The Debt Settlement: The Case for Revision

AMERICANS have a reputation for plain speaking. They will not, therefore, resent others indulging in this agreeable method of relieving one’s feelings. No American who has visited Europe occasionally during the last few years, and who has come in touch with public opinion, can have failed to be impressed by the growing antipathy to the United States. However disagreeable it may be to recognize this fact, it would be folly to ignore it.

No greater calamity could happen to the world than an estrangement of Europe and America, and particularly of the two great English-speaking peoples. The destinies of the world are largely in their hands, and not merely good feeling but generous coöperation is essential for the task of rebuilding the shattered world and leading all nations to a higher moral development.

The unpopularity of America in Europe is due to her post-war attitude to European resettlement. Rightly or wrongly, she has managed to create the impression that, when her fear of the German menace was removed, she left Europe in the lurch, devoted herself to taking financial and commercial advantage of Europe’s misfortunes, and was concerned only in her own material interests.

This view, so general throughout Europe, and especially in France and England, is, I believe, largely, if not wholly, without foundation. But it exists, and nothing has done so much to give to it apparent justification as America’s policy on the matter of Interallied debts. It is of vital importance, therefore, that Americans should know how their European debtors feel on this subject.

I

The nations of Europe see themselves crushed by colossal war debts and burdened by intolerable taxation. For five years Britain has suffered from unparalleled trade depression. At a cost of a hundred million pounds a year she has maintained a vast army of unemployed. Her foreign trade, on which she so largely depends, is 25 per cent below the pre-war volume. She sees America enjoying unbounded prosperity, capturing her former markets, and keeping her goods out of America by prohibitive tariffs. And all the while America is exacting from her comparatively poverty-stricken debtors a huge annual tribute on account of financial assistance given by America for what her statesmen described as ‘a common enterprise and a common interest.’

I have met Americans who say that they cannot understand why there should be any feeling of resentment in England at the Anglo-American debt settlement. That settlement, they declare, was a voluntary act on the part of England, and was carried through at our request. That is not the fact. In 1920 President Wilson wrote to Mr. Lloyd George stating that it was highly improbable that the United States Congress would agree to any reduction of the British debt in order to induce Britain to forgo debts owed to her by her Allies, or to any reduction of Allied debts in order to facilitate a settlement of reparations.

Further, in 1922 the American Government addressed a firm but courteous note to the British Foreign Office demanding the payment of accrued interest upon the American debt, and asking that the debt should be funded and repaid by a sinking fund in twenty-five years. It was this demand which called forth the famous Balfour Note to Britain’s Continental debtors.

No self-respecting nation could fail to respond to such an imperative demand to pay her debts, and a few months later the British Government sent a mission to Washington to arrange funding terms. America’s first request was that the rate of interest to be paid by Britain should not be less than that at which America had to pay for loans. Eventually America conceded slightly more favorable terms, which were embodied in the Funding Agreement. Mr. Baldwin’s impressions of these negotiations were frankly expressed on his return. ‘The bulk of the people in America,’ he said, ‘have no acquaintance with international trade. . . . They think that all we have to do is to send the money over.’

Under this funding arrangement Britain admitted an indebtedness of $4,600,000,000. She agreed to pay interest at the rate of 3 per cent for the first ten years, and thereafter at the rate of 3½ per cent for the remaining period of fifty-two years, with additional annual payments for the amortization of the debt. In all, Britain is to pay to America over a period of sixtytwo years a total sum of £2,200,000,000!

Let us now examine the case for imposing this tribute of $500,000 a day upon the productive capacity of Britain for a period of two generations. The legality of the debt is not questioned. But it will not be maintained that this debt is wholly of the nature of an ordinary commercial debt. The debt is expressed in terms of money, but there was no cash transact on. The loans were made by America in munitions, food, cotton, and other war requirements. The purchases made by the British Government in America, before America entered the war, were paid for by pledging and selling British collateral securities. In this way Britain incurred a debt to her own citizens of about £800,000,000, which is quite apart from her funded debt to America.

It was after America entered the war, in April 1917, that Britain incurred her debt to America. She had already severely strained her financial strength by large loans to her Dominions and Allies. But for this she would never have needed to ask for credits from America for the war supplies she obtained from there. There is that justification for the contention that Britain borrowed from America to lend to her Allies. But it is not true that the British debt to America was incurred to lend to Britain’s Allies. An ambiguous phrase in the Balfour Note gave rise to the impression that our debt to America was incurred on behalf of our Continental Allies.

