A Creditor Country 
 
 GEORGE E. ROBERTS 
 
 Assistant to the President 
 The National City Bank 
 of New York 
 
 AN ADDRESS 
 BEFORE 
 
 The Investment Bankers Association of America 
 at Atlantic City, N. J. 
 December 10, 1918 
 
A Creditor Country 
 
 The end of the war finds the United States in a 
 much stronger position in world affairs than it was at 
 the beginning, but it finds us with new obligations and 
 responsibilities, some of which are of special concern 
 to you who are members of this organization of invest- 
 ment bankers. Among the most significant of the 
 changes which have occurred is the change of our 
 financial position from that of a debtor nation to that 
 of a creditor nation. Do we comprehend all that this 
 means? We understand, of course, that it means that 
 in our financial relations the balance of payments will 
 be in our favor, but do we know all that this involves, 
 and the policies which it imposes upon us? A people 
 who are creditors to the world must not play a miserly 
 part; they must play a helpful, reciprocal part. A 
 creditor nation which expects to receive its balances 
 regularly in gold will not make the best use of its 
 wealth or remain a leading factor in world affairs. 
 
 The United States government, in a little over a 
 year and a half, has loaned to governments associated 
 with it in the war, over $8,000,000,000, and the Secre- 
 tary of the Treasury within a few days has asked Con- 
 gress to authorize additional loans of this character to 
 the amount of $1,500,000,000. In all, including loans 
 privately made and offerings upon the investment 
 market, we will have an interest charge against Europe 
 on account of these transactions of approximately 
 $500,000,000 per year. How is this interest going 
 to be paid? I am not raising any question about 
 
the solvency of the debtors. I do not question 
 that these countries will have an amount of new 
 wealth each year which they can spare very much 
 in excess of this interest charge. I have no doubt that 
 the governments will be able to collect into their treas- 
 uries, through taxation, an amount ample to meet the 
 interest charges. But how are the payments to be 
 accomplished ? I am thinking of the physical difficulty 
 in making payments in another country and in a differ- 
 ent money. In the settlement of debts between individ- 
 uals there are three ways of doing it. They may be 
 paid in cash, they may be paid in trade, by the transfer 
 of property, or you may give your promissory note, 
 which of course is not a final settlement, although it 
 may defer the settlement to a more convenient time. 
 
 And settlements between countries are likewise 
 accomplished in these three ways. The claims may be 
 paid in gold, they may be offset with goods, or they 
 may be settled for the time by means of loans or the 
 sales of securities. 
 
 Now we know, to begin with, that these interest 
 charges will not be settled in gold, because the total 
 production of gold in the world outside of the United 
 States is less than $400,000,000 per year. And, even 
 if these governments were able to relinquish from their 
 present holdings sufficient gold to make a few pay- 
 ments, the effect of adding gold to our already large 
 reserves would be to raise the level of prices in this 
 country, and maintain prices here above those in the 
 rest of the world, which would place us at a disad- 
 vantage with our competitors in world trade. It would 
 make this the best country in the world to sell goods 
 in, and the poorest country in the world to sell goods 
 from. We couldn't afford to take their gold with such 
 results. 
 
 4 
 
And if, instead of shipping gold, these govern- 
 ments should attempt to gather up exchange over the 
 world to the amount of the interest charge, the effect 
 would be to exhaust the supply of dollar exchange 
 everywhere, so that our foreign customers who were 
 buying our goods would be unable to get any exchange 
 with which to make their payments. Dollar exchange 
 would go to such a premium everywhere that it would 
 put a prohibitory tax on our exports. So we don't 
 want attempts to pay the interest in that way. 
 
 Well, then, will we take our pay in foreign goods? 
 For the ten years ended with June 30, 1914, the average 
 annual trade balance in favor of the United States on 
 merchandise account was about $500,000,000. That 
 is how we stood on the commodity exchanges before 
 the war. This balance was largely offset, however, by 
 interest and dividend payments on American securities 
 held abroad, by our payments for the use of foreign 
 ships in our commerce, by the expenditures of Ameri- 
 can tourists abroad, and other incidental items. But 
 since then we have bought back most of the American 
 securities that were held abroad. Do we want to 
 import enough foreign goods to not only cover our 
 former merchandise balance, but the balance on inter- 
 est account? 
 
