The Marshall Plan and the Debt Agreement on German debt

24 October 2006 by Eric Toussaint

The present contribution presents an analysis of the bilateral economic policies developed by Washington towards its allies in the Cold War context. The Marshall Plan Marshall Plan A programme of economic reconstruction proposed in 1947 by the US State Secretary, George C. Marshall. With a budget of 12.5 billion dollars (more than 80 billion dollars in current terms) composed of donations and long-term loans, the Marshall Plan enabled 16 countries (notably France, the UK, Italy and the Scandinavian countries) to finance their reconstruction after the Second World War. replaced the World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

’s intervention since the US came to the conclusion that reconstruction gifts to Europe would be more efficient and cost-effective than loans. This bilateral policy aimed to buttress the capitalist Western block spearheaded by Washington against the Eastern bloc dominated by the USSR.

The United States cancelled the debts of some of its allies. The most obvious instance of this kind was the way the German debt was largely cancelled by the 1953 London Agreement. In order to make sure that the economy of West Germany would thrive and thus become a key element of stability in the Atlantic bloc, the creditor allies led by the United States made major concessions to German authorities and corporations - concessions that went beyond debt relief. A comparison between the way West Germany was treated after WWII and the current attitude to developing countries is a telling story.

 The US governments had learned from the mistakes made in the 1920s and 1930s

With the Treaty of Versailles at the end of the first World War, the victors demanded that Germany pay huge amounts as war debt and reparation [1]. Germany soon found it difficult to pay and social discontent grew as a consequence. The Wall Street crash occurred in 1929, leading to a global economic crisis. The US drastically reduced capital outflow. Germany stopped paying its debt to France, Belgium and Britain, and these countries in turn stopped paying their debts to the United States. The more industrialized world sank into recession and massive unemployment. International trade plummeted.

To prepare for a different outcome after WWII, Washington decided on policies that would be completely different from those implemented after WWI and until the early 1930s. It set up the Bretton Woods institutions and the United Nations. This was the international institutions approach.

We now have to analyse the bilateral economic policy developed by the United States.

 Give rather than lend money

The US government’s major concern at the end of the Second World War was to maintain the full employment that had been achieved thanks to the tremendous war effort. It also wanted to guarantee that there would be a trade surplus in relations between the US and the rest of the world. [2] But the major industrialized countries that could import US commodities Commodities The goods exchanged on the commodities market, traditionally raw materials such as metals and fuels, and cereals. were literally penniless. For European countries to be able to buy US goods they had to be provided with lots of dollars. But how? Through grants or through loans?

To put it simply, the US reasoning line went as follows: if we lend European countries on our side the money they need to rebuild their economy, how are they going to pay us back? They will no longer have the dollars we lent them since they used them to buy from us. So there are only three possibilities. First possibility: they pay us back in kind. Second possibility: they pay us back with dollars. Third possibility: we give them the money so that they can recover.

In the first hypothesis, if they pay us back in kind, their goods will compete with ours on our home market, full employment will be jeopardized, profits will fall. This is not a good solution.

In the second hypothesis, they cannot use the dollars they received on loan to pay us back since they have used them to buy our goods. Consequently, if they are to pay us back, we have to lend them the same amount (which they owe us) again, with interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. added. The risk of being caught in an infernal cycle of indebtedness (which puts a stop or slows down the smooth running of business) is added to the risk attached to the first possibility. If Europeans try not to accumulate debts towards us they will try and sell their goods on our home market. They will thus get some of the dollars they need to pay us back. But this will not be enough to rid them of their debts. And it will lower the rate of employment in the US. [3]

We are left with the third possibility: rather than lend money to Europeans (via the World Bank or not) it seems appropriate to give them the amount of dollars they need to build up their economy within a fairly short time. Europeans will use the donated dollars to buy goods and services from the US. This will guarantee an outlet for US exports, hence full employment. Once economic reconstruction is achieved Europeans will not be riddled with debts and will be able to pay for what they buy from us.

The US authorities thus concluded that they had better proceed by grants, and therefore launched the Marshall Plan.

 The Marshall Plan [4]

Between 1948 and 1951 the United States devoted over thirteen billion US dollars (eleven of which were freely given) to restore the economy of seventeen European countries in the context of the Organisation for European Economic Cooperation (OEEC, today OECD OECD
Organisation for Economic Co-operation and Development
OECD: the Organisation for Economic Co-operation and Development, created in 1960. It includes the major industrialized countries and has 34 members as of January 2016.
). The total of US aid amounted to approximately 90 billion of today’s US dollars. The United States demanded a number of commitments in exchange for their aid: first, European countries had to coordinate reconstruction expenses within the OEEC. The United States thus contributed to European cooperation, a prelude to the construction of Europe in order to reinforce the Western bloc against the Soviet bloc. Then they demanded that the money received be used to buy goods produced by their industry.

