The Price of War

Preface

Forty years have passed since the four powers in military occupation of Germany reached agreement in Berlin on a Reparations Plan. The agreement was short-lived and never whole-hearted; even the title of the document was the subject of a long dispute and a footnote was enough to put its publication in doubt. It was almost the last occasion on which the four powers united in planning a future for the German economy; and the fruits of their failure to agree are still with us in the division, first of Germany, then of Europe.

I took part in these events as the Treasury representative in Berlin, succeeding Austin Robinson and Donald MacDougall in late October 1945 as head of the Economic Advisory Panel that was preparing a British plan for Germany, and returning to London just before the publication of the Reparations Plan at the end of March 1946. My duties before and after this episode lay in very different directions since I had just completed four years in the Ministry of Aircraft Production and was about to join the staff of the London Economist when I was asked to go to Berlin. I was not able to satisfy a natural curiosity as to what had been going on before October 1945 or what happened after March 1946 until I embarked on this book. I had, however, so far indulged myself as to write five chapters of a personal memoir of the negotiations in Berlin while recovering from mumps in 1952.

My interest revived when an inquiry from Charles Kindleberger brought home to me that there was no available account of the Berlin negotiations from the British side. In 1947 my American colleagues, Ratchford and Ross, had published in Berlin Reparations Assignment a detailed narrative of events as they recalled them. But comparatively little was said about British views. I also reflected that the lapse of 40 years meant that the records were now open and that it should be possible to obtain a much fuller picture of the evolution of British policy towards Germany. To my surprise, however, the Berlin records of the Economic Advisory Panel had disappeared or been destroyed. Even the full report which I prepared on my return from Germany in March 1946 was no longer to be found. My correspondence with the Control Office for Germany could not be traced. Fortunately I retained a copy of many of the key documents, including my report and various letters, and could supplement them from the mass of Control Commission records which have recently been released.

My first thought was to complete and publish the memoir, leaving the first five chapters as they stood in 1952 but adding two further chapters to fill out the picture and give a more adequate account of the reparations negotiations in 1945-6 and their consequences. Memoirs of such distant events are, however, of limited interest. The reader would be left wondering what went before and what happened afterwards, and asking how the quadripartite negotiations in Berlin were linked with ministerial discussions and policy in London. I decided therefore to do a full-scale study of British reparations policy during and after the Second World War that could be read on its own. The memoir might add colour and piquancy, but I did not think that I could merge it with a more scholarly study, given the wide difference in subject matter and the limited interaction between ministerial policy and events in Berlin.

I have confined the study to German reparations, conscious that half the countries of Europe (and many others) were claiming or paying reparations after 1945. Albania, Egypt, Ethiopia, Greece and India were among the claimants and Austria, Bulgaria, Finland, Hungary and Italy among the payers. The amounts involved were often substantial but none raised problems comparable in international importance with the claims on Germany. I have also refrained from pursuing the activities in Brussels of the Inter-Allied Reparations Agency (IARA), which was intended to allocate reparations between the claimant Countries. The narrative stops in 1949 with the creation of the Federal Republic, and makes no reference to the later voluntary payment of reparations by the Federal Republic to Israel.

It was difficult to decide how to deal with the political setting of the reparations story. The quarrels over reparations cannot be understood in isolation from other quarrels between the powers concerned. But international relations during and after the Second World War is an enormous subject of which my knowledge is quite inadequate. I have stuck fairly closely to the theme of reparations, recognizing its powerful political overtones but limiting myself to such asides on the larger issues as seem necessary to explain why events took the course they did. Readers interested in the wider issues should turn to Mastny's Russia's Road to the Cold War, the three volumes on the 1940s by Herbert Feis, and Lord Bullock's Ernest Bevin, Foreign Secretary, 1945-1951. Also recommended are: W.H. McNeill's America, Britain and Russia; and The Semblance of Peace by Sir John Wheeler-Bennett and A.J. Nicholls.

Although German reparations are now a distant memory, the story is not without its relevance to current preoccupations. Reparations are a form of unilateral transfer akin to the transfers that fall to be made by countries with large international debts such as now abound. They were also the main bone of contention between Russia and her war-time allies in the West, so that the story of reparations is also the story of how Germany and Europe came to be split in two.

Until I had almost completed the manuscript I was unaware of the excellent, but unpublished, study of German reparations by Philip Baggaley ('Reparations, Security and the Industrial Disarmament of Germany: Origins of the Potsdam Decisions'), in Yale University Library, which traces the story to mid-1946 from the point of view of each of the three main powers involved. I was able to take advantage of Lord Bullock's account of the part played by Ernest Bevin and of some (but only a little) of the recent work of German scholars like Josef Foschepoth and Rolf Steininger. In the main I have gone to the original documents in the Public Record Office, concentrating on British policy rather than trying to do full justice to the views of the other countries involved. I am correspondingly grateful to the PRO for their assistance . . .

 

 

 

 

Introduction

 

 

Over the years there have been many attempts on the part of the victors in war to extract reparations from the vanquished. Sometimes they have succeeded, sometimes they have been disappointed with what they got.

An outstanding example of the successful exaction of an indemnity was the payment of 5 billion francs (£200 million) by France to Germany after the Franco-Prussian War in the 27 months between June 1871 and September 1873. Even for a rich country like France, 5 billion francs was in those days a large amount, equal to over 20 months' exports. But the payment was made without appearing to interrupt the economic development of France. Indeed, it was the effect on Germany that was thought at the time to be more open to question: it helped to sustain, and perhaps aggravate, the post-war boom that culminated in 1873 and was followed by what seemed a prolonged depression.

