1

                                                     Imperialism disguised as peace:
                            How Keynes' The economic consequences of the peace exposed
                               the inherent economic imperialism of the Treaty of Versailles.

                                                                  SYNOPSIS

       The Economic Consequences of the Peace by John Maynard Keynes was written to expose the fact that the Allies, in particular Britain and France, were taking advantage of Germany's defeat to impose upon it a severe form of economic imperialism. Their aim was to destroy the foundations of Germany's economy, by breaking up the most vital parts of Germany's pre-war industrial infrastructure. That is, the systematic expropriation of much of Germany's coal and iron industries; the expropriation of its colonies and merchant marine, and the economic isolation of Germany internationally; and the imposition of International Commissions, in particular the Reparations Commission, to effectively take over the administration of the German economy. These actions were designed to impoverish Germany, leaving it enfeebled and helpless, and then, by forcing it to pay massive reparations, keep it impoverished and weak for decades. With Germany militarily and economically powerless, Britain and France would then be free to advance their economic and political interests throughout Europe without resistance from Germany.

       With the defeat of Germany, Britain and France realized that they were being given a golden opportunity, not only to demilitarize Germany and remove it as a military power, but also to remove Germany as an economic and political power in Europe. Keynes, seeing the process from the inside, realised the full magnitude of what the Allies were really trying to achieve. The economic consequences of the peace was written to show the economic consequences to Germany from the decisions reached at the Paris Peace Conference in 1919.
       What Keynes was showing, was that the Allies, particularly Britain and France, were attempting to exercise a form of economic imperialism over Germany, where not only German military power, but also economic power would be crushed and subordinated to the economic and political interests of Britain and France.1 This was to be achieved in three main ways; by the dismemberment of much of Germany's most important industries, particularly coal, iron, and steel, and their transfer to other European nations. The reduction of Germany's economic position internationally through the expropriation of German colonial territory and other international assets, both state and private property, along with the expropriation of Germany's merchant marine fleet. And the imposition on Germany of the Reparations Commission, and other International Commissions, with sweeping powers over the German economy, which effectively reduced German economic and political sovereignty, and placed it in the hands of the Allies. Essentially, what the British and French aimed at was the bankrupting of Germany, then, by making it pay huge reparations, keep it weak, vulnerable, and most importantly, under their control.

       For Keynes, the Peace Treaty, as it evolved over 1919, represented not simply the punishment of Germany for having undertaken an aggressive war, but was in fact an instrument of British and French economic imperialism against Germany. This economic imperialism was aimed at achieving three main objectives; the impoverishment of Germany over both the short and long term; the undermining of Germany's control of its own economy; and the reduction of German economic power in Europe, and beyond, and the expansion of British and French economic power in its place.
       These objectives were to be achieved, firstly, by breaking up the German industrial base by the expropriation and transfer of territory in Europe (particularly to France and Poland) with important resources, industries, and industrial infrastructure such as coal, iron-ore, blast furnaces, steel mills, and railroads. In total, Germany lost one-third of its coal reserves (not including reparations to be paid in coal), three-quarters of its iron-ore reserves, 38 percent of its blast furnaces, and 10 percent of its steel mills.2
       The significance of this was that these industries, in particular iron and coal, were the foundations of the German economy, they were the very heart of Germany's economic power. By breaking these industries up, the German economy was effectively emasculated, which would have a devastating flow-on effect throughout the rest of the German economy on industries reliant on the coal and iron industries. Keynes recognised the impact this would have when he wrote:

       The German Empire has been built more truly on coal and iron than on blood and iron. The skilled
       exploitation of the great coalfields of the Ruhr, Upper Silesia, and the Saar, alone made possible the
       development of the steel, chemical, and electrical industries which established her as the first industrial
       nation of continental Europe. In striking, therefore, at her coal supply, the French politicians were not
       mistaking their target. [It was nothing short of] an act of spoilation [on the part of the Allies.]3

