The Economic Consequences of the Peace

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The Economic Consequences of the Peace (1919) is a book written and published by John Maynard Keynes.[1] Keynes attended the Paris Peace Conference, 1919 as a delegate of the British Treasury and argued for a much more generous peace. It was a best-seller throughout the world and was critical in establishing a general opinion that the Versailles Treaty was a "Carthaginian peace". It helped to consolidate American public opinion against the treaty and involvement in the League of Nations. The perception by much of the British public that Germany had been treated unfairly in turn was a crucial factor in public support for appeasement. The success of the book established Keynes' reputation as a leading economist especially on the left. When Keynes was a key player in establishing the Bretton Woods system in 1944, he remembered the lessons from Versailles as well as the Great Depression. The Marshall Plan, after the Second World War, was a similar system to that proposed by Keynes in The Economic Consequences of the Peace.


Keynes left Cambridge University to work at the Treasury in 1915. He worked daily on financing the war effort during World War I. That disturbed many of the pacifist members of the Bloomsbury Group of which he was a member. Lytton Strachey sent him a note in 1916 asking Keynes why he was still working at the Treasury.

Keynes quickly established a reputation as one of the Treasury's most able men and travelled to the Versailles Conference as an advisor to the British Government. In preparation for the conference, he argued that there should preferably be no reparations or that German reparations should be limited to £2,000 million. He considered that there should be a general forgiveness of war debts, which, he considered, would benefit Britain. Lastly, Keynes wanted the US government to launch a vast credit program to restore Europe to prosperity as soon as possible.

His general concern was that the Versailles conference should set the conditions for economic recovery. However, the conference focused on borders and national security. Reparations were set at a level that Keynes perceived would ruin Europe, Woodrow Wilson refused to countenance forgiveness of war debts and US Treasury officials would not even discuss the credit program.

During the conference, his health deteriorated, and he resigned in frustration from his position on 26 May 1919. He retired to Cambridge and wrote The Economic Consequences of the Peace over two months in the English summer.



Keynes described the conference as a clash of values and world views of the principal leaders.

Keynes describes Wilson as guardian of the hopes of men of good will of all nations.

"When President Wilson left Washington he enjoyed a prestige and a moral influence throughout the world unequalled in history. His bold and measured words carried to the peoples of Europe above and beyond the voices of their own politicians. The enemy peoples trusted him to carry out the compact he had made with them; and the Allied peoples acknowledged him not as a victor only but almost as a prophet. In addition to this moral influence the realities of power were in his hands. The American armies were at the height of their numbers, discipline, and equipment. Europe was in complete dependence on the food supplies of the United States; and financially she was even more absolutely at their mercy. Europe not only already owed the United States more than she could pay; but only a large measure of further assistance could save her from starvation and bankruptcy. Never had a philosopher held such weapons wherewith to bind the princes of this world. How the crowds of the European capitals pressed about the carriage of the President! 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 civilisation and lay for us the foundations of the future."[2]

French Prime Minister Georges Clemenceau shaped the outcome of the conference more than anyone else:

"[Clemenceau] took the view that European civil war is to be regarded as a normal, or at least a recurrent, state of affairs for the future, and that the sort of conflicts between organised Great Powers which have occupied the past hundred years will also engage the next. According to this vision of the future, European history is to be a perpetual prize-fight, of which France has won this round, but of which this round is certainly not the last. From the belief that essentially the old order does not change, being based on human nature which is always the same, and from a consequent scepticism of all that class of doctrine which the League of Nations stands for, the policy of France and of Clemenceau followed logically. For a peace of magnanimity or of fair and equal treatment, based on such 'ideology' as the Fourteen Points of the President, could only have the effect of shortening the interval of Germany's recovery and hastening the day when she will once again hurl at France her greater numbers and her superior resources and technical skill."[3]


The heart of the book is his two profound criticisms of the treaty. Firstly, he argues as an economist that Europe could not prosper without an equitable, effective and integrated economic system, which was impossible by the economic terms of the treaty. Secondly, the Allies had committed themselves in the Armistice agreement to critical principles regarding reparations, territorial adjustments, and evenhandedness in economic matters, which were materially breached by the treaty.

