Can We Finance the Future?

Where can the money be found to rehabilitate those countries whose industries have been ruined by the war?



THE main thought which runs through the nation today is “Win the war.” This above all else. But when we have won the war, what shall we have won? Victory in arms is not an end, but a beginning. We shall merely have won the right to look upon a devastated world, then to contemplate it in terms of its reconstruction. And such reconstruction must be effected along new lines; the old ones will not suffice.

The moment hostilities end, we shall be faced with a problem of relief for the famine-stricken and devastated countries. This in itself is a stupendous task, as former President Hoover has pointed out. It will take enormous quantities of food to establish the well-being and morale of the people of the world. Hungry and ill-clad people in the bitterness of despair are not in position to express or govern a lasting peace.

A lasting peace, a peace which can work out its own salvation within its own framework, must be based on these two concepts: first, that the increased welfare of the common man as a world citizen is the only true and workable basis for a prosperous future; second, that we must urge an economic democracy where the freedom of individual enterprise is sufficient to sustain the common man in his struggle toward his goal.

Initial relief must be largely gratuitous, provided out of the nations’ treasuries. Government alone has the machinery and can command the facilities and personnel to do this part of the work. But relief at best can be only temporary in character.

Reconversion and reconstruction must follow. We must simultaneously rehabilitate the devastated countries and develop those other countries whose normal economies have been impaired by war. Such neutral nations near and far must be helped to get started again.

This reconstruction implies freedom of industries to operate fairly and efficiently on the basis of private enterprise. It also implies freedom from past evils and blind commercial policy. Throughout the world there will be opportunities for bold venture, and only through definite encouragement to the risk-takers can the reconstruction of the belligerent and neutral countries be geared to the machinery necessary for permanent world prosperity.

The policies and methods to be employed constitute one of the most important decisions the world has ever had to face. If governments elect to become the sole dictators of their peoples’ welfare and attempt to establish themselves as the single regulator of social and economic forces, the conditions that alone can make a world of service effective will have disappeared. No one can foresee or conceive a government in the United States so strong and so wise as to mold, without opposition, the minds and desires of our 135 million people, let alone the rest of the world. Nor can we conceive of unrestrained private enterprise in a like role.

What government and free industry must achieve in the new world is the proper coördination of authority and responsibility. Collaboration in exercising authority and responsibility means control of politics as well as control of monopolies. Government must share the control of foreign aid programs with industry, so that each may have from the other support, guidance, and restraint against abuse.

Our first job in rehabilitation will be to help people to help themselves, to remove the despair with which they face the future, to extend them a helping hand, that they may once again establish their enterprises, furnish jobs, and build up their production and industry to a self-sustaining basis. This will take Capital. Goods. Service. And, above all, Management.


OUTSIDE the relief afforded after World War I, our assistance to foreign nations was largely in the form of advances against the securities they offered. The history of such advances discloses that, unless we exercise some continuing control, advances will not go for the purposes for which the loans are made. In the earlier post-war period, borrowings on a short-term basis were used for exchange control and speculations, while long-term loans went to promote economic nationalism and power politics.

We cannot and must not permit repetition of these conditions. They were occasioned in large measure by the lack of coöperation between government and private capital, by the absence of intelligent and forceful policies defining the nature and purposes of foreign loans, and by the absence of directive forces to keep them within the scope of their original intent. Our foreign loans were largely handled through diplomatic channels, with political implications. Attention was directed more to the insurance of service charges than to the objectives of the loans themselves. If we are to engage the resources of our country in the problems of rehabilitation, it is essential that free government and free industry coöperate both in planning the objectives and in protecting the advances made within the scope of those objectives.

It is equally important that free government and free industry in the borrowing country coöperate in determining the objectives and in giving the assurances that will encourage success of the loans and protect them from destructive interference.

Apart from assisting the nationals of devastated countries to re-establish their agriculture, industry, and other various enterprises, we shall have to assist the development of those nations (belligerent and neutral) whose pre-war economy has been disrupted, and in some cases largely destroyed, by the changes forced by the necessities of war in other countries and by the technological development of substitutes.

Should substitutes come into permanent use, as may be anticipated, they would disastrously affect the production of materials which have supported the actual physical existence of large portions of the population in various distant countries. What is to be done with people whose lives formerly depended upon the production of rubber? Of silk? Of wool and other fibers? Of fats? Of a thousand and one things for which, under the pressure of war, we have been obliged to develop substitutes?

If we are to enjoy peace, it will be because these people have the accompaniments of peace. And the responsibility to see that they do will fall largely upon us. Charity will not answer, for it cannot be long sustained. Service is the keynote. Service in helping these people to establish a new economy that will be appropriate to their situation. As we truly serve our neighbors, so also we shall serve ourselves.

