Good Business and the War Debts 9780231883139

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GOOD BUSINESS A N D THE

WAR DEBTS BY

HORACE T A Y L O R

PUBLISHED FOR T H E AUTHOR BY

COLUMBIA UNIVERSITY PRESS NEW YORK M CM XXXII

COPYRIGHT

COLUMBIA

1931

UNIVERSITY

PUBLISHED

JANUARY,

PRESS

1932

P R I N T E D IN T H E U N I T E D STATES OF FRANCIS EMORY F I T C H , INC., N E W

AMERICA YORK

GOOD BUSINESS AND THE WAR DEBTS I The man w h o owned the goose that laid the golden eggs did not deliberately kill the estimable bird w h i c h had made him his fortune. He never would have been so stupid. The fact is that he loved the goose so devotedly that he could not have brought himself to lay violent hands upon her, and he would have defended her w i t h his life against anyone else w h o sought to do her injury. When the bird died he was disconsolate and mourned bitterly the whole chain of circumstances w h i c h led to her demise. For the events leading up to this tragedy occurred in a very roundabout w a y . No, the man w h o owned the goose did not ruffle a single feather of the bird's sleek neck. That much is certain. And the historical records are clear on several other points. What the man actually did was to become a creditor—not wisely and too well. For years he had been carrying on a profitable trade w i t h the tribes of people w h o lived in the other sections of the then known world. Because of the magical properties which it possessed, these tribes of people set great store by gold, of which they did not have a sufficiency of their own. Gold could be rubbed across the palms of people and thereby changed into any known variety of useful thing: houses to live in, carts to haul one's belongings in, meat and cake for dinner. It gave one a comfortable secure feeling to have a little stock of it on hand to tide him over any bad times that might come along. Since these people did not have as much gold as they wanted, they traded the thing which they raised on their farms to the man who owned the goose in return for his golden eggs. What they raised was corn. The traffic thus created made everybody happy. The farmers had all the corn they needed for their own

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use and also were able to lay by comfortable little stocks of golden eggs. T h e man w h o owned the goose was able to get t h e very best feed for his precious bird in return for only a fraction of her golden output. And the gracious goose showed her appreciation by growing plumper and more beautiful and by laying bigger and better eggs. It seemed that a state of affairs had been reached in which all people could be prosperous and happy and free to devote themselves to certain mysterious rites called " h i g h e r and nobler t h i n g s . " Unfortunately, however, such was not the case. T h e farming tribes, ambitious to go in for raising corn in a big way, began quarreling among themselves over land boundaries; they divided into t w o rival factions and soon fell to fighting. T h e man w h o owned the goose was greatly distressed at this war among his friends and neighbors, customers and corn suppliers, and declared he would have none of it. But finally he allied himself with the side w h i c h seemed to him the just one, and struck some doughty b l o w s w h i c h helped to defeat the other side and thus to end the war. Furthermore, he drew heavily upon his reserve store of golden eggs and placed them at the disposal of his allies. For these allies already had exhausted their own supply of eggs through converting them into axes and clubs and stones with w h i c h to harass the enemy, and were threatened w i t h defeat unless the goose's owner would lend them some more. Thus the w a r ended w i t h the farming tribes of both sides badly battered, w i t h their land and farm equipment in a bad state, and w i t h t h e former allies of the man w h o owned the goose heavily in his debt. Most of these former allies, as debtors usually do, sought t h e most favorable terms possible from their creditor. "We cannot pay y o u , " they said. " W e should just be able to sell you enough corn for your needs in return for fresh golden eggs w i t h which to make our necessary improvements. T o pay you corn in return for the eggs which you lent us and which we

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used up in the war is impossible, because we shouldn't have enough corn left for ourselves and we should starve." The man who owned the goose really was a tender-hearted person, who couldn't bear to see suffering; so he reduced somewhat the amount of the debts owing to him. He also knew, and believed in, the creed of the market place. "Business is business," he recited from the creed, "and a debt is a debt. Thus far will I go and no farther. You borrowed my gold and you must pay m e . " Upon this the former allies declared that they could and would pay only if the former enemies were made to pay them enough in reparations or something of the sort to cover the debt. Of course this brought a loud wail from the former enemies, who said that they could pay nothing and that they had to have fresh golden eggs themselves. To all this the man who owned the goose replied that these matters were none of his business, that all he wanted was to be paid, and that they could arrange their own affairs among themselves. At this point there is a gap in the historical record, and all that we have is several historical theories as to what happened next. Some historians say that the farming tribes quarreled over their debts and fell to fighting again and that this time they exterminated each other. Others maintain that the tribes found ways of their own to produce gold, that they became militarists, denied all obligations, and raised their mailed fists to thumb their noses at the man who owned the goose. Still a third school holds that the tribes became communists and declared it incompatible with their communistic principles to pay anything to a capitalistic creditor. Despite these differences in theoretical explanation, there is one point upon which all authorities agree: the man who owned the goose did not get paid. And now we come from these matters of speculation back to the historical record. It became impossible to get corn with which to feed the goose. The owner sought frantically to find

