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Max Planck Encyclopedia of Public International Law [MPEPIL]

Dawes Plan (1924) and Young Plan (1930)

Dieter Fleck

From: Oxford Public International Law (http://opil.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved.date: 18 August 2019

Reparation — Peace treaties — World War I to World War II — Conduct of hostilities — Prisoners of war

Published under the auspices of the Max Planck Foundation for International Peace and the Rule of Law under the direction of Rüdiger Wolfrum.

A.  Historical Background

Arts 231–247 Versailles Peace Treaty (1919), far from closing a historical debate on the origins of World War I (see History of International Law, 1815 to World War I), affirmed Germany’s full responsibility for it and required Germany to compensate for war damage of the victorious States. As a first instalment 20 billion gold marks were to be paid until 1921, and the full amount of reparations was to be determined by a Reparation Commission representing all creditors. Delegates to this commission were nominated by the United States, Great Britain, France, Italy, Japan, Belgium, and the Serb-Croat-Slovene State. The Reparation Commission was given wide latitude under Art. 233 Versailles Peace Treaty and its Annexes as to the handling of the whole reparation problem including authority to interpret the relevant provisions of the treaty. While the combined reparation claims of France, Great Britain, Italy, and Belgium had amounted to 152.2 billion francs for damage to persons and 176.8 billion francs for damage to property, the Reparation Commission translated these into gold marks by arbitrarily dividing the claim for personal damage by 2.5 and that for property damage by 3.0 and then by adding 10% to both these amounts to cover the claims of the other Allies. The result of this computation was 67.2 billion for persons and 64.9 billion for property, in toto 132 billion gold marks, for which a payment schedule was adopted at the conference held in London in 1921.

Due to its rapid post-war inflation Germany was unable to perform in accordance with the London schedule of payments and persevered with its resistance against fulfilment. As a consequence, France had started to occupy Düsseldorf, Duisburg, and Ruhrort in 1921 and French-Belgian occupation of the entire Ruhr District—the industrial heart of Germany—followed in January 1923. In February 1923 French troops expanded the occupation of the west bank of the Rhine River in the South to include Offenburg and Appenweier. The British government condemned the occupation. Germany, in response, suspended all deliveries to the Allies and encouraged workers to engage in passive resistance. The occupation could not be based on a clear provision of the Versailles Peace Treaty: a reoccupation of German territory was provided for in Art. 430 Versailles Peace Treaty, in case the Reparation Commission found that Germany refused to observe the whole or part of its reparation obligations, but the members of the Reparation Commission were not in agreement whether that condition had been proved. Art. 233 Versailles Peace Treaty and Section 18 Annex II provided for ‘economic and financial prohibitions and reprisals and in general such other measures as the respective Governments may determine to be necessary in the circumstances’, but only in case of ‘voluntary default [manquement volontaire] by Germany’. In October 1923 Germany proposed, in accordance with Art. 234 Versailles Peace Treaty, that its ability to meet the obligations be investigated. Under the latter provision the Reparation Commission had discretion to extend the date, and to modify the form of payments, but not to cancel any part, except with the specific authority of the several governments represented. The Commission appointed two expert committees, the first to report on a plan on economic consolidation, and the second to investigate German capital exports during the inflationary period. The first and main committee was chaired by Charles G Dawes (later to become United States Vice President and, together with British Foreign Secretary Sir Austen Chamberlain, co-recipient of the Nobel Peace Price in 1926). A further member of the commission was Owen D Young, an American industrialist and businessman.

