The Economic Consequences of the Peace

Preface

I am the author of this book. During the war, I worked for the British Treasury for a time. I was also the Treasury’s official representative at the Paris Peace Conference until June 7, 1919. In addition, I served on the Supreme Economic Council. In that role, I was the deputy for the Chancellor of the Exchequer, who is Britain’s chief finance minister.

I eventually quit these jobs. I left because it became very clear that the proposed peace terms would not change in any major way. I had hoped for significant improvements, but I realized this was no longer possible.

This book will explain my reasons for objecting to the peace treaty. More broadly, it will explain my concerns about the entire approach the Conference took towards Europe’s economic problems. My objections are based on information that is public and known to everyone.

Introduction

John Maynard Keynes’s book, The Economic Consequences of the Peace, is important and still worth reading today for at least two main reasons.

A Powerful and Timely Argument

First, the book is a brilliant and forceful piece of persuasive writing. It’s as significant as other famous works that powerfully argued a case, like:

• Thomas Malthus’s Essay on Population (which discussed population growth and resources).
• Edmund Burke’s Reflections on the French Revolution (which criticized the revolution).
• Karl Marx and Friedrich Engels’s Communist Manifesto (which called for a new economic system).

Like these classic works, Keynes’s book is based on clear logic, written with strong passion, and filled with evidence. It’s considered some of his best writing, produced when he was in his mid-thirties and it was only his second published book.

The second reason this book remains important is its main message, or theme. This theme, which is both obvious and subtly suggested, is controversial and continues to be relevant through the years. To understand the book, it’s helpful to look at what Keynes seemed to be trying to do, and then consider what he actually achieved.

Keynes’s Background and the Versailles Treaty

This book is about a major historical event: the negotiation of the peace treaty at Versailles, which officially ended World War I. Keynes himself was deeply involved with the war.

Starting in 1915, Keynes was a young and promising economist with connections to Cambridge University and the influential Bloomsbury group of intellectuals and artists. He took on increasingly important roles in the British Treasury, where he helped manage the financial aspects of the war.

Even though Keynes became much more famous and honored internationally later in his life, he never had as much official responsibility during World War II as he did in the final three years of World War I. Because of his role, it was natural for him to be part of the Paris Peace Conference. There, he sometimes acted as the substitute for Britain’s chief finance minister (the Chancellor of the Exchequer) in high-level talks about the economic parts of the peace treaty. During these meetings, he sometimes interacted directly with the main leaders negotiating the treaty. Until June 1919, he appeared to be simply a trusted expert advisor to the British Prime Minister and other members of the British team.

Growing Disappointment and Resignation

However, that’s just how his bosses might have seen him. Personally, Keynes was becoming more and more upset about how the conference was unfolding. He saw the leaders repeatedly breaking promises they had made to the Germans or to the American president, Woodrow Wilson. This was bad enough. But what worried him more was that he felt their actions were destroying any hope for Europe to become prosperous and peaceful in the future.

A typical government official in such a situation might keep their doubts to themselves. They might try to ease their conscience by working quietly within the system to make small, safe changes to policies they couldn’t completely alter. Such an official might think it’s better to keep their job than to become a “hero” by speaking out and risking their career.

But Keynes was not like that. His friends from Cambridge and Bloomsbury also believed in speaking out. Keynes’s strong beliefs led him to take action. His first major step was to resign from his position. On June 5, 1919, he wrote a frank letter to the British Prime Minister, Lloyd George, telling him of his decision.

In simplified terms, Keynes wrote: “I have to tell you that I’m leaving this nightmare situation on Saturday. I can’t do any more good here. I kept hoping, even in these last terrible weeks, that you would find a way to make the treaty fair and sensible. But now it seems it’s too late. The fight is lost. I leave others to celebrate Europe’s ruin and decide what financial burdens will be left for British taxpayers.”

In Britain, there was a tradition of quietly respecting officials who resigned over matters of principle without making a fuss. But Keynes did not want to resign silently. He wanted his resignation to make a point.

Writing “The Economic Consequences of the Peace”

• Woodrow Wilson (President of the United States)
• Georges Clemenceau (Prime Minister of France)
• Vittorio Orlando (Prime Minister of Italy)

Keynes wrote The Economic Consequences of the Peace very quickly, during July and August of 1919. By Christmas, it was available in British bookstores, and a month later, it was published in the United States.

The Book’s Central Themes

The book’s strong central theme was the “wickedness and folly”—the bad decisions and moral failures—of these leaders. Keynes described how the Council of Four had formally adopted President Wilson’s “Fourteen Points” (a set of principles for a fair peace) and had used these principles to convince Germany to surrender. Then, Keynes argued, they cynically, vengefully, and destructively forced a harsh peace treaty on the defeated Germans. He called it a “Carthaginian peace,” meaning a peace designed to utterly crush the enemy, much like ancient Rome destroyed Carthage. Such a peace, Keynes believed, was perfectly designed to:

• Create more hatred and bitterness.
• Damage economic life across Europe.
• Destroy any chance of reconciliation between the winning and losing countries.

This was a big and important enough theme for a powerful, argumentative book, and that’s how people at the time saw it.

But there was an even bigger concern that drove Keynes to write the book. Of course, he wanted a fair peace and for the former enemies to find a way to get along. However, what concerned him even more deeply was the need to rebuild a functioning and stable Europe. His criticism of the Versailles treaty was so harsh precisely because he believed the treaty made this vital task impossible.

Keynes’s View of Pre-War Europe

Keynes’s picture of Europe before the war appears early in his book. He starts by saying that very few people truly understood how unique, unstable, complex, unreliable, and temporary the economic system of Western Europe had been for the previous 50 years. His second chapter, “Europe before the War,” expands on this idea.

The period before August 1914 (when World War I began) was an extraordinary time for human economic progress. It was true that most people worked hard and lived with few comforts. Yet, they generally seemed reasonably content. Importantly, anyone with talent or strong character who was above average had a chance to rise into the upper and middle classes. For these wealthier classes, life offered conveniences, comforts, and luxuries at a low cost—things beyond what even the richest kings of past eras could have imagined. This whole way of life depended on a delicate, finely balanced system.

Keynes pointed to several factors that made this pre-war European system work:

• Few Barriers to Trade: National borders and tariffs (taxes on imported goods) caused minimal interference with trade.
• Stable Money: Different countries’ currencies were stable and linked to gold, allowing money (capital) and goods to flow easily between nations. Keynes noted that people only realized the full value of this system when it was gone.
• Security: Across this large area of Europe, people and their property were generally very safe.

These conditions of order, security, and consistency—which Europe had never experienced over such a large and populated area for so long—paved the way for a huge system of transportation, coal distribution, and international trade. This system made industrial life possible in the crowded new cities.

Inequality and the “Double Bluff”

Keynes also argued that Europe’s fragile pre-war stability relied on a general acceptance of significant inequality in income and wealth. He explained that European society and its economy were structured to gather the maximum amount of capital—money used for investment and business growth.

While the daily lives of ordinary people did see some slow improvement, the system was set up so that a large part of any new wealth went to the rich class, who were least likely to spend it all immediately. This was like an unspoken social agreement: the rich were protected in their wealth, and the poor didn’t become too envious, partly because the rich behaved discreetly.

Keynes wrote that the newly rich people of the 19th century were not accustomed to spending large amounts of money on themselves. They preferred the power that came from investing their money to the immediate pleasures of spending it. In fact, Keynes argued, it was precisely this inequality in wealth that made possible the vast buildup of factories, railways, and other “capital improvements” that were a hallmark of that age. He saw this as the main justification for the capitalist system at the time. If the rich had simply spent their new fortunes on their own enjoyment, Keynes believed the world would have quickly found such a system unbearable.

This remarkable system, according to Keynes, depended on a “double bluff” or deception:

1. The Workers’ Acceptance: The working classes accepted a situation where they received very little of the wealth that they, nature, and the capitalists together produced. They accepted this due to lack of awareness, feeling powerless, or being persuaded by custom, tradition, authority, and the established social order.
2. The Capitalists’ Reinvestment: The capitalist classes were allowed to claim the largest part of the wealth (“the cake”) on the unspoken condition that they would actually consume very little of it themselves and instead reinvest most of it.

Not Perfect, But Better

In his later writings, Keynes made it clear that he favored increasing the share of wealth going to the poor, with the rich contributing their fair share. Nevertheless, he recognized that pre-war Europe offered unusual opportunities for business and new ideas—qualities he always valued.

Regarding the unfair distribution of income and wealth, Keynes believed that the total amount of wealth (what he called “the cake”) was actually very small compared to everyone’s desires. So, even if it had been divided equally among everyone at that time, no one would have been significantly better off.

An Open and Hopeful (Though Flawed) Era

So, while pre-war Europe was no perfect society (no “Utopia”), it was undeniably a place where:

• Borders were relatively open.
• Travel and trade were largely free from burdensome customs rules and passport controls.
• Many believed that major wars between “civilized” European nations were a thing of the past, relegated to other parts of the world (a view reflecting the attitudes of that time).
• Talented people had opportunities.
• Life offered a modest sense of hope for most working poor people.

Europe’s growing economic output depended on countries specializing in different areas (the international division of labor). This was encouraged by the free movement of people and resources, and by a general belief that another massive war like the Napoleonic Wars (which ended a century earlier) would not happen again to disrupt complex international trade and investment. Nations, it was thought, were too civilized to repeat such follies.

How the War Shattered the Old Order

Keynes was certain that World War I had shaken the very foundations of this delicate pre-war system. It destroyed both the psychological expectations (the general mindset) and the institutional arrangements (the established ways of doing things) on which pre-war harmony and prosperity had depended.

One key change was that the “double bluff” regarding wealth distribution was exposed. Keynes wrote that the war had shown everyone the possibilities of consumption (using goods and services) and had made the idea of abstinence (saving and not spending) seem pointless to many. As a result, he predicted:

• The working classes might no longer be willing to accept getting such a small share of the wealth.
• The capitalist classes, no longer confident about the future, might decide to enjoy their wealth more fully while they still could. This, in turn, could hasten the time when their wealth might be challenged or taken away.

The war caused other economic disasters too. Before the war, European prosperity had been boosted by cheap food from “the New World” (North and South America) and by a favorable balance of payments with the United States. This favorable balance meant that Britain, for example, earned more from its old investments in America (its former colony) than it paid out. However, even before the war, growing populations were starting to make food more expensive.

The war completely wiped out this financial advantage. Britain was forced to sell many of its foreign investments to pay for the war. Furthermore, Britain and its allies had to borrow enormous sums of money from America to fight the war, leaving them heavily in debt.

A Perilous World for All

Consequently, the world in 1919 was almost as dangerous for the countries that had won the war as it was for those that had lost. Although the victors often had trouble seeing this truth, everyone’s fate was intertwined with the new world order being created at the peace conference in Versailles.

Keynes asserted that the peace conference had two crucial tasks:

1. To honor its commitments and ensure justice.
2. Equally importantly, to re-establish normal life and heal the wounds of war.

Evaluating Keynes’s Case Against the Leaders

It is with these standards—justice and the need to rebuild Europe—in mind that we should evaluate Keynes’s arguments against the “Council of Four” (the leaders of the USA, France, Britain, and Italy).

Keynes’s case against them begins with ethics. He argues that it is fundamentally wrong for leaders to break their solemn promises (“plighted word”). Doing so damages:

• Their personal honor.
• Their nation’s reputation.
• The future of international negotiations (as trust is eroded).

Therefore, a significant part of Keynes’s criticism is the charge that the Allied leaders went back on their commitments. He accused them of writing various territorial and financial conditions into the peace treaty that violated the letter or the spirit of President Wilson’s “Fourteen Points.” These Fourteen Points were the very principles on which Germany had agreed to the Armistice (the agreement to stop fighting).

Keynes’s Sharp Portraits of the Leaders

Because Keynes believed character and morality were crucial, and because he had observed the Council of Four firsthand, he included biting character sketches of the leaders, particularly Clemenceau of France and Wilson of the USA, in his book before presenting his main economic arguments.

In Keynes’s pained judgment, Clemenceau was devastatingly wrong. However, Keynes also saw him as a strong, consistent character who was too contemptuous of those around him to bother hiding his cynicism behind a false show of morality.

In contrast, President Woodrow Wilson of the USA and Prime Minister David Lloyd George of Britain came off much worse in Keynes’s descriptions:

• Wilson was depicted as a foolish and preachy idealist, lost in unrealistic ideas of America’s moral superiority.
• Lloyd George was portrayed as brilliant but unreliable, more concerned with winning an upcoming election in Britain than with the difficult task of reconstructing Europe.

Impact of the Character Sketches

The Times essentially said that:

• Keynes’s book showed his political inexperience and naivety.
• He was harshly judging the leaders of France, Britain, and America as both statesmen and men.
• His portraits of them were questionable, and only those who knew the leaders intimately could tell truth from falsehood.
• While Keynes might be a “clever” economist and a successful former Treasury official, his book had done a disservice to the Allies and would only please their enemies.

Despite such attacks, many people liked Keynes’s book, and it sold extremely well. Years later, in an obituary for Keynes, the renowned Harvard economist Joseph Schumpeter praised The Economic Consequences of the Peace in the highest terms. Schumpeter said its reception was so phenomenal that the word “success” seemed too plain. He called the book a “masterpiece,” describing it as:

• Packed with practical wisdom that was also profound.
• Relentlessly logical yet never cold or unfeeling.
• Genuinely humane but not overly sentimental.
• Facing all the facts without useless regret but also without hopelessness.
• A work that combined sound advice with sound analysis.

The Core Economic Argument: Unrealistic Reparations

Beyond character and morality, the main economic argument of Keynes’s book is a demonstration of how utterly impractical and unrealistic the reparations clauses of the Peace Treaty were. Reparations were the payments Germany was supposed to make to the Allied countries to cover war damages.

Whether or not the Germans were morally inferior to the Allies (as The Times had implied), Keynes argued that Germany’s economy had shrunk dramatically and its workforce was severely depleted by the war. Therefore, Germany was simply incapable of meeting the enormous financial demands that the Reparations Commission (the body set up to manage these payments) was trying to impose.

Germany’s Pre-War Economic Strengths

Statistics can often be dry, but the chapters where Keynes lays out his factual case are still admired as rare examples of how a master of argument and language can make a heavily detailed line of reasoning fascinating.

Keynes began by explaining the sources of Germany’s prosperity before 1914 (the year World War I started). He identified three main pillars:

1. Thriving overseas trade: This included a competitive and expanding fleet of merchant ships.
2. Growing foreign investments: Germany was investing more money in a wider range of businesses in other countries.
3. Successful manufacturing: Above all, Germany excelled at producing and exporting high-quality manufactured goods at reasonable prices.

The Significance of Alsace-Lorraine

Germany’s Weakened Foundations

Before the war, Germany also had an excellent railway system. These railroads quickly moved German products to the borders. Smart government policies on trade taxes (tariffs) and customs helped Germany sell these goods to other countries. These strengths – industry, resources like coal, and transport – formed the solid base for both the German economy and its powerful military.

Keynes’s Case: A Deliberate Blow to German Economy

1. Targeting Trade: Keynes argued that the peace agreement was cleverly designed to hurt Germany’s ability to trade overseas. Excited by their victory, the Allies took most of Germany’s merchant ships. These ships had previously carried a lot of international goods and most of Germany’s own imports and exports.
2. Loss of Colonies and Assets: Germany lost political control over its colonies abroad. While this was a blow, even more costly was the forced surrender of private property owned by German citizens in these former colonies. To make things worse, Germany was still held responsible for the debts of these territories it no longer controlled.
3. Alsace-Lorraine Property: The regions of Alsace and Lorraine were returned to France, a move that everyone, including Keynes, agreed was fair. However, the victorious Allies gave themselves the right to seize and sell off all private German-owned property in these regions as they wished.

Crippling Germany’s Coal and Iron Industries

The Allied negotiators did even more severe damage to Germany’s economic future through their arrangements for iron and coal:

• Territorial Losses:
  • The Saar basin, a rich coal mining area, was handed over to France (though its people would have a vote on its future later).
  • Poland took Upper Silesia as its “share of the loot.” This region was the source of nearly a quarter of Germany’s hard coal before the war.
• Forced Coal Deliveries: Despite having its own coal resources drastically reduced, Germany was ordered to:
  • Repair French coal mines in northern France that were damaged during the war.
  • Supply France with an extra 7 million tons of coal each year for ten years.
  • Belgium was promised 8 million tons of German coal per year for ten years.
  • Italy was to receive 4.5 million tons annually.
  • Luxembourg was promised an amount of German coal equal to what it used to import from Germany before the war each year.

If Germany met all these demands, it would be exporting about 25 million tons of coal every year just for reparations. This would leave only about 78 million tons for its own people to heat their homes and for its factories to run.

However, in the years just before the war, Germany used about 139 million tons of coal annually. Even considering that Germany lost some population and territory (about 10% of each), forcing it to meet these coal demands meant its industries would be crippled.

This put Germany’s new, fragile democratic government (known as Weimar Germany) at an almost fatal disadvantage from the very beginning. The situation was made worse because Germany had lost the iron-rich region of Lorraine to France. This meant Germany now had to buy iron ore (which mostly came from Lorraine before the war) from France, paying in gold or French francs – currencies that were incredibly hard for a bankrupt nation to obtain.

Other Damaging Clauses

Keynes noted other parts of the treaty related to tariffs (trade taxes) and transportation that, while less critical than the reparations or coal clauses, still caused harm. These included:

• Forcing Germany to give special tariff deals to Poland, Luxembourg, Alsace, and Lorraine.
• Limiting Germany’s power to set its own tariffs. This last point was a violation of Germany’s independence. It exposed the country to the risk of importing too many luxury goods and unnecessary items at a time when it desperately needed to import essential food and raw materials for its industries.

Foolish Policies Made Worse by Reparations

From Keynes’s perspective, all these measures were extremely foolish. They seemed designed to punish ordinary Germans and to make it take much longer for Germany to rejoin the international community as a peaceful nation.

What truly showed how unrealistic the Allies’ overall policy was, however, was the combination of these damaging economic clauses with the enormous reparations demands.

A History of War Payments

The idea of making a defeated nation pay reparations or indemnities was not new, even among “civilized” nations:

• After the Franco-Prussian War in the 1870s, Germany had forced France to pay a large sum (by the standards of that time).
• In 1917, during World War I, Germany, at a moment of military success on the Eastern Front, imposed the Treaty of Brest-Litovsk on Russia. This treaty was so harsh that, by comparison, the Versailles Treaty looked almost generous. (The Brest-Litovsk treaty was later cancelled by other events.)
• Interestingly, when France had to pay Germany after the 1870s war, the French paid off their debt ahead of schedule, and the effort actually helped to boost the French economy.

Why Versailles Reparations Were Different and Disastrous

There were two catastrophic things about the Versailles reparations:

1. The Unbelievably Large Amounts: The sums of money supposedly to be collected were astronomical.
2. The Victors’ Total Control: The winning countries had complete power over when and how Germany would make these payments.

Keynes recognized that even before the war ended, public expectations and political promises in the Allied countries about how much Germany would pay had become wildly inflated. Many newspapers and politicians wanted Germany—officially blamed for all war guilt—to pay not just for direct damage caused by its armies in Belgium and France, but also for all disruptions caused by the war. This included shelling, bombing (which was minor compared to later wars), and submarine attacks (which especially affected Britain, as it lost many ships).

This thinking quickly led to the idea that Germany should pay for all Allied war costs: ammunition, soldiers’ pay, benefits for soldiers’ families, lost exports, and anything else people could think of. A particularly strong demand was that Germany should take on the cost of war pensions for Allied soldiers.

Keynes’s Estimate of Fair Reparations

Keynes was not, in principle, against the idea of Germany paying some reparations. However, he didn’t think they were part of the wisest possible peace settlement. He believed it was practical and arguably fair to require Germany to compensate the winners for the direct damage caused by its soldiers and sailors.

• $750 million for Belgium
• $4 billion for France
• $2.85 billion for Britain (mostly for ships sunk by U-boats)
• $1.25 billion for other Allies

His grand total for direct damages was about $8.85 billion. This was less than a quarter of the figure the creators of the Versailles Treaty were planning to collect from Germany.

How Could Germany Realistically Pay?

If such horrific actions were ruled out, Germany could only pay its reparations through the usual ways nations settled international debts:

• Paying in gold or silver.
• Transferring ships or foreign investments.
• Selling German-owned property in the Allied countries.
• The largest and most common way: earning gold, silver, and foreign currency by selling more goods and services to the Allies and America than it bought from them (an export surplus).

Germany’s Limited Resources in 1919

In 1919, none of these sources offered Germany much hope:

• Gold: The German central bank had only about $300 million in gold. Later events showed this was far less than what was needed just to support its own paper money.
• Ships: After forced transfers, the few remaining German merchant ships might have sold for about $600 million.
• Foreign Investments: Experts estimated German ownership of foreign stocks and bonds at between $500 million and $1.25 billion.
• Property Abroad: German-owned private property in places like Latin America might, if sold under pressure, have raised another half-billion dollars.

Even with the most generous expert guesses, Germany might have raised less than $3 billion from these forced sales. And forced sales always mean lower prices. Moreover, losing these assets, especially its remaining ships, would further damage Germany’s ability to produce goods. This sum of less than $3 billion was bound to be much less than 10% of the total reparations demanded.

The Impossibility of an Export Surplus

It followed logically that if Germany was to satisfy the Allied Reparations Commission, its only real path was to achieve a large favorable balance of payments. This meant selling far more goods and services to the world (especially the European Allies and the United States) than it bought from them.

This prospect, like Germany’s others, was bleak:

• In 1913, before the war, Germany (like other advanced industrial nations) actually bought more from other countries than it sold to them. It covered this deficit with income from its foreign investments and fees from its banking, brokerage, and shipping services – sources that were now largely gone.
• Germany’s exports directly competed with British goods in major industries like iron, coal, machinery, shipbuilding, and textiles.
• Keynes acknowledged that Germany could try to raise its own tariffs on imports and reduce imports of food and raw materials (if the Allies allowed it). But this would lead to severe food shortages, limit German workers’ productivity, raise the prices of German exports (making them harder to sell), and mean fewer raw materials to make goods for export.

Keynes’s Realistic Annual Payment Estimate

Taking everything into account, Keynes believed Germany could likely pay the Allies perhaps $500 million (half a billion dollars) per year. This amount was equivalent to 5% interest on a total capital sum of $10 billion. Keynes considered this $10 billion figure not only possible but also fairly reasonable. It was only about a billion dollars more than his conservative estimate of the direct damage ($8.85 billion) caused by German forces.

Events Prove Keynes Right: The Ruhr Crisis and Hyperinflation

Throughout the 1920s, there were constant arguments about how much Germany should pay. Subsequent events strongly suggested that Keynes’s original criticisms were accurate. Germany did not pay the demanded amounts, and probably could not have paid them even with the best intentions.

In late 1922 and early 1923, the French government declared Germany in default (meaning it had failed to make its payments). By March 1923, French and Belgian troops had occupied Germany’s Ruhr Valley, its industrial heartland, to try to force payments.

The German response was passive resistance (like strikes and non-cooperation). By September 1923, this had led to hyperinflation: the German mark became almost worthless.

• Workers needed to be paid daily, sometimes even hourly, as prices soared.
• Banks recalled old currency notes to print more zeros on them.
• People took baskets full of money to buy simple items like a loaf of bread.

US Intervention and the Dawes Plan

Germany was too large and important in Europe to be simply ignored or allowed to collapse completely. Following the Ruhr occupation and hyperinflation, the United States stepped in.

At the end of 1923, US President Coolidge formed the Dawes Commission. Its task was to create a workable schedule for German reparations payments. The Dawes Plan, announced in April 1924, had several key parts:

1. Stabilizing Currency: It aimed to stabilize the German mark by reorganizing Germany’s central bank (the Reichsbank) under Allied supervision.
2. Reducing Reparations: Importantly, it significantly lowered the total amount of reparations Germany owed.
3. Providing a Loan: To make the plan more acceptable to the unhappy Germans, it included a large foreign loan, more than half of which came from the United States.

The Young Plan: Another Adjustment

The Dawes Plan eased the immediate crisis but didn’t permanently solve the reparations issue. Germany remained dissatisfied even with the revised payments. This eventually led to another American commission and the Young Plan in 1929 (named after its chairman).

The “Insanity” of a System Tied to US Loans

Much of the widespread foolishness of the whole reparations system was linked to the role of the United States. During World War I, the US had loaned huge sums of money to Britain, France, Italy, and other Allies. These Allied nations could generally only repay their American loans if and when Germany paid reparations to them.

This clear financial link did not stop American politicians and bankers. They all strongly defended the idea that the two sets of debts (German reparations to Allies, and Allied debts to the US) were completely unrelated. This was legally strong but made no economic sense. Their position was that even if Germany completely defaulted on reparations, Britain, France, and Italy were still fully responsible for making their loan payments to their American creditors. US President Calvin Coolidge famously summed this up: “They hired the money, didn’t they?” (meaning, they borrowed it, so they must pay it back).

A Weird Financial Web

The strange nature of international finance at this time was clear in the system that developed to keep trade and payments somehow working. The core problem was:

• Neither Britain nor the United States (both with governments influenced by protectionists who wanted to limit imports) showed any desire to make it easier for Germany to sell its goods in their countries. So, Germany couldn’t earn the money to pay.
• Despite this, the Allies demanded reparations from Germany, calling it their moral right and a political necessity. They had made too many promises to their own citizens to admit that Germany was too broke to pay.
• Americans, having rejected joining the League of Nations and turned inward to enjoy their own economic boom (the “Roaring Twenties”), had little sympathy for their former European allies. Many Americans felt their soldiers had won the war for Britain and France, and now these European countries were trying to trick “naive, honest Uncle Sam” out of money.

Keynes’s Sensible Solutions Ignored

As Keynes had written back in 1919, there were two sensible ways out of this mess:

1. The Best Way: Simultaneously cancel all inter-Allied war debts and German reparations. This would have immediately lifted the crushing burden of debt from everyone and offered a chance to quickly restore pre-war trade and currency stability.
2. The Next Best Way: If cancellation wasn’t possible, then major trading nations should sharply lower their tariffs (taxes on imports) to allow German goods to flow into European and American markets, enabling Germany to earn the money to pay.

The Circular Flow of Loans and Its Collapse

Of course, what actually happened was entirely different and quite absurd. The unstable system of international trade in the 1920s only worked because Americans loaned large amounts of money to Germany, supposedly to help German industry and transport develop.

The actual mechanism was almost comical:

1. American banks and investors loaned money to Germany.
2. Germany used most of this borrowed American money to make its reparations payments to the European Allies (like Britain and France).
3. The European Allies then used this money (received from Germany but originating from US loans) to pay the interest and principal on their own war loans from the United States.

In short, American money was going to Germany, then to the Allies, and then back to America. As long as the US continued to make these loans to Germany, the shaky structure of Allied war debts and German reparations could barely stand.

The logical outcome was obvious: one day, the Americans would get tired of this expensive game. Then Germany would default on its reparations, and the Allies, in turn, would stop paying their war debts to the US.

What actually brought this system to a halt was the Great Depression, which began in 1929.

• American loans to Germany dried up.
• In 1931, Germany defaulted on its payments.
• In June 1931, US President Herbert Hoover was forced to declare a one-year moratorium (temporary stop) on all payments of inter-Allied debts and German reparations.

By June 1933, almost all countries had stopped paying their war debts to the United States. Only Finland continued to honor its obligations.

Assessing Keynes’s Wisdom

How wise was Keynes? How accurately did he foresee the problems that would arise from the Versailles Treaty?

During the 1920s, public opinion in the Allied nations, even in France, gradually shifted. More and more people came to believe that the Peace Treaty had been both overly vengeful and simply unworkable. The Dawes Plan and the Young Plan were international, though cautious, attempts to repair some of the damage.

History cannot be rerun to see what might have happened if different choices were made, but it is open to discussion and speculation.

Assessing Keynes’s Wisdom and Influence

What if Things Had Been Different?

• Could democracy have thrived in Germany under such conditions?
• Could Adolf Hitler and the Nazi party never have risen to power?

Such a positive outcome might have been even more likely if, during the 1920s, the winning countries had encouraged free trade and international cooperation. The introduction suggests that terrible events like the wild inflation in Germany (1923-1924) that devastated its middle class, and the Great Depression of 1929 that completed their despair, were not inevitable. Just as World War II itself and the millions murdered in Nazi death camps were not unavoidable tragedies.

An Alternative View: Etienne Mantoux’s Criticisms

We can never know for sure what might have happened. There is another perspective on Keynes and his book. This view was powerfully presented by a young French economist named Etienne Mantoux in a book written during World War II, titled The Carthaginian Peace or the Economic Consequences of Mr. Keynes (essentially, a critique of Keynes). Mantoux attacked Keynes’s arguments on two main grounds:

What makes Mantoux's arguments on this point so powerful and emotional is not the economic debate itself (where, from Keynes's perspective, Mantoux was largely wrong). Instead, it's the horrifying knowledge, fueling Mantoux's anger, of just how many resources, goods, and even people the conquering Germans under Nazi rule were later able to brutally extract from their victims all over Europe during World War II. When a winning nation is willing to treat the defeated as mere loot, take their property, and enslave or kill large numbers of people, then the usual problems of how a country "transfers" payments disappear.

However, while Mantoux's rage is understandable, he overlooks key differences between the 1920s (after World War I) and the 1940s (during World War II). In the 1920s, the Allies would have had to use cruel, Nazi-like methods to get such results from Germany, and such methods were beyond what they could even imagine at the time.

2. French Security Needs: Mantoux’s second main criticism of Keynes concerned the political strategies of the 1920s. He argued that France’s demand for security from Germany was not simply due to a desire for revenge or excessive national pride (as Keynes suggested). Instead, it stemmed from: * Repeated German aggression against France from the 1870s onwards. * A very unfavorable population balance: there were more Germans than French people, and Germany’s birth rate was higher, meaning this gap would only grow.

Under these circumstances, Mantoux believed French security required either strong guarantees of protection from America and Britain (which neither country provided) or a Germany that was deliberately kept very weak. He pointed out that the French leader, Clemenceau, could have chosen to break Germany into smaller pieces but did not. As Hitler and the Nazis later showed, Clemenceau (the "Old Tiger"), for all his toughness, was far more civilized than these "New Barbarians."

Keynes’s “Mischievous” Role, According to Mantoux

From this perspective, Mantoux charged that Keynes’s role was extremely harmful. He argued that Keynes very early on turned American and British public opinion against enforcing even the “mild” parts of the Versailles Treaty. As an example, about a month before the United States Senate rejected joining the League of Nations, Senator Borah, a leading isolationist, praised Keynes’s book to his colleagues. Borah summarized Keynes’s argument: the treaty would lead to perpetual famine and constant revolution in Europe; unless it was completely rewritten, Europe’s economic system would be destroyed, millions would die, and revolutions would follow. Borah agreed with Keynes that the treaty was a “crime born of blind revenge and insatiable greed.”

Mantoux’s final claim was that this “loss of faith” and paralyzed will among the Allies, influenced by Keynes, made possible the “pathetic succession of surrenders” to Hitler that led to the catastrophe of World War II in 1939-1940.

Other Perspectives: Veblen and the Fear of Communism

History didn’t exactly follow Veblen’s prediction. The Treaty of Rapallo in 1922 unexpectedly brought Germany and Russia (both international outcasts at the time) into a friendly relationship. Later, the 1939 Nazi-Soviet Pact (an agreement between Hitler’s Germany and Stalin’s Russia) was a necessary step before Germany invaded Poland, starting World War II.

However, Veblen was right about one crucial thing: the intense, almost morbid fear among French and British conservatives and reactionaries that Communism would triumph, both in their own countries and in Russia. British leaders like Neville Chamberlain were influenced less by any guilt over how Germany had been treated at Versailles, and more by a wishful longing for an alliance with Germany and Italy against what they saw as the greater threat of Communism.

Allied Inconsistency and Its Consequences

Returning to Mantoux’s side of the argument, one could say that if the European Allies and the Americans were truly incapable of creating a wise and healing peace (as their actions often suggested), then perhaps they should have chosen Clemenceau’s tough approach to security. This would have meant keeping Germany consistently weak, even if it required a long-term military occupation of large parts of German territory by Allied troops.

In reality, the Allies followed no consistent policy. The Versailles Treaty was severe, but the later Dawes and Young Plans (which adjusted reparations) were more moderate. This inconsistency was not a good thing. The young, struggling Weimar democratic government in Germany was unfairly burdened with the moral blame for the war and endless financial arguments over reparations. It was these democrats, not the overthrown Kaiser (Emperor) or the temporarily sidelined German military leaders, who became the targets of popular German anger and dissatisfaction.

Furthermore, Allied protectionism (blocking imports) and economic mismanagement contributed directly to the Great Depression. This massive economic crisis, in turn, opened the doors for the Nazis and their allies in business and the military to take power.

Perhaps Keynes expected too much wisdom from Allied leaders and too much good sense from their citizens. Maybe ordinary people really did want revenge. It’s possible that a peace based on repression was the only alternative to the indecisive, inconsistent peace that actually occurred. If World War I marked the beginning of a “century of barbarism,” then perhaps only harsh, “barbarous” solutions stood any chance of success.

Keynes’s Enduring Vision

A Belief in Reason

Pessimistic thoughts like these are common today, across the political spectrum. But they rarely troubled Keynes. He has rightly been called a “child of the Locke-Hume-Mill connection,” meaning he was deeply influenced by Enlightenment philosophers who valued reason, evidence, and logical argument. Those who follow in the tradition of these great thinkers have always cherished the power of reason and the hope of persuading others through logic.

Beyond Versailles: Keynes’s Later Work

For Keynes, who never gave up trying to win over opponents with argument, The Economic Consequences of the Peace was an important episode in his life, not his sole obsession. During the 1920s, he grew increasingly concerned about persistent unemployment in Britain, especially in Scotland, Wales, and northern England, where older industries like shipbuilding, textiles, and coal mining were in decline. He reconciled with David Lloyd George (the former Prime Minister he had criticized) and provided him with a program to create jobs.

Hinting at his major contributions in the 1930s, Keynes advocated for:

• Government deficit spending: The government spending more money than it took in through taxes to stimulate the economy.
• Public works jobs: Creating jobs by funding large construction projects like roads or buildings.
• Other government interventions: The government actively stepping in to fill the gaps in economic activity and employment that occurred when private businesses were not investing or hiring enough.

Challenges and a Masterpiece

Keynes had little luck getting these domestic policies adopted in the 1920s. Officials at the British Treasury strongly opposed his ideas. They made the “damning argument” (known as the “Treasury View”) that whatever money the government spent, private investors would simply spend that much less, so there would be no overall benefit. They triumphantly, and bureaucratically, concluded that the government could do nothing more to fight unemployment than to appear cautious and confident.

As the Great Depression made Britain’s economic problems even worse, Keynes focused his efforts on developing a new and original theory of income and employment. This work culminated at the end of 1935 in his masterpiece, The General Theory of Employment, Interest and Money. The writer of this introduction calls it “thus far in the century the most important book written by an economist.”

Core Values: Individuality and Variety

The mature Keynes remained true to the beliefs of his younger self. He always believed in reason, individuality, and variety. Here is his consistent vision, in simplified terms from his own words: “Individualism, if it can be cleared of its faults, is the best protection for personal liberty because, compared to any other system, it greatly expands people’s range of choices. It is also the best protection for the variety of life, which comes directly from this wide range of personal choice. Losing this variety is the greatest of all losses in a society where everyone is forced to be the same or in a totalitarian state (where the government has total control). This variety keeps alive the traditions that represent the most secure and successful choices of past generations; it also enriches the present with diverse and imaginative ideas.”

Keynes knew that pre-war Europe had “defects and abuses” he was never patient with. But he also believed that pre-war Europe promoted values that he and his intellectual friends (like Lytton Strachey, Virginia Woolf, and E. M. Forster) held more precious than life itself.

A “Failure” of Vision?

Still, it’s hard to blame Keynes for struggling with all his energy to “put together the Humpty Dumpty” – to try to rebuild the pre-war European order that had so disastrously collapsed. His efforts were blocked by conventional, old-fashioned thinking and by calculating politicians who appealed to the worst emotions of the people who elected them. These short-sighted politicians ultimately granted Adolf Hitler and his regime of “thugs and murderers” what they had denied to the earlier, honest democratic leaders of Weimar Germany.

Introductory

Humans have a remarkable ability to get used to their surroundings. Because of this, very few of us truly understand how incredibly unusual, unstable, complicated, unreliable, and temporary the economic system in Western Europe has been for the past 50 years. We tend to think that the unique and temporary advantages we’ve recently enjoyed are natural, permanent, and can always be counted on. We make our plans based on this belief.

Building on a Shaky Foundation

On this shaky and false foundation, we make plans to improve society and create our political policies. We pursue our conflicts and personal ambitions, feeling like we have enough resources to spare that we can even encourage arguments within the European family of nations, instead of trying to calm them.

Driven by crazy ideas and reckless selfishness, the German people destroyed the very foundations on which all our lives and societies were built. Now, however, the leaders of France and Britain risk completing the ruin that Germany started. They are doing this through a peace treaty that, if put into effect, will damage Europe’s delicate and complex economic system even further. This system was already shaken and broken by war. Yet, it is the only way the people of Europe can find work and survive. Instead of restoring it, the treaty threatens to harm it more.

England’s Unawareness

In England, life on the surface doesn’t yet make us feel or realize that an entire era has ended. We are all busy trying to get back to our lives as they were before the war. The only difference is that many of us seem to be much richer than we were. Before the war, we spent millions. Now, we’ve learned we can spend hundreds of millions and apparently not suffer for it. It seems we weren’t using our economy’s full potential before.

So, we now expect not just a return to the comforts we had in 1914, but for those comforts to become much bigger and better. People from all social classes are making their plans based on this idea: the rich plan to spend more and save less, and the poor plan to spend more and work less.

The Reality in Mainland Europe

But perhaps it’s only in England (and America) that people can be so unaware of the true situation. In mainland Europe, the ground itself feels like it’s shaking, and everyone is aware of the dangerous rumblings. There, the problems are not just about spending too much or “labor troubles.” It’s about life and death, about starvation and basic survival. It’s about the terrifying collapse of a dying civilization.

A View from Paris

For someone like me, who spent most of the six months after the Armistice (the end of World War I fighting) in Paris, occasional visits back to London were a strange experience. England still seems to stand apart from Europe. The silent tremors of Europe’s suffering don’t seem to reach it. Europe is a distinct place, and England doesn’t feel like part of its essential being.

But the countries of mainland Europe are deeply connected. France, Germany, Italy, Austria, Holland, Russia, Romania, and Poland all beat with a shared pulse; their basic structures and civilizations are essentially one. They grew and prospered together. They were shaken together by the war – a war that Britain (and to a lesser extent, America), despite our huge contributions and sacrifices, managed to stay somewhat economically outside of, in terms of direct damage to our homelands. And now, these European nations may fall together.

This is what makes the Peace Treaty signed in Paris so destructive. If this “European Civil War” is to end with France and Italy using their temporary victory to destroy a defeated Germany and Austria-Hungary, they are also inviting their own destruction. This is because they are deeply and complicatedly tied to their victims by hidden emotional and economic connections.

An Englishman like myself, who took part in the Paris Peace Conference and was a member of the Supreme Economic Council of the Allied Powers during those months, was forced into a new way of thinking. I began to feel European in my concerns and outlook. There, at the very heart of the European system, my purely British worries largely faded away. I became haunted by different, more terrifying fears.

Paris was a nightmare. Everyone there seemed to be in a grim state of mind. A sense of approaching disaster hung over the seemingly light-hearted official events. There was a feeling of how small and powerless people were in the face of the huge events confronting them. The decisions being made felt both incredibly important and strangely unreal. Light-heartedness, blindness to reality, arrogance, confused demands from outside – all the elements of an ancient tragedy were present. Sitting in the grand, theatrical rooms of French state buildings, one could look at the extraordinary faces of leaders like President Wilson and Prime Minister Clemenceau, with their fixed expressions and unchanging roles, and wonder if they were real faces at all, or just the tragicomic masks of actors in some bizarre play or puppet show.

A Sense of Unreality and Fate

Everything that happened in Paris had this feeling of being extremely important and yet, at the same time, completely unimportant. The decisions seemed to hold enormous consequences for the future of human society. Yet, there was a whisper in the air that these words and decisions were not real, that they were useless, insignificant, and would have no effect, totally disconnected from actual events.

One strongly felt that events were marching towards their destined conclusion, uninfluenced and unaffected by the thoughts and plans of the statesmen meeting in their councils. It was like the scenes described by Tolstoy in War and Peace or by Thomas Hardy in his poetic drama The Dynasts. In Hardy’s work, timeless Spirits comment on human actions:

The Spirit of the Years notes that people have lost their wisdom and self-control, driven by some unthinking universal force. The powerful are motivated only by revenge, while the weak are filled with helpless anger. The Spirit of the Pities asks why this Force causes such senseless actions. The Spirit of the Years replies that the Force works unknowingly, like someone possessed and unable to use judgment.

This feeling of powerful, unseen forces at work, and the futility of human efforts, was strong in Paris.

The Nightmare of Paris vs. London’s Indifference

In Paris, those of us connected with the Supreme Economic Council received almost hourly reports of the misery, chaos, and collapsing societies across all of Central and Eastern Europe—affecting both Allied and enemy countries. We heard directly from the financial representatives of Germany and Austria, who provided undeniable proof of how terribly exhausted their countries were. In this context, an occasional visit to the hot, stuffy room in President Wilson’s Paris residence, where the “Big Four” leaders (of the USA, France, Britain, and Italy) decided fates through what seemed like empty and unproductive political games, only added to the sense of nightmare.

The problems of Europe were terrifyingly real and urgent in Paris. So, an occasional return to the vast indifference of London was a bit unsettling. In London, these huge European questions seemed very far away. People were only troubled by our own, smaller, local problems. Londoners generally believed that the Paris conference was making a big mess of things, but they remained uninterested. It was in this spirit that the British people accepted the Treaty of Versailles – without even reading it.

This book, however, has been written under the influence of Paris, not London. It is written by someone who, though an Englishman, also feels himself to be a European. Because of my recent, vivid experiences, I cannot turn away from the great historical drama unfolding these days. It is a drama that will destroy great institutions, but it may also create a new world.

Europe Before the War

Before 1870, different parts of the small continent of Europe specialized in making their own products. However, if you looked at Europe as a whole, it was mostly self-sufficient, meaning it could largely provide for its own needs. The number of people living in Europe was suited to this situation.

A New and Unstable Economic Era After 1870

After 1870, a new and unheard-of situation developed on a large scale. For the next fifty years, Europe’s economic condition became unstable and unusual. For the first time in recorded history, the problem of having enough food for a growing population actually reversed. As the number of people increased, food surprisingly became easier to get. Producing more in agriculture, just like in industry, brought greater returns.

This happened because:

• As Europe’s population grew, more people emigrated to new countries (like those in the Americas) to farm the land there.
• At the same time, more workers became available in Europe. They made the industrial products and machinery needed by the emigrants in their new homes. They also built the railways and ships that brought food and raw materials to Europe from distant places.

Up to around the year 1900, a certain amount of industrial work could buy an increasing quantity of food each year. It’s possible that around 1900, this trend started to change, and it began to take more effort to get the same amount from nature. However, even if basic foods like grains were becoming more expensive in real terms, other improvements balanced this out. For example, one of many new developments was the large-scale use of resources from tropical Africa. A great trade in oil-seeds (like palm oil or groundnuts) began, bringing a new and cheaper form of essential food to European tables.

Most of us who lived before the war grew up in this “economic Eldorado”—this wonderfully prosperous time, almost an economic paradise, as earlier economists would have seen it.

Forgetting Past Warnings

That happy age lost sight of a view of the world that had deeply worried the founders of economics. Before the 18th century, people didn’t have false hopes about endless plenty. To challenge the optimistic illusions that became popular late in that century, the economist Thomas Malthus warned of a “Devil”: the danger that population would grow faster than the food supply. For fifty years after Malthus, all serious economic writings kept this danger in mind. Then, for the next fifty years, it seemed this “Devil” was chained up and out of sight. Now, perhaps, we have set him loose again.

The Pre-War “Golden Age”: A Closer Look

What an extraordinary period of human economic progress that era was, which suddenly ended in August 1914! It’s true that most of the population worked hard and lived with a low level of comfort. Yet, they appeared to be reasonably content with their situation. But for any man with abilities or character above the average, it was possible to rise into the middle and upper classes. For these classes, life offered conveniences, comforts, and luxuries at a low cost and with very little trouble—things beyond what even the richest and most powerful kings of past ages could have imagined.

Consider an inhabitant of London before the war:

• He could order various products from all over the world by telephone while sipping his morning tea in bed and expect them to be delivered to his doorstep quickly.
• At the same time, using the same means, he could invest his money in natural resources and new businesses anywhere in the world. He could then share in their future profits without any effort or trouble.
• He could also choose to invest his money securely with any major town or city in any continent that he fancied or had good information about.
• If he wished, he could immediately arrange cheap and comfortable travel to any country or climate, without needing a passport or other official papers.
• He could send his servant to a nearby bank to get whatever gold or silver coins he needed.
• He could then travel abroad to foreign countries, even without knowing their religion, language, or customs, carrying his wealth on his person. He would have been very annoyed and surprised by even the slightest interference.

