It is safe to say that no one could accuse either Murray Rothbard or Ralph Raico of not being critical of Keynes, especially when he deserved it. Rothbard was quoted as saying, “There is one good thing about Marx: he was not a Keynesian.” Having dealt thoroughly with Keynesian economics, Rothbard also dealt with the moral character of Keynes: “Keynes the Man: Hero or Villain?” Despite that, both Rothbard and Raico may have been too generous to Keynes in one respect—praising his book, The Economic Consequences of the Peace (1919).
Rothbard called this book “Keynes’s fine work” and Raico, in his lecture—now a must-read book—World at War, when addressing German reparations following WWI, said,
Then the question of reparations. The idea of reparations is accepted by the Allies. The Germans say, “How much should we pay?” And the French say, “Well, you just start sending things” [laughter]. Keynes (1971) has a very good book on this: The Economic Consequences of the Peace. It’s one of his best books, really.
Rothbard and Raico had reasons for praising the book in their time, but they were missing some key information. This demonstrates why history and historical research is an ongoing endeavor and views sometimes have to be updated based on new evidence. Raico’s posthumously-published World at War was transcribed and annotated by Edward W. Fuller, who provides a clarifying footnote,
In the years after Raico’s lecture, scholars learned that Keynes codrafted Article 231 with Allen W. Dulles. Keynes’s biographer writes, “[Keynes] touched on Article 231 on the Treaty, the ‘war guilt’ clause, which he had drafted with Dulles, remarking on its draftsmanship and its expediency but playing down its longterm importance” (Moggridge 1992, 331). Actually, in The Economics of the Peace, Keynes boldly praised his own “virtuosity in draftsmanship” (1971, 96). See Fuller and Whitten (2017) for a critical assessment of Keynes’s role in the war and the peace conference.
As it turns out, after further historical evidence was unearthed, Keynes even had a hand in drafting the infamous Article 231—the war guilt and reparations clause, a key factor leading to WWII—and did not oppose the Treaty of Versailles for the reasons originally thought. In short, Keynes contributed to a key cause of WWII, later opposed the Treaty of Versailles for his own reasons, came into economic prominence through the publication of Economics Consequences, and helped wreak havoc on the 20th century through his terrible economic theory. Keynes was actually worse than even Rothbard and Raico thought!
Further historical research, indeed, plainly shows Keynes’s name listed on the Notes of a Meeting Held at Mr. Lloyd George’s Flat at 23, Rue Nitot on Monday, April 7, 1919, at 4 p.m., in which this clause was finally approved. And, in Papers Relating to the Foreign Relations of the United States, The Paris Peace Conference, 1919, Volume XIII, Section I.—General Provisions (Art. 231 to 244), we read,
The reparation clauses adopted on the 5th were revised by Thomas W. Lamont, John Maynard Keynes, and Louis Loucheur for consideration by the Council of Four on April 7. At that meeting the language of what became articles 231 and 232 was discussed together and clause 1 was approved in this form:...
Edward W. Fuller—Raico’s transcriber and annotator—and Robert C. Whitten have provided us with the details of this story in “Keynes and the First World War” (2017) and elsewhere. Previously, it was believed that Keynes heroically left the Paris Peace Conference (1919) and wrote The Economic Consequences of the Peace as his protest to the harsh reparations clauses in the treaty, and this was even believed by Raico and Rothbard. However, Fuller and Whitten argue convincingly that this is “seriously incomplete and misleading” and “that Britain’s war-debt problem, not German reparations, led Keynes to resign” and write his book.
What Keynes found objectionable in the Treaty of Versailles was not—as was supposed—the harshness of exacting reparations from the Germans, but that the treaty did not cancel British war debt repayment to the United States (a situation Keynes also helped create).
