800.51W89 Great Britain/356

The British Embassy to the Department of State

1. In their note of November 10th His Majesty’s Government in the United Kingdom put forward a request to the United States Government to enter upon discussions with a view to the adjustment of the British War Debt, and at the same time they suggested a suspension of the payment due on December 15th, their purpose being to avoid the financial and political unsettlement which must follow a resumption of war debt payments, to avert the intensification of the present world depression by the further disturbance of the exchanges, to foster the revival of commercial confidence—of which some hesitating signs have recently appeared—and finally to allow of a close examination between the United States and Great Britain of the whole subject in preparation for the International Economic Conference.95

2. His Majesty’s Government warmly welcome that part of the reply of the United States Government in which they express their willingness to facilitate such discussions and, noting that it does not appear to the United States Government that sufficient reasons have been given for their request for a suspension of the December instalments, they now propose to set out in greater detail the considerations which actuated them in presenting their previous note.

3. The war produced a profound disorder in the course of international trade and after fourteen years this disorder has culminated in a crisis of unparalleled severity. It has resulted in a general collapse of trade throughout the civilised world with widespread unemployment and a disastrous fall in all national incomes including those of both the United States of America and of the United Kingdom. The causes of the depression may be manifold but it has been generally recognized that war debts and reparations have been one of the major causes and that a settlement of these debts, which will relieve world anxieties under this head is an indispensable condition of a revival of general prosperity. As the Bâle Committee declared in December last, “the adjustment of all reparations and war debts to the troubled situation of the world is the only lasting step capable of establishing confidence, which is the very condition of economic stability and real peace”. The Committee proceeded “We appeal to the Governments on whom the responsibility for action rests to permit of no delay in coming to decisions which will bring an amelioration of this grave crisis which weighs so heavily on all alike.”96 [Page 759] While in some respects it may be difficult for Governments to remedy the troubles of the world, there are certain steps which it is clearly within their powers and their responsibility to take.

4. The system of war debts was called into being by the war requirements of the belligerent nations. The resources in man-power and production of the Allied Countries had from 1914 been wholly employed in the prosecution of the war; their normal trading activities were to a large extent suspended and they had therefore less than their normal resources available for purchases abroad. But the vast requirements for war purposes in any case far exceeded any normal means to pay and could only be financed by means of loans from producing countries. The loans raised, whether they were market loans or government loans, were taken not in the form of money but in the form of goods and enormously augmented the volume of the exports of the lending countries. For example, before 1915 the United States export surplus normally varied from $200,000,000 to $600,000,000. In 1917 and 1918 it exceeded $3,000,000,000 and in 1919 it was about $4,000,000,000. The United States made loans to the Allies (including the United Kingdom) totalling approximately $10,000,000,000 (£2,055,000,000 at par); the United Kingdom made loans to its European Allies amounting to £1,600,000,000 equivalent (at par) to $7,800,000,000; the French Government had made similar loans equivalent (at par) to $2,237,000,000. In the aggregate these loans reach the colossal total of approximately $20,000,000,000 (equivalent at par to over £4,000,000,000).

5. If the course of commerce were deflected to the extent required to repay these war-time debts, it would entail a radical alteration in the economy both of debtor and of creditor countries. During the first few years after the war this was recognized and no attempt was made to collect them. But it proved impossible to secure a general agreement for their remission and the debtor Powers were called upon to fund their engagements. From 1923 onward a series of agreements were concluded providing for their repayment on varying terms, and in 1924 a provisional settlement was reached of German reparations on the basis of the Dawes Plan.97 The annuities provided for in most of these agreements were low during the earlier years, and their payment was rendered possible by the flow of investment capital from the United States of America to the Continent of Europe, which was then taking place. But the prosperous period from 1923 to 1929 was to a large extent illusory and the seeds of future trouble had already been sowed.

