Essence of Conflict - Washington University in St....

Essence of Conflict 1

Essence of Conflict

Cognitive Illusions, War Guilt, and the Origins of Appeasement

William P. Bottom

John M. Olin School of Business Washington University in St. Louis One Brookings Drive; 1133 St. Louis MO 63130 (314) 935-6351 Fax: (314) 935-6359 [email protected]

KEYWORDS: bounded rationality, cognitive illusions, organization

The author wishes to thank Angelina Bernardi and Courtney Karr for assistance in translating documents, the Historical Collections Department of the Baker Library at Harvard Business School for access to the papers of Thomas W. Lamont, and the Seeley G. Mudd Library at Princeton University for access to the papers of Bernard Baruch and John Foster Dulles. Leda Cosmides, Dan Druckman, Ron King, Chris Long, Gary Miller, Alexandra Mislin, and Kathleen O’Connor provided helpful comments on an earlier version of this paper.


Abstract

Experimental studies consistently indicate that human information processing and decision-making violate basic precepts of rationality. Yet rational choice theory is increasingly used to model organizations, politics, and international relations. Experimental evidence of cognitive bias is often discounted as a methodological artifact because analysis, organization, specialization, and the presence of strong incentives are presumed to eliminate bias outside the laboratory. A controversy in the historiography of the Paris Peace Conference of 1919 provides an opportunity to address that assumption. Did “the vindictiveness of the British and French peace terms; the exclusion of Germany and Russia from the peace conferences … the foolish attempts to draw the blood of reparations and war debts … usher in a second vast military conflagration” (Kennan, 1996)? Or, was the peace treaty “a flexible instrument crafted by relatively well intentioned and rational leaders” (Ikenberry, 2000)? The extensive record of primary and secondary sources was used to reconstruct beliefs, strategies, and actions of the decision makers over an extended time frame. That pattern was tested against three conceptions of rationality: the pure form of noncooperative game theory, the semi-strong form of Williamson’s “contractual man”, and the strongly bounded form of behavioral theory. Hypotheses regarding the structure and implementation of the Treaty derived from these three paradigms were tested. Both semi-strong and strongly bounded conceptions of rationality accounted for the structure of the Treaty. Only the behavioral conception of rationality could account for the systematic failure in treaty implementation and the evolution of the Allied policy of appeasement. This strategy permitted the Hitler regime to repeatedly and unilaterally deviate from the provisions of the Treaty to improve its political, economic, territorial, and military position at the direct expense of the Allies. The tragic course of the war that followed is directly attributable to policy errors of the 1930’s which derived from earlier errors in the initial construction of the Treaty.


Essence of Conflict

“The most terrible of accounts between peoples has been opened. It shall be paid.”

Georges Clemenceau, Prime Minister of France, Speech to the French Senate, September 18, 1918 on the upcoming peace negotiations to end fighting with Germany after World War I. “The day must come when a German Government will summon up the courage to declare to the foreign powers: ‘The Treaty of Versailles is founded on a monstrous lie. We refuse to carry out its terms any longer. Do what you will! If you wish for war go and get it! Then we shall see whether you can turn seventy million Germans into serfs and slaves!’” Adolf Hitler, “The Role of the Party”, Speech to the NSDAP, Munich, August, 1, 1923

Behavioral programs of research on organization (March & Simon, 1958), finance (Shiller,

1988), and political science (Merriam, 1922) are guided by the assumption that individuals have

limited cognitive resources and that social theory must be built on a descriptive model of the

heuristic methods of information processing used to cope with these limitations. The origins of

research on cognitive heuristics and biases are commonly traced to a few sources: Kahneman,

Slovic, and Tversky (1982; see also Gilovich, Griffin & Kahneman, 2002) cited Meehl’s (1954)

empirical studies of clinician judgment, Edwards (1968) experiments on probability judgment,

Simon’s (1947) theoretical work on the bounded rationality of professional administrators, and

Bruner’s (1957) empirical and conceptual work on “internal processes, mental limitations, and the

way in which the processes are shaped by the limitations” (xii). This truncated history obscures the

earlier contributions of an informal network of highly placed government officials, diplomats, and

professionals from such fields as law, banking, journalism, and the military.

During the interwar decades of the 1920’s and 1930’s members of this network published a

series of books and articles laying out a theoretical framework for the study of lay and professional

judgment and error. The framework was based neither on abstract theorizing nor laboratory

experimentation with inexperienced subjects making hypothetical decisions. This was an inductive


theory building exercise (Eisenhardt, 1989) grounded by participant-observation of decision-making

and negotiation over the highest possible stakes. While many ties in the network existed prior to

1919, the Paris Peace Conference during the first six months of that year proved to be a catalyst for

the extension of professional relationships and friendships across borders, industries, and

professional domains (Schulzinger, 1984). In Paris the central members of this network

collaborated in an attempt to create a new world order for peace, stability, and economic

development following the chaos and destruction of World War I and the collapse of the German,

Austro-Hungarian, Ottoman, and Russian Empires (Macmillan, 2000).

Lt. General Jan Christian Smuts, South African Defense Minister and soon to be Prime

Minister, precipitated the surge in theory development with a letter to John Maynard Keynes.

Keynes had just resigned his position with the British Treasury in protest over the terms of the

Treaty of Versailles, which was to establish a peace settlement with Germany. Smuts, a highly

respected British delegate to the Peace Conference, recommended an action research project:

“And now to the future. I think it would be advisable for you as soon as possible to set about writing a clear, connected account of what the financial and economic clauses of the Treaty actually are and mean, and what their probable results will be. .. The treaty will in any case emerge as a rotten thing, of which we shall all be heartily ashamed in due course … (but) it may well be that with peace, and the better knowledge of what it all means, a great revulsion will set in and a favourable atmosphere will be created in which to help the public to scrap this monstrous instrument.” (document 1012, reprinted in Hancock and van der Poel, 1966).

Keynes’ polemics against a “treaty which was not wise, which was partly

impossible, and which endangered the life of Europe” (1923, see also 1920) sparked an

outpouring of work both attacking and defending the Treaty while also explaining how the

terms had been constructed (see Bottom, 2003 for a summary). Nicolson (1933) extended

Keynes’ critique beyond the financial settlement while drawing general lessons that


continue to influence the thinking of diplomats and foreign policy makers to the present day

(see Holbrooke, 2000).

A member of the American delegation in Paris, James Shotwell organized groups of

scholars to produce multivolume histories of the war and of the Paris Peace Conference

under the auspices of the Carnegie Endowment for International Peace. Shotwell (1941)

personally concluded that while individual sections of the Treaty could be rationalized and

understood in isolation, that systemic organizational failure had rendered the Treaty

unworkable. “The failure in statesmanship lay in the fact that when one added all the parts

of the treaty together ‘the whole was greater than the sum of the parts’ and more than any

one nation would readily carry out in the succeeding years” (p. vi).

Walter Lippmann (1919, 1922, 1926) articulated the theory of judgment and choice

that would eventually become the cornerstone of “behavioral theory” in the social sciences.

In rejecting the model of “the omnicompetent citizen” of democratic theory, Lippmann drew

heavily on his participant-observation of the peace negotiations but also on his prior work

with the “Committee on Public Information” which had successfully rallied support in

America for a military campaign against “the Hun” in Europe (see Figure 1). “’Those who

can, do; those who can not, teach.’ Lippmann could, and did. But unlike many doers,

Lippmann can tell how he does it” as a contemporary reviewer noted (Holcombe, 1922).

In explaining these events, Lippmann noted that limits on time, attention, and

cognitive capacity prevent individuals from thoroughly processing information and making

rational policy decisions. He redefined the term “stereotype” to describe “the pictures in our

heads” that serve as building blocks for the construction of mental models (though he


referred to them as “quasi-environments’) we actually use to make judgments and decisions.

These highly simplified models necessarily contain sizeable “blind spots” leaving us

susceptible to the formation of cognitive illusions. From Lippmann’s observation, those

illusions are commonly shaped by business and political leaders to further their agendas

since “the opportunities for manipulation open to anyone who understands the process are

plain enough” (1922, p. 158). But leaders must also rely on their own mental models and

Lippmann’s first example of a stereotype paraphrased Keynes in describing how French

Prime Minister Georges Clemenceau predicted German behavior (Bottom, 2003).

Subsequent studies published by social scientists in psychology and political science

(eg. Allport, 1923, 1954; Cantril & Allport, 1935; Bruner, 1947, 1957; Bruner & Allport,

1940; Gilbert, 1951; Hastorf & Cantril, 1954; Katz & Braly, 1933; Madon et al., 2001;

Merriam, 1919, 1924; Lasswell, 1927; Lasswell et al. 1935; Kahneman, Slovic, and

Tversky, 1982; Gilovich, Griffin, & Kahneman, 2003) extended and refined the behavioral

theory of judgment and decision making. Lippmann’s social theory of public opinion

shaped developments in the field of international relations (Holsti, 1992). His psychological

theory of judgment and bias had a profound and lasting impact on social psychology where

the concept of stereotype quickly became the fundamental building block for research on

person perception (Allport, 1954; Gilbert, 1961; Katz & Braly, 1933; Madon et al., 2001;

Tversky & Kahneman, 1974).

Merriam (1924), Lippmann’s colleague on the CPI propaganda campaign,

established a basic framework for using psychology to build a behavioral political science.

However it was Merriam’s doctoral students Lasswell and Simon who would make the most


enduring contributions to the paradigm. Through observational study of a Milwaukee

government agency, Simon (1947), having studied under both Merriam and Lasswell (see

Simon, 1996), found ample support for Lippmann’s thesis that the decision-making of

public administrators is shaped by their cognitive limitations, giving rise to selective

perception and blind spots (Dearborn & Simon, 1957). Coining the term “bounded

rationality” – behavior that is intendedly rational but only limitedly so – Simon noted that

organization and hierarchy provide a means of extending individual limitations, potentially

mitigating some of the bias that limits individual rationality. Echoing Shotwell’s analysis

of the Treaty, however, Simon stressed the challenges in achieving coordination and the

importance of leadership in preventing organization from simply propagating individual

bias. Subsequent work has shown that propagation and amplification do pose significant

organizational problems (Bottom, Ladha, & Miller, 2003; Janis, 1974; Kerry, Maccoun, &

Kramer, 1996).

With the simultaneous refinement of rational choice theory, behavioral decision

theorists subsequently found a normative benchmark that could be used to experimentally

isolate, manipulate, and track many of the phenomenon that Lippmann had earlier attributed

to the operation of stereotypes. They also uncovered new aspects of heuristic reasoning

(Gilovich, Griffin, & Kahneman; 2002; Kahneman & Tversky, 1982). Behavioral

“anomalies’ that have been consistently replicated include self serving biases such as

wishful thinking, illusion of control, and egocentric perceptions of fairness. They also

include reference dependence effects in risky choice such as loss aversion, mental

accounting, and sunk cost effects (Luce, 2000).


The purpose of this paper is to re-examine the behavioral paradigm’s original

explanation of the Treaty of Versailles against competing explanations generated from two

alternative paradigms that have subsequently developed within contemporary organizational

science. These alternative paradigms are based upon quite different assumptions about

human decision making and rationality.

Alternative Conceptions of Rationality

Rational choice theorists have made considerable progress employing the methods of non-

cooperative game theory to model the design and function of organizations. In these theories,

agents with unlimited cognitive capacity effortlessly and optimally process information, making

choices that are consistent with expected utility maximization. They have complete and well-

ordered preferences over all possible states of nature. They search for and process information in a

manner consistent with Bayes’ theorem. Kreps (1988) called such a decision maker TOTREP –

short for “tradeoff talking rational economic person”.

When formulating a strategy in a social decision making context, the basis of non-

cooperative game theory, TOTREP reasons thoroughly about the possible choices of all other

relevant actors. Any TOTREP’s strategy is therefore optimally conditioned on the likely strategy to

be followed by all other relevant TOTREPs. The ultimate product of this modeling exercise is to

identify the set of Nash equilibrium strategies – highly stable combinations used to predict behavior

and design optimal incentive systems (Milgrom & Roberts, 1990). The proper interpretation of

rational choice theory has long been a subject of controversy. While a number of theorists treat it as

normative theory, more recent applications in social science have increasingly used it as a

descriptive theory of individual and organizational behavior. Harsanyi (1977) argued that game


theory’s most useful function could be as a comparative standard for the construction of genuinely

descriptive theory, by clarifying what constitutes rational behavior in a given situation it “confronts

us with the question of explaining why people deviate from this concept of rationality in specific

ways in specific situations” (p. 18).

A distinctive, third paradigm for research in organizational science recognizes the

importance of limitations on individual rationality and cognitive capacity. According to new

institutional economics, organization arises in response to these bounds, extending the limits on

individual rationality. Oliver Williamson (1975, 1985; 1998) developed a “semi-strong” form of

rational choice theory that has generated a highly distinctive and extremely influential institutional

theory of economics. Williamson addressed both the bounds on individual rationality and the

tempering effects of markets and hierarchies. He agrees with Simon and other behavioralists that

cognitive illusions are important for understanding economic behavior, though only in consumer

markets where individuals or small families make untutored and relatively unsophisticated

purchasing decisions. Illusions have little relevance for organizational decisions because of the

forces of selection, specialization, organization, and competition.

“Evidence that individualists on average are poor probabilists speaks only to the mean. If there is variance in the aptitude to make probabilistic choices among members of the population, and if it is cost-effective to screen for differential competence, then an efficient alignment of differential competence can be effected through specialization (organization). Not only does organization matter in this respect, but it also relieves problems of limited cognitive ability by permitting composite tasks to be broken down into nearly separable parts, each of which is more tractable, thereafter to be recombined (Williamson, 1998, p. 77-78).

Organization facilitates the specialization of decision-making. An adaptive logic of cost-

benefit efficiency drives organizations to expend resources on hiring more qualified “probabilists”

when the benefits of doing so are greatest. Stanovich and West (1999) did find moderate negative

correlations between general cognitive ability and susceptibility to many widely studied cognitive


biases including sunk cost effects. Such individuals, who may also be those whom social

psychologists would identify as “high in need for cognition” (Cacciopo, et al., 1996), may quite

naturally come to be sorted into positions requiring and rewarding their unique abilities. The sorting

process means that bias and illusions will be mitigated when it matters most. The resulting

efficiency is a product of the way in which markets, organizations, and hierarchy facilitate exchange.

Williamson called his semi-strong version of rational choice, “contractual man” (sic). For ease of

reference, it will be referred to here as the “contractual” paradigm to distinguish it from the strong

form (rational) and the weak form (behavioral) paradigms.

Testing the Robustness of Cognitive Illusions

A considerable amount of work has already been undertaken to test the robustness of

cognitive illusions in the face of market pressure, experience, incentives, and other potentially

mitigating forces. We will make no attempt to review this growing body of work. However, the

basic pattern is worth noting. Increasing incentives for accurate judgment has generally been shown

to dampen but not eliminate most of the widely studied forms of bias (Camerer and Hogarth, 1999).

