7. Book of the Debts

BOOK OF THE DEBTS

I

“To wipe out all that”

—RAMSAY MACDONALD

PRIME MINISTER OF ENGLAND

On war debts and reparations, in his election speeches, 1931.

“This crude job jocularly called a settlement.”

—LLOYD GEORGE,

Referring to the British agreement with the United States Treasury, in his book entitled, “The Truth About War Debts And Reparations”, 1932.

In the spring of 1917 the star of Germanity was overcoming. “It cannot be said,” wrote General Pershing in his Final Report, “that German hopes of a final victory were extravagant, either as viewed at that time or as viewed in the light of history. Financial problems of the Allies were difficult, supplies were becoming exhausted, and their armies had suffered tremendous losses. Discouragement existed not only among the civil populations but throughout the armies as well.”

The financial case was desperate. The Allies were staring at the end of their credit.

In March, before the United States had embraced the war, the American Ambassador to Great Britain sent a letter home to his brother, saying: “My staff and I are asking everybody what the Americans can best do to help the cause along. The views are not startling but they are interesting. Jellicoe: More ships, merchant ships, any kind of ships. Balfour: Credits in the United States big enough to keep up the rate of exchange. Bonar Law: Same thing. The military men: An expeditionary force, no matter how small, for the effect of the American flag in Europe.”

What Balfour meant by credits enough to keep up the rate of exchange was anything to support the exchange value of the British pound sterling, or, that is to say, its buying power in other countries, most importantly its buying power in the markets of the United States. Credit—American credit—meant more food, more supplies, more munitions, even the ships Jellicoe wanted. Credit meant everything but man power; and the problem of man power was yet less acute than the problem of credit. A small expeditionary force, if only a regiment, to take the American flag to the front for its effect on their morale—yes, that was very desirable. But first of all, credit.

“By their own admission, at the time we came into the situation, the Allies were at their wits’ end to know which way to turn in order to obtain needed supplies. When the United States opened her pocketbook all was changed. The outcome we know. Our help ended the war. We supplied in almost unlimited volume the munitions required to enable the Allies to go on fighting while we were enrolling and training men. When the armistice was signed we had all but two million men in France. Within six months we would have had twice that number there. To conserve shipping to get these men across, we bought great quantities of munitions in Europe. We paid higher prices for these goods than we would have needed to pay at home, even with the cost of ocean transportation added, but it was better to do this and save shipping for the men.” From “The Inter-Ally Debts,” by Harvey E. Fisk, published by the Bankers Trust Company of New York, 1924.

On April 6, 1917, the United States entered the war, as an associate, not as an ally. This distinction was jealously maintained to the end of the war, through the armistice period and at the Peace Conference.

Four days later the chairman of the Ways and Means Committee introduced in Congress the first Liberty Bond Act with these words: “This bill contains the largest authorization of bond issues ever contained in any bill presented to any legislative body in the history of the world.”

It authorized the Secretary of the Treasury to borrow five billions of dollars on the credit of the American Government; and of this incredible sum of five billions to be raised at once by the sale of Liberty Bonds three fifths was for the purpose of buying at par the bonds of foreign governments at war with Germany. That was the credit the Allies were in desperate need of; and that was the beginning of the war debts. Within two weeks the bill was passed.

The first advance could not wait on the preparation and sale of Liberty Bonds. The United States Treasury borrowed money on its own notes to make the initial loan to Great Britain.

What this meant to Great Britain was described by the notable pen of Ambassador Page in a letter to President Wilson, dated London, May 4: “I heard all the speeches in both houses on the resolution of appreciation of our coming into the war. It wasn’t oratory but it was well said and well meant. They know how badly they need help and they do mean to be as good to us as their benignant insularity will permit. They are changing. I can’t describe the great difference that the war has made to them. They’ll almost become docile in a little more time. And we came in the nick of time for them—very true. If we hadn’t, their exchange would have gone down soon and they know it. I shall never forget the afternoon I spent with Mr. Balfour and Mr. Bonar Law on that subject. They saw blue ruin without our financial help.”

By subsequent acts, as the credit was required, Congress voted seven billions of dollars more from the proceeds of Liberty Bonds to be loaned to foreign governments on their unsecured promissory notes, which were received temporarily in lieu of bonds; always these notes were to be replaced later by bonds running parallel to the Liberty Bonds on which the American Government borrowed the money. The total amount so authorized was ten billions. All subsequent acts, however, were merely extensional. It was understood that our undertaking to provide credit was unlimited and the character of the transactions had been definitely established.

American Treasury loans to foreign governments, beginning in April, 1917, ended in November, 1920, and amounted, net, to somewhat less than eleven billions of dollars. They fall under three main headings, namely:

(a) pre-armistice loans,

(b) post-armistice loans, and

(c) loans after the war for relief, for reconstruction, for mopping up, and to enable European governments to buy a great quantity of surplus American property in Europe. This last named item in France alone was 400 millions.

Direct cash advances from the United States Treasury to foreign governments, pre-armistice, were a little more than 7 billions. Direct cash advances from the United States Treasury to foreign governments, post-armistice, were a little more than 2⅓ billions.

And all of this represented money raised by the American Government both from the sale of Liberty Bonds and by taxation and reloaned to foreign governments. By far the greater part of it was from the proceeds of Liberty Bonds, and those Liberty Bonds are still outstanding in the hands of the American people. Congress never imagined redeeming them out of American taxes. It was taken for granted that the foreign governments were going to redeem the obligations they delivered to the United States Treasury as they got the money; and as they redeemed their obligations the United States Treasury automatically would redeem the parallel Liberty Bonds.

“The indebtedness incurred by the United States to make the foreign loans is not cared for by the sinking fund. Congress contemplated that foreign repayments would provide for that part of our debt.”—Report of the Secretary of the Treasury, 1920, page 64.

II

“A loan should come laughing home”

—OLD PROVERB

As to the character of these American Treasury loans to foreign governments, a controversy that was invented in Europe immediately after the war has continued ever since, with increasing ill-will, confusion of fact and emotional bitterness. Were they by nature formal transactions between nations, subject to the terms and sequels of financial usage, or had they a meaning such as to make interest, accounting, settlement and repayment repugnant? Not now—not since they have come to be invested with feeling from ceaseless dispute and propaganda—but in the beginning how were they understood?

The answer, if it exists, would be found—

(a) in the law itself,

(b) in the contract,

(c) in the attitude of the borrowers at the time, if there is any record of that, and

(d) in the use the borrowers made of the money; that is to say, in facts tending to show whether their use of it was as that of borrowers who mean to pay it back with interest and have therefore full and unlimited rights in it, or otherwise.

The law was explicit.

Section 2 of the First Liberty Loan Act reads as follows:

“That for the purpose of more effectually providing for the national security and defense and prosecuting the war, by establishing credits by the United States for foreign governments, the Secretary of the Treasury, with the approval of the President, is hereby authorized, on behalf of the United States, to purchase, at par, from such foreign governments then engaged in war with the enemies of the United States, their obligations hereafter issued, bearing the same rate of interest and containing in their essentials the same terms and conditions as those of the United States issued under the authority of this Act.”

In bringing this bill before Congress, the Ways and Means Committee of the House made the following unanimous statement:

“It authorizes the purchase with the proceeds from the sale of these (Liberty) bonds of the obligations of foreign governments bearing the same rate of interest and containing essentially the same terms and conditions as the (Liberty) bonds issued under authority of this act. It provides that should any of the (Liberty) bonds of the United States issued and used for the purchase of such foreign obligations be converted into United States bonds bearing a higher rate of interest . . . that in such events the obligations of the foreign governments held by the United States shall be converted into obligations bearing the same rate of interest as the like bonds of the United States. It will, therefore, be observed that the $3,000,000,000 credit proposed to be extended to foreign governments will take care of itself and will not constitute an indebtedness that will have to be met by taxation in the future.”

In the course of debate several objections were raised. One was that we were proposing to buy the obligations of foreign governments at par, whereas their bonds were already selling at a discount. To this the chairman of the Ways and Means Committee replied: “If their bonds have gone down to 80 or 75 or 50 per cent., all the more necessity exists for us to loan them this money at the lowest possible rate of interest, because they are helping to fight our cause.”

Another objection was that the law did not restrain the borrowers in their use of the money; for example, it did not require them to spend the money in this country, nor was there anything in it to prevent them from using money out of the American Treasury to pay off other loans in Wall Street. To this the chairman of the Ways and Means Committee answered: “Why not leave it to them to expend the proceeds in any way which their judgment tells them is the best way to achieve success?” By necessity most of the money would be spent in this country, he said, and as for their using it to pay off other loans maturing in Wall Street, he could hardly conceive of it, and yet: “Why limit or qualify the use of the money?”

There were many emotional passages. That would be expected. Those who showed too much anxiety about the safety of the loans were rebuked by others who said security was not what we ought to be thinking of. Some kept saying the borrowers were fighting our battles. This provoked a gentleman from Pennsylvania to say: “I do not like the suggestion that the reason we propose to lend them the proceeds of our bonds is to reward them for ‘fighting our battles.’ My view is that these foreign governments are fighting their own battles and that we are aiding them. When we lend these foreign countries money we are rendering them an assistance and they are not rendering assistance to us.” A gentleman from Virginia said he wished it were possible to write into the bill a “forbearance and remittance upon any French bonds purchased by the American Government,” and this sentiment was applauded.

