THE LIBRARY OF THE UNIVERSITY OF CALIFORNIA LOS ANGELES £ 0k. +«•*£* \ OUR ELEVEN BILLION DOLLARS 1 OUR ELEVEN BILLION DOLLARS Europe's Debt to the United States BY ROBERT MOUNTSIER 1922 THOMAS SELTZER New York Copyright, 1922, by THOMAS SELTZER, Inc. All rights reserved Printed in the United States of America FOREWORD "Our Eleven Billion Dollars" has grown out of the writer's frequent business trips in Europe. In this presentation of the European economic and political situation, with special reference to the billions owed to the United States by Europe, the facts and figures are based largely upon official documents. But the whole truth is not to be obtained from such sources; the authority for many statements is based on personal experience in Europe and the experience of other Americans holding important business or official positions abroad. Robert Mountsier. New York City, April 10, 1922. 1C95872 CONTENTS PAGE I Eleven Billion Dollars Worth of Europe 1 II Europe, Dr., to U. S. A. & Co., Cr.— $16,000,000,000 13 III Billions for Refunding, But Not One Cent for Cancellation 23 IV Increasing Debts and Unbalanced Budgets 38 V Europe's Paper, America's Gold ... 52 VI Foreign Trade and Foreign Exchange . . 66 VII Ge rman Reparat ions and Preparations . . 87 VIII European Plans to Revive World Trade .107 IX The First International Bank — an American Plan for Restoring Europe .117 X Wanted: A World Economic Conference in Washington 130 STATISTICS PAGE 1. Obligations of European Governments to the United States for Advances Made under the Liberty Bond Acts 16 2. Obligations of European Governments to the United States for Surplus War Supplies and Foodstuffs 17 3. Totals of War and Post-war Debts Owed to the United States Government by European Gov- ernments 19 4. Statement of European Government, Municipal and Corporate Loans Placed in the United States 20 5. Post-war Budgets of the Principal Countries of the World 40, 41 6. National Debts of the Principal Countries of the World 44, 45 7. Effect of the War on the Public Debt of the United States 49 8. Growth of the United States' Gold Power . . 59 9. United States' Post-war Imports and Exports of Gold 60 10. Gold Reserves and Paper Currency Issues of Principal Countries 62 11. Rise and Fall in Annual Foreign Trade Balance of the United States between 1912 and 1921 66 12. Foreign Commerce of the United States for 1920 and 1921 68 13. Index of Value and Volume of the United States' Foreign Trade from 1913 to 1921. . 72 14. Index Numbers of Value and Volume of Ex- ports during 1919, 1920 and 1921, Based on Average Monthly Figures for 1913 ... 74 STATISTICS PAGE 15. Index Numbers of Value and Volume of Im- ports during 1919, 1920 and 1921, Based on Average Monthly Figures for 1913 . . . 75 16. Foreign Trade of the Principal Belligerent and Neutral Countries 80 17. Depreciated Values of European Monetary- Units in Terms of the American Dollar . . 81 18. Index Numbers of "Wholesale Prices from 1913 to 1922 84 19. Index Numbers of Food Prices in the United States during Three "War and Post-^var Periods 86 20. Increases in German Currency and Decreases in Exchange Value of the Mark .... 92 $11,000,000,000 WORTH OF EUROPE Seventeen European governments or so-called governments owe the government of the United States $11,000,000,000 and more. The whole coun- try has heard repeatedly of the large amounts loaned by the United States government during the war and after, but as yet the majority of American people know little of the truth about this enormous debt. As much of the truth as can be put into this book is here for every man to read. The facts and figures given are of direct personal concern to merchant and manufacturer, banker and financier, capitalist and workman, indeed to anybody owning a Liberty bond or paying a tax, either directly or indirectly. The $11,000,000,000 and more that many Amer- icans, Congressmen included, expect Europe to pay us in the next twenty-five years, are not com- ing back to the United States. This is a fact that it is far better to face to-day than five or twenty- five years from now. No amount of camouflage can change this part of the truth; those billions and other billions that will accumulate are abroad to stay, no matter whether Europe and America have peace or war. And the reasons. 2 OUR ELEVEN BILLION DOLLARS Europe cannot now pay her debts, and she will be unable to pay them within the next twenty- five years. Furthermore, though it may seem paradoxical, the people of the United States can- not afford to have billion after billion paid into the country. Even now, with more than $3,500,- 000,000 of gold in this country, we have more gold than we know what to do with. It is better for us as well as for Europe that this flood of gold from across the Atlantic should cease. The Con- gressman who demands that Europe pay us at once in hard cash evidently does not know that the world's supply of gold money is consider- ably less than Europe's total debt to us, and that if the United States held all the gold in the world it would mean poverty for the American people even though every man, woman and child in this country had their pockets filled with $20 gold pieces. Europe might be able ultimately to pay us $11,000,000,000, plus accrued interest, in goods, but we can no more afford importations on such a vast scale than continued payments of large sums of gold. Commodities shipped to this coun- try in an attempt to settle Europe's debts would jam every dock on the Atlantic and Pacific coasts and would glut our markets and cause gen- eral business stagnation, with factories closed throughout the country and workmen by the mil- lion thrown out of employment. If it is not evident now, it will in time be gen- $11,000,000,000 "WORTH OF EUROPE 3 erally realized by the American people that we cannot collect directly the billions owed us by Europe, nor can we, for the sake of Europe as well as for this country, cancel these debts under present conditions. Since this huge sum cannot be paid in gold, currency or goods, since we have more gold, currency and goods than we ourselves need, there remains but one solution of a problem that is keeping financiers and govern- ment treasury officials throughout the world awake at night. This solution requires the American people to invest $11,000,000,000 and other billions in Eu- rope — all these expatriated dollars to work for us instead of helping keep many Americans out of work, as at present. Even though the United States is unable to absorb the billions of the principal from Europe, it might absorb the interest. However, it will soon become evident that even the interest for many years should be invested abroad. At pres- ent, interest on the debts owed by Europe to the United States government is accruing at the rate of about $1,400,000 a day. While you are reading this page Europe 's debt to the United States has increased over $1,000. Under the present loans to the governments of Europe and the so-called governments, to use a phrase that is popular with the United States Treasury, we are legally entitled to $11,000,- 000,000 worth of Europe, but just what part of 4 OUR ELEVEN BILLION DOLLARS the European countries and their assets has not yet been determined. That we should collect our $11,000,000,000 worth by conquest or annexation has never entered anybody's head, not even that of the most belligerent senator. But having an important interest in Europe in these billions of government loans and the billions owed to Amer- ican manufacturers, bankers and investors, it is well to know just where we stand, and that is pri- marily a matter of where Europe stands. Not one of the European governments owing us money is actually solvent at the present time. In some ways Europe has gone from bad at the Peace Conference to worse in the hands of poli- ticians who have been manipulating national and international affairs toward further war and ruin. Europe is suffering from bad politics and bad economics. Economic warfare has been waged violently in Europe since the Armistice, and unless Europe reforms, this economic war is preliminary to another great war, the founda- tions of which were laid by the Treaty of Ver- sailles. New countries, established on alleged racial lines in defiance of economic and geographic boundaries, have been vying with older govern- ments in making laws that ignore and violate the inexorable laws of economics. They have subsi- dized foods and unemployment, erected tariff walls and attempted to build up export trade while legislating against importing. They have $11,000,000,000 WORTH OF EUROPE H tried to stabilize exchange and to replace gold with paper. While failing to balance budgets they have established and supported unnatural industries and have spent money on armaments in preparation for the next war. No student of history can be among the pessi- mists who think Europe is permanently ruined. Although humanity is in a pretty bad way, partly because of what the war did not do for it, the world will come back to a new sort of normality — it will never be a normality of pre-war condi- tions — as always in the past after a widely devas- tating war. And this return will be made de- spite the $350,000,000,000 loss suffered by the world through Europe's War, a name far nearer the truth than the term World War. Three cen- turies ago Europe had the Thirty Years ' War, but blacker conditions than exist to-day did not pre- vent Europe's return to periods of peace so pros- perous as to make it possible to indulge in further costly wars. The Napoleonic wars laid waste Eu- rope, leaving England with a debt sixteen times as great as at the beginning, but in a far shorter period than that covered by these wars England became the leading power in western Europe, her influence greatly enhanced by gold and credit. To-day Great Britain's debt is ten times what it was before the recent war. After the war of 1870 the pessimists said that France would be ruined by the payment of the huge indemnity demanded by Prussia, that the 6 OUR ELEVEN BILLION DOLLARS payment of the indemnity in full was absolutely impossible. But in those days there was only a Bismarck to see that the French paid ; to-day the outcome is less certain since there are a Keynes, a Wells and a Lloyd George to see that the French are not paid in full by the Germans. No country to-day has a more discouraging outlook than had the United States after the Bevo- lutionary War when the new nation had been formed from thirteen impoverished colonies. For us that is ancient history, but living to-day are Americans who have forgotten that after the Civil War they handled an American dollar that was worth little more than the French franc of 1921 and that not until fourteen years after Lee surrendered to Grant did the United States re- sume gold payments. And yet the constant bombardment of the prop- aganda that Europe is ruined if Germany is compelled to pay the reparation sums imposed by the Allies. Note, however, that this prophetic propaganda ignores the payment by France, fol- lowing her defeat in 1871, of an unprecedented indemnity without whining, without attempts at evasion. Since 1919 certain improvements have been brought about in the European situation through Europe's own efforts. Food conditions are better, with the exception of Russia, and the fuel prob- lem is of the past. The revolutionary spirit is no longer threatening, and the workers are more $11,000,000,000 WORTH OF EUROPE 7 kindly disposed toward greater productive ef- forts. Transportation has improved, and industry is being reorganized with a view to greater effi- ciency and increased production. All this with the result that a marked advance in the standard of living has taken place in central and western Europe since 1919. Nevertheless, from the American point of view, indeed from any practical business standpoint, what is Europe? At the opening of the Genoa conference a bad commercial and financial risk; everywhere over-inflation the rule, with govern- ment after government still printing unsecured paper money. Indeed, it would appear that nothing but printing presses could keep up with Europe's expenditures, what with government waste and the cost of armaments. Certain European politicians continue to ignore the fact that submarines, no matter what their number, do not float loans and capital ships can- not create capital. Europe's problem is to replace fixed capital destroyed by the war, not to destroy more capital by putting a large portion of what she has left into navies and armies. The solution of this problem lies in increased production, which can be accomplished best with the aid of American capital plus economy and hard work on Europe 's part. Too many European peoples have lost their old habits of hard work and thrift. There has been extensive loafing on the job in certain quar- ters of Europe since the Armistice, not only on 8 OUR ELEVEN BILLION DOLLARS the part of workers, many of whom have delib- erately reduced production, but also on the part of capitalists and government officials, who fre- quently have waited for problems to solve them- selves or for the United States to do their work for them. Having acquired bad habits, Europe finds it difficult to eliminate instruments of warfare, re- duce inflation and balance budgets, but her costly experiences are bringing her to a point where she understands that a thorough reorganization is necessary to prevent further military, political and financial disasters. Only recently has Europe come to realize that without such reorganization no financial assistance can be expected from the United States. We have heard much talk of the United States ' saving Europe, but two obstacles have been in the way — the United States does not wish to play the role of savior, and Europe does not wish to be saved. Europe has been quite willing to accept our charity and our credits, but with these re- duced to a minimum and with a growing knowledge of the dangers ahead the whole situation is pre- senting itself in a different light. It is for Europe to display a willingness to clean house so that she may have something to show us when asking for financial assistance that will enable her to return to a self-supporting and paying basis. The American public has so far given little indication that it is willing to meet Europe on this proposi- $11,000,000,000 ^YORTH OF EUROPE 9 tion, but it appears that the time is not far distant when a sufficient understanding or acute neces- sity will bring the