Consequências econômicas de Mister Keynes: a ascensão de Hitler - Edward W. Fuller (Mises Wire)

The Economic Consequences of the Peace: 100 Years Later

Edward W. Fuller

Mises Wire, December 16, 2019

Introduction

December 12, 2019 is the hundred-year anniversary of The Economic Consequences of the Peace by John Maynard Keynes. This work has been described as “one of the most influential books of the twentieth century.”1 It made Keynes the most famous economist in the world, and it was the basis of his massive influence on twentieth-century economics. Many of Keynes’s harshest critics view it as his one good book. However, the case can be made that The Economic Consequences of the Peace is his worst book. On its centenary, it is proper to reassess the work and its influence.

Britain’s War-Debt Problem

To truly understand The Economic Consequences of the Peace, it must be realized that the First World War devastated Britain financially. Britain was the world’s financial superpower prior to 1914, but the war changed this. During the war, Britain assisted her European allies by making massive war loans. At the end of the war, France, Russia, Italy, Belgium, and Serbia were deeply indebted to Britain.

Given the scope of the Great War, however, Britain did not have the financial capacity to finance the Allied war effort by herself. Consequently, the British became totally dependent on the United States for financing. In effect, the British borrowed from the United States and re-lent the money to her riskier allies. According to Keynes, “Almost the whole of England’s indebtedness to the United States was incurred, not on her own account, but to enable her to assist the rest of her Allies.”2

At the end of the war, the Allies were heavily indebted to Britain, while Britain was heavily indebted to the United Stated. As Keynes wrote, “the war ended with everyone owing everyone else immense sums of money. … The Allies owe a large sum to Great Britain; and Great Britain owes a large sum to the United States.”3 In The Economic Consequences of the Peace, Keynes estimated the net debt position of the Allies using official Treasury figures.4

As the table above shows, the British were in a perilous financial position at the close of the war. Britain had to repay the United States, but the shattered Allies could not repay Britain. This debt-vice is the key to The Economic Consequences of the Peace.

Keynes’s defenders neglect a vital question: who was responsible for orchestrating Britain’s war-debt problem? The answer is Keynes. He started work at the British Treasury in January 1915, and he was transferred to the First Finance Division in May of that year. In May 1917, he became chief of the A Division, newly created to manage all of Britain’s inter-allied lending and borrowing. By the end of the war, he was the third-highest-ranking official in the British Treasury. 

Keynes boasted, “I was in the Treasury throughout the war and all the money we lent or borrowed passed through my hands.”5 He reported, “I happen to have been during the war the Treasury official most directly concerned with the borrowing and the spending of the money.”6  Roy Harrod, an unabashed defender of Keynes, admits: “He occupied the key position at what was without challenge the centre of the inter-allied economic effort, he thought out the policy, and in effect bore the ultimate responsibility for the decisions.”7

Keynes was the British Treasury’s chief representative at the Paris Peace Conference of 1919. His overarching goal at the conference was to solve the war-debt problem he had masterminded. As will become clear, his main solution was war-debt cancellation. On November 29, 1918, he submitted an official memorandum called “The Treatment of Inter-Ally Debt Arising out of the War.” Unfortunately, this crucial document was not published in Keynes’s collected writings. The document is reproduced in the appendix below. We read,

At the opening of the Peace Conference, this country should propose to the United States that all debts incurred between the Governments of the Associated countries prior to January 1st, 1919, should be cancelled. … Failing such a settlement the war will end with a net-work of heavy tributes payable from one Ally to another. A certain amount of indemnity will be recoverable from the enemy, but this is likely to be of a less amount than the indemnities which the Allies will be paying to one another. This is an improper conclusion to such a war as the present one. … Indeed, failing a readjustment, the financial sacrifice of the United States will have been disproportionately small, and Germany will be the only Power free from the financial grip of the U.S.8

Keynes was obsessed with war-debt cancellation at the conference. His American counterpart, Thomas W. Lamont, reported: “The question [of cancelling war-debts] in one form or another constantly arose. It was always ‘stepped on’ by the American delegates.”9 Naturally, the Americans violently opposed war-debt cancellation, for it would shift the financial burden of the war from Europe to America. Austen Chamberlain, the Chancellor of the Exchequer, wrote to Keynes:

No doubt it would be a very good thing if the United States would propose or support a universal cancellation of debt, but my information from Paris is that they show no inclination to do anything of the kind. … To propose the mere cancellation of debt looks as if we were trying to shift the whole burden on to America.10

Keynes left Paris in June 1919 and published The Economic Consequences of the Peace in December. Again, his main policy was war-debt cancellation. He described the “Settlement of inter-Ally indebtedness” as “an indispensable preliminary.”11 He wrote,

If all the above Inter-Ally indebtedness were mutually forgiven, the net result on paper (i.e. assuming all the loans to be good) would be a surrender by the United States of about $10,000,000,000 and by the United Kingdom of about $4,500,000,000. France would gain about $3,500,000,000 and Italy about $4,000,000,000. But these figures overstate the loss of the United Kingdom and understate the gain to France. … [T]he relief in anxiety which such a liquidation of the position would carry with it would be very great. It is from the United States, therefore, that the proposal asks generosity.12

Keynes was desperate to cancel war debts throughout the 1920s and early 1930s.13 However, his cancellation scheme was doomed to repeated rejection. The Americans were afraid that the massive losses from cancellation would devastate the US financial system. But Keynes was incapable of seeing the problem from the American perspective. To his insular mind, anything that was good for Britain must be good for the world.  

German Reparations

According to the conventional wisdom, Keynes was a great opponent of German reparations. In reality, he was the single most important reparations planner at the Paris Peace Conference.