Most importantly, he saw this state of affairs as normal, certain, and permanent, something that would only continue to improve. He thought any change for the worse was strange, outrageous, and could be avoided. The big political issues of the day—militarism and imperialism (building empires), rivalries between races and cultures, monopolies, trade restrictions, and exclusion—seemed like little more than entertainment in his daily newspaper. These things appeared to have almost no influence on the ordinary course of social and economic life, which had become almost completely international in practice.

It will help us understand the nature and results of the peace treaty we have forced on our enemies if I explain in more detail some of the main unstable elements that were already present in Europe’s economic life when the war broke out.

I. Population

Germany’s Rapid Growth In 1870, Germany had a population of about 40 million people. By 1892, this number had risen to 50 million, and by June 30, 1914 (just before the war), it was about 68 million. In the years right before the war, Germany’s population was increasing by about 850,000 people each year. Only a very small number of these people emigrated to other countries.

This huge increase in population was only possible because of a massive change in Germany’s economic structure. Germany transformed itself from an agricultural country that mostly supported itself into a vast and complicated industrial machine. This machine depended for its smooth operation on a delicate balance of many factors, both inside and outside Germany. Only by keeping this machine running continuously and at full speed could Germany find jobs at home for its growing population and find ways to buy the food and supplies they needed from other countries. The German economic machine was like a spinning top: to stay upright, it had to spin faster and faster.

Growth in Austria-Hungary In the Austro-Hungarian Empire, the population grew from about 40 million in 1890 to at least 50 million when the war began. The same trend of population growth was happening there, though to a lesser extent than in Germany. The number of births exceeded deaths by about half a million each year. However, out of this increase, about a quarter of a million people emigrated annually.

Central Europe: A Population Powerhouse To understand the situation today, we must clearly grasp what an extraordinary center of population Central Europe had become due to the development of this “Germanic system” (Germany and Austria-Hungary). Before the war, the combined population of Germany and Austria-Hungary was not only much larger than that of the United States, but it was also about equal to the population of all of North America. These large numbers of people, living in a compact area, formed the military strength of the Central Powers (Germany and Austria-Hungary). But these same large numbers—which even the war has not significantly reduced—remain a serious danger to European order if they are deprived of the means to live.

Russia’s Even Greater Expansion European Russia increased its population even more dramatically than Germany. It grew from less than 100 million people in 1890 to about 150 million when the war started. In the year just before 1914, the excess of births over deaths in Russia as a whole was at the astonishing rate of two million people per year. This enormous growth in Russia’s population, which has not been widely noticed in England, has nevertheless been one of the most significant facts of recent years.

Population Growth as a Force in History Great historical events are often due to long-term (“secular”) changes in population growth and other fundamental economic causes. Because these changes happen gradually, people living at the time often don’t notice them. Instead, they blame events on the mistakes of politicians or the fanaticism of non-believers. For example, the extraordinary events of the past two years in Russia—that vast social upheaval which has overturned what seemed most stable (religion, the basis of property, land ownership, forms of government, and social classes)—may owe more to the deep impact of a rapidly expanding population than to Lenin or Tsar Nicholas. The disruptive power of too many people being born in a nation may have played a greater role in breaking the bonds of society than either the power of new ideas or the errors of an autocratic government.

II. Organization

The delicate system by which these large populations lived depended partly on factors within Europe itself.

An Interconnected System The interference of national borders and trade taxes (tariffs) was kept to a minimum. Not far short of three hundred million people lived within the three great empires of Russia, Germany, and Austria-Hungary, and goods could move relatively freely between them. The different national currencies were all kept stable in relation to gold and to each other. This made it easy for money (capital) and trade to flow between countries to an extent that we only fully realize the value of now that we have lost these advantages. Across this vast area, there was almost absolute security for people’s property and for their personal safety.

Foundations of Industry These factors—order, security, and uniformity—which Europe had never before enjoyed over such a wide and populated area or for such a long time, prepared the way for the organization of the huge systems of transport, coal distribution, and foreign trade. These systems, in turn, made an industrial way of life possible in the densely populated new urban centers. This is too well known to need detailed proof with figures. But it can be illustrated by the figures for coal, which was as vital to the industrial growth of Central Europe as it was to England. German coal production grew from 30 million tons in 1871 to 70 million tons in 1890, 110 million tons in 1900, and 190 million tons in 1913.

Germany: The Economic Hub The rest of the European economic system grouped itself around Germany as a central support. The prosperity of the rest of the continent mainly depended on the prosperity and business activity of Germany. Germany’s increasing economic pace gave its neighbors a market for their products. In return, German businesses supplied these neighboring countries with most of what they needed at low prices.

The statistics showing the economic interdependence of Germany and its neighbors are overwhelming:

• Germany was the best customer for Russia, Norway, Holland, Belgium, Switzerland, Italy, and Austria-Hungary.
• It was the second-best customer for Great Britain, Sweden, and Denmark.
• It was the third-best customer for France.
• Germany was the largest source of supply for Russia, Norway, Sweden, Denmark, Holland, Switzerland, Italy, Austria-Hungary, Romania, and Bulgaria.
• It was the second-largest source of supply for Great Britain, Belgium, and France.

In Britain’s own case, we sent more exports to Germany than to any other country in the world except India. We also bought more from Germany than from any other country in the world except the United States.

There was no European country (except those west of Germany) that did not conduct more than a quarter of its total trade with Germany. For Russia, Austria-Hungary, and Holland, the proportion was far greater.

Germany not only traded with these countries but, in some cases, also supplied a large part of the investment money (capital) needed for their own development. Of Germany’s foreign investments before the war, which totaled about $6.25 billion, nearly $2.5 billion was invested in Russia, Austria-Hungary, Bulgaria, Romania, and Turkey. Through a system of “peaceful penetration” (gaining influence through economic means), Germany provided these countries not only with capital but also with organization, which they needed just as much. In this way, the whole of Europe east of the Rhine River fell into Germany’s industrial orbit, and its economic life was shaped accordingly.

However, these internal European factors alone would not have been enough to enable the population to support itself. The cooperation of external factors and certain general attitudes common to the whole of Europe were also necessary. Many of the conditions already discussed were true for Europe as a whole, not just the Central Empires. But everything that follows was common to the entire European system.

III. The Psychology of Society

Europe’s society and economy were organized in such a way as to ensure the maximum accumulation of capital (the saving and buildup of wealth for investment). While there was some continuous improvement in the daily living conditions of most people, society was structured so that a large part of any increased income went to the control of the class least likely to spend it immediately—the rich. The “new rich” of the 19th century were not brought up to spend lavishly. They preferred the power that investment gave them to the pleasures of immediate consumption.

In fact, it was precisely this inequality in the distribution of wealth that made possible the vast buildups of fixed wealth (like factories and railways) and capital improvements (like new technologies and infrastructure) that distinguished that age from all others. This, in reality, was the main justification for the Capitalist System. If the rich had spent their new wealth on their own enjoyments, the world would long ago have found such a system unbearable. But, like bees, they saved and accumulated. This benefited the whole community, even if their own personal aims were more limited.

The immense accumulations of fixed capital, which were built up during the half-century before the war to the great benefit of humankind, could never have happened in a society where wealth was divided equally. The railways of the world, which that age built as a monument for future generations, were, much like the Pyramids of Egypt, the result of labor that was not free to immediately consume the full value of its efforts in enjoyment.

The “Double Bluff” of Pre-War Capitalism This remarkable system depended for its growth on a “double bluff” or deception:

1. The Laboring Classes’ Acceptance: The working classes accepted a situation where they could call very little of the “cake” (the total wealth produced) their own, even though they, along with nature and the capitalists, were cooperating to produce it. They accepted this because they were unaware of their potential power, felt powerless, or were compelled, persuaded, or tricked by custom, tradition, authority, and the well-established order of society.
2. The Capitalist Classes’ Reinvestment: The capitalist classes, on the other hand, were allowed to claim the best part of the cake as theirs and were theoretically free to consume it all. However, this was on the unspoken, underlying condition that they consumed very little of it in practice and reinvested the rest.

The duty of “saving” became almost the highest virtue, and the growth of the “cake” became the object of true dedication, almost like a religion. All the instincts of Puritanism—which in other ages had led people to withdraw from the world and neglect both the arts of production and the arts of enjoyment—grew around the idea of not consuming the cake. And so the cake increased; but for what ultimate purpose was not clearly considered. Individuals were encouraged not so much to abstain from spending altogether, but to delay it, and to cultivate the pleasures of security and looking forward to future enjoyment. Saving was for old age or for your children; but this was mostly just in theory. The real virtue of the cake was that it was never supposed to be consumed, neither by you nor by your children after you.

Society’s Unconscious Goal: “Progress” In writing this, I am not necessarily criticizing the practices of that generation. In the unconscious depths of its being, society knew what it was about. The “cake” was actually very small in proportion to people’s desire to consume, and if it were shared all around, no one would be much better off. Society was working not for the small pleasures of today but for the future security and improvement of the human race—in fact, for “progress.”

The hope was that if only the cake were not cut but was allowed to grow at the same rapid rate that Malthus predicted for population growth (a rate also true of compound interest), perhaps a day might come when there would at last be enough to go around. Then, future generations (“posterity”) could enter into the enjoyment of our labors. In that future day, overwork, overcrowding, and underfeeding would have ended. Men, secure in having the comforts and necessities of the body, could then move on to the nobler activities of their minds and spirits. One rapid rate of growth (compound interest) might cancel out another (population growth), and so the 19th century was able to forget the rapid reproduction of the human species while contemplating the amazing power of compound interest.

Two Dangers to This Hope There were two pitfalls in this outlook:

1. What if population still grew faster than savings? Then our self-denials would only lead to more people, not more happiness.
2. What if the cake, after all, was consumed too soon, in war—the destroyer of all such hopes?

An Unstable Foundation But these thoughts lead too far from my main purpose here. I only want to point out that the principle of accumulation based on inequality was a vital part of the pre-war order of society and of progress as we then understood it. And I want to emphasize that this principle depended on unstable psychological conditions, which it may be impossible to recreate. It was not natural for a population, of whom so few enjoyed the comforts of life, to save and accumulate so hugely.

The war has revealed the possibility of consumption (spending) to everyone and has shown the foolishness of abstinence (not spending) to many. Thus, the “bluff” is discovered. The laboring classes may no longer be willing to go without so much. And the capitalist classes, no longer confident of the future, may try to enjoy their freedom to consume more fully while they still can. This might hurry the moment when their wealth is taken away (confiscation).

IV. The Relation of the Old World to the New

The saving and accumulating habits of Europe before the war were the necessary condition for the greatest of the external factors that maintained Europe’s economic balance.

Of the surplus capital goods (like machinery, tools, and infrastructure) that Europe accumulated, a substantial part was exported to other parts of the world. Investing this capital abroad made it possible to develop new sources of food, materials, and transport in these new lands. At the same time, it enabled the Old World (Europe) to establish a claim on the natural wealth and untapped potential of the New World (like the Americas and other developing regions).

This section continues and concludes the chapter “Europe Before the War,” focusing on how Europe used its foreign investments and the growing instability of its food supply before World War I.

Europe’s Careful Use of Investment Income

This income from foreign investments became extremely important. Europe (the “Old World”) used the yearly payments it received from these investments very carefully. It’s true that Europe enjoyed the benefit of cheap and plentiful supplies that resulted from the new developments its investments had made possible in other lands. These benefits were enjoyed immediately, not put off.

However, most of the money earned as interest from these foreign investments was reinvested. It was allowed to grow over time, building up a reserve. It was hoped this reserve would be a safety net for a less happy future. This might be a time when European industrial workers could no longer buy products from other continents so easily. Or it might be a time when the balance between Europe’s established civilizations and the growing populations of people in other parts of the world, with different climates and environments, would be threatened. In this way, all people in Europe, whether they stayed at home or moved to new lands, generally benefited from the development of these new global resources.

An Unstable Balance: Europe’s Food Supply

Even before the war, however, the balance that had been established between Europe’s old civilizations and these new global resources was being threatened. Europe’s prosperity was based on two key facts:

1. Cheap Food from America: Because America had a large surplus of food that it could export, Europe was able to buy food at a cheap rate. This meant Europe did not have to trade too many of its own manufactured goods to get the food it needed.
2. Income from Past Investments: As a result of its previous investments of capital around the world, Europe was entitled to receive a substantial amount of income each year without having to make any current payment in return for that specific income.

The second factor—the income from investments—seemed safe at the time. But the first factor—the cheap food supply—was not so secure. This was mainly because the population in overseas countries, especially in the United States, was growing.

The Shrinking American Food Surplus When the fresh, fertile soils of America were first cultivated, the number of people living in the Americas, and therefore their own local need for food, was very small compared to Europe’s population. As recently as 1890, Europe had three times as many people as North and South America combined.

But by 1914, the United States was beginning to need almost all the wheat it produced for its own people. The time was clearly approaching when America would only have extra wheat to sell abroad in years when the harvest was exceptionally good. (Indeed, Keynes notes that America’s domestic wheat needs at the time of his writing were estimated at more than 90% of its average production in the five years from 1909-1913.)

Even before the war, this trend towards tighter food supplies (“stringency”) was becoming clear. It wasn’t so much that there was a lack of wheat in the world overall. Rather, there was a steady increase in its real cost. To encourage farmers worldwide to produce an adequate supply of wheat, it was necessary to offer them a higher real price (meaning a price that could buy more other goods and services).

One of the most favorable factors in this situation for Europe was the large amount of food Central and Western Europe was getting from the exportable surpluses of Russia and Romania.

A Precarious Situation In short, Europe’s ability to draw on the resources of the New World was becoming uncertain. The “law of diminishing returns”—an economic principle stating that after a certain point, adding more resources to production (like land or labor) results in smaller and smaller increases in output—was finally taking effect in agriculture. This meant that each year, Europe had to offer a greater quantity of its own manufactured goods to obtain the same amount of food, like bread. Because of this, Europe absolutely could not afford any disruption to its main sources of supply.

Key Factors of Pre-War Instability

Much more could be said to describe the unique economic features of Europe in 1914. However, I have chosen to emphasize three or four of the greatest factors of instability:

1. An Overly Large Population: Europe had a huge population that depended for its survival on a complicated and artificial economic organization.
2. Psychological Instability: There was an unstable psychological relationship between the working classes and the capitalist classes (as discussed with the “double bluff”).
3. Unstable Food Supply: Europe’s claim on the food supplies of the New World was unstable, coupled with its complete dependence on these supplies.

The War’s Devastating Impact

The war had shaken this entire system so severely that it endangered the very life of Europe. A large part of the continent was sick and dying. Its population was far greater than the number of people for whom a livelihood (jobs and resources) was available. Its economic organization was destroyed, its transport system was broken, and its food supplies were terribly damaged.

The Task of the Peace Conference

It was the task of the Peace Conference to:

• Honor commitments and satisfy justice.
• But, just as importantly, to re-establish life and heal the wounds of war.

These tasks were necessary not only out of generosity—the kind of magnanimity that wise leaders in ancient times showed towards defeated enemies—but also out of practical common sense (prudence).

We will examine the actual character of the Peace Treaty in the following chapters.

The Conference

In the next chapters (Chapters IV and V), I will look closely at the economic and financial parts of the Treaty of Peace with Germany. But it will be easier to understand where many of these terms truly came from if we first examine some of the personalities and personal factors that influenced how they were created.

As I do this, I will inevitably touch on people’s motives. Observers can easily make mistakes about motives, and we are not entitled to make final judgments. However, if in this chapter I sometimes seem to take the freedom to analyze people in a way that historians often do (but which we usually hesitate to do with people still living, even if we have more information), I hope the reader will excuse me. Please remember how much the world needs to understand—even if the understanding is only partial and uncertain—the complex struggle of human will and purpose. This struggle, which is not yet over, was concentrated in the persons of four individuals in a way never seen before. In those first months of 1919, these four men became like a miniature version of all humanity, deciding its fate.

French Tactics and Policy

In the parts of the Treaty that concern me here, the French generally took the lead. Usually, they were the ones who first made the most specific and the most extreme proposals.

This was partly a tactic. When you expect the final result to be a compromise, it’s often wise to start by asking for a lot. The French, like most others, expected two rounds of compromise:

1. First, to reach an agreement with their allies.
2. Second, during the actual peace conference, to reach an agreement with the Germans themselves.

These tactics worked. The French Prime Minister, Clemenceau, gained a reputation among his colleagues in the Council of Four for being moderate. He did this by sometimes rejecting the more extreme proposals of his own ministers, making it seem like he was being fair and objective. As a result, many things were approved because the American and British critics:

• Were sometimes understandably a little ignorant of the real issues at stake.
• Felt uncomfortable if they criticized France too persistently, as it made them seem like they were always taking Germany’s side.

So, when British and American interests were not directly and seriously affected, their criticism often weakened. Some treaty conditions were passed that even the French themselves didn’t take very seriously. The last-minute decision not to allow any discussion with the Germans meant there was no chance to fix these problematic parts.

But apart from tactics, the French also had a clear policy. Although Clemenceau might sharply dismiss the claims of his ministers like Klotz or Loucheur, or close his eyes with a tired expression when French interests were no longer the topic of discussion, he knew which points were absolutely vital. On these crucial matters, he gave very little ground. If the main economic ideas of the Treaty represent any single intellectual vision, it is the vision of France and of Clemenceau.

Clemenceau: The Dominant Figure

Clemenceau was by far the most distinguished and impressive member of the Council of Four (the leaders of France, Britain, Italy, and the USA). He had accurately sized up his colleagues. He alone had a clear idea for the peace and had thought through all its consequences. His age, his character, his sharp wit, and his appearance all combined to make him seem objective and well-defined in an otherwise confusing environment. One could not despise Clemenceau or dislike him; one could only hold a different view about the nature of civilized humanity, or at least hope for a different future.

Clemenceau’s appearance and way of carrying himself are widely known. At the Council of Four, he wore a very good, thick, black wool coat with a square tail. He always wore gray suede gloves. His boots were of thick black leather, excellent quality, but in a country style, and sometimes, curiously, they fastened in the front with a buckle instead of laces.

His seat in the room at the President’s house (President Wilson’s temporary Paris residence), where the regular meetings of the Council of Four were held, was on a square, decoratively-covered chair. This chair was in the middle of the semicircle of leaders facing the fireplace. Signor Orlando (of Italy) was on his left. President Wilson was next to Orlando, by the fireplace. The British Prime Minister, Lloyd George, was on Clemenceau’s right, on the other side of the fireplace.

Clemenceau carried no papers and no briefcase. He had no personal secretary with him, though several French ministers and officials relevant to the topic being discussed would be present around him. His walk, his hand gestures, and his voice were still strong. However, especially after an assassination attempt on him, he looked like a very old man saving his strength for important moments.

He rarely spoke, usually letting his ministers or officials make the initial statement for the French side. He often closed his eyes and leaned back in his chair with an unreadable, parchment-like face, his gray-gloved hands clasped in front of him. A short sentence, either decisive or cynical, was generally enough from him. Sometimes it was a question, or a blunt rejection of his own ministers’ points (without trying to spare their feelings), or a display of stubbornness emphasized by a few sharply spoken words in English. But when speech and passion were needed, they were there. His sudden outbursts of words, often followed by a deep cough from his chest, made an impact more through their force and surprise than through gentle persuasion.

Scenes of Chaos at the Conference

Quite often, Mr. Lloyd George, after giving a speech in English, would walk across the hearthrug to President Wilson while the speech was being translated into French. He would do this to privately reinforce his point with a personal appeal or to test if a compromise was possible. This would sometimes trigger general chaos and disorder. President Wilson’s advisers would crowd around him. A moment later, the British experts would drift over to find out what was happening or to make sure things were going their way. Then the French would join, a little suspicious that the others were arranging something without them. Soon, everyone in the room would be on their feet, talking at once in both English and French.

My last and most vivid memory is of such a scene: President Wilson and Prime Minister Lloyd George at the center of a surging crowd and a babble of noise. It was a confusing mix of eager, unplanned compromises and counter-compromises – all dramatic but ultimately meaningless, focused on what was an unimportant question anyway. The truly important issues of the morning’s meeting were forgotten and ignored.

And there was Clemenceau, silent and distant on the edge of the group (because nothing directly touching the security of France was being discussed). He sat enthroned in his gray gloves on the brocaded chair, his spirit seeming dry and empty of hope. He looked very old and tired, yet he surveyed the scene with a cynical and almost mischievous expression. And when silence was finally restored and everyone had returned to their seats, they would discover that he had disappeared.

Clemenceau’s Philosophy: France First, Power Politics Always

Clemenceau felt about France what Pericles, the ancient Greek statesman, felt about Athens: France was uniquely valuable, and nothing else truly mattered. But his theory of politics was like that of Bismarck, the German chancellor known for his practical and power-focused approach. Clemenceau had one illusion: France. And he had one disillusionment: mankind, including Frenchmen, and especially his colleagues at the conference.

His principles for the peace were simple. First, he strongly believed in a particular view of German psychology: that Germans understand nothing but intimidation. He thought they lack generosity or remorse in negotiations, that they will take any advantage they can, and that they will shamefully lower themselves for profit. He believed they had no honor, pride, or mercy. Therefore, he concluded, you must never negotiate with a German or try to win them over; you must dictate terms to them. Only then will they respect you, and only then will you prevent them from cheating you. It’s uncertain, however, whether he thought these traits were unique to Germans, or if his honest opinion of other nations was much different.

His philosophy, therefore, had no room for “sentimentality” or emotional considerations in international relations. Nations are real things. You love one (your own), and for the rest, you feel indifference—or hatred. The glory of the nation you love is a desirable goal, but it is generally achieved at your neighbor’s expense. The politics of power are inevitable. There is nothing very new to learn about this war or why it was fought. In his view, England had, as in every previous century, destroyed a trade rival. A mighty chapter had closed in the long-running struggle between the glories of Germany and France.

Prudence required some outward show of respect—some “lip service”—to the “ideals” of foolish Americans and hypocritical Englishmen. But it would be stupid to believe that there is much room in the world, as it really is, for things like the League of Nations. Similarly, there was no real sense in the principle of self-determination (the idea that national groups should be able to choose their own government), except as a clever way to rearrange the balance of power to benefit oneself.

Clemenceau’s Goal: Reversing German Progress

These are general principles. To understand the practical details of the peace that Clemenceau thought necessary for the power and security of France, we must look at the historical events that happened during his lifetime. Before the Franco-German War (1870-1871), the populations of France and Germany were about equal. Germany’s coal, iron, and shipping industries were just beginning, and France was much wealthier. Even after France lost the regions of Alsace-Lorraine to Germany in that war, there wasn’t a huge difference between the real resources of the two countries.

But in the years between that war and 1914, their relative positions changed completely. By 1914:

• Germany’s population was nearly 70% larger than France’s.
• Germany had become one of the world’s leading manufacturing and trading nations.
• Its technical skill and its ability to produce future wealth were unmatched. France, on the other hand, had a population that was stagnant or declining. Compared to other nations, France had fallen seriously behind in wealth and in its power to create it.

A Future of Perpetual Conflict

Therefore, despite France’s victory in the current war (World War I, achieved this time with the help of England and America), its future position remained dangerous. This was especially true in the eyes of someone like Clemenceau, who believed that war within Europe was a normal, or at least a recurring, state of affairs for the future. He thought that the kinds of conflicts between organized great powers that had filled the past hundred years would also define the next hundred.

According to this vision, European history is like a perpetual prize-fight. France had won this round, but this round was certainly not the last. Clemenceau believed that the old order of power politics doesn’t fundamentally change because human nature is always the same. This led him to be skeptical of all the ideas that the League of Nations stood for. From this viewpoint, the policy of France and of Clemenceau followed logically.

A peace based on generosity or fair and equal treatment, like President Wilson’s Fourteen Points, could only shorten the time it would take for Germany to recover. It would only hasten the day when Germany would once again attack France with its larger population, superior resources, and technical skill. This was why “guarantees”—measures to keep Germany weak—were necessary. And each guarantee that was taken, by increasing Germany’s anger and thus the likelihood of future German revenge, made even more crushing provisions necessary.

So, as soon as one adopts this view of the world and rejects other, more idealistic views, a demand for a “Carthaginian Peace”—a peace designed to utterly crush the enemy—becomes inevitable, to the full extent of one’s temporary power to impose it. Clemenceau made no secret of the fact that he did not consider himself bound by the Fourteen Points. He mostly left it to others to come up with the necessary justifications or excuses to satisfy President Wilson’s conscience or preserve his public image.

Setting the Clock Back

Therefore, as much as possible, France’s policy was to set the clock back. It aimed to undo the progress Germany had made since 1870. Germany’s population was to be reduced through the loss of territory and other measures. But chiefly, its economic system—the source of its new strength, the vast structure built on iron, coal, and transport—had to be destroyed. If France could seize even part of what Germany was forced to give up, the inequality of strength between the two rivals for dominance in Europe might be corrected for many generations.

This thinking led to the numerous treaty provisions designed to destroy Germany’s highly organized economic life, which we will examine in the next chapter.

This is the policy of an old man, whose most vivid memories and active imagination are focused on the past, not the future. He sees the issue in terms of France versus Germany, not in terms of humanity or European civilization struggling towards a new order. The war has affected his thinking differently from ours; he neither expects nor hopes that we are at the beginning of a new age.

The Impossibility of a Carthaginian Peace

However, this is not just a question of ideals. My purpose in this book is to show that a Carthaginian Peace is not practically right or possible. Although the way of thinking that produces such a peace is aware of economic factors, it nevertheless overlooks the deeper economic trends that will shape the future. The clock cannot be set back. You cannot return Central Europe to the conditions of 1870 without creating such enormous strains in the European structure and unleashing such powerful human and spiritual forces that they will overwhelm not only France and its “guarantees,” but also its institutions and the existing social order.

President Wilson’s Collapse

How was this harsh policy of Clemenceau’s substituted for President Wilson’s Fourteen Points? And how did the President come to accept it? The answers are difficult and depend on elements of character, psychology, and the subtle influence of the surroundings—factors that are hard to detect and even harder to describe.

But, if the actions of a single individual ever truly matter, then the collapse of President Wilson has been one of the most decisive moral events in history. I must try to explain it. What a significant place the President held in the hearts and hopes of the world when he sailed to Europe on the George Washington! What a great man seemed to have come to Europe in those early days of our victory!

In November 1918, the Allied armies under General Foch and the words of President Wilson had brought a sudden escape from the war that was swallowing up everything we cared for. The conditions for peace seemed favorable beyond any expectation. The victory was so complete that fear did not need to play any part in the settlement. The enemy had surrendered, relying on a solemn agreement about the general character of the peace. The terms of this agreement seemed to promise a settlement based on justice and generosity, offering a fair hope for restoring the broken flow of life. To make sure of this, the President himself was coming to Europe to put his seal on this work.

When President Wilson left Washington, he enjoyed a level of prestige and moral influence throughout the world that was unequaled in history. His bold and carefully chosen words reached the peoples of Europe, rising above the voices of their own politicians. The people in enemy countries trusted him to carry out the agreement he had made with them. The Allied peoples saw him not just as a victor but almost as a prophet.

In addition to this moral influence, he held real power. The American armies were at their peak in numbers, discipline, and equipment. Europe completely depended on food supplies from the United States. Financially, Europe was even more absolutely at America’s mercy. Europe not only already owed the United States more than it could possibly pay, but only a large amount of further American assistance could save it from starvation and bankruptcy. Never before had a philosopher held such powerful tools to influence the leaders of the world.

How the crowds in European capitals pressed around the President’s carriage! With what curiosity, anxiety, and hope people sought a glimpse of the features and bearing of this “man of destiny.” Coming from the West, he was expected to heal the wounds of Europe—the ancient parent of his own civilization—and to lay the foundations for our future.

The Great Disillusionment

The disillusionment that followed was so complete that some of those who had trusted him most hardly dared to speak of it. “Could it be true?” they asked those returning from the Paris conference. “Was the Treaty really as bad as it seemed? What had happened to the President? What weakness or misfortune had led to such an extraordinary, unlooked-for betrayal?”

Yet the causes of this failure were very ordinary and human. The President was not a hero or a prophet. He was not even a philosopher. He was a man with good intentions but also with many of the weaknesses of other human beings. He lacked the dominating intellectual power that would have been necessary to cope with the subtle and dangerous master negotiators he faced. A tremendous clash of forces and personalities had brought these European leaders to the top, triumphant in the swift game of give-and-take, face-to-face in council meetings—a game of which President Wilson had no experience at all.

Misconceptions About President Wilson

We in Europe had indeed formed quite a wrong idea of the President. We knew he was a solitary person who kept to himself, and we believed him to be very strong-willed and stubborn. We did not imagine him as someone focused on details. However, we thought that his clear grasp of certain main ideas, combined with his persistence, would enable him to sweep through minor obstacles and complexities.

Besides these qualities, we expected him to have the objectivity, the education, and the wide knowledge of a scholar. The great distinction of his language in his famous Notes and speeches seemed to indicate a man of lofty and powerful imagination. His portraits suggested a fine presence and a commanding way of speaking.

With these perceived qualities, President Wilson had reached and held, with growing authority, the top position in America—a country where political skills are highly developed. All of this, without expecting the impossible, seemed like a good combination of abilities for the task of making peace.

First Impressions: Wilson’s Limitations Emerge

However, the first close-up impression of Mr. Wilson began to weaken some, though not all, of these illusions. His head and facial features were finely shaped, looking exactly like his photographs. The muscles of his neck and the way he held his head were distinguished. But, like Odysseus (the ancient Greek hero who was said to look wiser when seated), President Wilson also seemed wiser when he was sitting down. His hands, though capable and fairly strong, lacked a certain delicacy and finesse.

A first glance at the President suggested that, whatever else he might be, his basic nature was not primarily that of a student or a scholar. It also seemed he didn’t have much of the worldly sophistication that marked men like M. Clemenceau (of France) and Mr. Balfour (of Britain) as exceptionally cultured gentlemen of their class and generation.

More serious than this, however, was that he was not only insensitive to his physical surroundings; he was not sensitive to his overall environment at all. What chance could such a man have against Mr. Lloyd George’s (the British Prime Minister) unfailing, almost psychic, ability to sense everything about the people immediately around him?

To see the British Prime Minister watching the group, using what seemed like six or seven extra senses not available to ordinary people—judging character, motives, and subconscious urges; perceiving what each person was thinking and even what they were about to say next; and then, with an almost telepathic instinct, crafting the argument or appeal best suited to the vanity, weakness, or self-interest of the person he was addressing—was to realize that the poor President would be like someone playing a game of blind man’s buff in that company. He was completely outmatched.

Never could a man have walked into such a situation as a more perfect and destined victim of the Prime Minister’s polished skills. The Old World (Europe) was tough and experienced in cynical politics anyway; its heart of stone could dull the sharpest sword of the bravest, most idealistic knight. But this President Wilson, like a blind and deaf Don Quixote (an idealistic but out-of-touch hero), was entering a dangerous den where his opponent held all the advantages.

Understanding Wilson’s True Nature

If President Wilson was not the wise philosopher-king people had hoped for, what was he? After all, he had spent much of his life at a university. He was not a businessman or an ordinary party politician, but he was a man of force, personality, and importance. What, then, was his true temperament?

The clue, once found, was very revealing. President Wilson was like a Nonconformist minister, perhaps a Presbyterian. His way of thinking and his temperament were essentially theological (based on religious faith and moral principles) rather than intellectual (based on critical analysis and worldly understanding). This way of thinking had both strengths and weaknesses. While this type of personality was less common in England and Scotland than it used to be, this description still gives the clearest impression of the President.

High Ideals, No Practical Plan

With this picture of him in mind, we can look at what actually happened. President Wilson’s program for the world, as he presented it in his speeches and official notes (like the Fourteen Points), showed such an admirable spirit and purpose that his supporters did not want to criticize the details. They felt that the details were quite rightly not filled in yet, but would be worked out in due course.

At the beginning of the Paris Peace Conference, it was commonly believed that President Wilson, with the help of many advisers, had developed a comprehensive plan. This plan was thought to cover not only the League of Nations but also how to include the Fourteen Points in an actual Treaty of Peace.

But in fact, President Wilson had not thought things out in practical terms. When it came to putting his ideas into practice, they were vague and incomplete. He had no plan, no scheme, no constructive ideas at all for turning the grand principles he had announced so forcefully from the White House into living reality. He could have preached a sermon on any of his points or delivered a dignified prayer for their fulfillment, but he could not figure out how to apply them concretely to the actual situation in Europe.

Slow, Unadaptable, and Outmaneuvered

Not only did he lack detailed proposals, but he was also, in many respects (perhaps unavoidably), poorly informed about European conditions. And it wasn’t just that he was ill-informed—that was true of Mr. Lloyd George as well. The bigger problem was that his mind was slow and unadaptable.

President Wilson’s slowness compared to the Europeans was noticeable. He could not quickly grasp what others were saying, assess a situation at a glance, form a reply, and adjust his position slightly to meet a new argument. Because of this, he was often defeated by the sheer speed, understanding, and mental agility of someone like Lloyd George. There has seldom been a top-ranking statesman more unskilled than President Wilson in the quick back-and-forth of a council meeting.

A moment often arrives in negotiations when you can achieve a substantial victory if, by making a small apparent concession, you can allow your opponents to save face (avoid embarrassment) or win them over by restating your proposal in a way that helps them without harming your own essential goals. President Wilson was not equipped with this simple and common skill. His mind was too slow and unresourceful to come up with alternatives quickly.

President Wilson was capable of digging in his heels and refusing to budge, as he did on the issue of Fiume (a disputed port city). But he had no other way to defend his position. As a rule, his opponents needed only a little maneuvering to prevent matters from reaching a point of open confrontation until it was too late for him to resist effectively. Through pleasantness and an appearance of agreement, President Wilson would be maneuvered away from his original position. He would miss the right moment to stand firm, and before he knew what had happened, it was too late.

Besides, it’s impossible to be constantly “digging in your toes” month after month during close and seemingly friendly conversations between associates. Victory would only have been possible for someone who always had a quick enough grasp of the whole situation to save their strongest arguments for the right moment and know for certain the rare, exact times for decisive action. For that, President Wilson was far too slow-minded and bewildered.

Isolated and Ill-Advised

He did not make up for these weaknesses by seeking help from the combined wisdom of his team. For the economic parts of the Treaty, he had gathered a very capable group of businessmen. However, they were inexperienced in public affairs and (with one or two exceptions) knew as little about Europe as he did. They were only called in irregularly, when he thought he needed them for a specific purpose.

Thus, the aloofness that had seemed effective for him in Washington was maintained in Paris. His abnormally reserved nature did not allow anyone to get close to him who might aspire to be his moral equal or to continuously influence him. His fellow American peace commissioners were like “dummies” with no real power. Even the trusted Colonel House—who knew far more about people and Europe than the President, and whose sensitivity had often benefited the President’s duller perceptions—faded into the background as time went on.

All of this was encouraged by his colleagues on the Council of Four (Clemenceau, Lloyd George, and Orlando). By breaking up the larger Council of Ten (which had included more nations) and concentrating power in their small group, they completed the isolation that President Wilson’s own temperament had already started.

So, day after day and week after week, he allowed himself to be shut away—unsupported, unadvised, and alone—with men much sharper than himself. He faced situations of extreme difficulty where he needed every kind of resourcefulness, creativity, and knowledge to succeed. Instead, he allowed himself to be “drugged” by their atmosphere, to discuss matters based on their plans and their information, and to be led down their paths.

The Slow Path to Compromise

These and various other causes combined to produce the situation that followed. The reader must remember that the processes described here in a few pages actually took place slowly, gradually, and subtly (often in a harmful way that wasn’t immediately obvious) over a period of about five months.

Since President Wilson had not thought out any detailed plans, the Council generally worked from French or British drafts of the treaty. Therefore, if the treaty was to align at all with his own ideas and purposes, he had to constantly take a position of obstruction, criticism, and negation.

If he was met with apparent generosity on some points (because there was always a safe margin of completely ridiculous suggestions included in the drafts that no one took seriously anyway), it was difficult for him not to give in on other points. Compromise was inevitable. And it was very difficult to never compromise on what was essential.

Besides, he was soon made to appear as if he were taking Germany’s side. This left him open to the suggestion of being “pro-German”—a charge to which he was foolishly and unfortunately sensitive.

Wilson’s Dilemma: Few Good Choices

After showing much principle and dignity in the early days of the Council of Ten, President Wilson discovered that there were certain very important points in the programs of his French, British, or Italian colleagues that he could not get them to give up through secret diplomacy. What, then, was he to do as a last resort?

He had a few wretched alternatives:

1. He could let the Conference drag on endlessly by being purely stubborn.
2. He could break up the Conference and return to America in a rage with nothing settled.
3. He could try to appeal to the world public, over the heads of the other leaders at the Conference.

All these options were terrible, and a great deal could be said against each one. They were also very risky, especially for a politician. President Wilson’s mistaken policy regarding the recent Congressional elections in America had weakened his personal position in his own country. It was by no means certain that the American public would support him if he refused to compromise. Such a fight would involve a campaign where the real issues would be confused by all sorts of personal and party politics. Who could say if right would win in a struggle that would certainly not be decided on its merits?

Besides, any open break with his colleagues would surely bring down on him the blind anger of “anti-German” resentment, which still filled the public in all Allied countries. They would not listen to his arguments. They would not be calm enough to treat the issue as one of international morality or the right way to govern Europe. The cry would simply be that, for various sinister and selfish reasons, President Wilson wanted to “let the Hun off” (be easy on the Germans). He could anticipate the almost unanimous condemnation from the French and British press.

Thus, if he publicly challenged the other leaders, he might be defeated. And if he were defeated, wouldn’t the final peace treaty be far worse than if he kept his prestige and tried to make it as good as the limiting conditions of European politics allowed?

But above all, if he were defeated, would he not lose the League of Nations? And wasn’t the League, after all, by far the most important issue for the future happiness of the world? He might have reasoned that the Treaty would be changed and softened by time. Much in it that seemed so vital now would become unimportant later, and much that was impractical would never actually happen precisely because it was impractical. But the League, even in an imperfect form, was permanent. It was the first step towards a new principle in the government of the world. Truth and justice in international relations could not be established in a few months; they would have to be born in due course through the slow development of the League. Clemenceau had been clever enough to let it be known that he would accept the League—at a price.

A Lonely Man, A Fading Faith

At this critical point in his fortunes, President Wilson was a lonely man. Caught in the complex traps of Old World politics, he desperately needed sympathy, moral support, and the enthusiasm of the masses. But buried in the Conference, stifled in the hot and poisoned atmosphere of Paris, no echo of support reached him from the outside world. No throb of passion, sympathy, or encouragement came from his silent supporters in any country.

He felt that the blaze of popularity that had greeted his arrival in Europe was already dimming. The Paris press openly mocked him. His political opponents at home were taking advantage of his absence to create an atmosphere against him. England was cold, critical, and unresponsive. He had chosen his close associates in such a way that he did not receive through private channels the current of faith and enthusiasm that seemed to be blocked from public sources. He needed, but lacked, the added strength that comes from collective belief.

The terror of what Germany might do again still hung over everyone. Even the sympathetic public was very cautious. Their attitude was: the enemy must not be encouraged, our friends must be supported, this is not the time for disagreements or protests, the President must be trusted to do his best. And in this spiritual drought, the flower of President Wilson’s faith withered and dried up.

The Path of Compromise

Thus it happened that President Wilson cancelled his order for the ship, the George Washington, to be ready. In a moment of well-founded anger at the “treacherous halls of Paris,” he had ordered it prepared to carry him away from the conference and back to Washington D.C., the seat of his authority, where he could have felt himself again.

But as soon, alas, as he had taken the road of compromise, the weaknesses of his temperament and his skills, already mentioned, became fatally obvious. He could take the high moral ground; he could be stubborn; he could write pronouncements as if from Mount Sinai or Mount Olympus (places of divine authority); he could remain unapproachable in the White House or even in the Council of Ten and be safe. But if he once stepped down to the intimate, equal level of the “Big Four” leaders, the game was clearly lost for him.

A Principled Man’s Dangerous Compromises

Now, what I have called his theological or Presbyterian temperament became dangerous. Having decided that some concessions were unavoidable, he might have tried, through firmness, skill, and the use of the United States’ financial power, to secure as much as he could of the substance of his goals, even if it meant sacrificing some of the exact wording.

But President Wilson was not capable of such clear self-understanding. He was too conscientious. Although compromises were now necessary, he remained a man of principle, and he saw the Fourteen Points as a contract that was absolutely binding on him. He would do nothing that was not honorable. He would do nothing that was not just and right. He would do nothing that was contrary to his great declaration of faith.

Thus, without any admission that the divine-seeming inspiration of the Fourteen Points was being lessened, they became a document to be explained away, reinterpreted, and subjected to all the intellectual tricks of self-deception. By such means, I dare say, President Wilson’s forefathers had persuaded themselves that the course they felt it necessary to take was consistent with every syllable of the Pentateuch (the first five books of the Old Testament, considered sacred scripture).

Twisting Words to Fit Actions

President Wilson’s attitude to his colleagues had now become something like this: “I want to meet you as far as I can. I see your difficulties, and I would like to be able to agree to what you propose. But I can do nothing that is not just and right. You must first show me that what you want truly falls within the words of the pronouncements that are binding on me.”

Then began the weaving of that web of sophistry (clever but false arguments) and Jesuitical exegesis (overly subtle and manipulative interpretation, often used to justify actions). This was finally to clothe the language and substance of the whole Treaty with insincerity. The word was sent out to all the deceptive influences in Paris, much like Shakespeare’s witches in Macbeth chanted: “Fair is foul, and foul is fair, Hover through the fog and filthy air.” (Meaning that good and bad were being deliberately confused and values twisted.)

The most subtle users of false arguments and the most hypocritical writers were set to work. They produced many ingenious pieces of reasoning that might have deceived a cleverer man than President Wilson for more than an hour.

Examples of Deceptive Language in the Treaty

• German-Austria: Instead of openly saying that German-Austria was prohibited from uniting with Germany except with France’s permission (which would contradict the principle of self-determination), the Treaty, with delicate wording, states that “Germany acknowledges and will respect strictly the independence of Austria… she agrees that this independence shall be inalienable, except with the consent of the Council of the League of Nations.” This sounds quite different from an outright ban, but it is not really. And who knows if President Wilson forgot that another part of the Treaty said that for this purpose, the Council of the League had to be unanimous (meaning France, as a member, could veto any union).

• Danzig: Instead of giving the city of Danzig directly to Poland, the Treaty established Danzig as a “Free City.” However, it included this “Free City” within the Polish customs border, gave Poland control of the river and railway system, and stated that “the Polish Government shall undertake the conduct of the foreign relations of the Free City of Danzig as well as the diplomatic protection of citizens of that city when abroad.” In effect, Danzig was under Polish control.

• German Rivers: When placing Germany’s river system under foreign control, the Treaty spoke of declaring “international” those “river systems which naturally provide more than one State with access to the sea.” This was a roundabout way of justifying foreign control.

Such examples could be multiplied. The honest and understandable purpose of French policy—to limit Germany’s population and weaken its economic system—was dressed up, for President Wilson’s sake, in the grand and noble-sounding language of freedom and international equality.

The Decisive Moment: Pensions as “Civilian Damage”

But perhaps the most decisive moment in the breakdown of President Wilson’s moral position and the clouding of his mind came at last. To the dismay of his advisers, he allowed himself to be persuaded that the money spent by the Allied Governments on pensions for soldiers and separation allowances for their families could be fairly regarded as “damage done to the civilian population… by German aggression.” This was argued in a way that other expenses of the war could not be so regarded. (This redefinition allowed the Allies to greatly increase the amount of reparations Germany would have to pay.) It was a long, “theological” struggle—a debate more about interpreting words than about facts. After rejecting many different arguments, President Wilson finally gave in to a masterpiece of the sophist’s art (a brilliant piece of deceptive reasoning).

An Intact Conscience?

At last, the work on the Treaty was finished. And President Wilson’s conscience, Keynes notes with deep irony, was still intact.

Despite everything, I believe President Wilson’s temperament allowed him to leave Paris genuinely believing he had been sincere. It is probable that even today, he is truly convinced that the Treaty of Versailles contains almost nothing that goes against the principles he had previously declared.

The German Response and Wilson’s Inflexibility

But the process of self-deception and compromise had been too complete, and this led to the final tragic episode of this drama. When the German representative, Count Brockdorff-Rantzau, replied to the proposed treaty, he inevitably argued that Germany had surrendered based on certain assurances about the nature of the peace. He stated that the Treaty, in many specific points, was not consistent with those assurances.

This was exactly what President Wilson could not admit. After intense, solitary reflection and prayers to God, he had convinced himself that he had done nothing that was not just and right. For President Wilson to admit that the German reply had any valid points would have been to destroy his self-respect and shatter his inner peace. Every instinct of his stubborn nature rose up to protect himself.

In the language of psychology, suggesting to President Wilson that the Treaty was a betrayal of his own stated principles was like touching a raw, deeply sensitive emotional issue—something similar to what might be called a “Freudian complex.” It was a subject that was unbearable for him to discuss, and every subconscious instinct he had worked to prevent any further exploration of it.

Clemenceau’s Final Triumph and Wilson’s Rigidity

Thus, it was that M. Clemenceau (the French Prime Minister) succeeded in achieving what had seemed, just a few months earlier, an extraordinary and impossible proposal: that the Germans should not be heard. The Germans were not to be allowed to discuss or negotiate the terms of the treaty.