In the Senate the debate was of the same pattern.

The facts are that Congress entertained no proposal to treat the loans as gifts or subsidies, nor otherwise at all than as loans, strictly repayable with interest, and that the bill as quoted became a law by unanimous vote in both House and Senate.

All the contracts were formal. There was, however, some deviation from the law. It provided that we were to buy the bonds of foreign governments, their bonds to be parallel in terms and interest to the Liberty Bonds sold by the American Government to raise the money; but there was never time to prepare the bonds, and for that reason the United States Treasury accepted from foreign governments, in lieu of bonds, their promissory notes. This was the note:

“The government of [name of foreign country], for value received, promises to pay to the United States of America, or assigns, the sum of [number of dollars in words] on demand, with interest from the date hereof at the rate of [blank] per cent, per annum. . . . This certificate will be converted by the government of [name of foreign country] if requested by the Secretary of the Treasury of the United States of America, at par, with an adjustment of accrued interest, into an equal amount of [rate] per cent, convertible gold bonds of the government of [name of foreign country], conforming to the provisions of acts of Congress of the United States.

(Signed “By its representative.

“For the government [name of foreign country]”

“Dated the ...... day of .......”

When the direct cash advances ceased, in November, 1920, the American Treasury held such notes to the face value of nearly ten billions. They were separately signed by eleven foreign governments. The principals were—

Great Britain	for	$4,277,000,000
France	for	2,997,477,000
Italy	for	1,631,338,987
Belgium	for	349,214,468
Russia	for	187,729,750

As to the attitude of the borrowers, it is to be said first that never during the war was there any suggestion coming from them that the terms were hard or ungenerous, or that the loans were not loans in a strict financial sense, repayable in full with interest. France explicitly rejected the idea of special treatment, or that she should receive anything as a gift or subsidy.

On April 11, 1917, while the first Liberty Loan Act was pending in Congress, and the gentleman from Virginia saying he wished it were possible to write into the law some “forbearance and remittance” in the case of France, the American Ambassador to France wired from Paris to the Secretary of State in Washington as follows:

“The Premier personally expressed the hope to me that no resolution would be introduced or debated in Congress tending to make a gift to the government of France from the United States, however much the sentiment of good will prompting it might be appreciated by the French people.”

There is more to the same point in this part of the record. Le Matin of Paris published portions of a cable exchange between the French Premier and the French Ambassador to the United States as follows:

“DIPLOMATIE PARIS

April 12, 1917.

“I have just had an interview with the Secretary of the Treasury regarding our financial needs. The amount of $133,000,000 a month drew no observation from him; the amount of $218,000,000 which would be reached by adding our expenses outside the United States, appeared high to him, but it is not impossible that we shall get it. . . . As to the term for repayment, I mentioned (supposing this to be desirable) that of 15 years. Mr. McAdoo said that he had no objection to that

(Signed) JUSSERAND.”

“April 17, 1917.

“I shall do my best in the matter of repayment in 25 years. . . . I believed that I had good reason to suppose that 15 years would be considered satisfactory.

(Signed) JUSSERAND.”

“Paris, April 19, 1917.

“French Ambassador, Washington.

The Minister of Finance insists that the term of amortization shall be 30 years, a normal and minimum term in such operations.

(Signed) RIBOT.”

In the settlements that have been so much disputed about France did receive special treatment. The amount to be repaid was reduced practically to post-armistice loans, and the term of repayment was made, not thirty years, as the French themselves had suggested as the normal minimum in such operations, but sixty-two years. That in its place.

Immediately upon the intervention of the United States as a belligerent, on the side of the Allies, England and France sent missions to this country to discuss cooperation. Head of the British mission was Arthur J. Balfour, Foreign Minister and former premier of Great Britain. His part was diplomacy. With him came Lord Cunliffe, governor of the Bank of England; his part was finance. Head of the French mission was M. Viviani, Minister of Justice; his associate and financial adviser was M. Simon, Inspector of Finance. The first business of these missions was finance.

As part of its campaign to sell Liberty Bonds the United States Treasury, in 1917, issued a long, popular statement telling why we were lending the proceeds of Liberty Bonds to foreign government and the meaning of such loans. The money was not a contribution to the Allies, our associates; it was loaned to them and would ultimately be repaid in full. That view was very positive; also the view that the Allies were perfectly solvent; the only trouble was that they were in need of ready money. And if it should seem that one effect of these loans was to uphold their own trade and commerce, so much the better. It was sound economic policy on our part to assist them to uphold their industrial life and commercial welfare. That made them all the stronger, as belligerents and as creditors.

In these views and representations the foreign missions heartily collaborated. They were undoubtedly sincere; everybody was. It is the record.

“The foreign governments were required by the Treasury to state the purposes to be served in order to enable the Treasury to determine whether they were germane to the purposes indicated by the Liberty Loan Acts and whether and in what amounts credits should be given. The Treasury did not, of course, make expenditures for the foreign governments. It paid to them the purchase price of the securities; and they made the expenditures.”—Report of the Secretary of the Treasury, 1920, p. 69.

But in the view of the American Treasury at the time almost anything tending to promote the morale and welfare of the Allies, even the welfare of their industry and commerce, was considered germane. And this leads to the matter of how the money actually was spent—as if the borrowers had full rights in it because they meant to pay it back with interest, or otherwise.

On page 340 of the annual report of the Secretary of the Treasury, year 1920, exhibit 27, appears the following summary of what they did with the money:

Expenditures:

For—
Munitions for themselves	$ 2,493,610,325
Munitions for other governments	205,495,810
Exchange and cotton purchases	2,644,783,870
Cereals	1,422,476,706
Other foods	1,629,726,803
Tobacco	145,100,821
Other supplies	613,107,429
Transportation	136,083,775
Shipping	173,397,084
Reimbursements	1,872,914,604
Interest	730,504,177
Maturities	648,246,317
Relief	538,188,330
Silver	267,943,389
Food for Northern Russia	7,029,966
Purchases from neutrals	18,718,579
Special credit for Italy against American expenditures in Italy	25,000,000
Miscellaneous	168,530,576
Total reported expenditures	$13,740,858,551

Deduct:

For—
Reimbursements from United States credits to other governments	$ 1,872,914,604
Dollar payments by United States government for foreign currencies	1,490,557,908
Proceeds of rupee credits and gold from India	81,352,908
Total deductions	$ 3,444,824,623
Net expenditures reported by foreign governments
	$10,296,033,927

They did use American Treasury dollars to pay off loans in Wall Street—loans contracted there with private bankers before this country entered the war. That is the explanation of item, “Maturities, $648,246,317”, in the summary above.

Item, “Interest, $730,504,177”, represents, among other things, the payment of interest on their promissory notes at the United States Treasury with the proceeds of new notes—that is, they borrowed money to pay interest on what they had borrowed before, and continued in a punctilious manner to pay interest in that way, so long as the loans continued; when the Treasury stopped lending they stopped paying interest. Paying interest on borrowed money out of that money itself is under certain temporary circumstances a practice understood by finance; the importance of noting it at all is further to indicate the attitude of the borrowers at the time. The transactions were financial in a strict sense, so understood by every one.

Item, “Reimbursements, $1,872,914,604”, represents money borrowed at the United States Treasury by one foreign government to pay back another foreign government. The silver was for India. The other items are generally self-explanatory, with one exception—the largest item of all—namely “Exchange and cotton purchases, $2,644,783,870.”

Commenting on this item, the Secretary of the Treasury, annual report 1920, page 71, said: “In the early stages of the war all commodity purchases by Great Britain were thus merged in exchange, except purchases of munitions and sugar. Therefore, the exchange item in the British statement of expenditures reflected purchases of wheat, food, cotton, leather and oil under [British] government control, as well as all transactions of individual buyers in the United States.”

Any Treasury statement touching this exchange item, or any banker’s statement about it, is bound to be technical, not that the people of finance love to be technical, only that they understand one another better in a language of their own. But what it means is after all quite simple; and it is what Lord Balfour was thinking of when he said to Ambassador Page that the imperative need was for enough American credit to support the exchange—that is to say, the buying power of the pound sterling. Great Britain, remember, had been banker for the Allies since the beginning of the war. Her value to them in that rôle, beyond the fact that she possessed enormous financial resources, was that the pound sterling was the paramount money of the world and that British bankers, from long experience, were the most skillful practitioners of the art of foreign exchange.

