The Economic Consequences of the Peace by John Maynard Keynes

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THE ECONOMIC CONSEQUENCES OF THE PEACE

by

JOHN MAYNARD KEYNES, C.B.
Fellow of King's College, Cambridge

New York
Harcourt, Brace and Howe

1920

PREFACE

The writer of this book was temporarily attached to the British
Treasury during the war and was their official representative at the
Paris Peace Conference up to June 7, 1919; he also sat as deputy for
the Chancellor of the Exchequer on the Supreme Economic Council. He
resigned from these positions when it became evident that hope could
no longer be entertained of substantial modification in the draft
Terms of Peace. The grounds of his objection to the Treaty, or rather
to the whole policy of the Conference towards the economic problems of
Europe, will appear in the following chapters. They are entirely of a
public character, and are based on facts known to the whole world.

J.M. Keynes.
King's College, Cambridge,
November, 1919.

CONTENTS

I. INTRODUCTORY
II. EUROPE BEFORE THE WAR
III. THE CONFERENCE
IV. THE TREATY
V. REPARATION
VI. EUROPE AFTER THE TREATY
VII. REMEDIES

THE ECONOMIC CONSEQUENCES OF THE PEACE

CHAPTER I

INTRODUCTORY

The power to become habituated to his surroundings is a marked
characteristic of mankind. Very few of us realize with conviction the
intensely unusual, unstable, complicated, unreliable, temporary nature
of the economic organization by which Western Europe has lived for the
last half century. We assume some of the most peculiar and temporary of
our late advantages as natural, permanent, and to be depended on, and we
lay our plans accordingly. On this sandy and false foundation we scheme
for social improvement and dress our political platforms, pursue our
animosities and particular ambitions, and feel ourselves with enough
margin in hand to foster, not assuage, civil conflict in the European
family. Moved by insane delusion and reckless self-regard, the German
people overturned the foundations on which we all lived and built. But
the spokesmen of the French and British peoples have run the risk of
completing the ruin, which Germany began, by a Peace which, if it is
carried into effect, must impair yet further, when it might have
restored, the delicate, complicated organization, already shaken and
broken by war, through which alone the European peoples can employ
themselves and live.

In England the outward aspect of life does not yet teach us to feel or
realize in the least that an age is over. We are busy picking up the
threads of our life where we dropped them, with this difference only,
that many of us seem a good deal richer than we were before. Where we
spent millions before the war, we have now learnt that we can spend
hundreds of millions and apparently not suffer for it. Evidently we did
not exploit to the utmost the possibilities of our economic life. We
look, therefore, not only to a return to the comforts of 1914, but to an
immense broadening and intensification of them. All classes alike thus
build their plans, the rich to spend more and save less, the poor to
spend more and work less.

But perhaps it is only in England (and America) that it is possible to
be so unconscious. In continental Europe the earth heaves and no one but
is aware of the rumblings. There it is not just a matter of extravagance
or "labor troubles"; but of life and death, of starvation and existence,
and of the fearful convulsions of a dying civilization.

* * * * *

For one who spent in Paris the greater part of the six months which
succeeded the Armistice an occasional visit to London was a strange
experience. England still stands outside Europe. Europe's voiceless
tremors do not reach her. Europe is apart and England is not of her
flesh and body. But Europe is solid with herself. France, Germany,
Italy, Austria and Holland, Russia and Roumania and Poland, throb
together, and their structure and civilization are essentially one. They
flourished together, they have rocked together in a war, which we, in
spite of our enormous contributions and sacrifices (like though in a
less degree than America), economically stood outside, and they may fall
together. In this lies the destructive significance of the Peace of
Paris. If the European Civil War is to end with France and Italy abusing
their momentary victorious power to destroy Germany and Austria-Hungary
now prostrate, they invite their own destruction also, being so deeply
and inextricably intertwined with their victims by hidden psychic and
economic bonds. At any rate an Englishman who took part in the
Conference of Paris and was during those months a member of the Supreme
Economic Council of the Allied Powers, was bound to become, for him a
new experience, a European in his cares and outlook. There, at the nerve
center of the European system, his British preoccupations must largely
fall away and he must be haunted by other and more dreadful specters.
Paris was a nightmare, and every one there was morbid. A sense of
impending catastrophe overhung the frivolous scene; the futility and
smallness of man before the great events confronting him; the mingled
significance and unreality of the decisions; levity, blindness,
insolence, confused cries from without,--all the elements of ancient
tragedy were there. Seated indeed amid the theatrical trappings of the
French Saloons of State, one could wonder if the extraordinary visages
of Wilson and of Clemenceau, with their fixed hue and unchanging
characterization, were really faces at all and not the tragi-comic masks
of some strange drama or puppet-show.

