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It’s December 1919, and an explosive new book has hit the shelves.
John Maynard Keynes’s “The Economic Consequences of the Peace” criticizes the Treaty of Versailles
and claims that Germany should be spared economic ruin for the good of all.
But the Britain and France have their own problems, since across the Atlantic, a new
superpower starts calling in its debts.
Hi, I’m Jesse Alexander and welcome to the Great War.
The First World War was not only total war in military terms, but also in terms of economic
and industrial mobilization.
Armies and economies clashed in the quest for victory , and the final triumph of the
Allies was in no small part due to their economic superiority over the Central Powers.
But once peace finally came, the question of how to repair the wrecked economies of
Europe took centre stage, and it would not be an easy nut to crack.
Four years of economic and financial desperation had pushed all belligerents’ systems to
the brink – and found them wanting.
Very early in the conflict, it became clear that business as usual was not good enough
to maintain a nation at war.
Trade was disrupted, industry was converted to war production, and workers were sent to
the army.
Every state struggled to find the money to keep up the fight.
At first, Germany had hoped to rely on short term tax hikes to pay for the war.
However, Germany’s federal system meant the central government in Berlin had little
control over taxation in federal states.
In any case, taxation would only cover around 14 percent of war costs.
(Ferguson 115)
The remainder was paid for through Kriegsanleihen, or war bonds – that’s money lent by individuals
and companies to the state.
And for a while, it seemed to work.
In fact, Germany’s war bonds campaigns were so successful that it was even able to lend
money to its Austro-Hungarian and Ottoman allies.
But despite this success, Germany’s war debt continued to grow until it was over 90
percent of total government expenditure in 1918.
The country’s leaders hoped that the eventual spoils of victory would cover these debts,
but this didn’t happen and may not have worked out even if they had won.
(Eichengreen 75) Germany’s food supplies, which were poor even at the start of the war,
reached crisis levels due to blockade and a drop in international trade, resulting in
the so called 'Turnip Winter' of 1916-17.
By 1918, the black market price of meat in Berlin was 25 times its 1914 level.
(Demps and Materna 540)
As for Britain and France, they had some advantages over Germany in facing the strains of war,
mostly due to their larger empires, more developed banking sectors, and access to world trade.
But even amongst the Allies, spending skyrocketed and debt grew.
Initially, France also believed it could self-finance the war through taxation and war bonds, but
it was soon forced to borrow from Britain.
Then Britain exhausted its money reserves and had to turn to American lenders for capital.
At first, the US government allowed banks to give loans to the Allies, but by 1917 the
US government itself was also issuing loans so Britain could buy food and munitions from
American companies.
By 1918, Britain was importing around 4 times more from the US than it had in 1914, while
its exports were negligible.
(Horn 87)
Once the war ended, much of Europe and the Middle East was in a state of total economic
collapse.
Food shortages were severe in many regions, especially where fighting continued into 1919
and 1920 , and millions were threatened by famine.
The situation was so serious, that the American Relief Administration was sent to Europe to
oversee the distribution of food to 23 countries, in particular war-torn Russia.
Its budget of 100 million dollars – that's 1.5 billion in today’s money – which was
matched by private donations, was testament to the scale of the problem, but in spite
of American efforts millions still went hungry.
So, faced with an unprecedented crisis, in immediate economic terms the Allies had little
reason to celebrate when peace came.
Instead, they now faced the daunting task of piecing together their broken economies.
In 1918, Britain and France were heavily in debt, their empires weakened, and worst of
all - their lenders were now demanding repayment.
Luckily for them, they had a heavily industrialised Germany to turn to for payments - and a treaty
to enforce them.
The Treaty of Versailles established a new order in Europe, and, in a sense, the world.
The League of Nations, new borders, demilitarization, occupation, colonial mandate s – it was
all laid out in the document signed in June 1919.
One of the most controversial aspects was Article 231, the so-called War Guilt Clause,
which was added as a legal justification for demanding reparations.
By signing the treaty, Germany accepted responsibility for the damage caused by the war, and for
repaying the victors.
Now, the Allies knew Germany would not be able to pay for everything, but the treaty
reserved the right to impose penalties for damage to civilian and government property:
“The Allied and Associated Governments recognise that the resources of Germany are not adequate
[...] to make complete reparation for all such loss and damage.
