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 REPARATIONS 
 
 and 
 
 INTERNATIONAL DEBTS 
 
 An Address by the 
 
 Right Honorable Reginald McKenna 
 
 Chairman of the London Joint City and Midland Bank, Ltd. 
 At the Convention of the 
 
 American Bankers Association 
 
 New York, October 4, 1922 
 
 PUBLISHED BY 
 
 THE NEW YORK TRUST COMPANY 
 
 100 BROADWAY 
 
 NEW YORK 
 
Reparations and International Debts 
 
 From an Address by The Right Hon. R. McKenna, Chairman 
 of the London Joint City and Midland Bank, Limited 
 
 When I received the honor of your invita- 
 tion which I greatly appreciated, I must con- 
 fess I had many misgivings. I knew it would 
 not be a light task to address an audience 
 whose collective importance in the world of 
 finance is unrivalled. I remembered, how- 
 ever, the cordial friendship which has always 
 existed between American and British bank- 
 ers, and as I realized that your invitation was 
 a further evidence of this friendship my hesi- 
 tation gave way and I gladly decided to come. 
 
 Let me begin with an explanation of my 
 choice of subject. I thought at first that 
 some professional topic should be selected, 
 but I soon came across a serious difficulty. 
 There is a much greater difference between 
 tile law and practice of banking in America 
 and England than is generally supposed, and 
 I felt that I should be liable to be misunder- 
 stood unless this difference were constantly 
 borne in mind. Tliis very meeting will illus- 
 trate the point. 
 
 I understand there are over thirty thou- 
 sand separate banks in the United States, a 
 large number of wliich are represented here. 
 In the whole of Great Britain we have only 
 thirty-nine. But with us the branch system 
 is so highly developed that these few banks 
 have no less than 9,650 branches, of which 
 6,800 belong to five banks alone. 
 
 Differences Between 
 British and 
 American Banking 
 
 The main distinction is that our banks are 
 regarded by the legislature as ordinary cor- 
 porations or companies, while yours are sub- 
 ject to special legislation in regard to nearly 
 all their activities. You have a limit pre- 
 scribed to the amount of a loan to any one 
 
 customer. Certain loans are prohibited and 
 others are restricted. Your investments are 
 regulated. You are subject to limitations in 
 incurring contingent liabilities and you are 
 bound to maintain minimum cash reserves. 
 We have none of these restrictions. Alone 
 amongst deposit banking countries the United 
 States protects depositors, some of the states 
 going so far as to prescribe a system of guar- 
 antee. 
 
 Britain's Central 
 Bank System 
 
 We differ also in our central bank polic}'. 
 You have adopted the Federal Reserve Sys- 
 tem under wliich there are twelve Federal Re- 
 serve Banks in twelve districts. In England 
 we have a single central bank of issue, a joint 
 stock corporation which deals with private 
 customers as well as Avith the Govermnent 
 and the banks. Your Federal Reserve notes 
 are issued against gold and self-liquidating 
 commercial paper. Our Bank of England 
 notes are issued against gold only, with a 
 fiduciary issue of £18,450,000. 
 
 The principles of sound banking are the 
 same everywhere, but our countries diverge 
 in law and practice. This is natural : British 
 social and political conditions differ so much 
 from yours that the same banking system 
 could hardly be appropriate to both. Per- 
 haps we have each sometliing to learn from 
 the other, but I am sure any hasty attempt 
 to establish a common procedure in the 
 two countries would be unwise. As our de- 
 velopment has progressed each nation has 
 adapted itself to its environment, and such 
 changes as we may make in the future must 
 confonn to the habits and traditions of our 
 peoples. 
 
With these thoughts in mind I found it 
 very difficult to select a technical banking 
 subject for discussion today. However care- 
 ful I might be I felt that, unless accompanied 
 by much tedious explanation, my language, 
 associated with ideas related to English prac- 
 tice, would be liable to be misunderstood by 
 3'ou whose associated ideas are so different. 
 I resolved therefore to pass over professional 
 banking topics and to look for a subject of 
 general interest to the business community. 
 What should tliis be.'' 
 
 Reparations and 
 International Debts 
 
 In their report to the Reparation Com- 
 mission the Bankers' Committee wliich sat 
 early this summer in Paris laid stress upon 
 the need to resume nonnal trade conditions 
 between countries and to stabilize exchanges, 
 and they came to the conclusion that neither 
 of these aims could be accomplished without 
 a definite settlement of the reparation and 
 other international debts. Here then it seemed 
 to me was a subject for my address. 
 
 There will be general agreement that there 
 is no matter of more deep concern to the 
 world's trade at the present time than repa- 
 ration payments and international debts, and 
 I trust therefore you will not deem it out of 
 place that I have chosen this subject for dis- 
 cussion today. 
 
