London Agreement on German External Debts
The London Agreement on German External Debts, also known as the London Debt Agreement (German: Londoner Schuldenabkommen), was a debt relief treaty between the Federal Republic of Germany and creditor nations. It was concluded in London during negotiations which lasted from February 27 to August 8, 1953.
The London Debt Agreement covered a number of different types of German debt from before and after the Second World War. Some of them arose directly out of the efforts to finance the reparations system, while others reflect extensive lending, mostly by U.S. investors to German firms and governments.
The parties that were involved besides West Germany included Belgium, Canada, Denmark, France, Great Britain, Greece, Iran, Ireland, Italy, Liechtenstein, Luxembourg, Norway, Pakistan, Spain, Sweden, Switzerland, South Africa, the United States, Yugoslavia and others. The states of the Eastern Bloc were not involved. The negotiations lasted from February 27 to August 8, 1953.
The total under negotiation was 16 billion marks of debt resulting from the Treaty of Versailles after World War I which had not been paid in the 1930s, but which Germany decided to repay to restore its reputation. This money was owed to government and private banks in the U.S., France and Britain. Another 16 billion marks represented postwar loans by the U.S.
Under the London Debts Agreement of 1953, the repayable amount was reduced by 50% to about 15 billion marks and stretched out over 30 years, and compared to the fast-growing German economy were of minor impact.
An important term of the agreement was that repayments were only due while West Germany ran a trade surplus, and that repayments were limited to 3% of export earnings. This gave Germany’s creditors a powerful incentive to import German goods, assisting reconstruction.
The agreement significantly contributed to the growth of the post-war German economy and reemergence of Germany as a world economic power. It allowed Germany to enter international economic institutions such as the World Bank, International Monetary Fund and World Trade Organization.
Some of the agreement included debts to be paid after the reunification of Germany. Over decades it seemed unlikely to transpire, but in 1990 another 239.4 million Deutsche Mark of unpaid coupons were revived. On 3 October 2010 the last payment was made of 69.9 million euro. This is considered to be the last payment by Germany on all known debts resulting from both world wars.
There is an interesting background to this agreement that will require some telling.
Germans of all political stripes hated the Versailles Treaty and particularly its “war guilt” clause and attendant reparations requirement. For all of the 1920’s, the Germans waged a sophisticated campaign to roll back the amount of the reparations obligation and then to delay its payment. The hyperinflation of 1923, which originated in the German government’s decision to finance World War I with debt rather than taxation, as well as in the command nature of the wartime economy, and which destroyed, according to some historians, up to one hundred years of German savings, was a campaign of passive resistance to the French occupation of the Ruhr to enforce reparations payments from Germany. Out of that crisis came the Dawes Plan of 1924, the principal features of which were to lower total reparations and to extend the amortization period, as well as to grant a large international loan to assist in making those payments. In 1930, with the Depression in full swing, the Germans successfully negotiated both the Hoover Standstill( proposed by Herbert Hoover) agreement that suspended reparations and external debt service payments for one year, as well as a new international loan under the Young Plan. German municipalities, states, private industry and the Reich government succeeded in attracting foreign loans throughout the second half of the 1920’s to assist in Germany’s economic recovery and to make reparations payments, to the extent that by 1930, foreign debt was 26 billion Reichmarks, or approximately $5.5 billion, at an exchange rate of 4.2 marks to the dollar. This compares with an annual national income of 75 billion RM in 1930. One historian has estimated that Germany actually avoided paying any reparations at all because the net of capital outflows and inflows during the period from 1920 to 1933 was positive for to the extent of 2.1% of her national income over those years. That is, she paid 22.891 billion RM in reparations and brought in, from borrowing, and default on that borrowing, as well as from effective confiscation of foreign investment through the inflation of the currency, a total of 40.64 billion RM. It was the loans to Germany that comprised her external debt. Hitler’s repudiation of the Versailles Treaty, the Second World War and its segue into the Cold War effectively ended reparations for Germany.
The default on external debt was a technical marvel that mirrored the sophisticated thinking of German policy makers in planning to avoid reparations payments and other features of the Versailles Treaty.  To begin with, the Allies had never specified whether reparations or loans to Germany would be given priority of repayment in any financial crisis. In 1930, the Brüning government, in a move to destroy the reparations regime for good, instituted controls that placed all foreign exchange generated by Germany into a government account, from which it was disbursed to foreign exporters to Germany at a discount from selling prices of their goods and at a premium from selling prices to importers of German goods. This mechanism guaranteed a favorable balance of payments to Germany. The most important feature of the Brüning program, however, allowed German exporters to purchase German debt on foreign stock exchanges whose price had fallen as much as 85% due to the depression with their export generated foreign currency. Exporters would then repatriate the debt for trading at much closer to face value prices on the Berlin bourse. In this way, German exporters, whose prices were closely regulated by the German government, were permitted to make a normal profit that would have been denied to them by unfavorable currency exchange rates or by hostile tariffs. Interest and amortization payments on the outstanding debt were not withheld at this point, however.
