Memorandum by the Assistant Economic Adviser (Livesey)

During the Wilson Administration the war debt question was clearly a Treasury matter, negotiations concerning which were handled directly between the Treasury and foreign representatives in Europe. An important exception was that on May 21, 1920, the British Chancellor of the Exchequer informed the American Treasury representative that the British Government had decided to suspend for the time being the negotiations with regard to the funding of the war debts, since decisions reached at the conference with France raised “questions of great importance unsuited for departmental treatment between our two Treasuries”.1 He stated that the Prime Minister intended to take up the matter directly with the President of the United States. This was followed by the Premier’s letter of August 52 to President Wilson suggesting an all-around arrangement for the reduction or cancellation of inter-allied indebtedness, and President Wilson’s reply of November 3, 1921 [1920]3 (the history of [Page 571] the debts under Wilson is well summarized in Chapter 3 of Moulton and Pasvolsky’s War Debts and World Prosperity).

The first step under the Harding Administration appears to have been a conversation between Secretary Mellon and the British Ambassador on May 2 at the Department of State and in the presence of the Secretary of State. Secretary Mellon told the Senate Finance Committee on July 21, 1921, that this was the first and the only conversation that he had had with any of the representatives of debtor governments.4 He said he had spoken to the Secretary of State about the obligations two or three weeks before the actual conference and asked him what the procedure should be to bring about some attention to the obligations. Mr. Hughes said that he would mention it to the Ambassador, and that he supposed the natural way would be to arrange a conference. Mr. Mellon received word that Mr. Hughes had made the appointment for them to meet. There was a short general discussion on the whole financial situation of the European governments. In June, 1931 [1921], the Administration asked Congress to authorize the Secretary of the Treasury to make agreements with foreign governments. The Congress responded February 9, 1922, by establishing the World War Foreign Debt Commission.

Mr. Mellon and Mr. Hoover were members of the Commission throughout its life, Mr. Hughes and Mr. Kellogg successively representing the Department of State. The Commission had 74 meetings between April 18, 1922 and May 1, 1926. From October 20, 1923 to August 6, 1925, it held only six meetings and accomplished little. Up to the latter date, its accomplishments were the very important agreement with Great Britain June 18, 1923, and agreements with Finland ($9,000,000), Hungary ($1,939,000), Lithuania ($6,030,000), and Poland ($178,560,000).

Looking at the record it seems quite clear that after the British had made their great decision in 1923, the other important settlements were almost forced by the need the debtors felt for American credits for stabilization purposes and by the policy reported as follows in the Commission’s minutes for August 6, 1925:

“In May, 1925, certain banking interests in New York consulted the State Department as to its attitude toward the flotation of a Czechoslovak loan in the United States. After consulting with the President, the Chairman of the Commission, and Mr. Hoover, it was decided that the State Department should object to the flotation of a loan of any foreign government indebted to the United States which was unwilling to enter into negotiations for the funding of its debt on a proper basis.”5

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After the Commission expired in February, 1927, Austria came forward with a debt funding proposal which had been made also to the other eight countries which were pari passu creditors of Austria in respect of relief debts.6 The work of examining this proposal and preparing it to present to Congress was handled almost entirely by the Department of State, but the actual presentation to Congress was by Under Secretary of the Treasury Mills. The Greek debt settlement7 was worked out in 1928 by the two departments in close collaboration negotiating with the Greek Minister. Mr. Mills again presented the case before the Congressional committees. Both matters were presented to the Congress through letters of the Secretary of the Treasury to the President forwarded by the President to the Congress with an approving message.

During the time between the signature of the agreement with France in April, 1926,8 and its ratification just before August 1, 1929, the French maintained a Financial Attaché who was in contact with the Treasury, but such matters as negotiation of the terms on which France made payments of the amounts scheduled in the unratified agreement were handled through the Department of State.

During all this time, from the point of view of the public and of Congress, war debts appeared as Treasury business. It came to be the accepted theory that debt settlements were made on the basis of the ascertained capacity to pay of each debtor—a financial question. When announcements regarding debt negotiations were made, they emanated from the Treasury. The Department of State seemed particularly glad to leave to the Treasury the task of presenting debt matters to the Congress.

On one particular occasion the State Department very brusquely washed its hands of a war debt matter. On March 15, 1927, Secretary Mellon sent to Mr. Hibben, President of Princeton University, a letter9 answering his statement and one signed by 116 members of the University faculty,9a urging reconsideration and revision of the debt settlements. Unfortunately a stenographer transcribing the letter, which was drafted by Mr. Mills, omitted, at one place, the words “except Great Britain”, which were in the draft approved by Mr. Mills. On May 2, 1927, the British Embassy sent the Secretary of State a long note10 to clarify the British policy and position regarding war debts and gave notice they were about to publish the note. May 4, the Secretary of State replied very briefly11 that “The Government [Page 573] of the United States regards the correspondence between Mr. Mellon and Mr. Hibben as a purely domestic discussion and does not desire to engage in any formal diplomatic exchanges on the subject”. By vigorous haste the Treasury was able to issue a statement of its position to the press May 5,12 simultaneously with the publication of the British note, which it blanketed. The State Department practically declined to have anything to do with the preparation of this Treasury statement, although the Treasury would have welcomed assistance.

