John Maynard Keynes was one of the most important figures of the 1920s, ’30s, and ’40s. He was born in 1883 in England and educated at Cambridge University. He worked as a civil servant and taught economics at Cambridge. He was blessed with the kind of brain that doesn’t automatically accept what others believe to be the absolute truth.
Economic Consequences of World War I Peace Deal
He saw great dangers had been built into the Treaty of Versailles, which ended World War I. In 1919, he wrote The Economic Consequences of the Peace, in which he correctly predicted that the staggering amount of money Germany was forced to pay for starting the war would have serious consequences.
He foresaw that these war reparations would cripple Germany’s economy and lead to a rise in militarism and another conflict. He was right as reported by spartacuslearning.com: “After the First World War Germany suffered from inflation. In January, 1921, there were 64 marks to the dollar. By November, 1923 this had changed to 4,200,000,000,000 marks to the dollar.”
There was high unemployment and the middle class saw its savings wiped out. Adolf Hitler was able to exploit the widespread anger among Germans about the way they had been treated and rise to power.
Economic Lessons from the Great Depression
During the Depression of the 1930s, Keynes rejected the classical economic theories of the time and proposed new ways of dealing with the boom and bust cycles of business. His idea, quite radical for the time, was that during economic slumps governments should increase their spending. This would prime the pump for economic growth . When the economy was humming along sweetly, governments should reduce their spending and sock away some cash for use during the next, inevitable, downturn. This, and many other concepts, became the orthodox approach and are called Keynesian economics.
As Robert Reich writes in an online biography of Keynes at Time Magazine, “The economy may reach perfect balance, but at a cost of high unemployment and social misery. Better for governments to avoid the pain in the first place by taking up the slack.”
Bretton Woods Conference
The contribution of Keynes to economic thinking was rewarded in many ways including the title of First Baron Keynes of Tilton, conferred upon him in 1942.
Lord Keynes headed up the British delegation to the Bretton Woods Conference that was held in the first three weeks of July 1944 in New Hampshire.
Delegates from 44 countries discussed how to build a post-war global economic system that would not suffer from the boom and bust cycles that led to the Great Depression.
Out of that conference came the International Monetary Fund, the General Agreement on Tariffs and Trade which has become the World Trade Organization, and the International Bank for Reconstruction and Development (IBRD), which is now part of the World Bank Group.
Architect of Post-War Economic System
Keynes was appointed chair of the committee that was to work on setting up the IBRD, but his influence went far beyond this.
One delegate to the conference was Dr. E. A. Goldenweiser, director of research and statistics of the Board of Governors of the Federal Reserve System. He was a member of the American delegation, and he gave an assessment of Lord Keynes at the gathering:
“He shone in two respects - in the fact that he is, of course, one of the brightest lights of mankind in both thinking and expression and in his ability to influence people, and he shone also by being the world’s worst chairmen…
“His function at Bretton Woods was primarily performed in a suite of rooms on the second floor to which everybody went for inspiration and guidance and compromise.”
After the Bretton Woods Conference Keynes returned to England where his health started to deteriorate. He suffered a series of heart attacks and died in April 1946 and the age of 62.
Keynesian Economics Fall out of Favour
In the late 1970s, politicians such as the U.K.'s Prime Minister Margaret Thatcher and, a little later, U.S. President Ronald Reagan were trying to bring inflation under control. They dismissed the ideas of Keynes and turned to those of the American economist Milton Friedman.
The era of red meat, cage-fighter capitalism was ushered in as governments everywhere removed regulations from banks, financial houses, and other areas of the economy. Following the sub-prime mortgage mess that hit the world’s economy in late 2007, governments all over the world started dusting off their old copies of Keynesian textbooks.
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