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The War Debt Settlements

ISSUE:  Winter 1928

The World War Foreign Debt Commission, charged with negotiating settlements with foreign governments indebted to our government, expired last February, its task practically completed. A record of its work, with voluminous and informing exhibits, is in print. All of the debt settlements it negotiated are in force save one: the Mellon-Berenger agreement of April 29, 1926, has not been ratified by the American Senate or the French Parliament, but France is voluntarily making payments slightly in excess of those called for by the agreement. The matter is practically closed.—Or is it? The earliest settlements have fifty-seven years to run. The payments in the early years, in several cases, are comparatively, light. For other reasons the test of workability has yet to be applied. Moreover, our foreign debt policy has been under scattering fire for several years. Latterly, when this policy has been transmuted into operating settlements, it has been the subject of renewed though partly muffled criticism abroad and of increasing controversy at home. Is the policy sound? Are the settlements under it thoroughly just, expedient, even generous, and on the whole commendable? Are the critics cranks, sentimentalists, and false prophets? If so, it is well to have them shown up in their true light. Or are there serious and genuine reasons for reconsidering our policy, and perhaps even revising the so-called settlements? Today, when no emergency presents itself, when world affairs are assuming a more normal status, when international prejudices and suspicions are diminishing, the time is fully ripe for giving the subject the well-balanced, fair-minded consideration that it deserves at the hands of the American people, upon whom, fundamentally, the decision rests. Too much of the discussion has been highly, partisan, serving not to increase mutual understanding but to heighten prejudices. There has been too much misrepresentation, too much petty controversy over minor points. There is a real need for a cool, sympathetic consideration of the subject from various angles, and an approach to a truer understanding of it by the public both in the United States and abroad.


To see the problem in perspective it is helpful to review the origin of the debts and the preliminaries to actual negotiations for settlements. The United States entered the war on April 6, 1917. Our European allies, long heavy buyers of American goods, needed to continue purchasing vast supplies of our foodstuffs, raw materials, munitions, and other supplies for their military forces and civilian use. Financially, as well as on the battle front, they were hard pressed. Our forces were not ready and could not quickly be made ready. But our farms, our factories, our financial machinery, were already in large measure attuned to war. Far from being impaired, our economic and financial strength was at a high pitch. Our immediate contribution to the ending of the war, perforce, consisted primarily in strengthening the experienced hands of the allies.

Congress therefore promptly authorized the /Treasury to advance to the allied governments such funds as they required to finance their purchases here, beyond what they could meet with their other resources including proceeds of our purchases in their countries. Most of our wartime advances were spent before we were able to throw into the field our own military forces, at heavy cost to us because of our unpreparedness, our inexperience, and our distance from the battle-fields. The war was won before we had made direct effective use of all the armies, shipping, equipment, and materials that had cost so much to prepare. The borrowings continued after the armistice, under the guise of advances for the prosecution of the war, and in large part to permit fulfillment of pre-armistice contracts with our manufacturers and exporters. In addition, after the end of actual hostilities, a number of countries, including several that were not our allies in the war, gave their notes for relief supplies, and several, notably France, bought on credit, at a fraction of their cost, our surplus war stocks in Europe. Such was the origin of the debts.

The advances were evidenced by demand notes, at first bearing interest at practically the same rates as our Liberty Bonds, but later fixed at 5 per cent. It was understood that these demand notes would be funded after the war, and implied that the terms would be substantially identical with those of our own bonds. When the war advances were first proposed, indeed, some American Senators urged that we should disregard the chances of never getting repayment, or that we could well afford to make gifts instead of loans; in particular, a gift to France was talked of. But the French Premier, Ribot, being advised that special favors to France would be humiliating to one of her allies, requested that no resolution calling for a gift to France should be introduced. The terms agreed upon were not only acceptable to Congress but welcome to all the allies. It was plainly the understanding that the burden of our domestic borrowing for advances to the allies was to be borne, eventually, not by our taxpayers but by theirs.

All told, our advances, exclusive of interest, totaled over ten billion dollars—nearly 40 per cent of our national debt at its peak—advanced or charges to twenty different countries between April 6, 1917 and November 1, 1920. The debts of Great Britain, France, and Italy combined were over eight billion dollars, four-fifths of the total. Of the principal, about seven billion dollars was advanced before the armistice, and over three billion afterward. About nine and one-half billion dollars represented war advances, nearly six hundred million represented debts for surplus war stocks, and some one hundred and forty million represented debts for relief supplies, etc.

Other governments made similar advances to various purchasing governments. Great Britain advanced much more than she had borrowed. Of most other countries the reverse was true, and several had debts but no credits. The United States alone emerged almost wholly a creditor. The gross intergovernment indebtedness in 1923 was estimated at twenty-eight billion dollars exclusive of reparation claims.

During the Peace Conference, when the liquidation of the war was the center of negotiation, the inter-ally war debts naturally came up for discussion. The French and British governments wished to have “the question of reimbursement . . . settled . . . at a conference . . . in Paris during the peace negotiations.” Numerous suggestions were made, by Frenchmen, Britons, and Americans—for the most part by private individuals quite unofficially — that some clearing of the whole intricate mixture of debts and credits be undertaken, by a process of offsets and cancellations, perhaps involving claims against Germany as well. But United States Treasury, officials, and President Wilson himself, repelled all such suggestions. Recalling that we had been not an ally but an associated power, asserting that the United States alone “had neither sought nor received substantial benefits from the war,” aware that the United States owed no debts to be cancelled, they turned a deaf ear to all proposals for pooling war costs, cancelling war debts, accepting Germany as a debtor in lieu of allied governments, or treating our advances as in any degree contributions to the common cause. Thev insisted that the debts to the United States government were not a suitable subject for international conference, had no relation to German reparations, and were to be settled, one by one, in accordance with the terms of the advances.

The Peace Conference over, the President’s policies were repudiated, not in this, but in most other respects. The Senate refused to ratify the Treaty of Versailles or the security pact with Great Britain and France. We held aloof from the League of Nations. Influenced by bitter political animosities, the disillusionment of returned soldiers, the discouraged advocates of a mild peace, we experienced a remarkable revulsion of public opinion. As time passed, America looked on from afar, with some anxiety, much distrust, and more scorn, at what were regarded as fatal errors in the peace treaty, bungling efforts to exact reparations, the militaristic policy of France, the collapse of currencies. In such an atmosphere our debt policy was rigidly maintained. Under Democratic and Republican administrations alike we sought, at first with patience but with increasing insistence and eventual pressure, to get the war debts funded.

For a long time, however, the debtor governments did not meet our wishes, and hardly accepted our position as final. The French, Belgian, and Italian governments, unable to balance their domestic budgets and burdened by new debts incurred for reconstruction of devastated regions, could not see their way to enter into funding negotiations. The British government continued to press, from time to time, for “some large solution of the problem.” The Chancellor of the Exchequer wrote our Treasury, in February, 1920, in the course of a review of European conditions: “. . . we should welcome a general cancellation of the intergovernmental war debts. The moral effect would even be a greater practical change and fresh hope and confidence would spring up everywhere. The existence of these international debts deters neutrals from giving assistance, checks private credits, and will, I fear, prove a disturbing effect in future international relations.” Secretary Houston replied on March 1, restating our position at length. I quote a portion of his letter.

“As to the general cancellation of intergovernmental war debts . . . Any proposal or movement of such character would, I am confident, serve no useful purpose. On the contrary it would, I fear, mislead the people of the debtor countries as to the justice and efficacy of such a plan and arouse hopes, the disappointment of which could only have a harmful effect. . . .

“Such a proposal does not involve mutual sacrifices on the part of the nations concerned. It simply involves a contribution mainly by the United States. The United States has shown its desire to assist Europe. . . . What this Government could do for the immediate relief of the debtor countries has been done. Their need now is for private credits. The indebtedness of the allied Governments to each other and to the United States is not a present burden upon the debtor Governments, since they are not paying interest or even, as far as I am aware, providing in their budgets or taxes for the payment of either principal or interest. At the present time the foreign obligations held by the Government of the United States do not constitute a practical obstacle to obtaining credits here, and I do not think that the European countries would obtain a dollar additional credit as a result of the cancellation of those obligations. The proposal does not touch matters out of which the present financial, and economic difficulties of Europe chiefly, grow. The relief from present ills, in so far as it can be obtained, is primarily within the control of the debtor Governments and peoples themselves. Most of the debtor Governments have not levied taxes sufficient to enable them to balance their budgets, nor have they taken any energetic and adequate measures to reduce their expenditures to meet their income. Too little progress has been made in disarmament. No appreciable progress has been made in deflating excessive issues of currency or in stabilizing the currencies at new levels, but in Continental Europe there has been a constant increase in note issues. Private initiative has not been restored. Unnecessary and unwise economic barriers still exist. Instead of setting trade and commerce free by appropriate steps there appear to be concerted efforts to obtain from the most needy discriminatory advantages and exclusive concessions. There is not yet apparent any disposition on the part of Europe to make a prompt and reasonable definite settlement of the reparation claims against Germany or to adopt policies which will set Germany and Austria free to make their necessary contribution to the economic rehabilitation of Europe.”

Further correspondence culminated in a letter from the British Premier to President Wilson, on August 5, 1920, in which he reviewed the British efforts to secure early agreement on reparation obligations at a figure “within the reasonable capacity of Germany to pay.” The French Premier, Mr. Lloyd George said, agreed, “but he pointed out that it was impossible for France to agree to accept anything less than it was entitled to under the treaty unless its debts to its Allies and associates in the war were treated in the same way.” The British Government, Mr. George went on, accepted this declaration as “eminently fair,” but concluded that they could not “remit any part of what was owed to them by France except as part and parcel of all round settlement of inter-allied indebtedness. . . , The principal reason,” he said, “was that British public opinion would never support a one-sided arrangement at its sole expense, and that if such a one-sided arrangement were made it could not fail to estrange and eventually embitter the relations between the American and the British people with calamitous results to the future of the world.” He asked the President’s advice “as to the best method of securing that the whole problem could be considered and settled by the United States Government in concert with its associates at the earliest possible moment that the political situation in America makes it possible.”

President Wilson replied on November 3, 1920, restating the American position. In part he said:

“It is highly improbable that either the Congress or popular opinion in this country will ever permit a cancellation of any part of the debt of the British Government to the United States in order to induce the British Government to remit, in whole or in part, the debt to Great Britain of France or any other of the allied Governments, or that it would consent to a cancellation or reduction in the debts of any of the allied Governments as an inducement towards a practical settlement of the reparation claims. As a matter of fact, such a settlement in our judgment would in itself increase the ultimate financial strength of the Allies.

“The United States Government entirely agrees with the British Government that the fixing of Germany’s reparation obligation is a cardinal necessity for the renewal of the economic life of Europe and would prove to be most helpful in the interests of peace throughout the world; however, it fails to perceive the logic in a suggestion in effect either that the United States shall pay part of Germany’s reparation obligation or that it shall make a gratuity to the allied Governments to induce them to fix such obligation at an amount within Germany’s capacity to pay. This Government has endeavored heretofore in a most friendly spirit to make it clear that it cannot consent to connect the reparation question with that of intergovernmental indebtedness.

“The long delay which has occurred in the funding of the demand obligations is already embarrassing the Treasury, which will find itself compelled to begin to collect back and current interest if speedy progress is not made with the funding. Unless arrangements are completed for funding such loans, and in that connection for the deferring of interest, in the present state of opinion here there is likely to develop a dangerous misunderstanding.”

Behind the seemingly recalcitrant attitude of the debtor governments lay certain strongly held convictions which, if comprehended by American officials, awakened little response. The French felt that it was inconceivable that a partner in the war should demand settlement of a war debt in advance of an effectively operating settlement of reparations, or require France to agree to make definite payments when her receipts from reparations were highly uncertain. While in no sense repudiating the debt, the French felt that the recognition of the fact that she was the chief victim of the war’s destruction of life and property, and of the circumstances under which the advances were made, would justify her creditors in not pressing for early settlement, or indeed settlement in full. Many Frenchmen felt that the United States, in failing to ratify the peace treaty and security pact, and to take her place in the League of Nations, the Reparation Commission, and other bodies, had deserted France, leaving her an undue share of the burden of enforcing the treaty to ensure her security and just reparations; and that, under all the circumstances, we might well regard our war advances, in part at least, as our just share of the cost of the war.

The British, on their part, sympathised with the French position in these respects. They were especially eager to give no basis for a charge of repudiation of their signature and did not wish to ask favors, but they by no means considered the British debt to the United States an ordinary commercial debt. They held the view that the interests of the United States and Great Britain alike lay in sacrificing war claims to attain the preeminent objectives—financial stability, economic recovery, and* normal trade.

In the unsettled state of affairs in Europe and the United States—both economic and political, and in default of agreement on underlying principles, no progress was made with debt-funding operations, interest was allowed merely to accrue, and only small payments were made—chiefly on the British debt for silver purchases and interest on the French debt for war stocks.

Early in 1922, as the outgrowth of a request by President Harding, Congress created a World War Foreign Debt Commission, headed by, the Secretary of the Treasury, to negotiate settlements with each debtor country. The Commission was authorized to accept the bonds of each nation running as long as June 15, 1947, and bearing interest at not less than 41/4 per cent per annum—virtually on terms such as the money had been raised by our government through Liberty Loans. Congress refused to give the Commission a freer hand, as the administration had desired; ostensibly it expected settlement in full on these terms, which were easier, indeed, than those on which any of the debtor governments could then borrow. The Commission sent polite notes to the debtor countries requesting each to send representatives to Washington to conclude agreements.

On August 1, 1922, the British Government, through the famous Balfour note addressed to the allied governments indebted to Great Britain for war advances, set forth its views and position at length. It was pointed out that Britain’s claims upon Germany, Russia, and the Allies were four times her debt to the United States, that this debt had been incurred essentially for allied account, and that hitherto, “pending a settlement which would go to the root of the problem, His Majesty’s Government have silently abstained from making any demands upon their allies, either for the payment of interest or the repayment of capital.” They reiterated that,

“so deeply are they convinced of the economic injury, inflicted on the world by the existing state of things that this country would be prepared (subject to the just claims of other parts of the Empire) to abandon all further right to German reparations and all claims to repayment by allies, provided that the renunciation formed part of a general plan by which this great problem could be dealt with as a whole and find a satisfactory solution. A general settlement would, in their view, be of more value to mankind than any gains that could accrue even from the most successful enforcement of legal obligations.”