In certain studies of experience, the effects appear to persist (e.g. Bottom, Bontempo, & Holtgrave,

1988; Northcraft & Neale, 1987); in some they appear to have been eliminated altogether. Wright

and Goodwin (2002) completely eliminated a framing effect with “a simple 'think-harder'

manipulation with undergraduate respondents while also finding no bias at all in the decisions of

experienced respondents.

These findings are open to varied interpretation and have been taken to vindicate each of the

three distinct views of rationality embodied in the various paradigms of organizational research.

Advocates of using rational choice as a building block for descriptive theory generally reject

evidence of cognitive illusions as merely an artifact of the experimental laboratory. As Zeckhauser


noted (186) “though an understanding of the phenomenon may help explain how our brain works it

is probably irrelevant to our ability to perceive situations accurately in the overwhelming majority of

real world situations” concluding that measurement of “real world consequence is the major

challenge to the behavioralists.” Some such as Roberts and Coursey (1990) are convinced that there

is no real world consequence – “competition in political markets will tend to eliminate

aggregate anomalies just as it does in economic markets.” This general dismissal of the

evidence completely ignores the originators of the behavioral paradigm - a group of highly

experienced and very well placed professional decision makers. Behavioralists such as

Keynes, Lippmann, Merriam, and Nicolson grounded their theory building in observational

study of decisions of considerable consequence.

However questions remain as to the accuracy of their original analysis of events and

the validity of the theoretical paradigm they did so much to develop. The passage of time

and the diligent work of historians have uncovered more information about the decisions

made during the construction of the Treaty and its implementation than could have been

known by participant-observers (Boemeke, Feldman, & Glaser, 1998). Controversy

remains even among diplomatic historians. Did the Paris Peace Conference produce “a

flexible treaty crafted by relatively well intentioned and rational leaders” as Ikenberry (1998) has

recently concluded? Or was Kennan (1996), adopting the interpretation of the early behavioralists,

justified in asserting that:

“the vindictiveness of the British and French peace terms; the exclusion of Germany and Russia from the peace conferences; the economic miseries of the postwar years; the foolish attempts to draw the blood of reparations and war debts from the veins of the exhausted peoples of the continent--these phenomena all assured that only twenty years after its ending, Europe would stand confronted with the nightmare of Adolf Hitler at the peak of his power, and …usher in a second vast military conflagration”?


This paper uses the extensive historical record of decisions and events before, during, and

after the treaty formulation process to test the three distinctive paradigms of organizational decision-

making – rational, contractual, and behavioral. The method is similar in some respects to Allison’s

study of the Cuban Missile Crisis (1970) which tested behavioral, rational choice, and bureaucratic

politics models against the record of events during the 13 days of the crisis. The three paradigms

generate qualitatively different predictions, or more precisely post-dictions, regarding both treaty

composition and implementation. By contrasting alternative conceptions of rationality in a social

decision making context, the methodology should avoid game theoretic criticisms leveled at

Allison’s approach (Bendor & Hammond, 1992; Dixit & Skeath, 1998).

Treaty Form and Function

Recent work within all three paradigms has addressed the form and function of written

contracts. Contracts between true TOTREP’s are “complete” (Hart & Holmstrom, 1987; Milgrom

& Roberts, 1990; Salanie, 1999). A complete contract explicitly describes and treats all relevant

contingencies that could affect the welfare of the parties for the life of the contract. It stipulates

rights and responsibilities, giving a precise allocation of costs and benefits between the parties for

each possible contingent event. Such a contract is, of course, only possible in a world where

cognitive resources are truly boundless. The impossibility of mentally constructing a game tree in

even comparatively simple contracting, motivated Simon to develop a behavioral theory of the

employment relationship (Simon, 1952).

Contractual and behavioral contracts assume a qualitatively different form and function.

The parties are assumed to lack the capability of conceiving all possible contingencies even in

comparatively simple settings (Rousseau, 1996; Williamson, 1985). Rather than attempt such an

impossible feat, they rely on “relational” contracting (Macneil, 1978; Goldberg, 1980) to establish


the parameters governing their relationship. A relational contract includes significant “gaps” –

unforeseen contingencies that are not described by the written instrument. The relational contract

uses various techniques to fill “gaps” so the parties can work out solutions to unforeseen problems as

they arise. Among the most common of these techniques are: “the use of a standard uncontrolled by

either of the parties”, “direct third party determination of performance” such as arbitration, “one

party control of terms”, “cost”, and “an agreement to agree” whereby the parties explicitly pledge to

“fill gaps in their relation” at a later point in time (Macneil, 1977). While TOTREP is an as-if

theory (Kreps, 1988) that makes no predictions about process or intention, behavioral and

contractual paradigms predict that architects of a long-term contract will purposefully build these

mechanisms into the formal document. Given the complexity and presumed duration of the Treaty

of Versailles, it must therefore contain numerous identifiable gaps and recognizable gap filling

mechanisms. The deliberative record must also show that the decision makers intentionally built

these features into the treaty in response to their own limitations.

Primary Sources of Data. The pre-armistice agreements, the armistice, and the Versailles

Treaty have long been public record (The Treaties of Peace, 1923; Temperley, 1924). Official

correspondence, diplomatic notes, memoranda, plans, draft language, minutes of meetings, and

committee reports were archived and eventually disclosed by the governments of all the major

powers. Woodrow Wilson’s personal papers were published in sixty-nine volumes including highly

sensitive communications regarding the war, the armistice, the conference, and the Senate

ratification hearings (Link, 1965-1994). With the expiration of the “fifty year rule” governing

confidentiality of diplomatic papers, the European governments provided public access to essential

documents generated by their delegations.


The record also includes the transcriber’s meticulous notes of each meeting held in Paris by

“the Council of Four” - the leaders of France, Great Britain, Italy, and the United States (Link, 1992;

Mantoux, 1992). The Council was the ultimate decision making authority at the conference from

March 24 through the signing of the treaty on June 28. This group held a total of 160 meetings, an

average of two per day, in the informal setting of Wilson’s residence. Mantoux’s transcripts were

augmented by the minutes of each meeting of the Council of Ten, the larger group consisting of the

foreign ministers and heads of government of the four major powers and Japan. This body governed

the PPC from January to March 24. Both sets of records were used to study the deliberative process

and as a source of insight into the intentions of the conference leadership in constructing the various

provisions of the Versailles Treaty.

Secondary Data Sources. The nations that participated in the PPC sent delegations of

varying size. The major powers built large organizations incorporating delegates, expert advisors,

and support staff. The German delegation was not actually permitted to attend the conference.

Their six official delegates, 12 commissioners, 13 secretaries and 15 advisors were sequestered

under heavy guard at Versailles from April 29 to June 23 (see “Preliminary List of the German

Peace Delegation at Versailles as of May 1, 1919” reprinted in Luckau, 1941, p. 188-190) with

restricted contact to the Allied representatives.

Delegates, advisors, support staff, and spectators generated a wide range of accounts of the

events. Many of these participant-observers kept diaries (Gelfand, 1998 estimated at least thirty

from the American delegation alone) and/or generated a daily record of events in letters to friends

and family members (Gelfand, 1998, p. 195). They gave speeches, wrote essays and published

memoirs concerning the conference. This documentary record yields information on the beliefs,

attitudes, intentions, and actions of the decision makers on all sides of the negotiation.


Table 1 summarizes the sources and media that yield information about the accounts of the

heads of government in Paris. All but Woodrow Wilson, whose health rapidly declined, later

published memoirs about the PPC. None kept a diary, though several close and intimate contacts

from that period did so. Frances Stevenson’s (Lloyd George, 1967) diary provides a daily record of

intimate conversations with British Prime Minister David Lloyd George in Paris. The two were

involved in a long-standing affair, later married, and discussed the most sensitive aspects of the

conference on a daily basis. Table 2 summarizes the accounts provided by the other delegates and

by highly placed and influential advisors.

Finally, with the lengthy passage of time, the long-term consequences of decisions rendered

and agreements made are considerably clearer. Historians (Boemeke, Feldman, & Glaser, 1999;

Macmillan, 2000; Trachtenberg, 1979, 1980), economic historians (Schuker, 1988), and

econometricians have analyzed the consequences of the decisions made in Paris and the provisions

embodied in the treaty (Ferguson, 1998; King et al., 2003; O’Loughlin, 2002; Sargent, 1982; Webb,

1989). Their work provides an additional set of source materials.

The Form of the Treaty

In the interest of brevity, the analysis makes no attempt to describe the construction of each

of the various sections of this wide-ranging Treaty. It focuses instead on Articles 231-247

concerning Reparations payments from Germany to the Allies. At a March 24, 1919 meeting of the

Council of Four, David Lloyd George had characterized this as “the most difficult of all” the

questions before the conference (Mantoux, 1992, p. 3) predicting that “our experts will never come

to an agreement… unless we agree on a common policy and assume the risks of our decision”. Later

the American expert Thomas Lamont would conclude that this section of the treaty had “caused

more delay and hard feelings than any other issue at the conference” (Lamont, 1921); it remains


perhaps the most widely studied aspect of the Treaty (see Boemeke, Feldman, & Glaser, 1998; Kent,

1984; Marks, 1998; Schuker, 1988; Trachtenberg, 1982). While the analysis focuses on Reparations,

the subsequent discussion does address the similarities in form between the Reparations terms and

other parts of the Treaty.

Treaty Completeness. An employment contract could conceivably endure for several

decades until the retirement or death of the employee. A Treaty governs conduct between nations

for indefinite future generations to come. Completeness is a particularly exacting standard for such

an instrument though presumably not for TOTREP. The section on Reparations in the Treaty of

Versailles was divided into two parts – (1) General Provisions consisting of thirteen articles and

seven annexes; (2) Specific Provisions consisting of three articles. That terminology is not

coincidental, it literally describes the manner in which issues and settlements were treated.

The three articles contained in the Specific Provisions section are closest in form to the type of

contract envisioned by non-cooperative game theory. They provide highly detailed descriptions of

obligations and rights. However the issues that were specifically were of secondary importance, to say the

least. Article 246, for example, describes the very specific set of German obligations regarding the return

of “the original Koran of the Caliph Othman” and “the skull of the Sultan Mkwawa”1. However even this

relatively simple and straightforward exchange was incompletely specified: “The delivery of the articles

above referred to will be effected in such place and in such conditions as may be laid down by the

Governments to which they are to be restored.”

But the disposition of the Sultan’s skull was plainly not the central issue treated in this

section of the Treaty. Nor was it the subject of “more hard feeling and delay” than any other issue.

The amount, mode, and timing of German financial payments to the Allied and Associated Nations,

the subject of very hard feelings, were all dealt with in a very different form under the section on

General provisions.


During the diplomacy that culminated with German disarmament under the Armistice,

agreement had been reached on the question of compensation from Germany. The agreement of all

the belligerents with Woodrow Wilson’s 14 points and with the language of Secretary of State

Robert Lansing’s note of November 5 was pivotal (see Boemeke, Feldman & Glaser, 1998;

Macmillan, 2001):

“In the conditions of peace laid down in his address to Congress on 8 January 1918, the President declared that invaded territories must be restored as well as evacuated and made free. The allied governments feel that no doubt ought to be allowed to exist as to what this provision implies. By it they understand that compensation will be made by Germany for all damage done to the civilian population of the Allies and to their property by the aggression of Germany by land, by sea, and from the air.” (Lansing to Sulzer, November 5, 1918, reprinted in Burnett, 1940, p. 411).

After six months of bargaining, hard feelings, and delay, Article 233 of the Treaty of Versailles

made it clear that the actual financial obligation of Germany would not be specified in the Treaty.

Instead it described the mechanism by which this notable gap was to be filled.

“The amount of the above damage for which compensation is to be made by Germany shall be determined by an Inter-Allied Commission, to be called the Reparation Commission and constituted in the form and with the powers set forth hereunder and in Annexes II to VII inclusive hereto. This Commission shall consider the claims and give to the German Government a just opportunity to be heard. The findings of the Commission as to the amount of damage defined as above shall be concluded and notified to the German Government on or before May 1, 1921, as representing the extent of that Government's obligations. The Commission shall concurrently draw up a schedule of payments prescribing the time and manner for securing and discharging the entire obligation within a period of thirty years from May 1, 1921.

One delegate and one assistant delegate were to be designated by: the United States, Great Britain,

France, Italy, Japan, Belgium, and the Serb-Croat-Slovene State.

On the minor issue of the Sultan’s Skull, the treaty language was reasonably specific though

it did leave some gaps. On the central issue of German financial obligations to the Allies, it left a

truly profound gap. Based on that construction, it would appear that the architects intended to


fashion a long-term resolution of the problem by delegating authority to a multi-national

organization. Primary source materials covering the deliberations over this section of the treaty and

secondary accounts by the key decision makers can be used to test this inference. Why did they

elect to create the Reparation Commission and how did they envision its function? Why did they

choose not to write out an explicit and complete contract governing German obligations and Allied

rights?

Bargaining over Reparations. Given the technical complexity of the financial issues, the

Council of Four relied on expert advisors to propose possible solutions to the reparations problem

(Lamont, 1922; Trachtenberg, 1984). The Commission on Reparations and Damages (CRD) was

one of many committees of experts convened at the beginning of the Conference (Minutes of the

Council of 10, reprinted in Link, 1986, volume 52; Temperley, 1923). Woodrow Wilson relied on a

diverse group of government officials, bankers, and business-men (Lamont, 1921). Georges

Clemenceau sought the advice of several experts, particularly the armaments minister and

industrialist Louis Loucheur (Burnett, 1939; Loucheur, 1962; Trachtenberg, 1984). Lloyd George

played off two competing sets of advisors including John Maynard Keynes and Lords Cunliffe and

Sumner. Keynes’ derisively referred to Cunliffe and Sumner as “the heavenly twins.”2 They called

him “Herr von K” (see Lentin, 2000) for reasons that will soon be evident.

The earliest question the CRD addressed was how to frame the issue before them. At the

third meeting of the committee, delegations submitted a written statement describing the principles

governing the reparations settlement (Burnett, 1939). These statements revealed a very basic

difference between the framing of the issue by the U.S. delegation and the other nations on the

committee. The British statement was quickly endorsed by the other delegations:


“Reparation is not a technical word. It is common to both languages and is well understood. It is the making good of the losses which a party injured has sustained by wrongful acts and their consequences, so as to replace him in as good a position as that which he occupied before the wrong was done. It is effectuated by material means and affords full compensation for the real effects of the wrong.” (Burnett, 1939).

The British would seek reparation in full from Germany for all costs they had incurred as a

consequence of the war.

A young lawyer, John Foster Dulles, presented the American argument against this claim:

“no reparation can be exacted unless: (1) it is clearly due in accordance with accepted principles of international law; or (2) it is stipulated for in the understanding embodied in President Wilson’s points regarding restoration of invaded territories and in the qualifications of these clauses embodied in the note of the Secretary of State of the United States of November 5, 1918.”

