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1	Origins of Intergovernmental Debt, 1917–21

One great change . . . – probably, in the end, a fatal change – has been effected by our generation. During the war individuals threw their little stocks into the national melting-pots. Wars have sometimes served to disperse gold, as when Alexander scattered the temple hoards of Persia or Pizarro those of the Incas. But on this occasion war concentrated gold in the vaults of the Central Banks; and these banks have not released it.

John Maynard Keynes, Treatise on Money, Vol. II (London 1930), p. 291

During World War I and its aftermath debts among governments came to overshadow the private investments that had characterized prewar economic relations. Even more important than their size, however, was the geographic concentration of credit in the hands of a single nation, the United States. No prewar economist had anticipated how the behavior of this government would differ from that of earlier creditor nations, or how the new system of intergovernmental debt might differ from that of private international investment.

Before World War I, claims on foreign assets were held mainly by private investors in the form of equity interests or mortgage bonds secured by income-producing assets in railroads, mining companies, banks and other foreign-based corporations. Large government debts were common, but were held principally by private investors, not other governments.

International lending and investment was assumed to be self-amortizing. As foreign wealth increased, investors in mines, factories and other such enterprises would be repaid out of their profits, and in the case of government debts, by growth in the national tax base. Governments borrowed to finance projects designed in principle to increase income, and hence their ability to levy higher taxes out of which their borrowings could be repaid.

The war changed all that. It gave birth to massive claims by governments on other governments far exceeding the value of international private investments, and based on altogether different principles. Paramount among the postwar claims were the Inter-Ally armaments debts, which stood at $28 billion in 1923, plus Germany’s reparations bill, set at $60 billion in 1921. These obligations, totaling some $88 billion – excluding future interest charges that accumulated and magnified the sum – did not find any counterpart in productive resources or in visibly expanding taxing capacity. Postwar claims for payment were to finance the war’s destruction of resources, not their creation. Credits to finance Allied arms purchases, and Germany’s devastation of other countries for which it was now told to pay, were incapable of generating any earnings to amortize the postwar debts. Unlike private investments, they were not secured by productive assets as collateral, nor was their size at all related to the Allies’ or Germany’s capacity to pay out of current national income and foreign trade.

World War I had cost its participants some $209 billion in direct expenditures,¹ a consumption of resources that Europe was unable to finance by itself. Prior to April 7, 1917, when the United States joined them, the Allies purchased U.S. arms on credit, running up a $3.5 billion debt in the form of European government obligations held by private U.S. investors. The belligerents also paid for U.S. arms by selling back to American residents nearly $4 billion of U.S. railroad bonds, common stocks and other securities.² The result was a $7.5 billion net shift in America’s investment position.

This represented Europe’s financial limit in terms of normal commercial standards. By the time the United States entered the war, the continent was close to the end of its financial tether. It lacked the means to purchase American arms for cash in the amounts required, or even adequate collateral on which to borrow further sums through U.S. banks. One of the first acts of Congress following declaration of war by the United States therefore was to vote government funds to finance arms loans to the Allies.

It would be almost a year before U.S. troops could be enlisted, trained and ready for battle in Europe. President Wilson not only had kept the country out of the war until 1917, he had left it militarily unprepared for conflict on the European scale. What the nation did have was money, labor power and plant capacity for arms productions. In a matter of weeks, Congress authorized a $3 billion loan to the Allies. A Treasury bulletin explained that “the loans were being made to the Allies to enable them to do the fighting which otherwise the American army would have to do at much expense, not only of men, but of money – money which would never be returned to America, and lives that never could be restored.” Representative A. Piatt Andrew drew the parallel that the United States was “virtually placed in a situation like that voluntarily assumed by many men in the North during the Civil War, who, having been drafted for the Union armies, hired substitutes to take their places.”³

Congress had a rationale for extending funds to Europe in the form of loans rather than freely sharing American resources for the common Allied cause. “The general principle underlying these obligations,” observed the Council on Foreign Relations a decade later, “was that the Allies should not pay less for accommodation than the United States had incurred in raising the funds from American citizens. Thus, as the Ways and Means Committee said in reporting on the first Liberty loan bill, the loan ‘will take care of itself and will not have to be met by taxation in the future.’”⁴ Not weighed in the bargain was the cost sustained by Europe in lives lost and property destroyed.

