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

by John Maynard Keynes

	Percentage of Total Exports.
	1913.					1920 (Jan.–Sept.)					1921 (June–Sept.)
Iron and steel goods		13	.	2			20					22
Machinery (including motor cars)		7	.	5			12					17
Chemicals and dies		4					13					9	.	5
Fuel		7					6	.	5			7
Paper goods		2	.	5			4					3	.	5
Electrical goods		2					3	.	5			?
Silk goods		2					3					15
Cotton goods		5	.	5			5
Woolen goods		6					.		.
Glass			.	5			2	.	5			2
Leather goods		3					2					4
Copper goods		3	.	5			1	.	5			?

It is clear, therefore, that, though raw materials other than coal, such as potash, sugar, and timber may yield a trifle, Germany can only compass an export trade of great value by exporting iron and steel goods, chemicals, dyes, textiles, and coal, for these are the only export articles of which she can produce great quantities. It is also clear that there have been no very marked changes in the proportionate importance of the different export trades since the war, except that the exchange position has somewhat stimulated, relatively to the others, those export lines, such as iron goods, machinery, chemicals, dyes, and glass, which do not involve much importation of raw materials.

To compel Germany to pay a large indemnity is therefore the same thing as to compel her to expand some or all of the above–mentioned exports to a greater extent than she would do otherwise. The only way in which she can effect this expansion is by offering the goods at a lower price than that at which other countries care to offer them; putting herself in a position to offer them cheap, partly by the German working classes lowering their standard of life without reducing their efficiency in the same degree, and partly by German export industries being subsidized, directly or indirectly, at the expense of the rest of the community.

These facts, formerly overlooked, are now, perhaps, exaggerated by popular opinion. For Principle (3), enunciated above, requires attention. Our industries will be subjected to strong competition from Germany, just as they were before the war, whether we exact Reparation or not; and we must not ascribe to the Reparation policy inconveniences which would exist in any case. The remedy lies not in the now popular nostrums for prescribing the form in which Germany shall pay, but in reducing the aggregate amount to a reasonable figure. For by prescribing the manner in which she shall pay us we do not control the form of her export trade as a whole; and by absorbing for reparation purposes the whole of a particular type of export, we compel her to expand her other exports to pay for her imports and other international obligations. On the other hand, we can secure from her moderate payments, on the sort of scale, for example, on which she might have been building up new foreign investments, without stimulating her exports as a whole to a greater activity than they would enjoy otherwise. This is the correct course for Great Britain from the standpoint of her own self–interest only.

The practical application of Principles (5) and (6) is also clear. So far as (5) is concerned, Great Britain is to receive not the whole of the indemnity, but about a fifth of it; whilst (6) provides the argument which to me has always appeared decisive. The permanence of reparation payments on a large scale for a long period of years is, to say the least, not to be reckoned on. Who believes that the Allies will, over a period of one or two generations, exert adequate force over the German Government, or that the German Government can exert adequate authority over its subjects, to extract continuing fruits on a vast scale from forced labor? No one believes it in his heart; no one at all. There is not the faintest possibility of our persisting with this affair to the end. But if this is so, then, most certainly, it will not be worth our while to disorder our export trades and disturb the equilibrium of our industry for two or three years; much less to endanger the peace of Europe.

The same principles apply with one modification to the United States and to the exaction by her of the debts which the Allied Governments owe. The industries of the United States would suffer, not so much from the competition of cheap goods from the Allies in their endeavors to pay their debts, as from the inability of the Allies to purchase from America their usual proportion of her exports. The Allies would have to find the money to pay America, not so much by selling more as by buying less. The farmers of the United States would suffer more than the manufacturers; if only because increased imports can be kept out by a tariff, whilst there is no such easy way of stimulating diminished exports. It is, however, a curious fact that whilst Wall Street and the manufacturing East are prepared to consider a modification of the debts, the Middle West and South is reported (I write ignorantly) to be dead against it. For two years Germany was not required to pay cash to the Allies, and during that period the manufacturers of Great Britain were quite blind to what the consequences would be to themselves when the payments actually began. The Allies have not yet been required to begin to pay cash to the United States, and the farmers of the latter are still as blind as were the British manufacturers to the injuries they will suffer if the Allies ever try seriously to pay in full. I recommend Senators and Congressmen from the agricultural districts of the United States, lest they soon suffer the same moral and intellectual ignominy as our own high–Reparation men, to invest at once in a little caution in their opposition to the efforts of Mr. Hardingʼs Administration to secure for itself a free hand to act wisely in this matter (and even perhaps generously) in accordance with the progress of opinion and of events.

The decisive argument, however, for the United States, as for Great Britain, is not the damage to particular interests (which would diminish with time), but the unlikelihood of permanence in the exaction of the debts, even if they were paid for a short period. I say this, not only because I doubt the ability of the European Allies to pay, but because of the great difficulty of the problem which the United States has before her in any case in balancing her commercial account with the Old World.

American economists have examined somewhat carefully the statistical measure of the change from the pre–war position. According to their estimates, America is now owed more interest on foreign investments than is due from her, quite apart from the interest on the debts of the Allied Governments; and her mercantile marine now earns from foreigners more than she owes them for similar services. Her excess of exports of commodities over imports approaches $3000 millions a year;[110] whilst, on the other side of the balance, payments, mainly to Europe, in respect of tourists and of immigrant remittances are estimated at not above $1000 millions a year. Thus, in order to balance the account as it now stands, the United States must lend to the rest of the world, in one shape or another, not less than $2000 millions a year, to which interest and sinking fund on the European Governmental War Debts would, if they were paid, add about $600 millions.

Recently, therefore, the United States must have been lending to the rest of the world, mainly Europe, something like $2000 millions a year. Fortunately for Europe, a fair proportion of this was by way of speculative purchases of depreciated paper currencies. From 1919 to 1921 the losses of American speculators fed Europe; but this source of income can scarcely be reckoned on permanently. For a time the policy of loans can meet the situation; but, as the interest on past loans mounts up, it must in the long run aggravate it.