Evening star. [volume] (Washington, D.C.) 1854-1972, 1920-10-03
EUROPE'S DEBTS
TO THIS COUNTRY
London Has Been. Financing
the Continent, Using Ameri-
can Credit Freely.

BY b. N. ANDERSON, Jr., Ph.D.
Economist. Chase National Bank.
Our one-sided trade with Europe
has created a wholly abnormal sit
uation, which may be summarized as
follows:
lowed an unfunded debt of over three
and half billion dollars to private
individuals, banks and corporations
addition to the ten billions, which Eu-
ropean governments owed to the
United States government, and in adj
dition to the debts of Europe to in
vestors in the United States holding
European securities.
2. On January I, 1919, Europe ap-
pears to have been creditor to the
! extent Of perhaps as much as $780,
[ 600, 900 on current items. This is an
uncertain element. But between
January 1. 1919, and September Is.
1920. net debts against Europe to the
created. swapping the initial credit
and creating a net unfunded debt of
something over three and a half bill
lions.
| 3. The main items involved in the
computation of the growth of the un-
IUnoe0 ueoe OF Europe III Inc per
under discussion (January 1, 1919, to
September Is, 1920 are. on the one
hand. our export balance (the excess
of our exports over our imports) with
Europe, which was 100000, and,
on the other hand, advances made by
the United States Treasury to our
European allies which partially offset
this export balance. A large number
of other smaller factors on both sides
| of the account are dealt with in the
balance sheet below.
! Accumulated Since 1919.
4. The greatest part of the unfund-
| ed debt Of Europe has been piled up
since the middle of 1919, as the gov
eminent had practically ceased
trade by that time. Since the middle
of 1919, virtually the whole export
balance has gone on open account
and SO has contributed to the I'M
funded debt. Long time loans made
| by private investors in America to
Europe to aid the exports have been
exceeded by old loans maturing in
| the period under discussion.
5. The growth of the unfunded debt
has been accompanied by great col
lapse in the foreign exchange rates. a
collapse which first assumed dramatic
proportions in June of 1919
S. The creation Of so great an IN
funded debt is something that no one
would have believed possible in the
| first half of 1919. That it has come
about appears to be primarily due TO
| the INTERPRETATION of London, when
| has largely assumed financial respon-
sibility for the continent, and which
has stood between the United States
and the continent in the process.
London has purchased with sterling
Cor with short-term dollar obliga-
tions) the great bulk Of the franc,
| lire and other continental exchanges
created in the United states, and mas as
| in other ways, provided collars LOT
| the use Of the continent
London Sponsors Europe.
London has also purchased great
| quantities Of goods from the United
States and other parts of the non
European world for cash or on short
credits. which she has resold to the
continent on long credits. AS a con-
sequence Of this, sterling exchange
has been unduly depressed as com
pared with its intrinsic merits, While
continental exchange rates have been
held above the figures which they
! would have reached in the absence OF
| London's support.
| 2. An unfunded debt of this mag
! nitude presents a more serious prob
lem than if American investors had
purchased European securities during
| the period under discussion to this
| amount. Unfunded debt, however. due
| ON demand or short notice, and due,
moreover, to many thousands of inde-
| pendent creditors. presents real
problem.
From American Banks.
8. The primary source from which
this money has been withdrawn has
been American banks, which have pro-
vided it directly or Indirectly through
| the creation of new bank credit The
major part of this credit has not been
| extended directly by American banks.
A greater part has come. in the first
| instance, out of the working capital
who have thus tied up great deal
Of working capital in indefinite ad-
yances to Europe. This has led them,
however, to have recourse to their
American banks for the replenishment
Of their working capital under ordi-
banks have thus indirectly borne the
burden even where they have not di-
rectly borne it
.. In the United States. the total
loans and Investments of rreporting
member banks" of the Federal Re.
from April II. 1919, to April 9; 1920.
from Nav -, 1919. to May 4. 1920, the
loans and discounts Of all national
banks increased "a per cent This in
crease occurred despite a sharp re-
duction in the holdings by American
hanks Of government war paper of
ali kinds and despite very sharp de-
cline in the holdings of Treasury GER
tificates of Indebtedness.
Causes of Credit Expansion.
10. The primary explanation of this
tremendous expansion of bank credit
in the United States is our unbalanced
and unfinanced export trade, together
with the rising prices. fictitious pros
perity, and speculation. which have
crown out of the unbalanced export
trade, The view, which even yet con-
! tinues to be expressed, that our bank
Exhaustion has been due to continued