World War I reparations

• 1. Introduction

  ›

  World War I reparations became, in the words of historians, the "chief battleground of the post-war era" and "the focus of the power struggle between France and Germany over whether the Versailles Treaty was to be enforced or revised." The war ended on the 11th of November 1918 with Germany signing an armistice that already contained a promise to pay "reparation for damage done" to the Allied countries. What followed was more than nine decades of argument, default, occupation, hyperinflation, political upheaval, and unresolved debt that did not finally close until the 3rd of October 2010. The questions this story raises are still unsettled: Were the reparations a genuine attempt at justice, or a political fiction designed to pacify angry electorates? Could Germany actually pay? And did the fight over payment help bring Adolf Hitler to power?

• 2. The Scale of Destruction

  ›

  More than 300,000 houses in German-occupied France were completely demolished. German forces stripped more than 6,000 factories of their machinery, smashed the textile industry in Lille and Sedan, destroyed nearly 2,000 breweries, blew up 112 mineshafts in Roubaix and Tourcoing, flooded or blocked more than 1,000 miles of mine galleries, ripped up more than 1,000 miles of railway, and dropped more than 1,000 bridges. Churches were looted. German wartime requisitions of farm animals included roughly 500,000 head of cattle, approximately 500,000 head of sheep, and more than 300,000 horses and donkeys.

  French Prime Minister Georges Clemenceau faced these realities with a single conviction: a just peace required Germany to pay for what it had done. For him, reparations were also a way of weakening Germany so it could never again threaten France, a position shared by the French electorate. British Prime Minister David Lloyd George took a different view. He argued for a smaller sum that would leave Germany a viable economic power and trading partner. He also pushed for reparations to cover war pensions for disabled veterans and allowances for war widows, which would reserve a larger share for the British Empire. Woodrow Wilson opposed any indemnity at all.

  At sea, nearly 8 million tons of British civilian shipping had been sunk by German U-boats, with heavy crew losses. France, Italy, and the United States lost another 2 million tons of merchant shipping. A further 1.2 million tons of neutral Norwegian, Danish, and Swedish vessels were also sunk. The sinking of five British hospital ships deepened the bitterness that Allied negotiators carried into the Paris Peace Conference, which opened on the 18th of January 1919.

• 3. The Numbers Game

  ›

  Article 231 of the Treaty of Versailles served as the legal basis for the reparation clauses that followed, but its significance was shaped by a mistranslation. Where the treaty said Germany "accepts responsibility" for causing the war's losses, the German Government's own edition read that Germany "admits it" was among "the authors of the war" responsible for all losses. Germans read this as a declaration of sole war guilt and an injustice. Despite the public outrage, German officials privately acknowledged that Germany's position was not as favorable as the imperial government had told the public during the war. Politicians seeking international sympathy continued to use Article 231 for its propaganda value.

  The actual reparation figure was set by the London Schedule of Payments on the 5th of May 1921. The full liability of all Central Powers combined was fixed at 132 billion gold marks. This figure was deliberately constructed in three tiers of bonds. The "A" and "B" bonds, totaling 50 billion gold marks, were the real obligation, less than the sum Germany had previously offered to pay. The "C" bonds, making up the rest, were, in the words of one assessment, "deliberately designed to be chimerical." Allied experts knew Germany could not pay 132 billion marks. The inflated figure was a political bargaining chip, meant to mislead public opinion into believing the headline number was being maintained while the genuine demand was far smaller.

  German Foreign Minister Count Ulrich von Brockdorff-Rantzau had told the Weimar National Assembly in February 1919 that Germany would pay reparations for war devastation but not for the actual costs of the war. When he met with Allied delegations after the treaty was drafted on the 7th of May, he stated: "We know the intensity of the hatred which meets us, and we have heard the victors' passionate demand that as the vanquished we shall be made to pay, and as the guilty we shall be punished." He then denied that Germany bore sole responsibility for the war.

