A Revision of the Treaty / Being a Sequel to The Economic Consequence of the Peace

by John Maynard Keynes

CHAPTER IV

The Reparation Bill

The Treaty of Versailles specified the classes of damage in respect of which Germany was to pay Reparation. It made no attempt to assess the amount of this damage. This duty was assigned to the Reparation Commission, who were instructed to notify their assessment to the German Government on or before May 1, 1921.

An attempt was made during the Peace Conference to agree to a figure there and then for insertion in the Treaty. The American delegates in particular favored this course. But an agreement could not be reached. There was no reasonable figure which was not seriously inadequate to popular expectations in France and the British Empire.[60] The highest figure to which the Americans would agree, namely, 140 milliard gold marks, was, as we shall see later, not much above the eventual assessment of the Reparation Commission; the lowest figure to which France and Great Britain would agree, namely, 180 milliard gold marks, was, as it has turned out, much above the amount to which they were entitled even under their own categories of claim.[61]

Between the date of the Treaty and the announcement of its decision by the Reparation Commission, there was much controversy as to what this amount should be. I propose to review some of the details of this problem, because, if men are in any way actuated by veracity in international affairs, a just opinion about it is still relevant to the Reparation problem.

The main contentions of The Economic Consequences of the Peace were these: (1) that the claims against Germany which the Allies were contemplating were impossible of payment; (2) that the economic solidarity of Europe was so close that the attempt to enforce these claims might ruin every one; (3) that the money cost of the damage done by the enemy in France and Belgium had been exaggerated; (4) that the inclusion of pensions and allowances in our claims was a breach of faith; and (5) that our legitimate claim against Germany was within her capacity to pay.

I have made some supplementary observations about (1) and (2) in Chapters III. and VI. I deal with (3) here and in Chapter V. with (4). These latter are still important. For, whilst time is so dealing with (1) and (2) that very few people now dispute them, the amount of our legitimate claim against Germany has not been brought into so sharp a focus by the pressure of events. Yet if my contention about this can be substantiated, the world will find it easier to arrange a practical settlement. The claims of justice in this connection are generally thought to be opposed to those of possibility, so that even if the pressure of events drives us reluctantly to admit that the latter must prevail, the former will rest unsatisfied. If, on the other hand, restricting ourselves to the devastations in France and Belgium, we can demonstrate that it is within the capacity of Germany to make full reparation, a harmony of sentiment and action can be established.

With this end in view it is necessary that I should take up again, in the light of the fuller information now available, the statements which I made in The Economic Consequences of the Peace (p. 120) to the effect that “the amount of the material damage done in the invaded districts has been the subject of enormous, if natural, exaggeration.” These statements have involved me in a charge, with which Frenchmen as eminent as M. Clemenceau[62] and M. Poincaré have associated themselves, that I was actuated not by the truth but by a supposed hostility to France in speaking thus of the allegations of M. Klotz and M. Loucheur and some other Frenchmen. But I still urge on France that her cause may be served by accuracy and the avoidance of overstatement; that the damage she has suffered is more likely to be made good if the amount is possible than if it is impossible; and that, the more moderate her claims are, the more likely she is to win the support of the world in securing priority for them. M. Brenier, in particular, has conducted a widespread propaganda with the object of creating prejudice against my statistics. Yet to add a large number of noughts at the end of an estimate is not really an indication of nobility of mind. Nor, in the long run, are those persons good advocates of Franceʼs cause who bring her name into contempt and her sincerity into doubt by using figures wildly. We shall never get to work with the restoration of Europe unless we can bring not only experts, but the public, to consider coolly what material damage France has suffered and what material resources of reparation Germany commands. The Times, in a leading article which accompanied some articles by M. Brenier (December 4, 1920), wrote with an air of noble contempt—“Mr. Keynes treats their losses as matter for statistics.” But chaos and poverty will continue as long as we insist on treating statistics as an emotional barometer and as a convenient vehicle of sentiment. In the following examination of figures let us agree that we are employing them to measure facts and not as a literary expression of love or hate.

