John Maynard Keynes
Writing during the Great
Depression of the 1930s,
British economist John
Maynard Keynes addressed
the problem of “boom and
bust” cycles that plagued
capitalism. His The General
Theory of Employment,
Interest, and Money,
published in 1936, proposed
increased or decreased
government spending in
response to economic
fluctuations.
Keynes had decided that a
stronger theoretical foundation
was needed for what later became
known as an “expansionist”
economic policy. For a dozen
years he had devoted most of his
thinking to this problem, leading to
the publication of his two major
works:
—A Treatise on Money (1930; 2 volumes) and The
General Theory of Employment, Interest, and Money
(1936). In 1937 Keynes was stricken with a coronary
thrombosis, and he never fully recovered his health.
In A Treatise on Money Keynes sought to explain
why an economy operates so unevenly, with
frequent business cycles of booms and busts. Like
other treatments of the subject, his work failed to explain
the problem of prolonged economic depression, a
phenomenon that did not conform to the then generally
accepted notion that recessions were self-correcting. It
was then felt that during recessions savings would
accumulate, causing interest rates to fall, and would
thereby encourage business to invest and the economy
to expand.
Keynes closely examined the problem
of prolonged depression in The General
Theory of Employment, Interest, and
Money. This book, which provided a
theoretical defense for government
programs that were already being
tried in Britain and by President
Franklin D. Roosevelt in the United
States, proposed that no self-correcting
mechanism to lift an economy out of a
depression existed. It stated that
unused savings prolonged economic
stagnation and that business
investment was spurred by new
inventions, new markets, and other
influences not related to the interest
rate on savings.
Since business investment necessarily fluctuated, it
could not be depended on to maintain a high level of
employment and a steady flow of income through the
economy. Keynes proposed that government
spending must compensate for insufficient business
investment in times of recession.
After the war Keynes served as the British treasury
delegate at the Paris Peace Conference and through
this experience underwent the main crisis of his life. He
was passionately opposed to British (and Allied) policy at
the conference. Keynes held that, on the moral plane,
the peace treaty (see Treaty of Versailles) should show
magnanimity to the fallen foe and that, on the economic
plane, the demands for reparation were fantastically
impractical and that unsuccessful attempts to
enforce them would lead to the ruin of Europe.
He resigned his position in June 1919 in a biting letter to
British prime minister David Lloyd George. This
resignation made it unlikely that Keynes would be
employed again officially for a considerable time.
Within three months Keynes published a devastating
attack on the Versailles treaty settlements: The
Economic Consequences of the Peace (1919). In it he
correctly predicted that the staggering reparations
levied against Germany would goad that country
into economic nationalism and a resurgence of
militarism.
In addition to its remorseless economic argument
against the reparations, this book contained vivid and
brilliant character sketches. It was quickly recognized as
a masterpiece of polemical writing and became one of
the best-selling books ever composed on a topic in
economics. Keynes achieved worldwide fame through it.
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