The Meaning of the Gold Crisis

I

To plain people there is an aura of mystery about gold; partly because, as money, they never see it. It sits in subterranean fortresses of incredible complexity, and from their gloomy silence works its queer alchemy upon the fate of nations by processes that only its hierophants can comprehend. Yet in the story of what has happened, this past year, to the finances of the Western nations the real protagonists are not mysterious and inexorable ‘economic forces,’ but ordinary very ordinary — human beings, with passions and prejudices like our own, and certainly no greater store of wisdom. It is a story of intense and even dramatic interest as it moves through clashing motives from chaos to conflict; and it is a story that vitally concerns every American citizen.

Twelve months ago — in the early spring of 1931 — certain representatives of French capital and German industry were quietly talking things over in Berlin. Their conversations were unofficial and unreported, and nothing very definite was expected to come of them in the immediate future; but there was more than a chance that a better atmosphere would be established, out of which, in due time, an economic if not a political rapprochement might appear.

So, at any rate, thought M. Briand, watching matters hopefully from the Quai d’Orsay. For M. Briand there was a certain need to be hopeful. Times were not easy in Germany, were distinctly difficult in Austria, and were becoming critical in the agricultural states of the Little Entente. The restoration of Europe would not wait forever. But as yet none of the general nostrums had been applied. There were three of them on the shelf. Britain and the Scandinavian states had for years been pressing the case for a general tariff revision — pressing it at Paris, at Washington, at Geneva. They had got, in 1926, the bankers’ manifesto to help them, with its emphatic warning that ‘there can be no recovery in Europe until politicians of all territories, old and new, realize that trade is not war.’ Lionel Rothschild in London and J. P. Morgan in New York had both signed that. The French would not oppose the general thesis. Economic nationalism was no doubt an evil— from the ideal standpoint; mais, que faire? The French, especially French heavy industry, had been advancing since 1925 an alternative policy: the policy of international cartelization. They had hoped that the World Economic Conference of 1927 might endorse that. But it declined the opportunity, coming down instead on the British side of the fence. ‘The time has come to put an end to the growth in customs tariffs and to reverse the direction of the movement.’ Which was all very well if the states could be persuaded to take action. M. Briand, with one eye on Washington and the other on his friends of the Little Entente, remained doubtful. Germany and Austria remained impatient. Finally — in the spring of 1930 — M. Briand had produced his own scheme: a scheme taking both the British free-trade thesis and the French cartelization thesis in its stride, but starting from the principle that the economic problem must be subordinate to the development of political security. Twenty-six European nations began arguing. There was plenty to argue about. Meanwhile the trade depression deepened, crop surpluses piled up, America enacted a new high tariff, and Austria drifted steadily toward bankruptcy.

Bereft of her raw materials by the peace treaties, and of her markets by the tariffs of the Little Entente, Austria found her national economy precarious at best. True, it had made substantial progress under the tutelage of the League of Nations; so much, in fact, that League tutelage was withdrawn at the end of 1926. Budgetary balance had been achieved, productive power expanded, and trade equilibrium brought appreciably nearer. On the strength of that and the funding of her American debt in May, Austria had successfully floated an international loan of $102,000,000 in July 1930. The loan was oversubscribed. New York took twenty-five millions; London, fifteen. Holland, Sweden, Switzerland, and Italy joined in. Paris would have none of it.

By the end of the year, Austria was facing her all-too-familiar problem. Her industries, expanded for an export trade, faced the double difficulty of universal tariff walls and a failure in the buying power of her agricultural neighbors. Credit for farmers had reached prohibitive prices. Crops could not move, and farmers could not buy.

The southeastern states had talked through a whole series of conferences to no practical purpose. A League meeting in November 1930 got no further than a vague recommendation of bilateral agreements between industrial and agricultural states. A meeting of M. Briand’s European commission in January 1931 established several more committees. Dr. Schober, Foreign Minister, came back to Vienna reporting ‘not one iota of positive achievement.’ Meanwhile Austrian foreign obligations pressed harder and harder on a shrinking revenue, and Austrian industry leaned harder and harder on the banks.

