The Economic Consequences of the Peace

“Paris was a nightmare, and every one there was morbid. A sense of impending catastrophe overhung the frivolous scene; the futility and smallness of man before the great events confronting him; the mingled significance and unreality of the decisions; levity, blindness, insolence, confused cries from without,—all the elements of ancient tragedy were there.”

Keynes presents the atmosphere of the conference in literary, theatrical terms to set the mood for his description of the events that follows. Keynes uses his strengths both as an economist and as a literary writer to convey the folly of the proceedings and to emphasize the potential destructiveness of the treaty.

“What an extraordinary episode in the economic progress of man that age was which came to an end in August 1914. The greater part of the population, it is true, worked hard and lived at a low standard of comfort, yet were, to all appearances, reasonably contented with this lot. But escape was possible, for any man of capacity or character at all exceeding the average, into the middle and upper classes, for whom life offered, at a low cost and with the least trouble, conveniences, comforts, and amenities beyond the compass of the richest and most powerful monarchs of other ages.”

Here, the author discusses the economic and political developments in Europe in the late 19th and early 20th centuries. Overall, Europe had a relatively high standard of living. Of course, the inequalities produced by capitalism, argues the author, meant that most of the population lived below that standard. And yet their lifestyle was sufficient not to produce revolutionary conditions because it had improved from the early days of uncontrolled capitalism. Also, Keynes comments on the possibility of social mobility in this society in order to attain a higher standard of living. Overall, the discussion of the prewar status quo sets the scene for analyzing the postwar conditions and the way in which the Treaty of Versailles would affect them.

“The great events of history are often due to secular changes in the growth of population and other fundamental economic causes, which, escaping by their gradual character the notice of contemporary observers, are attributed to the follies of statesmen or the fanaticism of atheists.”

Prior to examining the Treaty of Versailles, Keynes reviews the macro-level developments in Europe in the late 19th and early 20th centuries. Many of these developments were the result of the Second Industrial Revolution. He reviews the organizational changes in the industries, trade and resources, and population growth. The author credits the population size and other quantifiable, material developments as being one of the key causes of historic changes.

“In fact, it was precisely the inequality of the distribution of wealth which made possible those vast accumulations of fixed wealth and of capital improvements which distinguished that age from all others. Herein lay, in fact, the main justification of the Capitalist System.”

Keynes is critical of unbridled capitalism but not of capitalism per se. Here, he argues that in the late 19th and early 20th century, capital accumulation allowed for economic and technological progress that occurred in certain parts of Europe such as Britain and Germany. At the same time, this system created socioeconomic inequalities between the upper and lower classes.

“In so far as the main economic lines of the Treaty represent an intellectual idea, it is the idea of France and of Clemenceau.”

Clemenceau was an experienced leader of France who represented his country at the postwar Paris Peace Conference. According to Keynes, the French side was motivated by revanchism, exaggerated material claims, and making sure that Germany does not rise again. The author argues that it is this view that came to be expressed in the accepted version of the Treaty of Versailles. The latter harshly punished Germany causing economic and political problems in that country itself and throughout Europe, as Keynes forecasted.

“For a Peace of magnanimity or of fair and equal treatment, based on such ‘ideology’ as the Fourteen Points of the President, could only have the effect of shortening the interval of Germany's recovery and hastening the day when she will once again hurl at France her greater numbers and her superior resources and technical skill.”

Keynes believed that the Fourteen Points were too vague for practical solutions to the question of German reparations. At the same time, Wilson’s Points contained the type of statements about justice that could translate into arriving at a settlement that would allow Germany to recover economically. According to Keynes, this type of settlement is not what Clemenceau wanted because he perceived European history as a “perpetual prizefight” (19) in which Germany could rise once again. Instead, Clemenceau pursued a policy of vengeance and was motivated by the goal of not allowing Germany to supersede France.

“In short, not only are German sovereignty and German influence extirpated from the whole of her former oversea possessions, but the persons and property of her nationals resident or owning property in those parts are deprived of legal status and legal security.”

The Treaty of Versailles dictated that Germany should lose some territories to its neighbors France, Czechoslovakia, Belgium, and Poland. France, for instance, received Alsace-Lorraine. Germany also lost its colonial possessions in Africa. Keynes is horrified that this policy affected not only government but also private property and thinks that it went too far. However, while the European neighbors were treated with the question of self-determination in mind, the same principle was not equally applied to non-Europeans abroad. Keynes is not concerned with the Africans living in the former German colonies, which is in line with the European racist and imperialist thinking of the time.

