The International Ledger
Ryan, John A.
THE COMMONWEAL December 2, 1925 THE INTERNATIONAL LEDGER By JOHN A. RYAN EUROPEAN ill-feeling toward the United States, arising out of our apparently harsh and unbending attitude toward...
...His vindication may come even sooner than the vindication which followed his books on the German fiscal conditions of 1920 to 1923...
...Two suggestive facts may, however, be mentioned: before the war, the public debt of France was the largest in the world...
...What practical difference does it make to this generation whether Italy, as the settlement requires, pays 73,000,000 fiftysix years from now, or only 7,000,000, or nothing at all...
...Ah, but this could be done if only the French people would pay higher taxes...
...Since the amount spent in the last fiscal year for reconstruction was 8,000,000,000 francs, the elimination of that item alone would reduce the deficit to 10,000,000,000 francs...
...All Americans who put forth this contention are guilty of exactly the same uncharity which characterized Frenchmen in their attitude toward Germany's capacity to pay reparations in the years immediately preceding the appointment of the Dawes commission...
...They would not yield more than 1,500,000,000 francs...
...Total payments made by Italy, however, will exceed the funded principal by less than one-fifth...
...The combined foreign and domestic debt of Frence is two and one-quarter times that of Italy...
...Hence, it would seem that the excess in the French national income is fully offset by the excess in the French annual obligations and expenditures...
...In the summary of Italy's fiscal condition, presented by the commission from that country, we are told that after deducting the minimum cost of living, the per capita income of France is two and one-half times that of Italy...
...In the opinion of these writers, the deficits in the French budget for the coming year will be 18,000,000,000 francs...
...The first part of the answer is that she cannot safely pay anything for a period of years, say four or five, during which she must endeavor to balance her budget by reducing expenditures and increasing revenues...
...As a matter of fact, French prosperity and business activity has for several years been based entirely upon credit and currency inflation...
...Adding this amount to the 8,000,000,000 which might be saved by withholding money for reconstruction work, and subtracting the sum from the 18,000,000,000 deficit, we have a remainder of 8,000,000,000 which can be cancelled only by an increase of taxation or a reduction in the interest paid to the holders of government bonds, or by both methods...
...Why should we get excited about money that we cannot begin to collect until that far-off time...
...To be sure, if the process were carried further than suggested by Moulton and Lewis, and the interest rates to French bond-holders were reduced to 1 percent, or to nothing at all, a considerable sum would become available for that purpose...
...Moulton's statements concerning Germany's inability to make the reparation payments demanded by France and Great Britain...
...In other words, the excess above the principal to be paid by Italy in the course of sixty-two years represents an annual interest rate of less than one-third of 1 percent...
...France is prosperous enough to pay the United States money...
...Moulton was roundly accused of being "pro-German...
...As things are, there is grave danger that we shall be accused, and rightly, of the same lack of charity which was properly charged to France in her treatment of Germany during the years 1920 to 1924...
...But do Americans really wish to usurp those functions of vindictive justice which God has claimed for Himself...
...Her annual expenditures are more than two and one-half times those of Italy...
...This would be "the line of least resistance...
...Constantine E. McGuire, produced Germany's Capacity to Pay...
...We may take it as axiomatic that France cannot begin to pay instalments on her debt to the United States until her budget is balanced...
...This assertion is quite as general and slipshod as that about French "prosperity...
...The obvious refutation of all this slipshod reasoning is that the current prosperity in France is not sufficient to enable the French government to meet its domestic obligations and to balance its budget...
...It would not provide anything for payment on the French foreign debts...
...In the following paragraphs, the attempt will be made to show that such a settlement is demanded by considerations of equity, economics and international friendship and peace...
...That is to say, the amount of money collected as revenue by the French government last year was 16,500,000,000 francs less than the amount paid out...
...An adequate statement of the reasons for the continuous and huge deficit cannot be given in this place...
...As in all the years since the war began, the deficit has been made up by borrowing...
...It is of exactly the same kind as that which characterized Germany in the years 1920 to 1922...
...How much, then, is France able to pay...
...that is, a practical moritorium for five years, and gradually increasing payments for the remaining fifty-seven years, so that the total amount returned to the United States would be about 20 percent in excess of the funded principal, or a total of about $6,000,000,000...
...The premises from which this conclusion is drawn seem to run about as follows—"France owes the United States money...
...Every economist who has studied the question now knows that France cannot for many years to come pay to the United States the amounts which American politicians and other uninformed Americans contend that she is able to pay...
...And yet, it would merely balance the domestic budget...