The proceedings of Paris all had this air of extraordinary importance
and unimportance at the same time. The decisions seemed charged with
consequences to the future of human society; yet the air whispered that
the word was not flesh, that it was futile, insignificant, of no effect,
dissociated from events; and one felt most strongly the impression,
described by Tolstoy in _War and Peace_ or by Hardy in _The Dynasts_, of
events marching on to their fated conclusion uninfluenced and unaffected
by the cerebrations of Statesmen in Council:

_Spirit of the Years_

Observe that all wide sight and self-command
Deserts these throngs now driven to demonry
By the Immanent Unrecking. Nought remains
But vindictiveness here amid the strong,
And there amid the weak an impotent rage.

_Spirit of the Pities_

Why prompts the Will so senseless-shaped a doing?

_Spirit of the Years_

I have told thee that It works unwittingly,
As one possessed not judging.

In Paris, where those connected with the Supreme Economic Council,
received almost hourly the reports of the misery, disorder, and decaying
organization of all Central and Eastern Europe, allied and enemy alike,
and learnt from the lips of the financial representatives of Germany and
Austria unanswerable evidence, of the terrible exhaustion of their
countries, an occasional visit to the hot, dry room in the President's
house, where the Four fulfilled their destinies in empty and arid
intrigue, only added to the sense of nightmare. Yet there in Paris the
problems of Europe were terrible and clamant, and an occasional return
to the vast unconcern of London a little disconcerting. For in London
these questions were very far away, and our own lesser problems alone
troubling. London believed that Paris was making a great confusion of
its business, but remained uninterested. In this spirit the British
people received the Treaty without reading it. But it is under the
influence of Paris, not London, that this book has been written by one
who, though an Englishman, feels himself a European also, and, because
of too vivid recent experience, cannot disinterest himself from the
further unfolding of the great historic drama of these days which will
destroy great institutions, but may also create a new world.

CHAPTER II

EUROPE BEFORE THE WAR

Before 1870 different parts of the small continent of Europe had
specialized in their own products; but, taken as a whole, it was
substantially self-subsistent. And its population was adjusted to this
state of affairs.

After 1870 there was developed on a large scale an unprecedented
situation, and the economic condition of Europe became during the next
fifty years unstable and peculiar. The pressure of population on food,
which had already been balanced by the accessibility of supplies from
America, became for the first time in recorded history definitely
reversed. As numbers increased, food was actually easier to secure.
Larger proportional returns from an increasing scale of production
became true of agriculture as well as industry. With the growth of the
European population there were more emigrants on the one hand to till
the soil of the new countries, and, on the other, more workmen were
available in Europe to prepare the industrial products and capital goods
which were to maintain the emigrant populations in their new homes, and
to build the railways and ships which were to make accessible to Europe
food and raw products from distant sources. Up to about 1900 a unit of
labor applied to industry yielded year by year a purchasing power over
an increasing quantity of food. It is possible that about the year 1900
this process began to be reversed, and a diminishing yield of Nature to
man's effort was beginning to reassert itself. But the tendency of
cereals to rise in real cost was balanced by other improvements;
and--one of many novelties--the resources of tropical Africa then for
the first time came into large employ, and a great traffic in oil-seeds
began to bring to the table of Europe in a new and cheaper form one of
the essential foodstuffs of mankind. In this economic Eldorado, in this
economic Utopia, as the earlier economists would have deemed it, most of
us were brought up.

