Abstract
John Maynard Keynes participated in the Paris Peace Conference in 1919, but resigned due to concerns over the heavy reparations imposed on Germany through the Treaty of Versailles. Keynes prophesied that the economic consequences of the peace treaty would lead to instability in Europe with long-lasting effects on the global economy.
Keynes criticised the lack of provisions for economic rehabilitation in Europe and warned about the interconnectedness of national economies, insisting on the importance of a stable Germany for a stable Europe. He advocated for policies focused on generating full employment, maintaining real wages, and promoting economic recovery to prevent future economic causes of war and conflict.
Context
John Maynard Keynes (1883-1946) participated in the Paris Peace Conference in 1919 as a representative of the British Treasury and advisor to Prime Minister David Lloyd George. He resigned after desperately trying and failing to reduce the huge demands for reparations being made on Germany. The Economic Consequences of the Peace (1919) is Keynes' prophetic analysis of the effects that the peace treaty would have both on Germany and, even more fatefully, the world.
The Treaty of Versailles (1919), which ended World War I, imposed heavy reparations on Germany. Keynes argued that these reparations would lead to economic instability in Europe: this reflects his concern about the long-term economic consequences of punitive measures. Keynes was particularly critical of the lack of provisions for the economic rehabilitation of Europe, noting that the Treaty did not promote economic solidarity among the Allies or stabilise the new Eastern states of Europe.
Keynes warned that the economic consequences of the peace would be felt for generations, pointing to the potential for lasting damage to the European economy. He predicted that the harsh terms imposed on Germany would lead to financial collapse and in turn would have serious economic and political repercussions on Europe and the world, which indeed happened in the 1929 crash.
The economist's warning came true and postwar Europe faced severe economic challenges, including inflation, unemployment, and social unrest. Many countries had suffered extensive damage to their infrastructure, including railways, factories and homes, hindering economic recovery and growth. Countries like Germany were burdened with heavy reparations imposed by the Treaty of Versailles. This led to hyperinflation in Germany during the early 1920s, severely devaluing the currency and destabilising the economy. The war also resulted in massive unemployment as soldiers returned home and industries that had been focused on war production had to transition back to peacetime economies. Agricultural production was also affected, with many farms damaged or abandoned during the war. This meant food shortages and increased prices.
To mitigate the destructive consequences of the war the early 20th century saw the rise of new economic theories, including those related to government intervention in the economy. Keynes' insights into the economic repercussions of the Treaty of Versailles reveal his foresight regarding the fragility of peace and economic stability and his criticism of the Treaty can be seen as a precursor to his later ideas about the role of government in managing economic cycles.
The aftermath of the war made clear the interconnectedness of national economies. Keynes warned that the economic distress in Germany would have ripple effects across Europe, arguing for a stable Germany to ensure a stable Europe. He believed that the international system that led to World War I could be transformed into a peaceful and just world order, advocating policies that would generate full employment and maintain decent levels of real wages to eliminate the economic causes of war and conflict.
Keynes, as a member of the Bloomsbury group,and so concientious objector, also noted the moral implications of the treaty, suggesting that the desire for revenge against Germany was misguided and would ultimately harm the victors as well. He called for a more equitable peace settlement that would promote economic recovery and stability rather than punishment. His book had a significant impact on economic thought and policy, highlighting particularly the interconnectedness of the European economies and the importance of considering economic consequences in political decisions.
Summary
Introductory
In Britain the outward aspect of life in 1918 continued to derive from an Imperial past, as if the country still governed an Empire and did not belong to Europe. That age is over. If the European Civil War is to end with France and Italy abusing their momentary victorious power to destroy Germany and Austria-Hungary now prostrate, they invite their own destruction also, because they are so deeply and inextricably intertwined with their victims by hidden psychic and economic bonds. France, Germany, Italy, Austria and Holland, Russia and Roumania and Poland's structure and civilisation are essentially one. For an Englishman who took part in the Conference of Paris, it was to become a new experience, as a European.
Europe before the war
After the Franco-Prussian War of 1870 the economic condition of Europe became unstable during the next fifty years. With the growth of the European population there were more emigrants on the one hand to till the soil of the new countries, and, on the other, more workmen were available in Europe to prepare the industrial products. The whole of Europe east of the Rhine fell into the German industrial orbit, and its economic life was adjusted accordingly. Europe was so organised socially and economically as to secure the maximum accumulation of capital. The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half-century before the war, could never have come about in a society where wealth was divided equitably. Even before the war, however, the equilibrium thus established between old civilisations and new resources was being threatened.
