John Maynard Keynes, The Economic Consequences of the Peace (1919), selections; the full text is also available on-line. An economist at Cambridge University and a member of the so-called "Bloomsbury Group" of artists and intellectuals, Keynes worked for the British Treasury Office during the First World War and was an advisor to the British Government during the negotiation of the Versailles Treaty. He resigned before the Treaty was complete and wrote the book during summer 1919; within six months of publication, it had sold 100,000 copies and been translated into a dozen languages. Keynes later advised British policymakers during World War Two; some argue that the 1944 Bretton Woods Agreement put into place the proposals made twenty-five years earlier in Economic Consequences of the Peace.

Chapter One. Introductory. The power to become habituated to his surroundings is a marked characteristic of mankind. Very few of us realize with conviction the intensely unusual, unstable, complicated, unreliable, temporary nature of the economic organization by which Western Europe has lived for the last half century. We assume some of the most peculiar and temporary of our late advantages as natural, permanent, and to be depended on, and we lay our plans accordingly. On this sandy and false foundation we scheme for social improvement and dress our political platforms, pursue our animosities and particular ambitions, and feel ourselves with enough margin in hand to foster, not assuage, civil conflict in the European family. Moved by insane delusion and reckless self-regard, the German people overturned the foundations on which we all lived and built. But the spokesmen of the French and British peoples have run the risk of completing the ruin, which Germany began, by a Peace which, if it is carried into effect, must impair yet further, when it might have restored, the delicate, complicated organization, already shaken and broken by war, through which alone the European peoples can employ themselves and live....

Chapter Two. Europe before the War. Before 1870 different parts of the small continent of Europe had specialized in their own products; but, taken as a whole, it was substantially self-subsistent. And its population was adjusted to this state of affairs.

After 1870 there was developed on a large scale an unprecedented situation, and the economic condition of Europe became during the next fifty years unstable and peculiar. The pressure of population on food, which had already been balanced by the accessibility of supplies from America, became for the first time in recorded history definitely reversed. As numbers increased, food was actually easier to secure. Larger proportional returns from an increasing scale of production became true of agriculture as well as industry. With the growth of the European population there were more emigrants on the one hand to till the soil of the new countries, and, on the other, more workmen were available in Europe to prepare the industrial products and capital goods which were to maintain the emigrant populations in their new homes, and to build the railways and ships which were to make accessible to Europe food and raw products from distant sources. Up to about 1900 a unit of labor applied to industry yielded year by year a purchasing power over an increasing quantity of food. It is possible that about the year 1900 this process began to be reversed, and a diminishing yield of Nature to man's effort was beginning to reassert itself. But the tendency of cereals to rise in real cost was balanced by other improvements; and—one of many novelties—the resources of tropical Africa then for the first time came into large employ, and a great traffic in oil-seeds began to bring to the table of Europe in a new and cheaper form one of the essential foodstuffs of mankind. In this economic Eldorado, in this economic Utopia, as the earlier economists would have deemed it, most of us were brought up.

That happy age lost sight of a view of the world which filled with deep-seated melancholy the founders of our Political Economy. Before the eighteenth century mankind entertained no false hopes. To lay the illusions which grew popular at that age's latter end, Malthus disclosed a Devil. For half a century all serious economical writings held that Devil in clear prospect. For the next half century he was chained up and out of sight. Now perhaps we have loosed him again.

What an extraordinary episode in the economic progress of man that age was which came to an end in August, 1914! The greater part of the population, it is true, worked hard and lived at a low standard of comfort, yet were, to all appearances, reasonably contented with this lot. But escape was possible, for any man of capacity or character at all exceeding the average, into the middle and upper classes, for whom life offered, at a low cost and with the least trouble, conveniences, comforts, and amenities beyond the compass of the richest and most powerful monarchs of other ages. ...

Europe was so organized socially and economically as to secure the maximum accumulation of capital. While there was some continuous improvement in the daily conditions of life of the mass of the population, Society was so framed as to throw a great part of the increased income into the control of the class least likely to consume it. The new rich of the nineteenth century were not brought up to large expenditures, and preferred the power which investment gave them to the pleasures of immediate consumption. In fact, it was precisely the inequality of the distribution of wealth which made possible those vast accumulations of fixed wealth and of capital improvements which distinguished that age from all others. Herein lay, in fact, the main justification of the Capitalist System. If the rich had spent their new wealth on their own enjoyments, the world would long ago have found such a régime intolerable. But like bees they saved and accumulated, not less to the advantage of the whole community because they themselves held narrower ends in prospect.

