CHAPTER IV
NATIONAL DEBTS
Past Fiscal Policies
Like Dickens' genial Micawber, who optimistically presented his LO.U.'s in fancied "settlement" of his steadily mounting obligations, a very considerable percentage of the human race is strangely oblivious of the inevitable consequences of unrestricted debt accumulation. No matter how great or how pressing the obligations, there is always an abiding faith that something is sure to "turn up" which will afford a breathing spell and provide an opportunity for making the necessary preparation for an adjustment of one's financial relations. And in the case of government debts there is far greater indifference to consequences than with private obligations. It is hardly too much to say that the great majority of people assume, instinctively as it were, that a rapid growth of government debts is a matter of little moment. When obligations fall due, renew them; then go right on accumulating more.
One of the hardest lessons society has ever had to learn is that government revenues must be made to equal government expenditures if ultimate financial disaster is to be avoided. The lesson, however, appears to have been fairly well learned, except in Mexico and numerous countries of Central and South America, by the end of the nineteenth century. All of the leading national governments of the world, and most state and municipal governments, raised revenues sufficient to meet expenditures. While accumulated debts were seldom reduced, they were nevertheless under control; they were not allowed to increase regardless of the adequacy of revenues for the payment of interest thereon. Financiers and economists were reasonably content with this feature of government fiscal management.
When Alexander Hamilton assumed control of the finances of the Republic in 1789, he found it necessary to reckon with the fact that one of the chief causes of the American Revolution had been the insistence of colonial governments on their inalienable rights to issue bills of credit and acquire debts without consent of the mother country. He also found that the strongest opposition to the adoption of our federal Constitution came from those colonies which had experimented most with the government printing presses. They strongly opposed giving to the federal government the power to coin money and regulate the value thereof. And many years later, in the fourteen years following the Civil War, a struggle took place to determine whether the United States government should be allowed to issue United States notes or greenbacks as a means of getting something for nothing. However, in the years immediately preceding the Great War, unsound government financial methods had given way before the accumulated wisdom derived from the disastrous experiences of the past.
Lessons Unlearned
The war has, however, turned backward the clock of time. Society appears to have unlearned the lessons it was believed to have mastered. With barely an exception, European governments have made no real effort since the war to adjust expenditures to income; and there has been an amazing popular indifference to this appalling fact. It is, moreover, not merely national governments that have fallen into evil ways; European states and municipalities without number have followed a similar course. And Europe is not alone in pursuit of this folly, as anyone may see who will take the trouble to scrutinize the financial status of New York and Chicago, the two largest cities in the United States.
It is not merely because it is extremely difficult to balance budgets that governments fail to do so. It is almost as much because the lessons of sound finance have been forgotten. Interestingly enough, it is not the uneducated classes alone who are responsible for the present disregard of correct principles of government finance. An amazing number of prominent government officials and men of affairs were swept off their feet by the events of the war. At the time of the Armistice there was no end of prediction in Washington and London and Paris that there was no possibility of a post-war era of depression and hard times, because society had learned how to make effective use of that marvelous economic phenomenon known as credit. The staggering volume of credit operations during the war had, in fact, quite turned the heads of many, if not most, statesmen.
Society had not learned to use credit effectively; it had rather re-learned how to abuse it. The three years that have elapsed since the Armistice have in public, as well as in private, finance been marked by a credit debauch that is hardly paralleled in history. The appalling consequences of the policies that have been pursued are now revealed in the disillusioning figures of government debts and government budgets.
British National Debt
The following table, 1 shows the debt of Great Britian before the war and since the close of hostilities (in pounds sterling):
1 The Economist, March 28, 1921.
Total Debt 1914, Aug £ 700,000,000
1918, Nov 7,120,000,000
1919, Mar 7,481,000,000
1919, Dec 8,079,000,000
1920, Mar 7,876,000,000
1921, Mar 7,630,000,000
It will be seen that during the war the British debt was multiplied tenfold. After the war the debt rose, in 1919, £600,000,000; but in 1920 and 1921 it declined slightly. It is dear that the expenses of government were then being met by taxation. 2
The question presents itself, however, whether the heavy burden of taxation which the British public is enduring is not seriously impeding the economic life of the nation. This issue will be subsequently considered in an analysis of the s to which the national income of Great Britain is now being devoted. It will there be shown that the burden of debt, together with other government expenses and unemployment insurance, are not only absorbing all the funds ordinarily available for new capital development, but are actually preventing the maintenance of the existing industries of the nation.
Some measure of alleviation from taxation in Great Britain might come if the Allied nations paid the £1,800,000,000 they owe Great Britain; but the chance that any of the Allied nations will be able to pay these debts is indefinitely remote. Indeed, the tentative proposal of Great Britain looking towards a cancellation of all inter-Allied debts arising from the war, affords evidence that she is not counting upon any positive fiscal relief from this source. 3
2 For the estimates for 1922, see page 47.
1 That Great Britain would have nothing to gain from an all-around cancellation of debts, may be seen from the fact that while the British
Indebtedness of French Nation
Let us now turn to the figures of French national indebtedness. The following table shows the effects of the war (in francs, the foreign debts being estimated at current rates of exchange):
(In francs)
Total Debt 1914, July 31 34,188,000,000
1918, Dec. 31 151,122,000,000
1919, Dec. 31 240,242,000,000
1920, Sept. 30 285,836,000,000
1921, Feb. 28 302,743,000,000
The French debt before the war was the largest of any of the national debts, per capita. In terms of percentage of national income, it also constituted one of the largest debts in the world.5 5La France Financiere et Economique, Tome I, page 305; Projet de loi du Budget, 1920, pages 162-3; Ibid., 1921, pages 12, 13, 184, 185. This huge debt was multiplied during the war five times; and it has been exactly doubled since the Armistice. In the single year, 1919, the debt increased 89 billion francs. This increase must, in justice, be charged in no small degree to war expenditures incident to demobilization and the liquidation of war contracts.
