3. On Saving Europe (The Moratorium)

(THE MORATORIUM)

“A little debt makes a debtor, but a great one an enemy.”

—GNOMOLOGIA

Take a text from the news as it was printed in the New York Times on Monday, June 23, 1931: “Led by New York, tremendous buying enthusiasm swept over the security and commodity markets of the world yesterday in response to week-end developments reflecting the favorable reception of President Hoover’s proposal for a one-year moratorium on war debts and reparations. The world-wide advance in prices added billions of dollars to open market values, with stocks, bonds, grain, cotton, sugar, silver and lead in heavy demand. Pronounced strength developed in the German bond list, the gains ranging from 2 to 13½ points. . . . United States government bonds failed to participate in the move, all of them closing behind minus signs.”

The last line fell obscurely at the end of a paragraph. And that was all the notice any one bestowed upon the most significant fact of a delirious day, namely, the fact that everything in the world went up with the single exception of United States government bonds. And why was that? United States government bonds were telling why, and telling it loudly to such as would listen. They were telling it in the language of quotations, and this is what they were saying:

“Again this business of saving Europe with American credit! Do you ever count up what it has cost you already? It is becoming more and more costly; and, besides, you may not be saving Europe at all. You may be only inflating her. Better may turn out to be worse.”

As it did. The world-wide rise in everything but United States government bonds was fictitious, a momentary delusion. Worse was to come.

Specifically, the Hoover debt holiday plan was to save Germany from financial collapse and so avert a disaster that had been bound to react in a ghastly manner upon the whole structure of international finance. The first cost to us was reckoned at $250,000,000. That was the sum we should have to forego on account of war debts owing by Great Britain, France, Belgium, Italy and others to the American Treasury. We could not propose simply that Germany should stop paying reparations for a year to her European creditors. That would have cost Great Britain, France, Belgium, Italy and others too much. They could not afford it. If they had to forego reparations from Germany and still pay interest to the United States Treasury on their American war debts they would be hurt in their pockets. So what we proposed was that if Germany’s European creditors would give her one year of grace on reparations, the United States would give them one year of grace on their war debt payments to the American Treasury.

Even so there were difficulties, because it would still cost Europe herself something to save Germany. The situation was that France, Great Britain, Belgium and others had been collecting as reparations from Germany a little more than $400,000,000 a year and paying the United States on account of their war debts to the American Treasury a little less than $250,000,000 a year. Thus a general international war debt holiday to save Germany would cost them the difference, or about $150,000,000. Great Britain had been collecting from her war debtors only $50,000,000 more than she had been paying to the United States on account of her own American war debt; and she was willing. But France had been collecting from Germany $100,000,000 more than she had been paying to the United States Treasury on account of her war debt, and she was unwilling. After long and painful negotiations it was agreed, for the sake of the debt holiday plan and to save Germany, that France should receive special treatment. An irreducible portion of her reparations money would be paid by Germany to the International Bank at Basle and then reloaned by France to Germany under a new arrangement. Everybody else took Germany’s word for it.

Thus the plan took effect. It cost us $250,000,000. Well, a little more. While Germany’s European creditors were debating the plan and higgling over what it was going to cost them, the Federal Reserve Bank in New York made a direct loan to the German Reichsbank to keep it open. Say, then, it had cost us altogether $300,000,000. Was it not cheap?

We really thought we had done a grand thing; we read every morning in the newspapers that it was a grand thing. The diplomats and chancelleries of Europe were saying so, on typewritten slips, or in interviews, and the American correspondents were quoting them to us by cable. But the typewritten words of diplomats and chancelleries are purposefully suave. What people were really thinking and saying, even the diplomats, was very different. They were saying, among other things: “This is the beginning of the end of our hateful war debts to the U(ncle) S(hylock) Treasury.”

Conservative British newspapers did play up to the official Downing Street tune, the more willingly because it happened to be the British season for hating France; all the popular papers were sarcastic.

French opinion was caustic. These Americans, always saying they wouldn’t and didn’t, now again blundering their hands into the affairs of Europe, not understanding them at all. Interfering without knowing what it was they interfered with. Using their power of credit to dictate terms between France and Germany. Why shouldn’t they lend their credit as credit merely, in a financial way, and otherwise mind their own business? Besides, they were in bad manners, as usual, to propose that France should forego German reparations for a year without having first consulted France about it.

Comment in Germany was brutal and a little exultant. The Americans were obliged to save Germany from bankruptcy in order to protect the two and one half billions or more they had already loaned to her. It was to save themselves they were saving her and saving Europe.