The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the war, could never have come about in a Society where wealth was divided equitably. The railways of the world, which that age built as a monument to posterity, were, not less than the Pyramids of Egypt, the work of labor which was not free to consume in immediate enjoyment the full equivalent of its efforts.

Thus this remarkable system depended for its growth on a double bluff or deception. On the one hand the laboring classes accepted from ignorance or powerlessness, or were compelled, persuaded, or cajoled by custom, convention, authority, and the well-established order of Society into accepting, a situation in which they could call their own very little of the cake that they and Nature and the capitalists were co-operating to produce. And on the other hand the capitalist classes were allowed to call the best part of the cake theirs and were theoretically free to consume it, on the tacit underlying condition that they consumed very little of it in practice. The duty of "saving" became nine-tenths of virtue and the growth of the cake the object of true religion. There grew round the non-consumption of the cake all those instincts of puritanism which in other ages has withdrawn itself from the world and has neglected the arts of production as well as those of enjoyment. And so the cake increased; but to what end was not clearly contemplated. Individuals would be exhorted not so much to abstain as to defer, and to cultivate the pleasures of security and anticipation. Saving was for old age or for your children; but this was only in theory,—the virtue of the cake was that it was never to be consumed, neither by you nor by your children after you.

In writing thus I do not necessarily disparage the practices of that generation. In the unconscious recesses of its being Society knew what it was about. The cake was really very small in proportion to the appetites of consumption, and no one, if it were shared all round, would be much the better off by the cutting of it. Society was working not for the small pleasures of today but for the future security and improvement of the race,—in fact for "progress." If only the cake were not cut but was allowed to grow in the geometrical proportion predicted by Malthus of population, but not less true of compound interest, perhaps a day might come when there would at last be enough to go round, and when posterity could enter into the enjoyment of our labors. In that day overwork, overcrowding, and underfeeding would have come to an end, and men, secure of the comforts and necessities of the body, could proceed to the nobler exercises of their faculties. One geometrical ratio might cancel another, and the nineteenth century was able to forget the fertility of the species in a contemplation of the dizzy virtues of compound interest.

There were two pitfalls in this prospect: lest, population still outstripping accumulation, our self-denials promote not happiness but numbers; and lest the cake be after all consumed, prematurely, in war, the consumer of all such hopes.

But these thoughts lead too far from my present purpose. I seek only to point out that the principle of accumulation based on inequality was a vital part of the pre-war order of Society and of progress as we then understood it, and to emphasize that this principle depended on unstable psychological conditions, which it may be impossible to recreate. It was not natural for a population, of whom so few enjoyed the comforts of life, to accumulate so hugely. The war has disclosed the possibility of consumption to all and the vanity of abstinence to many. Thus the bluff is discovered; the laboring classes may be no longer willing to forego so largely, and the capitalist classes, no longer confident of the future, may seek to enjoy more fully their liberties of consumption so long as they last, and thus precipitate the hour of their confiscation. ...

Of the surplus capital goods accumulated by Europe a substantial part was exported abroad, where its investment made possible the development of the new resources of food, materials, and transport, and at the same time enabled the Old World to stake out a claim in the natural wealth and virgin potentialities of the New. This last factor came to be of the vastest importance. The Old World employed with an immense prudence the annual tribute it was thus entitled to draw. The benefit of cheap and abundant supplies, resulting from the new developments which its surplus capital had made possible, was, it is true, enjoyed and not postponed. But the greater part of the money interest accruing on these foreign investments was reinvested and allowed to accumulate, as a reserve (it was then hoped) against the less happy day when the industrial labor of Europe could no longer purchase on such easy terms the produce of other continents, and when the due balance would be threatened between its historical civilizations and the multiplying races of other climates and environments. Thus the whole of the European races tended to benefit alike from the development of new resources whether they pursued their culture at home or adventured it abroad.

Even before the war, however, the equilibrium thus established between old civilizations and new resources was being threatened. The prosperity of Europe was based on the facts that, owing to the large exportable surplus of foodstuffs in America, she was able to purchase food at a cheap rate measured in terms of the labor required to produce her own exports, and that, as a result of her previous investments of capital, she was entitled to a substantial amount annually without any payment in return at all. The second of these factors then seemed out of danger, but, as a result of the growth of population overseas, chiefly in the United States, the first was not so secure.

