religious colleges. It was largely to promote protectionist doctrines that state land-grant colleges and business schools were created after the Civil War. In contrast to the economic theories of David Ricardo and Thomas Malthus, these colleges described America as a new civilization, whose dynamics were those of increasing returns in agriculture as well as industry, and the perception that rising living standards would bring about a new social morality. The protectionist Simon Patten was typical in juxtaposing American civilization to European society wracked by class conflict, pauper labor and a struggle for foreign markets based on reducing wage levels. Teaching at the University of Pennsylvania from the 1890s through the 1910s, Patten’s students included such future luminaries as Franklin Roosevelt’s brains-truster Rex Tugwell and the socialist Scott Nearing.
Europe’s imperial rivalries were viewed as stemming from its competing princely ambitions and an idle landed aristocracy, and from the fact that its home markets were too impoverished to purchase industrial manufactures of the type that were finding a ready market in the United States. To Republican nationalists the United States did not need colonies. Its tariff revenues would better be spent on internal improvements than on vainglorious foreign conquests.
This attitude helps explain America’s belated commitment to World War I. The nation declared war in 1917 only when it became apparent that to stay out would entail at least an interim economic collapse as American bankers and exporters found themselves stuck with uncollectible loans to Britain and its allies. Reflecting the ideological and moral elements in America’s entry, President Wilson viewed the nation’s political and cultural heritage as stemming largely from England. He was a Democrat, and a southerner to boot, whereas most of the leading Republican intellectuals, including Patten, Thorstein Veblen and Charles Beard, felt a closer kinship to Germany. That nation was after all in much the same position as the United States in seeking to shape its social evolution by state policy to build a high-income, technologically innovative economy, marked by government leadership in social spending and the financing of heavy industry.
This social philosophy helps explain America’s particular form of isolationism preceding and after World War I, and especially the government’s demand to be repaid for its wartime loans to its allies. U.S. officials insisted that the nation was merely an associate in the war, not a full ally. Its $12 billion in armaments and reconstruction loans to Europe were more of a business character than a contribution to a common effort. America saw itself as economically and politically distinct.
The dilemma of U.S. economic diplomacy in the interwar years
The United States, and specifically its government, emerged from the war not only as the world’s major creditor, but a creditor to foreign governments with which it felt little brotherhood. It did not see its dominant economic position as obliging it to take responsibility for stabilizing world finance and trade. If Europe wished to channel its labor and capital to produce armaments instead of paying its debts, and if it persisted in its historical antagonisms – as evidenced by the onerous Treaty of Versailles imposed on Germany – the United States need feel no obligation to accommodate it.
The government therefore did not seek to create a system capable of extending new loans to foreign countries to finance their payments to the United States, as it was to do after World War II. Nor did it lower its tariffs so as to open U.S. markets to foreign producers as a means of enabling them to pay their war debts to the U.S. Treasury. The United States rather wished to see Europe’s empires dissolved, and did not mind seeing imperial governments stripped of their wealth, which tended to be used for military purposes with which few Americans sympathized. The resulting failure to take the lead in restructuring the world economy and to perceive the financial and commercial policy obligations inherent in the United States’ new economic status rendered its war credits uncollectible.
Economically, the U.S. attitude was to urge European governments to reduce their military spending and/or living standards, to permit their money to flow out and their prices to fall. In this way, it was hoped, world payments equilibrium might be re-established even in the face of rising American protectionism and full payment of the Inter-Ally debts that were the legacy of the Great War.
This was not a clearly thought-out position or a realistic one, but many leading Europeans shared these attitudes. In trying to cope with the international financial breakdown of the 1920s, their governments were advised by anti-German writers such as Bertil Ohlin and Jacques Rueff, who insisted that Germany could repay its assessed reparations if only it would submit to sufficient austerity.
The parallel with monetarist Chicago School attitudes towards today’s debtor economies is appallingly obvious. Its view of international payments adjustment was as self-defeating in the 1920s as are the IMF’s austerity programs today. By insisting on repayment of its allies’ war debts in full, and by simultaneously enacting increasingly protectionist tariffs at home, the U.S. Government made repayment of these debts impossible.
Private investors traditionally had been obliged to take losses when debtors defaulted, but it became apparent that the U.S. Government was not about to relinquish its creditor hold on the Allies. This intransigence obliged them to keep tightening the screws on Germany.
To review the 1920s from today’s vantage point is to examine how nations were not acting in their enlightened self-interest but in an unquestioning reaction against obsolete economic attitudes. The orthodox ideology carried over from the prewar era was anachronistic in failing to recognize that the world economy emerged from World War I shackled with debts far beyond its ability to pay – or at least, beyond the ability to pay except on conditions in which debtor countries merely would borrow the funds from private lenders in the creditor nation to pay the creditor-nation government. U.S. bankers and investors lent money to German municipalities, which turned the dollars over to the central bank to pay reparations to the Allies, which in turn used the dollars to pay their war debts to the U.S. Treasury. The world financial system thus was kept afloat simply by intergovernmental debts being wound down by a proportional build-up in private sector and municipal debts.
The ensuing débâcle introduced a behavioral difference from the processes analyzed by Hobson, Lenin and other theorists of prewar world diplomacy. In the nineteenth century Britain took on the position of world banker in no small measure to provide its colonies and dependencies with the credit necessary to sustain the international specialization of production desired by British industry. After World War I, the U.S. Government pursued no such policy. An enlightened imperialism would have sought to turn other countries into economic satellites of the United States. But the United States did not want European exports, nor were its investors particularly interested in Europe after its own stock market outperformed those of Europe.
The United States could have named the terms on which it would have supplied the world with dollars to enable foreign countries to repay their war debts. It could have specified what imports it wanted or was willing to take. But it did not ask, or even permit, debtor countries to pay their debts in the form of exports to the United States. Its investors could have named the foreign assets they wanted to buy, but private investors were overshadowed by intergovernmental financial agreements, or the lack of them, enforced by the U.S. Government. On both the trade and financial fronts the U.S. Government pursued policies that impelled European countries to withdraw from the world economy and turn within.
Even the United States’ attempt to ameliorate matters backfired. To make it easier for the Bank of England to pay its war debts, the Federal Reserve held down interest rates so as not to draw money away from Britain. But low interest rates spurred a stock market boom, discouraging U.S. capital outflows to European financial markets.
America’s failure to recycle the proceeds of its intergovernmental debt receipts into the purchase of European exports and assets was a failure to perceive the implicit strategy dictated by its unique position as world creditor. European diplomats spelled out the required strategy clearly enough in the 1920s, but the U.S. Government’s economic isolationism precluded it from collecting its intergovernmental debts. Its status as world creditor proved ultimately worthless as the world economy broke into nationalist units, each striving to become independent of foreign trade and payments, and from the U.S. economy in particular. In this respect America forced its own inward-looking attitude on other nations.