The Long Shadow of Versailles: An Unusual Controversy on John Maynard Keynes between the German Ordoliberals Walter Eucken and Wilhelm Röpke

Keynes and Our Time

Wilhelm Röpke, May 5, 1946, Neue Zürcher Zeitung^[87]

Translated by Karen Horn

When John Maynard Keynes recently died at the age of 62, the most famous economist of our time left us, and also one of the leading dramatis personae of this segment of our century. The history of these decades, which begin with the end of the First World War, can probably no more be written without the name of this strange man^[88] than without that of an Einstein, Churchill, Roosevelt or Hitler. Only in such a comprehensive consideration will his importance clearly emerge. But how shall we judge his influence? Is he the Copernicus of economics that many celebrate him as, the man who banished the ghosts of an economic policy frozen in the chains of tradition and who opened the gate to prosperity and stability? Or did he demolish more than was good, and has he summoned into being spirits that he himself might have liked to get rid of?

It is difficult to answer these questions in brief, since a fair judgment would not only have to take into account the man’s so extraordinarily versatile activity and the charm of his personality, but would also have to exhaust scientific problems which have nourished the greater part of the economic disputes of our time and which have given even the experts pause. But after everything has been said that has to be said to the praise of the deceased and all pros and cons have been well considered, there remains a decisive rest which compels us to regard his influence and his intellectual legacy with more mixed feelings than seem to do most of the authors of the obituaries dedicated to him. These feelings do not lack the tragic note, either, if we consider it quite possible that Keynes himself, at the end of his life, did not find unrestricted pleasure in the seed he had sown.

One of the utmost stimulating, but often also confusing peculiarities of this animated, impulsive and artistically sensitive mind was that several times in his life he changed positions which he had just recently held with intelligence and vigor. In the author of the “Economic Consequences of the Peace” (1919) and of the famous reconstruction supplements of the “Manchester Guardian”, which in the early Twenties promoted the program of a free-trade and Malthusian liberalism, it is difficult to recognize the same man who later proclaimed the “End of Laissez-faire”, who had the presumption, with utterly weak arguments, to defend autarky, and who then, with his own country’s transition to economic and monetary nationalism, intellectually prepared and justified that of the other countries as well. Indeed, it even was his fate – initially not even without visible pleasure and in any case without protest – to become the intellectual authority for National Socialist Germany’s economic policy. From this eventful trajectory of life spoke a strong temperament, often even a hussar-like recklessness, and yet in two essential points he remained more consistent than he appeared to be. For all his criticism of “capitalism”, he never became a socialist but always remained a liberal who professed the freedoms of the bourgeois world^[89] and believed to be serving them in his – we believe odd^[90] – way. On the other hand, it was one of the constants of his development that, in the course of his increasingly comprehensive researches in monetary theory, he came to look for the real defect of our economic system in the organization of its finances, and made proposals for the improvement of this organization ranging from the moderate ones of his “Tract on Monetary Reform” (1923) to the radical ones of his last great work, “The General Theory of Employment, Interest and Money” (1936).

This is not the place to pay tribute to the merits for the advancement of theory that Keynes earned through these works. No doubt they are considerable, even if one is of the opinion that he has coarsened much that others had formulated more cautiously, and even if one would like at best to ascribe to him the role of the one who has set minds in motion by the vehemence and boldness of his appearance. But precisely because he was endowed with the gift of reaching the wider world, it had to be asked again and again whether the practical results of his theories and proposals, which were intended to serve an improvement of the existing economic system, did not ultimately shake its foundations, so that Keynes, in tragic opposition to his own intention, joined the wreckers^[91] of the same bourgeois order^[92] to which he felt he belonged.

One can be of the opinion that there are times in which vigorous measures to increase the money supply prevent disaster, but it is not with impunity that an eminent head gives the blessing of his authority to the already strong tendency^[93] of governments to inflate. One can be of the opinion that under certain circumstances the increase in government debt is the lesser evil, but it is not with impunity that one makes a maxim out of it. It may happen – as in the depression of the years 1931 and 1932 – that all means for the rapid elimination of mass unemployment fail, except the increase of “effective demand” through credit expansion, but it is not with impunity that one treats with barely concealed contempt the established rules and institutions upon which the orderly course of economic life depends in the long run, if it is not to be put under constant inflationary pressure. One can uncover in the process of saving many a problem overlooked by earlier and more fortunate generations, but it is not with impunity that one robs people of the feeling that they are doing the right thing when they save and build up a reserve from their income for themselves and their descendants, instead of spending from an embarrassment of riches and calling, when need comes knocking, on the help of the state, which is becoming a great debtor. Just as in extreme distress at sea one may cut the masts and let the cargo go overboard, so too in economic life there may be storms that force us to temporarily abandon the principles of free international economic trade, but it is not with impunity that one declares these principles obsolete as soon as they are inconvenient for the policy of “full employment” on which we have now fixated ourselves under the shock of the last depression. Competition, freedom of markets, elasticity of wages and thrifty finance are no sufficient guarantees of prosperity and stability; indeed, there are extraordinary situations in which one can grant exceptions from these excellent principles, but it is not with impunity that one tells the crowd that it may now trample them underfoot in good conscience.