B.  The Dawes Report

The Dawes Report recommended that the newly created Rentenmark should be gradually withdrawn from circulation and a new bank should be created which would have the exclusive right to issue paper money in Germany and obliged to keep a gold reserve of 33.33%, mostly in foreign banks. Germany should fulfil its reparation obligations from the ordinary annual budget, railway bonds, and industrial debentures. Payments should be linked to an ‘index of prosperity’ and the German tax burden should be at least as heavy as that of the Allies. The Dawes Report further recommended that the German railways system (Reichsbahn) should be transformed into a joint stock company and German industry should receive 800 million gold marks of mortgage bonds as a loan from the Allies, predominantly the United States, to increase investments and stabilize the economy. While the Dawes Report did not set any fixed amount of total reparations, Germany was supposed after a transitional period of two years to pay 1.25 billion gold marks per annum from the revenue side of the budget, 660 million gold marks from railway bonds, 300 million gold marks from industrial debentures, and 290 million gold marks from transport taxes, in toto 2.5 billion marks per annum.

C.  The London Conference (1924)

At the London Conference, held from July until August 1924, an international treaty based on the Dawes Report was adopted. The Final Protocol of the London Conference of 16 August 1924 (‘London Agreement’) included an agreement between the German government and the Reparation Commission which secured co-operation, and an agreement between the German and the Allied governments which gave unlimited discretionary power to the Transfer Committee and instituted an arbitral commission to settle disputes (see Arbitration). German customs boundaries which had been created after the occupation of the Ruhr area were removed and an amnesty clause was agreed on all crimes relating to the occupation.

On 30 August 1924 Germany issued the Bank Act, creating the Reichsbank as an organization independent of the German government with an exclusive right to issue paper money (Reichsmark), a capital of 300 million Reichsmarks in gold or foreign exchange, and a board consisting of six non-Germans (one each from Belgium, France, Great Britain, the Netherlands, Switzerland, and the United States), and seven Germans. The reserves of the Reichsbank were to be 40% and a foreign commissioner was entrusted with supervision. At the same date the Reichsbahn became a joint stock company which was authorized to issue debenture bonds worth 1.1 billion gold marks and empowered to collect a transport tax. The railway employees continued to be government civil servants. A railway commissioner was to be responsible for the safeguarding of reparations and was empowered to decree increases in tariffs if such were necessary. Finally all industrial companies which had a capital of more than 50,000 gold marks were required to take out a first public law mortgage in the amount of 5 billion gold marks, of which 20% fell upon heavy industry, 17% on machine and electrical industries, 8% on the chemical industry, 7% on the textile industry, and the rest on other industries and businesses. Entrepreneurs had to issue debentures and place them at the disposal of a trustee. Provisions were made for payments to be temporarily suspended if they appeared likely to jeopardize the stability of the Reichsmark. While all reparations were to be controlled by the Reparation Commission in Paris, an American Agent-General for Reparation Payments in Berlin was entrusted with day-to-day administration.

The London Agreement was considered as being effective from 1 September 1924. A few days before, in response to progress at the London Conference, the French Government had withdrawn occupation forces from Offenburg and Appenweier. In October, the German currency was stabilized with an American-backed German External Loan of 800 million gold marks which could be sold quickly with considerable profit at the international stock exchanges and thus reduced the immediate burden of reparation payments. Occupation of the Ruhr District ended in August 1925.

D.  The Young Plan (1930)

As it had become apparent a few years later that the capital requirements of the German economy had been vastly underestimated due to runaway inflation, negotiation[s] with Germany were resumed by Belgium, France, Great Britain, Italy, Japan, and the United States. On 20 January 1930 the Dawes Plan was replaced by the Young Plan which converted the German reparation debt from a political into a commercial obligation and divided the entire debt into 59 annual payments, which, in contrast to the provisions of the Dawes Plan, were no longer linked to an index of prosperity. The annual payments were fixed at an average of 2.05 billion Reichsmarks (including the cost of servicing the Dawes Loan) until 1956, to be followed by 1.65 billion marks until 1988. International control of Reichsbank and Reichsbahn was terminated. Germany waived existing claims relating to property or pecuniary rights of prisoners of war and all other claims which the German Government had presented or might present for its own account. The Bank for International Settlements (BIS) in Basle was founded and became the reparations agency. In accordance with the policy of commercializing the reparation debt, the creditor States were asked to release all political control, special securities, pledges, and charges which they still held under the Dawes Plan. The Reichsbank Act was amended accordingly, the Railway Commissioner was replaced by a German and the industrial debentures extinguished. A US$ 300 million Young Plan Loan was issued which gave the German government an option to use one third of its proceeds for economic investments. A US$ 125 million loan had recently been negotiated with the Swedish Match Company and Kreuger and Toll of Amsterdam.

