Before World War 1, claims on foreign assets were held predominantly by private investors in the form of equity interests or mortgage bonds on income-producing assets in corporations, like railroads or banks. While large government debts existed, these were usually held by private investors, not by foreign governments. Additionally, international investment into productive assets like factories (or into governments) was designed to generate profit (or tax revenue) that would then be given to investors, but also to the corporations/governments being invested in. This meant that they would be able to repay those debts to the investors.

World War 1 changed this setup. Debts between governments were now predominant and massive. And the United States was the creditor nation for most of this debt. Most of this debt was in the form of the Inter-Ally debts which, in the early 1920s, stood at $28 billion, and Germany’s reparations debt, which stood at $60 billion - with interest. Unlike the private investment of before the war, these claims were not in productive resources or increasing the tax revenue of the allies, therefore meaning they could not easily generate the money to pay off the debt.

During the war, the Allies shifted through various means $7.5 billion into the US to pay for weapons, which was their financial limit by the time the US entered the war. When the US entered the war, one of the first things it did was to allow the US government to create funds to finance weapon shipments to the Allies, and, not wanting the US population to take on the burden of repaying this debt, they specifically made these loans to Europe, and not just free sharing of resources and money.

It is notable that this differs from how wars were previously financed, with Britain using subsidies to finance its allies over the centuries, and the French using subsidies to fund the American War of Independence. These were granted monthly and thus could be stopped at any time if their performance was lacking. Using loans had been done before, but the economic problems in the debtor countries post-war created antagonisms. The American War of Independence cost France $700 million and France asked for no compensation beyond $6 million in loans, and even this was eventually retired. Between the Napoleonic Wars and World War 1, most wars were local and between two countries and thus did not require inter-ally debts.

As World War 1 begun, there was no real conception that a loan system would be pursued and the Europeans assumed that the subsidy system would be used as normal. Even the United States initially seemed genuine about not intending for the debts to be repaid; with them intending on giving billions to France as a gift for their help during the War of Independence. Additionally, the Europeans holding off the Axis while the Americans trained their troops (as opposed to having to send inexperienced men to the front) was also seen as part of paying off any debt. However, when the US entered the war, they said that it had no interest in territory nor any colonial ambitions, and legally argued that this meant they could not use the subsidy system and instead had to issue loans - and these loans would eventually harden into inter-governmental claims that had to be repaid in full.

The overriding assumption here, of course, was that debts simply had to be repaid - they were sacred. But this massive amount of debt was a shock to a fragile system that had survived because it is represented by real assets and the amounts lent were not too large; Keynes predicted that the WW1 debts would never be repaid, and this would lead to a breakdown in world investment and trade, and probably more war.

In the aftermath of WW1, Congress denied loans to Europe for reconstruction. Because Europe could not afford to pay for US agricultural prices, this therefore threatened a US agricultural and industrial collapse. The Wilson Administration decided to bypass Congress and acted as if this war was still happening through some creative legal justifications. Additionally, it was suggested by one report that the US use its men and materials to help Europe during reconstruction; resources were indeed given to Germany and Austria to prevent socialist revolution there.

The US did not officially end its war with Germany until the Treaty of Berlin in the summer of 1921. It then began the process of ensuring the collection of debt from the Allies. They initially made overtures to American ambassadors to adjust the debt, but were rebuffed, and the US threatened that they would not provide credits to a government that planned to support a policy that would delay the payment of debt. The Allies remained lax about the issue until early 1922, when the US established the Foreign War Debt Commission, which established that the debt should be repaid within 25 years, and at an interest rate no lower than 4.5%.

The US explicitly and repeated stated that they would not allow the debts to the Allies to be cancelled, despite insistence from Britain and France. Despite the US advising the Allies to be moderate with Germany, the US was not at all moderate with the Allies. The immense cost of the war to Europe was not seen by the US as a good reason for Europe to punish Germany yet further with added debts, and yet the US regarded its own argument - that it was not an ally but an associate in the war - as completely ironclad as to why it should not cancel the loans to the Allies.

Ironically, the US private sector suffered as a result of this policy. To repay its debt, Germany would be forced to undersell American and Allied producers; meanwhile, the debt payments ruined the postwar financial and commercial price stability that was needed for international trade. The entire policy was rather short-sighted - it stipulated that Germany repay the Allies but did not provide any major method to do so, such as by exporting its products to the Allies; nor was Germany receiving much foreign investment. In fact, the US increased tariffs on Germany and the Allies from 1921 to 1933 to protect its own industries; this was to counteract the Allies depreciating their own currencies to make their products cheaper so they could earn the money to pay their debts. Meanwhile, the Federal System acted to insulate the US from the inflation resulting from gold inflows. Despite now possessing much of the world’s gold, and the sterling on the way out, the US and its dollar was not yet ready to take its place.

Germany was bled white by the Allies demanding reparations far above what it could have paid, and Germany was only kept functioning by lending from the US. The US also began to intrude on the foreign loan processes of US private investors, preventing loans to nations that had not made arrangements to fund and pay their debts to the US. It also demanded that any loans paid would go to productive investments, so as to generate the money for the loan to be repaid. Of course, the fact that the Inter-Ally debt to the US was non-productive was neither here nor there.

While the German debt to the Allies could, through legal processes, have been appealed, reduced, or even cancelled, the Allied debt to the US could not have been altered, meaning the Allies were, in a sense, under a more harsh imposition from its ally than Germany was to its enemies. Indeed, Germany’s annual payments were scaled down from 7 billion gold marks in 1920 to 2 billion marks in 1929, but the Allies received no similar kindness. With increasing American tariffs, the only way for the Allies to obtain the funds to repay the US was through German reparations, and Germany simply did not have the money and resources to pay this. This was not merely the standard degree of capitalist or national greed; Britain and France both cancelled Belgium’s debt towards them; the US did not, despite the debt being smaller.

In all, the US became the world creditor because of the actions of its government. It was not because of private investment abroad or through foreign expansion. Usually, governments followed private interests abroad, to colonize foreign lands and provide military support to the capitalists to take the land from the natives and ensure other nations could not then steal this land from them. It was more rare that the government took the initiative and forced the private sector to follow them. No longer was this true - the government was responsible for the majority of US investments overseas, and it did not get involved in underdeveloped foreign lands, but instead with a Europe that had a greater industrial output than themselves. If the US had not committed to the war with its military, American capitalists could have dominated the exhausted continent and generated the money to do so with military deals to the various battling powers, and taken Europe’s colonies for themselves. From this coldhearted capitalist perspective, involvement in WW1 was a mistake for the US.

The US becoming the singular creditor for much of the world was an unforeseen development in imperialism. Lenin, Kautsky, Hobson, and Hilferding expected the growth and concentration of finance capital in the international sphere, and thenceforth to peace (Kautsky) or to war (Lenin). While Lenin was right in the short term about it leading to war, they - and most everybody else - did not adequately predict was the US becoming the world creditor, and even more importantly, what the consequences of this would be. The government subordinated the (at least short-term) interests of its national bourgeoisie to that of the government. This was the earliest manifestation of what would become more developed by the coming fascist governments in Germany, Italy, and Spain - the capitalists subordinated to a national political purpose (although not to the capitalists’ detriment necessarily).