These bitter^[94] thoughts come up when we try at this moment to draw the conclusion of so rich and honorable^[95] a life. It was not with impunity that he gave his mind free rein and indulged in his delight in paradoxes, and that he was such an astute mind and such an attractive personality only increased the mischief, since it only made his teaching all the more seductive. He has accustomed a new generation to an economic thinking which merely revolves around the question of how “effective demand” can most safely be maintained at the highest possible level, and which may now prove fatal since an entirely different economic situation has for the foreseeable future abolished the preconditions of the whole theory, and the reverse question arises as to how an inflationary boom can be slowed down in time. But he has done worse than that. Not only did he demolish what was decayed, but by his preaching of pragmatism in economic policy and his crusading against principles deeply rooted in the moral-political soil, he proved himself at the same time to be one of the strongest forces of that watering down of norms which constitutes the real core of our social crisis. At bottom, his program of economic policy was: Pecca fortiter, i. e., do heartily what you desire and what was hitherto called sin! Whether or to what extent Keynes was right on the level of economic theory and economic technique may be disputed for a long time to come; that he was very wrong on the higher level of social philosophy and political ethics should already be clear today.

That Keynes not only acted in this way, but evidently did so even with the best conscience, indeed with the same sense of pursuing a beneficial mission which distinguishes his so numerous followers all over the world, is something which probably has deep reasons connected with the type of man and the type of philosophy he represents. How is it that a man so extraordinary in the best sense, whose mind embraced so much, and who was at least as much artist and organizer as he was scholar, could be so blind to those moral-political preconditions without which human society cannot exist and which, even in the narrower sphere of the economy, are more important in the long run than a refined credit technique?

In order to understand what type of man and philosophy we are dealing with here, we recall with benefit another name in the history of economics. We mean none less than Adam Smith, with whom Keynes bears a certain resemblance by the depth and extent of his impact. Both Adam Smith and Keynes were men whose interests extended far beyond the confines of economics. But while Smith, in addition to his main work on the “Wealth of Nations” (1776), has left us a book on the “Theory of Moral Sentiments” (1756), without which the deep moral-philosophical background of his much-misconstructed economic doctrine escapes us, Keynes, in addition to his economic works, wrote a monograph on the theory of probability. For Smith, who had written his book on the “Wealth of Nations” as part of a planned giant opus on the cultural history of mankind, economics was an organic part of the larger whole of the intellectual, moral, and historical life of society; for Keynes it was part of a mathematical-mechanical world order. One was a humanistic mind of the 18th century, the other a geometric one of the 20th century; a deistic moralist the one, a positivistic scienticist the other. For the one, the cosmos of human society and human economy was the result of the working of an “invisible hand”, something that had become and was alive and which human reason was able to comprehend and also to destroy, but not to recreate; for the other, the result of mechanical quanta, to be assessed and directed by an all-supervising technical human intelligence. The teachings of the one were a promising beginning, those of the other the end product of a process of disintegration in which the crisis of a thoroughly rationalistic society finds its expression. On the lesser level of economics, the road from Adam Smith to Keynes has certainly been one of progress in many respects; on the higher level of the whole intellectual development it is just as indubitably a fatal regression.

Thus we finally recognize in the teachings of Keynes the social philosophy of the man who proudly calls himself modern, who believes that he can “make” society and the economy, who has forgotten the mysterious forces of the soul and of society which cannot be squeezed into any mathematical equations, into any statistics and into any planning programs, and who in his impatience wants to see rapid results without knowing their price any longer. To him applies what a French peasant philosopher wrote years ago: “Pour conjurer les diverses crises, pour sauver la société, on propose des remèdes rapides et bouleversants (nationalisation, monnaie fondante, autarchie économique, etc., sans parler de la guerre à laquelle tout le monde pense en silence). Ces remèdes donnent la fièvre aux nations. Fièvre consomptive, hélas! et non réactive, qui, au lieu de balayer les impuretés, détruit les réserves. Les nations cherchent le salut dans ce qui les tue. Chaque essai novateur représente un coup de fouet qui communique à l’organisme collectif une vigueur factice au prix de la consomption d’une réserve vitale. On dilapide les plus obscures, les plus profondes ressources du corps social (je pense à des choses aussi diverses que la stabilité monétaire, la continuité et la saine spécialisation professionnelles, l’insertion de l'individu dans les vieux cadres locaux, familiaux et religieux) au profit d’une réussite éphémère, d’une euphorie d’agonisant. Le salut de l’heure présent a pour rançon la dégradation de l'avenir. Que sait-on aujourd’hui de la vraie politique, de cette sagesse patiente et silencieuse qui regarde, qui crée des réserves?”^[96] (Gustave Thibon, Diagnostics, Paris 1942, pp. 22 to 23.)

It is not in no small degree this character of Keynes’ doctrine which explains its wide success in those countries where the type of man corresponding to it is particularly numerous. The more distant a person is, by milieu, habit, way of life and social conditions, from the realization that the real infirmity of our civilization lies in the profoundly unnatural character of our lives, our society, and our thinking, but not in our still deficient mastery of the art of increasing government debt, of permanently lowering the interest rate, of pumping up “effective demand”, of making the exchange rates jitter and of manipulating the balance of payments, – the more likely he will be to have fallen for the teachings to which Keynes has given course. Conversely, however, the success of these doctrines shows us how widespread the type of man is that they address, and how sick is an age which produces this type. The progressive recovery for which we hope and whose first signs we believe we can already spot today will therefore manifest itself, among other things, in the growing number of people who free themselves from the spell of Keynes’ teachings and sober up to recognize not only their economic weaknesses but also their socio-philosophical errors. All the more freely will they then be able to appreciate the true merits of this man whose life lacked neither grandeur nor tragedy.