 Why, our trade conventions and commercial con- 
 gresses are all talking about reducing our imports and 
 increasing our exports! At Atlantic City last week, 
 at the sessions of that very representative body, the 
 United States Chamber of Commerce, a list was pre- 
 sented of some 470 commodities which heretofore we 
 have been buying abroad, but which hereafter we are 
 going to make at home, and Mr. Schwab told them 
 that we were going to have the greatest merchant fleet 
 in the world, to carry our increasing exports to all 
 
 5 
 
quarters, thus keeping our industries running at top 
 speed. 
 
 Now, of course, I am in favor of foreign trade. 
 Over at the City Bank we are doing all we can to 
 encourage people who are qualified to make a study 
 of the export trade. And I like the idea of having our 
 own ships, but I am bothered about this situation. 
 Frankly, I think that in the long run we will have to 
 modify our enthusiasm a little about making every- 
 thing for ourselves and doing everything for ourselves, 
 and at the same time doing so much more for every- 
 body else. If we are going to have balances in our 
 favor in every important relation with other countries, 
 how are they going to make payment? There is only 
 one possible way in which it can be done. We will have 
 to capitalize our balances and convert them into for- 
 eign investments. We are out in the world to stay, 
 for we never can get our belongings home. 
 
 Without approaching any controversial phase of 
 the subject, it is certain that at the present time, in 
 view of the world scarcity of goods and of capital, 
 all interests will be served by having us export up to 
 the limit of our capacity. The countries of Europe are 
 going to have too much to do at home to export freely 
 for a time. We have the capacity, but how will would- 
 be buyers make payment? The only way we can sell 
 anything to Europe at this time is by granting credits 
 freely. And when I speak of credits I am not talking 
 about commercial credits. We cannot take part in the 
 reconstruction of Europe on 60 and 90 days' time. The 
 exporters and bankers cannot carry these credits. 
 They would soon be loaded up and out of the business. 
 What kind of a fix would bankers be in to take care of 
 the home situation if they loaned their demand de- 
 posits to build houses and equip shops in Europe ? We 
 
 6 
 
must create an investment market which will take these 
 securities, and it is up to the investment bankers to do 
 this. The public must take these loans as long term 
 investments. 
 
 I repeat that this situation is not because the people 
 of Belgium, France, Italy and other countries are indi- 
 vidually unable to make payments. They are able to 
 make them at home, in their own money, but they are 
 unable to overcome the difficulty which attaches to 
 making payment here. There is no medium of pay- 
 ment. They cannot send you farms or buildings or 
 railways or industrial plants, but they can send securi- 
 ties which carry the title to property. 
 
 The situation is illustrated by the relations between 
 Canada and the United States during recent months. 
 A party in Canada desiring to make a payment in the 
 United States has had to pay a premium of approxi- 
 mately two per cent, for a draft. The explanation has 
 been that Canada's importations from the United 
 States have been larger than her exportations to this 
 country; our exports to Canada for the fiscal year 
 ended June 30, 1918, amounted to $778,510,000; our 
 imports from Canada in the same time amounted to 
 $321,000,000, and credits had to be created here against 
 which the Canadian banks might draw for their cus- 
 tomers who had payments to make in this country. 
 In ordinary times gold would be shipped; that is the 
 regular method, but during the war trade has been 
 so unbalanced that the Canadian government put an 
 embargo on gold exports. It recognized a danger that 
 the gold reserves of the country might be all drained 
 away. Some other method of creating Canadian credits 
 here and of effecting the settlements had to be found. 
 
 Canadian exchange in New York may be created 
 by selling securities in New York, by borrowing there 
 
 7 
 
or by shifting credits from some other market, as 
 from London, but where it must be done by these 
 methods, supplementing the ordinary trade credits, 
 somebody must be paid for rendering the service. As 
 the demand for exchange increases the rate rises and' 
 the compensation is increased. The compensation 
 which it has been necessary to pay during the past 
 year has been about two per cent. That two per cent, 
 has increased the cost in Canada of importations from 
 the United States and it has also served as a premium 
 on Canadian exports to the United States. Two per 
 cent, may not seem very large, but it would seriously 
 affect profits in many lines of trade ; moreover, the ex- 
 change charge might easily have been five per cent, or 
 ten per cent., if the trade balance had been larger, but 
 in order to hold the balance down the Canadian Gov- 
 ernment placed an embargo on the importation of lux- 
 ury goods. 
 
