Borrowing and Reparations
Monroe, A. E.
36 THE COMMONWEAL May 15, 1929 BORROWING AND REPARATIONS By A. E. MONROE TWO ideas stand cut so prominently in most discussions concerning reparations that the man in the street may be...
...36 THE COMMONWEAL May 15, 1929 BORROWING AND REPARATIONS By A. E. MONROE TWO ideas stand cut so prominently in most discussions concerning reparations that the man in the street may be pardoned for concluding that they must be the basis of any adequate solution of this vexing question...
...It is very doubtful whether this backward movement of funds would equal the original payments, but there is every reason to believe that it would be of substantial proportions...
...It would be much easier, moreover, if enough funds could be kept out of the German money market—either by actual transfer abroad or by action of the Agent-General—to keep interest rates higher in Germany than elsewhere...
...It would be premature, however, to conclude from this that the work of the Agent-General is over...
...The present wave of stock speculation in this country tends to have this effect, but it is difficult to say just how much influence it has...
...Interest rates would therefore rise in Germany, her demands for capital being at least as great as before the war...
...they do not increase the productivity of German labor, except very indirectly in some cases...
...If the Agent-General yields to pressure or sentiment and invests his untransferred balances in Germany, the result, as I have intimated, will be an easing of German money rates and a reduction of the differential between German and foreign rates which is the lure needed to attract funds from abroad...
...Yet both are unsound, as I shall try to show...
...In fact I think that is probably the case...
...If they can be transferred they will tend to lower interest rates outside of Germany...
...If this is the net result of reparation payments, why not avoid the serious dislocations sure to be wrought by such investment flows—not difficulties of transfer as such—by borrowing in the first place...
...So far as Germany is concerned there would almost certainly be a curtailment of investment, nearly if not quite equivalent to the sum paid to the Allies...
...She is poorer by every mortgage she has to lay on her national income...
...Does anyone suppose that the great sums which British investors have poured into Argentina "must be repaid...
...Nor does it make any difference, as far as the Allies are concerned, what the loans are used for, so long as the security is deemed adequate—a point for the dispassionate analysis of bankers...
...A boom in one of the creditor countries, for example, would raise interest rates there, at least temporarily, and cut down the margin by which German interest rates attract foreign investors...
...but it is nevertheless the wise policy in any long-run view of the problem...
...All this would continue as long as the payment of reparations lasted...
...Some German commodities will sell better in world markets...
...It is simply the amount which the German government can collect from its people...
...Now it is no part of my argument to deny that the transfer of the huge sums due on reparations accounts is likely to encounter serious difficulties...
...For the most part these fears seem to me to be pure moonshine...
...Are we not helping to cut our own throats in thus providing Germany with new and efficient means of waging commercial warfare upon us...
...If anything should occur to check such transfer of reparations as is now being effected or to retard the backward flow of funds to Germany, there would be need of some such means of taking up the slack and preventing a deadlock...
...The physical maximum is all the income-yielding property of the country and all its income above the bare subsistence needs of the people, but of course the politically feasible maximum is nowhere near that...
...Does this mean that Germany by some subtle means is evading her obligations, as the much-used phrase "paying reparations out of loans" seems to imply...
...The AgentjGeneral would have acquired prime German investments which he could sell in foreign markets or use as collateral for an issue of bonds...
...In other words, investment in Germany's industries presupposes that similar opportunities have already been taken advantage of at home...
...If things were left to themselves, the ebb and flow of investment funds would be checked before it had got fairly started...
...Why it should be so generally assumed that the first question must be answered in the affirmative is a mystery...
...It seems more probable that they were in doubt about the possibilities of transfer and, rightly enough, considered this a good way to put the question to a test...
...Loans to Germany, then, are the almost inevitable result of reparation payments under existing conditions...
...The whole process is a voluntary one, it must be remembered, and so will doubtless stop short of calamity...
...I do not mean to imply that the framers of the Dawes plan thought of this as one of the functions of the machinery they set up to deal with the transfer of reparations...
...What, then, are we to conclude concerning the limit of reparations, since it is not, or need not be, a question of transfer difficulties...
...If made at home, as is likely, this will lower interest rates and eventually lead to the purchase of securities in foreign markets...
...If our business men are as alert as the Germans are, we shall be as well equipped as they...
...That depends...
...Germany would borrow as she paid...
...A man who gives a mortgage on his house in order to satisfy a damage claim against him is poorer from that moment, and all his other creditors know it...
...It is to be hoped, therefore, that the Agent-General and the Transfer Committee will not be abolished unless some agency is set up to take over this important function...
...More's the pity...
...If they cannot be transferred, except at a loss, their owners will have every incentive to leave them on deposit in Germany—in effect a loan...
...Loans for such purposes as parks and housing do not produce the wherewithal for paying the interest due...
...Will they not have to be repaid some day, and do they not entail heavy interest payments in the meanwhile...
...For we must not forget that capital will not flow to Germany, generally speaking, until the alternatives at home are worse, often considerably worse...
...As for the interest payments, practically the same arguments can be advanced as apply to the reparation payments themselves...
...This discrepancy between interest rates in Germany and the rates prevailing outside would cause investment funds to flow into the German market until something like the previous balance had been restored...
...Such lines as banking, insurance and shipping, which will be favored by Germany's low interest rates, will obtain an increasing share of the world's business...
