¹ Keohane, Robert O., After Hegemony: Cooperation and Discord in the World Political Economy (Princeton: Princeton University Press, 1984)Google Scholar; idem, “The Demand for International Regimes,” in Krasner, Stephen, ed., International Regimes (Ithaca, N.Y.: Cornell University Press, 1983).Google Scholar

² For an excellent review of this literature, see Crawford, Vincent, “International Lending, Long-term Credit Relationships, and Dynamic Contracting Theory,” Princeton Studies in International Finance, no. 59 (Princeton: International Finance Section, Princeton University, 1987).Google Scholar For a review of functional theories of international regimes, see Haggard, Stephan and Simmons, Beth A., “Theories of International Regimes,” International Organization 41 (Summer 1987), 506–9.CrossRefGoogle Scholar

³ This was a coercive strategy to force German debt repayment through military occupation of the Ruhr valley in the early 1920s.

⁴ Despite several instances of a “perceived need” to cooperate in international economic affairs, the interwar years generally offered few innovations in international economic organization. See Clarke, S. V. O., “The Reconstruction of the International Monetary System: The Attempts of 1922 and 1933,” Princeton Studies in International Finance, no. 33 (Princeton: International Finance Section, Princeton University, 1973), 3Google Scholar; and idem, Central Bank Cooperation, 1924–31 (New York: Federal Reserve Bank of New York, 1967).

⁵ See Frieden, Jeffry, Banking on the World: The Politics of American International Finance (New York: Harper and Row, 1987), 63–64.Google Scholar For the IMF comparison, see Gardner, Richard, Sterling-Dollar Diplomacy in Current Perspective (New York: Columbia University Press, 1980), 110–44.Google Scholar One of the few international organizations to survive the Second World War, the bank is now estimated to hold between 10 and 15 percent of global monetary reserves on behalf of its member central banks, from which it provides short-term bridge loans to a member whose currency is under severe pressure. It has cooperated closely with the International Monetary Fund since 1978 by accepting special drawing rights deposits, and twice in the 1980s it granted credit facilities to the IMF. The BIS has also been instrumental in coordinating financial regulations, particularly capital adequacy requirements, within the markets of its members. See Kapstein, Ethan B., “Resolving the Regulators' Dilemma: International Coordination of Banking Regulations,” International Organization 43 (Spring 1989)CrossRefGoogle Scholar; Murphy, Dale D., “Regulatory Convergence in International Banking: Capital Adequacy Standards” (Manuscript, MITDepartment of Political Science, 1991).Google Scholar Its membership has always encompassed all the central banks of Europe, except those of Albania and the USSR, and for this reason it is viewed by some as well positioned to facilitate the integration of Eastern Europe into the international monetary system. See Giovanoli, Mario, “The Role of the Bank for International Settlements in International Monetary Cooperation and Its Tasks Relating to the European Currency Unit,” International Lawyer 23 (Winter 1989).Google Scholar Information on the bank's activities can be found in its Annual Report.

⁶ Costigliola, Frank, “The Other Side of Isolation: Establishment of the First World Bank, 1929—30,” Journal of American History 61 (December 1972)Google Scholar; Dulles, Eleanor Lansing, The Bank for International Settlements at Work (New York: MacMillan, 1932).Google Scholar

⁷ Less often discussed is the problem of lenders' time-inconsistent preferences. For lenders, under some assumptions, it may be rational ex ante to commit oneself to a credit ceiling so as to impose a limit on the borrower's consumption and reduce the chances of default. Ex post, however, a lender may be unwilling (for fear of losing the entire investment) to enforce the limit that would have been optimal were it credible in the first place. See Hellwig, Martin, “A Model of Borrowing and Lending with Bankruptcy,” Econometrica 45 (November 1977).CrossRefGoogle Scholar

⁸ Note that raising their interest rates to compensate for the heightened risk would actually raise the probability of default. See Cooper, Richard and Sachs, Jeffrey, “Borrowing Abroad: The Debtor's Perspective,” in Smith, Gorden W. and Cuddington, John T., eds., International Debt and the Developing Countries (Washington D.C.: World Bank, 1985).Google Scholar Credit rationing is often the result in models that incorporate imperfect information and information asymmetries, a problem treated below.

⁹ For an excellent review of these difficulties, see Sachs, Jeffrey and Cohen, Daniel, “LDC Borrowing with Default Risk” (Cambridge: National Bureau of Economic Research Working Paper, no. 925, July 1982).Google Scholar

¹⁰ According to the most generally accepted theories of international law, sovereign external debts are like any other form of international agreement; no special rules or methods of redress apply to state defaults. See Starke, J. G., Introduction to International Law, 10th ed. (London: Butterworths, 1989), 304Google Scholar and passim. Nineteenth-century conceptions condoned the use of force to enforce financial obligations. The Palmerston Circular (1848) argued that a state could intervene and even resort to military force on behalf of private bondholders while the Drago Doctrine limited such interventions to cases in which states refused to accept arbitration or submit to an arbitral award. Both of these modes of enforcement are unavailable in a world in which the peaceful resolution of disputes is the prevailing norm. On the other hand, foreign debts of private borrowers can be enforced in the courts of the nationality of the borrower, making the problems of contract enforceability much less serious than is the case of sovereign borrowers. The problem goes back at least to the early nineteenth century, when creditor groups tried to organize to improve their chances of collecting sovereign foreign debts. On the Organization of Foreign Bondholders, see Winkler, Max, Foreign Bonds: An Autopsy (Philadelphia: Rowland and Swain, 1933), 153–57Google Scholar; Edelstein, Murray, Overseas Investment in the Age of High Imperialism: The United Kingdom, 1850–1914 (New York: Columbia University Press, 1982), 129Google Scholar; Jenks, Leland Hamilton, The Migration of British Capital to 1875 (New York: Alfred Knopf, 1938), 290.Google Scholar The best overview is given by Feis, Herbert, Europe the World's Banker, 1870–1914 (New Haven: Yale University Press, 1930).Google Scholar The IMF has played a similar role in the postwar world. See Lipson, Charles, “The International Or ganization of Third World Debt,” International Organization 34 (Autumn 1981)Google Scholar; and Edwards, Sebastian, “The International Monetary Fund and the Developing Countries: A Critical Evaluation,” Carnegie-Rochester Conference Series on Public Policy 31 (Autumn 1989).CrossRefGoogle Scholar For explicit comparisons of interwar debt and default with the 1980s, see Eichengreen, Barry, “Resolving Debt Crises: An Historical Perspective,” in Edwards, Sebastian and Lorraine, Felipe, eds., Debt, Adjustment, and Recovery: Latin America's Prospects for Growth and Development (Oxford and Cambridge: Blackwell, 1989)Google Scholar; and Eichengreen, Barry and Portes, Richard, “Dealing with Debt: The 1930s and 1980s,” in Dealing with Debt: A World Bank Symposium (Washington D.C.: World Bank, 1989).CrossRefGoogle Scholar

