The Great War was a total conflict of nation against nation, resulting in differential destruction of national social systems. It therefore changed the reparations question into an issue of apportioning the relative gains or losses from participation in the war. Because of the unexpectedly long duration of World War I, none of the belligerents could impose sufficiently large taxes to pay for their economic needs. Internal tax income proved too small to pay for necessary imports. Consequently, the Allies largely had financed the war in the United States through selling international investments and through first-year borrowing. Until April 1917, the British, and to a lesser extent the French, Russian, Italian, and Belgian governments, had borrowed by floating their bond issues through American bankers. The British loans were secured by the international investments of its citizens that the government had sequestered. As the war dragged on, it became clear to British leaders that the longer the conflict continued, the greater the probability that Britain would emerge from the war minus its international investment empire, the protection of which was one of the reasons it was fighting the war. In the view of Prime Minister David Lloyd George, the burden of war costs had somehow to be shifted to the Central Powers, so that Britain would be able to keep its international investments.
U.S. entry into the war in April 1917 presented the possibility to Allied leaders that the United States somehow could be made to bear some of the burden of the war costs. They accordingly began to shape reparations plans that would redistribute Allied war costs not only to Germany but also to American taxpayers and investors. With this ultimate intention in mind, the Allied efforts to impose war costs on Germany began on 5 April 1919, when Lloyd George asserted that Germany should stipulate in the peace treaty "her obligation for all the costs of the war." The United States opposed, on legal grounds, the inclusion of war costs in the reparations total, although, paradoxically and illogically, President Woodrow Wilson did agree that pensions for Allied soldiers, despite not being part of existing international legal definitions of reparations, and thus in no way "civilian damages," ought to be part of the total. In order to limit the amount that Germany would be required to pay, the United States made two broad proposals concerning the parameters within which reparations totals ought to be determined. First, no matter what the amount, Germany would be required to make payments for no more than thirty-five years. Second, a reparations commission would be set up to fix the amount that Germany would be able to pay.
American leaders assumed that these parameters would limit reparations demands to the surplus the German economy could produce, over and above what was necessary for a restoration of a level approximating the nation's living standards in 1914. On the other hand, the provision that thirty-five years be the longest period of payment allowable would roughly fix the total of reparations to be paid. These limits were intended to encourage Allied interest in restoring German economic life. At the Paris Peace Conference early in 1919, the chief American experts, Norman H. Davis and Thomas W. Lamont, suggested a maximum figure of roughly $28.5 billion, half in gold and the remainder in German marks. But Lloyd George and French Premier Georges Clemenceau pressed for a much higher amount. To prevent this disagreement from dividing the Allies, negotiators agreed to a compromise providing for creation of a reparations commission with responsibility to determine Germany's exact liability by May 1921. Veterans' pensions would be included, as Wilson had agreed, but in fact this would have an impact only on distribution, not on the final reparations amount. This decision to postpone determination of an exact amount and the terms of repayment resulted in the United States failing to gain either of its main objectives.
Superficially, the establishment of a reparations commission would seem to have been a victory for the American position. However, France insisted that the commission have no independent power to modify the length and amount of payment in accord with ability to pay. The French position, which prevailed, allowed the postwar commission simply to total up the claims and required at least fifty years of payment from Germany. Meeting its deadline, the commission in 1921 fixed Germany's total liability at about $33 billion. Of this total, approximately $11 billion was assessed to pay for all damaged Allied property. The rest represented war costs imposed by the victors as punishment for Germany's "war guilt" under article 231 of the Versailles Treaty. Under this provision, Germany accepted responsibility for "all the loss and damage to which the Allied and Associated governments and their nationals have been subjected as a consequence of the war imposed upon them by the aggression of Germany and her allies." By then, the U.S. Senate had rejected the League of Nations Covenant and the Treaty of Versailles to which it was attached. The United States therefore had withdrawn from the reparations commission and only had "observers" at its deliberations.