(CRD Minutes of the Fifth Meeting, February 13, 1919, reprinted in Burnett, 1939, p. 308).

The discussion soon moved past principles to specifying a fixed sum constituting the total

German debt and a schedule of payments to liquidate the sum. This negotiation spread over several

sub-committees and ad hoc working groups (Baruch, 1923; Burnett, 1939; Lamont, 1922) in a three

way bargaining game between the United State, France, and Great Britain. Figure 2 summarizes the

successive positions taken by the three delegations during this period.

The American team was plainly surprised by the magnitude of British and French demands.

Wilson’s closest advisor Edward M. House (see Bottom, 2003) registered this surprise in his diary:

“The British now put in a tentative total demand on Germany of one hundred and twenty billion dollars (480 milliard marks), and the French think Germany should pay a total of two hundred billion of dollars (800 milliard marks). I thought the British were as crazy as the French, but they seem only half as crazy which still leaves them a good heavy margin of lunacy. Our people think that the maximum cannot be over twenty-two billions of dollars (88 milliard marks) and are inclined to think it should be under that amount.” (diary entry of February 21, 1919 reprinted in Seymour, 1928, p. 343).

As the chart depicts, Anglo-French intransigence eventually led the Americans to propose figures in

excess of 100 billion marks, much higher than the maximal position their analysts felt was possible.


Why then did even these extreme sums fail to resolve the differences? Why did they fail to specify a

fixed sum and instead elect to leave a gap in the Reparations Section?

As the British statement of principles declared, the Anglo-French reference point was the

massive financial, physical, and human costs they incurred during the war. These were the

benchmarks against which they evaluated proposals. The United States entered the war late,

incurred comparatively light losses, and reaped enormous economic and geo-political gains from

supplying the combatants (Friedman & Schwartz, 1962; Kindleberger, 1964; Kuznets, 1947). Table

3 and Figure 3 illustrate this vast disparity in losses. The disparity also shaped the language of the

negotiators. French Prime Minister Clemenceau had vowed to use the negotiations to close the

“most terrible of accounts opened between peoples” (cited in Noble, 1935). Woodrow Wilson had

described America’s mission as “the infinite privilege of fulfilling her destiny and saving the world”

(cited in Widenour, 1998, p. 550). The American reparations negotiators invariably referred to

German “capacity to pay” as the reference point. They and the Keynes faction of the British

delegation (see Keynes, 1917; 1919; Kent, 1984; Trachtenberg, 1982) estimated that German

capacity to pay was far less than 100 billion gold backed marks. Loucheur (1962) privately agreed.

This view was based on economic pragmatism and the necessity of establishing ex ante the

right incentives to insure German compliance with the Treaty ex post. They argued that the Treaty

terms had to be self-enforcing:

“… what the world requires, and requires immediately is a new basis of credit… A definite obligation assumed by Germany under conditions which warrant us in believing that Germany herself has the will and believes she has the capacity to discharge such an obligation, will serve as an immediate basis of credit. A far larger amount assumed under equally satisfactory conditions eighteen months from now would not begin to have the same practical value. Also a larger amount imposed today at the point of a bayonet and in the face of declarations by Germany that the sum is far in excess of her capacity, would prove of no value as a basis of credit… The risks involved in delay far outweigh the difference between such definite sum as might be fixed today and the most


optimistic estimates which have been made as to Germany’s capacity.” (Dulles to Wilson, June 2, 1919, Burnett, p. 109).

The American experts succeeded in persuading the French to lower their total demand based

on “the play of the percentages” (Baruch, 1923; Burnett, 1939; Kent, 1989; Lamont, 1921;

Trachtenberg, 1982). By the percentages, it was far better for France, having sustained a

disproportionate percentage of the physical destruction of the war, to insist on its priority over the

smaller, realistic, and just sum reflecting only damages to truly civilian property. That demand

would ultimately bring France a larger total sum than were they to share more equally with Britain in

an illusory claim for the vast but unobtainable (and unjust) pie comprising “reparation in full”.

This argument left Lloyd George as the final obstacle to specifying a fixed sum and schedule

of payments constituting Germany’s total obligation (Lentin, 2003; Trachtenberg, 1982;

Trachtenberg, 1998). The British Prime Minister vacillated between experts who used German

capacity to pay as a reference point (Keynes and Lord Montagu) and those who insisted on

reparation for war costs (Lords Cunliffe and Sumner). On March 10, Lloyd George, Wilson, and

Clemenceau asked Montagu, Norman Davis, and Loucheur to work out a deal.3 They agreed to a

total fixed sum of 120 billion goldmarks. On March 15, the three leaders endorsed the

recommendation but three days later Montagu was replaced by Cunliffe and the agreement fell apart

(Lentin, 2002; Mantoux, p. 5, footnote 2). By March 25 the numbers had diverged again to stay.

Lloyd George attempted to explain his position in the Council, “It will be as difficult for me

as for M. Clemenceau to dispel the illusions which surround the subject of reparation. Four hundred

members of the British Parliament have sworn to extract from Germany the very last penny to which

we are entitled; I will have to face them” (Mantoux, 1992, Vol. 1, p. 19). The other leaders grew

increasingly frustrated at Lloyd George’s gamesmanship. Orlando described him as a “slippery

prestidigitator.” Wilson wished for “ ‘a less slippery customer to deal with than L.G. for he is


always temporizing,’ ” (cited in Macmillan, 2001, p. 41). Clemenceau concluded that “ ‘Lloyd

George travels in every direction, so inconsistent is he from day to day’ ” (Lentin, 2000, p. 2). The

Frenchman was so offended by Lloyd George’s tactics that he eventually challenged him to a duel

with swords or pistols (Macmillan, 2001).

By the end of March, the impasse on perhaps the single most important issue threatened a

complete breakdown of the Conference. Working with Norman Davis, Dulles devised the

compromise that reconciled the conflicting interests of the delegations in Paris (Burnett, 1939;

Marks, 1998). In their taxonomy of integrative bargaining solutions, Pruitt and Carnevale (1993),

define “bridging” as a type of integrative solution in which a creative alternative is devised that

satisfies the most important interests underlying the parties’ original demands. The Dulles

compromise was a bridging solution that creatively met the most important interests of Great Britain,

France, and the United States. The scheme hinged on a flexible mechanism that could adjust

demands over time as economic and political conditions changed.

The Dulles Compromise. The scheme split the elusive search for a single fixed sum into

two separate parts. The first part, Article 231 in the final Treaty, addressed the British and French

reference points, the total costs of the war:

“The Allied and Associated Governments affirm and Germany accepts, the responsibility of Germany and her allies for causing all the loss and damage to which the Allied and Associated Governments and their nationals have been subjected as a consequence of the war imposed upon them by the aggression of Germany and her allies.”

By creating a theoretical responsibility for payment in full, the authors could thereby claim

that they had balanced the “most terrible of accounts between peoples.” At least they had left intact

the illusion of having done so. German capacity to pay, the American reference point, was


addressed by Article 233. The Reparation Commission was granted a two-year delay in specifying

the debt and a schedule of payments. As the historian William Keylor (1998, p. 500) explained it:

“By affirming Germany’s moral responsibility for the war and its legal liability for the damage to persons and property, while implicitly acknowledging (in what was to become Article 232) her financial incapacity to pay the enormous bill that was certain to result … Davis and Dulles thought that they had devised a brilliant solution to the reparation dilemma … a ‘psychological sop’ to Allied public opinion as compensation for the loss of the huge German payments that Allied leaders knew could and would never be paid.”

The Council of Four discussed these considerations and weighed the tradeoffs. French

Finance Minister Klotz pointed out the need for the commission to have sufficient flexibility to deal

with unforeseeable contingencies.

“The commission must be able to grant extensions. I don’t think we can arrive at a satisfactory total estimate as early as 1921. It would require superhuman genius to know at that date what Germany will be able to pay during the next thirty years. (Mantoux, 1992, vol. 1. p. 150).

Lloyd George agreed: “We will all be in a rather bad state for a number of years, and

Germany will need ten years to get back on her feet. We can’t really say what Germany’s capacity

to pay will be! (Mantoux, 1992, vol. 1, p. 151). “Our public opinion, like yours, demands reparation

as complete as possible… The public will say ‘it isn’t the enemy’s situation on the day after the

peace, but a rather long period – ten years, twenty years – that must be contemplated in order to

know what he must pay us.’” (Mantoux, 1992, vol. 1, p. 169-170). The Americans, the Keynes’

faction, and Loucheur would make one final attempt - in early June - to replace the Dulles language

in favor of a fixed sum. This renewed attempt followed the German presentation of their written

objections to the draft Treaty which raised questions about the interpretation of the Dulles language

(this interpretive question will be discussed in some detail below). German objections created

considerable doubt about whether they would sign the Treaty or restart the war. This final attempt

too failed, the Dulles compromise remained in the final treaty, and the Allies issued an ultimatum to

sign (Bottom, 2003). Keynes resigned in protest,


“I can do no more good here. I’ve gone on hoping even through these last dreadful weeks that you’d find some way to make of the treaty a just and expedient document. But now it’s apparently too late. The battle is lost. I leave the twins to gloat over the devastation of Europe” (Keynes to Lloyd George, June 5 1919, reprinted in Johnson, 1977, p. 469).

Discussion

The Treaty of Versailles was not a complete contract because the authors of the Treaty were

not TOTREPs and could not specify all the relevant contingencies. They knew this, said as much,

and therefore attempted to find an alternative contractual form. As an examination of the

Reparations section revealed, the large gaps in the Treaty were not simply minor issues or remote

contingencies. While the Allies could be somewhat specific about such matters as the return of the

Sultan Mkwawa’s skull, they settled the financial issue only in a “general” sense. The concepts of

relational contracting and flexible gap filling mechanisms accurately characterize the construction

the Reparations section. The deliberative record and secondary accounts are completely consistent

with the logic of the behavioral and contractual paradigms. Moreover, these theories go well beyond

the as-if reasoning of the TOTREP formulation and provide a very good explanation of the

reasoning and intentions of the decision makers.

While the analysis here focused only on the Reparations section, other sections of the Treaty

were constructed in a similar way. Whaley (1984), in an analysis commissioned by the Central

Intelligence Agency, documented the logical inconsistencies and gaps in the military disarmament

clauses. The Poltitical Clauses for Europe sought to establish the boundaries of Germany through

similar gap filling mechanisms: “a commission … shall be constituted fifteen days after the coming

into force of the Treaty to delimit on the spot the frontier line between Poland and Germany”

(Article 87, The Treaty of Versailles, 1922). The various sections of the Treaty created a large

number of special purpose commissions to fill various gaps in the provisions (Papers of John Foster

Dulles, Seeley G. Mudd Library, Princeton University, July 1919).


The first 28 articles of the Treaty chartered a unique form of gap filling mechanism, The

League of Nations. The Covenant established an organization consisting of a General Assembly of

all members with a smaller Secretariat and executive council where the five great powers would

have a majority (Cecil, 1942; Macmillan, 2000; Monnet, 1978). Membership required a pledge to

respect the independence and territorial boundaries of other member states. Germany was excluded

from the set of initial members. It was granted only the right to petition for membership at a later

date. Lamont explained the relationship between the League and the Treaty – it was “the dynamo to

make it work”.

“The end of the war, in which had been involved all the great nations of the World and most of the lesser ones, found a situation that was the most confused and complex ever presented to the solution of man. It was utterly impossible to see far enough into the future to be able in the Treaty to devise for each one of these complex situations a solution and a formula that would work. Tribunals, commissions, executive bodies had to be established under the authority of the nations themselves that were involved. How was this authority to be concentrated and invoked? The only possible method was through some medium of some world-wide agency such as the League of Nations. There was no other way out of this difficulty… But for the long future the Covenant has a much greater function than that. Its first care may well be to set up the machinery that will serve to modify and to complete a treaty that at best contains great imperfections; that will serve to put into running order these clauses of the treaty which some of us think are not unjust, but simply unworkable.” (note by Lamont to Wilson; Papers of Thomas W. Lamont, Baker Library, Harvard Business School, Bin 171, Folder 29).

Lamont may have put it most plainly, but this was not merely his view. The lower half of

Table 4 contains the very critical views of the Treaty provided by a wide range of delegates and

experts. The widespread pessimism regarding the Treaty stemmed from the common belief that the

terms were too punitive, a breach of the commitments made to Germany under the Armistice

agreement and Wilson’s 14 Points, and/or simply impossible to fulfill. The reparations terms were

one important source of concern, though there were a great many others. The presence of an

occupation army in the Rhineland for 15 years, the forced concession of all German colonies, the

loss of 25,000 square miles of territory to new states in Poland and Czechoslovakia, and the


exclusion of Germany from the League were frequently cited as evidence that the Treaty

was overly punitive.

The upper half of Table 4, however, contains appraisals of the Treaty from its strongest

advocates. Note that the grounds most provided for optimism reflected their understanding that the

League and/or Treaty Commissions would provide the means to complete and perfect the terms over

time. Time, attention, and cognitive capacity may have limited the ability to perfect the Treaty at the

Conference. But the flexibility in international relations created by the League would render that

unnecessary. Theirs was indisputably the logic of bounded rationality and relational contracting.

This analysis of the form of the Treaty provided a test pitting the unbounded rationality of the

TOTREP concept against the two distinct conceptions of bounded rationality. Only bounded

rationality could explain the reasoning of the treaty architects and the choices they made. Analysis

of the implementation of the Treaty will permit a test distinguishing between the semi-strong and

weak forms of rationality.

Implementation of the Treaty

“The fundamental prediction of noncooperative game theory is that the outcome of a

strategic interaction will be a Nash equilibrium” (Bendor & Hammond, 1992, p. 157). The

outcomes that result from a Nash Equilibrium need not be efficient. As is true in the prisoner’s

dilemma game, the equilibrium could result in a Pareto inferior outcome. But the equilibrium

concept provides qualitative constraints on implementation strategies that differentiate it from

contractual and behavioral theory.

Kreps (1990, p. 28) explained these constraints. “A Nash equilibrium is an array of

strategies, one for each player, such that no player has an incentive (in terms of improving his own


payoff) to deviate from his part of the strategy array”. The justification for the concept is rarely

explicit, but a common and somewhat intuitive explanation is:

“in cases where players can gather beforehand for pre-play negotiation. They sit down together and try, via some procedure to reason through how they should act. If they come to agreement, and if that agreement is credibly self-enforcing in the sense that no one who believes that others will conform has the motivation to deviate, then the agreement will be a Nash equilibrium. The set of Nash equilibria contains the set of credibly self-enforcing agreements that could be made” (Kreps, 1990, p. 28).

