The following article is so informative—I’d no knowledge of any of this—I felt compelled to share it. Authored by Edward W. Fuller, it was originally published by the Mises Institute on June 28, 2019, and is republished here with permission.
June 28, 2019 is the centenary of the Treaty of Versailles. The notorious treaty, signed by Germany on June 28, 1919, was the most important of the peace treaties that ended the First World War. Although each defeated nation signed its own treaty, the entire settlement is often called the Treaty of Versailles. The war and peace settlement caused a century of statism and war. On the centenary of the Treaty of Versailles, it is appropriate to reassess its consequences and its lessons for the future.
In early January, 1919, delegates from Britain, France, Italy, and the United States congregated in Paris. Initially, the Allies’ plan was to have a preliminary conference amongst themselves to decide on the peace terms to offer Germany. After the brief preliminary conference, the plan was to invite Germany to a full-scale peace conference to negotiate the terms.
As the Allies squabbled amongst themselves, the preliminary conference gradually developed into the full-scale conference. The Germans were not summoned to Paris until early May. And when they finally arrived, they were never allowed to negotiate the terms of the treaty. Thus, the Treaty of Versailles was a dictated treaty, not a negotiated treaty.
It was unfair for the Allies to dictate the terms of the treaty to Germany. This violated precedents set after the French lost the Napoleonic wars and the Franco-Prussian war. Breaking these precedents was bound to breed contempt for the treaty in Germany. The various military clauses, reparation clauses, and territorial clauses added fuel to the fire.
The military clauses of the treaty disarmed Germany. But the German disarmament was supposed to be part of general European disarmament sponsored by the League of Nations. While the Germans were disarmed by the treaty, the Allies did not fulfill their promise to disarm. This was unfair, and the Allies’ broken promise infuriated German public opinion.
German reparations received too much attention in the aftermath of the war. This was due in large part to John Maynard Keynes and his highly influential book The Economic Consequences of the Peace. Keynes’s entire analysis of the reparations problem was fatally flawed, for it was based on a mercantilist theory called the transfer problem. Economic science shows that the transfer problem does not exist.(1) Keynes’s mercantilist analysis of the reparations problem incited the Germans, and has misled economists and historians ever since.
Economic historians have increasingly recognized that the reparations imposed on Germany were not as onerous as Keynes insisted.(2) However, there was one feature of the settlement that was certainly unwise and unfair: the Allies did not fix the amount of reparations in the treaty. The Germans were forced to sign a blank check, and this allowed them to complain that they had been condemned to indefinite slave labor. Keynes was in charge of preparing the British Treasury’s position on reparations, and it was his tragic idea to not fix the amount of reparations in the treaty.(3)
The reparations section of the treaty included Article 231 – the infamous war-guilt clause. Article 231 required Germany to accept responsibility for starting the war. This clause was unfair, because Germany was not solely responsible for the war. All the major European powers share the blame. Interestingly, Keynes and John Foster Dulles were the lead draftsmen of Article 231.(4)
An unfortunate consequence of Keynes’s book was to shift attention away from the territorial problems with the treaty. As the title of his book suggests, Keynes’s criticisms of the treaty were entirely economic; he never criticized the territorial clauses. The really significant problems with the peace settlement were the imperialistic territorial clauses.
Prior to the conference, the Allied leaders assured the world that the peace would be based on the principle of national self-determination. Their actions proved otherwise. At the conference, the Allies imperialistically carved up the world and created new but unsustainable nation states with government coercion.
The Versailles Peace Treaty meant Germany would lose 13 percent of its territory and 10 percent of its population. In the West, Germany lost Alsace-Loraine to France. The residents of Alsace-Loraine were never allowed to decide for themselves whether they wanted to rejoin France. The Allies’ violation of the principle of national self-determination in Alsace-Loraine embittered the Germans.
In the east, the Allied leaders imperialistically carved up Germany (along with Russia and Austria-Hungary) to recreate Poland, a country that had ceased to exist in 1795. To resurrect Poland, millions of Germans, Lithuanians, Byelorussians, and Ukrainians were denied the right to self-determination. Moreover, President Wilson had promised the reborn Poland access to the sea, so the Allies created the Polish Corridor. The Polish Corridor cut off East Prussia from Germany, and it contained the German city of Danzig. The Polish Corridor meant Poland was loathed in Germany.
