IV. THE DAWES AND YOUNG PLANS 
The US Senate failed to ratify the Treaty of Versailles in March 1920. The official stumbling block was the famous Article X, requiring that signatories join the League of Nations and agree to join in wars declared by the League. If Woodrow Wilson had not been incapacitated by a massive stroke, he might have been able to push the bill through or find an acceptable compromise. But it would have made little difference. The country was thoroughly sick of wars, of international intrigues, of Bolsheviks and socialists, and of war profiteers. A year later, Harding and the Republicans took over the White House on the promise of returning to “normalcy.” Europe and its travails be damned, not least because they were stiffing us on their war debts.20
European chanceries abounded with hard feelings toward America. Yes, the almost-too-late war entry by the United States had saved their bacon, and yes, the United States had provided loans to the Allies equivalent to a full quarter of annual prewar US GDP. That behavior was a sharp break from America’s wary “no entanglements” policy, which dated all the way back to the founders. The intervention against the Germans was considered a one-off thing, caused by German attacks on US shipping. Now that the war was over, America’s priorities were to clean up its financial books, squelch inflation, develop reasonable arrangements to collect on its loans, and get back to business. The average congressman was oblivious to or didn’t care that much of the war lending had been recycled right back home, where it had fueled a mighty expansion of the United States’s already formidable production apparatus. Or that the economies of all the belligerents had contracted during the war, except for that of the United States, which had grown half again larger. Or that the United States also controlled more than 40 percent of the world’s monetary gold and was a cynosure for much of the world’s “safe-haven” money.21
The usual story is that “Uncle Shylock” would not be moved, as epitomized by then-Vice President Calvin Coolidge’s famous dismissal of loan forgiveness: “They hired the money, didn’t they?” In reality, America’s elite bankers and businessmen understood that Europe’s finance and trading systems had to be returned to working order, post haste. As Strong had written to Treasury Secretary Andrew Mellon, “The financial advantage of collecting the debts is a consideration of minor importance to the country,” compared to the benefits of a broad stabilization of major country monetary regimes. Despite his image as a conservative fossil, partly based on a years-later comment by Herbert Hoover,* Mellon had spent a lifetime in international finance, and was finely tuned to its nuances.22
Hoover, then the commerce secretary, and Charles Evans Hughes, the secretary of state, were quietly pushing for more American involvement in Europe’s problems, and Hughes floated the idea of having a purely private “committee of experts” come up with some solutions. Montagu Norman, the head of the Bank of England, who had developed a good working relationship with Schacht and was particularly close to Strong, favored the idea. Raymond Poincaré, the French prime minister, whose ministry was still bogged down in the Ruhr invasion, was also desperate for practical solutions.
The challenge was how to shake some money loose from the Americans without the official involvement of the administration or Congress. America’s private-sector investment banks could readily raise the required amounts from commercial investors; the problem was how to provide unimpeachable security in the absence of a US guarantee. The banks, led by J. P. Morgan with support from Kuhn, Loeb and Company, Dillon, Read and Company, and other American investment banks, were willing to try, with guidance from a committee of experts along the lines suggested by Hughes. The Coolidge administration gave a quiet nod of permission for American bankers to participate, and Morgan’s Lamont was made point man.23
Neither the United States nor Great Britain was especially enamored of reparations, taking their cue from Keynes’s best seller, The Economic Consequences of the Peace, with its dire predictions of the chaos that would follow enforcement of reparations on the scale approved by the 1921 London schedule. That arrayed the Anglo-Saxons against the French and Belgians, who had absorbed by far the greatest part of human and economic damage from the war, and who had most counted on reparations to finance their recovery. The French economy had enjoyed surprisingly good economic returns in the early 1920s but had hit a wall by 1924.24
The experts’ committee members were officially advisers to the Reparation Commission.* Their remit was to develop a workable plan that was acceptable to investors, to speed a German recovery, and to achieve reasonable justice for the countries that been devastated by the German invasions. The committee had ten members and was chaired by Charles G. Dawes, a former Chicago banker who had served in France as a brigadier general with the American forces and had been the US budget director in the Harding administration. He was the perfect frontman for the delicate negotiations that lay ahead, because he had no difficulty in ignoring reporters—or roaring at them to get out of his way. The brains of the committee, however, was Owen D. Young, forty years old and already the chief executive of both General Electric and the Radio Corporation of America. The committee was filled out by two Englishmen, two Frenchmen, two Italians, and two Belgians.