From the time that Mr. Garrard Winston became Secretary of the World War Foreign Debt Commission, at its August 6, 1925 meeting, until March 4, 1933, the debt question was chiefly handled by Mr. Winston and by Mr. Mills successively. Mr. Mills was very active in the discussions in June, 1931, leading up to the announcement of the Hoover Moratorium13 on June 20. However, the chief preliminary discussions with outside advisers and the later discussions with foreign representatives were conducted by Mr. Stimson at his own home. The trans-Atlantic discussions with France through Mr. Mellon at Paris were conducted by telephone from the State Department or the White House, with the President, the Under-Secretary of State, and the Under Secretary of the Treasury all participating. The Secretary of State participated in the presentation of this matter to the Congress in December, 1931.

During the first half of 1932, the United States had to insist rather strenuously to obtain the actual signature of moratorium agreements14 so that the war debtor governments should not enter the Lausanne Conference on Reparations15 with the agreements still unsigned. The departments cooperated in this. During this time there seemed to be considerable danger that war debts and reparations might be entangled by the European governments and it was not at all clear what would happen to reparations at the conference—the crisis of which coincided exactly with the bottom of the depression of the United States as measured by many indices. By this time war debts were a principal preoccupation of the Secretary of State and no longer merely a Treasury matter.

The default correspondence of December, 1932,16 was handled by both departments working in close collaboration. In connection with this correspondence, President Hoover suggested the appointment of a commission or an agency to be selected with President-elect Roosevelt, [Page 574] which agency would have the power to negotiate. Mr. Roosevelt declined to accept responsibility for negotiations before March 4, but authorized the Secretary of State to give notice to several debtor governments that the incoming Administration would be glad to receive their representatives separately beginning in March for the purpose of discussing war debts.

Under the Roosevelt Administration, the Treasury Department has apparently not felt that war debts are a question peculiarly in its jurisdiction. This is suggested, for example, by a letter sent the Secretary of Commerce by the Secretary of the Treasury, April 9, 1935:

“I have your letter of March 25, 1935, advising that there is due the Government of Belgium in connection with the settlement of litigation arising out of certain cases resulting from a voyage of the S. S. City of Brunswick the sum of $40,000 and suggesting that this sum might be applied on account of the indebtedness of the Belgian Government to the United States.

“I feel that this matter is a question of policy that should be decided by the State Department and have referred it to the Secretary of State.”

The Treasury apparently has no high officer as well informed on and interested in war debts as were Mr. Winston and Mr. Mills, in whose hands war debt matters accordingly tended to center. Neither is there in the permanent Treasury service anyone as thoroughly informed on them as Mr. Bell, now Acting Director of the Budget.

I know of no particular indication in the record that the debts have been treated as a Treasury rather than a State Department matter because of the fact that the Secretary of State is charged with the conduct of political relations with other countries. However, it is a clear central fact that the United States has always tried to treat the debts as ordinary financial obligations of each of the debtor governments while the debtors have always tried to treat them as political rather than commercial obligations. In setting up the Debt Commission by statute, the Congress forced the debtor governments to deal with a special financial commission rather than with the central political authorities of the United States Government. A statute of this kind of course greatly eases the pressure on the Secretary of State to discuss debts in connection with other phases of relations with foreign countries. The debtors on the other hand have consistently sought to establish the whole war debts and reparations nexus as a single problem which must be settled by an all-around arrangement. That is where they left the situation by the Lausanne Agreement of July, 1932, and the default correspondence of December, 1932.

If the United States should now wish to undertake serious negotiations to collect war debts, it would probably find difficulty in getting the individual debtors to treat separately on the basis of their capacity to pay. Great Britain would probably not pay much to the United [Page 575] States without collecting from France. If France could settle for a reasonable payment to the United States and a reasonable payment to Great Britain which the latter could pass on to the United States, and if France could foresee sufficient political and other advantage to itself therein, negotiation might accomplish something. Neither of these two principal debtors has pleaded inability to pay. If they made new agreements, minor debtors with some capacity to pay would probably follow. It is rather hard to foresee the debtors undertaking new negotiations in which Treasury calculating machines will grind out new schedules for payments of millions of dollars per annum for decades to come.

  1. Combined Annual Reports of the World War Foreign Debt Commission, 1922–1926 (Washington, Government Printing Office, 1927), p. 70.
  2. Ibid., p. 72.
  3. Ibid., p. 73.
  4. See Refunding of Obligations of Foreign Governments, Hearings before the Committee on Finance, United States Senate, 67th Cong., 1st sess., on S. 2135 (Washington, Government Printing Office, 1921), p. 153.
  5. See Foreign Relations, 1925, vol. ii, pp. 39 ff.
  6. See Foreign Relations, 1927, vol. i, pp. 442 ff.
  7. See ibid., 1928, vol. iii, pp. 1 ff.
  8. See ibid., 1926, vol. ii, pp. 91 ff.
  9. Ibid., 1927, vol. ii, p. 732.
  10. Ibid., p. 731.
  11. Ibid., p. 739.
  12. Ibid., p. 745.
  13. Combined Annual Reports of the World War Foreign Debt Commission, 1922–1926, p. 627.
  14. See Foreign Relations, 1931, vol. i, pp. 1 ff.
  15. See ibid., 1932, vol. i, pp. 584 ff.
  16. See ibid., pp. 636 ff.
  17. See ibid., pp. 700 ff.