A pragmatic approach to external debt: The write-down of Germany’s debts in 1953

Timothy W. Guinnane 13 August 2015



The Greek debt crisis has prompted a surprising number of references to an obscure agreement signed in London 60 years ago. The 1953 London Debt Agreement (LDA) marked the end of a long period of German default on external debt owed to both governments and private entities. The LDA cut the debt roughly in half, rescheduled what remained, and tied repayments to export revenues. Greece, in one of history’s great ironies, signed the LDA as a creditor nation. Prime Minister Tsipras has argued that Germany should appreciate the lesson of 1953 and offer similar debt forgiveness to Greece today.1 Both Germany’s and Greece’s partisans have misrepresented the LDA and in so doing obscured the motivations of Germany’s creditors in 1953. The LDA offers an important lesson, but only if understood accurately.

The London agreement

The Federal Republic of Germany (‘West Germany’) began life in 1949 as an occupied county with limited sovereignty. The three western occupying powers (the UK, France, and the US) conditioned full sovereignty on, among other things, settlement of the external debt problem. The LDA reflects two distinct deals. The occupying governments agreed to reduce money owed to them by Germany because of post-WWII assistance programmes, including the US ‘Marshall Plan’. This part of the agreement was simple, as debts incurred in the late 1940s did not entail complex issues of currency valuations or interest rates, and the only relevant parties were the four governments. The remaining German debt arose from pre-WWII borrowing, and posed complex issues. Much of the debt reflected bonds issued by German government entities and purchased by private investors elsewhere. Other debt reflected borrowing by German firms. One important loan (the Dawes Loan) dated to 1924 and had not been serviced since the early 1930s. If calculated at the contractual rate, the back interest alone would be worth as much as the principal. In addition, the debt had been issued in several currencies, some of which had depreciated so badly that even full repayment in the 1950s would amount to little.

The West German government insisted that any negotiation recognise its ability to pay as a constraint, noting that it had no authority in the German Democratic Republic (‘East Germany’), and that much German infrastructure had been destroyed by war. Hermann Abs, the lead German negotiator in London, insisted as a bedrock principle that the binding constraint was Germany’s ability to generate export earnings. This approach effectively set up each creditor as a competitor to every other creditor.

To achieve savings in the pre-war obligations, the agreement waved some unpaid interest on the older loans, and reduced interest rates going forward. Other savings came from an artful treatment of the gold clauses written into some tranches of pre-war loans. Gold clauses were a common feature of 19th and early 20th century lending contracts, requiring repayment in currency equivalent to the gold value of the currency at the time of issue. The LDA substituted this with what amounts to a US dollar clause – if the original loan had a gold clause, the lender after 1953 would receive payments equal to the dollar value of the currency rather than the gold value. This decision reduced much of the pre-war debt, since the US had devalued the dollar in gold terms in 1933. The decision also protected holders of obligations denominated in badly-depreciated currencies from a complete loss of their investment.2

The agreement included two provisions designed to make sure payments did not ruin the German economy. Some payments under the LDA were limited by German export earnings, and in any case Germany had the right to demand consultations if the payments posed too much hardship. And while the LDA specified principles for the debts of all German entities and parties, at first it did not apply to East Germany. The Federal Republic insisted that it could not be responsible for all of German obligations when it only ran part of the country. German negotiators in London assumed that reunification would ease the burden of making payments.3 Some of the pre-war obligations were hived off into contingent obligations that would be issued and serviced only if the entire country was unified.4

Reparations debt?

Some (especially German) accounts of the LDA dismiss the write-downs by claiming the debts were the reparations required by the Treaty of Versailles, which ended WWI.5 The Versailles reparations demands may have been excessive and unwise, but the connection between the LDA and the reparations obligations is limited. The post-war debts reflect the costs of supporting the civilian population in the occupied zones. This part of the write-down has nothing to do with reparations. Many of the pre-war debts were ordinary commercial obligations, and others reflected bonds issued by German cities and states, of the sort regional and local government entities float all the time. Again, reductions in these debts have nothing to do with reparations.

The only connections between the LDA and the Versailles reparations stem from the Dawes Loan (1924) and the Young Loan (1929). The Dawes Loan helped stabilise the German economy after the hyperinflation of 1921-23. That hyperinflation reflected conflict over reparations, and the Dawes Loan in effect let private lenders finance Germany’s reparations payments. The Young Loan was part of a plan to reduce the burden continued reparations payments imposed on Germany, in part by refinancing current reparations obligations. The reparations obligations were cancelled in 1932. Germany actually borrowed more from US investors than it paid in reparations.6

The London Debt Agreement as a precedent for a Greek bail-out?

