FRANCE feels herself today in a very strong position, but the best French observers while conscious of that strength are also conscious of its responsibilities and dangers. France has an opportunity, many of them believe, to come to a real understanding with Germany, perhaps for the first time since the war; but they know that she must use discreetly her power to direct European affairs at this critical juncture. For if French statesmen either fail to be firm enough with Germany or press her too hard they may let slip the golden opportunity for reaching an understanding or may throw her into the arms of the extremists, Right or Left. The purpose of these notes is to set down what Frenchmen believe to be the governing factors in the situation: particularly as it has been affected by President Hoover's proposal for a year's holiday in war debt and reparation payments.

The French papers have commented frequently on Mr. Hoover's assertion that the economic and the political can be separated into water-tight compartments, and that the United States can mix in one and not in the other. They recall the difficulties in which he found himself over the theory that reparation receipts and debt payments had no connection, when in their eyes they plainly were two pockets in the same pair of trousers. They recall his belief, enunciated at Indianapolis as recently as June 15 last, that the United States could recover independently from the economic crisis, a belief which evaporated suddenly in the hot sun of reality. Similarly, they say, he is letting his wish father his thought when he asserts that a European settlement can be reached on purely business lines. Nevertheless, while rejecting the theory that states are governed by enlightened self-interest, divorced from passions of greed, revenge, fear, hope, prejudice and all sorts of traditions of friendship and enmity, the French recognize that the present crisis, while political in its implications for the future, is predominantly economic. And even if they did not recognize it, the Banque de France and the group of great French banks which form the nucleus of French financial strength are possessed of and control the resources which compose the principal cards in the hands of French political negotiators, whether at Berlin or London or Washington.

The private opinion of many French bankers regarding the world financial situation may be reported somewhat as follows. In the first place, they reject for the time being Germany's claim that she should receive further loans or credits. They cannot get rid of the belief, apparently, that since 1924 she has been deliberately letting herself drift toward the present crisis, and that now that it has arrived she has thrown herself on the mercy of the financial world in the hope of being freed of reparation payments. They see the proof of this contention in the extravagant and unsound financial policy of German municipalities and of the Reich itself, a policy which Mr. S. Parker Gilbert frequently denounced while Agent-General for Reparation Payments. In particular, they criticize Germany's accumulation of short-term debts. At the present moment German banks have short-term loans from abroad amounting to between 5 and 6 billion marks. A year ago they amounted to about 10 billion marks. Contrary to sound banking principle, the sums thus borrowed were tied up in building and other projects -- many of them unproductive -- and became "frozen." Had the borrowed money been used to finance commercial transactions based on the actual exchange of goods, at home and abroad, the difficulties of Germany would not have been overwhelming even if foreign bankers had called their loans; it would have sufficed for the German banks in turn to cancel their acceptances and other commercial credits.

French bankers do not think the world's difficulty is to find credits but to find borrowers. When it was suggested by the French Government that a great loan be made to Germany the first question asked was, Who would buy a German bond today? There was no answer. From this time the feeling began to grow in France that the only signature still good among the states needing capital in large amounts was Great Britain's. France made it plain that she was at any time ready to open a large credit for Great Britain, either alone or jointly with the United States. Pride, she said, should not prevent London from asking for it. She denied that prestige was involved. After all, France has a deep regard for the experience and capabilities of British international finance, which was already established and proficient long before she had begun to learn the art. Then too she remembers what happened to the franc in 1926 and has no illusions that her present situation will last indefinitely. She was ready to loan money to England in a perfectly matter-of-fact way, without strings, with no gestures of magnanimity, hoping merely to maintain the best of relations with London, so that sometime when she herself is in difficulties she might count on reciprocal support from across the Channel. In the event, the Central Banks of France and the United States opened a credit to the Bank of England in the amount of $250,000,000.

