The Treaty of Versailles And The Economic Consequences Of The Peace I THE GREAT WAR 1919

This episode of The Great War was made possible by our supporters on Patreon. 2019 slash 1919 was a crazy year for us here at the Great War Channel, and we just want to say a big thank you to everyone who supports us on Patreon. In light of YouTube's recent moves against history channels this year, your support is doubly important to keep history alive and to keep it free for everyone to watch. So please support us and go to patreon.com slash thegreatwar and make your pledge. And now, on to the show. It's December 1919, and an explosive new book has just hit the shelves. John Maynard Keynes' The Economic Consequences of the Peace criticizes the Treaty of Versailles and claims that Germany should be spared economic ruin for the good of all. But Britain and France have their own problems, since across the Atlantic, a new superpower has started to call in its debts. Hi, I'm Jesse Alexander and welcome to The Great War. The First World War was not only a total war in military terms, but also in terms of economic and industrial mobilization. Armies and economies clashed in the quest for victory, and the final triumph of the Allies was in no small part due to their economic superiority over the central powers. But once peace finally came, the question of how to repair the wrecked economies of Europe took centre stage, and it would not be an easy nut to crack. Four years of economic and financial desperation had pushed all belligerent systems to the brink, and it had found them wanting. Very early on in the conflict, it became clear that business as usual was not good enough to maintain a nation at war. Trade was disrupted, industry was converted to war production, and workers were sent to the army. Every state struggled to find the money to keep up the fight. At first, Germany had hoped to rely on short-term tax hikes to pay for the war. However, Germany's federal system meant that the central government in Berlin had little control over taxation in the federal states. In any case, taxation could only cover around 14% of total war costs. The remainder would have to be paid for through Kriegsanleihen or war bonds, that is to say money lent by individuals and companies to the state. And for a while, it seemed to work. In fact, Germany's war bonds campaigns were so successful that it was even able to lend money to its Austro-Hungarian and Ottoman allies. But despite this success, Germany's war debt continued to grow until it was over 90% of total government expenditure in 1918. The country's leaders hoped that the eventual spoils of victory would cover these debts. But this didn't happen, and may not even have worked if they had won. Germany's food supplies, which were poor even at the start of the war, reached crisis levels due to the blockade and a drop in international trade, which resulted in the so-called Turnip Winter of 1916-1917. By 1918, the black market price of meat in Berlin was 25 times its 1914 level. As for Britain and France, they had some advantages over Germany in facing the strains of war – mostly due to their larger empires, more developed banking sectors, and their access to world trade. But even amongst the Allies, spending skyrocketed and debt grew. Initially, France also believed it could self-finance the war through taxation and war bonds, but it was soon forced to borrow from Britain. Then Britain exhausted its money reserves as well, and had to turn to American lenders for capital. At first, the US government allowed US banks to give loans to the Allies. But by 1917, the US government itself was also issuing loans so that Britain could buy food and munitions from American companies. By 1918, Britain was importing around four times more from the US than it had back in 1914, while its exports were negligible. Now, once the war ended, much of Europe and the Middle East was in a state of total economic collapse. Food shortages were severe in many regions, especially where fighting continued into 1919 and 1920, and millions were threatened by famine. The situation was so serious that the American Relief Administration was sent to Europe to oversee the distribution of food to 23 countries, in particular in war-torn Russia. Its budget of $100 million – that's about $1.5 billion in today's money, which was matched by private donations – was testament to the scale of the problem. But in spite of American efforts, millions still went hungry. So, faced with an unprecedented crisis, in immediate economic terms, the Allies had little reason to celebrate when peace finally came. Instead, they now faced the daunting task of piecing together their broken economies. By 1918, Britain and France were heavily in debt, their empires had been weakened, and worst of all, their lenders were now demanding repayment. Luckily for them, they had a heavily industrialized Germany to turn to for payments, and a treaty to enforce them. The Treaty of Versailles established a new order in Europe, and in a sense, in the world. The League of Nations, new borders, demilitarization, occupation, colonial mandates – it was all laid out in the documents signed in June 1919. One of the most controversial aspects was Article 231, the so-called War Guilt Clause, which