While the contractual paradigm assumes limits on rationality, it claims that decision-makers

will wisely choose methods to economize on cognition. When the transactions are repeated, involve

significant uncertainties, and highly idiosyncratic assets then the relational form of contract will be

used. The contract will provide an efficient governance structure for managing the exchange in a

mutually beneficial way. According to Williamson, an organizational imperative applies: “organize

transactions so as to economize on bounded rationality while simultaneously safeguarding them

against the hazards of opportunism” (p. 32). Problems, in the form of unforeseen contingencies, are

expected to generate ongoing disputes between the parties. However the flexibility of the contract

permits adaptive and efficient adjustments as long as the continuance of the relationship remains in

the best interests of the parties. A high degree of efficiency and stability should result.

Behavioral theory predicts neither efficiency nor stability in the relationship between the

parties (Bazerman & Neale, 1991). Because the meaning of the provisions of a complex agreement

is subjective and idiosyncratic, disputes over implementation are inevitable (Robinson & Rousseau,

1992). The paradigm predicts ongoing friction, instability, and renegotiation. Unilateral breaches of

the contract lead to adverse reactions by the injured party (Rousseau, 1996). Such adverse reactions

may include vocal attempts to change the contract and obtain compensation for damages. If the

grievance is not redressed in some manner, the harmed party may come to experience strong

emotions such as anger, resentment, and rage that can spur one to seek retribution, inflicting damage


on the other party to even a psychological score (Aquino, Bies & Tripp, 2001; Boehm, 1984;

Bottom, Gibson, Daniels, & Murnighan, 2002; Chagnon, 1989; Dietz, Robinson, Folger, Baron, &

Schulz., 2003; Nisbett & Cohen, 1999; Pillutla & Murnighan, 1996).4

The Path of Treaty Implementation

By 1939, the most destructive war in human history had begun. Through what sequence of

events did the relational gap filling mechanisms of the Treaty of Versailles fail? Were the events

consistent with the rational, contractual, or behavioral paradigms? The analysis of those questions

will split the interwar period into two segments, 1919-1932 and 1932-1939, divided by the ascension

to power of Adolf Hitler.

Table 5 is a timeline of the important foreign policy decisions of the second segment, which

ended with Neville Chamberlain’s declaration of war against Germany. These events encompass the

evolution and failure of the widely condemned policy of appeasement. In popular discourse, it was

the implementation of this strategy that fueled Hitler’s ambitions, weakened the Allied military

position, and paved the way for Hitler’s early military victories.

The cause of peace requires all free nations to recognize new and undeniable realities. In the 20th century, some chose to appease murderous dictators, whose threats were allowed to grow into genocide and global war. In this century, when evil men plot chemical, biological and nuclear terror, a policy of appeasement could bring destruction of a kind never before seen on this earth. (President George W. Bush address to the nation, March 17, 2003, http://www.whitehouse.gov/news/releases/2003/03/20030317-7.html).

The policy decisions that actually comprised the appeasement strategy followed a very

systematic sequential pattern. A unilateral German breach of a provision or provisions of the Treaty

of Versailles was met with Allied acquiescence. No attempt was made by France or Great Britain to

enforce the provisions of the Treaty when they were publicly challenged. The controlling articles of

the Treaty for each German challenge are listed in Table 5. Appeasement of Germany is precisely


defined therefore as a sequence of Allied decisions NOT to enforce the Treaty of Versailles

following a unilateral breach by the German Government. Each move by Adolf Hitler was an

unambiguous and very public violation of the Treaty. Observability and verifiability which can

sometimes complicate contract enforcement (Milgrom & Roberts, 1990) posed no obstacles to

enforcement in this case.

The appeasement sequence describes a strategic interaction of disequilibrium. If fully

rational parties were playing Nash equilibrium strategies then none should have any incentive to

unilaterally deviate to improve their position. Unilateral deviation to improve the German position

literally defined German foreign policy during the crucial decade of the 1930’s. Up through the

Munich agreement which unwound the Czech border established at the PPC, Hitler’s foreign policy

moves were purely unilateral and highly successful by almost any measure. The Munich agreement

deviated by representing a joint renegotiation with Neville Chamberlain. However the historical

record indicates that Hitler would have moved unilaterally had Chamberlain not intervened to

propose a deal he could not refuse. In fact Hitler was furious that Chamberlain had found a way to

prevent him from doing so (Kershaw, 2000). He fully intended to take the Sudetenland by force and

quickly returned to purely unilateral success when he seized the remaining non-Sudeten regions of

Czechoslovakia. Remilitarizing and refortifying the Rhine frontier with France, annexing Austria,

annexing Czechoslovakia, and repudiating foreign debt unilaterally improved Germany’s position.

This was precisely how Hitler characterized his accomplishments at the time:

“I have not only politically united the German people, but also militarily rearmed them, and I have further attempted to tear up page for page that Treaty, which contained in its 448 articles the most base violations ever accorded to nations and human beings. I have given back to the Reich the provinces stolen from us in 1919. I have led back into the homeland the millions of deeply unhappy Germans who had been torn away from us. I have recreated the thousand-year historic unity of the German living space, and I have attempted to do all this without spilling blood and without inflicting on my people or on others the suffering of the war.” (Speech to the Reichstag, April 28, 1939, reprinted in Kershaw, 2000, p. 185).


Had the British or the French responded decisively to enforce compliance with the Treaty at

the beginning of the sequence, the costs and risks would have been negligible. Opposition to Hitler

and the unilateral moves existed within the highest levels of the military hierarchy in Germany. A

planned coup against the regime involving both the head of the German General Staff and his

immediate predecessor was aborted only by the bloodless German victory of the Munich agreement

(Churchill, 1948; Kershaw, 1998). The Allies guessed wrong consistently and repeatedly during this

segment of the interwar period, despite having the greatest possible incentives for guessing right.

Churchill (1948, p. 310-311) described this “sad tale of wrong judgments formed by well

meaning and capable people”:

“Look back and see what we had successively accepted or thrown away: A Germany disarmed by solemn treaty; a Germany rearmed in violation of a solemn treaty; air superiority or even air parity cast away; the Rhineland forcibly occupied and the Siegfried line built or building; the Berlin-Rome axis established; Austria devoured and digested by the Reich; Czechoslovakia deserted and ruined by the Munich Pact; its fortress line in German hands, its mighty arsenal of Skoda henceforward making munitions for the German armies; President Roosevelt’s effort to stabilize or bring to a head the European situation by the intervention of the United States waved aside with one hand and Soviet Russia’s undoubted willingness to join the Western Powers and go to all lengths to save Czechoslovakia ignored on the other; the services of thirty-five Czech divisions against the unripened German army cast away when Great Britain could herself supply only two to strengthen the front of France; And now when every one of these aids and advantages has been squandered and thrown away, Great Britain advances, leading France by the hand, to guarantee the integrity of Poland.”

Lest his verdict be considered hindsight, it is important to note that Churchill consistently and

controversially provided the same critique as each of these decisions were being taken (Gilbert,

1982).

Hitler had recognized the potential downside of the Rhineland remilitarization, commenting

later:


“ ‘Had the French then marched into the Rhineland, we would have had to withdraw again with our tails between our legs. The military force at our disposal would not have permitted even for limited resistance’ ”. “’It would have been the greatest political defeat for me’”. (Kershaw, 1998, p. 588).

He had also however correctly calculated that neither the French nor the British were willing to

enforce a Treaty formulated by their own elected representatives who imposed those terms “at the

point of a bayonet”. Adhering to the Treaty did not constitute a Nash equilibrium. Hitler recognized

this fact and fully exploited it.

The Origins of Appeasement

The rational, empathic, and forward looking nature of non-cooperative game theory is

inconsistent with both the form and the path of implementation of the Treaty of Versailles. The

Treaty did not constitute a Nash equilibrium. The contractual paradigm explains the form of the

Treaty and the intentions of the drafters in creating institutions such as the Reparations Commission

and the League of Nations. The contractual paradigm cannot account for the failure of these

institutional solutions nor the political and economic instability that followed. Understanding the

causes of this failure requires an analysis of the first decade of the inter-war period. Table 6 is a

timeline of the major events and also charts the improbable rise to power of Adolf Hitler. It also

makes evident that the gap in the reparations settlement was never resolved by the Reparations

Commission. It remained the most serious problem in international relations for the entire decade.

An Unforseen Contingency. Upon beginning the process of implementing the Treaty, its

drafters were immediately confronted with an unforeseen contingency of tremendous significance.

Article 2, section 2 of the United States Constitution provides the institutional framework within

which a President can negotiate a treaty with a foreign government (“He shall have Power, by and

with the Advice and Consent of the Senate, to make Treaties, provided two thirds of the Senators

present concur”). In November 1919 and March 1920 the Treaty was voted down over opposition to


the League of Nations. This effectively ended American participation in the numerous post-war

institutions created by the Treaty, including both the League and the Reparations Commission. The

crowning negotiating achievement of the French delegation at Paris, a separate NATO-type military

alliance with Great Britain and the United States, was also nullified by the Senate rejection

(Clemenceau, 1929; Lentin, 2003). “And we, who had deferred so much to his (Woodrow

Wilson’s) opinions in all this business of peace-making, were told without ceremony that we ought

to be better informed about the American Constitution” (Churchill, 1948, p. 11).

The loss of American participation in the League and the demise of the mutual security pact

damaged the flexibility of the Treaty. The loss of American membership on the Reparation

Commission retarded the Reparations resolution. The logic of the Dulles compromise had been that

the passage of time would diminish emotional obstacles to specifying a reasonable fixed sum under

American leadership. In the absence of an American commissioner, the bargaining proceeded in the

same confused, chaotic, and contentious manner that characterized the peace conference itself

(Ferguson, 1995; Kent, 1982; Trachtenberg, 1982). Three clear milestones distinguish the decade

long renegotiation process: the London Ultimatum of 1921, the Dawes Plan of 1924, and the Young

Plan of 1930.

The London schedule appeared to fix the total German debt at 135 milliard goldmarks,

though the true debt burden has been valued as low as 49 billion goldmarks by historians. The

negotiators again chose (by means of a series of three bond issues) to perpetuate the illusion that the

true reparations debt was much higher than it actually was. The German government responded with

a genuine attempt to pay reparations on a significant scale (Ferguson, 1996; Trachtenberg, 1980;

Webb, 1988) - a strategy of Treaty revision through “fulfillment.” Payments in cash and kind totaled

roughly 10.134 billion gold marks (Shuker, 1988, p. 107) during this period. Fulfillment advocates


believed that a real attempt to meet the Treaty demands would cause such great economic problems

that the Allies would be forced to renegotiate. The political costs of fulfillment were enormous – its

architect, the foreign minister Walther Rathenau, a Jewish industrialist, soon became the focal point

of Nazi propaganda which included the chant: “ ‘Shoot down that Walther Rathenau / That cursed,

Goddamned Jewish Sow’ ” (Chernow, 1993, p. 227). They soon did so, assassinating Rathenau in

June 1922.

Even under a fulfillment policy, German payments fell behind the Treaty requirements for

the first installment of 20 billion gold marks and the broader London Schedule. France and Belgium

occupied the Ruhr to enforce compliance and the German economy collapsed (Ferguson, 1996;

Shuker, 1988). All reparation payments were suspended as were payments for the cost of

occupation. The mark, which had been steadily losing value, suddenly collapsed and prices

exploded. Figure 4 plots the exchange rate of the paper mark against an index of foreign currencies.

By November 15, a single U.S. dollar traded for 4.2 trillion marks. Life savings of those not holding

assets in foreign currency were wiped out in an instant. Investment bankers, financiers, and

industrialists who held diversified portfolios avoided the tragic fate of the common person.

In his blistering attack on the Treaty, Keynes (1920) had included a warning about the

political dangers of relying on an inflation tax to extract wealth for reparations:

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become 'profiteers,' who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.


The German hyperinflation would prove his point dramatically. A ready focal

point for “the hatred of the bourgeoisie” was not hard to find among a German populace

with a broad strain of anti-semitism. As Chernow (1993, p. 4) noted in his study of M.M.

Warburg and Company, the most powerful German banking firm of that period: “no innate

cleverness about money pushed Jews toward finance. Barred from crafts by medieval guilds

and from farming by local ordinances, they were shunted into trade or money-lending by

default… Like many supposedly ‘Jewish traits’, money-lending was artificially created by

anti-Semitic barriers – even if Anti-Semites later loudly cried ‘financial strangulation’ by the

Jews.”

The Dawes plan renegotiated the reparations debt to stem the immediate crisis. It

brokered an end to the Ruhr occupation, suspended reparations payments in cash, and

provided for a large loan to the German government underwriting a new currency. The

Dawes loan also triggered a boom in private American loans to Germany. The agent in

charge of monitoring reparations payments, Parker S. Gilbert quickly concluded that these

were ill-advised loans, largely ignorant of the massive political risk (Schuker, 1988). The

effect of the lending was to establish an interesting circular system of payments: USA to

Germany in loans, Germany to France and Great Britain in reparations payments, and

France and Great Britain back to the USA in war loan repayments. As a skeptical internal

memorandum at J. P. Morgan explained the logic of the Dawes Plan, “Germany must have a

loan of $ 200,000,000 to furnish a gold reserve for her currency; but the proceeds of the loan

can perfectly well serve that purpose and at the same time be spent in Germany to pay

reparations in kind.” (Lamont Collection, b. 176, f. 8, April 18, 1924, written by “RL”, most

likely Russell Leffingwell, Morgan Partner and former Treasury official under Wilson).


A final attempt at renegotiating the reparations debt, the Young Plan of 1929

required Germany to again begin making reparations payments in cash in return for a

reduced level of payments stretched out to 1988. It also provided for an additional loan that

raised a $ 300 million for Germany but also transferred a portion directly to France and

Great Britain for reparations. When the Young Plan came into force, the German and

American economies had entered the Great Depression and the Weimar Republic was

collapsing. Voting for the NSDAP would grow from less than 3 percent in 1924 to 37.2 %

in 1932. The strongest upsurge in support for the Party came from segments of the

bourgeoisie (King et al., 2002; O’Loughlin, 2002).

“Closing the Most Terrible of Accounts”

After reviewing records of all the transfers to 1931, Schuker (1988) calculated the

total value of German reparation payments under the London, Dawes, and Young regimes at

22.891 billion gold marks. Not only was this total less than the Allies had demanded, it was

also far less than the flow of American capital into Weimar Germany. This massive flow of

funds constituted “one of the greatest proportional transfers of wealth in modern history”

though obviously in a direction opposite that envisioned by the Treaty of Versailles

(Schuker, 1988, p. 120). Ex post, after Hitler defaulted, these transfers converted into

“reverse reparations” payments from America to Germany, though the generosity had

brought little evident good will from the German public.

The Treaty was integral to the identity of the NSDAP. The twenty-five point

“permanent program of the party” announced by Hitler at a meeting on February 24, 1920

demonstrates the inseparable connection. The first three of the principles were direct attacks

on the Treaty. Principle number 2 was blunt. “We demand equality of rights for the

German people in its dealings with other nations, and the revocation of the peace treaties of


Versailles and Saint-Germain.” The permanent program of the party was its opposition to

the Treaty.