Well, what they did here, especially in the “early stages of the war” referred to by the Secretary of the Treasury, meaning early in the period of American participation, was this: Instead of spending the dollars they borrowed out of the American Treasury in a direct manner for American commodities, they spent those dollars to buy the pound sterling (or, as bankers would say, sterling exchange, which comes to the same thing), in the New York exchange market. In one hand they used American Treasury dollars to create British credit with which in the other hand they transacted the business of buying American commodities. But why? Why should they use American dollars to buy sterling exchange, thereby creating British credit to spend, instead of spending American dollars direct for American commodities? Because in that way they could continue to control the international exchange of the world in terms of the pound sterling and uphold the power of British credit. The advantages were very important. For the remainder of the war, the exchange value of the pound sterling, i.e., its buying power, in this country and every other country, was at least one quarter more than its true value; having an unlimited amount of American Treasury dollars to support it with, they were able to “peg” or stabilize it at an artificial value. Thus, wherever in the world the British had to spend pounds they got just that much more for their money. And when the American Government had to buy pounds in London to meet its own war expenses in Great Britain, or to pay the British for transporting American troops to France in British ships, it had to pay just that much more for them and got just that much less for its money. Finally, by thus merging their transactions under the head of exchange, so that they had only to report to the United States Treasury that so and so many dollars had been expended for “exchange”, they gained obviously much more freedom of action.

“It will readily be apparent that completely to analyze the total purchases of exchange is impossible.”—From the report of the Secretary of the Treasury, 1920, page 72, under the heading, “Expenditures Reported by Foreign Governments.”

All the Treasury knew, as the Secretary had said before, was that “the exchange item in the British expenditures reflected purchases of wheat, cotton, leather and oil under [British] Government control, as well as all transactions of individual buyers.” Which means that British credit created in the New York foreign exchange market with dollars from the American Treasury was used not only to buy American commodities for the British Government; to an unknown extent it was used also to buy American commodities for British individuals; in other words, for private account as distinct from public account—a distinction modified only by the view that in such a war as that was, all activities, direct and indirect, were vital, even those of private trade. That, indeed, was the view of the United States Treasury, indicated in its popular bulletin on why we were lending the proceeds of Liberty Bonds to foreign governments. In that view it was a question not so much of what they did with the money as how much we could afford to lend.

“Millions of dollars [of Liberty Loan money] were lent to Great Britain after hostilities had ceased to enable her to build up her export trade. There is no question in regard to these facts, and also in regard to the fact that considerable loans were made to the newer countries to help them get on their feet.”—From “The Inter-Ally Debts,” by Harvey E. Fisk, published by the Bankers Trust Company of New York.

That was quite all right at the time. Whatever the borrowing foreign governments did with their American Treasury dollars was all right, and no question was ever raised about it, so long as they continued to treat the loans in the character in which they were originally understood, meaning loans as such, repayable. But when, after the war, they began to say the only resemblance the loans bore to financial transactions was their legal form, and after they had launched an organized political propaganda, led by the British, for an all-around cancellation of war debts, then the British became extremely resentful of any saying that they had used American Treasury dollars for other than purely war purposes.

On July 14, 1926, Mr. Mellon, then Secretary of the Treasury, wrote a public letter to an American cancellationist to explain, among other things, why in the terms of settlement Great Britain was treated with less leniency than France. In that letter he said: “It must be remembered that England borrowed a large proportion of its debt to us for purely commercial as distinguished from war purposes—to meet its commercial obligations maturing in the United States, to furnish India with silver, to buy food to be resold to its civilian population, and to maintain exchange.”

This drew a hot retort from the British Chancellor of the Exchequer, who, on July 19, 1926, rose in Parliament to say:

“During the period of American intervention over seven billions of dollars were spent by Great Britain in the United States. Of that seven billions we borrowed four and provided an additional three billions from our own independent resources. Regarding commercial maturities, Secretary Mellon must either have been misinterpreted or misled. . . . There has been a great deal of resentment and ill-feeling regarding this debt, and it is very important that this resentment shall not be increased by any misunderstanding of the actual facts.”

The next day, July 20, the United States Treasury issued the following statement in rejoinder:

“From England’s total reported expenditures in America, from April 6, 1917, to November 1, 1920, there should be deducted the $1,853,000,000 expenditures for which Great Britain was simply the purchasing agent for the other allies and for which Great Britain was paid by the other allies from money loaned to them by the United States. This amount was not provided from England’s ‘own independent resources.’ This leaves $5,366,000,000. Of this amount $1,682,000,000 represents ‘exchange and cotton purchases.’ The greater part of this expenditure was for the maintenance of sterling exchange, not necessary for purchases in America, but which enabled England to make purchases in other countries at an undepreciated exchange rate. Then $2,643,000,000 was for food and tobacco. A part of this item is probably included in the account out of which England was reimbursed by the other allies, and a part was resold by England to its own civilian population. To the extent of this resale England avoided the necessity of floating loans in its own country. Then $507,877,000 was for interest and principal of England’s commercial obligations maturing in America, and $261,000,000 was for silver. The total principal advances to Great Britain after the armistice were $581,000,000.”

The British Chancellor of the Exchequer subsided; the next retort came from the British Treasury, not on the facts, but on the interpretation of events. It said:

“Great Britain provided sterling and neutral currencies to meet all her own requirements throughout the war, and in addition, bore the burden of covering the sterling requirements of her continental allies. But for the fact that the United States did not feel able on entering the war to relieve her of that additional burden, Great Britain would have been able to meet from the resources she placed at the disposal of her allies her own expenditures in America, and in all human probability the British debt to the United States would never have been incurred.”

What the British Treasury is saying is this—that if only the American Treasury had loaned France, Italy, Belgium and others the money they needed to spend in Great Britain, they would not have had to borrow anything more from Great Britain after we got into the war. They would have had American dollars to spend in Great Britain, and that would have made it very much easier for Great Britain, of course.

III

“The last gasp of repudiation is the plea that under modern democratic conditions no government which depends upon its people for existence and must rely for its continuance in power on reelection by popular vote can undertake to impose on its people the burden of paying the war debts. I can only comment that if the good faith of governments is to be swallowed up in the bad faith of people, then the world is due for a sad disillusionment.”

—THE HON. BAINBRIDGE COLBY

Formerly Secretary of State in the Wilson Cabinet, speaking against cancellationism, April 13, 1932.

“The question of a general joint adjustment of all debts arising out of the war did not arise until after the armistice. It first appears to have been informally suggested by the British Chancellor of the Exchequer to Assistant Secretary of the Treasury Crosby, who was then in Europe, repudiated by him and apparently dropped for the time being.”—Annual report of the Secretary of the Treasury, 1920, page 63.

The phrase, “and apparently dropped for the time being”, is an example of Treasury accuracy outside of arithmetic. For the debtor governments the situation at that time was extremely delicate. They were politically united against the United States as the great common creditor; the ideal way to make America pay according to her capacity was to involve her at once in a scheme of general war-debt cancellation wherein, as the only ultimate creditor, she would be the only ultimate loser; and it was important to advance immediately upon this object while the American mood was extravagant, and if possible imbed it in the peace treaty. But, on the other hand, they were still borrowing American Treasury dollars on post-armistice account. If they moved too fast, the American Treasury might become suddenly realistic and close the book.

On January 15, 1919, the French High Commissioner in the United States addressed a letter to the Secretary of the Treasury, saying:

“The financial relations among the Allies, brought about by the war, are closely interwoven. The British and French governments have both borrowed from the United States; but France is also a debtor of England. The French and Italian governments have both borrowed from the United States; but Italy is also a debtor of France. Although a debtor of the United States and of Great Britain, France has loaned about 10,000,000,000 francs to its allies. It appears to my government that, if the future adjustment of such mutual accounts is to be made the object of separate and distinct agreements, privileged situations might arise to the prejudice of some of the governments concerned. . . . In short, the French Government looks upon these questions as concerning all the allies and demanding a general and simultaneous settlement.”

To this the Secretary of the Treasury replied:

“I agree with you that where two or more of the associated governments have made loans to the same government none should seek any unfair priority or advantage over others in terms of payment, . . . only Great Britain, besides the United States, has made loans to France; and I do not anticipate that the treasuries of the respective countries will have any difficulty in arriving at arrangements which will be equitable and free from discrimination.”

A few days later the American Treasury heard that at a meeting of the Financial Drafting Committee appointed by the Council of Ten at the peace conference in Paris the French member, M. Klotz, had supported the proposal that a consolidation and reapportionment of war debts be one of the peace table questions; and the Assistant Secretary of the Treasury in a letter of March 8, 1919, asked the Deputy French High Commissioner in Washington if that was so, saying: “You will appreciate that the Treasury cannot contemplate continuance of advances to any allied government which is lending its support to any plan which would create uncertainty as to its due repayment of advances made to it by the United States Treasury.”

The Deputy French High Commissioner replied, saying this had been an Italian proposal in Paris and the French member of the Financial Drafting Committee had been only polite enough not to throw it out of the window. “Furthermore,” he said, “with reference to the attitude of the French officials toward the principle involved in this question, the French Government never made any declaration favoring either the Italian proposition or any other similar proposition.”

This exchange between the United States Treasury and the Deputy French High Commissioner, in 1919, will be found reprinted in the annual report of the Secretary of the Treasury, year 1926, page 66, together with the following very dry comment:

“It is to be noted that Assistant Secretary Rathbone’s letter of March 8, 1919, to Mr. de Billy, Deputy French High Commissioner, stated that the Treasury could not contemplate continuance of advances to any allied government lending its support to a plan which would create uncertainty as to its due repayment of advances made to it by the United States Treasury. Mr. de Billy, in his reply of March 18, 1919, removed this uncertainty as to due repayment. The cash advances of the United States to France subsequent to March 18, 1919, aggregated $690,000,000, and in addition there was an indebtedness of $407,000,000 incurred by France to the United States in the purchase of war stocks, a total of approximately $1,100,000,000.”

