Dark Forebodings:

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Pres. Woodrow Wilson and Prime Ministers Clemenceau and Lloyd George, acting with supreme disregard for the dark realities of the situation, have produced a peace treaty that will complete the financial and economic ruin of Europe.

  Keynes sets forth dark forebodings in his elegant writing style. The economic and social world that England has become accustomed to is actually very fragile. As a result of The Great War - which was a vast civil war among the European nations - there is financial insolvency and economic disruption throughout Europe. All of Central Europe is on the verge of starvation and civil disorder. And now, Pres. Woodrow Wilson and Prime Ministers Clemenceau and Lloyd George, acting with supreme disregard for the dark realities of the situation, have produced a peace treaty that will complete the financial and economic ruin of Europe.
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  Nineteenth century globalization had made possible levels of legal and economic security and individual prosperity on an unprecedented scale throughout most of Europe. The vast German economy had become the centerpiece of the economic system. All the lesser European economies depended on the German market and on efficient German suppliers. For Britain, Germany was the second biggest market and supplier. Germany supplied massive amounts of capital to the other European nations and considerable managerial expertise.
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Keynes marvels that the social system permitted this growth to take place without generating destructive levels of popular envy.

  Europe enjoyed fifty years of vast capitalist growth prior to the war under economic systems that encouraged the accumulation of capital. All sectors of the population experienced considerable improvement in living conditions, but vast wealth was accumulated by the capitalist class. Keynes marvels that the social system permitted this growth to take place without generating destructive levels of popular envy.
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  However, war has now consumed vast amounts of the accumulated wealth. All that accumulation is now exposed as in vain. The mass of the laboring class may no longer be content with the unequal distribution of wealth. Keynes' rhetoric reveals the Marxian roots of his comments and expectations.

  "It was not natural for a population, of whom so few enjoyed the comforts of life, to accumulate so hugely. The war had 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."

  Malthusian fears are also repeatedly revealed. Increasing populations in Europe and in the overseas providers of inexpensive food imports are seen as a Malthusian threat that must ultimately end this period of agricultural plenty.

  "[By] 1914 the domestic requirements of the United States - - - were approaching their production, and the date was evidently near when there would be an exportable surplus only in years of exceptionally favorable harvest."

  The world was on the cusp of great technological advances in agriculture that would make the entire twentieth century a period of vast food surplus for capitalist nations even as U.S. population tripled and other capitalist nation populations increased by tens of millions. This was clearly beyond Keynes' most optimistic imaginings. He exhibits in this book a tendency towards the absurd levels of static analysis that appear so prominently in 1936 in his "The General Theory of Employment, Interest, and Money," and that repeatedly afflicts all three volumes of Marx, "Das Kapital." See, Keynes, "The General Theory" Part I, Keynesian Theory and Keynes, The General Theory Part II, Keynesian Monetary Policy & Fiscal Policy, and the six articles on Marx, "Das Kapital," beginning with Karl Marx, Capital (Das Kapital) (vol. 1) (I).

  Succumbing to Malthusian influence, Keynes argues that population growth is at last about to outstrip economic resources. Succumbing to Marxian influence, he argues that the capitalist system is at last about to prove socially and economically unsustainable.

  The left loves to find reasons why capitalism is unsustainable. This expectation has been for a mere 150 years repeatedly and inevitably disappointed. Even after a century of industrial revolution, Keynes is completely oblivious to the continuation of technological advance. The contemplation of continued acceleration of technological advance is simply beyond the left wing intellectual capacity of the day.
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  Being infinitely adjustable, capitalist markets are infinitely sustainable. Only by blocking the sometimes painful adjustment mechanisms can governments render markets unsustainable. Only massive entitlement welfare state obligations can cause a permanent collapse.

The Peace Conference had to act with sufficient magnanimity and prudence to "reestablish life and heal wounds."

The effort to refashion Central Europe as an array of small independent ethnic nations will prove disastrous in every way - economically, militarily and socially.

