ACENTURY before the World War began, another worldwide war was drawing to its close. In the twenty-three years of European struggle, broken only by two short intervals of armed peace, which ended in 1815, the expenditure of national energies and resources was relatively as great as the waste we have recently witnessed, if not greater; and the exhaustion of the combatants, as testified by the subsequent economic distress and the protracted recovery, paralleled the present European situation. National hatreds had been as deeply aroused. But when the peace was made, even though the victors, after the Hundred Days, were demanding more security than they had thought necessary in 1814, the parallel ceases to be so close. Perhaps the lust for vengeance had been more fully sated. The decisive series of events, the victory of the allied arms at Waterloo, the march on Paris, and the chaining of the colossus at St. Helena, gave a dramatic and satisfying fulfillment to the war aims.

At any rate, as compared with the Treaty of Versailles, the terms imposed in November, 1815, upon France, the prostrate enemy, were surprisingly considerate. There was no such stupidity committed as to extort a confession of war guilt; the territorial conquests of France were taken from her, but she was left her boundaries of 1790. The preamble of the Peace Treaty stated that "the indemnity due to the Allied Powers could not be either entirely territorial or entirely pecuniary without prejudice to France in the one or the other of her essential interests." The indemnity was fixed at 700 million livres, equivalent to about 28 million pounds sterling, to be paid over five years, and until payment was completed France was to maintain the 150,000 men of the allied army of occupation. Castlereagh in 1816 estimated that the total of indemnities and military expenses payable by France would amount to about 80 million pounds sterling. But this sum was cut down, because the period of occupation, and hence of occupation charges, were curtailed by agreement when France in 1818 had completed the indemnity payments, and had also settled the further claims against her by an inscription of rentes totalling 24 million francs. The speed shown by France in making a full settlement seemed to justify Castlereagh's earnest conviction, as expressed in his great Treaty speech to the House of Commons on February 19, 1816, that the charges imposed on France were moderate and fairly adjusted to her capacity to pay without undue strain. He was satisfied, he said, that "no arrangement could be wise that carried ruin to one of the countries between which it was concluded."

A few days after Castlereagh's speech, on March 1, 1816, the critics of the upper chamber attacked the Premier, the Earl of Liverpool, for the Government's "expensive and disinterested generosity" in regard to the debts owing to England from its allies. Lord Holland urged consideration for the English taxpayers who had borne a burden of taxes unparalleled in history. Are they to have no relief, he asked, "while the other countries which they had rescued by their [English] blood and treasure were not even to pay their just debts, because, forsooth, they were unwilling, or said they were unable, though their resources had so greatly increased?" Lord Liverpool explained in regard to the chief item, the Imperial loans of £6,200,000 to Austria contracted in 1795 and 1797, that conditions following 1797, the date of Austria's last interest payment, had made it impossible to ask her for repayment. Instead, in 1803, 1809 and 1813 England had advanced subsidies to Austria. "A loan," he added, "was then out of the question, and . . . it became a maxim with every administration, after the experience of the Austrian loan, not to engage in any transaction of that kind." It should be remembered, he urged, how much Austria had suffered in the cause of Europe. As for the next largest obligation, the Dutch loan to Russia guaranteed by England, amounting to a little over two million pounds sterling, the English Government in 1815 had taken over half of the debt, and under the circumstances he thought it unwise "to stir the question". "He admitted," the Parliamentary report continues, "that the principle was not one which ought to be encouraged; but what he maintained was this, that, under the special circumstances in which this country had acted, the pecuniary sacrifices to which we had submitted were justified by the soundest views of prudence and expedience."

The Austrian debt, with accumulated interest, totalling £15,600,000, was liquidated finally in 1824, when Austria, although she evidently regarded this political obligation as not a debt justly due, settled by a payment of £2,200,000. A loan to Portugal of £600,000, floated in England in 1809 with government guarantee, was remitted in 1815. The only remaining loans, the comparatively small items of £200,000 to the House of Orange in 1813, and £200,000 to the French Bourbons in 1814, were repaid. England had aided her allies, not by loans, but by grants of many subsidies. According to the careful archive studies made by Dr. Silberling, the total sum of bills drawn and bills and specie remitted for British subsidies and loans abroad, from 1793 to 1816, was £61.3 millions, of which at least £53 millions represented subsidy payments.