If only President Wilson had not been so determined to see himself as perfectly “conscientious,” if only he had not hidden from himself what he had actually been doing by agreeing to various compromises, he was in a position, even at the last moment, to have recovered lost ground. He could have achieved some very significant improvements to the treaty.

But President Wilson was now set in his views. It was as if his arms and legs had been set in a fixed posture by surgeons, and they would have to be broken again before they could be moved or changed. To his horror, Mr. Lloyd George (the British Prime Minister), who wanted as much moderation in the treaty as he dared to push for at the last moment, discovered something crucial. He found that he could not, in five days, persuade President Wilson that there were errors in a treaty that it had taken five months to convince Wilson was just and right.

After all, it was harder to “de-bamboozle” this old Presbyterian (to make him see he had been tricked or led astray) than it had been to “bamboozle” him in the first place. This was because undoing the self-deception would now involve attacking Wilson’s belief in himself and his own self-respect.

Wilson’s Final Stance

Thus, in the final act of the conference, President Wilson stood for stubbornness and a refusal to make any further conciliations or compromises.

The Treaty

The ideas I discussed in the second chapter—about Europe’s fragile economy and its interconnectedness—were not on the minds of the leaders gathered in Paris for the Peace Conference. The future well-being of Europe was not their main concern. How Europe’s people would make a living was not their primary worry.

Instead, their preoccupations (the things they focused on), both good and bad, were:

• Frontiers and nationalities (drawing new borders and deciding which country people belonged to).
• The balance of power between countries.
• Imperial aggrandizements (expanding their own empires).
• The future weakening of Germany, seen as a strong and dangerous enemy.
• Revenge.
• Shifting their own unbearable financial war burdens onto the shoulders of the defeated Germans.

Two Competing Visions for Peace

Two rival plans for the future of the world emerged:

1. The Fourteen Points: President Wilson’s plan, which aimed for a just and lasting peace.
2. The Carthaginian Peace: M. Clemenceau’s (the French Prime Minister) approach, which aimed to crush Germany completely, much like ancient Rome destroyed Carthage.

However, only one of these plans truly had a right to be considered. This was because Germany had not surrendered unconditionally. Instead, Germany had surrendered based on an agreed understanding about the general character of the peace.

A Common Misunderstanding: The Armistice vs. The Pre-Armistice Agreement

This aspect of what happened is too important to pass over quickly, because many people, at least in England, have greatly misunderstood it. Many believe that the Armistice terms (the agreement to stop fighting) were the first contract made between the Allied Powers and the German Government. They think that the Allies entered the Peace Conference with their hands free to decide any terms, except for what the Armistice itself might have stated.

This was not the case. To make the situation clear, it’s necessary to briefly review the history of the negotiations. These negotiations began with a German note (official message) on October 5, 1918, and ended with President Wilson’s note on November 5, 1918. This happened before the Armistice was signed.

The Pre-Armistice Negotiations: A Timeline

Here’s how those crucial negotiations unfolded:

• October 5, 1918: The German Government sent a short note to President Wilson. In it, they accepted his Fourteen Points and asked for peace negotiations.
• October 8, 1918: President Wilson replied. He asked if the German Government definitely accepted “the terms laid down” in his Fourteen Points and his later speeches. He also asked if their reason for entering discussions would “be only to agree upon the practical details of their application.” He added that German troops would have to leave all invaded territory before an Armistice could be agreed.
• October 12, 1918: The German Government gave a definite “yes” to these questions. They stated that their purpose in discussions “would be only to agree upon practical details of the application of these terms.”
• October 14, 1918: After receiving this clear “yes,” President Wilson sent another message to make three points clear:
  1. The details of the Armistice would have to be decided by military advisers from the United States and the Allies. These terms must absolutely prevent any possibility of Germany starting to fight again.
  2. Submarine warfare must stop if these peace talks were to continue.
  3. He needed further guarantees that the German government he was dealing with truly represented the German people.
• October 20, 1918: Germany accepted points (1) and (2). Regarding point (3), they pointed out that Germany now had a constitution and a government whose authority depended on the Reichstag (the German parliament).
• October 23, 1918: President Wilson announced that he had “received the solemn and explicit assurance of the German Government that it unreservedly accepts the terms of peace laid down in his Address to the Congress of the United States on January 8, 1918 (the Fourteen Points), and the principles of settlement enunciated in his subsequent Addresses… and that it is ready to discuss the details of their application.” He stated he had sent this correspondence to the Allied Governments. He suggested that if these governments were willing to make peace based on the terms and principles indicated, they should ask their military advisers to draw up Armistice terms. These Armistice terms should ensure that the Allied governments had the unrestricted power to safeguard and enforce the details of the peace to which Germany had agreed. At the end of this note, President Wilson hinted more openly than before that the Kaiser (the German Emperor) should abdicate (give up his throne).

This completes the first stage of negotiations, which involved only President Wilson acting for the Allied side.

The Allies Agree, with Two Qualifications

• November 5, 1918: President Wilson sent Germany the reply he had received from the Allied Governments. He added that Marshal Foch (the Allied supreme commander) had been authorized to communicate the terms of an armistice to official German representatives. In this reply, the Allied Governments stated that, “subject to the qualifications which follow, [they] declare their willingness to make peace with the Government of Germany on the terms of peace laid down in the President’s Address to Congress of January 8, 1918, and the principles of settlement enunciated in his subsequent Addresses.”

  The “qualifications” (exceptions or conditions) were two:

  1. Freedom of the Seas: Regarding Wilson’s point about freedom of the seas, the Allies “reserved to themselves complete freedom.” This meant they didn’t fully agree with Wilson’s specific proposal and wanted to decide their own policy on this matter.
  2. Reparation: This point stated: “Further, in the conditions of peace laid down in his Address to Congress on the 8th January, 1918, the President declared that invaded territories must be restored as well as evacuated and made free. The Allied Governments feel that no doubt ought to be allowed to exist as to what this provision implies. By it they understand that compensation will be made by Germany for all damage done to the civilian population of the Allies and to their property by the aggression of Germany by land, by sea, and from the air.” In simpler terms, the Allies clarified that “restored” territories meant Germany would have to pay compensation for all damage caused to Allied civilians and their property by German attacks.

A Binding Contract

The nature of the contract between Germany and the Allies that resulted from this exchange of documents is plain and clear, with only one possible meaning. The terms of the peace were to be based on President Wilson’s speeches. The purpose of the Peace Conference was only “to discuss the details of their application.”

The circumstances of this contract were unusually serious and binding. One of the conditions was that Germany had to agree to Armistice terms that would leave it helpless and unable to fight. Germany made itself helpless because it relied on this contract. Therefore, the honor of the Allies was especially involved in fulfilling their part of the agreement. If there were any unclear points (ambiguities), honor demanded that the Allies should not use their powerful position to take advantage of them.

What Was in the Contract?

So, what was the actual substance of this contract that the Allies had bound themselves to? Looking at the documents shows that:

• A large part of President Wilson’s speeches concerned general spirit, purpose, and intentions, rather than concrete solutions.
• Many questions that needed to be settled in the Peace Treaty were not even mentioned.
• However, certain important questions were settled definitely and clearly.

It’s true that within certain broad limits, the Allies still had some freedom to decide details. Also, it is difficult to enforce general statements about spirit and intention on a contractual basis. Every person must judge for themselves whether, considering those statements, deception or hypocrisy occurred later. But, as we will see, there remained certain important issues on which the contract was absolutely clear.

Key Terms of the Pre-Armistice Agreement

Besides the Fourteen Points of January 18, 1918, four other speeches by President Wilson form part of the contract. (These were given on Feb 11, Apr 6, July 4, and Sept 27, 1918, with the last one being specifically mentioned in the agreement). I will select from these speeches the most important concrete promises relevant to the German Treaty, avoiding repetition. The parts I omit generally relate to intentions and are perhaps too vague to be considered contractual, but they would mostly add to, rather than weaken, the points I quote.

Here are some key commitments:

• From the Fourteen Points (January 8, 1918):

  • (3) The removal, as far as possible, of all economic barriers between nations. Establishment of equal trade conditions among all nations agreeing to the peace and joining together to maintain it.
  • (4) Adequate guarantees given and taken that national armaments (weapons and military forces) will be reduced to the lowest point needed for domestic safety (keeping order within a country).
  • (5) A free, open-minded, and completely impartial adjustment of all colonial claims (claims to colonies). This adjustment must consider the interests of the populations living in those colonies.
  • (6), (7), (8), and (11) The evacuation (withdrawal of troops) and “restoration” of all invaded territory, especially Belgium. (To this, the Allies added their clarification: “restoration” includes Germany paying compensation for all damage done to civilians and their property by land, sea, and air.)
  • (8) Righting “the wrong done to France by Prussia in 1871 in the matter of Alsace-Lorraine” (meaning Alsace-Lorraine should be returned to France).
  • (13) An independent Poland, including “the territories inhabited by indisputably Polish populations” and “assured a free and secure access to the sea.”
  • (14) The creation of a League of Nations.

• From the Address to Congress (February 11, 1918):

  • “There shall be no annexations (taking of territory by force), no contributions (forced financial payments beyond agreed reparations), no punitive damages (payments intended purely as punishment).”
  • “Self-determination is not a mere phrase. It is an imperative principle of action which statesmen will henceforth ignore at their peril.” (The idea that people should choose their own government is a vital rule that leaders ignore at their own risk.)
  • “Every territorial settlement involved in this war must be made in the interest and for the benefit of the populations concerned, and not as a part of any mere adjustment or compromise of claims amongst rival States.”

• From the New York Address (September 27, 1918):

  1. “The impartial justice meted out (given out) must involve no discrimination between those to whom we wish to be just and those to whom we do not wish to be just.” (Fairness must be applied equally to all.)
  2. “No special or separate interest of any single nation or any group of nations can be made the basis of any part of the settlement which is not consistent with the common interest of all.”
  3. “There can be no leagues or alliances or special covenants (agreements) and understandings within the general and common family of the League of Nations.” (No secret side-deals between members of the League.)
  4. “There can be no special selfish economic combinations within the League and no employment of any form of economic boycott or exclusion, except as the power of economic penalty… may be vested in the League of Nations itself as a means of discipline and control.” (Countries shouldn’t use economic punishments against each other, unless the League itself decides to do so to maintain order.)
  5. “All international agreements and treaties of every kind must be made known in their entirety to the rest of the world.” (No secret treaties.)

A Wise Program Lost

This wise and generous program for the world had, by November 5, 1918, moved beyond being just idealism and wishful thinking. It had become part of a solemn contract to which all the Great Powers of the world had put their signature.

But it was lost, nevertheless, in the messy and complicated situation (the “morass”) of Paris. The spirit of the program was lost altogether. The letter of it (its specific points) was ignored in some parts and distorted in others.

The German Response to the Draft Treaty

The German comments on the draft Treaty of Peace largely consisted of a comparison. They compared the terms of the pre-Armistice understanding (on the basis of which Germany had agreed to surrender) with the actual conditions of the document they were then offered to sign.

The German commentators had little difficulty showing that the draft Treaty was a breach of promises and a violation of international morality. They argued it was comparable to Germany’s own offense in invading Belgium.

Nevertheless, the German reply was not, in all its parts, a document fully worthy of such a serious occasion. Although much of its content was just and important, it somewhat lacked a truly broad perspective and high dignity. The general effect didn’t have the simple, clear treatment, with the calm, objective despair that the deep emotions of the moment might have produced.

In any case, the Allied Governments gave the German reply no serious consideration. I doubt that anything the German delegation could have said at that stage of the proceedings would have much influenced the final result.

The Treaty’s Insincerity

The most common virtues of individuals are often missing in the leaders of nations. A statesman representing his country, not himself, may prove to be vengeful, dishonest, and selfish—as history often records—without facing excessive blame. These qualities are familiar in treaties imposed by victorious nations on defeated ones.

But the German delegation did not succeed in exposing, in burning and prophetic words, the quality that chiefly distinguishes this particular treaty from all its historical predecessors: its insincerity.

However, exploring this theme of insincerity in depth must be for another writer. In what follows, I am mainly concerned not with the justice of the Treaty—neither with the demand for punishment against the enemy, nor with the obligation of the victors to honor their contract. Instead, my focus is on its wisdom and its consequences.

Overview of the Treaty’s Economic Provisions

Therefore, in this chapter, I propose to set forth plainly the main economic provisions of the Treaty. I will reserve my comments on the Reparation Chapter, and on Germany’s capacity to meet the payments demanded from her, for the next chapter.

The German economic system as it existed before the war depended on three main factors:

1. Overseas commerce: This included its merchant ships, its colonies, its foreign investments, its exports, and the international connections of its merchants.
2. Coal and iron: The use of its coal and iron resources and the industries built upon them.
3. Transport and tariff system: Its railways, canals, and trade tax policies.

Of these, the first factor (overseas commerce), while not the least important, was certainly the most vulnerable to attack. The Treaty aims at the systematic destruction of all three factors, but principally of the first two.

I. Destruction of German Overseas Commerce and Property

(1) Merchant Ships Seized Germany has been forced to hand over to the Allies:

• All of its merchant ships exceeding 1600 gross tons (a measure of size).
• Half of its ships between 1000 tons and 1600 tons.
• One quarter of its trawlers (fishing boats) and other fishing boats.

This handover is comprehensive. It includes not only ships flying the German flag, but also all ships owned by Germans but flying other flags, and all ships that were under construction as well as those already built. Furthermore, Germany must, if required, build for the Allies specific types of ships up to 200,000 tons annually for five years. The value of these newly built ships will be credited to Germany against the money it owes for Reparations.

Thus, the German merchant marine is effectively swept from the seas. It cannot be restored for many years to come on a scale large enough to meet the needs of Germany’s own commerce. For the present, no shipping lines will operate from major German ports like Hamburg, except those that foreign nations might find profitable to establish using their extra ships. Germany will have to pay foreign companies whatever charges they demand for carrying its trade. It will only receive whatever services and conveniences these foreign companies choose to provide. It seems that the prosperity of German ports and commerce can only revive if Germany somehow succeeds in bringing the merchant ships of Scandinavia and Holland under its effective influence.

(2) Colonies and Government Property Lost Germany has ceded (given up) to the Allies “all her rights and titles over her oversea possessions” (its colonies). This means Germany loses not only the right to rule these colonies but also its government-owned property there. All such property, including railways, must be surrendered without any payment to Germany. On the other hand, the German Government remains responsible for any debts that may have been incurred for buying or building this property, or for developing the colonies generally.

(3) Harsh Treatment of Private German Citizens and Their Property In a departure from the usual practice in most similar transfers of territory in recent history, the property and persons of private German citizens (as distinct from their Government) are also harmfully affected in these former German colonies.

• The Allied Government now controlling a former German colony “may make such provisions as it thinks fit” regarding sending German citizens back to Germany. It can also decide the conditions under which German subjects of European origin will (or will not) be allowed to live, own property, trade, or practice a profession there.
• All contracts and agreements benefiting German citizens for the construction or operation of public works (like railways or mines) are transferred to the Allied Governments as part of the Reparation payments owed by Germany.

But these terms are minor compared with a more sweeping provision. This provision states that “the Allied and Associated Powers reserve the right to retain and liquidate (sell off) all property, rights, and interests belonging… to German nationals, or companies controlled by them,” within the former German colonies. This wholesale taking of private property is to happen without the Allies giving any compensation to the individuals whose property is taken. The money raised from selling these assets will be used:

• First, to pay private debts owed by any German citizens to citizens of Allied countries.
• Second, to meet claims owed by citizens of Austria, Hungary, Bulgaria, or Turkey. Any money left over may either be returned by the Allied power directly to Germany or kept by them. If kept, the money must be transferred to the Reparation Commission to be credited to Germany’s Reparation account.

In short, not only are German rule and German influence completely removed from all of her former overseas colonies, but the persons and property of her citizens living or owning property in those areas are deprived of legal status and legal security.

(4) Private German Property in Alsace-Lorraine The harsh provisions just outlined for the private property of Germans in the former German colonies apply equally to private German property in Alsace-Lorraine (which was returned to France), unless the French Government chooses to grant exceptions. This is of much greater practical importance than the similar taking of property overseas. This is because of the far higher value of the property involved in Alsace-Lorraine and the closer economic connections between German business interests there and those in Germany itself. These connections had grown significantly due to the great development of the mineral wealth (like coal and iron) in these provinces since 1871.

The region of Alsace-Lorraine had been under German rule for almost 50 years. A large majority of the people living there spoke German. It was also a place where Germany had some of its most important businesses.

Despite this, the French government could now take control of all property owned by Germans in Alsace-Lorraine. This included property of Germans who lived there or had invested in businesses there. France did not have to pay these Germans for their property. The only way Germans might receive compensation was if the German government itself chose to pay them.

The French government had the right to take the personal property of German citizens and German companies in Alsace-Lorraine without paying for it. The money made from selling this property would be used to help settle various financial claims France had against Germany.

This harsh rule was only softened if the French government specifically allowed German individuals to continue living in Alsace-Lorraine. In that case, their property would not be taken.

However, all government, state, and city-owned property was to be handed over to France. France did not have to give Germany any credit for this property. This included the railway system in Alsace-Lorraine and all its trains and equipment.

Even though France took over the property, Germany was still responsible for any existing public debts connected to it. Alsace-Lorraine also returned to French control free from any share of Germany’s war debts or debts from before the war. Germany did not receive any credit for this when calculating war damages (Reparations).

Taking German Private Property Beyond Former German Lands

The taking of German private property was not just limited to former German colonies and Alsace-Lorraine. How German private property was handled was a very important part of the Treaty. It hasn’t received as much attention as it should, even though German representatives at Versailles protested it very strongly.

As far as I know, no peace treaty in recent history has treated private property in this way. The German representatives argued that this new approach set a dangerous and immoral example for the security of private property everywhere. This is likely an overstatement. For the past 200 years, there has been a customary and legally accepted sharp difference between the property of a country (the State) and the property of its citizens. This distinction is somewhat artificial. It is quickly becoming outdated due to many factors, not just this Peace Treaty. It doesn’t fit well with modern ideas about the relationship between a government and its people, especially ideas leaning towards more social responsibility and control.

However, it is true that the Treaty severely damages an idea that forms the basis of much of what has been known as international law.

The main rules about taking German private property located outside of Germany’s new borders often overlap. In some cases, the stricter rules seem to make other, less strict rules unnecessary. Generally, the harsher and broader rules are not as clearly written as the more specific and limited ones. These rules are as follows:

(a) Allied Power to Seize German Property

The Allies stated they “reserve the right to retain and liquidate all property, rights and interests belonging at the date of the coming into force of the present Treaty to German nationals, or companies controlled by them, within their territories, colonies, possessions and protectorates, including territories ceded to them by the present Treaty.”

This is a broader version of the rule already discussed for the colonies and Alsace-Lorraine. The value of the property taken in this way would first be used to pay off private debts owed by Germany to citizens of the Allied country where the property was seized. Second, it would be used to satisfy claims related to the actions of Germany’s former allies. If there was any money left over, and if the Allied government decided to keep it, this amount had to be credited to Germany’s Reparation account (the money Germany owed for war damages).

However, an important point is that the Allied government taking the property was not forced to give the leftover money to the Reparation Commission. It could choose to return the money directly to Germany. This would allow the United States, for example, if it wished, to use the very large amounts of money held by its enemy-property custodian to pay for food and supplies for Germany, without needing approval from the Reparation Commission.

These rules started with a plan for settling debts between enemy countries through a Clearing House. The idea was to avoid a lot of trouble and legal battles. Each government involved in the war would be responsible for:

1. Collecting private debts owed by its own citizens to citizens of enemy countries (since normal collection was stopped by the war).
2. Distributing the money collected to its own citizens who had claims against citizens of enemy countries. Any final difference in amounts owed would be settled with a cash payment.

Such a system could have been perfectly fair and equal for both sides. And in some ways, it was. The system for collecting business debts was mostly fair.

But because the Allied Governments had won a complete victory, they were able to add many rules that were not fair or equal, favoring themselves. Here are the main ones:

• Unequal Property Return: While Allied citizens’ property in Germany was to be returned to them when peace was declared, German property in Allied countries was to be kept and sold off as described above. This meant that all German property in many parts of the world could be taken. Large amounts of German property already held by officials in Allied countries could be kept permanently.
• Expanded Use of German Assets: German assets could be used not only to cover German debts but also, if there was enough money, to pay for “claims by the nationals of such Allied or Associated Power with regard to their property, rights, and interests in the territory of other Enemy Powers” (like Turkey, Bulgaria, and Austria). This was a remarkable rule and, naturally, it did not apply in reverse to Allied property.
• Withholding Balances: Any final money owed to Germany from these private accounts did not have to be paid to Germany. Instead, it could be kept and used to offset the various amounts the German government owed. The carrying out of these rules was ensured by forcing Germany to hand over property deeds, titles, and related information.
• Contract Cancellations: Pre-war contracts between Allied citizens and German citizens could be either canceled or restarted, but only if the Allied citizen chose to do so. This meant that any contracts that benefited Germany would be canceled. On the other hand, Germany would be forced to honor contracts that were to its disadvantage.

(b) Eliminating German Influence in Neighboring and Allied Countries

So far, we’ve discussed German property within Allied territory. The next rule aimed to remove German businesses and investments from countries that were Germany’s neighbors, former allies, or certain other nations.

Article 260 of the Financial Clauses stated that the Reparation Commission could, within one year of the Treaty taking effect, demand that the German Government take ownership of its citizens’ assets and hand them over to the Commission. This applied to “any rights and interests of German nationals in any public utility undertaking (like water or power companies) or in any concession (special rights to conduct business) operating in Russia, China, Turkey, Austria, Hungary, and Bulgaria, or in the possessions or dependencies of these States, or in any territory formerly belonging to Germany or her allies, to be ceded by Germany or her allies to any Power or to be administered by a Mandatory under the present Treaty.”

This was a very broad description. It partly overlapped with the rules mentioned in point (a) above. Importantly, it included new countries and territories created from the former Russian, Austro-Hungarian, and Turkish Empires. This meant Germany’s influence was removed, and its capital (money and investments) was taken in all those neighboring countries. These were countries where Germany might naturally have looked to for its future economic survival and as places to use its energy, business skills, and technical knowledge.

Carrying out this plan in detail would give the Reparation Commission a strange task. It would become the owner of many rights and business interests across a huge area. This area was often unstable, disorganized by war, internal conflict, and the rise of Bolshevism (Communism in Russia), making its cooperation uncertain. Dividing these spoils (seized assets) among the victorious nations would also create a lot of work for a powerful new office. Greedy adventurers and jealous individuals seeking business rights from twenty or thirty nations would flock to its doors.

To make sure the Reparation Commission didn’t miss any opportunity to use its rights fully, there was another rule. The German government had to give the Commission a list of all these rights and interests within six months of the Treaty starting. This list had to include rights “whether already granted, contingent (dependent on certain conditions) or not yet exercised.” Any rights not reported within this time would automatically be lost and go to the Allied Governments. It’s not clear how binding such a rule could be on a German citizen whose person and property were outside of Germany’s control. However, all the countries named in the list were vulnerable to pressure from the Allied authorities, either through specific treaty clauses or other means.

(c) Sweeping Powers Over All German Property

There was a third rule, even more sweeping than the previous two. Neither of the earlier rules affected German interests in neutral countries (countries not involved in the war).

The Reparation Commission was given the power, until May 1, 1921, to demand payment of up to $5 billion. They could decide how this payment should be made, “whether in gold, commodities (raw materials or goods), ships, securities (stocks and bonds) or otherwise.”

This rule effectively gave the Reparation Commission dictatorial powers over all German property of every kind for that period. Under this Article, they could point to any specific business, company, or property, whether inside or outside Germany, and demand it be handed over. Their authority seemed to cover not only property existing when the Peace Treaty was signed but also any property that might be created or bought by Germans in the following 18 months.

For example, as soon as the Commission was set up, they could (and presumably would) select the large and successful German company in South America known as the Deutsche Ueberseeische Elektrizitätsgesellschaft (D.U.E.G.), a major overseas electricity company. They could then sell it to Allied businesses. The wording of this clause was clear and covered everything.

It’s worth noting that this introduced a completely new way of collecting payments from a defeated nation (indemnities). Previously, a total sum was set, and the country being fined was free to figure out how to pay it. But in this case, those receiving the payment (the Allies) could, for a certain time, not only demand a certain amount of money but also specify the exact type of property to be used for payment. So, the powers of the Reparation Commission, which I will discuss more in the next chapter, could be used to destroy Germany’s business and economic structure as well as to demand payment.

The combined effect of rules (a), (b), and (c) (and some other minor rules I haven’t detailed) was to take away everything Germany owned outside its new borders as defined by the Treaty. Or rather, it gave the Allies the power to do so if they wished—it hadn’t all been done yet. Not only were Germany’s overseas investments taken and its international business connections destroyed, but the same process of removal was applied in the territories of its former allies and its immediate neighbors.

Ensuring Complete Economic Control

Just in case the above rules missed anything, other articles were included in the Treaty. These probably didn’t add much in practical terms to what was already described. However, they are worth a brief mention because they show the thoroughness with which the victorious Powers planned the economic domination of their defeated enemy.

First, there was a general clause where Germany gave up all claims: “In territory outside her European frontiers as fixed by the present Treaty, Germany renounces all rights, titles and privileges whatever in or over territory which belonged to her or to her allies, and all rights, titles and privileges whatever their origin which she held as against the Allied and Associated Powers … ”

Then came some more specific rules:

• Germany gave up all rights and privileges it might have gained in China.
• There were similar rules for Siam (now Thailand), Liberia, Morocco, and Egypt.
• In Egypt’s case, not only were special privileges given up, but Article 150 took away ordinary freedoms. The Egyptian Government was given “complete liberty of action in regulating the status of German nationals and the conditions under which they may establish themselves in Egypt.”

Under Article 258, Germany gave up its right to participate in any international financial or economic organizations “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.”

Generally, only those pre-war treaties and agreements that benefited the Allied Governments were renewed. Those that favored Germany were allowed to expire.

It is clear, however, that none of these additional rules were as important as those described earlier. They were the logical final steps in making Germany an outcast and economically subject to the Allies’ wishes. But they didn’t significantly add to the disabilities Germany already faced.

Impact on Germany’s Coal and Iron Industries

The rules about coal and iron were more important for their long-term effects on Germany’s internal industrial economy than for the immediate amount of money involved. The German Empire was built more on coal and iron than on “blood and iron” (a famous phrase referring to military strength).

The smart use of the large coalfields in the Ruhr, Upper Silesia, and the Saar regions was what made it possible for Germany to develop its steel, chemical, and electrical industries. These industries made Germany the leading industrial nation in mainland Europe. One-third of Germany’s population lived in towns with more than 20,000 people. Such a high concentration of industry is only possible with a strong foundation of coal and iron.

Therefore, when French politicians targeted Germany’s coal supply, they knew what they were doing. It is only the extreme, and frankly, technically impossible, demands of the Treaty that might save the situation in the long run.

(1) How the Treaty Targeted Germany’s Coal Supply

The Treaty attacked Germany’s coal supply in four main ways:

(i.) The Saar Basin Coal Mines The Treaty stated: “As compensation for the destruction of the coal-mines in the north of France, and as part payment towards the total reparation due from Germany for the damage resulting from the war, Germany cedes to France in full and absolute possession, with exclusive rights of exploitation, unencumbered, and free from all debts and charges of any kind, the coal-mines situated in the Saar Basin.”

While the League of Nations would govern this area for fifteen years, it’s important to note that the mines themselves were given to France completely. After fifteen years, the people living in the Saar district would vote to decide if the territory should become part of France or Germany. If they chose to reunite with Germany, Germany would be allowed to buy back the mines at a price paid in gold.

The world has already recognized the Saar deal as an act of robbery and dishonesty. As for compensating France for destroyed coal mines, the Treaty addressed this elsewhere, as we will see.

German representatives stated, without anyone disagreeing, that “There is no industrial region in Germany the population of which is so permanent, so homogeneous, and so little complex as that of the Saar district. Among more than 650,000 inhabitants, there were in 1918 less than 100 French. The Saar district has been German for more than 1,000 years. Temporary occupation as a result of warlike operations on the part of the French always terminated in a short time in the restoration of the country upon the conclusion of peace. During a period of 1048 years France has possessed the country for not quite 68 years in all. When, on the occasion of the first Treaty of Paris in 1814, a small portion of the territory now coveted was retained for France, the population raised the most energetic opposition and demanded ‘reunion with their German fatherland,’ to which they were ‘related by language, customs, and religion.‘ After an occupation of one year and a quarter, this desire was taken into account in the second Treaty of Paris in 1815. Since then the country has remained uninterruptedly attached to Germany, and owes its economic development to that connection.“

The French wanted the Saar coal to fuel the ironworks in Lorraine, which they had regained. They took the coal in a ruthless, strategic way, much like Bismarck (a former German chancellor known for his practical and often harsh policies) might have done. It wasn’t a lack of historical examples that made this action wrong, but rather the Allies’ own stated ideals and promises during the war, which contradicted such a seizure.

**(ii.)

(ii.) Upper Silesia Upper Silesia is a region mostly without large towns. However, it contains one of Germany’s major coalfields. This area produced about 23 percent of all German hard coal. The Treaty stated that Upper Silesia would be given to Poland, but only after a plebiscite (a vote by the people living there to decide their future).

Upper Silesia was never historically part of Poland. Its population was a mix of Polish, German, and Czecho-Slovakian people. The exact numbers for each group were disputed. Economically, the region was very German. Industries in Eastern Germany relied on its coal. Losing Upper Silesia would be a devastating blow to Germany’s economic structure.

If Germany lost the coalfields in Upper Silesia and the Saar, its coal supply would shrink by nearly one-third.

(iii.) Coal to Compensate for French Mine Damage From the coal Germany had left, it was required to make up for the losses France suffered due to war damage in the coalfields of its northern provinces. This had to be done year by year. The Treaty specified that “Germany undertakes to deliver to France annually, for a period not exceeding ten years, an amount of coal equal to the difference between the annual production before the war of the coal-mines of the Nord and Pas de Calais, destroyed as a result of the war, and the production of the mines of the same area during the year in question.” This delivery was capped:

• It could not be more than 20 million tons per year for the first five years.
• It could not be more than 8 million tons per year for the next five years.

This would be a reasonable requirement if it were the only one. Germany might have been able to meet this demand if it still had its other resources.

(iv.) Additional Coal Deliveries as Reparation Payments The final rule about coal was part of the general plan for reparations. Reparations were the payments Germany had to make for war damages. Some of these payments were to be made in goods (in kind) instead of cash. As part of these reparation payments, Germany had to deliver coal, or its equivalent in coke (a type of fuel made from coal). These deliveries to France were in addition to the coal France received from the Saar mines or as compensation for the damaged mines in Northern France. The deliveries were:

• To France: 7 million tons each year for ten years.
• To Belgium: 8 million tons each year for ten years.
• To Italy: An annual amount starting at 4.5 million tons in 1919-1920 and increasing each year to 8.5 million tons for the six years from 1923-1924 to 1928-1929.
• To Luxemburg: If needed, an amount of coal equal to what Luxemburg used from Germany before the war.

This added up to an annual average of about 25 million tons.

Germany’s Ability to Meet These Coal Demands We need to look at these figures in relation to how much coal Germany was likely to produce. Germany’s highest pre-war coal production was in 1913, with a total of 191.5 million tons. From this:

• 19 million tons were used at the mines themselves.
• 33.5 million tons were exported (exports minus imports).
• This left 139 million tons for Germany’s own domestic use.

The estimated loss of production due to losing territory was:

• Alsace-Lorraine: 5.5 million tons
• Saar Basin: 13.2 million tons
• Upper Silesia (if lost after the vote): 43.8 million tons
• Total Loss from Territory: 62.5 million tons

So, based on 1913 output, Germany would have 130.7 million tons left (191.5 - 60.8, using slightly different internal figures from the author for immediate calculation, but the total loss impact is similar). If we subtract coal used at the mines (say, around 12.7 million to keep the math aligned with author’s subsequent 118m figure), this leaves about 118 million tons.

Out of this supply, for some years Germany would have to send:

• Over 20 million tons to France as compensation for damaged French mines.
• 25 million tons to France, Belgium, Italy, and Luxemburg.

The first figure is a maximum, and the second is slightly less in the early years. So, we can estimate the total coal Germany promised to Allied countries as 40 million tons per year. This would leave Germany with 78 million tons for its own use (118 million - 40 million). This compares to a pre-war consumption of 139 million tons.

However, this comparison needs significant changes to be accurate. First, it’s certain that pre-war output numbers are not reliable for predicting current output.

• In 1918, production was 161.5 million tons, down from 191.5 million in 1913.
• In the first half of 1919, production was less than 50 million tons (excluding Alsace-Lorraine and Saar, but including Upper Silesia). This suggests an annual rate of about 100 million tons.

The reasons for such low output were partly temporary. But German authorities agreed (and were not proven wrong) that some causes would continue for some time.

• Shorter Work Hours: Daily shifts were reduced from 8.5 to 7 hours. It was unlikely the government could force a return to longer hours.
• Poor Equipment: Mining equipment was in bad condition because essential materials were lacking during the wartime blockade.
• Malnutrition: Workers were physically weaker due to poor nutrition. This couldn’t be fixed if Germany had to meet huge reparation demands; living standards would likely have to fall further.
• Fewer Miners: War casualties reduced the number of skilled miners. The situation in England alone showed that Germany could not expect to reach pre-war output levels. German authorities estimated their output loss at over 30 percent. This was roughly half due to shorter shifts and half due to other economic problems. This figure seems generally believable, though the author doesn’t have the expertise to confirm or deny it.

So, the pre-war net figure of 118 million tons (after losing territory and mine consumption) was likely to fall to at least 100 million tons due to these factors. If 40 million tons of this had to be exported to the Allies, only 60 million tons would remain for Germany’s own domestic use. Losing territory would also reduce Germany’s demand for coal, but even the most generous estimate put this reduction at no more than 29 million tons. Therefore, these rough calculations suggest Germany’s post-war domestic needs (assuming pre-war efficiency of railways and industry) would be around 110 million tons. However, its output would not exceed 100 million tons, and 40 million of that was already promised to the Allies. This would leave only 60 million tons for a need of 110 million.

The Reality of the Coal Situation This detailed statistical analysis is important. It’s clear that we shouldn’t rely too heavily on the exact figures, as they are estimates and uncertain. But the overall picture is undeniably clear. Considering territory loss and reduced efficiency, Germany could not export large amounts of coal in the near future. In fact, it would even depend on its treaty rights to buy coal from Upper Silesia if it were to continue as an industrial nation. Every million tons Germany was forced to export would mean shutting down an industry. This might be possible to some extent, with consequences to be discussed later. But it is obvious that Germany could not, and would not, provide the Allies with 40 million tons of coal annually. Allied Ministers who told their people that Germany could do this were deceiving them, likely to calm public anxiety about the path Europe was taking.

Dangers of Unrealistic Treaty Terms Having these unrealistic provisions in the Peace Treaty is especially dangerous for the future. The wildly optimistic expectations about reparation payments, which Finance Ministers used to mislead their public, will be forgotten once they’ve served their purpose of delaying taxes and spending cuts. But the coal clauses won’t be forgotten so easily. This is because it will be absolutely vital for France and Italy to do everything they can to get the coal Germany promised them. Europe’s coal situation was nearly desperate due to several factors:

• Reduced output from German destruction of mines in France.
• Reduced output from mines in the United Kingdom and elsewhere.
• Many secondary issues, like broken-down transportation, disorganized systems, and inefficient new governments. France and Italy, having treaty rights to German coal, would not give them up easily in this scramble for resources.

A Difficult Choice The French and Italian arguments will be very strong, even unanswerable from a certain viewpoint. The situation will be presented as a choice between German industry and French and Italian industry. It might be true that giving up the coal would destroy German industry. But it might also be true that not giving it up would endanger French and Italian industry. In such a case, shouldn’t the victors, with their treaty rights, get what they want? Especially when much of the damage was ultimately caused by the wrongful acts of the defeated Germans? Yet, if these feelings and rights are pushed further than wisdom allows, the impact on the social and economic life of Central Europe will be too severe to be contained.

The Wider Impact of Coal Shortages This isn’t the whole problem. If France and Italy are to cover their own coal shortages using Germany’s output, then Northern Europe, Switzerland, and Austria will suffer. These countries previously got a large part of their coal from Germany’s surplus exports. Before the war, 13.6 million tons of Germany’s coal exports went to Austria-Hungary. Since nearly all the former Austro-Hungarian Empire’s coalfields are now outside of what is German-Austria, that new Austrian state faces complete industrial ruin if it cannot get coal from Germany. Germany’s neutral neighbors, who used to get coal partly from Great Britain but mostly from Germany, will also face very serious problems. They will likely go to great lengths to make their own exports of essential materials to Germany dependent on being paid in coal. Indeed, they are already starting to do this.

The Rise of Barter As money-based economies break down, international barter (trading goods for goods) is becoming common. In Central and Southeastern Europe, money often no longer reflects true value and won’t necessarily buy anything. As a result, a country with a product another country needs will sell it not for cash, but only in exchange for a promise from the buyer country to provide something equally necessary in return. This is an extremely complicated system compared to the almost perfect simplicity of pre-war international trade. However, in today’s highly unusual industrial conditions, barter has some advantages as a way to encourage production. The “butter-shifts” in Germany’s Ruhr industrial area are an example. Miners there worked for direct payment in food (like butter) instead of money. This shows how far modern Europe has regressed towards barter. It’s a striking illustration of the poor economic organization that the breakdown of currency and free trade is quickly leading to. But these barter systems might produce coal when other methods fail.

A No-Win Situation Yet, if Germany manages to find coal for its neutral neighbors (perhaps through barter), France and Italy might loudly claim that Germany therefore can and must fulfill its treaty obligations to them. This argument will seem very just. It will be difficult to argue against such claims by pointing out that German miners might work for butter but can’t be forced to mine coal if the sale brings them nothing, or that if Germany has no coal for its neighbors, it might not get essential imports for its own survival.

Consequences of a Coal Free-for-All If the distribution of European coal becomes a scramble where France is satisfied first, Italy second, and everyone else takes their chances, the industrial future of Europe is dark. The chances of revolution will be very high. This is a situation where specific interests and claims, no matter how well-founded in emotion or justice, must give way to what is practically necessary for everyone. If Mr. Hoover’s calculation that Europe’s coal output has fallen by one-third is even roughly true, we face a situation where distribution must be fair, based on need. Every possible incentive for increased production and efficient transport must be used. The creation of a European Coal Commission by the Allied Supreme Council in August 1919 was a wise step. If used properly and expanded, it could be very helpful. But the author reserves constructive ideas for a later chapter. Here, the author is only exploring the consequences of trying to carry out the Treaty literally, even if it seems impossible.

(2) Rules About Iron Ore

The rules about iron ore need less detailed discussion, even though their effects are destructive. They need less attention because the outcome is largely unavoidable. Almost exactly 75 percent of the iron ore mined in Germany in 1913 came from Alsace-Lorraine. The main importance of these provinces, often referred to as the “stolen provinces,” was their iron ore.

There is no doubt that Germany must lose these ore fields. The only question is how much access Germany will be allowed to purchase their output. The German representatives tried hard to include a rule where the coal and coke they supplied to France would be exchanged for minette (a type of iron ore) from Lorraine. But they did not get this rule included; the decision remains entirely up to France.

France’s Conflicting Goals for Iron Ore France’s future policy on this will be driven by motives that don’t entirely align.

• While Lorraine provided 75 percent of Germany’s iron ore, only 25 percent of Germany’s blast furnaces (used to smelt iron) were in Lorraine and the Saar basin combined. A large amount of the ore was transported into Germany proper for processing.
• Similarly, about 25 percent of Germany’s iron and steel factories were located in Alsace-Lorraine. So, for the moment, the most economical and profitable action for France would certainly be to continue exporting a large part of the ore to Germany.

On the other hand, France, having regained the Lorraine deposits, will likely aim to replace German industries that relied on this ore with new industries within its own borders. It would take a lot of time to develop the necessary factories and skilled workers in France. Even then, France could hardly process all the ore unless it could rely on receiving coal from Germany. The uncertainty about the final status of the Saar region will also disrupt the plans of investors thinking about setting up new industries in France.

Politics Over Economics In reality, here as elsewhere, political concerns disastrously interfere with economic ones. In a system of free trade and open economic exchange, it wouldn’t matter much if iron was on one side of a political border and labor, coal, and blast furnaces were on the other. But as things stand, people have found ways to make themselves and each other poorer. They prefer collective hostility to individual happiness. Based on the current passions and behaviors of European capitalist society, it seems certain that Europe’s effective iron output will decrease due to a new political frontier (even if that frontier is required by sentiment and historical justice). This is because nationalism and private interests are allowed to create a new economic barrier along the same lines. In the current governance of Europe, these considerations are allowed to outweigh the continent’s intense need for the most consistent and efficient production to repair war damage and satisfy workers’ demands for better pay.

Impact on Upper Silesia’s Iron Industry Similar effects, though on a smaller scale, are likely if Upper Silesia is transferred to Poland. While Upper Silesia has little iron ore, its coal resources led to the establishment of many blast furnaces there. What will happen to them? If Germany is cut off from its ore supplies in the west, will it export any of its small remaining ore supplies from the east, beyond its new borders? The efficiency and output of the industry seem certain to decline.

The Treaty Damages Economic Organization Thus, the Treaty attacks economic organization. By destroying this organization, it further reduces the already diminished wealth of the entire community. The economic barriers to be set up between coal and iron – the foundations of modern industrialism – will not only reduce the production of useful goods. They may also waste a huge amount of human labor by forcing coal or iron to be dragged many useless miles to satisfy the demands of a political treaty or because obstacles have been created to the sensible location of industry.

Other Treaty Provisions: Transport and Tariffs

Finally, there are Treaty provisions related to Germany’s transport and tariff (import/export tax) systems. These parts of the Treaty are not nearly as important or significant as those discussed so far. They are minor annoyances, interferences, and sources of frustration. They are objectionable not so much for their concrete negative effects, but because they are dishonorable to the Allies, considering the promises they made. The reader should consider what follows in light of the assurances quoted earlier, which Germany relied on when it laid down her arms.

Here’s how the Treaty further impacted Germany’s economy:

(i.) Rules on Trade and Tariffs

The various other economic rules began with several points that would have matched the spirit of President Wilson’s third Fourteen Point (which aimed for equal trade conditions)—if they applied to both sides.

• For both imports and exports, and regarding taxes on goods (tariffs), rules, and restrictions, Germany agreed for five years to give most-favored-nation treatment to the Allied and Associated States. This means Germany had to give them the best trade terms it offered to any country.
• However, Germany itself was not entitled to receive such treatment in return.

Here are some specific examples of these one-sided rules:

• For five years, Alsace-Lorraine could export goods to Germany tax-free, up to the average amount it sent yearly between 1911 and 1913. But there was no similar rule for German exports going to Alsace-Lorraine.
• For three years, Polish exports to Germany, and for five years, Luxemburg’s exports to Germany, received similar tax-free privileges. But German exports to Poland or Luxemburg did not.
• Luxemburg, which had benefited from being part of the German Customs Union (a free-trade area) for many years, was now permanently excluded from it.

For six months after the Treaty began, Germany was not allowed to charge higher import taxes on goods from Allied and Associated States than the most favorable tax rates it had before the war. For another two and a half years (making three years in total), this ban continued for certain goods. These included items that had special pre-war agreements, as well as wine, vegetable oils, artificial silk, and washed or cleaned wool.

The author considered this a ridiculous and harmful rule. It prevented Germany from taking necessary steps to save its limited resources to buy essential items and pay reparations. Because of how wealth was distributed in Germany and due to reckless spending by some individuals (a result of uncertain times), Germany faced a potential flood of luxury and semi-luxury goods from abroad. People had been starved of these items for years. Importing them would use up Germany’s small supply of foreign money. These rules undermined the German government’s power to encourage savings or to raise taxes during a critical time. The author saw it as an example of senseless greed that backfired: after taking Germany’s available wealth and demanding impossible future payments, the Allies added a specific order that Germany must allow imports of items like champagne and silk as easily as it did in its prosperous days.

Another rule affecting Germany’s customs system could have serious and widespread effects if applied. The Allies reserved the right to set up a special customs system for the occupied area on the west bank of the Rhine River. They could do this “if such a measure being necessary in their opinion in order to safeguard the economic interests of the population of these territories.” This rule was likely added to possibly help France’s policy of somehow separating the west bank provinces from Germany during the years of occupation. The plan to create an independent Republic there, under French influence (possibly with religious backing), had not been given up. This republic would act as a buffer state and achieve France’s goal of pushing Germany proper beyond the Rhine. Some believed that much could be achieved through threats, bribes, and persuasion over fifteen years or more. If this rule was acted upon and the economy of the Rhine’s left bank was effectively cut off from the rest of Germany, the impact would be extensive. But, the author noted, the dreams of scheming diplomats do not always succeed, and one must have hope for the future.

(ii.) Rules About Railways

The rules about railways, as first presented to Germany, were significantly changed in the final Treaty. They were now limited to ensuring that goods coming from Allied territory to Germany, or passing through Germany, would receive the best possible treatment for rail freight rates and other conditions. This treatment had to be as good as that applied to similar goods carried on any German lines “under similar conditions of transport, for example, as regards length of route.” As a one-sided rule, it was an interference in Germany’s internal affairs that was hard to justify. However, its practical effect, and that of a similar rule for passenger travel, would largely depend on how the phrase “similar conditions of transport” was interpreted.