The popularity and growth of the party was attributable to Hitler’s incendiary speeches on

this theme during the early 1920’s. “The crowds that began to flock in 1919 and 1920 to Hitler’s

speeches were not motivated by refined theories. For them, simple slogans, kindling the fires of

anger, resentment, and hatred were what worked.” (Kershaw, 1998, p. 137). He addressed over

thirty mass meetings by the end of 1920 and many more in 1921. Membership in the party grew

from 190 in January 1920 to 3300 by August 1921 (Kershaw, 1997, p. 149). In these speeches,

Hitler relentlessly drove the enduring theme of Nazi propaganda (see Table 7): the imperative for

revenge against “the November criminals” who undermined the Empire (in November 1918),

betrayed the German people and soldiers, and cravenly submitted to the dishonorable “Versailles

Diktat” of the Allies.

Who were the “November Criminals”? They included center-left politicians such as

Matthias Erzberger who recognized that the war was lost and signed the armistice on behalf of

Germany (Luckau, 1941; Macmillan, 2001; Scheidemann, 1930). Like that other November

Criminal, Walther Rathenau, Erzberger was assassinated by right wing paramilitaries affiliated with

the NSDAP (Kershaw, 1998). The Jewish bankers, Max Warburg and Carl Melchior, were two

other prominent “November Criminals”. Financial experts to the German delegation at Versailles,

Warburg and Melchior had attempted to create a workable reparations deal. They even advanced a

proposal for German payments totaling 100 billion goldmarks5 in an unsuccessful attempt to force

the Allies into face-to-face negotiations (Boemeke, Feldman, & Glaser, 1998; Chernow, 1993;

Trachtenberg, 1982). Their gamble very nearly worked (Baruch, 1923; Keynes, 1920, Lamont,

1921; Mantoux, 1992) but had unforseen consequences in Germany. When the offer became public


in Germany, it fueled charges of treason and of a “stab in the back” from Nazi’s agitating against

“the Warburg Jewish Peace” (cited by Chernow, 1993, p. 217).

Behind the scenes, Warburg and Melchior were vehemently opposed to the Dulles

framework (Chernow, 1996; Luckau, 1945); their offer was a desperate attempt to force the Allies

into face to face bargaining to undo it. Writing to his wife from Versailles in May 1919, Warburg

expressed his true views: “But to announce a new world era, to speak of loving kindness and justice,

and then to set out on an expedition of world banditry, to plant the seed of new conflict and murder

faith in a better time to come, that surely is to commit a sin of world proportions, and to see that

done with one’s own eyes fills one with horror and with dread.” (cited by Chernow, 1993, p. 215).

The German response to the draft expressed concern about the open-ended nature of the

settlement and the intrusive nature of the Reparations Commission. But opposition to the Treaty was

strongest against Article 231. The government attempted to sign the Treaty subject to a reservation

on this article. “Germany further lays the greatest emphasis on the declaration that she cannot accept

Article 231 of the Treaty of Peace which requires Germany to admit herself to be the sole and only

author of the war, and does not cover this article by her signature.” (Bauer to Clemenceau, June 22,

1919 reprinted in Luckau, 1941, p. 479). The reservation was rejected and the Allies issued an

ultimatum for unconditional signature (Bottom, 2003). Recall that Article 231 was an American

construction, not French and British vindictiveness. It was the psychological sop by which Dulles

had intended to satisfy Anglo-French demands with the illusion of a debt paid in full.

The German interpretation of Article 231 as the “war guilt clause” damaged the Weimar

Republic and politicians associated with the Treaty. Years later, Lamont who had played a role in

drafting the reparations compromise, explained the confusion to colleagues at J.P. Morgan:


“I notice in Norris’ memo his reference to Hoover’s comment on the so-called war guilt clause of the Versailles Treaty. If Mr. Hoover had had anything to do with drawing up that part of the treaty with Germany, he would have known that there was no war guilt clause. There was a clause so drafted as to hold Germany responsible in a financial sense for all the damage that she had caused. When this was submitted to the Germans they at once came back, I always thought with malice aforethought, and demanded to know if this meant that Germany was solely responsible for causing the war. That put Clemenceau and Lloyd George in the hole. They could not from a political point of view say ‘Oh no, we didn’t mean that.’ And although they never intended it that way they just let the matter drop. From that time on the Germans made that terrific hullabaloo about a war guilt clause and that was one of the very good bases for Hitler’s start in stirring up his people.” (Memo from Lamont to RGW and EEN, July 6, 1942, Bin 98, Folder 23, Papers of Thomas W. Lamont, Baker Library, Harvard Business School).

Whatever Lamont’s suspicions, German experts including Warburg, Melchior, and Max

Weber did interpret Article 231 as an admission of German responsibility for the war. Luckau’s

(1941) survey of the German delegation’s correspondence yields no evidence of strategic

manipulation in their interpretation of its meaning. That Herbert Hoover, an Allied delegate, could

interpret the clause in this manner indicates that German malice was not necessary for such

confusion to arise. While it was never intended to do so, the gap filling reparations compromise

created an inflammatory moral issue.

Admission of the collective guilt of the German people became a mark of dishonor. It

provided the theme for Hitler’s political campaign (see Table 7). He would certainly never have

succeeded without the economic chaos of the 1920’s (King et al., 2003). The depression which

brought the Party to the threshold of power, cannot be disentangled from the policy distortions

caused by the hyperinflation and the ongoing reparations struggle (Ferguson, 1996). Hyperinflation

was a direct result of the bitter struggle over reparations, the ill-conceived Ruhr occupation, and the

policy of “passive resistance” to the occupation (Sargent, 1982; Trachtenberg, 1982).

Because of the troubling consequences of implementing the Versailles Treaty – the

occupation, the hyperinflation, the depression, and the ultimate repudiation of reparations payments,

the Allied leadership experienced great difficulty judging Hitler’s motives and ultimate ambitions.


They no longer believed in the justice of the terms they had imposed on Germany and against which

Hitler was acting. Neville Chamberlain’s delusional beliefs during his face-to-face meetings with

Hitler are well known. Shortly after negotiating the Munich Agreement, Chamberlain pronounced “I

believe it is peace for our time” and privately wrote to his sister, that:

“I had established a certain confidence which was my aim...in spite of the hardness and ruthlessness I thought I saw in his (Hitler’s) face, I got the impression that here was a man who would be relied upon when he had given his word.” (quoted in Goldstein, 1998).

But Chamberlain was far from alone in making this misjudgment. This appeared to be an

“aggregate anomaly”. As Churchill would later note (1948, p. 224-225), “All those Englishmen who

visited the German Fuehrer in those years were embarrassed or compromised. No one was more

completely misled than Mr. Lloyd George whose rapturous accounts of his conversation make odd

reading today.”

That it was Lloyd George who was most “completely misled” is notable in two respects.

The former British prime minister had been the lone political survivor of the Council of Four. In

Paris he had been the ultimate stumbling block to inserting a definite fixed sum for the reparations

debt in the Treaty. His decision to replace Montagu with Cunliffe had led Dulles to formulate his ill-

fated compromise with its open-ended financial claim and war guilt clause. In the late 1930’s, Lloyd

George was still a prominent force in British politics (Churchill, 1948; Lentin, 2002; Morgan, 1974)

so his judgments regarding Hitler held great interest to Chamberlain and the British public.

The second notable aspect of Lloyd George’s misjudgment is how jarringly out of character

it was. This sudden failure marked an ironic end to a political career founded upon an acute sense of

perspective taking and the ability to turn it to political advantage. Keynes provided a memorable

characterization of “the Wizard” in his critique of Woodrow Wilson’s failure:


What chance could such a man have against Mr. Lloyd George’s unerring, almost medium like sensibility to everyone immediately around him? To see the British Prime Minister watching the company, with six or seven senses not available to ordinary men, judging character, motive, and subconscious impulse, perceiving what each was thinking and even what each was going to say next, and compounding with telepathic instinct the argument or appeal best suited to the vanity, weakness, or self interest of his immediate auditor, was to realize that the President would be playing blind man’s bluff in that party.” (1920, p. 25-26).

But it was Lloyd George who played blind man’s bluff at his historic meeting with Hitler at

Berchtesgaden, two years before Chamberlain’s meeting.

“He is a born leader, a magnetic dynamic personality with a single-minded purpose, a resolute will and a fearless heart. He is the national leader not only in name but also in deeds. He has protected his people against the potential enemies surrounding them, and he has secured them against the constant fear of starvation… Hitler is the George Washington of Germany, the man who made his country independent of all its oppressors.” (Lloyd George, 1936).

Lloyd George’s biographer, Kenneth Morgan (1970) concluded that his perception of Hitler

was distorted by his own beliefs about the errors and injustices in the Versailles Treaty (Morgan,

1970). While in agreement, the historian Lewis Namier (1942, p. 60), who had been a British

advisor at the PPC, emphasized that this bias was an aggregate anomaly among the British public:

“as Hitler blustered and threatened, pangs of conscience were felt about the Treaty of Versailles while worse treaties remained forgotten. This was not mere hypocrisy or fear – behind it was the passionate desire of a war weary world to believe that it was still in its power to preserve peace. There was hope and comfort in guilt…”

Namier provided a behavioral explanation for the strategic errors and disequilibrium of the

time period. This behavioral explanation is also consistent with the many predictions of the

delegates and expert advisors whose appraisals of the Treaty are summarized in the lower half of

Table 4. Note the prediction made by General Smuts in 1919. Shortly before the Treaty was signed,

Smuts warned Lloyd George that the reparations scheme was a dangerous source of future

disequilibrium: “while a very large amount of reparation could be obtained from Germany in the

long run, the actual scheme adopted in our Reparation clauses is unworkable, and must kill the goose

which is to lay the golden eggs.” (Hancock & van der Poel, 1966, p. 986). In his letter to Keynes he


had discussed the “shame” and “revulsion” that would eventually lead to revision of the “monstrous”

treaty. Unfortunately the shame and revulsion he had predicted also introduced the disequilibrium

which would provide Hitler with a strategic opportunity.

Smuts prediction of Allied shame and revulsion preceded the hyperinflation, the political

assassinations, the depression, the failure to obtain reparation payments, the fall of the Weimar

Republic, and the rise of fascism in Italy, Germany, and Japan. Smuts issued it before “over

700,000 died of sheer hunger in those dark years” (Lloyd George, 1936). Namier and Smuts’

interpretations, the views of well- informed and highly sophisticated participant-observers, are

consistent with neither the rational nor the contractual paradigms. Those paradigms take no account

of state dependent choice based on pangs, guilt, shame, revulsion, or fear. Their views are consistent

with the behavioral theory of cognitive and emotional influences on judgment – wishful thinking,

overconfidence, illusion of control, regret, and guilt. As Namier pointed out, the delusion in this

case was a collective, systemic, and aggregate anomaly not a personal mistake by one statesman.

Contrary to the claim made by Coursey and Roberts (1992), this aggregate anomaly persisted despite

organizational support, professional advisors, and analytic tools. The political marketplace not only

failed to eliminate it, it quite clearly exacerbated it.

The origins of those cognitive illusions can be found in the construction of an unstable peace

treaty which contained within it provisions that were popular at the time in England and France but

which could not be implemented. Attempts to implement the reparations terms led to economic and

political chaos in Germany and widespread human suffering. Regret, shame, revulsion, and guilt

undermined the willingness to subsequently enforce the renegotiated reparations demands and other

provisions of the Treaty. “That Treaty was for Hitler the blackmailer’s lucky find – not the real

treaty, but the legends built up around it. He did not start them (it is amazing how little inventive


capacity he has shown in an almost unique career), but he has put them to the fullest and foulest use”

(Namier, 1942, p. 57). Namier made only one error - under a relational contract, the “legends” are

the real treaty because the psychological contract is the contract.

Discussion

The semi-strong and weak conceptions of rationality provided sound accounts for the form

and structure of the Treaty of Versailles. Both accounted for the intentions of the drafters. Only the

weak conception of rationality embodied in the behavioral paradigm of research could account for

the implementation problems and systematic unraveling of the Treaty during the 1930’s. The Allied

policy of appeasement was a product of blind spots induced by regret and shame over “the grave

mistakes” (see Lord Cecil’s quote in Table 4) made in constructing the Treaty coupled with wishful

thinking that war could be avoided.

The analysis here focused primarily on the troubled interpretation and implementation of the

reparations section. Whaley (1984) demonstrated equally severe problems with the enforcement of

the disarmament section. Germany easily evaded the spirit of the disarmament provisions. Those

sections that were enforced actually led to unforeseen disadvantages for the Allies, facilitating

German technical advancement in arms, munitions, and “blitzkrieg”. The gap left in the reparations

section of the Versailles Treaty stemmed from the backward reasoning associated with the sunk

costs of the war, human and financial. Rather than specify the precise debt Germany would need to

repay, the Allies relied on a drafting gimmick, the Dulles compromise, that could sustain the

cognitive illusion of reparation in full - “that the most terrible of accounts between nations” would

be closed by the Treaty.


Years later Dulles (1940) provided a behavioral explanation for the “stupidity” of the

reparations compromise.

“Analysis of the documents shows that the participants suffered from ‘blind spots’. Of these the most important is that illustrated by the ‘war guilt’ provision (Article 231). In the light of subsequent developments it may be that this article was the most important single article in the Treaty. Thereby, in German eyes, Germany was branded with moral guilt for the World War… There was thus created a sense of injustice and a reaction against the imputed moral inferiority… The significance of Article 231 was not adequately perceived by the reparations delegates or apparently by their Chiefs of State… It came therefore as a surprise when German observations on the Conditions of Peace showed that this section could plausibly be, and in fact was, considered to be a historical judgment of ‘war guilt’. It can thus be said that the profound significance of this article of the Treaty came about through accident, rather than design.” (page xi-xii).

TOTREP, the theoretical abstraction of unbounded rationality would have created a

complete contract, structuring incentives so that adherence would constitute a self-enforcing

equilibrium. The human negotiators in Paris were unable to do so. Analysis of the implementation

of the Treaty substantially validates Kennan’s withering critique and the predictions of the

behavioral paradigm. The attention and concern devoted to settling up accounts between peoples

ultimately led to an unstable and unenforceable agreement. These errors included the construction

of the Reparations section with its open ended financial demand justified by a mis-communicated,

misinterpreted, and supremely destructive war guilt clause.

Zeckhauser (1986) argued that “measuring the real world consequence (of cognitive

illusions) is the major challenge to the behavioralists” where importance is defined as “frequency of

occurrence times impact”. The analysis of the Versailles Treaty has demonstrated the way in which

cognitive illusions and blind spots contributed directly to the greatest tragedy in human history – as

measured by number of deaths and physical destruction. That certainly constitutes impact though

perhaps not “frequency of occurrence.”


