Keynes and The Economic Consequences of the Peace
The conclusion of World War I set into motion a political debate that had
tremendous implications for the future of Europe and the world. In the pivotal
time period between October of 1918 and June of 1919, the political, economic
and social relations of Europe were debated under the terms of the Armistice
agreement of November 5, 1918. Within this debate, the terms of peace were
outlined and the penalties that were to be assessed to Germany codified in the
Treaty of Versailles. President Wilson, intoxicated with the moral rightness of
his Fourteen Points for international peace, convinced the Germans to accept an
Armistice that would be based on the ideals of the Fourteen Points that were
first enumerated on January 8, 1918. Pursuing a foreign policy of idealism,
Wilson attempted to provide a framework in which international peace could be
assured. Key to this peace initiative was the idea of a League of Nations whose
task would be too arbitrate disputes between nations and affirm the right for
self-determination among the nations of the world. Implicit and later enlarged
upon by Wilson was the idea that punitive damages would not be levied against
the German government, as indicated in his speech before Congress on February
11, 1918.
Critical to the debate was the issue of reparations. France and Britain
advocated that Germany must pay for the civilian damages and economic losses
that occurred due to the war. Negotiations over the amount of reparations that
Germany should pay became an central issue in the drafting of the Treaty of
Versailles. The political platforms that each of the Allied nations had brought
to the conference in Paris were in conflict. France was seeking to avoid a
future threat from Germany by subjugating Germany’s economic interests to
France’s future security interests. Britain’s leadership, bound by a
political mandate to crush the enemy, sought to make Germany pay for the
economic costs of the war that had arisen in England. America, led by Wilson’s
ideals, sought to find a “just and right” peace that would afford
international stability in the future.
Involved in the debates and terms of the Treaty, representing the British
Government, was John Maynard Keynes. An economist that had risen to prominence
in the Treasury Department, Keynes demonstrated a respectable ability to
understand the flow of currency in international markets and to analyze the
economic needs of Europe as the war came to a end. In the autumn of 1918, as the
war was drawing to a close, Keynes and others at the British Treasury were
assessing the potential amount of reparations that Germany might be able to pay.
The figure they arrived at was 2000 million pounds, but this was rejected by
other negotiators and leaders in Britain as being too small. By February of
1919, Keynes was the official Treasury representative from Britain on the
Supreme Economic Council. This council was formed to deal with the economic
problems of Europe during the transition period between war and the peace
settlement. This position provided Keynes with an overview of the international
financial situation and the pressing economic needs of Europe. He continued his
advocacy of a lenient and magnanimous treaty of peace that would allow the
economic situation of Europe to stabilize.
By June of 1919, Keynes had become disillusioned with the peace process.
Frustrated by the demands of the allies for full compensation of the war and the
specifics of the Treaty of Versailles, Keynes resigned from his position at the
Treasury and the Supreme Economic Council. By this point, Keynes had determined
that the terms of peace and reparation were too severe to be justifiable. His
attempts to put forward a more magnanimous treaty had been rejected by the
Allied governments. In frustration he turned his pen to the writing of The
Economic Consequences of the Peace which appeared in late 1919. The book
reflected his predictions and analysis of the consequences of the Treaty of
Versailles on the future peace and economies of Europe. The book immediately was
received around the world with mixed reactions.
The main thesis of the book revolves around the reparations that had been
imposed upon Germany in the Treaty of Versailles. Coupled with this perspective
was a polemic against the political aims of the Council of Four consisting of
Woodrow Wilson of America, Georges Clemenceau of France, David Lloyd George of
Britain and Vittorio Orlando of Italy. In particular, Keynes wrote against the
actions of Wilson, Clemenceau and George. In chapter three of The Economic
Consequences of the Peace, Keynes portrays these leaders as lacking vision and
courage to address the economic problems of Europe. Writing in polemic fashion,
he portrays Clemenceau as being driven by one illusion, “France.” In
essence, Clemenceau is characterized as being driven by an intense nationalism
that would admit no leniency toward Germany and demanded unreasonable economic
reparations. Wilson was portrayed as a leader who was like a “Nonconformist
minister.” While Wilson came to the Conference with high ideals expressed in
the Fourteen Points, he lacked any detailed proposal and was “bamboozled”
into accepting British and French concessions that amounted to interpretive
glosses of the Fourteen Points. For Keynes, this changed the original terms of
peace to one that violated Germany’s understanding of the peace initiative,
and thus represented a breach of international goodwill. As for George, Keynes
elaborated that the British leader had succumbed to political pressure that
required of him to demand the full costs of the war from Germany.
