Appendix A. The 1919 Prophecies
A few months ago, the London economist remarked that
That, many people will be turning to read or re-read Lord Keynes's The Economic Consequences
of the Peace.
They will find the task rewarding, not so much for the brilliant analysis of the economic
consequences as for the inspired account of the Peace itself and the process of its making.
There are passages in it which, in the setting of today, have an almost frightening urgency.
The passages to which the economist referred include the picture of Europe at the end of
World War I, almost completely lost from sight in piecemeal settlement and in empty and arid
intrigue.
Here was a matter of life and death, of starvation and existence, and of the fearful convulsions
of a dying civilization.
Here was Europe forgotten yet deeply and inextricably intertwined, victors and defeated alike, by
hidden psychic and economic bonds.
The Economist referred also to the picture of the World War I peacemakers themselves,
the portrayal of the complex struggle of human will and purpose, concentrated in the persons
of four individuals in a manner never paralleled, the portrait of the righteous President Wilson
refusing to discuss the final decisions lest he should thereby be shaken in his faith that,
In the sweat of solitary contemplation, and with prayers to God, he had done nothing that
was not just and right.
It was the task of the Peace Conference, wrote Keynes, to honor engagements and to satisfy
justice, but not less, to re-establish life and to heal wounds.
And neither part of the task, he concluded, had been performed.
When we turn back to the economic consequences of the piece and look at it again in the light
of twenty-five years' experience and perspective, with the added illumination brought by the
striking parallel in some respects between conditions at the time it was written and
conditions today, we still find it undeniably a brilliant piece of writing.
The most fascinating section is still chapter 3, in which the personalities of the big three
of that time, Clemenceau, Lloyd George and Wilson, are described in unforgettable terms.
Clemenceau, with his weary cynicism, sitting with closed eyes and an impassive face of
of Parchment, his gray-gloved hands clasped in front of him,
awaking to sudden outbursts only when the interests of France
were directly concerned.
Lloyd George, with his unerring, almost medium-like sensibility
to everyone immediately around him, with six or seven senses not
available to ordinary men, judging character, motive,
and subconscious impulse, perceiving what each was thinking and even what each was going to say next,
and compounding with telepathic instinct the argument or appeal best suited to the vanity, weakness, or self-interest of his immediate auditor.
And finally, the poor President Wilson himself, playing blind man's bluff in that party,
A blind and deaf Don Quixote, like a nonconformist minister, perhaps a Presbyterian, rigid, with
a temperament theological rather than intellectual, appallingly incompetent in the agilities of
the council chamber, and Lloyd George desiring at the last moment all the moderation he dared,
According to his horror that it was harder to de-bamboozle this old Presbyterian than
it had been to bamboozle him.
These portraits are as vivid as those of Lytton Strachey.
It is interesting to recall that Strachey dedicated one of his early volumes to Keynes.
But, like Strachey's, there is also a little trace of the smart aleck in them.
This trace is even more pronounced in a well-known passage in the book in which Keynes contemptuously
compares modern railroads to the pyramids of Egypt and ridicules the capitalistic cake
which must always grow and never be enjoyed, a passage calculated to delight gourmets of
paradox but easily demolished by serious argument.
This brings us to the economic sections of the book.
For a quarter of a century now, Lord Keynes, on the basis of this work, has ranked in some
circles as a major prophet.
On the surface, indeed, his prophecies seemed to be uncannily accurate.
At a time when allied statesmen were talking of reparations claims that would have reached
the best for more than a very few years.
What actually happened was that after endless conferences, the reparations claims were steadily
scaled down until, under the Young Plan in 1929, they reached almost exactly the five
hundred million dollars annually that Keynes had seen in 1919 as the maximum collectible.
In the end, even these were not paid, nor were the inter-allied loans either.
The whole process was brought to an abrupt end by President Hoover's moratorium in 1931
and never revived.
Could a profit ever have had clearer vindication?
But a few questions uptrued themselves.
Does the fact that Germany did not pay on net balance practically any reparations at all
prove that she could not have paid them?
The German reparations were unintentionally paid, in fact, chiefly by trusting American
investors.
