International debt accounts were deteriorating. Nations, like families, couldn’t pay their bills. In the early 1930s, European nations owed the U.S. roughly $11.5 billion in World War I debt (about $165 billion in 2011 dollars), chiefly for food and war materiel.
And Germany, penalized under the Treaty of Versailles for war aggression (a much-disputed claim), initially owed $64 billion in gold as reparations, a sum reduced to $27 billion in a 1929 revision. In theory, Germany's payments to France or Britain could be shipped to the U.S., reducing war-loan balances. But German payments were slow and small, and the arrangement fell apart after the stock-market crash of 1929.
By mid-1931, fear spread that Germany’s economy and government would collapse. Defaults could spiral across Europe.
President Herbert Hoover thus proposed in July of that year a "postponement during one year of all payments on intergovernmental debts, reparations, and relief debts, both principal and interest.” Stock prices leapt upward “all around the world."
In France, politicians objected loudly, and the Senate overwhelmingly condemned the scheme. Given their depressed economies, France and Britain needed German gold marks to fund payments to the U.S. If Germany was going to cut or postpone reparations to the European victors, the victors’ obligations to the U.S. would need to be rearranged or rescheduled.
If the U.S. had been willing to forgive war debts, Europe’s crises would have lessened -- but this didn't happen. Congress still agreed with President Calvin Coolidge’s 1922 comment: “They hired the money, didn’t they?”
Now, with Hoover’s proposal that the U.S. would at least postpone bills due, the French leadership overrode parliamentary objections and signed on. On Aug. 11, 18 nations confirmed the payment suspension.
But soon after, Berlin’s great Danat Bank closed its doors, signaling the German economy’s distress, and markets began deteriorating once again. Too many cracks had appeared in the global economic structure for one gesture to reverse contraction, deflation and disarray. By fall, international commercial payments began freezing up, as governments and central banks curtailed foreign-exchange transactions, declining to convert local currencies into dollars or pounds to pay overseas bills.
Hoover's moratorium was too little, too late.
(Philip Scranton is a Board of Governors Professor of the History of Industry and Technology at the University of Rutgers at Camden and the editor-in-chief of Enterprise and Society. He writes "This Week in the Great Depression" for the Echoes blog. The opinions expressed are his own.)
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