¹¹ Crawford (fn. 2), 5–6. Another form of implicit contract is that of “pure reputation” modeled by Bulow, Jeremy and Rogoff, Kenneth, “Sovereign Debt: Is to Forgive to Forget?” American Economic Review 79 (March 1989), 43–50.Google Scholar

¹² For an example of the theoretical work linking the default decision to political instability, see Aizenman, Joshua, “External Debt, Planning Horizon, and Distorted Credit Markets,” Journal of International Money and Finance 9 (June 1990).CrossRefGoogle Scholar Default and political polarization are explored in Alesina, Alberto and Tabellini, Guido, “External Debt, Capital Flight, and Political Risk,” Journal of International Economics 27 (November 1989).CrossRefGoogle Scholar

¹³ Edwards, Sebastian and Tabellini, Guido, “Political Instability, Political Weakness and Inflation: An Empirical Analysis,” Journal of International Money and Finance 10, Supplement (March 1991).Google Scholar An institutionally underdeveloped tax system may be another condition associated with debt default. See Kharas, Homi J., “Constrained Optimal Borrowing by LDCS,” Domestic Finance Study, no. 75 (Washington D.C.: World Bank, 1981)Google Scholar; and Katz, Menachem, “Government Policy, External Public Indebtedness, and Debt Service” (Washington D.C.: International Monetary Fund, 1982).Google Scholar

¹⁴ The most reasonable forms of collateral to hold—foreign exchange reserves, government or railway bonds, title to property, title to import duties—are usually worth only a fraction of what an indebted government might owe. They are moreover worthless if the defaulting government does not wish to honor them and if there is no ultimate enforcer of these claims.

¹⁵ In the absence of institutional arrangements among themselves, creditors can find it difficult to coordinate their reactions to default. While it may be preferable for all to attempt to punish a borrower's defection by withholding future credit, individual firms may find it profitable to make separate deals to defect from the group effort to impose sanctions. But most importantly, under conditions of anarchy, creditors face tremendous uncertainty regarding the resolution of a sovereign state's payment moratorium. To the extent that creditors anticipate collective action problems among themselves, this may contribute further to suboptimal market behavior. See Lipson, Charles, “Bankers Dilemmas: Private Cooperation in Rescheduling Sovereign Debts,” World Politics 38 (October 1985).CrossRefGoogle Scholar However, recent theoretical work by Jeremy Bulow and Kenneth Rogoff (fn. 11) suggests that “punishing” by a generalized credit moratorium is not sufficient to ensure compliance. In their model, “small” countries (defined as those that cannot affect world prices and interest rates) are simply not able to establish their reputations, because they will be better off if they default and use the savings to conduct future business by paying cash in advance. They conclude that a “pure reputational model,” in which the only punishment is an end to foreign borrowing, provides insufficient incentives for compliance.

¹⁶ There is disagreement in the empirical literature concerning LDCS as to whether or not a country's “reputation” actually lessens its future access to credit. See Bulow and Rogoff (fn. 11). Empirical work by Peter Lindert appears to confirm the weak role that reputation has played in international finance in the twentieth century. See Lindert, , “Response to Debt Crisis: What Is Different about the 1980s?” in Eichengreen, Barry and Lindert, Peter, eds., The International Debt Crisis in Historical Perspective (Cambridge: MIT Press, 1989)Google Scholar; Lindert, Peter H. and Morton, Peter J., “How Sovereign Debt Has Worked,” in Sachs, Jeffrey D., ed., Developing Country Debt and Country Performance (Chicago: National Bureau of Economic Research, 1989).Google Scholar

¹⁷ See Jaffee, D. and Russell, T., “Imperfect Information, Uncertainty, and Credit Rationing,” Quarterly Journal of Economics 90 (November 1976)CrossRefGoogle Scholar; Stiglitz, J. and Weiss, A., “Credit Rationing in Markets with Imperfect Information,” American Economic Review 71 (June 1981)Google Scholar; Gale, D. and Hellwig, M., “Incentive-Compatible Debt Contracts I: The One-Period Problem” (Bonn: DP, 1983)Google Scholar; and Eaton, Jonathan and Gersovitz, Mark, “Debt with Potential Repudiation: Theoretical and Empirical Analysis,” Review of Economic Studies 48 (April 1981).CrossRefGoogle Scholar

¹⁸ Kletzer, Kenneth M., “Asymmetries of Information and LDC Borrowing with Sovereign Risk,” Economic Journal 94 (June 1984).CrossRefGoogle Scholar

¹⁹ At any rate, it can be thought of as a collective good for lenders and for all but the highest risk borrowers, who may fare better in a low-information environment. The fact that Germany was reasonably cooperative in agreeing to international supervision indicates that they were probably not in the highest risk category at this time.

