Economics and The Public Welfare

Chapter 15

The Dawes Plan

The Reforms Needed. It was clear enough to informed students of economics and international finance what Europe and the United States needed to do to get things straightened out, long before the Ruhr crisis came. The elements in the problem were the following:

1. Reparations payments had been set far too high. They had to be reduced to magnitudes within the power of the German people to pay and to magnitudes that the German people recognized they could pay. It was necessary that they should be arrested entirely for a time, or almost entirely, and that a schedule should be established under which reparations payments could rise as Germany’s capacity to pay increased.

2. The debts of Britain, France, Italy, and Belgium to the United States, and of France, Italy, and Belgium to Great Britain, were likewise of a magnitude that looked pretty hopeless in the early postwar years. Indeed, the debts of the Continental countries to the United States and Britain were obviously greater than could be paid in full, even if a long schedule of payments were arranged. The British, as we shall see in our chapter dealing with the intergovernmental debts, made a settlement with us in which they asked for and received very moderate concessions on June 19, 1923. For several years the other debts made very little of a problem for the foreign exchanges, as no payments were made and we contented ourselves with allowing interest to accrue. But it was obviously necessary, if these countries were to enjoy private credit, that the question of their debts to the United States Government be adjusted in a sound way.

3. All the Continental belligerents, victors and vanquished, had unbalanced budgets, and were borrowing and spending far more than the tax revenues collected; and all of them had currencies which, lacking gold redemption and increasing steadily in volume, were fluctuating violently and depreciating rapidly. There was great need for the balancing of budgets and for the stabilization of currencies with gold.

4. As a means of facilitating the balancing of budgets and the stabilization of currencies, there was need of financial aid from the strong creditor countries. This should take the form of new loans, the proceeds of which were to be taken partly in gold, to build up the reserves of the banks of issue. These new loans would assist the financially stricken countries in reorganizing their finances, and above all, enable them to cease borrowing from the central banks of issue and ruining their currencies.

5. Finally, it was obviously necessary, if international credits were to be of any use or were ever to be repaid, that the movement of goods from country to country must be facilitated, that tariffs must be lowered, quotas or other trade barriers be removed, and that the men having bank balances in one country be free to dispose of them in the foreign exchange markets without encountering governmentally created difficulties.

Tying Foreign Loans to Internal Reforms. There was a great deal of discussion of these matters, much of which was summarized in the Conference on European Rehabilitation at the Institute of Politics at Williamstown, Massachusetts, in August of 1922. This conference ran through about four weeks, and in the course of it there was a round-table discussion participated in by Mr. Paul D. Cravath, Mr. Paul Warburg, Mr. David Houston, former Secretary of the Treasury, and the present writer.

Much of the discussion hinged on the “vicious circle” that currencies could not be stabilized until budgets were balanced, but that budgets could not be balanced while currencies were depreciating. Europeans proclaimed their inability to make financial reforms unless the United States would make loans. Americans declared that the loans could not be made until the Europeans instituted the reforms. The answer was that we could straighten out this tangle by making one comprehensive settlement. Since budgets, currencies, reparations, foreign loans, and Inter-Allied debts were all so intimately related, it followed that we should tie them together in one comprehensive settlement.1

Mr. Warburg insisted that this was not politically feasible, that it was impossible to get things done simultaneously, that the best that could be hoped for was to bring them about piecemeal. However, it was possible to accomplish many of them simultaneously, if not for all countries at once, at least for each of the Stricken countries one by one. In particular when the question of foreign loans arose, the creditor was in a position to impose adequate requirements for internal reform upon the country which was receiving the credit, and investment bankers who acted as intermediaries in placing such loans with their own investors had an obligation to do this.

Austrian Loan Tied to Internal Reforms. The following year, 1923, it proved possible to do precisely this for Austria. The crown had depreciated to 14,000 to 1, and Austria was ready for anything that would get her out of the morass. Under the auspices of the League of Nations an international loan was arranged. The loan was issued in various currencies and placed in the markets of many different countries. The total was approximately $126,000,000 (nominal value), of which $25,000,000 (at a discount of 10%) was placed in the United States. London, Paris, Amsterdam, and even Italy took part. This loan was guaranteed by Great Britain, France, and Czechoslovakia to the extent of 24 1/2% each, by Italy to the extent of 20 1/2%, by Belgium 2%, Sweden 2%, Denmark 1%, and the Netherlands 1%. This guarantee applied to all of the loan except a small part which, instead of being placed with the public, took the form of advances by the Swiss and Spanish Governments.2 Austria agreed to rigorous conditions. She was to stabilize her currency on the gold basis. She was to submit to an adequate measure of foreign supervision of her finances.

