The Rites Of Reparations

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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.