THE debts of other governments to the United States have been the subject of much discussion since the end of the World War. The effect which their payment would have upon us and upon the countries indebted to us has been the subject of articles written by economists here and in Europe. Suggestions have been made both at home and abroad that these debts should be cancelled or readjusted. Some progress has been made toward their refunding, that is, the conversion of the promissory notes of the respective foreign governments which we held, which by their terms were payable on demand, into long term obligations with fixed dates of maturity. In some quarters it has been suggested that reparation payments by Germany are in some way inextricably bound up with our loans to foreign governments. In other quarters such a suggestion has been strenuously opposed. The obligations of a government, indebted to two or more other governments, and the rights of the creditor governments as between themselves, both legal and moral, have been the subject of speeches widely circulated in the press. It is not intended in this article to discuss these controversial questions, but to attempt to clarify the issues by making a brief statement of some of the basic facts relating to our Government loans and the principal considerations which governed the United States Treasury in making the loans to the Allied Governments under the authority of the Liberty Loan Acts.

Under the provisions of the Liberty Loan Acts the Secretary of the Treasury was authorized to make loans to the Allied Governments only out of credits established in their favor with the approval of the President before the declaration of peace. From time to time, therefore, when the government concerned had requested the establishment of a credit in its favor, the Secretary of the Treasury would obtain the approval of the President to the establishment of such a credit, and thereupon the Treasury would notify the government concerned that a credit had been established in its favor in a designated amount and that from this credit the Treasury would make loans if, and to the extent which, it should determine and for purposes which it should approve. The establishment of each such credit constituted the President's approval of loans by the Treasury up to the amount of such credit; ordinarily it had no other effect. It did not constitute a liability of the United States nor an engagement on the part of the Treasury to make loans or to pay out dollars. It was subject to withdrawal at pleasure by the Treasury, and in the cases of credits established in favor of Cuba and of Russia the unused portions of such credits were in fact withdrawn after our Treasury had determined that loans to those governments were not required to the full amount of the credits established in their favor. There were other cases too where established credits were in part withdrawn. In a very few special cases what were called effective credits were established in favor of Allied Governments, that is, credits which the governments concerned were assured would be devoted by the Treasury to making loans to them in the future. This was done in cases where dollars were not immediately required and if, in lieu of furnishing the dollars at once, the undertaking of the United States to furnish the dollars at a future time met the need of the Allied Government. Obviously it was to our interest not to furnish dollars more quickly than needed, and to the interest of the borrower not to have interest run from an earlier date than necessary.

When we commenced establishing credits and making loans the foreign governments desired that credits should be established in their favor sufficient in amount to cover all their dollar commitments and all their dollar needs that they could foresee in the near future. On the other hand, our Treasury felt that in view of our own large dollar requirements for war purposes and the limit placed on war expenditure in this country by the country's productive capacity, the total amount of credits established in favor of Allied Governments should not average more than about $500,000,000 each month. The dollar needs of the Allied Governments as so estimated by them considerably exceeded $500,000,000 a month, so that there naturally ensued a competition between the Allied Governments regarding the extent to which each should participate in the credits we were prepared to establish. Each Allied Government was reluctant to reduce its estimate of its need for dollar credits so as to bring the aggregate of all such requests within the limit of $500,000,000 monthly, fixed by our Treasury. The Treasury was not equipped to determine with certainty whether the effective prosecution of the war required the establishment of a credit in favor of Great Britain for one purpose rather than a credit in favor of France for another or in favor of Italy for a third. In relief of these perplexities, it soon became apparent that the estimated dollar requirements of the Allied Governments were one thing, and the supply of commodities obtainable upon our markets in a given time was quite another, and that in consequence, while our Treasury might have been staggered to supply dollars quickly to the aggregate amount indicated by the Allied Governments, it would be able to supply all the dollars required by the Allied Governments as fast as the commodities they purchased could be delivered to them by our producers. In view of these considerations, the Treasury adopted towards Great Britain, France, and Italy the general policy of establishing credits, the amounts of which bore no definite relation to the amount of their commitments nor to the amount of their requirements here, but which aggregated approximately the estimated amount of dollars which they would require for disbursement during a period of thirty or forty days. As a consequence of this method of procedure, competition between the Allied Governments for our credits ceased and we were able in due course to establish for all of them the credits which were needed, in addition to their own available dollar resources, to meet their dollar requirements for war purposes. In the case of certain of the smaller countries it was found necessary to continue to establish credits up to the amount of their commitments in the United States, as without such credits in their favor they found it difficult to place to advantage orders upon our markets.

After putting into effect the practice of establishing credits to cover estimated cash disbursements for a period of thirty or forty days, the Treasury fixed Tuesdays and Thursdays of each week as the days when it would ordinarily make loans from these established credits. In a case of urgent necessity the Treasury would make loans on other days, but it was found to be less disturbing to our banking institutions if the bulk of our loans were made on days fixed in advance. In general the dollars we loaned were made available by the Treasury instructing the New York Federal Reserve Bank (in accordance with the previously received request of the borrowing government) to hold subject to the order of that government a stated amount in dollars, and so notifying the borrowing government. Ordinarily on the same day the borrowing government withdrew from the Federal Reserve Bank the funds placed to its credit and deposited the same with its own depositary in the United States. Loans were not made on every Tuesday and on every Thursday to every Allied Government availing of our loans, but while the war was going on and for some time thereafter, while deliveries were constantly being made to the Allied Governments under existing incompleted contracts requiring the payment to our producers of a large amount of dollars, there were not many Tuesdays or Thursdays on which some loans were not made by our Treasury. The general purposes for which loans would be made to the Allied Governments having been approved, the amount of loans to be made by our Treasury on any given day was determined by a consideration of the amount of the bank balances of the Allied Governments and the estimated dollar demands upon them for the next few days. In connection with the sale of Liberty Bonds, the Treasury had carefully built up a system under which its balances were pro rated among various banking institutions throughout the land in proportion to their subscriptions to Liberty Bonds and Treasury Certificates. As the money which the Allied Governments borrowed belonged to them, and in consequence they could deposit it where they pleased, care had to be taken that the equilibrium established by this system should not be disrupted by unnecessarily large cash balances being built up by the Allied Governments with their own depositaries. The governments borrowing on Tuesdays would advise the Treasury regarding their approximate cash balances at the close of business on the preceding Monday, any other dollar resources expected to become immediately available to them, and their estimated dollar disbursements on that day and the next; in the light of that information the Treasury determined the amount of dollars it would loan that Tuesday. Similarly the Treasury on Thursdays would be advised of the approximate amount of bank balances at the close of business the preceding day and of the estimated dollar receipts and payments that day and on the succeeding Friday, Saturday, and Monday.

