Short of force: US debt diplomacy in the 1920s


‘During the latter half of the nineteenth century’, wrote Keynes in his Treatise on Money, ‘the influence of London on credit conditions throughout the world was so predominant that the Bank of England could almost have claimed to be the conductor of the international orchestra.’

By 1919 the baton had been wrested away, though not all of its attendant privileges were yet conceded.

Washington found itself in the novel position of global creditor, thanks largely to the enormous wartime growth of intergovernmental liabilities.

War had left several of the European imperial powers as broken reeds, while the victorious Allies  Britain, France and Italy — incurred heavy debt obligations to the US Treasury.

Inter-Ally loans

Over the next decade, with the US Federal Reserve now holding nearly half the world’s gold reserves, the US State and Treasury departments used this privileged status as a lever to intervene in the fiscal and monetary affairs of debtor governments, most notably in Europe, and thereby to shape their foreign and security policies.

Despite the conventional picture of aprèsguerre ‘isolationism’, it was this hypertrophy of the US state during the 1920s  extra-territorial incursions of its policymakers into other jurisdictions, including encroachments within the world’s developed European core  that provided both a staging post and testing ground for later expansionism.

Washington’s political domination of its European ‘partners’ during this earlier epoch would eventually allow imperialism, after 1945, to take the new institutional forms henceforth associated with Wilson, Franklin Roosevelt and Clinton’s ‘liberal internationalist’ foreign policy.

Dawes London Conference 1930

In 1921 the new Republican administration announced that a swiftly growing pool of US overseas assets was ‘assuming an increasing importance’ for ‘foreign political relations’.

Proclaiming official ‘alarm’, in mid-1921 President Harding, along with Treasury Secretary Mellon, Commerce Secretary Hoover and Secretary of State Hughes, met in Washington with representatives of JP Morgan & Co. and other investment houses and banks.

Hoover described the result:

It was finally agreed that all proposals for new foreign loans should be submitted to the State Department for its opinion, and a public notice to that effect was issued on March 3, 1922. The State Department in turn was to submit these proposals to Commerce and Treasury. The Commerce Department gave advice to the promoters, as to security and reproductive character. The State Department advised upon political desirability and undesirability. We made no pretense of authority, but relied upon cooperative action.

In 1926, writing in Foreign AffairsJohn Foster Dulles would describe the ease with which cooperation ensued: ‘There is, generally speaking, a real willingness on the part of American bankers to subordinate their interest in aid of the attainment of important national objectives in the field of international relations.’

Indeed the US foreign policymaking elite  which from 1921 found permanent organization outside the State Department via the Council on Foreign Relations  was heavily populated by J.P. Morgan & Co. partners like Henry Davison, Thomas Lamont, Dwight Morrow and Russell Leffingwell (the CFR’s inaugural president was Morgan’s legal counsel John W. Davis).

(Other New York investment banks like Lazard, through figures like Frank Altschul, also contributed personnel straddling the business elite and foreign-policy formation.)

Lamont attended the Paris Peace Conference as a Treasury Department delegate; he and Morrow served as diplomatic envoys to the 1924 Conference of London, where Whitehall and Paris agreed reluctantly to the Dawes Plan.

In 1922 Lamont confided to Jack Morgan that Mellon appeared to think ‘that if we keep alive all these notes owing to us from dinky little countries all over Europe, the fact that we are holding these notes will give us a sort of stranglehold politically on some of those countries and enable us to tell them what they shall and shall not do. Herbert Hoover has the same benevolent idea.’