On the one hand, private international claims were being wound down by European governments requisitioning and reselling their citizens’ U.S. investments to pay for American arms. But in short order liabilities of governments to one another were built up as Europe owed a growing arms debt to the U.S. Treasury. Including postwar Victory Loans, obligations of the Allies to the U.S. Government grew to $12 billion by 1921, starting with a $3 billion credit granted in 1917. Philip Snowden, Chancellor of the Exchequer in Britain’s first Labour government, observed that the United States had levied about $3 billion in excess profits taxes on its armaments and related industries. Pointing out that this just happened to correspond in value to America’s first official loan package to Europe, he concluded: “The sums loaned by America from 1917 to help the Allies to fight her battle were but a part of the profits she made out of the Allies before her entry into the war.”⁵

Secretary of the Treasury Andrew Mellon acknowledged that U.S. profits on some war transactions ran as high as 80 per cent.⁶ Still, the die had been cast for loans, not subsidies: As one banker later observed: “Little did anyone realize, whether in or out of official life, what this decision was to cost. It meant that within the next three years the United States Government would supply the Allied Powers with which it had now become associated, in exchange for their unsecured promises of payment at indefinite dates in the future, with munitions of war valued at over $9,500,000,000.”⁷

Earlier wars had been conducted largely on a subsidy basis, with one nation – Britain in particular – financing the military costs of its allies. This practice had been employed as early as the fourteenth century, “when Edward III paid French and Flemish princelings to win French territory. When the modern system of European states evolved every contender for European dominance found himself opposed by a combination financed by an implacable Britain.” Subsidies “insured loyalty and effort. Being granted monthly, they could be stopped promptly if any ally showed slackness . . . When loans were granted in place of subsidies, they invited unfortunate consequences,” as occurred with the Austrian loans of 1795–97.⁸ Exorbitant brokerage fees, followed by economic problems in the debtor countries, tended to become sore spots of international diplomacy, creating almost as much antagonism as gratitude toward the lending government.

France had followed a subsidy policy when it helped finance the American War of Independence.

French financial assistance, expressed in consignments of munitions and supplies, contributed greatly to the success of the revolting North American colonies leading up to Yorktown, and for this last victory the revolutionists were indebted in equal measure to French military and naval support, which is estimated to have cost France $700,000,000 and for which she asked no recompense. France’s help was expressed in outright gifts amounting to nearly $2,000,000 and in post-alliance loans to the extent of some $6,000,000. In making funding arrangements with Benjamin Franklin, the government of Louis XVI remitted wartime interest charges, a course that the United States was to pursue after the World War [only] in her funding agreement with Belgium.

However, the United States was lax in paying the loan portion of French assistance. “Between 1786, when the first repayment fell due, and 1790, no contribution on the debt either of principal or interest could be made by either the Confederation or the infant Republic, and repeated calls for a settlement by the new-born French republic in 1793 fell on ears attuned only to the needs of an impoverished people struggling to nationhood. It was left to Alexander Hamilton eventually to apply his financial genius to a tardy liquidation of this indebtedness, which was converted into domestic bonds and retired in 1815.”⁹

Most of the wars fought during the century spanning the Napoleonic Wars and World War I were of a confined, bilateral character, such as the Franco-Prussian War, the Boer War, the Spanish-American War and the Russo-Japanese War. With the exception of the Crimean War, they did not involve large groups of nations, and hence there were neither Inter-Ally debts nor subsidies. World War I, however, was a conflagration of unprecedented scope, in both its direct costs and its economic aftermath. Unlike most of the wars of the preceding century, it was fought on the European mainland itself, with great destruction of lives and property.

