In August 1921 the Sunday Times announced a ‘remarkable and important series of articles’ by the author of The Economic Consequences of the Peace under the general title of ‘Europe's Economic Outlook’. According to the advertisement, the articles would examine and answer the following questions.

1. (1) Can Germany pay the last reparation demands?

2. (2) What effect will this reparation policy of the Allies have on world trade?

3. (3) Why are we suffering from trade depression?

4. (4) What permanent improvement of wages can labour hope for?

5. (5) How can a true economic balance between the old world and the new be restored?

The five articles produced the expected sensational reaction not only in England, but in Europe and the United States as well. It was the first which had the greatest international repercussions. Published in the Sunday Times 21 August 1921 and simultaneously in Germany, France and the United States, it appeared just ten days before Germany's first payment under the new agreement of the London Conference was due. In it Keynes predicted the eventual inevitable failure of Germany to meet her obligations.

From the Sunday Times, 21 August 1921

NEW REPARATIONS SETTLEMENT: CAN GERMANY PAY?

The illusion of prosperity, apparently springing out of war, has disappeared from our minds, and pessimism has displaced the unfounded hopes of the spring of 1920. This pessimism is mainly economic. The political field is clearer than it was, even in Ireland.

A Revision of the Treaty was largely the product of a period of discussion with Harcourt, Brace during the summer and autumn of 1921. In June 1921, Keynes had proposed to Alfred Harcourt that he prepare for publication at the end of 1921 ‘a final revised edition’ of The Economic Consequences of the Peace. For this edition he proposed to write a new introduction of some 40 pages, to leave the present text as it stood and to deal with new facts or criticisms in footnotes or a series of appendices to the chapters of Economic Consequences.

To this proposal Alfred Harcourt replied in late June that Keynes ‘give something near to prayerful consideration to making a new book out of the new material and even such old material… from “The Economic Consequences of the Peace”’ as he needed. He strongly argued the case for a restatement, saying that the public would not buy or read a revision but merely take note of the changes from reviews, and that Keynes would write a better book freed from the constraints of the earlier work.

Keynes appears to have accepted this proposal with alacrity, for on 3 August he sent Harcourt a draft table of contents for a volume of about 40,000 words entitled ‘Essays Supplementary to The Economic Consequences of the Peace’.

Keynes was drawn into the planning for the peace at what was still an early stage of the war when, at the request of the Board of Trade, he collaborated with Professor Sir W. J. Ashley in writing a ‘Memorandum on the Effect of an Indemnity’, dated 2 January 1916. In September 1918 he took part in a conference on the future development of the inter-allied economic organisation. From the time of the Armistice until the end of the year he was occupied with the Treasury's study of the whole question of reparations.

Ironically, the early document written with Ashley had an effect that could not have been to Keynes's liking. This, together with the Board of Trade memorandum on ‘Economic Considerations Affecting the Terms of Peace’ to which it was annexed, was produced for the use of the War Cabinet in November 1918, and the Hughes Committee, appointed to consider the feasibility of claiming an indemnity, had these two reports before them. When Lloyd George came to write The Truth About the Peace Treaties twenty years later, he attributed all schemes for extracting tribute from Germany over a long period of years to the inspiration of the Ashley–Keynes memorandum. Moreover, he wrote: ‘Mr Keynes is the sole patentee and promoter of that method of extraction.’

According to Lloyd George,

All the extravagant estimates formulated after the war as to Germany's capacity to pay were based on this plan …

The Economic Consequences of the Peace, which I published in December 1919, has been reprinted from time to time without revision or correction. So much has come to our knowledge since then, that a revised edition of that book would be out of place. I have thought it better, therefore, to leave it unaltered, and to collect together in this Sequel the corrections and additions which the flow of events makes necessary, together with my reflections on the present facts.

But this book is strictly what it represents itself to be—a Sequel; I might almost have said an Appendix. I have nothing very new to say on the fundamental issues. Some of the remedies which I proposed two years ago are now everybody's commonplaces, and I have nothing startling to add to them. My object is a strictly limited one, namely, to provide facts and materials for an intelligent review of the reparation problem, as it now is.

‘The great thing about this wood’, said M. Clemenceau of his pine forest in La Vendée, ‘is that here there is not the slightest chance of meeting Lloyd George or President Wilson. Nothing, here, but the squirrels.’ I wish that I could claim the same advantages for this book.

The thoughts which I have expressed in the second chapter were not present to the mind of Paris. The future life of Europe was not their concern; its means of livelihood was not their anxiety. Their preoccupations, good and bad alike, related to frontiers and nationalities, to the balance of power, to imperial aggrandisements, to the future enfeeblement of a strong and dangerous enemy, to revenge, and to the shifting by the victors of their unbearable financial burdens on to the shoulders of the defeated.