  However, one thing Keynes saw all too accurately. The war had vastly impoverished Europe and disrupted its commerce. It had undermined social cohesion and faith in political leadership. The Peace Conference thus had vital tasks. It of course had to provide a just outcome. However, it also had to act with sufficient magnanimity and prudence to "reestablish life and heal wounds."
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  Clemenceau entertained no illusions about a peaceful outcome. He understood that Wilson's 14 points and League of Nations were naïve. They were incapable of even remotely realizing Wilson's dreams. Germany would again one day threaten France. Thus, France had to take this temporary opportunity to strengthen itself and sufficiently weaken Germany to safeguard France.
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  However, this became a self-fulfilling prophesy. The burdens imposed on Germany only increased her enmity. A "Carthaginian Peace" imposed on Germany is not only unjust, it is not possible as a practical matter, Keynes pointed out. In addition, the effort to refashion Central Europe as an array of small independent ethnic nations will prove disastrous in every way - economically, militarily and socially - Keynes presciently asserts.
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War-torn Europe had become totally dependent on the U.S. for financial resources and food for its starving millions.

Wilson was "a blind and deaf Don Quixote"

  The Armistice and disarmament were accepted only on the assurance that the Peace Treaty would be based on Wilson's 14 points, according to the Germans. Keynes accepts that assertion - and then belabors Wilson for abandoning his 14 points. He notes that Wilson's influence was initially preeminent due to the popular appeal of his ideals, the strength of American arms, and the preeminence of the financial position gained by the U.S. as a result of the war. War-torn Europe had become totally dependent on the U.S. for financial resources and food for its starving millions.

  "Never had a philosopher held such weapons wherewith to bind the princes of this world. How the crowds of the European capitals pressed about the carriage of the President! With what curiosity, anxiety, and hope we sought a glimpse of the features and bearing of the man of destiny who, coming from the West, was to bring healing to the wounds of the ancient parent of his civilization and lay for us the foundations of the future."

  As high the hope - so deep the disillusion. How could Wilson so completely betray his own ideals? Keynes asserts that Wilson was a good man, but with no diplomatic experience - no capacity to deal with Clemenceau and Lloyd George. He was totally lacking in bargaining skills. He was "a blind and deaf Don Quixote" completely unable to understand, much less counter, the devious purposes and negotiating tactics of the other principals.
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Lacking his own plans, Wilson was always working from British or French drafts - always in the position of seeking changes in plans not his own.

  Incredibly, Wilson came to the Conference without any definitive plans. His ideas were still just incomplete, nebulous generalities.

  "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. He could have preached a sermon on any of them or have addressed a stately prayer to the Almighty for their fulfillment; but he could not frame their concrete application to the actual state of Europe."

  Worse, he was uninformed about European realities. Worse still, he was intellectually incapable of familiarizing himself with either the European situation or the character of the Peace Conference negotiations. He could be stubborn on some points, but lacked all other pertinent skills. Stubborn resolve could not be effectively applied to more than a few points without destroying the essential relationships among the Allies.
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  On all other points, it was Wilson who was subtly manipulated. He was alone with the other three principals during the "Council of Four" negotiating sessions, and his pride and aloofness prevented him from seeking advice from his delegation. See, MacMillan, Paris 1919, Part I, Reordering Europe, and Part II, The Far East, the Near East, and the Treaty of Versailles.

  "Thus day after day and week after week, he allowed himself to be closeted, unsupported, unadvised, and alone, with men much sharper than himself, in situations of supreme difficulty, where he needed for success every description of resource, fertility, and knowledge."

  Lacking his own plans, he was always working from British or French drafts - always in the position of seeking changes in plans not his own. These drafts included extreme points that Lloyd George and Clemenceau were willing to bargain away to keep what they wanted. To raise too many objections or defend objections too much was to appear "pro-German" and thus lose popular support. Inevitably, some even of the bargaining chips survived to become parts of the treaty.
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The League was the centerpiece of Wilson's hopes and dreams for the future.