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substitutes and to coax the goose to eat sawdust or straw or broken-up bottles. The bird was disconsolate and would have none of them. She became a mere shadow of her former self, lost her beautiful feathers and ceased laying. She had a series of sinking spells—and finally she died. Her owner wailed and tore his hair and cursed himself. And w h a t became of the man w h o owned the goose? The record doesn't say. But the goose was his only means of support, so he probably died too. It is extremely unfortunate that there is a gap in the record of these events between the ultimatum which the creditor issued t o his debtors and the regrettable demise of the goose. We should like to know exactly what happened in the interim. There are strong reasons to believe, however, that we shall know before very long; new facts are being learned every day, and it seems probable that the complete history of these world-stirring events may be written within the next decade or so. In view of all t h a t happened, however, we can even now be reasonably certain of one thing: the creditor policy which the man pursued was a shortsighted one. Because the gold which he had lent his neighbors loomed so large in his eyes that he was not able t o see the surrounding circumstances, the man lost his loan. Worse still—although it occurred unintentionally and in a roundabout way—the man killed his goose. T h a t was bad business. Of course all this happened in the time of Aesop, roughly twentyfive hundred years ago. Not much in the way of sound business policy was to be expected from people so far removed from modern methods of efficiency. We of today are enlightened. If the man w h o owned the goose had asked us we should have told him that it was sound business policy to liquidate the debts and call for a new deal. We should have told him also that sentiment has no place in business and that his new policy should be adopted, not out of tender-heartedness, but for the

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good and sufficient reason that it would pay him better than any other one would. That unfortunate man and his goose are, however, beyond our power to save. So let us leave them in their ancient graves and leap over the centuries to the present moment. History does not repeat itself, but human nature remains about the same. Thus it is no accident that we in America stand today just where the goose's owner did when he issued his ultimatum to his debtors. We also have shown a certain amount of consideration to the nations which owe us money. We have, for moral reasons, written off a part of the debts which originally were owing to us. And now we have reached a pass in our affairs where we must rid ourselves of all sentimental ideas and consider our future conduct from a purely business point of view. Our first duty is to ourselves, our own people, our own goose and her future as a layer of golden eggs. Our problem can and must be stated in the purest business terms: Will it pay us better to try to collect the debts owing to our government, or to cancel them and give a new deal all around? The best way to come to grips with a problem as large as this one is to break it up into the smallest number of general questions which will cover the whole matter. In this case it is necessary to handle three such questions: What are the facts? What do they mean? and What of it? Each of these general questions can be divided into its necessary parts. So let us now consider the first broad question: What are the facts? II Just what is our policy today with reference to these troublesome debts? That is necessarily the point from which we have to start in any enumeration of the facts. The position we have taken can be stated very briefly. We must be paid. These four words embody the principle upon which present world economic

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relations rest. To give effect to this simple declaration, there has been erected a vast mechanism which controls the business of nations. The parts of this mechanism are called the Interallied Debt Settlements, the Young Plan, the Bank for International Settlements. Taken together these parts make a complicated set of intermeshing gears which is fascinatingly intricate in detail and tremendous in conception. That may be the reason w h y so much that has been written and said about the present situation has stopped right here. There is a large literature dealing w i t h these several arrangements, and so anyone w h o has the inclination and the time and the technical knowledge may study the mechanism itself just as far as he likes. For our present purposes w e must set the mechanism aside simply to prevent its obscuring more important matters. One question of relationship must, however, be squarely faced. Is it true that the payment of the debts which our former allies owe to us is directly related to the reparations payments w h i c h these same former allies are to receive from Germany under the Young Plan? Are not these two matters distinct and separate from each other? Our position in the past has been that they are quite distinct and separate, but that is a rather difficult position to hold today. Our government receives no reparations from Germany in the strict sense of the term. It has, however, certain claims against Germany, including the costs of the Army of Occupation, the payment of which is provided for by the Young Plan. Thus the Plan was ratified by the United States as well as by the countries which receive reparations. The Plan so arranges the annual payments to be made by Germany that each of our debtors will receive enough in reparations each year to cover the amount it has to pay to us. And this is no accident; the representatives of our debtors were quite clear on this point in discussing what annual payments their respective governments would be willing to accept.

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Furthermore, and perhaps more important, it is provided in the Young Plan that in case the United States reduces any of the debts of her former allies, two-thirds of the reduction shall immediately be passed along to Germany in the form of lowered reparations payments; in the last twenty-two years covered by the Plan (from 1966 to 1988), Germany is to receive the entire benefit of such reduction. These provisions establish a more than tacit relationship between reparations and the debt settlements. Although we did not officially create this relationship, we cannot afford to ignore its existence. What Germany pays is, technically, to cover damages to property which occurrcd thirteen or more years ago. Actually, in terms of the present situation, most of what Germany pays is passed on by the nations which receive it to pay their debts to the United States. Just what does Germany have to pay under the Young Plan? She is to pay a stated sum every year until 1988. For the next thirty-five years (until 1966), the annual payments called for by the Plan average five hundred million dollars. After 1966 the annual payments drop to a yearly average of about four hundred million dollars for the remaining twenty-two years of the Plan. During the entire period covered by the Young Plan (the fifty-nine years from 1929 to 1988), Germany is to pay a total of more than twenty-seven billion dollars. This total replaces the indeterminate amount required from Germany by the earlier Dawes Plan. The Young Plan modified the Dawes Plan in several important ways and probably is as liberal an instrument as the political tempers of the participating nations would have permitted at the time of its creation, early in 1929. What is to be done with the money which Germany pays? Each year the payments arc to be credited to the reparations claims of the various former enemies of Germany. T h e largest claims are those of France, Great Britain, Italy and Belgium, in the order named. Actually, however, these countries and the

