none superior, yet no American army of the past has been so victimized by distrust and grievances. So long as we continue the existing system history will repeat itself, and if we are engaged in a defensive war on American soil, politics will enter and destroy the efficiency of the army. Nothing saved it in France but the ocean and the censorship. The nation does not yet appreciate the tremendous qualities of the victories gained in France, and the failures that would have come had not General Pershing been given a free hand to make and remake his army as the panorama of the whole Western front unfolded to his unprejudiced vision. The nation to-day has a wonderful reservoir of talented men experienced in modern war. Knowing that, Congress has not hesitated to cut and slash the army without regard to the system recently provided by its own acts, for dividing the country into military areas, wherein are to be developed all the elements of defense, provided volunteers may be secured for the purpose. The new system was a great stride on the road of progress. The rate at which officers are being trained for staff duty, and high command gives much assurance for the future, but all is blurred by the necessity for placing organizations on the inactive list, and undertaking a system of very uncertain tenure and one sure to undergo further modification in the near future. It smacks much of the former efforts to have manoeuvers in the small Regular Army by posing decimated companies to represent battalions, and markers as brigades and divisions. With the strength reduced to the present numbers, the inactive organizations will eventually disappear, and the number of officers will be made to harmonize with what Congress may deem the size of possible war clouds. As in all our national life the Regular Army will carry on, making its sacrifices, yet rallying its elements around the only nucleus available to keep alive a knowledge of the art of war and the application of all the sciences to the murderous business of making war dangerous for one's enemies. Pacifist propaganda will again play its discouraging part and our military policy will remain in eclipse.

WILLIAM HARDING CARTER.

VOL. CCXV.-NO. 796

22

THE TER MEULEN CREDIT PLAN

BY W. F. GEPHART

THE need for devising a Ter Meulen or other similar extraordinary method of mobilizing credit cannot be understood unless one appreciates in what manner the credit structure of nations and international trading was affected by the World War. This disorganization of national and international credit appears to the ordinary person in its superficial aspects as depreciated exchange rates and inflated price levels in the various countries. The rate of exchange is simply the relationship existing between the basic value of the monetary units of two trading countries and is chiefly an effect and not a cause of the depressed industrial situation in a country.

Depreciated exchanges result primarily from currency and trade conditions. Whenever a nation begins to issue an unduly large amount of paper money for credit purposes, doubt is created in the minds not only of its own people but of international traders as to its ability to redeem this currency in gold, the standard unit of international values. As a result of such a policy, the circulating value of the currency becomes less than its face value in gold, both in the domestic and the foreign market, although there may be considerable discrepancy between its domestic and its foreign value. Likewise, if a nation imports a much greater volume of goods than it exports there is a deficiency of bills of exchange for sale in the country and a surplus of buyers of these bills. This forces up the rates, and thus, as in the case of any similar condition of mal-adjustment between supply and demand, the price of the article advances. In this case it happens to be the price of exchange, but the same condition would prevail in the case of an actual physical commodity or goods.

Under normal conditions, when there is a mal-adjustment between the demands for and the supply of bills, much can be done through an artificial method of creating bills by financial

institutions making arrangements with each other by which bankers' bills or other methods of settling international balances originate. Difficulty in the exchange rate, however, is not a new thing. In earlier times the South American and Central American countries as well as some of the Oriental nations experienced the same kind of difficulty which is now occurring in the European countries. It is only because of the importance of the international trading nations concerned and the extreme depression of the exchange of these nations that the problem seems unusual. At the present time, the exchanges of Switzerland and Holland are near their old parities, but in practically all the other European nations their exchanges are below normal, and in some cases very much so. However, the difficulty with respect to international trading is not only, or perhaps primarily, in the fact that the exchanges are depreciated, but rather that these exchanges fluctuate so much over brief periods. These fluctuations in the rate of exchanges introduce a disturbing element in international trade: that is, this condition introduces uncertainty and risk because the rate of exchange is a part of the price or cost of the goods. A prospective purchaser, making a contract for the importation of goods, cannot know very definitely what his final cost will be with the rate of exchanges fluctuating violently over short periods.

