

PROCEEDINGS OF THE
COUNCIL ON FOREIGN RELATIONS


Cancellation of Inter-Allied Indebtedness
&“ _ ‘ - Paper Read at'the Meeting of February 8, 1921


. ' By
CONSTANTINE E. ‘ McGUIRE


A BRIEF REVIEW
OF THE
PRINCIPAL FACTORS
TO BE
CONSIDERED IN CONNECTION
WITH THE
CANCELLATION OF
THE
' EUROPEAN INDEBTEDNESS
TO THE
UNITED STATES


‘ "'M‘“ HE Ministries of Finance of the world have had to
' conduct their inventories of national ﬁnancial re-
: sources in recent years under conditions of exceptional
~ diﬂiculty, and the oﬂicial reports even of some of the
5 larger countries, to say nothing of those whose
sovereignty has only lately been recognized, have not
. a A-
7 been published and made available as early as usual.
But the budgetary speeches have had to be made, and these, together
with oﬁcial memoranda such as was ﬁled at the Financial Con-
ference in Brussels (September 23—October, 8, 1920), have furnished
some material for quasi-oﬂicial reports, for the publications of public
and private banking institutions, and for numerous studies of in-
dividual students of public and private credit. While I shall not
have occasion, from the very nature of the considerations that I
am advancing here, to present any exhaustive series of quotations
from this material, I believe I may *fairly say that an oﬂicial source
can be readily pointed out for all the ﬁgures which I have occasion
to give,—and a source, I must add, in no case conﬁdential, but, on
the contrary, available to any who could have occasion to consult it.
With a view :to approach the subject in an orderly way, let me
ﬁrst indicate the amount and origin of the indebtedness. Then it
will be proper to discuss the economic signiﬁcance of this indebted-
ness, its relation to the stability of governments and the orderly
conduct of business throughout the world, and the alternatives of
policy which the world is facing.
It is clear, of course, that in so short a time, we cannot analyze
budgets, or attempt to show in detail the alarming proportion of
public revenue still being devoted to preparations for war. We are
here concerned with what is to be done with the cost of past wars,
and, in a very general way, how are the nations going to be safe-
guarded from further unrestrained preparation for war. Moreover,
the ~few ﬁgures I shall submit are not extreme; still deeper colors
'could be used in a more detailed study.
The British national debt, funded and unfunded, is declared in
parliamentary papers (cmd 1024, 1920, and Return 240, December
15, 1920) to have stood on March 31, 1920 at £ 7,828,779,095, an
amount greater than the debt as it stood March 31, 1919, by
15 379,126,574. But the British government have certain obligations
additional to its funded and unfunded debt, (pp 10—13 of cmd 1024),
which amounted on March 31, 1920 to £ 46,862,866. The aggregate
gross liabilities of the State were calculated as £ 7,875,641,961. Con-
verted at 4.86, this sum would represent approximately thirty-eight
8
and a third thousand millions; but if converted at something like
recent sterling exchange rates (say 3.75), it would represent ap—
proximately twenty-nine and one-half thousand millions. The ﬁgures
—not all ofﬁcial—for the current ﬁscal year (until March 31, 1921),
indicate that the burden is steadily growing heavier. The Statist
(Dec. 18, 1920) estimates the gross liabilities of the State as
i 7,881,893,000, and it is known that the ﬂoating debt is increasing. On
March 31, 1920, it was i 1,312,205,000; on Dec. 31, 5 1,408,081,000.
Furthermore, none, of the ﬁgures accessible take account of the
enormous aggregate of claims against the British government—claims
of every descriptions, and in every stage of formulation and valida-
tion—railroad and shipping claims, prize court claims, and property
claims. While the total value of these liabilities will not have to be
provided at a given—or an early—date, they constitute, none the
less, an appreciable drain on the British national ﬁnances.
Against these liabilities there are recorded in addition to the
potential wealth of the nation, some assets calculated with precision
to reach £ 106,023,346, and consisting of shares in various corpora-
tions, the Suez Canal, French and Indian obligations, and other
assets amounting to £ 700,000,000, and consisting of (1), advances
to the Colonies, Allied Powers, and the like, and (2), surplus stores
ships, and other war supplies. From time to time, of course,
parliamentary debates disclose certain details in reference to these
advances and other assets; and Treasury statements frequently sub-
mit itemized ﬁgures. A fairly recent one follows:
LOANS T0 ALLIES AND DOMINIONS.
(Million £)
Advances during Advances during Total Advances


Financial year Financial year from August
1918-19. 1919-20 ‘- 1914, to March
31, 1920.
Dominions 23 51% 119%
Allies ..........._.____.. 236 163 1,731
Total 213 111%, 1,850%
v
LIABILITIES OF THE UNITED KINGDO
(Million £) '
Aug. 1, Mar. 31, Mar. 31, Aug. 14,
1914. _ 1917. 1920. 1920.