• 4. Default, Occupation, and Hyperinflation

  ›

  From the beginning, German coal deliveries fell short of the agreed level. The Spa Conference in July 1920 tried to address this by paying Germany five marks per ton of coal delivered. Germany continued to default anyway. By late 1922, defaults had grown so serious that a crisis engulfed the Reparations Commission. On the 26th of December 1922, Germany defaulted on timber deliveries; the timber quota had been based on a German proposal and the default was described as massive. By January 1923, despite repeated reductions in the required quota, Germany had defaulted on coal deliveries for the 34th time in three years.

  On the 9th of January 1923, the Reparation Commission declared Germany in default and voted to occupy the Ruhr. Britain was the lone dissenting voice. On the 11th of January, French and Belgian soldiers, supported by Italian engineers, entered the region. French Premier Raymond Poincaré had been reluctant to order the occupation and had only taken the step after Britain rejected his proposals for more moderate sanctions. He wrote to the French ambassador in London: "We are also certain that Germany, as a nation, resigns herself to keep her pledged word only under the impact of necessity." The occupation proved marginally profitable; the occupying powers received 900 million gold marks, much of it merely covering military costs. But Poincaré's real concern was that allowing Germany to defy Versailles on reparations would create a precedent for dismantling the entire treaty.

  Germany responded with a campaign of passive resistance, funding it by printing money. By November 1923, one US dollar was worth 4,200,000,000,000 marks. Historians have debated ever since whether reparations caused the hyperinflation. Historian Sally Marks argued that inflation long predated reparations and that the period of least inflation coincided with the period of largest reparation payments. She wrote that the "astronomic inflation which ensued was a result of German policy," specifically the government paying for passive resistance from an empty treasury and retiring its debts with worthless currency.

• 5. The Dawes and Young Plans

  ›

  In October 1923, a committee chaired by Charles G. Dawes, former Director of the U.S. Bureau of the Budget, was formed to consider, from a purely technical standpoint, how to balance the German budget and set an achievable level of reparations. The Dawes Plan was accepted in April 1924. In the first year following implementation, Germany would pay 1 billion marks, rising to 2.5 billion marks per year by the fifth year. A loan of 800 million marks was to be raised, over 50% from the United States, 25% from Britain, and the balance from other European nations, to back the German currency and aid in reparation payments.

  Under the Dawes Plan, Germany always met her obligations. But German long-term goals had not changed: the revision of the Treaty of Versailles to end reparations altogether. In late 1927, the Agent-General for Reparations called for a more permanent payment scheme. German Foreign Minister Gustav Stresemann called for a final reparation plan alongside an early withdrawal of Allied troops from the Rhineland. France, aware of its weakening financial position, agreed. On the 16th of September 1928, a joint Entente-German statement acknowledged the need for a new plan.

  A new committee chaired by American banker Owen D. Young presented its findings in June 1929. The Young Plan, ratified by the German Government on the 12th of March 1930, set a theoretical final reparation figure of 112 billion gold marks, with payments to be completed by 1988 - the first time a final deadline had ever been set. The Reparations Agency would be replaced by the newly established Bank for International Settlements. German nationalist politician Alfred Hugenberg proposed the Law against the Enslavement of the German People to reject the plan outright, and in a December 1929 plebiscite, 5.8 million out of 6.3 million voters voted in favor of his position, though this fell well short of the 21 million votes required. The campaign drew national attention to Adolf Hitler, who had worked with Hugenberg to promote the referendum, and generated valuable right-wing financing for Hitler's movement.

• 6. Collapse and the Keynes Debate

  ›

  In May 1931, Creditanstalt, the largest bank in Austria, collapsed, sparking a banking crisis across Germany and Austria. Chancellor Heinrich Brüning announced that Germany was suspending reparation payments, triggering a massive withdrawal of funds from German banks. By mid-July, all German banks had closed. United States President Herbert Hoover intervened in June, publicly proposing a one-year moratorium on reparations and war debts; by July, the "Hoover Moratorium" had been accepted. On the 13th of July, the German Darmstädter Bank collapsed, leading to further bankruptcies and rising unemployment.

