German Reparations, 1919 - 1932: A Historical Survey

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German Reparations, 1919–1932

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German Reparations, 1919–1932 A Historical Survey Leonard Gomes

© Leonard Gomes 2010 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6-10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2010 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN: 978–0–230–23838–1 hardback This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Gomes, Leonard. German reparations, 1919–1932 : a historical survey / Leonard Gomes. p. cm. Includes bibliographical references. ISBN 978–0–230–23838–1 (hbk. : alk. paper) 1. World War, 1914–1918 – Reparations – Germany. 2. Finance – Germany – History – 20th century. 3. Germany – Economic conditions –1918–1945. I. Title. D649.G3G46 2010 940.3⬘1422—dc22 10 9 8 7 6 5 4 3 2 1 19 18 17 16 15 14 13 12 11 10 Printed and bound in Great Britain by CPI Antony Rowe, Chippenham and Eastbourne

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Contents List of Abbreviations

vii

Introduction

1

1 Reparations and the Legacy of War Synopsis – the reparations saga in a nutshell 1.1 Legacy of the Great War 1.2 What really happened at Paris 1.3 The Versailles settlement and the ‘German problem’

3 3 4 22

2 Summits on Sums 2.1 La politique des casinos 2.2 The London Schedule of Payments 2.3 Significance of the figures 2.4 Feasibility of the London Schedule

47 47 65 68 71

3 Fulfilment Crises and Allied Disunity 3.1 A fraudulent bankruptcy? 3.2 Poincaré and ‘the lure of the Ruhr’ 3.3 The Ruhr occupation

84 84 104 117

4 From Dawes to Young 4.1 The Dawes Plan 4.2 Germany under Dawes: Reparations on credit 4.3 The Young Plan

141 141 157 166

5 The End of Reparations (and After) 5.1 Weimar’s faltering economy and the slump 5.2 Germany’s banking crisis and the end of reparations 5.3 An unresolved issue: Allied war debts 5.4 The Nazi debt default and post-war redemption

192 192

v

31

203 212 217

vi

Contents

Appendix: Keynes, the Transfer Problem and German Reparations A.1 The transfer problem: The Keynes-Ohlin debate A.2 Keynes’s anti-reparations campaign

228 228 233

Bibliography

241

Index

251

Abbreviations BDFA CAB 2/-, 23/Cmd DBFP

DIA FRUS FRUS PPP GM

PD [HC] RM SAFR

SIA

British Documents on Foreign Affairs, edited by K. Bourne and D. C. Watt, 1989. Cabinet Papers (UK), National Archives, Kew. British Parliamentary Command Papers. Cited by number and year. UK Foreign Office, Documents on British Foreign Policy 1919–1939 (London, 1946–85). Cited by series number and volume number. Royal Institute of International Affairs (London). Documents on International Affairs, annual. US Department of State, Papers Relating to the Foreign Relations of the United States, annual. US Department of State, The Paris Peace Conference, 1919 (Washington, DC., 1942–7). Gold mark. A unit of account equal to the pre-war (1913) gold value of the German mark in terms of the US dollar, which was 1 gold mark = $0.238 (or $1 = 4.2 GM). Figures for reparations quoted in gold marks can thus be expressed in dollars by dividing by 4.2 (usually rounded off to 4). British Parliamentary Debates [House of Commons] Hansard. Reichsmark, The gold-backed German currency unit after 1924, equivalent to $1 = 4.2 RM. Survey of American Foreign Relations, Council on Foreign Relations, Washington, DC. Cited by year and page number. Royal Institute of International Affairs (London). Survey of International Affairs, annual.

Note: Throughout the text references to ‘billion’ = one thousand million (equivalent to an American billion or British milliard).

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Introduction

This book attempts to provide answers to two questions: (1) How and why were heavy reparations imposed on Germany by the victorious Allies under the Treaty of Versailles (1919) at the end of the First World War; and (2) How did Germany end up paying no net reparations out of her own resources? The answers are provided by telling the story of reparations (like all storytelling) from beginning to end, with thematic sub-sections organised in a broader chronological framework, using the existing literature as source material. It is, therefore, a literature survey, a historical overview of the classical German reparations story. The book is not a research monograph. It conveys no original research by the author and no archival ‘mining’ has been done. It is simply a work of synthesis. As indicated above, the author’s material is the current literature on the multidimensional and complex story of German reparations from 1919 to the abandonment of payments at the Lausanne Conference in 1932. The literature on the reparations problem is vast and diverse, reflecting both the centrality of the issue to any understanding of interwar European history, as well as differences (mainly of opinion and interpretation) in national perspectives. In general, consensus has grown since the 1970s, but significant differences remain on specific points – as there were from the beginning. The sequence of events described in the literature starts from the peacemakers’ decision at Versailles to use reparations (1) to distribute nationally and internationally the enormous costs of the war (including the huge war debts owed to each other and to the United States); and (2) additionally, by the French, as a security check on Germany – a device to restrain Germany’s industrial and military potential. After a series of reparation crises, culminating in the 1923 1

2


Franco-Belgian occupation of the Ruhr (against a diplomatic background of Anglo-French disunity), there followed a brief period of economic recovery, attempts at reconciliation and security enhancement. Shortly afterwards, the reparations problem returned with a vengeance, and finally disappeared in the maelstrom of the Great Depression – a catastrophe that cleared the way for Hitler’s assumption of power. This ‘historical context’ frames the present narrative. Thus, the book deals with the traditional concerns of the historiography, as follows: 1. The Allied disagreements over the ‘German problem’, reparations and Allied war debts at the Paris Peace Conference and afterwards (Chapter 1). 2. The series of Allied reparation conferences to agree on a moderate (lump-sum) reparations settlement, and the fixing of the 1921 London Schedule of Payments (Chapter 2). 3. The Ruhr occupation and the German inflation (Chapter 3). 4. The Dawes and Young reparation regimes in Germany (Chapter 4). 5. The Great Depression, the 1931 German banking/currency crises, the end of reparations and the Nazi Debt Default (Chapter 5). The book ends with an Appendix on the Keynes-Ohlin Debate on the Transfer Problem and Keynes’s 14-year campaign against reparations and the Versailles Treaty. Throughout the discussion, the emphases are on how and why things happened, with what results – and what is the current position on each of these matters (as reflected in the latest writings of specialists in the field). Much of the fresh perspectives on reparations still remains in the specialist journals/books, and have not quite filtered down to reach the pages of undergraduate textbooks. This book can help to bridge that gap in teaching literature, and provide a good overview of the topic for academics intending to work in the field. The critical narrative provides sources easily accessible to students and other interested general readers.

1 Reparations and the Legacy of War

Synopsis – the reparations saga in a nutshell Reparations became a divisive issue among the Allies since the time of the Armistice (11 November 1918). It continued to exercise a jinx-like influence on Allied deliberations throughout the Peace Conference itself – ‘reparations were the curse of Versailles’, says Antony Lentin (1990, p. 273) – something which carried over to the succession of inter-Allied conferences after 1919 concerned with various aspects of treaty execution and enforcement. The peace talks wrangling over what should be Germany’s reparation liability meant that the conference ended without reaching agreement on the total bill to be presented to Germany. The task of settling on a final figure by May 1921 was left to the Reparations Commission set up under the Treaty. In the meantime, Germany was to pay an interim amount of $5 billion (or 20 billion GM) by 1 May 1921. It therefore took the victorious Allies two years to prepare and reach agreement on the sum owed by Germany and how the debt was to be discharged. That agreement, however, did little to settle Allied differences over reparations. A new confrontational twist was given to Allied disagreements as a result of the rejection of the Treaty of Versailles by the US Senate (19 March 1920) and the consequent withdrawal of official American representatives from all Allied Treaty institutions, in particular, the Reparations Commission, whose chairman was expected to be an American. With no official presence on the Commission, the United States had almost no leverage on reparation decisions. What was previously a three-cornered contest (United States-France-Great Britain) now became a straight head-to-head between France and Great Britain. The two latter countries clashed repeatedly in meetings of the Reparations Commission, which 3

4


came to a head and climaxed in January 1923 over the Franco-Belgian occupation of the Ruhr. The heat went out of the dispute for a time during the Dawes settlement (1924–29); but the embers of discord still flickered until 1932 when reparations came to an end. To understand how reparations figured as one of the most complex and contentious problems in the interwar period, it must first be seen in the context of the baleful legacy of the Great War – the human, material (physical damage) and financial costs. These costs to the European Allies included huge war debts to the United States and to each other. The wrangling about who should pay for the war – how the burden of these costs should be distributed among American and European taxpayers on the one side, and Germany on the other – started here and continued until reparations ended at the Lausanne Conference (1932) and the European Allies repudiated their American war debts.

1.1 Legacy of the Great War Debts, indemnities and reparations This chapter sets the stage for the German reparations drama that began at the 1919 Paris Peace Conference, two months after the fighting stopped. The 1914–18 War was the most destructive and bloodiest conflict thus far in human history. The human and material costs (or ‘indirect costs’) were staggering. More than 68 million men had been mobilised for ‘total’ warfare;1 of these, at least 10 million died, and 20 million were wounded. In addition to these military casualties, at least 6.6 million civilians perished.2 Alongside the loss of life, the war caused massive material physical damage. Human and physical capital losses have been estimated at $150 billion. On the western front, the war zone – its battlefields resembling moonscapes – was concentrated in parts of Belgium, and France’s ten north-eastern departments. This region suffered great damage to houses, farms, factories and other property. The need to mobilise national resources on a massive scale led to unprecedented levels of military expenditures in all belligerent countries. War expenditures by governments, known as ‘direct costs’, totalled some $180 billion.3 These expenditures were only partially covered by taxation. In France and Germany taxes financed between 15 and 17 percent of war spending, while in Britain the proportion of expenditure accounted for by taxes averaged 25 per cent and eventually rose to 28 per cent.4 The bulk of national budgetary deficits were financed by a combination of inflationary expansion of paper money, liquid government debt and extensive foreign and domestic borrowing. Initially,

Reparations and the Legacy of War 5

with the assistance of the US government, Allied countries obtained dollars by selling bonds to American private investors and by liquidating American securities held by their citizens and firms. After the United States entered the war, the Allies obtained much of their foreign borrowing from the United States in the form of US Treasury advances. The proceeds of these borrowings were used to purchase food, raw materials and munitions during the war, and after the Armistice, to provide supplies for the start of post-war reconstruction. In all, the United States lent roughly $10 billion to the European Allies, some of it intermediated through Great Britain. France emerged from the war owing $4 billion to the United States and $3 billion to Great Britain. Britain incurred a $4.7 billion war debt to the United States, but it was owed $11.1 billion by the other Allies.5 Britain would repay the United States so long as Britain was repaid by France; which, in turn, was counting on reparations from Germany. Thus emerged the ‘reparations/war-debt tangle’ of the interwar years. Public-sector deficits increased dramatically after the war, not only on account of swollen debt-service payments but also because of additional government obligations for war-related pensions and, in countries with war-devastated regions, for reconstruction. The situation in Germany was different. There was no external debt to speak of – only internal debt (obligations owed to German citizens). Germany experienced no physical destruction during the war. By 1922 the accumulated German war debt (excluding reparations) was almost entirely wiped out by wartime inflation and the hyperinflation that followed. The result was that, in dollar terms, the 1922 national debt was almost exactly what it had been in 1914 (Ferguson, 2000, p. 429). Budgetary and debt-management policies became fiercely contested issues of political debate throughout the interwar period – the reluctance of all social classes to accept fiscal sacrifices for the sake of national budgetary stabilisation. Politicians vacillated when confronted with the socially divisive decisions on how the costs of the war should be apportioned. In Europe, at the time, a popular strand of thinking was: if the United States insisted on repayment of its debt, then the Allied debtors would have to insist on compensatory reparations from Germany. That was the suggestion that brought the link between inter-Allied debts and reparations to the forefront of public debate. From the start, the Americans regarded their wartime loans to the Allies as ordinary commercial debts, repayable in full. Constrained by Congress and American public opinion, Wilson could not write off the Allied war debt – a generous offer that might have encouraged Britain and France to moderate

6


their own financial demands on Germany. Such a trade-off might likely have led to a manageable reparation claim confined to civilian damages and reparations might not then have been a problem. But that was not to be. The British failed in their bid immediately after the Armistice to get the Americans to cancel all inter-Allied war debts when US Treasury Secretary, William McAdoo in November 1918 insisted on full repayment.6 Wilson’s successors, Harding, Coolidge and Hoover, all demanded full repayment of the loans with interest. They adamantly resisted all Allied attempts to shift the costs of war and peacetime reconstruction on to the shoulders of Uncle Sam. For a long time thereafter, it was vigorously maintained that the American war loans and the inter-Allied debt in general represented the Entente’s joint contribution to the war effort; that is to say, that they were ‘political’ debts and should be drastically reduced or written off altogether. A just and fair settlement based on the principle of ‘equality of sacrifice’ in a common cause would surely point in that direction. With that path blocked by American short-sightedness or selfishness, the European Allies had no alternative but to fall back on the traditional recourse of an indemnity in all but name. The Germans, not Allied taxpayers, must pay for the damage and other losses. The victors should not end up being financially worse off than the losers, or be made to bear the cost of the war. It was simple justice. Of course, stripped of all sophisticated argumentation, it was an instance of the age-old international distributional conflict: Let the war-costs burden fall on the shoulders of the losers – especially when the latter had only domestic war debts to worry about. From time immemorial defeated nations have invariably been forced to pay tributes or indemnities to the victors, often, but not always, based on the claim that the losing side provoked the war. For the victorious country, an indemnity was the means to recoup its own war costs in addition to whatever territorial gains might be acquired at the expense of the vanquished. Bismarck imposed a huge indemnity of 5 billion francs on France after the Franco-Prussian War (1870–71) – an amount equivalent to twice Prussia’s total war costs and the largest indemnity bill up to that time.7 Bismarck initially demanded 6 billion francs, but settled for 5 billion (with interest charged at 5 per cent) after negotiations with Adolphe Thiers, the French prime minister. The financial bill was, of course, additional to the cession by France of the two provinces of Alsace and Lorraine, including the strategic city of Metz.8 The German occupation garrison, maintained at French expense, was a guarantee of French payments. The German troops were withdrawn in stages to match the receipt of indemnity payments.


By the Treaty of Brest-Litovsk (3 March 1918) Germany imposed an indemnity of around $1.4 billion (6 billion GM) on the Bolsheviks. Russia was also forced to hand over huge parts of its European domains, to give up all claims to Poland and the Baltic provinces and to grant independence to Ukraine, White Russia and Finland. The area given up contained a third of Russia’s population, a third of its farmland, half of its industry and 90 per cent of its coalmines. Norman Stone writes that the Treaty ‘turned much of Tsarist Russia into a huge German protectorate’.9 The terms of this ruthless peace astonished the American and European Allies; it was a warning of what a ‘German peace’ would look like if they were to lose the war. The Germans planned throughout the war to recover full war costs by imposing huge indemnities on the Allies. Just over a year later, however, Article 116 of the Treaty of Versailles annulled the Brest-Litovsk Treaty – although Bolshevik Russia was not a party to the Paris Peace Conference. Less than a month before the Treaty of Brest-Litovsk, President Woodrow Wilson of the United States indicated in his famous ‘Peace Without Indemnities’ pledge and other declarations, such as the ‘Fourteen Points’ address to Congress on 8 January 1918,10 that a Wilsonian peace would be one of justice, moderation and reconciliation, freely negotiated ‘among equals’.11 With no provision for an indemnity in Wilson’s peace programme, European leaders wondered how they could make good the promise to their citizens that Germany would have to pay full compensation for all Allied war costs. For all that Wilson demanded was that Germany evacuate and ‘restore’ all occupied territory (Belgium, France and Serbia). Precisely what ‘restoration’ meant was spelt out more clearly by the American government in a note to the German government on 5 November 1918 during the armistice negotiations with Germany. The note, known as the Lansing Note (which Germany accepted) stipulated that Germany would be liable to pay ‘compensation ... for all damage done to the civilian population of the Allies and their property by the aggression of Germany by land, by sea, and from the air.’ This ‘elucidation’ was incorporated in the pre-Armistice agreement at the insistence of the French Prime Minister, Georges Clemenceau who, at a meeting of the Supreme War Council three days earlier, asked that ‘reparation for damages done’ be mentioned in the Armistice terms. This condition was repeated more curtly in Article 19 of the Armistice Convention (11 November 1918) which stated that in the final peace terms there would be: ‘Réparation des dommages.’ This stipulation (accepted by Germany as a contractual financial liability) was to be the basis for the Allies’ subsequent demand

8


for reparations.12 There was also a significant British contribution to the final wording of the Lansing Note. The original American draft referred to compensation for damages resulting from Germany’s ‘invasion of Allied territory’. That phrase was changed, at British instigation, and the words ‘the aggression of Germany’ substituted for it in the final draft sent to Germany (Sharp, 1991a, p. 80).13 Reparation for civilian damage was a striking departure from the traditional practice of European peacemaking. In the past, when monarchs and aristocratic statesmen made war and peace the restoration of destroyed property was not a factor that weighed with them either in relation to the inhabitants of a war zone or in their peace negotiations with defeated enemies. What mattered was the recovery of the war expenses of the king or state, the amount received going straight into state coffers. As a matter of fact, with rare exceptions, civilian damages (to houses, farms and factories) had never been reimbursed by governments. The victims themselves were left to bear the costs of repairing the damages sustained. As Léon Blum, the French socialist leader expressed it in 1923, the man whose house was burnt down had only one recourse: ‘to sit on the ruins, crying his eyes out and holding out his hands for charity’ (Blum, 1955–72, p. 278)14. When occasionally the state made some restitution for civilian losses, it was always as an act of grace or favour, not as a matter of right. There was never any right, in either law or custom for the citizen to claim war-related damages from the state. All that changed with the ‘total war’ machine unleashed by the war of 1914 and its awesome, destructive effects on everything and everyone in its path. Early in the war, wrote Léon Blum, the belligerent states declared for the first time a new right: ‘that they will hold the entire nation responsible for the damages caused to each citizen’ (Blum, 1955–72, p. 278). In France, the recognition of this new right of the citizen was enshrined in the so-called Charte des sinistrés (Victims’ Charter) that became law on 17 April 1919. The law provided for the reimbursement and reparation by the state of all damages to real and personal property due to acts of war, whether by Allied armies or those caused by the enemy. William MacDonald, writing in 1922, hailed the French law on war damages as ‘one of the great legislative enactments of modern times’.15 Of course, this new principle of national responsibility for war damages (announced as early as 26 December 1914 in France) cannot be separated from the question of German reparations. There is a definite link, for it was partly based on the assumption that the cost of restoring the invaded regions would ultimately be borne by Germany. The success


of the reconstruction policy to which the French government committed itself was thus inseparably bound up with the payment of reparations by Germany for civilian damage. In the event, however, as Anne Orde notes: ‘The French people paid for reconstruction out of their own savings twice as much as they received from Germany in reparation’ (Orde, 1993, p. 14).16 For the countries with devastated areas the ruins were an ever-present reminder of what constituted an irreducible minimum level of compensation. An early attempt to quantify the damage was made by Brig. General Charles McKinstrey of the US Army Corps of Engineers. At the request of the American peace delegation at Paris, he and his team undertook a rapid survey of the battlefields of northern France and Belgium. McKinstrey estimated that ‘the value of civilian damage would not be much over 60–100 billion GM, or $15–$25 billion’ (Burnett, 1940, vol. I, p. 25). In his final report, dated 26 May 1919, he estimated the replacement cost of the totality of Allied damages at approximately $40 billion (Burnett, 1940, vol. II, p. 46). But some politicians and government advisers among the Allies sought to go beyond the minimum, and extended the principle of ‘reparation as compensation’ to include all or part of the Allied war costs – without offending against the Wilsonian ban on ‘indemnities’. Such was the case with those who successfully managed to get Wilson’s assent at the Peace Conference to the inclusion of military pensions and allowances in the total of reparations chargeable to Germany. Physical destruction, occupation experiences and security concerns Almost from the moment the guns fell silent on 11 November 1919 disunity plagued the Allied leaders and officials as they prepared themselves for the peace negotiations. Old rivalries, disagreements and divergent national interests quickly surfaced (particularly in Anglo-French relations) to weaken the wartime solidarity of the trenches. In June 1921, Clemenceau ruefully admitted to Lloyd George: ‘I have to tell you that from the very day of the Armistice I found you an enemy of France’. Lloyd George casually replied, ‘Well, was it not always our traditional policy?’17 Each of the victors brought different expectations and perceptions to the negotiating table. Contradictory national viewpoints and aspirations were obstacles that proved difficult to overcome or reconcile in daily exchange. These national pressures were clearly powerful forces shaping the peace settlement, and endured long after. They sprung from a variety

10 German Reparations, 1919–1932

of sources in each country (apart from the old rivalries revived by negotiating disputes) – different wartime experiences on the home front, in particular, different experiences of enemy occupation and physical destruction, feelings of security or insecurity, effects of territorial changes on interstate power relations between neighbouring states, as well as other burdensome legacies of the war such as war debts and fiscal deficits. Although the human losses were on average equally high among the major combatants, physical destruction varied greatly. So did experiences of enemy occupation. Losing almost as many men as Germany but with a population only two-thirds as large, France looked for security after the trauma of invasion and occupation. Located next to France in the heart of Europe, Germany had a population of well over 60 million people in 1919 (as against France’s 40 million, and three men of military age to France’s two), with a gross domestic product (GDP) more than one-and-a-half times that of France, and four times France’s heavy industry – the basis of military power. Fearing German revenge, France sought to protect itself against a third surprise attack by Germany. Security thus became the overriding objective of French post-war policy. As a basic long-term goal it took priority over reparations which was justified initially at the Peace Conference as recompense for the destruction suffered at the hands of the retreating German army. The quest for security proved elusive and problematic as it became inextricably entwined with the debt/reparations tangle. For some in France the demand for reparations indirectly had a security aspect since it was a means of transferring German economic resources to France. Like enforced German disarmament, it could also be used as a brake on German power (militaryindustrial potential) for the foreseeable future. Mark Brawley (2009, p. 83) summarises this part of French security policy thus: ‘The French wanted to shape reparations in ways that would both limit the speed of Germany’s economic recovery from the war (while hastening France’s), but also hold down the rate at which Germany could transform economic power into military force.’ For the present, however, the immediate concern was to deal with the human and material ravages of the war. France lost a quarter of its male population aged between 18 and 30 – a higher proportion than that of any other combatant. The devastated war zone covered an area of 9 million acres in France’s ten north-eastern departments. Although these departments comprised a mere 7 per cent of the country’s total land area and was inhabited by only 10 per cent of the population it was the industrial heartland of the country in 1913. It produced 60 per cent


of the nation’s coal output, 66 per cent of textile production, 55 per cent of metallurgical production and 20 per cent of GDP. The occupying power ruthlessly exploited the mines, factories and farms of the region for its own war effort. As a result of the fighting and occupation, 564,300 private dwellings and 17,600 public buildings were completely or largely destroyed; 860,400 acres of farmland were laid waste, much of it rendered unsuitable for cultivation; 20,000 factories and workshops were destroyed or badly damaged. Some of the factories, those with modern technology, were taken to Germany. About one million head of cattle as well as other farm animals were carried off across the Rhine.18 Estimates of the monetary cost of the damage range between 35 billion 1913 gold francs ($7 billion) and 55 billion gold francs ($11 billion).19 Many coal mines were deliberately flooded by the retreating German armies. Much of the infrastructure of the area was destroyed or badly damaged (railways, roads, bridges, etc.). Enemy sabotage of coal mines in the departments of the Nord and Pas-de-Calais reduced domestic output by 20 million tons a year for some time after, while French mines were being repaired. French ministers looked to Germany for coal deliveries in the form of reparations to fill the gap in French requirements. The French shortage of coal was exacerbated in one respect by the return of Alsace-Lorraine. The addition of the two provinces meant that there was a deficiency of coking coal. The acquisition of Lorraine, with its modern plants recently built by the Germans effectively doubled France’s iron and steel making capacity. French mines (even with the use of the Saar’s low-grade coal mines for 15 years) did not produce enough coal suitable for smelting the ‘minette’ iron ore of Lorraine. But without large supplies of cheap coke and market outlets for the increased output of semi-finished products, many of the newly acquired blast furnaces and steel mills in Lorraine would be useless, and French steel would be faced with a serious, costly crisis of excess capacity. To be in a position to compete with German steel in world markets, therefore, France needed great quantities of coking coal to feed the blast furnaces left by the Germans. Coke from the Ruhr was the obvious source of supply, but the Ruhr magnates regularly obstructed deliveries to France. Failure to obtain assured, sizeable quantities of coke from the Ruhr threatened to derail French ambition to challenge Germany’s dominant metallurgical position in Europe. There were fears that the industrial potential of Lorraine could remain unexploited. Uncertainty over markets and coke supplies cast a shadow over the prospects for a big expansion of French heavy industry and rapid industrialisation, more generally. During and after the Peace Conference, the French engaged in economic talks with

12


the German authorities and looked for ways to find an accommodation with them. One such initiative was the French proposal in August 1919 for an international steel cartel with Germany and the neighbouring countries of Belgium and Luxembourg. Cartel agreements for potash and dyestuffs were also considered. Louis Loucheur, Clemenceau’s minister for reconstruction, met with members of the German delegation in Paris to discuss the arrangements, which would involve some form of industrial integration, featuring the exchange of Lorraine iron ore for Ruhr coke. The political leaders in Berlin expressed interest in the scheme as indicating either an early softening of the French position or the adoption of a more pragmatic approach by their late enemy. But the Ruhr industrialists turned down the project. They were still smarting from the loss of their businesses in Alsace-Lorraine and refused to negotiate with the French from a position of weakness. They preferred to wait for the economic tide to turn in their favour – as it must do, sooner or later – when they could have integration on their terms, that is to say, under Ruhr leadership. The German government paid compensation to the former owners of plants and installations in Lorraine. The recipients used such funds to build new, modern plants in the Ruhr to substitute for those they had lost. Hugo Stinnes, the Ruhr magnate, and his colleagues knew that the French iron and steel industry was uncompetitive. They believed that the French would not be able to operate the furnaces and mills at full capacity because of lack of export outlets and insufficiency of coke. Consequently, the French metallurgists would be forced to dispose of their surplus ‘minette’ through exports to the Ruhr. In any case, the Ruhr iron masters could obtain higher-grade Swedish ores, and do without Lorraine supplies (Soutou, 1976, pp. 22–4).20 Equally, the French got little help from their wartime allies with their economic recovery. French reconstruction plans (presented by Etienne Clémentel, French minister of commerce) assumed the continuation into peacetime of Allied (mainly American) wartime ‘pooling’ arrangements for food, raw materials and shipping. The scheme provided such vital resources at subsidised prices and distributed them according to the need of individual Allies. Clémentel envisaged an Allied economic bloc for the reconstruction of Europe that would eventually include Germany.21 What France and the other Allies asked of the Americans (for the reconstruction period) was acceptance of the principle ‘from each according to means, to each according to needs’. However, since at least the end of 1918, American officials warned that the United States had no intention of prolonging economic cooperation into peacetime – thereby subsidising the French economy. And, in fact, shortly thereafter


the United States dismantled the Allied agencies running the scheme in favour of ‘Open Door’ globalisation policy and free trade practices.22 Thwarted in their overtures to Germany and denied economic cooperation from Britain and the United States and suffering from a chronic demographic deficit with respect to Germany, French leaders began a desperate quest for international security. Clemenceau distrusted Germany. As Bernard Baruch observed: ‘At the peace conference, he [Clemenceau] had but one objective: security against Germany, a nation which twice in his lifetime had scourged his beloved France’ (Baruch, 1958, p. 112). In the recent clash of arms, Clemenceau knew that France just managed to survive, and only emerged victorious with the help of her Allies. Deprived of the Russian alliance and harbouring fears of German revenge, magnified by the adversary’s superiority in population, economic strength and power, France sought security in a military frontier on the Rhine as it was in the time of Louis XIV and Napoleon. A few French commentators wanted to simply detach the Rhineland from Germany and transfer it back to France. But, as David Stevenson points out, ‘there was only limited support for breaking Germany up’ and annexing the Rhineland in public opinion, and even in government circles.23 Then, there was Marshal Foch’s more pragmatic proposal to detach the region from Germany by the creation along the Rhine of neutral, demilitarised ‘buffer states’. This latter proposal was Clemenceau’s demand at the Peace Conference, which he knew Wilson and Lloyd George would oppose, but worth using as a bargaining counter to secure the more desirable prize – an Anglo-American defensive alliance. In the end, he settled for a demilitarised Rhineland and a temporary Allied occupation of the area for up to 15 years, in exchange for Anglo-American security pacts promising immediate American and British military assistance in the event of unprovoked German aggression (Lentin, 2001, pp. 47–66; Sharp, 2008, pp. 123–6). Lloyd George even offered to build a Channel tunnel so that British soldiers could be moved quickly in large numbers to France.24 However, shortly afterwards, the guarantees proved worthless when the US Senate rejected the Versailles Treaty and the joint British guarantee lapsed (although it was ratified by Parliament), since British adherence was contingent on American ratification of the agreement.25 The Rhineland arrangement accepted by Clemenceau involved Allied occupation of three zones on the left bank of the Rhine, including the stationing of Allied garrisons on bridgeheads at Cologne, Koblenz and Mainz, within a 50 km radius east of each city. The demilitarised zone extended 50 km east of the river. There was to be a phased withdrawal of the Allied garrisons over

14


15 years at 5-year intervals, starting with the British zone of occupation around Cologne and ending with the evacuation of the French zone – largest of the 3 – at Mainz. The occupied area was administered by an Inter-Allied Rhineland High Commission (IARHC) working in liaison with the German authorities. French goals were not purely defensive, however. Nationalists harboured Rhenish ambitions that were shared by others. Although Clemenceau and his principal adviser, André Tardieu, understood the weakness of the Rhenish separatist movement, ‘they intended to use the occupation to encourage Rhenish separatism’.26 Newspapers on the left, especially Communist papers strongly opposed such adventures. British peace plans and attitudes Like the Americans, for the British people the war was over at Armistice. The human losses were high – 750,000 killed, but there was no invasion, no foreign occupation and slight evidence of physical damage. The civilian property damage on land, estimated as £360 million at 1913 prices, was caused by Zeppelin airships and Gotha bombers in cross-channel raids.27 British shipping losses, resulting from enemy submarine action, amounted to £384 million – see Broadberry and Harrison (2005, table 7.12, p. 227). During the November-December 1918 ‘Coupon Election’28 campaign when popular emotion was still reacting to the war, Lloyd George, the prime minister, promised the British people that if he won the election he would ‘put the Kaiser on trial’ and make the Germans ‘pay the last farthing’. Others, such as George Barnes, a Labour cabinet minister (later a member of the British Peace Delegation) were all for ‘hanging the Kaiser’. Another cabinet minister, Sir Eric Geddes, used unforgettable imagery to describe the government’s promise to extract maximum reparations from Germany: ‘The Germans’, he vowed, ‘are going to pay every penny; they are going to be squeezed as a lemon is squeezed – until the pips squeak.’29 The Lloyd George coalition won a landslide majority – 474 seats, against 59 Labour and 26 Asquithian Liberals.30 Between the ceasefire and the Coupon election, the British government commissioned reports on indemnities and reparations in preparation for the forthcoming peace talks. The Board of Trade and the Treasury produced reports and memoranda dealing with the likely effects of reparations, Germany’s capacity to pay and what amounts could realistically be expected. The Treasury’s memorandum of December 1918, drafted by Keynes estimated Germany’s capacity to pay to be between £2 billion and £3 billion (Keynes, CW, XVI, pp. 344–83). He favoured imposing


a modest bill of £2 billion (or less) as being in Britain’s best interests. Any higher sum would likely force Germany to pay reparations out of trade surpluses, through an export drive, that would ruin British trade. Earlier, in October 1918 Keynes argued for a total of £1 billion as a realistic and satisfactory total figure for reparations. These surprisingly moderate assessments did not correspond with the mood or expectations of the population in the run-up to the general elections (Moggridge, 1992, pp. 293–4). Members of the government and the conservative press knew it. Lloyd George knew it. Responding to the electorate’s desire for vengeance and the clamour to make Germany pay for the war, Lloyd George appointed the Australian Prime Minister, William ‘Billy’ Hughes to chair a Cabinet Committee on Indemnity. Hughes had been going around the country calling for a substantial, punitive indemnity for the British Empire. The Committee met during early December and agreed a report calling for an indemnity of £24 billion to cover the total cost of the war. That figure had only recently been produced by Keynes and the British Treasury as an estimate of what it had cost the Allies to win the war. The Committee members were convinced it was an amount that Germany could easily pay in annual instalments of £1.2 billion over 50 years.31 The recommendations of the Committee were adopted by Lloyd George and the full British cabinet, despite misgivings by some members. It was an extreme position, but one the Committee justified partly on the ground that payment of a large indemnity would operate as a deterrent to future aggression. For those who shared the views of the Committee, writes Lorna Jaffe, ‘the crucial concern was making Germany pay the cost of the war. This, they believed, would assure Germany’s military as well as its economic paralysis’.32 That was the agreed reparations remit of the British people that the British peace delegation took to Paris in January 1919. Over the next few months, the German High Seas fleet was interned in Scapa Flow in the Orkneys. The enemy’s submarines were in Harwich harbour. In all, 11 battleships, 5 battle cruisers, 8 light cruisers and 50 destroyers were impounded, guarded by 3 trawlers. The captured ships were subsequently scuttled by their skeleton crews on the orders of RearAdmiral Ludwig von Reuter on 21 June 1919. In all, 52 ships went to the bottom. Britain received the bulk of the surrendered German merchant fleet to make up for the loss of British vessels sunk by German submarines (8 million tons of shipping). The German colonies were mainly in British or British Empire hands. In British eyes, these war prizes eliminated Germany as an imperial and naval threat. Naval security was assured, plus the bonus of an enlarged British Empire which, with

16


23 per cent of the world’s land surface, reached its maximum territorial extent. Convinced that Germany was no longer a threat, British leaders pressed for world disarmament. Within months of the signing of the Treaty, the mood of the country changed. Apart from the casualty figures, the monetary costs of the war were felt to be too high. The country ran up debts to the United States to the tune of $4.7 billion, liquidated securities held in New York worth $835 million and sold gold valued at $926 million to help finance the war.33 Also lost was the income (dividends and interest) formerly earned on such investments. There were calls for early demobilisation and an end to conscription. Another war was to be avoided at all costs. With Germany disarmed and under democratic government, appeasement of Germany gained increasing public support. France was now seen as the most likely threat. There was distrust in Britain about French ambitions, for instance, that France harboured annexationist designs on the Rhineland. Some influential Britons even wrote and thought of France as a potential enemy, all over again. Such thinking brought into play Britain’s traditional continental policy of the ‘balance of power’ – in this case, balancing Germany against France. British business leaders and City interests wanted European economic recovery to strengthen the ailing British economy, but knew that could not be attained by keeping Germany down. They hoped for the renewal of old trading and financial links with a restored and prosperous Germany.34 In fact, the malaise of the British economy was structural in nature, stemming from concentration on old declining industries, the loss of traditional overseas markets during the war, productivity weaknesses, unemployment after the brief post-war boom fizzled out, rigidities in internal costs and wage structures and the restrictive effects of a deflationary policy designed to restore the gold standard and London’s place as the world’s principal financial market. Clearly, Britain’s problems had little to do with Europe, but it was nevertheless felt that German economic recovery was part of the solution. Finally, there was the belief that only a strong Germany could prevent the spread of Bolshevism westward. On every occasion where there was contact with Allied representatives, German officials and business leaders played on these hopes (German economic recovery) and fears (Bolshevik contagion). German perceptions From the moment the war ended and throughout the sittings of the Peace Conference, the Germans did not accept defeat. They thought they had fought a defensive war that ended in a draw. The German


armies marched home in good order, officers at their head, with bands playing and battle flags flying – at least until they had crossed the Rhine into the Reich. Army units disintegrated as they re-entered Germany. All the soldiers now wanted to do was to get back to their homes. Many officers just looked on helplessly, for fear of abuse or assaults. Meanwhile, the second German revolution – the November 1918 ‘revolution from below’ – was in progress. The Kaiser’s regime had collapsed. Revolutionary Workers and Soldiers’ Councils were set up in several major cities. Many army units disobeyed orders to put down radical insurrections. The army chiefs, with titular Reich Chancellor Friedrich Ebert’s approval, staged a march past of ten divisions in Berlin on 10 December 1918 (Delmer, 1972, pp. 13–15). In the pouring rain, Ebert greeted the soldiers at the Brandenburg Gate with the words: ‘No enemy has conquered you! The unity of Germany is now in your hands!’35 The Socialist leader thus implicitly committed himself to the army, recognising it as the ultimate defender of the new Republican order. The German leaders never told the people the truth about the capitulation. Right-wingers and radical nationalists convinced themselves, and wanted the German people to believe, that their country’s armies had not been defeated in the field, but were betrayed by corrupt politicians, socialists, pacifists, war profiteers and Jews – a bunch of traitors, branded as the ‘November criminals’ – from which sprang the myth of the ‘stab in the back’ (Dolchstosslegende).36 ‘Millions of ex-soldiers who knew better felt too guilty to protest openly about this new and dangerous legend’.37 For months, German leaders and much of the population appeared to live in ‘the dreamland of the Armistice period’ – a phrase of the theologian, Ernst Troeltsch, quoted by Klaus Schwabe.38 In that ‘realm of illusions’, the people experienced a collective flight from reality, a refusal to face the collapse of German military power and the consequences for the Reich of an imposed victors’ peace. However, when elections were held on 19 January 1919 for a Constituent Assembly, the people voted overwhelmingly (by a majority of over 70 per cent) for the moderate, democratic peace parties – the Social Democrats, left liberals and Centre Party (the so-called Weimar Coalition). The German casualty list (2 million killed, 4.8 million wounded) was the highest of all the combatants. Germany was left with reduced territory, but suffered no destruction or occupation. There were no war-damaged areas to repair. Like the Franco-Prussian war, the fighting took place entirely on foreign soil. Germany lost 13 per cent of its territory (some 27,000 square miles) and between 6.5 and 7 million people


(10 per cent of the pre-war total population). Alsace-Lorraine returned to France, and a substantial German minority (mainly in the ‘Polish Corridor’ separating East Prussia from the rest of Germany) passed under Polish rule. Former Austrian territory (in Bohemia and Moravia) ceded to Czechoslovakia included 3 million German-speaking inhabitants. The territorial transfers meant that Germany lost 48 per cent of her iron production (due to the cession of Lorraine), 16 per cent of coal production and 30 per cent of steel production. German property abroad totalling 16 billion marks was seized and financial assets frozen. The merchant marine was reduced to one-tenth of its pre-war size. The German army was limited to a volunteer force of 100,000 – an army, moreover, deprived of heavy artillery, tanks, submarines and military aircraft. The commercial clauses of the Treaty of Versailles, aimed at opening the German market to Allied goods, temporarily deprived Germany of its tariff autonomy. The intention was to try to shift the post-war commercial balance of power in favour of Allied producers and exporters by temporarily neutralising or disarming Germany’s competitive potential, while the one-sided restructuring or rebalancing of commercial advantages take effect. German competitive pressure in world markets during 1900–14 was still fresh in the memories of the country’s trade rivals.39 Under Articles 264–268, the Allies were granted non-reciprocal, most-favoured-nation (MFN) access to German markets for five years. These provisions meant that Allied goods entering Germany had to be taxed at the lowest German tariff rate – in effect, the tariff of 1902. However, the Allies were left free to impose their most discriminatory (or highest) tariffs on German goods. Alsace-Lorraine and Luxembourg had the right to export their products (mainly steel and iron) duty-free to Germany for the same period (five years). Poland was also granted transitional privileges lasting three years for their products in the German market.40 Article 270 gave the Allies the right to operate a special customs regime in the occupied Rhineland, protected by a customs barrier from the rest of Germany. These trade weapons against Germany proved ineffective, however. German officials found ways around the commercial clauses through a system of quantitative controls and licensing on a wide range of goods. Import and export prohibitions were also imposed to limit imports to essential goods and prohibit the export of scarce raw materials. These regulations and prohibitions were only removed when the Treaty’s commercial clauses expired in 1925.


In the short term, the boundary changes reduced overall economic capacity or total national income by 10 per cent; but in the long run, the shedding of low-productivity regions in the east proved beneficial to Germany. It increased the prospects for faster per capita income growth through the reallocation of resources to higher-productivity sectors. Despite the territorial adjustments, Germany had not been broken up. Bismarck’s Reich was left substantially intact; so was the country’s industrial and economic infrastructure, much of which was modernised and upgraded with new technology before and during the war. It remained the largest state in Western Europe; and kept the demographic and economic potential to be a great military power once again. Preparing for Versailles How would Germany use that potential in the inevitable diplomatic/ political tussle with the Allies over the terms of the peace treaty? Would it be directed towards peaceful coexistence and compliance with treaty obligations? Or would it be on the side of defiance and revisionism? Optimists took comfort from the fact that Germany’s economic and military potential now belonged to the new Weimar Republic, with its democratic form of government and professedly democratic values. But, as Sefton Delmer expressed it: ‘Germany’s democracy was to be a democracy with a hole in its heart’ (Delmer, 1972, p. 10).41 But the hole was full of the business elites, officer corps, bureaucracy (including the Foreign Office), judges and police – all members or servants of the old Kaiserreich ruling class who remained in power. In a Germany full of grievances, this was ominous. Realists abroad feared that aggressive nationalists would sooner or later gain the upper hand in Germany, so that whatever the peace terms they would attempt to undo them and reverse the verdict of 1918. Against these general statements, there are exceptions – cases where individuals and groups initiated or supported compromise solutions to Germany’s most pressing problems (domestic and external) through mediation rather than extremism. On 15 November 1918, the trade unions (under Carl Liegen) and the employers, represented by heavy industrialist, Hugo Stinnes negotiated the Stinnes-Liegen Agreement; this, together with the creation of ZAG (the Central Working Association), brought in the eight-hour working day and collective bargaining. Obviously, the employers’ motives were to buy off the workers and fend off calls for nationalisation (Winkler, 2006, p. 343). Examples can be found of senior civil servants at the Finance ministry and the

20


Foreign Office who urged mediation and diplomatic accord rather than confrontation and defiance (Fischer, 2006, pp. 21–3).42 German Foreign Office officials made preparations for Versailles by setting out the country’s position on a number of issues likely to feature in the settlement. Their standpoint on the matter assumed that Germany would be involved in the peace negotiations, and that Wilson’s Fourteen Points and the pre-Armistice agreement would form the basis of the peace treaty. These assumptions were mistaken; and, of course, German expectations of getting off lightly changed to disappointment and resentment at the reality of a tough, dictated peace.43 On reparations, the officials and a committee of experts (including bankers and industrialists) prepared arguments to the effect that Germany could only pay limited reparations. The slim and uncertain margin of foreign exchange resulting from trade was (on average) just sufficient to pay for food and raw materials. To enable Germany to pay reparations, foreign-exchange resources must be made available through a substantial foreign loan. This argument became a stock refrain of German officials and ministers over the next four years when replying to reparation creditors about unpaid bills. Alternatively, and sometimes additionally, the argument was presented that German living standards and the social gains of the Revolution must not be endangered, in the interests of social stability and domestic peace (Krüger, 1973, pp. 108–12).44 The official German attitude to reparations was set since early 1919 before the Treaty was signed. High reparations had to be resisted to preserve Germany’s economic potential, thereby enabling it to regain its former great-power status. The official position on Versailles was, frankly, based on nothing but wishful thinking. Those in charge of peace planning wanted a status-quo-ante peace, as if nothing had happened in the meantime.45 Interpretations of the Fourteen Points were self-serving, seeing Wilson’s peace programme as solely favourable to Germany. In trying to hold reparations to a minimum, the German approach seemingly ignored or forgot that the Allies had war aims and post-war economic problems of their own. An alternative approach might have served Germany better, as Krüger himself suggests. Belgian experiences and post-war expectations What about the Belgians? What were their experiences and their post-war expectations? The Belgians suffered invasion and 50 months of occupation, during which their resources and labour were ruthlessly exploited by the Germans (Zuckerman, 2004). The violation of Belgian


neutrality was followed by enemy atrocities during the first weeks of the war, the execution of hostages and the killing of innocent civilians.46 About 120,000 unemployed Belgian workers were brutally deported to Germany to work in munitions factories. When the war ended, Belgian industry lay in ruins. Factories producing output useful to the occupiers were exploited to the full through massive requisitions, while other industrial plants were closed down or neglected, especially those competing with German production (cement works and glass factories, for example). Starting in 1917, the occupiers adopted a deliberate policy of destruction of Belgian industrial capacity with the intention of crippling Belgium as a future industrial rival. Factories were demolished, others dismantled, with their machines transported to Germany for use either as integral units or as spare parts. Many textile mills, gutted of their machinery, were blown up. Belgium lost 6 per cent of its housing (80,000 buildings, wholly or partly destroyed), two-thirds of its railways (including 4000 km of railway track), half of its steel mills, with the remainder producing just 10 per cent of its pre-war level of output. The retreating Germans took away more than half of the cattle and two-thirds of the horses. Fortunately for the Belgians, their coalmines were spared the flood damage meted out to the French. This was due to timely protest by neutral countries, Spain, the Netherlands and Switzerland (Zuckerman, 2004, chapter 12). During the war, the Allies had guaranteed the ‘restoration’ of Belgium and promised reparations. Consequently, at the Paris peace talks the Belgians expected that their claim for compensation would be speedily and fully accepted. They hoped to get at least $3 billion to cover civilian damage, war debts (5 billion francs borrowed from the European Allies and the United States) and pensions. They also wanted a priority on the first sums Germany paid.47 Another Belgian claim concerned compensation for the cost of withdrawing the 6 billion paper marks the Germans added to the Belgian money supply as a forced circulation. The cost to the Belgian government of the conversion operation amounted to 7.5 billion francs; for although the value of the paper marks fell by more than half against the Belgian franc, the Belgian authorities authorised the National Bank to redeem the marks at the official occupation rate of 1 mark = 1.25 francs. The Belgians hoped that with Allied support they could get the Germans to take back the paper marks and give gold in exchange. On each of their three financial claims Belgium succeeded in principle; but in practice failed to receive compensation on anything like the scale promised in 1919. Belgium had to repay her war debt to the United States out

22


of her own resources, and the repayment of loans from American and British commercial banks swallowed up the 350 million marks which Belgium received out of the first billion marks Germany paid in the summer of 1921. The claim for reimbursement of the marks stored up at the Belgian National Bank became a matter for bilateral negotiation between Germany and Belgium. Some compensatory payments were made by Germany, starting in 1929 and continued intermittently until the German default of 1934. Overall, however, Belgium gained more than her allocated 8 per cent share of total reparations received by all the Allies up to 1933.

1.2 What really happened at Paris Reparations – ‘the most troublesome problem’ The first plenary session of the Peace Conference (attended by representatives from 27 countries) opened on 18 January 1919 with a glittering ceremony in the Salon de l’Horloge at the Quai d’Orsay (the French Ministry of Foreign Affairs). After a short welcoming speech by French President Raymond Poincaré, Georges Clemenceau was nominated president of the Conference by acclamation. The reparations discussions in Paris ended without any agreement on a final figure to put in the Treaty. At the outset few expected such a result; but, as Thomas Lamont (the Wall Street banker and chief American delegate on reparations) recalled, the subject ‘caused more trouble, contention, hard feeling and delay ... than any other point of the Treaty’ (Lamont, 1921, p. 259). John Foster Dulles, a legal adviser with the American delegation, later US Secretary of State in the 1950s, said that reparations ‘proved, perhaps, the most troublesome single problem of the Peace Conference’ (Pruessen, 1982, p. 32), and Lloyd George in June 1919 referred to reparations as ‘the most baffling and perplexing of all’ the challenges of the Peace Conference.48 And so it has remained to this day: ‘No section of the treaty would be more controversial and more criticized than its chapter on reparations’ (Stevenson, 2004, p. 516). Lloyd George wins inclusion of pensions in reparations bill The delay and contention over figures might have been avoided if the decision in 1919 was that of one victor imposing an indemnity on the loser; but that was not the case at Paris. There were several victors (each with their own divergent demands and expectations); and, by an American veto, the European victors were precluded from seeking an indemnity. Instead, they had to prepare a reparations bill as


compensation for civilian damages only. A war indemnity could have been demanded, without any further justification, by virtue of the Allied victory. But since the European Allies meant somehow to cover some or all of their war costs, and Wilson knew it, the narrowing of the claim to restitution or reparation (formally, but not in practice) was later seen as a hypocritical way of avoiding the use of the term ‘indemnity’. The preparation of a reparations bill would be a tiresome and protracted business; for although the physical and human destruction was there for all to see, the making of reliable estimates would take time. The situation was complicated on account of the fact that the extent of the war damage varied across the Allied claimants from virtually nil to quite a lot. Given that all the Allies incurred substantial financial war costs, the distribution of reparation payments according to physical damage sustained inevitably raised questions about the fairness of the claims procedure. Should the apportionment of compensation take account of financial debts incurred and casualties suffered in the common cause as well? Should countries reconstructing devastated areas be granted priority for the receipt of reparation payments? If so, how would that affect the claims and likely receipts of the other Allies (notably Britain) without reconstruction costs, but with other huge war-related debts? Notions of justice, fairness as well as undoubted legal rights entered into consideration; and thus the way was open for disputes and disagreements in response to the different needs, interests and state of public opinion in the Allied countries. The reparation issue became entangled with other disputed items on the negotiating agenda of the political leaders (the ‘Big Four’). In any case, from the start, reparation was never wholly or merely a technical matter. Questions on German ‘capacity to pay’, for instance, were as much technical as political, perhaps even more so given the wide uncertainty (and therefore, contestability) over estimates of current and potential capacity. The financial experts involved in the day-to-day negotiations were not free agents. They argued within negotiating positions set by their political masters. But those bargaining stances were liable to change from time to time as short-term political expediency dictated. Consequently, experts sometimes disagreed even within delegations, as negotiating positions changed. Initially, both Britain and France argued in favour of war costs; but sticking to the pre-Armistice agreement, the American experts were opposed. The Americans had few reparation claims and wanted little or nothing for themselves. They were able to occupy the moral high ground. According to Sally Marks, the United States had, however, claims for reparations amounting to


almost $1.5 billion (6 billion GM) (Marks, 1978, p. 235).49 This ‘disinterested objectivity’ allowed them to approach the reparation debate in a dispassionate manner. They sought to base the reparations bill on a realistic estimate of German capacity to pay. That capacity they judged to be no more than 120 billion GM, but which should be sufficient to cover the compensation claims for civilian material damages. The American experts hoped to persuade the European Allies to agree to some such figure so that a fixed sum representing Germany’s total liability could be inscribed in the Treaty. A fixed sum limited to reparation for physical war damage would entitle France to claim the lion’s share of whatever amount it was possible to get from Germany. The exclusion of claims for war costs, however, would deprive Britain of a fair share of the spoils. Britain’s war costs, including the huge debts to the United States were greater than those of any of the Allies. By comparison, Britain’s claim for material damage was small. On the other hand, if war costs were included, France would be disadvantaged, since she would receive a lower percentage of the total reparations paid by Germany. And if Germany could only pay for repairing the civilian losses, that percentage disadvantage would become an absolute disadvantage for France. Thus, in competition with Britain, France could get a larger absolute share of a finite reparation sum, limited to German payments for ‘civilian damage’ only. For a while, the financial experts made much of this ‘play of the percentages’ (Burnett, 1940, vol. I, p. 25). Among the Allied leaders, the one who leant most on his financial advisers, indeed, choosing reparation ‘hardliners’ (Hughes, Cunliffe and Sumner) to send to Paris, was Lloyd George. His objective was to increase Britain’s share of whatever might be got out of Germany even if that meant inflating Germany’s liability beyond any likely recoverable figure – in fact, an indemnity in all but name. He successfully achieved this objective by: (1) disputing the French damage estimates; (2) getting France to abandon its claim to priority in the receipt of German payments on the French plea that physical damage in France, as in Belgium, should be repaired first, and (3) getting President Wilson to agree to the inclusion of military pensions and allowances in the categories chargeable to reparations. To defend his gain for a large British share to whatever was actually paid, he had to block the American demand for the stipulation of a low, fixed sum in the Treaty. He managed that as well by simply doing nothing to break the impasse over the assessment of German capacity to pay. With time running out, the matter was disposed of at a meeting of the plenipotentiaries on 29 March 1919. With Wilson reserving his position and Lloyd George and Clemenceau in favour, the


Council of Four abandoned its attempt to agree on a fixed sum for insertion in the Treaty. On 1 April 1919, General Jan Smuts (an Allied leader Wilson held in the highest esteem)50 persuaded the President to consent to the inclusion of military pensions and allowances in the list of legitimate damages – against the advice of his financial and legal experts.51 The British Empire could now plausibly lay claim to 30 per cent of reparation receipts. War pensions were the only kind of claim Lloyd George could make on behalf of Britain’s Canadian and Australian allies. The previous day (31 March), Smuts in a memorandum to Wilson argued the case for a wider definition of ‘civilian damages’ to provide compensation for the financial loss suffered by Great Britain as distinct from the French and Belgian personal and property losses (allowed for under the pre-Armistice agreement). Smuts’s plea greatly impressed Wilson who saw it as an acceptable excuse to bring about a fairer distribution of German payments among the Allies, as demanded by Lloyd George. When the American economic and financial experts met with the President on 1 April, they all rated the Smuts proposal nearly as bad as the inclusion of war costs and urged the President to reconsider the matter. Thomas Lamont said that no lawyer in the American delegation would accept Smuts’s argument for the inclusion of pensions, and John Foster Dulles remarked that the logic of the concession on pensions could open the door for the admission of a host of other illegitimate war costs in the reparation claims. To which the President exclaimed: ‘Logic? Logic? I don’t give a damn for logic, if you will excuse my French! I am going to include pensions.’52 ‘At which point’, reported Dulles’s biographer, ‘Dulles and the other advisers saw fit to leave. The British had carried the day’ (Pruessen, 1982, p. 41). At a stroke, Germany’s potential reparations bill doubled (or so it appeared at the time); although the final figure was still to be determined. With their leverage over the reparations settlement steadily diminishing, the French made common cause with the British and agreed to the inclusion of pensions. War pensions – a new charge in national budgets Pensions for widows and disabled soldiers mattered enormously during and after the war, on account of the vast scale of the human losses and the relatively new social consensus that compensation for death and injury must be a national responsibility in a modern democratic state. Gone were the days when the disabled and their families were condemned to the customary beggary of old soldiers. Pension costs were now to be shared at the national level and funded through the government budget. These sudden, additional costs placed enormous


strains on national finances, already heavily burdened by the direct costs of fighting the war. The results in the early post-war years were swollen budgetary deficits and substantial increases in the real value of national debts. In Britain, total expenditure on war pensions (starting from nothing before 1916–17) reached a post-war peak of £106,645,516 for the financial year 1920–21 – absorbing something like 8 per cent of total government spending (£1330 million).53 German benefits for disabled war victims were the most generous in Europe, being based on loss of earning capacity as well as degree of physical disability. Pensions for the most severely disabled were on a par with the average wage of skilled workers. In addition there were extra allowances for wives and children. In 1925–26, war pensions accounted for a hefty 26 per cent of total Reich expenditures and never fell below 20 per cent for the next four years.54 In France, in a spirit of national solidarity, the law of 31 March 1919, known as ‘La loi Lugol’ (after its parliamentary sponsor, Jules Lugol, a Left-Radical deputy) provided pensions for wounded soldiers and to widows, orphans and parents. In each of the two years, 1919 and 1920 alone, 1.2 million ex-servicemen received pensions, while death benefits were paid to around 1.5 million relatives. The cost for the two years amounted to 6 billion francs (Martin, 1999, p. 27). In the après-guerre, approximately 600,000 widows, 750,000 orphans, as well as an estimated 900,000 parents regularly received benefit payments from the state. These enormous pension costs consumed 2–3 per cent annually of France’s GDP during most of the interwar period.55 In total, up to 1938, these state expenditures amounted to 20 billion 1913 francs, representing something like 40 per cent of French 1913 GDP (Blancheton, 2001, p. 159). Nevertheless, these expenditures for human capital losses were less than reconstruction expenses (30 billion francs). Three-fifths of the total compensation for material damage and human losses were paid out between 1919 and 1926. Every Allied finance minister hopelessly wrestling with a massively unbalanced budget might be forgiven for entertaining the illusion of German reparations as the answer to his prayer. Article 231 – the notorious ‘war-guilt’ clause On 7 April, a draft of the general clauses of the reparations section of the Treaty was discussed by the Council of Four. The next day, the Americans and the European Allies composed their differences by agreeing the texts of Articles 231 and 232 (together with 233 which established the permanent Reparations Commission). The compromise enshrined


in Articles 231 and 232 was between the American determination to exclude war costs (except for Belgium) and the need of Clemenceau and Lloyd George for an unequivocal statement of Germany’s total liability to satisfy their respective publics. Article 231, therefore, required Germany to accept a theoretically unlimited liability for total reparations (civilian damages plus war costs); while Article 232, noting the enemy’s bounded or restricted capacity to pay, limited Germany’s actual legal liability to ten categories of civilian damages (including pensions and separation allowances).56 Article 231 subsequently became notorious as the war-guilt clause. Sally Marks (2003, p. 15) notes, that ‘Germany was expecting a war guilt clause and seized on Article 231’ when the Treaty terms were announced. German leaders and press immediately branded it as the vindictive Kriegsschuldlüge (‘war-guilt lie’) – a proclamation of moral guilt before the whole world. The German people were forced thereby to admit sole responsibility for the war and the destruction caused by their ‘aggression’. Article 231 became the pretext for a sustained German propaganda campaign aimed at undermining the moral and legal credibility of the Treaty, combined with demand for the revision of the reparations and other material parts of the peace settlement.57 The German Foreign Office lawyers reasoned that if ‘war guilt’ were disproved, then the legal basis for reparations would be shown to have no validity. On the Allied side, it can be urged in defence that no imputation of guilt was intended, since there is no mention of ‘war guilt’ in Article 231. Liability for civilian damage was a responsibility that the German government had freely and explicitly recognised during the Armistice negotiations. The Article was a well-intentioned attempt to set a ceiling for Germany’s financial liability. That is to say, it was designed to protect Germany rather than to punish her. Fundamentally, however, Article 231 had no financial consequence in the given context of defining German liability. In that sense, it was redundant. Article 232 was sufficient by itself as a full and complete statement of Allied just claims. Article 231 was, however, necessary for compelling political reasons. Denied the right to integral (or total) war costs, the Allied public needed some psychological compensation in exchange – satisfied by the Article’s affirmation of German ‘responsibility’, with its implied or oblique moral implications. There is no doubt that the Allied leaders were all convinced of the guilt of Germany, who deserved to be punished.58 Majority opinion in Allied countries, full of notions of indemnity, held that Germany had lost the war and should pay for it as an act of restitution and justice. When they approved the clause, the Allied leaders were aware of the moral

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implication, but did not foresee the effect it would have in Germany. At the time, the legal, financial, political and moral issues were mixed up; and while the phraseology adopted was meant to produce a particular political effect in Allied countries, the words sprang from an undoubted and widely held moral attitude towards the ex-enemy among the peacemakers. In this frame of mind, those who drafted and approved the clause failed to notice that the wording chosen might be seen as giving the clause a definite penal character – the way the Germans saw it. Words to mollify the Allied public might whip up emotions of indignation among another audience. The European Allies increased further the open-ended drift of the reparation arrangements. No time limit to the years of payments would be inscribed in the Treaty. The determination of that matter and others such as the amount and manner of payments (including the drawing up of a schedule of payments by 1 May 1921) would be the responsibility of a permanent inter-Allied Reparations Commission to be created under the Treaty. Moreover, the Reparations Commission would have the right to extend German payments beyond 30 years (roughly a generation) and Germany’s debt could only be reduced by unanimous vote of the Commission. In the meantime, Germany would be required to pay the equivalent of $5 billion (20 billion GM) in cash and kind before 1 May 1921 – mostly to cover the expenses of the Allied army of occupation. German counterproposals and the ‘blank cheque’ The draft Treaty – a heavy document with its 440 Articles – was handed to the German representatives on 7 May 1919 at the Trianon Palace. They were given 15 days (later extended to 22 days) to reply in writing. In his reply to the short opening address by Clemenceau, Count Ulrich von Brockdorff-Rantzau, foreign minister and leader of the German peace delegation, launched into an attack on the ‘war-guilt’ clause, declaring that his colleagues and the German people knew the ‘Wucht des Hasses, die uns hier entgegentritt’ – ‘the force of the hatred that confronts us here’ – and that they were asked to say that they alone were responsible for the war; but ‘such a confession from my lips would be a lie’.59 Hans Mommsen notes that while Brockdorff’s speech contained some positive points, ‘it failed completely ... to produce a willingness to negotiate’ by the Allies (Mommsen, 1996, p. 95).60 In fact, his manner and ‘rejectionist’ stand only served to strengthen Allied solidarity on the peace terms. On 29 May the German delegates submitted their counterproposals in a 100-page document of 40,000 words, one-fifth of which dealt with reparations. This document was the last in a series


of written notes and observations (15 in all) the German delegates sent to the Allies over a three-week period. The reparation provisions were condemned as unjust and impossible to fulfil. The absence of a definite figure of reparations liability was deplored and the German delegation asked for a fixed sum to be mentioned in the final Treaty. Nevertheless, the Germans made their own offer of 100 billion GM, without interest – the first 20 billion to be paid in goods by 1 May 1926 and after that date 80 billion in cash over a period of 50 years. The maximum payment for each of the first ten years was to be 1 billion GM. The financial offer was on condition that the Allies grant territorial concessions and the receipt of larger reparation credits than those provided in the draft Treaty for transferred property in ceded territory and all deliveries made under the ceasefire agreement. In general, the counterproposals were hedged about by legal reservations and counterclaims and the demand for revisions and concessions, many of which could not be seriously considered. There was the demand for immediate membership of the League of Nations, the reduction in the duration of the Rhineland occupation to only six months, keeping of their merchant ships, the retention of Upper Silesia and the return of the German colonies. Even Keynes considered the German reparation proposals ‘obscure and rather disingenuous’ (Keynes CW, II, p. 138). Since the conditions attached to the German offer implied, wrote Keynes, ‘the abandonment of the greater part of the treaty, it could hardly be regarded as a serious one’ (p. 140). Members of the British Cabinet and Empire delegation met in Paris at the weekend, 30 May–1 June to consider the German counterproposals. They were in shock; gripped by confusion, guilt and panic – a fear that the Germans would not sign the Treaty and, consequently, British soldiers and sailors would be called upon to resume military operations. Appeasement was palpable among them. There were criticisms of, and objections to the territorial provisions of the draft Treaty and the omission of any definite figure for reparations. The Allied financial claims were regarded as excessive and beyond Germany’s capacity to pay. Revisionism was openly espoused by several members at the meeting. They thought serious consideration should be given to the main German grievances, for example, over the German-Polish border, a plebiscite in Upper Silesia, admission to the League of Nations and the long duration of the Rhineland occupation. Lloyd George was in a quandary. He claimed that he wanted a revision of the reparation clauses. But he ignored the pleas of his delegation for naming a figure. He made it clear ‘he did not think that the time had quite come for letting Germany off anything ... If Germany could not pay, it meant that


the British taxpayer had to pay ... the British working man would have to pay more if Germany did not.’61 Meanwhile, Wilson, taking up the German plea for a definite statement of their reparations debt made one final, last-minute push for a fixed sum. His financial experts set about lobbying again for Allied, particularly French, agreement. Simultaneously, over the next week or so, Lloyd George played one of his devious games to wreck the American drive for the adoption of a moderate fixed sum. On 2 June 1919 at a meeting with Wilson and Clemenceau, Lloyd George, referring to the alarm and concerns rife among the British delegation, announced revisionist proposals that amounted to a rewriting of major parts of the draft Treaty. Lloyd George’s sudden ‘conversion to virtue for others’ aroused ‘Wilson’s contempt and anger’.62 Asked pointedly by President Wilson what were his proposals for reparations, Lloyd George replied: ‘I would leave our claim intact and I wouldn’t touch a single one of our categories’.63 He would, however, invite the Germans to make a reasonable offer in three months time, since the figure mentioned in the counterproposals was insufficient. On 9 June, Wilson’s attempt to gain approval for a maximum fixed sum of 120 billion GM failed. Lloyd George, supported by Clemenceau, blocked it. Wilson was furious with Lloyd George, who just a few days earlier expressed his concern at the indefinite and unlimited character of the debt imposed on Germany; and who privately confided to Wilson that ‘he was willing at last to agree to the American wish for a “fixed sum” ’.64 Lloyd George got his way on this issue, and a plebiscite for Upper Silesia was the only major concession he managed to win for Germany. In this, Lloyd George was again backed by Clemenceau, and Wilson gave in. No other significant changes were made in the Treaty. The Allied reply to the German reparation counterproposals was given to the German peace delegation on 16 June, the same day as the final, revised test of the Treaty was delivered, with a five-day ultimatum to sign on the dotted line. As a result of Lloyd George’s June manoeuvres, there was no reparations settlement in the Treaty. The problem was deferred and the Germans, with justice, were right to complain that they were asked to sign a ‘blank cheque’ and had to wait for two long years before the Allies could insert the figures. ‘Expressed crudely’, Alan Sharp agrees, ‘the Germans were asked to buy a pig in a poke’ (Sharp, 1991a, p. 88). As everyone knows, the signing ceremony took place in the Galerie des Glaces at Versailles on 28 June 1919 – the fifth anniversary of the Sarajevo assassination that ignited the war. The Germans signed, but not without confusion, hesitations and anguish. None of the responsible political


leaders wanted to take responsibility for signing. The right-wing parties and nationalist papers railed against the Schmachfrieden – the ‘shameful peace’. A few days after receipt of the draft Treaty at a meeting of the National Assembly in the great hall of Berlin University (12 May), Chancellor Philipp Scheidemann declared that, in the government’s view, the Treaty was unacceptable. Then, right arm outstretched in a melodramatic gesture, he declaimed: ‘Welche Hand müßte nicht verdorren, die sich und uns diese Fessel legt?’ – ‘What hand would not wither that binds itself and us in these fetters?’ (Winkler, 2006, p. 358).65 A month later, as the deadline for signing approached, realism crept in the deliberations. Instead of a resolute, united front in favour of rejection, the Cabinet was evenly split. Matthias Erzberger, of the Centre Party who, as head of the armistice delegation, signed the ceasefire, declared himself in favour of signing the Treaty – adding the cynical, but persuasive advice: ‘When one signs under duress there is no question of sincerity’ (Delmer, 1972, p. 54). Signing does not necessarily mean fulfilling an agreement; that remark had the desired effect. Signing was seen as a desperate necessity to save the country from Allied occupation and possible dismemberment. On 20 June, the Scheidemann cabinet resigned. Three days later, faced with the threat of invasion, the National Assembly, voting by a show of hands, authorised the new Gustav Bauer government to sign the Treaty. One and a half hours before the expiry of the Allies’ ultimatum, the German peace delegates in France confirmed acceptance of the peace terms. Five days later, Hermann Müller, the foreign minister and Johannes Bell, the transport minister affixed their signatures to the Treaty on behalf of Germany. The Allied blockade of Germany was finally lifted on 12 July 1919, two weeks after the signing of the Treaty.

