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W HEN the editor of Harper' 8 .828,606,604. The interest on this debt

Magazine asked me to express is approximately $1,015,000,000 per
my "views on the financial and ec- annum. In addition, sinking funds for
onomic problems which the incoming the gradual retirement of the debt call
Administration will have to facc," he every year for, say, $250,000,000 more.
might as well have invited me to write a Thus the total Treasury requirements
third volume to H. G. Wells's history of for the service of the debt come approxi-
the world. Each of the party platforms mately to $1,265,000,000 annually. This
last summer made allusion to most of debt-service item alone is more than one
the problems that are confronting us; and one-half times the total revenues of
but party platforms have the habit of the government in 1914. (This paper
touching only thc "high spots." They does not classify postal receipts as in-
declare the benevolent intentions of their cluded in rcvcnues.) To maintain the
respective parties, but they can hardly civil establishment, we need, according
be expected to set forth concrete working to the Treasury's incomplete estimates,
programs. In fact, the field to be sur- $695,000,000 a year. The cost of our
veyed is so large that I shall not attempt military and naval establishment will, of
at all to touch upon the questions that course, be whatever Congress sees fit. to
are pressing for solution in labor, in mer- make it, but the figure for this is placed
chant marine, and in many other mat- by the Treasury at $1,553,000,000, a
ters. There are, however, three out- sum almost twice the total government
standing topics which every citizen revenues six years ago. In fact, if, in
ought to study and discuss. For it is this category of a war budget, we include
only by reviewing past history that we the items for service upon our war debt
can gain the data upon 'which to form and pensions, we shall see that to war
sound judgment for future operation. purposes, past and present, we are devot-
These three topics - all of which are ing 80 per cent of our total Federal
closely correlated-are those, first, of revenues. For a strictly peace-loving
taxation; second, of the tariff; and third, nation this is "going some." Of course,
of foreign trade relations. it must bc obvious that the quickest
way to reduce this great burden of the
TAXATION military establishment is to enter into
First, we must look upon our govern- some agreement with the other nations
ment's balance sheet and profit-and-loss of the world, looking to partial disarma-
account. Of course this is a dull thing ment; toward a naval holiday wherein
to do. Nothing is more irksome than to we are free from the necessity every year
study one's own household accounts; of building new capital ships at a cost of
but we have to remember this is our own $30,000,000 apiece. When a distin-
government-no one else's. According, guished professional soldier like General
then, to official figures, the interest- Pershing comes out for a drastic reduc-
bearing debt of the Federal government tion of armament, the great body of
amounted, on October 31, 1920, to $23,- citizens who are struggling under the

heavy burden of taxation can afford to revenues, as compared with its require-
urge a similar policy. ments in pre-war days, and the burden
Rut to return to our figures, the grand of taxation will be heavy. How shall the
total of our Treasury requirements is burden be distributed? Shall some por-
$3,750,000,000 annually, as compared tion of the population, some parts of the
with $700,000,000 lor similar purposes country, some businesses, be overloaded,
in 1914. Secretary Houston has re- or shall the burden be spread as evenly
cently urged that the revenues should as may be over all that part of the popu-
provide for an outlay of at least $4,000,- .Iation that is able to carry it? II we are
000,000 a year. .to comprehend this last inquiry, we
There is also to be considered the must again look at the dry figures. In
floating debt in the form of Treasury the last three years, a total of $9,385,-
certificates, mostly held by the banks, 000,000, or 60 per cent of the Treasury's
amounting, on October 31, 1920, to total receipts, has been derived from
$2,629,432,950. If this floating debt is income and profits taxes. In 1914, when
to be paid from current revenue before the Treasury's total ordinary receipts
the maturity of Victory notes in May, were $734,673,166, only about 8 per cent,
1923, the Treasury must be supplied or $60,710,196, was derived from in-
with approximately $1,300,000,000 ad- come taxes, the balance of the revenues
ditional annual revenues in both 1921 flowing from indirect taxation and mis-
and 1922. In 1923 $5,025,000,000 of cellaneous sources. The figures speak
Victory notes and 'Val' Savings certifi- for themselves. Before America's par-
cates mature. Here we have, roughly, ticipation in the war the country's tax
$7,600,000,000 government debt, to be burden was light, and direct taxes con-
either retired or refunded in the next tributed about one-third of the Treas-
three years. The retirement of the ury's total receipts. But in 1917 the
Treasury certificates out of current reve- enactment of the Revenue bill marked a
[lues, as Secretary Houston proposes, is radical change of policy, and the govern-
certainly desirable, if practicable. But ment's scheme of taxation was made to
whether the revenues will be sufficient, bear with tremendous weight upon in-
vithout sweeping revision of the revenue comes and profits, as the following state-
aws, is more than doubtful; for our ment of Treasury receipts clearly shows.
'evenues are now largely derived from a These figures are in millions of dollars:
lingle source of taxation, and the tax
cherne has been so unscientifically ap- Year and Other Mis- Total
Ended Profits Internal Cus- cella- Ordinary
ilied to that single source that what was June 30 Taxes Revenue toms neous Receipts
rut recently a "gusher" may soon be a 1914 ..... 61 319 292 62 734
rickle, if not a "dry hole." In the fore- 1915 ..... 80
72 698
1916 ..... 54 780
.oing estimates no allowance has been 1917. ,.,. 360 449 226 83 1,118
'lade for payments by foreign govern- 1918, .... 2,839 857 1S3 295 4,174
1919. , .. 2,601 1.239 1113 624 4,647
aents on account of their indebtedness. 1020. , ... 3,945 1,460 323 967 6,695
o our government. For the time being
yen their interest payments are being As regards income and profits taxes on
eferred, and I see little likelihood of our corporations, it is certain that the gov-
overnment's foreign creditors - ear- ernment's. revenues from this source in
estly as they may desire it-being able 1021, assessed on the profits of 1920,
) make any early or substantial reduc- will fall heavily below those of recent
on of their indebtedness. You can't years. The sharp drop in commodity
et blood out of a stone. prices and the curtailment of manufac-
As we look at the situation to-day, tures in the last half of 1920 mean only
Lis much is certain: For years the one thing-heavy losses in stocks of
reasury will be in need of prodigious goods and materials on hand, and there-
VOL. CXLIL-No. 850.-55

