The World War Foreign Debt Commission and Its Effect on the World Fiscal Scenario
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The World War Foreign Debt Commission and Its Effect on the World Fiscal Scenario

At the end of World War I the USA made it clear that the loans given earlier could not be waived off but made an effort to help the European powers by setting up the World War Foreign Debt Commission. This was set up by President Harding in 1922. The terms of the commission included re-negotiation of the loans for a more structured payment. The commission negotiated with 15 nations including the UK, France, Finland, Italy and Belgium.

With the 21stcentury well on way one is apt to lose focus of an economic crisis nearly a hundred years back. The fiscal problems surrounding the world during the First World War and the US financial help are worth recounting. The First World War 1914-18 saw the USA enter the war late, but it gave financial help in the form of loans to the allied powers against the Central Powers.The lending started from 1915 and was conditioned by 2 factors

a)    The first was purely commercial and the financial wizards in the USA thought it a good opportunity to further firm up the economy.

b)    Secondly the United States felt an affinity with the Allies notably England and Western Europe. They did not offer these loans to the Central powers led by Germany.

 The end of the war resulted in the defeat of the Central powers and the United States expected their war time allies to pay back the loans. All the debtor nations accepted their liability, except Russia which now had a communist regime after the execution of Czar Nicholas II.

 The economic situation in Europe deteriorated badly and the powers expressed their inability to pay back the loans. The USA made it clear that the loans could not be waived off but made an effort to help the European powers by setting up the World War Foreign Debt Commission. This was set up by President Harding in 1922. The terms of the commission included re-negotiation of the loans for a more structured payment. The commission now negotiated with 15 nations including the UK, France, Finland, Italy and Belgium.  The commission restructured a payment of $11.5 billion.

The World War Debt Commission had sweeping powers as enumerated below

a)     It consisted of 5 members with the secretary of treasury as the Chairman.

b)      The commission could subject to the approval of the President extend the period of payment of interest and principle and also convert the loans to power bonds. These bonds would be held by United States Grain Corporation, the War Department, the Navy Department, or the American Relief Administration.

c)      The commission was also authorized to issue bonds whose validity could be up to15 Jun 1947.

The commission did not have to the power to cancel any debt as the USA was not at all keen to forego its rightful share as a creditor nation.The commission was expected to be time bound and a period of 3 years was thought sufficient for the commission to do its work.

 The commission did excellent work on the fiscal front and narrowed down the principle payment to 11.5 billion which was to be paid back over a period of 62 years at an interest rate of about 2%. This was expected to bring in $22 billion.

 The financial situation worsened in Europe in 1925-26 and perforce the USA had to agree to a moratorium. By this time the USA realized that the loans could never be paid back and. President Calvin Coolidge despite his initial refusal agreed to cancel large outstanding debts of various governments.

  The recommendations of the commission thus became dead as the Dodo and are now of only academic interest. But the winding up of the commission marked the rise of the USA as a world fiscal power which continues to this day.

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