Germany, too, found her economic problem becoming acute in the latter part of 1930. Not only had European purchasing power declined. The cessation of foreign investment rendered an export balance more than ever necessary in order to supply foreign funds for transfer. To attain that balance still heavier sacrifices were necessary inside Germany. And the heavier the sacrifices, the more distant seemed the prospect of relief. A growing desperation showed itself in the drift to the extreme parties at the September elections; this in turn roused panic in Germany and fury in France. On the twelfth of October it was stated in Basel that the Reichsbank could defend its currency for only two weeks more. It had lost 10 per cent of its foreign exchange holdings in one day. Over fifty million dollars of its gold had gone to Paris. Immediate help was necessary. The Reichsbank appealed to the bankers, meeting in Basel. Dr. Curtius appealed to M. Briand at Geneva.

The bankers, led by the American house of Lee, Higginson, agreed to give Germany a credit of one hundred and twenty-five million dollars for six months, with an option of three renewals. The American group themselves took the larger share — seventyfive — and urged the French to take at least a nominal amount — say, five millions — to give confidence all round. Briand, persuaded by Dr. Curtius, personally urged the Premier, Tardieu, to put the French banks in. Paris would have none of it. On the very day the arrangement was made, the Journal des Débats drew attention to the large French balances still lying in Berlin, and added this: ‘If we agree to use the pacific means at our disposal, we can be in a position definitely to promise the Germans that their rebellion against the peace treaties will inevitably be followed by a collapse of the reichsmark similar to that of 1923. Germany is free to run the risk, but in any case she now is warned of the consequences.’ The Journal was not speaking without its book. The method had been used before. And Berlin was not the only capital in which those ‘pacific means’ had been accumulated.

II

But by February 1931 things were looking a little better to M. Briand. The German crisis had been staved off — with other people’s money; and perhaps, after all, it had given the German industrialists a useful lesson. They were badly in need of capital; the Americans had stopped buying German bonds even more abruptly than they had started; the British market in 1930 had twice shown its weakness; Paris was well able to include German industry in the list of its long-term debtors. Perhaps something could be arranged.

In European politics an east wind is an ill wind; and at this juncture the east wind began to blow. The Vienna Protocol was announced, with startling suddenness, on March 21. That Austria and Germany should have plotted anything so definite as a customs union seemed little short of monstrous. One did not do things that way. One suggested a general idea and embarked on a correspondence course with a couple of dozen foreign offices. It had almost become a tradition — a very pleasant tradition so long as one’s finances were flourishing. ‘It is evident,’ said M. Briand, ‘that a halt has come to our relations with Germany.’ M. Briand’s diplomacy, M. Briand’s position, M. Briand’s European union, were affronted. More: they were threatened. For the errant powers had invited the adherence to their scheme of any who cared to join. And the invitation was not as promptly rejected even by the Little Entente as M. Briand had good reason to expect. M. Titulescu of Rumania, for instance, felt a ‘distinct attraction’ about the offer. Rumanian trade negotiations with Germany were actually going on; one hardly knew where they might stop. Rumania was also negotiating in Vienna with Hungary, and Hungarian opinion was distinctly favorable. Count Bethlen saw in the scheme the ‘verge of a new economic order.’ Yugoslavia, too, appeared to like the notion. In Czechoslovakia, Benš was raging, true to form and to his French supporters; but even there the prospect of a free market was having its effect. Bulgaria and Italy were more than interested, and the latter had the impudence to call the Briand plan ‘mere words.’ Visions of a revisionist bloc running right through Europe began to rise. And what then might happen to the ‘security first’ programme?

Austria was clearly getting desperate. ‘We Austrians,’ said Schober, ‘have had enough hovering between life and death.’ He and Curtius had acted like good Europeans: ‘Are those others good Europeans who would like, because of its ostensible mistakes of form, to bring to nothing the plan on which the hope of millions in our countries depends?’ Something had to be done. Already Germany had been told that this was the end of any prospect of opening the French capital market. ‘Pertinax’ and other writers were not unmindful of the ‘pacific means at our disposal,’ which now came in useful in Vienna. But positive as well as negative measures were called for. The French capital market was already wide open (on terms) to the southeastern powers; a note of empressement crept into its welcome.