fore greatly reduced profits for the year. demand for its services and runs into
This statement applies with almost equal lower wages and unemployment.
force to the revenues to be derived next Whether the excess-profits-tax law
year from individual income taxes. Sec- works badly or wcll is, however, not the
retary Houston recognized this when, a chief point. The serious situation is
few weeks ago, he said, "There is no that this policy of relying for taxation
certain means of predicting the course upon incomes and profits makes the
of business or of incomes and profits; government practically dependent upon
but the probability is that the income a single source of revenue. In such
and profits tax receipts for the calendar policy lurks a grave danger. Prof. T. S.
year 1920 will be materially lower." Adams, former chairman of the Advi-
It is unnecessary for me to discuss at sory Tax Board, focused attention on
length the inequities and the unsound the peril when he recently wrote
features of the so-called excess-profits
tax. Throughout the country students This reaction from indirect to direct taxa-
tion has goneto extremesin certain respects,
and experts, including Secretary Hous- and it has madethe Federal governmentdan-
ton, have been almost unanimous in gerously dependent upon a single source OJ
urging the necessity for the repeal or method of taxation. An industrial depres-
complete revision of this tax. The sion might easily cut the public revenue ir
Treasury's attitude was concisely put by half and bring with it a fall in the public
Secretary Glass in his report to Con- credit that-in view of the large refunding
gress in 1919 in these '.'lords: operations which the government must facr
in the near future-would spell disaster. }.
The Treasury's objections to the excess- single tax, whether upon general property
profits tax, even as a war expedient (in con- land, income, expenditure, or any othe
tradistinction to a war-profits tax), have basis, may be attractive in theory, but i
been repeatedly voiced before the commit- does not furnish a. dependable basis for th
tees of the Congress. Still more objection- financialsystem of a great modern state.
able is the operation of the excess-prefitstax
in peace times. It encourageswasteful ex- We are even now in the midst of th
penditures, puts a premium on overcapitali- "industrial depression" which Professo
zation and a penalty on brains, energy, and Adams apprehended, and consequentl;
enterprise; discourages new ventures, and the new Administration, unless it is abl
confirmsold ventures in their monopolies. to institute sweeping economies, rna
Those who are actively engaged in conceivably find itself--even under ou
trying to forward the business affairs present burdensome tax laws-facing
of the country are running every day serious deficit in revenue.
into the unfortunate workings of this Not only is the government at preser
law. In time of war men are quick to dependent chiefly upon a single soure
suppress natural impulses and to merge of taxation, but the method- of imposin
'the welfare of self, family, and friends the taxes bears with extraordinar
into the one end of winning the war. But weight upon a small portion of the COUI
with war ended no man or concern, try. Not less than $3,472,000,000, (
operating in a large or small way, will approximately 64 per cent, of the tot:
undertake the risk of new enterprise if income-and-profits-tax receipts in 19]
his reward is to be snatched away from and 1919 came from five states-Illinoi
him by the requirements of his govern- Massachusetts, New York, Ohio, ar
ment, which, however, assumes no share Pennsylvania. Still further analysis
of his loss in case his enterprise prove un- the personal income tax returns for tl
profitable. So that, all over the country, calendar year 1917 (complete figures f
this tax acts as a dead hand on initiative later years not yet being available)
and enterprise. With enterprise held in worth while. In: that year 1~ per ce
check, labor soon feels the slackened of the population of the United Stat