Nothing more was heard from the French for a long time. From there the British went on with it.

Out of place in the chronology, yet illuminating at this point, are two notable contributions in the American point of view. One is a letter from Norman H. Davis, Assistant Secretary of the Treasury, to President Wilson, dated February 23, 1920 (reprinted in Senate Document Number 86, December 6, 1921), as follows:

“I have for some time suspected that the loans made by England to France and Italy have not the same standing as our loans to the Allies. I recall that Mr. Lloyd George told me England could not afford to force these countries to pay her. Article XI. of the Pact of London states: ‘Italy shall receive a military contribution corresponding to her strength and sacrifices.’ I do not know what this means. It most probably has a direct relation to the obligations of the Italian Government now held by the British Government, and it may well be that the British desire a general cancellation of inter-governmental war debts as a means of discharging secret treaty provisions. If such is the case the British might thus in a great part at our expense discharge their treaty obligations.”

Another is from the Honorable Oscar F. Crosby, who as Assistant Secretary of the Treasury, had intimate contact with all these matters both here and in Europe. It was he to whom the British Chancellor of the Exchequer first suggested a pooling of war debts. Out of his experiences in Europe Mr. Crosby wrote:

“. . . Complex, not simple, relations exist between European countries. Money considerations, territorial transfers, commercial privileges—all these are in constant flux. Among allies, trading is the order of the day. It begins often long before hostilities, continues during the war, is most active at the peace table, and may be protracted during years of adjustment after the war. . . . The money problem between France and Great Britain is only one of many problems arising between them, and it is quite to be expected that France will use every asset, political or material, which may be available in a perfectly legitimate trading process. . . . It is quite possible that while the shuttle is weaving to and fro through these various threads, Great Britain, without waiting for the long-drawn end, may decide to make a gesture of generosity, proposing to cut her claims against France if we will but move pari passu with her. . . . And if we decline this sort of proposition, again we play the role of the hard-hearted person, etc., to both the British and the French man in the street.”

And this turned out to be an amazingly perfect forecast of the celebrated Balfour note, in which the British debt policy has ever since been grounded.

War-debt cancellation became a forbidden subject at the peace conference table; nevertheless, representatives of the British Treasury developed that theme in all the margins. After the peace conference, on February 4, 1920, one of them, Mr. Blackett, wrote to the Assistant Secretary of the United States Treasury, saying: “. . . And as you are aware, the Chancellor of the Exchequer expressed himself ready to take any steps toward relieving the governments which are debtors to the British Government of the burden of their debts which the United States Treasury might feel able to propose in regard to the obligations of the governments which it holds.”

Then on February 9, 1920, the British Embassy in Washington delivered to the American Treasury a message direct from the British Chancellor of the Exchequer in which he said, flatly: “We should welcome a general cancellation of intergovernmental war debts.”

To this the Secretary of the Treasury, on March 1, 1920, replied in parts as follows:

“Of course I recognize that a general cancellation of such debts would be of advantage to Great Britain and that it would probably not involve any losses on her part. As there are no obligations of the United States Government which would be cancelled under such a plan, the effect would be that, in consideration of a cancellation by the United States Government of obligations which it holds for advances made to the British Government and other allied governments, the British Government would cancel its debts against France, Italy, Russia and her other allies. 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. . . . A general cancellation as suggested would . . . throw upon the people of this country the exclusive burden of meeting the interest and of ultimately extinguishing the principal of our loans to the allied governments. This nation has neither sought nor received substantial benefits from the war. On the other hand, the allies, although having suffered greatly in loss of lives and property, have, under the terms of the treaty of peace, and otherwise, acquired very considerable accessions of territories, populations, economic and other advantages. It would therefore seem that if full account were taken of these and of the whole situation there would be no desire nor reason to call upon the government of this country for further contributions.”

Thus the British Treasury came to an impasse with the American Treasury. Further exchanges were futile. The next step was much higher. On August 5, 1920, the Prime Minister of Great Britain, Mr. Lloyd George, wrote to President Wilson about the debts as follows:

“I come now to the other question I wish to write to you about, and that is the knotty problem of interallied indebtedness. . . . The British and French governments have been discussing during the last four months the question of giving fixity and definiteness to Germany’s reparation obligations. The British Government has stood steadily by the view that it was vital that Germany’s liabilities should be fixed at a figure which it was within the reasonable capacity of Germany to pay. . . . After great difficulties with his own people, M. Millerand found himself able to accept this view, but he pointed out that it was impossible for France 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. This declaration appeared to the British Government eminently fair. But after careful consideration they came to the conclusion that it was impossible to remit any part of what was owed to them by France except as part and parcel of all-round settlement of interallied indebtedness. . . . Accordingly, the British Government has informed the French Government that it will agree to any equitable arrangement for the reduction or cancellation of interallied indebtedness but that such an arrangement must be one that applies all round. . . . I should very much welcome any advice which you might feel yourself able to give me 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.”

This is perhaps the most significant one document in the whole record. The word of the British Prime Minister that France will agree to accept reparations in a sum within the reasonable capacity of Germany to pay, only provided the creditors of France forgive France her debts to them; and this seems eminently fair to the British Government, provided the American Government will forgive all of them their debts to the United States Treasury.

President Wilson replied to the Prime Minister of Great Britain as follows, November 3, 1920:

“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. . . . The United States Government . . . 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.”

President Wilson’s letter produced nearly two years of official silence. But in place of all the political and economic arguments that had failed was substituted an emotional propaganda, unprecedented in volume, intensity and ramifications, in the press of Europe, in the press of the United States, in subsidized books, in public and parliamentary speeches, on the American lecture platform by visiting Europeans—all with the effect, if not with the deliberately organized intent, to raise against this country a tide of injurious feeling. This was the Shylock nation, insisting upon the value of its dollars against the lives Europe had poured out in a common cause. And all this time Europe’s promissory notes lay fading in the vaults of the United States Treasury. The debtor governments ignored them. They had not been funded into long-term bonds, as the contract was; not a dollar of interest had been paid.

Suddenly, in July, 1922, all the anti-American feeling thus prepared in Europe was gathered up and fixed in the famous Balfour note, which for both literary style and subtlety of dialect is one of the fine examples of demagogic statescraft in the political papers of the English language.

Lord Balfour was then Acting Secretary of State for Foreign Affairs. He addressed his note to France and then separately to each of Great Britain’s debtors. The policy favored by the government of Great Britain, he said to them, was “that of surrendering their share of German reparations and writing off through one great transaction the whole body of inter-allied indebtedness.” Now, with “the greatest reluctance”, with “distaste”, Great Britain was obliged to adopt another policy, and the reason for this was that the American Government was demanding the payment of Great Britain’s debt to the United States Treasury. Thus, Great Britain was “regretfully constrained” to ask her debtors to pay, but the amount she would ask them to pay would depend not on what they owed Great Britain but on what Great Britain would have to pay America.

“In no circumstances,” said Lord Balfour, “do we propose to ask more from our debtors than is necessary to pay our creditors, and while we do not ask for more, all will admit that we can hardly be content with less, for it should not be forgotten, though it sometimes is, that our liabilities were incurred for others, not for ourselves.”

Then he explained why it had been necessary for Great Britain to incur its debt to the United States Treasury for others, not for itself. The reason was that “the United States insisted, in substance if not in form, that though our allies were to spend the money it was only on our security that they were prepared to lend it.”

Thus was it laid eminently upon the mind of Europe that there would be no reparations for Germany to pay, no war debts for one government to pay another, but for the fact that the American Government was demanding its war dollars back; and laid at the same time upon the mind of England that the entire British debt to the United States Treasury arose from the fact that the American Government during the war had been willing to lend its dollars to the Allies only on the guarantee of Great Britain.

The American reaction to the Balfour note was one of deep astonishment. The American Ambassador to Great Britain in a speech at the Pilgrim’s Dinner said he did not doubt that the British Government itself would remove the misapprehensions created by Lord Balfour. The British Government was silent. But Lord Balfour replied to the American Ambassador in a public statement, in which he said:

“The American Ambassador, as I understand it, regards the financial arrangements between partners in the great war as so many isolated undertakings to be separately considered and carried through one by one. . . . I am myself inclined to a somewhat less commercial view. . . . I do not propose to criticise those who differ from me, but one final observation I will make on this matter. If, as I suppose, it is the first of these competing views which commends itself to public opinion in the United States, the unconditional and uncontested legal rights of that country could not have been enforced in a manner less likely to injure the happy relations which I am glad to say prevail between the two peoples.”

As for Lord Balfour’s statement that Great Britain’s debt to the American Treasury was incurred for others, not for itself—this is merely a refinement returned upon the British Treasury’s original thesis, namely, that if the American Treasury had loaned France, Italy, Belgium and others all the dollars needed to meet their expenditures in Great Britain, then it would not have been necessary for them to borrow anything more from Great Britain; they would have been able, instead, to buy in Great Britain with American dollars and Great Britain would have had more dollars to spend in the United States.

