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The Solvency of the AUies



Great Britain ~ France
Belgium — Italy



COMPLIMENTS

FRANK KENNEDY

REPRESENTATIVE

907 KOHL BLHLDING

SAN FRANCISCO, GAL.



Guaranty Trust Company
of New York




The Solvency of the AUies



Great Britain — France
Belgium — Italy



Guaranty Trust Company of New York
140 Broadway



FirrH AVENUi; okiicf:

Fifth Avenue and tSrd Street



LONDON O F F I C K
32 Lombard Street, E. C.



LIVEKPOOL
27 Cotton Lxchai



O I' F I C E
ye Buildings



MAUISON AVENUE OFFICE
Madison Avenue and 60th Street

PARIS OFFICF,
Rue des Italiens, 1 and 3

BRUSSELS OFFICE
158 Rue Royale






COPYRIGHT, 1919
GUARANTY TRUST COMPANY OF NEW YORK



Foreword



WHEN the Armistice brought to an
end a period of unequalled de-
struction of lives and property and nations
confronted the tasks of readjusting indus-
try and trade toa peace basis, almost every-
where there was manifest — and quite
naturally — a disposition to magnify the
losses which had been sustained. Admit-
tedly, many of the losses are irreparable;
but the time has come to take account
of what remains and of what the future
promises.

A survey of the present resources and
producing power of the principal Euro-
pean Allies cannot fail to impress one with
their ability to reestablish their economic
Hfe. Already, in fact, there is ample evi-
dence of gratifying progress in the work
of rehabilitation. Yet it is imperative
for all of us, especially our leaders in
finance and industry, to gauge the present
situation and its probable consequences as
accurately as possible.

We have, in a large sense, the welfare of
the whole world in our keeping today,
iind upon the wisdom and farsightedness
which we show now in discharging this
obligation will depend, in considerable
measure, not only the progress of other
nations but our own future as well. I
believe absolutely that if the established
countries of Europe are given the coopera-
tion which we are capable of extending
at this time, there will be no question
that they will be able to revive their indus-
tries and normal trade conditions, which
should i)rovide a stable l)asis for credit.



The needs of European countries are
for food, raw materials, coal, and machin-
ery, which can be supjjlied to them in
adequate quantities only through extension
of credit on our part, as they have neither
the gold nor sufficient goods with which
to make immediate payment. Food for
the hungry and work for the idle must be
provided if the peoples of Europe are to
maintain stable political conditions and
resume peace-time production.

It is certain that American banking in-
stitutions cannot handle the credit de-
mands presented without cooperation.
Such cooperation must be accorded by
our Government, our manufacturers, and
producers. By team-play between these
important factors in the situation, Europe
can be put on its feet financially and in-
dustrially, and this country can be placed
in a position of unchallenged leadership in
the business affairs of the world.

This is a time when all thought of
profits should be forgotten, and the simple
necessities of the situation faced. Our
first and single duty now is to help restore
the world to normal conditions. If we
do our part in bringing that about, the
question of j)rofits will be cared for in the
future.

This country is facing its greatest op-
portunity and its greatest obligation, and
if the sacrifices which have been made in
the war are not to be in vain, we must rise
to meet that opportunity and that obliga-
tion fully.

Charles H. Sabin.



i/50116



Introduction



NOTHING is gained either by mag-
nifying the losses or by minimizing
the (hfficulties and problems that must be
faced as a result of the World War. Ac-
cordingly, it is the purpose of this book to
make a brief, impartial survey and
analysis, from the information available,
of the essential facts upon which judgment
may be based as to the ability of the prin-
cipal European Allies to meet their obli-
gations and at the same time regain a nor-
mal place in the work of the world.

In considering the ability of the Allies
to reestablish their industrial life, an ab-
solutely essential prerequisite of solvency,
it is well to keep in mind certain funda-
mentals of war finance which will enable
one to understand more fully the ability
of these Nations to make the necessary
readjustments.

