The CHAIRMAN. They have saved the interest.

Mr. DAVIS. It may be accumulating. I doubt if any Russian Government will ever be recognized by the principal powers of the world unless it assumes those obligations which have apparently been repudiated.

Senator KNOX. Internal as well as external, you mean?

Mr. DAVIS. They would not be so much concerned with the internal. I do not know, Senator, about that.

Senator KNOX. Have they repudiated their internal obligations?
Mr. DAVIS. I am not positive.
Russia has not repudiated

Senator HITCHCOCK. No; I think not.

her internal obligations.

Senator KNOX. It depends altogether on what you call "Russia.' This Bolshevik government has.

Senator HITCHCOCK. I think they made some exception when they made their proclamation, in favor of their internal obligations, certainly during certain periods.

The CHAIRMAN. They have repudiated the exterior debts, have they not?

Mr. DAVIS. They have-especially Trotski-signified their willingness to recognize their obligations.

Senator WILLIAMS. But they do not pay.

Mr. DAVIS. No; they do not pay.

Senator WILLIAMS. They did that when they wanted to negotiate. Senator HITCHCOCK. Have you any idea why it was provided that each of these certificates should be divided into five parts? Why was the number five selected?

Mr. DAVIS. We rather favored, at first, having only one certificate issued to each Government, really a trust certificate showing its ownership in an undivided amount of bonds; but some of the countries, especially France, rather wanted those in smaller denominations. thinking that they might be able to use them, either to offset some other debt or to pledge them at their bank for additional credits, and so we finally agreed that they should have as many as five certificates, but that those should be in such large units that it would avoid any danger of having them get into the hands of the public: because there are two ways of looking at that. In the first place, assume that certificates were endorsed by a responsible government like France or England, who would have the largest units, and then assuming that they might be sold to a syndicate as Senator Moses thought might happen, then if that syndicate should issue debenture, against that certificate, there would not be the danger attached to it, because there would be an additional security back of it, by the endorsement of the French Government, and it would not increase the amount of securities floating in the world, or that would otherwise have been issued, because they would be used to take up some other obligations, or to take the place of obligations which would otherwise have been issued to meet their requirements; and assuming that one of the Governments might be a bankrupt Government, and that it should sell its certificates to speculators, it is rather difficult to conceive it as a fact that investors would purchase debentures issued against an ownership certificate representing bonds which the reparation commission had felt were not safe enough to distribute. can not imagine any intelligent investor purchasing a debenture of that kind.

I

Senator HITCHCOCK. Do I understand you to say that the amount of these bonds represented by these certificates in the aggregate is $15,000,000,000 ?

Mr. DAVIS. Yes; that is the amount of the original

Senator HITCHCOCK. Deposit?

Mr. DAVIS. Deposit, except the additional amount which will be issued to Belgium, which would possibly not exceed $900,000,000 or a billion.

Senator JOHNSON of California. Is it not a fact that Europeans have been fed up upon the idea of a tremendous bill, and that is the reason that the thing is there left indefinite?

Mr. DAVIS. Their people have expected a great deal.

Senator JOHNSON of California. That is the reason you speak of the reason for certain indefinite provisions of the treaty being political? Mr. DAVIS. Well, I hardly know how to answer that, Senator. Senator JOHNSON of California. You used that term several times yesterday.

Mr. DAVIS. Yes.

Senator JOHNSON of California. What did you mean when you used that term "political"?

Mr. DAVIS. I mean that the people in Europe are still shell shocked. Senator JOHNSON of California. I think you can include us, too. Mr. DAVIS. And they have been carrying tremendous burdens, and they have expected to get a certain relief from those burdens, and they were in different ways led to believe that Germany would assume a great portion of those; and they were even led to believe that they would collect from Germany even more than the amount of Germany's bill which will be defined under the categories; and it will take some time, probably, for them to realize how much Germany can pay and how much they really can afford to have Germany pay.

Senator JOHNSON of California. And for that reason, for the reason that you state, the matter was left in indefinite shape?