  Only the Peace Conference could establish the League of Nations, so Wilson could not be so obstructionist as to threaten the Conference. The League was the centerpiece of Wilson's hopes and dreams for the future. For that he would compromise almost anything else. The others on the Council of Four viewed the League derisively and willingly gave Wilson what he wanted on it to assure their other objectives.
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  Over time, Wilson's popular appeal in Europe waned and his opponents in Congress undermined his popularity at home. He could not afford a failed Peace Conference. His initial position of strength had become fatally weakened. All that was required to get his acquiescence on the objectives of the others was sophistry.
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  Everything was phrased sanctimoniously in terminology conforming to the principles of the 14 points. Thus, limitations on German sovereign rights were rephrased as international rights or rights of Poland or other neighboring states. Reparations were expanded to crushing levels by including such expenses as pensions and separation allowances in the calculation.
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  In the end, it was Lloyd George who had doubts about the harshness of the Treaty. However, by then Wilson had become committed to the Treaty. He could not admit his own failure and refused last minute amendment.
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The Treaty:

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  The economic future of Europe "was not their anxiety."

  This is somewhat of an overstatement. Access to ports and coal and other resources were primary concerns, as were reparations sufficient to cover war debts. However, that was far from an adequate agenda for dealing with the massive economic problems created by the war, and reparations were unrealistic in the absence of free trade.

  The negotiations that led to the Armistice are described in some detail by Keynes. For Germany, it was all clearly premised on the magnanimous terms of Wilson's 14 points and some subsequent statements in addition to German evacuation and restoration of invaded territory, substantial disarmament, and agreement to pay reparations "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." The Peace Treaty should thus have been premised on these terms and should have dealt only with the details of implementation, Keynes insists.

  "Germany having rendered herself helpless in reliance on the Contract, the honor of the Allies was peculiarly involved in fulfilling their part and, if there were ambiguities, in not using their position to take advantage of them."

  Germany didn't exactly comply with the "Contract" terms, either. Instead of restoring and evacuating, the retreating German forces looted and destroyed everything of economic value - especially the vital coal mines.

    Wilson's terms were mostly just generalities - often just expressions of spirit, purpose, and intention - leaving considerable scope for interpretation. However, there were some important definitive terms and they at least should have imposed some limits on the rest..

  Point 3 - Free trade "so far as possible."

  Point 4 - Mutual disarmament "to the lowest point consistent with domestic safety."

  Point 5 - A fair adjustment of colonial claims with specific regard to the interests of the indigenous populations.

  Points 6, 7, 8 & 11 - Evacuation and restoration of invaded territory - especially Belgium.

  Point 8 - Reversal of German seizure of Alsace and Lorraine.

  Point 13 - An independent Poland including access to the sea and inclusion of territories with a majority Polish population.

  Point 14 - The League of Nations.
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  To this must be added the reparations provisions as stated above and Wilson's promise that there would be no punitive damages. Self determination was perhaps the most important of Wilson's general principles, but there were others that were almost as important. Nations should not form cliques within the League of Nations, and every settlement must be in the broad interest of all nations rather than just of particular nations.

  These last two expectations were childishly naïve. Thank goodness James Madison had a firmer grasp on reality. He understood that the U.S. Constitution had to be designed to work in the real world, "because men are not angels." See, Bowen, " "Miracle at Philadelphia," Part I, "Divisive Issues that Threatened the Union."

  These were the basics of the Armistice accepted by the major Allies and Germany. They were largely missing from the Peace Treaty. Keynes concentrates on the economic impact on Germany.
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Economic terms of the Treaty:

 Germany loses Alsace-Lorraine and her colonies and all German owned property therein - both government and private.  This includes the property of Germans living in those colonies. Nevertheless, Germany remains obligated on the prior debts incurred in those territories. A majority of the population in Alsace-Lorraine is German.

  "So far as I know, there is no precedent in any peace treaty of recent history for the treatment of private property set forth below, and the German representatives urged that the precedent now established strikes a dangerous and immoral blow at the security of private property everywhere."

  Similar expropriation provisions apply to German property in the new nations and the remaining territory of the other Central Powers. Up to $5 billion in reparations may be demanded in any form collectible against German property and interests even in neutral nations.

  "This provision has the effect of intrusting to the Reparation Commission for the period in question dictatorial powers over all German property of every description whatever. They can, under this Article, point to any specific business, enterprise, or property, whether within or outside Germany, and demand its surrender; and their authority would appear to extend not only to property existing at the date of the Peace, but also to any which may be created or acquired at any time in the course of the next eighteen months."

