Throughout the debt-settlement negotiations, the European debtor governments argued that payments on the debts should be dependent upon the collection of reparations from Germany. The United States refused consistently to recognize any relation between the two transactions. In American eyes, the Allied governments that had borrowed from the United States—had "hired the money," as President Calvin Coolidge put it—were under obligation to repay their borrowings regardless of what they might be able to collect from Germany. In actual fact, however, it was obvious that the ability of the Allied governments to pay their debts would be affected by their success or failure in collecting reparations, and it is for this reason the United States took a sympathetic attitude toward efforts to solve the reparations problem.
The peace conference had left to the Reparations Commission the determination of the amount to be paid by Germany. In May 1921 the commission set the figure at 132 billion marks, or approximately $33 billion. Germany accepted the figure under threat of occupation of additional German territory. Annual payments of a minimum of 2 billion marks were to begin at once, with later payments to be adjusted in the light of estimates of capacity to pay and evaluation of payments in kind already made.
Within just fifteen months of the settlement, Germany was in default on the required payments, whether willfully or through inability to meet the schedules. Over British objection (backed by that of the American observer), the Reparations Commission authorized occupation of the great German industrial area of the Ruhr Valley. French and Belgian armies carried out the mandate in January 1923 and held the Ruhr until September 1924. Germany met the occupation with passive resistance, and its economy suffered a prolonged and disastrous inflation. Reparations payments stopped entirely.
In the meantime, Secretary of State Charles Evans Hughes had proposed that a committee of experts study Germany's capacity to pay and devise a plan to facilitate payments. Late in 1923, all the governments concerned agreed to the suggestion, and the Reparations Commission appointed two committees to study different aspects of the problem. One of the committees was headed by the Chicago banker Charles G. Dawes. The Dawes Plan, which went into effect on 1 September 1924, was admittedly a temporary expedient, providing a rising scale of reparations payments over a period in which it was hoped the German economic and monetary system could be restored to a healthy condition. Germany received an international loan of $200 million. It agreed to make reparations payments beginning at 1 billion gold marks the first year, rising to 2.5 billion in the fifth year and thereafter. Payments would be made in German currency to an agent general for reparations. Thereupon Germany's responsibility would cease. The problem of converting the marks into foreign currencies would be the responsibility of the Inter-Allied Transfer Committee. No attempt was made to reassess the total or to set a date for the termination of payments.
During the prosperous years 1924 to 1928 the Dawes Plan worked satisfactorily, and by the latter year, the time appeared ripe for an attempt at a final settlement. A new committee headed by another American, the New York financier Owen D. Young, proposed the Young Plan, which was agreed to by Germany and its creditors in January 1930. By the new arrangement, which was intended to make a final disposition of the reparations problem, Germany agreed to make thirty-seven annual payments averaging a little over $500 million, followed by twenty-two annual payments averaging slightly under $400 million. By the end of the fifty-nine years, Germany would have paid altogether about $9 billion of principal and $17 billion of interest—a drastic reduction from the $33 billion of principal at first demanded by the Reparations Commission. Furthermore, the Young Plan clearly recognized the relationship between reparations and war debts through a concurrent agreement (not participated in by the United States) that any scaling down of the debts would bring about a corresponding reduction in reparations. The annuities to be distributed under the plan were so proportioned as to cover the war debt payments to be made by the recipients. As long as Germany continued to pay the Young Plan annuities, the debtor governments would have the wherewithal to satisfy their creditors, of whom the chief was the United States. If general prosperity had continued, the plan would have been workable.