Debt Denial
The Big Four at the Paris Peace Conference: (left to right) British prime minister David Lloyd George, Italian premier Vittorio Orlando, French premier Georges Clemenceau, and U.S. president Woodrow Wilson
By Amity Shlaes
This essay is adapted from Amity Shlaes’s regular column “The Forgotten Book,” which she pens for “Capital Matters” as a fellow of National Review Institute.
All politicians defer addressing inconvenient challenges. Reality gets in the way of policies they want to see through. Reality gets in the way of the proximate election.
But there’s one form of denial at which the world’s politicians star, delivering performances of a quality that could earn them an Oscar. That is denial of the consequences of excessive sovereign debt—our own, or that of other lands.
Americans have become accustomed to this denial theater. Lawmakers ought to be rewriting Social Security and Medicare. Absent changes, our nation’s debt path is, as Federal Reserve chairman Jerome Powell has pointed out, “unsustainable.” Yet lawmakers do not rush to craft the obvious remedies: entitlement reform.
Instead, senators, congressmen, and treasury officials count up small pockets of money available for “extraordinary measures,” prattle on about the growth potential of Keynesian infrastructure spending, or debate relatively minor tax cuts. This despite the fact that each day that the federal debt goes unaddressed, the scope for such popular measures is narrowed.
Just how far debt denial can take a people comes clear in a volume written a century ago by none other than John Maynard Keynes himself. Keynes penned The Economic Consequences of the Peace in several furious months over the summer of 1919, after returning disgusted from the Versailles peace negotiations that brought a formal close to World War I. At the time, Keynes was not yet Keynes, a deity of economics, but merely Keynes, Cambridge professor and government adviser.
Nonetheless, for anyone seeking context in considering our current debt theater, The Economic Consequences of the Peace is reading without peer.
A RUINOUS PEACE
To set his stage, Keynes pictures first the golden pre-war Europe, when, as he notes, “the inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole world, in such quantity as he might see fit, and reasonably expect their early delivery at his doorstep,” as well as one in which “he could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or formality.” While Keynes’s portrait misleads—coal miners did not live like this—the legitimate point is that in this era many Europeans could for the first time nurse hope for such a life for their children.
On the pre-war continent, the golden engine was Germany. “Round Germany as a central support the rest of the European economic system grouped itself, and on the prosperity of Germany the rest of the continent mainly depended.” This second image is no exaggeration: Germany was the best customer for English goods after India, and the largest importer from Russia, Norway, and Holland.
In 1919, voters of many lands, as today, were told that prosperity would be a given. Then, as now, people told themselves, “Life will again be normal.” They did not ask, “What is needed to make life normal?” “On this sandy and false foundation,” notes Keynes of postwar Britain, “we scheme for social improvement and dress our political platforms, pursue our animosities and particular ambitions.” In other words, Gavin Newsom would have fit right in.
After the armistice, the Big Four—leaders of France, Italy, Britain, and the United States—assembled in Paris to restore what had been lost. Instead, their work, the horrified Keynes observed, emerged as an effort that would complete “the ruin which Germany began by a peace which if it is carried into effect, must impair yet further when it might have restored, the delicate, complicated organization” of a world economy that had enabled them to thrive.
Revenge, not restoration, was what many at Paris sought. Britain had lost nearly a million men in the conflict, with an even higher figure wounded. “We will get all you can squeeze out of a lemon and a bit more,” one prominent Briton, Sir Eric Geddes, said. “I will squeeze her until you can hear the pips squeak.” Britain’s prime minister demanded “fullest indemnities.”
The leaders of devastated France were yet more bent on vengeance. The Americans, late to enter the war, and with a tenth of Britain’s casualties, did not defend Germany. Indeed, as Keynes reports, President Woodrow Wilson played harsh in good measure because he wanted to undermine the impression that he was “pro-German.” Italy had its demands on the Adriatic.
OBSESSIONS AND DELUSIONS
What caused the Big Four to delude themselves into believing that German debt, German recovery, or a truly free European economy did not matter? Or that Germany, which had seen two million of its own soldiers fall, would not implode as Russia had done? Obsessions of the kind known to us from politicians today held the postwar statesmen in their thrall.
Georges Clemenceau, the French leader, was the nationalist: Make France Great Again was his motto. Senior in years and experience to Wilson or Prime Minister David Lloyd George, Clemenceau sat on his chair in the negotiations as enthroned, a monarch with a single purpose. “He felt about France as Pericles about Athens,” writes Keynes of Clemenceau, “unique value in her, nothing else mattering.” Germany had conquered France in 1871; to Clemenceau, recapturing what had been lost, and more, was all. Clemenceau dismissed the Italian prime minister, who sat protesting to the left of the throne, as “the weeper.”
Wilson represented another familiar type: the sanctimonious ideologue. Well before his arrival in Paris, the U.S. president had presented his “Fourteen Points” for the postwar world, including his League of Nations and the principle of free trade. Self-determination of nations was another Wilson goal: Poland, for example, must become an independent state. The ideals were worthy enough—the trade freedom would have facilitated recovery. But the document was too finished, too detailed and elaborate. The Fourteen Points appalled Clemenceau: “The good Lord himself had only ten.”
The real damage was that the Points in their formality left Wilson little room to negotiate once he arrived in Paris. He did not want to, anyhow—his second error. Those who did not sign on to his crusade were his “deplorables.” With a bravado reminiscent of union leaders today—think Shawn Fain of the United Auto Workers—Wilson did not arrive in, so much as march on, Paris.