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several others which arc entitled to receive reparations are to get only a small part of this money. Most of it is to be passed along by the reparations-receiving nations in payment of their indebtedness to the United States. O f the annual payments w h i c h Germany is to make for the next thirty-five years, averaging five hundred million dollars, considerably more than half will actually be received by the United States. Only sixteen millions a year represents Army of Occupation costs and other claims which we have against Germany; the remainder is the total of annuities due us under the Interallied Debt Settlements. T h e payments in the last twenty-two years of the Plan ( 1 9 6 6 to 1988), averaging about four hundred million dollars a year, accrue entirely to our credit; after 1966 each reparations-receiving nation will get only enough to cover its debt to us. O f the twenty-seven billion dollars which Germany is to pay under the Plan, almost twenty-one billions, or three-fourths, will be received by the United States. Figures as large as these tend to clog the mind and thus to make clear thinking difficult. We must, however, equip ourselves w i t h a few more large figures. Does the Young Plan represent the total of reparations that have been, or will be, paid by Germany? By no means. Germany began paying reparations as soon as the war ended. She turned over money, ships, railroad equipment, coal, submarine cables, foreign investments, and a vast number of other valuable things to the Allies. Since most of these deliveries were of goods rather than of money, it is difficult for anyone to speak with certainty of their total value. A number of unofficial estimates have been made, all of which run into enormous sums. Some of these estimates place the amount as high as ten billion dollars. For Americans the most authoritative statement in this regard comes from the Institute of Economics, in Washington. As a result of its independent study of the matter, the Institute estimated that Germany had

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paid well above six billion dollars before the end of 1922. Between this time and the present moratorium Germany is officially credited w i t h having paid another t w o and one-half billions. Besides these amounts, Germany also has turned over all of her former colonial possessions, w h i c h , in the reckoning of empire, probably are w o r t h some billions of dollars. But do these deliveries of cash and of other valuable t h i n g s represent net payments by Germany? They do not. A part of w h a t Germany has paid has been borrowed for that purpose. Still more has been borrowed by the German banks and business concerns w h i c h have to assist the government to m a k e the payments. The net foreign debt of Germany (apart from reparations) amounts today to almost five billion dollars. This total foreign debt is greater than the amount of reparations paid to the present time under both the Dawes Plan and the Young Plan. W h a t Germany has paid has, in effect, been merely a conversion of reparations into one or another form of debt. These are the essential facts. Let us turn next to our second general question: W h a t do they mean? Ill One conclusion should be clear from the facts w e have surveyed. Most of w h a t Germany pays in the future is to come to the United States. But w h a t of it? the sceptics m a y ask. It just happens that our former allies borrowed money from us w h i c h we quite properly expect them to repay. It also happens that these same former allies have claims against Germany w h i c h are more than sufficient to cover w h a t they owe us. W h y shouldn't they apply a part of w h a t they collect from Germany to settle their indebtedness to us? Such argument is entirely reasonable, but in the present case is aside from the point. No one is denying the legitimacy of paying a creditor w i t h w h a t is collected from debtors. Nor arc we saying that our former

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allies simply are robbing Peter to pay Paul. The history of the whole affair indicates that Germany—if defeated—would have been compelled to pay reparations for the damages she inflicted during the war, even if we had never lent a single penny to our former allies. There is, however, one all-important conclusion which is clearly demonstrated by the present facts. That is, that the policy of the United States w i t h reference to these conditions dominates the policies of every other nation of the world. If Great Britain, for example, wanted to modify the present situation in order to promote her own interests, she could not. We have her own word for it. She must pay us and so she must get the money w i t h which to pay us. So must our other debtors. Final decisions on matters of policy can only be made by us. In the present state of international financial relations, authority •—and responsibility—rests in our hands alone. Another question, the one which has been most studied and most talked about in this connection, is the least important one for our present purposes. That is, whether Germany w i l l be able to pay the amounts called for by the Young Plan. The answer is that nobody knows. Economic forecasting is not as precise as that of the astronomer; in as complicated a case as the present, it is not possible to say w i t h any certainty what Germany can do in 1988. Things change so rapidly in these days; if the present trends run their course, it is even possible that Germany, as w e know her today, will not exist in 1988. One can, of course, set up a long list of " i f s " and then say that Germany can pay if all of the " i f s " pan out. It would be interesting to make a digest of the " i f s " which were stated not more than two or three years ago by the best-qualified observers, and which already have become unruly. These cases lead one to believe, not only that nobody knows whether Germany can pay in 1988, but also that nobody knows whether Germany can pay next year. (Our only real certainty in this matter appears

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to be that Germany cannot pay during the present year of moratorium.) It even seems perfectly logical to go further and say that the very existence and unruliness of so many " i f s " makes ultimate payment by Germany extremely doubtful. All this, however, as already stated, is the least important of the questions for consideration here. If, in the final reckoning, Germany cannot pay, the present problem will have been settled—although, of course, a number of worse ones may have been created in the process. For our present purposes let us assume that she can pay and confine our attention solely to the meaning of the facts which were given. In this connection a more important question is: What are the means available to Germany for actually transferring to her creditors the tremendous sums of money which are due them? There is only one possible way. German business concerns must sell more goods and services to foreigners than Germans buy from foreign business concerns. Some of these goods and services will be sold to tourists w h o visit Germany—in which case they need not be exported, but will be eaten, or drunk, or otherwise consumed, on the spot. Another kind of sale will be that of the services of German ships which convey freight and passengers between different countries and are paid by foreigners for so doing. The most important of all, however, is the sale of goods to foreign countries; it is only by maintaining a large export business that Germany will be able to pay w h a t she owes. Not only t h a t ; she must maintain a volume of exports much greater than the amount of her imports. This leads us to a question which has troubled many people w h o are seriously interested in this matter, but which most economists, because they understand it so thoroughly themselves, have failed to explain. W h y is it necessary for German manufacturers, shipping companies, etc., to sell more of their goods and services to foreigners than Germans buy from foreign

