World War I Reparations - Impact On The German Economy

Impact On The German Economy

The economic problems that the payments brought, and German resentment at their imposition are usually cited as one of the more significant factors that led to the end of the Weimar Republic and the beginning of the dictatorship of Adolf Hitler. The British economist John Maynard Keynes in his best-selling 1919 book The Economic Consequences of the Peace argued that reparations threatened to destabilize the German economy, and hence German politics. The majority of historians, such as the Canadian historian Margaret MacMillan in her 2001 book Peacemakers: The Paris Peace Conference of 1919 and Its Attempt to End War, have since disagreed with this assertion. The French economist Étienne Mantoux in his 1946 book The Carthaginian Peace, or the Economic Consequences of Mr. Keynes established that Germany could have paid all of the reparations had they wanted to, and that the problem was not the Germans were unable to pay, but rather that they were unwilling to pay. The American historian Sally Marks commented that Keynes had fallen in love with Carl Melchior, a member of the German delegation, and that views on reparations "...were shaped by his passion for Carl Melchior, the German financier and reparations expert whom he met during negotiations at Spa shortly after the armistice".

In opposition to Keynes, Mantoux held that justice demanded that Germany should pay for the whole damage caused by the war, and he set out to prove that many of Keynes' forecasts were not verified by subsequent events. For example, Keynes believed European output in iron would decrease, but by 1929 iron output in Europe was up 10% from the 1913 figure. Keynes predicted that German iron and steel output would decrease, but by 1927 steel output increased by 30% and iron output increased by 38% from 1913 (within the pre-war borders). Keynes also argued that German coal mining efficiency would decrease but labour efficiency by 1929 had increased on the 1913 figure by 30%. Keynes contended that Germany would be unable to export coal immediately after the Treaty but German net coal exports were 15 million tons within a year and by 1926 the tonnage exported reached 35 million. He also put forward the claim that German national savings in the years after the Treaty would be less than 2 billion marks; however, in 1925 the German national savings figure was estimated at 6.4 billion marks and in 1927, 7.6 billion marks. Keynes also believed that Germany would be unable to pay the more than 2 billion marks in reparations for the next 30 years, but Mantoux contends that German rearmament spending was seven times as much as that figure in each year between 1933 and 1939

Economists such as Keynes assert that payment of the reparations would have been economically impossible. However, according to the American historian William R. Keylor in his essay "Versailles and International Diplomacy" from the book The Treaty of Versailles: A Reassessment after 75 Years, 'An increase in taxation and reduction in consumption in the Weimar Republic would have yielded the requisite export surplus to generate the foreign exchange needed to service the reparation debt." However this export surplus and the resulting export deficit for those collecting reparations could have created a politically difficult situation. Indeed, this was one of the causes of the UK General Strike of 1926.

The American historian Sally Marks commented the figure of 132 billion marks of reparations imposed by the London Conference of May 1921 was a highly misleading one Reparations were divided into A, B, and C bonds The bulk of the reparations were assigned to the C bonds, which were as Marks called "chimerical" as the Allies did not intend to collect the C bonds, which only existed to give the impression to French public opinion that substantial sums were going to be collected The Allies intended to collect only the A and B bonds, which totaled 50 billion marks, which was an amount that was slightly smaller than the 51 billion marks that the Germans had offered to pay Marks noted that as long as the French occupied the Düsseldorf area in 1921 as an incentive to pay, the Germans paid all of their reparations in full and on time, and it was only after the French pulled out of Düsseldorf in 1922, that the Germans started to default on a regular basis. By late 1922, the German defaults on payments had grown so serious and regular that a crisis engulfed the Reparations Commission as the French and Belgian delegates urging the seizure of the Ruhr as a way of encouraging the Germans to make more effort to pay, and the British delegate urging a lowering of the payments. As a consequence of an enormous German default on timber deliveries in December 1922, the Reparations Commission declared Germany in default, whch led to the occupation of the Ruhr in January 1923. Particularly galling to the French was that the timber quota which the Germans had defaulted was based on a German assessment of their capacity to deliver and then had subsequently been lowered from below the German assessment. There was little doubt among the Allies that the government of Chancellor Wilhelm Cuno had defaulted on the timber deliveries deliberately as a provocation intended to test the willingness of the Allies to enforce reparations if the Germans should chose not to pay. Providing more fuel for the fire was a German default on coal deliveries in early January 1923, which was the thirty-fourth coal default in the last thirty-six months. The French Premier Raymond Poincaré was deeply reluctant to order the Ruhr occupation, and had only taken this step after the British had rejected his proposals for more moderate sanctions against Germany. Frustrated at Germany's unwillingness to pay reparations, Poincaré hoped for joint Anglo-French economic sanctions against Germany in 1922 and opposed military action. However by December 1922 he was faced with Anglo-American-German hostility and saw coal for French steel production and money for reconstructing the devastated industrial areas draining away. Poincaré was exasperated with British failure to act, and wrote to the French ambassador in London:

"Judging others by themselves, the English, who are blinded by their loyalty, have always thought that the Germans did not abide by their pledges inscribed in the Versailles Treaty because they had not frankly agreed to them. ... We, on the contrary, believe that if Germany, far from making the slightest effort to carry out the treaty of peace, has always tried to escape her obligations, it is because until now she has not been convinced of her defeat. ... We are also certain that Germany, as a nation, resigns herself to keep her pledged word only under the impact of necessity".

Poincaré decided to occupy the Ruhr in 11 January 1923 to extract the reparations himself. This "was profitable and caused neither the German hyperinflation, which began in 1922 and ballooned because of German responses to the Ruhr occupation, nor the franc's 1924 collapse, which arose from French financial practices and the evaporation of reparations". The profits, after Ruhr-Rhineland occupation costs, were nearly 900 million gold marks. The real issue during the Ruhrkampf (Ruhr struggle) in 1923 as the Germans labeled the battle against the French occupation was not the German defaults on coal and timber deliveries, but the sanctity of the Versailles treaty Poincaré often argued to the British that if the Germans could get away with defying Versailles in regards to the reparations, then a precedent would be created, and inevitably the Germans would proceed to dismantle the rest of the Versailles treaty. Finally, Poincaré argued that once the chains that had bound Germany in Versailles had been destroyed, then it was inevitable that Germany would once more plunge the world back into another world war.

In order to pay for the "passive resistance" in the Ruhr, the German government began the hyper-inflation that destroyed the German economy in 1923. In 2008, the British historian Richard J. Evans argued that Keynes was simply wrong about reparations being unpayable, and instead contended that the responsibility for the great inflation of 1923 lay with the German government who preferred hyper-inflation to paying reparations Although the French did succeed in making their occupation of the Ruhr pay, the Germans through their "passive resistance" in the Ruhr and the Hyperinflation which wrecked their economy, won the world's sympathy, and under heavy Anglo-American financial pressure (the simultaneous decline in the value of the franc made the French very open to pressure from Wall Street and the City), the French were forced to agree to the Dawes Plan of April 1924, which substantially lowered German reparations payments. Under the Dawes Plan, Germany paid only 1 billion marks in 1924, and then increasing large sums for the next three years, until the total was to rise to 2 and quarter billion by 1927. After 1927, Germany was to make an annual payment of 2 and half billion marks. Even under the reduced payments under the Dawes Plan, Germany continued to default in reparations payments. To deal with the implementation of the Dawes Plan, a conference took place in London in July–August 1924. The British Prime Minister J. Ramsay MacDonald, who accepted Keynes's view of reparations as impossible to pay successfully pressured the French Premier Édouard Herriot into a whole series of concessions to Germany. A British onlooker, the diplomat Sir Eric Phipps commented that “The London Conference was for the French “man in the street” one long Calvary…as he saw M. Herriot abandoning one by one the cherished possessions of French preponderance on the Reparations Commission, the right of sanctions in the event of German default, the economic occupation of the Ruhr, the French-Belgian railroad Régie, and finally, the military occupation of the Ruhr within a year.” The Dawes Plan was a momentous moment in European history as it marked the first time that Germany had succeeded in defying Versailles, and revised an aspect of the treaty in its favour. The London conference was the first major triumph of British Appeasement.

