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3	America Spurns World Leadership

I shall spare no effort to restore world trade by international economic readjustment, but the emergency at home cannot wait on that accomplishment.

Franklin Delano Roosevelt Inauguration Speech, March 4, 1933

It is not the job of political leaders to adopt economic policies based on broad principles that appear to best serve the world as a whole. Voters expect heads of state to pursue the national interest. Far-sighted leaders may look to the long run rather than pursuing merely transitory advantages, and the long-term position no doubt is helped by growth in the world economy. But the means to such growth along the way must reflect a composite of calculated pursuits of national interest, not its subordination by some to the advantage of other economies.

No nation has shown itself more aware of this distinction between national self-interest and cosmopolitan ideals than the United States. This is partly because of congressional veto power over international policies. It is hard enough for the Executive Branch to mobilize U.S. policy even at the national level, answerable as it is to congressmen and senators representing their local interests. Politicians since the Civil War have set aside protectionist policies to pursue the goals of more open trade and markets, currency stability and the responsibilities of world leadership only when these policies have been calculated to support America’s own prosperity. When economic expansion at home has called for federal budget deficits, monetary inflation, competitive devaluation of the dollar, agricultural protectionism, industrial trade quotas and other abandonments of internationalist principles, the United States has been much quicker to adopt nationalist policies than have other industrial nations.

Also important in understanding U.S. international relations is the sheer size of its home market. U.S. economic policy traditionally has looked to this market as the mainspring of economic growth rather than depending on foreign markets for its major stimulus. This policy of self-reliance was what John Hobson had urged upon Europe as an alternative to its attempts to monopolize foreign markets through the colonialism that helped bring on World War I. In this respect American isolationism contained an element of idealism and even anti-militarism, at least as expressed by the American School’s economic theory. The Economics of Abundance of Rex Tugwell’s mentor Simon Patten went hand in hand with his distinction between private and national interest.¹

European countries historically have been more internationally oriented. This has led them to formulate their policies in terms of symmetrical economic rights so as to provide a basis for nations voluntarily trading, lending and investing with each other in order to widen the overall market. To be sure, there has been a recognition that free trade favors the lead nations, just as free capital movements favor creditor powers. Taken in conjunction with the inflationary excesses of the debt-burdened 1920s, The shift of world economic momentum from trade to finance during the 1920s and early 1930s, prompted France, Britain and other countries to view currency stability as a precondition for stable trade and prosperity. Europe’s internationalist emphasis followed from the fact that trade represented a much higher proportion of its national income than that of the United States – 20 to 25 per cent, compared to just 3 to 4 per cent for the United States. Europe sought to achieve stability as a precondition for business revival.

The resolution of the Inter-Ally debt and its related trade problems was by no means implicit, although it seemed so to economists. There were strong party differences in the United States, reflecting regional as well as ideological differences about what position the nation should take. In fact, Roosevelt’s election signified an about-face in U.S. policy which had been on the way to making the economic accommodation with Europe that most economists – and certainly most Europeans – had believed was inevitable. To the incoming Democratic Administration nothing was inevitable, least of all a relinquishing of America’s creditor hold over Britain, France and the rest of Europe. Yet Roosevelt’s advisors were soon shown financial facts that indeed seemed to speak for themselves: “Up to June 15, 1931, we had received $750,000,000 on principal and $1,900,000,000 in interest.”²

Interest charges thus were nearly two and a half times as large as principal payments. Europe seemed to be on a financial treadmill as its debts mounted up, unpaid and indeed unpayable without access to U.S. markets and elsewhere to displace American exports, or a large-scale government intrusion into property relations by sequestering private European holdings to pay the U.S. Government. In fact, throughout Roosevelt’s twelve-year administration the United States put itself in precisely this “socialist” position of urging nationalization of the properties held by large corporations in order to turn them over to the U.S. Government. To be sure, the United States intended to sell off these enterprises to private-sector U.S. buyers. But the financial process was threatening to transform the world’s major property relations, shifting ownership from debtor to creditor economy. This was a structural change which Hoover and his Cabinet were not prepared to initiate.

An indication of Roosevelt’s willingness to break sharply from the traditional worldview is reflected in Moley’s sarcastic remark that “the collapse of the system of international economics which had, up to that time, prevailed” hardly meant the end of civilization.

