market turn down; and following Black Friday, on October 24, the New York market collapse accelerated further declines abroad. The London Economist reported in December that “Wall Street speculation ceased to be a national and became an international problem, and one that affected London, the world’s financial center, most of all.”19
In point of fact the U.S. economy and its financial markets were most seriously affected by the stock market crash and its aftermath. Despite the fact that the U.S. economy was much less exposed to the vicissitudes of international financial and trade movements than other countries relative to the size of its national income and wealth, its financial practices were much more highly pyramided. Checking accounts were used more in the United States than abroad. Furthermore, the years of monetary ease in the United States had spurred a tripling of consumer debt and security loans, mortgage debt and nearly all forms of credit during 1921–29. This pyramiding was now called in by the banks – at a time when most home and farm mortgages came up for renewal every three years – contributing to a wave of foreclosures in the wake of stock market margin calls.
The United States thus became a major victim of its own intransigence with regard to the Inter-Ally debt problem. Its national income fell by $20 billion in 1931 (from a $90 billion level in 1929), losing “in a single year three times as much as the whole capital value of the war-debts due to her, and nearly eighty times as much as the total of one year’s annuities.”20 Its exports and domestic tax revenues fell correspondingly. The illusion that Europe could settle its war debts and reparations on a workable basis by borrowing the funds from U.S. investors ad infinitum was shattered. “What had actually happened was that they were supported by an increasingly dizzy structure of private debt. It was a structure which could stand only so long as it was raised higher and higher. By June of 1931 the whole structure was in collapse, threatening to bring down with it in one smash all the public and private debts of Germany.”21
President Hoover declares a moratorium on Inter-Ally debts
On June 5, 1931, Germany appealed to the world to forgo demand for reparations payments. Andrew Mellon, still Secretary of the Treasury, met with President Hoover on June 18 and convinced him that Germany could not possibly meet its scheduled payment. A number of leading financial houses and banks in New York were heavily involved in the German bond market and “were threatened with bankruptcy in the event of a wholesale default by Germany.”22 The President held a series of Cabinet meetings and met with Republican and Democratic congressional leaders to obtain general endorsement of a one-year postponement of all payments on intergovernmental debts.
This became his moratorium plan of June 20, which froze all private as well as governmental short-term German liabilities. He emphasized, however, that he did not approve “in any remote sense, the cancellation of debts to the United States of America.” True, he acknowledged, the basis of debt settlement was finally to become “the capacity, under normal conditions, of the debtor to pay . . . I am sure that the American people have no desire to attempt to extract any ounce beyond the capacity to pay . . .” But every ounce up to that point would be expected. Yet to Europe the term “capacity” meant capacity to pay put of reparations receipts; to America it meant the capacity to pay out of ordinary budgets, assisted preferably by cuts in arms expenditures.23
Nonetheless, Hoover’s announcements made stock markets jump throughout the world, and improvements in foreign exchange conditions more than repaid the United States for the loss of the nominal $250 million sum of funds forgone.24 The winding down of intergovernmental claims thus had a salutary initial effect on the network of private international finance capital.
However, letting Germany off the hook shifted the focus of world anxiety to London. Publication of the Macmillan Report in July 1931 disclosed that Britain’s foreign short-term credits amounted to over £400 million as against her realizable short-term foreign claims of only about £50 million after deducting the uncollectible Central European claims. On July 13, the day the Macmillan Report was made public, the Danat Bank closed its doors. A run on sterling dislodged its exchange parity, and Europan exchange rates began to collapse under the accumulated debt burdens of the preceding decade.25 The Hoover Moratorium had come too late.
As in a Greek tragedy, inexorable forces were set in motion. To begin with, Britain’s devaluation impaired Germany’s export potential. British coal, for instance, became cheaper than German coal, so that German ships took on British coal at Rotterdam rather than buying domestic coal in Bremen and Hamburg. To make matters worse, many German firms had carried on their business in sterling, and suffered considerable loss when its exchange rate fell.26
These events triggered a worldwide tariff and devaluation war. Britain’s abandonment of the gold exchange standard was followed by similar moves by the Scandinavian countries (Sweden, Denmark Norway and Finland) and by Portugal, Greece, Egypt, Japan, several South American states with major trading ties to Britain, and by the British Commonwealth generally. These nations formed a de facto Sterling Area capable, in principle of, turning the tables of international economic power against the gold standard countries, led by the United States and France, which between themselves were left with 80 per cent of the world’s monetary gold. But what good was this bullion if an alternative instrument, paper sterling, were to become acceptable by most of the world in preference to continued subservience to gold? This potential contributed to Anglo-French and Anglo-American economic tensions, And fear of a new world trading system based on devalued sterling underlay much of President Roosevelt’s subsequent hard line towards Britain.
How could this deterioration of the world economy have been avoided? The German Government scarcely could have worked harder to meet its reparations obligations. Throughout the 1920s there was little talk of suspending these payments, and Germany’s political parties vied to devise ways in which the payments schedule might be met.27 The European Allies also tried their best to service their debts to the United States. This is not to say that they were blameless in their relations with Germany. The Poincaré Government in France was especially vindictive and, after occupying the Ruhr in 1923, replied in the following words to Britain’s protest over this act:
An eye for an eye, a tooth for a tooth. In strict accordance with the precedent established by Germany in 1871, the Ruhr District will be released only when Germany pays. The Reich must be brought to such a state of distress that it will prefer the execution of the Treaty of Versailles to the conditions created by the occupation. German resistance must cease unconditionally, without any compensation. Germany’s capacity to pay cannot be established at all in presence of the present confusion in her economy. Furthermore it is absurd to fix it definitely, as it is continually changing. The German Government will never recognize any amount as just and reasonable, and, if it does, it will deny it on the f following day. In 1871 nobody in the world cared whether France considered the Treaty of Frankfort just and possible of execution. And what about the investigation of Germany’s capacity to pay by impartial experts? What does impartial mean? Who has to select the experts?28
The Allies were extortionate in their ways of exacting tribute from Germany, but they were acting under the force majeure imposed by the United States’ insistence that their war debts be paid to the last cent, including interest. Because the U.S. Government was the ultimate claimant on all war debts, the failure to achieve a realistic solution to the transfer problem cannot but be attributed to U.S. policy.
With regard to world indebtedness, the United States had adopted a double standard. Under the Dawes Plan, Germany was protected against enlargement of the real burden of her reparations payments by a fall in world commodity prices relative to the dollar, or more properly, relative to gold. The Dawes Plan stipulated that “the German government and the Reparation Commission each have the right in any future year, in case of a claim that the general purchasing power of gold as compared with 1928 had altered by not less than 10 per cent, to ask for a revision on the sole and single ground of such altered gold value,” and that “after revision, the altered basis should stand for each succeeding year until a claim be made by either party that there has again been a change, since the year to which the alteration applied, of not less than 10 per cent.”29
This provision