Lord Keynes – Beginning and End

Wilhelm Röpke, September 1, 1946, Neue Zürcher Zeitung

Translated by Karen Horn

In accordance with the fatal law of the duplicity of cases, after John Maynard Keynes, whose death occasioned an overall appreciation in this place (No. 782 of May 5, 1946)^[97], another representative of modern England, the so versatile writer Herbert George Wells^[98], has now also departed from life. It is difficult to compare the two, and probably they themselves felt their dissimilarity most strongly. And yet they do have things in common which become all the more apparent the more we distance ourselves from them. At the very least, they should be united by the tragic circumstance that, at the end of their lives, they had some reason to be quite dissatisfied with the course of the world and to wonder bitterly whether they themselves had not summoned the spirits they could not get rid of. Whether Wells possessed this degree of self-knowledge, we do not know, but doubt it; probably he did not understand until the end that the philosophy of an atheistic-mechanistic positivism he so effectively advocated is one of the main causes of today’s terrible state of the world, and therefore, because he did not see the rescue through intellectual conversion, ended in despair and bitterness.

That we can assert self-knowledge with considerable certainty in the case of Keynes speaks for the greatness of his character and the incorruptibility and agility of his mind. Therefore, those are probably right who lament the premature death of the man who alone would have been able to repair the intellectual damage he had done and, with his authority, call to their senses a whole younger generation whose minds he had confused by his teachings. This ties in with the report we have received from a well-known American economist who had invited Keynes in the last days of his life to an evening party in Washington together with the leading economists of the federal agencies, all devoted Keynes followers. The event turned out to be a complete fiasco, since master and disciples no longer understood each other: If the former was appalled by the schematism and crudeness of the economic ideas held by those who had thought themselves his disciples, the latter were disappointed by the master who had become cautious and measured.^[99]

It is perhaps a doubtful compliment – but in a certain sense, it nevertheless is one, too – if those who best knew this man who will still occupy the world for a long time had expected from him, even in his age, an unbiased and possibly unsparing criticism of his work, after having recanted so often before. We have double cause to lament that Keynes died before the publication of a book whose author, one of the great hopes of the intellectual youth of France, became one of the last victims of this cruel war and thus has not lived to see the great attention his work has found in a short time. It is a book which offers a criticism as pitiless as it is altogether deserved, though not of the whole of Keynes’s lifetime achievement, yet of its first and especially glorious section. It is entitled “The Carthaginian Peace, or the Economic Consequences of Mr. Keynes” (London, Oxford Press, 1946)^[100], and its author is Étienne Mantoux, son of the well-known historian, economist, and diplomat Paul Mantoux, and like his father equally at home in French and English culture, a young but exceedingly gifted scholar who dared to throw down his chivalrous gauntlet to Keynes, without suspecting that it would fall down before a dead man. In a graceful manner, Harald Nicolson saluted both dead men in The Spectator (June 14, 1946), exclaiming, “With what delight, appreciation and generosity would Maynard Keynes have read this brilliant indictment!”^[101]

Étienne Mantoux deals with the early Keynes who, at that time after the First World War, had acquired first and lasting fame through his book “The Economic Consequences of the Peace” protesting against the Versailles Peace Conference^[102], and who, through his cutting criticism of the peace treaties, had contributed like no other to their revision and to the formation of that bad conscience which dominated an influential part of public opinion in the victorious states until the Second World War. From this preoccupation with a book that not only established Keynesian fame, but in a real sense made history, a work has emerged from the hand of our dead French friend that captivates the reader most strongly through its literary mastery and its consistently compelling logic. But it is also an extremely important book, because it shows us that ominous period in a completely different light than the author of the “Economic Consequences of the Peace” had taught his contemporaries, and because it forces us to think about this author far more skeptically than would match his fame. Certainly, the revision of our judgment on the period of history that begins with the Versailles Peace Treaty is far more important than that of our judgment on a single man, however eminent, and certainly the first task was closer to Mantoux’s heart than the second. Since, however, we are concerned here with the man who has influenced present economic thinking and promises to continue influencing it in such a profound – and, we believe, ultimately objectionable – way, and not with international politics between the two world wars, we shall stick primarily to this side of the book we are to praise.

