IT MUST, in many ways, be annoying for Dr Merkel and the Germans to have to hear the whingeing of the Portuguese, Irish, Greeks and Spaniards. For the Germans have come through problems unimaginable to most nations. Defeat in two world wars, hyperinflation in the 1920s, dictatorship and a divided country. One item in the litany of German disaster in the 20th century is often overlooked – reparations inflicted on Germany by the Treaty of Versailles after the first World War.
The treaty, signed in 1919, almost one year after war’s end, included a clause – Article 231 – which declared Germany and its allies responsible for the war and liable for its cost (in money, not lives lost).
The figure arrived at by the British and French, who wished to teach the Germans a lesson, was massive: 269 billion gold marks. This was the equivalent of about 100,000 tons of gold – more than 50 per cent of all the gold ever mined (some 165,000 tons). It was an amount far beyond any country’s ability to pay.
Britain and France had been almost bankrupted by the cost of the war, and were deeply in debt to the US. They wanted their money back – and Germany was going to pay. The economist JM Keynes claimed at the time that the cost of reparations would ruin not only Germany, but the world economy.
However, the Germans made a good start to repaying their desperate burden. But by January 1923 they failed to make their payment, and French troops occupied the Ruhr, taking German coal instead of German money. In turn this led to hyperinflation, with Germany printing money by the shedload. In 1920, one dollar was worth 100.5 German marks – with hyperinflation, this rose astronomically, to one dollar getting you 4.47 billion marks.
In turn, Britain and France then found it increasingly difficult to repay their loans to the US.
The Allies realised that something needed to be done so that Germany could make at least some reparations. So in 1924, the Dawes Plan was put into place. Charles Dawes, an American banker, arranged that Germany got longer to pay, reduced the amount of reparations and, as good bankers do, gave Germany a large loan to help them meet their payments.
All went well for about five years, but by 1929 Germany was again stumbling. This time the Young Plan was put into effect: this reduced the amount of reparations to 112 billion gold marks, and a defined period of repayments of 59 years — up to 1988. Owen Young, whose name was given to the plan, was an American industrialist and businessman.
Sadly, 1929 wasn’t a very good year for economics. The Wall Street Crash of October 1929 led to the Great Depression of the 1930s. As America itself floundered and banks failed, Germany was – again – hit hard.
Realising that Germany was on the edge of total economic collapse, US president Herbert Hoover proposed a one-year moratorium on reparations and intergovernmental debt payments. While Britain accepted the plan, France dithered – during this delay there was a run on German banks, all of which had to close temporarily. Then in 1932 the Lausanne conference attempted to write off nearly all the German debt, and also suggested the US agree to defer payment of the debts owed to America by Britain and France: this time the proposal failed to meet the approval of US legislators.
With savings wiped out by inflation, jobs lost (German unemployment soon hit six million) extremists flourished. The Weimar Republic gave way with the election of Adolf Hitler and his Nazis in 1933 – one of his first moves was to stop paying reparations altogether, thus making any changes by the Lausanne conference irrelevant.
Hitler’s policies, many of which were aimed at destroying the Treaty of Versailles in its entirety, led to war in 1939 and, for Germany, the crushing defeat of May 1945. After the war, Germany was divided between the victorious Allied powers: Britain, the US, France and the Soviet Union. The Soviet Union controlled the area which became known as “East Germany”, or the German Democratic Republic. The other allies created the Federal Republic of Germany, and its first chancellor was a noted anti-Nazi, Konrad Adenauer.
The creation of “two Germanys” led to its own problems, over which “Germany” inherited the reparations payments from the first World War.
West Germany, whose economy was shattered, suffered sovereign default in 1948, while the East, also ruined, languished under the Soviets.
Yet another conference, this time in London in 1953, saw Adenauer commit West Germany to resuming payment of Germany’s prewar debts. But Adenauer argued that interest on foreign bonds should only be paid when Germany was reunited. By the 1980s, the debt from the London agreement had been almost completely repaid, and the final portion of some $94 million was paid off on October 3rd, 2010 – the 20th anniversary on Germany’s reunification, which had heralded the collapse of the Soviet Union and its allies. It was also more than 91 years after the signing of the Treaty of Versailles. Truly, debt repayment is all about time – and timing.