Hungarian and Polish Loans. A similar rescue party was organized for Hungary. The creditors sent Mr. Jeremiah Smith of Boston to sit in a position of authority in Hungary, countersigning checks and passing on the use of the funds for which the loan was made while the reforms were being carried through. The sum 3 here was a good deal smaller, about $50,650,000. It was enough. The same thing was done for Poland in 1927 when the Honorable Charles S. Dewey left the United States Treasury to perform a similar service. The amount of $72,000,000 sufficed for Poland.4 Great sums were not required to stabilize a country when internal financial reforms were insisted upon in connection with the loan, and it was not difficult for the finance minister of an embarrassed country to persuade his people to submit to the necessary reforms when the outside help could thereby be obtained.

All three of these loans worked. All three of them stabilized the currencies. All three of them set the countries going in industrial activity again.

Dawes Plan Ties All Elements of Problem Together. The Dawes Plan for Germany in 1924 was based on the game principle. The Dawes Plan in principle undertook to tie all the elements together in one comprehensive settlement, and to create a framework under which Germany’s economic life could revive, and under which it was to Germany’s interest to pay as much as she could. By the end of 1923 Germany was desperate and was ready for anything. And France was convinced that from the standpoint of her own financial interests a radical change of policy was necessary.

A great international committee was created of so-called “experts” representing officially the governments of Great Britain, France, Italy, Belgium, and Germany, and representing unofficially the Government of the United States. The American representatives of this committee were General Charles G. Dawes, later Vice-President of the United States, Mr. Owen D. Young, head of the General Electric Company, and Mr. Henry M. Robinson, President of the First National Bank of Los Angeles. More “expert” still were men like Colonel Leonard P. Ayres and Professor E. W. Kemmerer, who assisted the nominal “experts.” Expert also was Sir Josiah Stamp of England.

The Committee, in its report, set its problem in very clean-cut terms: how can the German budget be balanced and German currency be stabilized while providing for adequate reparations payments? They proposed a plan to solve this problem, emphasizing that the entire plan was based on the assumption that the fiscal and economic unity of Germany would be restored, and that economic activity would not be hampered by political or military control.

Foreign Loan. A foreign loan of 800 million gold marks (roughly $200,000,000) was to be provided for the establishment of a new bank of issue for currency stabilization, and for the first year’s reparations payments.

New Bank of Issue. A new bank of issue was to take over the assets and the liabilities of the Reichsbank, which included a substantial amount of gold. It was to get additional capital subscribed in Germany and abroad. It was to be privately owned and free of government control, though it was to be the fiscal agent and depository of the German Government. It was to be administered by a German President and a German Managing Board and supervised in large matters affecting creditor nations by a board of seven Germans and seven foreigners, one of the foreigners being the Bank Commissioner.

Currency Stabilization. A gold reserve of 33 1/3% was to be maintained by the bank and the bank’s notes were to be redeemed in gold. The report of the Committee, however, stated that the Committee believed that conditions would be unfavorable to immediate redemption at the inception of the bank.

American Participation in Loan Conditioned on Immediate Gold Payments by Bank. This last point in the Committee’s report represented a reluctant concession by the American members to the British, the French, and the Italians. The Italians and French were sentimental about it. It was not fair that Germany should have the gold standard while they themselves did not have it. The British were not themselves ready to return immediately to the gold standard, and their idea was that Germany should go to the sterling standard, and that then they would take care both of sterling and of Germany.5

This aroused emphatic protests in the United States.6 In point of fact, however, the new bank did immediately begin gold payments. There is adequate reason to believe that the Department of State informally made it clear that American participation in the proposed Dawes Plan loan to Germany would not be regarded favorably by the American Government unless Germany went immediately to the gold standard. And American participation in the loan was, of course, essential to the success of the plan.

The plan involved an interesting allocation of sources of revenue for the payment in marks of reparations, and these included not only taxes but also first mortgages placed on the German railways and the German industries excepting agriculture.

Transfer of Payments Out of Germany. The plan made a sharp distinction between payments by the Germans in marks, and the transfer of these marks into foreign currencies for payments to the creditor governments under reparations accounts. The Germans performed their obligations fully when they turned over marks in proper amount to a Transfer Committee, which was to consist of the Agent General for Reparations Payments and five experts in foreign exchange and finance. It was then the business of the Transfer Committee, representing the creditor governments, to get the money out of Germany if they could.

Safeguards Under the Dawes Plan. Reparations funds in marks were first of all to be deposited by the Transfer Committee in the Reichsbank, and then they were to sell these marks as they could. But they were not to sell them in the foreign exchange market if they thereby endangered the stability of the mark in the foreign exchanges. The protection of the mark from depreciation and the protection of the exchange rates was the problem of the new Reichsbank, over which the Allies kept adequate supervision; the problem of the agent of the Allies, namely the Transfer Committee; and the problem of the Allied Governments, which framed their own commercial policy with reference to the admittance or the exclusion of German goods.