Keynes reviews the facts whereby the Armistice was based on acceptance by the Allies and Germany of Wilson's Fourteen Points and other terms referred to in making the Armistice.

"On 5 October 1918 the German government addressed a brief Note to the President accepting the Fourteen Points and asking for peace negotiations. The President's reply of 8 October asked if he was to understand definitely that the German government accepted 'the terms laid down' in the Fourteen Points and in his subsequent addresses and 'that its object in entering into discussion would be only to agree upon the practical details of their application.' He added that the evacuation of invaded territory must be a prior condition of an armistice. On 12 October the German government returned an unconditional affirmative to these questions; 'its object in entering into discussions would be only to agree upon practical details of the application of these terms'. … The nature of the contract between Germany and the Allies resulting from this exchange of documents is plain and unequivocal. The terms of the peace are to be in accordance with the addresses of the President, and the purpose of the peace conference is 'to discuss the details of their application.' The circumstances of the contract were of an unusually solemn and binding character; for one of the conditions of it was that Germany should agree to armistice terms which were to be such as would leave her helpless. Germany having rendered herself helpless in reliance on the contract, the honour of the Allies was peculiarly involved in fulfilling their part and, if there were ambiguities, in not using their position to take advantage of them."[4]

Keynes summarises the most important aspects of the Fourteen Points and other addresses by Wilson that were part of the Armistice agreement.

"The Fourteen Points – (3) 'The removal, so far as possible, of all economic barriers and the establishment of an equality of trade conditions among all the nations consenting to the peace and associating themselves for its maintenance.’ (4) 'Adequate guarantees given and taken that national armaments will be reduced to the lowest point consistent with domestic safety.’ (5) 'A free, open-minded, and absolutely impartial adjustment of all colonial claims', regard being had to the interests of the populations concerned. (6), (7), (8), and (11) The evacuation and 'restoration' of all invaded territory, especially of Belgium. To this must be added the rider of the Allies, claiming compensation for all damage done to civilians and their property by land, by sea, and from the air (quoted in full above). (8) The righting of 'the wrong done to France by Prussia in 1871 in the matter of Alsace-Lorraine'. (13) An independent Poland, including 'the territories inhabited by indisputably Polish populations' and 'assured a free and secure access to the sea'. (14) The League of Nations"[5]

"Before the Congress, 11 February – 'There shall be no annexations, no contributions, no punitive damages.... Self-determination is not a mere phrase. It is an imperative principle of action which statesmen will henceforth ignore at their peril.... Every territorial settlement involved in this war must be made in the interest and for the benefit of the populations concerned, and not as a part of any mere adjustment or compromise of claims amongst rival States.'"[6]

"New York, 27 September – (1) 'The impartial justice meted out must involve no discrimination between those to whom we wish to be just and those to whom we do not wish to be just.' (2) 'No special or separate interest of any single nation or any group of nations can be made the basis of any part of the settlement which is not consistent with the common interest of all.' (3) 'There can be no leagues or alliances or special covenants and understandings within the general and common family of the League of Nations.' (4) 'There can be no special selfish economic combinations within the League and no employment of any form of economic boycott or exclusion, except as the power of economic penalty by exclusion from the markets of the world may be vested in the League of Nations itself as a means of discipline and control.' (5) 'All international agreements and treaties of every kind must be made known in their entirety to the rest of the world.'"[7]

Keynes points to the material violation of the terms regarding reparations, territorial adjustments, and an equitable economic settlement as a blot on the honour of the western allies and a primary cause of a future war. Given that he was writing in 1919, his prediction that the next war would begin twenty years hence had an uncanny accuracy.