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conccrns, in order that the German government may pay its reparations bill? If the total annual income of all the German people runs about fifteen billion dollars ( w h i c h it averaged from 1925 to 1929), w h y can't their government collect from them in taxes the four or five hundred millions needed for reparations payments and send the money to its creditors? The German government must indeed collect this money from its people. But it cannot send this amount of money out of Germany. The notes issued by the German Reichsbank are not money except within Germany. The only kind of money that foreign governments will accept is gold. Of monetary gold—that held by the Reichsbank as security for its notes—there is only between two and three hundred million dollars' worth in Germany. This is not enough to make one year's reparations payment. And, too, if this gold were to be sent out of Germany, the currency of the country would become so unstable that it would be virtually impossible for the German government to finance itself, to say nothing of paying any further reparations. This is exactly the reason for the provision in the Young Plan that the transfer of reparations can be postponed whenever "Germany's exchange and economic life may be seriously endangered by the transfer . . . of the postponable annuities." It also is the immediate reason for the present moratorium. So, to repeat, payment can only be made by the sale of more goods and services to foreigners than are bought from foreigners. The understanding of this matter is so important that I shall venture to give an illustration of how international payments are made. If you already know all about it, please skip to the next paragraph. Let us suppose that an importer in New York orders $1000 worth of goods from an exporter in Berlin. The goods arrive. The bank at which the importer does business receives a draft for $1000 drawn by the Berlin exporter against the New York importer. The importer pays the draft. The

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New York bank credits the account of its Berlin correspondent bank with the money. The Berlin bank pays the exporter the equivalent in marks of $1000. Next an exporter in New York sells $1000 worth of goods to an importer in Berlin. This time the process is exactly reversed. The Berlin bank collects from the importer and credits the account of the New York bank. The New York bank pays the exporter his $1000. This illustration is about as hard to keep straight as the jingle about Peter Piper. And several minor details, such as the fees charged by the banks, are omitted. The important feature of the two transactions should, however, be clear. Both importers have their goods in clear title; both exporters have been paid their money; the t w o banks are even w i t h each other. And not a cent of money has been shipped across the ocean. It also follows that these private business transactions—in cases where exports exceed imports—create in foreign banks credits which may be bought and used by governments for public purposes. To make a reparations payment it is necessary that German exporters sell more goods than German importers buy; enough more to enable the German government to pay money to German banks and have equivalent amounts paid by foreign banks to their respective governments—the amounts being sufficient to cover reparations requirements. As has been seen, all this must be done without shipping any actual money out of Germany. The necessity for Germany to secure a balance of exports suggests an interesting corollary. Doesn't it follow, for exactly the same reasons, that the United States must import more goods than she exports? Yes; at least she must if she is ever to be paid what is due to her. Even if it were possible to be paid by bringing in gold ( w h i c h it is not) it would be a fruitless policy to do so. The four to five billion dollars of monetary gold now held in this country is greatly in excess of our ordinary needs. The fact that this country and France together now hold about

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two-thirds of the monetary gold in the world means that some other countries do not have enough—as witness the suspension of the gold standard by Great Britain and several others. It follows from this that our business will have great difficulty in competing with the products of those countries whose currencies have depreciated and thus made prices low in terms of gold. But, as a matter of fact, the only way that we ever can be paid is by importing more than we export. Let us return to our main analysis. German industries must secure and maintain an excess of exports over imports. How great a change docs this mean in the foreign trade of Germany? In the five years before the World War (1909-1913) Germany had an average excess of imports of 350 million dollars. This was made possible by the fact that Germans were receiving large incomes from investments in foreign countries—investments which do not exist today. German economic life was adjusted to this scheme of things. Since the war German industries have been compelled to build up their export trade, and the German government has had to work toward reducing imports—all in the interest of wiping out the former excess of imports, and going beyond that to create a large balance of exports. Naturally this tremendous job could not be accomplished at once; for several years after the war German imports continued to exceed exports. Now, however, the tide appears definitely to have turned. In every month since February, 1930, Germany's exports have been larger than her imports. In the first nine months of 1931, this excess of exports amounted to 535 million dollars. If the monthly average of this period can be maintained until the end of the year, Germany's exports will exceed her imports by 700 million dollars in 1931. Thus within two years the balance of German commerce has changed from a consistent excess of imports to the first place among the nations whose

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exports exceed their imports. This is the most remarkable about facc in trade conditions in the whole history of commerce. If continued beyond the present moratorium period, this excess of exports, together with the payments by foreigners for services of German ships and the expenditures of tourists who visit Germany, will be enough to cover reparations payments as well as interest on outstanding debts. This assumes that Germany can carry on at this rate and not break internally from the strain, and also that the German government can raise enough money by taxes to buy the necessary foreign credits. These assumptions really are the latest important "ifs" on which Germany's final ability to pay rests. As already has been stated, we are not concerned with that problem here. We are, however, very deeply concerned with the means which must be employed if Germany is to maintain her excess of exports and thus be able to pay reparations. Ultimate meanings may be clarified by examining the immediate facts. The large foreign balances which are being created by German commerce ordinarily would be used for making reparations payments. But on account of the strained condition of German finances, they must, during the present period of moratorium, be devoted to other purposes. A part of the balances will be needed to pay interest on the five billion dollars of current indebtedness which already has been referred to. A more important part must be used to establish credits with which to replace some of the short-time loans which were so suddenly withdrawn in the summer of 1931. Germany's finances were saved from total collapse at that time by the arrangement of a moratorium on reparations payments. In her present effort to save her tottering economic system, Germany is using the moratorium period exactly as it was intended to be used. Incidentally, she is, by heroic measures, showing what she can do in the way of creating an excess of exports.

