Cancellation (1928)

Let us remember the origin of the War Debts. Soon after the beginning of the war it was clear that certain of our Allies—Russia and Belgium in the first instance, but subsequently all of them—would require financial assistance. We might have given this in loans or in subsidies. Loans were preferred to subsidies, in order to preserve a greater sense of responsibility and economy in the spending of them. But though financial assistance took the form of loans, it is scarcely to be supposed that the lending countries regarded them at the time as being in the nature of ordinary investments. Indeed it would have been very illogical to do so. For we often gave assistance in the form of money, precisely because we were less able to assist with men or ships. For example, when we sent guns to Italy to help her after her first serious reverse, she had to pay for them by loans. But when matters got worse still, and we sent not only guns but gunners too to man them and to be killed, then we charged nothing. Yet in the former case Italy's contribution was the greater and in the latter ours. In particular, America's contribution for some time after she came into the war was mainly financial, because she was not yet ready to help in any other way. So long as America was sending materials and munitions to be used by Allied soldiers, she charged us for them, and these charges are the origin of what we now owe her. But when later on she sent men too, to use the munitions themselves, then we were charged nothing. Evidently there is not much logic in a system which causes us to owe money to America, not because she was able to help us so much, but because at first she was able to help us, so far at least as man power was concerned, so little.

This does not mean that the financial help which America gave us was not of the most extraordinary value to us. By the time that America came into the war our own resources as a lender were literally at an end. We were still at that time just about able to finance ourselves, but we had reached a point when we could no longer finance our Allies as well. America's financial assistance was therefore quite invaluable. From the moment she entered the war she undertook to lend whatever was required for the expenditure of ourselves and our Allies in the United States, including some contribution to support the Foreign Exchanges. But she was not prepared to make loans for use outside America. Great Britain had therefore to go on making loans to her Allies for such expenditure—with the result that we had to lend our Allies after America came into the war an amount almost equal to what we ourselves borrowed. More precisely, we borrowed from the United States, after she came into the war, £850,000,000, and lent to our Allies during the same period £750,000,000; so that in effect it was true—what the Americans have always been concerned to deny—that the loans she made to us were for the purpose of financing our Allies rather than for ourselves.

The result was that by the end of the war we were owed by our Allies about £1,600,000,000, whilst we, in our turn, owed to the United States £850,000,000.

Since the war, the question has been constantly debated whether these sums ought to be treated as investments, just like any other business transaction, or whether regard should be paid to their origin and to the circumstances in which they were made. It has been the British view that they were not made as business transactions and should not be treated as such. It has been the American view, on the other hand, that they should be taken at their face value, that is to say, as bonds due and payable, tempered only by considerations as to the capacity of the debtor to pay, and, in practice, by a willingness on the part of the United States to accept a low rate of interest.

During the Peace Conference the British Government urged that the Allied War Debts should be entirely cancelled. Mr. Lloyd George raised the matter again with President Wilson in August 1920. Finally, in August 1922, in the famous Note written by Lord Balfour, the considered British view, from which we have never gone back, was set forth. In this Note the British Government declared their willingness to cancel the whole of what their Allies owed them, and also to forgo their own claims on Germany in favour of the other Allies, if the United States in turn would relieve them of their debt. By such an arrangement Great Britain would have been giving up on paper more than twice what she gained. The offer still holds good.

This policy was not accepted by the United States, and a separate settlement has been made between each pair of countries in turn. The settlement made with Great Britain is equivalent to charging a rate of interest of 3·3 per cent on the whole amount due. The American settlement with France is equivalent to repayment at 1·6 per cent interest, and that with Italy to repayment at 0·4 per cent interest. Thus, the American settlement with Great Britain is twice as onerous as that with France and eight times as onerous as that with Italy. Great Britain, in her turn, has made arrangements with France and Italy, and has in both cases let them off lighter even than has the United States—the British settlement with France being 10 per cent easier and that with Italy 33 per cent easier than the corresponding American settlements. Thus, whilst the other Allies have been largely relieved this country is left with the task of repaying her whole burden, subject only to the mitigation that the rate of interest charged, namely, 3·3 per cent, is moderate.

