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The German Transfer Problem, 1920-1933: A Sovereign Debt Perspective

  • Albrecht Ritschl

The severity of the Great Depression in Germany has sometimes been blamed on reparations in simplistic fashion. Alternative interpretations relied on American capital exports, the demise of the Gold Standard, or on malfunctions of the domestic economy, such as excessive wage increases during the 1920s. This paper argues for a more subtle link between Germany's slump and these policies. I explain Germany's foreign borrowing rush before 1929 from transfer protection under the Dawes Plan, which gave commercial credits seniority over reparations. I argue that the Young Plan of 1929 implied a reversal of this seniority scheme, causing a sudden stop and reversal in the German balance of payments that lasted throughout the Great Depression. Invoking basic results of sovereign debt theory, the paper identifies a sequence of reparation regimes with varying degrees of relaxation of Germany's participation constraint in international credit markets. Transfer protection under the Dawes Plan created an incentive for Germany (and her commercial creditors) to drive out reparations. I conclude that the Young Plan could only have worked in the absence of an international recession, and that attempts to salvage it in 1931 were necessarily futile.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1155.

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Date of creation: Jul 2012
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Handle: RePEc:cep:cepdps:dp1155
Contact details of provider: Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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  1. Jeremy I. Bulow & Kenneth Rogoff, 1986. "A Constant Recontracting Model of Sovereign Debt," NBER Working Papers 2088, National Bureau of Economic Research, Inc.
  2. Ritschl, Albrecht, 1996. "Sustainability of High Public Debt: What the Historical Record Shows," CEPR Discussion Papers 1357, C.E.P.R. Discussion Papers.
  3. Hautcoeur, P. C. & Sicsic, P., 1998. "Threat of a capital levy, expected devaluation and interest rates in France during the interwar period," DELTA Working Papers 98-01, DELTA (Ecole normale supérieure).
  4. Lloyd A. Metzler, 1942. "The Transfer Problem Reconsidered," Journal of Political Economy, University of Chicago Press, vol. 50, pages 397.
  5. Alesina, A. & Drazen, A., 1991. "Why Are Stabilizations Delayed?," Papers 6-91, Tel Aviv - the Sackler Institute of Economic Studies.
  6. Reinhart, Carmen & Calvo, Guillermo, 2000. "When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options," MPRA Paper 6982, University Library of Munich, Germany.
  7. A.O. Ritschl, 2001. "Nazi economic imperialism and the exploitation of the small: evidence from Germany’s secret foreign exchange balances, 1938-1940[While I wa]," Economic History Review, Economic History Society, vol. 54(2), pages 324-345, 05.
  8. Ritschl, Albrecht, 1998. "Reparation transfers, the Borchardt hypothesis and the Great Depression in Germany, 1929 32: A guided tour for hard-headed Keynesians," European Review of Economic History, Cambridge University Press, vol. 2(01), pages 49-72, April.
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