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But how did Germany sccurc her present trade balance and h o w can she maintain it in the future? There are t w o w a y s of securing such a balance. One is by increasing exports; the other is by diminishing imports. In the case of Germany the existing excess of exports has been created by the second of these methods. German exports actually have decreased since 1929. But imports have declined still more—enough more to call the present trade balance into existence. Most of the decline has been in r a w materials w h i c h are used by manufacturing industries. In recent months the deviation from the normal ratio of manufactured exports to raw-material imports in Germany has been so marked that some observers have called it "Germany's clearance s a l e . " M a n y students of foreign trade believe that the present l o w volume of raw-material imports cannot be continued much longer. W i t h o u t troubling ourselves over the question of possibility, w e can determine the methods by w h i c h Germany may be able to maintain her present excess of exports over imports, and thus pay the reparations called for by the Young Plan. One w a y is by permanently substituting r a w materials produced at home, such as rayon and rye, for those w h i c h w o u l d have to be imported from abroad, such as cotton and w h e a t . Some substitution of this kind appears already to have occurred. Another w a y of reducing imports, w i t h o u t substituting home-produced r a w materials for those produced abroad, is by a permanent lowering of the standards of living of the German people. As a matter of fact this lowering of living-standards already has taken place, and it seems inevitable (under present conditions) that a part of any future German cxcess of exports must be gained in this w a y . It is primarily because of resentment against this forced reduction in standards of l i v i n g that the Fascist movement has become so strong in Germany. Still another general method by w h i c h Germany can maintain her present excess of exports is by increasing her

AND THE WAR DEBTS importation of r a w materials, and, at the same time, increasing exports by an equal amount. The first t w o of these methods speak for themselves, the last deserves further consideration. How is Germany able to export such large quantities of goods? There is only one possible w a y . German exporters must offer goods in the foreign markets at lower prices than their competitors. This has been done, and it must continue to be done in the future. To be able to do this very thing has been the a i m of German industrial policy since shortly after the w a r . The remarkable program of " r a t i o n a l i z a t i o n , " or modernizing of industry, w h i c h has been carried out in Germany since 1924, has had for its aim the reduction of costs in order that German commerce m i g h t be able to hold its own, under its new and difficult conditions, in the w o r l d ' s markets. Adopting and developing the methods of production used in America, German industries have in several important departments outstripped their teacher. The German coal mines are an important source of supply for Europe, as the silent mines of England bear mute testimony. A large proportion of the ships w h i c h have been built in the past ten years are the product of German shipyards. In several of the most technical branches of manufacturing, such as the dye, electrical, chemical, and machinery industries, Germany is a h i g h l y efficient and quite formidable competitor in the w o r l d ' s markets. When competitive or tariff conditions have made it necessary, German manufacturers have not hesitated to " d u m p " their goods in foreign markets. That is, they have sold their goods abroad at lower prices than they have charged at home. In passing judgment on such practices, it is w e l l to bear in mind that German commercial policy is fixed by the inflexible facts w h i c h w e have surveyed. The policy of Germany is inextricably geared to the Young Plan, w h i c h in turn is geared to the Interallied Debt Settlements. The Young Plan provides possible temporary relief for Germany;

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if and when the payment of reparations threatens to impair the internal stability of the country, a postponement of payments can be arranged. The German government has given its solemn promise that such temporary relief will not be asked for except in case of serious emergency. As a matter of fact it might well be a staggering blow to German finance and business if postponement were requested in such an emergency. Any sudden withdrawal of credit from Germany would have serious consequences to the entire business community of the country as well as to the government. A large part of the current German debt to foreigners is in the form of short-time loans which have been made by private lenders abroad to German banks, industrial concerns, and governmental bodies. As these loans become due they have to be renewed, or else replaced with other short-time obligations. If Germany were to ask for a postponement of payment, confidence would be badly shaken; it is highly probable that the short-time creditors would demand payment and that no new loans would be forthcoming. Something approximating this has taken place only recently. Early in 1931 many German government officials and their advisers saw clearly that Germany would not be able to continue paying reparations for many months longer. Some kind of relief —if only temporary—had to be secured. To ask for a postponement of payments, however, would amount tacitly to an official admission of the country's insolvency, and would cause the short-time creditors to demand payment of their loans. The timely intervention of the present moratorium in June, 1931, saved the German government from having to make the painful admission. What happened, however, was very similar to what had been anticipated in case of a request for postponement. Many short-time creditors demanded payment, and large sums of credit were withdrawn. To avoid a financial collapse in Germany, the foreign creditors have agreed, under certain con-