Keynes outlined the causes of high inflation and economic stagnation in postwar Europe in The Economic Consequences of the Peace:

"Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.... Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."[8]

Keynes explicitly pointed out the relationship between governments printing money and inflation:

"The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance."[9]

Keynes also pointed out how government price controls discourage production:

"The presumption of a spurious value for the currency, by the force of law expressed in the regulation of prices, contains in itself, however, the seeds of final economic decay, and soon dries up the sources of ultimate supply. If a man is compelled to exchange the fruits of his labors for paper which, as experience soon teaches him, he cannot use to purchase what he requires at a price comparable to that which he has received for his own products, he will keep his produce for himself, dispose of it to his friends and neighbors as a favor, or relax his efforts in producing it. A system of compelling the exchange of commodities at what is not their real relative value not only relaxes production, but leads finally to the waste and inefficiency of barter."[10]

Keynes detailed the relationship between German government deficits and inflation:

"In Germany the total expenditure of the Empire, the Federal States, and the Communes in 1919–20 is estimated at 25 milliards of marks, of which not above 10 milliards are covered by previously existing taxation. This is without allowing anything for the payment of the indemnity. In Russia, Poland, Hungary, or Austria such a thing as a budget cannot be seriously considered to exist at all."[11]

"Thus the menace of inflationism described above is not merely a product of the war, of which peace begins the cure. It is a continuing phenomenon of which the end is not yet in sight."[11]

Keynes ended with this ominous warning:

"But who can say how much is endurable, or in what direction men will seek at last to escape from their misfortunes?"[12]


The book was released in late 1919 and became an immediate bestseller on both sides of the Atlantic: it was released in the US in 1920. The scathing sketches of Wilson, Lloyd George and Clemenceau proved to be very popular and the work established Keynes' reputation with the public as a leading economist. In six months, the book had sold 100,000 copies with translations into 12 languages. It restored Keynes' reputation with the Bloomsbury Group, which had been tarnished by his work for the Treasury during the war. Keynes returned to Cambridge to work as an economist, where he was regarded as the leading student of Alfred Marshall.

Impact in US[edit]

As well as being highly successful in commercial terms in the US, the book proved to be highly influential. The book was released just before the US Senate considered the treaty and confirmed the beliefs of the "irreconcilables" against American participation in the League of Nations. As well, the book also heightened the doubts of the "reservationists", led by Henry Cabot Lodge, over the terms of the treaty and created doubts in the minds of Wilson's supporters. Lodge, the Republican Senate leader, shared Keynes' concerns about the severity of the treaty on Germany and believed that it would have to be renegotiated in the future. Keynes played a critical role in turning American public opinion against the treaty of Versailles and the League of Nations, but it was Wilson's poor management of the issue and a number of strokes he had that would be decisive: America would not participate in the League of Nations.

Impact in UK[edit]

Keynes' portrayal of the treaty as a Carthaginian peace quickly became the orthodoxy in academic circles and was a common opinion in the British public. It was widely believed in Britain that the terms of the treaty were unfair. That was influential in determining a response to the attempts by Adolf Hitler to overturn the Versailles Treaty especially in the period leading up to the Munich Agreement. In Germany, the book confirmed what the overwhelming majority of the people already believed: the unfairness of the treaty. France was reluctant to use armed force to enforce the treaty without the support of the British Government. Prior to late 1938, the strength of public opposition to prospective involvement in another war meant that British support for the French position was unreliable.