Many French observers (and others too) seem to be profoundly relieved that the proposal to make a large long-term loan to Germany failed. Here is where the political factor enters in. If a loan had been made to Germany simply on Berlin's verbal assurances of peaceful collaboration with France and respect for the treaty situation, such assurances could have been disregarded by whatever succeeding German Government felt so inclined. On the other hand, if the loan had been made in return for an explicit written agreement, Germany would never have forgiven France and the possibility for a sincere rapprochement of the two peoples would have vanished. As it is, Germany is left to put her own house in order, by stringent financial measures and with the friendly counsel and assistance of the world banking community, but without the false stimulus of a loan which could never have been disposed of to investors.

A factor in the situation which gives even more power than usual to European business and banking interests is that all the governments concerned in the current negotiations are weak. Dr. Brüning is weak, despite the result of the Prussian plebiscite; so is M. Laval, so is Mr. MacDonald. Even the position of Mr. Hoover would not be called iron-clad. Moreover, all the governments concerned except Germany have heavy deficits to face in the coming year. In France the prospective deficit is very important politically because general elections are to be held in May 1932. Many believe that M. Laval would fall if Parliament were in session today. He made a success in London; but he faces the necessity of imposing new taxes, and that fact is uppermost in the minds of the deputies who are busy putting their political fences in order for next spring. In general, too, the French are skeptical about the value of the merry-go-round of official visits that marked the months of July and August. Granting that it may have had a psychological value, they doubt that it was a manifestation of serious statesmanship except in so far as the visits of Secretary Stimson and Secretary Mellon were concerned. It leaves the participants exhausted, as they themselves admit; others add that it destroys their perspective, makes them dizzy and gives them indigestion.

When President Hoover put forward his proposition for a moratorium of war debt and reparation payments he awakened contradictory emotions in Paris. On the one hand, all but the strongest French nationalists admitted his generous motives; they felt that it would be alien to the best French traditions not to join in the demonstration of international solidarity which he suggested. On the other hand, they were profoundly shocked on learning that he had in mind the suspension of all inter-governmental payments, including the "unconditional" part of German reparation payments. By reason of a very strong attachment which the French have for the execution of written agreements, and also because of the circumstances under which the Young Plan was negotiated and ratified, they were taken aback by the abrupt demand that the Plan be set aside, both as regards its provisions for German payments and as regards the machinery which it had authorized for meeting just such an emergency as the President said had arisen. It cannot be concealed that part of the French worry arose out of the fact that the precedent now seemed set for an American president, or anyone else in a position of particular power at a given moment, to precipitate the abrogation of a treaty which he considered an obstacle to relieving a dangerous situation, without recourse to legal procedure or even to negotiation; this policy of the ultimatum the French found most unpalatable, and not a few cries went up in the French press that a new dictatorship was in course of erection.

Under the Dawes Plan the total German annuity (without taking account of variations in the index of prosperity) was 2,500,000,000 marks. The Young Plan reduced it to an average annuity of about 2,000,000,000 marks. The French share was reduced proportionately, or by about 20 percent. When the Young Plan came up for ratification the French Parliament accepted it only because it opened the way for the " commercialization " of a part of the German debt. This had been done by dividing the annuity into two parts, one "unconditional" and thus "mobilizable," amounting to 612,000,000 marks, the other "conditional," amounting to an average of about 1,400,000,000 marks. The conditional part was subject to a moratorium and might be paid in reichsmarks instead of in foreign currency. The amount of the unconditional part, which was not subject to a moratorium and which had always to be paid in foreign currency, was intentionally made so small that there could be no doubt as to Germany's ability to carry through the payment of it. Under the new allotment of the German annuity France was to receive enough to pay her debts to the United States and Great Britain, plus an annual payment of 420,000,000 marks for reconstruction purposes. This latter represented interest on a capital sum of 42,000,000,000 francs; the French claimed, of course, that actually they had spent an immensely larger amount on restoring the devastated regions. The Chamber of Deputies was influenced to accept the sacrifice involved in the Young Plan because in dividing up the unconditional payments among the creditor nations the Young Committee had agreed that France should receive 500,000,000 of the total of 612,000,000 marks comprising that section of the annuity.

