That International Millstone


No great public question has ever worn a more forbidding mien than the problem of the war debts. Vast wastes of figures, dense fogs of economic argument, and violent storms of political controversy, intermittently raging around the subject, have caused many intelligent persons, as they did a Prime Minister of Great Britain, to regard it as ‘almost hopeless.’ Since the day in 1922, however, when the late Mr. Bonar Law thus characterized the problem, the progress of events has rendered its outlines considerably more distinct. In that evolution, the pressure of impending disaster was on two occasions the moving force, while, in the eight years that elapsed between those two events, the powerful influence of an orderly economic reconstruction was felt in giving more definite shape to the problem.

The German debacle in 1923 forced the adoption of the Dawes Plan, with its reorganization of the German currency and its trial scheme of reparation payments. Resulting from this partial crystallization of the reparation problem, there followed the funding of the floating debts owing by the European ex-Allies to the United States (except the British debt, which had been funded in 1922). The five-year period of European recovery that followed brought a further focusing of the major problem, undertaken as a deliberate act of statesmanship and eventuating in the Young Plan. By this settlement, the reparation debt, which had been an indeterminate charge on Germany, was funded on a somewhat lower scale of annuities than those paid under the Dawes Plan, the International Bank was organized, and a rebating agreement was entered into with Germany by the European ex-Allies, the effect of which was to link up the reparation debt, so far as was possible without the assent of the United States, with the Literally debts.

Nineteen-thirty brought the world depression, and, as it deepened, a spectre of imminent catastrophe in Germany once more appeared, this time to bring about the Hoover Plan for a year’s all-round suspension of inter-governmental debt payments. By this step the American Government for the first time took action in practical recognition of the relationship existing between the two bodies of debts. Thus occurred another significant focusing of the problem.

The conditions in Germany which called for the emergency relief contemplated by the moratorium scheme were traceable in the first instance to the economic strain of the depression. The process by which they had developed was a familiar variety of the endless chain of panic: (1) long-continued economic strain, creating (2) political tension, which induces (3) fiscal difficulties, fall in security values, and flight of funds from the country — these things constituting an added economic strain, which sets up a greater political tension, and so on.

Thus the panic mounts, carrying terror with it, until either the crash comes or there is interposed some arresting act or gesture, full in the eye of the world, which everyone everywhere, excepting the incurably deluded, is instantly moved to accept as the signal for ending the madness. For acceptance as such a signal in the June crisis, President Hoover’s call for a moratorium had all the requisites. It combined the dramatic quality of a great and unexpected gesture of international good will with the solid contribution of an act of financial salvage.

Among the troubles incident to the depression, the fall in prices had placed an added burden on all debtors, and Germany, as a debtor for substantial interest charges on both private and public account, had to shoulder such a burden. The irregular spread and as yet unsettled character of the various price changes make it uncertain how severe the added burden really is and whether and to what extent it is likely to prove permanent. If we accept the reading of the conventional indicator, — the fall in the German wholesale-price index from the level of the year 1929, — the real burden of the charges on Germany’s external debts (including charges estimated at $200,000,000 a year on debts privately held) had increased by April of this year in the proportion of 17 per cent.

This added burden of debt charges may perhaps be fairly represented in total as the equivalent of $100,000,000 a year — a negligible sum in ordinary times for the German national economy to carry. During the past year the reparation payments amounted to $432,000,000, of which $157,000,000 was derived from the railways and $275,000,000 was a burden on the budget of the Reich. It is apparent that the added ‘depression burden’ attributable to reparations payments, and more particularly that part falling on the budget, was not in reality of great moment. It was inevitable, however, that it should be made much of by the repudiationist parties in opposition to the government, and the tension in the political situation, which had been less acute in the early months of 1931, again became ominous.

Herr Bruening and his colleagues, in their struggle to balance the budget, had long resisted the temptation of laying the fiscal troubles of the State definitely at the door of reparations. When they finally succumbed to it, in promulgating the drastic emergency tax decree of June 6, they yielded to what they doubtless believed to be the force majeure of political necessity. But the horn of the dilemma which they grasped in putting forward such a justification of their fiscal programme was one that carried the highly disquieting implication abroad of a projected move to upset the Young Plan. As a consequence, the withdrawal of funds from the country was from that moment dangerously accelerated.

