IN THESE days of moratoria and defaults on international obligations any revision of an existing arrangement which is made in behalf of the creditors is worthy of special notice. Such a revision was actually agreed to by the German Government on January 31, 1934, when its representatives consented to permit the payment of 76.9 percent of the interest due on certain long-term bonds, instead of the 65 percent which had been fixed as the limit in December.

This arrangement breaks the chain in a long series of reductions of the foreign claims on Germany. It will be recalled that at the time of the peace treaties there was talk for a time among some of the Allied delegations of collecting something like $200,000,000,000 from the Central Powers, with Germany assuming responsibility for ultimate payment of the Austrian and Hungarian quotas as well as her own. The amount of the Allied claims was not fixed in the treaties, but when the bill was presented later it revealed a sharp scaling down of the earlier estimates. These reductions were continued in subsequent revisions, and the story may be briefly summarized as follows:

1. May 5, 1921. The London settlement fixed Germany's direct and indirect liability at 132,000,000,000 gold marks ($31,400,000,000). The share of this to be assumed by the other Central Powers was not fixed, but Germany was to be responsible for the whole amount in case of default by her former allies. The annual instalments due from Germany were fixed at the equivalent of $500,000,000 plus a sum equal to 25 percent of the value of her exports, or a computed total of approximately $750,000,000.

2. March 21, 1922. Germany's cash payments for 1922 were reduced to $180,000,000, with the understanding that payments in kind were to continue.

3. August 31, 1922. Cash payments were suspended for six months.

4. January 11, 1923. French and Belgian troops marched into the Ruhr district because of Germany's default on payments in kind, and all payments under the London agreement came to an end. Some revenue, however, was collected by the occupation authorities.

5. September 1, 1924. Payments began under the Dawes Plan. Total payments were not fixed, but payment in the first year amounted to about one-third of those contemplated in the London agreement. The payments were scheduled to increase until in the fifth, and thereafter the "standard," year (1928-1929) they reached the sum of 2,500,000,000 gold marks ($600,000,000).

6. September 1, 1929. The Young Plan became operative, and for the years immediately ahead payments were reduced by approximately a third from those of the Dawes Plan "standard year."

7. June 20, 1931. President Hoover announced his plan for a moratorium of one year on all intergovernmental debts. Its acceptance by Germany's creditors relieved her of further reparation payments until July 1, 1932.

8. July 8, 1932. The Lausanne Conference agreed to liquidate all claims for reparations with a final payment by Germany of 3,000,000,000 reichsmarks ($714,000,000). Payment was to be made in 5 percent bonds, to be issued at 90 in not less than three years nor more than fifteen years after 1932, and to be sold "only when Germany's economic situation made it practicable."

While Germany's indebtedness on account of reparations was thus being reduced virtually to the vanishing point, she was also obtaining a large degree of relief from the burden of her private debts. These relief measures may also be summarized:

1. September 17, 1931. A "standstill" agreement provided a moratorium of six months on Germany's short-term external debts, representing loans by foreign banks to German financial institutions.

2. January 23, 1932. The "standstill" agreement was extended to February 28, 1933.

3. February 17, 1933. The "standstill" agreement was renewed for another year.

4. June 9, 1933. The German government decreed a transfer moratorium for six months on all public and private debts contracted before July, 1931, except those covered by the "standstill" agreement. This decree was modified shortly afterward so as to exclude from the moratorium the Dawes Plan loan of 1924 and the Young Plan loan of 1930 and to provide for a maximum payment in cash of 50 percent of the amount due on other loans. The remaining 50 percent was to be paid in scrip, redeemable at 50 percent of its par value. The creditors would thus eventually obtain 75 percent of their interest.

5. June 16, 1933. The "standstill" agreement was modified in Germany's favor by fractional reductions in the rate of interest on the short-term loans and by further postponement of certain guaranteed repayments.

