Skip to main content

Full text of "A brief review of the principal factors to be considered in connection with the cancellation of the European indebtedness to the United States"

See other formats



Cancellation of Inter- Allied Indebtedness 

Paper Read at the Meeting of February 8, 1921 














Digitized by the Internet Archive 
in 2015 

HE Ministries of Finance of the world have had to 
conduct their inventories o'f national financial re- 
sources in recent years under conditions of exceptional 
difficulty, and the official reports even of some of the 
larger countries, to say nothing of those whose 
sovereignty has only lately been recognized, have not 
been published and made available as early as usual. 
But the budgetary speeches have had to be made, and these, together 
with official memoranda such as was filed at the Financial Con- 
ference in Brussels (September 23 — October, 8, 1920), have furnished 
some material for quasi-official 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 official 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 oi 
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 
£ 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 


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 
£ 7,881,893,000, and it is known that the floating debt is increasing. On 
March 31, 1920, it was £ 1,312,205,000; on Dec. 31, & 1,408,081,000. 
Furthermore, none of the figures accessible take account o'f 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: 


(Million £) 

Advances during Advances during Total Advances 
Financial year Financial year from August 
1918-19. 1919-20 1914, to March 

31, 1920. 







111 ¥2 





Aug. 1, 

Mar. 31, 

Mar. 31, 

Aug. 1 





Funded Debt 588 




Term Annuities 30 




31/2% War Stock 




41/2% War Stock 




4 & 5% War Stock 




National War Bonds .. . 



4% Funding Loan 



4% Victory Bonds 



Treasury Bonds 


Treasury Bills* 15 




Exchequer Bonds . 20 




Nat'l Savings Certs 




War Expenditure Certs 


Other Debt 




American Loan 




Temporary Advances 1 








Other Capital Liabilities 57 




Total Liabilities 711 




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 £ 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 & 5,382,539,454 for the period 
April 1— Dec. 31, 1919. £ 529,496,272 have yet to be collected in 
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 £ 1,225,980,718 for 1919. 

The obligations oi the British Government due to foreign 
governments appear to be those held by the Government of the 
United States, stated at $4,212,835,992 on March 31, 1920 in the 
British Treasury Report, (and at $4,196,838,358.44 of principal, and 
$314,582,824.97 of interest, on November 15, 1920 in the Annual 

♦Excluding bills held as collateral for loans payable abroad and included 
In External debts. 


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 o'f 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), 
30,000,000 gold pesos to Argentina, and £ 538,000 to the 
Government of Mauritius. 

I referred a 'few minutes ago to the indefiniteness of official 
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 O'f March 31, 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 dyestuffs of the value of marks 40,613,600. 
Under the Financial Clauses the Army o'f 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 £ 4,627,356.12. 8d in settle- 


ment of monthly debit balances between the Germans and 
British Clearing Offices. 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 £ SOV2 of the per capita national income of £ as 
against £ 4:^2 of £ 50 respectively in 1912-1913. 

(National Income 1913 £ 2,250,000,000 

Government Income 1913 £ 200,000,000 

National Income 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. £ 7,000,000 o'f 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 


$2,966,028,443 (payable in dollars) to the Government of the United 
States, as reported (November 15, 1920), to mention only the larger 

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 o'f income: 


Taxation 17,500,000,000 

Short term> Treasury Notes 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, Rene Pupin and E. Michel, (in the Journal de la 
Societe 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-efficient 
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 44,287,000,000 and ordinary and 
extraordinary receipts of 24,963,000,000, — it being intended to re- 
cover sixteen and a hal'f 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 had yielded francs 27,000,- 

(*) "The obligations of Russia remain; they must be met, and shall 
be met by the new state, or collection of new states which may now or 
later represent Russia." 


000,000, of which francs 9,000,000,00 were new money. This is a 
better showing than had been estimated officially. 

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 revealed by 
them alone. The ominous mass of banknotes, bons de la defense 
nationale and obligations de la defense nationale seems almost in- 

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 ISV2 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 o'f 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 official 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 oi 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 Clearing 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 o'f M. 70,000,000,000. This appears from the following official 
figures, of which the British Department of Overseas Trade says, 


"there can be no reasonable ground for not accepting them at present." 

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. 

(9,000,000,000 transferrable to the States). 
101,200,000,000 Expenditure of the German Empire. 
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 Pohsh 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 

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 oi 
Russia. Nor is there time or occasion for separate study o'f colonial 


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. So with 
India to some extent; and with France and the French colonies and 

Japan, to be sure, has a less unsound situation in the matter of 
public credit than any o'f 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 o'f 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, 13y2% 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 o'f 
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, oi 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 


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 2^/4% 
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 pur- 
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 ¥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 for 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 o'f $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 Sec- 
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 


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. 

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 o'f distribution, and tranquil public feeling as to the future, 
may again clearly be discerned at work. 

It has been sufficiently 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- 


ficult for the governments o'f 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 
oi 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 were brought 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 o'f 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 O'f 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 TEtatisme, 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 o"f 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 
oi 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 


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 

It is true that mankind has a way o'f 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, wilHng 
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 expedients 
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 


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 o'f 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 o'f 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 o'f 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 


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 sel'f-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 effect, 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 off 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 o'f 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 o'f 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 effort on the part of our 
government would go far towards settling by international con- 


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 seli-direction. 
An independent Ireland would be as little concerned with the im- 
perial projects of larger nations as either of the Low 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 of 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 itsel'f? 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- 


most imperial state in the world, vigorously pushing forward 
a program o'f 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 pro'found 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 effectuating, 
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.