The
Burden of Reparations
Perhaps the most widely held explanations for the chronic instability of the Weimar republic is that its legitimacy was fatally undermined by war reparations. These wounds, the argument goes, were inflicted in two places: first, the German economy, which was hobbled by the burden of payments; and second, German political culture, which became poisoned by vengeance against an unjust peace. This vengeance was directed primarily against the democratic parties of the middle and center-left; in the long run, the politics of resentment would reinforce the appeal of antidemocratic, authoritarian movements of the far right. The first and most eloquent proponent of this view was great economist, John Maynard Keynes, who already in 1920 predicted dire consequences for “civilization and progress” if Germany were forced to pay reparations that amounted to 1,700% of its national income.
Chart: Reparations and the Reich Deficit as a Percentage of Net
National Product, 1919-1932
Source: Niall Ferguson, “The German Interwar Economy: Political
Choice versus Economic Determinism,” in Mary Fulbrook and John Breuilly, eds.,
German History Since 1800 (London: Arnold, 1997), 270.
The Treaty of Versailles, which ended World War I, had identified Germany as the principal aggressor (§231) and imposed severe penalties, including the loss of about 13% of its territory, including several industrial regions, all of its former colonies in Africa and Asia, near total demilitarization, and the surrender of virtually all of Germany's merchant marine and much of its railroad stock. The treaty also required Germany to pay an indemnification for the damaged it had inflicted (§232); the treaty stipulated an interim payment of 20 billion Reichsmark (RM), but referred the question of total indemnity and payment to the decisions of a Reparations Commission. That sum was finally announced at the London Conference of the Reparations Commission on 27 April 1921: Germany would pay 132 billion ‘gold marks’—i.e., a sum fixed at a value of four marks to the US Dollar and therefore resistant to inflation—to be paid in annuities of 2 billion marks plus 26% ad valorum of German exports. In May 1921, a schedule of payments was worked out, which divided the total bill into three bond issues—schedules A (worth 12 billion marks), B (38 billion), and C (82 billion). The German government was instructed to remit 1 billion in ‘gold marks’ immediately, and it did.
Keynes objected that even the schedule A bonds were equivalent to more than 80% of Germany's gross domestic product and drew the conclusion that only national bankruptcy and resentment could ensue from so draconian an arrangement. Historians have disputed the point ever since. Keynes' followers note that Germany was already saddled with huge internal debts, which had arisen from a policy of financing the war on credit. By March 1921, the German government had an operating deficit of 6 billion ‘gold marks,’ a sum equal to about a sixth of annual national income. The new German republic was further burdened with the obligation to pay pensions to the war-wounded, war widows and orphans. It's ability to collect taxes were severely compromised by the effects of Revolution in 1918-1919. Despite some savings—freedom from military spending lightened the national budget considerably—reparations only deepened the economic and fiscal crisis that Germany was already in. To come up with the 1 billion in ‘gold marks’ paid in 1921, for example, the government sold off paper Reichsmarks on international currency exchanges, flooding the market and accelerating an already dangerous inflation of paper money. By January 1922, the value of the Reichsmark had shrunk to a rate of 493.2 RM to 1 US Dollar. A year later the rate was down to 17,972 RM to the dollar. By November 1923, the RM lost all value.
Other historians question the damage that reparations are supposed to have inflicted. They argue, first, that while the total indemnity was unimaginably large, Germany's actual reparations payments only amounted to a tiny fraction of the total charge. For one thing, payment on the the schedule C bonds—82 billion of the whole amount—was not set to begin until the other two had been paid off. Sally Marks therefore considers the C bonds “chimerical” and “entirely unreal.” For practical purposes, then, the tab added up to 50 billion, not 132 billion. What is more, Germany only paid a small portion of its annual obligation after that first, 1 billion ‘gold mark’ installment. As a result, the reparations as a proportion of net national product remained below 5% from 1923 on (see chart).
These historians also emphasize, second, that the cost of reparations was compensated by the extension of loans, mostly American, that were never repaid. To put the point another way, the US assumed a large portion of the indemnity—it was, indeed, one of the largest transfers of real wealth in modern history. Under the Dawes Plan of 1924, reparations payments were rescheduled at a lower rate; the first payment of 1 billion was financed almost entirely out of foreign loans. And the overall burden of reparations continued to drop down to a level closer to Germany's ability to pay. In 1929, for example, the Young Plan effectively lowered the total indemnity to 37 billion and the annual payments to less than 2 billion, to be financed in the short run by yet another massive loan. Statistics on the German Railroads' share of reparations payments during this period support the argument the problems surrounding reparations stemmed from mainly from psychological factors, not from an inability to pay. Then in 1931, a moratorium was declared on reparations payments. By the time Adolf Hitler repudiated the obligation, reparations payments were largely a thing of the past.
The long and the short of it is that in total, Germany paid out only slightly more than 20 billion of the 132 billion ‘gold marks.’ But Keynesians insist that such statistics lie: the figure of 20 billion, they argue, does not credit Germany with certain huge payments in kind, among them coal mines in the Saar and an steel mills surrendered as a result of the border changes of 1919. It also overlooks the blow that reparations delivered to German political culture: each round rescheduling raised anew the fundamental question of war guilt and its material cost, prompting widespread rejection of even lowered burdens. Hostility to the Young Plan, for example, expressed itself in a national plebiscite, in which 5.8 million voters registered their opposition to further payments. Hitler and other right-wing opponents of the republic exploited such resentments to the fullest. By the same token, reparations to the war-wounded continued to increase the public debt. As Niall Ferguson sums it up, “the republic existed to pay not only reparations to the victorious Allies but also to the Germans themselves.”
Niall Ferguson, “The Balance of Payments Question: Versailles and After,” in Manfred F. Boemeke et al., eds., The Treaty of Versailles: A Reassessment after 75 Years (Cambridge: Cambridge University Press, 1998), 401-440.
John Maynard Keynes, The Economic Consequences of the Peace (New York: Harcourt, Brace and Howe, 1920).
Sally Marks, “The Myths of Reparations,” Central European History 11 (1978): 231-255.
Sally Marks, “Mistakes and Myths: The Allies, Germany, and the Versailles Treaty, 1918-1921,” Journal of Modern History 85 (2013): 632-659.
Wolfram Fischer, Deutsche Wirtschaftspolitik, 1918-1945, 3d rev. ed. (Opladen: Leske, 1968).
Stephen A. Shuker, American ‘Reparations’ to Germany, 1919-1933: Implications for the Third-World Debt Crisis (Princeton: Department of Economics, 1988).
David Felix, “Reparations Reconsidered with a Vengeance,” Central European History 42 (1971): 171-179.
Alfred Mierzejewski, “Payments and Profits: The German National Railway Company and Reparations, 1924-1932,” German Studies Review 18 (1995 ): 65-85.
Bruce Kent, The Spoils of War: The Politics, Economics, and Diplomacy of Reparations, 1918-1932 (Oxford: Clarendon, 1989).
Harold James, The German Slump: Politics and Economics, 1924-1936 (Oxford: Clarendon, 1986).