Mr. DAVIS. That was probably one of the reasons why we could not come to a satisfactory agreement for fixing a definite amount. Senator HARDING. Now, getting back for a moment to the question which I asked you in rather unhappy language: Referring to article 237, in which it is provided that these payments by Germany shall be divided by the allied and associated powers into portions which have been determined upon by them in advance, has there been any determined amount for Russia?

Mr. DAVIS. No; there has not been for anybody yet.

Senator HARDING. What does it mean, then, when it says "have been determined upon"?

Mr. DAVIS. That seems to be a rather unfortunate wording.

Senator BRANDEGEE. It means "which shall have been determined upon," does it not?

Mr. DAVIS. Yes; that is what it does mean, as I recall now. Senator WILLIAMS. It speaks of the date of the ratification of the treaty.

Senator HARDING. That is not clear to me. It says, "which have been determined upon."

Senator MOSES. "Seront repartis" is the French future.

Mr. DAVIS. It means "which shall have been determined upon," but this practically means not to divide it until you do determine what the division shall be and that has not been determined and will have to be determined yet.

The CHAIRMAN. As a matter of fact, it has not been determined. Senator MOSES. We seem to get that from every witness.

Senator JOHNSON of California. How long do you think it will take to determine what each country claims?

Mr. DAVIS. The first claims, tentative claims, of the various Governments I believe have all been filed now, but they are subject to revision. It was estimated that it would probably take two years to agree upon the final amount of the claims of the respective Gov

ernments.

Senator JOHNSON of California. The determination to be made, of

course

Mr. DAVIS. By the Reparation Commission.

Senator JOHNSON of California. Yes; and there is no appeal from their decision?

Mr. DAVIS. No.

Senator JOHNSON of California. They determine just exactly what shall be levied upon Germany in the future, and then levy it? Mr. DAVIS. Well, within those specified categories. Senator JOHNSON of California. Yes; of course.

Mr. DAVIS. And Germany has an opportunity to be heard on that. Senator JOHNSON of California. Yes.

Senator PITTMAN. You stated, in answer to Senator Johnson, that one of the reasons was a so-called political reason. What were the other arguments raised by the other powers against fixing a definite amount?

Mr. DAVIS. Some of them argued that no one could tell now what Germany would be able to pay in 30 years.

Senator PITTMAN. Is that true?

Mr. DAVIS. Oh, yes; that is true. No one can tell exactly what they can pay. It depends on so very many things. It depends upon their labor conditions, upon their markets, upon their industrial efficiency, and upon the financial situation throughout the world, and many other factors.

Senator PITTMAN. If you had fixed an amount it would have had to be an arbitrary amount?

Mr. DAVIS. It would have had to be.

Senator PITTMAN. And well within the powers of Germany to pay! Mr. DAVIS. Within the reasonably estimated powers.

Senator PITTMAN. It would probably have been much less than she could pay?

Mr. DAVIS. Yes; there was some danger of that.

Senator MOSES. Who estimated the American claims that were filed?

Mr. DAVIS. Mr. Vance McCormick represented us on the subcommittee of the reparation commission which had charge of ascertaining the claims of the various Governments under the various categories. Senator JONHSON of California. Does the treaty leave Germany in a position to indulge in any commerce--I do not mean internal ?` Mr. DAVIS. Oh, yes; I think so.

Senator JOHNSON of California. Is there any sufficient number of ships by which she could?

Mr. DAVIS. Germany will not have many ships. She will be practically in the same position that the United States was in before the war; she will have to hire her ships, unless the allied and associated powers decide that it is advisable to let her retain enough of her ships to meet her own requirements until she can build others to replace them.

Senator JOHNSON of California. Has not the reparation commission control over her commerce?

Mr. DAVIS. For the first three years they have control over her shipbuilding output, up to a certain amount.

Senator JOHNSON of California. They have substantial control over her industrial life and her commerce, too, have they not?

Mr. DAVIS. They will have considerable control for the first two years. After that I think that we will have no control whatever to speak of, provided Germany is in good faith endeavoring to comply with her obligations, except that others will have a call on a certain amount of Germany's coal.

Senator JOHNSON of California. France alone?

Mr. DAVIS. Well, that principally goes to France.