In chapters four and five, Keynes developed his central thesis based on economic
considerations. Chapter four examines the Treaty in detail and enumerates the
numerous clauses that will deny Germany the ability to economically rebound or
survive. Since the Treaty included the ceding of Germany’s mercantile
inventory and several of its coal producing areas, Alsace-Lorraine and Upper
Selesia, Keynes could not see how these provisions could enable Germany to
economically produce a surplus to meet the terms of the Treaty. Stressing that
Germany’s pre-war coal production had stimulated the economic solidity of
Europe, Keynes saw the possibility of revolutionary reactions in European
countries if economic order was not restored to Germany. This would mean a
revision of the treaty to prevent the economic dislocations that would be caused
by the pursuit of the terms of the Treaty of Versailles. The terms regarding
tariffs and transportation on German river systems left the economic
administration of Germany’s economy in the control of the Reparation
Committee, in Keynes understanding. This represented a violation of the all
important idea of political “self-determination.”
Chapter five represents the central economic argument of Keynes. In this
chapter, he outlines his analysis of Germany’s ability to pay reparations. In
the first section of this chapter, Keynes assesses that the actual amount of
reparations should be fixed at $10,600,000,000, based on Armistice conditions of
peace. In the next section of chapter five, Keynes delineates that under the
provisions of the Treaty, the reparations are expanded to include claims for
Pensions and Separation Allowances. This later inclusion, according to Keynes,
was a direct violation of the spirit of the conditions of peace set forth in the
Armistice. The inclusion of Pensions and Separation Allowances, designed to
compensate those who had lost family members in the war and also to fund the
pensions of WW1 veterans and their families, would more than double the
reparations due by Germany. Keynes asserts that this would set the amount of
reparations at $40,000,000,000, well above the $10,000,000,000 he thought
adequate for justice.
Keynes then begins a systematic appraisal of the wealth and ability of Germany
to pay the reparations as outlined in the treaty. Using pre-war economic data on
Germany’s balance of trade and industry, Keynes outlines why it will be
impossible for Germany to make payments to the Allies in accordance to the
Treaty of Versailles. His expressed aim is to show that exports will never reach
a level over imports to allow a realistic ability to pay reparations. Equally,
Keynes continues to express how this subjugation of Germany’s economic ability
to reparations would undermine social cohesion and led to further economic
dislocations in Europe with revolutionary potentials. His final aim in this
chapter is to show how the Reparations Committee and its powers amount to a
total subjugation of the German economy to the whims of the Committee.
In Chapter six, Keynes returns to his polemic against the economic mandates of
the treaty upon Germany and Europe. Examining the situation as it existed in the
1919, Keynes enumerates how the failure of the exchange system, the reduction of
production, and the debt held by Allied governments were sowing the seeds for a
revolutionary reaction that would undermine Europe from its pre-war strength and
stability. Key to this understanding was an awareness of the need for
international trade. If currencies held by the new recognized nations and
Germany were worthless in the international market, how could these countries
begin to provide trade and provide for their own subsistence? In the despair
that would follow, according to Keynes, people would turn to any idea that seem
to provide an answer to the malaise that was evident in Europe.
Having presented this gloomy picture of the potential results of the treaty,
Keynes sets forth his proposals for a revision of the treaty. First, he would
set the sum of reparations at $10,000,000,000, deducting from this amount the
assets that were ceded in the Armistice such as the mercantile fleet and
overseas possessions. He called for the idea of a Free Trade Union among
European nations in which tariffs would be banned for 10 years. Coal provisions
to France would be amended so that Germany’s liability to provide coal would
only amount to the difference between France’s capacity after the war and the
productive capacity before the war, limited to 20 million tons a year. Second,
Keynes proposed that all Inter-Allied war debts be canceled. Third, he argues
for an immediate loan of $1,000,000,000 be provided for the reconstruction of
Europe’s infrastructure. Fourth, he advocates that trade with Russia should be
re-established so that the Central countries of Europe might once again be
stimulated by German commerce.
