WHEN at the close of 1922 the attempt to solve the reparation problem by political means finally failed, Secretary of State Hughes, in a speech at New Haven on December 20, made his well-known proposal to withdraw the problem from the sphere of politics and to entrust an international committee of experts with the elaboration of a constructive scheme. It required the whole of the year 1923 for this proposal to materialize; the present report of the Dawes Committee is the outcome of these efforts. With it there dawns a new epoch in reparation policy. The discussion of the reparations question has now been placed on a purely business footing and has been removed from the influence of speculative political aims. It was, indeed, high time for this decision to take practical form. The economic decay of Europe could not be permitted to proceed any further. The entire civilized world has welcomed the Dawes Report in the firm hope that its acceptance may lead to the reinstallment of the world's disordered economy.

For any clear realization of the changes brought about by recent years it is necessary to glance back at the situation prevailing prior to the great catastrophe.

The world's economic activity was rooted in a division of labor carried through with considerable strictness. On the one side stood the preponderantly manufacturing countries, on the other the preponderantly agrarian, every country developing the capacities most natural to it. The exchange of commodities between nation and nation had entered a period of extraordinary growth. While the goods handled in international commerce in the year 1890 were valued at about 17.8 billion dollars, their estimated value in 1912 was 39.2 billion dollars. Thus, within rather less than a quarter of a century, the value of the merchandise passing between one country and another had more than doubled. Every nation had participated in this wonderful economic development. In 1912 the leading countries--exclusive of their colonies--had the following proportions of the world's trade: Great Britain, 16.6 percent; Germany, 12.9 percent; United States, 9.9 percent; and France, 9.0 per cent.

To meet this great expansion of international trade relations, there was a correspondingly vast development in the transport system, both by land and by sea. Thus the world's mercantile marine increased by leaps and bounds. The steam tonnage of the world for ships of over 1,000 gross registered tons, which in the year 1901 stood at 14.6 million gross registered tons, had risen to 45.4 million by 1914.

In the main, this development of trade and traffic was rendered possible by the astounding expansion of an international credit resting upon international confidence in the safety and stability of the international economic structure. The currencies of the leading countries were backed by gold and fluctuated by decimal points only, corresponding with the fluctuations of the balance of payment. Available capital was able to flow freely in any direction where its owner believed it would find remunerative employment. Unproductive accumulations of enormous masses of gold in the vaults of the banks were then unthinkable.

As a consequence, the relations of the Continental countries drew continually closer and more intimate. Each individual country became a link in a homogeneous economic chain which could not be strained at any one point without the effect being felt by its every link. The whole earth was covered with a network of mutual political, economic and cultural relations of an increasingly intimate nature. Men learned to think in terms of continents instead of countries. Their horizon became world wide. Their daily life depended upon the smooth working of the vast machinery by which commodities and capital were internationally exchanged. New York, London, Berlin and Paris formed the centers which kept this machinery running.

This ingenious contrivance of international economic relations has been completely unhinged and rearranged by the World War and by post-war events. The international division of labor is no longer as clear and comprehensible as formerly. In the hothouse atmosphere of the crisis caused by the war, the manufacturing plants already existing in the old-established industrial countries have been extended and new industries have been founded. Countries which before the war had no industry worth mentioning have begun to industrialize themselves and to export manufactures in place of raw materials. Competition has grown much keener in the international market. As a result of the impoverishment of extensive districts in Europe a general decline has taken place in the trade of the world. In 1923 Great Britain's exports, for example, totaled only 74.5 percent of the figure for 1913, while by last year the German export trade had reached only about one-half of its pre-war dimensions. The comparative per capita values of the visible exports of the United States, France, and Great Britain for the years 1913 and 1922 have been computed as follows:

Per Capita Value of Exports Percentage
(in dollars) of Increase
1913 1922
United States 27.00 36.24 33
France 38.27 47.00 25
Great Britain
  and Ireland 56.35 67.34 20

Since, however, the price index in 1922 was about 50 percent above that for 1913, it is clear that in 1922 the actual quantity of goods exchanged lagged far behind the pre-war total. In one hemisphere there are peoples numbering many millions who are forced to pinch and scrape in order to make both ends meet and to subsist upon exceedingly meager means; in the other hemisphere, the farmers, for example, are at their wits' end to know how to dispose of their crops.

The cause of this astounding situation is to be sought in the destruction of international credit. The currency systems of certain great countries have been shaken to their foundation. International finance has lost all stability. The gold reserves of the nations have experienced a complete rearrangement. Gold has flowed from one end of the world to become stagnant at the other. The total gold reserves of the world for the first quarter of the year 1924 are estimated at 9,562.5 million dollars. The following table showing the reserves of the principal banks of issue gives an excellent picture of the sweeping change that has taken place:

In millions of dollars
1. United States of America 4,385.9
2. France 1,068.8
3. Great Britain 752.9
4. Japan 550.9
5. Spain 487.6
6. Argentine 463.8
7. Netherlands 223.8
8. Italy 216.0
9. Australia 121.6
10. Germany 110.7
11. Rumania 107.0
12. Switzerland 103.4[i]

America has become the greatest creditor of the world, a vast reservoir in which the yellow metal is stored up without distributing that prosperity which, under normal circumstances, it would have brought to those in need of it. This is easily comprehensible, inasmuch as the indispensable requisite of credit, namely, international confidence, is at a minimum. As the Dawes Committee repeatedly emphasizes, the dislocated international economic machinery cannot be thoroughly readjusted until international confidence and credit have been restored.

