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tions, abolishing the military system, closing arms factories and, in fact, doing all the things that more than a year later they had to do under circumstances of far greater difficulty. And above all, the remaining peace terms, relating largely to world-conditions for generations to come, could have been more calmly discussed without the fear of a suddenly revived military Germany which haunted the daily proceedings of the actual Peace Conference.

This defective armistice was signed on November 11th. The nations seemed indifferent about making peace, trusting to the huge Allied armies then in France to control Germany. But the great expense of their maintenance and the absence of millions of men from their homes, cheerfully borne in war, became very irksome to the peoples in peace, and these armies began rapidly to diminish. The 11th of December came, with no Peace Conference in sight, and the armistice had to be renewed. Allied military men began to feel grave apprehension when they thought of the millions of trained soldiers in Germany whom they themselves had left with an unknown but large equipment of arms, politically demoralized, to be sure, and for the time sick of war; yet there was always the possibility that the right leader might yet arise with the right war-cry to bring them to their feet again. So, further security was attempted by additional terms to the renewed armistice. The 11th of January, 1919, came with the Peace Conference just getting to work, and the same course was followed in the second renewal of the armistice.

When the time for the third renewal of the armistice February 11thapproached, the situation had grown more serious. The Allied armies were greatly reduced and the process of reduction was rapidly continuing. Notwithstanding the fact that the arms called for by the terms of the armistice had been surrendered and that the Germans had abandoned on the field still more of many important articles of equipment than they had surrendered under the armistice, there was a growing fear in certain quarters that there was still a great accumulation of arms in Germany and that their manufacturing plants were still producing them in quantities. When we consider the total demoralization of Germany at that time, it is difficult to believe that there was much ground for this apprehension. Nevertheless, the fear existed. It made itself evident in the still more drastic terms that were proposed to be imposed in this renewal of the armistice. As there was considerable difference of opinion as to the wisdom of this course, an Allied committee of civil and military representatives was appointed to prepare a memorandum and recommendation on this subject for consideration by the heads of the four governments.

When this committee met and the course which it was inclined to take became evident, the American representative expressed the following opinion: that the Allies had every reason for supporting the then existing government in Germany; that this government was as nearly a democratic one as could be expected at that time and under the circumstances; that the continual pin-thrusts being made by the Allies were playing into the hands of the opponents in Germany of this government; that, if another revolution came, this government would probably be succeeded either by an imperialistic military one, or by a bolshevist one; and that, finally, instead of these continual additions of new terms to the armistice, there should be drawn up at once the final military peace terms which, being imposed upon Germany without further delay, would relieve the Allies of all further apprehension. The committee, however, accepted the other proposed terms for the renewal of the armistice and made its report. The council of the heads of governments, however, decided upon the other course. It adopted a resolution to the effect that a renewal of the armistice would no longer be granted for a fixed time, but only for a short period during which the final military, naval and air terms of peace would be drafted and after approval would be at once submitted to the Germans for acceptance as a preliminary treaty,--and that the Germans should be at once so informed.

The Germans were at once so informed, and it is much to be regretted that the course that had been contemplated was not followed to a conclusion. A military and naval committee was at once appointed to prepare the draft of these final peace terms. In a few days it had completed its work and submitted its recommendations. In these recommendations there was only one point in regard to which there was any material difference of opinion among the heads of the governments. Had they desired, they could have settled this difference of opinion within twenty-four hours and these final military terms could have been, and undoubtedly would have been, immediately imposed upon Germany. Unfortunately, the President of the United States, who had supported this course, had been obliged to return to Washington. During his absence it was decided to revert to the former method of procedure and to combine all of the other terms of the treaty with the military terms. The result was that what would otherwise have been the real treaty of peace had to wait until the Powers had settled their differences of opinion about matters which were, largely, only incidental to a treaty of peace. And so, the preliminary treaty,—which involved the military, naval and air terms, and which was all that was necessary in order to bring a feeling of real security to Europe and to enormously reduce wasteful expenditures,-had to wait until the general treaty was signed on June 28, 1919. This treaty did not go into effect until the specified number of Allied Powers had ratified it. The result was that measures which could have been and should have been begun the better part of a year before were not undertaken until the beginning of the year 1920.

All of this was due, not to the fact of the armistice but to the form of it.

The armistice was made because all the Allied world wanted it, and for no other reason. But its defective form, for which America was in no way whatever responsible, invited and permitted in a considerable degree the delays which proved the bane of the Peace Conference and which prevented the more prompt reestablishment of the peace of the world.




of the Board of Editors


It is of advantage to every state in need of financial aid, as well as to the banks of every country having funds to invest abroad, that external governmental loans be generally regarded attractive. Attractiveness amounting to more than temporary and sentimental interest, depends upon the development of a conviction among the best buyers of every land that such loans constitute a safe investment in the face of every contingency reasonably to be anticipated, and that they are fairly immune from dangers which have heretofore proved to be inherent in or incidental to dealings with sovereign states of certain types—dangers of repudiation on colorable or solid grounds, dangers of invalidity, dangers arising from the operation of certain principles of international law concerning the effect of changes of sovereignty, dangers due to inadequate security or to pledges incapable of practical utilization for the benefit of the lender, dangers due to the freedom of the borrower to apply at will and without restraint the proceeds of a loan.