The publishing of The Economic Consequences of the Peace occurred against the
backdrop of several political facts. The idea that the reparations were
uncollectable and unjust was acknowledged while the negotiations in Paris were
ongoing by some in the British and American governments. This acknowledgment,
however, was delegated as a task for the League of Nations and the Reparation
Committee to solve. Also, with the rise of Bolshevism in Russia, many were
beginning to see the need for a stable Europe and a strong Germany to act as a
buffer zone from communist expansion. Equally important, Wilson was fighting a
loosing battle to have the treaty ratified in the United States. Without the
United States support and ratification of the treaty, the League of Nations
would not function as planned. In Congress on February 10, 1920, Senator Borah
quoted extensively from The Economic Consequences of the Peace in his efforts to
oppose the ratification of the Treaty of Versailles. In this complex
environment, it is only natural that reactions to the book would result in
varied opinions.
The question that arises concerning this book is whether it was written as an
accurate prophetic analysis of the future of Europe, or was it written as a
polemic to force changes in the terms of peace. In the reactions that followed,
several were to be expected. Germany praised the book as a reflection of their
concerns. Opponents to the Treaty of Versailles in the United States seized the
book as a source for defeating Wilson and the idea of the League of Nations.
France was outraged and insisted that Germany was capable of paying the
reparations. In Britain, Keynes, once sought out for advice and help in economic
matters, was shunned by many. Whatever the response, responses primarily
centered around two areas.
One response focused on the character representations that Keynes had described
of the Council of Four at Paris. Charles Seymour in the Yale Review seized upon
this aspect in his review of the book in 1920. In this review, Seymour makes the
claim that the Council was not ignorant to the economic realities of Europe, but
they were influenced by public opinion in the Allied nations that demanded harsh
reparations. On the issue of Wilson’s preparedness, Seymour appeals to the
fact that Colonel House had detailed plans of new territorial boundaries before
the conference began. Seymour’s opinion of the book is summed up in his
statement that “Mr. Keynes has missed a great opportunity.” Meaning Keynes
book is written more in the fashion of a “propagandist” rather than an
objective analysis of what revisions of the treaty were necessary for a lasting
and effective peace.
This point of view was further expressed by Frederic Ogg in his review of the
book in The American Political Science Review. Commenting on the conclusions of
Keynes, Ogg writes, “his book gives more evidence of moral indignation than of
intellectual discrimination, and his language is often lacking in scholarly
restraint.” Ogg goes on to say that Keynes was primarily interested in the
economic conditions of the treaty and ignored the pressing political
considerations. He describes Keynes perspective as being “Germanocentric.”
Thus criticism in one respect tended to focus on the emotional polemic nature of
the book.
A second criticism of the book centered around the issue of reparations and
Germany’s economic abilities. Dr. Hazen, professor of History at Columbia
University, criticized Keynes lack of understanding of the political
reparations amount. In his article in the New York Times on February 29,
1920, Hazen proceeds to criticize Keynes “remedies” as being short-sighted
and representing the ideas of the “Extreme Left.” Hazen attacks Keynes ideas
on the canceling of Inter-Allied debts, Germany’s historic claim to the Sarre
Basin coal mines, and the idea of a lump sum reparation of $10,000,000,000. Once
again, Keynes is viewed as maintaining a pro-German attitude that amounts to the
“art of slurring those who helped win this war, without undergoing the labor
of presenting the situation with any fairness.”
Probably the greatest criticism of Keynes book came from Entienne Mantoux in his
book The Carthaginian Peace. Written in 1944, Mantoux presents an economic
rebuttal to Keynes claims that Germany was unable to pay the reparations.
Focusing on the idea of reparations in a section entitled “The Transfer
Problem,” Mantoux delineates how Germany could have shifted its industry
production to produce products that would be desired by other countries and thus
expand Germany’s exports. His argument is overshadowed by Germany’s
occupation of France during World War II when he wrote this book. Thus he argues
that the massive re-armament of Germany is evidence that Germany could have paid
the reparations. Of course this books was written some 24 years after the fact
and thus cannot truly gauge the initial reactions to Keynes book.
While these criticism abound, there were others who found the book to be an
adequate description of the Treaty of Versailles. C.J. Bushnell in a short
review of the book in The American Journal of Sociology, outlines the general
thesis of the book. For Bushnell, the “prime importance of the work consists
in its vivid sense of the growing moral and economic solidarity of the world,
and particularly of Europe and its detailed search for a sound economic basis on
which a peace settlement can really be made, in view of that solidarity.”
