Martin Pool

The Economic Consequences of the Peace

with 4 comments

I read John Maynard Keynes’s The Economic Consequences of the Peace on my flight to London. It was written in about 1920 and constitutes Keynes’s criticism of the economic aspects of the Treaty of Versailles, which imposed demands for reparations from Germany so irrationally high that they would likely ruin not only Germany but all Europe.

I had learned of this issue of reparations in high school history, but had imagined the instability was caused by German resentment of the payments. In fact, the amounts were set so high that even after seizing much of Germany’s shipping, railroads, and private citizen’s assets there was still no prospect they could ever be paid off.

The book is very readable – clear, well argued on both moral and intellectual grounds, lively. It’s quite tragic to contemplate how much suffering in the 20s, 30s, and 40s might have been avoided had his message been heard at the time. His essential point was that if Europe was to recover it must do so collectively, by imposing only moderate reparations and promoting trade and economic growth. He is scathing towards almost all the political leaders of the time.

On the other hand, von Mises wrote ‘it is said that [the book] inaugurated the anti-French and pro-German tendencies of Great Britain’s “appeasement” policy which virtually encouraged the rise of Nazism, permitted Hitler to defy the essential clauses of the Treaty of Versailles and finally resulted in the outbreak of the Second World War’. I don’t know if this is fair, but I intend to read more. It does seem that Keynes forsaw that a treaty making physically impossible demands must fail one way or another.

On any day you can turn on the TV and see a Nazi documentary — in some places they seem to run continuously — but rarely much thoughtful explanation of how that situation arose.

What an extraordinary episode in the economic progress of man that age was which came to an end in August, 1914! The greater part of the population, it is true, worked hard and lived at a low standard of comfort, yet were, to all appearances, reasonably contented with this lot. But escape was possible, for any man of capacity or character at all exceeding the average, into the middle and upper classes, for whom life offered, at a low cost and with the least trouble, conveniences, comforts, and amenities beyond the compass of the richest and most powerful monarchs of other ages. The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or be could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend. He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality, could despatch his servant to the neighboring office of a bank for such supply of the precious metals as might seem convenient, and could then proceed abroad to foreign quarters, without knowledge of their religion, language, or customs, bearing coined wealth upon his person, and would consider himself greatly aggrieved and much surprised at the least interference. But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable. The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion, which were to play the serpent to this paradise, were little more than the amusements of his daily newspaper, and appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalization of which was nearly complete in practice.
….

Thus this remarkable system [before the War] depended for its growth on a double bluff or deception. On the one hand the laboring classes accepted from ignorance or powerlessness, or were compelled, persuaded, or cajoled by custom, convention, authority, and the well-established order of Society into accepting, a situation in which they could call their own very little of the cake that they and Nature and the capitalists were co-operating to produce. And on the other hand the capitalist classes were allowed to call the best part of the cake theirs and were theoretically free to consume it, on the tacit underlying condition that they consumed very little of it in practice. The duty of “saving” became nine-tenths of virtue and the growth of the cake the object of true religion. There grew round the non-consumption of the cake all those instincts of puritanism which in other ages has withdrawn itself from the world and has neglected the arts of production as well as those of enjoyment. And so the cake increased; but to what end was not clearly contemplated. Individuals would be exhorted not so much to abstain as to defer, and to cultivate the pleasures of security and anticipation. Saving was for old age or for your children; but this was only in theory,–the virtue of the cake was that it was never to be consumed, neither by you nor by your children after you.

Written by Martin Pool

April 19, 2009 at 9:50 am

Posted in books, economics

4 Responses

Subscribe to comments with RSS.

  1. Well, the price that Germany had been asked to pay was high for sure, but it unfortunately wasn’t unrealistic. The damages to the economy and infrastructures of northern France were estimated to be about a thousand billion francs, and of course noone could never pay back for those damages. I don’t blame anyone for that, if the French had won the war, they’d probably have dealt similar damages on the German part of the battlefield.

    What i want to point out is that war has a cost, an astouding cost. Not the one of the sophisticated weapons used for slaughtering civilians, but the one for the children of the children of the citizens of the former battlefields : the price to build a whole country upon the ruins that were left.

    Unfortunately, there still are people who are so blinded by their own irrational hate that they feel comfortable with making people have to pay this very same price, nowadays.

    sidi

    April 19, 2009 at 1:42 pm

  2. I don’t have a source for this unfortunately, but we were told in university history that reparation treaties were always expected to be broken in some form eventually, and were usually monumentally harsh as part of this expectation: essentially strip-mining the loser while you could. They didn’t seem committed to that view, it was just a point-of-view they raised when they talked about the consequences of the Treaty of Versailles in the 30s and 40s, that perhaps it had not been uniquely harsh among reparation treaties. (Even if one accepted this, and I don’t have the information to do so, it does not imply that the terms of the Treaty were not implicated in the continuing war in the 30s and 40s.)

    Mary

    April 19, 2009 at 9:19 pm

  3. @Mary, Keynes seems to support the idea that France aimed to strip-mine Germany, without seriously expecting to recover the whole amount. His point is that Europe is so integrated that the economic recovery of the victors and the future stability of Europe depends on Germany becoming productive again, so the policy was self-destructive, as it eventually proved to be.

    He states that in France’s defeat in the 1870s it was required to pay about $1bn to Germany, a much smaller amount relative to their economies at the time. So it might not have been uniquely harsh in history but it was unusually harsh.

    mbp

    April 20, 2009 at 7:33 am

  4. I’m told the pastiche of the world leaders at Versailles is worth savouring. I’ve been trying to get my hands on this book, but had delivery issues. Can’t wait until it arrives.

    As for the effect of Keynes. I think he whipped up awareness about the injustice at Versailles and I’ve read elsewhere how people thought he created a climate where people thought it was OK to let Germany on a loose leash. Though, I find this idea romantic.

    Appeasement had as much to do with a lack of British preparation. They needed to delay before they could begin a war.

    Whatismore, Keynes dropped out of policy making circles for the 1920s and 30s. Not including a brief stint on a government board to deal with unemployment. By the time of appeasement I imagine the debate in policy circles had moved on, however much JMK ignited the public imagination at the time.

    Thanks for this post – it made great reading.

    arjunasoctupus

    April 11, 2010 at 5:48 pm


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

%d bloggers like this: