sector’s ability to finance and transfer them. Garrard Winston suggested at a University of Chicago Round Table Conference that “War debtors could very well approach the United States Treasury and suggest canceling future installments of the debt settlements by discount for cash. At reasonable current interest rates the discount would reduce payments for the later years of the term to quite attainable figures, and the menace of a continuing burden on generations not yet born would end.”6 Furthermore, American investors would probably be the major purchasers of the Allied bond issues, just as Germans subscribed to a great indemnity following the Franco-Prussian fear in 1871–72 and Englishmen did the same in 1816–17. To be sure, this would displace private corporate borrowing for productive purposes, but it seemed unlikely in any event that business expansion could persist without resolving the problem of intergovernmental debt service.
In short, whereas the hope for world peace prior to World War I, as voiced by Kautsky and others, lay in the prospects for intergovernmental cooperation, this now seemed dashed. Lenin had rejected Kautsky’s prescription, which he called ultra-imperialism, on the ground that it was an unattainable ideal: cartels, and the governments they influenced, could not cooperate because of the constantly shifting relative power among firms and nations, even at the monopoly level. Governments would tend to break any agreement as their actual economic strength outgrew the constraints of past international agreements.
However, what was now occurring was the concentration of world power in American hands, despite the desire by other governments to shift this power from the United States towards a more balanced and multi-centric world. World balance was prevented largely by U.S. intransigence regarding the Inter-Ally debts and its insistence that this problem had nothing to do with that of reparations. Foreign governments acquiesced, at least for the time being.
Whatever the new system was, it was no longer dominated by private sector finance capital, unless one insists on viewing the breakdown of world finance created by the Inter-Ally debts, the stock market crash of 1929 and the Great Depression as policies supported by finance capital. To be sure, the disenfranchisement of private capital was in large part the result of a war whose motivations stemmed largely from competition of international finance capital. However, the consequence of this war was to disenfranchise it, to supplant it by a system overburdened by intergovernmental claims and debts. Individualist laissez-faire in the international monetary sphere was shortsighted in advocating that their governments carve up the world and its markets even at the risk of war. The results were not what any prewar observers had anticipated, including those in the socialist camp.
The destructive effect of the postwar intergovernmental debt system was aggravated by the fact that its financial claims had no counterpart in productive capital resources, and hence no real means by which it might be paid. It was, instead, a claim for payment of the cost of destroying Europe’s resources. Keynes was quick to dispute the false analogy between the sanctity of private productive investments and the more tenuous postwar intergovernmental claims, and to deride the typical bankers’ view “that a comparable system between Governments, on a far vaster and definitely oppressive scale, represented by no real assets, and less closely associated with the property system, is natural and reasonable and in conformity with human nature.” An old country could develop a young country by private investment to bring productive resources into being, so that “the arrangement may be mutually advantageous, and out of abundant profits the lender may hope to be repaid. But the position cannot be reversed.” A young country such as the United States could not expect the older countries of Europe to be capable of out-producing her to the extent of generating a saleable export surplus sufficient to amortize the heavy Inter-Ally debts and at the same time meet internal needs. “If European bonds are issued in America on the analogy of the American bonds issued in Europe during the nineteenth century, the analogy will be a false one; because, taken in the aggregate, there is no natural increase, no real sinking fund, out of which they can be repaid. The interest will be furnished out of new loans, so long as these are obtainable, and the financial structure will mount always higher, until it is not worth while to maintain any longer the illusion that it has foundations. The unwillingness of American investors to buy European bonds is based on common sense.”7
Europe could directly raise the funds necessary to amortize its Inter-Ally debts by generating a payments surplus with the United States in two ways: by expanding imports into this country – that is, by making incursions into U.S. markets – and by borrowing from U.S. investors. As Frank Taussig emphasized: “Certain lines of American industry will experience additional competition from their European rivals. Consequences of this sort, even though less in quantitative importance than is commonly supposed, must be faced as a probable result of the debt payments.”8 Commerce Department theoreticians suggested that the United States would have to evolve into a trade deficit nation in order to finance its receipt of debt service from Europe: “If the European Governments that have not yet started to pay their debts to the United States Government should do so, there can be little doubt that imports of merchandise would regularly equal or exceed exports, as is usually the case with creditor countries.”9
These theoreticians accepted as axiomatic that debt repayments to the U.S. Government must take precedence over other concerns, including some shift in trading patterns between the United States and other countries. The primacy in finance of government over private interests was made nakedly obvious. Yet private U.S. interests could not go unconsidered. The dilemma of the United States lay in the contradiction between the role of world usurer played by the U.S. Government as an autonomous economic institution and the injury this must inflict upon domestic industrial interests – and hence, upon the nation – if European imports into the United States were to grow large enough to permit payment of the war debts.
The government attempted to resolve this contradiction by insisting that this was the problem of Europe, not of the United States. Europe must not be made more able to compete in U.S. markets. By inference, therefore, Europe must meet its debt obligations not by expansion of overseas commerce, but by reduction of consumption. The obvious means to this end was to limit European imports into the United States by raising tariffs. Europe, then, must limit consumption in order to raise a surplus out of which to meet its debts. To monetize this surplus, Europe must sell abroad what it saved out of reduced consumption – but not in U.S. markets.
The government of the United States after World War I thus established the precedent that, through government international finance capital, the United States would influence the direction of growth in world commerce and, simultaneously, the consumption functions of other nations. U.S. tariffs served the double purpose of sheltering domestic industries and influencing the direction of world trade, each within the context of the paramount needs of intergovernmental debt service. Minimizing consumption in Europe increased both the margin out of which debt payments could be made and the creditworthiness of Europe, so that Europe could borrow in U.S. capital markets, further facilitating principal and interest payments on the intergovernmental debt.
However, the United States refused to permit Europe to pay off its World War I debt by exporting more goods to the United States. The country’s tariffs were raised in 1921 specifically to defend U.S. producers against the prospect of Germany and other countries depreciating their currencies under pressure of their foreign debts.10 In May of that year prices began their collapse in the United States, following the drying up of European markets that had been supported by U.S. War and Victory loans. An emergency tariff on agricultural imports was levied, followed in 1922 by the Fordney Tariff which restored the high level of import duties set by the Payne-Aldrich Act of 1909. Tariffs on dutiable imports were raised to an average 38 per cent, compared to 16 per cent in 1920.
Even more devastating to international trade, the American Selling Price features of the 1909 Act were also restored as the “equalized cost of production” principle and applied to a number of commodity categories. This meant that tariffs were levied not according to the value of imports as charged by foreign suppliers, but according to the value of similar goods produced in the United States. This legislation made it virtually impossible for other economies to undersell American producers in their home market. The President was authorized to raise tariffs wherever existing duties were insufficient to neutralize the comparative advantage of production costs enjoyed by