made returns of taxable incomes. About delegates to the Constitutional Conven-

98 per cent of the total 17-'2 per cent tion in 1787 would have chortled with
paid ~67-'2per cent of the total individual glee at these figures!
income taxes, while the balance-only Thc stages by which the country has
2 per cent-paid 737-'2 per cent of the finally reached the imposition of indi-
taxes. In other words, three ten-thou- vidual income taxes, and those at a rate
sandths of the population paid almost higher upon very large incomes than
three-quarters of the income taxes. that prevailing in other countries-in-
There were in that year 1,565,3~8 tax- cluding England, the home of the in-
able incomes running from $2,000 to come tax-are so well known that it is
$40,000 each. The total of these in- not necessary to recall them here. The
comes aggregated $7,824,276,660; but of Continental Congress had no authority
this only $151,946,821, or about ~ per to levy direct taxes; and even at the
cent on the average, was paid in income time of the Constitutional Convention
tax. At the same time there were 26,190 the individual states desired to reserve
incomes each of $40,000 or above, aggre- that power exclusively to themselves.
gating $2,768,710,50~. Upon this The Sixteenth Amendment, proclaimed
amount (being less than one-third the in 1913, nullified the provision of Article
larger amount) there was paid in income I of the Constitution and provided that$422,052,848, almost tliree times as "the Congress shall have power to lay
nuch as the total paid by the million and collect taxes on incomes, from what-
md a half incomes. As is well known, the ever source derived, without apportion-
:ubsequent revision of the Revenue Act ment among the several states and with-
nade the burden on the higher incomes out regard to any census or enumera-
ieavier for 1918 and 1919. tion." Thus, the limitation on the
Back in 1787 Alexander Hamilton Federal power to lay direct taxes was
iredicted that the collection of direct swept aside, and the government was
axes by the Federal government would granted free hand to tap a new source of
e most difficult. He believed that the revenue, not only to meet the require-
eople would not readily disclose the ments of increasing appropriations, but,
etails of their incomes and private as it was soon to appear, to provide the
ffairs, or, as he put it, "The genius of bulk of the revenue from taxation needed
h.epeople will illy brook the inquisitive to meet the colossal expenditures of tLe
nd peremptory spirit of excise laws." war against the Central Powers. The
lamilton then added this significant faith of Congress in the efficacy of direct
hrase: "The pockets of the farmers, taxation soon was made clear; and, daz-
a the other hand, will reluctantly yield zled by the invisible and mysterious fund
LItscanty supplies, in the unwelcome of personal property, it soon assumed
tape of impositions on their houses and that inquisitorial role which Hamilton
nds." As a matter of fact, the govern- had deplored. And, in point of fact, it
.ent returns for 1917 go far to confirm almost forgot the "pockets of the far-
amilton's estimate of the empty- mers." It laid-as has been pointed out
icketed or escaping farmer; for only --=-anextraordinary burden of direct tax
106,000,000,or less than 7 per cent of on a portion of the country. It went
e total net income returned for 1917, farther, and laid it on a very small
represented by personal incomes from minority of the population.
.rieulture and animal husbandry, al- In pointing out these features of the
ough the gross value of farm products income-tax law I would not be under-
r that year was officially estimated at stood as indicating that there has been
e gigantic sum of $19,331,000,000. severe complaint on the part of that
ow the shades of Blount, Spaight, small minority of the population because
illiamson, and those other agrarian of the prodigious burden of taxation laid