Of course with any case methodology, the problem arises of fitting theory to events, of

creating “just so stories” (Druckman, 2002). That concern raises particularly intriguing questions

with this case. Though previously overlooked, the behavioral paradigm and the concept of

stereotypes, blind spots and cognitive illusions was developed by an informal network of participant-

observers of the treaty construction process. The theory originally derived from this case, though

eventually the paradigm would be generalized and extended far beyond it. The investigation here

was intended to test whether the “predictions” of the original behavioralists were consistent with the

eventual unfolding of events and the more complete understanding of the original decisions that is

now available. To a very large extent it was.

Given the degrees of freedom issue, perhaps Versailles was simply a unique event in history.

Or perhaps the beliefs and decision rules used by statesmen and women have since adapted in such a

way that TOTREP can now be treated as a descriptive model of executive decision in the 21st

Century. The justification for the Iraq war provided by President George W. Bush reflects a strong

conviction that he has drawn the appropriate lessons from Neville Chamberlain’s mistakes. Shortly

before Chamberlain journeyed to Munich, another of the early behavioralists, Nicolson (1933)

warned against the temptation to engage in such thinking:

“Human error is a permanent and not a periodic factor in history, and … future negotiators will be exposed, however noble their intentions to futilities of intention and omission as grave as any which characterized the blunders and inequities of the Council (of Four). They were convinced that they would never commit the blunders and inequities of the Congress of Vienna. Future generations will be equally convinced that they will be immune from the defects which assailed the negotiators of Paris. Yet they in turn will be exposed to similar microbes of infection, to the eternal inadequacy of human intelligence.”

Equating a normative model of rational action, TOTREP, with the descriptive model of

organizational decision making is to ignore the existence of these microbes of infection. There is

now considerable evidence that humans are distinctly predisposed to the formation of at least mildly


delusional systems of belief (Lippmann, 1922; Taylor and Brown, 1994). Political leaders regularly

attempt to manipulate those delusions in order to “manufacture consent”; political markets can

exacerbate those delusions (Lippmann, 1922). Lloyd George repudiated the Montagu-Davis-

Loucheur reparations settlement in mid-March of 1919 because of British public opinion. The

Dulles compromise was the direct product of a political market that Lloyd George believed

demanded the recovery or at least the appearance of recovering sunk costs, “Our public opinion, like

yours, demands reparation as complete as possible”). There is ample evidence in the accounts of

business decision makers and observers (Lewis, 2003; Maclean & Elkind, 2003), in the study of the

financial records associated with strategic decisions of business firms (Hambrick & Havward, 1998;

Lys & Vincent, 1995; Malmendier & Tate, 2003; Roll, 1986), and in the analysis of volatility in

even highly efficient financial markets (Shiller, 1989) to suggest that the flawed reasoning observed

here occurs in business decisions as well. Decision makers in business organizations are subject to

the same microbes of infection as politicians. Descriptive models of organization must reflect that.

To assume otherwise squanders the tremendous value of rational choice theory in what Harsanyi

termed “the analysis of deviations.”

References

Allison, Graham. (1971). Essence of Decision. Boston: Little Brown. Allport, Gordon. 1954. The Nature of Prejudice. Cambridge MA: Addison Wesley. Allport, Gordon. 1923. Germany’s state of mind. New Republic, 34: 63-65.


Aquino, Karl., Thomas M. Tripp, and Robert J. Bies (2001). How Employees Respond to Personal

Offense: The Effects of Blame Attribution, Victim Status, and Offender Status on Revenge and Reconciliation in the Workplace. Journal of Applied Psychology, 86: 52-59.

Arkes, Hal R., & Peter Ayton. 1999. “The Sunk Cost and Concorde Effects: Are Humans Less Rational Than Lower Animals?” Psychological Bulletin, 125: 591-600. Baynes, Norman H. 1969. The Speeches of Adolf Hitler, April 1922-August 1939,

volume 1. New York: Howard Fertig.

Bazerman, Max H., & Margaret A. Neale. 1991. Cognition and Rationality in Negotiation. New York: Free Press.

Bendor, Jonathan. 2003. “Herbert Simon: Political Scientist,” Annual Review of Political Science,

6: 433-471. Bendor, Jonathan and Thomas H. Hammond. 1992. “Rethinking Allison’s Models,”

American Political Science Review, 86: 301-321.

Berle, Adolf A. 1973. Navigating the Rapids, 1918-1971. New York: Harcourt Brace Jovanovich.

Boehm, Christopher. 1984. Blood Revenge: The Anthropology of Feuding in

Montenegro and Other Tribal Societies. Lawrence, KS: University Press of Kansas. Boemeke, Manfred F., Gerald D. Feldman, and Elisabeth Glaser. The Treaty of

Versailles: A Reassessment after 75 Years. Cambridge: Cambridge University Press.

Bottom, William P. (2003). “Keynes’ Attack on the Versailles Treaty: An Early Investigation of the Consequences of Bounded Rationality, Cognitive Illusions, and Framing Effects,” International Negotiation, 8: 367-402.

Bottom, William P., Kevin Gibson, Steven Daniels, & J. Keith Murnighan (2002). When Talk is

not Cheap: Substantive Penance and Expressions of Intent in Rebuilding Cooperation. Organization Science, 13, 497-513.

Bottom, William P., Krishna Ladha, & Gary J. Miller (2002). Propagation of Individual Bias

Through Group Decision Making: Error in the Treatment of Asymmetrically Informative Signals. Journal of Risk and Uncertainty, 25, 147-163.

Bottom, William P. 1998. Negotiator Risk: Sources of Uncertainty and the Impact of

Reference Points on Negotiated Settlements. Organizational Behavior and Human Decision Processes, 76, 89-112.

Bottom, William P., & Amy Studt. 1993. Framing effects and the Distributive Aspect of Integrative Bargaining. Organizational Behavior and Human Decision Processes,

56, 459-474.


Bottom, William P., Robert N. Bontempo, & David Holtgrave. 1989. “Experts, Novices, and the St.

Petersburg Paradox: Is One Solution Enough?” Journal of Behavioral Decision Making, 2: 113-121.

Bruner, Jerome S. 1973. Beyond the Information Given: Studies in the Psychology of Knowing.

New York: Norton. Bruner, Jerome S., & Gordon Allport. 1940. “Fifty Years of Change in American Psychology,”

Psychological Bulletin, 37: 757-776. Cacioppo, J. T., R. E. Petty, J. Feinstein, & W. B. Jarvis, B. (1996). “Dispositional

Differences in Cognitive Motivation: The Life and Times of Individuals Varying in Need for Cognition,” Psychological Bulletin, 119: 197-253

Camerer, Colin. 2003. Behavioral Game Theory: Experiments in Strategic Interaction.

Princeton NJ: Princeton University Press. Cantril, Hadley & Gordon Allport. 1935. The Psychology of Radio. New York: Harper. Cecil, Robert. 1941. A Great Experiment. New York: Oxford University Press. Chagnon, Napoleon. 1989. “Life Histories, Blood Revenge, and Warfare in a Tribal

Population,” Science, 985-992.

Churchill, Winston S. 1948. The Gathering Storm. Boston: Houghton Mifflin. Clodfelter, Michael. (1992). Warfare and Armed Conflicts: A Statistical

Reference to Casualty and Other Figures, 1618-1991. London: McFarland & Company.

Coursey, Don L, & Russell D. Roberts. 1991. “Competition in Business and Political Markets,” Public Choice, 70: 83-88.

Dearborn, Dewitt C., & Herbert A. Simon 1958. “Selective Perception: A Note on the Departmental

Identification of Executives,” Sociometry, 21: 140-144. Dietz, Joerg, Sandra L. Robinson, Robert Folger, Robert A. Baron, and Martin Schulz.

2003. The Impact of Community Violence and an Organization's Procedural Justice Climate on Workplace Aggression. Academy of Management Journal, 46: 317-326.

Dixit, Avinash, & Skeath, Susan. 1999. Games of Strategy. New York: W. W. Norton. Eisenhardt, Kathleen M. 1989. “Building Theories from Case Study Research,” Academy

of Management Review, 14: 532-550. Feder, Gottfried. 1934. Hitler’s Official Programme and its Fundamental Ideas.

London: George Allen & Unwin.


Ferguson, Niall. 1995. Paper and Iron: Hamburg Business and German Politics in the Era of Inflation, 1897-1927. Cambridge: Cambridge University Press.

Ferguson, Niall. 1996. “Constraints and Room for Manoeuvre in the German Inflation of

the Early 1920s,” Economic History Review, 49: 635- Frank, Robert H. 1988. Passions within Reason: The Strategic Role of the Emotions.

New York: Norton. Friedman, Milton, & Anna Schwartz. 1971. A Monetary History of the United States, 1867-

1960. Princeton NJ: Princeton University Press. Fry, Michael G. 1998. “British Revisionism”, In M.F. Boemeke, G.D. Feldman, & E.

Glaser, (eds.), “The Treaty of Versailles: A Reassessment After 75 Years. Cambridge: Cambridge University Press, 565-602.

Goldberg, Victor P. 1980. “Relational Exchange: Economics and Complex Contracts,” American Behavioral Scientist, 23: 337-352. Gelfand, Lawrence E. 1998. “The American Mission to Negotiate Peace: An Historian Looks

Back,” In M.F. Boemeke, G.D. Feldman, & E. Glaser (eds.), The Treaty of Versailles: A Retrospective after 75 Years. Cambridge: Cambridge University Press, 189-202.

Gilbert, G.M. 1951. “Stereotype Persistence and Change Among College Students,” Journal of

Abnormal and Social Psychology, 46: 245-254. Gilovich, Thomas, Griffin, Dale, & Daniel Kahneman. 2003. Heuristics and Biases: The

Psychology of Intuitive Judgment. Cambridge: Cambridge University Press. Hancock, W. K., & Jean van der Poel. (ed.). 1966. Selections from the Smuts Papers.

Cambridge: Cambridge University Press. Harsanyi, John C. 1977. Rational Behavior and Bargaining Equilibrium in Games and Social

Situations. Cambridge: Cambridge University Press. Hart, Oliver and Bengt Holmstrom, 1987. “The Theory of Contracts,” In T. Bewley

(ed.), Advances in Econometrics: the 5th World Congress. Cambridge: Cambridge University Press, 71-155.

Hastorf, Albert H. & Hadley Cantril. 1954. “They Saw a Game: A Case Study,” Journal of

Abnormal and Social Psychology, 49: 129-134. Hayward, Mathew L.A., & Donald C. Hambrick. 1997. Explaining the premium paid for

large acquisitions: Evidence of CEO hubris. Administrative Science Quarterly, 42: 103-127.

Hirshleifer, Jack. 2001. The Dark Side of the Force: Economic Foundations of Conflict

Theory. Cambridge: Cambridge University Press.


Holcombe, Arthur N. 1922. “Review of ‘Public Opinion’ by Walter Lippmann,’” American

Political Science Review, 16: 500-501. Holsti, Ole. 1992. “Public Opinion and Foreign Policy: Challenges to the Almond-Lippmann

Consensus,” International Studies Quarterly, 36: 439-466. Hoover, Herbert. 1958. The Ordeal of Woodrow Wilson. New York: McGraw Hill. House, Edward M., & Charles Seymour. 1921. What Really Happened at Paris. New York: C.

Scribner’s and Sons. Ikenberry, G. John. 1999. “The Treaty of Versailles”. Foreign Affairs, 78, 140. James, Roderick R, (Ed). 1974. Winston S. Churchill: His Complete Speeches, 1897

-1963. London: Chelsea House Publishers. Janis, Irving L. 1974. Groupthink: Psychological Studies of Policy Decisions and

Fiascoes. New York: Houghton Mifflin. Johnson, Elizabeth (ed. 1977). The Collected Writings of John Maynard Keynes,

Volume XVI: The Treasury and Versailles. London: Macmillan. Kahneman, Daniel. 2003. A Perspective on Judgment and Choice: Mapping Bounded

Rationality. American Psychologist, 58: 697-720. Kahneman, Daniel, Slovic Paul, & Amos Tversky. 1982. Judgment Under Uncertainty:

Heuristics and Biases. Cambridge: Cambridge University Press. Keltner, Dacher & James Haidt. 1999. Social Functions of Emotions at Multiple Levels

of Analysis. Cognition and Emotion, 13: 505-522. Kennan, George F. 1996. At a Century’s Ending: Reflections, 1982-1995. New York. Kent, Bruce. 1989. The Spoils of War: The Politics, Economics, and Diplomacy of

Reparations. Oxford: Clarendon Press. Kerr, Norbert L., Robert MacCoun, & Gerald P. Kramer. (1996). Bias in judgment: Comparing

individuals and groups. Psychological Review, 103: 687-719. Kershaw, Ian. 2000. Hitler 1936-1945: Nemesis. New York: Norton. Kershaw, Ian. 1998. Hitler 1889-1936: Hubris. New York: Norton. Kershaw, Ian. 1991. Hitler: Profiles in Power. New York: Addison Wesley. Keylor, William R. 1998. “Versailles and International Diplomacy”, In M.F.


Boemeke, G.D. Feldman, & E. Glaser, (eds.), “The Treaty of Versailles: A Reassessment After 75 Years. Cambridge: Cambridge University Press, 469-506.

Keynes, John M. 1922. A Revision of the Treaty. New York: Harcourt Brace. Keynes, John M. 1919. The Economic Consequences of the Peace. London:

Macmillan. King, Gary, Ori Rosen, Martin Tanner, & Alexander F. Wagner. 2002. “The Ordinary

Election of Adolf Hitler: A Modern Voting Behavior Approach,” Center for Basic Research in the Social Sciences Working Paper, Harvard University.

Kreps, David M. 1990. Game Theory and Economic Modelling. Oxford: Oxford

University Press. Kreps, David M. 1988. Notes on the Theory of Choice. Boulder CO: Westview Press. Kindleberger, Charles P. 1964. Economic Growth in France and Britain, 1851-1950.

Cambridge MA: Harvard University Press.

Klotz, Louis-Lucien. 1924. De la Guerre à la Paix: Souvenirs et Documents. Paris: Payot. Kuznets, Simon. 1946. National Product Since 1869. New York: National Bureau of

Economic Research. Lamont, Thomas W. 1921. “Reparations,” In E. M. House & C. Seymour (eds.), What Really

Happened at Paris. New York: Charles Scribner’s & Sons. Lansing, Robert. 1921. The Peace Negotiations, A Personal Narrative. Boston: Houghton

-Mifflin. Lasswell, Harold D., Ralph D. Casey, and Bruce L. Smith (eds.). 1935. Propaganda and

Promotional Activities: An Annotated Bibliography. Chicago: Chicago University Press.