 There are two preliminary observations 
 which I must make. The first is that I speak 
 as a banker expressing my personal views. I 
 have nothing to do with politics and I do 
 not appear here in any representative char- 
 acter. I approach the question solely from 
 the economic point of view and my endeavor 
 is to determine so far as I can the limit of 
 the debtors' capacity to pay, and the effect 
 of payment upon the world's trade. Our 
 duty is to satisfy ourselves on the financial 
 possibilities of the case. It is not what the 
 debtors may justly be called upon to pay, 
 but what they are able to pay, which we as 
 business men, anxious to discover the condi- 
 tions upon which trade prosperity is founded, 
 must consider with the most careful attention. 
 
 My second observation is to meet a pos- 
 sible criticism. How can I, a member of a 
 nation which is one of the debtors of the 
 United States, speak freely to an American 
 audience upon international indebtedness? 
 The primary and essential duty of a debtor 
 is to discharge liis liability, and, until this is 
 done, all observations on the origin of the 
 debt and on the economic consequences of 
 international payments are liable to be 
 viewed with suspicion. A creditor may, if he 
 like, open up questions of that kind, but a 
 debtor should admit liis obligation without 
 further discussion. I recognize that these 
 are objections wlnich I must answer and I be- 
 lieve that I can do so conclusively. 
 
 In the course of my argument I shall show 
 that England has the ability to pay, and, 
 once that is established, I can unhesitatingly 
 assert her determination to honor her bond 
 in full. I believe I am justified in asking you 
 to treat England's debt to the United States 
 as certain to be provided for, and, if this be 
 conceded, we shall be free to consider the 
 question of the remaining international debts 
 as one in which America and England are 
 equally concerned and in which both have the 
 same interest as creditors. 
 
 Magnitude of 
 the War Debts 
 
 First, let us look at the magnitude of these 
 international debts. The greatest of all is 
 that of Germany for reparations, a debt of 
 which the United States decUned to receive 
 any shares. The amount was not defined by 
 the Treaty of Versailles, but subsequently by 
 the London Ultimatum it was put at 32 bil- 
 lion dollars, at wliich amount it stands nom- 
 inally today. Of the remaining debts the 
 liability of France to the United States and 
 Great Britain is 6I/2 billion dollars, and of 
 Italy to the same two countries 41/2 billion 
 dollars. Russia owes these countries SYo bil- 
 lion dollars and a further 1 billion dollars to 
 France. These are the principal debts ; the 
 others are all comparatively small in amount. 
 Of the creditors of the European Continental 
 Goverments, England is the greatest. 
 
We have no record in history of interna- 
 tional claims of this magnitude. The in- 
 demnity exacted by Germany from France 
 under the Treaty of Frankfort in 1871, in 
 round figures 1 billion dollars, created the 
 largest debt between Governments ever known 
 unto the recent war, and is the only prece- 
 dent we have of a considerable international 
 payment. It is of interest to recall how the 
 liability was discharged. Paj'ment of 150 
 million dollars was made in gold and silver 
 coin and in German banknotes and currency 
 collected in France and the balance in for- 
 eign bills, chiefly German currency' bills. 
 
 How France Paid 
 the 1871 Indemnity 
 
 The precise form in which the payment was 
 made is however comparatively unimportant. 
 For our present pui"pose the significant ques- 
 tion is how France procured the means of 
 payment. She was bound to acquire German 
 marks or foreign currency exchangeable for 
 marks, and to do so she had either to find 
 German or other foreign buyers for such 
 things as she had to sell or to obtain foreign 
 subscriptions to her loans. Very consider- 
 able sales were made of foreign securities 
 owned by French nationals, the French loans 
 were largely subscribed externally, and the 
 export of French goods was so much in- 
 creased that an average excess of imports of 
 (\o million dollars a j'ear in the four years 
 18G8-1S71 was converted into an average. ex- 
 cess of exports of 46 million doDars a year 
 in the four subsequent j'ears. By September, 
 1873, the whole indemnity was paid, and al- 
 though France remained to be liable for the 
 loans she had issued, she was clear of any 
 direct debt to the German Government, and 
 indeed of all foreign debt payable in any but 
 her own currency. 
 
 Here we have an example of a very con- 
 siderable international debt rapidly paid off 
 without any serious disorganization of the 
 world's trade. Now what were the conditions 
 which made this possible? The war had been 
 short, and the same amount of indemnity was 
 
 well within the capacity of France to pay. 
 Her nationals held large blocks of foreign 
 securities, which were realizable in foreign 
 markets ; her credit was good, which enabled 
 her to obtain foreign subscriptions to her 
 loans ; and in her effort to increase her ex- 
 ports she was not hampered by high tariffs. 
 