American people to aid Europe in its financial rehabilitation. As yet there is on this side of the Atlantic no general understanding of how $11,000,000,000 involve the United States in Europe's affairs. For some time the man in the street, no matter whether Wall Street or Main Street, has been seeing more and more clearly that we need Eu- rope and Europe needs us. With the world an economic as well as a geographic unit the United States cannot have prosperity until Europe, our best export customer, has the credit or means with which to buy our products. To sum up the situation : As a result of the war the United States has a greater productive capac- ity and larger surpluses of manufactured and agricultural products than ever before. In Eu- rope exists an immediate need for these surplus products. But the war and poor political and economic management have impoverished Europe to such an extent that she can buy only on long- term credits. These long-term credits and capital with which to reestablish her own productiveness are to be had in quantity only from the United States. As the leading creditor country of the world it will be our role to act as Europe 's banker — when she institutes reforms satisfactory to us — just as Europe 's capital in the form of huge loans and investments formerly enabled the United 10 OUR ELEVEN BILLION DOLLARS States to develop its great resources. Before the war Great Britain, France and Germany had im- mense sums invested in the United States and other countries. These investments for the most part would have been permanent had it not been for the war, which compelled the belligerents to exchange an important part of their holdings abroad for munitions and foodstuffs. The situation is now reversed. Instead of a good percentage of the profits of American indus- try and enterprise going to Europe in the form of interest and dividends and commodities, the United States has accumulated wealth in Europe and will be acquiring more on the other side of the Atlantic, thanks in part to the debt of $11,000,- 000,000 and more. With our great industries es- tablished on a scale to meet foreign demands as well as home consumption we cannot afford to ignore Europe and her needs. We must sell our surplus commodities to a Europe that is econom- ically sound, and the quickest way to create such a condition, is to invest, after she has instituted indispensable reforms, more billions in her indus- tries — in stocks giving American control. The Harding Administration has given various indications that it realizes the necessity of Amer- ican financial aid to Europe in the matter of re- funding the European governments' debts, facil- itating American investments abroad and extend- ing long-term credits. President Harding has pointed out that "heroic remedies" are necessary $11,000,000,000 WORTH OF EUROPE 11 to meet the situation. To Congress he has made known his attitude in the clearest terms : ' * If we must choose between a people in idleness pressing for payment of indebtedness or a people resuming normal ways of employment and carrying credit, let us choose the latter." But the Administration awaits the psychologi- cal moment for the United States to join Europe in what would amount practically to a close as- sociation with European nations in a commercial and financial alliance. One President of the United States led a horse to water and failed to make him drink. Doubtless his successor is not ignorant of the fact that a thirsty horse will lead to water and drink of its own accord. After get- ting thirsty enough for prosperity, which largely depends upon the revival of Europe, the general public and Congress will accept new financial and commercial arrangements with Europe. Not only for us was the Conference on the Limitation of Armament a great stride toward this end; Europe also made a forward move in coming to Washington, and the meeting of the Supreme Council at Cannes and the so-called Economic and Financial Conference at Genoa, may be considered quick, if faltering, steps toward a willingness to united action in the economic reconstruction of Europe. Tn this work the United States will be the domi- nating power because of the huge debt Europe owes this country and the sums she must still 12 OUR ELEVEN BILLION DOLLARS borrow. Some would have us use our billions as a big stick — $11,000,000,000 and more would in- deed make a big stick to wield over battered Eu- rope — but the present Administration may be counted upon to use it as a pointer of the kind so well known in the American school room. As the chief creditor and the principal banker the United States has a right and also a duty to teach the lesson that balanced budgets, minus armaments, minus currency inflation, plus long-time credits, investments and increased production equal eco- nomic recovery in both Europe and the United States. The short-sighted American who has not kept pace with the times but is living before the year 1914 and thinking in terms of the Monroe Doctrine and grocery bills cries, "Stay out of Europe!" He is the man who refuses to acknowledge that the complete resumption of the country's business activity on a normal scale depends largely upon the progress of financial and industrial recupera- tion in those countries which consume our surplus products ; he is the man who cannot see that fail- ure to give Europe financial aid in the near future means that the United States will have to decrease production and consumption even below pre-war normal, crippling not only itself but the rest of the world for an indefinite period. Only those who are blind fail to see that we are already in Europe, that we are in to the extent of $11,000,000,000 and more. II EUROPE, DR., TO U. S. A. & CO., CR., $16,000,000,000 It is now generally known in Europe, but not so generally admitted, that had the United States not entered the war Germany would have dictated the treaty of peace. An important part of this country's aid consisted in providing the Allies with foodstuffs and war supplies bought here with the billions loaned to the Allies when they were at the ends of their financial ropes. A total of $10,000,000,000 was made available by Congress and the American people through the four Liberty loans for "such foreign governments then en- gaged in war with the enemies of the United States," their obligations to bear the same rate of interest and contain the same terms and con- ditions as the Liberty Loan Acts. The form of obligation or promissory note taken from the foreign government borrowers follows, the British form being used as the example : Certificate of Indebtedness The Government of the United Kingdom of Great Britain and Ireland, for value received, promises to pay the United States of America, or assigns, the sum of on demand, 13 14 OUR ELEVEN BILLION DOLLARS with the interest from the date hereof, at the rate of 5 per cent per annum. Such principal sum and the interest thereon will be paid at the Sub- Treasury of the United States in New York, or, at the option of the holder, at the Treasury of the United States in Washington, in gold coin of the United States of America of the present standard of weight and fineness, or, at the option of the holder, at the Bank of England, London, England, in pounds sterling at the fixed rate of $4.76 7-16 to the pound sterling, and at any such place of payment without deduction of any British taxes, present or future. This certificate will be converted by the Govern- ment of the United Kingdom of Great Britain and Ireland, if requested by the Secretary of the Trea- sury of the United States of America, at par, with an adjustment of accrued interest, into an equal amount of five per cent convertible gold bonds of the Government of the United Kingdom of Great Britain and Ireland conforming to the provisions of acts of Congress known respectively as second Liberty bond act, third Liberty bond act and fourth Liberty bond act. If bonds of the United States issued under authority of said acts shall be converted into other bonds of the United States bearing a higher rate of interest than four and one-half per cent per annum, a proportionate part of the obligations of the Government of the United Kingdom of Great Britain and Ireland of this series acquired by the United States under EUROPE, DR., TO U. S. A. & CO., CR. 15 authority of said acts shall, at the request of said Secretary of the Treasury, be converted into obli- gations of said Government of the United King- dom of Great Britain and Ireland bearing interest at a rate exceeding that previously borne by this obligation by the same amount as the interest rate of the bonds of the United States issued upon such conversion exceeds the interest rate of four and one-half per cent but not less than the highest rate of interest borne by such bonds of the United States. For the Government of the United Kingdom of Great Britain and Ireland. Dated this day of , 19. . The loans made under the Liberty Loan Acts to nine European governments, with the amounts paid on the principal and interest and the amounts of interest accrued and unpaid up to November 15, 1921, are given in Table 1 (see page 16). Of the credits established for European gov- ernments there remained on November 30, 1921, $39,309,463.41, on which no advances had then been made. In addition to this sum $289,474,- 689.44 is left as an unused balance from the $10,000,000,000 originally provided by Congress. Other obligations accepted from foreign gov- ernments are for surplus war materials remaining in Europe after the war and for foodstuffs for European relief through the American Relief Administration and the United States Grain Cor- H < H g « H Eh O P3 H W CQ H A H H Sg « tf i> Q 9* o& £ w ^ Q §S & W W O §§ CO p z < o « O ~ £ S«5 a <»£t3 g«2 S S- - a- go g S | 2 00 r- 01 — I r- -n" > ,-i B5 co t ^co tficoc r-cco ntqn oq o co oo oococon 0>C0iO00HiCON00 rH CN* lO •©"'■Din© ooio • •*oo co-* ©* ; 00© . too MOO C0.-I -HO0 • t*-CO ■ IOtJI OO) ©f~ too' . *T o o o to o o ©005 1000 © O O "5 O ©' OO'O'OOiO © © o ■* o_t^ ©" O* •*©"©" os OOCOOOOIN © 0_qNON t*Tin oo~co>o^ t-. rt -* (N CN 00 CO © >o © © i © lO © o > 00 OJOj is'o'S' i t^ofo- risTt>Too )03I^-'* a>M cm"'* COOOOCN oo"©io t*T 3^g^ ■S.oflol5>i6SS J«IS<1 WT3 bD 2 9 £~ § a a a M OS v 43 is » o 'Hi -S b 5 Z ■o .a 3 V II &-H2 a a o> m at .3 £ S a « a a a 0) ITS OS ' S >> 2 !s 5 E o »< 3 us b » H -U 77 0* A OQ 1 >, tr 3 3 GO fl CD C a H 3 J a QJ H < T3 * °° 13 5 2 E2 n o h a 3 a 2 © o >> oj5 ** g ~ ■S o 8 * a . *> -a a .a a o a o „ o ■« o -a js .^ a n oj *> Ch o m a' m < H SQ Q W « fa Z fa & & H «a K Q H O og H W a, S W 2^ cs a. w a. > & O «3 a Ss wg fa a* 02 O o H •< O pq o £ 2 •3.2 02 & so 3-2 c 5 0} H a n a 9 s 3 s 05 • 2 00 •0 co IN O CN CO 00 • co • ■ to CN O C5 1< CN CN © -< CO •*»" •1 1 1» «o # 00 1^ «5 00 ©' 06 cm' IN t^ 1^ •*' 10 -r to E0 h- CO CO r-l Tj< 05 rH IO CN CO \-"co"co"co"-h">,-wfa« « c1< rt 2 in "* - . — 05 — > m o o 3 ^ 55 a o ° £ *> -a £ S « © d < — -*f -•-' — _2 O s A b *■ — M -! 01 > 3 7. cS **-. o o ■^ 2 g n TJ T3 a fi c 2 £0 O t, •o o H 1 bJ= 3 « J? e-2 •a 3 05 o 1 .1 8 2 a H 05 0> © M 10 B at) m < — '2 a = P u eft 03 fc- ¥ o fl £ -2 o £ * -r " 1 2 3 M 05 £ ® B .a * .m "g a ° o ** Jill m a ja a 3 B *" a ° ^ o o a o m m .¥»)««) o 2 "o *a C "3 2 O J! J -O - H H H 18 OUR ELEVEN BILLION DOLLARS poration. These obligations, with the interest paid and the interest accrued and unpaid, up to November 15, 1921, are detailed in Table 2 (see page 17). Table 3 (see page 19) gives the totals of the original obligations and the total debts owed on November 15, 1921, by eighteen European govern- ments and so-called governments to the United States, with the total amounts paid on account of principal and interest and the total amounts of unpaid interest. The total sum of $11,313,860,127.27 owed by these eighteen European governments is now the most important factor, not only of the United States government's credits but also in the field of international credit, and it will continue so for many years to come. Nor is this $11,313,860,127.27 all that Europe owes us. Private loans, investments and com- mercial transactions must be added. The government, state, municipal and corporate loans placed in the United States by Europe and outstanding on June 1, 1921, amounted to $1,101,- 826,200. Table 4 (see page 20) shows this indebt- edness in detail, the figures being based on com- pilations made by the Guaranty Trust Company of New York, from the most accurate and complete information available. But this tabulation does not include subscriptions in the United States to foreign loans, since the amounts of such subscrip- tions are not available, nor does it include most H Z 9 z > O o m w H "«! H w Q W H Z 02 P H H z o tf H H 02 h £ « H 02 o Ph Q Z «< NiOOJlNH f- 1 6? >>o. 