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The Economic Consequences of the Peace

John Maynard Keynes:
His View from 1919 and Modern Historical Revisions

Book Report:

Timothy J. Smith, ONI MSSI Track 18 MSI-698, Economics and Intelligence
25 September 2011


The consequences of the war. and. 1 . Europe Before the War Keynes commences with a review of European economic growth and prosperity during the prewar era (1870-1914). Keynes.Keynes. the Allied heads of state and government. well before the great statesmen assembled in Paris and Versailles in 1919. and conducted with extreme strategic and diplomatic obstinacy – induced in part by embitterment at the levels of national sacrifice required.. Austria-Hungary and Russia. The subject has sparked interminable controversy ever since. John Maynard: The Economic Consequences of the Peace. would bankrupt their former adversary and either drive it and much of central and eastern Europe into chaos and Bolshevik and „Spartacist‟ (German Communist) revolution. or would lead to a second World War – which he estimated would break out in about two decades (i. which freed Europe from what we might call „the spectre of Malthus‟. He addressed himself to the failure of the peacemakers to solve that problem. Keynes‟ book has featured in this debate. Keynes‟ book itself. causing massive impoverishment. some argue.e. As Keynes himself acknowledges. the economic consequences of the war itself had been catastrophic. We‟ll conclude the review with a quick overview of elements in the debate. in all of 1 Etienne Mantoux: The Carthaginian Peace or the Economic Consequences of Mr. and ultimately economic collapse. and especially the reparations the Allies demanded of Germany. and descent again into total war. 1946. London. through vast economic commitment. widespread privation. and the resulting Treaty of Versailles. the rise of Hitler and the Nazis. the peace. circa 1939). placed what Keynes and his adherents deemed to be insuperable burdens on Weimar Germany. 1919 Introduction John Maynard Keynes‟ wrote The Economic Consequences of the Peace in order to bring an argument before the public criticizing the post-World War I Paris Peace Conference.but yet seemingly prescient in the long term – or perhaps self-fulfilling. which in turn were due in part to the near-impotence of offensive warfare in that technological era. including a lively debate in the present era. Reflections through the fullness of time suggest hypotheses that Keynes‟ 1919 prophecy was erroneous in the short term – or perhaps self-negating -. and the simultaneous roles of Keynes‟ book as objective observation and successful prescription – a Heisenbergian dilemma for later observers seeking to untangle cause from effect (one author has spoken of „the economic consequences of Mr. Keynes‟1). if only somewhat peripherally to the larger issues. He believed the settlement. The preceding World War was the first true „total war‟ fought for well-nigh absolute objectives by massed peoples. hyperinflation. this time even more horrific. particularly in Germany.

The Germans had agreed to the Armistice in November 1918 trusting in Wilson‟s pledge and stature. Lloyd George as a supple but facile politico focused primarily on electoral success at home. suffice it to say that he characterized Clemenceau as a supreme power-realist determined to prevent Germany from attacking again in the future. and hence national military power. and the German Economy Keynes describes the damage the Versailles terms would inflict on the three pillars of the German economy: (1) overseas commerce. 33. He deemed the dour Frenchman the architect of the treaty. Reparations.. American demographic expansion and demand had substantially reduced the American farm surplus by 1914. Prime Minister Lloyd George and President Wilson (Italy‟s Orlando he ignored). supply and trade. Yet Europe‟s. Ibid. huge population continued to depend on this surplus. By comparison. the „locomotive‟ then as since. to unprecedented levels. which he famously dubbed a “Carthaginian Peace”2. He argued that this prosperity had rested on inequality in the European class structure. The Great War destroyed much of this edifice of European prosperity. visionary Fourteen Points upon which a just peace could have been erected. would lead to a catastrophic continental convulsion and either Bolshevik revolution or a war of revenge. The Paris Peace Conference In one of the most provocative sections of the book.3 His main argument was that by 1919 Lloyd George and Wilson had failed utterly to moderate French terms. Keynes was convinced that these. if enacted and enforced at Versailles. and intended his rapidly-penned work to sound a clarion call in warning. p. Keynes drew memorably invidious portraits of the Allied statesmen in the Council of Four. well intended but ineffective. but yet by mid-1919 the Conference stood poised to adopt France‟s draconian terms instead. however. The Treaty. population and economic growth in Britain and France lagged. making it a political sensation. Such characterization helped propel the work to best-seller status immediately upon release. and notably Germany‟s. (2) domestic 2 3 Keynes. frontiers. In all of this. Wilson losing control of events and of any prospect for upholding the noble. This stands peripheral to the main economic argument. German capital investment drove industrialization throughout the continent.which belated but yet rapid industrialization drove population. which had been balanced so precariously on an uninterrupted high volume of industry. economic interdependence and apparent security. 51. shipping and investment. 2 . 51. and on cheap foodstuffs from America. and Wilson as a rigid moralist. Yet tariffs. and trade promoted flourishing prosperity. pp. driving up prices. Germany was the central actor and stage. Premier Clemenceau. and believed the French intended to hobble Germany for generations to come through a strategy of impoverishment – the “enfeeblement of a strong and dangerous enemy”. however.