 France's Resources in 
 Accumulated Wealth 
 
 She was driven off the gold standard and, 
 although there was some decline in the value 
 of the franc, the depreciation never exceeded 
 5 per cent, and, taking the whole period 
 through, amounted to barely more than 1 
 per cent. But of the several factors in the 
 French ability to pay the most important 
 lay in her accumulated reserve of wealth, the 
 foreign securities owned by her nationals. 
 
 It is interesting to note the industrial con- 
 dition of France at that time. Employment 
 was extremely active and production was 
 on a great scale. She had to meet her ex- 
 ternal liabilities, which compelled her to in- 
 crease her sales in foreign markets, and she 
 did so notwithstanding the competition of 
 other nations. The improved standard of 
 efficiency in production which was thereby 
 forced upon her endured long after the period 
 of the indemnity. In Germany, on the other 
 hand, there was a verj' different experience. 
 The receipt of a large amount of gold and 
 silver had, with other causes then in opera- 
 tion, a serious effect upon German internal 
 prices, which rose rapidly. 
 
 Effects Upon Germany 
 of French Payments 
 
 In 1872 there was a brief trade and finan- 
 cial boom, followed in the ensuing year by a 
 ci'isis which was the beginning of a period of 
 depression. It would not be correct to say 
 that the trade conditions in Germany were 
 entirely due to the payment of the French 
 indemnity, but undoubtedly it was a contrib- 
 utory cause of material importance. The 
 
comparative prosperity in France and de- 
 pression in Germany are remarkable and give 
 color to the storj that Bismarck, in com- 
 menting upon the state of the two countries, 
 declared that the next time he defeated 
 France he would insist on paying an indem- 
 nity. 
 
 Such is the only precedent we have for the 
 payment of a great international debt. The 
 figures we have to deal with today are on a 
 far larger scale than the indemnity exacted 
 from France fifty years ago, but the problem 
 in all essential particulars is the same. We 
 have to discover the capacity of the debtors 
 to pay and to consider the consequences of 
 payment. As the indemnity demanded from 
 Germany is much the greatest of the debts 
 and is the one most urgently in need of satis- 
 factory settlement I place it in the front of 
 our discussion. 
 
 Germany's Capacity 
 to Pay Reparations 
 
 The first question is, what is Germany's 
 capacity to pay? You are perhaps expect- 
 ing that I am about to give you an inventory 
 of Germany's natural resources and an esti- 
 mate of her productive power. All this has 
 been done many times and much industry has 
 been displayed in the inquiry. I have no 
 doubt that the experts who advised the sig- 
 natories of the Treaty of Versailles that Ger- 
 many could pay 120 billion dollars had made 
 many careful calculations of this kind. But 
 what we have to investigate is not Germany's 
 capacity to produce wealth, but her capacity 
 to pay foreign debt. 
 
 I cannot help thinking that we have here 
 the source of the error into which the Ver- 
 iailles experts seem to have fallen. Nobody 
 has ever doubted Germany's immense power 
 to produce, but production by itself is not 
 enough. She must find a market for her ex- 
 ports, and the problem thus becomes one of 
 determining the possible extension of Ger- 
 man export trade. Nor is this the end. 
 We must remember that an increase in her 
 exports will only provide funds for repara- 
 
 tions if there is no corresponding increase 
 in imports. Payment for her indispensable 
 imports must be the first charge upon the 
 proceeds of her foreign sales, and it is only 
 the balance, the exportable surplus, which is 
 available for reparations. 
 
 "Exportable Surplus" 
 Analyzed 
 
 In speaking of a nation's exportable sur- 
 plus we must not forget that other factors 
 may contribute to it besides the balance of 
 exports over imports. Interest received 
 from foreign investments and payment for 
 external services, such as sliipping, may be 
 contributory factors. Before the war Ger- 
 many possessed a very considerable export- 
 able surplus derived from all three sources, 
 but mainly from the interest on her foreign 
 investments which were probably worth not 
 less than 51/2 billion dollars. As regards the 
 surplus from the sale of her products and 
 payment for services it is safe to say that it 
 never exceeded 100 million dollars a year. 
 But what is her position today? 
 
 Most of her foreign investments have gone. 
 Some were sold during the war, others have 
 been seized as enemy property by the Gov- 
 ernments of the Allied and Associated Pow- 
 ers, and most of what remain have lost their 
 value, as in the case of the Russian invest- 
 ments. Her shipping has been largely con- 
 fiscated, and she has been deprived of some 
 of her most productive areas — Alsace-Lor- 
 raine, the Saar Basin, and the Polish prov- 
 inces. All the sources whence an exportable 
 surplus might have been drawn have been 
 greatly impaired if not wholly destroyed. 
 
