Pathfinder to Prosperity?

The biggest attempt at government debt conversion in British history made front pages all over the world last week, but did it make sense?

Division of opinion was sharp. On international exchange Sterling slipped to $3.59 and the price of British stocks rose, as though in anticipation of a further slump in the pound. But there was a jubilant side to the picture. The House of Commons rocked with cheers when gout-ridden Chancellor of the Exchequer Neville Chamberlain walked painfully to make his bold announcement. Holders of British 5% War Loan Bonds, he declared, are now offered by His Majesty's Exchequer the following option: 1) they can exchange their 5% bonds for 3 1/2% bonds or 2) they can accept repayment of the full cash value of their 5% bonds on or before Dec. 1, 1932 in paper pounds.

Should any considerable percentage of the holders of this -L-2,086,000,000 loan demand their paper pounds, His Majesty's Government could almost certainly not pay without resorting to inflation. What the Chancellor hoped last week was, of course, that a vast majority of bondholders would exchange their 5% bonds for 3 1/2%. In that case the Exchequer will save in interest payments the equivalent of $100,000,000 yearly.

In the British Isles a loyal Press backed Chancellor Chamberlain to the limit last week. The Bank of England helped to make 3 1/2% look attractive by cutting its rate from 2 1/2% to 2%--lowest since 1897. "I am delighted, delighted!" cried Laborite George Lansbury, Leader of His Majesty's Loyal Opposition in the House of Commons, "that this effort is being made to place Great Britain's tremendous debt on a sounder footing."

Financiers on the Continent were frankly skeptical of Mr. Chamberlain's ability to chew the huge chunk of conversion he had bitten off. On the other hand, since the pound is not in gold it can be inflated if necessary until British bondholders find themselves as shabbily treated as Frenchmen who bought War bonds in francs worth 20-c- and hold them today in francs worth 4-c-.

In the U. S., where the dollar retains the same gold value it had before the War, an historic series of debt conversions was engineered by Andrew William Mellon as Secretary of the Treasury. With a public debt of nearly 24 billion dollars outstanding after the War he successfully refunded Treasury obligations at a lower interest, paid off what he could outright, in nine years reduced the debt to 16 billions.

Mr. Mellon, veteran of this hugely successful operation and now Ambassador in London, perhaps was consulted by Chancellor Chamberlain, perhaps opined that now was indeed the psychological moment for Great Britain to attempt to convert her vast debt. Economists always list cheap money as one of the essentials for recovery from a depression. Certainly last week Chancellor Chamberlain did his utmost to make London money cheap, was hailed as a pathfinder to Prosperity.

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