AMERICA AND DEBTS

Evening Post, Volume CXI, Issue 81, 6 April 1926, Page 3

AMERICA AND DEBTS

ARRANGING PAYMENT CONDITIONS OF SETTLEMENT EUROPE'S ECONOMIC RECOVERY. According to a recent issue of the Federal Reserve Bulletin the total indebtedness of Europe to the United States at 23rd November, 1925, was nearly 12,000,000,000 dollars. Arrangements have now been made for payment by the following countrlCS: ~* Funded Debt (Millions of dollars). Belgium .. .... .. 417-Czecho-Slovakia .... 115 Esthonia ..... • • • ■ 14 Finland 9 Great Britain . 4554 Hungary .. 2 Italy .. '... 2043 Latvia .. .. .. ... 6 Lithuania 6 Poland .. .... .. 178 Rumania 44 Total .. 7387 Substantial progress has thus been made in procuring a settlement of the-debt problem, writes Professor D. B. Copland in the Melbourne "Argus." France is the only country with a large debt for which no arrangements have been made. Principal and accrued interest for France amount to 4,200,000,000 dollars, and when a settlement is reached the outstanding amount divided among eight small countries will be less >than 400,000,000 dollars. It is a sign of European economic recoy-ei-y that such a satisfactory position has been reached, but the completion of funding arrangements by no means disposes of all the problems connected' with the debts. TERMS OF PAYMENT. Great Britain has already paid 950,000,QOO dollars, and the arrangements under which the British debt is being paid has been taken as a model for other countries. Payments are spread over 62 years with interest at 3 per cent, during the first 10 yeai'S and 3% per cent, thereafter. At the time when the British settlement was arranged this was thought to be a concession, but with interest falling it is doubtful whether such first-class securities will be yielding much more than 3% per cent. This is the conclusion of a correspondent of the "Economist," which recently reviewed the trend of interest rates. In any case a concession in interest from 4ya per cent, to 3 arid 3% per cent, would merely compensate for the. fall in prices since the debts were incurred, and therefore for the increased value of the money payment. Thus ,so far as Great Britain is concerned the United States has exacted her dues in full measure. Italy is the latest country, which^ has■ arranged for payment. Her total debt is 2,042,000,000 dollars, and a schedule of annual payments over 62 years is fixed in the terms of settlement. But the interest rates are lower than in the British and other agreements. Thus beginning with 1931 interest rates will run at one-eighth of 1. per cent, for 10 years, and will increase for successive 10-year periods to onefourth, one-half, three-fourths, and 1 per cent., and for the last seven years to 2 per cent. The terms are very satisfactory to Italy, and the United Stat(* Debt Commission has made substantial concessions to the Italian plea of insufficient resources. Thus the Commission, commenting on the settlement, declared that its basis was the capacity of Italy to pay. "Italy is poor in natural resources. The visible balance of trade is adverse. Food to support her rapidly increasing population, coal, oil, iron, and copper have to be imported. Her future depends upon the development of her industry and the labour of her people." There is evidence here of some attempt by the United States to grasp the fundamentals of the post-war economic situation in Europe, but many of these things could have been said about Great Britain in 1923. It is possible that Great Britain was too anxious about the political effects of delaying a definite settlement of her debt to the United States.

