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  Publication on War Debts & Gold Crisis

by Ivy Lee & AsHTTP/1.1 100 Continue sociates

  NO 112                    New York City                      March 4th 1932

  ‘Public sentiment’ is everything.  With public sentiment nothing can fail; without it nothing can succeed.  Consequently he who molds public sentiment goes deeper than he who statutes or pronounces decisions.  He makes statutes and decisions possible or impossible  to be executed.”  ABRAHAM LINCOLN in  first joint debate at Ottawa, Ill., with Stephen A. Douglas, August 21,1858.

  An address delivered at DePauw University, Greencastle, Indiana, February 21, 1932.


  This is a plea for realistic treatment of the problem of war debts and reparations.  Such realistic approach will necessitate detachment from prevalent American political sentiment.  But no considerations of political sentiment should deter us from making an effort calmly to analyse the stubborn facts.  The inter-relationship of debts and reparations may be seen if we analyse the conditions under which debts and reparations, however disagreeable they may be or however difficult it may be for us to adjust ourselves to them.

Let us question, first of all, the idea that there is no essential connection between inter-allied debts and German reparations.  When President Hoover proposed, last June, a moratorium on all inter-governmental debts, he recognized the fact of this inter-relationship, no matter how definitely he stated that the payment of reparations is a strictly European problem in which we are not involved.  The fact which he recognized was that, unless Germany was freed immediately from the necessity of making reparations payments for at least one year, there would be instant collapse of the whole German credit structure with most serious results to us.  He also recognized the utter impracticability of absolving Germany from her immediate obligations without corresponding absolution of the Allies from making payments on inter-governmental debts.  The inter relationship of debts and reparations may be seen if we analyse the conditions under which debts and reparations developed.


In nearly all previous wars, rich nations had financed their allies by subsidies.  At the outset of the World War, however, England established the plan of making loans instead of subsidies to her Allies, largely for the reason that by such process she could exercise control over her Allies in the making of their purchases.

We followed in England’s train.  After we entered the war, the Allies were permitted to borrow no more American money in the open market.  In fact the whole capital market of the United States was absorbed by Liberty bond issues.  England was in dire need of increasing quantities of war supplies which we were alone in a position to furnish.  The other Allies were frantically calling for supplies such as England had been furnishing.  But England’s financial tether in this country was about at an end.  The Allies, likewise, had no foreign exchange available with which to make purchases in England.  We, accordingly, loaned to England a total of $4,250,000,000, every dollar of which we stipulated should be expended in the United States.  We loaned neither to England nor to any of the other Allies, money which they could expend elsewhere.

Through its control of loans, our Government was able to maintain a rigid oversight upon Allied purchases made in this country.  All such purchases were made at war-time prices, resulting in huge profits to our manufacturers and in high prices to our farmers.

During this period, when we were lending England $4,250,000,000, England in turn loaned to her Allies the sum of $3,750,000,000.  Thus, some 85 per cent of the money we loaned to England was, in effect, for the purpose of enabling England to finance her Allies, who were at that moment our own.  At the end of the war, England was owed by her Allies a total of about $8,000,000,000, while she owed us little over half that sum or $4,250,000.000.


Ordinarily, international loans are made for productive purposes, for the financing of public works or industrial enterprises.  The continually recurring wealth produced from them makes possible payment of interest and amortization of principal upon such loans.  But war loans were made for purposes of destruction.  They did not, with unimportant exceptions, represent productive investments; they were and still are of no more value productively than if they had been taken out to sea and sunk in mid-ocean.

  Take another phase of the subject: It cannot be doubted that it was contemplated, when these loans were made, that the Allies would eventually, as a result of victory, be able to collect from Germany the money necessary to repay us.  Certain it is that, had the Allies contemplated the possibility that they could not collect from a defeated Germany the sums necessary for such repayment, they would have stipulated such a condition in borrowing the money, and there is no doubt but that we would have agreed to it.