1.3 The Versailles settlement and the ‘German problem’ The work of the peacemakers at Paris ended in failure. People today regard the Versailles settlement as flawed and unsustainable. Historians generally agree; although their views may differ as regards the reasons for failure or may attach different weights to the potential weaknesses of the various parts of the Treaty, for instance, the territorial provisions or the economic and financial sections. But all agree that a search for answers as to what went wrong must start with what happened at Paris. That the Treaty rested on shaky foundations is now taken for granted. Agreement is less complete on whether there were inherent weaknesses in some of the major arrangements or whether the faults lie mainly in


enforcement and implementation. In either case the spotlight necessarily falls on the peacemakers, their policies, the shifts and turns in their negotiating positions, as well as the expectations, attitudes and responses of the vanquished. In a nutshell, the downfall of Versailles resulted from the failure of the treaty-makers to solve the German problem: What was to be done about Germany? How to integrate a conciliated Germany – potentially the most powerful nation in Europe – into a peaceful, democratic world order under conditions such as would provide security to France and her weaker neighbours to the east. Perhaps we only see this with the benefit of hindsight; but it was a goal that eluded the Paris peacemakers for the simple reason that the Allies approached the problem from fundamentally different perspectives. A disaffected Germany, located at the heart of Europe, nursing a multiplicity of grievances, real and imagined (including the feeling of being an outcast in Europe), alongside an insecure, exhausted France was the Achilles heel of the 1919 Paris settlement – a weakness that was never seriously addressed by the Anglo-Saxon victors. At bottom, the vulnerabilities of the peace can be traced to: (1) German rejection of the Treaty. (2) Anglo-American guilt over the so-called Carthaginian peace and the first stirrings of appeasement. (3) French feelings of insecurity; and (4) The absence of a united Allied will to enforce the Treaty. The Treaty of Versailles was no peace of reconciliation. Some of the terms were indeed severe. A standard excuse, but perhaps a genuine one, is that realistically a mild peace was not possible. In Allied countries, Germany was blamed for over four years of bloody carnage marked by savagery and barbaric ruthlessness – ‘an assault on their civilisation’. There was to be no status-quo-ante peace, as the Germans wanted. Unlike some other nineteenth-century peace negotiations (Vienna 1815, Paris 1856, Berlin 1878) where all involved parties took part in the negotiations with equal rights (and sometimes ‘as friends’, said Metternich of the Congress of Vienna), Versailles was not a full ‘Congress’ – a meeting with the ex-enemies. There were no direct negotiations with the Germans – except, as mentioned below, for the secret and limited Franco-German contacts during March–May, 1919. The Treaty terms were the result of compromises or trade-offs among the victors. Nevertheless, the Germans had sympathisers, if not champions of their cause, within the Allied delegations. But the reason given for the arm’s length approach to the Germans was fear that the whole Allied compromise package, the result of acrimonious debates, would unravel under German negotiating pressure, and reopen divisions among the


victors. Not being a negotiating party to the impositions, the Germans resented the Treaty as an unjust Diktat. From the start, the German people and their political leaders never accepted the Treaty – a disposition Hans Mommsen calls ‘the inner rejection of the Treaty’ (Mommsen, 1996, p. 91). They expected a ‘peace of justice’ and a ‘peace between equals’. That never happened. They felt that the Treaty terms contradicted the letter and spirit of President Wilson’s ‘Fourteen Points’ and were disappointed, since they looked to Wilson and his advisers to protect them from the greed and malice of the French. They complained of discriminatory treatment, for example, in the matter of compulsory disarmament (while other countries were allowed to carry on with wartime levels of armaments) and the selective application of the principle of national self-determination – to Germany’s disadvantage. As evidence of Allied vindictiveness, the Germans pointed to the Schmachparagraphen (shame sections) – Article 227 (calling for the extradition of the exiled Kaiser) and Articles 228–229 (demanding the handing over of nationals accused of war crimes) as deliberate attempts to humiliate Germany. German complaints and rejection of Versailles found a sympathetic response among disappointed liberals in the United States and Britain who took to calling the settlement ‘the peace to end peace’. Even as the Treaty was being signed thoughts of most politicians in Britain were on revision and they agreed, as the liberal historian and education minister, Herbert Fisher put it, that the Treaty ‘should be modified ... there will be an appeasement.’66 We referred earlier to the revisionist sentiments expressed at the British Cabinet and Empire Delegation in Paris during the last weekend in May 1919. At another famous weekend meeting two months earlier, this time at a hotel in the forest of Fontainebleau (22–24 March 1919), Lloyd George and some of his close advisers drew up the document known as the Fontainebleau Memorandum.67 Peter Neville ranks it alongside Keynes’s Economic Consequences of the Peace ‘as one of the founding texts of British inter-war appeasement’ (Neville, 2006, p. 8). Professor Antony Lentin considers the Fontainebleau memorandum more than an appeal to liberal idealism and a case for making concessions to Germany: ‘It was a deliberate attack on French policy, and it was understood as such’ (Lentin, 2001, p. 18). Douglas Newton, however, sees a somewhat different emphasis in the memorandum. The warning against a punitive peace for Germany was ‘in order to prevent it collapsing into Bolshevism’ (Newton, 1997, p. 417). One of the dramatic moments of the peace talks was on the question of French security – the historic ‘Rhineland compromise’ of 14 March

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1919. Here, Clemenceau accepted Lloyd George’s offer of a security pact in exchange for the renunciation of autonomous buffer states in the Rhineland. Wilson made an identical offer on behalf of the United States. Clemenceau thus backed away from Marshal Foch’s insistence on a security frontier on the Rhine. Rather than risk an irreparable rupture of the wartime alliance with the Anglo-Saxon powers, Clemenceau opted for something he prized above all else – the preservation and continuation of that alliance, now strengthened by formal security pacts with each of the principal Allies against future German aggression. For, after all, what France had at the moment was only an entente with Great Britain and temporary, friendly cooperation with the United States. But as it turned out, the Anglo-French security guarantee never came into being. Clemenceau was ‘effectively hoodwinked by Lloyd George’s eleventh-hour linkage of the operation of the British guarantee to the separate American pact’ (Sharp, 1995, p. 63). The British withdrew their guarantee on 19 March 1920 when the US Senate definitely rejected the Treaty of Versailles.68 Perhaps Clemenceau did not consider the AngloAmerican promise of military assistance as an absolute guarantee. Certainly, many in France were sceptical about it, comparing its contingency and dependency on others – ‘a mere scrap of paper’ – with the cast-iron certainty of a physical guarantee – a Rhine frontier. In the end, after much wrangling, Clemenceau managed to bolster the temporary Rhineland occupation with guarantees and sanctions written into the Treaty. Article 429, for instance, authorises the Allies (in effect, France) to delay the evacuation of its troops beyond the time limit of 15 years if ‘the guarantees against unprovoked aggression by Germany were not considered sufficient’ – presumably, meaning by that, if German disarmament did not take place. Article 430 specifically links duration of occupation to the payment of reparations. If Germany does not pay, the occupation can be prolonged or areas reoccupied even after the evacuation of Allied troops. Following these sanction clauses, Article 431 provides for an early withdrawal of occupation forces before the end of 15 years if Germany complies with all her Treaty obligations – a concession conceded by Clemenceau to Lloyd George. At a Cabinet meeting on 25 April 1919, Clemenceau predicted that Germany would default on reparations and disarmament obligations and that could be the excuse for indefinite Allied occupation (Bariéty, 1977, p. 62). But that scenario was never a realistic one. Initially, Wilson and Lloyd George were against military occupation and British troops were not likely to stay on the Rhine – except in very exceptional circumstances – for more than five years. Rhineland occupation was understood to be a joint Allied


responsibility. Any prolongation of occupation would have to be done by France alone. Given British and American attitudes, the exercise of that option by France would have been without Allied approval and support – a very risky enterprise indeed. In any event, extended occupation was never tested, as all occupation troops were withdrawn after ten years (in 1930). As their allies deserted them, the French felt even more isolated and insecure than they did when the Peace Conference started. Then the loss of the alliance with Tsarist Russia was deeply felt and they instinctively came to believe that the safety of France depended on the weakness of Germany. French security and German weakness became linked in the public mind. There seemed to be no other option – except, perhaps, to try to conciliate Germany. French political and business leaders did try for an accommodation with Germany even during the peace negotiations. But it was not clear under what terms or conditions such mutual understandings could be realised. And, more important, it was not obvious how such accommodation with Germany would alleviate the existential sense of insecurity felt by the French people. Nothing substantial came of the French overtures for cooperation. Germany was in no mood for reconciliation, not for the present at any rate; and the peace terms themselves were not conciliatory enough to provide incentives for both sides to seek and work out cooperative solutions. France consequently fell back on the only realistic, that is to say, available option – to weaken Germany’s strategic advantage by trying to uphold the Treaty’s constraints on German power. They sought to achieve that through support for a strong Poland and the newly created eastern European states on Germany’s eastern border. Too weak and divided by internal conflicts with disaffected minorities, these states together could not be a credible eastern counterweight to German power hitherto provided by Tsarist Russia.69 More realistically, then, French security had to be found in the means provided by the Treaty itself. Those means – reparations, temporary Rhineland occupation and German disarmament – if effectively deployed could provide a balm to soothe French insecurity. At the peace talks, France’s two principal allies regarded her as ruthless and unforgiving. The British, in particular, interpreted French calls for adequate measures for enforcing the peace terms as evidence of punitive aims. The Versailles Treaty – ‘too mild for its severity?’ After this brief review of the weaknesses of Versailles, we can see the sense in French nationalist historian, Jacques Bainville’s witty paradox


that the Treaty was ‘too mild for its severity’ – ‘Une paix trop douce pour ce qu’elle a de dur’.70 The Treaty was too mild with regard to matters where Germany could regain its strength and power. For instance, Germany was not dismembered. Its factories and economic infrastructure remained intact, including the country’s industrial heartland and arsenal, the Ruhr, which escaped Allied occupation – leaving Germany’s immense economic potential undiminished. The German disarmament clauses could be evaded. Compliance was dependent on the German government’s goodwill and cooperation. On the other hand, where the Treaty was harsh, for instance in some of the territorial provisions and financial clauses, there were no enforcement procedures. The Allies stationed troops in the Rhineland, but there was no mechanism for using those troops to enforce the settlement. ‘Severity’ included what Lloyd George called the ‘pinpricks’ that unnecessarily humiliated Germany, such as the clauses dealing with ‘war guilt’ and war crimes, hurtful to German pride. Coming under the heading of ‘severe’ were other punitive provisions, such as the inclusion of pensions in the reparations bill. These latter, superficially severe provisions were either unnecessary or unjustified, but were retained; and the Germans made much of them. In general, where it could have been anticipated that the Allies would need to show continuing solidarity and firmness in the post-Conference period, no provision was made for tackling the problem. Marc Trachtenberg, in his recent reflections on Versailles, writes that Wilson’s rhetoric prevented him from coming to grips with the central issue – that the problem of enforcement would be fundamental. But Wilson ‘simply could not bring himself to face up to that problem’. As for Lloyd George, adds Trachtenberg, ‘he did not think seriously about the problem of enforcement’ (Trachtenberg, 2000, pp. 200–1). Even if they had thought seriously about enforcement, their people and lawmakers would not have done anything about it. The United States withdrew from the settlement and the British wanted to disengage from Europe, except to check French pretensions to ‘rule the roost’ in Europe. The refusal of Britain and the United States to honour their promises to France under the security pacts let slip the chance to provide what would have been potentially the most effective guarantee of the Versailles peace. Security guarantees to France – in effect an underpinning of the Treaty by Britain and the United States – would have been the most powerful deterrent to German non-compliance and an incentive for French moderation. The compromises represented by the peace settlement resulted in a Treaty (and subsidiary documents) full of ambiguities. Contrary


to appearances, the Treaty was not rigid and immutable – even with sanction clauses, guarantees and mechanisms of control. It was not a monolithic structure, the ‘System of Versailles’, as some disparagingly referred to it in the 1930s. These features of Versailles, in particular its in-built flexibility and resilience are sometimes not sufficiently appreciated. They helped it to survive the turbulence and challenges of the early post-war years, through to the relative calm of the mid-1920s until more turbulence with the depression and the final, fatal challenge of fascism. In 2000, Marc Trachtenberg referred again to how Lloyd George blocked French efforts at seeking a workable arrangement with the Germans in 1919 and afterwards. The most important example of this, says Trachtenberg, was Lloyd George’s ‘torpedoing of the Seydoux Plan negotiations of late 1920 ... for a reparations arrangement that both Germany and France could have accepted’ (Trachtenberg, 2000, p. 202). Lloyd George’s own defence of his obstructionist tactics at the Peace Conference was that he was simply playing for time, waiting for tempers to cool. That was why he opted for delay; but that afterwards, he tried to get a reduction in the reparations bill. He succeeded in doing so at the London conference in the spring of 1921 when the May 1921 Schedule of Payments finally fixed the total of German liabilities. While acknowledging this justification, Alan Sharp makes reply that ‘the prime minister’s moderation could also be seen in terms of an arsonist claiming credit for calling the fire brigade, a further example of short-term improvisation to deal with immediate political needs’ (Sharp, 1991b, p. 136). Trachtenberg, however, agrees with Antony Lentin that it was not domestic political pressures that drove the prime minister to adopt an inflexible line on reparations, against his better judgement. His political position remained unassailable throughout the peace negotiations, especially after he faced down his critics in the House of Commons on 16 April 1919. That gave him wide latitude to return home with a reasonable, moderate settlement (Trachtenberg, 2000, p. 202). Recently, Lord Morgan (Kenneth Morgan, the historian) wrote that, although Lloyd George was responsible for swelling the reparations bill by including pensions, ‘in the end, he succeeded in pushing the reparations issue into the long grass’ – for later evaluation by the Reparations Commission ‘which ensured that most of the money would never be paid.’ ‘An erratic’ course, observes Lord Morgan, given Lloyd George’s professed attachment to Keynes’s line that the ‘dynamism’ of the German economy – judged essential for the restoration of British and European prosperity – should not be stifled by heavy

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reparation burdens. No wonder, he says, ‘Keynes could never fathom Lord George’s strategy here – but then, Keynes was not a politician!’ noted Lord Morgan (Morgan, 2006, pp. 35–6). As we have seen, Lloyd George preferred to leave matters unresolved, including the notorious, ‘blank cheque’. Maybe, he was hedging his bets, keeping his options open, believing that he could ‘reverse gears’ later. Perhaps Germany could pay quite a lot, after all. If these suppositions weighed with him, that could explain why there were no time limit on reparations and no total or specific sum in the Treaty. However, he overplayed the tactical game of shifting positions (and the advantages it brought) to the point where he lost all focus and became incapable of making a coherent, positive contribution to moderation. In short, his behaviour showed lack of conviction. Sharp asks: Did Lloyd George ever establish ‘in his own mind the figure for a “moderate” settlement?’ The answer is: ‘It seems unlikely’ (Sharp, 1991b, p. 138). Clearly Lloyd George did not, himself, set an example of moderation, particularly in deeds, but also in words. Early in June 1919 when he feared that Germany might not sign the Treaty, and some of his colleagues demanded revisions, Lloyd George refused to make any concessions on the reparations sections – although he was the champion of a conciliatory treatment of Germany in territorial matters. As Lentin says, Lloyd George never really deviated from his strategy to ‘extract from Germany as large a sum as possible’; and quoting John Hemery, puts that figure ‘ “somewhere between £5 billion and £11 billion” ’ (Lentin, 1998, p. 226).71 The British prime minister never really abandoned his claim for war costs, both before and during the Peace Conference and continued to press for high reparations at international conferences during 1920 and 1921 (Lentin, 1990, p. 272). Was it also the stirring of the old Anglo-French rivalry in his breast that France was getting away with too big a slice of the reparations pie? That something could be done about that by inflating the bill so that John Bull could end up with an adequate absolute amount of whatever could be extracted from Germany? Certainly, he seemed to be particularly concerned, and in dead earnest, about how the spoils were to be divided and about Britain’s share. ‘Contrary to what was once supposed’, says Lentin, ‘it is clear that Lloyd George, rather than Clemenceau, was the obstacle to an immediate, agreed and workable solution to reparations’ (Lentin, 2001, p. 17). Clemenceau was more realistic, perhaps wiser, about reparations. His finance minister and reconstruction minister might entertain a vain hope in the promise of reparations to plug the hole in the national budget, to finance reconstruction of the devastated


areas and the revival of the economy. Clemenceau knew better: very little reparations, if any, would in fact be paid. France could only use reparations, as the Treaty allowed, as a pressure point on Germany to execute the Treaty’s disarmament clauses and as means to limit German power in the interests of French security. As regards the reparation payments themselves, he doubted whether France would ever recover more than ‘the price of the coats (des capotes) in which her soldiers were killed’ (Chastenet, 1960, p. 40).

Notes 1. See John Keegan, The First World War (London: Hutchinson, 1998), p. 8. 2. Casualty lists for indirect costs are conveniently summarised in Matthew Hughes and William J. Philpott, The Palgrave Concise Historical Atlas of the First World War (Basingstoke: Palgrave Macmillan, 2005), Map 50: ‘The Costs of the War, 1914–19’. See also Spencer C. Tucker, The Great War, 1914–18 (London: UCL Press, 1998), p. 176. 3. The figures for direct and indirect costs of the war, widely quoted by historians, are from E.L. Bogart’s 1920 study, Direct and Indirect Costs of the Great War (New York: Oxford University Press). For a critical review of Bogart’s work (allowing for the impact on wealth, using national balance sheets) see Stephen Broadberry and Mark Harrison, ‘The Economics of World War I: an Overview’, pp. 22–28 in Broadberry and Harrison (eds) (2005). 4. For French war finance, see Pierre-Cyrille Hautecoeur, ‘Was the Great War a Watershed? The Economics of World War I in France’ in Broadberry and Harrison (eds) (2005), pp. 183–187. A French income tax law passed in 1913 came into effect (at low rates) only in 1916 and raised relatively little – less than 1 billion francs during the war. Another reason for the stagnation of revenue from taxation in France was the loss of north-eastern France under enemy occupation – a factor that significantly reduced the tax base. British and German war financing are discussed in the Broadberry and Harrison (2005) volume at pp. 215–220 by Stephen Broadberry and Peter Howlett, and at pp. 59–64 by Albrecht Ritschl, respectively. 5. For an excellent recent account of the origins of the Allied war debt problem, see Robert Self (2006, chapter 2, pp. 15–33). 6. See Alan P. Dobson, Anglo-American Relations in the Twentieth Century (London: Routledge, 1995), pp. 47–8. 7. See Lindley Fraser, Germany between Two Wars (Oxford: Oxford University Press, 1944), pp. 60–1. 8. See Christian Tomuschat, ‘The 1871 Peace Treaty and the 1919 Versailles Treaty’ in Randall Lesaffer (ed.), Peace Treaties and International Law: From the Late Middle Ages to World War I (Cambridge: Cambridge University Press, 2004), pp. 387–8. 9. See Norman Stone, World War One: A Short History (London: Allen Lane, 2007), p. 130. 10. Wilson’s Fourteen Points summarised the war aims of the United States in a series of stipulations that were also intended to provide the agenda


11.

12. 13.

14. 15.

16.

for the peace settlement. The basic principle was self-determination for the peoples of the Austro-Hungarian, Turkish and German empires. Secret diplomacy was replaced by ‘open covenants of peace, openly arrived at.’ There were to be freedom of the seas, arms reductions and the removal of trade barriers. Specific territorial provisions required evacuation and restoration of Belgium, the return of Alsace-Lorraine to France and the creation of an independent Poland. The final point called for ‘a general association of nations’ to guarantee the security and independence of states – later known as the League of Nations. See Sharp (2008, pp. 40–3) for the full texts of Wilson’s Fourteen Points and other declarations. Shortly after the Bolsheviks came to power in Russia in November 1917, they published the secret Allied treaties promising one another the spoils of victory. Wilson’s peace plan – bold and idealistic – was partly a response to the Bolshevik leaders’ denunciation of the war as one fought for imperialistic ends, and their call for soldiers to lay down their arms and fight for world revolution. Wilson’s call for a non-punitive peace settlement based on principles of justice, equality and democracy offered an inspiring alternative to Lenin’s peace manifesto. It was also a warning to the European Allies that their secret agreements on war aims and sharing of the spoils would have to be revised. In a recent paper on the realist approach to international politics, Marc Trachtenberg (2003, pp. 168–9, n. 29) refers to the persistence of the myth that ‘Wilson was the champion of a peace of reconciliation with Germany, and that Britain and France insisted on much harsher terms and forced him into disastrous compromises’. In fact, claims Trachtenberg, the ‘peace that was imposed, the Versailles settlement of 1919, was very much a Wilsonian peace’. But ‘it was also an extremely unstable peace ... that led to disaster’. Wilson’s failure to back a conciliatory peace was deliberate. It was what he wanted, judging from his speeches during the war and in 1919. He was hostile to the method of peacemaking used at Vienna in 1815 – the method of ‘bargain, compromise, accommodation or adjustment of interests’, as he called it. For a recent, thorough account of the Armistice episode see Bullitt Lowry, Armistice 1918 (Kent and London: Kent State University Press, 1996). While accepting the justification for the British change of phraseology, Alan Sharp notes that ‘there were moral overtones to the new wording reflecting the unspoken assumptions of German guilt in 1914’ (Sharp, 1991a, p. 80). See also, Las Casas (Pseudonym), La France Sans Président (Paris: Editions Balland, 1993), p. 25. William MacDonald, The Reconstruction of France (London: Macmillan, 1922), p. 76. He added that the legislation ‘pledged the faith and credit of the state to the financial support of an undertaking the like of which was never attempted by any government’ (p. 76). In 1932, when French reconstruction ended, the total costs were estimated at around 28 billion gold francs (or a cumulative total of 103 billions in current francs), equivalent to $3.9 billion. See Sauvy (1969, p. 209). In total, over the whole period of 1918–31, France received 8.9 billion GM (equivalent to £435 million, or $2.1 billion), representing 40.9 per cent of the total reparations paid by Germany. See Castillon (1953, p. 65).

Reparations and the Legacy of War 41 17. Georges Clemenceau, Grandeur and Misery of Victory (London: Harrap, 1930), p. 113. 18. For figures on the devastation in northern France, see Helen McPhail, The Long Silence (London: I.B. Tauris, 1999) Appendix, pp. 225–7. 19. 35 billion gold francs was the Reparations Commission’s estimate for the purpose of evaluating French reparation claims for civilian damages. Benjamin Martin (1999, pp. 18–19) quotes this estimate, remarking that it is ‘generally agreed to be reasonable’. Alan Sharp (1991a, p. 77) refers to a 1984 estimate by the French economic historian, Alfred Sauvy who arrives at a figure of 55 billion gold francs (£2.2 billion or $11 billion). See also Pierre-Cyrille Hautecoeur, ‘Was the Great War a Watershed? The Economics of World War I in France’ in Broadberry and Harrison (2005, p. 199) who adds that such a material loss amounted to 125 per cent of French 1913 national income. Between these extremes, there is the 1920 estimate for French property losses by R.L. Bogart amounting to 50 billion gold francs ($10 billion) quoted in Broadberry and Harrison (2005) table 1.7, p. 23. A likely figure to settle on is, perhaps, Bogart’s estimate. These estimates of material loss do not take into account the loss to the country and private individuals of the value of output diverted to the German war effort when the region was under German occupation between August 1914 and November 1918. Expressing Bogart’s estimates in national balance sheet terms, Broadberry and Harrison’s analysis suggests that France’s physical capital losses were extremely heavy when expressed as a percentage of prewar capital (pp. 28–9). For France, the loss on 1913 domestic capital assets was 59.6 per cent, compared with 9.9 per cent in Britain. 20. In 1926 (in the wake of the Locarno accords) the French offer of industrial cooperation to control production and allocate markets by quotas was finally taken up by the Ruhr industrialists when German heavy industry was then operating at high productivity levels. In September 1926 they agreed to the setting up of a private international steel cartel, comprising the steel-makers of France, Germany, Luxembourg, Belgium and the Saar. In the following year, a Franco-German commercial treaty was signed on 17 August 1927, and an international potash cartel also came into being. William Diebold comments that ‘the steel cartel proved to be an unfulfilled promise’, since it had little effect in restoring the ‘natural’ economic links of the Ruhr-Lorraine area. The cartel broke down partly on account of ‘its failure to limit German production and exports to the levels desired by the producers of other countries’. See, William Diebold, Jr, The Schuman Plan: A Study in Economic Cooperation, 1950–1959 (New York: Praeger, 1959), p. 28. 21. Peter Yearwood writes that ideas similar to Clémentel’s and those of his assistant, Jean Monnet, would later be embodied ‘in the Marshall Plan and the European Economic Community.’ But in 1919, such plans ‘went well beyond what the British and the Americans were ready to accept’. See Peter J. Yearwood, Guarantee of Peace: The League of Nations in British Policy 1914–1925 (Oxford: Oxford University Press, 2009), p. 92. 22. On Allied and American economic plans for the peace, see Glaser (1998, pp. 371–88). 23. David Stevenson, ‘French War Aims and Peace Planning’ in Boemeke, Feldman and Glaser (eds) (1998), p. 94.

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24. See Keith Wilson, Channel Tunnel Visions 1850–1945: Dreams and Nightmares (London: Hambledon Press, 1995). See also, Sharp (1979, pp. 210–15). 25. By a sleight of hand at the time of signing the Anglo-French Treaty of Guarantee, Lloyd George ‘ensured that the British obligation was totally dependent on the Americans honouring their commitment first’, writes Alan Sharp ‘Clemenceau and the French felt cheated and lost trust in Britain’ (Sharp, 2008, pp. 125–6). 26. David Stevenson, ‘France at the Paris Peace Conference’ in Boyce R.D. (ed.) (1998, p. 24). 27. See p. 96 in Tucker (1998) referred to above in n. 2. 28. The name comes from the tear-off coupons in the wartime rationing voucher. The election (held on 14 December) was so dubbed by Herbert Asquith, leader of the Independent Liberals, to describe the Lloyd George government’s method of favouring those electoral candidates deemed to be loyal coalition supporters. Such candidates were sent an official letter of endorsement, ‘the coupon’, signed by Lloyd George and Bonar Law, the Conservative leader. By that device – arbitrary and dubious as it was – Lloyd George hoped to preserve in peacetime the patriotism and national unity of the war years, with himself as leader and the ‘man who won the war’. The ‘Khaki election’ was another term used to describe the 1918 ballot, on account of the election of a large number of ex-officers. 29. Geddes’s oft-quoted remarks gained notoriety after Keynes mentioned them in his Economic Consequences of the Peace, 1919 (Keynes CW, vol. II, pp. 89–90). Geddes, a former businessman, was MP for Cambridge. He made the remarks during an address to the Beaconsfield Club on 10 December 1918, repeating a similar phrase used in an election speech the previous evening at the Guildhall, Cambridge, as reported in the Cambridge Daily News, 11 December 1918 and The Times, 10 December 1918. Referring later to Geddes’s ‘squeaking pips’ metaphor as ‘this perfect expression’, Keynes said that it impressed him when he came to write his 1919 book. Keynes, CW, vol. XVII, pp. 14–15. 30. Under the recently extended franchise swelling the electorate from 7.7 million to 21.4 million, with that result, Lloyd George faced virtually no serious opposition in Parliament and thereby secured a resounding popular mandate to write the peace and to make Great Britain ‘a land fit for heroes’. Nevertheless, the prime minister had to make his policies attractive to the 382 Conservative and Unionist MPs. During the election campaign many of them, responding to the public resolve for revenge and compensation for all war losses, made pledges and commitments to secure those peace terms. Inbal Rose notes that the conservative press ‘considered it essential that Germany should pay for the war’ and in general strengthen the public’s desire for ‘a harsh peace’. See Rose (1999, pp. 9–10). 31. Keynes’s Treasury memorandum is reprinted in Keynes CW, vol. XVI, pp. 344–83. On the Hughes Committee on Indemnity, see Robert E. Bunselmeyer, The Cost of the War 1914–19 (Hamden, CT: Archon Books, 1975), pp. 94–104; Imperial War Cabinet Committee on Indemnity Report, Proceedings and Memoranda, CAB 27/43 and CAB 29/2/P-38.

Reparations and the Legacy of War 43 32. See Lorna S. Jaffe, British Policy towards Postwar German Disarmament 1914– 1919 (London: Allen & Unwin, 1985), p. 122. 33. See The Economist, 23 January 1932, ‘Supplement on Reparations and War Debts’, p. 4. 34. See Scott Newton, Profits of Peace: The Political Economy of Anglo-German Appeasement (Oxford: Clarendon Press, 1996), p. 58. 35. See, Friedrich Ebert, Schriften, Aufzeichnungen und Reden (Dresden: C. Reissner, 1926), p. 127. 36. The ‘stab in the back’ story received an authoritative boost from recently retired Field Marshal Paul von Hindenburg on 18 November 1919 who repeated it when giving evidence concerning the timing of unrestricted submarine warfare in 1916–17. Suddenly, he deviated from his testimony and quoted an unknown British general to the effect that the German army was ‘stabbed in the back’ by the home front in 1918. The accusation, prevalent at the time among soldiers and politicians, gained credibility among the German middle classes, further weakening their respect for the young Republic. The catch-phrase soon became notorious as Nazi propaganda. See, Holger H. Herwig, ‘Of Men and Myths’ in J. Winter, G. Parker and M.R. Habeck (eds) The Great War and the Twentieth Century (New Haven, CT: Yale University Press, 2000), pp. 299–329. 37. See Stig Förster, ‘Consequences of War and Defeat: Assessing the Weimar Republic’, Bulletin of the German Historical Institute London, 17 (1995), p. 29 – a review of Richard Bessel’s Germany after the First World War (Oxford: Clarendon Press), p. 29. Bessel’s research deals with Germany’s social, economic and demobilisation problems in the aftermath of defeat and revolution. 38. Klaus Schwabe’s quotation is at p. 42 in Boemeke, Feldman and Glaser (eds) (1998). 39. The rise of German industrial power was spectacular before 1914. In that year, Germany’s share of total world manufacturing output stood at 14.8 per cent, compared with Britain’s at 13.6 per cent. See Scott Newton (1996, p. 9). London bankers benefited, however, since they provided most of the finance for Germany’s burgeoning import-export trade – trade acceptances and short-term credits. 40. For a summary of the Treaty’s commercial clauses and German attempts to defend the domestic market, see O. Delle Donne, European Tariff Policies Since the World War (New York: Adelphi Co., 1928), pp. 197–9, 206–09. With some exaggeration, Delle Donne claimed: ‘These [Allied] restrictions, which were without parallel in history, imposed upon Germany the most absolute economic servitude’ (p. 198). On the economic clauses and German reaction to them, see also Glaser (1998, pp. 384–97). 41. Sefton Delmer was Berlin correspondent of the London Daily Express newspaper from 1928 to 1933. 42. Fischer (2006) mentions people like Ago von Maltzan, Carl von Schubert and Leopold von Hoesch as serious conciliators during the Ruhr crisis. 43. See Peter Krüger, ‘German Disappointment and Anti-Western Resentment, 1918–19’ in Schröder (ed.) (1993, pp. 323–35). See also Klaus Schwabe, ‘Germany’s Peace Aims and the Domestic and International Constraints’ in Boemeke, Feldman and Glaser (eds) (1998), pp. 37–67.

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44. See also Gerald Feldman’s review of Krüger in Journal of Modern History, 46 (1974), pp. 558–9. 45. In December 1918, the Hamburg banker and financial adviser on peace negotiations, Max Warburg believed ‘in the full restoration of prewar Germany in a postwar world’, according to his nephew. Quoted in Ron Chernow, The Warburgs (London: Chatto & Windus, 1993), p. 212. 46. See John Horne and Alan Kramer, German Atrocities, 1914: A History of Denial (London: Yale University Press, 2001). 47. See Sally Marks, Innocent Abroad: Belgium at the Paris Peace Conference of 1919 (Chapel Hill: University of North Carolina Press, 1981), chapter 4; Zuckerman (2004, chapter 14). 48. See Minutes of Meeting of British Empire Delegation, 1 June 1919 in BDFA, II, Series I, IV, p. 111. 49. The American claims on Germany were mainly for the expenses of the small US army of occupation (initially, 40,000 troops) that remained in Germany until 1923, and for ‘mixed claims’ to private individuals arising from pre-war claims and seizure of enemy private property. These claims against Germany, however, were not counted as reparation payments. Reparations, proper, were largely for shipping losses due to enemy action. These amounted to $110 million (Marks 1998, p. 339, n. 7). The United States received regular deliveries of chemical dyes from Germany until 1922, and also obtained valuable German patents, notably for aspirin. Despite sustaining a loss of only 350,000 tons of shipping (3 per cent of total Allied shipping losses) the United States retained a total of 600,000 tons of captured German ships – the difference in tonnage being counted as reparation payments. 50. On account of his enthusiastic support for Wilson’s pet project, a League of Nations, and his introduction of the notion of ‘mandates’ for ex-colonies. 51. War pensions were government payments to disabled ex-servicemen and the widows or orphans of soldiers killed in the war. Separation allowances were payments made to dependents of soldiers on active service as compensation for loss of income. 52. See Edward M. Lamont, The Ambassador from Wall Street: The Story of Thomas W. Lamont (Langham, MD: Madison Books, 1994), p. 112; Seth P. Tillman, Anglo-American Relations at the Paris Peace Conference of 1919 (Princeton, NJ: Princeton University Press, 1961), p. 245. 53. See Sir Bernard Mallett and C. Oswald George, British Budgets: Second Series, 1913–14 to 1920–21 (London: Macmillan & Co. Ltd., 1929) table III, p.393. See also, Alan T. Peacock and Jack Wiseman, The Growth of Public Expenditure in the United Kingdom (Oxford: Oxford University Press, 1961) table A-7, p. 168. 54. See Deborah Cohen, The War Come Home: Disabled Veterans in Britain and Germany, 1914–1939 (Berkeley: University of California Press, 2001), pp. 5, 7 and Appendix table 3, p. 194. See also, Deborah Cohen, ‘The War’s Returns’ in R. Chickering and S. Förster (eds) The Shadow of Total War (Cambridge: Cambridge University Press, 2002), pp. 114, 118. 55. See p. 199 in Hautecoeur (2005) mentioned in n. 4 above. 56. Article 231 states: ‘The Allied and Associated Governments affirm and Germany accepts the responsibility of Germany and her allies for causing all


57.

58.

59. 60.

61. 62.

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’. Article 232 immediately qualifies this statement of Germany’s liability: ‘The Allied and associated Governments recognise that the resources of Germany are not adequate ... to make complete reparation for all such loss and damage. The Allied and Associated Governments, however, require, and Germany undertakes that she will make compensation for all damage done to the civilian population ... and to their property ... and in general all damage as defined in Annex 1 hereto.’ Annex 1 lists the ten categories of damages. These first two clauses of the Treaty’s Reparations Chapter were the result of much debate and several earlier drafts by John Foster Dulles, written to provide a satisfactory statement of the compromise mentioned in the text. The distinction in the clauses between the moral and juridical justification for Germany’s reparations liability was firmed up by a last-minute suggestion of Norman Davis at the Council of Four meeting on 29 March 1919. See Sharp (1991a, pp. 86–7) and Arthur Walworth, Wilson and His Peacemakers (New York: Norton, 1986), p. 288. The German propaganda campaign against the war-guilt clause was orchestrated by the Ministry of Foreign Affairs through its War Guilt Department (Kriegsschuldreferat) and its front organisations. For a good, short account of the German campaign of obfuscation, see Herman J. Wittgens, ‘War Guilt Propaganda Conducted by the German Foreign Ministry During the 1920s’, Canadian Historical Association, Historical Papers, 1980, pp. 228–47. In the short run, Weimar leaders benefited from the war-guilt propaganda in swaying foreign opinion against reparations and the ‘unjust peace of Versailles’; but domestically, as Wittgens notes, ‘the campaign strengthened the nationalist enemies who associated the republic with defeat, revolution, and the acceptance of the shameful peace’ (p. 246). Wilson certainly was convinced of Germany’s guilt. Quoting from Wilson’s speeches in late 1919 and other sources, Marc Trachtenberg (2003, p. 169 and n. 28) writes: ‘In Wilson’s view, Germany had committed a great crime, and people had to be shown “that they could not do anything of the sort the Germans attempted without suffering the severest kind of punishment”.’ On another occasion, Wilson said that the treaty ‘seeks to punish one of the greatest wrongs ever done in history ...’ Quoted in Gerhard Schulz, Revolution and Peace Treaties 1917–1920 (London: Methuen, 1972), p. 180. Margaret MacMillan (2003, p. 474) describes Brockdorff-Rantzau’s speech and the reaction to it thus: ‘Although he said much that was conciliatory, the ineptitude of his interpreters, his decision to remain seated and his harsh, rasping voice left an appalling impression.’ See Minutes of Meeting of British Empire Delegation, 1 June 1919, in BDFA, II, Series I, IV, pp. 111–12. See Sigmund Freud and William Bullitt, Thomas Woodrow Wilson: A Psychological Study (London: Weidenfeld and Nicolson, 1967), pp. 236–7. Freud and Bullitt added that Lloyd George ‘was unwilling to abandon one molecule of the British pound of flesh’, and that the last days of the

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63.

64. 65.

66. 67. 68.

69.

70.

71.

German Reparations, 1919–1932 Conference was lightened ‘by the comic though somewhat nauseating spectacle of the little Welsh Shylock, his pound of flesh safely in his pocket, preaching unselfishness – for others’ (p. 237). See Paul Mantoux, Deliberations of the Council of Four (March 24–June 28, 1919): Notes of the Official Interpreter, translated and edited by Arthur S. Link (Princeton, NJ: Princeton University Press, 1992) vol. 2, p. 276. Quoted in Margaret L. Coit, Mr Baruch (Boston, MA: Houghton Mifflin, 1957), p. 273. Also quoted in Andreas Hillgruber, ‘ “Revisionismus” – Kontinuität und Wandel in der Außenpolitik der Weimarer Republik’, Historische Zeitschrift, vol. 237 (1983), p. 597. Winkler (2006, p. 358) records that at the same meeting, president of the National Assembly, the Centre delegate, Konstantin Fehrenbach, threatened the Allies with a second world war. Quoted in Martin Pugh, Lloyd George (London: Longman, 1988), p. 136. Pugh comments: ‘It is to his credit that Lloyd George entirely agreed’ (p. 136). The Fontainebleau memorandum is reproduced in Lloyd George’s The Truth about the Peace Treaties (London: Gollancz, 1938) vol. 1, pp. 403–16. Wilson first presented the Treaty of Versailles alone to the Senate, and only sent the French guarantee pact 19 days later. The pact was referred to the Foreign Relations Committee; but it was never taken up, and never reported out. France also looked to the new states – Czechoslovakia, Poland and Yugoslavia – as forming a bulwark, or cordon sanitaire, against the spread of Bolshevism from Soviet Russia. Title of Bainville’s article in the right-wing newspaper, Action Française, 8 May 1919. Also in Bainville’s Les conséquences politiques de la paix (Paris [1920] 1995, p. 35). Depending on points of view, some people see the Treaty as either too severe or too mild, while others like Bainville observe a blend of the two attributes. In 1973, the German historian Karl Dietrich Erdmann, like Bainville, judged the Treaty ‘too severe, since Germany could do no other, from the first moment onwards, than try to shake it off; too lenient, because Germany was not so far weakened as to be deprived of the hope and possibility of either extricating herself from the treaty or tearing it up’. Quoted in Kolb (1988, p. 33); see also, Williamson (2005, p. 173). Lentin (1998, in n. 13, p. 226) quotes from John Hemery’s unpublished 1988 Cambridge University Ph.D. dissertation, ‘The Emergence of Treasury Influence in British Foreign Policy, 1914–1921’, pp. 223–6.

2 Summits on Sums

This chapter reviews highlights of the series of reparation conferences – ten in all – called by Lloyd George during 1920–21 to agree on a fixed reparations sum in advance of the Reparations Commission decision due before 1 May 1921. Lloyd George wanted to get the French to moderate their demands and meet with the Germans. However, when talks broke down completely with Berlin in April 1921, the Germans were forced to accept on 5 May, under ultimatum, a reparations bill for 132 billion GM.

2.1 La politique des casinos1 The second (resumed) attempt to fix the total German liability was no less taxing than the first – perhaps more so. Allied disunity (already evident during the peacemaking) became more obvious in the years afterwards. In the absence of the United States, Britain and France were left the daunting task of implementing the Versailles stipulations and having to deal with a recalcitrant and defiant Germany determined to break the Treaty. But the two European Allies had sharply different views on key aspects of treaty execution, such as reparations and disarmament. France wanted to enforce the Treaty, Britain to revise or abandon it. Each was thus driven to obstruct the other; yet neither could prevail – none more so than in the extremely complex, dreary and divisive reparation negotiations over plans and solutions, starting from 10 January 1920 when the Treaty came into force. Revision vs enforcement During the long delay from the signing of the Treaty to the production of a reparations figure in May 1921 there was a shift in British public 47

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opinion against what was perceived as the injustices of Versailles, especially against the reparation clauses. Disillusionment with the Treaty and the war itself, combined with feelings of guilt and ‘fair-play’ led many influential people to believe that Germany was harshly treated. Support grew for revision rather than enforcement and for the loosening of ties to France – the sole champion of enforcement to secure reparations. These widely held revisionist sentiments corresponded with post-war official attitudes which, for political as much as for economic reasons, did not want to see a weakened Germany. There was the belief that a prosperous Germany was essential for British economic recovery – a telling argument as the economy slid into a deep recession aggravated by a deflationary policy in the latter half of 1920 (after a brief post-war boom). Many in Britain ascribed the chronic unemployment – averaging 1 million throughout the 1920s – to the collapse of the country’s Central European markets. Pre-war Germany had been a major market for British manufactured goods, second only to India. Germany took 25 per cent of British exports. In 1921, the value of British exports to Germany was down to 43 per cent of its value in 1913.2 Influential City and manufacturing interests called for the resumption of financial and trading links with the former enemy. With the economy in poor shape and given the modest British reparation share, officials were led to favour revision of the reparation plans then under consideration. The ‘transfer problem’ appeared to many as a practical reality. That is to say, the popular conviction that asking Germany to pay large reparations could only seriously damage British trade, since to earn the necessary foreign cash Germany would be forced into an aggressive export drive in the British and world markets. Such conviction favoured those calling for a drastic reduction in Germany’s reparations bill. Earlier, at the Peace Conference Lloyd George was emphatic: ‘We don’t want German goods.’3 The same logic fed objections to France’s demand for Germany to fulfil its total reparation obligations. German compliance could mean only one thing – a weakening of Germany’s capacity to import; hence, Britain would be deprived of a valuable customer. ‘Where Britain saw sixty-five million customers, however, France saw a nation-in-arms’, observes Alan Sharp, ‘and this was one of the perceptions that divided the two as they came to enforce the treaty.’4 Not that Lloyd George and his advisers ever considered giving up Britain’s reparation share (although some sections of opinion had come to doubt whether Germany should pay any reparations at all). Rather, they wanted it to come out of a moderate overall amount within Germany’s capacity to pay – although, to date, there was no agreement

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what that absolute amount should be; indeed, even less so, what was Germany’s ‘capacity to pay’. One thing they were certain of: they were against reparations-in-kind and in favour of purely financial (or cash) payments. They were not interested in receiving deliveries of German coal and manufactured goods, for obvious reasons – such items were competitive with domestic production and British exports. The handover of German ships (over 1.5 million tons) as compensation for maritime shipping losses resulted in unemployment and loss of business in British shipyards. Workers and producers in other industries feared similar effects from German ‘dumping’ of goods to pay for reparations. For the British, therefore – particularly those persuaded by ‘transferproblem’ reasoning – trade was better than reparations. British opposition to early post-war French projects stemmed from political and strategic perceptions. There were fears of a new French hegemony if the Napoleonic ambitions of some nationalists remained unchecked. The French gave cause for concern when, in April 1920 (after the collapse of the Kapp putsch in Berlin)5 Alexandre Millerand, the French premier, sent troops to occupy Frankfurt, Darmstadt and three other towns (Hanau, Homburg and Dieburg) in the Maingau – thereby unilaterally extending the area of Allied occupation in Germany. The incident led to the first serious breach in Anglo-French relations just when the two allies were facing up to the difficult challenges of treaty execution and enforcement. The Kapp putsch had provoked a communist uprising in the Ruhr by miners and metalworkers against the return of militarism in Germany. They seized control of the whole area east of Düsseldorf and Mülheim. The workers demanded the disbandment of both Freikorps and Reichswehr units, and their replacement by a workers’ and soldiers’ militia. The legitimate Bauer government asked the Allies for permission to send an army corps of 20,000 men into the Ruhr – part of the demilitarised zone – to suppress the workers’ regime. London consented to the request. Paris refused; but on 20 March proposed instead that the Allies themselves send in troops to put down the insurrection. The British government rejected this solution. With confusion and disarray in the Allied camp, Reichswehr troops entered the neutral zone on 2 April. On the night of 5 April, French troops stationed in Wiesbaden began the occupation of five towns in the Main region. Britain refused to join in the French action; but Belgium despatched (8 April) one battalion to support the French. Both Curzon and Lloyd George condemned the French unilateral action, and Lloyd George warned: ‘We may be landed one day in war with Germany through French action. Or we may have to repudiate our allies.’6 British diplomatic


protest was followed up by a temporary ban on coal exports to France (Kent, 1989, p. 93). However, as Inbal Rose observes, the reaction of the British conservative press was different: rather than condemning ‘the French for breach of unity’, it ‘pointed an accusing finger at the government’ (Rose, 1999, p. 142).7 A similar opinion on the matter is implicit in Philip Bell’s remark that the British reaction, exposing Anglo-French division, weakened what might have been ‘a salutary warning, and a clear lead on how to enforce the Treaty of Versailles’ (Bell, 1996, p. 135). The French action was mounted as a precaution against the retention of German troops in that part of the demilitarised zone after they had put down the Red uprising. Having restored order in the Ruhr, the German troops were eventually withdrawn under pressure from London, and Millerand evacuated Frankfurt and the other towns on 17 May. The incident aroused suspicion of French militarism, with references to the large French army, number of submarines and size of the air force. In British eyes, therefore, a weak Germany was undesirable for economic as well as ‘balance-of-power’ reasons. Attempts at Franco-German cooperation French public opinion, no less than the attitudes of the political leadership, was ambivalent in the post-war confrontation with Germany over reparations and security. A majority of public opinion was unanimous that Germany should be made to pay reparations. The cry was: ‘Germany can and should pay.’ At the same time, there was a recognition that perhaps France’s needs could be better met through Franco-German accommodation and compromise via direct negotiations with Germans about modalities of payment and transfer (for example, the Wiesbaden accords) and encouraging cooperation between French and German industrialists. Accordingly, French diplomacy was sometimes flexible and conciliatory; other times, marked by firmness. A policy of firmness with Germany was adopted for internal political and financial reasons. By the Wiesbaden accords, concluded on 7 October 1921, Germany agreed to make reparations in kind for the reconstruction of France through a five-year programme equivalent to 7 billion RM. The initiative came from the German side. Instead of cash payments, German reparations would take the form of deliveries of a range of products, including building materials, equipment and manufactured goods. It was envisaged that German workers would also be available to work on reconstruction projects, including the rebuilding of houses in the devastated areas of France.8 The accords were negotiated earlier at Wiesbaden on 12–14 June by Walther Rathenau, the German reconstruction minister,

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and Louis Loucheur, French minister of the liberated territories (Carls, 1993, p. 231; Kent, 1989, p. 149).9 The scheme was basically an attempt to surmount the difficulty of extracting cash payments from a financially strapped Germany (shortage of gold, foreign exchange and tax revenues, exacerbated by currency depreciation) and meeting France’s desperate need for extra resources to reconstruct the devastated regions. It was a limited, but positive attempt to do something practical about reparations by two businessmen who then had ministerial responsibilities in their respective countries. The need to convert Germany’s payments as widely as possible into deliveries in kind was an obvious first aim, in view of the 26 per cent tax on all German exports to Britain imposed by Lloyd George under the Reparations (Recovery) Act, 1921. This became more serious when the British export levy was generalised to form part of the German reparations annuities under the London Schedule of Payments, May 1921. German business leaders protested that the proposed levy would make it virtually impossible for exporters to earn sufficient foreign exchange to make the reparation payments. Something clearly had to be done to circumvent the threatened ruinous drag on German exports – hence the compelling attraction of deliveries in kind for Rathenau and Loucheur. In addition to providing an alternative to the stalled cash payments process, the initiative had several positive features promising better Franco-German relations and a lessening of anti-reparations feeling in Germany. The agreements were an early attempt to detach reparation from its political context and to see it as essentially an economic issue, amenable to settlement like any business transaction. At the same time, the projected scheme showed that German and French businessmen, with the blessing of their governments, could negotiate bilaterally, independent of the Reparations Commission and other outside interests. Increased production to make deliveries would provide a powerful stimulus to the German economy, draw ex-soldiers into employment and hasten German economic recovery. Finally, it indicated German willingness to meet its debt obligations. Unfortunately, the Wiesbaden accords remained a dead letter. The scheme never got off the ground, partly on account of the resistance of businessmen on both sides of the Rhine. French industrialists feared a flood of competitive products, and their German counterparts worried that they would be forced to divert their production from more profitable commercial exports. In addition, public opinion in Germany was hostile to the project. Hugo Stinnes and other heavy industrialists were opposed to it, and a fortnight after signing the final accord Rathenau was forced out of office. However, the British proved to be the most

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resistant obstacle to the Wiesbaden project; when the agreement was reported to the Reparations Commission for approval, ‘the British set up roadblocks and mobilised Belgian and Italian opposition’ to it (Carls, 1993, p. 233). The British representative, Sir John Bradbury, rejected the idea. He obstructed and delayed acceptance of the scheme for six months (until the end of March, 1922). In the meantime, the German and international situations had deteriorated. The window of opportunity closed, and nothing further could be done along Wiesbaden lines. ‘A Franco-German attempt to ease the problem of reparations thus came to nothing’, notes Philip Bell (Bell, 1996, p. 138). He further rues the circumstance where a practical method for dealing with the reparations problem ‘was stymied by the British, who at one and the same time complained of French intransigence and thwarted French flexibility’ (Bell, 1996, p. 138). The British did not want to lose their lucrative coal exports to France. They opposed the scheme because it seemed to give France an implicit priority on reparations and could, in fact, increase the French share of reparation receipts. In addition, they were suspicious of any Franco-German bilateral deal, and were opposed to any new bloc on the continent. In any case, the British claims to reparations in kind had already been met through replacement tonnage of enemy ships, and therefore they had no need for further deliveries in kind. They wanted cash payments. French ambivalence: Security through firmness The French parliamentary elections of November 1919 had returned a right-wing majority of deputies to the new Chamber (grouped into a Bloc National), soon nicknamed by contemporaries, Chambre ‘bleu horizon’, after the uniforms of the large number of ex-servicemen among the new members. The nationalist attitudes of the Bloc National meant that even conciliatory governments such as the one led by Aristide Briand had to adopt the rhetoric of fermeté in negotiations, while making concessions to reach agreement for realisable objectives. Thus, instances of German defaults on cash reparations and deliveries in kind were invariably backed by threats of occupation of the Ruhr. The public at large might have believed that reparations were the solution to all their present problems, and that by keeping Germany relatively weak French security would be assured; but few responsible politicians were persuaded, although they could not say so openly. Briand was one who challenged the assumptions behind these unrealistic expectations, in particular, the facile reasoning linking full reparations and national security as two goals that could be simultaneously achieved by strict

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enforcement of the Treaty. In a speech to the Chamber of Deputies on 20 January 1921 setting out his government’s programme, he echoed the nationalist refrain for a strong line on German payments: ‘The sanction of the Great War ... the consequence of victory, means the execution of the Treaty’; but the new premier pointed to the contradictions and risks involved in it: Germany can only pay if it becomes the leading exporter in world markets, but this implies the industrial recovery of Germany and therefore the risk that it could again thereby build up its war potential. Equally, ‘security at any price’ is a delusion. It assumes a weak and impoverished Germany, incapable of paying even modest reparations – a Germany prone to takeover by either the extreme right or Bolshevik left. (Suarez, 1938–1952, pp. 107–9). Briand realised, too, that France would eventually have to settle for a lower level of reparations (perhaps less than the bill for physical destruction suffered) under relentless British pressure to limit the total of reparations to Germany’s ‘capacity to pay’. Conference diplomacy So it was that, as soon as the Treaty came into force on 10 January 1920, Lloyd George launched a diplomatic offensive to get the French to moderate their position and meet with the Germans. The aim was to induce a general change in French and Belgian attitudes, thus paving the way for revision and reconciliation on reparations and disarmament matters. The policy was implemented initially through a series of conferences, ten in all, over a period of 16 months between January 1920 and May 1921. The French went along with this arrangement because they wanted a British alliance (for security) and in order to get sanctions (for German defaults). Tactically, French leaders knew they could not act alone. The stage was thus set for the two allies to replay their ancient rivalries and suspicions on reparations and disarmament. The stage set resembled the pre-1904 scene, since clashes of interests also appeared outside Europe. Thus Zara Steiner notes: ‘The battles with the French in Turkey and the Middle East were as fierce, if not fiercer, than imperial clashes before the war.’10 The Germans were alert to the fact that reparation was the great flash point between France and Great Britain – the area where the Allies were most disunited; so they had every incentive to exploit the rift. Briand, and Millerand before him, were aware that Germany benefited from Franco-British disagreement; so Millerand secured from Lloyd George, as a condition of French participation in his ‘conciliation by conference’ initiatives, the principle of the ‘united front’ – that negotiations

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with the Germans should be preceded by Allied agreement on all matters to be discussed with them. Lloyd George was hell-bent on a fixed sum and would brook no delay. He wanted a quick agreement with Germany on a reasonable figure. The Reparations Commission got down to work early enough (February 1920), but was making slow progress with the evaluation of war damages. Lloyd George considered bypassing the Commission and replacing it with regular meetings of Allied leaders, even though that meant working outside the Treaty. But he was prepared to take that step for more substantial reasons than the tardiness of the Commission. British officials suspected that, in the absence of an American official presence, the Reparations Commission might lose its autonomy and fall under the sway of the French. But that would be uncongenial to current British policy, since Lloyd George knew quite well that the French Chamber still demanded the totality of reparations – with the German debt fixed on the basis of the real value of the war damages. Lloyd George saw high-level gatherings as an agreeable and effective mechanism for pre-empting the functions and prerogatives of the Commission and achieving his objectives. The irony is that his pre-emptive mechanism turned out to be a flop. It was a redundant and ultimately futile attempt to force the pace of post-war settlement. The possibilities of reaching agreement on a German offer through face-to-face talks were finally exhausted early in May 1921. Bilateral talks completely broke down. The crisis forced the Allies to abandon the search for a reparation settlement outside the framework of the Treaty. They had to return, after all, to the procedure specified by Versailles – assigning to the Reparations Commission the determination of the German debt and ways of payment, in accordance with the Treaty. The crisis ended with the German acceptance, under ultimatum, of the Schedule of Payments (5 May 1921). Alan Sharp, noting Lloyd George’s distrust of the Reparations Commission, remarked that, in the crisis, ‘... Lloyd George found himself advocating a return to the letter of the treaty, having spent nearly two years trying to circumvent it’ (Sharp, 1991b, p. 138). Lloyd George’s strategy was at fault, Sharp suggests, for the British prime minister never worked out realistic means to reach his desired end of moderate reparations, as noted earlier. Lloyd George started his diplomatic ‘tour of the casinos’ (18–26 April 1920), ‘sous le ciel bleu de San Remo’, according to Poincaré’s description of the venue.11 There the Allied leaders agreed (at Lloyd George’s prompting, supported by the Italian premier, Nitti) to invite the German

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government to meet them for talks on reparations and to hear what precise proposals the Germans had for settling the debt. In any discussion with the Germans, Millerand insisted on prior Allied agreement on their demands, and sanctions in the event of German default. The meeting with the Germans fixed for May was subsequently changed to 5–16 July 1920 on account of the Reichstag elections in June. The San Remo meeting ended with a firm Allied declaration (26 April 1920) threatening the use of coercive measures, ‘... even to the extent, if necessary, of an occupation of German territory ...’ if the German government continued its failure to fulfil treaty obligations on coal deliveries, disarmament and the destruction of fortifications and war materials (DBFP, I, vol. 8, p. 8; Cmd. 1325 (1921) p. 95). Over the next two months, several inter-Allied meetings took place at Hythe, Boulogne and Brussels to work out a common position on reparations and disarmament prior to the meeting with the Germans at Spa in July. In anticipation of a German offer, Lloyd George wanted the Allies to set and stick to a total reparation figure (with schedules of payment) for comparison with that of any German offer. A payments scheme, known as the Avenol plan, was adopted in principle by the Allies. The plan was devised by Joseph Avenol, financial counsellor at the French embassy in London. A ‘fixed sum’ was abandoned. Instead, Germany would be asked to pay, according to capacity, through a series of 42 annual payments starting from 1921, according to a schedule of double annuities – a fixed part of 3 billion GM payable throughout the 42 years and an additional part from 1926–27. The additional annuity would amount to 3 billion GM from 1926 to 1930 and 4 billion GM thereafter. This was equivalent to a fixed sum with present value12 of 102 billion GM on which interest at 5 per cent would be paid (Trachtenberg, 1980, pp. 141–4; Weill-Raynal, 1947, pp. 558–62). Encounter with the Germans at Spa The first face-to-face encounter with the Germans since Versailles at Spa (5–16 July 1920) was a fiasco. Its original purpose was to consider the reparation offer Germany was to make; but with no definite offer forthcoming from the Germans, the discussion centred on German disarmament and coal deliveries (Krüger, 1985, pp. 103–10). The Allies rejected Germany’s demand for an army of 200,000 men, in spite of the German delegation’s warning about the internal and external threats they faced from Bolshevism. The German government was given until 1 January 1921 to reduce the army to 100,000 men or face further occupation of


German territory. On 9 July, the Germans gave in and accepted the Allied ultimatum. The reparation issue was brusquely set aside. The German representatives easily got what they wanted – the matter was referred to an expert committee. This was agreeable to Lloyd George who felt that moderate estimates were more likely to come from an expert committee than from the Reparations Commission. For the Allies more generally there was one positive development. After much acrimonious discussion, they finally settled the distribution of reparations among themselves – the famous ‘Spa percentages’ – even though they had not yet agreed on the total German liability. France was to receive 52 per cent, Britain and Empire, 22, Italy 10, Belgium 8, Yugoslavia 5 and 3 per cent for the rest. For some months past, the French had been complaining about dwindling reparation coal deliveries, although the Reparations Commission had already accommodated Germany by reducing the original, agreed monthly quota from 3.5 million tons to an average of 2 million tons for the period April to June 1920 – an overall reduction of 43 per cent. That was to take account of current German difficulties – Rhine floods, miners’ strikes, diversion of Silesian coal output to Poland on Allied demand. But still Germany did not meet the new target. Actual deliveries were down by 50 per cent of the new, reduced quotas. The coal crisis of 1920 made the French economy ever more dependent on British coal supplies. The result was that ‘the British ruthlessly exploited their monopoly and charged extortionate rates until September’ (Williamson, 1991, p. 84).13 Millerand wanted to negotiate a new programme of coal deliveries with the Germans at Spa, calling for the supply of 2.4 million tons per month – an item that dominated the rest of the proceedings. The negotiation on coal deliveries was a disaster for France. The coal protocol provided for reduced German coal deliveries to the Allies over the next six months from 2.4 million tons to 2 million tons per month. Prices were increased by a (non-refundable) surcharge or premium of 5 GM per ton payable in cash to finance food subsidies for the Ruhr miners. In addition, the Allies agreed to provide loans or advances (avances provisoires) for each ton of coal delivered, just about equal to the difference between the domestic German price (including freight to the frontier) and the British export price. It was a thinly disguised contrivance to meet the German demand for ready cash in foreign exchange. The advances and premium amounted to paying Germany for deliveries in kind, although France had yet to see a penny of German reparations cash. The advances were monetary credits in return for what were supposed to be free reparation goods (DBFP, I, vol. 8, No. 77). The Spa coal

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protocol was undoubtedly a bad deal for the French. They got less coal and at a higher price. French consumers had to pay more for German coal. The cost of coal to French industry shot up to twice the amount paid by competitors in Germany and Britain. Reparations coal in France rose to two-thirds the British export price – a substantial erosion of the price differential in favour of German coal relative to British coal – a welcome gain for British coal exporters. Working on the reparations bill – plans, schemes and ideas Despite the failure of the Spa Conference, marked as it was by the display of German truculence, the Allies still consented to further talks with the Germans. Among the plans, schemes and ideas discussed by the experts, the plan presented by Jacques Seydoux, reparations expert at the Quai d’Orsay, aroused much interest (Krüger, 1985, pp. 116–21). It offered a temporary solution to the problem for the next five years, which was nevertheless extremely helpful, in that it suggested a practical method by means of which Germany could begin to discharge her reparations debt. The Seydoux plan envisaged an average annuity of 3 billion GM over the five years 1921–26, consisting for the most part of deliveries in kind, and a smaller part raised by a tax on the foreign-exchange earnings of German conglomerates and cartels kept in foreign countries. The scheme for deliveries in kind was, in fact, the blueprint for the Rathenau-Loucheur Wiesbaden accords in the autumn of 1921, mentioned above. Although the British experts accepted the plan as a worthwhile compromise, Lloyd George thought otherwise; for him, it was not good enough. Despite continuous rebuffs from a defiant Germany, he still fancied his chances of brokering a deal on a fixed sum, willingly accepted by the Germans in advance of a Reparations Commission decision due before 1 May 1921. That decision, he feared, would turn out to be impossible for Germany to fulfil – with dire consequences for the reconstruction of Europe on which British prosperity depended. Moreover, he continued to believe that Germany’s international credit could not be restored until the full extent of her total liabilities was known. Uncertainty over the German debt, he claimed, was also having an adverse effect on business conditions in Britain and the rest of Europe. Indeed, he attributed the current sharp recession directly to that pervasive uncertainty, rather than to the deliberate deflationary policy of the Bank of England. He referred implicitly to the ‘transfer problem’ and warned against making heavy reparation demands that would surely spell ruin for Allied industries, as German goods flood world markets. There would be no let up,


as that was the only way Germany could obtain annually the massive means of payment required to foot the bill. Of course, he said, Germany must pay, but ‘she must pay her indemnity in such a way which will not injure the industries of France, Great Britain, Italy and Belgium’ (DBFP, I, vol. 15, p. 62). Excessive German trade surpluses (and Allied industrial distress) must inevitably follow from an excessive indemnity. ‘You are injuring your debtor’, Lloyd George warned, ‘and a debtor is a person that you ought to cherish – you ought to look after him and see that he is in a condition to pay his debt’ (DBFP, I, vol. 15, p. 64). Frederick Northedge correctly sees in this injunction ‘the permanent core of the British argument throughout the years of discussion on reparations.’14 It was predictable, therefore, that at the Paris conference (24–29 January 1921), Lloyd George would immediately reject the provisional plan worked out by the experts. All bets were off, and it was back to the drawing board. Not surprisingly, the fallback position was a version of the scheme discussed the previous summer at Boulogne. Known as the ‘Paris Proposals’, the new Allied scheme consisted of a parallel series of fixed and variable amounts, payable over 42 years. Starting at 2 billion GM, the ‘fixed’ annuities would gradually increase to 6 billion GM and remain at that level for 31 years. The variable annuities took the form of a levy of 12 per cent on German exports into Allied countries, payable until 1963 (Bergmann 1927, pp. 56–7; SIA, 1920–23, pp. 127–8). The export levy was a novelty. It was suggested by Henri Jaspar (Belgian foreign minister) as an effective means of increasing reparation receipts over time by linking the payment of annuities to some index of German prosperity. At the same time, it would lighten Germany’s burden during periods of economic downturns. Since the actual sums to be collected were variable, the export percentage device could be used in negotiation as promising less or more reparations, depending on how it was viewed; and that ambiguity of perception made it politically attractive in what was, after all, a game of illusions (Steiner, 2005, p. 196). It was one of the ideas floated by the experts. The financial obscurity over figures, and ‘Now you see it, now you don’t’ tricks were very much part of the international game played during 1920–21, otherwise known as ‘Fixing the Bill.’ The Paris fixed annuities alone totalled 226 billion GM; but the present value of the total debt (including the export percentages) came to 124 billion GM, with a discount rate of 5 per cent ( Weill-Raynal, 1947, p. 607). As guarantee of the deal, all German customs receipts were pledged to the payment of reparations. And, of course, Germany was charged with the costs of the Allied armies of occupation. The specific payments demanded by the Allied leaders were not intended to be

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taken seriously as a practical settlement, but as a means of bolstering the false hopes of Allied opinion; or, ‘for the edification of the Jingo gallery in their respective countries’, as the Economist magazine put it at the time.15 German recalcitrance, impasse and Allied sanctions Lloyd George was pleased to get hold of an agreed total figure as a basis for negotiation,16 and the proposals were sent off to the German government, whose members were invited to a conference in London in early March 1921.The Paris proposals – taken seriously in Berlin – raised a storm of protest in Germany from the press and politicians of all parties. At the first session on 1 March, the leader of the German delegation, the foreign minister, Simons, outlined ambiguous counterproposals, which reduced the Paris proposals by approximately 80 per cent (Krüger, 1985, pp. 122–6). Simons ignored the variable annuities and claimed that German payments in cash and kind since Versailles amounted to 20 billion GM – although he knew that only three days previously the Reparations Commission had officially notified the German government that 12 billion GM was still outstanding on the initial instalment required before 1 May 1921 under Article 235 of the Treaty. After further ‘transparent and futile juggling’ of the figures – in Keynes’s words (Keynes CW, vol. 3, p. 18) – Simons arrived at a debt of 30 billion GM (present value at 8 per cent discount) which Germany was prepared to pay. But even that offer was vague, and conditional on Germany being given an international loan of 8 billion GM, the retention of Upper Silesia and the removal of all restrictions on German foreign trade. At this point, as Simons ventured to go into more details, Lloyd George stopped him, shrugging his shoulders: ‘It’s time to end this session, because in five more minutes it will be us who will end up owing money to Germany.’ Briand then slid his pocket watch along the table to Lloyd George with a scribbled note reading: ‘Here is my watch. It only remains for you to hand over your shirt’ (Suarez, 1938–1952, p. 165). The talks were abruptly suspended. From that moment sanctions became inevitable. Two days later, in a forceful outburst, Lloyd George rebuked the Germans on their attitude, their bad faith in regard to the fulfilment of treaty obligations, and described their proposals as ‘an offence and an exasperation’ (Keynes, CW, vol. 3, p. 18). He then issued an ultimatum: Accept the Paris proposals or ‘equivalent’ ones by 7 March, or face Allied military and economic sanctions. During the next few days there was much ‘toing and froing’ as private talks continued among the delegations, to little effect – except that on the night of 6 March the Allies

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made a compromise offer to the German delegation, providing for a fixed annual payment of 3 billion GM for 30 years and a 30 per cent levy on German exports, payable in Allied countries. The conference resumed the next morning (Monday 7 March) at Lancaster House. The crowds gathered to cheer Marshal Foch and Lloyd George, shouted: ‘Make them pay, Lloyd George!’17 Simons made a defiant speech. He would accept the new Allied terms only for the first five years with the help of a foreign loan of 8 billion GM and provided that Germany retained Upper Silesia and was accorded commercial equality. After five years a fresh arrangement could be worked out. Lloyd George scoffed at Silesia being made a condition, since it really suggested that Germany’s proposal was not one for five years, but only for five weeks – a reference to the fact that a plebiscite on Silesia’s fate was due to take place later in a few weeks time, and that if the vote went against them, Germany might not pay (PD [HC], 10 March 1921. cols. 754, 761).18 The Allied leaders, Lloyd George and Briand, found themselves boxed into a corner by political constraints, exaggerated by their own playing to the gallery. They could not now acquiesce in a temporary settlement, particularly in view of Simons’s insistence on unacceptable financial and political conditions. Simons himself was cornered, for in responding to the Allied terms with his own counterproposals in London, he was primarily concerned with winning plaudits in Germany for standing up to the Allies’ ‘impossible demands’, rather than clinching a practical deal.19 With that impasse, the talks broke down and Lloyd George announced the Allies’ decision to put sanctions into effect immediately – citing as reasons, not only the present refusal to accept reparation terms similar to the Paris proposals, but also the repeated defaults on the handing over of war criminals and disarmament (Keynes, CW, vol. 3, p. 19). The next day (8 March), Allied troops occupied the three principal Rhine ports of Düsseldorf, Duisburg and Ruhrort – the vital river outlets for Ruhr coal.20 On 8 April, the French established a customs line along the Rhine for the retention by the Allies of duties paid on goods entering or leaving the occupied zone – all receipts being credited to Germany’s reparations account. It was dismantled six months later (1 October 1921). A levy of up to 50 per cent on the value of all German imports into Allied countries was also authorised. It was up to the German government to compensate their own exporters for the deduction in the prices of German export goods. This last sanction was devised by the British government and passed into legislation as the German Reparation (Recovery) Act on 24 March 1921.21 Importers of German goods into Britain were obliged to hand over to the British

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government 50 per cent of the purchase price of such goods, paying the German seller the other half. It was expected that the German government would reimburse their exporters for the loss.22 The export levy sanction was applied only by Britain. France and Belgium passed legislation similar to the British Reparation Recovery Act, but never activated the sanction. The British levy was reduced from 50 per cent to 26 per cent when the London Schedule of Payment (May 1921) instituted a uniform rate of levy on German exports, not as sanction, but as the means of paying a variable annuity. France’s levy came into force on 1 October 1924 (SIA, 1920–23, p. 147). The next two months – that is, the interval before the 1 May Reparations Commission’s decision – were tumultuous. Sanctions evidently did nothing to shift German attitudes. Berlin remained defiant and showed little signs of surrendering. On the Allied side, especially in the French camp, frustration at German obstructionism, the futility of talks getting nowhere and concerns about the German default on 12 billion GM of the initial treaty instalment of 20 billions generated an atmosphere of impending crisis. Briand responded to increasing political pressure by promising the Senate that if Germany continued with new delays to wriggle out of her obligation, ‘... a firm hand will grab her by the collar’ (Unger, 2005, p. 429).23 The worrying question faced by Allied leaders at the end of March 1921 was the familiar one in all cases of an impasse: where to go from here? Would there be an agreed settlement before the Reparations Commission finally decides? The current German attitude suggested a negative answer. The choice was therefore: use force or delay a decision. Sanctions had brutally and totally wrecked Lloyd George’s efforts to get the Germans to willingly consent to an amicable settlement. The result was merely to stiffen German resistance. It looked as if, inevitably, a settlement would have to be imposed by the Allies. The further question was: how much force? or, what type of sanction to deploy? The Reparations Commission had the undoubted moral and legal authority to impose a fixed sum on Germany; but if Germany refused to comply, the demand had to be backed up by force. So the question about the use of force could not be evaded. In the final analysis, it was the only option. But realistically – that is, in diplomatic and political terms – the use of this option depended on a compromise between British and French positions. That is, between British willingness to meet the Germans more than half way, and the French resolve to go for tough sanctions, even a full-scale occupation of the Ruhr basin. But in the spring of 1921, getting that compromise appeared fraught with trouble and conflict.


