and redrew the global map—especially in Central Europe and the Middle East. It ushered in the communist takeover of Russia and sparked colonial revolts in Southeast Asia, inspiring (among others) a very young Hõ Chí Minh to dedicate himself to Vietnamese independence. In many Western countries, the war legitimized labor rights and women’s suffrage, as those who bore the burdens of war became more active in shaping subsequent domestic politics. Making policy in the wake of these transitions would challenge the best of politicians.
Initially, in early 1917 and again in 1918, Wilson had defined America’s war aims in broad terms. The war must produce “some definite concert of power which will make it virtually impossible that any such catastrophe should ever overwhelm us again.” Indeed, only “a peace between equals can last,” and so he hoped to persuade the British, French, Italians, and other belligerents away from vindictiveness toward the Germans and Austro-Hungarians. With that “right state of mind” between nations, he aimed to tackle the “vexed questions of territory [and] racial and national allegiance.”2 America would join the war, but only if the war were “the culminating and final war for human liberty,” the war to end all wars.3 “What we are striving for,” he told Congress, “is a new international order based upon broad and universal principles of right and justice—no mere peace of shreds and patches.”4 Anything less would desecrate the deaths of American boys lost on French battlefields and sully America’s role in international affairs.
First, he planned to tap the democratic desires of people around the world to enjoy national self-determination. “‘Self-determination’ is not a mere phrase. It is an imperative principle of action, which statesmen will henceforth ignore at their peril.”5 His hope, articulated in the language of democratic reform, was that ethnic and racial strife would disappear if nationalism could find an outlet within borders that reflected the ethnic and racial makeup of the people who lived there. Second, nationalism could be kept from becoming imperialism if mitigated by an international commitment to “Open Door” trade and finance. So long as every nation felt it could safely buy and sell on international markets, the justification for colonial competition might fade away.6 Finally, a League of Nations would act as the institutional underpinning to provide security to the world. “My conception of the league of nations is just this,” Wilson explained, “that it shall operate as the organized moral force of men throughout the world.”7 The league would become “the watchman of peace,” it was the “main object of the peace … the only thing that could complete it or make it worthwhile … the hope of the world.”8 Behind all of these goals lay Wilson’s eschatological reading of history as progressive. The future would be better than the past, and America (along with Wilson) could help history along its way.9
Many issues stood in the way of making those ideals reality, several of which seem obvious in retrospect. First, Wilson carried an idiosyncratic definition of self-determination that papered over the problems of implementing democracy and the “new international order” he had promised.10 Second, the plan for economic interdependence after the war ignored the financial reality that emerged from the war. Wilson assumed individual economies would seamlessly return to a global system that rested upon the gold standard. Over the next decade, this would be the largest source of ongoing crises. Wilson also failed to consider more thoughtfully the relationship between economic performance and democratic stability. In short, Wilson did not fully think through the ways in which economic nationalism might undermine the kind of democratic institutions he hoped to see around the world, let alone economic internationalism.
The astonishing cost of World War I had driven all belligerents off the gold standard during the war. In place of gold, each had printed money with varying degrees of abandon. As a result, by war’s end every country had a great deal more currency in circulation than it had held before, in some cases by multiples of ten or more. The surplus money created strong inflationary pressures that most countries tried to curb through price controls, rationing, and similar policies.11 In addition to printing money, the belligerents borrowed from anyone who would lend. For the Allies this meant borrowing from each other and ultimately from the United States. Collectively, the Allies owed the United States about $12 billion. Britain owed $4.2 billion, France $3.4 billion, Italy $1.6 billion, and so on. Unfortunately for the French, they had loaned about $2.5 billion to Russia before the Bolshevik Revolution in 1917. The new communist regime had no intention of ever repaying this debt.12
After the war, Europe desperately needed capital to rebuild. Yet European currencies had lost much of their value. Only the United States had the means to make this investment because only the United States had deep reserves of the one form of money everyone trusted: gold.
All of this background helps clarify why the economic order Wilson sought not only failed to materialize, but, within a decade had wilted into the Great Depression. He insisted that the world return to an open and competitive market at a moment when the United States produced the lion’s share of important products, held a huge load of the world’s money, and also held enormous IOU’s from the countries it traded with.13 At Versailles, the French and British recognized how the arrangement tilted against them and pressed Wilson for debt forgiveness. As an incentive, they raised the question of German reparations, suggesting that Wilson forgive them their debts so that they could, in turn, forgive their debtor. After all, they reasoned, Wilson had suggested a magnanimous peace, and financial magnanimity expressed this idea as well as any other gesture. Moreover, America had come to the war late and suffered a fraction of British and French sacrifice. Debt forgiveness might equalize the American contribution to the Allied victory. Wilson’s close confidant Colonel E. M. House agreed: “Should [Americans] not be asked to consider a large share of these loans as a part of our necessary war expenditures, and should not an adjustment be suggested by us and not by our debtors?”14
Figure 1. US, German, French, and UK gold reserves as percentage of world stock, 1913–1930. Source: World Gold Council, “Central Bank Gold Reserves, An Historical Perspective Since 1845 (November 1999).”
But Wilson would have none of it. He saw debt and reparations as distinct moral and legal questions. German reparations constituted a “fine”—a punishment for bad behavior. The Allies should set reparations high enough to hurt—to become a disincentive against future bad behavior. By contrast, Allied debts represented legal obligations entered into voluntarily. If the Allies had no interest in paying their debts, maybe they should not fight such costly wars. Besides, in a roundabout way, wouldn’t debt forgiveness just encourage future war?15
In the end, Wilson got his way, but only to doom his ideals. America would collect on Allied debts, but the British and French passed their burden along to Germany in the form of staggering reparations totaling about 130 billion gold marks (roughly $33 billion in 1919 dollars, which, when viewed as a percentage of 2015 American GDP, amounts to $7.5 trillion).16 Since Germany had few reserves of gold at the end of the war, it had to pay in installments out of current production, meaning it had to generate trade surpluses to created leftover reserves for reparations. Yet, as the Economist explained in 1921 (just prior to the first reparations payment), while Germany would likely export about 3.5 billion marks of goods that year, it would import about 4.7 billion in food and other critical materials. With no planned surplus in the coming years, where would reparations come from?17
The more ominous problem, though, was that the plan essentially tied the entire global financial system to the fate of the German economy. Perhaps, under the best of circumstances, this might be a good idea. But in the chaos that followed the war, with Germany perilously close to political and economic anarchy, this was a very poor choice indeed. Over the next years, the world came to the brink of financial crisis again and again as this precarious structure nearly collapsed.
For Eisenhower and Clay in particular, this history created a heavy weight when they found themselves,
