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THE CRISIS
by
Ernest Bevin and G.D.H.Cole
IV.—DEBTORS AND CREDITORS
[LENDING TO LESS DEVELOPED COUNTRIES. RISK OF DEFAULT]
The basis of world trade is mutual exchange of products. Some countries are best suited to produce certain types of goods, and other countries to produce other goods. In general, the prosperity of each country, as well as the total wealth of the world, will be greatest if each economic area specializes in producing the goods which it is best fitted to produce, and exchanges its surplus for the different surpluses of other areas. The basis of international trade is international barter, based on the different productive qualities, national and acquired, of the various countries and their inhabitants.
To this simple exchange of commodities, however, the modern world has added a new and growingly important kind of international trade based, not on the exchange of goods for goods, but on the lending by the richer and more developed countries of capital resources for the development of the less advanced. This form of trade involves, in the first instance, exports from the former countries to the latter without any equivalent return in goods; but it also creates on the part of the borrowers an obligation to pay interest, that is, to export in future years to the creditor countries goods for which no equivalent in their goods will be due. In the beginning, then, the lending countries have a surplus of exports over imports; but, when the lending has gone on for some time, the interest due on the capital already exported comes to exceed the amount of new capital annually lent abroad, and these countries accordingly show an excess of imports—commonly called an adverse balance of trade. This has long been the position of Great Britain, which has been for generations past the leading creditor country in the world.
This extensive lending of capital to the less developed countries is justified economically, and made attractive to investors in the older countries, by the fact that the exploitation of the unused resources of the less advanced areas often affords prospects of higher profits than can easily be made at home. In other words, the capital is more productive when used in this way than it would be if it were applied to the further development of home resources.
So far, so good. If the capital lent to the less advanced countries is so applied as rapidly to increase their riches and productive power, they can, out of their increased wealth, afford to pay interest on it to the creditor nations, and still retain a margin of profit for themselves. But if the loans so made are wasted in unproductive expenditure, or squandered on wars and armaments, the burden of interest on the debtor country may easily become unbearable; and there have been in the past many defaults due to this cause. Moreover, even if the loans are put to the best productive use, but the value of money changes, or there is a heavy fall in the prices of the goods chiefly produced by the debtor countries, or a serious and prolonged world depression of trade, it may become impossible for the debtors, through no fault of their own, to pay the interest due. For they can pay this only in goods; and if their exports fall off seriously in either quantity or price, they have no other resources out of which to pay, unless indeed they are able to resort to further borrowing—and that will only exaggerate the problem in future years.
In face of the catastrophic fall of prices in recent years, the position of the countries which have borrowed large masses of foreign capital has become increasingly difficult, especially when their borrowings have been in terms of a gold standard currency. For the interest, in view of the lower prices, has come to represent a greatly increased debt in terms of commodities. Hence the recent defaults of Chile and Brazil, the threatened default of Australia, the extreme hardships involved for India and China in the meeting of their international obligations. In the case of India and China, the situation is further aggravated by the fall in the price of silver, which has depressed the purchasing power of the Far East even more than the fall in commodity prices.
It is not too much to say that, failing considerable modifications in the claims of creditor countries, widespread default is inevitable in the near future. As far as Great Britain is concerned, the position of debtors has been greatly eased by her departure from the gold standard; for the debtor countries will now be called upon to pay their interest only in sterling at a lower gold and commodity value. But the United States is still claiming to be paid in gold dollars, and so are other countries which remain on the gold standard. The danger of defaults has therefore not been averted, though in the case of Australia, which owes most of its debts to Great Britain, the position has been materially improved by our departure from gold.
[IMPOSSIBLE SITUATION OF GERMANY]
In Europe, the great debtor nation is Germany. The Germans owe large sums in interest on the capital which they have borrowed for economic reconstruction since the war; and the greater part of this debt is owing to American creditors in gold dollars. The falling price-level has therefore added greatly to the dead weight of Germany’s annual interest obligations.
But Germany is under obligation to pay not only interest on her commercial borrowings, but also large sums in Reparations and other Government debts. Under the Young Plan, the sums due for Reparations are fixed in gold, without any allowance for changes in the price-level. Accordingly, as prices have fallen, the real burden on Germany has proportionately increased, until it has become at the present time altogether impossible for her to meet the changes involved. As we saw, she has made of late years a tremendous effort to build up an export surplus, both by increasing the volume of her exports and by decreasing imports. By these means she succeeded in turning a large adverse trade balance in 1928 into a substantial favourable balance in 1930, at the expense of a very low standard of life for her own people. But, even so, the balance available is wholly inadequate to enable her to meet her international debts and to pay Reparations on anything like the scale laid down in the Young Plan. The moratorium declared this year on the initiative of the Americans was the only possible alternative to a German default, followed by the collapse of the entire Young Plan and probably by most serious political complications as well.
By means of various moratoria, a respite until next February has been barely secured. But no sensible person supposes that Germany will be in a position to resume payment next year. Indeed, despite the Hoover moratorium, it has been touch and go with German finance all through the present summer. The precarious condition of Germany has throughout added greatly to the difficulties of London; for it has been out of the question for London financiers to attempt to withdraw from Berlin the large loans which they have made. If they did attempt to do so, Germany would at once collapse, and her creditors would lose their money. London therefore has been called upon to meet the claims of American creditors at a time when she has been unable to draw in the sums due to her from her German debtors. This is partly the fault of the London financiers, for locking up in loans which cannot be quickly recalled money borrowed on short term from America and France. But unless someone had lent Germany the money there would have been a complete German collapse long ere now.
