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The Myth that Versailles Reparations Destroyed the German Economy

Updated on February 5, 2018
German hyperinflation, as seen by these huge stacks of paper money awaiting distribution, is often blamed as a direct result of reparations imposed by the Treaty of Versailles, but stems more from German internal politics and responses.
German hyperinflation, as seen by these huge stacks of paper money awaiting distribution, is often blamed as a direct result of reparations imposed by the Treaty of Versailles, but stems more from German internal politics and responses. | Source

Myth: The huge reparations that Germany had to pay were single-handedly responsible for German hyperinflation, and the Great Depression.

The reparations problems of the Treaty of Versailles are perhaps unique in history. War reparations were a reasonably common element in treaties by this point, especially in large and destructive wars (such as the Franco-Prussian war or the Napoleon Wars, where in both wars France had been forced to pay large reparations after its defeat, and wherein Prussia had had to pay huge reparations itself in 1806). But in these previous treaties, reparations were paid generally quickly, even well before schedule in the Franco-Prussian War. They were paid too in similar conditions : the German claim that the nation was exhausted from prolonged war, the loss of territory, and that their government was not well established and its political fragility harmed its ability to pay reparations, were similar to those that had existed in France in 1815 and 1871. Yet, neither had had the sheer bitter acrimony of reparations from the Great War.

Note that Weimar hyper-inflation didn't begin until 1922 : during the proceeding years, the value of the German currency had been stable or actually improved.
Note that Weimar hyper-inflation didn't begin until 1922 : during the proceeding years, the value of the German currency had been stable or actually improved. | Source

To begin with, what was the basic scope of the German economy? Initially, after the period of confusion and chaos, there was a recovery from the war. But much more famously in 1922 the German economy entered a spiral of hyper-inflation, which drove the currency to become essentially worthless. It was not until 1924 that the Rentenmark was introduced, which succeeded in stabilizing the German currency. Inflation after this date was not a problem in Germany : deflation was the problem instead at times. It is certainly a myth that Hitler for example, rose to power upon the problem of inflation, as inflation had been vanquished for more than half a decade by the time of the stock market crash and the beginning of the Great Depression. During this period of 1924-1929, Germany had a relatively prosperous existence, fueled to a great extent by international loans which provided it with the money to pay reparations and to have an artificially high internal standard of living : much of the money from these loans was invested into non-profitable enterprises related to municipal bonds. Ultimately, after the stock market crash, a program of internal devaluation, emphasizing cutting wages and living standards internally to enable exports externally, was adopted, as the German economy struggled under the weight of servicing the vast debts it had built up over the previous years.

German pain often had a self-inflicted nature to it...
German pain often had a self-inflicted nature to it...

Instead of the problems of the German economy in the 1920s being ones which arose principally from the Treaty, they were ones which were heavily occasioned by German internal problems. Germany ran huge, extreme, budget deficits. To some extent, this was internally necessarily, in the chaotic early years of the Weimar Republic, when Germany was politically fragile and cuts could have undermined the Weimar regime. But even more importantly, huge budget deficits fueled a spiral of inflation and enabled Germany to portray the suffering face of a victim to the world. German fiscal and monetary policy bears primary responsibility for German hyperinflation, and this was a response to reparations, not the fault of reparations itself. Later, at the beginning of the Great Depression, Germany opted for an intense program of internal devaluation, which was a response to its preference to take huge loans rather than to pay reparations, and as part of a final effort to rid itself of reparations. The cost, was domestic misery which destroyed German democracy. In the end, Germany itself was the nation which would pay the most tremendous prices for this policy : although it would modify the reparations in the Dawes Plan and then ultimately end them in 1932 in Hoover's reparations moratorium, it undertook this only by a policy which fundamentally destabilized the economic and domestic nature of Germany. In the long run, it would be Germany which would pay the most catastrophic prices for this. In the short term, German democratic politicians achieved their objective of treaty revision only by their self-extermination - in the cases of those who were killed by the Nazi regime upon its take over, their effective suicide. German democracy chose suicide rather than pay reparations which were within its capability to pay : the 50 billion goldmarks that were assigned under A and B bonds were after all, not that different in terms of export earnings to those that the French had paid after 1871 - and the French had paid them quickly and without serious problem. Furthermore, the amount that the Germans had actually paid was far lower.

While the reparations on Germany were large, Germany also had a very large economy, and the main expense of a government in the era - military forces - were no longer necessary payments for Germany, as it was forbidden a significant army under Versailles. This was in marked contrast to 1871 France, which soon rebuilt a large and capable army, the one which would eventually go on to defeat Germany nearly half a century later. Germany spent 3.28% of its GDP in 1912, while in 1928, it was only .93%. Germany's spending on its army would either have been close to the amount it spent on reparations, or in excess by billions of Reichsmark. Of course, reparation payments are completely lost, while military spending is merely wasted money, but it still demonstrates that the reparations settlement was not as harsh as Germans proclaimed.

John Maynard Keynes was a brilliant economist, but his assessment of the Treaty of Versailles was wrong.
John Maynard Keynes was a brilliant economist, but his assessment of the Treaty of Versailles was wrong.

Indeed, the reparations settlement was less harmful than the most outspoken critics declared that it would be at the time. John Maynard Keynes, a British economist attending the conference, declared that capitalism in Central Europe would be destroyed, and that Germany would enter into a Malthusian crisis - neither of which came true. His other short-term economic predictions showed themselves incorrect as well : his predicted decline in steel rendered a 10% increase from 1913's level by 1928, and within the space previously constituting the German empire, instead of production falling, steel and iron output rose by 30% and 38% respectively. Coal exports rose, and coal labor mining efficiency by 30% by 1929, while German savings grew continuously from 1925 onwards instead of evaporating. Asides from the German hyperinflation, caused primarily by factors other than reparations or as part of a petulant response to reparations, and the Great Depression, caused by a host of factors following from the war and not just reparations alone, the German economy was never the basket case which Keynes predicted. It was only when Germany chose to destroy its own solvency to free itself from the reparations burden that its economy approached Keynes' apocalyptic vision.

© 2017 Ryan Thomas

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