THE DEBT SETTLEMENTS Before even the last inter-Ally loans had been made, it was clear that the problem of repayment would assume an importance in international politics second only to the question of reparations. Soon after the Armistice it became known that the British Gov ernment favoured a general cancellation of inter-Ally debts, but the United States was not prepared to agree to such a course. In May 192o the inter-Ally Conference on Reparations at Hythe declared that it was "important to arrive at a settlement which will embrace the whole body of the international liabilities which have been left as a legacy of the war, and which will at the same time ensure a parallel liquidation of the inter-Ally war debts and of the reparation debts of the Central Empires." This was fol lowed, however, a few days later by a statement by the Chancellor of the Exchequer in the House of Commons to the effect that the question of the United Kingdom debt to the United States of America was being dealt with independently of any question of the part of this country's share of indemnity from Germany. By 1922 the different points of view of the various Allied and Asso• ciated Powers on this subject became clearly defined. On Feb. 9 of that year the American Foreign Debt Funding Bill was signed, authorizing the refunding of Allied debts to the extent of $11,000,000,00o into securities with a maximum currency of 25 years, carrying interest at a rate of not less than the nego tiations to be carried out by a commission of five members (subsequently increased to eight) under the chairmanship of the Secretary to the Treasury. It was, at the same time, made clear that the United States Government would not consider the remis sion of debts due to them from the Allies but would look for repayment, though it was recognized that immediate payments would not be possible in every case. This action had a determin ing effect on the attitude of the Powers concerned towards the whole problem of inter-Ally debts.
The Balfour Note.—Great Britain, which had hitherto made no final pronouncement of policy, was now faced with the neces sity of funding her debt to America, and consequently compelled to lay down a principle for dealing with her own debtors. Accord ingly, on Aug. I, 1922, a Note was dispatched to the Governments concerned which has since formed the basis of British policy. In this communication, commonly known as the "Balfour Note," it was stated that, while Great Britain would have been willing to forego all claims for reparations and the repayment of inter-Ally debts if this had formed part of an universal settlement, she must now ask for some measure of repayment. She would, however, be content with a total sum from her Allies and Germany sufficient to cover her own payments to the United States, though this was equivalent to only one quarter of the amount due to her. The French reply in Sept. was inconclusive and unsatisfactory, and the policy of that country was definitely revealed in Oct. at a meeting of the Reparations Commission.
At this meeting certain proposals were submitted by the British delegate for the settlement of the reparations problem, provided that the question of inter-Ally debts was settled at the same time. The French delegate rejected this scheme and put forward a counter-proposal which definitely made the payment of inter-Ally debts dependent on receipts from reparations. At the inter-Allied Conference in London in Dec. 1922 Signor Mussolini, on behalf of Italy, proposed the cancellation of part of Germany's repara tion liability if Great Britain would agree to the cancellation of the debts due to her from her Allies. Poincare elaborated this scheme and offered to hand over forthwith part of the French claim on Germany in payment of her debt to Great Britain and to accept similar terms from her own Allied debtors. Both these proposals were rejected by Bonar Law. The discussion was continued at the Paris Conference on Reparations in Jan. 1923. At this conference the French Government reiterated the principle of the dependence of inter-Ally repayments on German reparations.
The British proposal, which was contingent on the acceptance of their plan for the solution of the reparations question, rested on the basis of the remission of all European Allied debts to the United Kingdom except a small percentage which was to be paid in German obligations, while all German payments over a fixed minimum were to be available for the repayment of European debts to the United States. The failure of the Paris Conference, which was followed by the French occupation of the Ruhr, marked the last attempt to reach any common basis of agreement on this question, although the question was dealt with in the British Note of Aug. 11, 1923 addressed to the French and Belgian Govern ments regarding the occupation of the Ruhr. In this document the British Government offered as part of a general settlement of the Reparation question to accept in full payment of both reparation and Allied debts a sum equivalent to the amount necessary to cover the funded British debt to the United States, which was estimated on a 5% basis at 14.2 milliards of gold marks. The proposals con tained in this Note were not accepted by the Allied Governments concerned.
In Dec. 1924 the authority of the Debt Funding Commission was extended for another two years and in the following May a demarche was made by the United States Government to induce the governments whose debts were still unfunded to negotiate for repayment on the basis of the capacity to pay of the debtor. Consequently, in the latter part of 1925 the majority of the re maining Allies either came to terms or initiated discussions. Thus in Aug. a Belgian delegation arrived at Washington and an agree ment was shortly reached by which the debt was divided into two parts. The pre-Armistice debt of $171,780,0oo was treated spe cially, as by the Treaty of Versailles Germany must pay the Bel gian war debt as part of her reparations. Belgium undertook to repay this sum in full over a period of 62 years, but no interest was payable. The post-Armistice debt of $246,000,00o was also to be repaid in full over 62 years, and in addition interest was to be paid at a rate which rose from of 1 % in the first year to 1 % in the tenth year and at the rate of 31% thereafter.
In Oct. an agreement was reached with the Czechoslovak Gov ernment which fixed the debt due at June 1925 as $115,000,000, repayable on terms similar to those reached with Great Britain. Latvia had already signed an agreement in September, and was fol lowed by Estonia in October. In November an Italian delegation signed an agreement which fixed the principal sum due at $2,042 million to be repaid over a period of 62 years. Interest, however, was not to be paid during the first 5 years, and thereafter only at a rate rising by so-year periods from one-eighth of 1 % to 2% per annum, or an average of just under 1% per annum for the whole time. This was followed in December by a settlement with Rumania, on the British model.