...Her credit was shattered by the calamitous inflation of her currency, the stability of her new government was doubted both at home and abroad, and the mistrust and aversion engendered by years of bitter warfare could not be lightly brushed away...
...They should be regarded as a form of consumption requiring an expensive foreign ingredient—capital—and regulated accordingly...
...and if this policy is adhered to it must eventually attract funds from outside, The pressure to abandon it may be great, what with Allied dissatisfaction over the non-receipt of reparaMay 15, 1929 THE COMMONWEAL 37 tions and German resentment at tight money while large sums lie idle within her borders...
...These are, first, that the difficulty of transferring the sums collected from Germany sets a practical limit to the amount the Allies can hope to obtain...
...So far the tightness of the German money market and the consequent flow of investment funds to Germany have apparently not been dependent upon the operations of the Agent-General...
...An infinite total if you don't mind waiting...
...Failure to recognize this has been due to a strange ignoring of the place of investment in the modern world...
...Let us begin by considering the results to be expected if the transfer of reparations were as simple as the proverbial rolling off a log...
...To understand the importance of proper management under the Dawes plan we must consider how the payments made by the Reich to the Agent-General for Reparations are likely to affect Germany's investment markets...
...This for the first year...
...The point is that such difficulties have little effect upon the final result, as things now stand...
...By proceeding with caution, and perhaps aided by some kind of Allied endorsement or guarantee, he ought to be able to dispose of his holdings without great loss, though it might be necessary to pay pretty heavily for underwriting until investors became familiar with this new type of "investment trust...
...They are therefore to be encouraged as a means of rebuilding Germany's wealth and hastening the day when the foreign loans can pass into German hands...
...To provide all the necessary funds by forcing a reduction of consumption—the only alternative—was politically out of the question, even if physically possible...
...There is not the slightest objection to allowing the Germans to place their loans through their strongest borrowers, be they municipalities, states or industrial enterprises...
...The loans now being made to German borrowers may run forever unless German investors desire to take them over...
...Unfortunately this expedient, which served the French government so well for its indemnity payments in 1871, was not open to Germany...
...That German industry is destined to become a formidable competitor in many lines is very probable, but it will achieve this by the same means it employed before the war, not because it has obtained loans from abroad...
...but this would be offset later when reparation payments exceeded the amounts being spent on restorations...
...Of course not...
...They throw no light on Germany's capacity to pay or the Allies' ability to collect...
...And if the person who takes the mortgage also happens to be the one to whom the damages are due, shall we say he has paid the claim out of his own pocket and allowed the real culprit to go free...
...In countries where there were no devastated regions to be restored the funds coming from Germany would have a depressive effect on the money markets from the start, unless an increase in consumption occurred, which is not very probable...
...Loans from abroad have been forthcoming about as rapidly as there were reparation payments to be transferred...
...These loans to Germany, it may be objected, only increase the problem of transfer...
...This has been due, it would seem, in part to the "payments in kind," and in part to the abnormal capital needs of German industries after the neglect of the war years...
...In the Allied countries, on the other hand, no such result would follow, except perhaps for a time...
...If the restoration of devastated areas were carried on more rapidly than reparation payments were received, there would be a temporary stiffening of interest rates...
...and, second, that the loans from abroad which have accounted for most of Germany's payments since the Dawes plan has been in operation are at best only a temporary palliative...
...Industrial loans, however, not only increase the output of labor enough to provide for interest payments, but generally do better than that, as every business man familiar with the practice of "trading on the equity" is well aware...
...Thereafter there would be only the national income to draw upon, but such payments might continue indefinitely...
...As the taxes which furnished reparation payments are abolished or reduced, the people of Germany may be expected to increase their consumption somewhat, but some increase of investment is also probable...
...It is not a question of equalizing rates, for capital is not sufficiently liquid to bring this about even under more favorable conditions, but of restoring the prewar relation between the interest rates in different countries...
...There is no reason, however, to expect that this change will be catastrophic...
...This "paying off the mortgage" will doubtless begin 38 THE COMMONWEAL May 15, 1929 gradually...
...The case would not be hopeless, however...
...The loans, it is true, may mature at no very late date, but as long as the industries are prosperous a refunding is the natural thing to expect...
...I hope it will not now be interpreted as implying sympathy with a program of bitter revenge...
...This reference to Germany's economic recovery raises the question of the threat to the prosperity of the rest of the world that is supposed to lurk in the loans by means of which she is rebuilding her industrial machine...
...A loan for any purpose simply releases that much German capital for any other borrower who can pay the price...
...The Germans themselves, however, cannot view the trend of investment in their country with this indifference...
...but under such procedure as provided by the Dawes plan, firm and wise management could effect about the same readjustment as would ensue under the simplest conditions—borrowing by Germany as long as reparation payments continued and in amounts roughly proportional to, though probably less than, these payments...
...This is perhaps a hard saying—too hard to make a few years ago...
...Would the result just described be prevented or seriously modified if the transfer of reparations encountered grave difficulty...
...Perhaps a board or bank could handle the matter better...
...To pay for these there will develop an increase in German exports, visible and invisible, especially the latter at first...
...In reality, these loans are a perfectly normal result of reparation payments, whether transfer be easy or greatly impeded...
...If the Agent-General sequestrates or internes, so to speak, such sums as he finds himself unable to transfer, they will be just as effectively withdrawn from the market and will have just as much stiffening effect on interest rates as if they had been successfully remitted abroad...
...Germany's case is no different...
Vol. 10 • May 1929 • No. 2