upon it. During the war itself there was income tax entirely. Obviously, the
no complaint. On the contrary, there higher a man's income and the heavier
was readiness, nay, eagerness, to make the rates of income tax imposed, the
any sacrifice that would better support greater is the incentive for him to trans-
the government and advance the prose- fer his investments from a form of prop-
cution of the war. Now, however, that erty burdened with taxes to obligations
the war has been won, it behooves us to which are tax exempt.
examine more closely the economic The diversion to the government's
aspects of the situation, and to deter- Treasury of a large stream of income
mine whether our so-called excess profits which otherwise would be available for
and income taxes, as at present levied, loans or new business throughout the
are not serving actually to reduce the country naturally causes a rise in interest
country's wealth and its power of con- rates. Even were the stream so diverted
tinued and ample employment for labor . not large, interest rates would still rise
at a good wage. because of the competition between
Certainly an outstanding fact of the taxable and tax-exempt securities. For
first importance is that the investment instance, an individual with an income
markets are deprived of a fund that of $!'l5,000can to better advantage buy
should be available for the productive a 5-per-cent municipal bond (tax ex-
and reproductive purposes of the coun- empt) than it taxable bond yielding 678
try's industry and commerce. Excessive per cent. In the same way the greater
income taxes, especially, upon large in- a man's income the greater is the advan-
comes, accomplish little more than the tage in his holding a tax-exempt secur-
unwholesome transfer of funds from the ity. For a man receiving a great income,
productive processes of the country to like $250,000, a 5-per-cent tax-exemp1
the Treasury of the government. In the investment is equivalent to a taxable
absence of such excessive taxation, funds investment yielding 18~ per cent. Frorr
normally accumulated are promptly re- all this it must be clear that, from ar
invested, so as to swell the country's economic point of view, the advantage:
capital available for new enterprise. of direct taxation-and there are ad
But with a continuation of an income mittedly many-are lost to the stab
tax that is excessive, and for large in- when too large a part of the country'
comes indeed almost confiscatory, even vitalizing wealth-designed to develoj
the stream flowing into the Treasury will new enterprise, to create vast nev
inevitably diminish. Human ingenuity fields of employment-is forced fron
for legal avoidance and reduction of the the channels of commerce and become
tax will be vigorously exercised. In solidified in an inert mass of tax-fre
this country, for instance, municipal municipal obligations, the owners 0
bonds offer a ready means for the indi- which do not contribute to Federa
vidual of large income to defeat the in- government support and hardly at a:
come-tax law. There are state, city, and to the direct up-building of the COUIl
other municipal obligations-tax exempt try's wealth.
----outstanding in this country to an esti- In his annual report to Congress i
mated amount of $4,670,000,000. The 1919, Secretary of the Treasury Glas
first Liberty loan, the 3%;-per-cent Vic- emphasized the very situation that
tory notes, and other government obli- have described. His recommendatior
gations amounting to about $6,080,000,- had the support of the President, whi
000 are also exempt from all income in his message to Congress in the sarr
tax. Here we have the income from year, suggested that "the Congre:
$10,750,000,000 of obligations, equiva- might well consider whether the highs
lent to 5 per cent of the country's total rates' of income and profits tax can, i
wealth (as estimated in 1014) escaping peace time, be effectively productive,


revenue, and whether they may not, on TI!E TARIFF

the contrary, be destructive of business A few years ago, as I have pointed
activity and productive of waste and out, the income tax was a novelty to
inefficiency. There is a point at which, Americans. The tariff, on the other
in peace times, high rates of income and hand, has so long had a foremost place
profits taxes discourage energy, remove in our national finance that it has be-
the incentive to new enterprise, encour- come well-nigh a tradition. But the
age extravagant expenditure, and pro- new fact of supreme importance that
duce industrial stagnation, with conse- confronts us to-d~ in our study of the
quent unemployment and other attend- tariff problem is that we have grown
ant evils." Has our unscientific tax from a debtor to a creditor nation. His-
system been a strong contributing cause torically it will be recalled that prior to
to our present "industrial stagnation" 1787 certain of the states had adopted,
and "unemployment"? We may well as against one another, a policy of pro-
ask ourselves this question. tection to their local industries. The
When, in accordance with the Repub- grant to Congress of the power to lay
lican platform pledges, the new Admin- imposts changed all this and at once
istration and the new Congress take up transformed the tariff from a state to a
the subject of revenue revision, they can national issue, which it has continued
hardly find the situation otherwise than down to the present time.
as it has been described by Secretaries The historical background of the
Glass and Houston and by President American protective policy must be kept
Wilson. Whether, however, the Admin- clearly in mind if we are to have an intel-
istration will be able to cut the knot and ligent discussion of the problem to-day.
revise these particular taxes is a grave Our forefathers, prior to the war of the
question, because of the huge revenues Revolution, were educated under Great
which for the next few years the Treas- Britain's former policy of exercising
ury will still require. We must have strong measures for controlling foreign
greater economy in administration, and trade and protecting home industries.
that the Republican party has promised. In winning America's independence they
nut we can hardly expect any reduction aimed also to knock the shackles from
in the aggregate tax burden. Moreover, commerce; possibly they dreamed of
no one is looking for an abandonment of free trade throughout the world. But
the income-tax principle. Income taxes while the Colonies were fighting the
in this country have come to stay. The war for independence, the death knell of
question is whether they shall be levied the old mercantile system in England
productively or the reverse, as now. In was being sounded. In the same year
any event, whether the excess-profits the Colonies declared their indepen-
tax is repealed or not, whether the in- dence, Adam Smith's Wealth of Nations
come-tax law is revised or not, all indi- appeared, overthrowing the old eco-
cations point to diminishing revenues nomic system in England. Smith's
from these sources. There are those who teachings in England were echoed by
favor a general sales tax, there are others James Madison in America, who said, "I
who favor a limited sales tax, there are own myself the friend to a very free
still others who favor consumption taxes system of commerce." But the new
on selected articles. All of these pro- . Federal government was in dire need of
posals have had much discussion and revenues to bolster up its credit, a con-
must have more. The recent proposal sideration which influenced many who,
by some Republicans to get a billion -in principle, were free-traders, to still
dollars a year by raising import duties their opposition to a protective policy,
naturally brings us to the second topic and indeed even to support it. Thus
elfour discussion. Madison, although leaning strongly

