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Today in History, 6/28/06

Today in History, 6/28/06

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  • AmyW AmyW's Avatar 06-28-06 | 11:52 AM
  • KEYNES PREDICTS ECONOMIC CHAOS:
    June 28, 1919


    At the Palace of Versailles outside Paris, Germany signs the Treaty of
    Versailles with the Allies, officially ending World War I. The English economist
    John Maynard Keynes, who had attended the peace conference but then left in
    protest of the treaty, was one of the most outspoken critics of the punitive
    agreement. In his The Economic Consequences of the Peace, published in December
    1919, Keynes predicted that the stiff war reparations and other harsh terms
    imposed on Germany by the treaty would lead to the financial collapse of the
    country, which in turn would have serious economic and political repercussions
    on Europe and the world.By the fall of 1918, it was apparent to the leaders of
    Germany that defeat was inevitable in World War I. After four years of terrible
    attrition, Germany no longer had the men or resources to resist the Allies, who
    had been given a tremendous boost by the infusion of American manpower and
    supplies. In order to avert an Allied invasion of Germany, the German government
    contacted U.S. President Woodrow Wilson in October 1918 and asked him to arrange
    a general armistice. Earlier that year, Wilson had proclaimed his "Fourteen
    Points," which proposed terms for a "just and stable peace" between Germany and
    its enemies. The Germans asked that the armistice be established along these
    terms, and the Allies more or less complied, assuring Germany of a fair and
    unselfish final peace treaty. On November 11, 1918, the armistice was signed and
    went into effect, and fighting in World War I came to an end.In January 1919,
    John Maynard Keynes traveled to the Paris Peace Conference as the chief
    representative of the British Treasury. The brilliant 35-year-old economist had
    previously won acclaim for his work with the Indian currency and his management
    of British finances during the war. In Paris, he sat on an economic council and
    advised British Prime Minister David Lloyd George, but the important peacemaking
    decisions were out of his hands, and President Wilson, Prime Minister Lloyd
    George, and French Prime Minister Georges Clemenceau wielded the real authority.
    Germany had no role in the negotiations deciding its fate, and lesser Allied
    powers had little responsibility in the drafting of the final treaty.It soon
    became apparent that the treaty would bear only a faint resemblance to the
    Fourteen Points that had been proposed by Wilson and embraced by the Germans.
    Wilson, a great idealist, had few negotiating skills, and he soon buckled under
    the pressure of Clemenceau, who hoped to punish Germany as severely as it had
    punished France in the Treaty of Frankfurt that ended the Franco-Prussian War in
    1871. Lloyd George took the middle ground between the two men, but he backed the
    French plan to force Germany to pay reparations for damages inflicted on Allied
    civilians and their property. Since the treaty officially held Germany
    responsible for the outbreak of World War I (in reality it was only partially
    responsible), the Allies would not have to pay reparations for damages they
    inflicted on German civilians.The treaty that began to emerge was a thinly
    veiled Carthaginian Peace, an agreement that accomplished Clemenceau's hope to
    crush France's old rival. According to its terms, Germany was to relinquish 10
    percent of its territory. It was to be disarmed, and its overseas empire taken
    over by the Allies. Most detrimental to Germany's immediate future, however, was
    the confiscation of its foreign financial holdings and its merchant carrier
    fleet. The German economy, already devastated by the war, was thus further
    crippled, and the stiff war reparations demanded ensured that it would not soon
    return to its feet. A final reparations figure was not agreed upon in the
    treaty, but estimates placed the amount in excess of $30 billion, far beyond
    Germany's capacity to pay. Germany would be subject to invasion if it fell
    behind on payments.Keynes, horrified by the terms of the emerging treaty,
    presented a plan to the Allied leaders in which the German government be given a
    substantial loan, thus allowing it to buy food and materials while beginning
    reparations payments immediately. Lloyd George approved the "Keynes Plan," but
    President Wilson turned it down because he feared it would not receive
    congressional approval. In a private letter to a friend, Keynes called the
    idealistic American president "the greatest fraud on earth." On June 5, 1919,
    Keynes wrote a note to Lloyd George informing the prime minister that he was
    resigning his post in protest of the impending "devastation of Europe."The
    Germans initially refused to sign the Treaty of Versailles, and it took an
    ultimatum from the Allies to bring the German delegation to Paris on June 28. It
    was five years to the day since the assassination of Archduke Francis Ferdinand,
    which began the chain of events that led to the outbreak of World War I.
    Clemenceau chose the location for the signing of the treaty: the Hall of Mirrors
    in Versailles Palace, site of the signing of the Treaty of Frankfurt that ended
    the Franco-Prussian War. At the ceremony, General Jan Christiaan Smuts, soon to
    be president of South Africa, was the only Allied leader to protest formally the
    Treaty of Versailles, saying it would do grave injury to the industrial revival
    of Europe.At Smuts' urging, Keynes began work on The Economic Consequences of
    the Peace. It was published in December 1919 and was widely read. In the book,
    Keynes made a grim prophecy that would have particular relevance to the next
    generation of Europeans: "If we aim at the impoverishment of Central Europe,
    vengeance, I dare say, will not limp. Nothing can then delay for very long the
    forces of Reaction and the despairing convulsions of Revolution, before which
    the horrors of the later German war will fade into nothing, and which will
    destroy, whoever is victor, the civilisation and the progress of our
    generation."Germany soon fell hopelessly behind in its reparations payments, and
    in 1923 France and Belgium occupied the industrial Ruhr region as a means of
    forcing payment. In protest, workers and employers closed down the factories in
    the region. Catastrophic inflation ensued, and Germany's fragile economy began
    quickly to collapse. By the time the crash came in November 1923, a lifetime of
    savings could not buy a loaf of bread. That month, the Nazi Party led by Adolf
    Hitler launched an abortive coup against Germany's government. The Nazis were
    crushed and Hitler was imprisoned, but many resentful Germans sympathized with
    the Nazis and their hatred of the Treaty of Versailles.A decade later, Hitler
    would exploit this continuing bitterness among Germans to seize control of the
    German state. In the 1930s, the Treaty of Versailles was significantly revised
    and altered in Germany's favor, but this belated amendment could not stop the
    rise of German militarism and the subsequent outbreak of World War II.In the
    late 1930s, John Maynard Keynes gained a reputation as the world's foremost
    economist by advocating large-scale government economic planning to keep
    unemployment low and markets healthy. Today, all major capitalist nations adhere
    to the key principles of Keynesian economics. He died in 1946.

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