Leaving on one side for the present the items of pensions and allowances and loans to Belgium, let us examine the data relating to the material damage in Northern France. The claims made by the French Government did not vary very much from the spring of 1919, when the Peace Conference was sitting, down to the spring of 1921, when the Reparation Commission was deciding its assessment, though the fluctuations in the value of the franc over that period cause some confusion. Early in 1919 M. Dubois, speaking on behalf of the Budget Commission of the Chamber, gave the figure of 65 milliard francs “as a minimum,” and on February 17, 1919, M. Loucheur, speaking before the Senate as Minister of Industrial Reconstruction, estimated the cost at 75 milliards at the prices then prevailing. On September 5, 1919, M. Klotz, addressing the Chamber as Minister of Finance, put the total French claims for damage to property (presumably inclusive of losses at sea, etc.) at 134 milliards. In July 1920 M. Dubois, by that time President of the Reparation Commission, in a Report for the Brussels and Spa Conferences, put the figure at 62 milliards on the basis of pre–war prices.[63] In January 1921 M. Doumer, speaking as Finance Minister, put the figure at 110 milliards. The actual claim which the French Government submitted to the Reparation Commission in April 1921 was for 127 milliard paper francs at current prices.[64] By that time the exchange value of the franc, and also its purchasing power, had considerably depreciated, and, allowing for this, there is not so great a discrepancy as appears at first sight between the above estimates.

For the assessment of the Reparation Commission it was necessary to convert this claim from paper francs into gold marks. The rate to be adopted for this purpose was the subject of acute controversy. On the basis of the actual rate of exchange prevailing at that date (April 1921) the gold mark was worth about 3.25 paper francs. The French representatives claimed that this depreciation was temporary and that a permanent settlement ought not to be based on it. They asked, therefore, for a rate of about frs. 1.50 or frs. 1.75 to the gold mark.[65] The question was eventually submitted to the arbitration of Mr. Boyden, the American member of the Reparation Commission, who, like most arbitrators, took a middle course and decided that 2.20 paper francs should be deemed equivalent to 1 gold mark.[66] He would probably have found it difficult to give a reason for this decision. As regards that part of the claim which was in respect of pensions, a forecast of the gold value of the franc, however impracticable, was relevant. But as regards that part which was in respect of material damage, no such adjustment was necessary[67]; for the French claim had been drawn up on the basis of the current costs of reconstruction, the gold equivalent of which need not be expected to rise with an increase in the gold value of the franc, an improvement in the exchange being balanced sooner or later by a fall in franc prices. It might have been proper to make allowance for any premium existing, at the date of the assessment, on the internal purchasing power of the franc over that of its external exchange–equivalent in gold. But in April 1921 the franc was not far from its proper “purchasing power parity,” and I calculate that on this basis it would have been approximately accurate to have equated the gold mark with 3 paper francs. The rate of 2.20 had the effect, therefore, of inflating the French claim against Germany very materially.

At this rate the claim of 127 milliard paper francs for material damage was equivalent to 57.7 milliard gold marks, of which the chief items were as follows:

		Francs (paper), millions.			Marks (Gold), millions.
Industrial damages			38,882			17,673
Damage to houses			36,892			16,768
Furniture and fittings			25,119			11,417
Unbuilt–on land			21,671			9,850
State property			1,958			890
Public works			2,583			1,174
	Total		127,105			57,772

This total is one which I believe to be a vast, indeed a fantastic, exaggeration beyond anything which it would be possible to justify under cross–examination. At the date when I wrote The Economic Consequences of the Peace, exact statistics as to the damage done were not available, and it was only possible to fix a maximum limit to a reasonable claim, having regard to the pre–war wealth of the invaded districts. Now, however, much more detail is available with which to check the claim.