All the remaining debtors, including Yugoslavia, Greece, Estonia and Latvia, later concluded agreements on similar terms, with the exception of Russia, Armenia, Greece and Austria. For the last special arrangements for postponement had been made. If the settlements which had already been made are considered, it will be seen that the terms of the Debt Funding bill with regard to the repayment of capital in full had been carried out in each case, and that, where concessions have been made, they had taken the form of a reduction in the rate of interest. Thus, Great Britain was paying 76% of the 41% per annum laid down by the law, while Belgium paid 48% and Italy 252%. These agreements were ratified by Congress early in 1926.
By an agreement signed on Jan. 27, 1926, the total amount of the Italian debt at that date was calculated at £610,840,000, and it was agreed that Italy should pay 62 annual payments of with a partial moratorium for the first seven years. In addition, the Italian gold to the extent of L22,200,000 which had been deposited in the Bank of England as part security for certain loans was to be returned to her by instalments over the same period. It will be seen that, while the total amount to be repaid was not so great in proportion as that which the United States would receive, the present value was about the same. Of other debtors Belgium had repaid her post-Armistice debts, and Rumania had reached an agreement on the same basis as that of the offer to France in Aug. 1925, while Yugoslavia, Greece and Portugal had also come to terms. Russia alone had made no move. As for relief credits and credits for stores, Lithuania and Latvia repaid the amount due on Jan. 1, 1925, while funding agreements for the full amount had been concluded with Poland, Czechoslovakia, Estonia, Hungary, Rumania, Yugoslavia and Greece.
Although it was the declared policy of both Great Britain and the United States to treat the problem of inter-Ally debts as en tirely separate from that of reparations, the doctrine of repayment according to capacity, enunciated by the United States, had led to results which are not without interest. Great Britain had ad vanced to her Allies a total sum of L1,423,132,000, and, on the basis of the arrangements already concluded with her debtors, would receive a total sum on account of both principal and inter est of L1,147,000,000 in the form of annual payments over a period of 62 years of L18,500,000. On the other hand, she bor rowed from the United States approximately £960,000,000, on which she was paying £30,000,000 and would later have to pay £38,000,000 per annum, so that, in effect, although she lent over 5o% more than she borrowed, she would receive from her Allies less than half the amount which she must in her turn pay. Even if she received her full share of £20,000,000 per annum of German reparation payments under the Dawes scheme (which was a very optimistic estimate), her total receipts on account of inter-Ally debts and reparations combined would only just cover her pay ments to America. On the other hand, it is interesting to note that the United States would eventually receive on account of loans to her Allies an annual sum equivalent to 65% of that payable annually by Germany in a standard year under the Dawes scheme.
Accordingly, when President Hoover on June 20, 1931, in re sponse to the German appeal, proposed the postponement for one year from July 1, 1931, of all Reparation payments, he also in cluded in his plan all inter-governmental debts. The Moratorium provided that the postponed War Debt instalments were to be re funded in ten equal annual instalments beginning on July 1, with interest 3% per annum (subsequently 4%). The first in stalments affected did not fall due till December 15, and Congress ratified the plan just in time, but rejected the presidential pro posal that the Debt Funding Commission should be re-established, and added that it was "against the policy of Congress that any of the indebtedness of foreign countries to the United States should be in any manner cancelled or reduced." The Lausanne Conference.—The Lausanne Agreement of July 9, 1932, dealt only with Reparations, which it practically abolished. A subsidiary document, however, known as the "Gen tlemen's Agreement," provided that the Lausanne Agreement would not be ratified by the Creditor Governments (Belgium, Great Britain, France and Italy) until a satisfactory settlement had been reached between them and their own creditors. If no such settlement could be obtained, a fresh consultation would take place. As a result of declarations by the European Creditor Gov ernments, War Debt payments were suspended until the Lausanne Agreement was ratified. The United States Government was not, of course, committed by any of the documents referred to above.
Discussions with regard to the British debt took place in Wash ington in March 1933, but the American Administration was ab sorbed in the financial crisis and the devaluation of the dollar and no progress was made. In any case, agreement was unlikely in view of the declaration of British policy contained in the Note of January 25 and two speeches of the Chancellor of the Excheq uer. It was then made clear that any settlement must be final and not involve the re-opening of the Reparations question and that the British Government would not consider compensation, since adjustment was as much in the interest of the creditor as of the debtor. The reference to Reparations implied that not more than 10% of the capital would be repaid by Great Britain.
The British Government made token payments of only $10, 000,000 in June 1933 and $7,500,000 in December 1933 instead of the $75,950,000 and $117,671,000 due on those occasions respec tively. In May 1934 the United States Government asked for payment of the three overdue instalments and the two Mora torium instalments but, owing to recent U.S. legislation, a token payment would then have been regarded as a default. The British Government accordingly made no payment on June al though it still declared its readiness to negotiate a final settlement. Token payments were also made in June and December by Czechoslovakia, Italy, Latvia, Lithuania and (in June only) Ru mania. No debtor country has since made any payment except Finland, which has paid in full throughout. (R. J. S.)