From Colony to Superpower: U.S. Foreign Relations Since 1776 (75 page)

The problems were monumental. The war had wreaked massive physical and emotional destruction across the Continent, stoking the enmities that had provoked conflict in the first place. Angry at their defeat and the victor's peace imposed on them, Germans were not disposed to cooperate. Disappointed with Anglo-American refusals to provide firm security guarantees against a German resurgence, France sought to use economic pressure
to keep Germany at heel. Overshadowing everything else, and standing as insuperable obstacles to reconstruction, were the $33 billion in reparations Germany was required to pay the Allies and the $27 billion in war debts owed by the Allies, $10 billion to the United States. Viewing reparations as a means to keep Germany weak and under control, France demanded full payment. Germany adamantly retorted that the amount of reparations imposed on it far exceeded its ability to pay. The British linked the debts owed them with those they owed the United States, building a united European front on this issue. The Allies naturally claimed that since such debts had been incurred in a common cause—the United States had paid mainly in dollars, they in blood—they should be scaled back or canceled altogether. They linked war debts and reparations, insisting that they could not grant relief to Germany without relief themselves.
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It would take another devastating world war to demonstrate that economic generosity could be the height of political realism, and Americans in the 1920s could hardly be expected to see this. To be sure, some international businessmen and bankers and diplomats such as Alanson Houghton, former Corning Glass magnate and Harding's ambassador to Germany, perceived in terms of war debts and reparations that expediency would be the better part of wisdom. But most U.S. officials agreed with Harding that the dilemma for the United States was "how to assert a helpful influence abroad without sacrificing anything of importance to our people."
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American leaders were intent on protecting the domestic market from a surge of postwar European imports. Congress enacted high tariffs in the early 1920s and maintained them throughout the decade, making it difficult for Europeans to sell in the United States. United States officials also refused to take any step that required higher taxes. Republican leaders generally sympathized with the need to adjust German reparations schedules and recognized that war debts posed a huge obstacle to European recovery. But they also perceived that the solutions put forth by the Europeans would require high taxes at home. They believed that the war debts gave them some leverage in pushing Europeans toward the sort of settlements they viewed as necessary for proper reconstruction. They publicly denied a link between reparations and war debts. Congress underscored the political delicacy of the war debts issue in 1922 by creating a World War Foreign Debts Commission and setting a standard of 4.25 percent interest to be paid over twenty-five years. Because
of timid leadership, conflicts within the executive branch over what to do, and congressional constraints, the Harding administration refused to jump into the fray in 1921–22, closely guarding its freedom of action and permitting the situation in Europe to deteriorate dangerously.
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While Europe wallowed in torpor, conflict, and indecision, the United States gradually assumed leadership. Cooperating with private bankers on both sides of the Atlantic, British and U.S. officials worked out a debt settlement providing for payment over sixty-two years at a sliding scale of 3 to 3.5 percent interest. Some British leaders naturally complained, as Chancellor of the Exchequer Stanley Baldwin put it, that a tightfisted United States deserved a "replica of the golden calf." But most also conceded that such a settlement was essential for broader European recovery. Business and political leaders on both sides also recognized, as one American banker put it, that if the two countries could work together "the rest of the world would have a combination to whom they would have to pay attention." Congress acquiesced in a settlement more generous than it had mandated. The British passed on their savings to their debtors. The agreement set a precedent for further Anglo-American cooperation and facilitated subsequent settlement of the reparations problem.
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Hughes allowed the recalcitrant French and Germans to approach the brink of disaster before interceding. While rejecting U.S. efforts to reach a debt settlement, France continued to demand reparations from Germany. When Germany refused to pay, France and Belgium in January 1923 marched into the Ruhr, seized the coal mines, and extended the area of occupation. The Germans responded with passive resistance, putting huge strain on an already shaky French economy. The Ruhr occupation caused a deepening economic and political crisis in Germany—the mark fell to the lowest point ever reached by any currency to that time—raising the threat of a right-wing coup or, even worse in American eyes, a "Red Republic." The cost of the occupation drove the value of the franc down by more than 40 percent, making France amenable to U.S. pressure. Sovereignty was "dear to the hearts of the French people," banker Lamont shrewdly observed, "but the Franc was much dearer."
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With Europe on the verge of a major crisis, Hughes finally acted. The Ruhr occupation alarmed Americans as nothing to this point, even Senator Borah insisting that "bold and determined" action was required to avert "utter
economic chaos."
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Previously, Hughes had proposed that the reparations problem be turned over to a committee of experts to devise a workable and equitable solution. He now revived the proposal and applied intense pressure. With Hughes's backing, Lamont withheld a desperately needed loan until France agreed to liquidate the occupation and refer the issue to an independent commission. After nearly a year of crisis and with Europe on the verge of chaos, the two countries accepted Hughes's proposal.

