3.  As soon as the Reparation Commission is satisfied that Germany can do better than this, 5 per cent bearer bonds are to be issued for a further $10,000,000,000, the rate of amortization being determined by the Commission hereafter.  This would bring the annual payment to $1,400,000,000 without allowing anything for the discharge of the capital of the last $10,000,000,000.

4.  Germany’s liability, however, is not limited to $25,000,000,000, and the Reparation Commission is to demand further instalments of bearer bonds until the total enemy liability under Annex I. has been provided for.  On the basis of my estimate of $40,000,000,000 for the total liability, which is more likely to be criticized as being too low than as being too high, the amount of this balance will be $15,000,000,000.  Assuming interest at 5 per cent, this will raise the annual payment to $2,150,000,000 without allowance for amortization.

5.  But even this is not all.  There is a further provision of devastating significance.  Bonds representing payments in excess of $15,000,000,000 are not to be issued until the Commission is satisfied that Germany can meet the interest on them.  But this does not mean that interest is remitted in the meantime.  As from May 1, 1921, interest is to be debited to Germany on such part of her outstanding debt as has not been covered by payment in cash or kind or by the issue of bonds as above,[114] and “the rate of interest shall be 5 per cent unless the Commission shall determine at some future time that circumstances justify a variation of this rate.”  That is to say, the capital sum of indebtedness is rolling up all the time at compound interest.  The effect of this provision towards increasing the burden is, on the assumption that Germany cannot pay very large sums at first, enormous.  At 5 per cent compound interest a capital sum doubles itself in fifteen years.  On the assumption that Germany cannot pay more than $750,000,000 annually until 1936 (i.e. 5 per cent interest on $15,000,000,000) the $25,000,000,000 on which interest is deferred will have risen to $50,000,000,000, carrying an annual interest charge of $2,500,000,000.  That is to say, even if Germany pays $750,000,000 annually up to 1936, she will nevertheless owe us at that date more than half as much again as she does now ($65,000,000,000 as compared with $40,000,000,000).  From 1936 onwards she will have to pay to us $3,250,000,000 annually in order to keep pace with the interest alone.  At the end of any year in which she pays less than this sum she will owe more than she did at the beginning of it.  And if she is to discharge the capital sum in thirty years from 1930, i.e. in forty-eight years from the Armistice, she must pay an additional $650,000,000 annually, making $3,900,000,000 in all.[115]

It is, in my judgment, as certain as anything can be, for reasons which I will elaborate in a moment, that Germany cannot pay anything approaching this sum.  Until the Treaty is altered, therefore, Germany has in effect engaged herself to hand over to the Allies the whole of her surplus production in perpetuity.