“Recent events, however,” it was set forth, “make such a policy difficult of accomplishment. With the most perfect courtesy, and in the exercise of their undoubted rights, the American Government have required this country to pay the interest accrued since 1919 on the Anglo-American debt, to convert it from an unfunded debt, and to repay it by a sinking fund in twenty-five years. Such a procedure is clearly in accordance with the original contract. His Majesty’s Government make no complaint of it; they recognise their obligations and are prepared to fulfil them. But evidently they cannot do so without profoundly modifying the course which, in different circumstances, they would have wished to pursue. They cannot treat the repayment of the Anglo-American loan as if it were an isolated incident in which only the United States of America and Great Britain had any concern. It is but one of a connected series of transactions, in which this country appears sometimes as debtor, sometimes as creditor, and, if our undoubted obligations as a debtor are to be enforced, our not less undoubted rights as a creditor cannot be left wholly in abeyance.

“His Majesty’s Government do not conceal the fact that they adopt this change of policy, with the greatest reluctance. It is true that Great Britain is owed more than it owes, and that, if all inter-Allied war debts were paid, the British Treasury would, on balance, be a large gainer by the transaction. But can the present world situation be looked at only from this narrow financial standpoint? It is true that many of the Allied and Associated Powers are, as between each other, creditors or debtors, or both. But they were, and are, much more. They were partners in the greatest international effort ever made in the cause of freedom; and they are still partners in dealing with some, at least, of its results. Their debts were incurred, their loans were made, not for the separate advantage of particular States, but for a great purpose common to them all, and that purpose has been, in the main, accomplished. . . .

“It cannot be right that one partner in the common enterprise should recover all that she has lent, and that another, while recovering nothing, should be required to pay all that she has borrowed. Such a procedure is contrary to every principle of natural justice and cannot be expected to commend itself to the people of this country. They are suffering from an unparalleled burden of taxation, from an immense diminution in national wealth, from serious want of employment, and from the severe curtailment of useful expenditure. These evils are courageously borne. But were they to be increased by, an arrangement which, however legitimate, is obviously one-sided, the British taxpayer would inevitably ask why he should be singled out to bear a burden which others are bound to share.

“To such a question there can be but one answer, and I am convinced that Allied opinion will admit its justice. But while His Majesty’s Government are thus regretfully constrained to request the French Government to make arrangements for dealing to the best of their ability with Anglo-French loans, they desire to explain that the amount of interest and repayment for which they ask depends not so much on what France and other Allies owe to Great Britain as on what Great Britain has to pay America . . . In no circumstances do we propose to ask more from our debtors than is necessary to pay to our creditors. And, while we do not ask for more, all will admit that we can hardly be content with less. . . .”

The Balfour note aroused much resentment in America, partly because of a misleading statement concerning our advances to the continental allies, but more because it apparently sought to place upon American policy the onus of preventing a just, reasonable, and practical solution of grave and pressing problems of world economy and finance. But the note failed to alter our fixed policy.

Early in 1923, therefore, after a change in the British Government, and spurred by a desire to restore the gold standard in England with American financial cooperation, a British mission headed by the Chancellor of the Exchequer and the Governor of the Bank of England came to Washington and negotiated with the American Commission for the settlement of the British debt. Certain passages of Mr. Baldwin’s opening speech deserve quotation:

“We have come with the express intention of repaying our debt, and it is owing to the practical difficulties of making international payments that we are about to consult with you in order to accomplish the end which we both have in view. . . .

“That debt was contracted in a common cause. It was the first contribution made by the United States to save civilization from being engulfed and free peoples being brought under the destructive rule of a military autocracy; it was followed by the contribution of the man power of the United States, whose soldiers fought so gallantly with ours and those of our Allies for the same purpose.

“Then we were enlisted in a common cause; we still have common economic interests. The payment of our debt to you involves much more than the transfer of huge sums from London to Washington. It must affect the future well-being of both countries and on their prosperity depends to a large extent that of the entire world. The settlement we make here will determine the condition and material welfare of the great mass of wage earners in Great Britain and the United States, their wives and children. . . .

“The payment of our debt to you will impose upon us the necessity of levying heavy taxes to meet those payments. . . . Further taxation would decrease the purchasing power of the British workingman and reduce our consumption of American products. There would be a diminished export demand for American cereals, cotton, meats, and other products of the soil, the mine, and the factory. Desirous as we are to maintain the social scale of our own worker, the effect of additional taxation would be inevitably to depress it. From the consequences of that I do not see how America can escape. The social condition of the American workingman, raised to its present level in some measure as a result of the war, is now the highest in the world; but if we are unable to purchase from you, if we are forced by stern necessity to economize still further, to buy from you only those things we must have, but even those in greatly reduced quantities, the American farmer, as well as the American workingman, will feel the pinch. He likewise will be compelled to economize; he will have to do with less; he will be brought down to a lower standard of living. Our modern civilization does not permit of economic isolation. Economic relations are too closely, interwoven for one nation to be prosperous when other nations are suffering.

“This debt is not a debt for dollars sent to Europe, the money was all expended here, most of it for cotton, wheat, food products and munitions of war. Every cent used for the purchase of these goods was spent in America; American labor received the wages; American capitalists the profits; the United States Treasury the taxation imposed on those profits.

