However, it was possible to accomplish many of them simultaneously, if not for all countries at once, at least for each of the stricken countries one by one. In particular, when the question of foreign loans arose, the creditor was in a position to impose adequate requirements for internal reform upon the country which was receiving the credit, and investment bankers who acted as intermediaries in placing such loans with their own investors had an obligation to do this.
Austrian Loan Tied to Internal Reforms. The following year, 1923, it proved possible to do precisely this for Austria. The crown had depreciated
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to 14,000 to 1, and Austria was ready for anything that would get her out of the morass. Under the auspices of the League of Nations an international loan was arranged. The loan was issued in various currencies and placed in the markets of many different countries. The total was approximately $126 million (nominal value), of which $25 million (at a discount of 10 percent) was placed in the United States. London, Paris, Amsterdam, and even Italy took part. This loan was guaranteed by Great Britain, France, and Czechoslovakia to the extent of 24.5 percent each, by Italy to the extent of 20.5 percent, by Belgium 2 percent, Sweden 2 percent, Denmark 1 percent, and the Netherlands 1 percent. This guarantee applied to all of the loan except a small part which, instead of being placed with the public, took the form of advances by the Swiss and Spanish governments.2 Austria agreed to rigorous conditions. She was to stabilize her currency on the gold basis. She was to submit to an adequate measure of foreign supervision of her finances.
Hungarian and Polish Loans. A similar rescue party was organized for Hungary. The creditors sent Jeremiah Smith of Boston to sit in a position of authority in Hungary, countersigning checks and passing on the use of the funds for which the loan was made while the reforms were being carried through. The sum3 here was a good dealer smaller, about $50,650,000. It was enough. The same thing was done for Poland in 1927 when the Honorable Charles S. Dewey left the United States Treasury to perform a similar service. The amount of $72,000,000 sufficed for Poland.4 Great sums were not required to stabilize a country when internal financial reforms were insisted upon in connection with the loan, and it was not difficult for the finance minister of an embarrassed country to persuade his people to submit to the necessary reforms when the outside help could thereby be obtained.
All three of these loans worked. All three of them stabilized the currencies. All three of them set the countries going in industrial activity again.
Dawes Plan Ties All Elements of Problem Together. The Dawes Plan for Germany in 1924 was based on the same principle. The Dawes Plan in principle undertook to tie all the elements together in one comprehensive
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settlement, and to create a framework under which Germany’s economic life could revive, and under which it was to Germany’s interest to pay as much as she could. By the end of 1923 Germany was desperate and was ready for anything. And France was convinced that from the standpoint of her own financial interests a radical change of policy was necessary.
A great international committee was created of so-called experts representing officially the governments of Great Britain, France, Italy, Belgium, and Germany, and representing unofficially the government of the United States. The American representatives of this committee were Gen. Charles G. Dawes, later Vice President of the United States, Owen D. Young, head of the General Electric Company, and Henry M. Robinson, president of the First National Bank of Los Angeles. More “expert” still were men like Col. Leonard P. Ayres and Professor E. W. Kemmerer, who assisted the nominal “experts.” Expert also was Sir Josiah Stamp of England.
The committee, in its report, set its problem in very clean-cut terms: how can the German budget be balanced and German currency be stabilized while providing for adequate reparations payments? They proposed a plan to solve this problem, emphasizing that the entire plan was based on the assumption that the fiscal and economic unity of Germany would be restored, and that economic activity would not be hampered by political or military control.
Foreign Loan. A foreign loan of 800 million gold marks (roughly $200 million) was to be provided for the establishment of a new bank of issue for currency stabilization, and for the first year’s reparations payments.
New Bank of Issue. A new bank of issue was to take over the assets and the liabilities of the Reichsbank, which included a substantial amount of gold. It was to get additional capital subscribed in Germany and abroad. It was to be privately owned and free of government control, though it was to be the fiscal agent and depository of the German government. It was to be administered by a German president and a German managing board and supervised in large matters affecting creditor nations by a board of seven Germans and seven foreigners, one of the foreigners being the bank commissioner.
Currency Stabilization. A gold reserve of 33.3 percent was to be maintained by the bank and the bank’s notes were to be redeemed in gold. The report of the committee, however, stated that the committee believed that conditions would be unfavorable to immediate redemption at the inception of the bank.
American Participation in Loan Conditioned on Immediate Gold Payments by Bank. This last point in the committee’s report represented a reluctant concession by the American members to the British, the French, and the Italians. The Italians and the French were sentimental about it. It was not fair that Germany should have the gold standard while they
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themselves did not have it. The British were not themselves ready to return immediately to the gold standard, and their idea was that Germany should go to the sterling standard, and that then they would take care both of sterling and of Germany.5
This aroused emphatic protests in the United States.6 In point of fact, however, the new bank did immediately begin gold payments. There is adequate reason to believe that the Department of State informally made it clear that American participation in the proposed Dawes Plan loan to Germany would not be regarded favorably by the American government unless Germany went immediately to the gold standard. And American participation in the loan was, of course, essential to the success of the plan.
The plan involved an interesting allocation of sources of revenue for the payment in marks of reparations, and these included not only taxes but also first mortgages placed on the German railways and the German industries excepting agriculture.
Transfer of Payments out of Germany. The plan made a sharp distinction between payments by the Germans in marks, and the transfer of these marks into foreign currencies for payments to the creditor governments under reparations accounts. The Germans performed their obligations fully when they turned over marks in proper amount to a transfer committee, which was to consist of the agent general for reparations payments and five experts in foreign exchange and finance. It was then the business of the Transfer Committee, representing the creditor governments, to get the money out of Germany if they could.
Safeguards Under the Dawes Plan. Reparations funds in marks were first of all to be deposited by the Transfer Committee in the Reichsbank, and then they were to sell these marks as they could. But they were not to sell them in the foreign exchange market if they thereby endangered the stability of the mark in the foreign exchanges. The protection of the mark from depreciation and the protection of the exchange rates were the problem of the new Reichsbank, over which the Allies kept adequate supervision; the problem of the agent of the Allies, namely, the Transfer Committee; and the problem of the Allied governments, which framed their own commercial policy with reference to the admittance or the exclusion of German goods.
It was provided that not more than two billion gold marks should accumulate in the new Reichsbank to Transfer Committee account. The Transfer Committee might accumulate an additional three billion marks without transferring it, but was obliged to invest this sum in German
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industries. The plan, moreover, provided that if after the accumulation reached five billion marks it was impossible to withdraw from Germany the full amount of Germany’s annual payments, then Germany’s payments in marks should be proportionately