That happy age lost sight of a view of the world which filled with
deep-seated melancholy the founders of our Political Economy. Before the
eighteenth century mankind entertained no false hopes. To lay the
illusions which grew popular at that age's latter end, Malthus disclosed
a Devil. For half a century all serious economical writings held that
Devil in clear prospect. For the next half century he was chained up and
out of sight. Now perhaps we have loosed him again.

What an extraordinary episode in the economic progress of man that age
was which came to an end in August, 1914! The greater part of the
population, it is true, worked hard and lived at a low standard of
comfort, yet were, to all appearances, reasonably contented with this
lot. But escape was possible, for any man of capacity or character at
all exceeding the average, into the middle and upper classes, for whom
life offered, at a low cost and with the least trouble, conveniences,
comforts, and amenities beyond the compass of the richest and most
powerful monarchs of other ages. The inhabitant of London could order by
telephone, sipping his morning tea in bed, the various products of the
whole earth, in such quantity as he might see fit, and reasonably expect
their early delivery upon his doorstep; he could at the same moment and
by the same means adventure his wealth in the natural resources and new
enterprises of any quarter of the world, and share, without exertion or
even trouble, in their prospective fruits and advantages; or be could
decide to couple the security of his fortunes with the good faith of the
townspeople of any substantial municipality in any continent that fancy
or information might recommend. He could secure forthwith, if he wished
it, cheap and comfortable means of transit to any country or climate
without passport or other formality, could despatch his servant to the
neighboring office of a bank for such supply of the precious metals as
might seem convenient, and could then proceed abroad to foreign
quarters, without knowledge of their religion, language, or customs,
bearing coined wealth upon his person, and would consider himself
greatly aggrieved and much surprised at the least interference. But,
most important of all, he regarded this state of affairs as normal,
certain, and permanent, except in the direction of further improvement,
and any deviation from it as aberrant, scandalous, and avoidable. The
projects and politics of militarism and imperialism, of racial and
cultural rivalries, of monopolies, restrictions, and exclusion, which
were to play the serpent to this paradise, were little more than the
amusements of his daily newspaper, and appeared to exercise almost no
influence at all on the ordinary course of social and economic life, the
internationalization of which was nearly complete in practice.

It will assist us to appreciate the character and consequences of the
Peace which we have imposed on our enemies, if I elucidate a little
further some of the chief unstable elements already present when war
broke out, in the economic life of Europe.

I. _Population_

In 1870 Germany had a population of about 40,000,000. By 1892 this
figure had risen to 50,000,000, and by June 30, 1914, to about
68,000,000. In the years immediately preceding the war the annual
increase was about 850,000, of whom an insignificant proportion
emigrated.[1] This great increase was only rendered possible by a
far-reaching transformation of the economic structure of the country.
From being agricultural and mainly self-supporting, Germany transformed
herself into a vast and complicated industrial machine, dependent for
its working on the equipoise of many factors outside Germany as well as
within. Only by operating this machine, continuously and at full blast,
could she find occupation at home for her increasing population and the
means of purchasing their subsistence from abroad. The German machine
was like a top which to maintain its equilibrium must spin ever faster
and faster.

In the Austro-Hungarian Empire, which grew from about 40,000,000 in 1890
to at least 50,000,000 at the outbreak of war, the same tendency was
present in a less degree, the annual excess of births over deaths being
about half a million, out of which, however, there was an annual
emigration of some quarter of a million persons.

To understand the present situation, we must apprehend with vividness
what an extraordinary center of population the development of the
Germanic system had enabled Central Europe to become. Before the war the
population of Germany and Austria-Hungary together not only
substantially exceeded that of the United States, but was about equal to
that of the whole of North America. In these numbers, situated within a
compact territory, lay the military strength of the Central Powers. But
these same numbers--for even the war has not appreciably diminished
them[2]--if deprived of the means of life, remain a hardly less danger
to European order.

