The Economic Consequences of the Peace

This chapter provides the background to World War I and the Treaty of Versailles. Keynes breaks the chapter into sections: “Population,” “Organization,” “The Psychology of Society,” and “The Relation of the Old World to the New” (10, 11, 12, 14, respectively). Keynes believes that it is important to examine the political, sociological, and economic developments in Europe, starting from the latter part of the 19th century to understand the way in which the continent became economically and culturally integrated. Understanding how this integration occurred frames Keynes’s perception of the Treaty of Versailles as a disaster.

Prior to World War I, Europe became unstable for three key reasons: First, Europe’s population grew. Second, the socio-economic relations, which Keynes calls “psychological instability,” between the working class and big business (capitalists) were unequal. Third, Europe greatly depended on certain supplies coming from the New World.

The author provides many examples of the 19th-century population growth in Europe. Unification-era Germany had a population of 40 million, which rose to 68 million by the start of World War I. Similar developments occurred throughout the continent in the Austro-Hungarian Empire and Russia. Keynes believes that the “great events of history are often due to secular changes in the growth of population and other fundamental economic causes” (10). In the previous chapter, he took on the role of a philosopher and alluded to Hegelian historic progress that surpasses human agency. Here, he returns to his expertise as an economist, operating with numbers and facts.

Next, Keynes focuses on Europe’s geopolitical organization. In Keynes’s view, Germany is a key to late-19th-century economic growth in Central Europe and the continent at large: “[O]n the prosperity and the enterprise of Germany the prosperity of the rest of the Continent mainly depended” (11). When he refers to “organization,” he means geopolitical structuring, including borders, tariffs, transportation, industrial production, and trade. For example, Britain exported more goods to Germany than any other country in the world. European countries not only relied on trade with an economic powerhouse like Germany, but also on German capital. Several countries in Europe received German investment, including Russia, the Ottoman Empire, and Austria-Hungary. This level of economic integration—with Germany at its heart—meant that many of the circumstances in one country affected the entire continent.

One such factor was the conditions under capitalism, which shaped Europe on a social and economic level. Capitalism allowed the wealthy to invest, which led to capital accumulation. Yet it was the working class that created the infrastructure during the Industrial Revolution. The working class was “not free to consume in immediate enjoyment the full equivalent of its efforts” (13). By highlighting socioeconomic inequalities and capital accumulation, Keynes takes a view that is not unlike German philosopher Karl Marx’s analysis of the unequal social relations under capitalism even though the two thinkers’ theoretic perceptions of economics ultimately differed.

Late-19th-century European capitalism led to Malthusian population growth. According to the English economist Thomas Malthus, an improvement in socioeconomic conditions leads to an increase in population, which then reduces the quality of life that caused the population growth in the first place. Keynes argues that “the nineteenth century was able to forget the fertility of the species in a contemplation of the dizzy virtues of compound interest” (13). However, the initial improvement of economic conditions at that time did not end “overwork, overcrowding, and underfeeding” (13). Only the wealthy could enjoy the fruits of capital accumulation.

Capital accumulation led to a surplus of capital goods in Europe, which were then exported. This system was underpinned by cheap supplies often acquired in the New World, “Even before the war, however, the equilibrium between old civilization and new resources was being threatened” (14). The conditions changed, for instance, population growth abroad in places like the US, which affected domestic production:

In short, Europe’s claim on the resources of the New World was becoming precarious; the law of diminishing returns was at least reasserting itself and making it necessary year by year for Europe to offer a greater quantity of other commodities to obtain the same amount of bread; Europe, therefore, could by no means afford the disorganization of any of her principal sources of supply (14-15).

This paradigm shift that occurred in the New World was one of the contributing factors to instability in Europe on the eve of World War I. The war that not only destabilized the existing system but “endanger[ed] the life of Europe altogether” (15).