The Economic Consequences of the Peace

“Reparation” is the most extensive chapter in this book. This detailed study is coming from Keynes the economist rather than Keynes as a witness of an important historic event, the Paris Peace Conference. It features extensive footnoted numerical data on prewar (1913) and postwar conditions (1918) and several examinations of different case scenarios, some of which are hypothetical. The author divides this chapter into five main sections: “I. Undertakings Given Prior to the Peace Negotiations” (50), “II. The Conference and the Terms of the Treaty” (57), “III. Germany’s Capacity to Pay” (67), “IV. The Reparation Commission” (80), and “V. The German Counter-Proposals” (84). The goal of “Reparations” is to use mathematical analysis and historic information to back up the overall claim of this book—that the Treaty of Versailles is not just harmful to Germany but detrimental to all of Europe.

“Undertakings Given Prior to the Peace Negotiations” discusses the damage claims by the victors, for instance, Britain, France, and Belgium. Keynes underscores the difficulty of accurately assessing the material damage and, on that basis, calculating the appropriate reparations. Indeed, military historians often note the problems that arise with assessing war numbers—from the accurate assessment of casualties to infrastructure damage—even in the modern context. Yet the issue is not limited to carrying out an appropriate assessment. Keynes argues that both revanchism and the victim status of the Big Four are behind the exaggerated claims.

Damage claims and their specific categories were linked to President Wilson’s Fourteen Points: “compensation will 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” (50-51). However, Wilson also suggested that there should be no punitive damages applied to Germany.

Keynes argues that based on these statements, Britain could claim damage to “civilian life and property” including “air raids, naval bombardments, submarine warfare, and mines” (52). For example, Britain lost mercantile vessels due to enemy action. In turn, the French could claim not only the damages to civilians and property in war areas but also looted food, cattle, and machinery. The French could even claim compensation for being forced to perform labor. Fellow continental Europeans, the Belgians, could make similar claims.

He asserts that the “amount of the material damage done in the invaded districts has been the subject of enormous, if natural, exaggeration” (53), but the assessment of reparations must remain objective. Keynes provides several examples of such exaggerations. For instance, Belgian cities Ostend, Brussels, and Antwerp were generally intact, as was much of the farmland. Keynes attributes some of this behavior to the so-called national character, “the Belgian people possess the instinct of individual self-protection unusually well developed,” and during the war, some of them learned “to profit at the expense of the invader” (53). As was the case with the previous chapters, this type of generalized thinking about an ethnocultural or racial group is problematic, yet it was typical for the racialized theories of the time. Keynes believes that these exaggerated claims come from the “special position occupied by Belgium in the popular mind” (15) when that country was first invaded in 1914.

The French claims are more legitimate because the scale of destruction was greater in France than in Belgium. However, even these claims are exaggerated based on emotion, “as responsible French statisticians have themselves pointed out” (54). Keynes uses numerical information on the entire French housing properties from 1917 to prove his case. The author explains his calculations and includes the claims of Italy, Romania, Serbia, and Greece. Ultimately, he arrives at an Allied total claim of $10.6 billion but warns the reader that “there is much guesswork” in his numbers because of the aforementioned issues, especially in the French claims (56).

“The Conference and the Terms of the Treaty” discusses how the domestic politics in the victors’ countries, such as the British General Election of 1918, affected the course of the Paris Peace Conference. Keynes also analyzes the way German liability was linked to the famous war-guilt clause, Article 231, of the Treaty of Versailles.

The UK’s 1918 General Election “affords a sad, dramatic history of the essential weakness of one who draws his chief inspiration not from his own true impulses, but from the grosser effluxions of the atmosphere which momentarily surrounds him” (58). Keynes is referring to the kind of populism that a victory in a war affords. Yet, eventually, the public sentiment returns to domestic issues, including those that are the direct result of the war.