The Allied and Associated Governments, however, require, and Germany undertakes, that she
will make compensation for all damage done to the civilian population of the Allied and
Associated Powers and to their property.”
(Peace Treaty of Versailles, Part VIII – Article 232, page 138)
The exact amount of reparations to was to be determined by a separate inter-allied Reparation
Commission after the treaty signing.
For the victorious powers, especially France, reparations were critical – since their
own recovery and reconstruction of areas devastate d by the fighting depended on German payments.
So, the treaty wasn’t just about ending the war and swapping territory, it had an
important economic component that would shape post-war Europe.
This has been the cause of much controversy amongst historians, but it was also hotly
debated at the time.
Foremost amongst the economists who opposed the Versailles treaty was John Maynard Keynes
, a British mathematician and British representative at the Paris Peace Conference.
Keynes was prominent, and was friends with influential figures like Bertrand Russell
, Duncan Grant, Vanessa Bell, and Virginia Wolff.
He also worked closely with British Prime Minister David Lloyd George , and was central
to developing one side of the great debate which gripped the conference: should Germany
be economically crippled for years to come, or should it be allowed to rebuild and rejoin
the international community?
From the outset, Keynes – who was a conscientious objector - was against the imposition of heavy
reparations on Germany, and instead advocated for leniency.
Initially, it seemed Lloyd George was receptive to his ideas, however he soon discovered the
British public, and some of his economist colleagues, did not share this point of view
– most Britons wanted Germany to be punished.
With Keynes' ideas falling on deaf ears, he became disillusioned and resigned his position
at the peace conference before the treaty was signed.
He then began writing a blistering critique of Versailles and its creators.
“The Economic Consequences of the Peace” was released in December 1919 and was a broadside
against Versailles and the peace process , criticized the Big Four, and made dark predictions for
Europe’s future.
Keynes argued that the continent was a single economic unit, tied together not just through
geography, but also via a trade system that increased the well-being and quality of life
for all Europeans.
Disrupting this economic ecosystem with what he saw as impossibly high reparations not
only made poor economic sense, but was downright dangerous.
Instead, Keynes claimed the Treaty was mostly dictated by vengeance, greed, political opportunism
and even self-delusion, as states scrambled to redraw borders and gain traditional great
power prestige, while ignoring the economic realities the war had created:
“The Treaty includes no provisions for the economic rehabilitation of Europe,– nothing
to make the defeated Central Powers into good neighbors, nothing to stabilize the new states
of Europe, nothing to reclaim Russia; nor does it promote in any way a compact of solidarity
amongst the Allies themselves; no arrangement was reached at Paris for restoring the disordered
finances of France and Italy, or to adjust the systems of the Old World and the New.”
(Keynes 211)
Now, Keynes was originally optimistic about the idealism of US President Woodrow Wilson
and his 14 Points, including the League of Nations.
But he would eventually criticise the actions of all the national leaders at Versailles.
For Keynes, Clemenceau just wanted to crush Germany into oblivion, Lloyd George wanted
to appease the British public in the short term, while the US President became paralysed
by domestic ambivalence and an ambiguous desire to do justice - which was easily manipulated
by others.
Keynes proposed four revisions to the treaty.
First, reparations payments - on which no limit had yet been set - should be reduced.
Second, Allied debts to the United States should be reduced or forgiven altogether.
Third, an international loan for reconstruction should be created, and currency reformed.
And fourth, Keynes called for a restoration of relations and trade with Russia.
But despite the success of his book, which quickly became a bestseller, his recommendations
were mostly ignored.
Reparations were later partly reduced and some loans were made available for redevelopment,
but Russia appeared a lost cause, and the US was under no obligation and in no mood
to forgive war debt.
So Keynes had written the most famous attack against the Versailles Treaty, but the political
leaders had other ideas, and the treaty came into force in January 1920.
And though the United States would not ratify the treaty, the Americans definitely did want
their money back.
Now Keynes argued that inter-state war loans had been forgiven between European nations
in the past, and initially Wilson had flirted with the idea of clearing some debts.
But, by late 1919 his health was failing and the prevailing political winds favoured US
isolationism and debt repayment from Britain and France.
The need for the Allies to repay American loans soon led to a game of economic musical
chairs in Europe.
