The Dawes Plan: How American Loans Rescheduled German Reparations, 1924–1932

On the morning of 14 October 1924, clerks at J.P. Morgan & Co. on Wall Street began taking orders for a bond issue that had no obvious precedent: a seven per cent gold loan to the government of a country that four years earlier had been an enemy, eleven months earlier had been printing banknotes in denominations of a hundred trillion, and was at that moment still under partial military occupation by France. The American tranche was $110 million. It was gone within hours, heavily oversubscribed, and by the end of the week brokers in Chicago and Boston were turning customers away.

That loan was the hinge of the Dawes Plan, and it worked in a way almost nobody had planned for. What the plan was supposed to do was make German reparations payable. What it actually did was wire the German economy directly into the American capital market, so that when the American capital market stopped functioning in 1929 the German economy stopped with it.

The Ruhr and the Impasse

Reparations under the Treaty of Versailles had been left deliberately open in 1919 and fixed by the Reparation Commission on 5 May 1921 at 132 billion gold marks under the London Schedule of Payments. Even at the time the figure was partly theatrical: the schedule divided the total into A, B and C bonds, and the C bonds — some 82 billion marks of the total — were widely understood by officials on both sides as a political fiction that would never be serviced. Sally Marks's dissection of the arithmetic is the standard corrective to the idea that Germany faced a genuine 132-billion-mark bill (Marks, 1978).

John Maynard Keynes had already made the case against the whole structure, in a book that outsold every other work of economics of its generation. "The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable," he wrote in 1919, and the passage was quoted back at Allied negotiators for the next decade.

Payment collapsed anyway. After Germany defaulted on deliveries of timber and coal, French and Belgian troops marched into the Ruhr on 11 January 1923 to extract reparations in kind. Berlin answered with passive resistance, paid the striking Ruhr workforce with printed money, and destroyed its own currency in the process. By November 1923 the paper mark stood at 4.2 trillion to the dollar, a collapse traced in detail in the Weimar hyperinflation of 1921 to 1923. France held the Ruhr and got almost nothing. Germany had no currency. The impasse was complete, and it was expensive for everyone holding it.

On 30 November 1923 the Reparation Commission appointed two committees of experts. The first, chaired by the Chicago banker and future US Vice-President Charles G. Dawes and containing Owen D. Young of General Electric, was charged with balancing the German budget and stabilising the currency. Its remit excluded the one question everybody cared about — the total sum owed — which was precisely what made agreement possible.

What the Plan Actually Did

The Dawes Committee reported on 9 April 1924. The London Conference ran from 16 July to 16 August, the agreement was signed on 30 August 1924, and the plan took effect on 1 September.

Its mechanism had four parts. Annuities were graduated rather than flat, starting at 1,000 million gold marks in the first year and climbing over five years to a standard annuity of 2,500 million. Those annuities were secured on specific pledged revenues rather than on the German budget in general: a first mortgage of 11 billion gold marks on the German national railways, which were reorganised as a separate company, 5 billion marks of debentures on German industry, and the yield of taxes on transport, customs, tobacco, beer, sugar and spirits. The Reichsbank was reconstituted as an institution independent of the government, with a gold-exchange standard and a supervisory board on which foreigners sat. And an Agent General for Reparation Payments was installed in Berlin to oversee the whole apparatus.

Two features mattered more than the headline numbers. First, the Dawes Plan set no total and no end date. Germany paid an annuity; what the annuity amortised was left unstated, which meant the political question was postponed rather than settled. Second, and decisively, came the transfer protection clause. Germany discharged its obligation by paying Reichsmarks into an account at the Reichsbank. Converting those marks into foreign currency was the job of a Transfer Committee, which was instructed to convert only so far as the exchange rate would bear it. Exchange risk moved from the debtor to the creditors.

Barry Eichengreen's account of the interwar gold standard treats that clause as the quiet centre of the arrangement: it made German default on transfer a creditor problem rather than a German one, and thereby made German bonds attractive to buy (Eichengreen, 1992).

The man who ran the machinery was Seymour Parker Gilbert, a former US Under Secretary of the Treasury who took up the post of Agent General in October 1924 at the age of thirty-two and held it until May 1930. His office in Berlin received the annuities, supervised the pledged revenues, and published annual reports that became the single most authoritative source on the German economy in the period.

French troops began withdrawing from the Ruhr in 1925 and the evacuation was completed that summer. Dawes shared the Nobel Peace Prize for 1925 with Austen Chamberlain.

The Recycling Machine

Here is where the plan stopped behaving as designed.

The 800-million-gold-mark Dawes Loan of October 1924 was intended as a one-off stabilisation credit to prime the pump. American investors read it differently. The loan carried the implicit blessing of the US government, it paid seven per cent when domestic Liberty Bonds paid four, and it had sold out instantly. Underwriters drew the obvious conclusion and went looking for more German paper to sell.

Between 1924 and 1930 something on the order of 25 to 30 billion Reichsmarks of foreign capital, most of it American, flowed into Germany. Prussian state loans, Hamburg harbour bonds, municipal swimming baths in the Rhineland, Krupp, Siemens, the great chemical combine of I.G. Farben — American salesmen sold all of it. The Reich then used part of the inflow to pay reparations to Britain, France and Belgium, who used the receipts to service their war debts to the United States Treasury.

