THERE cannot be a war without losses. For five years the world discontinued productive effort and concentrated upon destruction. The resulting losses are measured by debt. The debt assumes varying forms--internal, reparation, inter-Allied, etc.--and is generally represented by bonds or notes. For the four years succeeding the armistice the nations of the world have been desperately concentrated upon manipulating and shifting these symbols of loss. Each nation has sought to place them so as to relieve itself from, and impose on another, the task of making good its own war losses.

But have the stakes of this game been as high as they seemed? Will they ever be more than paper counters, due to practical limitations on the possibility of one nation making good material losses suffered in another nation?

This is the problem which we shall consider with respect to so much of our own war losses as are represented by the Allied debts.

STATISTICS

A large part of our material and products which were consumed in the war passed through the hands of the Allies. It was they who used them, and they undertook to make good to us this portion of our war contribution. This arrangement took the form of the Allied governments giving us their promissory notes in an amount equal to the value of the goods so used by them. There is thus owing to our government from Allied governments the following sums (which include some credits extended after the armistice for reconstruction rather than for war purposes):

 

United Kingdom $4,197,000,000
France 3,357,000,0001
Italy 1,631,000,000
Belgium 350,000,000
Russia 170,000,000
Other Allies 300,000,0002
  --------------
  Total $10,005,000,000
1Includes $407,000,000 due War Department for war stocks purchased.
2Includes $160,000,000 due War Department for war stocks purchased.

These figures represent principal only. Interest is not included. If we take January 1, 1918, as the average due date, and compute interest at five per cent, the total sum due today will be close to $12,500,000,000.

It is also useful to have in mind the situation of Great Britain and France with respect to intergovernmental war debts. There is owing to Great Britain from other governments approximately $16,500,000,000. This figure includes $7,315,000,000 as Great Britain's share (22 per cent) of the German reparation debt, finally fixed by the Reparation Commission at $33,000,000,000.

There is owing to the French Government from other governments approximately $18,404,000,000. This is arrived at by converting France's Allied advances of Fcs. 15,181,000,000 at the rate of 1 fc. equals 8 cents, and adding France's share (52 per cent) of the German reparation debt.

MORAL CONSIDERATIONS

There are persuasive reasons for the view that we cannot honorably seek to collect these Allied debts. It is urged that the war was a common enterprise in which each participant was under the duty to contribute freely its own resources; that this was really understood at the time our treasury advances were made; and that promises to repay were mere formalities to check waste and extravagance.

The conception has a strong appeal, for war is so terrible that we instinctively seek to idealize it, to give it the character of a crusade in which each participant pledges his all, irrespective of material considerations. But it is a conception which does not correspond to the facts. Actually, the war was conducted on the definite understanding that each belligerent should pay for any resources furnished by a co-belligerent, whether acquired for the prosecution of the war or otherwise. This was the basis which from the first prevailed as between the Allies, and when we entered the war we adopted the accepted arrangement. France and Italy paid for British coal and ships. We paid for the transportation of our troops in British ships and for the French services and materials which our troops used in France. Further, under the legislation permitting Treasury advances to enable the Allies to acquire war supplies from us, repayment was explicitly prescribed and the Allied Governments willingly gave their promises to repay. It is doubtless true that we made the advances for military and political rather than commercial motives, and we were, at the moment, to some degree indifferent as to the probabilities and mode of repayment. But we did insist on maintaining relations upon a basis which would leave us, after the war, with certain definite rights against the Allies. It was sound statesmanship to have done so. It was impossible at the time to foresee on what terms the war would end or in what situation it would leave the various belligerents. That situation has now developed and we must determine, in the light thereof, what use shall be made of the rights which we thus reserved to ourselves.

It is doubtless true that it is not the function of government to indulge in sentiment and make a pure gift of the property of its citizens. It is equally true that mere possession of certain rights does not necessarily require a blind and futile attempt to secure literal enforcement. The objective to be sought is that form of utilization which will most promote the welfare of the American people. The normal procedure will be to collect. But if this be impossible or if the effort involve serious risk, then it is not merely the right but the duty of our government to explore alternative means of utilization.

THE EXCHANGE PROBLEM CREATED BY INTERNATIONAL DEBTS

International debts, like domestic debts, may be either extinguished or funded. Let us first consider extinguishment and particularly the exchange problem to which this gives rise and which sharply differentiates international from ordinary indebtedness.