 Thus, it will be seen, that on account of an unbal- 
 anced state of trade in favor of the United States in 
 the last year, the neighboring and friendly Govern- 
 ment of Canada took two steps to cut down imports 
 from this country. First, it put an embargo upon gold 
 exports from Canada, the normal method of settling 
 balances; and second, it forbade. the importation of 
 goods classed as luxuries or non-essentials. 
 
 But lest it may be thought that the action of the 
 Canadian Government was unfriendly and extraordin- 
 ary, let me hasten to add that the United States pursued 
 precisely the same policy, where the trade balances were 
 adverse to it. Because it maintained an embargo on 
 gold, and because there was a trade balance between 
 the United States and Argentina largely in favor of 
 the latter, it has been necessary in this country to pay 
 a premium of about seven per cent, to get a draft on 
 
 8 
 
Buenos Aires, and this charge has increased to this ex- 
 tent the cost of all our importations from Argentina. 
 
 For a similar reason it has been necessary to pay 
 as high as fifty per cent, premium for a draft on Spain, 
 and in Italy it has been necessary to pay a premium 
 of one hundred per cent, for a draft on New York. 
 What show would we have to export goods to Italy 
 against such an exchange charge as that? In Paris to- 
 day it is costing about five per cent, to get a draft on 
 New York and it has been as high as ten per cent. In 
 London a New York draft costs about two i)cr cent., 
 but it has taken constant lending by this country for 
 the last three years to hold it down to that point. 
 
 These premiums, or exchange charges, have been 
 due to the fact that payments were running heavily one 
 way and it was difficult to obtain further credits in the 
 creditor country. Contrary to popular opinion it is not 
 necessarily a question of national credit, but mainly of 
 unbalanced trade. If you are in New York and want to 
 convert New York funds into a draft on Madrid you 
 have to find someone who has a bank balance in Madrid 
 which he will transfer to you in exchange for your 
 New York funds. 
 
 The position of the bankers who deal in foreign 
 exchange is often misrepresented. They are not re- 
 sponsible for the fluctuations. A banker may borrow 
 abroad temporarily for exchange purposes, but not for 
 an indefinite amount or an indefinite time. In the long 
 run the banker is simply a dealer. He buys and sells 
 on the market, and exchange rates are governed by 
 the trend of payments between countries. If the bal- 
 ance of payments is one way temporarily, during a 
 few months of a year, and certain to be reversed in 
 later months, bankers can and do bridge over the period 
 and the fluctuations in rates are slight, but if the bal- 
 
 9 
 
ance of payments is continuously one way the exchange 
 bankers cannot stand in the gap. No government ex- 
 change bank could stand in the gap. There are only 
 two remedies for such a situation: one is to have ex- 
 change rates go high enough to force the merchandise 
 trade back into balance, and the other is to have the 
 creditor country balance the account by continually 
 converting its credits into investments. 
 
 These conditions are fundamental. If the balance 
 of payments is in favor of the United States, both on 
 merchandise account and interest account, exchange 
 rates will rise as the balances increase until they are 
 prohibitory upon exports, unless we accept settlement 
 in securities. Our new position as a creditor nation will 
 compel us to be a lending nation. If we fail to recog- 
 nize this condition our export trade will be cut off by 
 the sheer inability of would-be customers to find the 
 means of making payments to us. Exchange rates on 
 this country will penalize our exports. 
 
 This situation faces us suddenly, as a result of the 
 war. Great Britain and Germany grew into their great 
 foreign trade gradually, by means of their foreign in- 
 vestments. They developed a body of investors accus- 
 tomed to put their money into companies doing business 
 abroad. The British or German promoter found the 
 opportunity for an investment, the securities were sold 
 in England or Germany and the money was expended 
 there for equipment or merchandise and the export 
 trade flourished. Great Britain and Germany not only 
 developed their export trade in this manner, but by this 
 exportation of capital they created the great proper- 
 ties which they own all around the world. 
 
