4. 1917-1930, Inter-Allied debts after World War I

The USA lent about $10 billion to the Allied powers during and after the First World War, a debt which was never fully repaid or officially cancelled. Today it would be equivalent to $245 billion.

At the end of World War I, many European countries were deeply indebted to the United States and England. England itself was also indebted to the United States. The French government was trying to get payment from Russia to pay its own debt to the US, while England and the other victorious nations were piling pressure on Germany to pay for war reparations. Germany was forced to print more money to keep its economy going, but this created extreme inflation, followed by resentment and radicalisation of the German population, paving the way to Hitler’s national-socialist murderous regime.  

Meanwhile, the USA had become Europe’s main creditor. Its economy was boosted by the early phase of industrialisation, so productivity was high. Investors were living the dream, spending and borrowing lavishly. There was little oversight on bank loans, so it was easy to make risky or fraudulent investments with capital borrowed from small banks that  were indebted to other banks. This system made a few people extremely rich, while factory workers, by then the majority of the working class, remained quite poor. Eventually, this system led to an excess of production. Goods were produced, but not enough people were buying them. This, in short, were the causes of the 1929 financial crash, and the few years that followed are known as the Great Depression. Millions lost their jobs and their savings. Regular people turned to homelessness in a matter of weeks. It became nearly impossible to obtain credit or find a job with decent pay. 

The effect of this crash outside of the US was enormous, especially in Germany, because Europe depended on loans from US banks, and the US suddenly stopped handing out loans. So the ripple effect passed the Atlantic and more millions lost their jobs, resulting in mass protest and anger towards the elites. Hitler came to power in 1933 and turned that anger into dogmatic and violent fanaticism. In Spain and Italy, fascist regimes took over. 

The US government tried to contain the debt crisis and declared a moratorium on debt payments, so European countries could stop paying their debts to the USA for a few years. In 1934, the moratorium came to an end and the payments of debts inherited from World War I had to start again. But something else happened. The eighteen countries indebted to the USA simply stopped paying, including France, Belgium, Germany, Poland and Hungary.   

They went into default. Struggling with mass unemployment and failing banks, payment of debt owed to US bankers was a low priority. A common opinion was that the debt had been paid in blood and that US capitalists had made enough money on the back of the war. 

This episode is shadowed by World War II, which started just a few years later. The USA never asked for these debts to be repaid, and the economies of debtor countries were significantly lifted by this debt “oversight” in the long term. According to Carmen Reinhart, this collective default was the debt relief that made an economic rebound possible after World War II. The total total debt relief represented 20% of the average Gross Domestic Product (GDP). A few years after the default, the average GDP grew by the same percentage. Reinhart compared the positive effect of this 1934 default to the lackluster results of debt relief granted by the World Bank and the IMF to developing countries from the 1980’s to the 2000’s, concluding that without a complete erasure of the debt from public accounts, debt relief is not effective in the long term. 

This article is the fourth in a series dedicated to the timeline of debt cancellations in history.