French opinion was much excited on learning that President Hoover proposed the postponement of the section of reparation payments which the Young Plan had marked down as unpostponable. It was felt that France had made concessions under the Young Plan in exchange for that stipulation, and that it was unfair to suggest subsequently that the bargain be broken. The French Government had to take account of this feeling, which permeated all parties.

With complaints of this nature already ringing in their ears the statisticians of the French Government set themselves to figure out what the Hoover Plan would cost France, and what it would cost the other nations involved. The sums that each European state would normally have received and paid out in the year July 1, 1931 to June 30, 1932, and the net loss of each under the Hoover Plan, are shown in the following table (all figures in gold marks)[i]:

Receipts from: Payments to:
Germany 806,400,000 Great Britain 272,100,000
Czechoslovakia 3,200,000 Italy 3,500,000
Jugoslavia 2,600,000 United States 209,900,000
Greece 300,000 -----------
Rumania 2,100,000   Total 485,500,000
  Total 814,600,000
Net loss to France: 329,100,000 marks.

Receipts from: Payments to:
Germany 346,600,000 United States 669,700,000
Czechoslovakia 1,400,000
Belgium 3,100,000
France 272,100,000
Greece 7,200,000
Italy 90,700,000
Jugoslavia 6,100,000
Portugal 7,200,000
Rumania 5,100,000
  Total 739,500,000
Net loss to Great Britain: 69,800,000 marks.

Receipts from: Payments to:
Germany 192,300,000 Great Britain 90,700,000
Czechoslovakia 3,100,000 United States 61,800,000
France 3,500,000 -----------
-----------   Total 152,500,000
  Total 198,900,000
Net loss to Italy: 46,400,000 marks.

Receipts from: Payments to:
Germany 103,300,000 Great Britain 3,100,000
United States 33,400,000
  Total 36,500,000
Net loss to Belgium: 66,800,000 marks.

Receipts from: Payments to:
Germany 79,300,000 Great Britain 6,100,000
Bulgaria 400,000 France 2,600,000
----------- United States 1,000,000
  Total 79,700,000 -----------
  Total 9,700,000
Net loss to Jugoslavia: 70,000,000 marks.

Receipts from: Payments to:
Germany 12,300,000 Great Britain 5,100,000
Bulgaria 1,000,000 France 2,100,000
----------- United States 3,400,000
  Total 13,300,000 -----------
  Total 10,600,000
Net loss to Rumania: 2,700,000 marks.

Receipts from: Payments to:
Germany 6,700,000 Great Britain 7,200,000
Bulgaria 6,000,000 France 300,000
Czechoslovakia 1,800,000 United States 1,000,000
----------- -----------
  Total 14,500,000   Total 8,500,000
Net loss to Greece: 6,000,000 marks.

From this table it appears that of all European countries France loses most by the Hoover Plan. Her net sacrifice is not nearly so great as that of the United States, which foregoes receipts amounting to about a billion marks, but it is materially in excess of Great Britain's. As a matter of fact, if the American and French losses are compared on a per capita basis it will be found that they are equal; the Hoover Plan costs each American and each Frenchman 8 marks apiece. The 329,000,000 marks which France will not receive this year would have gone a long way toward balancing her budget. The same condition obtains in Jugoslavia and Belgium, the two countries which with France are most seriously affected by the Hoover Plan. The budgets of all three will show heavy deficits this next year; the German budget will probably show an excess. The French point out, therefore, that the determination of these states to examine the Hoover Plan in detail rather than to swallow it whole, as they were urged to do, was not frivolous but was based on serious considerations of national interest.