For the time being, Germany’s transport system would be much more seriously disrupted by the rules requiring it to hand over rolling-stock (trains and wagons).

• Under the Armistice terms (the agreement that stopped the fighting), Germany had to surrender 5,000 locomotives and 150,000 wagons, all “in good working order, with all necessary spare parts and fittings.”
• The Treaty required Germany to confirm this surrender and to recognize Allied ownership of this equipment.
• Furthermore, for railway systems in territories Germany was forced to give up, it had to hand over these systems complete with all their rolling-stock. This rolling-stock had to be “in a normal state of upkeep” as recorded in the last inventory before November 11, 1918. This meant that the railway systems in ceded territories would not have to share in the general wear and tear and reduction of Germany’s overall rolling-stock.

This loss of equipment could undoubtedly be replaced over time. But a lack of lubricating oils and the tremendous wear and tear from the war (which hadn’t been fixed with normal repairs) had already made the German railway system very inefficient. The additional heavy losses under the Treaty would ensure this poor state continued for some time. These losses significantly worsened the difficulties with the coal problem and with export industries in general.

(iii.) Rules About Germany’s River Systems

Then there were the rules about Germany’s river systems. The author believed these were largely unnecessary and so unrelated to the supposed aims of the Allies that their actual purpose was generally unknown. Yet, they represented an unprecedented interference in a country’s internal affairs. They could be used in a way that took away all effective German control over its own transport system. In their current form, the author felt they were impossible to justify, but simple changes might make them reasonable.

Most of Germany’s main rivers start or end in non-German territory:

• The Rhine starts in Switzerland, is a border river for part of its length, and flows into the sea in Holland.
• The Danube starts in Germany but mostly flows through other countries.
• The Elbe starts in the mountains of Bohemia (now Czechia).
• The Oder flows through Lower Silesia.
• The Niemen now forms the border of East Prussia and starts in Russia. Of these, the Rhine and Niemen are border rivers. The Elbe is mainly German but important for Bohemia in its upper parts. The Danube in its German section seems to concern only Germany. The Oder is almost purely a German river unless the vote in Upper Silesia results in that region being detached from Germany.

Rivers that “naturally provide more than one State with access to the sea,” as the Treaty says, rightly need some international rules and strong guarantees against discrimination. This idea had long been accepted in the International Commissions that regulated the Rhine and the Danube. But on such commissions, the countries involved should be represented more or less according to their level of interest. The Treaty, however, used the international nature of these rivers as an excuse to take Germany’s river system out of German control.

After some articles that appropriately aimed to prevent discrimination and interference with free transit, the Treaty handed over the administration of the Elbe, Oder, Danube, and Rhine rivers to International Commissions. The final powers of these Commissions were to be decided by “a General Convention drawn up by the Allied and Associated Powers, and approved by the League of Nations.” In the meantime, the Commissions were to create their own rules and would apparently have very broad powers, “particularly in regard to the execution of works of maintenance, control, and improvement on the river system, the financial regime, the fixing and collection of charges, and regulations for navigation.”

So far, the author noted, there was much to be said in favor of these Treaty terms. Freedom of transit through countries is an important part of good international relations and should be established everywhere. The problematic part of the Commissions was their membership. In every case, the voting power was arranged to place Germany in a clear minority:

• Elbe Commission: Germany had 4 out of 10 votes.
• Oder Commission: Germany had 3 out of 9 votes.
• Rhine Commission: Germany had 4 out of 19 votes.
• Danube Commission (not yet finalized): Germany would apparently have a small minority. France and Great Britain were represented on the commissions for all these rivers. For some unknown reason, Italy and Belgium also had representatives on the Elbe Commission.

Thus, the great waterways of Germany were handed over to foreign bodies with the widest powers. Much of the local and internal business of cities like Hamburg, Magdeburg, Dresden, Stettin, Frankfurt, Breslau, and Ulm would be subject to foreign control. It was almost as if the countries of Continental Europe were given a majority say in controlling London’s River Thames or the Port of London.

Certain minor rules followed patterns now familiar in the Treaty:

• Germany had to give up to 20 percent of its inland (river and canal) boat tonnage.
• Beyond this, Germany had to give up a proportion of its riverboats on the Elbe, Oder, Niemen, and Danube. An American arbitrator would decide this amount, considering “the legitimate needs of the parties concerned, and particularly to the shipping traffic during the five years preceding the war.” The boats to be ceded would be chosen from the newest ones.
• The same procedure applied to German vessels and tugboats on the Rhine and to German property in the port of Rotterdam.
• Where the Rhine flows between France and Germany, France was to have all rights to use the water for irrigation or to generate power, while Germany was to have none. All bridges over this section were to become entirely French property.
• Finally, the administration of Kehl, a purely German port on the eastern bank of the Rhine, was to be combined with that of Strassburg (a French city) for seven years. It was to be managed by a Frenchman appointed by the new Rhine Commission.

Thus, the Economic Clauses of the Treaty were thorough. Little was overlooked that could make Germany poorer now or hinder its development in the future. In this situation, Germany was expected to make huge money payments, the scale and manner of which would be examined in the next chapter.

Reparation

This section explains how the demands for Reparation (payments for war damages) from Germany were determined.

I. Promises Made Before Peace Talks

The types of damage the Allies could claim from Germany were based on:

• President Wilson’s Fourteen Points from January 8, 1918.
• Changes to these points made by the Allied Governments in a special note. President Wilson officially gave this note to the German Government on November 5, 1918, as the foundation for peace.

The key principle was: “compensation will be made by Germany for all damage done to the civilian population of the Allies and to their property by the aggression of Germany by land, by sea, and from the air.”

This limit was strengthened by President Wilson’s speech to the U.S. Congress on February 11, 1918. The terms of this speech were an explicit part of the agreement with Germany. It stated there would be “no contributions” (meaning payments simply for losing the war) and “no punitive damages” (meaning payments designed purely as punishment).

Some people argued that a phrase in the Armistice Terms (the agreement that stopped the fighting) changed everything. This phrase said, “that any future claims and demands of the Allies and the United States of America remain unaffected.” They claimed this wiped out all previous agreements and allowed the Allies to demand whatever they wanted.

However, it’s not reasonable to believe this casual, protective phrase, which nobody thought was very important at the time, canceled all the formal messages between President Wilson and Germany about the peace terms. It didn’t abolish the Fourteen Points or turn Germany’s acceptance of the Armistice into an unconditional surrender regarding financial demands. It was just a typical phrase used by legal writers to ensure that listing some claims didn’t mean other claims couldn’t be made. In any case, this argument was settled by the Allied reply to Germany’s complaints about the first draft of the Treaty. In that reply, the Allies admitted that the reparation rules had to follow President Wilson’s Note of November 5.

So, assuming the terms of that Note were binding, we need to understand the exact meaning of the phrase: “all damage done to the civilian population of the Allies and to their property by the aggression of Germany by land, by sea, and from the air.”

Few sentences in history have caused so much work for clever debaters and lawyers as this apparently simple statement. Some have even argued that it covers the entire cost of the war. They point out that the whole cost of the war had to be paid by taxes, and such taxes are “damaging to the civilian population.” They admit the wording is awkward and it would have been simpler to say “all loss and spending of any kind.” They also agree that the focus on damage to civilians and their property seems unfortunate. But, in their view, errors in wording should not prevent the Allies from exercising the rights of victors.

However, there are limits to this interpretation.

• The natural meaning of the phrase emphasizes civilian damages, not general military costs.
• We must also remember that this phrase was used to explain the meaning of “restoration” in President Wilson’s Fourteen Points.
• The Fourteen Points mentioned damage in invaded territories like Belgium, France, Romania, Serbia, and Montenegro. (Italy was strangely not mentioned).
• But the Fourteen Points did not cover losses at sea from submarines, bombardments from the sea (like the one at Scarborough), or damage from air raids.

The Allied Supreme Council in Paris proposed changes to President Wilson to fix these omissions. These involved losses to civilian life and property that were very similar to those in occupied territories. At that time—the end of October 1918—the author does not believe any responsible leader was thinking of demanding that Germany pay for the general costs of the war. They only wanted to make it clear (which was very important to Great Britain) that payment for damage to non-combatants and their property was not limited to invaded land. It applied equally to all such damage, whether “by land, by sea, or from the air.” It was only later that a widespread public demand for Germany to pay the full costs of the war made it politically convenient to be dishonest and try to find meanings in the written agreement that were never intended.

What Damages Could Legitimately Be Claimed?

Based on a strict interpretation of the agreements, what damages could be claimed?

For the United Kingdom, the list would include:

• (a) Damage to civilian life and property caused by enemy government actions. This includes damage from air raids, naval bombardments, submarine warfare, and mines.
• (b) Compensation for the improper treatment of interned civilians. It would not include the general costs of the war or, for example, indirect damage from loss of trade.

The French claim would include items similar to the UK’s, plus:

• (c) Damage to the property and persons of civilians in the war zone, and by air attacks behind enemy lines.
• (d) Compensation for the looting of food, raw materials, livestock, machinery, household items, timber, and similar goods by the enemy governments or their citizens in occupied territory.
• (e) Repayment of fines and goods taken by enemy governments or their officers from French towns or citizens.
• (f) Compensation to French citizens who were deported or forced to do labor.

In addition, there was a more debatable item:

• (g) The expenses of the Relief Commission in providing necessary food and clothing to keep the French civilian population alive in the enemy-occupied areas.

The Belgian claim would include similar items. If one argued that Belgium deserved something closer to payment for general war costs, it could only be because of the breach of international law when Belgium was invaded. However, the Fourteen Points did not include special demands on this basis. Since the cost of Belgian relief (item g) and its general war costs had already been covered by loans from the British, French, and U.S. governments, any repayment by Germany for these would likely be used by Belgium to pay back those loans. So, such demands were effectively an addition to the claims of the three lending governments.

The claims of the other Allies would be put together along similar lines. But for them, a key question arose: to what extent could Germany be held partly responsible for damage done not by itself, but by its wartime allies (Austria-Hungary, Bulgaria, and Turkey)? This is one of many questions the Fourteen Points did not clearly answer.

• On one hand, Point 11 explicitly covered damage to Romania, Serbia, and Montenegro, without specifying which country’s troops caused the damage.
• On the other hand, the Allies’ Note spoke of “German” aggression, when it could have said aggression by “Germany and her allies.” On a strict, literal interpretation, the author doubts that Germany was liable for damage done, for example, by the Turks to the Suez Canal, or by Austrian submarines in the Adriatic Sea. But if the Allies wanted to push the point, they could make Germany partly liable without seriously going against the general intention of their agreements.

Among the Allies themselves, the situation was quite different. It would be extremely unfair and a betrayal if France and Great Britain took what Germany could pay and left Italy and Serbia to get what they could from what remained of Austria-Hungary. It is clear that among the Allies, any assets received should be pooled and shared out according to the total claims of each nation.

If this happened, and if the author’s estimate (given later) that Germany’s ability to pay would be used up by the direct and legitimate claims of the Allies is accepted, then the question of Germany’s partial liability for its allies becomes purely theoretical. Wise and honorable leaders would therefore have given Germany the benefit of the doubt and claimed against it only for the damage it had directly caused.

Estimating the Total Demand

Based on these types of claims, what would the total demand be? No figures exist for a scientific or exact estimate. The author offers his own guess with these initial observations:

The amount of physical damage in the invaded areas has been hugely, though perhaps understandably, exaggerated. A journey through the devastated parts of France was incredibly shocking to see and imagine. In the winter of 1918-1919, before nature had a chance to soften the scene, the horror and desolation of war were visible on an extraordinary scale. The destruction was complete. For mile after mile, nothing was left. No building could be lived in, and no field could be farmed. The sameness was also striking: one devastated area looked exactly like another—piles of rubble, a swamp of bomb craters, and tangled wire. The amount of human labor needed to restore such a landscape seemed impossible to calculate. To anyone who saw it, no amount of money, even billions of dollars, seemed enough to represent the destruction. Some governments, for various understandable reasons, have not hesitated to take advantage of these feelings.

Popular opinion is most wrong, the author thinks, about Belgium.

• Belgium is a small country, and the actual area of devastation was a small part of the whole.
• The initial German invasion in 1914 did some local damage. After that, the battle-line in Belgium did not move back and forth over a wide area as it did in France. It was mostly stationary, and fighting was limited to a small corner of the country. Much of this area was historically undeveloped, poor, and quiet, and did not include Belgium’s main industrial centers.
• Some damage remained in the small flooded area, deliberate damage by retreating Germans to buildings, equipment, and transport, and the looting of machinery, cattle, and other movable property.
• However, Brussels, Antwerp, and even Ostend are mostly undamaged. The great majority of the land, which is Belgium’s main source of wealth, is nearly as well farmed as before.
• A traveler could drive through the entire devastated area of Belgium almost before realizing it. In contrast, the destruction in France was on a completely different scale.
• Industrially, the looting was serious and temporarily crippling. But the actual money cost of replacing machinery adds up slowly. A few tens of millions of dollars would have covered the value of every machine Belgium ever owned.
• Besides, a purely statistical view must note that Belgians have a strong instinct for self-preservation. The large amount of German banknotes held in Belgium at the time of the Armistice shows that some groups, despite German harshness, found ways to profit from the invaders. Belgian claims against Germany for sums greater than the total estimated pre-war wealth of the entire country are simply irresponsible.

To help guide our thinking, here is an official summary of Belgian wealth, published in 1913 by Belgium’s Finance Ministry:

• Houses: $1.1 billion
• Furniture, etc.: $1.1 billion
• Land (value): $2.08 billion
• Farm Animals and Tools: $0.3 billion
• Coins and Gold/Silver Bullion: $0.23 billion
• Industrial Plants and Tools: $0.6 billion
• Railways, Trams, Ships: $0.34 billion
• Foreign Investments: $0.12 billion
• Official Total (1913): $5.87 billion

This total is about $780 per person. Dr. Stamp, a leading expert, tends to think this is too low on first impression (though he doesn’t accept some much higher recent estimates). For comparison, wealth per person in neighboring countries was about $835 for Holland, $1,220 for Germany, and $1,515 for France. A total of $7.5 billion for Belgium, or about $1,000 per person, would be quite generous. The official estimate for land and buildings is likely more accurate than the other figures. On the other hand, increased construction costs must be considered.

Taking all this into account, the author estimates the maximum money value of actual physical loss of Belgian property through destruction and looting at $750 million. While hesitant to set an even lower estimate that differs so much from common figures, he would be surprised if claims even for this amount could be proven. Claims for financial demands like levies, fines, and requisitions might add another $500 million. If the money advanced to Belgium by its allies for general war costs is included (this includes relief costs), about $1.25 billion must be added. This brings the total to $2.5 billion.

The destruction in France was on a much more significant scale. This was true for both the length of the battle line and the much deeper area of land over which the battle moved. It is a common mistake to think of Belgium as the main victim of the war. The author believes that when considering casualties, property loss, and future debt, Belgium will turn out to have made the smallest relative sacrifice of all the warring nations, except for the United States. Among the Allies, Serbia’s sufferings and losses were proportionally the greatest, followed by France. France was, in all important ways, just as much a victim of German ambition as Belgium was. France’s entry into the war was just as unavoidable. In the author’s judgment, despite France’s policy at the Peace Conference (a policy largely due to its sufferings), France has the strongest claims for generosity.

The special place Belgium holds in popular imagination is due to the fact that in 1914 its sacrifice was by far the greatest of any Ally. But after 1914, Belgium played a minor role. Consequently, by the end of 1918, its relative sacrifices (apart from the suffering from invasion, which cannot be measured in money) had fallen behind. In some respects, they were not even as great as, for example, Australia’s. The author states this with no wish to avoid the obligations to Belgium made by responsible British leaders on many occasions. Great Britain should not seek any payment from Germany for itself until Belgium’s just claims are fully met. But this is no reason why we, or they, should not tell the truth about the actual amount.

While French claims are immensely larger, here too there has been excessive exaggeration, as responsible French statisticians have themselves pointed out.

• No more than 10 percent of France’s area was actually occupied by the enemy.
• No more than 4 percent lay within the area of substantial devastation.
• Of the sixty French towns with over 35,000 people, only two were destroyed: Reims (population 115,178) and St. Quentin (population 55,571).
• Three others were occupied—Lille, Roubaix, and Douai—and suffered from looted machinery and other property, but were not substantially damaged otherwise.
• Amiens, Calais, Dunkerque, and Boulogne suffered secondary damage from bombardment and air raids. However, the value of Calais and Boulogne must have increased due to new facilities built for the British Army.

The Annuaire Statistique de la France, 1917 (a French statistical yearbook) valued all house property in France at $11.9 billion (59.5 billion francs). Therefore, a current French estimate of $4 billion (20 billion francs) for the destruction of house property alone is obviously far too high. A figure of $600 million at pre-war prices, or about $1.25 billion at current prices, is much closer to the correct amount for destroyed housing. Estimates of the value of French land (excluding buildings) range from $12.4 billion to $15.58 billion. So, it would be excessive to claim damage to land as high as $500 million. The value of farm capital (livestock, equipment, etc.) for all of France has not been estimated by responsible authorities at more than $2.1 billion. There remain losses of furniture and machinery, damage to coal mines and the transport system, and many other smaller items. But these losses, however serious, cannot be valued in the hundreds of millions of dollars for such a small part of France. In short, it will be difficult to establish a bill exceeding $2.5 billion for physical and material damage in the occupied and devastated areas of Northern France. The author is confirmed in this estimate by the opinion of M. René Pupin, who wrote the most complete and scientific estimate of France’s pre-war wealth. The author came across M. Pupin’s work after he had already arrived at his own figure.

One expert estimates that the physical damage in the areas that were invaded was between $2 billion and $3 billion. My own estimate is about halfway between these figures.

However, Mr. Dubois, speaking for the Budget Commission of the French Chamber, stated a “minimum” figure of $13 billion. This amount didn’t even include money taken by force during the war, losses of ships and their cargo, road damage, or the loss of public monuments. And Mr. Loucheur, the Minister of Industrial Reconstruction, told the Senate on February 17, 1919, that rebuilding the destroyed regions would cost $15 billion. This was more than double what another expert, Mr. Pupin, thought all the property in those areas was worth. At that time, Mr. Loucheur was strongly arguing for France’s claims at the Peace Conference. Like others, he may have felt that telling the absolute truth was not compatible with what he saw as his patriotic duty.

The numbers discussed so far don’t cover all of France’s claims. There are still other things to consider:

• Money and goods taken from the occupied areas.
• Losses of French merchant ships and their cargo due to attacks by German warships and submarines. An extra $1 billion would probably be enough to cover all these additional claims. To be safe, though, we will add $1.5 billion to France’s claim, bringing the total to $4 billion.

Mr. Dubois and Mr. Loucheur made their statements in early 1919. A speech by Mr. Klotz, the French Minister of Finance, six months later (September 5, 1919) was harder to excuse. In this speech, Mr. Klotz estimated France’s total claims for property damage at $26.8 billion. This figure likely included losses at sea but did not include pensions and allowances. It was more than six times my estimate. Even if my own figure turns out to be wrong, Mr. Klotz’s high number could never have been justified. The French government ministers have deceived their people so badly. When the truth eventually comes out, as it soon must (both about their own claims and Germany’s ability to pay), the consequences will affect more than just Mr. Klotz. It might even threaten the current system of government and society he represents.

British Claims for Damages

Based on the current understanding, British claims would mostly be for losses at sea. This includes:

• Losses of ships (hulls).
• Losses of cargo.

Of course, there would also be claims for damage to civilian property from air raids and bombing from the sea. But compared to the other figures we are discussing, the money involved here is small. About $25 million might cover all of it, and $50 million certainly would.

The British lost 2,479 merchant ships (not including fishing boats) due to enemy action, totaling about 7.76 million gross tons. Figuring out the replacement cost for these ships is difficult, and opinions can vary widely. If we use a rate of $150 per gross ton, the total claim is $1.15 billion. Shipbuilding is getting faster, so this rate might soon be too high, but it can be changed if experts suggest a better one. To this, we must add the value of the lost cargo. This is mostly guesswork. An estimate of $200 for each ton of shipping lost might be a reasonable approximation. That would mean $1.55 billion for cargo. So, the total for ships and cargo would be $2.7 billion.

If we add another $150 million to cover air raids, bombings, claims from civilians held by the enemy, and various other small items, this should be more than enough. This brings Great Britain’s total claim to $2.85 billion. It might seem surprising that Great Britain’s financial claim is almost as large as France’s and even larger than Belgium’s. However, the damage to its merchant marine was enormous, whether measured by financial loss or the real loss to the country’s economic strength.

Claims from Other Allied Countries

Other countries also had claims:

• Italy, Serbia, and Romania claimed damages from invasion.
• These countries, and others like Greece, also had losses at sea.

For this discussion, I will assume that Germany is responsible for these claims, even if the damage was directly caused by Germany’s allies. I will also assume that no such claims will be made for Russia.

Italy’s losses from invasion and at sea were likely not very large. A figure between $250 million and $500 million should be enough to cover them.

Serbia suffered more than any other country from a human perspective. However, its financial losses were not extremely large because its economy was not highly developed. An Italian statistician, Maroi, estimated Serbia’s national wealth at $2.4 billion, or $525 per person. Most of this wealth was in land, which did not suffer permanent damage.

Because there is very little solid information to guess the exact claims of this group of countries, I prefer to make one overall guess rather than several small ones. I estimate the total for this entire group at $1.25 billion.

Summary of Estimated Claims

So, we are left with the following estimated claims: (The original text implies a list here, but does not provide it before cutting off. The author then immediately discusses the guesswork involved.)

I must emphasize that there is a lot of guesswork in these figures. The figure for France, especially, is likely to be criticized. However, I am fairly confident that the general size of the claim, rather than the exact numbers, is reasonably accurate. To put it another way: a claim against Germany, based on the interpretation of the agreements made before the Armistice (the official end of fighting), would certainly be more than $8 billion but less than $15 billion.

This is the amount we were entitled to ask from the enemy. For reasons I will explain more fully later, I believe it would have been wise and fair to ask the German government during the peace negotiations to agree to a final payment of $10 billion. This would have settled the matter without needing to examine all the details. This amount would have provided an immediate and definite solution. If Germany had been given some flexibility, it might not have been completely impossible for them to pay this sum. This money should then have been divided among the Allies based on their needs and general fairness.

But the issue was not decided based on what was most sensible.

II. The Peace Conference and the Treaty Terms

I don’t believe that when the Armistice was signed, responsible leaders in the Allied countries expected Germany to pay for anything beyond the cost of repairing direct physical damage. This damage was caused by the invasion of Allied territory and the submarine attacks. At that time, there were serious doubts about whether Germany would even accept our terms. In other ways, these terms were already very harsh. It would have seemed like a bad political move to risk continuing the war by demanding a money payment that Allied public opinion wasn’t expecting at the time and that probably couldn’t be collected anyway. I think the French never fully accepted this viewpoint, but it was certainly the British position. The conditions before the Armistice were created in this atmosphere.

A month later, the situation had completely changed. We had discovered just how weak Germany’s position really was. Some had suspected this, but no one had dared to count on it as a certainty. It became clear that we could have demanded an unconditional surrender if we had decided to.

But there was another new factor that was more important locally, especially in Britain. The British Prime Minister realized that the end of the war might also mean the end of the political coalition that kept him in power. He knew that domestic problems would arise with:

• Demobilization (sending soldiers home).
• Switching industry from wartime to peacetime production.
• The financial situation.
• The general psychological reactions of the people. These problems would give his enemies strong arguments against him if he gave them time to develop.

Therefore, the Prime Minister saw his best chance to hold onto his power was to act quickly, before the excitement of victory faded. His power was very personal and not tied to any specific party or principle, which was unusual in British politics. He tried to use the emotions of the moment to build a new foundation of power that might last longer than the inevitable negative reactions expected in the near future. So, shortly after the Armistice, the popular victorious leader, at the peak of his influence, called a General Election. Many people at the time recognized this as a politically immoral act. There was no public interest that required such a quick election. It would have been better to wait a short time until the issues of the new era became clearer and the country had more specific topics to consider and instruct its new representatives on. But personal ambition decided otherwise.

For a while, everything went well for the Prime Minister. But as the election campaign progressed, government candidates found they lacked a strong, effective slogan. The War Cabinet was asking for continued authority because they had won the war. However, the Prime Minister remained silent or spoke in general terms about his future policies. This was partly because the new issues hadn’t yet become clear, and partly to maintain the delicate balance of his Coalition Party. As a result, the campaign seemed a bit dull. Looking back, it seems unlikely that the Coalition Party was ever in real danger of losing. But party managers get nervous easily. The Prime Minister’s more anxious advisors told him he wasn’t safe from unexpected problems, and he listened to them. The party managers demanded more “ginger” – more excitement and energy. The Prime Minister started looking for some.

Assuming that keeping the Prime Minister in power was the main goal, the rest followed logically. At that point, some groups were loudly complaining that the government hadn’t made it clear enough that they weren’t going to “let Germany off” easily. Mr. Hughes was getting a lot of attention for demanding a very large payment from Germany, and Lord Northcliffe, a powerful newspaper owner, was supporting the same cause. This gave the Prime Minister an idea to solve two problems at once. By adopting the policy of Mr. Hughes and Lord Northcliffe, he could silence these influential critics. At the same time, he could give his party managers an effective campaign slogan to overpower the growing criticism from other areas.

The 1918 General Election campaign is a sad, dramatic story. It shows the fundamental weakness of a leader who gets his main inspiration not from his own true beliefs, but from the cruder feelings of the public mood around him. The Prime Minister’s natural instincts were often right and reasonable. He himself did not believe in hanging the Kaiser (the German emperor) or that it was wise or possible to get a huge payment from Germany. On November 22, he and Mr. Bonar Law (another leading politician) issued their Election Manifesto. It made no mention of either hanging the Kaiser or demanding large payments. Instead, it spoke of disarmament and the League of Nations. It concluded that “our first task must be to conclude a just and lasting peace, and so to establish the foundations of a new Europe that occasion for further wars may be for ever averted.” In his speech at Wolverhampton on November 24, the day before Parliament was dissolved for the election, he said nothing about reparations or payments from Germany. The next day in Glasgow, Mr. Bonar Law would not make any promises. He said, “We are going to the Conference as one of a number of allies, and you cannot expect a member of the Government, whatever he may think, to state in public before he goes into that Conference, what line he is going to take in regard to any particular question.”

But a few days later, at Newcastle on November 29, the Prime Minister started to get more enthusiastic about the idea. He said: “When Germany defeated France she made France pay. That is the principle which she herself has established. There is absolutely no doubt about the principle, and that is the principle we should proceed upon—that Germany must pay the costs of the war up to the limit of her capacity to do so.” However, he also included many “words of warning” about the practical problems. He said: “We have appointed a strong Committee of experts, representing every shade of opinion, to consider this question very carefully and to advise us. There is no doubt as to the justice of the demand. She ought to pay, she must pay as far as she can, but we are not going to allow her to pay in such a way as to wreck our industries.” At this point, the Prime Minister tried to suggest he would be very tough, but without creating excessive hopes of actually getting the money. He also avoided committing himself to a specific course of action at the Peace Conference. It was rumored that a high financial authority in the city had said Germany could definitely pay $100 billion, and this authority wouldn’t dismiss a figure twice that amount. However, Treasury officials, as the Prime Minister (Mr. Lloyd George) indicated, had a different opinion. So, he could use the wide disagreement among his advisors as a cover. He could treat the exact amount Germany could pay as an open question, in which he had to do his best for his country’s interests. He remained silent about Britain’s commitments under President Wilson’s Fourteen Points peace plan.

On November 30, Mr. Barnes, a member of the War Cabinet who was supposed to represent Labor, shouted from a platform, “I am for hanging the Kaiser.”

On December 6, the Prime Minister issued a statement of policy and aims. He significantly emphasized the word “European,” stating that “All the European Allies have accepted the principle that the Central Powers must pay the cost of the war up to the limit of their capacity.”

But it was now little more than a week before Polling Day (Election Day), and he still hadn’t said enough to satisfy the public’s current desires. On December 8, The Times newspaper, which usually provided a respectable cover for the less restrained views of its associates, declared in an editorial titled “Making Germany Pay” that “The public mind was still bewildered by the Prime Minister’s various statements.” They added, “There is too much suspicion of influences concerned to let the Germans off lightly, whereas the only possible motive in determining their capacity to pay must be the interests of the Allies.” Their political correspondent wrote, “It is the candidate who deals with the issues of to-day, who adopts Mr. Barnes’s phrase about ‘hanging the Kaiser’ and plumps for the payment of the cost of the war by Germany, who rouses his audience and strikes the notes to which they are most responsive.”

On December 9, at the Queen’s Hall, the Prime Minister avoided the subject. But from this point on, the decline in responsible thought and speech accelerated hour by hour. The most extreme example was Sir Eric Geddes at the Guildhall in Cambridge. In an earlier speech, he had carelessly expressed doubts about getting the whole cost of the war from Germany. This had made people suspicious of him, so he needed to repair his reputation. The now repentant Sir Eric Geddes shouted, “We will get out of her all you can squeeze out of a lemon and a bit more. I will squeeze her until you can hear the pips squeak!” His policy was to take every piece of property belonging to Germans in neutral and Allied countries, all her gold and silver, her jewels, and the contents of her art galleries and libraries, and sell them for the Allies’ benefit. “I would strip Germany,” he cried, “as she has stripped Belgium.”

By December 11, the Prime Minister had given in. His Final Manifesto of Six Points, issued to the voters that day, is a sad contrast to his program from three weeks earlier. I will list it in full:

1. Trial of the Kaiser.
2. Punishment of those responsible for atrocities.
3. Fullest Indemnities (payments) from Germany.
4. Britain for the British, socially and industrially.
5. Rehabilitation of those broken in the war.
6. A happier country for all.

This list provides material for cynics. Three weeks of campaigning had reduced the powerful leaders of England to this mixture of greed and sentimentality, prejudice and deception. Only a short time before, these same leaders had spoken honorably about disarmament, a League of Nations, and a just and lasting peace that would build the foundations of a new Europe.

On the same evening, the Prime Minister spoke in Bristol. He effectively withdrew his previous reservations and laid down four principles to guide his policy on payments from Germany. The main ones were:

• First, we have an absolute right to demand the whole cost of the war.
• Second, we propose to demand the whole cost of the war.
• Third, a committee appointed by the Cabinet believes that this can be done. Four days later, he faced the election.

The Prime Minister never said that he himself believed Germany could pay the whole cost of the war. But in the speeches of his supporters during the campaign, the program became much more definite and extreme than he might have intended.

The average voter was made to believe that Germany could definitely be forced to pay most, if not all, of the war’s costs. This idea appealed to two groups of people:

• Those who were practically and selfishly worried about the future expenses caused by the war.
• Those whose emotions had been deeply disturbed by the horrors of the war. A vote for a Coalition candidate seemed to promise both the punishment of evil (symbolized as “Anti-Christ”) and Germany taking over Britain’s national debt.

This combination of promises proved impossible to resist. Once again, Mr. Lloyd George’s political instincts were correct. No candidate could safely speak out against this program, and none did. The old Liberal Party had nothing similar to offer the voters and was almost wiped out. A new House of Commons was elected. Most of its members had promised the public much more than the Prime Minister’s carefully worded commitments. Shortly after they arrived at Westminster, I asked a Conservative friend, who had seen previous Parliaments, what he thought of them. “They are a lot of hard-faced men,” he said, “who look as if they had done very well out of the war.”

This was the atmosphere when the Prime Minister left for the Paris Peace Conference. These were the difficult situations he had created for himself. He had committed himself and his government to make demands on a helpless enemy. These demands went against solemn agreements Britain had made. The enemy had laid down its weapons trusting these agreements. History will find it hard to forgive this episode. A war supposedly fought to protect the sacredness of international agreements ended with the victorious defenders of these ideals breaking one of the most sacred agreements possible.

The True Problems Facing Europe

Beyond other aspects of this situation, I believe the campaign to make Germany pay the general costs of the war was one of the most serious acts of political foolishness our leaders have ever been responsible for. Europe might have had a much different future if either Mr. Lloyd George (the British Prime Minister) or Mr. Wilson (the US President) had understood the most serious problems. They needed to see that these problems were not political or about territory, but financial and economic. The dangers of the future were not about borders or national power, but about food, coal, and transportation. Neither of them paid enough attention to these crucial issues at any point during the Conference.

In any case, the British delegation’s commitments on the issue of payments from Germany hopelessly clouded the atmosphere for wise and reasonable discussion. The hopes the Prime Minister had created did more than just force him to support an unjust and unworkable economic plan in the treaty with Germany. These hopes also put him at odds with President Wilson. Furthermore, they created conflicts with the competing interests of France and Belgium. The clearer it became that little could actually be gotten from Germany, the more necessary it seemed for each nation to be patriotically greedy and selfish. Each tried to grab what it could, even at the expense of France’s more just claims and greater need, or Belgium’s well-founded expectations. Yet, greed could not solve the financial problems that were about to trouble Europe. The only way to cure these problems was through magnanimity – showing a generous spirit.

If Europe is to survive its troubles, it will need a great deal of generosity from America. Therefore, Europe must also practice generosity itself. It is useless for the Allies, fresh from stripping Germany and each other, to turn to the United States for help to get European countries, including Germany, back on their feet. If the General Election of December 1918 had been fought on principles of wise generosity instead of foolish greed, Europe’s financial future might be much better now.

A Proposed Alternative Path

I still believe that before the main Peace Conference, or very early in its meetings, Great Britain’s representatives should have deeply discussed the whole economic and financial situation with the United States. Britain should have been authorized to make concrete proposals along these general lines:

1. Cancel all debts between Allied countries outright.
2. Fix the total amount Germany had to pay at $10 billion.
3. Great Britain should give up all claims to a share of this sum. Any share Britain might be entitled to should be given to the Conference to help the finances of the new countries about to be created.
4. To make some credit available immediately, all parties to the Treaty should guarantee a suitable portion of Germany’s payments.
5. The former enemy countries should also be allowed to issue a moderate amount of government bonds with a similar guarantee, to help their economic recovery.

Such proposals would have required an appeal to the generosity of the United States. But that was unavoidable. Given America’s much smaller financial sacrifices in the war, it was a fair appeal to make. These proposals would have been practical. There is nothing unrealistic or overly idealistic about them. And they would have given Europe some hope for financial stability and rebuilding. However, I will discuss these ideas further in Chapter VII. We must now return to the events in Paris.

The Difficult Position of Allied Finance Ministers

I have described the complicated situation Mr. Lloyd George took with him to Paris. The position of the finance ministers of the other Allied countries was even worse. In Great Britain, we had not based our financial plans on expecting any large payment from Germany. Money from such a source would have been like an unexpected bonus. Despite later developments, there was an expectation at that time that Britain could balance its budget through normal methods.

But this was not true for France or Italy. Their peacetime budgets made no attempt to balance. They had no prospect of balancing without a major change in existing policy. Indeed, their financial situation was, and still is, nearly hopeless. These countries were heading for national bankruptcy. This fact could only be hidden by creating the expectation of huge payments from the enemy. As soon as it was admitted that it was impossible to make Germany pay for both sides’ expenses, and that shifting their debts onto the enemy was not feasible, the French and Italian finance ministers found themselves in an unsustainable position.

Therefore, a realistic, scientific consideration of Germany’s ability to pay was impossible from the start. The expectations that political needs had made it necessary to create were so far from the truth that simply tweaking figures was useless. It was necessary to ignore the facts entirely. The resulting dishonesty was fundamental. It became impossible to build any workable, constructive financial policy on such a false basis. For this reason, among others, a generous financial policy was essential. The financial position of France and Italy was so bad that it was impossible to make them listen to reason about German payments unless one could also show them some other way out of their troubles. In my opinion, the representatives of the United States were greatly at fault for offering no constructive proposals at all to a suffering and confused Europe.

Conflicting French Aims: Clemenceau vs. Klotz

It is worth noting another factor in the situation: the conflict between the “crushing” policy of Mr. Clemenceau (the French Prime Minister) and the financial needs of Mr. Klotz (the French Finance Minister). Clemenceau’s goal was to weaken and destroy Germany in every possible way. I imagine he was always a bit dismissive of the indemnity (the payment from Germany). He had no intention of leaving Germany in a position to engage in large-scale international trade. But he didn’t bother to understand either the indemnity issue or poor Mr. Klotz’s overwhelming financial difficulties. If it amused the financiers to put some very large demands in the Treaty, well, there was no harm in that. But satisfying these demands must not be allowed to interfere with the essential requirements of a Carthaginian Peace – a peace settlement so harsh that it completely destroys the enemy. The combination of Mr. Clemenceau’s “real” policy (focused on crushing Germany) applied to unrealistic financial issues, with Mr. Klotz’s policy of pretending on what were very real financial issues, led to a whole set of incompatible provisions in the Treaty. This was on top of the already impossible nature of the reparation proposals.

The Troubled Negotiations

I cannot describe here the endless arguments and plotting between the Allies themselves. After some months, these finally led to presenting Germany with the Reparation Chapter in its final form. There can have been few negotiations in history so twisted, so miserable, and so completely unsatisfactory to everyone involved. I doubt if anyone who took a major part in that debate can look back on it without shame. I must limit myself to an analysis of the elements of the final compromise, which is known to the world.

The main point to be settled, of course, was what items Germany could fairly be asked to pay for. Mr. Lloyd George’s election promise that the Allies were entitled to demand the entire costs of the war from Germany was clearly unsustainable from the beginning. Or, to put it more impartially, it was clear that even the most persuasive person could not convince President Wilson that this demand matched our pre-Armistice agreements.

The actual compromise finally reached can be read in the following paragraphs of the Treaty as it was published:

• Article 231 states: “The Allied and Associated Governments affirm and Germany accepts the responsibility of Germany and her allies for causing all the loss and damage to which the Allied and Associated Governments and their nationals have been subjected as a consequence of the war imposed upon them by the aggression of Germany and her allies.” This article was well and carefully written. President Wilson could read it as Germany admitting moral responsibility for starting the war. Prime Minister Lloyd George could explain it as Germany admitting financial liability for the general costs of the war.

• Article 232 continues: “The Allied and Associated Governments recognize that the resources of Germany are not adequate, after taking into account permanent diminutions of such resources which will result from other provisions of the present Treaty, to make complete reparation for all such loss and damage.” President Wilson could console himself that this was just a statement of obvious fact. Recognizing that Germany cannot pay a certain claim does not mean she is legally required to pay it. But the Prime Minister could point out that, in context, it emphasized to the reader the idea of Germany’s theoretical liability asserted in the previous Article.

• Article 232 then says: “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 during the period of the belligerency of each as an Allied or Associated Power against Germany by such aggression by land, by sea, and from the air, and in general all damage as defined in Annex I. hereto.” The words “compensation for all damage done to the civilian population…and to their property” were practically a quote from the pre-Armistice conditions, which satisfied President Wilson’s concerns. The addition of the words “and in general all damage as defined in Annex I. hereto” gave the Prime Minister an opening in Annex I.

So far, however, this is all just a matter of words, of clever legal drafting. It doesn’t harm anyone and probably seemed much more important at the time than it ever will again. For the real substance, we must look at Annex I.

Analyzing Annex I: What Germany Would Pay For

A large part of Annex I strictly follows the pre-Armistice conditions, or at least doesn’t stretch them beyond what is fairly arguable.

• Paragraph 1 claims for injuries to civilians, or to their dependents if they died, as a direct result of acts of war.

• Paragraph 2 claims for acts of cruelty, violence, or mistreatment by the enemy towards civilian victims.

• Paragraph 3 claims for enemy actions that harmed the health, ability to work, or honor of civilians in occupied or invaded areas.

• Paragraph 8 claims for forced labor demanded by the enemy from civilians.

• Paragraph 9 claims for damage to property (except for naval and military works or materials) as a direct result of hostilities.

• Paragraph 10 claims for fines and levies imposed by the enemy on the civilian population. All these demands are just and in line with the Allies’ rights.

• Paragraph 4, which claims for “damage caused by any kind of maltreatment of prisoners of war,” is more questionable if we stick strictly to the letter of the agreements. However, it might be justifiable under the Hague Convention (international rules of warfare) and involves a very small amount of money.

The Controversial Claims: Pensions and Allowances

However, Paragraphs 5, 6, and 7 involve an issue of immensely greater importance. These paragraphs demand payment for:

• The amount of Separation Allowances (money paid to families of soldiers who were mobilized) granted by Allied Governments during the war.
• The amount of pensions and compensations for injury or death of soldiers, payable by these Governments both now and in the future. Financially, these items add a very large amount to the bill – about twice as much as all the other claims combined.

One can easily see how a convincing case could be made for including these types of damage, if only on emotional grounds. It can be argued, first, that from a general fairness perspective, it seems monstrously unfair that:

• A woman whose house is destroyed should be able to claim payment from the enemy, while a woman whose husband is killed on the battlefield should not.
• A farmer who loses his farm should be able to claim, but a woman who loses her husband’s earning power should not. In fact, the argument for including pensions and separation allowances largely relies on exploiting the somewhat arbitrary nature of the rules set down in the pre-Armistice conditions. Of all the losses caused by war, some affect individuals more heavily, while others are spread more evenly across the whole community. However, through government compensation, many of the individual losses are effectively turned into community-wide losses.

A more logical rule for a limited claim (short of the entire costs of the war) would have been for enemy actions that violated international agreements or recognized practices of warfare. But this also would have been very difficult to apply. It would have been unfairly unfavorable to French interests compared to Belgium (whose neutrality Germany had guaranteed) and Great Britain (the main sufferer from illegal submarine attacks).

In any case, the appeals to sentiment and fairness mentioned above are hollow. It makes no difference to the person receiving a separation allowance or a pension whether the government paying them gets compensation for this specific reason or for another. If the government recovers money from Germany, it reduces the burden on all taxpayers, just as a contribution towards the general costs of the war would have done.

But the main point is that it was too late to consider whether the pre-Armistice conditions were perfectly wise and logical, or to change them. The only question was whether these conditions were, in fact, limited to direct damage to civilians and their property, as described in Paragraphs 1, 2, 3, 8, 9, and 10 of Annex I. If words have any meaning, or agreements have any force, we had no more right to claim for these government war expenses (pensions and separation allowances) than for any other general costs of the war. And who is prepared to argue in detail that we were entitled to demand those general costs?

A Political Compromise

What had really happened was a compromise. It was a compromise between the Prime Minister’s pledge to British voters to claim the entire costs of the war, and the opposite pledge the Allies had given to Germany at the Armistice.

• The Prime Minister could claim that although he had not gotten the entire costs of the war, he had still secured an important contribution towards them. He could say he had always qualified his promises by stating that Germany’s ability to pay was a limiting factor, and that the bill now presented more than used up this capacity, according to more sober estimates.
• President Wilson, on the other hand, had secured a formula that was not too obvious a breach of faith. He had avoided a quarrel with his Allies on an issue where appeals to sentiment and passion would all have been against him if it became a matter of open public debate.

Given the Prime Minister’s election pledges, President Wilson could hardly hope to get him to abandon them completely without a public fight. And the cry for “pensions” would have had overwhelming popular appeal in all countries. Once more, the Prime Minister had shown himself to be a highly skilled political tactician.

A further point of great difficulty can be easily seen between the lines of the Treaty. It fixes no definite sum as representing Germany’s liability.

The Problem of Not Naming a Total Amount

Many people have criticized the fact that the Treaty doesn’t name a final sum for reparations. This is inconvenient for both Germany and the Allies. Germany doesn’t know how much it has to pay, and the Allies don’t know how much they will receive. The method the Treaty seems to suggest for figuring out the total amount is clearly impractical. It involves adding up hundreds of thousands of individual claims for damage to land, farm buildings, and even chickens over many months. The reasonable approach would have been for both sides to agree on a fixed total sum without examining every small detail. If this fixed sum had been named in the Treaty, the settlement would have been more business-like.

But this was impossible for two main reasons:

1. False statements about Germany’s ability to pay: Two different kinds of false ideas had been widely spread. One was about how much Germany could actually pay.
2. False statements about Allied claims: The other was about the true amount of the Allies’ just claims for the damaged areas.

Trying to set a figure for either of these created a dilemma:

• If they set a figure for Germany’s ability to pay that was close to what honest and well-informed experts believed, it would have been far too low for what people in England and France expected.
• On the other hand, if they set a definite figure for the damage done that wouldn’t badly disappoint the hopes raised in France and Belgium, it might have been impossible to prove. The Germans were believed to have gathered a lot of evidence about the extent of their own wrongdoing, which could have been used to challenge an inflated Allied claim.

Therefore, the safest option for the politicians was to mention no figure at all. This necessity is a major reason why the Reparation Chapter of the Treaty is so complicated.

Author’s Estimate of Total Claims Including Pensions

You might be interested in my estimate of the claim that can actually be justified under Annex I of the Reparation Chapter. Earlier, I guessed the claims not including pensions and separation allowances to be, at the very most, $15 billion.

The claim for pensions and separation allowances under Annex I is not based on what these payments actually cost the Allied governments. Instead, it is a calculated figure. This calculation uses the payment scales that were in effect in France when the Treaty began. This method avoids the uncomfortable situation of valuing an American or British life more highly than a French or Italian life. The French rate for pensions and allowances is in the middle – not as high as American or British rates, but higher than Italian, Belgian, or Serbian rates.

To make this calculation, one would need the actual French payment rates and the number of soldiers mobilized and casualties in each category for all the Allied armies. Not all these detailed figures are available. However, enough is known about the general level of allowances, the numbers of people involved, and the casualties suffered to make an estimate that should be reasonably close.