With Rumania — fortunately—matters were already settled: a loan of face-value fifty million dollars had been concluded on March 11. There had been minor difficulties. The governor of the Rumanian national bank had objected violently to the French terms. These involved the spending of the French part of the loan in French contracts, and control of the bank. It had, in fact, been necessary for the Rumanian Premier to appeal to King Carol. The King, under persuasion, did what was necessary. The governor was summarily dismissed. The affair was settled. But with other powers negotiations were incomplete. Yugoslavia was troublesome. She had refused the French terms before; had tried, in fact, to get away from Paris. But the Rothschilds did not like lending to a dictatorship, and previous American loans had tied up too much collateral. The terms involved contracts and concessions, acceptance of former Turkish obligations, and an anti-Anschluss policy. The matter dragged on into April, when it caused a Cabinet crisis. The loan was concluded in the first week of May — not without backward glances from Belgrade to the Vienna Protocol. Czechoslovakia had in the meantime been disposed of. A fifty-million-dollar loan was announced on April 23. The loan was not to be issued for several months, but Dr. Benes considered the announcement timely. In Poland, plans for a railway up the corridor to the rival port of Gdynia had roused the wrath of Danzig, which threatened to protest to the League of Nations. The matter was settled in April by a loan from the Schneider-Creusot bank (the Pays du Nord) of forty million dollars.

It happened that during these negotiations Mr. Norman, governor of the Bank of England, was in New York to discuss the general problem of freer long-term financing for Central Europe. He returned to find some substantial part of it settled, if not solved. Germany and Austria were still uncared for. They had not yet learned what the ‘security first ’ programme meant in terms of banking. They would learn in time. Meanwhile revisionism was pushed safely into the background. The Vienna Protocol was gently transferred to the World Court. Vienna and Berlin were left to count the cost of their diplomatic temerity.

III

That cost brought Austria to the breaking point. By what unlucky accident the condition of the great Rothschild bank leaked out to Paris matters little now; from the second week of May the Credit Anstalt was doomed. Ever since 1929, when it had been obliged to take over another tottering bank, its position had been insecure. Its Central European connections proved in bad times a source of weakness rather than strength, and its funds — and those of its short-term creditors — were frozen in bankrupt Austrian industry. The national bank of Austria and the international bank at Basel tried in vain to stem the panic with short-term credits. Day by day, estimates of the foreign liabilities of the Credit Anstalt rose higher. Those liabilities were overwhelmingly concentrated on London and New York. London was involved in the huge sum of twenty-seven million dollars, New York in about twenty-four; France and the other powers no more than five or six apiece. For the first time, people began to wonder about the position of England. How big was her stake in the solvency of the Central Powers?

The Austrian parliament, on May 14, had voted a loan of twenty-one million dollars, the greater part of which was to be pumped into the Credit Anstalt. Dr. Schober, Austria’s Foreign Minister, set out to find the money. He went to Paris, offering to suspend all action on the customs union until the World Court had reported. The offer was not high enough. Germany could give no adequate help. The committee of creditors, meeting in London, suspended their pressure only in return for a guarantee of the liabilities by the Austrian Government. The guarantee precipitated a cabinet crisis in Vienna. Again Schober approached Paris, asking at least enough ready money to stave off a currency crisis in Austria. According to his own account, his minister was referred to the Foreign Office, where he could find neither M. Briand nor M. Briand’s assistant. An unnamed official revealed the terms: Austria should relinquish altogether the customs union; should request a League inquiry into her financial condition and accept in advance the findings; should undertake to inform France before concluding any future treaties affecting the political or economic situation in Europe.

The emissary returned to Vienna, where the terms were communicated to the British ambassador. He agreed that they were ‘intolerable.’ The matter was transferred to London. Mr. Norman was disposed to be sympathetic. Schober should learn that Austria was not without a friend in the world. Moreover, speed was imperative, and the British stake was large. On June 17 the Bank of England advanced the entire twenty-one millions without guarantee. There is reason to suppose that this was not the only assistance forthcoming in London. Paris heard of the transaction with interest. If the English chose to raise their stake in the European game, that was their affair. The game was not over yet.

IV

But the pace was quickening. Panic had been latent in Germany since the shaking of September 1930. Heavy deficits were now looming before both the government and the state railways, these latter being the basis of the non-postponable reparations payments. The consequences of the Vienna Protocol were not reassuring. The crash of the Anstalt revealed the depth of the chasm underlying Central European finance — save where it rested on the gold of Paris. The flight from the schilling was becoming a flight from the mark. Within four weeks following the twenty-third of May, the Reichsbank had lost two hundred and fifty million dollars in gold and foreign exchange, and the reserve ratio had fallen from 68 to 40.2 per cent. Legal minimum was 40.