The Allies created the new nation of Czechoslovakia by carving up Germany and the shattered Austro-Hungarian Empire. The Slovaks, Poles, Ukrainians, and Hungarians in the new Czechoslovakia were denied the right to self-determination. This was also the case for three million Germans in the Sudetenland. In Germany, Czechoslovakia was a constant reminder of the Allies’ bad faith on the issue of self-determination.
Finally, the Treaty of Versailles prohibited the unification of Germany and Austria. This prohibition violated the Austrians’ right to national self-determination. The territorial clauses regarding Alsace-Loraine, Poland, Czechoslovakia, and Austria meant the right to self-determination had been unfairly denied to millions of Germans and other Europeans.
Any person interested in the preservation and proliferation of humanity must despise Adolph Hitler and his vile Nazi regime. But it must be asked: how could a lunatic like Hitler rise to power in Germany? The answer is the First World War and the Treaty of Versailles. The German population thought the treaty was unfair, and they wanted someone to oppose it. The treaty created the platform for Hitler’s rise to power. For this reason, the Treaty of Versailles must be considered a major cause of the Second World War.
Italy was the weakest power at the outbreak of the Great War. Although Italy had a defense treaty with Germany and Austria-Hungary before the war, these nations had not been attacked. This meant Italy was not obliged to enter the war on the side of the Central Powers. Instead, Italy remained neutral and opportunistically shopped around for territory.
The Central Powers offered Italy territory, but Italy wanted a piece of Austro-Hungarian territory called South Tyrol. This would give Italy a defensible border in the Alps. For obvious reasons, the Austro-Hungarians refused to promise their own territory to Italy. The Allies, by contrast, were happy to promise Italy this territory. On April 26, 1915, Britain, France, and Russia signed the imperialistic Treaty of London with Italy. With this agreement, Italy would get South Tyrol, Austrian Littoral, and Northern Dalmatia when the Allies won the war.
At the peace conference, President Wilson refused to uphold the Treaty of London. This enraged the Italians. The Italians were granted South Tyrol, and this pushed the Italian border up to the Alps. But the Allies broke their promises on Austrian Littoral and Northern Dalmatia. Rather, the Allies gave this territory to the new nation of Yugoslavia.
The Allies’ failure to uphold the Treaty of London left many Italians feeling cheated. The Allied victory became known as the “Mutilated Victory” in Italy. The Allies’ broken promises to the Italians at the Paris Peace Conference launched Benito Mussolini and his fascist regime into power in 1922.
The Paris Peace Conference had a significant impact on Asia. Prior to the war, the Western powers exercised imperialistic control over most of Asia. Britain controlled modern day India, Pakistan, Bangladesh, and Myanmar, along with Hong Kong and Singapore. France controlled modern day Vietnam, Cambodia, and Laos. Russia took territory in Northern China; the Netherlands had Indonesia; the United States controlled the Philippines.
China and Japan were the only real significant independent Asian countries before the war. But China was on the verge of losing its independence. The British, French, Germans, and Russians all exercised control of territory in China via concessions. But Japan was China’s greatest threat. Before the war, Japan had already taken Taiwan and Korea from China, and they controlled Manchuria. The First World War halted European expansion in China, but this left Japan unchecked to wrest away more Chinese territory.
Japan entered the war on the side of the Allies. Before the war, Germany had control of islands in the Pacific, and Japan took these islands during the war. Germany had controlled a territory in China called Shandong, and Japan seized these German concessions. The Japanese made secret imperialistic agreements with Britain during the war that would allow them to keep the German Pacific islands and Shandong.
The Japanese had two demands at the Paris Peace Conference. First, they wanted the Allies to uphold their secret wartime agreements on Shandong and the German Pacific islands. Second, they wanted a racial equality clause. In other words, the Japanese desired a clause in the peace treaty stating that Europeans and Asians are of equal racial quality.
Like the Japanese, the Chinese joined the war on the side of the Allies. The Chinese believed that contributing to the war effort would prevent the Europeans and Japanese from expanding in China after the war. China had one major demand at the Paris Peace Conference: Shandong. This territory had a large Chinese population, and it was culturally important because it was the birthplace of Confucius. But the British had promised Shandong to the Japanese. The Allies found themselves in a dilemma over Shandong.
According to the principle of national self-determination, the Chinese had the proper claim to Shandong. Sadly, the principle of imperialism prevailed over the principle of national self-determination. The peacemakers upheld their imperialistic wartime agreement and granted Shandong to the Japanese instead of the Chinese.
