Dawes Plan

The Dawes Plan is the 1924 agreement that rescheduled Germany's First World War reparation payments, stabilised its currency after the hyperinflation of 1923, and arranged an international loan to restart its economy. It was drafted by a committee of experts chaired by the American banker Charles G. Dawes, signed in London on 16 August 1924 and took effect on 1 September 1924.

The plan did not reduce the total that Germany owed under the reparations bill of 1921; it changed how and when the money would be paid. It sits between the original Treaty of Versailles settlement and the Young Plan of 1929, which replaced it. It is a central case in the history of war reparations and in the story of how American lending became tied to European debts in the 1920s.

Imagine someone who owes a huge debt, has lost their job and has seen their savings become worthless. The lenders have even moved in to seize the furniture. A mediator steps in and says: stop taking the furniture, give the debtor a new bank account, lend them some money to get back on their feet, and set up a repayment plan that starts small and grows as their income recovers. An independent trustee will watch the payments.

That is the Dawes Plan. Germany was the debtor, France and Belgium had occupied its industrial heartland, and its money had collapsed. The plan gave Germany a new, stable currency, a foreign loan and a payment schedule it could manage, with foreign oversight to reassure the creditors.

In 1921 the Allied Reparation Commission fixed Germany's liability at 132 billion gold marks. Germany fell behind on deliveries, and in January 1923 French and Belgian troops occupied the Ruhr, Germany's main coal and steel region. The German government backed passive resistance by paying striking workers, financing the cost through monetary financing, and the mark collapsed into one of the best-known episodes of hyperinflation. A temporary currency, the Rentenmark, halted the collapse in late 1923, but a lasting solution needed agreement on reparations.

In late 1923 the Reparation Commission appointed two committees of experts. The main one, chaired by Dawes, had two members each from Belgium, France, the United Kingdom, Italy and the United States; the second American member was Owen D. Young. It presented its report in April 1924.

• Rising annuities. Payments started at 1 billion gold marks in the first year and rose to a standard annuity of 2.5 billion gold marks from 1928 to 1929. No final total or end date was fixed.
• Secured revenues. The payments were backed by bonds of the German state railways, debentures on German industry, and specified taxes and customs duties.
• The Dawes loan. An international loan of 800 million gold marks, about USD 200 million, was raised for Germany; roughly half was sold in New York through a syndicate led by J.P. Morgan.
• A reformed central bank. The Reichsbank was reorganised under a new banking law, made independent of the government and given a board with foreign members, and the Reichsmark became the new currency.
• Foreign supervision. An Agent General for Reparation Payments, the American S. Parker Gilbert, oversaw the payments from Berlin, and a transfer committee could hold back transfers that threatened the stability of the mark.

As part of the settlement, France and Belgium agreed to withdraw from the Ruhr, which they completed in August 1925.

The plan worked for about four years, largely because American investors lent heavily to German governments, cities and companies after the Dawes loan restored confidence. Germany paid reparations to Britain, France and the other Allies, who used part of the money to service their own war debts to the United States. The result was a circular flow: American capital moved to Germany, reparations moved to the Allies, and debt payments moved back to the United States.

That circle depended on continued lending. It showed how reparations, sovereign default risk and international bonds were bound together, and how the reparations problem was also a balance of payments problem: Germany could only pay creditors abroad if it earned or borrowed foreign currency. When American lending fell away from 1928, the arrangement came under strain.

Dawes shared the 1925 Nobel Peace Prize with Austen Chamberlain, and he served as Vice President of the United States under Calvin Coolidge from 1925 to 1929. Supporters credit the plan with ending the Ruhr crisis, giving Germany a stable currency and opening the period of relative calm in Europe in the mid-1920s.

Critics on the German right attacked it as an infringement of sovereignty, because foreign officials sat inside German institutions. Economists have since argued that it postponed the reparations question instead of settling it, and that it made Germany dependent on short-term foreign credit. It was replaced by the Young Plan in 1929, which set a final total, ended foreign supervision and created the Bank for International Settlements; payments were then suspended by the Hoover Moratorium in 1931 and largely cancelled at Lausanne in 1932. The bonds from the Dawes and Young loans were finally dealt with under the London Agreement on German External Debts of 1953, signed for West Germany, whose currency by then was the Deutsche Mark.

• Office of the Historian, US Department of State: The Dawes Plan, the Young Plan, German Reparations, and Inter-allied War Debts
• The Nobel Prize: Charles G. Dawes, Facts