Money must be wisely advanced, but always on the basis of some quid pro quo. Continual free gifts, either of money or of materials, are weakening to morale and incentive; the gratitude they awaken merely reflects anticipation of greater favors to come. We must act wisely not only for the protection of the peace, but also for the protection of our living standards. Until we have assisted these peoples in raising their own standards to proportionate equality, our own will suffer by the threat of cheap labor sustained by inferior standards.

The rapidity with which this rehabilitation can be accomplished will depend upon how quickly the populations will recover from the shock of war, the amount of manpower and management available, and the resources of the government of the country. It is conceivable that agricultural production will resume of its own initiative, with what tools it has remaining. It cannot be fully restored until modern equipment is available, either through imports or through manufacture in the country of use. This, in turn, will depend upon the extent to which previous facilities exist, and on the availability of raw materials, capital, and management, as well as labor.

Certainly there will be a welter of things crying for attention. It will be possible to give attention only to those that are most important, and they should be wisely selected. If we are to give assistance, the governments concerned should determine what fields of endeavor are worthy of consideration and support.

Is this work abroad to be done through governmental channels with the taxpayers’ money, or are private enterprise and private capital to be invoked? Shall we depend on the channels of government financing, or on those of the existing financial machinery of this country— the commercial banks in which the savings of our people are deposited?

If we emerge from the war at the present high level of national resources, we shall have funds for constructive investments, both at home and abroad. This would seem desirable, domestically and internationally, because of the growing interrelation between levels of economic activity and employment.

We cannot release our accumulation of savings until our industries are once again prepared to produce the necessary goods and services to satisfy high civilian demand. Rest rictive measures against spending will not alone prevent the inflation which will result if these large deposits are placed on the domestic market before industry has reconverted to the production of peacetime goods.

Since we cannot release these heavy sums for spending, our people shoidd have an opportunity to employ them in investments such as these rehabilitation projects where the basis of return will provide an adequate incentive.

If loans are to be made through the government with the taxpayers’ money, what assurance shall we have that they will be used for the objectives sought? What assurances that they will be used under proper management? What assurances are necessary to safeguard the investment and contribute to a lasting peace?

On the other hand, private enterprise and venture capital need the directing aid of government in the selection of acceptable enterprise. They need the protective measures which our own government and that of the borrowing country can furnish in mutual pledges to safeguard the enterprise.

Therefore, we come to the conclusion that on both sides there should be a coöperative participation of national governments and private capital. It would appear, for the borrowing country, that the efficient management of private capital on the lending side is even more important to the success of the undertaking than is the capital itself. With private enterprise administering a foreign capital loan in a borrowing country, the incentive of reward for successful performance allows industry to act as a mediator between technology, volume, cost, and price; and it is therefore a referee on problems of production, distribution, and consumption.

Just how the legal and technical phases of such divided authority and responsibility of private capital and government in both the borrowing and lending countries is to be effected in a practical manner now becomes the important question.


IF THE United States is to play an important and intelligent role in the aid of other nations, both in rehabilitation and in development, and if it concludes that the authority and responsibility are to be vested not in government alone, but in both government and private enterprise, then we can address ourselves to the ways and means. Once a project is adopted and once the coöperation between authority and responsibility is accepted, we are brought face to face with the practical problems of introducing foreign loans into the economic processes of the borrowing country.

It is suggested that with the advent of peace the government of the United States invite governments of the devastated countries, together with representatives of private enterprise in both foreign countries and the United States, to study with it the urgent necessities of the situation and to determine the fields in which initiative should be taken. These might consist of agricultural projects alone, or of selected industrial enterprises, or both.

When these various projects have been mutually agreed upon, our government should encourage qualified enterprises in this country to submit work projects in the designated fields. If these are approved, the government of the United States should extend to the originating organization whatever guarantees are necessary to awaken and to stimulate both management and equity capital to carry out the enterprise.

Under these circumstances, the projects would provide investment opportunities for accumulated savings. They would give new hope to warexpanded enterprises in their promise that we can maintain our production in reconverting to peacetime economy. They would assure opportunities for useful employment for those who have served in the war industries and for returning soldiers who must find work.

Such encouragement through guarantees on the part of government would necessarily carry certain stipulations of obligations to restrain the enterprise within the approved fields, to protect it from abuse, and to ensure that the benefits for which it was devised accrued to the borrowing country to which the facilities were extended.

As an illustration of what is here intended, let us assume that the government of France and the government of the United States have agreed that a desirable objective is the restoration of French textile mills. The United States government requests that private sources submit project s for the rehabilitation of one, or several, textile plants in France. The government, through whatever department might be designated or created for the purpose, would pass upon the worthiness of the submitted projects. Having made a favorable decision and having secured similar approval from the French government, the United States government would then certify the project for government guarantee.