Lasswell, Harold D. 1927. Propaganda Technique in the World War. New York: Knopf. Lentin, Antony. 2001. Lloyd George and the Lost Peace: From Versailles to Hitler,

1919-1940. Basingstoke, England: Palgrave. Lewis, Michael. 2003. Moneyball. New York: Random House. Link, Arthur S. 1992. “Mantoux and His Notes,” In A. S. Link (ed.), The Deliberations

of the Council of Four, Volume 1. Princeton, NJ: Princeton University Press. Link, Arthur S. (Ed.). 1965-1994. The Private Papers of Woodrow Wilson (vols. 1-69).

Princeton NJ: Princeton University Press.


Lippmann, Walter. 1926. The Phantom Public. New York: Harcourt Brace. Lippmann, Walter. 1922. Public Opinion. New York: Harcourt Brace. Lloyd George, David. 1939. Memoirs of the Peace Conference. New Haven, CT: Yale University

Press. Lloyd George, David. 1969. “I Talked to Hitler,” Daily Express, November 17, 1936. Reprinted

in J. Remak (ed.), The Nazi Years: A Documentary History. New York: Prentice Hall, 80-82.

Lloyd George, Frances. 1967. The Years that are Past. London: Hutchinson.

Loucheur, Louis. 1962. Carnets Secrets, 1908-1932. Brussels: Brepols, 1962. Lucas, Robert E., Jr. 1986. “Adaptive Behavior and Economic Theory,” Journal of

Business, 59: S401-S426. Luce, R. Duncan. 2000. Utility of Gains and Losses: Measurement- Theoretical,

and Experimental Approaches. London: Erlbaum. Luckau, Alma. 1941. The German Delegation in Paris. New York: Carnegie Institution for

International Peace. Lys, Thomas., & Linda Vincent. 1995. “An Analysis of Value Destruction in AT&T’s

Acquisition of NCR,” Journal of Financial Economics, 39: 353-378. McCormick, Vance C. 1977. Diaries of Vance C. McCormick. New Haven, CT: Yale

University Library. McEwan, Joseph M., editor (1986). The Riddell Diaries. London: Athlone Press. McLean, Bethany and Peter Elkind. 2003. The Smartest Guys in the Room: The

Amazing Rise and Scandalous Fall of Enron. New York: Portfolio. Macmillan, Margaret A. (2003). Paris 1919: Six Months That Changed the World. New

York: Random House. Macneil, Ian R. 1978. “Contracts: Adjustments of Long Term Economic Relations

Under Classical, Neo-Classical, and Relational Contract Law,” Northwestern University Law Review, 47: 691-816.

Madon, Stephanie, Guyll, Max, Aboufadel, Kathy, Montiel, Eulices, Smith, Alison, Palumbo, Polly, & Lee Jussim. 2001. “Ethnic and National Stereotypes: The Princeton Trilogy Revisited

and Revised,” Personality and Social Psychology Bulletin, 27: 996-1010.


Malmendier, Ulrike & Geoffrey Tate. 2003. “CEO Overconfidence and Corporate Investment,” Stanford University Working Paper.

Mantoux, Paul. 1992. The Deliberations of the Council of Four, Vol. 1-2. A.S. Link

(editor, translator). Princeton, NJ: Princeton University Press. March, James G., & Simon, Herbert A. 1958. Organizations. New York: Wiley. Marks, Sally. 2003. The Illusion of Peace: International Relations in Europe, 1918-1933.

Basingstoke England: Palgrave Macmillan. Marks, Sally. 1998. “Smoke and Mirrors: In Smoke-Filled Rooms and the Galerie des

Glaces,” In M. F. Boemeke, G.D. Feldman, & E. Glaser (eds.), The Treaty of Versailles: A Reassessment After 75 Years. Cambridge: Cambridge University Press, 337-370.

Merriam, Charles E. 1924. “The Significance of Psychology for the Study of Politics,” American

Political Science Review, 18: 469-488. Merriam, Charles E. 1919. “American Publicity in Italy,” American Political Science Review, XIII:

541-555. Milgrom, Paul & Roberts, John. 1992. The Economics of Organization. Englewood

Cliffs NJ: Prentice Hall. Mommsen, Wolfgang J. 1998. Max Weber and the Peace Treaty of Versailles. In M.F.

Boemeke, G.D. Feldman, & E. Glaser, (eds.), The Treaty of Versailles: A Reassessment After 75 Years. Cambridge: Cambridge University Press, 535-546.

Monnet, Jean. 1978. Memoirs. Garden City, NY: Doubleday. Morgan, Kenneth O. 2002. “Review of ‘Lloyd George and the Lost Peace: From

Versailles to Hitler: 1919-1940,’” English Historical Review, 117: 745-746. Morgan, Kenneth O. 1974. Lloyd George. Oxford: Oxford University Press. Morris, Michael W., & Dacher Keltner. 2000. “How Emotions Work in Interpersonal Conflicts: An Analysis of the Social Functions of Emotional Expression in Negotiation,” In B.

Staw and R. Sutton (eds.), Research on Organizational Behavior, 22: 1-50. Namier, Lewis B. 1942. Conflicts: Studies in Contemporary History. London:

Macmillan & Co. Northcraft Gregory, B., & Margaret A. Neale. 1987. “Experts, Amateurs, and Real Estate:

An Anchoring and Adjustment Perspective on Property Pricing Decisions”. Organizational Behavior and Human Decision Processes, 39: 84-97.

Nicolson, Harold. 1933. Peacemaking 1919. London: Constable and Co.


Nisbett, Richard E., & Dov Cohen. 1999. “Men, Honor, and Murder,” Scientific American, 10:

16-19. Nitti, Francesco. 1922. The Wreck of Europe. Indianapolis. Bobbs-Merrill. Noble, George B. 1935. Policies and Opinions at Paris, 1919. New York: Macmillan. O’Loughlin, John. 2002. “The Electoral Geography of Weimar Germany,” Political

Analysis, 10: 217-243. Orlando, Vittorio. 1960. Memorie, 1915-1919. Milan. Rizzoli. Palmer, Frederick. 1934. Bliss, Peacemaker: The Life and Letters of General Tasker Howard

Bliss. New York: Dodd, Mead, & Company. Pillutla, Madan M. and J. Keith Murnighan (1996). “Unfairness, Anger, and Spite:

Emotional Rejections of Ultimatum Offers”. Organizational Behavior and Human Decision Processes, 68: 208-224.

Pruitt, Dean G., & Carnevale, Peter J. 1993. Negotiation in Social Conflict. Pacific

Grove CA: Brooks/Cole. Rabin, Matthew. 1994. “Incorporating Fairness into Game-Theory and Economics,”

American Economic Review, 83: 1281-1302. Rhodes, Roderick R. 1974. Winston S. Churchill: His Complete Speeches. Robinson, Sandra L., & Rousseau, Denise M. (1994). “Violating the Psychological Contract: Not the Exception But the Norm,” Journal of Organizational Behavior,

15: 245-259. Roll, Richard. 1986. “The Hubris Hypothesis of Corporate Takeovers,” Journal of

Business, 59: 197-216.

Rousseau, Denise M. 1995. Psychological Contracts in Organizations: Understanding Written and Unwritten Agreements. Thousand Oaks, CA: Sage.

Rubinstein, Ariel. 1998. Modeling Bounded Rationality. Cambridge, MA: MIT Press. Sargent, Thomas J. 1982. “The Ends of Four Big Inflations.” In Robert E. Hall (ed.), Inflation: Causes and Effects. Chicago: University of Chicago Press. Seymour, Charles. 1928. The Intimate Papers of Colonel House: The Ending of the War. Boston: Houghton Mifflin. Schuker, Stephen A. 1998. “The Rhineland question: West European security at the Paris Peace Conference of 1919”, In M.F. Boemeke, G.D. Feldman, & E. Glaser,


(eds.), The Treaty of Versailles: A Reassessment After 75 Years. Cambridge: Cambridge University Press, 275-312.

Schuker, Stephen A. 1988. American "Reparations" to Germany, 1919-1933: Implications for the Third World Debt Crisis. Princeton, NJ: Princeton Studies in

International Finance. Schulzinger, Robert D. 1984. The Wise Men of Foreign Affairs: The History of the Council on

Foreign Relations. New York: Columbia University Press. Shotwell, James A. 1941. “Preface,” In A. Luckau, The German Delegation in Paris. New York:

Carnegie Institution for International Peace. Shiller, Robert J. 1989. Market Volatility. Cambridge: MIT Press. Simon, Herbert A. 1991. Models of My Life. New York: Basic Books. Simon, Herbert A. 1967. “Motivational and Emotional Controls of Cognition,” Psychological

Review, 74: 29-39. Simon, Herbert A. 1951. “A Formal Theory of the Employment Relationship,” Econometrica, 19:

293-305. Simon, Herbert A. 1947. Administrative Behavior. New York: MacMillan. Sonnino, Sidney. 1972. Diario. Bari: Laterza. Stanovich, Keith E., & Richard F. West. 2000. “Individual differences in reasoning: Implications

for the rationality debate. Behavioral and Brain Sciences, 23: 645-665. Tardieu, Andre. 1921. The Truth About the Treaty. Indianapolis, IN: Bobbs Merrill. Taylor, Shelley E., & Jonathon D. Brown. (1994). “Positive Illusions and Well Being

Revisited: Separating Fact from Fiction,” Psychological Bulletin, 116: 21-27. Temperley, Harold W.V. 1924. A History of the Peace Conference of Paris. London:

Frowde, Hodder, & Stoughton. Thaler, Richard H. 1999. “Mental Accounting Matters,” Journal of Behavioral Decision

Making, 12: 183-206. Thaler, Richard H. 1985. “Mental Accounting and Consumer Choice,” Marketing

Science, 4: 199-214. Trachtenberg, Marc. 1980. Reparation in World Politics. New York: Columbia University Press. Trachtenberg, Marc. (1979). “Reparation at the Paris Peace Conference,” The Journal


of Modern History, 51: 24-55. The Treaties of Peace, 1919-23: Versailles, St. Germain, Trianon. 1924. New York:

Carnegie Endowment for International Peace. Tversky, Amos, & Kahneman, Daniel. 1974. “Judgment under uncertainty: Heuristics

and Biases.” Science, 1124-1131. Webb, Steven B. 1989. Hyperinflation and Stabilization in Weimar Germany.

New York: Oxford University Press.

Weinstein, Edwin A. 1970. “Woodrow Wilson’s Neurological Illness,” Journal of American History, 57: 324-351.

Whaley, Barton. 1984. Covert German Rearmament, 1919-1939: Deception and Misperception.

College Park, MD: University Publications of America. Widenour, William C. 1998. “The Construction of the American Interpretation: The

Pro-Treaty Version” In M.F. Boemeke, G.D. Feldman, & E. Glaser, (eds.), “The Treaty of Versailles: A Reassessment After 75 Years. Cambridge: Cambridge University Press, 547-564.

Williamson, Oliver E. 1999. “Public and Private Bureaucracies: A Transaction Cost

Economics Perspective,” Journal of Law, Economics, and Organization, 15: 306-342. Williamson, Oliver E. 1998. “The Institutions of Governance,” American Economic

Review, 88: 75-79. Williamson, Oliver E. 1985. The Economic Institutions of Capitalism. New York: Free

Press. Williamson, Oliver E. 1975. Markets and Hierarchies. New York: Free Press. Wright, George, & Goodwin, Paul. 2002. “Eliminating a Framing Bias by Using Simple

Instructions to Think Harder and Respondents with Managerial Experience,” Strategic Management Journal, 23: 1059-1067.

Zeckhauser, Richard. 1986. “Behavioral versus Rational Economics: What You See is

What You Conquer,” Journal of Business, 59: S435-S449.


Table 1. Accounts of the PPC Provided By the Heads of Government and Lead Negotiators.

Timing of

Account(s) Form of Account Informant Delegation Profession Pre-1923 Post-1923 Diary Letters Essay Memoirs Speeches

Clemenceau, Georges France Prime Minister x x x x x Lloyd George, David Great Britain Prime Minister x x x x x x

(a)Riddell, Georgei Journalist x x x (b)Stevenson, Frances iii iii Secretary x x x x

Nitti, Francescoiii Italy Prime Minister x x Orlando, Vittorio Italy Prime Minister x x x x x Poincare, Raymond France President x x x x x Scheidemann, Phillip Germany Chancellor x x x x Wilson, Woodrow USA President x x x

(a)Grayson, Caryiv Physician x x (b)Benham, Edithv Secretary x x

iLloyd George appointed Riddell press liaison at the Peace Conference. McEwen’s (1986) introduction describes their friendship and Riddell’s work as diarist. ii Frances Stevenson was secretary to Lloyd George, his mistress, and later his wife. iii An economist by training, Nitti became Prime Minister when the Orlando government fell in June 1919. ivAdmiral Grayson, a naval surgeon, accompanied Wilson to Paris. Weinstein (1971) describes both their friendship and Wilson’s serious health problems. vSocial secretary to Edith Bolling Wilson who accompanied her husband in Paris.


Table 2. Accounts of the PPC Provided by Plenipotentiary Delegates and Expert Advisors.

Informant Country Profession Pre-1923 Post-1923 Diary Letters Essay Memoirs SpeechesPlenipotentiary DelegatesBliss, Tasker U.S.A. General x x Brockdorff-Rantzau, U Ger. For. Minister x xChurchill, Winston G.B. Sec. of War x x x x x xFoch, Ferdinand Fr. General x x xGiesberts, Johann Ger. Labor Leader x xHouse, Edward U.S.A. Diplomat x x x x xKlotz, L-L Fr. Fin. Minister x xLansing, Robert U.S.A. Sec. of State x x x xMelchior, Carl Ger. Banker x x xSmuts, Jan C. G.B. Def. Minister x x x xSonnino, Sidney Italy For. Minister x x xTardieu, Andre Fr. Diplomat x x(b) Expert Advisors

Baker, Ray S. U.S.A. Journalist x x xBaruch, Bernard U.S.A. Financier x xBerle, Adolf U.S.A. Lawyer x xBonsal, Stephen U.S.A. Diplomat x xCecil, Robert G.B. Diplomat x x x xCunliffe, Walter G.B. Banker x xDavis, Norman U.S.A. Financier x xDay, Clive U.S.A. Economist x xDulles, John F. U.S.A. Lawyer x x x x x x xHeadlam-Morley, J. G.B. Diplomat x xHoover, Herbert U.S.A. Engineer x x x x xHunter Miller, D. U.S.A. Lawyer x x x xKeynes, John M. G.B. Economist x x x x xLamont, Thomas U.S.A. Banker x x x x x x xLippmann, Walter U.S.A. Journalist x x x x xLoucheur, Louis Fr. Engineer x x xMcCormick, Vance U.S.A. Financier x x xMonnet, Jean Fr. Diplomat x xNamier, Lewis G.B. Historian x xNicolson, Harold G.B. Diplomat x x x x x Rathenau, Walther Ger. Industrialist x x Riddell, George A. G.B. Journalist x x Seymour, Charles U.S.A. Historian x x xShotwell, James U.S.A. Historian x x xSimons, Walter Ger. Jurist x x xSumner, John G.B. Judge x xWarburg, Max Ger. Banker x x x x xWeber, Max Ger. Sociologist x x

Timing of Account(s) Form of Account


Table 3 The human cost of World War I: Casualty figures by country.