Those to whom the gold-standard and free-trade ideals were the twin deities of an unshakable orthodoxy – the international bankers, the majority of our economists, and almost every graduate at every Eastern university who had dipped into the fields of foreign relations or economics – had undertaken to discover a remedy for it. By common consent they had settled upon the reparations and the war debts. If these were canceled (these particular debts among all debts – public and private) or traded for general European disarmament or British resumption of the gold standard or what not, we would root out the cause of our troubles, they had announced. And so ponderous were the arguments that buttressed this formula in the Atlantic states – in academic and presumably “intellectual” circles, at any rate – that it was actually unrespectable not to accept them. . . . Only their prospective dupes, the majority of American citizens, stubbornly refused to swallow them.³

Roosevelt and Moley certainly had no intention of being so duped!

Although Roosevelt was elected president on November 8, 1932, he would not take office for nearly four months, on March 4, 1933. This interregnum reflected one of the American political system’s distinguishing features, a survival from an epoch when rapid transportation had not yet developed to carry newly elected officials to Washington from as far away as California. (Even though air transport has become the norm today, it still takes nearly two months for the new president to take office after being elected.) This interregnum left the Hoover Administration in the position of being a “lame duck.” Not only European governments were concerned over what the change of party control would mean for U.S. attitudes toward the World War I debts, so was the Hoover Administration. An interregnum was at hand that threatened to disrupt the diplomatic negotiations in process. European diplomats and Hoover himself wanted to know how much of this was merely public posturing and what the intentions of the incoming administration really were.

The problem was so pressing in view of the British and French notes of November 10 that two days later, on Saturday, November 12, Hoover sent a telegram to President-elect Roosevelt asking for a meeting to discuss the foreign debt issue. The Moratorium to which Congress had agreed a year earlier had expired, and major payments were scheduled to due on December 15, headed by $95.5 million from Britain and $19.3 million from France.

Roosevelt and his advisors were surprised to receive Hoover’s telegram, as such joint meetings between the outgoing and incoming presidents seemed unprecedented. It was apparent that Hoover wanted to commit Roosevelt to a debt settlement that the Republicans had been negotiating out of sight of the voters. Roosevelt for his part did everything he could to avoid being saddled with responsibility for “the December 15th problem,” that is, the problem of what to do when Europe refrained from paying its scheduled resumption of Inter-Ally debts. He could not very well refuse to meet with Hoover, but he did not want to commit himself to being a part of the solution toward which Hoover seemed to be moving vis-à-vis Europe.

“We were profoundly certain that the foreign protestations of inability to pay were in large part untrue,” writes Raymond Moley, whom Roosevelt had invited to the meeting with Hoover.* “Even if they were not, we knew of no trade for the war debts which seemed advisable – as advisable, at least, as keeping the debts alive to remind our debtors that they were going to find it pretty difficult to finance another war in this country.”⁴ The position of Moley, Tugwell and other advisors set the tone for U.S. policy over the remainder of the 1930s. One constant theme was that the U.S. Government should not give up its claims just so that Europe could use the money to re-arm. The idea was that if Europe would stop arming, it would have the money to pay its debts. It also could raise the money if chose to requisition private holdings.

What makes these U.S. attitudes so fascinating today is that almost no European (with the exception of Charles de Gaulle) made such demands on the U.S. in the 1960s, even though most Europeans disagreed with its military activities in Southeast Asia and were accumulating dollars that they found unusable for buying out U.S. industrial companies, even their European holdings. Just the opposite, as later chapters will describe; despite America’s shift into debtor position vis-à-vis Europe, American private investors continued to buy out European companies. This contrast between the 1930s and 1960s and 1970s should be borne in mind while reviewing the American diplomacy leading up to World War II. It shows how difficult it is to gain international acquiescence in a change in underlying financial and property structures.

Roosevelt meets with Hoover to discuss the debt problem

Roosevelt was well aware of the ideological gulf between himself and Hoover when, on Monday, November 14, he sent a telegram accepting Hoover’s invitation for a “wholly informal and personal” meeting on November 22. He asked Moley to accompany him; Hoover was joined by Treasury Secretary Ogden Mills, but not Stimson.

Moley describes Hoover as plunging “into a long recital on the debt question. He spoke without interruption for nearly an hour . . . Before he had finished, it was clear that we were in the presence of the best-informed individual in the country on the question of the debts. His story showed a mastery of detail and a clarity of arrangement that compelled admiration.” He started by explaining that “our government is now confronted with a world problem of major importance to this nation.” While he did not favor debt revision in itself, “he was willing to bargain if, in compensation for some readjustments on our part, we should receive benefits in an expansion of markets for the products of our labor and our farms.”⁵ The question was, what trade concessions did foreign countries really have to give America?