It was provided that not more than 2 billion gold marks should accumulate in the new Reichsbank to Transfer Committee account. The Transfer Committee might accumulate an additional 3 billion marks without transferring it, but was obliged to invest this sum in German industries. The plan, moreover, provided that if after the accumulation reached 5 billion marks it was impossible to withdraw from Germany the full amount of Germany’s annual payments, then Germany’s payments in marks should be proportionately reduced. In addition the Transfer Committee had the power by a two-thirds vote to suspend accumulations in Germany before reaching the 5,000,000,000-mark limit, if its members should decide that such an accumulation was a menace to the economic situation in Germany or to the interests of the creditor nations.

Abandonment of Safeguards in Young Plan of 1929. These were significant safeguards. It was the abandonment of these safeguards, under the Young Plan of 1929 which succeeded the Dawes Plan, that was responsible for the collapse of Germany in 1931. Had the Dawes Plan been left alone, and properly administered, it would have accomplished its purpose.

Safeguards Gave Priority to Private Credits Over Reparations. These safeguards, though they did not in terms give priority to private credits to Germany over the reparations payments, did in fact give priority to private credits. The private creditor would have no obligation to protect the German exchange rates. He would get his payments whether this put the mark below the lower gold point or not. Reparations payments could only be transferred if the exchange rate were not thereby endangered.

Without this priority for future private credits Germany could not have received the private credits which were later granted to her. The Dawes Plan explicitly stated that one of its purposes was to restore Germany’s foreign credit.

The Schedule of Reparations Payments. For the first year, the fiscal year 1924-1925, reparations payments were to be I billion marks. None of this was to come from the budget of the German Government. Two hundred millions of it was to come from interest on the German Railway bonds and 800 millions of it was to come from the foreign loan. For subsequent years increasing amounts were to come from German sources. The total was to rise to 1200 million marks in the fiscal year 1926-1927, to 1750 million marks in the fiscal year 1927-1928, and to reach the “standard years” payment of 2,500,000,000 marks in the fiscal year 1928-1929.

How Could Foreign Loan Supply Both Gold Reserve and Reparations? The question naturally arises as to how the loan of 800 million marks could simultaneously provide a gold reserve for the Reichsbank and be used in making payments on reparations account. The answer is not difficult. The German Government, receiving the loan in gold, was to turn it over to the new Reichsbank, receiving in exchange a deposit credit against which it could draw for payments in marks inside Germany. These payments financed the “deliveries in kind” of goods, including coal and other commodities, which were to be turned over to the creditors under reparations. These creditor countries were to get their money through the sale of the goods. This put no burden on mark exchange. The plan called for substantial payments in kind and provided also an ingenious device whereby merchants in foreign countries and merchants in Germany might deal with one another, with the payments being made by the foreign merchants to their own governments, and the payments being made to the German exporters by the German Government.

Schedule of Reparations Too High. The one great defect of the Dawes Plan was that the schedule of reparations payments was put too high, though, as indicated above, safeguards provided for the correction of this if it should later turn out to be true.

It is believed that in the conference which preceded the assembling of the nominal “experts” in Paris (the conferences among the real economic experts rather than the political experts) there had been reached an agreement by which the peak of payment should not exceed 1800 million marks. With the assembling of the nominal “experts” a much larger sum was talked about by one of them. The French, unable to resist the temptation, jumped at this vast figure. The result was a compromise at 2500 million marks, which was economically unrealistic, and which led to the unfortunate Young Plan of 1929, as a substitute for the Dawes Plan.

The Magic of Sound Money. The Dawes Committee knew very well that the plan could not work unless German industry and finance revived. But the Committee had no doubt that industry and finance would revive if sound currency were established, if men once more had money in which they believed and in which they could safely make contracts, and if freedom of private initiative were restored. The fact is, as we shall later see, that the inauguration of the Dawes plan brought to Germany an extraordinary industrial revival.

• 1This point will be discussed at length in Chap. 34.
• 2I have not been able to find that this article was ever published. However, the reader will find much of it in two books by Veblen: Imperial Germany and the Industrial Revolution, New York, 1915; and The Nature of Peace and the Terms of Its Perpetuation, New York, 1917.
• 3See my book The Effects of the War on Money, Credit and Banking in France and the United States, published by the Carnegie Endowment for International Peace, Oxford University Press, New York, 1919. For London, see the interesting articles by Mr. J. M. Keynes in the British Economic Journal in late 1914.
• 4O. M. W. Sprague: “Crisis of 1914 in the United States,” American Economic Review, September, 1915; H. G. S. Noble: “The New York Stock Exchange in the Crisis of 1914,” Garden City, N. Y., Country Life Press, 1915. These two papers are classics of permanent value.
• 5The figures of all the State and National banks and trust companies appear only once a year in the Comptroller’s report as of approximately June 30. For dates other than June 30, it is necessary to make estimates. During the war period these estimates are made on the basis of variation in the National Bank figures.
• 6War Industries Board Price Bulletin No. 3, Government Control Over Prices, by Paul Willard Garrett, assisted by Isador Lubin and Stella Stewart, Washington, Government Printing Office, 1920, p. 550.