The first of May 1921 marked the expiry date for two important settlements: (1) the balance of 12 billion GM owed by Germany, and (2) the long-awaited announcement by the Reparations Commission of the final total German debt. As the countdown to the deadline approached, a full-blown crisis threatened to erupt, which was only defused by a return to the procedures of Versailles through the intermediation of the Reparations Commission. That story features in standard texts on interwar European history. The sequence of events is briefly recounted here. On 21 April, Berlin tried to involve the US government by asking for American arbitration in the reparations dispute. US Secretary of State, Charles Evans Hughes refused, but privately passed the German propositions to the Allied leaders. On 23–24 April, Lloyd George and Briand met at Lympne in Kent to consider the new German proposal, which they promptly refused. Simons offered to pay 50 billion GM (present value), but without deducting the 20 billion he previously claimed Germany had already paid. The total annuities of the offer amounted to 200 billion GM. The new German offer (whilst at least 50 per cent better than the previous one) was accompanied by various conditions and supplementary proposals, such as an international loan; payments to be made largely by deliveries in kind; German willingness to take on part of the Allied war debt to the United States; an offer of 1 million GM in cash, immediately; a satisfactory outcome in Upper Silesia; a reduction in the expenses of the Allied armies of occupation; a continuation in the growth of German exports; an international committee of experts to examine Germany’s capacity to pay; and a halt to the sale of German property abroad (Baechler 1996, p. 284; Keynes, CW, vol. 3, pp. 22–3). Unimpressed, Briand then put forward demands for further military and economic sanctions, and Lloyd George even announced his government’s intention of joining France in extending sanctions to the whole of the Ruhr if Germany persisted in its defiance. But cracks soon appeared in this façade of Franco-British unity. Lloyd George quickly backtracked. As Keynes parodied his behaviour, the British prime minister, ‘having indulged his habitual morbid taste’ for looking down from the edge of the precipice, quickly drew back (Keynes, CW, vol. 3, pp. 25–26). Lloyd George now came out against new sanctions, for the present. Circumstances had not changed since March. Instead, he suggested sending an ultimatum to the Reich government threatening an occupation of the Ruhr, forcing it to accept the Paris proposals of January – a suggestion Briand refused to consider. Why go back to the Paris plan that has obviously been overtaken by events? Why should the Allies take new initiative while Germany shows no

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signs of complying (Jeannesson, 1998, p. 61)? The contrasting positions of Briand and Lloyd George seemed irreconcilable. Although they were both agreed on the principle of a Ruhr occupation, Lloyd George ‘saw it only as an eventuality, while [Briand] already regarded it as a dead certainty’, according to Stanislas Jeannesson. ‘[Lloyd George] considered the threat more effective than its execution, while the other thought it was already high time for action’ (Jeannesson, 1998, p. 61). The Reparations Commission fixes the bill By the time the Allies met once again in London on 30 April 1921, the Reparations Commission had cobbled together a figure of 132 billion GM for the total German reparations liability. In the end, Lloyd George lost the race to fix the German debt with his conference diplomacy. The Reparations Commission won by getting there first, prompting Jacques Seydoux to recall the fable of the Tortoise and the Hare (Seydoux, 1921, p. 691). The amount of 132 billion GM was a Belgian compromise between a higher (by 25 per cent) Franco-Italian estimate and a lower British figure, but it still purported to represent the total of all Allied war damages. To this sum was added the Belgian war debt of 5.6 billion GM, but minus a sum of 11.3 billion GM representing payments made by Germany’s former allies, credits for state property ceded to the Allies and payments already made, leaving a net nominal balance of 126.3 billion GM as the total German debt.24 How the published figure of 132 billion GM was arrived at has never been officially disclosed. It appears that during March–April 1921, as Allied hopes faded of reaching agreement with the Germans on a mutually satisfactory reparations settlement, the members of the Reparations Commission realised that they must speed up their work at the Astoria hotel (Paris). Faced with a time constraint and the complex final stages of completing the task of evaluating Allied war damages, the delegates realised that the work they had to do now called for judgement rather than more number crunching. Although no one mentioned the word ‘forfait’, a variety of figures, seemingly arbitrary, were freely quoted in informal discussions among the Commission’s members. Each member, expressing national tendencies, seemed to have in mind a range of negotiable figures between a maximum and a minimum. The Belgians, for instance, favoured a range between 130 to 150 billion GM. The British advised a minimum of 105 billions, but were prepared to go up to 125; while the French, determined not to settle for less than the cost of repairing the damage caused by the ex-enemy, adopted a range of 150–180 billions. The Italians considered 175 billions a reasonable

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sum to demand from Germany. The Belgian delegates, Bemelmans and Delacroix, then urged on their fellow members, in the interests of preserving unanimity, convergence on an ‘unassailable minimum’ figure for total damages that would then represent the total German reparations debt. Dubois, the French delegate, and Sir John Bradbury, the British delegate, as well as the Italian delegate, d’Amelio, then fell in with the Belgian compromise figure of 132 billion GM. (Antonucci, 1935, pp. 46–53; Depoortere, 1997, pp. 101–5; Furst, 1927, pp. 124–26).25 The amount was less than the previously agreed Paris proposal and Briand knew he would have a difficult time justifying that at home. He therefore called for immediate occupation. But this time, despite the fact that Germany refused to pay the sum of 12 billion GM falling due on 1 May, Lloyd George procrastinated. He wanted to give Germany some more time. Lloyd George’s caution and backsliding were no doubt partly due to pressure by City bankers and industrialists urging him to reject French calls for further sanctions likely to damage Britain’s commercial and financial relations with Germany. The British economy was then suffering from a deepening recession and high unemployment during the winter of 1920–21. But the prime minister hardly needed such restraining advice, since he was already walking away from any such showdown. On 2 May 1921, Briand announced a French mobilisation (recalling reservists of the class of 1919) for an impending Ruhr occupation, citing German default on the interim balance. Lloyd George refused to go along with that, saying that he would only consider occupation if the Germans rejected the final bill of the Reparations Commission. A timely intervention by Henri Jaspar, the Belgian foreign minister, successfully defused the crisis: mobilise at once for a Ruhr occupation, but move troops slowly, allowing Berlin time to reply to an ultimatum. The pause would provide breathing space for things to happen, such as getting up a payments schedule to accompany the ultimatum. This procedure was acceptable to all the Allies (Depoortere, 1997, p. 106). They knew that it would take ten days for the 80,000 French and other Allied soldiers to be fully prepared. Financial experts were then set to work by the Allied leaders during the night of 4–5 May to work out a payments scheme. The result was the London Schedule of Payments approved by the inter-Allied conference and presented to the German government by the Reparations Commission on 5 May 1921 with an ultimatum attached, threatening a Ruhr occupation. After a cabinet crisis in Berlin, the new Wirth government (formed on 10 May) accepted the terms of the ultimatum with the approval of the Reichstag, 220 votes against

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172.26 Lloyd George was relieved and pleased with himself. After a year and a half of fruitless international meetings, interminable face-to-face talks (informally and private) among Allied and German leaders and their experts, he managed at the last minute to retrieve the situation and claim victory in his quest for a just and moderate settlement of the German debt – not the kind he preferred, with the willing consent of the German government, but a successful conclusion, all the same. His risky gambit paid off other dividends as well: it kept the French out of the Ruhr, but provided Briand with sufficient tangible gains as well as the satisfaction of German submission to temporarily quell the bluster from Foch and the nationalists. Alan Sharp regards Lloyd George’s ‘success’ as just another example of the prime minister’s shortterm political improvisations (Sharp, 1991b, p. 136). It was, indeed, an ill-fated improvisation, for it began to collapse before the year was out. By November 1921, claimed David Felix, ‘Lloyd George ... was manoeuvring to destroy the [London Payments] plan’ (Felix, 1971, p. 174).

2.2 The London Schedule of Payments The Schedule of Payments provided for the issue by Germany of two series of bonds bearing interest of 5 per cent and 1 per cent repayment of principal (the so-called A and B bonds) totalling 50 billion GM, while a third category of interest-free bonds (‘C’ bonds) in the amount of 82 billion GM were to be issued only when it could be shown that these prior obligations could be met. And until such time, Germany was not obliged to provide the coupons (the periodic payment vouchers) for the ‘C’ bonds. And, of course, the bonds could not be sold to the public without the coupons. To all intents and purposes, the sum represented by this third series – with its postponement of payment – was never meant to be paid. It was purely fictitious; that is to say, it was reckoned ad kalendas graecas, and was merely a sop to clamorous taxpayers in Allied countries. That meant that Germany’s immediate liabilities were less than 50 billion GM – in fact, as little as 41 billion GM (after crediting the amount paid by Germany since 1919). That was the sum regarded by Keynes as a feasible maximum in 1919 (Keynes, CW, vol. 2, p. 126). The stipulated annuities (payable in quarterly instalments) consisted of a fixed payment of 2 billion GM and a variable payment corresponding to 26 per cent of the value of German exports in every 12-month period – estimated at 1 billion GM at the current export level – also payable quarterly, beginning 1 May 1921. The total annual payments were thus 3 billion GM in a full year. These payments were expected to

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be just sufficient to service the A and B bonds. The number of annuities or the number of years for the debt to be discharged was not specified in the Schedule, but 30 was frequently mentioned, although some reckoned that it was more likely to be spread over 35 years. Provision was made for payments to be made by deliveries in kind. There was no earmarking of bonds for specific purposes but an impression was given that the C bonds were to provide for Allied war debt cancellation; the A bonds represented the unpaid balance of the interim 20 billion German debt, and the B bonds were Allied war damages. A payment of 1 billion GM was required within 25 days. The London Schedule’s variable annuity took the form of the German export levy because Lloyd George insisted on it. He became committed to the idea since the Paris resolutions, and imposed a severe form of it as a sanction against Germany in March 1921. But as a device (or ‘prosperity index’) to provide the Allies with increased payments resulting from improvements in Germany’s economic situation, it was not particularly good. It was a narrowly based indicator targeting export growth only, which was not a particularly reliable measure of German prosperity or recovery. It was likely to produce meagre extra payments, have undesirable effects and distort the channels of trade – apart from introducing protectionism by the back door. Yet, other practical schemes were available. Ideas about a prosperity index to form the basis for a variable annuity of increasing payments were discussed by German and Allied experts during the months before May 1921, a notable one being Joseph Avenol’s proposal for a variable annuity tied to German prosperity (or capacity to pay) as a supplement to the fixed minimum annuity of the Boulogne scheme. The Allies would thereby have a shared stake in Germany’s economic growth and prosperity. The German experts had earlier debated the merits of such a device, based on alternative indices of prosperity such as increases in German national income, changes in trade surpluses and increases in earnings of foreign exchange or improvements in the mark exchange rate.27 One such prosperity index prepared by the German experts for inclusion in the German reparations proposal of 1 March 1921 – one that would have increased the attractiveness of their offer – was, unfortunately, dropped from the formal package at the last moment by Simons, with disastrous consequences. Germany made the first cash payments under the London Schedule in an elaborate operation spread over three months in the summer of 1921. It involved the purchase on the foreign-exchange market of gold and assorted foreign currencies to the value of 150 million GM and the

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delivery of 850 million GM in government short-term (three-month) Treasury bills (denominated in dollars and endorsed by four leading German banks). The government had great difficulty acquiring dollars to redeem the Treasury bills by 31 August 1921, and finally had to purchase dollars to the value of 400 million GM. The dollars, of course, were purchased by the sale of paper marks on foreign-exchange markets. The floating paper mark, already depreciated by inflation, was further weakened by the official foreign-exchange operations – falling from 60 marks to the dollar at the end of May to an average of 85 in August (Feldman, 1993, p. 346). It never recovered and, indeed, collapsed in the summer of 1922. Only a very small portion of the variable annuity due in November 1921 was paid in cash – the balance was met by deliveries in kind since May, the Germans claimed. The Schedule’s timetable broke down before the end of the year. On 14 December, there was a reparations crisis as the German government requested a partial moratorium on payments due in January and February 1922. Facing the prospect of increasing German defaults, the Reparations Commission agreed in March 1921 to defer two-thirds of the receipts due, but demanded German tax increases in return. That relief of a reduced schedule soon proved insufficient to avert the payments crisis. On 12 July 1922, the German government sought a three-year suspension of payments for that year and until the end of 1924. That meant that after a last 50-million GM payment (on 15 July), Germany would make no further cash payments until 1925. In effect, the German government asked for the suspension of the May 1921 Schedule of Payments (Feldman, 1993, p. 454). The British government was sympathetic and the French hostile. The Allies could reach no agreement on the conditions for such a long moratorium, let alone find a compromise for a durable settlement. As the reparations crisis deepened, cash payments stopped in August 1922 – although reduced deliveries in kind continued until January 1923. There were no further cash remittances until the implementation of the Dawes Plan in late 1924 and, of course, after the Franco-Belgian occupation of the Ruhr. Why did the Germans pay nothing more from mid-1922 until after the Ruhr occupation? Was it ‘incapacity to pay’ as the Germans pleaded at the time; or was it an early case of ‘Can’t pay, won’t pay’, such as was heard in the 1980s with regard to developing countries’ debts? Did the reparations burden destroy the mark, as the German public believed? Answers to these questions feature in the historical debate over the feasibility of the 1921 London Schedule. Before summarising the contending viewpoints in this controversy – which continues with unflagging

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zeal among protagonists – we take a closer look at the significance of the figures mentioned in the London Schedule.

2.3

Significance of the figures

By a cleverly disguised sleight of hand, a nominal debt of 132 billion GM was transformed into one of 50 billion GM. The trick involved the status of the C bonds. The experts who worked on the Schedule knew that Germany could not, within an acceptable time frame, pay more than 3 billion GM per year and that therefore payment of a capital (or principal) sum of 50 billion was all that could be expected (Furst, 1927, pp. 133–4). The 50 billion present value is obtained by capitalising the annual payments stream at a discount factor of 6 per cent (reflecting 5 per cent interest plus 1 per cent amortisation). Thus, starting from an estimate of Germany’s capacity to pay, the Allied experts arrived at a much-reduced actual liability. But this effective lowering of the German debt could not be publicly admitted for fear of being accused of having sold out to the Germans. For if according to the Schedule, Germany had to continue making annual payments until a total sum of 132 billion GM had been transferred to the Allies, these annual payments would have to be in the region of 7.5 billion GM – that is to say, regular annual payments equal to 6 per cent service of the 132 billion debt. The debt reduction trick works if the annual payments can be pegged at 3 billion; for then, C bonds cannot be issued in the foreseeable future. Coupons for some of the C bonds would only be issued when Germany starts to pay more than the 3 billion instalments on the debt of 50 billion. That could happen if the proceeds from the 26 per cent export levy rose to the level that would trigger issue of some of the C bonds – that is to say, a level of 5.5 billion GM. But that implies total German exports of around 21 billion GM annually (Furst, 1927, p. 131). Pre-war, German exports reached its highest ever level of 10.1 billon GM in 1913. It would take Germany some time yet to repeat that performance in the more difficult, protectionist trade conditions of the 1920s. Even on the most optimistic projections, allowing for full German economic recovery, total annual German exports were not expected to exceed 7 or 8 billion for at least five or six years. Even more distant would be the time when Germany could manage to double the marvellous 1913 export performance. Therefore, the general, though not universal opinion was that coupons for C bonds would not (and were not meant to) be issued in any meaningful eventuality. Georges Theunis, the Belgian premier, jokingly, but pointedly, remarked that

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the Reparations Commission ‘could stick [such bonds] in a drawer without bothering to lock up, for no thief would be tempted to steal them.’28 The average level of German exports for the three years 1920–1922 was 4.8 billion GM, which implies a total annuity payment of approximately 3 billion – below the threshold level for the activation of C bonds. Of course, German defaults in servicing the A and B bonds would also block the issue of C bonds. Informed opinion never took seriously the reality of the C bonds even though some on the Allied side had a forlorn hope that it might be used at some stage in the future as a bargaining counter in inter-Allied war debt cancellation negotiations. In 1921, Keynes wrote: ‘It is probable that sooner or later, the C bonds ... will be not only postponed but cancelled’ (Keynes, CW, vol. 3, p. 68). Sally Marks notes that by early 1923, cancellation was actively discussed; and in government circles ‘... the fiction of the C bonds was maintained no longer than fifteen months’ (Marks, 1969, p. 361). It has even been suggested that the Wirth coalition managed to get Reichstag approval for the London Schedule because ‘... sensible German opinion was cognisant of the reality with which they were asked to comply. The C bonds were a fiction.’29 Feldman mentions one Centre Party politician confidently asserting in May 1921, that ‘the Entente will only demand the 50 billion marks, not the rest. They have only called for the rest for domestic political reasons’ (Feldman, 1993, p. 339). For the year and a half that the London Schedule remained viable, the C bonds cast a dim but perceptible shadow over the financial markets. Although the total German debt was finally fixed, uncertainty remained over the future level of reparations, given the C bonds in the background. For Germany, such uncertainty could influence and adversely affect its ability to borrow to pay reparations and also influence decisions to invest and save, since future tax levels or burdens remained uncertain. And, of course, uncertainty would not only affect German business but also the creditworthiness of France, Britain and other reparation creditors. On the other hand, investors might have fully discounted the probability that the C bonds would ever be issued. Alan Sharp notes: ‘only once (in December 1922) did anyone argue seriously that the C bonds would ever be paid’ (Sharp, 1991b, p. 135). The present value of the London Schedule is often mentioned as 50 billion GM. But the published figures provide scope for other possibilities. To lighten the burden on Germany the framers of the Schedule decided that there would be no interest on the 82 billion worth of C bonds. This might have been intended as a nominal relief from any rise in the real


burden of the reparation debt stemming from international deflation after 1921. Whatever the motivation, the result was that the present value of the German liability was considerably less than 132 billion – according to Weill-Reynal’s estimate, a present value of 108 billion GM (Weill-Raynal, 1947, pp. 682–702). Stephen Schuker (1976, pp. 14–15) sets the present value, at most, as 64 billion GM. Those who take the C bonds completely out of the reckoning (for example, Sally Marks) make the present value equal to 50 billion GM, exactly equivalent to the value of the A and B bonds (Marks, 1969, p. 363). There was a suggestion that the A and B bonds could be floated on the financial markets; but since the interest on the bonds was below the market rate, they could only be sold at a sizeable discount from the par value. Frank Tipton (2003, p. 330) notes: ‘This may have reduced the real burden [on Germany] to as little as 25 to 35 billion.’ In fact, no serious effort was ever made to buy or sell the bonds, as indeed was the case with all subsequent German reparation bonds. How does the ‘burden’ of the 1921 Schedule of Payments compare with the previous evaluations? Estimates of the present value of the Schedule fall in the range 50–108 billion GM. On this basis we see that it was less than the Paris proposals of January 1921 (124 billion), about the same as the June 1920 Boulogne scheme (101 billion), and slightly more than the 120 billions accepted in May 1920 by Millerand as the basis of an immediate settlement. The figure was nearly the same as one suggested by the Americans at the Peace conference and that offered to the Allies by Brockdorff-Rantzau in the German counterproposals of May 1919. At the lower end of the range, 50 billion (which we can take as the consensus figure for the London Schedule), the present value of the Allied demand was the same as the German last-minute offer of 24 April 1921, but rejected by the Allies on 3 May 1921. The certainty that there would have to be a substantial discount on the 50 billion nominal (or face) value of the London Schedule if the A and B bonds were to be marketed – perhaps, as just mentioned, a reduction to 25–35 billion – prompts Sally Marks to compare that total German obligation with the second, more straightforward and acceptable offer of a fixed liability of 50 billions present value, or equivalently a series of annuities totalling 200 billions. This alternative stream of annuity payments is indeed suggestive: that the nominal capital value of the second German offer was well above 50 billion GM. So Marks concludes: ‘What the Germans offered on April 24 was substantially more than they were ordered to pay on May 5’ (Marks, 1969, p. 364). The interesting question, therefore, is why then did Briand and Lloyd George reject it? The answer

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Marks gives is that, evidently, ‘a large figure had to be maintained somehow for the benefit of public opinion in the receiver countries’ (Marks, 1969, p. 363). This is undoubtedly true; but the Allies’ unwillingness at that eleventh hour to consider any new German proposals might also have been due to the fact that they had ‘made up their minds to let the Treaty take its course’ (SIA, 1920–23, p. 133). The Fehrenbach cabinet in Berlin seemed unmoved by the Allied sanctions already in place. A new German government might be more amenable. The Allies therefore resolved to let the Reparations Commission decide, thereby justifying further sanctions that might throw up a new cabinet and yield German compliance. There were further consequences of the Allies’ political opportunism that mandated a fictitiously larger reparations bill than their real claim. If the ordinary people in Allied countries were fooled and members of the German government were agreeably surprised, it was nevertheless an insidious deception that deepened resentment among the German people. They saw only the fabulous 132 billion of the so-called London Ultimatum that they regarded as completely unjust and impossible to fulfil. ‘Even moderate Germans were shocked’, notes Eric Weitz, while ‘other Germans were just recalcitrant and demanded sheer refusal – no negotiations, no payments, nothing’ (Weitz, 2007, p. 132). The Hugenberg nationalist press echoed and amplified that defiance by keeping up an unflagging barrage of invective and caricatures against the ‘slave tribute’, directed principally at the French. The moderate fine print embedded in the Allied claims was kept hidden from the German people by official propaganda, while the economic burdens of reparations were exaggerated.

2.4

Feasibility of the London Schedule

Comparison of debt burdens Turning now to the feasibility of the burden represented by the London Schedule, the context is one filled with the monetary legacy of the war – dislocated exchange rates, large stocks of inconvertible currencies, swollen budget deficits and inflation in all countries, apart from marked uncertainty about the political and economic future. Output levels in all combatant countries were far below capacity and, indeed, many struggled for nearly a decade to regain pre-war levels. In 1919, wholesale prices were twice as high in the United States as they were in 1913; in Britain they were two-and-a half times as high. In


France, they were more than three times as high, and in Germany, they were eight times as high. The world price level in terms of dollars and gold roughly doubled since before the war, but the official price of gold remained unchanged at $20.67 an ounce. The value of gold in relation to all other commodities fell proportionately. These monetary changes reduced the real value of all claims (or debt) expressed in gold or dollars. In particular, it reduced the dollar equivalents of claims expressed in GM, such as reparations quoted at the pre-war mark/dollar rate of 4.2. However, between 1920 and 1922, these price-level changes were reversed as the United States and Britain experienced a sharp deflation with prices declining by approximately 50 per cent. Monetary restraint in these countries contributed to the worldwide deflationary pressure for the rest of the decade. With price-level swings of such magnitude (combined with depressed GNP levels), evaluating the burden of reparations is a hazardous business; for the real burden of a given sum of reparations to be paid over a number of years (such as the 1921 Schedule) depends on expectations of future price levels, GNP growth and export values. To this caveat must be added an observation about the reliability of the official German statistics on these macroeconomic quantities – national incomes were unadjusted for inflation and exports were understated, at least until the mid-1920s.30 Carl-Ludwig Holtfrerich (1986, pp. 137–55) produced a careful assessment of the 1921 debt burden, in which he deflated post-war German national income expressed in 1913 prices by a 1920s US price index to reflect the reduced purchasing power of the dollar or gold. On the basis of these national income estimates in terms of the current purchasing power of the dollar, he found that the required annuity of 3 billion GM (if paid in full) would have represented 5.5 per cent of German national income in 1921, 5.4 per cent in 1922 and 6.0 per cent in 1923. The economic historian Albrecht Ritschl (2005) shows that the German national debt (including reparations) as a percentage of GNP was comparable to the debt burden faced by Britain and France in 1920. The A and B bonds together represented a reparation burden of 99 per cent of 1913 German GNP. Including the outstanding national debt, the total burden on GNP amounts to 147 billion GM in 1920, which is very nearly the same as the gold value of the British and French debt levels, standing respectively at 144 per cent and 135 per cent in 1920. Ritschl comments that in purely fiscal terms ‘... Germany’s debt burden was clearly less outrageous than it would appear.’ And he surmised that the Allied leaders (given the general expectation of a full return to gold parity in their countries) might have felt it reasonable to burden Germany with a

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debt total not far below ‘... those borne by their own taxpayers’ (Ritschl, 2005, p. 70). The Versailles Treaty itself (in Article 30) had called for the principle of ‘comparable burdens’ to be followed in peacetime. Even Lloyd George was insistent that Germany had not done enough to carry her fair share of the burden as he repeated to the House of Commons in February 1921: ‘She [Germany] has not taxed herself up to the limit of her capacity. She has not taxed herself up to the level of the Allies ... It is not that Germany is too poor to meet these demands’ (PD [HC] 138, 5s. Col. 468, February 1921). In Germany’s case, however, the largest part of the debt was foreignowned unlike in Britain and France where domestically held debts were predominant. Now, with large annual foreign-debt commitments weighing heavily in the government’s budget, there is always the incentive to default on repayments so that ‘willingness to pay’ takes precedence over ‘capacity to pay’. Germany fell into that mode right from the beginning. Note that a debtor country’s capacity to pay usually refers not to the total debt burden, or debt ‘overhang’ as such, but to current and future ability to service the debt, that is to say, to pay the annual instalments required to liquidate the debt. ‘Capacity to pay’ vs ‘willingness to pay’ ‘Capacity to pay’ is an ambiguous concept. Its meaning can vary, depending on whether it is seen from the debtor’s point of view or from that of the creditor. In these contrasting perceptions, moral evaluation of the debt figure quite prominently – in particular, how binding or legitimate the obligation is perceived to be. That is why no precise measure of Germany’s capacity to pay has ever been found to satisfy all doubters and believers. It really represents a state of mind, particularly so since reparation is first and foremost a political debt. As Dan Silverman says: ‘It more accurately reflects the state of the national will than the state of the national resources.’ Comparing the Allies’ capacity to repay their war debts with Germany’s capacity to pay reparations on this basis, Silverman ranks Germany’s capacity as ‘very slight’, France’s capacity only somewhat greater and Britain’s capacity ‘fairly substantial’ (Silverman, 1982, pp. 146–7).31 Of course, in a technical sense, a range of economic indicators (including forecasts of capacity for a debt payable over a number of years) for a debtor country can be collated to suggest suitable measures of capacity to pay. Among these indicators are the following: taxable capacity, state of the national budget, level and growth of national income, export capacity and projections of export growth, saving ratios and consumption spending, foreign currency reserves,


access to world capital markets, international credit rating, level of capital imports, and so on. But all such ‘objective’ exercises, if they are not to remain sterile academic estimates, have to be interpreted and transformed into national policy decisions and action. They will be filtered through the lens of political priorities and imperatives. At this point, the ‘technical’ process merges imperceptibly into ‘willingness to pay’, with all the attendant relativity and subjectivity described above. Manfred Berg (1993, p. 411) refers to Holtfrerich’s contention that ‘there can be a political inability to service foreign debt even if the economic capacity seems assured theoretically’ (see Holtfrerich, 1990, pp. 468–71).32 After a thorough analysis, Stephen Schuker arrives at German debt-income ratios implied by the London Schedule similar to those of Ritschl. Given the most reliable estimates of national income and projected figures for German exports, Germany would have had to pay reparations amounting to 5.37 per cent of the 1921 national income. If the annuities were kept at 3 billion GM and the London Schedule still applied, then the reparations burden would have come down to 4.3 per cent of national income for the post-inflation years of 1925–29 (Schuker, 1988, pp. 17–18). Elsewhere, Schuker notes that the 1921 Schedule represented a massive reduction in the German debt from the incredible Versailles figures ‘... to a sum which ... was reasonably consonant with German capacity to pay’ (Schuker, 1976, p. 15). He went on to say, that if implemented, the annual payments ‘... required substantial sacrifice but not an insuperable burden for a nation resolved to limit domestic consumption sufficiently to meet the levy’ (Schuker, 1976, p. 15). Zara Steiner, after reviewing some of the recent debt-burden estimates, concludes that ‘... it does appear that Germany could have paid the actual sum demanded in 1921’ (Steiner, 2005, p. 199). Finally, she writes, reparations ‘did not cripple Germany; despite the sometimes hysterical historical debates that have ensued, the problem of payment was always a political rather than an economic question’ (Steiner, 2005, p. 606). William Keylor in his 1992 text on the international history of the twentieth century agrees with Schuker that Germany ‘... could easily have managed the payments with but a moderate reduction of domestic consumption.’33 The diplomatic historian, Norman Rich writes: ‘The London Schedule was not unreasonable, and the German government could have made the required payments through taxation.’34 Bernard Wasserstein (2007, p. 131) asserts: ‘viewed in economic as distinct from political terms, [reparations] were within the capacity of [Germany] to pay.’

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Judgements such as these (and several others in similar vein) might have prompted Sally Marks to remark, no doubt correctly: ‘A substantial degree of scholarly consensus now suggests that paying what was actually asked of it was within Germany’s financial capacity’ (Marks, 1998, p. 357). Gerald Feldman raises a dissenting voice against this newfound conformity. He denies any scholarly consensus that Germany could have paid the reparations, mentioning Peter Krüger35 and Niall Ferguson who also disagree with Marks. He insists that the reparation demands undermined German democracy and ‘... were instrumentalized to promote inflation at the beginning of the republic and deflation at its end’ (Feldman, 1998, p. 447). He mentions approvingly Ferguson’s remark that the effort to pay the first cash instalment in 1921 ‘... put an intolerable strain on the [German] state’s finances’ (Ferguson, 1998, p. 425); but he also agrees with Ferguson that ‘... the German policy of trying to use inflation to beat reparations is above all to be criticized because it did not work’ (Feldman, 1998, p. 447). Both Feldman and Ferguson are adamant about the decisive role of reparations in disrupting the German economy, and Ferguson is in no doubt that German governments between 1919 and 1923 made no serious attempt to balance the budget and that they used currency depreciation to avoid paying reparations. These governments, and those that followed up to Brüning’s 1930 cabinet, had no intention of fulfilling the terms of the various reparation plans, from the London Schedule to the Young Plan. Instead, German leaders used reparations as a tool in domestic and international policy; but with disastrous results for the German people – ‘inflation, stagnation, deflation and complete economic collapse’, as Ferguson relates it (Ferguson, 2001b, p. 45). But it is one thing to admit that German attempts to avoid reparations contributed to these catastrophes and another to claim that the reparations burden caused these troubles. Commenting on the adoption of inflationary policies by early Weimar governments (and the social costs involved) Schuker points out ‘... it does not follow that the actual reparations burden, as opposed to the subjective perception of that burden, forced Berlin to make the fiscal and monetary choices that perpetuated the inflation’ (Schuker, 1992, p. 52, n. 19). Others like David Felix (1981, pp. 578–9) argue that Germany simply had no capacity to pay in the early 1920s. With national income of $8 billion annually, Germany was ordered to pay $750 million a year in reparations, he noted; but this was at a time when the annual trade deficit was $250 million, along with a budget deficit of $400 million in 1921 – a


clear case of economic incapacity to pay, a financial impossibility, in other words. Political inability to pay The views expressed above come from two sides: (1) those who argue that Germany (in the early 1920s) had the economic capacity, but did not pay, and (2) those who claim that Germany could not pay because of sheer incapacity. Yet both sides agree that non-payment was because of political constraints in the Weimar Republic. These two approaches can be explained or reconciled by means of Holtfrerich’s working hypothesis about the existence of political inability to pay even in the presence of economic capacity. Political inability stemmed from two powerful political forces: (1) the general unwillingness of the German people, who viewed reparations as a political debt unjustly imposed on them by rapacious victors, and (2) the weakness of Weimar coalition governments struggling for survival against assaults (political and material) from Right and Left foes. These two political factors combined to shape Weimar’s reparations policy. Public opinion, that is to say, general unwillingness to pay, remained constant and led to political inability to pay. At the governmental level, coalition ministers knew that their legitimacy, constantly called into question, depended on the achievement of tangible, domestic social benefits, such as increased wages, improved living standards, food subsidies, rent controls and other welfare measures. Beset by economic failures and severely constrained to deliver those benefits, ministers knew they could not sacrifice or subordinate these domestic objectives to the service of reparation debts. Any Erfüllungspolitiker, or political leader advocating the payment of reparations, says Manfred Berg, without exaggeration, ‘risked more than their political future. The assassinations of Matthias Erzberger and Walther Rathenau made this painfully clear’ (Berg, 1993, p. 412). Hence Weimar ministers adopted obstruction, inaction or evasive strategies that resulted in no serious attempt to balance the national budget and reduce the massive railways and post office deficits. In 1920, 12 per cent of Reich expenditure went to finance deficits in the post and railway systems (James, 1999, p. 19). Deficit spending resulted in currency depreciation and capital flight abroad. This meant only one thing: the stifling of economic capacity to pay, even when the potential was there. In this sort of political culture, then, popular unwillingness translated into political inability or political incapacity to pay, whether or not economic capacity existed. Professor Gerald Feldman reported a socialist critic deploring in June 1921 the attitude of the Reich Finance Ministry

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over the past year ‘as always trying to demonstrate that we could not pay, instead of working out plans of how we should bear the burdens which were in the offing in any case’ (Feldman, 1993, p. 344). Transfer constraints Some critics of the 1921 reparations bill used arguments based on the ‘transfer problem’ to suggest that Germany would have to achieve an immediate balance of trade surplus to earn the foreign exchange equal to the reparations demand. In support of this argument reference was made to the almost complete absence of foreign earnings on German invisible current account, which normally financed the pre-war trade balance deficit. Foreign investment income was lost by the sequestration of German private property and other assets abroad, while income from German shipping was greatly reduced owing to the expropriation of the bulk of the German merchant vessels.36 In the absence of a foreign loan and in conditions where German goods faced Allied tariff barriers the question arose: What level of tax increases and cut in living standards would have to be endured to bring about the required export surpluses?37 However, on this score there was no cause for concern; the issue was purely academic, as no transfer problem arose. With the exception of 1926, no export surplus was earned by Germany before 1929, and then, only for a brief period of about a year when reparations were paid out of a trade surplus. The Hoover moratorium and the end of reparations came shortly afterwards. In 1921 – the year of the London Schedule – there was a deficit in the trade balance of 1 million GM. Between 1919 and 1921 Germany had a cumulative trade deficit of around 6 billion GM. Although transfer-problem reasoning is academic – to the effect that the reparation creditors cannot collect unless Germany run trade surpluses – in the analysis of the actual German reparations experience its relevance to the politics of reparations was quickly perceived by the Germans. Playing on the Allied fear of German goods flooding their markets, increased German competition in third markets and the threat of more job losses, the German leaders saw political advantages in a policy of monetary expansion and currency depreciation. A dumping policy, it was thought, would exert pressure on the Allies to reduce reparations. But although ‘exchange dumping’ was successful for a time, it backfired with the onset of severe deflation in Britain and the United States in early 1921. As inflationary deficit financing continued uninterruptedly in Germany, the pumping up of domestic demand led to a surge of German imports, thereby defeating the strategy of putting pressure on

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the Allies to moderate their reparation demands. Instead, it showed that a booming Germany could indeed pay reparations and that reparations were compatible with German recovery, whilst at the same time affording some relief to the depressed American and British economies. What was not so well understood, however, was that the German ‘recovery’ was artificial and dangerous, in that it was happening in an economy overheated by excessive monetary expansion. Throughout the period of 1919 to mid-1922, increased German economic activity for domestic reconstruction and the modernisation of industrial plants kept high the level of German imports as well as the demand for foreign exchange by the government, individuals and business. All these demands – including the foreign exchange to pay the first reparation cash instalment in 1921, the 6 billion trade deficit for 1919–22 and the acquisition by German nationals of around 6.75 billion GM worth of foreign-currency assets – were effectively financed by speculative short-term capital inflows in the expectation of capital gains from the mark’s future appreciation. But that expected event never materialised. Foreigners purchased or invested 15 billion GM in mark-denominated bank deposits and other mark assets (short-term bonds, securities and property) during 1919–1922 – holdings that were never repaid. The value of these foreign-held assets (including the paper-mark reserves neutral countries had accumulated in mid-1920) was extinguished in the German hyperinflation. Instead of appreciating, the mark depreciated. The foreign speculators’ loss was Germany’s gain. The foreign-currency inflow allowed the Germans to acquire real resources to the tune of 15 billion GM. It was a ‘free gift’ to Germany, or a ‘reverse transfer’ five times the size of reparation cash transfers during the same period, as Keynes knew full well. In his speech at the Hamburg Overseas Week (26 August 1922) he told his listeners: ‘I do not believe that Germany has paid a penny for these items [reparation payments] out of her own resources’ (Keynes, CW, vol. 18, p. 26).

Notes 1. ‘La politique des casinos’ – The phrase disdainfully used by Raymond Poincaré to refer to Lloyd George’s penchant for dealing with Treaty execution and enforcement through frequent summit meetings in European capitals, spa towns and seaside resorts during 1920–22. See Rain (1945, p. 141). George Slocombe, a London-based journalist who covered these conferences described in his memoirs how the new-style international diplomacy initiated by the conferences at San Remo and Spa ‘presaged that brilliant and theatrical procession of statesmen and ambassadors, financiers and concession

Summits on Sums 79

2.

3. 4. 5.

6. 7.

8.

9.

10.

11. 12.

hunters, journalists, photographers, secretaries, cipher-clerks, telephonists, stenographers, and interpreters which was to march, like the Diets of the Holy Roman Empire, and the Councils of the Church, from city to city, from casino to casino, from Spa to Boulogne, from Boulogne to Cannes, from Cannes to Genoa, from Genoa to Lausanne ...’ (Slocombe 1936, p. 88). In 1922, Sir Charles Hobhouse, a cabinet minister, quoted figures indicating that in 1913 British exports to Germany were valued at £41 million, ‘an amount greater than to any other country save India, and we took from her £76m, an amount greater than from any country save the United States’. The trade with Germany was thus ‘one-third of the total foreign trade of this country in 1913.’ See, Sir Charles Hobhouse, An Address on German Reparations, National Association of Merchants and Manufacturers, 20 June 1922, p. 10. See G.A. Riddell, Lord Riddell’s Intimate Diary of the Peace Conference and After, 1918–1923 (London: Gollancz, 1933), p. 3. Alan Sharp, ‘A Comment’ in Boemeke, Feldman and Glaser (1998, p. 141). The Kapp putsch on 13 March 1920 was the first of several attempts to overthrow the Weimar republic. The leaders of the attempted coup were Wolfgang Kapp, a former Prussian civil servant, and General von Lüttwitz, commander of the Berlin detachment of the Reichswehr. The putsch collapsed after a mere five days largely owing to fence-sitting or non-cooperation by much of the bureaucracy, and the effectiveness of a general strike called by the trade unions, later endorsed by the government which fled, first to Dresden then Stuttgart. Also, the conspirators failed to obtain funds from the Reichsbank to pay their troops. Quoted in Steiner (2005, p. 193). In general, as Rose (p. 142) notes, most conservative newspapers played down the French action – calling it a mere ‘technical irregularity’ or a ‘breach of diplomatic etiquette’ – suspecting that the Germans ‘were testing the entente and Allied unity’, and that further Franco-British disagreement would lead them to continue their defiance of the Treaty. The use of German labour on French soil so soon after the traumas and catastrophe of occupation was an obvious non-starter. The sensibilities of the sinistrés (war victims) and the objection of French labour unions were too great to overcome. For more on Rathenau’s negotiations with Loucheur on reparations and the Wiesbaden accords, see Hartmut Pogge von Strandmann (ed.) Walther Rathenau: Industrialist, Banker, Intellectual and Politician. Notes and Diaries 1907–1922 (Oxford: Clarendon Press, 1985), pp. 250–72. Zara Steiner, ‘Foreign Office Views: Germany and the Great War’ in R.J. Bullen, H. von Strandmann and A.B. Polonsky (eds) Ideas into Politics (London: Croom Helm, 1984), p. 47. Title of Raymond Poincaré’s article in Le Matin, 19 April 1920. Present value is the discounted value of a financial sum arising at some future period. Thus, the ‘present value’ of a stream of payments over a period of time (like the reparation annuities) is what the total is worth at the present time – the sum of future payments stripped of future compound interest.

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13. David Williamson notes that the British hold over the French economy was only broken by the recession of 1920–21 and the fall in the demand for coal, resulting in the collapse of coal prices. Meanwhile, the French coal crisis added to the strains in Anglo-French relations and ‘encouraged the French to look upon the Ruhr as a “black Eldorado” ’ (Williamson, 1991, p. 84). 14. F.S. Northedge, The Troubled Giant (London: Bell, 1966), p. 174. 15. See The Economist, 5 March 1921, p. 503. The report continued, that the sum of payments ‘looked pleasantly staggering, but was really much more moderate than it looked, because the payment was spread over 42 years’. 16. Lloyd George’s backing of the Paris proposals was political posturing, a public relations gambit to bolster Aristide Briand’s position against the hardliners of the Bloc nationale who were asking for annuities of around 12 billion GM – as Paul Doumer, the French finance minister, did at the start of the Paris conference. The proposals were not meant seriously, and Lloyd George knew that Briand was ‘a kindred spirit’ and ‘secretly quite sensible’, as Keynes noted at the time (Keynes CW, vol. 3, p. 15). Therefore, Briand could come round to a German annuity of 3 billion GM – the maximum British figure. At the same time, Lloyd George thought he could sway the German negotiators to make similar, ‘sensible’ proposals for a final settlement in a month’s time if he deferred showing his hand on sanctions. In conversation with Theunis, the Belgian finance minister, Lloyd George agreed that the worst danger for Europe would be if Poincaré and the German nationalists came to power (Depoortere, 1997, p. 87). 17. Reported by Keynes (CW, vol. 3, p. 19) referring to the account of the scene in The Times of 8 March 1921. 18. The vote (20 March 1921) did, in fact, go in favour of Germany – 60 per cent against 40 per cent for Poland; 717,122 opted for Germany and 483,154 for Poland. However, after a Polish nationalist uprising in May 1921, the region was partitioned by the League of Nations (12 October 1921), awarding the key industrial area to Poland. 19. Louis Loucheur, who was present at the official sessions of the conference and also attended certain private meetings with the German representatives, later wrote: ‘I can say with perfect impartiality that it was the unanimous opinion of the Allies that the German Government then in power was literally seeking to make fools of them; and it was in consequence of this opinion that the occupation of Duisburg, Ruhrort and Düsseldorf was decided upon – unanimously.’ See L.Loucheur, ‘The Essentials of a Reparations Settlement’, Foreign Affairs, 2 (1923), p. 2. 20. Düsseldorf, having been incorporated in the Franco-Belgian occupation of the Ruhr, remained occupied until 25 August 1925. 21. It is often suggested that Lloyd George devised the Reparation (Recovery) Act to compensate for French military sanctions, but it was also clearly inspired by protectionist urges. The export levy was conceived as a disguised protectionist device – in fact, an across the board anti-dumping duty – against the flood of German exports to Britain, artificially stimulated by the sharp and progressive depreciation of the mark. Bruce Kent saw in this move clear evidence of ‘the unreality of Britain’s own reparation policy’, since such a measure (whatever its short-term advantages), ‘made it virtually impossible for Germany to earn the foreign exchange she needed to fulfil her

Summits on Sums 81

22.

23.

24.

25.

26.

reparation obligations’ (Kent, 1989, p. 129). It was the same Lloyd George who, only a month previously at the Paris conference, lectured fellow Allied leaders on the vital importance of looking after Germany, as the Allies’ debtor; to see that she was in a condition to pay her debts, and not to add to her difficulties by making her ‘less capable of discharging [her] obligations.’ See DBFP, I, vol. 15, pp. 64–5. Commenting on the reaction to the British levy proposal, the London Economist magazine reported that ‘it is at once mocked at by the City as a quite unworkable absurdity’. See The Economist, 12 March 1921, p. 555. It did work, but the government receipts were meagre, at least in the first year. The yield for 1921–22 was only £3.6 million, but rose to over £8 million when the rate of levy was reduced to 26 per cent during the period 1922–4. See Kent (1989, p. 129, n. 29). The merchants and bankers of the City of London carried on a lucrative business financing German trade, so obviously they did not like the 1921 levy, which was bound to reduce considerably the volume of German trade (both export and import). See also Journal Officiel, Senate, 5 April 1921, Second Session, p. 582. The Journal Officiel noted that Briand’s words were greeted with ‘unanimous and prolonged applause’. Weill-Raynal, 1947, vol. 1, p. 651 gives the figure of 123.3 billion GM. The adjustment had no material effect on the total German liability, since it applied to the ‘inactive’ part of the debt, the never-issued C bonds. The reparation figure of 132 billion GM was therefore not based, as originally intended, on a detailed, numerical evaluation of Allied claims for war damage. However, already since March 1921, total claims by the four principal Allied countries for war damages to property and persons were assessed (after severe pruning by the Reparations Commission) at 374 billion French francs (Antonucci, 1935, p. 50). But once the Commission reached unanimous agreement on the 132 billion figure, it seemed pointless to continue with the next stage of the evaluation, which was to convert the assessed damages into gold marks – an exercise that could quite easily have been done to bring that damage figure into line with the agreed figure for the total German debt. By an iterative process using successively more moderate conversion rates of exchange, allowing for arbitrary small adjustments by the way, one could finally arrive at a sum corresponding to an estimate of Germany’s capacity to pay, that is to say, the compromise figure of 132 billion GM. Apparently, such exercises were done at the time. One 1928 source quoted figures mentioned by John Foster Dulles to the effect that property damages amounted to 45 billion GM and pensions and separation allowances accounted for 87 billion GM – see SAFR, 1928, p. 350. Bruce Kent refers to a 1921 letter by Bemelmans suggesting that one such conversion exercise was done, which revealed that total Allied property damages came to 64.9 billion GM and personal damage to 67.2 billion GM. See Kent (1989, p. 132). Political upheavals rocked Germany throughout 1921. The reparations crisis and trouble in Upper Silesia (as Polish insurgents under Wojciech Korfanty invaded the area) led to the fall of Konstantin Fehrenbach’s government. Joseph Wirth of the Centre party headed a more broadly based cabinet in the first minority ‘Weimar coalition’. The industrialist, Walther Rathenau,


27.

28. 29. 30.

31.

32.

33. 34. 35.

36.

37.

joined the cabinet, first as reconstruction minister, then as foreign minister. The Wirth-Rathenau policy of ‘fulfilment’ – defined by Heinrich Winkler (2006, p. 374) as: ‘Germany would do its utmost to fulfil the requirement imposed upon it, thereby demonstrating the absurdity of the reparations policy’ – was effectively abandoned by the end of 1921, a casualty of the reluctance of all parties to raise taxes and the disaster of the Upper Silesian partition, whereby four-fifths of the coal mines and industrial plants went to Poland. For a useful, short account of Germany’s political crises in 1919–22, see Williamson (2005, pp. 178–82). The German financial experts were, of course, familiar with the Besserungsschein provision in German bankruptcy law, whereby a debtor promises to increase assessed payments to creditors as his/her financial position improves. See Bergmann (1927, p. 37). Quoted in Schuker (1988, p. 17). Andrew Crozier, The Causes of the Second World War (Oxford: Blackwell, 1997), p. 54. ‘It was a given’, says Gerald Feldman, ‘that the official figures on imports and exports were fairly worthless’ (Feldman, 1993, p. 349). There was a systematic underreporting of exports combined with inflated figures for imports, as exporters and importers disguised their capital-flight operations, whereby they accumulated foreign-exchange earnings abroad. Great Britain, of course, had little or no incentive to default on its internal public debt. Financial stability was too important to be put at risk. Equally, the external war debt had to be honoured, since the country’s reputation as the world’s leading financial centre was at stake. Supporting Holtfrerich, Berg states that ‘the political capacity of the Weimar Republic to pay reparations was not solely limited by its unwillingness, but by grave political and social constraints as well’ (Berg, 1993, p. 411). This point was forcefully stressed earlier by Peter Krüger in his critical review of the stream of revisionist literature in the mid-1970s. See Krüger (1981, pp. 34–40). William Keylor, The Twentieth-Century World, 2nd edn. (Oxford: Oxford University Press, 1992), p. 94. Norman Rich, Great Power Diplomacy since 1914 (Boston: McGraw-Hill, 2003), p. 144. Peter Krüger, a German reparations expert, was an early critic of the 1970s revisionist writings by American historians (Trachtenberg, Marks, Schuker) minimising the reparations burden on the German economy. In an influential 1981 article, he showed how reparations destabilised Weimar politics, strengthened the nationalist right, and widened distributional conflicts. See Krüger (1981, pp. 21–47), especially Section III ‘The relationship of reparations to internal developments in Germany’ (pp. 34–40). Note, however, that by the summer of 1923 the 2.5 million tons of German shipping loss was completely replaced by new, modern ships – financed by 12 billion marks compensation paid by the German government to the shipping companies. In his 1963 book on how the British economy adjusted and made good wartime losses after 1945, Sir Roy Harrod remarked that what Germany was asked to pay in 1921 ‘would have involved a much smaller outflow of

Summits on Sums 83 exports not balanced by imports, and therefore a much smaller burden than the United Kingdom has had to suffer since the war.’ Britain managed to achieve an average export surplus of 66 per cent (1946–61) through ‘sweat, toil and austerity’. See Sir Roy Harrod, The British Economy (New York and London: McGraw-Hill, 1963), pp. 30–1.

3 Fulfilment Crises and Allied Disunity

Did the Germans deliberately allow inflation to ruin their currency in 1922–23 to evade reparations? Many at the time believed, and others since then still hold that was the case – that the German authorities and business interests contrived a fraudulent bankruptcy to demonstrate incapacity to pay, coupled with a cry for foreign loans and help to lift the burden of reparations from the German people. The charge against the authorities – of risking financial bankruptcy to sabotage reparations – was disputed, and the ensuing debate shows no sign of abating. Allied disunity and German recalcitrance over reparations and disarmament led to the Franco-Belgian occupation of the Ruhr and the passive resistance it provoked – events referred to by some historians as the renewal of war between France and Germany by economic means. The financing of the passive resistance campaign in Germany through the printing presses destroyed the mark and the political chaos threatened to break up the Reich. These events are described and interpreted, keeping a balance, by placing the events in their economic and political contexts. In the end, though, it was the Ruhr occupation that made possible the 1924 Dawes Plan for a reparations settlement under the informal auspices of the United States – a settlement (financed by American money) that ushered in a five-year period of economic prosperity for Germany.

3.1

A fraudulent bankruptcy?

An inflation consensus Charles Kindleberger began a book review on the German inflation of the 1920s by counting that inflation as one of the four ‘... big unsettled questions of modern history and economic history’ (Kindleberger, 1994, 84

Fulfilment Crises and Allied Disunity 85

p. 1216). According to Harold James (1999, p. 19), the German inflation and hyperinflation ‘is one of the most notorious, and most studied, monetary catastrophes in human history’. Inflations, especially those that develop into hyperinflations, are traumatic social events, besides being pathological economic phenomena liable to fragment the inflationary experience thereafter and distort or colour the reality of the episode. The interwar German inflation still remains unsettled on account of the complexity of the experience itself, but also on account of the confusing variety of competing theories pressed into service to explain the phenomenon.1 Academic agreement has not been made easier by the 1970s methodological dispute among economists about the nature and workings of a monetary economy, resulting in the rise of monetarism and the decline of Keynesianism. Among the differences of opinion that still persist over the causes of the German inflation is the one about whether the German government and the Reichsbank were complicit in deliberately contriving bankruptcy through currency depreciation and inflation to avoid paying reparations. At the time, this was the view held not only by most French observers (including Poincaré), but also by those in other countries as well. On the German side, this charge was denied. Instead, the reparations burden was blamed for causing the inflation. At any rate, that was what the government wanted the German people to believe. The German government maintained that the Treaty obligations added hugely to the budget deficit, leaving no option but to resort to inflationary short-term borrowing at the Reichsbank. The Reichsbank, in turn, further added that even if monetisation of the public debt stopped, depreciation of the mark and domestic inflation would still continue. Why? To buy foreign exchange to pay reparations, the Reichsbank would have to provide the government with equivalent domestic currency. The excess demand for foreign currency would depreciate the mark exchange rate, resulting in a rise in the price of all imported commodities, which would feed through to domestic inflation via a rise in the general level of prices and wages. Domestic inflation is thus imported directly through higher import prices and indirectly by inducing a rise in domestic costs and prices. Academic opinion then was divided between adherents of the balance-of-payments school and those who relied on the quantity theory of money (the monetarists). The balance-of-payments school attributed the massive exchange depreciation to external real shocks to the balance of payments – for example, reparations, the huge import bill incurred on account of the need to restock the country’s factories

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and shops with raw materials, capital equipment and foodstuffs. Depreciation led to domestic inflation through the rise in import prices. The Reichsbank was forced to expand the money supply; failure to do so would have meant a disastrous contraction of the real money stock, and hence massive unemployment. The monetarists detected a quite different sequence of cause and effect. For them, the extraordinary exchange depreciation was the result of overissue of currency and the monetisation of government debt through the lax discounting practices of the Reichsbank. The huge government budget deficit – a failure of fiscal management – was the primary cause of the excessive issues of paper money. The consequent rise in the price level led to the adverse balance of payments and exchange-rate depreciation. An influential, early monetarist explanation of the inflation was the work of Costantino Bresciani-Turroni (1937 [1931]). The monetarists criticised supporters of the balance-of-payments theory for failure to see that the payments deficit and exchange depreciation were determined by an excess supply of domestic money relative to monetary developments abroad. Quantity theory reasoning lay behind the French claim that the German authorities were bringing about bankruptcy to avoid paying reparations. The chain of causation stressed by the balance-of-payments theory suited the political purpose of the Reichsbank and German government. It shifted the blame for the inflation from domestic fiscal mismanagement to Allied reparation demands, loss of German foreign assets and lack of a large stabilisation loan. A flood of cheap German exports to Allied and world markets resulting from mark depreciation was useful as a scare factor. More than technical matters are involved in an understanding of the German inflation. The progressive weakening, and then the collapse of the currency was an extraordinary process that developed in response to a complex mixture of social, political and economic pressures on a weak, chaotic and crisis-ridden Republic. Born in the midst of revolutionary upheavals, social conflict and the shame of military defeat, the new Weimar Republic was plagued during the first four years of its existence by political assassinations, plots and uprisings by both right and left factions, divisive political strife and distributional conflicts (Winkler, 2006, pp. 336–72). The early political leaders, novices in the art of democratic government succumbed to the attractions of an ‘inflationary consensus’ both as the means for their own survival and to keep at bay the threat of social revolution. Subsequently, the internal political dynamics of the situation determined (subject to the shifting constraints of international pressures) the course of the inflation in its


initial phase. When ‘trotting’ inflation gave way to ‘galloping’, inflationary dynamics took over and swiftly pushed the currency to its utter ruin. Domestic and international constraints The motives and constraints that led the political and monetary authorities to opt for an inflationary fiscal policy will be discussed later; but for the moment we look briefly at the domestic and international implications of the decision. Internally 1. It ruled out an early official stabilisation of the currency. For whatever reasons, one, or perhaps two favourable opportunities for permanent stabilisation were missed in May 1920 and November 1922. 2. It helped the government to find remedies (crisis management, really) for its most pressing socio-political problems. These included the demobilisation of 6 million returning soldiers in late 1918 and early 1919, managing the swift conversion to peacetime production, the maintenance of social peace through welfare spending on work creation, war pensions, food subsidies, rent control and generous compensation payments to the former owners of assets seized by the Allies (merchant ships, for example). 3. It was a cheat or deception (whether deliberate or unplanned), initially based on ‘money illusion’ and the ‘inflation tax’2 which resulted in the loss of nominal money values by creditors, including those who held financial assets in savings, pensions and insurance. 4. It offered the Reich and German citizens a golden opportunity to rid themselves of most of their internal and non-reparation foreign debt. The process of inflation minimised distributional conflicts over sharing of reconstruction costs and war debt burdens by providing an impersonal monetary contrivance to do the job in a disguised, indirect fashion instead of through the socially confrontational method of getting agreement on burden-sharing through vastly increased taxation loads. Now, how did the international constraint impinge on German economic policy-making? If the internal constraint suggested the choice of one set of policies (inflation), why did the international constraint fail to influence the selection of another set of policies – namely, permanent stabilisation and compliance with Treaty obligations? We touched on this earlier when we discussed ‘capacity to pay’ in connection with the London Schedule annuities. The international constraint was weak


and ineffectual for most of the time and only became binding as the Ruhr occupation’s grip tightened and the currency plunged into the abyss. The meagre amounts actually paid in cash reparations did little to weaken the anti-reparations and revisionist attitude of the population, reflected across the political parties from the far right to the communists. It was not so much the actual payments that were regarded as objectionable but the mere fact of having to pay reparations at all. Stabilisation and a return to gold parity required swingeing increases in taxes, especially on those who had made vast profits out of the war. But it was a political ‘hot potato’ and even the majority SPD (the Social Democrats) had no answer to the right-wing objection that any taxes collected would simply go into the pockets of the Allies, particularly the French. Thus the imposition and payment of such taxes were considered unpatriotic – never mind France (up to 1923) never received one franc in cash reparations, on account of the Belgian priority rule. The reparation debt had to be paid in gold or dollars; so, German inflation could not extinguish it, although it could be defaulted on. Partial default was tried; but then the German authorities were suspected of using financial bankruptcy to show that the reparations burden could not be borne. As a sovereign debtor, Germany had every incentive to default. It was in the process of defaulting on its own internal debt and could do the same with the foreign debt (reparations). The unspoken assumption among Germany’s political and business leaders was: ‘If disaster comes, what do we have to lose?’ Having already forfeited their foreign assets to the Allies, they had indeed nothing further to lose from Allied retaliation. So, even if Germany had the real-resource capability of paying, ‘willingness to pay’ would not be forthcoming. We suggested earlier a meaningful distinction between ‘capacity to pay’ – in principle an objective and quantifiable magnitude – and ‘willingness to pay’ – a subjective or psychological state of mind or attitude. In fact, however, the circumstances and political dynamics of the early 1920s robbed both of any meaning until the 1924 Dawes settlement. Erfüllungspolitik, the Wirth-Rathenau policy of fulfilling treaty obligations, was another early casualty of those years. But did the failure to even half-fulfil reparation obligations prove bad faith on the part of the German government? There is now a general consensus among historians that the policy of fulfilment was a tactic, a German attempt to demonstrate incapacity to pay and, hence, also to prove that fulfilment was not possible. Feldman is quite clear: ‘Fulfillment was a tactic, a short-term policy; it certainly was not a conviction’ (Feldman, 1993, p. 452; Feldman, 2005, p. 488). But does that suggest that the


German authorities therefore deliberately opted for inflation and the risk of financial bankruptcy to sabotage reparations? Or, was it rather, inverting the question, that reparations were the cause or source of the inflation and bankruptcy? The deliberate courting of disaster through a contrived financial bankruptcy is at odds with a long-standing objective of the German government to secure a large international stabilisation loan and the need to retain British and American support, so vital in the effort to win such a loan. As Theo Balderston remarks: ‘Persuading the international capital market that it was not credit-worthy seems an odd way of working towards that loan’ (Balderston, 2002, p. 28). Fiscal problems To proceed further we need to fill in some details about Germany’s fiscal problems to see how reparations related to the bankruptcy crisis. It is now generally agreed that the inflation began during the war. The failure to levy adequate taxes meant that the government financed the war for the first two years by the sale of war bonds to the public; but thereafter, by increases in the floating debt or short-term borrowing from the Reichsbank which hugely increased the monetary base and, hence, the actual money supply. The increase in the floating debt through the issue of Treasury bills was simply money printed to cover government expenses. The result was that by the end of the war (November 1918) cash in circulation was five times the amount in 1913 – up from 6 billion marks to 29.2 billions.3 At the same time, GDP (gross domestic product) declined by 50 per cent over the same period. One does not have to be a quantity theory fan to see that here was an obvious case of: ‘Too much money chasing too few goods’ – an inflationary scenario in anybody’s book. There was nothing exceptional, though, in German war financing. The two European belligerents, Britain and France, also used inflationary methods to finance their wartime budget deficits. Albrecht Ritschl finds that the ratio of public borrowing to tax revenues, as well as the rate at which the war debts were monetised, was hardly higher in Germany than in Britain. The difference between the two countries was in their inflation experience after the war ended (Ritschl, 2005, pp. 41–76). The new Weimar Republic inherited a mountain of debt, something like 172 billion marks (nominal) at the end of October 1919 (Webb, 1986a, p. 780).4 Payment of interest on the debt swallowed up practically all of the central government’s revenue in 1919 (Hughes, 1988, p. 6). Who was to pay this bill? Not Big Business and the wealthy property-owning classes. They knew they might be targets


for expropriation through a capital levy and war-profits taxes, but they were not prepared to make sacrifices. They would escape being caught in the net of the tax authorities by exporting their capital abroad, as many of them did, starting from the end of 1919. The rich cashed in their War Loan certificates and Treasury bills and exchanged the mark proceeds for deposits in foreign safe havens. The trade unions, on behalf of the workers, refused to give up their newly won collective bargaining power and shorter working week recognised by the Stinnes-Legien agreement. They also opposed regressive taxation on working-class consumer staples. The middle classes alone were without defences. They had no effective veto power, but no one thought they could shoulder the whole burden of taxation. None of the above social and economic groups wanted to pay taxes for the benefit of the Allies. They each wanted to shift their share of the costs and burden of the war on to others. The option of defaulting on the internal debt through inflation proved irresistible to the state, business, agriculture and labour. Rising prices seemed to be easing the process of peacetime adjustment and economic recovery. The government saw how inflation was eroding the burden of state debt. Business was booming, unemployment was low and exports soared under the stimulus of rising prices and a depreciated currency. With money wages rising, the workers would not consent to deflation and retrenchment. Heavily mortgaged East Elbian landowners did not mind inflation, and industrialists saw an opportunity to significantly reduce their pre-war debts with repayment in depreciated paper marks. After the war, the budget deficit remained large. Although as a proportion of net national product (NNP) the central government’s deficit fell from its wartime peak, it still averaged 16 per cent during 1919–22. Fiscal balance was impossible. In addition to the huge expenditure on debt service, government spending expanded enormously for demobilising the economy, social programmes, job-creation schemes and shipbuilding programmes. Matthias Erzberger, who in June 1919 became finance minister in the Bauer government, tried to come to grips with the budgetary problem through his famous tax reforms. The reforms shifted tax authority and control from the federal states to the Reich in a new centralised tax administration that survived the inflation. Between April 1919 and March 1920, Erzberger introduced a whole range of new taxes and increased tax rates with the intention of broadening the tax base and increasing the yield from existing taxes (Epstein, 1971, pp. 338–48).5 The new taxes included the Reich income tax of 1920, a one-off wealth tax or capital levy (the Reichsnotopfer), a capital gains tax on company


dividends and land transfers, and an inheritance tax. The new national income tax was steeply progressive, with tax rates ranging from 10 to 60 per cent. A novelty was the provision for wage earners to have their taxes deductible at source on the PAYE (‘pay-as-you-earn’) system. The most controversial of Erzberger’s imposts was the wealth tax or capital levy that took effect from January 1920, but providing for payments to be spread over 30 annual instalments. The yield from these taxes was disappointing owing to tax evasion of all kinds by the rich, including capital flight. The capital levy brought in no new revenue, since it was paid in almost worthless war bonds. The reason why the actual tax receipts fell so miserably short of forecast revenues was that Erzberger’s taxes were designed for an environment of stable prices. To neutralise the incentive for wealthy, self-assessed taxpayers to delay paying their tax bills in inflationary conditions, Erzberger should have made his taxes inflation-proof by indexing (or valorising) them to some measure of real value to keep the rate of taxation on a par with that of depreciation.6 Despite some increase in tax receipts, revenue from taxation and other sources remained woefully insufficient and covered only a half of government spending in 1919–21. The gap between revenue and expenditure widened after 1921. Because of collection lags that reduced the real tax revenues and tax evasion, taxes never covered more than 35 per cent of expenditures, and sometimes even less, between 1921 and 1923. As a result, the government ran deficits exceeding 50 per cent of its expenditures from 1919 to 1923 (Holtfrerich, 1986, p. 173). In fact, the average borrowing requirement for the period was 75.8 per cent. That excess of spending over tax revenue was funded by the issue of Treasury bills, which the Reichsbank promptly discounted at negative real interest rates. ‘Discounting’ was, that is to say, the advance of cash by the Reichsbank against the government’s bills or IOUs – a method by means of which the government procured immediate, additional money to pay for its excess spending (the budget deficit). Monetary expansion and a further twist to the inflationary spiral resulted. Inflation itself added significantly to the budget deficit by reducing the real value of tax revenue. Since taxes were levied in nominal terms, the time lag between assessment and collection reduced tax liabilities, as inflation rose, to trifling amounts (for taxpayers whose incomes were not taxed at source). The ballooning of government expenditure, out of all proportion to tax revenue, was a real problem. Erzberger looked at only one side of the national accounts, and his successors failed to match tax reforms with

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expenditure cuts. They failed to control expenditure – a failure that blew the chances, however slim, of an early stabilisation and slowdown of inflation. It is true that in the 1922 budget the chancellor, Joseph Wirth did succeed in cutting expenditure from 6.65 billion GM to 3.95 billion GM, with the result that total public spending fell to 24 per cent of NNP in 1922 (Clingan, 2001, p. 33; Ferguson, 1995, p. 320). But counterbalancing this gain there was an equally large fall (1.5 billion GM) in government revenue due to the effects of inflation and the first reparation cash payments. The fiscal deficit remained practically the same. In the summer of 1921, the Wirth cabinet discussed proposals (by Julius Hirsch of the Economics Ministry) for an increase in corporation tax rates and a further capital levy, or ‘appropriation of real values’ (Erfassung der Sachwerte). The right-wing parties in the Reichstag opposed the tax increases and there was internal government wrangling between officials in the Finance Ministry and those from the Economics Ministry. As a result, Wirth’s tax package ‘fell into a black hole as inflation rose and fiscal policy collapsed’ (Clingan, 2001, p. 33). In fact, however, Wirth himself came out against the capital levy to balance the budget. The proposed tax conflicted with his desire to prove Germany’s incapacity to pay. He was obviously not sincere in his desire to balance the budget, as he felt that the 1921 London reparation demands could not be fulfilled by taxation. As he frankly expressed it to party leaders in January 1922: ‘The goal of our entire policy must be the dismantling of the London Ultimatum. It would therefore be a mistake if, by implementing a seizure of real values [capital taxation] at this time, we were to declare the ultimatum to be 80 per cent possible.’7 The Reichstag received Wirth’s tax proposals only in October 1921. There was little discussion on them, and the members procrastinated and refused to vote the extra funds initially asked for by the government. The government’s request to the Allies – made on 14 December 1921 – for a moratorium on cash payments for the 1922 January and February reparation instalments was granted at the Cannes conference in January 1922 (and confirmed by the Reparations Commission on 21 March 1922) on two conditions: (1) that the government take vigorous action to balance the budget by an increase in taxation of 60 billion paper marks; and (2) that they put a stop to the unlimited and cheap discounting of government bills by granting the Reichsbank autonomy and independence from the government. The Berlin government initially spurned these conditions, including the stipulated 31 May deadline for the reforms to be in place. But the British unofficially advised


‘the Germans to bluff, and they followed [the] advice’ (Fink, 1984, p. 93). After sitting on Wirth’s tax package for a vital eight months, members of the Reichstag finally approved the budget proposals late in March 1922. It was the last chance to get on top of the fiscal crisis before the onset of hyperinflation later in the summer. Instead of grasping the nettle, the Reichstag parties made a perfunctory bow to Allied pressure with a grubby tax compromise (Kerstingjohänner, 2004, pp. 275–81). The result was an unsatisfactory, watered down budget riddled with exemptions, loopholes and amendments that weakened much of the specific provisions. Another package of 15 taxes was not approved by the Reichstag until July 1922 (Clingan, 2001, p. 33). Too late in the day, the new taxes yielded very little revenue for 1922, since assessments continued on the basis of paper marks. The Allies were particularly disappointed by the rejection of the property tax on the rich. As regards Reichsbank autonomy, a law was duly passed on 26 May 1922 granting the Bank autonomy; but it did not stop the discounting of Treasury bills, as the Allies expected. Instead, in July 1922 it resumed the discounting of commercial bills on a vast scale. One writer remarked that the May 1922 Autonomy Law changed nothing; in fact it was only after autonomy was granted that ‘the printing of banknotes on that uncontrollable excess that led to the collapse of the financial system in 1923’ (Leaman, 2001, p. 73).8 German politicians and officials, even those supposedly inclined to fulfilment (like Wirth and Rathenau), obstructed every reasonable scheme to facilitate reparation payments (Fink, 1984, pp. 93–4). As the deficit widened, the prospect for ultimate budget balance evaporated. The government’s credit plummeted, and it could not borrow at long term, either domestically or abroad. In return for a definite shelving of further property taxation, the German industrialists offered to solve the fiscal crisis by putting at the disposal of the government a portion of their foreign-currency holdings and credit as guarantee for securing a foreign reparations loan – the so-called ‘credit action’ initiative in the autumn of 1921. The government, however, refused the offer, since the industrialists’ bargain was conditional not only on the remission of a proportion of future taxation, but also on the privatisation of the loss-making state railways and renegotiation of the eight-hour day agreement (Balderston, 2002, pp. 21, 27). In Balderston’s view, the Reichstag’s refusal to vote additional taxes and the industrialists’ credit initiative signified that the government faced a situation of ‘implicit bankruptcy’ (Balderston, 2002, p. 27).


