The reaction within Germany to the peace treaty reached a pitch of hysteria. All forms of public entertainment were suspended for a week as a sign of protest. Flags across the country were lowered to half-mast. The chancellor, Philipp Scheidemann, characterized the terms as “unbearable, unrealizable, and unacceptable,” and proclaimed that it would make the Germans “slaves and helots . . . doing forced labor behind barbed wire and prison bars.” The Germans were given a deadline of five days to agree to the terms or face a resumption of hostilities. Scheidemann resigned rather than put his signature on the document, of which he said, “What hand would not wither which placed this chain upon itself and upon us?” On the day that Germany accepted the terms, its Protestant churches declared a day of national mourning.
Behind all the divisions that were to wrack Germany for the next few years, the one single factor that united every class and every political party—democrats and royalists, liberals and Socialists, Catholics and Protestants, northerners and southerners, Prussians, Bavarians, Saxons, and Hessians—was the injustice of the peace treaty, or as it was called the Diktat. And of all the various penalties heaped on Germany by the treaty—disarmament, dismemberment, occupation, and reparations—it was reparations that would become the single most consuming obsession of German foreign policy. Germany had meekly agreed to reduce its military machine to a shadow of its former power, thus leaving it impotent to do anything about the loss of territory or of its colonies. Only on reparations did Germany seem able to fight back. It discovered what every large debtor at some point discovers: that when one owes a large amount of money, threatening to default can give one the upper hand.
Schacht’s first introduction to the issue of reparations came in the fall of 1919. He was asked to join a group of industrialists and businessmen sent to The Hague to negotiate with the Allied commission on the delivery of goods in kind as part of the interim settlement. The German delegation was subjected to a litany of petty humiliations: they were forced to stay at the worst hotel, given bad food, their movements restricted, and they were openly followed. Finally, during the negotiations themselves, they were not even provided with chairs but were required to stand. When Schacht complained, he was told, “You seem to forget that your country lost the war.” It was Schacht’s first encounter with what he was to call the “medieval arrogance” of the victors.
IRONICALLY, IT WAS not a German but an Englishman who launched the most devastating attack on reparations. In November 1919, John Maynard Keynes, the young Cambridge don, published The Economic Consequences of the Peace. In the book Keynes argued that in order for Germany to earn the money to pay the Allies, it would have to sell more goods than it bought, and its trade partners would have to be willing to absorb this large influx of goods, with potentially crippling consequences for their own industries. It was therefore in the Allies’ own self-interest to moderate their demands. As he put it, “If Germany is to be milked, she must not first of all be ruined.” He concluded that the most Germany could afford to pay, without causing a massive disruption of world trade, was around $6 billion.
The book became an immediate best seller; over one hundred thousand copies were bought worldwide in its first six months alone. It was serialized in the United States in the New Republic and in France by La Nouvelle Revue Française and translated into French, German, Dutch, Flemish, Danish, Swedish, Italian, Spanish, Romanian, Russian, Japanese, and Chinese. At the age of thirty-six, Keynes’s brilliant pen had carried him to fame, not merely in Britain but across the world.
From an early age, people had remarked on young Maynard’s intellect, which had been carefully nurtured from his childhood. Born in 1883, in Cambridge, England, he spent most of his life in and around Cambridge University. His father, John Neville Keynes, was a don, a philosopher, and logician of great early promise but little ambition who had drifted into university administration. Maynard spent four years at Eton, where he was one of those golden boys known both for their extraordinary academic achievement and their social popularity, and in 1902 he entered King’s College, Cambridge, to read mathematics. He was soon elected to that elite intellectual society nicknamed “the Apostles,” which already included G. E. Moore, Bertrand Russell, and Lytton Strachey. He spent his years at Cambridge absorbed in a hothouse combination of high-minded ph
ilosophical debate and homoerotic entanglements with his fellow Apostles. Even Bertrand Russell, rarely impressed by other people’s brainpower, wrote that Keynes’ intellect was “the sharpest and clearest that I have ever known.”
