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In Versailles and After Henig makes a series of bold claims.

The thrust
of her argument is that the Versailles treaty was not excessively harsh, and
that its failure was due to a lack of political will on the part of the victors, as
opposed to intrinsic problems with the treaty itself.1 This essay will briefly
introduce the basic background and traditional historiography on Versailles,
assess the territorial and economic fairness of the treaty, and conclude that
whilst fair territorially, Versailles was a gross injustice not only on Germany,
but on Europe as a whole primarily due to reparations.

In the immediate aftermath of Versailles, empowered by the work of


Keynes, mass media, and a frenzy of guilt, citizens and historians alike
adjudged Versailles to be excessively harsh, as Germany did not have
capacity to pay, reversing the pre-treaty feeling of anger towards Germany
as evidenced in figure 1.12 and 1.2.3 The initial view was tainted by a lack of
available evidence, and by the immediacy of all involved. It focussed almost
entirely on capacity to pay, isolating fairness as an economic question. This
could be compared to early historical analysis on WW2, before the thought
provoking work of AJP Taylor caused many aspects to be re-examined.4 In
the latter part of the 20th century the first wave of serious revisionism emerged
backed by the excellent but dated economic analysis of Etienne Mantoux.
Ruth Henig, Versailles and After, 1919-1933 (Hoboken: Taylor and Francis, 2006), pp.1,28.
Will Dyson, Peace and Cannon Fodder illustration, The Daily Herald, May 17 1919. From The
British Cartoon Archive, http://www.cartoons.ac.uk/group/treaty-versailles?page=4 (Accessed
November 10th, 2014)
3 David Low, Perhaps it would gee up better if we let it touch earth illustration, The Star, Jan 24
1921. From The British Cartoon Archive, http://www.cartoons.ac.uk/group/treatyversailles?page=4 (Accessed November 10th, 2014)
4 Gordon Martel, Origins of the Second World War Reconsidered. (Hoboken: Taylor and Francis,
2002), p. 1.
1
2

Historians reviewed the documentation, including previously unavailable


sources, and concluded that reparations could have been paid, but Germany
simply chose not to do so, and the Allies chose not to enforce it. 5 Versailles
was compared to the treaties of Brest-Litovsk,St-Germain, and Trianon, noting
those treaties were far harsher.

Figure 1.1

Figure 1.2

Additionally it was argued that Germany was justly defeated,


rendering reparations fair. The cause of the economic crisis was attributed to
German belligerence and non-compliance. It was concluded that Versailles
was not overly harsh, observing that Germany had not paid much in total by
1933, and could have worked had the Allies had the political willpower to
enforce it. Keynes work is repainted as populist propaganda, which further
dampened prospects of enforcement.6 Whilst deeply ensconced, these views
are analytically problematic; partly because they rely on the idea of political
will for enforcement, which in hindsight is not a credible counterfactual.

Sally Marks, Mistakes and Myths: The Allies, Germany, and the Versailles Treaty, 19181921,
The Journal of Modern History, Vol. 85, No. 3 (September 2013), pp. 632-659.
6 Ibid. p. 636.
5

Additionally war is won on military and economic strength, not justice, and in
the modern world justice does not include the spoils of war. Like previous
generations, who had focused almost solely on Versailles as an economic
question, using outdated Keynesian methodology; the new wave framed it as
a political question, all but completely ignoring the economic aspects. This
was in part due to historians lack of understanding or interest in economics,
and the implicit acceptance of Mantouxs work as gospel.

Recent research recognises the work of prior historians as foundations,


whilst exploring Versailles in a new light fusing the economic question with the
social and political.7 Whilst the social and political impact of Versailles is of
great importance, it cannot be taken in isolation from the economics, just as it
cannot be considered a purely economic question as Keynes proposed. This
essay will therefore focus on what can be ascertained empirically, in an
attempt to discover whether Versailles was excessively harsh from a
multidisciplinary standpoint.

Territorially, as a result of Versailles, Germany lost the gains she made


from Brest-Litovsk, all overseas colonies, around 13% of economic
productivity and land, 10% of her population, and 40% of her merchant
shipping vessels. She was also severed from East Prussia by the Polish sea
corridor, and had military limitations imposed. 8

Albrecht Ritschl, Sustainability of high public debt: what the historical record shows, Swedish
Economic Policy Review, 3 (1) (1996), pp. 175-198.
8 Henig, Versailles and after, 1919-1933, p. 27.
7

However, many of these losses were in fact economically


advantageous as the administration of empires in the early 20th century was
becoming increasingly less profitable. 9 Moreover, Germany lost virtually none
of her core territory. Additionally, as fighting had mostly been in French
territory, German production and economic output was virtually unaffected by
war, unlike France who suffered devastation to her most productive regions. It
has been documented that even as German forces marched home from
France, they destroyed key economic production facilities.

Territorial loss did not substantially affect trading, elicit protectionism or


have other undesirable effects of lost land. Lines had been drawn as much as
a quarter of a century before in line with ethnic and nationalistic feeling, and
codification of borders was just that: it did not affect trade substantially. 10 In
actuality the only two territorial clauses that were substantially harmful to
Germany were the loss of her merchant shipping fleet, and the severance with
East Prussia.

Figure 1.311 shows German GNP was not substantially affected by


territorial loss, even before 1924 when money was endogenous. Whilst
territorial loss lowered actual GNP, per capita GDP was higher by 1923 than
in 1913, even before the Dawes plan came into effect.
Patrick O'Brien, The Costs and Benefits of British Imperialism 1846-1914, Past and Present,
120 (1), pp. 178-180.
9

Hans Christian Heinemeyer, Quantitative Studies on European Economic Integration Between


1880 and 1939 (Dr.Sc., Free University of Berlin, 2012), pp. 44-65.
10

Albrecht Ritschl, The pity of peace: Germany's economy at war, 19141918 and beyond in
Stephen Broadberry and Mark Harrison (eds.) The Economics of World War I, (Cambridge
University Press, 2005), p. 47.
11

It is evident that although the German people may have harboured


resentment and humiliation over the terms of the treaty, the loss of their
empire, and the loss of some territories, the territorial aspects of Versailles
were not excessively harsh. Indeed, the dismembering of the military, the loss
of colonies, and the loss of remote administrative regions can be considered
economically beneficial to Germany, leaving the country in a stronger position
relatively than in 1913.12

The economic facet of Versailles is more complex. Were reparations


set at a level that Germany a) had the ability to pay politically and socially
given the limits of international coercion b) had the capacity to pay
economically?

Jaroslav Sodomka, Povlen hospodsk krize ve vmarsk republice a Dawesv pln


(Ph.D., University of Economics, Prague, 2008), p. 48.
12

It can be assumed that the desired reparations amount for any nation
(including Weimar Germany) is zero. However, imposing nations would not
agree to this, and would attempt to enforce the maximum payments possible.
Hence we can say that x > 0, where x determines the maximum reparations
and debt service a nation is capable of paying. If r is reparations and d is
commercial debt, in almost all circumstances, r+d x. This answers the
maximum that Germany could pay, whatever the demands of the allies, x was
limited by sovereign debt theory. Sovereign debt theory also elucidates that
outright default of debt would be sanctioned, and the likely result of debt
overhang is partial payment. 13

Until late 1920, Germany was in a position to pay substantial


reparations, backed by strong tax edicts. However when news of larger than
expected reparations surfaced, Germany encountered a true tax boycott,
supported by regional tax collection offices.14 Thus the vehicle for reparations
payments ground to a halt, as x was substantially lowered. Erzberger
resigned, and Germany entered a period of hyperinflation, likely intentionally
to avoid reparations. By 1923 tensions over reparations had exceeded French
patience, who along with Belgium, occupied the Ruhr ostensibly due to a

Albrecht Ritschl, The German Transfer Problem, 1920-1933: A Sovereign Debt Perspective, CEP
Discussion Paper 1155 (July 2012), p. 7.
13

Albrecht Ritschl, Reparations, Deficits, and Debt Default: The Great Depression in Germany,
Working Paper 163/12, (LSE 2012),
http://www.lse.ac.uk/economicHistory/workingPapers/2012/WP163.pdf, p. 5.
14

minimal default on timber delivery. 15 Passive resistance continued with the


government sponsoring idle workers, which in effect charged hyperinflation
even more, and limited the profitability of occupation. This period
demonstrates the limitations of enforcement; even military occupation, with all
its associated costs, cannot guarantee high repayment of reparations. France
learned this lesson once more in 1945-1948 when occupying Germany16 as
did the Soviets in East Germany.17 Ritschl notes that completely defaulting on
reparations also does not work, due to the social and welfare implications for
the debtor nation, and the optimal amount is simply what it takes to avoid
punitive measures. 18

Reparations were not Germanys only problem. Pre-1924, when


x < r, it was nigh impossible, for obvious reasons, to attract an influx of foreign
credit as x could not cover commercial debt service due to reparations, which
had primacy in debt repayment.19 Thus with 26% of Germanys exports going
to the allied powers, at a lower than market price due to trade protectionism20,
coupled with decreased production due to passive resistance and quantitative
Theo Balderston and Maurice Kirby, Economics and Politics in the Weimar Republic (New
Studies in Economic and Social History). (United Kingdom: Cambridge University Press, 2002), p.
22.
15

Albrecht Ritschl, "WAS SCHACHT RIGHT? Reparations, the Young Plan, and the great depression
in Germany, (Universitat Pompeu Fabra and CEPR, 1996), p. 11.
16

Rainer Karlsch, Allein Bezahlt: Die Reparationsleistungen Der SBZ/DDR 1945-53, (Berlin: C.
Links. 1993)
17

Ritschl,"WAS SCHACHT RIGHT? Reparations, the Young Plan, and the great depression in
Germany, p. 11.
18

Balderston, Economics and Politics in the Weimar Republic (New Studies in Economic and Social
History), p. 20, 28; Ritschl, Reparations, Deficits, and Debt Default: The Great Depression in
Germany, P. 6.
19

Balderston, Economics and Politics in the Weimar Republic (New Studies in Economic and Social
History), p. 32
20

easing policy, inflation soared. Technically speaking, Germany could have


raised taxes as opposed to raising funds, but with the general attitude in
Germany at the time (see figure 1.421 1.522), and the stab in the back myth,
there was a very real probability that this would have resulted in regional tax
boycotts and a more toxic environment. Additionally inducing economic crisis
served notice to the allies that reparations were too harsh, insulated Germany
from the 1920/1921 slump, and exploited her remaining foreign creditors.

Figure 1.4

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Figure 1.5

Throughout the period, the core of German fulfilment policy was to


prove that capacity to pay question was outside the realms of possibility, and
to revise the treaty. In reality capacity to pay was a function of the relation

Unknown author, The executioner awaits, Simplissimus, (3 June 1919).


Unknown author, Clemenceau the Vampire, Kladderadatsch. (July 1919).
23 Ritschl, The German Transfer Problem, 1920-1933: A Sovereign Debt Perspective, p. 7.
21
22

between allied enforcement and German compliance, and the financial


markets assessments of them. In purely economic terms, considering tax
burdens, the A and B bonds relative to GDP was less than that imposed on
British peasants in 1821.24 However considered relative to transfer burden,
the annuity equated to around 60% of exports25 or b = (i- n)r/(1+n)X26 ; well
above the tolerable maximum in the debt crisis of the 1980s.27 Regardless,
nobody has seriously accused Germany of attempting to pay the maximum,
but the treaty itself had limited reparations to capacity to pay.28 This posed
intrinsic problems, given the effects of sovereign debt theory intimated above.
It would always be in Germanys interest to limit her capacity to pay. Thus in
a sense, with the insertion of the capacity to pay clause, the essence of the
treaty was bankrupted from the outset.

The Dawes plan was initiated in response to German inability to pay


reparations in 1924, partly so that the allied powers could continue servicing
their war debt to the USA, and partially to stabilize the German economy.
Aside from a loan to Germany, the Dawes plan had one extremely important
facet. It added transfer protection, giving debt seniority to commercial

Balderston, Economics and Politics in the Weimar Republic (New Studies in Economic and Social
History), p. 26
25 Ibid.
26 Let b be the burden of exports required to pay reparations. Let I be the real interest rate. Let n
be growth rate of GNP. Let r be reparations debt. And let X be exports. Note that due to
aforementioned export rate exploitation issues and covert exports the formula will not be exact,
but will roughly balance out.
27 S.B. Webb, Latin American debt today and German reparations after World War I A
comparison, Weltwirtschaftliches Archiv (1988)., p. 751.
28 Balderston, Economics and Politics in the Weimar Republic (New Studies in Economic and Social
History), p. 26
24

interests on foreign exchange surplus.29 Reparations were essentially


reduced to junior debt. Thus a paradox ensued whereby Germany was able to
attract a large influx of foreign capital and use it to service the reparations
debt. It was so pivotal that money actually became exogenous in the 19241929 period, whilst Germany paid her reparations debt entirely through
commercial loans, primarily from American investors. Schuker aptly labeled
this period American reparations to Germany,30 whilst Streseman called it
dancing on a volcano. The reparations agent constantly complained about
new capital investment in this period; swimming pools, stadia, social housing,
and notably an expensive electric railway that was the envy of Europe.
However this cannot be taken to mean Germany had a large surplus. Ritschl
characterises the period well with: the result of re-optimization will always be
an attempt to smooth out consumption over time, and that even without the
volcano, there still would have been some dancing. 31