Before the conference, Keynes split the reparations liability into two parts: (1) an upfront payment and (2) a series of long-term payments made over a period of decades. First, Keynes demanded a large upfront reparations payment from the Germans. His main concern was to obtain Germany’s gold reserves, merchant marine, and imperial possessions. He wrote,

Germany is liable up to the full extent of the injury she has caused to the Allied and Associated Nations. … The Allied and Associated Governments demand accordingly that Germany render payment for the injury which she has caused up to the full limit of her capacity. … Germany shall hand over immediately (a) the whole of her mercantile marine, (b) the whole of her gold and silver coin and bullion in the Reichsbank and all other banks; (c) the whole of the foreign property of her nationals situated outside Germany, including all foreign securities, foreign properties and business and concessions.14

On top of the large upfront payment, Keynes recommended imposing a long-term liability. In fact, the evidence shows that Keynes originated the idea of imposing long-term reparations on Germany. He first recommended a long-term liability in a joint memorandum with William J. Ashley dated January 2, 1916 and entitled “Memorandum on the Effect of an Indemnity.”15 Lloyd George confirmed, “Professor Ashley and Mr. Keynes are thus the joint authors of the long-term indemnity which was incorporated in the Treaty.”16

Keynes conceived the plan to impose long-term reparations on the Germans, and he started estimating Germany’s capacity to pay long before the end of the war.17 But at the conference, he concluded that it was impossible to estimate Germany’s capacity to pay each year. His solution was to leave the amount of reparations unfixed in the treaty. Instead, he called for the establishment of a committee to set the annual reparations bill year by year. In short, it was Keynes’s disastrous idea to not fix the amount of reparations in the treaty.18

In the armistice, the Germans agreed to restore the territory they had invaded. Since the entire war on the Western front was fought in France and Belgium, the armistice gave these nations a legal basis for imposing reparations on Germany. By contrast, the Armistice did not entitle Britain to German reparations. Thus, at the conference, the British contrived the notorious war-guilt clause, Article 231 of the Treaty of Versailles, to provide a legal basis for British claims to reparations. Along with John Foster Dulles, Keynes was the author of Article 231.19

As noted, Keynes recommended war-debt cancellation in The Economic Consequences of the Peace. This would solve the war-debt problem. But he also advocated imposing short- and long-term reparations on the Germans. This means the reparations he advocated in The Economic Consequences of the Peace were not designed to alleviate Europe’s financial problems. Instead, the reparations were punitive: 

(1) The amount of 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 … war material … State property … public debt, and 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 installments of $250,000,000, beginning in 1923.20

The Transfer Problem

Clearly, it is absurd to claim that Keynes opposed German reparations; he was the single most important architect of the reparations settlement. Beyond that, he continued advocating German reparations after the treaty. So why is he so commonly considered an opponent of German reparations? The answer is the transfer problem.

Advocates of the transfer problem argued that Germany’s annual reparations payments would stimulate her exports. In this view, Germany could only raise the money needed to pay reparations by exporting her goods abroad. But Britain was Germany’s chief competitor in export markets. To those who believed in the transfer problem, a large annual reparations liability posed a threat to British export industries. Keynes wrote,

Two eventualities have to be sharply distinguished; the first, in which the usual course of trade is not gravely disturbed by the payment. … The second, in which the amount involved is so large that it cannot be paid without a drastic disturbance of the course of trade and a far-reaching stimulation of the exports of the paying country. … An indemnity high enough to absorb the whole of Germany’s normal surplus, for investment abroad and for building up foreign business and connections must certainly be advantageous to this country and correspondingly injurious to the enemy.21

Keynes’s belief in the transfer problem led him to play a balancing act. On one hand, he wanted the British to receive enough from Germany each year to cover Britain’s annual debt payments to the United States. On the other, he did not want the annual payments to be too large, for this would to stimulate German exports at Britain’s expense. To Keynes, the best strategy was

to obtain all the property which can be transferred immediately or over a period of three years, levying this contribution as ruthlessly and completely, so as to ruin entirely for many years to come Germany’s overseas development and her international credit; but having done this … to ask only a small tribute over a term of years.22

He wrote later,

We can secure from her moderate [annual] payments, on the sort of scale, for example, on which she might have been building up new foreign investments, without stimulating her exports as a whole to a greater activity than they would enjoy otherwise. This is the correct course for Great Britain from the standpoint of her own self-interest only.23

Superficially, it looks like Keynes recommended modest annual payments out of humanitarian concern for the Germans. But once the transfer problem is considered, it is clear that he recommended modest payments to stifle Germany’s international development. Paradoxically, for a believer in the transfer problem, large annual reparations payments would have helped Germany recover from the war. This was not Keynes’s goal, however. Instead, his goal was to prevent Germany from reemerging as an economic rival to the British Empire. He wrote,

We, who are imperialists … think that British rule brings with it an increase of justice, liberty, and prosperity; and we administer our Empire not with a view to our pecuniary aggrandizement. … Germany’s aims are not such. … [S]he looks rather to definite material gains. … [W]e distrust her diplomacy, we distrust her international honesty, we resent her calumnious attitude towards us. She envies our possessions; she would observe no scruple if there was any prospect of depriving us of them. She considers us her natural antagonist. She fears the preponderance of the Anglo Saxon race.24   

The transfer problem was the economic theory underlying all of Keynes’s work on reparations before, during, and after the Paris Peace Conference. But Keynes’s theory of the transfer problem is a fallacy; the transfer problem does not exist. Even Robert Skidelsky, a zealous Keynesian, confesses, “If we stick to the pure theory of the matter, Keynes was wrong.”25 Ludwig von Mises explains,

