The Economic Consequences of the Peace

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by Merve Emre

On June 5, 1919, just three weeks shy of the signing of the Treaty of Versailles, British Treasury representative John Maynard Keynes submitted his letter of resignation to British Prime Minister David Lloyd George. “I’ve gone on hoping even through these last dreadful weeks,” he wrote, “that you’d find some way to make of the Treaty a just and expedient document. But now it’s apparently too late. The battle is lost.”[1] With his resignation tendered, Keynes promptly fled the Paris Peace Conference (PPC) and retired to Cambridge. There, he spent the summer writing The Economic Consequences of the Peace, his scathing and prophetic critique of the PPC negotiations and the Treaty’s reparation terms. The first paragraph of the “Introductory” chapter conveys Keynes’s dissatisfaction in no uncertain terms: “The spokesmen of the French and British peoples have run the risk of completing the ruin, which Germany began, by a Peace which, if it is carried into effect, must impair yet further, when it might have restored, the delicate, complicated organization, already shaken and broken by war, through which alone the European peoples can employ themselves and live.”[2]

The Macroeconomic Critique

Keynes’s denunciation of the Treaty can be read as not one, but two, related critiques: a technical critique of the Treaty’s macroeconomic effects and a psychological critique of European nationalism. The technical critique of the “Carthaginian Peace,” which Keynes fleshed out in Chapters Four (“The Treaty”) and Five (“Reparation”) is the more dispassionate section of The Economic Consequences. In “The Treaty” Keynes argued that systematically depriving Germany of her commercial and industrial infrastructure – including her mercantile marine, colonies, foreign investment, private property, mining assets, and trade barriers – would disrupt Germany’s production and export of domestic goods, and, consequently, prohibit her from importing foreign goods from the Allied economies. The dismantling of Germany’s import-export business, Keynes predicted, would inevitably spill over into French, British, and Italian markets by “jamming” the pervasive trade relationships that had existed prior to the war. Keynes’s detailed example was Germany’s diminished coal production and exportation. Using his rough estimates of production capacity, he demonstrated that once the Germans ceded their coalfields to the French and Polish, and compensated the Allies for their diminished coal capacity (40,000,000 tons of coal annually), the Germans would be incapable of producing surplus coal for exportation. Ironically, then, the treaty bound the German and Allied economies closer together under maximally self-destructive terms:

“Germany cannot export coal in the near future if she is to continue as an industrial nation […] and will not furnish the Allies with a contribution of 40,000,000 tons annually […] If the distribution of the European coal supplies is to be a scramble in which France is satisfied first, Italy next, and everyone else takes their chance, the industrial future of Europe is black and the prospects of revolution very good.”[3]

The externalities of economic devastation were further amplified by the exaggerated reparation payments that Keynes outlined in “Reparations.” He read the reparation clause of the Treaty, that “compensation [would] be made by Germany for all damage done to the civilian population of the Allies and to their property by the aggression of Germany by land, by sea, and from the air,” as impractically vague and subject to vindictive manipulation by the French and British.[4] Holding Germany liable for all physical and material damage to Allied assets, he argued, while undercutting her commercial and industrial base, would create a dangerous situation of indebtedness. As an alternative, Keynes outlined a reparations counterproposal with three main clauses, which he presented to Lloyd George at the PPC. First, he suggested that reparation payments be fixed at $10,000,000,000, with one-quarter of the payment extracted immediately from the surrender of property, and the remaining three-quarters paid in thirty annual installments with no accumulated interest. Second, he advised the French to accept just enough coal from Germany to supplement diminished production capacity in Alsace-Lorraine, but to restore the Saar coalfields to Germany in ten years time. Finally, Keynes called for a stop to the vitriolic nationalism that demonized the German people and guaranteed their future economic ruin:

“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 […] 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.”

The Psychological/Political Critique

For many of his contemporary readers and reviewers, Keynes’s technical critique was less controversial than his psychological one. His devastating character sketches of the Council of Four, touting all the “juicy gossip from Paris,” were deemed “startling and explosive,” “lacking in scholarly restraint” and “not quite nice for a civil servant.”[5] Historian Margaret MacMillan describes Keynes as a “very clever, rather ugly young man” who went to Paris “to create myths about the Paris Conference.” Keynes’s, she writes, was the voice of “intellectually superior Cambridge” that spoke “romantic nonsense” when it came to his descriptions of Clemenceau (“dry in soul and empty of hope”), Woodrow Wilson (“this blind and deaf Don Quixote”), and Lloyd George (“a goat-footed bard”).[6]