In a statement to the Associated Press, March 9, 1923, the Honorable Oscar T. Crosby, Assistant Secretary of the Treasury during the war, said: “Lord Balfour says: ‘We explained to the American Government that we should be able to find all the dollars necessary to purchase our own war materials without borrowing from the United States or anybody else.’ Certainly no such statement came to my knowledge. On the contrary, the need of borrowing dollars for British requirements here (and even in neutral countries) was always in the forefront in my contact with the subject.”

Then as concerning Lord Balfour’s statement that “the United States insisted, in substance if not in form, that although our allies were to spend the money it was only on our security they were prepared to lend it”,—simply, it was not so. The record says it was not so. Every Secretary of the Treasury, then and since, has said it was not so. The policy of the United States Treasury was to make loans to foreign governments separately, to each on its own security. This was explicit. Lord Balfour himself must have forgotten that eighteen months before he wrote this misapprehension into his celebrated note, the British Chancellor of the Exchequer, rising to an interrogation in the House of Commons (February 22, 1921), declared: “No loan made by the United States Government to allied governments was ever guaranteed by us.”

The London Economist, which ranks first in Great Britain if not in the world among economic journals, had the gaunt and solitary honesty, (February 14, 1925), to say: “The Balfour note endeavours to create the impression that our payment to America is not part of the war costs chargeable against Great Britain at all, and does so by making two false suggestions. The first is that our borrowings in America were not for our own use, when, in fact, they were largely spent upon feeding our own people; the second is that America, unwilling to lend to our Allies, handed the money to us to pass on to them, whereas, in fact, the United States was lending to the European Allies £1,315 millions while she was lending Great Britain £940 millions. . . . There is no special characteristic of our American debt that differentiates it from other war costs.”

But the emotional power of the Balfour note was terrific. If he was contemptuous of facts, he was even more contemptuous of money and exchange, and of consistency, too, for this was the same Arthur James Balfour who had said to Ambassador Page in 1917 that what they most needed was enough American credit to support the British exchange. Now, when it is all over, as Lord Balfour, Acting Secretary of State for Foreign Affairs, he says:

“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 still are 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 the great purpose common to them all, and that purpose has been in the main accomplished.

“To generous minds it can never be agreeable, although for reasons of state it may perhaps be necessary, to regard the monetary aspect of this great event as a thing apart, to be torn from its historical setting and treated as no more than ordinary commercial dealing between traders who borrow and capitalists who lend.”

This passage had endless reverberations in this country; and then when British publicists began to orchestrate the Balfour theme with variations such as this from the brilliant J. M. Keynes—

So long as America was sending materials and munitions to be used by Allied soldiers, she charged us for them and these charges are the origin of what we now owe her. But when later on she sent men, too, to use the munitions themselves, then we were charged nothing. Evidently there is not much logic in a system which causes us to owe money to America, not because she was able to help us so much but because at first she was able to help us, so far at least as man power was concerned, so little.

—there were many Americans, some unfamiliar with, the facts, on whom the impression was the effect intended.

Indeed, the one valid ground, if any, on which to cancel war debts all around, would be that it was a common cause in principle as represented in Lord Balfour’s exalted language, a cause above money, above spoils, above advantage, then and afterward, and that it was so treated by all the nations engaged, save only the United States. In that case we should be ashamed. But was it in that case?

“Until the war ended no intimation was made that these advances were subsidies, or that they were contributions to a joint cause, or that they would be the subject of a general pooling after the war.”—Secretary of the Treasury, under the heading, “Obligations of Foreign Governments”, annual report 1926, page 60.

During the war, for obvious reasons, the Allies found it necessary to make large expenditures in the countries of one another. Before we entered the conflict, the rule among them was that so far as possible each one loaned the others the money the others needed to spend in its own country. Thus, England loaned her allies the pounds sterling to meet their expenditures in the British Empire, France loaned her allies the francs they needed to meet their expenditures in France, and so on. The result would be that after the war all would have claims against one another for money so loaned; then claims would cancel claims, by a simple clearing of credits and debits, leaving only the net balances to be considered.

When we entered the war the United States Treasury embraced that principle. It undertook to lend the Allies all the dollars they needed to spend for food, munitions, supplies and services in this country. But, on the other hand, the Allies never extended that principle to us. To meet our own war expenditures in the British Empire we were obliged to buy pounds sterling, and we paid for them in cash. To meet American war expenditures in France, which were enormous, the United States Treasury was obliged to buy francs, and it paid for them in cash. The same in Italy; the same everywhere. The United States was lending dollars to Great Britain, France, Italy and others to meet their expenditures in the United States and at the same time buying for cash the pounds sterling, the francs, the lire, etc., to meet our own expenditures in those countries. Moreover, the cost to us of those pounds and francs, etc., was greater because in the New York Exchange market the British were using dollars out of the American Treasury to hold the pound sterling at an artificial value; and the French on a smaller scale were doing the same thing with the franc.

“For its own purposes in Great Britain, France and Italy the United States did not borrow pounds or francs or lire. Our Treasury was obliged to procure these currencies for the use of our Army abroad. We bought pounds, francs and lire from the governments of Great Britain, France and Italy and made payment therefor in dollars here.”—Assistant Secretary of the Treasury Rathbone, annual report of the Treasury, 1926, page 61.

“We purchased supplies and services from France and the British Empire by hundreds of millions. They had to be paid for in francs and in pounds. We did not get those francs and pounds on credit; we paid cash for them. . . . In other words, we paid cash for the goods and services necessary to enable us to make our joint contribution to the common cause. Our associates got the goods and services purchased in this country to enable them to make that part of their joint contribution on credit. Here is the fundamental reason which explains why we ended the war with every one owing us and our owing no one. We are now urged to cancel these debts because it is alleged that they were incurred in a common cause. Neither abroad nor in this country has it been suggested that if this is to be done, we are to be reimbursed the dollars actually expended by us in France and Great Britain, so that the goods and services they sold to us might constitute their contribution to the common cause. . . . Among the purposes for which we made dollar advances was that of maintaining the franc and the pound at somewhere near their normal values. In other words, we loaned our associates the dollars with which to purchase bills on London and Paris and so permit them to peg the exchanges. When we were obliged to buy francs and sterling for our own uses in the Paris and London markets we did so at the artificial prices maintained by the use of the very funds we had loaned.”—From a letter by the Secretary of the Treasury, Mr. Mellon, to certain Princeton Professors, March 15, 1927.

It has still to be mentioned that the goods and services bought in this country with borrowed dollars by the Allies were bought at controlled prices. They paid only what the American Government paid for like goods and services. But the goods and services bought by the American Government in allied countries for cash were bought at uncontrolled or civilian prices.

There is a kind of indecent plausibility in saying that when we sent supplies and ammunitions to the Allies we charged for them, whereas when we sent man power to consume our own supplies and ammunition we charged nothing, so that now when we talk of collecting a debt owing us for supplies and ammunition, we seem to be setting a value upon things over the value of the lives we ourselves were willing to contribute.

When we began to send man power into the allied countries—no, we did not charge for that. We were charged for it.

We were charged for moving American soldiers across the sea in British ships; we bought pounds sterling with dollars and paid cash for that British service. We were charged port dues for landing ships in French harbors—ships bearing our own munitions and supplies; we bought French francs with dollars and paid cash for the right to enter. We were charged for moving American soldiers, American munitions and American supplies on French railroads to the front; we bought francs with dollars and paid cash for the privilege of getting our man power and equipment to where the war was. Everything the Allies got in this country they borrowed; for everything we got in the allied countries we paid cash. Never through all the tumult about war debts has this detail of truth been mentioned by the allied governments to us, nor by any of them to their own people.

Where was Lord Balfour’s common cause, above money or advantage? Where was it among the Allies themselves? The peace conference was a terrific struggle for advantage. The English thought France got it.

Certainly ideas of separate advantage in a very ancient sense governed the Allies when they were dividing among themselves by trade and barter more than a million square miles of former German territory in Asia and Africa and all the property of both the German Government and its nationals that was lying about the world, and then islands of strategic importance in the Pacific which naturally belonged to the naval frontier of this country. None of this we touched. But when, after rejecting the Treaty of Versailles, we had made a separate peace with Germany and appeared with certain claims against her for specific damage to persons and property, such, for example, as claims arising from the Lusitania case, the Allies took the position that we could not collect anything from Germany because their claims upon her for more reparations than she could pay had priority over any claims of ours.

IV

As concerning payment, the dollars left in Europe by American tourists in one average year would much more than pay Europe’s total annual obligation to the United States Treasury.

—DATA FROM THE DEPARTMENT OF COMMERCE

The American Treasury closed its till to foreign governments in November, 1920, more than two years after the armistice. The last advance was one of $10,000,000 to France. But that was not the end of foreign borrowing. The foreign governments turned from the American Treasury to Wall Street and began to borrow there out of the private American reservoir. Their access to it was very free. They borrowed in Wall Street, on their bonds, for every conceivable purpose—for public works, for reconstruction, to avoid increasing taxation at home, to postpone balancing their budgets and to support their inflated currencies.