An excess of exports is not a prerequisite for the payment of reparations. The causation, rather, is the other way round. The fact that a nation makes such payments has the tendency to create such an excess of exports. There is no such thing as a “transfer” problem. If the German Government collects the amount needed for the payments (in Reichsmarks) by taxing its citizens, every German taxpayer must correspondingly reduce his consumption either of German or of imported products. In the second case the amount of foreign exchange which otherwise would have been used for the purchase of these imported goods becomes available. In the first case the prices of domestic products drop, and this tends to increase exports and thereby the amount of foreign exchange available. Thus collecting at home the amount of Reichsmarks required for the payment automatically provides the quantity of foreign exchange needed for the transfer. … The inflow of Germany’s payments necessarily rendered the receiving countries’ balance of trade “unfavorable.” Their imports exceeded their exports because they collected the reparations. From the viewpoint of mercantilist fallacies this effect seemed alarming.26

The transfer problem is the economic theory on which The Economic Consequences of the Peace is based. However, Keynes’s mercantilist theory of the transfer problem is incorrect. In the end, The Economic Consequences of the Peace was rooted in a tissue of mercantilist fallacies.   

Reassessing the Mythology

According to the conventional wisdom, Keynes valiantly resigned from the British delegation in protest against the severe reparations imposed on the German underdogs. As Skidelsky claims, “He resigned in June 1919, just before the Versailles peace treaty was signed, in protest against the allied determination to extract huge reparations from Germany.”27 This rosy interpretation is pure mythology.

Keynes’s significant role in planning for reparations dispels any notion that he resigned over reparations. He recommended imposing a large upfront payment on the Germans; he originated the idea of a long-term indemnity; it was his idea to leave the amount of reparations unfixed in the treaty; and he drafted Article 231. Keynes did not oppose the reparations settlement; he was its chief architect.

More fundamentally, those who assert that Keynes resigned out of concern for Germany seriously misconstrue the man. He was a die-hard British “nationalist.”28 His overriding concern was to protect and advance the British Empire’s position in the postwar world. It is absurd to argue that Keynes resigned over German problems. Surely, British problems led to his resignation.

So why did Keynes resign? He devised the system of inter-allied war loans, and he understood that his system had passed financial hegemony from Britain to the United States. He wrote in October 1916, “The American executive and the American public will be in a position to dictate to this country.”29 By 1917, President Wilson recognized that Britain was “financially in our hands” and “when the war is over we can force them to our way of thinking.”30 Keynes acknowledged that Britain was in the “financial grip of the U.S.” just before the conference:   

The sum we ourselves owe to the United States must undoubtedly be regarded as very real debts. … Such a burden will cripple our foreign development in other parts of the world, and will lay us open to future pressure by the United States of a most objectionable description.31

Keynes went to the Paris Peace Conference to reclaim Britain’s financial supremacy from the United States. Of course, this meant the Americans were his great opponents at the conference. As Skidelsky admits, “What has not been sufficiently appreciated is the extent to which Keynes was anti-American. … He wanted to keep America out of Europe”.32 The Paris Peace Conference was just the beginning of Keynes’s failed lifelong crusade to win back Britain’s financial hegemony.

Keynes played the key role in creating Britain’s “difficult and embarrassing” war-debt problem.33 He went to the conference to solve the problem, but he failed. He resigned in protest against American opposition to war-debt cancellation. In other words, Keynes resigned because he could not solve the war-debt problem he had masterminded.

The Consequences of Keynes

The economic consequences of Keynes’s war-debt problem were significant. Britain’s war-debt plagued her after the war and, in the early 1930s, Keynes advised the British government to default.34 The government obliged after 1933. The result was the Johnson Act of 1934, which prohibited the United States from making loans to any country in default.

When the Second World War broke out, the Johnson Act prohibited the United States from assisting Britain with war loans. Consequently, Britain became totally dependent on the Lend-Lease Program, and “During World War II, Keynes, from the British Treasury, spearheaded the United Kingdom’s lend-lease financing.”35 Throughout the war, the United States used the Lend-Lease Program to dismantle the British Empire. Given his central role in the war-debt problem and Lend-Lease, Keynes deserves much credit for the demise of his beloved empire.36

Also, the war-debt problem had significant economic consequences internationally. It was a major factor in the trade and currency wars of the 1920s and 1930s. This economic warfare contributed to the Great Depression of the 1930s, and it played a neglected role in the outbreak of Second World War. Although many of today’s financial problems are traced to the 1930s and 1940s, they have their ultimate origins in the financial pandemonium created by the First War World. And Keynes was at the center of the chaos.

Like the economic consequences, the political consequences of Keynes were disastrous. As Thomas Lamont put it, Keynes “paved the way for Hitler’s rise.”37 Of course, Keynes did not make Hitler inevitable. But he played a significant role in creating the political conditions that made Hitler possible.

German resentment of the Treaty of Versailles was the major cause of Hitler's rise to power. It was Keynes’s idea to not fix the amount of reparations in the treaty. This gave the Germans an unlimited theoretical liability, and they felt condemned to indefinite slave labor. Keynes’s idea of a “blank check” enraged the Germans, and it was a serious source of German opposition to the treaty.

More importantly, Keynes was a lead author of Article 231 of the treaty, and this clause became the focus of German opposition to the treaty. Article 231 was one of Hitler’s most important propaganda weapons during his rise to power. Given his central role in drafting Article 231, Keynes certainly contributed to the rise of Hitler.