A missed opportunity, total Treaty expenses and capital flight There was at least one occasion – between April 1920 and May 1921 – when an opportunity was missed for fiscal adjustment and permanent stabilisation. It was a year of price stability and it seemed as if the inflation was subsiding. Erzberger’s new taxes did increase government revenue although not by the amount expected. The lifting of the Allied blockade in early summer 1919 led to a surge in imports of necessities, principally food and raw materials – a restocking boom. As imports exceeded exports, there was an initial depreciation of the mark that boosted German exports for a time. That helped to improve the balance of payments by providing the means to pay for the imports. But this was soon followed by massive short-term speculative capital inflows (mainly from the United States) that then stabilised the exchange rate. The exchange rate stabilised against the dollar. The capital inflows helped to finance a large part of the considerable trade deficit (or excess of imports over exports) between 1919 and 1922. The inward flow of capital expressed foreign investors’ confidence that the mark would strengthen, taking into account such factors as the high level of economic activity in Germany, with low unemployment and the country’s apparent immunity from the effects of the 1920–21 world economic downturn. The speculative capital was attracted to Germany in the expectation of making large capital gains from anticipated mark appreciation in the foreign-exchange market. Falling world prices and the recovery of the mark’s exchange value due to speculative capital inflows meant that prices in Germany stopped rising in May 1920 and even began to fall, before stabilising (with minor deviations) for about six months thereafter. Germany experienced improved terms of trade, that is to say, a rise in real income for several months. The capital inflow, and the expansionary effects generated by it, allowed the German people to enjoy a level of consumption higher than would have been possible during the worldwide slump of 1920–21 when Britain, for example, suffered an unemployment rate of 20 per cent in early 1921 as a result of the sharp tightening of monetary policy in mid-1920. As late as early summer 1921, foreign investors still felt that there was some chance for an early currency stabilisation. But in German official circles, there was manifestly not the will to seize the opportunity to bring it about. The opportunity passed and the inflationary cycle resumed. About this phase until the start of hyperinflation in July 1922 Feldman wrote: ‘While the chief sources of the German inflation were endogenous, the catalyst of inflationary development between the spring of 1921 and the summer of 1922 was reparations’ (Feldman, 1993, p. 418).


In this view, the inflation was home grown, but from spring 1921 reparations acted as an exogenous factor that accelerated the process. But exactly how reparations brought this about has not been satisfactorily explained. There were no cash payments before June 1921. Payments stopped altogether in August 1922 after only 15 months and were not resumed until late in 1924 when the Dawes Plan went into effect (Balderston, 2002, pp. 14–15; Marks, 1978, pp. 237–8). During the fiscal year 1921 (April 1921 to March 1922), actual cash reparation payments amounted to between 2.5 and 3.1 per cent of German NNP.9 With current budget deficits of around 12 per cent of national income, reparations did not massively add to the total public debt burden. However, reparations were the most politically controversial categories of the German budget both as expenses as well as proportions of revenues. Hence, where reparations weighed heavily was in terms of their psychological impact and effect on expectations. As Steven Webb put it: ‘the threat of what Germany might have to pay affected the course of the inflation more than what it actually paid’ (Webb, 1989, p. 38). There is another side to Germany’s financial obligations, sometimes overlooked by historians. Besides reparations proper (as specified in the London Schedule of Payments) there were other Treaty expenses known as ‘prior charges’ that Germany had to pay. These expenses were a first charge on reparation receipts, and hence, had to come out of the flow of Germany’s reparation payments. Whatever amounts remained, if any, after these deductions were then credited to the reparations account. These non-reparation claims included the substantial costs of the Allied armies of occupation, the expenses of the various Allied Control Commissions, the costs of raw material and food imports supplied by the Allies and the settlement of pre-war Allied private citizens’ debts through the clearing-house system of monthly payments set up under Article 296 of the Treaty of Versailles.10 The monthly instalments were fixed at 40 billion GM in June 1921. These extra Treaty expenses, to the extent that they were paid, further burdened the German budget, but without affording any relief for the country’s reparations debt, especially in the early years of the reparations regime. Expenses of the British, French and Belgian armies of occupation swallowed up almost all the payments, deliveries in kind, and cessions actually made by Germany before 1 May 1921 – a total of 2.6 billion GM (Bergmann, 1927, pp. 72–3). As a result, the expenses of the US army of occupation (1 billion GM) remained unpaid until 1925 when arrears on payments were resumed under the Dawes Plan.11 In the fiscal year 1921, non-reparation Treaty expenses of 1.4 billion GM were 60 per cent

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of total reparations paid (Webb, 1989, p. 109). Clearing payments for pre-war private debts (Ausgleichsverfahren) were settled in foreign currency. These totalled 615 million GM by August 1922, when payments stopped, and Germany was granted a moratorium until 30 June 1923 on all clearing payments (Felix, 1971, p. 174, n. 9).12 Payment for food imports also caused a drain on scarce foreign-exchange reserves. That is why some critics say one needs to take these payments into account alongside the straight reparation payments when calculating the impact on the German budget and inflation (Fischer, 2005, p. 503; Fischer, 2006, pp. 24–5). Adding expenses for deliveries in kind, mainly coal (1.05 billion GM), occupation costs and clearing-house payments (another 1 billion GM) to the cash reparations paid in 1921 brings the total German debt burden to 8.3 per cent of 1921 national income – the highest budgetary burden over all the years that reparations were paid (Ferguson, 2001a, p. 104). Total Treaty expenses in 1921 amounted to something like 60 per cent of the revenue the German government was able to raise in taxation. These expenses accounted for two-thirds of the Reich deficit in 1921 (Ferguson, 1995, p. 313). However, according to Ferguson’s calculations, these expenses ‘amounted to no more than 15 per cent’ of total public spending for the years 1920 and 1921 (Ferguson, 1995, p. 278). Whatever the precise magnitudes of the reparations burden, politics and socio-economic realities determined the possible. Robert Hetzel mentions the political cause of the hyperinflation as stemming from ‘... the inability of a fragile democracy to impose the taxes necessary to pay war reparations’ (Hetzel, 2002, p. 2). The budget constraint was tightly set by political and psychological parameters. The budget was, in fact, the stage where the inflationary drama was played out with all its psychological, political and economic features. Those who maintain that reparations were a red herring in the inflationary experience of Germany and that the real problems were capital flight, exchange-rate vulnerability and investor shyness, all induced by massive deficit financing, have a point. The balance-of-payments theory of the inflation ascribes an important role to the exchange rate as a channel for the transmission of inflation to the domestic economy. Since the exchange rate provided the monetary link between the German economy and the wider financial and trading world, it also registered the effects emanating from German domestic monetary and fiscal shocks. In that sense, the behaviour of the mark exchange rate mirrored the interplay among the active forces in the causal chain of the German inflation. After the lifting of exchange


controls in September 1919, the exchange rate responded to inflows and outflows of capital. There were several well-known episodes of capital outflows that resulted in real appreciation of the mark and sharply accelerated inflation; but the role of German capital flight has generally been underestimated or neglected in the vast literature on the German inflation. There was a steady flight of capital out of Germany which successive governments were either unwilling or unable to control. The first bout of capital flight in the summer of 1919 stemmed from Erzberger’s proposed tax increases, particularly the capital levy and plans for the stamping of banknotes. The exchange rate was further weakened at this time mainly through the repayments of wartime Swedish debts for iron ore incurred by German iron and steel manufacturers. In all, German debtors, wanting to restore their credit abroad, repaid around 1 billion GM to foreign private creditors during 1919 and 1920. Although the lifting of exchange controls was coupled (on 12 September 1919) with a law making capital flight illegal, except for transactions handled by licensed dealers, the regulations were ineffective. The German authorities complained that German capital flight evaded controls by going through the ‘Hole in the West’ (‘das Loch im Westen’).13 In March 1920, the Allies acceded to Berlin’s request and allowed German customs and frontier regulations to be enforced in the occupied Rhineland. This plugging of the ‘Hole’, however, made no difference to the escape of flight capital. Transfer of German capital abroad was immense. One 1923 estimate puts German-owned deposits in the United States at nearly $2 billion – about a quarter of Germany’s 1923 GDP (Fourgeaud, 1926, pp. 92–4; Preparata, 2005, p. 125). Capital flight went mainly to Holland and Switzerland. Marks fleeing Germany also found their way to safe havens in the United States through the Amsterdam and Zurich foreign-exchange markets. These German-owned foreign deposits provided the base for the opening up of another successful conduit for German capital flight. The owners, typically large German industrial firms, set up holding companies, principally in the Netherlands (but in other neutral countries, as well) and used their foreign-currency deposits to buy up failing or insolvent firms in Germany. These businesses were acquired merely to feed the profitable holding company in Holland with supplies and consignments invoiced at ridiculously low prices – thereby defrauding the German tax authorities. The holding company then sold the shipments on international markets and retained the sales proceeds, in dollars or florins, safely in Holland (Fourgeaud, 1926, pp. 93–6).14 The well-known sharp depreciation of the mark against the dollar between May and December


1921, which ended the period of ‘relative stabilisation’, was really the result of capital flight by German firms and individuals fearful of further depreciation and inflation from reparation payments.15 Guido Preparata (2005, p. 126) recognises that the proportion of German wealth that fled the country is largely unknown, but the effects were considerable and well established. ‘The transfer of such funds in marks’, he writes, ‘and their conversion into other currencies, exerted a tremendous pressure on the exchange value of the mark and on the Reich’s budget, which was deprived to a large extent of its taxable base’.16 Failures of fiscal policy must be viewed with reference to domestic social and political circumstances. Weak governing coalitions, institutions and powerful vested interests prevented effective fiscal reforms that were needed to end the inflation. The outcome was an informal inflation consensus that led to a laissez-faire attitude to fiscal imbalances and a permissive monetary policy. Default on the domestic debt and a partial default on reparations (June 1922) were the way out, given the impossibility of increasing tax revenues. The inflation consensus was related to tax boycott, the obstructionism of power groups, capital flight and reparations in a complex pattern of causation and interdependence. Reparations and inflation Reparations and other treaty expenses, including occupation costs, were obligations of the German government and had to come out of the German budget. The government made no preparation for the start of cash payments – as if it would never happen. Its desperate scramble for foreign exchange to pay the first instalment in the summer of 1921 adversely affected market expectations about the external and internal value of the mark. This shock to confidence, combined with the resumption of inflation in June 1921, the assassination of Erzberger (26 August), and the partition of Upper Silesia on 12 October – which meant that Germany lost three-quarters of the coal fields in the region – led to capital flight and massive exchange depreciation in the second half of 1921. The refusal of the Reichstag to impose additional taxes was one expression of an unofficial ‘inflation consensus’. As prospects for eventual budget balance faded, even the government and the Reichsbank came more fully to share the same goals as the power groups who were opposed to any early end to inflation. The reparations issue now became a factor that ‘heavily boosted’ the ongoing ‘inflation consensus’ (Feldman, 1993, p. 452). Political leaders saw the inflation as a good defence against the reparation creditors (apart from its initial


macroeconomic benefits associated with the ‘boom’, such as export expansion, full employment and economic growth). They also noted how inflation had, by 1921, reduced the real value of the internal debt to something like 24 billion GM. Nevertheless, it was still 60 per cent of net national product, so there was still some way yet to go before it disappeared altogether! The government, industrial leaders and the Reichsbank came to believe that no stabilisation was possible until reparations were drastically scaled down and Germany was granted a large stabilisation loan (Schuker, 1978, p. 357). They looked to Britain and the United States for help on this, and further believed that France would be ruined in any violent confrontation over reparations. These assumptions and intentions may account for the reckless gamble of Chancellor Wilhelm Cuno, who from November 1922 to April 1923, played fast and loose with the currency until it had been totally destroyed. After July 1922, with confidence thoroughly undermined in the probability of future government budgetary surpluses, inflation turned to hyperinflation, an acceleration marked for the first time by inflation rates in excess of 50 per cent per month – the common definition of hyperinflation. For the rest of the year, inflation ran at 1300 per cent. In July 1922, too, the exchange rate of the mark fell below 1 per cent of its pre-war value, and in the forward market it stood at a large and growing discount. The ‘flight from the mark’ into other currencies intensified; and, domestically, there was a flight from paper marks to Sachwerte (or physical assets). It became common practice to use foreign currency in everyday transactions. The government’s financing of the passive resistance in response to the Ruhr occupation deepened the fiscal crisis. Government expenditures soared whilst tax revenues fell by 74 per cent, causing the Reich deficit to widen to 22 per cent of net national product – a debt that was automatically discounted by the Reichsbank, greatly enlarging the already bloated money stock (Ferguson and Granville, 2000, p. 1068). When finally the authorities stopped the printing presses and put an end to inflation by the stabilisation programme of 20 November 1923, among the wreckage left behind was the state debt. Measured against the purchasing power of 1913, the real value of the public debt was reduced to 0.154 GM, or 15.4 pfennig – just 3 cents! (Hughes, 1988, p. 7; also Widdig, 2001, p. 50). As William McNeil remarks, ‘Germany’s entire wartime debt ... could have been paid off with one United States nickel’ (McNeil, 1993, p. 193). The German state, as the largest debtor, was a big winner from the inflation; so too were the private debtors such as the big industrialists who bought factories, plant, properties and other


fixed assets on credit and paid with worthless paper marks. The biggest losers were foreigners who held mark-denominated assets (estimated at around 8 billion GM) wiped out by the inflation. Commenting on this well-documented fact, Harold James wrote that it points to the conclusion that ‘... the German government was engaged in a systematic defrauding of foreigners until Poincaré occupied the Ruhr and called the German bluff’ (James, 1984, p. 516). No one now insists that reparations caused the great German inflation. But in 1992, Barry Eichengreen came close to doing so in his influential book on the interwar gold standard, Golden Fetters.17 He obtains an econometric estimate of government deficits that would result from a 1922 inflation-corrected budget, that is to say, a budget balance that would have prevailed in a scenario of stable prices. With this exercise, he finds that only in the last quarter of 1922 was the estimated deficit of the ‘no-inflation budget’ greater (by 55 billion GM) than the actual Treaty expenses for those last three months (Eichengreen, 1992, p. 141).18 So, therefore, if there were no inflation, reparations and other treaty expenses, the Reich budget would have balanced in 1922, and there would have been no deficit. With no deficit, there would have been no monetary expansion to finance it, and therefore inflation would have been eliminated. On the strength of this historical counterfactual, Eichengreen confidently asserts: ‘Reparations ... were ultimately responsible for the German hyperinflation’ (Eichengreen, 1992, p. 141). The key assumption in Eichengreen’s argument is that there would have been no budget deficit in the absence of reparations. This is highly questionable. Already, before the 1921 London Schedule (since 1919, in fact) the Reich budget was deeply in the red; and there was no real willingness to balance the budget, even when inflation was slowing down. Proceeding from this, Niall Ferguson challenges the basis of this assumption and the conclusion Eichengreen derives from it. He argues that even if the German government had no reparations and other Treaty expenses to meet, there would still have been large deficits in the Reich budget, certainly for the years 1919, 1920 and 1923. For, excluding Treaty expenses from the budget, Ferguson calculates that total public spending would still be running at around 33 per cent of net national income compared with around 18 per cent before the war (Ferguson, 2001a, p. 106). Clearly, without reparations, inflation might have been lower – though not zero. With lower inflation, tax receipts would not be subject to rapid erosion, and therefore the real value of government revenue would have been higher and more certain, by corresponding more closely to forecast tax yields. But, says Ferguson, it is very likely that


there would have been deficits, for the simple reason that real domestic debt service would have weighed more heavily, since it would not have been so sharply reduced by inflation. Thus, Ferguson concludes: ‘It cannot be assumed that domestic spending would not have risen had reparations magically been abolished’ (Ferguson, 2001a, p. 106). Ferguson goes on to show why, in addition to the costs of servicing the funded debt, government spending would have remained at excessively high levels on account of ‘social spending’ – high public sector pay, generous unemployment benefits and war pensions, housing and food subsidies, job creation in the shipbuilding programme, rail and post office deficits, over-manning to keep unemployment low, and so on. He calls such social expenditure ‘domestic reparations’ or ‘German reparations to Germans’.19 Such domestic reparations, says Ferguson, ‘were more important than actual reparations in generating the German fiscal deficit’ (Ferguson, 2001a, p. 107). If reparations had been reduced or abolished, it is probable that ‘reparations to the Germans themselves ... would simply have been increased’ to take up the slack (Ferguson, 2001b, p. 48). Like Eichengreen, Steven Webb (1986b, pp. 46–82) set up a hypothetical simulation exercise, assuming continuing price stability after June 1921, to calculate what budget surpluses would have been available for reparations. The baseline for his analysis was the year of price stability (July 1920 to June 1921). The reasoning was that if prices had remained stable, government revenue would have been higher in real terms, and therefore budget surpluses would have been earned in sufficient amounts to pay cash reparations and cover all Reich expenditures. To generate these results under price stability, Webb requires an additional assumption: that the Allies agree to a one-year delay in cash reparations (until May 1922) to allow time for Erzberger’s taxes to work in a regime of price stability. Webb’s results show a hypothetical surplus of 267 million GM a year, sufficient to pay cash reparations of between 200 and 300 million GM without raising taxes, reducing other government expenditures and without borrowing. To generate cash reparations of 2 billion GM annually – to satisfy Allied demands – would have required the Reichstag putting a 20 per cent surcharge on all taxes. Webb claims that this last assumption is not far-fetched; and he is emphatic that under his counterfactual scenario, ‘the Germans could pay’ (Webb, 1986b, pp. 61–3).20 That may be true, but the early 1920s’ brutal reality was different. Stabilisation lasted only a few months; inflation returned and reparations stalled. The disastrous fall out from Weimar’s failed early stabilisation resulted, in

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the words of Albrecht Ritschl, from ‘an economic war of attrition’ waged by Germany ‘against her reparation creditors’. Moreover, the dominant aspect of the inflation period was ‘not how to sustain debt and distribute its burden among taxpayers, but rather how to default on external debt [reparations] in a situation of political fanaticism where taxpayers would shoot a finance minister who proposed a balanced budget’ (Ritschl, 1996, p. 192). Was the inflation ‘an avoidable disaster’? There is the view that while reparations might not have caused the inflation, they aggravated it or added fuel to the inflationary furnace. But the aggravation resided more in the minds or attitudes of people than in the reality. Reparations were only one of several contributory factors, as mentioned above. Economic historians might juggle ratios of debtincome, reparations-government revenue or reparations-government expenditure; but no one has yet been able to put definite weights on the several determining influences. The bottom line, of course, is that Germany paid less than half the cash sums due during the relevant period, 1921–23. The inflation was a multi-phased phenomenon, characterised by considerable variation and complexity. There was nothing deterministic about it; hence, there is no simple answer to the question who or what was responsible for it. The German decision-makers had a choice of options like other combatants after the war; but they chose inflation, rather than deflation and early stabilisation, because the other options would have led to the overthrow of the regime.21 That might well have been the case. But was it an intelligible response to Weimar’s fiscal problems, or an avoidable disaster? There was a certain fatalism or resignation to circumstances, even a naïve insouciance in the position adopted; yet there might have been a rationale to all this. Bernd Widdig noted that political and financial leaders ‘... downplayed or even denied the potential for a complete meltdown of the financial system’ (Widdig, 2001, p. 39). It was not ‘reparations alone that prevented a stabilisation of the currency, although they were used by the German side as an argument to explain their inability to pay’, says Helmut Heiber (1993, p. 73). Feldman finds that some of the charges of German bad faith are misplaced. ‘Nevertheless’, says he, ‘the criticisms of German behaviour are not without basis and cannot be dismissed. One need turn neither to critical historians nor to Allied polemics for such an argument. The Germans provided enough testimony of their own’ (Feldman, 1993, p. 344).


It may be impossible for historians to determine whether the German authorities deliberately engineered the inflation to sabotage reparations; but whatever the intention, the results were effectively the same. The way the inflationary situation was used by the leadership gave the impression that it was somehow intentional – like the ‘fulfilment’ policy, just a tactic to get a drastic reduction in reparations.22 For this reason, it is not difficult to see why failure to halt the inflation was widely perceived outside Germany as a deliberate act of policy.23 The resulting bankruptcy was regarded as fraudulent, a cheat, a deception or, perhaps, even German self-deception. Quite positively, Stephen Schuker states: ‘Heedless of the long-term social costs, Germany deliberately failed to arrest currency depreciation in 1921–3 in order to avoid the payment of reparations’ (Schuker, 2003, p. 83).24 The Hamburg banker, Friedrich Bendixen, openly praised the merits of inflation ‘as a means of salvation’. He considered inflation to be an easy and preferable form of taxation and an effective lever against reparations and the other impositions of Versailles (Leaman, 2001, p. 70). Leaman further notes: ‘Bendixen’s published views of the economic advantages of inflation were clearly shared by both the Reichsbank and by the series of governments that presided over the period’ (Leaman, 2001, p. 70). On the question of intent, Dan Silverman (1994) sees a manifestation of it in the determination of Germany’s business and political leaders to protect the country from ‘any significant reduction in the standard of living, and, for this purpose, inflation was the only weapon available to a supposedly defeated nation’. Silverman adds: ‘The fact that inflation proved to be a dangerous and imperfect weapon does not in any way detract from the intent’ (Silverman, 1994, p. 1714). An analogy from criminal jurisprudence springs to mind about the accusation of fraudulent bankruptcy: Is it like the charge of ‘manslaughter’ as against ‘murder’? Is it like a case of accidental or unintended death, rather than one of criminal intent? As noted by Feldman and others, hyperinflation began in July 1922, several months before the Ruhr occupation; so the blame for the final currency collapse cannot be directly attributed to the occupation. It was the ‘flight from the mark’, both internally and externally, that started the hyperinflation when all hopes faded for future budget surpluses. Once started, it followed the momentum of its own self-propelling dynamics. Before that, on paper, at any rate, Germany was heading for bankruptcy; but the impression abroad was that the economy was doing well. The country was experiencing a ‘boom’ when other industrial

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countries were suffering from depressed economic activity and unemployment. German protestations that they were unable to pay did not go down well, at least in France. ‘No wonder’, wrote Sefton Delmer, ‘that the French were determined that Germany should not be allowed to get away with what they believed to be obviously fraudulent bankruptcy’ (Delmer, 1972, p. 75). The political leaders and the Reichsbank started the inflationary rollercoaster and put in place the mechanism that kept it going. As they started the process by themselves, they ended it when it suited their purposes – when, that is, they were faced with utter monetary chaos and the likely disintegration of the Reich. Stabilisation and monetary reform were put into effect without the rewards and incentives the leadership always claimed were denied them, but which they deemed to be prerequisites for permanent stabilisation – a permanent solution to the reparations problem and an international stabilisation loan. The ease with which stabilisation was set up, albeit by draconian measures and at some cost, caused many to wonder at the time why it could not have been done much earlier.

3.2 Poincaré and ‘the lure of the Ruhr’25 The gathering storm On 11 January 1923, Raymond Poincaré, the new French premier – exactly one year to the day since he took office – gave the order for troops to begin the occupation of the Ruhr.26 The Ruhr decision was the climax to the build-up of years of French frustration and disappointment at outside obstruction and little progress over disarmament, reparations, war debts and security. The series of post-Versailles conferences with Lloyd George resulted in progressive reductions of French reparation claims after constant pressure on France to help German recovery by making concessions, but given little in return. For Poincaré himself, and the right-wing majority in the Bloc National, events of the year 1922 offered no respite from ongoing national worries; instead, they increased the sense of failure of policy to achieve national goals over the past three years – a feeling of drift made worse by the challenges of 1922 threatening to hamstring national policy options ever further. On security, the year started badly with the disastrous Cannes conference and the resignation of Briand over concessions he was willing to make to secure a ten-year military guarantee from Lloyd George. What the British offered did not cover the demilitarised zone in the Rhineland and called for no Anglo-French military planning. It only


promised British military support in the case of German aggression against the soil of France and involving no British defence of the status quo on Germany’s eastern borders. In French opinion, this guarantee was one without teeth and therefore not good enough. What they wanted was a reciprocal security pact between equals backed up by a military convention. Briand lost favour with the power brokers in Paris (principally Poincaré, chairman of the powerful Senate foreign affairs committee and President Millerand) over his dealings with Lloyd George at the end of 1921, and shortly afterwards at Cannes in early January 1922. He seemed to be playing second fiddle to Lloyd George most of the time. They were not satisfied that Briand was doing enough to safeguard vital French interests on the matters under discussion, namely, a reparations moratorium for Germany and arrangements for Lloyd George’s projected reconstruction conference at Genoa. On reparations, it was felt that Briand appeared to be conceding too much by agreeing to a partial moratorium on cash payments, without adequate guarantees. The Wirth government requested the moratorium on 14 December 1921 after Germany failed to get a loan from the Bank of England. Apparently, the British government blocked or prevented the loan, while simultaneously urging Germany to request a moratorium.27 Sally Marks claims that ‘both moves [were] intended to force Anglo-French talks on reparations aimed at sharp reductions’ (Marks, 1991 p. 74). When rumours circulated in Paris that, indeed, a reduction in German reparations was being discussed at Cannes there was immediate anxiety in Paris that Briand was going too far. President Millerand despatched urgent telegrams to Briand warning him not to give in or concede anything.28 The denouement is well known. There were press leaks of Millerand’s telegrams and photographs of Lloyd George giving an attentive Briand a golf lesson, Briand’s hurried return to Paris and his abrupt resignation (12 January) in a short speech to the Chamber of Deputies, ending with the famous words: ‘Voilà ce que j’ai fait. Voilà où nous en étions quand j’ai quitté Cannes. D’autres feront mieux’29 (‘That’s what I’ve done. That’s where we were when I left Cannes. Others might do better!’). Three days later, Millerand appointed Poincaré to the premiership. In his last magazine article of 15 January commenting on recent events, Poincaré wrote that the most important factor telling against Briand was that people had the impression that ‘France was just tagging along behind Great Britain’ (Roth, 2000, p. 401). Carole Fink (1984, p. 41) comes to the same conclusion. Lloyd George, she wrote, ‘bullied Briand beyond the latter’s capacity to make concessions and offered too little in return’.

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Lloyd George ‘asked France to surrender on many key issues in order to receive a simple guarantee against unprovoked aggression.’ Failure at Genoa One of the concessions allegedly made by Briand related to arrangements for Lloyd George’s forthcoming Genoa conference at which German and Soviet delegates would be represented on an equal basis to that of the Allies. At London meetings in December 1921 with Rathenau, Loucheur and Briand, Lloyd George spoke enthusiastically about his plan for a vast scheme of European reconstruction, involving the opening up of the Russian market spearheaded by German technology transfers, trade and investment. The disquiet felt by Poincaré and even by some of Briand’s cabinet was that the reconstruction conference might provide Germany with a platform for revisionist demands, especially on reparations, and allow Soviet Russia to claim official recognition and obtain Western credits without first agreeing to the repayment of prewar and wartime tsarist debts and compensation for the nationalisation of foreign property in Russia.30 They judged the conference premature, attendance by all on an equal footing as tending to blur the distinction between victors and losers and straining relations among the Allies. People like Poincaré, Louis Barthou and Jacques Seydoux asked: why should reconstruction start with the Soviet Union and eastern Europe while parts of western Europe were neglected, still struggling alone to rebuild their devastated regions and shattered economies without concerted or joint efforts. The new French government agreed to the conference on condition that reparations, disarmament and the Versailles Treaty were excluded from the agenda. Determined to realise his vision, Lloyd George went ahead with the conference of 34 countries, which opened on 10 April 1922 and lasted for six weeks. Lloyd George had signed an Anglo-Soviet trade agreement on 16 March 1921. He wanted to build on that. With British unemployment at 2 million, social unrest at home, export growth at a standstill, no progress on reparations, European reconstruction hampered by the deepening German financial crisis, Lloyd George looked for a breakthrough with the Genoa conference. He saw Soviet Russia as the key to solving Europe’s economic, debt and security problems. With the aid of Germany as a middleman, the pre-war pattern of trade in Europe could be restored through a western consortium or syndicate for organising East-West trade and investment. The exchange of Russian raw materials for German industrial goods and capital equipment would be the catalyst for a continuing process of mutually beneficial trade, expanding


like a ripple effect to revitalise the whole European economy, including Britain. Part of the profits from German exports to the East could be devoted to the payment of reparations, thereby providing collateral for French reconstruction loans, relieving at the same time Franco-German tension and enhancing security. The British prime minister also hoped that success at Genoa would bolster his own weakened political position and that of his coalition government. But already, a month before the opening of the conference, Lloyd George’s plan suffered a serious setback. The United States announced its refusal to attend the conference. The American boycott meant that the inter-Allied debt problem was now added to reparations and disarmament as excluded items for discussion and negotiation. This narrowing of the agenda left little of practical concern to most participants, but made way for a public rapprochement between Germany and the Soviets in pursuit of their immediate interests. The Harding administration in the United States saw Europe’s real problems as political and not economic, as Lloyd George pretended. Schuker says the US government considered the Genoa conference ‘a sideshow – a misconceived British conjuring trick to deal with the superficial features of trade depression on the Continent before agreement was reached on the political prerequisites for European economic reconstruction along sound lines’ (Schuker, 1991, p. 95).31 The knock out blow followed a week after the start of the conference. That was, of course, the famous ‘coup de surprise’: the treaty signed by Germany and Soviet Russia on Easter Sunday, 16 April, at the nearby seaside resort of Rapallo. The treaty provided for mutual recognition by both Powers, the cancellation of all financial claims, including reparations, the granting of mutual most-favoured-nation tariff treatment and close economic cooperation that continued until the end of the Weimar Republic in 1932–3. The Americans referred to Genoa as a conjuring trick. Zara Steiner (2005, p. 213) adds to the metaphor by saying that with the failure of the Genoa conference, the ‘Welsh Wizard’s bag of tricks was almost empty’. Lloyd George never regained his grip, and six months later (19 October 1922) he was forced to resign in the wake of the Chanak crisis.32 The fallout from the ‘bombshell’ of the Rapallo treaty added to French insecurity. It was feared that the ganging up by the two pariah states could become the nucleus of a coalition of discontented states against the Versailles Treaty. But for all its immediate, ‘shock’ effects in heightening tension, Rapallo and the failure of Genoa made little difference one way or the other to the grim realities facing Europe for the rest of the crisis year, 1922. The problems of reparations, inter-Allied debt and security did not go away. They remained as intractable as ever.


The Balfour Note and reparations During the year, the war debt issue returned with a vengeance. The Americans demanded repayment by the Allies of all war debts owed the United States to be discharged over 25 years at a minimum of 4.25 per cent interest. The Republican-controlled Congress set up a Foreign Debt Commission (February 1922) and called for the negotiation of repayment schedules (or funding agreements) under these terms. The Balfour Note of 1 August in reaction to the American demand did not help. In fact, it was another irritation. It stated that Britain would seek to recover from all its European debtors (including Germany) only as much as the United States required from Britain.33 In effect, since Germany was paying next to nothing in cash reparations, Britain wanted the European Allies to fund whatever amount Britain paid to the United States – since Britain had already abandoned any hope of ever recovering substantial reparations from Germany. That proposal had one logical effect – to make France redouble its efforts to get sufficient reparations from Germany to pay its Allied war debts (as well as to cover the cost of restoring the devastated regions), since there was no sign that the United States would reduce or cancel the French debt. Conversely, the less forthcoming from Germany, the more of the British debt France would have to repay. But in any case, for France, the payments due from Germany were much greater than the French debt to Britain; and since the time of the peace talks, France insisted that war debt payment must follow, or wait upon the receipt of reparations. The Balfour Note came on top of mounting pressure on France to make bigger concessions on German reparations. After paying the first billion marks in the summer of 1921, Germany claimed its inability to pay the amounts demanded under the London Schedule and began asking for relief on cash payments. On 21 March 1922, the Reparations Commission confirmed the first partial moratorium from payments due on 15 January and 15 February 1922. The London Schedule of Payments was temporarily suspended on conditions that the German government implement specific budgetary and financial reforms by 31 May 1922 and make reduced payments of 720 million GM in cash and twice that amount in deliveries in kind, distributed evenly throughout the year. If the stipulated reforms were not implemented by 31 May 1922, the partial moratorium would be suspended and the London Schedule would be restored from 15 June 1922. If, in addition, the reduced, staggered cash payments were not forthcoming, the Reparations Commission could then declare Germany in default. The German government initially rejected these conditions on 7 April. However, fearing that default could


lead to Allied occupation, Berlin relented and agreed to the Reparations Commission’s requirements at the end of May, in the expectation that a foreign loan might be approved by the recently appointed Bankers’ Committee. The reforms made by the Wirth government were merely cosmetic and a sham; but they were just enough to enable Germany to escape the 31 May deadline. The moratorium held, and the London Schedule was kept in abeyance until the end of 1922. Since the beginning of 1922, the British believed that it was impossible for Germany to fulfil the London Schedule of Payments. They wanted it scrapped and replaced by a new, affordable plan, involving a reduction of the reparations debt within Germany’s ‘capacity to pay’. For the present, Lloyd George and Sir John Bradbury, the British delegate to the Reparations Commission, positively encouraged the Germans to demand a moratorium on payments, and they strongly backed the meeting of the Bankers’ Committee to enquire into the conditions for a foreign loan to Germany. An extended moratorium was to provide a breathing space for Germany to put its financial affairs in order. That would require the assistance of a substantial international loan to stabilise the currency and provide for the resumption of a much lower level of reparation payments. A group of international bankers (known as the Bankers’ Committee) meeting in Paris at the end of May under the auspices of the Reparations Commission gave up within days trying to arrange an international loan for Germany (Bergmann, 1927, pp. 130–8). Such a loan was only possible, reported J. P. Morgan, the American member on the Committee, on condition of a substantial reduction in the German reparation debt and an extended moratorium. Poincaré would only consider this if an equivalent reduction in French war debt (from either Britain or the United States) and acceptable guarantees were promised. Morgan tried to persuade Poincaré to accept a reduction in the reparations bill with the argument that such a move would soon induce the United States to reduce its own war debt demands. But, for Poincaré, ‘this was a leap in the dark’ that he refused to make, according to Denise Artaud, in view of the recent US Congressional decisions (Artaud, 1998, p. 95). Why should France give up the right to reparations, but still continue to shoulder the burden of an enormous external war debt, plus the huge costs of repairing her war-devastated areas? Morgan’s report was exactly the position of British and American bankers and, perhaps, also that of British and German political leaders. The latter were not unduly discouraged by the Committee’s decision to turn down a loan to Germany, since it expressed publicly the general recognition of Germany’s need

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for an extended moratorium and sharp debt reduction. In fact, as Steiner says, ‘the Germans ... were actually relieved’ by the Bankers’ outwardly negative, but really favourable response (Steiner, 2005, p. 214). Sally Marks agrees, since ‘German insistence that payment was possible only through loans was primarily designed to reduce the bill’ (Marks, 1991, p. 68). The Bankers’ report ‘was a blow to the French position’, says Feldman, ‘and it was meant to be.’ In fact, the ‘initial draft of the committee report was so anti-French that it had been toned down’ (Feldman, 1993, p. 442). The Bankers’ Committee reported on a single, narrow question: what were the prospects of an international loan for Germany? Perhaps, if they were given a wider remit – going beyond the monetary dimension – to look at the actual state of the German economy, they would have found an economy in a far better state of health than that indicated by a single test of eligibility for a loan. They would have seen a Germany financially ruined, but economically powerful. By 1922, the country’s industrial potential was approaching that of 1914. Germany was the world’s second largest economy and third largest international trader to the rest of the world (Webb, 1987, p. 425). With a prosperous industry and hardly any unemployment, Germany was Europe’s strongest economy, despite mounting financial chaos. Germany experienced a boom and strong economic growth during 1920–22. By the autumn of 1921, ‘German exports were booming and leading the German economy to a quick and total recovery at the expense of the Allies’ (Webb, 1987, p. 431). However, Germany’s import demand increased more rapidly than exports over the period, pushing the trade balance to a small deficit in 1922. Unemployment averaged 1.5 per cent in autumn 1921, and in the summer of 1922 there was full employment in Germany, with unemployment remaining under 1 per cent from April to September.34 And, of course, there was little or no internal debt to speak of. In fact, German firms and individuals built up sizeable credits abroad in the shape of a reserve of capital in foreign money. Yet, it was the country seen by British leaders to be incapable of paying its debts to the Allies – on account of the camouflage of financial chaos. The failure of the Bankers’ Committee set off an immediate flurry of adverse speculation against both the mark and the French franc in the foreign-exchange market. Politically, it widened the divergence between London and Paris, already under way, over war debt settlement with the United States and German reparations. The franc began a period of weakness on the foreign exchanges, which saw it fall by 20 per cent between June and December 1922 (Artaud, 1998, p. 95). The dollar rate


for the mark, which was 278 on 8 June rose to 313 within a week, and on 31 July it stood at 670 (Feldman, 1993, pp. 443, 450). The assassination of Germany’s foreign minister, Walther Rathenau, in his open car on the streets of Berlin by two right-wing gunmen on 24 June accelerated the mark’s decline. There was no chance for an early stabilisation of the mark and inflation intensified; for ‘now the Frankenstein of inflation, which the German government had created for their aid, refused to respond to control’ (Wheeler-Bennett and Latimer, 1930, p. 48). Fulfilment crisis Meanwhile, by mid-summer 1922, Germany’s commitment to the moratorium’s obligations evaporated. Since March 1922, Germany made only token cash payments and, in fact, paid only a half (435 million GM in all) of the reduced cash payments it pledged itself to make. Finally, in June 1922 Germany stopped all cash payments (Marks, 1978, p. 238, n. 26). But Berlin also steadily defaulted on coal and timber deliveries, despite constant adjustments by the Reparations Commission. In December 1922, the German government actually stopped a reparations shipment as an act of defiance to force a revision of reparations; and there were several other incidents of obstruction. Still, there was no let up. Six months after agreeing to the last Allied moratorium terms, Germany made (12 July 1922) a third request for full relief on the balance of cash due for 1922 and for the next two years, citing the sharp fall of the mark and accelerating inflation. Wirth succumbed to the fierce nationalist agitation against reparations and fulfilment, even adopting their slogan: ‘Erst Brot, dann Reparation’ (‘Bread first, then reparations’).35 On 7 August 1922, a conference was convened by Lloyd George (at French request) to consider this latest demand by Germany (in a note to the Reparations Commission) for an extended suspension of cash payments. Poincaré responded by repeating his demand for tangible or physical ‘guarantees’ before granting a moratorium. The examples he suggested pending the resumption of payments were 1. Control of the German budget and the Reichsbank’s discounting policy. 2. Handing over of Prussian state mines and forests to the Reparations Commission. 3. The sequestration by the Reparations Commission of 60 per cent equity stake in chemical and dyestuff companies on the left bank of the Rhine.

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4. Direct payment to the Guarantee Committee of receipts from German customs duties. 5. The re-establishment of a customs cordon along the right bank of the Rhine to the east of the occupied zone. Poincaré was concerned, given his lack of trust in German good faith, that a long moratorium without the strictest conditions would mean the end of reparations. That was why the Allies needed tough, cast-iron guarantees in place to compel Germany to resume reparation payments after an extended moratorium. Despite the support of the Belgian and Italian leaders and some moderation of the French demands, Lloyd George refused to consider the French requests, except for German budgetary and financial controls and the collection of customs dues. Poincaré originally intended to put before the conference a plan for the structured reduction of reparations and war debts. The plan called for the reduction of German reparations to 50 billion GM – the total of the A and B bonds of the London Schedule of Payments – and the activation of the C bonds for the settlement of war debts among the Allies. But this scheme was stymied by the Balfour Note, published a week before the opening of the conference. The divergence between the latter and the French plan was too great, both in principle and purpose, that Poincaré withheld it rather than risk an outright rejection at the conference. Instead, he came to the August meeting with his hastily worked out scheme for ‘productive pledges’ (‘gages productifs’), which he must have known would be unacceptable to the British. Anglo-French differences about how to deal with Germany’s moratorium request proved irreconcilable, and the conference broke up without coming to a decision. Poincaré went away ‘empty handed but with free hands’, deciding to act alone if necessary (Jeannesson, 1998, p. 95). With the question of German payments for the remaining months of 1922 unresolved, the matter was referred back to the Reparations Commission. After difficult negotiations, the Belgians – to whom all the outstanding cash payments were due, on account of their priority – agreed on 31 August to accept IOUs in lieu of ready cash for the next four months. The German IOUs were in the form of six-month Treasury certificates maturing in early 1923, guaranteed by the Reichsbank and the Bank of England. The deal, which meant that Belgium had to wait six months for the money, amounted to an informal or ‘disguised’ moratorium until 15 January 1923. The fall of Lloyd George on 19 October made no difference to Anglo-French discord over reparations; and partly as a result of that


the Franco-German ‘cold war’ intensified. German defiance in the face of French threats increased in the autumn of 1922. Joseph Wirth resigned and was succeeded on 22 November by Wilhelm Cuno, managing director of the Hamburg-America shipping line (HAPAG). Cuno formed a ‘cabinet of experts’, a non-party ministry of businessmen – a Geschäftsministerium. The change of government signalled a change in strategy from Erfüllungspolitik to Katastrophenpolitik – a posture of defiance, and even the adoption of a confrontational approach (Peukert, 1992, pp. 55–6). The new German cabinet made it clear that they would not continue reparation payments without a sizeable reduction of the London Schedule of Payments. Earlier, on 14 November, the German government requested relief for three or four years from all payments other than deliveries in kind that could be funded by the German budget.36 Cuno followed this up with an offer of a payment of 20 billion GM to be raised by an international loan. Cuno then suddenly proposed late in December (on the eve of an Allied conference in Paris) a Rhineland security pact in an obvious effort to forestall a Ruhr occupation. No overall plan accompanied this suggestion (Cmd. 1812 [1923], pp. 68–70). The request for a moratorium was noted, but not discussed, at the Allied conference in London (9–11 December 1922), which then adjourned until January 1923. The other two German offers were rejected. Bonar Law was pessimistic about finding a solution to the reparations question acceptable to France, and took Poincaré’s occupation threats very seriously. ‘We having together knocked Germany down, one of us is going to kick her while she is on the ground, and the others will let her’, he complained to Neville Chamberlain.37 Dreading the chaotic consequences of a breach with France, Law played for time ‘by telling his Allies just enough to raise their hopes of British cooperation in their efforts to squeeze the reluctant Germans, while stopping short of any pledge’ (Adams, 1999, p. 345). The ploy worked in persuading Poincaré to meet again in Paris in the New Year. The London Schedule, in suspension until the end of 1922, would come into effect again in the next three weeks. 15 January was the date when the existing moratorium expired and Germany’s next payment was due. Without any payment, Germany would be in default – unless there was some agreement to replace the Schedule. Mésentente Cordiale The long-expected crunch came at the Paris Allied conference (2 January 1923 at the Quai d’Orsay), called to agree a new reparations plan to replace the suspended London Schedule. This latest in the series of

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Anglo-French meetings proved how right the French pessimists were who predicted the end result – the whittling down of reparations to practically nothing. Indeed, the British pushed a non-negotiable plan for a four-year moratorium on German cash payments without guarantees, which, to all intents and purposes, would have meant the end of reparations. For some time, British financial and government circles knew (or suspected) that the Germans were deliberately destroying their currency to avoid reparations.38 Something had to be done; but what? For the British, the choice was obviously between acquiescence in the status quo and coercion. Acquiescence was a non-starter. Poincaré, across the Channel, was huffing and puffing about productive pledges and going into the Ruhr to get them. To put off the appearance of that worse case scenario, the British government tried what they did the last time, early in 1922. They encouraged the Germans to demand an extended moratorium, a pause, to give Berlin a chance to put matters right. But London was unwilling to ask for stringent guarantees in return. The British were afraid that the imposition of sanctions beyond external financial supervision would alienate the Germans. They might refuse; in that case, a Ruhr occupation would appear as truly the only option – a disastrous course that must be avoided at all costs. The trick, for Berlin and London, was to put together a package sufficiently attractive to get Poincaré to agree to a long German moratorium and to drop his plans to seize gages in the Ruhr. That was the Bonar Law plan – the Anglo-German solution for the latest and most serious reparations crisis. The sweetener in the plan (and Britain’s sacrifice) was the offer of a sizeable reduction and, somewhat grudgingly, even cancellation of the French war debts to Britain; for as Bradbury advised Bonar Law, ‘the object of the plan is to do a deal ... on inter-allied debts as cheaply as possible.’39 But such parsimony meant, says Arthur Turner (1998, p. 115), that the Bonar Law plan suffered from a basic defect of ‘offering too little to achieve its purpose.’40 The British plan, Bonar Law tamely admitted, was an attempt ‘to make the best of a bad job’ (Cmd. 1812 [1923] p. 138). The plan itself was a bad job.41 It was notoriously complex and obscure involving intricate trade-offs of financial claims and counterclaims between the Allies that left everyone discontented with the redistribution of financial burdens resulting from the plan’s arrangements. The plan was ineptly prepared and clumsily presented; and worse, was initially offered on a ‘take it or leave it’ basis. The reparations C bonds would be cancelled, thereby reducing the total German debt (including occupation costs) to 50 billion GM (nominal) – in present value terms, a debt of around


37 billion GM. If Germany was able to pay immediately through an international loan, the debt’s present value would fall to 25 billion GM. Germany would pay nothing for four years; then 2 billion GM annually for four years, followed by 3.5 billion GM annually after ten years, to be financed by a complicated series of bond issues. During the moratorium period, Germany would stabilise the mark, balance the budget and accept financial supervision by a new, Foreign Finance Council sitting in Berlin. The Council would be chaired by the German Finance Minister and would replace the existing Guarantee Committee of the Reparations Commission. The Reparations Commission would thus be reduced to a mere auditing and accounting body, shorn of its executive powers – at least until the end of 1928, but probably for some indeterminate time afterwards. Britain was to be given veto powers over the imposition of any sanctions (for example, the seizure of pledges) in case of future German default, since such punitive measures would in future require a unanimous Allied vote. Belgium would have to give up its priority claim on reparations in exchange for cancellation of its war debt to Britain. The British plan offered France and Italy financial inducements, such as partial war debt relief, but with tight strings attached. The conditions were that France and Italy must renounce all claims to the gold they had deposited at the Bank of England during the war as security for British loans – 1.1 billion GM by France and 500 million GM by Italy. ‘This was a rather brutal method of reminding these countries of their financial indebtedness to Great Britain’, notes Hermann Rupieper – a provocation that contributed to the failure of the conference (Rupieper, 1979, p. 74). In addition, France and Italy were to transfer to the British government bonds to the value of 2.6 billion and 1.5 billion GM, respectively – nearly the total of the Belgian war debt. France was to write off the Italian debt owed to her (around 1.5 billion GM). The plan effectively altered the Spa percentages. The French share of reparation receipts was to be reduced from 52 to 42 per cent, while the British percentage of the reduced (absolute) German liability was to be maintained, since Britain would not consent to give up its reparation claims on Germany. However, as Bonar Law claimed, Britain would end up getting less from Germany and the European Allies than the amount she would still have to pay the United States for war debts. There was little evidence of the striking generosity from Britain that Poincaré expected, for the British plan fell far short of complete and unconditional cancellation of Allied debt to Britain and offered no inducement to moderation on France’s part by, for example, agreeing to a priority for the repair of France’s devastated region.

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According to Denise Artaud, the British plan ‘would have allowed Britain to cover approximately 70 per cent of its war debts, while providing only 55 per cent of the sums France had already spent on reconstructing its devastated regions’ (Artaud, 1998, p. 97). Zara Steiner (2005, p. 220) comments that the British proposals, drawn up by Bradbury and the Treasury, ‘reflected their distrust and dislike of the French and appeared deliberately provocative.’42 Bonar Law, for his part, regarded Poincaré’s position as contradictory and self-defeating. ‘The French’, he declared to a cabinet colleague, ‘are trying to cut beef steaks from the cow which they would like also to milk’, and emphasised that the British could not go along with anything that would ‘help to produce disaster in Germany and rob the British taxpayer of an ultimate indemnity from Germany.’43 This declaration was perfectly consistent with the current British position: turning a blind eye to German obstructionism while insisting that Germany must pay to the limit of her capacity. In fact, Law was convinced that the reparations clauses were untenable. The Bonar Law plan, therefore, amounted to a revision of the Versailles Treaty and abandonment of the London Schedule of Payments. It would have meant the practical end of reparations.44 First of all, ‘France objected to awarding the requested moratorium as a bad conduct prize’ (Marks, 2003, p. 53; Maisel, 1994, p. 122). But more substantially, Poincaré would not agree to give up tangible pledges in return for partial cancellation of French debts to Britain. He desired no military occupation, but insisted on strictly economic sanctions and control of trade. He had his eye on the German coal tax (worth more than total reparation deliveries in 1922), customs receipts in the Rhineland, coal stocks in the Ruhr (estimated as being worth a billion GM a year), as well as strict control over German finances. For the French government, partial debt cancellation would not provide immediate cash. It would do nothing for the current government budget. It would not bring in revenue, nor relieve the deficit and pay for reconstruction. Without material pledges there was no guarantee that there would be a resumption of German payments after the moratorium. Instead of ‘promises’, Poincaré wanted to turn the reparations claim into ready cash or coal. The British reparations reduction/debt cancellation package was the final straw for Poincaré. The result was deadlock. Bonar Law ‘unnecessarily offended Belgium and Italy, sending both to France’s side’ (Marks, 2003, p. 55). But without Britain, there was no effective Allied unity; yet, reluctantly, Poincaré was prepared to go it alone. Elspeth O’Riordan (2001, p. 26) agrees that the British proposals, instead of seeking an Allied consensus, ‘precipitated the Ruhr occupation by provoking not only France,


but also Belgium and Italy.’ In the end, writes John Keiger, ‘Britain was as much to blame as Germany for finally goading Poincaré into occupying the Ruhr’ (Keiger, 1997, p. 297). Bonar Law’s plan failed to impress. But it is probably true to say that no British government could have done better. The conference ended abruptly on 4 January, and a week later French and Belgian troops were in Essen, at the heart of the Ruhr.

3.3

The Ruhr occupation

A couple of days before, by a vote of 3 to 1 (with Britain opposing France, Belgium and Italy) the Reparations Commission had declared Germany in deliberate default on coal deliveries, having already on 26 December 1922 declared a default on timber and telegraph poles. Notice of voluntary default was necessary to legalise direct action. Since Germany was still protected by a temporary moratorium on cash payments until 15 January 1923, default had to come about on payments in kind. For some time, a Ruhr occupation was threatened. The first threat was made jointly by the Allies at the Spa conference in July 1920. Germany met the Allies’ demand for specified coal deliveries, so the threat was not carried out. The following year a Ruhr occupation was accepted in principle by Lloyd George and led to the joint Allied occupation of Düsseldorf at the mouth of the Ruhr on 8 March 1921. Economic sanctions in the form of a customs cordon between the Rhineland and the rest of Germany was set up for the collection of tariff revenues45 – lifted on 1 October after Germany accepted the London Schedule of Payments on 11 May 1921 and the Wirth cabinet adopted a policy of fulfilment of treaty clauses (Erfüllungspolitik). France continued to threaten ‘direct action’ – that is, the use of force – in the Ruhr for the previous six months or so. For many, therefore, it was no surprise when it took place; but curiously, Berlin was caught unprepared. The Cuno government, believing up to the last minute that Poincaré would back down, made no plans to deal with the occupation. Germany reacted with fury and ‘a scream of indignation’ (Eyck, 1962, p. 233). For a little while, the German people seemed solidly united around their government, sinking their political and social differences as if the Burgfrieden, or the spirit of August 1914, had returned.46 In protest, the Ruhr workers and officials spontaneously went on strike, refusing all cooperation with the invaders. The German government supported the Ruhr workers’ action by a call (on 19 January 1923) for passive resistance (passiver Widerstand – a campaign of civil disobedience – throughout the whole of the occupied territories (Ruhr and Rhineland)). Germany suspended all reparation payments to France

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and Belgium. The government decided to aid industry to keep production going by a package of financial compensation for lost sales and for forced deliveries to the occupiers. As factories and mines gradually shut down, Berlin stepped up the level of compensation to industrialists for ‘unproductive wages’ from 60 to 100 per cent, in addition to financial credits for lost production and profits. In effect, the government ended up paying the wages of idle workers and the salaries of railway workers and officials expelled from the occupation zone by printing more money (Rupieper, 1979, p. 105). Expecting, or rather, hoping for little popular resistance the two occupying powers felt they could just send in some engineers accompanied by military escorts to collect the coal that would be dug by German miners, ready for shipment to France and Belgium. Instead, they were forced to work the mines and run the railways themselves. About 70 French and Belgian engineers and technicians (including two Italians), formed a specially appointed industrial commission, the Mission Interalliée de Contrôle des Usines et des Mines (MICUM) to take control and supervise the principal mines and factories in the area. The work of the commission was severely hampered to start with because the Germans removed the technical records and key members of the technical staff of the Coal Syndicate (Kohlensyndikat) from Essen to Hamburg on 9 January 1923, two days before French and Belgian troops moved into the Ruhr. The Syndicate was the private-sector agency responsible for the distribution of the Ruhr coal output. Deprived of technical manuals, production records, inventories of coal stocks and their location, MICUM staff had to go out (from their headquarters at the Kaiserhof hotel just outside Essen), escorted by soldiers, to find the information they lacked. Passive resistance and non-cooperation made their task more difficult, not least, because they were initially only protected by a small force of around 21,000 soldiers – three French divisions and a Belgian battalion. The French brought in more troops – three new infantry divisions, bringing the total to 45,000 – and extended the area of occupation eastward to Dortmund. The occupying authorities set up customs barriers – effectively, a blockade – which sealed the Ruhr off from the rest of Germany. In the first place, the barrier was designed to confiscate the customs revenue in the occupied territories. The receipts were allocated to a special Franco-Belgian expense fund (Caisse de comptabilité des gages) to pay for occupation costs. But the customs cordon soon became an economic instrument to control the trade into and out of the occupied territories. A system of export-import licences for the exchange of merchandise between the two parts of Germany was put in place. Exports


of coal and industrial raw materials from the Ruhr were banned, and an export duty of 10 per cent was imposed on all other goods going to unoccupied Germany. In addition, a regime of discriminatory tariffs was devised, providing preferential treatment for imports into the occupied territories from France and Belgium. The customs cordon (erected as early as February 1923) deprived unoccupied Germany of essential fuels and raw materials (coal, coke, steel, pig iron, etc.). The removal of un-cooperative workers and their replacement with Rhinelanders started early with the expulsion of 8500 Prussian bureaucrats, police officers, railway and postal workers. In total the number evicted from the occupied zone could have reached 145,000 (including families). There was, no doubt, a good deal of real suffering and deprivation, even impoverishment, in the occupied territories. There were food shortages and cases of malnutrition caused by the runaway inflation and the disruption of trade. Farmers were unwilling to exchange produce for worthless money. Thousands of undernourished children (perhaps as many as 300,000) were evacuated for the sake of their health to the non-occupied part of Germany during April–May 1923 (Fischer, 2003, pp. 108–35).47 Sharing the burden of a localised catastrophe – such as the Ruhr children health scare – and spreading the misery among the wider national community can make very effective propaganda. No doubt, the German government, through the Reichszentrale für Heimatdienst (Reich Central Office for Home Affairs), made good use of it to strengthen national solidarity and the will to resist the invaders. According to Marks, one reason why the resistance was prolonged was because Poincaré lacked brutality and was not ruthless enough. He failed to cut off the flow of money and food and created soup kitchens for the Ruhr’s poor (Marks, 2003, p. 57).48 Relief funds from Berlin, distributed clandestinely by employers and private associations ‘enabled an idle workforce to continue buying food, which the French still allowed freely into occupied Germany’ (Liberman, 1996, p. 94). In the propaganda war, the French response was no match for the extraordinarily effective German effort in turning world opinion, particularly British, American and neutral opinion against the French. A potent weapon in the armoury of German propaganda was the presence of black colonial troops (African and Arab) among the occupying forces. These soldiers were portrayed as routinely indulging in acts of wanton brutality (looting, vandalism, senseless violence and rape) against the civilian population of the occupied territories. The propaganda campaign was at its most shrill and lurid when depicting the behaviour of French black soldiers as a racial insult and menace to innocent German


women.49 In the Ruhr itself there were no colonial troops, except for 200 sent there by mistake and promptly withdrawn, ‘having been in the Ruhr 48 hours without incident.’50 The reckoning The Ruhr struggle (or Ruhrkampf ) became a showdown, a crucial test of will and strength. Inevitably, German civil disobedience and resistance took the form of violent opposition, attacks on occupation forces and sabotage of bridges and railways by clandestine paramilitary groups or commando units, often linked to the Reichswehr. The French and Belgians responded with coercive measures and reprisals. Military tribunals dealt with acts of sabotage. Conan Fischer (2003, p. 165) points out that ‘the extent of violent sabotage [by right-wing paramilitaries] was limited’. Striking miners and other workers were killed in clashes with occupying troops. Mine owners and other recalcitrant individuals suffered from arrests and harassment, as well as fines and imprisonment. Fatal casualties numbered 132 Germans and 20 occupation soldiers (Liberman, 1996, p. 95). Of eleven death sentences imposed by military tribunals of the occupation authorities, only one was actually carried out – that on Leo Schlageter, convicted of sabotage and executed on 26 May 1923, later acclaimed by the Nazis as a völkisch hero of resistance. As Berlin resorted to ever more devious means to funnel immense quantities of paper marks into the Ruhr to pay non-productive or striking workers, the occupation authorities tried to intercept the traffic by seizing consignments of notes at banks and at customs border posts. These contraband measures, however, were never really very successful. The French and Belgians managed to seize only a small fraction of the paper marks smuggled into the occupied area (Liberman, 1996, p. 94). By the spring of 1923, however, resistance was crumbling and France was tightening its grip. Passive resistance was hurting Germany more than France. The German government lost the tax revenues as well as the customs receipts from the occupied territories, but continued to finance the resistance to the tune of billions of vastly depreciated paper marks per month – equivalent to something like 40 million GM a day. Instead of imposing extra taxes in the unoccupied part of Germany to finance the resistance, the government kept 2000 presses running night and day printing banknotes of ever more astronomical denominations and removed all restraints on public spending. On 5 January 1923 the dollar exchange rate was 8700. A month later it fell to 42,250 marks (Feldman, 1993, table 37, p. 637). Within the space of one week, at the end of July, the Treasury paid out 530 billion paper marks to


support the conflict (Fischer, 2003, p. 80). One estimate puts the financial cost to the German government during the first six months of the occupation at 827.6 million GM – that is, not counting the real cost of lost output from the occupied areas and the forfeit of tax and customs revenues (Liberman, 1996, p. 94; Nicholls, 2000, p. 102). Another estimate (on 23 October 1923) by Maurice Frère, a Belgian financial adviser at the Reparations Commission, puts the total expenses incurred by the Reich between January and September 1923 at 6.4 billion GM. The cost of passive resistance alone absorbed a quarter of the national budget (Jeannesson, 1998, pp. 179–80). As a result, ‘the cost to the German government ... was far higher than the sum of reparations from 1919 to 1923’ (Lee and Michalka, 1987, p. 46)51 – particularly if one reckons the degradation of the productive system brought on by the monetary collapse. During the first few months the occupiers were only able to collect very small quantities of coal and coke lying at the pitheads. The German historian, Karl Dietrich Erdmann notes that in the first six months of the occupation, ‘less coal and coke was delivered [to France] than in the last ten days before occupation.’52 The German iron and steel industrialists stopped importing minette and French and Belgian pig iron, causing a sharp, but temporary contraction of Lorraine industry. The French iron and steel industry suffered from the shutting off of coal and coke supplies resulting from the German ban on shipments, strikes in the mines and railway, and by the expense of importing costly British coal. British coal was relatively expensive for French buyers, not only because British coal merchants increased their export prices, but also on account of the weakness of the franc which raised the cost of British coal substantially. Whereas, before the entry of troops, 114 blast furnaces were operating in France, during February and March only 74 kept their fires burning owing to lack of supplies.53 In the meantime, however, the occupying forces had established the Franco-Belgian Régie on 1 March 1923 with the help of over 11,000 specially recruited French and Belgian railway workers and those offering their services as volunteers. The Régie took over the running of the railways, thereby easing somewhat the problem of getting coal and coke deliveries out of the Ruhr. By June the French, for example, were collecting around 40 per cent of their reparation quota of coal compared with 5 per cent three months earlier (Trachtenberg, 1980, p. 304). Every ton of coal collected in the Ruhr made it unnecessary for the French to import a ton from Britain. By that time also, MICUM was taking over and running more mines and factories with the help of Polish and other workers.


On the German side, however, the resistance was having a devastating effect. Deprived of resources (such as coal, steel and pig iron) from their industrial heartland, businesses in the unoccupied territory could not function. There were shutdowns and widespread laying-off of workers. The economy ground to a standstill. The financing of the resistance, including relief efforts, became unsustainable. The already accelerating inflation spiralled out of control into hyperinflation during the summer. Food shortages became more widespread. There was the danger of a revolutionary situation developing in Germany. The Reich government lost control of events in the Ruhr and more generally faced internal subversion from the right and the left. The French and the Belgians were gaining the upper hand. The Ruhr industrialists realised that France could hold out longer than Germany. By mid-summer 1923 the inactivity of the minority Cuno government in the face of the deteriorating economic and social position and the growing misery of the working classes led to the so-called Cuno strikes and riots throughout the occupied territories, and even in the rest of Germany. ‘It is ironic’, says Edmund Clingan, ‘that this “cabinet of experts” turned out to be one of the most inept, and that Germany’s economic collapse occurred under a man generally regarded as a successful business leader’ (Clingan, 2001, p. 34).54 When the Reichstag met in the first week of August, the failure of Cuno’s domestic and diplomatic initiatives was obvious. On 11 August, the Social Democrats withdrew their support from Cuno, who resigned and was replaced as chancellor by Gustav Stresemann, leader of the German People’s Party (DVP) on 13 August. Stresemann formed a ‘grand coalition’ government (excluding only the communists and extreme right) with himself as foreign minister. The passive resistance eight-months’ campaign was called off unconditionally by the new government of Stresemann on 26 September 1923. A day earlier, at a meeting of the Minister-Presidents of the German States, Stresemann declared that Germany faced ‘a total collapse of the whole economy’. He referred to the increasing demoralisation in the occupied territories, but insisted on the need to end the subsidy for the resistance campaign that had already cost the Reich 8000 billion in paper marks.55 Resistance expenses were then running at a rate equivalent to 40 million GM a day. Payments to striking workers and officials stopped, and public expenditure suffered deep cuts. These were necessary to stabilise a new currency, the Rentenmark, and to support a package of monetary reforms to halt the further ravages of hyperinflation.