However, we still thought very well of it ourselves. And in any case, looking at it unromantically, the solvency of Europe was a bargain at $300,000,000, if really we had saved it. But in a little while it appeared very clearly that we hadn’t. Within two weeks the whole of that $300,000,000 credit had been swallowed up and Europe was saying to us:

“Now see what has happened! The Hoover plan was all right; the intention was good. Only it was inadequate in the first place, and then, unfortunately, the dilatory and public discussion of it by the nations concerned has advertised Germany’s condition to the whole world. Now all of Germany’s private creditors are in a panic. American banks are calling their deposits out of German banks. The Germans themselves are in flight from the mark. What are you going to do about it? If after this you let Germany go down, it had been better to have done nothing at all. And if you let Germany go down, all of Europe may crash.”

So there had to be a second Hoover plan to save Europe. The second plan was that American banks should stop calling their deposits and short-term credits out of Germany and relend her the money for a certain period, say, six months. That meant probably $600,000,000 more American credit. The cost of saving Germany was suddenly multiplied by three. Nevertheless, it had to be done and it was done under the direction of an American banker who was called to Europe for that purpose.

Yet who could say what it was worth to save Germany, first for her own sake and then for the sake of Europe? It was no longer a bargain; still, thinking of the enormous investment of American money in Germany, now all in jeopardy, it might be worth even a billion of dollars—that is to say again, provided we had really saved the situation. But had we? No.

In a few days more it was clear that what all this American credit had bought was only a postponement of evil. The German crisis had still to be met in some radical manner, or else what would happen at the end of the Hoover holiday, or, even before that, when the money perforce reloaned by American banks in Germany for six months was due again? The only radical solution Germany can think of, naturally, is to get rid of reparations; then to borrow more American credit. And the only radical solution the rest of Europe can think of is to get their American war debts cancelled.

But there had been hardly time to begin thinking of radical solutions before another crisis developed. There was an international run on the Bank of England for gold. Her gold began to give out. What could the Old Lady of Threadneedle Street do? What could save the credit of the Bank of England? Only American credit could do that. So the Bank of England came to New York and got a big loan from the Federal Reserve Bank.

American credit had twice saved Germany, once for herself and once for the sake of Europe, and now it had saved the Bank of England—all in less than three months. And the cost had been roughly a billion and a quarter.

Who still could say it had not been worth it?

But again the sigh of relief was interrupted. After all that, another crisis. Germany was not saved; she had been only floated on a raft of American credit. Europe as a whole was not saved because Germany wasn’t. And for these reasons the Bank of England discovered immediately that the loan she had got from the Federal Reserve Bank in New York was not enough. That is to say, the Bank of England itself was not saved. She had underestimated the amount of saving required. What to do?

Everybody thought of the same thing at once, as if it were new—the same magic, the same miraculous fluid. More American credit.

But now certain new difficulties. One is that the Bank of England cannot borrow enough. Besides, going to New York again so soon with more I. O. U.’s in her hand will hurt her credit. The American bankers may lift their eyebrows. The next idea is that the British Government itself shall borrow American credit to Save the Bank of England. The only weakness of this idea is that the Labor Government of Great Britain as it stands is not in good credit. It is a socialist government and year after year it has been closing the national account book in red ink. It spends so much money upon schemes of social benefit, particularly in the form of a public wage to the unemployed, that it cannot balance its budget. How will it look for the British Government to go asking for American credit when it is already spending more than its income and cannot balance its budget?

American bankers, indeed, had been sounded out to see if they would mind. They had not lifted their eyebrows, but they had said: “Really, before expecting us to float a British loan you ought to do something about your books. They are too much talked about. Can’t you economize, spend somewhat less on these meritorious social schemes and balance your budget? If you did that the talk about the red ink in your national account book would stop and then it would be easy enough to float a British loan in America, or to give the British Treasury any amount of bank credit.”

Whereupon the British decided to change their government, adopt a program of social economy and balance their budget. This had long been indicated as a necessary thing to do. It was the insolvency of the socialist Labor Government, among other things, that was hurting the credit of the pound sterling. Nevertheless, the disagreeable task of reducing public expenditures was postponed until the Bank of England had exhausted its power to borrow American credit on its I. O. U.’s. Then it became imperative for the British Treasury to put itself in good standing as a borrower.

When the news came from London that the British had changed their government and now were going to balance their budget, Wall Street bankers were already discussing a loan to Great Britain. “They reiterated their preparedness,” said the New York Times, August 26, “to provide a substantial loan if the new government requires it.” Further: “The amount, bankers said, should be as large as can be readily supplied by the banks of the country and the credit should run at least a year. A number of bankers believe Great Britain would benefit from a long-term loan and a few of them believe British credit is still strong enough to make a public offering possible even in the present depressed bond market.”