If the negotiations for a foreign credit for the Reichsbank prove successful (which at this writing, early in July, is uncertain), and if the dangers of a Fascist dictatorship are averted, it is conceivable that by the time the moratorium year expires conditions in Germany will be substantially improved. But even if the movement should be definitely in that direction, it seems unlikely that the agitation for revision of the Young Plan will abate. Reparations has entered upon one of its periodically acute political phases and at best the problem of calming the waters will be one of extreme difficulty. It seems probable that at no distant date — that is, when the year’s moratorium expires in June 1932 — the whole question, with all its momentous possibilities for international discord, will again be thrown on the conference table for negotiation of a new settlement. Without the official participation of the United States in such a conference, the difficulties of reaching a settlement would be truly colossal. We in America may well now ask ourselves what our relation to the question really is and what our attitude toward it ought to be.


Up to the moment when President Hoover announced his plan for a moratorium, the most significant clarification in the outlines of the problem of the war debts had come about through the action of the European reparation creditors, at the time of the adoption of the Young Plan, in agreeing to pass on to Germany two thirds of any benefits (and from 1966, for the final twenty-two years of the plan, all benefits) accruing through any reductions in their obligations that may be granted by the United States.

While as a practical matter the two grand divisions of the war debts were always closely related, the United States Government has all along been under the necessity of emphasizing and preserving the rights of its citizens to hold the Allies to their legally separate obligations. The Allied Governments, on the other hand, have always been at pains to insist that their performance as debtors would be vitally affected by the amount which they might realize on their account receivable from Germany. They have wanted it understood, as an American writer put it, that there is a close connection between two pockets in the same pair of trousers.

This practical relationship between the two groups of obligations the Allies strikingly brought out and effectively confirmed by their rebating agreement with Germany, even though in form that agreement dealt with the allocation of supposititious refunds by the United States rather than with the source from which the payments to the United States were to be derived. A definite linking up of receipts and payments the Allies later attempted to secure by proposing to insert in the agreement with the Bank for International Settlements, as trustee for reparations, a schedule which would have matched up each payment into the bank by Germany with each payment out of the bank to the United States.

That proposal, which was defeated by the unofficial American delegation, was in any case superfluous, for the rebating agreement had already served the purpose which the Allies had in view. It had served to fix with great distinctness in the public mind the fact that the German indemnity was in greater part (two thirds) being siphoned directly through the channels of international exchange into the coffers of the United States Treasury.

Though the Allies are unable formally to step out of their intermediate position in the transaction, and though our government, in the absence of legislative authority to do otherwise, must continue to insist on the maintenance of that status, no good can come of our blinking the real facts of the situation. Quite plainly, the two parties chiefly interested, as debtor and creditor respectively, are Germany and the United States, and in the minds of all the world, except possibly ourselves, we have been in the business, on a large scale, of cashing in on an indemnity from our defeated ex-enemy. The picture has become quite clear, and it is not one which we can regard without deep misgiving.


This sharpening of the broad outline of the problem has had a valuable byproduct. It has delivered us from an irritating controversy in the field of morals which has been going on for more than a decade. The Allies have now definitely abandoned most of the reparation debt and no longer have a very substantial direct interest in cancellation of the Interally debts as such. This being so, there is an end of the futile and, as it has seemed to me, shallow argument for remission of the Interally debts on the ground of a supposed moral delinquency on our part in delaying our entry into the war. For, now that the chief direct effect of maintaining our rights as creditor is to maintain the German debt at its present level, while the chief direct effect of remission would be to reduce Germany’s burden, any good reason for remission that may exist can hardly be founded on the plea that we did not start in soon enough to punish Germany.

It is, then, substantially true to say that the Interally debt problem as such has faded away, and the real problem, which has always stood behind it, now confronts us. We are now face to face with the problem of German reparations, terribly grim and formidable, but become more coherent in broad outline and (from causes connected with the actual payment of reparations) more clearly defined in detail.

This clarification of detail has resulted from the clearing away in the past seven years of a rank growth of doctrinaire economic theory with which for many years the subject was surrounded. That body of doctrine, as it happened, was mobilized in support of cancellation of the debt, and, as every observer of events and every reader of the Dawes and the Young reports has discerned, it was maintained with such clamorous insistence as to make each of the several attempts at an objective survey of the problem difficult almost beyond imagination.

The doctrine that most confused the lay mind went by the name of the ‘transfer problem.’ It emanated from the brain of the brilliant English theorist, J. M. Keynes, who attempted to prove that the mechanics of international exchange would not permit the transfer of the reparation payments into the currencies of the creditor nations without causing the collapse of the mark.