If an American creates a dollar debt, his ability to extinguish it is, roughly speaking, dependent upon his industry, capacity and resources. For what he does for others, he is entitled to payment in dollars as the medium which has legal currency. Thus he earns in the same currency as that in which his debt is payable and no exchange problem arises.

But today, for all practical purposes, there is no international legal tender. Gold nominally serves this purpose, but the amount is so small in proportion to international debts, and so concentrated in the hands of a few creditor nations, that it cannot today be regarded as an effective medium for the discharge of other than minor debit balances. In the absence, then, of any international currency, a foreigner, who has contracted a dollar obligation, cannot discharge that obligation merely by industry, capacity and resources. However hard or effectively he may work, he will, if a Frenchman, normally receive francs, or if an Englishman, pounds sterling. But this will not help him, for neither francs nor sterling can be tendered in extinguishment of his dollar obligation. The foreign debtor must in some way get dollars which, however, are the exclusive creation of the creditor government and are procurable only from America. Thus, however industrious or able the foreign debtor may be, however anxious to discharge the debt, he cannot do so without adequate opportunity to procure dollars.

The various methods by which a foreign debtor may procure dollars are well recognized and may be summarized as follows:

Sales of goods or other values in America (exports).

Work in America, part of the proceeds of which are sent back to the debtor country (emigrant remittances).

Gifts of dollars (relief remittances).

Services or sales to Americans abroad (tourist expenditures).

Services to American business, principally that transacted abroad (freight, insurance, banking, brokerage and other like "invisibles").

Payments of principal or interest on dollar loans or investments previously made by the debtor.[iii]

In these limited classes of cases, the foreigner has a contact with America or Americans which enables him to derive dollars. Not only are these opportunities relatively few, but it is noteworthy that in the only two classes where the initiative rests with the debtor (exports and emigrant remittances) this initiative is, in fact, controlled by the sovereignty of the creditor nation expressed in tariff and immigrant legislation. The creditor, for perfectly proper and independent reasons, may by its policy in these matters have cut off the debtor from adequate opportunity to procure the currency by which alone the debt may be extinguished. Thus we have, in international debts, a dominating problem of exchange which may place the debtor in a situation where, with the best will in the world, he cannot procure the currency in which his debt is payable.

It is to avoid this risk that, under normal conditions, nations currently balance with each other. International dealings are virtually on a barter basis, with exchanges of goods and services of so nearly an equal value that gold shipments will suffice to make up the small differences. Only in a period of great emergency would nations permit the creation of enormous debit and credit balances. Such an emergency having arisen, we must realize that discharge of the resulting debts raises very difficult and abnormal problems of exchange. The debts cannot be appraised, nor the debtors judged, by the simple standards to which we are accustomed.

AVOIDANCE OF EXCHANGE PROBLEM BY PERMANENT FUNDING OF DEBT

Under modern conditions a debt may be valuable without even the probability that it can or will be extinguished. This is not true as to the indebtedness of individuals, where the debtor himself is mortal. It is true where the debtor entity is permanent. Take the case of our railroads, public utilities, municipalities and states. No one expects that the many billions of dollars of debt which they have created will be extinguished. On the contrary, in the normal course of events their indebtedness will steadily increase in the future as it has in the past. As one maturity is reached, the debt will be carried forward by a funding operation and new money will be borrowed from time to time for improvements and betterments. The result will be that as between the debtor entity and outsiders the expiry of ten years will find that as much money has come in as has gone out in dividends and interest.

A similar situation can exist between nations, and the indebtedness of one to another can assume a permanent form so that there need be no net outgo from the debtor nation. For this situation to obtain, it is required that there be re-invested in the debtor country each year sums of money approximately equivalent to the outgo in the form of dividends and interest on existing investments.

The position of Great Britain during past years will illustrate how indebtedness may be usefully perpetuated in a form which will not create any exchange problem for the debtor country. In 1854 British funds placed abroad are estimated to have been £550,000,000. In 1914, they had grown to an estimated £4,200,-000,000. Now £550,000,000, with interest at 4 per cent cumulated semi-annually, will in 53 years, amount to approximately £4,200,000,000. Four per cent is taken as a rate of return as so much of the nominal rate as was in excess of this would represent insurance against loss, and was doubtless actually absorbed by losses so as to leave a net return of not more than four per cent. This means that the 1854 indebtedness to Great Britain from abroad with interest thereon has, in effect, been reinvested in the debtor countries. On net balance, little, if anything, has been brought back to Great Britain. From a national aspect, the return to Great Britain has been in the form of increased power through development and extension of controlled enterprises abroad and a preferential trading position obtained thereby.