At the root of the trouble lay two factors, closely related: the world depression, and the increased reliance of Germany on short-term funds. But for these factors, the position would have been encouraging. In the years 1927-30 Germany had converted an adverse foreign trade balance of five hundred million dollars into a favorable balance of rather more than that amount. But in 1929 the flow of longterm investment from abroad had ceased abruptly; and short-term borrowing, largely from London and New York, had been resorted to to fill the gap. The financial policy of both centres had encouraged the procedure. The total of that borrowing made the whole financial structure abnormally sensitive to shocks such as that of September 1930; and the record of the second half of that year shows the position clearly.

This gives a positive balance of 954 millions; which had been used up in paying

Reichsmarks

In 1931 the balance of item 1 remained favorable, but diminished in amount. The same was true for every exporting nation. Items 2 and 3 also were shrinking. The flight of capital under item 4 continued. And what then was going to be done about the heavy midyear payments due on items 5 and 6?

It was this dilemma which sent Doctors Curtius and Bruening to London early in June and started Mr. Sackett cabling to Washington. The international bank at Basel, with the central banks of England, France, and the United States, opened a rediscount credit of one hundred million dollars for the Reichsbank on June 25; before the month was out, three fourths of it was used up. Such measures could not stop the collapse. More help was needed, and that for a longer term. Another long-term loan was impossible. Whatever the rest might be willing to risk, Paris would not hear of it. Mr. Hoover was prevailed on to take the only remaining rescue action. But in taking it he committed a diplomatic blunder almost as bad as the ill-fated customs union.

It is permissible to wonder whether, if the sentiments toward France of Mr. MacDonald, Mr. Snowden, and Mr. Norman had been a little warmer, that blunder would not have been forestalled. But even bankers and diplomats become human under pressure; and the English, during those critical weeks, had begun to feel themselves in a distinctly tight place. The French, however, were human, too. There had been intimate Anglo-German conversations in London from which they were left out; there had been indirect communications of a very urgent nature between Berlin and Washington; and here was the most drastic step of all sprung upon them without prior consultation. Yet they were to be by far the heaviest European losers under the postponement of the war debts. Of course, the French sacrifice was the heaviest precisely because France had insisted on taking no less than three quarters of the unconditional payments under the Young Plan. But that was ancient history now, and the French certainly had a case. As the principal European creditors of Germany, they considered themselves gratuitously snubbed; and further, there was no sufficient indication of any quid pro quo.

It was all very well — as M. Louis Marin pointed out in the French Chamber — for England and America to risk their dues in the moratorium — they had a big stake in Germany: ‘For us the question is not so simple.’ Out of Germany’s long-term bonds at the end of June, totaling 2400 millions of dollars, America held about 1300 and England 275. If other long-term investments were included, all three amounts would be about twice as high. France held 118 millions in Dawes and Young loans, and practically nothing more. Out of Germany’s total shortterm foreign debt at the same date, approximately 3000 millions, America claimed 37 percent, England 24 percent, and France 7 per cent, considerably less than Holland or Switzerland. But under the Hoover moratorium, with America giving up 250 millions for the year, England sacrificed (net) only 17, while France was asked for 82! Certainly the French had a case, and they insisted on presenting it.

Unfortunately the process took time. And time was the one thing Germany could not afford to lose. There was a quick upturn in confidence after Mr. Hoover’s announcement. But as the bargaining went on, collapse in Germany came rushing back. Germans were selling marks, despite the efforts of the government to stop them; gold was following the foreign balances out of the country — over 100 million dollars of it crossed the Atlantic in the month of June; the international credit was used up, and the reserve ratio still falling; early in July there were riots and a run on food shops in Berlin. On the eleventh, the Darmstadter bank closed its doors: it had paid out 175 million dollars in six weeks. London was reported to be involved in its liabilities to the extent of 45 millions. Dr. Luther was searching Europe for a loan. Mr. Henderson was talking to Paris with a new note of urgency.

But it did not need Mr. Henderson to point the moral; the French could see that for themselves. Every move in the game had drawn attention to England’s danger. Day by day, in the London committee on the Credit Anstalt, in the Basel negotiations over Austria and over Germany, in the Paris conference on the moratorium, in numberless private bankers’ meetings, the tale of England’s stake in Central Europe had been unfolding itself before the eyes of the French. Every crisis, every hint of crisis, in Germany and Austria, every resort by the French to those ‘pacific means at our disposal,’ had frozen the British assets a little faster. And yet England had gone on piling up her stake. She had added 21 millions of dollars on the Credit Anstalt, 15 on the international credit to Austria in July 1930, still more on the American credit to Germany in October, 25 on the last German credit of June 1931—when was she going to stop? And how was she going to end?