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O K 5 Q 6 W w S On O « w o H « w H < oooooc ©ooc o ©ocooc ©ooc © OfflOOOOC ©iO_OC CM "3 usNoddc o'cdo'u; CO CN t^OOO — ©coot CN o o_-^ooo_c 0_CNO_C 00 H t^ c$ cS o 10 ir. id coidcc ©CO T-lt»CC iftCOcNCC © rt(M Tj 6» m oo c © oo = o [3 oo C © "C oo" c ©* oo c © 00© ©rt c 00 CO CM (• ce o oo c o © oo c © "C* t-_ ©m c CN ea-s* l>r ©"co" c •* 00 ©CO - o CO ON t^ CM ■eg ^h" iftod o" o3 3 co O 35 S N e© oooooc oo©c O oooooc oooc o c eg a qnoqqtt o©oc © inido"o"o"cc ©"©"©"ir CN CN00OOO — OOOOC i— < a CN t» ©_©_ ©C ©_io_o_c- 00 3 cdt>rcN©"io"c ©"TflftTj ■* > OS© Ht«lf •^CNcNU - t» o 99^ Tf o O e» C a O u a a W a o fa a 3 o O "o co 3 "C c 3 O O c 3 w "o S a 3 . ; £.2 * M"3 « >> S3 3 § > 5 'E -It* G ! '5 1 S«febwrtc SQ^cbo- n £ EUROPE, DR., TO U. S. A. & CO., CR, 21 of the foreign currency issues placed in this country nor issues partly sold here and partly in other countries. To this total of $1,101,826,200 for such private loans and to the $11,313,860,127 of United States Government loans must be added the European investments of American corporations and indi- viduals and the commercial obligations held by Americans against Europe for manufactured and raw materials sold since the war. Exact figures for these two classes of debts cannot be given, but conservative estimates place them at not less than $3,500,000,000. Total owed by Europe to United States — about $16,000,000,000. Estimate our credits in foreign countries out- side of Europe at $2,000,000,000, and it is seen that in seven years the United States, which in 1914 was a debtor country, has risen to the position of the world's leading creditor nation, with $18,000,000,000 of all kinds of investments abroad. This is some two billions less than the balance which Great Britain had abroad in 1914, after centuries of trading and investing in all parts of the world. When the war broke out Great Britain possessed foreign credits amounting to more than £4,000,000,000— more than $20,000,000,000 at par of exchange. Of this amount the British had to use about one-fourth during the war to meet foreign obligations, chiefly for American products. To-day Great Britain, at the same time our chief 22 OUR ELEVEN BILLION DOLLARS debtor and her continental allies' creditor, is in a difficult financial situation, but she is not trying to collect the $9,000,000,000 of war debts due her from her former allies, if only for the reason that she knows they cannot be collected, at least not in actual cash. For the sake of prosperity in the United States the day can come none too quickly when the Amer- ican people will have advanced from creditors who want "payment in 30 days" to keen investors in foreign industries, who will say to those $16,000,000,000 and more, "Stay in Europe and work for us; we don't want you here, we can't afford to have you come back home." Ill BILLIONS FOR REFUNDING, BUT NOT ONE CENT FOR CANCELLATION The European countries owing us $11,000,000,- 000 and more are only too willing to settle their debts — by cancellation. Such an easy method of ending all these complicated and burdensome transactions of the war appeals to the debtors in Europe, but it finds little support among the American people, who, still paying for the war, feel they have heard too much on the subject from European sources. This propaganda of cancellation, born shortly after the Armistice, has led an interesting career. The first cancellation proposal to reach Washing- ton through official channels was contained in a cablegram of December 4, 1918, sent to Secretary of the Treasury McAdoo through the American Embassy in London. Here is a part of this cable- gram: "Chancellor of the Exchequer revived suggestions made before of possibility of cancella- tion of all loans made by one associated govern- ment to any other for the conduct of the war. I stated that so far as I know such an idea had never for a moment been entertained by you, and the subject was dropped. Similar suggestions in 23 24 OUR ELEVEN BILLION DOLLARS unofficial but important quarters are not infre- quent in London and Paris. " Second. Keynes has suggested in several con- versations the theory that future aid to Allies should now be taken over by us so that as nearly as possible our loans to Allies should equal those of the British. This thought appears also in letter from the Chancellor to me, received to-day, re- ferring to Italian situation in which statement is made that the Chancellor called attention of Stringher to fact that the aggregate of British government loans to Italy were double those of the United States and that their further action toward Italy must be determined by Italian ar- rangements with us." Further suggestions, emanating from English sources, kept the cancellation ball rolling. Austen Chamberlain, Chancellor of the Exchequer, played with the ball a number of times, but it was President Wilson himself who kicked it right into the Treasury Department, which prepared for him a memorandum beginning, "Your recent message through the British Embassy, in which among other matters you advocate a general can- cellation of intergovernmental war debts, has been received, ' ' and ending after detailed consid- eration of the subject with the following: "A proposal that the United States should can- cel its debts against the allied governments would simply result, in effect, in the cancellation by one of the principal creditors of its claims in order BILLIONS FOR REFUNDING 25 that the claims of the other creditors might re- main intact, and would transfer from the peoples of the debtor governments to the shoulders of the people of the United States the taxes necessary to liquidate the outstanding obligations of the United States government representing the loans made by it to the allied governments. The United States government in little over two years raised for war purposes through taxes and loans approx- imately $37,000,000,000, out of which were made to the allied governments the loans to assist them in winning the war. The United States govern- ment has neither received nor sought substantial material benefits from the war or under the terms of the treaty of peace. On the other hand, the Allies, although having suffered greatly in loss of lives and property, have under the terms of the treaty and otherwise acquired accessions of ter- ritories, properties, raw materials and other ad- vantages, including their claims against Germany for vast indemnities. It would seem that if full account were taken of these there would be no incentive, desire or reason to call upon the United States for further contributions." The British cancellation proposals continued under discussion in cables, letters and informal conversations until in October, 1920, Secretary of the Treasury Houston wrote that the Treasury Department refused to consider cancellation as a form of settlement of the debts, this after the British Prime Minister, Lloyd George, had sent 26 OUR ELEVEN BILLION DOLLARS the following to President Wilson on August 5, 1920 : "I come now to another question I wish to write you about, and that is the knotty problem of interallied indebtedness. Indeed, I promised Mr. Rathbone [an assistant secretary of the Treasury who was abroad the winter of 1919-1920 negoti- ating the matter] long ago that I would write to you about it, but I have had to put it off for one reason and another till now. "The British and French governments have been discussing, during the last four months, the question of giving fixity and definiteness to Ger- many's reparation obligations. The British gov- ernment has stood steadily by the view that it was vital that Germany's liabilities should be fixed at a figure which it was within the reasonable capac- ity of Germany to pay, and that this figure should be fixed without delay because the reconstruction of Central Europe could not begin nor could the Allies themselves raise money on the strength of Germany 's obligation to pay them reparation un- til her liabilities had been exactly defined. After great difficulty with his own people, M. Millerand found himself able to accept this view, but he pointed out that it was impossible for France to agree to accept anything less than it was entitled to under the treaty, unless its debts to its Allies and associates in the war were treated in the same way. "This declaration appeared to the British gov- ernment eminently fair. But after careful con- BILLIONS FOR REFUNDING 27 sideration they came to the conclusion that it was impossible to remit any part of what was owed to them by France except as part and parcel of all- around settlement of interallied indebtedness. I need not go into the reasons which led to this conclusion which must be clear to you; but the principal reason was that British public opinion would never support a one-sided arrangement at its sole expense, and that if such a one-sided ar- rang jment were made it could not fail to estrange and eventually embitter the relations between the American and British people, with calamitous re- sults to the future of the world. You will remem- ber that Great Britain borrowed from the United States about half as much as its total loans to the Allies, and that after America's entry into the war, it lent to the Allies almost exactly the same amount as it borrowed from the United States of America. Accordingly the British government has informed the French government that it will agree to any equitable arrangement for the reduction or cancellation of interallied indebtedness, but that such an arrangement must be one which ap- plies all around. 4 'As you know, the representatives of the Allies and of Germany are meeting at Geneva in a week or two to commence discussion on the subject of reparation. I recognize that in the midst of a Presidential election and with Congress not in session, it is impossible for the United States to deal with this question in a practical manner, but 28 OUR ELEVEN BILLION DOLLARS the question is one of such importance to the fu- ture of Europe, and indeed to the relations be- tween the allied and associated powers, that I should very much welcome any advice which you might feel yourself able to give me as to the best method of securing that the whole problem could be considered and settled by the United States government in concert with its associates at the earliest possible moment that the political situ- ation in America makes it possible. ' ' There is one other point which I would like to add. When the British government decided that it could not deal with the question of the debts owed to it by its Allies except as part and parcel of an all-around arrangement of interallied debts, the Chancellor of the Exchequer told Mr. Bath- bone that he could not proceed any further with the negotiations which they had been conducting together with regard to the postponement of the payment of interest on the funding of Great Brit- ain's debts to America. I should like to make it plain that this is due to no reluctance on the part of Great Britain to fund its debt, but solely to the fact that it cannot bind itself to any arrangement which would prejudice the working of any inter- allied arrangement which may be reached in the future. If some method can be found for funding the British debt which does not prejudice the larger question, the British government would be glad to fall in with it." So much for Lloyd George and his opinion on BILLIONS FOR REFUNDING 29 refunding and cancellation, which differs radi- cally from the official American point of view. Before the Senate Committee on Finance, Secre- tary of the Treasury Mellon has given his assur- ance that cancellation is not his idea of the man- ner in which Europe's debts to the United States should be settled : The Chairman (Senator Penrose). Mr. Mellon, there is no intention on the part of the present Administration to cancel or forgive any part of this indebtedness of foreign nations, is there? Secretary Mellon. No. The Chairman. That has been bruited abroad, though so far as conditions are at present it is absolutely without foundation. Secretary Mellon. The examination of all these memoranda in the cases shows that there has not anything been done nor has any suggestion been made on the part of the Treasury in that di- rection. They have all along taken the position that these are obligations owing to this country, and valid obligations that must be eventually paid. To this denial of Secretary Mellon 's was added a statement from the White House that our Gov- ernment did not intend to cancel the debts owed by the governments of Europe. But the propaganda of cancellation continues, not only on the part of the debtors but even with the aid of a few Americans. Among those in this country urging cancellation are Justice John H. 30 OUR ELEVEN BILLION DOLLARS Clarke, of the Supreme Court; Professor Edwin Seligman, of Columbia University, and Otto H. Kahn, of Kuhn, Loeb & Co. They consider that our war loans should be regarded as a part of America's contribution to the war. Nevertheless, these obligations of $11,000,000,- 000 and more constitute a just debt, both legally and morally. Nothing in the original loans or in our association with the Allies affords any basis for the claim that the debts should be considered as an American contribution to the war and there- fore cancelled. When the loans were provided for by Congress and later negotiated with representa- tives of the allied governments the sums involved were not looked upon as gifts, but as dollars — not pounds, francs or lire — borrowed by the United States government, which, while loaning these dollars to European governments, promptly paid France, Italy and Great Britain for all services and supplies. Assume, for the moment, that Europe's entire $11,000,000,000 indebtedness to our government is wiped out to-morrow by an act of Congress. "Would the cancelling of the debts assure the economic recovery of Europe? Would currency become stabilized? Would our export trade and industrial situation improve ? If Europe cast aside her worn-out economic and political machinery, created new institutions to fit the needs of new conditions, cancellation would help her economic recovery and hasten the BILLIONS FOR REFUNDING 31 process of stabilization. But thorough reform in Europe would eliminate the need for cancellation. So long as Europe remains what she is, so long as she fails to effect economic and political reforms, wiping this immense debt off her slate would not increase production and fixed capital, would not put workers into factories and on the land under more favorable living conditions, would not re- lieve the masses of their burdens of taxation. Cancellation would not mean better food, better clothing, better homes, better working hours for any but politicians, speculators and holders of large sums of money. For Europe of to-day the cancelling of inter-governmental debts would mean freedom to continue wasteful methods and to spend larger sums on preparations for war. In particular, cancellation would mean more for Great Britain than for any other country, and in this unrevealed fact may lie the reason that Lon- don has fostered the cancellation idea and has persistently kept it before the world. If the inter- governmental debts were all cancelled, the United States would lose $11,000,000,000 and more, whereas Great Britain, the only other important creditor nation, would lose only about $5,000,000,- 000, since she owes approximately $4,000,000,000 to us, while other governments owe her about $9,000,000,000. Our foreign credits would be re- duced by this cancellation process from $18,000,- 000,000 to $7,000,000,000, and Great Britain's loans and investments abroad would stand at about 32 OUR ELEVEN BILLION DOLLARS $15,000,000,000. By cancellation Great Britain would displace the United States as the world's chief creditor nation. As matters now stand, the United States' in- vestment in the war totals $45,000,000,000, the only items on the credit side being some German shipping and the famous eleven billions. The gross cost of the war to Great Britain is put at about $52,000,000,000, against which may be cred- ited a certain amount of German shipping, an uncertain amount of German reparation money, $9,000,000,000 