THE New Zealand Herald AND DAILY SOUTHERN CROSS. SATURDAY, FEBRUARY 18, 1922. GERMAN REPARATION.

New Zealand Herald, Volume LIX, Issue 18019, 18 February 1922, Page 8

THE New Zealand Herald AND DAILY SOUTHERN CROSS. SATURDAY, FEBRUARY 18, 1922. GERMAN REPARATION.

♦ The majority which the German Government has secured in the most critical Parliamentary test it has yet faced will bo a source of satisfaction to Allied countries, not because the Wirth Cabinet is by any means ideal, but because there is no alternative in sight that would not be worse. The present Government of Germany is weak, and in many respects inefficient, but it is the only one that has made an effort to be frank with the Allies, and in dealing with obstructive debtors it is better to negotiate with those who mean well rather than with those who are equally unbusinesslike but have no intention of paying. There is a more particular reason why the survival of the Wirth Government suits Allied policy. When Germany met the demand for the January reparation payments with a plea of poverty the Allies granted her a provisional moratorium on condition that financial reforms were instituted. The Wirth Government accepted this condition, and it may be said broadly that all hope of obtaining reparation from Germany according to time-table depends upon the enforcement of the reforms to which the present Government has pledged itself. Stated in its simplest terms, the issue is whether the wealth of Germany shall be taxed. The German Government is poor—even the French admit that—but it is poor because it has lacked the courago to take the wealth that lies to its hand. Taxation in defeated Germany is lower than in victorious Britain. The country can find plenty of money for railway construction, for shipbuilding on a large scale, for extending industries and enlarging factories of all kinds and for the purchase of materials abroad. There is no lack of new capital for investment and the dividends being earned by Herr Stinnes and other multimillionaires are not small. The only purpose for which Germany appears to be unable to find money is for the payment of her external debts.

The central defect in the German financial policy, from the Allied point of view, is the ceaseless inflation. It should be remembered, when apportioning the blame for this, that it is not now. It is necessary to go back to the pre-war period to get to the root of the evil from which German finances are now suffering. The German navy was built partly out of loan money, war expenditure was almost wholly financed by loans and credit expansion, the idea fixed in the mind of every German statesman being that the cost would be passed on to the vanquished. If Germany did not pay her way before tho war it is not surprising that since the armistice successive Governments have shirked the task of imposing the very heavy taxation required to place Germany in a position of financial stability. In point of fact, taxation has been extraordinarily light, and the yield has been seriously diminished by the railway subsidy and the bread subsidy, both of which are practically rebates, as they keep the cost of living artificially low and so permit German manufacturers to under-cut their rivals. This system of finance leads inevitably to deficits—there have even been adverse balances in the ordinary budgets without making any allowance for reparation. The floating debt has steadily increased and the issue of paper money has proceeded without interruption. Since 1918 the note circulation of the Bank of Germany has shown a five-fold increase, the floating debt has been doubled, and tho mark has been reduced to a fraction of its original value. There has been another significant phenomenon. Germans who realise the meaning of inflation have been careful to convert their holdings of constantly depreciating paper money into real property or to transfer their wealth to foreign countries having a sound currency. This " fleeing the mark " has resulted in enormous quantities'of German gold going abroad. In Holland German capitalists are said to command half the available credits in the money market, and the total foreign investments amount to some 90 milliards of marks, while the Reichsbank still retains a considerable amount of gold in its coffers. It is an essential part of the reforms imposed by the Allies that the German Government should secure the return of this exported capital and make it bear its share of taxation.

It is an interesting speculation where this policy of inflation will land Germany. It has already been carried so far as to amount virtually to repudiation. The depreciation of the mark means that Germany is repaying farthings for the shillings she borrowed. From the point of view of her creditors in marks—who are practically all Germans—this has been disastrous, but one effect has been that Germany has achieved a more drastic reduction of her real debt than any other country. Expressed in sterling the German national debt now stands at only £400,000,000; that is to say, the burden of her debt in terms of commodities and services is lighter than that of any other important European country. It is obvious that in taking this course Germany is running a serious risk, but she is accepting it with her eyes open. Everything depends upon her ability to effect a transition from | inflation to a balanced budget and sound currency, The insistence of the Allies upon reform forces that transition upon her. The immediate effect will undoubtedy be a check to Germany's artificial 'prosperity ; what the ultimate effect may be is a matter upon which opinions differ very widely. There is, however, a reasonable prospect that if a Government can be found courageous enough and strong enough to tax the real wealth of Germany reparation payments will be met. Whether it will suit the Allies, particularly Britain, to accept them in exactly the form now prescribed is another very intricato question.