 Impossible For Germany 
 to Pay Out of Exports 
 
 At no time was Germany's exportable sur- 
 plus sufficient to enable her to make the an- 
 nual payments demanded under the London 
 ultimatum ; it is entirely out of the question 
 that she could do so todav. 
 
But let us get a little nearer to the problem 
 of Germany's present capacity to pay from 
 the surplus sale of her production. Accord- 
 ing to a recent statement by the Chancellor 
 of the Exchequer in the House of Commons, 
 she has paid money and delivered property 
 altogether to the value of about two billion 
 dollars. Of this amount 1,645 million dollars 
 represented the value of ships, coal, other 
 payments in kind, property in ceded territo- 
 ries and local payments to Armies of Occu- 
 pation. The amount in cash has been only 
 375 million dollars. And yet, with this com- 
 ])aratively small cash payment, observe what 
 has happened. 
 
 The mark has declined to less than one- 
 seventieth of the value it had when the obli- 
 gation to pay was imposed upon Germany by 
 the Treaty of Versailles. The means of pay- 
 ment has been found by the sale of marks. 
 After this experience it is difficult to beheve 
 that Germany has any surplus at the present 
 time from the export of her products. 
 
 There is a further consideration in sup- 
 port of this conclusion. It is beyond ques- 
 tion that in the last three years Germany has 
 made every effort to develop her external 
 trade. The German workman, whose industry 
 and efficiency are generally admitted, has 
 been fully employed and the factories have 
 been actively at work all over the country. 
 
 German Competition 
 Alreadj' Causes Complaint 
 
 The decline in the mark, which at every 
 stage has been much greater in the external 
 than in the internal value, has afforded a 
 very considerable advantage to the German 
 exporter, so much so indeed that there is 
 hardly anywhere a manufacturer, producing 
 goods for export, who does not complain of 
 German competition. Nevertheless, the Ger- 
 man trade figures show that the exports, long 
 after the immediate deficiency in essential 
 foreign commodities due to the war was made 
 good, are still barely equal to the imports. 
 The conclusion seems irresistible that Ger- 
 
 many has no present capacity to obtain a 
 surplus from the export of goods. 
 
 I am not sanguine enough to believe that 
 those who think they can extract from Ger- 
 many enough money to enable them to meet 
 the internal liabilities, which they themselves 
 have incurred in restoring devastated areas, 
 will be satisfied with the statement I have 
 just made. 
 
 Effect of Enforcing 
 German Payments 
 
 At the recent Reparation Conference of 
 the Allied Powers held in London proposals 
 were made of punitive measures to be taken 
 with the object of compelling Germany to 
 make immediate cash payments, a policy 
 which could only have been advanced under 
 the conviction that Germany really could 
 pay. For my part I do not believe that it is 
 within her power to do so, but let us suppose 
 for a moment that she can. We have then to 
 consider what the effect of this enforced pay- 
 ment would be upon international trade, and 
 whether it would be to the advantage either 
 of Germany's creditors as a whole or of the 
 rest of the world. 
 
 If Germany could pay what is demanded 
 of her, the only method of obtaining the 
 money would be by increasing her exports. 
 Now what are these exports to be.'' She is 
 essentially a manufacturing nation. Her 
 foreign sale of raw materials is comparatively 
 small. On balance she is obliged to import 
 food, and in consequence of the loss of a 
 large part of her mineral lands she is com- 
 pelled to import both iron ore and coal for 
 the supply of her factories and furnaces. An 
 increased exportable surplus could only be 
 obtained by extending her sale of manufac- 
 tured goods. To do this in the teeth of the 
 competition of other manufacturing nations 
 she must work longer hours for less wages, 
 she must cut profits, she must reduce her im- 
 ports to the indispensable minimum. 
 
 But her competitors wiU not consent to 
 stand idle while they lose their trade. They 
 
will find themselves faced with growing un- 
 employment and heavy trade losses. So far 
 as German goods seek to invade their own 
 domestic markets they may endeavor to ex- 
 clude them by tariffs, but in order to retain 
 their hold on neutral markets they, too, will 
 be compelled to reduce wages and cut profits. 
 And thus Germany's effort to extend her 
 foreign trade must be confronted with the 
 opposition of the whole manufacturing in- 
 terest of tlie rest of the world, and could only 
 be successfully countered by a general lower- 
 ing of the standard of life. 
 