To those grants within the Marshall Plan we must add the partial cancellation of France’s debt to the US in 1946 (2 bn USD were written off). Similarly Belgium benefited from a reduction of its debt to the US as compensation for the uranium provided to make the first two atomic bombs which were dropped on the Japanese cities of Hiroshima and Nagasaki and which resulted in a first nuclear holocaust. The uranium had been extracted in the mines of Shinkolobwé (near Likasi, then Jadotville) located in the province of Katanga in the Belgian Congo. First move: Belgium was granted debt cancellation thanks to its colony, the natural ressources of which it lavishly exploited. Second move: some fifteen years later, Belgium transferred to the newly independent Congo the debts it had incurred in order to exploit those natural ressources as well as its population.

 The 1953 London Debt Agreement, or the German debt

If West Germany could redeem its debt and rebuild its economy so soon after WWII it was thanks to the political will of its creditors, i.e. the United States and their main Western allies (United Kingdom and France). In October 1950 these three countries drafted a project in which the German federal government acknowledged debts incurred before and during the war. They joined a declaration to the effect that “the three countries agree that the plan include an appropriate satisfaction of demands towards Germany so that its implementation does not jeopardize the financial situation of the German economy through unwanted repercussions nor has an excessive effect on its potential currency reserves. The first three countries are convinced that the German federal government shares their view and that the restoration of German solvability includes an adequate solution for the German debt which takes Germany’s economic problems into account and makes sure that negotiations are fair to all participants. [5]

Germany’s prewar debt amounted to 22.6 bn marks including interest. Its postwar debt was estimated at 16.2 bn. In the agreement signed in London on 27 February 1953 these sums were reduced to 7.5 bn and 7 bn respectively. [6] This amounts to a 62.6 % reduction.

The agreement set up the possibility to suspend payments and renegotiate conditions in the event that a substantial change limiting the availability of resources should occur. [7]

To make sure that the West German economy was effectively doing well and represented a stable key element in the Atlantic bloc against the Eastern bloc, allied creditors granted the indebted German authorities and companies major concessions that far exceeded debt relief. The starting point was that Germany had to be able to pay everything back while maintaining a high level of growth and improving the living standards of its population. They had to pay back without getting poorer. To achieve this creditors accepted first, that Germany pay its debt in its national currency, second, that Germany reduce importations (it could manufacture at home those goods that were formerly imported), [8] third, that it sell its manufactured goods abroad so as to achieve a positive trade balance Trade balance The trade balance of a country is the difference between merchandize sold (exports) and merchandize bought (imports). The resulting trade balance either shows a deficit or is in credit. . These various concessions were set down in the above-mentioned declaration. [9]

Another significant aspect was that the debt service Debt service The sum of the interests and the amortization of the capital borrowed. depended on how much the German economy could afford to pay, taking the country’s reconstruction and the export revenues into account. The debt service/export revenue ratio was not to exceed 5%. This meant that West Germany was not to use more than one twentieth of its export revenues to pay its debt. In fact it never used more than 4.2% (except once in 1959).

Another exceptional measure was that interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
were substantially reduced (between 0 and 5%).

Finally we have to consider the dollars the United States gave to West Germany: USD 1,173.7 million as part of the Marshall Plan from 3 April 1948 to 30 June 1952 with at least 200 million added from 1954 to 1961, mainly via USAID.

Thanks to such exceptional conditions Germany had redeemed its debt by 1960. In record time. It even anticipated on maturity dates.

 Some elements towards a comparison

It is enlightening to compare the way post-war West Germany was treated with the treatment of developing countries today. Although bruised by war, Germany was economically stronger than most developing countries. Yet it received in 1953 what is currently denied to developing countries.

Proportion of export revenues devoted to paying back the debt

Germany was allowed not to spend more than 5% of its export revenues to pay back its debt.

In 2004 developing countries had to spend an average of 12.5% of their export revenues to pay back their debts (8.7% for subsaharian African countries and 20% for countries in Latin America and the Caribbean). The proportion was even higher than 20% by the end of the 1990s.

Interest rate on external debt

As stipulated in the 1953 agreement about Germany’s debt the interest rate was between 0 and 5%.

By contrast, the interest rates to be paid by developing countries was much higher. A large majority of agreement had rates that could be increased.

From 1980 to 2000 the average interest rate for developing countries fluctuated between 4.8 and 9.1% (between 5.7 and 11.4% for Latin America and the Caribbean, and even between 6.6 and 11.9% for Brazil from 1980 to 2004).

Currency in which the external debt had to be paid

Germany was allowed to use its national currency.

No third world country can do the same except in exceptional cases for ludicrously small sums. All major indebted countries must use strong currencies (dollars, euros, yens, Swiss francs, pounds sterling).