The Americans held the balance of power on the committee, because everyone understood that nothing could happen without additional money, which could come only from American bankers. As Jack Morgan put it, he had no views on politics; his profession was “merely interpreting sentiment in financial markets”—in other words, he couldn’t sell bonds unless they were backed by sufficient collateral and other provisions to secure the promised returns. The British naturally allied themselves with the Americans. One of the British members, Josiah Stamp, was a shopkeeper’s son who had gotten a first in economics as a part-time student at the London School of Economics, went on for a PhD, became an expert on taxation and incomes, a prominent businessman, and director of the Bank of England. In 1938, he was elevated to a peer of the realm as the first Baron Stamp. The report of the committee was drafted primarily by Young, working closely with Stamp on technical issues.25
Dawes and Young led the negotiations with the principals, mostly leaving the details of the bond indentures to Lamont. Since the British were at one with the Americans on almost every question, Dawes and Young focused on the French and Germans. Dawes had made many powerful friends in France during his wartime service, and was fluent, so he handled the French side. As a senior GE executive, Young had long interacted with the top ranks of the German industrialists, most of whom agreed to support at least the spirit of the undertaking. The leading German industrial magnate, however, Hugo Stinnes, was an important holdout. Stinnes was a near-legendary figure in Germany, with massive holdings in coal and coke, iron and steel, and much else, all supported by wide-ranging global trading and financial interests, the kind of figure that inspired classic Timeese:
Hugo Stinnes. Crafty, potent, indurate, Herr Hugo Stinnes, coal magnate, multimillionaire, present “All-Highest” of Germany.… His aim is the control of the European steel industries, and, like all mysterious figures who move in the no-man’s-land of international politics, he stands to win whichever side comes out on top.
As Young and Stinnes wound up a discussion that had carried into the wee hours, Stinnes pronounced himself “still unconvinced.” Young shot back: “It is not for me to convince you, but rather you to convince me, as a Report is going to be made quite regardless of the attitude of any person or even the whole group of industrialists.” The magnate got aboard the next day, after Young agreed to a minor technical clarification.26
There was a final flap over the committee’s failure to set a definitive reparations number, which greatly irritated the French. The Germans complained almost as vociferously, but it was a pose—they had every interest in delaying the fixing of a number, so as to gain more time to whittle it down. The Americans and British refused even to make an attempt, given the recent chaos in the German economy—insisting in effect that the Dawes process would establish the boundaries of the possible and desirable, which would later inform a final settlement.
The Report of the First Committee of Experts to the Reparation Commission was released on April 9, 1924. It is a superb piece of work—calm, lucid, comprehensive, and fair. Benjamin Strong, after reviewing it at Young’s request, wrote that it was “a masterpiece of ingenuity.” The most telling accolade, however, came from Keynes, the violent critic of the whole idea of reparations. He wrote in The Nation and Athenaeum on April 12:
The report is the finest contribution hitherto made to this impossible problem. It breathes a new spirit and is conceived in a new vein. It achieves an atmosphere of impartiality, and exhibits scientific workmanship and sound learning. Though the language seems at times that of a sane man, who, finding himself in a madhouse, must accommodate himself to the inmates, it never loses its sanity.… [I]t is an honorable document and opens a new chapter.27
The preamble of the Report set the tone for the whole:
We have approached our task as businessmen anxious to achieve effective results. We have been concerned with the technical, not political problem presented to us.… The dominating feature of the German Budget is Germany’s obligation to the Allies under the Treaty of Versailles. We are concerned with the practical means of recovering this debt, not with the imposition of penalties.… [A]t the same time it is no ordinary debt with which we deal, for Germany suffered no appreciable devastation, and her primary obligation is toward those who have suffered so severely through the war.…
Finally convinced as we are, that it is hopeless to build any constructive scheme unless this finds its own guarantee in the fact that it is in the interest of all the parties to carry it out in good faith, we put forward our plan relying on this interest.28
