Loans to Support Exchange Did No Good

Second, I repeat, that all this vast credit to Europe used in supporting the exchange did no good. Continental Europe was in far worse financial and industrial position at the end of it than at the beginning. The finance ministers used the easy way so long as the outside world would take their currencies in the exchange markets.

Third, England had terrific losses. She would have done far better to have made her readjustment in the winter of 1918-19.

Much Smaller Loans, Conditioned on Financial Reforms, Would Have Solved Problem

Finally, very much smaller sums of money lent to Europe with discrimination and care, and conditioned on adequate financial and currency reforms on the Continent, would have turned the Continent of Europe up again, as indeed very much smaller loans, carefully supervised, given to the weakest countries individually did turn the tide at a later date.

Very much smaller loans would have meant, for one thing, that Europe would have bought only what she needed. She would have bought foods. She would have bought raw materials. She would have bought other things essential to set her industries going. She would have developed her industrial power and her power to export and would have been in a position to send us a back-flow of manufactured goods in return for the needed foods and raw material. As it was she sent us, through the whole of this period, a pitifully small volume of goods, and she bought from us a high percentage of the manufactured goods which she ought to have been producing herself. Our exports to Europe in 1919-20 ran very high in finished manufactures, including luxuries. The episode did nobody any good. It weakened the world.

The Keynes and Morgenthau plans, if carried through, would repeat this episode, on a vaster scale. We should pour American dollars into the international fund which it would use in supporting the exchanges of all weaker countries. We should export goods. We should have a boom based on the export of goods. We should finally "get fed up" with the drains on our dollars. We should cease to supply the unlimited dollars. The fund would deteriorate. The exchanges would crack. The exports would drop violently, and we should have another crisis of 1920-21.

The Keynes-Morgenthau plan puts the cart before the horse. It strikes at the symptom. It does not deal with the fundamentals.

Keynes and Morgenthau versus the Red Cross

Now we must recognize frankly that there will be countries on the Continent of Europe so stricken, so demoralized after the war that they will have no credit with which to buy goods, and that we and other countries which have surpluses must engage in an immense act of charity to help keep them alive. We should do this by Red Cross methods and on Red Cross lines. We should not call it loans, because we shall not get the money back. We should call it gifts and charity. We should know exactly what we are doing and we should mark it off our books forthwith.

We should limit the amount of it. We cannot feed the world. We cannot support the world. We can help. In every country, from the beginning, the government should be encouraged to be responsible, and their own people should be expected to do the main job. Of course the standard of life in Europe will be low when the war is over. Anyonewho supposes that the world can go through the devastation of this war, and come out with a high standard of life, is dealing in fantasies.

The Keynes-Morgenthau plan would make Red Cross work unnecessary—for a time. The weakest and most devastated of the Continental countries would have its quota in the international exchange stabilization fund. All countries would start with drawing power upon this fund. Under these circumstances the Finance Minister of each country would feed his own people instead of calling on the outside Red Cross. He could do it by printing bank notes, and while the quota lasted no Red Cross would be needed.

I would say that even in giving Red Cross aid to a stricken country, we should make strong representations to the governments of those countries directed toward the rehabilitation of their internal finances and currencies. Gifts, as well as loans, should do the recipient permanent good.

Both Keynes and Morgenthau Plans Put the Borrowers in Control of the Lending

Both the Keynes and Morgenthau plans put international lending into the hands of debtors.

The one great country which will be in a position to extend credits in the postwar period will be the United States. Some other countries, as Sweden, Switzerland, and the Argentine may be in a position to give some credits, but the majority control of the fund would be in the hands of the debtors, including Great Britain, even though the Morgenthau plan reserves a veto on certain points for the United States. Strong and weak alike, debtor and creditor alike, pool their resources and the debtors decide how to lend them. Now this, I submit, is an unnatural and an unsound arrangement in principle. If credits are to be safe, the creditor must be in a position to protect himself, and must be in a position to impose conditions that will make the credit safe.

When a would-be borrower is strong and in a good credit position he meets no unusual terms at his bank. Other banks would be glad to have the business. But when a borrower is weak and needs emergency help, a bank, if it lends at all, will make sure that there is such a reform in the borrower's position that the loan will be good and will do good. A bank, a majority of whose board of directors are impecunious debtors to the bank and all of whom are eager to borrow more, would very speedily become a ruined bank. It is this kind of bank which both the Keynes and Morgenthau plans would create.

