800.51 W 89 Great Britain/211

The British Ambassador (Howard) to the Secretary of State

No. 301

Sir: The attention of His Majesty’s Government has been drawn to the letter on Allied War Debts addressed to Professor John Grier Hibben, President of Princeton University, by Mr. Mellon, Secretary of the United States Treasury, which was published on March 17th.6 So far as this letter deals with matters of domestic controversy, His Majesty’s Government have of course no desire to offer any comment upon it. But the letter also contains certain specific references to the position of Great Britain: and His Majesty’s Government feel bound to point out that on points of cardinal importance, these statements do not correspond with the facts as known to His Majesty’s Government. His Majesty’s Government feel that in justice to themselves and in order that public opinion in both countries should have a fair opportunity of judging the position, it is essential that they should frankly bring such points to the attention of the United States Government.

2. In the first place, Mr. Mellon states that the United States “agreed to furnish the Allies dollars with which all their purchases in the United States should be consummated and what is more, we agreed to lend them these dollars”; but “when the United States purchased supplies and services from France and the British Empire”, they “did not get these francs and pounds on credit: they paid cash”. The United States “are now urged to cancel these debts because it is alleged that they were incurred in the common cause, but neither abroad nor in the United States has it been suggested that if this is to be done, the United States are to be reimbursed the dollars actually expended by us in France and Great Britain”.

This statement implies that the United States Government lent the British Government all the dollars required to purchase supplies in America and that, over and above these loans, they paid dollars to Great Britain for the services and supplies they required from the British Empire and that these dollars were retained by His Majesty’s Government for their own purposes. Such of course is not the case. All the dollar payments made by the United States for their sterling requirements in Great Britain—which though considerable were of course smaller in amount than the war loans to the United Kingdom—were taken into account in fixing the total amount of the war loans advanced to Great Britain and were applied directly to the purchase of supplies in America or to the repayment of debt. The arrangements made are clearly and concisely stated in an Article [Page 740] published in “Foreign Affairs” (April 1925) by Mr. Rathbone, who was during the War Assistant Secretary of the United States Treasury.

Mr. Rathbone’s explanation was as follows:

“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”.

It will be seen that the United States Government did not lend the whole of the money required for British purchases in America, but that the dollars received from the United States Treasury in payment of sterling provided by Great Britain were used to cover a corresponding part of Great Britain’s dollar requirements, and only the net dollar requirements were covered by loans from the United States Government.

This arrangement was obviously equitable and satisfactory to both parties, and was in fact originally suggested by the United States Government, in a letter dated the 3rd of December 1917, from Mr. Leffingwell, then Assistant Secretary of the United States Treasury, to the British Treasury representative in Washington, which includes the following paragraph:

“I assume that your Government will use the Dollar Fund thus received for meeting its Dollar requirements for purchases here and would therefore reduce correspondingly its requests for Dollar advances from the United States Treasury”.

The dollar payments to Great Britain were thus regularly applied to reduce the dollar advances to Great Britain, so long as the latter continued: when they ceased in 1919, the dollar payments by the United States Government were utilised to reduce the debt incurred by Great Britain. The statement made in Mr. Mellon’s letter on this point appears to His Majesty’s Government to be likely to give a very erroneous impression of the facts.

3. His Majesty’s Government now pass to Mr. Mellon’s contention that the payments made to the United States Government in respect of the British War Debt impose no burden on the British Taxpayer.

Mr. Mellon states that “all our principal debtors are already receiving from Germany more than enough to pay their debts to the United States”. So far as Great Britain is concerned, this statement is incorrect. The receipts of Great Britain during the financial [Page 741] year 1926–1927 from Germany on account of reparations represent approximately one quarter of the payments made by His Majesty’s Government to the United States Government and their prospective reparation receipts during the present financial year 1927–1928 (assuming that they are transferred in full) will fall substantially below one-half of the payments due to be made to the United States. Even if the receipts from Germany on account of Army Costs (which represent a partial reimbursement of the expenditure incurred by His Majesty’s Government on the maintenance of their forces) and on account of the Belgian War Debt (which represents a payment on behalf of Belgium) are included, the total receipts of Great Britain from Germany in either of these years will not exceed one-half of her payments to the United States. There can be no dispute as to the facts: the figures are published by the Agent General for Reparation Payments and are fully available to the United States Treasury.