By targeting coal and iron production and supply, the Allies would reduce Germany's industrial strength at its core. Since these were important export commodities, the significant reduction of these meant that Germany would be unable to import the essential raw materials it needed for its industries to operate.4 If Germany was then forced to export what was left to it as reparations, then Germany's industrial capacity would be reduced even further. In fact, as Keynes argued, Germany in 1919, even without the drain of reparations, could not produce enough coal even for its domestic use, and would actually need to import if it was to maintain its industries. Whereas, if required to export coal, German industries would be forced to close down.5
       Clearly, even without the drain of reparations, Germany would experience a significant down-turn in both its actual and potential productivity, and therefore its national wealth. By reducing Germany's supply of coal and iron-ore below the minimum necessary to sustain its existing industry, Germany would experience, at least in part, what was basically forced
de-industrialization. And as Marx observed, "[Force] is itself an economic power."6 Moreover, by expropriating territory rich in natural resources, Germany's supply of these through imports could be regulated, at least to some extent. This would act as a further brake on Germany's productive capacity and economic power, as well as providing an additional economic and political lever for the Allies with which to control Germany's activities. Essentially, through territorial expropriations, the Allies aimed to break-up Germany's industrial cohesivness, to split its industrial and economic strength amongst countries (in this case France and Poland) that had an interest in a weak (both militarily and economically) Germany, and thereby undermining the German economy at the organisational and structural level.7 Germany's industrial hegemony in Europe was to be destroyed, and Germany would be left in a state of, if not economic collapse, then certainly severe economic distress and deterioration. For Britain, the partial
de-industrialization of Germany was a way of regaining its lost industrial position in relation to Germany, as Germany since 1910 had been producing double the amount of steel and 50 percent more pig iron than Britain.8 While France hoped such actions would enhance its economic power, by giving it the opportunity to replace German industry, and therefore German economic power and influence in Europe, with its own.9

       Having undermined the German economy at its most fundamental level, its industrial base, the next step in France and Britain's imposition of economic imperialism over Germany, was against Germany's ability to export and trade beyond Europe, and to reduce Germany's economic and political presence in the world generally. This process began with the expropriation of Germany's colonies. This included not only the territory itself, but also the seizure of German owned private property within the colonies. Further, German owned assets outside of Germany and its colonies could also be expropriated. All assets, whether state owned or private property, could be seized without compensation.10
       The effects of these actions would not be inconsiderable to Germany. By taking the German colonies the Allies would further reduce Germany's access to non-foreign controlled sources of raw materials, further increasing their control over the German economy, as well as taking away a market, however small, for German exports. More importantly, as Keynes points out, is that these actions would eradicate German economic and political influence in its former colonies, and in the process reduce German nationals to second class persons. Keynes writes:

       In short, not only are German sovereignty and German influence expirpated from the whole of her former
       colonies, but the persons and property of her nationals resident or owning property in those parts are
       deprived of legal status and legal security. 11

When this is combined with the expropriation of German assets, both state and private, in other non-Allied countries, both inside and outside Europe, it becomes clear that the Allies were attempting to reduce German economic connections and influence world wide. This becomes evident when it is seen in relation to Article 258 of the Peace Treaty, which states that Germany must renounce its right to participate in any international economic or financial organisations which are "operating in any of the Allied or Associated States, or in Austria, Hungary, Bulgaria or Turkey, or in the dependencies of these States, or in the former Russian Empire."12 Considering that this covered most, if not all, of the industrialised, and therefore major economic nations of the world at the time, Germany was effectively out in the cold as regards playing an important role in the world economy. As Keynes saw it, "Generally speaking, only those pre-war treaties and conventions are revived which it suits the Allied Governments to revive, and those in Germany's favour may be allowed to lapse."13 Although, as Keynes notes, Article 258 was not substantially injurious to Germany economically, it would nevertheless have assisted the British and French by reducing the ability of Germany to have its voice heard over questions of international trade and finance, and in reducing Germany's ability to negotiate new trade agreements, particularly in Europe and other areas of importance to British and French economic and political interests.14 The Allies, in effect, would be determining to a substantial amount what Germany's external economic interests were to be.
       Alongside these measures, Germany was forced to hand over all vessels in its merchant marine over 1600 tons gross, and from half to one-quarter of the rest of its commercial fleet; this included German owned vessels under other flags, and ships under construction. Moreover, Germany was required to build up to 200,000 tons in new shipping every year for five years to replace Allied shipping lost during the war.15
       This is where real damage could be done to the German economy. With most of the German merchant marine in the hands of the Allies, Germany would become reliant on the Allies for its shipping needs. The Allies would be able to undermine Germany's ability to trade beyond Europe by effecting the cost and reliability of delivery of German exports. Keynes shows this when he writes:

       Germany will have to pay foreigners for the carriage of her trade such charges as they may be
       able to extract, and will receive only such conveniences as it may suit them to give her.16