Whatever may have been the considerations which led successive British governments during a long and exhausting war to assist the European allies by direct grants rather than by loans, whether it was a recognition that the continental armies were bearing the heavier brunt of the fighting on land, while England held the sea, or that she as the richest was best able to take her share in thus contributing to the common cause, or that as leader in the coalition against Napoleon she felt bound to finance the continued effort, the fact remains that subsidies, not loans, had been adopted by England as a settled policy, that while her allies shed blood in the common effort she furnished her share of the treasure. At the end of the struggle, for all practical purposes, England wiped the slate clean. Even her modest share of the French indemnity was spent abroad, distributed as prize-money to her troops in Paris, or contributed to the building of fortifications in Holland. Beset with difficulties of the gravest character at home, with taxes at an unprecedented height, with such serious financial complications that Ricardo was supporting a demand for a capital levy, with agriculture in distress and industry languishing, with an army of unemployed, and with riots in her manufacturing towns, England, nevertheless, showed expedient moderation toward France and prudent forbearance toward her allies. She left the Continent unhampered to undertake its necessary economic reorganization. Her action was not quixotic; it was not merely the "gentlemanly tradition" of government. The "new doctrine of disinterestedness" with which Lord Liverpool was taunted, was calm and far-sighted statesmanship. That it was so felt at the time even by the critics of the government may be the inference from the fact that no division was taken after the debate in the House of Lords. The country had supported the governmental policy.

Historical parallels must not be pushed too far, and doubtless some differences may be pointed out between England's position in relation to the Europe of the Napoleonic war period and that of the United States toward the Europe of the last great war. But on the matter of the war debts it is probable that the historian of the future will judge that the English chose a wiser course a century ago than that which the United States is now pursuing. Comparing the relative attitudes of the two countries toward somewhat similar crises, and watching the consequences unfold from the divergent decisions, the future historian, while making all necessary allowances for a country immature in international relationships, may regret that this particular lesson of history was not studied and followed. He will not forget the perhaps humanly inevitable stumbling of all the war-worn countries, though he will note that in the matter of debt remission England has again shown her genius for moderation by proposing that all the war debts be written off as war expense. But in the case of the United States he may go so far as to say that whether from motives of partisan politics, accentuated by the after-war reaction, or from callous indifference, or from sheer ignorance, a policy was followed, from 1920 to perhaps 1930, which was difficult to explain or commend. Not the least of her errors, endangering her political and economic future, was the insistence upon the substantial repayment of the war debts from her former associates in the war; or perhaps the initial failure of political judgment in granting aid during the war by loans rather than by subsidies.

Our future historian must very likely begin by inquiring why the United States went into the war; and after dispassionate appraisal of the evidence he will reject the idea that by specious propaganda she was misled into entering. The examination of this question is essential, for he will discover in his researches the belief, hinted or stated during the post-war period, that the United States felt free to withdraw from a war which was not her own. He will find, for instance, in a devoted Republican newspaper the assertion that "the war was primarily Europe's war, but we have been paying for much of Europe's share of its costs, as well as for our own . . . we asked nothing out of the war and we got nothing." His conclusion must be to the contrary. With comprehensible reluctance, the United States soberly decided that she must throw her immense weight into the struggle because her own vital interests were concerned and her ideals imperilled. She had watched the conflict at her door for two and a half years, but had taken no step toward military preparedness, except the equipment of some of her industries, at great advantage to herself, for the supply of the combatants. But, although a thrice unsuccessful candidate for the presidency declared that the United States could raise a million soldiers overnight, she could not get them trained, equipped and armed, and transported to the scene of conflict for over a year after the solemn declaration of war. The war had become an American war, but it was being fought alone by the sacrifice of European lives. In this tragic interval all that the United States could furnish was a portion of her abundant wealth. While waiting for troops, she could mobilize her fields and factories to supply with food, clothing and munitions the European nations, now her associates in a common cause, who had come literally and pitiably to the end of their borrowing capacity. The Secretary of the Treasury, Mr. McAdoo, was perhaps justified in telling them, rather brutally, that the United States had no intention of carrying the whole burden of the war, and in insisting that there be established Inter-Ally control organizations. The European allies were also within the limits of truth and courtesy in explaining that the greatest burden had already been borne and would continue to be borne by them, and that they would welcome American help and participation in Inter-Allied controls. In default of such controls or until they were established, to assure the proper allotment of war supplies, they would be obliged to borrow the money from the United States Government to pay for the necessary goods grown and made in the United States.