The sudden decision to call off the resistance – ‘capitulation’, as the nationalists called it – was intensely unpopular. The political crisis worsened and civil war loomed as the regime seemed on the verge of collapse. Extremists of right and left seized the opportunity to challenge the government with the threat of armed insurrection, despite the Reich government’s proclamation of a state emergency throughout Germany. In Saxony and Thuringia communists joined the socialist state governments in coalitions that allowed armed units to prepare an insurrection and threaten a breakaway, as independent states. The left-wing rebellion was, however, soon crushed by the Reichswehr in late October. But right-wing nationalists in Bavaria continued to defy the government, culminating in the fiasco of Hitler’s beer-hall putsch in Munich on 9 November 1923 (Eyck, 1962, pp. 266–76). The ‘battle for the franc’ To the astonishment of his associates and dismay of his allies, Poincaré refused to negotiate with Stresemann. The only bilateral deals he sanctioned were direct negotiations with the Ruhr industrialists, through MICUM, for the resumption of deliveries in kind. These private agreements were made between early October and 13 November 1923 and lasted for six months. Other than these, he had no plans to reap the rewards of a German capitulation and failed to turn victory in the Ruhr into political success. André François-Poncet, French ambassador in Berlin (1931–8), compared Poincaré to a successful poker player ‘who left the table without collecting his winnings’.56 According to Peter Liberman (1996, p. 98) the occupiers’ restraint and vacillation stemmed from ‘a desire to work within the Versailles framework and to avoid alienating Britain’. Poincaré could have imposed on Germany a reparations settlement on his own terms. Through his own dithering and obduracy, he lost the initiative. Within two months the tide turned strongly in favour of Anglo-American intervention in the Ruhr crisis and the international settlement of reparations. In January 1924, investors and speculators turned on the franc. It escalated into a panic as the franc fell precipitously in late February and early March, and which culminated in the ‘battle for the franc’ in the spring of that year. The exchange crisis had its origins in the seemingly intractable problem of public finance which successive post-war governments failed to resolve – large government budget deficits plus reconstruction expenditures financed by a rising national debt and the constant pressure to monetise such debt. The chronic state of uncertainty over the


public finances was heightened by the final shattering of the illusion of German reparation payments. The cost of reconstruction would have to be borne without the help of reparations. It looked as if the government would be forced to rely on further advances from the Bank of France to finance its current budget deficit of 18 billion francs. Investors took fright, dreading a collapse similar to that of the mark, and many sold or stopped renewing their maturing Treasury bills and used the proceeds to buy gold and foreign currencies. Speculative funds swollen by German flight capital kept in foreign financial centres constituted a powerful masse de manoeuvre against the franc. On 4 March 1924, professional speculators in Amsterdam and Vienna sold large quantities of assets denominated in francs. In a speculative transaction known as ‘short selling’, speculators sold borrowed francs on the foreign-exchange market with the intention of buying them back at a lower price and profiting on the price difference. The franc, trading at £1 = 90 francs at the beginning of 1923, reached 106.5 on 4 March and 123 francs on 8 March – well below its purchasing-power parity. In the midst of the crisis the government gained parliamentary approval for a 20 per cent increase in direct taxes (known as the double décime). The passage of the tax legislation, and a pledge of part of the gold reserves of the Bank of France, enabled the government to secure foreign credits of $100 million from J.P. Morgan & Co. of New York and £4 million from Lazards of London. During March and April 1924, the authorities used these funds to intervene in the foreign-exchange market to support the spot franc. The intervention operations were carried out by Lazard Frères in Paris on behalf of the Treasury and the Bank of France. Towards the end of April, the franc rose to $0.065 (that is to say, up 39 per cent from February) and resulted in a classic ‘bear squeeze’ – speculators who had sold francs short made losses. Very quickly, the authorities bought back all the dollars and pounds previously sold to support the franc, and were thus able to pay off the Morgan and Lazard loans.57 The franc’s vulnerability evident since the autumn of 1923, accentuated by the speculative attack in March 1924, had one notable political effect, according to Jean-Noël Jeanneney: ‘all observers knew ... that it had an important bearing on French policy during the last months of the Poincaré government and constrained it towards a less intransigent attitude’ (Jeanneney, 1977, p. 42).58 And, of course, at the general elections a couple of months later, the Left blamed the franc’s recent troubles on the Ruhr adventure. Poincaré lost a good deal of the Radical Party’s support in Parliament by his intransigence. The Socialist left wanted an


international settlement of reparations and French exit from the Ruhr (Fischer, 2003, p. 227; Keiger, 1997, p. 306).59 On 11 November 1923 when the slide in the franc began, Poincaré consented to a meeting of international experts under the aegis of the Reparations Commission to study the possibilities of reparation payments. This began a process that would end in the Dawes Plan adopted in April 1924, which proved to be very advantageous for Germany. Thus, within a year after its triumph, France was forced to agree to the scaling down of reparation payments without guarantees that the debt would be repaid and to agree to evacuate the Ruhr unconditionally. Britain’s ‘benevolent neutrality’ From the start, Britain openly disapproved of the French action in the Ruhr, but wished to maintain friendship with France through the adoption of a policy of ‘benevolent neutrality’ or ‘benevolent passivity’. In a recent biography of Bonar Law, Ralph Adams (1999, p. 346) refers to the fact that the prime minister ‘led an electorate and a party largely pro-French in their sympathies ... and he was determined not to allow the reparations crisis to escalate into a crisis in Anglo-French relations’. Early in the occupation, for example, as an act of amity, he allowed the French use of the railway facilities in the British zone. This pose led Britain to perform a delicate diplomatic balancing act marked by improvisation in trying to mediate ineffectually between the two warring sides. However, Britain’s disapproval and Curzon’s diplomatic clash with Poincaré over the legality of the occupation encouraged the Germans to hope for active help from Britain against France, thus stiffening German resistance. Later, after September 1923, British policy became more active, constructive and purposeful. But the fact remains that in Britain, throughout the crisis, criticism of France was acute60 and, as a contemporary American observer (Nicholas Roosevelt) wrote, ‘it became fashionable to ascribe all of England’s troubles to the occupation of the Ruhr’ (Roosevelt, 1925, p. 118). Foremost among Britain’s ‘troubles’, according to officials, business and political leaders, was the flagging economy and the high level of unemployment. In a government statement on the Ruhr crisis to the House of Commons on 12 July 1923, Baldwin, the British prime minister, called attention to ‘the serious effect that has already been produced upon British trade’ by events in the Ruhr.61 Yet, contrary to British complaints, the British economy (for a time) received a massive boost from the elimination of German competition in European markets. Cut off by the Ruhr shutdown continental importers, including German buyers, turned to the

126


British market to meet their needs. There was a big increase in exports of British coal and pig iron, the transport of which provided a welcome boost to British shipping. Poland and Czechoslovakia (allies of France) also profited handsomely from the Ruhr crisis through their increased coal exports. A careful contemporary analysis of British trade and unemployment in 1923 shows, rather convincingly, that the occupation had nothing to do with aggravating the British economic crisis. If anything, key sectors of the British economy profited from the Ruhr events (Leger, 1923).62 In fact, such gains led to a significant reduction in unemployment. Unemployment in Britain fell by 211,000 between the end of November 1922 and June 1923. In October 1923, unemployment was nearly 250,000 less than it was on 1 January, before the occupation. In percentage terms, unemployment fell from 12.7 per cent in January 1923 to 11.1 per cent in September 1923. The monthly output of iron and steel reached their highest levels since the war (with the exception of September 1920). ‘This increase in activity was the direct consequence of the Ruhr occupation’ (Leger, 1923, p. 30). Total British coal exports in 1923 were substantially higher then in each of the previous two years, despite being relatively more expensive than German, Polish and Czechoslovak coal. Coal exports increased from a monthly average of 5.1 million tons in 1922 to 7.2 million tons in March 1923, 7.7 million tons in May 1923, and continued roughly at that level until July 1923. Taking advantage of the surge in foreign demand, British coal exporters raised their export prices during January–May 1923 by an average of 10 shillings a ton, while domestic prices remained stable at around 20 to 22 shillings per ton (Jeannesson, 1998, p. 179; Leger, 1923, p. 31). Imports of British coal and coke into the occupied territories of Germany more than trebled between January and July 1923 (Williamson, 1991, p. 228); and into Germany as a whole they increased from 7.7 to 15.4 million tons from 1922 to 1923 (Fischer, 2003, p. 154; Rupieper, 1979, p. 113). British coal benefited from a special licensing arrangement with the occupation authorities whereby the coal was allowed into the occupied territories free of all import duties and taxes. Fischer adds that the British government provided credits for German purchase of British coal, and that ‘this trade sustained the German economy and the passive resistance’ (Fischer, 2003, p. 154). The Ruhr balance sheet Temporarily, most neighbouring countries profited financially from events in the Ruhr. What about the occupying countries, France and


Belgium? How did they fare? There is no agreement on what the profit and loss balance sheet should look like. Estimates of receipts and expenses vary widely for the whole period of the occupation up to 1 September 1924, or the first year, ending 10 December 1923. Initially, the operation proved more costly than expected and the net benefits correspondingly rather meagre. However, with the ending of passive resistance and the return to work (including the return of the 60,000 railway workers who had been deported for disobedience) the railway Régie started to make profits and deliveries in kind resumed – slowly at first, but then increasing in volume. The gains then became more substantial as the MICUM accords with the Ruhr industrialists took effect in late 1923 and early 1924. When the occupation began, the French planned to collect the Kohlensteuer (coal production tax). However, Berlin instructed the coal owners to pay their coal taxes to the new offices of the Rhenish-Westphalian Coal Syndicate in Hamburg. Foiled once again, the occupying authorities could only just keep a record of the accumulating lost tax revenues. In September 1923, when the coal owners began talks with MICUM for the resumption of deliveries of coal to France and Belgium, payment of the coal tax arrears featured in the negotiations. The matter was finally settled on 23 November 1923 by the agreement signed at Düsseldorf between the German Mining Federation (Bergbaulicher Verein), representing 85 per cent of the mining enterprises in the Ruhr, and MICUM, providing for full deliveries of reparation coal and coke (18 per cent of new coal and 35 per cent of new coke output), payment of the coal tax and a special levy on the sale of lignite (soft brown coal). The coal tax arrears (including the lignite levy) were fixed at $20 million, payable in foreign currency. The current tax was set at $10 per ton – something like 12 to 15 per cent of the value of output. Sooner than expected, $5.4 million were paid to France and Belgium by the end of December 1923 (Barnich, 1924, pp. 10–12; Jeannesson, 1998, p. 362; Williamson, 1991, p. 236). The payments under the Düsseldorf accords ran for five months, until 15 April 1924. According to one contemporary estimate, the total receipts obtained by France and Belgium (from all sources) in 1923 amounted to 228 million GM, just enough to defray occupation costs of around 200 million GM (Barnich, 1924, pp. 13, 16). Deliveries in kind and payments were maintained to the other Allies (Britain, Italy, Serbia) until August 1923. These additional payments by the German government amounted to 371 million GM, out of which Britain received 137 million GM under the Reparation (Recovery) Act. Thus, the countries that took no part in the Ruhr occupation ended up receiving more


than the French and Belgians (Barnich, 1924, p. 13). In terms of French receipts for 1923 set against reparation costs, another estimate arrives at a paper profit balance of 479 million francs, equivalent to something like 108 million GM.63 In December 1925, the Reparations Commission evaluated the total net gain on the Ruhr operation between 11 January 1923 and the date when the Dawes Plan took effect (1 September 1924). The total figure came to 900 million GM, with France obtaining 360 million GM, Belgium 455 million GM and Italy, the remainder. The total for Belgium included 350 million GM in cash on account of the country’s priority (Depoortere, 1997, pp. 349–50; FRUS, PPC, vol. 13, 1947, p. 785; Weill-Raynal, 1947, pp. 219–28). A figure for France’s net gain somewhere between 300 and 360 million GM seems a credible one, since other contemporary and modern estimates fall within that range. For instance, a 1930 American World Peace Foundation study on the 1929–30 reparations settlement quoted a figure of 312.9 million GM, mentioning that as being the amount of ‘net receipts on reparation account for 21 months of military self-help credited to France’ – with the expenses of the occupation up to 1 September 1924 all recovered (Myers, 1930, p. 9). In his recent book on French interwar monetary history, the French economist, Bertrand Blancheton mentions that the occupation raised ‘around 300 million gold marks, hardly enough to cover the costs of an occupation which was prolonged right up to the summer of 1925’ (Blancheton, 2001, p. 203). A popular belief holds that while the occupation eventually paid for itself, the net financial gains or profits were paltry. Both Sally Marks and Rolande Depoortere see the results in a different light. For them, the occupation was an undoubted financial success when considered against the stark choice facing France and Belgium under the Bonar Law plan on the eve of the occupation: either, expect nothing from Germany for the next three or four years, or occupy the Ruhr and seize whatever liquid or moveable assets might be available there. Those who belittle the occupation’s financial returns usually do so by comparing the Ruhr receipts to the London Schedule of Payments and the deliveries fulfilled by Germany in 1922 (17 million tons of reparation coal to France and Belgium) – a totally irrelevant comparison, since that contrast ignores the fact that the London Schedule was then inoperative and the only available alternative was the Bonar Law moratorium condition. Therefore, in assessing the occupation’s benefits for France and Belgium, the appropriate comparison is between the net Ruhr receipts and nothing (Marks, 2003, p. 58). For Belgium, Rolande Depoortere shows that on the basis of the appropriate comparison the short-term


benefits envisaged by the Bonar Law plan were far inferior, both in terms of liquid sums and deliveries in kind, to the actual Belgian receipts from the Ruhr occupation. She adds: ‘The occupation regime provided Belgium with 350 million GM in cash from 11 January 1923 to 1 September 1924. Whilst not a gold mine, it was however better than nothing’ (Depoortere, 1997, p. 275). Jere King is one historian who doubts the profitability of the occupation, but recognises that France, ‘in that ill-fated venture ... demonstrated its technical ability to operate coal mines and the world’s densest rail network (but with French trainmen) in the midst of a hostile population engaged in what was tantamount to a general strike’.64 For Stanislas Jeannesson, comparing the financial pay-off from the occupation with what France actually received in 1922, or what she was later to receive in 1925 is an idle and uninteresting business. The Ruhr was not a sudden break or hiatus between 1922 and 1925; nor was it a gratuitous lurch towards a different policy. The occupation served to break the deadlock over reparations. ‘It was a period of transition, the importance and effects of which cannot be measured in terms of receipts and expenses’ (Jeannesson, 1996, p. 67). To get some coal, or Rhenish ambitions? Was the military occupation of the Ruhr basically for economic reasons: merely to secure ‘productive pledges’ for the delivery of coal and coke to France? Clearly, the Ruhr decision was taken in the context of heightened French concerns over reparations and security. But given that the two problems were so intimately related in French thinking, it is no wonder that Poincaré’s staunchest backers saw the seizure of material pledges in the Ruhr and an active Rhenish policy as the means to cut the Gordian knot of France’s perceived dilemma – how to win reparations and security simultaneously – by one bold operation. Indeed, many at the time saw the occupation as only a pretext for more sinister, hegemonic designs on the Rhineland – to cut it off from the rest of Germany and establish a military frontier on the Rhine. This Rhenish ambition, if realised, would be the long sought-after solution to French security worries. Certainly, Poincaré went into the Ruhr not only to bring back coal and coke, but also for wider and deeper political and geo-strategic objectives, as Stanislas Jeannesson revealingly explains in Jeannesson (1996), (1998) and (2005). Jeannesson (2005) shows that there was ‘a deliberate French policy to separate the Rhineland from the rest of the country and treat it as an autonomous entity’ (p. 482); and that Poincaré wanted ‘to improve the Treaty to the benefit of France’s security’ (p. 484). When on


2 January 1923, Poincaré turned down a German offer of talks on reparations, Stresemann commented: ‘France does not want the Rhinegold, France wants the Rhine’ (Wright, 2002, p. 205). But France never got the Rhine! Poincaré could not turn his technical Ruhr triumph into the political success of a Rhineland, specially shaped to provide cast-iron guarantees for reparations and French security. The economic chaos that followed the end of passive resistance and the collapse of the mark led to an explosion of separatist outbreaks, which became a real threat to German sovereignty in the Rhineland. On 21 October 1923, Leo Deckers and other activists seized the City Hall of Aachen (Aix-la-Chapelle) in the Belgian zone of occupation and declared a ‘Rhineland Republic’. Over the next day or two, on the orders of Joseph Matthes and Adam Dorten, bands of separatists, many unsavoury characters among them, occupied the public buildings in Krefeld, Bonn, Trier and Wiesbaden in the French occupation zone. In Koblenz, Dorten proclaimed his own ‘Rhineland Republic’, headed by a provisional government. These sometimes bloody demonstrations and attempted putsche were carried out with the support of the French occupation administration under the guise of ‘benevolent neutrality’. In fact, as one historian of the separatist movement puts it, the ‘Rhineland Republic’ ‘... literally sat behind French bayonets’ (Nadler, 1987, p. 303). At this point (on 25 October), Poincaré overreached himself. He backed Dorten’s Rhineland Republic. He probably thought, better a separatist putsch than no putsch. Also, he might have assumed that the Reich was anyhow on the verge of breaking up, and so he could later present an independent Rhineland as a fait accompli in negotiations with the Anglo-American powers. But his gamble failed. Separatism suddenly collapsed. The final defeat of the separatists, what Jere King called ‘the rigor mortis of separatism’ took place on 12 February 1924 at Pirmasens, an industrial town in the Palatinate when a mob of 300 German nationalists besieged 40 separatists in the town hall. The crowd set fire to the building and brutally killed 17 separatists trying to flee the burning building (King, 1960, p. 123). Poincaré’s precipitate action misfired owing to the hostility of Great Britain to an independent Rhenish republic and a new, French-backed Rhenish currency, the waning of Belgian support for the whole enterprise, and the utter lack of popular support for the separatists. Moreover, the Reich, against all odds, held together, bolstered during October–November by the surprising success of monetary stabilisation and the temporary Rentenmark – a reassuring development which caused the Rhineland businessmen and notables to lose interest in autonomy or secession. By


the end of December, Poincaré’s Rhineland policy lay in ruins. The only asset France held as a bargaining chip in imminent international negotiations was the military occupation of the Ruhr. Although the occupation was maintained until 1925, the bargaining chip proved almost worthless; for under the Dawes agreement, France obtained no war debt relief or significant compensation for leaving the Ruhr. On the other hand, we have the judgement of the German historian, Erich Eyck that ‘the facts of the historical development give no reason to believe that German currency reform nor the general settlement of the reparations question could have come about had they not been forced by Poincaré’s brutal intervention’ [in the Ruhr] (Eyck, 1962, pp. 39–40). And similarly, Stanislas Jeannesson’s perspective on the occupation sees 1922 as the year ‘which made inevitable the occupation of the Ruhr; and it was the occupation which made possible the Dawes plan. That was its principal merit’ (Jeannesson, 1996, p. 67). Jonathan Wright reaches a similar conclusion, in a review of Jeannesson, to the effect that both the French and German governments ‘learning that the costs of conflict had been greater than expected on both sides, sought patiently to resolve their differences’ – a halting process that ultimately proved unsuccessful.65

Notes 1. Theo Balderston, a leading authority on interwar German macroeconomic history, provides a succinct, but remarkably lucid account of the complex issues surrounding the German inflation in Balderston (2002, chapter 3,pp. 34–60). More detailed are the works by Gerald Feldman (1993) and Carl-Ludwig Holtfrerich (1986). Feldman’s work is a monumental, analytic narrative that many claim as the definitive work on the inflationary period. Earlier, Holtfrerich provided a general, political economy framework for the modern discussion of the episode. 2. ‘Inflation tax’ refers to the hidden or implicit tax on money holdings due to the reduction in the purchasing power of money caused by inflation. It takes more cash to buy the same basket of goods. Keynes, CW, vol. IV, chapter 2 popularised the notion of inflation as a tax. An implication of the idea is that governments sometimes resort to the inflation tax as a means of funding their expenditures. For the German inflation, for instance, Holtfrerich calculates that as a percentage of aggregate government expenditures, the yield of the inflation tax during 1919–22 averaged 50 per cent. See Holtfrerich (1986, p. 150). ‘Money illusion’ refers to the tendency of people (at least in the initial stages of the inflationary process) to think in nominal rather than real terms. It is the confusion of changes in the nominal value of money and changes in its real value or what money can buy.

132 German Reparations, 1919–1932 3. James (1999, p. 17) gives the figure of 22.2 billion marks for Reichsbank notes, plus 10.1 billion of loan bureau notes, making a total cash circulation of 32.3 billion (nominal). Other sources give only the 22.2 billion of Reichsbank notes. Michael Hughes (1988, p. 6) quotes the figure of 29.2 billion for total currency supply, the amount mentioned in the text. Thirty billion or thereabouts seems a reasonably good estimate. Note that since the price level had doubled during the war, the real value of the money stock was about 15 billion in November 1918. 4. Included in the total debt was 48 billion marks of floating debt. Adjusted for wartime inflation, the total German debt at the end of the war was equivalent to around 85 billion 1913 GM. See Ferguson (2001b, p. 42). In 1913, the German national debt stood at 5 billion GM. 5. Despite being short-term failures, Erzberger’s radical tax measures laid the groundwork for more orderly finances following the stabilisation of 1923–4 by providing the Reich with a much strengthened tax system. People paid more tax; in fact, the tax burden almost doubled from 9 per cent in 1913 to 17 per cent in 1925 on average, or per capita. See Dietmar Petzina, Die deutsche Wirtschaft in der Zwischenkriegszeit (Wiesbaden: Steiner, 1977), p. 78. Tax revenue, as a proportion of national income, also increased from 15 to 25 per cent. 6. It was only in September 1923 when the inflationary damage was already done that tax payments were linked to the current price level in terms of gold or dollars. 7. See Agnete von Specht, Politische und wirtschaftliche Hintergründe der deutschen Inflation, 1918–1923 (Frankfurt am Main: 1982), p. 75. See also Schuker (1978, pp. 349–58) for similar statements resisting tax and budget reforms before obtaining a substantial reduction in Allied reparation claims. 8. The quotation is from Claus-Dieter Krohn, Die große Inflation in Deutschland 1918–1923 (Cologne, 1977), p. 19. Leaman (2001, p. 73) comments that the Bank’s action after autonomy coincided with its ‘policy of catastrophe’ and that the Bank was never under any pressure by the government, since ‘it was a willing conspirator in a national cause’. 9. The 2.5 per cent estimate is derived from cash payment figures of 1.013 billion GM provided in Marks (1978, pp. 237–8). Steven Webb (1989, table 6.1, p. 108 and pp. 108–9) arrives at a slightly higher total of 1.25 billion GM. With 1921 German net national product estimated at 40 billion GM, the Marks’s estimate comes to 2.5 per cent of German national income and Webb’s, to 3.1 per cent. Balderston (1994, p. 213) mentions an actual cash reparations burden in 1921–22 of around 2.5 per cent of real national income. 10. Under the 1924 Dawes Plan, all non-reparation charges were consolidated and incorporated in Germany’s annual reparation payments (Marks, 1978, p. 247). 11. US claims on Germany for occupation costs, mixed claims of private US citizens and US government reparation claims totalled to almost $1.5 billion (nearly 6 billion GM). Eventually, the United States received over 400 million GM, prior to complete German default in 1934 (FRUS PPP, 13: 516–18). 12. For a good account of clearing-house operations, see H.G. Moulton and C.E. McGuire, Germany’s Capacity to Pay (New York: McGraw-Hill, 1923), Appendix E, pp. 312–19.

Fulfilment Crises and Allied Disunity 133 13. The ‘Hole in the West’ referred to the supposedly lax control at the customs and frontier posts in West Germany under Allied occupation. Up to March 1920, the German criticism was that the ‘Hole’ amounted to an open, customs-free border through which German exports of raw materials evaded controls and non-essential French imports were allowed into Germany. On capital flight and the ‘Hole’, see Kerstingjohänner (2004, pp. 71–9). 14. See also, Preparata (2005, p. 125). The Netherlands benefited enormously from German capital flight and the sudden influx of German businesses as part of the capital evasion manoeuvre. While other neutral countries stagnated in the 1920s, the Netherlands did quite well and enjoyed unprecedented prosperity. Capital inflows fleeing Germany strengthened the Dutch guilder, enabling it to regain its pre-war parity in 1923 – two years before the rate was officially set. Exports grew at an astonishing rate of 12 per cent per year between 1920 and 1923, mainly due to the rapid growth of transit traffic with Germany: ‘Shipments of goods through Dutch harbours, that were dominated by transit trade with the German hinterland, grew at a staggering rate of 16 per cent a year between 1920 and 1929’ (van Zanden, 1997, p. 104). 15. Niall Ferguson (1998, p. 429) remarks that the economic and political events behind the capital flight ‘evidently caused more alarm in Germany than abroad, where holders of marks continued to believe in an ultimate recovery of the exchange rate’. He also noted that the German speculation against the mark was spontaneous, and although it is impossible to know how much capital flowed out of Germany, ‘clearly there was a movement amounting to several billion gold marks’ (p. 429). 16. Although Preparata has some sympathy for the ‘German explanation’ of the inflation and mark depreciation, he feels that a weakness of that account (among others) is the glossing over of capital flight. He therefore emphasises that ‘the (external) depreciation was truly driven by the capital flight, and only at a second remove by the tribute of Versailles’ (Preparata, 2005, p. 126). 17. Professor Barry Eichengreen is well known to students of international economics as a prolific writer in the field of international monetary and financial history. The full title of his 1992 book is Golden Fetters: The Gold Standard and the Great Depression, 1919–1939. 18. Incidentally, as Eichengreen notes (p. 141), the computed result showing that the budget would have remained in deficit in the absence of inflation ‘leads to the rejection of the argument that the sole cause of the inflation was depreciation of the mark’ – that is to say, the argument of the balance-of-payments school. 19. Ferguson (2001a, p. 106) explains ‘domestic reparations to Germans’ thus: ‘The Allies might want reparations for the damage done to them by the war; but German voters also felt entitled to “reparations” for the hardship they had endured since 1914.’ 20. Consistent with his hypothetical findings, Webb mentions what should have been done to avoid Weimar’s fiscal failure and inflation: (1) Erzberger should have designed inflation-proof taxes; (2) the ‘wealthy classes in Germany should not have evaded taxation by delaying payments, by legislative manoeuvring, or by capital exports’, and (3) the French should have given the Germans another year before requiring cash reparations.

134 German Reparations, 1919–1932 21. Jeremy Leaman (2001, p. 70) notes, as many others have done, that since all German governments lacked the will or means to impose effective wealth and income taxation, they ‘chose inflation as the path of least resistance’. 22. See Kerstingjohänner (2004, pp. 254–66). 23. Gerald Feldman, writing about the history of the Deutsche Bank during the inflation period, refers to reports by Carl Bergmann to the Bank from New York during 1921. Bergmann, formerly attached to the Reparations Commission, was then the Bank’s representative in the United States. In his reports, Bergmann mentions that he was kept busy countering widespread charges in the American press that ‘the Germans were deliberately running down the mark in order to prove they could not pay reparations.’ While refuting these press reports, Bergmann himself was ‘well aware that there were Germans who thought that a collapse of the mark would be the best way to bring about a reduction of reparations’. See Gerald D. Feldman, ‘The Deutsche Bank from World War to World Economic Crisis 1914–1933’ in L. Gall, G.D. Feldman, H. James, C.-L. Holtfrerich and H.E. Büschgen (eds), The Deutsche Bank 1870–1995 (London: Weidenfeld & Nicolson, 1995), p. 188. 24. Referring to Gerald Feldman’s magnum opus, The Great Disorder (1993) on the German inflation, Schuker writes that Feldman ‘declines to concede the general point, yet brings one thousand pages of evidence to support it’ Schuker (2003, p. 83, n. 23). 25. ‘The Lure of the Ruhr’ – phrase used by Lord Curzon in 1921 to warn British Empire ministers of the threat posed to European peace by the fatal attraction of a Ruhr occupation for the French. See Curzon’s speech at 1921 Meeting of the Imperial Conference E4, 22 June 1921, CAB 32/2/E4. 26. In a statement to the Chamber of Deputies, Poincaré mentioned the purpose of the operation: ‘We are going to get some coal. That’s all.’ Journal Officiel, Chambre des Députés, 12 January 1923, pp. 14–20. Cited in Roth (2000, p. 424). 27. Lloyd George supported Wirth’s moratorium request, fearing that Germany’s financial collapse and a payments default would result in London banks losing up to £6 million in outstanding short-term credits to German importers; see Steiner (2005, p. 206); Fink (1984, p. 24, n. 65); Orde (1990, pp. 168–70). 28. Briand might have been more flexible on reparations if Lloyd George had granted him the type of security pact he wanted and expected. But Briand clearly was not disposed to make concessions on reparations without adequate guarantees or under strict conditions. 29. Cited in Jean-Jacques Becker and Serge Berstein, Victoire et Frustrations, 1914–1929 (Paris, 1990, Editions du Seuil), p. 214; also Roth (2000, p. 401). 30. Despite Bolshevik repudiation of their claims, over two million Russian bondholders in France wanted their government to withhold official recognition until Moscow agreed to honour the pre-Soviet debts – $2 billion in privately held debt and another $1 billion of war debt. 31. According to Schuker, the American government felt that the Europeans had to make political decisions to write down reparations, fund war debts and reduce arms expenditures before starting on technical agreements for economic recovery (Schuker, 1991, p. 95).

Fulfilment Crises and Allied Disunity 135 32. The Chanak crisis resulted from Lloyd George’s disastrous pro-Greek line in the war then raging between Greeks and Turks in the Near East. The Turkish Nationalists at Ankara under Mustapha Kemal, having expelled the Greeks from Smyrna (Izmir) in September 1922 and on their way to Istanbul, clashed with British forces occupying the neutral Straits at Chanak on the Asian side of the Dardanelles. France and Italy had withdrawn their troops, but Lloyd George refused to desert the Greeks. War between Britain and the Kemalists was averted at the last moment by an armistice on 11 October 1922. Peace negotiations with the Turks continued during the autumn that led to formal negotiations at the Lausanne conference in November 1922. After difficult negotiations, the Lausanne Treaty was signed on 24 July 1923. The Chanak crisis and its aftermath, the toppling of Lloyd George, the resulting general elections, the arrival of a new prime minister, and the drawn-out negotiations at Lausanne were preoccupations that distracted the attention of British leaders from the looming Franco-German reparations crisis – especially during the critical months from August to December 1922. The problem was neglected, and British ministers were unprepared for the inevitable, disastrous confrontation. Curzon wanted French support at Lausanne until the signing of the Turkish treaty. Afterwards, he would be free to deal with France and the Ruhr. 33. ‘The subtext, however, gave out a different signal’ according to Stephen Schuker (1991, p. 120). In practical terms, ‘the [Balfour] note figured as a crude attempt to embarrass the United States into unilateral cancellation’ or, as ‘ “shamming bankrupt ... to put [America] in the dock” ’, as Lloyd George’s private secretary Sir Edward Grigg put it in July 1922 – quoted by Schuker (p. 120). Roberta Dayer (1988, p. 154) writes: ‘The publication of the Balfour note, which implicitly blamed the United States for the continuing disagreements on reparations, caused great ill-feeling and resentment in the United States, similar to the earlier reaction to Keynes’s Economic Consequences of the Peace.’ The Balfour Note did not shame the Americans into a change of policy. Their policy remained the same. Consequently, for Britain’s European debtors, as Anne Orde notes, ‘the Balfour Note was virtually meaningless without a change in United States policy’ [on war debts] (1993, p. 12). Six months later, in January 1923, after the overthrow of Lloyd George, Stanley Baldwin, the new chancellor of the exchequer, went to Washington and agreed to American debt-funding terms for the repayment of the British debt, spread over 62 years. 34. In the autumn of 1922 while British miners had their working week reduced to two days, German miners were working overtime. See William Guttmann and Patricia Meehan, The Great Inflation (Farnborough: Saxon House, 1975), p. 27. 35. See Heinrich August Winkler, Der lange Weg nach Westen, vol. 1 (München: Verlag C.H. Beck, 2000), p. 435. 36. Wirth backed up his demand for a long moratorium by attaching the 7 November 1922 majority report of a group of financial experts invited by the German government to advise on stabilisation. The group included, apart from Keynes, Robert Brand (a London banker), Gustav Cassel (the Swedish economist) and Jeremiah Jenks (the American financier). The experts’ plan called for immediate stabilisation of the mark through Germany’s own


37. 38.

39. 40.

41.

efforts, that is, through a domestic loan based on the gold reserves of the Reichsbank. But for stabilisation to succeed, they insisted, Germany must be relieved of all reparation payments in cash and kind for three or four years – a further blow to French hopes of obtaining money from Germany. For the experts’ report, see Cmd.1812 [1923], pp. 6–10. Quoted in David Dilks, Neville Chamberlain, vol. 1: Pioneering and Reform, 1899–1929 (Cambridge: Cambridge University Press, 1984), p. 304. There is ample archival evidence that British Treasury officials were aware that reports of collusive or intentional mismanagement of German finance for political purposes were not mere hostile anti-German propaganda. See Sally Marks (2003, p. 53 and p. 176, n. 39) reference to Foreign Office memo (23 November 1922) in National Archives, FO 371/7487; Marks (1972, p. 360 and n. 5); Maisel (1994, pp. 108–111). Feldman (1993, p. 378) writes: ‘The German government was well aware that there was widespread feeling in Europe that the Germans were deliberately promoting inflation to escape reparations.’ The British Treasury and Foreign Office officials, such as Tyrrell and Sir Eyre Crowe who suspected that the German state bankruptcy was wilfully generated, nevertheless fell for the German official line – that the financial mess demonstrated incapacity to pay. The British logic was therefore that since the Germans had succeeded in ruining their currency, there was no alternative but to grant them a long moratorium, a reduction in reparations and foreign loans – see Maisel (1994, p. 111). Such indulgence was needed to restore German credit through the stabilisation of the mark. At stake was the economic stability of Europe itself and the interests of foreign investors and mark speculators, whose German investments were at serious risk (Feldman, 1993, pp. 378–9). Bradbury to Bonar Law, 18 December 1922. Quoted in Turner (1997, p. 517). Keynes too, at the time, thought a great weakness of the Bonar Law plan was its treatment of France as regards her priority, her effective share of reparations and remission of her war debts: ‘We have got to be far more generous than this to France if there is to be the remotest possibility of a settlement now.’ To avoid failure at the Paris conference, Bonar Law must make an offer of ‘far more striking generosity’ (Keynes, CW, vol. 18, p. 111) – Keynes to Geoffrey Dawson, editor of The Times newspaper, 3 January 1923. Keynes was also then campaigning vigorously for equally generous treatment of Germany on a moratorium and reparations reduction. He preferred not to go public with his plea for more generosity to France so as not to make Bonar Law’s job at the conference more difficult. French newspapers, Keynes feared, might say ‘that even the notorious Francophobe Mr Keynes thinks the present proposals not nearly favourable enough to France’ (Keynes, CW, vol. 18, p. 112). The Bonar Law plan was basically the work of Sir John Bradbury of the Treasury, but currently chief British delegate to the Reparations Commission. Commenting on a draft of Bradbury’s plan in December 1922, Keynes thought it ‘most brilliant’ and ‘very ingenious’; but he objected to ‘its intricacy and obscurity’. He confessed that although conversant with these matters, he ‘had to read it through three or four times’ before he could grasp it fully, and doubted ‘whether Poincaré or de Lasteyrie [French finance minister] would ever do so’ (Keynes, CW, vol. 18, pp. 93–4). At the time, Wickham Steed,


42.

43. 44.

45. 46.

47.

formerly editor of The Times, credited British ministers for having ‘done something to simplify an intolerably intricate scheme which their experts had prepared for them’. See Wickham Steed, ‘The Position of France’, Journal of the British Institute of International Affairs, March 1923, p. 73. It must be recognised that Bonar Law was then a sick man, inadequately briefed for a difficult task and inexperienced in the ways of conference diplomacy. Steiner’s opinion echoes that of the Belgian ambassador in Paris, Baron Edmond de Gaiffier, who said at the time that certain parts of the British plan ‘were inspired by the mistrust, even animosity of Bradbury and Keynes towards France’ (Gaiffier to Henri Jaspar, Belgian foreign minister, 6 January 1923, quoted in Jeannesson, 1998, p. 124). Sally Marks (2002, p. 33) concurs – the British plan was born of ‘the Francophobia of Britain’s Reparation Commission delegate, Sir John Bradbury, and the inertia and inexperience of the new prime minister, Andrew Bonar Law.’ It appears that Bradbury and British Treasury officials were not too put out by the breakdown of talks with the French. They were happy to see Poincaré go into the Ruhr and there be punished for his rash and dangerous ‘direct action’. Only when the franc was weakened and taxation increased would the French learn their lesson and throw out Poincaré. In a confidential memo to Stanley Baldwin, chancellor of the exchequer, shortly before the Ruhr occupation, Bradbury insisted that only ‘a further fall in the franc’ would bring the French to their senses. See Fink (2006, p. 328 and p. 338, n. 8); also DBFP, I, vol. 20, p. 286. See Robert Rhodes James, Memoirs of a Conservative: J.C.C. Davidson’s Memoirs and Papers, 1910–37 (London: Weidenfeld and Nicolson, 1969), p. 145. This eventuality was taken quite seriously even by the British Foreign Office. A memorandum of the Central Department of 5 December 1922 observed that after an extended suspension of reparation payments, there was a danger that eventually Germany would pay nothing: ‘She would then, owing to her inflationist proceedings, be the one great industrialist power in Europe enjoying the advantages accruing from the extinction of both foreign and internal debt.’ FO 371/7488, C16643/99/18, central Department Memorandum on the Reparation Position, 5 December 1922. Cited in Maisel (1994, p. 111 and p. 258, n. 124). The duties collected were credited to Germany on reparations account. But, as Eyck (1962, p. 233) wrote, Adolf Hitler tried to shatter this solid national front the day after the invasion by shouting ‘to his followers in Munich’s Bürgerbräukeller, the beer hall where he would later stage his abortive Beer Hall Putsch: “Not ‘Down with France’ but ‘Down with traitors [in Berlin]’ should be our call!” ’ Conan Fischer’s book, The Ruhr Crisis, 1923–1924 (2003), is a valuable study of the grassroots during the Ruhr occupation, dealing with the everyday experience of the Ruhr population (bureaucrats, railway workers, industrialists, miners, women and children) and how they related both to the occupiers and the Berlin government. It is well researched in German regional and business archives; altogether, a fine piece of socio-political history. See also Conan Fischer, ‘The Ruhr Crisis: The Limits of Active Resistance’ in F. Biess, M. Roseman and H. Schissler (eds), Conflict, Catastrophe and Continuity: Essays in Modern German History (New York and Oxford: Berghahn Books, 2007), pp. 44–59.

138 German Reparations, 1919–1932 48. The other main reason why the conflict was prolonged was Britain’s attitude of sitting on the fence, failing to commit itself firmly to either side, with the result that British leaders failed to see that ‘they were watching a costly extension of the First World War’ (Marks, 2003, p. 57). 49. For accounts of the propaganda about the ‘Black Horror on the Rhine’ or the ‘Schwarze Schmach’, see Keith Nelson, ‘ “The Black Horror on the Rhine”: Race as a Factor in Post-World War I Diplomacy’, Journal of Modern History, 42 (1970), pp. 606–27; Sally Marks, ‘Black Watch on the Rhine: A Study in Propaganda, Prejudice and Prurience’, European Studies Review, 13 (1983), pp. 297–334. 50. See Marks (1983), ‘Black Watch on the Rhine’ (mentioned above), p. 311. 51. State Secretary, Julius Hirsch of the Economics Ministry remarked in October 1923 that the Ruhr occupation ‘caused much greater damage to the national economy than would have resulted from the paying of reparations’. Cited in Feldman (1993, p. 838). It is tempting to jump to the conclusion, as some do, that the sums spent by the German government on a futile resistance campaign could have been more usefully devoted to making payments on reparation account. But this conjecture is clearly invalid. Berlin can certainly finance the resistance for a while by producing a fantastic shower of confetti money within Germany, equivalent to a certain, purely notional gold-mark value. But the same conjuring trick cannot work externally to obtain real gold or gold-convertible foreign currencies on the exchange markets of the world to make reparation payments (or any other foreign payments, for that matter) – as Maurice Frère pointed out. See Jeannesson (1998, p. 180). 52. Karl Dietrich Erdmann, Die Weimarer Republik (München: Deutscher Taschenbuch Verlag, 1980), p. 240. 53. See Roosevelt (1925, p. 116). 54. Clingan adds that Cuno’s cabinet ‘proved to be the most economically maladroit Cabinet in the history of the Weimar Republic, no mean achievement’ (Clingan, 2001, p. 35). 55. See Stresemann’s speech to the representatives of the Länder, 25 September 1923 in Karl Dietrich Erdmann and Martin Vogt (eds), Die Kabinette Stresemann I und II (Boppard am Rhein: Harald Boldt Verlag, 1978), vol. I, no. 79, p. 349. 56. François-Poncet’s remarks, made in 1948, quoted in Marjorie M. Farrar, Principled Pragmatist: The Political Career of Alexandre Millerand (New York: Berg, 1990), p. 347. 57. For a brief account of the ‘battle for the franc’, see Leonard Gomes, ‘The Inter-war French Franc 1919–1936: Crisis, Stabilisation and Devaluation’ in Terry Brotherstone and Geoff Pilling (eds), History, Economic History and the Future of Marxism – Essays in Memory of Tom Kemp [1921–1993] (London: Porcupine Press, 1996), pp. 188–91. 58. Jeannesson (1998, pp. 387–8) notes that in a discussion of the crisis on 12 January 1923, French ministers all recognised that the fall of the franc was due to the remarkable turnaround in the Ruhr situation, in particular, the success of the Rentenbank – thanks to help Berlin received from London bankers. France had neither the financial means nor the political will to prolong its grip on the occupied territories. ‘France needed American loans


59.

60.

61. 62.

63.

and would therefore have to adapt its political ambitions to the economic demands of the Anglo-Saxon bankers.’ In a recent study of French security and reparation concerns up to the Ruhr occupation, Anne-Monika Lauter shows how French public opinion reacted to the occupation, as gauged by discussions in the press and regional assemblies, as well as by the activities of pressure groups and politicians. Public opinion was divided. Lauter’s research shows that the left favoured negotiation. The general public was troubled by the mounting cost and meagre benefits of the occupation, and it was frequently argued that the expenses of an expanded occupation force represented funds that could more profitably be used for French reconstruction. See Anne-Monika Lauter, Sicherheit und Reparationen: Die französische Öffentlichkeit, der Rhein, und die Ruhr (1919–1923) (Essen: Klartext, 2006). British political and public opinion was hostile, especially in Liberal and Labour circles. When French troops marched into the Ruhr, Lord Rothermere’s Daily Mail saluted the action with the headlines ‘Hats Off To France’. See Randolph S. Churchill, Lord Derby (London: Heinemann, 1959), p. 512. The Daily Mail continued to support the occupation for a while because it was good for British trade, that is to say, the rapid increase in British coal exports resulting from the elimination of German competition. But that was the exception. ‘Most of the British Press received its news and views from [Oswald] Mosley’s propaganda machine, from Gedye or from Voigt’, recalled Ernest Troughton in 1944. Gedye was the London Times correspondent in the Ruhr and Frederick Voigt wrote for the Manchester Guardian from Berlin. The two were particularly severe in their attacks on France, and were notorious for their sensational occupation stories, often obtained at second hand. See E. R. Troughton, It’s Happening Again (London: F. J. Parsons 1944), pp. 73–4; also Williamson (1991, pp. 229–31). Gedye later published a book, The Revolver Republic, based on his Ruhr stories and dispatches. Five weeks into the occupation, on 19 February 1923, in the House of Commons, Lloyd George denounced the occupation as a fatal mistake and accused France of planning to dismember Germany. Bernhard Fulda reckons that ‘about half of the weekly articles that Lloyd George wrote between January and September 1923 attacked French policy towards Germany and Poincaré personally ... Lloyd George’s standing in Germany rapidly improved.’ ‘It certainly helped’, says Fulda, ‘that he was harshly critical of Poincaré’s occupation of the Ruhr’ (Fulda, 2006, p. 42). Several years later, Lord Robert Cecil referred to the Ruhr occupation as ‘probably one of the stupidest things that a government has ever done’. See Lord Robert Cecil, A Great Experiment: An Autobiography (Oxford: Oxford University Press, 1941), pp. 142–3. PD [HC], vol. 116, 12 July 1923, p. 1587. Leger (1923, p. 48) suggests that British unemployment in 1923 was really due to the boilermakers’ lock-out, strikes, including the dockers’ strike of July and August and the decline of the textile industries. See L’Armée du Rhin, Un an d’occupation: l’oeuvre Franco-Belge dans le Ruhr en 1923 (Düsseldorf, 1924), p. 68. On 16 November 1923, Poincaré announced to the Chamber of Deputies that Ruhr expenses (up to 30 September 1923) amounted to 700 million francs, but total receipts were more than 1 billion

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francs – ‘We therefore have the right to congratulate ourselves about the results obtained’, he proudly remarked. Quoted in Martin (1999, p. 188). 64. See Jere C. King, ‘France’s Ruhr Policy: The Background of the Schuman Plan’, Proceedings of the 3rd Annual Meeting of the Western Society for French History, 4–6 December 1975 (A & M University, Texas, 1976, pp. 585–94). 65. See Jonathan Wright’s review in English Historical Review, 120 (2005), p. 1061.

4 From Dawes to Young

This chapter deals with the 1924–29 Dawes reparations arrangement. The Dawes Plan was an Anglo-American sponsored bankers’ bail out of Germany after the chaos of hyperinflation and Ruhr occupation. Germany was put in ‘receivership’, headed by an American, as Reparations Agent-General. The rescue package involved ‘transfer protection’, international supervision of German finances, railways and revenues. Germany resumed reparation payments on the basis of a partial moratorium and reduced annual payments for four years with the aid of an international pump-priming loan of $200 million. Germany recovered with further private loans, mainly from the United States. For five years Germany paid reparations with American money that returned to the United States as Britain and France used the reparation receipts to service their American war debts. That ‘virtuous’ circle ended when American loans stopped in 1928 and Germany was left with a foreign-debt mountain. A revised reparations scheme (the 1929 Young Plan) came to the rescue; but it was too late, as Germany succumbed early to the Great Depression.

4.1

The Dawes Plan

Genesis of the Plan In January 1924, opening the meeting of the Dawes Committee of experts in Paris, General Dawes remarked: ‘If France were not in the Ruhr we should not be here’ (SAFR, 1923, p. 361) – which was true, as his audience knew quite well. Many believed, as Secretary of State Hughes expressed it, that the Europeans had to undergo a ‘bit of chaos’ by the Ruhr crisis before they would come to their senses and listen to

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reason.1 And the ‘reason’ the Americans wanted to instil in European minds was the inescapable need for a business-like solution to the reparations problem (that is to say, one removed from politics and entrusted to a body of experts) – an idea they increasingly promoted since the peace settlement. A year before the convening of the Dawes Committee, Hughes himself publicly called for such an investigation by independent financial experts to devise a plan based on economic realities. Fearful that the French were about to occupy the Ruhr he made the proposals in his famous New Haven speech on 29 December 1922 hoping to sway the French away from military action, but to no avail (FRUS, 1922, pp. 199– 202).2 There had been so many planned or actual expert meetings over the past three years which led nowhere that the French were not disposed to listen. Poincaré was at that time interested in Germany’s present ability to pay reparations rather than another analysis of Germany’s future capacity to pay. At the time of the Bankers’ Committee (April/May 1922), US Commerce Secretary, Herbert Hoover made known to Hughes his strong objection to an American stabilisation loan for Germany unless reparations were renegotiated, and ‘threatened to make a public statement that unless reparations were lowered, the security for any new loan would be “worthless” ’ (Rosenberg, 1999, p. 168). Hoover’s objections, as well as frantic German pleas for help, were the pressures behind Hughes’s call for a new reparations settlement. One year later, on 11 November 1923, with deadlock in the Ruhr, facing diplomatic isolation, loss of support by Belgium and Italy and Anglo-American pressure, Poincaré consented in principle to such an independent enquiry being undertaken on behalf of the Reparations Commission. The French wished to limit the scope of the enquiry, notably that there should be no alteration to the May 1921 total of reparations. But as it became clear that the Anglo-Americans envisaged a package of measures, including a large international loan to Germany, reorganisation of German finances with specific budgetary provision and guarantees for the voluntary resumption of reparation payments, a compromise was finally reached; and on 30 November, the Reparations Commission appointed two independent committees of experts. The first committee – the most important one – under the chairmanship of General Dawes was to deal with means of balancing the German budget and stabilising the currency. The second committee (chaired by Sir Reginald McKenna) set up at the insistence of the French was given the job of estimating the amount of German capital lodged abroad with a view to getting it repatriated. The committees began work on

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14 January 1924. After working for four months, the Dawes Plan was published on 9 April 1924 (Cmd. 2105 [1924]).3 What were the factors behind the Anglo-American intervention and what helped to bring it about? At the time, the appointment of the Dawes Committee was hailed as a move heralding Uncle Sam’s return to Europe – with moneybags! It signalled a new, active engagement in European affairs. The turn of events in the Ruhr crisis during the autumn of 1923 was the spur to action by the United States and Britain – the capitulation of Stresemann, the collapse of the mark and the likely disintegration of the Reich. These events by shattering hopes for a steady recovery of Germany dealt a heavy blow to their national interests. Both countries saw the loss of a particularly valuable export market. Britain with high unemployment and sluggish domestic demand was looking to recover lost export markets. The United States, a creditor country with excess industrial capacity and huge agricultural surpluses feared not only loss of export business but also blocking of an outlet for surplus US capital. Political interests were also at stake. A German collapse would be bad news for Anglo-American efforts to keep Germany as a bulwark against communism and therefore a political partner of the Western democracies. London was alarmed at French control of German industry and the prospect of a Franco-German industrial cartel arising from the MICUM agreements won by French industrialists. To which were added British overblown fears of French military predominance and hegemonic ambitions. For both countries the Ruhr stalemate threatened important national interests and called for action. These took the form of strong pressure from Britain and the United States aimed at rescuing the German economy and stopping French control of German industry. They turned against Poincaré and sided with Germany whom they saw as the weakened but worthy underdog. The American leadership whilst not willing, officially, to admit a link between reparations and war debts nevertheless saw how entangled with politics and interrelated were the problems of reparations, war debts, inflation, budget deficits and security. Driven to action by the European crisis, the Americans saw that a settlement of reparations was the best way to unravel the snarls. That would then make it much easier to deal subsequently with the other problems. To back that decision, American engagement and private finance would be provided. After the Ruhr deadlock all responsible leaders in Europe were ready to welcome an American-backed rescue scheme for Germany. The Ruhr conflict brought into sharp relief the real contours of Europe’s

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discontents. It altered perceptions and led to shifts in attitudes and a reordering of national priorities. In Germany, Stresemann would instrumentalise reparations to get territorial concessions. In negotiations with the Allies he was prepared to make concessions on reparations to obtain treaty revision. In France, the national interest was now focused on security and financial stabilisation. The Ruhr endeavour failed to deliver on reparations or security. Putting off fiscal reforms in the hope of getting reparations to balance the national accounts now seemed ill-advised. The French realised they could not depend on reparations for fiscal and currency stabilisation. For that, American loans seemed more promising. Poincaré might have thought that victory in the Ruhr could be turned to good account by getting the British and the Americans to go along with French plans for solving the German problem through a great negotiation bearing on reparations, war debts, security and American loans. This was however never likely to happen. Instead, France’s rapidly deteriorating financial situation, mirrored in steady depreciation of the franc, rendered Poincaré dangerously exposed and more vulnerable to Anglo-American pressure. The financial setbacks resulted from the stalemate in the Ruhr, mounting costs of occupation, uncertainty over future reparation payments given a bankrupt Germany and the sharp decline in investors’ confidence about France’s ability to repay domestic and foreign loans. All this at a time when the market’s expectation was that sterling would soon return to its pre-war parity. The general opinion in the United States as well as Europe after five years of experience was that loans to Germany were necessary for reparation payments. They had to form an essential part of any new stabilisation package. It was, of course, the easy way out of the reparations thicket – the choice of the soft option. It offered an escape without hardship (at least in the short run) for all international creditors and domestic taxpayers. In their report the Dawes Committee members stated that they were concerned with the practical means of recovering the German reparations debt, not with the imposition of penalties. Their professed motto was: ‘Business not Politics’. The task was seen as a business problem to be resolved, leaving politics aside. As Thomas Lamont wrote five years later, the plan devised by the experts was ‘able to transfer the question of reparation from the point of the sword to the point of the pen’ (Lamont, 1930, p. 340). The Dawes Plan was a temporary scheme, or rescue package to get Germany back on its feet after monetary collapse and economic dislocation, for only so could the country start to pay its debts. The experts made no mention of Germany’s theoretical total reparations liability of 132 billion GM as determined in May 1921. They

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avoided the question altogether, since any reduction would have been unacceptable to the French. But whatever their private views, Germany’s total debt was not their immediate concern. They saw their job as that of investigating practical means to get reparations flowing again to the Allies. To do that they had to find out what maximum annual payments could be made if the German budget was to be balanced and the currency continuously stabilised. They viewed reparations as an annual burden and proposed a system of taxation and fund-raising based on the principle that Germany must pay taxes to the limit of its capacity. Germany must bear a tax burden at least as heavy as that of her creditors. The ‘taxable capacity’ of Germany was nowhere near its limit in early 1924. There was scope for tax increases, since the national debt was virtually wiped out by the hyperinflation and defence expenditure was low, owing to treaty restrictions on armaments. The sums levied for domestic debt service and defence were accordingly less than in Allied countries. Hence, German taxpayers carried a comparatively lighter tax burden. However, the Dawes Plan never imposed on Germany a level of taxation or tax rates equivalent to those in Allied countries.4 What they did, therefore, was to set down definite figures suggesting funds that Germany could generate in its own currency to meet annual reparation obligations for the next five years and beyond. Germany’s annual payments would only be limited by the country’s taxable capacity and the need to maintain a balanced budget. The immediate need was for an international loan of 800 million GM to bolster the Reichsbank’s depleted gold reserves and to finance the purchase of German commodities to make reparation payments in kind. The committee proposed a reorganisation of German finances involving some foreign supervision of the Reichsbank. The reichmark was firmly established on a gold-dollar basis – at the same parity as the old gold mark (1/2790 kilogram of fine gold, or 4.2 reichsmarks to the dollar) – to enhance investor confidence in its stability. The committee identified three sources that would provide a fund for reparation payments: (1) the ordinary Reich budget (2) railway bonds (worth 11 billion GM) plus a transport tax;5 and (3) industrial debentures (worth 5 billion GM) – (Schuker, 1976, pp. 180–6; Steiner, 2005, pp. 240–3). The budgetary contribution was expected to be slight in the first two years, but raised thereafter to reflect a tax burden broadly commensurate with the burden borne by taxpayers in the Allied countries. Interest and amortisation payments on the railway bonds and industrial debentures plus the transport tax would together contribute annual amounts of about 1.25 billion GM. When the plan was fully

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operational, the German budget would contribute the other half of the required reparation payments (1.25 billion GM). The committee recommended a four-year partial moratorium, requiring little cash payments for the first two years of the plan, but providing for the resumption of payments in kind. From a relatively low figure of 1 billion GM in the first year (September 1924 to August 1925) the annual payments would rise over the next three years to reach a steady-state level of 2.5 billion GM in the fifth or ‘standard year’.6 This annual payment, known as the ‘Standard Dawes Annuity’ was to continue, supplemented in future years by a percentage increase (estimated at about 3 per cent per annum) based on a complex index of German prosperity which would tie yearly payments to the strength of the German economy.7 A gold clause automatically adjusted annual money reparation payments if the value of gold (or the level of world gold prices) changed by 10 per cent or more from the 1928 value. The aim was to keep the reparations burden stable in terms of the quantity of goods and services that must be given up by Germany to effect the real transfer of reparations. The Dawes annuities were inclusive payments. They expressed the total value of all payments made by Germany in any one year and included not only reparations (cash and in kind), but also Allied occupation costs, the costs of the various control commissions, clearing payments in settlement of pre-war private debts, and in general, all Germany’s financial obligations under the Treaty – all consolidated in one figure of Germany’s annual indebtedness. In effect, the Dawes Plan, by another accounting sleight of hand, indirectly reduced the total reparations bill by incorporating all non-reparation charges into the global amount of Germany’s annual reparation payments (Marks, 1978, p. 247). Previously, Germany’s current debts were separated or itemised under several headings depending on whether the items were liabilities in mark or in foreign currencies. The Dawes method was an improvement on previous practice and it increased the transparency of reparation payments. In addition, the financial burden of maintaining foreign troops in the Rhineland was lifted, since occupation costs were now merged with the slimmer reparations account. As a consequence, what the new method did was to show how comparatively modest the Dawes annuities really were. But, on the other hand, the very smallness of that amount meant that the actual reparation payments could be squeezed and shrunk to insignificance. For under the new rules, all German liabilities and charges (including the costs of all new controls and service of the Dawes Loan) would have to come out of a single pot

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of German money. Every mark spent for these non-reparation purposes meant that much less for reparations proper. Hence, the French and other creditors could expect little or no relief for their weakened domestic budgets through significant German payments in the near future – even though the 1921 global reparations figure remained unchanged. The Dawes Committee did not deal with the vexed question of the distribution of reparation receipts among the creditor countries. That remained to be decided by the international conference later in the year.8 Transfer protection A notable feature of the plan was the elaborate care taken to protect German currency reserves from reparation transfers. Instead of continuing with the practice whereby the German authorities were responsible for raising in marks the sums due for reparations, converting those sums into foreign currencies in the foreign-exchange market and then transferring them to their creditors (all in one operation), the experts devised a two-stage process for reparation payments which separated the domestic collection from that of transfer to the reparation creditors. The transfer function was hived off to a new Transfer Committee composed of five (Allied) international experts and headed by the Agent General for Reparations, the American corporate lawyer and former undersecretary at the US Treasury Department, Seymour Parker Gilbert.9 Freed from the foreign remittance side of the operation, the German government’s responsibility for the payment of reparations ended when the funds raised in gold reichsmarks in a given year were deposited in the Agent General’s special account at the Reichsbank. The plan’s authors wanted to safeguard against a Transfer Problem or debt crisis wrecking the whole scheme. They were persuaded by the argument that a viable reparation programme required that reparation transfers should absolutely not exceed Germany’s capacity to pay. In the absence of foreign loans a German export surplus available at any point in time is the measure of Germany’s maximum capacity to pay. Failure to restrict reparation transfers to such available sums would result in serious budgetary instability and exchange crises – an outflow of gold and currency depreciation. To avoid these dangers and to promote Germany as a safe investment destination a ‘transfer protection’ clause was therefore inserted in the plan. Under its provisions the Agent General would convert the German reparation funds into the currencies of the reparation creditors (pounds, francs, and so on) only when

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conditions were favourable – that is to say, when there was a plentiful supply of such foreign currencies in the foreign-exchange market. The Transfer Committee had the power to suspend transfer of funds across the exchanges and stop selling marks if at any time the gold value of the mark (or its exchange value) tended to depreciate, involving a loss of gold and currency reserves. If transfer protection was activated under such unfavourable exchange conditions, then the Transfer Committee had to invest the un-transferred German funds in bonds or other loans in Germany. When the un-transferred sums reach 5 billion GM – whether in the form of deposits or investments – payments from the German Treasury were to be reduced to stop accumulation beyond that limit. The Committee could even suspend Treaty charges even before accumulation reached 5 billion GM.10 It was in Germany’s economic interest, of course, to maintain the stability of its currency. But since, under the plan, Germany’s reparation debts were liabilities in marks only, and that payment in marks should be the definitive discharge of Germany’s obligations, the Allies and their citizens (as receivers of reparations and payments in gold or foreign currencies) had every incentive to preserve the newly established German gold standard and prevent any depreciation in the external value of the mark. In the event, over the life of the Dawes Plan, the Transfer Committee never had to suspend transfers. When the plan was published in 1924, there was some concern that in dealing with the problem of transferring payments, the Dawes Committee failed to relate this problem to the stark realities facing Germany in terms of her balance of payments and foreign trade prospects more generally. Such realities, in conjunction with the protective device, it was felt, could jeopardise the whole reparation plan. The Committee repeatedly emphasises that a country can pay its international debts only if it runs a budget surplus equivalent to the debt payment, and an excess of exports over imports of equal magnitude in foreign currency. This principle applies to a country without the benefit of foreign loans or net foreign investment income and invisible earning – in fact, a country like Germany in 1924. If Germany is pressured to pay reparations that disturb that delicate equilibrium, the result can only be a certain collapse of the Germany currency and the return of inflation. To safeguard against that, and to protect the German standard of living, the elaborate machinery of protection for regulating the transfers was set up. The payment of reparations had to be managed. The Dawes experts evidently had no faith, as others did, in the workings of a supposedly automatic transfer mechanism. According to that theory, increased reparation taxes within Germany and a German

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budget surplus, by reducing the available buying power of the German people, would automatically set up economic forces resulting in an export surplus equal to the budget surplus. Foreign exchange would thereby be provided to make possible the transfer abroad of the funds collected within Germany. Disavowing any automatic solution to the problem, the experts of the Dawes Committee set up the ingenious device for regulating the amount of payment to be made annually by means of whatever export surplus may develop. But what the Committee disguises or does not bother to explain are the wider implications of the transfer protection device in such a regime. Even if the German people manage from year to year to raise the reparation funds to the limit of their taxable capacity, there is no guarantee that the Allies would be paid. Indeed, there is every probability that the reparation funds so collected in marks might not be transferred to the creditors. The problem arises because at this point the second stage of the two-stage transfer protection process comes into play. It stipulates that the transfer to other countries can take place only through an excess of exports over imports in Germany’s trade balance. If Germany cannot increase exports, then the amount of reparations set aside annually would not be transferred. Now, the experts knew perfectly well that over the past five years Germany never once achieved an export surplus, and the prospects for the next five years looked little better. The fact was that, as a contemporary estimate revealed, for Germany to reach her pre-war prosperity, she must ‘sell at least three times as much as the rest of the world has been buying from her’.11 It is astonishing, therefore, that there was no discussion in the Dawes report about how German exports could be increased – given that the reparation payments were dependent on the recovery of German markets. The report did not deal at all with the capacity of other countries to receive reparations without disruption of their economies. The experts did not consider the creditors’ capacity to receive payments as well as the debtor’s capacity to pay; yet one was the inverse of the other. The truth is, the Dawes Committee had a different, perhaps, more focused agenda. Their plan was to put Germany back on its feet. For that, reconstruction must precede reparations. They shielded the German balance of payments and consumption level from excessive reparation demands. They put in place guarantees to inspire financial confidence for the plan to work and for Germany to be able to borrow abroad. What the experts intended came to pass. The Dawes bailout worked its magic; so much so, that for four years the world forgot all about reparations.


Before moving on to the Dawes Plan in operation, a word on the McKenna Report on the German funds squirreled away in foreign financial centres. Few words will suffice, since the report itself was brief and inconsequential (Cmd. 2105 [1924], pp. 126–30). Before the war, the Committee reported, German foreign assets were about 28 billion GM, but at the end of 1923 the total was down to 6.75 billion GM – roughly a quarter of pre-war holdings. The Committee obtained these figures at second hand from German published sources and information volunteered by private individuals. They made no attempt to examine records and accounts of bankers and businesses engaged in the transactions under investigation; neither did they try to track down specific transactions. In fact, they could only guess at figures. The capital flight from Germany, the experts asserted, was propelled by fears over German monetary disorder (runaway inflation, currency depreciation) and reparation taxes. Germany would have had no net foreign assets, were it not for the fact that foreign speculators’ purchases of worthless paper marks and mark balances gave Germany a profit of between 7 and 8 billion GM. The foreign speculators’ loss (and Germany’s gain) was the source of foreign exchange that largely financed Germany’s post-war current account deficit (trade deficit and cash reparations) of nearly 10 billion GM. In a downbeat, laconic passage the McKenna Committee discouragingly denied that the hidden fugitive funds could be tracked down and arbitrarily appropriated by the German authorities. In any case, German capital abroad was not available for reparations, since it was all private property. Flight capital would only return in the wake of monetary stabilisation and a prosperous Germany. Those in the know paid no attention to the McKenna Report, because, ‘from the outset, it had been a smokescreen devised by Logan [James Logan, the American unofficial observer on the Reparations Commission] to divert the French.’ It gave the French a chance to ‘let off steam’ on a matter of high political importance to them, without affecting in any way the work of the main Dawes Committee (Buckingham, 1983, p. 139).12 The 1924 London conference The Dawes Plan received an early positive response. Within a week of receipt of the experts’ report the Reparations Commission unanimously decided to recommend the report’s conclusion to the governments concerned. By the middle of May 1924 all countries accepted the plan and agreed to an international conference in July/August to make arrangements for putting the plan into operation. Ready acceptance

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came partly because on the negative side there was no alternative and partly also because the plan was skilfully crafted and made a favourable impression with its seemingly technical competence in reparation management. Its functional set-up, eschewing political complications increased its general acceptability. Moreover, it was a bankers’ plan, backed by American money and the US administration – Carroll Quigley (1966, p. 308) referred to it as ‘largely a J.P. Morgan production’.13 It could not fail to impress. However, for all its business-like features the plan required political legitimacy to make it work. The report itself at several points obliquely mentioned the need for complementary political changes or compromises; for instance, the restoration of Germany’s ‘economic unity’ and the need for it to control all its territory and resources – hinting pointedly at the speedy economic evacuation of the Ruhr. Nothing was said about the military occupation. The complex machinery for collection and remittance of reparation funds envisaged by the plan seemed calculated to undermine the status and competence of the Reparations Commission. Then there was the matter of the terms and conditions for the German international loan to be discussed. Shortly after the Dawes report came out, US Secretary of State, Charles Evans Hughes asked the Wall Street Bank, J.P. Morgan & Co. to head a syndicate of banks to underwrite the loan. The American banks were expected to issue at least half of the total, the other half to be raised in various European capitals. The international loan was regarded as crucial for the success of the plan. In addition to its specific use mentioned above, the loan was expected to provide many indirect benefits. It would: (1) signal Germany’s goodwill by enabling it to resume reparation deliveries (2) emphasise the confidence of international bankers in German finance and economic prospects (3) send an encouraging signal to American capital markets, and (3) provide an Anglo-American seal of approval for the new reparation arrangements and perhaps be the forerunner of further loans to Germany. All was now set fair for the international conference to agree the terms of the Dawes settlement. When the conference opened in London on 16 July therefore, the items on the agenda were: (1) evacuation of the Ruhr (2) the status and powers of the Reparations Commission (3) agreement on Reichstag legislation required to implement the Dawes regime in Germany, and (4) the Dawes international loan for Germany.14 Between the acceptance of the Dawes Plan and the meeting of the international conference, general elections in Britain and France produced new political leaders in the two countries. Ramsay MacDonald, the leader of the


British Labour Party, became prime minister of a minority government in January 1924, and on 15 June the Radical-Socialist leader, Edouard Herriot replaced Poincaré as premier, at the head of a Cartel des Gauches majority of Socialists and Radical Socialists in the Chamber of Deputies. The conference, under the chairmanship of James Ramsay MacDonald met in two stages; for the first two weeks with the Allies among themselves, followed from 5 August by further negotiations with the participation of the Germans. With the fall of Poincaré on 11 May, the new premier, Edouard Herriot, headed the French delegation. The German delegation were led by Wilhelm Marx (chancellor) Gustav Stresemann (foreign minister) and Hans Luther (finance minister). MacDonald invited Herriot to spend a weekend (21–22 June 1924) at Chequers, the official country home of the prime minister, for preliminary talks. Herriot wanted the London conference to be followed soon by Allied meetings to discuss war debts and security. He tried to link Ruhr military withdrawal with a scheme (disliked by the Germans), but long cherished by the Quai d’Orsay, for the ‘mobilisation’ and ‘commercialisation’ of part of the German reparations debt – this time, in respect of the German railway bonds under the Dawes Plan. The plan expressly mentioned the possibility of such an operation, but it was never put into effect.15 He also wanted evacuation of the first Rhineland zone (Cologne), due in January 1925, to be delayed for two to five years until there was sufficient progress on German disarmament. These proposals failed to win MacDonald’s approval. Thereupon, Herriot showed his readiness to compromise on the powers of the Reparations Commission and the likely dates for Rhineland evacuation. He gave up the link between reparations and inter-Allied debt, and yielded on economic evacuation of the Ruhr as soon as the Germans put the Dawes machinery into operation. To make up for these disappointments, Herriot was fobbed off with a vague, high-sounding, but meaningless British ‘moral pledge of continuous collaboration’ (un pacte moral de collaboration continue) announced by MacDonald (Wheeler-Bennett and Latimer, 1930, pp. 59–60). At the conference, MacDonald sided with the Germans, championed their cause, and as chairman of the proceedings, habitually saw to it that no matter was settled before German objections or concerns were fully heard and sympathetically addressed. The Germans played their cards superbly, their game plan helped along by French policy, now in the more conciliatory hands of Herriot. The evacuation of the Ruhr (particularly military occupation) proved the most contentious issue. It was not really settled to the satisfaction of the German delegation until the

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last day of the conference – without requiring in return any concession on their part. Herriot agreed to military evacuation of the Ruhr within a year, while Dortmund and Offenburg would be evacuated at once.16 Economic occupation ended on 8 September 1924, shortly after the Dawes Plan came into force. The customs barrier between the occupied territories and the rest of Germany was abolished at the same time. The other three items on the agenda did not raise serious problems since all parties were pledged to accept the Dawes Plan in its entirety. They were all parts of the agreed Dawes package; but they required unpleasant adjustments and concessions from those affected by their implementation. The Dawes report had already recommended a ‘slimming down’ of the Reparations Commission by hiving off some of its important functions to various Dawes control commissions, such as the Transfer Committee and the Agent General’s office; but British negotiators meant to go further. The British government went in the conference determined to drastically curb the powers of the Reparations Commission, even to get rid of it; but the French were equally determined to keep unimpaired the Commission’s powers to declare Germany in default and to maintain France’s right to impose sanctions after the Ruhr evacuation. The compromise finally adopted made future sanctions against German default virtually impossible. This followed from the conference’s decision to curtail the activities of the Reparations Commission and sharply restrict its powers to declare default, while at the same time placing all manner of conditions and obstacles in the way of any creditor government seeking to impose sanctions unilaterally – even when default was declared. It was the end of the line for any further move to enforce German compliance under Versailles.17 Setting up the ‘receivership’ or bailout machinery for Germany proposed by the Dawes report – the network of foreign controls imposed on the country – was one difficulty to be faced. Particularly sensitive was the request for the conversion of the national railways (the Deutsche Reichsbahn) into an independent joint-stock company with foreign supervision – the company’s assets being held as collateral for the Dawes Loan and its revenues pledged to contribute (38 per cent) to reparation annuities. This required a change in the statutes of the Reichsbahn that could only be passed by a two-thirds majority in the Reichstag. The great worry of Stresemann and the Reich government was that they could only get such legislation passed with the support of the Nationalist (DNVP) members of the Reichstag. But the latter were against the proposed changes and disliked the Dawes Plan that they regarded as a ‘second Versailles’ – a new foreign scheme for the

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‘enslavement’ of the German people. German leaders, however, pinned their hopes on another expert examination of Germany’s capacity to pay, in the expectation that they would get a downward revision in the reparations bill before they had to pay the first ‘standard annuity’ in 1928–29. Stresemann and Marx (the Reich Chancellor) wanted to wring out of Herriot a definite date for military evacuation of the Ruhr. They needed this French undertaking to take back to Berlin hoping it would sway enough DNVP members to secure Reichstag approval. In the event, on 29 August 1924 the railway bill was finally passed by 314 votes, 24 more than the required two-thirds – with half the DNVP members voting in favour. The rest of the Dawes legislation was also adopted. The bankers’ conditions The least disputed item on the agenda, but the most significant and decisive for the success of the conference was the proposed Dawes Loan. The role it played is a fine example of the old adage, ‘Money talks’. Those doing the talking were the bankers – behind the scenes, of course! It was a remarkable display of ‘bankers’ diplomacy’. The bankers in question were the Morgan partners, principally Thomas Lamont (also a partner at the London branch, Morgan Grenfell) and the Governor of the Bank of England, Montagu Norman. They worked in tandem with the US representatives at the conference and the British political leaders, Prime Minister Ramsay MacDonald and his Chancellor of the Exchequer, Philip Snowden to achieve the same objective. The objective was to neutralise French reservations and force Herriot to comply with the Anglo-American political and financial demands. The money lever was the obvious available instrument to exert pressure. In Jon Jacobson’s opinion, the conditions imposed by the bankers ‘exceeded economic rationality’ – more than was necessary for the security of the loan and future loans, and even more than the Germans would have asked for themselves (Jacobson, 1989, p. 99).18 At the close of the conference, Frank Kellogg (the American ambassador in London) wrote to Alanson Houghton (American ambassador in Berlin): ‘The bankers were fighting the German battles better than they could do it themselves; and of course you know we were’ (Buckingham, 1983, p. 145). Of course, American underwriters and the other syndicate bankers who had to sell the bonds to American investors needed firm guarantees on the security and debt service of the investments. The success of the loan issue was far from certain – not because of shortage of funds in New York,19 but because of investor shyness and uncertainty about political conditions in Europe.20 American investors

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would be asked to buy German government bonds currently perceived as risky. The bankers were convinced that no one would lend to Germany with its industrial heartland currently under foreign occupation. The financiers, therefore, were adamant that nothing must be done to harm Germany’s economic recovery and its ability to repay loans. Everything must be done to win Germany’s willing acceptance of the Dawes Plan. To give bondholders adequate protection, the bankers insisted on three non-negotiable conditions before they could recommend the loan: (1) France must agree to a speedy evacuation of the Ruhr. (2) The Reparations Commission must be deprived of its right to declare a German default and the power to do so given to a new committee chaired by an American. The security of the loan had to be safeguarded from a renewal of unilateral sanctions by the French. (3) The loan must carry a first lien or charge on German assets and revenues – repayment of the loan must take priority over reparations transfer. The rights of American bondholders must take precedence over the rights of Allied taxpayers in the event of German insolvency. Now, as mentioned above, these conditions and demands were the same as those sought by the political leaders of Britain, the United States and Germany. Their political objectives just happened to coincide with what the financiers judged were the potential bondholders’ minimum terms and conditions. Stresemann certainly came to the conference demanding the first two conditions in exchange for efforts to secure German ratification of the necessary Dawes legislation, including the railway statute. Thus the Anglo-American authorities (and Stresemann, indirectly through intermediaries) worked hand in glove with the bankers’ diplomacy and together brought off the famous 1924 Dawes reparations settlement at the London conference. The political leaders of Britain, the United States and Germany – through diplomatic channels, personal meetings or indirect means – found common ground and formed a united bloc to fight for the Dawes agreements. The bankers’ loan offensive was considerably assisted by arm-twisting and lobbying by American and British ambassadors in Europe. The experts’ blueprint – the Dawes financial framework for Germany – needed the intergovernmental agreements signed in London to activate the machinery and bring about a regime change in the German economy – ‘Germany under Dawes’, the essence of the 1924 reparations experiment (Steiner, 2005, pp. 244–8). The bankers’ diplomatic activity on its own, whilst powerful, was insufficient for final success. To some extent the Anglo-American victory also owed something to the diplomatic and financial weakness of France and Herriot’s performance

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in London. In his recent history of modern France, Harry Kedward remarked that Herriot ‘embraced negotiation with a mixture of trust and enthusiasm which made him vulnerable to hardened and hostile British diplomacy’ (Kedward, 2006, p. 108) – an observation confirmed by all recent writers on the episode. The hapless Herriot not only had to face some tough negotiations across the conference table, but also had to reckon with a coterie of international bankers in the corridors and behind the scenes, determined to get their way. Herriot was ingenuous, ill-prepared, defenceless and poorly served by his advisors. He came to the conference with a weak hand, perhaps no hand. He was browbeaten by Snowden, cajoled by MacDonald and faced hostility from Montagu Norman in cahoots with Hjalmar Schacht. The British pressure on the French, particularly from Snowden and Norman was such, notes one reviewer, that it ‘... seems to have gone beyond the rational to a passionate Gallophobia’.21 Snowden’s attitude embarrassed even the Germans. It was relatively easy for the American bankers, in particular, to dictate terms to Herriot since all the other participants at the conference accepted the bankers’ demand that France give up the Ruhr as a condition for the German international loan – indispensable for the resumption of reparations and European reconstruction. Furthermore, the Morgan partners made it clear that the long-term loan to France then under consideration by them was dependent on success in floating the German loan.22 The bankers’ conditions for the German loan definitely reduced Herriot’s margin for manoeuvre at the conference. In his memoirs, Herriot relates how under the Dawes Plan the proposed German loan was ‘linked in an indivisible manner’ (liait de façon indivisible) to the financial payments flowing from mortgaged German railway bonds, industrial debentures and annual budgetary contributions of 1.5 billion GM. These financial payments in turn made up the fund out of which interest and amortisation on the loan plus reparations would be paid. As underwriters of the international loan and, indirectly, the German payments scheme, one could then understand why the bankers felt justified in demanding certain political and military guarantees.23 What Herriot resented was the way in which many of the key decisions were made in private, outside the committees and without any debate in the plenary sessions.24 Herriot was forced to make concessions in all directions. He alone left the conference empty-handed. By signing the London agreements France conceded all the bankers’ political and military demands, including its right under the Versailles Treaty to impose sanctions in case of German default. France was told to forget about getting advanced reparations through the mobilisation

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of part of the German debt – at least for the time being, and a new trade treaty with Germany was three years away. France was forced to retreat from the Ruhr, give up the profitable Régie and other Ruhr receipts and renounce all future designs on German territory or economic resources. Future relations with Germany had to be on the basis of détente rather than confrontation. The last French troops left the Ruhr on 25 August 1925 (departing from Düsseldorf, Duisburg and Ruhrort, occupied since March 1921). The country lost its influence in the Reparations Commission whose functions and prerogatives were also curtailed. The Dawes machinery for collection and remittance of reparations effectively bypassed the Commission. Overall, the London agreements were a clear victory for Germany. The Versailles system was revised to the benefit of Germany, and France lost the protection and safeguards provided by the treaty. Julius Curtius, Stresemann’s successor as German foreign minister, rejoiced that the 1924 settlement marked ‘the first departure from the atmosphere of Diktats, ultimatums and sanctions’ (Mit dem Dawes-Plan ist Zum erstenmal die Atmosphäre der Diktate, Ultimaten und Sanktionen verlassen worden).25 German leaders met and negotiated with the Allies on equal terms; and with the Anglo-Americans, at any rate, as partners rather than antagonists in a joint enterprise, heralding a policy of Gleichberechtigung (political equality) for the Germans.

