150 ChaPter 3
1930s, however, as soon as one country devalued its currency, it was likely that
the other major powers would do the same, so the devaluations never led to
an increase in exports but just created inflation without added trade.
But the biggest problem came from the decisions made at Versailles. By
imposing such huge reparations on Germany, $33 billion, the Allies made it
impossible for Berlin to recover. It could not rebuild its own industries while
so profoundly in debt, so it could not make reparations payments to England
or France, either in cash or in goods it produced. London and Paris, mean-
while, were deeply in debt to the U.S. for the loans and financial support that
Washington and Wall Street offered during the Great War, but they could not
repay their loans either. Britain’s economy was woeful, with exports down by
65 percent in 1921 and unemployment in the 25-30 percent range.
Woodrow Wilson’s ideas at Versailles, rejected by the Europeans, had been
vindicated. U.S. economic prosperity depended on European reconstruction,
and with Germany, England, and France all suffering, America’s economy was
stuck in the mud too. Britain did offer the U.S. a plan to have some debts
canceled in return for London canceling some of Germany’s reparation, but
President Warren G. Harding turned it down. In 1924, the U.S. tried to
stimulate Europe’s depression with the Dawes Plan, a program by which
Germany’s reparations would be adjusted to a lower amount and Americans
and foreign investors would send $200 million to Berlin to help rebuild. This,
alas, led to an economic triangle—the U.S. sent loans to Germany; Germany
sent that money in the form of reparations to England and France; and then
London and Paris repaid the U.S. for wartime debts with the same money [see
graphic below]. As John Maynard Keynes, the famed economist and British rep-
resentative to the reparations commission at Versailles [who, like Wilson, had
warned against the huge reparations for Germany], explained it, “reparations
and debts are mostly settled on paper and not in goods. The United States
lends money to Germany; Germany transfers its equivalent to the Allies; and
the Allies pass it back to the United States Government. Nothing real passes;
no one is penny worse.” The U.S. tried again in 1929, offering the Young Plan,
which further reduced German reparations and offered loans to Berlin, but it
was too little too late by that time, as the Depression had already hit hard.
The absence of foreign outlets for surplus capital surely was a sign of eco-
nomic distress, and the depression would worsen before getting better.