In the end France accepted the Hoover Plan, having secured recognition, in form at least, of the inviolable character of Germany's unconditional payments; it was decided that Germany should make these payments, but that France at the same time would loan an equal sum to the German Railway Company. France also asked that special arrangements be made regarding the completion of the Guaranty Fund required under the Young Plan, which stipulated that in case Germany asked for a moratorium France must make deposits to the value of 500,000,000 marks with the Bank for International Settlements to compensate the other creditors who would be affected by the suspension of conditional payments. Now the suspension of reparation payments did not deprive Germany of the right to declare a moratorium on July 1, 1932. Was France, after having been deprived of reparation receipts during a year, to find herself called upon to turn over 500,000,000 marks to the B.I.S.? The American Government apparently discovered some justice in French fears on this score, and it was agreed that instead of having to make the total deposit at one time France might make it in monthly payments. Further, France asked that some arrangement be made to extend financial help to the smaller countries whose budgets were being thrown out of kilter by the suspension of reparation receipts. The position of Jugoslavia was pointed out as being peculiarly acute. As Serbia was entirely occupied by the enemy after 1915 the Serbian Government had no opportunity to incur very large war debts; thus while the Hoover Plan deprives Jugoslavia of 79,700,000 marks it releases her from payments of only 9,700,000 marks, a net loss as large as Great Britain's and larger than Belgium's. In this matter France was not able to make arrangements which either she or the smaller states concerned felt very satisfactory; it was simply agreed that the Central Banks of the Powers are to investigate and if possible give credits to the countries which are particularly hard hit.

During the time that the negotiations leading to France's acceptance of the Hoover Plan were pursuing their troubled way the British and American press showed signs of great impatience. Perhaps it was not generally understood abroad that the relationship of Paris toward a prospective Germany bankruptcy was different from that of London or New York. French investments in Germany are insignificant. Other countries have made short-term investments there as follows (estimates of July 19, 1931):

Great Britain 1,800,000,000 marks
United States 1,500,000,000 "
Switzerland 750,000,000 "
Holland 500,000,000 "

Taking account of smaller sums from other countries, we may estimate the total short-term foreign capital invested in Germany today at between 5 and 6 billion marks. Of this total France is responsible for only about 300,000,000 marks. When one expresses surprise at the smallness of this sum in view of the present strength of French finance, bankers in Paris point out that France has never formed the habit of close financial relations with Germany. Political tension precluded anything of the sort before the war; French funds were placed in other countries, notably in England, whence a part of them flowed in turn to Germany. Since the war the same habit persists, and French foreign investments are mostly made in London or New York.

A word or two, now, to explain the French attitude on a matter closely related to the question whether or not fresh money should be put at the disposal of Germany. It is a favorite statement in London that France and the United States fail to make "proper" use of their large gold reserves, and it seems to be imagined that if they would show the right spirit the world economic crisis would be brought to a more speedy end.[ii] In French ears this sounds like an assumption that the flow of gold from one country to another is regulated by factors definitely within the control of Central Banks. It is categorically stated in Paris that the Banque de France (and the same statement is made for the Federal Reserve Bank) has not been seeking to attract foreign capital, but that on the contrary it has tried to promote the export of domestic capital. In both cases, it is pointed out, a "cheap money" policy has been followed. The French and the American discount rates have regularly remained below the discount rate maintained by the Bank of England, as the following table indicates:

New York Paris London
January 1, 1930 5
July 1, 1930 3
January 1, 1931 2 2 3
August 1, 1931 2

Despite this fact gold has flowed from London to Paris and New York. This merely means that capital prefers to be in those banking centers where it believes the economic and financial situation is sound and where it considers that it is safe. In recent weeks this fact became particularly marked, when the United States and France, together with Belgium, Switzerland and Holland, were the only countries whose credit was not shaken. In further reply to foreign criticism of French handling of the gold situation it is pointed out in Paris that the Banque de France has not converted its stock of foreign currencies into gold. Since the middle of 1929 this stock has remained with practically no variation at about 26,000,000,000 francs. Further, the French Government in April 1930 reduced the stamp tax on foreign bonds from 2 to 1 percent, and it has also reduced the income tax on foreign securities from 25 to 18 percent. These measures were designed to facilitate the issuance of foreign bonds in France and slow down the importation of gold.

