The Economic Consequences of the Peace

Chapter 4 examines the Treaty of Versailles’s key economic provisions. Keynes addresses the communication between the Big Four as well as their public statements, such as Woodrow Wilson’s address before the Congress in February 1918 and his speech in New York in September of that year. The economic details include the logistical organization of German trade, the status of its government-owned and private property, transportation methods (merchant fleet by sea, the river system, and others), as well as tariffs. The contested geographic areas in question include the Ruhr valley, Upper Silesia, and Saar—key industrial areas in Germany focused on coal, steel, and chemical production especially affected by the Treaty. Keynes underscores the unequal relationship between the victors and vanquished, in which the terms of the postwar peace were imposed on Germany unequivocally. These terms were to be based on Wilson’s addresses and his Fourteen Points. This chapter does not focus on the question of Germany’s reparations, which Keynes leaves for the following chapter.

Before World War I, the German economic system relied on foreign investments, its overseas colonies, trade within Europe and abroad, exports, heavy industry (especially iron and coal), and its transportation and tariffs. Keynes asserts that the “Treaty aims at the systematic destruction” of all these areas (30). His goal here is to illustrate the degree of German destruction after he already showed the extent to which Germany was the central driving force behind the continental European economy in the previous chapters: The “Treaty strikes at organization, and by the destruction of organization impairs yet further the reduced wealth of the whole community” (40).

The Big Four wanted Germany to surrender its mercantile fleet in excess of 1,600 tons, “Thus the German mercantile fleet is swept from the seas and cannot be restored for many years to come on a scale adequate to meet the requirements of her own commerce” (31). Keynes’s detailed discussion of the agreement’s main economic provisions makes it obvious that France, Britain, the US, and Italy expected Germany to pay massive reparations while at the same time limiting, if not eliminating, that country’s ability to continue running its own economy and, therefore, continue paying reparations. The confiscation of Germany’s merchant ships is one such example.

Germany was also to surrender its overseas colonies, including government property. These possessions were to be given to the Allies. Whereas Keynes previously referred to World War I as a European civil war, this economic provision reminds the reader of the fact that the war had a strong imperialist component. Indeed, the Austro-Hungarian, Ottoman, and Russian empires dissolved in the war’s aftermath. Germany was a latecomer in establishing an overseas colonial empire. Nonetheless, in Africa, Germany controlled parts of such countries as present-day Cameroon, Rwanda, and Nigeria. Germany’s loss of its colonial possessions did not mean that its former subjects were free to establish their own countries: Africa’s decolonization occurred mostly during the Cold War decades later. This subject also demonstrates the limits of the Wilsonian concept of self-determination, which stated that nations should be independent from foreign rule. The Big Four divided up Germany’s former African colonial territories and distributed them amongst themselves. In contrast, the former colonial territories in continental Europe, such as Poland and Finland, were granted independence.

The confiscation of Germany’s possessions included private property. Keynes considers the confiscation of private property without compensation on such a massive scale unprecedented. The Big Four sought to eliminate Germany’s potential influence in neighboring countries that were formerly part of the Austro-Hungarian, Ottoman, and Russian empires. It would have been in these countries that Germany could have improved its postwar economic situation through trade and investments.

Some provisions that were favorable to Germany remained, but they were not enough to outweigh the treaty’s negative features. A reasonable amount of German coal could be used to compensate the victors if Germany were left with other resources to keep its industries running as before. At the same time, the territorial provisions of the Treaty of Versailles harmed Germany’s industries and, thus, the interconnectedness of the European economy at large. For example, if Upper Silesia were to be transferred to Poland, then Poland would end up with Germany’s blast furnaces. This area was not resource-rich in the iron for which these furnaces were meant. Upper Silesia was divided, and a part of it did end up becoming a part of Poland after the war. Some historians highlight the inflated status that Poland received at Germany’s expense.

Keynes is equally critical of the planned 15-year-long handover of the Saar Basin to France through a League of Nations mandate. Out of the 650,000 inhabitants fewer than a hundred were French, whereas the rest were German. Without any concern for the local population, the area was given to France and Britain. The handover was intended to attack Germany’s supply of coal and the mines in the area, which were handed over to France. This type of behavior by France displays revanchism, “The project of establishing an independent Republic under French clerical auspices, which would act as a buffer state and realize the French ambition of driving Germany proper beyond the Rhine, has not yet been abandoned” (41).

Keynes argues that the Allies' expectation of Germany giving them 40 million tons every year to compensate for war damage is completely unrealistic. He carries out several calculations based on Germany’s prewar coal production, its postwar conditions, the amount of coal necessary to run its industries, and its loss of industries and territories in the war. Whereas it is difficult to arrive at the exact figures, Keynes’s overall argument is that Germany would cease being an industrial country if it were to be forced into these conditions. Yet politicians, he argues, “who have told their peoples that she can, have certainly deceived them for the sake of allaying for the moment the misgivings of the European peoples as to the path along which they are being led” (38). Inflated expectations on the part of the victors are dangerous because they avoid considering the treaty’s long-term consequences. Ruhr was another important industrial region for Germany that the Treaty of Versailles targeted in a similar way. Later, when Germany was unable to pay reparations as Keynes predicted, Belgium and France invaded and occupied the area between January 1923 and August 1925.

The Treaty’s provisions contained similarly unreasonable terms in other economic areas, like tariffs. Germany lost Alsace-Lorraine—which it acquired 50 years prior—to France. The region had the right to export to Germany without any customs duty for five years, but Germany did not have the same right. Keynes asserts that the proposed customs regime in general “would be serious and extensive in its consequences” (41).

Germany also faced transportation-related provisions although Keynes considers them less important and calls them “pin-pricks, interferences, and vexations” (41). Nonetheless, Germany’s rivers were “to be handed over to foreign bodies with the widest powers” (43). As a result, domestic businesses in cities like Hamburg, Dresden, and Frankfurt “will be subject to foreign jurisdiction” (43). The overall control of Germany by foreign powers was unprecedented. Keynes elaborates on this question in the subsequent chapter when he discusses the Reparations Commission.