...If it arrived at the conclusion that the capacity of France to pay was so much greater than that of Italy as to justify rejection of the French proposals, there was something vitally lacking in its study...
...Such a settlement would be good business for the United States, as well as for France...
...Military expenditures could not be reduced more than 20 percent, "in the absence of a security pact and an international agreement for a reduction of armaments...
...His vindication came within a very short time when the Dawes commission was appointed, and when its findings confirmed every one of Dr...
...Indeed, there is something unreal about large receipts forthcoming half a century hence...
...and the total amount to be received from Italy is $2,407,000,000...
...These terms are likewise much more generous than those which were offered by the French debt commission, but rejected by the American commission...
...According to Moulton and Lewis, it is difficult to see how total expenditares could be reduced by more than 2,000,000,000 francs...
...therefore, France ought to pay her debt in full...
...In both instances, Dr...
...Nevertheless, we have no record of any people or any government thus preferring the foreigner to themselves...
...To give France the benefit of the same terms that have been accorded Italy would greatly promote the prestige of the United States in Europe, good will between our country and France, and the practice of international charity...
...The unfriendly attitude of the French people seems to have been somewhat mitigated by the possibility, if not the hope, that their loan may ultimately be adjusted as liberally as was that of Italy...
...Just as we were then assured by returning December 2, 1925 THE COMMONWEAL 93 travelers that Germany was fully able to make large reparation payments to the Allies because of her great 4'prosperity," so we are now assured by tourists, casual thinkers and other amateur economists that French "prosperity" is adequate to the payment of the French debt...
...In view of these liberal conditions as to annual instalments and total payment, the French government could afford to abstain from insistence upon a so-called "security clause" in the agreement...
...or a settlement made under the compulsion of fear, which will, indeed, promise larger payments, but which will be impossible of execution...
...To this easy and ignorant generalization, the sufficient reply is that the French people are already paying in national taxes 19 percent of the national income...
...Both these books sharply challenged the prevailing opinion that Germany was able to pay enormous sums by way of reparations to the Allies...
...As happened in Germany, the ultimate result of this process would be the wiping out of all domestic debts, both public and private...
...This principle is recognized in the Dawes plan, which provides that Germany shall not be held to any reparation payments until a surplus exists above the necessary domestic expenditures...
...The same is true of the payments on account of pensions...
...The total military expenditures are 7,600,000,000 francs...
...Some of the critics of France have, indeed, contended that the 94 THE COMMONWEAL December 2, 1925 French government should pay its foreign creditors before its domestic creditors...
...By these two methods, the deficit could be wiped out...
...But France could pay to the United States a part, say 25 percent, of the amount which it now expends upon its military establishment and for the prosecution of imperialistic wars...
...Possibly this attitude of Americans toward France exemplifies retributive justice upon that country for her treatment of Germany...
...Obviously, that procedure represented common sense...
...According to Moulton and Lewis, the only alternative to this unprecedented and severe measure is continued inflation of the currency and indefinite decline in the value of the franc...
...Her capacity to pay, it is said, is much inferior to that of France...
...The greater part of the Italian payments are to be made subsequent to a date which is now fortyfive years distant...
...In other words, these critics do not take the trouble to analyze the nature and extent of French "prosperity," or to compare it with the precise amounts which they think that France can pay...
...This drastic proposal for the reduction of the annual interest payments to all the French holders of government bonds and notes, is the most eloquent testimony that could be desired to the desperate character of the fiscal condition of France...
...payment is to be spread over a period of sixty-two years...
...During that period, the French government insisted that Germany was able to make the impossible reparation payments required by the iniquitous Treaty of Versailles, and the no less iniquitous London Agreement of May, 1921...
...Here, as always, the answer is, the unbalanced budget...
...It would not be deliberately brought about by any modern government...
...According to the news garnered from the cable despatches, the Italian people are practically unanimous in their expressions of appreciation and gratitude for the liberal terms accorded their country in the debt funding arrangement...
...In the face of these appalling facts, we are told that France can pay her debt to the United States to the same extent and on the same terms as Great Britain, because France is a "prosperous country...
...If, however, the various rates of interest on the various kinds of government bonds and short-term notes were reduced to 2 percent, there would be a reduction in the government outlay of about 6,500,000,000 francs...
...The total amount to be paid by the former country is two and two-fifths times the funded principal, while the total amount due from Belgium is one and one-half times the funded principal...
...In other words, Germany will pay no reparations during any year in which her domestic budget does not balance...
...The first step toward wiping it out is to check inflation, by means of high interest rates and the outright restriction of loans, and also by discontinuing reconstruction work in the devastated areas...
