REPARATION, INTER–ALLY DEBT, AND INTERNATIONAL TRADE
It is fashionable at the present time to urge a reduction of the
Allies’ claims on Germany and of America’s claims on the Allies, on the
ground that, as such payments can only be made in goods, insistence on
these claims will be positively injurious to the claimants.
That it is in the self–interest of the Allies and of America to abate
their respective demands, I hold to be true. But it is better not to
use bad arguments, and the suggestion that it is necessarily injurious
to receive goods for nothing is not plausible or correct. I seek in
this chapter to disentangle the true from the false in the now popular
belief that there is something harmful in compelling Germany (or
Europe) to “fling goods at us.”
The argument is a little intricate and the reader must be patient.
1. It does not make very much difference whether the debtor country
pays by sending goods direct to the creditor or by selling them
elsewhere and remitting cash. In either case the goods come on to the
world market and are sold competitively or coöperatively in relation to
the industries of the creditor, as the case may be, this distinction
depending on the nature of the goods rather than on the market in which
they are sold.
2. It is not much use to _earmark_ non–competitive goods against the
payment of the debt, so long as competitive goods are being sold by the
debtor country in some other connection, _e.g._, to pay for its own
imports. This is simply to bury one’s head in the sand. For example,
out of the aggregate of goods which Germany would naturally export
in the event of her exports being forcibly stimulated, it might be
possible to pick out a selection of non–competitive goods; but it would
not affect the situation in the slightest degree to pretend that it was
these particular goods, and not the others, which were paying the debt.
It is therefore useless to prescribe that Germany shall pay in certain
specified commodities if these are commodities which she would export
in any case, and useless, equally, to forbid her to pay in certain
specified commodities, if that merely means that she will export these
commodities to some other market to pay for her imports generally. No
expedient on our part for making Germany pay us, or on America’s part
for making us pay her, in the shape of particular commodities affects
the position, except in so far as it modifies the form of the paying
country’s exports _as a whole_.
3. On the other hand, it does us no harm to receive for nothing the
proceeds of goods, even when they are sold competitively, if these
goods would be sold on the world’s market in any case.
4. If the result of pressing the debtor country to pay is to cause it
to offer competitive goods at a lower price than it would otherwise,
the particular industries in the creditor country which produce these
goods are bound to suffer, even though there are balancing advantages
for the creditor country as a whole.
5. In so far as the payments made by the debtor country accrue, not to
the country with which the debtor’s goods are competing, but to a third
party, clearly there are no balancing advantages to offset the direct
disadvantages under 4.
6. The answer to the question, whether the balancing advantages to
the creditor country as a whole outweigh the injury to particular
industries within that country, depends on the length of the period
over which the creditor country can reasonably expect to go on
receiving the payments. At first the injury to the industries which
suffer from the competition and to those employed in them is likely to
outweigh the benefit of the payments received. But, as in the course of
time the capital and labor are absorbed in other directions, a balance
of advantage may accrue.
The application of these general principles to the particular case of
ourselves and Germany is easy. Germany’s exports are so preponderantly
competitive with ours, that, if her exports are forcibly stimulated,
it is certain that she will have to sell goods against us. This is not
altered by the fact that it is possible to pick out a few exports or
potential exports, such as potash or sugar, which are not competitive.
If Germany is to have a _large_ surplus of exports over imports, she
must increase her competitive sales. In the _Economic Consequences of
the Peace_ (pp. 175–185) I demonstrated this at some length on the
basis of pre–war statistics. I showed not only that the goods she must
sell, but the markets she must sell them in, were largely competitive
with our own. The statistics of post–war trade show that the former
argument still holds good. The following table shows the proportions in
which her export trade was divided between the principal articles of
export, (1) in 1913, (2) in the first nine months of 1920 (the latest
period for which I have figures in this precise form), and (3) in the
four months June to September 1921, these last figures representing, I
think, a not exactly comparable classification, and being provisional
only:
──────────────────────────────────┬──────────────────────────────────
│ Percentage of Total Exports.
German Exports. ├───────┬────────────┬─────────────
│ 1913. │ 1920 │ 1921
│ │(Jan.─Sept.)│ (June─Sept.)