  The Lausanne Conference opened on the 16th of June 1932 and reached an agreement on the 9th of July: Germany would pay a single final installment of 3 billion marks, and the Young Plan would be annulled. But the Lausanne Treaty required a corresponding agreement with the United States on Allied war debts, which never materialized. The treaty was never ratified and never became legally valid. Between 1919 and 1932, Germany paid less than 21 billion marks in reparations, mostly funded by foreign loans that Hitler reneged on in 1939.

  The dominant voice shaping public understanding of reparations was British economist John Maynard Keynes. His 1919 book, The Economic Consequences of the Peace, called the Treaty of Versailles a "Carthaginian peace" that would economically affect all of Europe. He calculated a "safe maximum figure" for reparations and predicted the Reparation Commission would be used to destroy Germany's economic organization. According to historian Claude Campbell, Keynes "set the fashion for critics of the economic aspects of the treaty" and made "probably the severest and most sweeping indictment of its economic provisions." Keynes had been temporarily attached to the British Treasury during the war and later resigned when it became clear no substantial modifications to the treaty terms would be made.

  French economist Etienne Mantoux offered the harshest rebuttal, in a posthumously published book titled The Carthaginian Peace, or the Economic Consequences of Mr. Keynes. Mantoux argued that by 1929, European iron output had increased by 10% from 1913 levels. By 1927, German steel output had increased by 30% and iron output by 38% from 1913. By 1926, Germany was exporting 35 million tons of coal a year. By 1927, German national savings stood at 7.6 billion marks, far above the 2 billion Keynes had predicted as the maximum possible. Mantoux concluded that Germany had borrowed between 8 billion and 35 billion marks between 1920 and 1931 while paying only 21 billion in reparations, allowing it to re-equip and modernize its industry.

• 7. What Germany Actually Paid

  ›

  The precise figure Germany paid remains disputed. The German Government estimated it had paid the equivalent of 67.8 billion gold marks, a figure that included the scuttling of the German fleet at Scapa Flow, state property lost in ceded territories, and lost colonial holdings. The Reparation Commission and the Bank for International Settlements calculated a much lower figure: 20.598 billion gold marks, of which 7.595 billion was paid before the London Schedule of Payments took effect. Historian Niall Ferguson provides an even lower estimate of no more than 19 billion gold marks, which he calculates amounted to 2.4% of Germany's national income between 1919 and 1932.

  Stephen Schuker's comprehensive econometric study concedes a transfer of 16.8 billion marks over the whole period, but argues this was vastly offset by the devaluation of Allied paper-mark deposits up to 1923 and by loans Germany subsequently repudiated after 1924. Schuker calculates that the net capital transfer ran into Germany, not out of it, amounting to 17.75 billion marks, or 2.1% of Germany's entire national income from 1919 to 1931. In his estimate, America paid Germany four times more, in price-adjusted terms, than the United States furnished to West Germany under the post-1948 Marshall Plan.

  Sally Marks summarized the current scholarly consensus directly: "There are those who claim reparations were unpayable. In financial terms, that is untrue." She argued that raising taxes would have provided ample funds and that Germany had chosen to default repeatedly as part of a political strategy to undermine the Versailles system. She noted that in 1921, Germany met its requirements in full because Allied troops occupied customs posts. Once the Allies relinquished those posts, Germany made no further cash payments until 1924.

• 8. The Final Payments

  ›

  After World War II, West Germany took up the reparation obligation. The London Agreement on German External Debts, concluded in 1953, required Germany to repay 50% of the loan amounts that had been defaulted on in the 1920s, with some debt deferred until West and East Germany were reunified. Following reunification, Germany began making the final payments in 1995. A final installment was made on the 3rd of October 2010, settling the German loan debts connected to World War I reparations. The date fell, not by coincidence, on the twentieth anniversary of German reunification. In 1954, United States Secretary of State John Foster Dulles, one of the authors of Article 231 itself, reflected on the reparation episode: "Efforts to bankrupt and humiliate a nation merely incite a people of vigor and of courage to break the bonds imposed upon them."