Roosevelt’s team complained that Britain had failed to include provision for the debt payment in her budget. Why had the Hoover Administration made no attempt to bring up the issue? The debt agreements provided “that questions concerning adjustment of the debt should be brought up ninety days before payment was due,” but this period had passed, as Britain and France had not sent notes to the State Department until November 10. Had Hoover promised these countries that if he were re-elected, he would pressure Congress to forgive the debts? If so, how had he planned to get Congress to approve of any such settlement? “Finally – and this was the core of our doubts and misgivings – we wondered if there was any truth in the rumor that the President had promised [French Premier] Laval or [Prime Minister] MacDonald, when these gentlemen visited him, that he would attempt to bring about a complete readjustment of the debt situation. Men close to Laval openly made this claim . . . the British seemed to believe it. (I was later flatly told by three of the highest British officials that such had been the import of President Hoover’s conversations.)”⁶ Just what unpublicized agreements had been made?

Laying out the common ground between his views and Roosevelt’s, Hoover described the Inter-Ally debts as normal business obligations, not political debts. But the way the United States could best negotiate them was indeed political, on a country-by-country (that is, divide-and-conquer) basis, treating each country individually and bargaining for trade concessions or other benefits in exchange for relinquishing the debt stranglehold. Hoover even agreed that the Allied debts were not related to reparations receipts from Germany, a link that would have let the Allies off the hook from paying the United States once Germany stopped paying them. America had not played a role in setting reparations, but entered the picture simply as an arms creditor and provider of postwar aid. On the other hand, Hoover pointed out, the fact was that the debtors simply could not meet their scheduled December 15 payment. Britain had only $78 million available. If it threw more sterling onto the market to buy dollars, the pound would decline, forcing the dollar up and, with it, U.S. export prices relative to those of Commonwealth producers.

Then, describes Moley, “Mr. Hoover moved to one of those plausible generalizations into which he so frequently fell. Either cancellation or default, he said, would shake international credit. And that would cause economic shivers to pass through this country.”⁷ Thus, “while both cancellation and default ought to be avoided at all costs, we could not insist upon payment without extending some hope of revision or reexamination unless we wanted to force the European nations to establish a united front against us on economic questions. The price of this policy would be ‘grave repercussions’ both here and abroad.” Hoover therefore wanted to revive the Debt Commission called for at Lausanne the preceding summer, for which his administration had been preparing.

Roosevelt rejected Hoover’s emphasis upon restoring financial normalcy. It was business as usual, he believed, that had brought on the depression, which was the result of structural problems such as monopoly power, especially the concentration of financial power. Roosevelt’s solution was to regulate business, whereas Hoover took for granted the political, legal and public regulatory structure. And Hoover hardly was amenable to Roosevelt’s intention of using public regulation to shift power into the hands of government agencies, and incidentally to the hands of the Executive Branch. But precisely because Roosevelt saw economies as being controlled by their governments, he played down the role of foreign relations, even for Europe’s more open and trade-dependent economies. Quite simply, Roosevelt and Congress viewed international debts as a marginal consideration as compared to national planning.

Hoover reports that he concluded the meeting by inviting Roosevelt to join him in calling for “a meeting with Congressional leaders of both parties, which I would call for the next day at the White House, where we would jointly urge the reactivation of a War Debt Commission. This would at once display our united front in the foreign field.”⁸ In fact, he recognized, without Roosevelt’s support he could not get the Congressional assent that was needed to wind up the debt issue. He therefore invited Roosevelt to join with him in naming a bipartisan government commission to negotiate with Europe.

This was just what Roosevelt did not want. He said that he could not be a party to giving up the December 15 payments, although he granted that if these were made as a show of good faith, he would agree to discuss future adjustments “through action of the Executive” at such time as his own administration took office. The problem was complex, and a settlement would take considerable time to work out – the kind of stall people use when they are not prepared to let an issue be brought to a head. “Hoover and Mills were visibly annoyed,” Moley reports. “They had hoped that Roosevelt would prove receptive to Hoover’s general conclusions about the dreadful urgency of the problem. They had hoped that he would go along on the Debt Commission proposal.” The atmosphere became tense as their attitude toward Moley turned from contempt “into cold anger as the afternoon passed.”⁹ They could not understand Roosevelt’s refusal to see what to them was obvious regarding the debt problem, that America hardly could expect to restore trade while the international financial system remained deranged by debts far in excess of the ability of countries to pay.

