Britain and the United States may have acted as a brake over these issues, but the French exacted revenge on Germany in other ways. The peace settlement of June 1919, which became known as the Versailles Treaty, restored to France the Alsace-Lorraine region which had been lost to Germany forty years previously, and permitted French soldiers to occupy the mineral-rich Saar region of Germany. It also declared the German city of Danzig a free state. Under the terms of the treaty, Germany lost 13 per cent of its pre-war European territory and 10 per cent of its pre-war population, while the German army was reduced to 100,000 men and the navy to 15,000. Germany was also forced to sign a ‘war guilt clause’, accepting responsibility for all the loss and damage of the war. The German government regarded this clause as a violation of honour and a lie, while one German official called the treaty ‘the continuation of the war by other means’. Over the next decade, the treaty’s punitive terms would provide a focus for popular anger in Germany, which would be expressed in support for the ultranationalist Nazi party.
It was not only the Germans who regarded the Versailles Treaty as harsh. The Cambridge economist and Treasury representative John Maynard Keynes argued that reparations were unwise because European harmony and prosperity were dependent on a strong Germany. Lloyd George agreed, but he was unable to convince the French that a powerful Germany was compatible with their security. Press and public opinion in Britain were also against him, with the right-wing newspapers conducting a ‘Make Germany Pay’ and ‘Hate the Huns’ campaign, supported by the Unionists. As a result Lloyd George was compelled to sign a treaty which he knew to be ‘greedy’ and ‘vindictive’ in its treatment of Germany, and unlikely to lay the foundations for a lasting European peace.
Neither did the treaty’s other clauses inspire much optimism among experienced observers. The numerous independent countries that emerged after the dismantling of the empires of the Central Powers, such as Yugoslavia and Czechoslovakia, had no democratic traditions of their own; they also contained various, and often antagonistic, ethnic nationalities with historical links to the great continental powers. As for universal disarmament, none of the Allies was serious about reducing its arsenals and nor did the treaty clarify how many weapons should be decommissioned. Meanwhile, the forty-eight-member League of Nations, which was established to uphold peace, lacked an army and a navy. In their absence how could it police Europe effectively? The authority of the association was also undermined when the United States decided against joining, a retreat into isolation that was also a blow to Lloyd George’s diplomatic strategy. Since Britain lacked the military and economic capacity to supervise the globe alone, it required the assistance of the world’s emerging superpower. In the absence of a transatlantic alliance, Britain would be weaker and more isolated. It is unsurprising that English diplomats returned from Versailles in pessimistic mood. ‘If this was a war to make the world safe for democracy, it has failed,’ commented Lord Eustace Percy. ‘If it was a war to end war, it has left the future of the world more uncertain and more contentious.’
After signing the Versailles Treaty in June 1919, Lloyd George returned to an England barely recognizable from the one he had left. In the six months it had taken the Allies to share out the spoils of war, England’s economic boom had lost its momentum. ‘The whole thing came to an end, like the stopping of a clock,’ remembered Charles Masterman. The underlying cause of the recession was the international competition faced by Britain’s heavily indebted and technologically antiquated shipbuilding, coal and cotton industries. Meanwhile, the United States was enjoying the benefits of a technological revolution, based on automated machinery and new methods of management which ensured low-cost mass production. The native industries of India, Canada and South Africa were also flourishing. As British imports had not reached these imperial territories during the war, they had become self-sufficient. Engineering projects within the empire could now be carried out by local companies, and their products were more competitively priced. International demand for British produce was also affected by economic chaos on the Continent. How could the German people afford expensive British goods during the hyperinflation of the early Twenties?
Britain’s staple industries had received substantial investment during the war, and this was followed by an avalanche of orders in the immediate post-armistice period. Eight million tons of shipping lost in the conflict had to be replaced, and the shipbuilding, steel and iron giants had expanded to meet the demand. Yet wartime investment and post-war demand disguised the inherent weakness of these industries, as well as the serious damage done to the economy by the conflict. The country’s preoccupation with war had also offered the United States – which had been neutral from 1914 to 1917 – the opportunity to take over many of her customers. When government investment stopped, and the rush of post-war orders ended, Britain’s industries found themselves with a stockpile of expensive goods that no one wanted to buy. Total British exports were 20 per cent lower than they had been before the war, and Britain’s share of the world export market fell to 11 per cent, below that of the United States. To compound these problems, lavish post-war spending had stimulated inflation, and the government raised interest rates to keep prices under control. This discouraged borrowing and spending, and so reduced internal demand; it also meant that money borrowed in the lowinterest boom time would have to be paid back at higher rates. In consequence, many banks were overextended and many businesses collapsed.
Britain’s industrial activity and gross domestic product fell precipitately in 1920–21 and there was a sudden rise in unemployment. By the summer of 1921, unemployment in Britain exceeded 2 million (around 20 per cent of the working population). Long queues of men outside labour exchanges became a familiar sight in the old industrial centres of northern England. Among those waiting in line were many ex-soldiers, who came to the conclusion that the country they had fought for neither needed nor wanted them. ‘If they’d told me in France that I should come back to this,’ commented one former private, ‘I wouldn’t have believed it. Sometimes I wish to God the Germans had knocked me out.’
In a bid to avoid industrial and political unrest Lloyd George acted quickly, extending unemployment insurance in 1920 to all those who earned under five pounds per week. The following year he allowed the unemployed to continue to draw benefit beyond the maximum period allowed under the insurance scheme, as long as they could prove that they were genuinely seeking employment. The extension was necessary because people were now out of work for long periods. Yet Lloyd George’s decisiveness could not prevent protests and industrial action. In 1921 the first Hunger March from London to Brighton was organized by the recently formed National Unemployed Workers’ Movement. In 1920 and 1921 engineers, miners, railway workers, cotton spinners, shipyard workers and even the police went on strike for better job security and the maintenance of wages. In 1921 alone, 85 million working days were lost to industrial action.
The government feared that strikes might coalesce into one general strike that would bring the economy to a standstill. Lloyd George drew up plans for such an eventuality, which included the creation of a Defence Force of 75,000 men that would police the protests, run public transport and distribute food. The authorities were anxious. ‘The people grow discontented,’ remarked King George. ‘Riot begets revolt and possibly revolution.’ The elite had good reason to be fearful. The Soviet Workers’ State inspired sympathy in the left-wing press, and communist movements seemed on the verge of achieving power in Italy and Germany. In 1920 a British Communist party was established, its very existence encouraging the belief that capitalism was on the verge of collapse. Most economists did not share this view, but many had lost faith in the system’s power to improve living standards and reduce inequality.