The United States played a central role in resolving the tangle. The administration named Chicago banker Charles G. Dawes and Owen D. Young, a General Electric executive with close ties to the J. P. Morgan banking firm, to head its group of experts, closely monitored their work, and stepped in on occasion to mediate disputes. It was no easy task. A settlement had to be hard enough on Germany to satisfy Allied and particularly French concerns while soft enough to be acceptable to Berlin. The fast-talking and indefatigable Dawes—an "astounding human dynamo," one colleague called him—also had close connections to France from his wartime service in Paris and helped bring the French along.
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Young devised a flexible and ingenious plan, ironically one that would bear Dawes's name, that became a means not only to solve the intractable reparations problem but also to promote German recovery. The plan scaled back the reparations figure and started with small payments that increased as the German economy improved. By requiring recipients to buy German products, it also helped kick-start German recovery. Germany was provided a loan of $200 million and required to undertake reforms U.S. businessmen considered essential. Responsibility for payment was assigned to an American, S. Parker Gilbert, who in the process gained substantial influence over German finances. Hoover exulted in the "disinterested statesmanship" carried out by private American citizens and labeled the Dawes Plan a "peace mission without parallel in international history."
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Hughes strong-armed the Germans and still-recalcitrant French to go along. "Here is the American policy," he flatly informed French premier Raymond Poincaré. "If you turn this down, America is through."
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The deal was settled at a conference in London in the summer of 1924. Despite the reservations of some bankers, the American portion of the loan was snapped up in minutes. "How magnificent!" Lamont crowed.
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The United States also used its economic power to further the success of the October 1925 Locarno Conference, a political complement to the Dawes Plan. Recognizing that the reintegration of Germany into Europe through the reparations deal left France at a strategic and economic disadvantage, the United States sought to ease French security concerns. When negotiations for a European security pact stalled in the spring of 1925, Houghton, newly appointed U.S. ambassador to Great Britain, stepped in. Increasingly alarmed with the political instability in Germany and the Coolidge administration's timidity in addressing European issues, the ambassador, boldly acting on his own, issued during a May 1925 speech in London what came to be called the "peace ultimatum." If the Europeans did not move decisively, he warned, the United States might hold back further loans—American bankers were not interested in "speculative advances." Coolidge in time publicly backed his ambassador's position. Houghton played an important role in preliminary discussions leading to the conference. United States involvement thus abetted, if it did not determine, the agreements subsequently reached at Locarno. France, Belgium, and Germany consented to respect the boundaries drawn at Versailles, keep the Rhineland demilitarized, and refrain from attacking each other. Britain and Italy signed as guarantors. Germany also agreed to arbitrate with the new states of Eastern Europe its eastern boundaries. Locarno seemed to resolve major issues left over from Versailles and ease French security concerns at least a bit, providing some hope for European recovery and stability.
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The United States also secured war debt settlements with the Allies, but not without provoking ill will across the Atlantic. The ever cautious Coolidge administration walked a very fine line between its genuine concern for European recovery and fear of a taxpayer revolt. Continuing to skirt the terms set down by Congress in 1922, it established the principle of settling on the basis of a nation's capacity to pay and concluded a series of agreements more generous than that with the British. Seeking to woo Italian American voters and lure Italy from a united front with France, the administration negotiated with Benito Mussolini's government an especially generous settlement, a low interest rate canceling more than 75 percent of the debt.