The CFR’s 1928 Survey of American Foreign Relations described how federal supervision of foreign loans worked:

The [State Department’s] attitude is expressly one of watchfulness in the country’s larger interests of foreign relationships. It seeks (and has obtained) the cooperation of bankers, and its checks are applied so informally as to rely upon telephonic and verbal communication…

No matter how mild it is, any government action has unique and dominant implications. A request becomes a command when it emanates from a government department. To the bankers the request for cooperation was agreeable enough, for, apart from their desire not to impede the attainment of national objectives in the domain of foreign policy, the imprimatur (if the action of “passing” a loan application may be so called) of the State Department on any issue would connote a certain, if ambiguous, standing for the bonds to be marketed. It follows that any other course than acquiescence in the department’s wishes or acceptance of its ban would make it difficult for the issuing house to dispose of its loan to the American investor.

The pattern of formal objections and refusals of permission conformed exactly to strategic considerations.

With the suppression of Bolshevism being the foremost concern of postwar diplomacy, an embargo (not airtight) was imposed on lending to Soviet Russia.

And from 1924 the French government was unable to refinance its sovereign debt until it agreed to negotiate a repayment schedule with Washington’s World War Foreign Debt Commission (a three-year moratorium on interest had expired in October 1922).

The State Department’s refusal of permission to float a $100 million French loan through J.P. Morgan had the desired chastening effect on the Quai d’Orsay. It was soon brought to heel amid the Ruhr Crisis, rapid depreciation of the franc (one-fifth its prewar value), and the effective closure of the London capital market before Britain’s 1925 return to the gold standard.

The annual US Treasury Department report describes the calculated, sharp and precisely-timed application of pressure:

Early in 1925, after much consideration, it was decided that it was contrary to the best interests of the United States to permit foreign governments which refused to adjust or make a reasonable effort to adjust their debts to the United States to finance any portion of their requirements in this country. States, municipalities, and private enterprises within the country concerned were included in prohibition. Bankers consulting the State Department were notified that the government objected to such financing.

Henry Bérenger was sent to Washington to negotiate repayment terms with Mellon. In April 1926 he cabled back to Paris that  the ‘salvation of the franc and of the credit of France’ demanded their swift ratification.

By 1924, having wrested away effective control of the Inter-Allied Reparations Commission from Paris, business ‘experts’ from Wall Street and advisors from the US departments of Treasury and State were granted the right to monitor public expenditure in several Central European states.

These included Germany (via the Dawes Plan), parts of the former Austro-Hungarian Empire and newly created (and solidly anti-Bolshevik) states carved out from the former Tsarist Empire.

Following episodes of hyperinflation, the Hungarian ($50 000 000) and Austrian ($100 000 000) governments each borrowed stabilization funds from the League of Nations.

Conditionality attached to these loans compelled the indebted parties to undertake various institutional changes decreed by the creditors – including establishing central banks.

Under the borrowing protocols, these central banks would be constitutionally forbidden from refinancing government debt. (Adherence to this principle would later see the Reichsbank’s Hjalmar Schacht incur the ire of Hitler for refusing to finance 1930s armaments spending. The same prohibition would be included in the 1992 Maastricht Treaty of the European Union).

The terms also obliged the borrowing governments to submit to the oversight of a League of Nations Commissioner-General, who would monitor and adjust government expenditure to enforce compliance with the repayment schedules and other binding loan conditions.

The League Commissioner-General in Budapest, described by Time magazine as ‘the financial dictator of Hungary’, was the US’s Jeremiah Smith. Earlier attempts to have Roland Boyden, the US representative on the Reparations Commission, deployed to Vienna had been scuttled by the State Department.

Meanwhile S. Parker Gilbert, Mellon’s undersecretary at the US Treasury Department and later a J.P. Morgan & Co. partner, was installed as Agent-General for German reparations under the Dawes Plan.

The Polish government, recently turned over amid hyperinflation to the military strongman Jozef Piłsudski, also avoided League of Nations financial administration. Ignoring the imprecations of the Bank of England, Warsaw preferred oversight by a Wall Street ‘money doctor’.