The following particulars are quoted from a statement made by M. Briand in the French Senate on April 6, 1921, supplemented by an official memorandum published a few days later, and represent the position at about that date:[68]

(1) The population inhabiting the devastated districts in April 1921 was 4,100,000, as compared with 4,700,000 in 1914.

(2) Of the cultivable land 95 per cent of the surface had been releveled and 90 per cent had been plowed and was producing crops.

(3) 293,733 houses were totally destroyed, in replacement of which 132,000 provisional dwellings of different kinds had been erected.

(4) 296,502 houses were partially destroyed, of which 281,300 had been repaired.

(5) Fifty per cent of the factories were again working.

(6) Out of 2404 kilometers of railway destroyed, practically the whole had been reconstructed.

It seems, therefore, that, apart from refurnishing and from the rebuilding of houses and factories, the greater part of which had still to be accomplished, the bulk of the devastation was already made good out of the daily labor of France within two years of the Peace Conference, before Germany had paid anything.

This is a great achievement,—one more demonstration of the riches accruing to France from the patient industry of peasants, which makes her one of the rich countries of the world, in spite of the corrupt Parisian finance which for a generation past has wasted the savings of her investors. When we look at Northern France we see what honest Frenchmen can accomplish.[69] But when we turn to the money claims which are based on this, we are back in the atmosphere of Parisian finance,—so grasping, faithless, and extravagantly unveracious as to defeat in the end its own objects.

For let us compare some of these items of devastation with the claims lodged.

(1) 293,733 houses were totally destroyed and 296,502 were partially destroyed. Since nearly all the latter have been repaired, we shall not be underestimating the damage in assuming, for the purposes of a rough comparison, that, on the average, the damaged houses were half destroyed, which gives us altogether the equivalent of 442,000 houses totally destroyed. Turning back, we find that the French Governmentʼs claim for damage to houses was 16,768 million gold marks, that is to say $4,192,000,000. Dividing this sum by the number of houses, we find an average claim of $9,480, per house![70] This is a claim for what were chiefly peasantsʼ and minersʼ cottages and the tenements of small country towns. M. Tardieu has quoted M. Loucheur as saying that the houses in the Lens–Courrières district were worth 5000 francs ($1000) a–piece before the war, but would cost 15,000 francs to rebuild after the war, which sounds not at all unreasonable. In April 1921 the cost of building construction in Paris (which had been a good deal higher some months before) was estimated to be, in terms of paper francs, three and a half times the pre–war figure.[71] But even if we take the cost in francs at five times the pre–war figure, namely 25,000 paper francs per house, the claim lodged by the French Government is still three and a half times the truth. I fancy that the discrepancy, here and also under other heads, may be partly explained by the inclusion in the official French claim of indirect damages, namely, for loss of rent—perte de loyer. It does not appear what attitude the Reparation Commission took up towards indirect pecuniary and business losses arising in the devastated districts out of the war. But I do not think that such claims are admissible under the Treaty. Such losses, real though they were, were not essentially different from analogous losses occurring in other areas, and indeed throughout the territory of the Allies. The maximum claim, however, on this head would not go far towards justifying the above figure, and we can allow a considerable margin of error for such additional items without impairing the conclusion that the claim is exaggerated. In The Economic Consequences of the Peace (p. 127) I estimated that $1,250,000,000 might be a fair estimate for damage to house property; and I still think that this was about right.

(2) This claim for damage to houses is exclusive of furniture and fittings, which are the subject of a separate claim, namely, for 11,417 million gold marks, or about $2,850,000,000. To check this figure let us assume that the whole of the furniture and fittings were destroyed, not only where the houses were destroyed, but also in every case where a house was damaged. This is an overstatement, but we may set it off against the fact that in a good many cases the furniture may have been looted and not recovered by restitution (a large amount has, in fact, been recovered in this way), although the structure of the house was not damaged at all. The total number of houses damaged or destroyed was 590,000. Dividing this into $2,850,000,000, we have an average of nearly $5,000 per house—an average valuation of the furniture and fittings in each peasantʼs or collierʼs house of nearly $5,000! I hesitate to guess how great an overstatement shows itself here.