As the war began to engulf the world, it seemed at first that the subsidy system would have to be pursued if the Allies were not simply to drop out of the fighting once they exhausted their economic strength. Toward the beginning of the war, in February 1915, representatives of the British, French and Russian governments met and agreed to pool their financial as well as military resources. Three years later Britain and France (Russia having dropped out of the war) induced Greece to join forces on the Allied side by promising that payment for the munitions supplied to Greece “was to be decided after the war in accordance with the financial and economic situation of Greece. Reimbursement could hardly have been contemplated here; as a matter of fact, it was subordinated to the need of securing allegiance and thus was a harking back to eighteenth century methods.”¹⁰

U.S. Government representatives likewise had originally told their allies not to worry about conditions of repayment, which were to be settled after victory had been won, implicitly on nominal terms. For instance, at a time when there was broad public support for a $1 billion gift to France to help it wage the war in gratitude for its aid during the American Revolution, the French Government was officially encouraged to do all its arms financing through U.S. Government channels. The implication was that this financing ultimately would be equivalent to a gift. Senator Kenyon of Iowa announced: “I want to say this for myself, Mr. President, that I hope one of the loans, if we make it, will never be paid and that we will never ask that it be paid. We owe more to the Republic of France for what it has done for U.S. than we can ever repay. France came to us with money, with a part of her army and navy in the hour of our sore distress. And without the aid of France it is doubtful if we would have had this nation of ours . . . I never want to see this government ask France to return the loan which we may make to them.”¹¹

Typical of the overall U.S. tone at the time of its European loan negotiations was the statement of Representative Kitchin, chairman of the House Ways and Means Committee: “The fact is that if we ever get this money back at all when the war is won we shall get off cheap.”¹² A later writer observed: “When America joined the partnership in April 1917, it was her effort to get the men and munitions to the line at the earliest date possible. The munitions got there about a year before the men. If the men had reached there as soon as the munitions, they could have fired the shells. In that case we would have paid for the shells and also for the white crosses and war-risk insurance of the men who were destroyed while shooting them. But our men did not get there so soon, and to our partners fell the job of repelling the enemy and of paying for the ammunition with which they did that job.”¹³

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, at the close of the war, the Allies suggested to President Wilson that their war debts should be forgiven, the suggestion amounted to a proposal that the United States surrender its claims in order that their net collection from Germany might be greater. The idea was that if the United States would not compel the Allies to pay, the Allies would not need to compel Germany to pay so much. Thus by moderating their claims against Germany, they would have stronger assurance of collecting their claims. It was this proposition that President Wilson rejected with some heat in his letter of August 5, 1920, to Lloyd George. “The United States,” he said, “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 obligations at an amount within Germany’s capacity to pay.”²³

On November 3, Wilson further elaborated this policy: “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 reparations claims.” These remarks were made in response to the May 16 Hythe Conference, where Great Britain and France joined to urge a parallel liquidation of Inter-Ally debts and German reparations, the principle later embodied in Britain’s Belfour Note of August 1923.

The United States’ best and most equitable judgment was brought out in regard to the German reparations problem. Having severed the link between German reparations and Inter-Ally debts, the United States had no direct financial interest in reparations and therefore could be virtuous at no visible cost to itself. By contrast, the issue of Inter-Ally debts brought out all of its most shortsighted, greedy and blindly bureaucratic qualities, apparently because of the nation’s more direct financial interest in this matter. The U.S. Government advised its Allies to be moderate with Germany, but was itself immoderate with them. It urged them not to expect restitution of their war costs and war damage, but wished to be repaid in full for the cost of its own arms contribution to victory, on the above-noted technical ground that it was not an Ally but merely an Associate, unconcerned with dividing German spoils.

The motivation underlying U.S. Government policy was highly economic, but not a function simply of U.S. private sector drives. The only way Germany could have made reparations payments in the form of hard currencies would have been to export more goods by underselling U.S. and other Allied producers. In a similar manner U.S. insistence on Inter-Ally debt payments beyond Europe’s ability to pay soon wrecked the financial and commercial price stability that was a precondition for profitable international trade and investment.

American economists were by no means blind to the fact that “the amount of reparation was the measure of service that the world was willing that Germany should render to it.”²⁴ They pointed out that if Allied governments imposed heavy reparations on Germany, they must be prepared to enable Germany to make payment by exporting its products to the Allied Powers. How else, after all, could Germany earn the funds to make reparations now that its foreign investments had been stripped away? Unfortunately, and tragically, the U.S. Government turned a deaf ear to the corollary principle that the amount of Inter-Ally debts to be collected represented the amount of imports it was willing to purchase from its Allies and Germany. Instead of lowering its tariffs, it increased them steadily during 1921–33 to protect its own producers from foreign competition, especially from debtor countries whose depreciating currencies rendered their products cheaper as they tried to service their war obligations.

