The Economic Consequences of the Peace

"The Economic Consequences of the Peace" (1919) is a book published by John Maynard Keynes. Keynes attended the Versailles Conference as a delegate of the British Treasury and argued for a much more generous peace. It was a best seller throughout the world and was critical in establishing a general opinion that the Versailles Treaty was a "Carthaginian peace". It helped to consolidate American public opinion against the treaty and involvement in the League of Nations. The perception by much of the British public that Germany had been treated unfairly in turn was a crucial factor in public support for appeasement. The success of the book established Keynes' reputation as a leading economist especially on the left. When Keynes was a key player in establishing the Bretton Woods system in 1944, he remembered the lessons from Versailles as well as the Great Depression. The Marshall Plan after Second World War is a similar system to that proposed by Keynes in "The Economic Consequences of the Peace".

Writing of the book

Keynes left Cambridge University to work at Treasury in 1915. He worked daily on financing the war effort during World War I. This disturbed many of the pacifist members of the Bloomsbury Group of which Keynes was a member. Lytton Strachey sent him a note in 1916 asking Keynes why he was still working at Treasury.

Keynes quickly established a reputation as one of the Treasury's most able men and travelled to the Versailles Conference as an advisor to the British Government. In preparation for the conference, he argued that there should be no reparations or that, at worst, German reparations should be limited to £2,000 million. He considered that there should be a general forgiveness of war debts which he considered would benefit Britain. Lastly, Keynes wanted the US Government to launch a vast credit program to restore Europe to prosperity as soon as possible.

Keynes general concern was that the Versailles conference should set the conditions for economic recovery. However, the conference focussed on borders and national security. Reparations were set at a level that Keynes perceived would ruin Europe, Woodrow Wilson refused to countenance forgiveness of war debts and Wilson would not even let the US Treasury officials discuss the credit program. While Keynes' proposals were far sighted, few others at the Versailles Conference understood their importance and Keynes' proposals would have been controversial in nations such as France, Britain and the US.

During the conference, Keynes' health deteriorated and he resigned in frustration from his position on 26 May, 1919. He retired to Cambridge and wrote "The Economic Consequences of the Peace" over two months in the English summer.

Contents

Introductory

Europe before the War

The Conference

The Treaty

Reparation

Europe after the Treaty

Keynes outlined the causes of high inflation and economic stagnation in post-WWI Europe in "The Economic Consequences of the Peace".

"Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some... Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

Keynes explicity pointed out the relationship between governments printing money and inflation.

"The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance."

Keynes also pointed out how government price controls discourage production.

"The presumption of a spurious value for the currency, by the force of law expressed in the regulation of prices, contains in itself, however, the seeds of final economic decay, and soon dries up the sources of ultimate supply. If a man is compelled to exchange the fruits of his labors for paper which, as experience soon teaches him, he cannot use to purchase what he requires at a price comparable to that which he has received for his own products, he will keep his produce for himself, dispose of it to his friends and neighbors as a favor, or relax his efforts in producing it. A system of compelling the exchange of commodities at what is not their real relative value not only relaxes production, but leads finally to the waste and inefficiency of barter."

Keynes detailed the relationship between German government deficits and inflation.

"In Germany the total expenditure of the Empire, the Federal States, and the Communes in 1919-20 is estimated at 25 milliards of marks, of which not above 10 milliards are covered by previously existing taxation. This is without allowing anything for the payment of the indemnity. In Russia, Poland, Hungary, or Austria such a thing as a budget cannot be seriously considered to exist at all."

"Thus the menace of inflationism described above is not merely a product of the war, of which peace begins the cure. It is a continuing phenomenon of which the end is not yet in sight."

Keynes ended with this ominous warning.

"But who can say how much is endurable, or in what direction men will seek at last to escape from their misfortunes?"

The economic mess in Germany laid the foundation for the rise of Hitler.