Yet German obligations were impossible to meet in the global economic depression following the Wall Street crash of 1929 and its catastrophic consequences for the German economy. Both foreign credits and German payments were discontinued. On 1 July 1931 a moratorium for German payments was authorized by President Hoover. An agreement to suspend World War I reparations was reached at the Lausanne Conference in 1932, but rejected by the United States Congress in December 1932, as France and the United Kingdom were tying their own conference pledge to a cancellation of their debts to the United States. With Hitler’s takeover of power in January 1933, the system of joint review collapsed and no further payment nor transfer of goods was made before 1945 (see also National Socialism and International Law).

E.  Conclusion

Under the strict control system of the Dawes Plan, Germany soon regained international economic reputation and turned into a most profitable and secure investment place. The foreign bonds of the Dawes Plan Loan facilitated investments, increased co-operation under international standards, and thus helped reforming the German economy and winning back international confidence. Difficulties arising with respect to foreign exchange could not be prevented altogether, but as a result of Germany’s foreign loans there was always sufficient foreign currency in hand. Exports of heavy industry products lost their key role for the country, as raw materials were soon replaced by machines, engine building, precision mechanics, optical industry, electronic technology, and chemical products. This development led to an increase by 50% of German production from 1924 to 1928. The Young Plan brought further political and economic advantages for Germany, but also an increase of foreign debts for which in the years of political and economic instability at the decline of the Weimar Republic no sufficient solution was reached.

10  After World War II (see History of International Law, since World War II) the Federal Republic of Germany expressly accepted liability for the outstanding pre-war debt of the German Reich. A new settlement in the context of reparations after World War II was established with the London Agreement on German External Debts (1953) (‘1953 London Agreement’). The gold clause, which had been the main protective device of the Young Plan Loan, was replaced by the following protective clause in Art. 2 (e) para. 2 Annex I A 1953 London Agreement:

Should the rates of exchange ruling any of the currencies of issue on 1 August, 1952, alter thereafter by 5 per cent or more, the instalments due after that date, while still being made in the currency of the country of issue, shall be calculated on the basis of the least depreciated currency (in relation to the rate of exchange current on 1 August 1952) reconverted into the currency of issue at the rate of exchange current when the payment in question becomes due.

After the revaluations of the Deutsche Mark (‘DM’) in 1961 and 1969 a dispute arose concerning the calculation of the outstanding amounts due in respect of the sums advanced under the Young Plan Loan. It was settled in an arbitral reward of 16 May 1980 (‘Young Loan Arbitration’) which concluded that the disputed clause was applicable only against formal devaluations and the two revaluations of the Deutsche Mark did not bring this clause into action, as none of the other currencies of issue had their par values readjusted at the same time.

11  It is impossible today to state the overall amount of German World War I reparations ultimately settled. All relative payments and transfers are now part of the settlement after World War II—which has caused Germany enormous efforts over many decades. The loans connected with the Dawes and Young Plan were repaid by 1980 in accordance with Art. 4 1953 London Agreement (341 million DM for Dawes bonds, 990 million DM for Young bonds, 200 million DM for Kreuger bonds); also the remaining mortgage for the years 1945–52 (40.2 million DM for Dawes bonds; 175.8 million DM for Young bonds; 23.4 million DM for Kreuger bonds), which had been postponed under the 1953 London Agreement, is fully settled since 2010.

12  While reparations under the Versailles Peace Treaty remain an important example of State practice concerning issues of State responsibility for war damage, the lessons to be learned from the Dawes and Young Plans cannot be generalized, except for the principle that international co-operation based on ‘justice, fairness and mutual interest’, as Charles G Dawes had put it, is essential for the success of any peace process.

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