APPENDIX A THE 1919 PROPHECIES 1

A few months ago The London Economist remarked that “Many people will be turning to read or reread 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 Peace, 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 III, 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 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 every one 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 buff 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,” finding 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 something in the neighborhood of $40 billion, he contended that “a safe maximum figure of Germany’s capacity to pay” was $10 billion. The most that Germany could pay annually, he thought, was $500 million. He also urged the total cancellation of inter-Allied war debts, and added: “I do not believe that any of these tributes will continue to be paid, at 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 $500 million 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 prophet ever have had clearer vindication?

But a few questions obtrude 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 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 4 per cent of the total German national income, and less than a fifth even of the pre-Hitler (and post-inflation) annual governmental 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 but 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 his 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 import-phobia, 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 reparations 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 thirty 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 thirty annual installments of $250 million beginning three years hence (The Economic Consequences appeared late in 1919), on an assumed interest rate of 5 per cent, 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 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 Laski 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 plain 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 peace 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.

¹ This was first published in The New York Times Sunday Magazine of March 11, 1945.