The problems which bedevilled postwar monetary policy in several European countries were due to the dilemma of war debts owed by the British, the French and several smaller European countries to the United States, on the one hand, and the reparations which Germany was obliged to pay to France, Great Britain and Belgium on the other. The particular dilemma consisted of the practical financial interrelation between the two types of debts and the theoretical distinction between them on which the United States insisted. The United States had not asked Germany for reparations but was adamant about the payment of the war debts of its allies. Any American appeal for easing the burden of the reparations was accompanied by a statement that this did not mean that the erstwhile allies could expect any reduction of the war debts if they showed generosity as far as the reparations were concerned. This was not sheer obstinacy on the part of the American government, it was a reflection of domestic budgetary compulsions. The debt service of the war debts was an essential part of the American budget: if they were struck off or reduced, the government would have to raise taxes to that extent. In view of the frequent elections, no American politician would dare to risk such an unpopular initiative. In tracing the elements of this dilemma we shall first turn to the dimensions of the debts involved and then discuss the attempts at getting off the horns of this dilemma.
Great Britain, France and several smaller European countries owed war debts to the United States which amounted altogether