Our Interest in the Reparation Problem


THE Young Plan for the ‘complete and final settlement of the reparation problem’ was adopted last June, arrangements have been made for setting up the Bank for International Settlements at Basel, and the chancelleries of Europe are figuring their budgets anew in view of the altered schedules of reparation payments agreed to by Germany. From all of these conferences and agreements the United States has officially kept aloof, and with one small exception — the reduction of our claims against Germany by 10 per cent — has professed indifference as to the outcome. Is it true that ‘we have nothing to do with abroad,’ as Stanley Matthews of Ohio once stated in the United States Senate, or are our interests so inextricably intermingled with those of Europe that the settlement achieved at Paris inevitably affects our financial and economic future?

As to the official attitude of the United States Government there can be no question. When the Treaty of Versailles was formed, we declined to accept any share in the reparations which were exacted from Germany, asking only the reimbursement of the expenses of the American army of occupation and the payment of private claims of American citizens against Germany. When subsequently suggestions began to be made that we should accept German reparation bonds in lieu of the debts owed this Government by our allies, the official position of the United States was at once made clear. As early as June 26, 1920, D. F. Houston, Secretary of the Treasury, stated in a memorandum to Sir Auckland Geddes, the British Ambassador: —

It has at all times been the view of the United States Treasury that questions regarding the indebtedness of the Government of the United Kingdom of Great Britain and Ireland to the United States Government and the funding of such indebtedness had no relation either to questions concerning the war loans of the United States and of the United Kingdom to other governments or to questions regarding the reparation payments of the Central Empires of Europe. These views were expressed to the representative of the British Treasury constantly during the period when the United States Government was making loans to the Government of the United Kingdom, and since that time in Washington, in Paris, and in London.

Later in the same year, on November 5, President Wilson stated the same views in a letter to Lloyd George, then Prime Minister of Great Britain: —

The United States fails to perceive tbe logic in a suggestion in effect either that the United States shall pay part of Germany’s reparation obligation or that it shall make a gratuity to the Allied governments to induce them to fix such obligation at an amount within Germany’s capacity to pay. This Government has endeavored heretofore in a most friendly spirit to make it clear that it cannot consent to connect the reparation question with that of intergovernmental indebtedness.

Two years later Congress gave legislative sanction to this view by the creation of the World War Foreign Debt Commission. In the act of February 9, 1922, a provision was incorporated which forbade the substitution of German reparation bonds for the debts owed us by our allies. Section 3 of the act read as follows: —

That this act shall not be construed to authorize the exchange of bonds or other obligations of any foreign government for those of any other foreign government, or cancellation of any part of such indebtedness except through payment thereof.

Within the next five years the Commission succeeded in making debtfunding agreements with all of our allies except France. An agreement was drawn up by Mr. Mellon acting for the United States and M. Bérenger acting for France, but the latter country did not ratify it until July 1929. It seemed as though the American debt-funding act closed the door to the cancellation of the Allied debts, or to the reduction of German reparations below the point at which we had fixed our claims — namely, a total of $11,522,354,000 principal, with $10,621,000,000 of interest for the sixtytwo years through which the debts are to be paid, making a grand total of over $22,000,000,000.

Faced by the necessity of settling her indebtedness to the United States Government, Great Britain lost no time in suggesting to her Gallic neighbor the propriety of a prompt settlement of the French debt owed to Great Britain. On August 1, 1922, the Earl of Balfour sent to the French Ambassador in London a communication which contained the following significant statement: —

But while His Majesty’s Government are thus regretfully constrained to request the French Government to make arrangements for dealing to the best of their ability with Anglo-French loans, they desire to explain that the amount of interest and repayment for which they ask depends not so much on what France and other Allies owe to Great Britain as on what Great Britain has to pay America. The policy favored by His Majesty is, as I have already observed, that of surrendering their share of German reparation, and writing off, through one great transaction, the whole body of Interallied indebtedness. But if this be found impossible of accomplishment, we wish it to be understood that we do not in any event desire to make a profit out of any less satisfactory arrangement. In no circumstances do we propose to ask more from our debtors than is necessary to pay to our creditors, and while we do not ask for more, all will admit that we can hardly be content with less. ... So deeply are they convinced of the economic injury inflicted on the world by the existing state of things that this country would be prepared (subject to just claims of other parts of the Empire) to abandon all further right to German reparation and all claims to repayment by Allies, provided that this renunciation formed part of a general plan by which this great problem could be dealt with as a whole and find a satisfactory solution.