Germany’s ‘economic miracle’ (Wirtschaftswunder) rapidly lifted German incomes in the 1950s.7 Germany made the required payments with little stress. Even the new obligations posed by the 1990 reunification posed little hardship.8 Ex post one could argue that the LDA was unnecessarily generous. More germane to the Greek question is why Germany’s creditors agreed to this deal in 1953. Here, unfortunately for the Greeks today, the motivations driving the 1953 agreement are nearly entirely absent today.

After some initial proposals to the contrary, the three western occupying powers agreed on the need for a strong, prosperous Germany. This decision reflected, in part, the German economy’s historic importance to the European and indeed world economy. Tension with the Soviet Union metastasised into the Cold War, leaving western strategists more worried about anchoring Germany in western political and military structures than about unpaid debts. In the initial stages of the London discussions, the US government agreed to reduce its demand for repayment of post-war credits from $3.2 billion to $1.2 billion. This write-down equalled about one-fourth of the total German external debt. The US made this reduction contingent on satisfactory settlement of the pre-war debt issues (a feature Abs interpreted as a threat to Germany and other creditors alike). The UK and France agreed to smaller reductions of much smaller debts.9 Many of the countries represented in the agreement, not least the U.K., France, and even Greece, were recipients of considerable US assistance at the time, and had good reason to cooperate with the US. To the US government, the sums debated in London were modest; in 1953 the US spent $50.4 billion on defence alone.10 This figure includes the current cost of the Korean War (which only ended in July of 1953) as well as the sizable military establishment elsewhere. Given these other commitments, $2 billion was a small sum to pay to solidify Germany’s role as a linchpin of the western alliance.


Greece today understandably points to the LDA as a precedent for the debt reduction it seeks, but the Greek position today has little in common with Germany in the late 1940s. Greece has never been central to the European economy, nor is Greece critical to an alliance run by a wealthy hegemon. There are other important differences. Opponents of Greek debt forgiveness worry about moral hazard; if the Greeks get off, why should the Portuguese pay? There was little such concern in 1953. Germany was not the only government that had failed to meets its debt-service obligations, but it was the only one in a position to expect help by virtue of its importance. The bondholders’ identity poses another problem today. Much of Greece’s debt today is held by European governments or the ECB. These governments have their own fiscal challenges and their taxpayers are in no mood to provide fiscal subsidies to maintain a currency union. Intense press interest means that any offer (or eventual deal) will be widely reported, almost immediately, and will have political repercussions in Athens, Berlin, and elsewhere. The London Conference in contrast attracted only modest press attention, and the decisions reached there were so complex that few outside a small financial community could really understand what had been agreed. How many ordinary citizens understand gold clauses? Some US politicians objected to the US offer in London in the 1950s, but their concerns were brushed aside. To a government and populace accustomed to spending vast sums on the military and related functions, the US contribution to the London negotiations was insignificant.

The London Debt Agreement does hold one important lesson for today’s crisis. The London negotiators represented countries that had just buried thousands, even millions of their citizens because of a brutal war the debtor country inflicted on others. Yet the basis of the negotiation was remarkable pragmatism. Some private creditors were indeed furious at their treatment. The German Bundestag at first refused to ratify the agreement, thinking it gave too much credit to a French occupier who was viewed as unhelpful. And some accounts reflect resentment of the US approach, which one might fairly label bullying-by-chequebook. But the negotiations lacked the moralising and appeals to nationalist myth or historical grievance that characterise discussions of the crisis today. Greek politicians have tried to rub Germany’s nose in its WWII history, while some German politicians do not conceal their disdain for Greece’s political class. The London Debt Agreement, on the other hand, came about because leading participants agreed that a solution to the debt problem was in the best interest of the German people, Germany’s creditors, and her European and North American allies. Similar pragmatism might lead to a reasonable solution to Greece’s problems today.


Abs, Hermann J (1991) Entscheidungen 1949-1953: Die entstehung des Londoner Schuldenabkommens, Mainz-München: von Haese und Kohler.

Buchheim, C (1990) Die wiedereingliederung Westdeutschlands in die weltwirtschaft 1945-1958, Munich: Oldenburg

Chrysoloras, N (2014) “Tsipras brings up German guilt in push for debt writedown,” Bloomberg Business, December 2.

Deutsche Bundesbank (2004) “50 Jahre Deutsche Mark. Monetäre Statistiken von 1948 bis 1997” GESIS Datenarchiv, Köln. ZA8186.