In 1932, after France defaulted on its war loan payments to its Allies, Germany used that precedent to assume responsibility for all private and public German external debt and to suspend interest payments on all of it, citing a dearth of foreign exchange to meet both the reparations and external debt obligations, but promising to cover interest in arrears when Germany recovered those reserves sufficiently, if reparations were cancelled. This was followed by a formal regime of escrowing the payments in paper Marks in German accounts and issuing scrip to lenders for redemption of loan servicing payments, but at a 50% discount. A provision of the regulation allowed German exporters to make semi-annual interest payments to foreign lenders at the same 50% discount, then to submit the interest coupon to the appropriate Reich ministry for redemption at face value. Thus, in 1935, the Hamburg-America Line shipping company paid the interest on the American portion of the Young bonds to those willing to take a 50% discount.
In addition to encouraging exporters to purchase Germany’s external debt on foreign stock exchanges, the German government budgeted funds specifically for the same purpose, beginning in 1932. The U.S. Commerce Department estimated that, by the time Hitler came to power in January, 1933, surreptitious German government purchases of dollar bonds totaled $400 million in face value, on which an average discount of above 60% had been garnered. Another researcher estimates that, by 1936, a total of 32% of Germany ’s external debt had been repurchased. In an interesting aside, Klug discovered, in Bank of England records, an operation mounted by the Nazi Party to exploit the deep discounts of these buybacks to finance their activities. Before he was arrested by the French Surêté in May, 1934, Lt. Colonel Francis Norris, a retired British army officer, used approximately 300 million RM, provided to him by Joseph Göbbels from foreign exchange funds of either the Party or the government, to purchase up to 550 million RM of debt at face value that had been floated in European countries. But by 1936, the program of scrip issuance and discounted buybacks had conditioned bondholders for Hitler’s outright repudiation of all foreign debt, on the pretext that the loans were to have been repaid by foreign trade surpluses which had not materialized. Repayments, therefore, had to be taken from reparations payments and all remaining debt corresponded exactly to ’s reparations obligations. The Nazi government argued that the cause of revived world trade dictated that these obligations should be abrogated.
The American government played a largely passive role in the 1920’s and 1930’s in the dispute with Germany over repayment of these loans. Coming out of the First World War as the predominant creditor nation, the United States pursued a policy of strict enforcement of debt service by the Allies on their $10 billion in loans from banks. The Allies, therefore, looked to German reparations payments both to finance their own recovery from the War and to repay American loans. In part, this policy was dictated by the need to balance the federal budget during the 1920’s, at a time when Treasury Secretary Andrew Mellon was granting a huge tax reduction to American income earners. In part, it was also a sign of America’s reluctance to become involved in either the political or financial affairs of Europe, arising out of the country’s distaste for the way in which the War had been prosecuted and settled. Thus, the United States, the strongest financial power in the world, failed to assume its responsibility for maintaining world economic stability by making itself the lender of last resort. The Roosevelt Administration abjured any formal government involvement in helping bondholders seek German repayment during the 1930’s, partly out of pique with the recklessness of American bankers’ lending practices in Germany and partly because it was feared that such involvement could open up the government to the legal liability of, in effect, guaranteeing the loans made by Americans. A provision in the Securities Act of 1933 to create a public Foreign Bondholders Protective Council corporation that would lobby the German government on repayment of their foreign debts was vetoed by the Roosevelt Administration for just this reason. A private corporation of that name was organized in the same year and represented bondholders into the 1960’s.
In February, 1953, the London Agreement on German External Debt was signed by representatives of the West German government and the Western Allies to resolve the debts accumulated by the Germans. The London Debt Settlement Agreement provided that the German government would be responsible for repaying both the private and public debt arising during the interwar period; that it would repay approximately one half of the outstanding balance by issuing new bonds bearing simple interest of 3%, the other half being forgiven. One provision was of special importance. It required that all bonds acquired by repurchase in the 1930’s would be excluded from the agreement and that all bonds would be subject to a verification procedure to prevent those already redeemed bonds from being presented for a second redemption. During the Second World War, interest was paid on the repatriated bonds, so that interest coupons for that period were clipped and submitted to the government. It was these missing coupons that proved to be a determining factor in evaluating whether bonds submitted for authentication were to be redeemed under the London Debt Settlement Agreement. If the coupons were missing, the bonds were deemed to have been in German repositories at the end of the War and would not be redeemed. If they were attached, the bonds would be redeemed. Finally, and most importantly, the Agreement provided that the gold clauses in the original bond indentures, which permitted the lender the option of demanding German repayment in gold, would be rescinded. The LDSA provided for a verification and redemption period of five years, but should the two Germany ’s ever be reunited, the German government would assume responsibility for East Germany’s portion of back interest payments from the time of default through WWII. In 1995, the German government began making those interest payments to Americans through the Deutsche Bank offices in New York .