In view of these examples from the realm of both domestic and international finance, we must recognize that the Allied debts cannot be dismissed as valueless even if we should conclude that the debtor nations cannot solve the exchange problem involved in procuring dollars to extinguish the debt. Under proper conditions there may be a funding whereby, in effect, we will take our payment in the form of permanent ownership and control of foreign investments. The exchange problem will be avoided, not only as to principal but also as to interest, through a periodic increase of our private foreign investments at a rate and in an amount approximately balancing interest and dividends and maturing principal on existing investments.

THE TRADE POSITION OF EUROPE AS AFFECTING ABILITY TO SECURE DOLLAR EXCHANGE

Let us now try to form a rough estimate of what are the possibilities of the Allied governments being able to solve the problem of exchange and secure the dollars necessary to extinguish their aggregate indebtedness of about $12,500,000,000 to the United States Government.

For 1921, Europe's balance with the United States was approximately as follows:

 

Europe sold to the United States less than she  
  bought from the United States. On this trade  
  balance, Europe was left owing the United  
  States4 $1,600,000,000
Europe owed to private persons in the United  
  States about $5,000,000,000 divided between  
  funded and floating debt. For interest and  
  commissions on this debt Europe must have  
  required about 7% or 350,000,000
  -----------------
  Total $1,950,000,000
4Sale of securities are not included as pertaining to funding rather than extinguishment of debt. Furthermore, only direct transactions between the United States and Europe are taken into account. It does not appear that there could have been any important triangular operations, since we shipped gold to the approximate amount of our debit balances with other parts of the world.

On the other hand:

 

Europe received dollars for interest and dividends  
  on American securities which she still  
  holds. These dollars may be estimated as approximately  
  equal to 5% on $2,000,000,000, or $100,000,000
There were emigrant and relief remittances estimated  
  at about 500,000,000
Expenditures by Americans abroad were probably  
  in the neighborhood of 150,000,000
There was also doubtless some balance in favor  
  of Europe due to its having rendered the  
  United States more services than were rendered  
  by the United States in freights, banking,  
  insurance, etc. This we will estimate at 50,000,000
  -----------
  Total $800,000,000

--making receipts of dollar exchange amounting to $800,000,000 to apply against the payment of $1,950,000,000, or a net debit balance of $1,150,000,000.

While some of the figures used are not closely accurate, the result doubtless fairly reflects the situation and shows that Europe, far from having dollar exchange to apply to extinguish existing indebtedness, is in fact falling still further behind in dollar indebtedness. Before, therefore, any dollars will be available to extinguish the Treasury debts, the debtor nations must first reverse the existing situation with its enormous current balance against them.

What are the prospects of their being able to do so? By far the largest factor is exports and imports. Exports to the United States must be increased, imports from the United States must be decreased. The changes must be so great as to convert a debit balance of $1,150,000,000 into a credit balance of about $750,-000,000 which would be required to pay five per cent interest and one per cent amortization on the Allied debts as they stand today.

It seems wholly unlikely that this can occur within a period of time which we can usefully attempt to forecast. During 1921 our tariff was not excessively high. It is likely to be raised and even if it is ultimately lowered again, it is incredible, whichever political party is in power, that there should not be substantial tariff protection of American industries, whether the protection is so called or denominated a revenue tariff. Thus our purchases from Europe, while they doubtless will be increased, will increase only moderately and gradually. On the other hand, it is unlikely that Europe can advantageously reduce much further her purchases from us, which have already been cut, in effect, to food and raw materials, essentials for life and industry. Until Russia again assumes her role of producer of raw materials, Europe must continue to buy substantially from us and, indeed, we would not have it otherwise.

Aside from exports and imports, emigrant and relief remittances are the most important item in Europe's balance with us. These will doubtless decline, particularly in view of the policy of restriction of immigration which we have adopted.