[Page 760]

6. In the summer of 1929 the storm that was brewing was not yet visible, and it was hoped that conditions were sufficiently stabilized for a final settlement of reparations in the form of the Young Plan98 under which Germany undertook to pay annuities of about $500,000,000 (£100,000,000 at par) of which the major part was passed on as war debt payments. Unhappily almost before the ink had dried on the agreements embodying the Young Plan the storm had burst upon the world. Startled and alarmed, lenders who for five years so liberally poured their capital into the Continent of Europe withdrew such funds as were immediately recoverable. The debtors made desperate efforts to meet their liabilities, but confidence became more and more shaken and towards the middle of 1931 something like a panic prevailed. Since then the world has been living under the stress of repeated shocks which have completely undermined the confidence on which the system of investment depended, The process of disintegration has been pursued to the point where it has become an attempt to liquidate not only private fortunes and industries, but whole countries. Currencies are threatened with instability if not with collapse and controls and restrictions intended to remedy the trouble have merely aggravated it. Everywhere taxation has been ruthlessly increased and expenditures drastically curtailed and yet budgets are in deficit or are balanced with ever increasing difficulty. In all directions there are signs of paralysis of trade and the threat of bankruptcy and of financial collapse. The international monetary mechanism without which the modern world cannot effectively conduct its daily life is being broken into pieces with all the manifold forms of privation and distress which this involves. The countries of the world cannot even begin to consider how to restore this mechanism until the causes which undermined confidence have been removed. One of the most important of these is the system of inter-governmental debts.

7. These inter-governmental debts are radically different from commercial loans raised by foreign governments on the market for productive purposes. Such commercial loans are normally self-liquidating. The market loans thus raised during the last hundred years have converted whole territories from desolate swamps or uninhabited plains to flourishing provinces teeming with human life and producing great additions to the wealth of the world. Such productive loans directly afford means whereby the borrower can repay them with interest and at the same time become more prosperous. But reparations and war loans represent expenditure on destruction. [Page 761] Fertile fields were rendered barren and populous cities a shattered ruin. Such expenditure instead of producing a slow and steady accumulation of wealth destroys in a few hours stored-up riches of the past. Like the shells on which they were largely spent these loans were blown to pieces. They have produced nothing to repay them and they have left behind nothing but fresh complications and perplexities.

8. Repayment of these war debts necessitates unnatural transfers which provoke widespread economic evil. In so far as they have been paid in the past their payment was made possible directly or indirectly by further foreign lending on the part of creditor countries which temporarily conceal but eventually aggravate the difficulties. In the long run international debts can only be paid in the form of goods or services. But as the Bâle report of August 18th, 1931 truly pointed out “In recent years the world has been endeavouring to pursue two contradictory policies in permitting the development of an international financial system which involves the annual payment of large sums by debtor to creditor countries while at the same time putting obstacles in the way of the free movement of goods. So long as these obstacles remain such movements of capital must necessarily throw the world’s financial balance out of equilibrium”.99

9. The creditors in so far as they have refused acceptance of payment in goods have compelled their debtors to pay in gold. This has led to a drain on the gold reserves of many countries, and this in turn has forced up the price of gold in terms of commodities or in other words has forced down the price of commodities in terms of gold currencies. This fall in prices has caused widespread ruin to producers in debtor and creditor countries alike and threatens disastrous social and political repercussions. It has seriously increased the burden of commercial debts; but it has rendered intolerable the pecuniary burden of unproductive war debts.

10. The difficulties of maintaining payments fixed under existing agreements first became acute in the case of Germany and despite the moratorium adopted as the result of Mr. Hoover’s initiative last year, apprehensions created by the situation in that country caused large withdrawals of credits which in turn involved London as a leading international centre. Consequent movements of capital forced the United Kingdom to abandon the gold standard and while sterling has remained more stable in terms of goods than gold currencies, the events of September, 1931 gave a profound shock to [Page 762] confidence in the monetary system throughout the world. Thus the baneful effects of these unnatural transfers in respect of reparations and war debts have gravely accentuated the difficulties of all five continents including many countries which were neither debtors nor creditors in “the tragic bookkeeping” which resulted from the war. Confidence and credit cannot revive until an end has been put to these attempts to force the stream of capital to flow up-hill.