The Conference
Before the Franco-Prussian War (1870-71), the populations of France and Germany were approximately equal, but the coal, iron and shipping of Germany were in their infancy, and the wealth of France was greatly superior. The proposed peace, based on the “ideology” of the Fourteen Points of the US President in the Paris Peace Conference (1919-20), could only have the effect of shortening the interval of Germany’s recovery and hastening the day when she will once again throw at France superior resources and technical skill. It was commonly believed at the commencement of the Paris Conference that the President had thought out a comprehensive scheme not only for the League of Nations, but for the embodiment of the Fourteen Points in a Treaty of Peace. However, the honest and intelligible purpose of French policy, led by Clemenceau, was to limit the population of Germany and weaken her economic system.
The Treaty
This chapter aims to set forth the principal economic provisions of the Peace Treaty. The German commentators had little difficulty in showing that the draft Treaty constituted a breach of engagements and of international morality comparable with their own offence in the invasion of Belgium. The German economic system as it existed before the war depended on three main factors: overseas commerce, represented by her mercantile marine, her colonies, her foreign investments, her exports, and the overseas connections of her merchants; the exploitation of coal and iron and the industries built upon them; the transport and tariff system. Of these the first, while not the least important, was certainly the most vulnerable. The Treaty aims at the systematic destruction of all three, but principally of the first two. The Treaty made the international character of the rivers a pretext for taking the river system of Germany out of German control.
Reparation
The Reparation Commission has been established as the final arbiter on numerous economic and financial issues which it was convenient to leave unsettled in the Treaty itself. The Reparation Commission comes into very close contact with the problems of Europe and it bears a responsibility proportionate to its powers. The sum to be paid by Austria for reparation is left to the absolute discretion of the Reparation Commission, no determinate figure of any kind being mentioned in the text of the Treaty.
Europe after the Treaty
Europe consists of the densest aggregation of population in the history of the world. In relation to other continents Europe is not self-sufficient, in particular it cannot feed itself. The coal production of Europe as a whole is estimated to have fallen off by 30 per cent and the greater part of the industries of Europe and the whole of her transport system depend on coal. The problem of the reinauguration of the perpetual circle of production and exchange in foreign trade leads to a necessary digression on the currency situation of Europe. The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. In most of the other countries of Eastern and Southeastern Europe the real position is nearly as bad. The terms of the Peace Treaty imposed on the Austrian Republic bear no relation to the real facts of that State’s desperate situation.
Remedies
In this chapter, the author discusses a programme, for those who believe that the Peace of Versailles cannot work. It is under the following heads: The Revision of the Treaty, The settlement of inter-Ally indebtedness, An international loan and the reform of the currency, and The relations of Central Europe to Russia. Article V provides that,
“Except where otherwise expressly provided in this Covenant or by the terms of the present Treaty, decisions at any meeting of the Assembly or of the Council shall require the agreement of all the Members of the League represented at the meeting."
A settlement of Inter-Ally indebtedness is, therefore, an indispensable preliminary to the peoples of the Allied countries facing, with other than a maddened and exasperated heart, the inevitable truth about the prospects of an indemnity from the enemy. Expenditure out of the loan should be subject to general, but not detailed, supervision by the lending countries.
Themes
Pre-War Europe
The period before August 1914 (when World War I began) was an extraordinary time for human economic progress. It was true that most people worked hard and lived with few comforts. Yet, they generally seemed reasonably content. Importantly, anyone with talent or strong character who was above average had a chance to rise into the upper and middle classes. For these wealthier classes, life offered conveniences, comforts, and luxuries at a low cost. This whole way of life depended on a delicate, finely balanced system.
There are several factors that made this pre-war European system work. National borders and tariffs (taxes on imported goods) caused minimal interference with trade. Different countries’ currencies were stable and linked to gold, allowing capital and goods to flow easily between nations. Keynes noted that people only realised the full value of this system when it was gone. Security was assured across a large area of Europe and people and their property were generally very safe.
These conditions of order, security, and consistency, which Europe had never experienced over such a large and populated area for so long, paved the way for a huge system of transportation, coal distribution, and international trade. This system made industrial life possible in the crowded new cities.