But in the fourteen months following 1919, the debt rose from 240 billion francs to 302 billion francs, an increase of 62 billion francs, or almost twice the total of the enormous debt of 1914. Some of this amount is supposed to be recoverable from Germany through reparation payments. The budget for 1920 allowed for 20 billions "recoverable" war debt to the United States amounts to £1,141,000,000, the debts of other Allied nations to Great Britain amounts to £1,731,000,000, which sum is exclusive of colonial obligations, amounting to £119,500,000. (League of Nations, International Financial Conference, Brussels, 1920, Paper IV, Public Finance, page 21.) Italy and Japan were the only other nations with as high a ratio of debt to income. from Germany, and the 1921 budget for 16 billions. Thus for the fourteen months from January I, 1920, to March 1, 1921, the total of such recoverable sums was about 23 billion francs. This leaves 39 billion francs (62 billion—23 billion francs) as the net increase in the French debt for the fourteen months ending March 1, 1920, for which the French people must stand responsible.6 6The figures for French foreign indebtedness are usually computed in terms of current exchange rates, and, since French exchange fell during the period in question, not all of the increase is attributable to the excess of government expenditures over receipts. Perhaps 10 per cent of it is due to the fall in exchange rates, which affects the value of the foreign indebtedness.
Whether France is likely, in fact, to recover the other 23 billions from Germany must be left for later consideration.7 7See Part II. It will suffice here to say that payments by Germany in the immediate future are not likely to result in any reduction of the French debt. The agreement entered into at Spa, whereby Great Britain was permitted to value surrendered German ships at the price at which the British government should eventually sell them, and the decision of the Reparations Commission to charge France at once with the total value of the coal mines of the Saar, together result in giving practically all the actual money accumulated in the Treasury of the Reparations Commission since May 1, 1921, to Allied nations other than France.
Foreign Debt
Much has been made by some people—even by American financiers—of the decrease in the French foreign debt during the last year or so. The decrease is approximately from 35 billion to 33 billion francs. This reduction, however, was not accomplished as a result of genuine saving in France. The French budget did not afford a surplus to be used for this purpose; nor did French foreign trade yield a favorable balance available to pay off foreign debts. It was merely accomplished by a shifting of obligations, by proportionately increasing the domestic debt.
Now it may possibly be good policy thus to reduce the French foreign debt at the expense of the domestic debt, but let no one be deceived thereby and led to believe that such a reduction in the foreign debt is evidence of fundamental improvement in French conditions.
As to the immediate future, it will be shown in a study of the French budget that there is certain to be a further large increase in the French debt during the current year.
These persistent increases of French national debt are obviously due to the reluctance, or inability, of the French government to raise sufficient revenue to meet expenses. The French people, unlike the British, are not yet shouldering the burden of war and post-war costs. They are still attempting to postpone the evil day.
National Debt of Italy
The following table shows the Italian national debt before and since the war:8 8From the Federal Reserve Bulletin, May, 1921.
(In lire)
Total Debt 1913, Dec 15,000,000,000
1919, Dec 84,000,000,000*
1920, June 95,000,000,000
1920, Dec 100,000,000,000
* league of Nations International Financial Conference, Brussels, 1920.
It appears from these figures that Italy's national debt increased during the war more than five times. Moreover, since the war the debt has increased further in an alarming fashion. Thus the Italian situation is the replica of that in France. Italy has obviously not as yet demonstrated her financial solvency.
National Debt of Germany
Germany's national debt is as follows:9 9League of Nations, Brussels International Financial Conference, 1920, Paper IV, Public Finance, page 21.
(In marks)
Total Debt 1914, July 1 5,300,000,000
1918, Dec. 31 140,000,000,000
1919, Dec. 31 197,000,000,000
1920, Oct. 2j: 10 10From General Report on the Industrial and Economic Situation in Germany, Department of Overseas Trade, London, 1920, page 57. Funded and floating debt including interest on railroads taken over from federal states, etc 287,000,000,000
Compensation to German citizens arising out of the Peace Treaty... 131,000,000,000 418,000,000,000
The German government financial statements are so complicated and so obscure that it is impossible to find out the precise status at any given time. Taking the above figures, however, as approximately exact, what conclusion may be drawn? With government debts expanding by billions of marks monthly, it cannot be said that Germany has as yet demonstrated her capacity, or willingness, to live within her means. In view of the greater rapidity with which the German debt is increasing, Germany may be said to be one step further down the scale of financial instability than are France and Italy.
Other European Countries
Little would be gained by a study of the debts of other European countries. It may merely be stated that the neutral countries are infected with the same virus. This has been particularly the case since the war. The total debt burden in most cases is, however, not as yet of staggering dimensions.
As for the other countries of central and eastern Europe, figures of indebtedness which they furnished are so preposterously inadequate that it is useless to attempt a precise statement of the indebtedness of each. One may suspect that the governments of these countries do not even know the exact volume of their present debts. But it is known that in many of them the debt figures have now reached totals, as expressed in terms of their depreciated currencies, that are almost meaningless. There can be no doubt that they are much further down the scale than France or Italy or even Germany.
The conclusions to be drawn from the data given above are plain. Until the various European nations stop increasing their debts, they will not have evidenced their financial solvency. Until they demonstrate that they are able to raise each year sufficient revenue to meet running expenses, one cannot logically contend that European countries are convalescent and on the highroad to financial recovery.