The Economic Consequences of the Peace only incited the Germans after the war. In hindsight, his attack on the treaty was fatally flawed. Regardless, The Economic Consequences of the Peace greatly amplified German opposition to the treaty. By stimulating German opposition to the treaty, Keynes helped launch Hitler into power.

The Economic Consequences of the Peace is not Keynes’s one good book, his saving grace. Rather, it must be considered his most tragic book. No doubt, Keynes knew that he helped set the stage for Hitler. In 1933, he admitted his remorse to the German-born Cambridge historian Elizabeth Wiskemann. Keynes regretted The Economic Consequences of the Peace, and so should we.

On the morning after the German election, I travelled to Basle; it was an exquisite liberation to reach Switzerland. It must have been only a little later that I met Maynard Keynes at some gathering in London. I do wish you had not written that book, I found myself saying (meaning The Economic Consequences, which the Germans never ceased to quote) and then longed for the ground to swallow me up. But he said, simply and gently, So do I.38

Notes
1.  Robert Skidelsky, John Maynard Keynes: Hopes Betrayed (New York: Viking, 1983), p. 384.

• 2. The Collected Writings of John Maynard Keynes, vol. 2, p. 175.
• 3. The Collected Writings of John Maynard Keynes, vol. 2, pp. 177–78.
• 4. The Collected Writings of John Maynard Keynes, vol. 2, p. 172.
• 5. The Collected Writings of John Maynard Keynes, vol. 16, p. 3.
• 6. The Collected Writings of John Maynard Keynes, vol. 18, pp. 383–84.
• 7. Roy Harrod, The Life of John Maynard Keynes (London: Macmillan, 1951), p. 206.
• 8. “Memorandum on the Treatment of Inter-Allied Debt Arising Out of the War,” The John Maynard Keynes Papers (Cambridge, UK: King’s College, PT/7/11–21), p. 16.
• 9. In Edward M. House and Charles Seymour, What Really Happened at Paris: The Story of the Peace Conference, 1918–1919 (New York: Charles Scribner’s Sons, 1921), p. 289.
• 10. In The Collected Writings of John Maynard Keynes, vol. 16, p. 437.
• 11. The Collected Writings of John Maynard Keynes, vol. 2, pp. 176–77.
• 12. The Collected Writings of John Maynard Keynes, vol. 2, pp. 172–73.
• 13. The Collected Writings of John Maynard Keynes, vol. 3, p. 113, vol. 18, pp. 377, 381–82.
• 14. “Reparation and Indemnity,” The John Maynard Keynes Papers (Cambridge, UK: King’s College, RT/14/31–34). Available at https://mises.org/wire/keynes-and-versailles-treatys-infamous-article-231.
• 15. The Collected Writings of John Maynard Keynes, vol. 16, pp. 314–34.  
• 16. David Lloyd George, The Truth about the Peace Treaties (London: Victor Gollancz, 1938), p. 446.
• 17. The Collected Writings of John Maynard Keynes, vol. 16, pp. 344–83.
• 18. Charles Hession writes, “when the conference became bogged down on the amount of reparations to be demanded of the defeated nation, it was his suggestion that the exact sum be left undetermined.” John Maynard Keynes (New York: Macmillan, 1984), p. 147. For documentation, see https://mises.org/wire/keynes-and-versailles-treatys-infamous-article-231.
• 19. Donald Moggridge writes, “The significant draftsman of the clause were Keynes and John Foster Dulles.” Maynard Keynes: An Economist’s Biography (New York: Routledge, 1992), pp. 308, 331, 346. For documentation, see https://mises.org/wire/keynes-and-versailles-treatys-infamous-article-231.
• 20. The Collected Writings of John Maynard Keynes, vol. 2, p. 166.
• 21. The Collected Writings of John Maynard Keynes, vol. 16, pp. 379–81.
• 22. Ibid., p. 382.
• 23. The Collected Writings of John Maynard Keynes, vol. 3, p. 109.
• 24. “Speech to the Cambridge Union, 20 January 1903,” The John Maynard Keynes Papers (Cambridge, UK: King’s College, OC/5/4–26), p. 24.
• 25. Robert Skidelsky, John Maynard Keynes: Economist as Savior (New York: Viking, 1992), p. 311.
• 26. Ludwig von Mises, Omnipotent Government (1944; repr. Indianapolis: Liberty Fund, 2011), p. 241.
• 27. Robert Skidelsky, "Commanding Heights," p. 6. Available at https://www.pbs.org/wgbh/commandingheights/shared/pdf/int_robertskidelsky.pdf.
• 28. Robert A. Mundell, in Bertil Ohlin: A Centennial Celebration (Cambridge, MA: Massachusetts Institute of Technology Press, 2002), p. 259n17; Benjamin Steil, The Battle of Bretton Woods (Princeton: Princeton University Press, 2013), p. 149.
• 29. The Collected Writings of John Maynard Keynes, vol. 16, 198.
• 30. Keynes, quoted in Niall Ferguson, The Pity of War (New York: Basic Books, 1999), pp. 327, 329.
• 31. The Collected Writings of John Maynard Keynes, vol. 16, p. 418.
• 32. Skidelsky, John Maynard Keynes, p. 20.
• 33. The Collected Writings of John Maynard Keynes, vol. 16, p. 419.
• 34. The Collected Writings of John Maynard Keynes, vol. 18, pp. 373–76, 382–86, 387–90.
• 35. In Harold L. Wattel, The Policy Consequences of John Maynard Keynes (Basingstoke: Macmillan, 1986), p. 117.
• 36. Benjamin Steil writes, “[the US] would for years use Lend-Lease to press the British relentlessly for financial and trade concessions that would eliminate Britain as an economic and political rival in the postwar landscape.” He continues, “This would necessarily involve dismantling the structural supports of the empire. No Briton read the U.S. Treasury’s intentions better, and resented them more bitterly, than Maynard Keynes.” See Battle of Bretton Woods (Princeton: Princeton University Press, 2013), pp. 108, 110.
• 37. Ron Chernow, The House of Morgan (New York: Grove Press, 2010), p. 208.
• 38. Elizabeth Wiskemann, The Europe I Saw (New York: St. Martin’s Press, 1968), p. 53.

