The adoption of the Dawes Plan

On 16 August 1924, in London, representatives of the governments of Britain, France, Belgium, Italy, Japan, several smaller Allied states and Germany signed the final protocol of a conference at which they adopted a scheme for the payment of German reparations, drawn up by an international committee of experts chaired by the American banker and general Charles Gates Dawes. The plan did not fix how much Germany was to pay in total. Instead it laid down how much it was to pay each year, from what sources and under whose supervision, and it also gave Germany a large foreign loan to shore up its new currency. It was the first reparations settlement since the end of the war that Germany accepted as a partner rather than under the threat of an ultimatum. It ended the year-and-a-half-long conflict that had begun with the occupation of the Ruhr by the French and Belgians, and ushered in a few calm years in Europe. But it built them on American credit, which vanished when the Great Depression came.

Some accounts state that the plan “ended the Allied occupation of the Ruhr”. This is a simplification. In London, France and Belgium undertook to withdraw their troops from the Ruhr within a year and immediately gave up the economic exploitation of the occupied area, but the last soldiers left the region only in July and August 1925. The agreements were formally signed once more in London on 30 August, the day after the vote in the Reichstag, and the plan came into force on 1 September 1924.

The dispute over reparations

The Treaty of Versailles obliged Germany to make good the damage caused by the war but did not set the amount. That was fixed only by the Reparations Commission: in May 1921 the Allies announced in London a sum of 132 billion gold marks, together with an ultimatum threatening to occupy the Ruhr if Germany did not accept the schedule of payments. The government of Chancellor Joseph Wirth accepted it and pursued the so-called policy of fulfilment, intending to show that payment was possible only up to a point. Most of the sum existed only on paper in any case. Around 50 billion was realistically expected; the rest was meant to reassure public opinion in France and Britain.

Germany paid the first instalment and then fell into arrears with both cash and deliveries in kind. The mark fell ever faster. The French prime minister, Raymond Poincaré, concluded that Germany was evading its obligations deliberately and resolved to seize “productive pledges”. When the Reparations Commission declared Germany in default on deliveries of timber and coal, French and Belgian troops entered the Ruhr on 11 January 1923. The government in Berlin called for passive resistance and paid the striking workers and officials with the printing press, which led to hyperinflation. By the autumn of 1923 Germany was on the verge of disintegration: separatists in the Rhineland, Communists in Saxony and Hamburg, and in Bavaria Hitler’s putsch. The new chancellor, Gustav Stresemann, called off passive resistance on 26 September, and on 15 November a new currency, the Rentenmark, was introduced and halted the inflation.

Nor did the occupation bring France any benefit. Coal from the Ruhr trickled out, the costs were high, and Britain and the United States condemned French policy. At the beginning of 1924 the franc came under heavy speculative pressure, and the government in Paris had to ask the American bank J.P. Morgan & Co. for credit. The Americans thus had an argument France could not ignore.

The Dawes Committee

The idea of handing the reparations question to independent experts had been floated as early as 29 December 1922, before the entry into the Ruhr, by the US Secretary of State Charles Evans Hughes in a speech at New Haven. The United States had not ratified the Treaty of Versailles and officially wanted no part in reparations, but it had huge interests in Europe. Britain and France owed it billions of dollars in war debts, which they intended to repay with German money. In the autumn of 1923 Poincaré, financially weakened, agreed to a committee, and on 30 November the Reparations Commission appointed two panels of experts. The first was to examine how to balance the German budget and stabilise the currency; the second, under the former British Chancellor of the Exchequer Reginald McKenna, how much German capital had fled abroad.

The first committee began its deliberations in Paris on 14 January 1924. It had two experts each from Belgium, France, Britain, Italy and the United States. It was chaired by Dawes, a Chicago banker who during the war had been the general responsible for supplying the American army in France and then the first director of the federal Bureau of the Budget. The other American was Owen D. Young, chairman of the board of General Electric. Dawes gave the committee publicity and momentum, while much of the work on the figures was done by Young and the British economist Josiah Stamp. The report was published on 9 April 1924. In its introduction the experts stressed that they had approached the matter as businessmen and that the guarantees they proposed were economic, not political.

What the plan provided

Instalments. Germany was to pay rising annual instalments: a billion gold marks in the first year, then more and more, up to 2.5 billion in the year 1928/1929, which was deemed the first “normal” year. If the German economy did better than expected, the instalment could rise according to a special index of prosperity. Neither a total sum nor an end date for the payments was fixed. For France the figure of 132 billion had symbolic importance, and nobody wanted to abolish it formally.

Sources. The instalments were to come from the Reich budget, from the revenue of customs duties and taxes on alcohol, tobacco, beer and sugar, which were placed under control, and from interest on bonds charged on industry and the railways. The state railways were turned into a company, the Deutsche Reichsbahn, burdened with reparation bonds of 11 billion marks, and industry with bonds of 5 billion. Foreigners also sat on the railways’ board of management.

Currency. The Reichsbank was made independent of the government, and its general council included seven foreigners alongside seven Germans. A foreign commissioner oversaw the currency’s gold cover. Germany received an international loan of 800 million gold marks, about half of which was raised on the New York market. It was to form the basis of the reserves of the central bank and of the new mark, the Reichsmark, which replaced the Rentenmark.