4. When he comes later to deal with the position of Great Britain, Mr. Mellon does not in fact compare British receipts from Germany alone with British payments to the United States Government; he compares the total receipts of Great Britain from reparations and inter-allied debts, together, with the payments due by her to the United States Government. He gives figures purporting to show that Great Britain will receive $2,000,000 (£412,000) more this year than she pays to the United States: $15,000,000 (£3,090,000) more next year and $70,000,000 (£14,403,000) more in 1928–1929. While he admits that “in the past two years Great Britain has received about 100 million dollars (£20,576,000) from Germany, France and Italy less than she has paid to the United States”, he adds that “it is equally true that, from this year on, Great Britain will, every year, receive from her debtors a substantial amount more than she will pay to us, so that her American payments will not constitute a drain upon her own economic resources.”

5. This statement is also inaccurate, both as regards the past and as regards the future.

From the 1st of April 1919 to the 31st of December 1926, Great Britain has paid the sum of $828½ millions or £170½ millions in respect of the debt to the United States Government, whereas the sums received by Great Britain on account of Reparation, Belgian War Debt and Allied War Debts up to the same date amount to £41 millions ($200 millions) leaving a deficit of £129½ millions ($628½ millions).

There seems no special reason to select the past two years only, as is done in Mr. Mellon’s letter, but the position as regards this period is that during the first two years of the operation of the Dawes Plan (1924–1925 and 1925–1926), the receipts of this country from Reparation (including Belgian war debt) and Allied War Debts together fell [Page 742] short of British payments to the United States Government by approximately £50,000,000 ($243,000,000).

6. As regards the financial year 1926–1927, the share of the United Kingdom in the Third Dawes Plan annuity in respect of Reparation and Belgian War Debt amounts to £12 millions and the receipts from Inter-Allied War Debts to £8½ millions, or a total of £20½ millions, as against the payment due to the United States Government of £33 millions. During the following year, (1927–1928), the share of the United Kingdom in the Fourth Dawes annuity in respect of the Belgian War Debt and Reparation should amount to £14¼ millions and the receipts from Inter-Allied War Debts to £10½ millions, or a total of £24¾ millions, as against the payment of £33 millions to the United States. The share of the United Kingdom in the Fifth and subsequent Dawes annuities (i. e. after the 1st of September 1928) for Belgian War Debt and Reparation should amount to £22,400,000, and this, together with the payments from Inter-Allied War Debts (assuming the French War Debt Agreement to have been ratified and neglecting past deficits in British receipts as compared with payments) would be sufficient to cover the current payments due to the United States Government. Whether the payments from the Dawes annuities included in the above calculations will, in fact, be received, depends of course upon whether it is found possible to transfer the full amounts provided for by the Dawes plan.

7. But even if the full Dawes payments continue to be received for sixty years from now onwards, the present value of the receipts of Great Britain from reparation and Allied War Debts together would be less than that of the payments she is obligated to make to the United States Government on account of the British War Debt, assuming interest at 5% to be added to payments and receipts in the past and future payments and receipts to be discounted at the same rate.

8. It is quite true that His Majesty’s Government have frequently declared that their policy is to recover such a sum, in respect of their War Loans to the Allies as, with the Reparation Receipts of Great Britain, will suffice to cover the annual payments which they have to make to the United States, but this situation has not yet been reached, and up to the present the British taxpayer has had to find the greater part of the payments to the United States from his own resources, even after applying all receipts from Reparations and Inter-Allied debts to this purpose, and using none of these receipts as a set off against the interest which has to be paid on the loans raised in Great Britain out of which advances were made to the Allies. In no circumstances will Great Britain receive from reparations and Inter-Allied war debts, taken together more than she pays to America. The policy of His Majesty’s Government on this subject has been repeatedly declared. It is not their desire to retain for their country anything out of receipts [Page 743] from reparations and Inter-Allied war debts. In the event of their receipts from Inter-Allied war debts and reparations exceeding the payments made by them to the United States Government, they have undertaken to reduce, proportionately, the payments due to be made to Great Britain in respect of Inter-Allied war indebtedness and a provision to this effect appears in the various war debt funding agreements, which His Majesty’s Government have signed.

9. It is not clear on what basis the calculations cited by Mr. Mellon have been made, but it appears probable that error has arisen on the following points:—

(a) Receipts from Germany.