When first the virgin soils of America came into bearing, the proportions of the population of those continents themselves, and consequently of their own local requirements, to those of Europe were very small. As lately as 1890 Europe had a population three times that of North and South America added together. But by 1914 the domestic requirements of the United States for wheat were approaching their production, and the date was evidently near when there would be an exportable surplus only in years of exceptionally favorable harvest. Indeed, the present domestic requirements of the United States are estimated at more than ninety per cent of the average yield of the five years 1909-1913...In short, Europe's claim on the resources of the New World was becoming precarious; the law of diminishing returns was at last reasserting itself, and was making it necessary year by year for Europe to offer a greater quantity of other commodities to obtain the same amount of bread; and Europe, therefore, could by no means afford the disorganization of any of her principal sources of supply.

Chapter Three.The Conference.... [The French President, Georges Clemenceau] had one illusion—France; and one disillusion—mankind, including Frenchmen, and his colleagues not least. His principles for the peace can be expressed simply. In the first place, he was a foremost believer in the view of German psychology that the German understands and can understand nothing but intimidation, that he is without generosity or remorse in negotiation, that there is no advantage he will not take of you, and no extent to which he will not demean himself for profit, that he is without honor, pride, or mercy. Therefore you must never negotiate with a German or conciliate him; you must dictate to him. On no other terms will he respect you, or will you prevent him from cheating you. But it is doubtful how far he thought these characteristics peculiar to Germany, or whether his candid view of some other nations was fundamentally different. His philosophy had, therefore, no place for "sentimentality" in international relations. Nations are real things, of whom you love one and feel for the rest indifference—or hatred. The glory of the nation you love is a desirable end,—but generally to be obtained at your neighbor's expense. The politics of power are inevitable, and there is nothing very new to learn about this war or the end it was fought for; England had destroyed, as in each preceding century, a trade rival; a mighty chapter had been closed in the secular struggle between the glories of Germany and of France. Prudence required some measure of lip service to the "ideals" of foolish Americans [President Woodrow Wilson] and hypocritical Englishmen [the Prime Minister, David Lloyd George]; but it would be stupid to believe that there is much room in the world, as it really is, for such affairs as the League of Nations, or any sense in the principle of self-determination except as an ingenious formula for rearranging the balance of power in one's own interests.

These, however, are generalities. In tracing the practical details of the Peace which he thought necessary for the power and the security of France, we must go back to the historical causes which had operated during his lifetime. Before the Franco-German war [1870-1871] the populations of France and Germany were approximately equal; but the coal and iron and shipping of Germany were in their infancy, and the wealth of France was greatly superior. Even after the loss of Alsace-Lorraine there was no great discrepancy between the real resources of the two countries. But in the intervening period the relative position had changed completely. By 1914 the population of Germany was nearly seventy per cent in excess of that of France; she had become one of the first manufacturing and trading nations of the world; her technical skill and her means for the production of future wealth were unequaled. France on the other hand had a stationary or declining population, and, relatively to others, had fallen seriously behind in wealth and in the power to produce it.

In spite, therefore, of France's victorious issue from the present struggle (with the aid, this time, of England and America), her future position remained precarious in the eyes of one who 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 organized 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 skepticism 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 President Wilson, 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. Hence the necessity of "guarantees"; and each guarantee that was taken, by increasing irritation and thus the probability of a subsequent Revanche by Germany, made necessary yet further provisions to crush. [Revanche is French for "revenge," and it was a dominant nationalist political cry after Germany defeated France in the 1870-1871 Franco-Prussian War.]

So far as possible, therefore, it was the policy of France to set the clock back and to undo what, since 1870, the progress of Germany had accomplished. By loss of territory and other measures her population was to be curtailed; but chiefly the economic system, upon which she depended for her new strength, the vast fabric built upon iron, coal, and transport must be destroyed. If France could seize, even in part, what Germany was compelled to drop, the inequality of strength between the two rivals for European hegemony might be remedied for many generations. Hence sprang those cumulative provisions for the destruction of highly organized economic life which we shall examine in the next chapter. This is the policy of an old man, whose most vivid impressions and most lively imagination are of the past and not of the future. He sees the issue in terms of France and Germany, not of humanity and of European civilization struggling forwards to a new order. The war has bitten into his consciousness somewhat differently from ours, and he neither expects nor hopes that we are at the threshold of a new age....

