The Economic Consequences of the Peace

Keynes dissects the reparations clauses of the Treaty of Versailles, revealing a catastrophic mismatch between what Germany was expected to pay and what she could actually afford. He traces how Britain's 1918 election campaign transformed reasonable pre-war agreements into impossible demands—Lloyd George's government promised voters that Germany would pay the entire cost of the war, despite having previously agreed to much more limited compensation for civilian damages. Through detailed economic analysis, Keynes shows that Germany's maximum capacity was around $10 billion, while the Treaty demanded at least $40 billion. The chapter exposes how political expedience created a system designed to extract 'the maximum sum obtainable' year after year, essentially turning Germany into a permanent debtor state. Keynes introduces the Reparation Commission, a powerful international body with sweeping authority over German economic life, comparing it to bankruptcy administrators managing an entire nation. He argues this approach would either fail completely or reduce Germany to economic servitude, warning that such policies threatened the stability of all Europe. The chapter serves as a masterclass in how short-term political gains can create long-term economic disasters, and why understanding the difference between moral arguments and practical possibilities is crucial for sustainable policy-making.