by Adam Tooze
But this ad hoc approach had consequences. If all pension claims were admitted, the result was to inflate the sum to an impossible figure. This risked provoking the Germans into an outright rejection. So, instead, final agreement was postponed. To offset the immediate costs of reconstruction, Germany would deliver a substantial sum in 1919 and 1920 – in the order of $5 billion – for the immediate use of the Allies, much of it in kind.22 These deliveries would be overseen by a Reparations Commission that by 1 May 1921 would also have the task of fixing the final total. The schedule of repayment would stretch to at least 1951. Should the annuities prove excessive, the Germans would have a right to appeal. In the meantime Germany would issue IOUs to the value of 20 billion Goldmarks to cover its obligations up to 1921 and a further 40 billion Goldmarks to cover the sums due by the 1930s ($4.8 billion and $9.6 billion respectively). A further tranche of 40 billion Goldmarks would be called upon if German economic conditions improved sufficiently.23 Ideally, the French hoped to be able to sell these claims to investors in exchange for the dollars it urgently needed. But to ensure that it could control any such attempt to market the reparations bonds, America insisted that it must have a seat on the Reparations Commission and that a unanimous decision should be required in advance of any such sale.
III
This was obviously a makeshift arrangement. But it was a compromise agreed by all sides. Woodrow Wilson himself helped to broker the deal. All the major Entente powers signed. But what had they agreed?24 Insofar as the financial settlement at Versailles had any substance beyond the immediate payments imposed on Germany, it consisted in an agreement between the United States, France and Britain to go on negotiating. Writing in December 1921, John Maynard Keynes, the British economist, former Treasury advisor and vocal critic of the Versailles Treaty, acknowledged the political logic behind this compromise. The reparations settlement was not wise, nor in every respect practical. In some respects it was clearly dangerous, but, with more than two years distance from the events, Keynes was able to admit that ‘public passions and public ignorance play a part in the world of which he who aspires to lead a democracy must take account; . . . the Peace of Versailles was the best momentary settlement which the demands of the mob and the characters of the chief actors conjoined to permit’. If a truly safe and workable treaty could not be made in 1919, it was up to the skill and courage of the world’s political leaders to construct one over the years to come.25 Two years earlier, having resigned his position at the Treasury in a state of utter despair, Keynes had been in a far less patient mood. No single individual did more to undermine the political legitimacy of the Versailles peace than Keynes with his devastating book The Economic Consequences of the Peace, published in December 1919.
Generations of economists have picked apart the flaws in Keynes’s argument.26 But his critique stands both as a reflection of and as a major contributor to the mood of disillusionment that followed Versailles. Combining the authority of an economic expert, the colour of an insider and magnificent rhetorical force, Keynes’s book sold in the hundreds of thousands. It was quoted verbatim in the Republican assault on Wilson’s treaty in the US Senate. Both Lenin and Trotsky recommended Keynes as essential reading to the Comintern.27 He was welcomed with open arms in Germany and helped to poison yet further the atmosphere between London and Paris. Superficially, of course, Keynes stood on Germany’s side. But it was far from obvious, even from a German standpoint, whether he did not do more harm than good. His influence encouraged those in Germany who insisted that any payment was impossible, when a good faith effort to honour the treaty, even if it had fallen short, might well have steered the Weimar Republic away from the ruinous crisis of 1923.28 Of course, the point is not that Keynes was personally responsible for the ensuing disaster. The point is that rather than reading Keynes as a guide to the reparations problem, we should see The Economic Consequences of the Peace as symptomatic of the crisis that is the central preoccupation of this book.