 I know it is frequently alleged that the 
 collapse of the mark, with tlie accompanying 
 disorganization of the world's trade, might 
 have been avoided if tlie German Government 
 had acted with finnness and good faith. It 
 is said that Germany has intentionally depre- 
 ciated her currency in order to induce her 
 creditors to abandon their claims. We are 
 told that her people are not adequately taxed, 
 and that if they were subject to the burdens 
 borne in some other countries, the Govern- 
 ment would be able to meet its liabilities. 
 
 Additional Taxation 
 Would Not Help 
 
 It is certainly true that in my own coun- 
 try far heavier taxation is levied than in 
 Germany, but I am inclined to think we are 
 overtaxed and that overtaxation, so far from 
 fostering, cannot fail to depress national pro- 
 duction. But whether I am right or wrong 
 in that opinion I fail to see how additional 
 taxation can stimulate foreign trade and pro- 
 vide a large exportable surplus. The taxes 
 would be paid in marks, and, whether the 
 marks are derived from avowed taxation or 
 from concealed taxation through the use of 
 the printing press, they are in neither case 
 a currency which would be accepted in dis- 
 charge of foreign liability. 
 
 In the actual condition of Germany a for- 
 eign sale of marks is an inevitable accompani- 
 ment of the payment of. reparations. Ex- 
 cept by such sale there does not appear to be 
 any practicable method for the Government 
 
 to obtain the necessary foreign currency 
 other than by exacting it from exporters as 
 a condition of their receiving an export li- 
 cense. But the exporter, who often has ex- 
 ternal obligations of his own to meet, does 
 not want marks but dollars or pounds ster- 
 ling, as the case may be, and forthwith sells 
 the marks paid him by the Government for 
 the currency he needs. If we add to this 
 regular sale in the course of business the 
 further sale by Germans who mistrust the 
 stability of their own currency, we have a 
 sufficient explanation of the stupendous drop 
 in the value of German nionev. 
 
 How to Realize On 
 German Investments 
 
 Let me come back now to the question of 
 what Germany can pay. Certainly she can 
 pay sometliing, though not in the form or 
 under the conditions it is now sought to im- 
 pose upon her. Many Germans possess for- 
 eign assets, whether investments or balances 
 in foreign banks, and it would be a perfectly 
 practicable proceeding for them to sell these 
 assets to the German Government, who in 
 turn could hand them over to the Reparation 
 Commission. But it is an essential condition 
 of such a transaction that the owners of the 
 foreign assets should be willing to sell them ; 
 no Government in the present situation of 
 Germany could force a compulsory sale. 
 How then could this consent be obtained.'' 
 
 I have no doubt that if these assets could 
 be sold for an assured profit the holders 
 would be willing to dispose of them. It must 
 be remembered that to a considerable extent 
 they are the proceeds of sales of marks which 
 have been flung by Germans on the foreign 
 market under the well-founded apprehension 
 that the pressure of reparation payments 
 would rapidly depreciate their value. Re- 
 lieve this pressure and the mark would im- 
 mediately improve. It has still a far greater 
 value in Germany than it has outside, and 
 the German holders of foreign assets would 
 have a clear advantage in selling them for 
 marks to their Government. 
 
German Foreign 
 Investments Only 
 a Billion Dollars 
 
 It is impossible to give any precise esti- 
 mate of the total value of these assets, but I 
 believe it would be safe to put them at not 
 less than a billion dollars. Whatever the 
 amount may be, however, Germany could 
 pay it, provided the fall in the mark was 
 arrested. More than that I do not think she 
 has the ability to find, at any rate for some 
 years, and it would be a condition of this 
 payment that no more should be demanded 
 of her for a long time to come. I believe 
 that, looking merely at the amount to be re- 
 ceived, the creditors would gain by abandon- 
 ing the attempt to obtain other money pay- 
 ments for a period of at least three years, 
 and I am quite sure the world as a whole 
 would be an immense gainer in the general 
 stabilization of exchanges which would ensue 
 upon an arrest of the fall in the mark. 
 
 Before I leave this part of my subject 
 there is one observation I should like to make. 
 I have no wish to minimize the just claims 
 of the Allies against Germany, and I recog- 
 nize the serious political difficulties which 
 stand in the way of their abatement. But no 
 solution of the reparation is possible unless 
 political considerations are subordinated to 
 economic facts. Wliat Germany can pay 
 maj^ not be a simple question, but it is a ques- 
 tion capable of being answered. Unfortun- 
 ately the answer runs counter to popular 
 hopes, popular passions, and, more formid- 
 able still a popular sense of natural justice 
 which prescribes that the defeated enemy who 
 planned the War should make good the dam- 
 age suffered by the victors. And so no au- 
 toritative answer is given while Europe 
 slides into ruin. 
 