It is not true that after America entered the war she refused to accept the credit of the Continental Allies, or that Britain was required to underwrite the loans made by America to them. This truth has been repeatedly stated by British Ministers. If Britain had guaranteed the loans made direct to France and Italy by America, it is certain that she would have been called upon by America to meet the obligation, being the most substantial of the debtors.

In the interests of a right understanding of the position of America in regard to the loans she made to France and Italy, and in view of the widespread impression that she refused to lend to those countries on their own credit, I am glad to make this statement of the facts, based upon a close examination of the records. It is true that America refused to lend to the Allies beyond the sum of their purchases in America, her reason being that if she did so she would have no control over the expenditure of the money.

II

The case against America’s insistence upon the payment of her loans to her Allies in the war is quite strong enough on the actual facts without importing any questionable contentions into the controversy. That case is that America kept out of the war for nearly three years before she realized that it was to her interests to secure a victory for the Allies; that during that time she made colossal profits out of supplying munitions to the Allies; that by her belated recognition of her vital interest in the Allies’ cause she prolonged the war considerably, thus adding enormously to the financial burden of the Allies; that when she entered the war she was not for a long time able to contribute to the military prosecution of the war; that her loans to the Allies, made after her entry into the war, should be regarded as contributions to a common effort; that her financial help to the Allies was a small contribution to the common effort by comparison with the sacrifices in life made by the Allies during the interval in which she was unable to give much effective help in the field; that, on her own contention that ‘ capacity to pay ’ should be taken into account in estimating the respective contributions to the cost of the war, she is not bearing her share of that cost; that by insisting upon the payment of loans from impoverished countries she is retarding the economic revival of Europe and the world; that by insisting upon the payment from Britain she is preventing that country from forgiving all her own debtors; and finally, that it is not in the ultimate interests of America that she should burden the nations of Europe with this enormous annual tribute to her.

The bill authorizing the bond issue enabling the United States Treasury to extend credits to the Allied Governments was introduced into the House of Representatives five days after the entry of America into the war. It was unanimously approved by all parties. Speaker after speaker justified the credits on the ground that ‘the Allies were fighting the cause of America.’ Representative Mann of Illinois said, amid the applause of Congress, ‘We are not prepared to place men in the field. We are not prepared to fight with our army. We are not prepared to do much with our navy. . . . But there is one way in which we are prepared to engage in the war. There is only one way in which to-day we can do more than make our war an academic discussion, and the only way left to us is to help finance those nations who are fighting our enemy. ... I only hope and pray that the aid thus given may be effectual enough to end the war before we send our boys to the trenches.’

The debate in the Senate followed the same line. The whole tenor of the speeches there was ‘The Allies are fighting our battles’; ‘It will be months before we can do more than lend those who are fighting our money ’; ‘This is our immediate contribution to the war.’

The official bulletin issued in 1917 by the United States Treasury, appealing for subscriptions from the public for these loans, contains statements which have an important bearing on the subject.

It was stated that loans were essential to America’s protection, not alone in a military way, but for her economic protection and welfare. It was further stated that America was producing more goods than were needed for her own use, and that her economic protection and welfare demanded that she should sell much of her production to her Allies. In other words, the credits enabled America to get rid of her surplus production to the Allies at high prices and big profits, and to keep her workpeople in employment. Most significant of all was the admission in this official bulletin that the loans were made to the Allies to enable them to do the fighting which otherwise the American army would have to do at much expense, not only of men, but of money — money which would never be returned to America, and lives that never could be restored.

These admissions fully justify the conclusion that the loans made to the Allies to fight America’s battle should be regarded as her contribution to the war in lieu of the money she would have had to spend and the lives she would have had to sacrifice but for her unpreparedness to put men into the field earlier. The loans made by America did not obviate the need for Britain’s continuing largely to finance her European Allies. After the entry of America, Great Britain lent $4,176,000,000, and borrowed roughly the same amount from the United States — namely, $4,498,000,000. These figures prove conclusively that if Britain had not continued to finance her Allies she would have had no need to borrow from America. Therefore, in a real sense, the British debt to America ‘was incurred not for herself but for her Allies.’

From the outbreak of war to the entry of America, the United States was the great market for the supply of munitions, food, and other necessaries for war. Up to 1917, Great Britain borrowed from her nationals a sum of £800,000,000 to pay for goods supplied by America. She did this to a great extent by surrendering the private investments of British investors in America. The effects of this transaction are still being felt by Great Britain in the adverse balance of trade.