The Allies could simply make insufficient shipping available to Germany for its export needs, or alternatively raise the fees to a prohibitively high rate. These would be very useful tools for undermining German competitiveness in markets where the Germans were, or had been, major competitors to the Allies. In fact, as Keynes shows, Britain would be certain to benefit from Germany having no independent commercial fleet. In relation to German exports of Iron goods, machinery, coal and associated products, woollen goods, and cotton goods, which in 1913 made up 39.2% of Germany's exports, he notes:

       It will be observed that all these goods are of a kind in which before the war competition between Germany
       and the United Kingdom was very severe. If, therefore, the volume of such exports [from Germany] to
       overseas or European destinations increased the effect upon British export trade must be correspondingly
       serious.17

The economic benefits to Britain by reducing Germany's ability to export become obvious, Britain aimed at protecting its existing export markets, and hoped to gain by having its exports replace German exports, and hence the incentive to deprive Germany of its commercial fleet.
       Furthermore, Germany's reliance on the Allies for shipping would be increased by the requirement for it to build new shipping to replace Allied loses. When this is combined with Germany's loss of iron-ore and other steel making resources and infrastructure, and where it did not have enough resources even to maintain its existing industries, its ability to find the resources to build a whole new fleet was next to impossible. Indeed, even if Germany could find the resources, then the Allies could demand they be used to build ships for them, not Germany. So not only was Germany to be deprived of its existing fleet, it was also to be restricted in its ability to build a new fleet for at least five years, probably longer. No wonder Keynes wrote of this:

       Thus the German mercantile marine 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.18

For all intents and purposes, Germany, at least until it could rebuild its commercial fleet, would be at the mercy of the very countries who were its major export competitors. It would be they, not Germany, who would determine Germany's access to the world market. Hence, the Allies were determined to reduce such access, and in the process eliminate as far as possible Germany's export industry.

       The third, and in many ways most destructive tool of economic imperialism, was the imposition on Germany of various International Commissions, such as the various river commissions, and in particular the Reparations Commission.
Under the Peace Treaty Germany was not only to hand over at least one-fifth of its inland navigation tonnage and other river craft, but was to hand over the administration of its major water ways (the Elbe, the Oder, the Danube, and the Rhine) to International Commissions. Even though Germany was allowed representatives on these commissions, it was to be kept in a minority position, while of the Allies, only Britain and France would be represented on all the commissions. These commissions had the power and responsibility of maintaining, controlling, and improving the river systems, setting the regulations, as well as financial control and the fixing of charges.19
       So not only was Germany's external transport to be taken away, much of its internal transport was to be placed under direct foreign control. This would give Britain and France the ability to know much of what Germany was producing and where it was going. With the power over maintenance and improvement of the river systems, the British and French could, if they wished, oversee the gradual deterioration of Germany's river transport system, until it was sufficiently inefficient to suit their economic interests. This was also true of fixing the fees and charges, which, like shipping fees, could be set to suit the economic interests of the Allies. Of this Keynes wrote:

       Thus the great waterways of Germany are handed over to foreign bodies with the widest powers;
       and much of the local and domestic business . . . [of Germany] will be subject to a foreign jurisdiction.20

       The Reparation Commission on the other hand, was an altogether more serious body than the river commissions. Its role was to oversee and make sure Germany paid its debts as determined by the Peace Treaty. It had the power to seize, without compensation, any property, assets, and raw materials as part of Germany's reparations. It even had the power over how much of these would be returned to Germany in order to keep its economy functioning.21 If this was not enough, the commission had the power, in the words of the Treaty, to "examine the German system of taxation", in order, among other things, to "satisfy itself that, in general, the German scheme of taxation is fully as heavy" as the Allied powers.22 On this commission, Germany was not allowed representation.23 Its powers, therefore, were little short of enormous.
       Such sweeping powers gave the commission power over the whole of the German economy. It could decide which industries were to thrive and which were not, simply by its control over the supply of raw materials. This meant the Commission could determine the level of German industrial production if it chose. The fact that it could expropriate virtually any assets and property, gave the Commission the power to reshape or restructure the German economy to what was desired by the Commission's member states. And all this could be done under the cover of ensuring Germany paid its debts to the Allies. Moreover, the power to 'examine' the taxation system, effectively gave the commission the power to determine the rate of Germany's taxation, and just as significantly, the power to determine the level and purpose of Germany's internal expenditure.24 In other words, the Commission all but controlled the German treasury, and therefore the government and the nation. This was not lost on the German Delegation, which stated:

       The Commission, . . . will possess in Germany incomparably greater rights than the German Emperor
       ever possessed: the German people under its régime would remain for decades to come shorn of all
       rights, and deprived, . . . of any independence of [economic] action. [In such a situation] . . . German
       is no longer a people and a state, but becomes a mere trade concern [of] its creditors . . .25

So the German economy was to be controlled by the Allies. Again Britain and France, along with the United States and Italy, were to be permanently represented on the Commission, and were to be involved in all proceedings concerning all economic questions.26 Germany would, for the life of the Treaty, be effectively under the control of the Commission, both economically, and to an extent politically. In such as situation, the German government would, in certain instances, such as in questions over government expenditure, have to gain foreign permission in governing its own country. In many ways, German sovereignty was transferred to the Commission, and would remain in its hands for decades to come. To Keynes, Germany was to be reduced to a state of semi-nationhood, and was ". . . to be treated henceforward as [a] bankrupt estate to be administered by and for the benefit of the creditors",27 which made the Commission little more than "an instrument of oppression and rapine."28

       Keynes understood exactly why the Allies had chosen to strike at the German economy in the way they did. He realised that the Allies, by concentrating on Germany's overseas commerce, its coal and iron industries, and its transport and tariff system, had struck at Germany's three main pre-war economic pillars, and that the Allies planned to systematically destroy these structures, at least to the extent of removing Germany as the dominant economic power in Europe,29 and as a future serious economic competitor in Europe and beyond.30 This economic dominance was to be destroyed by impoverishing Germany in the short term, while obstructing its economic development into the future.31 At its most basic level, and possibly its most sinister, the objective of Britain and France was to destroy Germany's ability to produce an economic surplus, while still demanding payment of reparations. Galbraith sees it in this way, when we writes:

       Keynes case, with no bow to understatement, was that the Treaty had as its basic design, first to ruin
       Germany and its capacity to pay and then require payment.32

For Britain and France this made good sense. By the end of the war, both were in the same situation as Germany; economically and physically totally exhausted. Neither had the economic resources nor the political strength needed to oversee a permanent occupation of Germany, not even a partial occupation to control the Ruhr would have been feasible in the long term.33 In such a situation it made sense to control Germany through economic means. This way Germany could be subjugated to British and French interests for a far longer time than occupation would realistically allow. With Germany militarily impotent and economically destitute, the Allies could then easily bully and exploit Germany to advance their own interests, while Germany would not have the strength to resist. As Harrod shows, "Thus would Germany be continually harassed and kept low. [And] this is what actually happened for five years . . ."34 Germany was to be reduced to a state of economic feebleness, and then required, forced if necessary, to pay billions of Pounds in reparations, in order to ensure it stayed impoverished and vulnerable to Allied interference for as long as possible. This oppression by means of economic intervention, was the very heart of the Peace Treaty, and the ultimate objective of British and French economic imperialism.

       In conclusion, Keynes showed clearly how the British and French took advantage of the situation in 1919 to bring down an economic and political rival in Europe. In deciding that Germany had to pay for the whole cost of the war, Britain and France saw an opportunity that would most likely never have been repeated, to reduce Germany to a state of economic and political subservience. By targeting for destruction Germany's vital pre-war economic structures, the German economy and nation could be brought to its knees.
       Dividing a significant part of Germany's industrial power between France and Poland, ensured that those nations with the most to fear from a strong Germany, were made stronger at Germany's expense. Likewise, the expropriation of territory and property outside of Germany, and the restrictions on its right to make trade treaties and join international economic organisations, was designed with the express purpose of trying to isolate Germany internationally as far as possible, and in the process giving the Allies an unrestricted hand in their treatment of Germany. In addition, going beyond the immediate punishment of Germany, the Allies ensured their power over Germany was maintained over the longer term by the creation of the various International Commissions. Under these Commissions, particularly the Reparations Commission, Germany was to be little more than a European colony of Britain and France, where sovereignty was transferred to the new colonial government, the Reparations Commission, and would remain so for the term of the Treaty. As such, Germany was to be treated as a bankrupt estate, which existed only to pay its creditors.
       Yet, from an economic perspective, it seems irrational for the Allies to impoverish Germany and then expect it to be able to pay its reparations. Even though the Allies were quite serious about Germany paying its reparations, as Britain and France in particular needed the money and resources, it is obvious that Germany's ability to pay was more of an expectation on the part of the Allies, than an economic reality. Whereas, when seen from a political perspective, the actions of the Allies take on a very different character. By keeping Germany impoverished, it gave the Allies the opportunity to have long term economic power, and the attendant political power that goes with it, over Germany. With German military and economic power reduced, German political influence within Europe would also be reduced, and replaced, so the British and French hoped, by their political influence. On the other hand, even with its military severely reduced, if Germany was allowed to develop economically without interference it would soon become economically strong again, and would begin to reassert its economic and political muscle in Europe. This was definitely not in the interests of Britain and France. Therefore, given a choice between an economically progressing Germany that could afford to pay its reparations from its surplus production, and an impoverished Germany that could not, the British and French at least, preferred a weak and subjugated Germany. That way, Germany could be easily crushed and kept vulnerable, and at the mercy of the very powers it had tried to destroy.