On July 15 — the very day the German annuity should have been paid in London — sterling broke suddenly in all the capitals of Europe. France had agreed to the German moratorium on July 7; but during the two weeks’ delay more funds had flowed out of Germany — mostly to Paris — than the moratorium would release in the entire year. The result was the closing of all German banks by decree on July 14. The moratorium was too late. More would be needed. The London conference of Germany’s creditors opened on the twenty-fifth. It accomplished little save to aggravate the tension between London and Paris. Luther in Paris had been confronted with the usual political price for help. Henderson in London sided with him, and was accused by the French of making the conference a platform for revisionism. Meanwhile sterling exchange remained below the gold point, foreign balances were being withdrawn, gold flowing out — 158 millions by July 30, two thirds of it to Paris. Schober in Vienna had been warned that the Bank of England needed its money back. Schober came to Paris, trying to raise enough money to repay London. The price was complete supervision of Austrian finances, and final renunciation ’now and forever’ of the customs union. Schober went home and threatened to resign. But there was no escape. The League Finance Committee, to which Austria appealed, had no money of its own to lend. Paris had the money, and was in a position to name the terms. Hungary meanwhile had been brought to a satisfactory frame of mind. A loan of 25 millions was concluded in the latter days of July. Count Bethlen had the pleasure of announcing the terms in Budapest on July 27. They included, according to press reports, a lease of the Hungarian railroads, most-favorednation treatment for Czechoslovakia, French control of Hungarian finances, and renunciation of all efforts at revisionism. It was Bethlen who had seen in the Vienna Protocol the ‘verge of a new economic order.’ It was Bethlen who had negotiated the treaty of friendship with Austria last January. It was Bethlen whose denunciations of French policy had drawn a protest from the French minister. Bethlen announced the terms of the loan — and resigned. That was what happened to revisionism when French gold joined in the argument. Was Mr. Henderson still disposed to revisionism?

V

An age of history passed when the Bank of England went outside the City of London for help. M. Moret, of the Bank of France, was willing enough to come to the rescue, bringing the Federal Reserve banks with him. Neither official France nor official America was anxious to see a leading customer ruined; but they could not stop their own nationals, or those of Holland and Switzerland, from acting on the rule of sauve qui peut. The British Treasury itself, at this critical juncture, gave them every encouragement in the alarmist May Report. American banks in particular seized on the prominence given to the unemployment issue to damn the insurance idea for home consumption. Actually the cost of social insurance to the exchequer, including national health and old-age pensions, was only about one seventh of the budget on the May committee’s own showing — and that despite the advent of Winston Churchill in 1924 and a world depression in 1929. There were certainly abuses in the system; but they were far from being of an international magnitude. But just as the earlier Macmillan report had advertised the British stake in Europe, so the May Report advertised the unsound budgetary position. American bankers, either genuinely or expediently afraid of the unemployment issue, were now in a position to express their apprehension. France, having a social insurance scheme of her own, was less concerned about that item, but, in accordance with her general policy, emphasized the issue of budgetary balance.

On the imminent exhaustion of the first credit, Mr. Snowden found himself at last treading the road Dr. Schober and Dr. Luther had worn smooth; while Mr. Norman endeavored to ascertain whether there was really no alternative to the financial via crucis. M. Laval and M. Flandin were willing to meet Mr. Snowden halfway — on terms; but halfway was not enough. In New York there was hesitancy about entering upon a transaction of the necessary magnitude without the support of Paris — though the word ‘collateral’ was hardly a polite term to use in dealing with the British Treasury. In London, Sir George May — secretary of the Prudential Assurance Company, and author of the report that had proved such a boomerang for Mr. Snowden — offered to place the vast American holdings of his own and other companies at the service of the government. But the end of the business was not sufficiently in sight for the government to feel itself justified in taking them over. Thus the prospect of escape was closed, and the French bankers joined the American syndicate in negotiating the second credit of 400 million dollars. It might turn out, of course, that the joint terms were such as to break the labor government; but with that contingency the bankers had obviously nothing whatever to do. Mr. Henderson decided that the terms were, in fact, of such a nature, and followed Count Bethlen into the wilderness.