German policy was premeditated; as early as 1924 a foreign office


memorandum was circulated stipulating The more credit we can take in, the
less we will have to pay out in reparations.32 By 1929, when the allies
realised they had no choice but to renegotiate the Dawes plan with the Young
plan, commercial debt had reached 30% of GDP, much of it enshrined in short
term options, whilst the A and B reparation bonds still amounted to 70%. Thus

Ritschl, The German Transfer Problem, 1920-1933: A Sovereign Debt Perspective, p. 8.


Stephen Schuker. American Reparations to Germany, 1919-33: Implications for the Third World
Debt Crisis. (Princeton, N.J: Princeton University International Finance Section, Department of
Economics, 1988)
31 Ritschl,"WAS SCHACHT RIGHT? Reparations, the Young Plan, and the great depression in
Germany, p. 8.
32 Ibid. p. 14.
29
30

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Germany had a debt at 100% of GDP33, unheard of in the early 20th century,
and dangerously high even in todays terms. We can look to the Greece 2008
crisis and current world to evaluate what it would have been like for Germany,
without global commercialization or debt culture. Streseman wagered on
intentionally provoking such a transfer crisis, in the hope of cancelling
reparations debt.34 Subsequently the Young plan and global economic
catastrophe occurred, short-term credit was recalled, and the economy
spiralled, before a reparations moratorium was issued and the NSP came to
power. Reparations were then cancelled altogether, signalling the complete
collapse of the Versailles treaty.

The treaty of Versailles was not the result of Carthaginian peace. Had
it been, any problems could have been resolved with rude force.35 Some
conclude there was no will to enforce Versailles, whereas in actuality it was
completely unenforceable. France, the country who fashioned the punitive
clauses of the treaty, had the least means to enforce them. The USA, the one
country that could possibly have done so, showed no interest in doing so from
the outset.36 The treaty included multiple clauses that made no economic
sense, as Keynes pontificated, and were designed to be purely punitive in
nature - a political solution. The Dawes plan, which effectively allowed
Germany to run a huge ponzi scheme for years, was either the result of
naivety and being outsmarted by Germany, or more likely the recognition of

Ibid. p. 5.
Ibid. pp. 19-20.
35 Ritschl, The German Transfer Problem, 1920-1933: A Sovereign Debt Perspective, p. 18.
36 Ibid. p. 18.
33
34

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the USA that they needed to get rid of the B bonds and a calculated gamble.
The gamble failed, and depression ensued. Without the Dawes plan, the
same result would have occurred, but in the mid 1920s.37 (See Figure 2).
Keynes cannot be absolved entirely of blame however, because although he
may have been correct economically, his propaganda ironically postponed the
collapse of the settlement. Had it occurred in the mid 1920s, such tragic
consequences would likely not have occurred.

Reparations and therefore the economic consequences of Versailles


were undoubtedly excessive, unenforceable, and foolish. There is no credible
counterfactual where political will could have been exacted throughout the
Weimar period to force payment of reparations, as was consistently proven by
Germany: it was not in her capacity to pay prior to the Dawes plan. The
counterfactual hypothesis that political pressure could have been applied to
increase tax has been addressed briefly in this essay, but overall would have
been imprudent to apply anyway. Any trade surplus run would have directly
37

Ibid. p. 18.

12

had exports competing with Allied interests.38 There is nothing remotely


approaching a credible counterfactual for Germany having any capacity to pay
during the Young Plan. The reparations gamble had already been won, albeit
at huge political cost.

Thus insistence by the USA on war debts being paid leveraged


pressure onto Germany and other central economies through Versailles.
Specifically reparations and commercial trade protectionism severely impeded
post war European recovery. Initially Germany did not have the capacity to
pay, whether self engineered or not. During the Dawes plan, Germany had
the capacity to pay, and did so, albeit running a huge Ponzi scheme to do so.
Under the Young plan, obviously Germany did not have the capacity to pay.

