The financing of the World War I created an unprecedented volume of indebtedness within and between the belligerent states. After this déluge, states were confronted with the colossal challenge of reducing the debt overhang. The balance sheets that issued and held the debts originating from the war were intricately interwoven in an international web of hierarchically-ordered interlocking balance sheets. To investigate if and how it was possible to reduce this debt burden, we adopt the Monetary Architecture framework and the associated macro-financial governance process to establish the notion of ‘contraction management’. We apply this framework to three main classes of war debt, i.e., German domestic war debts, German reparation debts, and interallied war debts. We identify four contraction types that can in principle be adopted to actively decrease the debt burden: contraction by fulfilment (the orderly repayment of debt), contraction by cancellation (the partial or full writing off of debt via forgiveness or default), contraction by oblivion (the de facto removal of debt to an off-balance-sheet position), and contraction by redenomination (the change of unit of account to reduce the debt burden). We find that the original attempt for all three debt categories after World War I was to achieve contraction by fulfilment, which turned out impossible. In consequence, the approaches towards contraction management changed throughout different stages that were crucially influenced by the Weimar hyperinflation, the Great Depression, and the outbreak of World War II. In the end, German domestic war debts contracted by two consecutive redenominations, German reparations debts contracted by cancellation, and interallied war debts contracted by oblivion.
Presentation at the “Spring Meeting” at Hertie School of Governance in Berlin (04/2025).
Co-authors:
Armin Haas, Global Climate Forum
Verena Gradinger, Global Climate Forum
Andrei Guter-Sandu, University of Bath
Download link:
OBFA-TRANSFORM Working Paper No. 8-EN