  Numerous citations could be made from utterances by leaders in the Senate and House at the time these advances were made which show that practically everyone considered these loans as America’s contribution to the prosecution of the war.  Doubt was indeed expressed in the Senate and House as to whether these loans would be repaid, but indifference was declared by both Democrats and Republicans as to their eventual repayment, and these declarations of indifference were never seriously challenged.

In the fevered psychology of that moment, hard bargains were not being driven between Allies.  Let us suppose, for the sake of argument, that Germany had been the victor and that the Allies, along with ourselves, had been compelled to pay a huge indemnity to Germany.  Is it conceivable, then, that we would regard these loans as in the light of ordinary commercial investments and insist upon their repayment to us?  Let us suppose that the war had resulted in a stalemate, and that all questions of indemnities and reparations had been waived: is it thinkable, then, that while agreeing that our enemies should pay no reparations to us, we should require our Allies to repay every cent of the cost of the supplies we had furnished to them for carrying on the struggle?


If as a good many people believe it should develop that Germany either cannot or will not pay any further reparations, the victorious Allies, while receiving nothing whatever from defeated Germany, will yet be compelled, in settling their debts to us, to pay to the United States, over a period of nearly two generations, the sum of approximately $250,000,000 annually.  From a strictly financial point of view, would this not place the Allies in exactly the same position, at least measurably, as if they had been defeated in the war and had been compelled to pay an annual indemnity of that amount?

If it be admitted that repayment of the interallied debts were in any sense even morally subject to the results of the war, is it not arguable that these debts were in an entirely different category from ordinary commercial debts, and must be dealt with as such?  It is upon such a theory that it may be urged that the cancellation of war debts does not involve the slightest disregard for the sanctity of business contracts.

The World War is estimated to have cost our Allies some $120,000,000,000 for expenditures and property damage.  A similar basis of estimating places the cost in money to the United States at approximately $28,000,000,000.  In human lives, the war is estimated to have cost our Allies over 4,000,000 dead and nearly 7,000,000 wounded, while it cost the United States 107,000 dead and 191,000 wounded.  What could we think if what came to be a common effort should have imposed such a disproportionate burden upon our Allies, as contrasted with ourselves, and at the same time have left the United States as the sole beneficiary of tribute for 60 years, amounting to $250,000,000 annually?


  We may well ask ourselves, what is the likelihood of the continuation of any German reparations payments?  In my personal judgment, the whole scheme of reparations and interallied debts is a corpse, and the only real question is, ‘When will the funeral be held and what will be the inscription placed upon the tombstone? If the patient is not dead, certainly he is hanging on to life by a very slender thread.’  Nevertheless, a mere personal view of this kind is unimportant, and we are here this evening to reason, to examine the facts, and to try to ascertain their meaning.  Let us, then, consider first the economic aspects, and, secondly, the psychological features of reparations.

  The Treaty of Versailles imposed upon Germany an obligation, payments upon which could be made only by Germany’s maintaining an enormous export surplus over a long period of years.  Yet before the war Germany usually had had an adverse balance of trade.


  Nevertheless, between the signing of the Armistice and 1923, Germany paid in reparations a sum, wholly in goods, estimated by the Reparations Commission at a value of $2,000,000,000.  From 1924, when the Dawes Plan was agreed upon, until the Hoover moratorium in 1931, Germany paid in reparations $2,500,000,000 and borrowed during the same time some $4,500,000,000.  If one is to accept the figures of the Reparations Commission, Germany has borrowed abroad since 1924 almost exactly the total amount she has paid in reparations since the Armistice.  The German Government, however, recently issued a detailed statement, claiming that Germany had, since the Armistice, paid in reparations a total of approximately $16,000,000,000, or nearly four times the amount borrowed abroad.