At the same time that we made them our loans, the borrowing governments, through their representatives duly authorized for the purpose, executed promissory notes for the dollars borrowed, payable upon demand, except in the case of a few of the earlier notes which were expressed to be payable on a specified early date and which after their maturity were carried as past due or demand obligations. By their terms, these notes, or certificates of indebtedness as they were often called, bore interest at a specified rate, were payable in gold coin of the United States, and contained an agreement on the part of the borrowing government to convert the notes upon the request of the Secretary of the Treasury of the United States into an equal par amount of convertible gold bonds of the borrowing government, conforming to the provisions of the acts of Congress specified in each note under the authority of which the loan was made. These notes were in all respects as valid and binding as would have been long term obligations payable on fixed dates.

Under the terms of the Acts of Congress our loans could be made to the Allied Governments only for the purpose of more effectually providing for the national security and defense and prosecuting the war. But to prosecute the war against Germany effectively the Allied Governments were obliged to purchase on our markets not only munitions and supplies for their armies but also foodstuffs and commodities required for the sustenance of their civilian populations. In consequence, their war purchases in the United States for which we made our loans consisted of supplies required both by the military forces and the civilian populations of the Allied countries.

The financial requirements of each of the Allied and Associated Governments fell into three classes--according as they arose at home, in allied or associated countries, or in neutral countries. In general, the view of the United States Treasury was that the first class could and should be met by the government concerned through taxation or domestic loans; that as regards the second class, each country (if necessary) should stand ready to provide or arrange finance for the requirements of its allies for expenditures within its borders; and that expenditures in neutral countries should, for reasons of finance, be reduced to a minimum and should be met under some equitable arrangement by those countries able to provide the necessary finance in the required currency.

From the time it received the necessary authority from Congress, the United States Treasury was prepared to make to the Allied Governments whatever loans were required to enable them to make in the United States their necessary war purchases in so far as an Allied Government was unable itself to effect such purchases from other dollar resources at its disposal here. If the Allies were successfully to carry on the war, it was absolutely essential that they should make heavy purchases of our commodities. In view of our own stupendous financial program it would have been unwise to permit new issues of bonds of foreign governments to compete in our market with our own Liberty Bonds; and in any event no considerable amount could have been raised by the Allied Governments in that manner. It was clear that through taxation and loans we could gather in dollars, and that the dollars we loaned to the Allies and which were expended by them here remained subject to our taxes or available for the purchase of our Liberty Bonds. These same considerations, however, were applicable to the requirements of all the Allied Governments so far as they could be supplied in any Allied country. Thus there was linked with the proposition that we would find and loan to the Allies the dollars they required for war expenditures in our country, the corollary that each Allied country could and should, to the extent necessary, find and loan its currency to other Allied Governments for their war purchases within its territory. That is, for war purchases within the British Empire, Great Britain should supply and loan the necessary pounds to France, Italy and Belgium, and France should similarly supply and loan the francs needed for war expenditures of the Allied Governments in France.

For its own war purposes in Great Britain, France and Italy, the United States did not borrow pounds or francs or lire. Our Treasury was obliged to procure these currencies for the use of our army abroad. We bought pounds, francs and lire from the governments of Great Britain, France and Italy, and made payment therefor in dollars here. The dollars thus obtained by Great Britain, France and Italy were applied by them towards the cost of their war purchases here, and thus the amount of the dollar loans required by these countries from our Treasury was diminished in a corresponding sum. Similarly Great Britain, loaning to France and Italy much larger values than the British requirements for francs and lire, paid for the francs and lire required for British use by crediting to France and Italy the sterling equivalent of the francs and lire turned over to her. By this means, or by some similar transaction, Great Britain met her needs for those currencies. Some other of the Allied Governments, however, required francs which were loaned them by France and substantially all of the Allied Governments actively engaged in the war in Europe required sterling and obtained advances thereof from Great Britain.

The United States financed its own requirements in neutral countries. To some extent our loans to support sterling exchange (which are referred to hereafter) provided the means necessary to pay for British purchases in neutral countries, and, to the extent they did not suffice, Great Britain obtained for herself the neutral currencies she required. Direct aid was required, however, chiefly by France and Italy, to finance much of their necessary war purchases in neutral countries. It was evident that the United States or Great Britain or both would have to find much of the finance required by France and Italy in neutral countries. There was no particular principle under which all such finance should be furnished by one of those countries and none by the other; both the United States and Great Britain were financially able to assume and to carry the burden. Great Britain before we entered the war had supplied such neutral finance as France and Italy required and had not been able themselves to supply. Until we declared war on Germany the war had been the Allies' war, not ours, and our Treasury therefore could not accept the theory that, because before we entered the war Great Britain alone had furnished the assistance required by France and Italy for finance in neutral countries, it was our duty alone to furnish such assistance after we entered the war.

Various considerations had to be taken into account in determining how and to what extent the United States should aid in financing, in neutral countries, necessary requirements of France and Italy, arising from the time we entered the war. Great Britain as the great creditor nation had available facilities for obtaining neutral finance which we, at that time a debtor nation, did not have. The apparent large balance of trade in favor of the United States, after there had been eliminated therefrom the United States exports paid for by the dollars which we had loaned the Allied Governments, became a heavy adverse balance against the United States, and this seriously handicapped the ability of the United States to furnish financial aid to Allied Governments in neutral countries. Through its pre-war commercial interests and its well established war organizations, Great Britain was actually in a better position than we were in, or could put ourselves in, to handle the obtaining and utilizing of such neutral finance. Great Britain had capital interests in many neutral countries and for years the ocean transportation of exports and imports of neutral countries had been largely carried on by British ships. Between April, 1917, and November, 1918, as compared with the currencies of Sweden, Norway, Denmark, Holland, Switzerland, Spain, India, Japan, the Argentine, Chile, Peru, and Bolivia, the dollar was at a discount, and generally at a very heavy discount, and the pound was at an even heavier discount than the dollar. Consequently, purchases in these countries, if paid for in dollars or in pounds at their current exchange value, meant costs largely in excess of the high war prices as measured in terms of the currencies of these countries. If we alone were to finance these neutral requirements, it was as a practical matter impossible for us to delegate to Great Britain the control of the expenditure of our dollar loans for the neutral requirements of France and Italy for which they were unable themselves to provide. For the reasons elsewhere referred to, from the financial standpoint it was to our interest, and to the interest of Great Britain as well, that purchases which France and Italy could make in the United States or in Great Britain should be made there rather than in neutral countries. After we entered the war, in view of the considerations mentioned, Great Britain continued to furnish in the first instance most of the neutral finance required by France and Italy, but the United States Treasury, being prepared to bear its fair portion of the burden of securing finance for France and Italy in neutral countries, effected arrangements by which, after we entered the war, such purchases were ultimately in part financed by our dollar loans to France and Italy. The cost of the neutral finance so found after we entered the war was ultimately furnished, in the case of Italy, approximately one-half by the United States and one-half by Great Britain, and--in the case of France--something over one-half by the United States and the balance by Great Britain.

