In my U.S. textbook the U.S. debt policy, its financial complications, and its diplomatic effects were briefly discussed, ending with the summary that eventually no country ever fully paid its debts, except for “brave little Finland [in 1976]”. What circumstances led for Finland of all countries to repay its debt over 58 years?
EDIT: I have the quote from my textbook (American Pageant). “President Herbert Hoover declared a one-year debt moratorium in 1931, and before long all the debtors had defaulted — except ‘honest little Finland,’ which struggled along making payments until the last of its debt was discharged in 1976.”. I can dig into my textbooks citations for more info but not tonight as its not on me.
I'm confused, why did Finland even have war debt from WW1?
I'll try my hand at answering this, since I can at least read the Finnish sources.
This will be mainly based onKansantaloudellinen aikakauskirja -91.vsk-1/1995 "The only honest thing to do" - sotavelat, Suomi ja Hooverin moratorio 1931. Only in Finnish I'm afraid.
It mostly concerns why Finland did continue to pay, rather than why other countries stopped.
Some background: Calling these "war debts" makes sense only from an American perspective, as in Finlands case (as well as the Baltic states that were similarly newly independent from the Russian empire) these were debts incurred to secure shipments of grain and other foodstuffs immediately after World War One ending. However, they were dwarfed by the war debts of the same timeframe, so they got lumped in.
The Baltic states and Finland had been pretty dependent on Russian grain, so a breakdown in trade because of the independence and the Russian revolution necessitated external food imports, and the US were the ones who were able to deliver it. When Finlands "war debt" was formalized in 1923, the sum was agreed as $9 million, with twice-yearly repayments over 62 years, at 3% interest for the first 10 years, 3.5% for the remainder. Overall, the US was owed about $11 billion, so this is not a significant portion by any means.
The majority of what the US considered "war debts" were inextricably (though not officially) tied to war reparations that Germany had to pay, and those ran into trouble very soon after the war. During most of the 20s, there were renegotiations on reparations and debts ongoing, I'm sure someone else (or even you textbook)can give you a fuller explanation on the economic troubles. This was worsened by the Great Depression, and by 1931 Europe also had a currency crisis, and several countries, including Finland were more or less forced to go off the gold standard, and devalue their currency. This of course would make repayments of foreign debts more difficult.
The Hoover moratorium in the summer of 1931 was an attempt to get a handle on the economic crisis: everyone would get a years reprieve on reparations and war debt payments, which would allow time for a settlement to be negotiated. Payments on the old schedule were to restart in December 1932. There was a tentative agreement made called the treaty of Lausanne, that would reduce war reparations Germany owed by 90%, but it was contingent on the allies getting commensurate debt relief. In late 1932, this was voted down in the US Congress, and by this time the Nazis had started to consolidate power in Germany and no commitments to resume war reparartions were forthcoming, so even the few nations that made the payments in December 1932 defaulted in June 1933, except Finland.
I'm afraid I can't tell you exactly why each other nation decided to default. I'm sure some general themes were discussed in your textbook. Why didn't Finland follow suit? It's mostly a question of scale: Finlands debt was among the smallest at the time in absolute terms(only Lithuania had somewhat less debt among those that owed money to the US), and Finland owed the least in relation to GDP, exports, pretty much most used metrics, so claiming it was economically unfeasible to continue payments wasn't seen as a good argument (this from Finnish internal documents). It also didn't have any reason to connect default to Germany stopping war reparations; it wasn't owed anything by Germany.
In the end, Finnish politicians decided that paying the debts in full was a good PR exercise, which was seen as needed due to both some bad history on repaying loans (Finland had been off the gold standard in the early days of independence, and had made laws that forbid paying off foreign loans in non-Finnish currency, which had hurt investors, which in turn was thought to continue to hinder access to foreign loans. This is sourced from letters/telegrams by diplomats abroad), and the impression of political instability (the civil war was only 15 years past and by no means forgotten, there had been a failed coup-d'ètat in 1932) that wasn't unreasonable.
There's also a case to be made for the personal influence of the governor of the Bank of Finland, Risto Ryti (later war-time prime minister and president, and back to bank governor the moment he abdicated, but that's not really relevant), who was a strong proponent of paying off foreign debts in full on ideological grounds.
The full quote from the title of the article I linked above is from an interview with Ryti in 1934, by which time it was reasonably clear Finland was the only nation continuing to make payments, is pretty telling of the image they wanted to portray: "We signed a contract. We promised to pay. It is the only honest thing to do." Was it a struggle like your textbook quote says? Not really, but they certainly didn't mind portraying it as such.
This is not say Finland never tried to get out of the deal: they negotiated for interest reductions and debt forgiveness many times, and were granted another moratorium on payments from 1940 to 1942. By this time, Finland and the US were on opposite sides of the conflict, although they never declared war on each other. Payments resumed in December 1942 with Finland at war with US allies, the Soviet Union, which is certainly a strange footnote of history.
After the war, repayments of the loan were negotiated to be funneled into a educational exchange program between the countries, and the debt was finally paid off ahead of time to establish the Finnish-U.S. Educational Trust Fund. This is probably best seen as an aspect of the Cold War: low-key cultural influencing a neutral state. Coninuing repayments at that point wasn't a burden at all, really.
Was this an effective PR strategy by Finland? It's somewhat hard to tell, because the best comparison countries, the Baltic states, ceased to exist as independnt states by the end of the decade. I've certainly read anecdotes of the story being used when setting up closer business ties with the U.S. in the post-war period. It probably didn't hurt, and it wasn't a huge burden, so probably a reasonable risk to take for the potential reward. There are some political cartoons depicting Finland in a positive light in this context from US papers in the 1930s reproduced in that article, so clearly some people were influenced by it, but I wouldn't know how you'd go about establishing what quantifiable effect paying this debt had. Other than getting a throwaway line in a history textbook of course, but that may be because some text book author in the past got a nice stipend from the Finnish-U.S. Educational Trust Fund. ;)
(that last line is obviously unfounded speculation, if it wasn't clear)
TL;DR: The debt was relatively small, and not connected to German war reparations as for most nations, so they didnt feel they had the excuses other nations used to default, so it was instead seen as a useful PR exercise. Like making minimum payments on a credit card to improve your credit score, although that's not the greatest analogy ever.