Why grant Shandong to the Japanese? The Allies felt they had two choices: 1) meet the Japanese demand for a racial equality clause, or 2) reject the racial equality clause, but appease the Japanese with Shandong. The peacemakers, especially Wilson, could not overcome their racist inclinations, and they refused the Japanese demand for a racial equality clause.
The Japanese received Shandong, but they were disillusioned by the treaty. The Allies’ refusal to include the racial equality clause made the Japanese lose faith in the West. The treaty bred Japanese militarism and put Japan on the road to war with the United States.
Incredibly, the ramifications in China were just as disastrous. The peacemakers’ decision on Shandong ignited protests in Beijing on May 4, 1919. These protests evolved into the May Fourth Movement, and the Chinese communist movement was born. Seventy-five million Chinese died as a result of Mao Zedong’s communist regime. Eventually, Communism would spread to Korea and Vietnam, resulting in the Korean War, the Vietnam War, and ongoing tension between North Korea and the West.
The Middle East
The geopolitical problems in the Middle East over the last century have their roots in the First World War and the Paris Peace Conference. Before the war, the British controlled Egypt, the French controlled Algeria and Tunisia, and Italy controlled Libya. By contrast, the Ottoman Empire controlled modern day Iraq, Syria, Lebanon, Israel, Jordan, and Saudi Arabia.
At the beginning of the war, the Allied Powers made secret imperialistic agreements to carve up the Ottoman Empire. For their part in the war, the Russians demanded the expansion of its territory down to Constantinople. This was a sensitive issue for the British, for it would give Russia influence in the Mediterranean waters around the Suez Canal. India was the jewel in the crown of the British Empire, and Britain shuttled their troops to India through the canal. In short, the Suez Canal was essential to Britain’s imperial control over India.
The British would agree to the Russian demand for Constantinople, but only if Britain was guaranteed certain territory around the Suez Canal. This territory included modern day Egypt, Israel, Jordan, and southern Iraq. British control of these territories would create a bubble around the Suez Canal and thereby secure the British route to India.
The Sykes-Picot Agreement of January 3, 1916 was a secret treaty between Britain and France to carve up the Middle East after the war. France would get the territory of modern day Syria, Lebanon, and northern Iraq, while Britain would get the territory of modern day Egypt, Israel, Jordan, and southern Iraq. Later, the Russians and Italians assented to the treaty.
Unfortunately, the British made promises to the Arabs inside the Ottoman Empire that were incompatible with Sykes-Picot. The British and French controlled territory in India and North Africa that contained vast numbers of Muslims. The British and French were terrified that the Turkish sultan would incite Muslim revolts inside their empires. They were desperate to knock the Ottomans out of the war to avoid an Islamic uprising.
British military campaigns against the Ottomans were disastrous. As a result, the British devised a plan to destabilize the Ottoman Empire from within. The plan was to have the Arabs revolt against the Turks. The British promised Hussein, the Sharif of Mecca, that he would be made king of a unified and independent Arab state after the war if he revolted against the Turks. Hussein agreed. His son Faisal, advised by Lawrence of Arabia, led the Arab revolt against the Turks. The Arab revolt played an important role in the collapse of the Ottoman Empire.
At the peace conference, the British broke their promise to establish a unified and independent Arab state. Instead, they created a handful of new nations in the Middle East that would be dominated by Britain and France. In 1921, the French created the Kingdom of Syria. The British convinced the French to make Faisal the ruler of Syria, but he had no independence. He was exiled by the French in July 1920. The French created the state of Lebanon in 1920, and transferred territory from Syria to Lebanon. This act of imperialism still irritates Syrians today.
The imperialistic Sykes-Picot Agreement led to the creation of Iraq. According to Sykes-Picot, the British would get Baghdad and Basra, while the French would get Mosul in the North. The British realized the importance of oil much earlier than the French, and the British suspected there was oil in Mosul. In 1918, the British convinced the French to relinquish their claim to Mosul. In this way, the British took control of the entire territory that is now Iraq. The British formed the Kingdom of Iraq in 1921, and Faisal was made king.
The British promise for an independent Arab state was incompatible with Sykes-Picot. But British promises to European Jews further complicated the situation in the region. On November 2, 1917, the British government issued the Balfour Declaration — a public statement supporting a homeland for the Jewish people in Palestine. Czarist Russia was the great anti-Semitic power before the war, and this made many Jews reluctant to support the Allies. The English believed the Balfour Declaration would foster Jewish support of the Allies and weaken Jewish support for the Central Powers.
