The Economic Consequences of John Maynard Keynes

Before there was John Maynard Keynes’s General Theory (1936), there was his Economic Consequences of the Peace. Written during the summer of 1919, few books did more to discredit the Treaty of Versailles, which formally ended four years of war between the victorious Allied powers and a defeated Germany. It also launched the 36-year-old Keynes into a public and international spotlight which he never left.

Reading this short text a century later, it’s hard to dispute Paul Volcker’s assessment that the book is “frankly a polemic.” Quickly becoming a bestseller, Economic Consequences amused readers with its portraits of those who had lead the Allies to victory: France’s George Clemenceau (“dry in soul, empty of hope”), America’s Woodrow Wilson (“slow and unadaptable”), and Britain’s David Lloyd George (“ill-informed”).

The character-descriptions, however, had a point. Economic Consequences was all about turning public opinion against the Treaty of Versailles and Keynes understood the power of rhetoric.

It’s fair to say that Keynes succeeded in realizing his goal. For decades afterward, his interpretation of Versailles was orthodoxy, despite substantive challenges to the book’s analysis. In this respect, Economic Consequences represented Keynes’s emergence as a formidable political actor in his own right, the consequences of which we still live with today.

An Economist among the Politicians

Having worked in the British Treasury during World War I, Keynes attended the 1919 Paris Peace Conference as one of its representatives on Britain’s official delegation. His experience of the negotiations proved so disillusioning that Keynes resigned from the civil service in May 1919 and returned to academic life at Cambridge.

Much of this disappointment was vented in Keynes’ portrayal of Woodrow Wilson, the then-hero of European liberal and American progressive opinion. The American president, according to Keynes, simply wasn’t up to dealing with tough-minded wheeler-dealers like Clemenceau and Lloyd George. Wilson’s aspirations of realizing progressive ideals on an international level subsequently became ensnared, Keynes despaired, in “gloss and interpretation,” “a web of sophistry and Jesuitical exegesis,” and “all the intellectual apparatus of self-deception.”

A related frustration for Keynes was that the treaty included “no provisions for the economic rehabilitation of Europe.” The negotiators in Paris, he believed, had not understood that a lasting postwar European peace required a sound economic foundation. To the extent that they considered economic subjects, their focus was upon with the reparations that Germany owed the victors. Even worse, Keynes wrote, the Allies addressed economic issues “as a problem of theology, of politics, of electoral chicane, from every point of view except that of the economic future of the States whose destiny they were handling.”

It was de rigueur at the time for a war’s losers to pay reparations to the victors. Keynes insisted, however, that the Allies’ demands were not primarily driven by a desire to see Germany pay for the economic damage it had inflicted on the Allied powers. Deep down, he believed, there was a fair amount of vindictiveness at work, especially on France’s part: one which involved crippling Germany and “degrading the lives of millions of human beings . . . depriving a whole nation of happiness.”

Contesting Keynes

There’s little question that Keynes’s book definitively shaped many Europeans and Americans’ view of the Treaty of Versailles. Within six months of the publication of Economic Consequences, it had been translated into 12 languages. The book was regularly cited by Germans from across the political spectrum who felt humiliated by their nation’s defeat. Keynes’s claim that Versailles amounted to the imposition of “a Carthaginian peace” upon Germany also raised grave doubts in public opinion in the Allied countries about the treaty’s basic justice.

In following decades many scholars, most notably the French economist Étienne Mantoux, challenged the economic analysis of Economic Consequences. Mantoux disputed Keynes’s claim that Germany couldn’t possibly sustain reparations on the demanded scale without reducing itself to penury. Contrary to Keynes’s predictions, Mantoux showed that Germany’s economy recovered after the war much faster than expected. Germany’s coal exports and national saving rate in the 1920s, for instance, vastly exceeded Keynes’s forecasts. Mantoux also illustrated that German armaments-spending in the 1930s dwarfed Germany’s reparations bill. So much for an inability to pay.

A more political criticism of Keynes’s position was that it seems to ignore the fact that leading German politicians, whether Social Democrats, Catholic conservatives, or outspoken nationalists, never accepted that Germany should be paying reparations at all. In fact, Germany paid less than one-eighth of its reparations bill and payments were suspended at the Lausanne conference of 1932.

Recent studies of the negotiations leading to the Versailles treaty have also raised doubts about Keynes’s interpretation of events. In her 2002 book Paris 1919: Six Months That Changed the World, the Canadian historian Margaret MacMillan demonstrates that Lloyd George wasn’t quite the economic ignoramus that Keynes implied he was. Having been Chancellor of the Exchequer from 1908 until 1915, Lloyd George understood that Britain would soon need to trade with Germany again. While not averse to punishing Germany for what he saw as its direct responsibility for the war, Lloyd George recognized that pulverizing the German economy wasn’t in Britain’s long-term economic interest.

More generally, it’s arguable that Economic Consequences insufficiently appreciated the wider political context within which the Allied leaders had to maneuver. During the Paris negotiations, Keynes produced a memorandum which contained what he told his mother was “a grand scheme for the rehabilitation of Europe.” It provided, he believed, a comprehensive solution to all of Europe’s economic problems, including the reparations issue.