Experience has shown that the importance of any one of these dangers varies greatly according to the conditions of the particular case, and largely in proportion to the character and stability of the borrower. Thus in some instances the sole and reasonable concern of the lender pertains to the validity of the transaction; in others, the matter of validity affords but the first of a series of equally grave problems. The long record of losses sustained by holders of perfectly valid external bonds encourages belief that lenders have at times failed to appreciate the significance or reality of questions wholly unrelated to those of validity, and yet indissolubly connected with the matter of negotiation.

Despite the vast differences in the stability and character and credit and morale of the states comprising the international society, any one of them may seek and need foreign fiscal aid. When it does, its capacity to become a desirable borrower should be utilized. It is of highest importance that weak as well as strong states should be enabled to obtain funds for legitimate ends on just terms. If, therefore, by any process, an American bank may find itself in a position to lend with reasonable safety to a state of any continent and of any type or class, the means of attaining that position deserve consideration. It is not suggested that a loan to a state habitually in default and of unsavory record is to be regarded as desirable, or that the moral risk is ever to be disregarded in any transaction. It is believed, however, that as the financial history of every prospective public borrower is an open book, its idiosyncracies and propensities known, its fundamental laws within the reach of all, and the availability of its assets for hypothecation and use for the benefit of the lender under most unfavorable circumstances a matter of reasonable calculation, it lies within the power of American banks to estimate intelligently and closely the degree and kind of protection to be demanded of each particular applicant, and also to fix the terms on which it may, under most conditions, be fairly accepted as a borrower.

1 A slight enlargement of a paper presented to the Buenos Aires Conference of the International Law Association, August, 1922.

Another and perhaps a broader aspect of the general problem must engage attention. Arrangements acknowledged to be essential for the protection of lenders to states whose finances, through conditions of chronic disorder, have required complete rehabilitation and even political oversight, or which have not been accepted for all purposes as full-fledged members of the society of nations, should not be taken as standards of general applicability in dealings with states which have reached a higher and different plane. Certain terms imposed upon countries under the wardship of the United States, or upon others still subjected to a régime of extraterritorial jurisdiction, offer precedents of doubtful expediency in transactions with borrowers of a wholly different type. It is not suggested that necessary safeguards should ever be omitted. It is one of the chief purposes of this memorandum to emphasize the importance of safeguards which have been too often overlooked or ignored. It is merely submitted that some terms exacted of, and unwillingly yet validly accepted by, certain foreign borrowers, might prove to be the sowing of dragons' teeth and beget a popular opposition sufficing in time to jeopardize service and produce default. Involved, therefore, in every external bond transaction is the matter of fiscal statesmanship which is likely to play an increasingly important part in the largest success of foreign loans hereafter to be underwritten in the United States; for the question confronting the American lender is not entirely how rigorously or completely can the borrower be kept under the domination of the lender, but also how can the debtor be made the lasting friend of the American creditor, and inculcated with the desire both to repay obligations as they accrue, and also to seek in the United States rather than elsewhere financial aid whenever needed. It is the effect of such an idea upon the success of American diplomacy in the best sense that gives to every external loan floated in the United States a significance far beyond the horizon of the individual purchaser of a bond. Happily American bankers are not without the larger vision.

VALIDITY An external bond issue must be valid as a primary condition of acceptability. Validity, so far as it concerns the conduct of the borrower, is governed by the laws and constitution (if any) of the issuing state. Their requirements must be fully met. The lender must, therefore, satisfy itself as to compliance. In the course of so doing it may, in common prudence, invoke the aid of local counsel within the territory of the borrower, and deemed competent to pass judgment on the question whether every local condition essential to validity has been satisfied. Such action does not, however, remove from the lender the burden of taking cognizance of every obstacle which it has reason to believe or suspect the institutions of the borrower may oppose, and of seeking advice thereon. The lender necessarily assumes grave responsibility in accepting the assurances of foreign local advisors as to whether contemplated dangers are fanciful, or have been removed, or are non-existent. What constitutes requisite agsurance and what is to be regarded as trustworthy evidence of the requirements of the local law depend largely upon the personality of the borrower and the character of its highest officials. These vary greatly. In a recent bond agreement it was announced that

The Republic hereby represents and declares that all acts, conditions and legal formalities which should have been done or which should have happened or existed prior to the issuance of the Bonds, have existed, happened or been done as required by the constitution and laws of the Republic and in strict conformity therewith.4

It may be observed, however, that no official representation, however entitled to credibility, is necessarily decisive of the fact involved; and it may be doubted whether it precludes denial of an allegation of fact by the successor to the borrower in case the officials of the borrower have for any

? Although this condition and a variety of applications of it are familiar to American bankers and their counsel, it seems necessary, for sake of clearness, to advert to the general principle and to modes of assuring respect for it.

: In this connection, however, another consideration should be heeded. Oftentimes agreements for external bond issues are in fact concluded and perfected in the territory of the state where the lender is located-a circumstance which serves as a warning that no provision of the contract should set at nought any prohibition of the laws of that state denouncing as invalid contracts or provisions of a particular character. It is not suggested that the validity of mortgages or encumbrances of any kind upon immovable property within the state of the borrower is likely to be affected by the statutes of a foreign sovereignty. It is merely sought to be pointed out that in other matters, the state where the agreement is made may, for reasons of public policy, impose restrictions which if disregarded might prove embarrassing to the lender should the borrower subsequently invoke them as a ground for repudiation or rescission.

• Such is the language of a Bond Trust and Fiscal Agency Agreement between a certain Central American State and bankers of the United States, concluded in 1920.

See also Articles VI and X of Chinese Hankow Improvement Loan of September 17,

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