The Balfour Note — ‘possibly the most important single document in the history of the Interallied debts’ — indicated the British willingness to wipe the world slate clean of all indebtedness, if the other nations would agree. By such an arrangement Germany would have profited enormously; Great Britain and the other European nations which were at the same time debtors and creditors would have suffered more or less according as their hope of reparations exceeded the amounts they owed; while the United States, which was solely creditor, would have ‘held the bag.’ The United States Government refused to be moved by this suggestion, but instead went ahead with the policy of making funding agreements with each of the Allies whose demand notes it held. Nothing therefore came of the Balfour Note at the time, the British Government itself concluded a funding agreement with the United States on June 18, 1923, and the other nations slowly but steadily followed suit.


In the negotiations for the funding of the debts, the United States developed the principle of ‘capacity to pay,’ and although the World War Foreign Debt Commission steadfastly refused to link the debt payments with the sums received from Germany, it was evident that in estimating capacity the Commission was not unmindful of the reparation payments. France indeed insisted upon a ‘safeguard clause’ which should relieve her of payment of her debt to us in case Germany defaulted, but this the United States refused to concede. When France finally ratified the funding agreement in July 1929, after waiting over three years since it was drawn up, she made the rather futile gesture of stating this demand in an accompanying resolution.

Great Britain likewise refused to incorporate such a safeguard clause in the British-French funding agreement of July 12, 1926, although the accompanying notes which were exchanged by the two governments admitted the principle that France can pay only to the extent that she is paid by her debtors, and shall have the right to demand a reconsideration of the agreement in the event of total or serious default in the reparation paid by Germany. It was further agreed that, should the British Government receive more from war debts and reparations than it was obligated to pay the United States, it would remit an equivalent part of the debt owed it by France and other debtor nations.

Although by the Balfour Note and the provisions of the French and other funding agreements Great Britain assumed a generous role and placed the blame for the payment of the Interallied debts upon the United States, in one respect she showed herself more canny than our own World War Foreign Debt Commission. She uniformly asked for heavier payments from her debtors in the early years of the funding agreements, while we began with small payments in the early years and by an ascending scale reached the heaviest ones toward the end of the period of payment. Thus, although Italy’s debt to Great Britain was funded at $1,346,000,000 and that to the United States at $2,407,000,000, in the first five years Great Britain would receive $87,000,000 and the United States $25,000,000, while in the second five years the payments would be $97,000,000 and $50,000,000, respectively. With regard to the French agreements Mr. Winston Churchill made the following statement to the House of Commons on July 13, 1926: —

Although the French debt to the United States compared with the French debt to Britain is as eight to five [£827,000,000 to £557,000,000], payments will be made to Great Britain and the United States as follows: in the first five years the United States will receive £32,000,000 and Great Britain £42,500,000. In the first ten years the United States will receive £94,000,000 and Great Britain £105,000,000. It is only after the ten years that the United States agreement pulls up.

The real reason for this policy of extracting as much as possible from the debtor Allies in as short a space of time as possible was frankly avowed by Mr. Churchill in this same speech. It was because he did not believe that the payments would last very long, and consequently he attached little importance to the later payments. Let him speak once again: —

I quite agree, and I make no secret of it to this Committee, that we attach greater importance to getting substantial payments in the earlier years than we do to having written up on the tablets of the future some enormous payments to be handed over to our grandchildren. . . . [If] you take the view that perhaps in ten or fifteen or twenty years you will have a revision, and a review of the whole of those relations arising out of the Great War, then in fifteen years we shall have done better than the Americans.


Such was the situation when the breakdown in German reparation payments, as provided for by the Treaty of Versailles and the Spa and London agreements, necessitated a reconsideration of the ability of Germany to pay. It was then that the European creditor nations, despairing of solving the problem by the use of political methods or of military force, provided for the appointment of a committee of experts to devise a plan for handling reparations. The United States Government refused to take part officially in these negot iat ions and remained consistently aloof. Our practical interest in reparations was, however, abundantly evidenced by the actual presence of qualified American citizens at all important reparation commissions, and their active participation in some.