Funded Debt 588 318 315 _ - 315
Term Annuities _._.__.__.__.__... 30 24 19 19
3%% War Stock _...... _.... 63 63 63
4%% War Stock _... __ 20 13 13
4 & 5% War Stock .._. 1,962 2,041 2,009
National War Bonds _.... _.... 1,477 . 1,477
4% Funding Loan ._ __ _... 409 409
4% Victory Bonds .. _... .... 360 360
Treasury Bonds _...... .. _... _.. 10
Treasury Bills"l _......_. 15 464 1,059 1,000
Exchequer Bonds _... 20 320 319 317
Nat’l Savings Certs _. 74 275 277
War Expenditure Certs... 24 _... __
Other Debt _.... 317 1,229 1,220
American Loan _...... _.... 51 51 51
Temporary Advances 1 217 205 210
654 3,54 17,835 7,750
Other Capital Liabilities _...... 57 53 47 47
Total Liabilities 711 3,907 7,882 7,797
Thus, on May 19 last, the Chancellor of the Exchequer stated
that the indebtedness of France to England was in the neighborhood
of £ 500,000,000. On November 23, 1920 it was stated that Serbia
had been lent £ 21,000,000 during, and i 1,500,000 since, the war,
“for which that country undertook to deliver obligations bearing 5%
and 6% respectively. The ﬁgure of £ 700,000,000 is assumed on a
basis of a very low realization on the loans (with their par values
of £ 1,850,500,000) and low prices for war material. During the
nine months ending Dec. 31, 1920, the Government received £ 199,-
907,733 for surplus war stores, but not much more is expected to'
be sold.
The total receipts of the British treasury (taxation, short term
notes, and all other sources) for the nine months April 1,-Dec. 31,
1920, were £ 5,136,361,498, as against 5 5,382,539,454 for the period
April 1—Dec. 31, 1919. £ 529,496,272 have yet to be collectedin
the current quarter (Jan-Mar. 1921), in order to meet the budget
estimates. Ordinary expenditures chargeable against this period in
1920 reached £ 842,689,719, as compared with 5 1,225,980,718 for 1919.
The obligations of the British Government due to foreign
governments appear to be those held by the Government of the
United States, stated at 34,212,835,992 on March 31, 1920 in the
British Treasury Report, (and at $4,196,838,358.44 of principal, and
$314,582,82497 of interest, on November 15, 1920 in the Annual
'Excludlng bllla held as collateral for loans payable abroad and Included
In External debts
5
Report of the Secretary of the Treasury of the United States for
1920 (pp. 54—58); by the Canadian Government, $181,000,000; by
the Argentine Government 96,000,000 pesos gold; by the Uruguayan
-Government, 23,800,000 pesos gold; by the Japanese Government,
96,000,000 yen; and, ﬁnally by various other governments, some of
which are described as “allied,” and others are governments of
British colonies,-the total of the obligations of this last group
amounting to approximately £ 122,000,000 at par. With the large
amount of indebtedness to individual citizens, rather than govern-
ments, of other countries, we are not here concerned. The magnitude
of these obligations of England to private persons abroad may be
estimated from a statement by the Chancellor of the Exchequer on
December 20, 1920 as to the sums maturing for payment abroad
1921-1924, inclusive :—
In 1921, $20,850,000 worth of 3 months Treasury Bills
in the United States; 50,000,000 yen worth of Japanese 12
months Treasury Bills; $100,000,000, Canadian Bankers’
loan; 12,500,000 Swedish Kroner; $28,590,000 of Japanese
Treasury Bills repayable in United States Currency; and
ﬁnally, $129,048,000 of 5 year notes issued in United States;
In 1922, $95,000,000 worth of 3 year notes in United
States, and $40,000,000 of Canadian Bankers’ Loan. It
may be noted in passing that the only payments on debts
to foreign governments mentioned as contemplated in the
same years are $121,500,000 to the United States Govern—
ment for silver purchase (under so-called Pittman Act),
80,000,000 gold pesos to Argentina, and £ 538,000 to the
Government of Mauritius.
I referred a 'few minutes ago to the indeﬁniteness of oﬂicial
statements as to the amount of the obligations to Great Britain of
other countries. It would seem as if within a year after the war,
the British System of Accounts,—the best in Europe, if not in the
world—could have analyzed and digested all these foreign variable
assets. But in England as elsewhere the reparations negotiations
have left many ﬁgures much in doubt. The British Treasury Report
as of March 81, 1921 will clear up, let us hope, the character, date
of receipt and application, of the payments to Great Britain by
Germany under the Treaty of Versailles. I ﬁnd Mr. Chamberlain
reporting in November:
“Under the Reparation Clauses of the Treaty of
Versailles, this country has been allotted up to the present
time 158 ex-German steamers. Of these, 52 steamers of
257,847 gross tonnage in all have been sold for £ 4,991,625.
This country has also received under the Reparation Clauses
1,000 tons of dyestuﬁ's of the value of marks 40,613,600.
Under the Financial Clauses the Army of Occupation has
received in cash Marks 346,000,000 and in kind, accommoda-
tion and transport. Under the Economic Clauses this country
has received up to the present £ 4,627,856.12. 8d in settle-
6
ment of monthly debit balances beiween the Germans and
British Clearing Oﬂices. The Reparation Commission have
not yet ﬁxed the sterling equivalent of the sums in marks
referred to above.” '
The ﬁnancial experts in England have not been blind to the
seriousness of the condition of the national credit. Naturally, they
have not always been successful in persuading those in control of
public policy to follow their ﬁnancial plans, although it must be
said that Chancellor McKenna resolutely set out to impose taxes
that would produce large returns. His successor, however, has
appeared to drift along depending on short term ﬁnancing, ap-
parently seeking to avoid the further aggravation of economic dis-
turbance which he thinks would be entailed by any thoroughgoing,
drastic policy of taxation. It must not be inferred, of course, that
taxation in England is in any way light. The “Statist” estimates
(December 11, 1920) that the British Government in 1920-1921 is
taking £ 30% of the per capita national income of £ 112%, as
against £ 4% of £ 50 respectively in 1912-1913.