Wars are fought with present goods,
and their utilization for war purposes does
not necessarily impair the producing
power of belligerents, because the basic
factors in the production of consumable
goods — natural resources, tools, machinery,
labor — remain when hostilities cease, and
in many instances there is a material in-
crease in manufacturing capacity. The de-
velopment of new and improved methods
of production and the substitution of
automatic machinery for skilled labor,
have unquestionably increased the pro-
ducing power of the Allies during the war.

Coincident with war financing there
has been an increase of prices, due to
scarcity of materials, interruption in
distributing processes, and, in part, to
monetary inflation. But, in considering
the problems created by the debt of any
belligerent coimtry, it nuist be recognized



that high prices and inflation increase the
monetary value of the wealth of that
country and the monetary value of its
national income, which, relatively, reduces
the burden of the debt.

The larger portion of the war debt of
the Allies is internal. The ability to meet
an internal debt is purely a fiscal problem,
because there are no additions or sub-
tractions to the national wealth and the
payment of interest on the debt implies
the taxation of the people as a whole,
interest being paid to present holders of
the bonds, which effects only a partial
redistribution of the national wealtli.

The {)roblem of meeting external debts
is of vital significance to the national
wealth of the country. It means the ac-
tual shipping out of products, and does
not add to the wealth of the country.
However, during the period of war finance,
the creation of an external debt is of ma-
terial benefit, because it increases the
power of a warring nation to obtain sup-
plies of materials produced by other
peoples, thereby adding to its war-making
power. This is a burden rightly to be
borne by future generations.

One of the interesting points in regard
to the external debt of the Allies is that
our own Government is their largest
creditor. Making these advances was a
part of our war policy, and there is no
immediate pressure upon the finances of
the respective debtor countries to meet
the payments on them. If necessary, the
debtors can fund the interest on the.se
obligations until they have reestablished
their industrial life and trade activities.
This leaves these countries in a favorable
condition to meet the limited amount of



4]



external obligations that have been floated
through private channels, and which will
have to be paid in the immediate future.
In considering the situation which con-
fronts Europe now, it is necessary to take
account of the specific conditions of par-
ticular nations, of their past experience,
their natural resources, and their eco-
nomic possibilities. These conditions in
each case must be studied, of course, in
their relation to conditions outside the



particular nation. There is a wide range
to the community of interests among all
the nations. And one of the tasks in peace
will be to secure a wider appreciation of
these common interests of mankind.

With the hope that in some degree our
interpretation of the outlook in Europe
today may help to define America's obli-
gations and opportunities in the period of
reconstruction, we turn to a consideration
of four of the Allied nations.



M



CONTENTS

Page

Great Britain 7

France 12

Belgium 22

Italy 29

The Outlook in Europe Generally . 35



Great Britain



As one of the principal belligerents, en-
gaged in the war from the beginning
of hostilities, Great Britain has made ex-
penditures growing directly and indirectly
out of the war which are far greater than
those of any other Allied nation.

For convenience, in considering the
financial status of Great Britain, monetary
values will be rendered in American dollars
at the par of exchange, $4,866 to the
pound sterling.

Briefly stated, the major facts respect-
ing the finances of the United Kingdom as
of ISIarch 31, 1919, the end of the last
fiscal year, are as follows :

The gross debt was $36,746,650,056, of
which sum only $6,569,100,000 represented
external obligations, repayable in foreign
currency, while advances to Allies and
Dominions amounted to $8,580,000,000.

The estimated debt service of the
United Kingdom for the fiscal year 1919-
19*20, as presented in the Chancellor of the
Exchequer's budget proposals, will be
$1,751,760,000, or 30 per cent, of revenue
receipts. And the normal peace budget
of the British Government, as estimated
by the Chancellor, will be $3,727,356,000,
of which the debt service, including amor-
tizations of one-half per cent., will con-
stitute about 52 per cent. The post-war
budget, as foreseen by the Chancellor,
will be approximately four times that of
the fiscal year 1913-1914.