Most of the money needed by the French Government was raised by three large loans: one for 1.5 billion francs from the Bank of France; and two issues of bonds, for 2.25 and 3.5 billion francs respectively, that were either taken up on the day of issue or heavily overscribed by private investors attracted by an effective rate of interest of about 6 per cent. Some bonds, probably about one-third, were taken up by foreigners, particularly Germans, while others were sold to Frenchmen swapping out of foreign investments. Thus initially the money paid over came largely from capital borrowed abroad or realized from the sale of foreign assets. The strain on the French balance of payments was very much reduced - so much so that although the franc was inconvertible between 1870 and 1878 it suffered little or no depreciation.

The whole operation was an early demonstration of the role of capital movements in bringing about balance of payments adjustments: it is much easier to operate on the capital balance than on the current account. Not that the current account remained unaffected. There are no reliable figures for invisibles, although it is known that there was a large and fairly stable surplus, consisting mainly of interest on French holdings of foreign bonds. The balance on visibles, that is, the balance of trade, swung from a consistent deficit averaging 340 million francs a year in 1868-71 to an equally consistent surplus in the next four years, 1872-5, averaging 240 million francs, and then swung back again in the following four years, 1876-9, to a growing deficit that averaged 750 million francs per annum. It is natural to see in these fluctuations the influence of the the indemnity, and to conclude, perhaps rashly, that by 1875 a real transfer had been effected out of current income equal to perhaps half or more of the total indemnity, the other half being carried as an impairment of France's net external assets.

The boot was on the other foot after 1918, when it was Germany that was asked to pay reparations to France and other countries; the situation then was a very different one. Whereas in 1871 a relatively short war had left the French economy largely intact - French exports hardly fell in value in 1870, rose in 1871 and rose again, by over 30 per cent, in 1872 - in 1919 Germany was just emerging from a long and exhausting war, on the verge of revolution, blockaded and unable to trade freely. Other countries in central Europe were in an equally impoverished condition and this both inflamed the call for reparations and complicated the problem of exacting them.

Very large sums were demanded. Lord Cunliffe, a former Governor of the Bank of England, and Hughes, the Australian Prime Minister and a member of the War Cabinet, wanted to make Germany pay the full cost of the war, estimated at £24,000 million.
 

Others, like Keynes, thought that Germany might be able to pay no more than £1,000 million, but were prepared to recommend an indemnity of between £2,000 million and £3,000 million. Agreement was eventually reached in Paris on claims, including the cost of war pensions and separation allowances, that were later estimated to amount to £6,600 million.

It has been usual to pillory the French for the outrageousness of these claims. But it was the UK, not France, whose reparations policy at the Paris Peace Conference was most exacting and intransigent. Lloyd George professed moderation and reconciliation with Germany. But he also wanted justice and justice for him meant punishment. In the general election that followed the armistice of November 1918 he yielded to the popular clamour to make Germany pay, and throughout the peace negotiations continued to support demands that he knew to be impossible. His stance, which was by no means dictated by political pressure, committed the British Government to a harsh and punitive policy.

Such a policy was not at first favoured by the French. At the armistice they looked to co-operation between the Allies rather than to reparations from Germany for a solution to their economic problems.Their Minister of Commerce, Clementel, had plans in 1918 for a new international order which would continue into the peace some of the kinds of international collaboration that had grown up in the war. The main feature would have been a permanent inter-Allied system for the pooling and control of raw materials, with preferential tariffs within the Allied bloc. Allied co-operation was to provide a framework for the ultimate reintegration of Germany into the international economic system and at the same time restrain German ambitions. As for reparations, Clementel thought vast payments neither feasible nor desirable: they might, however, be demanded as a means of extracting 'concessions' (e.g. supplies of coal) from Germany and inducing recalcitrant allies to support the idea of a world fund forihe rebuilding of the devastated areas. These ideas foundered, however, on the refusal of the Allies to play the role assigned to them. The French then hoped for agreement on a moderate fixed sum in reparations with a German bond issue in the USA to raise the money and the payment of a substantial part of the proceeds into the French treasury. This, too, failed. The British would not agree to the naming of a fixed sum and it is questionable whether the Germans could have sold bonds in America.

As a condition of the armistice the Germans had agreed to make compensation 'for all damage done to the civilian population of the Allies and their property by the aggression of Germany by land, by sea and from the air'. But to war damage the British proposed to add war costs, hoping in this way to increase their share of the total. The French, while supporting British claims, wanted reparation, strictly defined, to have priority. They would have liked to pool war costs and reapportion the inter-Allied debt, each nation paying acording to its ability. The Americans, to whom a large part of the burden would have been transferred, would have none of this. They were also opposed to the inclusion of war costs and the attempt to include them was abandoned. From that point on, French proposals fell below the British demands and the French were prepared, while the British were not, to name a fixed sum.

The attitude of the British Government during the negotiations did not long command popular support. Public opinion quickly swung round, first among the troops quartered in Germany who saw the extremities to which the Germans were reduced, and then increasingly among the public at large. A mood of disillusionment and hostility to the Treaty of Versailles spread as it became clear that there would be no reconciliation, no assurance of lasting peace; the treaty would have to be upheld by force. The French, who had most reason to fear for their security, stood firm by the Treaty, and in so doing attracted to themselves the condemnation of those who wished to revise it. The idea took firm root that it had been French vindictiveness and vengefulness that accounted for the harshness of the terms of peace . . .