Our Side of the Transfer Dilemma
I
WE have heard so much about the Transfer Question during the past ten years in connection with the discussion of reparations that we have come to regard it as something peculiarly, if not exclusively, related to the problem of extracting reparation payments from Germany. The difficulty of transferring millions of marks every year to Germany’s reparation creditors has been emphasized again and again since the end of the war. The problem was officially considered in 1924 by a special committee of experts, whose findings were given wide publicity; and it has recently come up for reconsideration at the hands of another special committee. No other transfer question has risen to such dignity or, if recognized at all, has been given more than passing notice. That there could be a second transfer question comparable in magnitude or importance with the one which has commanded the attention of the world’s experts is a possibility that has received scant recognition in the public press or in the utterances of our official spokesmen.
Yet it is a fact that we too have a transfer question to face, involving far larger sums of money than are involved in reparation payments. Where Germany is required to provide a reparation annuity of approximately $600,000,000 during the current year for transfer to her creditors, we are scheduled to receive payments, on account of the interest and dividends from our foreign investments, of almost twice that amount. The outstanding difference, of course, between our situation and that of Germany, other than in the amount of the yearly sums involved, is that we are to receive payments, while Germany is to make them. It is probably for this reason that we have shown so little concern about our own problem. We take it for granted that, inasmuch as we are to receive, the yearly transfers will be made, and we need feel no responsibility in the matter.
There is no deep mystery in the methods by which payments are usually transferred between debtor and creditor countries. The transfer problem is one that ordinarily solves itself without formal plan. The record of international transfers in pre-war days clearly shows that whenever one country was required to make payments on the outside, say, on account of interest obligations on its foreign borrowings, the mere effort put forth in meeting these obligations called into operation certain economic forces which caused the exports of the paying country to increase or its imports to diminish; while the imports of the receiving country tended to increase or its exports to diminish. By exporting more than it imported, the debtor country was able to build up cash balances, somewhere beyond its own borders, on which drafts could be drawn for the payment of foreign interest charges. The whole mechanism of effecting transfers between nations through the shipment of goods worked automatically. There was no transfer question to be dealt with.
We should not be bothered with transfer questions at the present time any more than in pre-war days were it not for the tremendous sums to be transferred and the general antipathy on the part of creditor countries toward receiving their payments in the form of imported goods. What nation, for example, wants to receive its share of German reparations in goods? And what chance would a candidate for election to the highest office in this country have if he suggested that we should arrange to collect the enormous payments due us by opening our markets to foreign products? The situation is wholly unlike that which obtained in pre-war days when industrial countries invested capital in remote and undeveloped parts of the world and then took imported raw materials in payment of interest charges. It is no longer the simple matter of transferring coveted raw materials from the newer to the older countries. On the contrary, it is a question of transferring large payments between nations that are essentially industrial and strongly opposed to the importation of manufactured products which might have a prejudicial effect upon their own trade and industry.
II
Before considering the transfer question which directly concerns us as a great creditor nation, it will be well to note briefly some of the special problems in the German transfer question, affecting Germany herself, which made it necessary to set up special transfer machinery.
At the time the Dawes Committee undertook to deal with this matter, the German economic system seemed hopelessly disorganized. The national budget was unbalanced, and the new currency of the country, though temporarily stable, was wholly unfitted to serve the needs of a prosperous trade. The inflation of the old paper mark had destroyed confidence in money as a storehouse of value. More than that, it had literally stripped the nation of its working capital. A part of the nation’s great productive equipment, to be sure, was still on hand — there were the famous factories, railroads, and other fixed properties in more or less workable condition. But stocks of raw materials and consumable goods had been virtually used up in the inflationary process.
It was at once obvious that it would be physically impossible to extract reparations from a country which had nothing on hand to offer. If reparations were to be obtained at all they must come from the products of industry. And it was an essential to the restoration of German industry that the country be made reasonably safe for the investment of foreign capital and for the repatriation of German capital which had sought refuge in other parts of the world. With these considerations in mind, the immediate task of the Committee lay in devising means that would stabilize the currency, balance the national budget, and restore confidence.
In taking the next step, — namely, that of providing for reparation annuities, — the Committee was forced to recognize a distinction between two related issues: first, the amount of money that Germany could raise for reparation purposes; second, the amount that could be transferred to her creditors. There was no question whatever about the ability of the German nation to make large sums of money available out of tax revenue for transfer purposes, especially after industry once got on its feet. But there was a question as to how much could be transferred. On this point it was finally conceded that, irrespective of the amount of reparations to be provided for in the national budget, the maximum amount that could be transferred was limited to the economic surplus arising out of the nation’s activities. The evidence seemed conclusive that the transfer of reparation annuities over a period of years could be effected only out of the cash balances which Germany might build up in foreign countries from the sale of her goods and services. She must have an excess of exports over imports.
