Dawes Plan
A U.S.-led plan to revive the German economy so that Germany could pay the reparations it owed the Allies as a result of losing World War I, the Dawes Plan was the result of the work of a committee of economic experts appointed by the Allied Reparations Commission in November 1923.
Named for its chairman, American financier Charles G. Dawes, the Dawes Committee issued a report in April 1924 that called for lower reparations payments as part of a comprehensive reform of the German economy. Never envisioned as a long-range solution for Germany’s economic problems, the Dawes Plan provided stabilizing reforms that enabled the German economy to grow and prosper, allowing Germany to make regular reparations payments to the Allies, primarily Britain and France, who in turn made war debt payments to the United States. The Dawes Plan operated until 1929, when it was replaced by the Young Plan, a new U.S.-led effort to reduce Germany’s reparations burden. By the time the Young Plan began, however, the effects of the Depression, which had originated in the United States, had spread to Germany, ending the economic boom of the late 1920s and creating the conditions for the electoral successes of the National Socialist German Worker’s Party (NSDAP).The Dawes Plan was borne out of the international financial situation created by World War I, which saw the United States emerge as the world’s dominant economic power, enabled Britain and France to emerge victorious but financially exhausted, and left Germany in political and economic chaos. Article 231 of the Treaty of Versailles required Germany to accept responsibility for starting the war and causing all the damages suffered by the Allied and Associated (the United States) governments during the conflict. As a result of this “war guilt” clause, Germany was required to pay reparations for all the damages it inflicted upon the civilian populations of the Allied and Associated powers.
On April 27, 1921, the Allied Reparations Commission announced at its London Conference that Germany must pay a total reparations bill of 132 billion gold marks ($32 billion). The Allies had already determined that Germany would pay the majority of reparations (52 percent) to France, Britain would receive 22 percent, Italy 10 percent, and Belgium 8 percent; while the lesser Allied nations received varying percentages of the remaining total. Allied experts believed the German economy could tolerate the expense of the reparations, which could be met through in-kind and cash payments, the latter being raised by a combination of new taxes and spending reductions.The experts were correct in theory but wrong in practice. A politically and economically stable Germany could have made the scheduled payments, but the Weimar Republic in 1920 was neither: the republic defeated a left-wing rebellion in 1919, survived a right-wing coup attempt in 1920, and inherited a large budget
President and Mrs. Coolidge, standing on steps beside Mr. and Mrs. Charles Gates Dawes, June 30, 1924. (Library of Congress)
deficit and highly inflated currency from the former imperial regime, which used deficit spending to finance the war. Hated by the Left and the Right, the republic was also held in contempt by much of the general population, who blamed it for conducting Germany’s surrender to the Allies and agreeing to the onerous terms of the Versailles Treaty, especially the “war guilt” clause that forced Germany to pay the massive reparations debt. Given this attitude, it was unlikely that Germany would move quickly to fulfill its reparations obligations—any German government that tried to relieve this debt by raising taxes would not survive for long. Instead, successive Weimar governments resorted to inflation as a means of raising cash to pay off debt.
This strategy seemed to work at first: the German economy expanded with the initial injection of new money, and in August 1921 the German government paid the first installment of 1 billion marks as demanded by the terms of payment of the “London Ultimatum,” as the Reparation Commission’s plan of April 1921 came to be called by the Germans.
As inflation increased, however, Germany received less and less value for the marks it sold on the international currency market, where it had been buying foreign currency to pay reparations. At the end of 1921, the centrist government of Chancellor Joseph Wirth asked the Allies for a moratorium on reparations as the mark dropped in value to 192 to the dollar. The Reparations Commission finally agreed to a moratorium on monetary payments in November 1922 after the Wirth government, which fell that month, reported that new payments were impossible given the terrible state of the mark, which now stood at 3,500 to the dollar. France, however, insisted that Germany continue to make payments in kind. In January 1923, after the Germans failed to deliver a portion of the in-kind payments on time, the French government of Premier Raymond Poincare ordered troops, to occupy the Ruhr industrial region along with troops from Belgium.As the occupation progressed, the German government, now led by Chancellor Wilhelm Cuno, adopted a policy of “passive resistance” that encouraged Germans living in the Ruhr to refuse to work for the occupiers, who were forced to bring in their own workers to run German factories. Although a popular reaction that encouraged national unity, passive resistance led to economic disaster in Germany: the already heavily inflated mark spiraled into hyperinflation when the Reichsbank declared it could no longer risk using Germany’s dwindling gold reserves to support the worthless currency, which the Cuno government continued to print in order to support the millions of Germans now unemployed due to passive resistance. By August 1923, when the Cuno government was replaced by a cabinet led by Gustav Stresemann, the mark had fallen to 3.5 million to the dollar; it would reach 160 million to the dollar in September and drop to 4.2 trillion to the dollar before the Stresemann government began to bring inflation under control in November.