Following German complaints that reparations payments under the Dawes Plan were too high, the Young Plan of 1928, under which the Germans were to pay annuities of various amounts, but none to be higher than two and a quarter billion until 1988. Under the Young Plan, transfer protection was reduced while the Reparations Commission was abolished. The commission was replaced by the Bank for International Settlements. The task of executing the Young Plan was assigned to an international conference in The Hague which took place in August 1929. During the conference, the German Foreign Minister Gustav Stresemann demanded that an “unconditional Rhineland evacuation” five years ahead of schedule as the German condition for accepting the Young Plan. In this, Stresemann was strongly supported by the British, and as a result of strong Anglo-German pressure, the French agreed to evacuate the Rhineland in June 1930, five years ahead of schedule as the price of reducing German reparations. Labour had been returned to power in the 1929 elections, and as a result, MacDonald returned to his policy of 1924 of pressuring France into concessions to Germany with little regard for French concerns. Although the Young Plan did not come into effect until January 1930 owning largely to difficulties over the Rhineland evacuation, it was made retroactive to September 1, 1929 the date it was scheduled to come into effect, and as a result the Germans paid less than half of what they would have under the Dawes Plan from September 1929. Despite these concessions to Germany, a referendum was called in that country in December 1929 in an attempt to pass the so-called Liberty Law, which would have cancelled the Young Plan and tried those German politicians who accepted the plan for high treason. Though Brüning claimed that Germany could not pay reparations because of the Great Depression, his real reason was to seek a foreign policy success that might bolster his highly unpopular government. At the same time, Brüning started to demand gleichberechtigung (equality of status), that is doing away with Part V of Versailles, which had disarmed Germany. Brüning never explained why Germany was so impoverished by the Depression that she could not afford to pay reparations, even under the reduced rate of the Young Plan while at the same time stating that Germany could afford tanks, air force, heavy artillery, conscription, submarines, and the rest of weapons forbidden by Part V.

Marks has argued that the Germans could have easily paid the 50 billion marks in reparations, but instead chose to repeatedly default on reparations payments as part of a political strategy of undermining Versailles. Marks also points out that Article 231 of the Versailles treaty, the so-called “war guilt clause” says no such thing, and all that the clause does say is “the responsibility of Germany and her Allies for causing all the loss and damage to which the Allied and Associated Governments and their nationals have been subjected as a consequence of the war imposed upon them by the aggression of Germany and her allies” The claim that Article 231 implies “war guilt” was the work of various German politicians and apologists who misinterpreted Article 231 as saying that as a way of gaining international sympathy. Moreover, Marks points out that the next article, Article 232 of the Versailles treaty limits German responsibility to pay only for civilian damages, and that when a conference was called in London in 1921 to determine how much Germany should pay, the Allies calculated on the basis of Germany could pay, not on their needs.

It has been argued by some that it is a fallacy to consider the reparations as the primary source of the economic condition in Germany from 1919 to 1939. This perspective argues that Germany paid a small portion of the reparations and the hyper-inflation of the early 1920s was a result of the political and economic instability of the Weimar Republic. In fact, the occupation of the Ruhr by the French (which began when Germany failed to supply a required delivery of telegraph poles) did more damage to the economy than the reparations payments. Another fallacy is that these reparations were the single cause of the economic condition that saw Hitler's rise to power. Germany was in fact doing remarkably well after its hyper-inflation of 1923, and was once more one of the world's largest economies.

The economy continued to perform reasonably well until the foreign investments funding the economy, and the loans funding reparations payments, were suddenly withdrawn with the Stock Market Crash of 1929. This collapse was magnified by the volume of loans provided to German companies by US lenders. Even the reduced payments of the Dawes plan were primarily financed through a large volume of international loans. From 1924 onward German officials were "virtually flooded with loan offers by foreigners." When these debts suddenly came due it was as if years of reparations payments were compressed into a few short weeks.

