The Economic Consequences of the Peace

armisticeAfter the Armistice of November 11th, 1918, terminating the World War I in the west front, John Maynard Keynes attended the Paris Peace Conference as a delegate of the British Treasury. It was at that time that he wrote the book “The Economic Consequences of the Peace” (released at the end of 1919) (1).

I read the book back in 2012, and hadn’t yet written a thorough review of it in the blog despite of being reminded of it every year on Armistice Day, a memory day observed in France. In the book, Keynes explained how the disaster in the making was about to be produced; due to lack of communication between representatives from USA, UK, France and Italy, the electoral interests of British representatives and the intention from Clemenceau of taking as much as possible from Germany.

“Moved by insane delusion and reckless self-regard, the German people overturned the foundations on which we all lived and built. But the spokesmen of the French and British peoples have run the risk of completing the ruin, which Germany began, by a Peace which, if it is carried into effect, must impair yet further, when it might have restored, the delicate, complicated organization, already shaken and broken by war, through which alone the European peoples can employ themselves and live.”

economicconsequencesKeynes advocated for softer terms to be imposed on Germany, not only out of justice for its future generations but out of pragmatical economic estimates that he discusses in detail in the book.

“My purpose in this book is to show that the Carthaginian Peace is not practically right or possible. Although the school of thought from which it springs is aware of the economic factor, it overlooks, nevertheless, the deeper economic tendencies which are to govern the future. The clock cannot be set back”

He criticized that from the very beginning, as laid out in the Fourteen Points outlined in a speech by Woodrow Wilson earlier in 1918, the spirit of the conference was not the appropriate one,

“The thoughts which I have expressed in the second chapter were not present to the mind of Paris. The future life of Europe was not their concern; its means of livelihood was not their anxiety. Their preoccupations, good and bad alike, related to frontiers and nationalities, to the balance of power, to imperial aggrandizements, to the future enfeeblement of a strong and dangerous enemy, to revenge, and to the shifting by the victors of their unbearable financial burdens on to the shoulders of the defeated.”

At that time there wasn’t the amount of available open data on economic figures, output, trade, etc., that we enjoy today. This did not deter Keynes in making the estimates himself of the economic provisions that a sound peace treaty should include in his point of view.

The German economic system as it existed before the war depended on three main factors:

  1. Overseas commerce as represented by her mercantile marine, her colonies, her foreign investments, her exports, and the overseas connections of her merchants;
  2. The exploitation of her coal and iron and the industries built upon them;
  3. Her transport and tariff system.

Of these the first, while not the least important, was certainly the most vulnerable. The Treaty aims at the systematic destruction of all three, but principally of the first two”

Under the provisions of the treaty Germany was demanded a yearly contribution to the Allies of 40,000,000 tons of coal. Keynes argued to what extent this, together with other provisions, put Germany in a dire state.

  • Pre war maximum output had been reached in 1913, with 191,500,000 tons of coal. Out of which 19,000,000 tons were consumed in the mines and 33,500,000 tons were exported,
  • This left 139,000,000 for domestic (pre war) consumption.
  • The nominally German output was diminished due to loss of territory (Alsace-Lorraine, Saar Basin, Upper Silesia), which meant a reduction of up to 60,800,000 tons out of 1913 figures… thus, a maximum theoretical output of ~130,000,000 tons.
  • Keynes argued that the destruction of the war, the reduction in working hours (from 8.5h to 7h) and loss of efficiency (due to operators lost in the war, those with deteriorated health, etc.) could account for a loss 30% of output… thus, a maximum theoretical output limited to ~100,000,000 tons.

Requiring Germany to contribute 40,000,000 tons would leave it with only 60,000,000 tons for domestic use, which even when allowing for the loss of territory, meant that its economic future was being jeopardized.

Every million tons she is forced to export must be at the expense of closing down an industry.

But it is evident that Germany cannot and will not furnish the Allies with a contribution of 40,000,000 tons annually. Those Allied Ministers, who have told their peoples that she can, have certainly deceived them for the sake of allaying for the moment the misgivings of the European peoples as to the path along which they are being led.”

A similar criticism is made of the chapter of the treaty that covers the “Reparation“, that is the compensation for the destruction of the war and loss of civilian lives.

“compensation will be made by Germany for all damage done to the civilian population of the Allies and to their property by the aggression of Germany by land, by sea, and from the air.”

Keynes argued that the claims from the different Allies were much too high. He, again, came up with his own estimates, which he later validated with French output statistics of the time and suggested an early settlement, without entering in the painful exercise of calculating every minor detail.

Belgian claims against Germany such as I have seen, amounting to a sum in excess of the total estimated pre-war wealth of the whole country, are simply irresponsible.” […]

“While the French claims are immensely greater, here too there has been excessive exaggeration, as responsible French statisticians have themselves pointed out. Not above 10 per cent of the area of France was effectively occupied by the enemy, and not above 4 per cent lay within the area of substantial devastation. Of the sixty French towns having a population exceeding 35,000, only two were destroyed—Reims (115,178) and St. Quentin (55,571); three others were occupied—Lille, Roubaix, and Douai—and suffered from loot of machinery and other property, but were not substantially injured otherwise.” […]

“…it will be difficult to establish a bill exceeding $2,500,000,000 for physical and material damage in the occupied and devastated areas of Northern France. I am confirmed in this estimate by the opinion of M. René Pupin, the author of the most comprehensive and scientific estimate of the pre-war wealth of France, which I did not come across until after my own figure had been arrived at. […] but to be on the safe side, we will, somewhat arbitrarily, make an addition to the French claim of $1,500,000,000 on all heads, bringing it to $4,000,000,000 in all.