(National Income ....._.._..._.._.._...__..._.... 1913 £ 2,250,000,000
Government Income ........._.._............_. 1913 £' 200,000,000
National Income W 1920 £ 5,000,000,000
Government Income .........__......_... 1920 £ 1,400,000,000)
But it must be noted that of the estimated revenues for 1920-1921,
£ 1,418,300,000 (London Economist, October 20, 1920) more than a
ﬁfth (£ 310,756) is classiﬁed as special receipts emanating from
numerous sources other than taxation.
A discussion of the effect on British commercial banking and
investment banking conditions of this serious situation of the general
credit of the country would be interesting, but as we have yet to
consider some other countries, and then take up the question of the
disposition of the debts owed to the United States, I can only call
to your attention such a signiﬁcant fact as that total new capital
subscriptions for the calendar year 1920 are reported by the Bankers
Magazine at £ 367,000,000 against £ 1,036,000,000 in 1919; and rel-
atively little of the 1920 amount was destined elsewhere than within
England itself. To one detail, however, I must draw your attention,—
namely, the debasement of the subsidiary coinage of England. All
during the winter of 1919-20 this plan was discussed, and even the
fall in the price of silver did not alter the determination to reduce
the ﬁneness of British silver coin from .925 to .500. The Chancellor
announced at the end of December that the silver circulation of
the Kingdom amounts to £ 60,000,000. 5 7,000,000 of the new coin-
age has been minted.
The balance sheets of France, Italy, and Germany make mourn-
ful reading. France is reported to have had on September 30, 1920,
a national debt of 285,836,000,000 Francs—and this calculation is
based on a par rate of exchange for her foreign debt aggregating
83,273 millions, and in part consisting of half a billion pounds to
England (payable in sterling), (as reported March 31, 1920), and
7
$2,966,028,443 (payable in dollars) to the Government of the United
States, as reported (November 15, 1920), to mention only the larger
items. ~
French deﬁcits had been accumulating before the war, and the
government was only then beginning to make headway against them,
by resorting to an income tax. Actual use of this source of revenue
was deferred until 1916, and has never been as searching as might
have fairly been expected. The government income fell from ﬁve
billion francs in 1913 to francs 3,800,000,000 in 1915, rising to
6,300,000,000 in 1917, and 6,500,000,000 in 1918.
M. Klotz states (“Situation ﬁnanciere de la France,” in Revue
Economique Internationale, Nov. 1920) that the current ﬁscal year
would yield the following kinds and amounts of income:


...._.... Francs
Taxation 17,500,000,000
Short term Treasury Notes W 14,000,000,000
Long term Treasury Notes 11,500,000,000
Advances from the Bank of France 200,000,000

Francs 43,200,000,000
After reviewing the other assets of France, and fervently
reechoing the Anglo-French declaration of March 1918 (*), M.
Klotz declares that France is assured of recovering her advances
to her allies, which he calculates as francs 8,873,000,000 in cash
and credit, and francs 6,925,000,000 in supplies. The program of
“reparation integrale” vigorously championed by M. Klotz and many
others, is calculated to yield in the course of time more than francs
200,000,000,000. Of this, some francs 136,000,000,000, are calculated
by M. Louis Dubois to represent the aggregate property damages
(the balance being, broadly speaking personal damage). Able French
statisticians, René Pupin and E. Michel, (in the Journal de la
Societé de Statistique de Paris January, 1921) discuss the real extent
of the property damage, and while we have no time to analyze their
methods and results, it is interesting to ﬁnd that the ,“co-eﬂicient
of reconstruction" today is not less than 4, which applied to the
total replacement value (as distinguished from intrinsic and other
statistical values), of all the property in the ten devastated provinces
of France in 1914, calculated by Michel as francs 33,000,000,000,
would give us francs 132,000,000,000.
The budget as submitted for 1921 but not yet approved, con-
templates expenditures of francs $287,000,000 and ordinary and
extraordinary receipts of 24,963,000,000,—-it being intendedsto re-
cover sixteen and a half billions from Germany, now or later, in
installments, the unpaid balance to bear interest, and France herself
to issue bonds to cover the deﬁcit, which will, of course, be
guaranteed by the German payments.
It was reported lately (Federal Reserve Bulletin, January, 1921,
p. 79) that the French 6% national ,loan bad yielded francs 27,000,-
' —'("T__"TF6 obligations of Russia remain: they must be met, and shall
be met by the new state, or collection of new etetee which my new or
later represent Russia."
8
000,000, of which francs 9,000,000,00 were new money. This is a
better showing than had been estimated oﬁcially.
