World War I debts
World War I debts refer to the financial obligations imposed on Germany following the Treaty of Versailles, which concluded the war in 1919. Central to the treaty was Article 231, the war guilt clause, which held Germany responsible for the war's damages. In 1921, the Inter-Allied Reparations Commission calculated Germany's reparations at approximately $32 billion. However, Germany struggled to meet these payments, leading to a default in 1923 and subsequent economic turmoil, including hyperinflation.
In response, the Dawes Plan was implemented in 1924, restructuring Germany's payments and providing American loans to stabilize its economy. Despite initial success, the 1929 stock market crash severely impacted Germany, leading to another default on reparations. Efforts to revise these debts continued, culminating in the Young Plan, but the U.S. Congress ultimately rejected further adjustments. The unresolved debt issues and economic instability contributed to the rise of Adolf Hitler and the National Socialist Party, illustrating how the reparations intended to prevent future conflict inadvertently set the stage for World War II.
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World War I debts
Debts accrued by the governments of belligerent nations during World War I
The postwar idea of Germany being held responsible for World War I was an attempt to guarantee that no other country would consider fighting a war on such a massive scale ever again. In an attempt to manage the reparations, financial experts created a web of economic dependency, which allowed the American Depression to become a worldwide phenomenon.
In June of 1919, the Allied powers forced representatives of the new German government to sign the Treaty of Versailles officially ending World War I. One of the key elements of the treaty was Article 231, commonly known as the war guilt clause, whereby Germany accepted responsibility for “all the loss and damage to which the Allied and Associated Governments and their nationals have been subjected as a consequence of the war imposed upon them by the aggression of Germany and her allies.” Two years later, the Inter-Allied Reparations Commission set the total civilian cost of the war at thirty-two billion dollars. Germany could not make payment and defaulted the following year. As a consequence, under the terms of the Treaty of Versailles, France and Belgium invaded Germany’s industrial Ruhr region. Production there came to a standstill, and hyperinflation of the German currency followed.
America’s Impact
In 1923, President Warren G. Harding appointed Charles G. Dawes to the Inter-Allied Reparations Commission. The next year, Dawes organized a ten-member committee to propose a solution to the economic crisis in Germany. The Dawes Plan not only reset the German payment schedule, but also offered American loans to assist in the stabilization of the German economy. On one hand, the plan worked: Between 1924 and 1929, Germany flourished while it made payments to Great Britain and France, which in turn repaid their debt to the United States.
By 1929, however, it was becoming clear that, even with America’s help, Germany might soon default again. Owen D. Young, founder of RCA and an original member of Dawes’s group of ten was appointed by the Inter-Allied Reparations Commission to form a committee to address the issue. They presented the Young Plan in August, 1929, and it was approved by the Second Hague Commission in January, 1930. However, before the plan could go into effect, American banks began to pull cash from their European investments in reaction to the stock market crash.
Without American capital, the Germany economy collapsed and the country defaulted on its reparations obligations to Great Britain, France, and the other Allies. In turn, those countries were unable to pay their debts to the United States. The problem was compounded by the passage of the Hawley-Smoot Tariff Act in June, 1930. The act placed high tariffs on imported goods to protect American businesses and farmers. From the time the House of Representatives passed the bill in May, foreign governments had begun to retaliate against American products. Thus, the chilling effects of the tariffs on worldwide trade spread rapidly.
On June 20, 1931, President Herbert Hoover proposed a one-year moratorium on reparation payments in the hope of minimizing the economic instability. Within a month, fifteen countries had agreed to the plan, but Congress did not accept the president’s arrangement until the end of the year. With Hoover’s plan set to expire, France, Britain, and Germany met at Lausanne, Switzerland, in June, 1932, and developed a proposal to all but cancel war debt in response to the economic crisis. Under the plan, Germany would have owed only $713 million. In December, however, the U.S. Congress rejected the proposal, instead calling for the reimplementation of the Young Plan, but no further payments were made by any country. Adolf Hitler came to power two months later and refused to send the former Allied powers more money.
Impact
German war reparations were one of many issues that led the U.S. Senate to reject the Treaty of Versailles and America to seek a path of international isolation. However, as the creditor of the Allied nations, the country was forced to intervene twice in adjusting the schedule of payments. The Dawes Plan allowed Germany to rebound but linked its economy with that of the United States. When the U.S. stock market crashed on October, 1929, the impact was quickly felt in Berlin. Repeatedly, Congress made decisions that only made the situation worse. Meanwhile, the National Socialist German Workers (Nazi) Party used the issue of reparations to build support; the economic collapse of 1930 only fueled Adolf Hitler’s rise to power. Germany’s immense war debt was meant to deter another world war. Instead, it assisted Hitler in starting another one.
Bibliography
Kent, Bruce. The Spoils of War: The Politics, Economics, and Diplomacy of Reparations, 1918-1932. Oxford, England: Clarendon Press, 1989. Offers a solid overview of the topic of war reparations.
Schuker, Stephen A. The End of French Predominance in Europe: The Financial Crisis of 1924 and the Adoption of the Dawes Plan. Chapel Hill: University of North Carolina Press, 1988. Provides an excellent explanation of how France was unable to adapt to the growth of American economic power.
Self, Robert. Britain, America, and the War Debt Controversy: The Economic Development of an Unspecial Relationship 1917-1941. New York: Routledge, 2006. Challenges the traditional view of Britain and the United States working in concert by focusing on the issue of reparations in the interwar period.
Smiley, Gene. Rethinking the Great Depression. Chicago: Ivan R. Dee, 2003. Discusses the issue of reparations within the larger context of the causes of the Great Depression.
Turner, Arthur. The Cost of War: British Policy on the French War Debt, 1918-1932. A comprehensive account of the breakdown of relations between the former allies over the issue of war debt.
Wheeler-Bennett, John W. The Wreck of Reparations: Being the Political Background of the Lausanne Agreement. Reprint. New York: Howard Fertig, 1972. Originally published in 1933, this source provides a period view of the issue of reparations.
Wright, Jonathan. Gustav Stresemann: Weimar’s Greatest Statesman. New York: Oxford University Press, 2004. Stresemann sought to build a stable Germany, but in doing so he relied too heavily on American capital.