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When the question of the conversion into the form of long term bonds of the demand and short-term obligations of the British and Allied Governments held by the United States Treasury was taken up in the latter part of 1919, the British Chancellor of the Exchequer took advantage of the opportunity again to bring up the subject of the cancellation of the debts to America. Mr. Rathbone, to whom this suggestion was made and who was then in Paris, replied on November 18, 1919 as follows:

The United States Treasury has in no wise changed the views it has expressed, or modified the position that it has taken in the past, and regards the several obligations of the various Allied Governments held by the Government of the United States as representing the debt of each to the United States. . . .

The United States Treasury has never accepted the principle that a payment by Great Britain on account of her indebtedness to the United States required the receipt by Great Britain of a similar account from the Allied Governments indebted to Great Britain. On the contrary, the United States Treasury has always taken the position that the question of the British debt to the United States was a question between these two Governments alone.15

In the course of the same negotiations, in February, 1920, the Chancellor of the Exchequer sent a message through the British Embassy in effect inviting the American Treasury to the consideration of a general cancellation of intergovernmental war debts. A reply to this message was sent under date of March 19, 1920 by the Honorable David F. Houston, then Secretary of the Treasury. Mr. Houston's letter not only declined to accept the invitation, but gave cogent reasons which apply with equal force to the arguments now raised in the British note of August 1, 1922. Mr. Houston's letter of March 19 will therefore be quoted in extenso as containing a full statement of the American Government's attitude on the subject:

As to the general cancellation of intergovernmental war debts suggested by you, you will, I am sure, desire that I present my views no less frankly than you have presented yours. Any proposal or movement of such character would, I am confident, serve no useful purpose. On the contrary, it would, I fear, mislead the people of the debtor countries as to the justice and efficacy of such a plan and arouse hopes, the disappointment of which could only have a harmful effect. I feel certain that neither the American people nor our Congress, whose action on such a question would be required, is prepared to look with favor upon such a proposal.

Apparently there are those who have been laboring for some time under the delusion that the inevitable consequences of war can be avoided. As far back as January a year ago, before it could possibly be foreseen whether any measures were necessary other than the adoption of sound economic policies, various schemes including that of a cancellation of intergovernmental war debts, were launched. Of course, I

u Senate Document No. 86, 67th Cong., 2d sess., pp. 63 and 65.

recognize that a general cancellation of such debts would be of advantage to Great Britain and that it probably would not involve any losses on her part. As there are no obligations of the United States Government which would be cancelled under such a plan, the effect would be that in consideration of a cancellation by the United States Government of the obligations which it holds for advances made to the British Government and the other allied Governments the British Government would cancel its debts against France, Italy, Russia, and her other allies. Such a proposal does not involve mutual sacrifices on the part of the nations concerned. It simply involves a contribution mainly by the United States. The United States has shown its desire to assist Europe. Negotiations for funding the principal of the foreign obligations held by the United States Treasury and for postponing or funding the interest accruing during the reconstruction period are in progress. Since the armistice this Government has extended to foreign Governments financial assistance to the extent of approximately $4,000,000,000. What this Government could do for the immediate relief of the debtor countries has been done. Their need now is for private credits. The indebtedness of the allied Governments to each other and to the United States is not a present burden upon the debtor Governments, since they are not paying interest or even, as far as I am aware, providing in their budgets or taxes for the payment of their principal or interest. At the present time the foreign obligations held by the Government of the United States do not constitute a practical obstacle to obtaining credits here, and I do not think that the European countries would obtain a dollar additional credit as a result of the cancellation of those obligations. The proposal does not touch matters out of which the present financial and economic difficulties of Europe chiefly grow. The relief from present ills, in so far as it can be obtained, is primarily within the control of the debtor Governments and peoples themselves. Most of the debtor Governments have not levied taxes sufficient to enable them to balance their budgets, nor have they taken any energetic and adequate measures to reduce their expenditures to meet their income. Too little progress has been made in disarmament. No appreciable progress has been made in deflating excessive issues of currency or in stabilizing the currencies at new levels, but in Continental Europe there has been a constant increase in note issues. Private initiative has not been restored. Unnecessary and unwise economic barriers still exist. Instead of setting trade and commerce free by appropriate steps there appear to be concerted efforts to obtain from the most needy discriminatory advantages and exclusive concessions. There is not yet apparent any disposition on the part of Europe to make a prompt and reasonable definite settlement of the reparation claims against Germany or to adopt policies which will set Germany and Austria free to make their necessary contribution to the economic rehabilitation of Europe.