It is suggested that this guarantee should be made through a mutually approved private lending agency (commercial bank or other financial institution) for 80 per cent of the total capital required. This 80 per cent is to represent the security investment as evidenced by preferred stocks, bonds, or other form of senior security. This guarantee would be in such form as to be rediscountable at the Federal Reserve Bank and redeemable at the option of the private lending agency on sixty or ninety days’ notice. The conditions of the government guarantee woidd place upon the enterprise originating the project the responsibility and liability for the remaining 20 per cent. This 20 per cent could either be provided by the enterprise from its own sources or be supplied by the nationals of the country in which the project is to be developed, and would represent the equity investment.

The United States government guarantee would further provide that the originating company must furnish adequate American management, satisfactory to the government of the United States and that of the borrowing country, and maintain such management until the guarantee of the United States government has been fully extinguished.

A further provision of the guarantee would require that 10 per cent of the annual net profits arising from the enterprise would go toward retiring the government’s guarantee. It would permit a reward to management (fee and/or participation in profits) to an amount not in excess of 20 per cent of the annual net profits. It would provide for the remaining 70 per cent to accrue to the benefit of the nationals of the borrowing country, under conditions most favorable to the further growth of the enterprise, and with proper protection against its abuse for power politics or exchange speculation.

One of the most important provisions of the government guarantee would pertain to eventual equity ownership following the extinguishment of the guarantee or the security interest. At least 51 per cent equity ownership would be automatically vested in the nationals of the borrowing country, together with the further right to acquire the remaining interest upon terms and conditions previously understood. While it is not a matter of concern to the government whether the 20 per cent of required capital not covered by guarantee is furnished by our nationals or nationals of the borrowing country, it is concerned that all or at least 51 per cent of the equity shall in proper time come to be vested in the nationals of the borrowing country.

It is further suggested that one of the provisions of the guarantee be, wherever practical, that a fixed percentage of t he American management shall be drawn from the ranks of qualified returning American servicemen.

The United States government, before lending its approval and extending its financial guarantees, should receive from the government of the borrowing country satisfactory assurances that the borrowing government would refrain from erecting impediments of any nature which would militate against the success of the rehabilitation enterprise.

Under a procedure such as this, instead of working through government agencies and diplomatic channels and with the taxpayers’ money, we should fall back upon the existing private financial machinery and the savings of the people. We should open the field of opportunity to private investment and employment. We should extend assistance to the nations of the world — as outlined in the various programs of our public officers, and with the advantage that American capital advances would be protected by government influence. American management would ensure that the expenditures and efforts would be utilized for the agreed purposes and that the projects would contribute to the success and peace of the world at large. We should in this manner have thousands of private observers, alert through the incentive of reward and stimulated to successful endeavor.

There are two important points involved in the operations as outlined. First, how are we to envision the retirement of these loans; and second, what means shall we employ to enforce collections?

Repayment implies reduction all around in present impediments to multilateral trade, reduction in tariffs per unit of goods, with greatly increased outturn of goods. Under these circumstances there will be high employment in all countries, and savings to consumers in all countries will be high. These savings should flow to new capital equipment; the final expression of these savings is export of goods in multilateral trade — goods that are sold either to the lending country or to countries that trade them to the lending country.

These loans will not be large in contrast to the volume of goods and service in production and in multilateral trade. There are obviously two kinds of foreign lending, one under economic nationalism and one under international stimulation of multilateral trade. It is, of course, a situation which did not exist in the twenties or thirties: then we tried to accomplish ends through bilateral trade with currencies unstable and economic nationalism rampant.

As to the collection of loans, there can be no discussion of force. If the production of goods and services cannot flow into multilateral trade on the basis of high productivity, then the foreign loan is a failure and could not be collected in any event. The whole argument hinges on the fact that with large production and high employment it is possible to have stabilized currencies, and with these there should be no difficulty in securing exchange. Under these conditions, repayments of loans become almost automatic. In other words, it is high production and high consumption which make abundant foreign exchange. Presumably all countries will lessen impediments to foreign trade.

By helping others, we shall be helping ourselves. We shall not only be furnishing American labor with opportunity for employment, but we shall be lifting the living standards of the rest of the world to the protection of our own. We shall have inspired people with the hope of eventual success and prosperity. We shall have escaped the implications of imperialism through the assurance that with success will come ownership and further expansion.

The benefits of peace erect themselves in truer aspect; against the background of war. The benefits of peace will not come or prove lasting unless we strive for peace; and that striving for peace must be constructive, in t hat it brings the enjoyment of those benefits and conditions that make people happy and contented, furthering the will to maintain peace.