My guess for the amount to be added for pensions and allowances is substantial. I am more confident in the approximate accuracy of the total additional amount than in how it might be divided among the different Allied countries. You will notice that adding pensions and allowances greatly increases the total claim. In fact, it nearly doubles it. Adding this figure for pensions and allowances to the estimate for other damages, we get a total claim against Germany of $40 billion. I believe this figure is certainly high enough. The actual amount, if calculated precisely, might even be a bit less.

In the next part, I will examine how this $40 billion figure relates to Germany’s actual ability to pay. For now, it’s important to remember a few other details from the Treaty that speak for themselves:

Specific Payment Demands in the Treaty

1. Initial Payment: Out of the total claim, whatever it turns out to be, Germany must pay $5 billion before May 1, 1921.

   • This sum includes the costs of the Allied armies occupying Germany since the Armistice (a large expense, around $1 billion, which Germany is responsible for under Article 249 of the Treaty).
   • However, there’s an important condition: “such supplies of food and raw materials as may be judged by the Governments of the Principal Allied and Associated Powers to be essential to enable Germany to meet her obligations for Reparation may also, with the approval of the said Governments, be paid for out of the above sum.”
   • This condition is very significant. It allows Allied finance ministers to give their voters hope of large, early payments. At the same time, it gives the Reparation Commission the power to give back to Germany what it needs to survive economically. Facts will force the Commission to use this power.
   • This discretionary power makes the demand for an immediate $5 billion payment less harmful than it would otherwise be, but it doesn’t make it harmless.
     • First, my analysis in the next section shows that this sum cannot be found within the given time, even if a large part is effectively returned to Germany to pay for imports.
     • Second, the Reparation Commission can only use its power effectively by taking control of all of Germany’s foreign trade and the foreign currency earned from it. This task would be far too big for such a body.
     • If the Reparation Commission seriously tries to manage collecting this $5 billion and authorizing returns to Germany, Central Europe’s trade will be choked by inefficient bureaucracy.

2. First Set of Bonds: In addition to the early payment of $5 billion in cash or goods, Germany must deliver bearer bonds for another $10 billion. If the payments in cash or goods before May 1, 1921, fall short of $5 billion (because of the permitted deductions for food/materials), Germany must deliver enough additional bonds to bring the total payments in cash, goods, and bonds up to $15 billion by that date.

   • These bonds carry an interest rate of 2.5% per year from 1921 to 1925.
   • After 1925, the rate is 5% per year, plus an extra 1% for amortization (paying off the principal).
   • So, assuming Germany cannot provide any significant surplus for reparations before 1921, she will have to find $375 million annually from 1921 to 1925, and $900 million annually after that.

3. Second Set of Bonds: As soon as the Reparation Commission believes Germany can pay more, Germany must issue 5% bearer bonds for a further $10 billion. The Commission will decide the repayment schedule for this principal amount later.

   • This would bring the annual payment to $1.4 billion, without yet including payments to reduce the capital of this last $10 billion.

4. Liability Beyond $25 Billion: Germany’s total liability is not limited to $25 billion (the initial $5 billion plus the two $10 billion bond issues). The Reparation Commission is to demand more bearer bonds until the total enemy liability under Annex I is covered.

   • Based on my estimate of a $40 billion total liability (which is more likely to be criticized as too low than too high), the remaining balance will be $15 billion.
   • Assuming 5% interest on this balance, the annual payment will rise to $2.15 billion, again without including payments to reduce the principal.

5. The Impact of Compound Interest: Even this is not all. There is another provision with devastating importance.

   • Bonds for payments beyond the first $15 billion are not to be issued until the Commission is sure Germany can pay the interest on them.
   • However, this does not mean the interest is forgiven in the meantime. Starting May 1, 1921, Germany will be charged 5% interest on any part of its outstanding debt not covered by payments in cash or goods, or by the issued bonds. The Commission can change this rate in the future if circumstances justify it.
   • This means the total amount of debt keeps growing due to compound interest.
   • The effect of this provision is enormous, assuming Germany cannot pay very large sums at first. At 5% compound interest, a capital sum doubles in fifteen years.
   • Let’s assume Germany cannot pay more than $750 million annually until 1936 (which is 5% interest on $15 billion). The $25 billion on which interest is deferred will have risen to $50 billion by 1936. This would mean an annual interest charge of $2.5 billion on that portion alone.
   • So, even if Germany pays $750 million annually up to 1936, at that date, she will owe more than half as much again as she does now (a total of $65 billion compared to the initial $40 billion estimate).
   • From 1936 onwards, Germany would have to pay $3.25 billion annually just to keep up with the interest payments.
   • At the end of any year in which she pays less than this sum, she will owe more than she did at the beginning of it.
   • And if Germany is to pay off the total capital sum in thirty years from 1936 (meaning forty-eight years from the Armistice), she must pay an additional $650 million annually, making a total of $3.9 billion per year.

It is, in my judgment, as certain as anything can be that Germany cannot pay anything close to this sum. I will explain why shortly. Therefore, until the Treaty is changed, Germany has effectively agreed to hand over all of its surplus production to the Allies forever.

6. The Reparation Commission’s Discretion: The situation is not improved by the Reparation Commission having powers to change the interest rate, and to postpone or even cancel the capital debt.
   • First, some of these powers can only be used if the Commission or the governments it represents unanimously agree.
   • Also, perhaps more importantly, it will be the duty of the Reparation Commission to extract the maximum possible sum from Germany year after year, until there is a unanimous and major change in the Treaty’s policy.
   • There is a big difference between:
     • Fixing a definite sum that, although large, is within Germany’s ability to pay while still keeping a little for herself.
     • Fixing a sum far beyond her ability, which is then reduced at the discretion of a foreign Commission whose goal is to get the maximum amount possible each year.
   • The first option still leaves Germany with some small incentive for enterprise, energy, and hope. The second option essentially skins her alive year after year, forever. No matter how skillfully and discreetly this is done, and with whatever care not to “kill the patient” in the process, it represents a policy that, if truly intended and deliberately carried out, people would soon judge as one of the most outrageous acts of a cruel victor in civilized history.

The Treaty gives other highly significant functions and powers to the Reparation Commission. But it will be more convenient to deal with these in a separate section.

III. Germany’s Capacity to Pay

Germany can make the payments she has agreed to in three main ways:

1. Immediately transferable wealth: This includes gold, ships, and foreign investments.
2. The value of property: This includes property in territories Germany had to give up, or property surrendered under the Armistice agreement.
3. Annual payments over many years: These would be partly in cash and partly in materials like coal products, potash (a type of salt used in fertilizer), and dyes.

Excluded from this list is the actual return of property that was removed from territory occupied by Germany. Examples include Russian gold, Belgian and French investments, cattle, machinery, and works of art. If the actual stolen goods can be identified and returned, they must clearly go back to their rightful owners. They cannot be included in the general reparation payments. Article 238 of the Treaty specifically states this.

1. Immediately Transferable Wealth

(a) Gold After subtracting the gold that was to be returned to Russia, the official amount of gold held by the German central bank (Reichsbank) on November 30, 1918, was about $577 million. This was much larger than the amount the Reichsbank held before the war (which was $339 million on July 23, 1914). The increase was due to a strong campaign in Germany during the war. People were urged to surrender not only gold coins but also gold ornaments of all kinds to the Reichsbank. Private stashes of gold doubtless still exist. However, given the great efforts already made, it is unlikely that either the German government or the Allies will be able to find them. So, the reported figure probably represents the maximum amount the German government can get from its people. In addition to gold, the Reichsbank had about $5 million in silver. There must be a substantial additional amount of silver in circulation. The Reichsbank’s silver holdings were as high as $45.5 million at the end of 1917 and around $30 million until late October 1918, when people started to panic and hoard all kinds of currency. So, we can estimate a total of about $625 million for gold and silver together at the time of the Armistice.

However, these reserves are no longer intact. During the long period between the Armistice and the Peace Treaty, the Allies had to help provide Germany with food from abroad. Germany’s political condition at that time, and the serious threat of internal revolts (Spartacism), made this step necessary for the Allies’ own interests. They needed a stable German government to make a treaty with. But how to pay for these provisions caused grave difficulties. Many conferences were held between Allied and German representatives to find a payment method that would least harm the future prospects of reparation payments. From the beginning, German representatives argued that their country was so financially exhausted that a temporary loan from the Allies was the only solution. The Allies could hardly agree to this at a time when they were preparing to demand much larger immediate payments from Germany. Besides, the German claim wasn’t entirely accurate as long as their gold was untouched and their remaining foreign investments were unsold. In any case, it was unthinkable in the spring of 1919 that public opinion in Allied countries or America would have allowed a substantial loan to Germany. On the other hand, the Allies were naturally reluctant to use up Germany’s gold for food supplies. This gold seemed to be one of the few obvious and certain sources for reparations. Much time was spent exploring all possible alternatives. But it eventually became clear that even if German exports and sellable foreign investments had been valuable enough, they couldn’t be sold in time. Germany’s financial exhaustion was so complete that nothing substantial was immediately available except the gold in the Reichsbank. Accordingly, Germany transferred over $250 million in gold from the Reichsbank to the Allies (mostly to the United States, though Great Britain also received a significant sum) during the first six months of 1919 to pay for food.

But that was not all. Although Germany agreed, under the first extension of the Armistice, not to export gold without Allied permission, this permission could not always be denied. The Reichsbank had debts coming due in neighboring neutral countries that could only be paid in gold. If the Reichsbank failed to meet these obligations, it would have damaged Germany’s credit so badly that it would have harmed future reparation prospects. In some cases, therefore, the Allied Supreme Economic Council allowed the Reichsbank to export gold.

The net result of these various actions was to reduce the Reichsbank’s gold reserve by more than half. The figures fell from $575 million to $275 million by September 1919.

Under the Treaty, it would be possible to take all of this remaining sum for reparations. However, this amount is less than 4% of the Reichsbank’s total paper money in circulation. If all of it were confiscated, the psychological effect (especially since many mark banknotes were held abroad) could be expected to almost completely destroy the exchange value of the German mark.

Perhaps a sum of $25 million, $50 million, or even $100 million in gold might be taken for a special purpose. But we can assume the Reparation Commission will decide it’s unwise to completely ruin the German currency system. Doing so would negatively affect their future chances of getting payments. This is especially true because the French and Belgian governments hold a very large amount of German mark banknotes that used to circulate in the territories Germany occupied or gave up. So, they have a strong interest in the mark keeping some exchange value, quite apart from reparation prospects.

Therefore, it follows that no significant sum in gold or silver can be expected towards the initial $5 billion payment due by 1921.

(b) Shipping As we’ve seen, Germany has agreed to surrender almost all of its merchant shipping to the Allies. In fact, a large part of it was already in Allied hands before the peace treaty was finalized. Some ships were held in Allied ports, and others were provisionally transferred under the Brussels Agreement, which was related to supplying food to Germany. If we estimate the German shipping to be taken over under the Treaty at 4 million gross tons, and the average value at $150 per ton, the total monetary value is $600 million.

(c) Foreign Securities (Investments Abroad) Before the German government conducted a census of foreign investments in September 1916 (the exact results of which were not made public), Germany never officially required reporting of such investments. Various unofficial estimates were based on limited data, like the listing of foreign stocks on German stock exchanges or consular reports. Most German experts before the war generally agreed that their country’s net foreign investments were over $6.25 billion. I will use this figure as a starting point, although I believe it is an exaggeration. A figure of $5 billion would probably be more realistic.

However, several deductions must be made from this total amount:

• i. Investments in Allied Countries and the United States: These investments, which make up a large part of Germany’s foreign holdings, have been seized by officials like Public Trustees or Custodians of Enemy Property. They are not available for reparations, except for any amount left over after various private claims are settled. Under the plan for dealing with enemy debts, the first use of these assets is to pay private claims of Allied citizens against German citizens. It is unlikely there will be any significant surplus for other purposes, except possibly in the United States.

• ii. Investments in Germany’s Former Allies: Before the war, Germany’s most important foreign investments were not overseas (like Britain’s), but in countries like Russia, Austria-Hungary, Turkey, Romania, and Bulgaria. A large portion of these investments has now become almost worthless, at least for the time being, especially those in Russia and Austria-Hungary. If current market value is the test, none of these investments can be sold for more than a tiny amount. Unless the Allies are prepared to take over these securities at a price much higher than their current market value and hold them hoping for future recovery, there is no substantial source of immediate funds from investments in these countries.

• iii. Sales of Investments During the War: While Germany couldn’t sell off its foreign investments during the war to the same extent as Britain did, it still managed to do so in certain countries and as much as possible. Before the United States entered the war, Germany is believed to have resold a large part of its best American investments. However, some current estimates of these sales (around $300 million) are probably too high. Throughout the war, especially in its later stages when German currency was weak and its credit in nearby neutral countries was very low, Germany sold securities that countries like Holland, Switzerland, and Scandinavia would buy or accept as collateral for loans. It is reasonably certain that by June 1919, Germany’s investments in these countries had been reduced to a negligible amount and were far less than what Germany owed in those countries. Germany also sold some overseas securities, like Argentine bonds, for which a market could be found.

• iv. Flight of Securities Since the Armistice: It is certain that since the Armistice, many foreign securities still in private German hands have been moved abroad. This is extremely difficult to prevent. German foreign investments are usually in the form of bearer securities (meaning whoever holds the physical certificate owns them) and are not registered in anyone’s name. They are easily smuggled across Germany’s long land borders. For some months before the peace treaty was signed, it was clear that owners would not be allowed to keep these securities if Allied governments could find a way to get them. These factors spurred human cleverness, and efforts by both Allied and German governments to stop this outflow are believed to have been largely unsuccessful.

Considering all these points, it will be a miracle if much remains for reparations. The Allied countries, the United States, Germany’s own former allies, and the neutral countries next to Germany cover almost the entire civilized world. As we’ve seen, we cannot expect much to be available for reparations from investments in any of these areas. Indeed, there are no important countries left for investments except those in South America.

Putting exact figures on these deductions involves a lot of guesswork. Here is my best personal estimate:

• Deduction for (i) Sequestered investments in Allied/US countries: I estimate $1.5 billion initially seized. Perhaps $500 million of this might eventually be available for reparations after private debts are paid.
• Deduction for (ii) Investments in former German allies:
  • Austro-Hungarian securities held by Germans: about $986.5 million (as of 1912).
  • German investments in Russia (excluding government bonds): estimated at $475 million. Russian government bonds held by Germans: estimated at $750 million (in 1906). Total for Russia: around $1.225 billion.
  • German investments in Romania: $20 million to $22 million.
  • German capital in Turkey: about $295 million.
  • No estimates for Bulgaria are available to me. Altogether, I estimate a deduction of $2.5 billion for this group of countries.
• Deduction for (iii) Resales and pledging of securities during the war: I estimate $500 million to $750 million. This includes almost all German holdings of Scandinavian, Dutch, and Swiss securities, part of her South American securities, and a substantial portion of her North American securities sold before the US entered the war.
• Deduction for (iv) Flight of capital since Armistice: There are no reliable figures. However, if we estimate the value of securities that have already left Germany or are hidden within Germany beyond discovery at $500 million, we are not likely overstating it.

These various deductions add up to a round figure of about $5 billion. This leaves an amount of $1.25 billion theoretically still available from foreign securities.

To some, this figure may seem low. But remember, it is supposed to represent the leftover sellable securities that the German government might be able to get for public purposes. In my opinion, it is much too high. Looking at the problem differently, I arrive at a lower figure. If we exclude seized Allied securities and investments in Austria, Russia, etc., what specific blocks of securities, by country and company, could Germany possibly still have that would amount to as much as $1.25 billion? I cannot answer this. Germany has some Chinese government securities that were not seized, perhaps a few Japanese ones, and a more substantial value in first-class South American properties. But there are very few investments of this quality still in German hands. Even their value is measured in tens of millions, not fifties or hundreds of millions. In my judgment, anyone who joined a group to pay $500 million in cash for the unseized remnant of Germany’s overseas investments would be very rash. If the Reparation Commission is to get even this lower figure, they will probably have to manage these assets carefully for some years, not trying to sell them immediately.

So, we have a figure of $500 million to $1.25 billion as the maximum contribution from Germany’s foreign securities.

To summarize Germany’s immediately transferable wealth:

• (a) Gold and silver: Say, $300 million (but as noted, it’s not practical to take a substantial part).
• (b) Ships: $600 million.
• (c) Foreign securities: $500 million to $1.25 billion.

Considering that it’s not feasible to take much of the gold and silver without harming Allied interests, the total contribution from all these sources that the Reparation Commission can hope to get by May 1921, is likely between $1.25 billion and $1.75 billion at most.

2. Property in Ceded Territory or Surrendered Under the Armistice

As the Treaty is written, Germany will not receive significant credits towards reparations for its property in territories it had to give up.

• Private property in most ceded territories is used to pay off private German debts to Allied citizens. Only any surplus is available for reparations. The value of such property in Poland and other new states is paid directly to the owners.
• Government property in Alsace-Lorraine, in territory given to Belgium, and in Germany’s former colonies (now transferred to other powers as ‘Mandates’) is forfeited without Germany getting any credit for it. Buildings, forests, and other state property that belonged to the former Kingdom of Poland are also surrendered without credit.
• What remains for potential credit includes:
  • Government properties (other than the above) surrendered to Poland.
  • Government properties in Schleswig surrendered to Denmark.
  • The value of the Saar coalfields.
  • The value of certain river craft and German submarine cables. The Reparation Commission will not get any cash from Poland, whatever the Treaty says. I believe the Saar coalfields have been valued at $75 million to $100 million. A round figure of $150 million for all these items (excluding any surplus from private property) is probably a generous estimate.

Then there is the value of material surrendered under the Armistice. Article 250 states that the Reparation Commission will assess a credit for railway rolling stock surrendered, other specified items, and generally any surrendered material deemed to have “non-military value.” The rolling stock (150,000 wagons and 5,000 locomotives) is the only very valuable item. A round figure of $250 million for all Armistice surrenders is probably again a generous estimate.

So, we have $400 million ($150 million + $250 million) to add from this category to our previous figure of $1.25 billion to $1.75 billion. This $400 million is not cash that can help the Allies’ financial situation; it is only a bookkeeping credit between them or between them and Germany.

The new total of $1.65 billion to $2.15 billion is not, however, available for reparations yet. The first charge on it, under Article 251 of the Treaty, is the cost of the Armies of Occupation, both during the Armistice and after the peace. The total cost up to May 1921 cannot be calculated until we know how quickly the troops will be withdrawn. The monthly cost was over $100 million in early 1919 and is supposed to eventually drop to $5 million. I estimate, however, that this total cost of occupation might be about $1 billion. This leaves us with $500 million to $1 billion still in hand.

Out of this amount, plus any exports of goods and payments in kind Germany makes before May 1921 (which I haven’t accounted for yet), the Allies have suggested they will allow Germany to receive back sums to buy necessary food and raw materials. It’s not possible now to accurately judge:

• The money value of goods Germany will need to buy from abroad to rebuild its economy.
• How generously the Allies will use their discretion. If Germany’s stocks of raw materials and food were to be restored to anything near their normal level by May 1921, Germany would probably need foreign purchasing power of at least $500 million to $1 billion, in addition to the value of its current exports. While this is not likely to be permitted, I confidently state that Germany’s social and economic condition cannot possibly allow a surplus of exports over imports before May 1921. Any payments in kind Germany might provide to the Allies (like coal, dyes, timber) will have to be returned to her to enable her to pay for imports essential for her existence.

Therefore, the Reparation Commission can expect no addition from other sources to the $500 million to $1 billion we hypothetically credited it with. This amount is what’s left after realizing Germany’s immediately transferable wealth, calculating credits due to Germany, and paying for the Armies of Occupation. Since Belgium has a private agreement with France, the United States, and Great Britain (outside the Treaty) to receive the first $500 million available for reparations, the outcome is this: Belgium may possibly get its $500 million by May 1921, but none of the other Allies are likely to get any contribution worth mentioning by that date. At any rate, it would be very unwise for Finance Ministers to base their plans on any other assumption.

3. Annual Payments Spread Over a Term of Years

It is clear that Germany’s pre-war ability to pay an annual tribute abroad has been greatly affected by many factors:

• The almost total loss of its colonies, overseas connections, merchant fleet, and foreign properties.
• Giving up 10% of its territory and population.
• Losing one-third of its coal and three-quarters of its iron ore.
• Two million casualties among men in their prime.
• The starvation of its people for four years.
• The burden of a huge war debt.
• The depreciation of its currency to less than one-seventh of its former value.
• The breakup of its allies and their territories.
• Revolution at home and Bolshevism on its borders.
• And all the unmeasured ruin in strength and hope from four years of devastating war and final defeat.

All this, one would think, is obvious. Yet most estimates of a large payment from Germany depend on the assumption that it can conduct a vastly greater amount of trade in the future than it ever has in the past.

For figuring out a payment amount, it doesn’t greatly matter whether payment is in cash (or rather, foreign currency) or partly in goods (like coal, dyes, timber), as the Treaty suggests. In any case, Germany can only pay by exporting specific goods. The method of using the value of these exports for reparation payments is, relatively speaking, a minor detail.

We will lose ourselves in pure speculation unless we return to some basic principles and, whenever possible, to such statistics as are available.

It is certain that Germany can only make an annual payment over many years by:

• Reducing its imports (buying less from other countries).
• Increasing its exports (selling more to other countries). This way, Germany can create a larger trade surplus (the difference between exports and imports) that can be used to make payments abroad.

In the long run, Germany can pay only with goods, and nothing else. These goods can either be given directly to the Allies, or they can be sold to neutral countries, with the money earned then given to the Allies. Therefore, the most solid way to estimate how much Germany can pay is to analyze its trade figures from before the war. Only by looking at this analysis, along with some general information about the country’s ability to produce wealth, can we make a reasonable guess about the maximum amount by which Germany’s exports could exceed its imports.

Germany’s Pre-War Trade Balance

In 1913, Germany’s imports were $2.69 billion, and its exports were $2.525 billion. This does not include goods just passing through the country or trade in gold and silver. So, in 1913, imports were about $165 million more than exports. However, if we look at the average for the five years ending in 1913, Germany’s imports exceeded its exports by a much larger amount: $370 million per year.

This means that before the war, Germany’s ability to make new foreign investments did not come from a trade surplus. Instead, it came from:

• Interest earned on its existing foreign investments.
• Profits from its shipping industry.
• Profits from foreign banking and other similar sources.

Now, Germany’s foreign properties and its merchant ships are to be taken away. Its foreign banking and other sources of income from abroad have been largely destroyed. So, if Germany’s exports and imports were to remain at pre-war levels, it would be far from having a surplus to make foreign payments. In fact, it would not even be self-supporting. Germany’s first task, therefore, must be to change its consumption and production to cover this deficit. Any further savings it can make by using fewer imported goods, and any further increase in its exports, will then be available for reparation payments.

Analyzing Germany’s Key Exports and Imports

The following tables (which were in the original text but are summarized here) showed about two-thirds of Germany’s import and export trade listed under separate items. We can assume that what applies to these listed items also applies more or less to the remaining one-third, which consists of many less important goods.

Major Pre-War Exports: The tables showed that Germany’s most important exports were:

1. Iron goods, including tin plates (13.2% of total exports).
2. Machinery, etc. (7.5%).
3. Coal, coke, and briquettes (7%).
4. Woolen goods, including raw and combed wool (5.9%).
5. Cotton goods, including cotton yarn, thread, and raw cotton (5.6%). These five categories together made up 39.2% of Germany’s total exports.

It is important to note that before the war, Germany and the United Kingdom competed fiercely in selling all these types of goods. So, if Germany greatly increases its exports of these goods to overseas or European countries, it must seriously affect British export trade.

• Cotton and Woolen Goods: To increase exports of these, Germany would need to import more raw cotton and wool, as it produces almost none itself. So, these trades cannot grow unless Germany is given special access to these raw materials (which could only be at the expense of the Allies) beyond its pre-war consumption levels. Even then, the actual increase in value for reparations is not the total value of the exports, but only the difference between the value of the manufactured exports and the cost of the imported raw materials.
• Machinery, Iron Goods, and Coal: Germany’s ability to increase exports of these items will be reduced because it has lost territory in Poland, Upper Silesia, and Alsace-Lorraine. As pointed out earlier, these areas accounted for nearly one-third of Germany’s coal production. They also supplied no less than three-quarters of its iron ore, 38% of its blast furnaces, and 9.5% of its iron and steel factories. Therefore, unless Alsace-Lorraine and Upper Silesia send their iron ore to Germany to be processed (which would mean Germany has to import more and pay for it), an increase in export trade is impossible. A decrease is inevitable.

Other Exports: Next on the list were items like cereals, leather goods, sugar, paper, furs, electrical goods, silk goods, and dyes.

• Cereals: Germany did not have a net export of cereals; it imported far more than it exported.
• Sugar: Nearly 90% of Germany’s pre-war sugar exports went to the United Kingdom. This trade might be increased if Britain gave German sugar a preference or if sugar was taken as part payment for the indemnity, similar to what has been proposed for coal and dyes.
• Paper: Exports of paper might also be increased somewhat.
• Leather goods, furs, and silks: These depend on corresponding imports of raw materials. Silk goods largely compete with the industries of France and Italy.
• Potash: I have heard it suggested that the indemnity could be paid largely in potash. But before the war, potash made up only 0.6% of Germany’s exports, worth about $15 million in total. Besides, France now has its own potash field in regained territory and will not welcome a big increase in German potash exports. The remaining export items are individually very small.

Major Pre-War Imports: An examination of the import list shows that 63.6% were raw materials and food.

• Raw Materials: The main raw materials imported were cotton, wool, copper, hides, iron ore, furs, silk, rubber, and tin. Imports of these could not be much reduced without negatively affecting the export trade. They might even have to be increased if the export trade were to grow.
• Food: Imports of food like wheat, barley, coffee, eggs, rice, and maize present a different problem. It is unlikely that, apart from certain comforts, German working classes consumed more food than was needed for maximum efficiency before the war; they probably consumed less. Any large decrease in food imports would therefore reduce the efficiency of the industrial workers and, consequently, the amount of surplus exports they could be forced to produce. It is hardly possible to demand greatly increased productivity from German industry if the workers are underfed. However, this might not be equally true for items like barley (used for beer), coffee, eggs, and tobacco. If Germany could be forced into a system where no one drank beer or coffee, or smoked tobacco, a substantial saving could be made. Otherwise, there seems little room for any significant reduction in necessary food imports.

Where Germany Traded (1913 Data): An analysis of German exports and imports by destination and origin is also relevant. (The original text refers to a table here, which is summarized below based on the author’s description.) This analysis showed that of Germany’s exports in 1913:

• 18% went to the British Empire.
• 17% went to France, Italy, and Belgium.
• 10% went to Russia and Romania.
• 7% went to the United States. This means that more than half of Germany’s exports went to the countries of the Allied nations. Of the rest, 12% went to Austria-Hungary, Turkey, and Bulgaria, and 35% went to other countries. Therefore, unless the current Allies are prepared to encourage the import of German products, a substantial increase in the total volume of German exports can only happen by flooding neutral markets with German goods.

Estimating Germany’s Maximum Future Export Surplus

The above analysis gives some idea of the possible size of the maximum change in Germany’s export balance under the new conditions after the peace treaty. Let’s make some assumptions:

1. The Allies do not specially favor Germany over themselves in supplies of raw materials like cotton and wool (the world’s supply of which is limited).
2. France, having secured the iron-ore deposits, makes a serious attempt to also secure the blast furnaces and the steel trade.
3. Germany is not encouraged and assisted to undercut the iron and other trades of the Allies in overseas markets.
4. A substantial preference is not given to German goods in the British Empire. Based on these assumptions, looking at specific items shows that not much increase in German exports is practical.

Let us review the chief export items again:

1. Iron goods: Given Germany’s loss of resources, an increased net export seems impossible, and a large decrease is probable.
2. Machinery: Some increase is possible.
3. Coal and coke: Germany’s net export value before the war was $110 million. The Allies have agreed that for now, 20 million tons is the maximum possible export, with a problematic (and actually impossible) increase to 40 million tons at some future time. Even with 20 million tons, there is virtually no increase in value if measured in pre-war prices. Also, if this amount of coal is exacted, there must be a decrease of far greater value in the export of manufactured articles that need coal for their production.
4. Woolen goods: An increase is impossible without raw wool. Considering other demands for raw wool supplies, a decrease is likely.
5. Cotton goods: The same considerations apply as to wool.
6. Cereals: There never was and never can be a net export.
7. Leather goods: The same considerations apply as to wool.

We have now covered nearly half of Germany’s pre-war exports. There is no other single commodity that formerly represented as much as 3% of its exports. So, in what goods is Germany to pay?

• Dyes? Their total value in 1913 was $50 million.
• Toys?
• Potash? 1913 exports were worth $15 million. And even if the goods could be specified, in what markets are they to be sold? Remember, we are talking about goods worth not tens of millions annually, but hundreds of millions.

On the side of imports, a bit more might be possible. By lowering the standard of life, a noticeable reduction in spending on imported goods may be possible. But, as we have already seen, many large import items cannot be reduced without affecting the volume of exports.

An Optimistic Guess for Annual Payments

Let us make our guess as high as we can without being foolish. Suppose that after a time, Germany will be able, despite the reduction of its resources, facilities, markets, and productive power, to increase its exports and reduce its imports. Suppose this improves its trade balance altogether by $500 million annually, measured in pre-war prices. This adjustment is first needed to cover the negative trade balance, which averaged $370 million in the five years before the war. But let’s assume that after covering this, Germany is left with a positive trade balance of $250 million a year (at pre-war prices). Doubling this to account for the rise in prices since before the war, we get a figure of $500 million per year at current prices. Considering the political, social, and human factors, as well as the purely economic ones, I doubt if Germany could be made to pay this sum annually over a period of 30 years. However, it would not be foolish to assert or to hope that it could.

Such an annual figure, allowing 5% for interest and 1% for repayment of the capital, represents a total capital sum with a present value of about $8.5 billion.

Final Conclusion on Germany’s Capacity to Pay

Therefore, I reach the final conclusion that, including all methods of payment—immediately transferable wealth, property in ceded territories, and an annual payment—$10 billion is a safe maximum figure of Germany’s capacity to pay. In all the actual circumstances, I do not believe that Germany can pay even that much. Those who think this is a very low figure should consider this remarkable comparison: The wealth of France in 1871 was estimated at a little less than half that of Germany in 1913. Ignoring changes in the value of money, a payment from Germany of $2.5 billion today would be about comparable to the $1 billion sum paid by France in 1871. And since the real burden of such a payment increases more than proportionally to its amount, the payment of $10 billion by Germany would have far more severe consequences than the $1 billion paid by France in 1871.

There is only one way I see a possibility of adding to the figure I’ve reached: if German labor is actually transported to the devastated areas of France and Belgium to work on reconstruction. I have heard that a limited plan of this kind is actually being considered. The additional contribution from this would depend on the number of laborers the German government could manage to send and maintain, and also on the number that the Belgian and French populations would tolerate in their midst over several years. In any case, it would seem very difficult to employ imported labor on reconstruction work that would have a net present value exceeding, say, $1.25 billion. Even this would likely not be a net addition to the annual payments obtainable in other ways.

Therefore, a capacity to pay $40 billion or even $25 billion is not within the limits of reasonable possibility. It is up to those who believe that Germany can make an annual payment amounting to hundreds of millions of pounds sterling to say:

• In what specific goods do they intend this payment to be made?
• In what markets are these goods to be sold? Until they provide some level of detail and can produce some tangible argument for their conclusions, they do not deserve to be believed.

Important Considerations (Provisos)

I make only three provisos, none of which affect the force of my argument for immediate practical purposes:

1. If the Allies “nursed” Germany: If the Allies were to help Germany’s trade and industry for five or ten years – by providing large loans, ample shipping, food, and raw materials; building up markets for its goods; and deliberately using all their resources and goodwill to make Germany the greatest industrial nation in Europe, if not the world – then a substantially larger sum could probably be extracted thereafter. Germany is capable of very great productivity.
2. Changes in the Value of Money: While I estimate in terms of money, I assume there is no revolutionary change in the purchasing power of our unit of value (e.g., the dollar or pound). If the value of gold were to fall to half or a tenth of its present value, the real burden of a payment fixed in terms of gold would be reduced proportionately. If a gold sovereign (a British coin) becomes worth what a shilling (a much smaller unit) is worth now, then, of course, Germany could pay a larger sum than I have named, when measured in gold sovereigns.
3. Scientific Progress: I assume there is no revolutionary change in what nature and materials yield to human labor. It is not impossible that scientific progress could bring new methods and devices within our reach that would raise the whole standard of life immeasurably. A given volume of products might then represent only a fraction of the human effort it represents now. In this case, all standards of “capacity” to pay would change everywhere. But the fact that all things are possible is no excuse for talking foolishly.

It is true that in 1870, no one could have predicted Germany’s capacity in 1910. We cannot expect to make laws for a generation or more. Long-term changes in humanity’s economic condition and the likelihood of human forecasts being wrong can lead to mistakes in either direction. As reasonable people, we can do no better than base our policy on the evidence we have and adapt it to the five or ten years over which we might suppose ourselves to have some ability to foresee events. We are not wrong if we set aside the extreme chances of human existence and revolutionary changes in the order of nature or humanity’s relationship with it. The fact that we have no adequate knowledge of Germany’s capacity to pay over a long period of years is no justification (as I have heard some people claim) for stating that it can pay $50 billion.

Why Was the World So Gullible?

Why has the world been so ready to believe the untrue statements of politicians? If an explanation is needed, I believe this particular gullibility is partly due to the following influences:

• Loss of Financial Perspective: The vast spending of the war, the inflation of prices, and the depreciation of currency have led to a complete instability of our unit of value. This has made us lose all sense of number and scale in financial matters. What we believed to be the limits of possibility have been so enormously exceeded, and those who based their expectations on the past have been so often wrong, that the average person is now prepared to believe anything told with some show of authority. The larger the figure, the more readily it is accepted.

• A Plausible Fallacy for Deeper Thinkers: But those who look into the matter more deeply are sometimes misled by a fallacy that seems much more reasonable. Such a person might base their conclusions on Germany’s total surplus of annual productivity, as distinct from its export surplus. For example, Helfferich’s estimate of Germany’s annual increase in wealth in 1913 was $2 billion to $2.125 billion (not counting the increased money value of existing land and property). Before the war, Germany spent between $250 million and $500 million on weapons and military forces, an expense it can now do without. Why, therefore, should it not pay over to the Allies an annual sum of $2.5 billion?

That argument, about using Germany’s total yearly savings, sounds strong and believable in its simplest form.

But there are two mistakes in it. First, Germany’s annual savings, after what it has suffered in the war and from the peace treaty, will be much lower than before. And if these savings are taken away year after year, they cannot return to their previous level.

• The loss of Alsace-Lorraine, Poland, and Upper Silesia would reduce Germany’s surplus production by at least $250 million each year.
• Germany is thought to have earned about $500 million per year from its ships, foreign investments, and foreign banking connections. All of these have now been taken away.
• Germany’s savings on military spending are much less than its new annual cost for war pensions, now estimated at $1.25 billion. This pension cost represents a real loss of productive ability.
• Even if we ignore the internal debt (which is 24 billion marks) as a matter of how money is spread within Germany rather than its ability to produce, we must still account for:
  • The foreign debt Germany took on during the war.
  • The exhaustion of its stock of raw materials.
  • The reduction in its livestock.
  • The decreased productivity of its soil from lack of fertilizers and labor.
  • The loss in its wealth from not doing many repairs and renewals for nearly five years. Germany is not as rich as it was before the war. The decrease in its future savings for these reasons, quite apart from the factors already considered, could hardly be less than ten percent, which is $200 million annually.

These factors have already reduced Germany’s annual surplus to less than the $500 million we estimated earlier as the maximum it could pay each year. But even if someone argues that we haven’t yet considered lowering the standard of life and comfort in Germany, which might reasonably be imposed on a defeated enemy, there is still a basic flaw in this method of calculation.

The Fundamental Flaw: Converting Domestic Surplus to Exports An annual surplus that could be used for investment at home can only be turned into a surplus available for export abroad by a radical change in the kind of work people do. Labor might be available and efficient for domestic services in Germany, but it might not find any outlet in foreign trade. We are back to the same question we faced when looking at the export trade: in what export businesses is German labor going to find a greatly increased opportunity? Labor can only be shifted into new areas with a loss of efficiency and a large spending of capital. The annual surplus that German labor can produce for improving capital at home is not a measure, either in theory or in practice, of the annual payment it can make to foreign countries.

IV. The Reparation Commission

This organization is such a remarkable creation and may, if it operates at all, have such a wide influence on life in Europe, that its features deserve a separate examination.

There are no historical examples for the kind of payment demands imposed on Germany under the current Treaty. Money payments that were part of settlements after previous wars were different in two fundamental ways:

1. The sum demanded was fixed and measured as a single lump sum of money.
2. As long as the defeated country was making its annual cash payments, no further interference in its affairs was necessary.

But for reasons already explained, the payments in this case are not yet fixed. And when the sum is fixed, it will be more than Germany can pay in cash, and also more than it can pay at all. Therefore, it was necessary to set up a body to:

• Establish the bill of claims.
• Fix the method of payment.
• Approve necessary reductions and delays.

It was only possible to put this body in a position to demand the maximum amount year after year by giving it wide powers over the internal economic life of the enemy countries. These countries are to be treated from now on like bankrupt businesses, managed by and for the benefit of their creditors. In fact, however, its powers and functions have been expanded even beyond what was needed for this purpose. The Reparation Commission has been set up as the final judge on numerous economic and financial issues that were conveniently left unsettled in the Treaty itself.

Powers and Structure of the Reparation Commission

The powers and structure of the Reparation Commission are mainly described in Articles 233-241 and Annex II of the Reparation Chapter of the Treaty with Germany. But the same Commission will also have authority over Austria and Bulgaria, and possibly over Hungary and Turkey, when peace treaties are made with those countries. So, there are similar articles in the Austrian and Bulgarian Treaties.

• Representation: The main Allied countries (United States, Great Britain, France, and Italy) each have one chief delegate who takes part in all meetings.
  • Belgium’s delegate participates in all proceedings except those attended by Japan or the Serb-Croat-Slovene State (Yugoslavia).
  • Japan’s delegate participates in all proceedings affecting shipping or specifically Japanese issues.
  • The delegate of the Serb-Croat-Slovene State participates when questions about Austria, Hungary, or Bulgaria are being considered.
  • Other Allied nations are represented by delegates without voting power whenever their own claims and interests are being examined.
• Decision Making: In general, the Commission decides by a majority vote. However, in certain specific cases, unanimous agreement is required. The most important of these are:
  • Canceling German debt.
  • Long postponements of payment installments.
  • Selling German bonds that represent debt.
• Authority and Staff: The Commission has full executive authority to carry out its decisions. It can set up an executive staff and give authority to its officers. The Commission and its staff will enjoy diplomatic privileges. Their salaries will be paid by Germany, which will have no say in setting them.
• Organization: If the Commission is to perform its many functions adequately, it will need to create a vast, multilingual bureaucratic organization with hundreds of staff members. The economic destiny of Central Europe is to be entrusted to this organization, with its headquarters in Paris.

Main Functions of the Reparation Commission

Its main functions are as follows:

1. Determine the Total Claim: The Commission will decide the exact amount of the claim against the enemy countries by examining in detail the claims of each of the Allies under Annex I of the Reparation Chapter. This task must be finished by May 1921. It must give the German Government and Germany’s allies “a just opportunity to be heard, but not to take any part whatever in the decisions of the Commission.” This means the Commission will act as both a party in the case and a judge at the same time.
2. Set Payment Schedule: After determining the claim, it will create a schedule of payments to ensure the whole sum, with interest, is paid within thirty years. From time to time, it will “consider the resources and capacity of Germany… giving her representatives a just opportunity to be heard,” to adjust the schedule within the limits of what’s possible. “In periodically estimating Germany’s capacity to pay, the Commission shall examine the German system of taxation, first, to the end that the sums for reparation which Germany is required to pay shall become a charge upon all her revenues prior to that for the service or discharge of any domestic loan, and secondly, so as to satisfy itself that, in general, the German scheme of taxation is fully as heavy proportionately as that of any of the Powers represented on the Commission.”
3. Secure Initial Payment: Up to May 1921, the Commission has the power to demand any piece of German property, wherever it is located, to secure the payment of $5 billion. Germany must pay “in such instalments and in such manner, whether in gold, commodities, ships, securities, or otherwise, as the Reparation Commission may fix.”
4. Expropriate Assets: The Commission will decide which rights and interests of German citizens in public utility companies (like power or water companies) operating in Russia, China, Turkey, Austria, Hungary, and Bulgaria, or in any territory formerly belonging to Germany or its allies, are to be taken over and transferred to the Commission itself. It will assess the value of the interests transferred and will divide the spoils.
5. Manage German Economy for Payments: The Commission will determine how much of the resources taken from Germany must be returned to it to keep its economic organization alive enough to continue making reparation payments in the future.
6. Assess Value of Ceded Property: The Commission will assess the value, without appeal or arbitration, of property and rights given up under the Armistice and the Treaty. This includes railway rolling-stock, the merchant marine, river craft, cattle, the Saar mines, and property in ceded territories for which credit is to be given.
7. Determine Payments in Kind: The Commission will determine the amounts and values (within certain defined limits) of the contributions Germany is to make in goods (like coal or timber) year by year under various parts of the Reparation Chapter.
8. Oversee Restitution: The Commission will ensure Germany returns identifiable property.
9. Manage Receipts: The Commission will receive, manage, and distribute all payments from Germany, whether in cash or goods. It will also issue and sell German bonds representing the debt.
10. Divide Debts: The Commission will assign the share of the pre-war public debt to be taken over by the ceded areas of Schleswig, Poland, Danzig, and Upper Silesia. It will also distribute the public debt of the former Austro-Hungarian Empire among its new parts.
11. Handle Austro-Hungarian Bank/Currency: The Commission will liquidate the Austro-Hungarian Bank and will supervise the withdrawal and replacement of the currency system of the former Austro-Hungarian Empire.
12. Report Defaults and Advise Coercion: It is for the Commission to report if, in its judgment, Germany is failing to meet its obligations, and to advise on methods of forcing compliance.
13. Oversee Other Countries: In general, the Commission, acting through a subordinate body, will perform the same functions for Austria and Bulgaria as for Germany, and probably also for Hungary and Turkey.

There are also many other relatively minor duties assigned to the Commission. The summary above, however, sufficiently shows the scope and importance of its authority. This authority is made far more significant by the fact that the Treaty’s demands generally exceed Germany’s ability to pay. Consequently, the clauses that allow the Commission to grant reductions if, in its judgment, Germany’s economic conditions require it, will make the Commission the decider of Germany’s economic life in many different aspects. The Commission will not only inquire into Germany’s general ability to pay and decide (in the early years) what imports of food and raw materials are necessary. It is also authorized to exert pressure on the German system of taxation and on German internal spending to ensure that reparation payments are the first priority for the country’s entire resources. It will also decide on the effect on German economic life of demands for machinery, cattle, etc., and of the scheduled deliveries of coal.

Germany’s Forced Acceptance

By Article 240 of the Treaty, Germany expressly recognizes the Commission and its powers “as the same may be constituted by the Allied and Associated Governments.” Germany also “agrees irrevocably to the possession and exercise by such Commission of the power and authority given to it under the present Treaty.” It promises to provide the Commission with all relevant information. Finally, in Article 241, “Germany undertakes to pass, issue, and maintain in force any legislation, orders, and decrees that may be necessary to give complete effect to these provisions.”

The German Financial Commission at Versailles commented on this, and their words were hardly an exaggeration: “German democracy is thus annihilated at the very moment when the German people was about to build it up after a severe struggle—annihilated by the very persons who throughout the war never tired of maintaining that they sought to bring democracy to us… Germany is no longer a people and a State, but becomes a mere trade concern placed by its creditors in the hands of a receiver, without its being granted so much as the opportunity to prove its willingness to meet its obligations of its own accord. The Commission, which is to have its permanent headquarters outside Germany, will possess in Germany incomparably greater rights than the German Emperor ever possessed; the German people under its regime would remain for decades to come shorn of all rights, and deprived, to a far greater extent than any people in the days of absolutism, of any independence of action, of any individual aspiration in its economic or even in its ethical progress.”

The Allied Reply and the Author’s Critique

In their reply to these observations, the Allies refused to admit that there was any substance, basis, or force in them. They stated: “The observations of the German Delegation present a view of this Commission so distorted and so inexact that it is difficult to believe that the clauses of the Treaty have been calmly or carefully examined. It is not an engine of oppression or a device for interfering with German sovereignty. It has no forces at its command; it has no executive powers within the territory of Germany; it cannot, as is suggested, direct or control the educational or other systems of the country. Its business is to ask what is to be paid; to satisfy itself that Germany can pay; and to report to the Powers, whose delegation it is, in case Germany makes default. If Germany raises the money required in her own way, the Commission cannot order that it shall be raised in some other way; if Germany offers payment in kind, the Commission may accept such payment, but, except as specified in the Treaty itself, the Commission cannot require such a payment.”