The US ambassador in Warsaw had greeted Piłsudski, following his 1926 coup, as ‘the only man… who can prevent a Communistic uprising.’ Meanwhile he wrote to New York Federal Reserve Bank governor Benjamin Strong: ‘The net result of the revolution will be a strong and honest government which will lean towards America and American ideas rather than towards France.’

Upon consultation with Strong at the New York Fed, the new Polish government turned to the US economic advisor Edwin W. Kemmerer. Kemmerer and his ‘commission of American financial experts’ undertook a review of the Polish economy and its institutions.

Bank of England officials affected to find it ‘incredible’ that the Polish government would accept loan controls administered by  ‘a more or less irresponsible body of American bankers.’

The Kemmerer group’s policy advice for attaining ‘stability’ strayed far and wide: ‘As long as Poland’s international problems remain as they are … a strong army must, of course, be maintained.’

But above all, to stabilize its currency and return to gold convertibility, the Polish government was enjoined by Kemmerer’s experts to abandon its traditional reliance on French creditors:

Since the war the great bulk of the foreign loans floated throughout the world have been floated directly or indirectly in the American market; and this situation is likely to continue for some years to come. A large part of the world today is zealously seeking foreign capital. The United States is the principal source of such capital. A country that appoints American financial advisers and follows their advice in reorganizing its finances, along what American investors consider to be the most successful modern lines, increases its chances of appealing to the American investor and of obtaining from him capital on favorable terms.

Kemmerer was followed in Warsaw by US Treasury official Charles S. Dewey, who became a director of the Bank of Poland.

A 1927 publicity pamphlet written by John Foster Dulles for Bankers Trust read: ‘Polish stabilization is the first such operation to be realized under distinctively American leadership in all its phases.’

Poland loan 1927

Historians have drawn attention to how these ‘financial reconstruction’ programs, involving administration by external creditors, precociously anticipated features of later IMF structural-adjustment programs (compare, for example, the conditions imposed in Britain following its 1976 balance of payments crisis).

But installation of a debt-collection agency within the domestic state, staffed by foreign agents of the imperial powers and with the authority to directly control excise or customs revenue, might also be compared to the Chinese Imperial Maritime Customs Service, the Ottoman Public Debt Administration, or Greece’s International Financial Commission.

In 1922 the US State Department sent Arthur Milspaugh to Tehran as administrator-general of Persian finances; Jeremiah Jenks had travelled to China in 1904 to collect indemnities on behalf of the imperial Powers following the Boxer Rebellion.

Similar US outposts had been installed throughout the Caribbean basin and Central America over previous decades. The most notable case came from the Dominican Republic, where the Santo Domingo Improvement Company assumed the fiscal functions of state in 1893. Backed by warships, the Roosevelt administration took over Dominican finances in 1905.

Following this precedent, and after the announcement of the so-called Roosevelt Corollary to the Monroe Doctrine, US officials and New York bankers assumed administrative control of the customs houses of Nicaragua in 1910, Honduras and Guatemala in 1911, and Haiti in 1915.

In 1918 the Austrian economist Schumpeter had observed that ‘the budget is the skeleton of the state, stripped of all misleading ideologies’.

Thus Washington’s administrative control over the fiscal resources of its debtors, European as well as Latin American and Asian, allowed it to alter the substance of the domestic politics and internal social order of those countries.

German aspirations for a continental Mitteleuropa were thus exposed as idle daydreams, as were French hopes for a Europe threaded together by the loans of Société Générale and the Parisian bourse.

In 1927 the poet Paul Valéry observed mordantly: ‘Europe visibly aspires to be governed by an American commission. Its entire policy is directed to that end.’

September 1924 - S. Parker Gilbert - Agent General for German Reparations

In January 1923 a British delegation, led by Chancellor Stanley Baldwin and the Bank of England’s Montagu Norman, travelled to Washington to negotiate a settlement of Britain’s sovereign liabilities with Treasury Secretary Mellon and the World War Foreign Debt Commission.