Close examination of the $33 billion in reparations reveals, however, that the amount was less than it appeared to be. The commission specified that about $11 billion of A and B bonds would be payable at 5 percent interest over thirty-seven years. The remainder, in C bonds, would bear no interest and would come due only when the commission determined that Germany's new Weimar Republic was able to pay. The Allies in fact planned not to collect on these C bonds if Washington canceled the war debts to the United States. The U.S. government resented this attempted coercion and refused to cancel all Allied war debts. Administration officials under Wilson and his successor, Warren G. Harding, also were appalled by both the totals fixed and the procedures designed to collect them. Starting with President Wilson, American leaders tried to use the war debts owed to the United States to coerce the European leaders into easing the German reparations burden, not least because the Allies presumably now would collect on the C bonds. Washington's scheme was essentially the same as the one Wilson proposed at Versailles. German reparations had to be based upon Germany's capacity to pay and the period of payment had to be shortened, so that eventually German economic health could be restored.
During negotiations at Versailles, Wilson, as an inducement to the Allies to change their position, offered to cancel that part of the war debts to the United States that the Allies actually had incurred in fighting the war, in exchange for a reduction in the amount of German payments and in the length of time Germany was expected to pay. From 1921 to 1924, Presidents Warren G. Harding and Calvin Coolidge honored Wilson's offer. But the Allies refused. Instead, they demanded that Washington cancel all the war debts, including that portion of what they had borrowed from the United States after the fighting ceased ($3.3 billion of the total of $10.3 billion) that had been used for reconstruction and for civilian commercial trading. Wilson's Treasury secretaries, Carter Glass and David Houston, refused general cancellation on the ground that the Allies already had distributed among themselves spoils of war, including special concession trading advantages, greater than the postwar commercial debts they had contracted with the United States. At first, their successor, Republican secretary of the Treasury Andrew W. Mellon, followed the same policy.
With hindsight, it became fashionable among west European and U.S. intellectuals to accuse American leaders of ignorance and even selfishness in connection with their stubborn refusal to acknowledge any link between the reparations and the war debts. The majority seemed to accept the French argument that the war against Germany was a common effort, in which the United States had belatedly done its small part by contributing its money. "Some gave their ships, some munitions, some the lives of their sons, some money," a member of the French Chamber of Deputies told his colleagues, "and today those who gave money come saying to us: 'Give back what we loaned.'" If the United States indeed had been in "alliance" by treaty or moral commitment with the west European allies, this would have been a telling argument. But Wilson genuinely had tried to stay out of World War I—as long as he could do so—without facing some sort of settlement changing the balance of power against the Allies. To avoid a German military victory of this sort, he had joined the war, but he did not do so on behalf of Allied war aims. He opposed the division of spoils outlined in the "secret treaties" and rejected every Allied effort to induce the United States to share in the booty of war. Wilson in this specific sense sought a "peace without victory," which would allow the vanquished to reenter the community of industrial-capitalist states without disabling prohibitions.
From Wilson's standpoint, World War I was a civil war within the social system of industrial capitalism. Its basic causes were political and economic rivalries over issues such as access to raw materials, foreign markets, and investment outlets, with the allies attempting to defend the existing apportionment of world market opportunities and the Central Powers challenging it. But in Wilson's view neither side had gained as much as it had lost, because the war aroused forces that challenged the very legitimacy of industrial capitalism as a system. In general terms, the Arabian, Chinese, and Bolshevik revolutions were outgrowths of the war; specifically, they reflected the fact that the people in the Third World were dissatisfied with the pace at which they were achieving self-determination and industrial development under the management of the advanced industrial nations. To Wilson, the political destabilization inherent in national revolution appeared to exacerbate the original problem of economic rivalries among industrial states by effectively withdrawing more resources and people from the world market. He believed that to protect, stabilize, and allow for the expansion of industrial capitalism as a social system in the future, leaders formulating the peace after World War I had to establish a peace that would avoid another world war and possible future national revolutions.