The effect of this settlement is that Great Britain will have to pay to the United States a sum of about £33,000,000 annually up to 1933, rising to nearly £38,000,000 annually thereafter from that year until 1984, when the debt will have been discharged. The reality of the weight of this burden may be illustrated by certain calculations which I made in the summer of 1923 when the details of Mr. Baldwin's settlement with Washington were first made public. We shall be paying to the United States each year for sixty years a sum equivalent to two-thirds of the cost of our Navy, a sum nearly equal to our State expenditure on Education, a sum which exceeds the total burden of our pre-war debt. Looked at from another standpoint, it represents more than the total normal profits of our coal mines and our mercantile marine added together. With these sums we could endow and splendidly house every month for sixty years one new university, one new hospital, one new institute of research, etc., etc. With an equal sacrifice over an equal period we could abolish slums and re-house in comfort the half of our population which is now inadequately sheltered.

On the other hand, we are now receiving from our Allies and from Germany an important contribution as an offset to what we ourselves pay to the United States. It will be interesting to establish a rough balance-sheet.

In 1928 we shall receive from our Allies £12,800,000 and pay the United States £33,200,000; and by 1933 these figures will have risen to £17,700,000 and £37,800,000. Thus apart from our share of German Reparations, we shall be paying annually in respect of War Debts about £20,000,000 more than we receive. Now if the Dawes Annuities are paid by Germany in full, we shall come out just about "all-square." For the normal Dawes Annuity when it has reached its full figure (less the service of German loans, etc.) will amount to £117,000,000, of which our share (excluding the receipts of other parts of the Empire) will be about £22,000,000. Mr. Churchill has estimated that in the current financial year, 1928-29, our payments out will be £32,845,000, and our total receipts nearly £32,000,000.

It is not probable that these receipts will be realised in full. But it will enable us to summarise the situation if we assume for the moment that they are so realised. In this case, each Ally would be able to pay the United States out of their receipts from Germany. When the Allied Debt payments to the United States have reached their maximum amount under the existing settlements, they will total £83,000,000 per annum (the average amount payable annually over the whole period works out at a total of £61,000,000). If we add to this the direct American share in German Reparations, the United States will be receiving £78,000,000 annually out of the £117,000,000 receivable by the Allies from Germany, or 67 per cent, plus £10,000,000 from Italy not covered by Reparations; or if we take the average payments, in lieu of the maximum, the United States will be receiving £66,000,000 out of £117,000,000 or 57 per cent. In either case Great Britain would receive, on balance, nothing.

It follows from the above that if the maximum Dawes Annuities were to be reduced by one-third—which, in the opinion of many of us, is highly probable—the United States will, by the time that the Allied payments to her have reached their full figure, be the sole beneficiary. In this event the net result of all War Debt settlements would be to leave the United States—on balance and off-setting receipts against payments—receiving from Germany £78,000,000 per annum, and no one else getting anything.

I have put the calculation in this form because it renders it very clear why, in the minds of the Allies, the question of further relief to Germany is intimately bound up with the question of their own obligations to the United States. The official American attitude that there is no connection between the two, is a very hollow pretence. The resettlement of the Dawes Scheme is one to which the United States must be, in one way or another, a party. But—let me add—any concession she may make will go entirely to the relief of Germany and the European Allies, Great Britain adhering to her principle of receiving nothing on balance.

If all, or nearly all, of what Germany pays for Reparations has to be used, not to repair the damage done, but to repay the United States for the financial part which she played in the common struggle, many will feel that this is not an outcome tolerable to the sentiments of mankind or in reasonable accord with the spoken professions of Americans when they entered the war or afterwards. Yet it is a delicate matter, however keenly the public may feel, for any Englishman in authority to take the initiative in saying such things in an official way. Obviously, we must pay what we have covenanted to pay, and any proposal, if there is to be one, must come from the United States. It fell to my lot during the war to be the official draftsman in the British Treasury of all the financial agreements with the Allies and with the United States out of which this situation has arisen. I was intimately familiar, day by day, with the reasons and motives, which governed the character of the financial arrangements which were made. In the light of the memories of those days, I continue to hope that in due course, and in her own time, America will tell us that she has not spoken her last word.