 In the United States we are now confronted with 
 the question, can we rise promptly to an appreciation 
 of the necessities of our newly attained position? Are 
 
 10 
 
we ready to lend and lend and lend continually and 
 permanently to support and develop our foreign trade? 
 Will our investment market take up the ofiferings that 
 will have to be made here in order to hold the exchange 
 situation level? 
 
 The truth is that we have developed our industries 
 and increased our wealth so far beyond the position of 
 other countries that in the very nature of things it is 
 now to our interest to be a lending nation until the 
 equilibrium is in some degree restored. 
 
 The suggestion has been made in this country that 
 the United States should forgive or cancel its loans to 
 Great Britain, France and other allies, on account of 
 the services they have rendered to the world, this 
 country included, in the war. I am not going to dis- 
 cuss the merits or the difficulties of that proposal, and 
 it may be doubted whether the debtor countries would 
 care to have the subject brought under discussion or 
 any such action taken, but it is pertinent to say that 
 from our own standpoint, in view of the present situa- 
 tion in the exchanges, early payments upon either 
 principal or interest are undesirable. We already have 
 more than our share of the world's gold and additions 
 to our stock would be harmful instead of advantageous. 
 Payments in goods upon any such scale as would be re- 
 quired would cause an interference with our estab- 
 lished industries, for which the country is unprepared, 
 and which certainly would be vigorously opposed. 
 Other countries have far greater need to import com- 
 modities than has the United States. There is no doubt 
 that as a practical proposition the business interests of 
 this country would say, we do not want to be paid in 
 goods, and this means that we must increase the 
 amount of the loans by the amount of the interest, 
 perhaps for years to come — not because the debtors 
 
 11 
 
are unable to pay, but because as a creditor nation we 
 find it to our advantage at this time to increase our 
 investments abroad. 
 
 There is a natural equilibrium in economic affairs 
 which in the long run is bound to be maintained. There 
 is an altruism in the economic law which prevents 
 an individual or a nation from absorbing wealth with- 
 out limit. An individual whose investments have 
 reached the point where the income more than suffices 
 for his own wants, goes on accumulating and reinvest- 
 ing his surplus, although the gains no longer contrib- 
 ute anything to his personal needs or comfort. It is 
 reserve wealth or surplus wealth to him. Nominally 
 and lawfully it belongs to him; he controls it; but, 
 actually it is in the service of the public. 
 
 And so it is advantageous for a country whose stock 
 of wealth is proportionately greater than that of the 
 rest of the world to grant aid to other countries less 
 advanced or temporarily short of working capital. In 
 our economic relations our obligations coincide with 
 our largest and best interests. There is an obligation 
 upon us to assist in restoring industrial order in the 
 devastated regions of Europe, to put these people back 
 into homes and workshops, to supply them with the 
 means to become self-supporting and prosperous again, 
 and it is to our interest to do it because it will 
 give employment to our own industries. Our own 
 interests will be best served by allowing our income 
 from the foreign loans to remain in the possession 
 and service of our debtors. Neither the principal 
 nor the interest will ever be wrung from distressed 
 peoples. When the payments are made it will be done 
 by the natural readjustments in international affairs, 
 and by that time the productive powers of all coun- 
 tries will have so increased that no burden will be felt. 
 
 12 
 
I would like to emphasize, in this connection, what 
 to me is a most suggestive feature of this international 
 situation. We are, I repeat, under constraint by our 
 interests to allow both principal and accruing interest 
 to remain in the debtor countries. Think of just what 
 that means : it means that this capital, instead of being 
 passed over to us, will remain in use in these debtor 
 countries. It will be used to finance their business, to 
 enlarge their industries and give employment to their 
 people. It will contribute to the strength of their banks, 
 it will build up their foreign trade, and if we want to 
 take the narrow view of it, we may say that this capital 
 of ours in their hands will help to strengthen them as 
 competitors of ours in world affairs. And yet it will 
 be to our advantage to do it. We will suffer if 
 we fail to do it. In order to serve our own interests 
 we must serve the common interests, and that prin- 
 cipal holds throughout the business world. That 
 Etirope shall not pay her debts to us under present 
 conditions is fixed in the very constitution of things, 
 in the framework of economic relations. I doubt if she 
 ever does pay in the sense of sending goods or gold 
 to this country. Not if we remain a creditor nation. 
 We will have interests over there, we will have paper 
 certificates of obligation or perhaps of ownership in 
 properties over there ; but if we continue to take inter- 
 est or dividends in the form of new certificates we will 
 withdraw nothing. A creditor nation, increasing in 
 wealth, is always adding to the holdings of its tin boxes. 
 What difference does it make to the debtor nations so 
 long as they have all the property and all the increment 
 from the property? Generations may come and go, 
 enjoying a constantly increasing stream of products 
 from these properties, and never knowing that they 
 
 13 
 
are in debt. So little do certificates of ownership really 
 count in the distribution of consumable wealth. 
 
