Keynes’s grand solution—a reduction of reparations linked to the cancellation of inter-ally war debts—may be considered a statement of British financial interest as much as an expression of sympathy for the German position. He wrote that the payment of interest on those loans was an oppressive prospect for Great Britain and the other debtor countries. Nevertheless, the United States, given its history and its relationship to the European powers at that time, was not going to absorb the costs of a European war that it had no role in starting. Public opinion in America would have rebelled against any such solution. It was not a realistic proposal, nor was Keynes’s plea for another international loan from the United States after he had called for the cancellation of already existing debts. “Does he think we are financial simpletons?” asked one American reviewer of the book.
Keynes was also wrong to think that Wilson’s vision should or could have controlled the peace conference or that Germany would have accepted a treaty that fully incorporated his Fourteen Points. Here Keynes’s argument was more than a little illogical, for he wrote that “when it came to practice [Wilson’s] ideas were nebulous and incomplete. He had no plan, no scheme, no constructive ideas whatever for clothing with the flesh of life the commandments which he had thundered from the White House.” In that circumstance, it is hard to see why he thought that Wilson’s vision could have set the agenda for the conference. In addition, France and Great Britain had legitimate financial and security interests that could not be swept aside in the postwar negotiations, even by Wilson. The treaty that emerged from those negotiations was inevitably going to contain a bundle of compromises that gave each of the major powers some but not all of what it asked for.19 Public opinion in France and Great Britain would have recoiled against a “slap on the wrist” treaty in regard to German responsibility for the war. It is also probable that Germany would have recoiled against a thoroughly Wilsonian treaty, inasmuch as one of the Fourteen Points called for an independent Polish state to be carved out of the Polish populations on the eastern border of Germany, assured of free and secure access to the sea. That was a sore point for Germany, and one whose inclusion might have undermined any treaty that emerged from the Paris negotiations. Two decades later, the Second World War began on the day that Hitler moved to reverse that particular provision of the Treaty of Versailles.
In his own way, Keynes may have been as utopian as Wilson was in envisioning the postwar order. Wilson looked to transcend the balance-of-power politics that characterized the prewar regime in favor of a system of collective security as institutionalized in the League of Nations. That was judged by nearly everyone, including Keynes, to be a utopian vision and one that was unworkable under the conditions of the time. In much the same way, Keynes proposed a vision of European economic cooperation and integration that was equally implausible in a situation in which national rivalries and resentments had been inflamed by the deaths, damage, and overall suffering of the war. Keynes, in effect, was asking the warring parties of Europe to set aside their differences and forget past humiliations in the interests of mutual cooperation and economic progress, with the financial burden for that solution to be carried by the United States. None of the parties was willing to do that in 1919, and few people at the time thought that such a prospect was possible. The weight of history was still too great to allow for either the Wilsonian or the Keynesian solution.
It would take another war before such a vision could be seriously considered, this time under the supervision and patronage of the United States, motivated in large measure by the emergence of the Soviet Union as a potential adversary. As the Second World War approached an end, American and British planners sought to avoid the missteps of 1918 and 1919. This required in the first place the unconditional surrender of German forces and the Allied occupation of German territory. The remedies that Keynes proposed in 1919—relief, reconstruction, renewal of trade, cancellation of debts, limited reparations, stabilization of currencies, and integration of the vanquished into the postwar order—were generally accepted in 1945 as guideposts for the postwar order. Keynes, as the British representative at the Bretton Woods conference in 1944, played an important role in designing the institutional foundations of the postwar economic order: the World Bank, the International Monetary Fund, and an international currency regime pegged to the U.S. dollar. These policies and institutions, much in contrast to those adopted in 1919, established a basis for postwar security and prosperity across Western Europe and North America.
The Keynesian Revolution in Political Economy
Keynes attacked the Treaty of Versailles on political grounds, bluntly asserting that the negotiators addressed the wrong problems and held a mistaken vision of the postwar order. A consistent theme in his career as an economist is that he was a political economist. This was true in at least three senses: first, he understood that economic ideas had to be communicated to the public in a manner designed to persuade; second, he saw that the policies of the state had to be grounded in sound economics; third, he knew that the organization of the economy could not in the end be separated from the institutions of the state.
From this arises a central irony of the Keynesian revolution in economic policy: while Keynes was a political economist, assigning new responsibilities to the state to stabilize the economy, academic economists who followed his lead turned their discipline into a technical enterprise entirely separate from politics. The distinguished tradition of political economy largely faded away as Keynes’s revolution unfolded in the postwar era. This development has served to conceal an intriguing possibility—that Keynes’s enterprise is vulnerable not primarily because the economic theory is flawed, but because it cannot be made to work from a political point of view.
In The Economic Consequences of the Peace, Keynes declared that the old order of political economy in Europe had come to an end with the First World War. He took this theme further in The General Theory of Employment, Interest, and Money, where he argued, against the backdrop of the Great Depression, that the nineteenth-century theory of free markets and limited government was inadequate to modern conditions. His prescriptions for setting capitalism on a new foundation launched the “Keynesian revolution.” A key question today is whether evolving conditions in the political economy of capitalism are in the process of making the Keynesian synthesis ineffective and obsolete in its turn.
* * *
The Great Depression, more than any previous economic crisis, ignited a fundamental rethinking of the future of capitalism. What had gone wrong with the market system to cause such an unprecedented collapse? Was there a way to tame its “boom and bust” cycles? Could the capitalist system survive? Did it even deserve to survive; and if so, on what terms? The victories of communism in Russia and fascism in Germany suggested that capitalism would soon give way to one or the other of these extreme alternatives.
The Depression era produced three influential but widely diverging statements about the future of capitalism: Keynes’s General Theory (1936), Joseph Schumpeter’s Capitalism, Socialism, and Democracy (1942), and Friedrich Hayek’s The Road to Serfdom (1944). Each was a work of political economy in the broad sense, weaving together the interconnected subjects of politics, culture, institutions, and economic theory. Each had long been gestating in the mind of its author and expressed his considered reflections on the world crisis of the time. All three of these economists were well known in academic and policy circles long before these particular works appeared. To some extent, then, each developed his ideas in answer to theoretical challenges posed by the others.
Today, more than seventy years since they were first published, these three works continue to stand as seminal statements of influential public doctrines: Keynes’s General Theory for orthodox liberalism, The Road to Serfdom for market liberalism, and Capitalism, Socialism, and Democracy for conservatism and neoconservatism, or for the belief that culture is decisive for the survival of capitalism. For this reason, some have called their authors