4.2

Germany under Dawes: Reparations on credit

The Dawes Loan The Dawes Plan went into effect on 1 September 1924. Six weeks later, on 14 October, the Dawes Loan (known formally as the German External Loan 1924) was issued in New York and eight European countries. The total amount raised was $190.4 million equivalent at current exchange rates to 967 million RM, yielding 800 million GM net, for bonds with a face value of 1027 million RM (McNeil, 1986, p. 33). Following a massive advertising campaign to sell the bonds, the American tranche of $110 million was vastly oversubscribed and sold in 15 minutes. The American bankers took the bonds at 87 and sold them to the public at 92 per cent of face value. The Dawes bonds carried an attractive interest return of 7.3 per cent over 25 years – until 15 October 1949. Including amortisation, the nominal yield to maturity was 8.7 per cent. The low and declining level of long-term interest rates on Wall Street made the offer an attractive proposition for American investors. The yield on the bonds compared with about 4 per cent in the New York bond market


and was around 2 per cent higher than the rate on British government bonds. The American slice of the loan was protected by a ‘gold clause’ (interest and principal was to be paid in gold dollars). The equivalent of $50 million was issued in sterling in the City of London, and $13 million was sold privately by French banks in Paris (some of it to British banks). The rest of the loan was placed on five other European markets. J.P. Morgan as syndicate manager earned a quarter per cent commission plus underwriting fees. Through the firm’s efforts the Dawes Loan was made a direct and unconditional obligation of the German government, chargeable on all its assets and revenues. Specifically, German government revenues from customs duties and from specific taxes (on alcohol, tobacco and sugar) were collateral security. The remarkable success of the Dawes Loan flotation owed much to effective marketing to attract the interest of an American public more used to the patriotic purchase of Liberty Bonds. But the prospectus the underwriters promoted was in any case a very attractive one, not only in terms of interest return but also of security and guarantees for the investment. For the underwriters, if the German loan were to be a trailblazer for future loans the risk element must be reduced to the absolute minimum. The risks, as assessed by the Morgan partners included: (1) The probability, given the German reputation for evading reparations that they would deliberately default on reparation obligations almost immediately. (2) If not, the possibility that Germany might be unable to raise sufficient revenue to pay both reparations and repayment of the Dawes Loan. In which case, the Agent General and the Transfer Committee (given the insufficiency of funds) were bound under the Treaty of Versailles to give priority to the payments due to reparation creditors. (3) There was also the fear that the Reparations Commission might ‘mobilise’ or sell to private investors the reparation bonds of the Reichsbahn and that service of the bonds might have priority over interest and amortisation of the Dawes Loan. As noted earlier, France, in particular, was extremely keen to get hold of the proceeds of such sales (in addition to the cash reparation annuities) as means to repay war debts. In view of this risk-assessment exercise, the bankers determined that they must seek the utmost safeguards for the flotation they were sponsoring which would run over 25 years, whatever happened to the temporary Dawes Plan and its transfer guarantees. So as not to put potential bondholders at risk, the Morgan partners wanted repayment of the Dawes German loan to rank ahead of (or to have priority over) payment of reparations. What stood in the way was Article 248 of the Treaty of

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Versailles which provided that reparation claims must have absolute priority of payment by Germany over commercial debts and all other obligations of the Reich. For that purpose reparation payments were made a first charge or lien on all the assets and revenues of the German state. The Morgan bankers therefore set about lobbying the Reparations Commission to get an exception to this rule and recognition by the Transfer Committee of the priority of the Dawes Loan. On 13 October 1924 (the day before the flotation), the Reparations Commission gave its permission and granted bondholders preferential treatment or priority for the service of the Dawes Loan over all reparation payments (including deliveries in kind and other remittances). Also, as mentioned earlier, the loan service was made a specific charge on all payments provided under the Dawes scheme; for instance, the money raised by Reichsbahn revenues could be used to service the loan. In particular, purchases of the foreign currencies necessary for the service (interest and amortisation) were given absolute priority of remittance over the funds for transfer in discharge of reparations.26 This reversal of the Versailles ranking rule soon caused a ripple of uneasiness in financial circles and among others affected by the Dawes arrangements (notably, private investors and reparation creditors). The consequences of the decision, whilst obvious to the bankers responsible for the change, appeared vague and uncertain to others. Initially, this ‘priority question’ was discussed privately and only came into the open in 1927 or thereabouts, although it undoubtedly had a huge effect on the behaviour of debtor and creditor countries even before then. At the time the 1924 Dawes Loan was launched, the position was clear. Service of the loan ranked ahead of reparation payments; but since the loan repayments were small relative to reparation annuities there was no problem. The Dawes experts’ estimates of German revenues assigned to reparation payments indicated that the total of such revenues (based on Germany’s ‘capacity to pay’) was more than enough to cover both reparations and service of the Dawes Loan even when the latter was deducted from the reparation annuities available for remittance. An avalanche of American money While the Dawes recovery plan was being fashioned, Germany prepared itself for life after the hyperinflation. Currency stabilisation and the revival of the economy required drastic measures, costly in terms of unemployment, bankruptcies, idle factories and lost output. Hjalmar Schacht, the newly installed president of the Reichsbank was determined to establish the credibility of the restored gold standard and to defend

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it at all cost. The Reichsbank was obliged by statute to keep a gold and foreign-exchange reserve or ‘cover’ amounting to 40 per cent of its new note issue – three-quarters of the cover to be held in gold. It was further required to limit advances (cash) to the Reich to 100 million RM – two years later, increased to 400 million RM. The discount rate was kept at 10 per cent until February 1925. On 7 April 1924, Schacht ordered a complete stoppage of Reichsbank credit (Kreditstopp). As outstanding debts were repaid, credits were rationed and gradually allocated to favoured businesses, such as conglomerates and large firms undergoing rationalisation. As the Reichsbank was the sole source of credit in the first year of stabilisation, the credit action resulted in bankruptcies and the weeding out of many small businesses that had sprung up in the hothouse of the inflationary period. The toll of bankruptcies and business failures that stood at 123 just before the ‘credit stop’, mounted to 2870 in the third quarter of 1924 (McNeil, 1989, p. 112). Schacht wanted to promote ‘modernisation’ and ‘rationalisation’ in industry to improve Germany’s international competitiveness and the trade balance. A quarter of government employees were sacked in 1924 to reduce government spending. The budget was balanced by early 1924. An emergency decree put an end to the eight-hour day as normal working practice. The restrictive financial and fiscal measures of the stabilisation brought on a short, severe recession during the winter of 1925–26. Schacht’s Kreditstopp remained in force until December 1925; but the deflationary policy was maintained until the spring of 1926. Unemployment peaked at 22.6 per cent in January 1926 – reaching a level of 2 million (McNeil, 1989, p. 116). In the 1926 budget, the government moved to cushion the decline in output through tax cuts and by spending the budget surpluses of the past two years. Finance Minister Peter Reinhold could hardly conceal the implicit budget deficit of his expansionary fiscal proposals, but the effect was evident as output and employment increased and Germany quickly recovered from the recession.27 However, the wiping out of savings by the hyperinflation had left its mark, and the loan market remained tight. Meanwhile, following the success of the Dawes Loan floatation there was, surprisingly, no immediate rush to lend money to Germany, particularly in the form of long-term loans. There was an initial period of caution on the part of American banks and lenders, as they carefully appraised the economic situation in Germany and the credit worthiness of prospective borrowers. However, as the German boom gathered pace and confidence returned with the signing of the Locarno treaties (October 1925),28 the appetite of American investors for German bonds

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became almost insatiable. ‘Suddenly, on Wall Street and in financial centres across the land’, wrote Stephen Schuker, ‘everyone wanted a piece of the action in German bonds. Once-sceptical investment bankers soon found themselves combing the four corners of the Reich, seeking to ferret out business’ (Schuker, 1988, p. 37). From the late summer of 1925 foreign investment banks, mainly in New York, became particularly active in floating German bond issues. The United States became a ready market for German bonds. Of course, all this created a bonanza for the international bankers who, as Carroll Quigley puts it, ‘... sat in heaven, under a rain of fees and commissions’ (Quigley, 1966, p. 309). Huge quantities of foreign capital amounting to an avalanche flowed into Germany. During 1924–31, 135 loans to Germany were publicly offered in the United States.29 Push and pull factors were at work. The American market was awash with liquid balances, interest rates were low and investors were eagerly looking for more profitable investment outlets. On the borrowing side, Germany was suffering from a capital shortage, a liquidity or ‘credit crunch’ that left firms badly in need of working capital. States and municipalities, starved of funds by the Reich government, but planning to step up spending on social and infrastructure projects, found a solution by taking out enormous international loans to compensate for the reduction of tax revenue transferred to them from the central government. In addition to a substantial interest differential in favour of German securities, generous tax privileges (exemption from income tax and securities turnover tax) were given to foreign bonds to make the loans more appealing to US investors (Schuker, 1988, p. 40). As a temporary recovery programme or bailout, Dawes appeared a well-controlled, manageable scheme. But whether foreseen or not, all that changed with the surge of American loans that followed in the wake of the 1924 Dawes Loan. The huge flows of capital to Germany changed the character of the Dawes Plan. As is well known, Dawes turned into a ‘recycling’ scheme for the payment of reparations with borrowed (mostly American) money – ‘reparations on credit’, as it were. It was an official, international example of what is commonly called a ‘Ponzi scheme’. There are several examples of Ponzi finance in the world economy. The developing countries’ debt problem of the 1980s is one example, where several indebted countries financed debt service by issuing even more debt at higher interest rates. The obvious flaw in this surreal financial merry-go-round, in Germany’s case, was its dependence on a continuous flow of foreign loans. Long-term borrowing was used to meet obligatory, short-term payments such as reparation annuities and commercial debt service. In short, more long-term debt were

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incurred to pay current bills. That way the mandatory bills were paid without any sacrifice of living standards and cut in consumption levels – a form of ‘consumption-smoothing’ over time – since the extra loans permitted repayments to be spread out over the life of the bonds. No belt-tightening was currently required; that was put off for another day. The German people were once again conveniently relieved of the painful adjustments required to make a real resource transfer. But as the scheme worked and reparations were fully paid and American investors received their interest payments on the nail, there was a general acquiescence in the situation as it stood. Foreign loans swelled the foreign-exchange reserves of the Reichsbank and provided the necessary foreign currencies to keep the Agent General well supplied with transferable cash. At the same time, the foreign-currency proceeds of the loans, converted into reichsmarks, enabled the German borrowers to make capital investments that resulted in a huge permanent addition to Germany’s national wealth. The index of industrial production regained its pre-war level by 1927, and exports reached 13.4 billion GM in 1929, against 10 billion in 1913 (Heyde, 1998, pp. 35–64). In addition to bond financing (portfolio investment) and short-term credits to Germany, there was a considerable amount of US direst investment in German plant, equipment and factories, as well as joint ventures and the establishment of subsidiaries in ‘high-tech’ industries – all involving the transfer of American organisational skills and technology. US multinationals such as Ford, General Motors, Du Pont, General Electric, Dow Chemical, Standard Oil of New Jersey were all heavily involved in Germany’s industrial revival – a revival, wrote Ron Chernow, that ‘would provide Adolf Hitler with a splendid industrial machine and the money to finance massive rearmament’ (Chernow, 1990, pp. 250–1).30 Lending to Germany seemed safe enough despite loans to Germany reaching an average of $250 million a year on top of reparation liabilities and a continuous trade deficit.31 Germany became the largest debtor country in the world, accounting for one-third of all US long-term investment between 1919 and 1929.32 During the Dawes Plan period, Germany borrowed abroad at least 20 billion RM (half of it from the United States), equivalent to around 30 per cent of Germany’s 1929 national income (Heiber, 1993, p. 124; McNeil, 1986, pp. 18–19; Ritschl, 2003, p. 123). Destabilising incentives and excessive borrowing However, at the beginning of the fourth annuity year (1927–28) storm clouds appeared on the horizon. The fragility of the system was noticed.

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Concern was expressed at the continuing German trade deficit, the build-up of the German credit pyramid caused by over-borrowing and excessive public spending. American Dawes Loan investors, hitherto lulled into a false sense of security by the priority status on their German bonds, were making new assessments of risk and returns in view of the deteriorating German financial situation that suggested an incipient debt crisis. Whether justified or not, these fears were behind the reopening of the priority question, were the loans subsequently made to Germany on a par with the original 1924 Dawes Loan? If the answer was yes, and priority of all loan remittances over reparations was taken for granted, then this would create an implicit competition between reparations and private loans for the transfer funds in Germany. Thus, for example, if a foreign-exchange shortage arose, commercial claims (as senior debt) would absorb the limited sums available and effectively ‘drive out’ reparations. If on the other hand, the answer to the question was ‘No’, then in case of a German transfer crisis new investors would lose the Dawes ‘seniority’ safeguard against the limited funds going to reparations, resulting in new loans going into default. Germany’s credit rating would plummet. Quotations on existing German issues would be marked down. American investors would take fright and lending to Germany would cease. Whatever the answer, in either case, the priority question (especially if pushed to extremes) would inevitably give rise to a conflict of interest between Allied reparation creditors and American private lenders. This conflict of interest would not remain a purely financial problem. It could soon become a political issue at any moment if Germany had to choose between paying reparations or defaulting on private debts. The question was never resolved during the life of the Dawes Plan, since no conflict of interest actually arose, and Germany was never in default. No actual transfer crisis arose, and hence, there was no rationing or competition for foreign exchange, and all Germany’s debt obligations were met in full. Of the total reparation annuities due for the five years of the plan (7.65 billion RM), Germany made payments amounting to 7.55 billion RM; although deliveries in kind (not cash) accounted for over half of the mark value of the total amount paid (Castillon, 1953, p. 53). Of course, the uncertainty surrounding the priority issue – loans versus reparations – created a stir in financial circles and affected the psychology of the market in German bonds, since it raised questions such as how safe were the existing German loans and how much could foreigners safely lend Germany. But the purely legal aspects of the question were certain and clear enough. In the event of German bankruptcy or general default, the order of priority

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for claims on German assets were: (1) the 1924 Dawes external loan; (2) reparations, and (3) commercial and other loans.33 This legal position, however, did not stop German borrowers and some American issuing houses from trying to persuade investors that ordinary commercial loans to Germany enjoyed the same privileged status as the original 1924 Dawes Loan, and that lending to Germany was quite safe. And, indeed, in time it came to be generally recognised that since the commercial loans were, in fact, financing reparation payments, the private debts were entitled to priority treatment; hence, if it ever came to the crunch, commercial claims would take precedence over reparations. What kept the system going, therefore, was the fortuitous absence of crisis that allowed the recycling process to work unhindered, with American finance generating reparations. But crisis was just round the corner. Discontents and misgivings were simmering for some time. There was the feeling that the good times could not last. The reparations transfer problem was not solved. The Dawes regime merely disguised it and allowed the German people to indulge in a consumption spree. The government resumed building of the welfare state. The Dawes Plan was not tested because it never worked as originally intended. It was meant to provide a breathing space for the restoration of confidence in the German economy – to be followed by more fundamental adjustments such as balanced budgets, a gradual increase in taxation sufficient to raise the annual instalment of reparations by the fifth year and the achievement of an equivalent export surplus. These latter goals were not achieved. Instead, the scheme as it worked in practice merely succeeded in putting off the day of reckoning. These failures have been attributed to the distorted or destabilising incentives and disincentives unintentionally created by the functioning of the Dawes regime. Dawes provided incentives for Germany to over-borrow and build up a foreign credit mountain. Germany’s gold and foreign-currency reserves were shielded by ‘transfer protection’ and continuous capital inflows, as foreign creditors were also protected. Thus, despite large trade and current-account deficits the country faced no effective balance of payments constraint. Besides feeding an artificial consumption boom and public-sector spending spree, the foreign-debt block could provide another useful service – this time as leverage in the fight against reparations. The German economic historian, Albrecht Ritschl sees this as a plausible rationale for German over-borrowing and consequent accumulation of massive foreign debts (Ritschl, 2002, pp. 125–7).34 The strategy was to harness America’s financial muscle decisively on Germany’s side against the reparation

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creditors: ‘If New York bankers had enough investments in Germany, they would form a powerful ally in the German struggle against future reparations’ (Ritschl, 1999, p. 141). In January 1927, Hans Simon, an official in the German foreign ministry’s reparations section, summed up Germany’s reparations policy thus: ‘The greater our private debt, the smaller our reparations burden’ (McNeil, 1986, p. 157). The greater the amounts of foreign currency required to repay the burgeoning loans, the less cash would be left over for reparation transfers. This relationship could be exploited by Germany, Simon suggests, to engineer, over the next two years, a foreign-debt crisis and put an end to reparations. For Berlin, the temptation to risk instigating or contriving a foreign-debt crisis was ever present. Faced with such an open or incipient transfer crisis, the Anglo-Americans would certainly insist that commercial debts must be honoured (and repaid) before reparations. The hope was that the Americans, who called the shots in these matters, might work with the Germans against reparations. London and Wall Street could be counted upon to support bondholders against reparation creditors. But that depended on whether investors’ interest would prevail over American taxpayers’ interest in lower taxes (or the avoidance of increased taxes) made possible by the repayment of Allied war debts flowing from German reparations. As for disincentive effects, the most damaging was how, in a general way, the German authorities were relieved of practically all responsibility for the economic outcomes of their decision-making. The balance of payments could be neglected; so was the need to husband foreign exchange through the build-up of export surpluses. The Dawes regime encouraged lax fiscal policy at all levels of German governments, which allowed high spending by states and municipalities. At the same time, the Reichsbank pursued a restrictive monetary policy. Denied access to domestic credit the states, municipalities and firms turned to the international capital market, principally Wall Street, for funds. Incentives to control borrowing were weak and attempts to do so after 1925 by the Beratungsstelle für Auslandskredite (Foreign Loans Advisory Council) were not wholly successful because whilst nearly half of the public-sector applications for foreign loans were rejected, practically all loans for industry and agriculture were approved. These favoured borrowers also benefited from tax exemptions on their foreign loans. There were frequent criticisms of improvident borrowing and excessive spending by states and municipalities, with warnings that public-sector deficits could undermine the stability of the mark. Schacht was a particularly vocal critic, supported by Gilbert and US

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ambassador, Jacob Schurman (Rosenberg, 1999, pp. 172–4). Accusations were made that much of the capital was being put to ‘unproductive’ uses (such as municipal baths, public libraries, theatres, football stadiums and job-creation schemes) and that these were ‘crowding out’ income-generating private investment that would provide foreign exchange to repay the loans. That was so; but there was also a good deal of socially useful investments in infrastructure projects (including subways, railway electrification and roads) as well as spending on social housing and ports and harbour improvements. Schacht opposed excessive borrowing for another reason: ‘he wished as soon as possible to provoke a transfer crisis that would “prove” Germany’s inability to pay reparations’ (Schuker, 1985, p. 345). Indeed, in 1928 Schacht publicly declared: ‘I don’t want to pay, and therefore I will accept no theory that proves I must pay.’35 By 1927, service on the foreign debt reached alarming proportions and strained Germany’s transfer capacity by absorbing an inordinate amount of the foreign-exchange reserves available for all foreign payments, including reparation transfers. This worry fuelled fears that transfer protection and other Dawes safeguards might break down, with disastrous consequences. In October 1928, an alarmed Morgan partner, Russell Leffingwell, warned that the Dawes Plan had become a ‘house of cards’.36 By this time, the American bond market was effectively closed to German borrowers. American banks had already reduced Germany’s credit rating, and existing German bonds were being marked down.

4.3

The Young Plan

Searching for a final reparations plan Towards the end of 1927, Gilbert decided the time had come for the Dawes stopgap to go, and made proposals for an orderly revision of it. This had to be done to forestall a chaotic breakdown of the whole Dawes machinery. In collaboration with officials in Washington and Wall Street bankers, he set to work on the outlines of a revised reparations plan. Gilbert publicly signalled the need for change in his third annual report of 10 December 1927. Here, he called for a final fixing of Germany’s total reparation obligations, the abolition of transfer protection and an end to foreign supervision of German finances. During autumn the following year (1928), Gilbert had a series of conversations with political leaders, going from country to country whipping up support for his proposals and urging the appointment of a new committee of experts to revise the Dawes Plan.

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The ministers and foreign bankers he met were aware of the fragility of the current Dawes arrangements (as noted above), but there was little consensus on the remedies proposed by Gilbert. According to the Agent General, the Dawes Plan opened the international capital market to Germany and restored investor confidence; but the foreign credit resources were abused by the German authorities through reckless fiscal policies and unsustainable levels of borrowing. Such irresponsible behaviour would soon lead to a loss of access to foreign credit markets. Germany would not be able to pay reparations on credit and would have to find the necessary foreign exchange through trade surpluses. The removal of foreign supervision and transfer protection would stop the abuse and force Germany to adopt prudent policies if it wanted to avoid default and remain connected to international credit markets. The fixing of Germany’s total reparation obligations would provide an additional incentive for the German authorities to set their public finances in order. The final determination of the indemnity, by removing uncertainty, would allow foreign investors to assess risk more accurately. For Gilbert, envisaging some sort of final settlement of reparations and war debts, this action would facilitate the commercialisation (or public sale to private investors) of a part of the German reparation bonds – the proceeds of which could be used by the Allied debtors to repay their war debts at a discount. The European debtors would settle war debts among themselves and with the United States partly through depoliticised indemnity payments, thereby abating the international rancour associated with government-to-government claims, evasions and confrontations. These informal soundings by Gilbert revealed conflicting interests in the various capitals over his proposals, referred to then as the ‘American plan’. However, nothing could be done before the November 1928 US presidential elections and other national elections pending in Germany, France and Britain. In the meantime, countries firmed up their negotiating positions. Inevitably, the prospect of Dawes revision raised expectations and objections in various quarters. The US stand on war debt repayments predictably, and quite naturally enough, would be a key determinant of the positions taken by the reparation creditors (who were major debtors to the United States). That state of play rebounded on Germany’s bargaining position vis-à-vis both the reparation creditors and the United States itself. As reparations flowed to the European Allies under Dawes, so they began to repay their war debts to the United States under funding agreements negotiated during 1925–26. War debt repayments then became dependent on German reparation remittances, establishing

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a spontaneous link between the two sets of debts despite the official US denial of any such connection – but for the European debtors a perfectly sensible, second-best alternative to all-round debt cancellation – the ideal solution. But, of course, for the Americans, the Dawes reparations-war debt loop cast the United States in the role of debt collector for both types of debt as well as for the purely private debts underpinning the whole Dawes experiment. It was a role American officials desperately wanted to escape from; hence their steadfast support for a new revised settlement ruling out war debt reduction. In view of this attitude, the British who initially wanted to continue with the Dawes arrangement until a German payments crisis forced upon everyone a general all-round cancellation of debts changed tack in October 1928.37 Hoping for a softening of the American position on war debts, British ministers fell in with Gilbert’s call for a prompt, final settlement when the Agent General assured Churchill (Chancellor of the Exchequer) that reparation transfers would be sufficient to cover British debts to the United States as well as French debt payments to Britain – a transaction that would leave Britain all square, with a zero net balance on reparations and war debt accounts, as contemplated in the 1922 Balfour formula. Churchill sought assurance on this and got it on 19 October 1928, even though the deal implied keeping the German annuity as high as the Dawes standard annual payment. Likewise, the French backed the forthcoming enquiry on the understanding that German reparations would be fixed at a level sufficient to enable France to repay debts to the United States and Britain – $4 billion to the United States and £653 million to Britain – and to defray part of the cost involved in reconstructing the devastated areas. Revision could also involve commercialisation of part of the German reparations debt – an operation that would firmly commit Germany to paying. Germany would be less likely to default on debt instruments (now held by private foreign investors) and risk the loss of access to the world capital market. The proceeds from the sale of German reparation bonds would allow France to make advanced repayment of its US debt, possibly at a discount. The only problem was that the United States would only allow commercialisation after, not before, French ratification of the Mellon-Bérenger funding agreement (signed on 29 April 1926). American and French interests would coincide through the fixing of the German debt (with provision for partial commercialisation). Such action would encourage the French to ratify the Mellon-Bérenger agreement, lift the ban on the marketing of reparation bonds in the United States and remove a source of Franco-American discord – all the more

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reason for both countries to strengthen the political debt status quo against those calling for more radical revision. The late conversion of the British to the Franco-American position raised fears in Germany that the settlement taking shape would be one based on creditor claims rather than on Germany’s ‘capacity to pay’. Under pressure from Gilbert, the German cabinet was bounced into a decision, joining in the call for the meeting of an expert committee. Of course, Germany was anxious to get the Allies out of the Rhineland and was prepared to make concessions on reparations. When Stresemann met Poincaré in Paris on 27 August 1928 for the signing of the Briand-Kellogg pact, the French leader – returned to power in 1926 – confirmed that he no longer considered Rhineland occupation as a security guarantee, but simply as a pledge for the payment of reparations. ‘It was from that moment’, noted Christian Baechler, ‘that German diplomacy backed a final reparations settlement in order to obtain early Rhineland evacuation’ (Baechler, 1996, p. 775). Consequently, with some reservations, Berlin went along with Gilbert’s plan. German officials, particularly Schacht, had no wish to offend the Americans who they believed would demand lower reparations (less than the average Dawes annuities) to protect their outstanding private loans. Germany was already paying around 1 billion RM annually to service her commercial debts. Schacht was confident that the experts would not be bound by French and British claims when they come to examine Germany’s capacity to pay – as they inevitably must – given the loss of transfer protection. They would then have to base the size of the average reparations annuities on Germany’s capacity to pay, which must be considerably less than the standard Dawes annuity. Germany’s demand for a reduction in the Dawes annuity was in exchange for giving up transfer protection, but Stresemann also insisted on an early evacuation of the Rhineland and the ending of foreign control over the Reichsbank and the German railways. Stresemann, planning to proceed with the rearmament of Germany, had earlier demanded the removal of the Inter-Allied Military Control Commission (IAMCC) in Germany – the body set up under the Treaty to monitor and supervise German compliance with the disarmament clauses. The request was conceded, and the Commission was withdrawn on 31 January 1927.38 With Germany falling into line, Gilbert’s ‘missionary journey’ ended. In September 1928, at the session of the League Assembly at Geneva, Germany agreed with France and Britain in calling for negotiations and the appointment of a committee of financial experts to propose a final and definitive solution to the reparations problem. The members


of the experts’ committee nominated by the five creditor countries (and the Americans who agreed to serve) were formally appointed by the Reparations Commission in January 1929. The German government appointed their own experts on 9 January. Unlike the Dawes Committee, where Germany was not represented, this time her representatives were to participate as full-fledged partners. The financial experts, under the chairmanship of the American industrialist and chairman of General Electric, Owen D. Young held their first meeting in Paris on 11 February 1929 at the luxurious, new Hotel George V. The committee remained in session for 17 weeks. Despite meeting in a mood of optimism fed by the prevailing speculative boom, they were less disposed to compromise than the 1924 Dawes Committee members. The proceedings were marked by constant bickering, including several sharp and bitter exchanges between delegates over the amount Germany could be expected to pay in the future (Wheeler-Bennett and Latimer, 1930, pp. 85–91). The experts were faced with two tasks: (1) to review Germany’s recent economic performance and reassess Germany’s ‘capacity to pay’ in relation to the legitimate claims of the creditor countries, and (2) in the light of that reassessment to determine Germany’s total reparations liability, fix the size of Germany’s annuities and propose a timetable for payments (or the number of years over which they would be paid) – that is, find a definitive replacement for the 1921 London Schedule of Payments. As the negotiations started, two relevant factors became obvious: First, the link between reparations and war debts was recognised and taken for granted – except by Washington officials; although in practice they were happy to go along with a settlement that produced sufficient reparations from Germany to allow the European debtors to repay American war debts. Second, there was the gulf that separated reparation creditor claims and German expectations. The tension over this second matter exploded in the row over Schacht’s memorandum of 17 April stressing the weakness of the German economy, the unfavourable trade balance and rising unemployment. Schacht estimated that Germany needed 1 billion RM in foreign exchange to service the foreign loans and could not find another billion RM without ‘transfer protection’. An impartial examination of Germany’s capacity to pay, Schacht claimed, would suggest a sharp scaling down of annual payments lower than the tentative creditors’ figures or even the Dawes standard annuity. The German experts therefore initially offered 500 million RM on the basis of Germany’s capacity to pay, but Schacht increased that figure to 1650 million RM over 37 years if certain conditions were met. Those

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conditions were blatantly political and were rejected by the stunned experts. Schacht demanded the return of Danzig and the Polish Corridor, the return of the German colonies (to satisfy the country’s need for raw materials) and Allied tariff reductions to make it easier for Germany to pay reparations through increased export earnings. Schacht’s ‘bombshell’ nearly wrecked the conference. Schacht knew that Young desperately wanted to have a ‘successful’ conference; and he threw roadblocks in his way. However, when tension built up in the committee, Young simply ended meetings before rows broke out. He later recalled that ‘whenever I saw Schacht’s neck getting red or hands trembling, I adjourned the conference.’39 Whether intended or not, Schacht’s action did create a crisis – not only at the conference, but also in Germany itself where it provoked a cabinet crisis. There was panic on the German stock exchanges, and the Reichsbank suffered a sharp decline (approximately 1 billion RM) in its gold and foreign-exchange reserves owing to a massive withdrawal of short-term credit by French and other foreign banks. On 25 April the Reichsbank had to raise its discount rate sharply from 6.5 to 7.5 per cent. To stem the outflow British and American banks came to the rescue with support operations in the foreign-exchange market. With an already weakening economy, a fiscal crisis soon developed which further weakened Germany’s bargaining position. Schacht made his divisive demands without consulting Berlin. Fearing a collapse of the conference and further financial woes, the Müller government recalled Schacht and instructed him to moderate his position. The conference was saved by chairman Young’s timely intervention, by way of arbitration. Early in May, he proposed a compromise scheme that made it easier to get agreement on the size of annuities. Young brought together three pieces of finished work produced and already agreed in sub-committees or by himself. These were: (1) Agreement on how some substitute for ‘transfer protection’ could be incorporated in the new plan, to provide safeguards for transfer difficulties. This was done by dividing Germany’s obligations into two categories: ‘unconditional’ (amounts that must be paid under all circumstances, with absolute priority of payment) and ‘conditional’ (amounts that could be postponed in the event of transfer difficulties threatening the mark’s gold parity).40 (2) Young’s memorandum of 28 March on principles for determining annuities, whereby total German reparation liabilities should be sufficient to cover Allied war debts plus service of the Dawes Loan and an amount to provide most European reparations creditors with some indemnity for war damage. (3) The recent agreement among

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the Allied experts involving concessions by all creditor countries whereby they reduced their original reparation demands by 16 per cent. Young’s compromise proposals, revolving around an average annuity of 2050 million marks, defused the crisis and relieved the tension. Working within these parameters made it easier for delegates to focus on more meaningful figures and hence led to convergence on the actual compromise figures, known as the Young annuities, averaging 2050 million RM ($512.5 million) – the core of the Young Plan.41 Within a couple of days (3 May 1929) the Müller cabinet accepted the Young compromise scheme and instructed Schacht to sign the agreement. For the European creditor countries the latest Young scheme meant a further reduction of 7.5 per cent from the previously agreed total of Germany’s payments. That gave rise to disagreements about how to spread the burden of the reduced annuities among themselves – a dispute that was eventually patched up. The British delegates complained that the revised scheme changed the reparation shares among the Allies (known as the 1920 Spa percentages) in such a way – a 2.4 per cent reduction in Britain’s share – as to throw most of the burden of Allied sacrifice in favour of Germany upon Great Britain. It was felt that Britain was being called upon to shoulder a disproportionate share of the reduction in the size of the German annuities to allow Belgium and Italy to receive larger portions of the reduced (average) annual German payments. Ultimately, the British delegates accepted the arrangement, leaving to their government the option of amending the proposal later. On 22 May, all the creditor countries endorsed the agreement; on 7 June, all the parties signed the Young report (SIA, 1929). The Young Report The plan provided for a series of annuities beginning with 1707 million RM for the year 1930–31 (32 per cent below the standard Dawes annuity), rising gradually to a peak of 2420 million RM in 1965 before falling again and ending on 31 March 1988 with a fixed payment of 898 million RM – when, coincidentally, war debt payments to the United States would end. Thus, reparations were ‘matched up’ with Allied war debts. The average annuity to be paid during the first 37 years (including the charge for servicing the 1924 Dawes Loan, until paid off in the year 1949) was 2050 million RM compared with the Dawes standard annuity of 2500 million RM – a reduction of 20 per cent. During the first ten years, scheduled annual payments were going to be low (all below 2 billion RM). Thus, to begin with, Germany’s payments would be reduced by about a third. Over 58 years, the nominal payments would total

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115 billion RM, with a present (marketable) value of only 37 billion RM at a discount rate of 5.5 per cent. Out of this total, war debt payments to the United States would absorb roughly 65 per cent over the same period. For the first 37 years, the annuities covering net war debt payments to the United States would also meet some of the war-damage costs of the European Allies, that is to say, provide for reparations proper. But in the last 22 years, the annuities would almost exactly equal the war debt payments. A de facto link was thus established between reparations and war debts, similar to the Bonar Law plan of January 1923; though the US government still denied it. Germany was therefore asked to underwrite the Allies’ war debt payments to the United States (Heyde, 1998, pp. 65–9). The only way the Young Plan’s fixed schedule of annuities could be permanently reduced would be if the United States decided to cancel or reduce the Allied debt – an unlikely contingency. In the event of cancellation, German payments would be cut by two-thirds up to 1966, with no further payments thereafter (Lamont, 1930, pp. 336–63). In Germany, the annuities would come from two sources: the railways and the Reich budget. A direct tax on the Reichsbahn’s operating revenues amounting to 660 million RM a year for 37 years would go directly to meet the ‘unconditional’ annuities – reparations proper, plus debt service on the Dawes Loan. The remainder of each annuity, the ‘conditional’ or postponable portion (corresponding to the inter-Allied debts) would come out of the Reich budget. The experts could not agree on Germany’s present and future capacity to pay;42 hence, the division of each annuity into ‘conditional’ and ‘unconditional’ portions was a way to reconcile the difference by providing for an obligatory minimum payment and safeguards for payments beyond that amount. In addition, the unconditional category was a form ideally suited to partial mobilisation of the annuities since no issuing house could expect to sell bonds based on annuities subject to postponement or risks of non-payment. Mobilisation or commercialisation was an important feature of the Young Plan, certainly for those war-damaged countries (principally France and Belgium) hoping to recoup the costs of reconstruction by marketing some of the annuities – by selling reparation bonds for cash to private investors. It was believed that the conversion of sizeable sums of reparations into strictly commercial obligations could safeguard against a German attempt to renege on reparations. Debts to private persons would be less likely to be repudiated than obligations between governments simply from fear of losing creditworthiness in financial markets. For France in particular, prepayment through the public sale

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of reparation bonds perfectly fulfilled the need (besides the security aspect) originally served by keeping troops in the occupied Rhineland, who were just about to leave, in any case. Even so, mobilisation could only take place on a limited scale and Germany had to be compensated by a reasonable degree of transfer protection. Consequently, only about one-third of each annuity (approximately 660 million RM, or $165 million) was ‘unconditionally’ payable (or non-postponable), and only this portion of the debt (because it was more certain) could be commercialised. Of this ‘must pay’ portion of the annuities (after providing for service of the 1924 Dawes Loan), 500 million RM would go to France for reparations proper (war damage or indemnité nette), with the remainder (112 million RM) going to the other reparation creditors. Payments in kind were to continue, but for a limited period of ten years on a reducing scale, starting at 750 million RM annually and levelling off to 300 million RM (SIA, 1930, pp. 495–528).43 The Young Plan was hailed by many foreign observers as a complete and final settlement of reparations. But it was met with a storm of protests in Germany during the autumn of 1929. Why, then, did the German government accept it? Initially, there was disappointment at the way the creditor experts seemed focused on linking war debts to reparations. Even the American experts seemed determined to keep something like the Dawes recycling so that the United States could get war debt repayment through reparations. Schacht and the German political leaders had hopes for a different American agenda whereby the Americans would demand lower reparations to protect their private loans. Instead, they did the opposite. Despite official denials, they threw in their lot with the European creditors and pressed for high reparations to keep war debt repayments flowing Westwards. Washington’s uncompromising stand on war debt repayment meant that the Administration supported American taxpayers at the expense of bondholders. Although reduced by Young, Germany’s annual reparation payments remained high, extending the period of payment over two generations. But realistically, the alternative was reversion to the higher Dawes annuity. Germany lost ‘transfer protection’ on one-third of the average Young annuity, but was provided with a substitute, whereby Germany could claim a delay of the transfer for a maximum of two years. Reparation payments were now to be collected and distributed through the newly founded Bank for International Settlements (BIS) owned by the principal European central banks, which was also to deal with transfer suspensions or moratoriums. The Dawes ‘index of prosperity’ (which Germans feared would have led to increased future annuities) no longer applied.

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On the plus side, Germany regained its financial independence. The dismantling of all the Dawes supervisory agencies meant the abolition of foreign controls over transfers, the Reichsbahn and the Reichsbank, and the release of all pledges and guarantees used for the receipt of the Dawes reparations. The reparation bonds and debentures imposed on the German railways and industry were cancelled. But the big prize won by the Germans, especially dear to Stresemann, was the early evacuation of the Rhineland by French troops. Eighteen days before he died, Stresemann felt moved to rejoice: ‘Wir sind wieder Herr in Hause!’ (‘We are once more masters in our house!’).44 Never mind an inadequate reparations settlement – the Rhineland is free! By June, the second and third Rhineland zones of occupation (Koblenz and Mainz) were free of foreign troops. Within two years reparations would be gone as well. The Hague conferences, 1929–30 Snowden fights for Britain Before that came the two Hague conferences, the first in August 1929 and the second in January 1930. These met to put the political seal of approval on the Young Plan and the ongoing but separate negotiations on the Rhineland evacuation. Agreements on both these issues had to be finalised prior to ratification by national parliaments. Few delegates expected much trouble over the reparations settlement, but the return to power in June 1929 of a minority Labour government in Britain changed all that. Leading Labour ministers, especially Philip Snowden, Chancellor of the Exchequer, (soon to be chief British delegate at the Hague conference) with the support of the Prime Minister, Ramsay MacDonald, from the start were spoiling for a fight over the proposed distribution of German reparation payments. Appearing at The Hague on 6 August 1929 as ‘the narrowest of narrow Englishmen’, Snowden, in the words of his biographer ‘... created a world sensation’ with his bullying demands (Cross, 1966, p. 237). What were Snowden’s demands and why the row that nearly wrecked the conference? As mentioned above, in order to lighten Germany’s burden, Young’s compromise scheme reduced the Allied claims and thereby altered the 1920 Spa distribution of Allied reparation shares. The shares of Italy and Belgium were increased and the shares going to France and the British Empire were reduced; but the British percentage share was more sharply cut – from 22.8 per cent to 20.4 per cent. Nevertheless, the Young annuities assigned to Great Britain were in line with the Balfour Note, since Britain’s receipts would fully cover her future war debt repayments to

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the United States. But Snowden was not satisfied. Britain would, no doubt, get full coverage for the next ten years or so; but it would not cover the so-called arrears arising from the remittances Britain made to the United States out of her own resources during the past five years before receiving any repayments from her Allied debtors. Snowden sought compensation for arrears of £118 million owed to Britain – otherwise, Britain would be out of pocket. Putting matters right meant a readjustment of the Young payments to give Britain a larger share of both the conditional and unconditional annuities. To Snowden, Britain appeared to have been provided, unfairly, with little or no indemnity for war damage (reparations proper), as indicated by the small British share of the unconditional annuities – less than £900,000. Like Lloyd George before him, Snowden insisted that so long as reparations were being paid at all, Britain should get her proper share. He expressed his dissatisfaction by demanding a revision of the distribution of reparation receipts based on three objections: 1. The Young Report reduced Britain’s annual average share of reparation receipts by 48 million RM (£2.4 million). Snowden insisted that the full amount of 48 million RM provided by the Spa percentages should be restored to Britain, and in cash, rather than deliveries in kind. 2. On unconditional annuities (or reparations proper) Snowden objected to the Young distribution, which allocated roughly five-sixths of the total to France. A readjustment in Britain’s favour was required here. 3. Payments in kind (seen as a threat to British coal exports) were a feature of reparations particularly disliked by the British. Although under Young such payments were only to continue for ten years and on a decreasing scale, Snowden wanted to put an end to them at once. After three weeks of acrimonious negotiations, displays of brinkmanship and stonewalling, Snowden’s adamant attitude paid off.45 He settled for 40 million RM per annum out of the 48 million RM he claimed as the extra amount required to restore Britain’s rightful share of annual German receipts. He thus won back 83 per cent of the amount that the Baldwin government had sacrificed by signing the Young Plan. This was due to concessions wrung from France, Belgium and Italy. In addition, Britain’s share of unconditional annuities increased from 18 million RM to 55 million RM, with Germany this time bearing the additional burden.46 The surplus arising from the five-month overlap of the Dawes Plan and the Young Plan, which should have been repaid to Germany,

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was given instead to Britain. Snowden largely got his way on curtailing reparations in kind. To safeguard British markets abroad, such reparation deliveries from Germany to recipient countries could not be re-sold in foreign markets. In addition, Italy agreed to buy one million tons of Welsh coal every year (for three years) to counterbalance reparation deliveries from Germany. Snowden’s triumph brought trivial financial gains – ‘less than one-half of one percent’ of Britain’s annual budget (Jacobson, 1972, p. 310). It made not a scrap of difference to Britain’s financial problems. While all these animated theatrics were going on at The Hague, the British foreign secretary, Arthur Henderson, achieved far more historically important results at Scheveningen, in just a few hours, through intense but quiet diplomacy negotiating with Sresemann and Briand the series of agreements which led to the complete evacuation of the Rhineland by 30 June 1930. Snowden returned to a hero’s welcome in London and together with MacDonald drove through streets lined with cheering crowds to receive the Freedom of the City of London. As a result of the time lost in August by the long drawn-out wrangling over the British demands it was necessary to call a second Hague conference to deal with the backlog of work. In preparation for the conference seven committees of experts met to work out the technical details on matters still to be decided by the political negotiators. These included the mobilisation of reparations, the statutes of the BIS and the trust agreement between the Bank and the creditor countries, and the settlement of non-German (or east European) reparation obligations. This preparatory work was discussed and eventually approved by the participating governments in a series of agreements signed at The Hague on 20 January 1930. The Reparations Commission ceremonially burned the reparation bonds issued under the 1921 London Schedule of Payments, the reparation clauses of the Versailles Treaty were cancelled and the Reparations Commission was disbanded. Parker Gilbert wound up the Agent General’s business and left Berlin on 23 May 1930 after handing over the balance of cash and investments to the BIS. The BIS was confirmed as trustee for the creditor countries responsible for the receipt, management and distribution of the German reparation annuities (Clingan, 2001, p. 177). German Nationalists attack the Young Plan Between the two Hague conferences an ugly political situation developed in Germany during the autumn of 1929. The media baron, Alfred Hugenburg’s Nationalist Party (DNVP) launched a nationwide attack on the Young Plan, condemning it as an attempt to enslave the German


people by the demand for ‘tribute payments’ continuing well into the lifetime of their grandchildren. Joined by the NSDAP (known as the Nazis), the Stahlhelm (‘League of Front-Soldiers’, a militaristic veterans’ association) and the Pan-German League, the Nationalists demanded a referendum on a so-called Freedom Law (Freiheitsgesetz) before ratification of the Young agreements. Their campaign linked rejection of the Young Plan with repudiation of the ‘war-guilt lie’ of Versailles and calls for the immediate and unconditional evacuation of the Rhineland. The campaigners added a warning (in Paragraph 4 of the Freedom Law) that any member of the government who signed the Young Plan would be branded a traitor and could be tried for treason. The Nationalists aimed not merely to scupper the reparations plan, but also to ‘destroy the Great Coalition [the centre-left government of Hermann Müller], and possibly topple the Weimar Republic.’ They ‘exploited the Young Plan in order to wreck constitutional government in Germany’ (Maehl, 1986, pp. 147–8).47 The nationalist agitation received a boost on 5 December with the publication of a memorandum by Schacht complaining about the additional burden imposed on Germany by forced concessions to British demands at the recent Hague conference. The Nationalists succeeded in getting enough signatures on a petition to bring the proposed Freedom Law before the Reichstag, where it was voted down, 318 to 82 on 30 November 1929. The final stage of the campaign was then a plebiscite or the popular vote of the German people calling for rejection of the Young Plan and the ‘war guilt lie’. At the national ballot held on 22 December 1929, 5.8 million people expressed opposition to the Young Plan by voting in favour of the referendum. Whilst only 13.8 per cent of the total electorate backed the nationalists’ demands – far short of the number required to stop ratification (50 per cent or 21 million votes) – it was clear evidence of continuing German hostility to reparations and the Young Plan in particular. That was bound to raise doubts about German good faith in honouring future reparation commitments. With effective sanctions gone, reparation creditors were left with only German goodwill as guarantor of the Young payments. With the defeat of the plebiscite, ratification of the Young Plan proceeded when, after a stormy debate, the Reichstag finally approved it by a vote of 265 to 192 on 11 March 1930, followed by President von Hindenburg’s formal assent two days later. Ominously, the anti-Young campaign catapulted the Nazis into national prominence. Hitler and his party became household names throughout the Reich. Before that, they were a relatively small but noisy party based in Bavaria. Less than a year

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later at the Reichstag elections of September 1930 the Nazis, acquiring newly found legitimacy among the electorate, increased their representation from 12 to 107 seats (winning 6.4 million votes or 18.7 per cent of the popular vote) becoming the second largest party – after the Social Democrats (SPD). Young Plan stalled The BIS, based in Basel (Switzerland), opened its doors for business on 17 May 1930. Before that date the Bank’s management team opened negotiations with the financial authorities and issuing houses in nine different countries for the floatation of the Young Loan. Keen to establish its credibility, the BIS in one of its first tasks sponsored the loan to coincide with the date on which the first monthly reparations instalment from Germany was due (15 June 1930). The proceeds of a successful loan would contribute to the initial payment and also provide reassurance for a smooth and prompt reparation transfer in the coming year. In addition, it would signal that the financial markets could absorb ‘mobilised’ portions of the unconditional annuities. The Brüning cabinet in Berlin, on 10 June 1930, agreed to borrow $352 million at 5.5 per cent on nine different markets. The loan, formally known as the ‘German Government International 5 ½ % Loan 1930’, was issued in reichsmarks, dollars, belgas, French francs, sterling, guilders, lire, Swedish crowns and Swiss francs. However, the halcyon days when the Dawes Loan was floated were gone. The Young Loan floatation met with unfavourable market conditions – foreign bonds (particularly German debt) were being dumped on Wall Street and Germany’s credit rating was at its lowest at the time. Instead of the expected $352 million, the bankers could only sell $302 million, net (1.2 billion RM). There were few optimists who believed that Germany would ever repay such sums given the swollen size of Germany’s external liabilities (the debt overhang). Syndicate managers in New York and European centres found it difficult to sell the whole amount of their allocated bonds to the public and in all markets the bonds quickly fell to a discount with quotations well below the issue price, despite the high yield and special safeguards. The disastrous fall in the price of these bonds came as a shock, and indicated the difficulty of further attempts to commercialise reparations. Some of the discountable part of the American tranche was bought by French investors; but overall, American investors purchased a slightly larger share of the loan than the French – $98.53 million, American, and $98.25 million, French (Toniolo, 2005, pp. 70–2).

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Two-thirds of the proceeds of the $302 million went, via the BIS, to the creditor countries as a first instalment on reparations in proportion to their respective shares in the unconditional annuities. One-third was invested in Germany to finance the Reichsbahn and the Post Office. Two-thirds of the cost of servicing the loan (both interest and amortisation) was to come out of the unconditional reparation annuities payable by Germany (backed by a guarantee on specific tax revenues), and one-third was to be paid out of the German budget to the BIS. The Young Loan bonds were issued at 90 per cent below par, yielding 5.5 per cent annual nominal interest and maturing in 35 years (1930–65). All tranches of the Young Loan bonds (regardless of the currency of issue) carried a general ‘gold clause’ guarantee to protect investors against depreciation of their own currencies. This was in contrast to the Dawes Loan, where the American issue (the dollar tranche) was the only one for which the gold value of the bonds was explicitly guaranteed (Toniolo, 2005, p. 72). Under the new arrangement, known as the ‘General Bond’ between the Reich and the BIS, the German government ceased to be the debtor of the ex-Allied governments for at least a part of its unconditional annuities; instead, its debt was with the BIS, the trustee of the Young bondholders. The Young Plan was a flop. It lasted little more than a year, and Germany met its monthly reparation instalments only for that year. The plan did not take the politics out of reparations as the experts thought they had done. The channelling of reparations through the BIS – a new semi-private, supposedly neutral, international institution, run by a board of technocratic international bankers failed to alter nationalistic attitudes. The vision of a business-like cooperative solution quickly faded with the arrival of the storm clouds of Depression. Hopes soon foundered that the BIS would be a mechanism for issuing a series of international loans to finance reparations by mobilising reparation bonds. The Young Loan was the first and only sale of such bonds under the auspices of the BIS. The only other loan to Germany in connection with the Young Plan was the semi-official Kreuger loan arranged by American banks. Although the Young Committee made various references to the importance of exports, they were strangely reluctant to give reasons for their belief that Germany could pay. They wrote: ‘It is unnecessary for us to set out the various [economic reasons] which have led to our conclusions on the capacity of Germany to transfer’. Instead, they asserted boldly that ‘the total amount of the annuity proposed ... can, in fact, be both paid and transferred by Germany’.48 They were criticised at the

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time by those in the know for their unfounded optimism and failure to provide reasons for their astonishing conclusions. In the opinion of one critic, Dennis Robertson, the Cambridge economist, the available evidence about Germany’s ability to make real transfers was far from reassuring. Foreign loans were rapidly drying up; with the exception of 1926, no export surplus became available during the Dawes years – in fact, Germany was currently paying for imports with borrowed money. Consequently, Robertson estimated, to meet her foreign obligations under the Young Plan, Germany would have to borrow something like £150 million (3 billion RM) a year. Contemplating the future with equanimity, the Young experts were obviously relying on Germany’s ability to borrow and foreigners’ willingness to lend, so that loans would continue.49 But that was wishful thinking of a dangerous kind. The reality in 1929 was that the foreign borrowing would stop; the transfer problem would become acute, and there would be an insufficiency of foreign funds at Germany’s disposal to cover payments abroad. Under these credit-constraining conditions, Robertson suggested bleakly: ‘the only way reparations can ultimately be paid ... is by drastic action in Germany, designed to force down and keep down the standard of life in Germany ... with repercussions on both the German political situation and the world economic situation, many of which are very far from pleasant to contemplate.’50 It is a simple truth that a country cannot go on borrowing large sums of money without getting into repayment difficulties, that is, without at some stage reaching the limits of its creditworthiness and debt service capacity. Stresemann privately warned in late 1928: ‘Germany is dancing on a volcano’ (McNeil, 1986, p. 229). The Young rescheduling of the reparations debt reduced the present value of the debt by at least 20 per cent; but still the reparations debt owed (with a capitalised value of 35 billion RM) stood at something like 50 per cent of Germany’s 1929 national income which, when added to commercial debt, left Germany with an external debt amounting to over 70 per cent of gross domestic product (GDP) in 1929 (Ritschl, 1999, p. 144). Thus, even before the Wall Street crash in October 1929, Germany was saddled with an unsustainable foreign-debt burden.51 The perception, notably in financial markets, was that debt service obligations as a percentage of GDP would probably rise indefinitely in the absence of drastic corrective measures. It was a signal that Germany’s foreign credit limit had been reached. On a probabilistic basis, there was doubt that Germany would be able to honour the net present value of all existing debt servicing obligations. A domestic early-warning indication was the failure in

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May 1929 of a Reich internal loan designed to consolidate the government’s short-term floating debt. A placement of 500 million RM was offered, but only 177 million RM worth of bonds was sold. German investors were showing a marked reluctance to buy long-term government bonds. In fact, after 1929 there were no more Reich bond issues on the domestic market (Balderston, 1982, p. 511). After the summer of 1928, US foreign lending contracted sharply for a variety of reasons: diversion of funds to domestic uses and the increase in US interest rates in August 1928 being the most significant. But long-term lending to Germany fell more than lending to other European and Latin American countries, as investors in German securities took fright. New capital inflows to finance service on Germany’s outstanding debt evaporated in the second half of 1928. Unfounded optimism The Young Plan proved non-viable in the grim economic conditions of the late 1920s and could not be sustained. It was not robust enough to withstand the rapidly developing German financial and debt crises – a time when Germany had to find some 2 billion RM in reparation annuities and service on the Dawes Loan, plus 1 billion for commercial debt service. The dependence on foreign short-term credits in excess of liquid foreign assets (foreign-exchange reserves) was an exceedingly vulnerable item in Germany’s debt structure. In a panic, the bulk of these large credit obligations, recallable at very short notice, could precipitate a foreign-exchange crisis. In the 1931 crisis, 57.8 per cent of Germany’s foreign debts were repayable within three months (Born, 1983, p. 228). Already, at the end of 1930, exchange reserves amounted to only 18 per cent of short-term debt (Schnabel, 2004, pp. 842–3). Transfer difficulties persisted and the BIS mechanism could not eliminate them. Economic forces eventually killed off reparation, but it remained ‘political’ to the end. The political debts might be turned into ‘commercial debts’ handled by neutral bankers; nevertheless, they still remained debts. For the German people generally, the imposition of those debts still held deep political and psychological significance. The Young Plan’s reparations settlement suffered constant battering at the hands of German leaders throughout its short life. The aim was always revision, even repudiation of the plan. Schacht resigned in March 1930 as President of the Reichsbank in protest at the plan’s ratification. A few months later (August 1930), Chancellor Brüning on the campaign trail, listened approvingly as the chairman of his Centre Party, the prelate Ludwig Kaas, declared that ‘... no German accepts the Young Plan; the

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idea of revision is before our eyes’ (DBFP, Series 2, vol. I, p. 502). In an internal Reichsbank memorandum, Karl Blessing, later a Bundesbank president, wrote in April 1930 that by handling reparations, the BIS became a political institution and that from the start ‘... Germany should work skilfully in the BIS towards a revision of the Young Plan.’52 Germany wanted commercial loans but wished to be rid of reparations. Having locked themselves into the Young Plan to free the Rhineland, they set about trying to maximise whatever benefits could be derived from it, while steadfastly working to wriggle out of it. They were prepared to service commercial debts to maintain international creditworthiness, while waiting for a chance either by partial debt default or a severe financial crisis to get a drastic reduction in reparations. Germany’s creditors had a different view. For them, the way to establish creditworthiness was for Germany to pay reparation debts willingly. In the boom days when the Young Committee was sitting in Paris and American capital was flowing to Germany it was easy to believe that such capital inflows would continue to stimulate and underpin German economic growth. The pay-off for compliance with the reparations burden would be a new wave of American loans as occurred after the Dawes Loan. That was the carrot. The stick was removal of transfer protection to get Germany going on the virtuous path where it would be forced to pay its debts out of its own resources through export surpluses. The strategies of the two sides were incompatible. Germany accepted only one half of the package – the promise of large commercial loans. In German eyes, that was the only way that the Young Plan could be made to work. If the build-up of private debts forces Germany into partial default, then commercial debt would surely be favoured. Private commercial debt would drive out reparations. The weaknesses of both scenarios were the suppositions upon which they were based, the most serious of which was the same predictive flaw that large foreign loans would be forthcoming. That did not happen. When that part of the assumption did not materialise, Germany adopted its fallback position and ended up defaulting on its debt, enduring the misery of severe deflation – as Dennis Robertson predicted would happen.

Notes 1. See Hughes’s memorandum, 23 February 1923 in FRUS, 1923, vol. 2, p. 56. 2. Hughes emphasised that there could be ‘no economic recuperation in Europe unless Germany recuperates’ (p. 201) – a position fully in tune with British policy.

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3. For the full text and a discussion of the Dawes Plan, see Moulton (1924). See also, Reparations Commission, Report of the First Committee of Experts (Paris, 1924). 4. Sir Josiah Stamp (one of the Dawes experts who wanted lower reparations) estimated that if tax rates in Germany were equivalent to those in Britain, Germany could have raised 4.5 billion GM a year. But he felt that that was more than could be transferred abroad by Germany. The committee agreed, and so fixed Germany’s highest annual reparations payment – the ‘standard annuity’ – at just over half of that figure – see Schuker (1976), pp. 184–5. Stamp and the other experts had to face the fact of Germany’s unwillingness to pay and transfer reparations; so they were led to lower their demands to what could easily be paid by Germany. The committee wanted Germany’s voluntary compliance with the Dawes Plan. Their discussion on commensurate taxation was obviously not a serious one, but it gave others the impression that the anomaly was being tackled. But they knew that was ‘wishful thinking’, since they could do nothing about it. They and the Dawes commissioners had no effective control over the German budget. 5. The role of the German railways (Deutsche Reichsbahn Gesellschaft) in generating reparation funds during 1924–32 is clearly explained in Mierzejewski (1995). 6. Taking account of discrepancies in the evaluation of German national income, estimates of the annual reparation payments under the Dawes Plan vary from 1 per cent (in 1924–25) to around 3 per cent at the peak year starting in 1928. Castellan (1969, p. 160) finds that reparation payments for 1928 represented 2.4 per cent of German national income, using a figure of 72.4 billion RM for Germany’s GNP (gross national product) in that year. The consensus lies with Gerd Hardach’s estimate of 1.6 to 2.9 per cent of German GNP for the Dawes annual payments. See Hardach (1976, p. 146). The Dawes annuities were thus a relatively small share of German national income. The ‘standard’ Dawes payment, for instance, was actually less than half that of the 1921 London Schedule. See Webb (1988, p. 755). 7. The ‘index of prosperity’ was an average percentage increase, over a base value, in leading indicators of German prosperity, such as total exports and imports, budget receipts and expenditures, railway traffic, population, economic growth, consumption of tobacco, sugar, alcohol and coal. The index base was the average of the indicators in 1927, 1928 and 1929. 8. In the event, the matter of distribution was not settled at the London conference of August 1924, but by a special agreement signed at Paris on 14 January 1925. The British share increased from 22 per cent to 23.04 per cent and came at the expense of a reduction in the Belgian share. 9. The experts devised the elaborate mechanism of ‘transfer protection’ to provide enough flexibility to deal with any eventuality affecting Germany’s capacity to raise and transfer reparation sums. William McNeil noted that even as the plan was being accepted, ‘officials in the British Treasury, German government, and American banking circles did not believe that Germany could actually ever pay the sums set out by the Dawes Plan’ (McNeil, 1986, p. 27). With this doubt in their minds, the experts opted for ‘cautious flexibility’, since, they felt, only experience could determine what Germany could really pay.

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10. Caroll Quigley (1966, p. 308) points out that transfer protection ‘meant that the value of the German mark in the foreign-exchange market was artificially protected as if Germany had exchange control. This allowed Germany to begin a career of wild financial extravagance without suffering the consequences, which would have resulted under a system of free international exchange’. 11. See J. Henry Scattergood, ‘The Dawes Report – A Business Man’s View’, The Annals of the American Academy, CXIV (1924), p. 22. Scattergood referred to a 1924 estimate contained in a report on Germany’s economic and trade position by the Washington-based Institute of Economics. 12. Some years later, Sir Andrew McFadyean, secretary of the Dawes Committee, revealed that the McKenna Committee was an innocuous gesture to satisfy the French government in relation to the position they had taken up on German capital flight to evade reparations. The committee was set up, McFadyean wrote, ‘to conduct research into a mare’s nest, in which, to perpetrate a hideous mixed metaphor, the French had hoped to find golden German eggs which should have been made available for reparation payments’ (McFadyean, 1964, p. 89). 13. However, as General Dawes saw it, the plan had to appeal to two separate groups of people: it had to make sense to bankers such as J.P. Morgan, but it also had to appeal to Allied public opinion to meet with success. See Buckingham (1983, p. 140); Dawes (1939, p. 138). 14. For the proceedings of the Conference, see Cmd. 2270 [1924]. 15. German railway bonds with a face value of 11 billion RM were to be deposited with the Reparations Commissioners who might have handled the commercialisation operation. That operation would have involved the public sale of a portion of these bonds to private investors all over the world, thereby converting an intergovernmental debt into private debts. Germany would no longer be debtor to the Allies, but to private investors who would take the place of the Allied governments as creditors of the German government. For the French, the attraction of the conversion was the immediate receipt of a larger sum of money than could be provided by the scheduled Dawes annuities – monetary resources desperately needed to balance the French budget and support the weakened franc. Berlin feared commercialisation as an obvious trap set by the French to defeat Germany’s strategy of aiming for continuous downward revision of the reparations debt through intergovernmental negotiations. Once commercialised, Germany would find it difficult, if not impossible, to obtain debt reduction from private creditors, and default would likely invite market sanctions that could seriously damage Germany’s international credit. 16. Herriot was on shaky ground here, for after all, Poincaré had repeatedly stated that the occupation was simply to collect reparations – exactly, the point of the Dawes Plan. Withdrawal of French and Belgian troops from the Ruhr actually began on 14 August 1924. In June 1924 (at the time of the Chequers talks with MacDonald) Herriot made a friendly gesture to the Germans by authorizing the return of some 140,000 officials and workers expelled from the Ruhr, and freeing all prisoners still detained. See Davis (1975, p. 66).

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17. The new sanctions procedure aimed to prevent a repeat of the Ruhr occupation. Roadblocks to the calling of default and sanctions included the presence of a private American citizen when a declaration of default was under consideration; resort to arbitration against a majority decision, or on protest by Germany; sanctions only in the contestable case of ‘wilful default’, and so on. For details of the 1924 conference agreements, see George A. Finch, ‘The London Conference on the Application of the Dawes Plan’, The American Journal of International Law (1924), pp. 709–10, 715–17. 18. The reason why the American bankers asked for more stringent conditions, says Jacobson, was because ‘their action was instigated by the Franco-phobic Montagu Norman’ (p. 99). The Dawes Plan was indeed largely a J.P. Morgan production, but the show was directed by Montagu Norman. Norman involved the Morgan partners, principally Thomas Lamont, directly in the London negotiations. Given that half the Dawes Loan was to be placed on European markets, the American financiers deferred to Norman’s intimate knowledge of European credit markets. Such leeway allowed Norman to demand extra political conditions in addition to the normal financial guarantees. These extra demands amounted to vindictive coercion of the French (Jacobson, 1989, p. 99). 19. In fact, New York interest rates were, at that time, the lowest in the world. The American capital market became flushed with funds available for investment. In July 1924, Bank rate in London was raised from 3 to 4 per cent. Benjamin Strong, governor of the Federal Reserve Bank of New York (FRBNY) engineered a reduction in the discount rate from 4.5 per cent (in May 1924) to 3 per cent in August to inaugurate an ‘easy money’ policy. The aim was to combat domestic recession by providing cheap credit, assist the Bank of England to bolster its gold and foreign-exchange reserves by attracting foreign funds to London, and also, by increasing the attraction of New York for foreign borrowers. 20. The bankers’ initial pessimism reflected an understandable caution about handling an unfamiliar flotation; but it was partly a misreading of market sentiment and a decision to use ‘scare tactics’ to secure firmer guarantees. However, by early August, when American interest rates came down, thereby increasing the attractiveness of high-yielding foreign bonds, the bankers agreed that any remaining investor timidity in the market could be overcome by aggressive marketing. 21. See ‘La Grande Illusion’, a review of Stephen Schuker’s The End of French Predominance (1976) in The Economist, 15 January 1977, p. 101. 22. The franc was weak and still needed to be supported by the Morgan short-term $100 million line of credit. That loan was due to expire around the time the Dawes Loan would take effect. That was the point of pressure on the French available to the bankers. The American ambassador in Berlin, Alanson Houghton put it bluntly: ‘England and America have the franc in their control and can probably do with it what they want’ (Costigliola, 1976, p. 490). 23. See, Edouard Herriot (Memoires) Jadis, vol. 2 (Paris: Flammarion, 1952), p. 156. 24. See, Louis Muron, Edouard Herriot (1872–1957) (Lyons: Editions Lyonnaises d’Art et d’Histoire, 1997), p. 133.