toward free trade, recognized the govern- of these imports, and of these forty
ment's need of revenue. In drawing up groups 35 per cent are dutiable, 65 per
the first tariff bill, he yielded his free- cent nondutiable. The average ad
trade principles to what he regarded as valorem rate in 1920 on all imports (both
his public duty. free and dutiable) was 6.3 per cent. To
Since 1860 our tariff policy has de- have raised from duties in 1920 an addi-
parted farther and farther from Madi- tional $700,000,000 (so as to reach the
son's doctrine of free commerce. The magic one-billion-dollar mark) would
expenditures of the t;ivil War left the have meant increasing duties to produce
Federal government badly in need of an average ad valorem. of 20 per cent on
additional revenues, and among other all imports, dutiable and nondutiable.
expedients the tariff was availed of. Just how, at one clip, we can treble out
After the war the tariff was not only not average import duties and still maintain
reduced, but duties were actually raised the present imports has not yet been
above the war rates. The Tariff Act of explained. Still, suppose we attempt to
1864 is generally regarded as the basis of accomplish this seemingly paradoxical
the tariff as it exists to-day. In tariff feat. Then it must be manifest. from the
legislation since the Civil War, questions figures that I have just quoted as to the
of principle and of national policy have total of duties now paid, or to be paid,
still been argued, but there has been that to produce an extra revenue of
much pressure from particular indus- approximately $700,000,000 we must
tries, and the reshaping of the tariff, place exceedingly heavy imposts upon
from time to time, has not always been such articles of daily consumption as
free from the play of private interests. tea, coffee, sugar, etc., just as England
During the whole one hundred and does. Now if we add to the import costs
twenty-five years from 1780 to 1914 the of such articles, there is no one--in the
United States, be it noted, was always final analysis-to pay that extra cost
a debtor, never a creditor nation. except the consumer. And so there we
To-day, as in the days following the should again increase the cost of living.
Revolutionary War, the War of 1812 With such an inevitable end in view, is
and the Napoleonic Wars, and the Civil there a likelihood that Congress, no
War, the cry is raised again that the matter how strongly Republican, can be
remedy for stimulating that "languid persuaded to make such an increase in
and mutilated state of trade," as Hamil- duties?
ton termed it, is to be found in a high In point of fact the tariff problem is
tariff wall. "Dumping" of goods on our not soluble by scientific methods. It is
shores by Europe is to be prevented, and an economic and not a scientific problem.
$1,000,000,000 import duties are to flow Fundamentally, there is nothing new in
into the Treasury to boot! By what art it to-day except the factor of America's
will our magicians collect imposts in changed and changing situation. But
customs houses which they will have we shall hear the same old arguments of
first emptied? We can shut out imports a hundred and more years ago. There
entirely. We can produce almost ev- are many who still cling to the old mer-
erything, jf the duties are but high cantile theory of trade, who believe that
enough. Let us look at the facts a country's greatest gain lies in a large
and note what the bulk of our imports export trade with a correspondingly
consists of: large importation of specie in payment
In the year ended June 30th last our It is taking a long time for some of oUJ
total merchandise imports were $5,- statesmen, and for the American people
238,000,000 and the customs receipts to grasp this fact-that imports pay fo!
amounted to $322,000,000. Forty groups exports, and that, in thc long run, a coun
of commodities account for 88 per cent try gains, not loses, by ample imports.

