OUR DEBT TO AMERICA THE agreement reached between the British and American Governments for funding our debt to the United States has on the whole been favourably received in this country on the grounds that it has put an end to uncertainty, improved the prospects of Anglo-Saxon co-operation in the political field, and will improve trade prospects by enhancing British credit and financial prestige. At the same time, an agreement which will affect our public finances for sixty years by incorporating in our Budget a charge rather larger than the whole of our pre-war Consolidated Fund is a matter of such first-class importance that it is desirable its implication should be understood in its widest aspects. In the first place, it is worth while to consider whether it is right that we should pay America at all. During the war the European Allies from time to time asserted with emphasis that they were pooling their resources both in men and material, and this statement, if it meant anything at all, implied that, at that time at all events, it was the intention of the Allied nations to contribute to the war in proportion to their ability. To a very large extent the figures of debt between one and another of them were accidental, and it may be doubted if the elaborate system of book-keeping involved would ever have been retained had it not been for the consideration that it permitted each country to exercise a very effective form of control over the purchases made in it by its Allies at a time when resources were strained to the utmost. But, on the assumption that the nations were equally vitally interested in carrying the war to a successful conclusion, it is clear that the only equitable basis for sharing the cost of the war is that each should contribute in proportion to its ability, and that in estimating the distribution of the burden account should be taken of the devastation wrought, the loss in man power, etc. On any such basis the European Allies would clearly owe nothing to America; for, without in any way wishing to disparage the American effort, it is only fair to recognise that in proportion to her resources America's contribution was small. Her active participation on the battlefield was limited to the latter part of one out of the five campaigns, her tremendous organisation to provide war supplies, though taken up with characteristic energy, produced its results too late to influence the result of the war-none of her own production of ammunition arrived in time to be used by her troops in the field-the restrictions that had to be imposed upon her home population were comparatively light and were only endured for a short period, and her actual losses in the field, as Mr. W. M. Hughes has more than once reminded us, were less than those of Australia. But it is idle to complain or to attach too much importance to such considerations. America came into the war with much greater deliberation and from more disinterested motives than the European Allies, and no amount of generalisation can alter the fact that to the great populations of the West and Middle West the European War was a very remote affair. Events since the war have shown those in Europe who did not, perhaps, previously understand it how detached the American attitude towards European affairs must inevitably be, and however much we might wish it otherwise, and whatever may be the position in the future when communication and transport bind the New and the Old World more closely together, the American Government did not during the war, and to-day could not possibly, take the attitude that there was the same community of interest between America and Europe as there was between the European Allies. It is on these grounds that we may reasonably accept the situation that, while America will decide for herself what her ultimate net contribution towards the cost of the war is to be, we in Europe must still look for the only satisfactory settlement of this question on the basis of our ability to carry the burden of the war. The somewhat different argument that Great Britain should only be asked to repay America as and when we recover our debts from our Allies, on the ground that the former were incurred on their behalf, has already been dealt with in the November number of The Nineteenth Century. But, in view of continued misunderstanding, it may be worth while to recall that it is a purely accidental coincidence that the money we lent to France, Italy, and our other Allies about equals the amount we borrowed from America in 1917 and 1918, and that with the exception of (a) certain munition contracts placed by Great Britain for Russia which ran on after April 1917, (b) part of the money used for pegging the dollar exchange, some of which was required because of contracts placed in South America and elsewhere for material-some of which went to the Allies, and (c) money spent for material which we had to buy in America to replace precisely similar material which we used for munitions, etc., furnished to France and Italy, the money which we borrowed from the American Government was spent upon commodities (the largest item being food supplies) which we should in any case have had to purchase from her and would have had to pay for by selling more of our foreign investments, if the American Government had not financed us. The British Treasury attempted unsuccessfully in the later stages of the war to persuade America to assume the responsibility of financing all the overseas purchases of France and Italy, not only in America, but also in Great Britain and elsewhere; this would not have relieved us from the necessity of ourselves making purchases abroad, though it would have given us the dollars to pay for them without borrowing. But the Washington Government was not prepared to finance purchases over which it could exercise no control, and it rejected a plea which was in effect an argument that the United States should carry a larger proportion of the cost of the war. The American attitude being what it is, we could not appeal to America to relieve us from our debt except on the ground that we could not afford to pay. But when we come to the terms themselves, we find that America has not merely made some concession to us on the letter of her bond, but