Keynes and Versailles, 100 years on

by John Quiggin on June 7, 2019

The 100th anniversary of the Treaty of Versailles is coming back. I have a piece in The National Interest which ran under the headline (selected by the subeditor, as is usual), America Needs to Reexamine Its Wartime Relationships. Keynes first came to public attention with his critique of the Versailles Settlement, The Economic Consequences of the Peace, whith foreshadowed, in important respects, The General Theory of Employment, Interest and Money.

I argue that the rise, fall and rise again of the standing of Keynesian macroeconomics runs in parallel with views on the justifiability of the terms imposed at Versailles and more generally of the use of war as a policy instrument.

{ 26 comments }

1

marcel proust 06.07.19 at 5:47 pm

Several comments on the linked op-ed piece, starting with 3 that range from pedantry to nitpicking (something that will be no surprise to long time readers of comments on this blog).

1) Keynes first book, The Economic Consequences of the Peace,… Selon (because nothing heightens pedantry like the gratuitous use of a French word), Wikipedia indicates that his first book was https://www.gutenberg.org/ebooks/49166.

2)Hitler’s program of rearmament worked as an unplanned form of “military Keynesianism,” … ” Less unplanned and more military Keynesianism avant la lettre, just as much of the rest of the economic program that the Nazi’s initiated on coming to power was Keynesianism avant la lettre.

3) Most notable, and most successful was the Marshall plan, which led to the revival of the West German economy, and was followed by three decades of unparalleled growth and widely shared prosperity. This suggests that it was limited to W. Germany. It led to the revival of all of war ravaged western Europe. The UK and France received much larger amounts of aid than W. Germany, and another 15 European countries also received aid.

Moving beyond these trivialities …

4) In this context, Fischer’s work became the basis of a new, pro-war orthodoxy, in which all the conflicts of the twentieth century were seen as necessary responses to aggression. The Versailles Treaty was reinterpreted as a lenient settlement, and its failure excused in all sorts of ways. I am unaware of this, and curious to learn more about this argument. Can you provide some pointers? Thanks

5) As a result, Keynesian economics has seen a resurgence. The free-market opponents of Keynesianism, while still numerous, have had little to offer in policy terms, and have been marginalized on the political right, their historical home, by the rise of Trumpist populism. It is worth remembering (though perhaps not in the constrained confines of an op-ed piece) that all sectors of the political right appear to be perfectly happy to ignore the idea that governments must pay their debts (however incurred) or be subject to the rightful wrath of the “electronic herd” whenever it comes to either military spending or tax cuts (esp. for the wealthy). Also recall that former VP Cheney said “Deficits don’t matter”

2

marcel proust 06.07.19 at 5:49 pm

Gaaah!!! An edit or preview button is sorely missed on this blog.

1) Keynes first book, The Economic Consequences of the Peace,… Selon (because nothing heightens pedantry like the gratuitous use of a French word), Wikipedia indicates that his first book was Indian Currency and Finance.

3

Colin Danby 06.07.19 at 11:08 pm

1. Was explanatory material edited out? It seems as though the piece tries to link “pro-war orthodoxy” to rejection of Keynesian economics, and I’m not seeing the connection in either logical or even historical terms. “Keynesian economics” is also used super-broadly here, no?

2. “The year 1991 marked a near-complete eclipse of both Keynesian economics and the critique of militarism to which Keynes contributed. In particular, the idea that governments must pay their debts (however incurred) or be subject to the rightful wrath of the ‘electronic herd’ re-emerged as a central element of the “Washington consensus.” This also seems odd. If we are discussing the relative eclipse of mainstream “Keynesianism” in economics, that would be a bit earlier, I think. And at least in John Williamson’s canonical article, “fiscal discipline” does not require a balanced budget.

This might also be the moment to remind people of the _Tract on Monetary Reform_ and JMK’s lifelong interest in anti-inflationary policies. It’s unhelpful to use his name as a mere synonym for lots of gov’t spending.