  German assets in Allied countries and colonies had been frozen at the outset of the conflict and now need not be returned. They can be used to settle private claims of Allied citizens against not only Germans but also against nationals of the other Central Powers - Austria, Hungary, Bulgaria, Turkey. They can also be applied to reparations obligations. In any event, Keynes casually accepts the socialist concepts that undermine private property rights. These concepts render private property rights "out of date," he says. 
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  The coal mines of the Saar have been permanently taken by France along with occupation rights extending 15 years. If the people of the Saar then choose to rejoin Germany, Germany can buy back the coal mines. Upper Silesia with its important coal mines will be divided with Poland according to plebiscite.
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  There nevertheless are separate requirements that Germany provide France for ten years with coal sufficient to make up for the lost production of damaged coal mines in Northern France and make coal deliveries to Belgium, France and Italy as reparations in kind. Luxembourg, too, is to receive coal from Germany. Keynes offers some rough calculations.
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  Of about 139 million tons used domestically prior to the war, Germany is left with 118 million tons. After 40 million tons are taken under the Treaty, Germany is left with just 78 million tons. This may be as little as 60 million tons due to loss of productive capabilities during the war. The loss of territory and population will somewhat reduce domestic demand. (So too would the termination of war industries and elimination of the fleet.)
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  In fact, all of Europe faces a substantial reduction in coal supplies, Keynes asserts. Germany exported coal to Northern Europe, Switzerland and Austria before the war, but will have none for export any more. Austria now has no coal. Already, by September 1919, the European Coal Commission set up to deal with Europe's postwar coal shortage had cut Germany's coal delivery obligations more than in half. Peace Treaty requirements were proving unenforceable as written.
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  Iron oar and zinc losses from sources in Alsace-Lorraine, Upper Silesia and Luxembourg are also major percentages of Germany's total production.
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The productivity of all Europe will inevitably be disastrously reduced by the new political borders that will cut established flows of industry and commerce.

  Free trade would negate much of these dislocations, but nationalist sentiment and protectionist interests will not permit that. The productivity of all Europe will inevitably be disastrously reduced by the new political borders that will cut established flows of industry and commerce, Keynes again presciently points out.
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  The Treaty limits German tariffs on Allied nation exports for several years, but her exports are subject to Allied nation tariffs. How then can Germany earn the wherewithal to service her debt and reparation obligations?
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  Germany must also provide 5,000 locomotives and 150,000 wagons in good order. This is for the railroads in ceded areas such as Poland and Alsace-Lorraine. The loss of this equipment will hinder economic activity in Germany until maintenance and new production can catch up.
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  Control of Germany's rivers has been placed in international commissions. Germany has only minority representation on these commissions. A certain tonnage of river craft is to be turned over to other nations in a manner similar to the railroad stock.
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Reparations:

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  Wartime monetary damage is being grossly exaggerated. Keynes goes at some length to demonstrate the limits of the damages attributable to destruction of physical and commercial wealth in Belgium and France. Losses to land, buildings, personal wealth, cash, personal property values in all of Belgium, France, Britain and other allies are guesstimated at about $10 billion based on objective academic studies of total national wealth in those nations.

  This would be well over $100 billion in today's debauched dollars. Population densities in those nations during WW-I were much smaller and capital investment much less.

  These grossly inflated claims will not be collectible, Keynes, yet again presciently, points out. This will prove a severe disappointment for the people of the Allied nations who have been led to believe that Germany would be required to relieve them of all their war debts.
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  The popular passions and domestic political considerations behind the Treaty provisions are explained by Keynes. Lloyd George felt impelled to respond to the public outcry to "make the Hun pay." After all, that was the way Germany treated all those that it defeated. The public was in a hanging mood towards the Kaiser.
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  By responding to this public outcry, Lloyd George helped elect a lot of hard-liners to Parliament and significantly increased public expectations. He had thus trapped himself into supporting reparations expectations that could not be fulfilled. He now had bound himself to violate the Armistice agreements by imposing on Germany the full costs of the war - estimated at $120 billion at a minimum. Keynes nails the blindness of this policy.

  "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 and sovereignties but in food, coal, and transport. Neither of them paid adequate attention to these problems at any stage of the Conference."

Restoring the finances of Allies and foes alike and supporting those of the impoverished new nations should have been the central concern of the Peace Conference.

