The Economic Consequences of the Peace

by John Maynard Keynes

The note circulation of France is more than six times its pre-war level. The exchange value of the franc in terms of gold is a little less than two-thirds its former value; that is to say, the value of the franc has not fallen in proportion to the increased volume of the currency.[150] This apparently superior situation of France is due to the fact that until recently a very great part of her imports have not been paid for, but have been covered by loans from the Governments of Great Britain and the United States. This has allowed a want of equilibrium between exports and imports to be established, which is becoming a very serious factor, now that the outside assistance is being gradually discontinued. The internal economy of France and its price level in relation to the note circulation and the foreign exchanges is at present based on an excess of imports over exports which cannot possibly continue. Yet it is difficult to see how the position can be readjusted except by a lowering of the standard of consumption in France, which, even if it is only temporary, will provoke a great deal of discontent.[151]

The situation of Italy is not very different. There the note circulation is five or six times its pre-war level, and the exchange value of the lira in terms of gold about half its former value. Thus the adjustment of the exchange to the volume of the note circulation has proceeded further in Italy than in France. On the other hand, Italy's "invisible" receipts, from emigrant remittances and the expenditure of tourists, have been very injuriously affected; the disruption of Austria has deprived her of an important market; and her peculiar dependence on foreign shipping and on imported raw materials of every kind has laid her open to special injury from the increase of world prices. For all these reasons her position is grave, and her excess of imports as serious a symptom as in the case of France.[152]

The existing inflation and the maladjustment of international trade are aggravated, both in France and in Italy, by the unfortunate budgetary position of the Governments of these countries.

In France the failure to impose taxation is notorious. Before the war the aggregate French and British budgets, and also the average taxation per head, were about equal; but in France no substantial effort has been made to cover the increased expenditure. "Taxes increased in Great Britain during the war," it has been estimated, "from 95 francs per head to 265 francs, whereas the increase in France was only from 90 to 103 francs." The taxation voted in France for the financial year ending June 30, 1919, was less than half the estimated normal post-bellum expenditure. The normal budget for the future cannot be put below $4,400,000,000 (22 milliard francs), and may exceed this figure; but even for the fiscal year 1919-20 the estimated receipts from taxation do not cover much more than half this amount. The French Ministry of Finance have no plan or policy whatever for meeting this prodigious deficit, except the expectation of receipts from Germany on a scale which the French officials themselves know to be baseless. In the meantime they are helped by sales of war material and surplus American stocks and do not scruple, even in the latter half of 1919, to meet the deficit by the yet further expansion of the note issue of the Bank of France.[153]

The budgetary position of Italy is perhaps a little superior to that of France. Italian finance throughout the war was more enterprising than the French, and far greater efforts were made to impose taxation and pay for the war. Nevertheless Signor Nitti, the Prime Minister, in a letter addressed to the electorate on the eve of the General Election (Oct., 1919), thought it necessary to make public the following desperate analysis of the situation:—(1) The State expenditure amounts to about three times the revenue. (2) All the industrial undertakings of the State, including the railways, telegraphs, and telephones, are being run at a loss. Although the public is buying bread at a high price, that price represents a loss to the Government of about a milliard a year. (3) Exports now leaving the country are valued at only one-quarter or one-fifth of the imports from abroad. (4) The National Debt is increasing by about a milliard lire per month. (5) The military expenditure for one month is still larger than that for the first year of the war.

But if this is the budgetary position of France and Italy, that of the rest of belligerent Europe is yet more desperate. In Germany the total expenditure of the Empire, the Federal States, and the Communes in 1919-20 is estimated at 25 milliards of marks, of which not above 10 milliards are covered by previously existing taxation. This is without allowing anything for the payment of the indemnity. In Russia, Poland, Hungary, or Austria such a thing as a budget cannot be seriously considered to exist at all.[154]

Thus the menace of inflationism described above is not merely a product of the war, of which peace begins the cure. It is a continuing phenomenon of which the end is not yet in sight.

All these influences combine not merely to prevent Europe from supplying immediately a sufficient stream of exports to pay for the goods she needs to import, but they impair her credit for securing the working capital required to re-start the circle of exchange and also, by swinging the forces of economic law yet further from equilibrium rather than towards it, they favor a continuance of the present conditions instead of a recovery from them. An inefficient, unemployed, disorganized Europe faces us, torn by internal strife and international hate, fighting, starving, pillaging, and lying. What warrant is there for a picture of less somber colors?

I have paid little heed in this book to Russia, Hungary, or Austria.[155] There the miseries of life and the disintegration of society are too notorious to require analysis; and these countries are already experiencing the actuality of what for the rest of Europe is still in the realm of prediction. Yet they comprehend a vast territory and a great population, and are an extant example of how much man can suffer and how far society can decay. Above all, they are the signal to us of how in the final catastrophe the malady of the body passes over into malady of the mind. Economic privation proceeds by easy stages, and so long as men suffer it patiently the outside world cares little. Physical efficiency and resistance to disease slowly diminish,[156] but life proceeds somehow, until the limit of human endurance is reached at last and counsels of despair and madness stir the sufferers from the lethargy which precedes the crisis. Then man shakes himself, and the bonds of custom are loosed. The power of ideas is sovereign, and he listens to whatever instruction of hope, illusion, or revenge is carried to him on the air. As I write, the flames of Russian Bolshevism seem, for the moment at least, to have burnt themselves out, and the peoples of Central and Eastern Europe are held in a dreadful torpor. The lately gathered harvest keeps off the worst privations, and Peace has been declared at Paris. But winter approaches. Men will have nothing to look forward to or to nourish hopes on. There will be little fuel to moderate the rigors of the season or to comfort the starved bodies of the town-dwellers.

But who can say how much is endurable, or in what direction men will seek at last to escape from their misfortunes?