America’s economy may have overtaken Britain’s in the late 19th century. But it took the first world war for British politicians to begin to understand the consequences, and longer still to come to terms with the loss of global financial leadership.
Waging war and maintaining an empire becomes increasingly difficult if a country relies on the kindness of strangers to fund its debt. For the early stages of the first world war, Britain could delude itself that its financing of the conflict was broadly neutral in terms of international debt obligations, as it was both a lender and borrower.
And yet there was a critical difference: the UK was primarily lending to Russia and France, while borrowing from the US. Russia reneged on its debts following the 1917 revolution and France came out of the war linking its ability to pay to the receipt of German reparations, which despite the occupation of the Ruhr industrial region and numerous agreements in principle, were rarely forthcoming.
That left the US as the major creditor. But despite having played a major role in ending the war, the US had decided to opt out of the peace. Congress won its battle with an ailing President Woodrow Wilson and refused to ratify the Treaty of Versailles. And the incoming Republican administration of Warren G Harding was elected on a platform of “America First”. It wanted its money back. But it was also determined not to become embroiled in European affairs. These two objectives were hard to reconcile, as future presidents who have wanted to retreat from Europe have found to this day.
The debt negotiations of the 1920s are a dry and impenetrable subject. But Jill Eicher, herself a former US Treasury official, has found a way of bringing them to life by focusing on two of the main protagonists: Andrew Mellon, the US Treasury secretary from 1921 to 1932, and Winston Churchill, Britain’s chancellor of the exchequer from 1924 to 1929. As she puts it, “these two great intellects shaped moral questions . . . that their respective countries would confront again, and that the world still faces today.”
The two were very different characters. Mellon, a shy and reclusive banker, had been lending money since he began working in his father’s firm in 1874, aged 19. He retained the confidence of successive presidents. He was thoroughly orthodox, believing that the US had to reduce the national debt it had run up to support its allies and to pursue the war. But he was more flexible than his gaunt looks suggested: he knew that a creditor needed to focus on a debtor’s ability to pay and that sometimes the terms of a loan had to be eased to increase the chances of getting the money back.
Churchill by contrast was restless, ambitious and had a brilliant turn of phrase. He had little business acumen, and is remembered as an indifferent chancellor. However, he was quick to grasp the economics of Europe’s postwar debt position, arguing that “as long as these colossal debts hang over the world . . . its trade will be gravely and grievously restricted”. He also understood the politics: the idea that the US had a moral obligation to cancel its war debts was always likely to appeal to the British electorate.
The wrinkle in Eicher’s engaging story is that it wasn’t Churchill who did the deal with Mellon on Britain’s debt in 1924 but a previous chancellor but one, Stanley Baldwin.
Baldwin, influenced by Bank of England governor Montagu Norman, thought that Britain’s financial credibility rested on accepting its obligations and repaying its debt. Churchill may not have liked the deal but, to fulfil his ambition of becoming chancellor, he had to accept it since Baldwin was now prime minister. And, ironically, Churchill was to compound the problem by accepting Norman’s advice to return sterling to the gold standard at prewar parity, an act of Treasury orthodoxy he was to regret to the end of his days.
In the end, the terms of the debt agreement proved irrelevant. Germany suspended reparations in 1931 and France defaulted on its debt the following year. An agonising 18 months later, a British government, led in all but name by Stanley Baldwin, defaulted on its debt to the US: its first and last default since the 17th century.
Fortunately, when it came to financing the second world war, the US and a Churchill-led Britain were quick to learn the lessons. Britain accepted its subordinate financial status. The US recognised its role in guaranteeing European peace, and that co-operation rather than confrontation was the best route to economic stability. Present-day administrations on both sides of the Atlantic may find this book instructive.
Mellon vs Churchill: The Untold Story of Treasury Titans at War by Jill Eicher Pegasus Books £22/$32, 368 pages
Nicholas Macpherson is a former permanent secretary at the UK Treasury
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