²⁰ Bulow, Jeremy and Rogoff, Kenneth, “Multilateral Negotiations for Rescheduling Developing Country Debt,” International Monetary Fund Staff Papers 35 (December 1988).CrossRefGoogle Scholar

²¹ The model is based on symmetrical information, but the effect of relaxing this assumption is that agreement is delayed. Bulow and Rogoff (fn. 20) assume that the creditors' states will not interfere with the domestic legal system to prevent private creditors from sanctioning. Several other assumptions of the model should be pointed out: the debtor is assumed to be a small country in the sense that it cannot influence world interest rates but is sufficiently large to have some impact on welfare in the creditor country if trade is cut off. The debtor borrows, not to smooth consumption, but because its rate of discount exceeds that of world interest rates. Debtors cannot provide collateral. Both states' utility depends on the consumption of imports, which in turn depends on their ability to export. In case of default creditors can cut off trade until the debt is rescheduled by agreement. A debtor can store its exports, but they tend to depreciate over time. All private creditors are assumed to be a unified entity.

²² Note that this conclusion depends on the assumption of competitive capital markets, which differs from most of the literature cited above in which capital markets were characterized as oligopolistic.

²³ This is just the special case in which private creditors will not move from their original offer (their debt is not presently being rescheduled) and governments are willing to cut their own demands for repayment as part of a side payment to the debtor to facilitate agreement.

²⁴ Bulow and Rogoff s model (fn. 20) assumes that side payments can be made up to the value of total trade with the debtor country. This assumption would need to be relaxed to reflect accurately the political pressure the creditor governments felt to press for their full reparations during the 1920s. This problem is discussed below.

²⁵ Olson, Mancur, The Logic of Collective Action (Cambridge: Harvard University Press, 1965).Google Scholar

²⁶ Norman Frohlich, Joe Oppenheimer, and Oran Young term the willingness of any individual to supply a collective good without providing all of the resources himself an exercise of “political leadership” or “political entrepreneurialism.” See Frohlich, , Oppenheimer, , and Young, , Political Leadership and Collective Goods (Princeton: Princeton University Press, 1971), 6.Google Scholar I avoid this terminology, however, because it connotes a much more active and positive role than the bargained concession suggested here.

²⁷ This was not the first time an international bank had been discussed at high levels. In 1920 the League of Nations Committee on International Credits entertained the idea of an international bank of issue, which eventually evolved into a proposal for a League commission that would supervise and guarantee international loans for countries otherwise unable to obtain them. The former was proposed by Sir George Paish, the British economist, and submitted to the League by Léon Delacroix, the Belgian prime minister. The latter plan was developed by the Dutch banker Ter Muelen. See Eichengreen, Barry, Golden Fetters (London: Oxford University Press, 1992).Google Scholar

²⁸ Aldcroft, Derek H., From Versailles to Wall Street, 1919–1929 (London: Allen Lane, 1977), 261–67Google Scholar; Angeli, James W., The Recovery of Germany (New Haven: Yale University Press, 1929), 190–94.Google Scholar

²⁹ Schacht, , The Stabilization of the Mark (London: Allen and Unwin, 1927).Google Scholar See also idem, The End of Reparations (New York: Jonathan Cape and Harrison Smith, 1931), 33, where he makes his famous critique of German public spending on “stadiums, swimming pools, public squares,” and so forth.

³⁰ Andic, S. and Veverka, J., “The Growth of Government Expenditure in Germany since the Unification,” Finanzarchiv 23 (1964), 258Google Scholar; Peacock, A. T. and Wiseman, J., The Growth of Expenditures in the United Kingdom (London: Princeton University Press, 1967), 184.Google Scholar See also Böhme, Helmut, An Introduction to the Social and Economic History of Germany (Oxford: Basil Blackwell, 1978), 102–13.Google Scholar

³¹ For a good account of the complicated coalitional politics involved, see Turner, Henry Ashby, Stresemann and the Politics of the Weimar Republic (Princeton: Princeton University Press, 1963), 220–62.CrossRefGoogle Scholar Industrial and unemployment statistics are from James, Harold, The German Slump: Politics and Economics, 1924–1936 (Oxford: Clarendon Press, 1986), 218.Google Scholar See also Eyck, Erich, A History of the Weimar Republic (Cambridge: Harvard University Press, 1962), 2:192–95.Google Scholar

³² The October 1929 crash itself certainly contributed to the desiccation of international capital flows, but as can be seen in the cases of Argentina and Australia, capital imports rebounded in 1930, while for Germany they did not. Note also that short-term capital flows began to drop off in 1928, prior to the crash itself.

³³ This estimate is given by Phillip Snowden, chancellor of the exchequer, cited by Morton, W. A., British Finance, 1930–1940 (Madison: University of Wisconsin Press, 1943), 31.Google Scholar

³⁴ The Problem of International Investment (London: Royal Institute of International Affairs, 1937), 237–38. For a discussion of the causes of such high American investment levels, see Madden, J., Nadler, M., and Sauvain, H., America's Experience as a Creditor Nation (New York: Prentice-Hall, 1937)Google Scholar; and the Hearings before the Committee on Finance, Sales of Foreign Securities, United States Senate, 72d Cong. (Washington, D.C.: GPO, 1932). By 1935 Germany had defaulted on nearly $887 million of dollar bonds, of which about $532 million was held in the United States.

³⁵ Mitchell, B. R., European Historical Statistics, 1750–1975, 2d rev. ed. (New York: Facts on File, 1981), 819, Table K1.Google Scholar

³⁶ A Treasury officer until 1923, Gilbert quit that post and as a private citizen assumed the job of foreign supervision of the German economy in 1924. He later went on to become a partner in J. P. Morgan and Company, a job he held for most of the 1930s.

³⁷ Strong wrote to Gilbert that high American interest rates and the reversal in capital flows could “ultimately present a real hazard to Europe and especially to the smooth operation of the Dawes Plan.” Benjamin Strong to S. Parker Gilbert, July 14, 1928, quoted in Chandler, Lester V., Benjamin Strong, Central Banker (Washington D.C.: Brookings Institution, 1958), 459.Google Scholar

³⁸ Norman diary, May 14, 1928, Bank of England Archives, London (henceforth BEA/L).

³⁹ Formally, the Committee of Experts on Reparations.