What Wilson could not see was that Europe was not ready to be entirely reordered. Yet he would not, whatever reality he encountered, bend his approach. “The President was set,” writes Keynes. “His arms and legs had been spliced by the surgeons to a certain posture, and they must be broken again before they could be altered.”
Scholars have noted that Wilson was already a cardiovascular case when he arrived at Paris, having suffered several underdiscussed strokes. But vanity also fueled Wilson’s sanctimony, leading him to forgo small victories for the sake of a win that appeared—but only appeared—to honor one of his Points. Notes Keynes: “It was harder to de-bamboozle this old Presbyterian than it had been to bamboozle him; for the former involved his belief in and respect for himself.” It did not help matters that Wilson knew little of European geography or history, astounding Clemenceau: “What ignorance!”
One might have expected the Germans to speak up. Even losers deserve some say, and even the Allies had labeled the war’s conclusion “armistice,” not “absolute victory.” Today the first order of business demanded of tyrants post-conflict is regime change. In 1918, the Kaiser abdicated and Germans duly established the Weimar Republic. Still, as Keynes notes, the Big Four made an “eleventh-hour decision” to deny the Germans a place at the Paris negotiating table. Only on May 7, 1919, when all was set but the amount of reparations to pay, were German delegates summoned to be presented with draft language for the treaty.
German delegation leader Ulrich von Brockdorff-Rantzau—suffering from his own form of arrogance, not Presbyterian but German—trembled as he absorbed the news. The plan envisaged taking not only Alsace-Lorraine from Germany but also land to the east, to make room for a new nation, a reborn Poland. Germany lost control of the Rhineland, demilitarized under the treaty. This, as the Germans pointed out, violated Wilson’s principle of self-determination. Two German-speaking cities, Danzig and Memel, were detached from the pre-war state and established as stand-alone statelets. Farther afield, Germany lost all its colonies.
“We were aghast when we read in this document the demands made upon us,” Brockdorff-Rantzau wrote in response. “The exactions of that Treaty are more than the German people can bear.” They were “a death sentence.”
When the Allies rejected German counterproposals, the proud Brockdorff-Rantzau resigned rather than sign. Those German politicians who did reluctantly sign the Treaty of Versailles the following month were instantly decried at home as having committed a Dolchstoss, a stab in the back, upon their own people.
The enormity of the reparations demands left an opening for German communists and populists, including, eventually, a figure unknown in 1919: Adolf Hitler. “This instrument of unlimited blackmail and shameful humiliation” is how Hitler described Versailles, which he mentioned more than twenty times in Mein Kampf.
Yet most American and English observers did not allow themselves to acknowledge the legitimacy of Keynes’s concern; Edwin James of the New York Times spoke for many when he concluded that “Germany has not had enough whipping.”
DEBACLE
In her powerful Paris 1919, Margaret MacMillan argues that the heavy reparations terms that came after the treaty were not so onerous that they doomed Germany. That may be technically arguable. But Keynes, a live witness, prophesied that Versailles would yield a “Carthaginian peace.” And, what matters more, so did many Germans, especially after financial desperation drove Germany to “inflationism” (Keynes’s term). Within a few years a now-storied hyperinflation devastated what hope remained of a stable life in Germany, depleting the savings of every household. In 1923, the French and Belgians occupied the Ruhr after Germany failed to deliver coal and coke required under reparations agreements.
Just when the Dawes and Young Plans, American-led efforts to reschedule European debt, were helping recovery, more blows came. Habituated to revenge mode, the United States, France, and Britain chose to overlook the consequences of tariffs on Germany’s ability to repay. This was also a form of debt denial: So preoccupied with domestic joblessness were American politicians by, say, 1930, that they could not admit the consequences of tariffs for a nation struggling with debt.
When the Depression deepened worldwide, President Herbert Hoover, to his credit, declared a one-year debt moratorium for major parties. But Hoover also signed into law the Smoot-Hawley Tariff, so onerous that Hjalmar Schacht, the former president of the Reichsbank, traveled to America to issue a warning: “Germany’s exports to the United States certainly cannot enlarge in the face of the existing tariff. Now other countries have followed your example.” Schacht would later note that tariffs imposed by France and Britain around the same time took away “four-fifths of German exports.”
The economic setbacks fueled the rise of a nationalist more skilled than Clemenceau: Hitler. By 1933, Hitler had seized power, and papers were profiling Schacht as “Hitler’s Economic Expert.”
One can fantasize, as Keynes did, of what might have come to pass had tenable terms for German recovery been set in Paris that crucial spring of 1919. The war that followed less than a generation later might have been avoided. That lesson was well absorbed by the victorious United States after World War II, which before long offered the Marshall Plan.
Alas, the German debacle is less remembered today than it was in 1945, and we are more preoccupied and theatrical than American leadership was in 1945, 1946, and 1947. America’s debt disaster can still be avoided—but only if we drop the assumption that all will always be well with the U.S. economy and the dollar. DOGE offered an intriguing palliative, but only that. Our own debt crisis is the moment for political stars to climb down from their stage and undertake a serious set of reforms.
Amity Shlaes chairs the Coolidge Foundation, is the author of Great Society, and is a fellow of National Review Institute. She is at work on a history of the Gilded Age.
A version of this article first appeared in National Review’s “Capital Matters.”