Considering the depressed state of German industry, the absence of any economic surplus or foreign balances, and the insistent demand on the part of some of the creditor nations for reparations, it would have been fatuous to assume that the transfer question would take care of itself automatically in pre-war fashion. There was no getting away from the fact that, without ample safeguards during the period when an economic surplus was being built up, forced transfers of mark payments into the money of other countries would upset the exchanges, destroy currency stabilization, and imperil the whole future of reparations. Accordingly, it was arranged to make transfers only as conditions permitted, and to relieve Germany of all transfer responsibility. Once she had turned over to the Agent General for Reparations the prescribed annuity, the task of effecting a transfer would then devolve upon the Agent General. It was further arranged that the annuities should be graduated in amount, small at first, and rising to a peak of $600,000,000 during the fifth reparation year. The whole plan was well conceived to take the reparation problem out of the field of speculation and to bring about the transfer of the largest payments consistent with German industrial recovery and progress to the creditor nations.
A review of the practical operation of the plan during the first four years shows that, while transfers were effected promptly in accordance with the Dawes schedule, they did not come out of any economic surplus. They were made possible only because of the foreign cash balances which Germany acquired through external borrowing. For example, during the four Dawes years ending August 31, 1928, the total transfer for reparations account amounted to a little more than 5,000,000,000 marks. During the same period the volume of long-term foreign borrowing by the national, state, and municipal governments and by German industries exceeded 6,000,000,000 marks. When allowance is also made for the enormous volume of short-term loans which have been granted to German industry by outside lenders, it is safe to conclude that Germany’s external borrowings during the fouryear period took care of all reparation transfers and gave her a substantial supply of working capital besides. The transfer question, therefore, is almost as far from a settlement as it ever was. The fundamental problem remains to be dealt with.
Germany, still short of capital, must now face the prospect of extracting large sums from her taxpayers in order to provide the reparation annuities. The extraction and transfer of these sums— the exact amount for the sixth and succeeding years is unsettled at this writing — should tend automatically to create a void in her capital market, to attract funds from abroad at high interest rates, and to provide the foreign cash balances needed to effect further reparation transfers. But how long will it be possible to carry on in this manner? The continued growth in the volume of foreign loans will mean that larger and larger sums must be transferred to pay both reparations and foreign interest charges. Somewhere there is a limit to the amount that can be borrowed, and the use that can be made of foreign loans for effecting transfers. Eventually, exports of goods or services must be forthcoming for this purpose. Will Germany be able to increase her exports to the point where interest on foreign loans as well as reparations can be transferred in goods? If so, who is going to take the goods? With fresh tariff barriers every where to contend with, and with no colonial markets under her control, one cannot help wondering by what legerdemain Germany will be able to accomplish her task.
In one respect, at least, the situation of the reparation creditors is more hopeful. To the extent that they are able to sell to private investors their reparation rights, they will collect, their reparation claims in cash. It. should be observed, however, that the flotation and sale of reparation bonds in the investment markets of the world would not settle the question. The burden of collecting payments from Germany would merely be shifted to the shoulders of individual investors.
III
The American side of this question might be described as the reverse side, on the ground that we are scheduled to receive indirectly a substantial part of the reparation payments. During the present year, for example, we shall receive from our European war debtors — who are, in fact, the principal reparation creditors — more than $200,000,000 in principal and interest, or one third of the total reparation annuity.
But there is a much larger aspect to our side of the transfer question. During the past fifteen years our private investors have advanced to foreign borrowers more than $15,000,000,000, on which we expect to receive upward of a billion dollars in interest and dividends every year. It is here that our real problem emerges. It might not be a difficult matter to collect the interest and principal on our war loans, but how arc we going to get the interest payments due our private investors? If the transfer of $400,000,000 to $600,000,000 a year out of Germany presents a problem for the experts, what about the transfer of twice that amount into this country? Our side of the question makes the German side seem small by comparison. And yet we confidently assume that our payments will be forthcoming in the regular way — automatically, without the aid of any special transfer machinery.
We should have no difficulty in getting all these payments if we showed a disposition to take them in the ordinary commercial way — that is, if we adopted a more reasoned attitude on tariff policy and allowed foreign countries to send goods to our markets. The importation and sale of foreign goods would immediately create dollar balances within this country which foreign debtors could transfer to their American creditors in settlement of interest claims. A stroke of the pen is all that, would be needed to effect a transfer of the money once it was deposited in our banks.