The salient point to take from Versailles is that it is imprudent to extract


large financial reparations from a powerful state, and attempting to do so
causes instability and economic setback, not just for the state, but for the
system as a whole as subversive practices are employed to limit payment.
The LSC sovereign debt in the 1980s showed that even non-reparative
sovereign debt from weaker nations is a tricky beast.39 On a final note,
Feldman makes an excellent point that comparing Versailles to the London

Balderston, Economics and Politics in the Weimar Republic (New Studies in


Economic and Social History), p. 26
38

Laurence Whitehead, Latin American debt: an international bargaining perspective, Review of


International Studies, 15 (1989), pp. 231-249.
39

13

Debt Agreement gives important clues as to how Versailles could and


perhaps should have been structured.40

Gerald D. Feldman. The Reparations Debate, Diplomacy & Statecraft 16, no. 3: 487-498 (2005),
pp. 497-498.
40

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Selected Bibliography
Balderston, Theo, and Maurice Kirby. Economics and Politics in the Weimar
Republic (New Studies in Economic and Social History). United Kingdom:
Cambridge University Press, 2005.
Feldman, Gerald D. Feldman. The Reparations Debate, Diplomacy & Statecraft
16, no. 3, 2005. 487-498.
Fischer, Conan 'The human price of reparations' in 'After the Versailles treaty.
Enforcement, compliance, contested identities'. In: After the Versailles Treaty.
Enforcement, Compliance, Contested Identities. Routledge, London, 2009. pp. 8196.
Heinemeyer, Hans Christian, Quantitative Studies on European Economic
Integration Between 1880 and 1939 Dr. of Science Dissertion, Free University of
Berlin, 2008.
Henig, Ruth. Versailles and After, 1919-1933, Hoboken: Taylor and Francis, 2006.
Karlsch, Rainer. Allein Bezahlt: Die Reparationsleistungen Der SBZ/DDR 1945-53.
Berlin: C. Links, 1993.
Marks, Sally. Mistakes and Myths: The Allies, Germany, and the Versailles
Treaty, 19181921, The Journal of Modern History, Vol. 85, No. 3, September
2013.
Martel, Gordon. Origins of the Second World War Reconsidered. United States:
Taylor & Francis Inc, 2004.
McNeil, William. American Money and the Weimar Republic. United States:
Columbia University Press, 1986.
O'Brien, Patrick. The Costs and Benefits of British Imperialism 1846-1914, Past
and Present, 120 (1), August 1988.
Ritschl, Albrecht. Sustainability of high public debt: what the historical record
shows, Swedish Economic Policy Review, 3 (1), 1996. pp. 175-198.
Ritschl, Albrecht. The pity of peace: Germany's economy at war, 19141918 and
beyond In: Stephen Broadberry and Mark Harrison (eds.) The Economics of
World War I: Cambridge University Press, 2005.

15

Ritschl, Albrecht. The German Transfer Problem, 1920-1933: A Sovereign Debt


Perspective, Discussion Paper 1155. CEP,July 2012.
Ritschl, Albrecht. Reparations, Deficits, and Debt Default: the Great Depression in
Germany,CEP Discussion Papers dp1149, Centre for Economic Performance, LSE,
2012.
Ritschl, Albrecht. Albrecht Ritschl, "
WAS SCHACHT RIGHT? Reparations, the Young Plan, and the great depression in
Germany, Universitat Pompeu Fabra and CEPR, 1996.
Schuker, Stephen. American Reparations to Germany, 1919-33: Implications for
the Third World Debt Crisis. Princeton, N.J: Princeton University International
Finance Section, Department of Economics, 1988.
Sodomka, Jaroslav. Povlen hospodsk krize ve vmarsk republice a
Dawesv pln, Ph.D. Dissertation, University of Economics, Prague, 2008.
Webb, S.B. Latin American Debt Today and German Reparations after WW1 - A
Comparison.Weltwirtschaftliches Archiv, 1988.
White, Eugene. Making the French pay: The costs and consequences of the
Napoleonic reparations. European Review of Economic History, 2001. pp. 337365.
Whitehead, Laurence. Latin American debt: an international bargaining
perspective, Review of International Studies, 15, 1989. pp. 231-249.

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