War reparations have been a common feature in peace settlements for thousands of years. The chapter provides an overview of how historical reparations were paid, and then an overview of the literature on the transfer problem, one hundred years after Keynes started the debate. Whether direct transfers of money or indirect transfers of assets, transfers affect trade flows and future income in the short or the long run. Financing a transfer is a budgetary problem in the short run, and if a country can borrow the money, the constraint is a willingness to pay, not the capacity to pay. But a transfer can also have second-order effects on savings, investments, consumption, and output, because interest rates or the terms of trade might mitigate or exacerbate the economic costs of the transfer. I show that the terms of trade, for the most part, improved in the years following the announcement of reparations, and that sovereign debt markets allowed countries to finance reparations by borrowing.

Chapter 11 looks at the much smaller World War II reparations to the Allies. The Allies had learnt from previous reparations disasters and focused on the de-industrialisation of Germany and Japan. Only small reparations were actually paid, and the transfers were offset by US loans from the Marshall Plan. I show how even though reparations were agreed, they were not necessarily paid, using a case study of German reparations to Denmark.

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.

Chapter 12 is the story of Iraqi reparations imposed after the Gulf War. The rise in Iraqi indebtedness was a consequence of global geopolitical trends in the 1980s, when political lending trumped solvency concerns. It allowed Iraq to obtain financing on terms more favourable than offered by the US government. Reparations were a consequence of the end of the Iran–Iraq War when Iraq invaded Kuwait. Reparations were imposed by a UN Resolution with a direct enforcement mechanism to take money from oil revenues. I use oral history sources to trace how Iraqi debt was restructured after the US invasion in 2003. The restructuring was permeated by politics to inflict harsh terms on creditors at the Paris Club, at a time when creditor-friendly restructurings were the norm. Despite its apparent success, however, in going for a politically expedient deal at the Paris Club, I argue the restructuring missed an opportunity to enshrine a doctrine of odious debt in international law. All debt was written off, except war reparations, which were paid in full through sanctions and war. They proved to be senior to all other debt and did not enter the sovereign debt restructuring.

Chapter 4 studies the Napoleonic Wars reparations. France lost the Napoleonic Wars in 1815, ending decades of revolution and counter-revolution. After Napoleons final defeat at Waterloo, France was forced to pay just under 2 billion francs in reparations, around a quarter of output in 1815, over the following five years. With French government revenues of around 700 million francs in 1816, the transfer represented almost three times the annual budget. That was a big transfer, even more so as France faced significant credit constraints because earlier defaults prevented it from tapping sovereign debt markets. Not until 1817 did France manage to borrow large amounts of money, paying back reparations with two years to spare. How did the country manage to pay the large reparations transfer? I argue that France benefited economically from a positive shock to its terms of trade as the war wound down. The French peacetime economy was structurally different in terms of its imports and exports, which had changed during many years of war and blockades.

Chapter 8 looks at the famous case of German World War I reparations. Had Germany defaulted already in 1929, it would have saved two years worth of interest payments and entered autarky at the same time, as market access was by then de facto gone. At this point, the European nations did not have the ability to enforce debt contracts and the United States agreed to a de facto cancellation of reparations. The German sovereign default in the 1930s was on debt issued to pay reparations, but it also had several effects on other state liabilities, with loans offering different kinds of creditor protection. Germany in the 1920s had high levels of reparations, but was able to borrow, because it offered de facto seniority to new loans. Creditors were willing to lend into a large debt stock because they thought they would rank senior to reparations. The German default on its sovereign debt was special because it was allowed by its politically weak creditors, who were unable to enforce debt contracts in the 1930s.

Chapter 7 is a brief overview of the Mexican–American War reparations (1848–1881), Cretan War reparations (from 1897), and Chinese reparations following the Sino-Japanese War (1895–1901) and the Boxer Rebellion (1901 and 1939). The chapter is a tale of how reparations can be so small as to be meaningless for the economy (in the American case) or long, painful, and enforced by political and military power (Greek and Chinese cases).

Chapter 9 is the brief story of the lesser-known World War I reparations of Bulgaria and Russia. Both reparations were large in terms of each countrys output but were subsequently negotiated away in political treaties. In the Soviet Unions case, it is one of the examples of how you can repudiate debt completely but under the cost of exiting the global trading system.

What happens when countries cannot default on their debt? This history of war reparations shows that state survival trumps economics. This chapter introduces and summarises the book.

Chapter 13 makes the argument that militarily enforcing sovereign debt is akin to a debtors prison for states, based on the cases in the book.

Chapter 2 introduces a framework for how to think about war reparations. It discusses how a reparation transfer can be smoothed out over time by borrowing the money. I then discuss other ways a transfer can be paid, by taxes or printing money, and the effects this has on the balance of payments and the terms of trade. Finally, in a technical section, I show how changed terms of trade affect the current account and national income.

Chapter 3 discusses sovereign debt theory and practice. It goes through the history of sovereign debt and how the current theories of borrowing and lending developed in the 1980s. I argue that countries want to be part of global society, and that means they sometimes repay unsustainable debt. The chapter dives into why countries might default, when they might default, how often countries have defaulted, and what the economic and political costs are. I then describe what happens when countries need to restructure their sovereign debt, both in theory and with a practical guide for the process. Finally, in another technical section, I describe a sovereign debt model. The model explains when countries should have no willingness to repay their debt. It allows me to characterise a set of stylised macroeconomic facts that usually accompany sovereign debt defaults. The default set that comes out of the model states when countries should default. These facts and default set (not part of the technical section) are used in Chapters 6, 8, and 10. Chapter 3 is the last overview chapter; the rest are case studies.

Chapter 10 is the story of World War II reparations to the Soviet Bloc. It focuses on Finnish reparations in the 1940s, which were repaid under great economic strain. Unable to default because of geopolitical considerations, it took Finland years to grow its economy following the war because large parts of its domestic resources went to produce reparations. The country did not have the option of defaulting because of political pressure in the new geopolitical landscape that emerged from World War II. Finland managed to eventually grow its way out of debt trouble. The trajectory was suboptimal. It involved three devaluations, a fall in real wages of more than 50 per cent, and large inflationary problems. I argue that a sovereign debt default would have allowed foreign exchange to be used for domestic purposes, but because it was not possible the macroeconomic adjustment had to come from elsewhere. Finnish state survival and its geographical location meant that it chose to repay reparations rather than attempt a default.