France owed Britain, Britain owed the US, and Germany - according to Article 231 - owed
everyone.
To make matters worse for the Allied nations, the US demanded that loans be repaid in hard
currency – that's dollars, gold or Treasury bills – rather than in trade.
This was to be achieved over a 25 year period and covered all goods up until the US entered
the war in 1917.
It even covered arms sent after the declaration of war, but before the arrival of US troops.
Faced with the pressure to repay, Britain and especially France, which had suffered
extensive destruction during the war, leaned on Germany as a source of income.
But Germany soon defaulted on reparation payments, and then it also turned to the US for loans.
This meant that Germany was using American money to cover reparation payments to France,
which then covered French debt to Britain, which then sent it back to the US.
All the while, Germany's debt just kept growing.
Also, the disruption of German manufacturing, which had been undamaged during the war, meant
a potential trading partner for France and Britain was out of action.
Short term economic gain could also mean delayed recovery – or worse – for everyone.
So the combination of reparations payments and Allied debt to the US had created a fragile
economic situation in postwar Europe.
In Germany, economic hard times and resentment of the Treaty soon had political consequences
beyond pure economics.
The birth of the Weimar Republic was accompanied by economic chaos.
But in addition to the beginnings of inflation, widespread unemployment, and the liquidation
of personal savings, political violence became a feature of German society . Political street
violence was common, and the political centre, which could not stabilize the country, weakened.
Those who benefitted were those who proposed extreme solutions, like the Communists and
National Socialists.
In the words of journalist-turned-historian William Shirer: “Such times were heaven-sent
for Adolf Hitler.”
(Shirer 62)
Keynes certainly felt that the treaty’s economic provisions doomed Europe to a terrible
fate:
“If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict,
will not limp.
Nothing can then delay for very long that final war between the forces of Reaction and
the despairing convulsions of Revolution, before which the horrors of the late German
war will fade into nothing.”
(Keynes 250-251)
All the same, Keynes has not been without his critics.
Some historians have assessed the impact of the treaty differently, arguing that it did
not predestine Europe to its eventual fate in the 1930s.
Some have questioned his claim that reparations were too high to be paid.
Others have accused him of focusing too narrowly on utilitarian economics while ignoring the
political realities of the post war climate, in which voters in Britain and France wanted
to see Germany punished.
In any case the Treaty of Versailles and The Economic Consequences of the Peace will no
doubt continue to inspire debate.
What is clear is that as readers cracked open their fresh copies of Keynes’ book in late
1919, and the Treaty came into force in January 1920, Europe’s years of turbulence were
by no means over.
Alright, now that we’ve caught up on events in Asia Minor, it’s time for our roundup
segment, where we take a look at what else is going on in December 1919.
Let’s start in Britain, where on December 1st, Viscountess Astor became the first woman
to take her seat in the British parliament.
On the 8th, the Milner Commission was sent to Egypt to investigate the political situation
following pro-independence agitation.
It was boycotted by most Egyptian leaders, who opposed continued British rule.
On the 23rd, the Government of India Act was given royal assent.
Responding to unrest against British rule, the Act foresaw a gradual increase of Indian
involvement in the government of India.
Also in December, economist John Maynard Keynes resigned as an expert member of the British
delegation at the Paris Peace Conference.
The same month, he published his influential book “The Economic Consequences of the Peace”
which criticized the reparations schemes imposed on the Central Powers and portrayed the Big
Four in a negative light.
On the 18th, in the disputed city of Fiume, the population voted to accept an offer of
modus vivendi from the Italian government.
But nationalist leader Gabriele D’Annunzio refused to accept the results and the city
remained in limbo.
In Russia, the Red Army continued to push the White Forces of General Denikin towards
the Black Sea.
Kharkiv fell to the Reds on December 11, followed by Kiev on the 16th.
And finally, in American news, on December 22 anarchists Emma Goldman and Alexander Berkman
, along with nearly 250 others, were deported to Russia under the 1918 Anarchist Exclusion
Act.
We want to thank Sherry Wise and Mark Newton for their help with this episode.
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I’m Jesse Alexander and this is The Great War 1919, a production of Real Time History
and the only YouTube history channel that is organizing an international commission
to demand reparations from Youtube.