All Terrain Thinking

A Compendium of things I think are Important

The Economic Consequences of the Peace

by John Maynard Keynes - 1919

Chapter 2: Europe Before the War

    Before 1870 different parts of the small continent of Europe
 had specialised 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 labour
 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 oilseeds 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 he 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 neighbouring 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 internationalisation 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 million. By
 1892 this figure had risen to 50 million, and by 30 June 1914 to
 about 68 million. 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
 progress ever faster and faster.
 
     In the Austro-Hungarian empire, which grew from about 40
 million in 1890 to at least 50 million 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 centre 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 million in 1890 to
 about 150 million at the outbreak of war;(3*) and in the years
 immediately preceding 1914 the excess of births over deaths in
 Russia as a whole was at the prodigious rate of two million 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 organisation 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 realise 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
 organisation of that vast mechanism of transport, coal
 distribution, and foreign trade which made possible an industrial
 order of life in the dense urban centres 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 million tons in 1871 to 70 million tons in 1890, 110 million
 tons in 1900, and 190 million 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
 neighbours 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 neighbours 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 £31,250 million, not far
 short of £3500 million was invested in Russia, Austria-Hungary,
 Bulgaria, Roumania, and Turkey. And by the system of 'peaceful
 penetration' she gave these countries not only capital but, what
 they needed hardly less, organisation. 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 organised 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 régime 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 labour 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 labouring 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
 today 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
 labours. In that day overwork, overcrowding, and underfeeding
 would 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
 still 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
 in on equality was a vital part of the pre-war order of society
 and of progress as we then understood it, and to emphasise that
 this principle depended on unstable psychological conditions,
 which it may be impossible to re-create. 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 labouring classes may be no longer
 willing to forgo 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.

 IV. The Relation of the Old World to the New

     The accumulative habits of Europe before the war were the
 necessary condition of the greatest of the external factors which
 maintained the European equipoise.
 
     Of the surplus capital goods accumulated by Europe a
 substantial part was exported abroad, where its investment made
 possible the development of the new resources of food, materials,
 and transport, and at the same time enabled the Old World to
 stake out a claim in the natural wealth and virgin potentialities
 of the New. This last factor came to be of the vastest
 importance. The Old World employed with an immense prudence the
 annual tribute it was thus entitled to draw. The benefit of cheap
 and abundant supplies, resulting from the new developments which
 its surplus capital had made possible was, it is true, enjoyed
 and not postponed. But the greater part of the money interest
 accruing on these foreign investments was reinvested and allowed
 to accumulate, as a reserve (it was then hoped) against the less
 happy day when the industrial labour of Europe could no longer
 purchase on such easy terms the produce of other continents, and
 when the due balance would be threatened between its historical
 civilisations and the multiplying races of other climates and
 environments. Thus the whole of the European races tended to
 benefit alike from the development of new resources whether they
 pursued their culture at home or adventured it abroad.
 
     Even before the war, however, the equilibrium thus
 established between old civilisations and new resources was being
 threatened. The prosperity of Europe was based on the facts that,
 owing to the large exportable surplus of foodstuffs in America,
 she was able to purchase food at a cheap rate measured in terms
 of the labour required to produce her own exports, and that, as a
 result of her previous investments of capital, she was entitled
 to a substantial amount annually without any payment in return at
 all. The second of these factors then seemed out of danger but,
 as a result of the growth of population overseas, chiefly in the
 United States, the first was not so secure.
 
     When first the virgin soils of America came into bearing, the
 proportions of the population of those continents themselves, and
 consequently of their own local requirements, to those of Europe
 were very small. As lately as 1890 Europe had a population three
 times that of North and South America added together. But by 1914
 the domestic requirements of the United states for wheat were
 approaching their production, and the date was evidently near
 when there would be an exportable surplus only in years of
 exceptionally favourable harvest. Indeed, the present domestic
 requirements of the United States are estimated at more than
 ninety per cent of the average yield of the five years
 1909-13.(4*) At that time, however, the tendency towards
 stringency was showing itself, not so much in a lack of abundance
 as in a steady increase of real cost. That is to say, taking the
 world as a whole, there was no deficiency of wheat, but in order
 to call forth an adequate supply it was necessary to offer a
 higher real price. The most favourable factor in the situation
 was to be found in the extent to which Central and Western Europe
 was being fed from the exportable surplus of Russia and Roumania.
 
     In short, Europe's claim on the resources of the New World
 was becoming precarious; the law of diminishing returns was at
 last reasserting itself, and was making it necessary year by year
 for Europe to offer a greater quantity of other commodities to
 obtain the same amount of bread; and Europe, therefore, could by
 no means afford the disorganisation of any of her principal
 sources of supply.
 
     Much else might be said in an attempt to portray the economic
 peculiarities of the Europe of 1914. I have selected for emphasis
 the three or four greatest factors of instability -- the instability 
 of an excessive population dependent for its livelihood on a 
 complicated and artificial organisation, the psychological 
 instability of the labouring and capitalist classes, and the 
 instability  of Europe's claim, coupled with the completeness of her 
 dependence,  on the food supplies of the New World.
 
     The war had so shaken this system as to endanger the life of
 Europe altogether. A great part of the continent was sick and
 dying; its population was greatly in excess of the numbers for
 which a livelihood was available; its organisation was destroyed,
 its transport system ruptured, and its food supplies terribly
 impaired.
 
     It was the task of the peace conference to honour engagements
 and to satisfy justice; but not less to re-establish life and to
 heal wounds. These tasks were dictated as much by prudence as by
 the magnanimity which the wisdom of antiquity approved in
 victors. We will examine in the following chapters the actual
 character of the peace.

 NOTES:

 1. In 1913 there were 25,843 emigrants from Germany, of whom
 19,124 went to the United States.

 2. The net decrease of the German population at the end of 1918
 by decline of births and excess of deaths as compared with the
 beginning of 1914, is estimated at about 2,700,000.

 3. Including Poland and Finland, but excluding Siberia, central
 Asia,and the Caucasus.

 4. Even since 1914 the population of the United States has
 increased by seven or eight million. As their annual consumption
 of wheat per head is not less than six bushels, the pre-war scale
 of production in the United States would only show a substantial
 surplus over present domestic requirements in about one year out
 of five. We have been saved for the moment by the great harvests
 of 1918 and 1919, which have been called forth by Mr Hoover's
 guaranteed price. But the United States can hardly be expected to
 continue indefinitely to raise by a substantial figure the cost
 of living in its own country, in order to provide wheat for a
 Europe which cannot pay for it.

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