If we thus confine ourselves to tracing the picture of the economist Keynes that confronts us from Mantoux’s book, it will hardly surprise the insiders that it is anything but flattering. But even he who learned early on to recognize the brittleness of the arguments on which Keynes had built his fight against the economic provisions of the Treaty of Versailles is happy to be reminded that hardly any of the predictions have come true and hardly any of the deductions have proved tenable. While Keynes had predicted the darkest future for the German economy after the territorial cessions and under the burden of reparations, the most important economic numbers (iron and steel production, coal production, savings, capital formation, etc.) showed, a few years after the stabilization of the mark, a level exceeding that of 1914, in some cases even quite considerably so.^[103] While Keynes had explained that Germany could be expected to pay at most 2 billion marks in annual reparations over the next thirty years,^[104] Hitler could proudly declare in September 1939 that since 1933 his country had on average spent seven times that sum per year on armaments alone.^[105] While Keynes had prophesied Germany’s denudation of capital as a result of the Peace Treaty, it eventually resulted that Germany had received a total of 35 to 38 billion from abroad as capital from 1920 to 1931 and had paid 21 billion in total as reparations.^[106]

One may be of the opinion that these miscalculations are less serious than Mantoux assumes, especially if one considers that the original reparation plan was never carried out, thanks in no small part to the effects of Keynes’s warnings. Far more serious seem to us the flawed theories on which Keynes based his so gloomy forecasts at that time. Whether the reparations were just or unjust, reasonable or unreasonable, shall not be a matter for discussion here. However, we have always held that one would be doing economic science a very bad service if one tried to force from it the proof that reparations necessarily wrecked the German economy and currency and that they brought more harm than good even to the world itself. We have never been able to convince ourselves that it is advisable in any country to justify with bad theories even a cause that seems good. The opinion, which has become so popular, that the internal raising of the reparation sums does not in any way determine whether they can be converted into the currency of the creditor states at all, since this “transfer” presupposes a previous surplus in the German balance of payments^[107], has always appeared to us as such a bad theory, neither compatible with experience nor with logic. The same holds for the opinion, which has become no less popular, that since the reparation payment ultimately means a corresponding additional export on the part of Germany, the recipients are thereby more harmed than helped.

We must not forget that it was primarily the young Keynes who, with his authority and great literary talent, promoted such a misconception and exaggeration of the “transfer problem”. Since his authority is now so much used for other and more current theories, it is well to be reminded by Mantoux of how controversial a role the economist Keynes played at an earlier stage of his activity; indeed, not a few will be surprised today, when they revisit the subject matter, at how indiscriminate Keynes was then in his arguments and in their formulation. Even he, however, who wants to judge this more mildly will have to admit today that experience and logic have decided against the most important economic theories and assumptions with which Keynes wanted to prove the impossibility or catastrophic harmfulness of the German reparations.

It is not without interest to recall today that at that time, in this situation which was certainly not indifferent for their country, German economists fought Keynes and the official theories of Berlin, which were largely inspired by him, with arguments which they reencounter today in large part in Mantoux’s book. It results from this that this critique need not be associated with any particular political position. For Mantoux, it is part of a justification of the policy of Versailles as a whole; even he who wants to raise reservations against it will receive a strong impression from it and admire the talent of the young scholar so tragically wrested from us. For him, Keynes is not only the economist whose trustworthiness is overestimated, but also the author and politician who contributed to a great extent to depriving France of the fruits of victory. This is very understandable. But while it is certainly permissible to differ on these questions even today – a right which even English admirers of Mantoux’s book claim – there can hardly be any longer any doubt about the baleful character of other effects of Keynes‘s famous juvenile work. We will point out the most important ones.

First of all, it does not require any violence to see a clear, if indirect, connection between the Keynesian agitation and the fatal German inflation, which was one of the most important stages of the whole later disaster. Those who experienced that period actively or as mere observers in Germany know that in the struggle against the real cause of German inflation, namely the budget deficit, nothing paralyzed the energy of the good-willed and promoted the plans of the less numerous bad-willed so much as the catastrophe theory covered with the global authority of Keynes. Confirming the ancient adage that what confuses people is not so much the facts as the opinions about the facts, it was not, after all, the reparations that were to blame for the German monetary and financial wreckage, but the theories that shifted the responsibility for German inflation from the shoulders of governments and parliaments to the fatum of the “passive balance of payments”. If a man like Keynes proved that reparations must defeat all efforts within Germany, why make the heroic and unpopular attempt to keep the national budget in balance through rigorous restraint of government expenditure, draconian taxation, and vigorous encouragement of production? That the task was not impossible was proved by the fact that it succeeded under the most unfavorable circumstances imaginable in November 1923, when no other option was left^[108]. If those German statesmen who, like Wirth^[109] and Rathenau^[110], professed a “fulfillment policy”^[111] reaped a life-threatening unpopularity for it, Keynes was indeed not innocent of this.

On the other hand, anyone familiar with the most recent German history will confirm that it was Keynes who, like hardly anyone else, gave the cue to all those politicians, parties and popular currents which ultimately led Hitler to power when, with excessive exaggeration of the contexts and magnitudes, they whipped up the German people by agitating against the “tributes” and educated them in the belief, which still seems ineradicable today, that “Versailles” was the main source of all misery. One cannot understand German history to this day without noting the decisive effect that emanated from these slogans of “tribute burdens”, the “Dawes colony” (which also played a major role in Communist demagogy), and “Young slavery”. It is doubtful whether the horrible catastrophe of the Third Reich would have been possible without them, and still today, we fear, the reference to “Versailles” is the main theory of exoneration for the majority of the German people. But one should know, finally, that it was not the objective harshness of this Peace Treaty that is to be blamed for its political effects, but the way it was described to the German people, against the truth of the facts and against the evidence of logic. The destruction of this mythology of the Versailles Peace Treaty and of reparations is one of the supreme prerequisites for the cleansing and clarification of political thinking in Germany, without which a future for the German people is no longer conceivable. Because it is so effective in bringing about this destruction, the book discussed here can hardly be overestimated in its importance. Its effect on the Germans is however considerably impaired by the fact that it was completed at a moment when conclusions for the future suggested themselves that were different from those that impose themselves today.