France was a different matter altogether. Several members of the French parliament at one point proposed that the United States be given French Indochina in exchange for the debts, an ironic suggestion in terms of later history but a nonstarter on both sides. The French insisted more
adamantly than other Allies that their enormous sacrifices of blood and treasure entitled them to full cancellation. Economic and political chaos in France made it difficult even to initiate negotiations. A U.S. embargo on loans ultimately had the intended effect of forcing France to the bargaining table. French negotiators agreed to a settlement that would have canceled 52.8 percent of the debt. But French war veterans marched in protest, and angry citizens attacked American tourists—after they had completed their purchases, humorist Will Rogers sarcastically observed. Determined to stabilize the French economy without outside help and "to free ourselves of the yoke of Anglo-Saxon finance," Poincaré's government refused an American loan and began quietly paying off the debts without ratifying the agreement. More than any other issue, war debts poisoned U.S. postwar relations with the Allies. Proud Europeans deeply resented their new and humiliating dependence on the United States; even some Italians complained that the United States was trying to "enslave a whole continent." Viewing the debt settlements as generous, Americans took umbrage at French labeling of Uncle Sam as "Uncle Shylock."
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Despite these recriminations, the Republicans appeared to have accomplished much by 1926. The United States for the first time took the lead in addressing Europe's problems. It used its considerable economic leverage to settle the reparations issue, arrange debt agreements, and push the Europeans to stabilize their currencies on the basis of the gold standard. The policies seemed to have immediate, positive results. Near rock bottom just months before, the French and German economies rebounded. European production exceeded prewar levels. Exports increased sharply. As recovery continued, Americans reasoned, it would be easier to liquidate the debts. The reintegration of Germany into the European economy and the return of prosperity would provide a solid basis for prosperity, stability, and peace. All this had been accomplished, the Republicans could congratulate themselves, without political commitments or sacrifices on the part of the U.S. taxpayer.

Such assessments turned out to be premature, of course. Republican successes contained fundamental flaws.
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Americans exaggerated their own role in European recovery and underestimated the additional sacrifices they had imposed on already burdened Europeans. They failed to see the limitations of their policies and the need for continued adjustments or to appreciate the full extent of the war's impact on Europe or the real depth of resentments it stirred. They did not see that the Dawes Plan
had advantaged Germany at France's expense and that Locarno was at best an imperfect palliative. The economic arrangements relied too heavily on U.S. loans, whose continued availability in turn depended on an unreliable source. It seems obvious in retrospect that a truly successful American policy would have required lower tariffs, cancellation of war debts, and a more restrictive policy on loans. This was by no means obvious at the time, however, and if it had been it would still have been politically very difficult to obtain.

The United States played a much less significant role in addressing the vast problems of postwar reconstruction and nation-building in Eastern and Central Europe. Wilson had helped create the newly independent states there, of course, and his rhetoric and the vital wartime assistance provided by the American Relief Administration raised expectations on both sides that could not be met. Americans hoped that the new states would follow a democratic model and become outlets for their investment capital and markets for their products. Eastern Europeans looked upon the United States mainly as "the nation with money" and hoped for protection and assistance without interference.
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In reality, U.S. relations with Eastern Europe turned out to be a peripheral concern to each.
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The United States saw even less reason to get politically involved there than in Western Europe. It scrupulously avoided the numerous, complex, and volatile issues that divided peoples and governments against each other. Trade and investment developed to only modest proportions. Czechoslovakia's relatively democratic government and stable economy made it a good risk, and it attracted $85 million in U.S. investments, second only to Germany in the region. Ford, General Motors, IBM, and National Cash Register found major markets for their products.
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In contrast, the peoples who made up Yugoslavia were wary of foreign economic penetration, long a source of oppression, and their numerous, arcane rules governing trade—"the granite wall of stupid Serb unreason," one U.S. minister contemptuously labeled them—and their chaotic political and economic situation discouraged investors. The United States did negotiate with Yugoslavia a war debts settlement second only to its arrangement with Italy in terms of generosity. United States banks provided modest loans. Socony built an oil refinery in Croatia, Alcoa opened mines, and American Telephone and Telegraph
and International Telephone and Telegraph developed communications networks. But the most that can be concluded is that the United States played a role in the Yugoslavian economy.
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