Finest Hour 153, Winter 2011-12
The Truth about War Debts
“This is no time forcing a faithful debtor into extreme courses, and I believe that, in spite of the frenzied oratory of ebullient backwoods senators, moderate opinion in america recognizes the fact. Still less is it a time when the English-speaking peoples should fall out.”
By Winston S. Churchill
This article evolved from “The Bond Between Us,” Churchill’s similar piece for Collier’s in November 1933 (Cohen C411). It contains substantially the same words, although the Collier’s article is longer, remarking on the failure of the then-recent World Economic Conference. Since Churchill was an indefatigable reviser, we offer this version as his “final draft,” but “The Bond Between Us” is available to readers by email from the editor. In sending “The Bond Between Us” to Collier’s editor William Chenery, Churchill wrote: “There is no doubt that this Economic article is like a soufflé. It must be served while hot.”
Like many other people over here, during the last year I have watched with interest and sympathy the efforts made by President Roosevelt to restore prosperity to the United States. I am an ardent admirer of the main drift and impulse which he has given to the economic and financial policy of America.
I should have liked, however, to see the reduction in the gold content of the dollar taken as part of a bargain with Great Britain, so that all the prestige of the two great financial countries could be enlisted behind the new unit of values.
This would also serve as a safeguard against a very vicious tendency which is now rife in the world, and which has queered the pitch of trade and darkened counsel during the last twelve months. This is the desire to use depreciated currencies as a means of fostering external trade, which reproduces tariff wars and tariff obstructions in a new and far more delicate sphere of international commerce.
The competition of great communities to reduce the nominal values of their currencies to the lowest point would be a form of folly, as near akin to madness as castaway mariners on a raft lapping salt water in rivalry in the delusion that the winner would quench his thirst. A race between the leading commercial powers, to see who can make his currency valueless in the international market first, ought only to be held in some really large lunatic asylum.
There must be a stable unit of value and exchange between the great trading nations. The people have a right to ask this from their rulers. If gold through its misuse or hoarding has ceased to be available for that high function, all the more vital is it that the leading currencies should be harmonized and interwoven.
e have broken free from gold. America has broken free from gold. Gold soars upward on the wings of panic. But where are we to find a resting-place for the soles of our feet? Surely in our own virtue and in the intrinsic value of our new efforts; in the faithful conduct of our finances and in the association of our joint strength and reputation. The only alternative is that we wall ourselves up in our respective pens like the old robber barons in their feudal castles.
Turning to another aspect of the American recovery drive, although I cordially agree with and acclaim the Roosevelt policy of raising wholesale prices to the levels of normal years, it is impossible not to feel a grave anxiety— for we are all to a large extent in the same boat—about his policy of controlling all the businesses of the United States and regulating so minutely and in such a short time the delicate interplay between capital and labour.
But when it comes to shortening the hours of labour in a time of unparalleled unemployment, one feels that the President is again marching along the high road of national and international salvation.
We speak of the improvement of modern machinery as “labour saving.” What does “labour saving” mean? Does it mean simply that some labourers are to work as long and as hard as ever, while millions of others are to be told that they will never be wanted again? If so, machinery and invention would be a curse to the wage-earning classes, and we might well ask: “Where were the Luddites wrong when they riotously destroyed the new engines which were destroying them?”
But if “labour saving” means that the wage-earning masses are, with the aid of machinery, to make the same amount of things for something like the same wage in a shorter time, and have more leisure, then indeed will machinery and invention be a gift and a blessing to mankind.
Upon these vast and vital topics we know, at least roughly, President Roosevelt’s views. But there is another question, comparatively petty, perhaps, in the estimation of Americans, but of considerable importance to us, and in many ways ugly and irritating—the question of war debts. I have always believed that they lie at the root of our troubles.
The attempt of the victorious Allies to obtain enormous payments from Germany was bound to fail. No people can establish a large permanent lien on the future production of another. Not less injurious and crazy was the effort to liquidate these vast obligations through the agency of the poor little stocks of world gold.
Debts can only be paid across frontiers in goods or services, and if these cannot be received without injury to native industry, they are frankly irrecoverable. We have seen the exchanges of the world disorganized, and gold disqualified as a standard of measurement by the endeavour to use this scarce yellow metal to discharge the gigantic obligations so airily chalked up by credit.
One thing is clear: No European country is going to pay any war indemnities or war debts except England, and the question is: “How much will England pay?”
It is idle for the United States or Great Britain to expect the slightest repayment from Germany. Since the War Germany has borrowed to the utmost of her capacity without apparent intention of repaying either on
public or private account. The present regime in that country would glory in the fact that, though Germany lost the War, at any rate, she got £500,000,000 on the balance out of England and America as compensation for her losses.
If Germany does not pay, France and Italy will not pay what they owe either to Great Britain or to the United States. Thus it all comes back to England.
And what should England do? Let us suppose for the moment that the United States decided to remain oblivious of all that has taken place in Europe and the world. That is, in effect, the advice which has been given to the United States Government, within the last few weeks, by certain eminent politicians. Let us suppose they were to take it and to say:
“What is it to us that all your debtors have failed you? That is your affair. We rest upon your honour and your contracted faith. All the more, because these others have defaulted us as well as you, must we come down on the one faithful debtor. Your good faith will cost you dearly; but we admire you very much. It is a fine thing to have such firm principles in this dissolving world.