Though Lloyd George forwarded Keynes’s plan to Wilson, the proposal was quickly rejected. Keynes’s scheme was premised upon the assumption that the United States would effectively pick up the tab for resolving complicated problems like intra-Allied indebtedness as well as finance a rebooting of Europe’s economies. But neither Wilson, the U.S. Treasury, nor a Republican-controlled Congress had any interest in tying America to what Wilson called “the shaky financial structure of Europe.” Wariness about entanglements in intra-European disputes remained the default position of American foreign policy. As someone interested in international affairs and who had served as a senior Treasury official in wartime, Keynes should have known this and adjusted his expectations accordingly.

Similar criticisms may be made of the alterations to the peace treaty proposed in Economic Consequences’ last chapter. Keynes’s suggested revisions may be described as heavy on plans for a top-down reorganization of Europe’s economies, light on how to address the associated political challenges, and naive about the forces which had been let loose in Central and Eastern Europe following the Austro-Hungarian Empire’s dissolution.

Keynes may have regarded the territorial adjustments underway in these European regions as an irritating distraction from his big economic picture and desire for a once-and-for-all grand solution. That, however, wasn’t the view of countries like Poland trying to establish their sovereignty while simultaneously facing down a Bolshevik regime in Russia bent on carrying Marxist revolution into the West.

Keynes wasn’t blind to the challenges created by communist Russia. In Economic Consequences, however, he claimed that “the flames of Russian Bolshevikism seem, for the moment, to have burnt themselves out.” Keynes then suggested that lingering dangers might be mitigated by integrating the new Russia into the wider European economy via “the agency of German enterprise and organization.”

To be fair to Keynes, few Westerners knew much about what was happening in Russia in 1919. Even fewer grasped the new Bolshevik regime’s true nature. But anyone familiar with the outlook of the likes of Vladimir Lenin would have recognized Keynes’s proposition for Russia’s future as a non-starter. Lenin wasn’t interested in liberal schemes for universal-peace-forever-via-free-trade. Furthermore, he had just one interest in Germany. It was the indispensable lynchpin of the long-term goal from which Lenin never wavered: international revolution. “It is an absolute truth,” Lenin publicly stated in March 1918, “that without a German revolution we are doomed.”

The Economist Becomes the Master Politician

It would be easy to dismiss Keynes’s Economic Consequences as reflecting the naivety of a political novice or characterized by flawed economic analysis and predictions. That, however, would be to seriously underrate the book’s longer-term significance.

In one sense, Economic Consequences expressed a new faith: that a more just and economically-informed postwar settlement might have been realized if only liberal-minded people like Keynes had been in charge. There is consequently a straight line between Keynes’s 1919 book and some of his later international endeavors, such as his efforts to establish a new political and legal framework for international economic and monetary order at Bretton Woods in 1944.

More importantly, the sheer success of Economic Consequences in shaping opinion among influential audiences and the broader public marks the beginning of Keynes’s emergence as someone who was as skilled a political operator as a Clemenceau or a Lloyd George. Far from speaking from an Olympian height, Keynes became a master at advancing his ideas simultaneously with the three audiences which matter in democratic societies.

First, Keynes understood the importance of persuading the populace at large when advancing policy proposals. Economic Consequences wasn’t primarily written for economists or politicians. The intended audience was far wider and his book’s impressive sales suggest that Keynes hit his target. For the rest of his life, Keynes made a point of giving public speeches and radio-addresses as well as writing easy-to-read pamphlets and popular books accessible to non-specialist audiences ranging from trade unionists to journalists.

Second, Keynes understood that his fellow academicians are crucial for shaping opinion over the long term. To sway these people into his camp, Keynes continued teaching and giving seminars, penned short scholarly works, edited prestigious academic publications such as the Economic Journal, and helped launch the careers of people who would carry the Keynesian Gospel through the world’s universities, central banks, and finance ministries long after Keynes’s death in 1946.

Lastly, Keynes focused attention upon those who actually made the political decisions: cabinet ministers, members of parliament, and civil servants. While recognizing that this audience was influenced by mass opinion and the views of scholars, Keynes knew it was important to reach such individuals directly. Keynes did so through a combination of ferocious networking, direct lobbying, and writing eyes-only memoranda and well-placed opinion-pieces in establishment newspapers.

Keynes didn’t always get his way. But it’s hard to think of any economist who comes even close to Keynes in terms of single-handedly shaping the parameters within which questions of economic policy have been discussed throughout the West from the 1920s onwards up to today. From this perspective, Economic Consequences marked the beginning of Keynes’s role in propelling economics and economists to the forefront of politics and the formation of public policy.

Put another way: Having asserted the primacy of economics at Versailles, Keynes discovered that advancing economic ideas in public life requires smart and relentless politics. That’s one reason why, for better or worse, we still live very much in a Keynesian world. In this regard, free marketers could learn something from their nemesis.