4

Peter T 06.08.19 at 4:18 am

Ferdinand Mount makes some good points in the LRB:
https://www.lrb.co.uk/v41/n11/ferdinand-mount/why-we-go-to-war

5

LFC 06.08.19 at 12:25 pm

@ m proust

Since we’re doing pedantry, if one is going to use that French word gratuitously, I’d use it this way:

“Selon Wikipedia, Keynes’s first book was [etc.]…” (B/c “selon” translates as “according to”.)

By contrast, what you’ve written — “Selon, Wikipedia indicates [etc.]…” — doesn’t really work.

6

steven t johnson 06.08.19 at 1:12 pm

Peter T @4 cites a fellow who rhetorically asks “Where is Karl Marx now we need him?”

To be so rude as to answer, Karl Marx is as ever a primary target of the academy, serious opinion makers and the wealthy and their employees. But it seems to me that Mount really wants Karl Kautsky, who day dreamed about an ultraimperialism capable of peacefully resolving economic conflicts. It’s unclear whether the goal was to preserve the status quo with minor modifications, or to resolve the problem of declining powers with the geostrategic equivalent of bankruptcy court? At any rate, in practice Kautsky’s ultraimperialism is best displayed by NATO attacking Serbia and Libya. Or possibly by the way the EU satisfies the people’s need in Greece or Italy.

Mount also seems to me to presume that anyone power which wants to change things is aggressive. The US government has officially called such powers “revisionist.” If we are to talk about the materiality of war, it seems to me that we should accept as a cardinal principle that new orders are established according to the balance of powers. And that this can only be done practically, by contesting each other in war. To put it in other words, the verdicts of WWI can only be reversed by another war.

I think Marx’s attitude towards imperialism is complex but the most mature expression is in regards to the example closest to hand: Ireland. As I understand it (not an expert, to be sure,) he was not very favorable. Also, internationalism seemed to have something to do with his life work?

7

Stephen 06.08.19 at 4:28 pm

Marcel Proust, point 4 re Fischer’s work: “The Versailles Treaty was reinterpreted as a lenient settlement, and its failure excused in all sorts of ways. I am unaware of this, and curious to learn more about this argument. Can you provide some pointers?”

Well, a rather obvious one would be for you to abandon internet resources and read Fritz Fischer’s “Germany’s aims in the First World War” (paperback on Amazon, £17.99, not sure what it would be for you in euros, you being a Frenchman). You could follow it up with Fischer’s “War of illusions; German politics from 1911 to 1914” (used hardcover, £40).

There has been of course some reaction against Fischer, mostly along the lines of well, if other European powers had been aggressive and dominating outside Europe, why shouldn’t Germany have been aggressive and dominating inside Europe? Go look it up.

For a detailed and more modern approach, I would recommend JCG Rohl, especially
“Wilhelm II: Into the Abyss of War and Exile, 1900–1941”, £37.99 paperback. This deals with the catastrophic defects of pre-1914 German politics.

8

John Quiggin 06.08.19 at 5:31 pm

“There has been of course some reaction against Fischer, mostly along the lines of well, if other European powers had been aggressive and dominating outside Europe, why shouldn’t Germany have been aggressive and dominating inside Europe? “

Or, to turn this around, since the Entente powers fought the war with the intention of (among other territorial goals) carving up the Ottoman empire between them, the idea that Germany alone was guilty of aggression doesn’t stand up to scrutiny.

9

Stephen 06.08.19 at 6:13 pm

Are you sure that “the Entente powers fought the war with the intention of … carving up the Ottoman empire between them”? An alternative explanation would be that, a good time after the German invasion of Belgium, the First Marne, and various sanguinary episodes in the Balkans and on the Eastern Front, the Ottoman Empire launched an unprovoked attack on Russia (Oct 29, 1914, if you’re looking for details) which lead to France and Britain coming in to support their already-committed ally; after which they had, naturally, hostile intentions towards the Ottoman Empire. If the Ottoman Empire had decided on a policy of continuing neutrality, would Russia, France or Britain have lifted a finger against them? Are you suggesting the the correct Entente policy should have been, it’s quite all right for the Ottomans to attack one of us but heaven forbid that we should respond?

