Versailleslolfinal.pdf

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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.

1 Ruth Henig, Versailles and After, 1919-1933 (Hoboken: Taylor and Francis, 2006), pp.1,28. 2 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/treaty-versailles?page=4 (Accessed November 10th, 2014) 4 Gordon Martel, Origins of the Second World War Reconsidered. (Hoboken: Taylor and Francis, 2002), p. 1.

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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.

5 Sally Marks, ‘Mistakes and Myths: The Allies, Germany, and the Versailles Treaty, 1918–1921’, The Journal of Modern History, Vol. 85, No. 3 (September 2013), pp. 632-659. 6 Ibid. p. 636.

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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 Mantoux’s 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

7 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.

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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.

9 Patrick O'Brien, ‘The Costs and Benefits of British Imperialism 1846-1914’, Past and Present, 120 (1), pp. 178-180.

10 Hans Christian Heinemeyer, ‘Quantitative Studies on European Economic Integration Between 1880 and 1939’ (Dr.Sc., Free University of Berlin, 2012), pp. 44-65.

11 Albrecht Ritschl, ‘The pity of peace: Germany's economy at war, 1914–1918 and beyond’ in Stephen Broadberry and Mark Harrison (eds.) The Economics of World War I, (Cambridge University Press, 2005), p. 47.

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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?

12 Jaroslav Sodomka, P’oválečná hospodářská krize ve výmarské republice a Dawesův plán’ (Ph.D., University of Economics, Prague, 2008), p. 48.

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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

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

14 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.

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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 Germany’s 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 Germany’s 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

15 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.

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

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

18 Ritschl,"WAS SCHACHT RIGHT?” Reparations, the Young Plan, and the great depression in

Germany, p. 11.

19 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.

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

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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. 23

Figure 1.4 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

21 Unknown author, ‘The executioner awaits’, Simplissimus, (3 June 1919). 22 Unknown author, ‘Clemenceau the Vampire’, Kladderadatsch. (July 1919). 23 Ritschl, The German Transfer Problem, 1920-1933: A Sovereign Debt Perspective, p. 7.

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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 1980’s.’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 Germany’s 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

24 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

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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 1924-

1929 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

29 Ritschl, The German Transfer Problem, 1920-1933: A Sovereign Debt Perspective, p. 8. 30 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.

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Germany had a debt at 100% of GDP33, unheard of in the early 20th century,

and dangerously high even in today’s 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

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

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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 1920’s.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 1920’s, 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.

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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 1980’s 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

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

Economic and Social History), p. 26 39 Laurence Whitehead, ‘Latin American debt: an international bargaining perspective’, Review of International Studies, 15 (1989), pp. 231-249.

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Debt Agreement gives important clues as to how Versailles could and

perhaps should have been structured.40

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

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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. 81-96.

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, 1918–1921’, 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, 1914–1918 and beyond’ In: Stephen Broadberry and Mark Harrison (eds.) The Economics of World War I: Cambridge University Press, 2005.

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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. P’oválečná hospodářská krize ve výmarské republice a

Dawesův plán’, 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. 337-

365.

Whitehead, Laurence. ‘Latin American debt: an international bargaining

perspective’, Review of International Studies, 15, 1989. pp. 231-249.