owed to her by other governments, and Mesopotamia, German East Africa, German West Africa, Togoland and a number of Pacific islands. About $55,000,000,000 is the estimated gross cost of the war to France. Against this sum France can credit Alsace-Lorraine, Germany's rights in equatorial Africa, the Saar Basin mines, coal, live stock and paid and unpaid reparation sums. Italy's war cost is estimated at less than $20,000,000,000, against which are to be credited about 12,000 square miles of Austro-Hungarian territory, large shipments of coal and an unsettled reparation amount. At the Peace Conference we asked for no terri- tory, only for the German shipping seized in our harbors and for world-wide peace, and despite the invaluable services rendered by the United States in the war we have had little consideration from the Allies except when they have thought their purses would benefit. This selfish side of Europe BILLIONS FOR REFUNDING 33 the American people know only too well, and Con- gress, representing the American people, gave it full consideration in preparing the bill which provides for the refunding of the debts owed the United States government by eighteen govern- ments and so-called governments of Europe. Supported by President Harding, Secretary Mellon asked Congress to pass a bill authorizing the Secretary of the Treasury "from time to time to refund or convert, and to extend the time of payment of the principal or the interest, or both, of any obligation of any foreign government now owing to the United States of America, or any obligation of any foreign government hereafter received by the United States of America (includ- ing obligations held by the United States Grain Corporation), arising out of the European War, into bonds or other obligations of such, or of any other, foreign government, and from time to time to receive bonds of any foreign government in substitution for those now or hereafter held by the United States of America, in such form and of such terms, conditions, date or dates of maturity, and rate or rates of interest, and with such secur- ity, if any, as shall be deemed for the best interests of the United States of America, and to adjust and settle any and all claims, not now represented by bonds or obligations, which the United States of America now has or hereafter may have against any foreign government and to accept securities therefor." 34 OUR ELEVEN BILLION DOLLARS The Senate Committee on Finance was unwill- ing to report a bill giving so free a hand to the Secretary of the Treasury. The hearings held on the bill in June and July, 1921, and its consider- ation by Congress early in 1922 brought out strong opposition on the part of various senators against any suggestion of cancellation, against acceptance of bonds of other than the debtor nations, espec- ially German bonds, and against any provisions other than a specified minimum rate of interest and a definite limit upon the period over which the debts might be refunded. As passed by the Senate and the House of Rep- resentatives and signed by President Harding on February 9, 1922, although he objected to the changes made in the original bill, the "act to create a commission authorized under certain conditions to refund or convert obligations of foreign governments held by the United States of America, and for other purposes," is as follows: Be it enacted by the Senate and House of Rep- resentatives of the United States of America in Congress assembled, That a World War Foreign Debt Commission is hereby created consisting of five members, one of whom shall be the Secretary of the Treasury, who shall serve as chairman, and four of whom shall be appointed by the Presi- dent, by and with the advice and consent of the Senate. Sec. 2. That, subject to the approval of the BILLIONS FOR REFUNDING 35 President, the commission created by section 1 is hereby authorized to refund or convert, and to extend the time of payment of the principal or the interest, or both, of any obligation of any foreign Government now held by the United States of America, or any obligation of any foreign Gov- ernment hereafter received by the United States of America (including obligations held by the United States Grain Corporation, the War De- partment, the Navy Department, or the American Relief Administration), arising out of the World War, into bonds or other obligations of such for- eign Government in substitution for the bonds or other obligations of such Government now or here- after held by the United States of America, in such form and of such terms, conditions, date or dates of maturity, and rate or rates of interest, and with such security, if any, as shall be deemed for the best interests of the United States of America: Provided, That nothing contained in this Act shall be construed to authorize or em- power the commission to extend the time of ma- turity of any such bonds or other obligations due the United States of America by any foreign Gov- ernment beyond June 15, 1947, or to fix the rate of interest at less than 4% P er centum per annum : Provided further, That when the bond or other ob- ligation of any such Government has been re- funded or converted as herein provided, the au- thority of the commission over such refunded or converted bond or other obligation shall cease. 36 OUR ELEVEN BILLION DOLLARS Sec. 3. That this Act shall not be construed to authorize the exchange of bonds or other obliga- tions of any foreign Government for those of any other foreign Government, or cancellation of any part of such indebtedness except through payment thereof. Sec. 4. That the authority granted by this Act shall cease and determine at the end of three years from the date of the passage of this Act. Sec. 5. That the annual report of this commis- sion shall be included in the Annual Report of the Secretary of the Treasury on the state of the finances, but said commission shall immediately transmit to the Congress copies of any refunding agreements entered into, with the approval of the President, by each foreign Government upon the completion of the authority granted under this Act. This refunding act contains no provision for the payment of accrued interest or of future inter- est at any stated periods. The World War For- eign Debt Commission authorized by the act had as its original members Secretary of the Treasury Mellon, Secretary of State Hughes, Secretary of Commerce Hoover, Senator Reed Smoot of Utah, and Representative Theodore Burton of Ohio. The answer of the British treasury to the enactment of the refunding bill was the presenta- tion of a plan in March, 1922, to wipe out all BILLIONS FOR REFUNDING 37 intergovernmental war debts and credit the amount to the account of German reparations. This reduction of German reparation payments, according to the Chancellor of the Exchequer, Sir Robert Home, was dependent upon the United States' cancellation of Europe's $11,000,000,000 debt. In other words, Lloyd George had revived the scheme to involve the United States in the payment of an important part of the German reparation sums demanded by the Allies. The passing of the refunding bill by Congress and the establishment of the commission to carry out its provisions should have served to make known to Europe, if she had any doubts on the subject, that the great majority of the American people are willing to provide billions for refund- ing, but not one cent for cancellation. rv INCREASING DEBTS AND UNBALANCED BUDGETS With the enactment of the refunding bill the United States asked the eighteen debtor countries of Europe to recognize their debts to this govern- ment, end all talk of cancellation and get down to business. And settling down to business on the part of the continental debtors involves their in- ternal debts as well as the large sums owed to the chief creditor nations, England and the United States. Juggling budgets instead of balancing them does not conceal their latent bankruptcy, does not attract the American investor. Of the European belligerents and the new coun- tries born at Versailles not one actually made both ends meet last year. Their balance sheets show gaps of varying sizes between income and gross expenditure. Enormous deficits produced by the war have kept expenditures at an abnormal level, but the fiscal systems of European state finance leave much to be desired, especially by a creditor or a possible investor. On top of heavy current expenditures are piled interest on war debts — none required as yet on our loans — pen- sions, subsidies for food, coal, unemployment, 38 DEBTS AND BUDGETS 39 housing and railroads, and appropriations for armaments. Expenditures for war, past and fu- ture, represent a great proportion of the burden of taxation. In some of the countries past-war taxes plus next-war taxes, that is, current military expenditures, constitute a crushing burden. Even some of the neutral countries of Europe are having serious financial troubles. Their bud- get difficulties are due, for the most part, to the growth of government expenses caused by the rise of prices and the granting of subsidies, al- though in the case of Holland and Switzerland heavy expenditure was directly caused by the war. The neutrals have solved their problem by increased taxation, with the exception of Holland, Spain and Switzerland, which borrowed large sums. However, the European neutrals all added to their gold reserves during the war, opened credits for the belligerents and repatriated con- siderable amounts of national securities held abroad. The general financial situation of neutrals and belligerents is represented in Table 5 (see pages 40 and 41), compiled largely from the reports of the International Financial Conference at Brus- sels. This table gives the net budgets of each country, unless otherwise noted, the revenue figures, including receipts from all sources except loans, and the expenditure figures, covering all items of both ordinary and extraordinary budgets except in case of provision for amortization. Q s o w a H fa O CO w 5 H 55 O U ►J ••4 Oh 6 g 2 fa w a H fa O 03 H « O Q a n is 13 o fa - O 4> B H •" a 3 S 05_2 .2 4> 4> a o a 00 OS O *f "3 CO t~ CO CO 00 >-< ■ N- <-< OS CO CO tO I II ' I I iTlTl :l II I ' oooooooooooooooooo oooooooooooooooooo >qqq oscseooco-Htoco" Miooomiono >nt^oso_os(Ncqco of tC -h od oo" io ci qqq wscfdodh-"- - - COOOOHMOflfO .NOClrtNO ■ O O CO os_o_ ^iOCSCOOSCO" co © 'P.^os co o cm o co os t^- co h* co co co • r>- oo cn ^h *h co i-< r-ICN i-OH s — 2 Wfa.jMSSfaSQWjQrtSSS,-!^ rH !M N C-) IM CN —I 01 CN rH CN CI CN OSOSOSOSOSOSOSOSOSOSOSOSOSOSOSOSOSOS o.S Ifc 8 13 ■3 2 a -3 a o M O 4> u n ft 61 . 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O 53 2; a c os SB oj-S— ; - ^-2^ 3Ph os-3 *JZx»x ?-- s 0h>->i-j-'S- O u- V. — Vk p fa a - H d U S O C O O CO c OCOO C O O C C C _ cc cq Bqoqqqqqoqqo © co" c o OQ5QQQQSS8SS £ ?ccccco 5£&9289x£§SS c cccoo qoqq c qq c 5© q q o_coo 2 y~ ga -? (•wnKixsocNwe CIC. flM U5 "NX ^i CO ■* M i-l oqc dot u* — i CNCOC oc ic-">n o OOOOOOO OOQPQQOQQOQQ O O O O O CCCCCCO COCCCOOOCCCC CCS o o ocoocco_ qqqqqqqqqqqq qo©q© opooooo ©SSSSSSSSfiSS 2 2 222 cccccco oooooqooqqqq qqqqq c$ ci a t?Z r* oo in BdcoioodrHeooaft^odio^ of co ©"•*•-< Ot~c» ,-T i-T i-T i-T tC i-?i-oo i-icomooco m © 0> -h tD IN n-HC-'rCC-MC^DM 00 00 f~ CO t- ^i 00—1 r- cocnos ^iincm o »-< icuifm coooo c OOOO cccco a* -5 TJ.O >> a 2 .2 ° a a." 4)1-1 S h a '-3 3.<5fat^.~><0 • a o * N -a e>? a 46 OUR ELEVEN BILLION DOLLARS violations of economic and moral laws, violations which have demoralized domestic and foreign business and brought suffering to millions. Picture this bungling, debt-ridden Europe, with her foolish, frenzied, fantastic finances, her peo- ples suffering from underconsumption, with fac- tories working at part capacity or not at all, money inflated, credits frozen, loans unliquidated, budgets unbalanced. Great Britain — suffering from diminished for- eign trade, unemployment and the heaviest taxa- tion in Europe, but fortunate in having in the English and Scotch the most honest and capable business men in Europe. France — burdened with a debt of about 300,000,- 000,000 francs, suffering from the fear of future German aggression, and with good reason, but using bad judgment in seeking safety and in- creased power through the same methods of Eu- ropean diplomacy that brought on the last war, losing friends and gaining little. Belgium — a small country with a big debt, more or less forgotten because it is demanding little and going quietly about its business, or as much as the country has been able to regain. Italy — here to-day, but where she will be to- morrow nobody knows, rolling up a public debt of 110,000,000,000 lire and trying to put her finan- cial house in order, without any apparent inten- tion of providing for the payment of her debt to the United States. DEBTS AND BUDGETS 47 Germany — a country financially crippled but industrially and mentally active, whose leaders know just what they are doing and why they are doing it, even less to be trusted than the Kaiser's Germany, which destroyed the "scrap of paper," the Lusitania, Rheims Cathedral, Belgian and French homes and industries. Austria — a war wreck, weak and hungry, left prostrate by the Big Four, a victim of the worst profiteers of Europe, overburdened with money, paper money. Hungary — another case of total disability, bru- tally dismembered at the Peace Conference, and robbed by the Allies, Bolshevists and Rumanians of all but her nationalism. The Balkan States — as Balkanic as ever, but their rivalries, grievances and needs now over- shadowed by Balkanized Central Europe. The new States — all of them, including Czecho- slovakia, Jugo-Slavia, Poland, the Baltic States, not to forget the Irish Free State, suffering from the internal pains of party politics, from the egoism common to all small nations upon achiev- ing their "rights," and from lack of economic knowledge and experience. And we, the people of the United States, what is our situation? "We have not been innocent of economic sins committed during and since the war, of inflation, of private and government waste, of excess of ex- penditures over receipts, of business stupidities 48 OUR ELEVEN BILLION DOLLARS surpassing belief. But we have reformed to a large extent, business has improved, although it is far from its new post-war normal, and basic financial conditions are better than in 1921. We are better off than any European country, but this does not mean that the economic situation of the United States is satisfactory. Europe, looking at us, sees only a nation of overwhelming wealth, our $3,657,000,000 of gold exaggerated into a much larger sum, our manufactured products and raw materials not to be desired as much as fine gold. Europe estimates our wealth in terms of gold, but wealth is measured in value of goods rather than in metal. Our wealth increased during the period from 1914 to 1917, but in terms of goods it actually decreased after our entrance into the war, even though our towns and lands were not devastated by the enemy. Our products and ship- ping were destroyed at sea ; our railroads deteri- orated ; our leading industries were diverted from peace-time commodities to war supplies ; inflation and wasteful expenditure have cost public and government dearly; and the country has not yet seen the end of the costly readjustment of busi- ness. All this has meant the loss of wealth; be- sides, we owe ourselves almost twenty-four times the government debt of 1914, this new and enor- mous debt to be liquidated only by taxing our in- comes, properties and products. The great in- crease in our public debt as a result of the war is 00050 1 0! 