 German Limitations 
 Common to All 
 Countries 
 
 I have dealt at length with the reparation 
 problem in an endeavor to show that a na- 
 tion, except in so far as it has an exportable 
 surplus, can only pay foreign debt out of the 
 
 wealth it has accumulated outside its own 
 country. If we pass now to the other inter- 
 national debts we have to recognize that the 
 general argument is equally applicable to 
 them all. Have the debtors an exportable 
 surplus and what are their foreign assets.'' 
 
 With regard to the latter question the 
 only debtor possessing any large accumula- 
 tion of such assets is England. Notwith- 
 standing her immense sale of securities to the 
 United States the second and third years of 
 the war, a sale which largely furnished the 
 means of paying for the goods of all kinds 
 bought by the Allies, England still owns suffi- 
 cient foreign securities to cover her debt to 
 the United States two or three times over. 
 But neither France nor Italy has similar re- 
 serves of wealth, and I doubt whether either 
 of them has sufficient to meet more than a 
 trifling part of their foreign debt. 
 
 Only Small Payments 
 Out of Export 
 Surplus 
 
 There remains to be considered their ex- 
 portable surplus in the ordinary way of trade. 
 I shall speak later of the circumstances in 
 which an exportable surplus from produc- 
 tion usually arises, and I shall give my rea- 
 sons for thinking that nothing more than 
 comparatively small annual payments can 
 ever be made in this way. But it will be more 
 convenient now to deal with an individual 
 debt and I will ask you to consider the par- 
 ticular case of the debt from France to Eng- 
 land, which I can speak about with more 
 freedom as it is a debt in regard to wliich 
 my own country is the creditor. We shall 
 get a clearer view of it if we examine the 
 circumstances in which it was incurred. 
 
 During the War France developed an im- 
 mense demand for goods of foreign produc- 
 tion. As an increasing proportion of her 
 manpower became engaged in her army, her 
 capacity to supply herself was progressively 
 reduced. She had no abundance of foreign 
 securities with which to pay for her require- 
 ments and she could obtain the war materials 
 indispensable for the maintenance of the fight 
 
in no other way than by borowing the money 
 to pay for them. 
 
 Before the United States came into the 
 War France had borrowed one billion dollars 
 from the British Government, and this 
 amount was subsequently increased to over 
 2^ billion dollars. The price of the goods 
 bought by France was naturally high. Com- 
 modities produced to meet an urgent war 
 need can never be cheap. But France was 
 obliged to have the goods, whatever the price, 
 and a great stimulus was given to American 
 and British trade. 
 
 How Could France 
 Pay Her Debt? 
 
 Let us now reverse the process and im- 
 agine France paying off this debt. She could 
 only do so by producing goods and export- 
 ing them in very large quantities, far in ex- 
 cess of normal trade demands. If the gen- 
 eral trade organization of the world per- 
 mitted of the absorption of this additional 
 French output, I have no doubt that her in- 
 dustry would be capable of the effort neces- 
 sary to enable her to pay interest and sink- 
 ing fund on her debt. But would there be 
 any willingness to receive the goods ? Neither 
 England nor any other country is prepared 
 today to pay for and consume goods on an 
 exceptional scale. The immense demand cre- 
 ated by the War has no parallel in peace. 
 And yet how is France to pay unless an ex- 
 ceptional demand exists? 
 
 The truth is that her debt is far too great 
 in relation to ordinary international trade 
 possibilities. It was incurred by the pur- 
 chase of goods required in war and bought 
 at war prices. It could only be discharged 
 by the transmission of goods, not wanted in 
 peace, and sold at no less high prices. We 
 became accustomed in war to talk in bUhons. 
 Our language was suited to the circumstances 
 of the time, but, if we carry our minds back 
 to 1914 and return to the ideas appropriate 
 to peace conditions, we shall recognize at 
 once that France has no trade surplus or 
 reserves of accumulated and exportable 
 
 wealth to enable her to meet her present ex- 
 ternal liabilities. 
 
 There are of course conceivable, though I 
 trust improbable, conditions in wliich the 
 French Debt to us might be repaid. If we 
 were at war and the call upon our men to 
 line the trenches was such that many of our 
 mines and factories had to close down ; and 
 if France were at peace and at liberty to 
 increase her output to the utmost of her 
 capacity she might pour upon our shoi-es war 
 material and stores equal to the whole amount 
 of her debt to us. But in what part of the 
 globe is there a demand for this additional 
 output in time of peace.'' The mere endeavor 
 to extend her foreign sales to the necessary 
 degree would disorganize the trade of the 
 world. We have seen the painful effect of 
 an enforced competition by Germany ; we 
 should experience precisely the same results 
 from a similar effort by France. 
 