At this point the remnants of rationality appear to depart. Those who denounce America as a Shylock nation because we expect them to honor their debts to the American Treasury are at the same time borrowing more and more American capital in Wall Street! And this was the beginning of those enormous private loans to Europe which became in a few years so large that Europe could say, which now she is saying: “We cannot pay both our private debt to the United States Treasury and our debt to the American investor. Which will America have?”

Before the public till had been closed to foreign governments the Secretary of the Treasury, in a letter to the British Chancellor of the Exchequer, March 8, 1920, had said: “Since the armistice this government has extended to foreign governments financial assistance to the extent of approximately four billions of dollars. 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 for the payment of either principal or interest.”

Then at last, when it had cut them off, the American Treasury declared a three-year moratorium on their obligations and reminded them of their undertaking, on the request of the Secretary of the Treasury, to convert their hasty promissory notes into long-term bonds parallel to the Liberty Bonds the American Government had sold to raise the money. The only response to this reminder was the onset of that propaganda for debt cancellation which crystallized itself in the Balfour note.

For a year after the Balfour note nothing new happened, except that Reginald McKenna, a former Chancellor of the British Exchequer, came before the American Bankers’ Convention in New York with the unexpected thesis that the war debts were beyond the capacity of any debtor country to pay, Great Britain alone excepted. She could pay; in her accumulated foreign investments she had adequate resources out of which to discharge her debt to the United States Treasury. But that was not the point. If all the debtor countries could afford to pay as well as Great Britain, still the United States could not afford to receive payment, because, of course, she would have to receive payment in foreign goods and such enormous payments in the shape of foreign goods would ruin American industries.

That idea, too, like all European ideas, found fertile ground to fall upon; and although the area was not large, the intensive cultivation of it brought forth from this seed a very large crop. We have never since been rid of the curious fallacy that a creditor nation in our case cannot afford to receive payment. The argument has become familiar. The principal of great debts cannot be paid in gold; in the whole world there is not enough gold for that purpose, and, besides, that is not what gold is for. Therefore, debtor nations must pay their debts in goods. But since we set tariff barriers against the incoming of foreign goods, and do this because we are in the manufacturing business ourselves, how can we expect our debtors to pay us in goods? If there were no tariff barriers, they might be able to pay us in goods, but that would only invert the problem, for to receive the goods would ruin our own industries.

A more muddled argument was never imagined. Our debtors cannot pay unless we remove our tariff barriers. It stands thus on a free-trade leg. But if we remove the tariff barriers and let them pay, our unprotected industries will be ruined. It stands then on the leg of high protection. Perceive that if this were sound as a proposition in economics it would have to hold for the payment of international debts in principle, not war debts only; and that if it does so hold in principle, international debts as such are reduced to a logical absurdity. But to save the reason it is necessary only to set an adjective before the word goods.

It may be true, probably is true, that a nation in our case, or in England’s case, cannot afford to receive payment in competitive goods. The illuminating fact is that only about four tenths of the international trade of the world runs in competitive goods; the other six tenths is in noncompetitive goods, the exchange of which may be increased to any degree with mutual benefit. England is the great creditor nation. Her foreign investments are much larger and older than ours. She has never discovered any logical difficulty about receiving payment from her debtors. She was for a long time a free-trade nation, with no tariffs against foreign goods because her industry at first and for a long time was without any effective competition in the world. Her debtors did not pay her in cutlery such as she made herself at Sheffield, nor in textiles such as were made at Manchester, nor in coal, of which she had a surplus; but she was very willing to receive payment in such commodities as iron ore, raw cotton, raw wool, hides and wheat. Conditions have changed. English industry now demands protection against competitive foreign goods. So the theory of free trade is abandoned; British tariffs, like American tariffs, begin to rise, and yet you will not hear British bankers saying that for this reason Great Britain’s debtors will be unable to pay her, or that Great Britain cannot afford to receive payment.

Say that we could not afford to receive payment from Great Britain in motor cars. That may be quite true. It would injure our motor-car industry, provided British motor cars were cheaper than ours. But we are quite willing to receive payment in British tin, of which we have no source of our own, in British rubber, in British jute, and so on. Moreover, there are immense triangular transactions in foreign trade, as when Great Britain sells motor cars in Brazil and Brazil sells coffee in the United States. Brazil settles with Great Britain for the motor cars with a coffee credit in New York; and Great Britain, if she likes, may use that coffee credit to pay an instalment of her debt to the United States Treasury. The only sense in what Mr. McKenna said to the American bankers was this,—that a creditor nation will not be benefited by receiving payment from its debtors in goods it does not want. That was, after all, not a very startling idea; it failed perceptibly to advance the European cause of debt cancellation.

So in 1923 the British Government sent a mission to Washington to settle Great Britain’s debt. It was settled for eighty cents on the dollar. This was the first and highest of the principal settlements.

And it was made with the World War Foreign Debt Commission. This was a body that had been created by Congress to settle with the debtor countries, according to the capacity of each one to pay, not according to the contract. On January 4, 1926, the Secretary of the Treasury, speaking as chairman of the Debt Commission, made the following statement to the Ways and Means Committee of Congress on the settlements in general and the Anglo-American agreement in particular:

“Since foreign debt settlements do not seem to be clearly understood, I wish to mention some rather elemental facts. The obligations held by the Treasury [the original promissory notes of the foreign borrowers] generally call for payment on demand, and such payment cannot be made. We must find practical terms. Now, if we are owed $62 and payment is made to-day we receive the full value of our loan. If payment is made at the rate of $1 a year for 62 years without interest we would be conceding a part of the debt. What this concession amounts to can be variously estimated depending on the rate of discount arbitrarily taken. If we used 4¼ per cent., the present value of a $1 annuity for 62 years is a little over $21; if we use 3 per cent, its present value is $28. If, however, instead of $1 a year for 62 years without interest we should charge interest at the cost of money to us, we get the full value of the loan, since we could borrow the $62 to-day, pay interest on the borrowing, and repay the principal as annuities are received. From the United States standpoint, therefore, the question of whether a particular settlement represents a reduction in the debt depends on whether the interest charged over the entire period of the agreement is less than the average cost to us of money during that period. The flexibility in debt settlements is found in the rate of interest to be charged. . . .

“Great Britain was the first nation to recognize the desirability of putting its house in order. Great Britain owed us some $4,600,000,000 of principal and interest on its demand obligations. The American Debt Commission recommended a settlement on the basis of principal payments over a 62-year period, with interest at the rate of 3 per cent, per annum for the first 10 years and 3½ per cent, thereafter. Congress has approved the settlement. Taking into account the current interest rate when the settlement was made, the British agreement does not represent payment in full. If we figure the present value of the settlement at 4¼ per cent, we cancelled 20 per cent, of the debt. The settlement, however, was entirely based on our estimation of Great Britain’s capacity to pay. It is a precedent for the recognition of the principle of capacity to pay and is not a set formula to control other cases of substantially less capacity.”

Finland was the very first to settle; but she was in the class of post-armistice borrowers only. Of the principal debtors Great Britain was the first to settle. Her anxiety was to restore the pound sterling to a gold basis; and for that purpose, after having made terms with the American Treasury, she borrowed $300,000,000 gold in Wall Street.

“The largest banking credit ever formed for the benefit and use of a foreign nation during peace times was established yesterday in New York. It was $300,000,000, or three times the amount of the Bank of France credit set up one year ago. Of this British credit, $200,000,000 was taken by the Federal Reserve Bank and $100,000,000 by the private banking firm of J. P. Morgan and Company. Both items in this credit were arranged for the Bank of England and through it for the British Government. The purpose was to facilitate Great Britain’s return to a gold basis. . . . Sympathy will be shown by this government to any effort to aid the British Government in its attempt to keep its currency at par. It is understood here that purchases by the New York Federal Reserve Bank of sterling on the open market will receive Treasury approval.” —New York Times, April 29, 1925.

On the day before, the British Chancellor of the Exchequer, in a budget speech before the House of Commons, said:

“Finally, although we believe we are strong enough to achieve this important change from our new resources, and as a further precaution to make assurance doubly sure, I have made arrangements to obtain, if required, credits in the United States of not less than $300,000,000, with the possibility of expansion if need be. . . . These great credits across the Atlantic Ocean have been obtained and built up as a solemn warning to speculators of every kind and in every country of the resistance which they will encounter and of the reserves with which they will be confronted if they attempt to disturb the gold parity which Great Britain has now established.” [Cheers.]

For two years more the other principal debtors, France, Italy and Belgium, continued to ignore the existence of the World War Foreign Debt Commission in Washington, continued to ignore their promissory notes in the vaults of the American Treasury, continued also to borrow heavily in Wall Street out of the private American reservoir.

Then—

“As a matter of administrative policy it was determined to deny recourse to our money market by the debtor nations or their nationals until the nation negotiated a settlement of its debt to the United States.”—From a letter by the Secretary of the Treasury to the President, annual Treasury report, 1926, page 214.

This is to say, the American Government announced that a foreign government refusing to recognize its debt to the American Treasury should no longer have access to the private American reservoir, neither that government nor its nationals. After this, if they came to Wall Street seeking new loans, Wall Street was obliged to say to them: “Sorry, but you will have to see the United States Treasury first.”

