It is said that Germany only paid off its war reparations fron WW1 in 2010 so what happened to the payment of war reparations in Germany when it was split in 2?

by snp4
velax1

(the following is mainly a summary of information contained in a document published by the scientific services of the German Bundestag, the German parliament, which is linked to at the end of the post - note that this is a non-partisan service which is highly regarded in Germany for the accuracy of its studies)

To answer this question, one has to first take a look at the complex history of Germany's reparation payments before the Nazi time, before I then try to summarize the post world war II payments. Given the nature of this question, most of the documents and studies about this are in German, and I apologize in advance for the "German accent" in this posting.

The reparations Germany had to pay were based on article 231 of the contract of Versailles, which assigned all responsibility for the start of World War 1 to Germany. A consequence of this was that the Weimar Republic had accepted to compensate the other participants in the war for their damages, which were set in a conference in Paris in January 1921 to 269 billion gold mark, to be paid in 42 annual payments. After protests by the German government and very tense negotiations, this was revised in May 1921 to 132 billion gold mark, again to be paid over 42 annual payments (52% would go to France, 22% to Great Briton). Germany had problems to pay, which escalated to the annexation of the Ruhr region by France and Belgium in 1923, and also led to hyperinflaction, which was only stopped by the introduction of a new currency, the Rentenmark, on 15 November 1923 (which was later revised to the Reichsmark, in 1925; see the article by Braun quoted at the end of this post). These events in the end led to yet another revision of the repayments, the so-called Dawes Plan, in 1924. The Dawes plan included annual payments of 1 billion gold marks until 1927, and an increase of 2.5 billion from 1928 onward, and also included control over the Reichsbahn, Germany's train system. Since Germany was unable to fulfill these increased payments, the Dawes Plan was revised in 1929, leading to the so-called Young plan. These plans were based on the idea that Germany would only be able to pay back these debts if they did not strangle its economy. The Young plan sat Germany's debts to 112 billion Reichsmark, which should be paid over 59 years with a rate starting at 1.7 billion, which would then slowly increase to 2.4 billion Reichsmark and then decrease again. It also brought the Reichsbahn and Reichsbank back under German control.

In summary, around 1929 the situation was such that the repayments done through three different measures: 1. direct payments by the German government on the amount of annually 1-2.5 billion Reichsmark, 2. repayment via bonds based on the Dawes Plan, which was around 4 billion Reichsmark at an interest rate of 7 percent, and 300 million dollars at an interest rate of 5.5 percent, based on the Young Plan. These bonds turned out to be fairly successful, and despite the 1929 world economic crisis the bonds sold well. The Dawes plan effectively allowed Germany to pay its reparation debts by credit, which is a case of the so-called "transfer problem" that Keynes pointed out during that time, see Ritschl, LSE WP 163, for a summary of Germany's economic situation in that time, and Accominotti et al., 2017 (preprint - see link below) for a discussion on the Dawes Bonds and the effect of Germany's external default. Following the World Economic Crisis, in the Hoover moratorium from 20 June 1931, international payment flows were initially stopped (including a stop on Germany's repayments for 1931). Following this, agreements reached at the conference of Lausanne on 9 July 1932 would have ended the Young plan and offered Germany to get rid of its remaining debts by payment of 3 billion gold marks. However this was not ratified and with the rise to power of the Nazis, in 1934 Germany stopped all of the principal payments and the interest payments were significantly reduced (the perceived unfairness of the payments had been one of their major election promises). Until that time, Germany had paid around 25 billion Goldmarks in reparations, although the exact amount is still debated.

This now brings us to the situation after world war 2. Once the Federal Republic of Germany was founded in 1949, it saw itself as the successor to the German Empire / Weimar Republic, and started paying off the debt again, albeit at a reduced rate because of the weak West German economy at that time and based on the 1953 London treaty ("Agreement on German External Debts") with about 65 countries that were owed money by Germany. This treaty is complex - in fact, in 1973 Rumpf called it "das vielleicht komplizierteste Vertragswerk der deutschen Nachkriegsgeschichte" (the probably most complex treaty of Germany post war history). It includes not only government debts, but also regulates debt payments from private companies and even private people. The treaty reduced many of the debts Germany owed to other countries from 29.3 billion German Marks to 14.5 billion German marks). Some of the bonds were extended to the 1990s.

East Germany and countries from the Eastern bloc were not participating in the negotiations, and consequently East Germany was not a partner of the London treaty, which only included the Western allies. However, the Soviet Union and East Germany agreed in their agreement of 22 August 1953, just after the London treaty, that East Germany had paid all of its share of reparations from both wars, and therefore East Germany stopped all payments.

West Germany, on the other hand, followed the London treaty and continued the debt payments.

This now brings us to the German unification, and an interesting twist on things. The reason is that Article 5(2) of the London treaty states that some payments "...shall be deferred until the final settlement of the problem of reparation." This includes the interest payments that would have been due for 1945-1952. This settlement came with the so-called 4+2 agreement ("Treaty on the Final Settlement with Respect to Germany"), which were done "instead" of a peace agreement, such that from 1990 onward the reunified Germany started to pay interest on the Dawes and Young bonds again. At that time the principal of the Dawes and Young bonds had already been paid off (as well as that on the so-called Kreuger bonds - in total about 1.53 billion Deutsche Mark), but interest of a total of 239.4 million Deutsche Mark, i.e., around 125 million Euros, was still open, which was then paid off over 20 years (based on agreements in the London treaty). Overall, about 90% of the bond owners received payments (of a total of around 200 million Euros including interest). There is speculation that the other 10% of the bonds were probably lost (they were paper bonds, and it is speculated in the literature that quite a number of people did not believe that the German unification would ever come, and therefore treated them as junk bonds and might have destroyed them).

As of 3 October 2010 the payments were officially done.

Sources:

O. Accominotti, P. Kessler, K. Oosterlinck, The Dawes Bonds: Selective Default and International Trade, Manuscript dated 10 August 2017, available at https://www.eh.net/eha/wp-content/uploads/2017/08/Oosterlinck.pdf

H. Braun, Waehrungsreform 1923/1924, https://www.historisches-lexikon-bayerns.de/Lexikon/W%C3%A4hrungsreform,_1923/24

Agreement on German External Debts, https://www.bgbl.de/xaver/bgbl/start.xav#__bgbl__%2F%2F*%5B%40attr_id%3D%27bgbl253s0331.pdf

Agreement on the Final Settlement with Respect to Germany, http://chnm.gmu.edu/1989/archive/files/germany-final-settlement_e0189c0884.pdf

Summary of the overall German debts resulting from the Versailles treaty published by the scientific services of the German Bundestag (https://www.bundestag.de/resource/blob/413322/4c3fffa7b1de4151be9641a8254f6f30/WD-1-088-08-pdf-data.pdf)

A. Ritschl, Reparatios, Deficits, and Debt Default: The Great Depression in Germany, London School of Economics Working Paper 163/12, http://eprints.lse.ac.uk/44335/1/WP163.pdf

H. Rumpf, 1973, Die deutsche Frage und die Reparationen, https://www.zaoerv.de/33_1973/33_1973_2_a_344_371.pdf