Super Imperialism. Michael Hudson
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