Keynes was perhaps the most outspoken member of that liberal faction within the British political class for whom the war was an agonizing symptom of a deeper malaise.29 Even whilst serving at the very heart of the British war effort, on secondment from King’s College, Cambridge, to the UK Treasury, Keynes was struggling with profound personal doubt. In 1916 he sought exemption from military service not on the grounds of his war work, but as a conscientious objector. As a civil servant he was barred from publishing under his own name, but under a pseudonym in April 1916 he contributed a strongly argued article in support of the pro-peace stand of the Independent Labour Party, spelling out an argument that in some respects anticipated Wilson’s call for ‘peace without victory’. But Keynes was not so much a Wilsonian as the mirror image of a Wilsonian. He opposed Lloyd George and those dedicated to delivering the knock-out blow precisely because they were leading Britain headlong into ever greater dependence on America. Whereas Wilson sought to insulate America from the aggressive impulses of the ‘old world’, Europe, for Keynes, stood for a fragile blend of capitalism with true personal and cultural freedom.30 He saw none of this in America, even in its progressive version. What Wilson and Keynes had in common was a desire to preserve distance. The reality that faced them in 1919, however, was entanglement. If we compare the narrative of the peace provided by The Economic Consequences with what Keynes himself contributed as an expert to the peace conference, we get some sense of the contortions that were necessary to maintain at least the hope of disentanglement.
Keynes’s best-seller was a book about Europe written from the vantage point of Britain, which, as Keynes insisted, stood ‘outside’ the continental crisis.31 Keynes’s message was addressed to the British government, appealing for it to take leadership. But what is striking is the way in which he edged around the question of America’s part in the disaster. In chapter 3 Keynes delivered his devastating sketch of the Big Three as a bestiary of democratic vice. Wilson appears as the priggish Presbyterian preacher, Lloyd George as the quicksilver opportunist, but Clemenceau is the true villain of the piece – a wizened Frenchman who had imbibed the politics of Bismarck. This picture, however, is preserved in its simplicity only by excluding any treatment of the details of reparations from the stylized group portrait. It is only in the following chapters that Keynes addresses the treaty terms and reparations. Here his argument is subtly but significantly different. The main emphasis is on the point-by-point critique of every excessive demand made on Germany. But this is framed by a question. Could things have turned out differently?
Keynes argued that the only way that the crisis might have been defused was for Britain and America to have arrived at a general economic settlement in a preliminary discussion. Once again, his stress is on the British. But here, at least, Keynes goes beyond the personal critique of Wilson. The problem was that the American delegation had arrived at Paris without a properly worked-out economic plan.32 What such a joint Anglo-American proposal might have involved does not emerge until the very end of Keynes’s ferocious polemic. The first remedy he proposed was a reduction of the demands on Germany. But this, Keynes acknowledged, could only be justified in connection with a far wider financial rearrangement. Again he placed the onus on Britain to lead the way in abandoning all financial claims on Germany. But this, in turn, would have to be followed by a general cancellation of all inter-Allied debts and a new $1 billion loan, which would enable reparations to be paid and world trade to be restarted. As harsh as was his criticism of French demands, Keynes acknowledged at the end of his book that to consider a reparations reduction in isolation without allowing for a reduction of inter-Allied debts would be profoundly unjust.33
But in The Economic Consequences of the Peace Keynes never connected his outline of an alternative financial architecture with his furious personal polemic against the folly of Clemenceau and Lloyd George, or his historical account of how reparations came to be imposed. He presented his alternative plan as though i
t were an entirely novel idea, a great opportunity that had been missed at Versailles. His hundreds of thousands of readers across the world were left unaware of the fact that projects for a general reordering of the international economy, indeed Keynes’s very own proposals, had been considered at Versailles and rejected, not by Paris but by Washington. By the time of publication, in the hope of achieving a constructive revision of the peace, Keynes no doubt wished to avoid recriminations with the Americans. Furthermore, he shared Wilson’s deep distrust of the French. But the result was grossly to misrepresent the politics of the peace-making process.