The figures mentioned by Mr. Mellon appear to relate to the total receipts of the British Empire from the Dawes Annuities. But these include receipts in respect of the costs of occupation as well as in respect of Belgian War Debt and Reparation. The receipts in respect of costs of occupation represent a partial reimbursement of expenditure incurred by Great Britain; they are thus not available to enable payments to be made to the United States without imposing a burden on Great Britain and must be left out of account for the purpose of the present calculation. Further, the British Empire Reparation receipts have to be distributed between Great Britain and other parts of the Empire, the share of Great Britain having been agreed at 86.85 per cent of the total. The balance is not received by the British Treasury.

(b) Receipts from France.

A more important error is contained in the figures given by Mr. Mellon of the receipts of Great Britain from France. These appear to include the sums which were due by the Bank of France to the Bank of England in repayment of an advance made during the War. This loan was a private transaction and is not an inter-governmental debt. The payments are made to the Bank of England and not one penny thereof accrues to the British Treasury or the British Government. They are thus entirely irrelevant to the question of the extent to which the British taxpayer can meet payments to the United States Government out of receipts from reparation and Allied War Debts.

It should be added that, while the British taxpayer receives nothing from this commercial debt of the Bank of France, he has to meet very large market debts incurred by the British Treasury in the United States before the United States Government entered the War. Since 1st April 1919, the British taxpayer has paid $680 millions or £140 millions, on this head, over and above the payments made to the United States Government.

10. These facts and figures appear to His Majesty’s Government sufficiently to contravert the statement put forward by Mr. Mellon [Page 744] that the payments made to the United States Government in respect of the British War Debt will not constitute a drain on British economic resources. But much more might be said. It must be remembered that in addition to paying their own debts to the United States, the British people are sustaining the full charge for the advances made by His Majesty’s Government to the Allied Governments to enable them to finance the purchase of necessary commodities during the war not only in Great Britain but also in neutral countries. The capital sums lent for this purpose amounted to a net total of about £1350 millions ($6,600 millions) which, with interest accrued during the war period, amounted on 1st July 1919 to over £1450 millions ($7,000 millions) or nearly double the debt which His Majesty’s Government had themselves contracted at that date with the United States Government.

This amount was borrowed by the British Government from its own Nationals and in respect of this Debt the British taxpayer has had to pay interest at over 5% each year since, making a total annual payment of £72½ millions which will continue until the debt is paid off by further and additional contributions from British taxpayers. No relief from this burden can be looked for from receipts from Reparation and Allied War Debts, for in no case will these receipts amount to a greater total than that of British debt payments to the United States Government.

11. Whereas the United States Government is receiving from Germany a share of the Dawes annuities estimated to cover its reparation claims in full, and at the same time obtain from Great Britain repayment, with interest at 3%, of the full amount of war loans it advanced to Great Britain, Great Britain will retain for herself nothing of any payments she receives in respect either of reparations or of inter-allied war debts, but will apply all her receipts towards part payment of her liabilities to the United States. Any balance that remains she will pay out of her own resources, and in any case she will have to support the entire burden of her war losses and of the war loans she herself made to her Allies.

12. His Majesty’s Government have set out these considerations in no contentious or controversial spirit. On the contrary, their desire is to maintain and to promote a friendly understanding between the two great English-speaking nations, on whose cooperation great issues for the peace and progress of the world depend. They view with great misgiving the divergence of opinion and the estrangement of sentiment which is growing up in regard to these war obligations. It appears to them to be the task of British and of American Statesmen to do what can be done to alleviate this difference of view by setting out frankly and fairly the facts of the case and the policy adopted on either side. But the controversy can only be intensified if public opinion [Page 745] in America is guided by statements of facts in regard to their European debtors which to those debtors appear inaccurate and misleading.

It is for this reason that His Majesty’s Government regret that there should have been issued, under the authority of the Secretary of the United States Treasury a series of statements in regard to Great Britain which for the reasons set out above appear to them not to represent accurately or completely the facts. They trust that the United States Government will take steps to remove the unfortunate impression that has been created by the issue of this statement. The position and policy of the British Government in regard to these international payments is well-known and the records are easily available; but if at any time further information is desired by the United States Treasury, His Majesty’s Government will be happy to furnish it.

I have [etc.]

(For the Ambassador)
H. G. Chilton
  1. Supra.