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Keynes e o art. 231 do tratado de Versailles - Edward W. Fuller (Mises)

Keynes and the Versailles Treaty's Infamous "Article 231"

Edward W. Fuller

Mises Institute, April 5, 2019

April 7, 2019, marks the hundredth anniversary of Article 231 of the Treaty of Versailles — the infamous war-guilt clause. Although the treaty was not signed until June 28, the Supreme Council approved the notorious article on April 7, 1919. Thus, April 7 is the proper day to mourn the centenary of the calamitous war-guilt clause of the Treaty of Versailles.

After giving some background, this article presents documents that prove John Maynard Keynes, along with John Foster Dulles, was the author of Article 231. Next, it is argued that the war-guilt clause was unjust because Germany was not solely responsible for the war. Finally, the article draws some lessons to be learned from the war and the peace treaty. The most important is that the free market economy is the only way to lasting world peace.

The Prehistory of Article 231

Article 231 of the Treaty of Versailles required Germany to admit responsibility for starting the First World War. The clause reads:

The Allied and Associated Governments affirm and Germany accepts the responsibility of Germany and her allies for causing all the loss and damage to which the Allied and Associated Governments and their nationals have been subjected as a consequence of the war imposed upon them by the aggression of Germany and her allies.

The history of the article starts with President Woodrow Wilson’s Fourteen Points. Points seven and eight stipulate, “Belgium, the whole world will agree, must be evacuated and restored,” and “All French territory should be freed and the invaded portions restored.” The term “restored” is significant, for it meant France and Belgium could seek compensation from Germany for the invasion.

In October 1918, President Woodrow Wilson urged Britain, France, and Italy to offer peace terms to Germany based on the Fourteen Points. In late October, Colonel Edward House, Wilson’s advisor, met with Allied leaders in Paris to discuss the Fourteen Points. The British had one major objection to Wilson’s proposal: the Fourteen Points did not allow Britain to make claims against Germany for compensation.

The war on the western front was fought entirely on French and Belgian soil. And the Fourteen Points only called for the restoration of territory Germany had invaded. This was unacceptable to the British. David Lloyd George, the British prime minister, told his private secretary Philip Kerr:

She [Germany] must pay ample compensation for damage and that compensation must be equitably distributed among the Allies and not given entirely to France and Belgium. Devastated areas is only one item in war loss. Great Britain has probably spent more money on the war and incurred greater indirect losses in, for instance, shipping and trade, than France. She must have her fair share of compensation.1

On October 30, Lloyd George suggested the following addition to Wilson’s proposal: “Compensation will be made by Germany for all damage done to the civilian population of the Allies, and their property (by the forces of Germany?), by land, by sea, and from the air.”2 On November 1, the European leaders changed “by the forces of Germany” to “by the invasion by Germany of Allied territory.”3 The European leaders approved this language on November 3. But the British were afraid the term “invasion” might rule out their own claims for compensation. On November 4, the British insisted that the revised phrase be changed to “by the aggression of Germany.”4

Thus the famous Lansing note of November 5, 1918, emerged: “Compensation will be made by Germany for all damage done to the civilian population of the Allies and their property by the aggression of Germany by land, sea and from the air.”5

This passage was included in the Armistice of November 11, which ended the First World War. The term “aggression” in the Armistice is significant because it was later used in Article 231. The term was suggested by Kerr (also known as Lord Lothian).6 Thus, the use of the loaded term “aggression” in Article 231 must be attributed to the British and their drive for compensation from Germany.

With the Armistice, Germany agreed to make compensation to the Allies. However, this agreement did not constitute an admission of guilt. Furthermore, by signing the Armistice, the Germans only agreed to make compensation for property damaged as a result of military action. The Armistice did not include claims for war costs and reparations.

Given the way the Armistice read, the British claims to German compensation were the most precarious. Hence, Britain certainly had the most to gain from language such as that which became Article 231. As noted, Germany had already agreed to compensate France and Belgium for property damage, and the Americans never planned to seek compensation. Since their claims to compensation were the most questionable, the British were the hardliners on the issues of war guilt and reparations at the Paris Peace Conference.7

The Paris Peace Conference of 1919 commenced in early January. Initially, the Americans argued that the Allies could not seek reparations for all damage caused by the war. The American John Foster Dulles wrote on February 4, “Reparation would not be due for all damage caused by the war unless the war in its totality were an illegal act.”8 However, the British opposed the American position and argued that Germany must pay reparations. They claimed on February 10, “The war itself was an act of aggression and wrong; it was, therefore, a wrong for which reparation is due.”9

Unfortunately, the Americans acquiesced. On February 21, Dulles drafted a proposal that is widely considered a precursor of Article 231: “The German Government undertakes to make full and complete reparation, as hereinafter provided, for damage as hereinafter defined, done by the aggression of Germany and/or its allies to the territories and populations of the nations with which the German Government has been at war.”10 Although drafted by Dulles, the proposal reflected the British position. Furthermore, the Dulles draft did not require Germany to accept responsibility for the war. Hence, it was less severe than the final article.

