Reparations - From dawes to default

After World War I, the United States struggled to persuade European leaders to accept its definition of just amounts and terms for reparations payments. Presidents Harding and Coolidge, like their predecessor Wilson, applied a criterion in evaluating the different reparations payment proposals that reflected their view of its potential impact against war among industrial states and revolution in the Third World. They were certain that the high reparations required of Germany would militate against the rapid recovery of its economic and political life. Because they knew Germany was the industrial "power plant" of Europe, its slow recovery would retard that of eastern Europe. Narrowed world markets would reignite the kind of trade wars that had in great part caused World War I. At the same time, a failure to return Germany to equality among nations rather quickly would tend to inflame nationalist tendencies in that country. Far more frightening was the prospect of Bolshevik ideology gaining popularity among the German people, especially after the Soviet Union had established the Comintern in 1919 to promote a global communist revolution.

From the standpoint of the United States, the closed trade doors and special privileges arranged among the Allies would set in motion trends toward stagnation, if not contraction, of world markets. While it was true that closed doors and special-concession organization of world markets would tend to diminish both the share and the volume of world trade enjoyed by the United States, and so were against the immediate as well as the long-run interests of the United States, such policies were also against the long-run interests of industrial capitalism as a social system. It was true that Britain, France, Italy, and Belgium would achieve a larger share of world trade in a slowly growing global market under a regime of closed doors and special concessions, but the total volume of growth would be much smaller than under an open door regime—where each nation had equal opportunities to use its capital, technicians, and technology. However, it was also true that the total volume of goods and services available to satisfy the demands of competing domestic interests in the industrial states and of economic developers in the Third World would be greater in an open door world.

American leaders refused to cancel the war debts entirely in order to try to obtain an "expansionist" direction for the postwar world economy. This meant that the United States rejected a program for priority reconstruction of the victors, and instead pushed for priorities that would give the most economic growth for the whole system. It utilized war debts to press the victors to accept a "business-based" set of criteria providing for maximum efficiency of resource utilization. At any time that Britain and France were willing to accept such a businesslike "composition," the United States was willing to negotiate and make concessions in which it would give equivalent for equivalent. This was shown in 1922, when the U.S. Congress created the World War Foreign Debt Commission to set terms for the Allies to fund their borrowing, requiring an interest rate of at least 4.25 percent and repayment over twenty-five years with no reduction in principal. Britain, in the Balfour Note, stated that it would collect from its debtors only what was necessary to pay Washington. After prolonged haggling, the United States was forced to moderate its stand; the Coolidge administration canceled up to 80 percent of some nations' war debts. Thirteen countries agreed in 1926 to repay the lower amounts over sixty-two years at an average of 3.3 percent interest.

After 1926, U.S. and European leaders continued to disagree about the justice of these payments and the propriety of linking reparations to war debts. Meanwhile, the Allies expected the Weimar Republic to comply with the terms for payment of reparations, thereby financing reconstruction of their economies. But Germany refused to raise the taxes necessary to pay, allowing spiraling inflation to destroy the value of the mark. After a series of partial postponements, the Germans defaulted in January 1923. France and Belgium responded with joint occupation of the Ruhr Valley in an attempt to force Germany to devote its total surplus to reparations payments. German workers organized passive resistance, and the Weimar Republic suspended all payments. These events provided an early indication of how in Germany political problems surrounding payment of reparations dominated economic ones. German refusal to comply with Allied demands, combined with the U.S. government's veto of projected reconstruction loans by the House of Morgan to France, on the ground that the French government had not yet settled its war debts to the United States, forced France and the other European powers to agree to convene a conference of business experts, with the Chicago banker Charles G. Dawes serving as chairman and with the task of settling the reparations according to U.S. standards.