As Keynes acknowledged, what gave London its scope for strategic action was that it could afford to separate the question of what to demand from Germany from the question of settling its debts with the United States. The rest of the Entente did not have this luxury. Early in 1919 the Italians, who in relation to their modest national income were carrying the most unbearable level of foreign debt, suggested that as a prelude to the peace Washington might consider a general reapportionment of the costs of the war.34 The logic was simple. If the United States, by far the richest and least indebted of any of the combatants, were to grant substantial, well-publicized concessions to its European allies, they could afford both financially and politically to moderate their claims on Germany. Clemenceau’s government promptly associated itself with this call. America’s reaction was no less swift. On 8 March 1919, Treasury Under-Secretary Carter Glass cabled Paris that any such proposal would be treated as a veiled threat of default. Under such circumstances Washington could not be expected to consider any new credits. Washington insisted that Clemenceau should make a public commitment to refrain from any further demands for debt relief.35 When, in April 1919, faced with the impasse in the Versailles negotiations, the French resumed their calls for concessions, they were reminded that Clemenceau’s promise had been read into the congressional record. Paris was instructed in humiliating terms to put its financial household in order.36
To the British, these clashes between America and France were far from unwelcome. As Lloyd George wrote to London, the Americans were forming the view that ‘the French have been extraordinarily greedy . . . and . . . in proportion to their increasing suspicion of the French is their trust of the British’.37 Yet the British could not fault the logic of the French and Italian proposals. It was Keynes’s task at the Treasury to prepare the British response, which was presented to the Americans at the end of March. As Keynes acknowledged, a complete cancellation of inter-Allied claims would impose a loss of £1.668 billion on the US. But Britain as a large net creditor to the Entente would also bear a substantial loss, running to £651 million. The chief beneficiaries would be Italy, which would be relieved of £700 million in debt, and France, which would be granted £510 million in debt relief. Among the great powers there was absolutely no precedent for such enormous transfers of monies, but in light of the relative strength of the Allied economies and the damage they had suffered in the war, this did not seem unreasonable. All the arguments that Keynes would later deploy with such dramatic effect against reparations were first put to use in March 1919 in an effort to persuade Washington of the disastrous consequences of upholding the entangling network of inter-Allied war debts. Keynes was quite frank about the desperate situation in which France found itself. If Britain and America were to insist on full repayment, ‘victorious France must pay her friends and allies more than four times the indemnity which in the defeat of 1870 she paid Germany. The hand of Bismarck was light compared with that of an ally or of an associate.’38 How were the populations of Europe to be brought to accept an infuriatingly inadequate reparations settlement, if not by means of generous concessions from those who could afford to make them?
What Keynes did not tell the readers of The Economic Consequences of the Peace was that the proposals he presented at the end of the book, like those of the French and the Italians, were immediately vetoed by Washington. The Americans wanted no linkage. To maximize its influence the Wilson administration wanted to deal with each Allied debtor bilaterally and to move as quickly as possible toward the restoration of free international trade and private finance. It was precisely to rebut this American vision of a rapid return to the Edwardian free-market status quo that Keynes wrote the first draft of the elegant historical narrative that would later frame his best-selling book. The American vision of a quick restoration of liberal capitalist finance was, Keynes insisted, based on a weak grasp of history. It was undeniable that before the war large-scale private lending had animated the financial markets of the world. London had been the hub of that system, Wall Street a client. But as Keynes pointed out, this system was no more than fifty years old and it was ‘fragile’. It had ‘only survived because its burden on the paying countries has not so far been oppressive’ and because its material benefits were obvious. Loans were tied to ‘real assets’ such as railways, and as debts between private borrowers and lenders they were ‘bound up with the property system more generally’. Crucially, international loans had been seen as promises of progress. Prompt debt service ensured the prospect of larger loans on more generous terms in future. Those who after World War I were calling for a rapid return to private finance were arguing ‘by analogy . . . that a comparable system between governments’ could be made a ‘permanent order of society’, this despite the fact that the war had left obligations that were ‘far vaster’ and of ‘definitely oppressive scale’. These debts corresponded in daily life to ‘no real assets’ and were unrelated in any direct way to the system of private property. To attempt an immediate return to laissez-faire liberalism was both unrealistic and dangerous. Given the massive labour unrest convulsing the industrial regions of Britain, France, Germany and Italy, policy-makers should not forget that, even ‘capitalism at home, which engages many local sympathies, which plays a real part in the daily process of production, and upon the security of which the present organization of society largely depends, is not very safe’.39