That brought them all to Washington, and for the next two years the Debt Commission was very busy. As they settled with the American Treasury the ban was lifted and they resumed their borrowing in Wall Street. Italy, on her way home from Washington, where she had settled with the Treasury for twenty-six cents on the dollar, stopped in Wall Street and borrowed $100,000,000 at the market price. The last debtor but one to settle was France, in 1926. The very last was Yugoslavia.

No debtor settled in full. In each case the debtor laid before the Debt Commission a statement of its condition and resources and the Debt Commission, in collaboration with the debtor, thereby arrived at an estimate of what it could pay. There was a fiction in each case that the debtor should be able to say it had discharged the principal in full, and for that reason the sixty-two graduated annual payments, beginning small, were in an arbitrary manner divided between principal and interest—the interest very low or nominal—in order that the column showing payments of principal might add up to the full amount. But in every case the cost to the American Treasury of the money raised for these loans by the sale of Liberty Bonds was more than the rate of interest charged in the settlements. The rough result of the principal settlements, that with England alone excepted, was that we should get back in full with interest only what we had loaned after the armistice.

“Let us see what relation the burden of our debt settlements bears to our loans after the armistice. . . . In the case of England, post-armistice advances with interest amounted to $660,000,000, and the present value of the entire debt settlement is $3,297,000,000. It must be remembered that England borrowed a large proportion of its debt to us for purely commercial as distinguished from war purposes.

“France’s after-the-war indebtedness with interest amounts to $1,655,000,000. The settlement negotiated by Ambassador Bérenger with the American Debt Funding Commission has a present value of $1,681,000,000.

“Belgium’s post-armistice borrowings with interest were $258,000,000, and the present value of the settlement is $192,000,000.

“With Italy the situation is similar. Its post-armistice indebtedness with interest is $800,000,000 and the present value of its debt settlement is $426,000,000. It is the same as regards Serbia.”—Secretary of the Treasury, annual report 1926, page 261.

Given a rate of interest, the present or cash value of a series of annuities is an actuarial finding. It can no more be disputed than the table of interest. Present value, as used by the Secretary of the Treasury above, means simply the value of these settlements in the impossible case that the American Treasury could have found some one to take all those funded foreign government obligations off its hands for cash—some imaginary investor with that sum of money to invest, who could believe the instalments would be paid to the end in punctual manner and that 4¼ per cent, was a fair rate of interest for sixty-two years. On that basis of calculation you could say that Great Britain settled for eighty cents on the dollar, France for fifty cents and Italy for twenty-six cents.

The settlements were criticized, by some on the ground that they were too lenient, by others on the ground that they were too hard, and by others on the ground that they were unequal. The cancellationists were most vocal, saying the settlements were too hard.

“It is assumed that generosity did not enter into the negotiations of the Commission. It certainly was very lenient to Italy and it cannot be condemned as harsh to France when there is imposed no greater burden on that nation than the collection of the post-armistice indebtedness at five per cent, interest. French papers admit the Franco-British settlement, all things considered, is much more burdensome than the Franco-American settlement. No test of generosity is set up by the Columbia professors, but it is just assumed America was ungenerous.

“The Columbia professors complain because all debtors were not treated on an equality. They speak of a settlement of eighty per cent, present value with Great Britain and twenty-six per cent, present value with Italy. Do they propose to correct this want of equality by raising the Italian settlement to that of the British, which of course would impose a burden impossible of performance by Italy, or do they propose that the British be reduced to fifty per cent, and the Italian raised to fifty per cent., which would make an easy settlement for Great Britain and still an impossible settlement for Italy, or do they propose that the British settlement shall be brought down to the Italian twenty-six per cent., thus imposing no real burden on England at all? If the last is their proposition, then why cannot Italy say its twenty-six per cent, should be reduced to zero, because we are collecting nothing from another debtor, as, for instance, Armenia?”—From a letter by Senator Smoot, a member of the World War Foreign Debt Commission, to certain Columbia professors, December 20, 1926.

Then after all, the settlements settled nothing. European invective against this country for wanting its war dollars back went on as before; it never for one day ceased. The only change was one of tense. Before the settlements, it was that Europe would be ruined if she had to pay; afterward, as payments began to be made, the ruin of Europe was taking place.

It was with the assistance of American credit in Wall Street that Great Britain in 1925 restored the pound sterling to the gold basis. “By bringing sterling exchange to parity,” said Senator Smoot, chairman of the Senate Finance Committee, “England in paying its adverse international trade balance saves each year more than the annuity on the American debt.”

Nevertheless, within a year from the date of the budget speech in which he had referred so dramatically to the use and value of “those great credits across the Atlantic”, the British Chancellor of the Exchequer rose again in the House of Commons and said this gratuitous thing:

“When France and Italy have funded their debts, both to this country and to the United States, and when other minor powers have funded their debts, it is clear that the United States will be receiving, directly and indirectly, on her own account from reparations, from Italian sources balanced against reparations, from British sources, from French sources through British hands and from Italian sources through British hands, by far the larger part, at least sixty per cent., of the total probable reparations of Germany. An extraordinary situation will be developed, that by all these chains and lines and channels, the pressure of debt extraction will draw reparations from the devastated and war-stricken countries of Europe, and they will pass in an unbroken stream across the Atlantic to that wealthy and prosperous and great Republic. These facts will not pass out of the minds of any responsible persons either in the United States or Europe.”

This picture of wealth flowing in an unbroken stream from war-stricken Europe to America was utterly false.

As the British Chancellor was speaking, and as he must have known, the situation was that for each dollar received by the American Treasury on account of war debts Wall Street was lending three in Europe. The stream was heavily the other way. The situation was—and everybody knew it—that Germany was paying reparations with money that flowed first from the United States to Germany. American loans to Germany alone, out of the private American reservoir, to enable her to pay reparations to France, England, Italy, Belgium and others—our loans to Germany alone have amounted to more than twice the total amount received so far by the American Treasury from England, France, Italy, Belgium and others on account of their war-debt settlements. And yet the British Chancellor of the Exchequer might lay upon the imagination of the world the hateful suggestion that this country was drawing reparations from the devastated and war-stricken countries of Europe!

Such are the distortions, like acids, that produce the chemistries of European hatred to which so many Americans react by saying: “Right or wrong we cannot afford to collect the war debts. There will be too much bad feeling about it.” That is only to say, we must buy the good will of Europe. Then what a joke it would be on us if it should turn out that the war debts were a pretext only.

“Finally, the joint faculties of Columbia and Princeton urge the American people to reconsider the debt schemes with the allied countries ‘because of the growing odium with which this country is coming to be regarded by our European associates.’ I doubt whether European nations dislike us as much as some people tell us they do. But I know this, that if they do, the cancellation of that part of their debt which has not already been cancelled will not of itself change their dislike into affection. Neither in international relations any more than in private life is affection a purchasable commodity, while my observation and reading of history lead me to conclude that a nation is hardly likely to deserve and maintain the respect of other nations by sacrificing its own just claims.”—From a letter by the Secretary of the Treasury, Mr. Mellon, to certain Princeton professors, March 15, 1927.

The subject entire becomes at length so irrationalized by political misrepresentation in the Old World manner, by the dread of Americans to be thought ill of in Europe, and by the divided utterances of those in this country whose interest in private loans to Europe may cause them secretly to wish for a cancellation of war debts at the expense of the American taxpayer, that scarcely any popular assumption about it is within the perspective of fact, and the facts themselves become incredible. Certainly many Americans assume that the burden of war debt payments has been heavy on the debtor countries. But this burden—what is the measure of it?

“The British settlement calls for an average annual charge corresponding to 1.9 per cent, of the total British foreign trade, the Belgian settlement 0.88 per cent., the Italian settlement 2.87 per cent., and the French settlement 2.64 per cent. Great Britain’s average annuity represents 0.94 per cent, of its national income, Belgium’s 0.8 per cent, Italy’s 0.97 per cent., France’s 1.47 per cent.”—Statement of the Secretary of the Treasury before the Ways and Means Committee of Congress, May 20, 1926.

That was the case in 1926. All the percentages afterward fell, because both Europe’s foreign trade and the national income of the principal European countries increased. They would be somewhat different now in a state of world-wide depression, but abnormally different. The depression is abnormal.

The average total receipts of the American Treasury from the European debt settlements in the first five years was $213,523,120. In the year 1931, but for the moratorium, it would have been roughly $250,000,000. The crushing effects of this sum upon Europe is of course imaginary. For Great Britain, less than $165,000,000; for France, less than $40,000,000; for Italy, less than $15,000,000; for Belgium, less than $7,500,000; for Poland, less than $6,500,000; and then on down the scale. Great Britain the most, as her capacity is. For Great Britain, however, it is hardly more than one tenth of her own income from foreign investments. Say it is $3.50 per capita for war-debt payments to the American Treasury. In 1928 Great Britain’s annual income from foreign investments was $29.00 per capita. (Memorandum on International Trade and Balances of Payments, League of Nations, 1927-1929, Volume II.) There are other measures.