10

Peter T 06.09.19 at 12:29 am

Stephen has this one right. The Sykes-Picot agreement was 1916. The British and French had supported the Ottomans pre-war, and took no steps to initiate hostilities until the surprise Turkish naval attack on Sevastopol in late October 1914 (there was a British naval assistance mission in Constantinople which withdrew at Ottoman request in September 1914).

Quite why the Ottoman government sided with Germany and Austria remains a bit of a mystery. The government was a close cabal, and many members did not survive the war and aftermath.

11

J-D 06.09.19 at 3:59 am

My recent preference has been to blame Pitt the Elder for the First World War; I suspect myself of taking this position because it is (as far as I know) unique to myself. Perhaps in a few years time I will have abandoned this theory for another one, even less likely to find other adherents.

In 1936 somebody told Keynes that she wished he’d never written The Economic Consequences Of The Peace and (or so she wrote) he surprised her considerably by concurring. If Keynes’s later opinion differed from his earlier opinion, that’s insufficient basis to conclude that he was wrong to begin with and right later on (people change their minds, but not always in such a way as to correct themselves). But in a discussion of reassessment of Keynes’s views, there’s a place for consideration of Keynes’s own reassessment.

12

John Quiggin 06.09.19 at 4:23 am

“The British and French had supported the Ottomans pre-war,”

Russia was also an Entente power.

“Quite why the Ottoman government sided with Germany and Austria remains a bit of a mystery.”

Because they had ought an alliance with Britain and been turned down. Neutrality was a high risk option, though it would have been a better choice.

13

Another Nick 06.09.19 at 5:48 am

Stephen: Are you sure that “the Entente powers fought the war with the intention of … carving up the Ottoman empire between them”?

The Constantinople Agreement was signed 4 and a half months after German-commanded Turkish ships bombed the Russian coastline. Correspondence initiating those negotiations – and declaring in no uncertain terms what the negotiations were to be about – is documented from 19 Feb 1915, a month before the signing.

I would have thought it’s fairly indisputable the Entente powers “fought the war with the intention of… carving up the Ottoman empire between them”.

Stephen: Are you suggesting the the correct Entente policy should have been, it’s quite all right for the Ottomans to attack one of us but heaven forbid that we should respond?

Neutralising and defeating an aggressor is one thing. Declaring from the outset a plan to “carve up its empire” is another.

14

J-D 06.09.19 at 6:04 am

The present Turkish Government advocates revision of the 1923 Treaty of Lausanne, the last part of the post-WWI settlement; the present Greek Government is opposed to this:
https://www.trtworld.com/magazine/turkey-still-debates-whether-treaty-of-lausanne-was-a-fair-peace-deal-14632

15

John Quiggin 06.09.19 at 7:58 am

The British (because they were already on top) and Ottomans (because they could only lose from change) were the empires most supportive of the status quo, and therefore least keen on war. But the British were allied with Russia*, which was keen to expand at the expense of the Ottomans. So, they ended up on opposite sides

In any case once the war started, all the belligerent powers wanted territorial gains and none was interested in settling for peace without victory. The idea that German guilt proves Entente innocence doesn’t stand up.

* This point is critical, and routinely ignored by Britain’s defenders. German propaganda about the Russian threat might have been self-serving but it was based on fact. And, in the end, Britain went to war because of the alliance with Russia.

