None of the presidents from Wilson to Franklin D. Roosevelt or the high officials under them evinced any economic enlightenment on the subject. Herbert Hoover stuck to his rigid belief in the sanctity of contracts, and in October 1930 his secretary of state, Henry L. Stimson, rejected the idea of a connection between the Allied war debts and German reparations. But by this time the Great Depression had entered its serious stage, and voices were being raised at home and abroad for a drastic reduction of the debts just as German reparations had been twice reduced. Senator Alben W. Barkley of Kentucky returned from a trip to Europe to announce publicly that the American tariff was a handicap—that there was no possibility that Britain could continue to pay, that "in every circle with which I came in contact, official and unofficial, there was a profound feeling bordering on despair and even bitterness." Europeans could not understand "our demand that they pay us what they owed us and buy the goods we send them while at the same time denying them the ability to do either by preventing them from selling anything to us." Barkley's reference was to the new Smoot-Hawley Act (June 1930), the effect of which was to reduce foreign trade to a trickle. President Hoover had brushed aside warnings of the evil consequences of the bill. Senator Reed Smoot, the principal author, had been a member of the World War Foreign Debt Funding Commission, but to his mind no "good American" would advocate cancellation of the debts or oppose his tariff bill.
The basic economic consequence of the war was to advance the United States to a position of supremacy. Despite the difficulties surrounding the war debt settlements, dollar loans poured from private American banks and investment syndicates on a vast scale, accelerating after 1924 but coming to an almost complete stop in 1930. European governments, municipalities, and private corporations sought and received these loans, paying high interest rates (in dollars) and meeting their war debt installments from the proceeds of these loans. Germany was a leading recipient of American loans and was thus able to pay reparations to the Allies, who in turn were able to pay their American creditors. The source of these extraordinary loans was the profits of American industry in the sale of its products both at home and abroad, and in the abundance of speculative capital-seeking outlets. An open door—or rather, open doors—appeared as if by magic to dazzle the American investor. Latin America, Australasia, Africa, and East Asia obtained dollar loans. The lending process was a continuation of the Open Door policy pursued in China: an attempt by means of loans to capture the world's markets, but without serious consideration as to how these loans were to be repaid. Actually interest was being paid out of principal, not out of returns on the investment. As secretary of commerce under Coolidge, Herbert Hoover encouraged loans of this type, particularly to South American countries. Criticism, scrutiny, and hints to the naive individual investor to exercise caution were alien to Hoover's peculiar laissez-faire cast of mind.
When the bubble burst in 1930, total U.S. private long-term foreign investments stood at $15.17 billion, triple the figure in 1919. Germany still routinely made payments on its reparations account, and at least some of the Allied governments were forwarding their installments to Washington. But the principal of the war debts (including the postwar loans) carried on the books of the U.S. Treasury stood at $11.64 billion, which was $120 million more than the total shown at the time the thirteen governments signed the settlement agreements. Supposing that all thirteen had continued to pay principal and interest through the entire sixty-two-year period, the grand total would have exceeded $22 billion. Meanwhile, the fascist dictatorship under Benito Mussolini had installed itself in Italy; and in Germany, the Nazis, now on the high road to power in that country, had promised to repudiate all further reparations payments. Bolshevik Russia had long ago repudiated czarist Russia's war debts.
By June 1931, Germany, the greatest of the world's debtors, was near collapse; and while continuing to maintain that debts and reparations were unconnected, Hoover, after assuring himself of sufficient congressional support, proposed a year's moratorium on all intergovernmental debts. Hoover was at last ready to admit that debt redemption on the part of any country depended upon its capacity to pay, although probably as a political gesture, he again declared his disapproval of cancellation. Hoover's opponent, Franklin D. Roosevelt, declined to take a position but did not miss his opportunity to ridicule the Republicans for their absurd policy "of demanding payment and at the same time making payment impossible."
Meanwhile, the Lausanne Agreement (1932) between Germany and its creditors put an end, for all practical purposes, to reparations payments. Then Belgium, followed by France, defaulted. Britain and Italy managed to make partial payments through December 1932. It was at this time that Finland became conspicuous. "Sturdy little Finland" earned a high mark with the American public for meeting its semiannual installment of $166,538 punctually and in full. Britain offered a token payment in 1934 but, on being informed that this would not save it from the stigma of being a defaulter, decided to make no further gesture. Spurred by Senator Hiram Johnson, most vociferous among the diehards, Congress in April 1934 made certain there would be a stigma. It passed the Johnson Debt Default Act, which originally sought to close the door to any foreign government in default on its debts. Although this is what Johnson intended to do in the bill, the act as passed applied only to World War I debts owed to the U.S. Treasury. As Harry Dexter White pointed out to Treasury Secretary Henry Morgenthau, this left open the door to public lending to Latin American states and others that defaulted on private debts only. And the act did not apply to Export-Import Bank loans, though members of Congress frowned on lending the bank's funds to governments in default on their private debt. The Johnson Act had no practical effect; no foreign nation offered to resume payments, and none of those at whom the act was pointed was in the market for further American credits.