After taking all the measures within their power one or more of the debtor Governments may ultimately consider it necessary or advantageous to make some general settlement of their indebtedness. In such a case they would, I presume, propose to all creditors, domestic and foreign, a general composition which would take into account advantages obtained by such debtor country under the treaty of peace. How the American people or the American Congress would view participation in such a composition I can not say. It is very clear to me, however, that a general cancellation of intergovernmental war debts, irrespective of the positions of the separate debtor Governments, is of no present advantage or necessity. A general cancellation as suggested would, while retaining the domestic obligations intact, throw upon the people of this country the exclusive burden of meeting the interest and of ultimately extinguishing the principal of our loans to the allied Governments. This nation has neither sought nor received substantial benefits from the war. On the other hand, the Allies, although having suffered greatly in loss of lives and property, have under the terms of the treaty of peace and otherwise, acquired very considerable accessions of territories, populations, economic and other advantages. It would therefore seem that if a full account were taken of these and of the whole situation, there would be no desire nor reason to call upon the Government of this country for further contributions.14

So far as known, no reply to the foregoing letter has been published, nor are Mr. Houston's reasons for declining to consider the proposal of the Chancellor of the Exchequer covered by the note sent on August 1, 1922 by the Acting British Secretary of State for Foreign Affairs to the debtor governments. In that note the Earl of Balfour makes a pretense to generosity in the offer of general cancellation which Secretary Houston's letter denies. In it also the British Government officially circulates a general assumption as to the effect of the inter-Allied indebtedness upon the economic situation in Europe which is not shared by the American Secretary of the Treasury.

The Treaty of Versailles went into effect on January 10, 1920, and almost immediately thereafter the British and French Governments began to discuss the question of giving fixity and definiteness to Germany's reparation obligations, which had already consumed so much time at the Peace Conference and which had been decided adversely for the reasons previously given. On August 5, 1920, we find the British Prime Minister writing to President Wilson in regard to these Franco-British discussions and proposing an "all around settlement of inter-Allied indebtedness". In view of what had already taken place at the Peace Conference, Mr. Lloyd George's letter to President Wilson of August 5, 1920 deserves quotation on this subject. He said:

The British and the French Governments have been discussing during the last four months the question of giving fixity and definiteness to Germany's reparation obligations. The British Government has stood steadlly by the view that it was vital that Germany's liabilities should be fixed at a figure which it was within the reasonable capacity of Germany to pay, and that this figure should be fixed without delay, because the reconstruction of Central Europe could not begin nor could the Allies themselves raise money on the strength of Germany's obligation to pay them reparation until her liabilities had been exactly defined. After great difficulties with his own people, M. Millerand

16 Congressional Record, July 18, 1921, Vol. 61, Part 4, p. 3951.

found himself able to accept this view—but he pointed out that it was impossible for France to agree to accept nothing less than it was entitled to under the treaty, unless its debts to its allies and associates in the war were treated in the same way.