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ditions, not to ask payment of the remaining 1,300 million dollars of short-time loans before March, 1932. The condition is in no sense remedied, and there has been a clear demonstration of h o w dangerous it is for Germany t o try, even temporarily, to cease making payments. Today, when price levels everywhere are lower than they were at the time the Young Plan was made, Germany is complaining that she must sell more goods than formerly in order to meet her obligations. But she goes right on selling, while at the same time she tightens her belt and buys less from abroad. In the present world depression her exports have declined less than those of any other industrial country. In 1930 the value of her exports was only 10 per cent less than in 1929. This probably means t h a t the volume of goods sold was about the same, since the price level had declined enough to explain most of the difference in total value. In this connection it is interesting to observe t h a t the decline of exports from America has been greater t h a n the decline from any other country. In the same period, the year 1930, the value of our exports was 25 per cent less than in 1929- The fall in prices will not explain this difference. If there exists somewhere a land of shades in which the commercial spirits of the nations hold free and frank communion w i t h each other, an interesting forum must be in progress this very day. " I must have relief," cries the commercial spirit of Germany; "prices have declined, and I must sell more and still more of my goods in order t o pay my obligations to y o u . " The spirits of the other commercial countries point accusing fingers at her and chorus mournfully: "But you, you arc a chief cause of all our troubles. Prices are as low as they are because you sold goods in such quantities and so cheaply. Why should we relieve you?" " Y e s , " sighs the commercial spirit of Germany, ' 'I sold goods abundantly and cheaply and helped t o break

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the market. But you, you arc the ones w h o made me do i t . " Is there any answer to that? IV N o w we come to the crux of the matter. We have examined the facts, and w e have sought to see w h a t they mean. There remains only our third and last general question: W h a t of it? Thus far we have been investigating and seeking conclusions regarding matters w h i c h happen to be centered in Europe. Germany, because she happens to be the point on w h i c h all these matters focus, has been the object of our chief consideration. We have n o w t o consider matters of our own policy, and so we must confine our attention closely to our o w n affairs. Let us, therefore, plant our feet firmly on American soil and, when we must look abroad, let us do it only from t h a t perspective. So—• W h a t of it? We in America must, in our own interests, act at once to free ourselves from the entanglements in w h i c h we are caught. It is customary t o speak of a "burden of d e b t . " T h e United States is suffering today from a complication of troubles, among others from a burden of credit. We are in the painful position of having lent money which we cannot afford t o have repaid. For the plight in w h i c h we find ourselves we are not entirely to blame. Our money was lent in good f a i t h . And we had little to do w i t h causing the series of economic, political and military events w h i c h created the present situation. We are confronted, however, not by an historical problem, but by a condition. We may not be to blame for w h a t has happened in the past; but unless we employ every means t h a t we have to extricate ourselves from our present plight, we shall be entirely responsible for the consequences of our failure to act. The facts and tendencies which we have surveyed do not merely exist today; they also project themselves into the future.

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With reference to our own business interests, there are two conditions toward which we have no avowed policies either for the future or in the present. These two conditions, which can be stated very briefly, sum up our present difficulties and show w h y we need to act now in order to protect our future. The first condition is that the only w a y that we can be paid w h a t is owing to us is by importing more goods than w e export. Since we are producing goods on a large scale and must market them throughout the world, w e cannot conveniently reduce our exports. (The present reduction of them certainly is far from convenient.) In fact, it is argued that our exports must be increased. This means, of course, that we can only have an adequate excess of imports if we increase our imports very greatly—probably by as much as twofold. This raises an interesting question: What imports are we going to increase? Agricultural products? Hardly; we produce at home much more than we can use of most agricultural products, and just now we are trying to reduce our most important agricultural import by raising sugar at home. Mineral products? No—at least w e say we don't want to; and here again we are just now striving to increase our own production of copper and of several important alloy metals. Manufactured goods? But this is getting absurd; just take paper and a pencil and a copy of our tariff l a w and see if you can figure out how we can materially increase our imports without bringing in kinds of goods which we have explicitly said in the tariff l a w that we do not want to import. Neither mathematics nor magic can do it. It should be pleasant to think about imports, especially about those for which we already have paid. There could even conceivably be a sort of lazy-man's paradise—which would, however, be entirely inconsistent w i t h the American temperament—• in which everybody could quit work and live off the imports of goods which already have been paid for. But this is only

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conceivable, and not practically attainable for several obvious reasons. In the first place, the goods thus imported are not a gift to anybody, but must be sold in our markets; in the second place, our people have investments in productive enterprises which must be able to run in order that their owners may prosper, and which must be able to sell the goods which they produce in order to be able to run; in the third place, a large number of our people depend for their livelihood on being able to work in these productive enterprises—they must have work in order to buy the goods which must be sold by the productive enterprises if they arc to be able to run and thus to give work to these people. At some time in the future we must inevitably accommodate ourselves to an excess of imports, and the present would be the best time to start making policies looking toward that end. This condition must be accepted ultimately by every creditor nation—as witness England today, or Germany before the war. But we are not yet ready to make a quick change from an excess of exports to an excess of imports. That will require a great deal of adjusting for the very good reason that we are, today, geared to an excess of exports. Not to burden the reader with a long list of statistics on the subject, I will merely say that in 1928 our net excess of exports was 837 million dollars. We must continue to export more than we import for some years to come; if we do not we shall suffer a further internal disruption of our business and industry. To make it possible for foreign countries, in their present situation, to buy our goods in great quantities, it will be necessary to lend them more money, or else to trade them our goods in return for ownership in their business concerns. In so far as such loans or investments are made, we must be certain that they are used for productive purposes; that is, that their use will produce the means of paying interest or dividends, and also of paying the principal of loans.

