Manawatu Evening Standard. SATURDAY, MAY 6, 1933. AN AMERICAN DEFAULT.

Manawatu Standard, Volume LIII, Issue 134, 6 May 1933, Page 6

Manawatu Evening Standard. SATURDAY, MAY 6, 1933. AN AMERICAN DEFAULT.

The United States Administration having 1 decided that interest payments due on Liberty bonds to its own people will not be met in' gold has extended the principle to foreign bondholders. Its attitude on the question is that there should be no discrimination between the two sections. Such a complete disregard of a contractual obligation, carried out with “lightheartedness,” has caused a painful shock to financial circles in London where lapses from the path of rectitude, whether individual or national, are viewed with the gravest concern. “Wholesale repudiation” is the view taken by leading bankers on the default in the gold clause of these bonds, and financial interests in the United States are constrained to admit the force of British _ criticism. The American action is in striking contrast to Great Britain’s payment of war interest last December in gold, and holders of the Liberty bonds resident in England or in France will not only be prejudiced by payment in depreciated currency, but also have their faith in America gravely shaken. One leading Biitish banker makes the sharp comment that “America can now boast of two of the most blatant and deliberate defaults in history.” The reference in its relation to the first default no doubt is to the American States which, toward the middle stages of last century, borrowed foreign money for industrial puiposes and later made default. The Council of Foreign Bondholders and the Association of British Chambers of Commerce have related the facts on several occasions. Twice Mississippi defaulted —in 1842 and 1852—and Florida once in 1845. It has been an oft told story in the United States that the loans were raised to finance the Southern States’ conflict with the North, but even after the Civil War Florida, Alabama, North and South Carolina, Georgia, Louisiana, and Arkansas raised further loans, almost all from Europe, and chiefly from British nationals, and subsequently repudiated them, State legislation for this purpose dating’ from 18T2 to 1884. Some States, to avoid total repudiation, reduced their liabilities by cancelling old bonds and issuing new ones for smaller amounts, notwithstanding spirited protests from a number of bondholders. There were several “settlements” of this kind among the eight repudiating States. While the Constitution forbids a State to violate its solemn obligations, the Republic as a whole has stood behind the defaulters. The amount of dishonoured bonds in 1884 was stated at £61,815,800, inclusive of debts due by municipalities, townships, and country authorities. A Treasury paper issued in 1925 placed the total sums repudiated by the State Governments at £15,530,000, but the accretion of interest over' a lengthy period makes the total an impressive one. The Bondholders’ Council has well said that “with the exception of Russia there does not seem to be any other case on record where the obligation to repay money borrowed for industrial purposes has been deliberately repudiated, and recognition of the debt forbidden by law.” Now the United States makes another default in her history, making British banking opinion question how she can “hope to build a financial system on such rotten foundations.” France is

said to be viewing the matter with serious concern, but she is not without guilt in a somewhat similar matter. During the Great War, and at a dark stage for the Allied forces, France raised loans at four and five per cent, to winch English people and even soldiers in the trenches subscribed. The rate was lower than Britain herself was then paying, but it was a great patriotic effort to help an Ally sorely beset by a relentless foe. After the War, however, when the French franc following the financial crisis was stabilised at 125 to the pound, compared with 25 when the loans were raised, these investors found the value of their investments cut down by one-fifth. Having provided the sinews of war for their Ally, it has been a sore blow to British people for France to repudiate in this manner, and they will not readily forget such treatment. The French investors in the American Liberty -bonds can hardly complain now they are being, to some extent, dosed with their own medicine.