This international confidence is the foundation stone of international credit, and international credit is essential to international trade. To restore these, it is necessary for the forces of international economic intercourse to regain free play. The artificial boundaries which today hamper this free play must be raised in order that the natural equilibrium may be restored. The American packers must be enabled to send their goods once more to the peoples of the old world who are so sadly in need of them. The cotton grower and the farmer must no longer be left to struggle with financial difficulties because Europe cannot purchase the surplus of their crops. Is it to be regarded as a law of nature that one-half of mankind shall go hungry while the other half is unable to dispose profitably of its surplus? That must not be! Circumstances have turned things upside down; common sense must once more restore them to their proper position and endow them with equilibrium.

This is impossible, however, without the reconstruction of the machinery of credit. The lack of money among many peoples is, indeed, the great impediment to a complete resumption of the old commercial relations. Those familiar with the German economic situation and the experts of the Dawes Committee agree in affirming that the lack of available capital caused by the destructive effects of the monetary inflation is the chief factor in hindering the development of Germany's economic forces, impeding the recovery of her ability to make reparation payments and restricting the purchasing capacity of her people. If the world wishes to emerge from its present distressful situation the gold heaped up in certain centers, vastly in excess of their own needs, must be made to circulate once more in the channels of international commerce. Gold must regain once more its productive functions; and like warm rain upon the thirsty soil, it must refertilize the parched countries of the European continent and enable them to yield again their wonted harvest.

I would like to recall here that, in its last year's report, the Federal Reserve Board has taken up in an exhaustive manner the devaluation of the American gold reserves. Among other things it said:

"Great and impressive as has been the industrial growth of the United States in the past ten years, it can not be contended that it will require a twofold amount of gold to insure the integrity and impregnability of the gold standard. It is to be expected and desired that some portion of the gold which the tides of disorganized trade have brought us in the past ten years will eventually return to the countries whence it has come."

Furthermore, the editor of the Wall Street Journal, Mr. Clarence W. Barron, in a speech made in Boston in February of this year declared that the reëstablishment of a normal economic condition for the world will only be possible when the United States has guided back again into international channels the surplus of gold which is endangering the development of its own home demand on credit.

But, as already indicated, gold cannot fully exercise its former functions until international confidence in economic movements has been restored and people are assured of the stability of currencies and the inviolability of private property. Yet, how can confidence be restored so long as a portion of the world bristles with arms and threatens the rest with war? How will confidence revive so long as the countries of the world are burdened with a debt arising out of the war--a debt so crushing that it inevitably paralyzes all incentive to labor and destroys all hope for the future ?

Besides the 11.5 billion dollars of war debt due to the United States by the Allies, there is another 12.5 billion dollars owing to Great Britain, France, and Italy, including the Russian war debt of about 4.5 billion dollars. In addition there are not inconsiderable war debts due to the neutral countries. But above all there is to be added to these already scarcely conceivable sums the German reparation obligations of almost 31 billion marks under the London Agreement. Thus the sum total amounts to between 55 and 60 billion dollars. This represents more than the total value of the American exports in the prosperous years from 1914 to 1922 inclusive, or sixfold the gold reserves of the world's banks of issue! A settlement of this enormous debt is only possible by means of commodities and services, as the Dawes Committee has rightly recognized. It appears impossible to effect a transfer of such sums to the creditors without endangering anew the stability of the international exchanges.

The first, and as I think successful, effort to deal with this gigantic indebtedness and to adjust the burden to the economic capacity of the debtor and to the interests of the creditor, is to be found in the proposals made by the Dawes report for a provisional settlement of the German reparation payments. Here, for the first time in the history of the reparation question, the fact that the liquidation of the debts would injure the creditor countries and, indeed, the world's entire economy, has been thoroughly brought out; and it has further been shown how such injury may be avoided. This proves that the question of international indebtedness has two sides. Only if (as in the case of the Baldwin-Mellon Agreement) a tolerable solution of this excessively difficult problem is found through mutual concessions, will the nations be able with renewed courage and energy to proceed to readjust the dislocated economy of the world. Then, and then only, will it be possible for capital to resume unhindered its function as the animating force of international commerce and, by unbinding the latent energies of industry, confer fresh prosperity upon mankind.

I have been an optimist all my life, and I firmly believe in the final triumph of human reason. The best and most encouraging evidence in justification of these views, as I see it, is in the favorable reception accorded in almost every country to the Dawes report. By its cooperation the United States has done the world an incalculable service. It will assuredly not leave its work incomplete; it will pursue the path upon which it has entered until the goal has been reached, until the opportunity for peaceful labor has been restored to the world and economic and cultural development resume their ordered progress.

[i]In this table the figure for the United States includes the gold reserves of the Treasury, that for France includes 443.9 millions abroad, that for Great Britain includes gold backing of currency notes.

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