George feared the splintering of the political bloc that brought him to power as the war came to an end. He attempted to consolidate power by using “the prestige of victory” (57) rather than party or principle. He could foresee that the transition from a wartime to a peacetime economy—the social mood, and the financial repercussions—would give his opponents ammunition. Ultimately, he failed to use the victory to his advantage. In a matter of weeks, the domestic atmosphere in Britain reduced George’s manifesto to “a melancholy comparison” to its earlier variant. The Manifesto included such statements as “Trial of the Kaiser,” “Fullest Indemnities from Germany,” and “Britain for the British, socially and industrially” (59). The greatest chasm between the Prime Minister’s position and the voters was the question of reparations. George “never said that he himself believed that Germany could pay the whole cost of the war” (60). However, the public “was led to believe that Germany could certainly be made to pay the greater part” (60). By focusing on such details as domestic politics, Keynes empirically demonstrates just how complex the postwar conditions were beyond the halls of Paris where important men attempted to settle their differences.

These details also point to the fact that many had inflated expectations and “inherent impracticabilities” for Germany, as the main culprit, to compensate the victors rather than focusing on what Keynes calls a “scientific consideration” (62, 61). One of the most important aspects of the Treaty was Article 231 which later came to be known as the war-guilt clause:

The Allied and Associated Governments affirm and Germany accepts the responsibility of Germany and her allies for causing all the loss and damage to which the Allied and Associated Governments and their nationals have been subjected as a consequence of the war imposed upon them by the aggression of Germany and her allies (62).

Keynes also examines other aspects of the Treaty, for instance, Annex I. Its paragraphs list various claims ranging from “enemy acts injurious to health” to “damage done to property” (63).

Keynes believes that instead of exaggerated claims, the “most logical criterion for a limited claim, falling short of the entire costs of the war, would have been in respect of enemy acts contrary to international engagements or the recognized practices of warfare” (63). Keynes dedicates the final chapter of this book to comprehensively establishing his alternative proposal for settling the payments. However, he mentions individual solutions throughout the rest of the book. The problem with the Treaty of Versailles can be reduced to two key issues: the unlikelihood of Germany’s capacity to cover all the payments and the Allies' exaggerated claims about the extent of the devastation caused by war.

Keynes assumes that the amount that Germany is to pay is $25 billion ($429 trillion, adjusted for inflation in 2022). However, there are additional liabilities beyond that number, such as the installments of bearer bonds (debt securities). Keynes demonstrates by using his calculations how, with interest, Germany would owe more than half in 1936 as the country did at the time of writing. He concludes that “Germany cannot pay anything approaching this sum” (65). If the treaty remains in its present form, “Germany has in effect engaged herself to hand over to the Allies the whole of her surplus production in perpetuity” (67).

Keynes divides the next section, “Germany’s Capacity to Pay” into three subcategories: “Immediate Transferable Wealth” (68), “Property in ceded Territory or surrendered under the Armistice” (72), and “Annual Payments spread over a Term of Years” (74). He systematically examines each subcategory and the problems that it poses.

The capacity to pay comprises three key areas: the wealth that can be transferred immediately, such as gold or foreign securities; the property value in the territories that Germany lost; and, finally, the annual reparations payments. The latter range from cash to commodities, like coal and potash. Germany was forced to meet the liabilities of its Reichsbank (central bank) in neutral countries, and as a result, its gold reserves were less than half of what it was thought to have. Many of the country’s merchant ships were already in possession of the victors, so the value of available property was reduced here too. Its investments in Russia and Austro-Hungary lost their value as well. Russia, for instance, had undergone a Revolution in 1917, so its government securities were worthless. The author uses all these considerations and arrives at a much lower number of Germany’s wealth than assumed at the Paris Peace Conference. Indeed, further problems arise should its gold be confiscated because that would damage the German currency system. Indeed, the reparations’ size sent Germany’s currency into hyperinflation. In 1923, it took 42 billion German marks to buy one US cent.

The next area of significance is property, which includes private and government property in most of the territories that Germany ceded to its neighbors, for instance, Alsace-Lorraine, as well as its former African colonies. Germany’s ability to pay reparations by using commodities like coal, timber or dyes depended on its ability to return to “anything approaching their normal level” by 1921 (73). Germany needs to function, rather than collapse before it can pay these reparations, and to function, Germany needs certain types of imports that are “essential to her existence” (73). The interconnectedness of the European economy is a recurrent theme for Keynes throughout this book. He often returns to the way that the revanchism of the victors, the Big Four, seems to have blinded them to the way that destroying Germany would harshly affect both continental Europe and Britain in particular.