 The inevitable conclusion- is that these in- 
 ternational debts -are far too great for the 
 capacity of any of the debtor countries ex- 
 cept England. She alone in her accumulated 
 foreign investments has adequate resources 
 with which to disciaarge her liability to the 
 United States. 
 
 French Resources 
 Unequal to 
 Obligations 
 
 Of the others, France has the greatest re- 
 sources, but they are, I believe, quite insuffi- 
 cient to meet her obligations. The whole 
 subject requires a rational reconsideration 
 by the creditors, who must keep steadily in 
 view the immediate effect of the payment of 
 these debts on the general trade of the world. 
 The creditor countries will obtain greater 
 advantage from trade prosperity, which will 
 insure full employment in their factories and 
 workshops, than they can ever receive from 
 the precarious payment of these debts. 
 
 In the last two years we have had experi- 
 ence of the effect upon foreign trade of tum- 
 bling exchanges and broken-down credit, and, 
 though the consequences may be more serious 
 
in England than in the United States, where 
 foreign trade is comparatively only a small 
 part of the total trade, they are still grave 
 enough in the latter country also to warrant 
 the fullest and most careful consideration. 
 
 Real Meaning of 
 an "Exportable 
 Surplus." 
 
 It may be objected that my argument ap- 
 pears to lead to the unpalatable conclusion 
 that no nation, unless it has accumulated re^ 
 sources in the form of foreign investments, 
 can discharge external obligations to any- 
 thing more than a comparatively small 
 amount. This is an objection which goes 
 to the very root of the question of inter- 
 national loans and forces us to a considera- 
 tion of the real meaning of an exportable 
 surplus. I cannot do more than touch upon 
 it briefly now without stretching your pa- 
 tience beyond the limit, of extreme good 
 nature. 
 
 It seems to me that the most compact form 
 in which I can present the case is by calling 
 your attention to the experience of England 
 as a creditor country. For over two cen- 
 turies British capital has been lent to other 
 countries. Year by year England produced 
 more than she either consumed herself or 
 could exchange for the products of other na- 
 tions, and slie could nQ,t obtain a market 
 for the surplus unless she gave the purchaser 
 a long credit. Foreign loans and foreign 
 issues oT all kinds were taken up in England 
 and the proceeds were spent in paying for 
 the surplus production. British factories 
 and workshops were kept in good employ- 
 ment, but it was a condition of their pros- 
 perity that a jmrt of their output should be 
 disposed of in this way. 
 
 Taking the aggregate of the transactions 
 British creditors have received a good re- 
 turn on their investment, but the ability of 
 the debtors to pay has been dependent, speak- 
 ing generally, on the development of their 
 country being fostered by the receipt of 
 further loans. If we take the whole field of 
 British foreign investment we shall find that 
 
 every year England has returned in loan* 
 more than she received in interest, and the 
 balance of the world's indebtedness to her 
 has steadily been growing. 
 
 From tliis view of loans made to foreign 
 countries they might seem at first sight to be 
 somewhat unremunerative. If the creditor 
 has to go on lending in order to be paid the 
 interest on previous loans, a bad debt would 
 appear to be the only possible end to the 
 business. But this is by no means the case. 
 While tliis continuous lending has been true 
 in the past in the aggregate of foreign loans, 
 it is not necessarily true in any individual 
 instance, nor does it follow that it will al- 
 ways be true of the loans as a whole. 
 
 In our experience as bankers it is not un- 
 common to see loans to corporations and 
 firms justifiably increasing in amounts. The 
 borrower may show by the growth of his 
 business and expanding turnover that such 
 advances are thoroughly warranted, and, in 
 spite of his greater total of indebtedness, his 
 credit may be improving and his balance- 
 sheet may disclose an increasing surplus. 
 What is true of an individual or corporation 
 may be true of a country, but on a larger 
 scale and viewed over a much more extended 
 period of time. The life of an individual, or 
 even of the most successful company, is as 
 nothing compared with the life of a nation. 
 
 United States as 
 an Example 
 
 Take the case of your own country. The 
 United States has been the greatest external 
 borrower in history. You required foreign 
 capital for your internal development and 
 you took from England alone not less than 3 
 billion dollars. It is estimated that at the 
 time of the outbreak of the war your ex- 
 ternal debt had become stationary in amount, 
 and that your exportable surplus of commod- 
 ities sufficed to pay the whole of the inter- 
 est. Repayment of the capital, however, 
 would have been beyond even your capacity 
 for a very long period had it not been for 
 the opportunity afforded by the war. As 
 
you know, there arose then an inexhaustible 
 demand in Europe for American goods, which 
 led to an immense increase in your exports. 
 Payment for these exports was largely made 
 out of the proceeds of the sale of the stocks 
 and bonds held in England, and thus a cap- 
 ital liability which had been growing for over 
 two centuries was almost entirely discharged 
 in a few years. 
 
