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visits a problem, of time and safety, in Europe in the older days when there were no fast boats across the Channel, no trains, and no airplanes? Mexico City is now but four days away by rail

to-morrow it will be part of two days by airplane. Do you think that Mr. Kellogg and Mr. Saenz might not get somewhere if they sat down together with President Coolidge in Washington, or with President Calles in Mexico? Not the first visit, or the second, but the fifth, the sixth, the tenth they would tell!

Yet it all might fail - I will admit it more readily than will he who reads. But it would be a great failure!

Before this article is printed the next issue that I would mention may be a practical reality-arbitration may at last be trying its hand at a resolution of the oil-law tangle. To be sure, the controversy had reached a stage of bitterness rather beyond the possibility of easy arbitration before President Calles and Senator Borah put out their respective feelers, in January, on this matter of arbitration. Surely such issues, if talked out frankly and with less of the vast formality of the diplomatic exchanges, might much earlier have reached such a tribunal as the Permanent Court at The Hague. There is, we must realize in criticizing Washington's caution, that deep distrust of Mexican sincerity in all such questions, but are we gaining anything by avoiding arbitration until it is forced upon us? We could take, I think, another chance on arbitration!

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that it is fair and not aimed at her dignity and sovereignty; and even if it is, if it can be done without the glare of the grim demand. She has always found a way; she has done it a few times, even, in the limelight, but I have always believed that the Evarts Doctrine, for instance, succeeded, not because it was rough, but because it was firm and fair and did not tell Mexico how to comply. I sometimes wonder if we do not talk too much about the modification of laws and judicial decisions and such methods when we carry on the oil and land and mining correspondence. We do not know our power; we think we must insist and 'arrange.' We seem no longer to negotiate; we demand and seek arrangements of myriad detailed issues. We might so easily be a little more mediaval, so to speak, in our diplomacy. Suaviter in modo, fortiter in re—and Mexico would find the way to meet us.

Before these words are printed the Mexican situation may have flamed into fire; American lives, even, may have been taken, and diplomatic relations broken. As I write, the situation is electric with possibilities and dangers. Yet the problem remains unchanged, and the solution stated here is as true as it was when those who genuinely wished the best for Mexico first hailed Madero as a friend and savior for us all. A revolution or American soldiers might sweep President Calles out of office, and might even set up a profoundly 'pro-American' régime, but the 'Mexican situation' would remain; the problem of protection of American lives and property would remain; and there would remain, no nearer solved than it is to-day, the problem of making friends with Mexico. Yet it is simple, is the Mexican problem-simple if both we and Mexico face it with simplicity and wisdom and good will. And the greatest of these is good will.

THE INTERALLIED DEBTS

BY F. W. TAUSSIG

THE sums involved in the settlements with our former allies are very great. The total owed to the United States comes in round numbers to ten billions of dollars ten thousand millions. Almost the whole of this sum is due for advances made during the war and for the conduct of the war. Something is owed for American supplies left over in Europe after the war and sold there, and something more for relief extended after the war. Over nine-tenths, however, represents war expenditure, and it is this nine billions alone to which I shall give attention. The three chief debtors are Great Britain with four billions, France with three and onethird billions, Italy with one and twothirds billions. I state the sums in round numbers, as I shall throughout

this paper.

Agreements on the terms of repayment have been made with all the debtors, big and little. With the exception of France, each of them has come to a definitive settlement with the United States; and a settlement with France will doubtless come ere long. In every case the agreement is for annual payments spread over a period of sixty-two years the period beginning with the year 1922 for Great Britain, with 1925 for Belgium, 1926 for Italy, and so on, according to the dates when the several agreements were reached. The annual payments are moderate, in some cases even small, for the first five years, and then rise to a

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figure which is maintained practically to the end. Great Britain is the only country that pays heavy sums at the start roughly 160 millions a year for the first ten years, thereafter about 180 millions. Italy's payment begins with only five millions, rises to twenty-three millions by 1936, and finally attains a maximum of fifty millions a year. Belgium's begins with five millions and in ten years becomes about thirteen millions. The proposed arrangement with France calls for thirty millions annually during the earlier years (beginning with 1926?) and for a maximum of 125 millions by 1943; some such figures, it is probable, will be found in the eventual settlement. Taking all the countries concerned, and including the sums proposed for France, we find that the total remittances to the United States on debt account will be, in round numbers, 210 millions a year during the first fiveyear period, and 250 millions for the second quinquennium; then about 350 millions for forty-five years thereafter; and finally something more than 400 millions for the last decade of the longdrawn-out process. The end is to be reached in 1984 for Great Britain, and in the years immediately following for the other countries.

