THE CABINET: The French Debt

Two weeks ago M. Caillaux came, last week he went, and all he achieved by his coming and his going was to settle that the French War Debt to the U. S. should be left unsettled.

The Negotiations. The history of the attempts to reach a final debt accord is simple: a French proposal, an American counterproposal, a second French proposal—all rejected. Then as M. Caillaux was about to depart the Americans made an offer for a tentative arrangement, which M. Caillaux said he would take home and think over.

Proposal No. 1. M. Caillaux’s first offer called for payments in general as follows: $25,000,000 a year for five years; $30,000,000 a year for the next five years; $60,000,000 a year for the next ten years; $90,000,000 a year for 42 years-then the extinction of the debt. One might calculate what part of these payments was to be principal, what part interest, as one chooses. The principal of the French debt is $3,340,000,000, and with interest already accrued, the debt amounts to $4,200,000,000. The French proposal provided about $4,650,000,000* in payments over 62 years—calculable as repayment of the principal with interest at less than 1%, or payment of higher interest but only a fraction of the principal.

Proposal No. 2. The American counterproposal was for cancelation of about $200,000,000 of accrued interest, bringing the French Debt down to something like a round $4,000,000,000. Interest was to begin at ½% and increase¼% each year until the 13th year, when it would reach 3½%, the remainder of the principal to be paid off with that rate of interest over a period of about 62 years.

Proposal No. 3. The second French proposal called for payment of $40,000,000 a year for five years, $60,000,000 a year for seven years, and $100,000,000 a year for 56 years. This would make a total payment of $6,220,000,000 over 68 years. It might be calculated as repayment of the principal with a very low rate of interest or (as the Americans said in reply) of interest at 4V2% and repayment of less than half of the principal—only $1,750,000,000. This proposal was evidently that on which the French hoped to succeed. The American Debt Funding Commission was divided as to whether it should be accepted. Messrs. Mellon, Hoover, Smoot and Crisp (a subcommittee) discussed it with President Coolidge. At length it was decided that it too should be rejected.

Proposal No. 4 (tentative). By this time the last day of the conference had been reached, and M. Caillaux’s ship was sailing in only a few hours. The Americans then came forward with a tentative —ffer. Let the French acknowledge the principal of the debt and pay $40,000,000 a year for five years, which the U.S. would agree to consider as full discharge of all interest during that period. At the end of that period let a new conference be held.

This proposal is really an agreement to accept 1% interest for five years and then have the fight over a final settlement resumed. Its terms, $40,000,000 a year, are the same as the terms for the first five years of the best French proposal.

The Future of Proposal No. 4.

The French Government must give its assent to this proposal, and so must the U. S. Congress if it is to go into effect. From the French standpoint it has the advantage of preventing interest piling up in the interim. From the U. S. standpoint it means that this country will recieve $40,000,000 a year interest during this period instead of $20,000,000 a year. (The French have all along been paying $20,000,000 a year interest at 5% on some $400,000,000 of their debt contracted after the Armistice, when they bought U. S. surplus War supplies in Europe. These supplies were sold them at a bargain, and they have always distinguished between the debt thus incurred and the debt incurred during the actual fighting.).

The Cause of Failure. The reasons which prevented a final agreement come under several heads. The French journalists, Stephane Lauzanne and Pertinax, attributed the failure to the indiscretion of a minor member of the French Mission who gave out the terms of the second French offer (Proposal No. 3) while it was still supposed to be confidential. That explanation is insufficient.

A more serious reason was the difference over the so-called “safeguard clause.” The French Mission came prepared to insist that France must not be asked to keep up payments on her debt if German reparations should cease. The U. S. Commission wanted no strings tied to the agreement, although it was willing to admit that failure of reparations would alter France’s capacity to pay. What the Americans said, as paraphrased colloquially by Correspondent Mark Sullivan, was:

“You don’t need any such clause in the contract. If a year comes in which you can’t pay, then of course you can’t pay and that is all there is to it. When that time comes you can do what you are doing now—come over and discuss the matter.”

The real difficulty was one over which the negotiators did not have control—public opinion in France and Congress in the U. S. French opinion would immediately overthrow any ministry which granted such terms as the U. S. Congress would be willing to accept. Senator Smoot, representing the Senate on the American Commission, was reported to be the most determined in refusing concessions to the French. Senator Borah, whose shadow hung in the background although he had no immediate part in the negotiations, expressed his continued dissatisfaction with the French offers.

The International Aspect. The failure to reach a final agreement leaves international “finance still much at rag ends. England is uncertain how little she will now have to accept from France—since the English agreement called for £12,500,000 a year at first, but a larger amount if the U. S. got better terms. Some thought that Cail-laux “had triumphed” in America by keeping payments down to $40,000,000 a year for five years. In

France there was amazement that the conference had failed.

Everything remains unsettled, because even the tentative arrangement is not certain of acceptance, and its effect on French finances cannot yet be estimated. If, however, it is put in effect it will allow for a better determination of France’s capacity to pay by the end of the five-year period.

*If France funded her debt to the U. S. on the same basis as Great Britain, i would have to pay about $10,000,000,000 over 62 years.