This brings us to a third point. Mantoux will convince any well-intentioned reader that the Treaty of Versailles was anything but a “Punic peace”. Thanks in no small part to the literary activity of the young Keynes, its effects have been extraordinarily exaggerated, and today we recognize that the French historian J. Bainville probably came closest to the truth with his label “une paix trop douce pour ce qu’elle a de dur.”^[112] Versailles did not break Germany, enslave her, or deprive her of her future, and the alarm cries raised at the time – the most pervasive of which emanated from John Maynard Keynes – have proved false. What are the implications for today’s situation?

When Mantoux wrote his book, he believed he had to reckon with the danger that the victors, under the repercussions of the world opinion created essentially by Keynes about the unreasonableness of reparations, would treat Germany too leniently. And therefore, he demands that all inhibitions should be overcome this time. We are sure, however, that the author, were he alive today, would be the first to call this demand bizarrely outdated. Possibly the danger of an unreasonably harsh treatment of Germany has always been greater than that of an unreasonably mild one, but today, when Germany is really threatening to sink, there can be no doubt which of the two dangers has become reality. Whoever wants to learn about this may read the devastating and careful essay by Prof. Ferdinand A. Hermens, “The Economics of Potsdam”, which has just been published in the July issue of the excellent American journal “The Review of Politics” (Notre Dame, Indiana).^[113]

But the very conclusions which such an honest and intelligent mind as Mantoux thought he had to draw only a short time ago prove that the false alarm of 1919 is not entirely blameless if today the development, beyond all warnings, has led to the opposite extreme. Germany resembles a swimmer who once fooled the world with unfounded cries for help and now, when he is really in danger of drowning, may be heard too late. The worst consequence of the false pessimism spread by Keynes after the First World War may perhaps consist in that, after this experience, one now believes one must be on one’s guard against a new “propaganda of pity” – today, when there is truly no longer any need for propaganda and the facts themselves speak a devastating language. This is now really a “Punic peace”, with the only difference that, while the plow is being pulled over the ruins of the new Carthage, the danger of war, which was thought to have been banished, is looming hugely in a quite different place.^[114]

Of course, Keynes neither willed nor foresaw all these consequences, and of course it would be a great wrong to place the slightest doubt in the purity of his intentions. He also did not want his theory of reparations to lead anybody to the conclusion one day that, after their new defeat, as much as possible should be taken away from the Germans at once, so as not to suffer again the alleged trouble with the annual sums to be paid out of current production. Nor would he have approved, perhaps, of the conditions under which his earlier proposal to make reparations by German forced labor would one day be realized, an idea which had been rejected by Wilson at Versailles at the time as a barbaric regression (Mantoux, p. 123). Of course, it was also far from him to lull the world, by his gloomy prognoses about the German future, “into a sense of security against the danger threatening from National Socialism, and to thus contribute to its not being averted in time because Hitler’s economic possibilities were so fatally underestimated. But it is undeniable that Keynes’ work “The Economic Consequences of the Peace” is one of the famous books that form an important link in the causal chain of history. That the causal chain has led to a good end in the present case can hardly be claimed.

This is the book that established the fame of John Maynard Keynes and lent his name an authority that has certainly benefited his later works. There is much that can be said in praise of this book and its author even today, except that it identifies the author as an economist and social philosopher who deserves unconditional confidence for the conscientiousness of his reasoning. With this book the real career of Keynes began. Now it so happened that almost simultaneously with Mantoux’s work, which deals critically with the beginnings of Keynes, a last essay of his appeared posthumously in the June issue of the “Economic Journal”, as the conclusion of his literary activity.^[115] The essay, dealing with the future development of the American balance of payments, is utterly important and interesting, since it establishes in careful analysis a thoroughly optimistic view of the import capacity of the United States and thus corrects the widespread opinion that the dollar may become dangerously “scarce” in the course of the next few years due to a tendency of the American balance of payments toward surplus^[116].

But what gives very special weight to this last work that we owe to Keynes are the concluding remarks which reflect in an almost moving way the anxiety with which, at the end of his life, he observed certain tendencies in economic policy however earlier encouraged by himself. After appreciating in his essay the forces that justify his optimistic prognosis, he feels compelled to make the qualifying remark that his analysis ultimately depends on whether or not an economic nationalism that despises classical doctrines will paralyze the “natural forces” or “even the invisible hand that works toward equilibrium.” He praises the “classical medicine” and now speaks of “modernistic stuff” that has clouded the vision of many, however much he hastens to add that we can no longer rely on the “classical medicine” alone.^[117] It would be too much to ask that this man, at the end of his life, should abjure all that he has taught, and we ourselves would not even wish that. He still does not want to renounce the idea that variable exchange rates and “overall import control”^[118] should remain the most important instruments of an enlightened economic policy. But how much concern, bitterness, and disappointment must have accumulated in this man’s breast to be finally discharged in the sigh about “modernistic stuff, gone wrong and turned sour and silly.”^[119] Are not those right who mourn in him, who at the end of his life paid homage to the wisdom of the classics, the man who might have become the strongest force in the battle against the confusion of minds largely of his own making? But are not others also right who, without failing to recognize his eminence, nevertheless refuse to concede the role of a reliable and trustworthy intellectual leader of our time to a man who had so many errors to correct and sadly left so many others uncorrected?