Possibility of revising the agreement

The London Debt Agreement set up the possibility to suspend payments and renegotiate conditions in the event that a substantial change should curtail available resources.

Loan agreements with developing countries do not include such possibility.

Policy of import substitution

The London Debt Agreement stipulated that Germany could manufacture commodities it used to import.

By contrast the WB and the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
prohibit developing countries from manufacturing anything they can import.

Cash grants in strong currencies

Although it was largely responsible for the Second World War Germany received significant grants in strong currencies as part of the Marshall plan and beyond.

While the rich countries have promised developing countries assistance and cooperation, the latter merely receive a trickle by way of currency grants. Whereas they collectively pay back some 300 bn US dollars a year, they receive about 30 bn. The largest indebted countries in the Third World receive no cash aid whatsoever.

Undoubtedly the refusal to grant indebted developing countries the same kind of concessions as to Germany indicates that creditors do not really want these countries to get rid of their debts. Creditors consider that it is in their better interest to maintain developing countries in a permanent state of indebtedness so as to draw maximum revenues in the form of debt reimbursement, but also to enforce policies that serve their interests and to make sure that they remain loyal partners within the international institutions.

What the United States had done via the Marshall Plan for industrialized countries that had been ravaged by war they repeated towards some allied developing countries at strategic locations on the outskirts of the Soviet Union and China. They gave them much higher amounts than those lent by the WB to the rest of the developing countries. This particularly applies to South Korea and Taiwan, which were to receive significant aid from the 1950s, an aid that largely contributed to their economic success story.

From 1953 to 1961, for example, South Korea received more from the United States than what the WB lent to all independent countries in the Third World (India, Pakistan, Mexico, Brazil and Nigeria included), over USD 2,500 millions vs 2,323 millions. During the same period Taiwan received about 800 million dollars. [10] Because it was strategically located in relation to China and the USSR, a small farming country like South Korea benefited from US largesse. The WB and the United States were tolerant towards economic policies in Korea and Taiwan that they banned in Brazil or Mexico.

Translated by Christine Pagnoulle
Copyright Eric Toussaint 2006.


[1John Maynard Keynes, who worked for the British Treasury, had participated in the negotiations leading to the Treaty of Versailles (1919), the peace settlement that was signed after World War One ended. As he was against demanding such large amounts from Germany, he resigned from the British delegation and subsequently published a book called The Economic Consequences of the Peace (Keynes, 1919).

[2This is indeed what happened: the US trade balance, which used to be in the red, remained in the black until 1971. In other words the US exported more than they imported.

[3“Repayment in the form of imports has been traditionally opposed in this country on the ground that it causes competition for domestic producers and contributes to unemployment” Randolph E. Paul. 1947. Taxation for Prosperity, Bobbs-Merrill, Indianapolis, quoted by PAYER, Cheryl. 1991, Lent and Lost, Foreign Credit and Third World Development, Zed Books, London, p.20.

[4Information and table taken from the French page of Wikipedia:

[5Deutsche Auslandsschulden, 1951, p. 7 and following in Philip Hersel, El acuerdo de Londres de 1953 (III),

[61 USD dollar was worth 4.2 DM at the time. West Germany’s debt after reduction (i.e. DM 14.5 bn) was thus equal to USD 3.45 bn.

[7Creditors systematically refuse to include this kind of clause in agreements with developing countries.

[8In allowing Germany to replace imports by home-manufactured goods, creditors accepted to reduce their own exports to this country. As it happened, for the years 1950-1, 41% of German imports came from Britain, France and the United States. If we add the part of imports coming from other creditor countries that participated in the conference (Belgium, Netherlands, Sweden and Switzerland) the total amount reached 66%.

[9“The payment capacity of Germany’s private and public debtors does not signify only the capacity to regularly meet payment deadlines in DM without triggering an inflation process, but also that the country’s economy could cover its debts without upsetting its current balance of payments. To determine Germany’s payment capacity we have to face a number of issues, namely, 1. Germany’s future productive capacity with special consideration for the production of export commodities and of import substitution; 2. the possibility for Germany to sell German goods abroad; 3. probable future trade conditions; 4. economic and tax measures that might be required to insure a surplus in exports.” (Deutsche Auslandsschulden, 1951, p. 64 and following) in Philip Hersel, El acuerdo de Londres (IV), 8 de enero de 2003,

[10The author’s computation. Sources: 1) WB’s annual reports 1954-1961, 2) US Overseas Loans and Grants (Greenbook)

Eric Toussaint

is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France.
He is the author of Greece 2015: there was an alternative. London: Resistance Books / IIRE / CADTM, 2020 , Debt System (Haymarket books, Chicago, 2019), Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012, etc.
See his bibliography:
He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. He was the scientific coordinator of the Greek Truth Commission on Public Debt from April 2015 to November 2015.

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