...Had they been accepted, France would have been obligated to pay one and one-half times the funded principal...
...According to the recent settlement, the Italian debt, including interest since the loan was made, is funded in the sum of $2,042,000,000...
...Until his analysis and conclusions about the French fiscal situation are refuted by specific facts and arguments, he can afford to be complacent under the charge that he has turned "pro-French...
...In 1924, the Italian national budget almost, if not quite, balanced, while the deficit in the French budget was 16,500,000,000 francs, or more than onethird of the total expenditure for that year...
...It fails to examine the specific amount of the French deficit and the specific amount of money that might be saved by curtailing expenditures upon the French military and naval establishment...
...Nor is this all...
...Refunding of government bonds and a capital levy are considered and rejected as substitutes for the reduction in interest charges...
...THE COMMONWEAL December 2, 1925 THE INTERNATIONAL LEDGER By JOHN A. RYAN EUROPEAN ill-feeling toward the United States, arising out of our apparently harsh and unbending attitude toward our European debtors, has happily been somewhat softened in consequence of the settlement with Italy...
...In the light of the foregoing analysis, the conclusion seems warranted that France should receive the same terms of debt settlement as those which have been given to Italy...
...Undoubtedly, French taxes could be and must be increased, but it is utterly incorrect to say that they are low as compared with other countries...
...It can do so only by borrowing, and that is not a sound or practicable policy...
...Does that necessarily mean that the debtpaying capacity of the two countries stands in that ratio...
...If the whole amount of money spent on the French army and navy were somehow withheld, it would still fail of balancing the budget by about 9,000,000,000 francs...
...But it is also the line of maximum cost and sacrifice...
...Did the American commission give adequate consideration to the French capacity to pay...
...By no means...
...They include a capital levy, something that no other government in any country has dared to propose in modern times...
...Harold G. Moulton who in 1921, with John F. Bass, wrote America and the Balance Sheet of Europe, and in 1923, with Dr...
...and the expenditures since the war on account of pensions, war damages to property and reconstruction of the devastated areas, have amounted to 129,000,000,000 francs, or almost onehalf of the total domestic debt of the country...
...Imagine the enthusiastic reception that would be accorded the suggestion that the interest on United States Liberty Bonds should be reduced to 2 percent, for any purpose whatever...
...This is a considerably more generous adjustment than that given to either Great Britain or Belgium...
...The only tax increases that seem worth considering are a special surtax on high incomes and heavier levies upon bankers...
...The day after the settlement was made, the American commission informed us that it had "made a most exhaustive examination of Italy's fiscal and economic situation...
...The taxes for national purposes levied in Great Britain are only 18.5 percent of the national income, while those collected in the United States for all governmental purposes, national, state and local, were in 1923, only 11.5 percent of our national income...
...Was or was it not followed in the negotiations with the French commission...
...The reason given for the favorable terms accorded to Italy, in contrast with those demanded from France, is that Italy is a very poor country...
...The baffling character of the difficulty may, however, be more accurately understood from the study and the suggestions contained in chapter nine of The French Debt Problem, by Moulton and Lewis...
...The total deficit is 16,500,000,000 francs...
...for the alternatives are: further decline in French credit and in the value of the franc, which will render impossible the recovery of anything from France for a long term of years...
...So long as a country cannot pay its annual domestic obligations out of its annual revenues, it is not in a position to make substantial payments to foreigners...
...Should any reader raise the question, why so much reliance is placed on the opinion and estimates set forth in The French Debt Problem, the answer is that the principal author is the same Dr...
...The population of the latter is less than half a million under that of France...
...As a consequence of continued borrowing and continued currency inflation to meet continually mounting expenses, the value of the franc will sink to zero, simply because the government has found itself, or thought itself, unable to prevent the catastrophe by the adoption of such drastic and revolutionary measures as those proposed by Moulton and Lewis...
...If it did so, it refrained from emphasizing the fact in its communications to the press...
...The expenditures for civil services cannot be lessened by any considerable amount...
...If France would cut down her enormous military expenditures, she could balance her budget and pay her foreign debts...
...If, as is not at all unlikely, it comes to pass in France, the impelling cause will be precisely the same as that which produced a like disaster in Germany...
...In either case, the net result will be a smaller amount paid to the United States than might be obtained under the kind of adjustment that has been made with Italy...
...The enormous difficulty of performing this feat can be inferred from the drastic taxation proposals which are now before the French parliament...
...Today, everyone who knows anything, knows that the French government was wrong, and probably knew that it was wrong...
...In the regions of abstract ethical theory, some kind of case could possibly be made out for that contention...
Vol. 3 • December 1925 • No. 4