It is thus quite unlikely that Europe should, say within the next decade, reverse her present unfavorable balance with sufficient rapidity that, in this ten-year period, there will remain any net balance of dollar exchange available to apply to extinguishment of principal of, or even pay interest on, the Allied debts.

Any attempt to foresee the future beyond ten or fifteen years is largely futile. With money worth five per cent a payment postponed fifteen years loses half its value. Thus payments long deferred have little practical significance unless paid with accrued interest, which in fifteen years will double the debt and in thirty years quadruple it.

THE PRACTICAL POSSIBILITIES OF FUNDING

If our Treasury is to be paid, it is far more likely to be by a funding operation than by an actual extinguishment of the debt. Such a funding operation involves the sale for dollars by the debtor government or its nationals of securities, public or private, representing investments either in the debtor or in some other country. The operation may assume countless forms, varying from a sale of French Government bonds to the American public, to a transfer from British to American control of some South American enterprise. The essential is that an operation occur whereby dollar exchange is made available.

During the past eighteen months, operations of this character have been proceeding at a substantial rate. It is estimated that foreign securities publicly sold in the United States during the first six months of 1922 amounted to about $600,000,000. In addition, there must have been large amounts of private transfers. On the other hand, a substantial part of the public offerings represented funding operations under which no new dollar exchange became available. It would be fair to estimate the net amount of dollar exchange made available by these operations at between $500,000,000 and $600,000,000, or at the rate of about $1,100,000,000 per annum. This sum, large as it is and even if it all were available to Europe, would, at the moment, scarcely suffice to cover Europe's unfavorable balance of trade with us. But if we assume, as is possible though not probable, that by rigid curtailment of purchases and by a most energetic pushing of sales, Europe could balance her private transactions with us, then with the continuance of such American purchases of foreign securities a real possibility is created of the Allies funding their present debt to the Treasury, so that the Treasury would be paid off by the transformation of this debt into private foreign investments acquired by the American public.

But in order for the Allied debt to be incorporated usefully as a permanent part of our economic structure, there must be not merely a passing, but an ever increasing demand for foreign securities. We must have a situation such that any one holder can sell at his pleasure, and such that once the principal of the Allied debt is funded by various securities issued to individuals, the interest and dividends thereon, and the various maturities thereof can, at least in greatest part, be paid in dollars made available by additional American purchase of foreign securities, thus permanently avoiding the acuter problems of exchange. We must have a virtual duplication of the British situation where foreign investments of £550,000,000 in 1854 grew to £2,200,-000,000 in 1914, as the result of a demand which kept foreign securities as a whole readily marketable and which kept the debtor countries supplied with sterling exchange so that interest and dividends and maturities on existing interests could at all times be paid. In our own case we start with foreign investments, public and private, of about seventeen billion five hundred million dollars (12.5 billions to Treasury, 5 billions to investors, banks, etc.). These, in the event of funding, should rise to about thirty-five billion in 1937. In other words, while each individual will receive his income in such form as he desires, we, as a nation, must forego drawing down income or principal from foreign investments. We must continuously reinvest and definitely assume the role of developing foreign countries and extending our power and influence abroad.

This is a road upon which there can be no turning back. It will accomplish no good if, in a burst of enthusiasm about the outer world, we buy enough foreign securities to permit the Allies to fund thereby their debts to our Treasury. We must, at least until we become a large debtor on current account, go on with our purchases of foreign securities in amounts adequate to supply dollar exchange required for return on, and maturities of, existing investments. Otherwise our exchange problem, temporarily avoided, will return to destroy the value of all the previous investments which we have made.

Such a program, however appropriate for a nation already highly developed and fully populated, may become unwise or impossible in a country which, like the United States, has vast undeveloped resources of its own. It may become impossible because the domestic opportunities for investment of capital are so many and so attractive that foreign investments cannot offer a competitive return, or, if they do offer it, they may be unable to earn it. In either event, the requisite amount of foreign securities cannot be sold on our market. It may become unwise because of our domestic opportunities being such that we owe them our first attention. It would be folly for us to arrest prematurely our own development.

If it had not been for the accident of war, we would have continued for many years to devote ourselves primarily to our own development and would even have continued to borrow foreign capital for such purposes. We already have a serious task to digest the foreign securities which we have purchased to date and to fund Europe's current unfavorable balances with us. It is unlikely that, in our present state of national development, we should suddenly develop and maintain that appetite for foreign investments which would be required for a proper funding of the Allied debts in the form of private investments abroad.