Beginning in January 1924 and ending in September of that year, the conference worked out a system that U.S. delegates believed was based on Germany's ability to pay. In addition to measures for currency stabilization, the Dawes Plan provided for reductions in payments and, under very special circumstances, actual suspension of payments. Certain German revenues, to include taxes on alcohol and tobacco and railroad and budget revenues, were earmarked specifically for reparations payments. Furthermore, Weimar was not made responsible for obtaining the foreign exchange necessary to make the annual payments. Most significant, American and British bankers made a $200 million loan to enable German production to expand and reparations payments to begin. From 1924 to 1929, additional loans to Germany meant that net capital flow ran toward Germany. Foreign lending was responsible for a major transfer of wealth toward Germany that exceeded the amount of reparations and war debts. The total amount of reparations that the Dawes Plan imposed on Germany was not excessive, consuming between 5 and 6 percent of annual national income. Germany in fact maintained a higher standard of living than its production justified for the rest of the decade.

Subsequent to the Dawes agreements, German reparations payments to the Allies rose gradually. Germany's production also expanded. But what troubled the U.S. agent general for reparations payment, Seymour Parker Gilbert, was that most loans initially went for public works, unemployment relief, and investment in sectors with excess capacity, such as agriculture, textiles, and steel. Thus, the loans made no commensurate increase in Germany's ability to earn foreign exchange. While American officials objected to how Weimar was using the money, U.S. private bankers continued to extend loans to Germany, expecting profitable returns. German politicians hoped that increasing loans would work as a lever on the U.S. government, because, they believed, the more money Germany owed to U.S. banks, the more pressure Washington would place on the Allies to reduce reparations. This system could be sustained until German industry was essentially reconstructed, which came late in 1927. But then Germany's needs changed. Its heavy industry required new markets if it was to continue to expand. Germany's inability to find these markets revealed the major flaw in the Dawes Plan conception, which had envisioned a far more rapid development of world markets than actually occurred. Pointing to the necessity to deal with its inability to continue to balance foreign payments, the Weimar Republic requested a revision of the Dawes Plan. But Germany in fact resented paying even its already reduced reparations levy, viewing this as an act of national humiliation.

In recognition of the fact that the world market had not expanded as rapidly as the "Dawes planners" had expected, a new committee of experts on German reparations was formed to meet in Paris on 11 February 1929 to revise the Dawes Plan. General Electric Company executive Owen D. Young, one of the major architects of the Dawes Plan, was designated chair. Out of this meeting emerged the Young Plan, which scaled down the final amount of German payments again, reducing the amount by roughly 20 percent to $8,032,500,000 and making it payable over 58.5 years at an interest rate of 5.5 percent. An additional agreement placed limits on the length of German payments at 36.5 years, but this was dependent upon the organization of the Bank for International Settlements. In addition to functioning as a "trustee" for reparations payments, the new bank was supposed to provide financial facilities for making development loans, which planners thought would contribute to world market expansion. For the last twenty-two years of reparations payments, the profits of the new bank were used to make reparations payments. No nation was fully satisfied with the Young Plan. Reflecting the unhappiness in the United States, Secretary of the Treasury Ogden Mills complained that it "tied debts and reparations together," and thus ratified "the principles of the Balfour Note."

For various reasons, the Bank for International Settlements never functioned as a worldwide development bank. The new investment markets it was to create did not appear. Markets for capital goods and the growing capital surpluses they represented never came into existence. The amount of capital investments going into default became too great for the system to sustain. As world trade contracted, the means of settling payments globally disintegrated. On 16 June 1931, President Herbert Hoover proposed a one-year moratorium on payment of both reparations and war debts. He was still hopeful that some way could be found to reexpand the world economy in order to prevent the development of nationalist autarky. But after 1931, each industrial nation began to erect trade barriers to its domestic markets by means of tariffs and discriminatory administrative procedures, and combined these with export offensives based on government subsidies and currency depreciation. As a result, reparations payments never resumed after Hoover's moratorium ended. At Lausanne, Switzerland, in 1932, the Allies canceled them altogether, subject to a final token payment that the Germans never made. Except for Finland, European nations also defaulted on their war debts to the United States.

