following its unification in 1871. Before then, most states except for Great Britain were largely agricultural and self-sufficient. Trade was carried on mainly within local markets. After that time, industry and population grew steadily as trade quickened across Europe, widening the sphere of prosperity and the reach of modern comforts. The gold standard maintained stable currency values and facilitated trade and capital flows. By 1914, Keynes wrote, “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.”5 The generation that grew up before the First World War saw the world remade by the explosion in capitalist enterprise. It was the first era of globalization. Europe, led by Great Britain, France, and Germany, was the center of the world’s economic order.
Germany played a leading role in this surge in trade and wealth. Its population increased from 40 million to nearly 70 million between 1870 and 1914, much faster than the populations of France and Great Britain. (In 1914, Britain had a population of 46 million, and France, 40 million.) German industrial output expanded at an even greater pace, spurred on by the speedy and efficient introduction of the factory system. By 1900, Germany was a main European supplier of pharmaceuticals, electrical equipment, steel, and coal. Germany quickly became an important trading partner for every other European nation, including Great Britain.
Keynes identified a cause of this rapid growth in a moral and psychological disposition among all classes to save and invest new wealth rather than to exhaust it in consumption. The wealthy, in particular, were responsible for the accumulation of capital because “they were not brought up to large expenditures, and preferred the power which investment gave to them to the pleasures of immediate consumption.”6 They had “the cake,” so to speak, but on the condition that they abstained from eating it, or at least from eating all of it. (After all, the wealthy of that era lived in lavish homes, usually several of them.)
One of the reasons the prewar economy worked as well as it did was that the wealthy classes were at once the “savers” and the “investors.” The founding entrepreneurs still owned and managed their enterprises. The laboring classes accepted this arrangement because the proceeds from their labor were continuously plowed back into the building of more factories and railroads. Much of this surplus was invested in the United States, which in turn sent back surplus foodstuffs to support Europe’s growing population. Yet rapid population growth both in Europe and in America put pressure on agricultural prices. Keynes saw this trend as a destabilizing factor in the economic affairs of Europe, since some nations (Germany in particular) began to think of conquest as an alternative to trade for guaranteeing food supplies.7
The war permanently disrupted the delicate balance among the various factors of trade, psychology, population, and investment upon which the prewar order was constructed, leaving millions on the continent starving and destitute when the war ended. Nearly 20 million people were killed during the war and many millions more wounded or displaced; factories and transportation grids were destroyed across large swaths of the continent; food and medicine were in short supply; all countries were in debt from heavy borrowing to pay for armaments; national currencies were of uncertain value in relation to one another due to wartime inflation; and the accumulated wealth of the continent was consumed in a few years of war. The suffering was magnified by comparison with the comfortable lives that Europeans had enjoyed before 1914 and with the optimism for the future that nearly everyone had entertained just a few years earlier.
* * *
It was against this backdrop that European and American leaders gathered in Paris early in 1919 to hammer out a peace treaty. Many observers expected the French, British, and American leaders who controlled the Paris Peace Conference to craft a treaty that incorporated President Wilson’s Fourteen Points and his general principle that there should be “peace without victory.” In the months following the armistice, Wilson was by far the most popular political figure in the Western world—a leader who seemed to be carrying the hopes of the world on his shoulders. His program was one basis upon which Germany had agreed to lay down arms. Prior to the conference, Allied leaders made public declarations suggesting that the terms of the peace should be in accordance with Wilson’s various addresses on the subject.
Keynes avoided taking sides on the question of which country was to blame for starting the war. In Economic Consequences of the Peace, he stressed the various elements of Wilson’s program that pointed away from a punitive settlement. For example: “The removal so far as possible of all economic barriers and the establishment of an equality of trade conditions among all the nations consenting to the peace and associating themselves for its maintenance” (from the Fourteen Points); and, “There shall be no annexations, no contributions, and no punitive damages” (from an address before Congress), although Great Britain and France successfully demanded, as a rider to the president’s statements, compensation for damage done to civilians and their property by land, sea, and air during the war. There was also, of course, the League of Nations that, in Wilson’s mind, would treat all nations equally, arbitrate international differences, and enforce the peace.
Keynes viewed Wilson’s program as a solemn contract binding upon the parties to the Paris Peace Conference—as did Wilson himself, at least prior to the conference. It is far from clear that the other parties, especially the French and British representatives, saw the complex situation in the same light. In fact, despite some rhetorical declarations, they did not.
Like many who pinned their hopes on Wilson’s vision, Keynes was dismayed when, after six months of negotiations running from January to June (1919), the conference adopted a regime of reparations and territorial concessions designed to punish Germany by making her bear most of the costs of the war—including military losses that went well beyond compensation for civilian damages. By this time, Wilson had adjusted his position somewhat, declaring that Germany had to be punished for the crime of aggression.
The Treaty of Versailles assigned to Germany the major blame for the war, and forced her to disarm and to cede territories and raw materials to France. Article 231, the so-called “war guilt” clause, stated: “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 Allied powers assessed $5 billion (22 billion gold marks at 1914 values) to be paid immediately in gold and raw materials, and “punted” calculations of the rest of the reparations to a commission of Allied representatives to be set up later. On the basis of Article 231, Keynes calculated that Germany might be assessed as much as $40 billion (170 billion gold marks) in reparations, which was about three times Germany’s prewar GDP and four times the amount he estimated that Germany could afford to pay from remaining resources and proceeds from future exports. He argued that the sum needed to be cut back substantially to avoid out-of-control inflation and some form of revolutionary backlash in Germany.
For understandable reasons, the French feared a revival of German power and a renewed military campaign to reverse the decision of the war. One of the goals of the conference (insisted upon by France) was to establish as far as possible a rough equality between Germany and France in military and economic power. Due to the rapid growth in German population and industry over the previous decades, such a goal could not be accomplished without extreme measures either to shrink Germany or to stretch France. This, according to Keynes, was a wrongheaded approach:
My purpose in this book is to show that the Carthaginian Peace is not practically right or possible. The clock cannot be set back. You cannot restore Central Europe to 1870 without setting up such strains in the European structure and letting loose such human and spiritual forces as will overwhelm not only you and your ‘guarantees,’ but your institutions and the existing order of your society.8
Here was Keynes’s central point:
