RDP 2000-04: Keynes and Australia 1. JM Keynes, WM Hughes and Reparations

One of the first important (and least creditable) Australian forays into international diplomacy was the campaign of the Australian Prime Minister, William Morris Hughes, in 1918–1919, to have Germany forced to pay in reparations the full cost of the First World War. It was his burning, passionate condemnation of the magnitude of the reparations demands in The Economic Consequences of the Peace that first brought John Maynard Keynes to popular international prominence.

Keynes had worked in the British Treasury during the war. During the latter half of 1916, he and Professor Sir William Ashley prepared a ‘Memorandum on the Effect of an Indemnity’ at the request of the Board of Trade.^[1] It was one of the earliest documents prepared for the British government relating to possible reparations demands. It has a special significance because in 1938, in The Truth About the Peace Treaties, Lloyd George, referring to the Ashley-Keynes memorandum, described Keynes as ‘the sole patentee and promoter’ of exactions from Germany ‘over a long period of years’.^[2] In fact, the memorandum made no recommendations, and was ‘based throughout on the assumption that [Britain] would make no claim for reparation’;^[3] it was on the effect of an immediate postwar indemnity, paid by Germany to France and Belgiun, ‘to make good damage in the territories overrun’.^[4] Keynes stressed these points in defence against Lloyd George's 1938 attack on him – an attack Lloyd George had not made in, for example, his 1932 book, The Truth About Reparations and War-Debts.^[5]

Keynes did not make the point that his role in preparation of the memorandum was very much subsidiary to Ashley: he said in 1938 that ‘I remember a document of Ashley's though not distinctly what part I played in it’.^[6] Though the editor of Keynes's Collected Writings says ‘there is no evidence in Keynes's papers or in the Treasury files to show what was his particular share in writing this memorandum’,^[7] the Ashley papers in the British Library contain correspondence between the co-authors and typed drafts by Ashley with hand-written suggestions by Keynes; these drafts make it possible to show with much clarity Keynes's contribution to the paper. The Ashley papers also reveal an error in the Collected Writings and other accounts: though the memorandum bears the date 2 January 1916, it was actually signed by Ashley and Keynes on 2 January 1917; the typist put the wrong year by mistake, and no one corrected it.^[8]

In October 1918, Keynes made a preliminary estimate of Germany's capacity to pay reparations.^[9] He suggested £1,000 million (half in securities, capital goods and the like; half in annual payments) could be obtained ‘without crushing Germany’.^[10] In November–December 1918, Keynes ‘was occupied with the Treasury's study of the whole question of reparations’.^[11] The extent of Keynes's authorship of the resulting memorandum^[12] is uncertain.^[13] It argued that the cost of the war to the Allies far exceeded Germany's ability to pay;^[14] that an annual payment would be alternative to taking the maximum amount of transferable property (put at £1,370 million),^[15] because ‘if Germany is to be “milked” she must not first of all be ruined’;^[16] and since Britain would be disadvantaged by promoting German exports (which would be necessary if she were to make annual payments), the taking of transferable property was preferable.^[17] Combining both, ‘the limit of what we can safely exact’^[18] was closer to £2,000 than £3,000 million.^[19]

But on 7 November 1918, Hughes, in England for the Imperial War Cabinet, ‘publicly demanded that Germany be made to pay the costs of the war; his cry was taken up by leading newspapers’.^[20] Hughes was apparently aware that the negotiations between the Allies and with Germany for an Armistice agreement were leading to a formula for reparations that would confine them to ‘compensation … by Germany for all damage done to the civilian population of the Allies and to their property by the aggression of Germany by land, sea, and from the air’.^[21] This represented a broadening from the ‘restoration of invaded territories’ talked of in Wilson's Fourteen Points, which were the fundamental basis of the Armistice. Keynes wrote in The Economic Consequences of the Peace:^[22]

It must be said to Mr Hughes' honour that he apprehended from the first the bearing of the pre-armistice negotiations on our right to demand an indemnity covering the full costs of the war, protested against our ever having entered into such engagements, and maintained loudly that he had been no party to them and could not consider himself bound by them. His indignation may have been partly due to the fact that Australia not having been ravaged, would have no claims at all under the more limited interpretation of our rights.

It is not clear to me that it is ‘to Mr Hughes' honour’ that, the Allies having entered into an undertaking with Germany, he should urge them not to honour the commitment they had freely made.

On 26 November 1918, the day after the dissolution of Parliament for the December general election, and the date of the Treasury memorandum suggesting reparations of between £2,000 and £3,000 million, the Imperial War Cabinet appointed a committee of its own on reparations. Hughes was its Chairman; ‘the Committee was stuffed with Conservative Protectionists’; and Lord Cunliffe, an ex-governor of the Bank of England, gave an air of authority.^[23] The Hughes Committee had before it both the Ashley-Keynes memorandum and a Board of Trade memorandum on ‘Economic Considerations Affecting the Terms of Peace’.^[24] Keynes attended the first few hearings, and gave evidence to it.^[25] Keynes warned of the transfer problem – that Germany would have to earn the foreign exchange with which to pay the reparations, and this would require her to be fiercely competitive in all markets.^[26] But in complete disregard of such expert evidence, the Committee reported on 10 December that Germany could and should pay the total cost of the war – £24,000 million in annual instalments of £l,200 million.^[27] According to Elizabeth Johnson, ‘Hughes agreed at the meeting of the War Cabinet that considered – and buried – the Committee's report that it would not be possible to get the sum of £24,000 million or anything like it’;^[28] but the Cabinet did not resolve the conflict between the Keynes and Hughes approaches,^[29] and Hughes remained fiercely intent on getting as much as possible. He had declared his attitude: ‘Everything is practicable to the man who has strength enough to enforce his views, and we have that strength’.^[30]

The situation in Britain in November–December 1918 was complicated by Lloyd George's decision to hold immediate elections to capitalize on the euphoria of victory. But Keynes wrote in The Economic Consequences of the Peace^[31] that as the campaign developed, ‘the Prime Minister's more neurotic advisers’ felt a need for tough talk and impassioned anti-Hun slogans; Keynes put it this way:

On the assumption that the return of the Prime Minister to power was the primary consideration, the rest followed naturally. At that juncture there was a clamour from certain quarters that the government had given by no means sufficiently clear undertakings that they were not going ‘to let the Hun off’. Mr Hughes was evoking a good deal of attention by his demands for a very large indemnity, and Lord Northcliffe was lending his powerful aid to the same cause. This pointed the Prime Minister to a stone for two birds. By himself adopting the policy of Mr Hughes and Lord Northcliffe, he could at the same time silence those powerful critics and provide his party managers with an effective platform cry to drown the increasing voices of criticism from other quarters.

So on 11 December 1918 Lloyd George promised in Bristol ‘that if re-elected he would charge Germany the whole cost of the war, an “expert” Committee having told him Germany could pay it .... Furthermore, at the height of the election, Lloyd George accepted a recommendation by the Imperial War Cabinet that Hughes and Cunliffe, the chief authors of what he later called the “wild and fantastic report”, should be the British representatives – together with a judge, Lord Sumner – on the Reparations Commission at the Paris Peace Conference’.^[32] (The British Empire was represented and regarded as a single entity, with Dominion representatives – such as Hughes for Australia, and JC Smuts for South Africa – as part of that ‘British’ delegation.)

From January to June 1919, Keynes served as Principal Treasury Representative at the Paris Peace Conference. Harrod says that he held a ‘passionate intellectual contempt for the trash of Hughes and Cunliffe’.^[33] But he and the Treasury were excluded from the Reparations Committee of the Conference, and Keynes ‘could only make his views known unofficially’.^[34] He recorded in his 1922 book, A Revision of the Treaty, that there ‘the British delegates … namely, Mr Hughes, Lord Sumner and Lord Cunliffe, support[ed] the demand for complete war costs and not merely reparation for damage’; Keynes wrote:^[35]

They urged (1) that one of the principles enunciated by President Wilson was that each item of the Treaty should be just, and that it was in accordance with the general principles of justice to throw on Germany the whole costs of the war; and (2) that Great Britain's war costs had resulted from Germany's breach of the Treaty of Neutrality of Belgium, and that therefore Great Britain (but not necessarily, on this argument, all the other Allies) was entitled to complete repayment in accordance with the general principles of international law. These general arguments were, I think, overwhelmed by the speeches made on behalf of the American delegates by Mr John Foster Dulles.

The central contention of the Americans, to which Keynes was strongly wedded, was that the Allies had committed themselves in the Armistice to terms that ‘could not possibly include [the] pensions and separation allowances’ that Hughes, Sumner and Cunliffe sought to have included.^[36] They were concerned to increase the British, including the Australian, share in whatever reparations were obtained. Hughes argued ‘that the tax burden imposed on the Allies by the German aggression should be regarded as damage to civilians’.^[37] It is said that he ‘insisted that every Australian who had placed a mortgage on his house to buy a war bond was as definitely entitled to reparation as was every Frenchman whose house had been burned by the Germans’.^[38] When President Wilson insisted that this approach was incompatible with the Armistice undertakings, the British and French sought a means whereby their demands could be made to seem compatible with the Armistice terms. As always when an argument must be found, an argument was found, and President Wilson gave way.^[39] Elcock suggests that the earlier ‘obstinacy of Hughes, Cunliffe and Sumner’ contributed to alienating the Americans from the idea of co-operating ‘in assisting Europe to her feet’ when Keynes proposed ‘a grand scheme for the rehabilitation of Europe’.^[40] The negotiations on this and other issues are too complex to be recounted in detail here.^[41]

The inclusion of pensions and separation allowances trebled Germany's liability. At some point Lloyd George, apparently always conscious of it,^[42] acknowledged the wildness of the demands. ‘When [Hughes, Cunliffe and Sumner] drew up then our plan of payment from Germany rising to £600 million a year, to run until 1961, Lloyd George asked Keynes for something more moderate’. But Keynes's proposal was not accepted.^[43]

This and other attempts at moderating the terms of the Treaty having failed, Keynes resigned from the Treasury in early June 1919 in protest.^[44] He distilled his frenzy in The Economic Consequences of the Peace, published in England in December 1919. Its sequel, A Revision of the Treaty, appeared in January 1922. The Economic Consequences argued:^[45] First, the Treaty was unjust and dishonest in breaking the Allies' undertaking to the Germans, on which the Armistice was predicated, to base the peace on the principles enunciated by President Wilson. Secondly, the German economy was being so damaged, and the reparations demands were so great, that there was no way Germany could meet the demands. To the extent that she tried, her people would be long improverished and Britain would be hurt by her export competition. Thus, whether Germany tried to pay or not, political relations within Europe would be more and more envenomed and the door would be opened for revolution. Given ‘the economic unity of Europe’, a stable peace depended on the reconstruction of the European economic system, in which Germany was ‘a central support’.

As Colin Clark wrote in 1958:^[46]

Hughes was probably as much responsible as anyone for the adoption of the fantastically high demands for German reparations, which led to five years of chaos in European affairs. Hughes had worked out a claim, on some peculiar economics of his own, for reparations for Australia, which had not suffered any physical damage in the war, of £64,000,000.

But ‘in the end little of real economic value to Australia’ was gained.^[47]