⁴⁰ The second meeting of “experts” took place in Baden-Baden, Germany, in the autumn of 1929 and was known as the Organization Comittee because it hammered out the bank's formal statutes. The degree of actual independence varied from country to country. The stature of the British and the American delegates and the fact that they were indeed private businesspersons assured their independence. There is little doubt, however, that delegates took their country's national interests into consideration. Thomas Lamont described his responsibilities as follows: “In assisting to draft the report, we should naturally have in mind the best interests of the United States, and we will do everything within our power to guide it into channels and into terminology that will be cooperative with American interests. But we must face the fact that when the report is finished, we must sign it if we are satisfied with it as independent experts.” Undated [April ? 1929], file 179–6, Lamont Papers, Baker Business Library, Harvard Business School (henceforth LP/HBS).

⁴¹ Young, memo to the Committee of Experts, March 27, 1929, 179–8, LP/HBS.

⁴² Stamp to Hopkins, April 15, 1929, DPP2.4 Baring Brothers, London (henceforth BB/L); cable, J. P. Morgan to Leffingwell (New York), March 11, 1929, 178–17, LP/HBS. Lamont also expressed concern about the effects of a break in the negotiations on the market. Lamont to New York office, April 19, 1929, 178–20, LP/HBS. SO did Governor Harrison of the Federal Reserve Bank of New York, Harrison to Mellon, April 26, 1929, Harrison Papers, Federal Reserve Bank of New York (henceforth FRBNY). From the British side, see Charles Addis (member of the British delegation to the Paris conference), meeting of the General Council of the Reichsbank, March 23, 1929, BB/L; Ray Atherton, chargé d'affaires, American embassy, London, to the secretary of state, April 23, 1929, File 462.00 R 296 2837, State Department Records, National Archives, Washington, D.C. (henceforth NA/W); minutes of the meeting of the British delegation, February 16, 1929, DPP2.4, BB/L.

⁴³ For Schacht's position on exports, see his speech before the Expert's Committee, June 28, 1929, 180–20, LP/HBS; and Schacht (fn. 29, 1931), 208. Gilbert warned the American delegation that Schacht's strategy was to push the trade functions of the bank in the Organization Committee. July 4, 1929, 180–21, LP/HBS.

⁴⁴ See Burgess to Harrison, report of his trip to Europe, 797.3 A, BIS, 1929–70, FRBNY. Comments on Schacht's bank plan can be found in a memo: “The BIS,” for D. W. Morrow by de Sanchez, [June?] 1929, 180–11, LP/HBS. Memo, Pinsent to Hopkins, March 12, 1929, British Treasury Documents, 1393 F1 1282/1, Public Records Office, London (henceforth PRO/L).

⁴⁵ Cable, De Sanchez to Morgan and Company, New York, February 25, 1929, 178–17, LP/HBS.

⁴⁶ Minutes, meeting of British delegates, March 4, 1929, DPP2.4, BB/L; see also Stamp's address before the Society of Incorporated Auditors and Accountants, July 1929, private papers of Josiah Stamp, London.

⁴⁷ Cable, Morgan, J. P. and Company [Leffingwell?] to Morgan and Lamont, March 12, 1929, 178–17, LP/HBS.Google Scholar

⁴⁸ See Pinsent's diary of Addis's report of the Heads of Delegations Meeting, October 25, 1929, T160 386, F1 1282/03/1; Treasury Documents, PRO/L.

⁴⁹ “Notes on the Capital of the Bank,” memo, March 13, 1929, 797.3, FRBNY. The New York bankers were constantly criticized for their profit motive. Memo of an interview between Snowden and Francqui, written by Leith-Ross, November 14, 1929, T160 386 F1 1282/03/1, Treasury Documents, PRO/L. In any case, Lamont expressed a good deal of skepticism that bank profits could be counted on for much. Lamont to Hamilton, May 23, 1929, 179–23, LP/HBS.

⁵⁰ The group included Walter Stewart (U.K.), economist with the Bank of England; Shepard Morgan (U.S.), who had been working with the agent general's [for reparations] office in Berlin; Burgess, Federal Reserve Bank of New York; Pierre Quesnay, and Hjalmar Schacht (see Table 1). According to Josiah Stamp, the idea of an external bank emerged from various subcommittees as a way first of handling the trustee function (take over the role of the Reparations Commission) and then of developing wider credit functions. Stamp to Hopkins, March 13, 1929, DPP2.4, BB/L.

⁵¹ Burgess to Harrison, March 6, 1929, 797.3, FRBNY.

⁵² Formally, the Report of the Committee of Experts on Reparations, June 1929, Cmd. 3343.

⁵³ Report of the Committee of Experts on Reparations, June 1929, Cmd. 3343, Part 6(C) stated that the bank offered advantages over the current reparations setup, “which offers advantages to both Germany and the Creditor countries, because the Bank in putting the payments on a business basis makes their receipts more certain and facilitates their movement.”

⁵⁴ The collateralized portion of the debt recognized a thirty-seven-year nonpostponable RM 660 (U.S. $157) million annuity. The German government deposited certificates attached to yearly coupons representing this unconditional obligation, plus an additional amount that increased yearly and could be postponed in an emergency, for a total yearly average payment of about RM 2 billion (U.S. $476 million). It was the responsibility of the BIS to collect these coupons as they matured. For the distribution among creditors, see Annex VII of the Young Plan (Cmd. 3343), and Articles III, IV, V, and VI of the Trust Agreement. Had the plan not been interrupted, Germany would have made its final World War I reparations payment in March 1987. The exchange rate of 4.2 marks to the dollar (the rate at which Germany stabilized in 1925) is used throughout. This rate was generally in effect from 1925 through 1930. League of Nations, Monthly Bulletin of Statistics (1931), Table XV.

⁵⁵ Morgan, Shepard, “Conditions Precedent to the Settlement,” Proceedings of the American Academy of Political Science 14 (January 1931).Google Scholar

⁵⁶ Members of the advisory committee would be nominated by the government of the central banks of each of the founding countries: France, Germany, Britain, Belgium, Italy, and Japan, and with one representative of American finance. (American policy prevented Federal Reserve participation.) Four additional members representing various areas of expertise could be added to the advisory committee if desired. If transfer was postponed, Germany was still obliged to deposit the amount due in reichsmarks with the bank.