Remedies

Success

The book was released in late 1919 and became an immediate bestseller on both sides of the Atlantic: it was released in the US in 1920. The scathing sketches of Wilson, Lloyd George and Clemenceau proved to be very popular and the work established Keynes' reputation with the public as a leading economist. By 1924, the book had sold 140,000 copies with translations into 11 languages. It restored Keynes' reputation with the Bloomsbury Group which had been tarnished by his work for the treasury during the war. Keynes returned to Cambridge to work as an economist where he was regarded as the leading student of Alfred Marshall.

Impact on American participation in the League of Nations

As well as being highly successful in commercial terms in the US, the book proved to be highly influential. The book was released just before the US Senate considered the Treaty of Versailles and confirmed the beliefs of the isolationists or irreconcilables that American participation in world politics was not wise. As well, the book also heightened the doubts of the "reservationists" led by Henry Cabot Lodge over the terms of the treaty and created doubts in the minds of Wilson's supporters. Lodge, the Republican Senate Leader, shared Keynes' concerns about the severity of the Treaty on Germany and believed that it would have to be renegotiated in the future. The Economic Consequences of the Peace played a critical role in turning American public opinion against the Treaty of Versailles and the League of Nations although it was Wilson's poor management of the issue due to a number of strokes that would eventually ensure that America would not participate in the League of Nations.

Impact on British public support for the Treaty of Versailles

Keynes' portrayal of the Treaty of Versailles as a "Carthaginian peace" quickly became the orthodoxy in academic circles and was a common opinion amongst the British public. It was widely believed in Britain that the terms of the Versailles Treaty were unfair. This in turn was influential in determining a response to the attempts by Adolf Hitler to overturn the Versailles Treaty especially in the period leading up to the Munich Agreement. In Germany, Keynes work confirmed what the overwhelming majority of the people already believed: that is, that the Versailles Treaty was unfair. France was reluctant to use armed force to enforce the Versailles Treaty without the support of the British Government. Prior to late 1938, the strength of public opposition to prospective involvement in another war meant that British support for the French position was unreliable.

Étienne Mantoux criticised the impact of Keynes' book in his book "The Carthaginian Peace: or the Economic Consequences of Mr. Keynes" said that Keynes book did more than any other writing to discredit the Treaty of Versailles. Mantoux compared "The Economic Consequences of the Peace" to Edmund Burke's "Reflections on the Revolution in France" because of the immediate influence on public opinion. In his book Mantoux sought to discredit Keynes' predictions of what the consequences of the Treaty would be. For example, Keynes believed European output in iron would decrease but by 1929 iron output in Europe was up 10% from the 1913 figure. Keynes predicted that German iron and steel output would decrease but by 1927 steel output increased by 30% and iron output increased by 38% from 1913 (within the pre-war borders). Keynes also argued that German coal mining efficiency would decrease but labour efficiency by 1929 had increased on the 1913 figure by 30%. Keynes contended that Germany would be unable to export coal immediately after the Treaty but German net coal exports were 15 million tons within a year and by 1926 the tonnage exported reached 35 million. He also put forward the claim that German national savings in the years after the Treaty would be less than 2 billion marks: however in 1925 the German national savings figure was estimated at 6.4 billion marks and in 1927 7.6 billion marks. Keynes also believed that Germany would be unable to pay the 2 billion marks-plus in reparations for the next 30 years, but Mantoux contends that German rearmament spending was seven times as much as that figure in each year between 1933 and 1939. [http://links.jstor.org/sici?sici=0002-8282%28194612%2936%3A5%3C930%3ATCPOTE%3E2.0.CO%3B2-D]

During the 1930s, Keynes was an early advocate of rearmament to deter what he referred to as the "brigand powers" of Germany, Japan and Italy. In July 1936, Keynes sent a letter to the editor to the "New Statesman" saying "a state of inadequate armament on our part can only encourage the brigand powers who know no argument but force, and will play, in the long run, into the hands of those who would like us to acquiesce by inaction in these powers doing pretty much what they like in the world".