This is not an honest statement of the Reparation Commission’s scope and authority, as can be seen by comparing its terms with the summary given above or with the Treaty itself. For example, isn’t the statement that the Commission “has no forces at its command” a little hard to justify given Article 430 of the Treaty? This article says: “In case, either during the occupation or after the expiration of the fifteen years referred to above, the Reparation Commission finds that Germany refuses to observe the whole or part of her obligations under the present Treaty with regard to Reparation, the whole or part of the areas specified in Article 429 will be reoccupied immediately by the Allied and Associated Powers.” It should be noted that the decision as to whether Germany has kept its commitments and whether it is possible for it to keep them is left not to the League of Nations, but to the Reparation Commission itself. An unfavorable ruling by the Commission is to be followed “immediately” by the use of armed force. Moreover, the Allied reply tries to downplay the Commission’s powers by assuming that Germany is quite free to “raise the money required in her own way.” If that were true, many of the Reparation Commission’s powers would not come into practical effect. However, in reality, one of the main reasons for setting up the Commission at all is the expectation that Germany will not be able to carry the burden nominally placed upon it.

A Glimmer of Hope?

It is reported that the people of Vienna, hearing that a section of the Reparation Commission is about to visit them, have characteristically decided to pin their hopes on it. A financial body can obviously take nothing from them, for they have nothing. Therefore, they reason, this body must be for the purpose of assisting and relieving them. This is how the Viennese argue, still light-headed in their misfortune. But perhaps they are right. The Reparation Commission will come into very close contact with the problems of Europe. It will bear a responsibility equal to its powers. It may thus come to fulfill a very different role from what some of its creators intended. If it were transferred to the League of Nations, serving justice rather than national interests, who knows? With a change of heart and purpose, the Reparation Commission might yet be transformed from an instrument of oppression and plunder into an economic council of Europe. Its new object could be the restoration of life and happiness, even in the enemy countries.

V. The German Counter-Proposals

The German counter-proposals regarding reparations were somewhat unclear and also rather insincere. It will be remembered that the clauses in the Reparation Chapter about Germany issuing bonds gave the public the impression that the total payment had been fixed at $25 billion, or at least that this was a minimum figure. The German Delegation, therefore, set out to construct their reply based on this $25 billion figure. They apparently assumed that public opinion in Allied countries would not be satisfied with less than the appearance of $25 billion. Since they were not really prepared to offer such a large sum, they used their ingenuity to produce a formula. This formula could be presented to Allied opinion as yielding $25 billion, while really representing a much more modest sum. The formula they produced was easy to see through for anyone who read it carefully and knew the facts. Its authors could hardly have expected it to deceive the Allied negotiators.

So, the German tactic assumed that the Allied negotiators secretly wanted the same thing as the Germans: a settlement that was somewhat based on facts. The Germans thought the Allies would be willing to cooperate a little in drafting the Treaty. This was because the Allies had made promises to their own publics that were hard to keep. In slightly different circumstances, this idea might have had some truth to it. As things actually were, this cleverness did not help the Germans. They would have done much better if they had been straightforward and honest. They should have clearly stated what they believed their debts were on one hand, and what they believed their ability to pay was on the other.

The German offer, which they claimed was for $25 billion, amounted to the following:

Conditions Attached to the German Offer: First, the offer depended on the Allies making concessions in the Treaty to ensure that:

• “Germany shall retain the territorial integrity corresponding to the Armistice Convention.” (Meaning, Germany keeps the same borders agreed to when the fighting stopped).
• Germany “shall keep her colonial possessions and merchant ships, including those of large tonnage.”
• “In her own country and in the world at large she shall enjoy the same freedom of action as all other peoples.”
• “All war legislation shall be at once annulled.”
• “All interferences during the war with her economic rights and with German private property, etc., shall be treated in accordance with the principle of reciprocity.” (Meaning, German property and rights should be restored just as Allied property and rights were). In other words, the offer was conditional on the Allies abandoning most of the rest of the Treaty.

Payment Terms of the German Offer: Second, the claims were not to exceed a maximum of $25 billion.

• $5 billion of this was to be paid by May 1, 1926.
• No part of this $25 billion sum was to have interest charged on it while waiting for payment.

Credits Germany Wanted Against the $25 Billion: Third, Germany wanted several items to be counted as credits against this $25 billion sum. These included (among other things):

• (a) The value of everything delivered under the Armistice agreement, including military materials (like Germany’s navy).
• (b) The value of all railways and State property in the territories Germany had to give up.
• (c) The share of German public debt (including war debt) and reparation payments that these ceded territories would have had to bear if they had remained part of Germany.
• (d) The value of Germany’s claims for money it had lent to its allies during the war.

The credits to be deducted under (a), (b), (c), and (d) might have been about $10 billion more than what the actual Treaty allowed. However, the sum for item (d) is very hard to calculate.

The Real Value of Germany’s Offer: So, if we want to estimate the real value of Germany’s $25 billion offer, based on the rules laid down by the Treaty, we must:

1. First, deduct $10 billion for the offsets Germany claimed but which the Treaty did not allow. ($25 billion - $10 billion = $15 billion).
2. Then, halve the remainder ($15 billion / 2 = $7.5 billion). This is to get the present value of a future payment on which no interest is charged. (Money paid later is worth less than money paid now).

This reduces the German offer to a real value of about $7.5 billion. This compares to the $40 billion which, according to my rough estimate, the Treaty actually demands from Germany.

This $7.5 billion offer was, in itself, very substantial. Indeed, it caused widespread criticism within Germany. However, because it depended on the Allies abandoning most of the rest of the Treaty, it could hardly be seen as a serious offer. The German delegation would have done better if they had stated more clearly how much they felt able to pay.

The Allies’ Final Reply and a New Offer

In the Allies’ final reply to this counter-proposal, there is one important provision that I haven’t discussed yet. Broadly speaking, the Allies did not agree to any concessions on the Reparation Chapter as it was originally drafted. However, they did recognize that it was inconvenient for Germany not to know the total amount it had to pay. So, they proposed a way for the final total claim to be set at an earlier date than May 1, 1921. They promised that at any time within four months of the Treaty’s signature (up to the end of October 1919), Germany could submit an offer of a lump sum. This sum would be in settlement of its entire liability as defined in the Treaty. Within two months after that (before the end of 1919), the Allies “will, so far as may be possible, return their answers to any proposals that may be made.”

This Allied offer was subject to three conditions:

1. “Firstly, the German authorities will be expected, before making such proposals, to confer with the representatives of the Powers directly concerned.”
2. “Secondly, such offers must be unambiguous and must be precise and clear.”
3. “Thirdly, they must accept the categories and the Reparation clauses as matters settled beyond discussion.”

The offer, as made, does not seem to suggest any reopening of the question of Germany’s ability to pay. It is only concerned with establishing the total bill of claims as defined in the Treaty – for example, whether it is $35 billion, $40 billion, or $50 billion. The Allies’ reply added: “The questions are bare questions of fact, namely, the amount of the liabilities, and they are susceptible of being treated in this way.”

If the promised negotiations are really conducted along these lines, they are not likely to be successful. It will not be much easier to agree on a figure before the end of 1919 than it was during the Peace Conference. And it will not help Germany’s financial position to know for certain that it is liable for the huge sum that the Treaty demands, no matter how it’s calculated. However, these negotiations do offer an opportunity to reopen the whole question of reparation payments. But it is hardly to be hoped that public opinion in the Allied countries will have changed its mood sufficiently at such an early date.

A Final Moral Argument

I cannot leave this subject as if its just treatment depended entirely on our own pledges or on economic facts. The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable. It should be abhorrent and detestable, even if it were possible to achieve. It should be abhorrent and detestable, even if it enriched ourselves. It should be abhorrent and detestable, even if it did not sow the seeds of decay for the whole civilized life of Europe.

Some preach this policy in the name of Justice. In the great events of human history, in the unfolding of the complex fates of nations, Justice is not so simple. And if it were simple, nations are not authorized, by religion or by natural morals, to visit on the children of their enemies the misdoings of parents or of rulers.

Europe After the Treaty

This chapter must be one of sadness and worry. The Treaty of Peace includes no plans for the economic recovery of Europe.

• It does nothing to help the defeated Central Empires (Germany and its allies) become good neighbors.
• It does nothing to stabilize the new countries of Europe.
• It does nothing to help Russia recover.
• It does not encourage any kind of economic cooperation among the Allies themselves.
• No agreement was made in Paris to fix the troubled finances of France and Italy, or to adjust the economic systems of the Old World (Europe) and the New World (like America).

The Council of Four (the leaders of the main Allied powers) paid no attention to these vital issues. They were busy with other things:

• Clemenceau (France) focused on crushing the economic life of his enemy, Germany.
• Lloyd George (Britain) focused on making a deal and bringing home something that would look acceptable for a short time.
• The President (Wilson of the USA) focused on doing only what he believed was just and right, often overlooking practical needs.

It is an extraordinary fact that the fundamental economic problems of Europe – a continent starving and falling apart before their eyes – was the one question the Four leaders showed no interest in. Reparations (payments from Germany) were their main venture into economics. They treated it as a problem of religious doctrine, politics, or election trickery – from every point of view except that of the economic future of the countries whose fate they were deciding.

From this point on, I will leave behind Paris, the Conference, and the Treaty. I will briefly look at the current situation in Europe, as the War and the Peace have made it. It will no longer be my goal to separate the unavoidable results of the War from the avoidable misfortunes caused by the Peace.

The Core Problem: A Crowded Continent in Crisis

The essential facts of the situation, as I see them, are simple. Europe has the densest concentration of people in the history of the world. This population is used to a relatively high standard of living. Even now, some parts of this population expect things to get better, not worse. Compared to other continents, Europe is not self-sufficient; particularly, it cannot feed itself. Internally, the population is not evenly spread out. Much of it is crowded into a relatively small number of dense industrial centers. Before the war, this population managed to make a living, without much extra, through a delicate and incredibly complicated system. The foundations of this system were coal, iron, transportation, and an unbroken supply of imported food and raw materials from other continents.

By the destruction of this system and the interruption of supplies, a part of this population has lost its way of making a living. Emigration is not an option for the surplus population. It would take years to transport them overseas, even if countries could be found that were ready to receive them (which is not the case).

The danger we face, therefore, is the rapid decline of the standard of life for European populations. This decline could reach a point that means actual starvation for some people. This point has already been reached in Russia and is nearly reached in Austria. People will not always die quietly. Starvation brings to some a state of tiredness and helpless despair. But it drives other types of people to the nervous instability of hysteria and to a mad despair. In their distress, these people may overturn what remains of social organization. They might even submerge civilization itself in their desperate attempts to satisfy their overwhelming individual needs. This is the danger against which all our resources, courage, and idealism must now work together.

The German Perspective

On May 13, 1919, Count Brockdorff-Rantzau presented a report from the German Economic Commission to the Peace Conference. This commission had studied the effect of the peace conditions on the German population. “In the course of the last two generations,” they reported, “Germany has changed from an agricultural state to an industrial state. As an agricultural state, Germany could feed forty million people. As an industrial state, she could ensure food and basic needs for a population of sixty-seven million. In 1913, Germany imported about twelve million tons of food.” “Before the war, a total of fifteen million people in Germany made their living through foreign trade, shipping, and the use, directly or indirectly, of foreign raw materials.”

After listing the main relevant conditions of the Peace Treaty, the report continued: “After this reduction of her products, after the economic depression resulting from the loss of her colonies, her merchant fleet, and her foreign investments, Germany will not be in a position to import enough raw material from abroad. A very large part of German industry will, therefore, inevitably be condemned to destruction. The need to import food will increase considerably, at the same time that the possibility of meeting this demand is greatly reduced. In a very short time, therefore, Germany will not be in a position to give bread and work to her many millions of inhabitants, who are prevented from earning their livelihood by shipping and trade.” “These people should emigrate, but this is physically impossible, especially because many countries, including the most important ones, will oppose any German immigration. To put the peace conditions into action would logically mean, therefore, the loss of several million lives in Germany.” “This catastrophe would not take long to happen, seeing that the health of the population has been broken down during the War by the blockade, and during the Armistice by the worsening of the blockade, leading to famine. No help, however great, or however long it continued, could prevent these mass deaths.”

“We do not know, and indeed we doubt,” the report concluded, “whether the Delegates of the Allied and Associated Powers realize the inevitable consequences that will occur if Germany – an industrial state, very thickly populated, closely tied to the world’s economic system, and needing to import enormous quantities of raw material and food – suddenly finds herself pushed back to the stage of her development that matches her economic condition and population numbers of half a century ago. Those who sign this Treaty will sign the death sentence of many millions of German men, women, and children.”

I know of no adequate answer to these words. This accusation is at least as true for the Austrian peace settlement as it is for the German one. This is the fundamental problem before us. Compared to this, questions of adjusting territories and the balance of European power are insignificant. Some of the catastrophes of past history, which have set back human progress for centuries, were due to the reactions following the sudden end of temporarily favorable conditions. These conditions had allowed populations to grow beyond what could be supported when those favorable conditions ended, whether through natural causes or human actions.

Key Features of Europe’s Immediate Crisis

The important features of the current situation can be grouped under three headings:

1. The absolute decrease, for now, in Europe’s internal productivity.
2. The breakdown of transportation and exchange systems, which are needed to move products to where they are most wanted.
3. Europe’s inability to purchase its usual supplies from overseas.

The decrease in productivity is hard to estimate and might be exaggerated. But the initial evidence for it is overwhelming. This factor has been the main focus of Mr. Hoover’s well-considered warnings. Many causes have produced this decrease:

• Violent and long-lasting internal disorder, as in Russia and Hungary.
• The creation of new governments and their inexperience in readjusting economic relations, as in Poland and Czechoslovakia.
• The loss of efficient labor throughout the continent, due to war casualties or continued military mobilization.
• The decrease in efficiency due to continued underfeeding in the Central Empires (Germany, Austria-Hungary).
• The exhaustion of the soil from lack of the usual fertilizers during the war.
• The unsettled minds of the working classes about the fundamental economic issues of their lives.
• But above all (to quote Mr. Hoover), “there is a great fundamental relaxation of effort as the reflex of physical exhaustion of large sections of the population from privation and the mental and physical strain of the war.”

Many people are, for one reason or another, completely unemployed. According to Mr. Hoover, a summary of unemployment offices in Europe in July 1919 showed that 15 million families were receiving unemployment benefits in some form. These benefits were mainly being paid by constantly printing more money (inflation). In Germany, there is an added discouragement to labor and investment (if the reparation terms are taken literally): anything they produce beyond the very basic level of survival will be taken away from them for years to come.

The definite data we have perhaps doesn’t add much to the general picture of decay. But I will remind the reader of one or two examples:

• Europe’s overall coal production is estimated to have fallen by 30%. Most of Europe’s industries and its entire transport system depend on coal.
• Before the war, Germany produced 85% of the total food its people consumed. Now, the soil’s productivity is down by 40%, and the effective quality of livestock is down by 55%.
• Of the European countries that used to have a large surplus of food to export, Russia may itself starve, as much because of poor transport as because of reduced output.
• Hungary, apart from its other troubles, was looted by the Romanians immediately after its harvest.
• Austria will have consumed its entire 1919 harvest before the end of that calendar year. The figures are almost too overwhelming to be convincing. If they were not quite so bad, we might believe them more strongly.

But even when coal can be mined and grain harvested, the breakdown of the European railway system prevents them from being transported. And even when goods can be manufactured, the breakdown of the European currency system prevents them from being sold. I have already described the losses to Germany’s transport system from the war and from surrenders under the Armistice. But even so, Germany’s position, considering its ability to manufacture replacements, is probably not as serious as that of some of its neighbors. In Russia (about which we have very little exact information), the condition of railway cars and locomotives is believed to be absolutely desperate. This is one of the most fundamental factors in its current economic disorder. In Poland, Romania, and Hungary, the situation is not much better. Yet modern industrial life essentially depends on efficient transport facilities. The population that made its living by these means cannot continue to live without them. The breakdown of currency, and the distrust in its purchasing power, makes these evils even worse. This must be discussed in more detail in connection with foreign trade.

A Grim Picture of Europe

So, what is our picture of Europe?

• A country population able to survive on what it grows, but without the usual surplus for the towns. Also, because of the lack of imported materials (and thus a lack of variety and quantity in manufactured goods from towns), these country people lack the usual incentives to sell their food in return for other goods.
• An industrial population unable to keep up its strength due to lack of food, unable to earn a living due to lack of materials, and so unable to make up for the failure of homegrown production by importing from abroad. Yet, according to Mr. Hoover, “a rough estimate would indicate that the population of Europe is at least 100,000,000 greater than can be supported without imports, and must live by the production and distribution of exports.”

The problem of restarting the continuous cycle of production and exchange in foreign trade leads me to a necessary discussion of Europe’s currency situation.

The Debasement of Currency

Lenin is said to have declared that the best way to destroy the Capitalist System was to debase the currency (reduce its value). By a continuous process of inflation (printing too much money), governments can confiscate, secretly and unnoticed, an important part of the wealth of their citizens. By this method, they not only confiscate wealth, but they do so arbitrarily. While this process makes many people poorer, it actually makes some richer. The sight of this arbitrary rearrangement of riches strikes not only at people’s security but also at their confidence in the fairness of the existing distribution of wealth. Those to whom the system brings unexpected wealth, beyond what they deserve or even expect, become “profiteers.” These profiteers become the object of hatred from the middle class (whom inflation has impoverished) no less than from the working class. As inflation continues and the real value of the currency fluctuates wildly from month to month, all permanent relationships between debtors and creditors – which form the ultimate foundation of capitalism – become so completely disordered as to be almost meaningless. The process of getting wealth turns into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debase the currency. The process uses all the hidden forces of economic law on the side of destruction, and it does so in a way that not one person in a million can diagnose.

In the later stages of the war, all the fighting governments, either out of necessity or incompetence, did what a Bolshevist might have done by design. Even now that the war is over, most of them continue the same bad practices out of weakness. Furthermore, the governments of Europe, many of them being reckless in their methods as well as weak, try to direct popular anger towards a class known as “profiteers.” This anger is really about the more obvious consequences of their own damaging methods. These “profiteers” are, broadly speaking, the entrepreneur class of capitalists – the active and constructive element in the whole capitalist society. In a period of rapidly rising prices, they cannot help but get rich quickly, whether they want to or not. If prices are continually rising, every trader who has bought goods for stock or owns property and factories inevitably makes profits. By directing hatred against this class, therefore, European governments are taking a step further in the fatal process that the subtle mind of Lenin had consciously conceived. The profiteers are a consequence, not a cause, of rising prices. By combining popular hatred of the entrepreneur class with the blow already given to social security (by the violent and arbitrary disturbance of contracts and the established balance of wealth, which is the inevitable result of inflation), these governments are rapidly making it impossible for the social and economic order of the nineteenth century to continue. But they have no plan to replace it.

The Weakness of the Capitalist Class

We are thus faced in Europe with the sight of an extraordinary weakness on the part of the great capitalist class. This class emerged from the industrial triumphs of the nineteenth century and seemed, only a few years ago, to be our all-powerful master. The terror and personal timidity of the individuals in this class are now so great, and their confidence in their place in society and in their necessity to the social system is so diminished, that they are easy victims of intimidation. This was not the case in England twenty-five years ago, any more than it is now in the United States. Then, the capitalists believed in themselves, in their value to society, in the rightness of their continued existence with full enjoyment of their riches and unlimited use of their power. Now they tremble before every insult. Call them pro-Germans, international financiers, or profiteers, and they will give you any ransom you choose to ask, just so you don’t speak of them so harshly. They allow themselves to be ruined and completely undone by their own instruments: governments they created and a press they own. Perhaps it is historically true that no order of society ever perishes except by its own hand. In the more complex world of Western Europe, the “Immanent Will” (a philosophical concept of an underlying force in history) may achieve its ends more subtly. It may bring in revolution just as inevitably through a Klotz (French Finance Minister) or a George (British Prime Minister) as by the intellectual ideas, too ruthless and self-aware for us, of the bloodthirsty philosophers of Russia.

Rampant Inflation in Europe

The inflation of currency systems in Europe has reached extraordinary levels. The various governments involved in the war, unable, or too timid, or too short-sighted to get the resources they needed from loans or taxes, simply printed more banknotes to cover the balance.

• In Russia and Austria-Hungary, this process has reached a point where, for foreign trade, the currency is practically valueless.
• The Polish mark can be bought for about three cents, and the Austrian crown for less than two cents, but they cannot be sold at all.
• The German mark is worth less than four cents on the exchanges. In most of the other countries of Eastern and South-Eastern Europe, the real situation is nearly as bad.

The currency of Italy has fallen to little more than half of its stated value, even though it is still subject to some government regulation. French currency has an uncertain value on the market. Even British sterling (the pound) is seriously lower in its current value and has poor future prospects.

Money’s Value: At Home vs. Abroad

But while these currencies have a shaky value in foreign countries, they have never entirely lost their purchasing power at home – not even in Russia. A sense of trust in the legal money issued by the state is so deeply fixed in the citizens of all countries that they cannot help but believe that someday this money must get back at least part of its former value. To their minds, it seems that value is a built-in quality of money itself. They do not understand that the real wealth this money once represented has been used up and is gone forever. This feeling is supported by various legal rules with which governments try to control internal prices, and so preserve some purchasing power for their legal money. Thus, the force of law keeps some immediate purchasing power over certain goods. And the force of sentiment and custom, especially among peasants, maintains a willingness to hoard paper money that is really worthless.

The Dangers of False Value and Price Controls

However, this assumption of a fake value for the currency, created by laws that regulate prices, contains within itself the seeds of final economic ruin. It soon dries up the sources of ultimate supply. If a man is forced to exchange the products of his labor for paper money which, as experience soon teaches him, he cannot use to buy what he needs at a price comparable to what he received for his own products, he will:

• Keep his produce for himself.
• Give it to his friends and neighbors as a favor.
• Or, he will put less effort into producing it. A system of forcing the exchange of goods at prices that are not their real relative value not only reduces production but finally leads to the waste and inefficiency of barter (trading goods directly for other goods).

If, however, a government does not regulate prices and allows things to take their natural course, essential goods soon reach a level of price that only the rich can afford. The worthlessness of the money becomes clear, and the fraud on the public can no longer be hidden.

The effect on foreign trade of price-regulation and “profiteer-hunting” (blaming and punishing those who make large profits) as supposed cures for inflation is even worse. Whatever the situation may be at home, the currency must soon reach its real, lower level in foreign countries. As a result, prices inside and outside the country lose their normal relationship. The price of imported goods, when converted at the current exchange rate, is far higher than the local price. So, many essential goods will not be imported at all by private businesses. They must be provided by the government, which, by re-selling the goods below cost price, plunges itself a little further into debt. The bread subsidies, now common throughout Europe, are the main example of this.

Two Groups of European Countries

European countries currently fall into two distinct groups regarding how they show what is really the same problem everywhere. The difference depends on whether they were cut off from international trade by the Blockade, or had their imports paid for by their allies. I take Germany as typical of the first group, and France and Italy of the second.

Germany (Cut off by Blockade): The amount of money in circulation in Germany is about ten times what it was before the war. The value of the German mark in terms of gold is about one-eighth of its former value. Since world prices in terms of gold are more than double what they were, it follows that prices in marks inside Germany should be sixteen to twenty times their pre-war level if they are to be in line with prices outside Germany. But this is not the case. Despite a very large rise in German prices, they probably do not yet average much more than five times their former level for basic goods. It is impossible for them to rise further without a simultaneous and equally dramatic adjustment in money wages.

This existing mismatch hinders the revival of import trade in two ways (apart from other obstacles). This revival is essential for the economic reconstruction of the country:

1. Imported goods are too expensive for most of the population. The flood of imports that might have been expected after the blockade was lifted was not, in fact, commercially possible.
2. It is a risky venture for a merchant or manufacturer to buy materials with foreign credit. When they have imported or manufactured these materials, they will receive German marks of a quite uncertain and possibly unrealizable future value. This second obstacle to the revival of trade easily escapes notice and deserves some attention. It is impossible now to say what the mark will be worth in terms of foreign currency three months, six months, or a year from now. The exchange market can offer no reliable figure. Therefore, a German merchant, careful of his future credit and reputation, who is actually offered a short-term credit in sterling or dollars, may be hesitant and doubtful about accepting it. He will owe sterling or dollars, but he will sell his product for marks. His ability, when the time comes, to turn these marks into the currency in which he has to repay his debt is entirely problematic. Business loses its genuine character and becomes nothing more than a speculation on exchange rates, where fluctuations completely wipe out the normal profits of commerce.

So, there are three separate obstacles to the revival of trade:

1. A mismatch between internal prices and international prices.
2. A lack of individual credit abroad to buy the raw materials needed to secure working capital and restart the cycle of exchange.
3. A disordered currency system that makes credit operations risky or impossible, quite apart from the ordinary risks of business.

France and Italy (Imports Paid by Allies):

• France: The amount of money in circulation in France is more than six times its pre-war level. The exchange value of the franc in terms of gold is a little less than two-thirds of its former value. This means the value of the franc has not fallen as much as the increase in the volume of currency might suggest. This apparently better situation in France is because, until recently, a very large part of its imports were not paid for by France itself but were covered by loans from the governments of Great Britain and the United States. This allowed an imbalance between exports and imports to develop, which is becoming a very serious problem now that outside assistance is gradually stopping. The internal economy of France and its price level (in relation to its currency circulation and foreign exchange rates) are currently based on an excess of imports over exports that cannot possibly continue. Yet it is difficult to see how the situation can be fixed except by lowering the standard of consumption in France. Even if this is only temporary, it will cause a great deal of discontent.

• Italy: The situation in Italy is not very different. There, the money in circulation is five or six times its pre-war level, and the exchange value of the lira in terms of gold is about half its former value. So, the adjustment of the exchange rate to the volume of money in circulation has gone further in Italy than in France. On the other hand, Italy’s “invisible” income (money sent home by Italians living abroad and spending by tourists) has been very badly affected. The breakup of Austria has deprived Italy of an important market. Its particular dependence on foreign shipping and on imported raw materials of every kind has made it especially vulnerable to the increase in world prices. For all these reasons, Italy’s position is grave, and its excess of imports is as serious a symptom as in France.

Government Budget Problems

The existing inflation and the imbalance of international trade are made worse, both in France and in Italy, by the unfortunate budget situations of their governments.

France: The failure to impose adequate taxation in France is well-known. Before the war, the total French and British government budgets, and also the average taxation per person, were about equal. But in France, no substantial effort has been made to cover the increased spending. It has been estimated that “Taxes increased in Great Britain during the war from 95 francs per head to 265 francs, whereas the increase in France was only from 90 to 103 francs.” The taxation approved in France for the financial year ending June 30, 1919, was less than half the estimated normal post-war expenditure. The normal budget for the future cannot be put below $4.4 billion (22 billion francs) and may be even higher. But even for the 1919-20 fiscal year, the estimated income from taxation does not cover much more than half this amount. The French Ministry of Finance has no plan or policy whatsoever for dealing with this huge deficit, except hoping for payments from Germany on a scale that French officials themselves know is unrealistic. In the meantime, they are helped by sales of war materials and surplus American stocks. They do not hesitate, even in the latter half of 1919, to meet the deficit by printing even more money from the Bank of France.

Italy: Italy’s budget position is perhaps a little better than France’s. Italian finance during the war was more proactive than French finance, and far greater efforts were made to impose taxes and pay for the war. Nevertheless, Signor Nitti, the Prime Minister, in a letter to the electorate before the General Election (October 1919), felt it necessary to make public the following desperate analysis of the situation:

1. State expenditure is about three times the revenue.
2. All state-owned industrial businesses, including railways, telegraphs, and telephones, are running at a loss. Although the public buys bread at a high price, that price represents a loss to the government of about one billion lire a year.
3. Exports now leaving the country are valued at only one-quarter or one-fifth of the imports from abroad.
4. The National Debt is increasing by about one billion lire per month.
5. Military expenditure for one month is still larger than that for the first year of the war.

The Rest of Europe’s Finances

But if this is the budget situation in France and Italy, that of the rest of war-torn Europe is even more desperate.

• In Germany, the total expenditure of the Empire, the Federal States, and local communities in 1919-20 is estimated at 25 billion marks. Not more than 10 billion of this is covered by existing taxation. This is without allowing anything for paying the indemnity.
• In Russia, Poland, Hungary, or Austria, such a thing as a government budget cannot be seriously considered to exist at all.

Thus, the threat of inflation described above is not merely a product of the war, which peace begins to cure. It is an ongoing problem, and the end is not yet in sight.

A Disorganized and Desperate Europe

All these influences combine not only to prevent Europe from immediately supplying enough exports to pay for the goods it needs to import. They also damage its credit for getting the working capital required to restart the cycle of trade. Furthermore, by pushing the forces of economic law even further from balance rather than towards it, they encourage the present bad conditions to continue instead of allowing a recovery. An inefficient, unemployed, disorganized Europe faces us. It is torn by internal conflict and international hatred, fighting, starving, looting, and lying. What reason is there to paint a less gloomy picture?

I have paid little attention in this book to Russia, Hungary, or Austria. There, the miseries of life and the breakdown of society are too well-known to need analysis. These countries are already experiencing the reality of what, for the rest of Europe, is still only a prediction. Yet they cover a vast territory and a large population. They are a living example of how much humans can suffer and how far society can decay. Above all, they are a signal to us of how, in the final catastrophe, the sickness of the body passes over into a sickness of the mind. Economic hardship proceeds by easy stages. As long as people suffer it patiently, the outside world cares little. Physical efficiency and resistance to disease slowly decrease, but life goes on somehow, until the limit of human endurance is finally reached. Then, counsels of despair and madness stir the sufferers from the tiredness that precedes the crisis. Then, people shake themselves free, and the bonds of custom are loosened. The power of ideas becomes supreme, and people listen to whatever message of hope, illusion, or revenge is carried to them on the air.

As I write, the flames of Russian Bolshevism seem, for the moment at least, to have burned themselves out. The peoples of Central and Eastern Europe are held in a dreadful state of inaction. The recently gathered harvest keeps off the worst hardships, and peace has been declared in Paris. But winter approaches. People will have nothing to look forward to or to nourish their hopes on. There will be little fuel to lessen the harshness of the season or to comfort the starved bodies of the town-dwellers.

But who can say how much is endurable, or in what direction people will at last seek to escape from their misfortunes?

Remedies

It is hard to keep a true sense of perspective when dealing with very large issues. I have criticized the work done in Paris. I have painted a dark picture of Europe’s condition and its future prospects. This is one side of the situation, and I believe it is a true one. But in such a complex situation, not all signs point in the same direction. We might make the mistake of expecting bad results to follow too quickly and too surely from causes that are perhaps not the only relevant ones. The very darkness of the outlook makes us doubt its accuracy. Our imagination is dulled rather than excited by a story that is too sad. Our minds bounce back from what feels “too bad to be true.”

But before you, the reader, allow yourself to be too influenced by these natural reactions, and before I lead you towards remedies, improvements, and happier trends (which is the goal of this chapter), consider two contrasts. These are England and Russia. England might make you too optimistic. Russia should remind you that catastrophes can still happen, and that modern society is not safe from the very greatest evils.

England’s Situation: Different from Europe’s

In this book, I have generally not focused on the situation or problems of England. When I speak of “Europe,” you should usually understand it to exclude the British Isles. England is in a state of transition, and its economic problems are serious. We may be on the verge of great changes in its social and industrial structure. Some of us may welcome such possibilities, and some of us may regret them. But these problems are completely different from those threatening Europe. I do not see the slightest possibility of a catastrophe in England, nor any serious likelihood of a general collapse of society. The war has made us poorer, but not seriously so. I would judge that the real wealth of the country in 1919 is at least equal to what it was in 1900. Our balance of trade (imports versus exports) is unfavorable, but not so much that fixing it needs to disrupt our economic life. The deficit in our budget is large, but not beyond what firm and wise leadership could manage. The shortening of working hours may have somewhat reduced our productivity. But it should not be too much to hope that this is a temporary feature of the transition. Anyone who knows British working people cannot doubt that, if it suits them, and if they are in sympathy and reasonably content with their living conditions, they can produce at least as much in a shorter working day as they did in the longer hours that were common before.

The most serious problems for England have been brought to a crisis by the war, but they have more fundamental origins:

1. The driving forces of the nineteenth century have run their course and are exhausted. The economic motives and ideals of that generation no longer satisfy us. We must find a new way and suffer again the discomfort, and finally the pains, of a new industrial birth.
2. The other problem, which I discussed in Chapter II, is the increase in the real cost of food and the decreasing response of nature to any further increase in the world’s population. This trend must be especially harmful to the greatest of all industrial countries (Britain) and the one most dependent on imported food supplies.

But these long-term problems are common to every age. They are of a completely different kind from those that may affect the peoples of Central Europe. Those readers who are mainly thinking of British conditions, with which they are familiar, might be tempted to be optimistic. Even more so, those whose immediate surroundings are American must think about Russia, Turkey, Hungary, or Austria. In these places, the most dreadful material evils that people can suffer – famine, cold, disease, war, murder, and anarchy – are actual current experiences. Only by considering these can one understand the character of the misfortunes against which we must surely seek a remedy, if one exists.

What Then Is to Be Done?

The tentative suggestions in this chapter may seem inadequate to the reader. But the opportunity was missed in Paris during the six months after the Armistice. Nothing we can do now can repair the harm done at that time. Great hardship and great risks to society have become unavoidable. All that is now open to us is to redirect, as far as we can, the fundamental economic trends that underlie current events. We must guide them so that they promote the re-establishment of prosperity and order, instead of leading us deeper into misfortune.

First, we must escape from the atmosphere and methods of Paris. Those who controlled the Conference may bow to gusts of popular opinion, but they will never lead us out of our troubles. It is hardly likely that the Council of Four can retrace their steps, even if they wished to. Therefore, the replacement of the existing governments of Europe is an almost essential first step.

I propose then to discuss a program for those who believe that the Peace of Versailles cannot last. This program will cover the following points:

1. The Revision of the Treaty.
2. The settlement of debts between the Allies.
3. An international loan and the reform of currency.
4. The relations of Central Europe with Russia.

1. The Revision of the Treaty

Are there any constitutional ways open to us for changing the Treaty? President Wilson and General Smuts believed that securing the Covenant of the League of Nations outweighed much evil in the rest of the Treaty. They indicated that we must look to the League for the gradual development of a more tolerable life for Europe. General Smuts wrote in his statement on signing the Peace Treaty: “There are territorial settlements which will need revision. There are guarantees laid down which we all hope will soon be found out of harmony with the new peaceful temper and unarmed state of our former enemies. There are punishments foreshadowed over most of which a calmer mood may yet prefer to pass the sponge of oblivion. There are indemnities stipulated which cannot be enacted without grave injury to the industrial revival of Europe, and which it will be in the interests of all to render more tolerable and moderate… I am confident that the League of Nations will yet prove the path of escape for Europe out of the ruin brought about by this war.” Without the League, President Wilson told the Senate when he presented the Treaty to them in early July 1919, “…long-continued supervision of the task of reparation which Germany was to undertake to complete within the next generation might entirely break down; the reconsideration and revision of administrative arrangements and restrictions which the Treaty prescribed, but which it recognized might not provide lasting advantage or be entirely fair if too long enforced, would be impracticable.”

Can the League of Nations Revise the Treaty? Can we fairly hope to get from the League the benefits that two of its main creators encourage us to expect? The relevant part is in Article XIX of the Covenant: “The Assembly may from time to time advise the reconsideration by Members of the League of treaties which have become inapplicable and the consideration of international conditions whose continuance might endanger the peace of the world.”

But alas! Article V states that “Except where otherwise expressly provided in this Covenant or by the terms of the present Treaty, decisions at any meeting of the Assembly or of the Council shall require the agreement of all the Members of the League represented at the meeting.” Doesn’t this rule reduce the League, as far as an early review of any Treaty terms is concerned, to a body that just wastes time? If all parties to the Treaty unanimously agree that it needs changing in a particular way, a League and a Covenant are not needed to do it. Even when the Assembly of the League is unanimous, it can only “advise” review by the members specifically affected.

But the League will work, say its supporters, by its influence on world public opinion. The view of the majority will carry decisive weight in practice, even if it has no constitutional effect. Let us pray this is true. Yet the League, in the hands of trained European diplomats, may become an unmatched tool for obstruction and delay. The revision of Treaties is primarily entrusted not to the Council (which meets frequently), but to the Assembly (which will meet less often). Anyone with experience of large Inter-Ally Conferences knows the Assembly must become an unwieldy, multilingual debating society. In such a body, even the greatest determination and best management may fail to bring issues to a decision against an opposition that favors keeping things as they are.

There are indeed two disastrous flaws in the Covenant:

• Article V: which requires unanimity.
• Article X (much-criticized): by which “The Members of the League undertake to respect and preserve as against external aggression the territorial integrity and existing political independence of all Members of the League.” These two Articles together somewhat destroy the idea of the League as an instrument of progress. They equip it from the start with an almost fatal bias towards maintaining the status quo (the existing situation). It is these Articles that have reconciled some of its original opponents to the League. They now hope to make it another Holy Alliance to perpetuate the economic ruin of their enemies and maintain the Balance of Power in their own interests, which they believe they established by the Peace Treaty.

But while it would be wrong and foolish to hide the real difficulties from ourselves in the name of “idealism,” especially regarding treaty revision, that is no reason for any of us to criticize the League. The wisdom of the world may yet transform it into a powerful instrument of peace. Articles XI-XVII of the Covenant have already accomplished a great and beneficial achievement. Therefore, I agree that our first efforts to revise the Treaty must be made through the League rather than in any other way. We must hope that the force of general opinion and, if necessary, the use of financial pressure and incentives, may be enough to prevent a stubborn minority from using their right of veto. We must trust the new governments (whose existence I assume in the main Allied countries) to show deeper wisdom and greater generosity than their predecessors.

Three Great Changes Needed for Europe’s Economic Life We have seen in Chapters IV and V that many parts of the Treaty are objectionable. I do not intend to go into details here or try to revise the Treaty clause by clause. I will limit myself to three great changes that are necessary for the economic life of Europe, relating to:

1. Reparation
2. Coal and Iron
3. Tariffs

1. Reparation Revision Proposal: If the sum demanded for Reparation is less than what the Allies are entitled to based on a strict interpretation of their agreements, it is unnecessary to list the items it represents or to hear arguments about how it was compiled. I suggest, therefore, the following settlement:

• (1) Total Payment: The amount Germany pays for Reparation and the costs of the Armies of Occupation should be fixed at $10 billion.
• (2) Credits for Surrendered Items: The surrender of merchant ships and submarine cables under the Treaty, of war material under the Armistice, of State property in ceded territory, of claims against such territory for public debt, and of Germany’s claims against its former Allies, should be valued as a lump sum of $2.5 billion. No attempt should be made to evaluate them item by item.
• (3) Balance Payment: The remaining balance of $7.5 billion should not carry interest while waiting for repayment. Germany should pay it in thirty annual installments of $250 million, beginning in 1923.
• (4) Reparation Commission: The Reparation Commission should be dissolved. If any duties remain for it, it should become part of the League of Nations and should include representatives from Germany and neutral States.
• (5) Germany’s Responsibility: Germany would be left to meet the annual installments as it sees fit. Any complaint against it for not fulfilling its obligations would be lodged with the League of Nations. This means there would be no further seizure of German private property abroad, except what is required to meet private German debts from the proceeds of such property already sold or in the hands of Public Trustees in Allied countries and the United States. In particular, Article 260 (which allows seizure of German interests in public utility companies) would be canceled.
• (6) Austria: No attempt should be made to get reparation payments from Austria.

2. Coal and Iron Revision Proposal:

• (1) Coal Options and French Compensation: The Allies’ options to buy German coal under Annex V should be abandoned. However, Germany‘s obligation to make good France’s loss of coal from the destruction of its mines should remain. This means Germany should promise “to deliver to France annually for a period not exceeding ten years an amount of coal equal to the difference between the annual pre-war production of the coal mines of the Nord and Pas de Calais (destroyed by the war) and the production of the same mines during the years in question.” This delivery should not exceed twenty million tons in any one year of the first five years, and eight million tons in any one year of the following five years. This obligation should, however, end if the coal districts of Upper Silesia are taken from Germany in the final settlement after the vote (plebiscite).
• (2) Saar Arrangement: The arrangement for the Saar region should remain, with these changes: Germany should receive no credit for the mines. However, it should receive back both the mines and the territory without payment and unconditionally after ten years. But this should depend on France agreeing for the same period to supply Germany from Lorraine with at least 50% of the iron ore that was sent from Lorraine into Germany before the war. In return, Germany would promise to supply Lorraine with an amount of coal equal to the whole amount formerly sent to Lorraine from Germany, after accounting for the output of the Saar mines.
• (3) Upper Silesia Plebiscite: The arrangement for Upper Silesia should remain. A vote by the inhabitants should be held. In making a final decision, the main Allied Powers will consider “the wishes of the inhabitants as shown by the vote, and to the geographical and economic conditions of the locality.” However, the Allies should declare that in their judgment, “economic conditions” require the coal districts to be included in Germany unless the inhabitants strongly decide otherwise.
• (4) Coal Commission: The Coal Commission already established by the Allies should become part of the League of Nations. It should be enlarged to include representatives of Germany and the other States of Central and Eastern Europe, the Northern Neutral countries, and Switzerland. Its authority should be advisory only. It should cover the distribution of coal supplies from Germany, Poland, the former parts of the Austro-Hungarian Empire, and the exportable surplus of the United Kingdom. All States represented on the Commission should promise to provide it with the fullest information and to be guided by its advice as far as their sovereignty and vital interests allow.

3. Tariffs Revision Proposal (Free Trade Union):

• A Free Trade Union should be established under the League of Nations. Countries in this Union would promise to impose no protectionist tariffs (taxes on imports designed to protect domestic industries) whatever against the products of other members of the Union.
• Germany, Poland, the new States that were formerly part of the Austro-Hungarian and Turkish Empires, and the Mandated States (territories administered by Allied powers) should be compelled to join this Union for ten years. After that, joining would be voluntary.
• The joining of other States would be voluntary from the start. But it is hoped that the United Kingdom, at least, would become an original member.

Benefits of These Proposed Revisions:

• Reparation: By fixing reparation payments well within Germany’s ability to pay, we make it possible for hope and enterprise to renew within its territory. We avoid the constant friction and opportunity for improper pressure arising from Treaty clauses that are impossible to fulfill. We also make the intolerable powers of the Reparation Commission unnecessary.
• Coal and Iron: By moderating the clauses relating directly or indirectly to coal, and by arranging for the exchange of iron ore, we allow Germany’s industrial life to continue. We also put limits on the loss of productivity that would otherwise be caused by political frontiers interfering with the natural location of the iron and steel industry.
• Free Trade Union: Through the proposed Free Trade Union, some of the loss of organization and economic efficiency may be recovered. This loss would otherwise result from the countless new political frontiers now created between greedy, jealous, immature, and economically incomplete nationalist States. Economic frontiers were tolerable as long as immense territory was included in a few great Empires. But they will not be tolerable when the Empires of Germany, Austria-Hungary, Russia, and Turkey have been divided among some twenty independent authorities. A Free Trade Union, including all of Central, Eastern, and South-Eastern Europe, Siberia, Turkey, and (I should hope) the United Kingdom, Egypt, and India, might do as much for the peace and prosperity of the world as the League of Nations itself. Belgium, Holland, Scandinavia, and Switzerland might be expected to join it shortly.

It would also be very desirable if France and Italy decided to join this Free Trade Union.

Some critics might object, I suppose, that such an arrangement could, in effect, help realize the former German dream of Mittel-Europa (a German-dominated Central Europe). If other countries were foolish enough to stay outside the Union and leave all its advantages to Germany, there might be some truth in this. But an economic system that everyone had the chance to join, and which gave special privileges to none, is surely completely free from the criticisms aimed at a privileged and openly imperialistic plan of exclusion and discrimination. Our attitude to these criticisms must be decided by our whole moral and emotional reaction to the future of international relations and the Peace of the World.

If we believe that for at least a generation Germany cannot be trusted with even a small amount of prosperity; that while all our recent Allies are angels of light, all our recent enemies (Germans, Austrians, Hungarians, and the rest) are children of the devil; that year by year Germany must be kept poor and its children starved and crippled; and that Germany must be surrounded by enemies – then we shall reject all the proposals in this chapter. We would particularly reject those that might help Germany regain a part of its former material prosperity and find a way for the industrial population of its towns to make a living. But if this view of nations and their relationships is adopted by the democracies of Western Europe, and is financed by the United States, then heaven help us all. If we deliberately aim to make Central Europe poor, I dare predict that vengeance will not be slow to arrive. Nothing can then delay for very long that final civil war between the forces of Reaction (those wanting to return to old ways) and the despairing outbursts of Revolution. Before this civil war, the horrors of the recent German war will fade into nothing. This new war will destroy, whoever wins, the civilization and progress of our generation. Even if the result disappoints us, must we not base our actions on better expectations? Must we not believe that the prosperity and happiness of one country helps that of others, that the solidarity of humankind is not a fiction, and that nations can still afford to treat other nations as fellow human beings?

The changes I have proposed above might do something noticeable to help the industrial populations of Europe continue to earn a living. But they would not be enough by themselves. In particular, France would lose out on paper (though only on paper, because it will never actually get the full amount of its current claims). France must be shown some other way out of its financial difficulties. Therefore, I will now make proposals, first, for adjusting the claims of America and the Allies among themselves; and second, for providing enough credit to enable Europe to rebuild its stock of working capital.