There are many hide-bound protec- perhaps even $15,000,000,000. There-

tionists left in America who are to-day fore, whether we will it or not, from this
declaring that the tariff should be raised, time forward we must act the part of a
not simply for the purpose of gaining creditor nation; we must be governed
additional revenue, which everyone by the economic and commercial laws
knows the Treasury needs, but for the that govern creditor nations. We must
purpose of affording continued protec- begin to realize, if we do not already
tion upon an ample scale to American realize it, that we cannot continue to
industries. Now there may be certain pile up these credits indefinitely without
cases in the United States where the in- disarranging our own and the world's
knt-industry theory is still tenable, but markets. .In other words, we shall find
those cases must be few and far between. our operations working against the old
There are other cases where the question mercantile theory of trade, that same
ef national defense comes in. For in- ancient theory that England, as a great
stance, this country, as well as G~eat creditor and commercial nation, found
Britain, will be perfectly justified in herself compelled to abandon a hundred
levying such prohibitive duties upon and fifty years ago. We shall find our-
chemicals as will force their manufacture selves ardently desiring to buy as well
in this country; so that if a future Ger- as to sell. If such shall prove to be the
many, holding the chemical trade of the case-and I see no escape from it-we
world almost in its hands, were to arise shall automatically tend toward freer
and make war we should not be alto- trade. We shall inevitably grow to real-
gether helpless. With certain excep- ize that the ideal status for the world
tions, such as these, I believe economists is for our country to produce those'
are generally agreed that a creditor na- things which it can produce cheapest
tion must regulate its commerce to a and best, and to exchange those things
large extent on the principle of unre- for the products of other countries which
stricted trade. I do not for a moment those countries are able to produce bet-
mean to suggest that this country should ter and more cheaply than we.
forthwith go to a free-trade basis. Any- In the early days of this government,
thing approaching such a complete as I have pointed out, our Colonies and
change is impossible. But the tendency states were separated by tariff walls, but
toward freer trade is bound to become we saw almost at once the absurdity of
more marked. Our position before the not having a free exchange of goods,
war as a debtor nation was a far different under which New England could, manu-
one from what it is to-day. When in facturing shoes and cotton goods more
those days we sold food and raw mate- cheaply than the other states, freely sell
rials for export Wewere able to find our them in return for the coal and iron that
pay for them in a number of different could be more cheaply produced in Penn-
ways. The peoples abroad sold us ser- sylvania, for the wheat and corn which
zicesin the way of ocean transportation, could be grown better in Indiana and
.hey sold us insurance. Lastly, on a Illinois. As it was among the states of
arge scale, they loaned us capital, which this country, so measurably it is among
s only another way of saying that they the world states. The same basic prin-
lrovided credits with which we paid our ciples of production, of sale and barter
rwn imports. hold true. The only difference is that,
Now the position is reversed. From whereas in the case of the several states
ieing a nation in debt to the peoples of the Union, it took only a few years to
Lbroad,to the extent of say $5,000,000,- bring about free trade, in the case of the
100, as we were in 1914, we have become, world states it will take many years,
Innet balance, a creditor to the peoples perhaps generations.
!broad to the extent of $12,000,000;OOO~ In all this I am simply declaring what

will be the commercial tendency of this control, and impediments to interna-

country over a long period to come: not tional trade removed."
for a moment am I attempting to proph- Finally I may be permitted on this
esy what is going to happen when Con- subject to quote briefly from what Presi-
gress is called in special session on the dent Wilson said in his annual message
4th of next March. If, and when Con- to Congress, 1919: "Anything which
gress then convenes and takes up the would tend to prevent foreign coun-
tariff question, we are going to find the tries from settling for our exports by
same political difficulties that we have shipments of goods into this country
always met, there is going to be the same could only have the effect of preventing
outcry on the part of certain .industries them from paying for our exports and
for better protection. There is going to therefore of preventing the exports from
be the same log rolling, and in the end, being made. The productivity of the
if, and when, a new law is passed, it is country, greatly stimulated by the war,
going to be like all its predecessors- must find an outlet by exports to foreign
made up of compromises. But, even so, countries, and any measures taken to
I believe that we shall witness, even as prevent imports will inevitably curtail
early as this spring, a gradual realization exports, force curtailment of production,
by our legislators of the new situation in load the banking machinery of the coun-
which this country finds itself, a gradu- try with credits to carry unsold products,
ally growing conviction that as a creditor and produce industrial stagnation and
nation we must now begin to run into a unemployment. If we want to sell, we
period of freer trade. And I shall not must be prepared to buy."
'be surprised if the new Congress, realiz- It has of late been the fashion to decry
ing our country's enormously changed President Wilson's utterances, but in
situation, will find the difficulties of the light of history many of them will
thorough-going tariff revision so great come, more and more, to be acknowl-
that they may abandon any immediate edged as economically sound and funda-
attempt at it. mentally constructive. No one of them
can be clearer than the one I have just
FOREIGN TRADE RELATIONS quoted. "If we want to sell, we must
Each of the leading co-untries of the be prepared to buy." President McKin-
world has confronting it new problems as ley, in his famous Buffalo speech, deliv-
a result of the Great War. 'What course ered shortly before his death, said, in
will they adopt? Many of them, for- almost the same words, "We must not
merly creditor nations, have suffered a repose in fancied security that we can
reversal of their positions and are now forever sell everything and buy little or
in the debtor class. We can recall nothing." This has been axiomatic of
President Wilson's phrase, "the pro- trade since the world began. Yet many
gram for the world's peace" cannot be Americans still fail to realize that, as tc
complete without including the third of our foreign trade, it is now truer thar
his fourteen points, "The removal, so ever before. These individuals go bad
far as possible, of all economic barriers to the days before the war when we wen
and the establishment of an equality of buying-v-as I have shown-transporta
trade conditions among all the nations tion and capital. They fail to realizi
consenting to the peace and associating that with America turned creditor na
themselves for its maintenance." tion she must now-if she is to continu
This requirement was again voiced,' as to sell abroad - buy goods, or eve:
an ideal yet essential end, a few weeks securities. These individuals-be the;
ago at the Brussels Financial Confer- in the Congress, or scattered throughou
ence, which resolved that, "Commerce the land-will one day-and that OIl
should, as soon as possible, be freed from not far distant-wake up to realize tha