  In addition to her obligations on account of reparations, Germany today owes a net private debt to foreigners of something like $5,000,000,000.  Germany is indebted to American investors and banks in the sum of approximately $2,000,000,000.  But up to 1929 Germany’s imports had been greater than her exports.  Since foreign lending stopped, Germany has been able to show an export balance, but this balance is abnormal since it has been obtained, not through increased exports, but through enormously diminished imports.  As a matter of fact, Germany’s exports in 1931 were some $700,000,000 less than in 1930, but her imports were reduced by $1,000,000,000.  Germany is today exporting nearly twice as much as she is importing, but to continue exports on such a scale involves selling goods in the world market at very low prices, while such a reduction of imports exacts of Germany a very low level of consumption.  The whole situation represents continued impoverishment and high unemployment.  Continuation under such conditions of the German export balance on anything like the present scale would appear to be economically out of the question.


  If Germany is to pay reparations, service upon or amortization of private loans must be abandoned, at least for a long time to come.  The total service on her private debts involves a foreign obligation upon Germany of at least $325,000,000 a year.  Germany’s requirements for working capital are so great that it is evident that the restoration of Germany’s economic health will arise, for many years to come, through being relieved of the necessity to make huge payments abroad and in being able to command credit sufficient to enable her to purchase raw materials abroad and thus develop her internal economy to a point where she can eventually begin to make foreign payments on healthy basis

If reparations are to be paid before private debts, they will absorb all foreign export balances that Germany can possibly develop.  That situation, leaving nothing to pay on account of private debts, would mean the insolvency of Germany as a foreign borrower, total destruction of her ability to command credit for purchasing raw materials abroad, a complete breakdown in German internal economy, and thus progressive inability to make any payments whatever on account of either reparations or private debts.


  There is another phase of the subject which has created for Germany not only great difficulty in meeting reparations requirements, but has left a deep feeling of injustice.  Let us remember that Germany at the Armistice did not surrender unconditionally, but agreed to make peace on the basis of President Wilson’s Fourteen Points. Point Three stipulated that the Peace Treaty should effect:

  “The removal, so far as possible, of all economic barriers, and the establishment of an equality of trade conditions among all nations consenting to the Peace.”

  The Germans at Versailles claimed that the Treaty violated that condition, and that Germany was not accorded trade equality with the Allied nations.  In their answer to the Germans, the Allies (January 16, 1919) acknowledged this fact, but, with a subtlety worthy of Metternich, justi­fied it in these words:

  “The German Delegation,” said the Allies, “would neglect entirely the economic conditions which have resulted from the war.  They seek admission to all the trade arrangements provided by the Peace.  This would have the effect of establishing an inequality of trade(!)  Equality can only be established by arrangements which take into account the existing differences in economic strength and industrial integrity of the peoples of Europe.”


  And so the Treaty was made, with all its unequal burdens upon Germany.  And ever since then Germany has complained that, while the Allies were demanding huge reparations payments, they were establishing barriers to trade which made it difficult if not impossible for Germany to ship the goods out of the proceeds of which alone could reparations payments be made.

  A striking instance of the sort of thing that is going on all over the world today, preventing the normal movement of trade, and making it difficult for countries to pay their debts to one another, is afforded by the experience of Hungary and Switzerland.  Hungary formerly used much Swiss Cheese.  She was a great wheat-producing country and with her export sales of wheat she was able to pay for her cheese.  Switzerland bought Hungarian wheat and paid for it with the cheese which she produced.  Today, Hungary imposes a tariff on cheese, and Switzerland a tariff on wheat.  As a result, Hungary is making her own “Swiss” cheese, and is unable to sell her surplus of wheat; Switzerland is unable to sell her cheese, and yet is paying bounties to her farmers to raise wheat!

  The Committee of Experts which in 1924 promulgated the Dawes Plan pointed out that payments of reparations by Germany could be made only through bringing about a restoration of German prosperity, particularly in her foreign trade. As the Dawes Committee said:

  “The funds transferred to the Allies on reparations account cannot in the long run exceed the sums which the balance of payments makes it possible to transfer.”


