The Day After Russia Attacks
What War in Ukraine Would Look Like—and How America Should Respond
ARE our foreign loans safe? Can Germany keep up her increasing reparation payments, maintain her exchange position, and still pay her private loans? These questions become of importance when we consider the extraordinary extent of the public offerings of foreign securities in the United States, with refundings eliminated. Since January 1, 1921 the totals are as follows:
|1926 (first half)||432,658,200|
In the first half of 1926, exclusive of refunding operations, the totals by countries are as follows:
|Rest of Europe||48,882,000|
Whether the scattering and ofttimes loose comments of bankers and economists to the effect that Germany cannot meet her reparation payments when they reach the standard annual figure amounting approximately to $625,000,000 may have a definite purpose, is difficult to determine. It is also hard to determine whether these pessimistic predictions are having any result. It may be that financiers, in certain European countries, allow the wish to father the thought so far as German economic instability is concerned. But it is rather surprising that bankers and economists in the United States should be expressing opinions to the effect that there must be a revision of the Dawes Plan when the Agent General's report gives them nothing on which to base such assertions. The present attitude of Germany's business leaders does not afford any ground for doubt concerning the country's ability to pay. Such apprehension as is being expressed on this score within the borders of Germany seems to come, very largely, from political factions which desire to make the matter a popular issue. It is part of the campaign carried on by the Nationalists against the foreign policy of the Social Democrats and other middle groups. In order to persist, even as a political issue in Germany, this alleged inability to pay must have some basis of fact, or some background of propaganda from outside -- propaganda which may lead the German people to believe that an administration contending for payment would not be supported even by the expectations of Germany's creditors.
Curiously enough, all the evidence runs counter to any thought that Germany will be unable to pay. The Dawes Plan contemplates the payment, into a German bank for the credit of the Allies, of annual sums as follows:
and each year thereafter 2,500 million gold marks (about $625,000,000). This is known as the "standard annual payment," to be continued at the same rate unless unusual prosperity obtains in Germany, in which case provision is made for an increase.
For the first eighteen months of operation under the Dawes Plan the Agent General's report shows that the reparation payments have been made almost entirely through deliveries in kind and collections under the Recoveries Act, and that the service of the external loan of 1924 -- a relatively small item -- is the only important one that has had to be met by direct transfer.
The standard annual collection for reparations may seem to constitute a heavy burden, yet a careful examination of the annual pre-war military expenditures in Germany, when all factors are considered, indicates that it is not more burdensome, and is probably less so, than was the cost of maintaining the German military and naval establishments prior to 1914. This surely implies that the reparations burden on German productiveness, even in standard-payment years, will not prove excessive so far as the collection of the money and its deposit in the Reichsbank are concerned. Certain it is, at any rate, that the task of collection and deposit has not encountered thus far any serious difficulties.
Gathering a large sum of money and transferring it out of the country are two very different things, the latter being by far the more difficult problem. Nevertheless the transferring of the payments does not threaten at present to upset the exchange position of Germany. It is to be supposed and expected that the payments can be liquidated to a considerable extent (possibly to the extent of one-half the standard annual payment), through deliveries in kind, without appreciably affecting the normal and satisfactory exchange position. The remaining half of the payments may complicate the problem, but can probably be handled for the most part through the exportation of commodities from Germany, if, as we have every right to expect, there is a continued development of new countries and if the commodities paid for by reparation credit are utilized in this development.
In this connection it should be explained that various plans for the development of projects in the newer and more backward countries of the world have been put forth and in some cases are under way. These have been designated by some as "colonial projects" and by others as "assisted schemes." They may involve economic developments in all the colonies and other outlying parts of the British Empire, and in the colonial possessions in Africa and elsewhere of France, Belgium and Italy, such as Morocco, Congo, Libia, and other regions. This method of using Germany's productive power has two impelling incentives; first, it would facilitate the application of reparation credits (that might otherwise remain in the Reichsbank or be invested or loaned in Germany) to something really valuable and ultimately remunerative to the Allied creditors, and, second, it would hasten the development of the new countries by providing finances for the margin or equity which might not otherwise be easy to procure. These "assisted schemes" will supplement appreciably the normal exports from Germany, and should also be of some benefit with respect to German manufacturing costs, inasmuch as they would help carry the overhead and also tend to diminish the quantity variations in production.