Read that table as a circuit and the reparations question changes shape. Stephen Schuker's calculation of the net position found that the capital America lost on defaulted German bonds after 1931 exceeded what Germany actually transferred in reparations across the whole period — that in net terms the United States paid reparations to Germany rather than the reverse (Schuker, 1988). Albrecht Ritschl's reconstruction of the German balance of payments reaches a compatible conclusion by a different route, treating the Dawes system as a mechanism by which German reparations were effectively financed by American lending until the lending stopped (Ritschl, 2002).

Gilbert saw the danger from inside the machine. His memorandum to the German government in October 1927 warned bluntly that public authorities in Germany were spending and borrowing beyond what the country's earnings could sustain, and that municipal and state borrowing abroad was going into public works, relief and industries that already had excess capacity rather than into anything that would generate the foreign exchange to repay it. Berlin was furious, the German press demanded publication, and the borrowing continued.

Gustav Stresemann, the Foreign Minister who had built his career on the policy of accommodation that made the Dawes Plan possible, put the position without consolation shortly before his death in October 1929: "The economic position is only flourishing on the surface. Germany is in fact dancing on a volcano. If the short-term credits are called in, a large section of our economy would collapse."

Keynes Against Ohlin

Economists argued about the mechanism while it was still running, in an exchange that became one of the founding disputes of international macroeconomics.

Keynes, writing in the Economic Journal in 1929, split the problem in two. There was a budgetary problem — could the German state raise 2.5 billion marks a year in taxes? — and a transfer problem, which was whether those marks could be converted into foreign currency without a collapse in German export prices or a rise in German unemployment. He argued the transfer problem was the binding one, and that the terms of trade would move against Germany sharply enough to make the real burden far heavier than the nominal annuity suggested.

Bertil Ohlin replied that this understated the demand-side adjustment. Paying reparations reduces German purchasing power and raises purchasing power in the receiving countries, which shifts demand toward German goods and does part of the transfer work automatically, with a much smaller terms-of-trade movement than Keynes assumed (Ohlin, 1929). Neither man persuaded the other. Both arguments remain live in modern discussions of external adjustment, and the same analytical frame reappeared decades later in the eurozone — the shape of the argument over internal devaluation during the Greek debt crisis is recognisably a descendant of it.

What settled the 1920s version was not theory. It was that the transfer question was never tested, because the capital inflow was larger than the annuity throughout.

Young, Hoover, Lausanne

By 1928 Gilbert himself was pressing for a definitive settlement, on the grounds that an open-ended obligation was preventing Germany from being treated as a normal borrower. A second committee, chaired by Owen D. Young, sat from February 1929 and reported on 7 June.

The Young Plan fixed what the Dawes Plan had left open. Reparations were set at a defined total payable in 59 annuities running to 1988, graduated from roughly 1.7 billion Reichsmarks upward, with a nominal sum that reached about 112 billion Reichsmarks once interest was counted. Transfer protection was largely abolished, commercialising the debt. To administer the payments, the plan created a new institution in Basel: the Bank for International Settlements, which opened on 17 May 1930 and outlived every other piece of the reparations apparatus by a wide margin.

German nationalists mobilised against it. Alfred Hugenberg's media empire and the Stahlhelm ran a petition campaign, joined by a then-marginal Adolf Hitler, for a bill officially titled the Law against the Enslavement of the German People. Put to a referendum on 22 December 1929, it drew about 5.8 million votes — roughly 13.8 per cent of the electorate, far short of the majority required, but the campaign gave Hitler months of national newspaper coverage and respectable-right endorsement he could not otherwise have bought.

Then the lending stopped. American capital had already begun returning home during the 1929 boom on Wall Street, and after the crash of October 1929 the flow reversed outright. German unemployment passed three million in 1930 and four and a half million in 1931. When the Creditanstalt failed in Vienna in May 1931, short-term foreign credits were pulled out of central Europe wholesale, the Danat-Bank collapsed in July, and Germany closed its banks and imposed exchange controls.

Herbert Hoover proposed a one-year suspension of all intergovernmental payments on 20 June 1931. "The purpose of this action," his statement ran, "is to give the forthcoming year to the economic recovery of the world and to help free the recuperative forces already in motion in the United States from retarding influences from abroad." France resisted for a fortnight, then agreed. The moratorium ran from 1 July 1931, and reparations never resumed.

At Lausanne between 16 June and 9 July 1932 the creditor powers agreed to reduce the remaining obligation to a token 3 billion Reichsmarks in bonds to be issued at some future date. The agreement was never ratified, because the United States would not cancel the inter-Allied war debts that were its counterpart. Across the whole period from 1919 to 1932 Germany transferred less than 21 billion marks.

The Bonds Outlived the Republic

Hitler repudiated what remained in 1933. The Dawes and Young bonds themselves proved harder to kill than the government that issued them: the London Debt Agreement of 1953 revived servicing on the principal, deferred the accumulated interest until German reunification, and the Federal Republic made its final payment on that interest on 3 October 2010, eighty-six years after the clerks at Morgan's took the first orders.

What the Dawes Plan demonstrated was narrower and stranger than the lesson usually drawn from it. It did not prove that reparations were unpayable; the transfer test was never run. It showed instead that an international debt can be made to look serviceable for six years by financing it with fresh borrowing from the creditor's own citizens, and that the arrangement is stable exactly as long as the lending continues. The engineering was competent, the diplomacy was patient, and the whole structure rested on the willingness of retail investors in Ohio to keep buying seven per cent German municipal bonds.

In 1934, the receiver's notices went out to holders of the American tranche of the 1924 loan. Ten years earlier those same bonds had sold out in a single morning.