  Such, in brief, are the elementary economics of the situation, as far as Germany alone is concerned.  But economics do not tell the full story.  The scheme of reparations is set forth in the Treaty of Versailles to which Germany was compelled, at the mouths of Allied guns, to sign her name.  The first clause of the Reparations Chapter of the Treaty required Germany to subscribe to this confession:

“Germany accepts the responsibility of Germany and her allies for causing all loss and damage to which the Allied and Associated Governments have been subjected as a consequence of the war imposed upon them by the aggression of Germany and her allies.”

Before signing their names to this indictment, the German delegates to Versailles protested.  But the Allies rubbed it in, by addressing, on June 16, 1919, a communication to the German Delegation, in which it was stated that the Allies “regard this war as a crime deliberately plotted against the life and liberties of the peoples of Europe.”  It is this which the Germans regard as the so-called “War Guilt Lie.”  Regarding, as they have a right to do, this war-guilt accusation as the corner-stone of reparations, the German Consciousness rebels against the plan of reparations to just the extent that this war guilt accusation is regarded as unjust.

Is the accusation in fact unjust?  On this subject I can do no better than to quote from Professor G. P. Gooch, eminent British historical scholar, who, in his book, “Recent Revelations of European Diplomacy,” after setting forth the results of the historical researches of scholars since the war, states his conclusion that:

“It is a mistake to attribute exceptional wickedness to the governments, who, in the words of Mr. Lloyd George stumbled and staggered into war.”

His careful analysis of all the evidence leads Professor Gooch to the conclusion that the rulers of Germany and Austria “may be acquitted of the inexpiable crime of starting the avalanche.”

The Archbishop of York, Primate of England, in a sermon delivered on January 31st of this year, stated that the war guilt clause in the existing treaties “offends the Christian conscience.”  No European, he said, can read the diplomatic history of Europe from the Congress of Vienna onward, and exonerate his own nation from responsibility for the war.  The roots of the great disaster strike deep into the past; “it was the sin of us all that brought forth in those fearful years its flower and its fruit.”

In spite of the war-guilt indictment, it is an odd fact that the great bulk of Germans who participated in the war and in the defeat of their country have done their best to comply with the Treaty of Versailles and make good on its reparations requirements.  The opposition comes chiefly from the youth of Germany; those who had no remote responsibility for the conditions which caused the war or for the methods of its conduct.  The youth of Germany today feels that it is in bondage, that the scheme of reparations deprives the German of opportunity to enjoy life or to attain progress.  That feeling is the basis of Hitlerism.  So bitter is the feeling, so profound the rebellion against this sense of bondage, that it is hardly possible that the plan of reparations, at least as now imposed, will be long endured by the population of Germany.


  Contrast the treatment of Germany by the Allies with the treatment of France by Wellington after the Napoleonic Wars.  France had supported Napoleon in wars which carried devastation from Portugal to Russia.  After Waterloo, so great was the prestige of Wellington that to him was entrusted the power to say what indemnity should be imposed upon France to repay Russia, Austria, Germany and England for their expenditures and losses.  Philip Guedalla, in his recent life of Wellington, analyzes Wellington’s mental approach to the problem.  He says that the Duke considered that, “if such disasters as the Napoleonic wars were to be avoided, France must be reconciled to the new terms of peace.”  Wellington himself wrote a memorandum, setting forth his views as to the choice which lay before the Allies. He said:

 “If the policy of the united powers of Europe is to weaken France, let them do so in reality.  Let them take from that country its population and resources, as well as a few fortresses.  If they are not prepared for that decisive measure, if peace and tranquillity for a few years is their object, they must make an arrangement which will suit the interests of all the parties to it, and of which the justice and expediency will be so evident that they will tend to carry it into execution.”

  Well might the makers of the Treaty of Versailles have emulated the wisdom of Wellington.