I remarked at the outset that the sums involved are huge- totaling no less than nine billions. But this total stands only for the book amount of the loans as made by us during the two short years of the war period. What it

stands for in other terms than book account - what was really handed over by us to our allies when the loans were made and recorded—will be indicated presently. While it behooves us to understand and remember just how things then took their course, this aspect of the case does not bear on the point to which I would at present direct the reader's attention. What is now to be noted is the obvious contrast between the huge lump sum and the comparatively small annual payments, and the perhaps less obvious fact that this series of moderate annual payments is the one real thing coming back to the United States.

The annual payments alone have concrete importance. True, an actuary can calculate how much they represent, from his point of view, as an equivalent capital sum. According as he figures on a 3 per cent interest basis, or on one of 3 per cent or 4 per cent, he will tell you that so many billions more or less as the assumed percentage rate is lower or higher may be reckoned as the 'present value' of what is coming back; and he will tell you, too, how much may be regarded as repayment of principal, how much as interest on deferred payments. But such figuring has no significance for the realities of the case. It may serve to allay hostility or criticism and make a good 'talking point' before Congressional committees and chambers of commerce. But it is hardly more than a pretty mathematical game -attractive to the mathematicallyminded, impressive and puzzling to those not so minded. What is really to happen, what signifies for us and for the other peoples, is the series of annual payments.

What, now, about the amount of those annual payments and their importance to us?

Consider them in their proportion to other items, to other related things.

Two, three, four hundred millions make impressive sums. But what do they signify in comparison, for example, with the total income of the people of the United States? Our total national income for 1925 is supposed to amount to 90,000 millions. This is a stupendous sum. I will not vouch for its precise accuracy. The total of our income may be something more, something less. My statistical friends believe the figure to be within 10 per cent of the truth; and for the present purpose that degree of accuracy is all that is needed. Compare with this total the 200 millions odd which we are to receive from the Europeans in the next year or two. They come to about one quarter of one per cent of our national income. It is as if, having one hundred dollars to receive, we were to get twenty-five cents in addition - a negligible supplement. No doubt the payments are to increase, and in a few years will be doubled. But our national income will also increase; and, at anything like the rate of advance we have had in the last five years, that too will be doubled in ten years or so. As elements in our total annual resources, the payments will always be trivial. On the other hand, they will be no small items for the repaying countries, their national incomes being so much below ours in money values only half as much per head for the more prosperous of them, hardly one quarter as much for the less prosperous. And this discrepancy will become greater as time goes on. The growing remittances will become more and more onerous for them, since their national incomes, even though they may not stand still, cannot grow at the phenomenal rate which is ours and seems likely to remain ours.

Look at it in another way. These sums will go into the Federal treasury, and will be entered in the Government's budget. They may be directed either to lowering taxes or to reducing

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our national debt. The revenue of the Federal Government now amounts, in round numbers, to four billions a year. The debt receipt amounts for the present to 200 millions, more or less say 5 per cent of the government revenue, possibly 6. It happens that for the last fiscal year the Government came out, quite unexpectedly, with a surplus substantially largersome 300 millions; and we are at odds with each other about its disposition. Nor does it matter much what we do with it. As regards reduction of our national debt, we are repeating the course of events which followed the Civil War of 1861-65. Then, as now, we began to pay off a great debt with speed and with ease; and now, as then, we are in a fair way to get rid of it in a decade or two. This unexampled procedure — no other country has ever handled a public debt in this way is due in but small degree, for either period, to surpassing financial leadership. It is the result of the growth of this industrial giant of ours; of an abounding and increasing prosperity, which gives us in many a way occasion to pause, to reflect, to consider what we shall do with our abundance of material things.

