War Debt Issue

The desire of the United States to secure repayment for cash loans and goods extended to European Allies during and after World War I was a highly publicized issue during the 1920s. The stance did much to destroy the loyalties and goodwill that had developed during the conflict. Beginning in 1917, the U.S. began to extend cash and supplies to its European allies, expending more than $7 billion in government funds by the time of the armistice in November 1918. Following that, an additional $3 billion was directed to relief and reconstruction efforts of both the Allies and new European nations that grew out of the Paris peace negotiations. The sum of $10 billion (see table) was often described as a “war debt,” but a portion of that total was incurred after the war was over. Even before peace had formally been concluded, various Allied nations began to press the United States to scale back or cancel entirely these obligations. Indeed, there was some justification for reconsidering the entire debt issue:

Most of the borrowed money had been spent in the United States for supplies and war matériel, and had provided a tremendous stimulus for the American economy, which was then the envy of the world. Many Europeans believed that the U.S. had already been repaid.
Some of the debtor nations argued that the war had been a common cause and that one victorious power should not profit at the expense of others. Further, the U.S., insulated by wide oceans, had entered the war late and allowed the European allies to do most of the fighting and dying.
Practical economic realities also seemed to dictate a rethinking of the debt issue. It was unlikely that the Europeans would be able to repay their obligations in gold, as the U.S. wanted, because that commodity was needed to back up their faltering currencies. The other payment alternative would have been to send European goods to America and build a trade surplus, but U.S. protective trade policies made this nearly impossible.

The Harding administration made it clearly understood that the United States had no interest in cancellation. This position was widely supported by the public, which felt that those who incur debts should repay them. This tight-fistedness was not well received in Europe, where the image of Uncle Sam slowly gave way to “Uncle Shylock.” In February 1922, Congress established the World War Foreign Debt Commission to negotiate repayment plans with the debtor nations. The Commission eventually concluded 15 agreements that contained terms based upon the debtors’ abilities to pay. In aggregate, a final principal amount of $11.5 billion was accepted, to be paid off over 62 years with interest rates averaging slightly above two percent. If paid in full, this would have yielded more than $22 billion. Problems existed almost from the inception. The Harding administration maintained that war debts and German reparations were unrelated issues. In fact, they were not. Germany had been saddled with an unrealistically high postwar obligation of $33 billion, but was actually able to make payments for a number of months. This crushing obligation, however, could not be discharged and the Germans defaulted in less than a year. It quickly became apparent that the Allied recipients of the reparations payments were unable to pay the U.S. after the German default. This international problem was passed on to the Coolidge administration, following the death of Harding in August 1923.

See other diplomatic issues during the Harding administration.