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Notes -
Meynard Keynes arguably predicted the Great Depression in 1919 by forecasting the obvious inability of the Germans to pay back their crushing war reparations and the economic fallout that would ensue. Tariffs might have impacted things but I choose to believe that the Depression was mostly baked in since 1919 (since correct predictions are cool).
Germany paid almost none of the reparations. Less than 1/6 of the 130 billion marks were paid by 1930 (after which payments were paused, then indefinitely deferred due to the great depression), almost all by American banks which Germany never paid back. (N.b. only 50B (the A and B bonds) were required to be paid.) If you calculate for inflation etc. the US actually paid Germany significantly more than in the Marshall plan after!
For comparison, after the Franco-Prussian war, France received a similar proportion of GDP, had its banks finance it within a month then paid them off within 3 years. The German Empire (the Weimar state's actual name) via Havenstein instead chose to call a general strike and hyperinflate its currency to erase local war debts the government owed to German citizens and banks.
Also, the great depression started when the US stock market crashed, spreading elsewhere.
Yes this seems Bad For The Economy
Certainly. But am I wrong that Germany rug-pulling US banks and investors (and the European economy performing poorly due to the issues you mention, along with the occupation of the Ruhr) was bad for American speculators? And "overspeculation" was a leading cause of the 1929 stock market crash, wasn't it?
How did this impact the German economy if it never circulated (neither entered nor left it)?
I assume it was bad for the German economy because it made banks less likely to lend to them, drying up credit. (Plus the whole part where the French got irritated by the lack of repayment and seized some of their territory.)
We're literally talking about the opposite situation!
American banks gave Germany perhaps 4x as much as the 20 years later Marshall plan. Some was from the reparations (Dawes and Young plans) they bankrolled, without being paid back, which did not circulate in the German economy, but they loaned and invested even more (about $5 billion/year in the late 1920s, more than Germany (American bankers) paid in reparations in total (for comparison, in dollars, the total original reparation sum was $30 billion) which helped Germany grow production 30% above 1914 levels, with the 2nd largest industry in the world.)
Be that as it may, I don't think it's good for the American economy to loan money and not have it paid back. Obviously a certain amount of this is the cost of doing business, but it's not good when that happens.
Are you saying that failing to pay their war debts didn't hurt German credit?
I sense I might be losing the thread on this, so feel free to lay your thesis out for me.
That makes two of us! ...for the American economy, ah. I suppose not. But it kept bonds valued well on their books, working out like deferred payments. The American banks both financed the loser's payments and forwarded loans to the victors on reparations payments. I don't have access to the full period of bond values then, but I suspect their balance sheets were held up quite well until the depression.
The German government's credit wasn't really impacted, surprisingly. Somehow everyone kept playing ball with them even after they chose to hyperinflate themselves. Germans who bought war bonds etc. in WWI were the most negatively impacted. Even more surprising to me, Germany was still able to access credit markets into the 30s, even after they started issuing fake money: Öffa then Mefo bills. Chase bank e.g. went through crazy hoops and even let Americans buy German war bonds during WWII (until 1941) (at a discount, buying subsidized returnee marks taken from Jews).
Well that seems counterintuitive, but the interwar years were a weird time to be sure.
ETA: despite perhaps losing the plot, I enjoyed this - econ is not my strong suit, which means it is good for me to be discussing it.
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What percent of American GDP were German war reparations?
It's been a long time since my economics and history courses, but I don't think the United States was owed much if anything by Germany. To the extent that anything in 1919 was causitive [and, to be fair, I don't think most things are monocausal] I think it would have been by American investments in Germany and Europe failing to yield expected returns. Germany had a string of economic problems – hyperinflation, the occupation of the Ruhr – related to its reparations debts, and from what I understand these not only negatively impacted Germany but Europe as a whole. Now, to your question, I don't know what degree of American stock market speculation was actually in Europe, so possibly my cool Keynes myth is bunk, but given that the European markets in the 1930s were sensitive to the American stock market, I imagine the reverse was true as well. But do take the theory with a grain of salt, I gather that the True Causes of the Great Depression are still a cause for debate among actual economists.
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