9 00 CN CNCOm CO s 00 0<0t»'*'-i •* © CN'of—Co""* t*" 'f CN iCMfMOO s CO 00 CN co os_Oi cn oo <# o 0) r-"©~o"cfin CO* of CN CO — 00 CN 00 CN ■<1< t» CO — CD 00 = oo CN 04 CO OJ "■« 3 M M ^ O Cl CO o CO r» r>.r»cD — CO t~ N o> CNCO^ — to eo 69 O) e'oi^do" CN DO US o> osotor-o o CO co ■"co -a* "5 CN CN CN CN «* C© 000)050 O 00 00 — cDCTiCOtO 09 o co m rocs cn ©_ TT in co"cNro'cfc1" 0_m_Ci1<_CN CN X o r-TiHofcNid t>r of o" CO Tjl — 00 CN N m o> O5C500 © ©_ •» HNH •» 1) • J3 ■ a '. JS ■ w • a ■ V • "> '. ■> *" ' 5 : c .Q - 1 - s i ? ex : u a CO -0 S3 terest-bear which int< aring no in ding princi tKo Trent., 1 I; o E em 1 3 . B Cv d 13 o H •9gjog.S : -oh 3 2 "3 3ssHi 3 C O a> « 3 e s t- c > l!5 < 50 OUK ELEVEN BILLION DOLLARS shown in Table 7 (see page 49), with figures given for the outstanding debt on July 1 of each year. The public debt of the United States on Decem- ber 31, 1921, with a classification differing from that given in the tabulation on page 49 follows : pre-war debt, $883,784,050; Liberty bonds, $15,207,389,400; Victory bonds, $3,548,289,500; notes, series B-1924, $390,706,100; war savings certificates of indebtedness, $2,195,595,000; trea- sury notes, series A-1924, $311,191,600; treasury notes, series B-1924, $390,706,100; war savings securities, $651,844,374; matured debt, $11,867,- 140; debt bearing no interest, $238,317,187. The total gross debt amounted to $23,438,984,351, showing a net decrease of $538,819,109 from the public debt of December 31, 1920. That the financial situation of the United States government is no worse is due to notable econo- mies and reforms effected under the present Ad- ministration. Important reductions in govern- ment expenditure and in taxation have been insti- tuted, and the new Federal budget is preparing the way for additional decreases in disbursements. For the fiscal year 1920-21, ended June 30, receipts were $5,624,000,000 and expenditures $5,538,000,000. For the year ending June 30, 1922, income is expected to amount to $3,943,500,000 and outlay $3,968,000,000. The Director of the Budget, General Charles G. Dawes, anticipated that during the year 1922-23 government receipts would be $3,338,000,000 and expenditures $3,506,- DEBTS AND BUDGETS 51 000,000, the deficiency to be met by the release of $100,000,000 tied up in the Navy Department, and by additional economies in government operation. These figures show that the expenditures of the United States government have fallen $1,570,- 000,000 from 1921 to 1922, and that from 1921 to 1923 the total reduction should amount to $2,032,000,000—no small burden removed from the people of the United States. V EUROPE'S PAPER, AMERICA'S GOLD The public debts of Europe, increased to huge proportions by the war, are being financed pri- marily by the printing press, although this method increases the expenses of government and public during peace as well as during war. Behind the guns and shells of the World War were printing presses and paper ; the guns have long since ceased firing, but the presses are still operating, in some cases at full capacity. Their outpourings of incon- vertible paper serve only to enlarge the vicious circle of inflation, increasing debts, growing treas- ury deficits, decreased exchange values, rises in prices of commodities and services. Trying to meet budget deficits by printing more currency always has and always will result in further depreciation, since revenues never in- crease rapidly enough to overtake the depreci- ation and permit the issuing of paper to be halted. Let inflation continue long enough and it brings about the disorganization of trade and industry and the demoralization of the people. Until budgets are balanced no government can stop inflation, which Professor Gustav Cassel describes as the combined result of an artificial creation of purchasing power in order to finance 52 EUROPE'S PAPER, AMERICA'S GOLD 53 government expenditure beyond the real capacity of the country, and of the falsification of the money market by an abnormally low rate of in- terest, in both cases with the assistance of an arbitrary supply of legal tender. Inflation adds nothing to the real value on which the currency's buying power is based, but depreciates the cur- rency, reducing the actual purchasing power of each and every unit. In other words, inflation ad- vances prices. Once budgets are balanced and inflation stopped governments are confronted with the problem of deflation, the ticklish process of contracting paper issues and so decreasing the means of payment in relation to the nation's business. The most diffi- cult problem connected with inflation is to bring it to a stop once it is started, while the chief task with deflation is to stop it at the right point. Unless it is to be an operation costly both to the government and to the public, deflation has to be carried out by slow degrees and with extreme caution. Various countries, including our own, have had costly experiences with the contraction of paper issues. It would seem that we should have learned our lesson from the deflation scheme which threatened financial and commercial dis- aster for the country after the Civil War. Infla- tion brought us the false prosperity of 1919-20, deflation added to the depression of 1920-21, bringing new troubles and little relief from the high cost of living. And now we are suffering 54 OUR ELEVEN BILLION DOLLARS from an unusual form of inflation — too much gold. After bitter experiences it is becoming evident to the business man that inflation and deflation are twin evils instead of being antidotes one of the other, a point which Professor Irving Fisher has been preaching in this country, fearing that the danger ahead for us is re-inflation as a reaction against the recent rapid deflation, a false remedy for our war inflation. This secondary period of inflation will come, he thinks, as a result of an upward move in the price level, and afterward the usual deflation process, unless the double object lesson of the past two years serves to provide a way of escape. Most of our debtors in Europe, still issuing money instead of withdrawing it from circulation, are occupied with the troubles of inflation rather than with those of deflation. They are face to face with the fact that their public debts can be reduced only through payment or through repudi- ation. With regard to the $11,000,000,000 owed the United States government, Congress has made known through the refunding bill that it expects payment, but there are individuals, com- panies and banks in this country that may look forward to heavy losses through repudiation by various European governments of their paper obligations. Already several of the minor gov- ernments have indulged in repudiation by con- verting a part of their paper currency at a dis- EUKOPE'S PAPER, AMERICA'S GOLD 55 count — conversion they call it, but it is nothing more nor less than partial repudiation. The attempts to repudiate huge sums involving creditor nations as well as the nationals of the debtor nations will not all succeed, but repudia- tion on an extensive scale will come. In those European countries where inflation has reached almost unbelievable proportions, as in Austria, Poland and Eussia, it is impossible that the value of their out-standing paper will ever be brought back to par. This is a fact, an unpleasant one for many investors and gamblers in exchange, that is not generally recognized. Realization of the truth of this statement lies in the application of common sense to figures showing the volume of paper money outstanding in Europe. Dismembered Austria's paper is estimated at over 200,000,000,000 kronen, or crowns, which would be more than $50,000,000,000 at pre-war par, and her deficit for the fiscal year 1920-21 is esti- mated at 400,000,000,000 crowns, although the official figure is 165,000,000,000. Poland, upon its rebirth in 1919, established a new national cur- rency, Polish marks of a par value of 23.8 cents, starting with 3,000,000,000 of them. In two years this amount increased twenty times. Before the end of 1921 the out-standing currency amounted to more than 130,000,000,000 Polish marks, quoted at about one three-hundredth of a cent, or some- what less than one eight-hundredth of the par value. Poland's 1921 budget estimates revenues 56 OUR ELEVEN BILLION DOLLARS at 135,000,000,000 Polish marks and gives expendi- tures at 209,000,000,000, due largely to military costs. If Poland could bring her currency ulti- mately to par value, payment in the future of her present debt would be at many hundred times its value in 1922. In Russia at the beginning of the war the entire sum of paper rubles outstanding was 1,630,000,000. At the end of 1917 they amounted to 27,300,000,000, at the end of 1919 to 225,000,000,000, and in December, 1921, to 1,168,- 000,000,000. In October, 1921, Bolshevik currency was reported to total 5,750,000,000,000. With prices in Moscow at that time 48,600 times higher than in 1914, the monetary circulation was insuffi- cient—it was estimated that 48,600,000,000,000 rubles were needed, although the estimated amount in circulation was almost six trillions ! These figures show the utter hopelessness of any expectation that Austria, Poland and Russia will attempt to restore their currencies to pre- war values. Even under the most favorable cir- cumstances they would find it no easy matter to pay their debts in present gold value. Imagine Russia's trying to pay her debt multiplied by 1,000. And then there is Germany, but her infla- tion is another story to be considered in the next chapter. Figures showing the increase in notes issued by belligerent and neutral countries over the period of the war appear in Table 10 (see page 62A). The most depreciated of the world's currencies EUROPE'S PAPER, AMERICA'S GOLD 57 manage to exist because nothing better has come to take their place. With civilized man money is a habit, even when it is practically worthless. He finds barter inconvenient and expensive. Pianos for potatoes, tobacco in exchange for chickens, a clock as payment for a day's work have disad- vantages not even possessed by bundles of depre- ciated currency necessary in bulk in certain coun- tries to buy food, clothing and other needments. Reducing the nominal redemption value of the most depreciated currencies is one of the impor- tant subjects for an international conference, and the problem should be dealt with soon. The sooner it is settled the sooner will trade, finance and in- dustry tend to become stabilized. It is said that the allied financiers who held a meeting in Paris preliminary to the Cannes conference recom- mended that an international currency be adopted for all central and eastern Europe to take the place of marks, crowns, rubles and other units, their new gold value to bear the relation of 100 to the American dollar. Establishment of new redemption values will mean new par values for at least half a dozen European monetary units. Those holders of the currencies affected who are losers will have to bear this partial repudiation, the holders who gain will do the grinning. But introducing this reform will not keep the currencies stabilized at the new reduced par values. The countries con- cerned must keep their budgets balanced and se- 58 OUR ELEVEN BILLION DOLLARS cure an equilibrium between exports and imports so that national debits and credits balance each other. "No international currency, no attempt to stabilize the value of gold, will be a substitute for that simple, if difficult and often painful, duty of paying our way," said Lord Cullen, of the British delegation, at the International Financial Conference, and to these words he added, as the only remedy for the exchange situation, "hard work and economy," which constitute Lord Chalmers' prescription for getting public finance back on a solid foundation. Sound currency at new or old values and a sound economic situation in Europe involve the re-establishment of the gold standard in the prin- cipal European countries, that is, gold and paper must be interchangeable. If the gold standard needed to be vindicated, this war and the post-war period have together provided the vindication. Yet in the face of this, the year 1922 opened on Ford's scheme of "fliv- ver dollars," approved by Thomas Edison, to finance a part of the Muscle Shoals project, and another fiat money revival, this by Senator Ladd and his lone group crying in the wilderness of North Dakota for "honest money." As if two such demands that gold be dethroned as the sound money king were not enough, there was the spec- tacle of a learned economist chasing to the rain- bow 's end in Germany for the pot of gold — syn- thetic gold, which is to end gold as a monetary EUROPE'S PAPER, AMERICA'S GOLD 59 standard and strike America prostrate on a heap of metal that was worth $3,656,989,000 on Janu- ary 1, 1922. "With this accumulation of gold the United States has broken the world's gold records. It is by far the greatest sum of gold possessed to-day by any one country, indeed the greatest mass of the metal ever accumulated by a nation in the his- tory of the world. Eepresenting almost a half of the world's monetary gold, it has come to us chiefly from Europe during the past seven years, enlarging our supply of monetary gold, which be- fore the war was $1,900,000,000. The increase in the country's gold since 1912 is shown in the fol- lowing table: