FORTY-THREE governments have borrowed money in the United States through public offerings of dollar bonds in the New York market. The amount of their issues now outstanding is, in round numbers, three billion dollars. Political subdivisions of 26 foreign governments -- that is, states, provinces, departments and municipalities -- have also offered nearly two billions in dollar bonds in the United States, and private foreign corporations have floated another three billions. These are the estimates made by the Institute of International Finance, and they show that total outstanding issues of foreign dollar bonds amount, in round numbers, to eight billion dollars. This sum is exclusive of the war debts owed to the United States government, which with principal and unpaid interest now amount to approximately twelve billions.

All the war debts, except the small amount owed by Finland, are now in default; but for the time being these obligations have ceased to be a pressing diplomatic problem. The repeated exchange of notes between the United States and the leading war debtors has led to an impasse, and both sides are now disposed to hold the matter in abeyance until a more propitious season. In the meantime, the dollar bonds of twenty foreign national governments are wholly or partly in default, and these defaults are probably having more effect today on the foreign relations of the United States than the 99.9 percent default of the war debtors.

Ordinarily, the United States Government does not undertake to obtain through diplomatic channels the payment of claims which its citizens may have against debtors in foreign countries. Foreign loans are made at the lender's risk. The government assumes no responsibility for them, but it will endeavor to protect its citizens against unfair treatment and especially against discrimination by the foreign debtor in favor of creditors in other countries.

American holders of foreign dollar bonds have met with a variety of treatment from debtor governments since 1931. For convenience, the debtors may be grouped into four classes.

1. In the first group are the governments which have lived up to the literal terms of their contracts, including the so-called gold clause, and have maintained service on their dollar bonds by paying the equivalent of gold dollars of the former parity. They have refused to take advantage of the permissible repudiation of the gold clause, and they continue to pay on the basis of United States gold coin of the standard weight and fineness existing when the securities were issued. This has resulted in their paying slightly more than $1.69 in devalued dollars for every gold dollar called for in the bond.

The governments of France and Switzerland have met their dollar obligations in this way, and so have the French cities of Bordeaux, Lyons, Marseilles and Soissons. The bonds of the three cities first-named reached their maturity date on November 1, 1934, and American holders received payment of the principal at the rate of nearly $1,700 in present money for each $1,000 bond. Two French railway companies -- the Nord and the Paris-Orleans -- have dollar bonds outstanding on which they also have made payments on a gold basis. The Netherlands government has floated no dollar loans, but its East Indies colony paid in gold on its dollar bonds until these were recently converted into a new issue payable in guilders.

If the lines are not drawn too sharply, the government of Belgium may be included in the first group, although its treatment of dollar creditors has been less liberal than of its former associates in the European gold bloc. On April 30, 1933, shortly after the United States went off the gold standard, the Belgian Government announced that payments on dollar bonds presented for stamping at the central bank in Brussels by May 4 would be made on the usual gold basis. But since it was impossible for American bondholders to deliver their securities to the Brussels bank on four days' notice, they were unable to take advantage of this privilege, while European holders of these securities were able to do so. Interest on the unstamped bonds is paid in devalued dollars. At first sight this practice looks like discrimination against American lenders. Yet, as the United States Supreme Court recently pointed out in the gold-clause cases, American investors have not suffered a loss from payments in dollars of the new parity, and payment in dollars of the former standard would mean their "unjustified enrichment." On the other hand, European holders of Belgian dollar bonds would incur a substantial loss if they were paid in devalued dollars. Through its stamping arrangement the Belgian Government was apparently undertaking to accord equal treatment to both European and American investors. But even if there were some discrimination against Americans, the United States would have no ground for complaint, since Belgium is giving American bondholders the same treatment accorded them by their own government.

2. In the next group are nineteen governments [i] which are maintaining full interest payments on their dollar obligations, but in American currency of the new parity. They are legally entitled to follow this procedure, which in effect reduces the burden of their debts by about 30 percent. When the British Government announced its decision to pay the interest on its dollar bonds in devalued United States currency, it justified its action on the ground that the obligation to pay in standard gold dollars had been removed through the American Government's "alteration of the law of the land," and that payment could be made only in the new legal tender currency. The inadequacy of this explanation was promptly pointed out by a number of British financial writers. The London Economist, for example, remarked that the government was "departing from the clear intent of its bond" and that in consequence the outlook for financial reconstruction "based upon the sanctity of contract is indeed gloomy." The British Government, however, did not go the whole way in repudiating its gold-clause obligations. Through a refunding plan it offered something more than the new 60-cent dollars to those who would exchange their dollar bonds for a new issue payable in sterling. In actual practice, therefore, Great Britain has dealt more liberally with her American creditors than has Belgium, but less liberally than have France, Switzerland and the Netherlands East Indies.

3. The third group consists of twelve governments [ii] which at this time are making only partial payments on their dollar obligations. In some cases payment on any coupon date varies with the amount of foreign exchange available for debt service; in others full payment is set aside in local currency which cannot be transferred to the United States because of exchange control. In these latter instances the coupons can sometimes be sold in the American market, though usually at a heavy discount, and the net result is a partial payment in dollars. In a few cases payment has been tendered in new funding bonds bearing a low rate of interest.

Germany is the most important of the debtor governments making partial payment on dollar bonds. Her case is peculiar in that she is deliberately discriminating against American creditors on the ground that certain other creditor countries are entitled to favored treatment, since they have made it possible for her to pay them by giving her special trade concessions. Germany's treatment of American bondholders has evoked strong protests from Washington without as yet producing any material modification of her policy. On June 27, 1934, the Department of State sent a most caustic note to Berlin with regard to this matter; but when the next instalment on the Dawes Plan loan became due, all the countries in which this loan was floated except the United States received full payment. The American bondholders received one-half of the payment in dollars and the other half in blocked reichsmarks worth only about 50 cents on the dollar in the American market. When the next payment became due in April 1935, the American bondholders were paid only in reichsmarks. On October 15, 1935, they were paid in dollars, but at the rate of 5 percent instead of the stipulated coupon rate of 7 percent.

4. Finally, there are eight governments which at this time are making no payments on their dollar bonds. Three of these governments -- China, Mexico and Russia -- have been in default over a long period of years. The Mexican default occurred in 1914, the Russian in 1919, and the Chinese in 1921. Three governments -- Bolivia, Chile and Peru -- have been in default since 1931, and two others -- Colombia and El Salvador -- have been making partial payments for about three years, but suspended payment in 1935.

The number of complete and prolonged defaults is surprisingly small and it does not substantiate the widespread impression that most foreign bonds are practically worthless. In fact, full service was maintained throughout the depression on 64 percent of the dollar bonds of foreign governments; partial service was maintained on 21 percent, and on only 15 percent was payment completely suspended. For the dollar debts of political subdivisions, and especially for debts owed by foreign private corporations, the showing is not quite so good. Yet it may be well to bear in mind that the bonds of many American municipalities and business corporations have also not been immune to defaults since the onset of the depression.

[i] Argentina, Austria, Australia, Canada, Czechoslovakia, Free City of Danzig, Denmark, Dominican Republic, Estonia, Finland, Great Britain, Haiti, Irish Free State, Italy, Japan, Newfoundland, Norway, Poland and Sweden.

[ii] Brazil, Bulgaria, Costa Rica, Cuba, Germany, Greece, Guatemala, Hungary, Jugoslavia, Panama, Rumania and Uruguay. Colombia and El Salvador have made partial payments in previous years, but suspended debt service during 1935.

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  • WILLIAM O. SCROGGS, Director of Information, Council on Foreign Relations; joint author of "The United States in World Affairs"
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