  The question of reparations and interallied indebtedness, so far as it affects the United States, goes much deeper.  First of all, we cannot afford to allow either Germany or the Allies to default.  Indeed, is it not directly in our own interest to participate in canceling the whole scheme of reparations and war debts?  Even Secretary Mellon, head of the Debt Funding Commission, and anti-cancellation protagonist, in a statement before the House of Representatives Committee on Ways and Means, January 4, 1926, said:

“Europe is our largest customer.  Unless the finances of Europe can be restored, her currency placed on a sound basis, and her people able to earn and to spend, this country will not be able to dispose of its surplus products of food, materials and goods.”

  And then he added:

“The entire foreign debt is not worth as much to the American people in dollars and cents as a prosperous Europe as a customer.”

These words of Mr. Mellon recall the words of Horace Walpole, who, when certain onerous taxes were proposed in the British Parliament to be assessed against the American colonies, stated:

  “We do not want their taxes; we want their trade.”


  What does the trade of Germany and England mean to us?  Let those who talk glibly of the unimportance of our foreign trade in our total commerce reflect upon these figures:

In 1911, the United States produced 16,000,000 bales of cotton, of which Germany and England took 7.500,000 bales.  It so happens that the 1931 cotton crop was again about 16,000,000 bales, and of that crop Germany and Great Britain at the moment are taking a very much smaller proportion.  Hence the disastrous price of cotton which spreads its blight over all our Southern States. 

From 1909 to 1913, England and Germany took 40 per cent of our total exports of all kinds.  All South America took only 6 per cent and all Asia only 4 per cent.  Today the ability of either Germany or England to buy in our markets is steadily diminishing, and the unemployed men upon our streets, the idle machines in our factories, the empty freight cars on our railroads, and the pitiable plight of our farmers tell part of the story.

When President Hoover proposed his moratorium plan last June, values on the New York Stock Exchange improved $10,000,000,000 in two weeks.  Probably the paper value of all American wealth improved £30, 000,000,000 or $40,000,000,000 in that short period.  Why? There can be but one reason, and that was an evident public feeling that the end of reparations and interallied debts, which then seemed definitely in sight, would mean such a revival of world markets for American goods that trade would rapidly increase.  Had even a portion of these speculative values been sustained by the events, the chances are that the new taxable values created would have been such as to make the extra payments which American taxpayers might have to assume unimportant in comparison with the opportunities for profits and prosperity thus opened up.

If we waive our claim for payments on interallied debts, our taxpayers will, to be sure, be undertaking a burden of some $250,000,000 a year.  If we act wisely and constructively, we can, in opening up markets, create values for our farmers, our manufacturers, our workingmen, which will make them easily able, out of the new wealth created, to sustain the extra burden.


  We have a direct interest in restoring the solvency and the prosperity of the whole world.  Foreign nations owe us upward of $20,000,000,000.  Their debts and the interest upon them can only be repaid if trade revives and the credit of those nations is again placed upon a sound basis.  Some of our people say, lightly, this is only a bankers’ question.  Is it not, in reality, a people’s question?  The people—not the bankers—have invested in foreign securities.

It is the people’s money which is at stake.  Even where our bankers have made foreign loans, they have used the money of American people— their depositors and their stockholders—to pay American citizens for goods which have been shipped abroad.  The American people— farmers, manufacturers, workmen— have received the money; foreign peoples have the goods.  American bankers merely hold the IOU’s of foreign nations or banks, representing the benefits others have received.

It is argued that Wall Street bankers advocate debt revision merely to enable them to place more loans and gain more commissions, while the American people would have to bear the burden of paying for Europe’s war.  Assuming that the cost of meeting the added taxes of $250,000,000 annually arising from remission of war debts were placed upon American taxpayers, who would bear the major share of that burden?  Official Treasury figures for 1928 show that 97 per cent of the total income tax collected by the government was assessed against 380,000 persons out of our total population of 122,000,000, and that 60 per cent of the entire tax was assessed against 16,000 persons.  They are the ones who would bear the chief burden.  The chief benefits would go to the farmers in the creation of new markets for their goods, and to the workingmen in the creation of new opportunities to sell their labor.