After graduating in 1904, Keynes briefly tried to escape the university by joining the India Office as a “clerk”—he had only come second in the civil service exams and missed being selected for the Treasury, though he would characteristically insist that it was because “I evidently knew more about economics than my examiners.” Within a year of going to the India Office, he resigned. Even though the hours were not at all taxing—he worked from 11:00 a.m to 5:00 p.m. on weekdays, 11:00 a.m. to 1:00 p.m. on Saturdays, and had eight weeks’ vacation a year plus Derby Day—he had found that he did not have enough to do. His assignments included organizing the shipment of ten Ayrshire bulls to Bombay and preparing an annual report to Parliament, “The Moral and Material Progress of India.” Amused by the Victorian pomposity of the whole exercise, he joked to Lytton Strachey that he planned to include “an illustrated appendix on Sodomy.” Bored with the work and finding it difficult to restrain his natural irreverence toward authority, he returned to Cambridge.
While he almost immediately gained a lectureship in economics at the university, his first love had always been philosophy. In 1909, he began work on a book on the philosophical foundations of probability, which he hoped would change the way philosophers thought about uncertainty. The themes of the book—that nothing can be known with certainty, that it is hard to define what is a rational course of action when the future is so indeterminate, that intuition rather than analysis provides the ultimate basis for action in these circumstances—were to color much of his later economic thinking and his almost equally remarkable ability to make money from speculating.
But for all his passion for abstract ideas and philosophical discussions, Keynes also had wider and worldlier ambitions. In addition to his teaching duties and the book on probability, he spent the years before the war as a member of the Royal Commission on Indian Currency and Finance, even publishing a book on the subject; he took over the investment portfolio of his college; wrote occasional pieces on financial matters for the Morning Post and the Economist; and became the editor of the Economic Journal, to which he also contributed articles and reviews. Then there were his hobbies—the magnificent collections of old books and modern paintings, his golf, his passion for the ballet—and his many remarkable and varied friends. Indeed, there were times when he almost seemed to have too many interests.
To accommodate all these activities, he would spend a couple of days every week in London, where he shared a house at 38 Brunswick Square with some of his Bloomsbury friends—among them Adrian Stephen and Adrian’s sister Virginia and her husband Leonard Woolf—many of whom he had met as an undergraduate at Cambridge. But while his bohemian comrades viewed the world of money and power as somehow tainted, he very much wanted to be part of it.
His chance to return to government came with the war. On Sunday, August 2, he was in Cambridge when he received a letter from an old colleague at the UK Treasury, Basil Blackett. “I tried to get hold of you yesterday but found that you were not in town. I wanted to pick your brains for your country’s benefit and thought you might enjoy the process. If by chance you could spare time to see me on Monday, I should be grateful, but I fear the decisions will all have been taken by then.” Such an invitation from a man he respected, offering access to the center of world affairs, was irresistible. Unwilling to wait for the next train up to London, he persuaded his brother-in-law, A. V. Hill,16 to take him up to London in the sidecar of his motorcycle. By the end of the day, Keynes was ensconced in the Treasury Building in Whitehall, busy drafting a note for the chancellor on whether Britain should follow the rest of Europe into abandoning the gold standard. Within a few months, he had a job as a junior economic adviser within the Treasury.
He quickly rose within its rank. In early 1917, he became chief of the external finance division responsible for securing enough dollars on reasonable terms to pay for the war effort and keep the UK economy afloat. It was perhaps the most critical economic issue confronting Britain during the war, and put Keynes at the heart of economic policy making.
He became completely absorbed in the heady atmosphere of life as an establishment mandarin, thrown into the highest social and political circles. He was invited for country weekends by the prime minister and his wife, played bridge at No. 10 Downing Street, spent the weekend at the home of the chancellor of the exchequer, dined with the Duke of Connaught and the Princess of Monaco. He was, in the words of the society hostess Ottoline Morrell, “greedy for work, fame, influence, domination, admiration.”
That combination of success and cleverness could at times make him insufferable. His Bloomsbury friends, who inhabited a rarified world of art and literature and ideas, were able to tease him about his newfound connections in high places. They were even willing to tolerate his irritating cocksureness. He was redeemed in their eyes by the subversive pleasure he took in challenging authority. No one was immune from his witty and biting ripostes. Within just a few months of joining the Treasury, he told no less than Lloyd George, the chancellor of the exchequer, during a meeting, “With the utmost respect, I must, if asked my opinion, tell you that I regard your account as rubbish.” But to the many other people to whom he was rude or insulting, he was simply an arrogant young man with an overblown sense of his own intellectual superiority.