And so it came about that French, English and Italians fought and died, while the United States set about the business of learning to make war. Meanwhile Congress voted huge sums, for a part of which the Europeans gave their notes and spent the proceeds in the United States to feed and arm their soldiers at the front and to supply their strictly rationed civilians. Even after the desired control organizations were operating, the American Government was slow in giving them cordial support, and when it had the machinery available for proper allocation, it did not cease demanding notes for its contribution to the common war.

The Allies, it was later declared, gave "solemn" promise of repayment. But it is difficult to find in the historical record any evidence that the alternative policy of subsidies was at this time given any serious consideration. It could not very well be pressed by the nations who were asking for help; and the United States Government, if in the then existing welter of affairs it had weighed the matter at all, may have decided that for the time being the responsibility of borrowing would automatically act as a controlling force on too reckless a draft upon American resources. But when Congress voted to establish credit for the Allies "for the purpose of more effectually providing for the national security and defense and prosecuting the war," some of the legislators expressed the hope that the loans would not be repaid. And if the country could have known more fully the desperate straits to which the Allies in 1917 and early 1918 were reduced; if there had been in that contemporary surge of American helpfulness any discussion of the present and future bearing of the two policies, the decision might well have been for subsidies, the expenditure of which should be controlled by the kind of governmental organizations which were in fact later set up. In 1816, the critics of the English Government recalled the "solemn promises" of repayment made by Austria in 1795, but the answer was in effect that in war, money obligations must be subservient to urgent national needs. So in the war crisis of 1917 anything that could stop the breach in the dykes was hastily snatched at, and there was no discussion as to alternatives. With the flood breaking through and the country in danger, no one stopped to think of the precise form and effects of the future settlement. Certainly no one then considered the loans as ordinary commercial transactions. If reflection had been possible and if prompt controls had been established, it is conceivable that the country would have grimly rejected any dickering about the "sanctity of contracts." At that juncture the United States might have decided, if the case had been presented, that in any event the munitions and supplies, so imperatively needed, be sent unconditionally to support the Allies and to dishearten the enemies. Secretary McAdoo, in his report of 1919, said: "The service of these loans in assisting to hold the battlefronts of Europe, until the might of our heroic army could be felt effectively, made possible, beyond the shadow of a doubt, the ending of the war in the fall of 1918. Without this aid to the Allied Governments the war unquestionably would have been prolonged, if not lost, with the resultant great additional cost in life and treasure." To avoid this certain danger, seen during the war but only dimly remembered afterward, who can doubt that the American people would have willingly given outright, if it had realized the millstone which its loans were later to hang about the necks of the friends then fighting its battle.

Our historian, describing the post-war attitude toward the war debts, which had been so almost casually incurred to meet the greatest of emergencies, may express some surprise at the crystallization of national policy, despite some contemporary protests, in favor of pressure for repayment. But he will note in 1924 and 1925 some recrudescent criticism of this policy. In August, 1924, the former Commander of the American forces in France, General Pershing, declared that if it had not been for the Allies "who held the line fifteen months after we entered, it might well have been lost." Indeed, in March, 1918, that line was nigh to breaking. With evident consciousness of the weight of his words, General Pershing went on to say: "We were responsible for their having to hold the line, and we advanced the money which made it possible for them to hold it. But I believe part of that expense should now be borne by the United States."