Despite the force of these arguments and despite the unsatisfactory direction that the reparations negotiations were taking, the Americans would not hear of any dramatic debt-reduction plan. It was in response to their stonewalling that Keynes developed his second major proposal for international reconstruction – an international loan consortium. In The Economic Consequences of the Peace he touted the idea of an international loan of $1 billion, about £200 million.40 Six months earlier at Versailles he had been more ambitious. To get the cycle of repayment going, Keynes proposed that Germany should be enabled to issue almost six times as much, £1.2 billion in foreign bonds.41 Out of the proceeds, Germany would settle the most pressing demands of its wartime trading partners, allowing it to uphold its creditworthiness. Some £724 million would be used to settle its immediate reparations obligations. The rest of the Allies would provide Germany with £200 million in working capital with which to pay for the import of food and raw materials it urgently needed. To make the bonds attractive they would offer 4 per cent interest tax free. The international bonds would have absolute priority over all claims on the German government and they would be recognized as first-class collateral by all central banks. In the first instance the £1.2 billion in bond issue would be backed by the guarantee of the defeated powers collectively. But behind this guarantee would stand a consortium of the wartime Allies. The members of this consortium in turn would be answerable to the League of Nations. Unlike Clémentel, Keynes’s aim was not to create an elaborate long-term structure of government control to replace free trade or private lending. But he was scathing about those who believed that ‘with the early removal of obstacles in the form of the blockade and similar measures to free international intercourse, private enterprise may be safely entrusted with the task of finding the solution’. The problem of restoring Europe was simply ‘too great for private enterprise, and every delay puts this solution further out of court’. The governments of Europe and America must act to restore basic line
s of credit so that private initiative might then take over, otherwise those countries most in need of credit would be caught in a vicious circle of economic crisis, political uncertainty and diminished creditworthiness.42 If the liberal economy was to be saved, if unpolitical international markets were t0 be restored, the precondition was a political masterstroke.
The American financial experts closest to the European situation fully understood this logic (Table 8). On 29 March 1919 Lamont of J. P. Morgan drafted a strongly worded letter to Treasury Secretary Russell C. Leffingwell. ‘America holds the key,’ he began. ‘In the hands of the Secretary of the Treasury today, I believe is the power to conclude a real and lasting peace; if he fails to exercise that power, no one can foresee the consequences – consequences with almost as terrible results for America as for the rest of the world.’ The letter was never sent.43 But on 1 May 1919 Lamont did join forces with the economics expert Norman Davis to cable Washington, calling on the Treasury to do anything that it could ‘prudently and safely’ do.44 But by contrast with the sympathetic voices of the bankers, a very different tone prevailed amongst those closest to the Wilson administration. Already on 11 April 1919 Hoover counselled Wilson that a sound post-war order could not be built on the wartime alliance between the United States, Britain and France. If America did not distance itself, the result would be an endless series of demands. If, on the other hand, Washington were to use its muscle to force Britain and France to moderate their reparations demands, then that would make the US appear as the friend of Germany. The only option was to withdraw altogether from entanglement. If the Allies were left with sole responsibility for their actions, they would refrain from making the unreasonable demands that they might make under US protection. Dissociating America from its former allies was crucial if the League of Nations was not to become ‘a few neutrals gyrating around’ an ‘armed alliance’. That was bound to drive the ‘central Empires’ and Russia ‘into an independent league’. Hoover then went on to spell out more clearly than Wilson ever did the underlying political logic of their shared vision of offshore American power. The ‘necessary European revolution’ was, in Hoover’s view, not ‘yet over’. America should admit to itself that it did not ‘have the stomach to police it’. It should guard against becoming associated with a ‘storm of repression of revolution’. The fact that it was Britain, France and Italy who were asking for concessions, not Germany, Austria or Hungary, appeared not to matter to Hoover. Even with its former allies America should not accept ‘terms of coordination . . . that would make our independence of action wholly impossible’. The United States was ‘the one great moral reserve in the world’ and it must preserve that moral capital intact. If the Europeans were not willing to accept the 14 Points in their entirety, America should ‘retire from Europe lock, stock and barrel’ and concentrate its ‘economic and moral strength’ on the rest of the world.45 This was not isolationism. It was Wilsonian purism, a rejection of an entanglement with Europe in the interest of American world leadership.