Having thus fixed its general policy as to which countries should be the lenders, the United States Treasury formulated its general policy as to the Allied Governments which should be the borrowers. This was, that our loans should be made to each Allied Government to meet the cost of commodities purchased here for its own use; that we would not loan to one government the dollars needed for purchases to be made by or on behalf of another government, and that neither the financial condition of the borrower nor questions of political expediency in our own country should be factors in determining the government to which our dollars should be loaned and whose obligation we would consequently take. In view of the discussions since the war regarding our loans, it is interesting to recall that sympathy here at the time we were making our loans was strongly with France and that it was believed that loans to France would be more popular in our country politically than loans to Great Britain. However, as stated, no such consideration was permitted to influence our Treasury in the making of its loans.

A difficulty arose in applying the principle that we should loan to each Allied Government the dollars required for war purchases here for its own use. Before we entered the war various purchasing organizations had been built up and were functioning. It was deemed unwise to disturb or disrupt them. Many purchases were effected by a single organization set up by one of the Allied Governments which pooled the necessary purchases for the use of the three principal Allied Governments. To have insisted that each government make its own purchases separately would have caused them to compete with each other and would have further raised prices in the United States, with the resultant increase in the amount of our loans. To meet this situation, what was known as the dollar reimbursement plan was devised. Under this plan, if one Allied Government borrowed dollars to pay for purchases made by it in whole or in part for the use of another Allied Government, we loaned the government for whose benefit the purchases were made a sufficient amount of dollars to permit it to reimburse the government originally making the purchases. This was done on a settlement of the account, and sometimes indeed before its final settlement, and the government to which reimbursement was made either applied the dollars thus received toward the repayment of our loans to it or else held them to meet its dollar expenditures for purposes for which dollars would otherwise have been loaned to it by the United States. For example, if a British agency purchased in the United States a commodity, say copper, part of which was to be used by Great Britain, part by France and part by Italy, the British Government in the first instance borrowed of our Treasury sufficient dollars to make payment for all the copper so purchased. Later, when a specified amount of the copper so purchased was turned over to France and a specified amount to Italy, the British Government made claims against the French and Italian Treasuries for reimbursement in dollars for the cost to the British agency of the copper turned over to those countries, the price charged them being determined by the price of all copper so purchased, including expenses incident to the purchases, cost of transportation to seaboard, interest, etc. When these accounts of copper purchases were settled between these three governments, and sometimes pending final settlement, the French and Italian Governments would ask loans of the United States Treasury for the purpose of repaying in dollars to the British Government the amount of dollars which the British Government had thus expended for them in buying the copper turned over to France and to Italy, and dollar loans in the required amount having been made to France and to Italy, they would then pay the dollars to Great Britain in settlement of the cost of copper delivered to them by the British agency. The next step would probably have been to require the British Government to repay the dollars thus received to the United States Treasury on account of our loans to Great Britain and to have cancelled a corresponding amount of British obligations, had it not been that the cost of the copper bought for France and Italy then would have figured twice in calculating the aggregate amount of our loans to the Allied Governments; once when purchased from the American producer by the British agency for France and Italy, and once when purchased at cost by France and Italy from the British agency. Ordinarily, therefore, instead of requiring the dollars so received by Great Britain from France and Italy in reimbursement of the cost of its copper purchases for those countries to be applied on the British obligations which we held, our Treasury would require Great Britain to expend the dollars so received by it from France and Italy for other of its dollar purchases, in all respects as if the dollars so received had been loaned by the United States to the British Government. In its essence the dollar reimbursement plan was merely bookkeeping which, when applied, resulted in our loans being made to the appropriate country for whose use they were expended in accordance with the policy of the Treasury as stated. Its practical effect was to substitute for British obligations in our portfolio the obligations of other Allied Governments to the extent that purchases were made from our dollar loans to Great Britain for the use of other Allied Governments.

The difficulties which naturally occurred in giving effect to the principles which our Treasury adopted and the modifications which became necessary in the methods which we used in making our loans inevitably caused some extension of these principles. As already stated, we were prepared to loan the dollars needed to buy available commodities produced here so far as required by the Allied Governments for war purposes. It had, however, been the business custom for years, and such custom could not be changed in a day, to pay for various of such commodities, notably cotton, by means of the foreign exchanges.

