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The Rites Of Reparations

June 2024
5min read

One of my favorite quotations from Finley Peter Dunne’s inimitable bartender “Mr. Dooley” occurs when his friend Mr. Hennessy walks into the saloon just after the 1898 liberation of Cuba from Spain. “I see where th’ war is over,” says Hennessy, beaming. “The part y’see in the picture-papers is over,” says Dooley. “The tax collector will continue his part with relentless fury.”

Ah, that shrewd Mr. Dooley! I think about him in the aftermath of victory in the Persian Gulf when I read that the House of Representatives has just authorized spending $42.6 billion for the war—which is only an initial estimate of its cost. So the Internal Revenue Service will indeed carry on with its part of the affair for a long time.

The pill is sweetened by the pledges of various allies, since the start of the war, to contribute $43.9 billion in cash. That only means, however, that German, Japanese, Saudi Arabian, and other tax collectors will be furiously playing their roles too.

And tax collectors who serve whatever government survives in Iraq will be working even harder. This is because one of the conditions agreed to by the defeated Iraqis was to pay reparations and restitution for the damage visited upon Kuwait, a sum tentatively set at $80 to $100 billion.

There are historical precedents for trying to make the aggressor nation pay damages. Unfortunately they suggest that however strong the moral case for reparations may be, extracting them is neither simple nor risk-free.

Specifically, let us turn to 1919 and the mother of all reparation cases. (Sorry, the language of wartime has crept into my word processor and nested there.) The victorious Allies, in the Treaty of Versailles, demanded that Germany accept exclusive responsibility for causing the war and pay for “all the loss and damage to which the Allied and Associated Governments and their nationals have been subjected as a consequence.” Just what these sweeping terms covered was left to a reparations commission, which, in 1921, fixed the total bill at 132 billion gold marks. It was a gargantuan sum for the time, and the burden was magnified by the fact that the same treaty had stripped Germany of all its colonies and foreign assets, 90 percent of its merchant marine, and nearly a quarter of its coal-bearing lands.

The German government that received these crushing terms was the young Weimar Republic. Its leaders had overthrown the kaiser and the militarists, yet they found themselves punished no less harshly than unrepentant Junkers. Reparations payments were one more millstone that the Allies hung around the neck of a doomed German democracy.

Questions of justice aside, it was also evident that the German economy could not be simultaneously starved and milked. Yet Germany was allowed only six days to choose between agreement to the entire sum demanded or occupation of the industrially rich Ruhr Valley.

The United States, having rejected the treaty, was not a partner to these proceedings. But it was deeply bound up in the results, since the Allied governments owed American lenders some $11 billion, which they could (or would) repay only as they themselves collected reparations.

Germany, under protest, accepted the stipulated figure but almost immediately asked for a one-year moratorium, claiming that economic distress made it impossible to meet the first payments. Then came more requests for postponements, renegotiation, and loan assistance. The French became so outraged that in January of 1923 they went ahead and occupied the Ruhr. The Germans retaliated by a passive resistance campaign of strikes and slowdowns of miners, transportation and factory workers, and administrators, so no one got much of anything. Meanwhile, Germany slipped deeper into the disastrous inflation of 1923. It hit bottom in November when a dollar was worth 4.2 billion marks.

France charged that the German government deliberately created the chaos in order to plead poverty. Deliberate or not, the collapse got some results. A commission of experts reviewed the reparations situation. It was chaired by an American, Charles G. Dawes, a lawyer and financial expert who in 1921 became the first director of the United States Bureau of the Budget. The commission worked out a new plan whose basic elements were these: The French should get out of the Ruhr, Germany should reorganize its currency, replace the old worthless mark, and get a loan of 800 million gold marks (about $200 million), reparations should be financed in part by special taxes and by railroad and industrial bonds, and a new payment schedule should be set up of one billion marks a year for five years and 2.5 billion a year thereafter.