Sykes-Picot gave the British control of Palestine. In 1921, the British carved Jordan out of Palestine and made Hussein’s son Abdullah king. However, the creation of Jordan infuriated both the Jews and the Arabs. On the one hand, the Jews thought the Balfour Declaration granted them the entire territory of Palestine. Thus, they viewed the creation of Jordan as a broken promise. On the other hand, the Arabs in Palestine revolted at the idea of a Jewish homeland in their territory. There has been tension between the Jews and Muslims in the region ever since.
The war and peace treaties resulted in the creation of new and unsustainable nation states in the Middle East. For those living in the Middle East, even the names Iraq, Syria, Lebanon, Jordan, Israel, etc., are constant reminders that Britain and France betrayed the Arabs. In the end, British and French imperialism in the Middle East caused a century of turmoil in the region.
A Lesson for the Future
The First World War and the Paris Peace Conference led to Nazism in Germany, fascism in Italy, militarism in Japan, extremism in the Middle East, and communism in Russia, China, Korea, and Vietnam. What must be learned from the war and peace settlement? Here is the most important lesson: the free market economy is the only way to lasting world peace.
The war was caused by Europe’s imperialistic intervention in foreign trade. In the decades before the war, there was a massive drive by the European powers to expand their empires. This put the European powers on a collision course. Why the imperial expansion? The European powers did not allow other powers to trade freely in their empires. For this reason, the European powers viewed imperial expansion as the only way to gain new markets for their goods. Europe’s rejection of the principle of free trade was the fundamental cause of the First World War.
The peacemakers at the Paris Peace Conference could not establish a durable peace, because they refused to renounce the imperialistic system that caused the war in the first place. During the war, the British and French made imperialistic agreements to carve up the globe after the war. At the peace conference, they used the peace treaties to enshrine British and French imperialism. The Allies used the treaty to fortify their empires, and the result was a century of war.
Government intervention in the free market economy is the fundamental cause of all modern wars. Government intervention in the domestic economy makes it impossible for domestic producers to compete with foreign producers. To level the playing field, government must enact protectionist measures to shield hobbled domestic producers from foreign competition. Any government that intervenes in the domestic economy must inevitably embrace protectionism. And protectionism leads to conflict and war.
Free trade between nations is required to maintain world peace. But free trade between nations is impossible if nations intervene domestically. External free trade requires internal free trade. The path to lasting world peace starts with the free market economy at home. The great lesson from the First World War and Treaty of Versailles is this: the free market economy at home and abroad is the only way to establish durable peace between nations.
(1) As Ludwig von Mises writes, “There is no such thing as a ‘transfer’ problem.” Omnipotent Government (Indianapolis: Liberty Fund,  2011), p. 241. Even Robert Skidelsky, Keynes’s greatest living defender, had to admit: “If we stick to the pure theory of the matter, Keynes was wrong.” John Maynard Keynes: Economist as Savior (New York: Viking, 1992 ) p. 311. For a critique of The Economic Consequences of the Peace, see “Keynes and the First World War,” E.W. Fuller and R.C. Whitten, Libertarian Papers (vol. 9, no. 1, 2017), available at: http://libertarianpapers.org/fuller-whitten-keynes-first-world-war/
(2) Richard Davenport-Hines writes, “Economic historians now tend to believe … that Germany could have afforded to pay the stipulated reparations, which were not as irrational as Keynes claimed.” Universal Man (New York: Basic Books, 2015), p. 119. Also see Mises, Omnipotent Government (Indianapolis: Liberty Fund,  2011), pp. 236-41.
(3) Charles Hession writes, “when the conference became bogged down on the amount of reparations to be demanded of the defeated nation, it was his suggestion that the exact sum be left undetermined.” John Maynard Keynes (New York: Macmillan, 1984), p. 147. For documentation, see https://mises.org/wire/keynes-and-versailles-treatys-infamous-article-231
(4) According to Donald Moggridge, “The significant draftsman of the clause were Keynes and John Foster Dulles.” Maynard Keynes: An Economist’s Biography (New York: Routledge, 1992), pp. 308, 331, 346. For documentation, see https://mises.org/wire/keynes-and-versailles-treatys-infamous-article-231
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