In the final analysis, I believe, the "assisted schemes" method of liquidating the reparation credits may easily prove to be of great importance, especially in its effect on the producers of other countries. If the payments concerned only Germany and her immediate creditors, this would almost inevitably be so, but there is an ultimate creditor, the United States, to be considered as a factor in the whole situation. Great Britain, France, and Italy are entitled to receive payments from Germany, but when France has funded her debt to us (as Great Britain and Italy already have done), all three countries will become intermediaries between Germany and the United States. On the face of the figures it may easily be that more than half of whatever is paid by Germany will be short-circuited between Germany and the United States.
Germany will be a great surplus exporter of goods and materials as a result of the liquidation of reparations credits. The United States will be facing the forced exportation of German products to the value of something more than half the standard annual payment (possibly $350,000,000 a year). Apart from the developments in new countries in "colonial enterprises" and "assisted schemes," the way by which other countries can continue to take German goods, and to absorb their share of these large German exportations, will be for America to continue making loans to and investments in these countries. Thus American bankers will have a continuing and probably increasing incentive to handle foreign loans and investments. The question whether these loans are likely to be safe is therefore of no small interest.
More specifically there is the question as to the risk of loans made privately by banks and individuals in the United States to industrial or commercial concerns in the various European countries, or to their political subdivisions. From the standpoint of risk some differentiation should be made between loans made to Germany and those made to the other countries of continental Europe. Apart from the reparations, Germany has no large external obligations. Control over these payments is exercised to a degree by non-nationals, under a contract that is more specific than, and with the security for payment somewhat different from, the usual external obligations of a government. The constitution of the German Reich, moreover, gives the central government what is potentially a large measure of supervision over the finances of the political subdivisions. The exercise of this supervision may well place the Reich in the position of becoming the moral guarantor of foreign loans contracted by the German states and municipalities. In effect, furthermore, the German national government must strongly endeavor to protect the solvency and credit of German industrial and commercial concerns, for it is upon the prosperity of these that the collection of revenues for the reparations account will depend. For these various reasons, namely, the absence of large foreign obligations (other than reparations), the specific agreements and securities connected with the reparation payments, and with their transfer, and the considerable dependence of these payments upon German industrial solvency, it does not appear that private loans to Germany, or to her political subdivisions, or to German industrial and commercial concerns are an unduly hazardous form of investment.
The chief hazard, in the minds of many, hinges on the question of priority as between reparation payments and payments connected with debts privately contracted by the industries, commercial concerns, and political subdivisions of Germany. This question has been under discussion ever since the Dawes Plan was accepted. Of necessity the members of the Transfer Committee, who are tasked with the work of seeing that reparation payments do not unsettle conditions in Germany, have refused to state their position on this question with any definiteness. This Transfer Committee is composed of six members, namely, the Agent-General for Reparation Payments, as chairman, one other American member, one French member, one English member, one Italian member, and one Belgian member. Of this group, four would appear to be strongly interested in enforcing the payment and transfer of reparations as at present planned. The two American members might alone be expected to harbor a divided fealty as between reparation payments and the payment of private debts.
Yet it should be remembered that any failure in a large way to meet private loans because of the adverse position of exchange -- an adverse position resulting from transfers for reparation payments -- would so affect the whole German economic structure that subsequent payments on the reparations account would themselves be seriously threatened. From a theoretical standpoint it might be supposed that the Transfer Committee would not hesitate to give governmental payments a priority over private payments if the issue between the two should ever arise. But the two kinds of payments are so closely inter-related that the Committee would be very reluctant to force transfers for reparations if such action would entail a default on private loans.
The only shadow cast on the matter is the possible difficulty of demonstrating that the failure to meet private obligations was the direct result of transfers for reparations. Such relation of cause and effect might exist, and yet be impossible to prove. Nevertheless, I think that the Transfer Committee, composed of men of experience, training, and ability, will have a broad and detailed understanding of the effects which any transfer of exchange approved by them may produce. It seems certain that they will not be shortsighted in their approval, and that they will not approve any transfers which entail a real danger of default on private obligations contracted in good faith for productive purposes. Evidence of the effects, in the case of improper or excessive transfers, would probably show quite promptly, so that the Transfer Committee need only wait for time to correct the situation.
This whole question of governmental and private payments has an incidental bearing upon the policy of the United States with respect to the funding conditions of the Allied indebtedness. If American banks and investors hold the larger portion of the German external private obligations (as is altogether likely to be the case), and if the continued payment of reparations by Germany should by any chance be made a condition for the payment of the Allied debts to us (as some of our debtors would like to have it), we should then be in a position where our government desired priority for reparations while our banks and investors desired the repayment of their private loans. If, under these conditions, the payment of reparations comes to require the transfer of exchange in amounts so large as to affect adversely the payment of private obligations, we might become a house divided against itself, with our government and our investors each urging claims to preferential treatment. In that event it would seem that any Allied country which had succeeded in predicating its indebtedness to us upon the continued payment of German reparation would be freed from any worry over this problem.