The collapse of the mark ensured that Germany would not be able to resume reparations payments, intensifying an international financial crisis that began with the German reparations defaults of 1922. Without reparations, the Allies argued they could not afford to pay on the $10.3 billion war debt they owed the United States, whose citizens demanded their government collect the debt. In 1923, that government was led by the Republican Warren G. Harding (died August 2, 1923) and Calvin Coolidge, whose secretary of state, Charles Evans Hughes, realized that Allied war debt repayment depended on solving the reparations issue. As early as December 1922, Hughes had endorsed the idea of turning over the problem of German reparations to a committee of financial experts, including Americans, who would develop a plan for German payment based on Germany’s ability to pay. The inclusion of Americans on such a committee was somewhat controversial, given the fact that American politicians, beginning with Woodrow Wilson, refused to equate the payment of reparations with the issue of Allied war debts, which the American people believed should be paid whether or not the Germans could make reparations payments to the Allies. Hughes’s idea received little attention from the Allies until the fall of 1923, when the crisis of the German economy was at its worst.
On November 20, 1923, the Allied Reparations Commission created two committees made up of experts from the United States, Britain, France, Italy, and Belgium, who were entrusted with the task of proposing solutions to the German economic crisis in order to establish a manageable system of reparations payments. The first and more important of the two committees was headed by Charles G. Dawes, an American banker and future vice president of the
United States, and included another American, Owen D. Young, among its members. The Dawes Committee was supposed to devise a plan to balance the German budget and stabilize the mark.
Meeting for the first time on January 14, 1924, the Dawes Committee went on to hold fifty-three meetings until April 9, 1924, when the committee delivered its final report. Dubbed the “Dawes Plan” by the press, the committee’s report stressed economic rather than political solutions to Germany’s problems: an annual system of lower reparations payments, new taxes and financial reforms aimed at balancing Germany’s budget, a reorganization of the Reichsbank, a goldbased German currency, and a series of international loans (mostly from the United States) to Germany.The Dawes Plan emphasized that a German recovery was contingent on maintaining the economic unity of Germany. This point was clearly a criticism of the Franco-Belgian occupation of the Ruhr and the continued Allied occupation of the Rhineland. With their own country in financial crisis, the French finally agreed to withdraw their troops from the Ruhr in August 1925 (Belgium left as well), a year after the formal adoption of the Dawes Plan by the Allies and Germany. The Dawes Plan’s reforms stabilized the German economy and enabled the Weimar Republic to experience a period of substantial industrial growth from 1925 to 1929. The U.S.-backed loans allowed Germany to make its required annual reparations payments to the Allies, who in turn used the reparations money to make payments on the war debt they owed to the Americans. This system began to collapse, however, with the coming of the Great Depression in 1929, which encouraged the Allies and the United States to adopt the Young Plan that year. Named for its chairman and former member of the Dawes Committee, Owen D. Young, the Young Plan drastically reduced the total German reparations bill, but it had little effect on the Depression, which ravaged the German economy in 1930. The NSDAP benefited from the unpopularity of the Young Plan and the popular discontent brought on by the Depression to win big in the Reichstag elections of 1930, becoming the second-largest political party in Germany.
R. Boyd Murphree
See also Great Depression; Treaty of Versailles;
World War I
References and Further Reading
Dawes, Rufus C. The Dawes Plan in the Making. Indianapolis: Bobbs-Merrill, 1925.
Ellis, L. Ethan. Republican Foreign Policy, 1921—1933. New Brunswick, N.J.: Rutgers University Press, 1968.
Hardach, Karl. The Political Economy of Germany in the Twentieth Century. Berkeley: University of California Press, 1980.
Schuker, Stephen A. The End of French Predominance in Europe: The Financial Crisis of1924 and the Adoption of the Dawes Plan. Chapel Hill: University of North Carolina Press, 1976.