The per capita ﬁgures in the Statist (December 11, 1920), show
that of an estimated national per capita income of francs 3,200 in
1920 (as against one of 960 in 1913) the government was getting 574
(as against 129 in 1913). Taxation can perhaps sink more deeply
in France than would seem to be the case if these estimates hold;
but the economic balance sheet of the nation is not reveals! by
them alone. The ominous mass of banknotes, bons de la défense
nationals and obligations de la défense nationale seems almost in-
digestible. '
The Italian debt to the United States was stated by the Secretary
of the Treasury as $1,631,338,986.99 on November 15, 1920. The
total national debt, converted at par appears to be equal to about
$18,330,000,000. Of this, apart from the amount due to the United
States, about 13% billion lire represented pre war debt, 34 billions
the war loans, 24 billions the ﬂoating indebtedness and banknotes
issued on state account.
While revenues were increasing in 1920, the deﬁcit appears to -
be as formidable as ever, due largely, to be sure, to coal and wheat
costs. Let me again cite the Statist in connection with the per
capita taxation. In 1913, the Italian Government collected 65 lire
of the national per capita income of 580, while in 1920, it took 276
lire from the estimated national per capita income of 2175 lire.
The German national debt now exceeds three hundred thousand
million marks (M. 318,000,000,000, on December 31, 1920). The
Floating Debt is now increasing at the rate of six billion marks a
month; on December 31, 1920 it had reached M. 152,727,180,000:
There is an oﬂicial British estimate in Report 'of the Department of
Overseas Trade, of as high as M. 197,000,000,000; and the ordinary
daily receipts are now far below the interest on the ﬂoating debt
alone! The total paper currency issued exceeded M. 77,000,000,000
(November 25, 1920) ; of this, the note circulation of the Reichsbank
is reported on January 12, at M. 65,958,442,000 as against a gold
reserve hardly one-sixtieth as large. But the character of the Ger-
man situation becomes still more appalling when we recall that these '
ﬁgures do not embrace the results of the operations of the German
and British Gearing houses, a glimpse into which Mr. Chamberlain
permitted us to have a moment ago; nor do they account for com-
pensation to be paid to Germans by their own Government under
the Versailles Treaty, for such deliveries of ships, machinery, horses,
war supplies, and the like, payments which some courageous German
statistician measures as worth M. 131,000,000,000. Finally, the
Supreme Council has heaped Ossa on Pelion with aggregate payments
of M. 226,000,000,000, and an indeﬁnite 12% Exports Tax.
Germany’s deﬁcit during the present ﬁnancial year can not fall
inside of M. 70,000,000,000. This appears from the following oﬂicial
ﬁgures, of which the British Department of Overseas Trade says,
9
“there can be no reasonable ground for not accepting them at present.”
Expenditures.
M. 51,000,000,000 Expenditure, Ordinary and extraordinary
41,000,000,000 “ Armies of Occupation, Com-
missions and deliveries under
Versailles Treaty.
18,000,000,000 Port and Railroad Deﬁcits.
110,000,000,000
(9,000,000,000 transferrable to the States).\
101,200,000,000 Expenditure of the German Etnpire.
Revenues (Aggregate Taxation)
M. 36,970,000,000 for the Empire. Of this
9,400,000,000 go to the states; leaving
27,570,000,000 for the national expenditures.
In addition, it is estimated that the States and Communities, which
requiring M. 15,750,000,000 will be able by local taxation, to raise
M. 15,370,000,000.
Time does not permit any analysis of the expedients recom-
mended to soak up this colossal indebtedness. The capital levy, it
is now proposed, will be realized to the extent of 33%% by August
1, 1921. Not long since, the President of the Reichsbank advocated
the introduction of a forced loan, which might yield M. 15,000,000,000.
The Polish State Loan Bank reports (December 31, 1920) issues
of Polish marks 46,973,000,000, and seems to be increasing them
at the rate of marks 4,500,000,000, a month. Poland’s domestic debt
had reached M. 40,000,000,000 in September, according to its delegateS’
reports at the Brussels Financial Conference, while its foreign debt
to France, England and the United States is said to exceed $600,000,-
000. The Secretary of the Treasury reports (1920, p. 66-67) that
he holds (as custodian) obligations of Poland received from the
Secretaries of War and the Navy, for surplus war supplies, amount-
ing to nearly $60,000,000.
Czecho Slovakia has a national debt of kronen 40,000,000,000
some of which is the Bohemian share of the Austro Hungarian debt.
To the United States she owes $61,256,206 for direct advances, and
$20,600,000 'for surplus war supplies. Her note circulation, as re-
ported at Brussels, exceeded kronen 10,500,000,000 with no gold in
reserve.
The Roumanian delegates at Brussels announced a national debt
of roughly equivalent to $4,100,000,000 (at par). It appears that
on November 15, 1920 Roumania owed the United States $23,206,820.
Her note circulation exceeds ten billion lei. .