John Maynard Keynes

John Maynard Keynes is the most influential economist in modern history. Like many of the most celebrated and reviled personalities of the twentieth century, Keynes emerged out of the pandemonium of the First World War. He began working in the British Treasury in January 1915, and he was the third-highest-ranking official in the Treasury by the end of the war. In January 1919, he was sent to the Paris Peace Conference as the Treasury’s chief representative. He famously resigned from the British delegation in June 1919, and he publishedThe Economic Consequences of the Peace in December.11 This book made Keynes an international celebrity, and it laid the foundation for his enormous influence in the following decades.

According to the traditional wisdom, Keynes was a great opponent of German reparations. For example, the Keynesian economist Don Patinkin stresses Keynes’s “passionate disagreement with what he considered to be harsh clauses of the Versailles Peace Treaty.”12 Robert Skidelsky claims in his authoritative biography: “Keynes had no personal reason to feel guilty about the ‘harsh’ peace at Versailles, since he had opposed it.”13

In reality, Keynes was a chief draftsman of Article 231 and other financial sections of the Treaty of Versailles.14

From inside the British Treasury, Keynes was already planning for reparations by late 1915. On January 2, 1916, he submitted an official Treasury memorandum with William J. Ashley entitled “Memorandum on the Effect of an Indemnity.”15This memo shows that the idea to impose long-term reparations on Germany originated with Keynes and Ashley. Lloyd George confirmed that “Professor Ashley and Mr. Keynes are thus the joint authors of the long-term indemnity which was incorporated in the Treaty.”16

It was Keynes’s tragic idea to not fix the amount of reparations in the treaty. The key document is his memorandum of March 11, 1919, entitled “Reparation and Indemnity.” This vital document is reproduced in the appendix. In this memorandum, Keynes argues Germany must be forced to pay reparations. However, he claims it is impossible to determine how much Germany can pay each year. Therefore, he recommends the Allies leave the amount of reparations unfixed in the treaty. Rather than fixing the liability, the Allies should establish a commission to decide each year how much Germany should be forced to pay. He writes, “A Commission shall be set up including representatives of European neutral nations to fix year by year the sum payable annually by Germany for a period of thirty years.”

Unfortunately, the Allies took this advice. Keynes’s policy meant the Germans were forced to sign a blank check, and they felt condemned to indefinite slave labor. This tragic idea poisoned European politics in the interwar years. Shockingly, Keynes hypocritically attacked his own idea in The Economic Consequences of the Peace.17

Given its similarities to the Dulles draft of February 21, Keynes’s memo must be considered a precursor to Article 231. Furthermore, the extremely harsh terms in his proposal show that Keynes’s passionate opposition to reparations is pure mythology:

Germany is liable up to the full extent of the injury she has caused to the Allied and Associated Nations…. The Allied and Associated Governments demand accordingly that Germany render payment for the injury which she has caused up to the full limit of her capacity…. Germany shall hand over immediately (a) the whole of her mercantile marine, (b) the whole of her gold and silver coin and bullion in the Reichsbank and all other banks; (c) the whole of the foreign property of her nationals situated outside Germany, including all foreign securities, foreign properties and business and concessions.

The war-guilt clause began to take form in late March, and Keynes was Britain’s chief draftsman. By April 2, the draft committee had nearly arrived at Article 231: “The Allied and Associated Governments affirm the responsibility of the enemy states for causing all the loss and damage to which the Allied and Associated Governments and their nationals have been subjected as a consequence of the war imposed upon them by the aggression of the Enemy States.”18 Keynes’s copy of the April 2 draft shows his suggested revisions in his own handwriting.

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The April 2 draft comes extremely close to Article 231. Still, it lacks the severity of the final clause. In the April 2 draft, the Allies “affirm the responsibility of the enemy states.” But this draft does not stipulate that Germany must accept responsibility for starting the war. For this reason, the final clause incorporated in the treaty is harsher than the April 2 draft.

With Keynes’s help, Article 231 was achieved by April 7.19 His copy of the draft is reproduced below. As shown in his own hand, Keynes inserted the war-guilt language “and the Enemy States accept” responsibility. This addition is crucial. The Supreme Council approved the article on April 7.20

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The draft committee made one minor change to the article after its acceptance on April 7. On April 21, the language “Enemy States” was changed to “Germany and her allies.” With this change, the final article was achieved. Keynes and Dulles were responsible for the change.21 As all this shows, Keynes and Dulles were the chief draftsmen of Article 231. Keynes bears much responsibility for the most disastrous diplomatic article in modern history.

Keynes’s problematic role in the history of Article 231 has been almost totally neglected by historians. Roy Harrod’s official biography suppresses his involvement, as does Skidelsky’s hagiographical biography. In fact, Skidelsky distances his hero from the problematic article by incorrectly attributing the war-guilt clause to Philip Kerr.22 Donald Moggridge is the only Keynes biographer to admit his involvement: “The significant draftsmen of the clause were Keynes and John Foster Dulles.”23

After the conference, Keynes maintained that Germany was responsible for the war. He writes on the first page of The Economic Consequences of Peace: “Moved by insane delusion and reckless self-regard, the German people overturned the foundations on which we all lived and built.” He repeats in 1920:

Persons in power in Germany deliberately provoked the war and intended that it should commence when it did. If this be so, the accepted standards of international justice entitled us to impose, at Germany’s expense, any terms which might be calculated to make good some part of the destruction done, to heal Europe’s wounds, to preserve and perpetuate peace, and to terrify future malefactors.24

Keynes utterly failed to predict the disastrous consequences of his war-guilt clause. He argued the article was harmless, and he even had the audacity to give his draftsmanship a compliment in The Economic Consequences of the Peace: “So far, however, all this is only a matter of words, of virtuosity in draftsmanship, which does no one any harm, and which probably seemed much more important at the time than it ever will again between now and judgment day.”25

Was Germany Guilty?