⁵⁷ Memo, , “The Young Plan and Sanctions,” December 10, 1929, 667/6Google Scholar, BEA/L.

⁵⁸ Cmd. 3484, Misc. no. 4 (1930); Agreements Concluded at the Hague Conference, January 1930, Annex VIII, “Form of the Trust Agreement between the Creditor Governments and the Bank for International Settlements,” Article II, (a)(b) and (c). The allies failed, however, to make the BIS responsible for debt payments to the United States, a provision that would have made Morgan's cooperation impossible. The French, Belgians, and Italians were in favor of making the BIS the agent for paying off debts to America in full. Memo, to Snowden from Leith-Ross, [late Sept.?] 1929; minutes from the Subcommittee on the Trust Agreements, October 23, 1929; T160 386 F11282/03/1, PRO/L.

⁵⁹ One example is a sort of escrow account deposited by France with the BIS; the account would compensate Britain and other allies who had accepted smaller shares of the nonpostponable annuity. France had been given a larger share of the nonpostponable portion, in exchange for more moderate overall reparations demands. France then deposited 500 million gold marks ($120 million), to be held in trust by the bank and then split among the creditors to help equalize short-term payments.

⁶⁰ Young Plan, Annex III, Art. VH(a). The principle of nondiscrimination among creditors was of primary importance to the British Treasury. Trust Agreement, Revised Draft, July 25, 1929 (Leith-Ross's handwritten note in the margin); Leith-Ross to Waley, October 21, 1929, T160 386 F11282/03/1, PRO/L. The concern about distribution in case of postponement was largely motivated by the need to continue to cover debts to the United States. Memo of a conversation between Addis [?] and Quesnay, October 25, 1929; letter from Leith-Ross to Pinsent, November 1, 1929; note of an interview between Snowden and Francqui, by Leith-Ross, November 14, 1929, T160 386 F1 1282/03/1; Stamp to Leith-Ross, July 4, 1929, 1393 F1 1282/1, Treasury Documents, PRO/L.

⁶¹ The French wanted to bar the BIS from making revisions in the payment schedule. The Germans naturally wanted a committee of revision and particularly a committee that would rule that their failures were not due to bad faith. The middle ground (BIS proposals, government ratification) was proposed by the British. Leith-Ross to Pinsent, October 23, 1929.

⁶² Article 7 of the Draft Trust Agreement between Britain and the BIS; July 11 and July 25, 1929, T160 386 F1 1282/03/1; PRO/L.

⁶³ Interallied debts totaled a staggering $26 billion, mostly owed to the United States and the United Kingdom, and involved some twenty-eight countries. The director of the Economic and Financial Organization of the League of Nations, Sir Arthur Salter, wrote in his memoirs that “the history of the years between the wars could be largely written in terms of the problems of reparations.” Salter, , Memoirs of a Public Servant (London: Faber and Faber, 1961), 154.Google Scholar

⁶⁴ Poincaré's speech at Caen, reported in he Temps, October 28, 1928; Le Matin, November 6, 1928; and Journal Officiel, November 16, 1928, p. 2549. See also Paris embassy to Kellogg, November 13, 1928, 462 R 296: 2465. Poole to Kellogg, November 16, 1928, 462 R 296: 2473; November 20, 1928, and November 22, 1928, 462 R 296: 2483; State Department Documents, NA/W. Committee of Experts on Reparations, February 12, 1929, BB. 2, February 16, 1929, BB.4; BB/L. See also Wolfe, Martin, The French Franc between the Wars, 1919–1939 (New York: Columbia University Press, 1951), 29–32.Google Scholar

⁶⁵ Leith-Ross, Frederick, Money Talks: The Autobiography of Sir Frederick Leith-Ross (London: Hutchinson, 1968), 102–6Google Scholar; Salter, Arthur, Recovery (London: G. Bell and Sons, 1933), 144–47.Google Scholar The British had resisted reopening the reparations issue, as the Treasury was fairly satisfied with the income from German reparations under the Dawes Plan.

⁶⁶ Kellogg to Armour, December 7 and 21, 1928, 462 R 296: 2521, 2558b; Schurmann to Kellogg, December 15, 1928; 462 R 296:2538; Armour to Kellogg, December 20, 1928; 462 R 296: 2556, State Department, NA/W.

⁶⁷ London Sunday Times, April 21, 1929; Keynes's article in the Daily Express, April 22, 1929. See also Jacobson, Jon, Locarno Diplomacy, Germany and the West, 1925–1929 (Princeton: Princeton University Press, 1972), 218.Google Scholar

⁶⁸ Kindleberger, Charles P., The World in Depression, 1929–1939 (Berkeley: University of California Press, 1973), 112–16.Google Scholar On French gold imports, see Einzig, Paul, The Fight for Financial Supremacy (London: MacMillan, 1931)Google Scholar; and Hawtrey, R. G., The Art of Central Banking, 2d ed. (London: Frank Cass, 1932), 1–40.Google Scholar On the general decrease in British liquidity, see Moggridge, D. E., British Monetary Policy, 1924–1931: The Norman Conquest of $4.86 (Cambridge: Cambridge University Press, 1972), 127.Google Scholar

⁶⁹ The logic of the bargaining model derived from Bulow and Rogoff (fn. 20) would place more emphasis on absolute levels of trade than on the trend itself, since the pressure to make concessions flows from the present, or possibly anticipated, costs of enforcement via sanctions. The trend would be important only if it were used to project future costs of enforcement, in which case much more weight should be placed on France's growing trade dependence on Germany.

⁷⁰ Memo, Leith-Ross [?] to Hopkins, March 12, 1929, 1393 F1 1282/1, Treasury Documents, PRO/L.