For example, British manufacturers had for years been large buyers of raw cotton in the United States. The British manufacturer in payment for the cotton he purchased would authorize the American seller to draw on him for pounds sterling in a specified amount. The American seller would accordingly make his draft payable in sterling, and as he did not want pounds sterling in England but dollars in the United States, he would sell such draft on the New York exchange market for dollars. In ordinary peace times there was a commercial demand in New York for pounds, and these sterling drafts could readily be sold at or about the par of exchange, i.e., for an amount of dollars the gold content of which would equal the gold content of pounds to the amount specified in such draft. In peace times, fluctuations in exchange where the supply of pounds offered on the New York exchange market exceeded the demand, and vice versa, were checked by England exporting gold to us, or if the demand for pounds exceeded the supply of sterling drafts offered, by our exporting gold to England. War-time conditions fundamentally changed this situation. Great Britain in effect prohibited the export of gold and we permitted gold to be exported only under special licenses which were issued only in exceptional cases. Great Britain's exports were curtailed and her commercial carrying trade was disrupted. As we bought much less of British commodities and services during the war than in peace times, we required much less sterling than in peace times to pay for such British commodities and services as we bought during the war. On the other hand, the British need of dollars had largely increased over her peace-time requirements. Necessarily the effect of these conditions was to increase the British demand for dollars and to lessen the demand for pounds on our exchange market. Therefore, if cotton and other commodities purchased of us, which in peace times were ordinarily paid by sterling drafts, were still to be paid in that manner, it would not be possible to sell these sterling drafts for dollars at or near the par of exchange; and instead of drafts payable in pounds sterling commanding in our market something near the par of exchange in dollars ($4.86+) they could be sold only at a great sacrifice, how great it was impossible to foresee. Certainly on our exchange market the value of the pound as compared with the dollar would have tremendously declined and the credit of Great Britain would have been seriously affected at a time when it was of the utmost concern to all the governments at war with Germany that the financial credit of the Allied Governments should be maintained. It was recognized that the sterling drafts offered for sale on the New York exchange market were not only drafts issued in payment of purchases in the United States, but also drafts used in payment of purchases in other parts of the world, both within and without the British Empire; and that such purchases were not only governmental purchases but also private purchases, not only purchases by residents of Great Britain but also by residents of other countries. Hence our making loans for the purpose of supporting British exchange necessarily would involve an extension of the principles formulated by our Treasury to govern it in making our loans. However, it was believed that, because of the control exercised by the Allied Governments over exports and imports and over shipping, the great bulk of the purchases for which payments would be made over our exchange market would be for war materials and other commodities necessary for maintaining the civilian populations of the Allied countries, and that through such control and coöperation between the governments the amount of drafts coming on the exchange market, representing purchases in neutral countries, could be kept within reasonable limits.

It was decided, therefore, that British exchange should be pegged and that the Treasury would make the necessary dollar loans for the purpose. British exchange was pegged by supplying sufficient dollars through our loans to Great Britain to enable its representatives to purchase on the New York market, at a price agreed upon in advance, all sterling drafts offered for sale which were not purchased at or above that price. Thus there was created an unlimited demand for such drafts at a fixed price. The total amount expended by Great Britain in support of exchange and for cotton purchases was approximately $1,682,000,000, of which about $1,275,000,000 was during the period from April 6 to December 31, 1917, when our governmental agencies for the control of purchases were being established. It is impossible to analyze this large amount of expenditures but a study of our trade returns for 1917 suggests that, during that year, the amount of our advances to the Allies not represented by purchases and other expenditures in the United States was only a very small proportion of the total. By the first of January, 1918, most of the important purchases, other than cotton, had been taken off the exchange market and were being paid for direct in dollars and the advances to Great Britain for the purchase of exchange and for cotton for the period from January 1 to November 30, 1918, fell to about $296,000,000. During the same period our exports of cotton to Great Britain, as shown by the trade returns, amounted to about $290,000,000. The United States also made loans to support French exchange, though the method employed was somewhat different and the amount involved much less than in the support of sterling exchange. British exchange was pegged at a fixed point ($4.76 7/16 per pound for cable transfers) for the entire period. French exchange was pegged at a point, generally in the neighborhood of 5.70 francs to the dollar, agreed upon practically each month. Italian exchange lacking our support had depreciated to about 9.15 lire to the dollar, but after support was arranged through our standing ready to make loans to purchase drafts payable in lire, Italian exchange was brought to about 6.35 lire to the dollar.

As many French purchases were paid for by sterling drafts which were offered for sale in our markets, the dollar reimbursement plan was utilized to reimburse Great Britain for her borrowings of dollars to support sterling exchange to the estimated extent that French purchases were paid for in such sterling drafts. The cost of sterling drafts representing French purchases, paid for from our loans to Great Britain to support sterling exchange, was approximately $50,700,000, and accordingly we ultimately were given French obligations in lieu of British obligations to that amount.

The Treasury as rapidly as practicable arranged that payment for American commodities purchased by the Allies should be made direct in dollars, and eventually by far the greater part of the commodities (including cotton) which at the time we entered the war were being paid for by drafts payable in foreign currencies, were paid for direct in dollars by the Allied Governments out of our loans to them.

Next the shipping situation presented difficulties in the way of carrying out the Treasury's theory as to the particular government to which a loan should be made. These difficulties were most acute in connection with the supply of cereals. Apart from the United States, the principal sources for the supply of cereals were within the British Empire (Canada, Australia, India, etc.) or in neutral countries, especially the Argentine, in which Great Britain was in a position to secure finance. Considerations, both of time and of risk in shipping, made it expedient that Italy and France should be supplied largely from British Empire sources and that Great Britain should be supplied from America, rather than that all British Empire supplies should move to Great Britain and a corresponding amount of American supplies should move to France and Italy. It was recognized, however, that such an arrangement made for the common good should not have the effect of increasing Great Britain's borrowings in America on the one hand, and its loans to France and Italy on the other. The difficulty was worked out by means of a theoretical cereal allocation. That theory assumed that each country would receive, and so far as necessary apply to its own needs, the cereals available within its own territorial boundaries, and that it would purchase cereals here and borrow dollars for the payment thereof only to the extent that each country required for its consumption cereals in addition to the supply available within its own territories. Actually, in order to economize in the use of ships, the cereals were taken from the sources most available in view of the shipping situation and the German submarine menace.

Under the cereal allocation theory, the British Empire's supply of cereals was to be allocated in the first instance solely to Great Britain, and the cereal supply purchased in neutral countries was to be allocated to the country finding the finance, which was to be procured in such manner that sterling and franc drafts issued in payment therefor would not come upon the New York market as exchange and would not therefore be purchased with dollars from our loans to support exchange. The exportable supply of the United States was to be allocated in proportion to the requirements of the various allied countries in excess of those covered in the manner previously indicated; and our Treasury was prepared to make advances to the Allied Governments, in accordance with such allocation, up to the f.o.b. cost of the United States supply purchased and allocated to them.