The press was informed that Roosevelt had accepted “the idea of continuing diplomatic negotiation on debt revision,” but not “the Hoover proposal to revive the Debt Commission.” The East Coast papers denounced his rejection of Hoover’s internationalism as if “he didn’t quite know what the meeting with Hoover was all about.” Much of the blame was put on Moley, whom Roosevelt had chosen precisely for his rejection of internationalist principles. Indeed, six years later, even as war was breaking out, Moley still believed that the refusal to accept Hoover’s proposal “was the first spectacular step Roosevelt took to differentiate his foreign policy from that of the internationalists . . . It was a warning that the New Deal rejected the point of view of those who would make us parties to a political and economic alliance with England and France – policing the world, maintaining the international status quo, and seeking to enforce peace through threats of war.”¹⁰

Having failed to win Roosevelt’s support, Hoover felt obliged to reject European requests that its debt payments be postponed. On November 23, the day after he met with Roosevelt, Stimson replied to the French and German notes of November 10, explaining that only Congress, not the President, had authority suspend the December 15 payments, and that “reparations are solely a European question in which the United States is not involved.” The notes reminded the European Allies that their debts “must be treated as entirely separate from reparation claims arising out of the war.”

As the U.S. Council on Foreign Relations summed up the situation, “in Great Britain, Yugoslavia, Finland, Greece, and other debtor nations, an additional increase has occurred in consequence of currency depreciation. With the pound sterling at par, the British Treasury needed £20,000,000 to purchase the dollars required to pay principal and interest falling due in December, 1932. With the pound sterling at $3.22, it needed nearly £30,000,000.”¹¹ In sterling, Britain’s debt to the United States increased as it threw sterling onto foreign exchange markets for dollars, forcing down the value of its currency. The effect was to make Britain’s debt transfer an infinite function, much as Germany’s had been a decade earlier.

To such arguments U.S. diplomats replied coldly that if the debtor countries only would reduce their armaments expenditures, they would have that much more money to honor their international obligations. The debtors replied that they could not take steps to stabilize their currencies until their war debts had been reduced to workable levels. On December 1, a week after receiving Stimson’s reply, Britain informed U.S. officials that it deplored their demand to be paid in full, and “and concluded with the veiled threat that if war-debt payments were to be resumed the United Kingdom would have to strengthen its exchange position through measures further restricting British purchases of American goods.”¹² The effect of this warning was much like that of Third World countries arguing today that if the United States insists on payment of dollar loans, it must open its agricultural, textile and steel markets to debtor countries and let debtor countries protect their markets from U.S. suppliers.

On December 11 a follow-up note from Britain said that it would make the scheduled payment due on December 15, but would view it “as a capital payment of which account should be taken in any final settlement.” Stimson replied that the United States could not accept conditions imposed outside of the original payment agreement. Britain paid anyway, but insisted on the right to bring up at a future conference the idea of counting its debt payment as reducing the principal. This would have converted the debt effectively into an interest-free obligation. This is what friends traditionally do amongst themselves, so the idea hardly was out of the question anthropologically speaking. But what was at issue was power politics, not friendship.

France defaults and Britain pays only a token amount

Britain paid in full on December 15, but France defaulted, claiming that suspension of its payment was “the normal, equitable and necessary sequel” to the Hoover Moratorium. What infuriated U.S. officials was that, unlike Britain, France had the money and could have paid in their view, but chose not to as a matter of policy. Britain had never made the debt issue so categorical. It had asked politely hat in hand for debt forgiveness, not insisted on this imperiously as if it were a matter of obvious common sense. The Chamber of Deputies “authorized payment only if the United States would join an international conference designed to adjust all international obligations.”¹³ Britain, with its “good behavior” which had been so pleasing to the Americans, exemplified precisely what the French wanted to avoid. Yet Premier Herriot paid a steep price as his government fell when he failed to persuade the Chamber of Deputies to follow the British course. Yet another step was being taken on the path leading toward World War II.