Meanwhile, the Federal Reserve System acted to insulate America’s economy from the monetary effect of gold inflows, so as to prevent normal inflationary developments from helping to restore balance-of-payments equilibrium with Europe. The result was that despite the nation’s major share of the world’s gold, the U.S. Treasury and Federal Reserve System refrained from taking over from Britain the lead in maintaining a stable system of international finance. As George Auld put matters: “At the time of the Dawes Plan (in 1924), the world system was out of gear. Sterling had passed or seemed to have passed, but the dollar had not yet arrived. The day when the dollar would be the determining factor in the operation of the world machine had not begun. The machinery of foreign exchange was trying to function without its partner, the machinery of credit. No genuine creditor role was being played by any nation in the world system.”²⁵

The result of this attitude was that Germany was bled white after all, because the European Allies fixed its reparations at far above the sum that it could conceivably pay. Germany’s only hope was that it could somehow obtain from U.S. lenders the funds to meet its reparations payments. And for a time, it did.

The hard line regarding Inter-Ally indebtedness led the State Department to intrude into the foreign loan process of its private investors. It often had served the interests of private finance capital prior to the war, but now this finance capital was constrained to serve the ends of national diplomacy. This was clearly perceived by the Council on Foreign Relations in 1928: “Whereas in 1914 we owed foreigners about $4,500,000,000, we are now creditors to the extent of $25,000,000,000, inclusive of war debt. The metamorphosis in our financial relation to the world is the occasion for the intervention of the Federal Government. True, this relation, save for the war debt, is a private one between the American investor and the foreign borrower, but the lender is also a citizen of the United States, and his overseas undertakings affect his citizenship and might run counter to the conduct of our foreign relations.”²⁶

The United States thus joined Britain, Switzerland, France and other nations that subsumed their international capital exports to diplomatic ends. A State Department memorandum dated March 3, 1922, announced its hope “that American concerns that contemplate making foreign loans will inform the Department of State in due time of the essential facts and of subsequent developments of importance.” (The memorandum acknowledged that the State Department could not require such consultation.)

The government’s first concern was to prevent loans to nations that had not yet made arrangements to fund and begin paying their war debts to the United States. The U.S. Treasury report for 1925 describes how “after much consideration, it was decided that it was contrary to the best interests of the United States to permit foreign governments which refused to adjust or make a reasonable effort to adjust their debts to the United States to finance any portion of their requirements in this country. States, municipalities, and private enterprises within the country concerned were included in the prohibition. Bankers consulting the State Department were notified that the government objected to such financing.”²⁷

This objection blocked loans to at least one country in 1925, and it opened the way for the State Department to assert its influence over other types of loans. For instance, it objected to a loan to Brazil’s coffee cartel on the ground that the proceeds would be used to support world coffee prices at the expense of U.S. consumers. It also announced its objection in principle to loans made for non-productive purposes on the ground that foreign difficulties in repaying these loans might complicate further diplomacy. But no comment was made on the lack of productiveness that characterized the Inter-Ally arms debts, or on the intergovernmental antagonisms created by America’s hard-line policy to enforce their timely repayment. The Allies’ war debts could be deemed economically remunerative only if they could wring from Germany sufficient funds to repay their own wartime borrowings.

The question no longer remains open why the United States refused to acknowledge the tie between German reparations and the Inter-Ally debts after the reparations were fixed. The Allies did indeed need German funds to pay their armaments debts to America. Failure of the United States to adjust their debts in keeping with their receipt of German reparations and their general ability to pay bled the Allies as the Allies bled Germany.

U.S. Government intransigence over the war debts

U.S. Government finance capital would not even make the accommodation to its debtors that commercial creditors often are prepared to make. As soon as the war ended the government asked its allies to begin paying, with interest, for the arms and related support that had been financed by U.S. Government credits. In the history of warfare no ally had requested such payment for its military support. The provision of arms to allies, by universal custom, had been written off as a war cost. This time the credits were kept on the books. The eagle had unsheathed its claws.

