John Maynard Keynes had such a long and influential career that it seems incredible it should have started with such a dismal failure – his effort to prevail upon the peacemakers at Paris in 1919. But it is a remarkable story, even a tragedy; Keynes at Versailles would make a superb play, or even opera (I’m thinking along the lines of Einstein on the Beach or Nixon in China.)
Keynes was only thirty-six when he went with the British delegation to Paris as the chief representative of the Treasury. Before arriving he had prepared memoranda on the question of extracting reparations from the Germans. In his first, of 10/31/18, he developed two estimates for an indemnity payment – one “with crushing Germany” and one “without crushing Germany.” He recommended the lower one – the one “without crushing Germany” – not because he had any particular sympathy for the conquered enemy but because, he wrote, asking too much in the way of reparations would “defeat its object by leading to a condition in which the allies would have to give [Germany] a loan to save her from starvation and general anarchy[.]” Moreover, he said, it was one thing to take movable wealth – gold, currency, securities, and so forth – from Germany, but once that had been exhausted, the Allies had to rely on Germany’s capacity to produce for export so it could earn more gold and currency. If Germany had an indemnity bill to pay that was bigger than its current export sector, it would have to increase its exports – and compete with the Allied nations, like Britain, in the export market so it could pay its reparations bill. In other words, if the reparations bill were too large, it could turn into a jobs program for Germany – and a job-destroying program for Britain.
Keynes thus went to the conference with an idea of what a healthy world economic system would look like and in the hope of restoring it. He worked at the conference to make it happen, by seeking reparations that would not crush Germany and which would leave the system of international trade – which in Economic Consequences he would describe as a utopia – a hope of functioning.
He won a small victory. The Americans wanted to unload their surplus pork – as Keynes wrote of Herbert Hoover, the Food Administrator, “When Mr Hoover sleeps at night, visions of pigs float across his bedclothes and he frankly admits that at all hazards the nightmare must be dissipated.” The Germans, suffering meat shortages, wanted to buy food from the Americans. The British supported the Germans. The French did not, believing the Germans needed to hang on to any gold they had in order to pay reparations to France.
Keynes, with the informal permission of a higher-up, broke the rules against fraternization with the enemy to seek a private conference with Dr. Carl Melchior, one of the German negotiators. Keynes liked Melchior a lot, describing him with intended flattery as “[t]his Jew, for such, though not by appearance, I afterwards learnt him to be.” In the moment of their conference, Keynes said, “In a sort of way I was in love with him” – though not, perhaps, sexually; the middle-aged Melchior was not Keynes’s type.
Moved by Melchior’s stories of German hardship and incipient revolution, Keynes prevailed upon Lloyd George to do whatever was necessary to free the German gold – which the Prime Minister did, overcoming French intransigence by a dramatic and anti-Semitic performance, berating the Jewish French finance minister for his fixation on Germany’s “goold.”
The anti-Semitism, not far below the surface in such an assemblage as that one [Keynes wrote], was up in the heart of everyone. Everyone looked at Klotz with a momentary contempt and hatred; the poor man was bent over his seat, visibly cowering. We hardly knew what Lloyd George was saying, but the words “goold” and Klotz were repeated, and each time with exaggerated contempt. Then, turning, he called on Clemenceau to put a stop to these obstructive tactics, otherwise, he cried, M. Klotz would rank with Lenin and Trotsky among those who had spread Bolshevism in Europe. The Prime Minister ceased. All round the room you could see each one grinning and whispering to his neighbor “Klotzky.”
The French folded; the gold flowed.
Keynes next developed a plan to prevent reparations payments from injuring the international system, asking that the defeated nations issue bonds, with a sinking fund attached, which could be used in payment of debts between nations. The bonds would be guaranteed by the Allies, who would also accept them as payment for inter-allied debt. Ultimately, the bonds thus issued might function as an international currency that would liquidate the fetters of debt and leave nations free to plan afresh their reconstruction and development. Austen Chamberlain, the Chancellor of the Exchequer, recommended the plan to Lloyd George, writing,
considering the scheme from a purely business point of view, it is good business for America. It is clear that for a time at any rate the continent of Europe cannot buy except for upon credit. The United States and ourselves are alone in a position to furnish such credits – we only to a limited extent, the United States on a much larger scale. But in default of such a scheme as I am discussing, the United States will have to make her advances on the sole credit of each country – a credit shaken by the ravages of war and of doubtful value. Under this scheme in place of this individual and considerable risk, she would do her trade on an instrument of international credit as secure as any that can be offered to the world.
Moreover, Chamberlain wrote, it was essential that governments solve this problem. “in the financial sphere, the problem of restoring credit is almost certainly too great for private enterprise alone….” The amounts were too large, the risks too great, the credit too long. “The more prostrate a country is and the nearer to Bolshevism the more presumably it requires assistance. But the less likely is private enterprise to give it.”
Lloyd George accepted these arguments, presenting Keynes’s case to Woodrow Wilson, who rejected it – or rather, who permitted the Morgan partner Thomas Lamont to write a rejection over his name. Lamont, like other creditors, perhaps did not want paper, even if they were instruments as secure as any that can be offered. As his grandson later wrote, Lamont in 1919 looked forward to the future and “glowingly viewed the new business prospects for the Morgan bank.” He wanted his goold.
Keynes quit in despair, wrote the Economic Consequences, and became famous – as a Cassandra. It would take the Great Depression and twenty-five years before he would finally attain influence in making international institutions.