The Economic Consequences of the 1953 London Debt Agreement

29 Pages Posted: 31 Aug 2016 Last revised: 19 Feb 2021

See all articles by Gregori Galofré-Vilà

Gregori Galofré-Vilà

University of Oxford - Department of Sociology

Martin McKee

London School of Hygiene & Tropical Medicine - Department of Public Health

Christopher M. Meissner

University of California, Davis

David Stuckler

Oxford University

Date Written: August 2016

Abstract

In 1953 the Western Allied powers implemented a radical debt-relief plan that would, in due course, eliminate half of West Germany’s external debt and create a series of favourable debt repayment conditions. The London Debt Agreement (LDA) correlated with West Germany experiencing the highest rate of economic growth recorded in Europe in the 1950s and 1960s. In this paper we examine the economic consequences of this historical episode. We use new data compiled from the monthly reports of the Deutsche Bundesbank from 1948 to the 1960s. These reports not only provide detailed statistics of the German finances, but also a narrative on the evolution of the German economy on a monthly basis. These sources also contain special issues on the LDA, highlighting contemporaries’ interest in the state of German public finances and public opinion on the debt negotiation. We find evidence that debt relief in the LDA spurred economic growth in three main ways: creating fiscal space for public investment; lowering costs of borrowing; and stabilising inflation. Using difference-in-differences regression models comparing pre- and post-LDA years, we find that the LDA was associated with a substantial rise in real per capita social expenditure, in health, education, housing, and economic development, this rise being significantly over and above changes in other types of spending that include military expenditure. We further observe that benchmark yields on long-term debt, an indication of default risk, dropped substantially in West Germany when LDA negotiations began in 1951 and then stabilised at historically low rates after the LDA was ratified. The LDA coincided with new foreign borrowing and investment, which in turn helped promote economic growth. Finally, the German currency, the deutschmark, introduced in 1948, had been highly volatile until 1953, after which time we find it largely stabilised.

Suggested Citation

Galofré-Vilà, Gregori and McKee, Martin and Meissner, Christopher M. and Stuckler, David, The Economic Consequences of the 1953 London Debt Agreement (August 2016). NBER Working Paper No. w22557, Available at SSRN: https://ssrn.com/abstract=2832561

Gregori Galofré-Vilà (Contact Author)

University of Oxford - Department of Sociology ( email )

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Oxford, OX1 3UQ
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Martin McKee

London School of Hygiene & Tropical Medicine - Department of Public Health ( email )

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Health Services Research Unit Professor of European Public Health
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United Kingdom
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Christopher M. Meissner

University of California, Davis ( email )

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Davis, CA 95616
United States

David Stuckler

Oxford University ( email )

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Oxford, Oxfordshire OX1 4AU
United Kingdom

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