But Keynes’s commentary, mocking and effusive though it may have been, served a deeper purpose than poetic self-indulgence: it vehemently critiqued the anti-cosmopolitan strain of nationalism which afflicted both the Council of Four leaders, particularly Clemenceau and Lloyd George, as well as the general European populace. As Keynes observed, the globalization of the world economy in the pre-war years had created a weak continental interdependence, one rooted in currency and capital exchange rather than a commitment to cosmopolitan culture. Although the European markets enjoyed a productive codependence through 1913, nationalism remained the dominant ideological trend in European politics, its virulence growing as a result of the imperialistic ambitions of Britain, France, and Germany. The PPC negotiations first exposed and typified the cognitive disconnect between economic internationalization and the continued dominance of the nation-state as the delimiting entity of cultural and political attachments. As scholars have noted, the incompatible spatializations of economic and political power was one of the deconstructive sites of many modern internationalization projects. Carol A. Breckenridge and others observe that “nationhood – or nation-ness […] has demonstrated, more often than not, the terrible asymmetries of the idea of modernity itself.”[7]

The Economic Consequences identified this asymmetry between economic internationalization and nationalism early on in its argumentative progression. Take, for example, Keynes’s rather long, heavy-handed vignette of the typical Londoner:

“The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he may see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble in their prospective fruits and advantages; or he could […] proceed abroad to foreign quarters, without knowledge of their religion, language, or customs, bearing coined wealth upon his person, and would consider himself greatly aggrieved and much surprised at the least interference. But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable.”[8]

The conventionality of cosmopolitan purchasing patterns, Keynes implied, was rooted in the psychology of civil society. There existed a shared expectation among the inhabitants of Europe that trade was free, capital was mobile, and migration was the mere exchange of one type of currency (“coined wealth,” or sterling) for another. This market psychology, however, generated no corresponding incentives for cultural exchange; financial institutions guaranteed homogeneous investment practices across “any quarter of the world”; traveling to a distant country required no “knowledge of their religion, language or customs.” In this example, British national culture – typified by Keynes as the effete bourgeois inhabitant “sipping his morning tea in bed” – remained the locus of personal attachment.

In the post-war period, this nationalism assumed an ugly aspect. Keynes repeatedly charged the “emotions of the movement” – its “ordinary feelings,” “grosser effusions,” and “selfish fears” – as emboldening a poorly theorized conception of self-interest. The European citizenry, he observed, was so blinded with vindictive rage that they prioritized punishing Germany over securing a mutual restoration to pre-war productivity. When emotions dominated pragmatics, Keynes predicted that the nationalism of European leaders would undercut their own economic power base in a spectacular dismantling of the Western market. Magnanimity, rather than retribution, was the necessary sentiment for regional peace and prosperity. “Must we not base our actions on better expectations,” he asked, “and believe that the prosperity and happiness of one country promotes that of others?”[9]

Keynes’s character sketches, then, can be read as individual dramatizations of modernity’s “terrible asymmetries.” His portrait of Clemenceau is the most obvious example. Keynes positioned Clemenceau as a successor to realpolitik masters such as Pericles and Bismarck, whom Keynes found impressive in their own right, but ultimately dismissed as early products of more autarkic political systems. Clemenceau, he believed, represented an anachronism of sorts, and he took care to convey this not only in Clemenceau’s nationalistic gestures, but also in his aesthetic flourishes (one can hardly overlook the staleness that Keynes’s imparts to Clemenceau’s “impassive face of parchment,” “his gray-gloved hands,” and “his cynical and impish air”). Keynes ascribed to Clemenceau the predictable ideological tics of great power politics: a preoccupation with zero-sum gains, balance of power strategy, and the structural integrity of the nation-state:

“[Clemenceau’s] philosophy had no place for “sentimentality” in international relations. Nations are real things, of whom you love one and feel for the rest indifference – or hatred. The glory of the nation you love is a desirable end – but generally to be obtained at your neighbor’s expense. The politics of power are inevitable, and there is nothing very new to learn about this war or the end it was fought for […] It would be stupid to believe there is much room in the world, as it really is, for such affairs as the League of Nations, or any sense in the principle of self-determination except as an ingenuous formula for rearranging the balance of power in one’s own interests.”

“Sentimentality” here had two meanings for Keynes. There was the affective sentimentality that Clemenceau despised – some vague, idealistic conception of Western brotherhood that the “bamboozled” Wilson touted in his Fourteen Points. But there was a pragmatic sentimentality that Clemenceau could not comprehend. This was the internationalist ideology of mutually beneficial negotiation, compromise, and policy coordination: a “sentimentality” of economic self-interest that was necessary for France to resume its pre-war position in the regional marketplace.[10] Keynes’s critique of Clemenceau underscored the dangers of dismissing such sentimentality as a mere "principle." By defining France’s self-interest within a limited spatial and cultural psychology, Keynes believed that Clemenceau’s distinctly virulent nationalism left the country open to intra-European ruin.[11]

The irony of Clemenceau’s position is by now a familiar story. The commercial and industrial disempowerment of Germany severely disabled the local economies of production. Germany plunged into a hyperinflationary spiral that exacerbated the fiscal and political problems of a mounting budget deficit and rising unemployment. As Keynes predicted, the German government was unable to honor the reparation payments to France. France, in turn, had depended on German reparations to pay back her medium and long-term debts to the British and American governments, all the while flooding her domestic market with national defense bonds. From 1920 onwards, interest payments on foreign and domestic debt accounted for a staggering twenty-six percent of the government budget, government bonds lost sixty-two percent of their value, and devaluation of the franc prompted rapid capital flight out of the French market.[12] In November 1921, Germany requested a moratorium on reparations, but negotiations between France, Germany, and Britain broke down among strained Franco-British relations over French “hankerings” for the Rhine territories.[13] As German debts mounted and reparations evaporated, the French found themselves battling an “impossible situation” of economic degradation that persisted until well after the Second World War.