In this speech the French Minister of Finance estimated the total French claims for damage to property (presumably inclusive of losses at sea, etc., but apart from pensions and allowances) at $26,800,000,000 (134 milliard francs), or more than six times my estimate.” […]

(estimate for all countries) “I believe that it would have been a wise and just act to have asked the German Government at the Peace Negotiations to agree to a sum of $10,000,000,000 in final settlement, without further examination of particulars. This would have provided an immediate and certain solution, and would have required from Germany a sum which, if she were granted certain indulgences, it might not have proved entirely impossible for her to pay.”

A similar discussion is presented in relation to the Pensions and Allowances to be added to the Reparation chapter.

Keynes then turned to the ability of Germany to pay,

[…] “I reach, therefore, the final conclusion that, including all methods of payment—immediately transferable wealth, ceded property, and an annual tribute—$10,000,000,000 is a safe maximum figure of Germany’s capacity to pay. In all the actual circumstances, I do not believe that she can pay as much. Let those who consider this a very low figure, bear in mind the following remarkable comparison. The wealth of France in 1871 was estimated at a little less than half that of Germany in 1913. Apart from changes in the value of money, an indemnity from Germany of $2,500,000,000 would, therefore, be about comparable to the sum paid by France in 1871; and as the real burden of an indemnity increases more than in proportion to its amount, the payment of $10,000,000,000 by Germany would have far severer consequences than the $1,000,000,000 paid by France in 1871.”

A capacity of $40,000,000,000 or even of $25,000,000,000 is, therefore, not within the limits of reasonable possibility. It is for those who believe that Germany can make an annual payment amounting to hundreds of millions sterling to say in what specific commodities they intend this payment to be made and in what markets the goods are to be sold. Until they proceed to some degree of detail, and are able to produce some tangible argument in favor of their conclusions, they do not deserve to be believed.”

“… if the Allies were to “nurse” the trade and industry of Germany for a period of five or ten years, supplying her with large loans, and with ample shipping, food, and raw materials during that period, building up markets for her, and deliberately applying all their resources and goodwill to making her the greatest industrial nation in Europe, if not in the world, a substantially larger sum could probably be extracted thereafter; for Germany is capable of very great productivity.” […]

“It is true that in 1870 no man could have predicted Germany’s capacity in 1910. […] The fact that we have no adequate knowledge of Germany’s capacity to pay over a long period of years is no justification (as I have heard some people claim that, it is) for the statement that she can pay $50,000,000,000.”

The future in his view was then going to be bleak:

The Treaty includes no provisions for the economic rehabilitation of Europe,—nothing to make the defeated Central Empires into good neighbors, nothing to stabilize the new States of Europe,” […]

An enormous part of German industry will, therefore, be condemned inevitably to destruction. The need of importing foodstuffs will increase considerably at the same time that the possibility of satisfying this demand is as greatly diminished. In a very short time, therefore, Germany will not be in a position to give bread and work to her numerous millions of inhabitants, who are prevented from earning their livelihood by navigation and trade”

In the last chapter, he offered some alternative measures, which were clearly not taken in 1919 but which may have influenced the Marshall Plan after the World War II.

“I do not intend to enter here into details, or to attempt a revision of the Treaty clause by clause. I limit myself to three great changes which are necessary for the economic life of Europe, relating to Reparation, to Coal and Iron, and to Tariffs.

Reparation.—[…] I suggest, […], the following settlement:—

(1) The amount of the payment to be made by Germany in respect of Reparation and the costs of the Armies of Occupation might be fixed at $10,000,000,000.

(2) The surrender of merchant ships and submarine cables under the Treaty, of war material under the Armistice, of State property in ceded territory, of claims against such territory in respect of public debt, and of Germany’s claims against her former Allies, should be reckoned as worth the lump sum of $2,500,000,000, […].

(3) The balance of $7,500,000,000 should not carry interest pending its repayment, and should be paid by Germany in thirty annual instalments of $250,000,000, beginning in 1923.

Coal and Iron.—(1) The Allies’ options on coal under Annex V. should be abandoned, but Germany’s obligation to make good France’s loss of coal through the destruction of her mines should remain.

Tariffs.—A Free Trade Union should be established under the auspices of the League of Nations of countries undertaking to impose no protectionist tariffs whatever against the produce of other members of the Union, Germany, Poland, the new States which formerly composed the Austro-Hungarian and Turkish Empires, […] The adherence of other States would be voluntary from the outset. But it is to be hoped that the United Kingdom, at any rate, would become an original member.”

I strongly recommend the book. It not only gives an insight into the Peace Conference, the Treaty of Versailles, and how not to end a war, but it also gives a fabulous opportunity to read a very rich and readable book from John Maynard Keynes, a figure of which importance cannot be overstated.

(1) You may find it here at the Guttenberg Project.

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