  It is urged that if we reduce our claims for war debts, European countries will thus be able to continue more easily their expenditures for armaments.  Much as I protest against the huge European armaments, let us note that internal expenditures upon armaments cannot be related to foreign payments on war debts.  Expenditures for armaments by any country are not payments made to foreign countries.  They are domestic expenditures.  In France, for example, the maintenance of a large army involves enormous payments for food, clothing and housing for the soldiers.  Expenditures for guns once made are over; these other items are continuous.  France herself produces the wheat for the bread, the sheep for the wool, the lumber for the buildings necessary for these things.  Though these payments represent a burden upon the taxpayers of France, if the wheat, the wool and the lumber utilized in this way were not so employed, they could be sold abroad only with great difficulty and at low prices. Even if France should greatly reduce her expenditures on armament, it would not necessarily mean accumulation of comparable amounts in foreign exchange available to make payments abroad.

  The essential fact about war debt payments is that they are foreign payments.  Many people seem to think that the French Government may tax its citizens, deposit the money in the Bank of France, and then either draw a check upon the Bank of France to pay the United States on war debts, or use the same money for armament expenditures.  The essential difference is that a check drawn in francs by the French Government upon the Bank of France to the credit of the American Treasury is of no value to us until it is transferred into dollars.

The transfer of money from one government to another can only be made as a result of the transfer of goods, services or credit from one country to another.  These transfers of goods, services or credit must be made by the citizens of the countries which owe, to the citizens of the countries which are owed.  Commercial transactions do not take place between one government and another.  If more is sold to us by France than we sell to France, the French Government can then acquire from its own citizens, by taxation or otherwise, a portion or the whole of the surplus of the French exports.  This presupposes ability and willingness on the part of ourselves to purchase from France more than we sell to her.  If we refuse to make these excess purchases, payments can only be made in gold.  While France has gold today, it would not take a very long time, if all interallied debt settlements had to be made in gold, for us to absorb all of the gold in the world.

The situation is illustrated by a story told by Mr. Albert Wiggin.  On returning from Europe recently he said that when he was a boy he used to play marbles “for keeps.”  As long as all of his fellow-players had some marbles there was a game, but when one boy got all the marbles the game was over.


  Indeed, the smooth functioning of the gold standard is dependent upon the condition that the total exports (in the broadest sense) of all the countries in the world should strike a substantial balance with the total imports (in the same broad sense) of all the countries of the world.  Gold should be used internationally only for the settlement of the inequalities in payment which may develop between particular nations, just as currency is used to settle balances between banks and the Clearing House. The total of the debits and credits of all the banks should be equal.

If one set of banks is placed in a position where it must make constant payments of currency to another set of banks without corresponding credits accruing, it is only a question of time until the debtor group of banks will be out of the banking business.

If it develops that there is an abnormal movement of goods, services or credits from certain countries, which is nor balanced by a corresponding movement of values from the other countries, the entire equilibrium is upset.  That seems to have smitten the trade of the world in recent years is that through the operation of the reparations agreements and the interallied debt settlements, France has been entitled to receive an amount of values from Germany which represented no corresponding outflow of either goods, services or credit; the United States has been in a similar position with reference to the Allies who have been paying their debts to us.  As neither we nor France have been taking goods or services in adequate quantities, as France has not extended adequate credit, and as we have since the beginning of 1929 greatly curtailed foreign credits, gold in abnormal proportions has accumulated in France and in the United States.


  If this view is correct as to the real meaning of such unbalanced payments, the whole system of reparations and interallied debts is inherently and intrinsically a burden which the trade of the world cannot carry and maintain its prosperity.  It is a cancer, which slowly but surely eats into the otherwise healthy structure of world trade and greatly impedes its early revival.  The English, with that singular genius which enables them to penetrate into the fundamental meaning of things, have seen this clearly, and their government has set forth the view as the official opinion of the British nation that the whole structure of intergovernmental war debts should be abandoned.  And this notwithstanding the fact that the British, with a population of 45,000,000, have a national debt of some $35,000,000,000.