”. . . Now, seeing that the debt is a debt for goods supplied, it would be natural to ask, why not repay with goods?

“A moment’s consideration is sufficient to answer that question.

“These goods were supplied in war time at war prices. Prices have fallen so far that thus to repay $4,000,000,000, Great Britain would have to send to America a far greater bulk of goods than she originally purchased with the money loaned, and laying aside all consideration of the tariff barrier, would it be possible for America to accept repayment in coal, steel, iron, manufactured cotton goods and so forth, a method of repayment which would affect the employment of her people for years to come?

”. . . We intend to pay—but how best can international credits be made liquid when the creditor nation is unwilling to permit liquidation through the direct delivery of goods and is also unwilling to see the current sale of her products to the debtor nation interrupted, and when the debtor nation is unwilling to be put in the position of being unable to buy the products of the creditor nation.”

Since the discussions between the two commissions have not been published, one cannot tell how the American Commission actually met the arguments hidden in the British Chancellor’s gentle language. Judging by the result, they were largely dismissed as irrelevant. In the final agreement, no reduction in the face of the debt was conceded, and accrued interest was charged at 4Vi per cent to December 15, 1922. This total sum, 4,600 million dollars, was funded into 62-year bonds. The long period was adopted to ease the burden of annual payments on the principal. Furthermore, the rate of interest was fixed not at 4^4 per cent, but at 3 per cent for the first ten years and 3^ per cent thereafter—or, as the American Commission stated, “at the approximately normal rates of interest payable by strong governments over long terms of years.” The settlement involved payment, for interest and amortization of principal, of about one hundred and sixty million dollars a year until 1932 and about one hundred and eighty million to one hundred and eighty-six million a year thereafter. Since these terms were not within the legal authority of the Commission to grant, the settlement was submitted to Congress for approval. This was given; Congress thereupon authorized the Commission to make settlements with other debtors upon such terms as it “may believe to be just, subject to the approval of Congress,” and thereafter the Debt Commission asked no higher terms of any debtor.

Between 1925 and 1926, with considerable delay and after considerable pressure in certain cases, funding agreements were made with twelve other governments, including all the important debtors except Russia, whose Soviet Government had repudiated all foreign debts. All of these settlements followed the British model in general as to the calculation of the debt, funding it into sixty-two-year bonds, and requiring annual interest and amortization payments. The countries which had borrowed for relief supplies nearly all settled on the same terms as Great Britain, but in a few important instances there were significant departures. Czechoslovakia and Roumania were allowed to defer part of the interest payments for 18 and 14 years respectively. In partial deference to a commitment by President Wilson at the Peace Conference, whereby Belgium’s creditors agreed to look to Germany for the payment of Belgium’s war debts, Belgium was allowed to repay her pre-armistice debt without interest. Three countries only—France, Jugo-Slavia, and Italy—were granted substantially lower rates of interest, on the ground of incapacity to pay more, or by reference to what was more agreeably termed “the principle of capacity to pay.” In all cases the earlier payments were made relatively easy. Altogether, the scheduled payments to this country under these debt settlements rise from two hundred and eleven million dollars this year to three hundred and twenty-seven million in 1937, to three hundred and forty-two million in 1950, to about four hundred million in 1975, and a maximum of four hundred and twenty-one million in 1985. The annual payments do not bulk extremely large for nations, in relation to budgets, national incomes, or foreign trade. The maximum sums are moderate in comparison with standard annuity due from Germany on reparation account, some six hundred million dollars.

There has been much discussion of whether we have cancelled any of the debts, and if so, to what extent. Certainly there was no cancellation of principal, and we added accrued interest from the date of the advances. In all cases, however, though in varying degrees, rates of interest charged were lower than those stated in the demand notes and lower than the rates we paid on our Liberty and Victory Loans. In these ways we granted concessions from the terms of the advances, that were equivalent to partial remission of the debts. If one calculates the present worth of the scheduled payments as of the date of funding, using 4*4 per cent, the rate paid on several Liberty Loans, and expressed in the act establishing the Debt Commission, one reaches a total figure of six thousand eight hundred and sixty-two millions, or 59 per cent of the funded principal of about eleven and one-half billions: by, this calculation it appears we virtually remitted some 15 per cent of the British debt, 50 per cent of the French, 46 per cent of the Belgian, and 75 per cent of the Italian. If one uses a 5 per cent rate, as Secretary Mellon has done in endeavoring to stress our liberality to France, the effective remission comes out considerably more. If, however, one assumes that the policy implied in our terms for the advances was to charge interest at such rates as our government could borrow, and uses the rate at which our Treasury is now refunding an issue of Liberty Bonds, it appears that we made important remissions only in the case of Italy and Jugo-Slavia, and have even overcharged Great Britain and several other debtors.