Rather than attempt to compute Germany’s “capacity to pay,” Young looked for benchmarks from Germany’s peers. Unlike the other belligerents, Germany did not impose heavy taxes to finance the war, instead relying far more on borrowing. (The government had assumed it would win the war and would repay the debt by looting its victims.) So an obvious first step was “commensurate taxation,” bringing Germany’s federal taxes to the average rate of the Allied powers and devoting the increment to reparations. Then there was the opportunity created by the German hyperinflation, which had extinguished virtually all preexisting German bonds. With industry virtually debt-free, and with a modernized plant, there was room for a large issue of conservatively funded reparation industrial bonds. The final major source of funds would be the privatization of the national railroad system, the most modern in Europe. Privatization would entail large bond and stock issues, with the bond proceeds devoted to reparations, and stock proceeds going to the government. A few other cats and dogs, like a temporary transport tax that was made permanent, rounded out the package.29
The inducements for the Germans to sign on was money—specifically a $200 million gold loan, with the lead syndication by Morgan, and with the promise of a ready takeup by the financial markets. $100 million would create a healthy gold reserve for the Reichsbank, and the remainder would fund a cushion for the German transition to a balanced budget and any initial shortfalls in reparations. Since it would take time to establish the new taxes and sell the bonds, the reparation payments would be phased in. During the 1924–1925 fiscal year, no payments would be required. A payment of $300 million would be required in the second year, which would be ratcheted up in roughly equal steps to $625 million in 1929–1930, which would become a steady state, encompassing Germany’s entire annual obligation. In theory, those payments would extend for sixty-five years, but no one expected that this would be a permanent arrangement. The numbers all added up, and seemed well within the financial capabilities of the country. In the event of shortfalls, creditors had the right to apply the proceeds of specific sales and customs taxes to supply the deficiency.30
The plan took particular pains on the mechanics of payments. A special account would be set up in the Reichsbank, and all payments would be made to that account. The position of “agent-general for reparations” was created within the Reparation Commission, along with a transfer committee with five foreign members. The Germans were credited with the payments once they were deposited in the agent’s account, and the transfer committee directed the distributions with an eye for avoiding disruptions to international money markets. Funds could be accumulated within the account up to a limit, if necessary, and could also be invested in Germany, with securities issued to the reparation beneficiaries. The agent would also maintain a constant review of the German budget and spending practices, and would make an annual report on Germany’s financial and budgetary positions.31
Despite the accolades showered on the report, it still had to be approved by national legislatures. In Great Britain, the plan was adopted almost by acclamation. The French were stickier. Secretary Hughes made a tour of European capitals and leaned hard on the French, bluntly explaining that the Dawes plan was now “American policy. If you turn this down, America is through.” The Morgan-syndicated gold loan was obviously the main point of the Dawes plan, but the bankers worried that the political risk could kill the issue. The most fraught questions were the occupation of the Ruhr and the Rhineland. After much hard bargaining by Lamont, and reams of transatlantic cables, they accepted a French promise to withdraw from the Ruhr at the end of 1925—which was honored—and to shorten somewhat the period for the Rhineland occupation. The Morgans had considerable leverage of their own: they had floated a short-term $100 million note to tide the French over a budget crisis, which the French needed desperately to convert into a long-term loan. The price for that was signing off on the Dawes plan. A few days after the plan was finalized, the French were rewarded with a $100 million twenty-five-year bond syndication. Even the relatively inexperienced French prime minister, Édouard Herriot, carried the Parliament with little trouble.32 Lastly came the Germans. By then, the government strongly supported the Dawes plan, and each measure was carried by comfortable majorities. But the provision on railroad privatization required a two-thirds vote of the Reichstag, and the right-wing nationalist parties had enough votes to block it. It was finally passed after the chancellor, Wilhelm Marx, threatened to go to the country. The powers signed off on the plan on August 30. The loan went off successfully: American investors put up half the total, the British just under a quarter, and the French 6 percent, with the rest scattered through other European countries.33
