German reparations following World War I compared to today’s sovereign debt

One issue that has come up in Wealth, War and Wisdom is the amount that Germany owed in reparations following World War I. From a quick Google search, it seems that Germany owed about 83 percent of its GDP at the time and had to pay 2.5 percent of GDP every year. Conventional history textbooks present this as an unbearably high burden that Germans could not handle and therefore they needed to vote for Adolf Hitler and the Nazis.

Attitudes toward debt must have changed considerably since the 1920s. Japan owes more than 200 percent of GDP. ┬áThe U.S. governments (federal, state, and local) owe about 100 percent (flashy ource; boring source; Washington Post). The U.S. debt service as a percentage of GDP is forecast to rise to 3.1 percent (source) for federal debt alone. If we add another 2 percent for the states, which is probably too low since they pay a highest interest rate than the feds, that’s 5 percent of GDP or double what the Germans supposedly could not possibly afford. This page of 2010 data indicates that the world average for debt service was 4.6 percent of GDP.

What has changed such that 2.5 percent was considered unbearable in 1918 but 4.6 percent is normal today?

15 Comments

  1. Ken Hagler

    June 18, 2011 @ 10:35 pm

    1

    It’s not about the passage about time, it’s about military power and the relative importance of the country’s money. The US government can type a few more zeroes on a keyboard to create more money to pay debts with, and if anyone objects they can point to Iraq, Afghanistan, etc. and say, “See that? Keep accepting dollars or that could happen to you.”

  2. Jerry

    June 18, 2011 @ 10:44 pm

    2

    Getting off the gold reserve and floating the dollar!?

  3. thepolemarch

    June 18, 2011 @ 10:58 pm

    3

    1.) If real GDP per capita triples or quadruples, even a larger chunk seems less important – disposable income increases.

    2.) Financing government debt is much more palatable if you are receiving some beneficial goods and services (certainly debatable), than paying reparations to other countries for a war which only crippled you.

  4. David Wihl

    June 19, 2011 @ 12:22 am

    4

    Perhaps the lack of the gold standard?

  5. Pascal Bourguignon

    June 19, 2011 @ 12:22 am

    5

    Also, the big difference is the Germany’s debt was payable in real money, while our debts are in monkey money.

  6. Friedrich

    June 19, 2011 @ 2:15 am

    6

    “What has changed such that 2.5 percent was considered unbearable in 1918 but 4.6 percent is normal today?”

    Well today we’re printing money to that time gold was the “standard” for money. And till today we’re not able to just print “gold”. So it was asked for something worth something today we’re just asking for mor funny coloured paper….

  7. Dennis Deery

    June 19, 2011 @ 2:39 am

    7

    You also ignore the difference between forced debt and debt of choice, and the difference between a debt that brings benefits and a debt that does not. Whether they want to admit it or not, the American public HAS chosen the current level of indebtedness. And we get things we want from it – most particularly, wars.

    Contrast that with the reparations Germany owed. Nobody in the country voted for it, it was imposed from the outside. And since the reparations were payments to other countries, it took money out of Germany without giving them anything in return.

    To simplify it – if I borrow $1,000 to buy a cool TV, that’s a freely-made choice and hey, I get a TV. If I get a $1,000 fine from the police for doing something stupid, and I have to borrow money to pay it back, I’m likely to resent making out my monthly payment check.

  8. Tom Welsh

    June 19, 2011 @ 4:37 am

    8

    Attitudes to debt most certainly have changed! Nowadays debt is seen as almost virtuous – certainly desirable. Whole generations have grown up expecting to borrow their way to wealth and success (not that the majority ever find that works out for them).

    Just as important, inflation is now considered normal and perfect OK – necessary even to keep “growth” going. Before WW1, believe it or not, currencies sometimes maintained their value for decades or even centuries on end. Speaking as a British citizen, I generally assume that one pound sterling in the year 2000 would buy about the same value as one penny in 1900; while one cannot hope to be precise about such matters, that represents a loss of about 99 percent of the pound’s value. Wars were mostly responsible; in war governments borrow as much as they can, and thus give themselves a stron incentive to devalue their own currency so that they repay less in real terms.