Inherent in all of these reviews, however, is the realization that the Treaty of
Versailles was not a perfect treaty and some revision would have to occur. The
question was whether to take Keynes “remedies” as an economic fact and a
just appraisal of European needs.
In answering this question, Keynes’ motivations in writing the book are
important. R. F Harrod, in his book on the life of Keynes, states that the books
was ‘designed as a polemic; it was composed in two months at a white heat of
passion immediately after the events. It sought to influence public opinion at
once. Europe was disintegrating and must be saved.” Given this viewpoint, it
is not surprising that the tone of the book would be controversial and reactive.
For Keynes, the issue was not one of territorial relations and politics, but how
Europe would be enabled to recover from the devastation of the war. The issues
of starvation, deprivation and economic desolation far outweighed the political
aspirations of the Allies for Keynes. Viewing Germany as the central economic
power in Europe, it was natural to see the need for Germany’s rapid
revitalization to offset the economic dislocations that had occurred due to the
war. This could only occur if magnanimous treatment was directed toward Germany.
Equally, Keynes was attempting to bring Germany back into the European community
as not to arouse further alienation.
Equally significant is Keynes charge of hypocrisy against the Council of Four.
It is clear that the Fourteen Points as enumerated and accepted as a condition
for the Armistice by Germany, were amended and changed to achieve the political
and economic goals of France and Britain. Wilson’s lack of foreign affair
experience, no doubt put Wilson in a position where compromise and back-peddling
occurred. Nonetheless, Wilson believed that the League of Nations would resolve
the fine points of contention and counted on approval of the treaty in America
to provide a lasting framework for peace. This miscalculation by Wilson in the
end proved to be a significant cause of for weakening of the treaty and its
application. Without American assurances and involvement in the application of
the Treaty, the unresolved matters over reparations and methods of payment could
never be solved to anyone’s satisfaction.
In the end, The Economic Consequences of the Peace, as a polemic against the
Treaty of Versailles may have achieved what Keynes had set out to accomplish.
With the weariness of war being substituted with the normal functioning of life,
citizens of the Allied countries were ready to forget the problems of the war.
As Keynes states in “A Revision of the Treaty” in 1922, “The desire for a
quiet life, for reduced commitments, for comfortable terms with our neighbors is
now paramount. The megalomania of war has passed away, and every one wishes to
comform himself with the facts. For these reason the reparation chapter of the
Treaty of Versailles is crumbling. There is little prospect now of the
disastrous consequences of its fulfillment.” The public opinion that had once
demanded total compensation for the war became more interested in returning to
an era of stability and peace. In this respect, the polemic would serve to
justify a return to a more politically isolationists position. Afterall, what
could be more magnanimous than ignoring the political and economic developments
of Germany.
As an interesting aside, the book did prove to be prophetic on the rise of
revolutionary governments. While Germany never paid anywhere near the amount set
down in the Treaty of Versailles, Germany and other European nations did not
receive the economic assistance needed to foster a healthy democratic economy.
In response to the dislocations and disorder, Hitler and Mussolini arose in
Germany and Italy to carry their countries toward fascism. It is perhaps this
prophetic nature of the book which has enabled the book to remain a
“classic” in historical studies rather than the accuracy of its economic
arguments. Granted in the two years after the initial release of the book, no
critic was adequately able to refute the economic conclusions of Keynes.
However, the book did serve a political purpose. In the United States, the book
served as a justification to reject the Treaty of Versailles, and thus rejecting
the idea of a League of Nations that had strong opposition in America. The
ironic aspect is that both Keynes and the Congress of America engaged in a
course of action that was decisively pro-German. Albeit for different reasons.
Thus, the nations of the world began to turn their attention to national issues
rather than the defects of the treaty. The political aspirations of
self-determination and national strength began to dominate the policies of
governments. This was soon to manifest itself in increasing tariffs and
reciprocal tariffs among the Western nations that further weakened international
trade and the economic recovery in Europe. Except for France’s occasional
demands for reparations, governments became increasingly indifferent to the
reparation demands of the treaty. As a result, the weakness of the peace that
was achieved in 1918 and 1919 would fester and culminate in the crisis of World
War II. In many respects, this was the true consequences of the peace.
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© CopyRight 2002 Scott R. Simpson