(3) The largest claim of all, however, is for “industrial damages,” namely, 17,673 million gold marks, or about $4,400,000,000. In 1919 M. Loucheur estimated the cost of reconstruction of the coal mines at 2000 million francs, that is $400,000,000 at the par of exchange.[72] As the pre–war value of all the coal mines in Great Britain was estimated at only $650,000,000, and as the pre–war output of the British mines was fifteen times that of the invaded districts of France, this figure seems high.[73] But even if we accept it, there is still four thousand million dollars to account for. The great textile industries of Lille and Roubaix were robbed of their raw material, but their plant was not seriously injured, as is shown by the fact that in 1920 the woolen industry of these districts was already employing 93.8 per cent and the cotton industry 78.8 per cent of their pre–war personnel. At Tourcoing 55 factories out of 57 were in operation, and at Roubaix 46 out of 48.[74]

Altogether 11,500 industrial establishments are said to have been interfered with, but this includes every village workshop, and about three–quarters of them employed less than 20 persons. Half of them were at work again by the spring of 1921. What is the average claim made on their behalf? Deducting the coal mines as above and dividing the total claim by 11,500, we reach an average figure of nearly $35,000. The exaggeration seems prima facie on as high a scale as in the case of houses and furniture.

(4) The remaining item of importance is for unbuilt–on land. The claim under this head is for 9850 million gold marks, or about $2,460,000,000. M. Tardieu (op. cit., p. 347) quotes Mr. Lloyd George as follows, in the course of a discussion during the Peace Conference in which he was pointing out the excessive character of the French claims: “If you had to spend the money which you ask for the reconstruction of the devastated regions of the North of France, I assert that you could not manage to spend it. Besides, the land is still there. Although it has been badly upheaved in parts, it has not disappeared. Even if you put the Chemin des Dames up to auction, you would find buyers.” Mr. Lloyd Georgeʼs view has been justified by events. In April 1921 the French Prime Minister was able to tell his Senate that 95 per cent of the cultivable land had been releveled and that 90 per cent had been plowed and was producing crops. Some go so far as to maintain that the fertility of the soil has been actually improved by the disturbance of its surface and by its lying fallow for several years. But apart from its having proved easier than was anticipated to make good this category of damage, the total cultivated area (excluding woodland) of the whole of the eleven Departments affected was about 6,650,000 acres, of which 270,000 acres were in the “zone of destruction,” 2,000,000 acres in the “zone of trenches and bombardment,” and 4,200,000 acres in the “zone of simple occupation.” The claim, therefore, averaged over the whole area, works out at about $370 per acre and, averaged over the first two categories above, at more than $1000 per acre. This claim, though it is described as being in respect of unbuilt–on land, probably includes farm buildings (other than houses), implements, live stock, and the growing crops of August 1914. As experience has proved that the permanent qualities of the land have only been seriously impaired over a small area, these latter items should probably constitute the major part of the claim. We have also to allow for destruction of woodlands. But even with high estimates for each of these items, I do not see how we could reach a total above a third of the amount actually claimed.

These arguments are not exact, but they are sufficiently so to demonstrate that the claim sent in to the Reparation Commission is untenable. I believe that it is at least four times the truth. But it is possible that I have overlooked some items of claim, and it is better in discussions of this kind to leave a wide margin for possible error. I assert, therefore, that on the average the claim is not less than two or three times the truth.