This hypothesis had a tremendous vogue, and for years anyone who ventured to question its accuracy was dismissed from court by the pundits with pitying contempt. But as time went on and the Dawes Plan came, and the payments under it were transferred without difficulty, the Keynes formula suffered repeated revision and dilution. Finally, last year, the ‘problem’ suffered a body blow when a German committee of inquiry filed a report which admitted that the transfer of international payments in normal times is an automatic process. Events had shown, as indeed they showed in the commercial field before the war, that the mechanics of making international payments when trade and finance are functioning normally involves no ‘problem’ at all, other than the ordinary seasonal strains on the foreign exchanges that are customarily adjusted by the raising and lowering of the discount rates of the central banks.

A companion thesis was that of Germany’s alleged economic incapacity to pay the reparation debt. This idea, which both the Dawes Committee and the Young Committee distinctly repudiated, experienced similar vicissitudes. Six years of successful operation of the Dawes Plan left it with little vitality, and the payment, even during the first year of the depression, of the annuities of the Young Plan rendered it practically defunct.

The effects of the depression, though presumably temporary, now offer an opportunity for its resuscitation, and as a practical matter some consideration, over and above that granted by the moratorium, will doubtless have to be given to it. But, broadly and for the long view, the prophetic words of the Dawes Committee remain true: ‘Germany’s growing and industrious population; her great technical skill; the wealth of her material resources; the development of her agriculture on progressive lines; her eminence in industrial science; all these factors enable us to be hopeful with regard to her future production. . . . Without undue optimism it may be anticipated that Germany’s production will enable her to satisfy her own requirements and raise the amounts contemplated in this plan for reparation obligations.’ Five years later, with the demonstrated facts under their eyes, the Young Committee contented themselves with the observation that ‘it is ... to be emphasized that the total amount of the annuity proposed, while being far from covering the claims set forth by the creditors, is one which they have every reason to believe can in fact be both paid and transferred by Germany.’


From these various causes — the passing of the Literally debt problem, the clear emergence of our relation to the German reparation problem, and the disappearance of the twin theories of the economic impossibility of the payment of reparations — we now find ourselves in a much better position than heretofore to face the debt problem realistically and reach conclusions based on sound premises. What should those conclusions be?

Within the limits of a paragraph we may glance at certain basic facts relative to the reparation debt, which to my mind suggest the answer. The capital value (capitalized at 5 per cent) of the annuities under the Young Plan is approximately $9,000,000,000. The payments are scheduled to run for fifty-nine years (from September 1, 1929), in an average annual amount of $475,000,000. This represents about. 19 per cent of the 1929-30 annual budget of the German Reich. It is equivalent to $7.50 a head of the present population of Germany and constitutes about 4 per cent of the national income of Germany in 1925, as estimated by Harvey E. Fisk. The annual amount of the payments retained by the Allies — a third of the total — will average $158,000,000, which is 90 cents a head of the combined present population of the six principal European creditors. The annual amount of the payments remitted by the International Bank to the United States on account of Interally debts — two thirds of the total — will average $317,000,000. This is 2 1/2 per cent of our present governmental expenditures of all kinds, and is equivalent to $2.60 a head of our present population, or four tenths of one per cent of our national income.

The significant thing about these figures is their small size. The popular picture of reparations as a debt of ‘astronomical’ proportions reflects a rhetorically striking bit of epithet making, but one that is wholly fanciful. Wealth and income and everything that goes into their creation have expanded enormously within our lifetime and we sometimes find it hard always to think in terms of the twentieth century. Placed in the background of the highly productive industrial society of to-day, a few hundred million dollars a year are not impressive. Measured by the significant yardstick of national income, it is apparent that under normal conditions, and even assuming some permanent diminution of income due to the fall in prices, the annual reparation payment has for Germany, the debtor, only moderate economic importance, — an importance, moreover, which with each annual increase in population will steadily diminish, — while to the United States, the chief ultimate recipient, the payments are of practically no importance at all.

It would be idle to pile up statistics of national wealth, volume of trade, and other aspects of world economic life, with which to reenforce these obvious truths. The small percentage of national income represented by the debt payments tells the whole story: namely, that the profound importance which the reparation problem possesses is attributable to other than economic causes. If the debt is hard for Germany to pay, and if the payment of it is reasonably to be regarded as a threat to the peace and therefore to the economic prosperity of the world, the reason is not that it is economically difficult (except in a time of depression) for Germany to pay. And if we insist on its payment, it is not because of any real economic advantage to be gained by our insistence.