Keynes and the Reparations

Valentin F. Wagner, September 24, 1946, Neue Zürcher Zeitung

Translated by Karen Horn

If I take the liberty of making a few remarks on the essay “Lord Keynes – Beginning and End” from the pen of Prof. Röpke (cf. “N.Z.Z.” No. 1551) published in this paper, I would like to put some facts and truths into perspective for the attention of those readers who are not in a position to follow the state of scientific opinions themselves. This becomes a scientific and at the same time a human duty in view of the distortions contained in the account which Röpke sketches of Keynes’ position on the reparation problem. In his criticism, he draws on the recently published book by Étienne Mantoux, which, however, is no more than a welcome aid in the campaign of which he is apparently making his life’s mission and whose goal is to prove that Keynes was not a great scholar, but merely the inventor of fatal economic heresies. I do not know Mantoux’s book, and I therefore stick only to Röpke’s account. This is all the more permissible because in his article he does not actually say much about the content of the book^[120] and in any case gives his remarks the character of a personal verdict. On this verdict, I would like to make a few remarks.

Did Keynes, as he fought against the economic clauses of the Treaty of Versailles and, above all, advocated a reduction of German reparations to a “reasonable” level, grossly err in the evaluation of German ability to pay? Was his opinion that the transfer of such large sums was not possible over the long run or, if forced, must lead to serious shocks to the world economy, even to its collapse, a false theory and at the same time a mistaken prognosis, based on a irresponsible presentation of evidence and an unscrupulous use of arguments? Did Keynes, by the effect which he exerted with his two books on the public opinion of the world, both on that of Germany and of the victorious countries, lightheadedly deprive the Allies of the fruits of their victory? Is it true, in particular, that it was Keynes who, with these books, “like hardly anyone else, gave the cue to all those politicians, parties, and popular currents which ultimately led Hitler to power”?

These questions contain serious charges, and in today’s situation it is not merely of historical interest to know whether these accusations are valid or not. Mantoux’ book was due because the course of history over the past 28 years must have forced Keynes himself to raise the question whether he had done well to write his books on the peace treaties. With Mantoux, Prof. Röpke holds that Keynes had completely erred in his assessment of the German ability to pay, and that his assertion according to which the transfer of reparations was impossible and would lead to the most serious world economic shocks has also been disproved by events^[121]. Hardly any of Keynes’ predictions have come true, and hardly any of his deductions proved tenable. The German economy did not collapse under the burden of territorial cessions and reparations; on the contrary, it took a fabulous upswing, so that a few years after the stabilization of the mark all the relevant economic figures exceeded the level of 1914. While Keynes had predicted a great shortage of capital for Germany, 21 billion had instead been paid by Germany as reparations between 1920–31, and in the same period foreign countries had provided it with 35 to 38 billion in capital. While Keynes had estimated Germany’s ability to pay reparations in 1919 at a maximum of 2 billion annually for 30 years,^[122] he was later impressively refuted by Hitler who, for 6 years, had spent seven times that sum per year on armaments alone.

These are the only statements in the long article which are not mere assertions but want to be justifications for Röpke’s very theses which I have formulated as a question above. Let us consider this proof of evidence a little more closely. In his first book, Keynes put forward the thesis that reparation claims in significant amounts would necessarily lead to serious global economic disturbances. He justified his opinion with the fact that only relatively small export surpluses could be attained through a gradual transformation of the German balance of trade under the pressure of the payment obligations. The attainment of a huge export surplus of a permanent character, i. e., for a period of 30–40 years, would be impossible by way of automatic market transfer of reparations and under the given conditions and, if forced, would lead to serious disturbances. Keynes, therefore, was not at all of the opinion that Germany could not pay; he estimated, as Röpke also mentions, the German ability to pay in the most favorable case at 2 billion marks during 30 years and the cash value of these annuities, including the other payments, at 40 billion.^[123] A payment of 160 or even a payment of 100 billion, however, was for him outside “the limits of reasonable possibility.”^[124] Keynes further qualified his thesis in two regards. While he economically considered an annuity of 2 billion to be possible, he doubted from a political, social and human point of view whether such a payment could be enforced for over a span of 30 years. The second constraint concerned the upper limit. He considered higher payments possible under the following three conditions: A “substantially” higher payment could be obtained if the Allies treated the German economy with special “care” for a period of 5–10 years, by granting large loans, providing ships, food, raw materials, by creating markets for German goods, in short, on condition that the Allies were willing to make Germany the greatest industrial power in Europe or even in the world, “for Germany is capable of very great productivity.”^[125] Germany could also pay more in nominal terms if the value of money were to fall sharply, and finally more could be expected if almost revolutionary improvements in production methods were realized.^[126]

Since these conditions were not of immediate practical relevance, Keynes, in his proposal, went below that sum whose payment he considered possible in the most favorable case and, as he expressly states, out of political, social, and human considerations. The present value of the annuities to be paid was to be fixed at 30 billion marks, and this amount was to be paid, without carrying interest, in 30 installments of 1 billion each.^[127] In the second book, “A Revision of the Treaty”, completed in December 1921, Keynes modified his proposal. He now envisaged 30 annuities of 1¼ billion, going exclusively to France and Belgium.^[128]