Chapter Five. Reparations. The categories of damage in respect of which the Allies were entitled to ask for Reparation are governed by the relevant passages in President Wilson's Fourteen Points of January 8, 1918, as modified by the Allied Governments in their qualifying Note. ...that is to say, "compensation will be made by Germany for all damage done to the civilian population of the Allies and to their property by the aggression of Germany by land, by sea, and from the air."...
Assuming then that the terms of this Note are binding, we are left to elucidate the precise force of the phrase—"all damage done to the civilian population of the Allies and to their property by the aggression of Germany by land, by sea, and from the air." Few sentences in history have given so much work to the sophists and the lawyers, as we shall see in the next section of this chapter, as this apparently simple and unambiguous statement. Some have not scrupled to argue that it covers the entire cost of the war; for, they point out, the entire cost of the war has to be met by taxation, and such taxation is "damaging to the civilian population." They admit that the phrase is cumbrous, and that it would have been simpler to have said "all loss and expenditure of whatever description"; and they allow that the apparent emphasis on damage to the persons and property of civilians is unfortunate; but errors of draftsmanship should not, in their opinion, shut off the Allies from the rights inherent in victors. ...

What would the aggregate demand amount to? No figures exist on which to base any scientific or exact estimate, and I give my own guess for what it is worth, prefacing it with the following observations. ...The amount of the material damage done in the invaded districts has been the subject of enormous, if natural, exaggeration. A journey through the devastated areas of France is impressive to the eye and the imagination beyond description. During the winter of 1918-1919, before Nature had cast over the scene her ameliorating mantle, the horror and desolation of war was made visible to sight on an extraordinary scale of blasted grandeur. The completeness of the destruction was evident. For mile after mile nothing was left. No building was habitable and no field fit for the plow. The sameness was also striking. One devastated area was exactly like another—a heap of rubble, a morass of shell-holes, and a tangle of wire. The amount of human labor which would be required to restore such a countryside seemed incalculable; and to the returned traveler any number of milliards of dollars was inadequate to express in matter the destruction thus impressed upon his spirit. Some Governments for a variety of intelligible reasons have not been ashamed to exploit these feelings a little. [there follows a long section in which Keynes calculates that $10 billion might be a reasonable amount to expect from Germany; he then notes that the Allies were becoming increasingly aware of the toll taken on Germany by the war]... there was another new factor: The British Prime Minister had perceived that the conclusion of hostilities might soon bring with it the break-up of the political bloc upon which he was depending for his personal ascendency, and that the domestic difficulties which would be attendant on demobilization, the turn-over of industry from war to peace conditions, the financial situation, and the general psychological reactions of men's minds, would provide his enemies with powerful weapons, if he were to leave them time to mature. [he therefore called for an election, even though one was not due, because he assumed he had a better chance of winning an election at this point than several years later...]

The progress of the General Election of 1918 affords a sad, dramatic history of the essential weakness of one who draws his chief inspiration not from his own true impulses, but from the grosser effluxions of the atmosphere which momentarily surrounds him. The Prime Minister's natural instincts, as they so often are, were right and reasonable. He himself did not believe in hanging the Kaiser [the German Emperor] or in the wisdom or the possibility of a great indemnity. [no mention was made of it in the party platform] ... But a few days later at Newcastle (November 29) the Prime Minister was warming to his work: "When Germany defeated France [1871] she made France pay. That is the principle which she herself has established. There is absolutely no doubt about the principle, and that is the principle we should proceed upon—that Germany must pay the costs of the war up to the limit of her capacity to do so." But he accompanied this statement of principle with many "words of warning" as to the practical difficulties of the case: "We have appointed a strong Committee of experts, representing every shade of opinion, to consider this question very carefully and to advise us. There is no doubt as to the justice of the demand. She ought to pay, she must pay as far as she can, but we are not going to allow her to pay in such a way as to wreck our industries." At this stage the Prime Minister sought to indicate that he intended great severity, without raising excessive hopes of actually getting the money, or committing himself to a particular line of action at the Conference. It was rumored that a high City authority had committed himself to the opinion that Germany could certainly pay $100,000,000,000 and that this authority for his part would not care to discredit a figure of twice that sum. The Treasury officials, as Mr. Lloyd George indicated, took a different view. He could, therefore, shelter himself behind the wide discrepancy between the opinions of his different advisers, and regard the precise figure of Germany's capacity to pay as an open question in the treatment of which he must do his best for his country's interests....

On December 9, at the Queen's Hall, the Prime Minister avoided the subject. But from now on, the debauchery of thought and speech progressed hour by hour. The grossest spectacle was provided by Sir Eric Geddes in the Guildhall at Cambridge. An earlier speech in which, in a moment of injudicious candor, he had cast doubts on the possibility of extracting from Germany the whole cost of the war had been the object of serious suspicion, and he had therefore a reputation to regain. "We will get out of her all you can squeeze out of a lemon and a bit more," the penitent shouted, "I will squeeze her until you can hear the pips squeak"; his policy was to take every bit of property belonging to Germans in neutral and Allied countries, and all her gold and silver and her jewels, and the contents of her picture-galleries and libraries, to sell the proceeds for the Allies' benefit.... The Prime Minister never said that he himself believed that Germany could pay the whole cost of the war. But the program became in the mouths of his supporters on the hustings a great deal more than concrete. The ordinary voter was led to believe that Germany could certainly be made to pay the greater part, if not the whole cost of the war. Those whose practical and selfish fears for the future the expenses of the war had aroused, and those whose emotions its horrors had disordered, were both provided for. A vote for [the Prime Minister's] Coalition meant the Crucifixion of Anti-Christ and the assumption by Germany of the British National Debt....

