The Economic Consequences of the Peace

average much more than five times their former level, so far as staple commodities are concerned; and it is impossible that they should rise further except with a simultaneous and not less violent adjustment of the level of money wages. The existing maladjustment hinders in two ways (apart from other obstacles) that revival of the import trade which is the essential preliminary of the economic reconstruction of the country. In the first place, imported commodities are beyond the purchasing power of the great mass of the population,148 and the flood of imports which might have been expected to succeed the raising of the blockade was not in fact commercially possible.149 In the second place, it is a hazardous enterprise for a merchant or a manufacturer to purchase with a foreign credit material for which, when he has imported it or manufactured it, he will receive mark currency of a quite uncertain and possibly unrealizable value. This latter obstacle to the revival of trade is one which easily escapes notice and deserves a little attention. It is impossible at the present time to say what the mark will be worth in terms of foreign currency three or six months or a year hence, and the exchange market can quote no reliable figure. It may be the case, therefore, that a German merchant, careful of his future credit and reputation, who is actually offered a short period credit in terms of sterling or dollars, may be reluctant and doubtful whether to accept it. He will owe sterling or dollars, but he will sell his product for marks, and his power, when the time comes, to turn these marks into the currency in which he has to repay his debt is entirely problematic. Business loses its genuine character and becomes no better than a speculation in the exchanges, the fluctuations in which entirely obliterate the normal profits of commerce.

There are therefore three separate obstacles to the revival of trade: a maladjustment between internal prices and international prices, a lack of individual credit abroad wherewith to buy the raw materials needed to secure the working capital and to restart the circle of exchange, and a disordered currency system which renders credit operations hazardous or impossible quite apart from the ordinary risks of commerce.

The note circulation of France is more than six times its prewar level. The exchange value of the franc in terms of gold is a little less than two-thirds its former value; that is to say, the value of the franc has not fallen in proportion to the increased volume of the currency.150 This apparently superior situation of France is due to the fact that until recently a very great part of her imports have not been paid for, but have been covered by loans from the Governments of Great Britain and the United States. This has allowed a want of equilibrium between exports and imports to be established, which is becoming a very serious factor, now that the outside assistance is being gradually discontinued. The internal economy of France and its price level in relation to the note circulation and the foreign exchanges is at present based on an excess of imports over exports which cannot possibly continue. Yet it is difficult to see how the position can be readjusted except by a lowering of the standard of consumption in France, which, even if it is only temporary, will provoke a great deal of discontent.151

The situation of Italy is not very different. There the note circulation is five or six times its prewar level, and the exchange value of the lira in terms of gold about half its former value. Thus the adjustment of the exchange to the volume of the note circulation has proceeded further in Italy than in France. On the other hand, Italy’s “invisible” receipts, from emigrant remittances and the expenditure of tourists, have been very injuriously affected; the disruption of Austria has deprived her of an important market; and her peculiar dependence on foreign shipping and on imported raw materials of every kind has laid her open to special injury from the increase of world prices. For all these reasons her position is grave, and her excess of imports as serious a symptom as in the case of France.152

The existing inflation and the maladjustment of international trade are aggravated, both in France and in Italy, by the unfortunate budgetary position of the Governments of these countries.

In France the failure to impose taxation is notorious. Before the war the aggregate French and British budgets, and also the average taxation per head, were about equal; but in France no substantial effort has been made to cover the increased expenditure. “Taxes increased in Great Britain during the war,” it has been estimated, “from 95 francs per head to 265 francs, whereas the increase in France was only from 90 to 103 francs.” The taxation voted in France for the financial year ending June 30, 1919, was less than half the estimated normal postbellum expenditure. The normal budget for the future cannot be put below $4,400,000,000 (22 milliard francs), and may exceed this figure; but even for the fiscal year 1919⁠–⁠20 the estimated receipts from taxation do not cover much more than half this amount. The French Ministry of Finance have no plan or policy whatever for meeting this prodigious deficit, except the expectation of receipts from Germany on a scale which the French officials themselves know to be baseless. In the meantime they are helped by sales of war material and surplus American stocks and do not scruple, even in the latter half of 1919, to meet the deficit by the yet further expansion of the note issue of the Bank of France.153

The budgetary position of Italy is perhaps a little superior to that of France. Italian finance throughout the war was more enterprising than the French, and far greater efforts were