War Debts--Not Dead, but Sleeping

WHEN Mr. Coolidge dismissed the war-debt problem with the remark, ‘They hired the money, did n’t they?’ he simplified a problem for millions of Americans, but he did not contribute one iota to understanding.

The war-debt issue is a trap for the unwary. Even the Washington correspondents found this out when Mr. Leo C. Rosten presented them with a question on the subject. According to his new study, The Washington Correspondents, only 40.9 per cent of those questioned spotted the fallacy in the Borah-like statement: ‘If European nations can afford to arm, they can pay us the war debts.’ That fallacy underlines Mr. Coolidge’s statement, too. They both ignore the special circumstances involved in making payments in dollars across international frontiers.

Simple was the debt-creating process. All that America did was to open a credit account for Allies buying in the United States. Simple, too, is the domestic financing of rearmament. All that needs to be done is to tax or borrow from your own citizens. Paying a bill contracted abroad, howover, is more complicated. First the debtor government has to raise the money from its citizens; but then, with the tax receipts, it has to buy dollars. And it all depends upon prior American foreign purchases and lending whether those dollars are available.

This special problem of payment is one of many misunderstood elements of the war debts. Even the simplest facts are distorted in public debate. Every pay day, for instance, the headlines report that Finland is the only ‘war debtor’ to make payment. But Finland is not a war debtor. That country did not even come into existence till after the war, and its debt was contracted in surplus foodstuffs and materials which were left in Europe after the war making. In Helsingfors last summer no Finn with whom I discussed the subject omitted to tell me the circumstances of the obligation. I replied that it was a Sisyphean task to try to disabuse the American mind. The notion that Finland is the only debtor to pay its war debts is as deep-rooted as the idea that repaying war debts to a foreign country is no whit different from paying home manufacturers for armaments.

It would make the complications worse to rehash the old war-debt arguments: whether the war debt is ethically different from commercial debts; whether some of the war debt was ethically liquidated by services rendered when military America was preparing to enter the lists; whether the war debt is bound up with reparations; and so on. A British signature in 1923 nullified at least the dialectical value of most of these arguments. That was when Mr. (now Lord) Baldwin headed a war-debt mission to Washington. The object was to put the accumulated war-time promises to pay in some permanent debt form equipped with an amortization table. The agreement, concluded after considerable haggling, provided for payments spread over a period of sixty-two years, and carried an average interest rate of 3.3 per cent. The signature on the dotted line became a new starting point in war-debt debate.

In London to-day the Baldwin agreement is stigmatized as a major blunder in British history. I saw Mr. Baldwin after he had signed ‘the biggest financial transaction in history,’ and even then he and his entourage did not look exactly cheerful. ‘Not an unfair business deal,’ said Mr. Baldwin. There was a lugubriousness in the conclusion. It changed to bitterness when the Chancellor of the Exchequer, as he was then, landed in England. ‘If you look at the Senate,’ he told the ship news reporters, ‘you will find the majority come from the agricultural and pastoral communities, and they do not realize the meaning of any international debt.’ That impolite remark plainly showed the resentment with which Mr. Baldwin committed his pen to paper in Washington. Or perhaps he was reacting to the myth sedulously circulated among Americans that the agreement represented considerable cancellation of the original debt.

However that may be, Mr. Baldwin’s resentment was nothing as compared with that in the British Cabinet. Andrew Bonar Law was then Prime Minister. That hard-headed Scot would have rejected the agreement outright, but, bowing to the tradition of Cabinet responsibility, he allowed a favorable resolution of the Cabinet to stand under his own sponsorship. Not that any member of the Cabinet thought that the bargain was a fair one. But with Mr. Baldwin, then under the influence of Montagu Norman, enigmatic governor of the Bank of England, they felt that a settlement of the war debt was a sine qua non of the reëstablishment of British financial prestige and currency order in Europe. The arguments under that head in the Britain of 1923 were regarded by André Siegfried as ‘almost mystical.'

It is one of the ironies of post-war history that the agreement which was thought to be necessary to build up the currency edifice in Europe helped to pull it down again. British policy on both German reparations and Interallied debts had been based upon the American treatment of the war-debt question. It was called the policy of the Balfour Note of 1922. Britain was owed more than she owed, apart from reparations; but in the Balfour Note she declared her willingness to join in a general write-off, debts and reparations included. In no circumstances, it was added, would more be asked of British debtors and Germany than was necessary to pay the United States. Thus the Balfour Note implied: no receipts, no payments. When the United States, therefore, insisted upon a settlement, Britain insisted upon settlements from her debtors, and moreover aided France in milking Germany of reparations. No doubt the burdensome shifting of debt and reparations payments over international borders promoted the exchange crisis in Europe that brought the Humpty Dumpty of currency stabilization tumbling off the wall.

The Balfour Note may be forgotten in the United States. But it still animates much of the war-debt discussion in London. In 1923 the British were not successful in inserting a ‘safeguard clause’ in their debt settlement by way of protecting the principle of the Balfour Note. But no doubt they made a mental reservation that all the debts and reparations stood or fell together, as the French made a written reservation in the Chamber of Deputies ratification of the French war debt. The British reservation may not be cricket, but the British know it. It is the Baldwin agreement that sticks in the British craw, not the war debt as such. You can tell this from the language that is leveled at Lord Baldwin whenever the subject crops up in Parliamentary debate. I heard Lloyd George call the agreement ‘ a most monstrous bargain.’ Lord Snowden’s most vitriolic epithets used to be reserved for the luckless Baldwin. The mildest of them was ‘greenhorn.’