Our interest at the moment does not require that we should,
even in this hasty way, consider the outstanding ﬁgures of the
other countries of Europe and Asia-Belgium (with her estimated
deﬁcit of francs 4,500,000,000 in the budget for 1921), the Kingdom
of the Serbs; Croats, and Slovenes, or Greece, to say nothing of
Russia. Nor is there time or occasion for separate study of colonial
10
ﬁnance. The ﬁnancial fortunes of Egypt for instance, are inex-
tricably bound up with those of England, all the gold of Egypt hav-
ing been absorbed by London, and its place taken by British war
securities; Egypt’s cotton crop is sold to Milan, Barcelona and
New England through England, and a further ﬂood of paper cur-
rency, based on British securities, is let loose in Egypt. .80 with
India to some extent; and with France and the French colonies and
protectorates. '
Japan, to be sure, has a less unsound situation in the matter of
public credit than any of the other great powers except the United
States; although more satisfaction could be derived from this fact
if the condition of Japanese private credit (due to unstable com.- .
modity markets), were less overcast. On December 27, 1920 Japan’s
specie holdings were reported (Japan Gazette of Jan. 7, 1921) as
Yen 2,183,000,000 of which Yen 310,000,000 are likely to be required
on foreign account, but some Yen 500,000,000 are on deposit abroad
(chieﬂy in the United States) to the credit of Japanese private banks.
Japanese ordinary revenues for 1920 were expected to meet about 80%
of the ordinary expenditures.
Certain fundamental things will occur immediately to our minds.
The national debt of the world are of incredible size. Any attempt
to calculate them involves the use of ﬁgures that formerly were used
only by statisticians when they speculated on the extent of national
wealth. The currencies of the world are being increased in volume
in an alarming way. A short time ago the National City Bank of
New York estimated that the ratios of gold reserves to outstanding
government paper currency had fallen from 66% where it stood in
July, 1914, to 18% in November, 1918, 13%% in December, 1919,
and 9% in December 1920. And these ﬁgures do not take account
of Russia since 1917! It was already apparent, even before the
Brussels Financial Conference, that three out of four nations of
the world had had frankly to reconcile themselves to the abandon-
ment of the gold standard and to redouble their efforts to meet con-
stantly increasing government deﬁcits.
It is stated at various places in the report of the Secretary of
the Treasury for 1920 and most conveniently on page 106, that
the securities acquired by the Treasury under authority of the Liberty
Bond Acts aggregate $9,445,000,000. The securities, of which the
Treasury Department is custodian, and which are held on account
of sales of war supplies, amount to $563,000,000, while those received
from the Relief Administration amount to $84,000,000. The total
foreign securities held by the Government on November 15, were
reported as $10,092,054,122.73. This amount represents 91% of all the
securities owned by the Government, the other 9% comprising capital
stock of war emergency corporations, railroad securities and capital
stock and bonds of the land banks. '
With the methods carefully determined by Congress ‘for the
reduction of the indebtedness of the United States, I assume, of
course, that you are familiar. It is conveniently summarized on
11
Page 113 of the Report of the Secretary of the Treasury for 1920.
A cumulative sinking fund was established under the Victory Liberty
Loan Act and became effective July 1, 1920. This provision per-
manently appropriates for the current ﬁscal year and each ﬁscal
year thereafter until the debt is charged, “ an amount equal to 256%
of the aggregate amount of the bonds and notes outstanding July 1,
1920, less an amount equal to the par amount of any obligations of
foreign governments held by the United States on that date, plus
the interest which would have been payable during the ﬁscal year
for which the appropriation is made on the bonds and notes Ipur-
chased, redeemed or paid out of the sinking 'fund during such year
or in previous years.” Inasmuch as nineteen and one-half billion
dollars worth of liberty bonds and victory notes were outstanding
on July 1, and the par amount of the obligations of foreign govern-
ments purchased under the loan acts and held at that time was, as here-
tofore stated, nine billion four hundred forty-ﬁve million dollars, it
appears that the difference, that is the amount intended to be amortized
from this sinking fund, is ten billion one hundred thirty-six million
dollars. 2%% of this is $253,404,000. It has been calculated that
an average interest payment of something like $432,000,000 a year-
will be required in addition to the ﬁxed appropriation to extinguish
the indebtedness in twenty-ﬁve years ;-thus an average aggregate
payment of $685,000,000 fer some 25-28 years.
Any repayment of the principal of the foreign obligation has
to be applied to the retirement of the liberty bonds and victory notes
(Section 3, ﬁrst Liberty Bond Act, Section 3, Second Liberty Bond
Act). Repayments were made to an amount of $114,000,000 up to
November 15, 1920, and this amount was applied to the purchase of
liberty bonds having a par value of $119,000,000.
In a letter of the Secretary of the Treasury to the Chairman of
the Committee on Ways and Means in the House of Representatives
on December, 1919, (Annual Report, 1920, p. 59) it was stated that
the interest on the aggregate obligations purchased under the war
loan acts amount to $475,000,000 a year. It was then proposed by
the Treasury to defer the collection of the interest for the present
until the debtor nations were in a position to assume the burden. -
During the fall of 1920 and until the present time, so far as
any announcement has been made, the negotiations looking to the
deferment of interest collection have not been completed. The See-
retary of the Treasury now (in his Annual Report for 1920, p. 61)
proposes a method for the consideration of Congress and possibly
as a tentative basis of discussion with the European Governments.
It appears that some such plan will be worked out as was pro-
posed _in Secretary Glass’ letter to Chairman Fordney for the dis
position of the interest at the present time, while sooner or later,
of course, negotiations will have to be engaged in on the larger plan
now proposed by Secretary Houston for the funding of principal
and interest. Possibly the temporary plan will take the form of per-
mitting the deferment of interest for several years and its payment
12
thereafter installments together with the interest regularly accruing.
