The lessons of The Economic Consequences of the Peace for the laissez faire worshippers

[Robert Henderson]

Note: The Economic Consequences are worth reading in their entirety
because in examining why the Versailles Treaty was a mess, both because
of the impractical demands made on Germany and because it insulted and
penalised Germany but did not crush her.

Chapter II is of particular interest in the context of laissez faire
economics, because Keynes concisely describes the unstable circumstances
a century of laissez faire had created by 1914. RH

The economic consequences of the Peace

J M Keynes

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 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 food and raw products from distant sources. Up to about 1900
a unit of 1abor applied  to industry yielded year by year an increasing
quantity of  purchasing
power over an increasing 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 . In  this economic
Eldorado, in this economic Utopia, as the earlier economists would
 have deemed it, most of us were brought up. The Economic Consequences
of the Peace 13
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 dispatch 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 machinery 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 f and
faster.
In the Austro-Hungarian Empire, which grew from about 40,000,000 in 1 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, 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 w
an extraordinary center of population the development of the Germanic
system, had enabled Central Europe to become. Before the war the
population of Germany 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
many--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 their  neighbors an outlet for their
products, in exchange for which the enterprise of to c the German
merchant supplied them with their chief requirements at a low price.  
The statistics of the economic interdependence of Germany and her
neighbors plea are overwhelming. Germany was the best customer of
Russia, Norway, Holland, the 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. Her( 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 ends the world except India, and we bought more from
her than from any other country in the world except the United States.
kind,
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 all tho
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;
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.
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 labor 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 civilizations 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 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.
‘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 favorable harvest.
Indeed, the pr domestic requirements of the United States are estimated
at more than ninety per  cent of the average yield of the five years
1909-1913.[5] At that time, however tendency towards stringency was
showing itself, not so much in a lack of a dance 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 supp was
necessary to offer a higher real price. The most favorable factor in
the situation  was to be found in the extent to which Central and
Western Europe was being 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 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 me ford the disorganization of
any of her principal sources of supply.
Much else might be said in an attempt to portray the economic
peculiarities  the Europe of 1914. I have selected for emphasis the
three or four greatest : instability,--the instability of an excessive
population dependent for its livelihood  on a complicated and
artificial organization, the psychological instability laboring and
capitalist classes, and the instability of Europe’s claim, coupled’
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 organization was destroyed, its transport system
ruptured, and its food supplies terribly impaired.
It was the task of the Peace Conference to honor engagements and
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 of the Peace.
I The Economic Consequences of the Peace 21
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] Sums of money mentioned in this book in terms of
dollars have been converted from pounds sterling at the rate of $5 to
L1. [5] Even since 1914 the population of the United States has
increased by seven or eight millions. As their annual consumption of
wheat per head is not less than 6 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.

 ???
--
Robert Henderson
Blair Scandal website: http://www.geocities.com/ blairscandal/
Personal website: http://www.anywhere.demon.co.uk