Lloyd George remarked:

A business transaction at that date between Mr. Mellon and Mr. Baldwin was in the nature of a negotiation between a weasel and its quarry. The result was a bargain which brought international debt collection into disrepute… [This] crude job jocularly called a settlement, was to have a disastrous effect upon the whole further course of negotiations on international War Debts. The United States could not easily let off other countries with more favourable terms than she had exacted from us… Equally the exorbitant figure we had promised to pay raised by so much the amount we were compelled to demand from our debtors… I cannot help saying that I think in this matter of Debt Settlements Great Britain has had very shabby treatment, and had Great Britain been the creditor… I should have been a little ashamed as a Britisher if we had treated in this fashion a country so closely linked with ours in language, history and race.

Mellon boasted of having ‘made for the United States the most favourable settlements which could be obtained short of force… The only other alternative which they might urge is that the United States goes to war to collect.’

At this time, the US, UK and Japan were in fact engaged in an arms race. Each rival power was frantically increasing the size of its naval fleet, in particular capital ships.

Washington used its position as global creditor to demand that its European debtors reduce their military spending.

Hoover deplored how Allied governments were channelling national resources towards armaments instead of repaying wartime debts to the US Treasury: ‘loans that are dissipated… in military expenditure or in unbalanced budgets, or in the bolstering up of inflated currencies, are a double loss to the world.’

Following the 1922 announcement of the new policy on State Department oversight of external investment, Hoover explained to Benjamin Strong of the New York Federal Reserve Bank that a ‘governmental interest lies in finance which lends itself directly or indirectly to war or to the maintenance of political and economic stability’:

We are morally and selfishly interested in the economic and political recovery of all the world. America is practically the final reservoir of international capital. Unless this capital is to be employed for reproductive purposes there is little hope of economic recovery. The expenditure of American capital, whether represented by goods or gold in the maintenance of unbalanced budgets or the support of armies, is destructive use of capital. It is piling up dangers for the future of the world…

The most pertinent fact with regard to Europe today is that the whole political and economic life is enveloped in an atmosphere of war and not of peace. Restrictions on loans made from the United States to reproductive purposes will at least give the tendency to render impossible that form of statesmanship which would maintain such an atmosphere.

The Washington Naval Conference was held from November 1921.

There, the Five-Power Treaty (which included France and Italy) imposed limits on construction of new capital ships (aircraft carriers) while in the Four-Power Treaty the state parties (UK, Japan, US and France) agreed on bases and territorial possessions in the western Pacific. The Nine-Power Treaty sought to hold other powers to the terms of Washington’s Open Door Policy, forbidding dismemberment of China.

The combined outcome reduced the relative weight of British naval power, and broke the Anglo-Japanese naval alliance in the Pacific.

In 1923 British military spending fell by £50 million.

Meanwhile US-British strategic rivalry proceeded along several fronts.

An Anglo-French condominium (established through Sykes-Picot, the San Remo conference and secret protocols to the Treaty of Sèvres) had divided the oil-rich territory of the former Ottoman Empire and excluded US interests.

British armed forces had captured Mosul after signing the armistice with Turkey.

Lloyd George’s Cabinet Secretary Maurice Hankey had noted that ‘oil in the next war will occupy the place of coal in the present war, or at least a parallel place to coal’:

The only big potential supply that we can get under British control is the Persian and Mesopotamian supply. [Therefore] control over these oil supplies becomes a first-class British war aim.

‘I do not care under what system we keep the oil’, Lord Balfour had said of northern Mesopotamia and Iraqi Kurdistan in 1918. ‘But I am quite clear it is all-important for us that this oil should be available.’

The ‘system’ settled upon was a British League of Nations mandate over Mesopotamia, and the enforcement of an oil exploration and production concession granted in 1914 by the Ottoman government to the Turkish Petroleum Company (in which Anglo-Persian held a 50% stake, Royal Dutch Shell 25%, and the remaining 25% formerly held by Deutsche Bank was re-allocated after the war to the French government).

