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NOTE Appendix A: The 1919 Prophecies

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Appendix A. The 1919 Prophecies

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A few months ago, the London economist remarked that

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That, many people will be turning to read or re-read Lord Keynes's The Economic Consequences

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of the Peace.

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They will find the task rewarding, not so much for the brilliant analysis of the economic

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consequences as for the inspired account of the Peace itself and the process of its making.

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There are passages in it which, in the setting of today, have an almost frightening urgency.

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The passages to which the economist referred include the picture of Europe at the end of

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World War I, almost completely lost from sight in piecemeal settlement and in empty and arid

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intrigue.

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Here was a matter of life and death, of starvation and existence, and of the fearful convulsions

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of a dying civilization.

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Here was Europe forgotten yet deeply and inextricably intertwined, victors and defeated alike, by

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hidden psychic and economic bonds.

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The Economist referred also to the picture of the World War I peacemakers themselves,

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the portrayal of the complex struggle of human will and purpose, concentrated in the persons

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of four individuals in a manner never paralleled, the portrait of the righteous President Wilson

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refusing to discuss the final decisions lest he should thereby be shaken in his faith that,

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In the sweat of solitary contemplation, and with prayers to God, he had done nothing that

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was not just and right.

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It was the task of the Peace Conference, wrote Keynes, to honor engagements and to satisfy

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justice, but not less, to re-establish life and to heal wounds.

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And neither part of the task, he concluded, had been performed.

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When we turn back to the economic consequences of the piece and look at it again in the light

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of twenty-five years' experience and perspective, with the added illumination brought by the

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striking parallel in some respects between conditions at the time it was written and

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conditions today, we still find it undeniably a brilliant piece of writing.

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The most fascinating section is still chapter 3, in which the personalities of the big three

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of that time, Clemenceau, Lloyd George and Wilson, are described in unforgettable terms.

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Clemenceau, with his weary cynicism, sitting with closed eyes and an impassive face of

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of Parchment, his gray-gloved hands clasped in front of him,

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awaking to sudden outbursts only when the interests of France

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were directly concerned.

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Lloyd George, with his unerring, almost medium-like sensibility

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to everyone immediately around him, with six or seven senses not

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available to ordinary men, judging character, motive,

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and subconscious impulse, perceiving what each was thinking and even what each was going to say next,

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and compounding with telepathic instinct the argument or appeal best suited to the vanity, weakness, or self-interest of his immediate auditor.

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And finally, the poor President Wilson himself, playing blind man's bluff in that party,

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A blind and deaf Don Quixote, like a nonconformist minister, perhaps a Presbyterian, rigid, with

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a temperament theological rather than intellectual, appallingly incompetent in the agilities of

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the council chamber, and Lloyd George desiring at the last moment all the moderation he dared,

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According to his horror that it was harder to de-bamboozle this old Presbyterian than

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it had been to bamboozle him.

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These portraits are as vivid as those of Lytton Strachey.

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It is interesting to recall that Strachey dedicated one of his early volumes to Keynes.

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But, like Strachey's, there is also a little trace of the smart aleck in them.

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This trace is even more pronounced in a well-known passage in the book in which Keynes contemptuously

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compares modern railroads to the pyramids of Egypt and ridicules the capitalistic cake

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which must always grow and never be enjoyed, a passage calculated to delight gourmets of

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paradox but easily demolished by serious argument.

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This brings us to the economic sections of the book.

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For a quarter of a century now, Lord Keynes, on the basis of this work, has ranked in some

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circles as a major prophet.

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On the surface, indeed, his prophecies seemed to be uncannily accurate.

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At a time when allied statesmen were talking of reparations claims that would have reached

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the best for more than a very few years.

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What actually happened was that after endless conferences, the reparations claims were steadily

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scaled down until, under the Young Plan in 1929, they reached almost exactly the five

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hundred million dollars annually that Keynes had seen in 1919 as the maximum collectible.

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In the end, even these were not paid, nor were the inter-allied loans either.

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The whole process was brought to an abrupt end by President Hoover's moratorium in 1931

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and never revived.

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Could a profit ever have had clearer vindication?

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But a few questions uptrued themselves.

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Does the fact that Germany did not pay on net balance practically any reparations at all

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prove that she could not have paid them?

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The German reparations were unintentionally paid, in fact, chiefly by trusting American

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investors.

