• Banking and Finance in Historical Perspective
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40. Jahrgang | Jahr 2014 | Heft 1



Timothy W. Guinnane
Financial ‘Vergangenheitsbewältigung’: The 1953 London Debt Agreement
When the Federal Republic of Germany came into being in 1949, German citizens and earlier German governments were in default on some 30 billion Marks. The 1953 London Debt Agreement cut those debts by slightly more than half and extended the repayment periods. The Agreement also allowed Germany to postpone some payments until reunification. The London deal reflects a subtle and responsible understanding of the problems associated with the reparations and debt crises of the 1920s and 1930s, as well as fears about the moral hazard problems that would arise with making any part of the Agreement contingent on events Germany could influence. The generous terms offered to Germany reflected its central role in the European economy as well as U.S. foreign policy goals in the emerging Cold War.

Two days after the former German Democratic Republic (‘East Germany’) became part of the Federal Republic of Germany in October of 1990, the German Debt Administration announced that it would issue a new set of bonds. An observer might have thought that the new bonds were to pay for investments to upgrade the former East Germany’s crumbling infrastructure or for some other purpose related to the integration of the two economies. But these new bonds were to repay obligations Germany had incurred as long ago as the 1920s. This fact should puzzle: The Nazi regime had effectively defaulted on that debt. And in any case, why should Germany, in 1990,
start repaying debts incurred so long ago? The simple answer is that these repayments were required under the 1953 London Debt Agreement, which reduced the outstanding debt by more than half, and which marked the end of Germany’s isolation from international capital markets.[…]