We Should Do Our Own Lending

If we are going to lend to Europe in the postwar period, we should do it ourselves and not through an international institution. We should impose sound conditions to make the credit good. We should not impose selfish conditions. We should not impose capricious conditions. But we should impose conditions which will assure the return of solvency to the borrower, the balancing of the borrower's budget, and the stabilizing of his currency at a rate mat can be maintained against gold. We may well make specific gold loans to put gold in the reserves of the central bank of the country we are aiding. We should simultaneously insist upon a money market policy in the country, including firm discount rates, which will protect the gold.

The gold standard itself is a powerful deterrent to excessive e imports on the part of a country, and a powerful force working for an adequate volume of exports. Under the workings of the gold standard, an excess of imports tends to drain away a country's gold. The responsible central bank, obliged to redeem its currency in gold, thereupon raises its discount rate and restricts credit. The restriction of creditto importers checks their purchases of foreign goods. Imports are reduced. The restriction of credit to exporters hastens the sale of goods to foreign countries and compels them to make the necessary price reductions to get goods out.

Keynes-Morgenthau Plan Does Not Require Budget Balancing or Firm Discount Rates

Now, both the Keynes and Morgenthau plans have some suggestions as to dealing with weak countries which are using up their quotas too rapidly, and general statements regarding appropriate measures which the fund may take, but neither of them says anything about balancing internal budgets and neither of them says anything about firm discount rates to protect a currency.

On the contrary, it is in the spirit of both plans to make these unnecessary, as the following two sections will show.

Both Morgenthau and Keynes Plans Are Cheap Money Plans

High interest rates are anathema to Mr. Keynes and high interest rates are anathema to Mr. Morgenthau. Our present government borrowing policy in financing a great war at rates of interest exceedingly low are made possible only by a constant expansion of bank credit. Money can be got at these low rates from the banks, but cannot be got from investors in adequate volume at these rates. The low rates of interest on bank loans, moreover, are made possible only by continuing purchases of government securities by the Federal Reserve banks themselves, enlarging the base on which bank expansion takes place. Our pre-war policy from 1933 on, following Lord Keyne's monetary philosophy, was of the same character. Bank expansion was to supply the government with money, and the banks had their reserves enlarged by Federal Reserve purchases of government securities, by United States Treasury purchases of silver, and by gold flowing in from foreign countries. Lord Keyne's objection to the gold standard, rests in large part upon the fact that it is a restrictive standard. He wishes bank credit to expand freely against government deficit borrowing, because he sees no other way to make prosperity and full employment. The gold standard is a restrictive standard. It operates powerfully to hold undue credit expansion down. It compels readjustment and liquidation when unsound tendencies exhibit themselves. That is to my mind one of its greatest merits. It is to Lord Keyne's mind its great demerit.

The Keynes and Morgenthau plans both would create new currencies which would be additional to gold in the reserves of the central banks or of the various government treasuries. The liabilities of the international bank would function as if they were gold assets in the hands of the institutions which held them. They would relieve pressure on money markets everywhere, and remove or reduce the necessity for credit restraint through high interest rates.

International Rediscount Rate at 1%

Finally we have the remarkable circumstance in connection with both these plans that the international bank is to give its credit within the quotas without any charge at all and that when quotas are exceeded, it is to give its credit at a discount rate of 1%. Now this from the standpoint of the principles of sound central banking is utterly grotesque. A central bank should have its discount rate above the market rate. It should not make it possible for a member bank to rediscount in order to lend at a profit, and it should not give free credit at all. But here we have created a new central bank for the world, a new bank of rediscount for the world which, lending to central banks or government treasuries money which functions as ultimate reserve moneys,lends part of it at no charge and the rest at 1%. No more powerful instrument of world inflation could be devised. It would be an instrument for world inflation—an inflation which would move progressively until the stronger countries, alarmed at the quality of the fund, and alarmed at the inflationary phenomena within their own borders, ceased giving credit to the fund, pulled up, and cut their losses.

It is not to be expected that a fund constituted in this way, and managed by the debtor countries, would impose any adequate restrictions on fiscal deficits within the member countries, or require firm money rates within the member countries.