TABLE 8 GROWTH OF THE UNITED STATES' GOLD POWER Stock of Per Year Imports of Exports of Net gold in monetary cent gold (a) gold (a) Treasury (a) gold in of U. S. (6) 1913 1913 869,194,025 $77,762,622 $258,363,327 $1,924,000,000 100 1914 66,538,659 112,038,529 252,962,971 1,816,000,000 94 1915 171,568,755 146,224,148 247,746,370 2,312,000,000 120 1916 494,009,301 90,249,548 238,093,644 2,865,000,000 149 1917 977,176,026 291,921,225 214,941,127 3,040,000,000 158 1918 124,413,483 190,852,224 248,241,288 3,081,000,000 160 1919 62,363,733 116,575,535 364,575,414 2,788,000,000 145 1920 150,540,200 466,592,006 402,900,726 2,785,000,000 148 1921 644,480,218 133,537,902 415,994,196 3,657,000,000 188 (a) At the end of each fiscal year, June 30th. (6) At the end of the year. Most of the gold acquired by this country since 1914 represents the payment of private debts contracted during the war and since. The set- tlement of many such obligations last year re- 60 OUR ELEVEN BILLION DOLLARS suited in an unprecedented gold movement, the greatest the world has ever seen, millions upon millions of gold flowing into this country until the record-breaking sum of $691,267,448 for 1921 was reached on the last day of the year. During the same twelve months the United States ex- ported $23,680,000, the smallest amount shipped from the country in any year since 1898. The imports and exports by months for 1921, along with our other imports and exports of gold since the war, appear in the following table: TABLE 9 UNITED STATES' POST-WAR IMPORTS AND EXPORTS OF GOLD Month 1919 1920 1921 Imports $2,113,217 3,944,839 10,481,197 6,691,795 1,079,525 26,134,460 1,846,495 2,490,489 1,471,628 4,969,595 2,396,770 12,914,036 $12,017,551 4,473,360 16,985,222 48,522,212 15,687,859 26,764,983 19,817,758 15,377,794 39,110,008 116,762,001 56,889,037 38,193,669 $33,633,967 42,626,913 March 87,271,775 80,662,202 58,171,386 June July August October November December 43,576,476 64,247,479 84,901,554 66,085,253 47,106,839 51,298,626 31,684,978 Total $76,534,046 $417,068,273 $691,267,448 $94,977,065 $667,587,405 Exports $3,396,098 3,110,153 3,803,229 1,770,057 1,956,135 82,972,840 54,673,227 45,189,318 29,050,466 44,148,990 51,857,796 46,256,939 $47,816,873 42,873,376 47,049,586 44,622,477 7,561,583 5,319,875 21,872,783 24,986,182 17,229,090 25,931,239 19,869,757 17,058,287 $2,724,980 1,036,005 709,668 383,787 1,062,521 773,603 July 3,734,929 671,652 2,448,741 7,576,472 November 607,437 1,950,248 Total $368,185,248 $322,091,208 $23,680,043 $291,651,202 EUROPE'S PAPER, AMERICA'S GOLD 61 If this sensational gold movement were allowed to continue, with governments and individuals abroad paying their debts to the United States in gold and with Americans refusing to take up for- eign investments, this country would in time be burdened with a monopoly of the world's gold and be faced with the possibility of a universal abandonment of the gold standard. However, it is not conceivable that the debtor nations will in the future send us any such extraordinary quan- tities of gold as within the last few years or that the United States will permit them to continue gold shipments which disorganize our economic institutions as well as their own. It is true that gold helps the dollar to reign supreme throughout the world and provides the nation's business with security, but while our sup- ply of gold has been increasing our foreign trade has been diminishing. The inflow of the precious yellow metal has been a factor in preventing the outflow of commodities, and with idle gold we have idle workers. The person who expresses only satisfaction over our gold billions forgets that all the gold in the world cannot create a de- mand for commodities and services, that money does not create the capital with which business is carried on, that gold and the paper which repre- sent it are simply a convenience of exchange used in business transactions and in the creation of capital. A portion of our new gold reserves constitutes 62 OUR ELEVEN BILLION DOLLARS dead assets, and it will remain so until the world's economic situation improves sufficiently for us to invest abroad this excess, which is now piled up accumulating storage charges. Economists and bankers in general consider that our surplus gold will serve the country best if devoted to helping restore Europe to a sound economic state. Yet if loaned for rehabilitation of European monetary systems and industries, it will have to be invested not by the government and the banks which hold it but by the owners, who constitute the investing public. Following consideration of the fact that the country is overstocked with gold beyond its cur- rency needs and that the surplus earns no in- terest and serves no useful purpose, the United States Section of the Inter- American High Com- mission, of which Herbert Hoover, Secretary of Commerce, is chairman, has made this statement : ' ' The United States feels it to be to its own inter- est that this gold should be utilized in foreign channels, and also that it be redistributed. From an economic point of view the method of utiliza- tion is by the investment of capital abroad. The method of redistribution should be through loans for reproductive enterprise and by specific gold loans to countries which are in a position to un- dertake the reorganization of their currencies on a gold basis." Discussing our gold reserves and our trade W. P. G. Harding, governor of the Federal .•TRIES 1921 Bell -0,099 91 19 470 <2,090 205 7.286 (7,561 . 000,000 000,000 ,000,000 000,000 000.000 000,000 000,000 000,000 ,000.000 1,620 400 721 8,936 2,132 .000,000 oa ii ,000,000 000,000 000,000 N"c\ 130,000,000 420,000,000 1 1 3,000,000 740,000,000 104,000,000 Cot 513,000,000 582,000,000 i 75,000,000 ■ 10,000,000 10,000,000 ! 532,000,000 25,000,000 4,051,000,000 55,000,000 Brii 260,000.000 00,000 301 000,000 36,00 000.000 Gold $1,000,000 l.lXKJ.OOO 52,000,000 7,000,000 2S0,0OO,00O 8, 000,000 090,000.000 260,000,000 20S.000.000 101,000,000 l.").000.000 5,000,000 (100,000 81, ooo.ooo 764,000,666 61,000,000 241,000,OOtl 39.000,000 4S7.000.000 7 ."..000,000 453,000,000 24.000,000 42,000,000 25,000.000 5,000,000 1 540,000,000 87,000,000 30.0011 0006 3, 057,000,000 57,000,000 1 12,000,0006 190,000,000 1 0.1 )( 10,000 40,000,000 Notes <- 184 000,000 $19,100, 4,500, 1,180, 615, 2,260, 272 7,160, 24.300, 362, 4.110 880, 36,414 667 2,384 8,936 2,115 000,000 000.000 000,000 000,000 000.000 000,000 000,000 000,000 000,000 000,000 000,000 000,000 000,000 000,000 000,000 000.000 129,000,000 41 1\( 100,000 101,000,000 Vt7,000,000 100,000,000 578,000.000 .-,..1.000,0006 00,000,000 16,000,000 10,000 000 i :,i 1,000,000 e 34,000,0006 3,637,000,000 56,000,000 277,000,0006 447,000,000 150,000,000 39,000,000 $123,445,000,000 7 .1 Hungarian Bank. ont.n RESERVES IND PAPER CI RRENC1 [BSUES OF PRINCIPAL COUNTRIES 1914 1918 ,919 1021 Gold Cold Note, Gold Note, Gold Note* H-IIik'n 't' t-omitneji of Europe: H.'utum ." ' ". Bulgaria 8254,000.000 ublouoiooo 'iVuijiumju 853.000.000 ':ji;uii[i\»M 2;049|000,'000 $52,000,000 :.:vll»KMNIII [30,000,000 TI'MMII.l'.WII .}!■, HUH! ^IMHluil.MKI ill $19,100,000,000 i ranee (*.Y . ■ ■■■ ■ Italy .-,.oon,nori/ ' 42loO0iO00 3i;i000!000 594,000,000 '-- ilUJll _ W.OOOioOO Nmtral Countries of Europe: .!.k,:,tak«u> >r l'.l^'l rorin-cnt the finM Im>Mihiv lent yenrs exclusive of gold held nbrotid. , Bank and Hun«i EUROPE'S PAPER, AMERICA'S GOLD 63 Reserve Board, has said: " There is a lot of talk about the $3,500,000,000 in gold which we have in this country. It is said that America is grad- ually getting a corner on the gold market, that the gold of the world will soon be held in this country. The situation is this: Banking to be secure rests upon security. America, once a debtor nation, now is a creditor nation. Entirely apart from the $11,000,000,000, which the Allies owe, America is a creditor nation on open account, and the gold we have received represents the scrappings of the European nations. We cannot continue to do business forever on the gold stock of other nations. They have got to increase their gold supply." Europe's gold position as a result of the war and post-war movements of the metal is a long and involved story, which is best summarized in Table 10 (see page 62A), based on a tabulation prepared by the National City Bank of New York. During the great gold movement of 1921, when the chief debtor nations of Europe sent us hun- dreds of millions, they did so without diminish- ing their gold reserves. England shipped us ap- proximately $250,000,000 in 1921, yet the central gold reserves of the Bank of England remained almost stationary throughout the year at $625,- 000,000. France sent us about $200,000,000, and during the same period increased her gold re- serve in the Bank of France from $692,000,000 to $700,000,000. Although Sweden exported about 64 OUR ELEVEN BILLION DOLLARS $60,000,000 to us, her gold reserve lost only a few millions. How did the debtor nations accomplish this seemingly impossible feat? England received about $40,000,000 of gold from India and over $150,000,000 from South Africa. The chief source of the continent's gold was Russia. The countries receiving gold from the Bolshevists did not pass it directly on to us, since the United States government had taken the stand that it would not admit Russian gold be- cause the Moscow government had no title to it. Having no such scruples, certain European gov- ernments put the Russian gold as it came to them into their treasuries and sent us an equivalent amount from their own reserves or reminted the czarist-soviet gold and shipped it to America as, for example, "made in Sweden." While managing to preserve their gold reserves intact through 1921, Great Britain, France, Italy, Switzerland, Holland and the Scandinavian coun- tries succeeded during the year in reducing their total of paper currency about $2,000,000,000 at its face value. But this decrease was offset by the large increases in Germany, Austria, Poland, Hungary and Rumania. Table 10 (see page 62 A) shows that the face or par value of the outstanding paper of thirty-six principal countries of the world amounted toward the end of 1921 to $123,000,000,000 as against $82,000,000,000 in 1920, $55,000,000,000 in 1919, $40,000,000,000 in 1918 EUROPE'S PAPER, AMERICA'S GOLD 65 and $7,500,000,000 in 1914. Due to the great in- crease in paper last year, exceeding many times the billion dollar increase in the quantity of visi- ble gold reserve for the same period, the ratio of total gold to total paper stood at the end of 1921 at a lower point than in any previous year — less than 7 per cent, as compared with 14.7 per cent in 1919, 18.4 per cent after the Armistice and 63.3 per cent at the beginning of the war. And the greatest inflation crimes were com- mitted by Europe, with her $115,000,000,000 and more of paper and less than $3,500,000,000 of gold. VI FOREIGN TRADE AND FOREIGN EXCHANGE On a private business basis, without taking into account a dollar of the $11,000,000,000 and more of governmental debts, Europe owes the United States a sum exceeding her total gold re- serves. This commercial debt is due largely to the balance of trade in our favor, and the credit side of trade with the countries of Europe will be ours for an indefinite period. The favor- able balances for our world commerce from pre- war peace to post-war peace are as follows: TABLE 11 RISE AND FALL IN ANNUAL FOREIGN TRADE BALANCE OF THE UNITED STATES BETWEEN 1912 AND 1921 Year Exports Imports Excess of exports 1912 $2,399,216,000 2,484,018,000 2,113,625,000 3,554,670,000 5,482,641,000 6,233,514,000 6,149,085,000 7,920,425,000 8,228,016,000 4,485,122,000 $1,818,217,000 1,792,596,000 1,798,277,000 1,778,598,000 2,391,635,000 2,952,467,000 3,031,213,000 3,904,364,000 5,278,481,000 2,509,025,000 $580,999,000 1913 691,422,000 1914 324,348,000 1915 1,776,072,000 1916 3,091,006,000 1917 3,281,047,000 1918 3,117,872,000 1919 1920 4,016,061,000 2,949,535,000 1921 1,976,097,000 ■ - Discussing the trade outlook between this coun- try and Europe, Secretary of Commerce Hoover 66 FOREIGN TRADE, FOREIGN EXCHANGE 67 said at the beginning of the year : "One great dif- ficulty is the fact that Europe is not able to sell us any great quantity of goods and must, there- fore, be carried to a large extent on credit. For example, during the year just closed we sold to Europe approximately $2,300,000,000 worth of goods and bought approximately $760,000,000 worth. Either Europe must find a way of in- creasing the sale of goods directly or indirectly to this country or she must continue to be carried to a large extent on American credit, if her pur- chases of American products are to remain up to the present standard." Table 12 (see page 68) gives an analysis, by the Department of Commerce, of the United States' foreign trade for 1920 and 1921, classified by great groups according to the use or degree of manufacture. The extraordinary growth and sharp decline in our exports and imports shown in Tables 11 and 12 is a matter that comes home to every American. In these figures lie several hard facts. The one uppermost in the American mind is the difference between prosperity and "bad times," represented by the $3,343,000,000 drop from 1920 to 1921 in our exports and by the $424,000,000 decline in exports for December, 1921, as compared with December, 1920. Al- though partly due to the fall in prices, the figures showing this break in exports should prove to all American business men, farmers and workers o H H H m 2 Q j a < cn oo co oo ■>* in ncnujnccoo COOO>*tD"-< oonccno) nOMWN m IDOOMOOMtO 00 C^ O •<«< CO •* 00 00 -_o0'*oq if in d> en io t-T OOCiCOOlCN ffltCKO «!D NHrtUJOH moo" CMOS t-KO IN 00 00 ■>* c N ©IO 00 03 CO s OS OOtJI ©-< cc oo HN^lOOO moOQioo* O5tOt5lONC0_ jotoe^fcvfi-riir ihOM»I»N OlOlMMlO IN -i CN ■>>< ■* © •qi io t~. *J> 00 >o ONioracBiH (D^io^in oo •£> ■* CO O) t~ O_0J00O0S-h nrio5-<#cco moiOfHfi 00 CO CO CO tO I-I00-HC!©~H 00 t"* CO O IN ■»)< IN CO W IN Ol s-a o a >> ■»■«?