At the end of the First World War the Allies demanded from the Central Powers compensation for all the damage tat was done during the conflict. An Allied Reparations Committee was set up and in 1921 it reported that Germany should pay £6,600.000 million in annual instalments.
The people of Germany were outraged by the size of the sum. Nationalists politicians such as Adolf Hitler and Alfred Hugenberg claimed that if they gained power they would stop paying reparations. The British economist, John Maynard Keynes wrote a book The Consequences of the Peace where he claimed that this reparation programme would not only destroy the German economy but would damage the financial recovery of other nations in Europe.
When the German government failed to keep up the payments in 1923 French and Belgian troops occupied the Ruhr. This was followed by massive inflation and growing unemployment in Germany. Charles G. Dawes, an American banker, was asked by the Allied Reparations Committee to investigate the problem. His report, published in April, 1924, proposed a plan for instituting annual payments of reparations on a fixed scale. He also recommended the reorganization of the German State Bank and increased foreign loans.
The Dawes Plan was initially a great success. The currency was stabilized and inflation was brought under control. Large loans were raised in the United States and this investment resulted in a fall in unemployment. Germany was also able to meet her obligations under the Treaty of Versailles for the next five years. The Wall Street Crash created problems for the German economy and so a new commission under another banker, Owen Young, was set up to consider reparations in 1929.
Young's report suggested that the total amount of reparations should be reduced by about three-quarters and that Germany should make annual payments on a sliding-scale up to 1988. The Young Plan was accepted by all the governments concerned but it was severely criticized in Germany by right-wing politicians. The President of the Reichsbank, Hjalmar Schacht, also disagreed with the plan and resigned from office.
Unemployment continued to grow in Germany and in 1931 it was decided to suspend all payments of reparations. The following year a conference of creditors at Lausanne cancelled reparations. By this time Germany had only paid one eighth of the sum originally demanded.