11. In this connection it is pertinent to recall the statement made by the Secretary of the United States Treasury in his annual report for 1924–1925 that the principle of capacity to pay does not require the foreign debtor to pay to the full extent of its present or future capacity. The debtor government must, he continued, “be permitted to preserve and improve its economic position, to bring its budget into balance and to place its finances and currency on a sound basis, and to maintain and if possible to improve the standard of living of its citizens. No settlement which is oppressive and retards the recovery and development of the foreign debtor is to the best interests of the United States or of Europe.”1 The resumption of war debt payments in present circumstances appears altogether inconsistent with the principles here laid down.

Experience has in fact shown that when dealing with international transfers of the character and of the unprecedented magnitude of the post-war intergovernmental obligations, the principle of “capacity to pay” of the debtor—even if thus applied—can only be regarded as of secondary importance compared with an even wider principle, viz: that of the capacity of the world to endure the economic and financial consequences which those transfers would involve.

12. It is in the light of these wider economic and financial consequences that successive British governments have framed their well-known policy on this question which is referred to in a later passage of this note. His Majesty’s Government are aware that any remission of the war debts may be criticized as transferring liability from the taxpayer in the borrowing country to the taxpayer in the lending country, and in this respect taxpayers in the United Kingdom and in the United States are in much the same position. Both are already bearing a large share of the burden of the war debts and would continue to bear it even if all existing war debt arrangements between the governments could be maintained. For example in the case of the United Kingdom the effect of its reparation and war debt arrangements was to provide the sum sufficient to cover current payments to the United States Government. But this does not mean [Page 763] that the British taxpayer was relieved from his burdens in respect of the advances made to the Allies during the war; on the contrary he was left to find over £80,000,000 a year ($390,000,000 at par) for interest on internal loans out of which those advances had been made. For all the reparation and war debt receipts of the United Kingdom are required to cover the current payments due on its own War Debt to the United States Government and the United Kingdom taxpayer has had each year to find from his own resources the amount required for interest on advances made by the United Kingdom to the Allies which, as stated above, amounted to a total of about £1,600,000,000—$7,800,000,000 at par. In the case of the United States the amount due from foreign governments in respect of War Debt payments is now $270,000,000 a year, and if this were not received, it would increase by that amount the burden on the American taxpayer. It will be seen therefore that the policy which His Majesty’s Government have consistently advocated is one which, if it involves sacrifices on the part of American taxpayers, has involved similar sacrifices on the part of their own taxpayers.

The interests of the two countries looked at from this standpoint are the same. But it would be taking altogether too narrow a view to regard those interests as being limited to securing payment of these War Debts from the borrowing Governments.

13. Payments across exchange, restricted as they are by the effect of tariffs and trade barriers, are essentially different from payments made by the taxpayer in his own currency, and the burden of these vast intergovernmental debts must be judged by comparison, not with the volume of internal revenue, but with the balance of trade. So long as the debtor nations are compelled by every means to augment their export surpluses in order to meet intergovernmental debt burdens they cannot play their part in the normal economic operations of commerce and their diminished purchasing power will reflect itself in diminished receipts for producers in the creditor country with consequent fall in prices, depression of industry and unemployment. Even a partial recovery of business activity in creditor countries as a consequence of the removal of these abnormal conditions would result in additional receipts from tax on the existing scale which would compensate the exchequers of creditor countries many times over for the loss of revenues involved in revision of the war debt settlements.

14. The loss which both the United Kingdom and the United States taxpayers would suffer from reconsideration of the war debts cannot be measured in the same scales as the untold loss of wealth and human misery caused by the present economic crisis. The value [Page 764] of international trade had already six months ago decreased in three years by fifty per cent or by the equivalent of $5,000,000 for every hour, night and day, that passes and the situation has since deteriorated even further. It will not profit a creditor country to collect a few million pounds or dollars if it thereby perpetuates a world disorder which reacting on itself involves losses of revenue many times greater; and a settlement, however generous it may seem, which relieves the economic machinery of the world by clearing up these inter-governmental payments, would be repaid again and again by the contribution which it would make to world revival.