 We see, then, that a debtor nation may in 
 certain circumstances pay off its foreign 
 debt with remarkable ease and rapidity. The 
 indispensable condition for such rapid re- 
 payment is that there should be an extraor- 
 dinary demand for its goods, a demand 
 which is a natural accompaniment of war 
 but does not exist in peace. I cannot help 
 tliinking that there has been a general, though 
 very natural, misunderstanding of the con- 
 ditions under which international payments 
 are made. In its present magnitude the sub- 
 ject is new. 
 
 Mistaken Opinions 
 Causing Grave 
 Disasters 
 
 In the past we have been accustomed only 
 to the discharge of comparatively small lia- 
 bilities between nations which has been 
 effected partly by the remittance of gold, 
 and partly by an extension of export trade 
 facilitated by a fall in the exchange of the 
 debtor country, and it is not easy for us 
 now to free ourselves from the ideals we have 
 formed in the course of our past experience. 
 Mistaken opinions on these economic ques- 
 tions are not surprising, but they are caus- 
 ing grave disasters throughout the world. It 
 is not many years ago — it is well within my 
 own recollection — that a want of understand- 
 ing of sound principles of banking led to re- 
 peated financial crises which were then be- 
 lieved to be inevitable. As they usually hap- 
 pened at intervals of ten or eleven years, 
 many serious persons attributed them to the 
 variations which occur in the spots on the 
 sun. These spots may affect the weather 
 and, through the weather, the harvest, but 
 a wider knowledge of banking and of cur- 
 
 rency requirements has taught us how to es- 
 cape their malign influence on credit. 
 
 A better understanding of international 
 trade and of the possible limits of interna- 
 tional payments wiU quickly enable us to find 
 a remedy for the evils which now distract us. 
 The public on both sides of the Atlantic are 
 beginning to take a more rational view than 
 was possible three years ago, and if the lead- 
 ers of opinion direct our footsteps along the 
 right path I believe the world is now prepared 
 to follow it. 
 
 Mr. McKenna's 
 Conclusions 
 
 To sum up : the conclusion to wliich I am 
 driven is that Germany can only pay now 
 whatever she may have in foreign balances, 
 together with such amount as she can realize 
 by the sale of her remaining foreign securi- 
 ties ; that this payment is only possible if 
 all other demands are postponed for a definite 
 period long enough to insure the stabilization 
 of the mark ; and that future demands at the 
 expiration of this period must be limited to 
 the annual amount of Germany's exportable 
 surplus at that time. Further, that England 
 has the capacity to pay to the United States 
 interest and sinking fund on her debt, but 
 that the other debtors are none of them in 
 a position to meet more than a small part of 
 their external liabilities, and in the existing 
 condition of Europe a definite postponement 
 of any payment by them is desirable in the 
 interests of all parties. 
 
 The actual amount which the other debtors 
 could ultimately pay should, as in the case 
 of Germany, be ascertained by inquiry into 
 their exportable surplus at a full and frank 
 conference between creditors and debtors. 
 
 It remains only for me now to thank you 
 for the patience with which you have heard 
 me. I have strictly confined myself to a 
 consideration of the economic aspect of Rep- 
 arations and International Debts, how they 
 are payable, the general capacity of a debtor 
 country to pay, and the effect of payment. 
 
If I have become convinced that an attempt 
 to enforce payment beyond the debtor's 
 ability is injurious to the international trade 
 of the whole world, lowers wages, reduces 
 profits, and is a direct cause of unemploy- 
 ment, the conclusion is founded solely on 
 economic grounds and is uninfluenced by any 
 political considerations or any regard to the 
 moral obligations of the debtors. 
 
 I know very well that there are other con- 
 siderations affecting these debts, but these 
 are matters of statecraft to be determined 
 by the rulers of the creditor countries ac- 
 cording to their view of wise policy, which 
 
 covers many interests besides those of trade 
 and finance. The fact that a debtor cannot 
 pay does not of itself discharge the obliga- 
 tion. The debt majf become the subject of 
 negotiation and bargain by which if the 
 debtor obtains relief, the creditor may still 
 recover some advantage to which he may be 
 justly entitled. But I conceive it to be the 
 duty of bankers to help so far as they can 
 in forming a sound public opinion upon the 
 financial and commercial aspects of these in- 
 ternational debts, and it is in pursuance of 
 this duty that I have ventured to make these 
 observations today. 
 
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