Indeed, U.S. refusal to negotiate the Inter-Ally debts represented a more intransigent position than that taken by the Allies collectively vis-à-vis Germany in the Treaty of Versailles. The treaty itself imposed no fixed sum of reparations upon Germany, large or small, leaving this matter to the Reparations Commission. Article 234 specifically provided that “The Reparation Commission shall after May 1, 1921, from time to time, consider the resources and capacity of Germany, and after giving her representatives a just opportunity to be heard, shall have discretion to extend the date, and to modify the form of payments, such as are to be provided for in accordance with Article 233; but not to cancel any part, except with the specific authority of the several Governments represented upon the Commission.” Thus, although Germany’s reparation payments might be appealed, and even – by unanimous agreement – canceled, no such accommodation was made to America’s wartime Allies. This provision enabled Germany’s annual payments to be scaled down from an annual rate of 7 billion gold marks in 1920 to 2 billion marks in 1929 (about $426 million, at 4.2 gold marks to the dollar).²⁸ But the Allies were granted no such provision. This made it inevitable that they would follow in Germany’s ultimate bankruptcy.

When General Pershing marched into Paris at the head of the Allied troops, he saluted Lafayette’s tomb and announced, “Lafayette, we are here.” A cartoon of the early 1920s depicted him as having approached the monument and saying, “Lafayette, we are here. And now we want to be paid.” Of the nominal $28 billion of total Inter-Ally debts, the U.S. Government was owed $12 billion, some $4.7 billion by Britain, which in turn was owed $11 billion by its European allies. Much of this was owed by Russia and became uncollectible after the Bolshevik Revolution of November 1917. The size of this official indebtedness overwhelmed the private international investments existing prior to the war. Furthermore, whereas “America’s war debts were extended in commodities, the United States asks their repayment in dollars or in United States Government securities at par. The face value of these debts is $2,000,000,000 more than the world’s gold holdings. The completion of the syllogism is that nolens volens the United States must accept remittances in commodities or services in order to provide Europe with dollar exchange.”²⁹ But instead, its tariffs were increased and the Federal Reserve System pursued anti-inflationary policies. The result was to drain European gold to the United States.

The only visible way the Allies could obtain the funds to pay the United States was to insist upon German reparations. “Without the payments of the Allies to the United States,” a British official commented in 1929, “the reparation problem would be perfectly simple. It would be quite easy to fix a figure which Germany could pay, and which the Allies would accept; but once Europe has to pay these huge sums to the United States it becomes very difficult not to put the German debt too high.”³⁰ Germany was burdened with a sum calculated to reimburse the Allies for most of the damage wrought during the war, a sum that exceeded the total value of Germany’s corporate assets. It simply lacked the resources to provide the Allies with the funds necessary to amortize their debts to the United States and to each other. As Snowden noted:

When the funding arrangements which America had made with her European debtors fully mature she will be receiving approximately £120,000,000 [$600 million] a year on account of these debts. The most sanguine expectation of the yield of German reparations is not more than £50,000,000 [$250 million] a year, though the Dawes scheme provides for an eventual payment of £125,000,000 [$625 million] a year. But no authority believes that Germany will ever be able to pay a sum approaching the latter figure. Therefore, what all this amounts to is that America is going to take the whole of the German reparations and probably an equal sum in addition. This is not a bad arrangement for a country that entered the war with “No indemnities, and no material gain” emblazoned upon its banners.³¹

Snowden’s reference was to President Wilson’s address to Congress of April 2, 1917, in which he stated: “We have no selfish ends to serve, we desire no conquest, no dominion, we seek no indemnities for ourselves, no material compensation for the sacrifices we shall freely make.” Wilson had also promised Belgium that it would never be asked to repay the $171 million it had borrowed. But his promise was not honored, although the U.S. Government did agreed to waive the interest on this loan. Britain and France, by contrast, waived the principal as well as the interest on their much larger loans to Belgium.³² As Keynes put matters, France could “barely secure from Germany the full measure of the destruction of her countryside. Yet victorious France must pay her friends and Allies more than four times the indemnity which in the defeat of 1870 she paid Germany. The hand of Bismarck was light compared with that of an Ally or of an Associate.”³³ The result, he warned, would be that “the war will have ended with a network of heavy tribute payable from one Ally to another. The total amount of this tribute is even likely to exceed the amount obtainable from the enemy; and the war will have ended with the intolerable result of the Allies paying indemnities to one another instead of receiving them from the enemy.”