- But in any event, it is going to be a long time before the governments
of Europe are able to meet the aggregate interest payments, to say
nothing of amortization charges. Not even the most comfortably
ﬁxed of them all can face this gigantic burden anywhere in the
near 'future. 1
_ For purposes of war the needs of government always outrun
its resources. Invariably there has been an almost immediate resort
to the appropriation,—today we call it “mobilization,”-of private
resources. With due regard for the inviolability of individual in-
terests, but determined to secure and exercise effectively the 'control
of credit, the governments of the world in the last seven years have
drawn heavily upon the popular conﬁdence in what sovereignty can
do in their effort to turn to public uses, as variously conceived, all
the resources, tangible or intangible, within reach. As we have
seen, unlimited quantities have been issued of currency which has
depreciated in many instances to the rating of indeterminate pro-
missory notes, and 'for this currency and other obligations the govern-
ments have in a certain sense sought an endorsement on the part
of the public, that is, they have sought an expression of public con-
ﬁdence in the validity of government credit, in securities of relatively
long term which represent, among other things, an effort to stabilize
the earning power of credit throughout all forseeable exigencies until
a day may come when ﬁat currency may have been redeemed, or
when, in other words, the factors of abundant production, facile
means of distribution, and tranquil public feeling as to the future,
may again clearly be discerned at work.
It has been suﬂiciently set forth what a burden the indebtedness
of sovereign states constitute at the present time. No time has been
available to estimate the extent to which this burden has been in-
creased by local indebtedness, for, after all, local indebtedness is
apt substantially to represent investment in the machinery of pro-
duction and in things that facilitate the elaboration of goods ‘and
the effective and economical rendering of services. I do not wish
to imply a doubt as to the value of the indebtedness incurred by
sovereign states, but, as I have indicated, most of it has to do with
war and the preparations for war. In giving some per capita ﬁgures
I do not wish to have it inferred that one can judge the real weight
of the debt of sovereign states by per capita estimates. Those who
know conditions in some of the countries of this hemisphere and of
Asia, as well as those of Europe, know how inconclusive a measure
of economical strength we may ﬁnd in per capita ﬁgures of in-
debtedness, circulation and the like.
The economic signiﬁcance of the international indebtedness is
greater than its proportion to the total national debt. Whatever a
sovereign state may do with its domestic debt it is the accepted theory
that it must handle its foreign obligations with the greatest punctuality
and complete fulﬁllment of all conditions. Inability punctually and
fully to meet their foreign obligations has made it exceedingly dif-
13
ﬁcult for the governments of Western Europe to take any measures
which would effectively win back public conﬁdence, neutralize the
unfavorable inﬂuence affecting the exchanges, and assure encourage~
ment of production and the smooth operation of the processes of
distribution. I do not, of course, believe that all the ﬁnancial trouble
experienced in the last few years, of which the course of the ex-
changes is but one index, is attributable exclusively to the existence
of this mass of international indebtedness. Naturally there has been
an immense amount of readjustment necessary in the settling-down
process after so wild a struggle as the one we have experienced.
Artiﬁcial forces of every description werebrought into play to con-
trol and manipulate, to force, to retard, to concentrate, and to divert
all the processes of production, and these forces have in turn
stimulated the instinct of the speculator and befogged the landmarks
of the person of average prudence and responsibility. A great deal,
both material and spiritual, was torn loose from its moorings and
sent downstream to take its chances in the ice jam. And, of course,
it can not be too frequently emphasized that no one formula could
be expected to solve all the problems now crowding on the world.
Nevertheless, I am convinced that the problem which calls for solution
ﬁrst is the one which affects the general attitude towards the state.
The popular conﬁdence in‘ the state has everywhere been shaken.
This is natural. It is a' formal reaction from the imperious absorp-
tion of all activities and powers by the state, and the ruthless sub-
ordination of every interest to the national policy, as, for the time
being, the authorities interpret it. But it is one thing to resent and
challenge l‘Etatisme, the theory of the omnipotent government, and
quite another to become so demoralized in the face of the forbidding
aftermath of war, as to lose all assurance in the maintenance of
civil order, and the reasonable stability of ﬁscal policy, long enough
to bridge a single harvest. The business communities in Europe
today have no knowledge of what is ahead of them; they are fearful
of the governments, however much they detest the intolerable in-
terference with their lives the governments have now come to prac-
tice. The building up of a reasonably strong volume of private
credit is retarded by the universal pre-occupation as to the impending
disasters in public ﬁnance, with ’further uncontrolled inﬂation of
currency as the only medication. It is the dreadful recourse, each
day more frequent and violent, to the use of opiates. To be sure
private business is going on, and surprisingly briskly, and bank
balance sheets are roseate, but the burden of taxation, the cost of
the effort to maintain garish standards of living, and above all the
sinking purchasing power of currencies, are shadows overhanging
everything. Whether people attempt to think it out, or not, they
are much worried as to the integrity of the national credit. We
instinctively, and as we believe, loyally try to preserve intact the
nominal value of any contractual consideration, even though real
values may shrink tremendously. We do not wish to see any formal
impairment of public securities, and least of all an ofﬁcial admission
14
of bankruptcy. Yet that is undoubtedly what lies ahead of many
European governments. Some have drawn nearer to it than others.