Article 231 played a momentous role in European politics between the world wars. The war-guilt clause was loathed in Germany, and it became the focus of German opposition to the treaty. Adolf Hitler made Article 231 the great symbol of the injustice of the Versailles Treaty, or Diktat, and it was a major cause of his rise to power. We must ask on the centenary of this tragic article: Did Germany actually start the war? And was Article 231 unjust?

Article 231 was unjust because Germany was not solely responsible for starting the war. It is illegitimate to blame any single nation for starting the First World War. All the major European powers were at fault. To blame Germany, or any one combatant, for the war is to fundamentally misconstrue the basic causes of modern wars and the First World War in particular.

To understand why Germany does not bear sole responsibility for the war, it must be realized that all modern wars are commercial, or economic, in origin. President Woodrow Wilson declared in 1917:

Why, my fellow-citizens, is there any man here, or any woman — let me say, is there any child here, who does not know that the seed of war in the modern world is industrial and commercial rivalry? … This war, in its inception, was a commercial and industrial war. It was not a political war.26

The First World War was the result of Europe’s imperialistic intervention in foreign trade. Britain and France had gained imperial control over significant markets in Asia and Africa long before the German unification of 1871. Unfortunately, the British and French did not allow free trade in the foreign markets they controlled. Powers like Germany were shut out of foreign markets. Thus, Germany felt imperial expansion was the only way to open new markets for German goods. Like the British and French, the Germans failed to allow other imperial powers to trade freely in German-controlled territories. The fundamental cause of the First World War was Europe’s adoption of the principle of imperialism over the principle of free trade. All of the major powers were guilty of this charge, meaning they were all responsible for the war.

Keynes was a zealous imperialist, and the following statement by him is an excellent example of the common European attitude toward imperialism before the war:

It is only during the present reign that we have begun to realize the responsibilities of the Empire and to see our duties to subject races. We have begun to see that Great Britain may have a high destiny and a great future before her. We have before taken up “the white man’s burden” and we must endeavor to wield the power of Empire with more lasting effect and to greater good than the mighty empires that have risen and fallen through the course of history.27

The European powers believed they had the right, and even the duty, to exercise imperialistic control over less developed peoples. But the imperialistic mindset inevitably creates antagonism between nations. The following passage from Keynes reflects the bellicosity bred by the ideology of imperialism:

We, who are imperialist … think that British rule brings with it an increase of justice, liberty, and prosperity; and we administer our Empire not with a view to our pecuniary aggrandizement…. Germany’s aims are not such.… [S]he looks rather to definite material gains.… [W]e distrust her diplomacy, we distrust her international honesty, we resent her calumnious attitude towards us. She envies our possessions; she would observe no scruple if there was any prospect of depriving us of them. She considers us her natural antagonist. She fears the preponderance of the Anglo Saxon race.28

Imperialistic sentiment prevented the Allies from establishing a just and durable peace at the Paris Peace Conference. The great problem with the treaty was that it enshrined British and French imperialism. The Allies carved up the world and created new but unsustainable nation-states with government coercion. Imperialists like Keynes maintained, “The setting up of a great many of these states was, in my opinion, justified.”29 The imperialistic inclinations of Keynes and other Allied delegates prevented the Allies from establishing a just peace based on genuine national self-determination. The Second World War was the inevitable result.

Lessons for the Future

On the centenary of the infamous war-guilt clause, it is appropriate to contemplate the lessons to be learned from the First World War and the Paris Peace Conference. The first lesson is this: everyone loses in modern wars. Even the winners are worse off after a great war. Although victorious, the war cost Britain its superpower status. Britain’s economic might and financial dominance were the foundation of its massive empire. By destroying the economic basis of the empire, the First World War was the beginning of the end of British world hegemony. Britain was one of the greatest losers of the war.

If anyone benefited from the Great War, it was the United States. The war passed hegemony from Britain to the United States. Still, the war and its aftermath have haunted the United States ever since. First, the war set the stage for the Great Depression of the 1930s. All of the current financial problems facing the United States have their origins in the Depression. Thus, the financial effects of the war and the resulting Depression are still with us today.

Moreover, all of the United States’ greatest foreign-policy struggles over the last hundred years must be traced to the First World War. The war and the Allies’ peacemaking produced Nazism in Germany, militarism in Japan, extremism in the Middle East, and communism in Russia, China, Korea, and Vietnam. Thus, the Second World War, the Cold War, the Korean War, the Vietnam War, and the ongoing wars in the Middle East all resulted from the First World War. These conflicts have squandered vast resources that could have been used to improve living standards in the United States.

The second lesson is this: victors of modern wars must not write war-guilt clauses. Such clauses only breed contempt between peoples. All peacemaking efforts must be aimed at establishing a durable peace, but the antagonism engendered by war-guilt clauses undermines peace. A just war must result in a just and lasting peace. A war-guilt clause undercuts the peace and thereby calls into question whether the war itself was really just.

But here is the most important lesson: the free market economy is the only economic system compatible with durable peace between nations. All modern wars have one fundamental cause — namely, government intervention in the free market economy. Government intervention in the domestic economy renders domestic producers incapable of competing with foreign producers. Domestic producers then inevitably call on government for protection from foreign producers. In other words, they demand government level the playing field by penalizing foreign producers with protectionist measures. And protectionism leads to international conflict and war. Government intervention in the economy is the ultimate cause of all modern wars.