The cash value of the British settlement with the American Treasury in 1923 was a little more than 3¼ billions of dollars. Since then the new capital issues for foreign countries on the London money market have amounted to 4½ billions. (Figures from the Midland Bank, Ltd., London.) Since assuming the burden of war-debt payments Great Britain has increased her own foreign investments by more than the cash value of her settlement with the American Treasury.

The cash value of the French settlement with the American Treasury in 1926 was $1,655,000,000. (Annual report of the Treasury, 1926, page 261.) Since then the gold holdings of the Bank of France have increased $2,000,000,000. That is to say, the increase alone in the gold holdings of the Bank of France since the settlement of the French war debt with the American Treasury is $345,000,000 more than the cash value of that settlement at the time it was made. In 1931 the Bank of France had gold balances in New York equal to one half the entire principal cash value of her war debt to the United States Treasury.

One of the consequences of settling with the debtor countries on the capacity of each one to pay, not on the written contract, was that in negotiating their agreements they made of course in every case a statement of poverty. It would be only human. They were trading. The more convincing a statement of poverty was, the better the trade one could make with the American Debt Commission. This was understood. The Debt Commission checked their statements so far as possible; but after all, what you know about another country’s economics you take from its own figures. And always those statements of poverty were reinforced by propaganda in the

American and European press and in speeches on every international occasion. More or less exaggeration was unavoidable. Moreover, everybody at that time inclined to underestimate the recuperative power of the world. Much of this power was new, comparable only to the amazing power of destruction developed for the war. Power of the same kind, now turned to reconstruction.

The poverty of Europe to-day is either political and imaginary, like the crushing effect of the war debt to the American Treasury, or an idea derived from envious comparison with the United States. In its own world Europe is richer than ever before. The standard of living is higher than before the war, so much higher that a return to pre-war conditions is unimaginable. France is richer in gold. Great Britain is richer in investments. The whole of Europe is richer in material power and equipment, in all the means to the production of wealth.

“The year 1925 marks in some respects a turning point in post-war economic developments. Europe’s production probably reached the pre-war level in this year; and the quantum of world trade was for the first time greater than in 1913. . . . The adjustment which had taken place laid the foundation for a striking economic progress in the quinquennium 1925-1929, which is illustrated by the following chart:

NATIONAL INDICES OF INDUSTRIAL PRODUCTION

(Base: 1925 equals 100)

Country	1926	1927	1928	1929
France	116	102	119	130
Germany	95	120	120	122
Poland	98	123	138	138
United Kingdom	77	111	105	113
United States	104	102	107	114

“The main impetus to economic activity after 1925 came from an extraordinary advance in industrial technique and management—rationalization—in agriculture as well as in manufacturing industries. Equally important perhaps was the improvement in the means of communication and transit due to the increased use of motor vehicles and electricity. Finally, almost all countries gradually stabilized their currencies; and international lending on a commercial basis reached large dimensions.

“This progress was of course far from being either general or uniform. It was much more vigorous in Europe than in other continents. between 1925 and 1929 the aggregate production of crude products in Europe advanced nearly 4½ per cent, per annum, while the average annual increase in all other continents taken together was less than 2¼ per cent. Even these figures understate the case; for, in the basic year 1925, the European harvests happened to be exceptionally good. Thus, by 1929, Europe had recovered the ground lost in preceding years and the pre-war equilibrium between Europe and the rest of the world had been very largely restored.”—From Course and Phases of the World Economic Depression, League of Nations, 1931.

And lastly, until the moratorium of war-debt payments declared on the initiative of this country last year for the ease of our European debtors—until then, the burden of payment on their settlements with the American Treasury had never touched them really. The explanation is that new loans to the same countries out of the private American reservoir greatly exceeded their payments to the American Treasury. Much faster than they paid money into the American Treasury they borrowed it again in Wall Street. And in the normal course of events this might go on and on without end, for naturally American loans to Europe would increase more each year than the sum of European payments to the American Treasury on account of war debts, so that, in fact, the burden of payment need never touch them at all.

It is not the burden, in size or shape. The impasse is mental. To comprehend it one must reckon with the ways of Old World diplomacy, its passion for manipulations, its elaborate involutions of policy, the reach of its scheming. All its political arrangements are complex; all its bargains are compound. It knows no simple realities.

We think of the war debts as if they concerned only the American Treasury on this side and the separate debtor nations on the other side. We insist they are not political. Nevertheless, they have become involved in the political bargains of Europe. There is, for example, a bargain of record between our principal debtors on one hand and Germany on the other as to how any further cancellation of European debts owing to the American Treasury shall be divided among them. This bargain is Article 2 of “Special Memorandum” in the Young Plan, called in English, “Report of the Committee of Experts on Reparations”, printed by His Majesty’s Stationer, London, June, 1919, and reads as follows:

“2. Any relief which any Creditor Power may effectively receive, in respect of its net outward payments on account of War Debts; after making due allowance for any material or financial counter-considerations, and after taking into account any remissions on account of war-debt receipts which it may itself make, shall be dealt with as follows:

“As regards the first 37 years—

“(a) Germany shall benefit to the extent of two-thirds of the net relief available, by way of a reduction in her annuity obligations thereafter.

“(b) One-third of the net relief shall be retained by the creditor concerned.”

That is to say, if the American Government reduces or cancels the remainder of the European war debts, two thirds of the benefit shall pass to Germany in remission of reparations and one third shall be retained; or, for each dollar of war debts we forgive our debtors they will forgive Germany 66⅔ cents. How that interesting division was arrived at or what bargains off the record underlie this one, we do not know.

V

It is a fraud to accept what you cannot repay.

—PUBLILIUS SYRUS

The celebrated Balfour note, so unfair to this country, was a powerful two-edged stroke in European diplomacy, and it was, no doubt, more significant in that aspect than from any resentful American point of view. When the British Chancellor of the Exchequer makes a speech on war debts, as to say, for example, that the United States is drawing reparations’ from the devastated and war-stricken countries of Europe, we read it for direct meaning, but France reads it for its indirect political meaning. Is England inclining a little more to Germany? And as her conclusion may be as to that, so France may alter her tone with Germany. There is a British policy with France and a British policy with Germany, a French policy with Great Britain and a French policy with Germany, a German policy toward each of these, and so on; and in all of these more or less Europe’s war debts to the American Treasury are entangled.

And yet, above all that, there is definitely a common European attitude toward the debts. And this we do not easily comprehend. It is probably not what it seems, that is to say, not a feeling against the debts for any reason given, neither that nor a conviction of their spiritual enormity, as the propagandists keep saying, but a deep natural resentment at the sudden rise of the United States to the position of dominant world power. This was bound to have happened in any case; however, it did happen during the war, and such is the association in the European mind. And this was a more significant event than the war itself. The war was nothing new for Europe except in magnitude. Those who were enemies then had been allies before, and these who were allies then had been enemies before. Only the scars would be new. But for the first time in the common history of Europe a non-European power intervened for reasons of its own to decide the issue of a European quarrel, not for conquest, not for anything material it wanted, but because it could not bear it any longer, and for such reasons besides, as to make the world safe for democracy, the seas safe for neutrals, to impose upon Europe a peace without victory. It gained none of these ends; it lost them at the peace table. Old World diplomacy defeated it. Nevertheless, its power had been revealed. World power had been for many centuries one of Europe’s unchallenged attributes; then in the midst of a homicidal quarrel as to which European member should have it next, the power itself departed. It appeared on another continent, beyond the reach of conquest. The center of the political earth had shifted. And if, since the war, European diplomacy has employed all the resources of its wisdom and experience to discover and act upon the susceptibilities and weaknesses of this new power, for any advantage, that is only what we might have expected. The debts of course. What were the debts but a bitter reminder of Europe’s lost attribute?

At any rate, all the principal debtor governments from the beginning, their reluctant settlements notwithstanding, have had but one thought about their obligations to the American Treasury. That has been how not to pay them and yet not repudiate them. There was a problem for Old World diplomacy. Repudiation would be very simple, and for all we could or would do about it, perfectly safe; but unfortunately at the same time very unwise, for two reasons. In the first place, to repudiate their war debts, as they discovered, would cost them access to the private American reservoir. They would be unable to borrow any more in Wall Street. In the second place, to repudiate them would set a dangerous precedent in the world. Both Great Britain and France have large foreign investments. Great Britain’s investments in foreign countries are probably twenty billions of dollars. Therefore, for fear of setting a bad example to debtors, if for no other reasons, they could not afford to repudiate their debts. Only Germany could afford to do that.

So a debt policy was evolved and it has never for one moment changed. It is not the policy of Great Britain alone, nor the policy of France alone, nor of both together. It is a European policy. The aim of it is to get rid of these war debts to the American Treasury by a political stroke. Propaganda for cancellation was not the stroke. It was only the preparation. The stroke would be to commit the American Government to the proposition that its debtors should pay, and could pay, only provided they were paid reparations by Germany, so that if Germany should cease to pay them, as of course she would, they might cease to pay us.

The American Government has steadily insisted that so far as it is concerned, war debts and German reparations are unrelated. Nevertheless, Europe has stuck to her theme, trusting time, events and her skill of diplomacy to establish it.

THE END