One would not have guessed at all of this by looking at him. He looked so very ordinary—receding chin, thinning hair, feeble military mustache—and he dressed so conventionally—dark three-piece suits and a homburg, or sometimes a bowler. At first glance he might have been a modestly successful City drone—an insurance broker maybe—or possibly a minor civil servant.
Beneath that superior façade he actually harbored some profound insecurities—especially about his looks. “I have always suffered and I suppose always will from a most unalterable obsession that I am so physically repulsive that I’ve no business to hurl my body on anyone else’s,” he once confessed to his friend Lytton Strachey. But most of those who were close to him agreed that he could be the most attractive and charming of companions, his conversation sparkling, brilliant, and witty. He was “gay and whimsical and civilized” with “that gift of amusing and surprising, with which very clever people, and only very clever people, can by conversation give a peculiar relish to life,” remembered the art critic Clive Bell.
Most of Keynes’s Bloomsbury crowd were conscientious objectors. As the war dragged on, he himself became increasingly disillusioned with its terrible waste, the relentless loss of lives, the refusal of the politicians to contemplate a negotiated settlement, and the steady erosion of Britain’s financial standing. In 1917, he wrote to his mother that the continuation of the war “probably means the disappearance of the social order we have known hitherto. With some regrets I think I am not on the whole sorry. The abolition of the rich will be rather a comfort and serve them right anyhow. What frightens me is the prospect of general impoverishment. . . . I reflect with a good deal of satisfaction that because our rulers are as incompetent as they are mad and wicked, one particular era of a particular kind of civilization is very nearly over.”
When the war ended, Keynes was appointed the principal Treasury representative at the Paris Peace Conference. Though his official titles included deputy to the chancellor of the exchequer on the Supreme Economic Council, chairman of the Inter-Allied Financial Delegates in the Armistice negotiations, and representative of the British Empire on the Financial Committee, he soon found himself completely excluded from the most important economic negotiations at Paris, those on reparations. He had to watch impotently from the sidelines as the “nightmare” of the Peace Conference was played out. As he later wrote, “a sense of impending catastrophe overhung the frivolous scene.” When the terms of the treaty were finally announced in the middle of May, exhausted and disgusted, he felt he had no alternative but to resign. He wrote to Lloyd George, “The battle is lost. I leave the Twins [Sumner and Cunliffe] to gloat over the devastation of Europe.”
THE ECONOMIC CONSEQUENCES of THE PEACE was a strange book to have sold so well. Two-thirds of it comprised a detailed, often technical, polemic against reparations. At the time and even after, the whole debate over reparations was obfuscated by the enormous figures involved. They were simply too large and abstract for most people, including politicians and many bankers, to comprehend, particularly in an era when few people knew what the GDP of Germany or Britain was or even what the term meant. Keynes was able to pierce through all of this confusion and translate the tens of billions of dollars that were being bandied about so readily into something more tangible for the average man to grasp.
A book replete with figures and tables on the value of the housing stock of France and Belgium, the composition of German exports and imports in 1914, and estimates of the size of the German railway rolling stock may have been unlikely material for a best seller. But the sheer physicality of the technical details served as a chilling reminder that behind all of the abstract figures, this was an argument about the concrete things necessary to sustain standards of living.
Its success was partly due to the artfully mordant portraits he drew of the Big Three at Paris: Clemenceau, “dry in soul and empty of hope, very old and tired”; Wilson, “his thought and his temperament . . . essentially theological not intellectual”; “his mind . . . slow and unadaptable”; and Lloyd George, “with six or seven senses not available to ordinary men, judging character, motive and subconscious impulse, perceiving what each was thinking and even what each was going to say next.” Keynes was persuaded by several people, including his mother, to omit some of the best
but most inflammatory descriptions—especially the portrait of Lloyd George, “rooted in nothing; he is void and without content . . . one catches in his company the flavor of final purposelessness, inner irresponsibility, existence outside or away from our Saxon good and evil, mixed with cunning, remorselessness, love of power.”