The first permanent agent was S. Parker Gilbert, a lawyer in his early thirties and an assistant secretary of the treasury, universally conceded to be brilliant. The first few years of the Dawes plan almost justified the most extravagant hopes. German reparations were paid scrupulously. The major European nations all returned to the gold standard. The Germans effectively resumed gold payments once Schacht’s Reichsbank received the proceeds of the Morgan-led gold loan. By 1925, Germany’s national unemployment numbers had fallen from the very high levels of the immediate postwar period to well under a million—an estimated national rate of only about 4.5 percent, one of the best in Europe. Good feelings even spread to the point where Germany was admitted to the League of Nations by the Locarno Treaties in October.34
The good times, unfortunately, did not last. Part of the reason was the pervasive bad faith of the German statesmen and officers who participated in the postwar treaty implementation. For example, the Allies delivered the names of 895 men suspected of war crimes for trial in Germany. Very few trials were held, only twelve people were convicted, and only two, who had murdered women and children in lifeboats, received quasi-serious sentences of four years imprisonment each. They both escaped within two weeks and, allegedly, were never found.35
The German military ignored the Versailles disarmament mandates from the very start. Soon after the war ended, apparently without the government’s knowledge, they had reached agreements with the Soviets both to transfer weapons technology and to establish German factories in Russian territory producing arms for both nations. The French had good data on government-subsidized weapons research and development at Krupp plants. Even German industrial investment was concentrated in the large-scale machine tools, steel works, and heavy equipment needed to support future armies. German tractors got bigger and heavier to anticipate the production of new-generation tanks. “Flying clubs” proliferated through Germany, eventually enabling Hitler to miraculously create a German air force almost as soon as he took power. Police forces and the multiplying paramilitary organizations like the Free Corps, the Civil Guard, and the Home Defense were trained to full military standards. Hans von Seeckt, the senior military commander, and his subordinates openly mocked the feeble Allied efforts to control the pace of rearmament. In the mid-1920s, Seeckt claimed that he had a million men under arms, which was a gross exaggeration, but unsettling. Berliners joked about the worker in a baby carriage factory who stole an assembly to build one for his child, but it somehow always came out as a machine gun.36
The British government had detailed information on the German rearmament drive, but waved it off. Ramsay MacDonald said, “What can we expect? Would not we do the same thing here if we had been defeated, and… used with the same treatment?” The Royal Navy and Air Force busied themselves with planning defenses against French attacks on England. It was only the Army general staff that warned that Germany would “inevitably” clash with Great Britain, and that the German military would be “reconditioned, redisciplined, and thirsting for revenge” by 1935, when the last Allied troops would have withdrawn from the Rhineland.37
German financial ministers had a similarly dismissive attitude toward the payment of reparations. They became masters of playing off the British and the American bankers against the French, of winning early terminations of the Ruhr and Rhineland occupations, and in steamrolling the hapless Herriot to give up remedies against German reparation defaults. When Schacht arrived at the London conference where the final details of the Dawes plan were hammered into place, he cabled home with some delight that the British and the American bankers had imposed restrictions on the French protections that “almost go beyond the German claims.” For his part, Stresemann in private conversations always emphasized that the reparation agreements could never be enforced. The early year payments were manageable, he argued, and it would be to Germany’s advantage to act like a compliant power at first and to default when the later payments began to bite. Schacht had much the same view, and more than once noted that his objective was to cause reparations “chaos.”38
Altogether, a generous reckoning of German reparation payments, in cash and in kind, is about $5.5 billion, paid over the dozen years 1919–1931. It amounted to about 2.7 percent of German GNP over that span. Except for the first cash payment, all the rest was financed by loans that were never repaid. In stark contrast, the 5 billion gold franc reparations imposed by Germany on France at the conclusion of the Franco-Prussian War of 1870–1871 was fully paid off in only three years, or two years ahead of time. The French did it by mustering essentially all their national savings, and pushing down internal consumption to boost exports and repressing imports. War reparations may always be a bad idea, but given that history, one can sympathize with the French point of view.39