Our opposition to this mode of settlement is proverbial. We have served repeated notice on the world since the end of the war that we meant to resist the importation of foreign goods. Fearful lest the war debts be repaid to us in the form of goods, we made haste to put through the Emergency Tariff Act in 1921. This was followed by the Fordney-McCumber Act in the following year, which contained a ‘ flexible provision ’ empowering the President to raise any prescribed duty by as much as 50 per cent whenever it was established by investigation of the United States Tariff Commission that an increase in the duty was needed to equalize the difference in the cost of production at home and abroad. In some twenty-odd instances to date, the flexible provision has been used to advance import duties. And, not content with these results, we have again thrown the tariff question into the Congressional arena, where there is always the danger of getting a general upward revision of import duties in accordance with time-honored principles and precedents — ‘You vote for my schedule and I’ll vote for yours.’
Truly we are a high-protectionist country. The extent to which hightariff doctrine has attracted and captivated the average voter is nothing short of phenomenal. It would seem that practically everyone has become convinced of the efficacy of high tariffs. Even the Democratic Party at the Houston convention definitely abandoned its traditional stand on the tariff question, and boldly proclaimed its support for a tariff that would maintain a high standard of wages for American labor.
It must come as something of a shock to those who would try to look below the surface of our industrial activity to note how the phenomena of high wages and high standards of living are everywhere attributed to the beneficence of a high tariff, when, in point of fact, it is only through t he interchange of products that we prosper at all. One has only to realize the significance of the free interchange of products within our own borders, and what national loss the abandonment of that policy would entail, to appreciate how costly is our policy of restricting trade with other countries, and how fallacious the high-wages argument for protective tariffs. It is through trade that we prosper and pay high wages, not through the imposition of insurmountable trade barriers.
There are, indeed, sound arguments that could be advanced in support of a protective tariff under certain circumstances. These arguments — they are not heard to-day — all rest upon the obvious truth that restrictions on trade are costly, and upon the assumption that there may be times when it is worth while to pay the cost. For example, a good case could be made for the protection of infant industries which hold promise of vigorous growth if it is fully understood that the tariff will be removed gradually but surely when the industry has passed beyond the infantile stage. Then there is a specious military argument, which holds that a nation should develop a good measure of diversification in its industries, or it should tax food imports and keep its farms under tillage so that it would be able the better to supply the minimum of its needs in time of war, independently of other nations. Finally, one might propose the argument that we should maintain a high tariff’ because business has grown up to it, has become dependent on it, and serious consequences would follow for the whole industrial structure if we reduced it.
There is an element of respectability in all these arguments, particularly in the last one. We have had a number of experiences in the past with general tariff reduction, and they have all had unfortunate results for labor and industry. Experience has shown that a high tariff’ cannot be reduced in the twinkling of an eye without disrupting employment, destroying capital values, and provoking a period of trade depression. Possibly it is this fact in our experience which has so popularized current protective doctrine. Sound arguments against hasty tariff reduction have come to be used wrongly as arguments for an increase in tariff duties. At the present time no sound argument can be advanced in support of an increase in the tariff, nor could one find any economic justification for the succession of tariff increases since the end of the war.
Notwithstanding the size of the foreign payments that are scheduled to come our way, there is every indication that we shall maintain a scale of high tariff duties for many years to come, and that the trend in our rates of duty will be upward. The two major political parties are committed to the dangerous principle that import duties should be approximately equal to the difference in the cost of production at home and abroad, which means that we should have virtually an excluding tariff on all goods capable of being produced in this country. And so strongly rooted is this doctrine in the popular mind that no argument can shake it. The suggestion that we shall have to take goods from the outside if we are to collect the interest on our foreign investments meets with practically no response.
IV
If the foregoing analysis is correct, and we adhere to a goods-exelusion policy, raising the present scale of duties higher and higher as the occasion requires in order ‘to protect our high wages and living standards,’ how will our side of the transfer question be settled? What will be the outcome of this dilemma?
Before attempting to answer these questions, let us note how payments arc coming to us at the present time. An examination of our trade balance with foreign countries discloses an extraordinary relationship between exports and imports of goods. Instead of finding a yearly excess of imports over exports, as would befit the status of a great creditor country, we find exactly the opposite. Year after year our exports have exceeded our imports by a substantial margin, and during the year 1628 our ‘favorable balance,’ so called, amounted to more than $1,000,000,000. The explanation for the persistence of these favorable balances seems to be that the tariff keeps goods from coming into the country, while our mass-production methods, combined with our facilities for financing foreign countries and industries, enable us to sell abroad an increasing proportion of manufactured articles at prices below those of our most efficient competitors.