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This brings us to the second of the two conditions mentioned above. The internal political stability of European countries has a great bearing on the security of the loans and investments which our people, in good faith, have made in those countries, and, obviously, it affects the security of those to be made in the future. If there is any doubt of this, just observe what happened to the values of German bonds after the Fascists' victory in the German elections of September, 1930. The binding and arbitrary frame to which the economic and political relations within states and among states have been forced to conform has made Europe a mass of danger spots. They are exactly the conditions which make revolutions and wars. These are words which have their own offensive connotations to various groups of our people. It is extremely easy to become sentimental about them; and certainly their result in human suffering is their most terrible aspect. For our present purposes, however, it is not necessary to be at all sentimental, but rather to consider the matter in cold business terms. If there comes a real Fascist coup in Germany, it is fairly certain that there w i l l not, by peaceable means, be any further collection of reparations or of war debts. If the communists win out, we not only shall not be paid, but the property in Germany of our people w i l l be liable to confiscation. If either of these things happens, there will inevitably be repercussions in other countries which w i l l be injurious co U ui interests in countless ways. In either of these eventualities w h a t would we do about it? Straighten things out by force? Heaven forbid; that is the cause of the present trouble. If we felt ourselves compelled to take such drastic action, w h a t , in the ordinary terms of business, could we hope to gain by it? Assuming that we could w i n a war, would it not cost us many times more than the amount we have now at stake? And at the end of a war, whether we won it or not, would the conditions of payment not be many times

GOOD BUSINESS worse than they are now? These questions are, of course, rhetorical; their answers are obvious. As a matter of business, we cannot afford to let such things come about. The United States has been, since the war, the world's greatest source of credit and of new capital, not only in the official sense represented by loans made by our government or to foreign governments, but also in the private sense of loans and investments made by our citizens in foreign countries. Thousands of stockholders in American corporations have a stake in foreign business without being conscious of it, for the simple reason that the corporations in which they own stock are owners of property abroad. These investments have been made, not only in sources of raw materials, but also in the highly industrial countries of Europe. Certain outstanding cases are well known. Only recently the General Motors Corporation has bought 80 per cent of the stock of the great Opel works, the largest automobile factory in Germany; the General Electric Co., the International Telephone and Telegraph Corp., and the Public Utility Holding Corp., have separately interested themselves in various electrical and supply properties in Germany. And this only starts the long list. Other American concerns, of which the Ford Motor Company is the most conspicuous example, have built, or are building, their own plants in Europe. In view of this development, in view of the large amount of foreign securities owned by our people, in view of the dependency of our commerce on foreign markets, and—most important—in view of the fact that our policies necessarily dominate those of the whole world, can we honestly believe that economic and political stability in Europe is solely the concern of Europeans and none of our business? The amount owed us by our former allies is a large one—but not too large to pay for the benefits to be secured by cancellation. That is, assuming that we can and will be paid—which cannot

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be positively known until 1988. Germany is to pay more than twenty-seven billion dollars, of which we are to receive more than twenty billions. The figures are delusive. A part of what our debtors pay is interest. The "present w o r t h " of this twenty billion dollars—that is, the amount of money which, invested at a given rate of interest would be returned to us by 1988 in exactly the same manner as the Young Plan and the Interallied Debt Settlements provide—is much smaller. The capital sum which, if invested at 5 per cent for the whole period, would be returned to us in this manner, is less than six billion dollars. That sum is the present worth of our loans at this rate of interest. But 5 per cent is too low a rate. On a loan arranged for Germany by the Dawes Plan—a loan still outstanding—the rate of interest was 7 per cent. And according to the latest quotations on German bonds in the New York market —which is the best criterion of the present worth of Germany's obligations—the rate of interest used for calculating present capital value might even be higher than 7 per cent. Five billions is probably a liberal estimate of the present worth of our loans; it would be extremely difficult to get that much for them if we tried to sell them. Thus the twenty billion dollars which we are supposed to receive by 1988 shrinks to a fourth o f that amount when we consider what it is worth today; that is, of course, the effect of compound interest on payments extending over almost sixty years. Five billion dollars is a great deal of money—but not so much in comparison to some other things. Our annual national income, for example, averaged around ninety billion dollars in the good years, 1926 to 1928. Its amount has not been finally estimated for the lean years of 1930 and 1931. But the tremendous decline shown by Federal income tax returns indicates that the annual national income in the past two years was several times five billion dollars less than it was in the preceding years of plenty.

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It would be an exaggeration to say that the present depression —the worst one we in America ever have known—was caused entirely by the present state of international commercial relations. It seems obvious, however, that it could not possibly have reached its present intensity except for the arbitrary arrangements associated with reparations and debt settlements, and the great tangle of tariffs and restrictive measures which have been adopted by almost all countries in their desperate attempts to protect themselves against these same arbitrary arrangements. It is the most vicious of circles. The initial arbitrary international arrangements have begotten a vast litter of arbitrary intranational arrangements. And Germany goes right on paying with quantities of goods at low prices. T h a t , however, is not all that is being paid. Thousands of our people who own shares in business are paying through reductions in their dividend receipts; millions of our farmers are paying with losses or bankruptcy because the needy populations of Europe cannot buy their products; millions of people who want to work but have no jobs are paying with their lost wages, their lost self-confidence and their misery. These payments are not being credited to the account of reparations or of interallied debts or to any other account. They are simply and eternally lost. It should be borne in mind also that the total amount of these payments is "present w o r t h " ; they are paid now, and are not discounted at compound interest over the next sixty years. One or two other questions must be faced. If we cancel the debts due us—assuming always that they ultimately would be collected—does it not follow that our own national debt would have to be paid entirely by our taxpayers? Yes, it does. It appears probable, however, that we would not on this account be asked to pay higher rates of taxes, but rather that it would take us somewhat longer to finish retiring the debt. Our national debt, which is owed entirely to our own people, has been reduced