──────────────────────────────────┼───────┼────────────┼─────────────
Iron and steel goods │ 13.2 │ 20 │ 22
Machinery (including motor cars) │ 7.5 │ 12 │ 17
Chemicals and dies │ 4 │ 13 │ 9.5
Fuel │ 7 │ 6.5 │ ?
Paper goods │ 2.5 │ 4 │ 3.5
Electrical goods │ 2 │ 3.5 │ ?
Silk goods │ 2 │ 3 │}
Cotton goods │ 5.5 │ 3 │} 15
Woolen goods │ 6 │ .. │}
Glass │ .5 │ 2.5 │ 2
Leather goods │ 3 │ 2 │ 4
Copper goods │ 1.5 │ 1.5 │ ?
──────────────────────────────────┴───────┴────────────┴─────────────
It is clear, therefore, that, though raw materials other than coal,
such as potash, sugar, and timber may yield a trifle, Germany can only
compass an export trade of great value by exporting iron and steel
goods, chemicals, dyes, textiles, and coal, for these are the only
export articles of which she can produce great quantities. It is also
clear that there have been no very marked changes in the proportionate
importance of the different export trades since the war, except that
the exchange position has somewhat stimulated, relatively to the
others, those export lines, such as iron goods, machinery, chemicals,
dyes, and glass, which do not involve much importation of raw materials.
To compel Germany to pay a large indemnity is therefore the same thing
as to compel her to expand some or all of the above–mentioned exports
to a greater extent than she would do otherwise. The only way in which
she can effect this expansion is by offering the goods at a lower price
than that at which other countries care to offer them; putting herself
in a position to offer them cheap, partly by the German working classes
lowering their standard of life without reducing their efficiency
in the same degree, and partly by German _export_ industries being
subsidized, directly or indirectly, at the expense of the rest of the
community.
These facts, formerly overlooked, are now, perhaps, exaggerated
by popular opinion. For Principle (3), enunciated above, requires
attention. Our industries will be subjected to strong competition
from Germany, just as they were before the war, whether we exact
Reparation or not; and we must not ascribe to the Reparation policy
inconveniences which would exist in any case. The remedy lies not in
the now popular nostrums for prescribing the _form_ in which Germany
shall pay, but in reducing the aggregate _amount_ to a reasonable
figure. For by prescribing the manner in which she shall pay _us_ we do
not control the form of her export trade as a whole; and by absorbing
for reparation purposes the whole of a particular type of export, we
compel her to expand her other exports to pay for her imports and
other international obligations. On the other hand, we can secure
from her moderate payments, on the sort of scale, for example, on
which she might have been building up new foreign investments, without
stimulating her exports as a whole to a greater activity than they
would enjoy otherwise. This is the correct course for Great Britain
from the standpoint of her own self–interest only.
The practical application of Principles (5) and (6) is also clear. So
far as (5) is concerned, Great Britain is to receive not the whole
of the indemnity, but about a fifth of it; whilst (6) provides the
argument which to me has always appeared decisive. The _permanence_ of
reparation payments on a large scale for a long period of years is,
to say the least, not to be reckoned on. Who believes that the Allies
will, over a period of one or two generations, exert adequate force
over the German Government, or that the German Government can exert
adequate authority over its subjects, to extract continuing fruits on a
vast scale from forced labor? No one believes it in his heart; no one
at all. There is not the faintest possibility of our persisting with
this affair to the end. But if this is so, then, most certainly, it
will not be worth our while to disorder our export trades and disturb
the equilibrium of our industry for two or three years; much less to
endanger the peace of Europe.
