by Sylvia Nasar
Within two weeks, the incorrigible optimist had moved out of his room at the Majestic, rented an apartment with cook and valet on the edge of the Bois de Boulogne, and crawled into bed, too depressed to get up except when the PM summoned. By May 14, feeling like “an accomplice in all this wickedness and folly,” Keynes had made up his mind to resign. “The Peace is outrageous and impossible and can bring nothing but misfortune,” he wrote to his mother, Duncan Grant, and others.39
Keynes’s final intervention was a protest against “murdering Vienna.”40 The negotiations over Austria had been postponed until the German terms were settled. He was getting regular reports from Francis Oppenheimer, the Treasury’s emissary on the scene, who had been in constant touch with Joseph Schumpeter, who, in turn, was supplying data on Austrian assets, tax revenues, and the like. On May 29, Keynes sent Lloyd George a memorandum pleading the case that Austria should pay no reparations. On the thirtieth, he attended a meeting of the Austrian reparations commission and won a major concession, getting a demand for 10 billion gold crowns in reparations dropped. Quoting ghastly statistics about children dying of TB and malnourishment, he was partly successful in modifying a demand from the French that Austria surrender her milk cows.
Keynes agreed with one Viennese newspaper’s harsh criticism of the treaty:
Never has the substance of a treaty of peace so grossly betrayed the intentions which were said to have guided its construction as is the case with this Treaty . . . in which every provision is permeated with ruthlessness and pitilessness, in which no breath of human sympathy can be detected, which flies in the face of everything which binds man to man, which is a crime against humanity itself, against a suffering and tortured people.41
Although he must have known that it was a lost cause, Keynes continued to plead with Bernard Baruch for the US Treasury to endorse “my Grand Scheme for putting everyone on their legs.”42 Lloyd George called a special meeting of the British delegation and promised to refuse the services of the British Army to advance into Germany, or the services of the British Navy to enforce the blockade of Germany in order to obtain eleventh-hour changes in the treaty. But, as Keynes predicted in a letter to his mother, it really was too late for grand gestures. The French were furious, and President Wilson, who should have been sympathetic, had grown increasingly suspicious of British intentions. He vetoed Lloyd George’s proposal as peremptorily as he had rejected Keynes’s proposal for debt forgiveness a month earlier. Lloyd George did not press the case further, possibly because of an intelligence report that the German cabinet had already secretly decided to sign the treaty. Nonetheless, he predicted gloomily, “We shall have to do the whole thing over again in twenty five years at three times the cost.”43
By the time the Germans actually signed the Treaty of Versailles on June 28, Keynes had been back in England for nearly a month. He had retreated to Charleston, Virginia and Vanessa Stephen’s house in the country, where he spent long hours weeding furiously to distract himself. He had dashed off a letter of resignation to Austen Chamberlain, the Chancellor of the Exchequer, on June 5. On the same day, he had also written to Lloyd George, “The battle is lost. I leave the twins [the judge Lord Sumner and financier Lord Cunliffe, head of the British reparations commission] to gloat over the devastation of Europe and to taste what remains for the British taxpayer.”44
• • •
Austin Robinson, son of an Anglican minister, war pilot, and Cambridge undergraduate, dated his “conversion to the faith of the economists” to October 1919, when he attended one of Keynes’s last lectures for the term.45 Keynes read from his half-finished manuscript about the peace treaty in front of a large audience. Robinson was incredibly moved by “the very obvious depth of his dedication to the problems of the world and his hatred of failure to avert foreseeable disaster.”46 For Robinson’s generation, which wanted to put the war behind it by doing something to heal its wounds, Keynes’s argument that getting the economics right was essential for preventing future wars was a genuine revelation. He was intrigued by Keynes’s conviction that ideas mattered as much as, if not more than, competing economic and political interests.
Keynes had begun writing almost as soon as he returned to Cambridge from Paris. He plucked his theme for The Economic Consequences of the Peace from a clever remark by Jan Smuts’s mistress: “Mrs. Gillett, referring to the Anti–Corn Law League, had reminded Smuts that economic reform had preceded franchise reform in the nineteenth century, and that ‘now it seems as though in the same way the political and territorial questions won’t be solved ’til the economic world is righted.’ ” Smuts reported this remark to Keynes, who said “how true it was and he had never thought of it that way.”47 Margot Asquith, the amusing wife of the former prime minister, had suggested to Keynes that he include portraits of the major personalities. In August, Macmillan’s in London agreed to publish the book, although Keynes had to agree to pay the printing costs. Felix Frankfurter, with whom he had become friendly in Paris, arranged for an American edition.
Keynes blasted the treaty as a rank betrayal by the older generation of political leaders. Not only had the Big Four done nothing to restore the prewar European economy, but they had not seriously considered the need to do so. They had simply assumed that the restoration of broken ties and rebuilding would happen spontaneously.
The Treaty includes no provisions for the economic rehabilitation of Europe, nothing to make the defeated Central Empires 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 economic 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. . . .