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25. Julius Curtius, Der Young-Plan: Entstelllung und Wahrheit (Stuttgart: Mittelbach, 1950), p. 13. 26. But notice that the Dawes experts specified no special security or priority for the Dawes Loan. Harold Moulton noted that the loan was thus ‘merely placed on a parity with reparation obligations’. It was the Anglo-American bankers who subsequently insisted on priority for the loan. Moulton added that it is important to note, however, that the Dawes Committee stipulated that the service of the loan or any subsequent loans should be included in Germany’s total schedule of payments (Moulton, 1924, pp. 29–30). 27. For a brief, but excellent analysis of the importance of the 1926 budget in the history of Weimar fiscal policy, see C. Edmund Clingan, ‘The Budget Debate of 1926: A Case Study in Weimar Democracy’, European History Quarterly, 10 (2000), pp. 33–48. 28. At Locarno, Germany, France and Belgium renounced the use of force to alter their existing frontiers in western Europe and affirmed the permanence of a demilitarised Rhineland. While accepting the permanence of her western boundaries, Germany reserved the right to change its eastern borders; but agreed not to do so forcibly – only by peaceful revision under non-binding arbitration treaties with Poland and Czechoslovakia. The treaty commitments by Germany, France and Belgium were underwritten and guaranteed by Britain and Italy. A year later Germany was rewarded with a permanent seat on the Council of the League of Nations. Thus, it was claimed, the ‘economic peace’ of Dawes was underpinned by the ‘political peace’ of Locarno. In this amicable climate of peaceful coexistence, Briand and Stresemann had their famous four-hour private conversation over lunch on 17 September 1926 at Thoiry – a village in the French Jura, across the lake from Geneva. The two friends resolved to settle outstanding Franco-German differences, and agreed on a wide range of contentious matters – from early evacuation of the Rhineland to the advance payment of reparation annuities to France through the public sale of German railway bonds. However, the promise of Thoiry failed, owing to lack of domestic political support in France and Germany, and American opposition and British obstruction. A story, widely believed at the time, had it that when the waiter brought the bill, Briand grabbed it, saying: ‘I’ll pay the bill. You will pay the reparations.’ See Bernard Oudin, Aristide Briand: La Paix (Paris: Editions Robert Laffont, 1987), p. 494; also Steiner (2005, pp. 422–4). 29. See Robert K. Kuczynski, Bankers’ Profits from German Loans (Washington, DC: The Brookings Institution, 1932), pp. 150–5. 30. Edmund Clingan agrees with Chernow that ‘much of the modern plant that would produce tanks and planes’ were built under Weimar, but not that money to finance rearmament was also provided. He points out that ‘the foreign credits were long since consumed by the time the Austrian corporal got his hands on power’. But Clingan shares Chernow’s main point that it may be ‘a sad irony that the productivity growth of the Weimar years may have only benefited the Nazi regime of the 1930s’ – see Clingan (2001, p. 7). 31. See Jacques Attali, A Man of Influence: Sir Siegmund Warburg 1902–82 (London: Weidenfeld and Nicolson, 1986), p. 89.

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32. See Albert Fishlow, ‘Lessons from the Past: Capital Markets during the 19th Century and the Interwar Period’ in M. Kahler (ed.), The Politics of International Debt (Ithaca, NY and London: Cornell University Press, 1986), p. 73. 33. The priority of reparations was enshrined in Article 248 of the Treaty of Versailles that gave reparation creditors a ‘floating charge’ on all the assets and revenues of the Reich and its constituent states. The 1924 Dawes Loan (as part of the Dawes Plan) was accorded preferential treatment and granted special priority over all reparation payments and transfers. In fact, the payments of the loan were made out of the Dawes annuities themselves, and were secured by the ‘controlled revenues’. Some German states, municipalities and corporations disputed or ignored this priority ranking in their prospectuses and loan applications in order to assure American investors that they had unimpeded access to foreign exchange to meet loan repayments. For contemporary comments on the priority question, see Ernst H. Feilchenfeld, ‘Reparations and German External Loans’, Columbia Law Review, vol. 28 (1928), pp. 300–11; Roland W. Boyden, ‘The Priority Question’, Foreign Affairs, 6 (1928), pp. 368–78. 34. This is an example of a ‘moral hazard’ distortion – a situation where a debtor can strategically (or opportunistically) risk a default or affect its solvency through its own deliberate actions. In Germany’s case, the moral hazard was gambling on the abandonment of reparations. 35. Quoted in Werner Link, Amerikanische Stabilisierungspolitik (Düsseldorf: Droste, 1970), p. 386. 36. Leffingwell to Lamont, 22 October 1928, quoted in Costigliola (1984, p. 198). 37. According to Schuker, the British initially preferred to keep with the Dawes Plan ‘until an artificial crisis developed that forced cancellation of reparations and war debts all around’ – thus freeing them from paying war debts to the United States. They could pay, but ‘did not want to pay, because payment reduced their ability to compete against the United States for world financial leadership’ (Schuker, 1983, p. 125). 38. The presence of the Military Control Commission was deeply resented by the Germans and was never able to get on with its job of controlling German rearmament. In fact, as Lionel Kochan commented: ‘[The Commission’s] final report, detailing the full extent to which its work had been frustrated, was hushed up, lest it jeopardise the policy and atmosphere of understanding’ with Germany following the Locarno treaties. See Lionel Kochan, The Struggle for Germany 1914–1945 (Edinburgh: Edinburgh University Press, 1963), p. 55. The Commission’s report, running to 504 pages, concluded that Germany had never disarmed, and had no intention of disarming. But Sir Austen Chamberlain and Briand wanted nothing to block Germany’s admission to the League of Nations, and so acceded to Germany’s request to recall the IAMCC. 39. Quoted in John M. Carroll, ‘Owen D. Young and German Reparations: The Diplomacy of an Enlightened Businessman’ in Kenneth Paul Jones (ed.), US Diplomats in Europe, 1919–1941 (Santa Barbara, CA and Oxford: ABC-Clio, 1981), p. 57. 40. Owen Young agreed to the two-tier division of the German annuities to avoid a deadlock on the question of linking reparations and war debts. But it is important to see the implications of the division for the ‘priority’

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41.

42.

43.

44. 45.

46.

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question. The smaller, unconditional, portion of reparation bonds would have priority of transfer to reparation creditors; but the service on private loans to Germany would have priority (or rank ahead of) the larger, conditional, part of the annuity. The smaller segment of the annuity was made unconditionally transferable so as to make it suitable for commercialisation. No private investor would buy bonds subject to suspension, postponement, or other restrictions on payment. Thus, contrary to what is sometimes claimed, not the whole of the annual reparation payments had priority. Germany’s top reparations expert, Carl Bergmann remarked that from the moment Young’s compromise figures were accepted, ‘it finally became very clear that what was afoot in Paris was not the recognition of economic possibilities, but a purely political deal.’ See, Carl Bergmann, ‘Germany and the Young Plan’, Foreign Affairs, 8 (1930), p. 588. Up to 1928, Sir Josiah Stamp, ‘who probably knew more about ... reparations than anyone else’, believed that even after the Dawes experiment, Germany’s capacity to pay still remained a matter of guesswork. See, J. Harry Jones, Josiah Stamp, Public Servant (London: Pitman, 1964), p. 242. Jacobson (1972) gives a comprehensive account of the Young Plan negotiations. For texts, analyses and the Hague conferences, see Myers (1930). Lamont (1930) has a useful short account of the implications of the Plan. Quoted in Castellan (1969, p. 161). The famous spat between Snowden and Henri Chéron, the French finance minister, at the Hague is retold in Jacobson (1972, pp. 311–12); Carlton (1970, pp. 42–4); Slocombe (1936, pp. 297–9); Cross (1966, pp. 238–40); and by Snowden himself in his autobiography, Philip Viscount Snowden, An Autobiography, vol. 2 (London: Ivor Nicholson and Watson, 1934), pp. 792–99. When, on 10 August, Chéron questioned figures used by Snowden at an earlier meeting, Snowden replied hastily and witheringly that Chéron’s understanding of the Balfour Note was ‘grotesque and ridiculous’ – a phrase that was even more offensive when translated literally into French. Henri Chéron, a man of ample girth, took the remark personally, for he was often caricatured in the French press as a corpulent clown. Most delegates saw Snowden’s intemperate outburst as a disgraceful display of British self-seeking, apparently heedless of the political fallout. The incident threatened to wreck the conference, but Snowden’s apology the next day mended matters. Yet, as the contemporary journalist, George Slocombe recorded, ‘the incident, if ended, left a certain bitterness in the hearts of the French, and the days of recrimination, of inaction, of disagreement which followed did nothing to unseat it’ (Slocombe, 1936, p. 299). Snowden later admitted to Slocombe ‘that the French had already offered, by way of compensation to Great Britain, all they could reasonably be expected to sacrifice of the trifling increase they had been granted on the Spa percentages’ (Slocombe, 1936, p. 314). To the other delegates Snowden appeared as a ‘wrecker’, determined to undo 17 weeks of heroic work spent in setting up the series of delicately balanced reciprocal concessions that was the Young Plan. Even the Germans were taken aback by the vehemence of Snowden’s attack; but all the delegates were in the end disposed to make further financial

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47.

48. 49.

50. 51.

German Reparations, 1919–1932 sacrifices to prevent a breakdown, and the incalculable political damage that would cause. The furore at The Hague was about the sharing out of anticipated or future German reparations; but no one could foresee that Germany would pay only one instalment of the new reparations and that a general moratorium shortly thereafter would release them of further obligations. Robert Gerwarth agrees that the Nationalist-Nazi campaign against the reparations policy of the Republic ‘roused the public to a hitherto unknown pitch of emotion in late 1929’ and created ‘the fiercest anti-republican campaign Weimar had ever witnessed’, invoking the Bismarck myth in support. See Gerwarth (2005, pp. 118–19). See, Young Report (1929) reprinted in American Journal of International Law, 24 (1930) Supplement (Official Documents), pp. 85 and 93. Owen Young, as a leading entrepreneur in the new growth industry of electrical engineering was personally optimistic that ultimately Germany would be able to pay reparations in goods out of export surpluses. He saw the prospects for world economic growth as extremely bright. The reconstruction of German industry, based on the financing of the country’s chemical (I.G. Farben), steel (Vereinigte Stahlwerke) and electrical (Allgemeine Elektrizitäts Gesellschaft) cartels would be an important part of it. And that would require the continuation of American loans for some time to come. In July 1928 he confidently made the prediction that a German export surplus could develop only ‘as a result of the greatest economic development which the world has yet seen; and that must take place ... in the next ten or fifteen or twenty years.’ Speech by Owen D. Young (14 July 1928), quoted in Frank Costigliola, ‘The Other Side of Isolationism: The Establishment of the First World Bank, 1929–1930’, Journal of American History, 59 (1972), pp. 604–5. Some others shared Young’s misplaced optimism. Even as the Depression got under way, the prominent Columbia University international economist, James Angell could write in July 1931 that: ‘it can reasonably be expected that we [the United States] will continue to make large new investments in Germany for many years to come.’ See, James Angell, ‘Economic Germany and the United States Today’, Annals of the American Academy of Political and Social Science, 156 (July 1931), p. 1. Of course, the business interests of Young’s General Electric were involved. In common with other US multinationals, General Electric targeted Germany as the base for the expansion of operations overseas through direct investment and mergers with German cartels to share or dominate world markets. See Robertson’s comments in ‘Reparation: The Young Report’ by C.R.S. Harris in Royal Institute of International Affairs (September 1929), pp. 477–9. This implies that Germany carried a debt ‘overhang’, defined as the difference between the face value and the market value of debt, where the market value is the expected present value of the future net transfer from the debtor (Germany) to the creditors. Krugman states: ‘A country has a debt overhang problem when the expected present value of potential future resource transfers is less than its debt.’ See, Paul Krugman, ‘Financing vs. Forgiving a Debt Overhang’, Journal of Development Economics, 29 (1988), p. 255. Creditworthiness and access to international credit market will decline. Lifting the burden of a debt overhang calls for a reduction in debt and

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debt service. In the absence of good growth prospects, further rescheduling, or events that might change the outlook, deflation is the unavoidable remedy. 52. Blessing memorandum of 8 April 1930, ‘Gesichtspunkte für das Verhalten der Reichsbank in der BIZ’, quoted in Clement (2004, p. 35).

5 The End of Reparations (and After)

At Lausanne, the June 1932 international conference rang down the curtain on the long-running reparations tragicomedy. There, the last act was staged. The Depression was the deus ex machina that finally put an end to the reparations drama – an outcome that was foreseen. Germany, burdened by a mountain of foreign debt and tightly bound by domestic and international constraints, was least able to withstand the Depression. In the maelstrom of the slump, the Young Plan fell by the wayside (setting off a foreign-debt crisis), followed by banking and currency crises, then moratoriums and partial debt defaults. Reparations went under, but the other thread of the intergovernmental debt tangle – the Allied war debt to the United States – remained in place and survived for two more years. Reparations had an afterlife in the shape of the Dawes and Young Reich Loans that the German government agreed to repay in 1953 after the calamity of the Second World War. These are the events described and interpreted in this final chapter.

5.1

Weimar’s faltering economy and the slump

The Depression did not come to Germany suddenly as was the experience of some other countries. Germany’s slump began early with a slow and gradual slide into the abyss. The downturn started as early as the middle of 1927. Construction outlays and consumer durable sales fell off – evidence of a slackening off of domestic investment and consumption demand – and there was a growing scarcity of credit.1 Even before the onset of the world depression the economy was not efficient or productive enough to prolong the post-1924 upswing. The first clear sign of the fundamental weakness of the economy was the severe recession in the winter of 1928–29 when, in February 1929, for the first time, 192

The End of Reparations (and After) 193

unemployment reached 3 million – about 15 per cent of the employed population. The recovery from the hyperinflation period – Germany’s ‘golden twenties’ – was more apparent than real. There were some positive developments over the five ‘fat years’; but overall there were more minuses than pluses. The brief industrial revival was accompanied by strains and stresses that opened wide fissures in Weimar’s party politics and society. The recovery was merely a short interlude between Feldman’s ‘Great Disorder’ of the hyperinflation and Knut Borchardt’s ‘Crisis before the Crisis’ of the Dawes bailout period.2 Afflicted by deep structural problems, Weimar’s economy – potentially strong – was on the sickbed, and never recovered in time to save the regime from its fatal collapse. The state of the economy in the late 1920s can be briefly summarised. The outstanding feature was the lacklustre growth performance. It is true that some leading economic indicators reached pre-war levels. The index of industrial production showed output in 1927 regaining its pre-war level – a plateau it held, with only slight increases over the next two years. For an export economy, trade performance was disappointing during the stabilisation years (1924–28). Germany ran trade deficits ranging from 1.3 billion RM to 3 billion RM. Only in the recession year of 1926 was there a small trade surplus of 800 million RM (Johnson, 1997, p. 92). Real wages increased, but only regained their 1913 level in 1927 (Peukert, 1992, pp. 120–1). Productivity, or output per worker, improved significantly – by 17 per cent – but that was due to automation and the consequent ‘shake out’ of labour in the few leading industrial sectors involved in the ‘rationalisation’ movement. This programme of cartelisation, mergers and combines (designed to emulate American mass-production methods, but also to protect market shares and profit margins) led to a steady increase in the number of bankruptcies during 1924–29 and the weeding out of many long-established, family-owned firms. It created a modern industrial machine, unable to realise its potential on account of the weakness of domestic and world demand – thus leaving the conglomerates with excess capacity. Unused capacity translated into high unemployment and low profits. Agriculture was in a depressed state, burdened by huge debts, but protected by tariffs, subsidies and generous debt relief – the Osthilfe for politically influential East Elbian (Junker) landowners. In other sectors slow, patchy growth, high interest rates and wages reduced profitability and weakened the inducement to invest. In fact, the net investment ratio (net investment as a proportion of national income) fell from 16 per cent pre-war, to an average of only 10.5 per cent between 1925

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and 1929 (Peukert, 1992, p. 122; Tipton, 2003, p. 334). Industrial profits were generally on the low side, particularly after 1927, probably reflecting the high cost of capital relative to the returns on investment. With unemployment generally high, and new investment low, this state of affairs did nothing to lessen the relentless distributional conflict – the struggle over the relative shares of wages and profits in national income, and the merits of lower taxes versus increased welfare benefits. Even the Great Coalition government under chancellor Hermann Müller – with ministers from the Social Democrats (SDP) through the Centre party and the pro-business, liberal DVP – could not agree on domestic economic issues and fell victim to the Depression. From 1928, Social Democratic finance ministers tried to raise revenue by direct taxation and foreign borrowing to finance growing unemployment relief. But big business and the president of the Reichsbank (Hjalmar Schacht), supported by some coalition cabinet ministers, wanted to reduce taxes, curtail foreign borrowing and cut expenditures on welfare and unemployment benefits. In this situation, every attempt to tackle an economic problem sparked a political crisis, a crisis of political legitimacy. Loss of capital inflows Events like the German stock market crash of 13 May 1927 affected economic conditions, since as a result of it, and the rise of German interest rates, business confidence turned pessimistic and investment spending was curtailed. Germany, already in recession, suddenly suffered an external shock when US capital inflows were sharply reduced in 1928. Within six months from mid-1928, new US long-term loans to Germany fell from $200 million to $76 million and virtually ceased by the spring of 1929. A link snapped in the chain of international cash flows that kept the German economy ticking over. Besides long-term funds from abroad, Germany benefited from sizeable short-term foreign credits that amounted to 15.7 billion marks in 1929. Since 1924 Germany became dependent on these capital imports. These foreign borrowings relieved the chronic liquidity shortage in the domestic capital market, financed long-term investment and sustained the availability of domestic credit at lower levels of interest rates than might otherwise have been the case. The cut off of lending was a side effect of the 1928–29 bubble in the US stock market. To dampen speculation in the New York market during the boom in equities that started in March 1928, the Federal Reserve increased short-term interest rates from 5 to 6 per cent on 10 August 1929. Short-term money market rates on Wall Street went as high as 20 per cent. US investor interest switched from


foreign bonds to domestic equities (stocks and shares) and American banks recalled short-term funds invested in Germany. The decline in US long-term loans was partially offset by short-term credits from other countries. The cut in capital flows to Germany was compounded by the weakness of the German economy, plus the high level of external debt, which further reduced the attractiveness of investment in Germany. The loss of US capital inflows over such a short period had serious macroeconomic consequences for the faltering German economy. First, we consider the short-run or impact effects since these were the initial repercussions that led to the downfall of Müller’s government, and which later led Heinrich Brüning, his successor, to adopt a strict deflationary policy in line with orthodox gold standard rules. From at least mid-1929, the Reich found it increasingly difficult to obtain foreign credits to fund German budget deficits. But just at that moment, as tax receipts were swiftly declining due to the recession-induced fall in people’s incomes, the cash deficit soared to 738 million RM primarily to fund the shortfall in the unemployment insurance fund. The fund, set up by the Unemployment Insurance Act of July 1927 (Gesetz über Arbeitsvermittlung und Arbeitsversicherung), was sufficient to provide for only 800,000 unemployed; but in February 1929 it had to pay out unemployment benefit to 2.4 millions. The government could not find the extra cash the insurance fund needed, and the insurance agency was only saved with the help of a bank consortium loan. On 5 December 1929, Schacht – having already sabotaged a foreign short-term loan for the government – publicly called on the government to make deep spending cuts, claiming that fiscal policy was out of control (DIA, 1929, pp. 91–8). A week later, the government was forced to announce emergency budget proposals for cuts in government expenditures, increases in excise taxes on items of mass consumption, and reform of unemployment insurance, including a half percentage point increase in workers’ contribution to the fund, from 3 to 3.5 per cent. Shortly afterwards, however, the cabinet split on the issue. The Social Democrats, under mounting pressure from the trade unions, refused to sanction the increase in workers’ contributions, fearful about the survival of their Sozialpolitik (the welfare system). On 20 December 1929, Rudolf Hilferding, the finance minister, resigned, along with his state secretary, Johannes Popitz. Sensing the weakness of the government, the DVP, Schacht and business kept up the pressure for big spending cuts and a cut in unemployment benefits until March 1930, when political deadlock over a compromise austerity package forced the resignation of Müller – the last Social Democrat chancellor at the head

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of a parliamentary government. Müller could have resolved the crisis over unemployment contributions by means of a presidential decree, but Hindenburg denied the socialist chancellor the use of such emergency powers – a prerogative he allowed each of Müller’s successors to exercise. Hindenburg appointed Heinrich Brüning, floor leader of the Centre party deputies, as the new chancellor on 30 March 1930 (Maehl, 1986, pp. 151–62; Winkler, 2006, pp. 428–35).3 Earlier, on 7 March Schacht resigned as Reichsbank president. He was replaced by Hans Luther, a former Reich chancellor. As well as its initial impact on Germany’s fiscal system, the reduced availability of foreign credits affected monetary conditions in Germany. The sudden cut in capital imports reduced the Reichsbank’s foreign-exchange reserves.4 Fearing that such a sharp drop might lead to a capital outflow (‘capital flight’), the Reichsbank restricted monetary growth and increased interest rates in mid-1929. But that did not stop the waves of capital flight that occurred in 1929, late 1930 and 1931. Another effect of the foreign credit crisis was that it exposed the weaknesses of the German financial system, in particular its vulnerability to external monetary shocks. The Reichsbank’s powers to engage in stabilisation policies were constrained by the legislation enacted in 1924 under the Dawes Plan. The Bank was limited to setting discount rates and rediscounting commercial bills. It was prohibited from making advances to the Treasury and from undertaking open-market purchases of government securities – monetary financing of budget deficits were not allowed. These monetary prohibitions were in line with the Dawes requirement that the German government balance its budget, reparations included! The Bank had to keep adequate reserves and was obliged to raise interest rates whenever reserves fell below 40 per cent of the note issue. These restrictions were designed to prevent a repeat of the Reichsbank collusion in the 1923 hyperinflation episode. This meant however that the Bank had to stay on the gold standard and could not devalue the mark. The Reichsbank could only expand the monetary base by acquiring gold and foreign assets. It was ill equipped to provide any monetary stimulus, or to engage in any expansionary counter-cyclical public works programme once deflation took a grip. Its only policy was one of monetary passivity. The commercial banks were in no better shape to weather an economic storm. They were always short of liquidity and operated on low ratios of liquid assets to deposits. The gap created by the loss of long-term capital inflows was bridged by short-term borrowing,


principally by the commercial banks. American bankers maintained the volume of foreign funding for a while by extending short-term credits to German banks. Forty per cent of the total deposits of the big Berlin banks were foreign-currency deposits and credits. These funds were often volatile in nature, prone to sudden withdrawals in cases of changes in interest-rate differentials and crises of confidence. Such heavy dependence on foreign short-term debt put at risk the banking system’s liquidity and its vulnerability to banking panics if foreign banks recalled their loans. But the German banks relied on these foreign short-term deposits to make long-term loans to businesses, including equity investments – a very risky business. The banks were dangerously exposed to ‘debt deflation’ – fall in asset prices – brought on by a depression: that is, ‘bad debts’, or losses on the capital value of their equity investments and reductions in the real value of collateral on long-term loans extended to companies (James, 2001, p. 52). The German municipalities were also big users of foreign short-term and medium-term loans. Like the banks, the municipalities had these funds tied up or frozen in long-term projects and could only repay them by taking out new loans. Brüning’s deflation and diplomatic initiatives These initial difficulties with foreign loans (compounded by the domestic borrowing and funding crisis) started Brüning on his deflationary course. Of course, his action only made matters worse; so, the question is: why did Brüning continue with his austerity measures even when Germany in mid-1931 was in a full-blown economic and financial crisis?5 The answer lies in the fact that when faced with the credit cut-off, Brüning adopted a dual-track strategy. First, Brüning had to deflate the economy, that is, reduce domestic absorption (total spending, including spending on imports) and wages, and lower German domestic prices to enhance international competitiveness so as to generate sizeable German export surpluses. The foreign exchange earned by those surpluses would replace the lost capital inflows and also provide for the payment of reparations and the servicing of private foreign debts. At the same time, however, he would keep up the pressure to get Germany’s official creditors to abandon reparations; and the way to exert such pressure was by a revival of Germany’s competitive strength in world markets, but also to show the world the harm and suffering caused by reparations. Germany, its economy wracked by catastrophic deflation, must be seen to be willing, but unable to pay. Hans Mommsen suggests that Brüning wanted to put an end to reparations before finding work

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for the millions of unemployed (Mommsen, 1991, pp. 130–1).6 Having shelved feasible pump-priming remedies, Brüning wished to use deflation miseries to wreck reparations, just as other German leaders used the 1922–23 inflation disaster to make out that reparations were impossible (Knox, 2007, p. 373). Everyone would then see the economy’s collapse as evidence that Germany could not pay reparations. MacGregor Knox summarises Brüning’s policy thus: ‘Germany would not pay reparations, therefore it could not seem able to pay them’ – given that the Western powers would only agree to forgo reparations if Germany ‘appeared on the brink of chaos and Bolshevism’ (Knox, 2007, p. 373). At first, however, Brüning knew he had to reassure the bankers of New York, London and Paris of Germany’s good intentions now that the country had hit its international credit ceiling. With no transfer protection and reparations once again being accorded seniority (or priority status, at any rate for the ‘must pay’ portion), such reassurance was absolutely necessary to re-establish creditworthiness and to limit the withdrawals of foreign credits. Fulfilling reparation obligations was a crucial element in that reassurance, but not when it was combined with calls for revision of the Young Plan. For foreign investors, the inference was alarmingly clear: ‘whether Germany chose to pay or not to pay reparations, their investments were unsafe’ (Balderston, 2002, p. 85). And that was the initial contradiction in Brüning’s policy, the conflict of objectives, which he, however, resolved starting in early 1931. By mid-1931, he abandoned the dual strategy and went all out to get reparations cancelled, regardless of the economic consequences. The story, although full of dramatic events and initiatives, can be briefly told. Brüning’s plan of fiscal reform aimed at the restoration of government credit through a deflationary policy of tax increases and cuts in government spending that would generate the revenue to balance the budget. Additionally, Brüning hoped that repeated doses of deflation would lower domestic wages and prices relative to the world level, thereby making German exports more competitive. Brüning pushed through his austerity programme by a series of measures, supplemented above all by four presidential emergency decrees (Notverordungen) ‘for safeguarding the economy and finances’ under Article 48 of the Weimar constitution. During his two years in office, Brüning used these deflation decrees, bypassing parliament, on 1 December 1930, 5 June 1931, 6 October 1931 and 8 December 1931 to enforce tax increases, cuts in unemployment and other social benefits (including pensions) and expenditure cuts. Brüning started his austerity drive in July 1930 with a fiscal package imposing high taxes on civil servants, allowing


local authorities to impose a regressive poll tax (Bürgersteuer) and increase in unemployment contributions from 3.5 to 4.5 per cent, among other imposts. When the Reichstag solidly rejected the budget proposals, Brüning enacted the fiscal measures (with slight changes) by emergency decree on 26 July 1930, dissolved the Reichstag and called a general election for 14 September 1930.7 The result was disastrous – it gave a sharp boost to the extremist parties of left and right. And so, the pattern was set for Brüning’s handling of the crisis until his dismissal in May 1932 (Balderston, 2002, pp. 88–90; Clingan, 2001, pp. 171–81; Winkler, 2006, pp. 435–7).8 The Depression tightened its grip on Germany during the winter of 1930–31. Unemployment rose from 3 millions in 1930 to 4.9 millions by the end of January 1931. Brüning’s stringent austerity measures instead of contributing to recovery were only hastening more business failures and a deepening of the Depression through further reductions in output, employment and incomes. Earlier, the Nazi electoral success – a landslide victory – in the September 1930 Reichstag election had, within a short period of two months, set off a large-scale withdrawal of foreign short-term credits from Germany in addition to a substantial flight of German capital abroad. There were net sales of German shares and bonds on the New York and European stock exchanges and German stock market prices fell by 10 per cent. As early as the first week in October the Reichsbank lost about 640 million RM owing to the capital outflows, as foreign-owned deposits poured out of Berlin’s banks and German nationals transferred funds to safe havens abroad. One serious consequence of the loss of bank deposits was a contraction of the German money supply that, by June 1931, fell by 17 per cent (James, 2001, p. 60). When the panic subsided, the reserve drain brought the Bank’s gold cover dangerously near its legal minimum. The Reichsbank’s foreign-exchange reserves fell by one-third – a loss of nearly 1.3 billion RM. The basic rate on the German money markets jumped from 4.7 per cent to 7.1 per cent. At the beginning of 1931, Germany’s net foreign indebtedness was 15.9 billion RM (Rosenbaum and Sherman, 1979, p. 146). That was the amount the country owed to foreigners, most of it – 14.8 billion RM – at short term (three months or less). Ominously, these foreign short-term claims were three times larger than the Reichsbank’s total holdings of gold and foreign exchange (Clarke, 1967, p. 177). Despite the marked distrust of German debt in financial markets, Brüning managed to raise some money abroad that enabled him to hold out a little longer. Between April and November 1930, the German


government obtained $350 million of medium and long-term funds from abroad; $100 million came from the Young Loan flotation that the government used to reduce the floating debt. The remaining credits were arranged by the Boston-based bankers, Lee, Higginson and Company (heading a consortium of international bankers) in conjunction with the Swedish ‘Match King’, Ivar Kreuger.9 The loans made it easier for Brüning to push through his austerity programme. The $125 million bridging credit arranged by Lee, Higginson on 11 October 1930 at least made it possible for the government to cover its immediate cash-flow problem; but the relief was only temporary, for despite repeated bouts of retrenchment and cutbacks, Brüning was unable to weather the financial storm.10 After a year in office, Brüning was still struggling to get the Reich budget into balance; bearing in mind, of course, that when he took over he inherited a cash deficit of 1675 million RM. In early 1931, a deficit of 425 million RM was forecast for the next three months (Patch, 1998, p. 150). As a result of the contracting economy and the fall in incomes, government revenues were falling much faster than government expenditures. In fact, it was proving difficult to get expenditures under control – for several reasons. Unemployment and deprivation meant that more people were on unemployment and welfare benefits, so spending on social welfare increased, given the political resistance to cuts in unemployment benefits. Military spending increased as the Reichstag voted funds for a second pocket battleship. At the same time farmers held on to their agricultural subsidies granted to offset the collapse of farm prices. The budget was never really brought into balance after more drastic tax increases and cuts in expenditures. However, as Helmut Heiber recognises, Brüning did manage ‘to match expenditure to a dwindling revenue, reducing the deficit by no less than 38 per cent, from 11,400 million marks in 1928 to 7,000 million in 1932’ (Heiber, 1993, p. 181). On the international front, the prospects were hardly any better for Brüning’s strategy. Budgetary balance, indispensable for domestic retrenchment, was linked to foreign policy goals, such as Young Plan revision and freeing Germany from the shackles of Versailles. A balanced budget would stabilise investor expectations and retain the short-term capital still in Germany – thus avoiding a foreign credit crisis. Success on the fiscal front would free Germany from dependence on further foreign loans. Brüning saw reparations and the Young Plan regime as obstacles to the country’s freedom of action abroad. Indeed, he saw reparations as the principal cause of the economic depression


(Mommsen, 1991, p. 125). But only from a position of financial strength could Germany’s leaders bargain for revision. Freeing Germany from the burden of reparations and foreign debt was the key to overcoming the financial crisis and beating the depression. In the event, things unexpectedly worked out quite differently from the scenario envisaged by Brüning. But before that, at the beginning of 1931 he was made aware through diplomatic and other channels that revision of the Young Plan was out of the question for the time being. Brüning’s tough deflationary measures won early praise from bankers and others abroad; but his frantic efforts to plug the hole in the government budget proved less impressive to Germany’s creditors than Brüning might have wished. Of greater relevance was the huge external debt in a country shifting to extremist politics – to the left (communists) and the right (Nazis). Reparation dues were only a fraction of the total short-term debt; so whether Germany succeeded in winning reparations concessions from the Allies or not was a factor, but not a decisive one in increasing or decreasing the basic insecurity of private short-term investment in Germany. Domestic investors would not lend to the government and the country in general could not get foreign private loans. Frustrated by a feeling of being trapped – boxed into an awkward corner – Brüning, ‘fighting like an eagle in a sack’,11 sought an escape route in diplomatic initiatives which might divert attention from domestic hardships and mollify right-wing nationalists. The worsening political crisis aggravated by opposition to unpopular austerity measures and the deepening depression led the Brüning cabinet to turn away from Stresemann’s policy of ‘rapprochement’ (Verständigungspolitik) and to adopt a more assertive, nationalistic foreign policy (Krüger, 1985, pp. 507–30). On 21 March 1931 the diplomatic world was stunned by the surprise announcement in Vienna and Berlin of the proposal for an Austro-German customs union (Zollunion) – ‘the clearest expression of a reversal in German foreign policy’, observes Robert Gerwarth (2005, p. 134). The proposal was widely regarded as a preliminary move towards political union or Anschluss and the creation of a großdeutsch Reich – a development that would lead to the eventual German economic dominance of south-eastern Europe under the cloak of Mitteleuropa (Krüger, 1985, pp. 531–9). Such an agreement, affecting Austria’s economic independence, was expressly ruled out by Article 88 of the Treaty of Saint-Germain (1919) and the Geneva Protocol for Austrian Reconstruction of 4 October 1922. Following on the Brüning’s


cabinet rejection of Briand’s proposal for closer Franco-German economic cooperation, the move was calculated to put pressure on France to extract political and economic concessions.12 Predictably, French reactions were hostile. Within a few weeks the French government obstructed loans to Austria by French financial institutions to force abandonment of the customs union idea on 3 September 1931.13 On 11 May 1931 a much bigger crisis blew up when Austria’s largest bank, the Rothschild-owned Creditanstalt, failed as a result of vast losses incurred (now estimated as being over $100 million) when it took over its main rival, the bankrupt Bodencreditanstalt (Aguado, 2001, pp. 199–221). Austria lost $40 million, or a third of its foreign-exchange reserves; then suspended gold convertibility and allowed the schilling to depreciate. The crisis soon spread to Germany with a run on German banks at the end of May.14 Foreign depositors, fearing their assets would be frozen or lost if German banks failed, repatriated their capital. German nationals as well as currency speculators added to the ‘flight from the mark’ by withdrawing funds and converting them into safer currencies abroad. Germany was on the verge of financial insolvency as the Reichsbank’s gold and foreign-exchange reserves fell by 40 per cent from 2.3 billion RM to 1.5 billion RM by the second week of June 1931 (Ferguson and Temin, 2003, p. 30 and table 8, p. 31). Meanwhile, on 6 June came the public declaration (or manifesto) by the German government on the hardships caused by the efforts to pay reparations (DIA, 1931, pp. 111–13; FRUS, 1931, I, pp. 9–11). This socalled Tribute Appeal (Tributaufruf ) followed on the day Brüning and foreign minister Curtius met MacDonald and Arthur Henderson for talks at Chequers that Brüning hoped would provide a diplomatic occasion to reopen the reparations question, but not to exploit it. The appeal to the Allied powers concluded with the warning that ‘... the limit of the privations which we can impose on our people has been reached’; and that the country’s dire economic plight ‘requires Germany’s relief from unbearable reparation payments. The economic recovery of the world is also involved’ (DIA, 1931, p. 113). The nationalistic rhetoric of the declaration was combined with the third emergency decree published on 5 June 1931 imposing further austerity measures on account of the government’s mounting cash-flow problem. They needed to cover another deficit in the current budget – a shortfall of 782 million RM. The budget cuts included an additional 7 per cent cut in public sector salaries, a rise in the tariff on imported oil, increases in sugar and turnover taxes, a further reduction of 10–12 per cent in unemployment insurance benefit, a


reduction in other welfare benefits and an expansion of emergency or crisis taxes. Brüning knew that the decree would raise a storm of protest at home – he was already being called the Hungerkanzler. But he hoped it would strengthen his case for a foreign loan at the Chequers meeting. In Germany, the ‘tribute appeal’ made people feel that the savage cuts in public expenditure, unemployment relief and civil servants’ pay were really designed to release funds for making reparation payments (Mommsen, 1991, p. 130). Abroad, however, the declaration that Germany had reached the limit of its capacity to pay reparations was seen differently. It looked as if Germany might default on the private loans as well. American-held bonds and short-term credits were probably at risk, and the holders of these continued to call outstanding loans to German banks (Hardach, 1976, pp. 126–31). On 13 June the Reichsbank raised the discount rate from 5 to 7 per cent to induce foreign investors to keep their remaining credit balances in Germany – hoping thereby to retain enough gold and foreign-currency reserves to cover the domestic money supply. Instead of checking the outflow of gold, the Bank’s move only increased panicky fears and a loss of foreign confidence. Meanwhile at Chequers, Brüning failed to get a reparations moratorium or a large British loan. Runs on deposits in German banks followed; but given their low liquidity, the banks did not have enough cash. On 17 June, Nordwolle, a major textile manufacturer in Bremen, lost 200 million RM in failed speculative transactions, and went into bankruptcy – calling into question the solvency of the banks (notably the Danat bank) heavily involved in financing the company’s reckless speculative ventures.

5.2

Germany’s banking crisis and the end of reparations

The politics of the crisis As the crisis intensified, US President Herbert Hoover, fearing a German banking collapse and default on foreign debts, intervened on 20 June with a dramatic, unilateral proposal for a one-year postponement or moratorium on war debt and reparation payments (DIA, 1931, pp. 115–17; FRUS, 1931, I, pp. 33–5). Hoover acted primarily because default on the large American private loans to Germany would force bank liquidations in the United States. At the end of July 1931, German debts to American citizens and banks amounted to about $2.37 billion (9 billion RM) (Ferrell, 1957, p. 117). On 25 June the BIS organised a rescue package for Germany whereby the Bank of England, the Bank

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of France and the Federal Reserve Bank of New York lent $100 million to the Reichsbank to tide it over the next three weeks. This emergency credit to shore up the Reichsbank’s reserve position was renewed, or rolled over, for a further period of 90 days, but was not repaid until April 1933 (Clingan, 2001, pp. 190–1). A range of modern historical opinion has it that in early 1931 Brüning, boxed in and narrowly constrained in his economic policy options, sugared the pill of his unpalatable deflationary medicine with revisionist diplomatic initiatives to upstage the Nationalists at home and relieve the pressure from the Nazis. However, Brüning’s aggressive foreign policy – the customs union project and the strident demand for an end to reparations – directed against France for domestic consumption produced disastrous psychological consequences both at home and abroad. Abroad, according to Volker Hentschel, these policy statements ‘sounded like declarations of bankruptcy and of war in the same breath’, although not intended as such; but they were so understood, and caused massive flights of capital and the recall of foreign credits which ‘ruined first the German banks and then completely unhinged the international payments system.’15 Peter Temin declared in 2004 that German politics ‘were really rather wild by 1931’, and that Brüning ‘scared people who were lending ... The French were lending to Germany and wanted very much to continue and stabilise it. But they were so put off by the statements of Brüning ... that they just pulled out.’16 Earlier, Thomas Ferguson and Peter Temin wrote that Brüning’s government mishandled the crisis by ‘substituting rash statements about customs unions and reparations for serious budgetary action.’ These ill-timed statements ‘induced fears for the value of the Mark.’ The run was on the mark initially, not on the banks. It was the currency collapse that brought down the banks (Ferguson and Temin, 2003, pp. 2, 33). Those ill-fated policy statements triggered the German fiscal and currency crises, because they stopped French loans that would have stabilised the situation. Isabel Schnabel (2004, pp. 822–71) supports this judgement, but adds risky banking behaviour as a factor in the crisis. Brüning desperately needed strong international support (in the form of foreign reserves for the Reichsbank) to deal with the financial crisis; but by threatening the people who might have helped, he wrecked whatever slim chance he had of overcoming the crisis. The Hoover moratorium was a victory of sorts, but Brüning could not even take credit for it. The moratorium only took effect on 6 July. French ministers were not consulted beforehand and delayed their acceptance pending negotiations


with the Americans on conditions and guarantees. The French feared that Hoover’s proposal would mean the end of the Young Plan and perhaps of reparation payments altogether (Heyde, 1998, pp. 204–16). As the major recipient of reparations, France would be denied payments for a year, while debt relief would be provided to British and American investors as well as the German government, relieved of a $400,000 (1.6 billion RM) reparations payment. As the proposal stood, France would be a net loser by something like 2.5 billion francs – the difference between what it would receive from Germany in unconditional annuity and the annual war debt payments to Washington and London. Even before the announcement by Hoover, future reparation payments were believed by many (not only in France) to be at risk owing to the chronic weakness of the German mark. Would reparation payments be resumed once suspended? The Hoover moratorium was approved in principle by the French Chamber on 27 June (by 386 votes against 189). After further discussions and clarifications, a Franco-American agreement was signed on 6 July under which Germany would continue to pay the unconditional annuity to the BIS, which would then immediately re-lend it to the Reichsbahn. Unfortunately, the start of the moratorium did not stop the run on German banks or prevent the failure of a leading German bank, the Darmstädter-und-Nationalbank. Nor could it provide a solution for the fundamental problem facing Germany – a lack of adequate foreign exchange to match outstanding external short-term liabilities. At the end of 1930, the Reichsbank reserves amounted to only 18 per cent of short-term debt (Schnabel, 2004, pp. 842–3). The launch of the moratorium coincided with a dangerous surge of withdrawals of foreign funds during 6–8 July. The Reichsbank’s gold and foreign-currency reserves dropped below the 40 per cent cover mark. Reichsbank president Luther’s dramatic plane flight to London and Paris (on 9 July) and Basel (on 13 July) to appeal for urgent financial aid was a fiasco and he returned empty-handed. In desperation, fearing the wholesale collapse of the banking system the government ordered by presidential decree the closure of German banks for two days (14–15 July) and the first of a series of exchange controls was put in place (Hardach, 1976, p. 139).17 Private dealings in foreign exchange were banned. All foreign-exchange transactions were licensed and had to go through the Reichsbank and its agents. The import and export of gold and foreign currency by individuals was prohibited. These restrictions on the free movement of capital, gold and foreign currency made the reichsmark inconvertible, and implied the de facto suspension of the gold standard – even though


the parity of the reichsmark was maintained. Exchange controls were applied as an emergency measure to stop the withdrawal of foreign short-term debts.18 Creditors had to negotiate their own six-month voluntary moratoriums on short-term credits, known as ‘standstill agreements’ (Stillhalte-abkommen). These informal rescheduling arrangements to leave foreign short-term loans in Germany were later formalised by a committee of bankers into a Standstill Agreement on 9 September 1931 and repeatedly extended until May 1939 under the official name of the German Credit Agreement.19 Initially, the frozen credits totalled $1.25 billion, of which about 30 per cent were by British banks20. Under the agreement, interest on German commercial debts was paid in convertible currencies, but the principal was frozen, with no guarantee that any of the capital sum would ever be repaid.21 The repayments frozen by such agreements covered mainly outstanding acceptance credits (used in financing international trade), bank advances and deposits. Exchange controls on remittances to overseas creditors applied mainly to short-term credits, such as investments in property, mortgages and stock exchange securities. What the Standstill Agreements did (apart from the fact that they stopped the withdrawal of a further 10 billion RM of foreign private debt), was to transfer the liquidity crisis from the borrowers (German banks and companies) to the lenders (foreign banks and investors) – thus spreading the financial crisis ever wider. The typical German borrower, in effect, received an unsecured loan from the foreign bank.22 German banks made use of these acceptance credits again and again every three months to finance new trade transactions. The freezing of a large volume of British bank credits in Germany – some £64 million – was bound to weaken foreign confidence in British banking institutions and raise fears about the safety of balances held in London. It was evident that nothing could stop the German financial crisis from spreading to London. And so it did. From mid-July 1931 the pound sterling was subject to intense selling pressure. Holders of sterling, including speculators, began selling it for gold at the rate of £2.5 million per day. In the last two weeks of July, the Bank of England lost over $150 million in gold, dangerously reducing the Bank’s slender gold reserve. During the rest of the summer, the pound’s gold parity (already overvalued) was perilously maintained only with the support of the Bank of France and the Federal Reserve Bank of New York. It was in this atmosphere of crisis and urgency that the British government hastily called a conference in London for July 20 on the German


financial situation. Just before the start of the London conference, Pierre Laval, the new French prime minister tried to reach an agreement with the German delegates in Paris regarding future reparation payments. France would give Germany a ten-year loan of $500 million (with control of German customs as collateral) in exchange for a ‘political moratorium’, such as: (1) suspension for ten years of all demands by Germany for revision of existing treaties or of her eastern frontiers; (2) a halt to the construction of two new 10,000 ton pocket battleships, and (3) the maintenance of the status quo with Austria. Such political conditions, particularly the German commitment to renounce their claims to expansion in the east, were unacceptable to Brüning and Curtius and they rejected the French offer of long-term loans.23 When presenting his offer, says Hubert Cole, Laval ‘was unaware that the American government had already informed Brüning that they knew of Laval’s plan and did not support it.’24 The London conference (20–23 July 1931) led to nothing substantial, except to advise foreign creditors to freeze short-term credits still in Germany and a call for the BIS to nominate an expert committee (the Wiggin Committee) to assess the economic situation in Germany. There was no long-term loan to Germany, for the British financial situation was little better than Germany’s. But as the conference closed, many observers felt that even if the Hoover moratorium were limited to one year, Germany would never resume payment of reparations in full. The sterling crisis presently returned to centre stage. France promptly responded with a second credit of $200 million to the British Treasury on 28 August 1931 when there was an unprecedented crisis-of-confidence run on the Bank of England’s slim gold reserves. Washington joined in the support operation with an equal amount (Boyce, 2000, pp. 88–9). The foreign credits could not stem the tide of speculation and sterling was forced off the gold standard on 21 September 1931, depreciating by 30 per cent over the next three months. British financial journalists and most of the City of London blamed France for the sterling crisis – an accusation now regarded as unjustified.25 The depreciation of sterling, by causing the Reichsmark to appreciate by 40 per cent, severely weakened Germany’s export potential. British coal, for instance, became appreciably cheaper than German domestic coal at Bremen and Hamburg, making it cheaper for German ships to take on British bunkering coal at Rotterdam instead. Adding to that, many German firms who traditionally invoiced their export business in sterling suffered considerable loss. Wheeler-Bennett, writing in 1933, believed that the pound’s depreciation was the direct cause of a large increase in the number of


unemployed Germans, and that it contributed ‘materially to the situation which forced Germany to make application for a moratorium on 19 November’ (Wheeler-Bennett, 1933, p. 104). The road to Lausanne In the midst of these European anxieties and the threat of a worldwide tariff and devaluation war, the attention of European leaders then focused on what would happen after the Hoover year ended on 1 July 1932. Amid persistent rumours that Hoover was considering a proposal to prolong the moratorium, Pierre Laval made a trip to Washington (22–25 October 1931) to try one more time to get the American administration to recognise publicly a link between reparations and war debts. He failed utterly to shift the Americans and was bluntly told that it was for Europeans to sort out the reparations crisis among themselves. That message came back loud and clear to Europe, and Brüning for one, soon acted on that cue. After consultations with Laval, on 19 November he formally requested the BIS to convene a Special Advisory Committee to examine Germany’s claim for reparations relief, as provided for under the Young Plan. The Committee’s report – the Beneduce Report (named after the Italian chairman, Professor Alberto Beneduce) – published on 23 December agreed that Germany could manage no more reparation payments and that ‘adjustment’ to reparations and war debts should take place as a matter of urgency ‘to avoid new disasters’ (DIA, 1931, p. 109). That same day, by ironic coincidence, the US Congress declared against any reduction or cancellation of war debts. Almost immediately upon the announcement from Basel the British government issued invitations for a European conference to meet in January 1932 to reconsider the entire reparations and war debt issue under the present crisis-ridden economic and financial conditions. The conference was postponed from month to month, but eventually met on 16 June 1932 at the Swiss lakeside town of Lausanne. There, after three weeks of intense negotiation, reparations effectively came to an end. Was that result inevitable? Although long wished for in some quarters, such an end was still in doubt and remained a mere possibility. Many other options were in contention. Six months earlier, even the meeting of the conference appeared in jeopardy. The road to Lausanne was a tedious, wearisome slog. Widely divergent negotiating positions were taken up. In Britain, the City and the Treasury called for outright cancellation of reparations. The City’s financial institutions feared that their large private debts impounded in Germany by Standstill Agreements or exchange controls might never be recovered if


Germany had to continue reparation payments of any amount.26 The Hoover administration in the United States, although in favour of a further scaling down of Germany’s reparation obligations, did not want the Europeans to cancel reparations completely. Such a move, it was feared, would inevitably lead to default on war debt payments to the United States – leaving US taxpayers to pick up the bill for the Allies’ war costs and allowing Germany to escape from further burdens. And, of course, they were vigorously opposed to any link between the two types of sovereign debt. The French position was that they were prepared to reduce reparations in line with their war debts to the United States and Britain. But they still wanted to keep the ‘net indemnity’ annuities conceded under the Young Plan – the surplus, after meeting war debt payments. Britain and the United States wanted to give priority to private debts over reparations; but Laval denied there was any priority of private debt. The Germans wanted to be rid of reparations but they let the British, seconded by the Italians, make the running and keep up the pressure for the complete wiping off of reparations. They were quite content to let MacDonald present himself as the honest broker merely interested in getting a fair settlement. The forces and influences favouring bold action leading to the abandonment of reparations were undoubtedly the unanimous report of the Wiggin Committee on 18 August 1931 (DBFP, II, vol. II, p. 487) and the Beneduce Report (DIA, 1931, pp. 164–202). The Beneduce committee’s call for swift and decisive action to adjust all intergovernmental debts to the harsh realities of the slump was particularly pleasing to the Germans and strengthened their cancellationist position. The results of the Hoover-Laval talks were ambiguous, but there was an implicit recognition of the connection between reparations and war debts. The Hoover conversations also left the impression (perhaps mistaken) that if the Europeans agreed to postpone or readjust reparations, the United States might deal with war debts in a similar fashion. In addition, it was known that there was a substantial body of American economists and Wall Street bankers in favour of forgiving or rescheduling the war debts owed to the United States. These developments encouraged those Europeans urging remission of reparations. But hopes of American leniency were abruptly dashed when, as mentioned above, the US Congress declared on 22 December that it was against Congressional policy that ‘any of the indebtedness of foreign countries to the United States should be in any manner cancelled or reduced’ (DIA, 1931, p. 108).

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Another negative event affecting prospects for the conference occurred on 9 January following a press leak revealing that Brüning had told foreign ambassadors in Berlin that Germany could not pay any reparations either then or in the future. Brüning’s declaration caused outrage in France. A boycott of the proposed conference was threatened and there were even reports of a concentration of French forces on the frontier with Germany. Eventually, the uproar died down as British and French officials continued working on arrangements for the conference. It was agreed to postpone the conference until June in view of the imminent French parliamentary and Prussian state elections. Brüning agreed to the postponement for another more important reason. An immediate conference would likely result in a temporary extension of the moratorium for two or three years, at the end of which, Germany would be required to resume reparations since by then Germany would have recovered from the depression. However, if the conference was delayed until the summer, Brüning reckoned he would stand a better chance of getting a complete cancellation of reparations, since he expected a worsening of the German crisis as well as a further deepening of the depression worldwide, including the United States. Urgent and drastic action would be forced upon both creditor and debtor countries. Temporary or half measures would be of no avail. Only outright liquidation of all intergovernmental or sovereign debts would save the outstanding foreign private (or commercial) debts in Germany. The stratagem worked. As Brüning put it in his memoirs: ‘We were able to turn our economic sickness into a weapon’ to cast off the burdensome obligation to pay reparations.27 What helped to bring about a successful outcome was the return to power in France of Edouard Herriot in June 1932. Committed to reconciliation with Germany, Herriot was prepared to make concessions in return for compensation on disarmament and war debts. As on previous conference occasions he was amenable to coaxing by MacDonald in his desire to sustain Anglo-French cooperation. On the eve of the conference, as the economic situation worsened everywhere and the Weimar regime apparently on the verge of collapse, there was the realisation that if reparations were not then abandoned in some manner, they would in any case never be paid. There could be no going back to the Young Plan. In that sense, there was a certain inevitability about the outcome of the conference. Germany could not pay reparations, nor could France and Britain pay war debts. But would war debts go the way of reparations? That was the big area of uncertainty as the conference got under way. Journalists, politicians and other


interested observers in Europe wondered whether their political leaders assembled at Lausanne could provide a positive solution. The contents of the ‘disguised’ reparations package soon disclosed the answer. The Lausanne Convention (9 July 1931) was the agreement that put an end to reparations (DIA, 1932, pp. 12–39). The reparations bill was cut by nearly 98 per cent. Germany was required to make a token lump-sum payment of 3 billion GM ($714 million) in the form of 5 per cent redeemable bonds, to be deposited at the Bank for International Settlements (BIS). The bonds (issued at 100) were to be kept by the BIS as trustee for three years. After that period, the BIS would sell them on the open market at a price not below 90 per cent of par. That was very optimistic, for as Kindleberger surmised: ‘The present discounted value of the bonds in 1932 at the depth of the depression was almost certainly zero’ (Kindleberger, 1993, p. 296). The Lausanne Convention was never ratified, so the bonds were never actually issued. The agreement stipulated that if they were not sold within 15 years, they were to be cancelled. Accordingly, the bonds were ceremoniously burnt by BIS officials in 1948. War debt payments to Britain were suspended, pending ratification. The convention abrogated the Hague agreements and annulled the Young Plan; although Article 7 protected the rights of the Dawes and Young bondholders. Further, the conference recognised that whatever happened in the future, the reparation clauses of Versailles could never be activated and they were therefore consigned to oblivion. Lausanne was a bold but chancy agreement. Bold, because it recognised the reality that the Depression had effectively wrecked reparations;28 but it was risky because the cancellation was contingent on reaching satisfactory agreements with the United States on war debts – which was far from certain. That contingency factor was expressed in a private, so-called Gentlemen’s Agreement among the four principal European reparation creditors that they would not ratify the Lausanne Convention until they get war debt relief from the United States – which they knew they were unlikely to get (Wheeler-Bennett, 1933, p. 213). The Lausanne agreements were thus the result of a two-stage conference strategy: first, cancellation of reparations; then Allied war debts write-off. The gentlemen’s agreement envisaged that if there was no ratification because of US refusal to cancel war debts, then another conference could be held, presumably to revert to some modified version of the Young Plan. However, with the menacing Nazi regime in Berlin the likelihood of this happening was practically nil. Thereafter, as Sally Marks notes, reparations ‘quietly fell into limbo, a victim of German revisionism and

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world depression’ (Marks, 2003, p. 143; also Marks, 1978, p. 254). The nominal reparations bill that was first presented to Germany under ultimatum in 1921 was now cancelled without fanfare, with hardly any of the 1921 total having been paid: at most 21.5 billion GM ($5 billion) over the whole period 1919–32 – less than a third of it in cash. Much of that was paid with borrowed money and amounted to an average of only 2 per cent of Germany’s national income (Marks, 2003, p. 143; Schuker, 1988, pp. 107–8).29 When the Lausanne agreement finally came about, Brüning was no longer in office to benefit from it. Hindenburg withdrew his support from the chancellor and forced him to resign on 30 May 1932. Brüning later ruefully recalled that he fell ‘hundert Meter vor dem Ziel’ (‘100 metres from the goal’)30 – the goal, that is, of ending reparations, but not yet the slump. At Lausanne the French government secured a face-saving formula – a few ‘crumbs of comfort’ to reassure public opinion and counter charges of a sell-out. In fact, what was cooked up was a fiction, disguised by the secret gentlemen’s agreement, which guaranteed that Germany’s obligation to pay a fixed lump sum remained a dead letter. The delegates did not bother to consider the allocation among themselves of the token German payment – a further indication of the flimsy, insubstantial nature of the final-payment arrangements. In Germany there was disappointment. People felt they were entitled to relief. The Nazis, in particular, were not satisfied. They campaigned for an immediate and complete end to the ‘tribute’ payments and wanted nothing less than a ‘clean slate’. Within days, news of the secret European deal became public. In the United States the reaction was hostile. On Capitol Hill, politicians accused the European debtors of forming a ‘united front’ against their country and President Hoover deplored the debtor countries’ attempt to ‘gang up’ against the United States (Lochner, 1960, p. 130; see also SIA, 1932, pp. 115–16). Germans cynically saw the gentlemen’s agreement by America’s debtors as a ruse to get war debt cancellation, and felt that they were being used. The French felt they had a safeguard in the private agreement. It was seen as an effective formula for conveying a veiled or implicit threat of debt repudiation (without quite saying so) should the US administration refuse to negotiate.

5.3 An unresolved issue: Allied war debts The Lausanne Convention dealt with one side of the war debt/reparations equation. Unresolved, the war debt issue still remained in


contention, with everything to play for. News of the gentlemen’s agreement served to raise more sharply its pivotal importance. Despite the initial unfavourable transatlantic reaction, European interest now focused on Washington, hoping for a change in attitude there, later in the year. At Lausanne the delegates called for an international conference to discuss the world economic crisis. The British, in particular, hoped it would provide a forum to get war debts cancelled. America’s European debtors agreed to start discussion on war debt after the presidential election on 8 November with a view to getting a definitive settlement at the World Economic Conference in mid-1933. With the election out of the way, and war debt settlements falling due on 15 December, crunch time was fast approaching. In fact, the day of reckoning arrived on 10 November 1932. On that day, in a note to Washington, described by Secretary of State Stimson as a ‘bombshell’, the British government requested an immediate suspension of the December instalment pending negotiation on debt revision (Hudson, 2003, p. 78). The next day a similar request was presented by the French ambassador, which seemed to confirm American fears of a united European front or debtors’ coalition. The British instalment was $95.5 million (£27 million) made up of principal $30 million and interest $65.5 million. The French instalment, interest payment only, was $19.3 million (480 million francs). The British and French requests were rejected by the State Department on 23 November and again on 8 December 1931 (SIA, 1932, pp. 117–26). The official rebuff was blunt: ‘Pay now, talk later.’ European opinion saw this as a thoroughly negative and unhelpful attitude, bound to worsen the world economic and political crisis – especially as the Americans were presently blocking serious talks on intergovernmental debts. They were adamant that war debts must not be on the agenda of the forthcoming World Economic Conference. The Europeans’ sense of grievance was real. They had all made sacrifices to rid the world of the festering sore of reparations in the interest of world economic recovery and conscious of the totalitarian threat in Europe. Why, they asked, could the United States not reciprocate Europe’s historical cancellationist gesture by a similar one of writing off its own claims on the European Allies as their contribution to financial stability and a recovery in world trade? Already, interest charges on Europe’s total American debt of $10 billion were nearly two and a half times as large as the principal payments. In June 1931, the totals paid were: $750 million (principal) and $1.9 billion (interest) (Hudson, 2003, p. 81). On top of that, the slump had reduced the debt-service capacity of the European

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Allies, both (1) through the collapse of world prices relative to gold or the dollar, thereby increasing the real burden of debt service payable in dollars or gold (ultimately, in terms of the real goods and services that had to be sold), and (2) by the precipitous fall in the volume and value of world trade (by 50 per cent in value since 1929), especially the decline in industrial exports and therefore Europe’s ability to earn foreign exchange. US protectionist trade policy was itself a contributory factor to the decline in Europe’s capacity to pay. The steady increase in US tariff levels since 1921 deprived Europe of the means to pay debts by shutting out European goods from US markets. In 1932 the United States was still running a current-account surplus and foreign private lending had virtually ceased. The resulting dollar shortage meant that European debtors could only pay in gold – if, that is, they had any to spare. France alone, for the time being, had sufficient gold for that purpose. However, France was belatedly, but surely, sliding into the turbulent waters of the Depression, and the French budget was already in the red by some $500 million. Europe was no longer prepared to acquiesce in the blatant American fiction that war debts had nothing to do with reparations. This time round, as the bills came in, many wished to defy Uncle Sam and go for ‘voluntary default’. In December 1932 the anguished cry: ‘To pay or not to pay’ echoed more loudly along the corridors of many European finance ministries and treasuries (Self, 2006, pp. 112–14). Reference was made to how the Depression increased the real burden of foreign debts. In Britain, sterling’s depreciation increased the domestic-currency value of the American debt and added to the burden – ultimately to be borne by British taxpayers. The American instalment falling due on 15 December would have required only £20 million when sterling was at its pre-September 1931 gold parity; but now, with the exchange rate at $3.22, the Treasury had to find £27 million instead. The situation was made desperate by the fact that back in April 1932 the forecast for the 1932 budget assumed that there would be neither payments nor receipts on account of reparations and war debts. As a result, the new Chancellor of the Exchequer, Neville Chamberlain, made no provision for payment to the United States. He could only pay if there was a further significant increase in income tax – an imposition sure to be resented by Parliament and taxpayers already carrying a burden four times greater than that borne by the American public. All were in favour of getting the Americans to agree to an early revision and scaling down or even cancellation of the debt. The differences


were over tactics: what was the most effective way to win over the Americans? The Treasury establishment was against the resumption of payment, while the Foreign Office advice was to pay, even if it had to be just a token amount. Cognizant of France’s loss of reparations, British leaders had to keep France committed to the Lausanne settlement and the bargain with Britain to work together to put an end to war debts. In the face of American intransigence the threat to Lausanne was real, and to keep France on board Britain was forced to act in consort with France. Chamberlain, in charge of the war debt negotiations, was determined to prevent at all costs any reopening or disturbance of the Lausanne agreements. The cabinet was divided. Some were prepared to risk default to defeat America’s obduracy. Prime Minister MacDonald, with misplaced optimism, believed that Hoover would eventually agree to a revised settlement. In the end, the decision to pay in full was strongly influenced by the fears of the City of London, communicated to important cabinet members by the Bank of England governor, Montagu Norman (Self, 2006, p. 117). The warning was that default would seriously damage the creditworthiness of Britain and the reputation of the City of London, particularly after the September 1931 departure from gold and the subsequent depreciation of sterling. Britain’s debtors in Latin America and Asia, as well as the Irish Free State would be encouraged to default on loans, causing a further depreciation of sterling. After a fruitless exchange of notes with the lame duck Hoover administration, Britain reluctantly and at the last minute decided to pay the December instalment in full and in gold. In an accompanying note, Chamberlain stipulated that the payment was a capital advance against a final lump-sum settlement. Herriot wanted to do the same as the British and pay; but his hopes of getting sufficient political support vanished when, on the eve of the crucial parliamentary debate, Hoover insisted on full payment and offered no concession to France. On 14 December 1932, the Chamber of Deputies rejected Herriot’s plea and decided against the debt payment by 402 votes to 196, and Herriot immediately resigned. Afterwards France stopped paying war debts. Several other countries followed France in defaulting, including Belgium, Greece, Estonia, Poland and Hungary (Clavin, 1995, pp. 53–6; Self, 2006, pp. 125–32). Britain made token payments in June and December 1933 – just enough to avoid default. The June 1933 payment was $10 million in silver, calculated at an inflated price, very advantageous to Britain. The December payment was $7.5 million. Britain defaulted on 15 June 1934

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and ceased payment thereafter. The Americans particularly resented the British debt repudiation. This vindictive response found political expression in the Congressional debates leading up to the passage in April 1934 of the Debt Default Act (known as the Johnson Act), which demanded payment of war debts ‘at one hundred cents on the dollar.’31 This legislation (initiated by the isolationist Californian senator, Hiram Johnson) stopped the president accepting further token payments from countries that only did so to avoid the stigma of falling into the category of ‘wilful defaulters’. The Act also prohibited American citizens and corporations from making loans to all governments in default or behind with their payments to the United States Treasury.32 Twelve European countries were thus embargoed. By so doing, the Johnson Act effectively put an end to war debts, just as Lausanne ended German reparations (Self, 2006, pp. 188–95). Thus the reparations/debt tangle unravelled untidily after much bickering, bad grace, ill feelings and mutual recrimination among all involved in the affair’s denouement. It is natural to speculate how things might have turned out if the United States had agreed to all-round cancellation of war debts and reparations in 1919. ‘It was the $11 billion in war debts that made reparations so serious and deadly ... that gave reparations their painful reality, as Keynes knew’, says David Felix, a fierce critic of reparations (Felix, 2004, p. 60). Michael Hudson writes that the European Allies were not blameless in their relations with Germany, but says ‘they were acting under the force majeure imposed by the United States’ insistence that their war debts be paid to the last cent, including interest.’ Since the US government was ‘the ultimate claimant on all war debts’, failure to find a realistic solution to the war debts/reparations problem ‘cannot but be attributed to US policy’ (Hudson, 2003, p. 72). Further, he says: ‘the US government advised its Allies to be moderate with Germany, but was itself immoderate with them’ (Hudson, 2003, p. 48). Robert Self makes the same charge: ‘Washington repeatedly urged a modest settlement’ with regard to reparations ‘for fear that a draconian financial penalty would retard European economic recovery’ and outlets for American exports and investment. Yet, perversely, the American government did not apply the same logic to the war debts owed to the United States (Self, 2006, pp. 196–7). Certainly, only the United States could have broken the deadlock over reparations by negotiating a general, overall settlement of reparations and war debts. But a bigger failure of American policy was, as Klaus Schwabe puts it, ‘the illusion that economic means could solve any political problem in Europe’; and the vain hope that the reparations problem ‘could be depoliticized’ through unofficial


participation in reparation schemes (Dawes and Young) backed by private American money. But, Schwabe continues, ‘concessions to the German view regarding reparations were never accompanied by American guarantees, even of the most indirect sort, for the security of France.’33 In fact, the United States refused to make any political commitments to bolster peace and reconciliation associated with the reparation and reconstruction arrangements it had sponsored.34

5.4

The Nazi debt default and post-war redemption

Partial default and German ‘buybacks’ When Hitler and the Nazis came to power on 30 January 1933, Germany was then free of reparations, but it still shouldered a mountain of foreign debt (about 19 billion RM), including the outstanding Dawes and Young bonds (the Reich Loans). The transfer of interest and principal to service Germany’s external debt required the equivalent of 1 billion RM in foreign currency (Tooze, 2006, pp. 49–50). With the freeze on short-term debts, and reparations gone, the new government determined to default on the 10 billion RM of the long-term debt (Clement, 2004, p. 49). Repudiation would release scarce foreign-exchange reserves to purchase essential foreign raw materials and food for the vast rearmament programme and work-creation schemes planned by the government. That was the economic justification for targeting the long-term debt, but the Nazis had other reasons – political, nationalistic and emotional – for the attack. The Nazis regarded all long-term debt as ‘political’, and all payments on foreign debt as ‘tribute’. Reparations, it was said, were the cause of Germany’s indebtedness. The foreign long-term loans were involuntary and raised for reparation payments. The Dawes and Young Loans were said to be ‘tainted’ with the despicable reparations regime and the shameful Diktat of Versailles. In the absence of reparations, neither of those loans would have been undertaken.35 Schacht returned as president of the Reichsbank on 17 March 1933. The Hitler government needed all the foreign exchange they could get, and it was Schacht’s job to provide it through a debt default policy. Schacht prepared the ground by a premature repayment of the $100 million credit obtained from the central banks in 1931, thereby intentionally producing a sharp fall in the Reichsbank’s gold reserve. The cover ratio dropped to 15 per cent in May 1933, with a further fall to 8 per cent the following month (Clement, 2004, p. 37). Schacht followed that with a series of unilateral actions stretching over three


years, moving from partial default to outright default. The result was that Germany became the major defaulter in the 1930s. On 9 June 1933, the Reichsbank announced a general transfer moratorium or suspension of payments on all public and private long-term debts, including the Dawes and Young Loans. However, after negotiations and the threat of retaliatory action by Britain to impose a ‘clearing’ to take debt payments out of German export earnings, Schacht accepted a compromise scheme. He allowed the transfer of full interest and amortisation payments on the Dawes Loan and interest only on the Young Loan. Thus these Reich loans received transfer priority. Amortisation payments on all other loans, including the Young Loan, were suspended. Only 50 per cent of interest payments for bonds would be paid in foreign currency – later, further reduced to 30 per cent. The remaining 70 per cent was to be paid in ‘scrip’, or coupons, redeemable into foreign exchange only at a 50 per cent discount at the Golddiskontbank. Thus, foreign bondholders had their interest payments reduced to 65 per cent of the amount due (Clement, 2004, pp. 38–9). A later revision allowed creditors to get 77 per cent of their interest, instead of 65 per cent. The next year, on 14 June 1934, the German government announced a full transfer moratorium on all medium and long-term debts. This caused division among the creditor countries. There was no united front, and Schacht was able to play off one group of creditors against another. The United States and Britain, and other principal creditors sought face-saving bilateral clearing agreements with the German government. These were arrangements involving blocked accounts, where creditors could receive reduced interest payments in reichsmarks instead of foreign exchange. Bondholders were thus able to cover at least part of their investments in this partial default or ‘transfer stop’. Thus, until September 1939 when war broke out, interest at a reduced rate was paid to bondholders on Dawes and Young Loans. The blocking of transfers was used by the German government to bargain or swap debt repayments for trade concessions in favour of Germany (Toniolo, 2005, pp. 152–7). The reduction in the value of the German debt to creditors led to a sharp decline in the traded price of German bonds, including these Reich bonds. Purchases of these bonds were very profitable to Germans with the overvalued mark. By buying back the bonds cheaply, the Germans (officially or otherwise) were able to reduce further (by 32 per cent) their total foreign indebtedness.36 By September 1939, Germany’s total foreign debt was down to just under 10 billion RM. 37


The Federal Republic repays Germany’s debts At the end of the Second World War, the Federal Republic of Germany and 18 other countries signed, on 27 February 1953, the London Debt Agreement establishing a plan for the settlement of Germany’s pre-war and post-war indebtedness, after 20 years of default.38 The Agreement reduced Germany’s outstanding debt by 50 per cent, extended repayment over a period of 30 years and postponed some repayments until German reunification.39 The scaling down of the debt was very generous. For example, the pre-war debt valued at 13.5 billion marks was reduced to 7.5 billion marks. The United States unilaterally reduced their post-war claim for assistance (food and advances under the Marshall Plan) from $3.2 billion to $1.5 billion, payable over 35 years. For five years after 1953, only interest payments were due. Payments on the principal of the loans were delayed until 1958. From that year Germany started making annual payments of 760 million marks on all the debts. The delay in making amortisation payments was due to the fact that at about the same time as it accepted the London debt settlement, Germany entered into an agreement with Israel providing for payments to Holocaust victims and survivors. The payments amounted to 3.5 billion marks ($830 million) over the next 12 years.40 By late 1991 Germany had paid 110 billion marks ($70 billion) to Israel and individual Jews.41 All other reparation claims – for example, compensation for looting during the war, the costs of military occupation and the use of slave and forced labour in German plants – were excluded from the 1953 settlement. They were put off until Germany was united and a final peace treaty signed. Of course, reparations were extracted from Germany by the occupying powers before 1953 in the form of deliveries from current production and the seizure of industrial plant and equipment. German reunification in October 1990 signalled the final phase of the post-1945 German debt and reparations settlement. First, the German Debt Administration issued a new set of government bonds (maturing on 3 October 2010) to compensate bondholders for the arrears of interest due on the Dawes, Young and Kreuger Loans. Second, Germany began to settle with claimants for restitution and reparations, as agreed in 1953 (Clement, 2004, pp. 47–8). Germany repaid the country’s international debts forthrightly and expeditiously. The Standstill credits were paid off in 1954. All of the post-war debts were entirely repaid by the 1960s. Most of the other debts were settled by the early 1970s. The last payment on the principal of the Dawes Loan was made in 1969; that on the Young Loan in June 1980.