⁷¹ Leith-Ross to Pinsent, October 23, 1929; Leith-Ross to Pinsent, November 1, 1929; British Treasury Documents, T160 386, F1 1282/03/1, PRO/L. They also would have liked the BIS to assume responsibility for funneling reparations directly to the United States to pay off Britain's war debt, but they were sensitive to the difficulty this would cause with American public opinion. Hopkins memo, November 4, 1929; Pinsent to Leith-Ross, November 6, 1929, T160 386 F1 1282/03/1, PRO/L; Leith-Ross to Addis, April 3, 1930, 667/9, BEA/L. Moreover, the British realized that no matter what they agreed to separately with the bank, the American government would hold Britain responsible for the full payment. Memo, to Snowden from Leith-Ross, [late September?] 1929, T160 386 F1 1282/03/1. They realized that Morgan could not issue the bonds if the BIS were to get involved in debt payments to the U.S. British Delegation, Financial note no. 3, January 1930, T160 386 F1 1282/03/2, PRO/L. See also Addis to Norman, November 10, 1929, 630, BEA/L.

⁷² Treasury told the British delegates upon their return to London that they were not “well disposed” to their reparations settlements. Sir Charles Addis, private diary, June 21 and 25, 1929, SOAS, London. On the domestic reaction to the reductions, see Daily Mail, April 19, 1929; “Mr Snowden, and the Balfour Note,” Nation and Athenœum 45 (April 20, 1929), 67–68Google Scholar; Manchester Guardian, April 20, 1929; “Mr Snowden's, Victory—And After,” Nation and Athenœum 45 (August 31, 1929), 698–99.Google Scholar

⁷³ On behind-the-scenes efforts to secure Snowden's cooperation, see the following cables: Lamont to Young, July 31, 1929; Morgan to Young, July 31, 1929, 180–26; Lamont to Morgan, August 1, 1929; Young to Lamont, August 2, 1929, 180–27; Morgan, to Lamont, , August 6, 1929, 180–29Google Scholar; Morgan to Lamont, August 9, 1929, 180–30. Lamont concluded that “if the Conference breaks, it will be due to the Chancellor's unbridled belligerency and unforeseen complexities in British internal politics which none of us has the power to remedy. The Prime Minister apparently has no firm control over his ministers.” Lamont to Young, August 11, 1929, 180–31, LP/HBS.

⁷⁴ Memo, “The B.I.S.: Criticisms by R. G. Hawtrey,” July 27, 1929, BIS 667/2, BEA/L; memo, “International Clearing House,” R. G. Hawtrey (undated), BIS 667/2, BEA/L.

⁷⁵ Leith-Ross to Hopkins, July 15, 1929, T160 1393 F11282/2, Treasury Documents, PRO/L.

⁷⁶ This is the “gold exchange standard” with which Britain had tried to achieve international cooperation through the Genoa Resolutions of 1922. Cmd. 1667/1922: “Papers Relating to the International Economic Conference,” Genoa, April-May 1922, especially pt. III, Report of the Second Commission (Finance), pp. 59–67; Cmd. 1650/1922: “Resolutions Adopted by the Financial Commission of the 20th and 29th of April 1922.” See especially resolutions 1, 2, 9, 10, and 12.

⁷⁷ There was also the fear that the BIS itself could become another hoarder of gold. Bank of England, memo, “BIS, Precis of the Expert's Scheme,” July 8, 1929; “Answers to OEN's [Otto Niemeyer, Treasury] Questions,” Governor Norman, July 8,1929,667/6, BEA/L. Despite opposition to the gold exchange standard, Fed officials supported the BIS as a forum for Central Bank cooperation. See memo, “The BIS,” for Morrow, D. W. by de Sanchez [June?] 1929, 180–11Google Scholar, LP/HBS; [Lamont?] “America and the International Bank,” Foreign Policy Association News Bulletin 8 (July 5, 1929); and Fraser, Leon, “The International Bank and Its Future,” Foreign Affairs 14 (April 1936).CrossRefGoogle Scholar

⁷⁸ Leith-Ross to Hopkins, July 15, 1929, T160 1393 F1 1282/2, Treasury Documents, PRO/L. This concern was also voiced in the financial press. See Financial News, March 11, 1929; Journal of Commerce, July 18, 1929. These concerns resurfaced in the 1944 debates surrounding establishment of Bretton Woods institutions, where financial interests of the City of London feared that “if the plan is adopted financial control will leave London and sterling exchange will be replaced by dollar exchange.” See Gardner (fn. 5), 123.

⁷⁹ French investors had traditionally favored domestic to foreign investment, and the franc never became a significant store for international value. See Myers, Margaret G., Paris as a Financial Center (New York: Columbia University Press, 1936)Google Scholar; Einzig (fn. 68), 58–70.

⁸⁰ Dulles, Eleanor, The French Franc, 1914–1928: The Facts and Their Interpretation (New York: MacMillan, 1929)Google Scholar; idem, The Dollar, the Franc, and Inflation (New York: Macmillan, 1933); and Schuker, Stephen A., The End of French Predominance in Europe: The Financial Crisis of 1924 and the Adoption of the Dawes Plan (Chapel Hill: University of North Carolina Press, 1976).Google Scholar

⁸¹ Memo, “The BIS,” for D. W. Morrow by De Sanchez, June 1929[?], 180–11, LP/HBS.

⁸² Commercialization was not new, since Germany had in fact been fulfilling its obligations under the Dawes Plan by borrowing anew on a commercialized basis to pay off its official creditors. Mobilization, however, would mean that the remainder of the German annuity would be a direct obligation of the German Reich to individual bondholders with no guarantee by the creditor powers or the BIS.

⁸³ Note from Moreau and Parmentier to Poincaré, June 13, 1929; quoted in Weill-Raynal, Etienne, Les Reparations Allemandes et La France, vol. 3Google Scholar, L'Application du Plan Dawes, le Plan Young, et la Liquidation des Réparations (Avril 1924–1936) (Paris: Nouvelles Editions Latines, 1947), 457. See also Poincaré's, speech in Journal Officiel, Chambre, Débats Parlementaires, July 16, 1929, p. 2544.Google Scholar See also the Report of Gignoux, M. on the Hague Accords, Commission des Finances de la Chambre, March 24, 1930Google Scholar; Journal Officiel Documents Parlementaires, Chambre, Session Ordinaire, 1930, Annex no. 3.070, 318. On the link to France's Rhineland policy, see Jacobson (fn. 67), 300.

