John Maynard Keynes’s influential and polemic The Economic Consequences of the Peace (1919) denounced the Versailles Peace Treaty as harsh and unworkable because of the transfer problem in international payments.
John Maynard Keynes, a Cambridge economist, was in charge of external finance at the British Treasury during World War I and represented the treasury at the Versailles Peace Conference, playing a key role in allowing Germany to use its gold to pay for food imports (over French objections). He resigned in June 1919 and published The Economic Consequences of the Peace in protest against the economic terms of the peace treaty. Keynes argued that by demanding excessively large reparations payments, the victorious allies would foster lasting German nationalist resentment without managing to extract the bulk of the payments. Germany’s foreign securities, overseas investments, gold reserve, and remaining merchant marine (after compulsory transfers) were worth at most $3 billion, less than a tenth of the reparations demanded. To raise the foreign exchange to pay the balance of reparations payments, Germany’s exports would have to exceed its imports by the full amount of the transfer payments.
Keynes pointed out that the allied countries receiving transfers would have trade deficits equal to Germany’s trade surpluses, resulting from a correspondingly large shift in the terms of trade that priced producers in allied countries out of competition with German producers. He also questioned the incentive for Germans to produce goods for export, if the proceeds were to be taxed away for reparations. Keynes’s analysis provided the basis for much later analysis of capital transfers. In 1929, Bertil Ohlin extended Keynes’s analysis to consider the direct effect on imports of reduced income in the paying country and increased income in the receiving country.
Despite the French and Belgian occupation of the Ruhr in 1923 to punish German default, and despite the Dawes Plan of 1924 and the Young Plan of 1929, only token reparations payments were ever made, far exceeded by foreign loans to Germany that were never repaid. In 1931, President Herbert Hoover announced a one-year moratorium on reparations and interallied debts, which effectively became permanent. Resentment over reparations demands and the Ruhr occupation inflamed German nationalism. Keynes’s phenomenally successful book has sometimes been credited with the U.S. Senate’s refusal to ratify the Versailles Peace Treaty. However, the Senate first rejected the treaty in November 1919, before the publication of Keynes’s book in London in December 1919 and New York in January 1920. Senator William Borah read large portions of the book into the record in February 1920 when the Senate reconsidered ratifying the treaty with reservations, but rejection then was due not to Keynes, but to President Woodrow Wilson’s intransigence over the proposed reservations.
Robert W. Dimand
See also: Great Depression.
Keynes, John Maynard. The Economic Consequences of the Peace. London: Macmillan, 1919.
Mantoux, Etienne. The Carthaginian Peace or the Economic Consequences of Mr. Keynes. London: Oxford University Press, 1946.
Moggridge, D.E. Maynard Keynes: An Economist’s Biography. New York: Routledge, 1992.
Skidelsky, Robert. John Maynard Keynes: Hopes Betrayed, 1883–1920. London: Macmillan, 1983.