has let us off at a figure which is less than the net cost to the American Government of the debt she has incurred to her own citizens in finding the money to finance her loans to Great Britain and Europe. The terms of the settlement are briefly as follows: The principal of the notes to be refunded is $4,074,818,358. Interest accrued and unpaid to December 15, 1922, reckoned at 4 per cent., and not 5 per cent., as had been supposed, amounts to $629,836,107, making with the principal a total of $4,704,654,465. From this total have to be deducted payments made on October 16 and November 13, with interest thereon at 4 per cent. December 15, 1922, making $100,526,380. This leaves a net amount of $4,604,128,085, of which the odd $4,128,085 is to be paid in cash, so that the total principal of British indebtedness for which British Government bonds are to be issued to the Government of the United States is $4,600,000,000. Interest is payable at the rate of 3 per cent. from June 15, 1923, to December 15, 1932, and thereafter at the rate of 3 per cent. until final repayment. Sinking fund payments will increase regularly from $23,000,000 in the first year to $175,000,000 in the sixty-second and final year. The amount of the payment converted into sterling depends, of course, upon the rate of exchange, but, reckoning the payment at par, it commences at about 33,000,000l. and rises, according to the rate at which the sinking fund is paid, to 37,000,000l. or 38,000,000l. The terms are, however, modified by certain options which may These make the task of Great Britain appreciably lighter. These benefits cannot immediately be assessed in money. But the amount of the annual charge is a concession of a definite tangible amount. Our original obligation, which was on a 5 per cent. basis, was payable on demand, but as it was clearly impossible for the debt to be repaid in a lump sum, Congress about a year ago authorised its funding at 4 per cent., which is the rate paid by America on the Liberty Loans. (The first Liberty Loan of $1,400,000,000 was raised at 3 per cent., but this was convertible at the holders' option into 4 per cent. Liberty Loan, the issues of which ultimately amounted to approximately $13,000,000,000.) These loans, however, are redeemable at par at various dates between 1927 and 1947, and in the event of the general rate of interest falling it is clear that the American Government, if the loans are not previously redeemed out of revenue, would be able to convert into loans at a lower rate of interest at these redemption dates. By funding to-day the British Government surrenders the right to take advantage of any further fall in the rate of interest, except in so far as it is able to take advantage of the option entitling us to pay off in advance. But in practice it will be more possible for the United States to fund a terminable loan than for us to raise a very large sum of money in America at a reduced rate of interest; and it is probable that over the sixty years the United States of America will in fact have to pay somewhat less than 4 per cent. to its own people. Again, the borrowings of a Government from its own nationals are at a higher nominal interest figure than the net amount actually paid, since its interest payments are liable to taxation. Thus, when Great Britain pays 5 per cent. interest in this country, it recovers from most holders 5s. in the £ income tax, the net charge upon other sources of taxation therefore amounting only to 3 per cent. When Great Britain pays interest to the American Government she has no such power of taxing the interest, and the payment, therefore, of 3 per cent. abroad is equivalent to a burden of 4 per cent. upon the national resources. It is true that this argument applies only in a modified form to the position of the American Government, for the Liberty Loans were issued at 4 per cent. 'exempt from all Federal, State and local taxes except estate or inheritance taxes and Federal income sur-tax and profits tax.' There is, however, some deduction to be made on this account. For these two reasons, therefore, it is reasonable that, unless Congress wishes to profit at our expense, the loan should be funded at slightly less than 4 per cent. The actual figures are, however, very substantially less, and make it probable that over the whole period Congress is asking us to pay somewhat less than the corresponding Liberty Loans will actually cost the American Government. To this extent, therefore, the settlement represents a definite actual concession to this country. Coming to the effect of the settlement upon the British taxpayer and upon our trade relations, we may study the scheme in relation to the three considerations which determine the ability of any country to pay an international debt-viz., the possibility of raising the money by taxation, the possibility of converting these funds into a payment overseas, and the ability of the creditor to receive. As regards the first of these points, the charge, when account is taken of amortisation, is at a considerably cheaper rate than the cost of any other part of our war debt. At the present moment, when taxation is already near the breaking point, the raising of from 33,000,000l. to 37,000.000l. a year is undoubtedly a heavy obligation. But conditions have been included which may relieve the burden in the early years; and it is more important to consider its effect in the long run. The total annual national income before the war was estimated to be about 2,400,000,000l. Assuming post-war prices to be only 50 per cent. above the pre-war level, this is equivalent to 3,600,000,000l. With a reasonable amount of trade recovery (and without even assuming the absorption of all our unemployed, which to a large extent represents the increase in the adult population since 1914), we may reasonably expect that the national income in the near future will be considerably in excess of this figure. The American payment is less than 1 per cent. of this sum. But before the war the national income was increasing year by year, and, looking ahead, it is to be presumed, unless Great Britain is going to stand still economically, that this increase will continue; and if, as seems quite probable, the level of gold prices tends to settle at |