"Abnormal War Balances"

The term "abnormal war balances" as used in the Morgenthau plan is not defined. I am assuming that it has the same meaning as the term "abnormal balances in overseas ownership held in various countries at the end of the war" used in section 34 of the Keynes plan, which follows:

"The position of abnormal balances in overseas ownership held in various countries at the end of the war presents a problem of considerable importance and special difficulty. A country in which a large volume of such balances is held could not, unless it is in a creditor position, afford the risk of having to redeem them in bancor on a substantial scale, if this would have the effect of depleting its bancor resources at the outset. At the same time, it is very desirable that the countries owning these balances should be able to regard them as liquid, at any rate over and above the amounts which they can afford to lock up under an agreed programme of funding or long-term expenditure. Perhaps there should be some special over-riding provision for dealing with the transitional period only by which, through the aid of the Clearing Union, such balances would remain liquid and convertible into bancor by the creditor country whilst there would be no corresponding strain on the bancor resources of the debtor country, or, at any rate, the resulting strain would be spread over a period."

Another Hidden Purpose

We come here to one of the hidden purposes of the Keynes plan which our Treasury has swallowed whole, and for which our Treasury plan has worked out a definite solution. Lord Keynes is here proposing to transform Great Britain from the position of a very embarrassed debtor to the position of a strong and aggressive creditor, at the expense of the United States. What are these abnormal balances which debtors must not pay back to their owners, but which the owners are somehow going to be able to use as if they were liquid cash? How were they created? By what right can they be withheld from their lawful owners when the war is over? England is one great debtor of these balances. The United States are the other.

Britain's Embarrassing Blocked Debts

British banks held large deposits in sterling when the war broke out, due to foreign central banks in the so-called sterling area i. e. the British Dominions on a sterling basis and Scandinavian and Baltic countries which had followed England off the gold standard and had chosen to let their exchanges fluctuate with sterling. They believed, as a matter of course, that they could sell their sterling balances at any time, expecting them to be transferable freely on the books of the British banks at the order of the owner of the balances.

These "abnormal balances" include refugee money. In part they represent gold that was sent by confiding outsiders to England to be sold in the British gold market for sterling. In part they are supposed to represent goods shipped to England, during the war, with payments made in sterling, but with the sterling balances subsequently blocked so that they could not be transferred.

I have been unable to get figures even approximating the exact amounts, and I find a similar inability to get any estimate on the part of a great New York bank. My impression is, however, that the volume of this has grown rather than diminished during the war, and that restrictions on foreign exchange transactions in England, and ever growing restrictions on the transfer of foreign owned balances from one account to another, have tied up these funds in great volume so that the outside owner cannot use them. He cannot get gold out of England for them. He cannot exchange them in England for the currency of his own country, and he cannot even sell them in outside markets for whatever figure they will bring. They are blocked.

Now we are similar holders, in much greater amount, of money which came to us for safety from Europe as Hitler's strength grew. Much of it came to us in actual gold. And much gold came to us under Gresham's Law after our de facto stabilization in early 1934. We had, to be sure, a very imperfect gold stabilization, but England had none at all, and gold left places which were more unsafe to come to a place which looked safer.

"Hot Money"

In the period from 1931 on there was a great deal of "hot money," nervous money, jumping about from place to place seeking safety. The origin of this money was in the excessive bank expansion of the 1920's. Bank balances had risen tremendously under the cheap money policy of the 1920's. Sterling had been over-expanded. The British banks had made loans which created new sterling deposits far in excess of what was justified by the gold reserve position of the Bank of England, and foreigners had got hold of these sterling balances because England had spent them abroad or had loaned them abroad. We had over-expanded credit in the 1920's, creating very excessive dollar deposits, and a great many of these were in foreign hands because we had made excessive dollar loans to foreign countries.

When the foreigner tried to cash in these excessive British liabilities for gold in 1931, England quit paying gold and went off the gold standard, but the balances remained on the books of the British banks and the balances even grew as gold came to England from India and other places to buy sterling when sterling went low. The excessive amount is due primarily to the excessive expansion of credit in the '20's. The nervousness of the funds is due to the deterioration in quality of this excessive credit, and to the abandonment of gold.

If, after the war, England removes exchange restrictions, and the owners of these balances are free to sell them for what they will bring, the fear is that sterling will break to very low levels. The fear is that England will not have enough gold to protect sterling except at very low levels. The fear is that England will have to turn to the United States for financial aid, or may be obliged to deal with Creditors whom she cannot pay, as an embarrassed debtor usually does. England is proud and does not wish to occupy this position.

The Fund to Take Over Britain's Debts

The proposal therefore in the Keynes and Morgenthau plans is that the international bank shall take over these abnormal balances for prolonged periods, and create new credits in bancor or unitas which the countries who hold these balances in England may use as liquid cash for international purchases. England, relieved of the pressure ofthese debts would then be in a strong position. The proposal is further that the governments of the world shall unite to prevent capital transfers, making it somehow discreditable for creditors to want their money. And the proposal would put us, with our gigantic sums of gold, in the position of practicing the same thing, because we also hold these "abnormal balances."