The credit flowed out of London even more rapidly than it came in. On September 21, Mr. Snowden, in one of the bitterest speeches ever made in the House of Commons, admitted the defeat of England: —

When the financial history of the postwar period comes to be written, I do not think this country will have any reason to be ashamed of its part. We set an example both as regards meeting obligations and helping in the reconstruction of the world, and if we have failed it is because the undertaking was too heavy a burden for us to bear. Certainly it does not seem to me that other countries can afford to challenge or condemn us for what we have done. We exported to America during and immediately after the war actual gold to the value of $1,610,000,000 in discharge of our obligations. We then proceeded to fund our war debt to the United States, and under the basis of settlement we contributed $1,352,000,000, representing nearly 30 per cent of the debt at the date of funding. Though the British debt to the United States represented only 41 per cent of the total war debt owing to the United States, our payments represent 83 per cent of the total payments they received in respect to these debts.

The war loans made by the British Government to France, after deducting all offsets, amounted at the date of funding to $3,000,000,000, on which the British taxpayer has been paying approximately $150,000,000 yearly interest. Under the terms of settlement the French Government pays us only 40 per cent of this.

Much more could be said...

VI

There are at this writing three specific issues demanding action; and at least two of them must be decided before British financial policy can be further determined. They are: —

1. The question of Germany’s shortterm indebtedness, two thirds of it to England and America, amounting now to about 2700 millions.

2. The question of Germany’s longterm indebtedness, two thirds of it to England and America, amounting to about five billions. France asserts, and Germany and England deny, that this is separate from, and subordinate to

3. Reparations.

Committees are now dealing with questions 1 and 3. Action on question 1 is hardly in doubt. The short-term debts, which the creditors voluntarily have agreed to leave standing until February 29, 1932, must before that date be either renewed or funded. Question 3 is being dealt with as a request from Germany for postponement of payments under the Young Plan. But in the background lurks the crucial issue of question 2; and on this issue the conflict between England and France is now open. Said Mr. Baldwin recently in Parliament (November 13): ‘London has been largely instrumental in financing Germany during the last ten years, thereby enabling her to carry on international trade and to pay reparations. These financial advances were not speculative, but represented the best type of security known to the market, and it is clear that the security for these obligations must not be endangered by political debts. If that took place it would destroy Germany’s commercial credit, and once that was destroyed there would be no future prospect at all for reparations.’ Said M. Laval in reply (November 26):’We will demand payment of the unconditional annuities, and we will not accede to priority being given to private debts over reparations.’

In deciding how much more can usefully be said, it is important to keep the broad truth of the situation clearly in mind. That truth is essentially simple. England and America have staked billions of dollars on the ultimate success of revisionist diplomacy. Franco has staked her (much smaller) lendings on the precisely opposite policy. For the moment the English hand is called and England is broken. America, whether she knows it or not, is still in the game.

There has been this difference between American and English betting. American investors and American bond houses, when they put money into Germany, did not understand as fully as did the English the political, as distinct from the economic, chances involved. They were new at the game. They thought they were backing ordinary business propositions on their merits, and their calculations were along the same lines that they would apply to ordinary bond issues. On those lines most of the ventures were sound; most of them still are. The English, with France only twenty miles away, were in a better position to realize that behind the economic considerations lay the whole question of the restoration of Europe, with Germany and Austria as normally functioning parts of the European system. And that involved the Little Entente, the tariff question, and reparations.

Mr. Garet Garrett, in articles widely circulated (for reasons of its own) by the American Chemical Foundation, makes much of the fact that the reparations demands have no moral authority in Germany. Mr. Garrett is quite right; but he does not go far enough. The reparations demands have no moral authority in England, either. They never have had since Mr. Lloyd George was frozen out of public life for having committed England to them. There has never been a political party that dared to stand for their total execution. The Balfour declaration of 1922 — the considered utterance of a conservative government — was tangible evidence of the fact. In that declaration, it will be recalled, the British Government stated that it would prefer to surrender its share of reparations and ‘write off through one great transaction the whole body of Interallied indebtedness.’ Successive governments have maintained that position. While they have encouraged and assisted Germany in maintaining her payments, they have done so simply because they felt that in the given circumstances that was the only way toward a reëstablishment of commercial good will. But they have never ceased to hope that the circumstances would change. Ever since the London conference of May 1921, England has been urging France to moderate her speculations on what could be got out of Germany. For ten solid years England has been fighting an almost single-handed battle for the thesis that normal economic intercourse between free nations is the sole salvation of the world. Like America, she lent to her former enemies all and more than she received from them. Time and again, when the French political and economic blockade plunged them into crisis, the Anglo-Saxon peoples went to the rescue and pulled them out again — earning the scorn of France, hardly disguised.