 To illustrate — let us suppose a case within our 
 own country. Let us suppose that a resident of New 
 York makes an investment in Montana. Montana is 
 not a foreign country, but it is as far away as a foreign 
 country, and economic laws are the same everywhere. 
 We will suppose a resident of New York makes an in- 
 vestment in Montana, in a mining or manufacturing 
 enterprise. The business is successful, but as the 
 owner has all the income he requires for personal ex- 
 penditures from other sources, he draws nothing from 
 it. All the profits are retained in the business for de- 
 velopment purposes. The plant is enlarged ; the product 
 is increased. The product has a ready market; it 
 meets a common need; the public is served by the 
 increased production. The payroll grows larger; a 
 town grows up about the works; it grows into a city, 
 with stores, schools, churches, libraries, theatres, street 
 railways, and all the facilities, equipment and conveni- 
 ences of city life. It is a prosperous, progressive com- 
 munity. Finally, the owner dies, never having drawn a 
 dollar from the Montana property. Query: who has 
 had the benefits of the investment in Montana? You 
 may say that somebody will inherit the property, but 
 that does not alter the principle that so long as the 
 increment is reinvested productively the benefits are 
 running to the public and not to the owner. 
 
 An instance quite similar in some respects to this 
 supposed case developed the other day when Capt. 
 Joseph Delamar, whose wealth was largely in western 
 mines, died and left $10,000,000 worth of securities to 
 the endowment funds of Columbia, Harvard and Johns 
 Hopkins universities. That case is closed with the 
 accumulations definitely dedicated to the public. 
 
 14 
 
In the case of a creditor country, of course, indi- 
 viduals receive their incomes from foreign investments, 
 but the aggregate of foreign investments will naturally 
 continue to increase so long as the state of industry 
 and the exchanges makes it mutually advantageous. 
 There is a tendency for investment capital to flow to 
 the places where it is most needed, as there is for 
 commodities to flow to places where they are scarce and 
 in demand. A mutual interest is served. There is a 
 tendency to level conditions throughout countries which 
 are in contact, bringing up those which are behind. The 
 effectiveness, the marginal utility, of capital is greater 
 in a country where capital is relatively scarce. The part 
 which a creditor country plays is not a blood-sucking, 
 exploiting part, as sometimes represented, but a help- 
 ful, constructive part, even benevolent in the sense that 
 the immediate benefits are likely to be on the side of 
 the borrowing country. In a free, peaceful state of 
 world affairs, I do not know how one nation can be ex- 
 ploited by another. When I was a boy in the Middle 
 West, it used to be said that that section of this country 
 was exploited by the East, but the development of the 
 West was greatly aided by Eastern capital, and there 
 is more Eastern capital in the West now than ever 
 before. If conditions in Mexico were as favorable to 
 the employment of capital there as on this side of the 
 line, there would be a great flow of capital into Mexico 
 and quick leveling of living conditions there to what 
 they are in this country. And, finally, the development 
 of Mexico, and of her now idle resources would react 
 beneficially upon this country. 
 
 The fundamental fact in world relationships and 
 in all economic relationships is this mutuality of in- 
 terests. Unfortunately, there is only a faint compre- 
 hension of it, and, because this is so, we have a world 
 
 15 
 
of rivalries and antagonisms, which naturally break out 
 from time to time in war. The responsibility for war 
 does not lie wholly with the nation which fires the first 
 gun. The spirit of war is developed in mistaken ideas 
 about national interests. If nations believe that their 
 fundamental interests are in conflict, that there is an 
 irreconcilable rivalry and struggle for existence, if 
 people believe that the future of their country or of 
 their children is at stake, — of course they will fight; 
 war is inevitable. Nothing else is to be expected. 
 