Those who wish for lasting peace among nations must advocate free trade abroad. But foreign and domestic economic policy must form an integrated whole. Free trade abroad is impossible if the domestic economy is burdened by government intervention. Free trade abroad starts with free markets at home. The free market economy at home and abroad is the only way to lasting world peace.

Appendix: Reparation and Indemnity

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Image published with permission of Proquest. Further reproduction is prohibited without permission.

Image published with permission of Proquest. Further reproduction is prohibited without permission.

Image published with permission of Proquest. Further reproduction is prohibited without permission.

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• 1. Quoted in The Cost of the War, 1914–1919, R.E. Bunselmeyer (Hamden, CT: Archon Books, 1975), p. 82.
• 2. Reparation at the Paris Peace Conference from the Standpoint of the American Delegation , P.M. Burnett (New York: Columbia University Press, 1940), vol. 1, p. 393
• 3. Ibid., pp. 397, 402.
• 4. Ibid., pp. 407–08.
• 5. Ibid., p. 411.
• 6. See Lord Lothian, Philip Kerr, 1882–1940, J.R.M. Butler (New York: St. Martin’s Press., 1960), p. 73. Also see The Cost of the War, 1914–1919, R.E. Bunselmeyer (Hamden, CT: Archon Books, 1975), p. 82.
• 7. Keynes deceptively portrayed the French as the hardliners on reparations in The Economic Consequences of the Peace. According to Margaret MacMillan, “The picture painted so vividly by Keynes and others of a vindictive France, intent on grinding Germany down, begins to dissolve.” See Paris 1919: Six Months that Changed the World, M. MacMillan (New York: Random House, 2002), p. 192.
• 8. John Maynard Keynes: Fighting for Freedom, R. Skidelsky (New York: Viking, 2000 [2001]), p. 27.
• 9. Quoted in My Diary at the Conference of Paris, D.H. Miller (New York, 1928), vol. 19, p. 268.
• 10. Reparation at the Paris Peace Conference from the Standpoint of the American Delegation , P.M. Burnett (New York: Columbia University Press, 1940), vol. 1, p. 600.
• 11. Skidelsky describes Keynes’s work as “one of the most influential books of the twentieth century.” See John Maynard Keynes: Hopes Betrayed, R. Skidelsky (New York: Viking, 1983 [1986]), p. 384.
• 12. Anticipations of the General Theory and Other Essays on Keynes, D. Patinkin (Chicago: University of Chicago Press. 1982), p. xx.
• 13. John Maynard Keynes: Fighting for Freedom , R. Skidelsky (New York: Viking, 2000 [2001]), p. 27.
• 14. For a detailed critique of Keynes’s actions during and after the war, see “Keynes and the First World War,” E.W. Fuller and R.C. Whitten, Libertarian Papers (vol. 9, no. 1, 2017), available at: http://libertarianpapers.org/fuller-whitten-keynes-first-world-war/.
• 15. The Collected Writings of John Maynard Keynes (London: Macmillan and Cambridge University Press for the Royal Economic Society, 1923 [1971]), vol. 16, pp. 311–34.
• 16. The Truth about the Peace Treaties, D. Lloyd George (London: Victor Gollancz, 1938), p. 446.
• 17. The Collected Writings of John Maynard Keynes (London: Macmillan and Cambridge University Press for the Royal Economic Society, 1919 [1971]), vol. 2, pp. 85, 99. Marc Trachtenberg agrees: “It was British policy, especially British intransigence on figures, that was ultimately responsible for the failure of the Treaty to include a fixed sum.” See “Reparation at the Paris Peace Conference” in The Journal of Modern History (vol. 51, no. 1, 1979), p. 39.
• 18. John Maynard Keynes: Fighting for Freedom , R. Skidelsky (New York: Viking, 2000 [2001]), p. 27.
• 19. Ibid, p. 847.
• 20. Ibid, p. 857. Also see p. 847.
• 21. Ibid, p. 964.
• 22. John Maynard Keynes: Fighting for Freedom , R. Skidelsky (New York: Viking, 2000 [2001]), p. 27.
• 23. Maynard Keynes: An Economist’s Biography , D. Moggridge (London: Routledge, 1992) pp. 308, 331.
• 24. The Collected Writings of John Maynard Keynes (London: Macmillan and Cambridge University Press for the Royal Economic Society, 1920 [1977]), vol. 17, p. 52.
• 25. The Collected Writings of John Maynard Keynes (London: Macmillan and Cambridge University Press for the Royal Economic Society, 1919 [1971]), vol. 2, p. 96.
• 26. The Papers of Woodrow Wilson (Princeton, NJ: Princeton University Press, 1990), vol. 63, pp. 45–46.
• 27. The Collected Writings of John Maynard Keynes (London: Macmillan and Cambridge University Press for the Royal Economic Society, 1919 [1971]), vol. 2, pp. 85, 99. Marc Trachtenberg agrees: “It was British policy, especially British intransigence on figures, that was ultimately responsible for the failure of the Treaty to include a fixed sum.” See “Reparation at the Paris Peace Conference” in The Journal of Modern History (vol. 51, no. 1, 1979), p. 39.
• 28. Keynes was a passionate British imperialist, but Skidelsky, in an effort to protect Keynes, vigorously maintains that Keynes was not an imperialist: “Keynes was neither a jingoistic imperialist, nor an economic imperialist.” See Keynes in Canada, 2001, available at: http://www.skidelskyr.com/site/article/keynes-and-canada/
• 29. The John Maynard Keynes Papers (Cambridge, UK: King’s College), PS/2/51. Skidelsky admits, Keynes “did not object to the territorial or military clauses.” See John Maynard Keynes: Hopes Betrayed, R. Skidelsky (New York: Viking, 1983 [1986]), p. 371.