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N "AMERICA AMD THE DEBTS OF EUROPE" Address by EDMUND PLATT VICE-GOVERNOR FEDERAL RESERVE BOARD before THE AMERICAN ACADEMY OF FOLITICAL A!>JD SOCIAL SCIENC Pniladelphia, Pa. Friday Evening, May 1 2 , 1922. X-3395For Release in Morning Papers, Saturday, May 1 3 , 1922. 1964 / -l- X-3393 The topic assigned for discussion this evening "America and the Debts of Europe" is broad enough to allow of considerable latitude 2-nd does not necessarily imply that discussion is to be limited to the d Qbts of Europe to America, but I take it that it is with such debts toat we are chiefly concerned, and I propose to speak particularly of toe debts not of European governments to our government or even to our people who have purchased the bonds of European governments, but of toe debts which business m e n , manufacturers and bankers of Europe owe our business m e n , manufacturers and bankers. With regard to the great debt of cur former allies or associates l n vv ar to our government I merely want to say in passing that I have oeen rather surprised as to the source frcm which the principal demand for its early payment appears to come- If this demand came frcm toe great financial centers or from men of large incomes who pay the ^ os 1 rorr dUC t burdensome taxes, it would be explained by the desire for relief * taxes through the application of the sums received to the retin r u o n a n i i of txie war debt, but it appears to come from producing centers, Particularly from agricultural sections which are dependent upon '--port demand for their products for maintenance of prices. It would clear that early payment of any part of this debt must decreasa e purchasing power of the people of the allied countries and must therefore moke for lower prices for the products we sell to them. It is of course well known that European merchants, traders and kan^crs owe large sums of money to Americans. Even if we had no direct -2- X-3399 proof Of this we should know that it must be true from the fact that l a r g e flota t i o n s of foreign securities have been made in this country without turning the tide of gold importations. Since last October toe foreign financing in this country has at times almost equalled toe current trade credit balance, but gold importations have continued, ^ith only a slight slackening due evidently to the stoppage of gold Production in the South African mines through strikes. How much of an unfunded trade balance is there? This has proven interesting study for economists and statisticians and they have as sambled many columns of interesting figures, but have differed conerably i n their conclusions. I think the first serious effort to bri n g together the known facts, the visible items, with some estimate ' Of f Vin ii • invisible" items was made by the Federal Reserve Board's V i s i o n of Analysis and Research in-the Federal Reserve Bulletin for -Ptember, 1920. A merchandise balance had accumulated in our favor had $6,062,000,000 be m m v e r e v between November 1 , 1918 and July 3 1 , 1920 and it ^ i ^ o n t long before that such a one-sided trade could no'- v,S c a r ' i e d on indefinitely. The Federal Reserve Bulletin brought 0 1 ight offsets that appeared to reduce this balance of more than six ^ il l l 0 n d o l l a r s to about three billion dollars, adding that "from this, must be deducted the amount of indebtedness to European and r Coun 0 thecourse, t r i e s which existed at about the time of the Armistice." m i s was followed the next month by a much more elaborate study by |)r -Q a . IJ1. Anderson in the Chase Economic Bulletin on Europe's f u n d e d debt. His conclusion was that "on September 1 5 , 1920 Europe X-3399 owed an unfunded debt of over $3,500,000,000 to private individuals, banks and corporations in the United States," this being in addition t h e t e n billi ° n dollars which European governments owed to the United States government, and in addition to the debt of Europe to investors in the United States holding European securities. - D r . Anderson maintained that the primary explanation of the tremendous expansion of bank credit in the United States in 1919-20 was "our b a l a n c e d and unfinanced export trade, together with the rising Prices, fictitious prosperity, and speculation which have grown out o f the unbalanced export trade." Our exporters had borrowed money from * ° Ur b a n k 3 i n i a r 8 G amounts because of inability to collect what as due them abroad, or because they had taken payments in foreign c a r ^ n c y balances which they thought they could convert into American dollars at more favorable rates of exchange later. D r . Anderson G l a r e d that computations as to the unfunded balances