2. The Settlement of Inter-Ally Indebtedness

When proposing a change to the reparation terms, I have so far only considered them in relation to Germany. But fairness requires that such a large reduction in the amount should also lead to a readjustment of how it is divided among the Allies themselves. The statements our leaders made on every platform during the war, as well as other considerations, surely require that the areas damaged by the enemy’s invasion should receive priority for compensation. While helping these areas was one of the ultimate goals we said we were fighting for, we never included recovering money for separation allowances (payments to soldiers’ families) among our war aims. I suggest, therefore, that we should prove ourselves sincere and trustworthy by our actions. Accordingly, Great Britain should completely give up its claims for cash payment in favor of Belgium, Serbia, and France. All the payments made by Germany would then first be used to repair the physical damage done to those countries and provinces that suffered actual invasion by the enemy. I believe that the $7.5 billion thus available would be enough to cover entirely the actual costs of restoration. Furthermore, it is only by completely putting aside its own claims for cash compensation that Great Britain can, with clean hands, ask for a revision of the Treaty. Only then can it clear its honor from the breach of faith for which it bears the main responsibility, as a result of the policy its representatives were pledged to by the General Election of 1918.

With the reparation problem thus cleared up, it would be possible to bring forward two other financial proposals with a better chance of success. Both of these involve an appeal to the generosity of the United States.

Proposal 1: Cancel All Inter-Ally War Debts The first proposal is for the entire cancellation of debts between the Allied governments (that is, debts between the governments of the Allied and Associated countries) that were incurred for the purposes of the war. This proposal, which has already been suggested in some quarters, is one that I believe is absolutely essential for the future prosperity of the world. It would be an act of far-seeing statesmanship for the United Kingdom and the United States, the two main powers involved, to adopt it.

The sums of money involved are approximately as follows (based on the author’s textual description, as no table was provided in the original prompt):

• The total amount of Inter-Ally debt is nearly $20 billion (assuming loans from one Ally are not subtracted from loans to another).
• The United States is only a lender.
• The United Kingdom has lent about twice as much as it has borrowed.
• France has borrowed about three times as much as it has lent.
• The other Allies have only been borrowers.

If all the above Inter-Ally debts were mutually forgiven, the net result on paper (assuming all the loans are good and would be repaid) would be:

• The United States would give up about $10 billion.
• The United Kingdom would give up about $4.5 billion.
• France would gain about $3.5 billion.
• Italy would gain about $4 billion. But these figures overstate the loss to the United Kingdom and understate the gain to France. This is because a large part of the loans made by both these countries was to Russia and cannot, by any stretch of the imagination, be considered recoverable. If the loans the United Kingdom made to its Allies are estimated to be worth 50% of their full value (an arbitrary but convenient assumption), the operation would mean neither a loss nor a gain for the UK. But no matter how the net result is calculated on paper, the relief from anxiety that such a settlement would bring would be very great. Therefore, it is from the United States that the proposal asks for generosity.

Why the US Should Be Generous Speaking with very close knowledge of the relationships between the British, American, and other Allied Treasuries throughout the war, I believe this is an act of generosity that Europe can fairly ask for. This is provided that Europe is making an honorable attempt in other areas not to continue war (economic or otherwise), but to achieve the economic rebuilding of the whole continent. The financial sacrifices of the United States have been, in proportion to its wealth, immensely less than those of the European States. This could hardly have been otherwise. It was a European quarrel. The United States government could not have justified to its citizens spending the entire national strength, as the Europeans did. After the United States entered the war, its financial assistance was lavish and unlimited. Without this assistance, the Allies could never have won the war, quite apart from the decisive influence of the arrival of American troops. Europe, too, should never forget the extraordinary assistance given to it during the first six months of 1919 through Mr. Hoover and the American Commission of Relief. Never was a nobler work of selfless goodwill carried through with more determination, sincerity, and skill, and with less thanks either asked for or given. The ungrateful governments of Europe owe much more to the statesmanship and insight of Mr. Hoover and his team of American workers than they have yet appreciated or will ever acknowledge. The American Relief Commission, and only they, saw the European situation during those months in its true perspective and felt towards it as people should. It was their efforts, their energy, and the American resources placed at their disposal by the President (often acting against European obstruction) that not only saved an immense amount of human suffering but also prevented a widespread breakdown of the European system.

But when we speak of American financial assistance in this way, we silently assume – and America, I believe, assumed it too when it gave the money – that it was not an investment. If Europe is going to repay the $10 billion worth of financial assistance it received from the United States, with compound interest at 5%, the matter looks very different. If America’s loans are to be regarded in this light, its relative financial sacrifice has been very slight indeed.

Arguments about relative sacrifice are very unproductive and also very foolish. There is no reason in the world why relative sacrifice should necessarily be equal, as many other very relevant factors are quite different in the two cases. The following two or three facts are put forward, therefore, not to suggest they provide any compelling argument for Americans. They are only to show that from his own selfish point of view, an Englishman is not trying to avoid fair sacrifice on his country’s part in making this suggestion:

1. The sums that the British Treasury borrowed from the American Treasury after the US entered the war were approximately balanced by the sums England lent to its other Allies during the same period (i.e., not counting sums lent before the US entered the war). So, almost all of England’s debt to the United States was incurred not on its own account, but to enable it to help the rest of its Allies, who for various reasons could not get assistance directly from the United States.
2. The United Kingdom has sold about $5 billion worth of its foreign investments and has also incurred foreign debt of about $6 billion. The United States, far from selling, has bought back over $5 billion of its citizens’ foreign investments and has incurred practically no foreign debt.
3. The population of the United Kingdom is about half that of the United States, its income about one-third, and its accumulated wealth between one-half and one-third. The financial capacity of the United Kingdom can therefore be put at about two-fifths that of the United States. This figure allows us to make the following comparison: Excluding loans to Allies in each case (which is right if we assume these loans are to be repaid), the war expenditure of the United Kingdom has been about three times that of the United States, or, in proportion to capacity, between seven and eight times.

Having dealt with this issue as briefly as possible, I turn to the broader issues of future relations between the parties to the late war. The present proposal must primarily be judged by these broader issues.

Consequences of Not Settling Inter-Ally Debts If a settlement like the one now proposed is not made, the war will have ended with a network of heavy tribute payments owed from one Ally to another. The total amount of this tribute is even likely to be more than the amount that can be obtained from the enemy. The war will have ended with the intolerable result of the Allies paying indemnities to one another instead of receiving them from the enemy.

For this reason, the question of Inter-Allied debt is closely linked to the intense popular feeling among the European Allies about indemnities from Germany. This feeling is based not on any reasonable calculation of what Germany can actually pay, but on a well-founded understanding of the unbearable financial situation these countries will find themselves in unless Germany pays.

• Take Italy as an extreme example: If Italy can reasonably be expected to pay $4 billion, surely Germany can and ought to pay an immeasurably higher figure. Or, if it is decided (as it must be) that Austria can pay next to nothing, isn’t it an intolerable conclusion that Italy should be loaded with a crushing tribute, while Austria escapes? Or, to put it slightly differently, how can Italy be expected to submit to paying this great sum and see Czechoslovakia pay little or nothing?
• At the other end of the scale is the United Kingdom: Here the financial position is different, since asking Britain to pay $4 billion is a very different thing from asking Italy to pay it. But the feeling is much the same. If Britain has to be satisfied without full compensation from Germany, how bitter will be the protests against paying it to the United States. People will say that Britain has to be content with a claim against the bankrupt estates of Germany, France, Italy, and Russia, whereas the United States has secured a first claim on Britain.
• The case of France is at least as overwhelming: France can barely get from Germany full payment for the destruction of its countryside. Yet victorious France must pay its friends and Allies more than four times the indemnity which, in the defeat of 1870, it paid to Germany. The hand of Bismarck (the German leader in 1870) was light compared with that of an Ally or an Associate. A settlement of Inter-Ally debt is, therefore, an essential first step before the peoples of the Allied countries can face, with anything other than a maddened and exasperated heart, the inevitable truth about the prospects of an indemnity from the enemy.

It might be an exaggeration to say that it is impossible for the European Allies to pay the capital and interest due from them on these debts. But to make them do so would certainly impose a crushing burden. They may be expected, therefore, to make constant attempts to avoid or escape payment. These attempts will be a constant source of international friction and ill-will for many years to come. A debtor nation does not love its creditor. It is fruitless to expect feelings of goodwill from France, Italy, and Russia towards Great Britain or towards America if their future development is stifled for many years by the annual tribute they must pay. There will be a great incentive for them to seek their friends in other directions. Any future break in peaceful relations will always carry with it the enormous advantage of escaping the payment of external debts. If, on the other hand, these great debts are forgiven, it will give a boost to the solidarity and true friendliness of the nations recently allied.

The existence of the great war debts is a threat to financial stability everywhere. There is no European country in which refusing to pay debts (repudiation) may not soon become an important political issue. In the case of internal debt, however, there are interested parties on both sides, and the question is one of the internal distribution of wealth. With external debts, this is not so. Creditor nations may soon find their interests inconveniently tied up with maintaining a particular type of government or economic organization in the debtor countries. Entangling alliances or leagues are nothing compared to the entanglements of money owed.

The Burden of “Paper Entanglements” The final consideration influencing the reader’s attitude to this proposal must, however, depend on his view as to the future place in the world’s progress of the vast paper entanglements that are our legacy from war finance, both at home and abroad. The war has ended with everyone owing everyone else immense sums of money. Germany owes a large sum to the Allies; the Allies owe a large sum to Great Britain; and Great Britain owes a large sum to the United States. The holders of war loans in every country are owed a large sum by the State; and the State, in turn, is owed a large sum by these and other taxpayers. The whole position is highly artificial, misleading, and frustrating. We shall never be able to move forward again unless we can free our limbs from these paper shackles. A general bonfire of these debts is so greatly needed that unless we can make it an orderly and good-tempered affair, in which no serious injustice is done to anyone, it will, when it finally comes, grow into a huge fire that may destroy much else as well. Regarding internal debt, I am one of those who believe that a capital levy (a one-time tax on wealth) to eliminate debt is an absolute necessity for sound finance in every one of the European countries that fought in the war. But the continuation on a huge scale of debt between governments has its own special dangers.

Before the middle of the nineteenth century, no nation owed payments to a foreign nation on any considerable scale, except for tributes exacted under the force of actual military occupation and, at one time, by absentee princes under the rules of feudalism. It is true that the need for European capitalism to find an outlet in the New World has led, during the past fifty years (though even now on a relatively modest scale), to countries like Argentina owing an annual sum to countries like England. But the system is fragile. It has only survived because its burden on the paying countries has not so far been oppressive, because this burden is represented by real assets and is tied up with the property system generally, and because the sums already lent are not excessively large in relation to those which it is still hoped to borrow. Bankers are used to this system and believe it to be a necessary part of the permanent order of society.

Bankers are therefore inclined to believe, by comparing it to that system, that a similar system between governments – on a much larger and definitely oppressive scale, not represented by any real assets, and less closely tied to the property system – is natural, reasonable, and in line with human nature.

I doubt this view of the world. Even capitalism at home, which has many local supporters, plays a real part in the daily process of production, and upon whose security the present organization of society largely depends, is not very safe. But however this may be, will the discontented peoples of Europe be willing for a generation to come to arrange their lives so that a significant part of their daily produce can be used to meet a foreign payment? The reason for this payment, whether between Europe and America, or between Germany and the rest of Europe, does not strongly come from their sense of justice or duty.

On the one hand, Europe must depend in the long run on its own daily labor and not on the generosity of America. But on the other hand, Europe will not deprive itself so that the fruit of its daily labor goes elsewhere. In short, I do not believe that any of these tribute payments will continue to be made, at best, for more than a very few years. They do not fit with human nature or agree with the spirit of the age.

If there is any force in this way of thinking, then what is practical and what is generous align. The policy that will best promote immediate friendship between nations will not conflict with the permanent interests of the benefactor.

3. An International Loan

I now move to a second financial proposal. Europe’s needs are immediate. The prospect of being relieved of oppressive interest payments to England and America over the next two generations (and of receiving some yearly assistance from Germany for restoration costs) would free the future from excessive anxiety. But it would not solve the problems of the immediate present:

• Europe’s imports exceeding its exports.
• The unfavorable exchange rates.
• The disorder of the currency. It will be very difficult for European production to get started again without some temporary external help. I therefore support an international loan in some form, as has been advocated in many places in France, Germany, England, and also in the United States. No matter how the ultimate responsibility for repayment is distributed, the burden of finding the immediate resources must inevitably fall mainly upon the United States.

Objections to an International Loan: The main objections to all versions of this type of project are, I suppose, the following:

• The United States is unwilling to get further entangled in European affairs (after recent experiences). Anyway, for now, it has no more capital to spare for large-scale export.
• There is no guarantee that Europe will use financial assistance properly. There’s no guarantee it won’t squander the money and be in just as bad a situation two or three years from now as it is today.
  • Mr. Klotz (French Finance Minister) will use the money to put off the day of taxation a little longer.
  • Italy and Yugoslavia will fight each other using the proceeds.
  • Poland will use it to fulfill the military role towards all its neighbors that France has designed for it.
  • The governing classes of Romania will divide up the loot among themselves.
• In short, America would have postponed its own capital developments and raised its own cost of living so that Europe might continue for another year or two the practices, policies, and leaders of the past nine months.
• And as for assistance to Germany: is it reasonable or at all tolerable that the European Allies, having stripped Germany of her last bit of working capital (against the arguments and appeals of American financial representatives at Paris), should then turn to the United States for funds to help Germany recover just enough for the plundering to start again in a year or two?

Responding to Objections: There is no answer to these objections as things are now. If I had influence at the United States Treasury, I would not lend a penny to any of the current governments of Europe. They cannot be trusted with resources they would use to advance policies that both Republican and Democratic parties in the United States probably oppose (despite the President’s failure to assert either the might or the ideals of the American people). But if, as we must pray they will, the souls of the European peoples turn away this winter from the false idols that have survived the war that created them; if they substitute in their hearts thoughts and hopes of the happiness and solidarity of the European family for the hatred and nationalism that now possess them – then natural piety and brotherly love should compel the American people to put aside all the smaller objections of private advantage. They should complete the work they began in saving Europe from the tyranny of organized force, by saving Europe from herself. And even if this change of heart is not fully accomplished, and only some parties in each European country adopt a policy of reconciliation, America can still show the way. It can support the party of peace by having a plan and a condition under which it will give its aid to the work of renewing life.

The impulse, which we are told is now strong in the mind of the United States, to be free of the turmoil, the complication, the violence, the expense, and above all, the incomprehensibility of European problems, is easily understood. No one can feel more intensely than I do how natural it is to reply to the folly and impracticality of European leaders: “Rot, then, in your own malice, and we will go our way—Remote from Europe; from her blasted hopes; Her fields of carnage, and polluted air.” But if America recalls for a moment what Europe has meant to her and still means to her; what Europe, the mother of art and of knowledge, in spite of everything, still is and still will be; will she not reject these counsels of indifference and isolation? Will she not interest herself in what may prove to be decisive issues for the progress and civilization of all humankind?

Assuming then, if only to keep our hopes up, that America will be prepared to contribute to building up the good forces of Europe, and will not, having completed the destruction of an enemy, leave us to our misfortunes – what form should her aid take?

Outline of an International Loan: I do not propose to go into details. But the main outlines of all schemes for an international loan are much the same.

• The countries able to lend assistance – the neutrals, the United Kingdom, and (for the greater part of the sum required) the United States – must provide foreign purchasing credits for all the warring countries of continental Europe, both allied and ex-enemy.
• The total sum required might not be as large as is sometimes supposed. Much might be done, perhaps, with a fund of $1 billion in the first instance.
• This sum, even if a different precedent had been set by canceling Inter-Ally War Debt, should be lent and borrowed with the clear intention of its being repaid in full.
• With this goal in mind, the security for the loan should be the best obtainable. Arrangements for its ultimate repayment should be as complete as possible.
• Specifically, it should rank ahead of all other debts for payment of interest and repayment of capital. This includes:
  • All Reparation claims.
  • All Inter-Ally War Debt.
  • All internal war loans.
  • All other government debts of any kind.
• Those borrowing countries entitled to reparation payments should be required to pledge all such receipts to repayment of the new loan.
• All borrowing countries should be required to place their customs duties (taxes on imports) on a gold basis and pledge these receipts to servicing the loan.
• Spending from the loan should be subject to general, but not detailed, supervision by the lending countries.

A Guarantee Fund for Currency Reform: If, in addition to this loan for buying food and materials, a guarantee fund were established up to an equal amount (another $1 billion, of which probably only a part would need to be found in cash), to which all members of the League of Nations would contribute according to their means, it might be possible to base a general reorganization of European currencies upon it.

In this way, Europe might be equipped with the minimum amount of liquid resources necessary to revive her hopes, renew her economic organization, and enable her great underlying wealth to function for the benefit of her workers. It is useless at the present time to develop such schemes in further detail. A great change is necessary in public opinion before the proposals of this chapter can become practical politics. We must await the progress of events as patiently as we can.

4. The Relations of Central Europe to Russia

I have said very little about Russia in this book. The broad nature of the situation there needs no emphasis, and we know almost nothing authentic about the details. But in a discussion about how Europe’s economic situation can be restored, one or two aspects of the Russian question are vitally important.

Fears of a Russo-German Union: From the military point of view, a future union of forces between Russia and Germany is greatly feared in some quarters. This would be much more likely to happen if reactionary movements (wanting to return to old systems) were successful in both countries. An effective unity of purpose between Lenin (the Bolshevik leader) and the current, essentially middle-class, government of Germany is unthinkable. On the other hand, the same people who fear such a union are even more afraid of the success of Bolshevism. Yet they have to recognize that the only efficient forces for fighting Bolshevism are, inside Russia, the reactionaries, and outside Russia, the established forces of order and authority in Germany. Thus, those who advocate intervention in Russia, whether direct or indirect, are constantly working at cross-purposes with themselves. They do not know what they want; or rather, they want things they cannot help seeing are incompatible. This is one reason why their policy is so inconsistent and so extremely futile.

Allied Policy Towards Germany: The same conflict of purpose is apparent in the attitude of the Council of the Allies in Paris towards the present government of Germany.

• A victory of Spartacism (a communist revolutionary movement) in Germany might well be the prelude to revolution everywhere. It would renew the forces of Bolshevism in Russia and bring about the dreaded union of Germany and Russia. It would certainly end any expectations built on the financial and economic clauses of the Treaty of Peace. Therefore, Paris does not want Spartacism to succeed.
• But, on the other hand, a victory of reaction in Germany would be seen by everyone as a threat to the security of Europe. It would endanger the fruits of victory and the basis of the Peace. Besides, a new military power establishing itself in the East, with its spiritual home in Brandenburg (Prussia), drawing to itself all the military talent and adventurers from Eastern, Central, and South-Eastern Europe – a power that would be geographically out of reach for Allied military forces – might well create, at least in the fears of the timid, a new Napoleonic-style domination, rising like a phoenix from the ashes of international militarism. So, Paris dare not support German reactionaries.

The argument, then, points to supporting those moderate forces of order in Germany, which, somewhat to the world’s surprise, still manage to maintain themselves on the rock of the German character. But the present government of Germany stands for German unity more perhaps than for anything else. Signing the Peace Treaty was, above all, the price some Germans thought worth paying for the unity that was all that was left to them of 1870. Therefore, Paris, still hoping for some disintegration of Germany across the Rhine, cannot resist any opportunity for insult or indignity, any chance to lower the prestige or weaken the influence of a government with whose continued stability all the conservative interests of Europe are nevertheless bound up.

France’s Vision for Poland: The same dilemma affects the future of Poland in the role France has designed for it. Poland is to be strong, Catholic, militarist, and faithful – the partner, or at least the favorite, of victorious France, prosperous and magnificent between the ashes of Russia and the ruin of Germany. Romania, if only it could be persuaded to keep up appearances a little more, is part of the same scatter-brained idea. Yet, unless its great neighbors (Russia and Germany) are prosperous and orderly, Poland is an economic impossibility, with no industry but persecuting Jews. And when Poland finds that the seductive policy of France is pure empty boasting and that there is no money in it whatever, nor glory either, it will fall, as promptly as possible, into the arms of somebody else.

The calculations of “diplomacy,” therefore, lead us nowhere. Crazy dreams and childish intrigue in Russia, Poland, and nearby areas are the favorite indulgence at present of those Englishmen and Frenchmen who seek excitement in its least innocent form. They believe, or at least behave as if, foreign policy was like a cheap melodrama.

A More Solid Approach to Russia: Let us turn, therefore, to something more solid. The German government announced (October 30, 1919) its continued commitment to a policy of non-intervention in the internal affairs of Russia, “not only on principle, but because it believes that this policy is also justified from a practical point of view.” Let us assume that at last we also adopt the same standpoint, if not on principle, at least from a practical point of view. What then are the fundamental economic factors in the future relations of Central Europe with Eastern Europe?

Before the war, Western and Central Europe got a substantial part of their imported grains from Russia. Without Russia, the importing countries would have had to go short. Since 1914, the loss of Russian supplies has been made up, partly by drawing on reserves, partly from the excellent harvests of North America (encouraged by Mr. Hoover’s guaranteed price), but largely by reducing consumption and by hardship. After 1920, the need for Russian supplies will be even greater than it was before the war. The guaranteed price in North America will have been discontinued. The normal increase of population there will have significantly swollen home demand compared with 1914. And the soil of Europe will not yet have recovered its former productivity. If trade is not resumed with Russia, wheat in 1920-21 (unless the seasons are especially good) must be scarce and very expensive. The blockade of Russia, recently proclaimed by the Allies, is therefore a foolish and short-sighted action; we are blockading not so much Russia as ourselves.

Reviving Russian Exports and Germany’s Role: The process of reviving Russian export trade is bound to be a slow one anyway. The current productivity of the Russian peasant is not believed to be enough to produce an exportable surplus on the pre-war scale. The reasons for this are obviously many, but among them are:

• Not enough agricultural tools and accessories.
• Lack of incentive to produce, caused by the shortage of goods in towns that peasants can buy in exchange for their produce.
• Finally, there is the decay of the transport system, which hinders or makes impossible the collection of local surpluses in the big distribution centers.

I see no possible way of repairing this loss of productivity within any reasonable period except through German enterprise and organization. It is impossible geographically and for many other reasons for Englishmen, Frenchmen, or Americans to undertake it. We have neither the incentive nor the means for doing the work on a sufficient scale. Germany, on the other hand, has the experience, the incentive, and to a large extent the materials for:

• Furnishing the Russian peasant with the goods he has been starved of for the past five years.
• Reorganizing the business of transport and collection.
• And so, for bringing into the world’s pool, for the common advantage, the supplies from which we are now so disastrously cut off. It is in our interest to hasten the day when German agents and organizers will be in a position to set in motion the impulses of ordinary economic motives in every Russian village. This is a process quite independent of the governing authority in Russia. But we may surely predict with some certainty that, whether or not the form of communism represented by Soviet government proves permanently suited to the Russian temperament, the revival of trade, of the comforts of life, and of ordinary economic motives are not likely to promote the extreme forms of those doctrines of violence and tyranny which are the children of war and despair.

A Recommended Policy Towards Russia: Let us then, in our Russian policy, not only applaud and imitate the policy of non-intervention that the Government of Germany has announced. But, stopping a blockade that is harmful to our own permanent interests (as well as illegal), let us encourage and assist Germany to take up again her place in Europe as a creator and organizer of wealth for her Eastern and Southern neighbors.

There are many people in whom such proposals will raise strong prejudices. I ask them to think through the result of yielding to these prejudices. If we oppose in detail every means by which Germany or Russia can recover their material well-being, because we feel a national, racial, or political hatred for their populations or their governments, we must be prepared to face the consequences of such feelings. Even if there is no moral solidarity between the closely related races of Europe, there is an economic solidarity that we cannot disregard.

Even now, the world markets are all connected. If we do not allow Germany to trade products with Russia and so feed itself, Germany must inevitably compete with us (the Allies, especially Britain) for the food and goods produced in the New World (like North and South America). The more successful we are in breaking the economic ties between Germany and Russia, the more we will lower our own economic standards and increase the seriousness of our own domestic problems. This is looking at the issue from the most basic level of self-interest. There are other arguments against a policy of spreading and encouraging further the economic ruin of great countries, which even the slowest-witted person cannot ignore.

The Outlook: Gradual Decay, Not Sudden Upheaval

I see few signs of sudden or dramatic changes anywhere. There may be riots and revolutions, but at present, they are not likely to have fundamental importance. Revolution is a weapon against political tyranny and injustice. But what hopeful solutions can revolution offer to people suffering from economic hardship that is general and does not come from unfair distribution of wealth? Indeed, the only safeguard against revolution in Central Europe is the fact that, even to the minds of desperate people, revolution offers no prospect of improvement whatsoever. Therefore, what may lie ahead of us is a long, silent process of semi-starvation, and a gradual, steady lowering of the standards of life and comfort. The bankruptcy and decay of Europe, if we allow it to continue, will affect everyone in the long run, but perhaps not in a way that is striking or immediate.

A Chance to Rethink

This situation has one fortunate side. We may still have time to reconsider our actions and to view the world with new eyes. For the immediate future, events are taking control. The near destiny of Europe is no longer in the hands of any single person. The events of the coming year will not be shaped by the deliberate acts of political leaders. Instead, they will be shaped by hidden currents flowing continually beneath the surface of political history, and no one can predict their outcome. There is only one way we can influence these hidden currents: by setting in motion those forces of education and imagination that change public opinion. The means must be:

• Stating the truth.
• Unveiling illusions.
• Dispelling hatred.
• Enlarging and educating people’s hearts and minds.

The Current State of Mind (Autumn 1919)

In this autumn of 1919, as I write, we are at the lowest point of our fortunes. The reaction from the efforts, fears, and sufferings of the past five years is at its peak. Our ability to feel or care about things beyond the immediate questions of our own material well-being is temporarily dimmed. The greatest events outside our own direct experience and the most dreadful future possibilities cannot move us.

The author then quotes lines of poetry (from Shelley’s “Prometheus Unbound,” though Keynes adapted them slightly) to describe this mood:

In each human heart terror survives The ruin it has gorged: the loftiest fear All that they would disdain to think were true: Hypocrisy and custom make their minds The fanes of many a worship, now outworn. They dare not devise good for man’s estate, And yet they know not that they do not dare. The good want power but to weep barren tears. The powerful goodness want: worse need for them. The wise want love; and those who love want wisdom; And all best things are thus confused to ill. Many are strong and rich, and would be just, But live among their suffering fellow-men As if none felt: they know not what they do.

These lines express a deep weariness and disillusionment. People are too afraid to hope or act for the good of humanity. Good people lack power, powerful people lack goodness, wise people lack love, and loving people lack wisdom. As a result, good intentions are often twisted into bad outcomes. Many who have the means to help live as if unaware of the suffering around them.

We have already been pushed beyond our endurance and need rest. Never in the lifetime of people now living has the universal element in the human soul – our shared humanity and concern for others – burned so dimly.

For these reasons, the true voice of the new generation has not yet spoken, and silent public opinion has not yet formed. To the formation of the general opinion of the future I dedicate this book.

For example, we would certainly call a rainbow a mere appearance that occurs during a sun-shower. We might then call the rain itself “the thing in itself.” This is correct, as long as we understand “thing in itself” here in a purely physical sense. In this physical sense, the rain is something that, in universal experience and from all different viewpoints relative to our senses, is always perceived in a consistent way.

From this transcendental viewpoint, not only are the raindrops mere appearances, but even their round form, and indeed even the space through which they fall, are nothing in themselves. They are only modifications or fundamental structures of our sensible intuition (our way of sensing). The transcendental object – the underlying thing in itself – however, remains unknown to us.

The Certainty of Our Theory

Geometry as Proof

If this were true, we would first see that there are many propositions about both space and time – but especially about space – that are known a priori (without experience), are absolutely certain (“apodictic”), and expand our knowledge (“synthetic”). We will use space as our main example here.

There are only two ways:

1. Through concepts.
2. Through intuitions (direct awareness). Both of these are given either a priori (before experience) or a posteriori (from experience).

So, geometric knowledge must come from a priori sources – either through mere concepts or through a priori intuitions. It’s clear that from mere concepts alone, no synthetic knowledge (knowledge that expands understanding) can be achieved, only analytic knowledge (knowledge that clarifies concepts).

• Take the proposition: “With two straight lines, no space at all can be enclosed, so no figure is possible.” Try to derive this from just the concept of “straight lines” and the number “two.”
• Or take the proposition: “A figure is possible with three straight lines.” Try to derive this from these concepts alone.

But what kind of intuition is this? Is it a pure a priori intuition or an empirical one?

• If it were empirical, then no universally valid, let alone absolutely certain, proposition could ever come from it. Experience can never provide that kind of certainty.

This leads to some crucial points:

• If there wasn’t a built-in capacity in you for intuiting a priori;
• If this subjective condition related to form (how you intuit) were not at the same time the universal a priori condition under which alone the object of this (outer) intuition (like a triangle) is itself possible;
• If the object (the triangle) were something existing in itself, without any relation to you as the subject (the observer); …then how could you say that what necessarily lies in your subjective conditions for constructing a triangle must also necessarily belong to the triangle in itself? You couldn’t add something new (the figure) to your concept (of three lines) that must then necessarily be found in the object, because this object would be given before your knowledge of it and not through your act of knowing.

Therefore, if space (and time as well) were not a mere form of your intuition – a form that contains a priori conditions under which alone things could be outer objects for you, and these objects are nothing in themselves without these subjective conditions – then you could make absolutely no synthetic and a priori statements about outer objects.

It is therefore indubitably certain, and not merely possible or even probable, that space and time, as the necessary conditions of all experience (both outer and inner), are merely subjective conditions of all our intuition. In relation to these subjective conditions, therefore, all objects are mere appearances, and not things given “for themselves” or “as they are in themselves.” Furthermore, much can be said a priori about the form of these appearances, but nothing whatsoever about the things in themselves that may ground them.

The Transcendental Doctrine of Elements First Part The Transcendental Aesthetic 1[A 19/B 33]

The term “aesthetic” here relates to our senses and how we perceive things. “Transcendental” means we’re studying the basic conditions in our minds that make experience possible, conditions that exist before any specific experience. So, the Transcendental Aesthetic is the study of the fundamental principles of how we sense the world, known a priori (independently of experience).

How We Connect with Objects: Intuition and Sensibility

No matter how we learn about objects, our minds connect with them most directly through intuition. Think of intuition as an immediate, direct awareness of something. All our thinking, in one way or another, aims for this direct awareness as its ultimate goal.

However, this intuition only happens if an object is actually given to us. This, in turn, is only possible if the object affects our mind in a certain way. The ability of our mind to receive mental pictures or ideas (representations) when we are affected by objects is called sensibility. Sensibility is like our mind’s capacity to be open and receptive to information from the world.

So, objects are given to us through our sensibility. Sensibility alone provides us with these direct awarenesses, or intuitions. Once we have intuitions, we then think about them using our understanding. It is from our understanding that concepts (general ideas) arise.

But all thinking, whether it’s straightforward or more indirect, must ultimately connect back to intuitions. For us humans, this means all our thoughts must connect back to our sensibility. Why? Because there’s no other way for objects to be given to us.

Sensation and Appearance

When an object affects our ability to form representations, this effect is called sensation. For instance, the warmth you feel from the sun is a sensation. An intuition that is related to an object through sensation is called an empirical intuition. “Empirical” means it’s based on experience. The object of an empirical intuition, before our understanding has fully defined it with concepts, is called an appearance. It’s how the object appears to us.

Matter and Form in Appearances

In any appearance, we can identify two aspects:

1. Matter: This is the part of the appearance that corresponds to sensation. It’s the raw data from our senses – like the colors, sounds, or textures we experience. Matter is given to us a posteriori, meaning through experience.
2. Form: This is what allows the variety of an appearance (its diverse elements) to be perceived as organized or ordered in certain ways. For example, seeing several items arranged in a particular pattern. The structure or “container” in which sensations are ordered cannot itself be another sensation. So, this form must not come from sensation. Instead, the form of all appearances must already be present in our mind a priori – before any specific experience. Therefore, we can think about this form separately from all sensation.

Pure Intuition: Form Without Sensation

I call any mental representation pure (in the transcendental sense) if it contains nothing that comes from sensation. Following this, the pure form of our sensible intuitions – the underlying structure for how we sense things – must exist in our mind a priori. This pure form is where all the diverse content of appearances gets ordered. This pure form of sensibility itself is also called pure intuition.

Let’s make this clearer with an example: Imagine you have a mental picture of a physical object, like a ball.

• First, mentally remove everything your understanding thinks about it: concepts like “substance,” “force,” “divisibility,” and so on.
• Next, mentally remove everything that belongs to sensation: qualities like “impenetrable,” “hard,” “red,” and so on.

Even after removing all these, something from your original empirical intuition of the ball is still left: its extension (the space it occupies) and its shape. These aspects – extension and form – belong to pure intuition. Pure intuition happens a priori, even without a real object currently present to our senses or any active sensation. It exists as a fundamental way our sensibility is structured in our minds.

Transcendental Aesthetic: The Science of Pure Sensibility

I call the science that studies all the a priori principles of our sensibility the Transcendental Aesthetic. Such a science must exist. It forms the first part of the broader “Transcendental Doctrine of Elements.” It is different from the part that deals with the principles of pure thinking, which is named “Transcendental Logic.”

Outer Sense, Inner Sense, Space, and Time

We have something called outer sense. This is a property of our mind through which we represent objects as being outside of ourselves. Importantly, we represent all of them as existing in space. It is in space that their shape, size, and relationship to one another are determined or can be determined.

We also have an inner sense. Through inner sense, our mind is aware of itself or its own internal state. Inner sense doesn’t give us an intuition of the “soul” itself as an object. However, it does provide a specific form under which we can be aware of our inner state. This means everything related to our inner thoughts and feelings is represented in relationships of time.

Time cannot be perceived externally (as something outside us), just as space cannot be perceived as something inside us (like a thought or feeling).

So, what exactly are space and time?

• Are they actual existing things, like physical objects?
• Are they just properties or relations of things that would exist even if we weren’t perceiving them?
• Or, are they relations that only belong to the form of our intuition? This would mean they are part of the subjective makeup of our own minds. Without this mental structure, we couldn’t attribute these properties (like “being in space”) to anything at all.

To understand this, let’s first consider space.

Arguments About Space

1. Space is not learned from experience. Space is not an empirical concept that we get from outer experiences. For me to relate certain sensations to something outside of me (that is, to something in a different place in space from where I am), I must already have a representation of space. For me to see objects as outside one another—not just as different, but as in different places—the idea of space must already be there as a foundation. Therefore, we don’t get the representation of space from observing the relations between outer appearances through experience. Instead, outer experience itself is only possible because we already have this representation of space.

2. Space is a necessary, a priori foundation for perception. Space is a necessary representation that exists a priori (before experience). It is the ground for all our outer intuitions (our direct awareness of external things). You can never imagine that there is no space. However, you can easily think of space as empty, with no objects in it. Therefore, space should be seen as the condition that makes appearances possible, not as some feature that depends on them. It is an a priori representation that necessarily underlies all outer appearances.

3. Space is a pure intuition, not a general concept. Space is not a discursive (or general) concept about how things relate in general. It is a pure intuition. Here’s why: First, you can only represent one single space. When we talk about “many spaces,” we just mean parts of one and the same unique, all-encompassing space. These parts don’t come before the single, whole space as if they were components that could be assembled to make it. Instead, parts are only thought of within the one space. Space is essentially single. The variety within it (and thus the general concept of “spaces”) comes from imposing limitations on this single space. From this, it follows that an a priori intuition (one that is not empirical) is the foundation for all our concepts about space. This is also why all geometrical principles (e.g., in a triangle, any two sides added together are always greater than the third side) are never derived from general concepts like “line” or “triangle.” Instead, they are derived from intuition, and specifically, they are derived a priori with absolute certainty.

Conclusions About Space

From these points about space, we can draw the following conclusions:

a)  **Space is not a property of things in themselves.**
    Space does not represent any property of things as they are in themselves, nor does it represent any relation between them as they are in themselves. It’s not a characteristic that attaches to objects themselves and that would remain even if we were to ignore all the subjective conditions of how we perceive (our intuition). This is because neither absolute properties (like "this thing *is* X") nor relative properties (like "A is next to B") can be intuited *before* the existence of the things they belong to. So, such properties cannot be intuited *a priori*.

b)  **Space is the form of our outer sense.**
    Space is nothing other than the form of all appearances of our outer sense. It is the subjective condition of our sensibility, under which alone outer intuition is possible for us.
    Now, because our capacity to be affected by objects (our receptivity) must necessarily exist *before* any intuitions of these objects, we can understand something crucial: The form of all appearances (space) can be present in our mind *before* any actual perceptions, meaning it's there *a priori*. And as a pure intuition in which all objects must be arranged, it can contain the principles of their relationships *before* we have any experience of them.

The Human Standpoint on Space

Therefore, we can talk about space, extended objects, and so on, only from a human standpoint. If we set aside the subjective condition under which alone we can have outer intuition – namely, our particular way of being affected by objects – then the representation of space means nothing at all. This characteristic (being “in space”) is attributed to things only insofar as they appear to us, meaning they are objects of our sensibility.

The constant form of this receptivity, which we call sensibility, is a necessary condition for all the relationships in which objects can be perceived as outside us. If we mentally subtract these objects, what remains is this pure intuition, which we call space.

We cannot make the special conditions of our sensibility (like space) into conditions for the possibility of things in themselves. We can only make them conditions for the possibility of their appearances to us. So, we can correctly say that space includes all things that may appear to us externally. But we cannot say that space includes all things in themselves, whether they are intuited or not, or by whatever kind of mind they might be intuited. We simply cannot judge whether the intuitions of other thinking beings (if they exist) are bound by the same conditions that limit our intuition and that are universally valid for us.

If we add a limitation to a judgment related to the subject experiencing it, then the judgment becomes unconditionally valid. For example, the statement “All things are next to one another in space” is valid only under the limitation that these things are taken as objects of our sensible intuition. If I refine this and say: “All things, as outer intuitions, are next to one another in space,” then this rule is valid universally and without any further limitation.

So, we assert the empirical reality of space (it’s real with respect to all possible outer experience). However, we also assert its transcendental ideality (it’s nothing as soon as we leave out the condition of the possibility of all experience – our sensibility – and consider space as something that grounds things in themselves).

Besides space, however, there is no other subjective representation related to something external that could be called a priori objective.

The Purpose of Clarifying Space’s Ideality

The aim of this remark is only to prevent anyone from thinking of illustrating the asserted ideality of space with completely inadequate examples. Things like colors, taste, etc., are correctly considered not as qualities of things but as mere alterations of our subject, which can even be different in different people. For in this case, that which is originally itself only appearance (e.g., a rose) counts in an empirical sense as a thing in itself, which yet can appear different to every eye in regard to color. The transcendental concept of appearances in space, on the contrary, is a critical reminder that absolutely nothing that is intuited in space is a thing in itself. Space is not a form that is proper to anything in itself. Rather, objects in themselves are not known to us at all. What we call outer objects are nothing other than mere representations of our sensibility, whose form is space. But their true correlate—that is, the thing in itself—is not and cannot be known through them, nor is it ever asked after in experience.

The Transcendental Aesthetic: Second Section – On Time

Now, let’s consider time.

1. Time is not learned from experience. Time is not an empirical concept that is somehow drawn from experience. For simultaneity (things happening at the same time) or succession (things happening one after another) would not themselves come into perception if the representation of time did not ground them a priori. Only under its presupposition can one represent that several things exist at one and the same time or in different times.

2. Time is a necessary, a priori foundation for all intuitions. Time is a necessary representation that grounds all intuitions. In regard to appearances in general, one cannot remove time, though one can very well take the appearances away from time (imagine time passing with nothing happening). Time is therefore given a priori. In it alone is all actuality of appearances possible. The latter could all disappear, but time itself (as the universal condition of their possibility) cannot be removed.

3. The a priori necessity of time grounds principles about time. This a priori necessity also grounds the possibility of absolutely certain principles of the relations of time, or axioms of time in general. Time has only one dimension: different times are not simultaneous, but successive (just as different spaces are not successive, but simultaneous). These principles could not be drawn from experience, for this would yield neither strict universality nor absolute certainty. We would only be able to say: “This is what common perception teaches,” but not: “This is how matters must stand.” These principles are valid as rules under which alone experiences are possible at all, and instruct us before them, not through them.

4. Time is a pure form of sensible intuition, not a general concept. Time is no discursive or, as one calls it, general concept, but a pure form of sensible intuition. Different times are only parts of one and the same time. That representation, however, which can only be given through a single object (or framework), is an intuition. Further, the proposition that different times cannot be simultaneous cannot be derived from a general concept. The proposition is synthetic (it adds new information) and cannot arise from concepts alone. It is therefore immediately contained in the intuition and representation of time.

5. The infinitude of time means it’s a single, grounding framework. The infinitude of time signifies nothing more than that every determinate magnitude of time (like an hour or a day) is only possible through limitations of a single time grounding it. The original representation, time, must therefore be given as unlimited. But where the parts themselves and every magnitude of an object can be determinately represented only through limitation, there the entire representation cannot be given through concepts (for then the partial representations would come first). Instead, their immediate intuition must be the ground.

Conclusions About Time

From these concepts, we can draw the following conclusions:

a)  **Time is not something that exists by itself or as an objective property of things.**
    Time is not something that would exist on its own, nor does it attach to things as an objective determination that would remain if one abstracted from all subjective conditions of our intuition of them.
    If time were something existing on its own (the first case), it would be something that was actual yet without any actual object filling it.
    As for the second case (time as an objective property of things), time could not precede the objects as a determination or order attaching to the things themselves as their condition and be known and directly perceived *a priori* through propositions that expand our knowledge.
    But the latter (being known *a priori*) *can* very well occur if time is nothing other than the **subjective condition** under which all intuitions can take place *in us*. For then this form of inner intuition (time) can be represented *before* we experience objects, and therefore *a priori*.

b)  **Time is the form of our inner sense.**
    Time is nothing other than the form of our **inner sense**. This means it's the structure of how we are aware of ourselves and our own inner state (our thoughts, feelings, etc.).
    Time cannot be a characteristic of outer appearances; it belongs neither to a shape or a position in space. Instead, time determines the relationship between representations *within our inner state*.
    And precisely because this inner awareness (our inner intuition) doesn't provide us with any shape, we also attempt to make up for this lack through analogies. We often represent the sequence of time as a line progressing infinitely. On this line, the variety of moments forms a series that has only one dimension (length). We then infer all the properties of time from the properties of this line, with the sole difference that the parts of the line exist all at once (simultaneously), but the parts of time always exist one after another (successively).
    From this, it is also apparent that the representation of time is itself an **intuition** (a direct awareness), since all its relations can be expressed in an outer intuition (like the line).

c)  **Time is the *a priori* formal condition for all appearances in general.**
    Space, as the pure form of all *outer* intuitions, is limited as an *a priori* condition merely to those outer intuitions.
    However, *all* our representations – whether they have outer things as their object or not – belong to our inner state because they are, after all, determinations of our mind. This inner state, in turn, falls under the formal condition of inner intuition, which is **time**.
    Therefore, time is an *a priori* condition for *all appearance in general*. It is the immediate condition for inner appearances (of our souls or minds). And because outer appearances eventually become representations in our inner state, time is also the indirect (mediate) condition for outer appearances.
    So, if I can say *a priori* that "all outer appearances are in space and are determined *a priori* according to the relations of space," then, based on the principle of inner sense, I can say more broadly: "all appearances in general (i.e., all objects of the senses) are in time, and necessarily exist in relations of time."

Time is Real for Experience, but Ideal Apart from Us

If we abstract from our way of internally intuiting ourselves – and by means of this intuition also dealing with all outer intuitions in our capacity for representation – and thus take objects as they may be in themselves, then time is nothing. It only has objective validity in regard to appearances, because these are already things that we take as objects of our senses. But it is no longer objective if one abstracts from the sensibility of our intuition (that is, from that kind of representation that is peculiar to us) and speaks of “things in general.” Time is therefore merely a subjective condition of our (human) intuition (which is always sensible; that is, insofar as we are affected by objects). In itself, outside the subject (us), time is nothing. Nonetheless, it is necessarily objective in regard to all appearances, and thus also in regard to all things that can come before us in experience.

We cannot say that “all things are in time.” This is because when we use the concept of “things in general,” we are removing any specific way we might sense or intuit them. But it’s precisely our way of intuiting that makes time relevant to how we represent objects. Now, if we add this condition to our concept and say, “all things as appearances (as objects of our sensible intuition) are in time,” then this principle has solid objective correctness and a priori universality (it’s true before experience and applies universally to all such objects).

Our statements, therefore, teach the empirical reality of time. This means time has objective validity concerning all objects that may ever be given to our senses. And since our intuition is always sensible (related to our senses), no object can ever be given to us in experience that would not fall under the condition of time. But, on the other hand, we reject any claim that time has absolute reality. We deny that it would attach to things absolutely, as a condition or property, even without considering the form of our sensible intuition. Such properties, which would belong to things as they are in themselves, can never be given to us through the senses.

This, therefore, is what we mean by the transcendental ideality of time. According to this idea, if one ignores the subjective conditions of sensible intuition, time is nothing at all. It cannot be counted as either existing on its own (subsisting) or as a property within objects themselves (inhering), separate from their relation to our intuition.

Further Explanation (Elucidation) on Time

The objection goes like this: “Changes are real. (This is proven by the change of our own mental representations, even if one were to deny all outer appearances and their changes.) Now, changes are possible only in time. Therefore, time is something real.”