Next, Keynes examines the proposed annual reparations payments. The main reasons for Germany’s reduced capacity to pay are the loss of colonial possessions abroad and 10% of its land and inhabitants to its neighbors, the confiscation of its merchant fleet, 75% of its iron ore, and a third of its coal by the Allies, war debt, and an estimated 2 million in war casualties. Despite these facts, the reparations’ estimates still erroneously assume that Germany has a significant payment capacity. Keynes proposes an alternative to the terms of the Treaty of Versailles in the final chapter of this book. Yet here, he continues to make related, targeted suggestions about improving Germany’s situation. One suggestion includes reducing its imports and increasing its exports.

Keynes provides several tables with Germany’s economic prewar data from 1913. These include its imports, such as various raw materials (petroleum, cotton, wool, copper, and food), and exports (iron, coal, paper, leather, dyes, potash, and rubber). Germany’s most important exports were iron, machinery, and coal. After the war, Germany significantly lost its ability to export iron. Other exports played an international role too: 90% of German sugar went to Britain before the war. Keynes argues that his country could offer Germany a preferential arrangement, rather than solely punishing it, to help it stay economically viable. The author even suggests lowering the standard of life to reduce imports.

I reach, therefore, the final conclusion that, including all methods of payment-immediately transferable wealth, ceded property, and an annual tribute-$10,000,000,000 is a safe maximum figure of Germany's capacity to pay. In all the actual circumstances, I do not believe that she can pay as much (78).

Keynes investigates the loss of German resources, its power to produce, and even its facilities to arrive at this number. His goal is to demonstrate that the amount desired by the Allies ($25-$40 billion) is completely unrealistic. Examples like highlight Keynes’s frustration with the way politics overtook logic and economics at the conference and the reasons for his resignation.

Keynes provides three essential caveats. First, the Allies need to “nurse” Germany’s industry and trade by helping it in many ways such as “building up the markets for her” (79). Second, Keynes assumes that the unit of value measured in gold remains the same, else Germany’s capacity to pay, would be reduced further. Finally, he also assumes that there are no significant technological advancements changing the nature of human productivity.

After this, he examines the Reparations Commission tasked with determining the amount of the reparations. The Commission abided by Annex II and Articles 233-241 of the Treaty of Versailles. This international body also had authority over other Central Powers such as Austria. The Commission’s decisions came from a majority vote. Its main goals were to identify the amount of the exact claim against the vanquished and to create a payment schedule. This body also had several other tasks such as liquidating the Austro-Hungarian Bank of the now-defunct empire and determining whether any of Germany’s property should be returned.

Keynes considers the Commission to be an authoritarian body with dictatorial powers. He mimics the statements of the German Financial Commission, which asserted that “German democracy is thus annihilated,” and that the Commission, a foreign international body will now “possess in Germany incomparably greater rights than the German Emperor ever possessed” (83). The Allies, however, “refused to admit that there was any substance, ground, or force” in these statements (83). Examples like these demonstrate the lack of middle ground between the victors and the vanquished on essential questions. The Reparation Commission’s seemingly unlimited power also points to revanchism and politics clouding economic decisions. Of course, the very structure of the Paris Peace Conference was such because Germany was excluded from the key negotiations: it could only respond.

“The German Counter-Proposals,” the final section in this chapter, develops the theme of misunderstanding between the sides. Keynes suggests that the German tactics with their counterproposals were to assume that the victors “were secretly as anxious as the Germans themselves to arrive at a settlement which bore some relation to the facts” (86). Yet their assumption was erroneous, and “they would have done much better with a straightforward and candid estimate of what they believed to be the amount of their liabilities” instead of using the subtle approach (84).

The overall goal of the Treaty of Versailles, therefore, was to reduce “Germany to servitude for a generation” (86). This Allied policy was “abhorrent and detestable” (86). The author also brings up ethical questions about these decisions and the possible effects on the “whole civilized life in Europe” (86). This emotional response stands in contrast to much of this chapter, in which Keynes objectively presents tables and graphs, prewar and postwar exports, and explains his calculations. This is the voice of a frustrated professional who, too, was not heard by the high-ranking politicians whom he advised and who lacked his expertise in this essential field.