The Keynesian Revolution

Whereas the decades running up to the First World War had seen rising living standards and reasonably stable conditions almost everywhere, especially in the economically developed world, by no stretch of the imagination could the same be said for the period between the wars. The First World War, and the Treaty of Versailles which followed it, had seen the delicate network of relationships which made up the pre-war world damaged, apparently beyond repair. Different rates of inflation during the war among the major belligerents — 50% in the USA, 80% in Britain, 100% in France and 200% in Germany1 — had wreaked havoc with the relative competitiveness, which could only be remedied if major, but unwelcome, exchange rate changes took place. Reparations — forcing the defeated Germany to pay the victorious allies compensation for war guilt and damage - provided a profoundly destabilising influence. All the countries which had been engaged in the war suffered from recessions as hostilities ended. France’s industrial production fell by over 40% between 1913 and 1919,2 and it was not until 1927 that German GDP rose again to its immediate pre-First World War level.3 Germany suffered a catastrophic hyperinflation in 1923.4 Unemployment in Britain, one of the least successful of the world’s economies in the 1920s, averaged nearly 8.5% throughout the period from 1920 to 1929.5