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By 2004, it is claimed, Germany had paid out $100 billion in total reparations.42 Many factors helped Germany’s exemplary debt-repayment performance. Germany was required to pay only half of what it actually owed. But more important was the fact that in 1950 the West German government and business leaders realised that the repayment was essential for restoring the country’s access to international credit markets. Germany badly needed capital, external loans and foreign direct investment. To that powerful incentive and willingness was joined the ability to repay. After the currency reform of 1948 and Marshall Aid, the economy boomed. Germany experienced a Wirtschaftswunder, an ‘economic miracle’. Massive export surpluses throughout the 1960s provided Germany with a vast accumulation of foreign-exchange reserves (totalling 23 billion marks in 1960). The transfer capacity was there, the political willingness to honour financial obligations was present – all supported by a national social consensus (expressed in tax legislation by the Equalisation of Burdens Law of 1952) for a fair sharing of the burdens of compliance. As the late Gerald Feldman noted, the smoothness of the whole debt and reparations settlement ‘certainly demonstrated that Bonn was not Weimar’ (Feldman, 2005, p. 496). Summing up Coming to the end of recounting the story of reparations, one is tellingly reminded of Sally Marks’s warning that ‘those who study reparations must cope with technical complexity and political considerations wrapped in great clouds of misdirection and propaganda’ (Marks, 1998, p. 388). Specialists in the reparations field are, presumably, those who see the reality behind the ‘smoke and mirrors’, the propaganda and the murkiness surrounding the 13 years’ reparations struggle. It may be instructive, therefore, to sample some of these writers’ summing up on the reparations dispute. John Kenneth Galbraith wrote that reparations ‘were subject to elaborate permutations which had the principal effect of disguising the one solid fact that they could not or would not be paid.’43 Sally Marks blames the politicians for what she calls ‘the perpetual blight of the reparations question [that] plagued Germany, the Entente, and Europe’, leading to ‘the interwar destabilization of Europe’ (Marks, 1998, p. 370). Gerald Feldman claims: ‘Reparations were Weimar’s fatal distraction ... The fact that the Germans successfully cheated everyone in the end does not exculpate those responsible for the folly that began at Versailles’ (Feldman, 1985, pp. 399–400). Elsewhere, Feldman remarked that the paradox of reparations ‘was that they imposed demeaning obligations on the German State while undermining the


legitimacy and stability required by the State to fulfil them’ (Feldman, 1993, p. 350). Contrast that with Harold James’s comment that, after all, perhaps ‘reparations were the (relatively cheap) price for keeping Weimar democracy alive’ – implying that reparations stabilised Weimar until 1932 by providing a rallying point or common interest on which a national consensus could be built.44 Albrecht Ritschl declares that reparations themselves were not the cause of Germany’s economic crises. Rather, Germany’s economic woes stemmed basically from ‘the fateful German attempt (through various tactical manoeuvres) to withhold, evade and shake off reparations, instead of paying off the reparations burden evenly, over a suitably long time period’ (Ritschl, 2002, p. 240). If political and social conditions in Germany had been supportive of an effective policy of fulfilment, Ritschl concludes, German reparations ‘would probably be little more than a footnote in history, a curiosity of financial history ...’ (Ritschl, 2002, p. 243).45 Finally, we have the comment originally made in 1961 by the well-known British historian, A.J.P. Taylor that ‘the only economic effect of reparations was to give employment to a large number of bookkeepers.’46

Notes 1. See, Hans-Joachim Braun, The German Economy in the Twentieth Century (London: Routledge, 1990), pp. 66–7. 2. Knut Borchardt, the German economic historian, caused a stir in 1979 with his thesis that the mid-1920s German economic recovery was a fragile one; that Weimar was chronically ill, and it was that condition that made the Depression much worse in Germany – hence the reference to ‘the crisis before the crisis’. Borchardt’s thesis was challenged by Carl-Ludwig Holtfrerich, among others, opening a debate that continued for over twenty years. See K. Borchardt, Perspectives on Modern German Economic History and Policy (Cambridge: Cambridge University Press, 1991), pp. 91, 144–57. See also the papers by Harold James, Holtfrerich and Richard Bessel in Ian Kershaw (ed.), Weimar: Why Did German Democracy Fail (London: Weidenfeld and Nicolson, 1990). The central plank in Borchardt’s argument is the observation that real wages outstripped productivity gains and eroded profits, which translated into low investment and mediocre economic growth. Balderston (2002, pp. 68–71) provides a clear summary of the argument and concludes that ‘... most economic historians now probably support a moderate version of the Borchardt-James thesis that wage growth exceeded productivity growth in the mid-Weimar years’ (p. 71). 3. The regret is often expressed in the literature that the Müller coalition should have torn itself apart on a trivial matter ‘over the question of thirty pfennigs for the unemployed’, as Hilferding later complained to Gustav Noske,

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4. 5.

6.

7.


a former SPD minister. Hilferding asserted that in the ministerial crisis of March 1930 the SPD’s policies were ‘determined by people who were ready to let the entire German democracy and republic go to the devil over a matter of whether thirty pfennigs more or less should be given to the unemployed.’ See Gustav Noske, Erlebtes aus Aufstieg und Niedergang der deutschen Sozialdemokratie (Offenbach: Bollwerk-Verlag, 1947), p. 309. But that is only superficial appearance, placing the blame on the SPD and the trade unions for Müller’s departure by their intransigent stand, giving Müller no room for compromise. In reality, the government’s fate was sealed by powerful forces on the right – from Hindenburg and his ‘camarilla’ to heavy industry and the DVP – that wanted to dispense with parliamentary democracy and the SDP so as to dismantle the welfare state (Maehl, 1986, pp. 160–2; Winkler, 2006, pp. 429–35). Between 1924 and 1929 Schacht managed to keep these reserves at around 70 per cent of the note issue. Knut Borchardt’s answer to this question started the long-running debate among economic historians, known as the ‘Borchardt controversy’, mentioned in note 2 above. As is well known, Borchardt defends Brüning’s ruinous deflationary policy on the grounds that he had no room to manoeuvre, that there was no other option, that there were no feasible alternatives, and that no Weimar government could have done otherwise after 1929 and at least until mid-1931. Many now agree with Borchardt that during that period Brüning’s hands were tied by domestic and international constraints. Brüning’s critics maintain, however, that after the German banking crisis in the summer of 1931 the situation changed. New options became feasible, allowing scope for a stimulus package aimed at job creation. An expansionary spending programme was possible. Yet, Brüning hesitated until it was too late. See Borchardt’s restatement of his defence of Brüning in J. von Kruedener (ed.), Economic Crisis and Political Collapse: The Weimar Republic 1924–1933 (Oxford: Berg, 1990), pp. 99–151. MacGregor Knox (2007) remains unconvinced that Brüning could not have acted otherwise. Knox sees Brüning’s response to the economic crisis being driven by his ‘ruling superstition’ – a ‘nationalist monomania’ that deliverance might come from foreign policy successes. The evidence is in any case overwhelming that nationalist foreign policy goals were at the top of Brüning’s agenda. It was a choice he freely made. That was the decisive factor determining his policy, says Knox, ‘even if Brüning had lacked alternatives to deflation’ (Knox, 2007, p. 371 and p. 373, n. 414). Other modern commentators similarly see Brüning’s priority as focused on solving the reparations problem, despite the costs of soaring unemployment. Eberhard Kolb (2005, p. 122) puts it bluntly: ‘Brüning’s chief priority was not to cure unemployment and overcome the economic crisis, but to get rid of the reparations burden.’ Johnson (1997, p. 219, n. 79) writes that Brüning ‘wanted an economic downturn to force foreign powers to end reparations’. Gottfried von Haberler, the Austrian-born, distinguished Harvard economist wrote in 1987: ‘Chancellor Brüning deliberately deflated the economy to get rid of reparations.’ See G. Haberler, ‘The International Monetary System: Recent Developments in Historical Perspective’, Außenwirtschaft, 42 (1987), p. 373. Bernard Wasserstein (2007, p. 177) calls Brüning’s decision to appeal to the people by calling elections ‘one of the most disastrous miscalculations in the


8.

9.

10.

11.

12.

13.

14.

history of democracy’. See Heyde (1998, pp. 160–71) on how Brüning’s position was weakened by the growing influence of the Nazis. Brüning survived parliamentary battles – on the few occasions when he faced the Reichstag – with the help of the Social Democratic deputies, who adopted a policy of ‘toleration’ of his draconian austerity measures. The surge in the Nazi parliamentary strength made the Brüning cabinet the ‘lesser evil’ for the SPD leadership (Winkler, 2006, pp. 439–43). For a good, short account about the 1930 German loans, see Bernard V. Burke, ‘American Economic Diplomacy and the Weimar Republic’, Mid-America, 54 (1972), pp. 211–33. Ivar Kreuger, head of the Kreuger and Toll match empire agreed in September 1929 to loan the German government $125 million in return for a 50-year monopoly of the production and sale of match in Germany – a deal approved by the Reichstag on 28 January 1930. Lee, Higginson discounted the Kreuger loans to Germany; but the Swedish financier was already bankrupt by the Depression, and had no money to lend. He committed suicide in a Paris apartment on 12 March 1932, and was subsequently portrayed as a swindler and genius. John Kenneth Galbraith, the American economist, wrote in 1961 that Kreuger was ‘the biggest thief in the long history of larceny – a man who could think of embezzlement in terms of hundreds of millions’. See Robert Shaplen, Kreuger: Genius and Swindler (London: Andre Deutsch, 1961), pp. vii–viii. Lee, Higginson suffered heavy financial losses and never recovered from the Kreuger debacle – see Burke (1972, p. 232) mentioned above. See also The Economist, 22 December 2007 (pp. 113–15) on ‘The Match King’. The Lee, Higginson-Kreuger credits were made conditional on Germany keeping to the Young Plan and providing for a sinking fund to pay off the Reich floating debt. The conditions were designed to support and strengthen the Brüning cabinet against the threat from the Nazis. An apt description of Brüning’s behaviour during 1931, as seen by Selwyn Parker, The Great Crash (London: Piatkus, 2008), p. 95. As Brüning continued to tighten the economic screw on the German people, all it did was to delight the Nazis, who ridiculing ‘the Chancellor’s efforts ... continued to promise Brot und Freiheit’. Germany was then negotiating preferential trade agreements with Hungary and Romania, which Berlin regarded as complementary to the customs union project and ‘as diplomatic “successes” for domestic consumption’. See William S. Grenzebach, Jr, Germany’s Informal Empire in East-Central Europe (Stuttgart: Franz Steiner Verlag, 1988), p. 14. Two days later (5 September 1931), the International Court of Justice at The Hague ruled by a narrow majority of eight to nine votes that although the customs union project was compatible with Article 88 of the Treaty of St. Germain, it did violate the accords of the 1922 Geneva Protocol. See text of judgement in DIA, 1931. Berlin yielded when the furious French reaction was supported by pressure from Britain, Italy and Czechoslovakia. Observers and the financial press maintained that French banks withdrew short-term credits from Austrian and German banks to put pressure on Germany and Austria to abandon the customs union project. But Karl Erich Born notes that that does not tally with the facts, referring to a country-by-country breakdown of foreign credits held by Germany during


15.

16.

17. 18.

19. 20.

21.

22. 23.

24.

25.

those critical weeks and months. He writes: ‘the French did not recall any credits at this time.’ It was only later in the crisis, he claims, ‘that Paris tried to combine financial policy with diplomatic objectives.’ See Born (1983, p. 259). But, see new evidence in Aguado (2001, pp. 199–221) that although the French were not responsible for the collapse of the Creditanstalt, they were responsible for ‘an exacerbation of the flight from the schilling’ to force the Austrians to give up the customs union project (p. 217). See Volker Hentschel, ‘German Economic and Social Policy 1815–1939’ in Peter Mathias and Sidney Pollard (eds), The Cambridge Economic History of Europe, Vol. VIII, The Industrial Economies (Cambridge: Cambridge University Press, 1989), n. 102, pp. 802–3. Randall Parker in conversation with Peter Temin, 2004. See Randall E. Parker, The Economics of the Great Depression (Cheltenham: Edward Elgar, 2007), pp. 33–4. Foreign-exchange controls became an integral part of Nazi economic policy. Note that the ‘Standstill Agreements’ subsequently negotiated did not stop all foreign withdrawals. According to Harold James, from July 1931 to September 1931 4.3 billion RM foreign-currency credits were successfully recalled. See Harold James, ‘The Causes of the German Banking Crisis of 1931’, Economic History Review, 38 (1984), p. 82. See Richard Roberts, Schroders: Merchants and Bankers (Basingstoke: Macmillan Press, 1992), pp. 252–62. Many London banks had large outstanding loans to German municipalities and commercial firms. Such lending was very profitable business, ‘borrowing in Paris at cheap short-term rates of 2 per cent and lending to Germany at long-term rates as high as 8 per cent.’ See Jehanne Wake, Kleinwort Benson: The History of Two Families in Banking (Oxford: Oxford University Press, 1997), p. 243. Despite this exposure, even by 13 July, London banks did not join in the general scramble to withdraw loans and credits from Germany, following the advice of Montagu Norman (governor of the Bank of England) not to do so. Norman felt Germany needed ‘help and comfort rather than worrying’, since Germany was ‘a good bet in the long run’ (Wake, p. 243). Part of the acceptances was gradually reimbursed in reichsmarks, and the value of the outstanding loans was further reduced by the subsequent devaluation of the dollar and the pound sterling; but the bills and other short-term credits were not really repaid until the mid-1950s after the London Debt Agreement of 1953. See Harold van B. Cleveland and Thomas F. Huertas (eds), Citibank 1812–1970 (Cambridge, MA: Harvard University Press, 1985), p. 168. C. Edmund Clingan regards the French demands as ‘trifling’, and calls them ‘extremely reasonable’. He says, had the Germans accepted the deal, ‘it would have finally stabilised the budget, ended the credit crisis and begun economic recovery’. See Clingan (2001, p. 192). See Hubert Cole, Laval: A Biography (London: Heinemann, 1963), p. 46. Cole adds: ‘Britain and America were agreed that Laval was being much too beastly to the Germans.’ Sterling’s depreciation cost the Bank of France dearly – losses of around £25 million by the end of 1931 on its sterling balances held on


26.

27. 28.

29.

30. 31. 32.

deposit in London and the credits advanced in the summer. See Boyce (2000, pp. 89–90). See Neil Forbes, ‘London Banks, the German Standstill Agreements, and “Economic Appeasement” in the 1930s’, Economic History Review, 40 (1987), pp. 575–6. Heinrich Brüning, Memoiren 1918–1934 (Stuttgart: Deutsche Verlagsanstalt, 1970), p. 309. The Depression put an end to reparations; but were reparations the cause of the Depression? Some at the time, including the influential Swedish economist, Gustav Cassel, believed that to be the case. Sir Roy Harrod, the British economist and first official biographer of Keynes, doubted the connection. In a 1937 newspaper article, he called for ‘a sense of proportion’ in regard to Germany’s annual reparations payment in the 1920s. ‘This payment’, he continued, ‘only amounted to a small fraction of 1% of the total annual income of the world. Why should the difficulties of a debtor of this order of magnitude lead to events which culminated in the loss of world annual income of some 30%?’ The world economic collapse (1929–33) was a cataclysm springing from multiple sources or causes. The causes are still debatable, but monocausal explanations are suspect. Focusing on who were to blame, Liaquat Ahamed (2009, pp. 501–4) judges that the catastrophe was ‘the direct result of a series of misjudgments’ and policy failures by politicians and central bankers; a ‘dramatic sequence of collective blunders.’ One collective fault was the divisive post-war politics that burdened the world with ‘a gigantic overhange of international debts’ (reparations and inter-Allied war debts). Two other failures were the gold standard and policy errors by central banks. See G. Cassel, The Crisis in the World’s Monetary System (Oxford: Oxford University Press, 1932); Daniele Besomi (ed.), The Collected Interwar Papers and Correspondence of Roy Harrod, Vol. III (Cheltenham: Elgar, 2003), p. 1281. According to Schuker’s calculations (1985, 1988, and 1992, p. 43), net foreign capital inflows (wiped out by German inflation and partial defaults in 1932) amounted to a unilateral transfer or windfall profit for Germany at least equivalent in magnitude to the total of reparations paid. Long before Schuker, in the middle of the Second World War, the Czech economist, G. Borsky, wrote a short book showing that Germany never paid cash reparations out of its own resources. The book, The Greatest Swindle in the World: The Story of the German Reparations (London: New Europe Publishing Co., 1942) featured a Preface (a vigorous polemic) written by Lord Vansittart, the former permanent undersecretary at the British Foreign Office – a work seldom mentioned by historians of reparations. Quoted in Eberhard Kolb, Die Weimarer Republik (München: R. Oldenbourg Verlag, 1984), p. 133. For more on the Johnson Act, see Chal Vinson, J. ‘War Debts and Peace Legislation: The Johnson Act of 1934’, Mid-America, 50 (1968), pp. 206–22. ‘Lend-Lease’ was the system devised by the US government in March 1941 to get round the Neutrality and Johnson Acts and provide arms and supplies to Britain, without the latter having to pay for them with loans contracted in the United States on business terms – as was done during the First World War. Instead, the United States would ‘lease’ or ‘lend’ supplies to Britain. For

226

33.

34.

35. 36. 37.

38.

39.

40.

41. 42. 43.

German Reparations, 1919–1932 the origins and operation of Lend-Lease, see Survey of International Affairs, 1939–46, Appendix II, pp. 772–89. See Klaus Schwabe, in ‘The United States and the Weimar Republic: A “Special Relationship” That Failed’ in Frank Trommler and Joseph McVeigh (eds), America and the Germans: An Assessment of a Three-Hundred Year History, Vol. 2 (Philadelphia: University of Pennsylvania Press, 1985), p. 27. Schwabe further comments: ‘In helping Germany to stabilize its economy, America increased Germany’s military potential; and yet it was not prepared to counterbalance these effects of its policy by assisting France in strengthening its own security’ (p. 27). Paul Schroeder emphasises this point in a recent review article, where he also regrets that the deeply structural ‘French security dilemma’ was ‘never squarely faced by the British or Americans.’ See Paul W. Schroeder, ‘The Lights That Failed – and Those Never Lit’, International History Review, 28 (2006), pp. 124–5. Lord Vansittart (formerly, permanent undersecretary at the British Foreign Office in the 1930s) ruefully admitted: ‘We all blamed France ... for being vindictive, when her main motive was funk.’ See Lord Vansittart, The Mist Procession: The Autobiography of Lord Vansittart (London: Hutchinson, 1958), p. 206. See George P. Auld, ‘The Dawes and Young Loans: Then and Now’, Foreign Affairs, 13 (1934), pp. 6–25. See Adam Klug, The German Buybacks, 1932–1939: A Cure for Overhang? (Princeton, NJ: Princeton University Press, 1993), p. 21. See William O. Brown, Jr and Richard C.K. Burdekin, ‘German Debt Traded in London during the Second World War: A British Perspective on Hitler’, Economica, 69 (2002), p. 669. This work studies fluctuations in the prices of the Dawes and Young bonds traded on the London Stock Exchange from 1933 to 1945. For a brief, early account of the London Debt Agreement, see H. J. Dernburg, ‘Some Aspects of the German Debt Settlement’, Journal of Finance, 8 (1953), pp. 298–318. For a recent study of the Agreement, including the negotiations leading up to it, see Ursula Rombeck-Jaschinski, Das Londoner Schuldenabkommen: Die Regelung der deutschen Auslandsschulden nach dem Zweiten Weltkrieg (Munich: Oldenbourg, 2005). Postponement applied to arrears of interest owing to the Dawes, Young and Kreuger bondholders for the period 1945–52. Payments on arrears started in October 1990, the date of German reunification, and are due to be paid off in 2010 – more than 80 years after the Dawes, Young and Kreuger Loans were issued. See Timothy W. Guinnane, ‘Financial Vergangenheitsbewältigung: The 1953 London Debt Agreement’, Economic Growth Centre, Yale University. Working Paper No. 880, January 2004, pp. 30–3. See Michael Wolffsohn, Eternal Guilt? Forty Years of German-Jewish-Israeli Relations (New York: Columbia University Press, 1993), p. 84. See, ‘Editorial Comment’, American Journal of International Law, 98 (April 2004), p. 305. John Kenneth Galbraith, A Journey through Economic Time (Boston, MA and New York: Houghton Mifflin, 1994), p. 39.

The End of Reparations (and After) 227 44. Harold James, A German Identity, 1770–1990 (London: Weidenfeld & Nicolson, 1989), p. 134. A.J.P. Taylor (1991, p. 73) wrote that the German people ‘all blamed their troubles on reparations’. Supporting James, Zara Steiner wrote: ‘Indeed, the pursuit of revision kept the domestic political struggle within certain limits and muzzled the German right.’ See Steiner, ‘The Treaty of Versailles Revisited’, in M. Dockrill and J. Foster (eds), The Paris Peace Conference 1919: Peace without Victory? (Basingstoke: Palgrave, 2001), p. 21. 45. Recently, Alan Sharp and Conan Fischer pointed out that the absence of “supportive conditions” in Germany stemmed from the fact that the practicalities of compliance, execution and enforcement of Treaty terms proved problematic in the extreme. For the Germans, the peace settlement ‘posed a series of apparently insuperable challenges that the new republic could scarcely wish away. This dimension has been largely neglected in much of the anglophone literature’. See C. Fischer and A. Sharp (eds), After the Versailles Treaty (London and New York: Routledge, 2008), p. 2. 46. See Taylor (1991, p. 71).

Appendix: Keynes, the Transfer Problem and German Reparations

Keynes’s 14-year campaign against the Versailles Treaty (1919) lasted twice as long as the time he spent trying to understand the causes of mass unemployment. For economists, this period of Keynes’s professional activity is remembered chiefly for the 1929 Keynes-Ohlin debate on German reparations and the analytical contributions to transfer theory it stimulated, with the result that modern transfer theory is now firmly established as a basic component of the theory of international monetary adjustment. Ten years earlier Keynes launched his denunciation of the economic clauses of the Treaty with his Economic Consequences of the Peace (1919), described by one recent biographer as ‘one of the most influential books of the twentieth century’ (Skidelsky, 1992, p. 384). Keynes soon followed up his mordant critique of the peace settlement with A Revision of the Treaty (1922) and other numerous occasional and journalistic pieces on reparations in the following year – see Keynes, CW, vols 17 and 18. The aim of this Appendix is (a) to review a sample of some modern writings relating to Keynes’s handling of the German reparations question and (b) his treatment of the transfer problem in the 1929 debate, which became the technical/theoretical focus for the reparations controversy. Since Keynes’s early polemics against reparations led up to the 1929 debate with Bertil Ohlin when he was provoked or finally challenged to discuss reparations in terms of transfer theory, that is to say, challenged to provide theoretical underpinnings for his view, we shall start with that famous debate which Donald Moggridge calls ‘... one of the classic controversies in the literature of international economics’ (Moggridge, 1992, p. 476).

A.1 The transfer problem: The Keynes-Ohlin debate Early in 1929, after the apparent success of the Dawes Plan, the Young Committee started work on plans for definitely fixing Germany’s reparations liability in an agreed annuity schedule. The huge flow of foreign loans that masked a foreign-debt crisis had evaporated since the previous year, and Germany now faced the prospect of having to make real 228

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transfers to pay reparations and service its foreign debt. For Keynes, who never missed a chance to propagate his anti-reparations views, the new initiative provided such an opportunity. For that purpose, he used the pages of the Economic Journal, March 1929, of which he was editor, to restate his warning that Germany faced a deep transfer crisis, together with another airing of his pessimistic views about the intractability and futility of the whole reparations business. The reply from Ohlin (with a contribution from the French economist, Jacques Rueff) and the ensuing disagreement over the price effects of a unilateral transfer has been known ever since as the Keynes-Ohlin debate.1 The central question in contention was whether the reparations being demanded from Germany would lead to a ‘secondary burden’ on account of induced price effects – a terms of trade deterioration, or a cheapening of Germany’s export products relative to its imports – in addition to the primary burden of the transfer itself. If the terms of trade deteriorate for Germany, the country must also pay more than before for imports. The country’s welfare is further reduced, as it suffers a loss of real income. Keynes asserted that Germany was bound to suffer such a loss. Ohlin questions whether that is necessarily the case. He argues that if income effects are fully taken into account, Germany can develop an export surplus precisely matching the financial (reparations) transfer, so that a real transfer will take place through an outward movement of real resources (commodities) from Germany to the rest of the world. This can occur without any change in relative prices (or the terms of trade), solely by spending adjustments in Germany and the receiving countries. Ohlin contended that the raising of reparation taxes in Germany would automatically reduce the domestic demand for foreign goods. At the same time, the redistribution of the reparation receipts in the receiving countries through tax reductions or government spending would increase aggregate demand, part of which would be for German goods. Therefore, as expenditure falls in Germany and rises abroad, foreign residents will spend as much of their incremental income on German goods as the reduction in German spending on these goods – thereby creating the German trade surplus needed to effect the real transfer. In that case, Germany could continue to make annual reparation payments through recurring trade surpluses equal to the transfer payments with continuous balance-of-payments equilibrium and without having to bear any extra income loss through terms of trade deterioration. In modern transfer theory involving a two-country, two-commodity model, the terms of trade can move in either direction, or not move at

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all. This result depends on the familiar marginal propensity to import in both countries, m in the paying country and m* in the receiving country. According to the transfer criterion, the terms of trade would be unaffected by the transfer payment when m + m* = 1.0. The terms of trade deteriorate for the paying country when m + m* < 1, or move in favour of the paying country if m + m* > 1. The general transfer criterion confirms Ohlin’s contention that there is no substance to the belief (held by Keynes) that the paying country inevitably suffers a ‘secondary burden’.2 Ohlin was methodologically on the right track in emphasising the crucial importance of income effects. However, the smooth adjustment just described could be just one way (the optimistic way), among others, that the paying country and the receiving country might adjust to the income changes. Other outcomes are possible (notably Keynes’s pessimistic forecast based on relative price effects) – as Ohlin himself recognises and admits. Ohlin’s example of frictionless and full adjustment is based on the assumption of identical spending patterns in the paying and the receiving country. If, however, spending patterns differ between the two countries, for instance, if each country has a high propensity to spend on domestic than on foreign products – a home bias in spending – then an effective transfer requires a terms of trade deterioration or a real exchange rate depreciation in the paying country. This is precisely Keynes’s position, but the difference with Ohlin is that he sees that as the only outcome, whereas Ohlin recognises that the terms of trade may be affected, but with no inevitability of an ‘excess’ burden on Germany. Keynes grants that reparation taxes will reduce German expenditure on foreign goods; but since expenditure on foreign goods is only a small proportion of total German expenditure, that is, Germans tend to prefer their own tradable goods to imports (a home bias), the benefit to the German balance of payments from the cut in imports will be slight. The fall in imports by itself will be insufficient to make the export surplus equal to the financial transfer, which is the condition for equilibrium. To fill the gap, a massive increase in exports will be required – an export drive, in fact. The value of German exports, Keynes estimates, will have to increase by 40 per cent (Keynes, 1929a, pp. 2–6). Germany will have to undergo a severe deflation of prices and costs. In particular, there would have to be a massive reduction in the money wages of German workers. German export prices would have to fall. Taking an extreme case to emphasise his point – elasticity of demand for German goods less than 1.0 – Keynes claims that Germany would be unable by any

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expansion of her exports to make the requisite real transfer – as Keynes puts it: ‘In this case the more she [Germany] exports, the smaller will be the aggregate proceeds. Again the Transfer Problem will be a hopeless business’ (Keynes, 1929a, p. 2). In his reply (Ohlin, 1929, pp. 172–8), Ohlin agrees that in each country there is a bias in spending (say, 80 per cent) towards domestic or non-traded goods, so that only 20 per cent of the transfer will be made in real terms, automatically. But, says Ohlin, Keynes ignores further repercussions on the two countries’ trade balances of the 80 per cent of the transfer spent on non-traded goods (Ohlin, 1929, p. 174). Ohlin continues with a concise but clear account of how these indirect effects complete the real transfer in ‘a magnificent passage’, as Robert Mundell describes it (Mundell, 2002, p. 241). At the end of it, Ohlin asserts that it is not necessary for the paying country’s export prices to fall – no terms of trade deterioration – and hence, no secondary burden. But successful adjustment may nevertheless involve a ‘transfer effect’ (though not of the terms-of-trade variety), only one requiring a change in the relative price of traded to non-traded goods.3 We may briefly summarise Ohlin’s conclusion as follows: Adjustment in the paying country comes about through a reduction of the real exchange rate (a fall in the relative price of non-traded goods). Real depreciation leads to shrinkage of the non-traded goods sector, a corresponding expansion of the tradable sectors (export and import-competing) and the generation of an equilibrating export surplus. Opposite changes take place in the receiving country. In his rejoinder to Ohlin, Keynes repeated his opinion that there were only two ways in which Germany could improve its trade balance: (1) reduction in German money wages to increase competitiveness, and (2) a cut in real earnings of the German people (Keynes, 1929b, pp. 179–82). Jacques Rueff’s contribution to the debate appeared in the September 1929 issue of the Economic Journal (pp. 388–99). He supported Ohlin’s contention that there was no transfer problem by producing evidence refuting Keynes’s assertion that trade flows were insensitive to monetary flows such as reparation payments and capital movements. Rueff’s empirical evidence that trade balance adjustments occur without excessive strain and stress was obviously convincing to transfer optimists like Ohlin and Rueff; but apparently failed to impress Keynes, with his exaggerated fear of transfer difficulties caused by ‘sticky-mass’ trade balances. As we have seen, Keynes’s conclusion that sizeable reparations would create impossible problems for Germany and the whole world economy

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rested on three suppositions: (1) he ignored the income and expenditure effects of a transfer; in effect, he assumed that m + m* was close to zero; (2) his elasticity pessimism, and (3) his rejection of an adjustment mechanism founded on the transfer of purchasing power. Keynes was, of course, wide off the mark. He was wrong in his assessment of Germany’s ability to effectuate the transfer and in the theoretical arguments used to support his pessimistic prognostications. He was resistant to Ohlin’s unorthodox interpretation of the adjustment mechanism – in particular, the point that price elasticities have little or nothing to do with the analysis. Was it perhaps Keynes’s intuition, responding to the interwar economic environment, rather than any rigorous deduction from orthodox theory that disposed him to favour the ‘classical presumption’? There was, then, the perception that the correction of balance-of-payments disequilibria was actually severely impeded by monetary instability, rigid national cost structures, sticky money wages, tariffs, financial uncertainty, fiscal imbalances and unemployment. Did that perception colour his attitude to the feasibility of transfer? Steven Brakman and Charles van Marrewijk recently analysed transfers in an analytical framework incorporating the assumptions and assertions of Keynes and Ohlin. The results are not easy to interpret. However, the findings suggest that Keynes’s concern about the unemployment effect of the reparations transfer is valid; but perhaps weakened where unemployment and non-traded goods coexist. The results support Ohlin’s contention under all circumstances. By the same token, this implies that ‘Keynes presumption that a transfer worsens the donor’s terms of trade is not valid.’4 Some early critics saw Keynes as being trapped in an obsolete model, out of which he was soon to break loose. But it was, after all, a model that, at the time, served his critical and polemical purposes well enough. As Howard Ellis and Lloyd Metzler expressed it in 1950: ‘The paradoxical aspect of the controversy is that Keynes, who later laid the groundwork for the modern theory, adopted an extremely classical view in his discussion of German reparations.’5 Reviewing the debate in 1981, Paul Samuelson referred to the interchange as ‘one which pitted the unknown David from Sweden against the world-famous Goliath’, and concluded: ‘Goliath’s rhetorical bluster and political resentment against the Treaty of Versailles were not able to upset the neutral rationality of the youthful David.’6 In 1975, Harry Johnson, noting that Keynes’s contribution to the debate was ‘technically incompetent’, went on to deplore Keynes’s ‘standard “ploy” ... of

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claiming not to be certain of the meaning of technical terms used by others and pointing out at length the nonsense they could be made to mean by semantic interpretation divorced from concern with reaching truth about the scientific problem in hand.’7 More recently, Nobel laureate, Robert Mundell referred to Keynes’s claim that because of inelastic demand for German exports, Germany could not effect the transfer (whatever the reparation bill) as an ‘astonishing argument’, and added: ‘It will for a long time go down as one of the great puzzles of the history of economic thought why Keynes let himself fall victim to such an absurd position! The editor of the Economic Journal – Keynes himself – should have had it properly refereed.’8 In another comment on the Keynes-Ohlin debate, Mundell wrote: ‘Keynes’s practical insight was vindicated perhaps but not his logic, and it was a pity that he allowed his personal inclinations and advocacy to weaken his scientific objectivity.’9 Joseph Schumpeter, the celebrated historian of economic doctrines, in an obituary notice, referred to Keynes’s 1929 article as having been ‘dictated by the most generous motives and by unerring political wisdom’; but added that ‘it was not good theory and Ohlin and Rueff found it easy to deal with it. It is difficult to understand how Keynes can have been blind to the weak spots in his argument’.10

A.2 Keynes’s anti-reparations campaign At this distance in time, it seems a far cry from the din and clamour of the running battle over German reparations, but we must return to that political battleground to assess the role of Keynes as an active partisan in that struggle. Keynes’s objections centred on what he regarded as the excessive Allies’ reparations demand, and which he judged was beyond the capacity of Germany to fulfil.11 He therefore urged the cancellation of all inter-Allied war debts, a drastic reduction in reparations and an American-funded reconstruction loan (Keynes, CW, II, chapter 7). The Americans saw that they would have to provide most of the resources for these remedies, and Keynes’s scheme was rejected. Now, Keynes was not opposed to reparations as such; but he objected to the sum demanded and so, as Sidney Pollard said, ‘he turned what was a question of quantity into a matter of principle’.12 As mentioned earlier, in a Treasury memorandum of October 1918, Keynes himself suggested that Germany could pay a total of £3 billion to cover the ‘material damages of war’, as defined in the armistice terms, though £2 billion was considered a more realistic figure. At the Peace Conference, however, all the official figures suggested by the Allies were much larger than those

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put forward by Keynes. What infuriated Keynes was the acceptance in April 1919 by President Wilson (however reluctantly) of General Smuts’s suggestion that separation allowances and military pensions could properly be added to the total. For this more than doubled Germany’s liability at a stroke and in Keynes’s opinion imposed a crushing burden well beyond Germany’s capacity to pay. In June 1919, shortly after the Treaty was signed, Keynes resigned in disgust from the British delegation to the Conference, wrote Economic Consequences of the Peace during the summer and had it published on 12 December of that year. The book was a runaway success with British and American readers. Overnight Keynes became an international celebrity, hailed as a professional writer of outstanding ability, an economic guru and polemicist of great promise. It is claimed that his work helped to shape British European policy in the direction of appeasement during the later interwar years: that Keynes more than any other person helped to create a climate of opinion in Britain and in other countries highly critical of the Treaty of Versailles.13 The book added to the bitterness in Anglo-French relations through much of the interwar period. Many still consider that it had a part to play in the refusal of the US Senate to ratify the Treaty, and that it helped to fasten isolationist views on a whole generation of Americans.14 In Germany, it is reckoned to have strengthened resistance to the half-hearted Erfüllungspolitik of early 1920s German governments. In the book, Keynes insisted that the salvation of European civilisation and capitalism depended on giving primacy to economics over politics. The peacemakers, however, had done the opposite. By crippling the German economy (the central pillar of the economy of Europe) the provisions of the Treaty would stunt the revival of economic life on the continent. Despite his claim that his main preoccupation was with Europe’s ‘means of livelihood’ and that economic reasoning was the basis of his dissatisfaction with the Versailles settlement, Keynes objected to the Treaty quite as much on political as on economic grounds (Felix, 2004, pp. 58–62). Economic Consequences is, in fact, a thoroughly political work. He denounced Allied reparation claims as vindictive and immoral; they were impracticable and moreover, could not be carried out. The reparation demands, Keynes claimed, took no notice of economic realities. The attempt to extract tribute from the vanquished would not only ruin Germany, but would also impose severe hardship and unemployment on the victors themselves. He painted a picture of a destitute Germany laid low by the reparations burden. His polemic was liberally laced with doomsday scenarios,

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Malthusian crisis in Germany and other equally frightening apocalyptic imagery, for example, the grave danger of rampant inflation which could destroy the whole European economy by undermining business confidence and encouraging wild speculation. The immediate effects of the Treaty would be to degrade the lives of millions and deprive a whole nation of happiness – in Keynes’s words, the Treaty ‘will sow the decay of the whole civilised life of Europe ... If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp ...’ (Keynes, CW, II, p. 170). Keynes firmly believed that French reparations policy, by keeping Germany down, was very damaging to Britain’s long-run economic interests. There is much to be said, therefore, for Mark Brawley’s thesis that Keynes was critical of French proposals for high reparations, ‘not because they were irrationally high, but precisely because they were based on a strategy of balancing German power’ (Brawley, 2009, p. 85). Students of the reparations question find it puzzling that there was no critical response from economists at the time to so influential an economic tract when its economics was generally reckoned to be undistinguished and technically defective at certain crucial points of the argument, especially in its treatment of the alleged difficulties of ‘transfer’ of reparations. Keynes’s economic analysis and assessments remained largely unexamined. A quarter of a century had to pass before Economic Consequences of the Peace was subjected to a full-scale, detailed public critique by the young French economist, Etienne Mantoux who argued that Keynes’s objections to reparations were grossly exaggerated and that payment of the full amount was a reasonable request to make;15 but even then, Mantoux’s counter-arguments did not go down well, generally – the exception being a brief but sympathetic review in 1947 by the eminent historian of international economics, Jacob Viner. Viner first gave the answer – now standard – to the question why there was such a public silence by economists on Keynes’s tract: ‘... the political views which Keynes expounded with great force of exposition were those which Anglo-Saxon liberals of the 1920, including the economists, shared almost to a man, and I suppose there then seemed little point in exposing technical flaws in an economic argument which had the virtue of leading to the desired political conclusions.’16 A typical reaction to Mantoux’s thesis was its treatment in Sir Roy Harrod’s authorised biography of Keynes. Whilst appreciating that Mantoux’s indictment of Keynes is not extremist and that some statistical criticisms are well founded, he finds that Mantoux’s argument

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reaffirming the ability of Germany to effect in full the real transfer of reparations is ‘... feeble in the extreme’, and that the part of the Frenchman’s work that directly challenges Keynes’s main thesis ‘cannot be taken seriously’.17 For Mantoux, the peace settlement was no ‘Carthaginian peace’, for Germany did recover. During the industrial boom of 1920–22, GNP reached 80 per cent of the pre-war level, and by 1927 Germany regained her pre-war national income – and thereafter an increase in economic power more rapid and considerable than Keynes had anticipated. By 1930, Germany had forged ahead of Britain to become the world’s second biggest exporter, after the United States. Mantoux would have agreed with Stephen Schuker’s observation that ‘as Germany became more prosperous, Keynes kept lowering his estimates of what it could pay’ (Schuker, 1980, p. 125). Keynes’s prediction, that the reparations burden was going to be excessive and would destroy German industry, proved to be wrong, said Mantoux. But when he goes on to claim that the enormous expenditure on armaments during 1933–39 proves that reparations could have been paid in full, his argument is less convincing. Germany did achieve an impressive surplus of wealth and income, internally, but Keynes would have answered that one cannot assess a country’s capacity to make external payments by reference to its internal production. Mantoux next questions Keynes’s data and evidence. One example, dealing with Keynes’s estimate of German national income, is worth mentioning. Keynes wanted to convey a vivid picture of Germany’s hardship to his British and American readers and came up with an absurdly low figure of 5000 paper marks for per capita income in 1921, out of which taxation for reparations would absorb 2170 paper marks (a tax bite of 43 per cent) leaving the average German with an absolute (weekly per capita) disposable income, equivalent ‘in purchasing power of about five shillings in England’ (Keynes, CW, XVII, p. 247). A truly dolorous picture of grinding poverty! Keynes concluded with this rhetorical appeal to readers of the Sunday Times: ‘Would the whips and scorpions of any government recorded in history have been potent enough to extract nearly half their income from a people so situated?’ (Keynes, CW, XVII, p. 248). But was this absolute figure the result of an arithmetic trick? Mantoux suggested that it was. Mantoux’s criticism was justified, but because of Keynes’s roundabout method of calculation, Mantoux somehow missed the point by tracing Keynes’s error to his faulty method of estimating German 1921 real income. But Keynes’s method (although cumbersome and unnecessary in this context) did,

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in fact, approach a reasonable estimate for 1921 GNP by adjusting for the 60 per cent fall in the German price of gold between 1913 and 1921. It was Keynes’s subsequent steps in his calculation that were faulty and which produced the bogus equivalent figure of five shillings per capita, per week.18 After 1919, Keynes continued to churn out numerous occasional and journalistic pieces on reparations until 1932. He was in regular contact with influential bankers in Hamburg (including his friend Carl Melchior), made frequent trips to Germany and met privately with German leaders, including Cuno and Brüning. Turning to Keynes’s more personal role and stance in these matters, we note that his recent biographer, Robert Skidelsky acknowledges: ‘It would be fair to describe Keynes, on balance, as anti-French and pro-German.’19 André Tardieu (chief aide to Clemenceau at the Peace Conference, and later prime minister of France) dismissed him as ‘the pro-German scribe from Cambridge’ and the Morning Post newspaper elevated him to the status of ‘Herr Johann von Keynes’ (Schuker, 1980, p. 126). In 1995, Niall Ferguson remarked that his research revealed that ‘Keynes’s critique of the Versailles Treaty was based on anything but dispassionate economic analysis ... [T]he ideas contained in The Economic Consequences of the Peace ... were actually inspired by members of the German peace delegation at the Versailles conference.’20 Now there is no doubt that Keynes was Germany’s publicist-in-chief, unofficial principal financial adviser and lobbyist. He combined these roles in a singularly breathtaking and audacious act – a secret journey to Berlin (1 June 1923) to write a key German diplomatic note to the British Prime Minister, Stanley Baldwin – the famous Note of 7 June 1923 – which, on his return to England, he promoted among organs of the British Press and praised for its fairness in his own weekly, the Nation.21 But this is not surprising, since Keynes, in Sir Austin Robinson’s words ‘was in fact two men – the economic statesman and the creative pioneer in economic theory ... and that throughout his life Keynes was essentially a political economist’.22 Everyone agrees that in the final part of his life – during the Second World War, from the designing of Bretton Woods to his death – Keynes’s international statesmanship was of the highest order of distinction. But whilst all tribute to Keynes for his later contribution to the restoration of financial and economic order to the world after 1945, ‘... the earlier part of the record remains’, as Stephen Schuker regretfully reminds us. ‘Not only did Keynes do much to shift Germany’s just reparation burden to the Allies and to prepare the way for the resurgence of the Reich,

238 Appendix

but, on the evidence [of his own writings and activities] he did not act wholly in good faith’ (Schuker, 1980, p. 126). One final point concerns the supposedly enduring influence of Keynes on later attitudes to reparations. It was widely believed that Keynes had thoroughly convinced the political and intellectual elites of the Anglo-Saxon countries of the folly of demanding reparations, and that magnanimity rather than vindictiveness should be the watchword in the post-1945 treatment of Germany. But it is patently evident that Keynes’s message failed to register with the big players in the planning and policy of the post-war settlement. How else can we explain the proposals by the US Treasury, known as the Morgenthau Plan for the de-industrialisation of Germany – truly a Carthaginian peace, if ever there was one since 200 BC! Also, why did the United Kingdom back the ‘Demontagepolitik’, that is to say, the proposal to extract reparations from Germany purely by the dismantling of industrial plant, factories and equipment – a policy which would have resulted in Germany becoming, in effect, one vast ‘cabbage patch’. However, for reasons that everyone knows, no such thing happened. The abandonment of the policy of dismantling in 1950 did not stop the Allies from taking ‘hidden’ or intellectual reparations in the form of technological and scientific information, ‘know-how’ and patents from their zones of occupation.23

Notes 1. Much, though not all, of the Keynes-Ohlin debate can be found in Keynes, CW, vol. XI, pp. 451–80. 2. For a clear, brief explanation of the transfer criterion, see Wilfred J. Ethier, Modern International Economics (New York: Norton, 1995), pp. 268–70. 3. Substantial empirical evidence now supports a significant ‘transfer effect’ – relative price effects or real exchange rate changes. The transfer effect operates through changes in prices of non-traded goods adjusting to fixed or exogenously given prices of traded goods (or terms of trade) – exactly as Ohlin surmised. Consequently, economists are now convinced that a fall in the relative price of non-traded to traded goods (in the paying country) is required to effect a transfer. See M. Obstfeld and K. Rogoff, Foundations of International Macroeconomics (Cambridge, MA: MIT Press, 2002), pp. 255–6. 4. See Steven Brakman and Charles van Marrewijk, ‘Transfers, Nontraded Goods, and Unemployment: An Analysis of the Keynes-Ohlin Debate’, History of Political Economy, 39 (2007), p. 138. 5. H.S. Ellis and L.A. Metzler, ‘Introduction’ in H.S. Ellis and L.A. Metzler (eds), Readings in the Theory of International Trade (London: Allen & Unwin, 1950), pp. x–xi.

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6. See P.A. Samuelson, ‘Bertil Ohlin (1899–1979)’ in John Cunningham Wood (ed.), Bertil Ohlin: Critical Assessments, vol. 1 (London and New York: Routledge, 1981 [1995]), pp. 109, 112. 7. Harry G. Johnson, ‘The Classical Transfer Problem: An Alternative Formulation’, Economica, 42 (1975), p. 30. 8. See Mundell (2002, p. 245). 9. Robert A. Mundell, ‘Introduction: Latin American Debt and the Transfer Problem’ in Philip L. Brock, M.B. Connolly and C. González-Vega (eds), Latin American Debt and Adjustment (New York and London: Praeger, 1989), p. 5. 10. Joseph Schumpeter, ‘Keynes the Economist’ in Seymour E. Harris (ed.), The New Economics (New York: Knopf, 1949), n. 10, p. 81. 11. Daniel Arce M. analyses the reparations problem in game theory terms, and finds that although Keynes was right that reparations would ultimately have to be scaled down, the Allies’ initial decision to impose heavy reparations on Germany was ‘strategically rational’ in conditions of uncertainty about Germany’s capacity to pay. See Daniel G. Arce M., ‘The Economic Consequences of the Peace: Keynes and Correlation’, Mathematical Social Sciences, 29 (1995), pp. 263–76. 12. S. Pollard, ‘Review Article: New Light on an Old Master’, Economic Journal, 104 (1994), p. 143. 13. See W. Carr, ‘John Maynard Keynes and the Treaty of Versailles’, in A.P. Thirlwall (ed.), Keynes as a Policy Adviser (London: Macmillan, 1982), p. 80. 14. Bernard Baruch, the American financier and former adviser to President Wilson, mentioned to Winston Churchill in 1950 (four years after Keynes’s death) that Keynes ‘was the man who did more to destroy America’s steps toward international cooperation after World War I, than all the others put together. It was his devastating, unfair criticism of Woodrow Wilson that caused America to turn its back upon Europe.’ See, Jordan A. Schwarz, The Speculator: Bernard Baruch in Washington, 1917–1965 (Chapel Hill: University of North Carolina Press, 1981), p. 154. 15. Etienne Mantoux was the son of Paul Mantoux, official interpreter at the Peace Conference and himself the author of a well-known text on the Industrial Revolution published in 1928. Etienne Mantoux, who did postgraduate studies at Harvard, was killed on active service with the French air force near a Bavarian village on 29 April 1945, hardly a week before the war ended. His book, The Carthaginian Peace, or the Economic Consequences of Mr Keynes, was published posthumously by Oxford University Press in 1946. One would like to have heard Keynes’s own rejoinder to Mantoux. But of course he never lived to see the book. Keynes however never publicly regretted his stand, and the only expression of his thoughts on the matter comes from Sir Austin Robinson who wrote (in 1946) that Keynes ‘certainly said more than once in my hearing during the last war that the fault of Versailles was that it had failed either to be sufficiently Carthaginian or sufficiently liberal.’ See, Sir Austin Robinson, ‘John Maynard Keynes 1883–1946’, in J. Cunningham Wood (ed.), John Maynard Keynes: Critical Assessments (London: Croom Helm, 1983), p. 106. According to Kingsley Martin, the editor of The New Statesman (recalling his correspondence with Keynes in

240 Appendix

16.

17. 18.

19. 20. 21.

22. 23.

the summer of 1937) Keynes ‘supported [appeasement] even after Munich’, with the objective of ending ‘the injustices of Versailles.’ See Kingsley Martin, Editor: A Second Volume of Autobiography (London: Hutchinson, 1968), pp. 241–2. A year earlier, however, when Elizabeth Wiskemann, a German-born journalist, academic and former Cambridge student met Keynes at a party in London and impulsively said to him, ‘I do wish you had not written that book’, Keynes simply and gently replied, ‘So do I.’ See Elizabeth Wiskemann, The Europe I Saw (London: Collins, 1968), p. 53. The book in question was, of course, Economic Consequences of the Peace, ‘which the Germans never ceased to quote’. See Jacob Viner, ‘Review of Etienne Mantoux, The Carthaginian Peace’ [1947] in J. Viner, The Long View and the Short (Glencoe, IL: Free Press, 1958), p. 427. See R.F. Harrod, The Life of John Maynard Keynes (London: Macmillan, 1951), pp. 276–7. See Moggridge (1992, p. 371); also, Douglas C. McIntosh, ‘Mantoux versus Keynes: A Note on German Income and the Reparations Controversy’, Economic Journal, 87 (1977), 765–7. See Robert Skidelsky, ‘Discussion’ in A.P. Thirlwall (ed.), Keynes as a Policy Adviser (London: Macmillan, 1982), p. 112. Niall Ferguson, ‘Let Germany Keep Its Nerve’, The Spectator, 22 April 1995, p. 21. For details, see Giuliano Ferrari Bravo, ‘ “In the Name of Our Mutual Friend ...” The Keynes-Cuno Affair’, Journal of Contemporary History, 24 (1989), 147–68. Sir Austin Robinson, ‘John Maynard Keynes: Economist, Author, Statesman’, Economic Journal, 82 (1972), 537. See John Gimbel, ‘Science, Technology, and Reparations in Postwar Germany’ in J.M. Diefendorf, A. Frohn and H-J. Rupieper (eds), American Policy and the Reconstruction of West Germany, 1945–1955 (Cambridge: Cambridge University Press, 1993), pp. 175–96. Gimbel estimates that a figure of $10 billion as the amount of intellectual reparations taken by the United States and the United Kingdom is ‘probably not far from the mark’ (p. 193). Adam Tooze, noting that, in fact, ‘both halves of Germany paid substantially higher reparations after 1945 than the Weimar republic ever did’, referred to the belief that the Allies had learned a lesson not to demand reparations again, as ‘one of the most persistent myths in post-war history ...’ (Tooze, 2006, p. 673).

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Index Allied sanctions, 34, 53, 59, 60–2, 64, 71, 80, 114–17, 153, 155–7, 178, 186 Allied war debts, 2, 6, 108, 165, 171–2, 211–12, 225, 233 cancellation proposals, 6, 69, 116, 208, 216, 173, 208–9, 211–12, 216, 233 as unresolved problem, 192, 212–17 Alsace-Lorraine, 11–12, 18, 40 appeasement, 16, 29, 32–3, 234, 240 Austro-German customs union crisis, 201, 204, 223–4

at Peace Conference (1919), 14–16, 22–5, 29–30, 33–9 and reparation negotiations, 47–66, 104–6, 108–17 and Ruhr occupation, 124–6, 138 war debts, 5, 16, 24, 116, 212–16 Brüning, Heinrich, 195–6, 197–200, 202–4, 207, 210, 212, 222–3 deflationary policy, 197–200, 204, 222 diplomatic initiatives, 200–3 emergency decrees, 198, 202

balance of power, 16, 50, 235 Balderston, Theo, 89, 93, 131, 198, 221 Balfour Note, 108–11, 112, 135, 175, 189 Bank of England, 57, 105, 112, 115, 154, 186, 203, 206–7, 224 Bank of France, 124, 206, 224 Bank for International Settlements (BIS), 174, 183, 203, 205, 207, 211, 249 Bankers’ Committee, 109–10, 142 Belgium, passim priority for reparations, 21, 88, 112, 115, 128 and Ruhr occupation, 117–20, 127–9 wartime experience, 20–2 Berg, Manfred, 74, 76, 82 Blum, Léon, 8 Bonar Law, Andrew, 42, 113–16, 125, 129, 136–7 Bonar Law Plan, 114, 116–17, 128, 136, 173 Borchardt, Knut, 193, 221, 222 Bradbury, Sir John, 52, 64, 109, 114, 116, 136–7 Briand, Aristide, 52–3, 59–65, 80–1, 104–6, 134, 177, 187–8, 202 Britain, passim economic problems, 16, 48, 57, 64, 94, 106, 125–6, 139, 143

Clemenceau, Georges, 7, 9, 13–14, 22, 28, 30, 34, 38–9, 42 Conferences: Cannes (1922), 79, 92, 104–5 Genoa (1922), 105–7 The Hague (1929, 1930), 175–7 Lausanne (1932), 1, 4, 192, 208, 211–13, 215–16 Locarno (1925), 160, 187, 188 London (1921), 59–60 London (1924), 150–6 Paris (1921), 81 Paris (1923), 113–17 San Remo (1920), 55, 78 Spa (1920), 55–7, 78, 117 conference diplomacy, 53–65, 78–9, 106–7, 137 Cuno, Wilhelm, 99, 113, 117, 122, 138, 237 Dawes Loan, 146, 153–4, 157–61, 163–4, 171–4, 179–80, 182–3, 186, 188, 218–19 Dawes Plan, 84, 95, 125, 128, 131–2, 141, 143–6, 148, 150–3, 155–8, 161–4, 166, 176, 184–5, 188 destabilising incentives of, 162–6 genesis of, 141–5 as Ponzi scheme, 161–2

251

252

Index

Dawes Plan – continued transfer protection, 141, 147–9, 164, 166–7, 169–71, 174, 183–5, 198 debt burdens, 71, 73, 87 comparisons of, 71–3 Depoortere, Rolande, 64, 80, 128, 129 Erfüllungspolitik, 82, 88, 111, 113, 117, 221, 234 as tactic, 88, 103 Wirth-Rathenau policy, 82, 88, 93, 117 Feldman, Gerald D., 44, 69, 75–7, 82, 88, 94, 98, 102, 110, 131, 134, 136, 138, 220–1 Ferguson, Niall, 75, 96, 100, 101, 133, 237 Fink, Carole, 93, 105–6, 137 First World War, 1, 8, 138, 225 Armistice (1918), 3, 5, 6, 7, 14, 17, 25, 233 legacy of, 4–22, 71 Fischer, Conan, 43, 96, 120, 126, 137, 227 France, passim and Britain, 9, 10, 47–53, 62–3, 79, 112–17 reconstruction, 8–9, 12, 26, 38–40, 51, 106, 116, 124, 168 Rhenish ambitions, 13–14, 16, 129–31 and Ruhr occupation, 4, 84, 104, 117–31 sanction initiatives, 53, 60–4, 153, 155, 157 security concerns, 10, 13, 32–6, 39, 50, 52–3, 104, 106–7, 129–30, 139, 152, 217 security guarantees, 14, 34, 36, 39, 42, 46, 134 war damages, 4, 8–9, 10–11, 24, 26, 41–2, 81 war debts, 4, 114, 117, 167, 206, 213, 215 Germany, passim and American money, 84, 141, 151, 159, 161, 217

Banking crisis (1931), 202–6, 222 capacity to pay, 14, 23–4, 27, 29, 48–9, 53, 62, 67–8, 73–6, 81, 84, 87–8, 92, 109 capital flight, 76, 82, 91, 94, 96–8, 133, 150, 185, 196 capital inflows, 78, 94, 133, 164, 182–3, 194–7, 225 under Dawes Plan, 153, 157–66 Erzberger’s taxes, 90–4, 132–3 exports, 51, 58, 60, 62, 68, 74, 77, 79, 86, 110, 149, 198 fiscal/budgetary problems, 75, 85–7, 91–3, 98–102, 160, 195–6, 202 foreign debts, 73, 88, 141, 149, 161–2, 163–5, 179, 180–3, 190, 197–201, 205–6, 217–19 monetary/currency stabilisation, 87, 94, 98, 100, 103–4, 107, 129, 135, 159 moratoriums, 67, 92, 96, 105, 108–17, 128, 134–5, 141, 146, 192, 203, 206, 218 at Peace Conference (1919), 17–20, 27–30, 32–7 repayment of Weimar’s debts, 218–19 Standstill agreements, 204, 206, 208, 224 unemployment, 90, 110, 160, 170, 193–4, 199–200, 222 Versailles Treaty provisions, 18–19, 26–8, 30, 32–3, 95–6, 98, 227, 234–5 German inflation (1922–3), 84–104 and bankruptcy, 84–6, 88–9, 103, 114, 136 causes of, 84–93 consensus on, 86–91, 98–102 and distributional conflict, 86–7, 90 domestic and international constraints, 87–9 and fiscal problems, 89–93 hyperinflation, 5, 78, 94, 96, 99–100, 103, 122, 160 and reparations, 98–102 German railways, 169, 175, 184 Gilbert, Seymour Parker, 147, 165–9, 177

Index 253 Great Britain, see Britain Great Depression, 2, 37, 133, 141, 190, 192, 194, 199–201, 210–11, 214, 221, 225 Great War, see First World War Herriot, Édouard, 152–6, 185, 210, 215 Hitler, Adolf, 2, 123, 137, 162, 217 beer hall putsch, 123, 137 Holtfrerich, Carl-Ludwig, 72, 74, 76, 82, 131, 221 Hoover, Herbert, 77, 142, 203–5, 207–9, 212, 215 moratorium, 77, 204–5, 207 Hughes, Charles Evans, 62, 141–2, 151, 183 inflation tax, 87, 100, 131 James, Harold, 85, 100, 221, 224, 227 Jeannesson, Stanislas, 63, 112, 129, 131, 137, 138 Johnson Act (1934), 216, 225 Keynes, John Maynard (Lord Keynes of Tilton), 2, 14–15, 29, 33, 37–8, 42, 59, 62, 65, 69, 78, 80, 131, 136–7, 228, 230, 232, 235, 237–40 anti-reparations campaign, 233–8 Economic Consequences of the Peace (1919), 33, 42, 136, 228, 234–5, 237, 240 on German reparations, 14–15, 37–8, 228–38 Keynes-Ohlin debate (1929), 228–33 on transfer problem, 228–33 Krüger, Peter, 20, 82, 201 Lamont, Thomas, 22, 25, 144, 154, 186 Lausanne Conference (1932), 1, 4, 192, 208, 211–12, 216 Lausanne Convention (1932), 211–12 Laval, Pierre, 207–9, 224 Lentin, Antony, 3, 33, 37–8, 46 Lloyd George, David, 9, 13–15, 22, 24–5, 30–8, 42, 45, 47–9, 53–66, 78, 80–1, 104–7, 109, 112, 117, 134–5

and conference diplomacy, 53–65 Fontainebleau memorandum, 33, 46 and German reparations, 30, 37–8 war pensions claim, 22–5 Locarno treaties, 41, 160, 187, 188 London Schedule of Payments (1921), 2, 51, 64–5, 95, 108–9, 112–13, 116–17, 128, 170, 177, 184 burden of, 70–3 feasibility of, 71–8 significance of figures in, 68–71 Loucheur, Louis, 12, 51, 57, 79–80, 106 MacDonald, James Ramsay, 151–2, 154, 156, 175, 177, 185, 202, 209–10, 215 Mantoux, Étienne, 235–6, 239 Marks, Sally, 23, 27, 69–70, 75, 105, 110, 116, 128, 137, 211, 220 Mellon-Bérenger agreement, 168 mésentente cordiale, 113–17 Millerand, Alexandre, 49–50, 53, 55–6, 70, 105 Mommsen, Hans, 28, 33, 197, 203 Morgan, J.P. (bankers), 109, 124, 151, 154, 156, 158–9, 185–6 and Dawes Loan, 154–9, 186 Nazi debt default, 2, 22, 217–18 Norman, Montagu, 154, 156, 186, 215, 224 Ohlin, Bertil, 228, 229–32, 238 Keynes-Ohlin debate (1929), 228, 229–32 Paris Peace Conference (1919), 2, 4, 7, 22–31, 33–5 British peace plans at, 14–16 estimates of war damages, 9, 11, 41, 81 French claims at, 7–8, 10–11, 13–14, 34 German counterproposals at, 28–31, 70 reparations at, 22–8, 234

254 Index Poincaré, Raymond, 22, 54, 78–80, 100, 105–6, 109, 111–17, 119, 123–5, 129–31, 134, 137, 139, 143, 152, 160 and productive pledges (guarantees), 111–17 Ruhr occupation, 104, 114, 117, 123, 124–6, 129–31 ‘priority’ of payments question, 21, 23–4, 52, 88, 112, 115, 136, 155, 158–9, 163–4, 171, 187–9, 198, 209, 218 Rapallo, Treaty of, 107 Rathenau, Walther, 50–1, 76, 79, 81–2, 88, 93, 111 Reichsbank, 79, 85–6, 91–3, 98–9, 104, 111, 136, 145, 147, 159–60, 171, 196, 199, 203–5, 218 foreign-exchange reserves, 162, 166, 171, 182, 196, 199, 202 reparations, passim Allied claims for, 3, 5, 7, 27, 41, 81 amount paid (net), 78, 211–12 Anglo-French disagreements on, 3, 24, 47–50, 52, 62–3, 111–13, 115–16 ‘capacity to pay’ vs ‘willingness to pay’, 73–6, 87–8, 184 cash payments, 49–51, 66–7, 92, 5, 98, 105, 108, 111–12, 132, 146 ‘Clearing Payments’ regime, 95–6, 132, 146–7 deliveries in kind, 49, 50–2, 57, 66–7, 113, 127, 129, 163, 176 end of, 77, 190, 208–12 and inflation (German), 98–104 mobilisation /commercialisation of, 152, 156, 158, 167–8, 173–4, 177 as political problem, 73–4, 76–7, 95, 182 after Second World War, 238, 240 and other Treaty expenses, 95–6, 98, 146 see also Dawes Plan, Young Plan Reparations Commission, 3, 26, 28, 37, 41, 51, 54–7, 61–4, 69, 92, 108–10, 111–12, 115–17, 128, 142, 150–3, 159, 177

fixes reparations bill, 63–5 powers of, 115, 152 restriction of powers, 115, 151, 153, 155, 157 reparation crises and Allied disunity, 104–6, 111–17 Reparations (Recovery) Act 1921, 51, 60, 80–1 Rhineland, 13–14, 29, 33–6, 116–17, 129–31, 146, 152, 169, 175, 183, 187 evacuation of, 14, 152, 169, 175, 177–8, 187 occupation of, 14, 29, 33–5 separatism, 111, 129–31 Ritschl, Albrecht, 72, 73–4, 89, 102, 164–5, 221 Ruhr, 2, 11–12, 36, 41, 49, 61, 63–5, 67, 80, 84, 104, 116–35, 142–3 Ruhr occupation, 2, 4, 63–4, 84, 99, 103, 117–25, 139 balance sheet of, 126–9, 139–40 evacuation of, 151–5, 157 passive resistance, 99, 117–22, 126, 130, 137 Schacht, Hjalmar, 156, 159–60, 165–6, 169–72, 178, 184–6, 217–18, 222 Schuker, Stephen A., 70, 74–5, 103, 107, 132, 134–5, 161, 166, 188, 212, 225, 236–8 Schwabe, Klaus, 17, 216–17, 226 Seydoux, Jacques, 57, 63, 106 Seydoux Plan, 37, 57 Sharp, Alan, 8, 30, 34, 37–8, 40–2, 48, 54, 65, 67, 227 Snowden, Philip (Viscount), 154, 156, 175–7, 189 Steiner, Zara, 53, 74, 107, 110, 116, 137, 227 Stresemann, Gustav, 122–3, 130, 138, 143–4, 152–5, 169, 175, 181, 187, 201 Thoiry meeting (1926), 187 Trachtenberg, Marc, 36–7, 40, 45 Transfer problem, 2, 48, 57, 77, 147, 164, 181, 228–33, 238

Index 255 United States, passim and Allied war debts, 4–5, 143, 167–9, 172, 174, 208, 211, 212–17 loans to Germany, 141, 159–62, 183, 194, 228 at Peace Conference (1919), 5–8, 12–13, 22–6, 30–1, 33–4 rejection of Versailles Treaty, 3, 13, 34, 234 Upper Silesia, 29–30, 59–60, 62, 81–2, 98 Versailles Treaty (1919), 1–3, 7, 13, 18, 32, 34–5, 46, 50, 73, 95, 106–7, 116, 156, 158, 177, 188, 228, 234, 237 execution and enforcement of, 3, 31–2, 36, 47–50, 53, 59–63, 78, 227 and ‘German Problem’, 31–9 revision of, 47–50, 157 severity vs mildness of, 36–9 Treaty terms and Germany, 18–19, 32–3, 95, 98, 227, 234–5 ‘war guilt’ clause, 26–8, 44–5, 178 war costs and finance, 4–6, 7, 9, 23–5, 27, 38–9, 209 war damages, 2, 7–8, 23, 54, 63, 66, 81, 171 war pensions, 5, 22–6, 44, 87, 101, 234 Webb, Steven B., 95, 101, 110, 132–3

Weimar Republic, 19, 76, 79, 82, 86, 89, 107, 138, 178, 240 distributional conflicts, 82, 86–7, 89 economic and social problems, 76–7, 86, 91–5, 97–100, 102, 192–5 weakness of governments, 76, 86, 194–6, 210 see also Germany Wiesbaden accords, 50–1, 57, 79 Wilson, Woodrow (US President), 5, 7, 9, 13, 20, 23–5, 30, 33–4, 36, 39–40, 234, 239 Fourteen Points, 7, 20, 33, 39–40 Winkler, Heinrich August, 19, 31, 46, 82, 223 Wirth, Joseph, 64, 69, 81–2, 92–3, 105, 109, 111, 113, 117, 135 Young Loan, 179–80, 200, 217–19, 226 Young, Owen D., 170–1, 188, 190 Young Plan, 75, 141, 166–72, 173–83, 189, 192, 198, 200, 205, 208–11, 223 and commercialisation of reparations, 173, 185, 189 conditional /unconditional annuities, 171, 173–4, 176, 178–80, 189, 205 German nationalists’ attack on, 174, 177–9 Young Report, 172–6

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