represented Europe’s financial limit in terms of normal commercial standards. By the time the United States entered the war, the continent was close to the end of its financial tether. It lacked the means to purchase American arms for cash in the amounts required, or even adequate collateral on which to borrow further sums through U.S. banks. One of the first acts of Congress following declaration of war by the United States therefore was to vote government funds to finance arms loans to the Allies.
It would be almost a year before U.S. troops could be enlisted, trained and ready for battle in Europe. President Wilson not only had kept the country out of the war until 1917, he had left it militarily unprepared for conflict on the European scale. What the nation did have was money, labor power and plant capacity for arms productions. In a matter of weeks, Congress authorized a $3 billion loan to the Allies. A Treasury bulletin explained that “the loans were being made to the Allies to enable them to do the fighting which otherwise the American army would have to do at much expense, not only of men, but of money – money which would never be returned to America, and lives that never could be restored.” Representative A. Piatt Andrew drew the parallel that the United States was “virtually placed in a situation like that voluntarily assumed by many men in the North during the Civil War, who, having been drafted for the Union armies, hired substitutes to take their places.”3
Congress had a rationale for extending funds to Europe in the form of loans rather than freely sharing American resources for the common Allied cause. “The general principle underlying these obligations,” observed the Council on Foreign Relations a decade later, “was that the Allies should not pay less for accommodation than the United States had incurred in raising the funds from American citizens. Thus, as the Ways and Means Committee said in reporting on the first Liberty loan bill, the loan ‘will take care of itself and will not have to be met by taxation in the future.’”4 Not weighed in the bargain was the cost sustained by Europe in lives lost and property destroyed.
On the one hand, private international claims were being wound down by European governments requisitioning and reselling their citizens’ U.S. investments to pay for American arms. But in short order liabilities of governments to one another were built up as Europe owed a growing arms debt to the U.S. Treasury. Including postwar Victory Loans, obligations of the Allies to the U.S. Government grew to $12 billion by 1921, starting with a $3 billion credit granted in 1917. Philip Snowden, Chancellor of the Exchequer in Britain’s first Labour government, observed that the United States had levied about $3 billion in excess profits taxes on its armaments and related industries. Pointing out that this just happened to correspond in value to America’s first official loan package to Europe, he concluded: “The sums loaned by America from 1917 to help the Allies to fight her battle were but a part of the profits she made out of the Allies before her entry into the war.”5
Secretary of the Treasury Andrew Mellon acknowledged that U.S. profits on some war transactions ran as high as 80 per cent.6 Still, the die had been cast for loans, not subsidies: As one banker later observed: “Little did anyone realize, whether in or out of official life, what this decision was to cost. It meant that within the next three years the United States Government would supply the Allied Powers with which it had now become associated, in exchange for their unsecured promises of payment at indefinite dates in the future, with munitions of war valued at over $9,500,000,000.”7
Earlier wars had been conducted largely on a subsidy basis, with one nation – Britain in particular – financing the military costs of its allies. This practice had been employed as early as the fourteenth century, “when Edward III paid French and Flemish princelings to win French territory. When the modern system of European states evolved every contender for European dominance found himself opposed by a combination financed by an implacable Britain.” Subsidies “insured loyalty and effort. Being granted monthly, they could be stopped promptly if any ally showed slackness . . . When loans were granted in place of subsidies, they invited unfortunate consequences,” as occurred with the Austrian loans of 1795–97.8 Exorbitant brokerage fees, followed by economic problems in the debtor countries, tended to become sore spots of international diplomacy, creating almost as much antagonism as gratitude toward the lending government.
France had followed a subsidy policy when it helped finance the American War of Independence.
French financial assistance, expressed in consignments of munitions and supplies, contributed greatly to the success of the revolting North American colonies leading up to Yorktown, and for this last victory the revolutionists were indebted in equal measure to French military and naval support, which is estimated to have cost France $700,000,000 and for which she asked no recompense. France’s help was expressed in outright gifts amounting to nearly $2,000,000 and in post-alliance loans to the extent of some $6,000,000. In making funding arrangements with Benjamin Franklin, the government of Louis XVI remitted wartime interest charges, a course that the United States was to pursue after the World War [only] in her funding agreement with Belgium.
However, the United States was lax in paying the loan portion of French assistance. “Between 1786, when the first repayment fell due, and 1790, no contribution on the debt either of principal or interest could be made by either the Confederation or the infant Republic, and repeated calls for a settlement by the new-born French republic in 1793 fell on ears attuned only to the needs of an impoverished people struggling to nationhood. It was left to Alexander Hamilton eventually to apply his financial genius to a tardy liquidation of this indebtedness, which was converted into domestic bonds and retired in 1815.”9
Most of the wars fought during the century spanning the Napoleonic Wars and World War I were of a confined, bilateral character, such as the Franco-Prussian War, the Boer War, the Spanish-American War and the Russo-Japanese War. With the exception of the Crimean War, they did not involve large groups of nations, and hence there were neither Inter-Ally debts nor subsidies. World War I, however, was a conflagration of unprecedented scope, in both its direct costs and its economic aftermath. Unlike most of the wars of the preceding century, it was fought on the European mainland itself, with great destruction of lives and property.
As the war began to engulf the world, it seemed at first that the subsidy system would have to be pursued if the Allies were not simply to drop out of the fighting once they exhausted their economic strength. Toward the beginning of the war, in February 1915, representatives of the British, French and Russian governments met and agreed to pool their financial as well as military resources. Three years later Britain and France (Russia having dropped out of the war) induced Greece to join forces on the Allied side by promising that payment for the munitions supplied to Greece “was to be decided after the war in accordance with the financial and economic situation of Greece. Reimbursement could hardly have been contemplated here; as a matter of fact, it was subordinated to the need of securing allegiance and thus was a harking back to eighteenth century methods.”10
U.S. Government representatives likewise had originally told their allies not to worry about conditions of repayment, which were to be settled after victory had been won, implicitly on nominal terms. For instance, at a time when there was broad public support for a $1 billion gift to France to help it wage the war in gratitude for its aid during the American Revolution, the French Government was officially encouraged to do all its arms financing through U.S. Government channels. The implication was that this financing ultimately would be equivalent to a gift. Senator Kenyon of Iowa announced: “I want to say this for myself, Mr. President, that I hope one of the loans, if we make it, will never be paid and that we will never ask that it be paid. We owe more to the Republic of France for what it has done for U.S. than we can ever repay. France came to us with money, with a part of her army and navy in the hour of our sore distress. And without the aid of France it is doubtful if we would have had this nation of ours . . . I never want to see this government ask France to return the loan which we may make to them.”11
Typical of the overall U.S. tone at the time of its European loan negotiations was the statement of Representative Kitchin, chairman of the House Ways and Means Committee: “The fact is that if we ever get this money back at all when the war is won we shall get off cheap.”12 A later writer observed: “When America joined the partnership in April 1917, it was