Beyond bankruptcy we do care to look. The process of physical
rehabilitation is painful enough; the reconstruction of nations and
of an entire cultural phase in the world’s history, is the work of
centuries. There are those who say that nations have in other times
survived terrible burdens, and that it was never possible to meet all
obligations given in war time when they came due, although all
such obligations have subsequently been honored, and the hardship
survived.
It is true that mankind has a way of living through war,
pestilence and enslavement. It is true, however, that only by such
convulsions and agony we can move forward? Is our theory of
progress to be one of biological determinism, and are we to build
our future on successive mounds and ruins? Sure it is not necessary
that everything we have in our entire social order should be further
tested by the ﬁre, in order to see how much of it is to be preserved!
It seems as if these might be a healthy minority, at least, willing
to do business on some other theory of life.
We are now squarely confronted by the problem of the policy
of the United States. This money Europe owes us seems an enormous
amount; in comparison with the national debts, and even the ag-
gregate international obligations, it is not so large. But its import-
ance is paramount. We can use it to infuse new self-conﬁdence
and vigor in the torpid, half-drugged sovereignties, and immediately
enable them to inspire all who have to do business with them with
renewed conﬁdence in their ultimate recovery and normal function-
ing. We hold a key. If we demand payment, not all the cxpedicnts
they—or we—can contrive will avail; and the shriveled purchasing
power of their currencies will grow more and more feeble. We can
relieve them, if we will. If we do not, we can not have been the
gainers, for our debtors will either have been driven into some
action still more costly in character than the remission of the debts,
or they will have become officially bankrupt. I am aware that the
people of this country generally expect the foreign indebtedness to
be paid off, and that it will be no easy task to face them with the
assurance that its payment can not reasonably be expected in the
life-time of the present generation, and that, indeed, it will be ex-
pecting very much to count upon any person now living ever seeing
the day when all the deferred interest alone will have been paid up.
But they must be faced with the fact, and they may as well be
faced with it before 1945, when they will presumably have amortized
that portion of our own domestic debts which exceeds the foreign
obligations, for they will then have to begin amortizing that portion
which it is contemplated to amortize with the proceeds of the foreign
debts. After all, I believe that the people of this country would
be willing to face this additional burden, if they have before them
a resolute and well considered program formulated by the administra-
tion and intended to relieve the world as a whole from the spectre
15
of further preparations for war and at the same time alleviate the
situation in Europe. If the United States will take the lead and
formulate such a program, laying it before the leading nations, our
government may count upon having behind it the weight of popular
approval, not only in this country, but throughout all the little nations
in the world, all of whose people are sadly depressed by the anxiety
which they feel when they witness the demoralization of the great
nations who, after all, control the prosperity of the world. As I
contemplate the necessity of resolution and the adoption of some
plan rather than reliance upon a policy of drift, I am led to quote
a remark by Lord Loreburn in his penetrating study entitled “How
the War Came” (Page 175).
“A strong prompt decision by each State as to the course
it proposed to steer and an immediate announcement of that
course, where an antagonist was about in ignorance to thwart
it, or as a friend was about to commit some error which
would run counter to it—these, surely, are necessary in the
management of any kind of controversial business.”
As I see it, there are really two broad alternatives facing the
world today :— Of course, I am speaking of general and philosophical
tendencies, rather than detailed and particular cases. The nations
may continue to cultivate the theory of unlimited state sovereignty,
and encourage the further development of the means for its main-
tenance. The may continue to calculate on all possible combinations,
military and ﬁnancial, with which any of them might at any time
be confronted, and prepare to resist such combinations. They may
emphasize still more strongly the nationalistic theory of self-suf-
ﬁciency and economic independence, the control of strategic materials
and needs of communication, and proceed to abrogate all economic
laws in the superior interests of national sovereignty. They may
elaborate an economic and military policy intended to disprove and
defy the principals on which the material world seems to be con-
structed. For the United States, in particular this formula is an
inviting one, by reason of our immense resources, our geographical
position and the relation we now bear to the rest of the civilized
world. We can arm to the teeth and be prepared to meet any pos-
sible combination which might be formed against us, either by all
our debtors or by any group of them; and meanwhile we can salvage
such of their movable property as can be without too great difﬁculty
attached and brought under our own physical control,» We can
then fold our arms and look on while they “stew in their own juice."
Indeed, it is not so long since that a man remarked to me that he
thought Europe ought to be let pay the penalty for the corruption '
of its civilization, and that we should offer no help, either by way
of remission of debt or by extension of material assistance, but stand
aside and permit decay to set in and nature to take its course.
But the trouble with this alternative is that it overlooks the
fact that the entire world is more or less of a piece, and that what
goes on in Europe or even in one or the other end of Europe, can
16
not but have a repercussion in this country. It does not take account
of our dependence upon the existence of general tranquility in the
world and a state of conﬁdence and assurance that reasonable degree
of public order will be maintained while private business is being
transacted. Only the self-sufﬁcient village community can live in
such ideatight bliss. At the very moment that such a policy were
determined and the measures begun to give it eﬁect, the signs of
weakness would be discernible as a result of the effect on us of the
economic breakdown and political chaos in Europe. That break-
down has come in some quarters, and is barely being held 05 in
others, and if I have not summoned as witnesses all the observers
who, in books and magazines, report the widespread distress and
deepening despair which is settling on the old world, it is because
you are now acquainted with the character of the testimony. Un-
fortunately, this ﬁrst alternative is the one more readily taken up
in times like these, when idealistic hopes which took but little account
perhaps of realities have been disappointed, and reactions of cynicism
and disillusionment set in. It is a period of impatience and ill-
temper, when loose thinking is common, and resolute, steadfast
courses unpopular.