Transfer. The money was paid in marks into an account at the Reichsbank held by the Agent General for Reparation Payments, and a special committee decided how much of it could be converted into foreign currency and handed to the creditors without damaging the mark’s exchange rate. This “transfer protection” shifted the risk of currency difficulties on to the creditors. Young became the first Agent General on a provisional basis, and from October 1924 the post in Berlin was taken by a young American lawyer, Seymour Parker Gilbert.

The London Conference

The experts’ plan still had to be accepted by the politicians. Germany agreed to it as early as 16 April. In France the situation was transformed by the election of 11 May 1924, in which a coalition of the left defeated Poincaré and the Radical Édouard Herriot became prime minister. In Britain the first Labour government in history had been in office since January under Ramsay MacDonald, who had long regarded the occupation of the Ruhr as a mistake. On 16 July 1924 MacDonald opened a conference of the Allied powers in London. The United States, which did not formally take part, was represented by its ambassador in London, Frank Kellogg.

The hardest issue proved to be guarantees. The American bankers, above all the representatives of J.P. Morgan & Co., declared that they would not sell the loan bonds if France kept the right to unilateral sanctions – that is, to another occupation at the first delay in payments. Herriot gave way. It was agreed that only the Reparations Commission, joined by an American representative, could declare a default, and that sanctions would be possible only in the event of a flagrant and wilful breach of the plan. On 5 August the German delegation was admitted to the talks: Chancellor Wilhelm Marx, Foreign Minister Stresemann and Finance Minister Hans Luther. For the first time since the war Germany negotiated with the victors over reparations as an equal partner rather than as a party presented with ready-made terms. It was advised by the president of the Reichsbank, Hjalmar Schacht.

Germany demanded the immediate evacuation of the Ruhr. Herriot could not agree to this, since at home he was accused of giving away everything France had won. After difficult talks France and Belgium undertook, in separate letters, to withdraw their troops within a year at the latest, and as a gesture of goodwill to leave several smaller areas occupied in 1923 shortly. The Franco-Belgian administration of the Ruhr railways and the control of the mines were to end when the plan came into force. The British diplomat Eric Phipps noted that for the ordinary Frenchman the conference had been “one long Way of the Cross”: Herriot surrendered in turn France’s predominance on the Reparations Commission, the right to sanctions, the economic exploitation of the Ruhr and finally its military occupation. On 16 August all the delegations signed the final protocol.

The Reichstag and the first effects

In Germany the plan met resistance. The right called it a new yoke because it placed the railways and the central bank under foreign supervision; the Communists called it a tool of American capital; and the National Socialists rejected all reparations. In the election of May 1924 the nationalist German National People’s Party (DNVP), which campaigned against the plan, became the second-largest force in the Reichstag. The railway law amended the constitution and required a two-thirds majority. Under pressure from industrialists and large landowners, who wanted credit and an end to the occupation, 48 DNVP deputies voted in favour on 29 August 1924, and the laws were passed. On 30 August the agreements were signed in London, and on 1 September the plan came into force.

The effects came quickly. The Dawes loan was many times oversubscribed in New York, and in its wake American money flowed into Germany: credits for municipalities, banks and firms. By various estimates Germany borrowed between about 20 and nearly 30 billion marks abroad by 1929 – more than it paid in reparations over the same period. Production rose, unemployment fell and the Weimar Republic enjoyed its “Golden Twenties”. Germany paid the Dawes instalments almost without interruption, but in essence the Americans were lending Germany the money with which it paid reparations to France and Britain, which in turn used it to repay their war debts to America. For the plan Dawes received the Nobel Peace Prize for 1925, which he shared with the British Foreign Secretary Austen Chamberlain.

Significance

The Dawes Plan was a victory for the method Stresemann called the policy of understanding: Germany stopped resisting and began to pay, and in return regained its freedom of action step by step. Further steps soon followed: the Locarno Treaties, entry into the League of Nations, the early withdrawal of troops from the Rhineland. For France the plan meant the end of the policy of enforcing the Treaty of Versailles by force. After its failure in the Ruhr, Paris knew that it could not punish Germany alone without the consent of London and Washington, and this lesson weighed on French passivity in 1936, when Hitler marched troops into the demilitarised Rhineland.

The plan’s weakness was its dependence on American capital, much of it short-term. Nor did it settle how much Germany was to pay or for how long, and the full instalment of 2.5 billion marks due from 1928 seemed to most experts more than Germany could bear. In 1929 it was therefore replaced by a plan drawn up by a committee chaired by Young. When the New York stock market crashed in the autumn of 1929, American banks began to withdraw their credits from Germany. The Depression hit the Reich harder than other countries, unemployment rose above six million, and poverty and the fear of ruin drove millions of voters into the arms of Adolf Hitler, who only a few months before the London Conference had been sentenced to fortress confinement for the putsch.

The last traces of the plan were removed by Hitler himself. On 30 January 1937 he announced in the Reichstag that the Reichsbank and the railways were returning to the Reich’s full control, which in practice amounted to repudiating the London agreements. The Dawes loan, however, outlived the Third Reich. Under the London Agreement on German External Debts of 1953 it was repaid by the Federal Republic of Germany, and Germany made the last interest payments on the bonds of the Dawes and Young era on 3 October 2010, the twentieth anniversary of the country’s reunification.