was added as a legal justification for demanding reparations from Germany. By signing the treaty, the Germans accepted full responsibility for the damaged caused by the war, and for repaying the victors. The Allies knew that Germany would not be able to pay for everything, but the treaty reserved the right to impose penalties for damage to civilian and government property. The Allied and Associated Governments recognized that the resources of Germany are not adequate to make complete reparation for all such loss and damage. The Allied and Associated Governments, however, require, and Germany undertakes, that she will make compensation for all damage done to the civilian population of the Allied and Associated Powers and to their property. The exact amount of reparations was to be determined by a separate inter-Allied Reparation Commission after the treaty was signed. For the victorious powers, especially for France, reparations were critical, since their own recovery and reconstruction of areas devastated by the fighting depended on German payments. So the treaty wasn't just about ending the war and swapping territory. It also had an important economic component that would shape post-war Europe. This has been the cause of much controversy amongst historians, but it was also hotly debated at the time. Foremost amongst the economists who opposed the Versailles Treaty was John Maynard Keynes, a British mathematician and representative at the Paris Peace Conference. Keynes was prominent and was friends with influential figures like Bertrand Russell, Duncan Grant, Vanessa Bell, and Virginia Woolf. He also worked closely with British Prime Minister David Lloyd George, and was central to developing one side of the great debate which gripped the conference. Should Germany be economically crippled for years to come, or should it be allowed to build and rejoin the international community? From the outset, Keynes, who was a conscientious objector, was against the imposition of heavy reparations on Germany, and instead advocated for leniency. Initially, it seemed that Lloyd George was receptive to his ideas. However, he soon discovered that the British public and some of his economist colleagues did not share this point of view, because most Britons wanted Germany to be punished. With Keynes' ideas falling on deaf ears, he became disillusioned and resigned his position at the Peace Conference before the treaty was signed. He then began writing a blistering critique of Versailles and its creators. The Economic Consequences of the Peace was released in December 1919, and was a broadside against Versailles and the peace process, criticised the Big Four, and made dark predictions for Europe's future. Keynes argued that the continent was a single economic unit, tied together not just through geography, but also via a trade system that increased the well-being and quality of life for all Europeans. Disrupting this economic ecosystem with what he saw as impossibly high reparations not only made poor economic sense, but it was downright dangerous. Instead, Keynes claimed that the treaty was mostly dictated by vengeance, greed, political opportunism and even self-delusion, as states scrambled to redraw borders and gain traditional great power prestige, while ignoring the economic realities the war had created. The treaty includes no provisions for the economic rehabilitation of Europe. Nothing to make the defeated Central Powers into good neighbours, nothing to stabilise the new states of Europe, nothing to reclaim Russia. Nor does it promote in any way a compact of 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. Keynes was originally optimistic about the idealism of US President Woodrow Wilson and his 14 points, including the League of Nations. But he would eventually criticise the actions of all the national leaders at Versailles. For Keynes, Clemenceau just wanted to crush Germany into oblivion, Lloyd George wanted to appease the British public in the short term, while the US President became paralysed by domestic ambivalence and an ambiguous desire to do justice, which was easily manipulated by others. Keynes proposed four revisions to the treaty. First, reparations payments, on which no limit had yet been set, should be reduced. Second, Allied debts to the United States should be reduced or forgiven altogether. Third, an international loan for reconstruction should be created, and currency should be reformed. Fourth, Keynes called for a restoration of relations and trade with Russia. But despite the success of his book, which quickly became a bestseller, his recommendations were mostly ignored. Reparations were later partly reduced, and some loans were made available for redevelopment, but Russia appeared to be a lost cause, and the US was under no obligation and in no mood to forgive war debts. So Keynes had written the most famous attack against the Versailles Treaty, but the political leaders had other ideas, and the treaty came into force in January 1920. And though the United States would not ratify the treaty, the Americans definitely did want their money back. Keynes argued that interstate war loans had been forgiven between European nations in the past, and initially Wilson had flirted with the idea of clearing some debts. But