Franklin D. Roosevelt, who became president after defeating Hoover's bid for reelection, rejected an international solution to world economic problems then being considered at the London Economic Conference of June–July 1933. The movement toward nationalist autarky that he thereby accelerated prevented any reconsideration of a settlement on war debts or reparations. It later became fashionable to lay responsibility for the world depression, economic nationalism, the rise of Adolf Hitler, and World War II not only on high tariff rates in the United States, but also on the American refusal to equate war debts with reparations, and hence agree to the cancellation of war debts in exchange for a reduction of German reparations payments. These criticisms are without much merit. The key point that such critics make is that the burden of war debts caused the world economic crisis and the rise of "Hitlerism." Their argument ignores the reality that German financial policies and eventual defaults were mainly the product not of U.S. actions but of the political weakness that was a structural component of the political economy of the time. Weimar's fragmented polity, combined with the emotionally charged symbolic issues of war guilt, reparations, and nationalism, meant that following significantly different policies to prevent insolvency would have been highly unlikely, if not impossible.

Nor were Germany's reparations and loans solely responsible for creating the economic crisis that led to the international instability of the 1930s and the eventual outbreak of World War II. There were deeper causes. From 1924 to 1927, when the underlying condition for the economic crisis took shape, Germany had three possible avenues for stabilizing its foreign trade and payments. First, it could export directly to reparations receivers such as France and Belgium. Second, it could export its capital goods to the Third World for development purposes. And third, it could export to the Soviet Union. As a practical matter, all three of these alternatives were not open by 1927. Direct exports to reparations receivers would tend to interfere with employment in those countries, and so were not welcome. Export of capital goods to the Third World was not really possible—except for Latin America, where German industry could not compete very successfully with the United States, and China, where prolonged civil war by and large blocked economic development—because most of the Third World was under the control of the Allied victors, who discouraged the export of German capital goods to their colonies and semicolonies to preserve them as monopoly markets for their home industries. Extensive exports of German heavy industrial goods to the Soviet Union were blocked by the unofficial but effective U.S. government embargo on long-term American financing for developing Soviet socialized industry.

Since new outlets for German heavy industry did not appear in the world market, Germany began to invest American banking loans in an economically wasteful fashion. Bankers lent to German states and municipalities, which used these funds for projects designed to bring about more social consumption, such as municipal beautification, parks, sports stadia, hotels, public bathhouses, and roads of little or no productive utility. Investments of this sort did not provide goods or marketable services that could be used to defray the costs of the borrowed foreign capital. But the irony was that the United States, with the Dawes loans, spent an amount in excess of what the Germans paid in reparations. Germany transferred a total of 16.8 billion marks to the Allies while receiving 44.7 billion in speculative mark purchases and loans that it never repaid after the Great Depression brought down the international monetary system in 1931. President Hoover was not entirely wrong when he claimed that economic forces originating in Europe had shattered the U.S. economy, although his critics at that time ridiculed him for attempting to avoid blame for the economic collapse. While Hoover shares responsibility for the Great Depression, President Roosevelt failed to make any effort to protect the equity of American bondholders. His embrace of the anticreditor mood of the era meant that Germany was able to default on its war debts, resulting in U.S. investors paying "reverse reparations."

User Contributions:

Keith Edgerly
I appreciated the discussion of the Dawes Plan and consider it to be the best one I have yet read on the internet. I would very much be interested in learning more about what Herbert Hoover had to say about these matters.

I think you should link to Facebook. I would very much like to "like" this article.

Carolyn Gorman
Why is there no mention of Hitler's moratorium on the payment of interest to U.S. citizens who had purchased bonds sold by German companies pursuant to the Dawes Plan. Did not Hitler order the moratorium in 1933? Why is there no discussion of the many lawsuits against German companies who had sold 1.5 billion dollars in bonds in the period 1924-1930s pursuant to the Dawes plan, only to be denied interest payments in dollars pursuant to the German government's moratorium?

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