Despite these facts, the U.S. Treasury persistently refused to consider its scheduled repayments and interest as being in any way contingent upon the receipt of German reparations by the Allied Powers. Britain therefore had to turn to France and Germany to raise the funds with which to pay its war debts to the United States. France had only Germany to turn to, and marched into the Saar in 1921 to take in kind what it could not obtain in cash. It was a period in which the most extortionate of nationalistic acts were inspired by frustration at the economic situation imposed upon the world by the United States.

Super imperialism

The emergence of the United States as the overwhelming world creditor was at its very origin a governmental function. It was not the product of private investment abroad of surpluses earned through foreign trade, nor the result of self-expansion of private overseas investment through reemployment in foreign ventures of earnings and internally generated cash flow. Although such reinvestment of private funds did occur, it was small in comparison with the advances made by the U.S. Government during the war to its allies and, after the war, for relief and reconstruction.

In the case of other nations, government intervention in foreign lands generally had followed growth of private investments, especially in areas rich in undeveloped natural resources. Governments either seized territories to secure expansion of the private interests of their nationals in these areas and to exclude the capitalists of other nations from them, or they entered into special agreements with the rulers of such areas to produce identical results. In either case private capital took the initiative; government action was subsequent. This may not have been the invariable order of events but it was the usual order. There had been unquestioned emphasis upon the nurturing of private interests abroad, such interests being identified with those of the nation as a whole.

Attainment of world creditor status by the United States did not follow this historic path, nor was it identically motivated. The great surge of U.S. investments overseas was by government, not by private investors, although this did occur, of course. It was not directed principally toward undeveloped areas rich in raw materials, but to a Europe whose industrial output was larger than that of the United States, but visibly deficient in raw materials within its borders. Motivation for massive U.S. Government financial claims on Europe was political in its emphasis; economics played a smaller role.

The argument is valid, in fact, that private industrial and financial interests in the United States would have been best served by government nonintervention, financial or military, in the European war and in Europe’s reconstruction. An exhausted Europe, prostrated by an indefinitely prolonged war, would have exposed the whole continent to domination by U.S. finance capital, whose resources would have been generated in part by continued sales of arms on commercial terms to the belligerents. From the viewpoint of the generality of U.S. private finance capital, intervention therefore was an error. A totally exhausted Europe could not have continued its hold on its raw materials-producing colonies, as the end of World War II demonstrated. In these respects intervention by the U.S. Government limited the potential spheres of expansion of private U.S. finance capital in both Europe and its colonial areas.

This aspect of the evolution of American international finance capital, politically motivated and initiated and dominated by government, was unique in history. This is not to say that other governments had not in the past financed one or another side in foreign wars, as suited their political aims. But on no previous occasion had any nation employed government capital to become unquestioned creditor vis-à-vis the world. It was something new in international finance. It represented the accumulation and concentration of international assets in the hands of a government, not in the diverse holdings of private capital accretions, however concentrated these might be.

This unique development of U.S. international finance capital departed from the norms of finance, certainly from what had been foreseen by Hobson, Kautsky and Lenin. It not only was unforeseen, it was unforeseeable in the evolving economic and international relations of the period in which their thinking was formed. What had been anticipated was that the growth and concentration of finance capital in the international sphere was an unavoidable stage of the general accumulation and concentration of capital. Kautsky and Lenin shared this view with Hobson, as did Hilferding. Kautsky reasoned that this could lead to war, or to peace if adequate and binding agreements were reached among the international cartels of finance capital.

Lenin disagreed. War not only could, but must result from internationalization of the role of private finance capital. Governments in a capitalist world were the executive committees of the national bourgeoisies. The conflicts of interest among competing national groupings of finance capital must, ipso facto, become international disputes involving governments. It followed that war must ensue, and the wider the industrial and geographic range of the conflicts of interests, the wider the war would be.