The official American view of the settlements can be summarized briefly. The advances were made, on easy terms, with full expectation of repayment. Great moral importance attaches to the sanctity of contract in international relations. The American public rightly expects the debts to be honored and paid in full. Definitive settlement is financially essential for both debtor and creditor nations. In view of the lower rates of interest likely to prevail in times of peace, we have agreed to standard rates of interest substantially lower than those in the original contracts. Further to facilitate payment by the debtors we have agreed to still lower rates in the first ten or more years, and to extend the term of payment over a long period. Finally, in cases where the payment of these rates appears beyond the capacity of debtor nations to make without endangering its budgetary equilibrium, currency stability, and standard of living, we have agreed to still lower rates during more of the period. Within these limits we have necessarily sought the best terms possible, as trustees for the American people. We are confident that the settlements are both fair and workable.

A common American view, characteristic of the man in the street, is this: we were drawn, in spite of ourselves, into a European war, for the first and last time. It cost us heavily, even if we ended it quickly after we got going. Into the bargain we loaned the allies a lot of money, which we raised by Liberty Bonds that we must pay off. They’ve made a mess of things since the armistice, and they will probably keep on doing it. We don’t like their ways and many of the policies. We haven’t hurried them about payments, but a debt’s a debt, and there’s no reason on earth why they shouldn’t pay up. We don’t propose to be played for suckers. We stand for the principle of paying debts, among nations as well as among individuals. We’ve been easy in our terms to all, and remarkably generous to the nations that were hardest hit. We’ve had enough of unset-tlement. The matter’s settled. The plan works. Let’s drop the subject.

Against this complacent American view and the logical structure of our government position, a barrage of criticism has been laid down. It concerns primarily the debts for war advances, chiefly, those of our major allies, Great Britain and France. It comes from Americans—intelligent, informed, high-minded Americans. The grounds of these criticisms are in part moral, in part political, in part economic. Some look to the past, others to the future. No one person, perhaps, would endorse them all, certainly few could agree on their relative weight. Without attempting to exhaust the arsenal of arguments, let me summarize the principal ones for what they may be worth.

1.  The settlements, it is argued, are fundamentally unsound in principle. They ignore the fact that we made common cause with the allies in a great war. It was our war, at least from April, 1917. We were painfully slow to contribute effectively to its termination, and for more than a year we could exert little influence except through supplies for which we advanced money, while our delay was extremely costly to our allies not only in money but in lives. There is a substantial equitable offset to our legal claims. At least in large part, if not in whole, our war advances were in reality part of our proper share in the common cause. This aspect of the matter, on which the public of the debtor countries feels deeply, has been ignored in the settlements. We have officially treated the debts as ordinary debts. Even the recognition of a principle of “capacity to pay” savors of the bankruptcy court, of a desire to exact the uttermost farthing from an insolvent debtor. For the sake of our own honor, we must come to acknowledge our error, and not allow a wrong settlement to stand.

2.  The settlements, it is urged, ignore the revolutionary change in the value of the money unit. This is a matter familiar to economists and statisticians, but not generally understood. The sums were advanced to pay for goods sold at a high level of prices; the debts are expressed and repayable in terms of gold dollars. The price level today is at least a third lower, and a dollar will buy at least 50 per cent more, than when the debts were incurred. In terms of goods, we are exacting repayment that will cost the debtor and return to us some 50 per cent more in effort and sacrifice than the sums we advanced. This is patently unfair. In private business such changes are still ignored, to the great injury of debtors or creditors as the case may be. But we should not ignore it in so huge and vital and so long extended a settlement of debts with our war allies. On this ground alone a very substantial reduction of the face of the debts is called for. This is especially true in the case of Great Britain, for whom no important reduction in interest charges were made.

3. The terms of settlement, it is held, are ungenerous. Alone among the nations, we gained greatly in wealth during the war and even because of it. As a nation we are unbelievably, prosperous, unprecedentedly rich. We are lavish in public and private expenditures. We throw away hundreds of millions in pork barrel legislation, in Shipping Board wastefulness, and in other ways. Even so, our tax burden is relatively light, and our war bond issues are being retired with astounding rapidity. Indeed the principal fiscal significance of the payments at present is that our national debt is being reduced a little faster than would otherwise be the case. We have made concessions indeed, but we could remit the debts, even in whole, literally without feeling it. On the other hand, our debtors are struggling to restore their finances, their trade, their industry, their agriculture. Their national incomes are low compared with ours. Their tax burdens are oppressive. The scheduled payments, which mean little to us in our wealth, mean vastly more to our debtors and add greatly to their burdens, already extremely heavy.

4.  Our own policies, the argument runs, are unfairly inconsistent. In the last analysis, our debtors can pay us only in goods and services. We demand full payment of debts, but we have done and are doing everything we can to obstruct payment in terms available to the debtors. We maintain a high tariff and a prohibition law which restrict them in paying with goods. The example of our prosperity under a high protective tariff has encouraged similar measures in Europe, which greatly diminish productivity all over Europe. We are, in effect though not in form, subsidizing a huge merchant marine, which limits their ability to pay us in shipping services. We restrict immigration, and thus prevent their laborers from coming here, to relieve unemployment and other pressure at home, and to earn here a surplus whose remission to relatives at home would indirectly afford resources for debt payment. We seek to build up our export trade, but what Europe pays on the debts it does not have available to pay for our goods. We lend privately, indeed, with heavy commissions, at high interest rates, but we stand aloof from the principal agencies for world peace, without which our foreign investments will encounter grave risks. If we insist on our rights as creditors, it is but reasonable that we should facilitate payment by the debtors. In fairness to ourselves, as well as to our debtors, we should either remit the debts or greatly reduce them, or else modify our policies so as to promote the ease with which we can be paid.