This declaration appeared to the British Government eminently fair. But after careful consideration they came to the conclusion that it was impossible to remit any part of what was owed to them by France except as part and parcel of all around settlement of interallied indebtedness. I need not go into the reasons which led to this conclusion, which must be clear to you. But the principal reason was that British public opinion would never support a one-sided arrangement at its sole expense, and that if such a one-sided arrangement were made it could not fail to estrange and eventually embitter the relations between the American and British people, with calamitous results to the future of the world.17

It will be observed that Mr. Lloyd George, keen to detect one-sidedness in the Millerand proposal as affecting Great Britain, apparently was unable to see any one-sidedness in his own proposal to President Wilson as it affected the United States. Not so, however, with President Wilson, for in October, 1920 he sent an answer to the British Prime Minister which ought to have set at rest once and for all the agitation of the subject. Mr. Wilson replied:

It is highly improbable that either the Congress or popular opinion in this country will ever permit a cancellation of any part of the debt of the British Government to the United States in order to induce the British Government to remit, in whole or in part, the debt to Great Britain of France or any other of the allied Governments or that it would consent to a cancellation or reduction in the debts of any of the allied Governments as an inducement toward a practical settlement of the reparation claims. As a matter of fact, such a settlement, in our judgment, would in itself increase the ultimate financial strength of the Allies.

You will recall that suggestions looking to the cancellation or exchange of the indebtedness of Great Britain to the United States were made to me when I was in Paris. Like suggestions were again made by the chancellor of the exchequer in the early part of the present year. The United States Government by its duly authorized representatives has promptly and clearly stated its unwillingness to accept such suggestions each time they have been made and has pointed out in detail the considerations which caused its decision. The view of the United States Government has not changed, and it is not prepared to consent to the remission of any part of the debt of Great Britain to the United States. Any arrangements the British Government may make with regard to the debt owed to it by France or by the other allied Governments should be made in the light of the position now and heretofore taken by the United States, and the United States in making any arrangements with other allied Governments regarding their indebtedness to the United States (and none are now contemplated beyond the funding of indebtedness and the postponement of the payment of interest)

17 Senate Document No. 86, 67th Cong., 2d sees., p. 83.

will do so with the confident expectation of the payment in due course of the debt owed the United States by Great Britain. It is felt that the funding of these demand obligations of the British Government will do more to strengthen the friendly relations between America and Great Britain than would any other course of dealing with the same.

The United States Government entirely agrees with the British Government that the fixing of Germany's reparation obligation is a cardinal necessity for the renewal of the economic life of Europe and would prove to be most helpful in the interests of peace throughout the world; however, it fails to perceive the logic in a suggestion in effect either that the United States shall pay part of Germany's reparation obligation or that it shall make a gratuity to the allied Governments to induce them to fix such obligation at an amount within Germany's capacity to pay. This Government has endeavored heretofore in a most friendly spirit to make it clear that it can not consent to connect the reparation question with that of intergovernmental indebtedness.13

It was in the light of the record above set forth that the Act of Congress of February 9, 1922 was adopted. Hearings were held by the Senate and House Committees before the bill was reported out favorably. Treasury officials were the chief witnesses and they produced voluminous records from the Treasury Department covering the discussions between the governments from the beginning. No voice was raised either in the Senate or in the House of Representatives in favor of the cancellation in whole or in part of the Allied indebtedness to the United States. The debate on the bill was directed principally to amendments to make sure that the Act would not place in the hands of the Executive, authority to transfer the German reparation debt to the United States by the acceptance of German bonds in exchange for Allied indebtedness,19 and to leave no loop-hole in the law under which the Executive might entertain suggestions for the cancellation of the Allied debt.

Immediately upon the publication of the Balfour note, Mr. Mellon, the present Secretary of the United States Treasury, issued a statement in which he quoted the following from a memorandum handed to the British Ambassador in June, 1920:

It has been at all times the view of the United States Treasury that questions regarding the indebtedness of the Government of the United Kingdom of Great Britain and Ireland to the United States Government and the funding of such indebtedness had no relation either to questions arising concerning the war loans of the United States and of the United Kingdom to other governments or to questions regarding the reparation payments of the Central Empires of Europe. These views

"Congressional Record, July 18, 1921, Vol. 61, Part 4, pp. 3951-52.

1' See the agreement made with Belgium on June 16, 1919 by the British and French Premiere and President Wilson, in which they undertake to recommend to their respective governmental agencies the acceptance of German reparation bonds in satisfaction of the sums borrowed by Belgium from the Allied Governments, printed in the Supplement to this Journal, p. 190.

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