Two rival schemes for the future polity of the world took the field—the Fourteen Points of the President, and the Carthaginian peace of M. Clemenceau. Yet only one of these was entitled to take the field; for the enemy had not surrendered unconditionally, but on agreed terms as to the general character of the peace.

This aspect of what happened cannot, unfortunately, be passed over with a word, for in the minds of many Englishmen at least it has been a subject of very great misapprehension. Many persons believe that the armistice terms constituted the first contract concluded between the Allied and Associated Powers and the German government, and that we entered the conference with our hands free, except so far as these armistice terms might bind us. This was not the case. To make the position plain, it is necessary briefly to review the history of the negotiations which began with the German Note of 5 October 1918, and concluded with President Wilson's Note of 5 November 1918.

THE MEANING OF PURCHASING POWER

A man does not hold money for its own sake, but for its purchasing power—that is to say, for what it will buy. Therefore his demand is not for units of money as such, but for units of purchasing power. Since, however, there is no means of holding general purchasing power except in the form of money, his demand for purchasing power translates itself into a demand for an ‘equivalent’ quantity of money. What is the measure of ‘equivalence’ between units of money and units of purchasing power?

Since the purchasing power of money in a given context depends on the quantity of goods and services which a unit of money will purchase, it follows that it can be measured by the price of a composite commodity, made up of the various individual goods and services in proportions corresponding to their importance as objects of expenditure. Moreover, there are many types and purposes of expenditure, in which we may be interested at one time or another, corresponding to each of which there is an appropriate composite commodity. The price of a composite commodity which is representative of some type of expenditure, we shall call a price level; and the series of numbers indicative of changes in a given price level we shall call index numbers. It follows that the number of units of money which is ‘equivalent’ in a given context to a unit of purchasing power, depends on the corresponding price level and is given by the appropriate index number.

This essay will attempt first to indicate the philosophical setting of 1921 in which Keynes's Treatise on Probability appeared, and then to estimate its importance in the development of the philosophy of probability during the following half-century. Since this philosophy is almost as controversial now as it was when Keynes wrote, my estimate will necessarily be a personal one.

The story of the writing of the Treatise has been fully told in R. F. Harrod's biography of Keynes. Keynes started work on probability in 1906 when he was in the India Office, and devoted most of his intellectual energy to it for the next five years until the book was nearly completed. After 1911 Keynes undertook commitments which delayed his completing the book; but wide publicity was given to some of his ideas in Bertrand Russell's The Problems of Philosophy (1912) in the Home University Library series. Although much of the Treatise was set up in type by August 1914, it was not published until August 1921 after Keynes had spent much of 1920 in his final revision.

As Keynes says (p. 473), his Treatise was the first systematic work in English on the logical foundations of probability for 55 years (and in fact there had only been one comparable work in another language between 1866 and 1915). Moreover the Treatise appeared at a time when philosophers in the empiricist tradition, then reviving in Britain and the U.S.A., were very interested in how (to use Russell's terms) ‘derivative knowledge’ could be based upon ‘intuitive knowledge’ by a logical relationship between them.

This new standard edition of The Collected Writings of John Maynard Keynes forms the memorial to him of the Royal Economic Society. He devoted a very large share of his busy life to the Society. In 1911, at the age of twenty-eight, he became editor of the Economic Journal in succession to Edgeworth; two years later he was made secretary as well. He held these offices without intermittence until almost the end of his life. Edgeworth, it is true, returned to help him with the editorship from 1919 to 1925; MacGregor took Edgeworth's place until 1934, when Austin Robinson succeeded him and continued to assist Keynes down to 1945. But through all these years Keynes himself carried the major responsibility and made the principal decisions about the articles that were to appear in the Economic Journal, without any break save for one or two issues when he was seriously ill in 1937. It was only a few months before his death at Easter 1946 that he was elected president and handed over his editorship to Roy Harrod and the secretaryship to Austin Robinson.

In his dual capacity of editor and secretary Keynes played a major part in framing the policies of the Royal Economic Society. It was very largely due to him that some of the major publishing activities of the Society—Sraffa's edition of Ricardo, Stark's edition of the economic writings of Bentham, and Guillebaud's edition of Marshall, as well as a number of earlier publications in the 1930s—were initiated.

We leave saving to the private investor, and we encourage him to place his savings mainly in titles to money. We leave the responsibility for setting production in motion to the business man, who is mainly influenced by the profits which he expects to accrue to himself in terms of money. Those who are not in favour of drastic changes in the existing organisation of society believe that these arrangements, being in accord with human nature, have great advantages. But they cannot work properly if the money, which they assume as a stable measuring-rod, is undependable. Unemployment, the precarious life of the worker, the disappointment of expectation, the sudden loss of savings, the excessive windfalls to individuals, the speculator, the profiteer—all proceed, in large measure, from the instability of the standard of value.

