THE problem of the war debts owing to the United States Government, mainly by its Allies in the World War, has long been the subject of discussion and controversy. Throughout the period since 1932 payments have been in practically complete default. The debts are now carried on the books of the Treasury at an aggregate principal amount of about $11,200,000,000, while the unpaid interest thereon amounted on November 15, 1937, to $1,200,000,000.

Sixteen nations[i] received cash advances from the United States principally to enable them to purchase munitions in this country and to meet other commitments incurred here in connection with the war. The remainder of the debt covers surplus American war materials disposed of by our government after the war, and relief supplies furnished to states created by the peace treaties. The aggregate of the loans made in these three categories was nearly $9,900,000,000. At various dates from 1923 to 1930 all the loans but one small one were funded into longterm obligations, bearing interest at various rates. When this was done, interest unpaid to date was added to the debts, bringing the aggregate principal sums up to $11,600,000,000. The total payments made on these obligations up to the end of 1937 have amounted to $2,500,000,000 (net), most of these payments being applicable to accruing interest. A net amount of only $400,000,000 was applied in reduction of principal. As a result, the present balance of principal alone, without counting unpaid interest, is greater by $1,300,000,000 than the original debt.

The problem of the collection of this money, long dormant, has been revived by the recent offer of Hungary to pay the principal of its debt, without interest, over a term of years. Though this obligation is one of the relatively minor items on our books, the details of the proposal are significant. The Hungarian debt was incurred for relief supplies furnished at a cost of $1,685,000. In 1924 the debt was funded; and the unpaid interest which was added then and later brought the total principal amount up to $1,982,000. Of the total payments made on account, amounting to $478,000, all but $74,000 were applied, under the terms of the funding agreement, to meet accruing interest, with the result that the debt now stands at a principal amount of $1,908,000, plus interest arrears of $374,000. The Hungarian Government proposes that the debt should now be computed at its original principal amount, less all payments made to date, that is, at a net amount of $1,207,000, and that this sum be discharged without interest by a series of equal annual payments running for thirty years. It is to be noted that if the principles of the Hungarian offer were to be applied to the aggregate figures for all the debts, the United States would collect a total sum of $7,400,000,-000 (i.e. $9,900,000,000 less $2,500,000,000), upon which no interest charges would be made during the period of settlement.

The plan put forward by Hungary for clearing up its obligation deserves sympathetic consideration. But it will encounter obstacles in the American Congress, presumably due largely to a disinclination to make concessions to any government, even one admittedly unable to carry a substantial burden, which might be regarded as a precedent for dealing with the chief debtors. A practical settlement with Hungary, however, would hardly establish such a precedent, and need raise neither the fears of our legislators nor the hopes -- if such are entertained -- of our former Allies. The debt question, so far as this country is concerned, centers on the sums owed it by Great Britain and France. Evidently the concessions which the American people might make to those two nations can be determined only when one or both of them come forward with concrete proposals.

The British and the French obligations constitute three-quarters of the total sums involved. The British obligation, as incurred for loans made, amounted to $4,075,000,000 (net); and it was increased by unpaid interest added at the date of funding in 1923 to $4,600,000,000. Payments made have aggregated a net amount of $1,823,000,000. The debt now stands on the books at $4,368,000,000, exclusive of $818,000,000 unpaid interest computed to November 15, 1937. The French obligation, as incurred, came to $3,341,000,000 (net); unpaid interest added at date of funding in 1926 brought it up to $4,025,000,000; payments have been made of $421,000,000 (net); and the debt is now carried at $3,864,000,000, exclusive of $238,000,000 unpaid interest. If we include the Italian and Belgian obligations along with the British and French, we account for 96 per cent of the total debts. The figures for Italy are: original debt, $1,648,000,000; debt as funded (with unpaid interest added), $2,042,000,000; total payments, $101,000,000; present balance of principal, $2,005,000,000; interest unpaid, $14,000,000. The amounts for Belgium are: original debt, $377,000,000; debt as funded (with unpaid interest added), $418,000,000; total payments, $52,000,000; present balance of principal, $401,000,000; interest unpaid, $36,000,000. These sums, it need hardly be emphasized, are important both to the debtors and to the creditor.[ii]

Before the present apathy of Americans toward the debt problem is dispelled there will have to be some definite prospect of being able to realize substantially on one or both of the two major obligations. Only then will our people feel like grappling with the difficult elements involved in reaching a settlement with Great Britain or France. Our historic connection with the events that led us to grant the loans will again have to be ground through the mills of public controversy; the present extraordinary economic and political conditions in our two major wartime Allies will have to be given realistic consideration; and questions of great moment involved in our relations with those nations will have to receive searching scrutiny. Consideration of these complex factors will determine not only the American attitude when an offer materializes, but the attitudes which the debtors adopt in the meantime while formulating their proposals.