The next day the news in Wall Street was that negotiations had been formally opened and on the third day it was announced that American bankers had loaned the British Treasury $200,000,000 for a year.

But what was the popular reaction in England? The Americans had used their power of credit to interfere in the politics of Great Britain, even to the point of demanding the overthrow of the Labor Government. That was the reaction. The Daily Herald, organ of the Labor Party that had been ruling England, said: “Among the reasons Mr. MacDonald advances for imposing new privations on the most unfortunate section of the nation is the ‘pressure of public opinion abroad.’ Whose opinion? Not that of the democracies of Europe or America, oppressed by unemployment and distress for similar reasons, but that of foreign bankers, who laid down to the British Government terms, including changes in the unemployment benefit scheme, upon which and alone upon which they were prepared to render financial aid to the Bank of England.” It said the Federal Reserve Bank of New York had put a pistol to England’s head.

Which was to say, the Americans had no right to name the terms on which they would lend their money to save the Bank of England or to save the credit of the British Treasury. They ought to lend their money and mind their own business.

How do people arrive at this ground of unreason—the English people, who before us were the world’s principal creditors with a creditor mentality?

It is not simply that political passions have distorted the facts. That is true. But the facts belong to finance and finance is lost in its own world. It knows neither the way to go on nor how to go back. Having raised international debt to a new order of magnitude, now it faces international insolvency of the same grand order, and it is appalled. It cannot manage the facts. The only solution it can think of is more European debt, more American credit. By itself it cannot create any more debt. If the resources of private credit are not quite exhausted, the credulity of the creditor is about to be. But there may be still some resource left in the public credit of Europe. Finance at this point adopts the mentality of the crowd in the street. Let government do it. Let all the European governments increase their debts who can, to save themselves and one another. This is literal.

By agency of international finance Germany, in six or seven years, borrowed nearly four billions of dollars, two thirds of it from American lenders. It was much more than Germany could afford to borrow—that is, if she cared anything at all about her own solvency. Having procured this money to be loaned to Germany, having exhausted every kind of German security that could be made to look like a bond, international finance came to the sequel and said: “Germany must have more credit, for else her whole financial structure will collapse, and if that happens international finance cannot answer for the consequences. They will be terrible. But Germany has no more security to offer. Therefore international finance cannot float another German loan. But if Germany’s creditors will collectively guarantee a German bond issue, international finance can float that.”

Try going on from there. Suppose Germany’s European creditors, namely, Great Britain, France, Italy, Belgium and others should guarantee a German bond issued for more American credit. When that credit was exhausted, what would happen? Perhaps then, in order to go on lending American credit to Europe, we should have to guarantee our own loans. And what better security could you ask? An American loan to Europe guaranteed by Americans!

Well, and what is so very strange about that idea? All the American war loans and all the American post-armistice loans to Europe were guaranteed by the United States Government. It borrowed the money on Liberty Bonds and guaranteed them. If Europe does not pay this debt the American Government will. It cannot be wiped out or cancelled or reduced. It can only be transferred from the European taxpayer to the American taxpayer.

If the American lender is not a menace to the financial sanity of the Old World, the least definition of him would be to say he is to Europe a fabulous enigma.

Critical European economists say we are the worst lenders in the world, because we lend impulsively, in a reckless, emotional manner, not systematically. That is true. It is true that as lenders, simply so regarded, we are incomprehensible to ourselves and to other’s. Beyond all considerations of an economic or financial character there is pressing upon us continually that strange sense of obligation to save Europe.

It seized us deeply during the war. It carried us into the war. We were going to save Europe from Germany, the German people from the Hohenzollerns, little nations from big ones, all the people of Europe from the curse of war forever. There were other motives, to be sure. We had money on the side of the Allies, though by such measures as we now use it was very little. Our sympathies went to the Allies. We hated the way Germans made war. Some of us may have been a little afraid of a German Europe. Allied propaganda to get us in had its great effect. Yet for all of this we should never have gone in without the emotional thought images that made a crusade of it.

A war to end war. Where? In Europe. A war to make the world safe for democracy. Where was democracy supposed to be in danger? In Europe. A war to liberate oppressed nationalities. Where? In Europe. Not a war against the Germans—we said we had no quarrel with the German people—but a war to deliver them from the tyranny of their own bad war lords. And from no realistic point of view was any of this our business.

