The Economic Consequences of the Peace

The final chapter, “Remedies,” comprises four subcategories: “1. Revision of the Treaty” (108), “The Settlement of Inter-Ally Indebtedness” (112), “An International Loan” (117), and “The Relations of Central Europe to Russia” (119). These sections discuss the legal ability to modify this postwar settlement, the need to cancel war debts between the Allies and move on, to help Germany recover by using international loans, and the relationship with Russia after its 1917 Revolution. Having spent the bulk of the book discussing the background and the problems with the Treaty of Versailles, the author takes this opportunity to offer a number of specific constructive solutions. These are the types of solutions that Keynes attempted to implement at the Paris Peace Conference when he acted as Lloyd George’s economic advisor, only to be ignored.

First, Keynes explains the difficulties of dealing with complex phenomena in postwar Europe and making economic predictions based on these difficulties: “[W]e may make the error of expecting consequences to follow too swiftly and too inevitably from what perhaps are not all the relevant causes “(107). Keynes argues that it is better to avoid the methods of the Paris Peace Conference altogether, “Those who controlled the Conference may bow before the gusts of popular opinion, but they will never lead us out of our troubles” (107). After all, the Conference focused on vengeance and the victims’ emotions rather than using an objective approach needed in economics. He also excludes his native Britain from his examination of Europe, as he has before because its economic conditions are distinct.

First, the author addresses the question of whether the Treaty of Versailles may be legally revised now that it has been signed and accepted. (It is important to note that the treaty went into effect approximately a month after this book was published.) In Keynes’s view, despite the legal difficulties, the newly established League of Nations “outweighs much of the evil in the rest of the Treaty” (108). Indeed, the League, being an international body, could “use its influence on the public opinion of the world” (108).

Keynes worries that the league may be used against its purpose by the European diplomats, becoming “an unequaled instrument for obstruction and delay” (109). Keynes’s low opinion of this profession comes from his negative experience at the Paris Peace Conference. He considers it problematic that the League seems to be designed to preserve the status quo, rather than leading to positive changes. For example, Article X reasserts the political independence and territorial integrity of its member states. This article is problematic in the case of the German loss of territories, such as the majority-German Saar, in the author’s view. Indeed, during the interwar period, the League also proved itself to be largely ineffective lacking the legal mechanisms to prevent or punish Japan for the invasion of China’s Manchuria (1931) or Italy for the invasion of Abyssinia (1935).

As before, Keynes does not question Germany’s guilt but suggests a smaller, more reasonable reparations amount. He seeks to exclude Austria from reparations altogether. Keynes makes several other specific suggestions about upholding or amending the Treaty. For instance, the current arrangement of Upper Silesia, populated by both Germans and Poles, should work granted that a plebiscite is carried out. In 1921, such a referendum did take place, and the region was split between Germany and Poland. The author also proposes establishing a voluntary Free Trade Union for at least a decade to prevent the use of protectionist tariffs specifically as they pertain to Germany and the newly independent countries like Poland. This measure is meant to help postwar recovery. This proposed Union is also meant to recover “some part of the loss of organization and economic efficiency” that affected Germany logistically through the loss of its territories as well as through the loss of resources (111).

The next important question is one of inter-ally indebtedness. Keynes believes that canceling all war debts among the Allies is “absolutely essential to the future prosperity of the world” (112). He also considers this forgiveness to be “an act of generosity” (113). This act of generosity would “achieve the economic reconstitution of the whole Continent” (113). Keynes asserts that war debts are “a menace to financial stability everywhere” (115). The economist outlines each country’s status as a lender and a borrower. For example, the United States solely acted as a lender during World War I. In contrast, France borrowed triple the amount of what it had lent. The author uses economic data to explain that keeping war debts would be harmful as would be the case of Europe repaying the US at 5% compound interest. He criticizes the US for using war lending as a money-making venture because, considering this information, “this relative financial sacrifice has been very slight indeed” (114). Furthermore, there are no historic precedents to the scope and scale of these war debts:

Before the middle of the nineteenth century no nation owned payments to a foreign nation on any considerable scale, except such tributes as were exacted under the compulsion of actual occupation in force and, at one time, by absentee princes under sanctions of feudalism (116).

The next important remedy to Germany’s economic woes is an international loan. The author asserts that such a loan would invigorate the German economy. However, he argues against the Americans being the lenders because “the United States is disinclined to entangle herself further” in European affairs (117). Earlier, Keynes outlined the reasons why he considered the economic decisions made at the Paris Peace Conference to be short-sighted and harmful. For this reason, he argues that “[i]f I had any influence at the United States Treasury, I would not lend a penny to a single one of the present Governments of Europe” (118).

Keynes makes it clear that while he believes that all the inter-ally war debts should be canceled, this new international loan should be repaid in full. The loan should come from several countries that have the financial capacity to lend, and these should include both Britain and the United States. The loan should also “provide foreign purchasing credits for all the belligerent countries of continental Europe, allied and ex-enemy alike” (118). This view is consistent with Keynes’s assertion about the interconnectedness of the European economy, in which the recovery of Germany would mean the recovery of Europe and vice versa.

In the 1920s, European and American leaders may have heard Keynes’s call only in part. The question of inter-ally war indebtedness persisted and caused issues between the former Allies. The Americans, for instance, used the United States War Debt Commission, to extract the money lent to 17 countries during the war. On the other hand, 1924 saw an international loan plan not unlike Keynes’s proposal. The Dawes Plan was an American-led initiative that temporarily lowered German reparations, restructured its central bank, introduced a new currency after Weimar’s hyperinflation, and lent money to Germany through foreign banks. The US used this plan to its own benefit since the Allies receiving German reparations still owed the US war debts. The 1929 Young Plan sought to continue what its predecessor began but was cut short by the Great Depression that same year.

The final question in this chapter is about Russia. In 1917, the radical Bolsheviks overthrew the Provisional Government after tsar Nicholas II’s abdication that same year in the context of World War I. Keynes makes it clear that he neither supports the new Russian government ideologically nor does he subscribe to the idea of foreign intervention in Russia. Despite several differences, at that time, both Germany and Russia were in poor condition: Germany after the war, and Russia being still amidst its own Civil War.

Keynes notes that “an ultimate union of forces between Russia and Germany is greatly feared in some quarters” (119). He refers to a view held by the maritime power, Britain, later adopted by another maritime power, the United States, rooted in Halford Mackinder’s classic geopolitics: a union between these two continental land-based countries would shift the balance of power to Eurasia. Indeed, this view has persisted since. For example, NATO’s first Secretary General, Lord Ismay, stated that the purpose of this military alliance was to “keep the Soviet Union out, the Americans in, and the Germans down” (“Lord Ismay,” NATO Leaders, NATO).

According to Keynes, preventing the formation of such a union would not come from encouraging detrimental socio-economic conditions. The latter would only exacerbate the domestic politics in each country leading to the formation of reactionary movements. Paradoxically, German technology and logistics should be used in Russian villages to improve the conditions in both countries because this plan is one “of ordinary economic motive” (121). He believes that economics is separate from ideology in general and from the ideology of the Soviet government, specifically: “[T]he revival of trade, of the comforts of life and of ordinary economic motive are not likely to promote the extreme forms of those doctrines of violence and tyranny which are the children of war and despair” (121). In other words, Keynes subscribes to the view that socioeconomic well-being leads to political stability.