Senator JOHNSON of California. Does it not go to Belgium largely also?

Mr. DAVIS. A very small quantity of it. Mostly it goes to France, I think. I was not on the economic commission, but that is substantially correct.

Senator JOHNSON of California. I do not want to trouble you about those things that you are not thoroughly familiar with.

Senator MOSES. Annex III, page 277, reads as follows:

The German Government, on behalf of themselves and so as to bind all other persons interested, cede to the allied and associated Governments the property in all the German merchant ships which are of 1,600 tons gross and upward.

Mr. DAVIS. I say they do. But it is possible that the allied and associated powers will determine that it is advisable to let Germany retain, under some kind of conditions, say one-third of her mercantile marine to meet her requirements.

Senator MOSES. Do you regard that question as likely to arise? Mr. DAVIS. I say that while under this Annex III, paragraph 1, the allied and associated powers take over all the German ships with the exception of those under 1,600 tons, after that Germany will either have to go into court and charter ships, as the United States did before the war, or the allied and associated powers may decide that it is good business, as I think it will be myself, to let Germany retain, say, one-third of those ships or those contracts to meet their requirements.

Senator MOSES. That involves a modification of the treaty, does it not?

Mr. Davis. Not necessarily; it does not involve a modification of the treaty.

Senator JOHNSON of California. In respect to shipping, does it not? Mr. DAVIS. No, sir; the allied and associated powers can take those ships over and then recharter them to Germany on such a basis that Germany could run them with her own crews and pay in

her own currency.

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Senator JOHNSON of California. I do not mean that; but I thought you said the reparation commission could permit her to have a certain number of ships.

Mr. DAVIS. If I did, that was a mistake.

Senator JOHNSON of California. I probably misunderstood you. Senator HITCHCOCK. Mr. Davis, what factors were taken into account in estimating Germany's ability to pay? Can you give them briefly?

Mr. Davis. The first definite thing we had to go on is what Germany could have paid before the war when she had all of her capital intact. Assuming that she maintained the same efficiency and the same industrial output as before the war, Germany could pay at least $500,000,000 a year; and by cutting off her navy and army I figure that she could have increased that probably by $400,000,000 or $500,000,000 a year, assuming that she could have found a market. for her excess output. But Germany has been deprived, or has spent a great deal of her foreign investments-disposed of them-and she will not have that income of $500,000,000 a year from her mercantile marine and her investments abroad. That will be considerably reduced.

Senator HITCHCOCK. Did you, for instance, take into account the ability of her national government to levy taxes? Is there a limit to that, which was ascertained in any way?

Mr. DAVIS. No; because that really has very little relation to her capacity to pay in foreign currency.

Senator HITCHCOCK. Was any attempt made as to the amount of taxation the national government would be compelled to levy?

Mr. DAVIS. Germany paid her war expenses practically from the flotation of loans, instead of from taxation. They increased their taxes practically nothing during the war.

Senator HITCHCOCK. And issued additional currency?

Mr. DAVIS. Issued additional currency and bonds; and in order now to cover the interest and sinking fund on those bonds and to meet their increased expenditure, Germany will undoubtedly be compelled to increase her taxation very greatly, and probably it will reach 75 per cent of what the taxes are in France to-day, at least that much. and probably 100 per cent of the taxes in France, and I think it will probably be more, assuming that she does not levy a capital tax. which she is proposing to do.

Senator HITCHCOCK. I have seen the statement that Germany's national taxation would have to be approximately six times as much as it was prior to the war.

Mr. DAVIS. Yes, I think it will; but it was only about 9 per centit was very small in proportion to her requirements during the war. Senator HITCHCOCK. Is it expected that Germany will make an effort to keep up the interest on her domestic bonds?

Mr. DAVIS. Yes.

Senator HITCHCOCK. It is expected that she will do that?

Mr. DAVIS. There is one school in Germany which seems to favor levying a capital tax of 30 per cent right away.

Senator HITCHCOCK. All payable in one year?

Mr. DAVIS. Yes, payable in rather short installments.

Senator KNOX. That would be payable in their securities.

Mr. DAVIS. Yes, that just simply reduces their internal obligation.