A number of other evidences will be available to the historian, which indicate at this time a certain reawakening sensitiveness of the American conscience on the score of the debt payments. Very few, he will note, raised their voices for complete cancellation; that was regarded as too "unpopular;" it might even, so it was alleged without adequate proof, conduce to lightness in making war. More were advocating some reasonable compromise. Mr. Piez, the President of the Illinois Manufacturers' Association, in October, 1925, addressed a mild remonstrance to Senator Borah in regard to the French debt, and suggested the unwisdom of collecting "from Europe for nearly a third of a century, after we have paid off our own debt, large sums of money, not on account of the principal, but on account of the interest on the money we advanced." He pointed out that "France borrowed from us approximately $3,300,000,000 and offered us in settlement $6,220,000,000," and asked, "Were we fair in rejecting the French terms?" But this modest inquiry called forth from Senator Borah an appeal to taxpayers against "cancellation," although Mr. Piez had expressly disavowed so extreme a measure, and an assertion concerning the undue military expenditures and the great prosperity of the French, an argument which a well-informed book by Moulton and Lewis on "The French Debt Problem" was at the same time demonstrating as baseless. Another spokesman from Chicago, Mr. Rufus C. Dawes, President of the Chicago Association of Commerce, after Senator Borah's blast (which Dawes apparently refers to as the utterance of "a rash and unsafe adviser"), used a banker's language when he said: "Bankers might resent a debtor requesting cancellation of a debt. But a banker would be the last to suggest that there could be anything immoral in forgiving or abating a debt. They do it themselves all the time." And he reminds one of Castlereagh on the French indemnity when he concluded: "We ought to be willing to accept such a portion of the amount France owes us as the financial judgment of the world would approve as being within the ability of France to pay without too great strain."

We must pass over what our historian will have to say in regard to the foreign reactions of the American debt policy. He traces the fluctuations of European feeling, its increasing bitterness toward the United States, and he points out the growing realization on the part of those responsible for American foreign policy that it might not be desirable further to exacerbate the dislike which inevitably attaches to a creditor nation. He goes on to say that a consideration of an economic order, bearing on the expediency of the debt policy, was beginning to be more clearly perceived by the great class of business-men who dominated American life. As the debt settlements proceeded, the Debt Commission on one ground or another made somewhat bolder reductions. It became apparent that in the end the debts payable to the United States would be made about equal to the reparations payments undertaken by Germany to the debtors of the United States. France, England and Italy would become merely the chief conduits for the transfer from Germany to the United States of approximately $600,000,000 a year. It was seen that the American policy would leave France with practically no payments from Germany applicable to replace in part the great sum France had expended to repair the war ravages inflicted by Germany, literally on the soil as well as on the homes and industry of France. About the same time it was more fully realized that the insistence on debt payments would not only be damaging to France, already in the greatest financial difficulties largely because of her own efforts for restoration, but was likely to be an economic over-stimulus to Germany. This was perhaps what Mr. Dawes had in mind when he said that "the statesmen of the world must, in making their international settlements, take into consideration such things as . . . the effect of such payments upon the international competition of the future."

In the Dawes Plan, Americans had been prime movers (the Mr. Dawes above referred to had acted as adviser to the Commission of which his brother, Gen. Dawes, had been chairman), and in the success of its operation Americans had displayed a keen interest. This plan had removed a large part of the problem of Germany's "capacity to pay" out of the quagmire of politics and on to the firmer ground of practical experiment. The inauguration of the plan had been fortunate, for its success, in its time, with Germany at the nadir following her currency inflation, and with the French occupation of the Ruhr manifestly a failure. But it was a great service to have seized the propitious time, to have done the right things, and to have left undone those which only the future could determine. There had been doubt at first whether Germany could pay annually the sum determined upon. Soon, however, even the recalcitrant Germans acknowledged that this payment could be made. Then there emerged further serious doubt, even among those closest to the actual working of the plan, whether, once paid into the Reichsbank, these sums could regularly be transferred abroad by the Transfer Committee. There were limits to the possibilities of payments in kind or of what were known as "assisted schemes," upon which the English economist, Sir Josiah Stamp, had placed his chief, though somewhat doubting, dependence. There were limits also to long continued commercial loans, mainly from the United States to Germany; indeed, with the restoration of German earning power, it appeared probable that Germany would in a decade cease to figure as a borrower in the net international account. Even if by the steady pressure, exerted through the operations of the Transfer Committee on the market for bills of exchange, there should be created that predicted difference in price levels, lower in Germany and thus facilitating her exports, and appreciably higher in the United States, encouraging imports, there might still be thrown up new limiting barriers in the form of hostile tariffs. Such were some of the anticipated difficulties. But it was then apprehended that the United States would be impaled upon the horns of a dilemma. If these German payments could not be transferred, what would happen, it was asked, to the French debt payments to the United States? If France should receive little from Germany, what practically would become of those vehement American declarations that debt payments had no relation to reparation payments? And if, by perhaps 1927 or 1928, the French budget and currency had been balanced and stabilized with great sacrifices, followed by the anticipated but wholesome business depression, would the United States insist on the "sanctity of contracts," and plunge France into new disaster, while Germany went scot-free?

