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...
Rather than allowing the market to reestablish equilibrium itself, Keynes said that during times of recession and depression, consumer lack of confidence caused buyers to purchase fewer goods, thus causing suppliers to lay off more workers in an effort to sell current stores of inventory. This meant the national government had to employ workers, spend at a deficit, and increase the flow of money into the economy by putting more money in the hands of consumers, increasing consumer's sense of job security and buying power, and thus encourage suppliers to hire more workers to increase supply in response to increased, albeit deficit-generated demand. Debt forgiveness to generate consumer confidence internationally was also critical, however, and the Economic Consequences of the Peace remains an important text to read, to understand Keynesian philosophy viewed in an international as well as a national perspective, as well as to better understand Keynes from the point-of-view of his early development as an economist.
Works Cited
Keynes, John Maynard. (1919) the Economic Consequences of the Peace. Available online in full text on 16 December 2004 at http://socserv2.socsci.mcmaster.ca/~econ/ugcm/3ll3/keynes/peace
