By Carlo de Nuzzo
Research Assistant at Sciences Po (Paris)

After seventeen million deaths, the Great War finally ended in November 1918.  At the Paris Peace Conference the Council of Four, composed by the four heads of State of the most important winning powers (France, Great Britain, Italy, and the United States) discussed new political and geographic arrangements.

One of the most important topics was the amount of final reparations from the Central Powers. The United Kingdom and France were the largest debtors of the United States and at the same time the main recipients of reparations from Germany. As a consequence, during the Peace Conference, the allies discussed the possibility of imposing harsh reparations on the losing nations so that their own debts could be paid back.

Aged 36, John Maynard Keynes was one of the English delegates at the Paris Peace Conference. While there he proposed an entire cancellation of inter-ally war indebtedness. He also reasoned that the total amount of this tribute should not exceed the amount obtainable from the enemy, but the American delegates in Paris rejected Keynes’s idea of debt cancellation.

Two weeks later, Keynes elaborated a second plan, with a joint guarantee of reparation bonds. In his Scheme for the Rehabilitation of Europe Credit and For Financing Relief and Reconstruction, the Allied power would accept German reparation bonds ‘in final discharge of the debts incurred between ourselves’, as he said in a letter to Austen Chamberlain, the then Chancellor of the Exchequer, on 28 March 1919. Keynes elaborated this project after Jan Christian Smuts, South African Defence Minister told him about the appalling situation in Hungary and Austria.

Keynes’s Scheme would allow stricken countries, whose credit was temporarily destroyed, to restart their economies on the basis of credits guaranteed by the United States and the richest countries. For Roy Forbes Harrod, Keynes’s biographer, this plan was retrospectively perceived as a “Marshall Plan” on a reduced scale[1]. The ‘Keynes Plan’ recommended that the Central European States should issue guaranteed bonds by Allies, which in turn guaranteed by reparations that investments supported by loan will afford to pay.

In short, what Keynes’s plan provided was for a bond issue, proportionate issues by the German government and its defeated Allies with a quote to be used by the German Government for the purchase of food and raw materials. Another part would be to discharge German debts to the European neutrals, and the remainder would find use for purchases of food and raw materials in Austria, Hungary and Bulgaria. Four-fifths of the issue, would go to the recipients on reparations account, thus providing funds to finance recovery in countries such as France and Italy. The interest was to be jointly guaranteed by the Enemy States, with priority over reparations payments, and to be underwritten by the Allied and Associated governments, as well as by the Scandinavian governments and the Netherlands and Switzerland, in certain specified proportions.

Keynes believed that he had finally found the solution for all problems: European credit would be rehabilitated; the United States would be assured of a demand for its exports; the Central Powers too would obtain funds to feed their people and restart their industrial life, and there would be hope for the enemy powers to put themselves in a position to meet their onerous obligations.

Chamberlain advocated vigorously Keynes’s plan, and in a letter to Prime Minister Lloyd George on 17 April 1919, he wrote:

“I have no hesitation in recommending the scheme to you. It is marked by all Mr Keynes’s characteristic ability and fertility of resource: it provides the stricken countries of Europe, whether allied or enemy, with the means of re-equipping themselves and restarting on a sound basis the trade and industry of the world; […].”

Without a solution to the problem Keynes believed in a scenario of a “morass of destruction”, and, by consequence, an economic disruption of Europe. Even so, he expected a negative reaction from the French delegation in the Peace Conference because of the French ‘Revanchism’ towards Germany and lack of determination to corroborate to a German economic restarting.

Lloyd George, on the other hand, sponsored the scheme in a covering letter to U.S. President Woodrow Wilson, but did not succeed in convincing him. The American support was essential to give legitimation and reassurance of Keynes’s plan, and not necessarily because of its financial role - as the United States’ responsibility percentage was only 20 per cent, the same as France and the United Kingdom.

On 3 May 1919, Wilson’s answer came to Lloyd George: the American reaction to the plan was “disappointingly cool” and fairly vague:

          “I am sorry to say, however, that Mr. Keynes’ plan does not seem feasible from the American point of view. Our Treasury and our financial delegates here in Paris are convinced that the plan as presented  lacks many elements of economic and financial soundness. [...]”

The U.S. was against a general Scheme to restart Europe. They wanted to consider and play a different role for each separate problem of the new States and Eastern Allies, of the Enemy States, and of the Western Allies. This give us a deeper sense of the American spirit about rehabilitation of Europe.

However, one representative of the American Treasury proposed a financial treaty only for Great Britain, but Keynes refused disdainfully. One could say that the meaning was clear: The U.S. did not want to help Europe, but wrap a financial, and consequently a political, connection with Great Britain, ignoring and overlooking all ideas and possibilities of strong connections among European states.

Disappointed, Keynes wrote in a letter to one of the American delegates, Norman Davis, on 5 June 1919, two days before he resigned from his role at the Paris Conference:

“I am slipping away on Saturday from this scene of nightmare. I can do no more good here. You Americans are broken reeds, and I have no anticipation of any real improvement in the state of affairs.”

What happened to Keynes’s proposals enables a better understanding of the various processes involved in the U.S. hegemonic rise, the European decline and also of how all efforts to rehabilitate the continent were weakened by two matters: one was the inability of the European ruling class to look into the future, and the other was the American actions towards its allies. Furthermore, Keynes’s Scheme was one of the first to bring a strong sense of ‘European Union’ and solidarity to be grown through economic links.

[1] Roy Forbes Harrod, The Life of John Maynard Keynes, Harmondsworth, Penguin, 1972, p. 288.