16

Peter T 06.09.19 at 8:09 am

Russia certainly had eyes on Constantinople and the Straits (although not on the rest of Ottoman territory. It was a prominent Russian aim. Britain – and to a lesser degree France – were ambivalent. They certainly did not go to war with the intent of carving up the Ottoman Empire – they would have preferred Ottoman neutrality (for one thing it would allow them to supply Russia). When the Turks attacked, then the question changed – to one of “what do we do if we win, given that the Ottomans are likely to fall apart anyway?” The Turkish suggestion of a British alliance was just a routine diplomatic feeler – that the British declined certainly did not preclude neutrality (the least risky option), or even commit the Ottomans to any particular course in 1914 (see the Italian and Rumanian cases).

Since Fischer, a great deal of historical work has established fairly firmly that the key problem in European relations was Germany . It refused to participate in international conferences after 1909, refused British offers of a halt to the naval arms race, considered preemptive war against Russia in 1906, made bellicose speeches and threats at every opportunity. German war aims from the outset included a chunk of France, the Belgian coast, a satellite Ukraine and maybe some of Poland.

Worth noting that Bismarck, Caprivi, Bethmann-Hollweg – and the at least equally powerful Chiefs of Staff (the Moltkes, Schleiffen, Falkenhayn) – were all Old Prussian aristocrats, steeped in the Prussian tradition of militaristic expansionism. This was not a liberal state.

17

Peter T 06.09.19 at 8:24 am

But rather than re-hashing the causes of World War I, John’s point about Keynesian macro-economics elides a crucial point: it is not enough to spend to escape a depression, it matters what you spend on. The right has no problem with state spending – so long as it is on existing elites. But to be really effective, fiscal expansion has to spend on re-structuring the economy – so altering the existing social order. This may be tolerable when faced with a serious external threat, when the alternative may be defeat or worse. EG, the British state spent heavily on industrial development throughout the C18, all the European states did so from 1870 to roughly 1980, the US from 1936 to 1980. Keynesian policies go hand in hand with industrial policy – and this is the root of the objection to them.

18

John Quiggin 06.09.19 at 10:46 am

@17 I agree with all of this, though I’d extend it more broadly beyond industrial policy. Keynesian reliance on the state as the guarantor of full employment inevitably weakens the position of business and in particular the importance of “business confidence”.

let’s leave the causes issue for now. My main point was the idea central to Versailles, that a substantial part of the cost of the war could be extracted from Germany as reparations.

19

Peter T 06.09.19 at 11:23 am

On reparations, I think Keynes missed the point. For the French, reparations – and still more the military clauses – were meant to hobble German militarism – the control by the German military of the state. They saw this – correctly I think – as the central problem (in that the German military elite were committed to expansion and the repression of left wing forces at home). They failed, in part for lack of allied support, in part because Hindenberg and co anticipated them by handing over responsibility for defeat to the German left and ensured that the military remained a state within the state through Weimar. And then were instrumental in bringing Hitler to power.

The German military really were a problem analogous to Republicans in the US. They exercised a veto power over movement towards liberal solutions.

20

steven t johnson 06.09.19 at 2:03 pm

Peter T@19 credits the French in particular with the goal of restraining German militarism. I think if that were their goal they would have tried to intervene into domestic German politics, favoring land reform, tax reform, massive expansion of post-secondary education, removing the aristocracy from their privileged role in the officer corps, etc. In particular, they would have found the activities of the Freikorps to be essentially a militarist counter-attack. I think ultimately the French too preferred German militarism to German leftism

A note on Russian war aims: The Bolsheviks anticipated Fischer in publishing Russian documents, which thoroughly proved the aggressive intentions of both the tsar and the democratic government. But this is unlikely to have been a surprise to the Turks, who had seen two Balkan wars, the Austro-Hungarian annexation of Bosnia-Herzegovina and such, targeting the Ottomans. World War I began as the third Balkan war, after all.

So the Turks seeing themselves as targets was merely realpolitik. The Young Turks were taking over at this point, in the kind of democratic revolution that starts by building the national state…but the prospects of Greeks supported by the English or the Bulgars supported by the Russians made neutrality look like waiting for a war without allies.