Glasemann, H-G (1990) “Die Schattenquoten aus dem Londoner schuldenabkommen”, Die Bank 90(6): 347-353.

Glasemann, H-G (1993) “Vierzig jahre Londoner Schuldenabkommen”, Die Bank 93(8): 491-496.

Guinnane, T W (2015) “Financial vergangenheitsbewältigung: the 1953 London Debt Agreement”, Yale University Economic Growth Center, Discussion Paper No. 880, SSRN No. 493802. The original version of this paper was posted on SSRN in January of 2004.

Hunt, J (2008) “The economics of German reunification,” The New Palgrave Dictionary of Economics, S Durlaf and L Blume (eds), Palgrave Macmillan.

Porter, E (2015) “Germans forget postwar history lesson debt relief in Greece crisis,” The New York Times, July 7.

Rombeck-Jaschinski, U (2005) Das Londoner Schuldenabkommen: Die regelung der Deutschen auslandsschulden nach dem Zweiten Weltkrieg, München: Oldenburg.

Schuker, S A (1988) American ‘reparations’ to Germany, 1919-1933: Implications for the Third-World debt crisis, Princeton NJ: International Finance Section, Department of Economics, Princeton University.

Stern (2010) “Deutschland hat keine Kriegsschulden mehr,” Stern, Ocotober 3.


1 References to the LDA are too numerous to list; see, for example, Porter (2015). For Tsipras and the LDA, see Chrysoloras (2014).

2 In 1933, the US devalued the dollar from 1/20th to 1/35th of an ounce of gold. Gold clauses in US domestic contracts were abrogated in 1934. The Italian lira, to take an extreme example, depreciated 97% between 1930 and 1953; if the LDA had waved gold clauses in lira-denominated loans without something like the ‘dollar clause,’ those obligations would have been nearly worthless in 1953. The agreement specifies a similar treatment for loans denominated in Swiss francs. The US consumer price index increased by 56% between 1924 and 1953, a rough indication of how much the gold-clause decision cost a US investor who owned Dawes bonds.

3 This assumption of course turns out to be false. Estimates of the total cost of the German reunification effected in 1990 run to trillions of euros, and those costs are set to continue. From 1991-2003, Jennifer Hunt points out, Germany annually spent 4-5% of its GDP on the former East Germany (Hunt 2008).

4 The London Debt Agreement has not received as much attention from economic historians as one might expect. Buchheim (1990) remains the most complete treatment. Rombeck-Jaschinski (2005) stresses the diplomatic manoeuvrings that led to agreement and is less precise on the financial implications of the agreement. Guinnane (2015), which will appear in a revised and extended form (in English) in Bankhistorisches Archiv, provides additional detail and references. Much of the story here can be followed from the agreement itself, available in English in the House of Commons Paper Cmd. 8781. The conference that negotiated the private debts summarised its agreement in Cmd. 8653. The preliminary inter-governmental agreements that led to the negotiations are collected in Cmd. 7667 and Cmd. 8252

5 For one example, see Stern (2010).

6 Thus the title of one detailed study of the inter-war period: American ‘Reparations’ to Germany (Schuker 1988). While not part of the LDA itself, Germany agreed to another set of payments in 1952 that are part of a full account of the period. Konrad Adenauer, the first post-war Chancellor, agreed that in light of what the Nazis had done to the Jewish people, the Federal Republic owed considerable financial support both to the new state of Israel and to individual Jews and their survivors (the latter represented by the Conference on Jewish Material Claims Against Germany). Germany agreed to pay $1 billion to Israel and another $500 million to the Conference.

7 West German GDP measured in 1991 prices more than doubled from 1950 to 1960 (Deutsche Bundesbank 2004).

8 The German debt authority had purchased many of the warrants for the ‘shadow parts’ (Schattenquoten) to be issued at reunification at deeply-discounted rates in the 1960s and 1970s; Glasemann (1990, p. 353) says that in the early 1970s they traded at about 8% of their face value.

9 The UK reduced its post-war demands by £51 million (about $143 million); France, by about $4 million. The UK and France waved interest on the unpaid balance, while the US did not, so the amounts are not strictly comparable.

10 From Historical Statistics of the United States, series Y-1953.



Topics:  Economic history Europe's nations and regions

Tags:  Greece, Germany, WWII, WWI, default, debt, debt forgiveness, London debt agreement, reparations, bail out, Grexit

Philipp Golden Bartlett Professor of Economic History, Yale University

Vox Talks