Broadly speaking, the other alternative involves the adoption
by the leading nations of a reasonable policy of co-operation, looking
to gradual disarmament, and agreement on the fundamental principals.
Any plan laid before the other governments involve economic
elements, matters in the domain of international law and certain.
political, and, if you please, moral considerations, all of which are
vital factors in the peace of the world. It must embrace a genuine
cessation of military and naval preparation, not necessarily the scrap-
ping of ﬂeets, aircraft, or fortiﬁcations, but the declaration of what
is commonly known as a “holiday” in construction of these means
of offense and defense, and the immediate acquisition of all enter-
prises for the construction of armament and military munitions by
the several States. The reasonably rapid reduction of personnel,
no matter how the State has to provide for the men released, is
another indispensable element in any plan of restriction of the
preparations for war. 'In the domain of international law there
should be agreement in principle (to be carried out later in detailed
conventions) as to the outlawry of the use of chemical warfare;
the abandonment of reprisals in any and all circumstances; the
acceptance of the inviolability of merchant craft; possibly, also, the
automatic action of neutral governments to bring about an effective
blockade of belligerency wherever it appears without dispute as to
who is the aggressor. After all the thing which needs to be quaran-
tined is the state of belligerency. \
‘ There are certain other settlements which must be regarded,
I believe, as essential to the peace of the world, not only now, but
for the future. .
For instance, a determined and patient eﬁ'ort on the part of our
government would go far towards settling by international con-
17
vention the question of protection of racial minorities wherever
they exist, so far, indeed, as this problem can be solved otherwise
than by the exercise of real understanding and human charity. I
also ‘feel, and this is profoundly near my own heart, that the ex-
tension of the good ofﬁces of the United States Government at the
time that it were to initiate the other negotiations necessary to the
successful carrying out of this plan of cancellation of war indebted-
ness on the basis of Quid pro quo, would make it easy for the Govern-
ment of England gracefully to recognize the right of those who
reject her offer of partnership in empire, peacefully and unmolested
to withdraw. Such action, in such circumstances, would make it
possible for England to do at least with justice what, until lately,
could at any time have been done with generosity and as an im-
mortal precedent. England would thus secure a friendly neighbor
who would be undoubtedly willing to shoulder a just proportion of
the British war debt if permitted to go in peace, and who would
also be as willing to renounce the ambitions and burdens of empire
as all the other little nations have been willing to abandon them in
order to win the precious and spiritual treasure of self-direction.
An independent Ireland would be as little concerned with the im-
perial projects of larger nations as either of the Dow Countries
after their emergence from centuries of attempted assimilation by
their neighbors. Certainly, the Government of England can hardly
expect to increase the red corpuscles as against the rapidly increasing
white ones in her ﬁnancial system, so long as she has to spend
£ 3,000,000 a month to maintain her military forces in Ireland, and
thus lay out an amount far in excess of the net proﬁts she has been
in the habit of taking out of Ireland in the way 0f taxation for
many years.
Possibly no recapitulation is of any use after such a survey of
the question as I have had to make, but I venture to point out the
chief considerations that I have set before you. '
(1) Sovereignty has been a dreadful task-master. I be-
lieve we must be less sedulous in our devotion to it, and that
we must see whether we may not more 'wisely give heed to
what the little nations are thinking, than what resources the
big nations can muster.
(2) This war has frightfully mortgaged the future. Are
not signs everywhere discernible that people are going not
merely to chafe under the burden, but to question the utility
of our political, economic and social system, or even of our
sacrosanct ideas of sovereignty itself? If this is to be the
outcome, there is not going to be much of our foreign debt
paid to us, unless we put a lien on everything our debtors pos-
sess, movable and immovable, and have plenty of physical force
in reserve to make the lien good.
(3) Somehow, no doubt, the race will survive if any or
all the governments of Europe collapse. The United States
may become, either by design or as residuary legatee, the fore-
918
most imperial state in the world, vigorously pushing forward
a program of economic penetration through this hemisphere,
and ﬁnancial leadership in the world. Nevertheless, many new
ideas may be set loose under the pressure of economic forces,
and we may yet be brought to a period of exhaustion and stag-
nation as profound as that which overtook the classical world
of Asia 'and our own western classical antiquity. Is it possible
that we are incapable even of imagining, if not of cﬂectuating,
an alternative to this sacriﬁce?
(4) The debts to the Government of the United States
will never be paid. Our people will soon enough ﬁnd out that
not even a substantial portion of the interest can be paid. The
only real value of this indebtedness, if the paradox be permitted,
lies in their use at the present time rather than in any eventual
payment. It consists in their application so as to improve the
credit of the exhausted nations and thus make it possible for
them to balance their budgets, to restore public conﬁdence in
the stability of governments and ﬁscal programs, and in that
way encourage production, to stimulate the operation of the
private, quasi-public and public machinery that was absorbed
by the several governments for purposes of war,—and ﬁnally,
above all, to enable the United States to bring about a cordial
and immediate response to the program of international order
which this government may be inspired to offer to the world.
19
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