose that the predictions of the English Chancellor of the Exchequer will be fulfilled. If Germany and Austria are beaten it will not be for lack of ‘cash.’