owed us on our ,0r] -d trade wore not particularly valuable - that the European balance was th e only one that counted, as the triangular exchange of goods ^ credit by which America's credit balances in Europe had been b r o ^n through debit balances with South America and the Orient had d o w n < idea was combatted by Prof. John K . Williams in the June, log^ -view of Economic Statistics of the Harvard University Committee on Econ omic Research. He gave reasons for believing that it is still ^issible to to subtract from Europe's debt to us the amounts we owe non-European countries, and his final conclusion was that the unf Un J d o b t to the American merchants, bankers and corporat: -ions was x-3399 considerably smaller than others had estimatad. "Our international Situation since the Armistice," he declared, "has been less alarming than has frequently been stated. It appears improbable that our unfunded balance exceeded a billion do11,r. a t the end of last year" (December 31, i 9 2 0 ) . Our u n f u n d e d b a l a n c e frora ^ ^ ^ Q S t i m a t e d at from half a billion to a billion greater than our balance with world as a whole, but he concluded "It is not possible to believe th a t so prolonged and pronounced a recovery could have occurred ^ n European exchanges) had London and' the Continent been indebted the United States - besides the $10,S4U,0C0,CC0 of obligations by our government and the private long term indebtedness - ty three to four billion dollars". m November, 1 9 2 1 , the Federal erve Bulletin returned to the subject with a much more complete s tatoment of items of credit and debit than in the study of September, 1 9 2 0 , the conclusion being that so far as visible items, and items 1 "'hi 10X1 ' with some approach to accuracy were concerned, t h G U m ° d U °° Ur r n 0 r c h a n t s , bankers ,md corporations was on October 1 ' no less than $ 3 ^ 0 3 , 0 0 0 , 0 0 0 . that * Ihe Bulletin mentioned offsets night reduce this amount, such as the speculative purchases of I - ourrencies hy A f r i c a n s , hut did not attempt to estimate their amount. U h " I M = sum referred to our trade with non-European as ..veil as European countries. th ^ * It W a s swelled half a billion dollars hy d e l u s i o n of an item with relation to the cost of cancellation of 1 1 P^an thin - •war contracts in this country in 1 9 1 9 , an item not included, m any previously published estimate. n -5- X-3399 The February 1922 Federal Reserve Bulletin pointed that in October, November and December our favorable balance of trade was a little less than $300,000,000, from which gold imports of $125,000,000 were to be subtracted, leaving the net addition to the unfunded balance $175,000,000, and conjecturing that the invisible items plus foreign financing probably more than offset that amount. The unfunded balance on January 1 , 1922 was therefore given as $3,1+00,000,000, ^ P P i n g off $3,000,000 from the November estimate. There have, of course, been other contributions on his subject. The Journal of Commerce on Monday, April 2Uth, Published a number of articles by leading bankers and economists, a n d the economic magazines havs published occasional papers, but generally speaking these have added only an item or two to 4-V studies already referred to, or have expressed opinions Without bringing much that was new to their support. It is noteworthy that the main studies of this subject coincided with periods of depression or of recovery in sterling e *cnange. a n d w h e n Sterling had been pegged during the war at U.76, f l o w e d to take its own course after March I S , 1919 egan to fall until in February, 1920 it reached a low point o f 3-1S. it recovered to U.00, then fell to 3-5S in August X-3399 -b- at the time when the first study of u n t o d e d balances was made in the Federal Reserve Bulletin in September of that year, followed by D r . Anderson's study of October. In the Spring of 1921 there was a remarkable recovery with cable rates at or a little above $U.OO for more than a week in the latter part of a n d it; w a s d u r i n S this period of recovery, or before the reaction from it had proceeded far, that Prof. Williams made elaborate contribution to the Harvard Review of Economic Statistics. It was natural at that time to find reasons for S i e v i n g the unfunded balance much less than had previously ^ ^ e S t i c e e d ^ e d , and P r o f . W l l l a a f f l , conclusion that so pro- a recovery could not have occurred with so great an f u n d e d balance as three or four billions of dollars seems Rifled. ^•hlQ T*A * By the time of its publication, however, in June t a c t i o n was well under way and before the end of July Ste 5 r l i n g rates were as low as in August of