The cereal allocation theory dealt with further allocations of minor importance and also with the allocation of any excess of the British supply over British requirements. In point of fact, however, the British supply fell somewhat short of British requirements, and consequently a small part of the American supply was allocated to Great Britain. The practical effect, therefore, of the cereal allocation theory was that we received British obligations for the cost of cereals to the extent only that the British supply (obtained from the British Empire and neutral sources) was inadequate to meet the needs of Great Britain, although something over one-half of the cereal import requirements of the United Kingdom were actually met from the United States supply; and that we took the obligations of other Allied Governments for the cereals furnished them, although their requirements were actually met, at least to a considerable extent, by shipment from the British Empire source of supply. Before the cereal allocation theory was entirely worked out and accepted by the American and British Treasuries, and to meet a pressing emergency, at the urgent request of Great Britain we loaned her in the neighborhood of $200,000,000 to purchase wheat in Canada. The inability of Canada to finance its export of cereals was due largely if not entirely to purchases being made by Canada in the United States of the same character as those for which our Treasury was prepared to make loans to the Allied Governments, so that in making this Canadian cereal loan to Great Britain the departure from our principle of not ordinarily making loans to an Allied Government to finance purchases within its own territory was more apparent than real.

Much discussion took place regarding the extension of the principles of the cereal theoretical allocation to other supplies. In general, our Treasury expressed willingness to apply the principle to all cases where Great Britain was buying in the United States and furnishing to other Allied Governments similar supplies in substantially the same condition or stage of manufacture, whether Great Britain had obtained such supplies from the United States or from other sources, and on this basis British claims for reimbursement by France for pigiron and steel billets were accepted by the United States. Our Treasury, however, refused generally to extend the principle to raw materials of American origin used in producing manufactured articles for the Allies in Great Britain. Obviously many new considerations would have arisen in connection with any such extension, one of the most important being the difficulty of applying it with any degree of accuracy or completeness, particularly as such application to be logical would have to be bilateral, so that against any adjustment for, say, American pigiron entering into shells supplied by Great Britain from its loans to other Allied Governments there would have had to be an adjustment for, say, Indian jute contained in American sacks purchased with the dollars we loaned to the Allies. It is probable that on balance the amount involved in any such extension of the principle would have been relatively unimportant. Nevertheless, in certain specific cases where, to meet a military emergency, the Interallied Munitions Council required deliveries from one army to another of manufactured munitions containing American raw materials, the Treasury did consent that dollar reimbursement might be made for the cost of the American raw materials entering into the munitions so delivered.

The question of what items of British expenditures were made for account of other Allied Governments, and hence entitled to full reimbursement in dollars if made in the United States and part reimbursement if made in neutral countries, was a frequent subject of conference between the Treasuries of the countries concerned. It was not easy of solution. Great Britain made purchases for France for which dollar reimbursement was claimed from France to an aggregate amount in excess of $1,000,000,000. For a considerable period France paid Great Britain on account of such purchases the sum of $10,000,000 a week, derived from loans to France by the United States Treasury. It was easy to determine that certain of the advances made to Great Britain were for the use of Great Britain and of no other country. Munitions, cotton, foodstuffs, tobacco and other commodities purchased by Great Britain out of our loans were transported to England and there consumed because Great Britain had not a sufficiency of these commodities and required them for consumption if the war was to continue. So, too, interest on the advances we had made to Great Britain and the amounts required to meet the principal and interest of dollar obligations of the British Government to private holders as they matured during the war period were loans for the benefit and use of the British alone. In other cases it was just as easy to determine that certain purchases were effected out of our advances to Great Britain for the benefit not of Great Britain but of other Allied Governments. Such advances were repaid in dollars to Great Britain by the respective Allied Governments out of our loans made to them for that purpose. It was not so easy to determine other questions--for example, the division between the United States and Great Britain of purchases made in neutral countries for the use of other Allied countries, the proper settlement of the complicated figures dealing with the cereal allocation theory and the transportation of cereals, or the extent to which French purchases were paid for out of our loans to Great Britain to support sterling exchange. These and other debatable questions were argued pro and con and eventually an agreement was reached by the American and British Treasuries as a result of which dollar loans were made by the United States to the countries concerned and by them paid to Great Britain in full and final settlement, certainly as far as the United States Treasury was concerned, of the claim of Great Britain that it had used part of its dollar advances from the United States to effect purchases for the benefit of other Allied Governments. The dollars so received by Great Britain were either paid to the United States Treasury on account of British obligations which we held, or, as previously stated, used for dollar requirements of Great Britain in lieu of further loans to Great Britain from the United States. In either case the effect was to decrease the aggregate amount of British obligations which otherwise would have been held by us and correspondingly to increase the aggregate amount of the obligations of the other Allied Governments to us.

It will be observed from the table hereinafter set forth that the total amount of dollars paid in reimbursement to Great Britain by the other Allied Governments from our loans to them aggregated about $1,850,000,000. Without making a detailed analysis of this figure it may be broadly stated that of this sum roughly $1,100,000,000 represented reimbursement on account of cereals, $500,000,000 reimbursement for other replacements of a similar character such as iron, steel, meat, etc., and $250,000,000 neutral purchases and other special items.

These were the general theories on which the bulk of our war loans were made; there were special cases which had to be specially treated, such as the loan of our melted silver dollars to Great Britain under the Pitman Act, for use in India, which loan has now been repaid in full; loans to France in lieu of compliance with a request for one billion gold francs which M. Clemenceau made of President Wilson at a time when the Germans were advancing towards Paris and when our franc requirements for the purposes of our army in France were large; and loans for Austrian relief to prevent the spread of anarchy and the continuation of war. Attention should be called, however, to one notable departure from the principles adopted by our Treasury in making loans for expenditure in the United States, namely, the loans we made to Great Britain to enable that Government to make payment here in dollars of obligations which, before we entered the war, it had assumed in connection with American contracts entered into by the Russian Government. Before we entered the war our manufacturers had quite generally refused to enter into contracts to supply commodities to Russia unless they received some assurance that Russia would make the payments she obligated herself to make under the terms of the proposed contracts. Great Britain supplied the credit required by our manufacturers on Russian orders and in effect guaranteed the payments which Russia obligated herself to make under such contracts. After we entered the war, we from time to time loaned, to Great Britain and not to Russia, the dollars required to make the payments under these contracts as they became due, because the obligation was incurred by Great Britain before we entered the war. Thus Great Britain was called upon to pay and did pay out dollars we loaned to her (not to a very significant amount in comparison with the aggregate of our loans to Great Britain) in discharge of her old obligation of guaranty under these Russian contracts. To some extent Great Britain recouped these expenditures through the utilization or disposition of material delivered under such contracts, but on balance some small part of our dollar loans to Great Britain was for the purpose of meeting obligations in the United States entered into by Great Britain before we entered the war, but which were settled after we entered the war, and not for the direct benefit or use of Great Britain but for the use and benefit of Russia.