A movement toward a debt settlement, particularly if it should come from Great Britain, ought not to cause surprise. If an American may venture an opinion, there appear to be several reasons why the British are not happy about their present position in the matter. Under the terms of the Johnson Act of 1934, Great Britain is classed among the defaulting nations, which comprise all the debtors except Finland. To be stigmatized as defaulters is a new experience for the British. Their code of financial standards, while practical in the matter of accommodation to distressed debtors, is an old-fashioned one, and in the commercial field they have applied it as rigorously to their own practices as they have in passing judgment on the performances of their customers. True, they argue that advances of funds for war purposes in a grand alliance have not the same character as commercial debts. The roots of this idea, it is said, reach back to the days of other great European conflicts, when England's advances to her Continental allies were written off as subsidies, or, in the modern phrase, as "contributions to the common cause." From the influence of this analogy, perhaps, and from the fact that Britain has in effect charged off her World War advances to France and her other allies, there has arisen in England a widespread feeling that the stigma of the Johnson Act is unjust. Nevertheless it probably has not escaped some British minds that there are defects in an analogy drawn between British subsidies to the armies of Prince Eugene in a struggle to curb the pretensions of Louis XIV, and American advances to the British Government for the purpose, among other things, of keeping the Kaiser's armies out of the channel ports. Nor (still dealing with the intangibles) are the British insensible to the fact that the signature of one of their most respected elder statesmen, acting on behalf of the British Government, is attached to the funding agreement of 1923.

Moreover, there are potential embarrassments of a practical kind for the British in the present situation. Under the prohibition in the Johnson Act against the floating of loans in the United States by defaulting governments, British plans for financing rearmament would be deprived of flexibility in the event that the requirements were to exceed the supply of available funds in the London market or in case commitments for large purchases were to be made in the United States. Beyond this, British statesmen and important segments of the British public, it is generally believed, favor maintaining the best possible relations with the United States consistent with the limitations imposed by a heavily charged budget and a difficult political situation.

As to the state of opinion in the United States, an American may speak more circumstantially and with greater freedom. Among those in this country who favor a settlement are many who believe that Great Britain and the United States, possessing much in common in the character and spirit of their institutions, ought not in these days to be divided by a controversy over debt. Even these would agree, however, that it is for Great Britain to make the first move. One principal reason for this attitude is a deep aversion to being cast in the rôle of importunate debt-collectors. Americans unanimously rejected the jibes which at one period were directed at this country as "Uncle Shylock." They could not square this attitude with the historical record, and in particular with any circumstances suggesting that the funding agreements were consummated under duress, or that in their character they differed in any way from other treaties freely entered into by sovereign states.

The ill-feeling engendered at that time seems in the main to have disappeared, but there is just enough of a residuum of it left to make many people feel that, despite the magnitude of the sums involved, any positive effort to realize on the debts is not worth the probable attendant odium. Supporting this feeling has been the conviction that the debtors have no real intention of making any further payments of consequence, and that nothing which the United States might do would change the situation. Another section of public sentiment is expressed in the slang phrase, "Uncle Sam was an easy mark." In these few words the "man in the street" disposes of the whole war-debt question in both its quantitative and its qualitative aspects. The wide currency of this phrase reflects more than a point of view on an old controversy long ago become stale and unprofitable; it is significant also for its bearing on the prospective American attitude towards the ominous contingencies raised by recent events in Europe.

This is not the place to attempt a forecast of the probable trend of American policy in the event of serious trouble in Europe. The question is touched upon only in order to consider whether a settlement of the debt controversy may have more importance than is suggested by the long delay in disposing of it. A respectable body of persons in this country holds that we cannot avoid being involved in another prolonged general war in Europe. In their eyes it seems expedient to clear away old controversies, which though not directly related to present-day problems might prejudice the proper consideration of these latter on their merits.