At first glance it might appear that our European debtors would gain advantage in having the payment of their indebtedness to us predicated upon payments by Germany to them. The French Government, in particular, has apparently held this conviction, and has pressed the point. But a shifting of ultimate responsibility from France to Germany could hardly result otherwise than in forcing a virtual partnership between the United States and the latter country, by which Germany would receive from us every financial assistance to the end that she might be enabled to pay both her reparations and her private obligations to us. France could hardly expect to gain an advantage through such a situation.
The possibility may be made clearer, perhaps, by an analogy drawn from private business. Partnerships in extremis frequently arise out of private financial relations, and they have sometimes arisen out of governmental relations as well. A wise creditor does what he can, within reason, to help a debtor into a position where the latter can liquidate his indebtedness, especially if the debtor is showing energy, ability, and thrift. The United States, if an indirect relation of creditor and debtor were established with Germany through the insistence of France on such an arrangement, would be bound to assist and encourage a revival of German economic prosperity in every way. Such assistance would inevitably be at the expense of other European countries and would militate against their rapprochement with Germany, which is now making headway. So it would seem on the whole that our Allied debtors would stand to lose considerably were they to make good their insistence that payment of their debts to us be conditioned upon collections from Germany.
One other factor of safety deserves mention. The stabilization of European currencies on a gold basis will make for the safety of private loans to the extent that this stability is achieved. Great Britain and the United States, working together, took a most important step in restoring the pound sterling to parity, thus making it virtually certain that other important commercial countries will be constrained to maintain gold-backed currencies. I believe that the action of our Federal Reserve System, in agreeing to work with the Bank of England in getting the English currency back to a gold-backed basis constituted one of the wisest, most courageous, and most farseeing actions ever taken by a bank of issue. It has been of immeasurable benefit in international trade; it has relieved us from the menace of devaluation of gold, and it has diminished in the United States the danger of inflation. Likewise the stabilization of the German currency on a gold basis was in considerable measure achieved through American constructive effort, inasmuch as more than half of a very considerable loan to Germany, aggregating 800,000,000 marks, was contributed directly by this country.
Today we hold a disproportionately large share of the world's gold reserve, and in the immediate future this position is likely to be maintained. So long as it continues, and so long as we have an excess annual income, we shall loan and invest outside our own borders in close relationship to our excess income from abroad. But because credit is so liquid, one of the effects of the restoration of the gold standard in Europe will doubtless be, in time, to reduce the quantity of gold held in America. At present the central banks of issue in European countries are backing their currencies to some extent by gold coin but in perhaps a larger degree by what they call "earning gold," that is, by obligations or securities which call for payment in gold. To a considerable extent these obligations are in such form that final payment is in gold coin of the United States; it is not unlikely that at maturity they will be so collected and the gold moved to Europe. Much depends, however, upon the extent to which this "earning gold" in the form of gold obligations can be made to serve as a workable substitute for a reserve in idle specie. At any rate, if our present holding of gold is in time reduced by transfer to Europe, this may eventually, in its turn, somewhat modify the extent of our loaning abroad; but the present outlook, all things considered, is that we shall continue this loaning in substantial amounts for some years.
This discussion relates particularly to the risks, or absence of risk, in loans made by American banks and investors to the German government, to its political subdivisions, and to commercial or industrial concerns in Germany. But are the loans that we make to other continental countries more, or less, hazardous? The answer to that question can not be given in general terms because the factors which make for safety or the reverse are different in each country. France and Italy, for example, have large external obligations apart from their indebtedness to the United States. The burden of carrying these debts, moreover, has not been offset, as in Germany, by reductions in the cost of maintaining the military and naval forces. Again, the methods of collecting revenues for meeting these obligations, and for transferring them to foreign creditors, are not embodied in any definite agreement, nor is the process of transfer placed under the supervision of an international transfer committee. It is quite conceivable, although not at present probable, that the governments of some European countries, by insisting on priority for the payment of their own external obligations and the maintenance of their own credit in foreign money markets, may bring about an exchange situation in which private debtors will have difficulty in paying external creditors.
But this eventuality is not yet in sight, and the dangers which our foreign loans now face are more illusory than real. Economic necessity and the balancing forces that always make for economic stability seem at the present juncture to be strong enough to maintain a sound international credit.