Paying the Bill

The war, through increase of debt,
pensions and relief payments, and increase
of normal civil expenditures, has placed a
very large tax burden upon the British
people. It appears that in a normal post-
war year their taxes will have to yield about
$3,400,000,000, or 19.4 per cent, of their
national annual income, which is conserv-



atively estimated to be $17,517,600,000.
But already the policy of the Govern-
ment in the administration of war finances
has quite properly included heavy taxa-
tion. Of the total money raised for the
Government's own expenses during the
last five years, 36 per cent, was supplied
by means other than loans. And the fact
that the taxing machinery has been
organized for raising such enormous sums
will be very advantageous in planning
the after-war administration of Govern-
ment finances.

Ultimate Offsets to Debt

Furthermore, it will be noted, no allow-
ance has been made here for the indemni-
ties which eventually will be collected
from the Central Powers nor for the debts
owed to the British Government by the
Dominions and the Allies. While they
should be considered as ultimate offsets
to the British debt, in what degree re-
ceipts from these sources may be available
in the near future is a matter of specula-
tion. Eventually, however, they will re-
duce the burdens of English taxpayers, so
that the ratio between taxation and in-
come will gradually be reduced.

As regards the internal debt, which is
82 per cent, of the total, there is involved
no transfer of wealth to other countries.
The payment of interest and principal, it
is true, involves a transfer of wealth from
taxpayer to debt holder which may seri-
ously burden the individual taxpayer.
How well such a load may be adjusted to
the ability to bear it will depend upon the
equitableness of the taxing system. And
certainly there can be few . holders of
Government bonds who will not be called
upon to pay in some part, at least, the
taxes which they will in turn receive as
interest or principal of the obligations.



7]



THe ib teres* and amortization of the
other ^8. -per. cent, of the debt, which is
owed abroad, will amo'int to approxi-
mately $360,000,000. As an oflFset, the
interest due Great Britain on advances
made to Allies and Dominions amounts
approximately to 1 .3 times the total i nterest
on the external debt. Payments, in the
main, will have to be made in the form of
commodities or services, which, in inter-
national trade accounts, contribute to the
credit or export side of the ledger. To
what extent England's export trade will
be stimulated by this situation is problem-
atic. For many years the United King-
dom has imported more goods than it has
exported, but this so-called unfavorable
balance of trade has been offset by in-
ternational payments which do not enter
into the reports of foreign trade.

Foreign Investments

Chief among these counter-balancing
items in the case of Britain have been the
returns from investments abroad and the
receipts of British owned ocean-carriers.

It is estimated that British foreign in-
vestments before the war amounted to
$19,464,000,000, and that they now ap-
proximate $14,500,000,000. Broadly
speaking, then, the returns from foreign
investments that may be relied upon in
balancing the international account have
been reduced by about one-fourth during
the war. Nevertheless, the remaining
foreign investments exceed the external
debt by about $8,000,000,000, and the
yield from these investments at normal
rates would not only pay the interest on
that debt but also leave a large margin
to England's credit.

Productive Capacity

Nevertheless, the prosperity of the na-
tion will be measured largely by its ability
to produce marketable commodities for
sale abroad.

The experience of Great Britain in the



war is a most illuminating example of the
way in which war induces a rapid expan-
sion of the capacity to produce consum-
able goods. Edgar Crammond estimates
that the nation's power of production has
been increased by about 50 per cent, since
1914.

Great Britain's industrial position has
rested heretofore upon the ability to
gather in raw materials from abroad and
resell them as manufactures. In 1913,
69.5 per cent, of the merchandise exports
were classed as manufactures, while of
the imports only 25.2 per cent, were so
classed. The expanded physical equip-
ment has enhanced the nation's power to
serve as a world's workshop.

Labor Force

The number of men killed and those
who died of disease in the armed forces of
the United Kingdom during the war was
approximately 900,000. The population
numbered 45,516,259 in 1911. The in-
crease in subsequent years, estimated on a
basis of the excess of births over deaths in
the civihan population, added 2,057,121.
Deducting 900,000 from the total thus
obtained leaves an estimated population
at the end of 1918 of 46,673,380.

But even if the population is larger than
at the beginning of the war, it does not
necessarily follow that the actual product-
ive labor force has been augmented.
There has been a substitution of hitherto
unemployed women, for men withdrawn
from civilian tasks, however, and it is
reasonable to expect that such substitu-
tion will be operative in some measure
in the future.