The allied nations were not interested in our thought images, or, if at all, in one only because it worried them, and that was the one about saving the weak from the strong, otherwise, the right of self-determination for little people. The Allies did not care what our reasons were. We could be as romantic as we liked, only so we came in on their side, for unless we did the war was lost. They were not themselves fighting to make the world safe for democracy, nor to end war forever, nor to deliver the German people, nor to put destiny into the hands of little people; they were fighting to beat Germany, and with American assistance they did beat her. None of the things we thought we were fighting for came out. What survived was a continuing sense of obligation to save Europe.

Our own exertions in a war we had been much better off to stay out of cost us twenty-five billions of dollars. Then, in addition to that, we loaned out of the United States Treasury more than ten billions to our own associates. Lending to Europe out of the United States Treasury ended with the post-armistice loans. Then private lending began—lending by American banks and American investors. Counting our own direct war expenditures, the war loans, the post-armistice loans, and then the private lending since, Europe has cost us more than forty billions of dollars in less than fifteen years. That sum would have represented one fifth of our total national wealth in the year 1914.

Cast out the cost of our own war exertions. Pass the war loans by the United States Treasury to the Allies out of the proceeds of Liberty Bonds. Say that under the circumstances we were morally obliged to make them, whether anything should ever come back or not. Pass also the post-armistice loans out of the United States Treasury, which were for cleaning up the wreck in Europe. These constitute the war debts for which now we are hated in Europe and which no doubt will turn out to be worth very little. If the United States Treasury went to Wall Street to sell the long-term bonds it took from the Allies in place of their promissory notes, it would be lucky to get twenty cents on the dollar for them.

So consider only the private debt—that is, the American credit delivered to Europe since the war by American banks and American investors. All the terms were financial. The character of finance is selfish. Therefore, as to this private debt, representing five or six billions of American credit poured into Europe during the last eight years, it is permitted to ask: What have we gained thereby?

Definitely, in the first place, not the friendship or good will of Europe. On the contrary, we have raised against ourselves in Europe an ugly debtor mentality. This, you may say, is inevitable in the shape of human nature; creditors must expect it and allow for it. But what makes it much worse in Europe and gives it a sinister political importance is the prejudiced manner in which it is exploited, not only by the press and the politicians, but by responsible statesmen, by finance ministers who cannot balance their budgets, by governments when it is necessary to increase taxes.

Germany tells her people that if they did not have to pay reparations—called tribute—to the once allied nations, German wages would go up, German taxes would come down, German poverty would vanish, the German sun would rise.

The once allied nations say to Germany they are sorry; if they did not have to pay their war debts to the United States Treasury they could forego reparations, or in any case a great part of them, perhaps as much as two thirds. Yet all the time they keep saying to their own people that their troubles are multiplied upon them by the necessity to remit enormous sums each year to the United States Treasury on account of their war debts. That they collect these sums first from Germany as reparations is not emphasized. And the fact that so far there has been no payment of either reparations or war debts but with the aid of American credit does not interest them at all.

American loans to Germany have enabled her to pay reparations. Out of reparations from Germany the others make their annual payments on their war debts to the American Government. Anything we have yet got back from Europe was our own money, the worse for wear, and very little of that. But if you say this to a European, even to one who knows, he is offended. Very few of them do know, as a matter of fact; it is easier to believe what they hear from those who exploit the debtor mentality.

For a long time it was supposed that European feeling against America as the Shylock nation was owing to the nature of the debt—that it was a war debt and had a public character. Certainly there would be no such unreasonable feeling against a debt owing to private creditors. So we said, and saying it we continued to lend American credit in Europe until the weight of the private debt exceeded that of the war debt. Owing to its sheer magnitude this private debt now begins to assume a public character, and as it does there begins to rise about it and against it the same excitable popular feeling. Why are Americans so rich? Where do they get all this credit? Do they mean to enslave the world with their gold?

This is the sequel international finance does not foresee. When it comes suddenly to the end of its own resources, as it did in 1931, it must call on governments to interfere; after that all talk of keeping finance free of politics is sheer nonsense.

The real crisis in Germany last summer came after all nations had been relieved of war debts for one year, under the first Hoover plan. It was concerning the solvency of Germany in respect of her debt to private creditors that a seven-power conference of prime ministers was held in London in July. There the United States was represented by the American Secretary of State and the American Secretary of the Treasury, and there came forth the second Hoover plan, to save Germany from having to default on her debt, not to other governments, but to private creditors. The situation had got beyond the control of international finance; therefore, governments were obliged to interfere.