Nor, obviously, is there any real force in the argument for cancellation on the ground of direct economic advantage to the United States. The amount involved is too small to count.


If we still bear in mind the relative insignificance of the debt payments as compared with the great movements of trade and commerce, it seems impossible to admit the idea that the payments had any important causal relation to the world economic depression which was precipitated last year. So many other more significant causes are discernible that it seems superfluous, indeed somewhat ridiculous, to lug in the payments on the war debts as a contributing economic cause. In the boom stage that preceded the crash, the economic burden of the payments on Germany was even less than the moderate burden which they can be said normally to entail — it approached the negligible.

This, of course, is not to say that the existence of the reparation debt as a political factor, rather than the process of payment as an economic phenomenon, may not retard recovery from the present depression, perhaps seriously, despite the moratorium, or may not in the future precipitate a new crisis. Decidedly to the contrary, the former contingency appears to be a serious possibility and the latter contingency a strong probability. In short, it is these contingencies that in my view constitute the wholly convincing and the only reason for cancellation. We have immeasurably more at stake in the matter than the preservation of our rights to a trifling $317,000,000 a year, and if we possess the mental maturity necessary for looking out for our own interests we will on our own motion do away with this dangerous irritant in international relations.

No thoughtful person can have observed the rise of the Hitlerites to a position of importance in the political life of Germany without grave foreboding as to the consequences to the economic life of the world if that party, pledged to repudiation of the reparation debt, should come to power. It is idle to suggest that they have not succeeded. They succeeded in 1930 in dealing a heavy blow to Germany’s credit, and as much, perhaps, as any other one factor the agitation of their doctrines brought on the recent crisis. The consequent injuries to world economy have been of great severity, deepening the trade depression, causing an enormous shrinkage in values of foreign securities held in the United States and elsewhere, and entailing substantial losses to those who disposed of their holdings on a falling market.

Even more significant for the long future is the fact that 65,000,000 Germans, whether or not they are now prepared to turn the administration of their public affairs over to the Hitlerites, are as one in thinking of the reparation debt as a hateful indemnity saddled on the defeated. It advances the solution not at all to say that they must learn to change their thinking. They cannot. There are too many facts on their side of the argument. It is too plain that so long as the reparation debt stands, the war is still on, and the peace, in the sense of a real tranquillity, is only a fitful one.

We, on our side of the Atlantic, are 120,000,000 people, many of us thinking, mistakenly, that $317,000,000 a year is important to us; thinking, childishly, that Europe is to be taught by debt collection to mend its ways for the future; thinking, as pious creditors, of the ‘ sanctity of debts ’ — in short, not thinking at all.

Which nation is to change its attitude? The German people have been told that the burden of the debt is a cruel one. The power of facts may perhaps dispel that illusion. But what is to persuade them that they are not paying a tribute, as they call it? What, as a practical matter, is to prevent that idea from being whipped up periodically, as it has been in the past, into a furious agitation, destructive of the peace and confidence upon which the economic prosperity of the world must depend ?


For our part, it should not be beyond our capacity to understand that $2.60 a year apiece is nothing in comparison with our stake in the stability of Europe. Whether we can change our mode of thinking in the moralistic plane is another question. If we are thinking in terms of teaching all Europe a lesson, the whole background of our history is such as may prevent our soon learning wisdom. But if the only obstacle to remission of the debt lies in the dregs of our war-time anti-Germanism, the matter should not be so difficult. The war is over for most of us, and, quite apart from the merits of the controversy over national war guilt, so called, a sound distinction is drawn in the minds of millions of us between the aspirations of the late Prussian monarchy of ill repute and the ideals of the present German republic.

Our country, and only our country, has the power to liquidate the war by putting an end to a problem that has racked all Europe and some of the best brains of America like a nightmare. For our legislators, as for the rest of us, it should now be much less difficult — particularly with the events of the past few months in mind — to see where our interests lie, though admittedly it is simpler to whip up indignation on the subject of dollars, however few, to be permanently presented to Europe, than it is to be convincing on the indirect benefits, however great, of an act of wise and farseeing statesmanship. Many of our manufacturers now see the problem whole. If the representatives in Congress of our suffering agricultural belt could once get a vision of what a stable Europe can mean to the farm problem, we ought soon to see an end of the war debts.