⁸⁴ U.S. Embassy, Paris, to State Department, November 1, 1928, 462 R 296 2470; Shurmann to Kellogg, December 15, 1928, 462 R 296, NA/W. France's input reflected this obsession with the defection problem. In alliance with the Belgians they concocted unorthodox means to ensure that Germany would be subject to the discipline of the capital market. The French suggested that bonds be created for the whole of the German reparations debt and then that the numbers of the bonds be mixed up, so that the Germans could not tell whether they would be defaulting on a political or a commercial obligation. The point, of course, was to subject the Germans to market discipline, even if governments were the primary holders of German bonds. Although this idea was nixed by the Americans and the British, it highlights France's extreme concern with potential German defection. The French proposal is recorded in a conversation between Stamp and Parmentier, February 15, 1929, BB.42; for the Belgian suggestion, see the minutes of the meeting of the British delegation, February 1929, DPP2.4, BB/L. For the American reaction, see Young to President Hoover and secretary of state, March 2, 1929, 179–25, LP/HBS.

⁸⁵ This fear was expressed by Emile Moreau, governor of the Banque de France, the first week of the Paris Conference. Memo, “Commercialization and Mobilization,” February 21, 1929 [unattributed; likely written by a member of the American delegation], 179–7, LP/HBS.

⁸⁶ The Socialists objected to the bank on the grounds that they preferred international financial cooperation to be under state control in collaboration with the League of Nations, rather than under control of a “financial oligarchy.” They also noted that while the plan protected Germany in case of a payment moratorium, it did not protect those of her creditors who were in debt to the United States. Blum, Léon, Populaire (March 11, 1929)Google Scholar; Auriol, Vincent, Journal Officiel, Chambre, Débats Parlementaires (July 18, 1929), 2632.Google Scholar

⁸⁷ This generally favorable impression is conveyed in the French press. Journal des Débats (March 7, 1929) referred to the proposal as an “international clearing house” and a “superbank” and was generally favorable to the idea but warned of the political power it might give the United States. Le Temps (March 7, 1929) was generally favorable, as was L'Agence Economique et Finance (March 7 and 12, 1929). Echo de Paris (March 8, 1929) noted apprehensions in some circles regarding the “supranational” authority of “Young's” bank. On March 13, 1929, it carried an article that supported the trustee aspect of the plan but noted that the “Americans' superbank” was a “dangerous distraction from the real issue” of how much Germany should pay.

⁸⁸ This was virtually the only point on which American negotiators had strict orders from their government, Stimson to Young, April 15, 1929, 2787a; conversation between Stimson and the German ambassador, April 24, 1929, 2824; Stimson to Young, May 2, 1929, 2852, vol. 43, State Department Documents, NA/W.

⁸⁹ Stimson to Young, April 8, 1929, 462 R296, vol. 42, Doc. 2773b, State Department Documents, NA/W.

⁹⁰ Cable, Young to Hoover, Mellon, and Stimson, March 2 and 19, 1929, 179–25, LP/HBS. For an extremely generous interpretation of the American experts' motives, see Tarbell, Ida, Owen Young: A New Type of Industrial Leader (New York: MacMillan, 1932).Google Scholar

⁹¹ Memo, Lamont [?] to Schneider, May 17, 1929, 179–22, LP/HBS. AS early as May 1929, Secretary of State Stimson had made it clear to the New York banking crowd that the U.S. government would not permit any official of the Federal Reserve System to serve or select representatives or members for the proposed international bank. Cable, J. P. Morgan Inc. New York to Lamont in Paris, May 17, 1929, 178–26. Lamont blamed the American administration for making the collapse of the negotiations more likely. Lamont to Elihu Root, April 19, 1929, 179–27, LP/HBS.

⁹² Stimson to Hoover, June 8, 1929, quoted by Costigliola, Frank, “The Politics of Financial Stabilization” (Ph.D. diss., Cornell University, 1973), 478Google Scholar; more generally, idem, Awkward Dominion: American Political, Economic, and Cultural Relations with Europe, 1919–1933 (Ithaca, N.Y.: Cornell University Press, 1984). Mill intimated to Harrison upon receipt of the Young Plan that “after a more careful study of the Plan I have reached the conclusion that if neither reparations nor inter-allied war debts existed it would probably be advisable for the Federal Reserve System to participate in the organization and management of the international bank” (emphasis added); Mill to Harrison, June 19, 1929; Harrison Papers, 2013.1, FRBNY. This ambivalence reflected that of American opinion more generally. A sampling of American reactions include “The United States and the Bank for International Settlements,” Commercial and Financial Chronicle (June 29, 1929), 4211–13, which opposed Federal Reserve involvement in European politics. Other press reports noted that American aloofness might be dangerous. Chicago News, July 6, 1929. See also New YorK World, July 5, 1929; New YorK Herald Tribune, July 5, 1929; Commercial and Financial Chronicle, July 6, 1929.

⁹³ Memo on the Young Plan for the secretary of state, June 25, 1929, 180–18, LP/HBS.