In the US, the newly-created Federal Reserve System—in league with the US government and prominent bankers—enabled the funding of the Allies through war loans, doubling of the money supply, and eventual US entry into WWI at the behest of the Fed-connected bankers who wanted their loans repaid. Meanwhile, the British had provided substantial war loans to the other allied European powers via the Bank of England’s inflation so that, by the end of the war, these nations were heavily indebted to Britain, which was indebted to the US. The US was willing to provide loans to Britain, but was reluctant to loan money to other European powers. Therefore, Britain borrowed from the US in order to then loan that money to other European allies. Keynes wrote,
…almost the whole of England’s indebtedness to the United States was incurred, not on her own account, but to enable her to assist the rest of her Allies, who were for various reasons not in a position to draw their assistance from the United States direct [sic].
While it was highly likely that the US loans would be repaid by Britain, it was much less likely that the British loans would be repaid by France, Russia, Italy, Belgium, and Serbia. Therefore, Britain was in the unenviable position of repaying loans while not being repaid. Keynes also realized that financial power was shifting from Britain to the US.
As the third-highest-ranking official in the British Treasury, Keynes was the key architect of Britain’s war borrowing and lending and was thus responsible for Britain’s post-war financial position. Keynes saw the 1919 Paris Peace Conference as his chance to win back “Britain’s economic and financial hegemony from the United States.” For that reason, Keynes wanted Britain’s debt to the US to be canceled. In other words—the funding of these wars via central bank money and credit notwithstanding—Keynes basically wanted to shift the costs of the war to the US.
Since the Americans at the peace conference consistently rejected this, Keynes moved to what he saw as the next-best option—shifting the financial burden onto the losers, exacting heavy reparations in order to repay the debt. On November 5, 1918, when Germany agreed to the armistice terms, Germany and the Allies understood “that compensation will be made by Germany for all damage done to the civilian population of the Allies and their property by the aggression of Germany by land, by sea and from the air.” But the amount of reparations was not fixed and Germany was expected to just continue sending money indefinitely. In Raico’s humorous retelling, “Well, you just start sending things.”
As it turns out, leaving the amount of war reparations undetermined was Keynes’s idea too! The delegates could not agree on the amount of reparations and, while it was known that Germany could not pay the full cost of the war, the British and French had to appear stern. While the Americans wanted to fix the amount, a solid number was not reached. Thus, Keynes wrote a memorandum—“Reparation and Indemnity” (March 11, 1919), as quoted in Fuller and Whitten,
Germany is liable up to the full extent of the injury she has caused to the Allied and Associated Nations. The aggregate material injury so caused is not capable of exact computation, but it is certain that it much exceeds Germany’s capacity to pay by means which it is in the interest of the Allied and Associated Governments to enforce… The Allied and Associated Governments demand accordingly that Germany render payment for the injury which she has caused up to the full limit of her capacity. At the present time it is not possible to predict what degree of economic and material recovery is possible and permissible for the German nation within the generation now to come. It is therefore impossible at the present time to compute in terms of a definite money figure the ultimate extent of Germany’s capacity to make good… A Commission shall be set up including representatives of European neutral nations to fix year by year the sum payable annually by Germany for a period of thirty years. In fixing such sum the Commissioners shall have regard to the capacity of Germany to pay from time to time without injurious consequences to the Allied and Associated Nations. (The John Maynard Keynes Papers, RT/14/31-34. Cambridge, UK: King’s College, emphasis added)
Following the errors of mercantilism, one of the reasons Keynes and others wanted to leave the amount of reparations unfixed was because, as Keynes’s biographer stated, “to render Germany uncredit-worthy for a long term of years was to make it impossible for her to find means of recovery or to pay substantial reparations.” Keynes’s desire was to ruin Germany’s export industries, which he thought would benefit Britain by contrast. However, in The Economic Consequences of the Peace, he hypocritically condemned leaving the amount of reparations unfixed. Needless to say, this has a profound impact, not only on Germany, not only on Europe, but on the entire world. In A.J.P. Taylor’s, The Origins of the Second World War (p. 44), “Reparations counted as a symbol. They created resentment, suspicion, and international hostility. More than anything else, they cleared the way for the second World war.”