What seemed to have captured the public imagination was the outline of the world economy that Keynes was able to draw. In bold broad strokes, he described the workings of the prewar Edwardian world, the fragile foundations on which it had been built, and the mutilation to its financial fabric left by the war. He gave a foreboding picture of the future as the forces that had sustained the old economic order began to come asunder. Sounding at times like an Old Testament jeremiad, the book spoke of “civilization under threat,” of “men driven by starvation to the nervous instability of hysteria and mad despair.” The tone of impending doom may seem overwrought to our ears, but to a generation that had just emerged from the most horrendous and apparently pointless apocalypse, it rang true.
THE ECONOMIC CONSEQUENCES had an enormous impact on thinking about reparations throughout the world. The biggest change occurred in Britain. Even before the Peace Conference had adjourned in June 1919, Lloyd George had already begun to have second thoughts about the treaty. At the eleventh hour, he even tried to convince the other two leaders that perhaps they should soften the terms, but Wilson had adamantly refused, saying that the prime minister “ought to have been rational to begin with, and then would not have needed to have funked at the end.” It was not simply Lloyd George’s guilty conscience that led to the British change of heart. Britain, that nation of shopkeepers keen to get back to business, rediscovered the economic centrality of Germany. As foreign minister, Lord Curzon announced to the cabinet, Germany “is to us the most important country in Europe.” France, however, clung resolutely to its implacable hostility to its ancient enemy, and with the United States out of the European picture and Britain increasingly sympathetic to Germany, it found itself isolated.
In the four years after the Peace Conference, from early 1919 until the end of 1922, Europe was treated to the spectacle of one international gathering after another devoted to reparations. With governments in both France and Germany constantly falling—during those four years France went through five and Germany six—the one constant fixture at all these gatherings was the British prime minister, Lloyd George. As if trying to make up for his failure in Paris, he threw himself into the process. By one calculation, he attended thirty-three different international conferences in those few years. So many of them were held in the gambling resorts and spas of Europe—at San Remo in April 1920, in Boulogne in June, at Wiesbaden in October 1921, at Cannes in January 1922, and the final “circus” at Genoa in April 1922—that the French prime minister, Raymond Poincaré, dismissed them as “la politique des casinos.”
For all the magnificent and luxurious settings, these gatherings were painful affairs, not least because the French were so unclear in their own minds what they wanted. As Poincaré said in June 1922, “As far as I am concerned it would pain me if Germany were to pay; then we should have to evacuate the Rhineland. Which do you regard as better, obtaining cash or acquiring new territory? I for my part prefer occupation and conquest to the money of reparations.” Or as Lloyd George more pithily put it, “France could not decide whether it wanted to make beef-stew or milk the German cow.”
All the age-old animosities between the British and the French, buried for a decade under the common purpose of confronting Germany, resurfaced. The old stereotypes of the French—those “vainglorious, quarrelsome, restless and over-sensitive” people—on which previous generations of Englishmen had been reared, were revived. Foreign Minister Curzon complained of the French proclivity for “the gratification of private, generally monetary, and often sordid interests or ambitions, only too frequently pursued with a disregard of ordinary rules of straightforward and loyal dealing which is repugnant and offensive to normal British instincts.” At one point, in 1922, he became so frustrated in a confrontation with French Prime Minister Poincaré that he collapsed in tears, crying, “I can’t bear him.”
Dealing with Germany was no easier. Before the war, an American journalist had remarked on that “uneasy vanity, that touchiness that has made Germany the despair of all the diplomats all over the world.” The initial outrage over the Versailles Diktat had now curdled into frustration, bitterness, and resentment, which only made the defeated nation more difficult to deal with. From that first moment in May 1919, when the German foreign minister, Count Ulrich Graf von Brockdorff-Rantzau had insulted the Allied statesmen at Versailles by refusing to stand while addressing them, the Germans caused offense by their arrogant demeanor.
It was not simply their bad manners. They calculated, very correctly, that the longer they could string out the bargaining over reparations, the less they would end up paying. Their whole strategy was therefore to negotiate in bad faith. In the first two years after signing the treaty, Germany desperately scraped together what it could, and paid $2 billion out of the $5 billion of interim payments due.