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Reparations were important in creating uncertainty and doubt in the 1920s. Astronomical sums were thrown around at Versailles. The decision was postponed. Ultimately, the 1921 London Schedule of Payments required Germany to pay 132 billion gold marks (US$33 billion) in reparations to cover civilian damage caused during the war (Marks, 1978).⁵ Immediately 20 billion gold marks were to be paid, but only 8 billion was paid. The London schedule divided reparations into three groups, A, B and C. A was the leftover amount of 12 billion and B was 38 billion golden marks. The rest was designated as C, and none expected this to be paid.⁶ Ultimately, just over 20 billion gold marks or $5 billion was paid. Most of these payments were financed by foreign loans, many of which were eventually repudiated by Hitler (Marks, 1978).⁷

Reparation payments were progressively reduced.⁸ The Dawes Plan managed to finally get French agreement to a reparations deal after the fiasco of the occupation of the Rhineland in 1923.⁹ The United States loaned $200,000,000 to Germany to “prime the pump,” and Germany paid 1,000,000,000–2,500,000,000 marks in reparations for 5 years.¹⁰ But it soon became obvious that Germany would not be able to pay the required amounts. The Young Commission was set up in 1929. The Young Plan further reduced payments by about 20%. Also, of the annual payment of US$473 million, one-third had to be paid; the rest could be postponed, but would incur interest. Most of the payments were financed by a consortium of American investment banks coordinated by J.P. Morgan & Co. In the end, Germany received more money in loans than it ever paid in reparations; thus, the cost of repairing war damage was borne ultimately by the taxpayers, investors and consumers of the Allied nations and the United States.

There was considerable discussion and cooperation at various levels. But these did not satisfactorily resolve the issues. There were continuous alarms, and the performance of the world economy during this period was poor. Some analysts have attributed the problems to the lack of a hegemon. According to this idea, a hegemon would provide the public good of monetary stability and other countries would benefit from this stability (Kindleberger, 1973).¹¹ Such analysts argue that in the pre-World War I period, the UK had been the hegemon and the Bank of England (BE) had acted to ensure the smooth working of the GS. Eichengreen (1996, 1998) challenged this hegemonic interpretation of the GS, arguing that the international monetary system was essentially cooperative. The BE depended on lending from other central banks, the Bank of France in particular, to stabilize the system in times of crisis.¹² The extent of cooperation among central banks has been questioned. Cooperative efforts, Gallarotti (1995, Ch. 3)¹³ argues, were intermittent, occurred on an ad hoc basis when crises threatened, were bilateral rather than systemic and were effected in order to protect domestic markets.¹⁴

Great Britain was too weakened by the war to act as a hegemon any longer, and the US, which was now the most powerful economy, chose not to act to stabilise the world economy. Others argue that the BE could no longer stabilise the world economy because structural changes prevented it from playing that role (De Cecco, 1984). Still others have held that the reparations issue vitiated the atmosphere for cooperation or that they imposed an unbearable burden on Germany, which weakened it and the entire world economy.