Étienne Mantoux criticised the impact of Keynes' book in his book The Carthaginian Peace: or the Economic Consequences of Mr. Keynes by saying that it did more than any other writing to discredit the Treaty of Versailles. Mantoux compared The Economic Consequences of the Peace to Edmund Burke's Reflections on the Revolution in France because of the immediate influence on public opinion. Mantoux sought to discredit Keynes' predictions of what the consequences of the Treaty would be. For example, Keynes believed European output in iron would decrease, but by 1929, iron output in Europe was up 10% from the 1913 figure. Keynes predicted that German iron and steel output would decrease, but by 1927, steel output had increased by 30% and iron output increased by 38% from 1913 (within the pre-war borders). Keynes also argued that German coal mining efficiency would decrease, but labour efficiency by 1929 had increased on the 1913 figure by 30%. Keynes contended that Germany would be unable to export coal immediately, but German net coal exports had grown to 15 million tons within a year and by 1926 the tonnage exported had reached 35 million. Keynes also claimed that German national savings in the years after the treaty would be less than 2 billion marks: however, in 1925, the German national savings figure was estimated at 6.4 billion marks and, in 1927, 7.6 billion marks.

Keynes also believed that Germany would be unable to pay the more than 2 billion marks in reparations for the next 30 years, but Mantoux contends that German rearmament spending was seven times as much as that figure in each year between 1933 and 1939.[13]

During the 1930s, Keynes, despite many of his followers, was an early advocate of rearmament to deter what he referred to as the brigand powers of Germany, Japan and Italy. In July 1936, Keynes sent a letter to the editor to the New Statesman: a state of inadequate armament on our part can only encourage the brigand powers who know no argument but force, and will play, in the long run, into the hands of those who would like us to acquiesce by inaction in these powers doing pretty much what they like in the world.

After World War II[edit]

Keynes was a highly influential adviser to the British government during the Second World War. He was head of the British negotiating team that negotiated the Bretton Woods Agreement with the American team led by Harry Dexter White. In general, the Bretton Woods Agreement suggested a monetary system similar to that proposed by Keynes in The Economic Consequences of the Peace.

His proposal for an International Clearing Union formed the basis of proposals for the International Monetary Fund and the International Bank for Reconstruction and Development (later the World Bank and Bank for International Settlements). However, the operation of these institutions was not as liberal as Keynes would have wished. The extension of credit to Europe by the US by the Marshall Plan was similar to what Keynes had proposed at Versailles.

Keynes was also responsible for negotiating financial support for Britain during the Second World War. While Britain struggled to afford the terms offered during the war, the credit offered by the US was much more generous.

Furthermore, the Western powers did not ask for reparations from the defeated powers[citation needed] although the Soviet Union charged reparations from East Germany.

In occupied Germany, the Allies followed the Morgenthau plan to remove all German war potential by complete or partial pastoralisation. Thus, in the Industrial plans for Germany the rules for what Germany was to be allowed to retain were set out. Allied dismantling policy changed in late 1946 to mid 1947 although heavy industry continued to be dismantled until 1951. In March 1947 Herbert Hoover helped change policy by stating: "There is the illusion that the New Germany left after the annexations can be reduced to a 'pastoral state'. It cannot be done unless we exterminate or move 25,000,000 people out of it."[14]

As Keynes predicted, reparations and war debts were paid for by loans from the US, leaving no one better off.

The postwar system led to one of the greatest general increases in prosperity in human history. From 1948 to 1971, world trade increased by an average annual rate of 7.27% and industrial production grew by an average of 5.6%. That contrasts with the interwar period where world trade actually fell in the 1930s, and world industrial production grew fitfully in the 1920s and was hit by the Great Depression.



  1. ^ Keynes 1919.
  2. ^ Keynes 1919, pp. 34–35.
  3. ^ Keynes 1919, pp. 31–32.
  4. ^ Keynes 1919, pp. 52, 55.
  5. ^ Keynes 1919, pp. 56–57.
  6. ^ Keynes 1919, p. 57.
  7. ^ Keynes 1919, pp. 57–58.
  8. ^ Keynes 1919, p. 220.
  9. ^ Keynes 1919, p. 223.
  10. ^ Keynes 1919, pp. 224–225.
  11. ^ a b Keynes 1919, p. 232.
  12. ^ Keynes 1919, p. 235.
  13. ^ Heilperin 1946, pp. 930-934.
  14. ^ Reinert & Jomo 2008.


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