15. For this loss and suffering is not due to the niggardliness of nature. The triumphs of physical science are ever growing and the vast potentialties of the production of real wealth remain unimpaired. It is in the power of the governments of the world and particularly of the United States and of the United Kingdom as the two greatest creditor nations, if they unite in cooperating, to make the first and essential step towards averting disaster, financial, economic and political.

16. For the reasons given in the preceding paragraphs His Majesty’s Government base their request for a re-examination of the whole situation on the fact that payment of the war debts has in their view been proved to be inconsistent with the present economic organisation of the world and that any resumption of these payments is bound to accentuate the gravity of the present crisis and to compromise fatally all efforts to counteract it. But apart from these general considerations, His Majesty’s Government hold the sincere conviction that this request is fully justified on the grounds of the past record of the United Kingdom in the matter of intergovernmental debts and of their present position.

17. In the first place they would draw attention to the unprecedented efforts which have been made by the United Kingdom. The total British war expenditure in the United States amounted to approximately $12,000,000,000 (£2,400,000,000). Of this total only about one third was financed by borrowing from the United States Government, Approximately $3,000,000,000 (£600,000,000) was obtained by the sale of gold and of securities representing available capital assets which His Majesty’s Government had at its disposal the transfer of which has of course reduced the permanent wealth of this country. In addition His Majesty’s Government raised commercial loans on the United States market before the entry of the United States into the war to the amount of about $1,480,000,000 (£304,000,000 at par). The balance of the British war expenditure in the United States was financed by the export of British goods by the [Page 765] reimbursement on the part of the United States Government of expenditure incurred by His Majesty’s Government on behalf of the Allies and of sterling supplied by His Majesty’s Government to the United States troops. Of these market borrowings $1,340,000,000 (£275,000,000) have been repaid. In respect of the debt to the United States Government payments have been made amounting to $1,352,000,000 (£278,000,000 at par), of which $202,000,000 (£42,000,000 at par) were in respect of the principal of the debt as funded. Furthermore in addition to the payments under the funding agreement His Majesty’s Government have paid $233,000,000 (£48,000,000) in respect of war debt before funding and they have repaid in full both the loan for the purchase of silver amounting to $122,000,000 and the debt of $16,000,000 for relief supplies to Austria. The total of these debt payments which His Majesty’s Government have made to the United States since the war amount to the sum of $3,063,000,000 (£629,000,000).

18. Meanwhile the United Kingdom had claims on its Allies in respect of the war loans it had made. The advances made by this country amounted, as stated above, to £1,600,000,000 ($7,800,000,000) and had increased subsequently by the addition of unpaid interest to the capital. Shortly after the war His Majesty’s Government offered to join in any equitable arrangement for the reduction or cancellation of inter-allied debts provided it was of an all-round character. That proposal was not accepted and His Majesty’s Government were called upon to fund their debt to the United States of America. They then announced that they would limit their demands on their own debtors to the amount that they were themselves required to pay to their creditor. The fact that His Majesty’s Government were the first to fund their debt to the United States of America, and that some time elapsed before their debtors completed funding agreements with them, has resulted in their receipts from their debtors being less than half their payments to their creditor. The relative position is that the United States of America made loans amounting to $10,000,000,000 (£2,055,000,000) and the United Kingdom made similar loans amounting to $7,800,000,000 (£1,600,000,000); the United States have received for the benefit of their tax payers $2,112,000,000 (£434,000,000) and the United Kingdom have received for the benefit of their taxpayers nothing, have passed on all their receipts to the United States and have paid out of the pockets of their taxpayers to the United States $651,000,000 (£134,000,000). In fact when interest has been taken into account, some £200,000,000 ($973,000,000 at par) has been found by the British taxpayer. It may be observed that while the British share of the total indebtedness [Page 766] to the United States is only 40%, of the total debt payments made to the United States 80% has come from Great Britain. The efforts which this has involved to the British nation, coming as they did after the losses resulting from the war, constitute in the view of His Majesty’s Government a strong claim to consideration on the part of the United States Government.

19. Moreover His Majesty’s Government feel justified in calling attention to the changes of circumstances which have increased the burden of their obligations.