On December 16, Moley and Tugwell were presented with the Williams-Day Report which had been prepared for Hoover’s intended follow-up to Lausanne. Moley was “alarmed” to see that it took just the opposite position from the priority Roosevelt and Congress wanted to give to the domestic market. It “indicated that out of the meetings of experts was going to come an internationalists’ agenda – a program for a return to an international gold standard, for the sharp writing-down of international debts, and for measures of international ‘cooperation’ wholly incompatible with the inauguration of the New Deal’s domestic program.”¹⁴ Roosevelt believed that domestic recovery must take precedence over international concerns. It was not a revival of foreign trade that would cure the depression, but economic restructuring at home – the restructuring that the New Deal promised to bring about.

Moley was made “sick at heart” by hearing from Geneva that “Professor Williams had said that he personally believed that a debt settlement was the chief contribution that the United States could make to the Conference.” This attitude made him worry that Europe might succeed in bamboozling America at any such international meeting. “The more we’d considered what might come of the Conference, as a matter of fact, the less importance it seemed to have to the United States.” For the agenda for the conference “offered no real prospect of substantial benefits to this country.” Why, then, bother with it at all? Why not simply demand continued payment? “In the winter of 1932–33 our problem was to make them understand plainly that we saw what was up and refused to be out-traded. And our immediate task was to resist the efforts of their sympathizers in this country to persuade us that there was an inseverable relation between debts, world economic recovery and disarmament.”¹⁵

On December 17, Hoover sent a lengthy telegram to Roosevelt pointing out “that the debts could not be dissociated from the other problems that would come before the Economic Conference, and that the conference should be assembled as soon as possible.” Picking up the arguments he had made at their November meeting, he once again urged Roosevelt to join with him to select a delegation to make progress in reducing the level of intergovernmental debt.¹⁶

But Roosevelt would not go along, so two days later, on December 19, Hoover found himself obliged to announce in a special message to Congress that the government had declined to grant Europe the requested postponements, “as we considered that such action world amount to practical breakdown of the integrity of the agreements; would impose an abandonment of the national policies of dealing with these obligations separately with each nation; would create a situation where debts would have been regarded as being a counterpart of German reparations and indemnities and thus not only destroy their individual character and obligation but become an effective transfer of German reparations to the American taxpayer; would be no relief to the world situation without consideration of the destructive forces militating against economic recovery; would not be a proper call upon the American people to further sacrifices unless there were definite compensations.”¹⁷

Roosevelt replied to Hoover’s message that day, reiterating that he “looked upon the three questions of disarmament, debts, and economic relations as requiring selective treatment,” and that there was no reason to submerge the Economic Conference “in conversations relating to disarmament or debts. There was a ‘relationship, but not an identity.’” As Moley put matters, the British “wanted to establish, if possible, the theory that unless debts were settled there could be no possibility of agreement on other economic questions. But we could take in good part this natural attempt of the British to out-trade us without falling for it. And what was there to be gained by rushing into a conference with people who had championed the substance of the British proposals even before the British had made them?” All negotiations should be put on hold until after March 4, when a strongly Democratic Congress would be put in place, immune to such internationalist Anglophilia.¹⁸

Hoover recognized that affairs were surging ahead in Europe regardless for America’s political schedule, and on December 20 suggested that Roosevelt pick as an advisor someone knowledgeable about international affairs, such as Owen Young, Colonel House or, presumably, nearly anyone other than Moley. Roosevelt granted that “the British were probably entitled to special consideration because we had been less lenient with them than with any of our other debtors in the debt settlement.” But he insisted that any debt negotiations would have to be conducted by officials appointed by himself, after March 4. And as for the Economic Conference, the topic of debts should not be brought up, as it was an annoying side-issue. Creditors never want to hear about why debtors can’t pay, after all, preferring to focus single-mindedly on the debt that is owed. Roosevelt’s main concern was the U.S. economy in any event, and he decided that no further meetings with Hoover, Stimson or others were necessary regarding the debt issue prior to his taking office in March.

Led by the Morgan partner Russell Leffingwell, the internationalists tried to promote Norman Davis, a State Department Democrat, to a position of influence. Moley “was sure he wanted to get the debts out of the way to facilitate reviving private lending to Europe.” His fate was sealed when Roosevelt let him tag along with Moley and Tugwell on January 20 to meet at the State Department with Stimson to compose a reply to the British regarding the agenda for the Economic Conference planned for London in the summer. After Davis sided with Stimson’s position, Roosevelt henceforth chose to dispense with his advice.