Another simple fact which it is well to bear in mind: business men and bankers everywhere outside France are getting sick of this perennial incubus of reparations paralyzing with uncertainty the polity of Europe and the trade of the entire world. Boulogne conference, Brussels conference, Cannes conference, Genoa conference, Paris conference, Hague conference, London conference, Lausanne conference, Wiesbaden conference, Dawes Plan, Young Plan — an endless series of stop-gaps and makeshifts, not one with enough finality about it to back more than a short-term self-liquidating loan in an ordinary business transaction. And it needs to be emphasized that the mere fact of putting a political guarantee — even an international guarantee — behind a loan docs not add one cent to the earning power. It is doubtful whether it even gives more psychological security than ordinary business borrowers in civilized countries naturally provide in their own interest. And the political guarantee may, in certain circumstances, actually detract from the soundness of an investment. In the last resort, the only security behind any loan, national or international, is good faith and ordinary earning power. Save force? No. France tried it in the Ruhr and learned that, whatever else it yields, it does not produce interest or dividends. She may try it again; if she does she will learn the same lesson — and, perhaps, other lessons besides.

Mr. Garrett, in writing as brilliant as it is reckless, accuses Germany of bad faith and his own countrymen of unbelievable stupidity. Such utterances, harmless enough in normal times, are a menace to international sanity in a crisis like the present. Mr. Garrett dismisses with a flippant gesture the disaster of the Ruhr and the cost of the inflation to the German middle classes. He sees fit to ignore the determined effort made by Germany in 1927, in the reorganization of the Beratungsstelle, to bring all state and municipal borrowings under strict control: an effort which, if it did not entirely succeed, got nearer success than that of any other federal power. He ignores the endless increase of German taxation, although in order to achieve it President Hindenburg has taken risks which place the entire future of constitutional government in jeopardy.

He is apparently unacquainted with the final report of his countryman, the Agent-General for Reparations, written at the close of 1928 when the inflow of foreign capital was at its height. After noting that ‘all payments have been loyally and punctually made,’ Mr. Gilbert deals specifically with the charge that Germany, by her foreign borrowings, has been robbing Peter to pay Paul: her own nationals put up a far greater stake than foreigners. ‘ On the basis of the figures, the new issues of securities offered in the domestic market in the last four years have reached a total some two and one-half times the German issues offered to the foreign public.’ It is obvious, of course, Mr. Gilbert states, that foreign funds have in part served as the basis for domestic credit; but, with all due allowance, ‘the share attributable to abroad can be only a fraction, though a substantial fraction, of the total.’

Without reference to the merits of any of these loans, it is clear enough that foreign credits as a whole have greatly accelerated the process of German reconstruction. The proceeds of foreign loans, upon entering into the German economy, have provided the essential material out of which German labor and enterprise could create new and larger domestic values. Considering conditions at the start and the funds then available, there have taken place in the last four years a growth of trade and an extension and renovation of plant such as have not been equaled in any previous period of equal length. The sound character of this growth depends, of course, primarily on the magnitude of the supplemental values created, and secondly upon the capacity of those values to earn a return in excess of the cost of the borrowed funds. Taken as a whole, however, and without reference to any individual loan, it appears from such figures as are available that the new values created in Germany during the same period have aggregated several times the amount of the foreign debt incurred.

Mr. Gilbert concludes that the reconstruction of Germany ‘has played an essential part in the general process of European reconstruction.’ It may be added, in view of subsequent conditions, that the difficulty of Germany’s new assets in earning the returns of which Mr. Gilbert speaks was not primarily the fault of Germany.

There is no need, in considering these matters, to minimize the weaknesses of human will and intelligence that have been at work on all sides. Let us freely admit that Germany, like America, responded to the optimistic mood of 1928 and the cheapness of world credit in a normally shortsighted way. Let us admit that American and British bankers were acting mainly as financial middlemen in search of a profit, rather than as saintly architects of the new Jerusalem. Let us grant that they paid insufficient attention, not merely to the direct warnings of Dr. Schacht and Sir George Paish, but to such more ominous signs as the French military guarantee of the frontier of Bessarabia, and the inauguration of a seven-billionfranc programme of fort construction along the German and Italian frontiers, on the very heels of the Locarno treaties. All this can be admitted without wholesale vilification or childish petulance, except by persons who become hysterical at the mere prospect of international responsibility. Nobody foresaw the full scope of the world depression. Nobody foresaw the very human mistake made by the Central Powers in the announcing of the Vienna Protocol. Nobody foresaw the drastic nature of the French reply. The bankers may have underestimated these political risks; but they were fundamentally right in applying such funds as they could control to enterprises that promised, on the whole, to be genuinely productive. The real trouble lay in highly technical defects in the working of the gold and the gold exchange standards which are even now imperfectly realized, and which no one individual, or nation, has the power to rectify.