And were the reasons why German reparations and inter-allied war debts bogged down the
the same as the reasons why Mr. Keynes thought they would?
The evidence does not show it.
Let us look at the size of the reparations ultimately asked for under the Young Plan.
At an annual level of around $500 million or $2 billion gold marks, they were less than
and 4% of the total German national income and less than a fifth even of the pre-Hitler
and post-inflation annual government expenditures.
It would be absurd to call such a burden crushing.
Where did Keynes's arguments go astray?
He was right in seeing that all reparations would have to be paid, ultimately not in cash,
in Goods and Services, that is to say, in a German export excess.
He was right in contending that a world that insisted on reparations would have to open
its doors to imports from Germany.
But he was wrong in arguing that Germany's ability to produce this export excess was
to be measured by her pre-war trade balance.
He was wrong in this effort to give an itemized demonstration of Germany's inability to reach
a high export surplus.
He was wrong in assuming that the effects of this export surplus would be just like
those of any other export surplus.
For his whole discussion overlooks the obvious fact that Germany, in sending this export
Surplus would also be sending to the allied countries the purchasing power with which
to buy it.
The transfer of goods in the absence of barriers to imports on the part of the allied governments
would have followed as a natural consequence of the transfer of cash to pay for them.
Finally, he too often forgot that the war damage had actually been done.
Insofar as Germany failed to pay for reparations, her victims would have to do so.
The blunt fact is that when the Allies permitted the reparations payments to stop, they enabled
Germany to use the money thus saved for an immense armament program to launch against
them the most destructive war in history.
But it was partly because the world suffered from importphobia and was influenced by Keynes's
neo-mercantilist arguments that it was willing to grant that Germany could not pay the reparations.
This gave Germany the excuse for default.
The influence of Keynes's own arguments, in short, was partly responsible for the success
of his predictions.
That influence remains to this day, so that the Yalta announcement, for example, talks
only of reparations in kind.
Actually, if there is a willingness on the part of the victors to receive goods, there
is no essential economic difference between reparations in kind or in cash, except that
the latter are more flexible.
In each case there must be a transfer both of actual goods and of the cash values that
they represent.
Keynes's own proposals for reparation settlement are not entirely free from disingenuousness.
He proposed, for example, a total indemnity for Germany of $10 billion.
He then suggested that Germany be given a credit against this of $2.5 billion for the
surrender of merchant ships, cables, war materials and other items.
The balance of $7.5 billion, he adds, should not carry interest pending its repayment and
should be paid by Germany in 30 annual installments of $250 million beginning in 1923.
This is not only half the annual sum that Keynes had conceded earlier in his book that
Germany might pay, but it is not $7.5 billion.
The present value of 30 annual installments of $250 million beginning 3 years hence, the
economic consequences appeared late in 1919, on an assumed interest rate of 5% is less
than $3.5 billion.
In other words, on the usual interest rate assumptions, Mr. Keynes was actually suggesting
A capital payment from Germany of approximately half of $7.5 billion.
A fresh reading of Lord Keynes's old book reminds us of one thing more.
It is oversimplification, if not naive melodrama, to assume that America failed to enter the
The League of Nations and turned isolationist after 1920 because a few wicked old reactionaries
like Senator Lodge and President Harding prevented us.
On the contrary, the drive against the Treaty of Versailles, which embodied the League of
Nations, was led by the then left-wing liberals under the leadership of Keynes and his economic
CONSEQUENCES OF THE PEACE.
"'This is a very great book,' exclaimed Harold Lasky in his review in The Nation.
"'If any answer can be made to the overwhelming indictment of the treaty that it contains,
that answer has yet to be published.'
The New Republic took up the cry.
Its reviewer found the book like a fresh breeze coming into a plane
where poisonous gases are yet hanging.
The League was rejected as the mere instrument of a vicious treaty.
The lesson is twofold.
The liberals of today would do well to be something less than perfectionists in their
demands.
But the framers of the new treaties, in their turn, should try to establish a peace that
recognizes the economic interdependence of Europe and of the world.
A piece that, while it meets the demands of justice and prevents another aggression, will
be of such a nature that humane and liberal public opinion in the democracies, when the
passions of war have cooled, will still be willing to support it.