£ s «-; 3 N"** M .2 C C3 to (0 oj C u 0.0 f> 3 Ji is o -a u J3 s :-' ^O _3 FOREIGN TRADE, FOREIGN EXCHANGE 69 that it is an established fact that the United States, which increased its means of production, both industrial and agricultural, to abnormal pro- portions during the war, is coming back to a stage of production approaching a level nearer that of 1913 than the peak years of the war. The ex- porting producer has to face this hard fact and act accordingly, even though Europe and other parts of the world are still suffering from an under- consumption that matches our overproduction. Reviewing our foreign trade for the fiscal year 1920-21 the director of the Bureau of Foreign Trade and Commerce, Julius Klein, said: "The decrease of more than $3,000,000,000 in the value of American foreign trade in the last fiscal year, as compared with the immediately preceding year, was clearly the effect of the world-wide trade depression appearing as an aftermath of the war. To a great extent lower prices, rather than diminished quantities, are responsible for the decrease. In fact, a compilation of exported commodities, reduced so far as possible to a weight basis, shows weight increases of 34 per cent for the groups of raw materials and of 37 per cent for foodstuffs in 1921 over 1920, with a decrease of four per cent for such partly or wholly manufactured articles as can be shown in weight. The final totals, including articles form- ing 69 per cent of the value of domestic exports in 1921, indicate a decrease in value of 19 per cent but an increase in weight of 23 per cent in 70 OUR ELEVEN BILLION DOLLARS the exports of 1920-21 as compared with the pre- ceding year, 1919-20. "Aside from the effect of lower prices, how- ever, other causes contributed to the lower for- eign trade totals. It is evident that the United States no longer enjoys the advantage, possessed during and after the war, of being practically the only country able to supply the larger needs of the world. The European countries are again raising crops on the former battlefields and no longer depend on this country for the greater part of their food supplies, as was the case during and immediately after the close of the war. Like- wise, they have satisfied their most pressing needs for our raw materials, which were required in unprecedented quantities in 1919 and 1920 for the re-establishment of their manufacturing indus- tries. In the world markets for manufactured goods, as well as raw and partly manufactured materials, we no longer have the field to our- selves, but must compete in prices and terms with other countries. "The foreign exchange situation, with the dol- lar at a premium over the currencies of most other countries, had a depressing effect on our exports in the last year. With exchange rates of foreign currencies depreciated to a point which made our prices in dollars prohibitive, with de- clining imports, with the impossibility of settling in gold the balances already due us, with the dif- ficulty of arranging further credit facilities, with FOREIGN TRADE, FOREIGN EXCHANGE 71 cancellation of orders, with rejection of goods al- ready shipped and the dishonoring of drafts, it was impossible for exports to continue at the rate of $500,000,000 to $600,000,000 per month, to which they had grown during and directly after the war. In fact, an unavoidable drop in our exports was predicted long before it took place. Beginning with the early months of 1921 the monthly totals began to decrease, and during the last four months of the fiscal year the average was $350,000,000 per month. Even at this rate, if continued, our exports would average 75 per cent above the pre-war totals." But the figures of the Federal Reserve Board show that the volume of at least part of the export trade of the United States for 1921, calculated on a 1913 basis, was noticeably less than a 75 per cent average. A general idea of the actual trend in our foreign trade may be had from Table 13 (see page 72), which combines the Federal Re- serve Board's index figures for the value and volume of selected exported and imported com- modities, all on a 1913 basis, with index figures showing the annual value, in terms of the fluc- tuating dollar, of exports and imports from 1913 to 1921, along with the index numbers of the Bureau of Labor Statistics for wholesale prices of commodities in the United States. The actual movements of our post-war foreign trade are traced month by month through the years 1919, 1920 and 1921 in Tables 14 and 15 «> ri CO a Q si 9 P H 9 H fa O w S & o > w p > o 42 O a S Wholesale prices of goods imported (c) Value of selected imports (6) Volume of selected imports (6) Value of total imports (a) 009M010H8M Wholesale prices of com- modities in U. S. (d) hhhhmhMMh O a K W Wholesale prices of goods exported (c) O Tfl^-H Value of selected exports (6) Volume of selected exports (b) o ^©O Value of total exports (a) rt .-h IN -i ea 111 ^c^rHrHi-Hi-lrHCNO) go o a,, 2 & 55-rt Q a> c .-S M— i fl g2SP S °» 0.5 h*;Jk FOREIGN TRADE, FOREIGN EXCHANGE 73 (see pages 74 and 75), prepared by L. B. Mann, of the Division of Analysis and Research of the Federal Reserve Board. To throw light on how much of the increases in the value of American foreign trade has been due to increases in prices and how much reflected the increased volume of shipments and to determine the relative impor- tance of changes of prices and changes in vol- ume of shipments upon the value of American exports and imports, monthly exports of 29 com- modities and monthly imports of 27 commodities were studied. The tables show these two major groups of commodities divided into three minor groups — raw materials, producers ' goods and con- sumers ' goods. For purposes of combination the volume of shipments of each commodity was translated into dollars by multiplying by its aver- age wholesale price in the United States in 1913, the combined values thus obtained being con- verted into index numbers by making the average monthly value in 1913 equal to 100. The value of exports or imports of each commodity, as shown by the Department of Commerce figures, are represented in the tables by a comparable set of index numbers, the values of the commodities in each group having been added and their aver- age monthly values in 1913 taken as a base. Referring to the index numbers of Table 14 (page 74), Mr. Mann says: "The volume of mer- chandise exports of these selected commodities was slightly higher in January, 1919, than in the 74 OUR ELEVEN BILLION DOLLARS TABLE 14 INDEX NUMBERS OF VALUE AND VOLUME OF EXPORTS DURING 1919, 1920 AND 1921, BASED ON AVERAGE MONTHLY FIGURES FOR 1913 Year and Raw materials (12 com- modities) Producers' goods (10 com- modities) Consumers' goods (7 com- modities) Total exports (29 com- modities) Value Volume Value Volume Value Volume Value Volume 1919 January . . February . March. . . . May July August . . . September October. . . November December. 219.6 147.8 152.2 162.5 167.0 251.1 185.2 212.6 174.7 186.4 312.0 289.8 98.2 68.3 67.3 76.0 78.9 114.8 84.0 94.9 82.1 82.1 116.2 104.6 382.4 322.9 350.7 382. r 311.0 520.7 310.7 349.5 368.6 349.7 320.7 258.5 159.0 125.9 139.3 166.9 137.7 247.1 147.9 168.8 166.9 148.1 135.7 113.9 405.0 405.7 481.3 606.9 435.0 761.6 415.8 393.5 340.8 358.3 369.0 350.8 186.4 175.2 202.3 264.9 192.9 315.1 172.7 161.6 142.4 150.6 153.5 143.1 268.1 211.0 230.7 264.6 229.5 369.8 239.2 258.1 222.2 232.4 323.6 298.7 124.7 99.0 106.1 129.3 111.4 174.7 110.9 117.5 104.1 104.4 126.9 114.6 Average . 205.1 88.9 352.6 154.7 453.5 188.5 262.3 118.6 1920 January . . February . March. . . . April July August . . . September October. . . November December . 314.7 232.6 304.0 228.7 208.3 185.1 239.2 235.3 257.6 331.2 269.9 260.7 108.7 81.9 106.0 79.5 73.5 64.9 78.1 78.7 82.5 118.7 111.1 122.4 322.1 305.6 357.4 359.3 352.7 315.3 380.0 334.9 300.4 391.4 306.0 458.5 134.9 122.4 148.8 147.5 150.4 126.4 164.4 135.4 119.7 152.2 121.8 186.0 304.3 342.1 477.5 444.3 509.1 393.8 354.8 253.7 259.7 327.2 309.3 311.8 116.2 136.8 186.0 169.1 205.5 151.5 142.3 94.7 94.0 124.4 111.6 123.3 313.4 259.4 341.2 280.2 277.0 235.3 272.8 247.1 261.6 335.4 280.4 287.0 112.9 98.7 128.9 107.1 111.9 91.1 101.3 87.7 88.6 123.1 112.2 128.4 Average . 255.6 92.2 348.6 142.5 357.3 138.0 282.6 107.7 1921 January. . February . March. . . . June July August . . . September October . . . November 199.8 158.9 132.3 117.4 147.4 151.8 153.6 195.4 151.9 183.3 137.3 105.2 91.0 78.2 76.6 97.7 107.9 111.6 142.7 115.7 121.7 95.1 466.1 325.6 244.2 212.1 157.2 135.0 118.6 118.2 129.3 120.7 126.6 187.9 141.0 104.4 102.7 81.8 74.4 68.3 68.1 79.1 83.5 83.7 277.9 219.3 205.5 193.2 169.9 199.7 195.7 227.9 199.4 153.3 146.3 126.0 116.4 122.4 122.5 112.8 135.1 131.8 164.1 147.5 119.2 108.6 236.8 184.2 155.5 139.6 152.5 159.4 158.7 195.1 159.0 172.4 138.1 117.6 101.6 91.1 89.9 100.0 111.3 112.5 140.9 119.9 117.6 97.3 Average . 153.8 103.1 183.2 95.8 194.1 126.1 156.7 107.9 Raw materials: Lumber, wheat, corn, oats, barley, leaf tobacco, cotton, refined copper, anthracite, bituminous coal, pig iron, crude oil. Producers' goods: Sole leather, upper leather, steel rails, structural steel, steel plates, copper wire, acetate of lime, cottonseed oil, fuel oil, gasoline. Consumers' goods: Wheat flour, cotton cloth, boots and shoes, hams and shoulders, lard, illuminaing oil, refined sugar. FOREIGN TRADE, FOREIGN EXCHANGE 75 TABLE 15 INDEX NUMBERS OF VALUE AND VOLUME OF IMPORTS DURING 1919, 1920 AND 1921, BASED ON AVERAGE MONTHLY FIGURES FOR 1913 Year and Raw materials (10 com- modities) Producers' goods (12 com- modities) Consumers' goods (5 com- modities) Total imports (27 com- modities) Value Volume Value Volume Value Volume Value Volume 1919 January . . February . March. . . . April May June July August . . . September October. . . November December. 144.1 165.6 182.8 228.2 282.0 292.5 311.8 323.8 487.7 390.3 426.2 340.6 88.5 94.9 109.2 125.9 161.4 171.4 171.7 169.9 245.3 196.8 196.1 158.9 207.4 258.9 269.4 305.2 353.0 243.1 281.6 167.1 281.9 285.9 282.5 236.4 143.3 180.2 223.0 237.7 242.8 167.2 209.1 113.8 189.2 201.9 213.9 194.2 120.0 121.6 226.5 175.8 225.2 197.3 320.0 272.6 326.9 254.3 265.0 244.5 95.5 97.9 165.1 137.1 178.1 144.3 204.4 153.0 169.8 137.0 143.5 144.4 162.6 191.3 222.2 246.5 297.3 257.1 302.4 257.6 383.6 327.5 344.6 285.2 109.1 125.6 158.6 167.4 193.0 165.4 190.3 147.3 213.1 188.8 193.8 169.0 Average . 298.0 157.5 264.4 193.0 229.1 147.5 273.2 168.4 1920 January . . February . March. . . . April May July August . . . September October. . . November December. 452.2 411.4 431.9 375.2 305.9 352.6 275.8 259.8 192.8 151.6 140.8 119.5 206.1 173.2 192.7 173.9 127.5 157.3 121.0 122.3 101.3 89.1 86.3 79.4 395.6 498.5 548.1 482.2 501.0 789.6 819.7 750.1 424.4 298.2 335.8 262.6 244.8 289.4 338.8 262.5 227.2 257.2 256.8 256.3 165.3 131.5 166.4 133.0 272.3 225.3 302.1 337.6 181.5 252.4 288.0 248.5 170.1 167.5 128.7 95.1 152.9 126.9 173.0 193.7 108.1 149.2 168.3 160.0 120.5 120.4 102.4 91.6 398.7 408.8 450.2 407.1 353.8 492.6 475.2 435.4 272.6 207.7 209.2 166.9 211.1 206.9 241.2 208.6 159.6 191.4 176.9 176.0 127.1 109.2 117.3 100.4 Average . 289.1 135.8 508.8 227.4 224.4 166.7 356.5 168.8 1921 January . . February . March. . . . April June July August . . . September October. . . November 99.2 144.1 154.6 179.7 137.1 132.6 135.3 160.3 134.1 120.5 147.2 74.5 118.2 160.7 153.4 98.7 94.5 99.3 116.7 102.8 96.2 115.1 181.6 201.7 249.7 247.7 172.2 137.3 115.7 146.3 103.7 117.5 131.8 130.8 143.5 177.5 177.7 150.2 152.5 126.5 165.0 137.8 173.5 199.5 112.3 117.6 148.9 158.9 140.3 111.7 112.3 117.3 97.6 115.0 149.8 123.9 135.5 178.9 185.1 162.1 130.4 121.4 129.8 99.4 116.5 149.2 131.5 160.1 188.0 200.5 150.4 130.4 124.0 147.3 116.4 118.4 142.1 102.6 130.0 169.7 167.2 127.3 120.9 112.6 136.0 114.6 126.9 150.6 Average. 137.0 113.6 156.7 162.8 129.2 141.4 1 is 1 135.6 Raw materials: Cotton, refined copper, hides and skins, lumber, silk, tin, flax seed, leaf tobacco, pulp wood, wool. Producers' goods: Extract of quebracho, glycerine, nitrate of soda, mamlla hemp, jute, burlap, sisal grass, sulphate of ammonia, india rubber, cane sugar, news print, wood pulp. Consumers' goods: Cocoa, coffee, tea, bananas, olive oil. 76 OUR ELEVEN BILLION DOLLARS average month of 1913, while the total value of such exports was over two and one-half times as great. This divergence between the relatives of volume and value of exported merchandise tended to become greater until September, 1920. From October, 1920, to September, 1921, however, the value and volume series showed a marked ten- dency to return to their 1913 relationship. Eaw materials were first affected by this curtailment in relative values, but consumers' goods and pro- ducers ' goods very soon followed the same course. In October, 1921, the value of raw materials once more showed a relative increase as compared with the volume, while consumers' goods and produc- ers' goods registered a similar movement in No- vember. ' ' In regard to the imports indexed in Table 15 (page 75), the following points are made: "The volume of the selected group of imports in Janu- ary, 1919, was only slightly larger than in the average month of 1913, while their value was over 50 per cent greater. This difference between relative volume and value of imports for the group as a whole tended to increase until July, 1920, but after that month declined rapidly, until the volume on a 1913 base in October, 1921, was greater than the value. This decline started first in the consumers' group in October, 1919, was registered by raw materials commencing with June, 1920, and by producers ' goods commencing with August, 1920. It was finally entirely FOREIGN TRADE, FOREIGN EXCHANGE 77 checked in November, 1921, but average prices of consumers ' goods had already commenced to show a reverse movement in July, 1921. "The value of both exports and imports in- creased more rapidly than their volume during 1919 and the first half of 1920. Since the summer of 1920, however, these values have shrunk very rapidly and in recent months values of selected imports are relatively lower than in 1913, while values of a selected group of exports are only about 40 per cent higher than they would have been at 1913 prices." The excess in the volume of trade for the year 1921 over that for 1913 causes 0. K. Davis, sec- retary of the Foreign Trade Council, to ask, in the New York World: "Why do we Americans so sedulously indulge in bewailment? Why per- sist in seeing the dark as well as the wrong side of these matters? "In 1913 we were selling substantially all that we produced. The war came on, with its amaz- ing expansion of our productive capacity and our curtailment of consumption. In every industry there is an element, roughly estimated, as the last 20 per cent, the sale of which is essential to the prosperity of the whole operation. This applies equally to the steel maker, the farmer and to any person or concern engaged in industry. Costs are met, still roughly speaking, with the 80 per cent, and profits accrue from the 20 per