Keynes proved correct in his judgment that German society would buckle in its attempt to meet its reparations schedule. Germany succumbed to hyperinflation during 1921–22. To prevent this type of breakdown, an international economic conference had been convened in Brussels in 1920, and another was held in Genoa in 1922. In spirit, these two conferences were precursors of the 1945 Bretton Woods meetings, for they proposed many of the aims and principles endorsed after World War II by the International Monetary Fund and the World Bank. They were followed by the Dawes Plan in 1924 and the Young Plan in 1929 to coordinate the payment of intergovernmental debts by Germany to the Allied Powers. But they could not paper over the fundamentally untenable situation. Under the burden of reparations, Germany’s economy was bankrupted by the greatest inflation in history. The German middle class was wiped out, sowing the seeds for fascism.
Table 2.1 New Capital Issues in London and New York, 1921–30
(a) New Bond Flotations in the United States, 1921–30
(b) New Capital Applications in London, 1921–25
Source: Council on Foreign Relations, The United States in World Affairs: 1932 (New York: 1933), p. 74 for the U.S. figures; and William Adams Brown, The Gold Standard Reinterpreted: 1914–1934 (New York: 1940), Vol. I, p. 328 for the London figures.
Shortly after Andrew Bonar Law became Conservative Prime Minister of Britain in January 1923, he sent Stanley Baldwin and Montagu Norman to Washington to negotiate the funding of Britain’s war debt with US Treasury Secretary Andrew Mellon. Former Liberal Prime Minister Lloyd George, just displaced by Bonar Law, described the business transaction between Mellon and Baldwin as being
in the nature of a negotiation between a weasel and its quarry. The result was a bargain which has brought international debt collection into disrepute . . . The Treasury officials were not exactly bluffing, but they put forward their full demand as a start in the conversations, and to their surprise Dir. Baldwin said he thought the terms were fair, and accepted them. If all business was as easy as that there would be no joy in its pursuit. But this crude job, jocularly called a “settlement,” was to have a disastrous effect upon the whole further course of negotiations on international war-debts. The United States could not easily let off other countries with more favourable terms than she had exacted from us, and as a consequence the settlement of their American debts by our European allies hung fire for years, provoking continual friction and bitterness. Equally the exorbitant figure we had promised to pay raised by so much the amounts which under the policy of the Balfour Note we were compelled to demand from our own debtors.1
As matters worked out, “the United States agreed to fund the debts to her of our Continental Allies on terms markedly more favourable than she had granted to Britain.” The sums funded over time stood as shown in the table.
| Country-Funded Debt ($) | Total Paymentsin 62 Years ($) | Rate ofInterest (%) | |
| Britain | 4,600,000,000 | 11,105,965,000 | 3.3 |
| Belgium | 417,780,000 | 727,830,500 | 1.8 |
| France | 4,025,000,000 | 6, 847, 674, 104 | 1.6 |
| Yugoslavia | 62,850,000 | 95,177,635 | 1.0 |
| Italy | 2,042,000,000 | 2,407,677,500 | 0.4 |
The total sum due from Britain, including interest, amounted to over twice its original debt, having been settled at nearly twice the interest rate agreed to by Belgium, France, Yugoslavia and Italy (although identical to the 3.3 per cent charged to Poland, Czechoslovakia, Romania, Estonia, Finland, Lithuania, Latvia and Hungary). This was the price paid for being the first country to break European ranks and sign its “separate peace” with the U.S. Government – all in the name of preserving the sanctity of debt, as if Britain and its fellow Europeans were still world creditors. Here was certainly a case of economic ideology failing to keep pace with the evolution of national self-interest. “Probably,” the Council on Foreign Relations remarked, “the pact had more significance as a determinant of war debt policy than any other factor. It bound the other debtors by example to the principle of war debt acquittance; it put the American policy in a groove of formalism; it set the pace of treatment of other debtors by allowing of no other deviation than ‘capacity to pay.’” Even so, “opposition developed in the Senate against any ratification of the agreement. Not that it was felt to be too onerous; it was felt to be too lenient.”2
Mellon was clearly overjoyed. In the Combined Annual Reports of the World War Foreign Debt Commission he concluded: “We have, I believe, made for the United States the most favorable settlements that could be obtained short of force . . . The only other alternative which they [i.e., critics of the settlements] might urge is that the United States go to war to collect.” Another observer, Newton Baker, called the American principle of debt collection “the amount thought possible of collection without causing revolutions in the paying countries.”3
Perhaps the worst psychological consequence of the war debts, observed the Council on Foreign Relations, was to keep alive the question “Who won the war?” with its implicitly self-righteous answer. “It would seem that general bankruptcy should have attended the long-deferred day of reckoning for some of the Allied states. This was the outcome predicted by many observers who in prewar days had freely proclaimed the economic impossibility of waging a world war such as overtook mankind in 1914.”4
But unlike the situation with private debtors, there was to be no bankruptcy among national states. The U.S. Government refused to relax its unsustainable demands upon its European Allies. A 1929 observer remarked: “An American banker whom I saw today held the extreme view that ultimately Europe would declare war on the United States to repudiate her debts.” A contemporary asked: “[can] we be perfectly certain that Germany will go on cooperating, helping and pursuing a policy of peace and reconciliation, and turning her back on the policy of militarism and reaction?” He believed that a victory for Germany’s right wing was imminent as pressure built up to stop its reparations payments. “It will not mean a return to immediate armament by Germany, it will not mean an immediate outbreak of war; but it will mean the reversal of the present German policy of constructive cooperation in the building up of world peace.”5
The burdens imposed by international governmental finance thus prepared the ground for future war, as Lenin had anticipated that private capital and its growing concentration must do. In fact, to many observers, the hope for peace seemed to lie precisely in a restoration of international claims and investments to private hands. “At the end of 1927,” wrote the Council on Foreign Relations,
it was the hope in Europe that the United States would join in a scheme of readjustment of both debts and reparations by transplanting from the political bed of intergovernmental relationships to a wider field where they would be absorbed by private investors in the world markets of international finance. The idea was gaining ground in the United States, but the approach of responsible opinion, while recognizing the advisability of taking debts and reparations but of international politics, was lukewarm to European suggestions of a conference. It was felt that such a conference would seek to disturb settlements that are considered inviolable.
Perhaps, the Council speculated, Germany might deliver negotiable securities to the Allies, who would then market them for cash and ask the U.S. Treasury to make a once-and-for-all cash settlement for the proceeds. Intergovernmental