⁹⁴ Harrison, memo of conversations with Cotton and Mills, September 6, 1929, 2013.1 Harrison Papers, FRBNY. A series of letters between Harrison and the administration shows that the Fed was to be allowed to carry on a low-key relationship with the BIS. See Burgess to McGarrah, July 13, 1929; Harrison to Burgess, July 17 and 18, 1929, FRBNY; Harrison to Moreau and Schacht, August 13, 1929, FRBNY; see also Harrison's memo, “Views and Comments Relative to Provisions of the Experts' Report Concerning the Bank for International Settlements and Its Possible Relations with the Federal Reserve Bank of New York,” August 19, 1929, FRBNY; Young to Moreau, July 22, 1929; Harrison to Schacht, July 22, 1929, all in FRBNY file 797.3. See also Harrison, memo of a conversation with Cotton, December 18, 1929, Harrison Papers, Correspondence File, 2011.1, FRBNY. It was agreed that no American who was not satisfactory to the New York Federal Reserve would serve on the board of the BIS. Morgan to Lamont, memo regarding an interview between Young, Harrison, Cotton, and Mills, July 13, 1929, 180–22, LP/HBS. The reasons behind the American government's ambivalence were summarized from the British point of view in a letter from the British embassy in Washington to Treasury, Howard to Henderson, July 12, 1929, T160, 1393 F1 1282/2, PRO/L.

⁹⁵ Turner (fn. 31), 246–52.

⁹⁶ On the importance of eliminating international control, see Schacht's letter to Strese-mann, September 20, 1928, cited in Eyck (fn. 31), 175.

⁹⁷ Jacobson (fn. 67), 239—349. The British Labour Party also supported evacuation, and from May 1929 this was government policy. Winkler, Henry R., “The Emergence of a Labor Foreign Policy in Great Britain, 1918–1929,” Journal of Modern History 28 (September 1956).CrossRefGoogle Scholar British public opinion also favored French evacuation of the Rhineland. See “The Importance of the Rhineland,” Nation and Athenœum 44 (December 15, 1928), 402–3.

⁹⁸ From the British perspective, see the diaries of Lord Revelstoke (member of the British delegation to the Paris Conference), February 27-March 2, 1929, DPP2.4, BB/L.

⁹⁹ Addis wrote to Leith-Ross of the Paris negotiations: ”[The BIS] held out to Germany the prospect of increased foreign trade and the promise of material assistance out of the profits of the BIS. It was by this means and only by this means that the Experts succeeded in persuading Germany to agree to the annuities of the last 22 years.” Addis to Leith-Ross, July 28, 1929, Governor's File 263, BEA/L.

¹⁰⁰ Jacobson (fn.67), 290–91.

¹⁰¹ Throughout the experts' conference, Schacht had insisted that Germany could not be forced to pay ridiculous amounts. Lord Revelstoke's private diary, February 19, 1929, DPP2.4, BB/L; Schacht's memo of April 17, 1929, reprinted in Schacht (fn. 29), 63–71. When it became apparent in the autumn of 1929 that the BIS would not be able to extend much credit, Schacht threatened to walk out, to the thrill of an increasingly nationalistic German public. Federal Reserve Bank of New York, Foreign Information Division, memo, “Germany and the Bank for International Settlements,” February 1930, File 797.3, FRBNY. By January 1930 Schacht was demanding that the German government repudiate the Hague Protocol of the previous August. This put the German government in a very difficult position, since it could ill afford to appear less energetic than the Reichsbank in the defense of German interests. Gilbert to McGarrah et al., January 12, 1930, file 797.3, FRBNY.

¹⁰² See, e.g., L. Albert Hahn, “Die Internationale Bank und Krediterleichterung,” HansNiesser, “Der ‘Kreditfonds’ der Internationalen Bank,” and Palyi, Melchior, “Die Reparationsbank als Quelle für Kreditschopfung,” all in Die Reparationen Bank (Frankfurt am Main: Kritische Betrachtungen, Frankfurter Societäts-Druckerei, 1929).Google Scholar

¹⁰³ Turner (fn. 31), 258–59.

¹⁰⁴ Morgan in particular was seen as the key to the New York bond market and the ticket to a successful mobilization. Third meeting of the British delegates, Paris, February 10, 1929, DPP 2.5, BB/L.

¹⁰⁵ J. P. Morgan described the rescheduling and commercialization of German reparations as “this great work, which if successful, seems to me to mark the end of the war period as it settles the last outstanding questions between the belligerents.” Telegram, Morgan to Revelstoke, January 18, 1929, DPP2.4, BB/L.

¹⁰⁶ This problem was recognized prior to the Paris negotiations. The British feared that the French and Belgians would use partial mobilization to claim priority for their reparations, leaving the British with the risk of collecting political debts from Germany. Memo, Pinsent, “Provisional Conclusions of the 1st meeting of British members of the Committee of Experts on Reparations,” January 25, 1929; Goodchild to Pinsent, February 6, 1929, DPP2.4, BB/L.

¹⁰⁷ Revelstoke evidently did not succeed, however. To Montagu Norman, he described Treasury as “hide-bound” in their ideas and in possession of “impossibly inelastic ideas.” Revelstoke Diary, February 24 and 25, 1929, DPP2.4, BB/L.

¹⁰⁸ Wilson, Joan Hoff, American Business and Foreign Policy, 1920–1933 (Boston: Beacon Press, 1971), 123–56Google Scholar; Leffler, Melvin, “The Origins of Republican War Debt Diplomacy,” Journal of American History 59 (December 1972), 590.Google Scholar

¹⁰⁹ Cancellation was advocated by J. P. Morgan as early as 1922. See John Douglas Forbes, J. P. Morgan, Jr. (Charlottesville: University Press of Virginia, 1981), 145.

¹¹⁰ Lord Revelstoke wrote of J. P. Morgan at the beginning of the Paris Conference that “he is intently desirous, for his own credit's sake, to be the leader of a satisfactory settlement.” Clearly, a settlement that involved reduced reparations would enhance not only Morgan's personal credit but also the value of foreign bonds his firm would sell to investors. Lord Revelstoke diary, February 14, 1929, DPP2.4, BB/L.

¹¹¹ Lord Revelstoke diary, February 14, 1929, DPP2.4, BB/L.

¹¹² There was much concern at the time that the market for German bonds was dangerously oversaturated. Cable from New York Office to Lamont, May 16, 1929, 178–26, LP/HBS.

¹¹³ Memo, written by a member of the American delegation, “Commercialization/ Mobilization,” February 21, 1929, 179–7, LP/HBS.

¹¹⁴ Lamont to Morgan and Company, New York, June 1, 1929, 178–27, LP/HBS.