The war came at a time when the United States was in sore need of a trade revival. For twelve months before the outbreak of war that country had been suffering from a very severe industrial depression. The commercial outlook in that country was of the blackest description. The number of business failures at that time was the largest recorded in her history. The war came, and in an instant all was changed. Blank depression gave place to unbounded prosperity. The madness of Europe brought industrial salvation to the United States. The demand for everything she could produce was tremendous. Prices rose sky-high, and profits passed beyond the dreams of avarice. For the three years before she entered the war America was surfeited with wealth made out of the bloody sacrifices on the battlefields of Europe.

During the five trade years before the war, the United States exported to Europe goods to the value of $6,751498,000. During the five years of the war her exports to Europe rose to the value of $19,494,779,000 — an increase of 200 per cent. These figures are the more remarkable when it is remembered that during the war America’s exports to the countries of Middle Europe practically ceased. In sending these goods to Europe, both before and after America’s entry into the war, the American exporter and manufacturer took no risks. He trusted in God to give the victory to the Allies, but he trusted in collateral to secure the payment for munitions to secure that victory. When America became a partner in the war, an arrangement was made with England and France under which the War Industries Board supervised the purchases of the Allies in the United States. But there was no control of prices. Profiteering in war time became a monstrous scandal in Great Britain, in spite of antiprofiteering laws and boards for price control. It requires little imagination to conceive what happened in the United States in this respect before America’s entry. But the rise in the value of exports tells that story. The sums loaned by America from 1917 to help the Allies to fight her battle were but a part of the profits she had made out of the Allies before her entry into the war.

III

The relative sacrifices in life and treasure, and the relative capacities of the Allied and Associated Powers, must be considered in connection with the question of Interallied debts. And the point must be borne in mind during this consideration that America entered the war ‘ for her own economic protection and welfare.’ If her interest in the defeat of Germany was equal to that of her Allies she was morally bound to make an equal contribution to the effort to attain that result. But no such proportionate contribution is asked from her. No sacrifice she can now make in canceling the Allied debts can compensate her Allies for the loss of the millions of men whose bodies lie buried on the European battlefields. The New York correspondent of a London financial journal, writing on the debate on Interallied debts which I raised in the House of Commons in March last, said that great indignation had been aroused in official circles in Washington by my insinuation that the United States ought to have borne the entire cost of the war after her entry therein, on the theory that she had been delinquent in fulfilling her moral duty from August 1914 to April 1917. I neither made nor ever imagined such an insinuation. After America’s entry, Britain borrowed over £3,000,000,000 from her nationals to finance the war, for which she is paying 5 per cent interest, in addition to raising over £1,000,000,000 a year by taxation. We do not ask either America or anyone else to shoulder a penny of that burden. It is a difficult load to carry, but our self-respect will sustain us to the end.

The Bankers Trust Company of New York has furnished the following table of the relative cost of the war to the principal Allied Powers.

RELATIVE COST OF THE WAR TO THE GREAT POWERS

(In ‘ 1913 ’ dollars)

It will be seen from this tabic that Great Britain made by far the largest proportionate financial contribution to the cost of the war. She is still bearing a much heavier annual burden of taxation than any other of the late belligerents. Out of her abounding post-war prosperity, the United States is rapidly extinguishing her internal war debt; she is making enormous reductions of taxation; and the abundance of money is enabling her to convert maturing bonds at a very low rate of interest.

I prefer to take my figures from United States sources. The New York Trust Company Index, published in July of last year, gave a comparative table of the relative taxation burdens of the leading countries of Europe compared with the United States. The figures are based on national and local taxes in 1923-4, converted at average exchange rates. The table is adapted from the computations of the United States National Industrial Conference Board.

As a matter of fact, at the present time the taxation per head, and the proportion of national income absorbed by taxation, are much lower in the United States than in 1923-4; whereas in Great Britain the budget estimates for the current financial year are higher than in 1923-4. Our national wealth is not increasing. The yield of each penny of the income tax is showing a slight tendency to decline. More than half the tax revenue of Great Britain is absorbed in paying the interest and sinking fund of the war debt. In the United States, as the New York Trust Company points out, approximately three fifths of the total taxation is for states and municipalities, whereas in Great Britain four fifths is for national purposes.