TAXATION AND INTERNAL DEBT AS AFFECTING CAPACITY OF PAYMENT

We have heretofore dealt with the problem of the payment of the Allied debts as a problem in foreign exchange to be avoided by funding or met by trade activity which will give dollar exchange to our debtors. We must not, however, overlook the grave problems of taxation which will face the debtor nations even if the exchange problems can be solved or avoided.

Taxation is the process by which the Allied governments will secure, for payment to our Treasury, the dollars acquired by their nationals. If a British company sells securities or a French company sells perfumery in America, they both receive dollars. But as it is sterling or francs which they want for their business they will desire to sell their dollars for sterling or francs which they can use for their ordinary business purposes. The British and French Governments must be prepared to step in at this point and buy dollar exchange. The requisite sterling or francs are only available to the debtor governments out of taxation or borrowing which involves taxation. To discharge the debts to the United States Treasury, either by complete extinguishment or by funding, will require the debtor governments still further to increase their taxes. The taxes in Great Britain (which, however, it is hoped will be adequate to provide at least partial interest payment on the debt to the American Government) seem already to have passed the limit of sound economics, and it is generally felt that they must be decidedly lowered if individual initiative and business enterprise are to be restored. Yet even with present taxes a budget deficit is probable and plans for debt amortization have had to be abandoned.

The tax rates in France and Italy are close to the maximum and, despite the impression to the contrary, they are now being actually collected. Yet the budgets of both of these countries are far from balancing and neither makes any provision for its public debts to foreign governments. If, therefore, these nations should assume to pay interest on their debts to foreign governments and gradually fund or discharge the principal, it would place them in a dilemma between taxation so severe as to defeat its own object or a repudiation of internal indebtedness designed to clear the way so that all the proceeds of taxation, other than what was required for current government operations, would be available for the foreign debt. While, in principle, it may be that foreign debts should prevail over domestic, yet it is doubtful whether, in fact, the repudiation of internal debt would facilitate the discharge of external debt. The solvency of banks, insurance companies and countless individuals and corporations depends upon the credit of the domestic government and repudiation would cause such a collapse of the whole financial structure and such economic reactions as would delay, if not destroy, the ability to solve the dollar exchange aspect of our problem, whether by funding or earnings. It is significant to note, in this connection, that although the Reparation Commission has a first lien on all German Government assets, it has continuously permitted the German Government to pay promptly the interest on its internal loans. This affords practical recognition of the fact that actually to assert the primacy of external obligations, and to require the repudiation of internal debt, would in fact prejudice the ability of the debtor to pay his external obligations. Thus, in considering the ability of the Allies to pay their debts to our Government, we cannot ignore the fact of their internal indebtedness nor the virtual absorbtion of their taxing power in its service.

THE POSITION OF GREAT BRITAIN

We have heretofore been considering the Allied debts collectively. Obviously the capacity of the debtor nations varies greatly and for this reason we must consider the possibilities of partial as well as of total payment.

It is generally assumed that Great Britain can immediately begin to pay interest, amounting at five per cent to about $210,-000,000 per annum, and gradually discharge the principal as well.

I am inclined to feel that Great Britain can solve the foreign exchange aspects of the problem of payment. While Great Britain's adverse trade balance, represented by excess of imports for the year, August, 1921, to July, 1922, was about £190,000,000, nevertheless Great Britain still has very important invisible income in the form of charter hire, banking and brokerage commissions, insurance, etc. Also, Great Britain is supposed to retain about $15,000,000,000 of the $21,000,000,000 of foreign investments which she had in 1914. This retained portion is, however, much depreciated in value and current return. The securities sold during the war represented the cream of her investments and the balance includes large amounts which have become virtually worthless, such as investments in Russia. More important than these remaining investments is the retention of general confidence in Great Britain's financial strength and political stability, so that new issues of good English securities, or participations in British enterprises, could readily be placed in other markets. An indication of the strong exchange position of Great Britain is found in the recovery of the pound sterling from $3.18 in February, 1920, to the present quotation of about $4.46, which is less than 10 per cent below parity. This recovery occurred during a period when Great Britain was substantially reducing her dollar indebtedness to us, represented by Treasury bills, government bonds, etc., placed privately in this country, and repaying our Treasury for advances made under the Pittman Act. There is no reason to believe that Great Britain could not solve the dollar exchange aspect of her debt, primarily by sales of securities in the United States, and possibly as well by building up a favorable balance with certain nations which normally are our trade creditors.