Some of our dollar loans had resultant effects which were of importance. Lending the dollars needed to support sterling exchange resulted in the purchase by the British Government, from our loans, of drafts payable in sterling, and to the extent that such drafts were drawn in payment of purchases not made by the British Government itself, that government collected the sterling called for by the drafts purchased. The sterling thus obtained was available for the governmental purposes of Great Britain and to a corresponding extent diminished the sums the British Government was obliged to raise through loans or by taxation. When we loaned dollars with which the British Government purchased commodities, notably foodstuffs, for the use of the civilian population, the pounds paid therefor to the British Government on the sale of these commodities in Great Britain to the inhabitants of that country became available to the British Government. The French Government obtained a supply of francs through our support of French exchange, and France, Italy and, to a lesser extent, other countries obtained supplies of their currencies through the sale to their civilian populations of commodities purchased through our dollar loans. Our support of British and French exchange necessarily had the effect of maintaining the purchasing power of the pound and the franc, with consequent savings to the Governments of Great Britain and France. The purchasing power of the lira was increased when the arrangements we made effected its rise on our exchange market.

In the latter part of March, 1918, the Chancellor of the Exchequer for the British Treasury proposed a modification of the methods theretofore in use by the United States Treasury in making its loans to the Allied Governments. It was proposed that our Treasury should take over all the future obligations given to Great Britain by France and Italy, except obligations which they should enter into for the payment of interest on advances previously made to them by Great Britain, and that Great Britain should remain primarily responsible for arranging the finance of supplies to France and Italy outside of North America. For the supplies thus purchased for France and Italy it was proposed that France and Italy should make payment to Great Britain in dollars received by France and Italy from our loans, instead of making payment therefor to the British Treasury by their Treasury bills, and that the dollars so received by Great Britain were to be used to meet in part the approved purchases of Great Britain in the United States. The British Treasury estimated at that time its monthly loans to France at about $75,000,000 and to Italy at about $43,000,000, exclusive of loans for interest due Great Britain upon her previous advances, and that the result of adopting the proposal would be that the United States would loan to France and Italy about $118,000,000 per month more than we were then loaning those countries, and to Great Britain monthly about $118,000,000 less than we had been loaning her. This proposal was not accepted.

An excellent editorial entitled "The Balfour Note Once More," appearing in the British financial journal, The Economist, of March 10, 1923, states that the United States refused to accept this proposal largely on the ground that if it did so it would have no control over the expenditure of the money spent by agencies of the British Government for France and Italy. It is true that this consideration was one reason for declining the proposal. It was, as a practical matter, impossible for the United States to loan dollars to France and Italy for purposes and in amounts which were to be determined, not by our Treasury, but by agreement between Great Britain on the one hand, and France and Italy on the other hand. It was, however, a part of the proposal that Great Britain should remain responsible for financing in the first instance the supplies to France and Italy outside of North America, and indeed it would have been most unwise to scrap the efficient purchasing organization built up during the war by Great Britain. But while this consideration was important, the real reason for the rejection of the proposal was that it was in conflict with what our Treasury strongly believed should be the fundamental principle in making government loans, namely, that each government should find the finance required within its own territory by itself or by an Allied Government to the extent that such Allied Government was unable itself to provide the same. The reasons for the formulation of this principle have already been discussed. It was the least burdensome manner of finding the necessary war finance and our Treasury felt that any radical departure from that principle could not be logically defended and was fraught with financial and political danger. Through the cereal allocation theory and its extension to other commodities already referred to, the United States relieved Great Britain from the necessity of making loans to other Allied Governments for their purchases from her of commodities of substantially the same character and in the same state of manufacture as Great Britain was buying concurrently in the United States. But the fact that the Allied Governments required and were purchasing coal and woolen goods from Great Britain seemed no reason for our accepting French or Italian obligations, whether given before or after we entered the war, in payment for British purchases here of raw cotton or copper for its own use.

The fundamental cause of Great Britain borrowing from us while loaning to the Allies was that there were commodities here which Great Britain required for her own use and was obliged to pay for in dollars which she borrowed of us, and there were commodities within the British Empire required by the Allies which had to be furnished them and for which they could not pay except from loans. The same condition existed, though to a smaller extent, in the case of France, which, while borrowing both of the United States and of Great Britain, nevertheless made loans to Belgium, to Italy, to Russia and to others of the Allies.

The position of the British Government as both a borrower and lender unfortunately has led to some misapprehension regarding our own loans. In some quarters there has apparently existed the erroneous impression that while we made loans to other Allied Governments we did so only on British security, or the equally mistaken view that the dollars Great Britain borrowed of us enabled her to make loans to other Allied Governments.

The London Economist has done yeoman's service in removing these misunderstandings. Thus in its editorial already mentioned it is said:

"In the circumstances described we sympathise with the complaint of the American Ambassador against the sentence in the Balfour Note in which it says, 'Under the arrangment then arrived at the United States then 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.' This sentence certainly suggests that the American Government refused to accept the credit of our European Allies, and that in some way we were made to underwrite the loans they made from America for all purposes--an implication which is entirely incorrect. We regret, therefore, that Lord Balfour should have said on Thursday that 'I am unable myself to find in those words anything which is either misleading or obscure.'"

Again in an editorial entitled "Inter-allied Debt," appearing in The Economist of January 10, 1925, it is stated:

"Again, the fact that we are paying the United States is not in itself an argument for bringing pressure upon France, for it is not in any sense true, as is commonly supposed, that we borrowed from the United States merely to relend to France and Italy. Our loans from America are quite independent of our loans to our European Allies. America lent to Italy, to France, and to Great Britain moneys required to enable them to make necessary purchases from the United States, and far the larger part of what we bought in America consisted of wheat, meat, metals, explosives, oil fuel, and other essentials, either of our national existence or of our war effort. But France had to borrow not only in America; the fact that the greater part of her pigiron production was in German hands and that her mines were destroyed, meant that she had to buy iron and steel and coal in Great Britain, as well as woollen cloth, chemicals, and a great variety of manufactured products for which we advanced her sterling credits. It is an accident that the amount of these advances to France and Italy for purchases in Great Britain amounted during the latter part of the war to about the same amount as we had to borrow for British needs in the United States. But we cannot argue that if we had not been compelled to lend to our European Allies we need not have borrowed from America; the reason we had to borrow from the American Government was that--large though our internal loans might be--we had no means of securing credit in dollars. It is true we might have raised further sums by continuing to sell conscripted American securities, but it was already becoming difficult to make further sales, and this method of raising money would have been increasingly costly. On the other hand, the United States Government, as soon as it came into the war, was determined to control the purchases of ourselves and our Allies. For all parties concerned, therefore, it was the cheapest and most convenient plan for us to borrow from the United States Government. It is quite certain that even if France had not had to make any further purchases in Great Britain in 1917 and 1918, we should still have been under the necessity of borrowing in dollars in the United States in order to feed Great Britain and to provide the material which America alone could supply."