the year before, below - ' 60 from the 19th of July to August 6th. X-3399 -7- When the Division of Analysis and Research of the Federal Reserve Board made its second and chief investigation of the question of unfunded debts for the November issue of the Bulletin there had been considerable recovery, hit the study was. published or was prepared, just before the notable rise in sterling, in French francs and in lira that began about the time the Conference on the Limitation of Armaments met in Washington. % the end of November British pounds had risen to about $U.OO, and by December 31st to U.21 l/U, and by March to $U.U0. Since March the advance has proceeded less rapidly, but has been well sustained. There is no further talk of debasing the pound and British bankers express confidently their expectation that par may be reached before the close °f the present year, or soon after the end of the year. There is no necessary conflict between the figures on the unfunded Glance as given in the November Federal Reserve Bulletin and carried forward to the' end of the year and other studies of the subject, with the exception of one or two items, for the reason that the Bulletin has n o t attempted anything further than an appraisal of known facts with • ^ c h invisible items as had long been estimated as offsetting the balance o f trade, such as tourists' expenditures, relief contributions, emigrants' remittances, etc., concerning which enough information could be obtained ^Pon which to base estimates. As already stated it appears that the Sold imports, the known investments of Americans in foreign securities, the invisible items included in the Bulletin's figures have somewhat 0v erbalanced the excess of exports over imports for several months, S "* X-3399 ^ t for more than a year imports have been slowly increasing while exports (in value at least) have been decreasing, so that this change a l o n e is not enough to account for the very pronounced and well sus- tained rise in sterling and in the principal allied currencies. The s c o l l u s i o n eems inevitable that no such recovery could have been made t ^ there were still an unfunded balancs due the merchants and bankers o f this country as great as three billion dollars. That there was such a talance in the summer of I920, when the federal Reserve Board first undertook an investigation of the subject ha v e no doubt. Liquidation had scarcely begun at that time, and Dr a . '.Anderson xvas doubtless also right in attributing a large share the overextended condition of banks in the financial centres to h e efforts of our exporters to carry this balance,- Whether it could hav a v e b e e n cut down so much as Prof. Williams estimated by the beginning the y S a r 1921 seems more than doubtful, but that liquidation and ins o l e offsets had by that time become well started is reasonably cer?he Federal Reserve Bulletin has suggested that speculative P U r c h a s e s of foreign currencies may have been a large item and has al s 0 suggested that American exporters have doubtless charged off considerabl ^ i -^ses. A It seems probable that the major depressions of cnange mark periods when our people were seeking to convert foreign ances m t o dollars and that exchange recovered when most of the nv e - s i o n s had been made and losses wiped out. Some very large Arne r i r ^ exporters are known to have taken considerable losses in XERO ' ncofv t -9this w a y . X-3399 They sold in terms of foreign currencies, a n d found them when payments became due considerably depressed, but when recovery was delayed beyond their expectations they finally bought dollars and took their losses. Very large losses are also known to have been charged off some of our bankers. It should be remembered always' that even if the balance of trade S r e a c t u a H y against us European exchanges would not be at their old ld P a r n % T h e °° o f Principles laid down in the well know Bullion Report 1810 with regard to the effect of irredeemable paper currency on ^ c h a n g e still govern. With the English budget in balance and British n Prices about as low as ours,sterling might be nearer the old par than •f • it is now if there were no unfunded talance due us, but it . fre n n °t go to par until, the paper currency of England is actually and • °ly exchangeable for gold. Predictions as to the future course of exchange are rather thanks , however. could a As already mentioned there were British economists and Who declared no longer ago than last fall that the pound sterling never recover, or that its recovery could not be attained without it m o u s ->•0^ decrease of prices, it would to stabilise about or 3./0. Thereand hasthat in fact been be a better considerable decline it in