It is an extraordinary fact that the fundamental economic problems of a Europe starving and disintegrating before their eyes was the one question in which it was impossible to arouse the interest of the Four. Reparation was their main excursion into the economic field, and they settled it as a problem of theology, of politics, of electoral chicanery, from every point of view except that of the economic future of the states whose destiny they were handling.
A Carthaginian treaty, “if it is carried into effect, must impair yet further, when it might have restored, the delicate, complicated organization, already shaken and broken by war, through which alone the European peoples can employ themselves and live.”48
The Economic Consequences of the Peace is extraordinarily gloomy, prompting Leonard Woolf to nickname its author Keynessandra. “In continental Europe the earth heaves and no one but is aware of the rumblings,” Keynes writes. “There it is not just a matter of extravagance or ‘labor troubles’; but of life and death, of starvation and existence, and of the fearful convulsions of a dying civilization.” Part of Keynes’s gloom stems from his sense that it was “not only the war that has made Europe poorer.” Looking backward, Keynes now saw the prewar prosperity as a fool’s paradise.
We assume some of the most peculiar and temporary of our late advantages as natural, permanent, and to be depended on, and we lay our plans accordingly. On this sandy and false foundation we scheme for social improvement and dress our political platforms, pursue our animosities and particular ambitions, and feel ourselves with enough margin in hand to foster, not assuage, civil conflict in the European family.
Living standards could not have continued to rise much longer, he maintained. The prosperity of Europe had been based not on the “ingenious mechanism” of competition, an environment friendly to entrepreneurs and ample finance, but rather on a happy historical accident that had temporarily removed certain limits to growth. Thanks to the large exportable surplus of foodstuffs in America, Europe had been able to feed herself cheaply.
The trouble was, Keynes wrote, that American grain couldn’t stay cheap when US consumption caught up with supply. He reprised an argument by Arthur Jevons, a gifted contemporary of Marshall’s, wh
o predicted in 1870 that dwindling coal supplies would choke off England’s economic growth. Instead of fuel, the binding constraint for Keynes was wheat. There might be no shortage of wheat in the world as a whole, he acknowledged. But to call forth more supply in the future, he argued, would require England to offer a higher real price. In short, the law of diminishing returns would at last reassert itself, requiring Europe to offer more and more other goods and services to obtain the same amount of bread.
Keynes’s bleak economic forecast turned out to be too pessimistic. In the short run, Europe’s economy recovered in spite of the war’s devastation and the flaws in the treaty. In the long run—starting in the Great Depression and continuing past the end of the twentieth century—food became cheaper, not more expensive, absolutely as well as relative to wages. Keynes’s political prediction—that “vengeance . . . will not limp” and that “nothing can then delay for very long that final civil war between the forces of reaction and the despairing convulsions of revolution”—was far more prescient.
• • •
World War I and its aftermath set Keynes’s intellectual priorities and shaped his thinking about the economy, Skidelsky argues. Henry Wickham Steed, editor of the Times of London, characterized Keynes’s ideas as a “revolt of economics against politics.”49 Keynes was asserting the importance of something about which generals and prime ministers were only superficially familiar: how the modern world made its living, and that the ability to make a living was a prerequisite if not a guarantor of peace.
Keynes appreciated how specialized the global, especially the European, economy had become, how dependent each part was on the others, how subject to psychological shifts, and, consequently, how easily a breakdown in one could spread to the rest. Keynes had not yet identified policy levers—instruments of mastery—that would let governments exert more control over their economy’s course. But he was beginning to think in terms of an “economics of the whole,” and of the consequences of government action and inaction.
The war had deepened his distrust of conventional wisdom and had disabused him of any notion that progress was automatic. It was, all in all, a brutal lesson in the destructive powers of governments that willfully ignored economic realities. The Victorian economic miracle had produced the rapid growth of productive power and a dramatic rise in living standards. But the miracle had depended on certain government actions—spreading free trade, enabling the gold standard, upholding the rule of law—as well as untrammeled competition. Having absorbed that lesson, Keynes could not conceive how government could ignore its responsibility to restore prosperity.
• • •
In mid-October, Keynes was on the Continent for an international bankers’ conference. “There has never been as a big a business transaction as the peace treaty,” Melchior’s partner Max Warburg had remarked.50 Now his brother Paul, the American financier, hoped to organize commercial credits, financed mostly by American banks, so that Germany could import raw materials. On a whim, Keynes had invited Melchior by telegram to meet him. Three days later, the two were strolling along Amsterdam’s canals in the rain talking freely for the first time and marveling at how “extraordinary [it was] to meet without barriers.”51
After resigning, the German delegation in protest before the signing of the peace treaty and twice turning down offers to become Weimar’s finance minister, Melchior had gone back to his Hamburg bank. He told Keynes that the German president had betrayed Germany’s intention to sign the treaty to a British agent ahead of time. Melchior was certain that the tip had led Lloyd George to abandon his efforts to modify the treaty. After lunch, Keynes invited Melchior and Warburg back to his hotel room and read aloud his chapter on President Wilson. Keynes had portrayed the American leader as having raised the world’s hopes only to disappoint them:
With what curiosity, anxiety, and hope we sought a glimpse of the features and bearing of the man of destiny who, coming from the West, was to bring healing to the wounds of the ancient parent of his civilization and lay for us the foundations of the future.