 I do not like the language of warfare in descrip- 
 tion of trade rivalries. There are trade rivalries; 
 they are necessary, legitimate, and, if conducted in the 
 proper spirit, stimulating and wholesome. But it is a 
 mistake to emphasize them as though the success of one 
 nation depended upon driving another out of the field. 
 That idea is based upon the assumption that there is 
 only a limited amount of business to be done and never 
 enough for all — an error responsible for infinite mis- 
 chief. 
 
 It is the chief grievance alleged against the labor 
 organizations that they sometimes limit the output, 
 acting upon the theory that there is only a limited 
 amount of work to be done, and that it is to their 
 interest to make it go as far and pay as much in wages 
 as possible. Every such conception of industry and 
 business is fundamentally wrong. There is no limit to 
 the amount of work to be done or the amount of busi- 
 ness to be had, because there is no limit to the amount 
 of wealth that may be created from the resources of 
 nature, or to the consumptive demands of the world's 
 population. 
 
 Can anyone think in this age that there is danger 
 of general over-production of the commodities of 
 trade ? The people of the United States live upon a 
 
 16 
 
level of comfort above that of any other people in the 
 world, and yet the average family in this country lives 
 far below the level of its wants and its commendable 
 aspirations. In this day of free schools, of cheap print- 
 ing, of democratic ideas, the wants of the people de- 
 velop faster than their ability to supply them, and hence 
 we have a growing discontent which threatens the very 
 foundations of the social order. The spirit which finds 
 its blind expression in Bolshevism has its inception in 
 the desire for better living conditions, and it is an 
 ai¥ront to that spirit — and an aflfront to common sense 
 — to conduct the international policies of nations upon 
 the theory that the chief danger to be averted is that of 
 over-production. Such an argument amounts to a con- 
 fession of ineffectiveness ■ or non-achievement in the 
 industrial management of the world, and affords a basis 
 for challenging the existing order. 
 
 But it is one thing to be critical and another thing 
 to be constructive, and the critics of the existing order, 
 where they get a chance, display a greater incom- 
 petency. The condition of the masses will never be 
 improved by paralyzing industry in efforts to divide 
 the existing stock of wealth. The existing stock in 
 itself is of small importance; it is the constant and 
 efficient employment of all the agencies of production, 
 and the regular and increasing fliow of goods to the 
 market, which concerns the public. The problem of 
 society everywhere is to organize more effectively — 
 to co-ordinate, integrate and balance — production in all 
 branches to obtain the greatest possible output of the 
 things which minister to the common comfort and 
 welfare, and to secure by exchange of products and 
 services their widespread distribution and consumption. 
 This is the great appeal to the enlightened and con- 
 structive forces of the world. 
 
 17 
 
The United States, as a creditor nation, by the very 
 logic of its position and for the maintenance of its 
 leadership, will be obliged to use its strength for the 
 upbuilding of other countries. It has the opportunity, 
 the resources, the industrial equipment and organiza- 
 tion to play a great part in the reconstruction and 
 progress of the world. The only question is, how is 
 the world to pay for the things it would be glad to buy? 
 We can have any amount of business from Russia, 
 from Asia, from South America and from Europe, 
 upon condition that we finance the purchases, giving 
 them a chance to pay out of the benefits which are 
 created. 
 
 When one sees the opportunities that are waiting 
 for capital everywhere, and of the benefits that 
 would result if they could be improved, he is prompted 
 to think that this country ought to be willing to go on 
 siege rations, with meat days, bread cards and milk 
 tickets, and voluntarily economize and devote its sav- 
 ings and its industrial equipment to increasing the 
 productive capacity of the world, and thus ameliorating 
 conditions in this great emergency. 
 
 No group of business men in this country is more 
 directly interested in this situation than the Invest- 
 ment Bankers. It is your business to popularize the 
 fundamental virtues of thrift and economy, to teach 
 the social service that is performed in saving for in- 
 vestment, and to gather up the capital which is re- 
 quired for industrial development. There is no ade- 
 quate comprehension in the public mind of the part 
 which Capital plays in social progress, or of the obliga- 
 tions of our new position. It is for you to assume 
 leadership in a campaign of education. 
 
 A1950 
 
 18 
 
V 
 
f