Apart from other aspects of the transaction, I believe that the campaign for securing out of Germany the general costs of the war was one of the most serious acts of political unwisdom for which our statesmen have ever been responsible. To what a different future Europe might have looked forward if either Mr. Lloyd George or Mr. Wilson had apprehended that the most serious of the problems which claimed their attention were not political or territorial but financial and economic, and that the perils of the future lay not in frontiers or sovereignties but in food, coal, and transport. Neither of them paid adequate attention to these problems at any stage of the Conference. But in any event the atmosphere for the wise and reasonable consideration of them was hopelessly befogged by the commitments of the British delegation on the question of Indemnities. The hopes to which the Prime Minister had given rise not only compelled him to advocate an unjust and unworkable economic basis to the Treaty with Germany, but set him at variance with the President, and on the other hand with competing interests to those of France and Belgium. The clearer it became that but little could be expected from Germany, the more necessary it was to exercise patriotic greed and "sacred egotism" and snatch the bone from the juster claims and greater need of France or the well-founded expectations of Belgium. Yet the financial problems which were about to exercise Europe could not be solved by greed. The possibility of their cure lay in magnanimity.

Europe, if she is to survive her troubles, will need so much magnanimity from America, that she must herself practice it. It is useless for the Allies, hot from stripping Germany and one another, to turn for help to the United States to put the States of Europe, including Germany, on to their feet again. If the General Election of December, 1918, had been fought on lines of prudent generosity instead of imbecile greed, how much better the financial prospect of Europe might now be. I still believe that before the main Conference, or very early in its proceedings, the representatives of Great Britain should have entered deeply, with those of the United States, into the economic and financial situation as a whole, and that the former should have been authorized to make concrete proposals on the general lines (1) that all inter-allied indebtedness be canceled outright; (2) that the sum to be paid by Germany be fixed at $10,000,000,000; (3) that Great Britain renounce all claim to participation in this sum and that any share to which she proves entitled be placed at the disposal of the Conference for the purpose of aiding the finances of the New States about to be established; (4) that in order to make some basis of credit immediately available an appropriate proportion of the German obligations representing the sum to be paid by her should be guaranteed by all parties to the Treaty; and (5) that the ex-enemy Powers should also be allowed, with a view to their economic restoration, to issue a moderate amount of bonds carrying a similar guarantee. Such proposals involved an appeal to the generosity of the United States. But that was inevitable; and, in view of her far less financial sacrifices, it was an appeal which could fairly have been made to her. Such proposals would have been practicable. There is nothing in them quixotic or Utopian. And they would have opened up for Europe some prospect of financial stability and reconstruction....

I have described the entanglements which Mr. Lloyd George took with him. The position of the Finance Ministers of the other Allies was even worse. We in Great Britain had not based our financial arrangements on any expectation of an indemnity. Receipts from such a source would have been more or less in the nature of a windfall; and, in spite of subsequent developments, there was an expectation at that time of balancing our budget by normal methods. But this was not the case with France or Italy. Their peace budgets made no pretense of balancing and had no prospects of doing so, without some far-reaching revision of the existing policy. Indeed, the position was and remains nearly hopeless. These countries were heading for national bankruptcy. This fact could only be concealed by holding out the expectation of vast receipts from the enemy. As soon as it was admitted that it was in fact impossible to make Germany pay the expenses of both sides, and that the unloading of their liabilities upon the enemy was not practicable, the position of the Ministers of Finance of France and Italy became untenable. Thus a scientific consideration of Germany's capacity to pay was from the outset out of court. The expectations which the exigencies of politics had made it necessary to raise were so very remote from the truth that a slight distortion of figures was no use, and it was necessary to ignore the facts entirely. The resulting unveracity was fundamental. On a basis of so much falsehood it became impossible to erect any constructive financial policy which was workable. For this reason amongst others, a magnanimous financial policy was essential. The financial position of France and Italy was so bad that it was impossible to make them listen to reason on the subject of the German Indemnity, unless one could at the same time point out to them some alternative mode of escape from their troubles.