Now the question arises, What becomes of the yearly credits we build up in foreign countries out of our excess of exports? Specifically, what became of the net cash balance of $1,000,000,000 which must have been credited to our account in foreign banks during 1028 as the result of our large export trade?
Questions of this kind cannot be answered absolutely. Foreign cash balances arc not, as a rule, earmarked for a special purpose. It is generally known, however, that we have to make available in foreign countries every year a net cash balance of about $1,000,000,000 in order to provide cash for American tourists, to pay foreign shipping companies for their services in transporting our ocean freight, and to turn over to foreigners the cash remitted to them bv our immigrant population. These are all ‘invisible’ imports. They are services we have to pay for out of our foreign cash balances. Generally speaking, we obtain these cash balances by exporting more goods than we import.
One of the large invisible items for which we must receive payment is the interest due our private investors on foreign bonds, together with the interest and principal installments growing out of the war-debt settlements. Roughly, these combined items amount to about $1,200,000,000 a year. And how do we collect this enormous sum? The fact is, we do not collect it. We take promissory notes for it. Where we should be importing goods which could be sold and converted into cash balances so that foreign debtors might pay us, we are ‘importing’ their bonds and other pieces of paper on a grand scale. It is true, of course, that these foreign bonds are sold in our investment markets and cash balances are created, but in effect the cash is borrowed cash — the real settlement is only deferred.
There is thus a striking resemblance between our position and that of the chief reparation creditors. It has already been shown that reparations are received by these creditors only because Germany is able to borrow the money to pay them; and now it appears that our investors are getting interest payments from foreign debtors in precisely the same way. In neither case is any real transfer taking place. If we used to be appalled at any cry of ‘Borrow and buy,’ what are we to think of the form it has taken to-day — ‘Borrow and pay’?
In considering the ultimate outcome of our predicament, there is only one thing of which we can be absolutely certain — namely, no matter how far we carry the goods-exclusion policy, there will still be a balance between our total exports and total imports when full account is taken of the invisible items. Visible and invisible exports together must be equal to the combined total of visible and invisible imports. There is always a balance in these accounts. While a particular policy may affect the manner in which the two sides are balanced, it cannot possibly prevent a balance. How, then, may the balance be affected by the policy of excluding competitive goods?
If we start with the premise that tariff rates will be readjusted as often as may be necessary to exclude the competitive products of foreign countries from our markets, — and this appears to be our determined policy, — then there are only four possibilities in our situation to be considered. A change in some or all of the following factors along the lines suggested will be necessary to maintain the balance: —
1. Further imports of gold
2. An increase in the imports of noncompetitive goods and foreign services’
3. A material decline in our exports
4. Default and repudiation by foreign debtors
There are no other possibilities to be considered under the conditions as stated. While it. is probable that we shall continue to buy vast quantities of foreign securities, — an invisible import which looms large in our present balance, — it is obvious that the accounts cannot be balanced in this way for an indefinite period. The interest accumulation on our foreign holdings is being compounded — it is growing larger and larger every year. And it can be only a question of time until there will not be a sufficient supply of sound foreign securities to discharge the annual interest payments due us. Some other way must be found whereby interest can be paid. No merchant can continue long in business if he gets only promissory notes from his customers.
There is always one mode of settlement open to our foreign debtors, and that is to send us gold — a commodity on which no tariff duty is levied. It w ould, of course, be impossible for them to pay us in full with gold — there is not enough gold in the world to serve that purpose. But by sending us a little gold from time to time as newgold becomes available at the mines, or as foreign banks permit a portion of their gold reserves to be released for export, our debtors could contribute that much toward the balancing of our accounts in real goods.
We have already acquired vast quantities of the metal in this way over the past fifteen years. We have had flood after flood of foreign gold. Its intelligent, purpose in coming to us was, first, to maintain a balance in the two sides of our account, and, second, to inflate our prices so that foreign goods could come in over the tariff wall. Thus far we have succeeded in thwarting the inflationary purpose of gold imports in the commodity markets, but inflation in the security markets has run riot.
Recent financial experience clearly shows that excess gold is a trouble maker. With nearly one half of the world’s stock of monetary gold still in our possession, it is recognized by the banking authorities that further imports of gold should be prevented if possible. A few also recognize that only through a liberal credit policy on the part of the Reserve banks can gold imports be prevented over the years immediately ahead. Little wonder that astute speculators in the security markets during the past year have refused to be perturbed by high money rates.