But the wisdom of doing this does not seem to find general recognition in American public opinion. Our people generally, being convinced that they can do nothing on their own motion to effect a substantial realization on the war-debt claims, seem to feel that they had best put the question aside. It ceases to be their problem or to occupy their minds. If there is any indirect advantage to be gained from a settlement, they are only dimly aware of the fact -- least of all of any advantage which might accrue to the United States. And of course there are some isolationists who are not averse to having a handy excuse, in the unliquidated debts of the old war, for not allowing American interests to become engaged or sympathies enlisted in some new crisis.

For several reasons, then, it seems unlikely that if a settlement comes it will result from any initial steps taken from Washington under the pressure of American public opinion. But if the public's present attitude of passive opposition to the Government's taking the first step represents in effect a concession to the viewpoint of the debtors, that does not mean that it is receptive to the idea that in equity the debts are not really owing.

The reason for this is a conviction that while the occasion of and formal basis for our entry into the World War was the overt acts of the German Government in destroying American lives and property, the real purpose of our intervention was to go to the rescue of Britain and France in their struggle for survival. The great national movement that made possible our participation in the war was in the nature of a crusade. Our people generally do not admit that this nation faced any imminent danger, or even any long-range one. In their view, the United States was secure in its continental aloofness and self-containment. This opinion may be mistaken, but it is deeply held. In consequence, the theory that there exists an equitable claim for cancellation of debts fails to reach home. Americans do not grasp the argument that while our armies were gathering, our own first line of defense lay not in our Navy but in the trenches, and that the dollars which we sent, in the shape of munitions for our Allies, constituted our just share in holding the battle line in France. They argue that we entered the war without commitment as to the time, nature and extent of our participation, that we made an immense and decisive effort as promptly as we could, and that if we were now to consent to a retroactive increase in the amount or character of our contribution, such an adjustment would not be a matter of justice or equity, but an act of grace or charity.

But despite what has been said, there is no reason to believe that the state of public opinion in this country is such as would prevent the sympathetic consideration of a proposal by Great Britain for a considerable scaling down of the war-debt with a view to clearing the slate. A controversy unquestionably would be precipitated; but it appears possible that a proposal could be put forward in such terms that it would appeal to the American people as reasonable, and that as a result of the popular reaction to that proposal Congress would give its approval. What might be the specifications of a "reasonable" proposal, i.e. one that might be acceptable to opinion in the United States?

In the first place, the settlement offered would have to be a final one, that is, it should propose winding the debt up within a relatively short period of time, and not contemplate an extended schedule of deferred payments. A proposal of the latter kind would not be well received, for it would be regarded as likely at some later time to be the subject of renewed proposals for revision. Nor, for reasons already touched upon, would an offer of a purely nominal amount in liquidation of the debt receive sympathetic consideration. It would merely engender a painful controversy and would be unlikely to lead to an agreement.

No American can say how big a payment the British would consider to be impossibly large, nor can he suggest with any precision how small a payment would be regarded by public opinion here as too insignificant for consideration. But it seems evident that, like most other compromises, any agreed figure is bound to be of a size that will cause the extremists on both sides to protest against it as unfair and unreasonable.

Some of the considerations which might influence American opinion in the matter of reaching an agreement will now be discussed briefly. Much has been heard of the serious obstacles that would be encountered in an attempt to "transfer" the payments out of foreign currencies into dollars. There would be serious difficulties and dangers, it has been said, unless dollars could be made available to the debtor nations through a large expansion of American purchases of their products, with no corresponding increase in the export of American goods to them. Debt payments in gold have been called dangerous to debtor and creditor alike. But American opinion doubts whether such obstacles to the payment of war debts are related in important degree to the question of procurement of dollars by the debtor countries.

Great Britain, for example, is a large creditor on international commercial capital account, and as such already possesses ample means of making substantial payments abroad. The foreign holdings of British investors, including both liquid balances and longterm investments, have been estimated to amount to between $15,000,000,000 and $20,000,000,000. Great Britain depends in part upon its long-term foreign investments for recurring income on international current account, with which to pay for the excess of its merchandise imports over exports. The liquid balances held abroad, however, are undoubtedly substantial, and it does not seem impossible that a scheme of moderate payments on the British war debt (assuming that no part of them could be met out of current foreign earnings) could be largely taken care of by a mobilization of floating foreign balances, without levying to any important extent on the long-term holdings.

