The United States, however, entered the war on special terms. As the Council on Foreign Relations put matters, it was not an Ally but merely an Associate. Instead of subsidies it offered only loans, on the ground that it was not entering the war with territorial or colonialist ambitions.
If her loans had had a relation to subsidy, she would naturally have been interested in the apportionment of the spoils of victory, for it is of the essence of subsidy that the subsidizer shall be the principal artificer of the rearrangement. Pitt guided the coalition against Napoleon; his interest lay in the new map of Europe. America’s interest in the war in Europe was to secure her sovereign rights from an aggressor, and these secured, the apportionment of the spoils became a matter for the Allies to settle, while the United States negotiated a separate treaty of peace with Germany. The Treaty of Berlin is the final evidence of the lack of alliance of the United States with her former associates in war.14
The result of this unique military policy was that American credits became the war’s distinguishing economic feature. It insured that once the war was over the nominal loans made among the European Allies themselves would harden into intergovernmental claims in an attempt to service American requests for repayment, in full, of all arms and rehabilitation assistance granted during the war and reconstruction years.
The foundation of Europe’s official indebtedness was nothing more than the narrow, legalistic and ultimately bureaucratic assumption that debt, because it was debt, was somehow sacrosanct. “But the debt system is fragile,” observed John Maynard Keynes soon after the Versailles Treaty was signed, “and it has only survived because this burden is represented by real assets and is bound up with the property system generally, and because the sums already lent are not unduly large in relation to those which it is still hoped to borrow.”15 He predicted that neither Germany nor the Allied Powers would be able to repay the official debts out of their current output and incomes, much less translate their domestic taxing capacity into foreign exchange. The result would be a breakdown of world investment and trade. A new era of world hostility would then be aggravated by defaults on international investments, specifically on inter-governmental claims.
America’s motives for making post-Armistice loans
The fighting ended with the Armistice in November 1918. U.S. officials immediately sought to provide Europe with relief and reconstruction loans, but Congress refused to allocate the funds. This posed the threat of an agricultural and industrial price collapse in the United States since Europe could not continue to purchase food from the United States at inflated wartime prices. In January 1919, when Britain canceled its monthly food orders, fear spread among U.S. farming interests that a price collapse was imminent. Already the government had been “scrapping thousands of automobiles and motor trucks in order not to bring the automobile industry into ruin.”16
The same practice seemed in store for agriculture. Herbert Hoover, then head of the U.S. Food Administration, wrote to President Wilson:
Our manufacturers have enormous stocks . . . in hand ready for delivery. While we can protect our assurances given producers in many commodities, the most acute situation is in pork products which are perishable and must be exported . . . If there should be no remedy to this situation we shall have a debacle in the American markets and with the advances of several hundred million dollars now outstanding from the banks to the pork products industry, we shall not only be precipitated into a financial crisis but shall betray the American farmer who has engaged himself to these ends. The surplus is so large that there can be no absorption of it in the United States, and, being perishable, it will go to waste.17
The government therefore sought to bypass Congress’s refusal to grant reconstruction credits. “The Administration decided to act as if war were still in process. Technically this was so, for the loan acts provided that the legal ending of the war was to be determined by proclamation of the President.”18 In fact, one report to the U.S. Government on the problems of demobilization suggested a plan anticipating that of the World Bank after World War II: “In lieu of government demands, there are many uses to which men and materials could be devoted during the transition period, and from which they could very gradually be withdrawn. In the first place, there is a great need for replacing machinery, equipment, and other capital goods worn out and made obsolete by the war. In the second place, men, materials, and plants can be used in the rehabilitation of territory devastated in the war. There is abundant use in France, in Belgium, and in Russia for men and materials, and a large part of the industrial equipment to be used there might well be manufactured in this country.”19 Some of these reconstruction resources were transferred to Germany and Austria, with official U.S. sanction, in order to help stave off revolution there.20
The first Victory Liberty Loan was made in March 1918, “for the purpose only of providing for purchases of any property owned directly or indirectly by the United States, not needed by the United States, or of any wheat the price of which has been or may be guaranteed by the United States.” These post-Armistice loans were made to cover a three-year interim, until 1921. Congress refused to sign the Treaty of Versailles, and the United States did not make its own peace with Germany until the Treaty of Berlin in August 1921. Not until November 4 of that year did President Harding declare World War I legally over, retroactive to July 2, 1921, the date of the Senate’s resolution ending the state of war with Germany, Austria and Hungary.
The war finally being ended, the United States turned to the problem of collecting payment for the arms with which it had enabled its Allies to secure victory. Even prior to the Armistice ending military hostilities, “many suggestions were bruited among the European chancelleries for the readjustment of intergovernmental war indebtedness. Communicated informally to the American delegates to the Peace Conference, they eventually became the subject of direct overtures.” But the United States demurred. Mr Rathbone of the U.S. Treasury declared to the French Deputy High Commissioner in March 1919 that the Treasury Department would “not assent to any discussion at the Peace Conference, or elsewhere, of any plan or arrangement for the release, consolidation, or reapportionment of the obligations of foreign governments held by the United States.” He further warned France that American post-Armistice credits could not be continued “to any Allied Government which is lending its support to any plan which would create uncertainty as to its due payment of advances.”21
By 1921 the United States had grown antagonistic to the seeming indifference with which France and Italy viewed their war debts, and even more to the direct pressure from Britain to wipe all liabilities off the books, including reparations, in an attempt to reestablish commercial normalcy. In February 1922, Congress acted to bring matters to a head by establishing the Foreign War Debt Commission. It was headed by Secretary of the Treasury Andrew Mellon, who invited the nation’s foreign debtors to reach an agreement as to how to repay the funds they had borrowed during the war. “In drawing up the terms of reference of the Commission, Congress made two stipulations: first, that the debts should be refunded within twenty-five years and that 4½ per cent should be the lowest limit of the rate of interest; and, secondly, it was laid down, in a very complicated legal form, that no connection with any debts arising out of the war could possibly be created by the agreements which were to be concluded between America and her debtors.”22 In other words, America’s Inter-Ally debts were to be kept on the books and normal commercial interest rates charged on them. No contextual relationship between Allied arms debts and German reparations was ever acknowledged.
The link between German reparations and Inter-Ally war debts
It later was suggested that this refusal to acknowledge this seemingly obvious relationship between the Inter-Ally debts and German reparations stemmed from President Wilson’s desire to see a fair settlement reached with Germany.
When,