  Magnanimity and free trade were required to deal with Europe's postwar financial problems, not nationalist greed. The U.S. cannot be expected to be magnanimous about war debts if the Allies are greedily squabbling over the financial bones of the prostrate Central Powers. Restoring the finances of Allies and foes alike and supporting those of the impoverished new nations should have been the central concern of the Peace Conference.
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  Keynes provides specific proposals - all of which depend critically on U.S. willingness to write off the war debts.

  Keynes' proposals were thus nonstarters. The Republican Congress had no intention of being left holding the financial bag for the war. It was intent on retreating into isolationism and establishing tariff protections for influential domestic producers. Postwar finance in Europe was thus doomed, regardless of reparations obligations.

  France and Italy were in much worse shape than Britain. Their budgets were hopelessly out of balance, and their existing debts rendered them insolvent. This fact could be ignored only by pretending that their vast debts could be unloaded onto Germany. Thus, Germany's limited ability to make reparations payments had to be ignored.

  "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 liability upon the enemy was not practicable, the position of the Ministers of Finance of France and Italy became untenable."

  This is the common mode of governance when financial demagoguery afflicts a democracy. It can be seen in the way Congress determinedly ignores the realities of its vast entitlement programs and its rapidly increasing budgetary shortfalls and off budget obligations.

  Thus a financial myth was knowingly made the basis of the Peace Treaty. "On the basis of so much falsehood it became impossible to erect any constructive financial policy which was workable." Only a U.S. willingness to compromise the Allied war debts could save the day, and the U.S. offered nothing. (Politically, the U.S. delegation could not offer anything.)
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  In addition to the reparations calculated according to the terms of the Armistice agreement, the Treaty imposes "Pensions and Separation Allowances" obligations to cover payments to families of mobilized soldiers. The armies of WW-I were huge, so these sums are huge. Keynes guesstimates these sums at about $25 billion. This is more than double the reparations figure.
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  They are clearly not ordinary wartime expenses of military action. Nevertheless, the emotional appeal of including them made it impossible for Wilson to object. Words being malleable things, some arguments can be made for them under Wilson's principles and the Armistice agreement. They bring the likely reparations total to something between $32 billion and $44 billion, Keynes guesstimates.

  In 1921, the Reparations Commission would set the figure at $34 billion - itself considerably less than Allied expectations and financial needs. Keynes' calculations thus look pretty good. The French government expected the figure to be $75 billion, but by 1921, passions had cooled somewhat.

Payment:

  Germany had about $625 million mostly in gold and with some silver at the time of the Armistice. However, $250 million had been transferred to cover some of the expenses of provisions for a destitute German population. Further transfers were made to neutral countries to prevent the collapse of the mark. Only $275 million was left by September 1919. This is needed to support the mark. Belgium and France have major holdings in marks from the period of German occupation of their territory and so have an interest in the maintenance of its exchange value.
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  Merchant shipping has been transferred to the Allies to carry emergency food supplies to Germany. It is estimated as worth about $600 million.
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  The vast majority of foreign saleable securities held by Germany was liquidated during the war or has fled abroad. Assets frozen in Allied nations are to be used first to satisfy private claims. Keynes provides considerable statistics and prodigious guesstimates to arrive at about $1.25 billion maximum available for reparations. He believes $500 million to be the most likely figure.
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  Germany will not be exporting more than she imports for some time due to the vast needs of a disrupted economy and destitute population. Thus, there will be no further resources available from her economy. The $500 million initial reparations payment due Belgium is probably the only reparations payment likely in the foreseeable future. Allied nation financial assumptions based on sizeable reparations receipts will be shown to be illusory. Here, yet again, Keynes demonstrates his keen financial prescience.
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  Keynes goes into considerable detail about Germany's prewar trade balance and the likely impacts of her war debts and losses in property, territory and population to guesstimate the ability of Germany to make reparations payments into the future. It might be possible to encourage substantial increases in Germany's exports, but unfortunately all her major exports compete with products produced in the Allied nations. Imports - predominantly food and raw materials - can hardly be reduced very much.
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  Thus, Keynes comes up with a figure of just $250 million per year maximum available for reparations even after the German economy recovers some substantial measure of normal activity. This is capable of servicing a reparations debt of about $8.5 billion. Subtracting what has already been taken from her, this limits to about $10 billion the maximum reparations payable.