To the extent that a great creditor country like England chooses to discharge obligations abroad by using its foreign balances, there clearly is no necessity of converting the payments from its own currency into foreign currencies -- in other words, the transfer problem does not arise. On the question whether real obstacles arise when conversion of currencies does become necessary, recent economic history has provided an interesting practical demonstration. For the past four years, various countries have been sending gold to the United States in amounts aggregating over a billion dollars a year, representing roughly the amounts of the world's annual production of newly mined gold. In exchange for the gold delivered, individual European investors and others acquired American dollar bank balances and securities.

These large movements of gold to our shores occurred in a period admittedly marked by abnormal happenings throughout the world, and some part of those abnormalities may perhaps have been the effect rather than the cause of the shipments. Except in special instances, however, they were made without seriously threatening the monetary systems of the countries concerned; and large though they were, they produced nothing approaching a disruption of the international economic system. On the contrary, the trend of world economic conditions during the period in question was generally upward. Let us suppose, then, that the bookkeeping tags on those shipments -- or rather on a part of them -- had been changed so that instead of reading, say, "For credit to the investment account of Samuel Johnson or Jacques Coeur of Europe with the Babylonian Trust Company of Wall Street," they had been inscribed "For credit to the war debt account with the United States Treasury." Had that happened, large payments could clearly have been made on the debts with no serious injury to either debtor or creditor.

We reach the conclusion, then, that however great the problem of war debt payments may be, it does not arise primarily from the debtor countries' lack of gold or foreign exchange; it is rather a question of whether the debtor governments can raise public funds with which to purchase from their nationals part of their individual holdings of gold or dollar balances. The way in which the foreign exchanges operate is a mystery to most people, probably at times even to the experts. It might seem at first blush that the "transfer problem," stated in scientific terminology, as an obstacle to payment supposedly arising out of the operation of economic law, would furnish an impressive argument in favor of a substantial write-down of the debts. But it seems unlikely that this would be the case. The idea counts for little or nothing in the mind of the American public.

To many Americans, one of the most persuasive arguments for reduction lies in the budgetary burdens of Great Britain, actual and prospective. Mention of this inescapably brings up the question of comparative burdens. The matter cannot be explored here; but it might very well be found that Britain's fiscal load still exceeds ours, and it is reasonable to suppose that sympathetic consideration would be given to the relevant facts by the American people, the more so as they recall the substantial size of the payments already made on the British debt, aggregating, as already stated, a net amount of $1,823,000,000.

Another argument for reduction or cancellation is a highly practical one, namely that while Britain is a debtor to us she is also a creditor on defaulted obligations. But this argument frequently has been put forward in a form that keeps it from being very persuasive to Americans. Apart from the fact that the United States Government has from the first upheld the legal separateness of the two groups of transactions, the linking of the British obligation back through other inter-Ally obligations to the German reparation debt is indelibly associated in the minds of Americans of the war generation with the distasteful episode of the Balfour note of August 1, 1922. That note, addressed to the continental Allied Powers, suggested an all-around cancellation of debts. Thereby the British Government offered, in effect, to cancel a principal amount of British claims on the continental Allies of $3,700,000,000 net (i.e., gross claims of $7,800,000,000 less $4,100,000,000 owed to the United States), plus the British reparations claim on Germany; and it indirectly invited the United States to cancel $9,900,000,000 principal amount of claims, which, as no claim for reparations was made by the United States, were all held against the Allies. The note, in addition to what seemed a thinly disguised reproach to the quality of American generosity, contained a statement which (though asserted by the London Economist in its issue of March 10, 1923, and by other authority to carry "an implication which is entirely incorrect")[iii] appears never to have been formally cleared up. The statement was that the British debt to the United States was incurred under an arrangement whereby "the United States insisted, in substance if not in form, that, though our Allies were to spend the money, it was only on our security that they were prepared to lend it." Thus there are reasons why any detailed exposition of the manner in which the British obligation is a link in a chain of defaulted obligations finds no very sympathetic response here; and it seems unnecessary to the general argument. That the failure of Great Britain to collect her advances places her in a less favorable position to settle her own obligations should be clear to everyone, without extensive elaboration; and the practical effects of that circumstance are bound to be apparent in a presentation of the budgetary situation.