The immediately critical time ahead is early next year, when the existing temporary loans to Germany through the Bank for International Settlements are due to expire. But it is abundantly evident that no mere moratorium can be of avail in dealing with the situation. It is futile merely to extend another short-term credit to Germany, or merely to extend for a further short period the moratorium on war debt payments and reparations. For it is plain to any rational person that Germany and other debtor countries are burdened with international obligations which they can never possibly meet, and that as long as these inflated claims are maintained in being they are bound to plunge the world into recurrent financial crises, unless indeed a point is swiftly reached at which crisis passes into revolution, and the entire structure of world finance, and perhaps capitalism itself, goes up in smoke.
The only sound basis for world trade is mutual exchange of goods and services. This need not exclude capital loans from the more developed to the less developed countries, provided that these loans are kept within reasonable limits, that the proceeds are put to good productive use, and that the door is kept always open for revision of interest claims in the event of a serious change in the level of prices. But when interest claims are fixed in gold money in face of falling prices, when borrowing is allowed to pass the limits of sound productive expansion in the debtor country, where the proceeds of international loans are applied to non-productive uses, and, above all, where huge non-commercial claims to interest on war debts or to reparations payments are added to the burdens of ordinary borrowing, the entire equilibrium of the world financial system is bound to be upset, and a condition of economic crisis is bound to ensue.
The situation will be worst of all if to these other madnesses is added the raising of tariff walls to a height which seriously obstructs the buying and selling of goods across national frontiers, especially when such tariff walls are erected by creditor countries, which thus refuse to allow their debtors to pay in goods, attract to themselves an undue share of the world’s gold, and make the maintenance of equilibrium dependent on their will to make continuously huge investments of capital abroad, on a scale which can only add to the magnitude of the problem, by increasing constantly the payments due from the debtor nations.
[A WORLD CONFERENCE FOR THE CANCELLATION OF WAR DEBTS AND REPARATIONS]
Surely we have gone on long enough with this farce of war debts and reparations. What is needed here and now is a complete cancellation of all such claims. Great Britain would neither lose nor gain much directly if this were done; for she is on balance, in these respects, neither a large creditor nor a debtor. The United States would give up a great deal—on paper; for she is a huge creditor. But what is the use of being a creditor if the condition of continuing to be one is that you go on lending the debtor the money to pay you with? Even the United States would lose nothing in reality by complete cancellation. Germany would obviously gain; for she is the worst sufferer by the present situation. But does even France really wish to keep the whole world in permanent and disastrous crisis in order to get her own back on the Germans? And, if she does, will a suffering world allow her?
France, indeed, stands to lose, for the simple reason that she has been receiving payments from Germany, while she has successfully evaded the payment of most of her debts to others. France, like Belgium, had doubtless special claims immediately after the war for the restoration of her devastated areas; and, if she can substantiate even now reasonably small claims to special consideration they can be considered by way of exception—a payment towards her high cost of war pensions, for example. But, if any such exception is to be made in France’s favour, it must be only in return for a really large measure of disarmament. France cannot be allowed to wreck a world settlement by standing out for her pound of flesh, or to plead poverty as a reason for exceptional treatment while she continues to spend heavily on arming for the next war. But perhaps before long even the French will realize that it is not to their interest to pull the whole world economic system down in ruins for the sake of accumulating more and more useless gold in the cellars of the Banque de France.
Complete cancellation of war debts and reparations is the first obvious step towards the recovery of world equilibrium. But with this must go either monetary measures which will ensure a very considerable and lasting rise in the level of world wholesale prices, or a drastic scaling-down of all debts, international as well as internal, that are fixed in terms of gold. We have done this for our own debtors by going off the gold standard, and for as long as we remain off it, or at any rate allow the gold value of sterling to be greatly below the old parity. But corresponding concessions will have to be made by countries which remain on the gold standard to their debtors if a great sequence of national defaults is to be avoided.
For these and other purposes there ought to be, in the near future, a World Economic and Financial Conference, fully representative of the Governments of the nations involved—debtors as well as creditors. This Conference ought to have terms of reference wide enough to allow it to consider all the causes of the financial and economic crisis, and to accept remedies of the most far-reaching character and extent. It ought to deal at least with the following matters :—
- Complete cancellation of War Debts and Reparations.
- Scaling down of the interest obligations of debtor countries.
- The permanent raising and stabilization of the world level of wholesale prices.
- The reduction of tariffs.
- The regulation of the volume and direction of overseas lending.
These five points are not put forward as at all a complete summary of what the Conference would have to do, but merely in order to focus attention upon the immediate and outstanding issues.
This Conference, we hope, would be a real World Conference, representing all nations. But, if any nation refuses to attend, the Conference will have to be held without it; and it would be better to have a nation or two absent than to allow the agenda to be emasculated in order to secure their presence. For it is evident by now that only fundamental remedies are of any use in dealing with a world in imminent danger of total economic collapse. For years past, we have been patching up an impossible situation. Now at last the time has come to end it once and for all.
Great Britain’s part in the proposed Conference is clear enough. Her abandonment of the gold standard has given her back the initiative in the world’s financial affairs; for she is no longer harried and helpless with the fear of losing her gold, and all the world is watching attentively to find out what her new policy will be. Moreover, as she stands neither to lose nor to gain much directly by cancellation of war debts and reparations, she is admirably placed for putting forward sane and far-reaching proposals. Given a strong and imaginative Government, concerned above all to get the economic life of the nations once more on a firm basis, Great Britain to-day could lead the world. Instead, she is hovering between her desire to get back to prewar parity and her fears of losing her position as a creditor country, and letting her great opportunity go by. It will not long remain hers. For within a few months either some other country will have wrested the initiative from her, or the world financial system will have dissolved into chaos and, maybe, revolution. The time to act is now; and the action needed is plain enough for even politicians to see it.