For Great Britain the most serious aspect of the problem is that of taxation. British taxes should not be increased, and indeed should be decreased if her earning power is not to be dried up. It would be folly for us to require that Great Britain make payment of principal or even of interest if this will involve taxation so excessive as to destroy her economic and financial stability. This would involve us in financial losses far greater than any possible gain arising from payment to our Treasury.

LACK OF WILL TO PAY

Heretofore our discussion has been proceeding on the assumption that the Allied debts would be paid provided any methods of payment could be found. This assumption, however, is not accurate. It ignores the intangible, human factors of the problem. As a practical matter, the debts will only be paid if the debtor governments have the will to pay, and when we apply this test to our debtors we find that Great Britain alone has the slightest will to pay or the remotest intention of paying.

The British are a commercially minded people. They have a financial prestige to maintain. Not only would it be galling to their pride, but it would involve future financial injury if they were to assume any attitude other than that of willingness to discharge every financial obligation they have assumed. It may well be worth Great Britain's while to assume the great burden involved in the adjustment or funding of her debt to us on some basis which will involve at least partial payment and avoid the appearance of default. But the other debtors are not commercially minded. They have no great roles to maintain in the realm of international trade and finance. It will hurt neither their pride nor their pocketbook if they decline to pay. They themselves will be satisfied both as to their complete inability to pay and as to the inequity of their paying Allied creditors after having had to forego payments from their enemies which seem to have higher moral sanction.

I know of no pressure which we can exert against the Allies which would serve to reverse their point of view and bring them to a really earnest desire to pay. Indeed, having in mind the undoubted economic difficulties in the way of payment, it is almost inconceivable that we should attempt to exert any serious coercion, even assuming there were means of so doing. This would involve, on the one hand, a poisoning of relations with the nations whom we need and desire as our friends, and on the other hand it would almost certainly be ineffective in securing payments. Germany during the past four years has been subjected to every pressure which ingenuity could devise. Special duties have been levied upon her exports to Allied countries; she has been required to impose export duties for the account of her creditors; part of her territory has been occupied by foreign troops and she has been repeatedly threatened with further invasion, with blockade and with seizure of the private property of her subjects. Yet it is the consensus of opinion abroad that these measures have cost the creditors far more than they have brought in, and that experience shows there is no effective method of extorting an international payment which the debtor feels, rightly or wrongly, to be beyond his capacity. There is a growing recognition that to secure an international payment so large that it can be met only by a great national effort it is necessary that the debtor regard the debt as just, that he feel that his own interests will be promoted by payment and that the amount thereof is so clearly within his means that his credit will not be destroyed during the period when he is working to discharge the debt. The debts of the Allies, except possibly that of Great Britain, fail to comply with any of these conditions. If we ask it, Great Britain will pay as much and as rapidly as she considers is consistent with her own interest. If we request payment of our other debtors, we shall be given flat refusals, couched in language of varying politeness.

CONCLUSION

If the foregoing views are in substance correct, we can conclude that, while Great Britain may make some payment, the Allied debts as a whole will never be paid. But we cannot rest at this point. The promissory notes of the Allied governments still exist; they constitute a great influence, actual and potential, in the international situation; and even if they cannot be paid in the ordinary sense of the word, they may still be utilized to advance our own prosperity.

With the armistice the world, or at least that part of it represented by the victors, fell prey to illusions. They dealt only in terms of billions and placed their hopes in paper schemes and paper budgets of which rows of ciphers were the distinguishing characteristic. It was regarded as a notable concession to conservatism when the amount to be paid by Germany was fixed at 132,000,000,000 gold marks. Russia was to repay not merely the indebtedness which she had contracted before the war, but the additional billions of credits extended during the war. Bulgaria, Turkey, Hungary and even Austria were counted upon for payments running into the hundreds of millions and each creditor Ally confidently expected to be repaid the billions of inter-Ally advances which it had made. There was no realization of the fact that these debts and credits merely measured the waste and devastation of a war of unparalleled intensity. Except for war, it would have been impossible to have had the vast transfers and quick consumption of economic values which are recorded by these paper entries. In time of peace the process cannot be reversed or undone. The mere attempt so to do must inevitably involve economic and financial dislocations paralleling those of war itself.

