To tell the truth, a section of Allied opinion has become befuddled by these formulæ of Berlin, whose function is to accomplish in the moral order the same asphyxiating action as that of the gases employed on the battlefield by the German General Staff. The result of this moral intoxication is that important groups of the Allies begin to juggle with words and lose sight of facts. As the natural outcome of giving serious thought to impossibilities, grave errors are made in weighing the present situation, with an attendant weakening of the joint action of the Allied democracies. It is imperative, therefore, that the pursuit of Utopias, leading only to disaster, be abandoned, and that we return to those realities which alone can lead to victory and the establishment of a durable peace. If the formula ‘peace without annexations and indemnities’ has been allowed to insinuate itself into the general discussion, it is only because great numbers of the Allied peoples fail to understand the overwhelming advantages which Germany, by means of the war, has been able to assure to herself for the present and the future. The object of this paper is to show just what these advantages are, and at the same time to brand the utter hypocrisy of the slogan, ‘peace without annexations and indemnities,’ which, regarded even in the most favorable light, would allow Germany to make off with immense booty, leaving the Allies to face the incalculable losses incurred by them in a war launched by their adversary. _The significance of the low rate of German exchange_ The continual fall of German exchange is regarded by many of the Allies as proof of the progressive and irremediable impoverishment of Germany. When, for instance, the mark drops 47 per cent in Switzerland, while the franc has depreciated only 13 per cent, Frenchmen are for the most part inclined to believe that the war has affected the two countries in relatively the same proportion; they then conclude that Germany’s financial situation is infinitely worse than that of France. In reality, such a comprehensive conclusion cannot be reached simply through the rise and fall of exchange, which reflects only certain special aspects of the financial situation of a country. Among the various causes affecting exchange, there are two principal ones. The first is moral. It cannot be denied that the fluctuation of exchange responds to foreign confidence. If German exchange is low, it implies, to a certain extent at least, the existence of a universal conviction that in the long run Germany cannot hold out against her formidable ring of adversaries. As a result, there is no great demand for the currency of a state whose credit, it is thought, must finally collapse. It should be noted, however, that the reason for this fall of exchange is only a moral evaluation anticipating a probable outcome; it is not due to a mathematically certain estimate of what Germany now stands to win or lose as a result of the war.