With regard to the prospects of negotiating a quid pro quo with Europe at the January 20 meeting, Tugwell repeated Roosevelt’s argument that U.S. economic recovery did not really need tariff concessions from Britain or France. What was needed was a revival of confidence at home. To concede that German reparations could not be paid would open the door for the Allies to claim that this would deprive them of the money to pay their World War I debts. They would demand U.S. concessions on their own debts in return so that their debt service should be brought within their ability to pay. (In fact, Stimson’s diary for that day reveals that in a talk with Owen Young in New York, Britain hoped “for an independent settlement of the debt question without any concession in return.”)

Deliberate blindness as to the financial dynamics at work was thus the position dictated by U.S. self-interest – that is to say, the interest of its government as creditor, which the Eastern banking interests had come to realize was antithetical to their own private ambitions. Tugwell and Moley refused to authorize a statement acknowledging that America would address the debt problem at the London conference. They also insisted that Stimson’s reply to the British note would have to reject the idea that concessions on the debt issue might form the basis for currency stabilization. The major internationalist U.S. newspapers might agree with public opinion in Europe not to pay the war debts, but Congress was not about to let Europe off the hook. On the other hand, tariff and trade matters affecting the local interests with which voters and Congressmen were concerned might be dealt with at an international conference. Roosevelt’s advisors wanted to narrow the agenda to this area alone.

In a huff, Stimson accused Tugwell of “trying to tear down everything I have been working for in my whole term,” and said he would “leave a memorandum in the State Department files registering his mature judgment that another course would have been preferable.”¹⁹ Moley records that he didn’t give a hoot. The liberal internationalist wing of the Democrats was shunted onto a political siding. Hull’s position as Secretary of State served as little more than protective coloration for the New Dealers.

On January 24, having been apprised of the stalemated State Department meeting, Chancellor of the Exchequer Neville Chamberlain gave a speech taking “the position that the settlement of the debt to the United States must be both small and final.” This time Britain did not seek a quid pro quo. A showdown was clearly in the making, and Roosevelt’s team for its part did not intend to give an inch.

When Britain’s ambassador Ronald Lindsay was called back to London for consultation, Roosevelt suggested to Stimson that it might clarify matters if Sir Ronald first came to have a talk with him in Warm Springs where he was resting up. On January 28, Lindsay arrived and was treated to a discussion outlining the U.S. logic that Europe could pay if it would cut back its military spending, and that in any event “the nationals of both England and France owned vast amounts of securities and other property in this country which could have been utilized, within limits, in making the transfer.”²⁰ As the next chapter will show, U.S. diplomats were still making the latter point in 1940–41 when they were negotiating Lend-Lease and U.S. support of Britain and the rest of Europe against the Nazi aggression that ultimately drew the nation into World War II.

Moley brusquely dismissed the fact that selling sterling on the foreign exchange market to buy dollars to pay foreign debts was quite a different matter from buying arms for domestic currency. In the former case sterling’s exchange rate would fall, but this would be the response to domestic arms spending only if 100 per cent spilled over to buy foreign products – something unlikely given Britain’s large-scale unemployment. This Transfer Problem had been the basic point Keynes had made in the 1920s, but neither Moley nor the President was well versed in economic theory. “I doubt that either Roosevelt or I could have passed an examination such as is required of college students in elementary economics,” he reminisced. “Both of us were bored and confused by long, learned memoranda with which so many people had inundated us over the year since the campaign started in 1932.” Perhaps “the limitation of our economic expertise was an advantage,” for at least they had not been indoctrinated by the internationalist orthodoxy “that things would automatically right themselves in the fairly short run.” The problem with Republican policy was that “the advice sought by Stimson and Mills came mostly from the New York banking community and . . . these gentlemen not only were grossly ignorant of causes and effect in agriculture and industry, but in the crisis they could not supply a remedy for their own derelictions.”²¹

Moley recognized that “future payments on the debts would be small and far between,” but nonetheless believed that “they should remain on the books. So long as they were alive, their presence would be a warning, however slight, that the European debtors should not look upon the United States as a source of new help.” He later sought to justify his actions in 1933 by depicting Lausanne as “a minor Munich,” as “the cut in German reparations had been nothing less than an invitation to the Germans, who looked upon France and England as ‘paper tigers,’ to dedicate themselves to rearmament in anticipation of another war.” It followed that “To make what Tugwell called ‘the grand gesture’ of reducing or canceling the debts would seem ironical to the people of the country, who were themselves sorely burdened with private indebtedness – impoverished and mortgage-laden farmers, small businesses that could barely borrow enough from the banks to stay alive, big businesses that were depressed for lack of customers. For a Presidential candidate who had so seriously planned to attack the problem of debt on the home front to make international concessions after election would be resented.”²² Left out of account was a recognition that foreign economies no more could pay their international debts than American farmers, consumers and businesses could pay their domestic debts.

