Super Imperialism. Michael Hudson
Dawes Plan, was the maximum the Allies could extort. In fact, it was beyond the capacity of Germany to pay, as any increase in the real value of the reparations debt must impoverish Germany to the point of national exhaustion. Hence, the protection extended to Germany against the terms of trade turning against her as between the changing values of commodity exports and fixed gold-mark reparations payments.
Similar treatment was not accorded to the Allies with respect to their debts to the United States. America refused even to contemplate that given a fall in world prices – a rise in the value of gold as measured in commodities – the Inter-Ally debts, which amounted in practice to Britain’s and France’s debts to the United States, no more could be paid by Britain than reparations could be paid by Germany. U.S. policy was to treat Germany, the recent enemy, as a country in need of protection against the effects of a fall in prices, but to treat Britain, the recent ally, as a nation to be trodden down if a fall in world prices should occur. The recent enemy was to become a ward of the U.S. Government; the recent ally to be punished.
Because this ally was the world’s great imperial power and Germany its recent challenger for imperial supremacy, the suspicion is warranted that the United States had set its eyes lustfully on the British Empire. To swallow the Empire, the United States must first dislodge it. Britain must be forbidden the fruits of victory and Germany established again as its rival. The same policy was to recur after World War II.
World debt had become, and was used as, an instrument of power by the United States against its only serious rival, the British Empire. Britain was held responsible for payment to the United States of Germany’s reparations equivalents to Belgium, France and Britain, whether or not Germany could and did make such payment. The British debt was to be increased in real value if commodity prices should fall, but Germany’s debt obligations to Britain, both direct and indirect, were to be substantially protected in terms of its commodity price equivalent.
The derailing of international debt service prompts controversy
For a decade the world’s debt overhang had been kept afloat by the expedient of yet more debt. Private U.S. lending provided dollars that followed a triangular route to German municipal and private borrowers, via the German central bank to the governments of Britain, France and other Allied Powers, who recycled the dollars back to the United States. But the Great Crash of 1929 extinguished vast pools of paper capital, drying up sources of international borrowings. In 1931 international short-term debt was reduced between 33 and 40 per cent, withdrawing about $6 billion from commercial use in the debtor countries.30 The reduction of credit would have been much greater had it not been for the standstill agreements that froze short-term loans to Germany. The effect in any case was violently deflationary, collapsing world prices and trade. Foreign governments were unable to raise the dollars needed to pay their scheduled debt service, either by increasing their exports or by borrowing new private funds.
Almost unable to borrow abroad, Germany reduced its reparations payments. In 1932 it cut back its debt-service transfer first by half, then by 70 per cent. Meanwhile, Britain’s attempt to continue paying its share of the Inter-Ally debts, despite the slowing reparations receipts from Germany, forcing down the value of sterling at the same time that British prices were tumbling.
The decline in world prices increased the real burden of debt service because the transfer requirements, measured in commodities, increased as the dollar price of these commodities fell. “Since the various installments of that debt were negotiated and spent in this country, our price level has fallen by perhaps 50 per cent, thereby approximately doubling the actual payments demanded.”31 Yet the U.S. Congress was adamant that the Hoover Moratorium was merely a one-year postponement, not a cancellation of foreign indebtedness to the U.S. Treasury and certainly not contingent on Europe’s success in extracting further reparations from Germany. On December 10, 1931, President Hoover reassured Congress that “Reparations are a wholly European problem with which we have no relations.” And when the Brookings Institution published Harold Moulton’s analysis of the French war debt problem, leading the Foreign Debt Commission to scale down the U.S. claims on France, Hoover told a press conference that Moulton “represented a liability to the United States to the extent of $10 million a year in perpetuity.”32 He subsequently asked Congress to reestablish the Foreign Debt Commission with a possible eye to scaling down the debts, but his request was in vain, despite support by Senator Borah, Chairman of the Committee on Foreign Relations.
The representative U.S. view was epitomized in ex-President Calvin Coolidge’s terse comment, “We hired them the money, didn’t we?”33 On December 17 the House Ways and Means Committee reported that “It is hereby expressly declared to be against the policy of Congress that any indebtedness by foreign countries to the United States should be in any manner canceled or reduced.” A minority report went so far as to criticize President Hoover for proposing the reparations-and-debt moratorium in the first place, without first having consulted the full Congress. But on December 22, 1931, the Hoover Moratorium finally was ratified, although Congress charged the nation’s debtors 4 per cent on their outstanding balances, on the ground that this was the rate at which U.S. Treasury bonds were then selling. This somewhat awkwardly obliged the Allies to renegotiate their waiver of German reparations under the Hoover plan, increasing the rate of interest charged on Germany’s postponed payments and on their mutual indebtedness from 3 per cent to 4 per cent.
Meanwhile, Britain was forced to abandon the gold exchange standard in September 1931. Its attempt to service its debt to the United States had resulted first in a deflation of its domestic prices stemming largely from the government’s budgetary needs to raise the sterling equivalent of its debts to the U.S. Government; and then, despite this deflation, a collapse of its currency against those of other nations as it converted sterling into dollars. This transfer aspect of the debt problem disturbed Europe’s economies even more than their domestic budgetary problems.
The Lausanne Conference proposes to settle the debt tangle
At the Lausanne Conference in summer 1932, six months after the Hoover Moratorium, it was clear that the Allied Powers could not extract any more funds from Germany, and they turned to save themselves from their own debts to the United States. When Germany proposed a lump-sum final settlement of its reparations, Premier Herriot of France pointed out that “cancellation of reparations without a corresponding readjustment of allied war debts would place Germany in a privileged position.”34 Italy’s foreign minister proposed on July 4 that war debts and reparations be wiped off the books altogether. At the end of the conference the European Allies agreed to waive German reparations to the extent that the U.S. Government would waive its war claims against them. Herriot announced in an interview with the newspaper L’Intransigeant: “What must be clearly understood is that the link is now clearly established between the settlement of reparations and the solution of the debt problems with relation to the United States. Everything is now subordinated to an agreement with America.”35
The European Allies reasoned that they hardly could afford to give up German reparations if the price would be a stripping of their own gold stocks to continue paying for a war whose economic aftermath they now wanted to end. They agreed to cut German reparations by nearly 98 per cent, from $30 billion to about $700 million under a gentlemen’s agreement that the write-off was conditional on the United States’ reducing its own claims on the Allies. With a motto sanctified by the Lord’s Prayer, “Forgive us our debts, as we forgive our debtors,” Britain and France signed an addendum to their agreement with Germany stipulating that “if a satisfactory settlement about their own debts is reached, the aforesaid creditor Governments will ratify and the agreement with Germany will come into full effect. But if no such settlement can be obtained, the agreement with Germany will not be ratified; a new situation will have arisen and the Governments interested will have to consult together as to what should be done.”36
U.S. politicians accused Europe of forming a united front against the United States. (It was an election year, after all.) The Lausanne Conference disbanded in some disarray as American anxiety began to be awakened with regard to the prospect of British and French trade resurgence. U.S. officials began to worry that they had pressed their creditor position too far in forcing Britain and its Empire