The US State Department was naturally displeased by the Anglo-French monopoly, seeking to open the region to investment by US-owned oil firms.

Secretary of State Frank Kellogg remarked to the Navy Secretary:

In view of our probable future dependence upon foreign reserves of petroleum, the importance of keeping the Government of the United States in a position consistently to support and assist American interests… will be appreciated.

Open Door principles of equal commercial opportunity were thus invoked, while Allen Dulles of the State Department’s Near Eastern Division insisted that the Turkish Petroleum Company’s concession was invalid.

In September 1919 Standard Oil of New York (Socony) sent geologists to undertake exploration in Mesopotamia:

One of them incautiously sent a letter to his wife telling her “I am going to the biggest remaining oil possibilities in the world” and “the pie is so very big that whatever had to be done should be done to gain us the rights which properly belong to American citizens.

The British Foreign Office intercepted the letter and the geologists were detained in Baghdad.

Several years of diplomatic acrimony followed between Washington and London. By October 1920 the British ambassador in Washington commented: ‘At the moment there is an hysteria of hatred against England and all her works.’

Throughout early 1921 the Foreign Office’s intransigent response to US State Department appeals continued. But in mid-1921 members of the British political elite suddenly decided to accommodate US oil interests in Iraq.

Cabinet declared that: ‘Britain cannot quarrel with the United States.’ Winston Churchill wrote to Lord Curzon that ‘so long as the Americans are excluded from participation in Iraq oil we shall never see the end of our difficulties in the Middle East… The importance of reconciling American oil interests… is so great that we may well pay a high price for it.’

In March 1922 Stanley Baldwin personally met the president of New Jersey Standard Oil, and Cabinet agreed to send John Cadman as Whitehall’s envoy to the US to arrange a deal.

Following extended negotiations, Standard Oil of New Jersey, Socony and Gulf Oil were granted an equity stake (a combined 23.75%) in the Turkish Petroleum Company (renamed the Iraq Petroleum Company).

Iraq petroleum company pipeline

But this obviously was a pragmatic and limited retreat by the British empire  reculer pour mieux sauter  rather than a broad assent to Open Door principles that might further crack open the British and French spheres of influence to US firms.

Plainly it was not true, as Keynes claimed, that since the war the United States could ‘influence the international situation’ to suit itself.

The British, French and other colonial empires still remained as exclusive economic zones. Meanwhile the gold-exchange standard agreed at the 1922 Genoa Conference had retained the role of the pound sterling as a reserve currency.

As suggested by Keynes’s opening quotation, this conferred privileges on the City of London and authority on the Bank of England, and partially immunized Britain from balance-of-payments problems.

Between 1870 and 1914 the international payments regime, nominally a gold standard, had effectively been a ‘sterling exchange standard’, with foreign governments holding much of their external balances in sterling reserves, and international payments settled using British state liabilities and adjustments to the London discount rate.

‘Pax Britannica’, said Polanyi, frequently ‘prevailed by the timely pull of a thread in the international monetary network’, with London sucking in capital flows through a tweak of the discount rate.

But during the 1920s London and Paris faced balance-of-payments pressures that they had avoided during the Belle Époque.

With the British and French states now struggling, by the mid-1920s, to maintain convertibility of their debt into gold at a fixed rate, their currencies lost safe-haven status and automatic acceptability as a means of payment. Unchallenged pre-eminence as world financial intermediaries and sources of credit was also lost.

The political authority of the Bank of England and Banque de France in European capitals was reduced as European borrowers, traditionally reliant on loans underwritten and floated in London by Barclays or in Paris by Société Générale, now turned increasingly to Wall Street investment houses to secure financing.

British and French involution thus heralded, for the US business and political classes, a glorious morning of national extroversion.