The other horn of the dilemma, our annalist proceeds to show, was equally repugnant to American contemplation. If German payments should be transferred, successfully and continuously, even though they should be transmitted through France and England without any immediately perceptible shock to American economic life, the ultimate intensification of international competition was becoming distinctly visible, both to Americans and to Germans. The German outcry, protesting that such transfers could never be made, and if they were Germany would be ruined, became noticeably less audible by the close of 1925. And in its stead were heard urgent exhortations from German leaders to standardize and speed up production, to concentrate on the more efficient firms, to introduce labor-saving devices in order to cut costs to the lowest point. There were hardly concealed German exultations over their coming dominance in foreign markets. The report of the Reichs Kredit Gesellschaft on the economic situation, issued at the beginning of 1926, declared confidently: "Germany will be compelled by the transfer of Reparation payments to develop her foreign trade relations beyond their previous extent . . . . We therefore repeat that Germany is only beginning to take a more important share in the trade of the world . . . . The standard for the future development of German business is not the closing down of undertakings but rather progress by increasing the output of labor and extending the available markets." Germany's resolute turn-about and her hopefulness of great future expansion, despite temporary discouragements, was the outstanding feature of European economic history in 1925.

With this reawakened energy and with Germany's great organizing ability, the effect of the constantly pressing incentive of reparation payments, it was seen, would be not merely outward flowing goods and services and the resulting growth of her export industries and her shipping, but the reëstablishment the world over on a greater scale of German credit and trade organizations. Her export houses, spreading over the globe, would seek more lustily than ever before every nook and cranny for the tendrils of new trade. With determined and relentless paying of her war indemnity, Germany, it was obvious, would gain far more than she had lost in the war. Healthful and stimulating in the long run as business competition may be, the question was forcing itself upon American attention in 1926 whether it was really worth while to give a German competition, already naturally vigorous, the additional forced stimulation of the low home prices resulting from the heavy international payments. Also it was asked, at just the time when America was reaching a position where increased export trade was essential for her surplus industrial production, what would be the utility of making to Germany a gift of domination in those competitive foreign markets? Not only the leading American business men but even the humbler taxpayers were coming into agreement with Mr. Mellon, the Secretary of the Treasury, when he said: "The entire foreign debt is not worth as much to the American people in dollars and cents as a prosperous Europe as a customer." In short, it was realized that insistence on the debt payments was to produce maladjustments which more than offset any supposed benefits they could yield.

Whatever the event, therefore, whether history was to show German payments blocked in transfer or successfully issuing forth in a stream of goods and services, the examination of the alternatives should by 1926 and 1927 be influencing American public opinion toward a new course of marked leniency in regard to the debt payments. A general readjustment would then be accepted as necessary. Our historian, we suspect, will be recording the successive steps of this change of view and its translation into action. There might be an international commission operating like the agencies set up by the Dawes Plan, to explore the practicably possible and to do the expedient minimum. The great reduction of debts by mutual consent might very possibly accompany arms reductions -- a desirable combination, especially if the United States should see its way to bring something besides moral influence to the disarmament conferences. In any case, however translated into practice, there would be a general recognition of the fundamental fact that war debts are a part of the waste of war, like the spent shells and barbed wire for which they paid, and must not encumber the fertile fields of peace. The pages of our history will recount the various phases of this readjustment as occurring toward and about 1930. Germany, we may learn in passing, would obtain a much needed determination of her total obligation, and her payments, put within her demonstrated ability to pay and transfer, would be applied where they rightfully belong -- in assisting France, if France felt that she could afford to accept them, in extricating herself from the burden of restoration.

Let our historian paint at the end of his chapter, to relieve his tale of mischievous prejudices and uncharitableness between nations, some picture of human kindness -- of England, for instance, using the largely remitted American debt payment to irrigate Mesopotamia, or better still, to revive that dream of making "a land fit for heroes to live in," -- of prosperous America outgrowing her foolish fears of foreign guile and coöperating generously with her neighbors. And forgive him if he repeats sententiously the sound lesson of Lord Liverpool's "prudence and expedience:" In case of war, if you can give at all, give and do not lend.

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  • EDWIN F. GAY, Professor of Economic History, Harvard University; member of the War Trade Board and Chairman of the Division of Planning and Statistics of the War Industries Board; former President of the New York Evening Post
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