War Reparations and Germany’s 1952 Debt Reduction Plan

This is in addition to the huge sums that Germany owes Greece.

Posted on Global Research
Committee for the Abolition of Third World Debt
5 March 2015
by Oscar Ugarteche

The largest debt problems in terms of GDP faced in financial history have belonged either to the United States or to European Governments. Large debt problems in developing and emerging nations have usually stemmed out of a drop in GDP size due to a fall in export earnings and a rise in interest rates. The reason is that creditors stop lending at a certain point and start restructuring existing debt which leads to debt growth but it is not really new lending. In major nations, lending goes on as the strategic reason for borrowing has normally been justified: a war. As a result, the leading debt reduction and innovative management schemes are related to these.

Contrary to the impression generated by extensive works on the Latin American and African debt, it is the under researched European and US historical debt that must be looked into in order to understand some historical solution patterns to debt problems. Current European very high debt levels (over 90% of GDP) are due partially to accumulated current account deficits of over 3% of GDP for over a decade plus the cost of bank rescues in 2009-2010 plus some countercyclical policy costs. Greece has additional debt due to major infrastructure works. It entered the Euro with a high debt level (around 100% of GDP) but the total GDP amount shrunk 33.3% from 55,318 million euros to 36,866 million euros in constant terms between 2007 and 2013 as a result of austerity policies. |1| If GDP had remained stagnant, the index would be 131% and not 174.9% and rising.

Historically the debt that arose from the Confederate States of the United States was not recognised by the US Federal Government and was subject to complicated negotiations with British private bondholders until the late 1920’s when it was finally agreed that it would not be repaid. (Corporation of Foreign Bondholders, First Annual Report of the Council, London, February, 1904 and Fifty Seventh Annual of the Council, London, 1930) What was agreed finally in the League of Nations was that State debts have always to be guaranteed by the National Governments in order for creditors to be able to collect their debts.

The debt discussion revived after WWI, as the European war was financed locally in each country and internationally by the United States from 1915 onwards. This implied two things: first, the UK borrowed from the United States and onlent to third parties; and secondly the warring countries additionally borrowed directly from the US. At the end of the war this had to be solved somehow in order for those countries to recover growth. This is dealt with in H. Fisk’s The Inter Ally Debts. An Analysis of War and Post War Public Debts. New York, Banker’s Trust, 1924. Germany was not able to float bonds in New York after the War was declared so they only borrowed in Marks and dealt with through hyperinflation that did away with most of its value in 1922-1923.

Another aspect of the German debt was the introduction of reparation payments that although just from an ethical point of view, were extremely large for the economic capacity of the country as Keynes pointed out in his Economic Consequences of the Peace. According to Professor Albrecht Ritschl |2| from the LSE Germany managed to keep afloat borrowing money from the US during the 1920’s. The two largest loans are the Dawes Plan and the Young Plan but there were other loans adding up to 840.7 million dollars in 1939. The Young Plan contained massive debt reduction. Reparations payments were never met in full in the 1920’s and were suspended in 1932. They were reinitiated in 1990 without any readjustment in value after the reunification. The last quota was paid in 2010. |3|

In October 1929, U.S. President Hoover, under pressure from US academia, announced the creation of a Hoover Year that was meant to restructure debts payments due from July 1, 1931 to June 30, 1932, into ten yearly quotas. The mechanism would be in place as long as it was needed. The object was to relieve the UK from its payments to the US and to transfer this benefit on to the other allies that in turn would transfer them to German reparations. This relief was later eschewed by Chancellor Hitler who, after winning the elections, declared a debt cease payment in June 1933.

After WWII, in May 1951 a tripartite commission was formed by the US. UK and France in order to discuss post war and pre war debts. All creditors met in London in July 1951 to see what to do with the German debts and the solution proposed by Germany and widely accepted by the US and UK was that as Germany was divided into two, the debt would have to be divided equally and only 50% of the total public debt would be negotiated. Reparations would not be restored until after reunification. The other half would be left for negotiations also after the reunification, someday.

The Tripartite Commission announced that they were prepared to make important concessions in terms of the amounts and priorities of their claims some referred to post war assistance (1945-1951), making it clear that post war debts were conditioned by satisfactory and equitable agreement on pre-war debt. The amounts owed in 1939 were: 840.7 million dollars, 51.5 million pounds and 2,775.2 million French Francs, to name the debts of the leading three creditors. In 1939 constant US dollars the equivalent would be 206 billion dollars.