cent. "A farmer produces 1,000 bushels of wheat 78 OUR ELEVEN BILLION DOLLARS and sells only 800 bushels. If he cannot sell the remaining 20 per cent he will have a hard year — his profits will be cut off entirely. And precisely the same is true of the industries. "Before the war we had developed an export trade of about $1,000,000,000 in finished manufac- tures. Then came the war, with the enormous stimulation of production capacity and corre- sponding vital diversion of labor from agriculture to industry. We came out from the war with a capacity for production for export far beyond what our normal increase would have been. We accomplished in a jump, under the forced draught of the war, such an industrial development as would normally have been accomplished only over a period of two or three decades. "At the same time, we curtailed consumption to a point where there was an enormous expansion of our customary increment of wealth. In other words, we saved more than we ordinarily would have saved, and this extraordinary saving under the inspired impetus of the war bulks so large in the aggregate that we came from the war very greatly a creditor nation instead of the substantial debtor nation we were when we entered the war. Thus, we achieved in financial status in a single jump the same thing we achieved in industrial status, excepting that it would have required twice as long to build up such a credit as it would have required to build up such an industrial de- velopment. As a people we will have to learn FOREIGN TRADE, FOREIGN EXCHANGE 79 what the last 20 per cent of industrial production means to the economic health of the country." America is learning, at great cost, that the mar- gin of surplus production over domestic demand can break the domestic market and with it the domestic demand. Producers in the United States — industrial and agricultural leaders and workers alike — are beginning to realize that the country's production must be readjusted on a basis that provides for a surplus of production to meet the actual demand of foreign markets, a demand which will increase as Europe revives but which can never reach the high level of the war until another great war is waged abroad — after the debts of this war are settled — or the world's population has greatly increased. European countries are still far from the point where they can increase their production and ex- ports so that an equilibrium against our con- stantly increasing creditor position can be reached. Before the war we paid Europe $250,- 000,000 every year for capital invested in this country; now her annual interest debt to us amounts to about $800,000,000. The remedy for the situation is the reciprocal increase of exports and of imports, and a field of foreign trade new to us — foreign investment. But first Europe must produce the goods. How she is failing to do so is represented in Table 16 (see page 78A). With the problems of international trade, infla- tion, gold reserves and budgetary equilibrium, the 80 OUR ELEVEN BILLION DOLLARS problem of exchange is to be considered. The effect, not the cause of the world's economic troubles, exchange has fluctuated in the last few years in an amazing manner, rising or falling with every financial breeze or political sneeze. ' ' Stabilize exchange ' ' is the cry that has gone up throughout the world, as if stabilization were the cure-all for the world's post-war ills. But under the present economic and political conditions in Europe it would be just as impossible to stabilize exchange as to stabilize Lloyd George. Since the removal of the artificial supports pro- vided by the United States for allied exchange during the war, numerous artificial methods have been suggested for the stabilization of exchange, and a few tried, unsuccessfully, of course, since the credit position of Europe is to be strength- ened and her buying power increased only in the natural way — hard work and strict economy, in- creased production and normal consumption. So great is the gap between the dollar and most Euro- pean currencies to-day that not even all our gold could bridge it without Europe's reform. Sta- bilization of exchanges will never be brought about so long as Europe's economic and political instability continues. The disordered state of European exchanges is shown in Table 17 (see page 81), which gives the high and low European exchange rates for the year 1921 and their averages for January, 1922, compared with parity. UE8 Df imports ports, — 3f exports iports, + Belliger Belg Buhj2 Finli2 Frai Gen 9 Gre< 6 Italj8 Port 1 Unit 9 Neutral Dem Boll Spai S\v 5w tcu'j Countri An Bras Ja Uni pa4 British A us far. In N dii' (o) (b) (e) (d) ■ if) >u {h) (t) 0> (k) U> m) (n) (>) . (r) 000,000 000,000 000,000 000,000a 000,0006 000,000 000,000 000,000 000,000 000,000 ,-C(l It ."> 3,000,000 4,000,000 ,000,000 ,000,000 000,000 ,000,000 c 5,000,000 000,000 ,000,000 ,000,000 ,000,000 ,000,000rf 000,000 .Soutjl.000,000 Imports 7,728,937,000 e '2;626,8bi,666/ 23,548,000,000 6,523, 650,000/i 986,380,000 334,764,000 i 2,425,410,000 j 744.698.000A- 832,311,000/ 46,601,000m l.li'U. 224,000/1 2,509,025,403 43,657,000m 674,96 l,000p 29,442,000 v 28,4 11, 000 r 1921 Exports 5,447, 104,000 e ' 1 1993,772,666/ 21,553,000,000 '2;G77,16i',006a '703,130,666 844,778,000 i 1,239,871,000.; 356,677,000A- 681,376,000/ 36,256,000m 975,920,000/1 4,485,122,690 33,225,000<> 629,949,00Op 31,181,0007 11, 758,000 t Excess of imports over exports, — Excess of exports over imports, + — 2,281,833,000e '^633,029,606/ —1,995,000,000 — 13,000,000,0001/ —3,846,489,000/1 —277,250,606 +510,014,000/ -1,185,539,000; — 388,02 1,000 k —150,935,000 / —10,345,000m —318,304,000/1 + 1,976,097,293 — 10,432,000u — 15,012,000p + l,739,000y -1 6,653,000 r : PRINCIPAL CIM'NTRII S Unit 19.3 1919 i«i Cunt™ m^* Exports ExeesToTeiporM [mporta _ Excess of import* Excess of exports ^ Exports Excess of exporU B '"ffi™,' u CO ° n " ie * °' E "° Pe: Franc Franc Krone Gulden I. . .' TSE ■l."-;'i. ,; .1 1 H3-.ri.HMJ. 1 Lm|ooo!ooo —134.000.000 "jUJUMMMM. +23.000.000 — 25,OUU,UO0 +09l!o00;000 --:(, ■ aa i!ooo! I.Ih-TJMMI.kmi ■ ■ 79f>|l.H«l!lHXI ^l-'UXX.M."*) —669,000,000 — 23SiO00!0O0 + 4,018;UOO!000 +48,000,000 +732,00o|000d ■i 22.lKNi.IMU 7,728.937.000, 5,„7.,«.00O, , , s] S(((MK) PiS Franco Germany Countries outside Europe United States N.Vzf-nland.'.;: 2,026,801,000/ 1,993,773,000/ B44,778,000i | J 1 ...S7_|.,I,MI ; esilsTalooo, 36,25fl,b66n 975,920,000i 33,236,0001 629.949.00Op —038,029,000/ — 1 3.000,000.000 b 980,380,666 ■,.i - 4,000 .•.^■-..IM.iHin, nalauioooi j/HiitTij.yi.i.L 29,4*2,666i -277,250,000 | 510,01 1,000, 1 lS.V-.ilt.lMKlj ■ |N\"21,INM* | io,sa 0001 +l,97fl;097;298 —10.432.00Oq —.5.0 12,000 j» hi liirltjilinp .\l-ii. i-I.-.rr I-...I,,. eSSlt Total 1 Total: S P h3 S^ S° ° Q S £ <: < o o « g S & < "w &, a o H go > « < S u 3 ft. w p O«OOO*ONONOOOOOO00 t^ Ci*Or~OiO SSCOMOH MHrtMW(OM(Bias*OOMCBI»OS O00r»t~00 — iU!Mh CO CO CO O O t- © •* OtO ^J< Ot»C«H[«0'»0>! l O«ONOON OS ffl O ■* •* O) ©OOOOCOOOOOOOOOOCN .-i CO •-> •-> CM h nMionoonooooicnH •t-.Qi/s OhoONOOCOhO^NOO • ■*»< © »< CN ^ IN >-i g 9 : : : : :| : : : : :d : :J t2 ( 2g«S8.gS.sSgg-§g £ 2 £ K * £,2 5) a> (S fll o °-3 o g o 3 t* 3 k. 5J u j~ ?,.« £-c i^ « .©-a. to ■OMgu-a ^grjcj o a s a .2 Sj3 g o 3 S a • *Ss Si.S £ E £ => «s S-SSosd iSoog,!" gQKZajoDt 55 82 OUR ELEVEN BILLION DOLLARS The chaotic condition of international ex- change and its harmful effect as one of the factors hindering the recovery of the world's commerce is summed up by the statement of the United States Section of the Inter-American High Com- mission: "For the most part the exchange situa- tion merely reflects the economic situation. Ex- change has been likened to a barometer; the barometer indicates the weather, but it does not make the weather. The dislocations which still exist in the whole international economic struc- ture and the derangements of the international price structure are mainly responsible for the disordered exchange situation. The exchange situation will improve as the world's economic recovery goes on, especially in Europe, and par- ticularly as the existing distortions in the price structure disappear. 11 Confusion in the existing exchange situation shows itself principally in two ways: First, in the relative premiums and discounts on the cur- rencies of different countries, and, second, in the disastrous daily fluctuations of the currencies of some countries. "The export trade of countries whose cur- rencies are at a premium is at a serious disadvan- tage. The trade of the United States is suffering more from this derangement than any other coun- try, because its currency is at a premium with respect to practically every other country. The other American republics are, however, suffering, FOREIGN TRADE, FOREIGN EXCHANGE 83 if not in the same degree, nevertheless in much the same way as the United States wherever a similar relationship exists with regard to their respective currencies and to the currencies of the different states of Europe. "It is to be expected that in the course of time price levels and wage levels will rise in countries with depreciated currency and will decline in countries with premium currencies until an eco- nomic equilibrium is once more attained. Mean- while, however, while changes in the relative pre- mium and discount on currencies are going on, the process is causing incalculable inconvenience and serious injury — economically, financially and socially — both to the premium and discount countries. "The second phase of the derangement, that is, the daily fluctuation of exchange, is destruc- tive of sound and progressive business, because it drives every international transaction into the realm of speculation. The daily fluctuation in exchange in many instances absorbs more than the normal margins of profit, and thus either enlarges the margins or drives business to a cash basis instead of the accustomed credit relation- ships. In either case the result is a decrease in the entire commerce of the world. "The fluctuations are less extensive between the American republics than they are between the American republics as a group and Europe, but it is impossible to dissociate inter-American ■o 13 ■SI! ■e-cs •e-e u o cn cn o • *ooco -iOOOO MOOOh icr* OOOOOUO • in ■ r»COf~t^t^ ON U5t~CO00e3> • C0r»«rH HiH«i-li-l CN-H cT ; CO rO n NNOOOfl cn a> O00INHN00 COOOO-HCB ouo CO 00 OOOOOO O '* CO Ol lO >-l CM ri CO CN .-I CN>-1 WrtrtrtCNCN CNrH rn" © cn CO Tl< © C> ■*•> -H cNCNt~t~ OCO 00c0O-*CNm OOOOrt^CNOs oooor^f «0 Tf -< ■* C35 O <-i ■* O CO IO -^ CO CN CO CN CO CO CNCN CNCN CNCN CNCN ef«* t+ OS CO-Ht- ■rJteN to -r *N(NO COCN Oh«) 00-1 coooio OC5CNCO CO il OO^CN NCO <35 i-*O>C0 CO 0) CNCNC0C0 CNCN i-ccNCN ^ C3 oo O en a co cocn mo CNCO OlOS "5 00 co CO c o> NO© t~CD Ci oo CO -5- CM CN CO CO CO ■1CNCN t> CN OS CO OOCO^-^ r~co int^oo — -" -«»< CO CO OO CN 00 Tie* T|IN U5NCS mo » CO CN Ol 01 CNCNC0CN CO e 00 r~ 0) OS ■* cm coin COIN CO 00 ■>■* CNiOTt" •*m CO JD - 1- -HCS CO COCN coco o CN NiH rtCNCN'-i "5 f- t» co CO COU)0)iS r»r-< «-<©CN cor> m CO COC4 niiiO'* Csc ■V-hO cN^-i <35 ■<* co ■C — o«oinioc COO C?hOO*0 o o OJC OO^h--iC o>c OOOOOO Cl •<->•< ■«-• E co oooooc ooo oa oo o *-* oooooo ooo oo oo o o o. o <|5 W o 5 *o W o 3 u £ o • w GO a 3 o c c CD « 1 T. 3 £ a (3 o 1 c O 3 c ! 3 V 3'G >> s o-2 c tr £ <» co**: e-S-e • o ■5 r> S •"' o o> o-g2^2-3 .CO II JJOl 3 CO^ II 3^9 "3«" - ,> 3 *i< 2 M •H G .3 o>-» C0 o 3CO ** «) MCHcH ^H ro ^ ^cfl_^ t Oi *- » 3 73 >>t-< a> -° M >>•« !3 -° cu S S a%"a « FOREIGN TRADE, FOREIGN EXCHANGE 85 exchange relations from the European relation." The need of every country to-day is not only stable exchange but also a stable price level. Stable prices are possible only when there is neither inflation nor deflation. How to secure this needed stability awaits a practical solution. The plan of stabilizing prices by stabilizing the value of gold met with little support at the Inter- national Financial Conference. Money, whether specie or paper, has been varying in value throughout the centuries, yet its movements dur- ing the war and post-war periods have kept its holders more than ever on the anxious seat be- cause of the instability of its purchasing power through fluctuations of the dollar, pound, franc and other units in foreign exchange, through variations in the premium of gold in paper money countries, through upward and downward move- ments in price index numbers. The result has been that during the last eight years every man's money has changed its value more rapidly and more irregularly than ever before in this business generation, whether resting quietly in his pocket or deposited in a bank or invested in securities, without his being able to lift a hand to help or hinder. This instability is indicated in the index numbers of Table 18 (see page 84). The instability of the purchasing power of the dollar during the War of 1812, the Civil War and the World War, and the years immediately following, is shown in this tabulation of index 86 OUR ELEVEN BILLION DOLLARS numbers for the prices of food, the figures calcu- lated from the average prices of foodstuffs for five years before each of the three wars : TABLE 19 INDEX NUMBERS OF FOOD PRICES IN THE UNITED STATES DURING THREE WAR AND POST-WAR PERIODS War of 1812 Civil War World War 1810.... .. 165 1860 93 1913 102 1811.... .. 160 1861 93 1914 102 1812 . . 162 1862 109 1915 102 1813 .. 189 1863 137 1916 126 1814 . . 235 1864 176 1917 178 1815.... .. 185 1865 200 1918 200 1816.... 157 1866 176 1919 219 1817 .. 159 1867 159 1920 250 1819 .. 137 1868 148 1921 150 1820 .. 117 1869 142 1922 134a 1821 112 1870 131 1923 (a) Index number for January only. VII g e r man r eparatio ns and . - prepar; ' In the first years of the war we heard from the Germans of the huge indemnities that her con- quered enemies, also the United States because of alleged un-neutrality, would be compelled to pay when Germany dictated the treaty of peace. Since 1919 the Germans have been trying to convince the world that they are unable to pay reparations even when reduced to 138,000,000,000 gold marks, a figure less than the losses result- ing from the German invasion of France. The will to pay, t^Freiich_say^comes before the capacity to pay, and the world sees that Ger- many has the ability to pay but not the inclination. The judgment of public opinion, based on justice, not on sentimentality, is that Germany must make restitution for the damage caused by her aggres- sion, this restitution to be limited only by her capacity t