The disillusion was so complete, that some of those who had trusted most hardly dared speak of it. Could it be true? they asked of those who returned from Paris. Was the Treaty really as bad as it seemed? What had happened to the President? What weakness or what misfortune had led to so extraordinary, so unlooked-for a betrayal?
Wilson could preach ringing sermons on his Fourteen Points, but lacked
that dominating intellectual equipment which would have been necessary to cope with the subtle and dangerous spellbinders whom a tremendous clash of forces and personalities had brought to the top as triumphant masters in the swift game of give and take, face to face in Council.52
Warburg, who despised the president, giggled as Keynes read these lines, but Melchior listened solemnly and looked as if he was about to cry.
When the bankers held their meeting, Keynes urged them to support a reduction in reparations, cancellation of Allied war debts, and an international loan for Germany. He and Warburg drafted an appeal to the League of Nations and got a dozen of the conference participants to sign. Thus, the first of many attempts to revise Versailles was drafted before the ink on the treaty had dried.
• • •
With his daily quota of a thousand words “fit for the printer” seven days a week, Keynes had piled up sixty thousand words by October. As chapters were finished, he read or sent them to various people, including his mother, Frances, and Lytton Strachey. The whole publishing industry seemed dedicated to churning out books about the peace treaty. Keynes’s book was the first out of the gate, appearing two weeks before Christmas. By Easter, a hundred thousand copies had been sold in England and the United States. Keynes’s “reparation” to Bloomsbury for having abetted the war was graciously accepted. Lytton Strachey, whose Eminent Victorians had been the literary sensation of 1918, called Keynes’s argument “crushing” and predicted that “nobody could ignore it.”53 Though grumbling that Keynes had been very indiscreet, Austen Chamberlain confessed to his wife that the book was “brilliantly written” and had given him “malicious pleasure.”54 All reviewers were lavish in their praise of Keynes’s style and many were persuaded that it would be impossible for Germany to comply with the treaty.
Keynes’s book brought a simmering controversy to the boiling point. Some of the critics argued that Germany could afford to pay much more than Keynes said. Others called him politically clueless. Among the less flattering suggestions were that he was a “dehumanized intellectual” for his lack of partisanship. Predictably, the Tory attack on Keynes questioned his loyalty and suggested that perhaps he deserved an iron cross. A. J. P. Taylor, the historian, succinctly, and not unfairly, summarized the message of The Economic Consequences of the Peace as “Precautions should be taken against German grievances, not against German aggression.”55 Captain Paul Mantoux, the Big Four’s translator, attacked the book on the grounds that Keynes “had never been present at one of [the Council of Four’s] meetings.”56 But the most common criticism was simply that Keynes had missed the point. Wickham Steed, editor of the Times of London, noted that
If the war taught us one lesson above all others it was that the calculations of economists, bankers, and financial statesmen who preached the impossibility of war because it would not pay were perilous nonsense. Germany went to war because she made it pay in 1870–1 and believed she could make it pay again.57
American reviewers suspected Keynes of advancing British interests under the guise of altruism toward Europe. Thorstein Veblen, the sociologist, scolded him for getting Woodrow Wilson “all wrong.”58 On the first anniversary of the treaty, the New York Times called The Economic Consequences of the Peace “a very angry book” and claimed that “insofar as American opinion has changed, it is into distrust of all Europe and a desire to break away from entanglement from abroad.”59 Bernard Baruch expressed the administration’s position when he claimed that Keynes wanted that “America
shall pay instead of Germany.”60
Some historians now accept that Keynes’s criticism of President Wilson was unfair, and consider his condemnation of the French too partisan. If anything, they contend, British claims for reparations were less justifiable than those of the French. On the other hand, Margaret MacMillan’s Paris 1919: Six Months That Changed the World and other recent histories of the Peace Conference show that Keynes’s view that the Allies had blatantly violated their contract with Germany, and should have allowed the losers to negotiate some elements of the peace, is widely accepted now. And few disagree with Keynes’s principal point—that no peace based on such shaky economic foundations could possibly last.
Not surprisingly, Economic Consequences turned Keynes into a hero in Vienna and Berlin. Excerpts, translations, and new editions poured forth from the presses. Given that no ceiling on the amount of reparations was fixed in the treaty, the view that Keynes had not only voiced the German case but was in a position to influence opinion made perfect sense. Joseph Schumpeter, the former Austrian finance minister, called the book “a masterpiece.”61
Chapter VIII
The Joyless Street: Schumpeter and Hayek in Vienna
The alternating boom and bust is the form economic development takes in the era of capitalism.
—Joseph Schumpeter1
The 1920s are almost always viewed in a rearview mirror and judged solely as a preamble to, if not the cause of, the Great Depression, the rise of Fascism, and the triumph of Bolshevism. For the West, it is supposed to have been a time of decadence, delusions, fake prosperity, and false beliefs. But seen through the eyes of four individuals—Joseph Schumpeter, Friedrich Hayek, John Maynard Keynes, and Irving Fisher—it was as inventive, exciting, and genuinely progressive an era as any in the last century.