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very rapidly sincc the war. In the eleven years ending with 1930, it was brought down from around twenty-six billion dollars to about sixteen billions. This is an average reduction of about nine hundred million dollars a year. Unless we soon have a return of prosperous times, it is quite clear that we shall reduce the national debt more slowly in the future—regardless of whether we collect what is owing to us from foreign governments. And why, some reader may ask, should we alone bear all the cost of an act which would be beneficial to many other nations besides ourselves? European countries would be helped by a cancellation of the debts; why, therefore, should they not make some concessions on their side? Perhaps they should—it is even likely that they would. If representatives of our government, armed with five billion dollars of bargaining power, were to meet with delegations from other countries to consider the matter of trading concessions all around, a great deal might be done to remove the tangle of arbitrary conditions which is embarrassing us all. Much of the recent discussion of policy in relation to the war debts has served to confuse, rather than to clarify, the issue. One especially misleading opinion, which has been stated repeatedly, is that the nations of Europe, if relieved of their debts to us, would spend the money thus saved in increasing their armaments and preparing for war. A little thought should expose the fallacy in this argument. The cancellation of the debts due to us is inconceivable unless the amount canceled is passed along to Germany in the form of lowered reparations payments; there would be no benefit to us in cancellation unless this were done. Under these conditions England, France, Italy, and the others would not be getting the sums of money from Germany which now are being used to pay their debts to us. As for Germany, her military and naval forces are so limited by the

GOOD B U S I N E S S Versailles Treaty that a reduction in reparations payments could not affect her armaments in any very serious way. We in America have an important stake in promoting peace a m o n g the nations, and in reducing the great burden of expense w h i c h is due to competition in armaments. Let us, therefore, try to reach the heart of the matter and not concern ourselves too long w i t h its superficialities. When relations among states are unhealthy, armaments are a symptom rather than a cause. The changed proportions in economic factors which, taken together, comprise the present business depression, have beclouded the relations among the factors themselves. Thus it frequently has been said that frozen credits abroad and suspensions of the gold standard by foreign governments have been caused by the depression. On equally good authority it has been just as frequently stated that the intensity of the depression is the effect of frozen credits and suspensions of the gold standard abroad. A more exact description seems to be that these foreign conditions are neither cause nor effect, but are themselves parts of the depression; the parts are identical with the w h o l e and are related only to each other. In a case of such complexity there is a natural tendency to treat symptoms instead of the disease. Our Federal Farm Board goes into the cotton and grain business; Germany's short-time creditors grant a six-months' suspension of payments; Great Britain goes off the gold standard; we organize a new kind of central bank for the rediscount of investment paper with a view to liquidating certain frozen assets of our banks. It must be clear at once that none of these is, or can conceivably be, a remedy for the total situation; each one is a more or less necessary expedient. Some of them, as expedients frequently do when applied to complicated conditions, raise as many problems as they solve. T o use an old simile, these expedients are like

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trying to press dents out of a tin pan; as fast as a dent is pressed out a new dent appears in another place. The present moratorium is itself an expedient, although it comes nearer to basic conditions than any of those mentioned above. To be productive of any real benefit, the time which it allows must be used for making a permanent readjustment. There is a growing consciousness that the matters treated in the moratorium are something more important than symptoms. Some kind of "modification" of war debts and reparations is being considered by various public officials, and many people expect "something to be done." Yet to temporize now would be merely to add another troublesome, perhaps dangerous, expedient. Its possible danger lies in the fact that it would prevent action that is positive, adequate, and immediate. For the reasons which have been given, the war debts and reparations do not present any problems of degree. Their mere existence, in any degree at all, constitutes a problem. Major operations may appear more painful than treating symptoms, but when they become necessary they cannot successfully be done a bit at a time. We should cancel the debts owed to us by our former allies simply and solely because it will pay us to do so. To worldweary Europeans such an act may appear as the kind of practical idealism which a younger country and a younger people alone are capable of. Much would be done to restore hope and confidence and friendship among the nations. If this were brought about, and also if, as a result of our purely businesslike act, the good will of foreigners toward America and American business were increased, so much the better business would it be for us. V Mr. Owen D. Young, who probably has had closer contact

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with these conditions than any other American, in a recent address made a brilliant short summary of a large situation: ' Our politics and our economics are in conflict everywhere in the world today. Our economics are necessarily international because of our interdependence upon each other. Our politics, on the other hand, are national, increasingly so in every country. The first is forcing itself through frontiers toward an integrated world; the other is building up man-made barriers around a much larger number of political units than existed before the war. The forces are violent and imposing. Some better way must be found of accommodating each to the other or they will destroy each other." A fateful prophecy: They will destroy each other. For the sake of accuracy, however, and in order to fix responsibility, we should like to know which party to this double destruction is the active one—which one is to bring the destruction about. What became of the goose that laid the golden eggs? She died of causes which were extremely roundabout. And what became of the man who owned the goose? Well, the goose was his only means of support, so he probably died too. The line of causation is entirely clear. The goose's owner, although he did not start it, was responsible for the roundabout process which led to the bird's death. After the goose died, the owner found that he could not live without her, so he also died. There remains, however, a certain ambiguity as to the responsibility, the order of events, even the identity of the two who died. For, after all, which of the two was the goose?