Industrial Organization
The manifold improvements in Eng-
land's industrial organizat'on during the
war have constituted the most durable
offset to the loss of man-power.

It is estimated that, whereas in 1872
Great Britain produced 57 per cent, of
the total food consumed in the country,



8]




The Royal Exchange, in the heart of London, toith the Bank of England on the left



m 1913 only 42 per cent, was of domestic
production. During the war agricultural
production was greatly increased, some
4,000,000 acres being added to the area
under cultivation, and this will make the
country less dependent upon foreign
sources of food supplies than before the



war.



Standardization



It was in manufactures that the most
significant increases in output were ef-
fected. How this expansion was accom-
plished is explained in part by Professor
A. W. Kirkaldy as follows: "At Lord
Kitchener's instance, the whole world
was searched for the best machinery; new
factories were built, old factories were
stripped and re-equipped; and the new
machinery was automatic, semi-automatic,
fool-proof, such as unskilled workers could

very quickly be taught to handle

We had scrapped all our old-fashioned
ideas, our old machines that could do very



beautiful work with a skilled man behind,
and we replaced them with fool-proof
tools, whose steel brain did the work, with
an unskilled worker to pull the lever."

Other Industrial Gains

In other respects the gains to the indus-
trial organization of the country have been
important. Workers have been taught as
never before to work with gauge and
micrometer. The resulting gains in ac-
curacy of workmanship will be lasting.

Again, manufacturers have learned
much about the advantages of standardi-
zation of processes and operations in their
plants. This was brought about in part
by the Government in its efiForts to bring
to the maximum the output of all the
plants working for the Government. Un-
der Governmental guidance there was a
pooling of experience that has been of
great educational value to those directing
the production of goods.



9



There has been a tendency toward com-
bination in industry, for export trade and
for production. A notable example is the
recent dyestuffs combination. Employers,
too, have learned to work together more
readily than hitherto. Cooperation in un-
usual degree for a common cause of such
magnitude as winning the war is bound
to have its lasting effects.

Preparation of Banks

One evidence of the foresight of finan-
cial leaders in England is found in the
amalgamations of large commercial banks
which have brought together huge aggre-
gations of banking resources.

Whereas in 1902 there were 115 banks
in the United Kingdom publishing ac-
counts, and in 1914, 70, in 1918 amalga-
mations had reduced the number to 57,
with assets of approximately $12,700,000,-
000, or an average of about $223,000,000
per bank. No such concentration of bank-
ing resources has been effected in the
United States. Here, in June, 1918, the
State, private, and national banking in-
stitutions numbered 28,880, with aggre-
gate resources of $40,726,400,000, or an
average per bank of $1,410,000.

The recent amalgamation movement
owes its chief impetus to the contem-
plated after-war demands that in-
creased business would make upon the
banks. With the principal banking re-
sources already combined into larger units,
English bankers are better prepared than
ever to assist in the development of Eng-
lish industry and commerce.

The war occasioned a large increase
in paper money, chiefly through currency
notes issued directly by the British
Government. On July 29, 1914, the
Bank of England had issued $267,000,-
000 of notes secured by a gold reserve of
69 per cent. This had increased by June
18, 1919, to $505,000,000, with an 84 per



cent gold reserve. On June 18, 1919, the
amount of currency notes in circulation
totalled $1,677,000,000, with a gold re-
serve of 8.5 per cent. These were emer-
gency notes, and the whole amount was,
therefore, a net addition to the paper
circulation.

The national wealth, valued at $82,-
500,000,000 in 1914, is now estimated by
Crammond at $116,000,000,000, repre-
senting a war-time increase of 39 per cent.

After the Napoleonic Wars

England's recovery and industrial ex-
pansion following the Napoleonic Wars
furnish an object lesson that may well be
recalled in connection with the present
situation. It is very difficult, of course,
to institute a comparison between condi-
tions obtaining a century ago and those of
today. The applications of steam and
electricity in industry, and other trans-
formations and developments in the equip-
ment for supplying goods and services
make ours an industrial age markedly
different from that of 1815. Never-
theless, without pressing the analogy un-
duly, it is possible to find interesting and
suggestive similarities between conditions
and problems in Great Britain in the two
periods.

