6 - Franco-Prussian War Indemnities

Summary

Chapter 6 studies the case of Franco-Prussian War indemnities of 1871. France paid the indemnity of 25 per cent of output in three years to Prussia. The years following the end of the war featured several default-like characteristics (output contraction and high debt levels) but saw neither a devaluation of its currency nor a fall in real wages. France had easy access to loans at reasonable interest rates, with high investor participation from both foreign and domestic sources. The most important factor was that France had accumulated a high stock of foreign assets, meaning its net debt was essentially zero, which incentivised a settlement that did not include sanctions or confiscations. In this case, enforcement of sovereign debt played a positive role, in that a default would have been more costly than repayment. It is also likely that military enforcement was not needed, because France was incentivised to repay because of its easy access to debt and stock of foreign assets. The macroeconomic situation was, crucially, one in which the current account was positive, meaning that while France repaid the indemnity it did not do so by indebting itself.