if we wish to maintain our foreign trade, power, she was entitled to look to her
we must take a far deeper and more co- gallant ally, America, to help her in some
operative interest in the affairs of the way. The only way that France could
nations abroad than we ever took in the figure out was to have America under-
old days. For purely selfish reasons, take an additional burden, in money, as
America's participation in world affairs substitute to the loss of human life.
must be intimate and far reaching. She An alternate plan proposed at the
cannot escape unless she is prepared to Peace Conference was an all-around
suffer loss of foreign trade or to abandon scaling down, or cancellation, of inter-
it entirely. Before the Great War the national debts. For instance, France had
United States had, a foreign trade of lent money on a large scale to several of
about $4,250,000,000 a year. In the the lesser powers among the Allies.
year ended June 30th last, this had Great Britain in turn had loaned to
mounted to $13,350,000,000. For some France and to her other allies something
of its raw products the United States is like $8,000,000,000. The United States
totally or largely dependent on foreign had, as I have said before, loaned to all
sources of supply-that is, in rubber, the associated powers put together,
wool, jute, sugar, coffee, tea, nitrate, and about $10,000,000,000. This alternate
so on. We are.also dependent on foreign proposal at Paris meant that France
markets for the sale of American prod- would forgive many of the debts owing
ucts, like cotton, wheat, and other farm to her, Great Britain would write off
products; copper, iron and steel, leather. perhaps half the money owing to her.
II Congress should pass laws which work America, in turn, under any such
so as inevitably to cut down our imports scheme, would cancel perhaps half of the
of those articles that foreign countries debits owing to her. .All this, to be
can furnish us, we shall at the same time sure, would have meant a quick cleaning
automatically be depriving those coun- up of a good part of the international
tries of the ability to buy our cotton, balance sheet. But neither of these pro-
wheat, and other products. posals could be seriously considered by
Now at the time of the Peace Confer- the American delegation. The United
ence in 1919 many of the British, French, States had already undertaken, as her
and Italian economists undertook to share in the war, an expenditure of
carry too far the idea of international $35,000,000,000 within two years, and
relationship in trade and economics. the country was in no mood to consent at
They attempted to set up a theory of the time of the peace negotiations to take
801idarite financiere, as the French fondly on additional monetary obligations.
termed it. They proposed to bring The Peace Conference, however, did
about this financial solidarity through not adjourn until the machinery had
various methods. One was to pool all been set up to enable the different na-
the Allied national war debts and then tions to meet from time to time to dis-
have a redivision of the consolidated' cuss these problems of co-operation.
debt among the various nations, in in- This machinery was provided in the
verse proportion to their loss of man .financial section of the League of Na-
power. This particular proposition tions Covenant. The United States,
would, of course, have meant that Amer- for reasons of its own, refused to ratify
ica, whose loss in man power was com- the Treaty and the League Covenant.
paratively trifling, would have assumed Therefore, automatically, America has
a larger proportion of the funded debt. been prevented from having competent
These Allies of ours argued that inas- delegates sit in with the European na-
much as France, for instance, in her loss tions at the conferences of the last
of one and a half million men, had suf- eighteen months, called for the purpose
fered great depletion in her earning of discussing these important problems
VOL. CXLII.-No. 850.-56