It is often supposed that the costs of production are threefold, corresponding to the rewards of labour, enterprise, and accumulation. But there is a fourth cost, namely risk; and the reward of risk-bearing is one of the heaviest, and perhaps the most avoidable, burden on production. This element of risk is greatly aggravated by the instability of the standard of value. Currency reforms, which led to the adoption by this country and the world at large of sound monetary principles, would diminish the wastes of risk, which consume at present too much of our estate.

Nowhere do conservative notions consider themselves more in place than in currency; yet nowhere is the need of innovation more urgent.

With the new year Keynes turned to a new phase in his writing about reparations. He was compelled to return to the subject of the conference once more, however, to prove that he had actually been in a position to observe the scenes that he had described. In What Really Happened at Paris, a collection of public lectures given by some of the American delegates, an article by C. H. Haskins carried the following footnote on the ‘tone of mutual respect and good-will’ in the meetings of the Council of Four:

We much regret to announce the death of Professor Wilhelm Lexis, news of which has come to hand from Göttingen. Born in Eschweiler, near Aachen, on 17 July 1837, Lexis matriculated at the University of Bonn in 1855, where he read mathematics and natural science. For a few years he was an assistant master at the Gymnasium in Bonn. In 1861 he proceeded to Paris, where he devoted himself to the study of French economic conditions and soon became known as an authority on economic questions. In 1872 he was appointed to the Chair of Political Economy at Strassburg. Two years later he moved to Dorpat, and thence, in 1876, to Freiburg in Breisgau. He was called to Breslau in 1884, and finally settled in 1887 in Göttingen, where he continued to teach for a quarter of a century.

Lexis's work in economics is primarily associated with the celebrated Handwörterbuch der Staatswissenschaften, in the editing of which he was one of Professor Conrad's colleagues (as also in the editing of the Jahrbücher). In this great compilation he was responsible for much of the work on currency and monetary questions generally, and on public finance. Up to the end of his life he continued to contribute articles to the Jahrbücher on the progress of monetary science and practice.

Perhaps Lexis's most original contributions to knowledge, however, are to be found in his statistical investigations into problems of population and sex-ratio, and in the pure statistical theory which these investigations led him to develop.

The premature death of Governor Benjamin Strong of the New York Federal Reserve Bank at the age of fifty-one is a real misfortune. Governor Strong had been at the head of the Bank ever since the inception of the Federal Reserve System in 1914, and had been by far the most important guiding influence in the evolution of the system ever since. His integrity, independence, and real insight into the problems of his office have been of inestimable value, and there were very few, even in academic circles in the United States, who had thought more deeply—as witness his evidence before the Stabilization Committee of Congress two years ago—on the fundamental problems of the regulation of credit. The ‘open-market policy’, which in the United States is now hardly less important than the discount rate, as a method of controlling credit developments, was in its present form largely his creation. We also lose in him a man of wide international sympathies, who was always ready to play a wise and generous part in alleviating monetary difficulties abroad, and a firm friend of this country. His peculiarly intimate relations with the present Governor of the Bank of England ensured a measure of co-operation between the two institutions, without which our own currency problems would have been even more embarrassing. The question of the possible policy of his successor, not yet appointed, introduces a new element of doubt into the already dubious prospects of an effective international control of the price-level.

Keynes's experience as an investor naturally spilled over into his publications, initially in the ‘Finance and Investment’ column of The Nation (JMK, vol. xix). It also resulted in a series of reviews, which we reprint below. Most importantly, as the 1920s progressed, his experience plus his position as Chairman of the National Mutual, made his speech to the Society's annual meeting something of a City event.

We begin, therefore, by reprinting the published texts of Keynes's remarks annually from 1922 to 1938 with some related press controversies.

Speech to the Annual Meeting of the National Mutual, 18 January 1922

Gentlemen,

Before moving the formal adoption of the annual report and accounts, I will comment, in accordance with the usual custom, on points of special interest arising out of them.

The directors regret to report the death during the year of their Chairman, Colonel Villiers. He was a loyal supporter of the Society, and after serving on the board for 45 years, he had been for the last 18 months of his life the Society's Chairman, a position which he filled with dignity and with the respect of all his colleagues. My fellow-directors have done me the honour to elect me his successor, an honour which I naturally much appreciate.

Mr W. T. Layton, whose name and reputation in economic and in business circles are well known, has been appointed to the board, subject to confirmation by the members at this meeting.