In the first place the British debt is expressed in terms of gold but the burden on the British people is measured in terms of sterling. The payment due on December 15th is owing to this circumstance increased from 19³⁄₄ million pounds to approximately 30 million pounds. The importance of this from the national standpoint needs no emphasis. In fact however, as already stated, the discharge of all international debts must in the long run take the form of a transfer of goods or services. The average wholesale price index in the United States during the period when the debt was incurred was 189 and is now under 94 (taking 1913 as a basis in each case). The debt therefore represents today in terms of goods not less than twice the amount which was borrowed.

In this connection His Majesty’s Government would point out that the effect of the American tariff has been to restrict rather than to facilitate the import of manufactured goods which the United Kingdom produces and the difficulties in this respect have not decreased in recent years. In 1923 when the British war debt was funded the war debt annuity amounted to £33,000,000 or approximately half the value of British domestic exports to the United States (£60,000,000).

From 1933 onward the annuity which we should have to pay in respect of the war debt would amount at the present rate of exchange to approximately £60,000,000, whereas British domestic exports to America amounted to only £18,000,000 in 1931 and are not likely to exceed £16,000,000 for 1932.

Imports into the United Kingdom from the United States show an equally remarkable fall from £211,000,000 in 1923 to £104,000,000 in 1931 and £59,000,000 in the first nine months of 1932. The total trade between the two countries from the time of the funding agreement has fallen from about £300,000,000 a year to £100,000,000.

20. If therefore war debt payments had to be resumed, it is apparent that the exchange position of this country would need to be strengthened by a reduction of the very heavy adverse balance of the visible trade of the United Kingdom and the United States which amounted to £78,000,000 in 1931. In present circumstances this [Page 767] could only be done by adopting measures which would further restrict British purchases of American goods. The United Kingdom has up to the present generally been the best customer of the United States and the result of such restrictions would inevitably be to reduce specially the market in the United Kingdom for American farm products. To the extent therefore that payments were resumed to the United States Treasury a definite and unfavourable reaction must follow to the United States producer.

Moreover His Majesty’s Government would also have to guard against the effects which would follow if the facilities offered by the British market were used by other debtors of America to obtain sterling which they would then sell across the exchange in order to meet their obligations to the United States Government. After the war the United Kingdom attempted to maintain its traditional trading system of free imports with the result that debtor countries throughout the world sold their goods on the British market and took the proceeds away over the exchange or in gold to meet their obligations elsewhere. Under the stress of the present crisis His Majesty’s Government have had to modify their system and to adopt tariffs; but the United Kingdom still imports from abroad goods to the value of several hundreds of million pounds in excess of what it exports and it would be necessary to consider what action could be taken to secure that the sterling proceeds of these imports were used more largely for the benefit of the British market.

21. President Hoover in explaining his proposal for a suspension of intergovernmental payments for a year beginning July 1st, 1931, stated that its object was “to relieve the pressure of the difficulties resulting from the fall in prices and the lack of confidence in economic and political stability and to assist in the re-establishment of confidence thus forwarding political peace and economic stability in the world.”2 The action then taken gave a much needed respite but it was not sufficient to restore confidence. Depression still continues and a resumption of war debt payments to-day would for the reasons outlined above involve economic reactions which must intensify the instability of the world. If President Hoover’s hopes are to be realized definite remedial action requires to be taken to deal not merely with the British war debt to America but with the whole system of intergovernmental obligations with which it is related.

22. The initiative in devising a settlement of reparations was taken by the creditor governments of Germany at Lausanne with the cognizance and approval of the United States Government. An [Page 768] arrangement was there signed under which Germany would be substantially relieved of a burden which had become intolerable and the participating creditors agreed provisionally among themselves to a waiver of their intergovernmental debts. It was in the nature of things inevitable that that settlement was provisional and that its completion was dependent upon a satisfactory settlement in respect of the debts for which the creditor Powers themselves were liable to the United States Government.