By What Right Can We or Britain Refuse to Pay Our International Debts?

Now, I ask by what right the United States could refuse to pay in gold those foreigners who have trusted us with their nervous money, or those who have sent us their gold to escape Hitler? There is supposed to be a great deal of gold of the Bank of France in the United States. By what right could we withhold it from the Bank of France in a France under a government recognized by our government? By what right can England withhold the funds which came to her from the sterling bloc which she so encouraged after she left the gold standard? British financial writers have even scolded this sterling bloc. I quote the following from the London Economist of September 2, 1939, page 452.

"The fall in sterling is an international as well as a domestic problem. Its international character has already been reflected in the realignment of currencies formerly adhering to the fairly compact? sterling bloc, of which the details will be found in a subsequent note. All that need be said of the incipient disintegration of the bloc is that it is unfortunate in so far as it may be the prelude to increased exchange instability, but that from the point of view of sterling it is not an unmixed evil. For some years past the British Exchange Equalisation Account had found to its cost that the adherence of certain foreign countries to the sterling bloc had been a factor of instability and not of strength. Many sterling bloc countries have panicked into and then out of sterling with the abandon of the most highly-strung speculator. Some of the hottest of London's hot money has consisted of the sterling reserves of the sterling bloc, and their partial disappearance will not be altogether a loss."

There are various comments to be made on this passage. One is that it is evidence enough that there is no stability in a currency unanchored to gold, and that the British Equalization had found this out to its cost for several years before the outbreak of the war. But the other is that it throws light upon the character of these abnormal balances which Lord Keynes and Mr. Morgenthau propose to relieve England of the necessity of paying.

Gold is supposed to have come to England after the invasion of Norway from the Central Bank of Norway, carried through the streets of Oslo in small amounts, and taken out in small ships. May England withhold this from the National Bank of Norway as an "abnormal war balance" when Norway seeks to resume her strength? Or may England force the National Bank of Norway to take instead of the gold a dubious credit in an international bank in terms of "bancor" or "unitas" for part of it?

The world will have great confidence in the long run future of Great Britain when this war is over and we and Britain are victors. The world will show forbearance for England's financial difficulties if England faces them squarely. Let England pay those who have trusted her, if she can. If she cannot, let her tell her creditors the facts and let her ask their indulgence and let her make agreements with them.

We for our part are entitled to no indulgence whateverwith respect to these abnormal balances. They belong to their owners. We have plenty of gold. We can pay them and we should pay them even if we tighten our money markets in the process.

Something must be done toward creating a new confidence in the world that great governments and central banks are going to respect their obligations and do their best to pay them. We must not create a great international financial machinery the purpose of which is to let bankrupts ride with heads high on the shoulders of the solvent.

Illiquid Assets for Central Banks

The provision of the Morgenthau plan goes into great detail for dealing with these "abnormal balances." Countries are to cooperate to prevent their being transferred, but the countries which own them may sell them to the international fund, and the international fund is gradually to be paid off up to 80% of these balances by the end of twenty-three years, at which time it will still hold 20% of them. The international fund is to get 2% interest on the balances it holds, one-half paid by the country which sells them and one-half paid by the country which owes them. The volume of international currency, unit as or bancor, will thus expand against these illiquid balances at a discount rate of 2%.

Our Federal Reserve system is allowed to take commercial paper running only sixty days. In general, central banks are supposed to take only the prime paper of the country in which they operate and paper of a very short maturity. This international bank of rediscount is to give credit at 2% on twenty-three year loans and hold 20% of the loans indefinitely thereafter. The violation of sound financial principles could hardly go further.

The Composition of the International Fund—How The Fund Would Work

The Keynes bancor fund starts out with neither assets nor liabilities. At the opening of its books on the first morning of its existence it would show assets of zero and liabilities of zero. We may assume that the transactions on the first day involved the sale to the fund by the Stabilization Fund of the United States of ten million dollars worth of French francs, francs which had been created by the export of goods from America to France, in the form of an order to pay francs drawn on a French importer, a bill of exchange. These francs were then sold by the American exporter to his bank, which in turn sold them to the Federal Reserve Bank, which in turn sold them to the Stabilization Fund, which in turn sold them to the international fund. The international fund would pay for these francs by giving a deposit credit in bancor to the United States Stabilization Fund equivalent to ten million dollars. We may assume that the fund would then sell the francs it had purchased to the Bank of France, requiring payment in bancor. The Bank of France has no bancor, but it has an overdraft privilege with the fund. The fund thereupon debits the Bank of France in bancor in an amount equivalent to ten million dollars, and turns the francs over to it. If these are the only transactions of the day, the books of the international fund would show at the end of the day deposits in bancor equivalent to ten million dollars due to the United States Stabilization Fund, and loans (or overdrafts) to the Bank of France equivalent to ten million dollars in bancor. The books would balance. We should be creditor to the fund, France would be debtor.

