At the conclusion of World War I, Germany reluctantly agreed to pay unspecified reparations in the armistice agreement of November 1918. Later at Versailles they were required to sign a treaty that assigned full responsibility to them for causing the conflict (Article 231, the "war guilt clause") and called for the creation of an international reparations commission to determine the amount of damages.*
The bill was tallied in April 1921, when the commission determined that damages caused by Germany amounted to $33 billion or 133 billion gold marks. Payments were to be made in cash or by such in-kind commodities as steel and coal. Representatives of the German government were extremely reluctant to shoulder this crushing debt and did so only under the full weight of international pressure.
An initial payment of $250 million was made in September 1921. However, an economic crisis had gripped Germany, which caused runaway inflation and an end to additional installments. In May 1922, Allied governments granted Germany a temporary moratorium on reparations payments in the hope that their economy would recover during that period and enable the resumption of regular installment payments. France bitterly opposed the moratorium, having suffered severely from German aggression, but eventually agreed.
At the end of the prescribed period, Germany was in no position to resume payments and defaulted. In January 1923, an impatient France, accompanied by a token Belgian force, marched into the Ruhr Valley and set up a military occupation, figuring that control of the valuable industrial area could help force the resumption of payments.
The United States, of course, had not signed the peace treaty with Germany and had no claim to any reparations. However, hoping to avert a deepening of the international crisis, the Coolidge and Hoover administrations sponsored international plans to deal with the reparations issue:
The Republican presidents of the 1920s consistently denied that any link existed between war debt payments owed to the U.S. and the reparations payments expected from Germany. However, the fact was that the Allied recipients of the reparations payments were unable to pay the U.S. after the German default. This self-defeating stance did little to maintain good relations between the U.S. and its former allies.
The Dawes Plan (1924). The U.S. vice president helped to craft a plan for annual German installment payments, but avoided the more troublesome issue of the total amount owed.
The Young Plan (1929). A prominent U.S. financier worked to fashion a precise new German reparations formula to replace the Dawes Plan.
Further, the simple fact that the United States worked actively to draft the Dawes and Young plans was an acknowledgement that indeed war debts and reparations were inseparably connected. Otherwise, why would the U.S. become so deeply embroiled in a purely European dispute?
*The other Central Powers — Austria, Hungary, Bulgaria and Turkey — also were required to pay reparations under the terms of their separate peace agreements that followed Versailles. However, a final accounting of damages caused by these nations was never completed and no reparations were collected.
See other foreign issues confronting the Harding administration.