The same principles apply with one modification to the United States
and to the exaction by her of the debts which the Allied Governments
owe. The industries of the United States would suffer, not so much from
the competition of cheap goods from the Allies in their endeavors to
pay their debts, as from the inability of the Allies to purchase from
America their usual proportion of her exports. The Allies would have
to find the money to pay America, not so much by selling more as by
buying less. The farmers of the United States would suffer more than
the manufacturers; if only because increased imports can be kept out by
a tariff, whilst there is no such easy way of stimulating diminished
exports. It is, however, a curious fact that whilst Wall Street and
the manufacturing East are prepared to consider a modification of the
debts, the Middle West and South is reported (I write ignorantly) to be
dead against it. For two years Germany was not required to pay cash to
the Allies, and during that period the manufacturers of Great Britain
were quite blind to what the consequences would be to themselves when
the payments actually began. The Allies have not yet been required to
begin to pay cash to the United States, and the farmers of the latter
are still as blind as were the British manufacturers to the injuries
they will suffer if the Allies ever try seriously to pay in full. I
recommend Senators and Congressmen from the agricultural districts
of the United States, lest they soon suffer the same moral and
intellectual ignominy as our own high–Reparation men, to invest at once
in a little caution in their opposition to the efforts of Mr. Harding’s
Administration to secure for itself a free hand to act wisely in this
matter (and even perhaps generously) in accordance with the progress of
opinion and of events.
The decisive argument, however, for the United States, as for Great
Britain, is not the damage to particular interests (which would
diminish with time), but the unlikelihood of permanence in the exaction
of the debts, even if they were paid for a short period. I say this,
not only because I doubt the ability of the European Allies to pay, but
because of the great difficulty of the problem which the United States
has before her in any case in balancing her commercial account with the
Old World.
American economists have examined somewhat carefully the statistical
measure of the change from the pre–war position. According to their
estimates, America is now owed more interest on foreign investments
than is due from her, quite apart from the interest on the debts of
the Allied Governments; and her mercantile marine now earns from
foreigners more than she owes them for similar services. Her excess
of exports of commodities over imports approaches $3000 millions a
year;[110] whilst, on the other side of the balance, payments, mainly
to Europe, in respect of tourists and of immigrant remittances are
estimated at not above $1000 millions a year. Thus, in order to balance
the account as it now stands, the United States must lend to the rest
of the world, in one shape or another, not less than $2000 millions a
year, to which interest and sinking fund on the European Governmental
War Debts would, if they were paid, add about $600 millions.
Recently, therefore, the United States must have been lending to the
rest of the world, mainly Europe, something like $2000 millions a
year. Fortunately for Europe, a fair proportion of this was by way of
speculative purchases of depreciated paper currencies. From 1919 to
1921 the losses of American speculators fed Europe; but this source of
income can scarcely be reckoned on permanently. For a time the policy
of loans can meet the situation; but, as the interest on past loans
mounts up, it must in the long run aggravate it.
Mercantile nations have always employed large funds in overseas trade.
But the practice of foreign investment, as we know it now, is a very
modern contrivance, a very unstable one, and only suited to peculiar
circumstances. An old country can in this way develop a new one at a
time when the latter could not possibly do so with its own resources
alone; the arrangement may be mutually advantageous, and out of
abundant profits the lender may hope to be repaid. But the position
cannot be reversed. If European bonds are issued in America on the
analogy of the American bonds issued in Europe during the nineteenth
century, the analogy will be a false one; because, taken in the
aggregate, there is no natural increase, no _real_ sinking fund, out
of which they can be repaid. The interest will be furnished out of new
loans, so long as these are obtainable, and the financial structure
will mount always higher, until it is not worth while to maintain any
longer the illusion that it has foundations. The unwillingness of
American investors to buy European bonds is based on common sense.
At the end of 1919 I advocated (in _The Economic Consequences of the
Peace_) a reconstruction loan from America to Europe, conditioned,
however, on Europe’s putting her own house in order. In the past
two years America, in spite of European complaints to the contrary,
has, in fact, made _very large_ loans, much larger than the sum I
contemplated, though not mainly in the form of regular, dollar–bond
issues. No particular conditions were attached to these loans, and
much of the money has been lost. Though wasted in part, they have
helped Europe through the critical days of the post–Armistice period.
But a continuance of them cannot provide a solution for the existing
disequilibrium in the balance of indebtedness.
In part the adjustment may be effected by the United States taking the
place hitherto held by England, France, and (on a small scale) Germany
in providing capital for those new parts of the world less developed
than herself—the British Dominions and South America. The Russian
Empire, too, in Europe and Asia, may be regarded as virgin soil, which
will at a later date provide a suitable outlet for foreign capital.