prip^c * n l n ° fa c 'reat Britain and that decline has been doubtless a leading c t o r in fv n the recovery of sterling and also in the recovery of Britain's G X p o r t ^rtico trade. longer ago than April 1st the editor of the Economic TTorld whose G s are always worth reading and usually sound predicted that "no 10 ~ ~ X-3399 person now living will ever see the value of the present French franc of actual currency normally and regularly equal to one-half of that of toe gold franc established by law as the monetary unit of France". At the time that was published the French franc was quoted at about 9 cents in our currency. t o It had been as low as 5.79 in 1921 but had recovered S.13 at the end of December. Within a little more than two weeks after. M r . March made this prediction French francs sold a t 9.37 l/2, a n d T h a d little more than a quarter of a cent to go to reach half par. n e y have since fallen back somewhat, but I see no reason why they should not continue to advance, if France makes progress towards' balancing her budget. They are not lower now than our Civil TTar. greenbacks were at one time, and complete restoration does not appear ^ p o s s i b l e , though it may take a considerable number of years. I am not going to undertake to estimate how great an unfunded balance may still be due to the merchants, bankers and corporations ^ msr ica. They had a severe lesson in 1920 and have since then . ' Preferred a diminishing business for which payment was reasonably " Jdre i n hilars. It appears at any rate clear that they have for n "- y months been collecting or funding in some way, or charging off d u G a n d 0 i n them. I believe that investments in real estate in Europe the shares of European enterprises have been a very large off- °tting factor. Prof, ^illiams states in the May number of the Quarterly Journal of Economics that foreign investments in Germany S i Y\c ~ the Armistice have been estimated at nearly $250,000,000, and U ~ ~ x-3393 it is well known that Americans have been large investors not only ^ German property, but in Poland, in Italy and in the states which formerly made up the Austrian empire. This item of foreign invest- ment, with the wide-spread speculative purchases of foreign currencies mi g h t easily have amounted to a billion dollars. The debts of individuals -in Europe to individuals and corporations l n t o jflmerica a . t any rate can not at present, I believe, be so large as Present any insuperable bar either to the restoration of the ex- changes that seem within reach of restoration or to the stabilization o f exchange with countries where inflation of paper currencies has reached a point beyond the possibility of restoration. o f Fluctuation exchange, due to inflation, is annoying and introduces a very un- desirable element of speculation in foreign trade. An irredeemable Paper currency even if not constantly expanded is subject to changes o f 0 r v value from political and other causes not related to trade balances international debts. Our Civil Tar greenbacks went up or down in aiue i n accordance with the fortunes of the Union armies, and later W^ f-Vi t) ^ Q relation to policies under discussion in Congress. f The depre'cia- some European exchanges has undoubtedly been increased by the notability 0 f some governments or by socialistic policies. Confi$en<;e, as Sq cretary Hughes has well said, must precede credit. Given good government and balanced budgets something could doubtless be done in he direction of stabilizing exchanges between countries bavin--: an rr edeeroable paper currency and countries on a gold basis. It would x-3399 - 12 probably be in the nature of recognition for fixed periods, or in ° cc 0 r Cme c a s 3 s Permanently, of new pars around which fluctuations could be ntrolled within something approaching normal limits. No outside international attempts at "stabilization", however, could perform O r a c l e s or take the place of the necessary internal conditions and e ^ o r t s in each country. U n i t e d S t a t Stabilisation of exchanges between the e s and the neutral countries, whose currencies are not N e a t l y depreciated, such as Holland and the Scandinavian countries, —urns within reach on the former gold par bases, and foreign trade doubtless be benefited by such control of fluctuation as might G nd 0 instituted in other cases, but so long as our own currency is sound - our prices attractive and so long as the pound sterling continues maintain itself at a point so near p a r , with francs and lira show- *S progress, it can hardly be said that the continuance or recovery 0 U r fop e i g n trade are really depenaent upon any such stabilizing measures.
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