Germany financially and unleash forces that might set off a revolution or another war. While such events did unfold during the 1920s and 1930s, it is not true that reparations or the treaty was their primary cause.
To a significant degree, the Allied representatives in Paris presented Germany with a bill designed to placate anti-German sentiment at home, a point that Keynes did not fully appreciate.16 By 1921, the reparations commission set up by the Allies scaled back the levies to $33 billion (about 132 billion gold marks) to be paid at interest over thirty or so years, a sum that was lower than Keynes’s initial estimates but still much higher than he thought Germany could afford to pay. Nearly two-thirds of this sum was assessed in the form of “C bonds,” which carried no interest and would be due at an indeterminate date when the commission decreed that the Weimar government could pay it. The C bonds were, as many said at the time, a phantom assessment. Thus the commission, bowing to economic reality, effectively slashed the reparations down to a level close to what Keynes estimated that Germany could afford.
Even at these reduced rates, however, the German government balked at making payments because the German people regarded reparations as a national humiliation—although Germany had imposed a war indemnity upon France at the conclusion of the Franco-Prussian War only fifty years earlier. The payments were made erratically until they were deferred after the stock market crash and then canceled when Hitler took power in 1933.
Scholars estimate that between 1920 and 1930 Germany paid approximately 20 billion gold marks in reparations, a fraction of the amount assessed, and a figure that was dwarfed by loans that poured into Germany from primarily American sources.17 At these levels, the reparations could not have caused all of the problems attributed to them: the German hyperinflation in 1923, the stock market collapse, or Hitler’s rise to power. The reparations in the end were more of a throbbing political problem that discredited the Weimar government within Germany and impeded international economic cooperation across Europe. Economists who have looked at these figures generally agree that the Germans could have afforded to pay the levies—that is, the 50 billion gold marks—if they had wanted to do so.18 As events proved, the massive debts run up by the belligerent powers during the war were far more consequential than German reparations in destabilizing the international economy in the 1920s.
Nor was it accurate for Keynes to claim that the treaty imposed a “Carthaginian Peace” upon Germany, because while the German army collapsed in the field in the autumn of 1918 and the German government disintegrated into chaos at home, German territory was never occupied by Allied troops and the country suffered little actual war damage. The war ended in an armistice rather than in national capitulation. Most of the war damage was localized in areas of Belgium and northern France. This was the basic problem: Germany was never subjected to the tribulations of foreign occupation and plunder that usually accompany defeat in war. For this reason, Germans never fully accepted the fact that they had lost the war. The Allies imposed harsh terms on Germany but set up no mechanism to enforce them against a recalcitrant government and population. Once the United States rejected the treaty and Great Britain withdrew from continental affairs, France was left alone to enforce the treaty against a larger and potentially more powerful adversary. As the years passed, Germany felt free to ignore the terms of the treaty, secure in the belief that they could not be enforced.
Keynes’s grand solution—a reduction of reparations linked to the cancellation of inter-ally war debts—may be considered a statement of British financial interest as much as an expression of sympathy for the German position. He wrote that the payment of interest on those loans was an oppressive prospect for Great Britain and the other debtor countries. Nevertheless, the United States, given its history and its relationship to the European powers at that time, was not going to absorb the costs of a European war that it had no role in starting. Public opinion in America would have rebelled against any such solution. It was not a realistic proposal, nor was Keynes’s plea for another international loan from the United States after he had called for the cancellation of already existing debts. “Does he think we are financial simpletons?” asked one American reviewer of the book.
Keynes was also wrong to think that Wilson’s vision should or could have controlled the peace conference or that Germany would have accepted a treaty that fully incorporated his Fourteen Points. Here Keynes’s argument was more than a little illogical, for he wrote that “when it came to practice [Wilson’s] ideas were nebulous and incomplete. He had no plan, no scheme, no constructive ideas whatever for clothing with the flesh of life the commandments which he had thundered from the White House.” In that circumstance, it is hard to see why he thought that Wilson’s vision could have set the agenda for the conference. In addition, France and Great Britain had legitimate financial and security interests that could not be swept aside in the postwar negotiations, even by Wilson. The treaty that emerged from those negotiations was inevitably going to contain a bundle of compromises that gave each of the major powers some but not all of what it asked for.19 Public opinion in France and Great Britain would have recoiled against a “slap on the wrist” treaty in regard to German responsibility for the war. It is also probable that Germany would have recoiled against a thoroughly Wilsonian treaty, inasmuch as one of the Fourteen Points called for an independent Polish state to be carved out of the Polish populations on the eastern border of Germany, assured of free and secure access to the sea. That was a sore point for Germany, and one whose inclusion might have undermined any treaty that emerged from the Paris negotiations. Two decades later, the Second World War began on the day that Hitler moved to reverse that particular provision of the Treaty of Versailles.
In his own way, Keynes may have been as utopian as Wilson was in envisioning the postwar order. Wilson looked to transcend the balance-of-power politics that characterized the prewar regime in favor of a system of collective security as institutionalized in the League of Nations. That was judged by nearly everyone, including Keynes, to be a utopian vision and one that was unworkable under the conditions of the time. In much the same way, Keynes proposed a vision of European economic cooperation and integration that was equally implausible in a situation in which national rivalries and resentments had been inflamed by the deaths, damage, and overall suffering of the war. Keynes, in effect, was asking the warring parties of Europe to set aside their differences and forget past humiliations in the interests of mutual cooperation and economic progress, with the financial burden for that solution to be carried by the United States. None of the parties was willing to do that in 1919, and few people at the time thought that such a prospect was possible. The weight of history was still too great to allow for either the Wilsonian or the Keynesian solution.
It would take another war before such a vision could be seriously considered, this time under the supervision and patronage of the United States, motivated in large measure by the emergence of the Soviet Union as a potential adversary. As the Second World War approached an end, American and British planners sought to avoid the missteps of 1918 and 1919. This required in the first place the unconditional surrender of German forces and the Allied occupation of German territory. The remedies that Keynes proposed in 1919—relief, reconstruction, renewal of trade, cancellation of debts, limited reparations, stabilization of currencies, and integration of the vanquished into the postwar order—were generally accepted in 1945 as guideposts for the postwar order. Keynes, as the British representative at the Bretton Woods conference in 1944, played an important role in designing the institutional foundations of the postwar economic order: the World Bank, the International Monetary Fund, and an international currency regime pegged to the U.S. dollar. These policies and institutions, much in contrast to those adopted in 1919, established a basis for postwar security and prosperity across Western Europe and North America.
The Keynesian Revolution in Political Economy
Keynes attacked the Treaty of Versailles on political grounds, bluntly asserting that the negotiators addressed the wrong problems