Neither Kautsky nor Lenin anticipated or analyzed the unique aspects of emergence of the United States as the one great creditor nation. Not only were they both in error on this account, but so were the people of the United States, including the majority of its scholars. Attention was riveted on the transfer problems inherent in the massive intergovernmental debts and on technical adjustments in the transfer mechanism. But the real question that called for examination by scholars, and was not examined, was what it portended for the world that a leading government would subordinate the interests of its national bourgeoisie to the autonomous interests of the national government. Under such a condition the resources of the nation’s private capitalists would be regulated to serve the ends considered appropriate by government. Not only would international financial resources of overwhelming magnitude accrue to such government, but obligations would be levied, as borrowings and taxes, by foreign governments upon their own citizens, including their bourgeoisies.

In 1925 a European theorist of imperialism, Gerhart von Schulze-Gaevernitz, wrote: “When the history of our time someday is written, what will be deemed the most important upshot of the Great War? The destruction of the royal dynasties that ruled Germany, Russia, Austria and Italy? The rise of France, destroying the balance of power which Great Britain promoted to preserve its own security?” No, he answered. The key effect was not to be found in Europe at all, for all these experiences were overshadowed by a single fact: the shift in the world’s center of gravity “from Europe, where it had existed since the days of Marathon, to America.”³⁴ He concluded that a new era of world politics was opened, which one could call Super Imperialism (Überimperialismus). “In order not to be misunderstood,” he explained, “I turn the concept of imperialism upside down. I understand by Super Imperialism that stage of the capitalist epoch in which finance capital mediates political power internationally, to acquire monopolistic control – and monopoly profits – from natural resources, raw materials and the power of labor, with the tendency towards autarky by controlling all regions, the entire world’s raw materials.”³⁵

Schulze-Gaevernitz saw that something was new, and that it was finance, but he missed the point that it was more in the hands of governments than in those of private investors. Nor did he follow up the implications of the fact that it was based on collecting money by selling arms, yet went beyond warfare, being based on the financial power of a single government as the antithesis of territorial military strategy and private interests alike.

No clear economic ends for the collectivity of private U.S. interests could be gained by the policy that was pursued by the U.S. Government. This distinguished its arrival on the world scene as the dominant creditor from, for example, the more gradual and military initiatives of Britain toward its earlier attainment of such status. Britain’s economic and territorial objectives had been as obvious as their clash with comparable aims in Germany was inevitable. But the United States occupied no such position. Territorial gain was neither a purpose nor a result of U.S. intervention in World War I. When the war was won, no clash of imperialist ambitions followed in the traditional colonial sense.

Instead, the U.S. Government undertook further capital issues to Europe, to recent foe as well as friend. The overwhelmingly governmental nature of U.S. international finance capital, initiated during the war, was further emphasized when the war ended. What was being experienced was the earliest manifestation of what was to evolve in other countries, though in far cruder form, into National Socialism. Germany under Hitler, Italy under Mussolini and Spain under Franco subordinated the individual interests of their separate capitalist groupings to a national political purpose without injuring these interests, but subjecting them to more or less effective regulation depending upon the character of the regime. Precisely this, but in far more benign fashion, was implicit in assumption of the role of the nation’s and the world’s main credit functions by the government of the United States.

There was no resistance to this usurpation of power by even the most formidable of domestic or international finance capital aggregations. On the contrary, the world financial order came to rest on the dominant role in world finance not only able to be played but actually played by the government of the United States.

In the world of capitalism this assumption of lending power by a single national government proved as revolutionary as the Bolshevik Revolution. The United States became all-powerful in the capitalist world; the more so since, immediately after World War I, it reduced the rate of dissipation of its assets by reducing its military budget. The ability of the U.S. Government to pursue political objectives abroad by impassive lending to other countries was reinforced by the government’s decision not to burden itself with the cost of attempting to attain these same objectives by the more traditional military means.

From the outset, therefore, the role of government in U.S. overseas investments was decisive. It was government that, however circuitously, determined the growth and direction of U.S. investments abroad, not the investment of private finance capital that determined the foreign policies of the United States. Without this perception one cannot comprehend the seemingly contradictory and apparently self-defeating policies pursued by the United States toward its World War I allies and during the years that followed. Nor can a foundation be laid for understanding the financial-imperial policies of the United States after World War II until one has grasped the power-seeking context within which the United States conducted itself in the interwar period with respect to German reparations and the Inter-Ally war debts.