While Great Britain’s financial burden remains practically undiminished, and while her trade languishes under this load, the wealth of the United States is expanding at an enormous rate. The Federal Trade Commission recently published statistics which show that her national wealth is computed at $550,000,000,000. The wealth of Great Britain is estimated at £24,000,000,000, about one fifth that of the United States, which is increasing yearly at the rate of $55,000,000,000 — that is to say, it is doubling itself in ten years. The national income of the United States, which in 1923 was estimated at $70,000,000,000, is steadily expanding at the rate of $10,000,000,000 a year. In other words, America’s national income is increasing yearly by the sum of the total amount of the debts owing to her by her European debtors. The present annual income of Great Britain is about £3,600,000,000.

A statement has been cabled to London that Mr. Mellon has in formed the President that the $300,000,000 Third Liberty Loan Bonds which mature in 1928 can shortly be converted at 3¼ per cent, effecting a saving of over $30,000,000 annually. Great Britain has large blocks of debt nearing maturity, and there is little probability that these can be converted at a lower rate than 5 per cent. In about twenty years’ time, I understand, — but of this I cannot write definitely, — the whole of America’s war debt will be redeemed. At the present rate of redemption it will take one hundred and fifty years for Great Britain to pay off her internal war debt.

There are two other points in this connection which may be noted. Under the Baldwin Settlement with America, Britain is to pay interest upon the American debt for fifty-two years at the rate of 3½ per cent. Even now it appears that America is able to borrow internally at a 3¼ per cent rate. If her national savings continue to grow at the present rate, the rate of interest will fall lower still, and it is no fantastic supposition that, while Britain is paying America 3½ per cent in the future, the United States Government will be able to borrow at 2½per cent.

The second point is that America, out of the tribute she is taking from Europe, and out of her surplus savings, is placing the countries of Europe under her yoke by her loans to these countries for public and commercial purposes. Mr. Hoover was recently reported in the London press to have estimated the income of the United States from these sources at £120,000,000 a year. America’s capacity to lend at cheap rates is taking away from London her former position as the centre of the world’s money market.

The late Mr. Bonar Law, speaking on the Baldwin Settlement with America, said that the payment would place the workers of Great Britain in bondage for two generations. We are already realizing the truth of that statement. The present Chancellor of the Exchequer is at his wits’ end to make his books balance. This year he has made drastic reductions of expenditure upon several of the vital services. He has raided the fund for the maintenance of the roads. He has taken money from the sick and disablement insurance funds. Education is being starved. But these economies go but a very short way toward meeting the annual payments we have to make to America on the debt settlement. In other words, this tribute to America is in part being paid at the expense of our sick and disabled and by starving the education of our children; and, for the rest, it is being paid by 1,500,000 hours of labor by British workmen every day. Put in another form, the payment to America is nearly equal to the whole sum we are able to give from national taxation for education; it is more than the cost of our admirable old-age pensions system; it is about one fourth of the whole expenditure of the local authorities on the innumerable vital and social services.

IV

There remain to be considered the terms on which Great Britain and America have respectively agreed with their war debtors for the funding of the debts. The terms of the Baldwin agreement with America have already been stated. Over a period of sixty-two years Britain is to pay America a total sum of £2,200,000,000, the principal of which at the time of the funding amounted to £920,000,000. It is said, though I cannot vouch for the accuracy of the statement, that when the Baldwin arrangement was made it was understood that the agreement would be revised if, later, America gave more favorable terms to her other debtors. Be that as it may, an added sense of grievance has been created by the more generous terms which America has given to Italy, France, and Belgium. But it is not that we begrudge the more lenient treatment America has given to these countries, for we ourselves have made far more generous concessions to them.

It was part of the policy of the Balfour Note that if our debtors, who were also debtors to America, made better terms with America than America had conceded to us our agreements with them should be revised, so that pari passu payments would be made to us. But in our agreements with France and Italy we have waived this condition, and have accepted a far smaller proportion of the debts than America has insisted upon their paying to her.

Take first the case of Italy. The following statement summarizes the terms of the British and American settlements with Italy.

Great Britain has sacrificed 55 per cent of the capital debt, and all the interest upon it from the date of the agreement. America is to get the whole of her capital debt and £75,000,000 of interest. It is true that for the first fifteen years Italy is to pay more to Britain than to America, but after that period her payments to America will, on the average, be double those paid to Britain. There is this further important difference to be noted. Britain will have to pay 5 per cent interest upon the sum she has forgiven Italy, which means that the British taxpayers will have to find £24,000,000 a year, for two generations at least, on the lost money she lent to Italy. It represents an income tax of fivepence in the pound. America is to get all she originally lent to Italy, and £156,000,000 of interest in addition.