Also of note are the ideas of the British historian A. J. P. Taylor from his 1961 book The Origins of the Second World War, in which he claims that the settlement had been too indecisive: it was harsh enough to be seen as punitive, without being crippling enough to prevent Germany regaining its big power status, and can thus be blamed for the rise of the Reich under Hitler within decades.

The British economic historian Niall Ferguson in his 1998 book The Pity of War argued that Germany could have paid reparations had there been the political will. Ferguson began his argument by noting that all of the belligerent countries in World War I had endured significant economic losses, not just Germany, and that in 1920–21, German net national product grew at 17%. Ferguson has argued that the German trade deficit of 1920 was caused by speculation promoted in turn by the amalgamation of rapid economic growth in Germany and a weak exchange rate for the mark, and not by the prospect of reparations. Ferguson has contended that the rise in the value of the mark after March 1920 was caused by speculators buying up the mark, and this revaluation of the mark led to inflation becoming a serious problem in Germany from 1921 onwards Ferguson has maintained that the ratio of total German debts in 1921 to the gross national product was less than the ratio of total British debts to the British G.N.P in the same period. Likewise, Ferguson has argued that the total annuity of 3 billion marks imposed by the London conference in 1921, which totalled 4–7% of German national income, was far less than the worries expressed by Keynes of 25–50% of German national income being handled over in reparations. Similarly, Ferguson has argued that France paid 4,933 million francs in reparations to Germany between 1871 and 1873 totalling 25% of French national net income without causing national bankruptcy, and has argued that German claims in the 1920s that reparations payments threatened Germany with bankruptcy were just an excuse to try to get out of paying reparations. Ferguson has argued that the plan called by the Young Committee in 1929 for Germany to pay reparations until 1988 is a far less than the 163 billion marks paid by Germany to the Economic European Community between 1958 and 1998 without experiencing a drastic collapse in living standards, and as such, the Young Plan was not the economically unviable plan as often depicted. The American historian Stephen Schuker has argued that the Germans received as much in American loans, which they never repaid, as Germany paid in reparations. Schuker has noted that between 1921 and 1931, Germany paid 19.1 billion marks in reparations, and in the same time, took in 27 billion marks in loans from the United States, which Germany defaulted on in 1932. Ferguson has argued the principle problem with reparations was not that the sum, but rather that the Allies entrusted the Germans with responsibility for paying reparations voluntarily without occupying significant amounts of German territory as an incentive to pay. Since German politicians were reluctant to raise the necessary taxes to pay for reparations, successive German governments chose to default on reparations out the hope that the Allies were not serious about collecting reparations. Even without reparations, total public spending in Germany between 1920 and 1923 comprised 33% of German net national product, and Ferguson has argued that even if no reparations had been imposed, Germany would still had significant problems caused by the need to pay World War I debts combined with the demands of voters for more social services. As a result of inflation, German debts by 1922 were reduced down to where they had been in 1914. Ferguson has argued that German inflation in the 1920s was not caused by reparations, but rather were a conscious political decision on the part of the German government to employ this particular economic strategy to deal with World War I debts and reparations.

Under the Hoover Moratorium of June 1931 issued by the American president Herbert Hoover, which was designed to deal with the world-wide financial crisis caused by the bankruptcy of the Creditanstalt in May 1931, Germany ceased paying reparations. At the Lausanne Conference of June 1932, reparations were formally cancelled. Marks calculates that between 1921 and 1931, Germany paid a total of 20 billion marks in reparations, most of which came from American loans that the Germans repudiated in 1932. In this way, the Germans largely escaped paying for World War I, and instead shifted the costs onto American investors. The American historian Gerhard Weinberg commented about the way the Germans used reparations to avoid paying the costs of World War I that "The shifting of the burden of reparations from her shoulders to those of her enemies served to accentuate this disparity" in the economic strength of the Allies, which struggled to pay their heavy World War I debts and the other costs of the war and Germany, which paid neither reparations nor its World War I debts.