The French are fond of describing the American and British loans to Europe as ‘speculation.’ A recent semi-official communiqué, for instance, asserting the claim for priority of reparations, states that ‘it is immoral to let war victims be sacrificed to post-war speculators.’ Was there no speculation, then, in the floating of French domestic loans to cover grossly inflated ‘costs of reconstruction’ on the basis of astronomical calculations of Germany’s capacity to pay through seventy years ahead? No speculation, when any banker will admit that income even thirty years removed has no present value? Was there no speculation in money advanced to Balkan states at high rates of interest which depended on direct intervention in their domestic politics? No speculation in financing and leasing a railroad up the Polish Corridor on a fifty-five-year term? No speculation in a loan to Hungary at 11 per cent, of which the essential security lay in restrictions on foreign policy that made Bethlen resign after ten years of office? No speculation in prohibiting the one concrete proposal advanced by the Central Powers with nothing better to substitute than the tortuous and wordy schemes of M. Briand, himself a prisoner of the Right?

There is this difference between French and Anglo-American speculation, if we are to use the word. The latter has been speculation on the results of ordinary economic enterprise, even if the circumstances were abnormal — on the efforts of ordinary men to earn a living and pay their way by means of the production and exchange of goods. The former has been speculation on the staying power of a particular political scheme whose ultimate sanction lies, without dissimulation, in the use of force. Let America beware lest in ceasing the one type of speculation she is led blindfold into the other.

France to-day is frightened. She is like a hysterical woman. And one does not calm a hysterical woman by threats. Moreover, she has cause to be frightened. For ten years she has been nourishing the very source of her own fears, until now her problem is worse than when she went into the Ruhr. She has consistently rejected the policy of coöperation, and the British have been forced out in despair. She is beginning now to feel the consequences, and the consequences are a further source of fear. But hysterical women cannot be allowed permanently to wreck the workaday business of the world; and while their cure may be long and costly, that work must go on.

The lead now passes to America. Not through a conspiracy, but through the weaknesses, the follies, the rivalries of ordinary human beings, America finds herself asked to choose between two theses: the French thesis that political security must precede economic stability, and the British thesis that economic security is the only guarantee of all political engagements. The French, in insisting on the inviolable nature of the Young Plan annuities, have acted on their thesis, as long ago, in the Balfour declaration, Britain acted on hers. America, in her attitude toward war debts on one hand and her European investments on the other, has virtually backed both policies. The fact is an embarrassment; it is also an opportunity. It gives her an authority she has not had before; and it puts her in a position from which, by yield-

ing nothing except on well-considered terms, she may profoundly influence the cause of world trade and world peace.

Cause, not causes. It is not, in British eyes, a question of sacrificing the American taxpayer to the American bondholder, but of sacrificing both alike to a dangerous chimera. Britain profoundly believes, her position and her history compel her to believe, that the road to peace is the road of normal economic coöperation. She no longer maintains that that coöperation must be planless, or that unrestricted competition will automatically evolve a plan; but she emphatically believes that the plan must be primarily economic, not political. Along the line of economic nationalism pursued by states that cannot hope to be self-sufficing, or along the line of bipartisan arrangements entered into, or condemned, for other than sound economic reasons, she sees only waste, overproduction, underconsumption, recurrent bankruptcy, political as well as economic insecurity. In the cause of sane economic coöperation she has shouldered far more than merely financial risks. She has pledged herself up to the hilt to pacific policies, she has thrown away her arms, without asking for any supplementary guarantees against the peculiar dangers of her position, grave though they are. Her empire now is nothing but a speculation in good will. For that spirit she has labored ten years in Europe — not because she was more altruistic than other nations, but because she believed it paid: paid England, paid all. In that cause she has risked her prestige, her trade, her financial supremacy, and the support of her nearest and most powerful neighbor. She has lost them all. She stands now wondering whether, if she cannot buy enough dollars with depreciated pounds to pay her war debt, she will have lost her honor, too.

England rests her case.