6. December 18, 1933. Dr. Hjalmar Schacht, president of the Reichsbank, announced that during the first half of 1934 cash transfers on the long-term debts would be further reduced to 30 percent, and that the remainder would be paid in scrip still redeemable at 50 percent of its face value. Under this arrangement the proportion of the interest to be paid the holders of German bonds would be reduced from 75 to 65 percent.

The transfer moratorium of June 1933 evoked much resentment among Germany's creditors and brought a sharp protest from the American bankers who had floated some $1,000,000,000 in German bonds in the United States. In December a committee of Germany's creditors conferred with Reichsbank officials and urged the termination of the moratorium at the end of the year. As proof of Germany's ability to meet the debt service they called attention to her favorable trade balance of the past six months, to the automatic reduction of the American debt charges through the depreciation of the dollar, and to the heavy buying by German investors of German securities at depressed prices in foreign markets, thereby further reducing the burden of the external debt.

The German answer was a continuation of the moratorium for another six months and also, as already indicated, a reduction of the payments to 65 percent of the amount due. But this was not the whole story. Germany had not only reduced her debt payments by unilateral action, but she had not treated all her creditors alike; the moratorium did not extend to the Dutch and Swiss holders of her bonds. The Netherlands and Switzerland, which ranked next to the United States as creditors of Germany, had protested and threatened reprisals when the moratorium was proclaimed in June 1933. The German Government thereupon entered into agreements with these countries under which their nationals would receive full payment of interest on German bonds in return for certain concessions to German exports.

This favored treatment brought strong protests from the American and British Governments. The outcome was a new conference between Germany and her creditors in Berlin in the last week of January. Under an agreement concluded on January 31, Germany is to end her preferential treatment of Dutch and Swiss bondholders on June 30, 1934. The partial moratorium, however, is to continue; 30 percent of the interest will still be remitted in cash and 70 percent in scrip, but the scrip issued in 1934 is to be redeemed at 67 percent of its face value, instead of 50 percent as heretofore. The total interest payments were thus raised from 65 to 76.9 percent of the contractual obligation, and this revision was expected to add somewhat more than $3,000,000 to the income of American bondholders during 1934.

This new agreement is significant in at least one respect. It represents a gain for creditors after they had been making repeated concessions to German debtors over a period of years. On the other hand, it still leaves the creditors with scrip which can be disposed of only at a sacrifice, and which, when disposed of, bestows a bounty on the German exporter and may enable him to undersell his American or British competitors.

By proclaiming a partial moratorium on long-term obligations the German Government has not only checked a possible drain on the gold and foreign exchange reserves of the Reichsbank, but it has also linked debt payments with increased exports. Under a rather complicated device, the scrip marks are purchased abroad at a discount and exchanged at full face value in Germany for ordinary marks. The profit from this exchange is employed to subsidize German exports. The Reichsbank authorities are careful to limit the subsidy which any exporter thus receives to an amount which may enable him merely to obtain the desired foreign orders. The amount of this subsidy will depend on the trade obstacles which must be overcome. The system is an outgrowth of debts, tariffs, exchange depreciation, and the various other factors which in recent years have disturbed the international flow of goods and capital. Germany insists that she can maintain the service on her huge long-term debts to the United States only by a sharp increase in her exports. Whether she has discharged her obligations as a debtor during the past year as faithfully as she might have done is a moot question. If it is true, as she contends, that she must increase her exports in order to pay her debts, the outlook for her creditors is not very promising; for any substantial increase without continuing some form of subsidy is hardly to be expected.

You are reading a free article.

Subscribe to Foreign Affairs to get unlimited access.

  • Paywall-free reading of new articles and a century of archives
  • Unlock access to iOS/Android apps to save editions for offline reading
  • Six issues a year in print, online, and audio editions
Subscribe Now
  • WILLIAM O. SCROGGS, Director of Information of the Council on Foreign Relations; joint author of "The United States in World Affairs."
  • More By William O. Scroggs