England took part in a series of wars
that continued, with brief interruptions,
from 1793 to 1815. The population of
Great Britain in 1816 was about 20,000,000.
The wealth of the United Kingdom at that
time was not more than $12,500,000,000,
and the national income was not more
than $1,500,000,000. Nevertheless, the
country had incurred an aggregate debt of
$4,475,000,000, the annual interest charge
on which was $165,000,000. Thus, approx-
imately 11 per cent, of the national income
was paid in support of the debt. At the
same time, the total annual expenditure of
the Government was more than 25 per
cent, of the national income.



10^



It is interesting to note that the esti-
mate of the ratio between debt service
and national income for the present after-
war period is almost identical with that
just cited. The ratio between the total
expenditures in the coming budget and the
national income is 21 per cent., or some-
what less than the estimated ratio in 1816.

Moreover, heavy taxation during the
Napoleonic Wars had borne much the
greater part of the British Government ex-
penditures. Taxes yielded $9,732,000,000
and loans $2,189,700,000.

In spite of the heavy expenditures, the
wealth of Great Britain increased year by
year during the wars. The steam engine
was brought into general use, and spinning
mills in the cotton and woolen trades un-
derwent great development. The output
of coal and iron rose rapidly. Both internal
and foreign trade multiplied. Exports,
which in 1811 were valued at $155,712,000,
were valued at $248,166,000 in 1815.

During the Napoleonic wars there had
been issued a great volume of paper cur-
rency, and prices rose to great heights.
After 1797, when the Bank of England sus-
pended cash payments, the country's cir-
culating media consisted entirely of paper
money.

Shortly after the signing of the peace
treaty there was a great slump in prices,
and the years 1816 and 1817 were marked
by a considerable business depression.
Poor crops in England contributed much
to this result, and another cause seems to
have been a misjudgment of the after-war
Continental demand for English manu-
factures, and a consequent speculation
in commodities at prices which proved
disastrous to English traders. Whether
the Continent's inability to offer goods in
exchange outweighed the influence of Eng-
lish tariff restrictions aimed at the Con-
tinent, it is impossible to say. In either
event the result was the same. The Con-
tinent had need of English goods but was



not prepared under the handicaps existing
to pay for them.

But in 1818, despite the temporary set-
back, British industry and commerce
made noticeable gains. By 1820 a period
of rapid industrial growth had begun.
What had seemed an unbearable burden
of debt in 1815 was borne with compara-
tive ease.

The Outlook

All in all, the outlook for industrial
progress in England is favorable. The
manufacturing capacity of the country
has been greatly increased during the war.
Even more notable have been the im-
provements in port and warehouse facili-
ties. Ships are being turned out rapidly,
and the British merchant marine still ex-
ceeds in tonnage that of any other nation.
A system of preferences which unites the
various parts of the Empire commercially
more closely than ever before will give the
vast colonial resources a new significance
for the development of British industry
and trade. The position of London as a
world financial center, still is an excep-
tionally important asset for the period of
rehabilitation.

The recent removal of restrictions on
the exportation of capital for investment
will naturally result in an expansion of the
export trade and a stimulation of domestic
production.

Much depends upon the spirit and tem-
per of a people. Their record of achieve-
ments in industry and finance has amply
demonstrated the capacity of the English
for doing big things in a big way, and for
meeting emergencies with the requisite
energy and ability.

In view of the advantages accruing
from a century of progress in the realms
of industry and finance, it may be ex-
pected that Great Britain will again re-
cover from the effects of' war no less
quickly than it did a century ago.



11



France



THE surprising military achievements
of France in the World War attested
not only the fortitude and morale of a
great people, but the strength and adapt-
ability of the country's industrial and
financial organization before the war. Be-
cause of the sacrifices in men and wealth
which France made in support of the com-
mon cause of the Allies, all the world is in-
terested in the re-
construction and re-
adjustment of
French industry
and finance.

Area, Population
and Debt

In area, conti-
nental France is
more than four
times as large as
New York State.
The population in
1911 was 39,601,-


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