The United States was represented unofficially on the original Reparation Commission successively by Albert Rathbone, Roland W. Boyden, and James A. Logan, as ‘observers.’ It was Secretary Hughes who first suggested, in 1922, the calling of a committee of experts to examine Germany’s ability to pay reparations, and it was another American, Charles G. Dawes, who acted as chairman of this committee when it was appointed in 1924. The resulting experts’ plan has ever since been popularly known as the Dawes Plan. Two Americans — Owen D. Young and S. Parker Gilbert — successively acted as Agent General for Reparations Payments, virtually administering the plan. The aid of these men was indispensable in solving the reparation problem, not merely because of their personal ability, but even more because of the vital interest of the United States in the problem. Official denial on our part cannot conceal the real connection in the budgets of the debtor Allies between reparations and the carrying out of the funding agreements which they have made with us. Although there is no legal connection between reparations and war debts, they are both part of the larger problem of the final financial liquidation of the war, and as such cannot in fact be dissociated.

The Dawes Plan went into effect in September 1924, and achieved admirable results in providing an opportunity to study the practical workings of reparation payments and in ensuring a political moratorium during which the problem could be envisaged in its economic aspects. It must be confessed that the effects of reparation payments have been obscured by foreign loans to Germany, most of them from the United States. Not only did this country subscribe over half of the initial, so-called Dawes, loan of $200,000,000 in 1924, but during the five years of the operation of the experts’ plan we lent to Germany all told about $1,500,000,000. Without American capital and personnel the success of this plan would have been doubtful. It was, however, confessedly only a temporary expedient, and was unsatisfactory in several respects, for it left undetermined the vital point of Germany’s total liabilities and subjected that country to irksome and humiliating foreign control. As early as December 1927, Mr. Gilbert, in his Report of the Agent General for Reparations Payments, took the initiative in suggesting the desirability of reaching a permanent settlement of the reparations problem.

This suggestion was followed, and at a meeting in Geneva on September 16, 1928, representatives of the six nations most vitally interested in reparations agreed to appoint a new committee of experts to provide a ‘complete and definite settlement of the reparation problem.’ The United States once more refused to take part officially in this settlement, but raised no objection to the participation of American experts. Accordingly Owen D. Young and J. P. Morgan were selected, with T. W. Lamont and T. N. Perkins as alternates. An American was again made chairman of the committee, and the plan has come to be known as the Young Plan by reason of that fact.

The tact and ability of the American delegates undoubtedly contributed much to the working out and final adoption of the settlement. The Young Plan was adopted on June 7, 1929, but the United States Government lost no time in declaring that it was in no way involved in the collection or receipt of reparations. The very nerve centre of the Young Plan is the Bank for International Settlements, which is said to have been suggested by Mr. Morgan and is to be organized by the central banks of the countries interested. But on May 16, 1929, Secretary of State Stimson announced that the Federal Reserve System would have no connection with the Bank.

While we look with interest and sympathy on the efforts being made by the committee of experts to suggest a solution for the settlement of the vexing question of German reparation, this Government does not desire to have any American official, directly or indirectly, participate in the collection of German reparation through the agency of this bank or otherwise.

Ever since the war the American Government has consistently taken this position. It has never accepted membership on the Reparation Commission. It has declined to join the Allied Powers in the confiscation of sequestered German property and the application of that property to its war claims.

The comparatively small sums it received under the Dawes Plan are applied solely to the Mixed Claims Commission in fulfillment of an agreement with Germany and to the repayment of expenses of the American army of occupation in Coblenz.

It does not now wish to take any step which would indicate a reversal of that attitude, and for that reason will not permit any officials of the Reserve System either themselves to serve or to select American representatives as members of the proposed international bank.

It would seem that this statement made the position of the Government sufficiently clear, but on June 18, after the adoption of the Young Plan, President Hoover felt it necessary to insist again that the reparation problem was a purely European affair with which the United States Government had, and could have, no official connection.

Our Government is not a party to that agreement and therefore would not be a signatory to it. There is no occasion to submit the agreement to Congress. The only point for Congressional action is an authority to the Administration to reduce Germany’s treaty obligations in respect to the comparatively minor items of army occupation costs and mixed claims.

This policy of aloofness had been foreseen by the framers of the Young Plan, and provision was made for election to the board of directors of the Bank for International Settlements of two fellow nationals (Americans), if for any reason the governor of any of the central banks should be unable to participate officially. It is certain, therefore, that this country will be unofficially but effectively represented. Indeed, it would be nothing short of calamitous if we were not so represented, for the international payments to the United States on account of war debts are second only to the German reparations in magnitude and in their consequent effect on foreign exchange and international trade. Moreover the United States, with Great Britain, is one of the principal capital markets of the world, and the handling of foreign loans from this country by the same agency which effects the transfer of reparation payments, and probably of payments on account of war debts, to this country would immensely simplify the problem and relieve the strain.

