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World Wars » 1900 » 1934

Post World War I: Debt and Economics
The events leading to the end of neutrality
When: 1934
Where: Washington DC, United States, North America

The New Deal's economic outlook was anything but international. By rejecting an international approach, whereby the American farmer and manufacturer would have to set prices at such levels as to compete for the world market the direction turned instead to a program of readjustment of domestic prices and costs. The Hawley-Smoot Tariff effectively cuts the United States out of the international market. By raising the barriers on our side of the ocean, the other countries followed suit in order to safeguard their domestic production. A decline of 63% in the next three years in foreign trade resulted. This enormous loss leads to the question: if debtor nations could not earn money, how could they send payments due on the loans?

To complicate matters more, a conference was called in 1932 to try to ease the world's financial strains. At the Laussane Conference, England and France reluctantly agreed that Germany was bankrupt and could, therefore, not pay but the slightest war reparations. They stated this only on the premise that the United States would scale down the amounts required from the debtor nations. This plan was received favorably by bankers and a few politicians, but the Congress refused to consider it and demanded resumption of payments after Hoover's one-year moratorium expired, This short-sighted view resulted in default; only Finland fully made the required payments.

Another conference was decided upon to discuss such topics as commodity prices, international trade monetary chaos, debts, and reparations. Roosevelt, in one of his Fireside Chats, insisted that 'the international conference that lies before us must succeed. The future of the world demands it and we have each of us pledged ourselves to the best joint efforts to this end.' This appeal went out to the heads of the 56 nations with this statement:

The conference must establish order in place of the present chaos by a stabilization of currencies, by freeing the flow of world trade, and by international action to raise price levels. It must, in short, supplement individual domestic programs for economic recovery, by wise and considered international action.

All hope for success was lost when the United States Congress instructed the delegates not to discuss tariffs, war debts, and reparation. The isolation-minded Congress won out again - they were in no mood to review the war debt question.

Some nations followed Great Britain's lead by making token payments with the idea that a future meeting would finally solve the problem.

The mood of Congress was so strongly opposed to any suggestions of debt reduction that in April 1934 it passed the Johnson Debt Default Act. Originally sponsored by the arch-isolationist Hiran Johnson of California, the bill prohibited any citizen of the United States from buying or selling any securities of any country in arrears or in default of its war debt under the penalty of fine and/or imprisonment. An amended form stated that no loans could be made to any nation in default or in arrears, nor could such country sell their securities in the United States. The result was just the opposite of what it intended: nations that had made partial payments stopped, as they felt the United States was vindictive.

While it did appear as though the United States was not interested in the international economic situation, that was not the case. Secretary of State Cordell Hull was working on a reciprocal trade agreement program. The Democrats recognized the limitations placed on trade by the Hawley-Smoot Tariff of 1930 and were now trying to revive trade by allowing the President 'to enter into executive commercial agreements' and 'within carefully guarded limits, to modify existing duties and import restrictions in such a way as will benefit American agriculture and industry.'

This plan met with opposition from many quarters; some feared that their special interests would suffer, others still insisted upon the value of high protective tariffs, and others considered it unconstitutional because it delegated powers to the President normally belonging to the Congress. The new act called 'an Act to amend the Tariff of 1930' is also called the Hull Trade Agreements Act. It authorized the President to negotiate trade agreements with other nations to obtain new markets for American products by raising or lowering the Hawley-Smoot rates by up to 50%. The life of this act was three years; by the end of that time sixteen countries had signed: Cuba, Belgium, Brazil, Canada, Colombia, Finland, El Salvador, Guatemala, Haiti, Honduras, Netherlands, Nicaragua, Sweden, and Switzerland. A three-year extension affected additional agreements with most of the remaining Latin American nations and Great Britain. This marked progress in the reduction of isolationism with regard to the United States.

In 1933, the United States and the Soviet Union restored diplomatic relations, although the Johnson Debt Default Act precluded any loans to Russia. With this restriction, no increase in trade was incurred. Other events which followed:
  • The Good Neighbor policy toward Latin America was presented.
  • In August, all marines were withdrawn from Haiti.
  • In November, the Platt Amendment was removed from the Cuban constitution.
  • In March 1934 the McDuffie-Tydings Act amended the Hawes-Cutting Act by establishing a ten year probationary period prior to the granting of Philippine independence.
  • In March 1936 the United States amended the Hay-Bunau-Varilla Treaty (1903) and agreed not to intervene in the internal affairs of Panama and the right to obtain more land was dropped.
  • On July 30th, 1940, the Act of Havana forbade the transfer of any European colony to another non-American power and if any such transfer were attempted the colony in question would pass immediately under the joint control of the American states.

Even with all this international progress, the American people were at best apathetic and at worst adamantly opposed to anything anywhere which would entangle the United States. Norman Davis expressed a unified opinion, stating that the United States would cooperate in international disarmament programs, but it would not 'participate in European political negotiations and settlements, and will not make any commitment whatever to use its armed forces for the settlement of any dispute anywhere.'

To add strength to the position came the report of the Nye Committee which report that American business, especially munitions and war-related factories, had profited greatly from World War I and had evaded taxes on these profits. The report also documented international banking institutions, including JP Morgan, helped bring the United States into the war to help guarantee the payment of loans. The committed accused Woodrow Wilson of duplicity by pretending to be ignorant of the secret treaties which pre-dated World War I.