On a personal level, The Economic Consequences had mixed results for Keynes' post-war social and professional engagements. The pacificist rhetoric of the treatise allowed Keynes to reingratiate himself amongst the conscientious-objectors of his Bloomsbury coterie, including Virginia and Leonard Woolf, Lytton Strachey, Vanessa Bell, and Keynes' former lover Duncan Grant. Strachey, perhaps the most vicious critic of Keynes' governmental services, had chastized Keynes during the war for his realpolitik aspirations, his political urge to achieve "the maximum slaughter at the minimum expense." After reading The Economic Consequences lauded the book's vicious portraits of the Peace Conference leaders. In gleeful tones, he wrote to his "Dearest Maynard": "Your book arrived today and I swallowed it at a gulp [...] most crushing, most terrible."[14] 

Keynes' post-war political career, however, was a differerent story. His second and final foray into the practical organization of international monetary reform proved as dissatisfying as the first. After World War II, Keynes headed the British delegation to the Bretton Woods conference, where the problem of currency pegging was heavily debated among the Allied victors. Keynes found the pressures of Bretton Woods “quite unbelievable” and the Americans irritating in their hegemonic preoccupations.[15] Keynes, who was particularly hostile to the inefficiencies of the intra-war gold standard, proposed a universal reserve currency (the “Bancor”) and a central bank cum clearing union to facilitate international trade and capital investment. However, the U.S. proposal, drafted by Treasury technical advisor Harry Dexter White and eventually accepted by the Bretton Woods committee, established a system of “pegged” interest rates whereby member states would maintain currency parity in terms of gold, and the U.S. dollar would be “fixed” to the gold peg at $35 per ounce. Shortly thereafter, Keynes suffered a fatal heart attack and did not live to see his second major prophecy materialize: the U.S. absorption of the world’s gold reserves made the dollar the world’s reserve currency and firmly cemented U.S. economic hegemony in the post-war era.

  1. Collected Letters of John Maynard Keynes, Vol. 16, p. 469. Keynes officially resigned on May 26, 1919, but the letter was composed a week later when he had already left Paris for Cambridge.
  2. John Maynard Keynes. The Economic Consequences of the Peace (New York; Harcourt, Brace, and Howe, 1920), p. 1
  3. Keynes, pp. 49-59.
  4. Keynes, p. 71.
  5. Josiah Stamp. “Review: The Economic Consequences of the Peace” (Foreign Affairs, Vol. 13, No. 1, Oct., 1934), pp. 104-112; D.H. Robertson. “Review” (The Economic Journal, Vol. 30, No. 117, Mar., 1920), pp. 77-84; Frederic A. Ogg. “Review” (The American Political Science Review, Vol. 14, No. 2, May, 1920), pp. 341-343.
  6. MacMillan, p. 39, 181. MacMillan is particularly distressed by Keynes’s hilarious description of Lloyd George: “How can I convey to the reader any just impression of this extraordinary figure of our time, this syren, this goat-footed bard, this half-human visitor to our age from the hag-ridden magic and enchanted wood of Celtic antiquity?”
  7. Carol A. Breckenridge, Sheldon Pollock, Homi K. Bhabha, and Dipesh Chakrabarty. Cosmopolitanism (Durham; Duke University Press, 2002).
  8. Keynes, pp. 11-12.
  9. Keynes, p. 164.
  10. For the classic elaboration of rational choice theory, see Robert Keohane’s After Hegemony: Cooperation and Discord in the World Political Economy (Princeton; Princeton University Press, 1984).
  11. One of the most vocal objectors to Keynes’s predictions was Ezra Pound, although most of his criticism was based on a misunderstanding of Keynes’s reasoning. In his article “Probari Ratio,” he wrote, “Mr. J.M. Keynes may deplore the poverty of our late enemies from a more humanitarian angle than those who merely regret an unlikelihood of ultimate payment; Nationalism and Communism are no more likely to become world systems than were the various panaceas of Anabaptists and Mamillaires to become worldwide spiritual nostrums.” Ezra Pound, “Probari Ratio” in Selected Prose, 1909-1965 (New York; New Directions Books, 1973).
  12. Jean-Pierre Dormois. The French Economy in the Twentieth Century (Cambridge; Cambridge University Press, 2004), p. 15-17.
  13. Conan Fischer. The Ruhr Crisis, 1923-1924 (Oxford; Oxford University Press, 2003), p. 20-25.
  14. Keynes, xii.
  15. Dean Acheson. Present at the Creation: My Years in the State Department (New York; Norton & Company, 1987), pp. 81-82.

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