The notion that only the powers seeking to revise the world order could be deemed aggressors needs rather more support I think. I also think the English entry into the Great War is inexplicable save as the state taking responsibility for—aggressively—maintaining the status quo in among nations. (I’m afraid I rule out moral outrage over Belgium as a factor in anything but propaganda, and so far as I can tell the issue of English entry was anyhow already decided.)

Again, Kautskyan ultraimperialism requires either the status quo be maintained forever, which is ultimately folly. Or it requires that somehow the ultraimperialist order peacefully rearrange itself. It seems to me that what we really have is a single power that won acts as primus inter pares in the great powers, and sets the terms. Changing this means ultimately war. In the meantime, the decay of the hegemon (to borrow a term) requires repeated demonstrations of force, prudently against weaker powers.

Keynesian industrial policy went away because it turned out that it couldn’t guarantee continued economic growth, or for that matter development in weaker nations. Keynesian economics still has no real theory of changes in the general profit rate so far as I know. It sees growth as the norm, with government intervention to correct the market failure due to bad policy of allowing rentiers to collect checks. (It’s true I read the General Theory in 1972, so bear with me, please.)

So I’m not sure that Keynes’ Economic Consequences was correct that reparations were the bad policy hampering world growth. The withdrawal from the Ruhr, Stresemann’s Locarno pacts, the Dawes and Young plans effectively undid Versailles. But undoing Versailles didn’t prevent even worse economic consequences, did it? Trashing the economy for the sake of a gold standard seems much worse.

21

LFC 06.09.19 at 3:27 pm

Small footnote on the diplo history: Bismarck’s alliance system helped prevent a general war in Europe, esp via the German-Russian agreement called the Reinsurance Treaty. It lapsed with Bismarck’s departure in 1890. Not necessary to be an overall fan of B. to acknowledge that he was a virtuoso diplomat and his successors weren’t. A problem w B’s system is that it needed a highly skilled diplomat to manage it successfully — reassuring Austria-Hungary while not alienating Russia too much was a delicate balancing act, perhaps unsustainable in the long run. P.s. I agree w Peter T re the illiberal character of the German polity etc in these decades.

22

Stephen 06.09.19 at 3:32 pm

JQ: if you will forgive me, I’d like to go back to your original article (which you cited) in The National Interest. There, you wrote of Keynes and the pacifist Bloomsberries: “Few shared the official view of the War as a triumph over German aggression. Rather, they saw it as a catastrophe, in which Germany was, at most, the first among equals in creating the disaster.”

Now, that is I think an accurate statement, and reflects Keynes’s views post-1918 on the war; though “first among equals” is surely a piece of weaselspeak, either they were first or they weren’t. @8 you have modified it to read “the idea that Germany alone was guilty of aggression doesn’t stand up to scrutiny”.

And @15 you have modified it further, “once the war started, all the belligerent powers wanted territorial gains and none was interested in settling for peace without victory. The idea that German guilt proves Entente innocence doesn’t stand up”.

Aren’t you moving the goalposts here? The initial argument was about Turkey or Germany were guilty of starting aggressive wars. Given that Turkey started the eastern war by bombarding Russian ports, and Germany started the western war by invading Belgium (to whose neutrality they were by treaty committed), and the Entente did nothing comparable, that is surely true. I am not impressed by arguments that Turkey and Germany were only getting their retaliation in first.

But you have now switched to arguing that neither the Entente nor the Central Powers, once the war was set going (through the aggressive actions of the Central Powers) were interested in settling for peace without victory. That is rather different from guilt for starting the war; wouldn’t you agree?

In any case, it would be useful if you could explain what “peace without victory” would have meant. Preservation of the Hapsburg and Ottoman empires intact? Maybe not an altogether bad idea, given what came after them. Preservation of the Romanov Empire intact (ditto, redoubled in spades)? Were any of these seriously offered by one party or the other? Could they have been?