    Inflation has become faster and pervasive since the USA finally cut loose from the gold standard in the days of Nixon. But most ordinary citizens are sublimely unaware of it (or choose to ignore it). Government statistics systematically underestimate inflation (see among many other explanations http://www.wnd.com/?pageId=59409). So the 4.6 percent cost of debt service is quite probably less than the inflation rate, meaning that it costs less than nothing! In the 1920s, however, debt really meant something. If you owed money, you paid it back or someone took it out of your hide. If you starved, too bad.

  9. Uwe

    June 19, 2011 @ 5:25 am

    9

    Interesting question but a slightly incorrect one.

    Conventional textbooks present the reparation issue as only one part of the propaganda that let Adolf Hitler to power (who never even got 40% in a free election).

    Another part was the back-stabbing theory saying that Germany lost the war because of internal enemies since no enemy had reached German terrain when Germany capitulated.

    Then there was the great depression which was a much more difficult time that the recent economic downturns.

    And then there were many other factors (democracy not working, civil war, etc). I would be surprised if there is even a single textbook who claims that the reparation demands (and their use in propaganda) were the cause for the Nazi party to come to power.

    I agree however that attitudes toward debt must have changed considerably. Many countries pay more than 12% of every tax dollar they get as interest for their dept. For me that doesn’t look like a good strategy.

    > What has changed such that 2.5 percent was
    > considered unbearable in 1918 but 4.6 percent
    > is normal today?

    Well – I guess these days we can still live relatively comfortable with 4.6 percent (Germany: 3.3% in 2010). But in 1918 (and onward) parents saw their children starving and that changes a lot. People were seeking radical solutions and got lured easily.

  10. Deadprogrammer

    June 19, 2011 @ 1:44 pm

    10

    I highly recommend When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany. From what I understand the unbearableness came from the situatuation in which reparations had to be paid in hard currency and/or natural resources while rampant inflation instantly devalued tax receipts. This was compounded by the refusal to raise taxes, guaranteed increases in wages to the heavily unionized workforce, out of control printing of money, stock market machinations, etc.

  11. Tom Cooper

    June 24, 2011 @ 11:34 am

    11

    Germany did not end up paying war reparations. They borrowed money to do so from United States creditors, and then defaulted on the debt.

    Also, the war reparations the nascent Bolshevik republic agreed to (paying Germany) were more onerous than what Germany agreed to at Versailles.

  12. somebody_somewhere

    June 25, 2011 @ 11:36 am

    12

    It was not just the money, it was also that the country had to be broken up into multiple peaces and entire new nations were created out of nothing within it.
    Polland for instance was just made out of the blue by the allies, and in that state a psycho dictator came to power and was butchering germans by the tens of thousands for decades for the sole crime of having the wrong opinions. This was all financed by the allies. Germans were forced to live in nations manufactured by the British solely to make the Germans weak, and they also had to watch as their fellow countrymen were being slaughtered, and coult do nothing.

    Another factor was that the Chancellor was forced to state that the war was all the fault of the Germans, which is a blatant lie.

    Also the Germans were not allowed to have a military.
    Also the country was bankrupt by the war already.

    So it was not only the debt imposed at Versailles.

    Imagine the United States having this fate,
    how would you feel?

  13. Foo

    June 25, 2011 @ 10:09 pm

    13

    A 2.5% GDP growth is considered modest growth, so if you are paying 2.5% in reparations, thus leaving your economy, then you need to achieve continuous exceptional growth to move your economy forward. If you factor in population growth, the picture gets even worse.

    Most of the current debt is internal. Interest payments are largely not leaving the economy and have insignificant effect on the GDP.

  14. CCG

    June 28, 2011 @ 9:32 pm

    14

    Tom Cooper: I’d also be curious to see what % of France’s GDP was consumed by the 3 billion franc indemnity the Germans slapped on them in 1871 (and which they paid off).

  15. CCG

    June 28, 2011 @ 9:34 pm

    15

    My mistake – 5 billion francs. And that in gold, no way to weasel out of it via printing press.

    http://en.wikipedia.org/wiki/War_reparations#pre.E2.80.93World_War_I

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