The comparison of the American settlement with France with the British agreement with France, not yet ratified, also brings out strikingly the more generous treatment of our debtor, and the severity of the Baldwin agreement. The indebtedness of France to America, including accrued interest, is £805,000,000. The French settlement provides for a total payment to America, spread over sixty-two years, of £1,369,000,000: that is, in addition to the funded debt, France has to pay America £564,000,000 as interest.

Under the Churchill-Caillaux agreement made last year, France agreed to pay an annuity of £12,500,000 for sixty-two years to liquidate her debt to Britain. Her total indebtedness to us on March 31 last was £647,000,000. Britain has asked France to pay £775,000,000 altogether, which is £128,000,000 in addition to the capital sum. America gets £564,000,000 as interest on the funded debt of £805,000,000; Britain gets £128,000,000 interest on a debt of £647,000,000.

Britain has shouldered an annual burden of £20,000,000 by the remission of debt she has made to France. Assuming that the French agreement is ratified, Britain has made a clear gift to Italy and France of £44,000,000 a year, or, in other words, has imposed an income tax on her people of ninepence in the pound for the next two generations at least.

The war debts owed to Britain amount to over £2,000,000,000. On these debts she is paying out of our taxes over £100,000,000 a year. Assuming that we get the £4,000,000 a year from Italy and the £12,500,000 from France, and that German reparations give us £15,000,000 a year, and that we get £2,000,000 from the smaller nations on account of their debts to us, we shall be receiving £33,500,000. We shall be paying America £38,000,000 a year, and will therefore be £4,500,000 a year to the bad. In addition to this, we shall be paying that £100,000,000 a year on the internal debt borrowed to lend to our Allies.

When the funding arrangements which America has made with her European debtors fully mature she will be receiving approximately £120,000,000 a year on account of these debts. The most sanguine expectation of the yield of German reparations is not more than £50,000,000 a year, though the Dawes Scheme provides for an eventual payment of £125,000,000 a year. But no authority believes that Germany will ever be able to pay a sum approaching the latter figure. Therefore, what all this amounts to is that America is going to take the whole of the German reparations and probably an equal sum in addition. This is not a bad arrangement for a country that entered the war with ‘No indemnities, and no material gain’ emblazoned upon its banners.

The position of Britain in regard to these Interallied debts has been made abundantly plain. She asks for no more in the aggregate from her debtors and from Germany than she has to pay to America. If America would cancel Britain’s debt to her, Britain would cancel all the debts owing to her by her late Allies. She would be willing to shoulder the whole of these debts herself. Therefore, if Britain were to ask for a revision of the American debt, no motive of gain to hersell could be imputed to her.

V

The last point that demands consideration is whether it is to the financial and commercial advantage of the United States that she should receive these annuities from impoverished Europe. It cannot be questioned that such a drain upon Europe tends to the latter’s impoverishment. It will retard her economic and commercial recovery. That cannot be to the best interests of the United States. As Mr. Mellon is reported to have said recently, ‘it is better to have solvent customers than to insist upon a debt settlement the terms of which would force one’s customers into bankruptcy.’ Then there is the problem of the receipt of these payments from Europe. The payments can be made only in goods or gold or foreign investments. America wants neither goods nor gold. The debtor countries can pay only out of an export surplus.

If these exports do not go direct to America they must go to other countries, where they will compete with American goods. The method of investing these payments in Europe is hardly more feasible. That might help the European countries which needed capital, but the remittances upon these loans would raise the import problem for America, though in a lesser degree.

If we look at this Interallied debt problem from the world point of view we are driven to the conclusion that the common-sense line, and the one which will be best for the real and ultimate interests of all countries, is an all-round cancellation of the debts. Britain is prepared for that. At the moment America stands in the way. But if recent dispatches from the United States, published in the English press, are reliable, the opinion there is moving in the direction of drastic revision or cancellation.

I have stated the case of Britain for revision or cancellation with frankness, but, I hope, fairly and without any wish to give offense. If that were given I should deplore it. I hope and believe that the bonds which unite the two great families of a common speech and a common tradition are too strong to be sundered or impaired by frankness of discussion upon a matter which it is to the vital interests of both countries to settle on fair and generous terms.