"Every one knows that in the long run interest and dividends on international investments must be paid in goods. Consequently, the new debtor-creditor relationships required extensive changes in the flow of goods between nations. For example, they required that Germany which for many years had an excess of imports, suddenly develop a large excess of exports, and that the United States, which for fifty years had had an excess of exports, promptly develop a large excess of imports.

"But in a world of steadily rising trade barriers Germany has been unable to build up a large surplus of exports. Failure to obtain sufficient exchange from the sale of goods to pay reparations and interest on the foreign debt has kept credit in Germany scarce and interest rates high. High interest rates attracted enough money to Germany until 1931 to enable her to meet her old obligations by incurring new ones. Unfortunately, however, a large part of Germany's new credits were short-term funds.

A Vulnerable Position

"Naturally, this large short-term indebtness placed Germany in an exceedingly vulnerable position. Any condition which threatened withdrawal of foreign funds produced a recession in German business, because it limited the ability of German enterprises to obtain credit with which to buy goods. Once a recession started, it was likely to go from bad to worse, because its very existence provoked further withdrawals of foreign funds and prevented the sale abroad of long-term German securities.

Flight From the Mark

"This weakness in the German situation manifested itself in the Spring of 1929, when fear of the failure of the Young Plan negotiations created a flight from the mark; again, in the Fall of 1930, when the results of the elections caused another flight, and, finally, in the Summer of 1931, when even the moratorium failed to avert an acute financial arises which paralyzed German business. Certainly the inability of Germany to develop a large export surplus must be regarded as a major factor in precipitating the depression in 1929 and in intensifying the depression in the Fall of 1930 and the Summer of 1931.

Our Ever-rising Tariff

"The high and ever-rising American tariff has prevented us from developing an excess of imports. Indeed, so high have been our duties that for many years over 95 per cent of the manufactured articles consumed in the United States have been domestic products. Not only were rates raised in 21921 and again in 1922, but whenever a commodity began to flow over the tariff will in appreciable quantities the Tariff Commission was disposed to recommend that the President use his authority under the so-called "flexible" clause to increase the duty.

"Of the thirty seven changes made in the rates, of 1922 under this provision, thirty-two were increases. As a result, our excess of exports over imports, instead of shrinking, as our new position of a creditor nation required, actually grew from $719,000,000 in 1922 to nearly $842,000,000 in 1929.

Drew Gold Away

"This failure to develop an excess of imports caused no acute difficulty while loans abroad continued in sufficient volume. But the export surplus was bound to draw gold to the United States in large quantities if, for any reason, the purchase of foreign securities should be seriously curtailed. Trouble started in 1929, when speculation in stocks destroyed the American in stocks destroyed the American market for foreign bonds. Gold began to enter the United States in great began to enter the United States in great volume--our net imports of gold in 1929 were about $120,000,000 causing in other countries a credit stringency which was a major factor in precipitating the depression.

"The depression itself and the political unrest which accompanied it in many countries made American investors still more averse to foreign bonds and reduced the net American export of long-term capital in 1930 to one-third that of 1928. Consequently, when in 1930 one country after another was being forced off the gold standard, the United States, which already possessed a huge surplus of gold, drew about $278,000,000 more from the rest of the world.

"The high tariff was not the only reason why by the end of 1930 Australia and most of the South American countries had definitely abandoned the gold standard. There were other important causes--excessive and unwise borrowing during the boom period, the inability of these countries to raise new loans, the collapse in the prices of wheat, wool, coffee, tin and other commodities. But the American tariff, by restricting the ability of the world to pay us with goods instead of gold, was a major factor in forcing a large part of the world off the gold standard and in accentuating the depreciation of many foreign currencies.

Depreciated Currencies

"The depreciation of foreign currencies, in turn, has been a principal reason why the depression has been so much longer and more sever than any one anticipated. Depreciated currencies have made exports cheap in terms of foreign currencies and thus have increased the downward trend of world prices; in addition, foreign goods have become expensive to countries with depreciated currencies, and thus their ability to buy from the rest of the world has been reduced.