The European delegates hoped that the Allies, Germans and Americans might settle among themselves what had been left unresolved at Lausanne. Matters moved toward a head on the eve of Roosevelt’s inauguration when Britain presented a seven-point memorandum on “British Policy on Economic Problems.”²³ “The depression cannot be effectively remedied by isolated action,” it stated, hoping to ward off U.S. isolationism. Hence, solutions must be sought through “international action on a very broad front,” toward which the Preparatory Commission of Experts established at Lausanne provided a useful basis for discussion.

In keeping with Roosevelt’s own ideas, the note’s first objective endorsed “a rise in the general level of prices, especially of farm commodities.” It also endorsed a coordinated monetary policy in both Britain and the United States “to ensure the provision of cheap and abundant short-term money.” The implication was that debtor countries should be freed from having to pay their debts to the United States, and to keep their interest rates high so as to attract foreign loans to provide the dollars to make these payments.

A third objective was currency stabilization – something that could not be done without alleviating the debt burden, for the major factor destabilizing currencies was debt service. And only an alleviation of this debt service would promote the fourth objective endorsed by the British note: abolition of the exchange controls that were threatening to restrict world trade. A related fifth objective was to relax trade barriers such as quotas, as well as a general agreement to reduce tariffs. This ran counter to the agricultural protectionism advocated by U.S. farm interests and soon written into law by the New Deal’s Agricultural Adjustment Act of 1933.

Hopes by Western U.S. senators for bimetallism – that is, inclusion of silver alongside gold in world central bank reserves – was dismissed as being “impossible of adoption,” a verdict that the Preparatory Commission also had reached. The problem of low silver prices would be solved “not by a rise in the price of silver as such,” but through “a rise in the general level of commodity prices, which would bring up the value of silver at the same time.”

Finally, the British listed their most important objective: U.S. assurance that the debt issue would soon be settled at an international conference. “The existence of these debts constitutes, as the Preparatory Commission have said, an insuperable barrier to economic and financial reconstruction, and there is no prospect of the World Economic Conference making progress if this barrier cannot be removed.”

This British agenda was about to be countered by Roosevelt’s New Deal. His program did indeed endorse higher price levels and lower interest rates. But as far as currency stabilization was concerned, Roosevelt was about to take America off gold, while his agricultural program and related policies would require protectionist trade quotas. As to settlement of the war debts, Roosevelt wasn’t prepared even to begin discussing a resolution of this problem.

MacDonald and Herriot visit Washington

After taking office on March 4, 1933, just five weeks after Hitler became Chancellor of Germany, President Roosevelt declared a bank holiday, repealed prohibition, provided unemployment relief and endorsed agricultural price supports. The last presupposed import quotas for the crops whose prices were being supported. On April 17, Senator Elmer Thomas of Oklahoma added an amendment authorizing the President to issue greenbacks, fix the ratio of the value of silver to gold and provide for free silver coinage, and fix the weight of the gold dollar by proclamation. Three days later, on April 20, Roosevelt cut the dollar loose from gold to find its own level. His objective was to reflate prices according to the theory of Cornell economics professor George F. Warren that domestic prices would rise in proportion to the dollar’s depreciation against gold. Rising prices would alleviate the depression by making it easier for farmers, workers and businesses to pay their debts. Both the House of Representatives and Senate backed the inflationary policies deemed necessary to reduce the debt burden and speed economic recovery.

Dollar depreciation had the incidental effect of increasing U.S. export competitiveness vis-à-vis Europe, wiping out much of the trade advantage that Britain had gained by going off gold the previous year and generally aggravating Europe’s already debt-ridden balance-of-payments position. But for the United States, Walter Lippman wrote, “national policies were bound to prevail. In such a conflict they always do prevail in any powerful nation.” The basic problem with such a policy was that “In spite of the underlying conception of the AAA [Agricultural Adjustment Act] and of NRA [National Recovery Act], that competition in the domestic market must be limited and controlled, the Administration continued to advocate freer trade in the world.”²⁴ The erroneous assumption was that foreign countries could open their markets in the face of increasing U.S. payments surpluses and still pay their dollar-denominated war debts.