Let us now ask first, starting from the estimate of the German ability to pay of 60 billion in 30 annuities, whether Keynes thus grossly underestimated German possibilities. Deciding this question is already complicated by the fact that the concept of the ability to pay can have different contents. Keynes never claimed that it was theoretically and practically impossible for Germany to raise, say, 300 billion in 30-50 years. An annuity of 6–10 billion would have corresponded to a reduction in the standard of living of 10–15 %, measured in terms of German national income between 1925–29. In view of the fact that in Germany around 1929 approximately these sums were spent on alcohol and tobacco – in 1930 the revenues from internal excise taxes on alcoholic beverages and tobacco alone amounted to nearly 2 billion marks –, an ability to pay in this sense and of this amount could actually be assumed, at least in the abstract.

With this assessment, however, the decisive questions are by no means answered. It is now important to know what the conditions are under which such enormous amounts or the masses of goods corresponding to them could both be raised within Germany and be transferred abroad. The obvious starting point of Keynes’ criticism and proposals is the assumption that both the raising and the transfer of reparations should take place within the framework of a relatively free market system. For the raising of funds, this means that it is done only by taxation and that no further coercive interventions are undertaken; for the transfer, it means that the creditor is simply provided with the sums of money raised. According to a certain theoretical view, the market process, under the influence of the described raising and transfer, automatically brings about a restructuring of the German production structure, and it also generates the necessary export surplus out of which the reparations are paid in real economic terms.

Now Keynes doubted the correctness of this theory and, above all, the actual effectiveness of this automatism. To be precise, I must say that he did not actually dispute the logical correctness of the theory and that he also recognized the effectiveness of the market process in principle. Keynes however doubted that this automatism could, without disturbance, raise and transfer in the real economy those significant amounts which were under discussion at the time he wrote his books. Thus, for him, it was first a problem of scale. But Keynes also doubted that the raising of such large sums was possible within a liberal economic order from a political, social, and human point of view.

I need not fear being refuted by anyone when I state that over the years probably all economists have come to the result that the capacity of this automatism is probably very limited, so that, in any case, annuities in the order of magnitude of 3 to 10 billion gold marks, payable through decades, far exceed its capacity.

I am therefore of the opinion, which I am sure is also shared today by most economists, that Keynes did not underestimate Germany's economic ability to pay reparations with his figure of 2 billion gold marks annually for a period of 30 years, well understood: within the possibilities of a market system. One must even say that even this payment could be expected only under quite extraordinarily favorable circumstances, namely, a corresponding willingness of the Germans to pay, minimal friction in the internal transformation process, the absence of strong restrictive trade barriers, i. e., a willingness of the Allies and the neutrals to absorb the German flow of goods, the absence of severe slumps, and the precondition of a progressively growing world economy. Since the fulfillment of these conditions was highly questionable from the outset, one must admit today, in retrospect, that not only this estimate by Keynes but also his own lower proposals were too high.

Mr. Röpke, however, disagrees. He declares that he has never been able to convince himself that it is advisable to justify with a bad theory even a good cause. He sees one such bad theory in the transfer theory, which he characterizes as an untenable nonsense. We must then conclude from this attitude and from the reference to Germany’s ability to pay for rearmament that according to Röpke, reparations could have been raised and transferred up to the amount of those sums that Hitler spent annually on rearmament.

But what about the evidential value of those facts that Röpke cites in order to show that reality has refuted Keynes? The fact that the production of iron, steel and coal, the volume of savings and capital formation exceeded the level of 1914 a few years after the stabilization of the mark cannot, after what has been said above, be regarded as a refutation of Keynes’ theses. After all, Germany’s productive capacity was beyond question for Keynes as well. For the assessment of reparation capacity in the sense paraphrased above, the figures of the balance of trade are decisive. Here we are not told that, during the six “fat” years of 1924–1929, average imports and exports were approximately equal to the average of the semi-decade 1909/13, imports outweighed exports, and the balance sheet showed a deficit only slightly different from the deficit of the immediate prewar years. Thus, in these good years a trade surplus could not be attained to pay reparations; but the significant surplus of the years 1930/32 was already a consequence of the crisis. It was no evidence of a growing ability to pay, but a consequence of economic collapse.

Finally, as for the argument that the capital denudation of Germany prophesied by Keynes did not occur, since Germany paid a total of 21 billion in reparations between 1930 and 1931 and received 35 to 38 billion in loans from abroad, it must be said that this fact proves the opposite of what Prof. Röpke wants to prove with it. When a country receives foreign capital on such an enormous scale in such a short period of time – never has an economy, not even America in its rise, seen an inflow of such enormous sums in such a short period of time –, then this is, I believe even according to the logic of the classical theory which Mr. Röpke holds so dear, the symptom of a very pronounced lack of capital. In reality, these figures are evidence of the whimsical and highly paradoxical reparations policy that was pursued. On the one hand, enormous sums were demanded, but on the other hand, nothing was done to collect them. This was left to the market process, and one even went so far as to “commercialize” the reparations. This process, however, as it occasionally does in other cases, did exactly the opposite of what it should have done: it moved huge amounts of capital to Germany, i. e. it made foreign countries formally pay for reparations to foreign countries and, in addition, it made billions available for investment in Germany itself. To formulate it more vividly in other words: Germany did not pay any reparations at all in an economic and real sense, as far as reparations are concerned that were to be transferred through the market process. After the outbreak of the global economic crisis and the onset of the depression, reparations were not even paid in this fun way any longer, as foreign capital stayed away.