I have spent much time over the French claim, because it is the largest, and because more particulars are available about it than about the claims of the other Allies. On the face of it, the Belgian claim is open to the same criticism as the French. But in this claim a larger part is played by levies on the civilian population and personal injuries to civilians. The material damage, however, was on a very much smaller scale than in France. Belgian industry is already working at its pre–war efficiency, and the amount of reconstruction still to be made good is not on a great scale. The Belgian Minister for Home Affairs stated in Parliament in February 1920 that at the date of the Armistice 80,000 houses and 1100 public buildings had been destroyed. This suggests that the Belgian claim on this head ought to be about a quarter of the French claim; but in view of the greater wealth of the invaded districts of France, the Belgian loss is probably decidedly less than a quarter of the French loss. The claim, actually submitted by Belgium, for property, shipping, civilians and prisoners (that is to say, the aggregate claim apart from pensions and allowances) amounted to 34,254 million Belgian francs. Inasmuch as the Belgian Ministry of Finance, in an official survey published in 1913, estimate the entire wealth of the country at 29,525 million Belgian francs, it is evident that, even allowing for the diminished value of the Belgian franc, which is our measuring rod, this claim is very grossly excessive. I should guess that the degree of exaggeration is quite as great as in the case of France.

The British Empire claim is, apart from pensions and allowances, almost entirely in respect of shipping losses. The tonnage lost and damaged is definitely known. The value of the cargoes carried is a matter of difficult guesswork. On the basis of an average of $150 for the hull and $200 for the cargo per gross ton lost, I estimated the claim in The Economic Consequences of the Peace (p. 132) at $2,700,000,000. The actual claim lodged was for $3,835,000,000. Much depends on the date at which the cost of replacement is calculated. Most of the tonnage was in fact replaced out of vessels the building of which commenced before the end of the war or shortly afterwards, and thus cost a much higher price than prevailed in, e.g., 1921. But even so the claim lodged is very high. It seems to be based on an estimate of $500 per gross ton lost for hull and cargo together, any excess in this being set off against the fact that no separate allowance is made for vessels damaged or molested, but not sunk. This figure is the highest for which any sort of plausible argument could be adduced, rather than a judicial estimate. I adhere to the estimate which I gave in The Economic Consequences of the Peace.

I forbear to examine the claims of the other Allies. The details, so far as they have been published, are given in Appendix No. 3.

The observations made above relate to the claims for material damage and do not bear on those for pensions and allowances, which are, nevertheless, a very large item. These latter are to be calculated, according to the Treaty, in the case of pensions “as being the capitalized cost at the date of coming into force of the Treaty, on the basis of the scales in force in France at such date,” and in the case of allowances made during hostilities to the dependents of mobilized persons “on the basis of the average scale for such payments in force in France” during each year. That is to say, the French Army scale is to be applied all round; and the result, given the numbers affected, should be a calculable figure, in which there should be little room for serious error. The actual claims were as follows in milliard gold marks:[75]

	Milliard marks (gold).
France		33
British Empire		37
Italy		17
Belgium		1
Japan		1
Roumania		4
		——
		93

This does not include Serbia, for which a separate figure is not available, or the United States. The total would work out, therefore, at about 100 milliard gold marks.[76]

What does the aggregate of the claims work out at under all heads, and what relation does this total bear to the final assessment of the Reparation Commission? As the claims are stated in a variety of national currencies, it is not quite a simple matter to reach a total. In the following table French francs are converted into gold marks at 2.20 (the rate adopted by the Commission as explained above), sterling approximately at par (on the analogy of the rate for francs), Belgian francs at the same rate as French francs, Italian lire at twice this rate, Serbian dinars at four times this rate, and Japanese yen at par.

	Milliard marks (gold).
France		99
British Empire		54
Italy		27
Belgium		16	½
Japan		1	½
Jugo–Slavia		9	½
Roumania		14
Greece		2
		——	—
		223	½

There are omitted from this table Poland and Czecho–Slovakia, of which the claims are probably inadmissible, the United States, which submitted no claim, and certain minor claimants shown in Appendix No. 3.

In round figures, therefore, we may put the claims as lodged before the Reparations Commission at about 225 milliard gold marks, of which 95 milliards was in respect of pensions and allowances, and 130 milliards for claims under other heads.

