The Economic Consequences of the Peace

This chapter returns to the effects of World War I and this postwar agreement on life in Europe at large. This analysis is in line with his repeated assertion that economic, social, and cultural life on the continent was quite interconnected and that harming its industrial heart, Germany, would harm other countries. The Treaty of Versailles compounded the many problems brought on by the devastation of the first global conflict of the 20th century. The paradox for Europe is its dense population and high standard of living as compared to the lack of self-sufficiency of its individual nations. Keynes’s tone in this chapter is “one of pessimism” (95).

One of the most important ways European economies were damaged was through inflation: “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency” (99). Keynes provides several examples, including France, in which the exchange rate of the franc was approximately two-thirds of its prewar value. The German mark was “worth less than four cents on the exchange” (100). Compared to gold, the value of the German mark was approximately one-eighth of its prewar value. Three years later, Germany would see hyperinflation in which one US cent would equal 42 billion German marks.

Keynes’s forecast about the reduction in the value of European currencies proved to be accurate. In turn, inflation led to higher prices in terms of gold as the standard, the author explains. However, it is important to note, World War I is not the sole culprit causing inflation. Instead, it is a “continuing phenomenon of which the end is not yet in sight” (102). There are, therefore, systemic issues plaguing the European economy:

[T]he maladjustment between internal prices and international prices, a lack of individual credit abroad wherewith to buy the raw materials needed to secure the working capital to re-start the circle of exchange, and a disordered currency system which renders credit operations hazardous or impossible quite apart from the ordinary risks of commerce (101).

The lack of raw materials in certain parts of Europe is a theme for Keynes. The author repeatedly emphasizes throughout this book the fact that the continent is generally not self-sufficient in this regard.

Keynes is also critical of the 1917 Russian Revolution. He considers the Bolshevik policies extreme and laments that nothing was done in Europe “to reclaim Russia” (95). Keynes’s motivations are both ideological and economic. At this time, Russia was embroiled in a bloody Civil War that compounded the devastation of World War I, and its economic policy at this time was war communism. The latter meant, for instance, the expropriation of resources from the population, and general economic collapse.

The situation in the newly established Soviet Union improved in the 1920s. Keynes overlooks the fact that the Allied intervention, involving Britain, the US, Canada, Japan, and others, began in 1918. This invasion of Russia occurred under the guise of helping the White Movement fight the Bolsheviks, but the foreigners also had a vested interest in the rich Russian resources that were no longer accessible to them as the Bolsheviks implemented nationalization. Keynes uses the example of the Russian Revolution to compare the deliberate destruction of the capitalist system in Russia with the incompetence with which the European leaders were destroying the interconnected economies of Europe.

At the end of this chapter, Keynes makes another ominous prediction. He describes the dire situation that Europe faced in the upcoming winter of 1919-1920, in which the public had “nothing to look forward to” (103), not even the basic necessities like staying warm and having sufficient food. Facing these privations, the author wonders “in what direction men will seek at last to escape from their misfortunes?” (103). The statement is deliberately vague. Keynes could have simply meant escaping one’s hardships by using substances like alcohol or even taking one’s own life. Considering his attention to the domestic politics of European countries, and the way the voters perceived the war and the Treaty of Versailles, it is possible that the author is referring to revolutionary sentiments as in Russia or the rise of reactionary movements that ultimately produced Adolf Hitler and the Nazi (National-Socialist) Party.