320 REPORTS ON THE STATE OF SCIENCE, ETC. 



{a) Four alternative plans offer themselves in place of exacting full pay- 

 ment, which appears never to have been contemplated on either side : — 



1. Granting delay in payment of interest and instalments. 



2. Reducing an agreed rate of interest. 



3. Reducing the principal. 



4. Forgiving interest for a specified number of years. 



Obviously these alternatives only apply to war debts contracted by the 

 respective Governments. Also a debt is either good, bad, or doubtful. It is 

 fallacious to treat these three as if they were the same, and at present there 

 is no criterion to decide as to which debts fall in either of the last two classes. 

 In so far as interest is merely postponed, it appears to have the effect of 

 temporarily alleviating the financial position, but the ultimate effect is likely 

 to be adverse. A reduction in the agreed rate of interest or a proportionate 

 reduction in the principal would have varied effects according to the conditions 

 under which it took place. If either arose from the opinion of the creditor 

 Government that it could not get more, this would be adverse to the credit of 

 the debtor country, which would be. in effect, in the position of having to make 

 a composition with its creditors. Therefore its rate for borrowing would move 

 asjainst it as contrasted with countries which did not require to compound. On 

 the other hand, if a general reduction, or even a cancellation, were made by 

 the United States, with Great Britain participating as an act of equity and 

 friendliness, no adverse effects need be anticipated. 



Needless to say the circumstances considered are apart from the offsetting 

 of debts as between the late Allies. This is obviously desirable, but it is not 

 easy at present, owing to the doubtful nature of some of these debts. The 

 important country for remission of debt is the United States ; for offsetting 

 debts it is Great Britain. Probably from the British point of view the time 

 would not be ripe till a reasonable valuation can be put on the debts owed to 

 vis. It is suggestive that the worse the financial administration has been in the 

 past, the more ready we were to accept foreign obligations to this country as 

 irrecoverable. 



Note. — ^Sir Drummond Fraser objects to any reference to our debt to the 

 U.S.A. except on this basis of payment. 



Cancellation of ' good * debts, such as ours to the U.S.A., would evidently 

 be likely to benefit the debtor country by raising its exchange, improving its 

 credit, and relieving its internal financial difficulties — thereby hastening its 

 industrial recovery and that of other countries indirectly. It would be likely 

 to spare the creditor country the temporary disturbance to its industries arising 

 from the annual receipt of laree quantities of goods forming the interest and 

 redemption payments. When these payments are actually made (there has 

 been little attempt to make them hitherto) they cause unpaid-for exports in 

 the debtor country and gratuitous imports in the creditor country. .Should the 

 payments be stopped suddenly by cancelling the balance of the debts, the men 

 employed in the export trades in the debtor countries would find their occupa- 

 tion gone, and the same kind of thing would happen to the men in the creditor 

 countries who had been employed by the specified purchasing power hitherto 

 free because of the receipt of the gratuitous imports ; there are certain to be 

 effects of di.slocation through the sudden disturbances of supply and demand 

 in the home market. So much unemployment might follow on both sides that 

 neither creditors nor debtors would be willing to wipe the slate. Where no 

 payments have been made the considerations point to the desirability of 

 cancellation without delay. At present the dcbt.s cause little inconvenience 

 because no attempt is being made to pay even the interest, except in the case 

 of the payment nf interest to America promised by the British Government in 

 the second half of the current financial year. It seems reasonable that the 

 Inter-ATly debts— contracted in food and munitions at exorbitant prices-^should 

 be scaled down, and the creditor country should agree tu reccixe interest in 

 tariff-free goods of the debtor country. 



(6) Tlie large payments demanded by the Allies from Germany on account 

 of reparations and indemnities have aroused much controversy in this country, 

 and it is difficult for this Committee to take sides. It is to be regretted that the 

 amount of these payments, which involve difficult questions of legal interpreta- 



