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Cool Today in History, 6/28/06

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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