There is no difficulty in answering this. I admit the entire argument. Time is certainly something real; namely, it is the real form of inner intuition. It therefore has subjective reality with regard to inner experience. That is, I really do have the representation of time and of my own states (my determinations) within it. Therefore, time should be regarded not as an object itself, but as the way of representing myself as an object.

But if I, or any other being, could be aware of myself without this condition of sensibility (time), then these very same states, which we now represent to ourselves as changes, would give us a kind of knowledge in which the representation of time, and therefore also of change, would not occur at all. So, its empirical reality remains as a condition of all our experiences. Only absolute reality cannot be granted to it, based on what we’ve discussed. Time is nothing except the form of our inner intuition. If one removes the special condition of our sensibility from it, then the concept of time also disappears. It does not stick to the objects themselves, but only to the subject that intuits them.

Why This Objection About Time is Common

The reason this objection about time’s reality is made so unanimously, even by those who don’t have convincing arguments against the ideality of space, is this: They didn’t expect to be able to prove the absolute reality of space with complete certainty because they were faced with idealism. Idealism suggests that the reality of outer objects cannot be strictly proven. On the contrary, the reality of the object of our inner sense (of myself and my state) seems immediately clear through consciousness. Outer objects could be mere illusions, but our inner state, in their opinion, is undeniably something real.

However, they didn’t consider that both inner and outer states, while their reality as representations isn’t disputed, still belong only to appearance. Appearance always has two sides:

1. One side where the object is considered in itself (without regard to the way it is intuited; the nature of this object in itself must therefore always remain problematic and unknown).
2. The other side where the form of the intuition of this object is considered. This form must not be sought in the object in itself, but in the subject to whom it appears. Nevertheless, this form really and necessarily pertains to the representation of this object.

Space and Time as Sources of Knowledge

Accordingly, space and time are two sources of knowledge from which different kinds of synthetic knowledge (knowledge that expands our understanding) can be drawn a priori. Pure mathematics provides a splendid example of this, especially concerning knowledge of space and its relations.

Taken together, space and time are the pure forms of all sensible intuition. They thereby make synthetic a priori propositions (statements that are true before experience and expand our knowledge) possible. But these a priori sources of knowledge also determine their own boundaries by the very fact that they are merely conditions of sensibility. Their boundary is that they apply to objects only as far as objects are considered as appearances. They do not present things as they are in themselves. Appearances alone are the field of their validity; beyond this field, no further objective use of them can take place.

This reality of space and time (as forms of our intuition) leaves the certainty of experiential knowledge untouched. We are just as certain of our experiences whether these forms necessarily stick to the things in themselves or only to our intuition of these things.

However, those who assert the absolute reality of space and time (whether they assume space and time exist on their own or are just properties inherent in things) must come into conflict with the principles of experience.

• If they choose the first option (that space and time exist on their own – generally the position of mathematical investigators of nature), then they must assume two eternal and infinite self-subsisting non-entities (space and time). These non-entities supposedly exist (yet without there being anything real in them) only to contain everything real within themselves.
• If they adopt the second position (as some metaphysicians of nature do), and hold that space and time are relations of appearances (next to or successive to one another) that are abstracted from experience (though confusedly represented in this abstraction), then they must dispute the validity, or at least the absolute certainty, of a priori mathematical doctrines concerning real things (e.g., things in space). They must do this because this certainty does not come from experience (a posteriori). On their view, the a priori concepts of space and time are only creations of the imagination. The origin of these concepts would really have to be sought in experience, from whose abstracted relations the imagination has made something that, while containing what is general in them, cannot exist without the restrictions that nature has attached to them.

The first group (mathematical investigators) succeeds in opening the field of appearances for mathematical statements. However, they themselves become very confused by these very conditions (space and time as self-subsisting non-entities) if the understanding tries to go beyond this field of appearances. The second group (metaphysicians of nature) succeeds, with respect to going beyond appearances, in that their representations of space and time do not stand in their way if they want to judge objects not as appearances but merely in relation to the understanding. However, they can neither offer any ground for the possibility of a priori mathematical knowledge (since they lack a true and objectively valid a priori intuition for space and time), nor can they bring the propositions of experience into necessary agreement with those mathematical assertions.

On our theory of the true nature of these two original forms of sensibility (space and time), both these difficulties are resolved.

Why Only Space and Time in Transcendental Aesthetic?

Finally, it is clear that the transcendental aesthetic cannot contain more than these two elements, namely space and time. This is because all other concepts belonging to sensibility – even the concept of motion, which unites both elements – presuppose something empirical. Motion, for instance, presupposes the perception of something movable. In space considered in itself, there is nothing movable. Therefore, the movable must be something that is found in space only through experience; it is an empirical datum. In the same way, the transcendental aesthetic cannot count the concept of alteration among its a priori data. Time itself does not alter; only something that is within time alters. For this, the perception of some existence and the succession of its states (its determinations) is required – in other words, experience.

General Remarks on the Transcendental Aesthetic

We have wanted to say that all our intuition is nothing but the representation of appearance.

• The things that we intuit are not, in themselves, what we intuit them to be.
• Nor are their relations constituted in themselves as they appear to us.
• If we remove our own subject (our mind), or even just the subjective constitution of our senses in general, then all the constitution, all relations of objects in space and time – indeed space and time themselves – would disappear.
• As appearances, they cannot exist in themselves, but only in us.

What may be the case with objects in themselves, abstracted from all this receptivity of our sensibility, remains entirely unknown to us. We are acquainted with nothing except our way of perceiving them. This way is peculiar to us, and therefore does not necessarily pertain to every being, though it certainly pertains to every human being. We are concerned solely with this. Space and time are its pure forms; sensation in general is its matter.

• We can know the pure forms (space and time) a priori, i.e., before any actual perception. They are therefore called pure intuition.
• The matter (sensation), however, is what makes our knowledge a posteriori cognition, i.e., empirical intuition. The pure forms adhere to our sensibility absolutely necessarily, whatever sort of sensations we may have. The sensations themselves can be very different.

Even if we could bring this intuition of ours to the highest degree of distinctness, we would not thereby come any closer to the constitution of objects in themselves. We would, in any case, still only completely know our own way of intuiting, i.e., our sensibility. And this knowledge would always be only under the conditions originally depending on the subject: space and time. What the objects may be in themselves would still never be known through the most enlightened cognition of their appearance, which is all that is ever given to us.

Therefore, the idea that our entire sensibility is nothing but a confused representation of things, which solely contains what pertains to them in themselves but only under a heap of marks and partial representations that we can never consciously separate, is a falsification of the concept of sensibility and of appearance. It renders the entire theory of them useless and empty. The difference between an indistinct and a distinct representation is merely logical; it does not concern the content or origin. Without doubt, the concept of “right” (as in justice) that is used by common sense contains the very same things that the most subtle speculation can develop out of it. It’s just that in common and practical use, one is not conscious of these many underlying representations within these thoughts. Thus, one cannot say that the common concept of right is “sensible” and contains a mere “appearance,” because right cannot appear at all. Rather, its concept lies in the understanding and represents a constitution (the moral constitution) of actions that pertains to them in themselves. The representation of a physical body in intuition, on the contrary, contains nothing at all that could pertain to an object in itself. It merely contains the appearance of something and the way in which we are affected by it. This receptivity of our cognitive capacity is called sensibility, and it remains worlds apart from the cognition of the object in itself, even if one might see through to the very bottom of the appearance.

The Leibnizian-Wolffian philosophy, therefore, directed all investigations of the nature and origin of our cognitions to an entirely incorrect point of view. It did so by considering the distinction between sensibility and the intellectual (or understanding) as merely logical (a matter of clearness or confusion). However, the distinction is obviously transcendental. It does not concern merely the form of distinctness or indistinctness, but its origin and content. So, through sensibility, we do not cognize the constitution of things in themselves merely indistinctly; rather, we do not cognize them at all. As soon as we take away our subjective constitution (our specific way of sensing), the represented object, along with the properties that sensible intuition attributes to it, is nowhere to be found, nor can it be encountered. This is because it is precisely this subjective constitution that determines its form as an appearance.

We ordinarily distinguish quite well between that which is essentially attached to the intuition of appearances and is valid for every human sense in general, and that which pertains to them only contingently (by chance). The contingent kind is not valid for sensibility in general but only for a particular situation or organization of this or that sense. And so, one calls the first kind of cognition one that represents the object in itself, but the second kind only its appearance. This distinction, however, is only empirical.

If one stands by this common distinction (as usually happens) and does not regard that empirical intuition (our everyday perception) as in turn mere appearance (as one ought to), so that there is nothing to be encountered in it that pertains to anything in itself, then our transcendental distinction is lost. We then believe ourselves to be knowing things in themselves, although we have nothing to do with anything except appearances anywhere (in the world of sense), even in the deepest research into its objects. Thus, we would certainly call a rainbow a mere appearance in a sun-shower. But we would call this rain the thing in itself. This is correct, as long as we understand “thing in itself” here in a merely physical sense—as that which in universal experience and all different positions relative to the senses is always determined thus and not otherwise in intuition. But if we consider this empirical object (the rain) in general and, without turning to its agreement with every human sense, ask whether it represents an object in itself (not the raindrops, since these, as appearances, are already empirical objects), then the question of the relation of the representation to the object is transcendental. And not only are these drops mere appearances, but even their round form, indeed even the space through which they fall, are nothing in themselves, but only mere modifications or foundations of our sensible intuition. The transcendental object, however, remains unknown to us.

The Certainty of Our Theory of Sensibility

The second important concern of our transcendental aesthetic is that it not merely earn some favor as a plausible hypothesis. It must be as certain and indubitable as can ever be demanded of a theory that is to serve as an “organon” (a fundamental tool for knowledge). In order to make this certainty fully convincing, we will choose a case in which its validity can become obvious.

Thus, if it were supposed that space and time are in themselves objective, and conditions of the possibility of things in themselves, then it would be shown, first, that there are a large number of a priori (known before experience), absolutely certain (“apodictic”), and knowledge-expanding (“synthetic”) propositions about both, but especially about space. We will therefore investigate space here as our primary example. Since the propositions of geometry are known synthetically, a priori, and with absolute certainty, I ask: Where do you take such propositions from? And on what does our understanding rely in attaining such absolutely necessary and universally valid truths?

There is no other way than through concepts or through intuitions (direct awarenesses). Both of these are given, as such, either a priori or a posteriori (from experience). The latter—namely empirical concepts, together with that on which they are grounded, empirical intuition—cannot yield any synthetic proposition except one that is also merely empirical (i.e., a proposition of experience). Thus, it can never contain necessity and absolute universality of the sort that is nevertheless characteristic of all propositions of geometry.

It is clear that from mere concepts alone, you can only get analytic knowledge, not synthetic knowledge.

• Analytic knowledge only clarifies what is already contained in a concept. For example, saying “a triangle has three sides” just analyzes the concept of a triangle.
• Synthetic knowledge, on the other hand, adds new information that wasn’t in the original concept. Geometric truths are like this; they expand our understanding.

Consider these geometric propositions:

• “With two straight lines, no space at all can be enclosed, so no figure is possible.” Try to derive this conclusion just from the concept of “straight lines” and the concept of “two.”
• Or, take the proposition: “A figure is possible with three straight lines.” Again, try to derive this just from these concepts.

All your effort will be useless. You will find yourself forced to turn to intuition (a direct, immediate awareness), just as geometry always does. So, you give yourself an object in intuition, like imagining or drawing a triangle.

But what kind of intuition is this?

• Is it a pure a priori intuition (one that comes from within your mind, before specific experiences)?
• Or is it an empirical one (based on a particular experience or observation)?

If it were an empirical intuition, then no universally valid, let alone absolutely certain (“apodictic”), proposition could ever come from it. Experience can never provide that kind of absolute necessity and universality.

Therefore, you must present your object (like the triangle) to yourself a priori in intuition, and base your synthetic proposition on this a priori intuition.

This leads to some crucial conclusions:

• If you did not have within you a faculty for intuiting a priori (a built-in way to be directly aware of things like space before any experience);
• If this subjective condition related to the form of your intuition (how you structure what you sense) were not at the same time the universal a priori condition under which alone the object of this (outer) intuition (like a triangle) is itself possible;
• If the object (the triangle, for instance) were something existing entirely in itself, without any relation to you as the perceiving subject; …then how could you say that what necessarily lies in your subjective conditions for constructing a triangle must also necessarily belong to the triangle in itself? You could not add something new (the figure of the triangle) to your concept (of three lines) that must then necessarily be found in the actual object, because this object would be given to you before your act of knowing it, and not through that act.

Therefore, if space (and time as well) were not a mere form of your intuition—a form containing a priori conditions under which alone things can be outer objects for you (and these objects are nothing in themselves without these subjective conditions)—then you could make absolutely no synthetic and a priori statements about outer objects.

It is therefore indubitably certain, and not merely possible or even probable, that space and time, as the necessary conditions of all experience (both outer experience of the world and inner experience of ourselves), are merely subjective conditions of all our intuition. In relation to these subjective conditions, therefore, all objects are mere appearances, and not things given “for themselves” or “as they truly are in themselves.” Furthermore, much can be said a priori that concerns the form of these appearances, but nothing whatsoever can be said about the things in themselves that may ground these appearances.

The Transcendental Doctrine of Elements Second Part The Transcendental Logic[A 50/B 74]

I. On Logic in General

Our knowledge comes from two fundamental sources in our minds:

1. The first is our ability to receive representations (the mind’s openness to impressions). This is how an object is given to us.
2. The second is our faculty for knowing an object through these representations (the mind’s active ability to form concepts). This is how an object is thought in relation to that representation (as a mental state).

Therefore, intuition (direct awareness) and concepts (general ideas) are the basic building blocks of all our knowledge. Neither concepts without some corresponding intuition, nor intuition without concepts, can produce knowledge.

Both intuitions and concepts can be either pure or empirical:

• They are empirical if sensation is involved (which assumes the actual presence of the object). For example, seeing a specific red apple involves sensation.
• They are pure if no sensation is mixed into the representation. Sensation can be called the matter (the raw material) of sensible knowledge.
  • Thus, pure intuition contains only the form under which something is directly perceived (like space and time).
  • And a pure concept contains only the form of thinking about an object in general.

Only pure intuitions or pure concepts can exist a priori (before or independent of any specific experience). Empirical ones are only possible a posteriori (after or dependent on experience).

Let’s re-emphasize these terms:

• If we call our mind’s capacity to receive representations (when it’s affected in some way) sensibility, then…
• The faculty for producing representations itself, or the spontaneity of knowledge (our mind’s active power), is the understanding.

It is part of our nature that our intuition can only ever be sensible. This means it only involves the way we are affected by objects. On the other hand, the faculty for thinking about the objects given by sensible intuition is the understanding.

Neither of these abilities is better than the other.

• Without sensibility, no object would be given to us.
• Without understanding, no object would be thought.

Thoughts without content are empty; intuitions without concepts are blind. It is therefore just as necessary to make our mind’s concepts sensible (that is, to add an object to them in intuition) as it is to make its intuitions understandable (that is, to bring them under concepts).

Furthermore, these two faculties or capacities cannot switch their functions:

• The understanding is not capable of directly perceiving or intuiting anything.
• The senses are not capable of thinking anything.

Knowledge can only arise from their unification. Because of this, we must not mix up their roles. Instead, we have good reason to carefully separate them from each other and distinguish them. Hence, we distinguish:

• The science of the rules of sensibility in general, which is Aesthetic (as discussed in the First Part).
• The science of the rules of understanding in general, which is Logic.

Divisions Within Logic

Logic, in turn, can be approached with two different aims:

1. Logic of the General Use of Understanding: This contains the absolutely necessary rules of thinking, without which no use of the understanding can happen. It concerns these rules without regard to the different kinds of objects it might be directed to. This can be called elementary logic.
2. Logic of the Particular Use of Understanding: This contains the rules for correctly thinking about a specific kind of object. This is sometimes called the organon (or instrument) of a particular science. Schools often teach this as an introduction to sciences, though in the development of human reason, these specific logics are usually figured out much later, after the science itself is already well-established and just needs final touches. To create rules for how a science of certain objects should be formed, one must already know those objects quite well.

General Logic: Pure vs. Applied

Now, general logic can be either pure logic or applied logic:

• Pure General Logic: In this, we ignore all empirical conditions under which our understanding operates. For example, we ignore the influence of the senses, the play of imagination, the laws of memory, the power of habit, personal inclinations, and so on. We also ignore the sources of prejudice and, in general, all causes from which certain knowledge might arise or be supposed to arise, because these things only concern the understanding under specific circumstances of its application, and experience is needed to know these circumstances. A general but pure logic, therefore, deals with strictly a priori principles. It is a canon of the understanding and reason – meaning it provides the standard or rule, but only for the formal aspect of their use, whatever the content (empirical or transcendental) may be.

• Applied General Logic: This is general logic directed towards the rules of using the understanding under the subjective empirical conditions that psychology teaches us. It therefore has empirical principles, even though it’s “general” because it concerns the use of the understanding without focusing on specific types of objects. Because of this, it is neither a canon of the understanding in general nor an organon (instrument) for particular sciences. It is merely a cathartic (a cleanser or purifier) of the common understanding.

Pure General Logic as a Science

In general logic, the part that is to form the pure teaching of reason must be entirely separated from the part that forms applied (though still general) logic. The former (pure general logic) alone is properly a science, although it is brief and dry, as a scholastically correct presentation of a doctrine of the elements of the understanding requires. In this, logicians must always keep two rules in view:

1. As general logic, it abstracts from all content of the understanding’s knowledge and from the differences between its objects. It deals with nothing but the mere form of thinking.
2. As pure logic, it has no empirical principles. Thus, it draws nothing from psychology (as some have occasionally been persuaded to think). Psychology, therefore, has no influence at all on the canon of the understanding. Pure logic is a proven doctrine, and everything in it must be completely a priori.

What I call applied logic (which is different from the common meaning of the word, where it might mean exercises for which pure logic provides the rules) is a description of the understanding and the rules for its necessary use in specific situations (in concreto). This means it considers the contingent (changeable) conditions of the person using their understanding, conditions which can hinder or help this use, and which can all only be given empirically. It deals with things like:

• Attention, its obstacles, and its results.
• The cause of errors.
• The state of doubt, of holding back judgment, of conviction, etc.

General and pure logic is related to this applied logic in the same way that pure morality (which contains only the necessary moral laws of a free will in general) is related to the actual doctrine of virtue. The doctrine of virtue assesses these moral laws under the hindrances of feelings, inclinations, and passions to which human beings are more or less subject. Such a doctrine of virtue can never yield a true and proven science, because it requires empirical and psychological principles, just as applied logic does.

II. On Transcendental Logic

General logic, as we have shown, abstracts from all content of knowledge. That is, it ignores any relation of knowledge to its object and considers only the logical form in the relation of different pieces of knowledge to one another – the form of thinking in general.

But, as the Transcendental Aesthetic proved, there are pure intuitions as well as empirical intuitions. So, it’s possible that a distinction between pure and empirical thinking of objects could also be found. If this is the case, there would be a kind of logic that does not abstract from all content of knowledge. A logic that contained merely the rules for the pure thinking of an object would exclude all knowledge that had empirical content. It would therefore concern the origin of our knowledge of objects, specifically when that origin cannot be attributed to the objects themselves. General logic, by contrast, has nothing to do with this origin of knowledge. It considers representations (whether they are originally given a priori in ourselves or only empirically) merely with respect to the laws according to which the understanding brings them into relation with one another when it thinks. Therefore, general logic deals only with the form of the understanding, which can be applied to representations wherever they may have originated.

An Important Remark on “Transcendental”

Not every a priori knowledge should be called transcendental. Only that knowledge is transcendental by means of which we know that certain representations (intuitions or concepts) are applied entirely a priori, or how they are possible a priori. This refers to the possibility of such knowledge or its a priori use.

Therefore:

• Neither space itself, nor any a priori geometrical determination of it, is a transcendental representation.
• However, the knowledge that these representations (like space) are not of empirical origin at all, AND the possibility that they can nevertheless be related a priori to objects of experience – this knowledge can be called transcendental.
• Likewise, the use of space for all objects in general would also be transcendental. But if its use is restricted solely to objects of the senses, then it is called empirical.

The difference between the transcendental and the empirical, therefore, belongs only to the critique of knowledge itself (how we examine and understand knowledge) and does not concern the relation of our knowledge to its object.

The Idea of Transcendental Logic

Such a science, which would determine the origin, the scope, and the objective validity of such knowledge, would have to be called Transcendental Logic. It has to do merely with the laws of the understanding and reason, but only insofar as they are related to objects a priori. This is different from general logic, which deals with empirical as well as pure cognitions of reason without making this distinction about their a priori relation to objects.

III. On the Division of General Logic into Analytic and Dialectic

There’s an old and famous question with which logicians were supposedly driven into a corner. It forced them either to argue in a miserable circle or else confess their ignorance and thus the uselessness of their entire art. The question is this: What is truth?

It is already a great and necessary proof of cleverness or insight to know what one should reasonably ask. For if the question is absurd in itself and demands unnecessary answers, then, besides embarrassing the person who proposes it, it also has the disadvantage of misleading the unwary listener into absurd answers. This presents the ridiculous sight (as the ancients said) of one person milking a male goat while another holds a sieve underneath.

If truth consists in the agreement of a piece of knowledge with its object, then this object must thereby be distinguished from others. For a piece of knowledge is false if it does not agree with the specific object to which it is related, even if it contains something that could well be valid for other objects. Now, a general criterion of truth would be one that was valid for all knowledge, without any distinction between their objects. But it is clear that with such a criterion, one abstracts from all content of knowledge (its relation to its object). Yet truth precisely concerns this content. Therefore, it would be completely impossible and absurd to ask for a mark of the truth of this content of knowledge. Thus, it is clear that a sufficient and yet at the same time general sign of truth cannot possibly be provided. Since we have called the content of knowledge its matter, one must say that no general sign of the truth of the matter of knowledge can be demanded, because that is self-contradictory.

However, concerning the mere form of knowledge (setting aside all content), it is equally clear that a logic, so far as it explains the general and necessary rules of understanding, must present criteria of truth in these very rules. For whatever contradicts these rules is false, since the understanding thereby contradicts its general rules of thinking and thus contradicts itself. But these criteria concern only the form of truth (i.e., of thinking in general). To that extent, they are entirely correct but not sufficient. For although a piece of knowledge may be in complete accord with logical form (i.e., not contradict itself), it can still always contradict the object. The merely logical criterion of truth – namely, the agreement of a piece of knowledge with the general and formal laws of understanding and reason – is therefore certainly the conditio sine qua non (the indispensable condition) and thus the negative condition of all truth. Logic, however, cannot go further than this. An error that concerns not form but content cannot be discovered by any test of logic.

General Logic as Analytic and Dialectic

General logic analyzes the entire formal business of the understanding and reason into its elements. It presents these elements as principles for all logical assessment of our knowledge. This part of logic can therefore be called an Analytic. Precisely because of this, it is at least the negative touchstone of truth: one must first of all examine and evaluate the form of all knowledge by means of these rules before investigating its content to find out whether it contains positive truth with regard to the object.

But since the mere form of knowledge, however well it may agree with logical laws, is far from enough to establish the material (objective) truth of the knowledge, nobody can dare to judge objects or assert anything about them merely with logic. One must first draw on well-founded information about them from outside of logic. Only then can one investigate its use and connection in a coherent whole according to logical laws, or, better, solely examine them according to such laws.

Nevertheless, there is something so seductive in possessing an apparent art for giving all our knowledge the form of understanding – even though one may yet be very empty and poor with regard to its content. Because of this, this general logic, which is merely a canon for judging, has been used as if it were an organon (an instrument) for the actual production of at least the semblance of objective assertions. And thus, in fact, it has thereby been misused. Now, general logic, when it is mistakenly used as an organon, is called Dialectic.

However different the meaning of this term “dialectic” (for a science or art) may have been among the ancients, one can still infer from their actual use of it that for them it was nothing other than the logic of illusion. It was a sophistical art for giving ignorance, indeed even intentional tricks, the appearance of truth. It did this by imitating the method of thoroughness that logic generally prescribes, and using logic’s topics for the embellishment of every empty pretension.

IV. On the Division of Transcendental Logic into the Transcendental Analytic and Dialectic

In a transcendental logic, we isolate the understanding (just as we isolated sensibility in the Transcendental Aesthetic). We lift out from our knowledge merely that part of our thought that has its origin solely in the understanding. The use of this pure knowledge, however, depends on this as its condition: that objects are given to us in intuition, to which this pure knowledge can be applied. For without intuition, all our knowledge would lack objects and therefore remain completely empty.

The part of transcendental logic, therefore, that explains the elements of the pure knowledge of the understanding, and the principles without which no object can be thought at all, is the Transcendental Analytic. At the same time, this is a logic of truth.

This Transcendental Analytic is a logic of truth because no knowledge can contradict it without, at the same time, losing all its content. If knowledge loses its content, it loses all relation to any object, and therefore, it loses all truth.

However, it is very tempting and seductive to use these pure cognitions (knowledge bits) of the understanding and its principles all by themselves. People are tempted to use them even beyond the limits of experience. But experience alone is what gives us the “matter” – the actual objects – to which those pure concepts of the understanding can be applied.

When the understanding tries to go beyond experience in this way, it falls into the danger of making a “material use” of what are merely “formal principles” of pure understanding. This means it tries to make claims about the actual content or substance of things using only the rules about the structure of thought. This leads to empty, misleading arguments (sophistries) and judging, without proper grounds, about objects that are not given to us – objects which perhaps could not be given to us in any way.

The Transcendental Analytic should properly be only a canon: a set of rules for assessing how we use our understanding empirically (in relation to experience). It is misused if one lets it count as an organon: an instrument for generating knowledge in a general and unrestricted way, daring to synthetically judge, assert, and decide about objects in general using only the pure understanding. The use of the pure understanding in this overreaching way would therefore be dialectical (leading to illusions or deceptive reasoning).

The second part of transcendental logic must therefore be a critique of this dialectical illusion. This part is called Transcendental Dialectic.

• It is not an art of dogmatically (authoritatively and without proof) creating such illusions – an art which, unfortunately, is very common in the many works of “metaphysical jugglery” (clever but deceptive philosophical arguments).
• Rather, Transcendental Dialectic is a critique of the understanding and reason concerning their “hyperphysical” use (their attempt to operate beyond the physical, experiential world).
• Its purpose is to uncover the false illusion of their groundless pretensions (their unjustified claims to knowledge).
• It aims to reduce their claims to invention and expansion of knowledge – supposedly achieved through transcendental principles – to what they really are: a matter for the mere assessment and evaluation of the pure understanding.
• By doing this, it guards the pure understanding against sophistical tricks (clever but false arguments).

Transcendental Logic First Division[B89]

Transcendental Logic: First Division The Transcendental Analytic

This part, the Transcendental Analytic, is like a detailed breakdown of all our knowledge that we have before experience (a priori knowledge). It breaks this knowledge down into the basic elements that come purely from our understanding.

The Transcendental Analytic focuses on several key points about these basic elements, which are concepts:

1. Purity: The concepts must be pure concepts, not empirical ones (concepts learned from experience).
2. Origin: They must belong to thinking and understanding, not to intuition (direct awareness) or sensibility (our capacity to sense).
3. Simplicity: They must be elementary concepts – the most basic building blocks – and clearly different from concepts that are derived from or made up of these basic ones.
4. Completeness: The list or system of these concepts must be complete. It must cover the entire field of the pure understanding without leaving anything out.

Now, achieving such completeness in a science isn’t something we can reliably do just by making a rough guess or by collecting ideas haphazardly. True completeness is possible only if we have an idea of the whole of the understanding’s a priori knowledge. This overall idea helps us determine how to divide and organize the concepts, forming a connected system.

The pure understanding separates itself completely not only from everything empirical but even from all sensibility. Therefore, it is a unity that stands on its own. It is sufficient by itself and does not need any additions from outside. Because of this, the total sum of the pure understanding’s knowledge will form a system. This system is understood and structured under one guiding idea. The completeness and clear organization of this system can then serve as a standard or test to check the correctness and genuineness of all the individual pieces of knowledge that fit into it.

This whole part of transcendental logic, the Transcendental Analytic, consists of two books:

• The first book contains the concepts of pure understanding.
• The second book contains its principles (the fundamental rules or truths based on these concepts).

Transcendental Logic Second Part Transcendental Dialectic[A293/B249]

Transcendental Logic Second Part: Transcendental Dialectic

Introduction

I. Transcendental Illusion

Earlier, we described dialectic in general as a “logic of illusion.” This doesn’t mean it’s a theory about probability. Probability deals with truth that is known through insufficient grounds, so while the knowledge might be flawed, it’s not necessarily deceptive. Therefore, probability doesn’t need to be separated from the analytical (truth-seeking) part of logic. Even less should we confuse appearance with illusion.

Truth and illusion are not found in the object itself as we directly perceive it (intuit it). Instead, they are found in the judgment we make about the object when we think about it. So, it’s correctly said that our senses do not make mistakes. This isn’t because they always judge correctly, but because they do not judge at all. Therefore, truth, as well as error – and also illusion, which leads to error – are found only in judgments. That is, they are found only in the relationship between the object and our understanding.

In knowledge that completely agrees with the laws of the understanding, there is no error. In a representation from our senses (like a raw sight or sound), there is no error because it contains no judgment at all. No force of nature can, on its own, depart from its own laws. Therefore:

• The understanding by itself (without the influence of another cause) cannot make a mistake. This is because when it acts merely according to its own laws, its effect (the judgment) must necessarily agree with these laws. The formal aspect of all truth consists in this agreement with the laws of the understanding.
• The senses by themselves cannot make a mistake, as they make no judgments, neither true nor false.

Since we have no other sources of knowledge besides these two (sensibility and understanding), it follows that error is caused only by the unnoticed influence of sensibility on the understanding. This influence causes the subjective reasons for our judgment to mix with the objective ones, making our judgments deviate from their proper course. Imagine a moving body: by itself, it would always continue in a straight line in the same direction. But it starts to move in a curved line if, at the same time, another force influences it in a different direction. To distinguish the proper action of the understanding from the force that interferes with it, it will be necessary to view an incorrect judgment as a kind of diagonal line resulting from two forces. These two forces pull the judgment in two different directions, forming an angle, so to speak. We then need to break down this combined effect into the simple effects of the understanding and of sensibility. In pure a priori judgments (judgments made before experience), this must happen through transcendental reflection. As we’ve already shown, transcendental reflection assigns every representation to its proper place in our cognitive faculty, and therefore also distinguishes the influence of that faculty on the representation.

Our main concern here is not with empirical illusion (like optical illusions). Empirical illusion occurs in the everyday use of otherwise correct rules of the understanding, where our judgment is misled by the influence of imagination. Instead, we are dealing only with transcendental illusion. This kind of illusion influences principles whose use is never meant for experience. If their use were meant for experience, we would at least have a way to test their correctness. But transcendental illusion, against all warnings of critical thinking, carries us away beyond the empirical use of our conceptual categories. It holds out to us the false appearance of extending the pure understanding beyond its proper limits.

We will call principles whose application stays entirely within the limits of possible experience immanent principles. Those principles that would try to fly beyond these boundaries, we will call transcendent principles. By “transcendent principles,” I don’t mean the transcendental use or misuse of categories. That is just a mistake of judgment when it’s not properly checked by critical thinking and doesn’t pay enough attention to the boundaries of the territory where the pure understanding is allowed to operate. Instead, I mean principles that actually encourage us to tear down all those boundary posts and to lay claim to a wholly new territory that recognizes no demarcations anywhere. Hence, transcendental and transcendent are not the same. The principles of pure understanding we presented earlier should only be used empirically (within experience), not transcendentally (in a way that reaches beyond the boundaries of experience). A principle that removes these limits, or indeed encourages us to overstep them, is called transcendent. If our critical examination can succeed in discovering the illusion in these supposed transcendent principles, then those principles that are of merely empirical use can be called, in contrast to them, immanent principles of pure understanding.

Logical illusion, which consists in merely imitating the form of reason (like the illusion of a misleading argument), arises solely from a failure to pay attention to the logical rule. As soon as this attention is focused on the specific case, logical illusion entirely disappears. Transcendental illusion, on the other hand, does not cease even when it is uncovered and its falsity is clearly seen through transcendental criticism. An example is the illusion in the statement: “The world must have a beginning in time.” The cause of this persistent illusion is that in our reason (considered subjectively as a human faculty of knowledge) there are fundamental rules and maxims for its use. These rules look entirely like objective principles. Because of them, the subjective necessity of a certain connection of our concepts (which is for the benefit of the understanding) is mistaken for an objective necessity (a determination of things in themselves). This is an illusion that cannot be avoided at all. It’s like how we cannot avoid the sea appearing higher in the middle than at the shores (because we see the middle part through higher rays of light than the shores). Or, even better, it’s like how an astronomer cannot prevent the rising moon from appearing larger to him, even when he is not deceived by this illusion in his judgments.

The Transcendental Dialectic will therefore content itself with uncovering the illusion in transcendental judgments, while at the same time protecting us from being deceived by it. However, it can never make transcendental illusion itself disappear and cease to be an illusion (unlike logical illusion). What we are dealing with here is a natural and unavoidable illusion. It rests on subjective principles and passes them off as objective. Logical dialectic, when it dissolves misleading arguments, deals only with an error in following principles or with an artificial illusion that imitates them. Hence, there is a natural and unavoidable dialectic of pure reason. It’s not one in which a clumsy thinker might get entangled through lack of knowledge, or one that some sophist has artfully invented to confuse rational people. Instead, it is one that is incurably attached to human reason. So, even after we have exposed the mirage, it will still not cease to lead our reason on with false hopes, continually propelling it into momentary errors that always need to be removed.

II. On Pure Reason as the Seat of Transcendental Illusion

A. On Reason in General

All our knowledge starts from the senses, goes from there to the understanding, and ends with reason. Beyond reason, there is nothing higher to be found in us to work on the material of intuition and bring it under the highest unity of thinking. Since I am now to give a definition of this supreme faculty of knowledge (reason), I find myself in some difficulty. Just like the understanding, reason has:

1. A merely formal use (which is logical): Here, reason abstracts from all content of knowledge.
2. A real use: Here, reason itself contains the origin of certain concepts and principles, which it derives neither from the senses nor from the understanding.

Logicians have long defined the first faculty (formal/logical use of reason) as that of drawing inferences indirectly (mediately), as distinct from drawing immediate inferences. But this definition gives us no insight into the second faculty, the one that itself generates concepts. Now, since a division of reason into a logical faculty and a transcendental faculty occurs here, we must seek a higher concept for this source of knowledge that includes both these aspects. From our experience with the concepts of the understanding, we can expect two things:

• That the logical concept of reason will give us the key to understanding the transcendental one.
• That the table of functions of the logical use of reason will give us the “family tree” of the concepts of reason.

In the first part of our transcendental logic, we defined the understanding as the faculty of rules. Here, we will distinguish reason from understanding by calling reason the faculty of principles.

The term “a principle” is ambiguous. It commonly means only a piece of knowledge that can be used as a principle, even if in itself and by its own origin it is not a principle. Every universal statement, even if it is taken from experience (by induction), can serve as the major premise in a logical argument (a syllogism); but it is not therefore itself a principle in the stricter sense. Mathematical axioms (e.g., that there can be only one straight line between any two points) are even universal a priori knowledge, and so they are correctly called principles relative to the specific cases that can be included under them. But I cannot therefore say that in general and in itself I know this proposition about straight lines from principles; I only know it in pure intuition.

I would therefore call “knowledge from principles” that knowledge in which I recognize the particular in the universal through concepts. Thus, every syllogism is a way of deriving knowledge from a principle. For the major premise always gives a concept such that everything included under its condition can be known from it according to a principle. Now, since every universal piece of knowledge can serve as the major premise in a syllogism, and since the understanding provides such universal a priori propositions, these propositions can, with respect to their possible use, be called principles.

But if we consider these principles of pure understanding in themselves, looking at their origin, then they are anything but knowledge derived from concepts. They would not even be possible a priori if we did not bring in pure intuition (as in mathematics) or the conditions of a possible experience in general. The statement “everything that happens has a cause” cannot be inferred at all from the concept of “what happens in general.” Rather, it is this very principle that shows how one can first get a definite experiential concept of “what happens.”

Thus, the understanding cannot produce synthetic knowledge (knowledge that expands our understanding) from concepts at all. It is properly these kinds of synthetic knowledge derived from concepts that I call principles absolutely. Nevertheless, all universal propositions in general can be called principles in a comparative sense.

It is an ancient wish – who knows how long it will take until perhaps it is fulfilled – that instead of the endless variety of civil laws, their principles might be sought out. For in this alone, it is said, can consist the secret of simplifying legislation. But in the case of laws, they are only limitations of our freedom to conditions under which it thoroughly agrees with itself. Hence, laws apply to something that is wholly our own work, and of which we can be the cause through that concept. But the idea that objects in themselves, as well as the nature of things, should stand under principles and be determined according to mere concepts is something that, if not impossible, is at least very paradoxical in what it demands. However that may be (for the investigation of this still lies before us), this much at least is clear: knowledge from principles (in themselves) is something entirely different from mere knowledge of the understanding. The understanding’s knowledge can, of course, come before other knowledge in the form of a principle, but in itself (insofar as it is synthetic) it still neither rests on mere thought nor contains in itself a universal truth according to concepts.

If the understanding can be called a faculty for creating unity in appearances by means of rules, then reason is the faculty for creating unity in the rules of understanding by means of principles. Thus, reason never applies directly to experience or to any object. Instead, it applies to the understanding, in order to give an a priori unity through concepts to the understanding’s diverse knowledge. This unity may be called “the unity of reason,” and it is of an altogether different kind than any unity that can be achieved by the understanding.

This is the universal concept of the faculty of reason, as far as that concept can be made understandable without specific examples (which will be given later).

B. On the Logical Use of Reason

We draw a distinction between what is known immediately and what is only inferred.

• That there are three angles in a figure enclosed by three straight lines is known immediately.
• But that these angles together equal two right angles is only inferred.

Because we constantly need to make inferences, we eventually become so accustomed to them that we no longer even notice this distinction. Often, as in so-called deceptions of the senses, we take something as immediately perceived when we have actually only inferred it.

In every inference, there is:

1. A proposition that serves as a ground (a reason or basis).
2. Another proposition, the conclusion, that is drawn from the first.
3. Finally, the inference itself (the logical consequence) according to which the truth of the conclusion is unfailingly connected with the truth of the first proposition.

If the inferred judgment already lies within the first one, so that it can be derived from it without needing a third, mediating representation, then this is called an “immediate inference.” I would rather call it an inference of the understanding. Examples of immediate inferences from “All humans are mortal”:

• “Some humans are mortal.”
• “Some mortal beings are human beings.”
• “Nothing immortal is a human being.” These propositions are thus immediate conclusions from the first one.

But if, in addition to the knowledge that serves as the ground, yet another judgment is necessary to produce the conclusion, then the inference is called a “syllogism” (a formal logical argument). On the other hand, the proposition “All scholars are mortal” does not lie directly within the underlying judgment “All humans are mortal” (because the concept “scholar” does not occur in it at all). It can be concluded from it only by means of an intermediate judgment (e.g., “All scholars are human”).

In every syllogism:

1. I first think a rule (the major premise) through the understanding.
2. Second, I subsume a piece of knowledge under the condition of the rule (the minor premise) by means of the power of judgment.
3. Finally, I determine my knowledge through the predicate of the rule (the conclusion), and this happens a priori through reason.

Thus, the relationship between a piece of knowledge and its condition, which the major premise represents as the rule, constitutes the different kinds of syllogisms. They are therefore threefold – just as are all judgments in general – distinguished by the way they express the relation of knowledge to the understanding: namely, categorical, hypothetical, or disjunctive syllogisms.

If, as usually happens, the conclusion is a judgment given as a problem (we want to see if it flows from already given judgments, through which a wholly different object is thought), then I look to see if the assertion of this conclusion can be found in the understanding under certain conditions, according to a universal rule. If I find such a condition, and if the object of the conclusion can be subsumed under the given condition, then this conclusion is derived from the rule that is also valid for other objects of knowledge. From this, we see that reason, in the process of inferring, seeks to bring the greatest variety of the understanding’s knowledge to the smallest number of principles (universal conditions). By doing so, it aims to create the highest possible unity within that variety of knowledge.

C. On the Pure Use of Reason

Can we isolate reason? And if so, is it then a genuine source of concepts and judgments that arise solely from it, and thereby refer to objects? Or is reason only a merely subordinate faculty that gives a certain form, called “logical” form, to already given knowledge? Through this logical form, different pieces of knowledge from the understanding are subordinated to one another, and lower rules are subordinated to higher ones (whose condition includes the condition of the lower rules in its scope), as far as this can be achieved through comparing them.

Indeed, the variety of rules and the unity of principles is a demand of reason. Reason wants to bring the understanding into a complete and thorough connection with itself, just as the understanding brings the variety of intuition under concepts and connects them through concepts. Yet, such a principle of reason does not dictate any law to objects themselves. It does not contain the basis for the possibility of knowing and determining objects as such in general. Rather, it is merely a subjective law of efficiency for our understanding. Its purpose is to help our understanding, through the comparison of its concepts, reduce their universal use to the smallest possible number. This principle does not justify us in demanding that objects themselves possess such uniformity (which might make things easier for our understanding or help it extend itself). Nor does it give objective validity to our reason’s guiding maxims. In a word, the question is: Does reason in itself – that is, pure reason – contain a priori synthetic principles and rules (knowledge-expanding rules known before experience)? And what might such principles consist of?

The formal and logical procedure of reason in syllogisms (logical arguments) already gives us enough guidance about where the basis of its transcendental principle will be found when it comes to synthetic knowledge gained through pure reason.

First, regarding syllogisms: A syllogism does not deal directly with intuitions (direct sensory awareness) in order to bring them under rules, as the understanding does with its categories. Instead, a syllogism deals with concepts and judgments. Therefore, if pure reason also deals with objects, it does not have an immediate reference to them and their intuition. It deals only with the understanding and its judgments. These judgments, in turn, apply directly to the senses and their intuition in order to determine their object. The unity of reason is therefore not the unity of a possible experience. It is essentially different from that unity, which is the unity of understanding. The principle that “everything which happens must have a cause” is not a principle known or prescribed by reason at all. It makes the unity of experience possible and borrows nothing from reason. Reason, working with mere concepts, could not have imposed any such synthetic unity without this reference to possible experience.

Second, regarding reason’s logical use: In its logical use, reason seeks the universal condition of its judgment (its conclusion). The syllogism is nothing but a judgment made by bringing its condition under a universal rule (the major premise). Now, since this rule is, in turn, subjected to this same attempt by reason (to find the condition of its condition, by means of further syllogisms, as far as we can go), we see very well that the proper principle of reason in general (in its logical use) is to find the unconditioned for the conditioned knowledge of the understanding. With this unconditioned, the unity of reason will be completed.

But this logical maxim (to seek the unconditioned) cannot become a principle of pure reason unless we assume something further: that when the conditioned is given, then the entire series of conditions subordinated one to another – a series which is itself unconditioned – is also given (i.e., it is contained in the object and its connection to other things).

Such a principle of pure reason, however, is obviously synthetic. The conditioned is analytically (by definition) related to some condition, but it is not analytically related to the unconditioned. Different synthetic propositions must arise from this principle. The pure understanding knows nothing of these propositions, since it only deals with objects of a possible experience, whose knowledge and synthesis (combination) are always conditioned. But the unconditioned, if it actually occurs, needs to be considered particularly according to all the characteristics that distinguish it from everything conditioned. It must thereby give us material for many synthetic a priori propositions.

The principles arising from this supreme principle of pure reason (to seek the unconditioned) will, however, be transcendent with respect to all appearances. This means that no adequate empirical use can ever be made of that principle. It will therefore be entirely distinct from all principles of the understanding (whose use is completely immanent, meaning it stays within the bounds of experience, because it only has the possibility of experience as its subject matter).

But several critical questions arise:

• Does the principle – that the series of conditions (in the combining of appearances, or even in the thinking of things in general) reaches to the unconditioned – actually have objective correctness or not?
• What consequences follow from it for the empirical use of the understanding?
• Or, does it instead yield no such objectively valid propositions at all? Is it only a logical instruction that tells us, in our ascent to ever higher conditions, to approach completeness in them and thus to bring the highest possible unity of reason into our knowledge?
• Has this need of reason, I ask, been misunderstood as a transcendental principle of pure reason, which too hastily assumes such an unlimited completeness in the series of conditions within the objects themselves?
• And if so, what other kinds of misinterpretations and delusions may have crept into the inferences of reason? These are inferences whose major premise (which is perhaps more a wish than a proven starting point) is taken from pure reason and ascends from experience to its conditions.

1. The first part will discuss the transcendent concepts of pure reason.
2. The second part will discuss reason’s transcendent and dialectical inferences of reason.

II. Transcendental Doctrine of Method

Previously, in the “Transcendental Doctrine of Elements,” we looked at the basic building blocks of pure reason – things like the forms of our sensibility (space and time) and the pure concepts of our understanding.

Now, the Doctrine of Method will focus on something different. It will determine the formal conditions for creating a complete system of pure reason. Think of it as the “how-to” guide for using these elements. It will outline the plan and procedures for organizing our pure, a priori knowledge (knowledge independent of experience) into a structured and secure system. This part will explore how pure reason should proceed to build its own edifice correctly.