The argument, often heard in support of debt reduction, that when the loans were made the price level generally was inflated and that it subsequently fell, is not convincing. True, this circumstance was hard on debtors; but it could bear no more heavily on the taxpayers of a debtor country than on the taxpayers of the lending country who take the place of the debtor when they are compelled to carry the defaulted loans. Nor is there substance to the claim that when they employed their loans for the purchase of American materials the borrowers were discriminated against in the matter of prices. This allegation is largely disproved by the fact that a large part of the munitions orders were placed under price-supervision arrangements impartially administered by agencies of the United States Government.

Another circumstance connected with the origin of the debts has a more favorable bearing on the case for their reduction, namely that the proceeds of the loans went largely to American labor and industry as wages and profits, and the excess profits realized by manufacturers during the period in question were taxed for the benefit of the United States Treasury. In this sequence of transactions, the essence of what happened was that a proportionate part of the loans made by the Treasury was returned to the Treasury by the borrowers, by their effective payments of excess profits taxes through the manufacturers. It is evident that only the net amount of the Allied loans (after deducting the taxes arising out of their employment) had to be provided from the proceeds of the Liberty loans subscribed by our citizens or from funds derived from general taxation.

When the various considerations that have been mentioned are taken into account, it appears that, from the American standpoint, there exists a basis for a settlement. Recent test polls conducted by the Institute of Public Opinion support this view, indicating that public sentiment, which a year ago seemed to favor collection of the debts in full by a majority of 54 percent, now favors reduction or cancellation by a majority of 53 percent. In the opinion of the writer, the most effective approach to a settlement would not be through the submission by the debtor government of a general argument for a revision, which would lead to a long public debate in advance even of any negotiation, but by its presentation of a definite offer upon which the American people could take a definite decision.

There is room for believing that an offer by Great Britain or France to pay the principal of its debt, without interest, in a relatively short series of annuities, would prove acceptable to our people. They might further be persuaded that in computing the amount of the debt for this purpose, the unpaid interest which was added to principal at the date of funding should be excluded. It seems less probable that public opinion generally would react favorably to a proposal that interest payments already made be credited against principal, although some concession of this kind would doubtless be supported by financial opinion if the adjustment proposed could reasonably be regarded as serving to keep the scale of annual payments within manageable proportions and to put an end once for all to the whole protracted controversy.

[i] Russia and Armenia are excluded from consideration in this discussion.

[ii] The aggregate figures for the twelve other debtors (omitting Russia and Armenia) are: original debts, $412,000,000; debts as funded (with unpaid interest added), $497,000,000; total payments, $64,000,000; present balance of principal, $594,000,000; interest unpaid, $52,000,000. These twelve debtors and the original amounts of their loans are as follows: Poland, $159,700,000; Czechoslovakia, $91,900,000; Jugoslavia, $15,000,000; Rumania, $36,000,000; Austria, $24,100,-000; Greece, $15,000,000; Estonia, $14,000,000; Finland, $8,300,000; Latvia, $5,100,000; Lithuania, $5,000,000; Hungary, $1,700,000; Nicaragua (unfunded), $300,000.

Russia borrowed $192,600,000, against which the only credits made have been $8,800,000, representing the proceeds of liquidation of financial affairs of the Russian Government in the United States. Armenia borrowed $12,000,000 and nothing has been paid. Neither of these debts was funded. Cuba borrowed $10,000,000, and Liberia $26,000; both debtors settled their obligations with interest.

Finland, as indicated above, borrowed $8,300,000; the debt as funded, with unpaid interest added, amounted to $9,000,000; total payments have amounted to $4,900,000; balance of principal at November 15, 1937 was $8,270,000; interest accrued to November 15, 1937 (none past due) was $164,000.

[iii] See also the London Economist of January 10, 1925; and "Making War Loans to the Allies," by Albert Rathbone, former Assistant Secretary of the United States Treasury, in FOREIGN AFFAIRS, April 1925.

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  • GEORGE P. AULD, Accountant-General of the Reparation Commission, 1920-24; author of "The Dawes Plan and the New Economics"
  • More By George P. Auld