  Germany's limited ability to service the Treaty reparations obligations was thus accurately foreseen by Keynes, but his calculations - typical for him - are static. They ignore productivity increases and substitution over time, among other things. For example, there was great increase in the production and use of lignite as a substitute for coal in power plants and some other uses. By the middle of the 1930s, Germany was exporting more coal than in 1913. By 1930, German grain production stimulated by her tariffs had increased so much that Germany no longer had to import any from North America. So much for static analysis and gloomy Malthusian fears.

  The possibility of substantial economic advancement in Germany and substantial increase in productivity are very briefly acknowledged by Keynes, but he considers reliance on those factors foolish. The Peace Treaty has taken away wealthy territories and significant assets and the war itself has left her considerably impoverished. The gain expected from disarmament is swamped by those considerations.

  After WW-II, Germany would suffer considerable additional territorial losses to Poland and her major industries and urban housing stock would be reduced to piles of rubble. East Germany would disappear behind the Iron Curtain. Most reparations obligations had been written off by 1950. Nevertheless, Germany would ultimately pay considerable reparations and would prosper mightily.
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  However, Germany received active assistance during her recovery period after WW-II, and had the tremendous advantage of a world of borders increasingly open to trade. In the absence of the trade war initiated by the United States in 1921, Germany and Europe would have fared much better during the 1920s and the history of the world might have traveled along far more productive and peaceful paths.

The Reparations Commission:

  On the other hand, when the Commission is forced to recognize the realities of Central Power finances it might substantially mitigate the reparations burdens.

  "The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable, -- abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilized life of Europe."

  The final reparations total of $34 billion set by the Commission would indeed be far beneath the fondest hopes in the Allied nations, but still far out of reach for Germany. Methods of lightening this load would be a predominant concern for Allied finance ministers throughout the 1920s.

Economic consequences of the peace:

"The Treaty includes no provisions for the economic rehabilitation of Europe."

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  Evaluating economic prospects in Europe, Keynes is at his prescient best. "The Treaty includes no provisions for the economic rehabilitation of Europe," he points out.

  "[There was] nothing to make the defeated Central Empires into good neighbors, nothing to stabilize the new States of Europe, nothing to reclaim Russia; nor does it promote in any way a compact of economic solidarity amongst the Allies themselves; no arrangement was reached at Paris for restoring the disordered finances of France and Italy, or to adjust the systems of the Old World and the New."
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  "It is an extraordinary fact that the fundamental economic problems of a Europe starving and disintegrating before their eyes, was the one question in which it was impossible to arouse the interest of the [Council of Four]."

European finances and transport are shattered, commercial arrangements destroyed, productivity reduced by the war and now by the peace treaties that broke economically cohesive empires into small nations lacking economic viability.

In Central Europe, the railways are everywhere blocked by new unfriendly borders.

  Europe is an economic and financial mess. Finances and transport are shattered, commercial arrangements destroyed, productivity reduced by the war and now by the peace treaties that broke economically cohesive empires into small nations lacking economic viability. Widespread starvation looms in the defeated Central Powers. There is no way to pay for food or coal or industrial raw material imports. In Central Europe, the railways are everywhere blocked by new unfriendly borders. Inflation is destroying the purchasing power of currencies.

  "Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

  As the U.S. Government determinedly debauches the dollar here in this first decade of the 21st century, this is a lesson that will have to be learned yet again.

The violently fluctuating exchange rates raise commercial risks that discourage production.

  Currencies are in rapid decline as governments are unable or too timid to obtain needed revenues from taxes or loans and so have to resort to the printing presses. The defeated Central Powers and the new emerging states have nothing to export with which to earn the wherewithal to purchase needed imports, yet they must import materials needed for the production of their exports. Moreover, the violently fluctuating exchange rates raise commercial risks that discourage production.

  "There are therefore three separate obstacles to the revival of trade: a maladjustment between internal prices and international prices, a lack of individual credit abroad wherewith to buy the raw materials needed to secure the working capital and to re-start the circle of exchange, and a disordered currency system which renders credit operations hazardous or impossible quite apart from the ordinary risks of commerce."