The Reparation Commission in announcing its decision did not particularize as between different claimants or as between different heads of claim, and merely stated a lump sum figure. Their figure was 132 milliards; that is to say, about 58 per cent of the sums claimed. This decision was in no way concerned with Germanyʼs capacity to pay, and was simply an assessment, intended to be judicial, as to the sum justly due under the heads of claim established by the Treaty of Versailles.

The decision was unanimous, but only in face of sharp differences of opinion. It is not suitable or in accordance with decency to set up a body of interested representatives to give a judicial decision in their own case. This arrangement was an offspring of the assumption which runs through the Treaty that the Allies are incapable of doing wrong, or even of partiality.

Nothing has been published in England about the discussions which led up to this conclusion. But M. Poincaré, at one time President of the Reparation Commission and presumably well–informed about its affairs, has lifted a corner of the veil in an article published in the Revue des Deux Mondes for May 15, 1921. He there divulges the fact that the final result was a compromise between the French and the British representatives, the latter of whom endeavored to fix the figure at 104 milliards, and defended this adjudication with skilful and even passionate advocacy.[77]

When the decision of the Reparation Commission was first announced, and was found to abate so largely the claims lodged with it, I hailed it, led away a little perhaps by its very close agreement with my own predictions, as a great triumph for justice in international affairs. So, in a measure, I still think it. The Reparation Commission went a considerable way in disavowing the veracity of the claims of the Allied Governments. Indeed, their reduction of the claims for items other than pensions and allowances must have been very great since the claims for pensions, being capable of more or less exact calculation,[78] can hardly have been subject to an initial error of anything approaching 42 per cent. If, for example, they reduced the claim for pensions and allowances from 95 to 80 milliards, they must have reduced the other claims from 130 milliards to 52 milliards, that is to say, by 60 per cent. Yet even so, on the data now available, I do not believe that their adjudication could be maintained before an impartial tribunal. The figure of 104 milliards, attributed by M. Poincaré to Sir John Bradbury, is probably the nearest we shall get to a strictly impartial assessment.

To complete our summary of the facts two particulars must be added. (1) The total, as assessed by the Reparation Commission, comprehends the total claim against Germany and her Allies. It includes, that is to say, the damage done by the armies of Austria–Hungary, Turkey, and Bulgaria, as well as by those of Germany. Payments, if any, made by Germanyʼs Allies must, presumably, be deducted from the sum due. But Annex I. of the Reparation Chapter of the Treaty of Versailles is so drafted as to render Germany liable for the whole amount. (2) This total is exclusive of the sum due under the Treaty for the reimbursement of sums lent to Belgium by her Allies during the war. At the date of the London Agreement (May 1921) Germanyʼs liability under this head was provisionally estimated at 3 milliard gold marks. But it had not then been decided at what rate these loans, which were made in terms of dollars, sterling, and francs, should be converted into gold marks. The question was referred for arbitration to Mr. Boyden, the United States Delegate on the Reparation Commission, and at the end of September 1921 he announced his decision to the effect that the rate of conversion should be based on the rate of exchange prevailing at the date of the Armistice. Including interest at 5 per cent, as provided by the Treaty, I estimate that this liability amounts at the end of 1921 to about 6 milliard gold marks, of which slightly more than a third is due to Great Britain and slightly less than a third each to France and the United States respectively.

I take, therefore, as my final conclusion that the best available estimate of the sum due from Germany, under the strict letter of the Treaty of Versailles, is 110 milliard gold marks, which may be divided between the main categories of claim in the proportions—74 milliards for pensions and allowances, 30 milliards for direct damage to the property and persons of civilians, and 6 milliards for war debt incurred by Belgium.

This total is more than Germany can pay. But the claim exclusive of pensions and allowances should be within her capacity. The inclusion of a demand for pensions and allowances was the subject of a long struggle and a bitter controversy in Paris. I have argued that those were right who maintained that this demand was inconsistent with the terms on which Germany surrendered at the Armistice. I return to this subject in the next chapter.