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                                                              Endnotes

1. This becomes clear when it is remembered that it was France and Britain that stood to gain the most territorially, both in Europe and from Germany's colonies, than the United States, as well as the most economically and politically from a subjugated Germany. Moreover, the United States' interests at the Peace Conference were largely dictated by Wilson's Fourteen Points, which Keynes theought were "nebulous and incomplete" when compared to the ideas and plans of the other Allied leaders. Keynes saw the difference in the interests and capabilities of the parties at the Peace Conference clearly. To Keynes, Wilson was "a generously intentioned man", but who was, "ill informed as to European conditions." While Clemenceau "made no pretence of considering himself bound by the Fourteen points." For Keynes, the European leaders were "subtle and dangerous spellbinders", who's interests were not based on noble ideas, but were "related to frontiers and nationalities, to the balance of power, to the future enfeeblement of a strong and dangerous enemy, [and] to revenge......."
       J. M. Keynes, The Economic Consequences of the Peace,
       London: The Labour Research Department, 1920, pp. 32 - 39, & p. 51.

2. Ibid., p. 170.

3. Ibid., pp. 74 - 76.

4. Ibid., p. 88.

5. Ibid., pp. 84 - 85.

6. K. Marx, Capital: Volume 1, London: Penguin Books, 1976, p. 916.

7. Keynes, op. cit., p. 92.

8. C. A. Kupchan, The Vunerability of Empire,
    New York: Cornell University Press, 1994, p. 365.

9. Keynes, op. cit., p. 91.

10. Ibid., pp. 61 - 63.

11. Ibid., p. 63.

12. Ibid., p. 74.

13. Ibid.

14. Ibid.

15. Ibid., pp. 60 - 61.

16. Ibid., p. 61.

17. Ibid., pp. 176 - 178.

18. Ibid., p. 61.

19. Ibid., pp. 100 - 101.

20. Ibid., p. 101.

21. Ibid., pp. 193 - 200.

22. Ibid., p. 197.

23. Ibid., p. 197.

24. Ibid., p. 200.

25. Ibid., p. 201.

26. Ibid., pp. 195 - 196.

27. Ibid., p. 194.

28. Ibid., p. 204.

29. Kupchan, op. cit., p. 395.

30. Keynes, op. cit., p. 60.

31. Ibid., p. 102.

32. J. K. Galbraith, The World Economy Since the Wars,
      London: Mandarin, 1995, pp. 37 - 38.

33. R. F. Harrod, The Life of John Maynard Keynes,
      New York: Harcourt, Brace and Company, 1951, p. 271.

34. Ibid.

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References

Elson, R. T. 1977. Prelude to War. World War II Series.
Alexandria, Virginia: Time-Life Books.

Galbraith, J. K. 1995. The World Economy Since the Wars. London: Mandarin.

Harrod, R. F. 1951. The Life of John Maynard Keynes.
New York: Harcourt, Brace and Company.

Hayek, F. A. 1997. The road to Serfdom. London: Routledge.

Heilbroner, R. L. 1972. The Worldly Philosophers. New York: Touchstone.

James, L. 1994. The Rise and Fall of the British Empire.
London: Abacus Books.

Johnston, S. 1987. Experiences of the Great War 1914 - 1918.
Melbourne: Longman Cheshire.

Keynes, J. M. 1920. The Economic Consequences of the Peace,
London: The Labour Research Department.

Kupchan, C. A. 1994. The Vunerability of Empire.
New York: Cornell University Press.

Marx, K. 1976. Capital: Volume 1. London: Penguin Books.

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