“The judgment of the world has already recognized the transaction of the Saar as an act of spoliation and insincerity. So far as compensation for the destruction of French coal-mines is concerned, this is provided for, as we shall see in a moment, elsewhere in the Treaty. ‘There is no industrial region in Germany,’ the German representatives have said without contradiction, ‘the population of which is so permanent, so homogeneous, and so little complex as that of the Saar district.’ Among more than 650,000 district. Among more than 650,000 inhabitants, there were in 1918 less than 100 French. The Saar district has been German for more than 1,000 years. Temporary occupation as a result of warlike operations on the part of the French always terminated in a short time in the restoration of the country upon the conclusion of peace. During a period of 1048 years France has possessed the country for not quite 68 years in all.”

Between 1920 and until 1935, because of the Treaty of Versailles, the Saar region faced occupation by France and Britain using a League of Nations mandate. France also came to be in control of the German mines there. This decision contradicted the principle of self-determination because this region was homogenously German for centuries. Therefore, such examples illustrate the unfairness of the Treaty of Versailles and the arbitrary way in which the Wilsonian Fourteen Points—the basis of the Treaty—were applied to Germany.

“The presence of these illusory provisions (amongst others) in the clauses of the Treaty of Peace is especially charged with danger for the future. The more extravagant expectations as to Reparation receipts, by which Finance Ministers have deceived their publics, will be heard of no more when they have served their immediate purpose of postponing the hour of taxation and retrenchment.”

Keynes pays attention to the relationship between the domestic conditions in the victorious countries, the voters and their demands, the political leadership, and the way these factors affected the Treaty of Versailles negotiations. He argues that the Big Four’s expectations for the size of Germany’s reparations were excessive, unreasonable, revanchist, and, at times, motivated by pleasing the domestic voter and scoring points in the elections.

“Thus the Treaty strikes at organization, and by the destruction of organization impairs yet further the reduced wealth of the whole community. The economic frontiers which are to be established between the coal and the iron, upon which modern industrialism is founded, will not only diminish the production of useful commodities, but may possibly occupy an immense quantity of human labor in dragging iron or coal, as the case may be, over many useless miles to satisfy the dictates of a political treaty or because obstructions have been established to the proper localization of industry.”

By examining the terms of the Treaty of Versailles in detail, Keynes identifies several problematic areas in it. These problems do not only pertain to the unrealistic amount of the reparations, but also to logistical questions, as is the case here. For example, some mines remained in Germany, but the blast furnaces for processing iron ore were now located in Poland due to territorial loss to the neighbors per the Treaty. By dismantling the established logistics, or what Keynes calls “organization,” this postwar agreement harms the German economy even more.

“Assuming then that the terms of this Note are binding, we are left to elucidate the precise force of the phrase—‘all damage done to the civilian population of the Allies and to their property by the aggression of to their property by the aggression of Germany by land, by sea, and from the air.’ Few sentences in history have given so much work to the sophists and the lawyers, as we shall see in the next section of this chapter, as this apparently simple and unambiguous statement.”

Keynes discusses the complex relationship between Wilson’s Fourteen Peace Points and the president’s subsequent note of November 5, 1918, that also served as the basis for the Treaty of Versailles. The author also examines the way in which this particular simple statement on reparations was investigated, interpreted, and reinterpreted by diplomats and lawyers who complicated matters.

“Thus a scientific consideration of Germany's capacity to pay was from the outset out of court. The expectations which the exigencies of politics had made it necessary to raise were so very remote from the truth that a slight distortion of figures was no use, and it was necessary to ignore the facts entirely. The resulting unveracity was fundamental. On a basis of so much falsehood it became impossible to erect any constructive financial policy which was workable. For this reason amongst others, a magnanimous financial policy was essential. The financial position of France and Italy was so bad that it was impossible to make them listen to reason on the subject of the German Indemnity, unless one could at the same time point out to them some alternative mode of escape from their troubles. The representatives of the United States were greatly at fault, in my judgment, for having no constructive proposals whatever to offer to a suffering and distracted Europe.” 

Keynes explicitly identifies the fact that the problems with the Treaty of Versailles were not cosmetic but rather fundamental. The claims were based on inaccurate information, unreasonable expectations, and the desire for vengeance. He argues, however, that the French and Italian positions were exaggerated but somewhat understandable in light of their own financial burdens. The US, in contrast, did not suffer infrastructural destruction like its European Allies. For this reason, the economist appears frustrated with the American side at the Paris Peace Conference for not proposing objective and reasonable solutions to include in the treaty.