  The victorious Allies vastly inflated their currencies and increased their trade deficits during the war and now face massive financial problems of their own. Their budgets are unsustainably in debt and they too continue to meet expenses by a vast increase in the currency in circulation. Russia, Poland, Hungary and Austria have no real budget at all. Rampant inflation undermines prospects for recovery.

  "An inefficient, unemployed, disorganized Europe faces us, torn by internal strife and international hate, fighting, starving, pillaging, and lying. What warrant is there for a picture of less somber colors?"

  Europe would be wracked by financial crises throughout the 1920s. See, James, "End of Globalization." It would ultimately descend into the abyss of the Great Depression and drag the U.S. down with it when Wall Street's appetite for foreign loans gave out. See, Great Depression Facts and Mythology, and the seven Great Depression Chronology series articles beginning with The Crash of '29.

Remedies:

  More hopeful is that the new governments taking power in the Allied democracies will view these matters more dispassionately and will support more magnanimous policies. Keynes wisely advises:

• Germany's reparations obligations should be reduced to $10 billion, with $2.5 billion credited on account of assets surrendered by Germany under the Treaty. The remainder should be paid over 30 years without interest. The Reparations Commission should be dissolved, and Austria should be left free from reparations obligations.
• The $7.5 billion in reparations payments should be dedicated solely to the restoration of the battlefield areas - for which by Keynes' calculation they should be adequate.
• Germany's obligations to provide coal to France should be limited to 10 years and a maximum of 20 million tons per year as may be needed to replace coal from ruined French mines.
• Commercial arrangements between Germany, the Saar and Lorraine should for ten years replicate somewhat the prewar commerce in coal and iron oar.
• Control of Upper Silesia should be determined by plebiscite.
• A free trade union should be created that might allow Germany, Poland and the new small nations of Central Europe access to markets and supplies needed for their prosperity.

  "By the proposed Free Trade Union some part of the loss of organization and economic efficiency may be retrieved, which must otherwise result from the innumerable new political frontiers now created between greedy, jealous, immature, and economically incomplete nationalist States."

  The free world arrangements that wound up WW-II would contain magnanimous terms similar to these suggestions - and Keynes in his last years would play an influential role in that process.

Repudiation will become an important political issue.

  Keynes then appeals to U.S. generosity for cancellation of all war debts. This is a proposal already put forward, but already unfortunately firmly rejected.

  Again, Keynes is here one world war too soon. The Republican Congress of the 1920s was not going to accept the financial burdens of the war for all the Allies. That they had little realistic chance of collecting on these debts is besides the point. They could never admit to the American electorate that they had assumed these costs.

  Of almost $20 billion in war loans, over $3.8 billion went to Russia primarily from England and France and was obviously no longer collectible. That granted, England would gain as much as she would lose from a policy of war loan cancellation. The U.S., however, would lose over $9 billion.
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  U.S. financial loans had saved the Allies from defeat in the last two years of the war, Keynes recognizes. Its generous and extraordinarily skillful relief efforts under Herbert Hoover greatly mitigated immediate postwar hardships. However, if the U.S. insists on collecting on these debts, it would leave the victors more heavily encumbered than any of the defeated Central Powers other than Germany. It would thus become impossible to expect the European Allies to be magnanimous towards Germany.

  "A settlement of Inter-Ally indebtedness is, therefore, an indispensable preliminary to the peoples of the Allied countries facing, with other than a maddened and exasperated heart, the inevitable truth about the prospects of an indemnity from the enemy."

  These vast debts will be a constant threat to financial stability and the cohesiveness of Allied relations, Keynes explains at some length. Repudiation will become an important political issue, he concludes yet again presciently.

  "In short, I do not believe that any of these tributes will continue to be paid, at the best, for more than a very few years. They do not square with human nature or agree with the spirit of the age."

  Yet Keynes proposes a $1 billion loan primarily from the U.S. to get European finances working again. (That's chutzpa. Yet after WW-II, the Marshall Plan would be such an effort, and it would not be just a loan.)
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  Finally, and with much less prescience, Keynes suggests that Bolshevik Russia might take her place in European commerce if Allied interventions in Russia were suspended.