12.1.4 Germany and Reparations

John Maynard Keynes, the creator of Keynesian economics, was a British economist at the Paris Peace Conference in 1919. He was so unsettled by the potential financial repercussions of the treaty’s terms that he wrote a book contending the large reparations would mean economic ruin for Germany, endangering the entire European economy. His predictions were soon borne out.

Germany faced numerous problems as the 1920s began. It was not only blamed for the war, but its foreign financial assets had also been seized under the treaty, further compromising its economic power, and it had been physically diminished when many rich industrial areas were cut away from its territory. Thus, one of the immediate problems facing the new democratic Weimar Republic government was finding a way to pay the reparations.

The first payment came due in 1921, but Germany was unable to fund the full amount, and the unresolved issue about how to enforce the treaty terms resurfaced. The next year, 1922, Germany defaulted on its payments to France and Britain. In response, French and Belgian troops occupied the Ruhr Valley, the center of German iron, coal, and steel production, as a means to force repayment. The French needed the valley’s resources (especially coal). German residents of the valley resisted the occupation, and many were killed in the resulting conflict.

To reach an immediate solution, Germany began simply printing more money. But this created an inflationary cycle, and the economy soon proved incapable of keeping up with the hyperinflation that resulted. The new money was literally not worth the paper it was printed on (Figure 12.6). The government had to print ever-larger denominations of bills, and people took wheelbarrows of cash to the store to buy a loaf of bread. Holding a job seemed ludicrous when pay could not keep up with a rate of inflation that increased by the day. The entire German middle class saw their savings disappear, and with their money went their support of the government.

In 1924, the United States intervened by arranging the Dawes Plan, by which Germany’s installment payments were lowered but set to increase in the future as its economy rebounded. Foreign banks, many in the United States, also loaned Germany money to stabilize its inflationary economy. This enabled Germany to make its payments, but it also meant taking on more debt. In essence, U.S. banks were loaning money to Germany that it was using to pay Britain and France, which in turn used that money to pay back their own debts to the United States.

Reparations continued to present an extreme economic hardship for Germany. In 1929, the United States announced a new proposal. The Young Plan stretched German reparations across a fifty-nine–year payment schedule, slightly lowered the total to $29 billion, and arranged hundreds of millions of dollars’ worth of additional loans. Germany continued to make payments until 1932, when the worldwide Great Depression made it untenable to continue. Later agreements canceled more of the remaining debt, and the last payment was finally made in 2010. In all, Germany paid only about one-eighth of the total.

Poor decisions by Germany’s Weimar Republic contributed to growing public frustration with the new democratic government. Many political groups attempted to use the country’s economic problems to catapult themselves to political power. Among these was the National Socialists or Nazi Party, whose members favored a more authoritarian government. One man who joined the group in the early 1920s was Adolf Hitler (Figure 12.7).

Hitler was a veteran of the war who subscribed to the unfounded stab-in-the-back theory and had developed an abiding hatred of the Treaty of Versailles. He became a persuasive orator in the 1920s and rose up the ranks of the Nazis as he recruited more people to the group. In 1923, he decided to launch a takeover of the state government in Munich. The planned Beer Hall Putsch (so named because the targeted politicians were to be kidnapped at a beer hall) failed, and Hitler and many supporters were arrested. Over the next year in jail, Hitler wrote the book Mein Kampf (“My Struggle”), in which he outlined his plan for the Nazis to achieve political power and their goals for the resurgence of Germany. These goals included the uniting of German-speaking peoples under one government and an expansion eastward in search of Lebensraum or “living space.” His words found a sympathetic audience in the 1920s.