Economic consequences of the peace by Keynes

Keynes

Book Review of the Economic Consequences of the Peace by John Maynard Keynes, 1919

The text, the Economic Consequences of the Peace, by John Maynard Keynes, was written in the immediate economic aftermath of World War I. The founding philosophies of modern or "Keynesian" economics were still in utero at this time, still solidifying in the Cambridge-educated economist's mind. However, later the proposed polices of this economist became fundamental in laying the philosophical foundation of the 'New Deal' social welfare policy of Franklin Delano Roosevelt in America. Aspects of Keynesian theory are evident in FDR's federally funded job creation, the Social Security program designed to bolster aging consumer confidence and buying power in a failing American economy, and even in the creation of the Tennessee Valley Authority which was the most ambitious federally funded attempt to create technological support for impoverished consumer areas of the nation. Viewed in its totality, Keynesian economics thus proposed a solution contrary to that of classical economics. The Economic Consequences of the Peace, viewed in isolation, proposed a unique and radical solution to the conventional assumption that the loser of war must be economically ravaged in reparation for its ills.

A common criticism of the American President Roosevelt and the British Keynes, and one reason that current classical economists of the University of Chicago School like Alan Greenspan continue with monetary-based policies to ameliorate recessions and depressions, is the idea that World War II improved the American economy, not the New Deal. But it is interesting to reflect that in the Economic Consequences of the Peace Keyes demonstrates that World War I had not been salutary for the world economy, nor was the demand all wartime debts be paid according to classical theories of debt avoidance and maintenance of the gold standard be upheld helpful to the world economy. In fact, Keynes 1919 tract demonstrated that the 'war to end all wars' had been economically and politically disastrous for Europe, and the policies of the First World War's aftermath merely continued this economic depletion. Enforced reparations bankrupted Weimar Germany and embittered that nation politically. Also critical to the problems of Europe were the war debt incurred by all the allied powers. "The existence of the great war debts is a menace to financial stability everywhere," wrote Keynes, as well as political stability.

Thus, the debt must be forgiven, contrary to conventional economic wisdom. He called for statesmanship in the form of forgiveness, for "but in whatever way the net result is calculated on paper, the relief in anxiety which such a liquidation of the position would carry with it would be very great." Forgiveness would generate consumer confidence in Europe, even though, "it is from the United States, therefore, that the proposal asks generosity." But ultimately, a confident Europe should help the United States. "If all the above inter-Ally indebtedness were mutually forgiven, the net result on paper (i.e., assuming all the loans to be good) would be a surrender by the United States of about £2,000 million and by the United Kingdom of about £900 million. France would gain about £700 million and Italy about £800 million."

Although the U.S. would lose money in the short run, however, it would gain by the strength created in the long run for the world. Thus, the idea of spending money through debt forgiveness in this case, to generate a healthier economy in the long run, was critical to Keynes philosophy from the beginning, even in terms of the forgiveness of war debt.

The war had broken the economic back of Europe, as well as its political and transport structures. Another key aspect of later Keynesian theory was the need for maintaining economic infrastructures, rather than breaking them in revenge, and that cash infusions in the short run reap dividends for all in the long run. Keynes always took a long-term rather than a short-term view of economic policies. The current policies against Germany only satisfied short-term emotions, but could cause long-term economic destruction of a major power and thus injure the world. "It was only at a later stage that a general popular demand for an indemnity, covering the full costs of the war, made it politically desirable to practice dishonesty and to try to discover in the written word what was not there."

However, Keynes' perspicuous view of world events also showed that he did not merely focus on the immediate effects of the war, but what the world situation was before as well as what might transpire after. Before the war the equilibrium, "established between old civilizations 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 labor 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." In other words, the agricultural trade that had sustained Europe was already in disrepair before the war, because the United States no longer imported so much food -- thus a new world economic order, based not upon injuring Germany or enriching the bankers of Europe must be created, an order of forgiveness, interdependence, and of a stable political and economic Europe with strong consumer confidence.