If the Nye Committee Report was accurate and the American people had no reason to believe otherwise, then it would be necessary to make sure that those same forces did not act in the same way again.

The first test of this came in January 1935, when Roosevelt recommended to the Senate that the United States join the World Court. A wave of isolationist sentiment defeated the resolution.

In order to ensure that bankers and munitions makers do not draw the United States into another war, it would be necessary to forbid loans and the export of weapons to the belligerents. The following theories were the focus here:
  • Was the United States drawn into the war because U.S. ships had carried supplies
  • Was the United States drawn into the war because U.S. citizens had traveled aboard belligerent ships
  • Was the United States drawn into the war because the the President had made unneutral decisions and had exercised too much discretion.

Congress reviewed the events leading to two wars: the Chaco War between Bolivia and Paraguay, and the Italo-Ethiopian War. As the popular demand for United States' neutrality grew, Congress passed the Neutrality Act which stipulated:
  • When war broke out between two or more foreign nations, or during the progress of such a war, an embargo on arms, munitions, and implements of war to any of the belligerents was to become effective, the President having the authority to designate what these commodities might be.
  • Control and supervision of the manufacture and sale of munitions was assigned to the National Munitions Control Board.
  • By Presidential proclamation, American citizens would travel on belligerent ships at their own risk.

In 1936, a few amendments were added to the 1935 act:
  • 1) The President has the right to decide when a state of war existed.
  • 2) Loans or credits to belligerents are prohibited.
  • 3) The act does not apply to other American nations involved in a war outside the hemisphere.
  • 4) The President must extend embargoes to other countries that might become belligerents.
  • 5) (1937) In the event of a civil war in a foreign country, implements of war may not be shipped to either side. This amendment was added with the onset of the Spanish Civil War.
  • 6) U.S. ports may not be used as a bases of supply for foreign powers. The 'Cash and Carry' principle allows foreign nations to buy military good as long as they are paid for in full before transfer to their vessels.

In 1937 hostilities broke out between China and Japan; Roosevelt did not invoke the Neutrality act because he believed it favored Japan. His favor for China was made apparent when he stated 'If we are to have a world in which we can breathe freely and live in amity without fear - the peace loving nations must make a concerted effort to uphold laws and principles on which alone peace can rest secure ... When and epidemic of physical disease starts to spread, the community approves and joins in a quarantine of the patients in order to protect the health of the community against the spread of the disease ... America hates war. America hopes for peace. Therefore, America engages in a search for Peace.

This so-called quarantine speech asked for a joint action on the part of peace-loving nations. The idea met with hostile response from the isolationists.

On December 12th, 1937, the Japanese bombed and strafed the U.S. gunboat Panay and three U.S. merchant ships in the Yangtze River, killing three and wounding 74 while sinking the Panay and two other ships. Following a complaint to the Japanese, an apology, financial compensation of $2 million, and a promise not to permit a recurrence, nothing more was done. The isolationists were satisfied.

In December, 1937, the Ludlow Amendment was proposed by the isolationists. It stated that a national referendum would be necessary before the U.S. could declare war, the only exception being in the event of invasion. Only after the concerted effort was the amendment defeated by a vote of 209-188.

Continued aggressive actions by the totalitarian states brought war closer and closer. Roosevelt indicated repeatedly that he wanted the democracies to win. On November 4th, 1939, a new neutrality act become law. It kept many of the earlier safeguards and extended the Cash and Carry principle, but it allowed Congress and the President the right to declare war, the embargo on the implements of war was dropped, and the President could define combat or danger zones where the United States' citizens, ships, and planes where forbidden.

With the fall of France on June 22nd, 1940, the realization that the the Maginot Line was not the defense line to safeguard the United States became more obvious. It became evident that, if Great Britain were to fall to the Germans, then the Atlantic Ocean would be the next defense line. To protect Great Britain, Roosevelt completed the destroyer-base deal whereby the U.S. rented for 99 years bases in the Bahamas, Jamaica, St Lucia, Trinidad, Antigua, and British Guiana in exchange for fifty obsolete destroyers.

Additional actions to strengthen the Western Hemisphere included the Havana Conference (1940) and the Burke-Wadsworth Act (1940) which called for draft registration.

Following the signing by Germany, Italy, and Japan of the Tri-partite Pact (also known as the Rome-Berlin-Tokyo Axis) the threat of war involving the U.S. became a greater reality. After hearing Hitler's comment 'I can beat any other power in the world', Roosevelt asked for additional aid for Great Britain:
'If Great Britain goes down, the Axis powers will control the continents of Europe, Asia, Australia, and the high seas - and they will be in a position to bring enormous military and naval resources against this hemisphere. It is no exaggeration to say that all of us, in all the Americas, would be living at the point of a gun - a gun loaded with explosive bullets, economic as well as military. We must become the arsenal of Democracy.'

Since the democracies were nearing the point of insolvency, the cash and carry notion was not practical. Roosevelt suggested that we loan war materials for which the U.S. 'Shall be repaid within a reasonable time following the close of hostilities, in similar materials, or, at our option, in other goods of many kinds, which they can produce and which we need.' Again the isolationists, led by Champ Clark (Missouri), Burton Wheeler (Montana), Hiram Johnson (California) and Robert La Follette (Wisconsin) protested vigorously, but the Lend-Lease Act became law on March 11th, 1940. This act marked the end of neutrality. The United States was committed to the defense of the democratic institutions of the world.

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