This plus the debt to the other 67 countries was reduced first by 50% and then the remaining 50% was reduced by half and made payable over a 25 year period (1953 to 1979). More interestingly, when the German unification finally came about, The German Federal Government demanded that the winning countries (of WWII) do not place a debt burden on the defeated countries, I.E. on East Germany. If they had respected the 1953 London agreement it would have meant recognising the other 50% of the debt and doping something with it. Instead, Germany was given a massive debt reduction in exchange for restoring reparations payments without any adjustment in value.

The German people should be grateful and remember the massive debt reductions and the concessional terms it received in time of need and despair after World War II. No one at the time either in the US, UK nor France, to name the three largest creditors, said “the taxpayers were unwilling to bail out those people.” History serves a purpose and we should all learn from it.

Source : Alainet

Oscar Ugarteche, a Peruvian economist, is the Coordinator of the Observatorio Económico de América Latina (OBELA), IIE-UNAM, Mexico – www.obela.org. Member of the SNI/Conacyt and president of ALAI. His most recent book is Arquitectura Financiera Internacional: una Genealogía de 1850-2008, México DF., IIEC-UNAM, 2014. 392pp. The material presented here uses that source except when stated otherwise.



New Greek leadership takes action; will Greece leave the Euro?


  • Why was the German post-WWII debt repayment structured in a completely different way than that of Cyprus and Greece?
  • How much pressure was exerted by corporations such as Ford, GM, IBM, ITT, Coca Cola, and banks on the German debt repayment structure so that their investments and income were not lost?
  • Does Germany have a special status politically with the European elite? Is it a country “too big” or “too important” to fail?
  • Will Germany repay their debt to Greece?

Greek Exit from the Euro!
By Andreas C. Chrysafis
Global Research, February 14, 2015

There is a serious political and economic clash going on deep inside the chambers of the EU. The newly elected Tsipras government has triggered a tsunami that may not be so easily contained. The northern states dominated by Germany and braced by the ECB have now also regressed to blackmailing tactics. What they feared the most is about to happen; a battle has ensued between David and the mighty Goliath – everyone knows the end result! It may also cause a domino effect over other member-states and that’s the worst nightmare facing the EU institution.

All eyes are directed at the new charismatic young Prime Minister Alexis Tsipras and his unorthodox Finance Minster Yianis Varoufakis. A Greek Revolution of the Mind has sprung into action. Immediately since taking office the Greek government, has forbidden Troika to return to Greece and cancelled the selling off of the Piraeus Ports to private investors. That shocked the Eurogroup.

The Greek nation had had enough of Troika’s failed austerity measures and it was decided in Athens that economic colonization through the suffering of the Greek people could no longer be tolerated under any terms.

Unless Greece renegotiates and restructures the unsustainable Troika loans, it will be impossible to repay it and the nation will remain in debt for generations to come. Greece’s request to renegotiate Troika’s terms was a wise move but was rejected by the Eurogroup. Exacerbating tension between the two camps, the Greek government also decided not to adopt further EU sanctions against Russia.

That did not go down well either. But one thing is for certain; the government of Greece is no longer prepared to play ball and be dictated to by a group of unaccountable and unelected EU Troika bankers at the expense of the people and its integrity as a free democratic nation.

Knowing its limitations and economic strength, Tsipras’ government behaved responsibly in wanting to re-structure the country’s debt within the boundaries of the EU. The refusal of assistance by the Eurogroup but especially by Germany came of no surprise. Actually Germany should have behaved much better because after WW2, it also faced a similar situation. Instead, it chose to behave appallingly against Greece.

In fact Germany faced total bankruptcy from the strains of the Second World War but the Allied nations came to its rescue with a grand master plan; a plan that was based on a different school of thought on how to help a country out of debt.

The London Agreement on German External Debts known as the 1953 London Debt Agreement was established as an Agreement that in fact set a precedent for debt relief for poorer economies.

This Debt Relief Agreement negotiated by the Western allies (Britain, the USA, France and bankers) provided an inspired master plan to help Germany recover financially rather than to destroy it completely. The idea behind the plan prescribed was that a country; is more likely to repay its debts through economic recovery rather than economic suppression and stagnation!

For Greece (and Cyprus for that matter), the EU-Troika did precisely the opposite. It destroyed its economy; robbed people’s bank accounts (bail-in); caused massive recession; suppression; shut down banks; raised taxation and triggered massive unemployment. Troika’s economic rescue plan was actually based on economic colonization and its success depended, on firstly destroying all hope of recovery for the ultimate control.