Post World War II Settlement

Keynes was a highly influential adviser to the British Government during the Second World War. He was head of the British negotiating team that negotiated the Bretton Woods Agreement with the American team led by Harry Dexter White. In general, the Bretton Woods Agreement suggested a monetary system similar to that proposed by Keynes in "The Economic Consequences of the Peace".

Keynes' proposal for an International Clearing Union formed the basis of proposals for the International Monetary Fund and the International Bank for Reconstruction and Development (later the World Bank and Bank for International Settlements). However, the operation of these institutions was not as liberal as Keynes would have wished. The extension of credit to Europe by the US through the Marshall Plan was along the lines proposed by Keynes during Versailles.

Keynes was also responsible for negotiating financial support for Britain during the Second World War. While Britain struggled to afford the terms offered during the war, the credit offered by the US was much more generous.

Furthermore, the Western powers did not ask for reparations from the defeated powersFact|date=May 2008 although the Soviet Union did charge reparations from East Germany.

In occupied Germany the Allies followed the Morgenthau plan, to remove all German war potential by complete or partial pastoralization. As part of this, in the Industrial plans for Germany the rules for which industry Germany was to be allowed to retain were set out. Allied dismantling policy changed in late 1946 to mid 1947, although heavy industry continued to be dismantled until 1951. In March 1947 Herbert Hoover helped change policy by stating:"There is the illusion that the New Germany left after the annexations can be reduced to a 'pastoral state'. It cannot be done unless we exterminate or move 25,000,000 people out of it." [http://www.un.org/Pubs/chronicle/2008/webarticles/080103_marshallplan.html]

As Keynes predicted, reparations and war debts were paid for by loans from the US, leaving no one better off.Fact|date=May 2008

The postwar system led to one of the greatest general increases in prosperity in human history. During the period 1948-1971, world trade increased by an average annual rate of 7.27% and industrial production grew by an average of 5.6%. This contrasts with the inter-war period where world trade actually fell in the 1930s and world industrial production grew fitfully in the 1920s and was hit by the depression.

Further Reading and Reference

* John Maynard Keynes "The Economic Consequences of the Peace", Harcourt Brace New York 1920
* R.F. Harrod, "The Life of John Maynard Keynes", Harcourt Brace New York 1951
* Étienne Mantoux, "The Carthaginian Peace: Or the Economic Consequences of Mr Keynes" Oxford University Press, 1946
* Robert Skidelsky, "John Maynard Keynes: Hopes Betrayed 1883-1920" Penguin 1994
* Robert Skidelsky, "John Maynard Keynes: Fighting for Freedom 1937-1946" Penguin 2002
* Paul Johnson "A History of the Modern World: From 1917 to the 1990s" George Weidenfeld & Nicolson Ltd London 1991

External Reference

*gutenberg|no=15776|name=The Economic Consequences of the Peace
* [http://www.fordham.edu/halsall/mod/1920keynes.html Modern History Sourcebook on the "Economic Consequences of the Peace"]
* [http://cupid.ecom.unimelb.edu.au/het/keynes/vebrev.html Review of "Economic Consequences of the Peace" in Political Science Quarterly 35] by Thorstein Veblen
* [http://www.jimmyatkinson.com/papers/versaillestreaty.html Dr Julián Casanova, The Treaty of Versailles and its Consequences]
* [http://www.foreignaffairs.org/20020101faessay8056-p0/walter-russell-mead/in-the-long-run-keynes-and-the-legacy-of-british-liberalism.html Walter Russell Mead, Review of "John Maynard Keynes: Fighting for Freedom 1937-1946" "Foreign Affairs" 2002]
* [http://www.mises.org/efandi/ch30.asp Review of R.F. Harrod, "The Life of John Maynard Keynes", 1951] by Ludwig von Mises
* [http://query.nytimes.com/gst/fullpage.html?res=940CEEDF1139F933A15752C0A9649C8B63/ "The New York Times" review of "John Maynard Keynes: Fighting for Freedom 1937-1946"]