5.  Because of such facts as these, it is argued, our policy and the settlements under it “have created and are fostering a deep sense of grievance against us.” We have disregarded deep-seated feelings on the part of debtor nations; we have ignored their points of view. Quite naturally we are condemned as unfair; we are pictured as cruel extortionists; good natured Uncle Sam is repainted as devilish Uncle Shylock. During the war we were regarded not only as saviors and comrades but as idealists. Now it appears that the almighty dollar is still our god. The annual payments are tribute, hurting the more because exacted by a late brother in arms. Making fresh investments at high rates, we are getting the world deeper and deeper into debt with us. We bestride the world like a financial colossus. We have proudly asserted that we sought no reparation from Germany, yet we are seeking to take for ourselves, under the guise of collecting our debts, most of the reparations which Germany is supposed to pay to the principal victims of the war. Such settlements rankle bitterly. We are building up a heritage of fear, resentment, and even hate. Out of such stuff wars are made. For the sake of world peace, of international amity, if for no other reason, we should make revised settlements which our debtors will regard, all things considered, as reasonable and fair.

6.  The execution of the settlements, it is urged, will seriously retard economic and financial recovery and progress in the debtor countries and hold down their standards of living, if not endanger their stability- Such a condition will react unfavorably upon us. As Secretary Mellon so forcibly stated: “The entire foreign debt is not worth as much to the American people in dollars and cents as a prosperous Europe for a customer.” This view weighed heavily with Great Britain in determining her debt policy. She wisely realized that, for her own prosperity as well as that of her debtors, the really vital problem was the restoration of stability in finance and the general revival of industry and trade. In making our settlements we were blind to our own interests, even as a business nation. It is to our own interest to assist Europe back to full productivity as it was in our own interest to ensure the victory of the Allied Powers.

7.  The payment of the debts, it is further urged, will not benefit us but injure us. It will intensify the competition of European goods in our home markets, and with our exports in foreign markets. Our agriculture has already suffered and continues to suffer from this cause. The direct relief to our taxpayers through the payments made will be more than offset by the injury to our business and to our ability to carry our tax burden. If, instead of accepting payments in goods and services, we continue to relend on private account the amount of the payments and more, we shall build up so huge an investment abroad that our credit will be subject to serious adverse influences from disturbances in foreign countries, and we shall be launched, willy-nilly, into an economic imperialism, with all that it implies in foreign entanglements and even war. Merely from the standpoint of self interest, we have adopted a mistakenly short-sighted policy. We must take a larger, more far-sighted view.

8. Finally, it is prophesied, the settlements will not be carried out. There is no precedent in history for such transactions, extending over two generations international payments growing out of the cost of a great war. There are many possibilities of breakdown. Even if the debtors find it possible to carry the load, we shall not find it to our interest to receive the payments. Eventually the settlements will be revised. Now, if we are forward-looking, is the time for us to reconsider them in the light of the past and the outlook for the future, and to avoid, by a revision the unpleasant, possibly disastrous consequences of attempting to secure fulfillment.


For my part, i cannot endorse all of the criticisms I have just summarized. They understate the real merits and exaggerate the shortcomings of our policy, and unduly magnify the economic difficulties to be encountered in executing the settlements. I do see, however, a great deal of merit in the criticisms. I believe our policy was unduly harsh — even more in procedure than in effect. I cannot regard the policy, or the settlements under it, as representing the acme of statesmanlike wisdom, though I recognize that under prevailing conditions—including the temper of Congress and public opinion in this country—it would not have been easy to do better. It is easier to be wise after the event than before; and I think it is wholesome to look back, not so much to criticize or condemn as to see what mistakes were made and what might better have been done. We are too prone to bask in a complacent self-satisfaction; it is well to realize that we have no monopoly of justice, wisdom, and sound judgment. Especially in this case a candid reexamination of our actions would put us in a better mood to face future developments.

Frankly, i believe we announced too early and adhered too rigidly to a narrowly logical position. It is fundamental, I believe, that insistence on legal rights is far less expedient than the promotion of productivity, trade, and good will. I am convinced that, despite logical arguments to the contrary, the debt and reparation problems were in fact closely related. I believe that our unyielding attitude on the debts delayed, at heavy cost to the world, a prompter reaching of a sane solution of the reparation problem, and that persistence in it may render difficult further adjustment of the reparation settlement. I believe the war debts constituted an international problem and were a suitable subject for international conference, not for final decisions but for exchange of views, clarification of thought, discussion of principles, and paving the way for mutually acceptable settlements. I consider that we arrogated to ourselves the right to be the final judges of what was right and expedient, as the Allied Powers did in the case of the Versailles Treaty and as Germany’s reparation creditors did, for several years under French leadership, in the case of German reparations. Except on the ground of capacity to pay, we ignored practically all considerations brought forward by the debtor nations. We used our legal position and our economic power to force certain settlements, notably with Great Britain and France, that fall short of commending themselves to public opinion in allied and neutral countries, and to a small but increasing body of intelligent American public opinion, as eminently fair, reasonable, and, in a large sense, politic. Our policy has been consistent, but consistency is by no means the greatest of vir-tures; indeed intemperance in consistency may be a supreme vice.