“Pay us therefore everything you owe according to the letter of the bond. Even the shot and shell fired to cover the employment of armies on the common front; even the excess profits collected by us from the American manufacturers who supplied you with munitions.”
Let us suppose for a moment that a thing like this happened. Let us further suppose—and it is a big supposition—that England accepted the situation. What would she have to do in order to pay the full amount of her war debt to the United States?
It is no use Americans arguing, “She can well afford to pay. At the moment she is better off than we.” Both these statements would be true. The question is not the ability to pay, but the method and the consequences of payment, across the exchanges and across the ocean.
We are the greatest customers of the United States. We buy every year from them between three and four times what we sell them. Our adverse balance is liquidated by shipping tropical products, by roundabout trade, and by the interest upon our own private investments in the United States, or in countries trading on favourable terms with them. Many experts think that, even so, the annual balance is adverse to us, and is running us subterraneously into further debt.
But on the assumption I am now making we should have to pay between forty and fifty millions sterling per annum over and above the ordinary adverse balance of trade between the two countries. How could we do this? Obviously, only in one way. We should have to reduce our purchases from the United States as much as we possibly could in order to save a margin for repayment of the war debts.
First of all these is tobacco. Many millions of pounds’ worth of American tobacco are imported every year; we could certainly do without this. If it came to a choice between our obligations and our tobacco, the tobacco would have to go. Our smokers would have to make shift with the supplies they could get from the British Empire or from Egypt and Turkey.
The same argument would cover motorcars and luxuries of all kinds. But there are certain commodities—cotton, for instance—which, whatever else happens, we must buy from the United States. Here the problem would become one of collecting dollars on this side of the Atlantic which could be remitted westward in payment of our debt.
But if Lancashire is mainly dependent upon American cotton, the cotton States also find in Lancashire their main market. The crop has to be grown each year, if millions of Americans who depend upon it are to live.
We might therefore place a surtax upon all American cotton entering Great Britain and remit its whole yield in the shape of dollar credits to New York. We could, of course, indemnify our own cotton spinners in the remission of taxation or in some other form of local currency. This is substantially the manner in which, up to the Lausanne Conference of 1932, we collected the reduced indemnity which Germany had agreed to pay us.
By thus on the one hand reducing our purchases from America and buying from other countries to whom we were not already debtors, or doing without in all cases of luxury, and on the other hand by levying a surtax in dollars on American importations at the ports, we could accumulate the dollar credits—or a great part of them—necessary for the half-yearly installments of the debt.
Such a process would be equally injurious to both countries, and it could not fail to raise an increasing friction between them. So the act of President Roosevelt, in declaring last May that the token payment of two million pounds by Great Britain in lieu of about twenty million did not constitute a default, was alike bold and sagacious.
It was courageous because it faced the difficulty of making the ordinary public understand that vast debts between nations cannot be treated like the ordinary indebtedness of private life. You can distrain upon the goods of an individual citizen, but you cannot put nations in the county court and get a bill of distress upon their furniture.
Secondly, the process of payment of the debts of individuals, whether in a country or across an exchange, has no relation to the process of payment of the vast obligations arising out of the Great War. These can only be paid in goods, services, or gold, the first two of which are not wanted, while the third is neither wanted nor, except fractionally, available. So President Roosevelt’s act was sagacious because it comprehended the realities of international trade.
We are drawing nearer in time to another crisis of the Anglo-American debt settlement. It would be a matter for general rejoicing if we could say that we were nearer than we have ever been to a settlement on the merits. It is of great consequence to the world that Great Britain and the United States, the two supreme creditor nations, should adjust their difficulties in such a manner as not to make repudiation of the written bond almost universal throughout the globe.
It is astonishing how countries which have defaulted have seemed to thrive. Germany, after her mark had gone to the moon, was able to borrow again almost immediately. France, who has devaluated her franc to one-fifth of its prewar value, and has bluntly refused to pay her war debts, already conceives herself in a position to lecture her disappointed creditor, the U.S., upon financial orthodoxy.
This is no time for forcing a faithful debtor into extreme courses, and I believe that, in spite of the frenzied oratory of ebullient backwoods senators, moderate opinion in America recognizes the fact. Still less is it a time when the English-speaking peoples should fall out.
It is a time for practical measures. It is a time for settlement; and it is a time when the two countries’ real and lasting interests, which lie beneath the surface of things, should be understood. Is it too much to hope that, taught by the pressure and anxieties which grip the whole world, a sense of common self-preservation and mutual support will inspire the British and American peoples and enable them, during the next few weeks, to achieve an amicable, economically possible and final settlement of this vexed question of the war debts, and thus clear the way for a fuller and more complete cooperation between them in the difficult and perhaps fateful years ahead?
First published in Answers, 17 March, 1934 (Cohen C422.) Republished in volume form in The Collected Essays of Sir Winston Churchill, vol. 2, Churchill and Politics (London: Library of Imperial History), 313-17. Reprinted by kind permission of the Churchill Literary Estate, Randolph S. Churchill and Curtis Brown Ltd.