In closing these observations, it is pertinent to quote a few sentences from the report of the Bankers’ Committee which arranged for the prolongation of foreign short-term credits to Germany.  That report, dated Berlin, January 23, 1932, was signed unanimously by the representatives of seven nations, including the two delegates from France and the American Chairman, Mr. A. H. Wiggin.  Three passages from the report to which the attention of the peoples and the governments of the world may well be directed are the following:

“It is obvious that a settlement of Germany’s international payments, which are now under discussion between the governments, is a vital element in this problem, as indeed are the inter-allied debts, which are in intimate economic connection with them.

“The nations of the world are contending each for a disproportionate share of a dwindling world trade.  With a different policy they could share with one another an expanding world trade.  It is essential that trade policy should permit goods to move in the settlement of inter-national debts, and that countries should make markets for one another.  With trade lines open, labor now idle in one country could be at work producing goods to exchange for goods which would be produced by labor now idle in another country.

“The present extreme crisis must bring home to all peoples of the world the fact that all countries grow poor together.  The obverse is as true.  All countries grow rich together.  A lightening of burdens and a greater freedom of trade, enriching one country, will enrich all.”  

“The Equation of Indebtedness”


(From Chapter IV of “The Theory of lnternational Trade,” by C. F. Bastable, published by Macmillan and Company, Limited, 1929)

            The mutual relations of nations, or trading groups, are not all comprised in the actual exchange of commodities.  When intercourse is of long standing, and when it has become possible to move capital with comparative ease from country to country, the exports and imports become but one clement a very important one, it is true in the sum of commercial transactions.

In order to understand the exact position of a country, we must consider not merely the equation of reciprocal demand, but rather what may be styled the equation of indebtedness.  It is not the equivalence of imports with exports that constitutes the stable condition of trade, but the equivalence in the sum of debts due to the country, and that of debts due by it.


The following remarks were part of a speech delivered by Professor Edwin W. Kemmerer of Princeton University, before the New York Chapter of the American Institute of Banking at the Waldorf-Astoria Hotel on February 27, 1932

            Is the charge true that we so frequently hear that the United States has forcibly drawn to itself an unreasonable proportion of the world’s stock of monetary gold and has deliberately and selfishly impounded it here?  The answer, I think, is clearly, “No.”

            In the first place, no one has yet given a satisfactory answer to the question, “What proportion of the world’s stock of monetary gold is the United States reasonably entitled to have?  “Roughly speaking, the United States has about 40 per cent of the estimated capitalized wealth of nineteen leading countries - countries which together have about 90 per cent of the world’s stock of monetary gold.  If, therefore, our share of the world’s monetary gold were merely proportionate to our share of the capitalized wealth, we should have 36 per cent of the total - almost exactly the percentage we do have.  Considering the high development of our American banking system and the highly efficient use we normally make of our monetary gold, we probably have somewhat more need, but we have not obtained it by a grasping policy.

  One common argument is that we insist upon foreign countries paying us what they owe us, and then by imposing against them high tariff barriers force them to pay us in gold.  May I say, parenthetically, that although personally I am not in sympathy with our American high tariff policy, I believe in “giving the devil his due,” and I believe that the influence of our tariff is a very small one on the world’s distribution of gold.


About two-thirds of our total imports enter free of all duty, while the average rate of duty on all American imports for consumption is now only about 14 per cent. Despite the tariff, our import trade has been growing. It increased from 8.3 per cent of the world’s total import trade in 1913 to 12.4 per cent in 1929, and for some years now our import trade has been the largest of any country in the world except that of Great Britain.  The total interallied debt payments to us in 1929 were equal to only 4.8 per cent of our merchandise imports, or to 7.4 per cent of our non-dutiable or free imports.  The interallied debt payments of Great Britain to the United States in that year were equivalent to 4½ per cent of her total merchandise exports.  Her debt payments to us were almost exactly equal to her non-dutiable merchandise exports to us.

