Many issues stood in the way of making those ideals reality, several of which seem obvious in retrospect. First, Wilson carried an idiosyncratic definition of self-determination that papered over the problems of implementing democracy and the “new international order” he had promised.10 Second, the plan for economic interdependence after the war ignored the financial reality that emerged from the war. Wilson assumed individual economies would seamlessly return to a global system that rested upon the gold standard. Over the next decade, this would be the largest source of ongoing crises. Wilson also failed to consider more thoughtfully the relationship between economic performance and democratic stability. In short, Wilson did not fully think through the ways in which economic nationalism might undermine the kind of democratic institutions he hoped to see around the world, let alone economic internationalism.
The astonishing cost of World War I had driven all belligerents off the gold standard during the war. In place of gold, each had printed money with varying degrees of abandon. As a result, by war’s end every country had a great deal more currency in circulation than it had held before, in some cases by multiples of ten or more. The surplus money created strong inflationary pressures that most countries tried to curb through price controls, rationing, and similar policies.11 In addition to printing money, the belligerents borrowed from anyone who would lend. For the Allies this meant borrowing from each other and ultimately from the United States. Collectively, the Allies owed the United States about $12 billion. Britain owed $4.2 billion, France $3.4 billion, Italy $1.6 billion, and so on. Unfortunately for the French, they had loaned about $2.5 billion to Russia before the Bolshevik Revolution in 1917. The new communist regime had no intention of ever repaying this debt.12
After the war, Europe desperately needed capital to rebuild. Yet European currencies had lost much of their value. Only the United States had the means to make this investment because only the United States had deep reserves of the one form of money everyone trusted: gold.
All of this background helps clarify why the economic order Wilson sought not only failed to materialize, but, within a decade had wilted into the Great Depression. He insisted that the world return to an open and competitive market at a moment when the United States produced the lion’s share of important products, held a huge load of the world’s money, and also held enormous IOU’s from the countries it traded with.13 At Versailles, the French and British recognized how the arrangement tilted against them and pressed Wilson for debt forgiveness. As an incentive, they raised the question of German reparations, suggesting that Wilson forgive them their debts so that they could, in turn, forgive their debtor. After all, they reasoned, Wilson had suggested a magnanimous peace, and financial magnanimity expressed this idea as well as any other gesture. Moreover, America had come to the war late and suffered a fraction of British and French sacrifice. Debt forgiveness might equalize the American contribution to the Allied victory. Wilson’s close confidant Colonel E. M. House agreed: “Should [Americans] not be asked to consider a large share of these loans as a part of our necessary war expenditures, and should not an adjustment be suggested by us and not by our debtors?”14
Figure 1. US, German, French, and UK gold reserves as percentage of world stock, 1913–1930. Source: World Gold Council, “Central Bank Gold Reserves, An Historical Perspective Since 1845 (November 1999).”
But Wilson would have none of it. He saw debt and reparations as distinct moral and legal questions. German reparations constituted a “fine”—a punishment for bad behavior. The Allies should set reparations high enough to hurt—to become a disincentive against future bad behavior. By contrast, Allied debts represented legal obligations entered into voluntarily. If the Allies had no interest in paying their debts, maybe they should not fight such costly wars. Besides, in a roundabout way, wouldn’t debt forgiveness just encourage future war?15
In the end, Wilson got his way, but only to doom his ideals. America would collect on Allied debts, but the British and French passed their burden along to Germany in the form of staggering reparations totaling about 130 billion gold marks (roughly $33 billion in 1919 dollars, which, when viewed as a percentage of 2015 American GDP, amounts to $7.5 trillion).16 Since Germany had few reserves of gold at the end of the war, it had to pay in installments out of current production, meaning it had to generate trade surpluses to created leftover reserves for reparations. Yet, as the Economist explained in 1921 (just prior to the first reparations payment), while Germany would likely export about 3.5 billion marks of goods that year, it would import about 4.7 billion in food and other critical materials. With no planned surplus in the coming years, where would reparations come from?17
The more ominous problem, though, was that the plan essentially tied the entire global financial system to the fate of the German economy. Perhaps, under the best of circumstances, this might be a good idea. But in the chaos that followed the war, with Germany perilously close to political and economic anarchy, this was a very poor choice indeed. Over the next years, the world came to the brink of financial crisis again and again as this precarious structure nearly collapsed.
For Eisenhower and Clay in particular, this history created a heavy weight when they found themselves, after the Second World War, in a position to improve on Wilson’s effort after the First. They realized as quickly as any other American official that no matter how well the global financial system might be designed, it had to take into consideration the economic realities of the countries joining it. If individual countries did not enter into the global system on roughly equal grounds and with largely stable domestic economies, then the global system itself could exacerbate problems within domestic economies, creating a political backlash against the global order. Under such circumstances, the international component of Wilson’s scheme would not mitigate nationalist impulses within individual countries but exacerbate those impulses.
* * *
Even as they observed the consequences of the peace, many army leaders worried initially about the poor American performance during the war. Much like the Spanish-American War, American victory in the First World War concealed a host of failures. Most obviously, American industry had dramatically underperformed its potential. As early as 1914, a handful of prominent figures (Theodore Roosevelt, Henry Cabot Lodge, Elihu Root, and the editors of the New Republic) had recognized the link between industry and war and had warned that the country remained woefully unprepared.18 While Wilson had cited military preparation as a reason to pass the Revenue Act of 1916, he spoke only to the immediate needs of soldiers and sailors.19 No comprehensive plan for coordinating industry ever went into effect during the war.20
In fact, contrary to the lore that emerged after the war, American entry had little to do with a “munitions industry” because no munitions industry really existed before it. Indeed, even after it began no munitions industry really emerged to feed it.21 Many industrial powerhouses ignored the war altogether—most conspicuously the auto industry where neither the Dodge brothers nor Henry Ford ever converted their factories to make tanks. Each continued to turn out cars and hold onto domestic market-share rather than supply this new weapon for the war effort.22
The War Department made up for what couldn’t be bought by ordering as much as possible of what could. The result was a predictable mess. American industry produced over thirty million 75-mm artillery shells, for example, but only twelve million fuses for those shells. Similar mismatches abounded.23 More worrisome, American industry rarely produced what mattered most for victory. While American soldiers used about 2,250 artillery pieces during the war, only 100 of them came from the United States. With the Dodge brothers and Henry Ford setting the (unpatriotic) standard, not a single American tank made its way to the front. America was home to the Wright brothers, yet the country managed only one thousand observational airplanes (by contrast, the French produced almost sixty-nine thousand combat planes). In many cases, General Pershing chose to buy or borrow what he could from the French and British. In all, the army consumed roughly eighteen thousand ship-tons of material in the war, of which ten thousand came from continental Europe.24
Surprisingly,