Country Dead WoundedAustria-Hungary 922,500 3,620,000Belgium 13,715 44,686British Empire 908,371 2,090,212Bulgaria 131,344 152,390France 1,365,735 4,266,000Germany 1,808,546 4,247,143Greece 5,000 21,000Italy 462,391 953,886Japan 300 907Montenegro 3,000 10,000Portuguese Empire 167,222 13,751Romania 335,706 120,000Russia (official) 643,214 2,754,202Russia (estimate) 1,700,000 4,950,000Serbia 125,000 133,148Turkey 325,000 400,000US 116,608 204,002 TOTALS 7,333,652 14,576,327


Table 4. Appraisals of the Treaty of Versailles.

Source Nationality Year AccountFavorable AppraisalsBaruch USA 1922 "It is true that the treaty is a severe treaty; the reparations clauses were framed to make possible a

successful future solution of the problems; as the anger and hatred engendered by the war cool"Churchill Great Britain 1929 "a fair judgment upon the settlement cannot leave the authors of the new map of Europe under serious reproach;Clemenceau France 1919 "… but a fluttering scrap of paper unless it is enforced." Cunliffe Great Britain 1919 "it can never truthfully be said that we let the Hun down gently for all his squealing." Lloyd George Great Britain 1919 "I do not claim that the Treaty is perfect in all respects. Where it is not perfect, I look

forward to the organization of the League of Nations to remedy, to repair, and to redress."Seymour USA 1922 "statesmen saw in the League an opportunity...for the handling of problems left unsolved at Paris ...Tardieu France 1920 "a compromise which ..contained enough of security, enough of justice, enough of solidarity" Wilson USA 1919 "The treaty is a hard one, but a hard one was needed… I think the thing will solve itself upon

the admission of Germany to the League"

Baker USA 1919 "a terrible document; a dispensation of retribution with scarcely a parallel in history"Berle USA 1919 "far from being the basis for lasting peace, the Treaty will be the direct and future cause of further wars"Bliss USA 1919 "What a wretched mess it is!; The treaty as it stands is unworkable"Brockdorff- Germany 1919 "thus must a whole people sign the decree for its own proscription, nay its own death sentence"RantzauCecil Great Britain 1942 "we can now see that grave mistakes were made"Day USA 1921 "Some features are the expression of deep rooted national prejudices which even now reason cannot combat"Foch France 1919 "This is not peace, it is an armistice for twenty years."Giesberts Germany 1919 "This shameful treaty has broken me, for I had believed in Wilson until today."Headlam- Great Britain 1919 "the total effect is, I am sure, quite indefensible and in fact is, I think, quite unworkable"MorleyHoover USA 1939 "peace for the long run could not be built on these foundations; the treaty contained the seeds of another war"House USA 1919 "The treaty is not a good one, it is too severe; it is far afield from (Wilson's 14 points)"Lamont USA 1921 "the economic clauses, as a whole, are unwisely harsh and exacting"Lansing USA 1919 "the terms appear immeasurably harsh and humiliating, while many of them seem to me impossible of performance."Lippmann USA 1919 "I can't see anything in this treaty but endless trouble for Europe"Melchior Germany 1919 "those who will sign this treaty, will sign the death sentence of many millions of German men, women, and children"Nicolson Great Britain 1919 "Now that we see them as a whole we realize that they are much too stiff… the real crime is the reparation section"Nitti Italy 1921 "The future will pour ridicule on this form of treaty which endeavors to justify excessive and absurd demands."Scheidemann Germany 1929 the most iniquitous piece of work ever produced",Smuts Great Britain 1919 "an impossible peace, conceived on a wrong basis .. It will prove utterly unstable"Warburg Germany 1919 "a monument of pathological fear and pathological hatred; there is in them neither shame nor any respect for justice"Weber Germany 1919 "the closer one examines the economic conditions the more terrible and complex they are so that even if we

were to accept only half of them we would see before us only a dark hole without even a distant beam of light"

Critical Appraisals


Table 5 Timeline of events during the implementation of the Treaty of Versailles: The treaty unravels 1932-1939.

Article Date Action Taken Violated

Sep-39 Chamberlain issues declaration of war on Germany Sep-39 Germany invades Poland 87, 100

1-Mar-39 Germany occupies Memel1 99 1-Mar-39 Germany occupies all of Czechoslovakia 27,812

Oct-38 Munich agreement partitions Czechoslovakia3 27,81 Sep-38 Chamberlain-Hitler meetings in Berchtesgaden

Mar-38 Hitler in Austria publicly announces “Anchluss”, unification with Germany 27,80 Sep-36 Lloyd George-Hitler meetings in Berchtesgaden

Apr-36 Germany begins construction of "Siegfried Line"4 42 Mar-36 German troops occupy Rhine bridgeheads 43 Jun-35 Germany reinstates conscription 173

1-Mar-35 Germany announces formation of Luftwaffe 198 1-Oct-33 Germany withdraws from League of Nations 1 Apr-33 Germany repudiates private and public foreign debt 239

1 Memel, a port city on the Baltic, came under Purssian control following the Napoleonic Wars. Germans constituted a majority of the city's population. The Treaty of Versailles severed Memel and the surrounding district from Germany placing it under French administration with a League of Nations mandate. 2 In addition to the Treaty clauses, this action directly violated the Munich agreement of October 1938 and Hitler’s assurance to Chamberlain that “he had no more territorial ambitions in Europe.” 3 The agreement granted the Sudeten region of Bohemia and Moravia to Germany. This territory was populated by primarily German speaking inhabitants. It also contained a formidable line of mountainous fortifications that posed a significant military obstacle to German forces. 4“a continuous concrete defense system running from the vicinity of Nijmegen, to the Swiss border consisting of varied constructions ranging from simple 'Dragon's teeth' to complete fortresses comparable to the French Maginot Line. This greatly impeded the Allied invasion of Germany in 1944 despite overwhelming military superiority.


Table 6 Timeline of key events in the implementation of the Treaty: Enforcing the Treaty.

Year Event 1919 Paris Peace Conference Opens (January)

German Worker’s Party (DAP) Forms (January) Treaty signed at Versailles Corporal Hitler assigned to education unit Hitler urged to join DAP by military superiors

1920 Treaty comes into force US Senate rejects the treaty Mutual security pact lapses in US Senate Hitler announces 25 point NSDAP program Kapp putsch in Germany

1921 London Ultimatum: "132 billion goldmarks" Matthias Erzberger assasinated in Germany German policy of revision thru “fulfillment”

1923 Franco-Belgian occupation of the Ruhr German hyperinflation Hitler jailed after putsch attempt fails Walther Rathenau assassinated Currency stabilization

1924 Dawes Plan for reparations American loans to Germany begin Reparations payments largely frozen Ruhr occupation ends

1925 Locarno Treaty Signed Germany reaffirms western borders Mutual security pact signed

1926 Germany enters League of Nations1928 NSDAP captures 12 seats in Reichstag

elections1929 Economic Depression

Stock market crash American loans to Germany end

1930 Young Plan for reparations Debt reduced payable over 53 years NSDAP captures 107 seats in Reichstag elections Reparations payments suspended

1931 Bank failures in Germany1932 Lausanne Conference: Reparations cancelled

NSDAP captures 230 seats in Reichstag elections1933 Hitler appointed Chancellor of Germany


Table 7. Basic themes from Adolf Hitler’s propaganda campaign (Source. Baynes, 1935). July 28, 1922: “Is it not these criminals, this Jewry, who are the real foes of the Republic, these men who from the day of its birth burdened it with the lie that this people was guilty of the World War? And have they not undermined the Republic who thereby gave to the foreign powers those spiritual arms with which these powers for the last three years shower blows upon us and oppress us and say to us ‘You deserve it, for you yourselves have confessed your guilt!’ And have not they opposed the Republic who have so reduced all power of resistance that to-day every Hottentot State is in a position to lord it over Germany? And do they not ceaselessly oppose Germany who have brought us, once the people of honour, so low that we have a reputation for the meanest economic corruption and the most debased political outlook?” April 13, 1923: But someone may perhaps yet raise the question whether it is expedient today to talk about the guilt for the war. Most assuredly we have the duty to talk about it! For the murderers of our Fatherland who all the years through have betrayed and sold Germany, they are the same men who, as the November criminals, have plunged us into the depths of misfortune. We have the duty to speak since in the near future, when we have gained power, we shall have the further duty of taking these creators of ruin, these clouts, these traitors to their State and of hanging them on the gallows to which they belong. “ …….. In the winter of the year 1919-20 we National Socialists publicly for the first time put to the German people the question, whose is the guilt for the War? And we received pat from all sides the stereotyped answer of despicable self-humiliation: “We confess it: the guilt for the War is ours!… Yes the whole revolution was made artificially on the basis of this truly monstrous lie. For if it had not been possible to bring this lie into the field as a propaganda formula against the old Reich, what sense could one give at all to the November treason? They needed this slander of the existing system in order to justify before the people their own deed of shame.” April 17, 1923: “With the armistice begins the humiliation of Germany. .. Today we are the foes of the Republic not because it is the Republic but because this Republic was founded at the moment when Germany was humiliated… It was no Treaty of Peace which was signed, but a betrayal of Peace… So long as this Treaty stands there can be no resurrection of the German people: no social reform of any kind is possible! The Treaty was made in order to bring 20 million Germans to their death and to ruin the German nation.” August 1, 1923: “The Republic was founded to be a milch-cow for its founders – for the whole parliamentary gang. There was never any thought of giving to the German people a free State: the object was to provide a mob of the lowest scoundrels with an obliging object for their exploitation.” 12 September 1923: “Shirkers, deserters, and pacifists: these are its founders and their heroic acts consisted in leaving in the lurch the soldiers at the front, in stopping reinforcements, in with-holding from them munitions, while at home against old men and half-starved children they carried through a revolutionary coup d’etat. They have quite simply got together their November-state by theft!” …. “And what did the Revolution not prophesy for us in the political sphere? One heard of the right of self-determination of peoples, of the League of Nations, of self-government of the people. And what was the result? A World peace, but a world peace over Germany which was but a field of corpses. Disarmament, but only the disarmament of Germany, with Germany looting its own resources. Self-determination yes, but self-determination for every negro tribe: and Germany does not count as a negro tribe. League of Nations yes: but a League of Nations which serves only as the guarantor for the fulfillment of the Peace Treaty, not for a better world-order which is to come. And Government by the people – for five years past no one has asked the people what it thinks of the act of November of the year 1918… Thereby Germany has been turned into a colony of the outside world.”


Figure 1. Posters produced under the auspices of the Committee on Public Information to build public support for American participation in the war in Europe.


Figure 2. Bargaining during the PPC over the insertion of a fixed sum to represent Germany’s total reparations obligation under the Treaty of Versailles.

Reparation Demands on Germany

0

100

200

300

400

500

600

700

800

900

One Two Three Five Six

20-Feb 20-Feb 22-Feb 15-Mar 25-Mar

Timing of Proposals

Bill

ions

of G

oldm

arks

BritainFranceUSA

Davis,Loucheur,MontaguDeal


Figure 3. National income in France, Great Britain, and the United States.

(A) France

0100200300400500

1901

1904

1907

1910

1913

1916

1919

1922

1925

1928

1931

1934

1937

Year

Rea

l Nat

iona

l Inc

ome

(B) Great Britain

0500

10001500200025003000

1870 1880 1890 1900 1910 1920 1930 1940 1950

Year

Rea

l Nat

iona

l Inc

ome

(mill

ions

of p

ound

s)

(C) United States

0

20

40

60

80

100

1890 1900 1910 1920 1930 1940

Years

Real

Nat

iona

l Inc

ome


Figure 4. The currency exchange rate of the German Mark against the U.S. dollar from 1918-1923 (logarithmic scale).

Exchange Rate Index

1.00

10.00

100.00

1000.00

10000.00

100000.00

1000000.00

10000000.00

100000000.00

1000000000.00

10000000000.00

100000000000.00

1000000000000.00

Jan-

18

May

-18

Sep

-18

Jan-

19

May

-19

Sep

-19

Jan-

20

May

-20

Sep

-20

Jan-

21

May

-21

Sep

-21

Jan-

22

May

-22

Sep

-22

Jan-

23

May

-23

Sep

-23


Endnotes 1 Mkwawa was the chief of Uhehe who won fame by defeating German forces at Lugalo (in what is now Tanzania) on 17th August 1891 and leading a seven year resistance until he shot himself to death. In 1953 Sir Edward Twining, then Governor of Tanganyika, personally traveled to the Bremen Anthropological Museum in Germany with the shape of the skull, cranial measurements and the place where the shot made a hole. He retrieved the skull and on June 19th 1954 at Kalenga, handed it over to Chief Adam Sapi Mkwawa. (source: www.mkwawa.com). 2 “Heavenly” was a reference to Cunliffe and Sumner’s residence in Paris, the Hotel Majestic. 3 Loucheur’s diary (1962) reads: “Monday March 10—Noon—Clémenceau has me urgently summoned. It’s necessary to be Baron Louis, Metternich, etc at the same time. Lloyd George and Colonel House leave here; each of us designated a representative to try and find a formula for the payments by Germany behind the scenes. A formula that is agreeable to the English and that at the same time defends our rights must be found. They will not accept the absolute priority for the reparations, but a certain percentage—for example 60% for France, 40% for England—to be determined. This negotiation conducted as secretly as possible. Wednesday March 12 - I’m going to inform Clémenceau of my negotiations with Montagu and Davis; he is content with what I told him and furious with Lloyd George who now no longer wants to give the left bank of the Rhine. I receive the order to drag out the negotiations for a day or two to wait on the arrival of Pr. Wilson and to find out a little of what Lloyd George thinks.” 4The Council of Four explicitly discussed the proper role of these emotions in deliberating over trying the Kaiser and other German officers for war crimes. Wilson: “every time I read documents on atrocities committed, I saw red, and I was very careful not to take a decision in such moments, in order always to be able to judge and act according to reason.” Lloyd George: “The truth is rather that our capacity for indignation is almost exhausted on account of hearing the frightful stories we have been hearing for five years. In fifty years they will judge more severely than today.” Clemenceau: “Nothing is done without emotion. Was not Jesus Christ driven by passion on the day when he drove the merchants from the temple?” (Meeting of April 2, in Mantoux, 1992, Vol 1, p. 122). 5 The size of the Warburg-Melchior offer was inflated to create the illusion of a larger concession than was actually being offered. As the Allied financial experts quickly noted, the present value of the offer was quite substantial but far less than 100 billion goldmarks since the balance was not interest bearing (Lamont, 1921).

Essence of Conflict - Washington University in St....

Documents

Transcript of Essence of Conflict - Washington University in St....