What could we do with the bancor? We could not get gold for them. The fund has no gold and in any case the Keynes plan provides that the bancor shall never be redeemed in gold. We do not want the one asset which the fund has, namely, a loan in bancor to the Bank of France. The onlyuse we could make of our deposit in bancor is to transfer it to the central bank or the exchange stabilization fund or the treasury of some other country to which we happened to owe money, and which was also a participant in the fund. There would presumably be no such country when the fund started. Very speedily the fund would accumulate a big balance sheet, as we exported goods to weak countries, receiving our pay in bancor deposits on the books of the fund, and the fund took in the liabilities of the importing countries.

A fund starting with nothing is rather more than Mr. Morgenthau could stomach, evidently. He wanted a fund with some real resources. He had provided that the fund shall be constituted by each country putting something in to start with. The fund is to start with at least two billion five hundred million dollars, being half of the aggregate quotas of the member countries which is to be not less than five billion dollars. The amount to be paid in by each country at the beginning should consist of 12 1/2% of its quota in gold, 12 1/2% of its quota in local currency and 23% of its own (i.e. government) securities, except, however, that countries having less than three hundred million dollars in gold and countries having less than one hundred million dollars in gold need provide initially only 7 1/2% and 5%, respectively, of their quotas in gold.

Mr. Morgenthau's fund is thus a curious mixture of assets and liabilities. The gold put in, and the dollars which we should put in would be assets of the fund, from the standpoint of the international balance sheet, exceedingly helpful to the fund in meeting liabilities. The French francs, Greek drachmae, and pounds sterling put into the fund would hardly be elements of strength from the standpoint of the international stabilization of exchange. The bonds which the government of France and the government of Greece put into the fund would serve to dilute the fund rather than to strengthen it. But in all events, Mr. Morgenthau would have an aggregate of gold and pieces of paper all of which he could measure in dollars, and all of which he could measure in unitas.

The operation of the fund under Mr. Morgenthau's plan would be essentially like those under the Keynes plan. If we sold French francs, we would get unitas deposits as credits. The Bank of France buys francs from the fund and gets a loan in unitas or it has an overdraft with the fund.

Two Kinds of Unitas Deposits

The Morgenthau plan provides that deposits in terms of unitas may be accepted by the fund from member countries upon the delivery of gold to the fund, and shall be transferable and redeemable in gold, and that the fund shall maintain 100% reserve in gold against all unitas deposits. I believe that this last provision is quite impossible. Unitas deposits will arise whenever a creditor country sells foreign exchange to the fund, and gets credit therefor on the fund's books. Unitas deposits must greatly exceed the fund's gold. We should speedily have two kinds of unitas deposits, one with 100% reserve redeemable in gold, and the other, the ordinary unitas, with a much smaller reserve of gold and not necessarily redeemable in gold. The latter could be expected to go to a discount as compared with the former. I think that the American plan has not been well thought out. The Keynes plan on this point has at least the merit of consistency. All bancor are of the same kind, and all are of dubious quality.

The International Fund, and Domestic Money Market Control

The foregoing account of actual transactions in the plan reveal a point which I think our Treasury has not under-

stood, namely, that to the extent that our Federal Reserve bank or our Stabilization Fund handles the foreign exchange transactions of the country through the international fund, we affect our domestic money market in an undesirable manner. If we are exporting heavily, and our Stabilization Fund is buying foreign exchange here to sell to the international fund for unitas deposits, we are simultaneously creating additional bank reserves in the United States, and making the money market easier. If the Federal Reserve Banks buy foreign exchange they pay for it with checks on themselves, and the effect is the same as if they were buying government securities or acceptances or anything else. These checks deposited in member banks are by them re-deposited in the Federal Reserve banks, increasing the reserve balances of the member banks, and making the money market easier. The same thing is true if the Stabilization Fund deals directly with the foreign exchange market. Its assets are gold. It puts the gold or gold certificates into the Federal Reserve banks, to get the dollars with which to buy the foreign exchange. It pays for the foreign exchange with checks on the Federal Reserve banks and this increases member bank reserves. The ability of the country as a whole to expand credit at home increases the more we extend credit to foreign countries.