“Two different kinds of false statements had been widely promulgated, one as to Germany's capacity to pay, the other as to the amount of the Allies' just claims in respect of the devastated areas. The fixing of either of these figures presented a dilemma. A figure for Germany's prospective capacity to pay, not too much in excess of the estimates of most candid and well-informed authorities, would have fallen hopelessly far short of popular expectations both in England and in France.”

One of the main problems at the Paris Peace Conference was the miscommunication between the sides and their unequal relationship. The victors, the Big Four, determined the terms of the treaty, while the vanquished Germany was excluded. Here, the victors had unrealistic expectations about Germany’s capacity to pay them and exaggerated the damage done to their countries as the victims of German aggression. The leaders’ expectations were mimicked domestically in their respective countries.

“While this is not likely to be permitted, I venture to assert as a matter beyond reasonable dispute that the social and economic condition of Germany cannot possibly permit a surplus of exports over imports during the period prior to May, 1921, and that the value of any payments in kind with which she may be able to furnish the Allies under the Treaty in the form of coal, dyes, timber, or other materials will have to be returned to her to enable her to pay for imports essential to her existence.”

This example is one of many in which Keynes demonstrates that the terms of the Treaty of Versailles are not only impractical and exaggerated but also harmful to the existence of Germany as such. This quote also highlights the fact that Germany was resource-rich in some areas but lacked resources in others. Germany imported these resources from other countries as a matter of survival and needed to continue doing so.

“The comments on this of the German Financial Commission at Versailles were hardly an exaggeration:—"German democracy is thus annihilated at the very moment when the German people was about to build it up after a severe struggle—annihilated by the very persons who throughout the war never tired of maintaining that they sought to bring democracy to us. . . . Germany is no longer a people and a State, but becomes a mere trade concern placed by its creditors in the hands of a receiver, without its being granted so much as the opportunity to prove its willingness to meet its obligations of its own accord. The Commission, which is to have its permanent headquarters outside Germany, will possess in Germany incomparably greater rights than the German Emperor ever possessed; the German people under its regime would remain for decades to come shorn of all rights, and deprived, to a far greater extent than any people in the days of absolutism, of any independence of action, of any individual aspiration in its economic or even in its ethical progress.’"

This indictment of the Reparations Commission by the German Financial Commission mimics the author’s sentiments. He is very critical of the terms of the Treaty of Versailles throughout this book because he predicts that it would not only harm Germany for years to come but also all of Europe. The foreign Reparations Commission had dictatorial power to impose its rulings over Germany which the Germans and the author viewed as having greater control of the country than even the absolute monarchs of Europe.

“The German tactic assumed, therefore, that the latter were secretly as anxious as the Germans themselves to arrive at a settlement which bore some relation to the facts, and that they would therefore be willing, in view of the entanglements which they had got themselves into with their own publics, to practise a little collusion in drafting the Treaty,—a supposition which in slightly different circumstances might have had a good deal of foundation. As matters actually were, this subtlety did not benefit them, and they would have done much better with a straightforward and candid estimate of what they believed to be the amount of their liabilities on the one hand, and their capacity to pay on the other.”

Keynes examines many aspects of negotiating the Treaty of Versailles at the Paris Peace Conference. It is important to note that the main vanquished party, Germany, was not allowed to participate in setting the terms—it could only respond, as the given example indicates. Keynes argues that the German side chose the wrong tactic. Rather than being explicitly clear about its financial capacity, the Germans operated under an erroneous assumption that the opposing, victorious side was more reasonable than its inflated claims.

“I cannot leave this subject as though its just treatment wholly depended either on our own pledges or on economic facts. The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable,— abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilized sow the decay of the whole civilized life of Europe. Some preach it in the name of Justice. In the great events of man's history, in the unwinding of the complex fates of nations Justice is not so simple. And if it were, nations are not authorized, by religion or by natural morals, to visit on the children of their enemies the misdoings of parents or of rulers.”

Here, Keynes discusses the discrepancy between the hypothetical question of justice—punishing Germany for starting World War I—and the practical consequences of economic collapse in not just Germany but all of Europe. Throughout this book, Keynes uses Germany’s prewar and postwar data to show that the terms of the Treaty of Versailles, as they stood, would cause socio-economic hardship in Germany for at least a generation—here referred to as punishing the children of the enemies for their parents’ actions.

“The Treaty includes no provisions for the economic rehabilitation of Europe,—nothing to make the defeated Central Empires into good neighbors, nothing to stabilize the new States of Europe, nothing to reclaim Russia; nor does it promote in any way a compact of economic solidarity amongst the Allies themselves; no arrangement was reached at Paris for restoring the disordered finances of France and Italy, or to adjust the systems of the Old World and the New.”