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Consider, finally, what the repayments amount to in their possible effects on our foreign trade. What kind of effect they will have I shall presently indicate; here my question is, how great an effect? It happens that our imports it is these which will be primarily affected present amount to about the same sum as our Federal revenue roughly four billions a year. The debt repayments will again be 5 or 6 per cent of this sum total. Now the imports fluctuate from year to year by many hundreds of millions by much more than 5 per cent a year. These fluctuations trouble us not at all. The business

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world hardly knows that they take place, and the public at large knows not and cares not, nor has it any reason for knowing or caring.

To sum up, the impressiveness of the figures when stated in suppositious capital sums is misleading. What actually comes to us—namely, the annual payment is little as compared with the national income, with the Federal Government revenue, with the country's foreign trade. If we get these receipts we shall not be made rich. If we do not get them we shall not be ruined.

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So much as to the magnitude and proportions of the facts of the case. I turn now to their meaning for us. Two questions arise. So far as all this payment goes, be it great or small, is it to our advantage or is it not? The second question is different: not whether the payment is to our advantage, but whether it is right that we should receive it. There is an economic question, and behind that there is a question of justice. I say justice. Perhaps it would be better to say chivalry, or even longrun expediency - at all events something other than the bare matter of measurable gain or loss.

As regards the immediate economic aspects of the case, the underlying fact is that payment must come to us in goods. Of course the debt settlements are in terms of dollars, and we have to reckon in dollars. But it is the merest commonplace in economics that payment cannot come in cash, or that but the merest fraction can so come. If it did come to us in cash- that is, in gold-we should be embarrassed to know what to do with the money. Our Federal banking system already has more gold in its reserve than it knows how to use with advantage. But, to repeat, it is through goods, not

in money, that we must expect the remittances to be made. Our imports will become larger or will be made larger than they otherwise would have been. The increase will not be great relatively to the total volume of our foreign trade, as was just explained. But somewhat larger the imports will be. More goods will come in from abroad, and this is the way in which we shall really be paid.

No doubt the inflow of the additional imports of goods will be staved off for a time by loans, such as we have been making to foreigners in these post-war years. We used to be borrowers from Europe; now we are lenders to all the world. Like so many other things, our international credit position is being turned topsy-turvy. These lending operations of ours are not likely to cease, though they may not continue indefinitely at the pace of recent years. They bring possibilities of postpone ments of the rise in imports, of temporary overlappings and adjustments, by which our foreign trade for the next few years will be affected in ways not easy of prediction. These minutiæ are interesting and sometimes perplexing to the economist and the financier, but do not affect the outstanding fact: it is in goods that we must take payment.

The goods, however, will not necessarily come in from the countries which have to make the payments. They will probably come by indirect ways from other countries. English people will not sell us many English goods direct. They will send their goods to other countries — the Orient, South America, Australia. We shall then buy goods in those countries, and shall be able to pay for their goods by utilizing the debt remittances to our Government. This sort of indirect trade is going on all the time. Our imports now consist chiefly of raw materials and tropical commodities, most of which come in

free of duty. It is imports of this very class that are likely to be swelled in consequence of the debt payments. We shall get more tea, coffee, raw silk, wool, jute, rubber, and the like.

No doubt the whole of the additional imports ascribable to the debt payments will not be accounted for in this way. Some share will come to us in the form of manufactured goods sent directly from England, France, Germany. Certain lines of American industry will experience additional competition from their European rivals. Consequences of this sort, even though less in quantitative importance than is commonly supposed, must be faced as a probable result of the debt payments. So far as this direct inflow of goods from Europe takes place, it raises the question whether added competition from abroad is on the whole a good thing for a country or a bad thing. The answer to that question depends upon one's entire attitude with regard to foreign trade and the maintenance of a system of very high protection - a much larger topic than I can go into on this occasion. I will merely remark that in my judgment the consequences do not all run one way. In the main they will not be harmful to us, in some part they will be. But in any event they will not be of great moment.

I may remark, in passing, that the free traders and tariff reformers are disposed to exaggerate the importance of this particular matter for the problems which interest them. They urge that, since payment must be made in goods, we must make it possible to receive the goods; whereas, by imposing tariff barriers, we make it impossible to receive them. A necessary corollary of the debt payments, in their view, is a lowering of our customs duties. Not quite so, for the reason just adduced. True, our high duties do make it somewhat harder to send in

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