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And were the reasons why German reparations and inter-allied war debts bogged down the

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the same as the reasons why Mr. Keynes thought they would?

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The evidence does not show it.

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Let us look at the size of the reparations ultimately asked for under the Young Plan.

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At an annual level of around $500 million or $2 billion gold marks, they were less than

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and 4% of the total German national income and less than a fifth even of the pre-Hitler

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and post-inflation annual government expenditures.

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It would be absurd to call such a burden crushing.

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Where did Keynes's arguments go astray?

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He was right in seeing that all reparations would have to be paid, ultimately not in cash,

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in Goods and Services, that is to say, in a German export excess.

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He was right in contending that a world that insisted on reparations would have to open

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its doors to imports from Germany.

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But he was wrong in arguing that Germany's ability to produce this export excess was

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to be measured by her pre-war trade balance.

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He was wrong in this effort to give an itemized demonstration of Germany's inability to reach

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a high export surplus.

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He was wrong in assuming that the effects of this export surplus would be just like

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those of any other export surplus.

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For his whole discussion overlooks the obvious fact that Germany, in sending this export

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Surplus would also be sending to the allied countries the purchasing power with which

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to buy it.

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The transfer of goods in the absence of barriers to imports on the part of the allied governments

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would have followed as a natural consequence of the transfer of cash to pay for them.

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Finally, he too often forgot that the war damage had actually been done.

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Insofar as Germany failed to pay for reparations, her victims would have to do so.

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The blunt fact is that when the Allies permitted the reparations payments to stop, they enabled

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Germany to use the money thus saved for an immense armament program to launch against

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them the most destructive war in history.

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But it was partly because the world suffered from importphobia and was influenced by Keynes's

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neo-mercantilist arguments that it was willing to grant that Germany could not pay the reparations.

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This gave Germany the excuse for default.

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The influence of Keynes's own arguments, in short, was partly responsible for the success

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of his predictions.

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That influence remains to this day, so that the Yalta announcement, for example, talks

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only of reparations in kind.

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Actually, if there is a willingness on the part of the victors to receive goods, there

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is no essential economic difference between reparations in kind or in cash, except that

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the latter are more flexible.

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In each case there must be a transfer both of actual goods and of the cash values that

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they represent.

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Keynes's own proposals for reparation settlement are not entirely free from disingenuousness.

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He proposed, for example, a total indemnity for Germany of $10 billion.

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He then suggested that Germany be given a credit against this of $2.5 billion for the

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surrender of merchant ships, cables, war materials and other items.

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The balance of $7.5 billion, he adds, should not carry interest pending its repayment and

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should be paid by Germany in 30 annual installments of $250 million beginning in 1923.

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This is not only half the annual sum that Keynes had conceded earlier in his book that

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Germany might pay, but it is not $7.5 billion.

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The present value of 30 annual installments of $250 million beginning 3 years hence, the

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economic consequences appeared late in 1919, on an assumed interest rate of 5% is less

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than $3.5 billion.

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In other words, on the usual interest rate assumptions, Mr. Keynes was actually suggesting

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A capital payment from Germany of approximately half of $7.5 billion.

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A fresh reading of Lord Keynes's old book reminds us of one thing more.

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It is oversimplification, if not naive melodrama, to assume that America failed to enter the

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The League of Nations and turned isolationist after 1920 because a few wicked old reactionaries

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like Senator Lodge and President Harding prevented us.

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On the contrary, the drive against the Treaty of Versailles, which embodied the League of

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Nations, was led by the then left-wing liberals under the leadership of Keynes and his economic

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CONSEQUENCES OF THE PEACE.

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"'This is a very great book,' exclaimed Harold Lasky in his review in The Nation.

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"'If any answer can be made to the overwhelming indictment of the treaty that it contains,

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that answer has yet to be published.'

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The New Republic took up the cry.

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Its reviewer found the book like a fresh breeze coming into a plane

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where poisonous gases are yet hanging.

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The League was rejected as the mere instrument of a vicious treaty.

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The lesson is twofold.

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The liberals of today would do well to be something less than perfectionists in their

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demands.

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But the framers of the new treaties, in their turn, should try to establish a peace that

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recognizes the economic interdependence of Europe and of the world.

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A piece that, while it meets the demands of justice and prevents another aggression, will

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be of such a nature that humane and liberal public opinion in the democracies, when the

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passions of war have cooled, will still be willing to support it.