One important reason why our stock of monetary gold in the United States is so large at present may be expressed in the term “safety first”.  Funds have flowed to the United States and France in very large quantities for safe keeping.  This flow of investment funds has carried with it a flow of gold.  The all-important consideration lately has been safety, not yield.  Our gold market for many years has been an absolutely free one.  Since 1919 the people of any foreign country (except Russia) having liquid assets in the United States have been able to convert them into gold at will and take the gold out of the country without restrictions.  

“Rules of the Gold Standard Game”


  (From the Quarterly Report of the Skandinaviska Kreditaktiebolaget, in Stockholm, January, 1932)

  The following conditions must be regarded as indispensable for the maintenance of an international gold standard system:

  Firstly economic conditions: the abolition of abnormal impediments to international commerce and international movements of capital; the renunciation of unreasonable demands for transfers of capital in connection with war debts as well as short term credits granted by private lenders; finally some willingness to grant loans to make up for deficits in the international balance of payments.

  Secondly monetary conditions: the utilization of increasing stocks of gold for increasing the amount of money in circulation and thus raising the level of prices - a condition which also involves the renunciation of unreasonable demands for gold cover; as a preparatory step the immediate abolition of all statutory enactments regarding minimum gold reserves.  

Equilibrium in Foreign Trade Is Important


(From “Essays in Persuasion,” by John Maynard Keynes, Harcourt, Brace and Company, 1932)  

  The equilibrium of international trade is based on a complicated balance between the agriculture and the industries of the different countries of the world, and on a specialization by each in the employment of its labor and its capital.  If one country is required to transfer to another without payment great quantities of goods, for which this equilibrium does not allow, the balance is destroyed.

Since capital and labor are fixed and organized in certain employments and cannot flow freely into others, the disturbance of the balance is destructive to the utility of the capital and labor thus fixed.  The organization, on which the wealth of the modern world so largely depends, suffers injury.

In course of time a new organization and a new equilibrium can be established.  But if the origin of the disturbance is of temporary duration, the losses from the injury done to organization may outweigh the profit of receiving goods without paying for them.  Moreover, since the losses will be concentrated on the capital and labor employed in particular industries, they will provoke an outcry out of proportion to the injury inflicted on the community as a whole.  

The Mal-distribution of Gold


 Chairman of the Westminster Bank, Limited, London.

  (From an address at the Annual General Meeting of the Bank in London, January 27, 1932)

In my judgment, what has been called the “gold crisis” arises in a large measure from the fact that gold has been required to fulfil a purpose for which it was never designed.  Gold is a token of exchange: it is the international counter, accepted by the nations as a standard, through which variations in the quantity and value of goods and services passing from country to country can be adjusted.

Gold should therefore be the instrument of commerce.  It should not be regarded as a commodity of commerce yet in these post-war  the nations have tended to treat it.  In effect, country “A” says to country  ‘B”—”You owe me many millions: please pay, but I will not take payment in goods—indeed, I have erected tariff barriers on purpose to prevent your goods from coming into my country.  I will not take your paper or your promises to pay, because I do not think they are good enough, so you must give me the only other means of payment which you have, namely, gold itself.”

Obviously, if this process were developed indefinitely and an attempt were made to settle all international war debts and reparations in gold, the stocks of the metal would be entirely insufficient for the purpose, and if there were gold in sufficient abundance then I anticipate that gold itself would depreciate in value.

The connection between the mal-distribution of gold and international payments is abundantly clear.  Two sets of simple statistics are sufficient to illustrate it.  In the years 1922-31, the net receipts in respect of war debts and reparations by France and America were approximately 650 million gold pounds: during the same period the net influx of gold into those two countries was approximately 550 millions.  The close correspondence between these two figures is not a fortuitous coincidence.

  This publication is issued privately by IVY LEE AND  ASSOCIATES, 15 Broad Street, New York City.


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