It cannot'be said that the United States has appreciated her own obligation to Europe in respect of economic affairs since the war. Many extenuating circumstances may be quoted in favour of the United States. The large sums spent upon relief of distressed peoples is. a case in point. But this expenditure was at best but a palliative, and could not go far towards an immediate solution of the economic situation. The economic policy of the United States at Paris has been shown by R.S. Baker in his semi-official treatise on "Woodrow Wilson arid World Settlement" to be fundamentally unsound. "Thus while the President's political policy at Paris sought with farsighted vision to knit the nations more and more closely together his economic policy was negative in character, and its, purpose was to break down obstacles to international trade rather than to set up new or co-operative relationships. It was unity and co-opera-tion in political affairs, laissez-faire in economic matters." Again, "our policy both as regards the League of Nations and the effort to secure co-operation in economic rehabilitation has . seemed to involve ths abandonment of European nations to their difficulties while holding them to their obligations." It is a far cry from this to the official recognition of the World Court and the willingness to accept "capacity to pay" .as the real basis of- a debt settlement. Public opinion in America has given tardy recognition to the new economic relationship of America to Europe, and the Administration was forced to maintain much longer than it desired the "negative" policy begun at Paris in 1919. ' CAPACITY TO PAY. The logic of events must cause a change of attitude. From the European end the. pre-requisites of debt payments are: —(1) a balance of public revenue over expenditure equal to the annual payment;. (2) a sufficient production of wealth to '.meet the ordinary needs of consumption, depreciation, and new capital, and to provide a surplus of saving for debt payment; and (3) the transfer of the annual obligation by means of an excess of exports over imports. All problems, as in the case of German reparations, present great difficulties for the country concerned. Thus the first means heavy taxation for interest which will not be distributed within the country. The second requires the most rigid private economy, and a depression of the standard of living. The heavy taxation will be resisted by the powerful commercial classes; working class organisations will '■ exercise their influence to maintain the highest possible standard of living. If both forms of opposition arc overcome, there will stillbe the very difficult matter of bringing about the required excess of exports over imports. Tho United States has always recognised these problems when applied to payment of reparations by Germany. There is no essential difference in their application to the debt of Europe to America. It is somewhat anomalous that the United States could press for a reduction in Germany's obligations to the Allies whilst attempting to hold the Allies strictly to their commitments. As already noted there is now some effort to apply the test of capacity to pay, but little provision is made in tho agreements so far concluded for the solution of difficulties that may arise over the problem of transferring 'the funds to the United States. In the case of reparations the Director-General of Reparations under the Dawes scheme is empowered to invest the funds in Germany, if at any time their transfer to the Allies will cause exchange difficulties. The maximum investments to be made in this way is £250,000,000, or two years' payments on ; reparation account. After this limit has been reached only those funds should be raised for reparations which can be transferred without upsetting exchange equilibrium. The matter may be stated simply in the following way. The German Government will purchase bills for transmission to the Allies. These bills are drawn against exports, and cannot be available in sufficient numbers unless exports exceed imports »fcr the required amount. If there is an insufficient excess of exports the Government demand for bills will cause the exchange to rise against Germany, and this will eventually imperil currency stability and the gold standard. EMBARRASSING EFFECTS OF PAYMENT. Now if this problem arises over the payment of debts, a likely contingency, the position would be almost as serious for the United States as for Europe. In the first place it is" vital to. the financial situation in .the United States that Europe shall proceed peacefully with the restoration of tlin gold standard. This is the official policy of tho United States, tt is only by this mcuns that America can shed her surplus gold and prevent an inflation of credit upon her excessive gold supplies. The banking authorities have striven sue-

cesafully against this for the last three years, and they recognise the' desirability of an outward flow of gold.. Secondly, the United States, as a creditor nation, is vitally interested in European stability, not merely on account of existing, debt, but also because Europe may eventually absorb some of the surplus capital of America. Indeed it is highly likely that much of the principal and interest of the existing debt will be reinvested in Europe in capital development. . This would solve the problem of transfers in the immediate future, and force upon Europe adequate saving for her industry v and commerce. As long as this did not unduly depress the standard of living there would be little injury, and ultimately considerable gain. / In the long run, however, the interest burden would become oppressive, and might exceed the capacity to pay as measured in the vital test of excess of exports over imports. These considerations, and there are many others, suggest that a mere' agreement to pay an annual sum in liquidation of a debt by no means.solves the problem of payment. The magnitude of the transactions and the ultimate effects upon economic relations between Europe and America cannot be fully realised at present. I have said nothing concerning the effects of payment upon the . United r States or upon the world distribution of international trade. From every point of view the steps being taken by. the United States to secure payment of such. a large debt create new and perplexing international economic problems. With increasing experience of its position as a creditor country the United States will realise more fully that in payment of an international debt there are many difficulties which do not arise with internal debts. As this process of enlightenment develops the country will work out its "manifest destiny," to borrow a phrase from a more aggressive period of American history, as a great creditor nation.