European Russia increased her population in a degree even greater than
Germany--from less than 100,000,000 in 1890 to about 150,000,000 at the
outbreak of war;[3] and in the year immediately preceding 1914 the
excess of births over deaths in Russia as a whole was at the prodigious
rate of two millions per annum. This inordinate growth in the population
of Russia, which has not been widely noticed in England, has been
nevertheless one of the most significant facts of recent years.

The great events of history are often due to secular changes in the
growth of population and other fundamental economic causes, which,
escaping by their gradual character the notice of contemporary
observers, are attributed to the follies of statesmen or the fanaticism
of atheists. Thus the extraordinary occurrences of the past two years in
Russia, that vast upheaval of Society, which has overturned what seemed
most stable--religion, the basis of property, the ownership of land, as
well as forms of government and the hierarchy of classes--may owe more
to the deep influences of expanding numbers than to Lenin or to
Nicholas; and the disruptive powers of excessive national fecundity may
have played a greater part in bursting the bonds of convention than
either the power of ideas or the errors of autocracy.

II. _Organization_

The delicate organization by which these peoples lived depended partly
on factors internal to the system.

The interference of frontiers and of tariffs was reduced to a minimum,
and not far short of three hundred millions of people lived within the
three Empires of Russia, Germany, and Austria-Hungary. The various
currencies, which were all maintained on a stable basis in relation to
gold and to one another, facilitated the easy flow of capital and of
trade to an extent the full value of which we only realize now, when we
are deprived of its advantages. Over this great area there was an almost
absolute security of property and of person.

These factors of order, security, and uniformity, which Europe had never
before enjoyed over so wide and populous a territory or for so long a
period, prepared the way for the organization of that vast mechanism of
transport, coal distribution, and foreign trade which made possible an
industrial order of life in the dense urban centers of new population.
This is too well known to require detailed substantiation with figures.
But it may be illustrated by the figures for coal, which has been the
key to the industrial growth of Central Europe hardly less than of
England; the output of German coal grew from 30,000,000 tons in 1871 to
70,000,000 tons in 1890, 110,000,000 tons in 1900, and 190,000,000 tons
in 1913.

Round Germany as a central support the rest of the European economic
system grouped itself, and on the prosperity and enterprise of Germany
the prosperity of the rest of the Continent mainly depended. The
increasing pace of Germany gave her neighbors an outlet for their
products, in exchange for which the enterprise of the German merchant
supplied them with their chief requirements at a low price.

The statistics of the economic interdependence of Germany and her
neighbors are overwhelming. Germany was the best customer of Russia,
Norway, Holland, Belgium, Switzerland, Italy, and Austria-Hungary; she
was the second best customer of Great Britain, Sweden, and Denmark; and
the third best customer of France. She was the largest source of supply
to Russia, Norway, Sweden, Denmark, Holland, Switzerland, Italy,
Austria-Hungary, Roumania, and Bulgaria; and the second largest source
of supply to Great Britain, Belgium, and France.

In our own case we sent more exports to Germany than to any other
country in the world except India, and we bought more from her than from
any other country in the world except the United States.

There was no European country except those west of Germany which did not
do more than a quarter of their total trade with her; and in the case of
Russia, Austria-Hungary, and Holland the proportion was far greater.

Germany not only furnished these countries with trade, but, in the case
of some of them, supplied a great part of the capital needed for their
own development. Of Germany's pre-war foreign investments, amounting in
all to about $6,250,000,000, not far short of $2,500,000,000 was
invested in Russia, Austria-Hungary, Bulgaria, Roumania, and Turkey.[4]
And by the system of "peaceful penetration" she gave these countries not
only capital, but, what they needed hardly less, organization. The whole
of Europe east of the Rhine thus fell into the German industrial orbit,
and its economic life was adjusted accordingly.

But these internal factors would not have been sufficient to enable the
population to support itself without the co-operation of external
factors also and of certain general dispositions common to the whole of
Europe. Many of the circumstances already treated were true of Europe as
a whole, and were not peculiar to the Central Empires. But all of what
follows was common to the whole European system.