I am not a cancellationist. I believe that complete forgiveness of the debts, or pooling of the war costs, or full substitution of Germany as a debtor, would have been quixotic and impolitic. At the same time I believe that we decidedly overemphasized sanctity of contract and underem-phasized the importance of facilitating the restoration of political and economic equilibrium in Europe. On certain grounds, I believe reductions of principal and interest could have been made, in full accord with fairness and sound policy, and with distinctly better results in fact and in feeling.

An exceedingly difficult fundamental question is whether we were morally obligated to regard our war advances as part of our share in the cost of the war. In view of our utter lack of responsibility for the conflict, our unstinted efforts after we entered the war, the huge expenditures we made on our own account—far and away beyond those of any other ally outside of Europe, relatively as well as absolutely—I cannot feel that we can rightly be charged with delinquency. Nevertheless, I believe that our effective participation, except through loans, wras so long delayed, at such heavy cost to our allies in life, effort, and expense, that we were fully justified in regarding a large part of our advances during the war as contributions and not as loans to be repaid. The profits made on the sale of these goods shipped to the allies, the taxes received by our government on these profits, were sufficiently large to justify a more liberal view than we officially adopted on this subject. The recognition of this principle, and reasonable negotiations under it, would have substantially cut down the principal of the debts and removed most of the sense of grievance that is felt in the debtor countries.

Secondly, i believe that a reduction in the principal was warranted by the marked change in the value of money. I believe that we should have adopted the broad principle that we desired repayment of no more in terms of purchasing power than we advanced. This policy would have involved the writing down of the principal, so far as it was not otherwise reduced, by perhaps a third, possibly subject to further adjustment up or down as further significant changes in the value of money should develop.

Thirdly, i believe that the standard interest rates charged on the principal so calculated should have been fixed in principle at the rates at which our government borrows. For several years the Treasury has borrowed at much less than 4V4 per cent, latterly as low as 3 per cent; and it is likely to be able to borrow at still lower rates in the future. This principle was only partially recognized in the settlements.

All of these adjustments would have been entirely in harmony with the spirit in whicli the advances were originally made. We could certainly have afforded to make them, quite voluntarily. Had Ave done so, we should probably have had little occasion to resort to the humiliating and uncertain principle of capacity to pay, except in regard to the distribution of annual payments. Had we gone only so far, I believe the settlements could have been made more promptly, with the substantial good will of the debtors, and with favorable influence on European development. Personally I believe we might well have gone further—at least by remitting entirely interest charges on the principal debt categories for the first few years after the armistice, and in other ways if necessary—and feasible— to promote Europe’s recovery. I believe such settlements could have been carried out, in the main, and that they would have rendered easier other adjustments if and when time and experience proved them advantageous.

Now that the settlements are made, however, it is impracticable to retrace our steps. I think it quite unlikely that any American administration, at all events in the near future, will frankly reverse the position our government has taken, or consent to participate officially in an international conference at which a wholesale revision would be considered. Conceivably the settlements will work as planned. On the other hand, I think it probable that experience will eventually render advisable, if not imperative, various modifications in certain of the settlements. An opportunity may well arise if and when the reparations plan again requires reconsideration. Meanwhile, it will be folly for us to taboo domestic and international discussion of the debt settlements, or to refuse to consider any sort of modi-fication of our policy. Open-minded consideration may well lead, in time and in roundabout ways, to moderation of certain settlements that now appear harsh. For the sake of economic stability and progress and that invaluable intangible asset known as international good will, it is highly important that such readjustments be made smoothly and in good temper, in such a way as to allay prejudice and resentments and to heighten mutual understanding among peoples of different nations.

It is premature to predict the form which future modifications will take. Possibly it will be through a fresh application of the principle of capacity to pay, if actual developments show that this capacity was overestimated. Perhaps it will come through accepting a lump sum in cash (perhaps raised by loans in our own markets) in settlement of some of the later installments, discounted at a higher rate than 3VL> per cent. Perhaps it will come through open recognition of the principle that, since the value of money has increased since the advances were made, we should reduce our claims for money repayment proportionately. Perhaps it will come through a substitution for part of the debts some consideration more valuable than the money payments could be. In any case, we shall do well to avoid a penny-wise, pound-foolish position; to cultivate no further our already excessive pride in our own opinions; and to be ready to propose adjustments instead of having them forced upon us by the logic of events.


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