The Dawes Plan was finally accepted. It was a great success for Dawes. It helped him win the Vice Presidency in the 1924 election. It also netted his half of the Nobel Peace Prize for 1925 (with a co-winner, Britain’s foreign secretary). It even brought resumption of reparations payments for a time. But some modern critics note that the money came largely from Americans who bought German bonds and was then turned over to the Allies to pay their own debts to United States investors. This created a kind of monetary merry-goround chiefly profitable to bankers.

From Germany’s point of view, which carried more weight as it regained international standing, the plan had other serious flaws. It set no limit on how many years the payments would run and by inference therefore left the original huge demand of 132 billion gold marks untouched. Moreover, it gave foreigners too much power over Germany’s internal affairs. So another commission of experts was convened in February of 1929, again headed by an American. This time he was Owen D. Young, chairman of the board of General Electric, a director of the New York Federal Reserve Bank, and a co-author of the Dawes Plan.

The Young Plan, produced by this commission, tried to balance the nationalism and economic capacity of the new Germany against realistically enforceable demands. It called for annual payments that would rise slowly from 1.7 billion marks in 1929 to about 2.4 billion in 1966, then taper back down toward 1.6 billion and end in 1988. Foreign controls would be abolished. A Bank of International Settlements in which Germany participated would handle the money. And the creditors offered to reduce Germany’s bill even further—provided that the United States would write off part of the Allied war debt!

Skeptics might have thought this last suggestion another way to get Uncle Sam to assume more of the cost of the war. However, the whole issue was soon moot in spite of the Young Plan’s adoption by both sides. The Great Depression struck Europe in 1931 and forced the suspension of both reparation and debt payments. Then Hitler came to power in 1933 and repudiated Germany’s obligations under the Versailles Treaty. Finally, in 1934, the European nations in debt to the United States formally went into default (except for Finland, which paid its full installment every year and was routinely and pointedly praised by U.S. lawmakers as a shining example).

There are historical precedents for making the aggressor pay damages. But they suggest that the process is neither simple nor risk-free.

And so, little was collected at great social cost, and thus ended the World War I reparations story. That of World War II is simpler in one sense, yet too complex for facile summary. In essence the Allies, correcting the mistakes of Versailles, recognized that a Germany totally wrecked by total war could yield no significant cash payments. A basic decision was made in 1945, therefore, to turn over hard goods and physical assets to the countries that Hitler had ravaged, even to the point of dismantling and transferring whole factories. Supposedly that would have the added benefit of weakening Germany as a future threat.

But the policy was applied unevenly by four separate occupying powers. The French squeezed their zone hard for occupying cost and reparations. The Russians looted theirs with a will, though in fairness they had suffered the most at Germany’s hands. The United States and Britain were more inclined to resist reducing their German “subjects” to starvation and nakedness, especially since the U.S. had to be the chief supplier of relief.

Most of all, the beginning of the Cold War changed the reparations picture. For both the Soviet Union and the Western powers, the economic rehabilitation of “their” Germany began to assume first priority. By 1954 all further claims for reparations had been withdrawn. Wes,t Germany, at least, and former German Axis partners negotiated separate agreements with individual nations claiming damages.

A similar pattern prevailed with regard to Japan. The Russians carried away substantial amounts of Japaneseowned machinery, rolling stock, and other capital equipment from their zones of occupation, without the justifications they could offer in Europe. The United States began with the intention of seizing and distributing elements of Japanese “excess” industrial capacity but soon discovered that after four years of blockade and bombing, there was little of it and that helping Japan recover made more strategic sense at the time. From 1949 on, reparations were no longer collected.

It is not yet clear what precedents will be followed in assessing Iraq, basically a country of a single asset, oil, whose price fluctuations are a life-and-death matter to most of the world’s economies. Any broad and long-lasting policy will also be endangered by the unpredictable storms of political change in the Middle East.

That is the very point. What seems ethically as clear as day about reparations turns out to be very cloudy when practically applied over time. But rain or shine, past experience suggests that (1) the issue will last for a long time, (2) Iraq will not finally pay all the costs of war and reconstruction, and (3) the great victory will be memorialized in federal budgets long after the yellow ribbons are put away.

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