Interbellum
Intergovernment Debt

A visual exploration

World War I (WWI) was one of the deadliest war and inflicted heavy costs and losses on some of the belligerents. Taxation only partially financed massive military expenditures. An important share of military expenditures and—in the post-war era—of reconstruction costs was financed through bilateral government loans. After the United States entered the war, it provided much of the needed financing, either directly through US Treasury advances or mediated through the United Kingdom. At the end of the war, the US and the UK were the only two net creditor countries. By then, Germany had accumulated very limited external debt.

Some interesting insights

WWI was the first war where the notion of war reparations was introduced to finance costs associated with inflicted losses. The losses were very different amongst countries. Human losses (and associated war pension costs) were particularly severe for Germany, France, Belgium, the UK. Belgium and France suffered the heaviest physical damages. In addition, Germany had destroyed large sways of industrial capacity in Belgium and the North of France, preventing effective competition with the Ruhr industries.

The amount of war reparations owed by Germany was to be negotiated taking several factors into account: (i) the estimation of physical costs; (ii) the possible inclusion of war-related pensions; (iii) Germany’s repayment capacity; (iv) linkages between the repayment of war reparations and of interallied debts; and (v) the existence of enforcement mechanisms for the repayment. Different perspectives and priorities among allied countries led to several rounds of negotiations over war reparations. Overtime, the lack of agreement on a substantial reduction of inter-related debt pave the way for bilateral defaults and contributed to the great depression.

Key milestones in the history of WWI-related bilateral debts include:

  • 1918—Armistice: the UK failed to convince the US to cancel war-related interallied debts on the ground it was political debt. The US considered it as commercial debt to be repaid in full.
  • 1919—The Versailles Treaty: no agreement was reached on the amount of war reparations. While Keynes and the US had argued for lower amounts that could be more easily repaid, the UK succeeded in including pensions. The Treaty included a provision to set up a war reparation commission to finalize the amount of war reparations. To enforce and guarantee peace, a security pact was agreed between France and the UK, but was withdrawn when the US Senate later rejected the Treaty.
  • 1921—The London Schedule: The war reparation commission settled in for an amount of 132 million German Marks with two series of bonds (the so-called A and B bonds) totaling 50 million German Marks issued immediately, and a third category of interest-free bonds (C bonds) in the amount of 82 million German Marks which were to be issued only when it could be shown that prior obligations could be met. The A and B bonds corresponded to what Keynes had regarded as a feasible maximum payment in 1919.

  • 1924-1929—The Dawes plan: After chaos caused from Germany’s hyperinflation, and evasion of reparation payments with led to the Franco-Belgian Ruhr occupation, Germany was placed under American receivership. For five years Germany paid reparations with American money that returned to the US as the UK and France used the reparations receipts to service their American war debts. This scheme was ultimately abandoned by the US.
  • 1929—The Young Plan: Germany’s debt was reduced significantly for the first 37 years, meeting part of the war debt payments to the US, and de facto linked to interallied war debt payments thereafter. Part of the payments were, however, made conditional to Germany’s budget stance.
  • 1932—The Lausanne treaty: Following the cessation of war reparation payments only one year after the signature of the Young agreement, and the subsequent irregular repayment of interallied debt, another attempt was made in Lausanne to substantially reduce interallied debts and war reparations, but was ultimately not ratified by the US. The rejection of the Lausanne agreement was compounded by Germany’s repudiation of Dawes and Young’s bonds, and ultimately caused a series of defaults in interallied debts.

An important dimension of discussions around debt amounts was related to discount rate assumptions since bilateral government loans were not securitized or valued in the market. Simulations show that different discount rate assumptions would have resulted in significant different outcomes, altering the balance in the discussions.

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