4 Keynes’ Prescription: Call for a Wilsonian ‘Marshall Plan’ Keynes believed that the “economic rehabilitation of Europe” should take first priority5. 4 5 3 . and therefore Europe. However. p. Italy and Serbia for more. investments and private property in these cessions and throughout the world. Finally.S. yielding a projected total of £2. 236-270. Keynes seemed to vacillate between accepting such a sum as just or decrying it as malicious. not only should forgive all inter-Allied debt incurred in the common cause. and predicted its enforcement would first fail and then threaten Germany. leaving the £2B – a figure to be specified in the treaty and not subject to change thereafter -. hyperinflation and collapse. and associated industries. She would have to return AlsaceLorraine to France and lose control of a third of her economically vital coal and three quarters of her iron ore resources and industries. Keynes judged the French to be preparing demands for approximately £800M in 1919 sterling. in order to enforce these crushing provisions. and had not been determined either when Keynes wrote or when the Treaty was signed. 213-225. with vast unpaid war debts and steeply depreciated currency. Belgium £500M. He argued at great length and in great detail that even the more modest sum would exceed German capacity to pay. Britain £570M. Keynes deemed these burdens so extreme as not just to be catastrophic but absurd and illusory. and it can be argued that Keynes was influential in promoting adoption of this approach. a prospect that filled Keynes with alarm. but should float yet further loans designed to restore German finances and underwrite the reparations.coal. while simultaneously supplying what Keynes deemed egregious mountains of coal in reparations (shipments in kind). This of course is much what the Dawes and Young Plans attempted during the 1920s and what the Marshall Plan did for Europe after the Second World War. Yet Allied leaders faced popular demand for quite extravagant sums. 211. Germany would have to cede to the Allies the bulk of her merchant and fishing fleets while also building new ships for the Allies. the Allies would establish control over Germany‟s external and internal trade and transport. She would have to cede all colonies to the Allies and accept highly un-favorable financial terms with regard to obligations.for Belgium and France. He thought the U. the countries most blighted by the ravages of war. located there. The exact figures for the value and composition of the Allies‟ claims for reparations fluctuated and varied widely. He believed the UK should forego any proceeds.6 See especially pp. 6 Pp. and that all the European belligerents could regain economic viability and Germany could sustain reparations only through massive largesse and generosity on the part of the victors. with starvation. iron. in the Saar and in Upper Silesia.12B. and (3) transport and tariffs. often waxing passionate on this account in describing German and Austrian prostration after four years of all-out war.