The bonds purchased on foreign markets at steep discounts by the German government, the Nazi Party and German exporters in the 1930's have an equally interesting history. Among the bonds covered by the LDSA was an issue of $300 million under the Young Plan mentioned above, $98 million of which was sold in the United States. After repatriation to Germany and their redemption at face value to German holders, they were housed in German government repositories as described above. The Russians looted these repositories when Berlin fell in 1945. In the early 1980's the Young Plan bonds, among others, were released into general circulation by Soviet or German intelligence agencies. Scam artists bought them up for $200 a piece, or at other nominal prices. These buyers would then sell them to unsuspecting investors in the US for prices that were multiples of their actual worth based on the supposed value of the Gold Clauses in the original contracts. The gold clauses, the scam artists argued, required the German government to redeem the bonds in gold at its price prevailing in the 1980's rather than it's price in 1930. These investors would present them to the German government for redemption and thereby trigger the verification features of the LSDA. German officials would reject them and the holders would be out the money they paid to the scam artists. One favorite scam would be to exchange these worthless bonds for stock in equally worthless shell corporations whose board would value that them at millions of dollars. They would then issue penny stocks and make a killing from gullible investors in those penny stocks. Not only had the LSDA rescinded these gold clauses but in 1933 the Roosevelt administration had outlawed such gold clauses in all US private and public contracts. That action was upheld by the Supreme Court in the Gold Clause cases.
 William C. McNeil, American Money and the : Economics and Politics on the Eve of the Great Depression, 1986, p. 18.
 Ibid., p. 19.
 Stephen A. Schuker, American “Reparations” to Germany, 1919-33, Princeton, NJ, 1988, pp. 106–120.
 Ibid. See Chapter 3 for a discussion of the default process.
 Frank C. Childs, The Theory and Practice of Exchange Control in (The Hague, 1958), p. 94.
 See Allen T. Bonnell, German Control over International Economic Relations, 1930-1940, , 1940, Chapters 3 and 4 for a discussion of this regime.
 Foreign Bondholders Protective Council, Annual Report, , 1936. It is interesting to note that Hamburg-America was substantially owned by the J.P. Morgan firm, the chief underwriter of the Young Plan bonds in the .
 Schuker, p. 72.
 Ibid., p. 72.
 Adam Klug, The German Buybacks, 1932-1939, , p. 21.
 Ibid., p. 17. See Edward J. Condon, “Reich Fast Buying Bonds It Weakened,” New York Times, , p. 3. Condon reported that it was estimated that the Germans had repatriated up to $450,000,000 face value of German dollar bonds issued in the . See also “Reports Big Deals in German Bonds: Paris Newspaper Attributes Large Buying to Col. Francis Norris, Now Here,” New York Times, , p. 11. This report estimated that Norris had purchased up to $40,000,000 in defaulted German dollar bonds while in the .
 Schuker, p. 75.
 See McNeil, pp. 88.
 Charles P. Kindleberger, The World in Depression 1929-1939(Berkeley, CA, 1975) p. 24.
 Joel Seligman, The Transformation of Wall Street: A History of the Securities and Exchange Commission and Modern Corporate Finance, , 1982, p. 63.
German External Debts, , US and Other Governments, 4 Treaties 443, pp. 451 et seq.
 McMillan, p. 199.
 Private correspondence with the German agency that conducted verification process, Bundesschuldenverwaltung, Dienststelle Berlin, Bundesrepublik Deutschland, 17 October 1995.
 Norman v. Baltimore & Ohio Railroad Co.,, 294 240(1935), United States v. Bankers Trust Co., 294 U.S. 240 (1935), Nortz v. United States, 294 U.S. 317 (1935), Perry v. United States, 294 U.S. 330 (1935).
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- Marshall Plan
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- Dawes Plan, 1924–29
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- Text of the treaty
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- Timothy W. Guinnane, Financial Vergangenheitsbewältigung: The 1953 London Debt Agreement