The Double Bluff
Keynes argued that Europe’s fragile pre-war stability relied on a general acceptance of significant inequality in income and wealth. He explained that European society and its economy were structured to gather the maximum amount of capital, money used for investment and business growth.
While the daily lives of ordinary people did see some slow improvement, the system was set up so that a large part of any new wealth went to the rich class, who were least likely to spend it all immediately. This was like an unspoken social agreement: the rich were protected in their wealth, and the poor didn’t become too envious, partly because the rich behaved discreetly.
Keynes wrote that the newly rich people of the 19th century were not accustomed to spending large amounts of money on themselves. They preferred the power that came from investing their money to the immediate pleasures of spending it. In fact, Keynes argued, it was precisely this inequality in wealth that made possible the vast buildup of factories, railways, and other “capital improvements” that were a hallmark of that age. He saw this as the main justification for the capitalist system at the time. If the rich had simply spent their new fortunes on their own enjoyment, Keynes believed the world would have quickly found such a system unbearable.
The deceptive bluff which maintained the system depended on two factors:
- The Workers’ Acceptance: The working classes accepted a situation where they received very little of the wealth that they, nature, and the capitalists together produced. They accepted this due to lack of awareness, feeling powerless, or being persuaded by custom, tradition, authority, and the established social order. (Marx had already analysed how this system worked 50 years before in his Capital.)
- The Capitalists’ Reinvestment: The capitalist classes were allowed to claim the largest part of the wealth on the unspoken condition that they would actually consume very little of it themselves and instead reinvest most of it.
The War Changed the Old Order
Keynes was certain that World War I had shaken the very foundations of this delicate pre-war system. It destroyed both the psychological expectations and the established ways of doing things on which pre-war harmony and prosperity had depended.
One key change was that the “double bluff” regarding wealth distribution was exposed. Keynes wrote that the war had shown everyone the possibilities of consumption (using goods and services) and had made the idea of abstinence (saving and not spending) seem pointless to many. As a result, he predicted: the working classes might no longer be willing to accept getting such a small share of the wealth; the capitalist classes, no longer confident about the future, might decide to spend their wealth.
The war caused other economic disasters too. Before the war, European prosperity had been boosted by cheap food from “the New World” (North and South America) and by a favourable balance of payments with the United States. This favourable balance meant that Britain, for example, earned more from its old investments in the US (its former colony) than it paid out. However, even before the war, growing populations were starting to make food more expensive.
The war completely wiped out this financial advantage. Britain was forced to sell many of its foreign investments to pay for the war. Furthermore, Britain and its allies had to borrow enormous sums of money from the US to fight the war, leaving them heavily in debt.
A Deliberate Blow to the German Economy
"The Treaty includes a plan for the economic disarmament of Germany." Keynes
Keynes argued that the peace agreement was cleverly designed to hurt Germany’s ability to trade overseas. Excited by their victory, the Allies took most of Germany’s merchant ships, which had previously carried a lot of international goods and most of Germany’s own imports and exports. The regions of Alsace and Lorraine were returned to France, a move that Keynes agreed was fair. However, the victorious Allies gave themselves the right to seize and sell off all private German-owned property in these regions as they wished.
Even more severe damage was inflicted on Germany’s economic future through the Treaty's arrangements for iron and coal. The Saar basin, a rich coal mining area, was handed over to France. Poland took Upper Silesia, the source of nearly a quarter of Germany’s hard coal before the war. Germany was ordered to repair French coal mines in northern France that were damaged during the war and supply France with an extra 7 million tons of coal each year for ten years. Belgium was promised 8 million tons of German coal per year for ten years. Italy was to receive 4.5 million tons annually.
In the years just before the war, Germany used about 139 million tons of coal annually. If Germany met all these demands, it would leave only about 78 million tons for its own people to heat their homes and for its factories to run. Forcing it to meet these coal demands meant its industries would be crippled.
This put Germany’s new, fragile democratic government, the Weimar Republic, at an almost fatal disadvantage from the very beginning. The situation was made worse because Germany had lost the iron-rich region of Lorraine to France. This meant Germany now had to buy iron ore, which mostly came from Lorraine before the war, paying France in gold or French francs, currencies that were incredibly hard for a bankrupt nation to obtain. (This economic ruin also left the way open for populist leaders to promise to re-establish German pride and make Germany great again.)
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