EUR.MACRO: Was Schacht Right? Foreign Debt, the Young Plan, and the Great Depression in Germany

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               EHS Abstract Submission
                    (c) 1997 EH.Net
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              Name: Albrecht Ritschl
               Email: ritschl@upf.es
         Institution: Universitat Pompeu Fabra

         Co-author: None
 
             Title: Was Schacht Right? Foreign Debt, the Young
Plan, and the Great Depression in Germany

  Internet Address
of abstracted work: Not available on the Internet

           By mail:
                     Albrecht Ritschl
                     Department of Economics
                     Universitat Pompeu Fabra
                     Ramon Trias Fargas, 25-27
                     Barcelona E-08005 Spain

          Language: English
 
          Abstract:
   The severity of the Great Depression in Germany has sometimes
been blamed, in simplistic fashion, on the reparation burden.
Alternative interpretations relied either on American exports or
on malfunctions of the domestic economy, such as demand
mismanagement or excessive wage increases during the preceding
years. This paper argues for a more subtle link between Germany's
macroeconomic performance and policy responses to the reparation
problem. I explain the foreign credit rush of Weimar Germany
during the second half of the 1920s from the transfer protection
clause of the Dawes Plan, which gave commercial credits de facto
seniority over reparation claims on Germany. I argue that the
transition to the Young Plan in 1929 implied a reversal of this
seniority scheme, causing a severe credit crunch in Germany that
lasted throughout the Great Depression. That the Young Plan would
have just this effect had been the prediction of Schacht, then
president of Germany's central bank and leader of the German
delegation to the Young Plan negotiations of 1929. Protesting
against the Young Plan, Schacht resigned from the presidency of
the Reichsbank, only to be re-appointed by the Nazis in 1933. I
argue that whatever the criticism of Schacht's later conduct, his
verdict on the Young Plan may have been right. A model of
sovereign debt with limited contract enforcement is employed to
identify a sequence of reparation regimes with varying degrees of
relaxation of Germany's participation constraint in international
credit markets. I conclude that given the high amount of German
international borrowing during the mid-1920s, abandoning transfer
protection in the Young Plan exposed Germany to credit
contraction and deflationary budget policies even before the
international beginning of the Great Depression. This may have
forced the country to deflate relative to its trade partners
throughout the depression up until 1932.

 
      Bibliography: Ritschl, Albrecht. "Was Schacht Right?
Foreign Debt, the Young Plan, and the Great Depression in
Germany." Paper prepared for presentation at the Cliometric
Society-sponsored ASSA Session "Money Down the River," January 4,
1998.
 
                  Subject: H
 Geographical Area: 4
      Country/Region: Germany
           Time Period: 8
 
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