It has already been stated in the course of this attempt to report the French viewpoint that Frenchmen have a lively recollection of the difficulties in which they found themselves in the first part of 1926. The "flight from the franc" had carried the pound sterling up to 245 francs. The coalition French Government under M. Poincaré adopted the following fiscal measures, to assure the balancing of the budget, to start immediately the amortization of the public debt, and to attract and retain foreign capital:

1.~Increase of the turnover tax from 1.30 to 2 percent.

2.~Increase of the income tax on securities from 12 to 18 percent.

3.~Increase of the real estate tax from 12 to 18 percent.

4.~Increase of the tax on salaries from 8 to 12 percent.

5.~Increase of the tax on industrial and commercial profits from 10 to 15 percent.

6.~Increase of the tax on agricultural profits from 8 to 12 percent.

7.~Increase of the transportation tax from 15.33 to 32.50 percent.

8.~Creation of a 7 percent tax on real properties the first time they changed hands after the introduction of the tax.

9.~Increase of indirect taxation and death duties from 50 to 100 percent.

In addition, there was created the "Caisse Autonome d'Amortissement de la Dette Publique" (Autonomous Sinking Fund Bureau of the Public Debt), and special revenues were assigned to it. Following the adoption of these measures French fiscal receipts increased as follows (the figures include all the revenues of the French state, including these of the "Caisse Autonome"):

1925 29,417,000,000 francs
1926 39,845,000,000 "
1927 47,737,000,000 "
1928 52,000,000,000 "
1929 56,922,000,000 "

The increase in receipts in 1926 and in 1927 is ascribed by French experts almost wholly to the increase in taxes; subsequent increases in receipts are put down to the growth of business.

The French public, remembering the measures to which it submitted in order to cure the 1926 crisis, asks why Germany, which was relieved of all internal debt by the eclipse of the old mark, which has now been relieved of almost all foreign debt payments by the Hoover moratorium, and which has received financial help from abroad in unprecedented amounts, should not be expected to make the same rigorous effort, the same sacrifices, that France made under M. Poincaré. The French people, who are frugal and hardworking to an extent which the tourist in Paris cannot imagine, have strongly ingrained in them the idea that any state can pull itself out of financial difficulties if it has sufficient will-power to cut expenditures to the bone.[iii]

They are waiting to see whether while the United States, England and France continue to carry a heavy public debt (a load augmented by the suspension of reparation and war debt payments), Germany, almost completely free from payments on account of public debt, will now turn resolutely to put her finances in order. If in June 1932 there is evidence of this having been done, France maintains that she will be the first to feel and express satisfaction and relief, and that she will find in the economic regeneration of her nearest neighbor, and in the calmer political atmosphere which she hopes will simultaneously appear there, full recompense for the sacrifices she agreed to make in common with Germany's other creditors.

[i]This table does not pretend to be complete; it does not include every intergovernmental debt suspended under the Hoover Plan. But it includes all major items and the general picture it gives is accurate. In figuring reparation receipts service charges fixed by the Young Plan have been deducted.

Japan would have received 13,200,000 marks from Germany. As she has no war debt to the United States or Great Britain that sum represents her loss under the Hoover Plan.

[ii]The London Times of August 9, 1931, for example, wrote of the world-wide trade depression as being "largely due to the failure of the United States and France to make proper use of their huge gold reserves," and went on to say that if they continued their present practice of the gold standard the rest of the world would sooner or later be compelled to adopt another standard.

[iii]The advice of the London Times to the British Government presumably holds good also for the German Government. On August 9, 1931, the Financial Editor of the Times wrote as follows: "The principles of sound finance require that a country should keep its expenditure within its income whether the latter be small or large. This is what is meant by sound policy in high finance, though in private life the same principle is called common sense."

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