It would appear, however, that during the latter part of the war Great Britain's loans to France and Italy were considerably less than her borrowings from us. Official British statistics show Great Britain's loans (probably including interest on loans made before March 31, 1917) from March 31, 1917, to March 31, 1919, to France at about £243,200,000 and to Italy at about £255,500,000 (an aggregate of something under £499,000,000), and Great Britain's loan from the United States Government outstanding March 31, 1919, at over £840,800,000.

That our loans to the Allied Governments attained the magnitude they did is due to the fact that we were not able to put an army at the battle front immediately upon our entering the war. When we first entered the war the Allied Governments were able to purchase large quantities of supplies here requiring large expenditures of dollars and huge loans to them. As our army took the field it began to absorb an increasingly large share of our products and thus the amount of our commodities available for purchase by the Allied Governments correspondingly decreased. So, too, when we first entered the war our governmental requirements for sterling, francs and lire were almost negligible, but as our military strength on the fighting line increased, our requirements for foreign moneys became correspondingly greater and the increasing amounts of dollars which we paid for such currencies furnished dollar resources to Great Britain, France and Italy which were utilized by those countries instead of borrowing from us equivalent amounts.

Our Treasury quite naturally felt that its duty did not cease with the actual making of our loans to the Allied Governments. It was of the utmost concern to the United States just how the dollars we loaned were expended, yet having purchased obligations of the Allied Governments the dollars we paid for such obligations were theirs, not ours. It would have been undignified for them as sovereign states to have permitted even a friendly power to exercise control over their dollar balances. Had the Treasury insisted on controlling the expenditures of the dollars loaned, it could not have escaped responsibility for the use of the borrowed dollars. The Treasury was not equipped to act as a purchasing agency. The acquisition of commodities was imperative, time was most important, and reasonable certainty of prompt deliveries far outweighed ordinary price considerations. Our Treasury concluded that the control of the dollars loaned must be given exclusively to the borrowers; it was so given, and the purposes of the Treasury were served and the interests of the United States protected by other measures taken by our Treasury to which reference will now be made.

In making their written requests for dollar loans the Allied Governments were required to specify generally the uses which they proposed to make of the dollars asked for, and the written replies of the Secretary of the Treasury granting applications for loans likewise specified the general purposes for which the dollars loaned were to be expended. Thus the borrowing governments became obligated in respect of their use of the dollars we loaned them.

The Allied Governments, in compliance with the request of the Treasury and to enable the Treasury to consider further applications for loans in the light of full information as to the use made of dollars previously loaned, reported to the Treasury, in detail and on forms prepared by the Treasury, the use made of the dollars previously loaned them.

Under arrangements entered into in September, 1917, purchases were made by the appropriate agencies of the various foreign governments under the general supervision of a Purchasing Commission established by agreement between the Secretary of the Treasury and the respective foreign governments for the purpose of coordinating governmental buying in the United States. The Interallied Council on War Purchases and Finance was organized through the efforts of our Treasury for the purpose of considering and coordinating the demands of the Allied Governments upon the United States Treasury. Later the War Industries Board was organized and passed upon the necessity of purchases on our markets by our government and by foreign governments as well, and the Treasury in general required the Allied Governments to obtain the consent of the War Industries Board to their purchases of commodities in the United States. Purchases of food in the United States by the Allied Governments were made only if the consent of our Food Administration was obtained, and purchases of fuel (coal and oil) only if the consent of our Fuel Administration was obtained. Arrangements were also made with our War Trade Board whereby the issue of export licenses to the Allied Governments was withheld except for commodities purchased with the approval of one or the other of the above mentioned agencies.

The organizations effected by our Treasury and our government proved to be of considerable value to the missions of the foreign governments making purchases in the United States in aiding them to make their purchases on the best possible terms. War prices were high in the United States, as elsewhere. That war prices in the United States did not go much higher than they actually did was due to the efforts of our Treasury and our governmental agencies to eliminate competition among governmental buyers, to coordinate purchases, and to check price inflation as far as practicable.

The annual report of Secretary of the Treasury Houston of 1920 contains an interesting analysis of the expenditures in the United States of the dollars which we loaned to the Allied Governments. From this analysis has been prepared the following table, in which fractions of $1,000,000 have been adjusted, dealing with the advances, repayments, expenditures, etc., of Great Britain, France, Italy and other countries for the period April 6, 1917, to November 1, 1920.

Great All
Britain France Italy Others Total
Cash advanced $4,277 $2,997 $1,631 $680 $9,585
Less refunds and repayments 80 31 . . . . 8 119
______ ______ ______ ______ ______
Net $4,197 $2,966 $1,631 $672 $9,466
______ ______ ______ ______ ______
Expenditures:
  Munitions and remounts $1,331 $827 $259 $77 $2,494
  Munitions for other governments 205 . . . . . . . . . . . . 205
  Exchange and cotton 1,683 807 87 68 2,645
  Cereals 1,375 . . . . 42 5 1,422
  Other foods 1,169 295 142 24 1,630
  Tobacco 99 41 . . . . 5 145
  Other supplies 215 277 63 58 613
  Transportation . . . . 32 100 4 136
  Shipping 49 122 1 1 173
  Reimbursements 19 1,046 784 24 1,873
  Interest 388 269 58 16 731
  Maturities 353 290 . . . . 5 648
  Relief 16 143 16 363 538
  Silver 262 6 . . . . . . . . 268
  Food for Northern Russia 7 . . . . . . . . . . . . 7
  Purchases from neutrals . . . . . . . . 19 . . . . 19
  Spec'l for U.S. war purchases in Italy . . . . . . . . 25 . . . . 25
  Miscellaneous 48 41 56 24 169
______ ______ ______ ______ ______
Total reported expenditures $7,219 $4,196 $1,652 $674 $13,741
Less:
  Reimbursement from U. S. credits $1,854 $19 . . . . . . . . $1,873
  U. S. dollar payments for foreign
   currencies 450 1,026 $14 $1 1,491
  Proceeds of rupee credits and gold
   from India 81 . . . . . . . . . . . . 81
______ ______ ______ ______ ______
Total deductions $2,385 $1,045 $14 $1 $3,445
______ ______ ______ ______ ______
Net expenditures $4,834 $3,151 $1,638 $673 $10,296