So these are the proofs Mr. Röpke brings forward to support his accusations against Keynes. He discreetly refrains from mentioning the outbreak of the crisis and from referring to the catastrophic depression into which the world, and especially Germany, was thrown. After all, the picture of those years of global economic collapse, with its enormous masses of unemployment, economic despair and social disintegration, could perhaps awaken in the reader a memory of Keynes’ dark prophecies. The author also ignores some other facts. There is no mention of the circumstances under which Keynes raised his warning voice. The reader is not told that the book on the economic consequences of the Peace Treaty was written in the autumn of 1919^[129], and the second [book] in the autumn of 1921^[130], thus both at a time when the economic and political conditions and prospects were viewed with the gravest concern by anyone reasonable. Above all, however, the decisive fact is concealed from the reader that the amount of the reparation debt was not specified in the Peace Treaty itself and was not fixed for the first time until the spring of 1921.^[131] Therefore, for two years, politicians in charge as well as demagogues, often united in one person, could to raise before parliaments and in election campaigns the most fantastic reparation demands, which were beyond any real possibility. Thus, in September 1919, the French Finance Minister Klotz, in a speech before the Chamber, estimated the cash value of the German reparation debt at 300 billion gold marks, payable from 1921 in 34 annual installments of about 18–20 billion! In the British khaki elections^[132] immediately after the armistice, Lord Cunliffe^[133] had demanded far more, namely an annuity of 28.8 billion over a period of approximately the same length. At the Paris Conference of January 1921, a payment plan was envisaged with an annuity rising from 2 to 6 billion and a gross sum of 226 billion. On top of this, however, an additional annuity, to be calculated according to certain criteria, was to be paid, the amount of which considerably exceeded the basic rate. These are just some of the demands that were made at that time. Keynes’ struggle is therefore only understandable against the background of these completely unreal and chimerical orders of magnitude. It was not until the London Conference that the present value of the reparation debt was fixed at 132 billion, and even the milder provisions of the Dawes Plan stipulated an annuity of 1.5–2.5 billion for a period of more than 60 years, which could rise to 2.5–3.4 billion as prosperity increased. The Young Plan, which reduced the annuities once again, also determined a gross total sum for the same period in the amount of 117 billion.

Everyone knows that the Dawes Plan as well as the Young Plan remained mere paper. In view of the fact, proven by experience, that the sum of the reparations paid through market means, taking into account the compensating foreign credits, was zero – or at best amounted to a few billions –, it will be truly impossible to claim that the reparations could have been transferred without difficulties. So, if one does call experience to bear witness, then it can probably only be described as a devastating confirmation of Keynesian predictions.

Mr. Prof. Röpke sums up his reflections in the scathing verdict that one “must^[134] refuse to concede the role of a reliable and trustworthy intellectual leader of our time to a man who had so many errors to correct and sadly left so many others uncorrected?” This recommendation is based not only on the thesis that Keynes erred in the question of reparations, but also on serious accusations regarding the historical-political effects of Keynes’ wrong predictions. According to Mr. Röpke, these calamitous effects are the following:

1. There is a connection between the Keynesian agitation and German inflation, since it was this agitation which encouraged the government not to balance the budget, which would have been quite possible, and instead to turn to the money press.

2. It was Keynes “who, like hardly anyone else, gave the cue to all those politicians, parties and popular currents which ultimately led Hitler to power,” namely, the cue that the “tributes” and “Versailles” were the source of all misery. With this, he becomes one of the originators of the disastrous “mythology” according to which Versailles was a “Punic” peace.

3. Keynes contributed, albeit unintentionally, “by his gloomy prognoses about the German future” to “lulling the world into a sense of security against the danger threatening from National Socialism,” and he was partly to blame for “its not being averted in time because Hitler’s economic possibilities were so fatally underestimated.” Therefore, it cannot be denied that Keynes’ writing “is one of the famous books which form an important link in the causal chain.”

In view of such serious accusations against a scholar of world renown, one will not be able to blame me if I point out that Prof. Röpke published a book in 1931 under the title “Der Weg des Unheils”^[135], which is nothing but an outcry against Versailles and the reparations. The book culminates in the sentence written by Mr. Röpke: “The world knows that the reparations are dynamite in economic as well as in political terms” (p. 74). I would like to refrain, in a lenient manner, from reproducing here in more detail the passionate remarks of the author against the Treaty of Versailles and the reparations. I shall content myself with stating that Mr. Prof. Röpke was of the opinion at that time that reparations were one of the main causes of the chaos in the world economy, that Germany had been driven into inflation by this “unbearable” burden, that reparations had far exceeded Germany’s ability to pay, and that their collection was impossible within a market system. Thus, at that time, he was quite in agreement with Keynes. It would be a cheap pleasure if I wanted to prove Prof. Röpke wrong and accuse him of changing his views. But anyone who was himself once a vehement agitator against Versailles and reparations is certainly not entitled to make such serious and, moreover, frivolous accusations in this respect as Röpke made against Keynes.