In his overview of the European socio-economic conditions after the Treaty of Versailles, Keynes remains pessimistic. He argues that the excessive punishment of Germany would not make it a good neighbor to the victorious Allies by creating tangible grievances. At the same time, Russia underwent a Revolution in 1917 by the radical Bolsheviks, was amidst a civil war and was cut off from the rest of Europe. The treaty did not even help the victorious parties. Overall, he considers this postwar settlement a failure.

“We are thus faced in Europe with the spectacle of an extraordinary weakness on the part of the great capitalist class, which has emerged from the industrial triumphs of the nineteenth century, and seemed a very few years ago our all-powerful master. The terror and personal timidity of the individuals of this class is now so great, their confidence in their place in society and in their necessity to the social organism so diminished, that they are the easy victims of intimidation.”

One remarkable development in the wake of World War I, according to Keynes, is the weakness of big business (the capitalist class) which was at the center of economic development in Europe in the late 19th-early 20th century. The socioeconomic devastation of the war was compounded by the unreasonable terms of the Treaty of Versailles. As a result, businesses lost confidence.

“But winter approaches. Men will have nothing to look forward to or to nourish hopes on. There will be little fuel to moderate the rigors of the season or to comfort the starved bodies of the town-dwellers. But who can say how much is endurable, or in what direction men will seek at last to escape from their misfortunes?”

Keynes describes the dismal situation in Europe in the wake of World War I, ranging from the lack of basic necessities to a surge in tuberculosis in certain areas. Imposing the terms of the Treaty of Versailles would only make matters worse, in his view. The last line of this quotation is particularly noteworthy. Keynes may be referring to desperate people resorting to self-medicating like using cheap alcohol or even self-harm. He could also be referring to the rise of extremist, populist movements in Germany. Considering the rise of Adolf Hitler and the Nazi Party motivated, in part, by postwar grievances and revanchism, this prediction seems particularly prescient.

“But the League will operate, say its supporters, by its influence on the public opinion of the world, and the view of the majority will carry decisive weight in practice, even though constitutionally it is of no effect. Let us pray that this be so. Yet the League in the hands of the trained European diplomatist may become an unequaled instrument for obstruction and delay.”

The League of Nations arose out of the Paris Peace Conference and was replaced by the United Nations in 1945. The League was the first international organization of its kind designed to foster collective security and world peace. However, it also lacked the necessary mechanisms of enforcing its decisions onto its members. As a result, in the 1930s, the League came to be viewed as ineffective due to its inability to prevent several international acts of aggression such as the Japanese invasion of Manchuria in 1931 under a false pretext. Japan simply pulled out of the League. Therefore, Keynes’s healthy skepticism years before these events seems reasonable.

“If we take the view that for at least a generation to come Germany cannot be trusted with even a modicum of prosperity, that while all our recent Allies are angels of light, all our recent enemies, Germans, Austrians, Hungarians, and the rest, are children of the devil, that year by year Germany must be kept impoverished and her children starved and crippled, and that she must be ringed round by enemies; then we shall reject all the proposals of this chapter, and particularly those which may assist Germany to regain a part of her former material prosperity and find a means of livelihood for the industrial population of her towns.”

On the one hand, Keynes does not fundamentally challenge the assertion of Germany’s war guilt in World War I. On the other hand, he advises against using a reductionist, black-and-white view, in which the Allies—Britain, France, the US, and Italy—are impeccable, whereas the vanquished parties like Germany are the “children of the devil” (111). The author rejects the Treaty of Versailles in two essential ways: it was economically unsound, and it was unethical—by punishing Germany for at least a generation. This quote pertains to the latter argument: this is a moral indictment.

“In this manner Europe might be equipped with the minimum amount of liquid resources necessary to revive her hopes, to renew her economic organization, and to enable her great intrinsic wealth to function for the benefit of her workers. It is useless at the present time to elaborate such schemes in further detail. A great change is necessary in public opinion before the proposals of this chapter can enter the region of practical politics, and we must await the progress of events as patiently as we can.”

This quotation is the author’s summary assessment of what needs to happen in Europe to improve its overall socioeconomic situation in the wake of World War I. His solutions comprise the complete forgiveness of inter-ally debts, the elimination of protectionist tariffs between certain European countries on a volunteer basis, an introduction of an international loan program to help the German economy and using the League of Nations to resolve additional diplomatic matters.