-problems the solution of which affects determined. Furthermore, if the new

the commercial interests of America Administration is to do its share in re-
only to a less degree than those of solving the present depressed business
Europe. Putting quite aside all the po- situation in America, it will see to it
litical aspects of the League of Nations, that methods are provided for Americans
it has been unfortunate for our manu- to take part in such vital discussions as
facturing and export interests that the to international matters as the German
United States has been unable to join in reparation has proved to he. What
these conferences and so ascertain, by a many of our people, who are urging that
meeting of minds, what methods of co- we refrain from "involving',' ourselves
operation could be adopted, mutually in the European situation, fail to under-
.helpful to the people of Europe who stand, is that commercially London,
want to buy our products and to the Paris, and Berlin are much nearer New
manufacturers and merchants of Amer- York to-day than was Buffalo a hundred
ica who want to sell these products to years ago. They are infinitely nearer as
European consumers. It is perfectly to prompt communication, and closer in
obvious that our own business situation point of time as to the transportation of
here is dependent for its revival to a con- commodities. Just as, a hundred and
siderable extent upon better conditions forty years ago, the thirteen states
in Europe. And the new Administration abandoned the theory of isolation, so we
must, I believe, make up its mind- as a country must realize that, commer-
simply in America's own selfish interests cially and economically, we never.can be
-to bring about some form of confer- isolated; that our prosperity is inter-
ence and understanding as to conditions Woven with the prosperity of our cus-
of foreign trade. tomers in Europe; and that, as those
Another phase of the same situation is customers are badly off, we must do our
that of the reparation which Germany best to help them back to a position of
must pay. In the Peace Treaty, con- restored and undiminished buying power.
trary to the vote of the American dele- To this same end, it will undoubtedly
gation, it was provided that the German be necessary for the new Secretary of the
indemnity should be left for settlement Treasury to consider whether, for the
to a later period. This postponement permanent interests of the Treasury, it
meant that Germany's liability was in- will eventually be wise to consider some
definite. It must be obvious that until plan for bringing down to a manageable
this liability is determined, neither Ger- figure the foreign obligations now owing
many, which is obliged to pay the in- to this government. Great Britain owes
demnity, nor France and the other coun- the United States Treasury something
tries, which are to receive it, can adjust like four and a half billion; France, two
their government budgets and their and a half billion; Italy and other coun-
economic life to the situation as it ex- tries, lesser amounts. We know per-
ists. In the settlement of this matter fectly well that the sums which Poland,
of German reparation America should Czecho-Slovakia, Jugo-Slavia, and per-
have had, and ought now to have, repre- haps other even richer countries will be
sentation; not because we want to able to pay in liquidation of their debts
"mess into" European complications, will for several years to come be trifling,
but simply because our own commercial if anything at all. We know, further-
interests are so largely involved in a more, that this debt, as long as the
reasonable and effective determination bulk of it is outstanding, remains as ar
of the amount that Germany must pay. incubus upon the backs of these foreigr
We all know that she must pay to the peoples, a heavy drag to their attempt:
limit of her capacity. What that limit to get on their feet. We understand tha
is should, long before this, have been the sooner they get on their feet, the

sooner they will again become good cus- In any event it will be very necessary
tomers of American exporters. The for the new Administration, as well as
question, then, confronting the Admin- all of our people, to approach this whole
.istration will be the same one which situation of international co-operation
confronts a rich creditor when his debtor, commercially (politically, too, for that
John Smith, becomes embarrassed. The matter) in a spirit of confidence. Not a
rich creditor, if he is wise, is apt, in few of our politicians have been casting
colloquial fashion, to say something like distrust upon the motives of our fellow
this: "John Smith, who is 'in the hole,' nations; they have told us that they are
has always been a good and profitable tricky and that we must watch out for
customer of mine. He owes me a hun- snares. So far as my own experience
dred thousand dollars to-day. I haven't goes, both statements are untrue. We
any security for it. If his other creditors Americans are no doubt a very fine peo-
who are in like position with me join me ple, but there are other peoples on the
in canceling twenty-five per cent of earth who are just as honest and self-
Smith's obligations that we hold, that sacrificing as we are. If we are to accom-
plan will put Smith in a position where plish anything in helping to build up
he still has some capital to work with; this world, somewhat broken in spirit,
he will get back on his feet again and and in trade and commerce very badly
continue for all time as a good customer broken, we must cultivate a spirit of
of mine. To be sure, I hate to write trust, rather than distrust. We must
off twenty-five thousand dollars of what arrange for close association, for con-
he owes me, but I think I would better stant comparison of ideas with our
do it, because out of my trading with friends across the seas. We must try to
him, if all goes well, within two or three arrive with them at a common under-
years I shall more than make up that standing, and be moved with a spirit of
loss and then have him as a friend and sympathy for the terrible disasters that
client for years to come." they are working through and that are
Of course thc positions of the indi- linked up to our own lesser troubles. If
vidual creditor and the United States in that spirit we approach these inter-
government differ in the point that the national problems, then indeed we shall
United States government isn't in busi- achieve something and can move for-
ness. But the United States govern- ward with confidence in what the future
ment is simply the representative of all holds in store.
the people of the United States who are The new Republican Administration
in the business of producing or selling comes into office with the most over-
goods, and therefore the government has whelming vote of confidence that the
a right, in a situation like this, to take country has ever bestowed upon any
the same position that an individual President-elect. With that vote of con-
creditor has. In pointing out the possi- fidence is joined an earnest desire upon
bility of action along this line I am not the par]; of an good citizens, whether
for a moment advocating" a cancellation they voted for Senator Harding or for
of European war debts in whole, or even Governor Cox, to rally to the support of
in part. I am simply indicating the sort the new President, and to do everything
of important problem along this line that within their power, through counsel and
the new Administration will have to take co-operation, to assist the Administra-
up ana discuss; discuss not on a basis of tion in: meeting these weighty problems
immediate benefit, but of advantage to that confront us "all-not as members of
the American people for a long time to a political party-but as loyal citizens
come. of one great American commonwealth.