The war permanently disrupted the delicate balance among the various factors of trade, psychology, population, and investment upon which the prewar order was constructed, leaving millions on the continent starving and destitute when the war ended. Nearly 20 million people were killed during the war and many millions more wounded or displaced; factories and transportation grids were destroyed across large swaths of the continent; food and medicine were in short supply; all countries were in debt from heavy borrowing to pay for armaments; national currencies were of uncertain value in relation to one another due to wartime inflation; and the accumulated wealth of the continent was consumed in a few years of war. The suffering was magnified by comparison with the comfortable lives that Europeans had enjoyed before 1914 and with the optimism for the future that nearly everyone had entertained just a few years earlier.
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It was against this backdrop that European and American leaders gathered in Paris early in 1919 to hammer out a peace treaty. Many observers expected the French, British, and American leaders who controlled the Paris Peace Conference to craft a treaty that incorporated President Wilson’s Fourteen Points and his general principle that there should be “peace without victory.” In the months following the armistice, Wilson was by far the most popular political figure in the Western world—a leader who seemed to be carrying the hopes of the world on his shoulders. His program was one basis upon which Germany had agreed to lay down arms. Prior to the conference, Allied leaders made public declarations suggesting that the terms of the peace should be in accordance with Wilson’s various addresses on the subject.
Keynes avoided taking sides on the question of which country was to blame for starting the war. In Economic Consequences of the Peace, he stressed the various elements of Wilson’s program that pointed away from a punitive settlement. For example: “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” (from the Fourteen Points); and, “There shall be no annexations, no contributions, and no punitive damages” (from an address before Congress), although Great Britain and France successfully demanded, as a rider to the president’s statements, compensation for damage done to civilians and their property by land, sea, and air during the war. There was also, of course, the League of Nations that, in Wilson’s mind, would treat all nations equally, arbitrate international differences, and enforce the peace.
Keynes viewed Wilson’s program as a solemn contract binding upon the parties to the Paris Peace Conference—as did Wilson himself, at least prior to the conference. It is far from clear that the other parties, especially the French and British representatives, saw the complex situation in the same light. In fact, despite some rhetorical declarations, they did not.
Like many who pinned their hopes on Wilson’s vision, Keynes was dismayed when, after six months of negotiations running from January to June (1919), the conference adopted a regime of reparations and territorial concessions designed to punish Germany by making her bear most of the costs of the war—including military losses that went well beyond compensation for civilian damages. By this time, Wilson had adjusted his position somewhat, declaring that Germany had to be punished for the crime of aggression.
The Treaty of Versailles assigned to Germany the major blame for the war, and forced her to disarm and to cede territories and raw materials to France. Article 231, the so-called “war guilt” clause, stated: “The Allied and Associated Governments affirm and Germany accepts the responsibility of Germany and her allies for causing all the loss and damage to which the Allied and Associated Governments and their nationals have been subjected as a consequence of the war imposed upon them by the aggression of Germany and her allies.” The Allied powers assessed $5 billion (22 billion gold marks at 1914 values) to be paid immediately in gold and raw materials, and “punted” calculations of the rest of the reparations to a commission of Allied representatives to be set up later. On the basis of Article 231, Keynes calculated that Germany might be assessed as much as $40 billion (170 billion gold marks) in reparations, which was about three times Germany’s prewar GDP and four times the amount he estimated that Germany could afford to pay from remaining resources and proceeds from future exports. He argued that the sum needed to be cut back substantially to avoid out-of-control inflation and some form of revolutionary backlash in Germany.
For understandable reasons, the French feared a revival of German power and a renewed military campaign to reverse the decision of the war. One of the goals of the conference (insisted upon by France) was to establish as far as possible a rough equality between Germany and France in military and economic power. Due to the rapid growth in German population and industry over the previous decades, such a goal could not be accomplished without extreme measures either to shrink Germany or to stretch France. This, according to Keynes, was a wrongheaded approach:
My purpose in this book is to show that the Carthaginian Peace is not practically right or possible. The clock cannot be set back. You cannot restore Central Europe to 1870 without setting up such strains in the European structure and letting loose such human and spiritual forces as will overwhelm not only you and your ‘guarantees,’ but your institutions and the existing order of your society.8
Here was Keynes’s central point: the old order in Europe could not be restored. Germany would henceforth be a major power on the continent. The treaty could not reverse that evolution, and any attempt to do so would end in failure—and possibly in a future attempt by Germany to reverse the decision of the war.
Keynes reserved his sharpest words for Wilson, the American president who might have used his prestige and popularity to craft a treaty more in keeping with the ideals of fairness, self-determination, free trade, and collective security that he enunciated during the course of the war. Wilson’s primary goal at the conference was to win European support for his League of Nations, an institution that he believed would secure the peace for future generations. European leaders dismissed this view as a delusion and had little difficulty in giving Wilson his League in return for his support for those elements of the treaty that they considered far more important: reparations and territorial concessions. Keynes portrayed Wilson as an American naïf, a “blind and deaf Don Quixote,” in the company of seasoned European negotiators. “There can seldom have been a statesman of the first rank,” Keynes wrote, “more incompetent than the President in the agilities of the council chamber.”9 According to Keynes, Wilson was so thoroughly “bamboozled” by the French and British leaders—Clemenceau and Lloyd-George—that he headed back to America comfortable in the illusion that the Treaty of Versailles established the foundations for true peace. Those hopes were formally dashed at home when the U.S. Senate rejected the treaty after Wilson refused to accept a compromise that would have limited the power of the League of Nations to take the United States into war without the consent of Congress.
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In pinning the blame for the treaty’s flaws on Wilson, Keynes realized that any solution to the European crisis would have to come about through the intervention of the United States. The war had shifted the balance of world power westward, as the United States emerged from the conflict with reserves of wealth that Europe would not be able to match for years or decades to come. Great Britain and France sought heavy reparations from Germany partly to pay for the war and to punish Germany, but also to use the proceeds to repay American banks for loans taken out to underwrite the war. The amount of these loans, some $4 billion owed by France and nearly $5 billion by Great Britain, represented nearly half of France’s prewar GDP and a third of Britain’s. The principal and interest (5 percent per year) due on the loans imposed a burden on their economies that would prove difficult to bear under conditions of postwar austerity. Keynes maintained that President Wilson could have marshaled the financial power of the United States to impose upon the European allies a treaty more in keeping with the requirements of postwar peace.
He reasoned, probably correctly, that Great Britain would be better off by renouncing reparations and gaining cancellation of the debts than by winning phantom reparations (that might not be paid) and paying real debts. If the United States would cancel inter-ally war debts in an “act