Carroll Quigley - Tragedy and Hope - A History of the World in Our Time

The Dawes Plan also established guarantees for reparations payments, setting aside various sources of income within Germany to provide funds and shifting the responsibility for changing these funds from marks into foreign exchange from the German government to an agent-general for reparations payments who received marks within Germany. These marks were transferred into foreign exchange only when there was a plentiful supply of such exchange within the German foreign-exchange market. This meant that the value of the German mark in the foreign-exchange market was artificially protected almost as if Germany had exchange control, since every time the value of the mark tended to fall, the agent-general stopped selling marks. This allowed Germany to begin a career of wild financial extravagance without suffering the consequences which would have resulted under a system of free international exchange. Specifically, Germany was able to borrow abroad beyond her ability to pay, without the normal slump in the value of the mark which would have stopped such loans under normal circumstances. It is worthy of note that this system was set up by the international bankers and that the subsequent lending of other people’s money to Germany was very profitable to these bankers.

Using these American loans, Germany’s industry was largely reequipped with the most advanced technical facilities, and almost every German municipality was provided with a post office, a swimming pool, sports facilities, or other nonproductive equipment. With these American loans Germany was able to rebuild her industrial system to make it the second best in the world by a wide margin, to keep up her prosperity and her standard of living in spite of the defeat and reparations, and to pay reparations without either a balanced budget or a favorable balance of trade. By these loans Germany’s creditors were able to pay their war debts to England and to the United States without sending goods or services. Foreign exchange went to Germany as loans, back to Italy, Belgium, France, and Britain as reparations, and finally back to the United States as payments on war debts. The only things wrong with the system were (a) that it would collapse as soon as the United States ceased to lend, and (b) in the meantime debts were merely being shifted from one account to another and no one was really getting any nearer to solvency. In the period 1924-1931, Germany paid 10.5 billion marks in reparations but borrowed abroad a total of 18.6 billion marks. Nothing was settled by all this, but the international bankers sat in heaven, under a rain of fees and commissions.

The Dawes Plan was replaced by the Young Plan at the beginning of 1930 for a variety of reasons. It was recognized that the Dawes Plan was only a temporary expedient, that Germany’s total reparations obligation was increasing even as she paid billions of marks, because the Dawes Plan payments were less than the payments required by the London Schedule; that the German foreign-exchange market had to be freed in order that Germany might face the consequences of her orgy of borrowing, and that Germany “could not pay” the standard Dawes payment of 2.5 billion marks a year which was required in the fifth and following years of the Dawes Plan. In addition, France, which had been forced to pay for the reconstruction of her devastated areas in the period 1919-1926, could not afford to wait for a generation or more for Germany to repay the cost of this reconstruction through reparations payments. France hoped to obtain a larger immediate income by “commercializing” some of Germany’s reparations obligations. Until this point all the reparations obligations were owed to governments. By selling bonds (backed by German’s promise to pay reparations) for cash to private investors France could reduce the debts she had incurred for reconstruction and could prevent Britain and Germany from making further reductions in the reparations obligations (since debts to private persons would be less likely to be repudiated than obligations between governments).

Britain, which had funded her war debts to the United States at 4.6 billion dollars in 1923, was quite prepared to reduce German reparations to the amount necessary to meet the payments on this war debt. France, which had war debts of 4 billion dollars as well as reconstruction expenses, hoped to commercialize the costs of the latter in order to obtain British support in refusing to reduce reparations below the total of both items. The problem was how to obtain German and British permission to “commercialize” part of the reparations. In order to obtain this permission France made a gross error in tactics: she promised to evacuate all of the Rhineland in 1930, five years before the date fixed in the Treaty of Versailles, in return for permission to commercialize part of the reparations payments.

This deal was embodied in the Young Plan, named after the American Owen D. Young (a Morgan agent), who served as chairman of the committee which drew up the new agreements (February to June 1929). Twenty governments signed these agreements in January 1930. The agreement with Germany provided for reparations to be paid for 59 years at rates rising from 1.7 billion marks in 1931 to a peak of 2.4 billion marks in 1966 and then declining to less than a billion marks in 1988. The earmarked sources of funds in Germany were abolished except for 660 million marks a year which could be “commercialized,” and all protection of Germany’s foreign-exchange position was ended by placing the responsibility for transferring reparations from marks to foreign currencies squarely on Germany. To assist in this task a new private bank called the Bank for International Settlements was established in Switzerland at Basle. Owned by the chief central banks of the world and holding accounts for each of them, the Bank for International Settlements was to serve as “a Central Bankers’ Bank” and allow international payments to be made by merely shifting credits from one country’s account to another on the books of the bank.

The Young Plan, which was to have been a final settlement of the reparations question, lasted for less than eighteen months. The crash of the New York stock market in October 1929 marked the end of the decade of reconstruction and opened the decade of destruction between the two wars. This crash ended the American loans to Germany and thus cut off the flow of foreign exchange which made it possible for Germany to appear as if it were paying reparations. In seven years, 1924-1931, the debt of the German federal government went up 6.6 billion marks while the debts of German local governments went up 11.6 billion marks. Germany’s net foreign debt, both public and private, was increased in the same period by 18.6 billion marks, exclusive of reparations. Germany could pay reparations only so long as her debts continued to grow because only by increasing debts could the necessary foreign exchange be obtained. Such foreign loans almost ceased in 1930, and by 1931 Germans and others had begun a “flight from the mark,” selling this currency for other monies in which they had greater confidence. This created a great drain on the German gold reserve. As the gold reserve dwindled, the volume of money and credit erected on that reserve had to be reduced by raising the interest rate. Prices fell because of the reduced supply of money and the reduced demand, so that it became almost impossible for the banks to sell collateral and other properties in order to obtain funds to meet the growing demand for money.

At this point, in April 1931, Germany announced a customs union with Austria. France protested that such a union was illegal under the Treaty of Saint-Germain, by which Austria had promised to maintain its independence from Germany. The dispute was referred to the World Court, but in the meantime the French, to discourage such attempts at union, recalled French funds from both Austria and Germany. Both countries were vulnerable. On May 8, 1931, the largest Austrian bank, the Credit-Anstalt (a Rothschild institution), with extensive interests, almost control, in 70 percent of Austria’s industry, announced that it had lost 140 million schillings (about $20 million). The true loss was over a billion schillings, and the bank had really been insolvent for years. The Rothschilds and the Austrian government gave the Credit-Anstalt 160 million to cover the loss, but public confidence had been destroyed. A run began on the bank. To meet this run the Austrian banks called in all the funds they had in German banks. The German banks began to collapse. These latter began to call in all their funds in London. The London banks began to fall, and gold flowed outward. On September 21st England was forced off the gold standard. During this crisis the Reichsbank lost 200 million marks of its gold reserve and foreign exchange in the first week of June and about 1,000 million in the second week of June. The discount rate was raised step by step to 15 percent without stopping the loss of reserves but destroying the activities of the German industrial system almost completely.