Refusal to identify our Federal Reserve System with the Bank for International Settlements does not mean that we shall decline to receive payments from this bank on international account. Some one of the great international banking houses of this country, possibly J. P. Morgan and Company, will undoubtedly represent the United States unofficially on the directorate of the Bank. The necessary liaison will then have been secured although our official skirts will be clear.


It is not necessary to describe in detail the arrangements effected by the Young Plan for the payment of reparations by Germany, since we are here interested only in the question as to how it affects the United States. Whatever may be the attitude of our Government, a study of the plan shows that the experts discovered a very close and real connection between reparations and war debts, and kept the Allied payments to the United States in their minds at every stage of their deliberations. In fact they succeeded in tying them together so definitely that the Young Plan is destined to have a profound effect upon the future of our funding agreements. A statement of the main provisions of the plan will make this evident.

In the first place, a clear distinction is made between the German payments for the first thirty-seven years and those for the last twenty-two years. The principle of the Balfour Note was revived, and applied to all the nations. These say, in effect, that they would be satisfied with the sums paid by Germany in thirty-seven years, but, since they are forced by the funding agreements with the United States to continue their payments to this country, they are regretfully compelled to ask Germany to carry on the reparation payments for an equal length of time. It would seem as if the experts, having an eye on the rapidity with which the public debt of the United States was being paid off, had concluded that our domestic debt would be completely expunged in some thirty years. At that time they might hope for a revision or cancellation of the Allied debts, since to continue payment further would be to liquidate a United States domestic debt already wiped out. They seem to have felt fairly confident in prognosticating thirty-seven years as the likely limit in the life of intergovernmental indebtedness.

But the experts were not content to leave the matter entirely to fate and the good will of the American people. They saw clearly that the sums to be paid in the future will depend in large measure on the policy of the United States Government, and they therefore arranged the debt payments so as to put the greatest possible pressure upon this country to cancel war debts in time. This plan — or plot, as some think it — is contained in a Concurrent Memorandum which was signed by all the members of the committee except those from the United States, but was not, for obvious reasons, made a part of the experts’ plan. This is an agreement between the four chief creditor countries and Germany that ‘any relief which any creditor Power may effectively receive, in respect of its net outward payments on account of war debts,’ shall be applied to reduce Germany’s reparation payments. During the first thirty-seven years Germany is to benefit to the extent of two thirds of such net relief, and during the last twenty-two years by the whole of it. The Memorandum contains a list of what are diplomatically called ‘out-payments,’ which correspond with the sums due the United States under the funding agreements. A comparison of the reparation payments by Germany with the outpayments of the Allies shows that during the first thirty-seven years the former cover reparations and war debts, but, during the last twenty-two years, war debts only. In other words, the whole onus of enforcing, not merely war-debt payments by the Allies, but also reparation payments by Germany, at least after the first thirty-seven years, is thus shifted to the shoulders of the United States. To the demands from revisionists in the United States and debt cancellationists in Europe will ultimately be added the pressure of 65,000,000 Germans for further reduction of Interallied debts owing this country.

Will the Government of the United States be able to continue to maintain its attitude of official aloofness in the face of these new developments, or has it been manæuvred into an untenable position? From the beginning our policy has consistently rested upon a refusal to admit any connection between war debts and reparation; the first, we said, was an American problem, and the second a European. The Allies, on the other hand, and now Germany also, have insisted that all international trade and finance constituted an indivisible whole, and that it was impossible to separate financial transactions of the magnitude of the intergovernmental debt and reparation payments from each other. Legally, the position of the United States was unassailable; economically, it was untenable and unsound. And now in the Concurrent Memorandum, and to a lesser degree in the Young Plan itself, the two series of payments have been definitely tied together, and their inevitable and inescapable relationship given official sanction. Never were the stakes greater in any international game of diplomacy, and it remains to be seen whether the latest play of the debtor nations is merely a bluff or whether American statesmanship has finally been defeated. On the whole, the logic of time and of economics is on the side of the signers of the Concurrent Memorandum. Whatever our political attitude may be, the United States cannot be, and for many years has not been, a financial and economic isolationist.