23. The United States Government have frequently reiterated that they do not admit any connection between reparations and war debts; but this differentiation in the matter of intergovernmental obligations arising out of the war is not accepted by other countries which have creditor claims on the German Government and whose ability to meet their own debt payments to the United States and to the United Kingdom is undoubtedly affected by the extent to which they themselves are paid by Germany. Whichever view is academically correct, there is a de facto connection between these two sets of inter-governmental obligations and this was by implication admitted by the United States Government when they proposed a moratorium on all intergovernmental obligations last year. Moreover His Majesty’s Government take it for granted that preferential treatment would never be claimed for war debts due to the United States as compared with those due to this country: and a situation in which this country was required to continue war debt payments while foregoing war debt payments due to it would be admitted at once to be unthinkable. Thus if payment of the sums due in respect of the British war debt to the United States Government were to be resumed, His Majesty’s Government would be obliged to reopen the question of payments from their own debtors—France, Italy, Portugal, Yugoslavia, Roumania, Greece, and also the British Dominions. The debtor countries would in turn have to demand payment by Germany of her obligations under the Young Plan and the United Kingdom would have to do likewise. Without a readjustment of war debt obligations the Lausanne agreement could not be ratified; the question of reparations would remain unsettled; the improvement in confidence which followed the Lausanne agreements would be undone and fatal results might well be found to have accrued to the solution of many grave political as well as financial problems now under discussion.

24. His Majesty’s Government understand that the Government of the United States have already appreciated the force of these considerations in the light of which they have recognised the desirability [Page 769] of a discussion of the major point stressed in a previous communication, namely, the revision of the existing debt obligations. But His Majesty’s Government wish to emphasise their conviction that their proposal for a suspension of the December payment, a proposal which would in no way affect any ultimate settlement, is necessary in order to create conditions favourable to a successful issue of subsequent conversations. The difficulties of making transfer in present circumstances are so great and would involve such far-reaching reactions both financial and political, that the resulting doubts and anxieties in regard to the immediate situation would distract the attention of Governments and peoples when the chief need was an objective and systematic approach to the problem to be solved.

25. Allusion has been made in the last paragraph to the difficulty of any attempt to meet the payment on December 15th by transfer across exchange. It has been the object of His Majesty’s Government to take all possible steps to mitigate fluctuations in the relative value of sterling and gold currencies. To this end, having in the first place repaid in full large temporary credits borrowed in connection with the financial crisis of the preceding year, they have acquired certain reserves in gold and in foreign exchange, but though these reserves are adequate for the purpose for which they were designed, they were not intended and would not suffice to cover as well the payment of $95,500,000 due on December 15th. The Exchange difficulty would remain even if the device were adopted of payment in sterling to a blocked account; for the existence of a large sum awaiting transfer would affect the market almost as seriously as an actual purchase of exchange. The only remaining alternative would be payment in gold. Such a method of payment would involve the sacrifice of a considerable part of the gold reserves of the Bank of England which are widely regarded as no more than sufficient for the responsibilities of London as a financial centre.

26. His Majesty’s Government trust that the full statement of their views which they have now made will demonstrate clearly the ground upon which their request was based, namely their own profound conviction that a resumption of the war debt payments as they existed before the Hoover moratorium would inevitably deepen the depression in world trade and would lead to further falls in commodity prices with disastrous consequences from which no nation would be exempt. They believe that a discussion between the United States Government and themselves upon these matters might bear fruitful issue for revival of world prosperity. They are convinced that the prospects of success would be materially improved by the postponement of the December instalment and they are prepared to [Page 770] consider with the Government of the United States of America any manner in which that postponement might be most conveniently arranged.

  1. See pp. 808 ff.
  2. For complete official text of this statement, see Bank for International Settlements, Report of the Special Advisory Committee, December, 1931, pp. 20 ff.
  3. Great Britain, Cmd. 2105 (1924).
  4. Great Britain, Cmd. 3343 (1929); see also Foreign Relations, 1929, vol. ii, pp. 1025 ff.
  5. Quoted from Bank for International Settlements, Report of the Committee appointed on the Recommendation of the London Conference, Basle [1931], p. 10.
  6. Treasury Department, Annual Report of the Secretary of the Treasury on the state of the finances for the fiscal year ended June 30, 1925, p. 53.
  7. See Foreign Relations, 1931, vol. i, p. 34.