Compare what the Allied Debt Relief Agreement did for Germany with what Troika’s Mnimonio rescue plan for Greece (and Cyprus) has done, and a contrasting picture emerges; one that shows double standards and sinister motives!

Analytically, Germany’s debts after the war amounted to 38.8 billion marks and the Agreement signed on 27 February 1953 reduced the debt to 14.5 billion, which amounts to a 62.6% reduction. The repayment period was also stretched out over 30 years and allowed Germany to postpone some payments until such time as re-unification. It was decided that the burden of servicing the entire debt if not reduced, meant that the German economy stood: little chance of a recovery!

The philosophy behind the Agreement was a masterpiece of the road to recovery, and it worked wonders. First and foremost, the Agreement provided that Germany was able to pay its external debt while maintaining a high level of growth and improving living standards of its population. In fact, it meant that they were allowed to pay back the loan without getting poorer. That was a superb piece of economic strategy that could only benefit both parties!

To achieve this, creditors agreed to help Germany in a number of positive ways such as but not limited to:

Reduce importation to assist and manufacture at home those goods that were formerly imported (equally helping with job-creation); creditors agreed to reduce their own exports to Germany; supported and purchased German exports to restore a positive trade balance; the debt service/export revenue ration, was not to exceed 5% and depended on how much the economy could afford; debt re-payment would derive directly from export revenue income; the Agreement also contained the possibility of suspending payments while conditions were re-negotiated in the event of reduced available resources. On the 3rd of October 2010 the last payment was made with 69,9 million euros. This payment was considered to be the last one to its creditors.

This is the kind of formula necessary for economic recovery and not Troika’s austerity, which destroys nations and reduces citizens to poverty. With the help of a hard working population Germany has become one of the most economically powerful and influential countries in Europe.

Compare what Troika’s rescue plan did for Greece, and it becomes obvious that the Resolutions (Mnimonios) introduced were never meant to restore economic recovery and growth like the 1953 London Debt Agreement did for Germany; they were geared to dominate through debt dependency.

In fact under the terms of the 1953 London Agreement on German External Debts, Germany owes the Greek people 476 million reichmarks ($14 billion) that Greece was forced to give Nazi Germany during its occupation. If 3% interest had been accrued over 66 years, the loan corresponds in today’s terms to $93 billion. The Tsipras government is now demanding that money back and if successful, it certainly would open up Pandora’s box for Germany.

If things remain unchanged, Greece will never be in a position to repay its crippling debt but will only enter into a deeper crisis. The annual interest payments alone (in billions) on a 350 billion debt would keep the nation in utter poverty and that’s precisely what the new government wants to avoid.

Equally, one can reasonably ask: what happened to all those billions borrowed? Where did it all go? Certainly it did not go to improving public services, the infrastructure and hospitals or to making people affluent and living with dignity. In fact the majority of those funds borrowed went straight back into the coffers of German and EU banks to bail themselves out at the expense of citizens. It is reported that less than 10% of the bailout money borrowed ever reached the people; that is what modern economic colonization does to poorer nations!

The new government recognized this and for the first time ever an elected government decided not to follow the footsteps of its predecessors who failed the people of Greece miserably.

A well-organized exit from the Euro currency and return to the Greek drachmas cannot be discounted. In fact it would be a wise decision because Greece will then determine its own exchange rate to help its economy grow free from EU constraints. As an EU member state, the UK did not adopt the Euro currency so why not Greece or Cyprus for that matter!

Actually, exit from the Euro may be more beneficial in the long run. However, there are various conflicting theories made by economists of a Euro exit but they all agree on one thing: that exit from the Euro, would not be easy but not impossible. The final word however, whether to retain the Euro or not, rests with the Greek people under the terms of a referendum. With transparency, well-informed citizens, can make well-informed decisions and the decision whether to retain the Euro or not, belongs to the people and not to a temporary government.

Out of the ashes of despair, Greece will rise up again and will succeed. It will do so because the nation’s dignity has been restored with thousands of people flooding the streets of Athens, Salonika and major cities to endorse their support for the new government. Unquestionably, a nation that has the full support of its people it will never fail.

However, there are certainly clouds looming on the horizon for both nations but on the positive side, Greece may be the catalyst to bring about changes for the better and that hope may also spread to Cyprus – we sure hope so for Cyprus’ sake!

Andreas C Chrysafis
Author – Writer – Artist