Again, later, when the British had to change their government in order to borrow American credit to save the Bank of England, a financial transaction with private creditors assumed a public character. The British Government borrowed the money, not from the American Government, but from American bankers. Nevertheless, because the American bankers had stipulated for public expenditures to be reduced in England and for the British budget to be balanced, it was possible, even plausible, for the British Labor Party to say the Americans had exerted their colossal money power to destroy the Labor Government of Great Britain; and there are hundreds of thousands of unemployed in England who will think American bankers responsible for their diminished weekly dole out of the British public funds.

A private international debt is easily defined; it represents borrowing by private persons in one country from private persons in another. So also is a public international debt easily defined; it is a debt owed by one government to another. But debt may be private on one side and public on the other, as when the government of one nation borrows from private lenders in another. But let it be strictly a private debt, owing by the nationals of one country to the nationals of another, and yet if it becomes so large as to endanger the solvency and economic freedom of the debtor people, or so large as to alter their economic relations adversely, it will clothe itself with a public character and political consequences are bound to follow.

Our loans to Europe are of all kinds. They represent borrowing by European governments from the American Government, they represent borrowing by private persons and private organizations in Europe from private American lenders, and they represent borrowing by European governments and States and municipalities from private American creditors. Less and less do these distinctions matter, because more and more the character of an American loan is merely that particular aspect of one great body of debt. The political implications of it simply as debt take us unawares.

In the September, 1931, number of the Revue des Deux Mondes, M. Henri Bérenger, formerly French Ambassador to the United States and co-author of the Mellon-Bérenger war-debt funding agreement between France and the American Government, has an essay in the fine style of French logic on what has happened to the foreign policy of these Americans. For 145 years they had founded their foreign policy on Washington’s farewell address to the American Congress. The words were few. No foreign entanglements. Woodrow Wilson was the first president to preach another doctrine, and the Americans rejected both him and his doctrine, and thereafter they sent only official observers to sit in the councils of Europe. “Then,” says M. Bérenger, “President Hoover issues his messages to the world and sends his Secretary of the Treasury and his Secretary of State to negotiate with European ministers. This came after the launching of the presidential message of June 20, which to all intents and purposes was a message of entanglement. What has taken place on the other side of the Atlantic to make such derogation of the Washington doctrine possible, even popular?”

He answers his own question, saying: “For seven years American bankers have been engaged in entangling the United States with Europe. . . . Indeed, the network of steel and gold that America has cast upon Europe has been so powerful that it has become jammed of its own weight. A crash in Berlin is immediately felt in Washington and every panic in Frankfort causes trembling in Wall Street. When the crisis becomes worse and extends itself to the City of London the United States is so entangled that it is in danger of being strangled.”

The French see it. In less than ten years finance has accomplished a fact the idea of which had been rejected by the American people for a century and a half, namely, the fact of foreign entanglement.

Since our lending to Europe bears us no friendship, only more and more dislike, and since it has caught us in a net of foreign entanglements contrary to our native wisdom, the question returns unanswered. What do we get out of it?

Now the voice of foreign commerce, saying: “But our lending abroad did increase our export trade. Our loans to Europe enabled her to buy from us great quantities of goods that otherwise she had been unable to buy. This kept our factories going, it kept our own labor employed.” And it is so, it did for a while. There is probably no point beyond which your export trade cannot be still further inflated so long as you lend people the money with which to buy your goods. But if it is good business when, having loaned your foreign customers the money to buy with, the goods are no sooner gone than you begin to wonder if you will get anything back, unless again you lend them the money to pay you with or forgive what they already owe—if that is business at all, then common sense is daftness and international finance has in itself the secret of wisdom.

Another voice is heard, saying: “But remember, this modern world is all one place. No nation may enjoy separate prosperity, not even this one. A war-haggard Europe was properly the concern of a country that had resources to spare. . . . That was reason enough for putting American credit at the command of Europe. Besides that it was our duty to do it, we should have been intelligent to do it on the ground of enlightened selfishness.”

This high and excellent thought belongs to a harmony the world is not ready to play. There is first the probability that it will be embraced from opposite sides differently, by the lenders with one enthusiasm and by the borrowers with another, and that the transactions between them will not be governed by the simple rules of prudence, judgment and moral responsibility. When, moreover, you talk of lending as a duty, what do you mean? And how afterward shall you treat the contract? There is the further danger that the thought will be degraded to the saying that a rich nation, only because it is richer than others, is obliged to disperse its surplus among the envious and less fortunate. That idea, indeed, has been asserted by many European doctors of political economy, who either do not see or care not that international borrowing tends thereby to become reckless and irresponsible, and is soon tinged with the ancient thought of plunder.