The American investor will lend more wisely to these countries, on the
lines on which British and French investors used to lend to them, than
direct to the old countries of Europe. But it is not likely that the
whole gap can be bridged thus. Ultimately, and probably soon, there
must be a readjustment of the balance of exports and imports. America
must buy more and sell less. This is the only alternative to her
making to Europe an annual present. Either American prices must rise
faster than European (which will be the case if the Federal Reserve
Board allows the gold influx to produce its natural consequences),
or, failing this, the same result must be brought about by a further
depreciation of the European exchanges, until Europe, by inability
to buy, has reduced her purchases to articles of necessity. At first
the American exporter, unable to scrap all at once the processes of
production for export, may meet the situation by lowering his prices;
but when these have continued, say for two years, below his cost of
production, he will be driven inevitably to curtail or abandon his
business.
It is useless for the United States to suppose that an equilibrium
position can be reached on the basis of her exporting at least as
much as at present, and at the same time restricting her imports by
a tariff. Just as the Allies demand vast payments from Germany, and
then exercise their ingenuity to prevent her paying them, so the
American Administration devises, with one hand, schemes for financing
exports, and, with the other, tariffs which will make it as difficult
as possible for such credits to be repaid. Great nations can often act
with a degree of folly which we should not excuse in an individual.
By the shipment to the United States of all the bullion in the
world, and the erection there of a sky–scraping golden calf, a short
postponement may be gained. But a point may even come when the United
States will refuse gold, yet still demand to be paid,—a new Midas
vainly asking more succulent fare than the barren metal of her own
contract.
In any case the readjustment will be severe, and injurious to important
interests. If, in addition, the United States exacts payment of the
Allied debts, the position will be intolerable. If she persevered
to the bitter end, scrapped her export industries and diverted to
other uses the capital now employed in them, and if her former
European associates decided to meet their obligations at whatever
cost to themselves, I do not deny that the final result might be to
America’s material interest. But the project is utterly chimerical.
It will not happen. Nothing is more certain than that America will
not pursue such a policy to its conclusion; she will abandon it as
soon as she experiences its first consequences. Nor, if she did, would
the Allies pay the money. The position is exactly parallel to that
of German Reparation. America will not carry through to a conclusion
the collection of Allied debt, any more than the Allies will carry
through the collection of their present Reparation demands. Neither, in
the long run, is serious politics. Nearly all well–informed persons
admit this in private conversation. But we live in a curious age when
utterances in the press are deliberately designed to be in conformity
with the worst–informed, instead of with the best–informed, opinion,
because the former is the wider spread; so that for comparatively long
periods there can be discrepancies, laughable or monstrous, between the
written and the spoken word.
If this is so, it is not good business for America to embitter her
relations with Europe, and to disorder her export industries for two
years, in pursuance of a policy which she is certain to abandon before
it has profited her.
For the benefit of any reader who enjoys an abstract statement,
I summarize the argument thus. The equilibrium of international
trade is based on a complicated balance between the agriculture and
the industries of the different countries of the world, and on a
specialization by each in the employment of its labor and its capital.
If one country is required to transfer to another without payment
great quantities of goods, for which this equilibrium does not allow,
the balance is destroyed. Since capital and labor are fixed and
organized in certain employments and cannot flow freely into others,
the disturbance of the balance is destructive to the utility of the
capital and labor thus fixed. The _organization_, on which the wealth
of the modern world so largely depends, suffers injury. In course of
time a new organization and a new equilibrium can be established.
But if the origin of the disturbance is of temporary duration, the
losses from the injury done to organization may outweigh the profit of
receiving goods without paying for them. Moreover, since the losses
will be concentrated on the capital and labor employed in particular
industries, they will provoke an outcry out of proportion to the injury
inflicted on the community as a whole.
FOOTNOTE:
[110] In the year of boom to June 1920, on a total trade of $13,350
millions, the excess of exports over imports was $2870 millions. In
the year, partly one of depression, to June 1921, on a total trade of
$10,150 millions, the excess of exports was $2860 millions.