The rate of exchange is the financial thermometer which registers for a nation the state of its industrial and business health. This general condition of the exchanges is but a part of the injurious effects of the war. The working of the complicated machinery of industry, commerce, and credit was interrupted by the war. Saved funds and current accumulations of free capital were used up in meeting the expenditures of the war. Little was provided for what, in normal industrial times, is called a replacement and repair fund for the industrial machine.

However necessary from a national point of view these expenditures were, the fact remains that they were largely uneconomical expenditures. Just as continued cropping of a field impoverishes the soil and luxuriant vegetation or ample crops will not again be produced until the soil is fertilized, so these European nations were using up in war expenditures the past and

present current savings of their people. Or, just as the owner of a machine, who continually uses it and neither keeps it in repair nor sets aside a fund for the purchase of a new machine, finds himself, at the close of the lifetime of the machine, poorer, so these nations found themselves at the close of the World War.

Europe needs credit and chiefly of a long period character, and because of the unusual condition of these nations, special measures, though always undesirable, are necessary to provide her with this credit.

The Ter Meulen scheme of International Credits was proposed by Mr. Ter Meulen, a prominent international financier of Amsterdam. It was presented at the Brussels Financial Congress in September, 1920, and immediately attracted the attention of international bankers and students of finance. This Financial Congress was held under the general auspices of the League of Nations and this body appointed a provisional committee which was to have charge of organizing the Ter Meulen Plan of International Credits. This committee later selected Sir Drummond Drummond-Fraser as the organizer.

It is expected that the complete organization will consist, first, of a permanent international committee of bankers and business men which will have general charge of the operation of the plan. This general international committee will have under its direct supervision the organizer and his staff, as well as a committee in each of the nations which participate in the plan. The operation of the plan would be thus only indirectly connected with the League of Nations: this body acting, as it were, as a sponsor for the application of the initial idea and providing, perhaps, at least in a suggestive manner, for the appointment of the permanent international committee which it is expected will take the place of the provisional committee.

The essence of the plan is a combination of government and private security. There is to be provided a special form of government credit which will reinforce private credit. The Governments of the countries which desire to aid their importers, or which will in unusual cases desire to purchase directly products for themselves, will issue bonds. These bonds will be loaned to their nationals: that is to those of their industrial citizens who

desire to import necessary products. These bonds are issued only in the amounts justified by the gold value of the underlying securities, which would consist either of pledged government securities, such as custom duties, or, in the case of private citizens, such collateral as they would have to present.

These bonds in order to be made more attractive are to be issued in whatever currency the lender may require: that is in dollars, pounds, francs, etc. The gold value of the underlying securities, whether of the State or of the citizens, is to be determined by this international committee of experts, aided by a local or national committee which is appointed by and operated under this international committee and is made up of bankers and business men. The League of Nations, as an organization, is thus not necessarily involved in the operation of the plan except in so far as this body originated the machinery, and, in a remote case, in the event of defalcation in the redemption of the bonds, and only then in case the guaranteed fund is not adequate to take care of the defaulted sum. These bonds are to be based on revenue-producing assets and it is assumed that the supervision of their issue under this international commission will command universal confidence inasmuch as the international and national commissions will have as their object the protection of the interests of the creditor.

The assumptions underlying the plan are: first, that both long and short term credits are necessary for the impoverished nations to which the plan is intended chiefly to apply. Second, that even these impoverished nations have unpledged revenue-producing assets to which a gold value can be assigned and which will thereby reinforce private credit. Third, that this impartial international committee will act as a trustee and thus increase the collateral value of such securities.

An importer in one of these impoverished nations, desiring to purchase necessary and essential goods in a foreign nation, would arrange the details of the terms with the proposed exporter very much as he formerly did: that is, the time, the payment, the price, and conditions of payment would be decided between the two parties to the transaction. The proposed importer would then apply to his Government for a loan of Ter Meulen bonds,