Britain began to prepare for the worst. In May it negotiated trade preferences with Argentina, extending the Imperial Preference system whose foundation had been laid at Ottawa a year earlier. Roosevelt approved an increase in U.S. cotton tariffs, and the trade wars of the 1930s began to gain momentum.

Hoping that the conflict could be resolved without a break, the British Prime Minister, Ramsay MacDonald, planned to visit Washington to seek U.S. commitment for the London Economic Conference. His Cabinet warned him not to make the trip “without advance assurance from us that the June 15^th debt payment could be postponed.” Otherwise, it was feared, he would be embarrassed by a failure in what had become Britain’s major economic concern. The United States refused to provide any such advance commitment, but MacDonald came anyway, accompanied by Sir Frederick Leith-Ross, Chief Economic Advisor to His Majesty’s Government, and Sir Robert Vansittart, Permanent Under-Secretary of State for Foreign Affairs.²⁵

Roosevelt invited former Prime Minister Herriot to the meeting in recognition of his having risked his political career attempting to get France to pay its December debt installment. Herriot was flanked by the economic advisor Charles Rist and Jean J. Bizot, Advisor to the French Treasury, as well as Robert Coulondre of the French Foreign Office and Paul Elbel of the Ministry of Commerce. Italy sent Guido Jung and a staff. Germany sent Hjalmar Schacht.

With the London Conference less than three months away, the world’s financial system was thrown into turmoil as Roosevelt cut the dollar free of gold while these visitors were crossing the Atlantic. Meanwhile, the State Department drafted a reply to the British proposals for a joint statement of principles that would guide the London negotiations. The task initially fell to Norman Davis, the suspect internationalist, but Moley quickly eliminated him from further involvement in the negotiations and set about preparing a reply himself, rejecting the idea “that the maintenance of the debts, whether the installments were paid or not paid, would in any way hinder recovery here or abroad.”²⁶

James Warburg, an official formerly with the Bank of New York, worked out a formula to settle the debt issue. Nicknamed “the Bunny,” it proposed to cancel all interest charges and substantially reduce the remaining principal “in the light of the depressed conditions that had arisen since the last agreements had been made in the 1920s. The debtors would reaffirm their obligations by depositing a note for the new amounts with the Bank for International Settlements. These notes were to be secured by a deposit of 25 per cent of the principal amount in gold bullion plus another 5 per cent in gold or silver. The remainder of the debts would be dealt with by a sinking-fund agreement under which each debtor would make certain annual payments to the Bank for International Settlements,” which would use the payments to buy U.S. Government debt. This proposal would have turned the Bank for International Settlements from an instrument designed to collect German reparations into one in charge of transferring European payments to the United States. European tribute would finance America’s budget deficit, leaving its revenue to be spent on goods and services to help pull the country out of depression.²⁷

Upon their arrival Roosevelt informed the European leaders that this was as far as the United States would go toward resolving the debt issue. As for the dollar’s falling value, he assured them that he did not want speculation to push it down “unnaturally,” but wanted it to find a “natural” level, defined as one that would restore prosperity for America. This certainly meant a much lower exchange rate against gold, as there is little point to devaluation unless one devalues to excess, that is, by enough to change existing trade patterns in one’s favor. This meant that the dollar’s fall would win export trade from countries that sought to keep their currencies on the gold standard at the existing gold price.²⁸

Roosevelt left the Europeans with the impression that he was eager to resolve the problem, however, and they left Washington in the belief that a final solution would be reached at the London Economic Conference. To a large extent they were merely reading in their hopes, for the joint statement Roosevelt issued with MacDonald was carefully written to be noncommittal, providing the United States with the escape clause that an improved gold standard should operate “without depressing prices,” “when circumstances permit,” and containing the qualification that its policy commitments would aim at “ultimate reestablishment of equilibrium in the international exchanges.”²⁹ Just what did all this mean about stabilizing exchange rates and opening markets in the near future was not clear.

Wheeler-Bennett noted how urgent this had become in January: “The flagging hopes and expectations of the world are centered on the Economic Conference . . . It may be the last upward effort that brings the world from the brink of disaster on to firm ground; it may be the last despairing struggle before the final plunge. By the date of the opening of the Conference, President Roosevelt will have been inaugurated, and the world will know whether or not he will use the reduction of war debts to bargain for the reduction of tariffs.”³⁰