Unfortunately. Without the theory. 368-391. John Maynard.doc. making it very difficult to extract them. See also Niall Ferguson: “Keynes and the German Inflation”. equations or charts for determination of supply.sscnet. the entire subject was and is huge in scope. No. and for credibly projecting the actual effects of compliance with reparations on the German economy. 7 The Book as a Work Keynes wrote in haste but eloquently. 436. Cambridge.Keynes‟ experience in this great moment in history might have colored his thinking about economics for much of the rest of his life. and Revision A lively debate has of course ensued since Versailles. methods. His call for deficit spending and U. unprocessed data can yield an no amount of discrete. He eventually includes tables. models. even identified as such. German History Institute.jstor. Worse. 7 8 4 .8 Most importantly. and Cambridge University Press. http://www. The General Theory of Employment. The open-minded but analytic skeptic can only evaluate Keynes‟ argument by supplying the econometric methodology himself and running Keynes‟ propositions through the models to test their validity formally. Gerald Feldman and Elisabeth Glaser: The Treaty of Versailles: A Reassessment after 75 Years. a detailed review of Manfred Boemeke. New Data. he made no use whatsoever of economic theory. Vol. Oxford University Press. which might have served to generalize in theory lessons he drew not only from the Great Depression but also from the earlier case of post-WWI Europe. but these remain sparse and wholly inadequate for a quantitative argument. 1998. Revisionist historians have begun to re-examine all elements of the Conference and Treaty. and marshalled an immense amount of quantitative data to support his argument. 191-205. not only did he write well before actual reparation figures had been established. hold them constant and compare them with other data as his argument unfolds. Interest and Money (1936). New Perspectives. Arguments have claimed that French policy toward reparations was more lenient than Keynes‟ claimed and that Keynes was deeply involved with Weimar political and financial officials and German bankers and that he incited German obstructionism. 110. immensely known of course as „Keynesianism‟ and embodied in his monumental General Theory of Employment. Even worse. See for instance Marc Trachtenberg: “Versailles Revisited”. it has been argued that Germany could have paid the reparations demanded Keynes. http://www. 1995. pp. loans to stimulate recovery appears to anticipate his later doctrine. conflicted and often deceptive intent. Interest and Money. in fact. Washington. primary documentation and secondary accounts. The English Historical Review. UK. His book consisted of a stream of alarming but quite untested hypotheses – most of which were poorly formulated and not. he folded his figures into his narrative text. and hidden in a vast ocean of confusing. demand. algorithms and tools of econometrics.ucla. and employment. let alone a proof.S. right up to the present day (benefitting from new primary sources as official archives are opened). price. Security Studies 9:2 (Spring 2000). Apr.

it does not appear that these later critics have undertaken.jstor. and the Versailles „Diktak‟ as a whole. intentionally and successfully using hyperinflation as a way out of internal and external debt. convincing arguments have been made that the Versailles settlement enhanced Germany‟s strategic security in eastern Europe. No.without collapse or enduring economic debilitation. Vol. as the French had feared and warned. reparations. After all. Nor have quantitative and computational social scientists explored in depth the actual susceptibility of German political society to Marxist-Leninist revolution during the 1920s. intended to undercut the value and the burden of sovereign debt and reparations. based on sounder premises. pp. No. for Germany never actually paid a significant level of reparations in the early 1920s (hence the French occupation of the Ruhr in 1923). http://www. For by the late 1930s Germany had re-established its hegemony in central And Clemenceau might have been more prescient. p. See also Sally Marks: “The Myths of Reparations”. 11. that distorted and ultimately collapsed the economy. ibid. but was ready and willing to do so as well. 10 Gerhard L. Sep. and Ferguson. 2. In particular. Central European History. cit. any more than Keynes did. 9 5 . 257. pp. 3. Nor have hypotheses been tested concerning the implications of a less obstinate and uncooperative German policy toward the settlement. Later researchers argue that it was not the loss of resources and industry and the reparations imposed by the Treaty that undermined the Weimar economy as Keynes had predicted. In the end. none appears to have tested hypotheses concerning German capacity to pay. when German fiscal and monetary policy was no longer contorted by efforts to evade reparations. 11 Weinberg. http://www. and the associated and quite intentional inflationary consequence. op. 248-260. in great part in response to Keynes‟ dire and adamant warnings. and that ultimate failure to enforce the treaty‟s provisions undermined French security and in fact left Germany the dominant power of the continent – largely fulfilling Berlin‟s World War I war aims. and was not only capable of re-enacting World War I while seeking to „get it right this time‟. but categorically refused to do so for nationalist political reasons. 1978. Trachtenberg.9 The proof for some lies in the incontestable fact of Germany‟s rapid recovery under Hitler.. p. 3.10 Indeed. 231-255.jstor. Instead it was the German government‟s profligate use of monetary expansion and deficit spending (a policy later known as „Keynesianism‟) both during and after the War. Sep.. op. Central European History. Weinberg: “The Defeat of Germany in 1918 and the European Balance of Power”. to test their hypotheses using formal econometric methodology. cit. Vol. 1969. Keynes might have been right about the politico-economic consequences of Versailles – but probably for the wrong reasons. the Anglo-American Allies had in the end refused to support France and Belgium in enforcing the Treaty‟s provisions.11 Although the present author lacks expertise in this or any other area of economic history or theory.