What hitherto had been domestic agencies like the Federal Reserve Bank of New York suddenly acquired an international policy reach, expanding their perimeter of influence to Warsaw and Budapest, as well as Tehran and Bogotá.

Across central and eastern Europe during the mid-1920s, currency stabilization, emergency loans and ‘reconstruction’ programs allowed US officials and economic advisors to take over administrative functions of debtor states (e.g. Horthy’s Hungary, Piłsudski’s Poland) that, a few years earlier, had faced the threat of socialist revolution and now were bulwarks of anti-Bolshevism.

Washington was thus able to affect the balance of forces within the propertied classes and governing elites of other countries.

US rulers could encourage the British and French states to promise to maintain convertibility of their debt into gold at a fixed rate, then watch as their governments enacted the wrenching policies needed to defend gold convertibility. (During the 1920s the Federal Reserve sterilized gold inflows, inflicting deflationary pressure on other economies.)

In 1920s Britain, as described by Keynes, deflation expressed the social supremacy of banks, financial institutions and the saving classes over the interests of borrowers  industrial and commercial firms  and their employees.

The result of credit restriction, besides stuffing money ‘into the pockets of the rentiers’, was that during Britain’s interwar years net additions to the stock of productive fixed capital (buildings, equipment, machinery) were meagre.

Capital intensity in interwar Britain

Since a higher level of output per unit of capital, alongside a lower share of value-added going to wages, raised profits, the domestic propertied classes were satisfied with this arrangement and a stable elite coalition persisted in Britain as it did not throughout much of Europe.

Interwar British profit rate

Yet the absorption of the surplus product by unproductive expenditure (dividends, interest payments, luxury consumption, etc.) prevented investment in new technology and impeded productivity growth.

Britain’s postwar technological backwardness would have lingering effects, the absence of an advanced and large-scale capital-goods sector (and the export weakness and chronic external deficits that resulted) providing an enduring economic basis for London’s ever deeper military-political submission to Washington.

The events of the 1920s would have lasting consequence for all the European powers that had been left weak by accumulated wartime liabilities and the social crises of the immediate postwar years.

In conditions that approximated Washington’s later imperial tutelage of ‘less-developed’ countries, personal connections were established and ideological affinities were cemented between a generation of US and West European financiers, businessmen, lawyers and state officials.

Individuals like John Foster Dulles, Jean Monnet, John J. McCloy and Dean Acheson  the first two of whom met at the 1919 Paris Peace Conference then worked intimately together in 1927 on a Polish stabilization loan underwritten by Bankers Trust and Chase National  would later emerge during the 1940s as eminences of the Atlantic alliance and ‘the father of Europe’ (Monnet).

John Foster Dulles funeral 1959

It would take the Second World War, the Atlantic Charter, Lend Lease and the Bretton Woods agreements (if not the Suez Crisis) before the institutions of world capitalism were finally remade to fit the designs of the US propertied classes.

But the 1920s laid solid foundations for Roosevelt’s later renovation: establishing circuits of financial, productive and commercial capital, and nurturing the personnel (technical advisors, diplomatic officials, etc.) and the intra-elite channels that would eventually guide Bretton Woods negotiations, the Marshall Plan, NATO, the European Coal and Steel Community and the Treaty of Rome.

Here, in the years of so-called isolationism, was the seedbed for the protection racket established after 1945, and never dissolved.

In this latter development, the other advanced capitalist states of Europe and East Asia were subordinated within a US-controlled Cold War military and security ‘alliance’: a hub-and-spokes network of ‘partners’ in which Tokyo was reduced to a diplomatic underling and European strategic goals could find no independent expression, being corralled within NATO integrated command.

Dean Acheson NATO


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2 Responses to “Short of force: US debt diplomacy in the 1920s”

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    […] World capitalism’s discarding of a metallic standard to underpin its monetary system was an index of the strength of one imperial state. […]

  2. Swimming in it | Churls Gone Wild Says:

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