by late 1919, his health was failing, and the prevailing political winds in the US favoured isolationism and debt repayment from Britain and France. The need for the Allies to American loans soon led to a sort of game of economic musical chairs in Europe. France owed Britain, and Britain owed the US, and Germany, according to Article 231, owed pretty much everyone. To make matters worse for the Allied nations, the US demanded that loans be repaid in hard currency – that is to say, dollars, gold or treasury bills – rather than in trade. This was to be achieved over a 25 year period, and covered all goods up until the US entered the war in 1917. It even covered arms sent after the declaration of war, but before the arrival of US troops. Faced with the pressure to repay, Britain, and especially France, which had suffered extensive destruction during the war, leaned on Germany as a source of income. But Germany soon defaulted on the reparations payments, and then it also turned to the US for loans. This meant that Germany was using American money to cover reparation payments to France, which then covered French debt to Britain, which then sent it back to the US. All the while, Germany's debt just kept on growing. Also, the disruption of German manufacturing, which had been undamaged during the war, meant that a potential trading partner for France and Britain was out of action. Short-term economic gain could also mean delayed recovery, or worse, for everyone. So the combination of reparations payments and Allied debt to the US had created a fragile economic situation in post-war Europe. In Germany, economic hard times and resentment of the treaty soon had political consequences beyond pure economics. The birth of the Weimar Republic was accompanied by economic chaos. But in addition to the beginnings of inflation, widespread unemployment and the liquidation of personal savings, political violence became a feature of German society. Political street violence was common, and the political centre, which could not stabilise the country, was weakened. Those who benefited were those who proposed extreme solutions, like the Communists and the National Socialists. In the words of journalist-turned-historian William Shirer, such times were heaven sent for Adolf Hitler. Keynes certainly felt that the treaty's economic provisions doomed Europe to a terrible fate. If we aim deliberately at the impoverishment of Europe, vengeance, I dare predict, will not limp. Nothing can then delay for very long that final war between the forces of reaction and the despairing convulsions of revolution, before which the horrors of the late German war will fade into nothing. All the same, Keynes has not been without his critics. Some historians have assessed the impact of the treaty quite differently, and have argued that it did not predestine Europe to its eventual fate in the 1930s. Some have also questioned his claim that reparations were too high to be paid. Others have accused him of focusing too narrowly on utilitarian economics while ignoring the political realities of the post-war climate, in which voters in Britain and France wanted to see Germany punished. In any case, the Treaty of Versailles and the economic consequences of the peace will no doubt continue to inspire debate. What is clear is that as readers cracked open their fresh copies of Keynes' book in late 1919, and the treaty came into force in January 1920, Europe's years of turbulence were by no means over. Alright, it's time for our roundup segment, where we take a look at what else is going on in December 1919. So let's start in Britain, where on December 1st, Viscountess Astor became the first woman to take her seat in the British Parliament. On the 8th, the Milner Commission was sent to Egypt to investigate the political situation following pro-independence agitation. It was boycotted by most Egyptian leaders, who opposed continued British rule. On the 23rd, the Government of India Act was given royal assent. Responding to unrest against British rule, the Act foresaw a gradual increase of Indian involvement in the Government of India. On the 18th, in the disputed city of Fiume on the Adriatic, the population voted to accept an offer of modus vivendi from the Italian government. But nationalist leader Gabriele D'Annunzio refused to accept the results, and the city remained in limbo. In Russia, the Red Army continued to push the white forces of General Denikin towards the Black Sea. Kharkiv fell to the Reds on December 11th, followed by Kiev on the 16th. And finally, in American news, on December 22nd, anarchists Emma Goldman and Alexander Berkman, along with nearly 250 others, were deported to Russia under the 1918 Anarchist Exclusion Act. We want to thank Sherry Wise and Mark Newton for their help with this episode. As usual, you can find all our sources for this episode in the video description, including links to our Amazon stores. To get access to all of our podcast episodes with expert interviews and other perks, you can also support us on Patreon, or click the Join button below. I'm Jesse Alexander and this is The Great War 1919, a production of Real Time History and the only YouTube history channel that is organizing an international commission to demand reparations from YouTube.