And yet it must be observed that, in spite of this effort to wriggle out of the Baldwin agreement, the wriggling has not damaged British credit even in America. Two years ago I made a canvass of American investment banking opinion on the price that Britain would have to pay for a commercial loan in lump-sum settlement of the war debt. Without hesitation the bankers agreed that such an offering could be marketed in the United States at between 3 and 3¼ per cent. In other words, the British Government could raise money in the American market on the same terms as the American Telephone and Telegraph Company, despite the default, or, as the French call it, deferment. Surely this shows that the war debt is sui generis.

So, perfidiously or not, many Britons think of the war debt in terms of the Balfour Note. At the Treasury in London I was shown the accounting, as of last June. It is still being carried in red ink in British government ledgers, as follows. Reparations paid to Great Britain amount to 610 million dollars, war-debt receipts to 350 million; total, 960 million. Against this sum the British have paid the United States on war-debt account no less than 2025 million dollars, or twice as much as they have received. Incidentally, this is about half of the amount originally borrowed, which was 4074 million dollars.

For five years there have been no receipts on reparation and debt account. For five years, consequently, there have been no war-debt payments to the United States beyond a ‘token’ payment or two.

Probably the fact that payments have ceased altogether may explain this throwback to Balfour Note argumentation. ‘Tokens’ continued to be paid even after Germany and Britain’s war debtors had ceased to pay. At least those tokens recognized the obligation. But Congress treated them with such contempt that the British stopped even token payments. For such payments would not have saved the British Government from being branded as a defaulter under the Johnson Act. That ‘legislative spasm,’ to quote The United States in World Affairs, can be regarded only ‘as an expression of international ill-will.’ One does not have to remain long in England to discover the sense of injury which is felt over the Johnson Act.

It is wrong to suggest, however, that the war debt has been forgotten in Great Britain. The talk about the Balfour Note is, so far as my impression goes, a sort of rationalization of a regretted impasse. One war-debt-revision mission has already been to Washington. This was the one headed by the chief economic adviser to the British Government, Sir Frederick Leith-Ross. Sir Frederick arrived in the fall of 1933. He proposed, according to gossip, a 10 per cent settlement of the present value of the debt. That is, the British washed the United States to accept the same arrangement with which they had wound up the reparation account the year before. True, this was Balfour Note diplomacy. But I think the British would better the offer to-day as part of a general economic entente with the United States. At any rate, I gathered in London that they are anxious to settle what Mr. Rosten calls ‘the foremost bête noire of our foreign relations.’ At least they can no longer proffer the commercial arguments concerning the difficulty of obtaining dollars which from time to time have been put forward in place of the real political arguments. Secretary Hull is offering to reduce any transfer difficulty contained in the Hawley-Smoot tariff. He has even offered to consider deliveries in kind — that is, payments in the same form in which the debts were ‘hired,’ thus avoiding the dollar complication. But with the Administration raining dollars on the world for gold and silver purchases there can be no difficulty in obtaining dollars for transfer.

The war debt, in the happy event of further conference, can be adjusted by a common recognition that two rights are in conflict. And that adjustment would be promoted, I suggest, by a little candor in British representations. It is the lack of this candor that has irritated Americans as much as the lack of remittances. British ineptitude in wardebt dealings with the United States started with the Balfour Note. In Wickham Steed’s words, this was ‘a deplorable exercise in short-range acuteness,’ in that it was destined to make the United States look like an exigent scapegoat. Since the Baldwin settlement, wardebt overtures from London have been equally unfortunate. The good that might flow to the creditor from revision; the necessity that the creditor should make the first move; the commercial difficulty of paying — these approaches have hardened the American heart. The first move, obviously, belongs to the debtor. He should forget the Balfour Note, acknowledge the Baldwin Settlement, and explain that that settlement was accepted only in the hope that it would start the machinery of peacetime progress again. That the settlement, patently, has had the opposite effect should be the grounds for a request for revision.

Then, I suggest, there may be a chance of demobilizing the psychological attitude which fastens around the war-debt problem in the United States. The errors in fact are not half as important as the errors in attitude. Americans, in case an offer comes from Britain, should again ask themselves some basic questions.

The first concerns ‘capacity to pay,’ one of the American formulas of settlement. Was it ever feasible to assess the ability of debtor nations to pay into the dim future of sixty years ? And was it not absurdly discriminatory to charge Britain 3.3 per cent while charging Italy 0.4 per cent? The negotiations of funding the war debts were more like the proceedings of a bankruptcy court than an effort to wind up the financial relations of what Woodrow Wilson called a partnership.

Was it just — and justice was the first American formula bequeathed to the World War Debt Funding Commission — to try to collect any interest at all on a debt contracted in a common cause?

There are precedents for the sacrifice of interest in the history of war loans. For instance, French help in the Revolutionary War. This 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 war-time interest charges. Between 1786, when the first repayment fell due, and 1790, no repayment could be made by either the Confederation or the infant Republic, and repeated calls for a settlement by the newborn French republic in 1793 fell on American ears attuned only to domestic harassments. It was left to Alexander Hamilton eventually to apply his financial genius to a tardy liquidation of the indebtedness, which was converted into domestic bonds and retired in 1815.

To Senator Hiram Johnson and other diehards the motto of ‘all or nothing’ may involve a certain pride. But Americans in general, with the prospect of further tax bills ahead of them, may feel that war-debt pride is an expensive luxury. Part of a loaf is better than no bread to a nation which has been unable to balance its budget since 1931. Moreover, Secretary Hull is a shrewd negotiator. He can be depended upon to combine a reasonable approach with an ability to get the maximum amount of bread; possibly, as a side concession, he might obtain the amelioration on behalf of the American consumer of the rubber and tin monopolies which thrive under British management. On both sides, however, the main desideratum is an independent determination to come to agreement.