With reference to the second factor which may come into the picture, — namely, an increase in the imports of non-competitive goods and foreign ‘services,’ — it is hoped and believed by many observers that as time goes on we shall increase our imports of dutiable luxury articles like furs, diamonds, Oriental rugs, and so forth, and of dutyfree products such as rubber, coffee, works of art, hides, raw silk, newsprint paper, bananas, and the like; furthermore, that we shall pay out more and more abroad on account of our tourists’expenditures, ocean freight charges, and immigrant remittances. As a matter of fact, if our tariff policy is any criterion at all, we are trusting blindly that we shall buy on the outside a sufficient quantity of luxuries, non-competitive goods, and services to balance our account without the aid of any other factor.
Surely no one questions our ability to take larger quantities of these goods and services. It is to be presumed as a matter of course that we shall import more and more rubber, more luxury goods in general, and that we shall have to provide larger foreign balances to pay for foreign services. But by what flights of fancy can it be assumed that such imports will be sufficient in themselves to effect the transfer of interest? There is no ground whatever for this assumption. It completely overlooks the fact that interest payments due us are being compounded from year to year, and that no such progressive rate of increase in the imports of special goods or services is possible. There is a limit to the amount of help we can expect from these items, and besides there are other available sources of help which must contribute their share to the common cause.
A decline in our export trade would improve the transfer situation for the simple reason that it would reduce the net amount foreign countries must pay us. It is probable that we shall witness a marked decline in this trade over the next few years. All are agreed that the recent great expansion in our export trade could not have taken place had we not put money into the hands of foreigners, through the purchase of their securities, with which they could pay our exporters. From this it follows that any curtailment in our purchases of foreign securities must operate to produce a corresponding diminution in our exports. Nations will not and cannot continue to buy from those to whom they cannot sell. Tariffs can be invoked in retaliation against those who impose them. And, on the strictly economic side, it becomes unprofitable to buy in markets where trade is artificially restricted, either because production costs and prices are too high or because the means of payment cannot be made readily available through the normal process of exchanging goods for goods.
In the case of agriculture there are stock examples of how a high tariff restricts exports. Since 1921, American agriculture has had a surplus problem to contend with. In part, the surplus production of our farms has been only a reflex of the shortage of purchasing power in European countries. These countries, unable to restore their prewar productivity by manufacturing goods for sale in our markets, have been obliged to restrict their purchases from us, particularly of those products which could be obtained elsewhere. They have found it possible to obtain larger and larger supplies of wheat, pork products, cotton, tobacco, and other raw materials from newer sources, with the result that the surplusproduction problem of our farms has been aggravated.
In time, the same tendencies are bound to appear in our export trade in finished products — when new sources of supply have been developed or when our foreign customers are forced by a shortage of purchasing power to economize in their buying. Equipped as we are for mass production, we need the widest possible outlet for our goods in foreign markets if we would attain the maximum of prosperity. Yet, by restricting and threatening still further to restrict the importation of foreign goods, we are bent on narrowing the foreign outlet for our products. The only compensating feature in our programme is that the automatic restriction of our exports will afford some relief to the foreign debtor who owes us money.
Finally, foreign debtors themselves might contribute something to the balancing of our account through sheer inability to pay us — that is, through default, if not complete repudiation. This is not a possibility that one likes to contemplate, yet it is a factor to be reckoned with. In times past, nations, states, and municipalities have been known to repudiate under stress; and many large business corporations, including most of our own railroad companies, have at one time or another had their capital structure relieved of the burden of excessive debts at the hands of a court of equity. It is only logical to expect that some of our foreign loans, carelessly made in a burst of optimistic sentiment, will give a bad account of themselves under normal circumstances. And under the special circumstances we are imposing it is certainly to be expected that losses on foreign loans will be well above the average. While wholesale repudiation is both unnecessary and unlikely, heavy losses would seem to be inevitable.
One of the unfortunate by-products of our tariff policy is the fact that credit and banking policy must be kept in line. Our creditor position in the world is such that Federal Reserve policy cannot be determined independently of credit conditions in other countries. We have encouraged foreign countries to return to the gold standard in order that they might absorb some of our excess gold and stabilize their currencies, thereby ensuring the continuity of the gold standard and an improved foreign market for our products. We cannot now retrace our steps by imposing on these countries credit conditions which would undo all that has been accomplished. In reconciling credit policy with a tariff policy over which they have no control, our banking authorities have a difficult problem to face; and not the least of their difficulties will be to meet the criticism aimed at their credit policy, when it is tariff policy that is fundamentally at fault.