It will be observed that this table shows expenditures reported to the Treasury exceeding by $830,000,000 the total amount of our loans within the period, and yet the expenditures for the full period had not been reported to the Treasury by many of the governments. It will doubtless be impossible ever to bring about an exact balance between the amount of our loans and the expenditures reported by the Allied Governments. As the Treasury would not in general make loans to an Allied Government so long as such government had available for use dollars however obtained, it is necessary in attempting to balance our dollar loans to the Allied Governments with their dollar expenditures to take into account the dollars which were or became available to the Allied Governments from sources other than our loans. When we entered the war a certain amount of dollars were available here to Allied Governments. After hostilities ceased there was some liquidation here by the Allied Governments of supplies they no longer required, which produced dollars. After the armistice the Treasury urged the Allied Governments to provide their dollar requirements through independent action on our financial markets. The British, French, Italian and Belgian Governments all found means to obtain dollar funds here. Even during the war dollar funds were to some extent provided by some of the Allied Governments. The support of Italian exchange resulted, not in dollar loans to Italy for that purpose, but in dollar balances here in favor of the Italian Treasury derived from private purchases of lire on our market. Various departments of our government became indebted to Allied Governments for services rendered or materials purchased, for which payment was made in dollars. American securities owned or controlled by Allied Governments were disposed of in our market, thus increasing their dollar resources. All these factors must be determined and applied if a balance is to be struck between the amount of the dollar resources of the Allied Governments, including the dollars we loaned them, and their dollar disbursements.

Our loans naturally divided themselves, on the basis of time, into two classes: those made before the armistice and those made thereafter. The following table, in which fractions of $1,000,000 have been adjusted, shows the amount of our loans both before and after the armistice, up to November 1, 1920 (all of our loans after the armistice except to a comparatively insignificant amount were made before November 15, 1919), after crediting repayments on account of principal prior to that date, all of which repayments were in the nature of bookkeeping entries except the payment of $500,000 on account of its obligations by the Government of Cuba:

Great All
Period Britain France Italy Others Total
April 24, 1917 to Nov. 15, 1918 $3,696 $1,970 $1,051 $381 $7,098
Nov. 15, 1918 to Nov. 1, 1920 501 996 580 291 2,368
______ ______ ______ ______ ______
   Total $4,197 $2,966 $1,631 $672 $9,466

In general, we made our loans for the same purposes after the armistice as we did before. Our Treasury absolutely declined to make post-armistice loans for reconstruction or trade purposes. We did loan in the aggregate some $48,000,000 in substantially equal parts to Great Britain, France, and Italy to purchase foodstuffs and relief supplies which those countries furnished Austria. The loan made to Great Britain for this purpose has been repaid to us. Our Treasury had no authority to make loans to Austria, an enemy country, and it was important as a war purpose that relief should be furnished Austria to prevent the spread of anarchy which might have led to a resumption of hostilities, and delayed the ending of war. For the same purposes we made loans direct to Czechoslovakia, Rumania and Serbia. For a time we continued after the armistice our loans to the Belgian Government for use by the Commission for Relief in Belgium. Loans were also made in relatively small amounts to Czechoslovakia, to furnish part of the cost of returning soldiers to Europe. Prior to the armistice, in lieu of complying with M. Clemenceau's request for 1,000,000,000 francs in gold, to which reference has been made, we had established in favor of France an effective credit in the sum of $200,000,000. This credit the French Government had transferred to the Bank of France, and the Bank of France had included the same as part of its reserves. The Bank of France drew dollars against this credit only after the armistice.

When it is recollected that at the time of the armistice we were loaning Great Britain only the dollars needed to meet her day-to-day expenditures, the aggregate of our net post-armistice loans to her of about $500,000,000 seems exceedingly moderate. At the time of the armistice Great Britain was obligated to make dollar payments against deliveries under existing contracts. In March, 1919, the British Treasury estimated its outstanding dollar commitments at about $273,000,000 in addition to about $88,000,000 interest on our loans to Great Britain which became payable and which was paid during April and May, 1919. It was not until some time after the actual signing of the armistice that the Allied and Associated Governments became reasonably certain that hostilities had come to an end, and until so satisfied it was impracticable for them to begin demobilization or to cut down a considerable part of their dollar expenditures here. Our net post-armistice loans to Great Britain were kept down only because of her other dollar resources, including dollars paid to Great Britain by the other Allied Governments under the dollar reimbursement plan.

The French and Italian post-armistice net borrowings included in the case of France the advances of the $200,000,000 effective credit assigned to the Bank of France, and in the case of both France and Italy loans made to enable those countries to reimburse Great Britain for purchases made by Great Britain for the use of France and Italy, respectively.

Consideration has here been given only to the bulk of our loans. There are few rules without exceptions and special circumstances had to be given weight in certain cases, but in general the principles stated, which were formulated by our Treasury, were carried into effect, sometimes through the use of complicated methods of procedure forced by war conditions.

The purpose of our loans to the Allies was to win the war. They were made without stint but without waste. We supplied to each country availing of our loans all the dollars each required in excess of its own dollar resources available for purchases in the United States. The dollars we loaned, used in this country by the Allied Governments, were expended for purposes approved by our own governmental agencies. We did not make loans for purposes which in our judgment were unnecessary and not calculated to help win the war. We kept the amount of our loans down by requiring the countries borrowing of us to use to the extent available their other dollar resources for purposes we approved. In conjunction with Great Britain we furnished the finance required to effect necessary war purchases of other Allied Governments in neutral markets. Upon final adjustment we held the promissory notes of each Allied Government to which we had made loans, in an amount corresponding with the financial assistance we had furnished it under the general principles herein outlined.

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  • ALBERT RATHBONE, Assistant Secretary of the Treasury, in charge of foreign loans, 1918-1920; American financial adviser at the Paris Peace Conference
  • More By Albert Rathbone