So long as these illusions prevailed, Europe failed to recover. Individual enterprise was stilled. Taxes were not paid. Budgets were not framed on the basis of real receipts and expenditures. Men had become so fascinated watching the juggling of milliards that they could not bring themselves down to the humble tasks of earning their thousands and saving their hundreds. It was impossible to attempt to stabilize exchange. Why make the effort when there impended avalanches of billions to be transferred from one nation to another with effects on exchange values which no existing resources could control? Europe was racked by efforts to infuse, even by force, some breath of life into the dry bones of these milliards which were expected to repair the losses of war without the necessity of economy and hard work.

This condition reacted with particular severity upon the commercial nations, of which we are one. We are today the world's great producer of food and raw materials. During the war we enormously increased our industrial capacity and created important markets for our manufactured goods. We were entitled to anticipate an era of prosperity wherein our products would be widely and largely distributed to make good the losses of war and the arrested development resulting from years of concentration upon military activity.

But no such prosperity was or is possible with world conditions such as have prevailed. What we require for our own prosperity is a Europe working and saving in order to be able to make good the losses of war. We need a cessation of the economic waste involved in maintaining great armies; a balancing of budgets which will permit of stabilized exchanges; political tranquillity that will ensure safety in financing foreign transactions.

But these conditions are impossible so long as the hopes and energies of Europe are concentrated upon mythical billions. Armies will be maintained as possible collecting agents; budgets will not be balanced because of the anticipated collections from debtor countries; political distrust and unrest will prevail as each nation seeks to avoid its own financial obligations and enforce those of others; and finally the resulting political and financial instability will discourage individual industry and frugality and breed the sharpness of unproductive traders and the wastefulness of gamblers.

That is why, with the prospect of prosperity, we have had a panic. With a vacuum to be filled, our goods have piled up in our warehouses. From a purely material standpoint it would be of inestimable value to secure conditions under which there will again be a normal movement of goods in world trade.

We now have the opportunity to take a great step toward the accomplishment of this end. It will cost us merely so much of the Allied debts as would in any event be uncollectable. For Europe is at last ready for a general settlement which will end political turmoil and introduce a period of real economic rehabilitation.

The most striking feature of the European situation of today is the willingness to clear away paper debts and credits which can never be collected, but which, by their existence, constantly disturb the political and financial situation. The Allies have avowed themselves ready to wipe out the war debts which exist between them, and France is prepared to reduce the German indemnity to modest proportions and grant, temporarily, a complete moratorium.

Let us not fall into the error of thinking that this attitude is but a clever device adopted by the Allies to avoid payment of their debts to us. Great Britain and France are both, on paper, creditor nations. There is owed to them far more than they owe. They would desire nothing more than to collect what is owing them and pay what they owe. But four years have shown that these paper credits are illusory. The very desperateness of their financial condition has forced these nations to test out the possibilities of payment. They have thus come face to face with reality and have developed an intelligent public opinion on these points more rapidly, perhaps, than have we who have been able to afford the luxury of nursing the illusion of payment without actually testing out its practical possibilities. It is true that the Allies will expect us to contribute to the general settlement, which is now becoming possible, by cancellation of so much of their debts as reason and experience show to be uncollectable. They do not desire this as an escape from payment. They only ask that we cancel that which in no event will be paid. But this they do ask, and regard as an essential. For the big objective, political and financial stability, will be jeopardized if one great creditor nation holds aloof and asserts the intention of repeating the experiments in collection which have, for four years past, disturbed the economic peace of the world.

What will be our response? The easy way is to let matters drift, to postpone decisive and irrevocable action. Will we thus assume the responsibility of dragging the world through more years of political and economic unrest in order to satisfy ourselves by personal experimentation that the Allied debts are, in the main, uncollectable? Or shall we avail ourselves of the present temper of Europe to effect a general settlement of the most disturbing of post-war problems? The answer will be the same whether we seek the maximum of material gain or whether we would have our nation assume leadership in world progress.

[iii] These methods may be direct, or the debtor may through one or more of such means, become creditor of a third party who, through one of these methods, has secured dollar exchange which he turns over to his creditor, thus creating what is known as a "triangular" operation.

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