And critically: what about the initial German conquests of economically very valuable territory in Belgium and northern France (to say nothing of the German treatment of the conquered populations). Was it ever on the cards that the Germans would have apologetically withdrawn? If not, what would have become of peace without victory?

23

Hidari 06.09.19 at 5:09 pm

@18 ‘I agree with all of this, though I’d extend it more broadly beyond industrial policy. Keynesian reliance on the state as the guarantor of full employment inevitably weakens the position of business and in particular the importance of “business confidence”.

This would seem to be an allusion to Kalecki who ‘predicted’ (or to be more specific, implied) that the Keynesian revolution would ultimately fail because not having full employment (and, its corollary, having a ‘reserve army’ of unemployed labourers, willing to (e.g.) break strikes, to serve as an example ‘pour encourage les autres’ etc.) was more important to capitalists then profits per se.

And so it proved, with the Thatcherite and Reagan counter-revolutions removing, step by step, the Keynesian ‘infrastructure’ in order to permit the creation of a more inegalitarian, more unequal society, but one in which there would be more ‘freedom’ for the 1% to make super-profits, and more misery and insecurity at the bottom, to help create ‘discipline in the factories and workplaces’.

https://delong.typepad.com/kalecki43.pdf

To the best of my knowledge, most ‘mainstream’ Keynesians simply sidestep (or ignore) this problem, and assume that ‘ultimately’ the capitalists will see that high growth, low unemployment etc. will ‘ultimately’ be seen as a good thing by the capitalists because ‘ultimately’ its in their best interests. ‘Tain’t so, and the ‘ultimate’ hostility of capitalists to even extremely moderate centre-left parties is not because they (i.e. the capitalists) are the victim of ‘false consciousness’ but on the contrary because they see very clearly where their true class interests lie.

Given that we live in a society where capitalists, essentially, control everything, this also indicates very clearly why the ‘glory years’ of les trentes glorieuses are not coming back anytime soon.

24

J-D 06.10.19 at 11:25 am

John Quiggin

My main point was the idea central to Versailles, that a substantial part of the cost of the war could be extracted from Germany as reparations.

Obviously it was a term of the treaty that Germany should pay reparations, but it’s not clear to me what it would mean to say that idea was ‘central’.

That aside, it’s interesting to me to note that after the Second World War, Germany not only resumed payments related to First World War reparations but also was required to provide compensation (not exclusively in cash, but in cash and kind) for the Second World War. The final payment on a revised schedule was made in 2010: that is, the German position is that those payments, by negotiated agreement, finalised all claims, but both Poland and Greece have argued that additional compensation (for the Second World War) is still owing. Obviously the payments Germany has actually made were within its economic capacity (for the German economy is not ruined), nor is it clear that its economic capacity to make compensation is exhausted (although whether it should meet the further claims made by Poland and Greece is a different question from that of whether it’s possible).

25

MFB 06.12.19 at 7:26 am

I think a lot of this leaves out the way in which the extreme right and the militarists in Britain tended to be the biggest supporters of extreme reparations. It seems to me that a lot of Keynes’ point in Economic Consequences was an attack on the “till the pips squeak” faction. Hence it’s not very surprising that his actual economic analysis was distorted.

The whole point of this faction’s calls for reparations (and for the Morgenthau plans during World War II) was to reduce Germany to an economic basket case, on the assumption that Germans were racially military aggressors and therefore had to be disempowered in perpetuity. Keynes’ liberal views saw this as intolerable; also he saw Europe as needing German industry to grow.

I’d say he was more right than wrong in this regard.

26

J-D 06.12.19 at 11:34 am

MFB

The disempowerment of Germany after the Second World War was much more comprehensive and much more effectively enforced than the disempowerment of Germany after the First World War: which strategy worked better?

Did Keynes have anything to say about the treatment of Germany by the victorious powers after the Second World War?

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