During the 1920s, the problems of Europe seemed far away to most Americans and unrelated to their lives. In retrospect, we can see that such an attitude was naive and counterproductive. The future might have been different if Americans had given more thought to its role in the world economy. Nevertheless, America could not completely ignore two problems that dominated the international scene: German war reparations (and Allied war debts to the United States) and the reestablishment of the international gold standard.
As noted in chapter 21, the Treaty of Versailles, which formally ended World War I, called for Germany to make large payments to France and the other Allies to compensate for damages caused by German forces during the war. It quickly became apparent that Germany lacked the economic strength and political commitment to make its payments on schedule. The question of what to do about Germany’s unpaid reparations would vex policymakers throughout the 1920s. In 1923, French and Belgian troops occupied the Ruhr valley because Germany had failed to make its scheduled payments. In 1924, under the Dawes plan—the commission that proposed the plan was headed by American Charles G. Dawes—France and Belgium left the Ruhr valley, Germany was given more time to pay its reparations, and a large loan, mostly from the United States, was floated to help Germany restore its economy and make its debt payments. In the late 1920s it became clear that the Dawes plan would not be enough. Under the Young plan of 1929—this commission was headed by American Owen Young—Germany’s reparation payments were scaled back. During the early 1930s further attempts were made to relieve Germany’s reparations burden, but the deteriorating economic situation and the rise of Hitler soon made these efforts irrelevant. Most historians now agree that trying to extract reparations from Germany was a mistake and that a wiser policy would have aimed at restoring the German economy as rapidly as possible, the policy followed after World War II.
It was taken for granted in the 1920s that restoration of the gold standard was necessary to achieve lasting prosperity. If each country made its currency convertible into gold, exchange rates would be fixed, monetary authorities would be forced to limit the amount of money they created (to avoid an outflow of gold), and inflation would be prevented. British bankers were particularly anxious to return to the gold standard at the prewar parity (i. e., the prewar price of pounds in terms of dollars) to help restore the position of London as the world’s leading financial center. Britain finally did return to the gold standard in 1924, but it appears that the pound was overvalued at the prewar rate. (The rate was $4.86 per ?1.00, but the equilibrium price where supply and demand for pounds would balance was probably less, say, $4.40.) The high rate made it hard for Britain to export goods and contributed to a long period of hard times in Britain.
Winston Churchill was the chancellor of the exchequer (similar to our secretary of treasury) at the time and responsible for this decision. Just as John Maynard Keynes had warned against imposing reparations on Germany in The Economic Consequences of the Peace (1920), he now warned against restoring the pound at its prewar value in The Economic Consequences of Mr. Churchill (1925).
The pressure on British exports would have been lessened had the United States been willing to let the resulting influx of gold increase its price level, but the Federal Reserve chose instead to “sterilize” the gold inflows. In retrospect, considerable difficulties might have been avoided had American policymakers seen the importance of taking into account the international repercussions of their actions. American monetary and fiscal policies during the 1920s, however, were influenced primarily by domestic considerations, and (except in the agricultural sector) things seemed to be moving smoothly.
World History