This obviously suggests that something is wrong. The thing that is wrong is for central banks or governmental stabilization funds to be the main instrumentality in foreign lending. If member banks buy foreign exchange, paying for it with deposit credits, they increase their deposits while their reserves do not increase, and their ability to lend further is diminished thereby. This is as it should be. We ought not to buy too much foreign exchange. We ought not to export too much on short credit. The really desirable way to get needed money for foreign countries is not to get it from either the banks or the Federal Reserve Banks or the Stabilization Fund, but to get it from private investors out of the savings of the people. We ought not to finance a one-sided flow of exports on short credits. Long credits should be given by investor's money, under carefully restricted conditions as indicated above.

Outline of a Fundamental Solution

I condemn the Morgenthau and Keynes plans in toto as putting the cart before the horse, as encouraging rather than checking unsound tendencies in Europe, and as introducing new unsound tendencies at home. We want foreign exchange stabilization, but we can get it only as part of a much more comprehensive treatment of fundamental disorders. We must make foreign loans, but we must condition them on internal financial and currency reforms in the countries to which we lend. These loans should be made with investor's money rather than with reserve money. The government has no money except as it taxes the people, or as it borrows from the banks or the people. The first financial aid must be governmental because the risks are too great for private capital to be willing to venture. But as I have indicated above, the first aid should be Red Cross aid rather than loans. No loans should be made that are not good, and none should be made without strict conditions.

The government must act first, not merely in Red Cross activities, but also in creating a strong, safe peace, a peace that we can believe will be permanent. Had we followed Woodrow Wilson's plan in 1919, we should have had such a peace. We should have had a strong and upright League of Nations which, combining strength with justice, would have pacified the world. The first foundation of international credit must be a strong political settlement, not a financial patchwork.

Then, as a vital part of world reconstruction, we must turn toward freer trade throughout the world, so that debtor countries needing to pay can pay with goods, so that creditor countries receiving pay can receive goods, so that the countries of Continental Europe, needing food and raw materials from us, can pay for them with dollars, not obtained by borrowing but by working and sending us their finished manufactures in exchange for the raw materials and foods.

At this point, I congratulate the Chamber of Commerce of Los Angeles upon the endorsement which it has given to Secretary Hull's request for a renewal of his power to negotiate reciprocal reduction of tariffs throughout the world. You have shown yourselves to be realists. We want to export goods and be paid for them by goods coming back. We do not wish again to export vast quantities of goods against promises to pay, and then refuse payment in the only way in which the debtor can pay, namely, with goods. The great causes for the break down of international credit in 1931

1. The excess amount of such credit created by cheap money policy in the '20's; and

2. The great growing fabric of tariffs and other trade impediments which prevented the movement of goods and threw the whole burden of payment of international debts upon gold.

Given real progress along these lines, however, I am satisfied that we can get investor's money in adequate amount for the loans that Europe needs and ought to have.

I cannot at all accept the proposition recently made by Mr. Harry D. White of the United States Treasury*, supposed author of the Morgenthau plan, that it is futile to look to the private investors to supply more than a small part of what capital is needed for the more urgent post-war reconstruction needs and that it must be handled by governments. In this same statement Mr. White refers to the billions of dollars of foreign exchange needed for this purpose. I think that the United States Treasury has come into an unreal world through the ease with which it has been able to borrow money from the banks in recent years. Money it can create this way. Capital is another story. And surely we must pull up speedily in this terrific use of bank credit.

In this connection, however, one thing is to be said. The bank expansion which has already taken place has put into the hands of private individuals billions and billions of dollars of bank deposits in excess of anything they ever previously held, and these funds would seek foreign investment at rates of interest that gave compensation for risk, under conditions which tempted venture capital. Let the government make a strong political settlement, let the government open trade lines, let the government cooperate with the bankers in seeing to it that reforms on the other side accompany the offer of European loans on this side, and we should get investor's money for the rehabilitation of Europe. Foreign loans made in the '20's were discredited by the disasters of '31 and '32, but foreign loans can be made good if we will avoid the follies that we engaged in in the '20's. And the follies of the '20's would look microscopic if we adopted the Keynes-Morgenthau plan.

* American Economic Review, Supplement, March, 1943, page 383.