III. _The Psychology of Society_

Europe was so organized socially and economically as to secure the
maximum accumulation of capital. While there was some continuous
improvement in the daily conditions of life of the mass of the
population, Society was so framed as to throw a great part of the
increased income into the control of the class least likely to consume
it. The new rich of the nineteenth century were not brought up to large
expenditures, and preferred the power which investment gave them to the
pleasures of immediate consumption. In fact, it was precisely the
_inequality_ of the distribution of wealth which made possible those
vast accumulations of fixed wealth and of capital improvements which
distinguished that age from all others. Herein lay, in fact, the main
justification of the Capitalist System. If the rich had spent their new
wealth on their own enjoyments, the world would long ago have found such
a regime intolerable. But like bees they saved and accumulated, not less
to the advantage of the whole community because they themselves held
narrower ends in prospect.

The immense accumulations of fixed capital which, to the great benefit
of mankind, were built up during the half century before the war, could
never have come about in a Society where wealth was divided equitably.
The railways of the world, which that age built as a monument to
posterity, were, not less than the Pyramids of Egypt, the work of labor
which was not free to consume in immediate enjoyment the full equivalent
of its efforts.

Thus this remarkable system depended for its growth on a double bluff or
deception. On the one hand the laboring classes accepted from ignorance
or powerlessness, or were compelled, persuaded, or cajoled by custom,
convention, authority, and the well-established order of Society into
accepting, a situation in which they could call their own very little of
the cake that they and Nature and the capitalists were co-operating to
produce. And on the other hand the capitalist classes were allowed to
call the best part of the cake theirs and were theoretically free to
consume it, on the tacit underlying condition that they consumed very
little of it in practice. The duty of "saving" became nine-tenths of
virtue and the growth of the cake the object of true religion. There
grew round the non-consumption of the cake all those instincts of
puritanism which in other ages has withdrawn itself from the world and
has neglected the arts of production as well as those of enjoyment. And
so the cake increased; but to what end was not clearly contemplated.
Individuals would be exhorted not so much to abstain as to defer, and to
cultivate the pleasures of security and anticipation. Saving was for old
age or for your children; but this was only in theory,--the virtue of
the cake was that it was never to be consumed, neither by you nor by
your children after you.

In writing thus I do not necessarily disparage the practices of that
generation. In the unconscious recesses of its being Society knew what
it was about. The cake was really very small in proportion to the
appetites of consumption, and no one, if it were shared all round, would
be much the better off by the cutting of it. Society was working not
for the small pleasures of to-day but for the future security and
improvement of the race,--in fact for "progress." If only the cake were
not cut but was allowed to grow in the geometrical proportion predicted
by Malthus of population, but not less true of compound interest,
perhaps a day might come when there would at last be enough to go round,
and when posterity could enter into the enjoyment of _our_ labors. In
that day overwork, overcrowding, and underfeeding would have come to an
end, and men, secure of the comforts and necessities of the body, could
proceed to the nobler exercises of their faculties. One geometrical
ratio might cancel another, and the nineteenth century was able to
forget the fertility of the species in a contemplation of the dizzy
virtues of compound interest.

There were two pitfalls in this prospect: lest, population till
outstripping accumulation, our self-denials promote not happiness but
numbers; and lest the cake be after all consumed, prematurely, in war,
the consumer of all such hopes.

But these thoughts lead too far from my present purpose. I seek only to
point out that the principle of accumulation based on inequality was a
vital part of the pre-war order of Society and of progress as we then
understood it, and to emphasize that this principle depended on unstable
psychological conditions, which it may be impossible to recreate. It
was not natural for a population, of whom so few enjoyed the comforts of
life, to accumulate so hugely. The war has disclosed the possibility of
consumption to all and the vanity of abstinence to many. Thus the bluff
is discovered; the laboring classes may be no longer willing to forego
so largely, and the capitalist classes, no longer confident of the
future, may seek to enjoy more fully their liberties of consumption so
long as they last, and thus precipitate the hour of their confiscation.

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